BANK OF AMERICA CORP /DE/
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[
ü
] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended
June 30, 2014
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number:
1-6523
Exact name of registrant as specified in its charter:
Bank of America Corporation
State or other jurisdiction of incorporation or organization:
Delaware
IRS Employer Identification No.:
56-0906609
Address of principal executive offices:
Bank of America Corporate Center
100 N. Tryon Street
Charlotte, North Carolina 28255
Registrant's telephone number, including area code:
(704) 386-5681
Former name, former address and former fiscal year, if changed since last report:
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 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).
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Large accelerated filer
ü
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Accelerated filer
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Non-accelerated filer
(do not check if a smaller
reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes No
ü
On
July 28, 2014
, there were
10,515,862,599
shares of Bank of America Corporation Common Stock outstanding.
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Bank of America Corporation
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June 30, 2014
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Form 10-Q
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INDEX
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2
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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This report on Form 10-Q, 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 matters. These statements are not guarantees of future results or performance and involve certain 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, under
Item 1A. Risk Factors of the Corporation's 2013 Annual Report on Form 10-K
, and in any of the Corporation's subsequent Securities and Exchange Commission filings: the potential negative impacts of the Corporation’s prior adjustment to its regulatory capital ratios, including, without limitation, the results of the Federal Reserve's review of the information pursuant to the Comprehensive Capital Analysis and Review, or the revised capital actions that have been submitted to the Federal Reserve; the Corporation’s ability to resolve representations and warranties repurchase claims made by monolines and private-label and other investors, including as a result of any adverse court rulings, 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; the possibility that the court decision with respect to the BNY Mellon Settlement is overturned on appeal in whole or in part; potential claims, damages, penalties and fines resulting from pending or future litigation, governmental proceedings or inquiries, and regulatory proceedings, including proceedings instituted by the U.S. Department of Justice, state Attorneys General and other members of the RMBS Working Group of the Financial Fraud Enforcement Task Force concerning mortgage-related matters; 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; 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; the possibility that future claims, damages, penalties and fines may occur in excess of the Corporation's recorded liability and estimated range of possible losses for litigation exposures; uncertainties about the financial stability, growth rates and the geopolitical environment 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; uncertainties related to the timing and pace of Federal Reserve tapering of quantitative easing, and the impact on global interest rates, currency exchange rates, and economic conditions in a number of countries; the possibility of future inquiries or investigations regarding pending or completed foreclosure activities; the possibility that unexpected foreclosure delays could impact the rate of decline of default-related servicing costs; uncertainty regarding timing and the potential impact of regulatory capital and liquidity requirements (including Basel 3); the negative impact of the Financial Reform Act on the Corporation’s businesses and earnings, including as a result of additional regulatory interpretation and rulemaking and the success of the Corporation’s actions to mitigate such impacts; the potential impact of implementing and conforming to the Volcker Rule; the potential impact of future derivative regulations; 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; reputational damage that may result from negative publicity, fines and penalties from regulatory violations and judicial proceedings; the Corporation’s ability to fully realize the anticipated cost savings in Legacy Assets & Servicing and the anticipated cost savings and other benefits from Project New BAC, including in accordance with currently anticipated timeframes; a failure in or breach of the Corporation’s operational or security systems or infrastructure, or those of third parties with which we do business, including as a result of cyber attacks; the impact on the Corporation’s business, financial condition and results of operations of a potential higher interest rate environment; 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-period amounts have been reclassified to conform to current period presentation. Throughout the MD&A, the Corporation uses certain acronyms and abbreviations which are defined in the Glossary.
3
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Executive Summary
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Business Overview
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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 nonbanking subsidiaries throughout the U.S. and in international markets, we provide a diversified range of banking and nonbanking 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
. We operate our banking activities primarily under two national bank charters: Bank of America, National Association (Bank of America, N.A. or BANA) and FIA Card Services, National Association (FIA Card Services, N.A. or FIA). On April 16, 2014, FIA and BANA filed an application with the Office of the Comptroller of the Currency (OCC) for consent to merge FIA into BANA and, if approved, we expect to complete the merger on October 1, 2014. At
June 30, 2014
, the Corporation had approximately
$2.2 trillion
in assets and approximately
233,000
full-time equivalent employees.
As of
June 30, 2014
, we operated in all 50 states, the District of Columbia and more than
40
countries. Our retail banking footprint covers approximately
80
percent of the U.S. population and we serve approximately
49 million
consumer and small business relationships with approximately
5,000
banking centers,
16,000
ATMs, nationwide call centers, and leading online (www.bankofamerica.com) and mobile banking platforms. We offer industry-leading support to more than
three million
small business owners. 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.
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Second Quarter 2014 Economic and Business Environment
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In the U.S., economic growth rebounded in the
second quarter of 2014
following contraction in the first quarter of 2014. Improved weather conditions positively impacted manufacturing, housing activity and retail spending. Exports continued to increase, while the trade deficit continued to widen. Employment gains strengthened during the quarter and the unemployment rate dropped to 6.1 percent at quarter end. Inflation, while moving slightly higher during the quarter due to higher transportation, food and housing costs, remained below the Board of Governors of the Federal Reserve System's (Federal Reserve) longer-term target of two percent.
Amid expectations that accommodative monetary policy would be only gradually removed, longer-term U.S. Treasury yields continued to decline over the quarter, while equity markets increased. The Federal Reserve continued to reduce its securities purchases, bringing targeted monthly purchases to $35 billion in July. The Federal Reserve also indicated that it would likely end its securities purchases in October.
Internationally, modest economic growth continued in the Eurozone in the
second quarter of 2014
, while healthy expansion continued in the U.K. The economy slowed in Japan following accelerated gains ahead of a consumption tax increase in the first quarter of 2014. China’s economy stabilized in the second quarter of 2014 after slowing modestly in recent quarters. For more information on our international exposure, see
Non-U.S. Portfolio
on page
113
.
4
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Recent Events
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AIG Settlement
On July 15, 2014, the Corporation and certain of its subsidiaries entered into a settlement agreement with American International Group, Inc. (AIG) to resolve all outstanding residential mortgage-backed securities (RMBS) litigation claims between the parties in exchange for a payment to AIG of $
650 million
. The settlement also provides for the withdrawal by AIG of its objection in the Bank of New York Mellon Settlement (BNY Mellon Settlement) court approval proceeding, including its participation in all pending appeals. Separately, on July 15, 2014, certain of our subsidiaries entered into a settlement agreement to resolve all outstanding mortgage insurance (MI) disputes brought by the Corporation against three AIG subsidiaries (the United Guaranty entities). This settlement will resolve all of the Corporation's pending MI litigation with the United Guaranty entities regarding legacy first- and second-lien mortgages originated or acquired by certain of our subsidiaries prior to 2009.
The settlement with the United Guaranty entities with respect to policies related to first-lien mortgages is subject to the consent of the GSEs; and the inclusion of loans other than GSE-insured loans is subject to obtaining any other necessary consents.
For additional information, see
Note 7 – Representations and Warranties Obligations and Corporate Guarantees
and
Note 10 – Commitments and Contingencies
to the Consolidated Financial Statements
.
Capital Management
On April 28, 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 Comprehensive Capital Analysis and Review (CCAR) to the Federal Reserve. On May 27, 2014, subsequent to a third-party review, we updated and resubmitted our requested capital actions and certain 2014 CCAR schedules to the Federal Reserve and we addressed the quantitative adjustments to our original capital plan as part of that resubmission. The requested capital actions contained in the resubmission are less than the 2014 capital actions previously submitted to the Federal Reserve. Pursuant to CCAR capital plan rules, the Federal Reserve has until August 10, 2014 to respond to our resubmitted 2014 CCAR items, including the requested capital actions.
Until the Federal Reserve acts on our 2014 CCAR resubmission, we must obtain the Federal Reserve's approval prior to any capital distributions. However, the Federal Reserve approved certain capital actions, including continued payment of a quarterly common stock dividend of $0.01 per share, subject to declaration by the Corporation's Board of Directors (the Board), the amendment to the terms of the Corporation’s 6% Cumulative Perpetual Preferred Stock, Series T (Series T Preferred Stock) as described below and the redemption or repurchase of a limited amount of trust preferred securities and subordinated debt. Additional common share buybacks were not included in this approval. In April 2014, prior to the suspension of our previously announced 2014 capital actions, we repurchased and retired
14.4 million
common shares for an aggregate purchase price of approximately
$233 million
.
For additional information, see
Capital Management
on page
64
.
Regulatory and Governmental Investigations
We are subject to inquiries and investigations, and may be subject to litigation, penalties and fines by the U.S. Department of Justice (DOJ), state Attorneys General and other members of the RMBS Working Group of the Financial Fraud Enforcement Task Force (collectively, the Governmental Authorities) regarding our RMBS and other mortgage-related matters. We are also a party to civil litigation proceedings brought by the DOJ and certain other Governmental Authorities regarding our RMBS
.
We continue to cooperate with and have had discussions about a potential resolution of these matters with certain Governmental Authorities. There can be no assurances that these discussions will lead to a resolution of any or all of these matters and additional litigation may be filed by the DOJ or certain other Governmental Authorities regarding our RMBS. For additional information regarding the risks associated with matters of this nature, see
Note 10 – Commitments and Contingencies
to the Consolidated Financial Statements
herein,
Item 1A. Risk Factors of the Corporation's 2013 Annual Report on Form 10-K
and
Note 12 – Commitments and Contingencies
to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K
.
Series T Preferred Stock
At the Corporation's annual meeting of stockholders on May 7, 2014, our stockholders approved an amendment to our Series T Preferred Stock such that it qualifies as Tier 1 capital, and the amendment became effective during the
three months ended June 30, 2014
. This resulted in a Tier 1 capital increase of approximately $2.9 billion, which benefited our Tier 1 capital and leverage ratios. For additional information on the Series T Preferred Stock, see
Capital Management – Regulatory Capital
on page
65
.
5
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Selected Financial Data
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Table
1
provides selected consolidated financial data for the
three and six months ended June 30, 2014 and 2013
, and at
June 30, 2014
and
December 31, 2013
.
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Table 1
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Selected Financial Data
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Three Months Ended June 30
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Six Months Ended June 30
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(Dollars in millions, except per share information)
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2014
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2013
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2014
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2013
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Income statement
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Revenue, net of interest expense (FTE basis)
(1)
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$
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21,960
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$
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22,949
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$
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44,727
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$
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46,357
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Net income
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2,291
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4,012
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2,015
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5,495
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Diluted earnings per common share
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0.19
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0.32
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0.14
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0.42
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Dividends paid per common share
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0.01
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0.01
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0.02
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0.02
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Performance ratios
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Return on average assets
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0.42
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%
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0.74
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%
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0.19
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%
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0.50
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%
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|||||||
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Return on average tangible shareholders' equity
(1)
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5.64
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9.98
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2.49
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6.84
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Efficiency ratio (FTE basis)
(1)
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84.43
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69.80
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91.17
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76.62
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Asset quality
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Allowance for loan and lease losses at period end
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$
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15,811
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$
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21,235
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Allowance for loan and lease losses as a percentage of total loans and leases outstanding at period end
(2)
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1.75
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%
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2.33
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%
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|||||||||||
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Nonperforming loans, leases and foreclosed properties at period end
(2)
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$
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15,300
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$
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21,280
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Net charge-offs
(3)
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$
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1,073
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$
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2,111
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2,461
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4,628
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Annualized net charge-offs as a percentage of average loans and leases outstanding
(2, 3)
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0.48
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%
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0.94
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%
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0.55
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%
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1.04
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%
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|||||||
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Annualized net charge-offs as a percentage of average loans and leases outstanding, excluding the purchased credit-impaired loan portfolio
(2)
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0.49
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0.97
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0.56
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1.07
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Annualized net charge-offs and purchased credit-impaired write-offs as a percentage of average loans and leases outstanding
(2)
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0.55
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1.07
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0.67
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1.29
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Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs
(3)
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3.67
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2.51
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3.19
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2.28
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Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs, excluding the purchased credit-impaired loan portfolio
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3.25
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2.04
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2.82
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1.85
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Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs and purchased credit-impaired write-offs
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3.20
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2.18
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2.60
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1.82
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June 30
2014 |
December 31
2013 |
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Total loans and leases
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$
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911,899
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$
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928,233
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Total assets
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2,170,557
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2,102,273
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Total deposits
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1,134,329
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1,119,271
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Total common shareholders' equity
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222,565
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219,333
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Total shareholders' equity
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237,411
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232,685
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Capital ratios
(4)
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Common equity tier 1 capital
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12.0
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%
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n/a
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|||||||||||
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Tier 1 common capital
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n/a
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10.9
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%
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|||||||||||
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Tier 1 capital
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12.5
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12.2
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Total capital
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15.3
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15.1
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Tier 1 leverage
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7.7
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7.7
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(1)
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Fully taxable-equivalent basis (FTE), return on average tangible shareholders' equity and the efficiency ratio are non-GAAP financial measures. Other companies may define or calculate these measures differently. For more information on these measures and ratios, and a corresponding reconciliation to GAAP financial measures, see
Supplemental Financial Data
on page
16
.
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(2)
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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
99
and corresponding
Table 46
, and
Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity
on page
108
and corresponding
Table 55
.
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(3)
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Net charge-offs exclude
$160 million
and
$551 million
of write-offs in the purchased credit-impaired loan portfolio for the
three and six months ended June 30, 2014
compared to
$313 million
and
$1.2 billion
for the same periods in
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
93
.
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(4)
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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.
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n/a = not applicable
6
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Financial Highlights
|
Net income was
$2.3 billion
, or
$0.19
per diluted share and
$2.0 billion
, or
$0.14
per diluted share for the
three and six months ended June 30, 2014
compared to
$4.0 billion
, or
$0.32
and
$5.5 billion
, or
$0.42
for the
same periods in 2013
. Although the establishment of additional reserves primarily for previously disclosed legacy mortgage-related matters resulted in increases of $3.5 billion and $7.3 billion in litigation expense compared to the same periods in 2013, our capital and liquidity levels remained strong, credit quality continued to improve, and we continue to focus on streamlining processes and achieving cost savings.
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Table 2
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|||||||||||||||
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Summary Income Statement
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|||||||||||||||
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Three Months Ended June 30
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Six Months Ended June 30
|
|||||||||||||
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(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
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Net interest income (FTE basis)
(1)
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$
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10,226
|
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$
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10,771
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$
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20,512
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$
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21,646
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|||
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Noninterest income
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11,734
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12,178
|
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24,215
|
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24,711
|
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|||||||
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Total revenue, net of interest expense (FTE basis)
(1)
|
21,960
|
|
22,949
|
|
44,727
|
|
46,357
|
|
|||||||
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Provision for credit losses
|
411
|
|
1,211
|
|
1,420
|
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2,924
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|||||||
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Noninterest expense
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18,541
|
|
16,018
|
|
40,779
|
|
35,518
|
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|||||||
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Income before income taxes
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3,008
|
|
5,720
|
|
2,528
|
|
7,915
|
|
|||||||
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Income tax expense (FTE basis)
(1)
|
717
|
|
1,708
|
|
513
|
|
2,420
|
|
|||||||
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Net income
|
2,291
|
|
4,012
|
|
2,015
|
|
5,495
|
|
|||||||
|
Preferred stock dividends
|
256
|
|
441
|
|
494
|
|
814
|
|
|||||||
|
Net income applicable to common shareholders
|
$
|
2,035
|
|
$
|
3,571
|
|
$
|
1,521
|
|
$
|
4,681
|
|
|||
|
Per common share information
|
|
|
|
||||||||||||
|
Earnings
|
$
|
0.19
|
|
$
|
0.33
|
|
$
|
0.14
|
|
$
|
0.43
|
|
|||
|
Diluted earnings
|
0.19
|
|
0.32
|
|
0.14
|
|
0.42
|
|
|||||||
|
(1)
|
FTE basis is a non-GAAP financial measure. For more information on this measure and for a corresponding reconciliation to GAAP financial measures, see
Supplemental Financial Data
on page
16
.
|
Net Interest Income
Net interest income on a fully taxable-equivalent (FTE) basis
decreased
$545 million
to
$10.2 billion
, and
$1.1 billion
to
$20.5 billion
for the
three and six months ended June 30, 2014
compared to the
same periods in 2013
. The
decreases
were
primarily due to the negative impact of market-related premium amortization expense on debt securities
,
lower consumer loan balances as well as lower loan yields,
and decreased trading-related net interest income,
partially offset by reductions in long-term debt balances and yields, higher commercial loan balances and lower rates paid on deposits.
The net interest yield on a FTE basis
decreased
13
basis points (bps) to
2.22 percent
, and
10
bps to
2.26 percent
for the
three and six months ended June 30, 2014
compared to the
same periods in 2013
due to the same factors as described above.
Given the additional liquidity during the first half of 2014, coupled with the average balance impact of lower consumer loan balances, we expect that net interest income in the second half of 2014 will improve modestly from the second quarter of 2014 level, excluding market-related adjustments. For more information on our liquidity position, see
Liquidity Risk
on page
75
.
7
Noninterest Income
|
Table 3
|
|||||||||||||||
|
Noninterest Income
|
|||||||||||||||
|
|
Three Months Ended June 30
|
Six Months Ended June 30
|
|||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Card income
|
$
|
1,441
|
|
$
|
1,469
|
|
$
|
2,834
|
|
$
|
2,879
|
|
|||
|
Service charges
|
1,866
|
|
1,837
|
|
3,692
|
|
3,636
|
|
|||||||
|
Investment and brokerage services
|
3,291
|
|
3,143
|
|
6,560
|
|
6,170
|
|
|||||||
|
Investment banking income
|
1,631
|
|
1,556
|
|
3,173
|
|
3,091
|
|
|||||||
|
Equity investment income
|
357
|
|
680
|
|
1,141
|
|
1,243
|
|
|||||||
|
Trading account profits
|
1,832
|
|
1,938
|
|
4,299
|
|
4,927
|
|
|||||||
|
Mortgage banking income
|
527
|
|
1,178
|
|
939
|
|
2,441
|
|
|||||||
|
Gains on sales of debt securities
|
382
|
|
457
|
|
759
|
|
525
|
|
|||||||
|
Other income (loss)
|
407
|
|
(80
|
)
|
818
|
|
(201
|
)
|
|||||||
|
Total noninterest income
|
$
|
11,734
|
|
$
|
12,178
|
|
$
|
24,215
|
|
$
|
24,711
|
|
|||
Noninterest income
decreased
$444 million
to
$11.7 billion
, and
$496 million
to
$24.2 billion
for the
three and six months ended June 30, 2014
compared to the
same periods in 2013
. The following highlights the significant changes.
|
•
|
Investment and brokerage services income
increased
$148 million
and
$390 million
primarily driven by higher market levels and the impact of long-term assets under management (AUM) inflows.
|
|
•
|
Equity investment income
decreased
$323 million
and
$102 million
. The three-month decline was due to gains on the sales of portions of an equity investment in
All Other
in the prior-year period, partially offset by a gain in the current-year period related to an initial public offering of an equity investment in
Global Markets
. The six-month decline was due to lower Global Principal Investments (GPI) gains compared to the prior-year period, partially offset by the gain in
Global Markets
.
|
|
•
|
Trading account profits
decreased
$106 million
and
$628 million
primarily due to declines in market volumes and reduced volatility.
|
|
•
|
Mortgage banking income
decreased
$651 million
and
$1.5 billion
primarily driven by lower core production revenue and servicing income, partially offset by lower representations and warranties provision.
|
|
•
|
Other income
increased
to
$407 million
from a loss of
$80 million
, and to
$818 million
from a loss of
$201 million
compared to the prior-year periods. The first quarter of 2013 included a write-down of $450 million on a monoline receivable. Other income included positive debit valuation adjustments (DVA) on structured liabilities of
$68 million
and
$265 million
in the current-year periods compared to positive DVA of
$10 million
and negative DVA of
$80 million
for the
same periods in 2013
.
|
Provision for Credit Losses
The provision for credit losses
decreased
$800 million
to
$411 million
, and
$1.5 billion
to
$1.4 billion
for the
three and six months ended June 30, 2014
compared to the
same periods in 2013
. The provision for credit losses was
$662 million
and
$1.0 billion
lower than net charge-offs resulting in reductions in the allowance for credit losses. The reductions in provision were driven by portfolio improvement, including increased home prices in the home loans portfolio, as well as lower levels of delinquencies in the consumer lending portfolio within
CBB
. This was partially offset by higher provision for credit losses in the commercial portfolio due to reserve increases.
Net charge-offs totaled
$1.1 billion
, or
0.48 percent
, and
$2.5 billion
, or
0.55 percent
of average loans and leases for the
three and six months ended June 30, 2014
compared to
$2.1 billion
, or
0.94 percent
, and
$4.6 billion
, or
1.04 percent
for the
same periods in 2013
. The
decreases
in net charge-offs were due to credit quality improvement across all major portfolios.
If the economy and our asset quality continue to improve, we expect net charge-offs to continue to show modest improvement from the second quarter amount of $1.3 billion, which excludes recoveries of
$185 million
on the nonperforming loan sales. We would also expect reserve releases to decline modestly through the balance of 2014. For more information on the provision for credit losses, see
Provision for Credit Losses
on page
117
.
8
Noninterest Expense
|
Table 4
|
|||||||||||||||
|
Noninterest Expense
|
|||||||||||||||
|
|
Three Months Ended June 30
|
Six Months Ended June 30
|
|||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Personnel
|
$
|
8,306
|
|
$
|
8,531
|
|
$
|
18,055
|
|
$
|
18,422
|
|
|||
|
Occupancy
|
1,079
|
|
1,109
|
|
2,194
|
|
2,263
|
|
|||||||
|
Equipment
|
534
|
|
532
|
|
1,080
|
|
1,082
|
|
|||||||
|
Marketing
|
450
|
|
437
|
|
892
|
|
866
|
|
|||||||
|
Professional fees
|
626
|
|
694
|
|
1,184
|
|
1,343
|
|
|||||||
|
Amortization of intangibles
|
235
|
|
274
|
|
474
|
|
550
|
|
|||||||
|
Data processing
|
761
|
|
779
|
|
1,594
|
|
1,591
|
|
|||||||
|
Telecommunications
|
324
|
|
411
|
|
694
|
|
820
|
|
|||||||
|
Other general operating
|
6,226
|
|
3,251
|
|
14,612
|
|
8,581
|
|
|||||||
|
Total noninterest expense
|
$
|
18,541
|
|
$
|
16,018
|
|
$
|
40,779
|
|
$
|
35,518
|
|
|||
Noninterest expense
increased
$2.5 billion
to
$18.5 billion
, and
$5.3 billion
to
$40.8 billion
for the
three and six months ended June 30, 2014
compared to the
same periods in 2013
primarily driven by higher other general operating expense. These increases in other general operating expense reflected increases in litigation expense, primarily related to previously disclosed legacy mortgage-related matters, of $3.5 billion to $4.0 billion for the three months ended June 30, 2014, and $7.3 billion to $10.0 billion for the six months ended June 30, 2014 compared to the
same periods in 2013
, partially offset by a decline in other general operating expenses in Legacy Assets & Servicing. Personnel expense
decreased
$225 million
and
$367 million
as we continued to streamline processes and achieve cost savings.
In connection with Project New BAC, which was first announced in the third quarter of 2011, we continue to achieve cost savings in certain noninterest expense categories as we further streamline workflows, simplify processes and align expenses with our overall strategic plan and operating principles. We expect total cost savings from Project New BAC, since inception of the project, to reach
$8 billion
on an annualized basis, or $2 billion per quarter. Our New BAC expense program is ahead of schedule, and we now expect to reach a quarterly level of $2 billion in cost savings in
the fourth quarter of 2014
, as opposed to mid-2015.
Income Tax Expense
|
Table 5
|
|||||||||||||||
|
Income Tax Expense
|
|||||||||||||||
|
|
Three Months Ended June 30
|
Six Months Ended June 30
|
|||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Income before income taxes
|
$
|
2,795
|
|
$
|
5,498
|
|
$
|
2,114
|
|
$
|
7,482
|
|
|||
|
Income tax expense
|
504
|
|
1,486
|
|
99
|
|
1,987
|
|
|||||||
|
Effective tax rate
|
18.0
|
%
|
27.0
|
%
|
4.7
|
%
|
26.6
|
%
|
|||||||
The effective tax rates for the
three and six months ended June 30, 2014
were driven by the impact of recurring tax preference benefits on the lower level of pre-tax income. Also reflected in the effective tax rate for the
six months ended June 30, 2014
were discrete tax benefits, principally from the resolution of certain tax matters, offset by the impact of certain accruals estimated to be nondeductible. We expect an effective tax rate of approximately 31 percent, absent any unusual items, for the remainder of 2014.
The effective tax rates for the
three and six months ended June 30, 2013
were primarily driven by our recurring tax preference benefits and an increase in tax benefits from the 2012 non-U.S. restructurings.
9
|
Balance Sheet Overview
|
||||||||||||||||||||||||||||||||
|
Table 6
|
||||||||||||||||||||||||||||||||
|
Selected Balance Sheet Data
|
||||||||||||||||||||||||||||||||
|
|
|
|
Average Balance
|
|||||||||||||||||||||||||||||
|
|
June 30
2014 |
December 31
2013 |
% Change
|
Three Months Ended
June 30 |
% Change
|
Six Months Ended
June 30 |
% Change
|
|||||||||||||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
||||||||||||||||||||||||||||
|
Assets
|
|
|
|
|
||||||||||||||||||||||||||||
|
Cash and cash equivalents
|
$
|
152,899
|
|
$
|
131,322
|
|
16
|
%
|
$
|
150,959
|
|
$
|
104,486
|
|
44
|
%
|
$
|
145,921
|
|
$
|
98,698
|
|
48
|
%
|
||||||||
|
Federal funds sold and securities borrowed or purchased under agreements to resell
|
229,449
|
|
190,328
|
|
21
|
|
235,393
|
|
233,394
|
|
1
|
|
224,012
|
|
235,417
|
|
(5
|
)
|
||||||||||||||
|
Trading account assets
|
196,952
|
|
200,993
|
|
(2
|
)
|
201,113
|
|
227,241
|
|
(11
|
)
|
202,467
|
|
233,568
|
|
(13
|
)
|
||||||||||||||
|
Debt securities
|
352,883
|
|
323,945
|
|
9
|
|
345,889
|
|
343,260
|
|
1
|
|
337,845
|
|
349,794
|
|
(3
|
)
|
||||||||||||||
|
Loans and leases
|
911,899
|
|
928,233
|
|
(2
|
)
|
912,580
|
|
914,234
|
|
—
|
|
916,012
|
|
910,269
|
|
1
|
|
||||||||||||||
|
Allowance for loan and lease losses
|
(15,811
|
)
|
(17,428
|
)
|
(9
|
)
|
(16,392
|
)
|
(22,060
|
)
|
(26
|
)
|
(16,766
|
)
|
(22,822
|
)
|
(27
|
)
|
||||||||||||||
|
All other assets
|
342,286
|
|
344,880
|
|
(1
|
)
|
340,013
|
|
384,055
|
|
(11
|
)
|
345,003
|
|
393,519
|
|
(12
|
)
|
||||||||||||||
|
Total assets
|
$
|
2,170,557
|
|
$
|
2,102,273
|
|
3
|
|
$
|
2,169,555
|
|
$
|
2,184,610
|
|
(1
|
)
|
$
|
2,154,494
|
|
$
|
2,198,443
|
|
(2
|
)
|
||||||||
|
Liabilities
|
|
|
|
|
||||||||||||||||||||||||||||
|
Deposits
|
$
|
1,134,329
|
|
$
|
1,119,271
|
|
1
|
|
$
|
1,128,563
|
|
$
|
1,079,956
|
|
5
|
|
$
|
1,123,399
|
|
$
|
1,077,631
|
|
4
|
|
||||||||
|
Federal funds purchased and securities loaned or sold under agreements to repurchase
|
217,829
|
|
198,106
|
|
10
|
|
222,525
|
|
270,790
|
|
(18
|
)
|
213,714
|
|
285,781
|
|
(25
|
)
|
||||||||||||||
|
Trading account liabilities
|
88,342
|
|
83,469
|
|
6
|
|
95,153
|
|
94,349
|
|
1
|
|
92,813
|
|
93,204
|
|
—
|
|
||||||||||||||
|
Short-term borrowings
|
45,873
|
|
45,999
|
|
—
|
|
48,722
|
|
47,238
|
|
3
|
|
48,447
|
|
42,001
|
|
15
|
|
||||||||||||||
|
Long-term debt
|
257,071
|
|
249,674
|
|
3
|
|
259,825
|
|
270,198
|
|
(4
|
)
|
256,768
|
|
272,088
|
|
(6
|
)
|
||||||||||||||
|
All other liabilities
|
189,702
|
|
173,069
|
|
10
|
|
178,970
|
|
187,016
|
|
(4
|
)
|
183,180
|
|
191,714
|
|
(4
|
)
|
||||||||||||||
|
Total liabilities
|
1,933,146
|
|
1,869,588
|
|
3
|
|
1,933,758
|
|
1,949,547
|
|
(1
|
)
|
1,918,321
|
|
1,962,419
|
|
(2
|
)
|
||||||||||||||
|
Shareholders' equity
|
237,411
|
|
232,685
|
|
2
|
|
235,797
|
|
235,063
|
|
—
|
|
236,173
|
|
236,024
|
|
—
|
|
||||||||||||||
|
Total liabilities and shareholders' equity
|
$
|
2,170,557
|
|
$
|
2,102,273
|
|
3
|
|
$
|
2,169,555
|
|
$
|
2,184,610
|
|
(1
|
)
|
$
|
2,154,494
|
|
$
|
2,198,443
|
|
(2
|
)
|
||||||||
Period-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.
Assets
At
June 30, 2014
, total assets were approximately
$2.2 trillion
,
up
$68.3 billion
from
December 31, 2013
. The key drivers were higher securities borrowed or purchased under agreements to resell to cover client and firm short positions, higher matched-book trading activity, higher debt securities driven by purchases of U.S. treasuries and fair value increases due to rates, and an increase in cash and cash equivalents primarily due to higher interest-bearing deposits with the Federal Reserve and non-U.S. central banks in connection with anticipated Basel 3 Liquidity Coverage Ratio (LCR) requirements. These increases were partially offset by a decline in consumer loan balances due to paydowns, net charge-offs and nonperforming loan sales outpacing new originations and repurchases of certain consumer loans.
Average total assets
decreased
$15.1 billion
for the
three months ended June 30, 2014
compared to the
same period in 2013
. The decrease was driven by a decline in all other assets primarily due to decreases in customer and other receivables, other earning assets, derivative dealer assets and loans held-for-sale (LHFS). The decrease in average total assets was also driven by decreased trading account assets due to a reduction in U.S. treasuries inventory
and agency pass-throughs as well as
consumer loans
due to run-off, payoffs and nonperforming loan sales outpacing new originations.
The decrease in average total assets was partially offset by increases in cash and cash equivalents primarily driven by higher interest-bearing deposits with the Federal Reserve and non-U.S. central banks, and commercial loans driven by higher customer demand.
10
Average total assets
decreased
$43.9 billion
for the
six months ended June 30, 2014
compared to the
same period in 2013
. The decrease was driven by declines in all other assets primarily due to decreases in other earning assets, customer and other receivables, derivative dealer assets and LHFS. The decrease in average total assets was also driven by a decline in trading account assets due to a reduction in U.S. treasuries inventory and agency pass-throughs, a decline in consumer loans due to run-off and paydowns outpacing originations, lower debt securities from sales of
securities in 2013 and paydowns outpacing new purchases, and a decline in securities borrowed or purchased under agreements to resell due to covering short positions and a lower matched-book. The decrease in average total assets was partially offset by increases in cash and cash equivalents primarily driven by higher interest-bearing deposits with the Federal Reserve and non-U.S. central banks, and commercial loans driven by higher customer demand.
Liabilities and Shareholders' Equity
At
June 30, 2014
, total liabilities were approximately
$1.9 trillion
,
up
$63.6 billion
from
December 31, 2013
primarily driven by higher securities loaned or sold under agreements to repurchase due to an increase in matched-book trading activity, an increase in all other liabilities primarily due to higher dealer payables, and growth in deposits. The increase in total liabilities was also driven by higher long-term debt due to new issuances outpacing maturities, and higher trading account liabilities.
Average total liabilities
decreased
$15.8 billion
for the
three months ended June 30, 2014
compared to the
same period in 2013
. The decrease was primarily driven by a decline in securities loaned or sold under agreements to repurchase due to a decrease in funding of long positions and a lower matched-book, planned reductions in long-term debt and maturities outpacing new issuances, and lower derivative liabilities, partially offset by growth in deposits.
Average total liabilities
decreased
$44.1 billion
for the
six months ended June 30, 2014
compared to the
same period in 2013
. The decrease was due to the same factors as described in the three-month discussion above.
Shareholders' equity of
$237.4 billion
at
June 30, 2014
increased
$4.7 billion
from
December 31, 2013
driven by a positive net change in the fair value of available-for-sale (AFS) debt securities due to decreases in rates, which is recorded in accumulated other comprehensive income (OCI), issuance of preferred stock and earnings, partially offset by capital returns.
Average shareholders' equity of
$235.8 billion
and
$236.2 billion
for the
three and six months ended June 30, 2014
remained relatively unchanged compared to the
same periods in 2013
as increases in earnings were partially offset by common and preferred stock repurchases and changes in unrealized gains and losses on AFS debt securities, which are recorded in accumulated OCI.
11
|
Table 7
|
|||||||||||||||||||
|
Selected Quarterly Financial Data
|
|||||||||||||||||||
|
|
2014 Quarters
|
2013 Quarters
|
|||||||||||||||||
|
(In millions, except per share information)
|
Second
|
First
|
Fourth
|
Third
|
Second
|
||||||||||||||
|
Income statement
|
|
|
|
|
|||||||||||||||
|
Net interest income
|
$
|
10,013
|
|
$
|
10,085
|
|
$
|
10,786
|
|
$
|
10,266
|
|
$
|
10,549
|
|
||||
|
Noninterest income
|
11,734
|
|
12,481
|
|
10,702
|
|
11,264
|
|
12,178
|
|
|||||||||
|
Total revenue, net of interest expense
|
21,747
|
|
22,566
|
|
21,488
|
|
21,530
|
|
22,727
|
|
|||||||||
|
Provision for credit losses
|
411
|
|
1,009
|
|
336
|
|
296
|
|
1,211
|
|
|||||||||
|
Noninterest expense
|
18,541
|
|
22,238
|
|
17,307
|
|
16,389
|
|
16,018
|
|
|||||||||
|
Income (loss) before income taxes
|
2,795
|
|
(681
|
)
|
3,845
|
|
4,845
|
|
5,498
|
|
|||||||||
|
Income tax expense (benefit)
|
504
|
|
(405
|
)
|
406
|
|
2,348
|
|
1,486
|
|
|||||||||
|
Net income (loss)
|
2,291
|
|
(276
|
)
|
3,439
|
|
2,497
|
|
4,012
|
|
|||||||||
|
Net income (loss) applicable to common shareholders
|
2,035
|
|
(514
|
)
|
3,183
|
|
2,218
|
|
3,571
|
|
|||||||||
|
Average common shares issued and outstanding
|
10,519
|
|
10,561
|
|
10,633
|
|
10,719
|
|
10,776
|
|
|||||||||
|
Average diluted common shares issued and outstanding
(1)
|
11,265
|
|
10,561
|
|
11,404
|
|
11,482
|
|
11,525
|
|
|||||||||
|
Performance ratios
|
|
|
|
|
|
||||||||||||||
|
Return on average assets
|
0.42
|
%
|
n/m
|
|
0.64
|
%
|
0.47
|
%
|
0.74
|
%
|
|||||||||
|
Four quarter trailing return on average assets
(2)
|
0.37
|
|
0.45
|
%
|
0.53
|
|
0.40
|
|
0.30
|
|
|||||||||
|
Return on average common shareholders' equity
|
3.68
|
|
n/m
|
|
5.74
|
|
4.06
|
|
6.55
|
|
|||||||||
|
Return on average tangible common shareholders' equity
(3)
|
5.47
|
|
n/m
|
|
8.61
|
|
6.15
|
|
9.88
|
|
|||||||||
|
Return on average tangible shareholders' equity
(3)
|
5.64
|
|
n/m
|
|
8.53
|
|
6.32
|
|
9.98
|
|
|||||||||
|
Total ending equity to total ending assets
|
10.94
|
|
10.79
|
|
11.07
|
|
10.92
|
|
10.88
|
|
|||||||||
|
Total average equity to total average assets
|
10.87
|
|
11.06
|
|
10.93
|
|
10.85
|
|
10.76
|
|
|||||||||
|
Dividend payout
|
5.16
|
|
n/m
|
|
3.33
|
|
4.82
|
|
3.01
|
|
|||||||||
|
Per common share data
|
|
|
|
|
|
||||||||||||||
|
Earnings (loss)
|
$
|
0.19
|
|
$
|
(0.05
|
)
|
$
|
0.30
|
|
$
|
0.21
|
|
$
|
0.33
|
|
||||
|
Diluted earnings (loss)
(1)
|
0.19
|
|
(0.05
|
)
|
0.29
|
|
0.20
|
|
0.32
|
|
|||||||||
|
Dividends paid
|
0.01
|
|
0.01
|
|
0.01
|
|
0.01
|
|
0.01
|
|
|||||||||
|
Book value
|
21.16
|
|
20.75
|
|
20.71
|
|
20.50
|
|
20.18
|
|
|||||||||
|
Tangible book value
(3)
|
14.24
|
|
13.81
|
|
13.79
|
|
13.62
|
|
13.32
|
|
|||||||||
|
Market price per share of common stock
|
|
|
|
|
|
||||||||||||||
|
Closing
|
$
|
15.37
|
|
$
|
17.20
|
|
$
|
15.57
|
|
$
|
13.80
|
|
$
|
12.86
|
|
||||
|
High closing
|
17.34
|
|
17.92
|
|
15.88
|
|
14.95
|
|
13.83
|
|
|||||||||
|
Low closing
|
14.51
|
|
16.10
|
|
13.69
|
|
12.83
|
|
11.44
|
|
|||||||||
|
Market capitalization
|
$
|
161,628
|
|
$
|
181,117
|
|
$
|
164,914
|
|
$
|
147,429
|
|
$
|
138,156
|
|
||||
|
(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 first quarter of 2014 because of the net loss.
|
|
(2)
|
Calculated as total net income for four consecutive quarters divided by annualized average assets for four consecutive quarters.
|
|
(3)
|
Tangible equity ratios and tangible book value per share of common stock are non-GAAP financial measures. Other companies may define or calculate these measures differently. For more information on these ratios and for corresponding reconciliations to GAAP financial measures, see
Supplemental Financial Data
on page
16
.
|
|
(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
82
.
|
|
(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
99
and corresponding Table
46
, and
Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity
on page
108
and corresponding Table
55
.
|
|
(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
$160 million
,
$391 million
,
$741 million
,
$443 million
and
$313 million
of write-offs in the purchased credit-impaired loan portfolio in the
second
and
first
quarters of
2014
and in the
fourth
,
third
and
second
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
93
.
|
|
(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
12
|
Table 7
|
|||||||||||||||||||
|
Selected Quarterly Financial Data (continued)
|
|||||||||||||||||||
|
|
2014 Quarters
|
2013 Quarters
|
|||||||||||||||||
|
(Dollars in millions)
|
Second
|
First
|
Fourth
|
Third
|
Second
|
||||||||||||||
|
Average balance sheet
|
|
|
|
|
|
||||||||||||||
|
Total loans and leases
|
$
|
912,580
|
|
$
|
919,482
|
|
$
|
929,777
|
|
$
|
923,978
|
|
$
|
914,234
|
|
||||
|
Total assets
|
2,169,555
|
|
2,139,266
|
|
2,134,875
|
|
2,123,430
|
|
2,184,610
|
|
|||||||||
|
Total deposits
|
1,128,563
|
|
1,118,178
|
|
1,112,674
|
|
1,090,611
|
|
1,079,956
|
|
|||||||||
|
Long-term debt
|
259,825
|
|
253,678
|
|
251,055
|
|
258,717
|
|
270,198
|
|
|||||||||
|
Common shareholders' equity
|
222,215
|
|
223,201
|
|
220,088
|
|
216,766
|
|
218,790
|
|
|||||||||
|
Total shareholders' equity
|
235,797
|
|
236,553
|
|
233,415
|
|
230,392
|
|
235,063
|
|
|||||||||
|
Asset quality
(4)
|
|
|
|
|
|
||||||||||||||
|
Allowance for credit losses
(5)
|
$
|
16,314
|
|
$
|
17,127
|
|
$
|
17,912
|
|
$
|
19,912
|
|
$
|
21,709
|
|
||||
|
Nonperforming loans, leases and foreclosed properties
(6)
|
15,300
|
|
17,732
|
|
17,772
|
|
20,028
|
|
21,280
|
|
|||||||||
|
Allowance for loan and lease losses as a percentage of total loans and leases outstanding
(6)
|
1.75
|
%
|
1.84
|
%
|
1.90
|
%
|
2.10
|
%
|
2.33
|
%
|
|||||||||
|
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases
(6)
|
108
|
|
97
|
|
102
|
|
100
|
|
103
|
|
|||||||||
|
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases, excluding the PCI loan portfolio
(6)
|
95
|
|
85
|
|
87
|
|
84
|
|
84
|
|
|||||||||
|
Amounts included in allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases
(7)
|
$
|
6,488
|
|
$
|
7,143
|
|
$
|
7,680
|
|
$
|
8,972
|
|
$
|
9,919
|
|
||||
|
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)
|
64
|
%
|
55
|
%
|
57
|
%
|
54
|
%
|
55
|
%
|
|||||||||
|
Net charge-offs
(8)
|
$
|
1,073
|
|
$
|
1,388
|
|
$
|
1,582
|
|
$
|
1,687
|
|
$
|
2,111
|
|
||||
|
Annualized net charge-offs as a percentage of average loans and leases outstanding
(6, 8)
|
0.48
|
%
|
0.62
|
%
|
0.68
|
%
|
0.73
|
%
|
0.94
|
%
|
|||||||||
|
Annualized net charge-offs as a percentage of average loans and leases outstanding, excluding the PCI loan portfolio
(6)
|
0.49
|
|
0.64
|
|
0.70
|
|
0.75
|
|
0.97
|
|
|||||||||
|
Annualized net charge-offs and PCI write-offs as a percentage of average loans and leases outstanding
(6)
|
0.55
|
|
0.79
|
|
1.00
|
|
0.92
|
|
1.07
|
|
|||||||||
|
Nonperforming loans and leases as a percentage of total loans and leases outstanding
(6)
|
1.63
|
|
1.89
|
|
1.87
|
|
2.10
|
|
2.26
|
|
|||||||||
|
Nonperforming loans, leases and foreclosed properties as a percentage of total loans, leases and foreclosed properties
(6)
|
1.70
|
|
1.96
|
|
1.93
|
|
2.17
|
|
2.33
|
|
|||||||||
|
Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs
(8)
|
3.67
|
|
2.95
|
|
2.78
|
|
2.90
|
|
2.51
|
|
|||||||||
|
Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs, excluding the PCI loan portfolio
|
3.25
|
|
2.58
|
|
2.38
|
|
2.42
|
|
2.04
|
|
|||||||||
|
Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs and PCI write-offs
|
3.20
|
|
2.30
|
|
1.89
|
|
2.30
|
|
2.18
|
|
|||||||||
|
Capital ratios at period end
(9)
|
|
|
|
|
|
||||||||||||||
|
Risk-based capital:
|
|
|
|
|
|
||||||||||||||
|
Common equity tier 1 capital
|
12.0
|
%
|
11.8
|
%
|
n/a
|
|
n/a
|
|
n/a
|
|
|||||||||
|
Tier 1 common capital
|
n/a
|
|
n/a
|
|
10.9
|
%
|
10.8
|
%
|
10.6
|
%
|
|||||||||
|
Tier 1 capital
|
12.5
|
|
11.9
|
|
12.2
|
|
12.1
|
|
11.9
|
|
|||||||||
|
Total capital
|
15.3
|
|
14.8
|
|
15.1
|
|
15.1
|
|
15.0
|
|
|||||||||
|
Tier 1 leverage
|
7.7
|
|
7.4
|
|
7.7
|
|
7.6
|
|
7.4
|
|
|||||||||
|
Tangible equity
(3)
|
7.85
|
|
7.65
|
|
7.86
|
|
7.73
|
|
7.67
|
|
|||||||||
|
Tangible common equity
(3)
|
7.14
|
|
7.00
|
|
7.20
|
|
7.08
|
|
6.98
|
|
|||||||||
For footnotes see page
12
.
13
|
Table 8
|
|||||||
|
Selected Year-to-Date Financial Data
|
|||||||
|
|
Six Months Ended June 30
|
||||||
|
(In millions, except per share information)
|
2014
|
2013
|
|||||
|
Income statement
|
|
|
|||||
|
Net interest income
|
$
|
20,098
|
|
$
|
21,213
|
|
|
|
Noninterest income
|
24,215
|
|
24,711
|
|
|||
|
Total revenue, net of interest expense
|
44,313
|
|
45,924
|
|
|||
|
Provision for credit losses
|
1,420
|
|
2,924
|
|
|||
|
Noninterest expense
|
40,779
|
|
35,518
|
|
|||
|
Income before income taxes
|
2,114
|
|
7,482
|
|
|||
|
Income tax expense
|
99
|
|
1,987
|
|
|||
|
Net income
|
2,015
|
|
5,495
|
|
|||
|
Net income applicable to common shareholders
|
1,521
|
|
4,681
|
|
|||
|
Average common shares issued and outstanding
|
10,540
|
|
10,787
|
|
|||
|
Average diluted common shares issued and outstanding
|
10,600
|
|
11,550
|
|
|||
|
Performance ratios
|
|
|
|||||
|
Return on average assets
|
0.19
|
%
|
0.50
|
%
|
|||
|
Return on average common shareholders' equity
|
1.38
|
|
4.32
|
|
|||
|
Return on average tangible common shareholders' equity
(1)
|
2.05
|
|
6.53
|
|
|||
|
Return on average tangible shareholders' equity
(1)
|
2.49
|
|
6.84
|
|
|||
|
Total ending equity to total ending assets
|
10.94
|
|
10.88
|
|
|||
|
Total average equity to total average assets
|
10.96
|
|
10.74
|
|
|||
|
Dividend payout
|
13.83
|
|
4.61
|
|
|||
|
Per common share data
|
|
|
|||||
|
Earnings
|
$
|
0.14
|
|
$
|
0.43
|
|
|
|
Diluted earnings
|
0.14
|
|
0.42
|
|
|||
|
Dividends paid
|
0.02
|
|
0.02
|
|
|||
|
Book value
|
21.16
|
|
20.18
|
|
|||
|
Tangible book value
(1)
|
14.24
|
|
13.32
|
|
|||
|
Market price per share of common stock
|
|
|
|||||
|
Closing
|
$
|
15.37
|
|
$
|
12.86
|
|
|
|
High closing
|
17.92
|
|
13.83
|
|
|||
|
Low closing
|
14.51
|
|
11.03
|
|
|||
|
Market capitalization
|
$
|
161,628
|
|
$
|
138,156
|
|
|
|
(1)
|
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 and for corresponding reconciliations to GAAP financial measures, see
Supplemental Financial Data
on page
16
.
|
|
(2)
|
For more information on the impact of the purchased credit-impaired loan portfolio on asset quality, see
Consumer Portfolio Credit Risk Management
on page
82
.
|
|
(3)
|
Includes the allowance for loan and lease losses and the reserve for unfunded lending commitments.
|
|
(4)
|
Balances and ratios do not include loans accounted for under the fair value option. For additional exclusions from nonperforming loans, leases and foreclosed properties, see
Consumer Portfolio Credit Risk Management – Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity
on page
99
and corresponding Table
46
, and
Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity
on page
108
and corresponding Table
55
.
|
|
(5)
|
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
.
|
|
(6)
|
Net charge-offs exclude
$551 million
and
$1.2 billion
of write-offs in the purchased credit-impaired loan portfolio for the
six months ended June 30, 2014 and 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
93
.
|
14
|
Table 8
|
|||||||
|
Selected Year-to-Date Financial Data (continued)
|
|||||||
|
|
Six Months Ended June 30
|
||||||
|
(Dollars in millions)
|
2014
|
2013
|
|||||
|
Average balance sheet
|
|
|
|||||
|
Total loans and leases
|
$
|
916,012
|
|
$
|
910,269
|
|
|
|
Total assets
|
2,154,494
|
|
2,198,443
|
|
|||
|
Total deposits
|
1,123,399
|
|
1,077,631
|
|
|||
|
Long-term debt
|
256,768
|
|
272,088
|
|
|||
|
Common shareholders' equity
|
222,705
|
|
218,509
|
|
|||
|
Total shareholders' equity
|
236,173
|
|
236,024
|
|
|||
|
Asset quality
(2)
|
|
|
|||||
|
Allowance for credit losses
(3)
|
$
|
16,314
|
|
$
|
21,709
|
|
|
|
Nonperforming loans, leases and foreclosed properties
(4)
|
15,300
|
|
21,280
|
|
|||
|
Allowance for loan and lease losses as a percentage of total loans and leases outstanding
(4)
|
1.75
|
%
|
2.33
|
%
|
|||
|
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases
(4)
|
108
|
|
103
|
|
|||
|
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases, excluding the PCI loan portfolio
(4)
|
95
|
|
84
|
|
|||
|
Amounts included in allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases
(5)
|
$
|
6,488
|
|
$
|
9,919
|
|
|
|
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
(4, 5)
|
64
|
%
|
55
|
%
|
|||
|
Net charge-offs
(6)
|
$
|
2,461
|
|
$
|
4,628
|
|
|
|
Annualized net charge-offs as a percentage of average loans and leases outstanding
(4, 6)
|
0.55
|
%
|
1.04
|
%
|
|||
|
Annualized net charge-offs as a percentage of average loans and leases outstanding, excluding the PCI loan portfolio
(4)
|
0.56
|
|
1.07
|
|
|||
|
Annualized net charge-offs and PCI write-offs as a percentage of average loans and leases outstanding
(4)
|
0.67
|
|
1.29
|
|
|||
|
Nonperforming loans and leases as a percentage of total loans and leases outstanding
(4)
|
1.63
|
|
2.26
|
|
|||
|
Nonperforming loans, leases and foreclosed properties as a percentage of total loans, leases and foreclosed properties
(4)
|
1.70
|
|
2.33
|
|
|||
|
Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs
(6)
|
3.19
|
|
2.28
|
|
|||
|
Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs, excluding the PCI loan portfolio
|
2.82
|
|
1.85
|
|
|||
|
Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs and PCI write-offs
|
2.60
|
|
1.82
|
|
|||
For footnotes see page
14
.
15
|
Supplemental Financial Data
|
We view net interest income and related ratios and analyses on a FTE basis, which when presented on a consolidated basis, are non-GAAP financial measures. We believe managing the business with net interest income on a 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 a 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:
|
•
|
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.
|
|
•
|
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.
|
|
•
|
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 Tables
7
and
8
.
16
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
28
and
Note 8 – Goodwill and Intangible Assets
to the Consolidated Financial Statements
.
Tables
9
,
10
and
11
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 9
|
|||||||||||||||||||
|
Quarterly Supplemental Financial Data and Reconciliations to GAAP Financial Measures
|
|||||||||||||||||||
|
|
2014 Quarters
|
2013 Quarters
|
|||||||||||||||||
|
(Dollars in millions)
|
Second
|
First
|
Fourth
|
Third
|
Second
|
||||||||||||||
|
Fully taxable-equivalent basis data
|
|
|
|
|
|||||||||||||||
|
Net interest income
|
$
|
10,226
|
|
$
|
10,286
|
|
$
|
10,999
|
|
$
|
10,479
|
|
$
|
10,771
|
|
||||
|
Total revenue, net of interest expense
|
21,960
|
|
22,767
|
|
21,701
|
|
21,743
|
|
22,949
|
|
|||||||||
|
Net interest yield
(1)
|
2.22
|
%
|
2.29
|
%
|
2.44
|
%
|
2.33
|
%
|
2.35
|
%
|
|||||||||
|
Efficiency ratio
|
84.43
|
|
97.68
|
|
79.75
|
|
75.38
|
|
69.80
|
|
|||||||||
|
(1)
|
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.
|
17
|
Table 9
|
|||||||||||||||||||
|
Quarterly Supplemental Financial Data and Reconciliations to GAAP Financial Measures (continued)
|
|||||||||||||||||||
|
|
2014 Quarters
|
2013 Quarters
|
|||||||||||||||||
|
(Dollars in millions)
|
Second
|
First
|
Fourth
|
Third
|
Second
|
||||||||||||||
|
Reconciliation of net interest income to net interest income on a fully taxable-equivalent basis
|
|
|
|
|
|
||||||||||||||
|
Net interest income
|
$
|
10,013
|
|
$
|
10,085
|
|
$
|
10,786
|
|
$
|
10,266
|
|
$
|
10,549
|
|
||||
|
Fully taxable-equivalent adjustment
|
213
|
|
201
|
|
213
|
|
213
|
|
222
|
|
|||||||||
|
Net interest income on a fully taxable-equivalent basis
|
$
|
10,226
|
|
$
|
10,286
|
|
$
|
10,999
|
|
$
|
10,479
|
|
$
|
10,771
|
|
||||
|
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
|
$
|
21,747
|
|
$
|
22,566
|
|
$
|
21,488
|
|
$
|
21,530
|
|
$
|
22,727
|
|
||||
|
Fully taxable-equivalent adjustment
|
213
|
|
201
|
|
213
|
|
213
|
|
222
|
|
|||||||||
|
Total revenue, net of interest expense on a fully taxable-equivalent basis
|
$
|
21,960
|
|
$
|
22,767
|
|
$
|
21,701
|
|
$
|
21,743
|
|
$
|
22,949
|
|
||||
|
Reconciliation of income tax expense (benefit) to income tax expense (benefit) on a fully taxable-equivalent basis
|
|
|
|
|
|
||||||||||||||
|
Income tax expense (benefit)
|
$
|
504
|
|
$
|
(405
|
)
|
$
|
406
|
|
$
|
2,348
|
|
$
|
1,486
|
|
||||
|
Fully taxable-equivalent adjustment
|
213
|
|
201
|
|
213
|
|
213
|
|
222
|
|
|||||||||
|
Income tax expense (benefit) on a fully taxable-equivalent basis
|
$
|
717
|
|
$
|
(204
|
)
|
$
|
619
|
|
$
|
2,561
|
|
$
|
1,708
|
|
||||
|
Reconciliation of average common shareholders' equity to average tangible common shareholders' equity
|
|
|
|
|
|
||||||||||||||
|
Common shareholders' equity
|
$
|
222,215
|
|
$
|
223,201
|
|
$
|
220,088
|
|
$
|
216,766
|
|
$
|
218,790
|
|
||||
|
Goodwill
|
(69,822
|
)
|
(69,842
|
)
|
(69,864
|
)
|
(69,903
|
)
|
(69,930
|
)
|
|||||||||
|
Intangible assets (excluding MSRs)
|
(5,235
|
)
|
(5,474
|
)
|
(5,725
|
)
|
(5,993
|
)
|
(6,270
|
)
|
|||||||||
|
Related deferred tax liabilities
|
2,100
|
|
2,165
|
|
2,231
|
|
2,296
|
|
2,360
|
|
|||||||||
|
Tangible common shareholders' equity
|
$
|
149,258
|
|
$
|
150,050
|
|
$
|
146,730
|
|
$
|
143,166
|
|
$
|
144,950
|
|
||||
|
Reconciliation of average shareholders' equity to average tangible shareholders' equity
|
|
|
|
|
|
||||||||||||||
|
Shareholders' equity
|
$
|
235,797
|
|
$
|
236,553
|
|
$
|
233,415
|
|
$
|
230,392
|
|
$
|
235,063
|
|
||||
|
Goodwill
|
(69,822
|
)
|
(69,842
|
)
|
(69,864
|
)
|
(69,903
|
)
|
(69,930
|
)
|
|||||||||
|
Intangible assets (excluding MSRs)
|
(5,235
|
)
|
(5,474
|
)
|
(5,725
|
)
|
(5,993
|
)
|
(6,270
|
)
|
|||||||||
|
Related deferred tax liabilities
|
2,100
|
|
2,165
|
|
2,231
|
|
2,296
|
|
2,360
|
|
|||||||||
|
Tangible shareholders' equity
|
$
|
162,840
|
|
$
|
163,402
|
|
$
|
160,057
|
|
$
|
156,792
|
|
$
|
161,223
|
|
||||
|
Reconciliation of period-end common shareholders' equity to period-end tangible common shareholders' equity
|
|
|
|
|
|
||||||||||||||
|
Common shareholders' equity
|
$
|
222,565
|
|
$
|
218,536
|
|
$
|
219,333
|
|
$
|
218,967
|
|
$
|
216,791
|
|
||||
|
Goodwill
|
(69,810
|
)
|
(69,842
|
)
|
(69,844
|
)
|
(69,891
|
)
|
(69,930
|
)
|
|||||||||
|
Intangible assets (excluding MSRs)
|
(5,099
|
)
|
(5,337
|
)
|
(5,574
|
)
|
(5,843
|
)
|
(6,104
|
)
|
|||||||||
|
Related deferred tax liabilities
|
2,078
|
|
2,100
|
|
2,166
|
|
2,231
|
|
2,297
|
|
|||||||||
|
Tangible common shareholders' equity
|
$
|
149,734
|
|
$
|
145,457
|
|
$
|
146,081
|
|
$
|
145,464
|
|
$
|
143,054
|
|
||||
|
Reconciliation of period-end shareholders' equity to period-end tangible shareholders' equity
|
|
|
|
|
|
||||||||||||||
|
Shareholders' equity
|
$
|
237,411
|
|
$
|
231,888
|
|
$
|
232,685
|
|
$
|
232,282
|
|
$
|
231,032
|
|
||||
|
Goodwill
|
(69,810
|
)
|
(69,842
|
)
|
(69,844
|
)
|
(69,891
|
)
|
(69,930
|
)
|
|||||||||
|
Intangible assets (excluding MSRs)
|
(5,099
|
)
|
(5,337
|
)
|
(5,574
|
)
|
(5,843
|
)
|
(6,104
|
)
|
|||||||||
|
Related deferred tax liabilities
|
2,078
|
|
2,100
|
|
2,166
|
|
2,231
|
|
2,297
|
|
|||||||||
|
Tangible shareholders' equity
|
$
|
164,580
|
|
$
|
158,809
|
|
$
|
159,433
|
|
$
|
158,779
|
|
$
|
157,295
|
|
||||
|
Reconciliation of period-end assets to period-end tangible assets
|
|
|
|
|
|
||||||||||||||
|
Assets
|
$
|
2,170,557
|
|
$
|
2,149,851
|
|
$
|
2,102,273
|
|
$
|
2,126,653
|
|
$
|
2,123,320
|
|
||||
|
Goodwill
|
(69,810
|
)
|
(69,842
|
)
|
(69,844
|
)
|
(69,891
|
)
|
(69,930
|
)
|
|||||||||
|
Intangible assets (excluding MSRs)
|
(5,099
|
)
|
(5,337
|
)
|
(5,574
|
)
|
(5,843
|
)
|
(6,104
|
)
|
|||||||||
|
Related deferred tax liabilities
|
2,078
|
|
2,100
|
|
2,166
|
|
2,231
|
|
2,297
|
|
|||||||||
|
Tangible assets
|
$
|
2,097,726
|
|
$
|
2,076,772
|
|
$
|
2,029,021
|
|
$
|
2,053,150
|
|
$
|
2,049,583
|
|
||||
18
|
Table 10
|
|||||||
|
Year-to-Date Supplemental Financial Data and Reconciliations to GAAP Financial Measures
|
|||||||
|
|
Six Months Ended June 30
|
||||||
|
(Dollars in millions, except per share information)
|
2014
|
2013
|
|||||
|
Fully taxable-equivalent basis data
|
|
|
|||||
|
Net interest income
|
$
|
20,512
|
|
$
|
21,646
|
|
|
|
Total revenue, net of interest expense
|
44,727
|
|
46,357
|
|
|||
|
Net interest yield
(1)
|
2.26
|
%
|
2.36
|
%
|
|||
|
Efficiency ratio
|
91.17
|
|
76.62
|
|
|||
|
Reconciliation of net interest income to net interest income on a fully taxable-equivalent basis
|
|
|
|||||
|
Net interest income
|
$
|
20,098
|
|
$
|
21,213
|
|
|
|
Fully taxable-equivalent adjustment
|
414
|
|
433
|
|
|||
|
Net interest income on a fully taxable-equivalent basis
|
$
|
20,512
|
|
$
|
21,646
|
|
|
|
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
|
$
|
44,313
|
|
$
|
45,924
|
|
|
|
Fully taxable-equivalent adjustment
|
414
|
|
433
|
|
|||
|
Total revenue, net of interest expense on a fully taxable-equivalent basis
|
$
|
44,727
|
|
$
|
46,357
|
|
|
|
Reconciliation of income tax expense to income tax expense on a fully taxable-equivalent basis
|
|
|
|||||
|
Income tax expense
|
$
|
99
|
|
$
|
1,987
|
|
|
|
Fully taxable-equivalent adjustment
|
414
|
|
433
|
|
|||
|
Income tax expense on a fully taxable-equivalent basis
|
$
|
513
|
|
$
|
2,420
|
|
|
|
Reconciliation of average common shareholders' equity to average tangible common shareholders' equity
|
|
|
|||||
|
Common shareholders' equity
|
$
|
222,705
|
|
$
|
218,509
|
|
|
|
Goodwill
|
(69,832
|
)
|
(69,937
|
)
|
|||
|
Intangible assets (excluding MSRs)
|
(5,354
|
)
|
(6,409
|
)
|
|||
|
Related deferred tax liabilities
|
2,132
|
|
2,393
|
|
|||
|
Tangible common shareholders' equity
|
$
|
149,651
|
|
$
|
144,556
|
|
|
|
Reconciliation of average shareholders' equity to average tangible shareholders' equity
|
|
|
|||||
|
Shareholders' equity
|
$
|
236,173
|
|
$
|
236,024
|
|
|
|
Goodwill
|
(69,832
|
)
|
(69,937
|
)
|
|||
|
Intangible assets (excluding MSRs)
|
(5,354
|
)
|
(6,409
|
)
|
|||
|
Related deferred tax liabilities
|
2,132
|
|
2,393
|
|
|||
|
Tangible shareholders' equity
|
$
|
163,119
|
|
$
|
162,071
|
|
|
|
(1)
|
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.
|
19
|
Table 11
|
|||||||||||||||
|
Segment Supplemental Financial Data Reconciliations to GAAP Financial Measures
(1)
|
|||||||||||||||
|
|
Three Months Ended June 30
|
Six Months Ended June 30
|
|||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Consumer & Business Banking
|
|
|
|||||||||||||
|
Reported net income
|
$
|
1,788
|
|
$
|
1,391
|
|
$
|
3,454
|
|
$
|
2,833
|
|
|||
|
Adjustment related to intangibles
(2)
|
1
|
|
2
|
|
2
|
|
4
|
|
|||||||
|
Adjusted net income
|
$
|
1,789
|
|
$
|
1,393
|
|
$
|
3,456
|
|
$
|
2,837
|
|
|||
|
Average allocated equity
(3)
|
$
|
61,460
|
|
$
|
62,050
|
|
$
|
61,468
|
|
$
|
62,063
|
|
|||
|
Adjustment related to goodwill and a percentage of intangibles
|
(31,960
|
)
|
(32,050
|
)
|
(31,968
|
)
|
(32,063
|
)
|
|||||||
|
Average allocated capital
|
$
|
29,500
|
|
$
|
30,000
|
|
$
|
29,500
|
|
$
|
30,000
|
|
|||
|
Deposits
|
|||||||||||||||
|
Reported net income
|
$
|
743
|
|
$
|
485
|
|
$
|
1,375
|
|
$
|
886
|
|
|||
|
Adjustment related to intangibles
(2)
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||
|
Adjusted net income
|
$
|
743
|
|
$
|
485
|
|
$
|
1,375
|
|
$
|
886
|
|
|||
|
Average allocated equity
(3)
|
$
|
36,486
|
|
$
|
35,395
|
|
$
|
36,484
|
|
$
|
35,397
|
|
|||
|
Adjustment related to goodwill and a percentage of intangibles
|
(19,986
|
)
|
(19,995
|
)
|
(19,984
|
)
|
(19,997
|
)
|
|||||||
|
Average allocated capital
|
$
|
16,500
|
|
$
|
15,400
|
|
$
|
16,500
|
|
$
|
15,400
|
|
|||
|
Consumer Lending
|
|||||||||||||||
|
Reported net income
|
$
|
1,045
|
|
$
|
906
|
|
$
|
2,079
|
|
$
|
1,947
|
|
|||
|
Adjustment related to intangibles
(2)
|
1
|
|
2
|
|
2
|
|
4
|
|
|||||||
|
Adjusted net income
|
$
|
1,046
|
|
$
|
908
|
|
$
|
2,081
|
|
$
|
1,951
|
|
|||
|
Average allocated equity
(3)
|
$
|
24,974
|
|
$
|
26,655
|
|
$
|
24,984
|
|
$
|
26,666
|
|
|||
|
Adjustment related to goodwill and a percentage of intangibles
|
(11,974
|
)
|
(12,055
|
)
|
(11,984
|
)
|
(12,066
|
)
|
|||||||
|
Average allocated capital
|
$
|
13,000
|
|
$
|
14,600
|
|
$
|
13,000
|
|
$
|
14,600
|
|
|||
|
Global Wealth & Investment Management
|
|||||||||||||||
|
Reported net income
|
$
|
724
|
|
$
|
759
|
|
$
|
1,453
|
|
$
|
1,479
|
|
|||
|
Adjustment related to intangibles
(2)
|
4
|
|
4
|
|
7
|
|
9
|
|
|||||||
|
Adjusted net income
|
$
|
728
|
|
$
|
763
|
|
$
|
1,460
|
|
$
|
1,488
|
|
|||
|
Average allocated equity
(3)
|
$
|
22,222
|
|
$
|
20,300
|
|
$
|
22,233
|
|
$
|
20,311
|
|
|||
|
Adjustment related to goodwill and a percentage of intangibles
|
(10,222
|
)
|
(10,300
|
)
|
(10,233
|
)
|
(10,311
|
)
|
|||||||
|
Average allocated capital
|
$
|
12,000
|
|
$
|
10,000
|
|
$
|
12,000
|
|
$
|
10,000
|
|
|||
|
Global Banking
|
|||||||||||||||
|
Reported net income
|
$
|
1,353
|
|
$
|
1,297
|
|
$
|
2,589
|
|
$
|
2,581
|
|
|||
|
Adjustment related to intangibles
(2)
|
1
|
|
1
|
|
1
|
|
1
|
|
|||||||
|
Adjusted net income
|
$
|
1,354
|
|
$
|
1,298
|
|
$
|
2,590
|
|
$
|
2,582
|
|
|||
|
Average allocated equity
(3)
|
$
|
53,405
|
|
$
|
45,416
|
|
$
|
53,406
|
|
$
|
45,411
|
|
|||
|
Adjustment related to goodwill and a percentage of intangibles
|
(22,405
|
)
|
(22,416
|
)
|
(22,406
|
)
|
(22,411
|
)
|
|||||||
|
Average allocated capital
|
$
|
31,000
|
|
$
|
23,000
|
|
$
|
31,000
|
|
$
|
23,000
|
|
|||
|
Global Markets
|
|||||||||||||||
|
Reported net income
|
$
|
1,101
|
|
$
|
962
|
|
$
|
2,409
|
|
$
|
2,074
|
|
|||
|
Adjustment related to intangibles
(2)
|
3
|
|
2
|
|
5
|
|
4
|
|
|||||||
|
Adjusted net income
|
$
|
1,104
|
|
$
|
964
|
|
$
|
2,414
|
|
$
|
2,078
|
|
|||
|
Average allocated equity
(3)
|
$
|
39,373
|
|
$
|
35,357
|
|
$
|
39,374
|
|
$
|
35,364
|
|
|||
|
Adjustment related to goodwill and a percentage of intangibles
|
(5,373
|
)
|
(5,357
|
)
|
(5,374
|
)
|
(5,364
|
)
|
|||||||
|
Average allocated capital
|
$
|
34,000
|
|
$
|
30,000
|
|
$
|
34,000
|
|
$
|
30,000
|
|
|||
|
(1)
|
There are no adjustments to reported net income (loss) or average allocated equity for
CRES
.
|
|
(2)
|
Represents cost of funds, earnings credits and certain expenses related to intangibles.
|
|
(3)
|
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
28
and
Note 8 – Goodwill and Intangible Assets
to the Consolidated Financial Statements
.
|
20
|
Net Interest Income Excluding Trading-related Net Interest Income
|
We manage net interest income on a FTE basis and excluding the impact of trading-related activities. As discussed in
Global Markets
on page
49
, 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 a FTE basis, is shown below. We believe the use of this non-GAAP presentation in
Table 12
provides additional clarity in assessing our results.
|
Table 12
|
|||||||||||||||
|
Net Interest Income Excluding Trading-related Net Interest Income
|
|||||||||||||||
|
|
Three Months Ended June 30
|
Six Months Ended June 30
|
|||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Net interest income (FTE basis)
|
|
|
|||||||||||||
|
As reported
|
$
|
10,226
|
|
$
|
10,771
|
|
$
|
20,512
|
|
$
|
21,646
|
|
|||
|
Impact of trading-related net interest income
|
(858
|
)
|
(914
|
)
|
(1,758
|
)
|
(1,923
|
)
|
|||||||
|
Net interest income excluding trading-related net interest income
(1)
|
$
|
9,368
|
|
$
|
9,857
|
|
$
|
18,754
|
|
$
|
19,723
|
|
|||
|
Average earning assets
(2)
|
|||||||||||||||
|
As reported
|
$
|
1,840,850
|
|
$
|
1,833,541
|
|
$
|
1,822,177
|
|
$
|
1,845,651
|
|
|||
|
Impact of trading-related earning assets
|
(463,395
|
)
|
(487,288
|
)
|
(453,105
|
)
|
(492,443
|
)
|
|||||||
|
Average earning assets excluding trading-related earning assets
(1)
|
$
|
1,377,455
|
|
$
|
1,346,253
|
|
$
|
1,369,072
|
|
$
|
1,353,208
|
|
|||
|
Net interest yield contribution (FTE basis)
(2, 3)
|
|||||||||||||||
|
As reported
|
2.22
|
%
|
2.35
|
%
|
2.26
|
%
|
2.36
|
%
|
|||||||
|
Impact of trading-related activities
|
0.50
|
|
0.58
|
|
0.49
|
|
0.57
|
|
|||||||
|
Net interest yield on earning assets excluding trading-related activities
(1)
|
2.72
|
%
|
2.93
|
%
|
2.75
|
%
|
2.93
|
%
|
|||||||
|
(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.
|
|
(3)
|
Calculated on an annualized basis.
|
For the
three and six months ended June 30, 2014
, net interest income excluding trading-related net interest income
decreased
$489 million
to
$9.4 billion
, and
$969 million
to
$18.8 billion
compared to the
same periods in 2013
. The
decreases
were
primarily due to the negative impact of market-related premium amortization expense on debt securities
,
lower consumer loan balances as well as lower loan yields,
partially offset by reductions in long-term debt balances and yields, higher commercial loan balances and lower rates paid on deposits.
For more information on the impact of interest rates, see
Interest Rate Risk Management for Nontrading Activities
on page
128
.
Average earning assets excluding trading-related earning assets for the
three and six months ended June 30, 2014
increased
$31.2 billion
to
$1,377.5 billion
, and
$15.9 billion
to
$1,369.1 billion
compared to the
same periods in 2013
. The
increases
were primarily in interest-bearing deposits with the Federal Reserve and commercial loans, partially offset by declines in other earning assets and consumer loans.
For the
three and six months ended June 30, 2014
, net interest yield on earning assets excluding trading-related activities
decreased
21 bps
to
2.72 percent
, and
18 bps
to
2.75 percent
compared to the
same periods in 2013
due to the same factors as described above.
21
|
Table 13
|
|||||||||||||||||||||
|
Quarterly Average Balances and Interest Rates – FTE Basis
|
|||||||||||||||||||||
|
|
Second Quarter 2014
|
First 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)
|
$
|
123,582
|
|
$
|
85
|
|
0.28
|
%
|
$
|
112,570
|
|
$
|
72
|
|
0.26
|
%
|
|||||
|
Time deposits placed and other short-term investments
|
10,509
|
|
39
|
|
1.51
|
|
13,880
|
|
49
|
|
1.43
|
|
|||||||||
|
Federal funds sold and securities borrowed or purchased under agreements to resell
|
235,393
|
|
297
|
|
0.51
|
|
212,504
|
|
265
|
|
0.51
|
|
|||||||||
|
Trading account assets
|
147,798
|
|
1,214
|
|
3.29
|
|
147,583
|
|
1,213
|
|
3.32
|
|
|||||||||
|
Debt securities
(2)
|
345,889
|
|
2,134
|
|
2.46
|
|
329,711
|
|
2,005
|
|
2.41
|
|
|||||||||
|
Loans and leases
(3)
:
|
|||||||||||||||||||||
|
Residential mortgage
(4)
|
243,405
|
|
2,195
|
|
3.61
|
|
247,556
|
|
2,240
|
|
3.62
|
|
|||||||||
|
Home equity
|
90,729
|
|
842
|
|
3.72
|
|
92,759
|
|
851
|
|
3.71
|
|
|||||||||
|
U.S. credit card
|
88,058
|
|
2,042
|
|
9.30
|
|
89,545
|
|
2,092
|
|
9.48
|
|
|||||||||
|
Non-U.S. credit card
|
11,759
|
|
308
|
|
10.51
|
|
11,554
|
|
308
|
|
10.79
|
|
|||||||||
|
Direct/Indirect consumer
(5)
|
82,102
|
|
524
|
|
2.56
|
|
81,728
|
|
530
|
|
2.63
|
|
|||||||||
|
Other consumer
(6)
|
2,012
|
|
17
|
|
3.60
|
|
1,962
|
|
18
|
|
3.66
|
|
|||||||||
|
Total consumer
|
518,065
|
|
5,928
|
|
4.58
|
|
525,104
|
|
6,039
|
|
4.64
|
|
|||||||||
|
U.S. commercial
|
230,487
|
|
1,672
|
|
2.91
|
|
228,058
|
|
1,651
|
|
2.93
|
|
|||||||||
|
Commercial real estate
(7)
|
48,315
|
|
357
|
|
2.97
|
|
48,753
|
|
368
|
|
3.06
|
|
|||||||||
|
Commercial lease financing
|
24,409
|
|
193
|
|
3.16
|
|
24,727
|
|
234
|
|
3.78
|
|
|||||||||
|
Non-U.S. commercial
|
91,304
|
|
570
|
|
2.50
|
|
92,840
|
|
543
|
|
2.37
|
|
|||||||||
|
Total commercial
|
394,515
|
|
2,792
|
|
2.84
|
|
394,378
|
|
2,796
|
|
2.87
|
|
|||||||||
|
Total loans and leases
|
912,580
|
|
8,720
|
|
3.83
|
|
919,482
|
|
8,835
|
|
3.88
|
|
|||||||||
|
Other earning assets
|
65,099
|
|
665
|
|
4.09
|
|
67,568
|
|
697
|
|
4.18
|
|
|||||||||
|
Total earning assets
(8)
|
1,840,850
|
|
13,154
|
|
2.86
|
|
1,803,298
|
|
13,136
|
|
2.93
|
|
|||||||||
|
Cash and due from banks
(1)
|
27,377
|
|
28,258
|
|
|||||||||||||||||
|
Other assets, less allowance for loan and lease losses
|
301,328
|
|
307,710
|
|
|||||||||||||||||
|
Total assets
|
$
|
2,169,555
|
|
$
|
2,139,266
|
|
|||||||||||||||
|
(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
and
$0
in the
second
and
first
quarters of
2014
, and
$56 million
,
$83 million
and
$86 million
in the
fourth
,
third
and
second
quarters of
2013
, respectively.
|
|
(5)
|
Includes non-U.S. consumer loans of
$4.4 billion
and
$4.6 billion
in the
second
and
first
quarters of
2014
, and
$5.1 billion
,
$6.7 billion
and
$7.5 billion
in the
fourth
,
third
and
second
quarters of
2013
, respectively.
|
|
(6)
|
Includes consumer finance loans of
$1.1 billion
and
$1.2 billion
in the
second
and
first
quarters of
2014
, and
$1.2 billion
,
$1.3 billion
and
$1.3 billion
in the
fourth
,
third
and
second
quarters of
2013
, respectively; consumer leases of
$762 million
and
$656 million
in the
second
and
first
quarters of
2014
, and
$549 million
,
$431 million
and
$291 million
in the
fourth
,
third
and
second
quarters of
2013
, respectively; consumer overdrafts of
$137 million
and
$140 million
in the
second
and
first
quarters of
2014
, and
$163 million
,
$172 million
and
$136 million
in the
fourth
,
third
and
second
quarters of
2013
, respectively; and other non-U.S. consumer loans of
$3 million
and
$5 million
in the
second
and
first
quarters of
2014
, and
$5 million
for each of the quarters of 2013.
|
|
(7)
|
Includes U.S. commercial real estate loans of
$46.7 billion
and
$47.0 billion
in the
second
and
first
quarters of
2014
, and
$44.5 billion
,
$41.5 billion
and
$39.1 billion
in the
fourth
,
third
and
second
quarters of
2013
, respectively; and non-U.S. commercial real estate loans of
$1.6 billion
and
$1.8 billion
in the
second
and
first
quarters of
2014
, and
$1.8 billion
,
$1.7 billion
and
$1.5 billion
in the
fourth
,
third
and
second
quarters of
2013
, respectively.
|
|
(8)
|
Interest income includes the impact of interest rate risk management contracts, which decreased interest income on the underlying assets by
$13 million
and
$5 million
in the
second
and
first
quarters of
2014
, and
$0
,
$1 million
and
$63 million
in the
fourth
,
third
and
second
quarters of
2013
, respectively. Interest expense includes the impact of interest rate risk management contracts, which decreased interest expense on the underlying liabilities by
$621 million
and
$592 million
in the
second
and
first
quarters of
2014
, and
$588 million
,
$556 million
and
$660 million
in the
fourth
,
third
and
second
quarters of
2013
, respectively. For more information on interest rate contracts, see Interest Rate Risk Management for Nontrading Activities on page
128
.
|
22
|
Table 13
|
||||||||||||||||||||||||||||||||
|
Quarterly Average Balances and Interest Rates – FTE Basis (continued)
|
||||||||||||||||||||||||||||||||
|
|
Fourth Quarter 2013
|
Third Quarter 2013
|
Second 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)
|
$
|
90,196
|
|
$
|
59
|
|
0.26
|
%
|
$
|
78,360
|
|
$
|
50
|
|
0.26
|
%
|
$
|
64,205
|
|
$
|
40
|
|
0.25
|
%
|
||||||||
|
Time deposits placed and other short-term investments
|
15,782
|
|
48
|
|
1.21
|
|
17,256
|
|
47
|
|
1.07
|
|
15,088
|
|
46
|
|
1.21
|
|
||||||||||||||
|
Federal funds sold and securities borrowed or purchased under agreements to resell
|
203,415
|
|
304
|
|
0.59
|
|
223,434
|
|
291
|
|
0.52
|
|
233,394
|
|
319
|
|
0.55
|
|
||||||||||||||
|
Trading account assets
|
156,194
|
|
1,182
|
|
3.01
|
|
144,502
|
|
1,093
|
|
3.01
|
|
181,620
|
|
1,224
|
|
2.70
|
|
||||||||||||||
|
Debt securities
(2)
|
325,119
|
|
2,455
|
|
3.02
|
|
327,493
|
|
2,211
|
|
2.70
|
|
343,260
|
|
2,557
|
|
2.98
|
|
||||||||||||||
|
Loans and leases
(3)
:
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
|
Residential mortgage
(4)
|
253,974
|
|
2,374
|
|
3.74
|
|
256,297
|
|
2,359
|
|
3.68
|
|
257,275
|
|
2,246
|
|
3.49
|
|
||||||||||||||
|
Home equity
|
95,388
|
|
953
|
|
3.97
|
|
98,172
|
|
930
|
|
3.77
|
|
101,708
|
|
951
|
|
3.74
|
|
||||||||||||||
|
U.S. credit card
|
90,057
|
|
2,125
|
|
9.36
|
|
90,005
|
|
2,226
|
|
9.81
|
|
89,722
|
|
2,192
|
|
9.80
|
|
||||||||||||||
|
Non-U.S. credit card
|
11,171
|
|
310
|
|
11.01
|
|
10,633
|
|
317
|
|
11.81
|
|
10,613
|
|
315
|
|
11.93
|
|
||||||||||||||
|
Direct/Indirect consumer
(5)
|
82,990
|
|
565
|
|
2.70
|
|
83,773
|
|
587
|
|
2.78
|
|
82,485
|
|
598
|
|
2.90
|
|
||||||||||||||
|
Other consumer
(6)
|
1,929
|
|
17
|
|
3.73
|
|
1,876
|
|
19
|
|
3.88
|
|
1,756
|
|
17
|
|
4.17
|
|
||||||||||||||
|
Total consumer
|
535,509
|
|
6,344
|
|
4.72
|
|
540,756
|
|
6,438
|
|
4.74
|
|
543,559
|
|
6,319
|
|
4.66
|
|
||||||||||||||
|
U.S. commercial
|
225,596
|
|
1,700
|
|
2.99
|
|
221,542
|
|
1,704
|
|
3.05
|
|
217,464
|
|
1,741
|
|
3.21
|
|
||||||||||||||
|
Commercial real estate
(7)
|
46,341
|
|
374
|
|
3.20
|
|
43,164
|
|
352
|
|
3.24
|
|
40,612
|
|
340
|
|
3.36
|
|
||||||||||||||
|
Commercial lease financing
|
24,468
|
|
206
|
|
3.37
|
|
23,860
|
|
204
|
|
3.41
|
|
23,579
|
|
205
|
|
3.48
|
|
||||||||||||||
|
Non-U.S. commercial
|
97,863
|
|
544
|
|
2.20
|
|
94,656
|
|
528
|
|
2.22
|
|
89,020
|
|
543
|
|
2.45
|
|
||||||||||||||
|
Total commercial
|
394,268
|
|
2,824
|
|
2.84
|
|
383,222
|
|
2,788
|
|
2.89
|
|
370,675
|
|
2,829
|
|
3.06
|
|
||||||||||||||
|
Total loans and leases
|
929,777
|
|
9,168
|
|
3.92
|
|
923,978
|
|
9,226
|
|
3.97
|
|
914,234
|
|
9,148
|
|
4.01
|
|
||||||||||||||
|
Other earning assets
|
78,214
|
|
709
|
|
3.61
|
|
74,022
|
|
677
|
|
3.62
|
|
81,740
|
|
713
|
|
3.50
|
|
||||||||||||||
|
Total earning assets
(8)
|
1,798,697
|
|
13,925
|
|
3.08
|
|
1,789,045
|
|
13,595
|
|
3.02
|
|
1,833,541
|
|
14,047
|
|
3.07
|
|
||||||||||||||
|
Cash and due from banks
(1)
|
35,063
|
|
|
34,704
|
|
|
40,281
|
|
|
|||||||||||||||||||||||
|
Other assets, less allowance for loan and lease losses
|
301,115
|
|
|
|
299,681
|
|
|
|
310,788
|
|
|
|
||||||||||||||||||||
|
Total assets
|
$
|
2,134,875
|
|
|
|
$
|
2,123,430
|
|
|
|
|
$
|
2,184,610
|
|
|
|
||||||||||||||||
For footnotes see page
22
.
23
|
Table 13
|
|||||||||||||||||||||
|
Quarterly Average Balances and Interest Rates – FTE Basis (continued)
|
|||||||||||||||||||||
|
|
Second Quarter 2014
|
First Quarter 2014
|
|||||||||||||||||||
|
(Dollars in millions)
|
Average
Balance
|
Interest
Income/
Expense
|
Yield/
Rate
|
Average
Balance
|
Interest
Income/
Expense
|
Yield/
Rate
|
|||||||||||||||
|
Interest-bearing liabilities
|
|
|
|
|
|
|
|||||||||||||||
|
U.S. interest-bearing deposits:
|
|
|
|
|
|
|
|||||||||||||||
|
Savings
|
$
|
47,450
|
|
$
|
—
|
|
—
|
%
|
$
|
45,196
|
|
$
|
1
|
|
0.01
|
%
|
|||||
|
NOW and money market deposit accounts
|
519,399
|
|
79
|
|
0.06
|
|
523,237
|
|
83
|
|
0.06
|
|
|||||||||
|
Consumer CDs and IRAs
|
68,706
|
|
70
|
|
0.41
|
|
71,141
|
|
84
|
|
0.48
|
|
|||||||||
|
Negotiable CDs, public funds and other deposits
|
33,412
|
|
29
|
|
0.35
|
|
29,826
|
|
27
|
|
0.37
|
|
|||||||||
|
Total U.S. interest-bearing deposits
|
668,967
|
|
178
|
|
0.11
|
|
669,400
|
|
195
|
|
0.12
|
|
|||||||||
|
Non-U.S. interest-bearing deposits:
|
|||||||||||||||||||||
|
Banks located in non-U.S. countries
|
10,538
|
|
19
|
|
0.72
|
|
11,071
|
|
21
|
|
0.75
|
|
|||||||||
|
Governments and official institutions
|
1,754
|
|
—
|
|
0.14
|
|
1,857
|
|
1
|
|
0.14
|
|
|||||||||
|
Time, savings and other
|
64,091
|
|
85
|
|
0.53
|
|
60,506
|
|
74
|
|
0.50
|
|
|||||||||
|
Total non-U.S. interest-bearing deposits
|
76,383
|
|
104
|
|
0.55
|
|
73,434
|
|
96
|
|
0.53
|
|
|||||||||
|
Total interest-bearing deposits
|
745,350
|
|
282
|
|
0.15
|
|
742,834
|
|
291
|
|
0.16
|
|
|||||||||
|
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
|
|
|||||||||
|
Trading account liabilities
|
95,153
|
|
398
|
|
1.68
|
|
90,448
|
|
435
|
|
1.95
|
|
|||||||||
|
Long-term debt
|
259,825
|
|
1,485
|
|
2.29
|
|
253,678
|
|
1,515
|
|
2.41
|
|
|||||||||
|
Total interest-bearing liabilities
(8)
|
1,371,575
|
|
2,928
|
|
0.86
|
|
1,339,931
|
|
2,850
|
|
0.86
|
|
|||||||||
|
Noninterest-bearing sources:
|
|||||||||||||||||||||
|
Noninterest-bearing deposits
|
383,213
|
|
375,344
|
|
|||||||||||||||||
|
Other liabilities
|
178,970
|
|
187,438
|
|
|||||||||||||||||
|
Shareholders' equity
|
235,797
|
|
236,553
|
|
|||||||||||||||||
|
Total liabilities and shareholders' equity
|
$
|
2,169,555
|
|
$
|
2,139,266
|
|
|||||||||||||||
|
Net interest spread
|
2.00
|
%
|
2.07
|
%
|
|||||||||||||||||
|
Impact of noninterest-bearing sources
|
0.22
|
|
0.22
|
|
|||||||||||||||||
|
Net interest income/yield on earning assets
|
$
|
10,226
|
|
2.22
|
%
|
$
|
10,286
|
|
2.29
|
%
|
|||||||||||
For footnotes see page
22
.
24
|
Table 13
|
||||||||||||||||||||||||||||||||
|
Quarterly Average Balances and Interest Rates – FTE Basis (continued)
|
||||||||||||||||||||||||||||||||
|
|
Fourth Quarter 2013
|
Third Quarter 2013
|
Second 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
|
|||||||||||||||||||||||
|
Interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
|
U.S. interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
|
Savings
|
$
|
43,665
|
|
$
|
5
|
|
0.05
|
%
|
$
|
43,968
|
|
$
|
5
|
|
0.05
|
%
|
$
|
44,897
|
|
$
|
6
|
|
0.05
|
%
|
||||||||
|
NOW and money market deposit accounts
|
514,220
|
|
89
|
|
0.07
|
|
508,136
|
|
100
|
|
0.08
|
|
500,628
|
|
107
|
|
0.09
|
|
||||||||||||||
|
Consumer CDs and IRAs
|
74,635
|
|
96
|
|
0.51
|
|
78,161
|
|
113
|
|
0.57
|
|
81,887
|
|
127
|
|
0.63
|
|
||||||||||||||
|
Negotiable CDs, public funds and other deposits
|
29,060
|
|
29
|
|
0.39
|
|
27,108
|
|
28
|
|
0.41
|
|
25,835
|
|
30
|
|
0.45
|
|
||||||||||||||
|
Total U.S. interest-bearing deposits
|
661,580
|
|
219
|
|
0.13
|
|
657,373
|
|
246
|
|
0.15
|
|
653,247
|
|
270
|
|
0.17
|
|
||||||||||||||
|
Non-U.S. interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
|
Banks located in non-U.S. countries
|
13,902
|
|
22
|
|
0.62
|
|
12,797
|
|
17
|
|
0.54
|
|
10,840
|
|
20
|
|
0.72
|
|
||||||||||||||
|
Governments and official institutions
|
1,750
|
|
1
|
|
0.18
|
|
1,580
|
|
1
|
|
0.19
|
|
1,528
|
|
—
|
|
0.19
|
|
||||||||||||||
|
Time, savings and other
|
58,513
|
|
72
|
|
0.49
|
|
54,899
|
|
70
|
|
0.51
|
|
55,049
|
|
76
|
|
0.55
|
|
||||||||||||||
|
Total non-U.S. interest-bearing deposits
|
74,165
|
|
95
|
|
0.51
|
|
69,276
|
|
88
|
|
0.50
|
|
67,417
|
|
96
|
|
0.57
|
|
||||||||||||||
|
Total interest-bearing deposits
|
735,745
|
|
314
|
|
0.17
|
|
726,649
|
|
334
|
|
0.18
|
|
720,664
|
|
366
|
|
0.20
|
|
||||||||||||||
|
Federal funds purchased, securities loaned or sold under agreements to repurchase and short-term borrowings
|
271,538
|
|
682
|
|
1.00
|
|
279,425
|
|
683
|
|
0.97
|
|
318,028
|
|
809
|
|
1.02
|
|
||||||||||||||
|
Trading account liabilities
|
82,393
|
|
364
|
|
1.75
|
|
84,648
|
|
375
|
|
1.76
|
|
94,349
|
|
427
|
|
1.82
|
|
||||||||||||||
|
Long-term debt
|
251,055
|
|
1,566
|
|
2.48
|
|
258,717
|
|
1,724
|
|
2.65
|
|
270,198
|
|
1,674
|
|
2.48
|
|
||||||||||||||
|
Total interest-bearing liabilities
(8)
|
1,340,731
|
|
2,926
|
|
0.87
|
|
1,349,439
|
|
3,116
|
|
0.92
|
|
1,403,239
|
|
3,276
|
|
0.94
|
|
||||||||||||||
|
Noninterest-bearing sources:
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
|
Noninterest-bearing deposits
|
376,929
|
|
|
|
363,962
|
|
|
|
|
359,292
|
|
|
|
|||||||||||||||||||
|
Other liabilities
|
183,800
|
|
|
|
179,637
|
|
|
|
|
187,016
|
|
|
|
|||||||||||||||||||
|
Shareholders' equity
|
233,415
|
|
|
|
230,392
|
|
|
|
|
235,063
|
|
|
|
|||||||||||||||||||
|
Total liabilities and shareholders' equity
|
$
|
2,134,875
|
|
|
|
$
|
2,123,430
|
|
|
|
$
|
2,184,610
|
|
|
|
|||||||||||||||||
|
Net interest spread
|
|
|
2.21
|
%
|
|
|
2.10
|
%
|
|
|
2.13
|
%
|
||||||||||||||||||||
|
Impact of noninterest-bearing sources
|
|
|
0.23
|
|
|
|
0.23
|
|
|
|
0.22
|
|
||||||||||||||||||||
|
Net interest income/yield on earning assets
|
|
$
|
10,999
|
|
2.44
|
%
|
|
$
|
10,479
|
|
2.33
|
%
|
|
$
|
10,771
|
|
2.35
|
%
|
||||||||||||||
For footnotes see page
22
.
25
|
Table 14
|
|||||||||||||||||||||
|
Year-to-Date Average Balances and Interest Rates – FTE Basis
|
|||||||||||||||||||||
|
Six Months Ended June 30
|
|||||||||||||||||||||
|
|
2014
|
2013
|
|||||||||||||||||||
|
(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)
|
$
|
118,106
|
|
$
|
157
|
|
0.27
|
%
|
$
|
60,676
|
|
$
|
73
|
|
0.24
|
%
|
|||||
|
Time deposits placed and other short-term investments
|
12,185
|
|
88
|
|
1.46
|
|
15,606
|
|
92
|
|
1.19
|
|
|||||||||
|
Federal funds sold and securities borrowed or purchased under agreements to resell
|
224,012
|
|
562
|
|
0.51
|
|
235,417
|
|
634
|
|
0.54
|
|
|||||||||
|
Trading account assets
|
147,691
|
|
2,427
|
|
3.31
|
|
187,957
|
|
2,604
|
|
2.79
|
|
|||||||||
|
Debt securities
(2)
|
337,845
|
|
4,139
|
|
2.43
|
|
349,794
|
|
5,113
|
|
2.92
|
|
|||||||||
|
Loans and leases
(3)
:
|
|
|
|
|
|
||||||||||||||||
|
Residential mortgage
(4)
|
245,469
|
|
4,435
|
|
3.61
|
|
257,949
|
|
4,586
|
|
3.56
|
|
|||||||||
|
Home equity
|
91,738
|
|
1,693
|
|
3.71
|
|
103,812
|
|
1,948
|
|
3.77
|
|
|||||||||
|
U.S. credit card
|
88,797
|
|
4,134
|
|
9.39
|
|
90,712
|
|
4,441
|
|
9.87
|
|
|||||||||
|
Non-U.S. credit card
|
11,657
|
|
616
|
|
10.65
|
|
10,819
|
|
644
|
|
12.01
|
|
|||||||||
|
Direct/Indirect consumer
(5)
|
81,916
|
|
1,054
|
|
2.59
|
|
82,425
|
|
1,218
|
|
2.98
|
|
|||||||||
|
Other consumer
(6)
|
1,988
|
|
35
|
|
3.63
|
|
1,710
|
|
36
|
|
4.26
|
|
|||||||||
|
Total consumer
|
521,565
|
|
11,967
|
|
4.61
|
|
547,427
|
|
12,873
|
|
4.73
|
|
|||||||||
|
U.S. commercial
|
229,279
|
|
3,323
|
|
2.92
|
|
214,103
|
|
3,407
|
|
3.21
|
|
|||||||||
|
Commercial real estate
(7)
|
48,533
|
|
725
|
|
3.01
|
|
39,899
|
|
666
|
|
3.37
|
|
|||||||||
|
Commercial lease financing
|
24,567
|
|
427
|
|
3.47
|
|
23,556
|
|
441
|
|
3.75
|
|
|||||||||
|
Non-U.S. commercial
|
92,068
|
|
1,113
|
|
2.44
|
|
85,284
|
|
1,010
|
|
2.39
|
|
|||||||||
|
Total commercial
|
394,447
|
|
5,588
|
|
2.85
|
|
362,842
|
|
5,524
|
|
3.07
|
|
|||||||||
|
Total loans and leases
|
916,012
|
|
17,555
|
|
3.85
|
|
910,269
|
|
18,397
|
|
4.07
|
|
|||||||||
|
Other earning assets
|
66,326
|
|
1,362
|
|
4.14
|
|
85,932
|
|
1,446
|
|
3.39
|
|
|||||||||
|
Total earning assets
(8)
|
1,822,177
|
|
26,290
|
|
2.90
|
|
1,845,651
|
|
28,359
|
|
3.09
|
|
|||||||||
|
Cash and due from banks
(1)
|
27,815
|
|
|
38,022
|
|
|
|||||||||||||||
|
Other assets, less allowance for loan and lease losses
|
304,502
|
|
|
|
314,770
|
|
|
|
|
||||||||||||
|
Total assets
|
$
|
2,154,494
|
|
|
|
$
|
2,198,443
|
|
|
|
|
||||||||||
|
(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
$1 million
and
$88 million
for the
six months ended June 30, 2014 and 2013
.
|
|
(5)
|
Includes non-U.S. consumer loans of
$4.5 billion
and
$7.6 billion
for the
six months ended June 30, 2014 and 2013
.
|
|
(6)
|
Includes consumer finance loans of
$1.1 billion
and
$1.4 billion
, consumer leases of
$709 million
and
$215 million
, consumer overdrafts of
$138 million
and
$139 million
, and other non-U.S. consumer loans of
$3 million
and
$5 million
for the
six months ended June 30, 2014 and 2013
.
|
|
(7)
|
Includes U.S. commercial real estate loans of
$46.8 billion
and
$38.4 billion
, and non-U.S. commercial real estate loans of
$1.7 billion
and
$1.5 billion
for the
six months ended June 30, 2014 and 2013
.
|
|
(8)
|
Interest income includes the impact of interest rate risk management contracts, which decreased interest income on the underlying assets by
$18 million
and
$204 million
for the
six months ended June 30, 2014 and 2013
. Interest expense includes the impact of interest rate risk management contracts, which decreased interest expense on the underlying liabilities by
$1.2 billion
and
$1.3 billion
for the
six months ended June 30, 2014 and 2013
. For more information on interest rate contracts, see Interest Rate Risk Management for Nontrading Activities on page
128
.
|
26
|
Table 14
|
|||||||||||||||||||||
|
Year-to-Date Average Balances and Interest Rates – FTE Basis (continued)
|
|||||||||||||||||||||
|
Six Months Ended June 30
|
|||||||||||||||||||||
|
|
2014
|
2013
|
|||||||||||||||||||
|
(Dollars in millions)
|
Average
Balance
|
Interest
Income/
Expense
|
Yield/
Rate
|
Average
Balance
|
Interest
Income/
Expense
|
Yield/
Rate
|
|||||||||||||||
|
Interest-bearing liabilities
|
|
|
|
|
|
|
|||||||||||||||
|
U.S. interest-bearing deposits:
|
|
|
|
|
|
|
|||||||||||||||
|
Savings
|
$
|
46,329
|
|
$
|
1
|
|
0.01
|
%
|
$
|
43,921
|
|
$
|
12
|
|
0.05
|
%
|
|||||
|
NOW and money market deposit accounts
|
521,307
|
|
162
|
|
0.06
|
|
500,901
|
|
224
|
|
0.09
|
|
|||||||||
|
Consumer CDs and IRAs
|
69,917
|
|
154
|
|
0.44
|
|
83,489
|
|
262
|
|
0.63
|
|
|||||||||
|
Negotiable CDs, public funds and other deposits
|
31,629
|
|
56
|
|
0.36
|
|
24,996
|
|
59
|
|
0.47
|
|
|||||||||
|
Total U.S. interest-bearing deposits
|
669,182
|
|
373
|
|
0.11
|
|
653,307
|
|
557
|
|
0.17
|
|
|||||||||
|
Non-U.S. interest-bearing deposits:
|
|
|
|
|
|
|
|||||||||||||||
|
Banks located in non-U.S. countries
|
10,803
|
|
40
|
|
0.74
|
|
11,498
|
|
41
|
|
0.72
|
|
|||||||||
|
Governments and official institutions
|
1,805
|
|
1
|
|
0.14
|
|
1,537
|
|
1
|
|
0.18
|
|
|||||||||
|
Time, savings and other
|
62,309
|
|
159
|
|
0.51
|
|
54,499
|
|
149
|
|
0.55
|
|
|||||||||
|
Total non-U.S. interest-bearing deposits
|
74,917
|
|
200
|
|
0.54
|
|
67,534
|
|
191
|
|
0.57
|
|
|||||||||
|
Total interest-bearing deposits
|
744,099
|
|
573
|
|
0.16
|
|
720,841
|
|
748
|
|
0.21
|
|
|||||||||
|
Federal funds purchased, securities loaned or sold under agreements to repurchase and short-term borrowings
|
262,161
|
|
1,372
|
|
1.06
|
|
327,782
|
|
1,558
|
|
0.96
|
|
|||||||||
|
Trading account liabilities
|
92,813
|
|
833
|
|
1.81
|
|
93,204
|
|
899
|
|
1.95
|
|
|||||||||
|
Long-term debt
|
256,768
|
|
3,000
|
|
2.34
|
|
272,088
|
|
3,508
|
|
2.59
|
|
|||||||||
|
Total interest-bearing liabilities
(8)
|
1,355,841
|
|
5,778
|
|
0.86
|
|
1,413,915
|
|
6,713
|
|
0.96
|
|
|||||||||
|
Noninterest-bearing sources:
|
|
|
|
|
|
|
|||||||||||||||
|
Noninterest-bearing deposits
|
379,300
|
|
356,790
|
|
|||||||||||||||||
|
Other liabilities
|
183,180
|
|
191,714
|
|
|||||||||||||||||
|
Shareholders' equity
|
236,173
|
|
236,024
|
|
|||||||||||||||||
|
Total liabilities and shareholders' equity
|
$
|
2,154,494
|
|
|
|
$
|
2,198,443
|
|
|
|
|||||||||||
|
Net interest spread
|
|
|
2.04
|
%
|
|
|
2.13
|
%
|
|||||||||||||
|
Impact of noninterest-bearing sources
|
|
|
0.22
|
|
|
|
0.23
|
|
|||||||||||||
|
Net interest income/yield on earning assets
|
|
$
|
20,512
|
|
2.26
|
%
|
|
$
|
21,646
|
|
2.36
|
%
|
|||||||||
For footnotes see page
26
.
27
|
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
. We prepare and evaluate segment results using certain non-GAAP financial measures. For additional information, see
Supplemental Financial Data
on page
16
.
Table 15
provides selected summary financial data for our business segments and
All Other
for the
three and six months ended June 30, 2014
compared to the
same periods in 2013
. For additional detailed information on these results, see the business segment and
All Other
discussions which follow.
|
Table 15
|
|||||||||||||||||||||||||||||||
|
Business Segment Results
|
|||||||||||||||||||||||||||||||
|
|
Three Months Ended June 30
|
||||||||||||||||||||||||||||||
|
|
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
|
$
|
7,373
|
|
$
|
7,434
|
|
$
|
534
|
|
$
|
967
|
|
$
|
4,000
|
|
$
|
4,184
|
|
$
|
1,788
|
|
$
|
1,391
|
|
|||||||
|
Consumer Real Estate Services
|
1,390
|
|
2,115
|
|
(20
|
)
|
291
|
|
5,902
|
|
3,383
|
|
(2,802
|
)
|
(930
|
)
|
|||||||||||||||
|
Global Wealth & Investment Management
|
4,589
|
|
4,499
|
|
(8
|
)
|
(15
|
)
|
3,447
|
|
3,270
|
|
724
|
|
759
|
|
|||||||||||||||
|
Global Banking
|
4,179
|
|
4,138
|
|
132
|
|
163
|
|
1,899
|
|
1,849
|
|
1,353
|
|
1,297
|
|
|||||||||||||||
|
Global Markets
|
4,583
|
|
4,194
|
|
19
|
|
(16
|
)
|
2,862
|
|
2,770
|
|
1,101
|
|
962
|
|
|||||||||||||||
|
All Other
|
(154
|
)
|
569
|
|
(246
|
)
|
(179
|
)
|
431
|
|
562
|
|
127
|
|
533
|
|
|||||||||||||||
|
Total FTE basis
|
21,960
|
|
22,949
|
|
411
|
|
1,211
|
|
18,541
|
|
16,018
|
|
2,291
|
|
4,012
|
|
|||||||||||||||
|
FTE adjustment
|
(213
|
)
|
(222
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||||||||
|
Total Consolidated
|
$
|
21,747
|
|
$
|
22,727
|
|
$
|
411
|
|
$
|
1,211
|
|
$
|
18,541
|
|
$
|
16,018
|
|
$
|
2,291
|
|
$
|
4,012
|
|
|||||||
|
|
Six Months Ended June 30
|
||||||||||||||||||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
||||||||||||||||||||||||
|
Consumer & Business Banking
|
$
|
14,811
|
|
$
|
14,846
|
|
$
|
1,346
|
|
$
|
1,919
|
|
$
|
7,963
|
|
$
|
8,349
|
|
$
|
3,454
|
|
$
|
2,833
|
|
|||||||
|
Consumer Real Estate Services
|
2,582
|
|
4,427
|
|
5
|
|
626
|
|
14,031
|
|
8,788
|
|
(7,829
|
)
|
(3,086
|
)
|
|||||||||||||||
|
Global Wealth & Investment Management
|
9,136
|
|
8,920
|
|
15
|
|
7
|
|
6,806
|
|
6,523
|
|
1,453
|
|
1,479
|
|
|||||||||||||||
|
Global Banking
|
8,448
|
|
8,168
|
|
397
|
|
312
|
|
3,927
|
|
3,685
|
|
2,589
|
|
2,581
|
|
|||||||||||||||
|
Global Markets
|
9,595
|
|
8,973
|
|
38
|
|
(11
|
)
|
5,939
|
|
5,843
|
|
2,409
|
|
2,074
|
|
|||||||||||||||
|
All Other
|
155
|
|
1,023
|
|
(381
|
)
|
71
|
|
2,113
|
|
2,330
|
|
(61
|
)
|
(386
|
)
|
|||||||||||||||
|
Total FTE basis
|
44,727
|
|
46,357
|
|
1,420
|
|
2,924
|
|
40,779
|
|
35,518
|
|
2,015
|
|
5,495
|
|
|||||||||||||||
|
FTE adjustment
|
(414
|
)
|
(433
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||||||||
|
Total Consolidated
|
$
|
44,313
|
|
$
|
45,924
|
|
$
|
1,420
|
|
$
|
2,924
|
|
$
|
40,779
|
|
$
|
35,518
|
|
$
|
2,015
|
|
$
|
5,495
|
|
|||||||
|
(1)
|
Total revenue is net of interest expense and is on a FTE basis which for consolidated revenue is a non-GAAP financial measure. For more information on this measure and for a corresponding reconciliation to a GAAP financial measure, see
Supplemental Financial Data
on page
16
.
|
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 a FTE basis and noninterest income. The adjustment of net interest income to a 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. For presentation purposes, in segments where the total of liabilities and equity exceeds assets, which are generally deposit-taking segments,
we allocate assets to match liabilities. Net interest income of the business segments also includes an allocation of net interest income generated by certain of our asset and liability management (ALM) activities.
28
Our
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.
Our
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
our
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 our 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.
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
and
Strategic Risk Management
on page
64
. 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 the latest annual planning process, 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, of which the more significant increases were in
Global Banking
and
Global Markets.
Prior periods were not restated.
For more information on the business segments and reconciliations to consolidated total revenue, net income (loss) and period-end total assets, see
Note 18 – Business Segment Information
to the Consolidated Financial Statements
.
29
|
Consumer & Business Banking
|
|
Three Months Ended June 30
|
||||||||||||||||||||||||||
|
Deposits
|
Consumer
Lending
|
Total Consumer &
Business Banking
|
||||||||||||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
% Change
|
|||||||||||||||||||
|
Net interest income (FTE basis)
|
$
|
2,599
|
|
$
|
2,472
|
|
$
|
2,330
|
|
$
|
2,562
|
|
$
|
4,929
|
|
$
|
5,034
|
|
(2
|
)%
|
||||||
|
Noninterest income:
|
||||||||||||||||||||||||||
|
Card income
|
17
|
|
15
|
|
1,149
|
|
1,171
|
|
1,166
|
|
1,186
|
|
(2
|
)
|
||||||||||||
|
Service charges
|
1,090
|
|
1,035
|
|
1
|
|
—
|
|
1,091
|
|
1,035
|
|
5
|
|
||||||||||||
|
All other income
|
134
|
|
117
|
|
53
|
|
62
|
|
187
|
|
179
|
|
4
|
|
||||||||||||
|
Total noninterest income
|
1,241
|
|
1,167
|
|
1,203
|
|
1,233
|
|
2,444
|
|
2,400
|
|
2
|
|
||||||||||||
|
Total revenue, net of interest expense (FTE basis)
|
3,840
|
|
3,639
|
|
3,533
|
|
3,795
|
|
7,373
|
|
7,434
|
|
(1
|
)
|
||||||||||||
|
Provision for credit losses
|
53
|
|
35
|
|
481
|
|
932
|
|
534
|
|
967
|
|
(45
|
)
|
||||||||||||
|
Noninterest expense
|
2,607
|
|
2,810
|
|
1,393
|
|
1,374
|
|
4,000
|
|
4,184
|
|
(4
|
)
|
||||||||||||
|
Income before income taxes
|
1,180
|
|
794
|
|
1,659
|
|
1,489
|
|
2,839
|
|
2,283
|
|
24
|
|
||||||||||||
|
Income tax expense (FTE basis)
|
437
|
|
309
|
|
614
|
|
583
|
|
1,051
|
|
892
|
|
18
|
|
||||||||||||
|
Net income
|
$
|
743
|
|
$
|
485
|
|
$
|
1,045
|
|
$
|
906
|
|
$
|
1,788
|
|
$
|
1,391
|
|
29
|
|
||||||
|
Net interest yield (FTE basis)
|
1.90
|
%
|
1.88
|
%
|
6.75
|
%
|
7.26
|
%
|
3.50
|
%
|
3.72
|
%
|
||||||||||||||
|
Return on average allocated capital
|
18.06
|
|
12.63
|
|
32.29
|
|
24.93
|
|
24.33
|
|
18.62
|
|
||||||||||||||
|
Efficiency ratio (FTE basis)
|
67.86
|
|
77.23
|
|
39.43
|
|
36.20
|
|
54.24
|
|
56.29
|
|
||||||||||||||
|
Balance Sheet
|
||||||||||||||||||||||||||
|
Three Months Ended June 30
|
||||||||||||||||||||||||||
|
Average
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
% Change
|
|||||||||||||||||||
|
Total loans and leases
|
$
|
22,482
|
|
$
|
22,434
|
|
$
|
137,758
|
|
$
|
141,159
|
|
$
|
160,240
|
|
$
|
163,593
|
|
(2
|
)%
|
||||||
|
Total earning assets
(1)
|
548,313
|
|
526,459
|
|
138,304
|
|
141,599
|
|
565,738
|
|
542,814
|
|
4
|
|
||||||||||||
|
Total assets
(1)
|
581,102
|
|
559,221
|
|
147,630
|
|
150,240
|
|
607,853
|
|
584,217
|
|
4
|
|
||||||||||||
|
Total deposits
|
542,796
|
|
521,782
|
|
n/m
|
|
n/m
|
|
543,566
|
|
522,244
|
|
4
|
|
||||||||||||
|
Allocated capital
|
16,500
|
|
15,400
|
|
13,000
|
|
14,600
|
|
29,500
|
|
30,000
|
|
(2
|
)
|
||||||||||||
|
(1)
|
For presentation purposes, 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
30
|
Six Months Ended June 30
|
||||||||||||||||||||||||||
|
Deposits
|
Consumer
Lending
|
Total Consumer &
Business Banking
|
||||||||||||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
% Change
|
|||||||||||||||||||
|
Net interest income (FTE basis)
|
$
|
5,144
|
|
$
|
4,859
|
|
$
|
4,736
|
|
$
|
5,188
|
|
$
|
9,880
|
|
$
|
10,047
|
|
(2
|
)%
|
||||||
|
Noninterest income:
|
||||||||||||||||||||||||||
|
Card income
|
33
|
|
30
|
|
2,295
|
|
2,363
|
|
2,328
|
|
2,393
|
|
(3
|
)
|
||||||||||||
|
Service charges
|
2,135
|
|
2,048
|
|
1
|
|
—
|
|
2,136
|
|
2,048
|
|
4
|
|
||||||||||||
|
All other income
|
248
|
|
219
|
|
219
|
|
139
|
|
467
|
|
358
|
|
30
|
|
||||||||||||
|
Total noninterest income
|
2,416
|
|
2,297
|
|
2,515
|
|
2,502
|
|
4,931
|
|
4,799
|
|
3
|
|
||||||||||||
|
Total revenue, net of interest expense (FTE basis)
|
7,560
|
|
7,156
|
|
7,251
|
|
7,690
|
|
14,811
|
|
14,846
|
|
—
|
|
||||||||||||
|
Provision for credit losses
|
133
|
|
98
|
|
1,213
|
|
1,821
|
|
1,346
|
|
1,919
|
|
(30
|
)
|
||||||||||||
|
Noninterest expense
|
5,237
|
|
5,626
|
|
2,726
|
|
2,723
|
|
7,963
|
|
8,349
|
|
(5
|
)
|
||||||||||||
|
Income before income taxes
|
2,190
|
|
1,432
|
|
3,312
|
|
3,146
|
|
5,502
|
|
4,578
|
|
20
|
|
||||||||||||
|
Income tax expense (FTE basis)
|
815
|
|
546
|
|
1,233
|
|
1,199
|
|
2,048
|
|
1,745
|
|
17
|
|
||||||||||||
|
Net income
|
$
|
1,375
|
|
$
|
886
|
|
$
|
2,079
|
|
$
|
1,947
|
|
$
|
3,454
|
|
$
|
2,833
|
|
22
|
|
||||||
|
Net interest yield (FTE basis)
|
1.91
|
%
|
1.90
|
%
|
6.85
|
%
|
7.33
|
%
|
3.56
|
%
|
3.80
|
%
|
||||||||||||||
|
Return on average allocated capital
|
16.81
|
|
11.62
|
|
32.29
|
|
26.94
|
|
23.63
|
|
19.08
|
|
||||||||||||||
|
Efficiency ratio (FTE basis)
|
69.26
|
|
78.61
|
|
37.60
|
|
35.41
|
|
53.76
|
|
56.23
|
|
||||||||||||||
|
Balance Sheet
|
||||||||||||||||||||||||||
|
Six Months Ended June 30
|
||||||||||||||||||||||||||
|
Average
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
% Change
|
|||||||||||||||||||
|
Total loans and leases
|
$
|
22,509
|
|
$
|
22,525
|
|
$
|
138,636
|
|
$
|
142,188
|
|
$
|
161,145
|
|
$
|
164,713
|
|
(2
|
)%
|
||||||
|
Total earning assets
(1)
|
543,882
|
|
516,634
|
|
139,350
|
|
142,629
|
|
559,636
|
|
533,098
|
|
5
|
|
||||||||||||
|
Total assets
(1)
|
576,632
|
|
549,395
|
|
148,667
|
|
151,222
|
|
601,703
|
|
574,452
|
|
5
|
|
||||||||||||
|
Total deposits
|
538,337
|
|
511,977
|
|
n/m
|
|
n/m
|
|
539,087
|
|
512,424
|
|
5
|
|
||||||||||||
|
Allocated capital
|
16,500
|
|
15,400
|
|
13,000
|
|
14,600
|
|
29,500
|
|
30,000
|
|
(2
|
)
|
||||||||||||
|
Period end
|
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
% Change
|
|||||||||||||||||||
|
Total loans and leases
|
$
|
22,420
|
|
$
|
22,578
|
|
$
|
138,722
|
|
$
|
142,516
|
|
$
|
161,142
|
|
$
|
165,094
|
|
(2
|
)%
|
||||||
|
Total earning assets
(1)
|
550,546
|
|
535,131
|
|
139,162
|
|
143,917
|
|
570,208
|
|
550,777
|
|
4
|
|
||||||||||||
|
Total assets
(1)
|
582,935
|
|
567,988
|
|
148,765
|
|
153,381
|
|
612,200
|
|
593,099
|
|
3
|
|
||||||||||||
|
Total deposits
|
544,689
|
|
530,920
|
|
n/m
|
|
n/m
|
|
545,530
|
|
531,668
|
|
3
|
|
||||||||||||
For footnotes see page
30
.
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
31
states and the District of Columbia.
The franchise network includes approximately
5,000
banking centers,
16,000
ATMs, nationwide call centers, and online and mobile platforms.
CBB
Results
Three Months Ended June 30, 2014
Compared to
Three Months Ended June 30, 2013
Net income for
CBB
increased
$397 million
to
$1.8 billion
primarily driven by lower provision for credit losses, lower noninterest expense and higher noninterest income, partially offset by lower net interest income. Net interest income
decreased
$105 million
to
$4.9 billion
due to lower average loan balances and card yields, partially offset by higher deposit balances. Noninterest income
increased
$44 million
to
$2.4 billion
primarily due to higher deposit service charges.
The provision for credit losses
decreased
$433 million
to
$534 million
primarily as a result of continued improvement in credit quality, due in part to lower delinquencies. Noninterest expense
decreased
$184 million
to
$4.0 billion
primarily driven by lower operating and litigation expenses.
The return on average allocated capital was
24.33 percent
, up from
18.62 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
28
.
31
Six Months Ended June 30, 2014
Compared to
Six Months Ended June 30, 2013
Net income for
CBB
increased
$621 million
to
$3.5 billion
primarily driven by lower provision for credit losses, lower noninterest expense and higher noninterest income, partially offset by lower net interest income. Net interest income
decreased
$167 million
to
$9.9 billion
and noninterest income
increased
$132 million
to
$4.9 billion
primarily due to portfolio divestiture gains and higher service charges, partially offset by the impact of the exit of consumer protection products.
The provision for credit losses
decreased
$573 million
to
$1.3 billion
and noninterest expense
decreased
$386 million
to
$8.0 billion
primarily driven by the same factors as described in the three-month discussion above.
The return on average allocated capital was
23.63 percent
, up from
19.08 percent
, reflecting an increase in net income combined with a small decrease in allocated capital.
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 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
43
.
Three Months Ended June 30, 2014
Compared to
Three Months Ended June 30, 2013
Net income for Deposits
increased
$258 million
to
$743 million
driven by lower noninterest expense and higher revenue, partially offset by an increase in the provision for credit losses. Net interest income
increased
$127 million
to
$2.6 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
$74 million
to
$1.2 billion
primarily due to higher deposit service charges.
The provision for credit losses
increased
$18 million
to
$53 million
as credit quality stabilized. Noninterest expense
decreased
$203 million
to
$2.6 billion
due to lower operating and personnel expenses.
Average deposits
increased
$21.0 billion
to
$542.8 billion
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 $32.3 billion was partially offset by a decline in time deposits of $11.3 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
six bps
to
six bps
.
32
Six Months Ended June 30, 2014
Compared to
Six Months Ended June 30, 2013
Net income for Deposits
increased
$489 million
to
$1.4 billion
driven by higher revenue and a decrease in noninterest expense, partially offset by an increase in the provision for credit losses. Net interest income
increased
$285 million
to
$5.1 billion
primarily driven by the same factors as described in the three-month discussion above. Noninterest income
increased
$119 million
to
$2.4 billion
primarily due to higher deposit service charges and investment and brokerage income.
The provision for credit losses
increased
$35 million
to
$133 million
as credit quality stabilized. Noninterest expense
decreased
$389 million
to
$5.2 billion
due to lower operating, personnel, Federal Deposit Insurance Corporation (FDIC) and litigation expenses.
Average deposits
increased
$26.4 billion
to
$538.3 billion
driven by a continuing customer shift to more liquid products in the low rate environment. Additionally, $5.4 billion of the increase in average deposits was due to net transfers from other businesses, largely
GWIM
.
|
Key Statistics
|
|||||||||||||
|
Three Months Ended June 30
|
Six Months Ended June 30
|
||||||||||||
|
2014
|
2013
|
2014
|
2013
|
||||||||||
|
Total deposit spreads (excludes noninterest costs)
|
1.59
|
%
|
1.51
|
%
|
1.58
|
%
|
1.51
|
%
|
|||||
|
Period end
|
|||||||||||||
|
Client brokerage assets (in millions)
|
$
|
105,926
|
|
$
|
84,182
|
|
|||||||
|
Online banking active accounts (units in thousands)
|
30,429
|
|
29,867
|
|
|||||||||
|
Mobile banking active accounts (units in thousands)
|
15,475
|
|
13,214
|
|
|||||||||
|
Banking centers
|
5,023
|
|
5,328
|
|
|||||||||
|
ATMs
|
15,976
|
|
16,354
|
|
|||||||||
Client brokerage assets
increased
$21.7 billion
driven by increased market valuations and account flows. Mobile banking customers
increased
2.3 million
reflecting continuing changes in our customers' banking preferences. The number of banking centers
declined
305
and ATMs
declined
378
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
.
Three Months Ended June 30, 2014
Compared to
Three Months Ended June 30, 2013
Net income for Consumer Lending
increased
$139 million
to
$1.0 billion
primarily driven by lower provision for credit losses, partially offset by lower revenue and higher noninterest expense. Net interest income
decreased
$232 million
to
$2.3 billion
driven by the impact of lower average loan balances and card yields. Noninterest income
decreased
$30 million
to
$1.2 billion
driven by lower card income.
The provision for credit losses
decreased
$451 million
to
$481 million
due to continued improvement in credit quality, due in part to lower delinquencies. Noninterest expense
increased
$19 million
to
$1.4 billion
primarily driven by higher operating expenses, largely offset by lower litigation expense.
Average loans
decreased
$3.4 billion
to
$137.8 billion
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 consumer auto loans.
33
Six Months Ended June 30, 2014
Compared to
Six Months Ended June 30, 2013
Net income for Consumer Lending
increased
$132 million
to
$2.1 billion
primarily due to lower provision for credit losses, partially offset by lower net interest income. Net interest income
decreased
$452 million
to
$4.7 billion
driven by the same factors as described in the three-month discussion above. Noninterest income of
$2.5 billion
remained relatively unchanged as portfolio divestiture gains were offset by lower card income.
The provision for credit losses
decreased
$608 million
to
$1.2 billion
due to the same factors as described in the three-month discussion above. Noninterest expense of
$2.7 billion
remained relatively unchanged.
Average loans
decreased
$3.6 billion
to
$138.6 billion
primarily driven by the same factors as described in the three-month discussion above.
|
Key Statistics
|
|||||||||||||||
|
Three Months Ended June 30
|
Six Months Ended June 30
|
||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Total U.S. credit card
(1)
|
|||||||||||||||
|
Gross interest yield
|
9.30
|
%
|
9.80
|
%
|
9.39
|
%
|
9.87
|
%
|
|||||||
|
Risk-adjusted margin
|
8.97
|
|
8.41
|
|
9.23
|
|
8.46
|
|
|||||||
|
New accounts (in thousands)
|
1,128
|
|
957
|
|
2,155
|
|
1,863
|
|
|||||||
|
Purchase volumes
|
$
|
53,584
|
|
$
|
51,945
|
|
$
|
102,447
|
|
$
|
98,577
|
|
|||
|
Debit card purchase volumes
|
$
|
69,492
|
|
$
|
67,740
|
|
$
|
135,382
|
|
$
|
132,375
|
|
|||
|
(1)
|
In addition to the U.S. credit card portfolio in
CBB
, the remaining U.S. credit card portfolio is in
GWIM
.
|
During the
three and six months ended June 30, 2014
, the total U.S. credit card risk-adjusted margin
increased
56
bps and
77
bps compared to the
same periods in 2013
due to an improvement in credit quality, and for the
six months ended June 30, 2014
, portfolio divestiture gains. Total U.S. credit card purchase volumes
increased
$1.6 billion
to
$53.6 billion
, and
$3.9 billion
to
$102.4 billion
and debit card purchase volumes
increased
$1.8 billion
to
$69.5 billion
, and
$3.0 billion
to
$135.4 billion
compared to the
same periods in 2013
, reflecting higher levels of consumer spending.
34
|
Consumer Real Estate Services
|
|
Three Months Ended June 30
|
||||||||||||||||||||||||||
|
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)
|
$
|
335
|
|
$
|
344
|
|
$
|
362
|
|
$
|
355
|
|
$
|
697
|
|
$
|
699
|
|
—
|
|
||||||
|
Noninterest income:
|
||||||||||||||||||||||||||
|
Mortgage banking income
|
237
|
|
654
|
|
369
|
|
757
|
|
606
|
|
1,411
|
|
(57
|
)%
|
||||||||||||
|
All other income
|
18
|
|
5
|
|
69
|
|
—
|
|
87
|
|
5
|
|
n/m
|
|
||||||||||||
|
Total noninterest income
|
255
|
|
659
|
|
438
|
|
757
|
|
693
|
|
1,416
|
|
(51
|
)
|
||||||||||||
|
Total revenue, net of interest expense (FTE basis)
|
590
|
|
1,003
|
|
800
|
|
1,112
|
|
1,390
|
|
2,115
|
|
(34
|
)
|
||||||||||||
|
Provision for credit losses
|
19
|
|
64
|
|
(39
|
)
|
227
|
|
(20
|
)
|
291
|
|
n/m
|
|
||||||||||||
|
Noninterest expense
|
660
|
|
862
|
|
5,242
|
|
2,521
|
|
5,902
|
|
3,383
|
|
74
|
|
||||||||||||
|
Income (loss) before income taxes
|
(89
|
)
|
77
|
|
(4,403
|
)
|
(1,636
|
)
|
(4,492
|
)
|
(1,559
|
)
|
n/m
|
|
||||||||||||
|
Income tax expense (benefit) (FTE basis)
|
(33
|
)
|
30
|
|
(1,657
|
)
|
(659
|
)
|
(1,690
|
)
|
(629
|
)
|
n/m
|
|
||||||||||||
|
Net income (loss)
|
$
|
(56
|
)
|
$
|
47
|
|
$
|
(2,746
|
)
|
$
|
(977
|
)
|
$
|
(2,802
|
)
|
$
|
(930
|
)
|
n/m
|
|
||||||
|
Net interest yield (FTE basis)
|
2.49
|
%
|
2.57
|
%
|
3.65
|
%
|
2.94
|
%
|
2.98
|
%
|
2.75
|
%
|
||||||||||||||
|
Efficiency ratio (FTE basis)
|
n/m
|
|
85.92
|
|
n/m
|
|
n/m
|
|
n/m
|
|
n/m
|
|
||||||||||||||
|
Balance Sheet
|
||||||||||||||||||||||||||
|
Three Months Ended June 30
|
||||||||||||||||||||||||||
|
Average
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
% Change
|
|||||||||||||||||||
|
Total loans and leases
|
$
|
51,553
|
|
$
|
46,870
|
|
$
|
36,704
|
|
$
|
43,244
|
|
$
|
88,257
|
|
$
|
90,114
|
|
(2
|
)%
|
||||||
|
Total earning assets
|
53,934
|
|
53,739
|
|
39,863
|
|
48,347
|
|
93,797
|
|
102,086
|
|
(8
|
)
|
||||||||||||
|
Total assets
|
53,962
|
|
54,000
|
|
55,626
|
|
68,276
|
|
109,588
|
|
122,276
|
|
(10
|
)
|
||||||||||||
|
Allocated capital
|
6,000
|
|
6,000
|
|
17,000
|
|
18,000
|
|
23,000
|
|
24,000
|
|
(4
|
)
|
||||||||||||
n/m = not meaningful
35
|
Six Months Ended June 30
|
||||||||||||||||||||||||||
|
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)
|
$
|
659
|
|
$
|
691
|
|
$
|
739
|
|
$
|
751
|
|
$
|
1,398
|
|
$
|
1,442
|
|
(3
|
)%
|
||||||
|
Noninterest income:
|
||||||||||||||||||||||||||
|
Mortgage banking income
|
415
|
|
1,351
|
|
660
|
|
1,547
|
|
1,075
|
|
2,898
|
|
(63
|
)
|
||||||||||||
|
All other income (loss)
|
22
|
|
(58
|
)
|
87
|
|
145
|
|
109
|
|
87
|
|
25
|
|
||||||||||||
|
Total noninterest income
|
437
|
|
1,293
|
|
747
|
|
1,692
|
|
1,184
|
|
2,985
|
|
(60
|
)
|
||||||||||||
|
Total revenue, net of interest expense (FTE basis)
|
1,096
|
|
1,984
|
|
1,486
|
|
2,443
|
|
2,582
|
|
4,427
|
|
(42
|
)
|
||||||||||||
|
Provision for credit losses
|
32
|
|
156
|
|
(27
|
)
|
470
|
|
5
|
|
626
|
|
(99
|
)
|
||||||||||||
|
Noninterest expense
|
1,375
|
|
1,684
|
|
12,656
|
|
7,104
|
|
14,031
|
|
8,788
|
|
60
|
|
||||||||||||
|
Income (loss) before income taxes
|
(311
|
)
|
144
|
|
(11,143
|
)
|
(5,131
|
)
|
(11,454
|
)
|
(4,987
|
)
|
130
|
|
||||||||||||
|
Income tax expense (benefit) (FTE basis)
|
(116
|
)
|
55
|
|
(3,509
|
)
|
(1,956
|
)
|
(3,625
|
)
|
(1,901
|
)
|
91
|
|
||||||||||||
|
Net income (loss)
|
$
|
(195
|
)
|
$
|
89
|
|
$
|
(7,634
|
)
|
$
|
(3,175
|
)
|
$
|
(7,829
|
)
|
$
|
(3,086
|
)
|
n/m
|
|
||||||
|
Net interest yield (FTE basis)
|
2.48
|
%
|
2.59
|
%
|
3.73
|
%
|
3.02
|
%
|
3.01
|
%
|
2.80
|
%
|
||||||||||||||
|
Efficiency ratio (FTE basis)
|
n/m
|
|
84.85
|
|
n/m
|
|
n/m
|
|
n/m
|
|
n/m
|
|
||||||||||||||
|
Balance Sheet
|
||||||||||||||||||||||||||
|
Six Months Ended June 30
|
||||||||||||||||||||||||||
|
Average
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
% Change
|
|||||||||||||||||||
|
Total loans and leases
|
$
|
51,183
|
|
$
|
47,048
|
|
$
|
37,401
|
|
$
|
44,483
|
|
$
|
88,584
|
|
$
|
91,531
|
|
(3
|
)%
|
||||||
|
Total earning assets
|
53,601
|
|
53,743
|
|
39,944
|
|
50,147
|
|
93,545
|
|
103,890
|
|
(10
|
)
|
||||||||||||
|
Total assets
|
53,565
|
|
54,252
|
|
56,508
|
|
71,039
|
|
110,073
|
|
125,291
|
|
(12
|
)
|
||||||||||||
|
Allocated capital
|
6,000
|
|
6,000
|
|
17,000
|
|
18,000
|
|
23,000
|
|
24,000
|
|
(4
|
)
|
||||||||||||
|
Period end
|
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
% Change
|
|||||||||||||||||||
|
Total loans and leases
|
$
|
52,172
|
|
$
|
51,021
|
|
$
|
35,984
|
|
$
|
38,732
|
|
$
|
88,156
|
|
$
|
89,753
|
|
(2
|
)%
|
||||||
|
Total earning assets
|
55,058
|
|
54,071
|
|
37,233
|
|
43,092
|
|
92,291
|
|
97,163
|
|
(5
|
)
|
||||||||||||
|
Total assets
|
55,002
|
|
53,927
|
|
52,648
|
|
59,459
|
|
107,650
|
|
113,386
|
|
(5
|
)
|
||||||||||||
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 all of 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
38
. 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
.
36
CRES
Results
Three Months Ended June 30, 2014
Compared to
Three Months Ended June 30, 2013
The
net loss
for
CRES
increased
$1.9 billion
to a net loss of
$2.8 billion
primarily driven by
higher
noninterest expense, resulting from higher litigation expense, and
lower
mortgage banking income, partially offset by
lower
provision for credit losses. Mortgage banking income
decreased
$805 million
due to both
lower
core production revenue and
lower
servicing income, partially offset by lower representations and warranties provision. The provision for credit losses
decreased
$311 million
to a benefit of
$20 million
primarily driven by continued improvement in portfolio trends including increased home prices. Noninterest expense
increased
$2.5 billion
due to a $3.6 billion increase in litigation expense for previously disclosed legacy mortgage-related matters, partially offset by lower operating expenses.
Six Months Ended June 30, 2014
Compared to
Six Months Ended June 30, 2013
The
net loss
for
CRES
increased
$4.7 billion
to a net loss of
$7.8 billion
driven by the same factors as described in the three-month discussion above. Mortgage banking income
decreased
$1.8 billion
, and the provision for credit losses
decreased
$621 million
to
$5 million
driven by the same factors as described in the three-month discussion above. Noninterest expense
increased
$5.2 billion
primarily due to a $7.4 billion increase in litigation expense as a result of the Federal Housing Finance Agency (FHFA) Settlement and for previously disclosed legacy mortgage-related matters, partially offset by the same factors as described in the three-month discussion above.
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 approximately 2,700 mortgage loan officers, including over 1,500 banking center mortgage loan officers covering nearly 2,800 banking centers, and a 750-person centralized sales force based in five call centers.
Three Months Ended June 30, 2014
Compared to
Three Months Ended June 30, 2013
Results for Home Loans
decreased
$103 million
to a net loss of
$56 million
driven by
lower
revenue, partially offset by a
decrease
in noninterest expense and
lower
provision for credit losses. Noninterest income
decreased
$404 million
due to lower mortgage banking income driven by a decline in core production revenue as a result of lower origination volumes combined with continued industry-wide margin compression. The provision for credit losses
decreased
$45 million
primarily driven by continued improvement in portfolio trends including increased home prices. Noninterest expense
decreased
$202 million
primarily due to lower personnel expenses resulting from lower loan originations.
Six Months Ended June 30, 2014
Compared to
Six Months Ended June 30, 2013
Results for Home Loans
decreased
$284 million
to a net loss of
$195 million
driven by the same factors as described in the three-month discussion above. Noninterest income
decreased
$856 million
, the provision for credit losses
decreased
$124 million
and noninterest expense
decreased
$309 million
. These changes were driven by the same factors as described in the three-month discussion above.
Legacy Assets & Servicing
Legacy Assets & Servicing is responsible for all of our 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 29 percent and 34 percent of the total mortgage serviced portfolio, as measured by unpaid principal balance, at
June 30, 2014 and 2013
.
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
.
37
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. In an effort to help our customers avoid foreclosure, Legacy Assets & Servicing evaluates various workout options prior to foreclosure which, combined with legislative changes at the state level and ongoing foreclosure delays in states where foreclosure requires a court order following a legal proceeding (judicial states), have resulted in elongated default timelines. 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
57
of the MD&A of the Corporation's 2013 Annual Report on Form 10-K
.
Three Months Ended June 30, 2014
Compared to
Three Months Ended June 30, 2013
The
net loss
for Legacy Assets & Servicing
increased
$1.8 billion
to a net loss of
$2.7 billion
driven by an
increase
in noninterest expense, primarily litigation expense, and
lower
noninterest income, partially offset by lower provision for credit losses. Noninterest income
decreased
$319 million
driven by a decline in servicing income due to a smaller servicing portfolio and less favorable MSR net-of-hedge performance. The provision for credit losses
decreased
$266 million
to a benefit of
$39 million
primarily due to continued improvement in portfolio trends including increased home prices.
Noninterest expense
increased
$2.7 billion
due to a $3.6 billion increase in litigation expense as discussed in
CRES
results above, partially offset by a decrease in default-related servicing expenses and lower mortgage-related assessments, waivers and similar costs related to foreclosure delays. Excluding litigation, noninterest expense decreased $871 million to $1.4 billion. Regarding LAS non-litigation costs, compliance with applicable mortgage programs and governance guidelines may delay the expected timing of achieving our $1.1 billion quarterly expense goal until the first quarter of 2015 as opposed to the fourth quarter of 2014.
Six Months Ended June 30, 2014
Compared to
Six Months Ended June 30, 2013
The
net loss
for Legacy Assets & Servicing
increased
$4.5 billion
to a net loss of
$7.6 billion
driven by an increase of
$5.6 billion
in noninterest expense as discussed in
CRES
results above and
lower
noninterest income, partially offset by lower provision for credit losses. Noninterest income
decreased
$945 million
and the provision for credit losses
decreased
$497 million
to a benefit of
$27 million
due to the same factors as described in three-month discussion above.
Noninterest expense
increased
$5.6 billion
due to the same factors as described in three-month discussion above. Excluding litigation, noninterest expense decreased $1.8 billion to $3.0 billion.
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.
38
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
$10.8 billion
during the
six months ended June 30, 2014
to
$101.3 billion
, of which
$36.0 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.
Legacy Serviced Portfolio
The Legacy Serviced Portfolio includes 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 27 percent and 33 percent of the total residential mortgage serviced portfolio of
$672 billion
and
$887 billion
, as measured by unpaid principal balance, at
June 30, 2014 and 2013
. 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)
|
|||||||
|
June 30
|
|||||||
|
(Dollars in billions)
|
2014
|
2013
|
|||||
|
Unpaid principal balance
|
|||||||
|
Residential mortgage loans
|
|||||||
|
Total
|
$
|
181
|
|
$
|
289
|
|
|
|
60 days or more past due
|
38
|
|
96
|
|
|||
|
Number of loans serviced (in thousands)
|
|||||||
|
Residential mortgage loans
|
|||||||
|
Total
|
987
|
|
1,468
|
|
|||
|
60 days or more past due
|
202
|
|
404
|
|
|||
|
(1)
|
Excludes
$37 billion
and
$45 billion
of home equity loans and HELOCs at
June 30, 2014 and 2013
.
|
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 73 percent and 67 percent of the total residential mortgage serviced portfolio, as measured by unpaid principal balance, at
June 30, 2014 and 2013
. 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)
|
|||||||
|
June 30
|
|||||||
|
(Dollars in billions)
|
2014
|
2013
|
|||||
|
Unpaid principal balance
|
|||||||
|
Residential mortgage loans
|
|||||||
|
Total
|
$
|
491
|
|
$
|
598
|
|
|
|
60 days or more past due
|
10
|
|
16
|
|
|||
|
Number of loans serviced (in thousands)
|
|||||||
|
Residential mortgage loans
|
|||||||
|
Total
|
3,121
|
|
3,790
|
|
|||
|
60 days or more past due
|
61
|
|
88
|
|
|||
|
(1)
|
Excludes
$51 billion
and
$54 billion
of home equity loans and HELOCs at
June 30, 2014 and 2013
.
|
39
|
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, costs related to representations and warranties in the sales transactions along with other obligations incurred in the sales of mortgage loans, and revenue earned in production-related ancillary businesses. 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
|
|||||||||||||||
|
Three Months Ended June 30
|
Six Months Ended June 30
|
||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Production income:
|
|||||||||||||||
|
Core production revenue
|
$
|
318
|
|
$
|
860
|
|
$
|
591
|
|
$
|
1,675
|
|
|||
|
Representations and warranties provision
|
(87
|
)
|
(197
|
)
|
(265
|
)
|
(447
|
)
|
|||||||
|
Total production income
|
231
|
|
663
|
|
326
|
|
1,228
|
|
|||||||
|
Servicing income:
|
|||||||||||||||
|
Servicing fees
|
476
|
|
785
|
|
990
|
|
1,701
|
|
|||||||
|
Amortization of expected cash flows
(1)
|
(209
|
)
|
(260
|
)
|
(419
|
)
|
(574
|
)
|
|||||||
|
Fair value changes of MSRs, net of risk management activities used to hedge certain market risks
(2)
|
105
|
|
215
|
|
171
|
|
526
|
|
|||||||
|
Other servicing-related revenue
|
3
|
|
8
|
|
7
|
|
17
|
|
|||||||
|
Total net servicing income
|
375
|
|
748
|
|
749
|
|
1,670
|
|
|||||||
|
Total
CRES
mortgage banking income
|
606
|
|
1,411
|
|
1,075
|
|
2,898
|
|
|||||||
|
Eliminations
(3)
|
(79
|
)
|
(233
|
)
|
(136
|
)
|
(457
|
)
|
|||||||
|
Total consolidated mortgage banking income
|
$
|
527
|
|
$
|
1,178
|
|
$
|
939
|
|
$
|
2,441
|
|
|||
|
(1)
|
Represents the net change in fair value of the MSR asset due to the recognition of modeled cash flows.
|
|
(2)
|
Includes gains on sales of MSRs.
|
|
(3)
|
Includes the effect of transfers of mortgage loans from
CRES
to the ALM portfolio included in
All Other
.
|
Three Months Ended June 30, 2014
Compared to
Three Months Ended June 30, 2013
Core production revenue
decreased
$542 million
due to lower origination volumes as described below, combined with industry-wide margin compression. The representations and warranties provision
decreased
$110 million
to
$87 million
. The provision was related to non-government-sponsored enterprises exposures.
Net servicing income
decreased
$373 million
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 2013 as well as loan prepayment activity, which exceeded new originations primarily due to our exit from non-retail channels.
Six Months Ended June 30, 2014
Compared to
Six Months Ended June 30, 2013
Core production revenue
decreased
$1.1 billion
due to the same factors as described in the three-month discussion above. The representations and warranties provision
decreased
$182 million
to
$265 million
. The provision included $103 million related to the FHFA Settlement and $162 million primarily related to non-government-sponsored enterprises exposures.
Net servicing income
decreased
$921 million
driven by the same factors as described in the three-month discussion above.
40
|
Key Statistics
|
|||||||||||||||||||
|
Three Months Ended June 30
|
Six Months Ended June 30
|
||||||||||||||||||
|
(Dollars in millions, except as noted)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||||||
|
Loan production
(1)
|
|||||||||||||||||||
|
Total
(2)
:
|
|||||||||||||||||||
|
First mortgage
|
$
|
11,099
|
|
$
|
25,276
|
|
$
|
19,949
|
|
$
|
49,196
|
|
|||||||
|
Home equity
|
2,602
|
|
1,497
|
|
4,587
|
|
2,615
|
|
|||||||||||
|
CRES:
|
|||||||||||||||||||
|
First mortgage
|
$
|
8,461
|
|
$
|
20,509
|
|
$
|
15,163
|
|
$
|
39,778
|
|
|||||||
|
Home equity
|
2,396
|
|
1,283
|
|
4,187
|
|
2,225
|
|
|||||||||||
|
Period end
|
June 30
2014 |
December 31
2013 |
|||||||||||||||||
|
Mortgage serviced portfolio (in billions)
(1, 3)
|
$
|
760
|
|
$
|
810
|
|
|||||||||||||
|
Mortgage loans serviced for investors (in billions)
(1)
|
505
|
|
550
|
|
|||||||||||||||
|
Mortgage servicing rights:
|
|||||||||||||||||||
|
Balance
(4)
|
4,134
|
|
5,042
|
|
|||||||||||||||
|
Capitalized mortgage servicing rights (% of loans serviced for investors)
|
82
|
|
bps
|
92
|
|
bps
|
|||||||||||||
|
(1)
|
The above loan production and period-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.
|
|
(4)
|
At June 30, 2014, excludes
$234 million
of certain non-U.S. residential mortgage MSR balances that are recorded in
Global Markets
.
|
Reflecting a decline in the overall mortgage market because of higher interest rates driving a decline in refinances, first mortgage loan originations in
CRES
declined
$12.0 billion
, or
59 percent
, to
$8.5 billion
for the
three months ended June 30, 2014
, and for the total Corporation,
decreased
$14.2 billion
, or
56 percent
, to
$11.1 billion
compared to
same period in 2013
. First mortgage loan originations in
CRES
declined
$24.6 billion
, or
62 percent
, to
$15.2 billion
for the
six months ended June 30, 2014
, and for the total Corporation,
decreased
$29.2 billion
, or
59 percent
, to
$19.9 billion
compared to the
same period in 2013
. The increase in interest rates also had an adverse impact on our mortgage loan applications, particularly for refinance mortgage loans compared to the
same period in 2013
.
During the
three months ended June 30, 2014
, 53 percent of our first mortgage production volume was for refinance originations and 47 percent was for purchase originations compared to 83 percent and 17 percent for the
same period in 2013
. Home Affordable Refinance Program (HARP) refinance originations were eight percent of all refinance originations as compared to 24 percent for the
same period in 2013
. Making Home Affordable non-HARP refinance originations were 19 percent of all refinance originations as compared to 21 percent for the
same period in 2013
. The remaining 73 percent of refinance originations was conventional refinances as compared to 55 percent for the
same period in 2013
.
During the
six months ended June 30, 2014
, 59 percent of our first mortgage production volume was for refinance originations and 41 percent was for purchase originations compared to 87 percent and 13 percent for the
same period in 2013
. HARP refinance originations were eight percent of all refinance originations as compared to 26 percent for the
same period in 2013
. Making Home Affordable non-HARP refinance originations were 20 percent of all refinance originations for both periods. The remaining 72 percent of refinance originations was conventional refinances as compared to 54 percent for the
same period in 2013
.
Home equity production for the total Corporation was
$2.6 billion
and
$4.6 billion
for the
three and six months ended June 30, 2014
compared to
$1.5 billion
and
$2.6 billion
for the
same periods in 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.
41
Mortgage Servicing Rights
At
June 30, 2014
, the balance of consumer MSRs managed within
CRES
, which excludes
$234 million
of certain non-U.S. residential mortgage MSRs recorded in
Global Markets
, was
$4.1 billion
, which represented
82
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
$908 million
in the
six months ended June 30, 2014
primarily driven by a decrease in value due to lower mortgage rates compared to
December 31, 2013
, which resulted in higher forecasted prepayment speeds, and the recognition of modeled cash flows. For more information on our servicing activities, see
Off-Balance Sheet Arrangements and Contractual Obligations – Servicing, Foreclosure and Other Mortgage Matters
on page
61
. For more information on MSRs, see
Note 17 – Mortgage Servicing Rights
to the Consolidated Financial Statements
.
42
|
Global Wealth & Investment Management
|
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
||||||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
% Change
|
2014
|
|
2013
|
% Change
|
||||||||||||||
|
Net interest income (FTE basis)
|
$
|
1,485
|
|
$
|
1,505
|
|
(1
|
)%
|
$
|
2,970
|
|
$
|
3,101
|
|
(4
|
)%
|
|||||
|
Noninterest income:
|
|||||||||||||||||||||
|
Investment and brokerage services
|
2,642
|
|
2,441
|
|
8
|
|
5,246
|
|
4,772
|
|
10
|
|
|||||||||
|
All other income
|
462
|
|
553
|
|
(16
|
)
|
920
|
|
1,047
|
|
(12
|
)
|
|||||||||
|
Total noninterest income
|
3,104
|
|
2,994
|
|
4
|
|
6,166
|
|
5,819
|
|
6
|
|
|||||||||
|
Total revenue, net of interest expense (FTE basis)
|
4,589
|
|
4,499
|
|
2
|
|
9,136
|
|
8,920
|
|
2
|
|
|||||||||
|
Provision for credit losses
|
(8
|
)
|
(15
|
)
|
(47
|
)
|
15
|
|
7
|
|
114
|
|
|||||||||
|
Noninterest expense
|
3,447
|
|
3,270
|
|
5
|
|
6,806
|
|
6,523
|
|
4
|
|
|||||||||
|
Income before income taxes
|
1,150
|
|
1,244
|
|
(8
|
)
|
2,315
|
|
2,390
|
|
(3
|
)
|
|||||||||
|
Income tax expense (FTE basis)
|
426
|
|
485
|
|
(12
|
)
|
862
|
|
911
|
|
(5
|
)
|
|||||||||
|
Net income
|
$
|
724
|
|
$
|
759
|
|
(5
|
)
|
$
|
1,453
|
|
$
|
1,479
|
|
(2
|
)
|
|||||
|
Net interest yield (FTE basis)
|
2.38
|
%
|
2.47
|
%
|
|
2.38
|
%
|
2.46
|
%
|
||||||||||||
|
Return on average allocated capital
|
24.33
|
|
30.59
|
|
|
24.53
|
|
30.00
|
|
||||||||||||
|
Efficiency ratio (FTE basis)
|
75.11
|
|
72.70
|
|
|
74.50
|
|
73.12
|
|
||||||||||||
|
Balance Sheet
|
|||||||||||||||||||||
|
Three Months Ended June 30
|
Six Months Ended June 30
|
||||||||||||||||||||
|
Average
|
2014
|
2013
|
% Change
|
2014
|
2013
|
% Change
|
|||||||||||||||
|
Total loans and leases
|
$
|
118,512
|
|
$
|
109,589
|
|
8
|
%
|
$
|
117,235
|
|
$
|
107,845
|
|
9
|
%
|
|||||
|
Total earning assets
|
249,892
|
|
244,860
|
|
2
|
|
251,705
|
|
254,155
|
|
(1
|
)
|
|||||||||
|
Total assets
|
268,294
|
|
263,735
|
|
2
|
|
270,674
|
|
272,966
|
|
(1
|
)
|
|||||||||
|
Total deposits
|
240,042
|
|
235,344
|
|
2
|
|
241,409
|
|
244,329
|
|
(1
|
)
|
|||||||||
|
Allocated capital
|
12,000
|
|
10,000
|
|
20
|
|
12,000
|
|
10,000
|
|
20
|
|
|||||||||
|
|
|
||||||||||||||||||||
|
Period end
|
June 30
2014 |
December 31
2013 |
% Change
|
||||||||||||||||||
|
Total loans and leases
|
$
|
120,187
|
|
$
|
115,846
|
|
4
|
%
|
|||||||||||||
|
Total earning assets
|
247,179
|
|
254,031
|
|
(3
|
)
|
|||||||||||||||
|
Total assets
|
265,581
|
|
274,112
|
|
(3
|
)
|
|||||||||||||||
|
Total deposits
|
237,046
|
|
244,901
|
|
(3
|
)
|
|||||||||||||||
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.
Three Months Ended June 30, 2014
Compared to
Three Months Ended June 30, 2013
Net income
decreased
$35 million
to
$724 million
driven by
higher
noninterest expense, partially offset by
higher
noninterest income. Noninterest income
increased
$
110 million
to $
3.1 billion
primarily driven by higher market valuation and long-term AUM flows, partially offset by lower transactional activity. Noninterest expense
increased
$177 million
to
$3.4 billion
primarily due to higher revenue-related
43
incentive compensation and other volume-related expenses, and additional investments in technology and other areas to support business growth.
Revenue from MLGWM was
$3.8 billion
,
up
one percent
, and revenue from U.S. Trust was
$783 million
,
up
six percent
, both driven by an increase in asset management fees related to higher market valuation and long-term AUM flows.
Return on average allocated capital was
24.3 percent
, down from
30.6 percent
as relatively stable earnings were more than offset by increased capital allocations. For more information on capital allocated to the business segments, see
Business Segment Operations
on page
28
.
Six Months Ended June 30, 2014
Compared to
Six Months Ended June 30, 2013
Net income
decreased
$26 million
to
$1.5 billion
driven by
higher
noninterest expense and
lower
net interest income, partially offset by
higher
noninterest income. Noninterest income
increased
$
347 million
to $
6.2 billion
and noninterest expense
increased
$283 million
to
$6.8 billion
. These changes were driven by the same factors as described in the three-month discussion above.
Revenue from MLGWM was
$7.6 billion
,
up
two percent
, and revenue from U.S. Trust was
$1.6 billion
,
up
six percent
, both driven by the same factors as described in the three-month discussion above.
Return on average allocated capital was
24.5 percent
, down from
30.0 percent
driven by the same factors as described in the three-month discussion above.
|
Net Migration Summary
|
GWIM
results are impacted by the net migration of clients and their related deposit and loan balances
to or from
CBB
,
Global Banking
,
CRES
and the ALM portfolio, as presented in the table below. We move clients between business segments to better meet their needs. During the first quarter of 2013,
GWIM
identified and transferred deposit balances of approximately $19 billion to
CBB
. Additionally, beginning in March 2013, the revenue and expense associated with
GWIM
clients who hold credit cards are included in
GWIM
; prior periods are in
CBB
.
|
Net Migration Summary
|
|||||||||||||||
|
|
Three Months Ended June 30
|
Six Months Ended June 30
|
|||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Total deposits, net –
GWIM
from / (to)
CBB
and
Global Banking
|
$
|
691
|
|
$
|
660
|
|
$
|
1,835
|
|
$
|
(17,888
|
)
|
|||
|
Total loans, net –
GWIM
from / (to)
CBB
,
CRES
and the ALM portfolio
|
(18
|
)
|
(30
|
)
|
(18
|
)
|
(59
|
)
|
|||||||
|
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
|
|||||||
|
(Dollars in millions)
|
June 30
2014 |
December 31
2013 |
|||||
|
Assets under management
|
$
|
878,741
|
|
$
|
821,449
|
|
|
|
Brokerage assets
|
1,091,558
|
|
1,045,122
|
|
|||
|
Assets in custody
|
137,391
|
|
136,190
|
|
|||
|
Deposits
|
237,046
|
|
244,901
|
|
|||
|
Loans and leases
(1)
|
123,432
|
|
118,776
|
|
|||
|
Total client balances
|
$
|
2,468,168
|
|
$
|
2,366,438
|
|
|
|
(1)
|
Includes margin receivables which are classified in customer and other receivables on the Consolidated Balance Sheet.
|
The
increase
of
$101.7 billion
, or
four percent
, in client balances was driven by higher market valuation and long-term AUM flows.
44
|
Global Banking
|
|||||||||||
|
|
Three Months Ended June 30
|
Six Months Ended June 30
|
|
||||||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
% Change
|
2014
|
|
2013
|
% Change
|
||||||||||||||
|
Net interest income (FTE basis)
|
$
|
2,239
|
|
$
|
2,252
|
|
(1
|
)%
|
$
|
4,541
|
|
$
|
4,411
|
|
3
|
%
|
|||||
|
Noninterest income:
|
|||||||||||||||||||||
|
Service charges
|
680
|
|
701
|
|
(3
|
)
|
1,367
|
|
1,387
|
|
(1
|
)
|
|||||||||
|
Investment banking fees
|
834
|
|
792
|
|
5
|
|
1,656
|
|
1,582
|
|
5
|
|
|||||||||
|
All other income
|
426
|
|
393
|
|
8
|
|
884
|
|
788
|
|
12
|
|
|||||||||
|
Total noninterest income
|
1,940
|
|
1,886
|
|
3
|
|
3,907
|
|
3,757
|
|
4
|
|
|||||||||
|
Total revenue, net of interest expense (FTE basis)
|
4,179
|
|
4,138
|
|
1
|
|
8,448
|
|
8,168
|
|
3
|
|
|||||||||
|
Provision for credit losses
|
132
|
|
163
|
|
(19
|
)
|
397
|
|
312
|
|
27
|
|
|||||||||
|
Noninterest expense
|
1,899
|
|
1,849
|
|
3
|
|
3,927
|
|
3,685
|
|
7
|
|
|||||||||
|
Income before income taxes
|
2,148
|
|
2,126
|
|
1
|
|
4,124
|
|
4,171
|
|
(1
|
)
|
|||||||||
|
Income tax expense (FTE basis)
|
795
|
|
829
|
|
(4
|
)
|
1,535
|
|
1,590
|
|
(3
|
)
|
|||||||||
|
Net income
|
$
|
1,353
|
|
$
|
1,297
|
|
4
|
|
$
|
2,589
|
|
$
|
2,581
|
|
—
|
|
|||||
|
Net interest yield (FTE basis)
|
2.58
|
%
|
3.17
|
%
|
2.63
|
%
|
3.18
|
%
|
|
||||||||||||
|
Return on average allocated capital
|
17.51
|
|
22.62
|
|
16.85
|
|
22.64
|
|
|
||||||||||||
|
Efficiency ratio (FTE basis)
|
45.44
|
|
44.71
|
|
46.48
|
|
45.13
|
|
|
||||||||||||
|
Balance Sheet
|
|||||||||||||||||||||
|
Three Months Ended June 30
|
Six Months Ended June 30
|
||||||||||||||||||||
|
Average
|
2014
|
2013
|
% Change
|
2014
|
2013
|
% Change
|
|||||||||||||||
|
Total loans and leases
|
$
|
271,417
|
|
$
|
255,674
|
|
6
|
%
|
$
|
271,446
|
|
$
|
249,903
|
|
9
|
%
|
|||||
|
Total earning assets
|
347,661
|
|
285,000
|
|
22
|
|
347,793
|
|
280,143
|
|
24
|
|
|||||||||
|
Total assets
|
390,997
|
|
326,775
|
|
20
|
|
392,030
|
|
322,036
|
|
22
|
|
|||||||||
|
Total deposits
|
258,937
|
|
226,912
|
|
14
|
|
257,692
|
|
224,132
|
|
15
|
|
|||||||||
|
Allocated capital
|
31,000
|
|
23,000
|
|
35
|
|
31,000
|
|
23,000
|
|
35
|
|
|||||||||
|
|
|
|
|
||||||||||||||||||
|
Period end
|
June 30
2014 |
December 31
2013 |
% Change
|
||||||||||||||||||
|
Total loans and leases
|
$
|
270,683
|
|
$
|
269,469
|
|
—
|
%
|
|||||||||||||
|
Total earning assets
|
363,713
|
|
336,607
|
|
8
|
|
|||||||||||||||
|
Total assets
|
407,367
|
|
378,659
|
|
8
|
|
|||||||||||||||
|
Total deposits
|
270,268
|
|
265,171
|
|
2
|
|
|||||||||||||||
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 work with our clients to provide investment banking products 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.
45
Three Months Ended June 30, 2014
Compared to
Three Months Ended June 30, 2013
Net income for
Global Banking
increased
$56 million
to
$1.4 billion
primarily driven by a
decrease
in the provision for credit losses, partially offset by
higher
noninterest expense. Revenue of
$4.2 billion
remained relatively unchanged.
The provision for credit losses
decreased
$31 million
to
$132 million
. Noninterest expense
increased
$50 million
to
$1.9 billion
primarily due to higher litigation expense.
Return on average allocated capital was
17.5 percent
, down from
22.6 percent
as modest earnings improvement was more than offset by increased capital allocations. For more information on capital allocated to the business segments, see
Business Segment Operations
on page
28
.
Six Months Ended June 30, 2014
Compared to
Six Months Ended June 30, 2013
Net income for
Global Banking
of
$2.6 billion
remained relatively unchanged as
higher
revenue was offset by
higher
noninterest expense and an
increase
in the provision for credit losses. Revenue
increased
$280 million
to
$8.4 billion
driven by higher net interest income from loan growth and higher investment banking fees.
The provision for credit losses
increased
$85 million
to
$397 million
. Noninterest expense
increased
$242 million
to
$3.9 billion
primarily from technology investments in our Global Transaction Services and lending platforms, additional client-facing personnel and higher litigation expense.
Return on average allocated capital was
16.9 percent
, down from
22.6 percent
driven by the same factors as described in the three-month discussion above.
46
|
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 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
|
|||||||||||||||||||||||
|
Three Months Ended June 30
|
|||||||||||||||||||||||
|
Global Corporate Banking
|
Global Commercial Banking
|
Total
|
|||||||||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
|||||||||||||||||
|
Revenue
|
|||||||||||||||||||||||
|
Business Lending
|
$
|
820
|
|
$
|
855
|
|
$
|
1,005
|
|
$
|
1,050
|
|
$
|
1,825
|
|
$
|
1,905
|
|
|||||
|
Global Transaction Services
|
766
|
|
702
|
|
719
|
|
733
|
|
1,485
|
|
1,435
|
|
|||||||||||
|
Total revenue, net of interest expense
|
$
|
1,586
|
|
$
|
1,557
|
|
$
|
1,724
|
|
$
|
1,783
|
|
$
|
3,310
|
|
$
|
3,340
|
|
|||||
|
Balance Sheet
|
|||||||||||||||||||||||
|
Average
|
|||||||||||||||||||||||
|
Total loans and leases
|
$
|
129,836
|
|
$
|
126,734
|
|
$
|
141,559
|
|
$
|
128,910
|
|
$
|
271,395
|
|
$
|
255,644
|
|
|||||
|
Total deposits
|
143,420
|
|
123,482
|
|
115,518
|
|
103,385
|
|
258,938
|
|
226,867
|
|
|||||||||||
|
Six Months Ended June 30
|
|||||||||||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
||||||||||||||||||
|
Revenue
|
|||||||||||||||||||||||
|
Business Lending
|
$
|
1,724
|
|
$
|
1,706
|
|
$
|
2,014
|
|
$
|
2,001
|
|
$
|
3,738
|
|
$
|
3,707
|
|
|||||
|
Global Transaction Services
|
1,506
|
|
1,368
|
|
1,454
|
|
1,446
|
|
2,960
|
|
2,814
|
|
|||||||||||
|
Total revenue, net of interest expense
|
$
|
3,230
|
|
$
|
3,074
|
|
$
|
3,468
|
|
$
|
3,447
|
|
$
|
6,698
|
|
$
|
6,521
|
|
|||||
|
Balance Sheet
|
|||||||||||||||||||||||
|
Average
|
|||||||||||||||||||||||
|
Total loans and leases
|
$
|
130,519
|
|
$
|
122,768
|
|
$
|
140,912
|
|
$
|
127,115
|
|
$
|
271,431
|
|
$
|
249,883
|
|
|||||
|
Total deposits
|
141,948
|
|
121,348
|
|
115,745
|
|
102,741
|
|
257,693
|
|
224,089
|
|
|||||||||||
|
Period end
|
|||||||||||||||||||||||
|
Total loans and leases
|
$
|
129,974
|
|
$
|
127,348
|
|
$
|
140,684
|
|
$
|
131,126
|
|
$
|
270,658
|
|
$
|
258,474
|
|
|||||
|
Total deposits
|
150,938
|
|
124,646
|
|
119,330
|
|
104,242
|
|
270,268
|
|
228,888
|
|
|||||||||||
Global Corporate and Global Commercial Banking revenue
decreased
$30 million
for the
three months ended June 30, 2014
compared to the
same period in 2013
due to
lower
revenue in Business Lending, partially offset by
higher
revenue in Global Transaction Services. Global Corporate and Global Commercial Banking revenue
increased
$177 million
for the
six months ended June 30, 2014
compared to the
same period in 2013
due to
higher
revenue in both Business Lending and Global Transaction Services.
Business Lending revenue in Global Corporate Banking
declined
$35 million
for the
three months ended June 30, 2014
compared to the
same period in 2013
primarily due to lower credit service charges and declined
$45 million
in Global Commercial Banking due to prior-year accretion on acquired portfolios. Business Lending revenue in Global Corporate Banking and Global Commercial Banking
increased
$18 million
and
$13 million
for the
six months ended June 30, 2014
compared to the
same period in 2013
due to the impact of higher loan balances, partially offset by lower loan spreads and prior-year accretion on acquired portfolios in Global Commercial Banking.
47
Global Transaction Services revenue in Global Corporate Banking
increased
$64 million
and
$138 million
for the
three and six months ended June 30, 2014
compared to the
same periods in 2013
driven by the impact of growth in U.S. and non-U.S. deposit balances, partially offset by the impact of the low rate environment. Global Transaction Services revenue in Global Commercial Banking remained relatively unchanged for the
three and six months ended June 30, 2014
compared to the
same periods in 2013
.
Average loans and leases in Global Corporate and Global Commercial Banking
increased
six percent
and
nine percent
for the
three and six months ended June 30, 2014
compared to the
same periods in 2013
driven by growth in the commercial and industrial, commercial real estate and commercial leasing portfolios. Average deposits in Global Corporate and Global Commercial Banking
increased
14 percent
and
15 percent
for the
three and six months ended June 30, 2014
compared to the
same periods in 2013
due to client liquidity, international growth and new client acquisitions.
|
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 as well as the portion attributable to
Global Banking.
|
Investment Banking Fees
|
|||||||||||||||||||||||||||||||
|
Three Months Ended June 30
|
Six Months Ended June 30
|
||||||||||||||||||||||||||||||
|
Global Banking
|
Total Corporation
|
Global Banking
|
Total Corporation
|
||||||||||||||||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
|||||||||||||||||||||||
|
Products
|
|||||||||||||||||||||||||||||||
|
Advisory
|
$
|
234
|
|
$
|
240
|
|
$
|
265
|
|
$
|
262
|
|
$
|
491
|
|
$
|
473
|
|
$
|
551
|
|
$
|
519
|
|
|||||||
|
Debt issuance
|
388
|
|
405
|
|
891
|
|
987
|
|
835
|
|
833
|
|
1,916
|
|
2,009
|
|
|||||||||||||||
|
Equity issuance
|
212
|
|
147
|
|
514
|
|
356
|
|
330
|
|
276
|
|
827
|
|
679
|
|
|||||||||||||||
|
Gross investment banking fees
|
834
|
|
792
|
|
1,670
|
|
1,605
|
|
1,656
|
|
1,582
|
|
3,294
|
|
3,207
|
|
|||||||||||||||
|
Self-led deals
|
(16
|
)
|
(7
|
)
|
(39
|
)
|
(49
|
)
|
(51
|
)
|
(35
|
)
|
(121
|
)
|
(116
|
)
|
|||||||||||||||
|
Total investment banking fees
|
$
|
818
|
|
$
|
785
|
|
$
|
1,631
|
|
$
|
1,556
|
|
$
|
1,605
|
|
$
|
1,547
|
|
$
|
3,173
|
|
$
|
3,091
|
|
|||||||
Total Corporation investment banking fees of
$1.6 billion
and
$3.2 billion
, excluding self-led deals, included within
Global Banking
and
Global Markets
,
increased
five percent
and
three percent
for the
three and six months ended June 30, 2014
compared to the
same periods in 2013
as strong equity underwriting, investment-grade underwriting and advisory fees were partially offset by lower underwriting fees for other debt products.
48
|
Global Markets
|
|
|
Three Months Ended June 30
|
Six Months Ended June 30
|
|||||||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
% Change
|
2014
|
2013
|
% Change
|
|||||||||||||||
|
Net interest income (FTE basis)
|
$
|
952
|
|
$
|
1,009
|
|
(6
|
)%
|
$
|
1,949
|
|
$
|
2,117
|
|
(8
|
)%
|
|||||
|
Noninterest income:
|
|||||||||||||||||||||
|
Investment and brokerage services
|
540
|
|
549
|
|
(2
|
)
|
1,101
|
|
1,077
|
|
2
|
|
|||||||||
|
Investment banking fees
|
760
|
|
668
|
|
14
|
|
1,496
|
|
1,347
|
|
11
|
|
|||||||||
|
Trading account profits
|
1,768
|
|
1,848
|
|
(4
|
)
|
4,135
|
|
4,738
|
|
(13
|
)
|
|||||||||
|
All other income (loss)
|
563
|
|
120
|
|
n/m
|
|
914
|
|
(306
|
)
|
n/m
|
|
|||||||||
|
Total noninterest income
|
3,631
|
|
3,185
|
|
14
|
|
7,646
|
|
6,856
|
|
12
|
|
|||||||||
|
Total revenue, net of interest expense (FTE basis)
|
4,583
|
|
4,194
|
|
9
|
|
9,595
|
|
8,973
|
|
7
|
|
|||||||||
|
Provision for credit losses
|
19
|
|
(16
|
)
|
n/m
|
|
38
|
|
(11
|
)
|
n/m
|
|
|||||||||
|
Noninterest expense
|
2,862
|
|
2,770
|
|
3
|
|
5,939
|
|
5,843
|
|
2
|
|
|||||||||
|
Income before income taxes
|
1,702
|
|
1,440
|
|
18
|
|
3,618
|
|
3,141
|
|
15
|
|
|||||||||
|
Income tax expense (FTE basis)
|
601
|
|
478
|
|
26
|
|
1,209
|
|
1,067
|
|
13
|
|
|||||||||
|
Net income
|
$
|
1,101
|
|
$
|
962
|
|
14
|
|
$
|
2,409
|
|
$
|
2,074
|
|
16
|
|
|||||
|
Return on average allocated capital
|
13.01
|
%
|
12.89
|
%
|
14.32
|
%
|
13.97
|
%
|
|||||||||||||
|
Efficiency ratio (FTE basis)
|
62.45
|
|
66.05
|
|
61.90
|
|
65.12
|
|
|||||||||||||
|
Balance Sheet
|
|||||||||||||||||||||
|
Three Months Ended June 30
|
Six Months Ended June 30
|
||||||||||||||||||||
|
Average
|
2014
|
2013
|
% Change
|
2014
|
2013
|
% Change
|
|||||||||||||||
|
Total trading-related assets
(1)
|
$
|
459,938
|
|
$
|
490,972
|
|
(6
|
)%
|
$
|
448,596
|
|
$
|
497,582
|
|
(10
|
)%
|
|||||
|
Total loans and leases
|
63,579
|
|
56,354
|
|
13
|
|
63,637
|
|
54,529
|
|
17
|
|
|||||||||
|
Total earning assets
(1)
|
478,192
|
|
499,338
|
|
(4
|
)
|
467,594
|
|
504,450
|
|
(7
|
)
|
|||||||||
|
Total assets
|
617,103
|
|
656,109
|
|
(6
|
)
|
609,315
|
|
663,021
|
|
(8
|
)
|
|||||||||
|
Allocated capital
|
34,000
|
|
30,000
|
|
13
|
|
34,000
|
|
30,000
|
|
13
|
|
|||||||||
|
Period end
|
June 30
2014 |
December 31
2013 |
% Change
|
||||||||||||||||||
|
Total trading-related assets
(1)
|
$
|
443,386
|
|
$
|
411,080
|
|
8
|
%
|
|||||||||||||
|
Total loans and leases
|
66,260
|
|
67,381
|
|
(2
|
)
|
|||||||||||||||
|
Total earning assets
(1)
|
465,383
|
|
432,807
|
|
8
|
|
|||||||||||||||
|
Total assets
|
610,395
|
|
575,584
|
|
6
|
|
|||||||||||||||
|
(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, mortgage-backed securities (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
48
.
On January 1, 2014,
the results for structured liabilities including DVA were moved into
Global Markets
from
All Other
to better align the performance and risk management of these instruments. As such, net DVA in
Global Markets
49
represents the combined total of net DVA on derivatives and structured liabilities. Prior periods have been reclassified to conform to current period presentation.
Three Months Ended June 30, 2014
Compared to
Three Months Ended June 30, 2013
Net income for
Global Markets
increased
$139 million
to
$1.1 billion
primarily driven by higher equity investment gains, which included a $240 million gain related to the initial public offering of an equity investment, and increased investment banking fees. Net DVA
gains
were
$69 million
compared to
gains
of
$49 million
. Noninterest expense
increased
$92 million
to
$2.9 billion
due to higher technology and staff support costs as well as increased personnel expense and professional fees.
Average earning assets
decreased
$21.1 billion
to
$478.2 billion
largely driven by a lower matched-book and trading related securities.
The return on average allocated capital was
13.01 percent
,
up
from
12.89 percent
, reflecting increased net income, partially offset by an increase in allocated capital. For more information on capital allocated to the business segments, see
Business Segment Operations
on page
28
.
Six Months Ended June 30, 2014
Compared to
Six Months Ended June 30, 2013
Net income for
Global Markets
increased
$335 million
to
$2.4 billion
primarily driven by the same factors as described in the three-month discussion above, as well as a first quarter 2013 write-down of a monoline receivable due to the settlement of a legacy matter. This was offset by a decrease in trading account profits due to declines in market volumes and reduced volatility. Net DVA
gains
were
$181 million
compared to
losses
of
$96 million
. Noninterest expense
increased
$96 million
to
$5.9 billion
due to higher technology costs and professional fees, partially offset by decreased personnel expense.
Average earning assets
decreased
$36.9 billion
to
$467.6 billion
largely driven by the same factors as described in the three-month discussion above.
The return on average allocated capital was
14.32 percent
,
up
from
13.97 percent
, largely driven by the same factors as described in the three-month discussion above.
50
|
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, 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 table below 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 table below and related discussion present sales and trading revenue excluding the impact of net DVA, which is a non-GAAP financial measure. We believe the use of this non-GAAP financial measure provides clarity in assessing the underlying performance of these businesses.
|
Sales and Trading Revenue
(1, 2)
|
|||||||||||||||
|
|
Three Months Ended June 30
|
Six Months Ended June 30
|
|||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Sales and trading revenue
|
|||||||||||||||
|
Fixed income, currencies and commodities
|
$
|
2,426
|
|
$
|
2,216
|
|
$
|
5,452
|
|
$
|
5,067
|
|
|||
|
Equities
|
1,045
|
|
1,280
|
|
2,230
|
|
2,433
|
|
|||||||
|
Total sales and trading revenue
|
$
|
3,471
|
|
$
|
3,496
|
|
$
|
7,682
|
|
$
|
7,500
|
|
|||
|
Sales and trading revenue, excluding net DVA
(3)
|
|||||||||||||||
|
Fixed income, currencies and commodities
|
$
|
2,370
|
|
$
|
2,253
|
|
$
|
5,316
|
|
$
|
5,252
|
|
|||
|
Equities
|
1,032
|
|
1,194
|
|
2,185
|
|
2,344
|
|
|||||||
|
Total sales and trading revenue, excluding net DVA
|
$
|
3,402
|
|
$
|
3,447
|
|
$
|
7,501
|
|
$
|
7,596
|
|
|||
|
(1)
|
Includes FTE adjustments of
$51 million
and
$88 million
for the
three and six months ended June 30, 2014
compared to
$47 million
and
$93 million
for the
same periods in 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
$68 million
and
$153 million
for the
three and six months ended June 30, 2014
compared to
$143 million
and
$210 million
for the
same periods in 2013
.
|
|
(3)
|
FICC and Equities sales and trading revenue, excluding the impact of net DVA, is a non-GAAP financial measure. FICC net DVA gains were
$56 million
and
$136 million
for the
three and six months ended June 30, 2014
compared to net DVA losses of
$37 million
and
$185 million
for the same periods in 2013. Equities net DVA gains were
$13 million
and
$45 million
for the
three and six months ended June 30, 2014
compared to net DVA gains of
$86 million
and
$89 million
for the same periods in 2013.
|
Three Months Ended June 30, 2014
Compared to
Three Months Ended June 30, 2013
Fixed-income, currency and commodities (FICC) revenue, excluding net DVA,
increased
$117 million
to
$2.4 billion
primarily due to improved performance in mortgage and municipal products, partially offset by declines in foreign exchange and commodities. Equities revenue, excluding net DVA,
decreased
$162 million
to
$1.0 billion
due to lower market volumes and reduced client activity. Sales and trading revenue included total commissions and brokerage fee revenue of
$540 million
, substantially all from equities, which remained relatively unchanged.
Six Months Ended June 30, 2014
Compared to
Six Months Ended June 30, 2013
FICC revenue, excluding net DVA,
increased
$64 million
to
$5.3 billion
as the prior-year period included a $450 million write-down of a monoline receivable related to the settlement of a legacy matter. Equities revenue, excluding net DVA,
decreased
$159 million
to
$2.2 billion
due to the same factors as described in the three-month discussion above. Sales and trading revenue included total commissions and brokerage fee revenue of
$1.1 billion
, substantially all from equities, which remained relatively unchanged.
51
|
All Other
|
|
|
Three Months Ended June 30
|
Six Months Ended June 30
|
|
||||||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
% Change
|
2014
|
2013
|
% Change
|
|||||||||||||||
|
Net interest income (FTE basis)
|
$
|
(76
|
)
|
$
|
272
|
|
n/m
|
|
$
|
(226
|
)
|
$
|
528
|
|
n/m
|
|
|||||
|
Noninterest income:
|
|
||||||||||||||||||||
|
Card income
|
88
|
|
81
|
|
9
|
%
|
174
|
|
166
|
|
5
|
%
|
|||||||||
|
Equity investment income
|
56
|
|
576
|
|
(90
|
)
|
730
|
|
1,096
|
|
(33
|
)
|
|||||||||
|
Gains on sales of debt securities
|
382
|
|
452
|
|
(15
|
)
|
739
|
|
519
|
|
42
|
|
|||||||||
|
All other loss
|
(604
|
)
|
(812
|
)
|
(26
|
)
|
(1,262
|
)
|
(1,286
|
)
|
(2
|
)
|
|||||||||
|
Total noninterest income
|
(78
|
)
|
297
|
|
n/m
|
|
381
|
|
495
|
|
(23
|
)
|
|||||||||
|
Total revenue, net of interest expense (FTE basis)
|
(154
|
)
|
569
|
|
n/m
|
|
155
|
|
1,023
|
|
(85
|
)
|
|||||||||
|
Provision for credit losses
|
(246
|
)
|
(179
|
)
|
37
|
|
(381
|
)
|
71
|
|
n/m
|
|
|||||||||
|
Noninterest expense
|
431
|
|
562
|
|
(23
|
)
|
2,113
|
|
2,330
|
|
(9
|
)
|
|||||||||
|
Income (loss) before income taxes
|
(339
|
)
|
186
|
|
n/m
|
|
(1,577
|
)
|
(1,378
|
)
|
14
|
|
|||||||||
|
Income tax benefit (FTE basis)
|
(466
|
)
|
(347
|
)
|
34
|
|
(1,516
|
)
|
(992
|
)
|
53
|
|
|||||||||
|
Net income (loss)
|
$
|
127
|
|
$
|
533
|
|
(76
|
)
|
$
|
(61
|
)
|
$
|
(386
|
)
|
(84
|
)
|
|||||
|
Balance Sheet
|
|||||||||||||||||||||
|
Three Months Ended June 30
|
Six Months Ended June 30
|
|
|||||||||||||||||||
|
Average
|
2014
|
2013
|
% Change
|
2014
|
2013
|
% Change
|
|||||||||||||||
|
Loans and leases:
|
|||||||||||||||||||||
|
Residential mortgage
|
$
|
187,854
|
|
$
|
211,137
|
|
(11
|
)%
|
$
|
190,904
|
|
$
|
213,156
|
|
(10
|
)%
|
|||||
|
Non-U.S. credit card
|
11,759
|
|
10,613
|
|
11
|
|
11,657
|
|
10,819
|
|
8
|
|
|||||||||
|
Other
|
10,962
|
|
17,160
|
|
(36
|
)
|
11,404
|
|
17,773
|
|
(36
|
)
|
|||||||||
|
Total loans and leases
|
210,575
|
|
238,910
|
|
(12
|
)
|
213,965
|
|
241,748
|
|
(11
|
)
|
|||||||||
|
Total assets
(1)
|
175,720
|
|
231,498
|
|
(24
|
)
|
170,699
|
|
240,677
|
|
(29
|
)
|
|||||||||
|
Total deposits
|
35,851
|
|
34,017
|
|
5
|
|
35,119
|
|
34,883
|
|
1
|
|
|||||||||
|
|
|
||||||||||||||||||||
|
Period end
|
|
June 30
2014 |
December 31
2013 |
% Change
|
|||||||||||||||||
|
Loans and leases:
|
|||||||||||||||||||||
|
Residential mortgage
|
$
|
182,221
|
|
$
|
197,061
|
|
(8
|
)%
|
|||||||||||||
|
Non-U.S. credit card
|
11,999
|
|
11,541
|
|
4
|
|
|||||||||||||||
|
Other
|
11,251
|
|
12,088
|
|
(7
|
)
|
|||||||||||||||
|
Total loans and leases
|
205,471
|
|
220,690
|
|
(7
|
)
|
|||||||||||||||
|
Total assets
(1)
|
167,364
|
|
167,433
|
|
—
|
|
|||||||||||||||
|
Total deposits
|
31,999
|
|
27,851
|
|
15
|
|
|||||||||||||||
|
(1)
|
For presentation purposes, 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
$593.1 billion
and
$589.2 billion
for the
three and six months ended June 30, 2014
compared to
$524.5 billion
and
$525.3 billion
for the
same periods in 2013
, and
$608.8 billion
and
$569.9 billion
at
June 30, 2014
and
December 31, 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.
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 Nontrading Activities
on page
128
. 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. Additionally,
certain residential mortgage loans that are managed by
Legacy Assets & Servicing are held in
All Other
.
52
On January 1, 2014,
the results for structured liabilities including DVA (previously referred to as fair value adjustments on structured liabilities) were moved from
All Other
into
Global Markets
to better align the performance and risk management of these instruments. Prior periods have been reclassified to conform to current period presentation.
Three Months Ended June 30, 2014
Compared to
Three Months Ended June 30, 2013
Net income
for
All Other
decreased
$406 million
to
$127 million
primarily due to a
decrease
in equity investment income of
$520 million
, the negative impact of market-related premium amortization expense on debt securities and a
decrease
of
$70 million
in gains on sales of debt securities, partially offset by an improvement in the provision for credit losses and lower noninterest exp
ense. The bulk sales of $2.1 billion in nonperforming residential mortgage loans also had a positive impact of approximately $350 million, including the gains on the sale of approximately $150 million with the remainder primarily reflected as recoveries through the provision for credit losses as noted in the paragraph below.
The provision for credit losses
improved
$67 million
to a
benefit
of
$246 million
primarily driven by $185 million of recoveries on the bulk sales.
Noninterest expense
decreased
$131 million
to
$431 million
primarily due to a decline in other general operating expenses. The income tax
benefit
was
$466 million
compared to a
benefit
of
$347 million
, with the increase primarily driven by the change in pre-tax earnings.
Six Months Ended June 30, 2014
Compared to
Six Months Ended June 30, 2013
The
net loss
for
All Other
decreased
$325 million
to a net loss of
$61 million
primarily due to the same factors as described in the three-month discussion above, partially offset by an
increase
of
$220 million
in gains on sales of debt securities.
The provision for credit losses
improved
$452 million
to a
benefit
of
$381 million
primarily driven by the same factor as described in the three-month discussion above as well as continued improvement in residential mortgage portfolio trends including increased home prices.
Noninterest expense
decreased
$217 million
to
$2.1 billion
driven by a decline in foreclosed properties expense. The income tax
benefit
was
$1.5 billion
compared to a
benefit
of
$992 million
, with the increase primarily driven by the same factor as described in the three-month discussion above as well as the resolution of certain tax matters and recurring tax preference items.
53
|
Equity Investment Activity
|
The tables below present the components of equity investments included in
All Other
at
June 30, 2014
and
December 31, 2013
, and also a reconciliation to the total consolidated equity investment income for the
three and six months ended June 30, 2014 and 2013
.
|
Equity Investments
|
|||||||||||||||
|
(Dollars in millions)
|
June 30
2014 |
December 31
2013 |
|||||||||||||
|
Global Principal Investments
|
$
|
1,136
|
|
$
|
1,604
|
|
|||||||||
|
Strategic and other investments
|
827
|
|
822
|
|
|||||||||||
|
Total equity investments included in
All Other
|
$
|
1,963
|
|
$
|
2,426
|
|
|||||||||
|
Equity Investment Income
|
|||||||||||||||
|
|
Three Months Ended June 30
|
Six Months Ended June 30
|
|||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Global Principal Investments
|
$
|
71
|
|
$
|
52
|
|
$
|
43
|
|
$
|
156
|
|
|||
|
Strategic and other investments
|
(15
|
)
|
524
|
|
687
|
|
940
|
|
|||||||
|
Total equity investment income included in
All Other
|
56
|
|
576
|
|
730
|
|
1,096
|
|
|||||||
|
Total equity investment income included in the business segments
|
301
|
|
104
|
|
411
|
|
147
|
|
|||||||
|
Total consolidated equity investment income
|
$
|
357
|
|
$
|
680
|
|
$
|
1,141
|
|
$
|
1,243
|
|
|||
Equity investments included in
All Other
decreased
$463 million
to
$2.0 billion
at
June 30, 2014
compared to
December 31, 2013
, with the decrease due to sales in the GPI portfolio. GPI had unfunded equity commitments of
$54 million
at
June 30, 2014
compared to $127 million at
December 31, 2013
.
Equity investment income included in
All Other
was
$56 million
and
$730 million
for the
three and six months ended June 30, 2014
, a
decrease
of
$520 million
and
$366 million
compared to the
same periods in 2013
. The
decrease
for the three-month period was due to gains on the sales of portions of an equity investment in the prior-year period. The six-month decline was due to the same factors as described in the three-month discussion as well as lower GPI results. Total Corporation equity investment income was
$357 million
and
$1.1 billion
for the
three and six months ended June 30, 2014
, a
decrease
of
$323 million
and
$102 million
from the
same periods in 2013
, due to the same factors as described above, partially offset by a gain related to the initial public offering of an equity investment in
Global Markets
.
54
|
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. For more information on obligations and commitments, see
Note 10 – Commitments and Contingencies
to the Consolidated Financial Statements
,
Off-Balance Sheet Arrangements and Contractual Obligations
on page
52
of the MD&A of the Corporation's 2013 Annual Report on Form 10-K
, as well as
Note 11 – Long-term Debt
and
Note 12 – Commitments and Contingencies
to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K
.
|
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. 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, monolines or 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
with respect to FHA-insured loans, VA, whole-loan investors, securitization trusts, monoline insurers or other financial guarantors (collectively, repurchases). In all such cases,
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.
For more information on accounting for representations and warranties and our representations and warranties repurchase claims and exposures, see
Note 7 – Representations and Warranties Obligations and Corporate Guarantees
and
Note 12 – Commitments and Contingencies
to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K
and
Item 1A. Risk Factors of the Corporation's 2013 Annual Report on Form 10-K
.
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 bulk settlements, certain of which have been for significant amounts in lieu of a loan-by-loan review process, including with the GSEs, with four monoline insurers and with the Bank of New York Mellon (BNY Mellon), as trustee (the Trustee) for certain trusts. 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 Financial Corporation (Countrywide) to Fannie Mae (FNMA) and Freddie Mac (FHLMC) through June 30, 2012 and December 31, 2009, respectively.
We
may reach other settlements in the future if opportunities arise on terms
we believe
to be advantageous. However, there can be no assurance that
we
will reach future settlements or, if
we do,
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. For example, we are currently involved in RMBS litigation including purported class action suits, actions brought by individual RMBS purchasers and actions by Governmental Authorities. Our liability in connection with the transactions and claims not covered by these settlements could be material. For more information on our exposure to RMBS matters involving securities law, fraud or related claims, see
Note 12 – Commitments and Contingencies
to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K
.
BNY Mellon Settlement
The settlement with Bank of New York 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. The court approval hearing began in the New York Supreme Court, New York County, on June 3, 2013 and concluded on November 21, 2013.
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 have filed cross-appeals appealing the court's approval of the settlement.
Pursuant to our settlement with AIG
on July 15, 2014, AIG withdrew its objection to the BNY Mellon Settlement, including its participation in all pending appeals and cross-appeals. Under the current schedule,
55
all appeals will be fully briefed by September 22, 2014.
The court's January 31, 2014 decision, order and judgment remain subject to these appeals, as well as a motion to reargue to be heard on September 24, 2014, and it is not possible at this time to predict when the court approval process will be completed.
Although we are not a party to the proceeding, certain of our 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 we and Countrywide will not withdraw from the settlement. If final court approval is not obtained, or if we and 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.
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 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 resolve 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
.
For additional information on the FGIC Settlement, and for a summary of the larger settlement actions and the related impact on the representations and warranties provision and liability, see
Note 7 – Representations and Warranties Obligations and Corporate Guarantees
to the Consolidated Financial Statements
.
Unresolved Repurchase Claims
Repurchase claims received from a counterparty are considered unresolved repurchase claims until the underlying loan is repurchased or the claim is rescinded by the counterparty.
Unresolved 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.
When a claim is denied
and we do
not receive a response from the counterparty, the claim remains in the unresolved repurchase claims balance until resolution
.
Table 16
presents unresolved repurchase claims by counterparty at
June 30, 2014
and
December 31, 2013
.
|
Table 16
|
|||||||
|
Unresolved Repurchase Claims by Counterparty
(1)
|
|||||||
|
(Dollars in millions)
|
June 30
2014 |
December 31
2013 |
|||||
|
Private-label securitization trustees, whole-loan investors, including third-party securitization sponsors and other
(2, 3)
|
$
|
20,551
|
|
$
|
17,953
|
|
|
|
Monolines
(4)
|
1,085
|
|
1,532
|
|
|||
|
GSEs
|
76
|
|
170
|
|
|||
|
Total unresolved repurchase claims
(3)
|
$
|
21,712
|
|
$
|
19,655
|
|
|
|
(1)
|
At both
June 30, 2014
and
December 31, 2013
, unresolved repurchase claims did not include repurchase demands of
$1.2 billion
where the Corporation believes that these demands are procedurally or substantively invalid.
|
|
(2)
|
The total notional amount of unresolved repurchase claims does not include repurchase claims related to the trusts covered by the BNY Mellon Settlement.
|
|
(3)
|
Includes
$13.7 billion
and
$13.8 billion
of claims based on individual file reviews and
$6.8 billion
and
$4.1 billion
of claims submitted without individual file reviews at
June 30, 2014
and
December 31, 2013
.
|
|
(4)
|
At
June 30, 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.
|
During the
three months ended June 30, 2014
, we
received
$2.4 billion
in new repurchase claims, including
$1.9 billion
of claims submitted without individual loan file reviews and
$258 million
of claims based on individual loan file reviews
submitted by private-label securitization trustees
,
$88 million
submitted by the GSEs for both Countrywide and legacy Bank of America originations not covered by the bulk settlements with the GSEs and
$168 million
submitted by whole-loan investors
.
During the
three months ended June 30, 2014
,
$964 million
in claims were resolved.
Of the claims resolved,
$469 million
were resolved through settlements, including
$450 million
related to the FGIC Settlement
,
$255 million
were resolved through rescissions and
$240 million
were resolved through mortgage repurchases and make-whole payments with private-label securitization trustees, whole-loan investors and the GSEs
.
56
During the
six months ended June 30, 2014
, we
received
$3.7 billion
in new repurchase claims, including
$2.8 billion
of claims submitted without an individual loan file review and
$449 million
of claims based on individual loan file reviews
submitted by private-label securitization trustees and a financial guarantee provider
,
$241 million
submitted by the GSEs for both Countrywide and legacy Bank of America originations not covered by the bulk settlements with the GSEs and
$198 million
submitted by whole-loan investors
.
During the
six months ended June 30, 2014
,
$1.7 billion
in claims were resolved.
Of the claims resolved,
$856 million
were resolved through settlement, including
$450 million
related to the FGIC Settlement and
$387 million
related to the FHFA Settlement
,
$417 million
were resolved through rescissions and
$417 million
were resolved through mortgage repurchases and make-whole payments with private-label securitization trustees, whole-loan investors and the GSEs
.
The increase in the notional amount of unresolved repurchase claims during the
three and six months ended June 30, 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, and (3) the lack of an established process to resolve disputes related to these claims
.
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
. We expect
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, and not included in, the total unresolved repurchase claims
of
$21.7 billion
at
June 30, 2014
, are repurchase demands we have received from private-label securitization investors and a master servicer where we believe
that these demands are procedurally or substantively invalid. The total amount outstanding of such demands was
$1.2 billion
at both
June 30, 2014
and
December 31, 2013
,
comprised of
$931 million
of demands received during 2012 and
$272 million
of demands related to trusts covered by the BNY Mellon Settlement
. We do
not believe that the
demands outstanding
at
June 30, 2014
are
valid repurchase claims and, therefore, it is not possible to predict the resolution with respect to such demands.
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 additional discussion of 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
60
.
At
June 30, 2014
and
December 31, 2013
, the liability for representations and warranties was
$12.1 billion
and
$13.3 billion
. For the
three and six months ended June 30, 2014
, the representations and warranties provision was
$87 million
and
$265 million
compared to
$197 million
and
$447 million
for the
same periods in 2013
. The provision for the
six months ended June 30, 2014
included
$103 million
related to the FHFA Settlement and
$162 million
primarily for our remaining non-GSE exposures.
Our estimated liability at
June 30, 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, 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 FNMA and FHLMC through June 30, 2012 and December 31, 2009, respectively. After these settlements, our 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
$14.0 billion
and loans with certain defects excluded from the settlements that we do not believe will be material, such as title defects and certain specified violations of the GSEs' charters. As of
June 30, 2014
, of the
$14.0 billion
, approximately
$11.3 billion
in principal has been paid,
$942 million
in principal has defaulted or was severely delinquent, and the notional amount of unresolved repurchase claims submitted by the GSEs was
$63 million
related to these vintages.
57
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 originated from
2004
through
2008
with an original principal balance of
$965 billion
to investors other than GSEs (although the GSEs are investors in certain private-label securitizations), including
$781 billion
to private-label and whole-loan investors without monoline insurance and $184 billion with monoline insurance. Of the
$965 billion
,
$562 billion
in principal has been paid,
$195 billion
in principal has defaulted,
$50 billion
in principal was severely delinquent, and
$158 billion
in principal was current or less than 180 days past due at
June 30, 2014
.
Table
17
details the population of loans originated between
2004
and
2008
and sold in non-agency securitizations or as whole loans by entity and product together with the defaulted and severely delinquent loans stratified by the number of payments the borrower made prior to default or becoming severely delinquent as of
June 30, 2014
.
|
Table 17
|
|||||||||||||||||||||||||||||||||||
|
Overview of Non-Agency Securitization and Whole-Loan Balances
|
|||||||||||||||||||||||||||||||||||
|
Principal Balance
|
Defaulted or Severely Delinquent
|
||||||||||||||||||||||||||||||||||
|
(Dollars in billions)
|
Original
Principal Balance |
Outstanding Principal Balance June 30
2014 |
Outstanding
Principal Balance 180 Days or More Past Due |
Defaulted
Principal Balance |
Defaulted
or Severely Delinquent |
Borrower Made Less than 13
Payments |
Borrower Made
13 to 24 Payments |
Borrower Made
25 to 36 Payments |
Borrower Made More than 36
Payments |
||||||||||||||||||||||||||
|
By Entity
|
|||||||||||||||||||||||||||||||||||
|
Bank of America
|
$
|
100
|
|
$
|
17
|
|
$
|
3
|
|
$
|
7
|
|
$
|
10
|
|
$
|
1
|
|
$
|
2
|
|
$
|
2
|
|
$
|
5
|
|
||||||||
|
Countrywide
|
716
|
|
163
|
|
40
|
|
147
|
|
187
|
|
24
|
|
45
|
|
44
|
|
74
|
|
|||||||||||||||||
|
Merrill Lynch
|
67
|
|
14
|
|
3
|
|
16
|
|
19
|
|
3
|
|
4
|
|
3
|
|
9
|
|
|||||||||||||||||
|
First Franklin
|
82
|
|
14
|
|
4
|
|
25
|
|
29
|
|
5
|
|
6
|
|
5
|
|
13
|
|
|||||||||||||||||
|
Total
(1, 2)
|
$
|
965
|
|
$
|
208
|
|
$
|
50
|
|
$
|
195
|
|
$
|
245
|
|
$
|
33
|
|
$
|
57
|
|
$
|
54
|
|
$
|
101
|
|
||||||||
|
By Product
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||
|
Prime
|
$
|
302
|
|
$
|
60
|
|
$
|
7
|
|
$
|
27
|
|
$
|
34
|
|
$
|
2
|
|
$
|
6
|
|
$
|
7
|
|
$
|
19
|
|
||||||||
|
Alt-A
|
172
|
|
47
|
|
10
|
|
39
|
|
49
|
|
7
|
|
12
|
|
11
|
|
19
|
|
|||||||||||||||||
|
Pay option
|
150
|
|
34
|
|
11
|
|
43
|
|
54
|
|
5
|
|
13
|
|
15
|
|
21
|
|
|||||||||||||||||
|
Subprime
|
247
|
|
52
|
|
17
|
|
67
|
|
84
|
|
17
|
|
20
|
|
15
|
|
32
|
|
|||||||||||||||||
|
Home equity
|
88
|
|
10
|
|
—
|
|
18
|
|
18
|
|
2
|
|
5
|
|
4
|
|
7
|
|
|||||||||||||||||
|
Other
|
6
|
|
5
|
|
5
|
|
1
|
|
6
|
|
—
|
|
1
|
|
2
|
|
3
|
|
|||||||||||||||||
|
Total
|
$
|
965
|
|
$
|
208
|
|
$
|
50
|
|
$
|
195
|
|
$
|
245
|
|
$
|
33
|
|
$
|
57
|
|
$
|
54
|
|
$
|
101
|
|
||||||||
|
(1)
|
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, a contractual liability to repurchase mortgage loans generally arises only if counterparties prove 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 balances were driven by external factors like the substantial depreciation in home prices, persistently high unemployment and other negative economic trends, diminishing the likelihood that any loan defect (assuming one exists at all) was the cause of a loan's default. As of
June 30, 2014
, approximately
25 percent
of the loans sold to non-GSEs that were originated between
2004
and
2008
have defaulted or are severely delinquent. Of the original principal balance for Countrywide,
$409 billion
is included in the BNY Mellon Settlement and, of this amount,
$110 billion
was defaulted or severely delinquent at
June 30, 2014
.
58
Experience with Private-label Securitizations and Whole Loans
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. The loans sold with an original total principal balance of
$780.5 billion
, without monoline insurance, included in Table
17
, were originated between
2004
and
2008
. Of the
$780.5 billion
,
$456.4 billion
have been paid in full and
$191.6 billion
were defaulted or severely delinquent at
June 30, 2014
. At least
25
payments have been made on approximately
64 percent
of the defaulted and severely delinquent loans. We have received approximately
$29.3 billion
of representations and warranties repurchase claims related to these vintages, including
$20.2 billion
from private-label securitization trustees and a financial guarantee provider,
$8.3 billion
from whole-loan investors and
$815 million
from one private-label securitization counterparty.
In private-label securitizations, certain presentation thresholds need to be met in order for investors to direct a trustee to assert repurchase claims. Continued high levels of new private-label claims are primarily related to repurchase requests received from trustees and third-party sponsors for private-label securitization transactions not included in the BNY Mellon Settlement, including claims related to first-lien third-party sponsored securitizations that include monoline insurance. Over time, there has been an increase in requests for loan files from certain private-label securitization trustees, as well as requests for tolling agreements to toll the applicable statute of limitations relating to representations and warranties repurchase claims and
we believe
it is likely that these requests will lead to an increase in repurchase claims from private-label securitization trustees with standing to bring such claims. In addition, private-label securitization trustees may have obtained loan files through other means, including litigation and administrative subpoenas, which may increase
our
total exposure.
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 (i.e., the date the transaction closed and not when the repurchase demand was denied). That decision has been applied by the state and federal courts in several RMBS lawsuits not involving the Corporation, 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 claims and lawsuits brought against the Corporation where New York law governs. A significant amount of representations and warranties claims and/or lawsuits
that we have 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 we therefore believe would be untimely.
The Corporation believes this ruling may have had an influence on recent activity in 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, on June 18, 2014, a group of institutional investors filed
six
lawsuits against
six
trustees covering more than
2,200
RMBS trusts alleging failure to pursue representations and warranties claims and servicer defaults based upon alleged contractual, statutory and tort theories of liability. The Corporation and its affiliates have not been named as parties to these lawsuits. The impact on the Corporation, if any, of such alternative legal theories or assertions is unclear.
We have resolved
$8.8 billion
of the
$29.3 billion
of claims received from whole-loan and private-label securitization counterparties with losses of
$1.9 billion
. The majority of these resolved claims were from third-party whole-loan investors. Approximately
$3.5 billion
of these claims were resolved through repurchase or indemnification,
$5.0 billion
were rescinded by the investor and
$331 million
were resolved through the FHFA Settlement.
At
June 30, 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
$20.5 billion
. We have
performed an initial review with respect to
substantially all of these claims and
do
not believe a valid basis for repurchase has been established by the claimant
. Until we receive a repurchase claim, we generally do not review loan files related to private-label securitizations sponsored by third-party whole-loan investors and are not required by the governing documents to do so.
Certain whole-loan investors have engaged with us in a consistent repurchase process and we have 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 we had sufficient experience to record a liability related to our 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. As discussed below, our estimated range of possible loss related to representations and warranties exposures as of
June 30, 2014
included possible losses related to these whole-loan sales and private-label securitizations.
59
The representations and warranties, as governed by the private-label securitization agreements, generally require that counterparties have the ability to both assert a 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 of loans directly or the right to access loan files.
Experience with Monoline Insurers
Legacy companies sold
$184.5 billion
of loans originated between
2004
and
2008
into monoline-insured securitizations, which are included in
Table 17
. At
June 30, 2014
and
December 31, 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
. The FGIC Settlement resolved
$450 million
of these claims pertaining to certain second-lien RMBS trusts for which FGIC provided financial guarantee insurance.
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.
During the
three and six months ended June 30, 2014
,
there was minimal loan-level repurchase claim activity with the remaining monoline as well as minimal requests for loan files for review through the representations and warranties process
. However, there may be additional claims or file requests in the future.
Open Mortgage Insurance Rescission Notices
In addition to repurchase claims, we receive notices from mortgage insurance companies of claim denials, cancellations or coverage rescission (collectively, MI rescission notices). Although the number of such open notices has remained elevated, they have decreased over the last several quarters as the resolution of open notices exceeded new notices.
We had approximately
91,000
and
101,000
open MI rescission notices at
June 30, 2014
and
December 31, 2013
. The decline was primarily due to settlements with MI companies. Open MI rescission notices at
June 30, 2014
included
30,000
pertaining principally to first-lien mortgages serviced for others
,
8,000
pertaining to loans HFI and
53,000
pertaining to ongoing litigation for second-lien mortgages
.
On July 15, 2014, certain of our subsidiaries entered into a settlement
agreement to resolve all outstanding MI disputes brought by the Corporation against three United Guaranty entities. This settlement will resolve all of the Corporation's pending MI litigation with the United Guaranty entities regarding legacy first- and second-lien mortgages originated or acquired by certain of
our
subsidiaries prior to 2009. In addition, the settlement will resolve
14,000
rescission notices open as of
June 30, 2014
.
The settlement with the United Guaranty entities with respect to policies related to first-lien mortgages is subject to the consent of the GSEs; and the inclusion of loans other than GSE-insured loans is subject to obtaining any other necessary consents.
For more information on open mortgage insurance rescission notices, see
Note 7 – Representations and Warranties Obligations and Corporate Guarantees
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
$4.0 billion
over existing accruals at
June 30, 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 any losses related to litigation matters, including RMBS litigation or litigation brought by monoline insurers, nor do they include any separate foreclosure costs and related costs, assessments and compensatory fees or any other possible losses related to potential claims for breaches of performance of servicing obligations (except as such losses are included as potential costs of the BNY Mellon Settlement), potential securities law or fraud claims or potential indemnity or other claims against
us,
including claims related to loans insured by the FHA
. We are not able to
reasonably estimate the amount of any possible loss with respect to any such servicing, securities law, fraud or other claims against
us,
except to the extent reflected in existing accruals or the estimated range of possible loss for litigation and regulatory matters disclosed in
Note 10 – Commitments and Contingencies
to the Consolidated Financial Statements
; however, in light of the inherent uncertainties involved in these matters 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 our results of operations or cash flows for any particular reporting period.
60
Future provisions and/or ranges of possible loss for representations and warranties may be significantly impacted if actual experiences are different from
our assumptions in our
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.
For more information on the methodology used to estimate the representations and warranties liability and the corresponding estimated range of possible loss, see
Item 1A. Risk Factors of the Corporation's 2013 Annual Report on Form 10-K
and
Note 7 – Representations and Warranties Obligations and Corporate Guarantees
to the Consolidated Financial Statements
.
|
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. 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.
2011 OCC Consent Order and 2013 IFR Acceleration Agreement
For more information on the 2011 OCC Consent Order and 2013 IFR Acceleration Agreement, see
Off-Balance Sheet Arrangements and Contractual Obligations – 2011 OCC Consent Order and 2013 IFR Acceleration Agreement
on page
57
of the MD&A of the Corporation's 2013 Annual Report on Form 10-K
.
National Mortgage Settlement
In March 2012, we entered into the National Mortgage Settlement with the DOJ, various federal regulatory agencies and
49
state Attorneys General to resolve federal and state investigations into certain residential mortgage origination, servicing and foreclosure practices. Our compliance with these servicing standards is subject to ongoing review by an independent monitor who has confirmed that we have fulfilled all national and state obligations with respect to borrower assistance.
For more information on the National Mortgage Settlement, see
Off-Balance Sheet Arrangements and Contractual Obligations – National Mortgage Settlement
on page
57
of the MD&A of the Corporation's 2013 Annual Report on Form 10-K
.
Mortgage Electronic Registration Systems, Inc.
For information on Mortgage Electronic Registration Systems, Inc., see
Off-Balance Sheet Arrangements and Contractual Obligations – Mortgage Electronic Registration Systems, Inc.
on page
58
of the MD&A of the Corporation's 2013 Annual Report on Form 10-K
.
Impact of Foreclosure Delays
Foreclosure delays impact our default-related servicing costs. We believe default-related servicing costs peaked in late 2012 and they began to decline in 2013, and this decline has continued in 2014. However, unexpected foreclosure delays could impact the rate of decline. Default-related servicing costs include costs related to resources needed for implementing new servicing standards mandated for the industry, including as part of the National Mortgage Settlement, other operational changes and operational costs due to delayed foreclosures, and do not include mortgage-related assessments, waivers and similar costs related to foreclosure delays.
61
Other areas of our operations are also impacted by foreclosure delays. In the
six months ended June 30, 2014
, we recorded
$64 million
of mortgage-related assessments, waivers and similar costs related to foreclosure delays compared to
$307 million
in the
same period in 2013
. It is also possible that the delays in foreclosure sales may result in additional costs and expenses, including costs associated with the maintenance of properties or possible home price declines while foreclosures are delayed. Finally, the time to complete foreclosure sales may continue to be protracted, which may result in a greater number of nonperforming loans and increased servicing advances, and may impact the collectability of such advances and the value of our MSR asset, RMBS and real estate owned properties. Accordingly, the ultimate resolution of disagreements with counterparties, delays in foreclosure sales beyond those currently anticipated, and any issues that may arise out of alleged irregularities in our foreclosure process could significantly increase the costs associated with our mortgage operations.
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. This scrutiny may extend beyond our pending foreclosure matters to issues arising out of alleged irregularities with respect to previously completed foreclosure activities. We are also subject to inquiries, investigations, actions and claims from regulators, trustees, investors and other third parties relating to other mortgage-related activities such as the purchase, sale, pooling, and origination and securitization of loans, as well as structuring, marketing, underwriting and issuance of RMBS and other securities, including claims relating to the adequacy and accuracy of disclosures in offering documents and representations and warranties made in connection with whole-loan sales or securitizations. The ongoing environment of heightened scrutiny has subjected us to governmental or regulatory inquiries and investigations, and may subject us to actions, including litigation, penalties and fines, including by the DOJ, state Attorneys General and other members of the RMBS Working Group of the Financial Fraud Enforcement Task Force (the RMBS Working Group), or by other regulators or government agencies that could significantly adversely affect our reputation and result in material costs to us in excess of current reserves and management’s estimate of the aggregate range of possible loss for litigation matters. The Corporation has previously disclosed that it is subject to inquiries and investigations, and may be subject to penalties and fines by the DOJ, state Attorneys General and other members of the RMBS Working Group, and is a party to certain litigation proceedings brought by the DOJ and certain other Governmental Authorities regarding the Corporation's RMBS and other mortgage-related matters. We continue to cooperate with and have had discussions about a potential resolution of mortgage and RMBS-related matters with certain Governmental Authorities. There can be no assurances that these discussions will lead to a resolution of any or all of these matters and additional litigation may be filed by the DOJ or certain other Governmental Authorities regarding our RMBS. For additional information regarding the risks associated with matters of this nature, see
Item 1A. Risk Factors of the Corporation's 2013 Annual Report on Form 10-K
.
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. For example, the Civil Division of the U.S. Attorney’s office for the Eastern District of New York is conducting an investigation concerning our compliance with the requirements of the FHA’s Direct Endorsement Program. 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 the 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 management’s estimate of the aggregate range of possible loss and on regulatory investigations, see
Note 10 – Commitments and Contingencies
to the Consolidated Financial Statements
.
62
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 in the future. 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.
In connection with the National Mortgage Settlement, BANA has agreed to implement certain additional servicing changes. The uniform servicing standards established under the National Mortgage Settlement are broadly consistent with the residential mortgage servicing practices imposed by the 2011 OCC Consent Order; however, they are more prescriptive and cover a broader range of our residential mortgage servicing activities. 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 being assessed by a monitor based on the measurement of outcomes with respect to these objectives. 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.
|
Regulatory Matters
|
Derivatives
Under
Commodity Futures Trading Commission
rules, swap dealers are now subject to exchange/swap execution facility trading requirements with respect to certain interest rate and index credit derivative transactions. The timing for margin and capital implementation remains unknown. The Securities and Exchange Commission (SEC) must propose and finalize many of its security-based swaps-related rules and has, to date, implemented a small number of clearing-related and definitional rules as well as portions of its cross-border rule. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Financial Reform Act) also requires banking entities to “push out” certain derivatives activity to one or more non-bank affiliates by July 2015.
Resolution Planning in the U.K.
In the U.K., the Prudential Regulation Authority (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.
Consumer
The Consumer Financial Protection Bureau has issued its final rule, effective August 1, 2015, requiring integrated disclosures under the Real Estate Settlement Procedures Act and the Truth in Lending Act.
For more information on other significant regulatory matters, see
Capital Management – Regulatory Capital
on page
65
,
Note 10 – Commitments and Contingencies
to the Consolidated Financial Statements
herein,
Regulatory Matters
on page
59
of the MD&A of the Corporation's 2013 Annual Report on Form 10-K
, and Item 1A. Risk Factors
of the Corporation's 2013 Annual Report on Form 10-K
.
63
|
Managing Risk
|
Risk is inherent in every material business activity that we undertake. Our business exposes us to strategic, credit, market, liquidity, compliance, operational and reputational risks. We must manage these risks to maximize our long-term results by ensuring the integrity of our assets and the quality of our earnings.
We take a comprehensive approach to risk management. We have a defined risk framework and articulated risk appetite which are approved annually by the Board. Risk management planning is integrated with strategic, financial and customer/client planning so that goals and responsibilities are aligned across the organization. Risk is managed in a systematic manner by focusing on the Corporation as a whole as well as managing risk across the enterprise and within individual business units, products, services and transactions, and across all geographic locations. We maintain a governance structure that delineates the responsibilities for risk management activities, as well as governance and oversight of those activities. For a more detailed discussion of our risk management activities, see pages
61 through 117
of the MD&A of the Corporation's 2013 Annual Report on Form 10-K
.
|
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.
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 Chief Executive Officer 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.
For more information on our
Strategic Risk Management
activities, see page
65
of the MD&A of the Corporation's 2013 Annual Report on Form 10-K
.
|
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 including under adverse conditions, take advantage of potential 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 the strategic plan, risk appetite and risk limits.
We set goals for capital ratios to meet key stakeholder expectations, including investors, rating agencies and regulators, and to achieve our financial performance objectives and strategic goals, while maintaining adequate capital, including during periods of stress. We assess capital adequacy to operate in a safe and sound manner and maintain adequate capital in relation to the risks associated with our business activities and strategy.
At least quarterly, we conduct an Internal Capital Adequacy Assessment Process (ICAAP). 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, capital and liquidity under a variety of stress scenarios. We perform qualitative risk assessments to identify and assess material risks not fully captured in the forecasts, stress tests or economic capital. 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 the capital guidelines and capital position to the Board or its committees.
64
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
and
Strategic Risk Management
on page
64
. The capital allocated to the business segments is referred to as allocated capital, which represents a non-GAAP financial measure. During the latest annual planning process, 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. For more information on the refined methodology, see
Business Segment Operations
on page
28
.
|
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.
In January 2014, we submitted our 2014 CCAR capital plan and received results on March 26, 2014. Based on the information in our January 2014 submission, the Federal Reserve advised us that it did not object to our 2014 capital actions. On April 28, 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.
A third party was engaged to perform certain procedures related to our 2014 CCAR resubmission process and controls regarding reporting and calculating regulatory capital ratios, and focused on the periods ended September 30, 2013 and March 31, 2014. The third-party review was completed and resulted in additional adjustments that had less than one basis point impact on our capital ratios for September 30, 2013 and no effect on our capital ratios for March 31, 2014. On May 27, 2014, subsequent to the third-party review, we updated and resubmitted our requested capital actions and certain 2014 CCAR schedules to the Federal Reserve and we addressed the quantitative adjustments to our original capital plan as part of that resubmission. The requested capital actions contained in the resubmission are less than the 2014 capital actions previously submitted to the Federal Reserve. Pursuant to CCAR capital plan rules, the Federal Reserve has until August 10, 2014 to respond to our resubmitted 2014 CCAR items, including the requested capital actions.
Until the Federal Reserve acts on our 2014 CCAR resubmission, we must obtain the Federal Reserve's approval prior to any capital distributions. However, the Federal Reserve approved certain capital actions, including continued payment of a quarterly common stock dividend of $0.01 per share, subject to declaration by the Board, the amendment to the terms of the Series T Preferred Stock as described below and the redemption or repurchase of a limited amount of trust preferred securities and subordinated debt. Additional common share buybacks were not included in this approval. In April 2014, prior to the suspension of our previously announced 2014 capital actions, we repurchased and retired 14.4 million common shares for an aggregate purchase price of approximately $233 million.
|
Regulatory Capital
|
As a financial services holding company, we are subject to regulatory capital rules issued by federal banking regulators. 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
)
. On January 1, 2014, we became subject to the Basel 3 rules, which include certain transition provisions through 2018. Basel 3 generally continues to be subject to interpretation by U.S. banking regulators. The Corporation and its primary affiliated banking entities, BANA and FIA, meet the definition of an advanced approaches bank and measure regulatory capital adequacy based on the Basel 3 rules. For more information on the regulatory capital amounts and calculations, see Basel 3 below.
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; changes the composition of regulatory capital; revises the adequately capitalized minimum requirements under the Prompt Corrective Action 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. For more information on the supplementary leverage ratio, see
Capital Management – Other Regulatory Capital Matters
on page
72
.
65
As an advanced approaches bank, under Basel 3, we are required to calculate regulatory capital ratios and risk-weighted assets under both the Standardized approach and, upon notification of approval by U.S. banking regulators, the Advanced approaches. The approach that yields the lower ratio is to be used to assess capital adequacy including under the Prompt Corrective Action framework. Prior to receipt of notification of approval, we are required to assess our capital adequacy under the Standardized approach only. The Prompt Corrective Action 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 entities. On January 1, 2015, common equity tier 1 capital will be included in the "well-capitalized" category.
Under the Basel 3 transition provisions in effect through December 31, 2014, the Standardized approach uses risk-weighted assets as measured under the Basel 1
–
2013 Rules in the determination of the Basel 3 Standardized approach capital ratios (Basel 3 Standardized
–
Transition). For more information on how risk-weighted assets are measured under the Basel 1
–
2013 Rules, see
Capital Management – Regulatory Capital
on page
65
of the MD&A of the Corporation's 2013 Annual Report on Form 10-K
. Effective January 1, 2015, the Prompt Corrective Action framework is amended to reflect the new capital requirements under Basel 3.
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, each of which will be impacted by future changes in interest rates, overall earnings performance or other corporate actions.
Changes to the composition of regulatory capital under Basel 3, such as recognizing the impact of unrealized gains or losses on AFS debt securities in common equity tier 1 capital, are subject to a transition period where the impact is recognized in 20 percent annual increments. These regulatory capital adjustments and deductions will be fully implemented in 2018. The phase-in period for the new minimum capital ratio requirements and related buffers under Basel 3 is from January 1, 2014 through December 31, 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 18
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 18
|
|||||||||
|
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 and excluded from Tier 2 capital beginning in 2016. The exclusion from Tier 2 capital starts at 40 percent on January 1, 2016, increasing 10 percent each year until the full amount is excluded from Tier 2 capital beginning on January 1, 2022. As of June 30, 2014, our qualifying Trust Securities were
$2.9 billion
(approximately
23
bps of Tier 1 capital) and will no longer qualify as Tier 1 capital or Tier 2 capital beginning in 2016, subject to the transition provisions.
66
Standardized Approach
The Basel 3 Standardized approach measures risk-weighted assets primarily for market risk and credit risk exposures. Exposures subject to market risk, as defined under the rules, are measured on a basis generally consistent with how market risk-weighted assets were measured under the Basel 1
–
2013 Rules. Credit risk exposures 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. Some key differences between the Standardized and Advanced approaches are that the Advanced approaches include a measure of operational risk and a credit valuation adjustment (CVA) capital charge in credit risk and rely on internal analytical models to measure credit risk-weighted assets. We estimate our common equity tier 1 capital ratio under the Basel 3 Standardized approach, on a fully phased-in basis, to be
9.5 percent
at
June 30, 2014
. As of
June 30, 2014
, we estimated that our Basel 3 Standardized common equity tier 1 capital would be
$137.2 billion
and total risk-weighted assets would be
$1,436.8 billion
, on a fully phased-in basis. This does not include the benefit of the removal of the surcharge applicable to the CRM. 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 21
. Our estimates under the Basel 3 Standardized approach 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. Realized results could differ from those estimates and assumptions.
Advanced Approaches
Under the Basel 3 Advanced approaches, risk-weighted assets are determined primarily for market risk and credit risk, similar to the Standardized approach, and also incorporate operational risk. Market risk capital measurements are consistent with the Standardized approach, except for securitization exposures, where the Supervisory Formula Approach is also permitted, and certain differences arising from the inclusion of the CVA capital charge in the credit risk capital measurement. 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, exposure at default (EAD). The analytical models primarily rely on internal historical default and loss experience. Operational risk is measured using internal models which rely on both internal and external operational loss experience and data. The Basel 3 Advanced approaches require approval by the U.S. regulatory agencies of our internal analytical models used to calculate risk-weighted assets. If these models are not approved, it would likely lead to an increase in our risk-weighted assets, which in some cases could be significant.
Under the Basel 3 Advanced approaches, we estimated our common equity tier 1 capital ratio, on a fully phased-in basis, to be
9.9 percent
at
June 30, 2014
. As of
June 30, 2014
, we estimated that our Basel 3 Advanced common equity tier 1 capital would be
$137.2 billion
and total risk-weighted assets would be
$1,387.4 billion
, on a fully phased-in basis. This assumes approval by U.S. banking regulators of our internal analytical models, but does not include the benefit of the removal of the surcharge applicable to the CRM. The calculations under Basel 3 require management to make estimates, assumptions and interpretations, including the probability of future events based on historical experience. 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. Realized results could differ from those estimates and assumptions.
67
Capital Composition and Ratios
Table 19
presents Bank of America Corporation's capital ratios and related information in accordance with Basel 3
Standardized
–
Transition as measured at
June 30, 2014
and the Basel 1
–
2013 Rules at
December 31, 2013
.
|
Table 19
|
||||||||||||||||||||
|
Bank of America Corporation Regulatory Capital
|
||||||||||||||||||||
|
|
June 30, 2014
|
December 31, 2013
|
||||||||||||||||||
|
(Dollars in millions)
|
Ratio
|
Amount
|
Minimum
Required
(1)
|
Ratio
|
Amount
|
Minimum
Required
(1)
|
||||||||||||||
|
Common equity tier 1 capital
(2)
|
12.0
|
%
|
$
|
153,582
|
|
4.0
|
%
|
n/a
|
|
n/a
|
|
n/a
|
|
|||||||
|
Tier 1 common capital
|
n/a
|
|
n/a
|
|
n/a
|
|
10.9
|
%
|
$
|
141,522
|
|
n/a
|
|
|||||||
|
Tier 1 capital
|
12.5
|
|
160,760
|
|
6.0
|
|
12.2
|
|
157,742
|
|
6.0
|
%
|
||||||||
|
Total capital
|
15.3
|
|
197,028
|
|
10.0
|
|
15.1
|
|
196,567
|
|
10.0
|
|
||||||||
|
Tier 1 leverage
|
7.7
|
|
160,760
|
|
4.0
|
|
7.7
|
|
157,742
|
|
4.0
|
|
||||||||
|
June 30
2014 |
December 31
2013 |
|||||||||||||||||||
|
Risk-weighted assets (in billions)
(2)
|
$
|
1,285
|
|
$
|
1,298
|
|
||||||||||||||
|
Adjusted quarterly average total assets (in billions)
(3)
|
2,091
|
|
2,052
|
|
||||||||||||||||
|
(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)
|
On a pro-forma basis, under Basel 3 Standardized
–
Transition, the December 31, 2013 common equity tier 1 capital and ratio would have been $152.7 billion and 11.6 percent, and risk-weighted assets would have been $1,316 billion.
|
|
(3)
|
Reflects adjusted average total assets for the
three months ended June 30, 2014
and
December 31, 2013
.
|
n/a = not applicable
Common equity tier 1 capital under Basel 3
Standardized
–
Transition was
$153.6 billion
at
June 30, 2014
, an
increase
of
$12.1 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
18
. During the
six months ended June 30, 2014
, Total capital
increased
$461 million
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 remained relatively unchanged for the
six months ended June 30, 2014
compared to
December 31, 2013
as an
increase
in Tier 1 capital was offset by an
increase
in adjusted quarterly average total assets. For additional information, see Tables
19
and
20
.
At
June 30, 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 $128 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 $1.1 billion, $1.0 billion or $837 million, respectively. An increase in our Tier 1 leverage ratio by one bp on such date would require $209 million of additional Tier 1 capital or a reduction of $2.7 billion in adjusted average assets.
Risk-weighted assets
decreased
$13 billion
during the
six months ended June 30, 2014
to
$1,285 billion
primarily due to decreases in residential mortgage and consumer credit card balances, partially offset by the impact of certain transition provisions under the Basel 3 Standardized
–
Transition and an increase in commercial loans.
68
Table 20
presents the capital composition as measured under Basel 3 Standardized
–
Transition at
June 30, 2014
and the Basel 1
–
2013 Rules at
December 31, 2013
.
|
Table 20
|
|||||||
|
Capital Composition
|
|||||||
|
(Dollars in millions)
|
June 30
2014 |
December 31
2013 |
|||||
|
Total common shareholders' equity
|
$
|
222,565
|
|
$
|
219,333
|
|
|
|
Goodwill
|
(69,263
|
)
|
(69,844
|
)
|
|||
|
Intangibles, other than mortgage servicing rights and goodwill
|
(713
|
)
|
—
|
|
|||
|
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
|
1,777
|
|
5,538
|
|
|||
|
Unamortized net periodic benefit costs recorded in accumulated OCI, net-of-tax
|
1,881
|
|
2,407
|
|
|||
|
DVA related to liabilities and derivatives
(1)
|
307
|
|
2,188
|
|
|||
|
Deferred tax assets arising from net operating loss and tax credit carryforwards
(2)
|
(2,780
|
)
|
(15,391
|
)
|
|||
|
Other
|
(192
|
)
|
1,554
|
|
|||
|
Common equity tier 1 capital
(3)
|
153,582
|
|
141,522
|
|
|||
|
Qualifying preferred stock
|
14,845
|
|
10,435
|
|
|||
|
Deferred tax assets arising from net operating loss and tax credit carryforwards under transition
|
(11,118
|
)
|
—
|
|
|||
|
DVA related to liabilities and derivatives under transition
|
1,229
|
|
—
|
|
|||
|
Defined benefit pension fund assets
|
(658
|
)
|
—
|
|
|||
|
Trust preferred securities
|
2,901
|
|
5,785
|
|
|||
|
Other
|
(21
|
)
|
—
|
|
|||
|
Total Tier 1 capital
|
160,760
|
|
157,742
|
|
|||
|
Long-term debt qualifying as Tier 2 capital
|
14,402
|
|
21,175
|
|
|||
|
Non-qualifying trust preferred securities capital instruments subject to phase out from Tier 2 capital
|
3,880
|
|
—
|
|
|||
|
Allowance for loan and lease losses
|
15,811
|
|
17,428
|
|
|||
|
Reserve for unfunded lending commitments
|
503
|
|
484
|
|
|||
|
Allowance for loan and lease losses exceeding 1.25 percent of risk-weighted assets
|
(1,498
|
)
|
(1,637
|
)
|
|||
|
Other
|
3,170
|
|
1,375
|
|
|||
|
Total capital
|
$
|
197,028
|
|
$
|
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)
|
June 30, 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.
|
69
Table 21
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
June 30, 2014
and
December 31, 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, 2018 when adopted and required by U.S. banking regulators.
|
Table 21
|
||||||
|
Regulatory Capital Reconciliations
(1, 2)
|
||||||
|
(Dollars in millions)
|
December 31
2013 |
|||||
|
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
|
|
|||
|
June 30
2014 |
||||||
|
Regulatory capital – Basel 3 transition to fully phased-in
|
||||||
|
Common equity tier 1 capital (transition)
|
$
|
153,582
|
|
|||
|
Adjustments and deductions recognized in Tier 1 capital during transition
(3)
|
(10,547
|
)
|
||||
|
Other adjustments and deductions phased in during transition
|
(5,852
|
)
|
||||
|
Common equity tier 1 capital (fully phased-in)
|
$
|
137,183
|
|
|||
|
June 30
2014 |
December 31
2013 |
|||||
|
Risk-weighted assets – As reported to Basel 3 (fully phased-in)
|
||||||
|
As reported risk-weighted assets
|
$
|
1,284,924
|
|
$
|
1,297,593
|
|
|
Changes in risk-weighted assets from reported to fully phased-in
|
151,901
|
|
162,731
|
|
||
|
Basel 3 Standardized approach risk-weighted assets (fully phased-in)
|
1,436,825
|
|
1,460,324
|
|
||
|
Changes in risk-weighted assets for advanced models
|
(49,390
|
)
|
(133,027
|
)
|
||
|
Basel 3 Advanced approaches risk-weighted assets (fully phased-in)
|
$
|
1,387,435
|
|
$
|
1,327,297
|
|
|
Regulatory capital ratios
|
||||||
|
Basel 1 Tier 1 common
|
n/a
|
|
10.9
|
%
|
||
|
Basel 3 Standardized approach common equity tier 1 (transition)
|
12.0
|
%
|
n/a
|
|
||
|
Basel 3 Standardized approach common equity tier 1 (fully phased-in)
|
9.5
|
|
8.8
|
|
||
|
Basel 3 Advanced approaches common equity tier 1 (fully phased-in)
|
9.9
|
|
9.6
|
|
||
|
(1)
|
Fully phased-in Basel 3 estimates are based on our current understanding of the Standardized and Advanced approaches under the Basel 3 rules, assuming all relevant regulatory model approvals, except for the potential reduction to risk-weighted assets resulting from the removal of the Comprehensive Risk Measure surcharge.
|
|
(2)
|
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 the Basel 1
–
2013 Rules at December 31, 2013.
|
|
(3)
|
For more information on the composition of adjustments and deductions, see
Table 20
.
|
n/a = not applicable
70
Bank of America, N.A. and FIA Card Services, N.A. Regulatory Capital
Table
22
presents regulatory capital information for BANA and FIA at
June 30, 2014
and
December 31, 2013
.
|
Table 22
|
|||||||||||||||||||
|
Bank of America, N.A. and FIA Card Services, N.A. Regulatory Capital
|
|||||||||||||||||||
|
|
June 30, 2014
|
December 31, 2013
|
|||||||||||||||||
|
|
Actual
|
Actual
|
|||||||||||||||||
|
(Dollars in millions)
|
Ratio
|
Amount
|
Minimum
Required
(1)
|
Ratio
|
Amount
|
Minimum
Required
(1)
|
|||||||||||||
|
Common equity tier 1 capital
|
|||||||||||||||||||
|
Bank of America, N.A.
|
12.6
|
%
|
$
|
125,964
|
|
4.0
|
%
|
n/a
|
|
n/a
|
|
n/a
|
|
||||||
|
FIA Card Services, N.A.
|
14.7
|
|
17,283
|
|
4.0
|
|
n/a
|
|
n/a
|
|
n/a
|
|
|||||||
|
Tier 1 capital
|
|
|
|
|
|
|
|||||||||||||
|
Bank of America, N.A.
|
12.6
|
|
125,964
|
|
6.0
|
|
12.3
|
%
|
$
|
125,886
|
|
6.0
|
%
|
||||||
|
FIA Card Services, N.A.
|
15.7
|
|
18,429
|
|
6.0
|
|
16.8
|
|
20,135
|
|
6.0
|
|
|||||||
|
Total capital
|
|
|
|
|
|
|
|||||||||||||
|
Bank of America, N.A.
|
14.0
|
|
140,709
|
|
10.0
|
|
13.8
|
|
141,232
|
|
10.0
|
|
|||||||
|
FIA Card Services, N.A.
|
17.0
|
|
19,934
|
|
10.0
|
|
18.1
|
|
21,672
|
|
10.0
|
|
|||||||
|
Tier 1 leverage
|
|
|
|
|
|
|
|||||||||||||
|
Bank of America, N.A.
|
9.1
|
|
125,964
|
|
5.0
|
|
9.2
|
|
125,886
|
|
5.0
|
|
|||||||
|
FIA Card Services, N.A.
|
12.1
|
|
18,429
|
|
5.0
|
|
12.9
|
|
20,135
|
|
5.0
|
|
|||||||
|
(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.
|
n/a = not applicable
BANA's Tier 1 capital ratio under Basel 3
Standardized
–
Transition was
12.6 percent
at
June 30, 2014
, an
increase
of
22
bps from
December 31, 2013
as lower risk-weighted assets and net income in excess of dividends to the parent company were partially offset by the impact of net unrealized gains and losses in accumulated OCI under the Basel 3 transition provisions. The Total capital ratio
increased
19
bps to
14.0 percent
at
June 30, 2014
compared to
December 31, 2013
. The Tier 1 leverage ratio
decreased
11
bps to
9.1 percent
at
June 30, 2014
compared to
December 31, 2013
. The
increase
in the Total capital ratio was driven by the same factors as the Tier 1 capital ratio. The
decrease
in the Tier 1 leverage ratio was driven by an increase in adjusted quarterly average total assets, partially offset by a slight increase in Tier 1 capital.
FIA's Tier 1 capital ratio under Basel 3
Standardized
–
Transition was
15.7 percent
at
June 30, 2014
, a
decrease
of
115
bps from
December 31, 2013
. The Total capital ratio
decreased
115
bps to
17.0 percent
at
June 30, 2014
compared to
December 31, 2013
. The Tier 1 leverage ratio
decreased
85
bps to
12.1 percent
at
June 30, 2014
compared to
December 31, 2013
. The
decreases
in the Tier 1 capital and Total capital ratios were driven by returns of capital to the parent company, partially offset by earnings and a decrease in risk-weighted assets compared to
December 31, 2013
. The
decrease
in the Tier 1 leverage ratio was driven by the decrease in Tier 1 capital, partially offset by a decrease in adjusted quarterly average total assets.
71
Other Regulatory Capital Matters
Series T Preferred Stock
In 2013, we entered into an agreement with Berkshire Hathaway, Inc., who (together with affiliates) holds all the outstanding shares of the Corporation's Series T Preferred Stock to amend the terms of the Corporation's Series T Preferred Stock. The material changes to the terms of the Series T Preferred Stock in the amendment were: (1) dividends will no longer be cumulative; (2) the dividend rate will be fixed at 6%; and (3) we may redeem the Series T Preferred Stock only after the fifth anniversary of the effective date of the amendment. These amendments permitted the Series T Preferred Stock to qualify as Tier 1 capital. The amendment was presented to our stockholders and approved at the Corporation's annual meeting of stockholders held on May 7, 2014. The revisions to the Series T Preferred Stock increased our Tier 1 capital by $2.9 billion, which also benefited our Tier 1 capital ratio by 23 bps and our Tier 1 leverage ratio by 14 bps. For more information on the Series T Preferred Stock, see
Note 13 – Shareholders' Equity
to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K
.
Supplementary Leverage Ratio
Basel 3 also will require a calculation of a supplementary leverage ratio, determined by dividing Tier 1 capital by supplementary leverage exposure for each month-end during a fiscal quarter, and then calculating the simple average. Supplementary leverage exposure is comprised of all on-balance sheet assets, plus a measure of certain off-balance sheet exposures, including among others, lending commitments, letters of credit, over-the-counter (OTC) derivatives, repo-style transactions and margin loan commitments. We will be required to disclose our supplementary leverage ratio effective January 1, 2015.
On April 8, 2014, U.S. banking regulators voted to adopt a final rule to modify the supplementary leverage ratio minimum requirements under Basel 3 effective in 2018. This only applies to BHCs with more than $700 billion in total assets or more than $10 trillion in total assets under custody. Effective January 1, 2018, the Corporation will be required to maintain a minimum supplementary leverage ratio of three percent, plus a supplementary leverage buffer of two percent, for a total of five percent. If the Corporation's supplementary leverage buffer is not greater than or equal to two 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 includes primarily BANA and FIA, are required to maintain a minimum six percent leverage ratio to be considered "well capitalized."
Also on April 8, 2014, U.S. banking regulators issued a notice of proposed rulemaking (NPR) introducing changes to the method of calculating the supplementary leverage exposure, effectively adopting provisions comparable to a final rule issued by the Basel Committee on Banking Supervision (Basel Committee) on January 12, 2014. Under the NPR, the supplementary leverage exposure would be revised to measure derivatives on a gross basis with cash variation margin reducing the exposure if certain conditions are met, include off-balance sheet commitments measured using the notional amount multiplied by conversion factors between
10 percent
and
100 percent
consistent with the Standardized approach, and a change to measure written credit derivatives using a notional-based approach with limited netting permitted. Also, the supplementary leverage ratio calculation formula would be modified to divide the Tier 1 capital measured on the last day of the quarter by the daily average during the quarter of the supplementary leverage exposure. The proposal is not yet final and, when finalized, could have provisions significantly different from those currently proposed. The provisions of the NPR, if finalized as currently proposed, could have an impact on certain of our businesses. We continue to evaluate the impact of the proposed NPR on us.
As of
June 30, 2014
, based on the proposed changes to the supplementary leverage exposure, we estimate the Corporation's supplementary leverage ratio to be in excess of five percent and our primary bank subsidiaries, BANA and FIA, to be above six percent. Our estimate uses Tier 1 capital measured as of
June 30, 2014
divided by the simple average of the supplementary leverage exposure at each month end during the quarter.
72
Systemically Important Financial Institution Buffer
In November 2011, the Basel Committee published a methodology to identify global systemically important banks (G-SIBs) and impose an additional loss absorbency requirement through the introduction of a buffer of up to
3.5 percent
for systemically important financial institutions (SIFIs). 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, interconnectedness and substitutability/financial institution infrastructure. Institutions with the highest scores are designated as G-SIBs and are assigned to one of four loss absorbency buckets from
one 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.
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 Financial Stability Board (FSB) of key information necessary to permit each G-SIB to calculate its score and observe its position within the buckets and relative to the industry total for each indicator. Every three years, 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 G-SIB framework, as well as other aspects of Basel 3 and jurisdiction-specific regulations.
The SIFI buffer requirement will begin to phase in effective January 2016, with full implementation in January 2019. Data from 2013, measured as of December 31, 2013, will be used to determine the SIFI buffer that will be effective for us in 2016.
As of
June 30, 2014
, we estimate our SIFI buffer would be
1.5 percent
, based on the publication of the key information used in the SIFI methodology by the Basel Committee in November 2013, and considering the FSB’s report, "Update of group of global systemically important banks." Our SIFI buffer could change each year based on our actions and those of our peers, as the score used to determine each G-SIB’s SIFI buffer is based on the industry total. If our score were to increase, we could be subject to a higher SIFI buffer requirement. U.S. banking regulators have not yet issued proposed or final rules related to the SIFI buffer or disclosure requirements.
For more information on regulatory capital, see
Note 16 – Regulatory Requirements and Restrictions
to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K
.
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
June 30, 2014
, MLPF&S's regulatory net capital as defined by Rule 15c3-1 was $10.8 billion and exceeded the minimum requirement of $1.1 billion by $9.7 billion. MLPCC’s net capital of $2.0 billion exceeded the minimum requirement of $398 million by $1.6 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
June 30, 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
June 30, 2014
, MLI’s capital resources were $32.4 billion which exceeded the minimum requirement of $19.3 billion with enough excess to cover any additional requirements as set by the regulators.
73
|
Common and Preferred Stock Dividends
|
For a summary of our declared quarterly cash dividends on common stock during the
second quarter of 2014
and through
July 29, 2014
, see
Note 11 – Shareholders' Equity
to the Consolidated Financial Statements
.
Table
23
is a summary of our cash dividend declarations on preferred stock during the
second quarter of 2014
and through
July 29, 2014
. During the
second quarter of 2014
, cash dividends declared on preferred stock were
$256 million
. For more information on preferred stock, see
Note 11 – Shareholders' Equity
to the Consolidated Financial Statements
.
|
Table 23
|
||||||||||||||||
|
Preferred Stock Cash Dividend Summary
|
||||||||||||||||
|
Preferred Stock
|
Outstanding
Notional
Amount
(in millions)
|
Declaration Date
|
Record Date
|
Payment Date
|
Per Annum
Dividend Rate
|
Dividend Per
Share
|
||||||||||
|
Series B
(1)
|
$
|
1
|
|
June 18, 2014
|
July 11, 2014
|
July 25, 2014
|
7.00
|
%
|
$
|
1.75
|
|
|||||
|
Series D
(2)
|
$
|
654
|
|
April 2, 2014
|
May 30, 2014
|
June 16, 2014
|
6.204
|
%
|
$
|
0.38775
|
|
|||||
|
July 9, 2014
|
August 29, 2014
|
September 15, 2014
|
6.204
|
|
0.38775
|
|
||||||||||
|
Series E
(2)
|
$
|
317
|
|
April 2, 2014
|
April 30, 2014
|
May 15, 2014
|
Floating
|
|
$
|
0.24722
|
|
|||||
|
July 9, 2014
|
July 31, 2014
|
August 15, 2014
|
Floating
|
|
0.25556
|
|
||||||||||
|
Series F
|
$
|
141
|
|
April 2, 2014
|
May 30, 2014
|
June 16, 2014
|
Floating
|
|
$
|
1,022.22222
|
|
|||||
|
July 9, 2014
|
August 29, 2014
|
September 15, 2014
|
Floating
|
|
1,022.22222
|
|
||||||||||
|
Series G
|
$
|
493
|
|
April 2, 2014
|
May 30, 2014
|
June 16, 2014
|
Adjustable
|
|
$
|
1,022.22222
|
|
|||||
|
July 9, 2014
|
August 29, 2014
|
September 15, 2014
|
Adjustable
|
|
1,022.22222
|
|
||||||||||
|
Series I
(2)
|
$
|
365
|
|
April 2, 2014
|
June 15, 2014
|
July 1, 2014
|
6.625
|
%
|
$
|
0.4140625
|
|
|||||
|
July 9, 2014
|
September 15, 2014
|
October 1, 2014
|
6.625
|
|
0.4140625
|
|
||||||||||
|
Series K
(3, 4)
|
$
|
1,544
|
|
July 9, 2014
|
July 15, 2014
|
July 30, 2014
|
Fixed-to-floating
|
|
$
|
40.00
|
|
|||||
|
Series L
|
$
|
3,080
|
|
June 18, 2014
|
July 1, 2014
|
July 30, 2014
|
7.25
|
%
|
$
|
18.125
|
|
|||||
|
Series M
(3, 4)
|
$
|
1,310
|
|
April 2, 2014
|
April 30, 2014
|
May 15, 2014
|
Fixed-to-floating
|
|
$
|
40.625
|
|
|||||
|
Series T
(5)
|
$
|
5,000
|
|
June 18, 2014
|
June 25, 2014
|
July 10, 2014
|
6.00
|
%
|
$
|
1,500.00
|
|
|||||
|
Series U
(3, 4)
|
$
|
1,000
|
|
April 2, 2014
|
May 15, 2014
|
June 2, 2014
|
Fixed-to-floating
|
|
$
|
26.00
|
|
|||||
|
Series 1
(6)
|
$
|
98
|
|
April 2, 2014
|
May 15, 2014
|
May 28, 2014
|
Floating
|
|
$
|
0.18750
|
|
|||||
|
July 9, 2014
|
August 15, 2014
|
August 28, 2014
|
Floating
|
|
0.18750
|
|
||||||||||
|
Series 2
(6)
|
$
|
299
|
|
April 2, 2014
|
May 15, 2014
|
May 28, 2014
|
Floating
|
|
$
|
0.18542
|
|
|||||
|
July 9, 2014
|
August 15, 2014
|
August 28, 2014
|
Floating
|
|
0.19167
|
|
||||||||||
|
Series 3
(6)
|
$
|
653
|
|
April 2, 2014
|
May 15, 2014
|
May 28, 2014
|
6.375
|
%
|
$
|
0.3984375
|
|
|||||
|
July 9, 2014
|
August 15, 2014
|
August 28, 2014
|
6.375
|
|
0.3984375
|
|
||||||||||
|
Series 4
(6)
|
$
|
210
|
|
April 2, 2014
|
May 15, 2014
|
May 28, 2014
|
Floating
|
|
$
|
0.24722
|
|
|||||
|
July 9, 2014
|
August 15, 2014
|
August 28, 2014
|
Floating
|
|
0.25556
|
|
||||||||||
|
Series 5
(6)
|
$
|
422
|
|
April 2, 2014
|
May 1, 2014
|
May 21, 2014
|
Floating
|
|
$
|
0.24722
|
|
|||||
|
July 9, 2014
|
August 1, 2014
|
August 21, 2014
|
Floating
|
|
0.25556
|
|
||||||||||
|
(1)
|
Dividends are cumulative.
|
|
(2)
|
Dividends per depositary share, each representing a 1/1,000
th
interest in a share of preferred stock.
|
|
(3)
|
Initially pays dividends semi-annually.
|
|
(4)
|
Dividends per depositary share, each representing a 1/25
th
interest in a share of preferred stock.
|
|
(5)
|
For more information on the amendment of the Series T Preferred Stock, see
Capital Management – Other Regulatory Capital Matters
on page
72
.
|
|
(6)
|
Dividends per depositary share, each representing a 1/1,200
th
interest in a share of preferred stock.
|
74
|
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 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. For more information regarding global funding and liquidity risk management, see
Liquidity Risk – Funding and Liquidity Risk Management
on page
71
of the MD&A of the Corporation's 2013 Annual Report on Form 10-K
.
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 central banks outside of the U.S. We limit the composition of high-quality, liquid, unencumbered securities to U.S. government securities, U.S. agency securities, U.S. agency MBS and a select group of non-U.S. government 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 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 similar in composition to what would qualify as High Quality Liquid Assets under the proposed LCR rulemaking. For more information on the proposed rulemaking, see
Liquidity Risk – Basel 3 Liquidity Standards
on page
76
.
Our Global Excess Liquidity Sources were
$431 billion
and
$376 billion
at
June 30, 2014
and
December 31, 2013
and were maintained as presented in Table
24
.
|
Table 24
|
|||||||||||
|
Global Excess Liquidity Sources
|
|||||||||||
|
(Dollars in billions)
|
June 30
2014 |
December 31
2013 |
Average for Three Months Ended June 30, 2014
|
||||||||
|
Parent company
|
$
|
92
|
|
$
|
95
|
|
$
|
88
|
|
||
|
Bank subsidiaries
|
303
|
|
249
|
|
297
|
|
|||||
|
Other regulated entities
|
36
|
|
32
|
|
35
|
|
|||||
|
Total Global Excess Liquidity Sources
|
$
|
431
|
|
$
|
376
|
|
$
|
420
|
|
||
As shown in Table
24
, parent company Global Excess Liquidity Sources totaled
$92 billion
and
$95 billion
at
June 30, 2014
and
December 31, 2013
. The
decrease
in parent company liquidity was primarily due to litigation settlements, partially offset by bank subsidiary inflows. Typically, parent company cash is deposited with BANA.
Global Excess Liquidity Sources available to our bank subsidiaries totaled
$303 billion
and
$249 billion
at
June 30, 2014
and
December 31, 2013
. The
increase
in bank subsidiaries' liquidity was primarily due to deposit growth, increased short-term borrowings and long-term debt, and an increase in the fair value of debt securities, partially offset by dividends and returns of capital to the parent company. Liquidity amounts 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 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 $234 billion and $218 billion at
June 30, 2014
and
December 31, 2013
. We have established operational procedures to enable us to borrow against these assets, including regularly monitoring our total pool of eligible loans and securities collateral. Eligibility is defined 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 only be used to fund obligations within the bank subsidiaries and can only be transferred to the parent company or non-bank subsidiaries with prior regulatory approval.
75
Global Excess Liquidity Sources available to our other regulated entities totaled
$36 billion
and
$32 billion
at
June 30, 2014
and
December 31, 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
25
presents the composition of Global Excess Liquidity Sources at
June 30, 2014
and
December 31, 2013
.
|
Table 25
|
|||||||
|
Global Excess Liquidity Sources Composition
|
|||||||
|
(Dollars in billions)
|
June 30
2014 |
December 31
2013 |
|||||
|
Cash on deposit
|
$
|
111
|
|
$
|
90
|
|
|
|
U.S. Treasuries
|
49
|
|
20
|
|
|||
|
U.S. agency securities and mortgage-backed securities
|
245
|
|
245
|
|
|||
|
Non-U.S. government and supranational securities
|
26
|
|
21
|
|
|||
|
Total Global Excess Liquidity Sources
|
$
|
431
|
|
$
|
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 38 months at
June 30, 2014
. For purposes of calculating Time to Required Funding, at
June 30, 2014
, we have included in the amount of unsecured contractual obligations the $8.6 billion liability 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 and 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, including Variable Rate Demand Notes; additional collateral that counterparties could call if our credit ratings were downgraded; collateral and margin requirements arising from market value changes; and potential liquidity required to maintain businesses and finance customer activities. Changes in certain market factors, including, but not limited to, credit rating downgrades, could negatively impact potential contractual and contingent outflows and the related financial instruments, and in some cases these impacts could be material to our financial results.
We consider all sources of funds that we could access during each stress scenario and focus particularly on matching available sources with corresponding liquidity requirements by legal entity. We also use the stress modeling results to manage our asset-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 LCR and the Net Stable Funding Ratio (NSFR). The LCR is calculated as the amount of a financial institution's unencumbered, high-quality, liquid assets relative to the net cash outflows the institution could encounter under a 30-day period of significant liquidity stress, expressed as a percentage. The Basel Committee's liquidity risk-related standards do not directly apply to U.S. financial institutions currently, and would only apply once U.S. rules are finalized by the U.S. banking regulators.
76
On October 24, 2013, the U.S. banking regulators jointly proposed regulations that would implement 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 proposal, an initial minimum LCR of 80 percent would be required in January 2015, and would thereafter increase in 10 percentage point increments annually through January 2017. These minimum requirements would be applicable to the Corporation on a consolidated basis and at our insured depository institutions, including BANA, FIA and Bank of America California, N.A. We are evaluating the proposal and the potential impact on our businesses, and we expect to meet or exceed the final LCR requirement within the regulatory timelines.
On January 12, 2014, the Basel Committee issued for comment a revised 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 revised proposal would align the NSFR to some of the 2013 revisions to the LCR and give more credit to a wider range of funding. The proposal 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 Basel Committee expects to complete the NSFR recalibration in 2014 and have the minimum standard in place by 2018. Assuming adoption by the U.S. banking regulators, we expect to meet the final NSFR requirement within the regulatory timelines.
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 expected from 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
$1.13 trillion
and
$1.12 trillion
at
June 30, 2014
and
December 31, 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 Federal Home Loan Bank (FHLB) loans. During the
three and six months ended June 30, 2014
,
$1.3 billion
and
$3.0 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 9 – Federal Funds Sold or Purchased, Securities Financing Agreements and Short-term Borrowings
to the Consolidated Financial Statements
.
We issue the majority of our long-term unsecured debt at the parent company. During the
three and six months ended June 30, 2014
, we issued $11.2 billion and $18.2 billion of long-term unsecured debt, including structured liabilities of $392 million and $1.1 billion, a majority of which were issued at the parent company. We also issue long-term unsecured debt through BANA in a variety of maturities and currencies to achieve cost-efficient funding and to maintain an appropriate maturity profile. During
three and six months ended June 30, 2014
, we issued $750 million and $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.
77
Table
26
presents the carrying value of aggregate annual contractual maturities of long-term debt at
June 30, 2014
. During the
six months ended June 30, 2014
, we had total long-term debt maturities and purchases of $31.9 billion consisting of $19.8 billion for Bank of America Corporation, $4.8 billion of other debt and $7.3 billion of consolidated variable interest entities (VIEs).
|
Table 26
|
|||||||||||||||||||||||||||
|
Long-term Debt By Maturity
|
|||||||||||||||||||||||||||
|
Remainder of
|
|||||||||||||||||||||||||||
|
(Dollars in millions)
|
2014
|
2015
|
2016
|
2017
|
2018
|
Thereafter
|
Total
|
||||||||||||||||||||
|
Bank of America Corporation
|
|||||||||||||||||||||||||||
|
Senior notes
|
$
|
9,734
|
|
$
|
15,288
|
|
$
|
18,054
|
|
$
|
18,213
|
|
$
|
20,378
|
|
$
|
53,710
|
|
$
|
135,377
|
|
||||||
|
Senior structured notes
|
3,005
|
|
5,842
|
|
3,126
|
|
1,735
|
|
2,000
|
|
11,448
|
|
27,156
|
|
|||||||||||||
|
Subordinated notes
|
—
|
|
1,243
|
|
5,208
|
|
5,667
|
|
3,326
|
|
8,925
|
|
24,369
|
|
|||||||||||||
|
Junior subordinated notes
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
7,257
|
|
7,257
|
|
|||||||||||||
|
Total Bank of America Corporation
|
12,739
|
|
22,373
|
|
26,388
|
|
25,615
|
|
25,704
|
|
81,340
|
|
194,159
|
|
|||||||||||||
|
Bank of America, N.A.
|
|||||||||||||||||||||||||||
|
Senior notes
|
34
|
|
755
|
|
2,501
|
|
5,164
|
|
—
|
|
150
|
|
8,604
|
|
|||||||||||||
|
Subordinated notes
|
—
|
|
—
|
|
1,076
|
|
3,613
|
|
—
|
|
1,621
|
|
6,310
|
|
|||||||||||||
|
Advances from Federal Home Loan Banks
|
1,257
|
|
4,502
|
|
6,003
|
|
10
|
|
11
|
|
159
|
|
11,942
|
|
|||||||||||||
|
Total Bank of America, N.A.
|
1,291
|
|
5,257
|
|
9,580
|
|
8,787
|
|
11
|
|
1,930
|
|
26,856
|
|
|||||||||||||
|
Other debt
|
|||||||||||||||||||||||||||
|
Senior notes
|
5
|
|
25
|
|
—
|
|
1
|
|
—
|
|
—
|
|
31
|
|
|||||||||||||
|
Structured liabilities
|
1,297
|
|
2,128
|
|
2,155
|
|
2,475
|
|
1,391
|
|
7,729
|
|
17,175
|
|
|||||||||||||
|
Junior subordinated notes
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
405
|
|
405
|
|
|||||||||||||
|
Other
|
200
|
|
55
|
|
932
|
|
434
|
|
48
|
|
443
|
|
2,112
|
|
|||||||||||||
|
Total other debt
|
1,502
|
|
2,208
|
|
3,087
|
|
2,910
|
|
1,439
|
|
8,577
|
|
19,723
|
|
|||||||||||||
|
Total long-term debt excluding consolidated VIEs
|
15,532
|
|
29,838
|
|
39,055
|
|
37,312
|
|
27,154
|
|
91,847
|
|
240,738
|
|
|||||||||||||
|
Long-term debt of consolidated VIEs
|
2,726
|
|
1,213
|
|
1,680
|
|
2,770
|
|
148
|
|
7,796
|
|
16,333
|
|
|||||||||||||
|
Total long-term debt
|
$
|
18,258
|
|
$
|
31,051
|
|
$
|
40,735
|
|
$
|
40,082
|
|
$
|
27,302
|
|
$
|
99,643
|
|
$
|
257,071
|
|
||||||
Table
27
presents our long-term debt by major currency at
June 30, 2014
and
December 31, 2013
.
|
Table 27
|
|||||||
|
Long-term Debt By Major Currency
|
|||||||
|
(Dollars in millions)
|
June 30
2014 |
December 31
2013 |
|||||
|
U.S. Dollar
|
$
|
193,610
|
|
$
|
176,294
|
|
|
|
Euro
|
38,459
|
|
46,029
|
|
|||
|
British Pound
|
8,997
|
|
9,772
|
|
|||
|
Japanese Yen
|
8,288
|
|
9,115
|
|
|||
|
Canadian Dollar
|
2,079
|
|
2,402
|
|
|||
|
Australian Dollar
|
1,540
|
|
1,870
|
|
|||
|
Swiss Franc
|
1,271
|
|
1,274
|
|
|||
|
Other
|
2,827
|
|
2,918
|
|
|||
|
Total long-term debt
|
$
|
257,071
|
|
$
|
249,674
|
|
|
Total long-term debt
increased
$7.4 billion
, or
three percent
, during the
six months ended June 30, 2014
, primarily driven by increased issuances related to actions we have taken in connection with anticipated Basel 3 LCR requirements. 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 of the Corporation's 2013 Annual Report on Form 10-K
and for more information regarding funding and liquidity risk management, see page
71
of the MD&A of the Corporation's 2013 Annual Report on Form 10-K
.
78
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 Nontrading Activities
on page
128
.
We also diversify our unsecured funding sources by issuing various types of debt instruments including structured liabilities, which are debt obligations that pay investors returns linked to other debt or equity securities, indices, currencies or commodities. We typically hedge the returns we are obligated to pay on these liabilities with 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 $44.8 billion and $48.4 billion at
June 30, 2014
and
December 31, 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, 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.
79
On March 26, 2014, Fitch Ratings (Fitch) concluded their periodic review of 12 large, complex securities trading and universal banks, including Bank of America Corporation. As a part of this action, Fitch affirmed all of the Corporation’s credit ratings and revised its outlook on the ratings to negative from stable. The revised 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 orderly liquidation provisions of the Financial Reform Act. On December 20, 2013, Standard & Poor's Ratings Services (S&P) affirmed the ratings of Bank of America Corporation. S&P continues to evaluate the possible removal of uplift for extraordinary government support in its holding company ratings for the U.S. banks that it views as having high systemic importance. Due to this ongoing evaluation and Corporation-specific factors, S&P maintained its negative outlook on the Corporation's ratings. 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 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
28
presents the Corporation's current long-term/short-term senior debt ratings and outlooks expressed by the rating agencies.
|
Table 28
|
||||||||||||||||||
|
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
|
Negative
|
A
|
F1
|
Negative
|
|||||||||
|
Merrill Lynch, Pierce, Fenner & Smith
|
NR
|
NR
|
NR
|
A
|
A-1
|
Negative
|
A
|
F1
|
Negative
|
|||||||||
|
Merrill Lynch International
|
NR
|
NR
|
NR
|
A
|
A-1
|
Negative
|
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
29
presents the amount of additional collateral contractually required by derivative contracts and other trading agreements at
June 30, 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 29
|
|||||||
|
Additional Collateral Required to be Posted Upon Downgrade
|
|||||||
|
June 30, 2014
|
|||||||
|
(Dollars in millions)
|
One incremental notch
|
Second incremental notch
|
|||||
|
Bank of America Corporation
|
$
|
1,119
|
|
$
|
3,275
|
|
|
|
Bank of America, N.A. and subsidiaries
(1)
|
778
|
|
2,218
|
|
|||
|
(1)
|
Included in Bank of America Corporation collateral requirements in this table.
|
80
Table
30
presents the derivative liability that would be subject to unilateral termination by counterparties and the amounts of collateral that would have been posted at
June 30, 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 30
|
|||||||
|
Derivative Liability Subject to Unilateral Termination Upon Downgrade
|
|||||||
|
June 30, 2014
|
|||||||
|
(Dollars in millions)
|
One incremental notch
|
Second incremental notch
|
|||||
|
Derivative liability
|
$
|
1,403
|
|
$
|
2,379
|
|
|
|
Collateral posted
|
1,158
|
|
1,914
|
|
|||
While certain potential impacts are contractual and quantifiable, the full scope of the consequences of a credit ratings 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
76
.
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
and Item 1A. Risk Factors
of the Corporation's 2013 Annual Report on Form 10-K
.
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.
|
Credit Risk Management
|
Credit quality continued to improve during the
second quarter of 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 – Second Quarter 2014 Economic and Business Environment
on page
4
.
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. Our exposure to certain European countries, including Greece, Ireland, Italy, Portugal and Spain, has experienced varying degrees of financial stress. For more information on our exposures and related risks in non-U.S. countries, see
Non-U.S. Portfolio
on page
113
and
Item 1A. Risk Factors of the Corporation's 2013 Annual Report on Form 10-K
.
For more information on our credit risk management activities, see
Consumer Portfolio Credit Risk Management
on page
82
,
Commercial Portfolio Credit Risk Management
on page
102
,
Non-U.S. Portfolio
on page
113
,
Provision for Credit Losses
and
Allowance for Credit Losses
both on page
117
, and
Note 4 – Outstanding Loans and Leases
and
Note 5 – Allowance for Credit Losses
to the Consolidated Financial Statements
.
81
|
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.
From January 2008 through the
second quarter of 2014
, Bank of America and Countrywide have completed approximately 1.4 million loan modifications with customers. During the
second quarter of 2014
, we completed approximately 21,000 customer loan modifications with a total unpaid principal balance of approximately $4 billion, including approximately 12,000 permanent modifications under the U.S. government's Making Home Affordable Program. Of the loan modifications completed during the
second quarter of 2014
, in terms of both the volume of modifications and the unpaid principal balance associated with the underlying loans, more than half were in the Corporation's HFI portfolio. The most common types of modifications include a combination of rate reduction and/or capitalization of past due amounts which represented 67 percent of the volume of modifications completed during the quarter, while capitalization of past due amounts represented 11 percent, principal forbearance represented nine percent and principal reductions and forgiveness represented four percent. 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
99
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 the
three and six months ended June 30, 2014
resulting in improved credit quality and lower credit losses across all major consumer portfolios compared to the
same periods in 2013
. Consumer loans 30 days or more past due declined during the
six months ended June 30, 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
$2.1 billion
decrease
in the consumer allowance for loan and lease losses during the
six months ended June 30, 2014
to
$11.3 billion
at
June 30, 2014
. For additional information, see
Allowance for Credit Losses
on page
117
.
For more information on our accounting policies regarding delinquencies, nonperforming status, charge-offs and TDRs for the consumer portfolio, see
Note 1 – Summary of Significant Accounting Principles
to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K
. 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
55
and
Note 7 – Representations and Warranties Obligations and Corporate Guarantees
to the Consolidated Financial Statements
.
82
Table
31
presents our outstanding consumer loans and leases, and the PCI loan portfolio. In addition to being included in the "Outstandings" columns in Table
31
, 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
93
and
Note 4 – Outstanding Loans and Leases
to the Consolidated Financial Statements
.
|
Table 31
|
|||||||||||||||
|
Consumer Loans and Leases
|
|||||||||||||||
|
|
Outstandings
|
Purchased Credit-impaired Loan Portfolio
|
|||||||||||||
|
(Dollars in millions)
|
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
|||||||||||
|
Residential mortgage
(1)
|
$
|
237,136
|
|
$
|
248,066
|
|
$
|
17,337
|
|
$
|
18,672
|
|
|||
|
Home equity
|
89,499
|
|
93,672
|
|
6,067
|
|
6,593
|
|
|||||||
|
U.S. credit card
|
89,020
|
|
92,338
|
|
n/a
|
|
n/a
|
|
|||||||
|
Non-U.S. credit card
|
11,999
|
|
11,541
|
|
n/a
|
|
n/a
|
|
|||||||
|
Direct/Indirect consumer
(2)
|
82,586
|
|
82,192
|
|
n/a
|
|
n/a
|
|
|||||||
|
Other consumer
(3)
|
2,079
|
|
1,977
|
|
n/a
|
|
n/a
|
|
|||||||
|
Consumer loans excluding loans accounted for under the fair value option
|
512,319
|
|
529,786
|
|
23,404
|
|
25,265
|
|
|||||||
|
Loans accounted for under the fair value option
(4)
|
2,154
|
|
2,164
|
|
n/a
|
|
n/a
|
|
|||||||
|
Total consumer loans and leases
|
$
|
514,473
|
|
$
|
531,950
|
|
$
|
23,404
|
|
$
|
25,265
|
|
|||
|
(1)
|
Outstandings include pay option loans of
$3.7 billion
and
$4.4 billion
at
June 30, 2014
and
December 31, 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
$2.0 billion
and
$2.7 billion
, U.S. securities-based lending loans of
$33.8 billion
and
$31.2 billion
, non-U.S. consumer loans of
$4.4 billion
and
$4.7 billion
, student loans of
$3.8 billion
and
$4.1 billion
and other consumer loans of
$937 million
and
$1.0 billion
at
June 30, 2014
and
December 31, 2013
.
|
|
(3)
|
Outstandings include consumer finance loans of
$1.1 billion
and
$1.2 billion
, consumer leases of
$819 million
and
$606 million
, consumer overdrafts of
$170 million
and
$176 million
and other non-U.S. consumer loans of
$3 million
and
$5 million
at
June 30, 2014
and
December 31, 2013
.
|
|
(4)
|
Consumer loans accounted for under the fair value option include residential mortgage loans of
$2.0 billion
and
$2.0 billion
and home equity loans of
$170 million
and
$147 million
at
June 30, 2014
and
December 31, 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
98
and
Note 15 – Fair Value Option
to the Consolidated Financial Statements
.
|
n/a = not applicable
83
Table
32
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 stand-by 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 32
|
|||||||||||||||
|
Consumer Credit Quality
|
|||||||||||||||
|
|
Nonperforming
|
Accruing Past Due 90 Days or More
|
|||||||||||||
|
(Dollars in millions)
|
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
|||||||||||
|
Residential mortgage
(1)
|
$
|
9,235
|
|
$
|
11,712
|
|
$
|
14,137
|
|
$
|
16,961
|
|
|||
|
Home equity
|
4,181
|
|
4,075
|
|
—
|
|
—
|
|
|||||||
|
U.S. credit card
|
n/a
|
|
n/a
|
|
868
|
|
1,053
|
|
|||||||
|
Non-U.S. credit card
|
n/a
|
|
n/a
|
|
122
|
|
131
|
|
|||||||
|
Direct/Indirect consumer
|
29
|
|
35
|
|
334
|
|
408
|
|
|||||||
|
Other consumer
|
15
|
|
18
|
|
1
|
|
2
|
|
|||||||
|
Total
(2)
|
$
|
13,460
|
|
$
|
15,840
|
|
$
|
15,462
|
|
$
|
18,555
|
|
|||
|
Consumer loans and leases as a percentage of outstanding consumer loans and leases
(2)
|
2.63
|
%
|
2.99
|
%
|
3.02
|
%
|
3.50
|
%
|
|||||||
|
Consumer loans and leases as a percentage of outstanding loans and leases, excluding PCI and fully-insured loan portfolios
(2)
|
3.30
|
|
3.80
|
|
0.32
|
|
0.38
|
|
|||||||
|
(1)
|
Residential mortgage loans accruing past due 90 days or more are fully-insured loans. At
June 30, 2014
and
December 31, 2013
, residential mortgage included
$10.4 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
$3.7 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
June 30, 2014
and
December 31, 2013
,
$425 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
84
Table
33
presents net charge-offs and related ratios for consumer loans and leases.
|
Table 33
|
|||||||||||||||||||||||||||
|
Consumer Net Charge-offs and Related Ratios
|
|||||||||||||||||||||||||||
|
|
Net Charge-offs
(1)
|
Net Charge-off Ratios
(1, 2)
|
|||||||||||||||||||||||||
|
Three Months Ended
June 30 |
Six Months Ended
June 30 |
Three Months Ended
June 30 |
Six Months Ended
June 30 |
||||||||||||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
|||||||||||||||||||
|
Residential mortgage
|
$
|
(35
|
)
|
$
|
271
|
|
$
|
92
|
|
$
|
654
|
|
(0.06
|
)%
|
0.43
|
%
|
0.08
|
%
|
0.51
|
%
|
|||||||
|
Home equity
|
239
|
|
486
|
|
541
|
|
1,170
|
|
1.06
|
|
1.92
|
|
1.19
|
|
2.27
|
|
|||||||||||
|
U.S. credit card
|
683
|
|
917
|
|
1,401
|
|
1,864
|
|
3.11
|
|
4.10
|
|
3.18
|
|
4.14
|
|
|||||||||||
|
Non-U.S. credit card
|
47
|
|
104
|
|
123
|
|
216
|
|
1.59
|
|
3.93
|
|
2.12
|
|
4.03
|
|
|||||||||||
|
Direct/Indirect consumer
|
33
|
|
86
|
|
91
|
|
210
|
|
0.16
|
|
0.42
|
|
0.22
|
|
0.51
|
|
|||||||||||
|
Other consumer
|
47
|
|
51
|
|
105
|
|
103
|
|
9.26
|
|
11.57
|
|
10.64
|
|
12.15
|
|
|||||||||||
|
Total
|
$
|
1,014
|
|
$
|
1,915
|
|
$
|
2,353
|
|
$
|
4,217
|
|
0.79
|
|
1.42
|
|
0.91
|
|
1.56
|
|
|||||||
|
(1)
|
Net charge-offs exclude write-offs in the PCI loan portfolio of
$70 million
and
$351 million
in residential mortgage and
$90 million
and
$200 million
in home equity for the
three and six months ended June 30, 2014
compared to
$203 million
and
$297 million
in residential mortgage and
$110 million
and
$855 million
in home equity for the
three and six months ended June 30, 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
93
.
|
|
(2)
|
Net charge-off ratios are calculated as annualized net charge-offs divided by average outstanding loans and leases excluding loans accounted for under the fair value option.
|
Net charge-off (recovery) ratios, excluding the PCI and fully-insured loan portfolios, were
(0.10) percent
and
0.13 percent
for residential mortgage,
1.14 percent
and
1.28 percent
for home equity, and 0.99 percent and 1.15 percent for the total consumer portfolio for the
three and six months ended June 30, 2014
, respectively. Net charge-off ratios, excluding the PCI and fully-insured loan portfolios, were
0.74 percent
and
0.90 percent
for residential mortgage,
2.07 percent
and
2.46 percent
for home equity, and 1.81 percent and 1.99 percent for the total consumer portfolio for the
three and six months ended June 30, 2013
, respectively. These are the only product classifications that include PCI and fully-insured loans for these periods.
Net charge-offs exclude write-offs in the PCI loan portfolio of
$70 million
and
$351 million
in residential mortgage and
$90 million
and
$200 million
in home equity for the
three and six months ended June 30, 2014
, respectively. Net charge-offs exclude write-offs in the PCI loan portfolio of
$203 million
and
$297 million
in residential mortgage and
$110 million
and
$855 million
in home equity for the
three and six months ended June 30, 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 0.06 percent and 0.37 percent for residential mortgage and 1.46 percent and 1.63 percent for home equity for the
three and six months ended June 30, 2014
, respectively. Net charge-off ratios including the PCI write-offs were 0.74 percent and 0.75 percent for residential mortgage and 2.35 percent and 3.93 percent for home equity for the
three and six months ended June 30, 2013
, respectively. For more information on PCI write-offs, see
Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio
on page
93
.
85
Table
34
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
35
.
|
Table 34
|
|||||||||||||||||||||||||||||||
|
Home Loans Portfolio
(1)
|
|||||||||||||||||||||||||||||||
|
|
Outstandings
|
Nonperforming
|
Net Charge-offs
(2)
|
||||||||||||||||||||||||||||
|
|
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
Three Months Ended
June 30 |
Six Months Ended
June 30 |
|||||||||||||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||||||||||||||||||
|
Core portfolio
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Residential mortgage
|
$
|
174,566
|
|
$
|
177,336
|
|
$
|
2,951
|
|
$
|
3,316
|
|
$
|
60
|
|
$
|
68
|
|
$
|
99
|
|
$
|
169
|
|
|||||||
|
Home equity
|
52,961
|
|
54,499
|
|
1,533
|
|
1,431
|
|
69
|
|
115
|
|
154
|
|
281
|
|
|||||||||||||||
|
Total Core portfolio
|
227,527
|
|
231,835
|
|
4,484
|
|
4,747
|
|
129
|
|
183
|
|
253
|
|
450
|
|
|||||||||||||||
|
Legacy Assets & Servicing portfolio
|
|
|
|
|
|||||||||||||||||||||||||||
|
Residential mortgage
|
62,570
|
|
70,730
|
|
6,284
|
|
8,396
|
|
(95
|
)
|
203
|
|
(7
|
)
|
485
|
|
|||||||||||||||
|
Home equity
|
36,538
|
|
39,173
|
|
2,648
|
|
2,644
|
|
170
|
|
371
|
|
387
|
|
889
|
|
|||||||||||||||
|
Total Legacy Assets & Servicing portfolio
|
99,108
|
|
109,903
|
|
8,932
|
|
11,040
|
|
75
|
|
574
|
|
380
|
|
1,374
|
|
|||||||||||||||
|
Home loans portfolio
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Residential mortgage
|
237,136
|
|
248,066
|
|
9,235
|
|
11,712
|
|
(35
|
)
|
271
|
|
92
|
|
654
|
|
|||||||||||||||
|
Home equity
|
89,499
|
|
93,672
|
|
4,181
|
|
4,075
|
|
239
|
|
486
|
|
541
|
|
1,170
|
|
|||||||||||||||
|
Total home loans portfolio
|
$
|
326,635
|
|
$
|
341,738
|
|
$
|
13,416
|
|
$
|
15,787
|
|
$
|
204
|
|
$
|
757
|
|
$
|
633
|
|
$
|
1,824
|
|
|||||||
|
Allowance for loan
and lease losses
|
Provision for loan
and lease losses
|
||||||||||||||||||||||||||||||
|
June 30
2014 |
December 31
2013 |
Three Months Ended
June 30 |
Six Months Ended
June 30 |
||||||||||||||||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
||||||||||||||||||||||||||||
|
Core portfolio
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Residential mortgage
|
$
|
634
|
|
$
|
728
|
|
$
|
48
|
|
$
|
39
|
|
$
|
4
|
|
$
|
144
|
|
|||||||||||||
|
Home equity
|
829
|
|
965
|
|
8
|
|
40
|
|
18
|
|
147
|
|
|||||||||||||||||||
|
Total Core portfolio
|
|
|
1,463
|
|
1,693
|
|
56
|
|
79
|
|
22
|
|
291
|
|
|||||||||||||||||
|
Legacy Assets & Servicing portfolio
|
|
|
|
|
|||||||||||||||||||||||||||
|
Residential mortgage
|
2,580
|
|
3,356
|
|
(302
|
)
|
(222
|
)
|
(422
|
)
|
(188
|
)
|
|||||||||||||||||||
|
Home equity
|
2,865
|
|
3,469
|
|
(38
|
)
|
170
|
|
(25
|
)
|
408
|
|
|||||||||||||||||||
|
Total Legacy Assets & Servicing portfolio
|
|
|
|
|
5,445
|
|
6,825
|
|
(340
|
)
|
(52
|
)
|
(447
|
)
|
220
|
|
|||||||||||||||
|
Home loans portfolio
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Residential mortgage
|
3,214
|
|
4,084
|
|
(254
|
)
|
(183
|
)
|
(418
|
)
|
(44
|
)
|
|||||||||||||||||||
|
Home equity
|
3,694
|
|
4,434
|
|
(30
|
)
|
210
|
|
(7
|
)
|
555
|
|
|||||||||||||||||||
|
Total home loans portfolio
|
$
|
6,908
|
|
$
|
8,518
|
|
$
|
(284
|
)
|
$
|
27
|
|
$
|
(425
|
)
|
$
|
511
|
|
|||||||||||||
|
(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
$2.0 billion
and
$2.0 billion
and home equity loans of
$170 million
and
$147 million
at
June 30, 2014
and
December 31, 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
98
and
Note 15 – Fair Value Option
to the Consolidated Financial Statements
.
|
|
(2)
|
Net charge-offs exclude write-offs in the PCI loan portfolios of
$70 million
and
$351 million
in residential mortgage and
$90 million
and
$200 million
in home equity for the
three and six months ended June 30, 2014
, which are included in the Legacy Assets & Servicing portfolio, compared to
$203 million
and
$297 million
in residential mortgage and
$110 million
and
$855 million
in home equity for the
three and six months ended June 30, 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
93
.
|
86
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
93
.
Residential Mortgage
The residential mortgage portfolio makes up the largest percentage of our consumer loan portfolio at 46 percent of consumer loans and leases at
June 30, 2014
. Approximately 21 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
$10.9 billion
during the
six months ended June 30, 2014
due to
paydowns, sales, charge-offs and transfers to foreclosed properties. 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
June 30, 2014
and
December 31, 2013
, the residential mortgage portfolio included
$81.0 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 stand-by agreements with FNMA and FHLMC. At
June 30, 2014
and
December 31, 2013
, $53.3 billion and $59.0 billion had FHA insurance with the remainder protected by long-term stand-by agreements. At
June 30, 2014
and
December 31, 2013
, $18.8 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 credit losses with respect to these loans.
The long-term stand-by 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
June 30, 2014
, these programs had the cumulative effect of reducing our risk-weighted assets by $8.2 billion, increasing both our Tier 1 capital ratio and common equity tier 1 capital ratio by eight 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 stand-by 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 as described in
Note 4 – Outstanding Loans and Leases
to the Consolidated Financial Statements
. At
June 30, 2014
and
December 31, 2013
, the synthetic securitization vehicles referenced principal balances of
$7.9 billion
and
$12.5 billion
of residential mortgage loans and provided loss protection up to
$294 million
and
$339 million
. At
June 30, 2014
and
December 31, 2013
, the Corporation had a receivable of
$184 million
and
$198 million
from these vehicles for reimbursement of losses. The Corporation records an allowance for credit losses on loans referenced by the synthetic securitization vehicles. The reported net charge-offs for the residential mortgage portfolio do not include the benefit of amounts reimbursable from these vehicles.
87
Table
35
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
93
.
|
Table 35
|
|||||||||||||||||||||||||||
|
Residential Mortgage – Key Credit Statistics
|
|||||||||||||||||||||||||||
|
|
Reported Basis
(1)
|
Excluding Purchased
Credit-impaired and
Fully-insured Loans
|
|||||||||||||||||||||||||
|
(Dollars in millions)
|
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
|||||||||||||||||||||||
|
Outstandings
|
$
|
237,136
|
|
$
|
248,066
|
|
$
|
138,751
|
|
$
|
142,147
|
|
|||||||||||||||
|
Accruing past due 30 days or more
|
19,220
|
|
23,052
|
|
1,873
|
|
2,371
|
|
|||||||||||||||||||
|
Accruing past due 90 days or more
|
14,137
|
|
16,961
|
|
—
|
|
—
|
|
|||||||||||||||||||
|
Nonperforming loans
|
9,235
|
|
11,712
|
|
9,235
|
|
11,712
|
|
|||||||||||||||||||
|
Percent of portfolio
|
|
|
|
|
|||||||||||||||||||||||
|
Refreshed LTV greater than 90 but less than or equal to 100
|
10
|
%
|
12
|
%
|
6
|
%
|
7
|
%
|
|||||||||||||||||||
|
Refreshed LTV greater than 100
|
9
|
|
13
|
|
9
|
|
10
|
|
|||||||||||||||||||
|
Refreshed FICO below 620
|
18
|
|
20
|
|
9
|
|
11
|
|
|||||||||||||||||||
|
2006 and 2007 vintages
(2)
|
20
|
|
21
|
|
25
|
|
27
|
|
|||||||||||||||||||
|
Reported Basis
|
Excluding Purchased Credit-impaired and Fully-insured Loans
|
||||||||||||||||||||||||||
|
Three Months Ended
June 30 |
Six Months Ended
June 30 |
Three Months Ended
June 30 |
Six Months Ended
June 30 |
||||||||||||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
||||||||||||||||||||
|
Net charge-off ratio
(3)
|
(0.06
|
)%
|
0.43
|
%
|
0.08
|
%
|
0.51
|
%
|
(0.10
|
)%
|
0.74
|
%
|
0.13
|
%
|
0.90
|
%
|
|||||||||||
|
(1)
|
Outstandings, accruing past due, nonperforming loans and percentages of portfolio exclude loans accounted for under the fair value option. There were
$2.0 billion
of residential mortgage loans accounted for under the fair value option at both
June 30, 2014
and
December 31, 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
98
and
Note 15 – Fair Value Option
to the Consolidated Financial Statements
.
|
|
(2)
|
These vintages of loans account for $4.7 billion, or
51 percent
and $6.2 billion, or
53 percent
of nonperforming residential mortgage loans at
June 30, 2014
and
December 31, 2013
. Additionally, these vintages contributed net recoveries of $78 million to residential mortgage net recoveries and net recoveries of $13 million to residential mortgage net charge-offs for the
three and six months ended June 30, 2014
, due primarily to bulk sales of nonperforming loans during the
three months ended June 30, 2014
. For the
three and six months ended June 30, 2013
, these vintages accounted for $181 million, or
67 percent
, and $430 million, or
66 percent
of total residential mortgage net charge-offs.
|
|
(3)
|
Net charge-off ratios are calculated as annualized net charge-offs divided by average outstanding loans excluding loans accounted for under the fair value option.
|
Nonperforming residential mortgage loans
decreased
$2.5 billion
during the
six months ended June 30, 2014
as sales of $1.8 billion, returns to performing status, paydowns, charge-offs, and transfers to foreclosed properties and held-for-sale outpaced new inflows. At
June 30, 2014
, borrowers were current on contractual payments with respect to $2.5 billion, or 27 percent of nonperforming residential mortgage loans, and $5.0 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
$498 million
during the
six months ended June 30, 2014
.
Net charge-offs
decreased
$306 million
to a net recovery of
$35 million
for the
three months ended June 30, 2014
, or
0.10 percent
of total average residential mortgage loans, compared to net charge-offs of
$271 million
, or
0.74 percent
, for the
same period in 2013
. Net charge-offs
decreased
$562 million
to
$92 million
for the
six months ended June 30, 2014
, or
0.13 percent
of total average residential mortgage loans, compared to
$654 million
, or
0.90 percent
, for the
same period in 2013
. These
decreases
in net charge-offs for the three- and
six-month
periods were 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
$185 million
related to nonperforming loan sales during the
three months ended June 30, 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
seven percent
of the residential mortgage portfolio at
June 30, 2014
and
December 31, 2013
. Loans with a refreshed LTV greater than 100 percent represented
nine percent
and
10 percent
of the residential mortgage loan portfolio at
June 30,
88
2014
and
December 31, 2013
. Of the loans with a refreshed LTV greater than 100 percent, 95 percent and 94 percent were performing at
June 30, 2014
and
December 31, 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 appreciation. Loans to borrowers with refreshed FICO scores below 620 represented
nine percent
and
11 percent
of the residential mortgage portfolio at
June 30, 2014
and
December 31, 2013
.
Of the
$138.8 billion
in total residential mortgage loans outstanding at
June 30, 2014
, as shown in Table
36
, 39 percent were originated as interest-only loans. The outstanding balance of interest-only residential mortgage loans that have entered the amortization period was $14.3 billion, or 26 percent at
June 30, 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
June 30, 2014
, $254 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
June 30, 2014
, $1.7 billion, or 12 percent of outstanding interest-only residential mortgages that had entered the amortization period were nonperforming, of which $939 million were contractually current, compared to
$9.2 billion
, or
seven percent
for the entire residential mortgage portfolio, of which $2.5 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
36
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
June 30, 2014
and
December 31, 2013
. For the
three and six months ended June 30, 2014
, loans within this MSA contributed net recoveries of $17 million and net recoveries of $22 million 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
June 30, 2014
and
December 31, 2013
. For the
three and six months ended June 30, 2014
, loans within this MSA contributed net charge-offs of $6 million and net charge-offs of $29 million within the residential mortgage portfolio. For the
three and six months ended June 30, 2013
, loans within this MSA contributed nine percent and eight percent of net charge-offs within the residential mortgage portfolio.
|
Table 36
|
|||||||||||||||||||||||||||||||
|
Residential Mortgage State Concentrations
|
|||||||||||||||||||||||||||||||
|
|
Outstandings
(1)
|
Nonperforming
(1)
|
Net Charge-offs
(2)
|
||||||||||||||||||||||||||||
|
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
Three Months Ended
June 30 |
Six Months Ended
June 30 |
||||||||||||||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||||||||||||||||||
|
California
|
$
|
46,754
|
|
$
|
47,885
|
|
$
|
2,538
|
|
$
|
3,396
|
|
$
|
(86
|
)
|
$
|
61
|
|
$
|
(94
|
)
|
$
|
157
|
|
|||||||
|
New York
(3)
|
11,835
|
|
11,787
|
|
674
|
|
789
|
|
4
|
|
15
|
|
17
|
|
30
|
|
|||||||||||||||
|
Florida
(3)
|
10,361
|
|
10,777
|
|
1,036
|
|
1,359
|
|
(13
|
)
|
35
|
|
(8
|
)
|
69
|
|
|||||||||||||||
|
Texas
|
6,649
|
|
6,766
|
|
315
|
|
407
|
|
3
|
|
5
|
|
4
|
|
14
|
|
|||||||||||||||
|
Virginia
|
4,564
|
|
4,774
|
|
291
|
|
369
|
|
4
|
|
5
|
|
10
|
|
14
|
|
|||||||||||||||
|
Other U.S./Non-U.S.
|
58,588
|
|
60,158
|
|
4,381
|
|
5,392
|
|
53
|
|
150
|
|
163
|
|
370
|
|
|||||||||||||||
|
Residential mortgage loans
(4)
|
$
|
138,751
|
|
$
|
142,147
|
|
$
|
9,235
|
|
$
|
11,712
|
|
$
|
(35
|
)
|
$
|
271
|
|
$
|
92
|
|
$
|
654
|
|
|||||||
|
Fully-insured loan portfolio
|
81,048
|
|
87,247
|
|
|
|
|
|
|||||||||||||||||||||||
|
Purchased credit-impaired residential mortgage loan portfolio
|
17,337
|
|
18,672
|
|
|
|
|
|
|||||||||||||||||||||||
|
Total residential mortgage loan portfolio
|
$
|
237,136
|
|
$
|
248,066
|
|
|
|
|
|
|||||||||||||||||||||
|
(1)
|
Outstandings and nonperforming amounts exclude loans accounted for under the fair value option. There were
$2.0 billion
of residential mortgage loans accounted for under the fair value option at both
June 30, 2014
and
December 31, 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
98
and
Note 15 – Fair Value Option
to the Consolidated Financial Statements
.
|
|
(2)
|
Net charge-offs exclude
$70 million
and
$351 million
of write-offs in the residential mortgage PCI loan portfolio for the
three and six months ended June 30, 2014
compared to
$203 million
and
$297 million
the
three and six months ended June 30, 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
93
.
|
|
(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.
|
89
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 $9.8 billion and $10.3 billion at
June 30, 2014
and
December 31, 2013
, or seven percent of the residential mortgage portfolio for both periods. The CRA portfolio included $1.2 billion and $1.7 billion of nonperforming loans at
June 30, 2014
and
December 31, 2013
, representing 13 percent and 14 percent of total nonperforming residential mortgage loans. The CRA portfolio reported net recoveries of $13 million and net charge-offs of $56 million for the
three months ended June 30, 2014 and 2013
, or 38 percent of total net recoveries and 21 percent of total net charge-offs for the residential mortgage portfolio. Net charge-offs in the CRA portfolio were $21 million and $148 million for the
six months ended June 30, 2014 and 2013
, or 23 percent of total net charge-offs for the residential mortgage portfolio for both periods.
Home Equity
At
June 30, 2014
, the home equity portfolio made up
17 percent
of the consumer portfolio and is comprised of HELOCs, home equity loans and reverse mortgages.
At
June 30, 2014
, our HELOC portfolio had an outstanding balance of $77.1 billion, or 86 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
June 30, 2014
, our home equity loan portfolio had an outstanding balance of
$10.8 billion
, or 12 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
$10.8 billion
at
June 30, 2014
, 52 percent of these loans have 25- to 30-year terms. At
June 30, 2014
, our reverse mortgage portfolio had an outstanding balance, excluding loans accounted for under the fair value option, of $1.6 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 these products.
At
June 30, 2014
, approximately 91 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
$4.2 billion
during the
six months ended June 30, 2014
primarily due to paydowns and charge-offs outpacing new originations and draws on existing lines. Of the total home equity portfolio at
June 30, 2014
and
December 31, 2013
, $22.6 billion and $23.0 billion, or 25 percent for both periods were in first-lien positions (27 percent and 26 percent excluding the PCI home equity portfolio). At
June 30, 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 $16.5 billion, or 20 percent of our total home equity portfolio excluding the PCI loan portfolio.
Unused HELOCs totaled
$55.0 billion
at
June 30, 2014
compared to
$56.8 billion
at
December 31, 2013
. This
decrease
was primarily due to customers choosing to close accounts and customer paydowns of principal balances, which more than offset the impact of new production. The HELOC utilization rate was 58 percent at
June 30, 2014
compared to 59 percent at
December 31, 2013
.
90
Table
37
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
93
.
|
Table 37
|
|||||||||||||||||||||||||||
|
Home Equity – Key Credit Statistics
|
|||||||||||||||||||||||||||
|
|
Reported Basis
(1)
|
Excluding Purchased
Credit-impaired Loans
|
|||||||||||||||||||||||||
|
(Dollars in millions)
|
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
|||||||||||||||||||||||
|
Outstandings
|
$
|
89,499
|
|
$
|
93,672
|
|
$
|
83,432
|
|
$
|
87,079
|
|
|||||||||||||||
|
Accruing past due 30 days or more
(2)
|
609
|
|
901
|
|
609
|
|
901
|
|
|||||||||||||||||||
|
Nonperforming loans
(2)
|
4,181
|
|
4,075
|
|
4,181
|
|
4,075
|
|
|||||||||||||||||||
|
Percent of portfolio
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Refreshed CLTV greater than 90 but less than or equal to 100
|
10
|
%
|
9
|
%
|
9
|
%
|
9
|
%
|
|||||||||||||||||||
|
Refreshed CLTV greater than 100
|
19
|
|
22
|
|
17
|
|
19
|
|
|||||||||||||||||||
|
Refreshed FICO below 620
|
7
|
|
8
|
|
7
|
|
8
|
|
|||||||||||||||||||
|
2006 and 2007 vintages
(3)
|
47
|
|
48
|
|
44
|
|
45
|
|
|||||||||||||||||||
|
Reported Basis
|
Excluding Purchased Credit-impaired Loans
|
||||||||||||||||||||||||||
|
Three Months Ended
June 30 |
Six Months Ended
June 30 |
Three Months Ended
June 30 |
Six Months Ended
June 30 |
||||||||||||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
||||||||||||||||||||
|
Net charge-off ratio
(4)
|
1.06
|
%
|
1.92
|
%
|
1.19
|
%
|
2.27
|
%
|
1.14
|
%
|
2.07
|
%
|
1.28
|
%
|
2.46
|
%
|
|||||||||||
|
(1)
|
Outstandings, accruing past due, nonperforming loans and percentages of the portfolio exclude loans accounted for under the fair value option. There were
$170 million
and
$147 million
of home equity loans accounted for under the fair value option at
June 30, 2014
and
December 31, 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
98
and
Note 15 – 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
$553 million
and
$582 million
of loans where we serviced the underlying first-lien at
June 30, 2014
and
December 31, 2013
.
|
|
(3)
|
These vintages of loans have higher refreshed combined LTV ratios and accounted for
49 percent
and
50 percent
of nonperforming home equity loans at
June 30, 2014
and
December 31, 2013
, and
56 percent
and
57 percent
of net charge-offs for the
three and six months ended June 30, 2014
and
63 percent
and
61 percent
for the
three and six months ended June 30, 2013
.
|
|
(4)
|
Net charge-off ratios are calculated as annualized net charge-offs divided by average outstanding loans excluding loans accounted for under the fair value option.
|
Nonperforming outstanding balances in the home equity portfolio
increased
$106 million
during the
six months ended June 30, 2014
primarily due to an increase in contractually current nonperforming loans where the loan has been modified in a TDR. At
June 30, 2014
, borrowers were current on contractual payments with respect to $2.1 billion, or 49 percent of nonperforming home equity loans, and $1.4 billion, or 34 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
$292 million
during the
six months ended June 30, 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. At
June 30, 2014
, we estimate that $1.8 billion of current and $210 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 $350 million of these combined amounts, with the remaining $1.7 billion serviced by third parties. Of the $2.0 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 approximately $1.2 billion had first-lien loans that were 90 days or more past due.
91
Net charge-offs
decreased
$247 million
to
$239 million
for the
three months ended June 30, 2014
, or
1.14 percent
of the total average home equity portfolio, compared to
$486 million
, or
2.07 percent
for the
same period in 2013
. Net charge-offs
decreased
$629 million
to
$541 million
for the
six months ended June 30, 2014
, or
1.28 percent
of the total average home equity portfolio, compared to
$1.2 billion
, or
2.46 percent
for the
same period in 2013
. These
decreases
in net charge-offs for the three- and
six-month
periods were primarily driven by favorable portfolio trends due in part to improvement in home prices and the U.S. economy. The net charge-off ratios 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
nine percent
of the home equity portfolio at both
June 30, 2014
and
December 31, 2013
. Outstanding balances with refreshed CLTVs greater than 100 percent comprised
17 percent
and
19 percent
of the home equity portfolio at
June 30, 2014
and
December 31, 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, somewhat mitigated by appreciation, has contributed to an increase in CLTV ratios. Of those outstanding balances with a refreshed CLTV greater than 100 percent, 95 percent of the customers were current on their home equity loan and 92 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
June 30, 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
June 30, 2014
and
December 31, 2013
.
Of the
$83.4 billion
in total home equity portfolio outstandings at
June 30, 2014
, as shown in
Table 38
, 76 percent were interest-only loans, almost all of which were HELOCs. The outstanding balance of HELOCs that have entered the amortization period was $3.5 billion, or five percent of total HELOCs at
June 30, 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
June 30, 2014
, $97 million, or three percent of outstanding HELOCs that had entered the amortization period were accruing past due 30 days or more compared to $547 million, or one percent for the entire HELOC portfolio. In addition, at
June 30, 2014
, $580 million, or 16 percent of outstanding HELOCs that had entered the amortization period were nonperforming, of which $268 million were contractually current, compared to $3.7 billion, or five percent for the entire HELOC portfolio, of which $1.8 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 their end of 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 the
three months ended June 30, 2014
, approximately 54 percent of these customers with an outstanding balance did not pay any principal on their HELOCs.
92
Table
38
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
June 30, 2014
and
December 31, 2013
. For the
three and six months ended June 30, 2014
, net charge-offs on loans within this MSA comprised 12 percent and 13 percent of total net charge-offs, and nine percent of net charge-offs for both the
three and six months ended June 30, 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
June 30, 2014
and
December 31, 2013
. For the
three and six months ended June 30, 2014
, net charge-offs on loans within this MSA comprised four percent and six percent of total net charge-offs, and nine percent of net charge-offs for both the
three and six months ended June 30, 2013
within the home equity portfolio.
|
Table 38
|
|||||||||||||||||||||||||||||||
|
Home Equity State Concentrations
|
|||||||||||||||||||||||||||||||
|
|
Outstandings
(1)
|
Nonperforming
(1)
|
Net Charge-offs
(2)
|
||||||||||||||||||||||||||||
|
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
Three Months Ended
June 30 |
Six Months Ended
June 30 |
||||||||||||||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||||||||||||||||||
|
California
|
$
|
24,307
|
|
$
|
25,061
|
|
$
|
1,097
|
|
$
|
1,047
|
|
$
|
34
|
|
$
|
136
|
|
$
|
92
|
|
$
|
329
|
|
|||||||
|
Florida
(3)
|
10,073
|
|
10,604
|
|
646
|
|
643
|
|
37
|
|
84
|
|
84
|
|
206
|
|
|||||||||||||||
|
New Jersey
(3)
|
6,001
|
|
6,153
|
|
308
|
|
304
|
|
15
|
|
27
|
|
37
|
|
63
|
|
|||||||||||||||
|
New York
(3)
|
5,828
|
|
6,035
|
|
405
|
|
405
|
|
22
|
|
29
|
|
49
|
|
68
|
|
|||||||||||||||
|
Massachusetts
|
3,747
|
|
3,881
|
|
158
|
|
144
|
|
6
|
|
10
|
|
14
|
|
25
|
|
|||||||||||||||
|
Other U.S./Non-U.S.
|
33,476
|
|
35,345
|
|
1,567
|
|
1,532
|
|
125
|
|
200
|
|
265
|
|
479
|
|
|||||||||||||||
|
Home equity loans
(4)
|
$
|
83,432
|
|
$
|
87,079
|
|
$
|
4,181
|
|
$
|
4,075
|
|
$
|
239
|
|
$
|
486
|
|
$
|
541
|
|
$
|
1,170
|
|
|||||||
|
Purchased credit-impaired home equity portfolio
|
6,067
|
|
6,593
|
|
|
|
|
|
|||||||||||||||||||||||
|
Total home equity loan portfolio
|
$
|
89,499
|
|
$
|
93,672
|
|
|
|
|
|
|||||||||||||||||||||
|
(1)
|
Outstandings and nonperforming amounts exclude loans accounted for under the fair value option. There were
$170 million
and
$147 million
of home equity loans accounted for under the fair value option at
June 30, 2014
and
December 31, 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
98
and
Note 15 – Fair Value Option
to the Consolidated Financial Statements
.
|
|
(2)
|
Net charge-offs exclude
$90 million
and
$200 million
of write-offs in the home equity PCI loan portfolio for the
three and six months ended June 30, 2014
compared to
$110 million
and
$855 million
for the
three and six months ended June 30, 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
93
.
|
|
(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. Evidence of credit quality deterioration as of the acquisition date may include statistics such as past due status, refreshed FICO scores and refreshed LTVs. PCI loans are recorded at fair value upon acquisition and the applicable accounting guidance prohibits carrying over or recording a valuation allowance in the initial accounting.
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 were 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 were one loan.
93
Table
39
presents the unpaid principal balance, carrying value, related valuation allowance and the net carrying value as a percentage of the unpaid principal balance for the PCI loan portfolio.
|
Table 39
|
||||||||||||||||||
|
Purchased Credit-impaired Loan Portfolio
|
||||||||||||||||||
|
|
June 30, 2014
|
|||||||||||||||||
|
(Dollars in millions)
|
Unpaid
Principal
Balance
|
Carrying
Value
|
Related
Valuation
Allowance
|
Carrying
Value Net of Valuation
Allowance
|
Percent of Unpaid
Principal
Balance
|
|||||||||||||
|
Residential mortgage
|
$
|
18,096
|
|
$
|
17,337
|
|
$
|
1,019
|
|
$
|
16,318
|
|
90.17
|
%
|
||||
|
Home equity
|
6,065
|
|
6,067
|
|
817
|
|
5,250
|
|
86.56
|
|
||||||||
|
Total purchased credit-impaired loan portfolio
|
$
|
24,161
|
|
$
|
23,404
|
|
$
|
1,836
|
|
$
|
21,568
|
|
89.27
|
|
||||
|
|
December 31, 2013
|
|||||||||||||||||
|
Residential mortgage
|
$
|
19,558
|
|
$
|
18,672
|
|
$
|
1,446
|
|
$
|
17,226
|
|
88.08
|
%
|
||||
|
Home equity
|
6,523
|
|
6,593
|
|
1,047
|
|
5,546
|
|
85.02
|
|
||||||||
|
Total purchased credit-impaired loan portfolio
|
$
|
26,081
|
|
$
|
25,265
|
|
$
|
2,493
|
|
$
|
22,772
|
|
87.31
|
|
||||
The total PCI unpaid principal balance
decreased
$1.9 billion
, or
seven percent
, during the
six months ended June 30, 2014
primarily driven by liquidations, including sales, payoffs, paydowns and write-offs. During the
six months ended June 30, 2014
, we sold PCI loans with a carrying value of $552 million compared to none for the same period in 2013.
Of the unpaid principal balance of
$24.2 billion
at
June 30, 2014
, $3.7 billion was 180 days or more past due, including $3.6 billion of first-lien mortgages and $96 million of home equity loans. Of the $20.5 billion that was less than 180 days past due, $18.0 billion, or 88 percent of the total unpaid principal balance was current based on the contractual terms while $1.7 billion, or eight percent, was in early stage delinquency.
During the
three and six months ended June 30, 2014
, we recorded a provision
benefit
of
$106 million
for the PCI loan portfolio including a benefit of $76 million for residential mortgage and a benefit of $30 million for home equity. This compared to a total provision
benefit
of
$252 million
and $459 million for the same periods in 2013. The provision
benefit
for the
three and six months ended June 30, 2014
was primarily driven by changes in liquidation assumptions and improved macro-economic conditions.
The PCI valuation allowance
declined
$657 million during the
six months ended June 30, 2014
due to write-offs in the PCI loan portfolio of
$351 million
in residential mortgage and
$200 million
in home equity, and provision
benefit
of
$106 million
for the PCI loan portfolio.
94
Purchased Credit-impaired Residential Mortgage Loan Portfolio
The PCI residential mortgage loan portfolio represented
74 percent
of the total PCI loan portfolio at
June 30, 2014
. Those loans to borrowers with a refreshed FICO score below 620 represented 46 percent of the PCI residential mortgage loan portfolio at
June 30, 2014
. Loans with a refreshed LTV greater than 90 percent, after consideration of purchase accounting adjustments and the related valuation allowance, represented 32 percent of the PCI residential mortgage loan portfolio and 44 percent based on the unpaid principal balance at
June 30, 2014
. Table
40
presents outstandings net of purchase accounting adjustments and before the related valuation allowance, by certain state concentrations.
|
Table 40
|
|||||||
|
Outstanding Purchased Credit-impaired Loan Portfolio – Residential Mortgage State Concentrations
|
|||||||
|
(Dollars in millions)
|
June 30
2014 |
December 31
2013 |
|||||
|
California
|
$
|
7,688
|
|
$
|
8,180
|
|
|
|
Florida
(1)
|
1,502
|
|
1,750
|
|
|||
|
Virginia
|
708
|
|
760
|
|
|||
|
Maryland
|
710
|
|
728
|
|
|||
|
Texas
|
399
|
|
433
|
|
|||
|
Other U.S./Non-U.S.
|
6,330
|
|
6,821
|
|
|||
|
Total
|
$
|
17,337
|
|
$
|
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
June 30, 2014
, the unpaid principal balance of pay option loans was $3.8 billion, with a carrying value of $3.7 billion, including $3.3 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 $1.5 billion, including $88 million of negative amortization. For those borrowers who are making payments in accordance with their contractual terms, two percent and five percent at
June 30, 2014
and
December 31, 2013
elected to make only the minimum payment on pay option ARMs. 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
June 30, 2014
that have not already experienced a payment reset, less than two percent are expected to reset before 2016, 32 percent are expected to reset in 2016 and 12 percent are expected to reset thereafter. In addition, nine percent are expected to prepay and approximately 45 percent are expected to default prior to being reset, most of which were severely delinquent as of
June 30, 2014
.
95
Purchased Credit-impaired Home Equity Loan Portfolio
The PCI home equity portfolio represented
26 percent
of the total PCI loan portfolio at
June 30, 2014
. Those loans with a refreshed FICO score below 620 represented 15 percent of the PCI home equity portfolio at
June 30, 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
June 30, 2014
. Table
41
presents outstandings net of purchase accounting adjustments and before the related valuation allowance, by certain state concentrations.
|
Table 41
|
|||||||
|
Outstanding Purchased Credit-impaired Loan Portfolio – Home Equity State Concentrations
|
|||||||
|
(Dollars in millions)
|
June 30
2014 |
December 31
2013 |
|||||
|
California
|
$
|
1,772
|
|
$
|
1,921
|
|
|
|
Florida
(1)
|
331
|
|
356
|
|
|||
|
Virginia
|
285
|
|
310
|
|
|||
|
Arizona
|
199
|
|
214
|
|
|||
|
Colorado
|
175
|
|
199
|
|
|||
|
Other U.S./Non-U.S.
|
3,305
|
|
3,593
|
|
|||
|
Total
|
$
|
6,067
|
|
$
|
6,593
|
|
|
|
(1)
|
In this state, foreclosure requires a court order following a legal proceeding (judicial state).
|
U.S. Credit Card
At
June 30, 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
$3.3 billion
during the
six months ended June 30, 2014
due to a seasonal decline in retail transaction volume and a portfolio divestiture. For the
three and six months ended June 30, 2014
, net charge-offs
decreased
$234 million
to
$683 million
and
$463 million
to
$1.4 billion
compared to the
same periods in 2013
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
$375 million
while loans 90 days or more past due and still accruing interest
declined
$185 million
during the
six months ended June 30, 2014
as a result of the factors mentioned above that contributed to lower net charge-offs.
Table
42
presents certain key credit statistics for the U.S. credit card portfolio.
|
Table 42
|
|||||||||||||||
|
U.S. Credit Card – Key Credit Statistics
|
|||||||||||||||
|
(Dollars in millions)
|
June 30
2014 |
December 31
2013 |
|||||||||||||
|
Outstandings
|
$
|
89,020
|
|
$
|
92,338
|
|
|||||||||
|
Accruing past due 30 days or more
|
1,698
|
|
2,073
|
|
|||||||||||
|
Accruing past due 90 days or more
|
868
|
|
1,053
|
|
|||||||||||
|
Three Months Ended
June 30 |
Six Months Ended
June 30 |
||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
||||||||||||
|
Net charge-offs
|
$
|
683
|
|
$
|
917
|
|
$
|
1,401
|
|
$
|
1,864
|
|
|||
|
Net charge-off ratios
(1)
|
3.11
|
%
|
4.10
|
%
|
3.18
|
%
|
4.14
|
%
|
|||||||
|
(1)
|
Net charge-off ratios are calculated as annualized net charge-offs divided by average outstanding loans.
|
Unused lines of credit for U.S. credit card totaled $310.9 billion and $315.1 billion at
June 30, 2014
and
December 31, 2013
. The $4.2 billion decrease was driven by the closure of inactive accounts and a portfolio divestiture.
96
Table
43
presents certain state concentrations for the U.S. credit card portfolio.
|
Table 43
|
|||||||||||||||||||||||||||||||
|
U.S. Credit Card State Concentrations
|
|||||||||||||||||||||||||||||||
|
|
Outstandings
|
Accruing Past Due
90 Days or More
|
Net Charge-offs
|
||||||||||||||||||||||||||||
|
|
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
Three Months Ended
June 30 |
Six Months Ended
June 30 |
|||||||||||||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||||||||||||||||||
|
California
|
$
|
13,172
|
|
$
|
13,689
|
|
$
|
131
|
|
$
|
162
|
|
$
|
107
|
|
$
|
152
|
|
$
|
221
|
|
$
|
314
|
|
|||||||
|
Florida
|
7,151
|
|
7,339
|
|
85
|
|
105
|
|
72
|
|
95
|
|
148
|
|
198
|
|
|||||||||||||||
|
Texas
|
6,318
|
|
6,405
|
|
58
|
|
72
|
|
45
|
|
57
|
|
94
|
|
118
|
|
|||||||||||||||
|
New York
|
5,481
|
|
5,624
|
|
62
|
|
70
|
|
44
|
|
64
|
|
90
|
|
124
|
|
|||||||||||||||
|
New Jersey
|
3,789
|
|
3,868
|
|
41
|
|
48
|
|
29
|
|
45
|
|
60
|
|
84
|
|
|||||||||||||||
|
Other U.S.
|
53,109
|
|
55,413
|
|
491
|
|
596
|
|
386
|
|
504
|
|
788
|
|
1,026
|
|
|||||||||||||||
|
Total U.S. credit card portfolio
|
$
|
89,020
|
|
$
|
92,338
|
|
$
|
868
|
|
$
|
1,053
|
|
$
|
683
|
|
$
|
917
|
|
$
|
1,401
|
|
$
|
1,864
|
|
|||||||
Non-U.S. Credit Card
Outstandings in the non-U.S. credit card portfolio, which are recorded in
All Other
, increased $458 million during the
six months ended June 30, 2014
due to stronger foreign currency exchange rates. For the
three and six months ended June 30, 2014
, net charge-offs
decreased
$57 million
to
$47 million
and
$93 million
to
$123 million
compared to the
same periods in 2013
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, which were partially offset by stronger foreign currency exchange rates.
Unused lines of credit for non-U.S. credit card totaled $32.3 billion and $31.1 billion at
June 30, 2014
and
December 31, 2013
. The $1.2 billion increase was primarily driven by stronger foreign currency exchange rates.
Table
44
presents certain key credit statistics for the non-U.S. credit card portfolio.
|
Table 44
|
|||||||||||||||
|
Non-U.S. Credit Card – Key Credit Statistics
|
|||||||||||||||
|
(Dollars in millions)
|
June 30
2014 |
December 31
2013 |
|||||||||||||
|
Outstandings
|
$
|
11,999
|
|
$
|
11,541
|
|
|||||||||
|
Accruing past due 30 days or more
|
225
|
|
248
|
|
|||||||||||
|
Accruing past due 90 days or more
|
122
|
|
131
|
|
|||||||||||
|
Three Months Ended
June 30 |
Six Months Ended
June 30 |
||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
||||||||||||
|
Net charge-offs
|
$
|
47
|
|
$
|
104
|
|
$
|
123
|
|
$
|
216
|
|
|||
|
Net charge-off ratios
(1)
|
1.59
|
%
|
3.93
|
%
|
2.12
|
%
|
4.03
|
%
|
|||||||
|
(1)
|
Net charge-off ratios are calculated as annualized net charge-offs divided by average outstanding loans.
|
97
Direct/Indirect Consumer
At
June 30, 2014
, approximately 48 percent of the direct/indirect portfolio was included in
CBB
(consumer dealer financial services – automotive, marine, aircraft, recreational vehicle loans and consumer personal loans), 46 percent was included in
GWIM
(principally securities-based lending loans and other personal loans) and the remainder was primarily in
All Other
(the
GWIM
International Wealth Management businesses based outside of the U.S. and student loans).
Outstandings in the direct/indirect portfolio
increased
$394 million
during the
six months ended June 30, 2014
as growth in the securities-based lending portfolio was mostly offset by lower outstandings in the consumer dealer financial services portfolio and the unsecured consumer lending portfolio. For the
three and six months ended June 30, 2014
, net charge-offs
decreased
$53 million
to
$33 million
, and
$119 million
to
$91 million
, or
0.16 percent
and
0.22 percent
of total average direct/indirect loans, compared to
0.42 percent
and
0.51 percent
for the
same periods in 2013
. These
decreases
in net charge-offs were 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 $41 million to $13 million, and $91 million to $33 million for the
three and six months ended June 30, 2014
, or 2.48 percent and 2.88 percent of total average unsecured consumer lending loans compared to 5.60 percent and 6.04 percent for the
same periods in 2013
. Direct/indirect loans that were past due 30 days or more and still accruing interest declined $219 million to $794 million during the
six months ended June 30, 2014
due to improvements in the dealer financial services, student lending and unsecured consumer lending portfolios.
Table
45
presents certain state concentrations for the direct/indirect consumer loan portfolio.
|
Table 45
|
|||||||||||||||||||||||||||||||
|
Direct/Indirect State Concentrations
|
|||||||||||||||||||||||||||||||
|
|
Outstandings
|
Accruing Past Due
90 Days or More
|
Net Charge-offs
|
||||||||||||||||||||||||||||
|
|
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
Three Months Ended
June 30 |
Six Months Ended
June 30 |
|||||||||||||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||||||||||||||||||
|
California
|
$
|
10,140
|
|
$
|
10,041
|
|
$
|
47
|
|
$
|
57
|
|
$
|
3
|
|
$
|
12
|
|
$
|
8
|
|
$
|
27
|
|
|||||||
|
Texas
|
7,892
|
|
7,850
|
|
59
|
|
66
|
|
4
|
|
8
|
|
10
|
|
20
|
|
|||||||||||||||
|
Florida
|
7,704
|
|
7,634
|
|
20
|
|
25
|
|
3
|
|
10
|
|
11
|
|
23
|
|
|||||||||||||||
|
New York
|
4,661
|
|
4,611
|
|
26
|
|
33
|
|
1
|
|
5
|
|
5
|
|
12
|
|
|||||||||||||||
|
New Jersey
|
2,548
|
|
2,526
|
|
5
|
|
8
|
|
(1
|
)
|
2
|
|
3
|
|
7
|
|
|||||||||||||||
|
Other U.S./Non-U.S.
|
49,641
|
|
49,530
|
|
177
|
|
219
|
|
23
|
|
49
|
|
54
|
|
121
|
|
|||||||||||||||
|
Total direct/indirect loan portfolio
|
$
|
82,586
|
|
$
|
82,192
|
|
$
|
334
|
|
$
|
408
|
|
$
|
33
|
|
$
|
86
|
|
$
|
91
|
|
$
|
210
|
|
|||||||
Other Consumer
At
June 30, 2014
, approximately 52 percent of the
$2.1 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
$2.2 billion
at
June 30, 2014
and were comprised of residential mortgage loans that were previously classified as held-for-sale, residential mortgage loans held in consolidated VIEs and repurchases of 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. During the
six months ended June 30, 2014
, we recorded net gains of
$27 million
resulting from changes in the fair value of these loans, including losses of $8 million on loans held in consolidated VIEs that were offset by gains recorded on related long-term debt.
98
Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity
Table
46
presents nonperforming consumer loans, leases and foreclosed properties activity for the
three and six months ended June 30, 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 of the Corporation's 2013 Annual Report on Form 10-K
. Nonperforming loans of
$13.5 billion
at
June 30, 2014
declined $2.4 billion compared to
December 31, 2013
as outflows including the impact of loan sales and transfers to held-for-sale 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
June 30, 2014
, $7.0 billion, or 50 percent of nonperforming consumer real estate loans and foreclosed properties had been written down to their estimated property value less costs to sell, including $6.5 billion of nonperforming loans 180 days or more past due and $547 million of foreclosed properties. In addition, at
June 30, 2014
, $4.6 billion, or 34 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 of
$547 million
at
June 30, 2014
remained relatively unchanged compared to
December 31, 2013
as liquidations were offset by additions. 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 $39 million and $76 million during the
three and six months ended June 30, 2014
. Not included in foreclosed properties at
June 30, 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
61
.
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
46
.
99
|
Table 46
|
|||||||||||||||
|
Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity
(1)
|
|||||||||||||||
|
Three Months Ended
June 30 |
Six Months Ended
June 30 |
||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Nonperforming loans and leases, beginning of period
|
$
|
15,844
|
|
$
|
19,282
|
|
$
|
15,840
|
|
$
|
19,431
|
|
|||
|
Additions to nonperforming loans and leases:
|
|
|
|
|
|||||||||||
|
New nonperforming loans and leases
|
1,825
|
|
2,289
|
|
3,852
|
|
4,950
|
|
|||||||
|
Reductions to nonperforming loans and leases:
|
|
|
|
|
|||||||||||
|
Paydowns and payoffs
|
(325
|
)
|
(695
|
)
|
(793
|
)
|
(1,375
|
)
|
|||||||
|
Sales
|
(1,825
|
)
|
(175
|
)
|
(1,825
|
)
|
(175
|
)
|
|||||||
|
Returns to performing status
(2)
|
(939
|
)
|
(1,139
|
)
|
(1,739
|
)
|
(2,082
|
)
|
|||||||
|
Charge-offs
|
(640
|
)
|
(932
|
)
|
(1,223
|
)
|
(2,004
|
)
|
|||||||
|
Transfers to foreclosed properties
(3)
|
(157
|
)
|
(90
|
)
|
(329
|
)
|
(205
|
)
|
|||||||
|
Transfers to loans held-for-sale
|
(323
|
)
|
—
|
|
(323
|
)
|
—
|
|
|||||||
|
Total net reductions to nonperforming loans and leases
|
(2,384
|
)
|
(742
|
)
|
(2,380
|
)
|
(891
|
)
|
|||||||
|
Total nonperforming loans and leases, June 30
(4)
|
13,460
|
|
18,540
|
|
13,460
|
|
18,540
|
|
|||||||
|
Foreclosed properties, beginning of period
|
538
|
|
620
|
|
533
|
|
650
|
|
|||||||
|
Additions to foreclosed properties:
|
|
|
|||||||||||||
|
New foreclosed properties
(3)
|
247
|
|
179
|
|
433
|
|
387
|
|
|||||||
|
Reductions to foreclosed properties:
|
|
||||||||||||||
|
Sales
|
(222
|
)
|
(266
|
)
|
(381
|
)
|
(484
|
)
|
|||||||
|
Write-downs
|
(16
|
)
|
(25
|
)
|
(38
|
)
|
(45
|
)
|
|||||||
|
Total net additions (reductions) to foreclosed properties
|
9
|
|
(112
|
)
|
14
|
|
(142
|
)
|
|||||||
|
Total foreclosed properties, June 30
(5)
|
547
|
|
508
|
|
547
|
|
508
|
|
|||||||
|
Nonperforming consumer loans, leases and foreclosed properties, June 30
|
$
|
14,007
|
|
$
|
19,048
|
|
$
|
14,007
|
|
$
|
19,048
|
|
|||
|
Nonperforming consumer loans and leases as a percentage of outstanding consumer loans and leases
(6)
|
2.63
|
%
|
3.43
|
%
|
|||||||||||
|
Nonperforming consumer loans, leases and foreclosed properties as a percentage of outstanding consumer loans, leases and foreclosed properties
(6)
|
2.73
|
|
3.52
|
|
|||||||||||
|
(1)
|
Balances do not include nonperforming LHFS of
$341 million
and
$554 million
and nonaccruing TDRs removed from the PCI loan portfolio prior to January 1, 2010 of
$140 million
and
$485 million
at
June 30, 2014 and 2013
as well as loans accruing past due 90 days or more as presented in
Table 32
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)
|
At
June 30, 2014
,
48 percent
of nonperforming loans were 180 days or more past due and were written down through charge-offs to
65 percent
of their unpaid principal balance.
|
|
(5)
|
Foreclosed property balances do not include loans that are insured by the FHA and have entered foreclosure of
$1.1 billion
and
$1.6 billion
at
June 30, 2014 and 2013
.
|
|
(6)
|
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
46
are net of $40 million and $85 million of charge-offs for the
three and six months ended June 30, 2014
compared to $47 million and $88 million for the
same periods in 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 both
June 30, 2014
and
December 31, 2013
,
$1.2 billion
of such junior-lien home equity loans were included in nonperforming loans and leases.
100
Table
47
presents TDRs for the home loans portfolio. Performing TDR balances are excluded from nonperforming loans and leases in Table
46
.
|
Table 47
|
|||||||||||||||||||||||
|
Home Loans Troubled Debt Restructurings
|
|||||||||||||||||||||||
|
|
June 30, 2014
|
December 31, 2013
|
|||||||||||||||||||||
|
(Dollars in millions)
|
Total
|
Nonperforming
|
Performing
|
Total
|
Nonperforming
|
Performing
|
|||||||||||||||||
|
Residential mortgage
(1, 2)
|
$
|
25,319
|
|
$
|
5,448
|
|
$
|
19,871
|
|
$
|
29,312
|
|
$
|
7,555
|
|
$
|
21,757
|
|
|||||
|
Home equity
(3)
|
2,201
|
|
1,460
|
|
741
|
|
2,146
|
|
1,389
|
|
757
|
|
|||||||||||
|
Total home loans troubled debt restructurings
|
$
|
27,520
|
|
$
|
6,908
|
|
$
|
20,612
|
|
$
|
31,458
|
|
$
|
8,944
|
|
$
|
22,514
|
|
|||||
|
(1)
|
Residential mortgage TDRs deemed collateral dependent totaled
$6.4 billion
and
$8.2 billion
, and included
$4.0 billion
and
$5.7 billion
of loans classified as nonperforming and
$2.4 billion
and
$2.5 billion
of loans classified as performing at
June 30, 2014
and
December 31, 2013
.
|
|
(2)
|
Residential mortgage performing TDRs included
$12.6 billion
and
$14.3 billion
of loans that were fully-insured at
June 30, 2014
and
December 31, 2013
.
|
|
(3)
|
Home equity TDRs deemed collateral dependent totaled
$1.4 billion
and
$1.4 billion
, and included
$1.2 billion
and
$1.2 billion
of loans classified as nonperforming and
$201 million
and
$227 million
of loans classified as performing at
June 30, 2014
and
December 31, 2013
.
|
In addition to modifying home loans, we work with customers that 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 consumer'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
46
as substantially all of the loans remain on accrual status until either charged off or paid in full. At
June 30, 2014
and
December 31, 2013
, our renegotiated TDR portfolio was
$1.5 billion
and
$2.1 billion
, of which
$1.2 billion
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
.
101
|
Commercial Portfolio Credit Risk Management
|
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
52
,
57
,
63
and
64
summarize our concentrations. We also utilize syndications of exposure to third parties, loan sales, hedging and other risk mitigation techniques to manage the size and risk profile of the commercial credit portfolio.
For more information on our 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 of the Corporation's 2013 Annual Report on Form 10-K
.
|
Commercial Credit Portfolio
|
During the
six months ended June 30, 2014
, outstanding commercial loans and leases
increased
$1.1 billion
, primarily in U.S. commercial. Credit quality was stable with slight declines in reservable criticized balances and nonperforming loans, leases and foreclosed property balances during the three and
six months ended June 30, 2014
. Nonperforming commercial loans and leases as a percentage of outstanding commercial loans and leases decreased slightly during the
six months ended June 30, 2014
to
0.31 percent
from
0.33 percent
(
0.31 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
$481 million
to
$4.5 billion
at
June 30, 2014
compared to
December 31, 2013
. For additional information, see
Allowance for Credit Losses
on page
117
.
Table
48
presents our commercial loans and leases portfolio, and related credit quality information at
June 30, 2014
and
December 31, 2013
.
|
Table 48
|
|||||||||||||||||||||||
|
Commercial Loans and Leases
|
|||||||||||||||||||||||
|
|
Outstandings
|
Nonperforming
|
Accruing Past Due 90
Days or More |
||||||||||||||||||||
|
(Dollars in millions)
|
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
|||||||||||||||||
|
U.S. commercial
|
$
|
218,037
|
|
$
|
212,557
|
|
$
|
849
|
|
$
|
819
|
|
$
|
86
|
|
$
|
47
|
|
|||||
|
Commercial real estate
(1)
|
46,815
|
|
47,893
|
|
252
|
|
322
|
|
8
|
|
21
|
|
|||||||||||
|
Commercial lease financing
|
24,565
|
|
25,199
|
|
8
|
|
16
|
|
20
|
|
41
|
|
|||||||||||
|
Non-U.S. commercial
|
85,677
|
|
89,462
|
|
7
|
|
64
|
|
1
|
|
17
|
|
|||||||||||
|
|
375,094
|
|
375,111
|
|
1,116
|
|
1,221
|
|
115
|
|
126
|
|
|||||||||||
|
U.S. small business commercial
(2)
|
13,585
|
|
13,294
|
|
100
|
|
88
|
|
73
|
|
78
|
|
|||||||||||
|
Commercial loans excluding loans accounted for under the fair value option
|
388,679
|
|
388,405
|
|
1,216
|
|
1,309
|
|
188
|
|
204
|
|
|||||||||||
|
Loans accounted for under the fair value option
(3)
|
8,747
|
|
7,878
|
|
2
|
|
2
|
|
—
|
|
—
|
|
|||||||||||
|
Total commercial loans and leases
|
$
|
397,426
|
|
$
|
396,283
|
|
$
|
1,218
|
|
$
|
1,311
|
|
$
|
188
|
|
$
|
204
|
|
|||||
|
(1)
|
Includes U.S. commercial real estate loans of
$45.5 billion
and
$46.3 billion
and non-U.S. commercial real estate loans of
$1.3 billion
and
$1.6 billion
at
June 30, 2014
and
December 31, 2013
.
|
|
(2)
|
Includes card-related products.
|
|
(3)
|
Commercial loans accounted for under the fair value option include U.S. commercial loans of
$1.3 billion
and
$1.5 billion
and non-U.S. commercial loans of
$7.4 billion
and
$6.4 billion
at
June 30, 2014
and
December 31, 2013
. For more information on the fair value option, see
Note 15 – Fair Value Option
to the Consolidated Financial Statements
.
|
102
Table
49
presents net charge-offs and related ratios for our commercial loans and leases for the
three and six months ended June 30, 2014 and 2013
. Improving trends across the portfolio drove lower charge-offs.
|
Table 49
|
|||||||||||||||||||||||||||
|
Commercial Net Charge-offs and Related Ratios
|
|||||||||||||||||||||||||||
|
Net Charge-offs
|
Net Charge-off Ratios
(1)
|
||||||||||||||||||||||||||
|
Three Months Ended
June 30 |
Six Months Ended
June 30 |
Three Months Ended
June 30 |
Six Months Ended
June 30 |
||||||||||||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
|||||||||||||||||||
|
U.S. commercial
|
$
|
6
|
|
$
|
43
|
|
$
|
11
|
|
$
|
88
|
|
0.01
|
%
|
0.09
|
%
|
0.01
|
%
|
0.09
|
%
|
|||||||
|
Commercial real estate
|
(32
|
)
|
44
|
|
(69
|
)
|
137
|
|
(0.27
|
)
|
0.43
|
|
(0.29
|
)
|
0.69
|
|
|||||||||||
|
Commercial lease financing
|
(5
|
)
|
(5
|
)
|
(7
|
)
|
(15
|
)
|
(0.07
|
)
|
(0.08
|
)
|
(0.05
|
)
|
(0.13
|
)
|
|||||||||||
|
Non-U.S. commercial
|
12
|
|
16
|
|
31
|
|
1
|
|
0.06
|
|
0.08
|
|
0.07
|
|
—
|
|
|||||||||||
|
|
(19
|
)
|
98
|
|
(34
|
)
|
211
|
|
(0.02
|
)
|
0.11
|
|
(0.02
|
)
|
0.12
|
|
|||||||||||
|
U.S. small business commercial
|
78
|
|
98
|
|
142
|
|
200
|
|
2.34
|
|
3.15
|
|
2.14
|
|
3.24
|
|
|||||||||||
|
Total commercial
|
$
|
59
|
|
$
|
196
|
|
$
|
108
|
|
$
|
411
|
|
0.06
|
|
0.22
|
|
0.06
|
|
0.23
|
|
|||||||
|
(1)
|
Net charge-off ratios are calculated as annualized net charge-offs divided by average outstanding loans and leases excluding loans accounted for under the fair value option.
|
Table
50
presents commercial credit exposure by type for utilized, unfunded and total binding committed credit exposure. Commercial utilized credit exposure includes standby letters of credit (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 committed credit exposure
increased
$12.6 billion
during the
six months ended June 30, 2014
primarily driven by increases in unfunded loans and leases.
Total commercial utilized credit exposure
increased
$376 million
during the
six months ended June 30, 2014
primarily driven by loans and leases, derivative assets and commercial letters of credit, partially offset by decreased SBLCs and financial guarantees. The utilization rate for loans and leases, SBLCs and financial guarantees, commercial letters of credit and bankers' acceptances, in the aggregate, was
58 percent
at both
June 30, 2014
and
December 31, 2013
.
|
Table 50
|
|||||||||||||||||||||||
|
Commercial Credit Exposure by Type
|
|||||||||||||||||||||||
|
|
Commercial Utilized
(1)
|
Commercial Unfunded
(2, 3)
|
Total Commercial Committed
|
||||||||||||||||||||
|
(Dollars in millions)
|
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
|||||||||||||||||
|
Loans and leases
|
$
|
397,426
|
|
$
|
396,283
|
|
$
|
318,407
|
|
$
|
307,478
|
|
$
|
715,833
|
|
$
|
703,761
|
|
|||||
|
Derivative assets
(4)
|
47,892
|
|
47,495
|
|
—
|
|
—
|
|
47,892
|
|
47,495
|
|
|||||||||||
|
Standby letters of credit and financial guarantees
|
34,255
|
|
35,893
|
|
907
|
|
1,334
|
|
35,162
|
|
37,227
|
|
|||||||||||
|
Debt securities and other investments
|
18,755
|
|
18,505
|
|
7,978
|
|
6,903
|
|
26,733
|
|
25,408
|
|
|||||||||||
|
Loans held-for-sale
|
6,317
|
|
6,604
|
|
815
|
|
101
|
|
7,132
|
|
6,705
|
|
|||||||||||
|
Commercial letters of credit
|
2,430
|
|
2,054
|
|
448
|
|
515
|
|
2,878
|
|
2,569
|
|
|||||||||||
|
Bankers' acceptances
|
375
|
|
246
|
|
—
|
|
—
|
|
375
|
|
246
|
|
|||||||||||
|
Foreclosed properties and other
|
420
|
|
414
|
|
—
|
|
—
|
|
420
|
|
414
|
|
|||||||||||
|
Total
|
$
|
507,870
|
|
$
|
507,494
|
|
$
|
328,555
|
|
$
|
316,331
|
|
$
|
836,425
|
|
$
|
823,825
|
|
|||||
|
(1)
|
Total commercial utilized exposure includes loans of
$8.7 billion
and
$7.9 billion
and issued letters of credit accounted for under the fair value option with a notional amount of
$553 million
and
$503 million
at
June 30, 2014
and
December 31, 2013
.
|
|
(2)
|
Total commercial unfunded exposure includes loan commitments accounted for under the fair value option with a notional amount of
$9.5 billion
and
$12.5 billion
at
June 30, 2014
and
December 31, 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
$41.2 billion
and
$47.3 billion
at
June 30, 2014
and
December 31, 2013
. Not reflected in utilized and committed exposure is additional derivative collateral held of
$16.3 billion
and $17.1 billion which consists primarily of other marketable securities.
|
103
Table
51
presents commercial utilized reservable criticized exposure by product 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
$431 million
during the
six months ended June 30, 2014
primarily in the commercial real estate and non-U.S. commercial portfolios driven largely by paydowns, charge-offs and upgrades outpacing downgrades. Approximately 84 percent of commercial utilized reservable criticized exposure was secured at both
June 30, 2014
and
December 31, 2013
.
|
Table 51
|
|||||||||||||
|
Commercial Utilized Reservable Criticized Exposure
|
|||||||||||||
|
|
June 30, 2014
|
December 31, 2013
|
|||||||||||
|
(Dollars in millions)
|
Amount
(1)
|
Percent
(2)
|
Amount
(1)
|
Percent
(2)
|
|||||||||
|
U.S. commercial
|
$
|
8,391
|
|
3.41
|
%
|
$
|
8,362
|
|
3.45
|
%
|
|||
|
Commercial real estate
|
1,230
|
|
2.54
|
|
1,452
|
|
2.92
|
|
|||||
|
Commercial lease financing
|
987
|
|
4.02
|
|
988
|
|
3.92
|
|
|||||
|
Non-U.S. commercial
|
1,287
|
|
1.40
|
|
1,424
|
|
1.49
|
|
|||||
|
|
11,895
|
|
2.89
|
|
12,226
|
|
2.96
|
|
|||||
|
U.S. small business commercial
|
535
|
|
3.94
|
|
635
|
|
4.77
|
|
|||||
|
Total commercial utilized reservable criticized exposure
|
$
|
12,430
|
|
2.92
|
|
$
|
12,861
|
|
3.02
|
|
|||
|
(1)
|
Total commercial utilized reservable criticized exposure includes loans and leases of
$11.0 billion
and
$11.5 billion
and commercial letters of credit of
$1.4 billion
and
$1.4 billion
at
June 30, 2014
and
December 31, 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
June 30, 2014
, 62 percent of the U.S. commercial loan portfolio, excluding small business, was managed in
Global Banking,
17 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
$5.5 billion
during the
six months ended June 30, 2014
with growth primarily from middle-market clients. Nonperforming loans and leases
increased
$30 million
, or
four percent
, during the
six months ended June 30, 2014
. Net charge-offs
decreased
$37 million
and
$77 million
for the
three and six months ended June 30, 2014
compared to the
same periods in 2013
.
104
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
June 30, 2014
and
December 31, 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
$1.1 billion
, or
two percent
, during the
six months ended June 30, 2014
primarily due to payoffs and portfolio sales.
For the
three and six months ended June 30, 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 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
$83 million
, or
20 percent
, and reservable criticized balances
decreased
$222 million
, or
15 percent
, during the
six months ended June 30, 2014
. Net charge-offs
decreased
$76 million
to a net recovery of
$32 million
, and
$206 million
to a net recovery of
$69 million
for the
three and six months ended June 30, 2014
compared to the
same periods in 2013
.
Table
52
presents outstanding commercial real estate loans by geographic region, based on the geographic location of the collateral, and by property type.
|
Table 52
|
|||||||
|
Outstanding Commercial Real Estate Loans
|
|||||||
|
(Dollars in millions)
|
June 30
2014 |
December 31
2013 |
|||||
|
By Geographic Region
|
|
|
|||||
|
California
|
$
|
10,405
|
|
$
|
10,358
|
|
|
|
Northeast
|
8,497
|
|
9,487
|
|
|||
|
Southwest
|
6,674
|
|
6,913
|
|
|||
|
Southeast
|
5,412
|
|
5,314
|
|
|||
|
Florida
|
3,124
|
|
3,030
|
|
|||
|
Midwest
|
3,085
|
|
3,109
|
|
|||
|
Illinois
|
2,500
|
|
2,319
|
|
|||
|
Northwest
|
2,235
|
|
2,037
|
|
|||
|
Midsouth
|
1,815
|
|
2,013
|
|
|||
|
Non-U.S.
|
1,319
|
|
1,582
|
|
|||
|
Other
(1)
|
1,749
|
|
1,731
|
|
|||
|
Total outstanding commercial real estate loans
|
$
|
46,815
|
|
$
|
47,893
|
|
|
|
By Property Type
|
|
|
|||||
|
Non-residential
|
|||||||
|
Office
|
$
|
12,515
|
|
$
|
12,799
|
|
|
|
Multi-family rental
|
8,505
|
|
8,559
|
|
|||
|
Shopping centers/retail
|
7,353
|
|
7,470
|
|
|||
|
Industrial/warehouse
|
4,563
|
|
4,522
|
|
|||
|
Hotels/motels
|
3,755
|
|
3,926
|
|
|||
|
Multi-use
|
1,785
|
|
1,960
|
|
|||
|
Land and land development
|
644
|
|
855
|
|
|||
|
Other
|
6,160
|
|
6,283
|
|
|||
|
Total non-residential
|
45,280
|
|
46,374
|
|
|||
|
Residential
|
1,535
|
|
1,519
|
|
|||
|
Total outstanding commercial real estate loans
|
$
|
46,815
|
|
$
|
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.
|
105
Tables
53
and
54
present commercial real estate credit quality data by non-residential and residential property types. The residential portfolio presented in Tables
52
,
53
and
54
includes condominiums and other residential real estate. Other property types in Tables
52
,
53
and
54
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 53
|
|||||||||||||||
|
Commercial Real Estate Credit Quality Data
|
|||||||||||||||
|
Nonperforming Loans and
Foreclosed Properties
(1)
|
Utilized Reservable
Criticized Exposure
(2)
|
||||||||||||||
|
(Dollars in millions)
|
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
|||||||||||
|
Non-residential
|
|
|
|
|
|||||||||||
|
Office
|
$
|
84
|
|
$
|
96
|
|
$
|
330
|
|
$
|
367
|
|
|||
|
Multi-family rental
|
26
|
|
15
|
|
198
|
|
234
|
|
|||||||
|
Shopping centers/retail
|
50
|
|
57
|
|
133
|
|
144
|
|
|||||||
|
Industrial/warehouse
|
15
|
|
22
|
|
120
|
|
119
|
|
|||||||
|
Hotels/motels
|
3
|
|
5
|
|
66
|
|
38
|
|
|||||||
|
Multi-use
|
14
|
|
19
|
|
67
|
|
157
|
|
|||||||
|
Land and land development
|
59
|
|
73
|
|
71
|
|
92
|
|
|||||||
|
Other
|
19
|
|
23
|
|
175
|
|
173
|
|
|||||||
|
Total non-residential
|
270
|
|
310
|
|
1,160
|
|
1,324
|
|
|||||||
|
Residential
|
59
|
|
102
|
|
70
|
|
128
|
|
|||||||
|
Total commercial real estate
|
$
|
329
|
|
$
|
412
|
|
$
|
1,230
|
|
$
|
1,452
|
|
|||
|
(1)
|
Includes commercial foreclosed properties of
$77 million
and $
90 million
at
June 30, 2014
and
December 31, 2013
.
|
|
(2)
|
Includes loans, SBLCs and bankers' acceptances and excludes loans accounted for under the fair value option.
|
|
Table 54
|
|||||||||||||||||||||||||||
|
Commercial Real Estate Net Charge-offs and Related Ratios
|
|||||||||||||||||||||||||||
|
Net Charge-offs
|
Net Charge-off Ratios
(1)
|
||||||||||||||||||||||||||
|
Three Months Ended June 30
|
Six Months Ended June 30
|
Three Months Ended June 30
|
Six Months Ended June 30
|
||||||||||||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
|||||||||||||||||||
|
Non-residential
|
|
|
|
|
|||||||||||||||||||||||
|
Office
|
$
|
—
|
|
$
|
—
|
|
$
|
(1
|
)
|
$
|
28
|
|
—
|
%
|
—
|
%
|
(0.02
|
)%
|
0.57
|
%
|
|||||||
|
Multi-family rental
|
(6
|
)
|
2
|
|
(11
|
)
|
4
|
|
(0.30
|
)
|
0.13
|
|
(0.26
|
)
|
0.11
|
|
|||||||||||
|
Shopping centers/retail
|
1
|
|
(3
|
)
|
3
|
|
7
|
|
0.02
|
|
(0.22
|
)
|
0.07
|
|
0.23
|
|
|||||||||||
|
Industrial/warehouse
|
1
|
|
8
|
|
(2
|
)
|
18
|
|
0.06
|
|
0.82
|
|
(0.08
|
)
|
0.95
|
|
|||||||||||
|
Hotels/motels
|
—
|
|
13
|
|
—
|
|
18
|
|
—
|
|
1.56
|
|
—
|
|
1.13
|
|
|||||||||||
|
Multi-use
|
—
|
|
2
|
|
(9
|
)
|
6
|
|
—
|
|
0.49
|
|
(0.94
|
)
|
0.56
|
|
|||||||||||
|
Land and land development
|
(1
|
)
|
12
|
|
—
|
|
24
|
|
(0.21
|
)
|
5.12
|
|
—
|
|
4.79
|
|
|||||||||||
|
Other
|
(12
|
)
|
(10
|
)
|
(34
|
)
|
(10
|
)
|
(0.68
|
)
|
(0.76
|
)
|
(1.04
|
)
|
(0.37
|
)
|
|||||||||||
|
Total non-residential
|
(17
|
)
|
24
|
|
(54
|
)
|
95
|
|
(0.15
|
)
|
0.24
|
|
(0.23
|
)
|
0.50
|
|
|||||||||||
|
Residential
|
(15
|
)
|
20
|
|
(15
|
)
|
42
|
|
(3.79
|
)
|
5.21
|
|
(1.89
|
)
|
5.45
|
|
|||||||||||
|
Total commercial real estate
|
$
|
(32
|
)
|
$
|
44
|
|
$
|
(69
|
)
|
$
|
137
|
|
(0.27
|
)
|
0.43
|
|
(0.29
|
)
|
0.69
|
|
|||||||
|
(1)
|
Net charge-off ratios are calculated as annualized net charge-offs divided by average outstanding loans excluding loans accounted for under the fair value option.
|
At
June 30, 2014
, total committed non-residential exposure was $65.9 billion compared to $68.6 billion at
December 31, 2013
, of which $45.3 billion and $46.4 billion were funded secured loans. Non-residential nonperforming loans and foreclosed properties
declined
$40 million
, or
13 percent
, to
$270 million
at
June 30, 2014
compared to
$310 million
at
December 31, 2013
, which represented 0.60 percent and 0.67 percent of total non-residential loans and foreclosed properties. The decline in nonperforming loans and foreclosed properties in the non-residential portfolio was driven by decreases across most property types. Non-residential utilized reservable criticized exposure
decreased
$164 million
, or
12 percent
, to
$1.2 billion
at
June 30, 2014
compared to
$1.3 billion
at
December 31, 2013
, which represented 2.48 percent and 2.75 percent of non-residential utilized reservable exposure. For the non-residential portfolio, net charge-offs
decreased
$41 million
to a net recovery of
$17 million
, and
$149 million
to a net recovery of
$54 million
for the
three and six months
106
ended June 30, 2014
compared to the
same periods in 2013
primarily due to lower levels of criticized and nonperforming assets as well as recoveries of prior period charge-offs.
At
June 30, 2014
, total committed residential exposure was $3.2 billion compared to $3.1 billion at
December 31, 2013
of which $1.5 billion were funded secured loans for both periods. Residential nonperforming loans and foreclosed properties
decreased
$43 million
, or
42 percent
, during the
six months ended June 30, 2014
due to repayments, sales and loan restructuring. Residential utilized reservable criticized exposure
decreased
$58 million
, or
45 percent
, during the
six months ended June 30, 2014
due to continued resolution of criticized exposure. The nonperforming loans, leases and foreclosed properties and the utilized reservable criticized ratios for the residential portfolio were 3.84 percent and 4.27 percent at
June 30, 2014
compared to 6.65 percent and 7.81 percent at
December 31, 2013
. Residential portfolio net charge-offs
decreased
$35 million
and
$57 million
for the
three and six months ended June 30, 2014
compared to the
same periods in 2013
.
At
June 30, 2014
and
December 31, 2013
, the commercial real estate loan portfolio included $6.9 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 development loans totaled $269 million and $431 million, and nonperforming construction and land development loans and foreclosed properties totaled $78 million and $100 million at
June 30, 2014
and
December 31, 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
June 30, 2014
, 72 percent of the non-U.S. commercial loan portfolio was managed in
Global Banking
and 28 percent in
Global Markets
. Outstanding loans, excluding loans accounted for under the fair value option,
decreased
$3.8 billion
during the
six months ended June 30, 2014
primarily due to decreased client financing activity. Net charge-offs were
$12 million
and
$31 million
for the
three and six months ended June 30, 2014
compared to
$16 million
and
$1 million
for the
same periods in 2013
. For more information on the non-U.S. commercial portfolio, see
Non-U.S. Portfolio
on page
113
.
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
June 30, 2014
and
December 31, 2013
. Net charge-offs were
$78 million
and
$142 million
for the
three and six months ended June 30, 2014
compared to
$98 million
and
$200 million
for the
same periods in 2013
. The decrease was 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, 68 percent and 74 percent were credit card-related products for the
three and six months ended June 30, 2014
compared to 72 percent and 74 percent for the
same periods in 2013
.
Commercial Loans Accounted for Under the Fair Value Option
The portfolio of commercial loans accounted for under the fair value option is held in
Global Markets
and
Global Banking
. Outstanding commercial loans accounted for under the fair value option
increased
$869 million
to an aggregate fair value of
$8.7 billion
at
June 30, 2014
compared to
December 31, 2013
primarily due to increased corporate borrowings under bank credit facilities. We recorded net gains of $18 million and $35 million during the
three and six months ended June 30, 2014
compared to no net gains or losses and net gains of $46 million for the
same periods 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
$330 million
and
$354 million
at
June 30, 2014
and
December 31, 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
$10.1 billion
and
$13.0 billion
at
June 30, 2014
and
December 31, 2013
. We recorded net gains of
$5 million
and
$14 million
during the
three and six months ended June 30, 2014
compared to net losses of
$19 million
and net gains of
$46 million
for the
same periods in 2013
from changes in the fair value of commitments and letters of credit. 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.
107
Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity
Table
55
presents the nonperforming commercial loans, leases and foreclosed properties activity during the
three and six months ended June 30, 2014
and
2013
. Nonperforming loans do not include loans accounted for under the fair value option. During the
three and six months ended June 30, 2014
, nonperforming commercial loans and leases
decreased
$49 million
and
$93 million
to
$1.2 billion
driven by paydowns, returns to performing status and charge-offs outpacing new nonperforming loans. Approximately 92 percent of commercial nonperforming loans, leases and foreclosed properties were secured and approximately 48 percent were contractually current. Commercial nonperforming loans were carried at approximately 72 percent of their unpaid principal balance before consideration of the allowance for loan and lease losses as the carrying value of these loans has been reduced to the estimated property value less costs to sell.
|
Table 55
|
|||||||||||||||
|
Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity
(1, 2)
|
|||||||||||||||
|
Three Months Ended June 30
|
Six Months Ended
June 30 |
||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Nonperforming loans and leases, beginning of period
|
$
|
1,265
|
|
$
|
2,734
|
|
$
|
1,309
|
|
$
|
3,224
|
|
|||
|
Additions to nonperforming loans and leases:
|
|||||||||||||||
|
New nonperforming loans and leases
|
275
|
|
269
|
|
537
|
|
619
|
|
|||||||
|
Advances
|
1
|
|
3
|
|
9
|
|
9
|
|
|||||||
|
Reductions to nonperforming loans and leases:
|
|||||||||||||||
|
Paydowns
|
(183
|
)
|
(312
|
)
|
(354
|
)
|
(640
|
)
|
|||||||
|
Sales
|
(29
|
)
|
(171
|
)
|
(56
|
)
|
(318
|
)
|
|||||||
|
Returns to performing status
(3)
|
(41
|
)
|
(243
|
)
|
(104
|
)
|
(410
|
)
|
|||||||
|
Charge-offs
|
(71
|
)
|
(170
|
)
|
(121
|
)
|
(347
|
)
|
|||||||
|
Transfers to foreclosed properties
(4)
|
(1
|
)
|
(7
|
)
|
(4
|
)
|
(28
|
)
|
|||||||
|
Transfers to loans held-for-sale
|
—
|
|
—
|
|
—
|
|
(6
|
)
|
|||||||
|
Total net reductions to nonperforming loans and leases
|
(49
|
)
|
(631
|
)
|
(93
|
)
|
(1,121
|
)
|
|||||||
|
Total nonperforming loans and leases, June 30
|
1,216
|
|
2,103
|
|
1,216
|
|
2,103
|
|
|||||||
|
Foreclosed properties, beginning of period
|
85
|
|
206
|
|
90
|
|
250
|
|
|||||||
|
Additions to foreclosed properties:
|
|
||||||||||||||
|
New foreclosed properties
(4)
|
1
|
|
3
|
|
3
|
|
15
|
|
|||||||
|
Reductions to foreclosed properties:
|
|||||||||||||||
|
Sales
|
(8
|
)
|
(76
|
)
|
(13
|
)
|
(120
|
)
|
|||||||
|
Write-downs
|
(1
|
)
|
(4
|
)
|
(3
|
)
|
(16
|
)
|
|||||||
|
Total net reductions to foreclosed properties
|
(8
|
)
|
(77
|
)
|
(13
|
)
|
(121
|
)
|
|||||||
|
Total foreclosed properties, June 30
|
77
|
|
129
|
|
77
|
|
129
|
|
|||||||
|
Nonperforming commercial loans, leases and foreclosed properties, June 30
|
$
|
1,293
|
|
$
|
2,232
|
|
$
|
1,293
|
|
$
|
2,232
|
|
|||
|
Nonperforming commercial loans and leases as a percentage of outstanding commercial loans and leases
(5)
|
0.31
|
%
|
0.57
|
%
|
|||||||||||
|
Nonperforming commercial loans, leases and foreclosed properties as a percentage of outstanding commercial loans, leases and foreclosed properties
(5)
|
0.33
|
|
0.60
|
|
|||||||||||
|
(1)
|
Balances do not include nonperforming LHFS of $256 million and $337 million at
June 30, 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.
|
108
Table
56
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 56
|
|||||||||||||||||||||||
|
Commercial Troubled Debt Restructurings
|
|||||||||||||||||||||||
|
|
June 30, 2014
|
December 31, 2013
|
|||||||||||||||||||||
|
(Dollars in millions)
|
Total
|
Non-performing
|
Performing
|
Total
|
Non-performing
|
Performing
|
|||||||||||||||||
|
U.S. commercial
|
$
|
1,336
|
|
$
|
301
|
|
$
|
1,035
|
|
$
|
1,318
|
|
$
|
298
|
|
$
|
1,020
|
|
|||||
|
Commercial real estate
|
661
|
|
121
|
|
540
|
|
835
|
|
198
|
|
637
|
|
|||||||||||
|
Non-U.S. commercial
|
46
|
|
2
|
|
44
|
|
48
|
|
38
|
|
10
|
|
|||||||||||
|
U.S. small business commercial
|
54
|
|
—
|
|
54
|
|
88
|
|
—
|
|
88
|
|
|||||||||||
|
Total commercial troubled debt restructurings
|
$
|
2,097
|
|
$
|
424
|
|
$
|
1,673
|
|
$
|
2,289
|
|
$
|
534
|
|
$
|
1,755
|
|
|||||
|
Industry Concentrations
|
Table
57
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
$12.6 billion
, or two percent, to
$836.4 billion
during the
six months ended June 30, 2014
. The
increase
in commercial committed exposure was concentrated in healthcare equipment and services, banking and diversified financials, partially offset by lower exposure to real estate.
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's Credit Risk Committee (CRC) oversees industry limit governance.
Diversified financials, our largest industry concentration with committed exposure of $120.7 billion, experienced an
increase
in committed exposure of
$2.6 billion
, or
two percent
, during the
six months ended June 30, 2014
. The increase was primarily in asset management, investment banking and brokerage.
Real estate, our second largest industry concentration with committed exposure of $74.5 billion, decreased $1.9 billion, or two percent, during the
six months ended June 30, 2014
. Real estate construction and land development exposure represented 14 percent of the total real estate industry committed exposure at
June 30, 2014
and
December 31, 2013
. For more information on commercial real estate and related portfolios, see
Commercial Portfolio Credit Risk Management – Commercial Real Estate
on page
105
.
Committed exposure to the healthcare equipment and services industry increased $6.7 billion, or 14 percent, during the
six months ended June 30, 2014
primarily driven by bridge financing for acquisitions. Banking industry committed exposure increased $3.0 billion, or six percent, during the
six months ended June 30, 2014
primarily related to mortgage banking. Utilities committed exposure increased $1.3 billion, or five percent, during the
six months ended June 30, 2014
primarily driven by gas utilities. Food, beverage and tobacco committed exposure increased $1.3 billion, or four percent, during the
six months ended June 30, 2014
primarily reflecting higher packaged foods exposure. Telecommunication services committed exposure decreased $1.2 billion, or 11 percent, during the
six months ended June 30, 2014
primarily as a result of paydowns.
Our committed state and municipal exposure of $37.0 billion at
June 30, 2014
consisted of $30.5 billion of commercial utilized exposure (including $18.8 billion of funded loans, $6.7 billion of SBLCs and $2.0 billion of derivative assets) and $6.5 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
57
. With the economy gradually strengthening, most state and local governments are experiencing improved fiscal circumstances 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.
109
|
Table 57
|
|||||||||||||||
|
Commercial Credit Exposure by Industry
(1)
|
|||||||||||||||
|
|
Commercial
Utilized
|
Total Commercial
Committed
|
|||||||||||||
|
(Dollars in millions)
|
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
|||||||||||
|
Diversified financials
|
$
|
72,302
|
|
$
|
76,673
|
|
$
|
120,705
|
|
$
|
118,092
|
|
|||
|
Real estate
(2)
|
52,982
|
|
54,336
|
|
74,535
|
|
76,418
|
|
|||||||
|
Healthcare equipment and services
|
32,410
|
|
30,828
|
|
55,737
|
|
49,063
|
|
|||||||
|
Retailing
|
33,941
|
|
32,859
|
|
54,983
|
|
54,616
|
|
|||||||
|
Capital goods
|
28,921
|
|
28,016
|
|
53,444
|
|
52,849
|
|
|||||||
|
Banking
|
42,543
|
|
41,399
|
|
51,100
|
|
48,078
|
|
|||||||
|
Government and public education
|
40,174
|
|
40,253
|
|
47,613
|
|
48,322
|
|
|||||||
|
Materials
|
23,292
|
|
22,384
|
|
42,809
|
|
42,699
|
|
|||||||
|
Energy
|
20,744
|
|
19,739
|
|
40,826
|
|
41,156
|
|
|||||||
|
Consumer services
|
21,414
|
|
21,080
|
|
34,391
|
|
34,217
|
|
|||||||
|
Food, beverage and tobacco
|
15,357
|
|
14,437
|
|
31,792
|
|
30,541
|
|
|||||||
|
Commercial services and supplies
|
19,259
|
|
19,770
|
|
31,013
|
|
32,007
|
|
|||||||
|
Utilities
|
9,898
|
|
9,253
|
|
26,549
|
|
25,243
|
|
|||||||
|
Transportation
|
16,227
|
|
15,280
|
|
23,787
|
|
22,595
|
|
|||||||
|
Media
|
11,801
|
|
13,070
|
|
23,283
|
|
22,655
|
|
|||||||
|
Individuals and trusts
|
15,790
|
|
14,864
|
|
19,811
|
|
18,681
|
|
|||||||
|
Technology hardware and equipment
|
6,883
|
|
6,166
|
|
13,428
|
|
12,733
|
|
|||||||
|
Software and services
|
6,296
|
|
6,814
|
|
13,360
|
|
14,172
|
|
|||||||
|
Pharmaceuticals and biotechnology
|
4,534
|
|
6,455
|
|
13,221
|
|
13,986
|
|
|||||||
|
Insurance, including monolines
|
4,827
|
|
5,926
|
|
11,075
|
|
12,203
|
|
|||||||
|
Consumer durables and apparel
|
5,793
|
|
5,427
|
|
10,274
|
|
9,757
|
|
|||||||
|
Telecommunication services
|
4,269
|
|
4,541
|
|
10,207
|
|
11,423
|
|
|||||||
|
Automobiles and components
|
3,446
|
|
3,165
|
|
9,000
|
|
8,424
|
|
|||||||
|
Food and staples retailing
|
4,079
|
|
3,950
|
|
7,831
|
|
7,909
|
|
|||||||
|
Religious and social organizations
|
5,144
|
|
5,452
|
|
6,965
|
|
7,677
|
|
|||||||
|
Other
|
5,544
|
|
5,357
|
|
8,686
|
|
8,309
|
|
|||||||
|
Total commercial credit exposure by industry
|
$
|
507,870
|
|
$
|
507,494
|
|
$
|
836,425
|
|
$
|
823,825
|
|
|||
|
Net credit default protection purchased on total commitments
(3)
|
|
|
$
|
(8,678
|
)
|
$
|
(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
111
.
|
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 collateralized debt obligations (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
55
and
Note 7 – Representations and Warranties Obligations and Corporate Guarantees
to the Consolidated Financial Statements
.
110
Table
58
presents the notional amount of our monoline derivative credit exposure, mark-to-market adjustment and the counterparty credit valuation adjustment. The notional amount of monoline exposure
decreased
$871 million
during the
six months ended June 30, 2014
due to terminations, paydowns and maturities of monoline contracts.
|
Table 58
|
|||||||||||||||
|
Derivative Credit Exposures
|
|||||||||||||||
|
(Dollars in millions)
|
June 30
2014 |
December 31
2013 |
|||||||||||||
|
Notional amount of monoline exposure
|
$
|
9,760
|
|
$
|
10,631
|
|
|||||||||
|
Mark-to-market
|
$
|
78
|
|
$
|
97
|
|
|||||||||
|
Counterparty credit valuation adjustment
|
(10
|
)
|
(15
|
)
|
|||||||||||
|
Net mark-to-market
|
$
|
68
|
|
$
|
82
|
|
|||||||||
|
Three Months Ended
June 30 |
Six Months Ended
June 30 |
||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
||||||||||||
|
Gains from credit valuation changes
|
$
|
1
|
|
$
|
19
|
|
$
|
3
|
|
$
|
45
|
|
|||
|
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
June 30, 2014
and
December 31, 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
$8.7 billion
and
$8.1 billion
. We recorded net losses of $72 million and $102 million for the
three and six months ended June 30, 2014
compared to net losses of $63 million and $129 million for the
same periods in 2013
on these positions. The losses on these instruments were offset by gains on the related exposures. The VaR results for these exposures are included in the fair value option portfolio information in
Table 68
. For additional information, see
Trading Risk Management
on page
122
.
Tables
59
and
60
present the maturity profiles and the credit exposure debt ratings of the net credit default protection portfolio at
June 30, 2014
and
December 31, 2013
.
|
Table 59
|
|||||
|
Net Credit Default Protection by Maturity
|
|||||
|
June 30
2014 |
December 31
2013 |
||||
|
Less than or equal to one year
|
40
|
%
|
35
|
%
|
|
|
Greater than one year and less than or equal to five years
|
58
|
|
63
|
|
|
|
Greater than five years
|
2
|
|
2
|
|
|
|
Total net credit default protection
|
100
|
%
|
100
|
%
|
|
111
|
Table 60
|
|||||||||||||
|
Net Credit Default Protection by Credit Exposure Debt Rating
|
|||||||||||||
|
(Dollars in millions)
|
June 30, 2014
|
December 31, 2013
|
|||||||||||
|
Ratings
(1, 2)
|
Net
Notional
(3)
|
Percent of
Total
|
Net
Notional
(3)
|
Percent of
Total
|
|||||||||
|
AA
|
$
|
(77
|
)
|
0.9
|
%
|
$
|
(7
|
)
|
0.1
|
%
|
|||
|
A
|
(1,890
|
)
|
21.8
|
|
(2,560
|
)
|
31.7
|
|
|||||
|
BBB
|
(4,885
|
)
|
56.3
|
|
(3,880
|
)
|
48.0
|
|
|||||
|
BB
|
(1,089
|
)
|
12.5
|
|
(1,137
|
)
|
14.1
|
|
|||||
|
B
|
(634
|
)
|
7.3
|
|
(452
|
)
|
5.6
|
|
|||||
|
CCC and below
|
(125
|
)
|
1.4
|
|
(115
|
)
|
1.4
|
|
|||||
|
NR
(4)
|
22
|
|
(0.2
|
)
|
66
|
|
(0.9
|
)
|
|||||
|
Total net credit default protection
|
$
|
(8,678
|
)
|
100.0
|
%
|
$
|
(8,085
|
)
|
100.0
|
%
|
|||
|
(1)
|
Ratings are refreshed on a quarterly basis.
|
|
(2)
|
Ratings of BBB- or higher are considered to meet the definition of investment grade.
|
|
(3)
|
Represents net credit default protection (purchased) sold.
|
|
(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
61
presents the total contract/notional amount of credit derivatives outstanding and includes both purchased and written credit derivatives. The credit risk amounts are measured as net asset exposure by counterparty, taking into consideration all contracts with the counterparty. For more information on our written credit derivatives, see
Note 2 – Derivatives
to the Consolidated Financial Statements
.
The credit risk amounts discussed above and presented in Table
61
take into consideration the effects of legally enforceable master netting agreements while amounts disclosed in
Note 2 – Derivatives
to the Consolidated Financial Statements
are shown on a gross basis. Credit risk reflects the potential benefit from offsetting exposure to non-credit derivative products with the same counterparties that may be netted upon the occurrence of certain events, thereby reducing our overall exposure.
|
Table 61
|
|||||||||||||||
|
Credit Derivatives
|
|||||||||||||||
|
|
June 30, 2014
|
December 31, 2013
|
|||||||||||||
|
(Dollars in millions)
|
Contract/
Notional
|
Credit Risk
|
Contract/
Notional
|
Credit Risk
|
|||||||||||
|
Purchased credit derivatives:
|
|
|
|
|
|||||||||||
|
Credit default swaps
|
$
|
1,263,330
|
|
$
|
4,784
|
|
$
|
1,305,090
|
|
$
|
6,042
|
|
|||
|
Total return swaps/other
|
64,886
|
|
501
|
|
38,094
|
|
402
|
|
|||||||
|
Total purchased credit derivatives
|
$
|
1,328,216
|
|
$
|
5,285
|
|
$
|
1,343,184
|
|
$
|
6,444
|
|
|||
|
Written credit derivatives:
|
|
|
|
|
|
||||||||||
|
Credit default swaps
|
$
|
1,223,840
|
|
n/a
|
|
$
|
1,265,380
|
|
n/a
|
|
|||||
|
Total return swaps/other
|
78,808
|
|
n/a
|
|
63,407
|
|
n/a
|
|
|||||||
|
Total written credit derivatives
|
$
|
1,302,648
|
|
n/a
|
|
$
|
1,328,787
|
|
n/a
|
|
|||||
112
|
Counterparty Credit Risk Valuation Adjustments
|
We record counterparty credit risk valuation adjustments on certain derivative assets, including our credit default protection purchased, in order to properly reflect the credit risk of the counterparty. 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 62
|
|||||||||||||||||||||||||||||||||||||||||||||||
|
Credit Valuation Gains and Losses
|
|||||||||||||||||||||||||||||||||||||||||||||||
|
Gains (Losses)
|
Three Months Ended June 30
|
Six Months Ended June 30
|
|||||||||||||||||||||||||||||||||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
||||||||||||||||||||||||||||||||||||||||||||
|
(Dollars in millions)
|
Gross
|
Hedge
|
Net
|
Gross
|
|
Hedge
|
|
Net
|
Gross
|
Hedge
|
Net
|
Gross
|
|
Hedge
|
|
Net
|
|||||||||||||||||||||||||||||||
|
Credit valuation
|
$
|
266
|
|
$
|
(105
|
)
|
$
|
161
|
|
$
|
143
|
|
$
|
(81
|
)
|
$
|
62
|
|
$
|
318
|
|
$
|
(117
|
)
|
$
|
201
|
|
$
|
12
|
|
$
|
(245
|
)
|
$
|
(233
|
)
|
|||||||||||
|
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 the Country Credit Risk Committee, a subcommittee of the CRC. 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.
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.
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. Derivative 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 less any fair value receivable or payable. Changes in the assumption of an isolated default can produce different results in a particular tranche.
113
Table 63
presents our 20 largest non-U.S. country exposures at
June 30, 2014
. These exposures accounted for
88 percent
of our total non-U.S. exposure at both
June 30, 2014
and
December 31, 2013
. Net country exposure for these 20 countries
increased
$5.2 billion
from
December 31, 2013
driven by higher securities balances in France, Germany and the United Kingdom, increased funded loans and loan equivalents exposure in Hong Kong and France, increased unfunded loan commitments in Singapore, as well as a reduction in hedges in Spain and Italy. These increases were partially offset by a decrease in funded loan and loan equivalents exposure in Italy and Russia, increased hedges in Russia, and decreases in counterparty exposure and securities in Japan.
|
Table 63
|
|||||||||||||||||||||||||||||||
|
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 June 30
2014 |
Hedges and Credit Default Protection
|
Net Country Exposure at June 30
2014 |
Increase (Decrease) from December 31
2013 |
|||||||||||||||||||||||
|
United Kingdom
|
$
|
24,394
|
|
$
|
14,519
|
|
$
|
5,603
|
|
$
|
6,626
|
|
$
|
51,142
|
|
$
|
(3,945
|
)
|
$
|
47,197
|
|
$
|
3,611
|
|
|||||||
|
Canada
|
5,716
|
|
6,818
|
|
1,594
|
|
5,565
|
|
19,693
|
|
(1,580
|
)
|
18,113
|
|
(298
|
)
|
|||||||||||||||
|
China
|
10,866
|
|
701
|
|
588
|
|
1,960
|
|
14,115
|
|
(335
|
)
|
13,780
|
|
859
|
|
|||||||||||||||
|
France
|
2,862
|
|
6,248
|
|
1,218
|
|
7,221
|
|
17,549
|
|
(4,265
|
)
|
13,284
|
|
3,121
|
|
|||||||||||||||
|
Germany
|
4,597
|
|
5,392
|
|
2,187
|
|
5,103
|
|
17,279
|
|
(4,030
|
)
|
13,249
|
|
531
|
|
|||||||||||||||
|
Brazil
|
8,809
|
|
620
|
|
274
|
|
2,865
|
|
12,568
|
|
(392
|
)
|
12,176
|
|
(1,456
|
)
|
|||||||||||||||
|
India
|
6,016
|
|
488
|
|
279
|
|
3,995
|
|
10,778
|
|
(61
|
)
|
10,717
|
|
466
|
|
|||||||||||||||
|
Australia
|
3,648
|
|
3,215
|
|
453
|
|
2,377
|
|
9,693
|
|
(499
|
)
|
9,194
|
|
1,197
|
|
|||||||||||||||
|
Netherlands
|
3,090
|
|
3,665
|
|
529
|
|
1,798
|
|
9,082
|
|
(1,436
|
)
|
7,646
|
|
11
|
|
|||||||||||||||
|
South Korea
|
4,061
|
|
909
|
|
638
|
|
2,216
|
|
7,824
|
|
(543
|
)
|
7,281
|
|
846
|
|
|||||||||||||||
|
Hong Kong
|
5,359
|
|
345
|
|
107
|
|
914
|
|
6,725
|
|
(61
|
)
|
6,664
|
|
1,307
|
|
|||||||||||||||
|
Japan
|
4,143
|
|
477
|
|
677
|
|
1,990
|
|
7,287
|
|
(1,245
|
)
|
6,042
|
|
(2,073
|
)
|
|||||||||||||||
|
Switzerland
|
2,474
|
|
2,937
|
|
757
|
|
565
|
|
6,733
|
|
(1,305
|
)
|
5,428
|
|
(118
|
)
|
|||||||||||||||
|
Singapore
|
1,975
|
|
2,053
|
|
106
|
|
1,271
|
|
5,405
|
|
(77
|
)
|
5,328
|
|
1,499
|
|
|||||||||||||||
|
Italy
|
2,849
|
|
2,008
|
|
1,964
|
|
729
|
|
7,550
|
|
(3,349
|
)
|
4,201
|
|
(1,001
|
)
|
|||||||||||||||
|
Taiwan
|
2,535
|
|
—
|
|
93
|
|
1,363
|
|
3,991
|
|
(4
|
)
|
3,987
|
|
(85
|
)
|
|||||||||||||||
|
Russian Federation
|
5,367
|
|
90
|
|
201
|
|
30
|
|
5,688
|
|
(1,752
|
)
|
3,936
|
|
(2,786
|
)
|
|||||||||||||||
|
Mexico
|
3,334
|
|
645
|
|
149
|
|
99
|
|
4,227
|
|
(400
|
)
|
3,827
|
|
(172
|
)
|
|||||||||||||||
|
Spain
|
2,902
|
|
834
|
|
263
|
|
673
|
|
4,672
|
|
(1,017
|
)
|
3,655
|
|
252
|
|
|||||||||||||||
|
Turkey
|
1,939
|
|
97
|
|
13
|
|
169
|
|
2,218
|
|
(11
|
)
|
2,207
|
|
(486
|
)
|
|||||||||||||||
|
Total top 20 non-U.S. countries exposure
|
$
|
106,936
|
|
$
|
52,061
|
|
$
|
17,693
|
|
$
|
47,529
|
|
$
|
224,219
|
|
$
|
(26,307
|
)
|
$
|
197,912
|
|
$
|
5,225
|
|
|||||||
Russian intervention in Ukraine during
2014
significantly increased regional geopolitical tensions. Net exposure to Russia was reduced to
$3.9 billion
at
June 30, 2014
, concentrated in oil and gas companies and commercial banks. Our exposure to Ukraine 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. The situation remains fluid with potential for further escalation of geopolitical tensions, increased severity of sanctions against Russian interests, and possible Russian counter-measures.
Certain European countries, including Greece, Ireland, Italy, Portugal and Spain, have experienced varying degrees of financial stress in recent years. While market conditions have stabilized, policymakers continue to address fundamental challenges of competitiveness, growth and high unemployment. A return of financial instability in these countries could disrupt financial markets and have a detrimental impact on global economic conditions and sovereign and non-sovereign debt in these countries. 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.
114
Table 64
presents our direct sovereign and non-sovereign exposures in these countries at
June 30, 2014
. Our total sovereign and non-sovereign exposure to these countries was
$14.8 billion
at
June 30, 2014
compared to
$17.1 billion
at
December 31, 2013
. The total exposure to these countries, net of all hedges, was
$10.1 billion
at
June 30, 2014
compared to
$10.4 billion
at
December 31, 2013
. At
June 30, 2014
and
December 31, 2013
, hedges and credit default protection purchased, net of credit default protection sold, was
$4.7 billion
and
$6.8 billion
. Net country exposure remained relatively unchanged from
December 31, 2013
.
|
Table 64
|
|||||||||||||||||||||||||||||||
|
Select European Countries
|
|||||||||||||||||||||||||||||||
|
(Dollars in millions)
|
Funded Loans and Loan Equivalents
|
Unfunded Loan Commitments
|
Net Counterparty Exposure
(1)
|
Securities/ Other Investments
(2)
|
Country Exposure at June 30
2014 |
Hedges and Credit Default Protection
(3)
|
Net Country Exposure at June 30
2014 |
Increase (Decrease) from December 31, 2013
|
|||||||||||||||||||||||
|
Greece
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
|
Sovereign
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
73
|
|
$
|
73
|
|
$
|
—
|
|
$
|
73
|
|
$
|
15
|
|
|||||||
|
Financial institutions
|
—
|
|
—
|
|
4
|
|
22
|
|
26
|
|
(11
|
)
|
15
|
|
18
|
|
|||||||||||||||
|
Corporates
|
11
|
|
13
|
|
—
|
|
39
|
|
63
|
|
(28
|
)
|
35
|
|
(63
|
)
|
|||||||||||||||
|
Total Greece
|
$
|
11
|
|
$
|
13
|
|
$
|
4
|
|
$
|
134
|
|
$
|
162
|
|
$
|
(39
|
)
|
$
|
123
|
|
$
|
(30
|
)
|
|||||||
|
Ireland
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Sovereign
|
$
|
20
|
|
$
|
—
|
|
$
|
17
|
|
$
|
—
|
|
$
|
37
|
|
$
|
(14
|
)
|
$
|
23
|
|
$
|
28
|
|
|||||||
|
Financial institutions
|
765
|
|
52
|
|
139
|
|
95
|
|
1,051
|
|
(17
|
)
|
1,034
|
|
54
|
|
|||||||||||||||
|
Corporates
|
411
|
|
522
|
|
72
|
|
51
|
|
1,056
|
|
(22
|
)
|
1,034
|
|
265
|
|
|||||||||||||||
|
Total Ireland
|
$
|
1,196
|
|
$
|
574
|
|
$
|
228
|
|
$
|
146
|
|
$
|
2,144
|
|
$
|
(53
|
)
|
$
|
2,091
|
|
$
|
347
|
|
|||||||
|
Italy
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Sovereign
|
$
|
18
|
|
$
|
—
|
|
$
|
1,619
|
|
$
|
364
|
|
$
|
2,001
|
|
$
|
(1,639
|
)
|
$
|
362
|
|
$
|
575
|
|
|||||||
|
Financial institutions
|
1,498
|
|
3
|
|
216
|
|
54
|
|
1,771
|
|
(922
|
)
|
849
|
|
(561
|
)
|
|||||||||||||||
|
Corporates
|
1,333
|
|
2,005
|
|
129
|
|
311
|
|
3,778
|
|
(788
|
)
|
2,990
|
|
(1,015
|
)
|
|||||||||||||||
|
Total Italy
|
$
|
2,849
|
|
$
|
2,008
|
|
$
|
1,964
|
|
$
|
729
|
|
$
|
7,550
|
|
$
|
(3,349
|
)
|
$
|
4,201
|
|
$
|
(1,001
|
)
|
|||||||
|
Portugal
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Sovereign
|
$
|
—
|
|
$
|
—
|
|
$
|
21
|
|
$
|
45
|
|
$
|
66
|
|
$
|
(27
|
)
|
$
|
39
|
|
$
|
16
|
|
|||||||
|
Financial institutions
|
5
|
|
—
|
|
5
|
|
20
|
|
30
|
|
(7
|
)
|
23
|
|
125
|
|
|||||||||||||||
|
Corporates
|
27
|
|
28
|
|
—
|
|
79
|
|
134
|
|
(180
|
)
|
(46
|
)
|
13
|
|
|||||||||||||||
|
Total Portugal
|
$
|
32
|
|
$
|
28
|
|
$
|
26
|
|
$
|
144
|
|
$
|
230
|
|
$
|
(214
|
)
|
$
|
16
|
|
$
|
154
|
|
|||||||
|
Spain
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Sovereign
|
$
|
36
|
|
$
|
—
|
|
$
|
68
|
|
$
|
11
|
|
$
|
115
|
|
$
|
(90
|
)
|
$
|
25
|
|
$
|
86
|
|
|||||||
|
Financial institutions
|
1,124
|
|
—
|
|
136
|
|
136
|
|
1,396
|
|
(125
|
)
|
1,271
|
|
323
|
|
|||||||||||||||
|
Corporates
|
1,742
|
|
834
|
|
59
|
|
526
|
|
3,161
|
|
(802
|
)
|
2,359
|
|
(157
|
)
|
|||||||||||||||
|
Total Spain
|
$
|
2,902
|
|
$
|
834
|
|
$
|
263
|
|
$
|
673
|
|
$
|
4,672
|
|
$
|
(1,017
|
)
|
$
|
3,655
|
|
$
|
252
|
|
|||||||
|
Total
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Sovereign
|
$
|
74
|
|
$
|
—
|
|
$
|
1,725
|
|
$
|
493
|
|
$
|
2,292
|
|
$
|
(1,770
|
)
|
$
|
522
|
|
$
|
720
|
|
|||||||
|
Financial institutions
|
3,392
|
|
55
|
|
500
|
|
327
|
|
4,274
|
|
(1,082
|
)
|
3,192
|
|
(41
|
)
|
|||||||||||||||
|
Corporates
|
3,524
|
|
3,402
|
|
260
|
|
1,006
|
|
8,192
|
|
(1,820
|
)
|
6,372
|
|
(957
|
)
|
|||||||||||||||
|
Total select European exposure
|
$
|
6,990
|
|
$
|
3,457
|
|
$
|
2,485
|
|
$
|
1,826
|
|
$
|
14,758
|
|
$
|
(4,672
|
)
|
$
|
10,086
|
|
$
|
(278
|
)
|
|||||||
|
(1)
|
Net counterparty exposure includes the fair value of derivatives, including the counterparty risk associated with CDS, and secured financing transactions. Derivative exposures are presented net of
$1.7 billion
in 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. The notional amount of reverse repurchase transactions was
$7.2 billion
. Counterparty exposure is not presented net of hedges or credit default protection.
|
|
(2)
|
Long securities exposures are netted on a single-name basis to, but not below, zero by short exposures of
$3.8 billion
and net CDS purchased of
$951 million
, consisting of
$663 million
of net single-name CDS purchased and
$288 million
of net indexed and tranched CDS purchased.
|
|
(3)
|
Represents credit default protection purchased, net of credit default protection sold, which is used to mitigate the Corporation's risk to country exposures as listed, and includes
$2.9 billion
to hedge loans and securities, consisting of
$1.5 billion
in net single-name CDS purchased and
$1.4 billion
in net indexed and tranched CDS purchased,
$1.8 billion
in additional credit default protection purchased to hedge derivative assets and
$131 million
in other short exposures.
|
115
The majority of our CDS contracts on reference assets in Greece, Ireland, Italy, Portugal and Spain are with highly-rated financial institutions primarily outside of the Eurozone and we work to limit or eliminate correlated CDS. Due to our engagement in market-making activities, our CDS portfolio contains contracts with various maturities to a diverse set of counterparties. We work to limit mismatches in maturities between our exposures and the CDS we use to hedge them. However, there may be instances where the protection purchased has a different maturity than the exposure for which the protection was purchased, in which case, those exposures and hedges are subject to more active monitoring and management.
Table 65
presents the notional amount and fair value of single-name CDS purchased and sold on reference assets in Greece, Ireland, Italy, Portugal and Spain.
Table 65
includes only single-name CDS netted at the counterparty level, whereas,
Table 64
includes single-name, indexed and tranched CDS exposures netted by the reference asset that they are intended to hedge; therefore, CDS purchased and sold information is not comparable between tables.
|
Table 65
|
|||||||||||||||
|
Single-Name CDS with Reference Assets in Greece, Ireland, Italy, Portugal and Spain
(1)
|
|||||||||||||||
|
June 30, 2014
|
|||||||||||||||
|
Notional
|
Fair Value
|
||||||||||||||
|
(Dollars in billions)
|
Purchased
|
Sold
|
Purchased
|
Sold
|
|||||||||||
|
Greece
|
|||||||||||||||
|
Aggregate
|
$
|
1.2
|
|
$
|
1.2
|
|
$
|
0.1
|
|
$
|
0.1
|
|
|||
|
After netting
(2)
|
0.2
|
|
0.2
|
|
—
|
|
—
|
|
|||||||
|
Ireland
|
|||||||||||||||
|
Aggregate
|
2.2
|
|
2.0
|
|
0.1
|
|
0.1
|
|
|||||||
|
After netting
(2)
|
0.9
|
|
0.7
|
|
0.1
|
|
—
|
|
|||||||
|
Italy
|
|||||||||||||||
|
Aggregate
|
52.6
|
|
47.8
|
|
1.9
|
|
1.3
|
|
|||||||
|
After netting
(2)
|
11.3
|
|
6.5
|
|
0.8
|
|
0.2
|
|
|||||||
|
Portugal
|
|||||||||||||||
|
Aggregate
|
6.6
|
|
6.7
|
|
0.3
|
|
0.3
|
|
|||||||
|
After netting
(2)
|
1.2
|
|
1.3
|
|
—
|
|
0.1
|
|
|||||||
|
Spain
|
|||||||||||||||
|
Aggregate
|
19.4
|
|
19.6
|
|
0.6
|
|
0.6
|
|
|||||||
|
After netting
(2)
|
2.9
|
|
3.1
|
|
0.1
|
|
0.1
|
|
|||||||
|
(1)
|
The majority of our CDS contracts on reference assets in Greece, Ireland, Italy, Portugal and Spain are primarily with non-Eurozone counterparties.
|
|
(2)
|
Amounts listed are after consideration of legally enforceable master netting agreements.
|
Losses could result even if there is credit default protection purchased because the purchased credit protection contracts may only pay out under certain scenarios and thus not all losses may be covered by the credit protection contracts. The effectiveness of our CDS protection as a hedge of these risks is influenced by a number of factors, including the contractual terms of the CDS. Generally, only the occurrence of a credit event as defined by the CDS terms (which may include, among other events, the failure to pay by, or restructuring of, the reference entity) results in a payment under the purchased credit protection contracts. The determination as to whether a credit event has occurred is made by the relevant International Swaps and Derivatives Association, Inc. (ISDA) Determination Committee (comprised of various ISDA member firms) based on the terms of the CDS and facts and circumstances for the event. Accordingly, uncertainties exist as to whether any particular strategy or policy action for addressing the European financial instability would constitute a credit event under the CDS. A voluntary restructuring may not trigger a credit event under CDS terms and consequently may not trigger a payment under the CDS contract.
In addition to our direct sovereign and non-sovereign exposures, a significant deterioration of the European economic recovery could result in material reductions in the value of sovereign debt and other asset classes posted as collateral, disruptions in capital markets, widening of credit spreads of U.S. and non-U.S. financial institutions, loss of investor confidence in the financial services industry, a slowdown in global economic activity and other adverse developments. For more information on the financial instability in Europe, see
Item 1A. Risk Factors of the Corporation's 2013 Annual Report on Form 10-K
.
116
|
Provision for Credit Losses
|
The provision for credit losses
decreased
$800 million
to
$411 million
, and
$1.5 billion
to
$1.4 billion
for the
three and six months ended June 30, 2014
compared to the
same periods in 2013
. The provision for credit losses was
$662 million
and
$1.0 billion
lower than net charge-offs for the
three and six months ended June 30, 2014
, resulting in a reduction in the allowance for credit losses primarily due to continued improvement in the home loans and credit card portfolios, partially offset by an increase in the allowance for the commercial portfolio. This compared to a reduction of
$900 million
and
$1.7 billion
in the allowance for credit losses for the
three and six months ended June 30, 2013
. If the economy and our asset quality continue to improve, we expect net charge-offs to continue to show modest improvement from the second quarter amount of $1.3 billion, which excludes recoveries of
$185 million
on the nonperforming loan sales. We would also expect reserve releases to decline modestly through the balance of 2014.
The provision for credit losses for the consumer portfolio
decreased
$827 million
to
$157 million
, and
$1.7 billion
to
$807 million
for the
three and six months ended June 30, 2014
compared to the
same periods in 2013
, due to continued improvement in the home loans portfolio primarily 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 delinquencies. The provision for credit losses related to the PCI loan portfolios was a
benefit
of
$106 million
for both the
three and six months ended June 30, 2014
compared to a
benefit
of
$252 million
and
$459 million
for the
same periods in 2013
.
The provision for credit losses for the commercial portfolio, including unfunded lending commitments,
increased
$27 million
to
$254 million
, and
$164 million
to
$613 million
for the
three and six months ended June 30, 2014
compared to the
same periods in 2013
due to reserve increases.
|
Allowance for Credit Losses
|
|
Allowance for Loan and Lease Losses
|
The allowance for loan and lease losses is comprised of two components. The first component covers nonperforming commercial loans and TDRs. The second component covers loans and leases on which there are incurred losses that are not yet individually identifiable, as well as incurred losses that may not be represented in the loss forecast models. We evaluate the adequacy of the allowance for loan and lease losses based on the total of these two components, each of which is described in more detail below. The allowance for loan and lease losses excludes LHFS and loans accounted for under the fair value option as the fair value reflects a credit risk component.
The first component of the allowance for loan and lease losses covers both nonperforming commercial loans and all TDRs within the consumer and commercial portfolios. These loans are subject to impairment measurement based on the present value of projected future cash flows discounted at the loan's original effective interest rate, or in certain circumstances, impairment may also be based upon the collateral value or the loan's observable market price if available. Impairment measurement for the renegotiated consumer credit card, small business credit card and unsecured consumer TDR portfolios is based on the present value of projected cash flows discounted using the average portfolio contractual interest rate, excluding promotionally priced loans, in effect prior to restructuring. For purposes of computing this specific loss component of the allowance, larger impaired loans are evaluated individually and smaller impaired loans are evaluated as a pool using historical experience for the respective product types and risk ratings of the loans.
The second component of the allowance for loan and lease losses covers the remaining consumer and commercial loans and leases that have incurred losses that are not yet individually identifiable. The allowance for consumer and certain homogeneous commercial loan and lease products is based on aggregated portfolio evaluations, generally by product type. Loss forecast models are utilized that consider a variety of factors including, but not limited to, historical loss experience, estimated defaults or foreclosures based on portfolio trends, delinquencies, economic trends and credit scores. Our consumer real estate loss forecast model estimates the portion of loans that will default based on individual loan attributes, the most significant of which are refreshed LTV or CLTV, and borrower credit score as well as vintage and geography, all of which are further broken down into current delinquency status. Additionally, we incorporate the delinquency status of underlying first-lien loans on our junior-lien home equity portfolio in our allowance process. Incorporating refreshed LTV and CLTV into our probability of default allows us to factor the impact of changes in home prices into our allowance for loan and lease losses. These loss forecast models are updated on a quarterly basis to incorporate information reflecting the current economic environment. As of
June 30, 2014
, the loss forecast process resulted in reductions in the allowance for all major consumer portfolios.
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
117
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
June 30, 2014
, the allowance increased for all major commercial portfolios.
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 the
three and six months ended June 30, 2014
, the factors that impacted the allowance for loan and lease losses included significant 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
67
, was
$11.3 billion
at
June 30, 2014
, a
decrease
of
$2.1 billion
from
December 31, 2013
. The
decrease
was primarily in the residential mortgage and home equity portfolios due to increased home prices and improved delinquencies as evidenced by improving LTV statistics as presented in Tables
35
and
37
, as well as continued loan balance run-off. In addition, 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
June 30, 2014
from
$2.1 billion
(to
1.91 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
declined
to
$868 million
at
June 30, 2014
from
$1.1 billion
(to
0.98 percent
from
1.14 percent
of outstanding U.S. credit card loans) at
December 31, 2013
.
See Tables
32
,
33
,
42
and
44
for additional details on key credit statistics for the credit card and other unsecured consumer lending portfolios.
The allowance for loan and lease losses for the commercial portfolio, as presented in Table
67
, was
$4.5 billion
at
June 30, 2014
, an
increase
of
$481 million
from
December 31, 2013
. The commercial utilized reservable criticized exposure
decreased
to
$12.4 billion
at
June 30, 2014
from
$12.9 billion
(to
2.92 percent
from
3.02 percent
of total commercial utilized reservable exposure) at
December 31, 2013
. Similarly, nonperforming commercial loans
declined
$93 million
from
December 31, 2013
to
$1.2 billion
at
June 30, 2014
(to
0.31 percent
from
0.34 percent
of outstanding commercial loans). See Tables
48
,
49
and
51
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
1.75 percent
at
June 30, 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
June 30, 2014
and
December 31, 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
1.59 percent
at
June 30, 2014
compared to
1.67 percent
at
December 31, 2013
.
118
Table
66
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 the
three and six months ended June 30, 2014 and 2013
.
|
Table 66
|
|||||||||||||||
|
Allowance for Credit Losses
|
|||||||||||||||
|
Three Months Ended June 30
|
Six Months Ended June 30
|
||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Allowance for loan and lease losses, beginning of period
|
$
|
16,618
|
|
$
|
22,441
|
|
$
|
17,428
|
|
$
|
24,179
|
|
|||
|
Loans and leases charged off
|
|||||||||||||||
|
Residential mortgage
|
(293
|
)
|
(330
|
)
|
(495
|
)
|
(754
|
)
|
|||||||
|
Home equity
|
(339
|
)
|
(606
|
)
|
(733
|
)
|
(1,375
|
)
|
|||||||
|
U.S. credit card
|
(792
|
)
|
(1,104
|
)
|
(1,618
|
)
|
(2,224
|
)
|
|||||||
|
Non-U.S. credit card
|
(96
|
)
|
(137
|
)
|
(194
|
)
|
(282
|
)
|
|||||||
|
Direct/Indirect consumer
|
(106
|
)
|
(187
|
)
|
(241
|
)
|
(412
|
)
|
|||||||
|
Other consumer
|
(57
|
)
|
(61
|
)
|
(126
|
)
|
(124
|
)
|
|||||||
|
Total consumer charge-offs
|
(1,683
|
)
|
(2,425
|
)
|
(3,407
|
)
|
(5,171
|
)
|
|||||||
|
U.S. commercial
(1)
|
(145
|
)
|
(214
|
)
|
(261
|
)
|
(421
|
)
|
|||||||
|
Commercial real estate
|
(3
|
)
|
(92
|
)
|
(10
|
)
|
(198
|
)
|
|||||||
|
Commercial lease financing
|
(1
|
)
|
(1
|
)
|
(2
|
)
|
(2
|
)
|
|||||||
|
Non-U.S. commercial
|
(12
|
)
|
(18
|
)
|
(32
|
)
|
(20
|
)
|
|||||||
|
Total commercial charge-offs
|
(161
|
)
|
(325
|
)
|
(305
|
)
|
(641
|
)
|
|||||||
|
Total loans and leases charged off
|
(1,844
|
)
|
(2,750
|
)
|
(3,712
|
)
|
(5,812
|
)
|
|||||||
|
Recoveries of loans and leases previously charged off
|
|
|
|
||||||||||||
|
Residential mortgage
|
328
|
|
59
|
|
403
|
|
100
|
|
|||||||
|
Home equity
|
100
|
|
120
|
|
192
|
|
205
|
|
|||||||
|
U.S. credit card
|
109
|
|
187
|
|
217
|
|
360
|
|
|||||||
|
Non-U.S. credit card
|
49
|
|
33
|
|
71
|
|
66
|
|
|||||||
|
Direct/Indirect consumer
|
73
|
|
101
|
|
150
|
|
202
|
|
|||||||
|
Other consumer
|
10
|
|
10
|
|
21
|
|
21
|
|
|||||||
|
Total consumer recoveries
|
669
|
|
510
|
|
1,054
|
|
954
|
|
|||||||
|
U.S. commercial
(2)
|
61
|
|
73
|
|
108
|
|
133
|
|
|||||||
|
Commercial real estate
|
35
|
|
48
|
|
79
|
|
61
|
|
|||||||
|
Commercial lease financing
|
6
|
|
6
|
|
9
|
|
17
|
|
|||||||
|
Non-U.S. commercial
|
—
|
|
2
|
|
1
|
|
19
|
|
|||||||
|
Total commercial recoveries
|
102
|
|
129
|
|
197
|
|
230
|
|
|||||||
|
Total recoveries of loans and leases previously charged off
|
771
|
|
639
|
|
1,251
|
|
1,184
|
|
|||||||
|
Net charge-offs
|
(1,073
|
)
|
(2,111
|
)
|
(2,461
|
)
|
(4,628
|
)
|
|||||||
|
Write-offs of PCI loans
|
(160
|
)
|
(313
|
)
|
(551
|
)
|
(1,152
|
)
|
|||||||
|
Provision for loan and lease losses
|
417
|
|
1,220
|
|
1,401
|
|
2,951
|
|
|||||||
|
Other
(3)
|
9
|
|
(2
|
)
|
(6
|
)
|
(115
|
)
|
|||||||
|
Allowance for loan and lease losses, June 30
|
15,811
|
|
21,235
|
|
15,811
|
|
21,235
|
|
|||||||
|
Reserve for unfunded lending commitments, beginning of period
|
509
|
|
486
|
|
484
|
|
513
|
|
|||||||
|
Provision for unfunded lending commitments
|
(6
|
)
|
(9
|
)
|
19
|
|
(27
|
)
|
|||||||
|
Other
|
—
|
|
(3
|
)
|
—
|
|
(12
|
)
|
|||||||
|
Reserve for unfunded lending commitments, June 30
|
503
|
|
474
|
|
503
|
|
474
|
|
|||||||
|
Allowance for credit losses, June 30
|
$
|
16,314
|
|
$
|
21,709
|
|
$
|
16,314
|
|
$
|
21,709
|
|
|||
|
(1)
|
Includes U.S. small business commercial charge-offs of
$94 million
and
$173 million
for the
three and six months ended June 30, 2014
compared to
$128 million
and
$257 million
for the same periods in
2013
.
|
|
(2)
|
Includes U.S. small business commercial recoveries of
$16 million
and
$31 million
for the
three and six months ended June 30, 2014
compared to
$30 million
and
$57 million
for the same periods in
2013
.
|
|
(3)
|
Primarily represents the net impact of portfolio sales, consolidations and deconsolidations, and foreign currency translation adjustments.
|
119
|
Table 66
|
|||||||||||||||
|
Allowance for Credit Losses (continued)
|
|||||||||||||||
|
Three Months Ended June 30
|
Six Months Ended June 30
|
||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Loan and allowance ratios:
|
|||||||||||||||
|
Loans and leases outstanding at June 30
(4)
|
$
|
900,998
|
|
$
|
912,109
|
|
$
|
900,998
|
|
$
|
912,109
|
|
|||
|
Allowance for loan and lease losses as a percentage of total loans and leases outstanding at June 30
(4)
|
1.75
|
%
|
2.33
|
%
|
1.75
|
%
|
2.33
|
%
|
|||||||
|
Consumer allowance for loan and lease losses as a percentage of total consumer loans and leases outstanding at June 30
(5)
|
2.21
|
|
3.35
|
|
2.21
|
|
3.35
|
|
|||||||
|
Commercial allowance for loan and lease losses as a percentage of total commercial loans and leases outstanding at June 30
(6)
|
1.15
|
|
0.85
|
|
1.15
|
|
0.85
|
|
|||||||
|
Average loans and leases outstanding
(4)
|
$
|
901,359
|
|
$
|
905,500
|
|
$
|
905,292
|
|
$
|
901,331
|
|
|||
|
Annualized net charge-offs as a percentage of average loans and leases outstanding
(4, 7)
|
0.48
|
%
|
0.94
|
%
|
0.55
|
%
|
1.04
|
%
|
|||||||
|
Annualized net charge-offs and PCI write-offs as a percentage of average loans and leases outstanding
(4)
|
0.55
|
|
1.07
|
|
0.67
|
|
1.29
|
|
|||||||
|
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases at June 30
(4, 8)
|
108
|
|
103
|
|
108
|
|
103
|
|
|||||||
|
Ratio of the allowance for loan and lease losses at June 30 to annualized net charge-offs
(7)
|
3.67
|
|
2.51
|
|
3.19
|
|
2.28
|
|
|||||||
|
Ratio of the allowance for loan and lease losses at June 30 to annualized net charge-offs and PCI write-offs
|
3.20
|
|
2.18
|
|
2.60
|
|
1.82
|
|
|||||||
|
Amounts included in allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases at June 30
(9)
|
$
|
6,488
|
|
$
|
9,919
|
|
$
|
6,488
|
|
$
|
9,919
|
|
|||
|
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 June 30
(4, 9)
|
64
|
%
|
55
|
%
|
64
|
%
|
55
|
%
|
|||||||
|
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 June 30
(4)
|
1.59
|
%
|
1.96
|
%
|
1.59
|
%
|
1.96
|
%
|
|||||||
|
Consumer allowance for loan and lease losses as a percentage of total consumer loans and leases outstanding at June 30
(5)
|
1.94
|
|
2.77
|
|
1.94
|
|
2.77
|
|
|||||||
|
Annualized net charge-offs as a percentage of average loans and leases outstanding
(4)
|
0.49
|
|
0.97
|
|
0.56
|
|
1.07
|
|
|||||||
|
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases at June 30
(4, 8)
|
95
|
|
84
|
|
95
|
|
84
|
|
|||||||
|
Ratio of the allowance for loan and lease losses at June 30 to annualized net charge-offs
|
3.25
|
|
2.04
|
|
2.82
|
|
1.85
|
|
|||||||
|
(4)
|
Outstanding loan and lease balances and ratios do not include loans accounted for under the fair value option of
$10.9 billion
and
$9.5 billion
at
June 30, 2014 and 2013
. Average loans accounted for under the fair value option were
$11.2 billion
and
$10.7 billion
for the
three and six months ended June 30, 2014
compared to
$8.7 billion
and
$8.9 billion
for the
same periods in 2013
.
|
|
(5)
|
Excludes consumer loans accounted for under the fair value option of
$2.2 billion
and
$1.1 billion
at
June 30, 2014 and 2013
.
|
|
(6)
|
Excludes commercial loans accounted for under the fair value option of
$8.7 billion
and
$8.4 billion
at
June 30, 2014 and 2013
.
|
|
(7)
|
Net charge-offs exclude
$160 million
and
$551 million
of write-offs in the PCI loan portfolio for the
three and six months ended June 30, 2014
compared to
$313 million
and
$1.2 billion
for the
same periods 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
93
.
|
|
(8)
|
For more information on our definition of nonperforming loans, see pages
99
and
108
.
|
|
(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
.
|
120
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
67
presents our allocation by product type.
|
Table 67
|
|||||||||||||||||||
|
Allocation of the Allowance for Credit Losses by Product Type
|
|||||||||||||||||||
|
|
June 30, 2014
|
December 31, 2013
|
|||||||||||||||||
|
(Dollars in millions)
|
Amount
|
Percent of
Total |
Percent of
Loans and Leases Outstanding (1) |
Amount
|
Percent of
Total |
Percent of
Loans and Leases Outstanding (1) |
|||||||||||||
|
Allowance for loan and lease losses
|
|
|
|
|
|
|
|||||||||||||
|
Residential mortgage
|
$
|
3,214
|
|
20.33
|
%
|
1.36
|
%
|
$
|
4,084
|
|
23.43
|
%
|
1.65
|
%
|
|||||
|
Home equity
|
3,694
|
|
23.36
|
|
4.13
|
|
4,434
|
|
25.44
|
|
4.73
|
|
|||||||
|
U.S. credit card
|
3,524
|
|
22.29
|
|
3.96
|
|
3,930
|
|
22.55
|
|
4.26
|
|
|||||||
|
Non-U.S. credit card
|
424
|
|
2.68
|
|
3.53
|
|
459
|
|
2.63
|
|
3.98
|
|
|||||||
|
Direct/Indirect consumer
|
371
|
|
2.35
|
|
0.45
|
|
417
|
|
2.39
|
|
0.51
|
|
|||||||
|
Other consumer
|
98
|
|
0.62
|
|
4.71
|
|
99
|
|
0.58
|
|
5.02
|
|
|||||||
|
Total consumer
|
11,325
|
|
71.63
|
|
2.21
|
|
13,423
|
|
77.02
|
|
2.53
|
|
|||||||
|
U.S. commercial
(2)
|
2,712
|
|
17.15
|
|
1.17
|
|
2,394
|
|
13.74
|
|
1.06
|
|
|||||||
|
Commercial real estate
|
963
|
|
6.09
|
|
2.06
|
|
917
|
|
5.26
|
|
1.91
|
|
|||||||
|
Commercial lease financing
|
137
|
|
0.87
|
|
0.56
|
|
118
|
|
0.68
|
|
0.47
|
|
|||||||
|
Non-U.S. commercial
|
674
|
|
4.26
|
|
0.79
|
|
576
|
|
3.30
|
|
0.64
|
|
|||||||
|
Total commercial
(3)
|
4,486
|
|
28.37
|
|
1.15
|
|
4,005
|
|
22.98
|
|
1.03
|
|
|||||||
|
Allowance for loan and lease losses
(4)
|
15,811
|
|
100.00
|
%
|
1.75
|
|
17,428
|
|
100.00
|
%
|
1.90
|
|
|||||||
|
Reserve for unfunded lending commitments
|
503
|
|
484
|
|
|||||||||||||||
|
Allowance for credit losses
|
$
|
16,314
|
|
$
|
17,912
|
|
|||||||||||||
|
(1)
|
Ratios are calculated as allowance for loan and lease losses as a percentage of loans and leases outstanding excluding loans accounted for under the fair value option. Consumer loans accounted for under the fair value option included residential mortgage loans of
$2.0 billion
and
$2.0 billion
and home equity loans of
$170 million
and
$147 million
at
June 30, 2014
and
December 31, 2013
. Commercial loans accounted for under the fair value option included U.S. commercial loans of
$1.3 billion
and
$1.5 billion
and non-U.S. commercial loans of
$7.4 billion
and
$6.4 billion
at
June 30, 2014
and
December 31, 2013
.
|
|
(2)
|
Includes allowance for loan and lease losses for U.S. small business commercial loans of
$511 million
and
$462 million
at
June 30, 2014
and
December 31, 2013
.
|
|
(3)
|
Includes allowance for loan and lease losses for impaired commercial loans of
$278 million
and
$277 million
at
June 30, 2014
and
December 31, 2013
.
|
|
(4)
|
Includes
$1.8 billion
and
$2.5 billion
of valuation allowance presented with the allowance for loan and lease losses related to PCI loans at
June 30, 2014
and
December 31, 2013
.
|
|
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
$503 million
at
June 30, 2014
, an
increase
of
$19 million
from
December 31, 2013
driven by minimal increases in expected losses.
121
|
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 Nontrading Activities
on page
128
.
Our traditional banking loan and deposit products are nontrading 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 nontrading positions arising from changes in interest rates is managed through our ALM activities. We have elected to account for certain assets and liabilities under the fair value option.
Our trading positions are reported at fair value with changes reflected in income. Trading positions are subject to various changes in market-based risk factors. The majority of this risk is generated by our activities in the interest rate, foreign exchange, credit, equity and commodities markets. In addition, the values of assets and liabilities could change due to market liquidity, correlations across markets and expectations of market volatility. We seek to manage these risk exposures by using a variety of techniques that encompass a broad range of financial instruments. The key risk management techniques are discussed in more detail in the Trading Risk Management section.
Global Markets Risk Management is an independent function within the Corporation that supports the Global Banking and Markets Risk Executive. The Global Markets Risk Committee (GMRC), chaired by the Global Markets Risk Executive, has been designated by Asset Liability and Market Risk Committee (ALMRC) as the primary risk governance authority for
Global Markets
. The GMRC'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. The Enterprise Model Risk Committee (EMRC) reports to the ALMRC and is responsible for providing management oversight and approval of model risk management and governance. The EMRC defines model risk standards, consistent with the Corporation's Risk Framework and risk appetite, prevailing regulatory guidance and industry best practice. Models must meet certain validation criteria, including effective challenge of the model development process and a sufficient demonstration of developmental evidence incorporating a comparison of alternative theories and approaches. The EMRC 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 14 – Fair Value Measurements
to the Consolidated Financial Statements
. For more information on our market risk management process, see page
108
of the MD&A of the Corporation's 2013 Annual Report on Form 10-K
.
|
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.
122
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 that 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.
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 governance 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 ALMRC has given authority to the GMRC 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 Board. The market risk based risk appetite limits were not exceeded during the
six months ended June 30, 2014
.
In periods of market stress, the GMRC 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. Where economically feasible, positions are sold or macroeconomic hedges are executed to reduce the exposures.
Market risk VaR for trading activities as presented in
Table 68
differs from VaR used for regulatory capital calculations (regulatory VaR). The VaR disclosed in
Table 68
excludes both counterparty 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 derivatives assets, and the corresponding hedges. Current regulatory standards require that regulatory VaR only exclude counterparty 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. Both regulatory and market risk VaR values utilize the same process and methodology.
123
To provide visibility of market risks to which the Corporation is exposed,
Table 68
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 counterparty CVA and corresponding hedges are considered covered positions; however, these are excluded from the VaR results presented in
Table 68
. In addition,
Table 68
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 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.
Table 68
presents period-end, average, high and low daily trading VaR for the
three months ended June 30, 2014
,
March 31, 2014
and
June 30, 2013
, as well as average daily trading VaR for the
six months ended June 30, 2014 and 2013
.
|
Table 68
|
|||||||||||||||||||||||||||||||||||||||||||||
|
Market Risk VaR for Trading Activities
|
|||||||||||||||||||||||||||||||||||||||||||||
|
Six Months
|
|||||||||||||||||||||||||||||||||||||||||||||
|
Three Months Ended
|
Ended
|
||||||||||||||||||||||||||||||||||||||||||||
|
June 30, 2014
|
March 31, 2014
|
June 30, 2013
|
June 30
|
||||||||||||||||||||||||||||||||||||||||||
|
(Dollars in millions)
|
Period End
|
Average
|
High
(1)
|
Low
(1)
|
Period End
|
Average
|
High
(1)
|
Low
(1)
|
Period End
|
Average
|
High
(1)
|
Low
(1)
|
2014 Average
|
2013 Average
|
|||||||||||||||||||||||||||||||
|
Foreign exchange
|
$
|
15
|
|
$
|
17
|
|
$
|
23
|
|
$
|
10
|
|
$
|
20
|
|
$
|
18
|
|
$
|
24
|
|
$
|
13
|
|
$
|
16
|
|
$
|
18
|
|
$
|
41
|
|
$
|
11
|
|
$
|
17
|
|
$
|
20
|
|
|||
|
Interest rate
|
41
|
|
38
|
|
60
|
|
22
|
|
43
|
|
35
|
|
49
|
|
19
|
|
24
|
|
34
|
|
50
|
|
22
|
|
37
|
|
37
|
|
|||||||||||||||||
|
Credit
|
56
|
|
52
|
|
62
|
|
45
|
|
45
|
|
62
|
|
71
|
|
45
|
|
48
|
|
55
|
|
68
|
|
47
|
|
57
|
|
64
|
|
|||||||||||||||||
|
Equities
|
14
|
|
16
|
|
23
|
|
12
|
|
15
|
|
17
|
|
24
|
|
11
|
|
28
|
|
34
|
|
57
|
|
24
|
|
16
|
|
32
|
|
|||||||||||||||||
|
Commodities
|
7
|
|
7
|
|
10
|
|
6
|
|
7
|
|
7
|
|
9
|
|
6
|
|
15
|
|
15
|
|
20
|
|
11
|
|
7
|
|
15
|
|
|||||||||||||||||
|
Portfolio diversification
|
(95
|
)
|
(84
|
)
|
—
|
|
—
|
|
(84
|
)
|
(77
|
)
|
—
|
|
—
|
|
(74
|
)
|
(92
|
)
|
—
|
|
—
|
|
(80
|
)
|
(96
|
)
|
|||||||||||||||||
|
Total covered positions trading portfolio
|
38
|
|
46
|
|
61
|
|
37
|
|
46
|
|
62
|
|
86
|
|
45
|
|
57
|
|
64
|
|
86
|
|
51
|
|
54
|
|
72
|
|
|||||||||||||||||
|
Impact from less liquid exposures
|
8
|
|
5
|
|
—
|
|
—
|
|
3
|
|
9
|
|
—
|
|
—
|
|
4
|
|
5
|
|
—
|
|
—
|
|
7
|
|
1
|
|
|||||||||||||||||
|
Total market-based trading portfolio
|
46
|
|
51
|
|
65
|
|
42
|
|
49
|
|
71
|
|
101
|
|
48
|
|
61
|
|
69
|
|
87
|
|
57
|
|
61
|
|
73
|
|
|||||||||||||||||
|
Fair value option loans
|
37
|
|
31
|
|
37
|
|
27
|
|
30
|
|
32
|
|
38
|
|
27
|
|
40
|
|
40
|
|
50
|
|
29
|
|
31
|
|
45
|
|
|||||||||||||||||
|
Fair value option hedges
|
17
|
|
14
|
|
17
|
|
12
|
|
12
|
|
14
|
|
17
|
|
11
|
|
18
|
|
18
|
|
21
|
|
15
|
|
14
|
|
21
|
|
|||||||||||||||||
|
Fair value option portfolio diversification
|
(28
|
)
|
(24
|
)
|
—
|
|
—
|
|
(21
|
)
|
(23
|
)
|
—
|
|
—
|
|
(29
|
)
|
(28
|
)
|
—
|
|
—
|
|
(23
|
)
|
(36
|
)
|
|||||||||||||||||
|
Total fair value option portfolio
|
26
|
|
21
|
|
26
|
|
19
|
|
21
|
|
23
|
|
28
|
|
21
|
|
29
|
|
30
|
|
39
|
|
21
|
|
22
|
|
30
|
|
|||||||||||||||||
|
Portfolio diversification
|
(20
|
)
|
(13
|
)
|
—
|
|
—
|
|
(11
|
)
|
(10
|
)
|
—
|
|
—
|
|
(13
|
)
|
(17
|
)
|
—
|
|
—
|
|
(11
|
)
|
(17
|
)
|
|||||||||||||||||
|
Total market-based portfolio
|
$
|
52
|
|
$
|
59
|
|
$
|
78
|
|
$
|
50
|
|
$
|
59
|
|
$
|
84
|
|
$
|
120
|
|
$
|
56
|
|
$
|
77
|
|
$
|
82
|
|
$
|
106
|
|
$
|
68
|
|
$
|
72
|
|
$
|
86
|
|
|||
|
(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 average total market-based trading portfolio VaR decreased for the
three months ended June 30, 2014
compared to the three months ended
March 31, 2014
primarily driven by reduced exposure to the credit markets and increased portfolio diversification. The average total market-based portfolio VaR decreased for the
three months ended June 30, 2014
compared to the three months ended
March 31, 2014
primarily driven by the same factors as described above for the total market-based trading portfolio.
124
The graph below presents the daily total market-based trading portfolio VaR for the previous five quarters, corresponding to the data presented in
Table 68
.
Additional VaR statistics produced within the Corporation's single VaR model are provided in
Table 69
at the same level of detail as in
Table 68
. 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 69
presents average trading VaR statistics for 99 percent and 95 percent confidence levels for the
three months ended June 30, 2014
,
March 31, 2014
and
June 30, 2013
.
|
Table 69
|
||||||||||||||||||||
|
Average Market Risk VaR for Trading Activities – 99 Percent and 95 Percent VaR Statistics
|
||||||||||||||||||||
|
Three Months Ended
|
||||||||||||||||||||
|
June 30, 2014
|
March 31, 2014
|
June 30, 2013
|
||||||||||||||||||
|
(Dollars in millions)
|
99 percent
|
95 percent
|
99 percent
|
95 percent
|
99 percent
|
95 percent
|
||||||||||||||
|
Foreign exchange
|
$
|
17
|
|
$
|
10
|
|
$
|
18
|
|
$
|
11
|
|
$
|
18
|
|
$
|
12
|
|
||
|
Interest rate
|
38
|
|
22
|
|
35
|
|
21
|
|
34
|
|
20
|
|
||||||||
|
Credit
|
52
|
|
26
|
|
62
|
|
33
|
|
55
|
|
32
|
|
||||||||
|
Equities
|
16
|
|
9
|
|
17
|
|
9
|
|
34
|
|
19
|
|
||||||||
|
Commodities
|
7
|
|
4
|
|
7
|
|
4
|
|
15
|
|
10
|
|
||||||||
|
Portfolio diversification
|
(84
|
)
|
(46
|
)
|
(77
|
)
|
(46
|
)
|
(92
|
)
|
(56
|
)
|
||||||||
|
Total covered positions trading portfolio
|
46
|
|
25
|
|
62
|
|
32
|
|
64
|
|
37
|
|
||||||||
|
Impact from less liquid exposures
|
5
|
|
2
|
|
9
|
|
5
|
|
5
|
|
3
|
|
||||||||
|
Total market-based trading portfolio
|
51
|
|
27
|
|
71
|
|
37
|
|
69
|
|
40
|
|
||||||||
|
Fair value option loans
|
31
|
|
14
|
|
32
|
|
14
|
|
40
|
|
21
|
|
||||||||
|
Fair value option hedges
|
14
|
|
9
|
|
14
|
|
9
|
|
18
|
|
12
|
|
||||||||
|
Fair value option portfolio diversification
|
(24
|
)
|
(14
|
)
|
(23
|
)
|
(12
|
)
|
(28
|
)
|
(17
|
)
|
||||||||
|
Total fair value option portfolio
|
21
|
|
9
|
|
23
|
|
11
|
|
30
|
|
16
|
|
||||||||
|
Portfolio diversification
|
(13
|
)
|
(6
|
)
|
(10
|
)
|
(7
|
)
|
(17
|
)
|
(8
|
)
|
||||||||
|
Total market-based portfolio
|
$
|
59
|
|
$
|
30
|
|
$
|
84
|
|
$
|
41
|
|
$
|
82
|
|
$
|
48
|
|
||
125
|
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, including the GMRC, regularly reviews and evaluates the results of these tests. The government agencies that regulate our operations also regularly review these results.
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, counterparty 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 the
three and six months ended June 30, 2014
, there were no days in which there was a backtesting excess for our total market-based portfolio or regulatory VaR results, utilizing a one-day holding period.
|
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 14 – 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 GMRC.
126
The histogram below is a graphic depiction of trading volatility and illustrates the daily level of trading-related revenue for the
three months ended June 30, 2014
compared to the three months ended
March 31, 2014
. During the
three months ended June 30, 2014
, positive trading-related revenue was recorded for 98 percent, or 64 trading days, of which 78 percent (51 days) were daily trading gains of over $25 million. This compares to the three months ended
March 31, 2014
, where positive trading-related revenue was recorded for 100 percent, or 61 trading days, of which 89 percent (54 days) were daily trading gains of over $25 million.
|
Trading Portfolio Stress Testing
|
Because the very nature of a VaR model suggests results can exceed our estimates and it is dependent on a limited historical window, we also stress test our portfolio using scenario analysis. This analysis estimates the change in 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
on page
64
.
127
|
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 nontrading 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 an effort 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 70
presents the spot and 12-month forward rates used in our baseline forecasts at
June 30, 2014
and
December 31, 2013
.
|
Table 70
|
|||||||||||||||||
|
Forward Rates
|
|||||||||||||||||
|
|
June 30, 2014
|
December 31, 2013
|
|||||||||||||||
|
|
Federal Funds
|
Three-month
LIBOR |
10-Year Swap
|
Federal Funds
|
Three-month
LIBOR |
10-Year Swap
|
|||||||||||
|
Spot rates
|
0.25
|
%
|
0.23
|
%
|
2.63
|
%
|
0.25
|
%
|
0.25
|
%
|
3.09
|
%
|
|||||
|
12-month forward rates
|
0.25
|
|
0.51
|
|
2.98
|
|
0.25
|
|
0.43
|
|
3.52
|
|
|||||
Table 71
shows the pre-tax dollar impact to forecasted net interest income over the next 12 months from
June 30, 2014
and
December 31, 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 further discussion of net interest income excluding the impact of trading-related activities, see page
21
.
We continue to be asset sensitive to both a parallel move in interest rates and to a lesser degree 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.
|
Table 71
|
|||||||||||||
|
Estimated Net Interest Income Excluding Trading-related Net Interest Income
|
|||||||||||||
|
(Dollars in millions)
Curve Change
|
Short Rate (bps)
|
Long Rate (bps)
|
June 30
2014 |
December 31
2013 |
|||||||||
|
Parallel shifts
|
|||||||||||||
|
+100 bps instantaneous shift
|
+100
|
|
+100
|
|
$
|
3,355
|
|
$
|
3,229
|
|
|||
|
-50 bps instantaneous shift
|
-50
|
|
-50
|
|
(1,927
|
)
|
(1,616
|
)
|
|||||
|
Flatteners
|
|
|
|
||||||||||
|
Short end instantaneous change
|
+100
|
|
—
|
|
2,272
|
|
2,210
|
|
|||||
|
Long end instantaneous change
|
—
|
|
-50
|
|
(979
|
)
|
(641
|
)
|
|||||
|
Steepeners
|
|
|
|
||||||||||
|
Short end instantaneous change
|
-50
|
|
—
|
|
(923
|
)
|
(937
|
)
|
|||||
|
Long end instantaneous change
|
—
|
|
+100
|
|
1,132
|
|
1,066
|
|
|||||
The sensitivity analysis in
Table 71
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.
128
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 71
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.
|
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 to a lesser extent U.S. Treasury, corporate, municipal and other debt securities. As part of the ALM positioning, we use derivatives to hedge interest rate and duration risk. At
June 30, 2014
and
December 31, 2013
, our securities portfolio had a carrying value of
$352.9 billion
and
$323.9 billion
.
During the
three months ended June 30, 2014 and 2013
, we purchased debt securities of $56.2 billion and $62.9 billion, sold
$27.2 billion
and
$45.7 billion
, and had maturities and received paydowns of $20.6 billion and $27.7 billion, respectively. We realized
$382 million
and
$457 million
in net gains on sales of AFS debt securities. During the
six months ended June 30, 2014 and 2013
, we purchased debt securities of
$121.3 billion
and
$99.2 billion
, sold
$57.9 billion
and
$61.0 billion
, and had maturities and received paydowns of
$39.8 billion
and
$51.7 billion
, respectively. We realized
$759 million
and
$525 million
in net gains on sales of AFS debt securities.
At
June 30, 2014
, accumulated OCI included after-tax net unrealized
gain
s of
$355 million
on AFS debt securities and after-tax net unrealized losses of
$22 million
on AFS marketable equity securities compared to after-tax net unrealized losses of
$645 million
and after-tax net unrealized gains of
$411 million
at
June 30, 2013
. For more information on accumulated OCI, see
Note 12 – Accumulated Other Comprehensive Income (Loss)
to the Consolidated Financial Statements
. The pre-tax net amounts in accumulated OCI related to AFS debt securities improved $3.7 billion and
$5.7 billion
during the
three and six months ended June 30, 2014
to a
$555 million
net unrealized
gain
primarily due to the impact of lower interest rates. For more information on our securities portfolio, see
Note 3 – Securities
to the Consolidated Financial Statements
.
We recognized
$10 million
and
$11 million
of other-than-temporary impairment (OTTI) losses in earnings on AFS debt securities in the
three and six months ended June 30, 2014
compared to losses of
$4 million
and
$13 million
for the
same periods in 2013
. OTTI losses in the three and six months ended June 30, 2014 and 2013 were on non-agency RMBS and were recorded in other income (loss) 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.
129
|
Residential Mortgage Portfolio
|
At
June 30, 2014
and
December 31, 2013
, our residential mortgage portfolio was
$237.1 billion
and
$248.1 billion
excluding
$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
98
. The
$10.9 billion
decrease
in the
six months ended June 30, 2014
was primarily due to
paydowns, sales, charge-offs and transfers to foreclosed properties. 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.
Three Months Ended June 30, 2014
Compared to
Three Months Ended June 30, 2013
During the
three months ended June 30, 2014
, CRES
and
GWIM
originated $6.0 billion of first-lien mortgages that we retained compared to $13.0 billion in the
same period in 2013
. We received paydowns of $8.8 billion compared to $15.9 billion in the
same period in 2013
. We repurchased $1.0 billion of loans pursuant to our servicing agreements with GNMA and redelivered $1.0 billion, primarily FHA-insured loans, compared to $2.9 billion and $1.6 billion in the
same period in 2013
. Sales of loans, excluding redelivered FHA loans, were $2.4 billion compared to $340 million in the
same period in 2013
. Substantially all of the loans sold during the
three months ended June 30, 2014
were nonperforming or PCI. Gains recognized on the sales of residential mortgages were $170 million compared to $16 million in the
same period in 2013
.
Six Months Ended June 30, 2014
Compared to
Six Months Ended June 30, 2013
During the
six months ended June 30, 2014
, CRES
and
GWIM
originated $10.6 billion of first-lien mortgages that we retained compared to $23.8 billion in the
same period in 2013
. We received paydowns of $17.8 billion compared to $29.9 billion in the
same period in 2013
. We repurchased $2.3 billion of loans pursuant to our servicing agreements with GNMA and redelivered $2.4 billion, primarily FHA-insured loans, compared to $6.0 billion and $1.9 billion in the
same period in 2013
. Sales of loans, excluding redelivered FHA loans, were $3.1 billion compared to $355 million in the
same period in 2013
. Substantially all of the loans sold during the
six months ended June 30, 2014
were nonperforming or PCI. Gains recognized on the sales of residential mortgages were $182 million compared to $16 million in the
same period 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 the
six months ended June 30, 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.
130
Table 72
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
June 30, 2014
and
December 31, 2013
. These amounts do not include derivative hedges on our MSRs.
|
Table 72
|
||||||||||||||||||||||||||||||||||
|
Asset and Liability Management Interest Rate and Foreign Exchange Contracts
|
||||||||||||||||||||||||||||||||||
|
|
|
|
June 30, 2014
|
|
||||||||||||||||||||||||||||||
|
|
|
|
Expected Maturity
|
|
||||||||||||||||||||||||||||||
|
(Dollars in millions, average estimated duration in years)
|
Fair
Value
|
Total
|
Remainder of 2014
|
2015
|
2016
|
2017
|
2018
|
Thereafter
|
Average
Estimated
Duration
|
|||||||||||||||||||||||||
|
Receive-fixed interest rate swaps
(1, 2)
|
$
|
6,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.12
|
|
|||||||||||||||
|
Notional amount
|
|
|
$
|
116,948
|
|
$
|
2,744
|
|
$
|
12,873
|
|
$
|
15,339
|
|
$
|
20,453
|
|
$
|
20,528
|
|
$
|
45,011
|
|
|
|
|||||||||
|
Weighted-average fixed-rate
|
|
|
3.31
|
%
|
3.38
|
%
|
3.32
|
%
|
3.12
|
%
|
3.76
|
%
|
3.36
|
%
|
3.14
|
%
|
|
|
||||||||||||||||
|
Pay-fixed interest rate swaps
(1, 2)
|
(419
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.64
|
|
||||||||||||||||
|
Notional amount
|
|
|
$
|
24,806
|
|
$
|
1,041
|
|
$
|
520
|
|
$
|
1,025
|
|
$
|
1,527
|
|
$
|
8,041
|
|
$
|
12,652
|
|
|
|
|||||||||
|
Weighted-average fixed-rate
|
|
|
2.07
|
%
|
0.34
|
%
|
2.30
|
%
|
1.65
|
%
|
1.84
|
%
|
1.50
|
%
|
2.63
|
%
|
|
|
||||||||||||||||
|
Same-currency basis swaps
(3)
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
Notional amount
|
|
|
$
|
111,497
|
|
$
|
22,624
|
|
$
|
18,988
|
|
$
|
15,691
|
|
$
|
19,596
|
|
$
|
11,031
|
|
$
|
23,567
|
|
|
|
|||||||||
|
Foreign exchange basis swaps
(2, 4, 5)
|
589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
Notional amount
|
|
|
197,508
|
|
18,379
|
|
36,658
|
|
30,571
|
|
25,603
|
|
17,673
|
|
68,624
|
|
|
|
||||||||||||||||
|
Option products
(6)
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
Notional amount
(7)
|
|
|
1,377
|
|
1,370
|
|
(11
|
)
|
—
|
|
—
|
|
—
|
|
18
|
|
|
|
||||||||||||||||
|
Foreign exchange contracts
(2, 5, 8)
|
1,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
Notional amount
(7)
|
|
|
(20,010
|
)
|
(34,997
|
)
|
231
|
|
(680
|
)
|
7,213
|
|
2,057
|
|
6,166
|
|
|
|
||||||||||||||||
|
Futures and forward rate contracts
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
Notional amount
(7)
|
|
|
(16,559
|
)
|
(16,559
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
||||||||||||||||
|
Net ALM contracts
|
$
|
8,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
|
|
|
December 31, 2013
|
|
||||||||||||||||||||||||||||||
|
|
|
|
Expected Maturity
|
|
||||||||||||||||||||||||||||||
|
(Dollars in millions, average estimated duration in years)
|
Fair
Value
|
Total
|
2014
|
2015
|
2016
|
2017
|
2018
|
Thereafter
|
Average
Estimated
Duration
|
|||||||||||||||||||||||||
|
Receive-fixed interest rate swaps
(1, 2)
|
$
|
5,074
|
|
|
|
|
|
|
|
|
4.67
|
|
||||||||||||||||||||||
|
Notional amount
|
|
$
|
109,539
|
|
$
|
7,604
|
|
$
|
12,873
|
|
$
|
15,339
|
|
$
|
19,803
|
|
$
|
20,733
|
|
$
|
33,187
|
|
|
|||||||||||
|
Weighted-average fixed-rate
|
|
3.42
|
%
|
3.79
|
%
|
3.32
|
%
|
3.12
|
%
|
3.87
|
%
|
3.34
|
%
|
3.29
|
%
|
|
||||||||||||||||||
|
Pay-fixed interest rate swaps
(1, 2)
|
427
|
|
|
|
|
|
|
|
|
5.92
|
|
|||||||||||||||||||||||
|
Notional amount
|
|
$
|
28,418
|
|
$
|
4,645
|
|
$
|
520
|
|
$
|
1,025
|
|
$
|
1,527
|
|
$
|
8,529
|
|
$
|
12,172
|
|
|
|||||||||||
|
Weighted-average fixed-rate
|
|
1.87
|
%
|
0.54
|
%
|
2.30
|
%
|
1.65
|
%
|
1.84
|
%
|
1.52
|
%
|
2.62
|
%
|
|
||||||||||||||||||
|
Same-currency basis swaps
(3)
|
6
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Notional amount
|
|
$
|
145,184
|
|
$
|
47,529
|
|
$
|
25,171
|
|
$
|
28,157
|
|
$
|
15,283
|
|
$
|
9,156
|
|
$
|
19,888
|
|
|
|||||||||||
|
Foreign exchange basis swaps
(2, 4, 5)
|
1,208
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Notional amount
|
|
205,560
|
|
39,151
|
|
37,298
|
|
27,293
|
|
24,304
|
|
14,517
|
|
62,997
|
|
|
||||||||||||||||||
|
Option products
(6)
|
21
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Notional amount
(7)
|
|
(641
|
)
|
(649
|
)
|
(11
|
)
|
—
|
|
—
|
|
—
|
|
19
|
|
|
||||||||||||||||||
|
Foreign exchange contracts
(2, 5, 8)
|
1,619
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Notional amount
(7)
|
|
(19,515
|
)
|
(35,991
|
)
|
1,873
|
|
(669
|
)
|
7,224
|
|
2,026
|
|
6,022
|
|
|
||||||||||||||||||
|
Futures and forward rate contracts
|
147
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Notional amount
(7)
|
|
(19,427
|
)
|
(19,427
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
||||||||||||||||||
|
Net ALM contracts
|
$
|
8,502
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
|
(1)
|
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 both
June 30, 2014
and
December 31, 2013
. There were
no
forward starting pay-fixed swap positions at
June 30, 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
June 30, 2014
and
December 31, 2013
, the notional amount of same-currency basis swaps was comprised of
$111.5 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)
|
Foreign exchange basis swaps consisted of cross-currency variable interest rate swaps used separately or in conjunction with receive-fixed interest rate swaps.
|
|
(5)
|
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.
|
|
(6)
|
The notional amount of option products of
$1.4 billion
at
June 30, 2014
was comprised of
$1.4 billion
in foreign exchange options,
$(11) million
in swaptions and
$18 million
in purchased caps/floors. 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.
|
|
(7)
|
Reflects the net of long and short positions. Amounts shown as negative reflect a net short position.
|
|
(8)
|
The notional amount of foreign exchange contracts of
$(20.0) billion
at
June 30, 2014
was comprised of
$30.9 billion
in foreign currency-denominated and cross-currency receive-fixed swaps,
$(44.2) billion
in net foreign currency forward rate contracts,
$(10.9) billion
in foreign currency-denominated pay-fixed swaps and
$3.7 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.
|
131
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
$3.3 billion
and
$3.6 billion
, on a pre-tax basis, at
June 30, 2014
and
December 31, 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
June 30, 2014
, the pre-tax net losses are expected to be reclassified into earnings as follows:
$960 million
, or 29 percent, within the next year, 50 percent in years two through five, and 14 percent in years six through ten, with the remaining seven 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
June 30, 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. To hedge interest rate risk and certain market risks of IRLCs and residential first mortgage LHFS, we utilize forward loan sale commitments and other derivative instruments including purchased options. At
June 30, 2014
and
December 31, 2013
, the notional amounts of derivatives economically hedging the IRLCs and residential first mortgage LHFS were $8.4 billion and $7.9 billion.
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. We use certain derivatives such as interest rate options, interest rate swaps, forward settlement contracts and Eurodollar futures, as well as principal-only and interest-only MBS and U.S. Treasuries to hedge interest rate and certain other market risks of MSRs. The fair value and notional amounts of the derivative contracts and the fair value of securities hedging the MSRs were $(3.6) billion, $1.1 trillion and $2.6 billion at
June 30, 2014
and $(2.9) billion, $1.8 trillion and $2.5 billion at
December 31, 2013
. For the
three and six months ended June 30, 2014
, we recorded in mortgage banking income gains of $387 million and $764 million 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 $752 million and $871 million for the
same periods in 2013
. For more information on MSRs, see
Note 17 – Mortgage Servicing Rights
to the Consolidated Financial Statements
and for more information on mortgage banking income, see
CRES
on page
35
.
132
|
Compliance Risk Management
|
The Global Compliance organization is responsible for overseeing compliance risk, which 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 requirements of applicable laws, rules, regulations, related self-regulatory organization standards and codes of conduct. Compliance is at the core of the Corporation's culture and is a key component of our risk management process.
The Global Compliance Framework, an addendum to our Risk Framework, outlines the elements and related high-level requirements of the Corporation's integrated global compliance program. It is supported by policies that articulate detailed requirements related to execution of the global compliance program. The Global Compliance Framework also defines the scope, roles and responsibilities of Global Compliance. It is designed to drive a comprehensive, risk-based approach for the proactive management, oversight and escalation of compliance risks across the Corporation.
The Global Compliance Framework also provides senior 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.
|
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
67
.
We approach operational risk management from two perspectives to manage operational risk 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 enterprise 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, mitigating, controlling, monitoring, testing and reviewing 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 Chief Risk Officer and a variety of management committees and risk oversight groups aligned to the Corporation's overall risk governance framework and practices. Of these, the Compliance and Operational Risk Committee (CORC) oversees the Corporation’s policies and processes for sound operational risk management. The CORC also serves as an escalation point for critical operational risk matters within the Corporation. The CORC reports operational risk activities to the Enterprise Risk Committee of the Board.
Within the Global Risk Management organization, the Corporate Operational Risk team develops and guides the strategies, policies, practices, controls and monitoring tools for assessing and managing operational risks across the organization and reports results to businesses, enterprise control functions, senior management, governance committees and the Board.
The business and enterprise control functions are responsible for managing all the risks within their units, including operational risks. In addition to enterprise risk management tools such as loss reporting, scenario analysis and Risk and Control Self Assessments (RCSAs), operational risk executives, working in conjunction with senior business executives, have developed key tools to help identify, measure, mitigate and monitor risk in each business and enterprise 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 enterprise control functions are also responsible for consistently implementing and monitoring adherence to corporate practices.
133
Business and enterprise control function management uses the enterprise RCSA process to identify 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 enterprise 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 enterprise control function level. Independent review and challenge to the Corporation’s overall operational risk management framework is performed by the Corporate Operational Risk Validation Team.
Enterprise control functions have risk governance and control responsibilities for their enterprise programs (e.g., Global Technology and Operations Group, CFO Group, Global Marketing and Corporate Affairs, Global Human Resources). They provide insights on day-to-day risk activities throughout the Corporation by overseeing and managing the performance of their functions against Corporation-wide expectations. The enterprise control functions participate in the operational risk management process in two ways. First, these organizations manage risk in their functional department. Second, they provide specialized risk management services (e.g., information management, vendor management) within their area of expertise to the enterprise, businesses and other enterprise control functions they support. These groups also work with business and risk executives to develop and guide appropriate strategies, policies, practices, controls and monitoring tools for each business and enterprise control function relative to these programs.
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 of the Corporation's 2013 Annual Report on Form 10-K
, 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 impacting results for the
six months ended June 30, 2014
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.
For additional information, see Complex Accounting Estimates on page
117
of the MD&A of the Corporation's 2013 Annual Report on Form 10-K
.
|
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. For additional information, see
Note 14 – Fair Value Measurements
and
Note 15 – Fair Value Option
to the Consolidated Financial Statements
, and
Complex Accounting Estimates
on page
117
of the MD&A of the Corporation's 2013 Annual Report on Form 10-K
.
We do not incorporate a funding valuation or funding benefit adjustment (collectively, FVA) into the fair value of our uncollateralized derivatives. There is diversity in industry practice regarding FVA and such views continue to evolve. We continue to evaluate FVA as it relates to our valuation methodologies used to comply with applicable fair value accounting guidance.
134
|
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 73
|
|||||||||||||||||||
|
Recurring Level 3 Asset and Liability Summary
|
|||||||||||||||||||
|
|
June 30, 2014
|
December 31, 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
|
$
|
8,079
|
|
29.18
|
%
|
0.37
|
%
|
$
|
9,044
|
|
28.46
|
%
|
0.43
|
%
|
|||||
|
Derivative assets
|
7,136
|
|
25.78
|
|
0.33
|
|
7,277
|
|
22.90
|
|
0.35
|
|
|||||||
|
AFS debt securities
|
4,001
|
|
14.45
|
|
0.18
|
|
4,760
|
|
14.98
|
|
0.23
|
|
|||||||
|
All other Level 3 assets at fair value
|
8,468
|
|
30.59
|
|
0.40
|
|
10,697
|
|
33.66
|
|
0.50
|
|
|||||||
|
Total Level 3 assets at fair value
(1)
|
$
|
27,684
|
|
100.00
|
%
|
1.28
|
%
|
$
|
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
|
$
|
7,932
|
|
76.39
|
%
|
0.41
|
%
|
$
|
7,301
|
|
78.20
|
%
|
0.39
|
%
|
|||||
|
Long-term debt
|
2,416
|
|
23.27
|
|
0.12
|
|
1,990
|
|
21.32
|
|
0.11
|
|
|||||||
|
All other Level 3 liabilities at fair value
|
35
|
|
0.34
|
|
0.01
|
|
45
|
|
0.48
|
|
—
|
|
|||||||
|
Total Level 3 liabilities at fair value
(1)
|
$
|
10,383
|
|
100.00
|
%
|
0.54
|
%
|
$
|
9,336
|
|
100.00
|
%
|
0.50
|
%
|
|||||
|
(1)
|
Level 3 total assets and liabilities are shown before the impact of cash collateral and counterparty netting related to our derivative positions.
|
During the
three and six months ended June 30, 2014
, we recognized net losses of
$252 million
and
$335 million
on Level 3 assets and liabilities. These net losses were primarily losses on MSRs and net derivative assets, partially offset by gains on trading account assets. Losses on MSRs were primarily due to the impact of the decrease in long-term interest rates on forecasted prepayments. The net losses on net derivative assets were primarily due to unrealized net losses on certain equity derivatives, partially offset by unrealized gains on IRLCs. Gains on trading account assets were primarily due to unrealized gains on certain corporate loans and CLOs. For more information on the components of net realized and unrealized gains and losses during
three and six months ended June 30, 2014
, see
Note 14 – Fair Value Measurements
to the Consolidated Financial Statements
.
Level 3 financial instruments, such as our consumer MSRs, 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 during the
three and six months ended June 30, 2014
, see
Note 14 – Fair Value Measurements
to the Consolidated Financial Statements
.
135
|
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.
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.
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. Estimated property values are primarily determined by utilizing the Case-Schiller Home Index, a widely used index based on data from repeat sales of single family homes. Case-Schiller indices are updated quarterly and are reported on a three-month or one-quarter lag. 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. Under certain circumstances, estimated values can also be determined by utilizing an automated valuation method (AVM) or Mortgage Risk
136
Assessment Corporation (MRAC) 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. The MRAC index is similar to the Case-Schiller Home Index in that it is an index that is based on data from repeat sales of single family homes and is reported on a lag.
Margin Receivable
–
An extension of credit secured by eligible securities in certain brokerage accounts.
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.
137
|
Acronyms
|
||
|
ABS
|
Asset-backed securities
|
|
|
AFS
|
Available-for-sale
|
|
|
ALM
|
Asset and liability management
|
|
|
ALMRC
|
Asset Liability and Market Risk Committee
|
|
|
ARM
|
Adjustable-rate mortgage
|
|
|
BHC
|
Bank holding company
|
|
|
CCAR
|
Comprehensive Capital Analysis and Review
|
|
|
CDO
|
Collateralized debt obligation
|
|
|
CLO
|
Collateralized loan obligation
|
|
|
CRA
|
Community Reinvestment Act
|
|
|
CRC
|
Credit Risk Committee
|
|
|
EAD
|
Exposure at default
|
|
|
FDIC
|
Federal Deposit Insurance Corporation
|
|
|
FHA
|
Federal Housing Administration
|
|
|
FHLMC
|
Freddie Mac
|
|
|
FICC
|
Fixed income, currencies and commodities
|
|
|
FICO
|
Fair Isaac Corporation (credit score)
|
|
|
FNMA
|
Fannie Mae
|
|
|
FTE
|
Fully taxable-equivalent
|
|
|
GAAP
|
Accounting principles generally accepted in the United States of America
|
|
|
GMRC
|
Global Markets Risk Committee
|
|
|
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
|
|
|
LCR
|
Liquidity Coverage Ratio
|
|
|
LGD
|
Loss-given default
|
|
|
LHFS
|
Loans held-for-sale
|
|
|
LIBOR
|
London InterBank Offered Rate
|
|
|
MBS
|
Mortgage-backed securities
|
|
|
MD&A
|
Management's Discussion and Analysis of Financial Condition and Results of Operations
|
|
|
MI
|
Mortgage insurance
|
|
|
MSA
|
Metropolitan statistical area
|
|
|
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
|
|
|
PPI
|
Payment protection insurance
|
|
|
RMBS
|
Residential mortgage-backed securities
|
|
|
SBLCs
|
Standby letters of credit
|
|
|
SEC
|
Securities and Exchange Commission
|
|
|
VA
|
U.S. Department of Veterans Affairs
|
|
|
VIE
|
Variable interest entity
|
|
138
|
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
See
Market Risk Management
on page
122
in the MD&A and the sections referenced therein for Quantitative and Qualitative Disclosures about Market Risk.
|
Item 4. CONTROLS AND PROCEDURES
|
|
Evaluation of Disclosure Controls and Procedures
|
As of the end of the period covered by this report and pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (Exchange Act), the Corporation's management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness and design of the Corporation's disclosure controls and procedures (as that term is defined in Rule 13a-15(e) of the Exchange Act). Based upon that evaluation, the Corporation's Chief Executive Officer and Chief Financial Officer concluded that the Corporation'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.
|
Changes in Internal Controls
|
There have been no changes in the Corporation's internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the three months ended
June 30, 2014
that have materially affected or are reasonably likely to materially affect the Corporation's internal control over financial reporting.
139
|
|
|||||||||||||||
|
|
|||||||||||||||
|
Bank of America Corporation and Subsidiaries
|
|||||||||||||||
|
|
|||||||||||||||
|
|
Three Months Ended June 30
|
Six Months Ended June 30
|
|||||||||||||
|
(Dollars in millions, except per share information)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Interest income
|
|
|
|||||||||||||
|
Loans and leases
|
$
|
8,635
|
|
$
|
9,060
|
|
$
|
17,395
|
|
$
|
18,238
|
|
|||
|
Debt securities
|
2,124
|
|
2,548
|
|
4,121
|
|
5,097
|
|
|||||||
|
Federal funds sold and securities borrowed or purchased under agreements to resell
|
297
|
|
319
|
|
562
|
|
634
|
|
|||||||
|
Trading account assets
|
1,175
|
|
1,181
|
|
2,352
|
|
2,518
|
|
|||||||
|
Other interest income
|
710
|
|
717
|
|
1,446
|
|
1,439
|
|
|||||||
|
Total interest income
|
12,941
|
|
13,825
|
|
25,876
|
|
27,926
|
|
|||||||
|
Interest expense
|
|||||||||||||||
|
Deposits
|
282
|
|
366
|
|
573
|
|
748
|
|
|||||||
|
Short-term borrowings
|
763
|
|
809
|
|
1,372
|
|
1,558
|
|
|||||||
|
Trading account liabilities
|
398
|
|
427
|
|
833
|
|
899
|
|
|||||||
|
Long-term debt
|
1,485
|
|
1,674
|
|
3,000
|
|
3,508
|
|
|||||||
|
Total interest expense
|
2,928
|
|
3,276
|
|
5,778
|
|
6,713
|
|
|||||||
|
Net interest income
|
10,013
|
|
10,549
|
|
20,098
|
|
21,213
|
|
|||||||
|
Noninterest income
|
|
||||||||||||||
|
Card income
|
1,441
|
|
1,469
|
|
2,834
|
|
2,879
|
|
|||||||
|
Service charges
|
1,866
|
|
1,837
|
|
3,692
|
|
3,636
|
|
|||||||
|
Investment and brokerage services
|
3,291
|
|
3,143
|
|
6,560
|
|
6,170
|
|
|||||||
|
Investment banking income
|
1,631
|
|
1,556
|
|
3,173
|
|
3,091
|
|
|||||||
|
Equity investment income
|
357
|
|
680
|
|
1,141
|
|
1,243
|
|
|||||||
|
Trading account profits
|
1,832
|
|
1,938
|
|
4,299
|
|
4,927
|
|
|||||||
|
Mortgage banking income
|
527
|
|
1,178
|
|
939
|
|
2,441
|
|
|||||||
|
Gains on sales of debt securities
|
382
|
|
457
|
|
759
|
|
525
|
|
|||||||
|
Other income (loss)
|
407
|
|
(80
|
)
|
818
|
|
(201
|
)
|
|||||||
|
Total noninterest income
|
11,734
|
|
12,178
|
|
24,215
|
|
24,711
|
|
|||||||
|
Total revenue, net of interest expense
|
21,747
|
|
22,727
|
|
44,313
|
|
45,924
|
|
|||||||
|
Provision for credit losses
|
411
|
|
1,211
|
|
1,420
|
|
2,924
|
|
|||||||
|
Noninterest expense
|
|
|
|||||||||||||
|
Personnel
|
8,306
|
|
8,531
|
|
18,055
|
|
18,422
|
|
|||||||
|
Occupancy
|
1,079
|
|
1,109
|
|
2,194
|
|
2,263
|
|
|||||||
|
Equipment
|
534
|
|
532
|
|
1,080
|
|
1,082
|
|
|||||||
|
Marketing
|
450
|
|
437
|
|
892
|
|
866
|
|
|||||||
|
Professional fees
|
626
|
|
694
|
|
1,184
|
|
1,343
|
|
|||||||
|
Amortization of intangibles
|
235
|
|
274
|
|
474
|
|
550
|
|
|||||||
|
Data processing
|
761
|
|
779
|
|
1,594
|
|
1,591
|
|
|||||||
|
Telecommunications
|
324
|
|
411
|
|
694
|
|
820
|
|
|||||||
|
Other general operating
|
6,226
|
|
3,251
|
|
14,612
|
|
8,581
|
|
|||||||
|
Total noninterest expense
|
18,541
|
|
16,018
|
|
40,779
|
|
35,518
|
|
|||||||
|
Income before income taxes
|
2,795
|
|
5,498
|
|
2,114
|
|
7,482
|
|
|||||||
|
Income tax expense
|
504
|
|
1,486
|
|
99
|
|
1,987
|
|
|||||||
|
Net income
|
$
|
2,291
|
|
$
|
4,012
|
|
$
|
2,015
|
|
$
|
5,495
|
|
|||
|
Preferred stock dividends
|
256
|
|
441
|
|
494
|
|
814
|
|
|||||||
|
Net income applicable to common shareholders
|
$
|
2,035
|
|
$
|
3,571
|
|
$
|
1,521
|
|
$
|
4,681
|
|
|||
|
Per common share information
|
|
||||||||||||||
|
Earnings
|
$
|
0.19
|
|
$
|
0.33
|
|
$
|
0.14
|
|
$
|
0.43
|
|
|||
|
Diluted earnings
|
0.19
|
|
0.32
|
|
0.14
|
|
0.42
|
|
|||||||
|
Dividends paid
|
0.01
|
|
0.01
|
|
0.02
|
|
0.02
|
|
|||||||
|
Average common shares issued and outstanding (in thousands)
|
10,519,359
|
|
10,775,867
|
|
10,539,769
|
|
10,787,357
|
|
|||||||
|
Average diluted common shares issued and outstanding (in thousands)
|
11,265,123
|
|
11,524,510
|
|
10,599,641
|
|
11,549,693
|
|
|||||||
See accompanying Notes to Consolidated Financial Statements.
140
|
Bank of America Corporation and Subsidiaries
Consolidated Statement of Comprehensive Income
|
|||||||||||||||
|
Three Months Ended June 30
|
Six Months Ended June 30
|
||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Net income
|
$
|
2,291
|
|
$
|
4,012
|
|
$
|
2,015
|
|
$
|
5,495
|
|
|||
|
Other comprehensive income (loss), net-of-tax:
|
|||||||||||||||
|
Net change in available-for-sale debt and marketable equity securities
|
2,305
|
|
(4,233
|
)
|
3,594
|
|
(5,139
|
)
|
|||||||
|
Net change in derivatives
|
7
|
|
13
|
|
215
|
|
185
|
|
|||||||
|
Employee benefit plan adjustments
|
7
|
|
48
|
|
56
|
|
133
|
|
|||||||
|
Net change in foreign currency translation adjustments
|
7
|
|
(49
|
)
|
(119
|
)
|
(91
|
)
|
|||||||
|
Other comprehensive income (loss)
|
2,326
|
|
(4,221
|
)
|
3,746
|
|
(4,912
|
)
|
|||||||
|
Comprehensive income (loss)
|
$
|
4,617
|
|
$
|
(209
|
)
|
$
|
5,761
|
|
$
|
583
|
|
|||
See accompanying Notes to Consolidated Financial Statements.
141
|
Bank of America Corporation and Subsidiaries
Consolidated Balance Sheet
|
|||||||
|
(Dollars in millions)
|
June 30
2014 |
December 31
2013 |
|||||
|
Assets
|
|
|
|||||
|
Cash and due from banks
|
$
|
31,969
|
|
$
|
36,852
|
|
|
|
Interest-bearing deposits with the Federal Reserve and non-U.S. central banks
|
120,930
|
|
94,470
|
|
|||
|
Cash and cash equivalents
|
152,899
|
|
131,322
|
|
|||
|
Time deposits placed and other short-term investments
|
8,646
|
|
11,540
|
|
|||
|
Federal funds sold and securities borrowed or purchased under agreements to resell (includes
$67,317
and $75,614 measured at fair value)
|
229,449
|
|
190,328
|
|
|||
|
Trading account assets (includes
$111,443
and $111,817 pledged as collateral)
|
196,952
|
|
200,993
|
|
|||
|
Derivative assets
|
47,892
|
|
47,495
|
|
|||
|
Debt securities:
|
|
||||||
|
Carried at fair value (includes
$50,633
and $52,283 pledged as collateral)
|
292,861
|
|
268,795
|
|
|||
|
Held-to-maturity, at cost (fair value –
$59,181
and $52,430;
$17,359
and $20,869 pledged as collateral)
|
60,022
|
|
55,150
|
|
|||
|
Total debt securities
|
352,883
|
|
323,945
|
|
|||
|
Loans and leases (includes
$10,901
and $10,042 measured at fair value and
$69,420
and $71,579 pledged as collateral)
|
911,899
|
|
928,233
|
|
|||
|
Allowance for loan and lease losses
|
(15,811
|
)
|
(17,428
|
)
|
|||
|
Loans and leases, net of allowance
|
896,088
|
|
910,805
|
|
|||
|
Premises and equipment, net
|
10,145
|
|
10,475
|
|
|||
|
Mortgage servicing rights (includes
$4,368
and $5,042 measured at fair value)
|
4,368
|
|
5,052
|
|
|||
|
Goodwill
|
69,810
|
|
69,844
|
|
|||
|
Intangible assets
|
5,099
|
|
5,574
|
|
|||
|
Loans held-for-sale (includes
$5,262
and $6,656 measured at fair value)
|
9,200
|
|
11,362
|
|
|||
|
Customer and other receivables
|
65,475
|
|
59,448
|
|
|||
|
Other assets (includes
$17,946
and $18,055 measured at fair value)
|
121,651
|
|
124,090
|
|
|||
|
Total assets
|
$
|
2,170,557
|
|
$
|
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
|
$
|
7,236
|
|
$
|
8,412
|
|
|
|
Derivative assets
|
25
|
|
185
|
|
|||
|
Loans and leases
|
102,799
|
|
109,118
|
|
|||
|
Allowance for loan and lease losses
|
(2,326
|
)
|
(2,674
|
)
|
|||
|
Loans and leases, net of allowance
|
100,473
|
|
106,444
|
|
|||
|
Loans held-for-sale
|
601
|
|
1,384
|
|
|||
|
All other assets
|
3,946
|
|
4,577
|
|
|||
|
Total assets of consolidated variable interest entities
|
$
|
112,281
|
|
$
|
121,002
|
|
|
See accompanying Notes to Consolidated Financial Statements.
142
|
Bank of America Corporation and Subsidiaries
Consolidated Balance Sheet (continued)
|
|||||||
|
(Dollars in millions)
|
June 30
2014 |
December 31
2013 |
|||||
|
Liabilities
|
|
|
|||||
|
Deposits in U.S. offices:
|
|
|
|||||
|
Noninterest-bearing
|
$
|
390,976
|
|
$
|
373,071
|
|
|
|
Interest-bearing (includes
$1,559
and $1,899 measured at fair value)
|
662,823
|
|
667,714
|
|
|||
|
Deposits in non-U.S. offices:
|
|||||||
|
Noninterest-bearing
|
7,224
|
|
8,254
|
|
|||
|
Interest-bearing
|
73,306
|
|
70,232
|
|
|||
|
Total deposits
|
1,134,329
|
|
1,119,271
|
|
|||
|
Federal funds purchased and securities loaned or sold under agreements to repurchase (includes
$35,965
and $33,684 measured at fair value)
|
217,829
|
|
198,106
|
|
|||
|
Trading account liabilities
|
88,342
|
|
83,469
|
|
|||
|
Derivative liabilities
|
38,647
|
|
37,407
|
|
|||
|
Short-term borrowings (includes
$2,350
and $1,520 measured at fair value)
|
45,873
|
|
45,999
|
|
|||
|
Accrued expenses and other liabilities (includes
$11,685
and $11,233 measured at fair value and
$503
and $484 of reserve for unfunded lending commitments)
|
151,055
|
|
135,662
|
|
|||
|
Long-term debt (includes
$42,543
and $47,035 measured at fair value)
|
257,071
|
|
249,674
|
|
|||
|
Total liabilities
|
1,933,146
|
|
1,869,588
|
|
|||
|
Commitments and contingencies (
|
|
|
|
|
|||
|
Shareholders' equity
|
|
|
|||||
|
Preferred stock, $0.01 par value; authorized –
100,000,000
shares; issued and outstanding –
3,467,790
and 3,407,790 shares
|
14,846
|
|
13,352
|
|
|||
|
Common stock and additional paid-in capital, $0.01 par value; authorized –
12,800,000,000
shares; issued and outstanding –
10,515,824,628
and 10,591,808,296 shares
|
153,468
|
|
155,293
|
|
|||
|
Retained earnings
|
73,808
|
|
72,497
|
|
|||
|
Accumulated other comprehensive income (loss)
|
(4,711
|
)
|
(8,457
|
)
|
|||
|
Total shareholders' equity
|
237,411
|
|
232,685
|
|
|||
|
Total liabilities and shareholders' equity
|
$
|
2,170,557
|
|
$
|
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)
|
$
|
927
|
|
$
|
1,150
|
|
|
|
Long-term debt (includes
$14,590
and $16,209 of non-recourse debt)
|
16,333
|
|
19,448
|
|
|||
|
All other liabilities (includes
$92
and $138 of non-recourse liabilities)
|
93
|
|
253
|
|
|||
|
Total liabilities of consolidated variable interest entities
|
$
|
17,353
|
|
$
|
20,851
|
|
|
See accompanying Notes to Consolidated Financial Statements.
143
|
Bank of America Corporation and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
|
|||||||||||||||||
|
Preferred
Stock |
Common Stock and Additional Paid-in Capital
|
Retained
Earnings |
Accumulated
Other Comprehensive Income (Loss) |
Total
Shareholders' Equity |
|||||||||||||
|
(Dollars in millions, shares in thousands)
|
Shares
|
Amount
|
|||||||||||||||
|
Balance, December 31, 2012
|
$
|
18,768
|
|
10,778,264
|
|
$
|
158,142
|
|
$
|
62,843
|
|
$
|
(2,797
|
)
|
$
|
236,956
|
|
|
Net income
|
5,495
|
|
5,495
|
|
|||||||||||||
|
Net change in available-for-sale debt and marketable equity securities
|
(5,139
|
)
|
(5,139
|
)
|
|||||||||||||
|
Net change in derivatives
|
185
|
|
185
|
|
|||||||||||||
|
Employee benefit plan adjustments
|
133
|
|
133
|
|
|||||||||||||
|
Net change in foreign currency translation adjustments
|
(91
|
)
|
(91
|
)
|
|||||||||||||
|
Dividends paid:
|
|
|
|
|
|||||||||||||
|
Common
|
(216
|
)
|
(216
|
)
|
|||||||||||||
|
Preferred
|
(738
|
)
|
(738
|
)
|
|||||||||||||
|
Issuance of preferred stock
|
1,008
|
|
1,008
|
|
|||||||||||||
|
Redemption of preferred stock
|
(5,535
|
)
|
(76
|
)
|
(5,611
|
)
|
|||||||||||
|
Common stock issued under employee plans and related tax effects
|
44,480
|
|
53
|
|
53
|
|
|||||||||||
|
Common stock repurchased
|
(79,646
|
)
|
(1,003
|
)
|
(1,003
|
)
|
|||||||||||
|
Balance, June 30, 2013
|
$
|
14,241
|
|
10,743,098
|
|
$
|
157,192
|
|
$
|
67,308
|
|
$
|
(7,709
|
)
|
$
|
231,032
|
|
|
Balance, December 31, 2013
|
$
|
13,352
|
|
10,591,808
|
|
$
|
155,293
|
|
$
|
72,497
|
|
$
|
(8,457
|
)
|
$
|
232,685
|
|
|
Net income
|
2,015
|
|
2,015
|
|
|||||||||||||
|
Net change in available-for-sale debt and marketable equity securities
|
3,594
|
|
3,594
|
|
|||||||||||||
|
Net change in derivatives
|
215
|
|
215
|
|
|||||||||||||
|
Employee benefit plan adjustments
|
56
|
|
56
|
|
|||||||||||||
|
Net change in foreign currency translation adjustments
|
(119
|
)
|
(119
|
)
|
|||||||||||||
|
Dividends paid:
|
|||||||||||||||||
|
Common
|
(210
|
)
|
(210
|
)
|
|||||||||||||
|
Preferred
|
(494
|
)
|
(494
|
)
|
|||||||||||||
|
Issuance of preferred stock
|
1,494
|
|
1,494
|
|
|||||||||||||
|
Common stock issued under employee plans and related tax effects
|
25,149
|
|
(150
|
)
|
(150
|
)
|
|||||||||||
|
Common stock repurchased
|
(101,132
|
)
|
(1,675
|
)
|
(1,675
|
)
|
|||||||||||
|
Balance, June 30, 2014
|
$
|
14,846
|
|
10,515,825
|
|
$
|
153,468
|
|
$
|
73,808
|
|
$
|
(4,711
|
)
|
$
|
237,411
|
|
See accompanying Notes to Consolidated Financial Statements.
144
|
Bank of America Corporation and Subsidiaries
|
|||||||
|
|
Six Months Ended June 30
|
||||||
|
(Dollars in millions)
|
2014
|
2013
|
|||||
|
Operating activities
|
|
|
|||||
|
Net income
|
$
|
2,015
|
|
$
|
5,495
|
|
|
|
Reconciliation of net income to net cash provided by operating activities:
|
|||||||
|
Provision for credit losses
|
1,420
|
|
2,924
|
|
|||
|
Gains on sales of debt securities
|
(759
|
)
|
(525
|
)
|
|||
|
Depreciation and premises improvements amortization
|
781
|
|
813
|
|
|||
|
Amortization of intangibles
|
474
|
|
550
|
|
|||
|
Net amortization of premium/discount on debt securities
|
1,278
|
|
655
|
|
|||
|
Deferred income taxes
|
320
|
|
884
|
|
|||
|
Originations and purchases of loans held-for-sale
|
(18,794
|
)
|
(40,128
|
)
|
|||
|
Proceeds from sales and paydowns of loans originally classified as held-for-sale
|
19,351
|
|
43,871
|
|
|||
|
Net decrease in trading and derivative instruments
|
12,874
|
|
41,218
|
|
|||
|
Net (increase) decrease in other assets
|
(6,936
|
)
|
25,281
|
|
|||
|
Net increase (decrease) in accrued expenses and other liabilities
|
15,374
|
|
(9,595
|
)
|
|||
|
Other operating activities, net
|
103
|
|
1,153
|
|
|||
|
Net cash provided by operating activities
|
27,501
|
|
72,596
|
|
|||
|
Investing activities
|
|
|
|||||
|
Net decrease in time deposits placed and other short-term investments
|
2,894
|
|
5,778
|
|
|||
|
Net increase in federal funds sold and securities borrowed or purchased under agreements to resell
|
(39,121
|
)
|
(4,244
|
)
|
|||
|
Proceeds from sales of debt securities carried at fair value
|
58,660
|
|
61,564
|
|
|||
|
Proceeds from paydowns and maturities of debt securities carried at fair value
|
36,773
|
|
46,652
|
|
|||
|
Purchases of debt securities carried at fair value
|
(113,103
|
)
|
(88,615
|
)
|
|||
|
Proceeds from paydowns and maturities of held-to-maturity debt securities
|
3,016
|
|
5,055
|
|
|||
|
Purchases of held-to-maturity debt securities
|
(8,207
|
)
|
(10,556
|
)
|
|||
|
Proceeds from sales of loans and leases
|
11,863
|
|
5,480
|
|
|||
|
Purchases of loans and leases
|
(5,079
|
)
|
(12,439
|
)
|
|||
|
Other changes in loans and leases, net
|
7,389
|
|
(13,237
|
)
|
|||
|
Net purchases of premises and equipment
|
(451
|
)
|
(98
|
)
|
|||
|
Proceeds from sales of foreclosed properties
|
394
|
|
604
|
|
|||
|
Proceeds from sales of investments
|
1,429
|
|
2,117
|
|
|||
|
Other investing activities, net
|
(266
|
)
|
(353
|
)
|
|||
|
Net cash used in investing activities
|
(43,809
|
)
|
(2,292
|
)
|
|||
|
Financing activities
|
|
|
|||||
|
Net increase (decrease) in deposits
|
15,058
|
|
(24,478
|
)
|
|||
|
Net increase (decrease) in federal funds purchased and securities loaned or sold under agreements to repurchase
|
19,723
|
|
(60,650
|
)
|
|||
|
Net increase (decrease) in short-term borrowings
|
(126
|
)
|
15,739
|
|
|||
|
Proceeds from issuance of long-term debt
|
35,789
|
|
25,174
|
|
|||
|
Retirement of long-term debt
|
(31,871
|
)
|
(29,433
|
)
|
|||
|
Proceeds from issuance of preferred stock
|
1,494
|
|
1,008
|
|
|||
|
Redemption of preferred stock
|
—
|
|
(5,535
|
)
|
|||
|
Common stock repurchased
|
(1,675
|
)
|
(1,003
|
)
|
|||
|
Cash dividends paid
|
(704
|
)
|
(954
|
)
|
|||
|
Excess tax benefits on share-based payments
|
34
|
|
12
|
|
|||
|
Other financing activities, net
|
(26
|
)
|
(13
|
)
|
|||
|
Net cash provided by (used in) financing activities
|
37,696
|
|
(80,133
|
)
|
|||
|
Effect of exchange rate changes on cash and cash equivalents
|
189
|
|
(2,095
|
)
|
|||
|
Net increase (decrease) in cash and cash equivalents
|
21,577
|
|
(11,924
|
)
|
|||
|
Cash and cash equivalents at January 1
|
131,322
|
|
110,752
|
|
|||
|
Cash and cash equivalents at June 30
|
$
|
152,899
|
|
$
|
98,828
|
|
|
See accompanying Notes to Consolidated Financial Statements.
145
|
Bank of America Corporation and Subsidiaries
Notes to Consolidated Financial Statements
|
|
|
Bank of America Corporation (together with its consolidated subsidiaries, the Corporation), a bank holding company and a financial holding company, provides a diverse range of financial services and products throughout the U.S. and in certain international markets. The term "the Corporation" as used herein may refer to Bank of America Corporation individually, Bank of America Corporation and its subsidiaries, or certain of Bank of America Corporation's subsidiaries or affiliates.
The Corporation conducts its activities through banking and nonbanking subsidiaries. The Corporation operates its banking activities primarily under two charters: Bank of America, National Association (Bank of America, N.A. or BANA) and FIA Card Services, National Association (FIA Card Services, N.A. or FIA).
|
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 or at fair value under the fair value option. 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.
These unaudited Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K. The nature of the Corporation's business is such that the results of any interim period are not necessarily indicative of results for a full year. In the opinion of management, all adjustments, which consist of normal recurring adjustments necessary for a fair statement of the interim period results have been made. 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 June 2014, the Financial Accounting Standards Board (FASB) issued new accounting 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. The Corporation does not expect this guidance to have a material impact on its consolidated financial position or results of operation.
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 operation.
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.
146
|
Accounting Policies
|
All significant accounting policies are discussed either in this Note, in
Note 1 – Summary of Significant Accounting Principles
to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K
or are included in the Notes herein listed below.
|
INDEX
|
Page
|
|
Note 2 – Derivatives
|
|
|
Note 3 – Securities
|
|
|
Note 4 – Outstanding Loans and Leases
|
|
|
Note 6 – Securitizations and Other Variable Interest Entities
|
|
|
Note 7 – Representations and Warranties Obligations and Corporate Guarantees
|
|
|
Note 10 – Commitments and Contingencies
|
|
|
Note 13 – Earnings Per Common Share
|
|
|
Note 14 – Fair Value Measurements
|
|
|
Note 17 – Mortgage Servicing Rights
|
|
147
|
|
|
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
to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K
. The following tables present derivative instruments included on the Consolidated Balance Sheet in derivative assets and liabilities at
June 30, 2014
and
December 31, 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.
|
|
June 30, 2014
|
||||||||||||||||||||||||||
|
|
|
Gross Derivative Assets
|
Gross Derivative Liabilities
|
||||||||||||||||||||||||
|
(Dollars in billions)
|
Contract/
Notional
(1)
|
Trading Derivatives and Other Risk Management Derivatives
|
Qualifying
Accounting
Hedges
|
Total
|
Trading Derivatives and Other Risk Management Derivatives
|
Qualifying
Accounting
Hedges
|
Total
|
||||||||||||||||||||
|
Interest rate contracts
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Swaps
|
$
|
30,735.7
|
|
$
|
569.4
|
|
$
|
8.2
|
|
$
|
577.6
|
|
$
|
568.3
|
|
$
|
0.3
|
|
$
|
568.6
|
|
||||||
|
Futures and forwards
|
9,781.2
|
|
1.9
|
|
—
|
|
1.9
|
|
2.0
|
|
—
|
|
2.0
|
|
|||||||||||||
|
Written options
|
1,924.4
|
|
—
|
|
—
|
|
—
|
|
72.0
|
|
—
|
|
72.0
|
|
|||||||||||||
|
Purchased options
|
1,965.2
|
|
72.6
|
|
—
|
|
72.6
|
|
—
|
|
—
|
|
—
|
|
|||||||||||||
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Swaps
|
2,289.6
|
|
33.3
|
|
0.8
|
|
34.1
|
|
33.3
|
|
0.8
|
|
34.1
|
|
|||||||||||||
|
Spot, futures and forwards
|
3,777.2
|
|
21.1
|
|
0.1
|
|
21.2
|
|
22.5
|
|
0.6
|
|
23.1
|
|
|||||||||||||
|
Written options
|
500.9
|
|
—
|
|
—
|
|
—
|
|
7.1
|
|
—
|
|
7.1
|
|
|||||||||||||
|
Purchased options
|
460.4
|
|
6.9
|
|
—
|
|
6.9
|
|
—
|
|
—
|
|
—
|
|
|||||||||||||
|
Equity contracts
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Swaps
|
185.1
|
|
3.9
|
|
—
|
|
3.9
|
|
3.7
|
|
—
|
|
3.7
|
|
|||||||||||||
|
Futures and forwards
|
83.7
|
|
1.2
|
|
—
|
|
1.2
|
|
1.7
|
|
—
|
|
1.7
|
|
|||||||||||||
|
Written options
|
330.3
|
|
—
|
|
—
|
|
—
|
|
28.7
|
|
—
|
|
28.7
|
|
|||||||||||||
|
Purchased options
|
306.4
|
|
28.6
|
|
—
|
|
28.6
|
|
—
|
|
—
|
|
—
|
|
|||||||||||||
|
Commodity contracts
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Swaps
|
69.5
|
|
2.8
|
|
—
|
|
2.8
|
|
4.2
|
|
—
|
|
4.2
|
|
|||||||||||||
|
Futures and forwards
|
564.6
|
|
5.1
|
|
—
|
|
5.1
|
|
3.3
|
|
—
|
|
3.3
|
|
|||||||||||||
|
Written options
|
148.0
|
|
—
|
|
—
|
|
—
|
|
4.7
|
|
—
|
|
4.7
|
|
|||||||||||||
|
Purchased options
|
154.3
|
|
4.8
|
|
—
|
|
4.8
|
|
—
|
|
—
|
|
—
|
|
|||||||||||||
|
Credit derivatives
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Purchased credit derivatives:
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Credit default swaps
|
1,263.3
|
|
10.1
|
|
—
|
|
10.1
|
|
29.1
|
|
—
|
|
29.1
|
|
|||||||||||||
|
Total return swaps/other
|
64.9
|
|
0.4
|
|
—
|
|
0.4
|
|
1.8
|
|
—
|
|
1.8
|
|
|||||||||||||
|
Written credit derivatives:
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Credit default swaps
|
1,223.8
|
|
30.4
|
|
—
|
|
30.4
|
|
8.7
|
|
—
|
|
8.7
|
|
|||||||||||||
|
Total return swaps/other
|
78.8
|
|
4.7
|
|
—
|
|
4.7
|
|
0.5
|
|
—
|
|
0.5
|
|
|||||||||||||
|
Gross derivative assets/liabilities
|
$
|
797.2
|
|
$
|
9.1
|
|
$
|
806.3
|
|
$
|
791.6
|
|
$
|
1.7
|
|
$
|
793.3
|
|
|||||||||
|
Less: Legally enforceable master netting agreements
|
|
(717.2
|
)
|
|
|
(717.2
|
)
|
||||||||||||||||||||
|
Less: Cash collateral received/paid
|
|
|
(41.2
|
)
|
|
|
(37.5
|
)
|
|||||||||||||||||||
|
Total derivative assets/liabilities
|
|
|
$
|
47.9
|
|
|
|
$
|
38.6
|
|
|||||||||||||||||
|
(1)
|
Represents the total contract/notional amount of derivative assets and liabilities outstanding.
|
148
|
|
December 31, 2013
|
||||||||||||||||||||||||||
|
|
|
Gross Derivative Assets
|
Gross Derivative Liabilities
|
||||||||||||||||||||||||
|
(Dollars in billions)
|
Contract/
Notional
(1)
|
Trading Derivatives and Other Risk Management Derivatives
|
Qualifying
Accounting
Hedges
|
Total
|
Trading Derivatives and Other Risk Management Derivatives
|
Qualifying
Accounting
Hedges
|
Total
|
||||||||||||||||||||
|
Interest rate contracts
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Swaps
|
$
|
33,272.0
|
|
$
|
659.9
|
|
$
|
7.5
|
|
$
|
667.4
|
|
$
|
658.4
|
|
$
|
0.9
|
|
$
|
659.3
|
|
||||||
|
Futures and forwards
|
8,217.6
|
|
1.6
|
|
—
|
|
1.6
|
|
1.5
|
|
—
|
|
1.5
|
|
|||||||||||||
|
Written options
|
2,065.4
|
|
—
|
|
—
|
|
—
|
|
64.4
|
|
—
|
|
64.4
|
|
|||||||||||||
|
Purchased options
|
2,028.3
|
|
65.4
|
|
—
|
|
65.4
|
|
—
|
|
—
|
|
—
|
|
|||||||||||||
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Swaps
|
2,284.1
|
|
43.1
|
|
1.0
|
|
44.1
|
|
42.7
|
|
1.0
|
|
43.7
|
|
|||||||||||||
|
Spot, futures and forwards
|
2,922.5
|
|
32.5
|
|
0.7
|
|
33.2
|
|
33.5
|
|
1.1
|
|
34.6
|
|
|||||||||||||
|
Written options
|
412.4
|
|
—
|
|
—
|
|
—
|
|
9.2
|
|
—
|
|
9.2
|
|
|||||||||||||
|
Purchased options
|
392.4
|
|
8.8
|
|
—
|
|
8.8
|
|
—
|
|
—
|
|
—
|
|
|||||||||||||
|
Equity contracts
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Swaps
|
162.0
|
|
3.6
|
|
—
|
|
3.6
|
|
4.2
|
|
—
|
|
4.2
|
|
|||||||||||||
|
Futures and forwards
|
71.4
|
|
1.1
|
|
—
|
|
1.1
|
|
1.4
|
|
—
|
|
1.4
|
|
|||||||||||||
|
Written options
|
315.6
|
|
—
|
|
—
|
|
—
|
|
29.6
|
|
—
|
|
29.6
|
|
|||||||||||||
|
Purchased options
|
266.7
|
|
30.4
|
|
—
|
|
30.4
|
|
—
|
|
—
|
|
—
|
|
|||||||||||||
|
Commodity contracts
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Swaps
|
73.1
|
|
3.8
|
|
—
|
|
3.8
|
|
5.7
|
|
—
|
|
5.7
|
|
|||||||||||||
|
Futures and forwards
|
454.4
|
|
4.7
|
|
—
|
|
4.7
|
|
2.5
|
|
—
|
|
2.5
|
|
|||||||||||||
|
Written options
|
157.3
|
|
—
|
|
—
|
|
—
|
|
5.0
|
|
—
|
|
5.0
|
|
|||||||||||||
|
Purchased options
|
164.0
|
|
5.2
|
|
—
|
|
5.2
|
|
—
|
|
—
|
|
—
|
|
|||||||||||||
|
Credit derivatives
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Purchased credit derivatives:
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Credit default swaps
|
1,305.1
|
|
15.7
|
|
—
|
|
15.7
|
|
28.1
|
|
—
|
|
28.1
|
|
|||||||||||||
|
Total return swaps/other
|
38.1
|
|
2.0
|
|
—
|
|
2.0
|
|
3.2
|
|
—
|
|
3.2
|
|
|||||||||||||
|
Written credit derivatives:
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Credit default swaps
|
1,265.4
|
|
29.3
|
|
—
|
|
29.3
|
|
13.8
|
|
—
|
|
13.8
|
|
|||||||||||||
|
Total return swaps/other
|
63.4
|
|
4.0
|
|
—
|
|
4.0
|
|
0.2
|
|
—
|
|
0.2
|
|
|||||||||||||
|
Gross derivative assets/liabilities
|
$
|
911.1
|
|
$
|
9.2
|
|
$
|
920.3
|
|
$
|
903.4
|
|
$
|
3.0
|
|
$
|
906.4
|
|
|||||||||
|
Less: Legally enforceable master netting agreements
|
|
(825.5
|
)
|
|
|
(825.5
|
)
|
||||||||||||||||||||
|
Less: Cash collateral received/paid
|
|
|
(47.3
|
)
|
|
|
(43.5
|
)
|
|||||||||||||||||||
|
Total derivative assets/liabilities
|
|
|
$
|
47.5
|
|
|
|
$
|
37.4
|
|
|||||||||||||||||
|
(1)
|
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.
149
The Offsetting of Derivatives table presents derivative instruments included in derivative assets and liabilities on the Consolidated Balance Sheet at
June 30, 2014
and
December 31, 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 9 – Federal Funds Sold or Purchased, Securities Financing Agreements and Short-term Borrowings
.
|
Offsetting of Derivatives
|
|||||||||||||||
|
|
June 30, 2014
|
December 31, 2013
|
|||||||||||||
|
(Dollars in billions)
|
Derivative
Assets
|
Derivative
Liabilities
|
Derivative
Assets
|
Derivative
Liabilities
|
|||||||||||
|
Interest rate contracts
|
|
|
|||||||||||||
|
Over-the-counter
|
$
|
360.0
|
|
$
|
346.6
|
|
$
|
381.7
|
|
$
|
365.9
|
|
|||
|
Exchange-traded
|
0.2
|
|
0.2
|
|
0.4
|
|
0.3
|
|
|||||||
|
Over-the-counter cleared
|
288.8
|
|
292.7
|
|
351.2
|
|
356.5
|
|
|||||||
|
Foreign exchange contracts
|
|||||||||||||||
|
Over-the-counter
|
59.5
|
|
61.0
|
|
82.9
|
|
83.9
|
|
|||||||
|
Equity contracts
|
|
|
|
|
|||||||||||
|
Over-the-counter
|
19.6
|
|
16.9
|
|
20.3
|
|
17.6
|
|
|||||||
|
Exchange-traded
|
8.3
|
|
9.7
|
|
8.4
|
|
9.8
|
|
|||||||
|
Commodity contracts
|
|||||||||||||||
|
Over-the-counter
|
7.0
|
|
7.7
|
|
6.3
|
|
7.4
|
|
|||||||
|
Exchange-traded
|
3.2
|
|
2.9
|
|
3.3
|
|
2.9
|
|
|||||||
|
Credit derivatives
|
|
|
|
|
|
|
|
|
|||||||
|
Over-the-counter
|
37.8
|
|
32.9
|
|
44.0
|
|
38.9
|
|
|||||||
|
Over-the-counter cleared
|
7.0
|
|
6.7
|
|
5.8
|
|
5.9
|
|
|||||||
|
Total gross derivative assets/liabilities, before netting
|
|
|
|
|
|||||||||||
|
Over-the-counter
|
483.9
|
|
465.1
|
|
535.2
|
|
513.7
|
|
|||||||
|
Exchange-traded
|
11.7
|
|
12.8
|
|
12.1
|
|
13.0
|
|
|||||||
|
Over-the-counter cleared
|
295.8
|
|
299.4
|
|
357.0
|
|
362.4
|
|
|||||||
|
Less: Legally enforceable master netting agreements and cash collateral received/paid
|
|||||||||||||||
|
Over-the-counter
|
(453.0
|
)
|
(445.5
|
)
|
(505.0
|
)
|
(495.4
|
)
|
|||||||
|
Exchange-traded
|
(10.2
|
)
|
(10.2
|
)
|
(11.2
|
)
|
(11.2
|
)
|
|||||||
|
Over-the-counter cleared
|
(295.2
|
)
|
(299.0
|
)
|
(356.6
|
)
|
(362.4
|
)
|
|||||||
|
Derivative assets/liabilities, after netting
|
33.0
|
|
22.6
|
|
31.5
|
|
20.1
|
|
|||||||
|
Other gross derivative assets/liabilities
|
14.9
|
|
16.0
|
|
16.0
|
|
17.3
|
|
|||||||
|
Total derivative assets/liabilities
|
47.9
|
|
38.6
|
|
47.5
|
|
37.4
|
|
|||||||
|
Less: Financial instruments collateral
(1)
|
(9.3
|
)
|
(5.5
|
)
|
(10.1
|
)
|
(4.6
|
)
|
|||||||
|
Total net derivative assets/liabilities
|
$
|
38.6
|
|
$
|
33.1
|
|
$
|
37.4
|
|
$
|
32.8
|
|
|||
|
(1)
|
These amounts are limited to the derivative asset/liability balance and, accordingly, do not include excess collateral received/pledged.
|
150
|
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 that are 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 17 – 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.
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).
151
|
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 certain information related to fair value hedges for the
three and six months ended June 30, 2014 and 2013
.
|
Derivatives Designated as Fair Value Hedges
|
|||||||||||||||||||||||
|
Gains (Losses)
|
Three Months Ended June 30
|
Six Months Ended June 30
|
|||||||||||||||||||||
|
2014
|
2014
|
||||||||||||||||||||||
|
(Dollars in millions)
|
Derivative
|
Hedged
Item
|
Hedge
Ineffectiveness
|
Derivative
|
Hedged
Item
|
Hedge
Ineffectiveness
|
|||||||||||||||||
|
Interest rate risk on long-term debt
(1)
|
$
|
735
|
|
$
|
(944
|
)
|
$
|
(209
|
)
|
$
|
1,101
|
|
$
|
(1,504
|
)
|
$
|
(403
|
)
|
|||||
|
Interest rate and foreign currency risk on long-term debt
(1)
|
145
|
|
(171
|
)
|
(26
|
)
|
263
|
|
(315
|
)
|
(52
|
)
|
|||||||||||
|
Interest rate risk on available-for-sale securities
(2)
|
(23
|
)
|
19
|
|
(4
|
)
|
(21
|
)
|
16
|
|
(5
|
)
|
|||||||||||
|
Price risk on commodity inventory
(3)
|
—
|
|
(2
|
)
|
(2
|
)
|
2
|
|
3
|
|
5
|
|
|||||||||||
|
Total
|
$
|
857
|
|
$
|
(1,098
|
)
|
$
|
(241
|
)
|
$
|
1,345
|
|
$
|
(1,800
|
)
|
$
|
(455
|
)
|
|||||
|
|
2013
|
2013
|
|||||||||||||||||||||
|
Interest rate risk on long-term debt
(1)
|
$
|
(2,407
|
)
|
$
|
2,239
|
|
$
|
(168
|
)
|
$
|
(3,383
|
)
|
$
|
3,033
|
|
$
|
(350
|
)
|
|||||
|
Interest rate and foreign currency risk on long-term debt
(1)
|
(582
|
)
|
548
|
|
(34
|
)
|
(2,120
|
)
|
2,004
|
|
(116
|
)
|
|||||||||||
|
Interest rate risk on available-for-sale securities
(2)
|
(14
|
)
|
9
|
|
(5
|
)
|
836
|
|
(837
|
)
|
(1
|
)
|
|||||||||||
|
Price risk on commodity inventory
(3)
|
3
|
|
(4
|
)
|
(1
|
)
|
—
|
|
(1
|
)
|
(1
|
)
|
|||||||||||
|
Total
|
$
|
(3,000
|
)
|
$
|
2,792
|
|
$
|
(208
|
)
|
$
|
(4,667
|
)
|
$
|
4,199
|
|
$
|
(468
|
)
|
|||||
|
(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.
|
152
Cash Flow and Net Investment Hedges
The table below summarizes certain information related to cash flow hedges and net investment hedges for the
three and six months ended June 30, 2014 and 2013
. During the next 12 months, net losses in accumulated other comprehensive income (OCI) of
$960 million
(
$600 million
after-tax) on derivative instruments that qualify as cash flow hedges are expected to be reclassified into earnings. 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
|
|||||||||||||||||||||||
|
|
Three Months Ended June 30
|
Six Months Ended June 30
|
|||||||||||||||||||||
|
2014
|
2014
|
||||||||||||||||||||||
|
(Dollars in millions, amounts pre-tax)
|
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)
|
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
|
$
|
28
|
|
$
|
(279
|
)
|
$
|
—
|
|
$
|
45
|
|
$
|
(560
|
)
|
$
|
—
|
|
|||||
|
Price risk on restricted stock awards
|
(220
|
)
|
75
|
|
—
|
|
(64
|
)
|
225
|
|
—
|
|
|||||||||||
|
Total
|
$
|
(192
|
)
|
$
|
(204
|
)
|
$
|
—
|
|
$
|
(19
|
)
|
$
|
(335
|
)
|
$
|
—
|
|
|||||
|
Net investment hedges
|
|
|
|
|
|
|
|||||||||||||||||
|
Foreign exchange risk
|
$
|
(797
|
)
|
$
|
—
|
|
$
|
(118
|
)
|
$
|
(978
|
)
|
$
|
(2
|
)
|
$
|
(176
|
)
|
|||||
|
2013
|
2013
|
||||||||||||||||||||||
|
Cash flow hedges
|
|||||||||||||||||||||||
|
Interest rate risk on variable-rate portfolios
|
$
|
(276
|
)
|
$
|
(255
|
)
|
$
|
(1
|
)
|
$
|
(290
|
)
|
$
|
(530
|
)
|
$
|
(2
|
)
|
|||||
|
Price risk on restricted stock awards
|
110
|
|
69
|
|
—
|
|
165
|
|
109
|
|
—
|
|
|||||||||||
|
Total
|
$
|
(166
|
)
|
$
|
(186
|
)
|
$
|
(1
|
)
|
$
|
(125
|
)
|
$
|
(421
|
)
|
$
|
(2
|
)
|
|||||
|
Net investment hedges
|
|
|
|
||||||||||||||||||||
|
Foreign exchange risk
|
$
|
804
|
|
$
|
3
|
|
$
|
(37
|
)
|
$
|
2,480
|
|
$
|
(91
|
)
|
$
|
(72
|
)
|
|||||
|
(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.
|
153
|
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 the
three and six months ended June 30, 2014 and 2013
. These gains (losses) are largely offset by the income or expense that is recorded on the hedged item.
|
Other Risk Management Derivatives
|
|||||||||||||||
|
Gains (Losses)
|
Three Months Ended June 30
|
Six Months Ended June 30
|
|||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Interest rate risk on mortgage banking income
(1)
|
$
|
196
|
|
$
|
(464
|
)
|
$
|
376
|
|
$
|
(497
|
)
|
|||
|
Credit risk on loans
(2)
|
(27
|
)
|
(11
|
)
|
(33
|
)
|
(7
|
)
|
|||||||
|
Interest rate and foreign currency risk on ALM activities
(3)
|
(713
|
)
|
1,113
|
|
(1,311
|
)
|
508
|
|
|||||||
|
Price risk on restricted stock awards
(4)
|
(338
|
)
|
124
|
|
26
|
|
240
|
|
|||||||
|
Other
|
(1
|
)
|
(8
|
)
|
(4
|
)
|
(11
|
)
|
|||||||
|
(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 considered derivative instruments, were
$225 million
and
$398 million
for the
three and six months ended June 30, 2014
compared to
$132 million
and
$539 million
for the
same periods in 2013
.
|
|
(2)
|
Net gains (losses) on these derivatives are recorded in other income (loss).
|
|
(3)
|
The balance is primarily related to hedges of debt securities carried at fair value and hedges of foreign currency-denominated debt. Results from these items are recorded in other income (loss). The offsetting mark-to-market, while not included in the table above, is also 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.
154
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 the
three and six months ended June 30, 2014 and 2013
. 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
.
Global Markets
results in
Note 18 – Business Segment Information
are presented on a fully taxable-equivalent (FTE) basis. The table below is not presented on a FTE basis.
|
Sales and Trading Revenue
|
|||||||||||||||||||||||||||||||
|
|
Three Months Ended June 30
|
Six Months Ended June 30
|
|||||||||||||||||||||||||||||
|
2014
|
2014
|
||||||||||||||||||||||||||||||
|
(Dollars in millions)
|
Trading
Account
Profits
|
Net Interest Income
|
Other
(1)
|
Total
|
Trading
Account Profits |
Net Interest Income
|
Other
(1)
|
Total
|
|||||||||||||||||||||||
|
Interest rate risk
|
$
|
443
|
|
$
|
302
|
|
$
|
85
|
|
$
|
830
|
|
$
|
796
|
|
$
|
582
|
|
$
|
222
|
|
$
|
1,600
|
|
|||||||
|
Foreign exchange risk
|
229
|
|
2
|
|
(31
|
)
|
200
|
|
466
|
|
4
|
|
(61
|
)
|
409
|
|
|||||||||||||||
|
Equity risk
|
550
|
|
(75
|
)
|
561
|
|
1,036
|
|
1,152
|
|
(92
|
)
|
1,162
|
|
2,222
|
|
|||||||||||||||
|
Credit risk
|
507
|
|
682
|
|
203
|
|
1,392
|
|
1,550
|
|
1,382
|
|
358
|
|
3,290
|
|
|||||||||||||||
|
Other risk
|
39
|
|
(97
|
)
|
20
|
|
(38
|
)
|
171
|
|
(191
|
)
|
93
|
|
73
|
|
|||||||||||||||
|
Total sales and trading revenue
|
$
|
1,768
|
|
$
|
814
|
|
$
|
838
|
|
$
|
3,420
|
|
$
|
4,135
|
|
$
|
1,685
|
|
$
|
1,774
|
|
$
|
7,594
|
|
|||||||
|
2013
|
2013
|
||||||||||||||||||||||||||||||
|
Interest rate risk
|
$
|
341
|
|
$
|
270
|
|
$
|
(34
|
)
|
$
|
577
|
|
$
|
1,018
|
|
$
|
563
|
|
$
|
(60
|
)
|
$
|
1,521
|
|
|||||||
|
Foreign exchange risk
|
305
|
|
1
|
|
(26
|
)
|
280
|
|
675
|
|
1
|
|
(51
|
)
|
625
|
|
|||||||||||||||
|
Equity risk
|
663
|
|
(21
|
)
|
638
|
|
1,280
|
|
1,271
|
|
(6
|
)
|
1,168
|
|
2,433
|
|
|||||||||||||||
|
Credit risk
|
415
|
|
672
|
|
125
|
|
1,212
|
|
1,454
|
|
1,388
|
|
(249
|
)
|
2,593
|
|
|||||||||||||||
|
Other risk
|
124
|
|
(42
|
)
|
18
|
|
100
|
|
320
|
|
(92
|
)
|
7
|
|
235
|
|
|||||||||||||||
|
Total sales and trading revenue
|
$
|
1,848
|
|
$
|
880
|
|
$
|
721
|
|
$
|
3,449
|
|
$
|
4,738
|
|
$
|
1,854
|
|
$
|
815
|
|
$
|
7,407
|
|
|||||||
|
(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
$540 million
and
$1.1 billion
for the
three and six months ended June 30, 2014
and
$549 million
and
$1.1 billion
for the
same periods in 2013
.
|
|
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.
155
Credit derivative instruments where the Corporation is the seller of credit protection and their expiration are summarized at
June 30, 2014
and
December 31, 2013
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.
|
Credit Derivative Instruments
|
|||||||||||||||||||
|
|
June 30, 2014
|
||||||||||||||||||
|
|
Carrying Value
|
||||||||||||||||||
|
(Dollars in millions)
|
Less than
One Year
|
One to
Three Years
|
Three to
Five Years
|
Over Five
Years
|
Total
|
||||||||||||||
|
Credit default swaps:
|
|
|
|
|
|
||||||||||||||
|
Investment grade
|
$
|
4
|
|
$
|
213
|
|
$
|
349
|
|
$
|
511
|
|
$
|
1,077
|
|
||||
|
Non-investment grade
|
425
|
|
1,301
|
|
1,365
|
|
4,523
|
|
7,614
|
|
|||||||||
|
Total
|
429
|
|
1,514
|
|
1,714
|
|
5,034
|
|
8,691
|
|
|||||||||
|
Total return swaps/other:
|
|
|
|
|
|
||||||||||||||
|
Investment grade
|
45
|
|
—
|
|
—
|
|
—
|
|
45
|
|
|||||||||
|
Non-investment grade
|
379
|
|
86
|
|
2
|
|
3
|
|
470
|
|
|||||||||
|
Total
|
424
|
|
86
|
|
2
|
|
3
|
|
515
|
|
|||||||||
|
Total credit derivatives
|
$
|
853
|
|
$
|
1,600
|
|
$
|
1,716
|
|
$
|
5,037
|
|
$
|
9,206
|
|
||||
|
Credit-related notes:
(1)
|
|
|
|
|
|
||||||||||||||
|
Investment grade
|
$
|
2
|
|
$
|
291
|
|
$
|
1,087
|
|
$
|
3,354
|
|
$
|
4,734
|
|
||||
|
Non-investment grade
|
63
|
|
170
|
|
100
|
|
1,122
|
|
1,455
|
|
|||||||||
|
Total credit-related notes
|
$
|
65
|
|
$
|
461
|
|
$
|
1,187
|
|
$
|
4,476
|
|
$
|
6,189
|
|
||||
|
|
Maximum Payout/Notional
|
||||||||||||||||||
|
Credit default swaps:
|
|
|
|
|
|
||||||||||||||
|
Investment grade
|
$
|
178,882
|
|
$
|
387,781
|
|
$
|
371,352
|
|
$
|
35,155
|
|
$
|
973,170
|
|
||||
|
Non-investment grade
|
49,325
|
|
93,451
|
|
84,476
|
|
23,418
|
|
250,670
|
|
|||||||||
|
Total
|
228,207
|
|
481,232
|
|
455,828
|
|
58,573
|
|
1,223,840
|
|
|||||||||
|
Total return swaps/other:
|
|
|
|
|
|
||||||||||||||
|
Investment grade
|
37,417
|
|
—
|
|
—
|
|
—
|
|
37,417
|
|
|||||||||
|
Non-investment grade
|
26,707
|
|
10,217
|
|
3,390
|
|
1,077
|
|
41,391
|
|
|||||||||
|
Total
|
64,124
|
|
10,217
|
|
3,390
|
|
1,077
|
|
78,808
|
|
|||||||||
|
Total credit derivatives
|
$
|
292,331
|
|
$
|
491,449
|
|
$
|
459,218
|
|
$
|
59,650
|
|
$
|
1,302,648
|
|
||||
|
December 31, 2013
|
|||||||||||||||||||
|
Carrying Value
|
|||||||||||||||||||
|
Credit default swaps:
|
|
|
|
|
|
||||||||||||||
|
Investment grade
|
$
|
2
|
|
$
|
220
|
|
$
|
974
|
|
$
|
1,134
|
|
$
|
2,330
|
|
||||
|
Non-investment grade
|
424
|
|
1,924
|
|
2,469
|
|
6,667
|
|
11,484
|
|
|||||||||
|
Total
|
426
|
|
2,144
|
|
3,443
|
|
7,801
|
|
13,814
|
|
|||||||||
|
Total return swaps/other:
|
|
|
|
|
|
||||||||||||||
|
Investment grade
|
22
|
|
—
|
|
—
|
|
—
|
|
22
|
|
|||||||||
|
Non-investment grade
|
29
|
|
38
|
|
2
|
|
86
|
|
155
|
|
|||||||||
|
Total
|
51
|
|
38
|
|
2
|
|
86
|
|
177
|
|
|||||||||
|
Total credit derivatives
|
$
|
477
|
|
$
|
2,182
|
|
$
|
3,445
|
|
$
|
7,887
|
|
$
|
13,991
|
|
||||
|
Credit-related notes:
(1)
|
|
|
|
|
|
||||||||||||||
|
Investment grade
|
$
|
—
|
|
$
|
278
|
|
$
|
595
|
|
$
|
4,457
|
|
$
|
5,330
|
|
||||
|
Non-investment grade
|
145
|
|
107
|
|
756
|
|
946
|
|
1,954
|
|
|||||||||
|
Total credit-related notes
|
$
|
145
|
|
$
|
385
|
|
$
|
1,351
|
|
$
|
5,403
|
|
$
|
7,284
|
|
||||
|
|
Maximum Payout/Notional
|
||||||||||||||||||
|
Credit default swaps:
|
|
|
|
|
|
||||||||||||||
|
Investment grade
|
$
|
170,764
|
|
$
|
379,273
|
|
$
|
411,426
|
|
$
|
36,039
|
|
$
|
997,502
|
|
||||
|
Non-investment grade
|
53,316
|
|
90,986
|
|
95,319
|
|
28,257
|
|
267,878
|
|
|||||||||
|
Total
|
224,080
|
|
470,259
|
|
506,745
|
|
64,296
|
|
1,265,380
|
|
|||||||||
|
Total return swaps/other:
|
|
|
|
|
|
||||||||||||||
|
Investment grade
|
21,771
|
|
—
|
|
—
|
|
—
|
|
21,771
|
|
|||||||||
|
Non-investment grade
|
27,784
|
|
8,150
|
|
4,103
|
|
1,599
|
|
41,636
|
|
|||||||||
|
Total
|
49,555
|
|
8,150
|
|
4,103
|
|
1,599
|
|
63,407
|
|
|||||||||
|
Total credit derivatives
|
$
|
273,635
|
|
$
|
478,409
|
|
$
|
510,848
|
|
$
|
65,895
|
|
$
|
1,328,787
|
|
||||
|
(1)
|
For credit-related notes, maximum payout/notional is the same as carrying value.
|
156
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
$3.1 billion
and
$950.5 billion
at
June 30, 2014
, and
$8.1 billion
and
$1.0 trillion
at
December 31, 2013
.
Credit-related notes in the table on page
156
include investments in securities issued by collateralized debt obligation (CDO), collateralized loan obligation 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
148
, 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
June 30, 2014
and
December 31, 2013
, the Corporation held cash and securities collateral of
$69.5 billion
and
$74.4 billion
, and posted cash and securities collateral of
$52.2 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
June 30, 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
$1.3 billion
, including $
625 million
for 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
June 30, 2014
, the current liability recorded for these derivative contracts was
$97 million
, against which the Corporation and certain subsidiaries had posted approximately
$33 million
of collateral.
157
The table below
presents the amount of additional collateral contractually required by derivative contracts and other trading agreements at
June 30, 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
|
|||||||
|
June 30, 2014
|
|||||||
|
(Dollars in millions)
|
One incremental notch
|
Second incremental notch
|
|||||
|
Bank of America Corporation
|
$
|
1,119
|
|
$
|
3,275
|
|
|
|
Bank of America, N.A. and subsidiaries
(1)
|
778
|
|
2,218
|
|
|||
|
(1)
|
Included in Bank of America Corporation collateral requirements in this table.
|
The table below
presents the derivative liability that would be subject to unilateral termination by counterparties and the amounts of collateral that would have been posted at
June 30, 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.
|
Derivative Liability Subject to Unilateral Termination Upon Downgrade
|
|||||||
|
June 30, 2014
|
|||||||
|
(Dollars in millions)
|
One incremental notch
|
Second incremental notch
|
|||||
|
Derivative liability
|
$
|
1,403
|
|
$
|
2,379
|
|
|
|
Collateral posted
|
1,158
|
|
1,914
|
|
|||
158
|
Valuation Adjustments on Derivatives
|
The Corporation records credit risk valuation adjustments on derivatives in order to properly reflect the credit quality of the counterparties and its own credit quality. The Corporation calculates valuation adjustments on derivatives based on a modeled expected exposure that incorporates current market risk factors. The exposure also takes into consideration credit mitigants such as enforceable master netting agreements and collateral. CDS spread data is used to estimate the default probabilities and severities that are applied to the exposures. Where no observable credit default data is available for counterparties, the Corporation uses proxies and other market data to estimate default probabilities and severity.
Valuation adjustments on derivatives are affected by changes in market spreads, non-credit related market factors such as interest 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 may enter 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 debit valuation adjustments (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 gross valuation adjustments on derivatives or may result in a gross positive valuation adjustment on derivatives becoming a negative adjustment (or the reverse).
The table below presents CVA and DVA gains (losses) on derivatives, which are recorded in trading account profits, on a gross and net of hedge basis, for the
three and six months ended June 30, 2014 and 2013
. For example, CVA gains reduce the cumulative CVA thereby increasing the derivatives asset balance. DVA gains increase the cumulative DVA thereby decreasing the derivatives liability balance. CVA and DVA losses have the opposite impact.
|
Valuation Adjustments on Derivatives
|
|||||||||||||||||||||||||||
|
Gains (Losses)
|
Three Months Ended June 30
|
Six Months Ended June 30
|
|||||||||||||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
||||||||||||||||||||||||
|
(Dollars in millions)
|
Gross
|
Net
|
Gross
|
Net
|
Gross
|
Net
|
Gross
|
Net
|
|||||||||||||||||||
|
Derivative assets (CVA)
(1)
|
$
|
266
|
|
$
|
161
|
|
$
|
143
|
|
$
|
62
|
|
$
|
318
|
|
$
|
201
|
|
$
|
12
|
|
$
|
(233
|
)
|
|||
|
Derivative liabilities (DVA)
(2)
|
(2
|
)
|
1
|
|
77
|
|
39
|
|
(84
|
)
|
(84
|
)
|
452
|
|
418
|
|
|||||||||||
|
(1)
|
At
June 30, 2014
and
December 31, 2013
, the cumulative CVA reduced the derivative assets balance by
$1.3 billion
and
$1.6 billion
.
|
|
(2)
|
At
June 30, 2014
and
December 31, 2013
, the cumulative DVA reduced the derivative liabilities balance by
$0.7 billion
and
$0.8 billion
.
|
159
|
|
The following tables present 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, held-to-maturity (HTM) debt securities and AFS marketable equity securities at
June 30, 2014
and
December 31, 2013
.
|
Debt Securities and Available-for-Sale Marketable Equity Securities
|
|||||||||||||||
|
June 30, 2014
|
|||||||||||||||
|
(Dollars in millions)
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
|||||||||||
|
Available-for-sale debt securities
|
|
|
|
|
|||||||||||
|
U.S. Treasury and agency securities
|
$
|
38,417
|
|
$
|
301
|
|
$
|
(15
|
)
|
$
|
38,703
|
|
|||
|
Mortgage-backed securities:
|
|
||||||||||||||
|
Agency
|
161,636
|
|
1,571
|
|
(1,664
|
)
|
161,543
|
|
|||||||
|
Agency-collateralized mortgage obligations
|
12,370
|
|
132
|
|
(61
|
)
|
12,441
|
|
|||||||
|
Non-agency residential
(1)
|
4,818
|
|
272
|
|
(84
|
)
|
5,006
|
|
|||||||
|
Commercial
|
2,240
|
|
39
|
|
(1
|
)
|
2,278
|
|
|||||||
|
Non-U.S. securities
|
7,034
|
|
40
|
|
(5
|
)
|
7,069
|
|
|||||||
|
Corporate/Agency bonds
|
813
|
|
18
|
|
(3
|
)
|
828
|
|
|||||||
|
Other taxable securities, substantially all asset-backed securities
|
13,587
|
|
38
|
|
(10
|
)
|
13,615
|
|
|||||||
|
Total taxable securities
|
240,915
|
|
2,411
|
|
(1,843
|
)
|
241,483
|
|
|||||||
|
Tax-exempt securities
|
8,802
|
|
5
|
|
(18
|
)
|
8,789
|
|
|||||||
|
Total available-for-sale debt securities
|
249,717
|
|
2,416
|
|
(1,861
|
)
|
250,272
|
|
|||||||
|
Other debt securities carried at fair value
|
43,032
|
|
151
|
|
(594
|
)
|
42,589
|
|
|||||||
|
Total debt securities carried at fair value
|
292,749
|
|
2,567
|
|
(2,455
|
)
|
292,861
|
|
|||||||
|
Held-to-maturity debt securities, substantially all U.S. agency mortgage-backed securities
|
60,022
|
|
247
|
|
(1,088
|
)
|
59,181
|
|
|||||||
|
Total debt securities
|
$
|
352,771
|
|
$
|
2,814
|
|
$
|
(3,543
|
)
|
$
|
352,042
|
|
|||
|
Available-for-sale marketable equity securities
(2)
|
$
|
276
|
|
$
|
—
|
|
$
|
(36
|
)
|
$
|
240
|
|
|||
|
December 31, 2013
|
|||||||||||||||
|
Available-for-sale debt securities
|
|||||||||||||||
|
U.S. Treasury and agency securities
|
$
|
8,910
|
|
$
|
106
|
|
$
|
(62
|
)
|
$
|
8,954
|
|
|||
|
Mortgage-backed securities:
|
|
|
|
||||||||||||
|
Agency
|
170,112
|
|
777
|
|
(5,954
|
)
|
164,935
|
|
|||||||
|
Agency-collateralized mortgage obligations
|
22,731
|
|
76
|
|
(315
|
)
|
22,492
|
|
|||||||
|
Non-agency residential
(1)
|
6,124
|
|
238
|
|
(123
|
)
|
6,239
|
|
|||||||
|
Commercial
|
2,429
|
|
63
|
|
(12
|
)
|
2,480
|
|
|||||||
|
Non-U.S. securities
|
7,207
|
|
37
|
|
(24
|
)
|
7,220
|
|
|||||||
|
Corporate/Agency bonds
|
860
|
|
20
|
|
(7
|
)
|
873
|
|
|||||||
|
Other taxable securities, substantially all asset-backed securities
|
16,805
|
|
30
|
|
(5
|
)
|
16,830
|
|
|||||||
|
Total taxable securities
|
235,178
|
|
1,347
|
|
(6,502
|
)
|
230,023
|
|
|||||||
|
Tax-exempt securities
|
5,967
|
|
10
|
|
(49
|
)
|
5,928
|
|
|||||||
|
Total available-for-sale debt securities
|
241,145
|
|
1,357
|
|
(6,551
|
)
|
235,951
|
|
|||||||
|
Other debt securities carried at fair value
|
34,145
|
|
34
|
|
(1,335
|
)
|
32,844
|
|
|||||||
|
Total debt securities carried at fair value
|
275,290
|
|
1,391
|
|
(7,886
|
)
|
268,795
|
|
|||||||
|
Held-to-maturity debt securities, substantially all U.S. agency mortgage-backed securities
|
55,150
|
|
20
|
|
(2,740
|
)
|
52,430
|
|
|||||||
|
Total debt securities
|
$
|
330,440
|
|
$
|
1,411
|
|
$
|
(10,626
|
)
|
$
|
321,225
|
|
|||
|
Available-for-sale marketable equity securities
(2)
|
$
|
230
|
|
$
|
—
|
|
$
|
(7
|
)
|
$
|
223
|
|
|||
|
(1)
|
At
June 30, 2014
and
December 31, 2013
, the underlying collateral type included approximately
78 percent
and
89 percent
prime,
13 percent
and
seven percent
Alt-A, and
nine percent
and
four percent
subprime.
|
|
(2)
|
Classified in other assets on the Consolidated Balance Sheet.
|
160
At
June 30, 2014
, the accumulated net unrealized
gain
on AFS debt securities included in accumulated OCI was
$355 million
, net of the related income tax
expense
of
$200 million
. At
June 30, 2014
and
December 31, 2013
, the Corporation had nonperforming AFS debt securities of
$155 million
and
$103 million
.
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 (loss). In
the
three and six months ended June 30, 2014
, the Corporation recorded unrealized mark-to-market net gains in other income (loss) of
$416 million
and
$860 million
and realized net gains of
$100 million
and
$83 million
on
other debt securities carried at fair value
, which excludes the benefit of certain hedges, the results of which are also reported in other income (loss), compared to unrealized mark-to-market net losses of
$1.2 billion
and
$1.4 billion
and realized net losses of
$220 million
and
$205 million
for the
same periods in 2013
.
|
Other Debt Securities Carried at Fair Value
|
|||||||
|
(Dollars in millions)
|
June 30
2014 |
December 31
2013 |
|||||
|
U.S. Treasury and agency securities
|
$
|
4,242
|
|
$
|
4,062
|
|
|
|
Mortgage-backed securities:
|
|||||||
|
Agency
|
16,448
|
|
16,500
|
|
|||
|
Agency-collateralized mortgage obligations
|
—
|
|
218
|
|
|||
|
Non-agency residential
|
3,401
|
|
—
|
|
|||
|
Commercial
|
793
|
|
749
|
|
|||
|
Non-U.S. securities
(1)
|
17,395
|
|
11,315
|
|
|||
|
Other taxable securities, substantially all asset-backed securities
|
310
|
|
—
|
|
|||
|
Total
|
$
|
42,589
|
|
$
|
32,844
|
|
|
|
(1)
|
These securities are primarily used to satisfy certain international regulatory liquidity requirements.
|
The gross realized gains and losses on sales of AFS debt securities for the
three and six months ended June 30, 2014 and 2013
are presented in the table below.
|
Gains and Losses on Sales of AFS Debt Securities
|
|||||||||||||||
|
|
Three Months Ended June 30
|
Six Months Ended June 30
|
|||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Gross gains
|
$
|
383
|
|
$
|
474
|
|
$
|
761
|
|
$
|
543
|
|
|||
|
Gross losses
|
(1
|
)
|
(17
|
)
|
(2
|
)
|
(18
|
)
|
|||||||
|
Net gains on sales of AFS debt securities
|
$
|
382
|
|
$
|
457
|
|
$
|
759
|
|
$
|
525
|
|
|||
|
Income tax expense attributable to realized net gains on sales of AFS debt securities
|
$
|
145
|
|
$
|
169
|
|
$
|
288
|
|
$
|
194
|
|
|||
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 securities and Freddie Mac (FHLMC), where the investment exceeded 10 percent of consolidated shareholders' equity at
June 30, 2014
and
December 31, 2013
, are presented in the table below.
|
Selected Securities Exceeding 10 Percent of Shareholders' Equity
|
|||||||||||||||
|
|
June 30, 2014
|
December 31, 2013
|
|||||||||||||
|
(Dollars in millions)
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
|||||||||||
|
Fannie Mae
|
$
|
121,088
|
|
$
|
120,142
|
|
$
|
123,813
|
|
$
|
118,708
|
|
|||
|
Government National Mortgage Association
|
108,968
|
|
108,633
|
|
118,700
|
|
115,314
|
|
|||||||
|
U.S. Treasury securities
|
40,236
|
|
40,520
|
|
10,533
|
|
10,428
|
|
|||||||
|
Freddie Mac
|
23,411
|
|
23,374
|
|
24,908
|
|
24,075
|
|
|||||||
161
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
June 30, 2014
and
December 31, 2013
.
|
Temporarily Impaired and Other-than-temporarily Impaired AFS Debt Securities
|
|||||||||||||||||||||||
|
June 30, 2014
|
|||||||||||||||||||||||
|
Less than 12 Months
|
12 Months or Longer
|
Total
|
|||||||||||||||||||||
|
(Dollars in millions)
|
Fair
Value
|
Gross
Unrealized
Losses
|
Fair
Value
|
Gross
Unrealized
Losses
|
Fair
Value
|
Gross
Unrealized
Losses
|
|||||||||||||||||
|
Temporarily impaired AFS debt securities
|
|
|
|
|
|
|
|||||||||||||||||
|
U.S. Treasury and agency securities
|
$
|
1,486
|
|
$
|
(1
|
)
|
$
|
678
|
|
$
|
(14
|
)
|
$
|
2,164
|
|
$
|
(15
|
)
|
|||||
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|||||||||||||||||
|
Agency
|
—
|
|
—
|
|
81,930
|
|
(1,664
|
)
|
81,930
|
|
(1,664
|
)
|
|||||||||||
|
Agency-collateralized mortgage obligations
|
1,407
|
|
(11
|
)
|
3,393
|
|
(50
|
)
|
4,800
|
|
(61
|
)
|
|||||||||||
|
Non-agency residential
|
275
|
|
(2
|
)
|
924
|
|
(48
|
)
|
1,199
|
|
(50
|
)
|
|||||||||||
|
Commercial
|
53
|
|
(1
|
)
|
—
|
|
—
|
|
53
|
|
(1
|
)
|
|||||||||||
|
Non-U.S. securities
|
131
|
|
(3
|
)
|
39
|
|
(2
|
)
|
170
|
|
(5
|
)
|
|||||||||||
|
Corporate/Agency bonds
|
—
|
|
—
|
|
93
|
|
(3
|
)
|
93
|
|
(3
|
)
|
|||||||||||
|
Other taxable securities, substantially all asset-backed securities
|
1,653
|
|
(6
|
)
|
364
|
|
(4
|
)
|
2,017
|
|
(10
|
)
|
|||||||||||
|
Total taxable securities
|
5,005
|
|
(24
|
)
|
87,421
|
|
(1,785
|
)
|
92,426
|
|
(1,809
|
)
|
|||||||||||
|
Tax-exempt securities
|
1,697
|
|
(5
|
)
|
992
|
|
(13
|
)
|
2,689
|
|
(18
|
)
|
|||||||||||
|
Total temporarily impaired AFS debt securities
|
6,702
|
|
(29
|
)
|
88,413
|
|
(1,798
|
)
|
95,115
|
|
(1,827
|
)
|
|||||||||||
|
Other-than-temporarily impaired AFS debt securities
(1)
|
|
|
|
|
|
|
|||||||||||||||||
|
Non-agency residential mortgage-backed securities
|
412
|
|
(33
|
)
|
1
|
|
(1
|
)
|
413
|
|
(34
|
)
|
|||||||||||
|
Total temporarily impaired and other-than-temporarily impaired AFS debt securities
|
$
|
7,114
|
|
$
|
(62
|
)
|
$
|
88,414
|
|
$
|
(1,799
|
)
|
$
|
95,528
|
|
$
|
(1,861
|
)
|
|||||
|
December 31, 2013
|
|||||||||||||||||||||||
|
Temporarily impaired AFS debt securities
|
|||||||||||||||||||||||
|
U.S. Treasury and agency securities
|
$
|
5,770
|
|
$
|
(61
|
)
|
$
|
19
|
|
$
|
(1
|
)
|
$
|
5,789
|
|
$
|
(62
|
)
|
|||||
|
Mortgage-backed securities:
|
|
|
|
|
|
||||||||||||||||||
|
Agency
|
132,032
|
|
(5,457
|
)
|
9,324
|
|
(497
|
)
|
141,356
|
|
(5,954
|
)
|
|||||||||||
|
Agency-collateralized mortgage obligations
|
13,438
|
|
(210
|
)
|
2,661
|
|
(105
|
)
|
16,099
|
|
(315
|
)
|
|||||||||||
|
Non-agency residential
|
819
|
|
(15
|
)
|
1,237
|
|
(106
|
)
|
2,056
|
|
(121
|
)
|
|||||||||||
|
Commercial
|
286
|
|
(12
|
)
|
—
|
|
—
|
|
286
|
|
(12
|
)
|
|||||||||||
|
Non-U.S. securities
|
—
|
|
—
|
|
45
|
|
(24
|
)
|
45
|
|
(24
|
)
|
|||||||||||
|
Corporate/Agency bonds
|
106
|
|
(3
|
)
|
282
|
|
(4
|
)
|
388
|
|
(7
|
)
|
|||||||||||
|
Other taxable securities, substantially all asset-backed securities
|
116
|
|
(2
|
)
|
280
|
|
(3
|
)
|
396
|
|
(5
|
)
|
|||||||||||
|
Total taxable securities
|
152,567
|
|
(5,760
|
)
|
13,848
|
|
(740
|
)
|
166,415
|
|
(6,500
|
)
|
|||||||||||
|
Tax-exempt securities
|
1,789
|
|
(30
|
)
|
990
|
|
(19
|
)
|
2,779
|
|
(49
|
)
|
|||||||||||
|
Total temporarily impaired AFS debt securities
|
154,356
|
|
(5,790
|
)
|
14,838
|
|
(759
|
)
|
169,194
|
|
(6,549
|
)
|
|||||||||||
|
Other-than-temporarily impaired AFS debt securities
(1)
|
|
|
|
|
|
|
|||||||||||||||||
|
Non-agency residential mortgage-backed securities
|
2
|
|
(1
|
)
|
1
|
|
(1
|
)
|
3
|
|
(2
|
)
|
|||||||||||
|
Total temporarily impaired and other-than-temporarily impaired AFS 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 remains in accumulated OCI.
|
The Corporation recorded other-than-temporary impairment (OTTI) losses on AFS debt securities for the
three and six months ended June 30, 2014 and 2013
as presented in the Net Impairment Losses Recognized in Earnings table. All such OTTI losses in the
three and six months ended June 30, 2014 and 2013
were on non-agency residential mortgage-backed securities (RMBS) and were recorded in other income (loss) on 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
162
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
|
|||||||||||||||
|
|
Three Months Ended June 30
|
Six Months Ended June 30
|
|||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Total OTTI losses (unrealized and realized)
|
$
|
(12
|
)
|
$
|
(5
|
)
|
$
|
(13
|
)
|
$
|
(14
|
)
|
|||
|
Unrealized OTTI losses recognized in OCI
|
2
|
|
1
|
|
2
|
|
1
|
|
|||||||
|
Net impairment losses recognized in earnings
|
$
|
(10
|
)
|
$
|
(4
|
)
|
$
|
(11
|
)
|
$
|
(13
|
)
|
|||
The Corporation's net impairment losses recognized in earnings consisted entirely of credit losses. The table below presents a rollforward of the credit losses recognized in earnings for the
three and six months ended June 30, 2014 and 2013
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
|
|||||||||||||||
|
|
Three Months Ended June 30
|
Six Months Ended June 30
|
|||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Balance, beginning of period
|
$
|
185
|
|
$
|
244
|
|
$
|
184
|
|
$
|
243
|
|
|||
|
Additions for credit losses recognized on AFS debt securities that had no previous impairment losses
|
10
|
|
—
|
|
10
|
|
5
|
|
|||||||
|
Additions for credit losses recognized on AFS debt securities that had previously incurred impairment losses
|
—
|
|
4
|
|
1
|
|
8
|
|
|||||||
|
Reductions for AFS debt securities matured, sold or intended to be sold
|
—
|
|
(43
|
)
|
—
|
|
(51
|
)
|
|||||||
|
Balance, June 30
|
$
|
195
|
|
$
|
205
|
|
$
|
195
|
|
$
|
205
|
|
|||
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
June 30, 2014
.
|
Significant Assumptions
|
||||||||
|
|
|
Range
(1)
|
||||||
|
Weighted-
average
|
10th
Percentile
(2)
|
90th
Percentile
(2)
|
||||||
|
Annual prepayment speed
|
14.3
|
%
|
3.6
|
%
|
26.4
|
%
|
||
|
Loss severity
|
42.0
|
|
13.4
|
|
53.9
|
|
||
|
Life default rate
|
42.9
|
|
1.5
|
|
99.6
|
|
||
|
(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
36.9 percent
for prime,
38.8 percent
for Alt-A and
50.2 percent
for subprime at
June 30, 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
29.9 percent
for prime,
44.2 percent
for Alt-A and
47.7 percent
for subprime at
June 30, 2014
.
163
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
June 30, 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
|
|||||||||||||||||||||||||||||
|
|
June 30, 2014
|
||||||||||||||||||||||||||||
|
Due in One
Year or Less
|
Due after One Year
through Five Years
|
Due after Five
Years through Ten Years
|
Due after
Ten Years
|
Total
|
|||||||||||||||||||||||||
|
(Dollars in millions)
|
Amount
|
Yield
(1)
|
Amount
|
Yield
(1)
|
Amount
|
Yield
(1)
|
Amount
|
Yield
(1)
|
Amount
|
Yield
(1)
|
|||||||||||||||||||
|
Amortized cost of debt securities carried at fair value
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
U.S. Treasury and agency securities
|
$
|
476
|
|
0.48
|
%
|
$
|
29,922
|
|
1.66
|
%
|
$
|
10,779
|
|
2.45
|
%
|
$
|
1,403
|
|
3.48
|
%
|
$
|
42,580
|
|
1.91
|
%
|
||||
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Agency
|
15
|
|
4.64
|
|
11,121
|
|
2.79
|
|
133,184
|
|
2.97
|
|
34,223
|
|
2.86
|
|
178,543
|
|
2.94
|
|
|||||||||
|
Agency-collateralized mortgage obligations
|
992
|
|
0.01
|
|
2,937
|
|
1.86
|
|
8,417
|
|
2.87
|
|
24
|
|
0.61
|
|
12,370
|
|
2.39
|
|
|||||||||
|
Non-agency residential
|
675
|
|
4.71
|
|
1,760
|
|
4.94
|
|
1,454
|
|
5.12
|
|
4,373
|
|
8.39
|
|
8,262
|
|
6.89
|
|
|||||||||
|
Commercial
|
409
|
|
6.65
|
|
190
|
|
3.08
|
|
2,449
|
|
2.74
|
|
7
|
|
4.09
|
|
3,055
|
|
3.29
|
|
|||||||||
|
Non-U.S. securities
|
21,714
|
|
0.83
|
|
2,593
|
|
3.60
|
|
119
|
|
4.09
|
|
—
|
|
—
|
|
24,426
|
|
1.14
|
|
|||||||||
|
Corporate/Agency bonds
|
400
|
|
2.28
|
|
159
|
|
3.76
|
|
112
|
|
3.91
|
|
142
|
|
1.29
|
|
813
|
|
2.62
|
|
|||||||||
|
Other taxable securities, substantially all asset-backed securities
|
5,271
|
|
1.50
|
|
6,096
|
|
1.22
|
|
1,683
|
|
2.10
|
|
848
|
|
3.63
|
|
13,898
|
|
1.43
|
|
|||||||||
|
Total taxable securities
|
29,952
|
|
1.10
|
|
54,778
|
|
2.06
|
|
158,197
|
|
2.94
|
|
41,020
|
|
3.48
|
|
283,947
|
|
2.65
|
|
|||||||||
|
Tax-exempt securities
|
150
|
|
1.58
|
|
3,448
|
|
1.06
|
|
3,250
|
|
1.11
|
|
1,954
|
|
0.88
|
|
8,802
|
|
1.13
|
|
|||||||||
|
Total amortized cost of debt securities carried at fair value
|
$
|
30,102
|
|
1.11
|
|
$
|
58,226
|
|
2.00
|
|
$
|
161,447
|
|
2.90
|
|
$
|
42,974
|
|
3.36
|
|
$
|
292,749
|
|
2.61
|
|
||||
|
Amortized cost of HTM debt securities
(2)
|
$
|
108
|
|
1.07
|
|
$
|
19
|
|
3.65
|
|
$
|
59,495
|
|
2.59
|
|
$
|
400
|
|
2.74
|
|
$
|
60,022
|
|
2.59
|
|
||||
|
Debt securities carried at fair value
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
U.S. Treasury and agency securities
|
$
|
476
|
|
|
$
|
30,089
|
|
|
$
|
10,938
|
|
|
$
|
1,442
|
|
|
$
|
42,945
|
|
|
|||||||||
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Agency
|
15
|
|
|
11,454
|
|
|
133,005
|
|
|
33,517
|
|
|
177,991
|
|
|
||||||||||||||
|
Agency-collateralized mortgage obligations
|
995
|
|
|
2,925
|
|
|
8,497
|
|
|
24
|
|
|
12,441
|
|
|
||||||||||||||
|
Non-agency residential
|
678
|
|
|
1,763
|
|
|
1,494
|
|
|
4,472
|
|
|
8,407
|
|
|
||||||||||||||
|
Commercial
|
422
|
|
|
196
|
|
|
2,446
|
|
|
7
|
|
|
3,071
|
|
|
||||||||||||||
|
Non-U.S. securities
|
21,713
|
|
|
2,628
|
|
|
123
|
|
|
—
|
|
|
24,464
|
|
|
||||||||||||||
|
Corporate/Agency bonds
|
399
|
|
|
170
|
|
|
118
|
|
|
141
|
|
|
828
|
|
|
||||||||||||||
|
Other taxable securities, substantially all asset-backed securities
|
5,275
|
|
|
6,096
|
|
|
1,706
|
|
|
848
|
|
|
13,925
|
|
|
||||||||||||||
|
Total taxable securities
|
29,973
|
|
|
55,321
|
|
|
158,327
|
|
|
40,451
|
|
|
284,072
|
|
|
||||||||||||||
|
Tax-exempt securities
|
150
|
|
|
3,449
|
|
|
3,242
|
|
|
1,948
|
|
|
8,789
|
|
|
||||||||||||||
|
Total debt securities carried at fair value
|
$
|
30,123
|
|
|
$
|
58,770
|
|
|
$
|
161,569
|
|
|
$
|
42,399
|
|
|
$
|
292,861
|
|
|
|||||||||
|
Fair value of HTM debt securities
(2)
|
$
|
108
|
|
$
|
19
|
|
$
|
58,669
|
|
$
|
385
|
|
$
|
59,181
|
|
||||||||||||||
|
(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
|
In 2013, the Corporation sold its remaining investment in China Construction Bank Corporation (CCB). The strategic assistance agreement between the Corporation and CCB, which includes cooperation in specific business areas, extends through 2016.
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 (CBB),
had a carrying value of
$3.2 billion
at both
June 30, 2014
and
December 31, 2013
. For additional information, see
Note 10 – Commitments and Contingencies
.
164
|
|
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
June 30, 2014
and
December 31, 2013
.
|
|
June 30, 2014
|
|||||||||||||||||||||||
|
(Dollars in millions)
|
30-59 Days
Past Due (1) |
60-89 Days
Past Due (1) |
90 Days or
More
Past Due
(2)
|
Total Past
Due 30 Days or More
|
Total Current or Less Than 30 Days Past Due
(3)
|
Purchased
Credit - impaired (4) |
Loans Accounted for Under the Fair Value Option
|
Total
Outstandings |
||||||||||||||||
|
Home loans
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
Core portfolio
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
Residential mortgage
|
$
|
1,822
|
|
$
|
659
|
|
$
|
6,392
|
|
$
|
8,873
|
|
$
|
165,693
|
|
|
$
|
174,566
|
|
|||||
|
Home equity
|
206
|
|
114
|
|
692
|
|
1,012
|
|
51,949
|
|
52,961
|
|
||||||||||||
|
Legacy Assets & Servicing portfolio
|
||||||||||||||||||||||||
|
Residential mortgage
(5)
|
2,261
|
|
1,153
|
|
13,830
|
|
17,244
|
|
27,989
|
|
$
|
17,337
|
|
62,570
|
|
|||||||||
|
Home equity
|
331
|
|
197
|
|
1,191
|
|
1,719
|
|
28,752
|
|
6,067
|
|
36,538
|
|
||||||||||
|
Credit card and other consumer
|
||||||||||||||||||||||||
|
U.S. credit card
|
485
|
|
345
|
|
868
|
|
1,698
|
|
87,322
|
|
89,020
|
|
||||||||||||
|
Non-U.S. credit card
|
57
|
|
46
|
|
122
|
|
225
|
|
11,774
|
|
11,999
|
|
||||||||||||
|
Direct/Indirect consumer
(6)
|
319
|
|
141
|
|
334
|
|
794
|
|
81,792
|
|
82,586
|
|
||||||||||||
|
Other consumer
(7)
|
22
|
|
7
|
|
16
|
|
45
|
|
2,034
|
|
2,079
|
|
||||||||||||
|
Total consumer
|
5,503
|
|
2,662
|
|
23,445
|
|
31,610
|
|
457,305
|
|
23,404
|
|
|
512,319
|
|
|||||||||
|
Consumer loans accounted for under the fair value option
(8)
|
|
|
|
|
|
|
$
|
2,154
|
|
2,154
|
|
|||||||||||||
|
Total consumer loans and leases
|
5,503
|
|
2,662
|
|
23,445
|
|
31,610
|
|
457,305
|
|
23,404
|
|
2,154
|
|
514,473
|
|
||||||||
|
Commercial
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
U.S. commercial
|
266
|
|
115
|
|
329
|
|
710
|
|
217,327
|
|
|
218,037
|
|
|||||||||||
|
Commercial real estate
(9)
|
30
|
|
35
|
|
196
|
|
261
|
|
46,554
|
|
|
46,815
|
|
|||||||||||
|
Commercial lease financing
|
36
|
|
34
|
|
21
|
|
91
|
|
24,474
|
|
|
24,565
|
|
|||||||||||
|
Non-U.S. commercial
|
15
|
|
4
|
|
1
|
|
20
|
|
85,657
|
|
|
85,677
|
|
|||||||||||
|
U.S. small business commercial
|
72
|
|
46
|
|
113
|
|
231
|
|
13,354
|
|
|
13,585
|
|
|||||||||||
|
Total commercial
|
419
|
|
234
|
|
660
|
|
1,313
|
|
387,366
|
|
|
388,679
|
|
|||||||||||
|
Commercial loans accounted for under the fair value option
(8)
|
|
|
|
|
|
|
8,747
|
|
8,747
|
|
||||||||||||||
|
Total commercial loans and leases
|
419
|
|
234
|
|
660
|
|
1,313
|
|
387,366
|
|
8,747
|
|
397,426
|
|
||||||||||
|
Total loans and leases
|
$
|
5,922
|
|
$
|
2,896
|
|
$
|
24,105
|
|
$
|
32,923
|
|
$
|
844,671
|
|
$
|
23,404
|
|
$
|
10,901
|
|
$
|
911,899
|
|
|
Percentage of outstandings
|
0.65
|
%
|
0.32
|
%
|
2.64
|
%
|
3.61
|
%
|
92.63
|
%
|
2.57
|
%
|
1.19
|
%
|
100.00
|
%
|
||||||||
|
(1)
|
Home loans 30-59 days past due includes fully-insured loans of
$2.2 billion
and nonperforming loans of
$531 million
. Home loans 60-89 days past due includes fully-insured loans of
$1.1 billion
and nonperforming loans of
$457 million
.
|
|
(2)
|
Home loans includes fully-insured loans of
$14.1 billion
.
|
|
(3)
|
Home loans includes
$4.6 billion
and direct/indirect consumer includes
$29 million
of nonperforming loans.
|
|
(4)
|
PCI loan amounts are shown gross of the valuation allowance.
|
|
(5)
|
Total outstandings includes pay option loans of
$3.7 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
$2.0 billion
, U.S. securities-based lending loans of
$33.8 billion
, non-U.S. consumer loans of
$4.4 billion
, student loans of
$3.8 billion
and other consumer loans of
$937 million
.
|
|
(7)
|
Total outstandings includes consumer finance loans of
$1.1 billion
, consumer leases of
$819 million
, consumer overdrafts of
$170 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
$2.0 billion
and home equity loans of
$170 million
. Commercial loans accounted for under the fair value option were U.S. commercial loans of
$1.3 billion
and non-U.S. commercial loans of
$7.4 billion
. For additional information, see
Note 14 – Fair Value Measurements
and
Note 15 – Fair Value Option
.
|
|
(9)
|
Total outstandings includes U.S. commercial real estate loans of
$45.5 billion
and non-U.S. commercial real estate loans of
$1.3 billion
.
|
165
|
|
December 31, 2013
|
|||||||||||||||||||||||
|
(Dollars in millions)
|
30-59 Days
Past Due (1) |
60-89 Days
Past Due (1) |
90 Days or
More
Past Due
(2)
|
Total Past
Due 30 Days or More
|
Total Current or Less Than 30 Days Past Due
(3)
|
Purchased
Credit - impaired (4) |
Loans
Accounted
for Under
the Fair
Value Option |
Total
Outstandings |
||||||||||||||||
|
Home loans
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
Core portfolio
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
Residential mortgage
|
$
|
2,151
|
|
$
|
754
|
|
$
|
7,188
|
|
$
|
10,093
|
|
$
|
167,243
|
|
|
$
|
177,336
|
|
|||||
|
Home equity
|
243
|
|
113
|
|
693
|
|
1,049
|
|
53,450
|
|
|
54,499
|
|
|||||||||||
|
Legacy Assets & Servicing portfolio
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
Residential mortgage
(5)
|
2,758
|
|
1,412
|
|
16,746
|
|
20,916
|
|
31,142
|
|
$
|
18,672
|
|
|
70,730
|
|
||||||||
|
Home equity
|
444
|
|
221
|
|
1,292
|
|
1,957
|
|
30,623
|
|
6,593
|
|
|
39,173
|
|
|||||||||
|
Credit card and other consumer
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
U.S. credit card
|
598
|
|
422
|
|
1,053
|
|
2,073
|
|
90,265
|
|
|
92,338
|
|
|||||||||||
|
Non-U.S. credit card
|
63
|
|
54
|
|
131
|
|
248
|
|
11,293
|
|
|
11,541
|
|
|||||||||||
|
Direct/Indirect consumer
(6)
|
431
|
|
175
|
|
410
|
|
1,016
|
|
81,176
|
|
|
82,192
|
|
|||||||||||
|
Other consumer
(7)
|
24
|
|
8
|
|
20
|
|
52
|
|
1,925
|
|
|
1,977
|
|
|||||||||||
|
Total consumer
|
6,712
|
|
3,159
|
|
27,533
|
|
37,404
|
|
467,117
|
|
25,265
|
|
|
529,786
|
|
|||||||||
|
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 14 – Fair Value Measurements
and
Note 15 – 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
.
|
166
The Corporation mitigates a portion of its 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. The Corporation pays a premium to the vehicles to purchase mezzanine loss protection on a portfolio of residential mortgage loans owned by the Corporation. Cash held in the vehicles is used to reimburse the Corporation in the event that losses on the mortgage portfolio exceed
10
basis points (bps) of the original pool balance, up to the remaining amount of purchased loss protection of
$294 million
and
$339 million
at
June 30, 2014
and
December 31, 2013
. The vehicles from which the Corporation purchases credit protection are VIEs. The Corporation does not have a variable interest in these vehicles and, accordingly, these vehicles are not consolidated by the Corporation. Amounts due from the vehicles are recorded in other income (loss) in the Consolidated Statement of Income when the Corporation recognizes a reimbursable loss, as described above. Amounts are collected when reimbursable losses are realized through the sale of the underlying collateral. At
June 30, 2014
and
December 31, 2013
, the Corporation had a receivable of
$184 million
and
$198 million
from these vehicles for reimbursement of losses, and principal of
$7.9 billion
and
$12.5 billion
of residential mortgage loans was referenced under these agreements. The Corporation records an allowance for credit losses on these loans without regard to the existence of the purchased loss protection as the protection does not represent a guarantee of individual loans.
In addition, the Corporation has entered into long-term credit protection agreements with FNMA and FHLMC on loans totaling
$27.7 billion
and
$28.2 billion
at
June 30, 2014
and
December 31, 2013
, providing full 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. For additional information, see
Note 7 – Representations and Warranties Obligations and Corporate Guarantees
.
|
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 both
June 30, 2014
and
December 31, 2013
,
$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
June 30, 2014
, nonperforming loans discharged in Chapter 7 bankruptcy with no change in repayment terms at the time of discharge were
$1.6 billion
of which
$940 million
were current on their contractual payments while
$564 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
50 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.
167
The table below presents the Corporation's nonperforming loans and leases including nonperforming TDRs, and loans accruing past due 90 days or more at
June 30, 2014
and
December 31, 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
to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K
.
|
Credit Quality
|
|||||||||||||||
|
|
Nonperforming Loans and Leases
(1)
|
Accruing Past Due 90 Days or More
|
|||||||||||||
|
(Dollars in millions)
|
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
|||||||||||
|
Home loans
|
|
|
|
|
|||||||||||
|
Core portfolio
|
|
|
|
|
|||||||||||
|
Residential mortgage
(2)
|
$
|
2,951
|
|
$
|
3,316
|
|
$
|
4,431
|
|
$
|
5,137
|
|
|||
|
Home equity
|
1,533
|
|
1,431
|
|
—
|
|
—
|
|
|||||||
|
Legacy Assets & Servicing portfolio
|
|
|
|
|
|||||||||||
|
Residential mortgage
(2)
|
6,284
|
|
8,396
|
|
9,706
|
|
11,824
|
|
|||||||
|
Home equity
|
2,648
|
|
2,644
|
|
—
|
|
—
|
|
|||||||
|
Credit card and other consumer
|
|
|
|
|
|||||||||||
|
U.S. credit card
|
n/a
|
|
n/a
|
|
868
|
|
1,053
|
|
|||||||
|
Non-U.S. credit card
|
n/a
|
|
n/a
|
|
122
|
|
131
|
|
|||||||
|
Direct/Indirect consumer
|
29
|
|
35
|
|
334
|
|
408
|
|
|||||||
|
Other consumer
|
15
|
|
18
|
|
1
|
|
2
|
|
|||||||
|
Total consumer
|
13,460
|
|
15,840
|
|
15,462
|
|
18,555
|
|
|||||||
|
Commercial
|
|
|
|
|
|||||||||||
|
U.S. commercial
|
849
|
|
819
|
|
86
|
|
47
|
|
|||||||
|
Commercial real estate
|
252
|
|
322
|
|
8
|
|
21
|
|
|||||||
|
Commercial lease financing
|
8
|
|
16
|
|
20
|
|
41
|
|
|||||||
|
Non-U.S. commercial
|
7
|
|
64
|
|
1
|
|
17
|
|
|||||||
|
U.S. small business commercial
|
100
|
|
88
|
|
73
|
|
78
|
|
|||||||
|
Total commercial
|
1,216
|
|
1,309
|
|
188
|
|
204
|
|
|||||||
|
Total loans and leases
|
$
|
14,676
|
|
$
|
17,149
|
|
$
|
15,650
|
|
$
|
18,759
|
|
|||
|
(1)
|
Nonperforming loan balances do not include nonaccruing TDRs removed from the PCI loan portfolio prior to January 1, 2010 of
$140 million
and
$260 million
at
June 30, 2014
and
December 31, 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
June 30, 2014
and
December 31, 2013
, residential mortgage includes
$10.4 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
$3.7 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
to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K
. 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.
168
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
June 30, 2014
and
December 31, 2013
.
|
Home Loans – Credit Quality Indicators
(1)
|
||||||||||||||||||
|
|
June 30, 2014
|
|||||||||||||||||
|
(Dollars in millions)
|
Core Portfolio Residential Mortgage
(2)
|
Legacy Assets & Servicing Residential Mortgage
(2)
|
Residential
Mortgage PCI (3) |
Core Portfolio Home Equity
(2)
|
Legacy Assets & Servicing Home Equity
(2)
|
Home
Equity PCI
|
||||||||||||
|
Refreshed LTV
(4)
|
|
|
|
|
|
|
||||||||||||
|
Less than or equal to 90 percent
|
$
|
97,480
|
|
$
|
20,589
|
|
$
|
11,842
|
|
$
|
45,886
|
|
$
|
16,068
|
|
$
|
2,205
|
|
|
Greater than 90 percent but less than or equal to 100 percent
|
5,261
|
|
3,627
|
|
2,274
|
|
3,249
|
|
4,177
|
|
1,137
|
|
||||||
|
Greater than 100 percent
|
5,429
|
|
6,365
|
|
3,221
|
|
3,826
|
|
10,226
|
|
2,725
|
|
||||||
|
Fully-insured loans
(5)
|
66,396
|
|
14,652
|
|
—
|
|
—
|
|
—
|
|
—
|
|
||||||
|
Total home loans
|
$
|
174,566
|
|
$
|
45,233
|
|
$
|
17,337
|
|
$
|
52,961
|
|
$
|
30,471
|
|
$
|
6,067
|
|
|
Refreshed FICO score
|
||||||||||||||||||
|
Less than 620
|
$
|
4,833
|
|
$
|
8,000
|
|
$
|
8,037
|
|
$
|
2,063
|
|
$
|
3,608
|
|
$
|
927
|
|
|
Greater than or equal to 620 and less than 680
|
6,617
|
|
4,595
|
|
3,207
|
|
3,810
|
|
4,834
|
|
1,063
|
|
||||||
|
Greater than or equal to 680 and less than 740
|
22,194
|
|
7,064
|
|
3,283
|
|
10,790
|
|
8,564
|
|
1,789
|
|
||||||
|
Greater than or equal to 740
|
74,526
|
|
10,922
|
|
2,810
|
|
36,298
|
|
13,465
|
|
2,288
|
|
||||||
|
Fully-insured loans
(5)
|
66,396
|
|
14,652
|
|
—
|
|
—
|
|
—
|
|
—
|
|
||||||
|
Total home loans
|
$
|
174,566
|
|
$
|
45,233
|
|
$
|
17,337
|
|
$
|
52,961
|
|
$
|
30,471
|
|
$
|
6,067
|
|
|
(1)
|
Excludes
$2.2 billion
of loans accounted for under the fair value option.
|
|
(2)
|
Excludes PCI loans.
|
|
(3)
|
Includes
$3.3 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)
|
Credit quality indicators are not reported for fully-insured loans as principal repayment is insured.
|
|
Credit Card and Other Consumer – Credit Quality Indicators
|
|||||||||||||||
|
|
June 30, 2014
|
||||||||||||||
|
(Dollars in millions)
|
U.S. Credit
Card |
Non-U.S.
Credit Card |
Direct/Indirect
Consumer |
Other
Consumer (1) |
|||||||||||
|
Refreshed FICO score
|
|
|
|
|
|||||||||||
|
Less than 620
|
$
|
4,413
|
|
$
|
—
|
|
$
|
1,305
|
|
$
|
492
|
|
|||
|
Greater than or equal to 620 and less than 680
|
12,025
|
|
—
|
|
3,538
|
|
296
|
|
|||||||
|
Greater than or equal to 680 and less than 740
|
34,176
|
|
—
|
|
9,467
|
|
348
|
|
|||||||
|
Greater than or equal to 740
|
38,406
|
|
—
|
|
25,422
|
|
770
|
|
|||||||
|
Other internal credit metrics
(2, 3, 4)
|
—
|
|
11,999
|
|
42,854
|
|
173
|
|
|||||||
|
Total credit card and other consumer
|
$
|
89,020
|
|
$
|
11,999
|
|
$
|
82,586
|
|
$
|
2,079
|
|
|||
|
(1)
|
52 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
$38.1 billion
of securities-based lending which is overcollateralized and therefore has minimal credit risk and
$3.8 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
June 30, 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.
|
|
Commercial – Credit Quality Indicators
(1)
|
|||||||||||||||||||
|
|
June 30, 2014
|
||||||||||||||||||
|
(Dollars in millions)
|
U.S.
Commercial |
Commercial
Real Estate
|
Commercial
Lease Financing |
Non-U.S.
Commercial |
U.S. Small
Business Commercial (2) |
||||||||||||||
|
Risk ratings
|
|
|
|
|
|
||||||||||||||
|
Pass rated
|
$
|
210,859
|
|
$
|
45,643
|
|
$
|
23,578
|
|
$
|
84,551
|
|
$
|
922
|
|
||||
|
Reservable criticized
|
7,178
|
|
1,172
|
|
987
|
|
1,126
|
|
268
|
|
|||||||||
|
Refreshed FICO score
(3)
|
|
|
|
|
|
||||||||||||||
|
Less than 620
|
204
|
|
|||||||||||||||||
|
Greater than or equal to 620 and less than 680
|
550
|
|
|||||||||||||||||
|
Greater than or equal to 680 and less than 740
|
1,609
|
|
|||||||||||||||||
|
Greater than or equal to 740
|
2,990
|
|
|||||||||||||||||
|
Other internal credit metrics
(3, 4)
|
7,042
|
|
|||||||||||||||||
|
Total commercial
|
$
|
218,037
|
|
$
|
46,815
|
|
$
|
24,565
|
|
$
|
85,677
|
|
$
|
13,585
|
|
||||
|
(1)
|
Excludes
$8.7 billion
of loans accounted for under the fair value option.
|
|
(2)
|
U.S. small business commercial includes
$267 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
June 30, 2014
,
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.
|
169
|
Home Loans – Credit Quality Indicators
(1)
|
||||||||||||||||||
|
|
December 31, 2013
|
|||||||||||||||||
|
(Dollars in millions)
|
Core Portfolio
Residential Mortgage (2) |
Legacy Assets & Servicing
Residential Mortgage (2) |
Residential
Mortgage PCI (3) |
Core Portfolio Home Equity
(2)
|
Legacy Assets & Servicing Home
Equity (2) |
Home
Equity PCI
|
||||||||||||
|
Refreshed LTV
(4)
|
|
|
|
|
|
|
||||||||||||
|
Less than or equal to 90 percent
|
$
|
95,833
|
|
$
|
22,391
|
|
$
|
11,400
|
|
$
|
45,898
|
|
$
|
16,714
|
|
$
|
2,036
|
|
|
Greater than 90 percent but less than or equal to 100 percent
|
5,541
|
|
4,134
|
|
2,653
|
|
3,659
|
|
4,233
|
|
698
|
|
||||||
|
Greater than 100 percent
|
6,250
|
|
7,998
|
|
4,619
|
|
4,942
|
|
11,633
|
|
3,859
|
|
||||||
|
Fully-insured loans
(5)
|
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
(5)
|
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)
|
Credit quality indicators are not reported for fully-insured loans as principal repayment is insured.
|
|
Credit Card and Other Consumer – Credit Quality Indicators
|
|||||||||||||||
|
|
December 31, 2013
|
||||||||||||||
|
(Dollars in millions)
|
U.S. Credit
Card |
Non-U.S.
Credit Card |
Direct/Indirect
Consumer |
Other
Consumer (1) |
|||||||||||
|
Refreshed FICO score
|
|
|
|
|
|||||||||||
|
Less than 620
|
$
|
4,989
|
|
$
|
—
|
|
$
|
1,220
|
|
$
|
539
|
|
|||
|
Greater than or equal to 620 and less than 680
|
12,753
|
|
—
|
|
3,345
|
|
264
|
|
|||||||
|
Greater than or equal to 680 and less than 740
|
35,413
|
|
—
|
|
9,887
|
|
199
|
|
|||||||
|
Greater than or equal to 740
|
39,183
|
|
—
|
|
26,220
|
|
188
|
|
|||||||
|
Other internal credit metrics
(2, 3, 4)
|
—
|
|
11,541
|
|
41,520
|
|
787
|
|
|||||||
|
Total credit card and other consumer
|
$
|
92,338
|
|
$
|
11,541
|
|
$
|
82,192
|
|
$
|
1,977
|
|
|||
|
(1)
|
60 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.
|
|
Commercial – Credit Quality Indicators
(1)
|
|||||||||||||||||||
|
|
December 31, 2013
|
||||||||||||||||||
|
(Dollars in millions)
|
U.S.
Commercial |
Commercial
Real Estate
|
Commercial
Lease Financing |
Non-U.S.
Commercial |
U.S. Small
Business Commercial (2) |
||||||||||||||
|
Risk ratings
|
|
|
|
|
|
||||||||||||||
|
Pass rated
|
$
|
205,416
|
|
$
|
46,507
|
|
$
|
24,211
|
|
$
|
88,138
|
|
$
|
1,191
|
|
||||
|
Reservable criticized
|
7,141
|
|
1,386
|
|
988
|
|
1,324
|
|
346
|
|
|||||||||
|
Refreshed FICO score
(3)
|
|
|
|
|
|
||||||||||||||
|
Less than 620
|
224
|
|
|||||||||||||||||
|
Greater than or equal to 620 and less than 680
|
534
|
|
|||||||||||||||||
|
Greater than or equal to 680 and less than 740
|
1,567
|
|
|||||||||||||||||
|
Greater than or equal to 740
|
2,779
|
|
|||||||||||||||||
|
Other internal credit metrics
(3, 4)
|
6,653
|
|
|||||||||||||||||
|
Total commercial
|
$
|
212,557
|
|
$
|
47,893
|
|
$
|
25,199
|
|
$
|
89,462
|
|
$
|
13,294
|
|
||||
|
(1)
|
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.
|
170
|
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. Purchased credit-impaired (PCI) loans are excluded and reported separately on page
184
. For additional information, see
Note 1 – Summary of Significant Accounting Principles
to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K
.
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.
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 at the time of discharge of
$3.2 billion
were included in TDRs at
June 30, 2014
, of which
$1.6 billion
were classified as nonperforming and
$1.6 billion
were 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.
171
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
June 30, 2014
and
December 31, 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
$547 million
and
$533 million
at
June 30, 2014
and
December 31, 2013
.
The table below provides the unpaid principal balance, carrying value and related allowance at
June 30, 2014
and
December 31, 2013
, and the average carrying value and interest income recognized for the
three and six months ended June 30, 2014 and 2013
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.
|
Impaired Loans – Home Loans
|
|||||||||||||||||||||||||||||||
|
|
June 30, 2014
|
December 31, 2013
|
|||||||||||||||||||||||||||||
|
(Dollars in millions)
|
Unpaid
Principal Balance |
Carrying
Value |
Related
Allowance |
Unpaid
Principal Balance |
Carrying
Value |
Related
Allowance |
|||||||||||||||||||||||||
|
With no recorded allowance
|
|
|
|||||||||||||||||||||||||||||
|
Residential mortgage
|
$
|
18,494
|
|
$
|
14,135
|
|
$
|
—
|
|
$
|
21,567
|
|
$
|
16,450
|
|
$
|
—
|
|
|||||||||||||
|
Home equity
|
3,356
|
|
1,454
|
|
—
|
|
3,249
|
|
1,385
|
|
—
|
|
|||||||||||||||||||
|
With an allowance recorded
|
|
|
|
|
|||||||||||||||||||||||||||
|
Residential mortgage
|
$
|
11,554
|
|
$
|
11,184
|
|
$
|
831
|
|
$
|
13,341
|
|
$
|
12,862
|
|
$
|
991
|
|
|||||||||||||
|
Home equity
|
883
|
|
747
|
|
238
|
|
893
|
|
761
|
|
240
|
|
|||||||||||||||||||
|
Total
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Residential mortgage
|
$
|
30,048
|
|
$
|
25,319
|
|
$
|
831
|
|
$
|
34,908
|
|
$
|
29,312
|
|
$
|
991
|
|
|||||||||||||
|
Home equity
|
4,239
|
|
2,201
|
|
238
|
|
4,142
|
|
2,146
|
|
240
|
|
|||||||||||||||||||
|
Three Months Ended June 30
|
Six Months Ended June 30
|
||||||||||||||||||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
||||||||||||||||||||||||||||
|
Average
Carrying Value |
Interest
Income Recognized (1) |
Average
Carrying Value |
Interest
Income Recognized (1) |
Average
Carrying Value |
Interest
Income Recognized (1) |
Average
Carrying Value |
Interest
Income Recognized (1) |
||||||||||||||||||||||||
|
With no recorded allowance
|
|||||||||||||||||||||||||||||||
|
Residential mortgage
|
$
|
15,202
|
|
$
|
187
|
|
$
|
16,812
|
|
$
|
140
|
|
$
|
15,781
|
|
$
|
347
|
|
$
|
16,353
|
|
$
|
284
|
|
|||||||
|
Home equity
|
1,436
|
|
24
|
|
1,204
|
|
19
|
|
1,419
|
|
46
|
|
1,169
|
|
36
|
|
|||||||||||||||
|
With an allowance recorded
|
|||||||||||||||||||||||||||||||
|
Residential mortgage
|
$
|
11,493
|
|
$
|
121
|
|
$
|
14,735
|
|
$
|
124
|
|
$
|
11,913
|
|
$
|
252
|
|
$
|
14,317
|
|
$
|
278
|
|
|||||||
|
Home equity
|
744
|
|
6
|
|
936
|
|
11
|
|
747
|
|
14
|
|
962
|
|
22
|
|
|||||||||||||||
|
Total
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
|
Residential mortgage
|
$
|
26,695
|
|
$
|
308
|
|
$
|
31,547
|
|
$
|
264
|
|
$
|
27,694
|
|
$
|
599
|
|
$
|
30,670
|
|
$
|
562
|
|
|||||||
|
Home equity
|
2,180
|
|
30
|
|
2,140
|
|
30
|
|
2,166
|
|
60
|
|
2,131
|
|
58
|
|
|||||||||||||||
|
(1)
|
Interest income recognized includes interest accrued and collected on the outstanding balances of accruing impaired loans as well as interest cash collections on nonaccruing impaired loans for which the principal is considered collectible.
|
172
The table below presents the
June 30, 2014 and 2013
unpaid principal balance, carrying value, and average pre- and post-modification interest rates on home loans that were modified in TDRs during the
three and six months ended June 30, 2014 and 2013
, and net charge-offs recorded during the period on loans that were modified in TDRs during the
six months ended June 30, 2014 and 2013
. 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 managed by Legacy Assets & Servicing.
|
Home Loans – TDRs Entered into During the Three Months Ended June 30, 2014 and 2013
(1)
|
|||||||||||||||||
|
June 30, 2014
|
Three Months Ended June 30, 2014
|
||||||||||||||||
|
(Dollars in millions)
|
Unpaid Principal Balance
|
Carrying
Value
|
Pre-Modification Interest Rate
|
Post-Modification Interest Rate
|
Net Charge-offs
(2)
|
||||||||||||
|
Residential mortgage
|
$
|
1,677
|
|
$
|
1,475
|
|
5.07
|
%
|
4.69
|
%
|
$
|
24
|
|
||||
|
Home equity
|
236
|
|
163
|
|
3.97
|
|
3.58
|
|
29
|
|
|||||||
|
Total
|
$
|
1,913
|
|
$
|
1,638
|
|
4.94
|
|
4.55
|
|
$
|
53
|
|
||||
|
June 30, 2013
|
Three Months Ended June 30, 2013
|
||||||||||||||||
|
Residential mortgage
|
$
|
3,988
|
|
$
|
3,518
|
|
5.29
|
%
|
4.56
|
%
|
$
|
78
|
|
||||
|
Home equity
|
268
|
|
169
|
|
6.23
|
|
5.20
|
|
45
|
|
|||||||
|
Total
|
$
|
4,256
|
|
$
|
3,687
|
|
5.35
|
|
4.60
|
|
$
|
123
|
|
||||
|
Home Loans – TDRs Entered into During the Six Months Ended June 30, 2014 and 2013
(1)
|
|||||||||||||||||
|
June 30, 2014
|
Six Months Ended June 30, 2014
|
||||||||||||||||
|
Residential mortgage
|
$
|
2,873
|
|
$
|
2,513
|
|
5.09
|
%
|
4.59
|
%
|
$
|
41
|
|
||||
|
Home equity
|
420
|
|
281
|
|
4.17
|
|
3.47
|
|
44
|
|
|||||||
|
Total
|
$
|
3,293
|
|
$
|
2,794
|
|
4.98
|
|
4.45
|
|
$
|
85
|
|
||||
|
June 30, 2013
|
Six Months Ended June 30, 2013
|
||||||||||||||||
|
Residential mortgage
|
$
|
8,843
|
|
$
|
7,798
|
|
5.38
|
%
|
4.55
|
%
|
$
|
117
|
|
||||
|
Home equity
|
519
|
|
306
|
|
5.83
|
|
4.59
|
|
109
|
|
|||||||
|
Total
|
$
|
9,362
|
|
$
|
8,104
|
|
5.41
|
|
4.55
|
|
$
|
226
|
|
||||
|
(1)
|
TDRs entered into during the
three and six months ended June 30, 2014
include residential mortgage modifications with principal forgiveness of
$22 million
and
$39 million
. TDRs entered into during the
three and six months ended June 30, 2013
include residential mortgage modifications with principal forgiveness of
$125 million
and
$344 million
.
|
|
(2)
|
Net charge-offs include amounts recorded on loans modified during the period that are no longer held by the Corporation at June 30, 2014 and 2013 due to sales and other dispositions.
|
173
The table below presents the
June 30, 2014 and 2013
carrying value for home loans that were modified in a TDR during the
three and six months ended June 30, 2014 and 2013
by type of modification.
|
Home Loans – Modification Programs
|
|||||||||||
|
TDRs Entered into During the
Three Months Ended June 30, 2014
|
|||||||||||
|
(Dollars in millions)
|
Residential Mortgage
|
Home
Equity
|
Total Carrying Value
|
||||||||
|
Modifications under government programs
|
|
|
|
||||||||
|
Contractual interest rate reduction
|
$
|
262
|
|
$
|
11
|
|
$
|
273
|
|
||
|
Principal and/or interest forbearance
|
1
|
|
3
|
|
4
|
|
|||||
|
Other modifications
(1)
|
52
|
|
—
|
|
52
|
|
|||||
|
Total modifications under government programs
|
315
|
|
14
|
|
329
|
|
|||||
|
Modifications under proprietary programs
|
|||||||||||
|
Contractual interest rate reduction
|
53
|
|
4
|
|
57
|
|
|||||
|
Capitalization of past due amounts
|
5
|
|
—
|
|
5
|
|
|||||
|
Principal and/or interest forbearance
|
15
|
|
3
|
|
18
|
|
|||||
|
Other modifications
(1)
|
4
|
|
—
|
|
4
|
|
|||||
|
Total modifications under proprietary programs
|
77
|
|
7
|
|
84
|
|
|||||
|
Trial modifications
|
917
|
|
94
|
|
1,011
|
|
|||||
|
Loans discharged in Chapter 7 bankruptcy
(2)
|
166
|
|
48
|
|
214
|
|
|||||
|
Total modifications
|
$
|
1,475
|
|
$
|
163
|
|
$
|
1,638
|
|
||
|
TDRs Entered into During the
Three Months Ended June 30, 2013
|
|||||||||||
|
Modifications under government programs
|
|
|
|
||||||||
|
Contractual interest rate reduction
|
$
|
187
|
|
$
|
14
|
|
$
|
201
|
|
||
|
Principal and/or interest forbearance
|
2
|
|
6
|
|
8
|
|
|||||
|
Other modifications
(1)
|
9
|
|
—
|
|
9
|
|
|||||
|
Total modifications under government programs
|
198
|
|
20
|
|
218
|
|
|||||
|
Modifications under proprietary programs
|
|||||||||||
|
Contractual interest rate reduction
|
896
|
|
4
|
|
900
|
|
|||||
|
Capitalization of past due amounts
|
26
|
|
—
|
|
26
|
|
|||||
|
Principal and/or interest forbearance
|
100
|
|
3
|
|
103
|
|
|||||
|
Other modifications
(1)
|
104
|
|
—
|
|
104
|
|
|||||
|
Total modifications under proprietary programs
|
1,126
|
|
7
|
|
1,133
|
|
|||||
|
Trial modifications
|
1,811
|
|
36
|
|
1,847
|
|
|||||
|
Loans discharged in Chapter 7 bankruptcy
(2)
|
383
|
|
106
|
|
489
|
|
|||||
|
Total modifications
|
$
|
3,518
|
|
$
|
169
|
|
$
|
3,687
|
|
||
|
(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.
|
174
|
Home Loans – Modification Programs
|
|||||||||||
|
TDRs Entered into During the
Six Months Ended June 30, 2014
|
|||||||||||
|
(Dollars in millions)
|
Residential Mortgage
|
Home
Equity
|
Total Carrying Value
|
||||||||
|
Modifications under government programs
|
|
|
|
||||||||
|
Contractual interest rate reduction
|
$
|
456
|
|
$
|
33
|
|
$
|
489
|
|
||
|
Principal and/or interest forbearance
|
10
|
|
11
|
|
21
|
|
|||||
|
Other modifications
(1)
|
70
|
|
—
|
|
70
|
|
|||||
|
Total modifications under government programs
|
536
|
|
44
|
|
580
|
|
|||||
|
Modifications under proprietary programs
|
|||||||||||
|
Contractual interest rate reduction
|
161
|
|
8
|
|
169
|
|
|||||
|
Capitalization of past due amounts
|
31
|
|
1
|
|
32
|
|
|||||
|
Principal and/or interest forbearance
|
41
|
|
8
|
|
49
|
|
|||||
|
Other modifications
(1)
|
22
|
|
4
|
|
26
|
|
|||||
|
Total modifications under proprietary programs
|
255
|
|
21
|
|
276
|
|
|||||
|
Trial modifications
|
1,389
|
|
115
|
|
1,504
|
|
|||||
|
Loans discharged in Chapter 7 bankruptcy
(2)
|
333
|
|
101
|
|
434
|
|
|||||
|
Total modifications
|
$
|
2,513
|
|
$
|
281
|
|
$
|
2,794
|
|
||
|
TDRs Entered into During the
Six Months Ended June 30, 2013
|
|||||||||||
|
Modifications under government programs
|
|
|
|
||||||||
|
Contractual interest rate reduction
|
$
|
779
|
|
$
|
25
|
|
$
|
804
|
|
||
|
Principal and/or interest forbearance
|
16
|
|
13
|
|
29
|
|
|||||
|
Other modifications
(1)
|
47
|
|
—
|
|
47
|
|
|||||
|
Total modifications under government programs
|
842
|
|
38
|
|
880
|
|
|||||
|
Modifications under proprietary programs
|
|||||||||||
|
Contractual interest rate reduction
|
2,299
|
|
31
|
|
2,330
|
|
|||||
|
Capitalization of past due amounts
|
57
|
|
—
|
|
57
|
|
|||||
|
Principal and/or interest forbearance
|
264
|
|
8
|
|
272
|
|
|||||
|
Other modifications
(1)
|
127
|
|
6
|
|
133
|
|
|||||
|
Total modifications under proprietary programs
|
2,747
|
|
45
|
|
2,792
|
|
|||||
|
Trial modifications
|
3,301
|
|
49
|
|
3,350
|
|
|||||
|
Loans discharged in Chapter 7 bankruptcy
(2)
|
908
|
|
174
|
|
1,082
|
|
|||||
|
Total modifications
|
$
|
7,798
|
|
$
|
306
|
|
$
|
8,104
|
|
||
|
(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.
|
175
The table below presents the carrying value of loans that entered into payment default during the
three and six months ended June 30, 2014 and 2013
that were modified in a TDR during the 12 months preceding payment default. Total carrying value includes loans with a carrying value of
$545 million
and
$410 million
that entered into payment default during the
six months ended June 30, 2014 and 2013
but were no longer held by the Corporation as of
June 30, 2014 and 2013
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 default 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
|
|||||||||||
|
Three Months Ended June 30, 2014
|
|||||||||||
|
(Dollars in millions)
|
Residential Mortgage
|
Home
Equity
|
Total Carrying Value
(1)
|
||||||||
|
Modifications under government programs
|
$
|
186
|
|
$
|
1
|
|
$
|
187
|
|
||
|
Modifications under proprietary programs
|
203
|
|
3
|
|
206
|
|
|||||
|
Loans discharged in Chapter 7 bankruptcy
(2)
|
153
|
|
41
|
|
194
|
|
|||||
|
Trial modifications
|
516
|
|
15
|
|
531
|
|
|||||
|
Total modifications
|
$
|
1,058
|
|
$
|
60
|
|
$
|
1,118
|
|
||
|
Three Months Ended June 30, 2013
|
|||||||||||
|
Modifications under government programs
|
$
|
68
|
|
$
|
—
|
|
$
|
68
|
|
||
|
Modifications under proprietary programs
|
264
|
|
1
|
|
265
|
|
|||||
|
Loans discharged in Chapter 7 bankruptcy
(2)
|
163
|
|
5
|
|
168
|
|
|||||
|
Trial modifications
|
1,385
|
|
1
|
|
1,386
|
|
|||||
|
Total modifications
|
$
|
1,880
|
|
$
|
7
|
|
$
|
1,887
|
|
||
|
Six Months Ended June 30, 2014
|
|||||||||||
|
Modifications under government programs
|
$
|
344
|
|
$
|
2
|
|
$
|
346
|
|
||
|
Modifications under proprietary programs
|
475
|
|
3
|
|
478
|
|
|||||
|
Loans discharged in Chapter 7 bankruptcy
(2)
|
274
|
|
42
|
|
316
|
|
|||||
|
Trial modifications
|
1,291
|
|
18
|
|
1,309
|
|
|||||
|
Total modifications
|
$
|
2,384
|
|
$
|
65
|
|
$
|
2,449
|
|
||
|
Six Months Ended June 30, 2013
|
|||||||||||
|
Modifications under government programs
|
$
|
158
|
|
$
|
2
|
|
$
|
160
|
|
||
|
Modifications under proprietary programs
|
546
|
|
4
|
|
550
|
|
|||||
|
Loans discharged in Chapter 7 bankruptcy
(2)
|
604
|
|
24
|
|
628
|
|
|||||
|
Trial modifications
|
1,937
|
|
5
|
|
1,942
|
|
|||||
|
Total modifications
|
$
|
3,245
|
|
$
|
35
|
|
$
|
3,280
|
|
||
|
(1)
|
Total carrying value includes loans with a carrying value of
$545 million
and
$410 million
that entered into payment default during the six months ended June 30, 2014 and 2013 but were no longer held by the Corporation as of June 30, 2014 and 2013 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.
|
176
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.
177
The table below provides the unpaid principal balance, carrying value and related allowance at
June 30, 2014
and
December 31, 2013
, and the average carrying value and interest income recognized for the
three and six months ended June 30, 2014 and 2013
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
|
|||||||||||||||||||||||||||||||
|
|
June 30, 2014
|
December 31, 2013
|
|||||||||||||||||||||||||||||
|
(Dollars in millions)
|
Unpaid
Principal Balance |
Carrying
Value (1) |
Related
Allowance |
Unpaid
Principal Balance |
Carrying
Value (1) |
Related
Allowance |
|||||||||||||||||||||||||
|
With no recorded allowance
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Direct/Indirect consumer
|
$
|
65
|
|
$
|
27
|
|
$
|
—
|
|
$
|
75
|
|
$
|
32
|
|
$
|
—
|
|
|||||||||||||
|
Other consumer
|
35
|
|
35
|
|
—
|
|
34
|
|
34
|
|
—
|
|
|||||||||||||||||||
|
With an allowance recorded
|
|||||||||||||||||||||||||||||||
|
U.S. credit card
|
$
|
1,013
|
|
$
|
1,076
|
|
$
|
257
|
|
$
|
1,384
|
|
$
|
1,465
|
|
$
|
337
|
|
|||||||||||||
|
Non-U.S. credit card
|
174
|
|
216
|
|
127
|
|
200
|
|
240
|
|
149
|
|
|||||||||||||||||||
|
Direct/Indirect consumer
|
138
|
|
163
|
|
45
|
|
242
|
|
282
|
|
84
|
|
|||||||||||||||||||
|
Other consumer
|
25
|
|
24
|
|
9
|
|
27
|
|
26
|
|
9
|
|
|||||||||||||||||||
|
Total
|
|||||||||||||||||||||||||||||||
|
U.S. credit card
|
$
|
1,013
|
|
$
|
1,076
|
|
$
|
257
|
|
$
|
1,384
|
|
$
|
1,465
|
|
$
|
337
|
|
|||||||||||||
|
Non-U.S. credit card
|
174
|
|
216
|
|
127
|
|
200
|
|
240
|
|
149
|
|
|||||||||||||||||||
|
Direct/Indirect consumer
|
203
|
|
190
|
|
45
|
|
317
|
|
314
|
|
84
|
|
|||||||||||||||||||
|
Other consumer
|
60
|
|
59
|
|
9
|
|
61
|
|
60
|
|
9
|
|
|||||||||||||||||||
|
Three Months Ended June 30
|
Six Months Ended June 30
|
||||||||||||||||||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
||||||||||||||||||||||||||||
|
Average
Carrying Value |
Interest
Income Recognized (2) |
Average
Carrying Value |
Interest
Income Recognized (2) |
Average
Carrying Value |
Interest
Income Recognized (2) |
Average
Carrying Value |
Interest
Income Recognized (2) |
||||||||||||||||||||||||
|
With no recorded allowance
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
|
Direct/Indirect consumer
|
$
|
30
|
|
$
|
—
|
|
$
|
44
|
|
$
|
—
|
|
$
|
29
|
|
$
|
—
|
|
$
|
48
|
|
$
|
—
|
|
|||||||
|
Other consumer
|
34
|
|
—
|
|
35
|
|
1
|
|
34
|
|
1
|
|
35
|
|
1
|
|
|||||||||||||||
|
With an allowance recorded
|
|||||||||||||||||||||||||||||||
|
U.S. credit card
|
$
|
1,205
|
|
$
|
18
|
|
$
|
2,287
|
|
$
|
36
|
|
$
|
1,306
|
|
$
|
40
|
|
$
|
2,505
|
|
$
|
78
|
|
|||||||
|
Non-U.S. credit card
|
224
|
|
1
|
|
273
|
|
2
|
|
230
|
|
3
|
|
284
|
|
4
|
|
|||||||||||||||
|
Direct/Indirect consumer
|
196
|
|
3
|
|
493
|
|
7
|
|
227
|
|
6
|
|
545
|
|
15
|
|
|||||||||||||||
|
Other consumer
|
24
|
|
1
|
|
28
|
|
—
|
|
25
|
|
1
|
|
29
|
|
1
|
|
|||||||||||||||
|
Total
|
|||||||||||||||||||||||||||||||
|
U.S. credit card
|
$
|
1,205
|
|
$
|
18
|
|
$
|
2,287
|
|
$
|
36
|
|
$
|
1,306
|
|
$
|
40
|
|
$
|
2,505
|
|
$
|
78
|
|
|||||||
|
Non-U.S. credit card
|
224
|
|
1
|
|
273
|
|
2
|
|
230
|
|
3
|
|
284
|
|
4
|
|
|||||||||||||||
|
Direct/Indirect consumer
|
226
|
|
3
|
|
537
|
|
7
|
|
256
|
|
6
|
|
593
|
|
15
|
|
|||||||||||||||
|
Other consumer
|
58
|
|
1
|
|
63
|
|
1
|
|
59
|
|
2
|
|
64
|
|
2
|
|
|||||||||||||||
|
(1)
|
Includes accrued interest and fees.
|
|
(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.
|
The table below provides information on the Corporation's primary modification programs for the renegotiated TDR portfolio at
June 30, 2014
and
December 31, 2013
.
|
Credit Card and Other Consumer – Renegotiated TDRs by Program Type
|
||||||||||||||||||||||||||||||||
|
|
Internal Programs
|
External Programs
|
Other
(1)
|
Total
|
Percent of Balances Current or
Less Than 30 Days Past Due |
|||||||||||||||||||||||||||
|
(Dollars in millions)
|
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
||||||||||||||||||||||
|
U.S. credit card
|
$
|
587
|
|
$
|
842
|
|
$
|
477
|
|
$
|
607
|
|
$
|
12
|
|
$
|
16
|
|
$
|
1,076
|
|
$
|
1,465
|
|
84.27
|
%
|
82.77
|
%
|
||||
|
Non-U.S. credit card
|
64
|
|
71
|
|
24
|
|
26
|
|
128
|
|
143
|
|
216
|
|
240
|
|
48.07
|
|
49.01
|
|
||||||||||||
|
Direct/Indirect consumer
|
97
|
|
170
|
|
63
|
|
106
|
|
30
|
|
38
|
|
190
|
|
314
|
|
85.36
|
|
84.29
|
|
||||||||||||
|
Other consumer
|
59
|
|
60
|
|
—
|
|
—
|
|
—
|
|
—
|
|
59
|
|
60
|
|
75.35
|
|
71.08
|
|
||||||||||||
|
Total renegotiated TDRs
|
$
|
807
|
|
$
|
1,143
|
|
$
|
564
|
|
$
|
739
|
|
$
|
170
|
|
$
|
197
|
|
$
|
1,541
|
|
$
|
2,079
|
|
79.00
|
|
78.77
|
|
||||
(1)
Other TDRs for non-U.S. credit card include modifications of accounts that are ineligible for a fixed payment plan.
178
The table below provides information on the Corporation's renegotiated TDR portfolio including the
June 30, 2014
and
2013
unpaid principal balance, carrying value and average pre- and post-modification interest rates of loans that were modified in TDRs during the
three and six months ended June 30, 2014 and 2013
, and net charge-offs recorded during the period on loans that were modified in TDRs during the
six months ended June 30, 2014 and 2013
.
|
Credit Card and Other Consumer – Renegotiated TDRs Entered into During the Three Months Ended June 30, 2014 and 2013
|
|||||||||||||||||
|
|
June 30, 2014
|
Three Months Ended June 30, 2014
|
|||||||||||||||
|
(Dollars in millions)
|
Unpaid Principal Balance
|
Carrying
Value
(1)
|
Pre-Modification Interest Rate
|
Post-Modification Interest Rate
|
Net Charge-offs
|
||||||||||||
|
U.S. credit card
|
$
|
78
|
|
$
|
87
|
|
16.74
|
%
|
5.03
|
%
|
$
|
8
|
|
||||
|
Non-U.S. credit card
|
47
|
|
55
|
|
25.36
|
|
0.41
|
|
15
|
|
|||||||
|
Direct/Indirect consumer
|
11
|
|
8
|
|
8.64
|
|
4.87
|
|
4
|
|
|||||||
|
Other consumer
|
3
|
|
3
|
|
9.64
|
|
5.66
|
|
—
|
|
|||||||
|
Total
|
$
|
139
|
|
$
|
153
|
|
19.30
|
|
3.37
|
|
$
|
27
|
|
||||
|
June 30, 2013
|
Three Months Ended June 30, 2013
|
||||||||||||||||
|
U.S. credit card
|
$
|
75
|
|
$
|
76
|
|
16.86
|
%
|
6.07
|
%
|
$
|
5
|
|
||||
|
Non-U.S. credit card
|
68
|
|
71
|
|
26.17
|
|
0.67
|
|
22
|
|
|||||||
|
Direct/Indirect consumer
|
17
|
|
12
|
|
8.92
|
|
5.18
|
|
3
|
|
|||||||
|
Other consumer
|
2
|
|
2
|
|
9.53
|
|
4.51
|
|
—
|
|
|||||||
|
Total
|
$
|
162
|
|
$
|
161
|
|
20.26
|
|
3.61
|
|
$
|
30
|
|
||||
|
Credit Card and Other Consumer – Renegotiated TDRs Entered into During the Six Months Ended June 30, 2014 and 2013
|
|||||||||||||||||
|
June 30, 2014
|
Six Months Ended June 30, 2014
|
||||||||||||||||
|
U.S. credit card
|
$
|
159
|
|
$
|
176
|
|
16.70
|
%
|
5.13
|
%
|
$
|
11
|
|
||||
|
Non-U.S. credit card
|
91
|
|
107
|
|
25.47
|
|
0.48
|
|
17
|
|
|||||||
|
Direct/Indirect consumer
|
20
|
|
15
|
|
9.35
|
|
4.68
|
|
7
|
|
|||||||
|
Other consumer
|
5
|
|
5
|
|
9.13
|
|
5.31
|
|
—
|
|
|||||||
|
Total
|
$
|
275
|
|
$
|
303
|
|
19.32
|
|
3.47
|
|
$
|
35
|
|
||||
|
June 30, 2013
|
Six Months Ended June 30, 2013
|
||||||||||||||||
|
U.S. credit card
|
$
|
151
|
|
$
|
153
|
|
16.91
|
%
|
6.13
|
%
|
$
|
7
|
|
||||
|
Non-U.S. credit card
|
123
|
|
129
|
|
26.16
|
|
0.71
|
|
25
|
|
|||||||
|
Direct/Indirect consumer
|
31
|
|
22
|
|
9.54
|
|
5.25
|
|
7
|
|
|||||||
|
Other consumer
|
3
|
|
3
|
|
9.48
|
|
5.26
|
|
—
|
|
|||||||
|
Total
|
$
|
308
|
|
$
|
307
|
|
20.11
|
|
3.73
|
|
$
|
39
|
|
||||
|
(1)
|
Includes accrued interest and fees.
|
179
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 the
three and six months ended June 30, 2014 and 2013
.
|
Credit Card and Other Consumer – Renegotiated TDRs Entered into During the Period by Program Type
|
|||||||||||||||
|
Three Months Ended June 30, 2014
|
|||||||||||||||
|
(Dollars in millions)
|
Internal Programs
|
External Programs
|
Other
(1)
|
Total
|
|||||||||||
|
U.S. credit card
|
$
|
58
|
|
$
|
29
|
|
$
|
—
|
|
$
|
87
|
|
|||
|
Non-U.S. credit card
|
1
|
|
2
|
|
52
|
|
55
|
|
|||||||
|
Direct/Indirect consumer
|
2
|
|
1
|
|
5
|
|
8
|
|
|||||||
|
Other consumer
|
3
|
|
—
|
|
—
|
|
3
|
|
|||||||
|
Total renegotiated TDRs
|
$
|
64
|
|
$
|
32
|
|
$
|
57
|
|
$
|
153
|
|
|||
|
Three Months Ended June 30, 2013
|
|||||||||||||||
|
U.S. credit card
|
$
|
39
|
|
$
|
37
|
|
$
|
—
|
|
$
|
76
|
|
|||
|
Non-U.S. credit card
|
6
|
|
3
|
|
62
|
|
71
|
|
|||||||
|
Direct/Indirect consumer
|
3
|
|
3
|
|
6
|
|
12
|
|
|||||||
|
Other consumer
|
2
|
|
—
|
|
—
|
|
2
|
|
|||||||
|
Total renegotiated TDRs
|
$
|
50
|
|
$
|
43
|
|
$
|
68
|
|
$
|
161
|
|
|||
|
Six Months Ended June 30, 2014
|
|||||||||||||||
|
U.S. credit card
|
$
|
119
|
|
$
|
57
|
|
$
|
—
|
|
$
|
176
|
|
|||
|
Non-U.S. credit card
|
4
|
|
4
|
|
99
|
|
107
|
|
|||||||
|
Direct/Indirect consumer
|
4
|
|
2
|
|
9
|
|
15
|
|
|||||||
|
Other consumer
|
5
|
|
—
|
|
—
|
|
5
|
|
|||||||
|
Total renegotiated TDRs
|
$
|
132
|
|
$
|
63
|
|
$
|
108
|
|
$
|
303
|
|
|||
|
Six Months Ended June 30, 2013
|
|||||||||||||||
|
U.S. credit card
|
$
|
80
|
|
$
|
73
|
|
$
|
—
|
|
$
|
153
|
|
|||
|
Non-U.S. credit card
|
12
|
|
6
|
|
111
|
|
129
|
|
|||||||
|
Direct/Indirect consumer
|
7
|
|
5
|
|
10
|
|
22
|
|
|||||||
|
Other consumer
|
3
|
|
—
|
|
—
|
|
3
|
|
|||||||
|
Total renegotiated TDRs
|
$
|
102
|
|
$
|
84
|
|
$
|
121
|
|
$
|
307
|
|
|||
(1)
Other TDRs for non-U.S. credit card include modifications of accounts that are ineligible for a fixed payment plan.
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,
76 percent
of new non-U.S. credit card TDRs and
10 percent
of new direct/indirect consumer TDRs may be in payment default within 12 months after modification. Loans that entered into payment default during the
three and six months ended June 30, 2014
that had been modified in a TDR during the preceding 12 months were
$12 million
and
$25 million
for U.S. credit card,
$54 million
and
$110 million
for non-U.S. credit card, and
$1 million
and
$3 million
for direct/indirect consumer. During the
three and six months ended June 30, 2013
, loans that entered into payment default that had been modified in a TDR during the preceding 12 months were
$14 million
and
$38 million
for U.S. credit card,
$59 million
and
$121 million
for non-U.S. credit card and
$1 million
and
$3 million
for direct/indirect consumer.
180
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
June 30, 2014
and
December 31, 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
$77 million
and
$90 million
at
June 30, 2014
and
December 31, 2013
.
181
The table below provides the unpaid principal balance, carrying value and related allowance at
June 30, 2014
and
December 31, 2013
, and the average carrying value and interest income recognized for the
three and six months ended June 30, 2014 and 2013
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.
|
Impaired Loans – Commercial
|
|||||||||||||||||||||||||||||||
|
|
June 30, 2014
|
December 31, 2013
|
|||||||||||||||||||||||||||||
|
(Dollars in millions)
|
Unpaid
Principal Balance |
Carrying
Value |
Related
Allowance |
Unpaid
Principal Balance |
Carrying
Value |
Related
Allowance |
|||||||||||||||||||||||||
|
With no recorded allowance
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
U.S. commercial
|
$
|
535
|
|
$
|
500
|
|
$
|
—
|
|
$
|
609
|
|
$
|
577
|
|
$
|
—
|
|
|||||||||||||
|
Commercial real estate
|
201
|
|
175
|
|
—
|
|
254
|
|
228
|
|
—
|
|
|||||||||||||||||||
|
Non-U.S. commercial
|
—
|
|
—
|
|
—
|
|
10
|
|
10
|
|
—
|
|
|||||||||||||||||||
|
With an allowance recorded
|
|
|
|
||||||||||||||||||||||||||||
|
U.S. commercial
|
$
|
1,648
|
|
$
|
1,384
|
|
$
|
184
|
|
$
|
1,581
|
|
$
|
1,262
|
|
$
|
164
|
|
|||||||||||||
|
Commercial real estate
|
835
|
|
617
|
|
52
|
|
1,066
|
|
731
|
|
61
|
|
|||||||||||||||||||
|
Non-U.S. commercial
|
334
|
|
51
|
|
3
|
|
254
|
|
64
|
|
16
|
|
|||||||||||||||||||
|
U.S. small business commercial
(1)
|
168
|
|
154
|
|
39
|
|
186
|
|
176
|
|
36
|
|
|||||||||||||||||||
|
Total
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
U.S. commercial
|
$
|
2,183
|
|
$
|
1,884
|
|
$
|
184
|
|
$
|
2,190
|
|
$
|
1,839
|
|
$
|
164
|
|
|||||||||||||
|
Commercial real estate
|
1,036
|
|
792
|
|
52
|
|
1,320
|
|
959
|
|
61
|
|
|||||||||||||||||||
|
Non-U.S. commercial
|
334
|
|
51
|
|
3
|
|
264
|
|
74
|
|
16
|
|
|||||||||||||||||||
|
U.S. small business commercial
(1)
|
168
|
|
154
|
|
39
|
|
186
|
|
176
|
|
36
|
|
|||||||||||||||||||
|
Three Months Ended June 30
|
Six Months Ended June 30
|
||||||||||||||||||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
||||||||||||||||||||||||||||
|
Average
Carrying Value |
Interest
Income Recognized (2) |
Average
Carrying Value |
Interest
Income Recognized (2) |
Average
Carrying Value |
Interest
Income Recognized (2) |
Average
Carrying Value |
Interest
Income Recognized (2) |
||||||||||||||||||||||||
|
With no recorded allowance
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
|
U.S. commercial
|
$
|
480
|
|
$
|
3
|
|
$
|
470
|
|
$
|
1
|
|
$
|
499
|
|
$
|
5
|
|
$
|
479
|
|
$
|
3
|
|
|||||||
|
Commercial real estate
|
193
|
|
1
|
|
356
|
|
1
|
|
206
|
|
2
|
|
372
|
|
2
|
|
|||||||||||||||
|
Non-U.S. commercial
|
5
|
|
—
|
|
31
|
|
—
|
|
7
|
|
—
|
|
38
|
|
—
|
|
|||||||||||||||
|
With an allowance recorded
|
|||||||||||||||||||||||||||||||
|
U.S. commercial
|
$
|
1,387
|
|
$
|
15
|
|
$
|
1,619
|
|
$
|
12
|
|
$
|
1,347
|
|
$
|
30
|
|
$
|
1,652
|
|
$
|
24
|
|
|||||||
|
Commercial real estate
|
632
|
|
6
|
|
1,139
|
|
6
|
|
667
|
|
13
|
|
1,359
|
|
14
|
|
|||||||||||||||
|
Non-U.S. commercial
|
63
|
|
1
|
|
152
|
|
2
|
|
68
|
|
2
|
|
130
|
|
5
|
|
|||||||||||||||
|
U.S. small business commercial
(1)
|
159
|
|
1
|
|
253
|
|
2
|
|
165
|
|
2
|
|
270
|
|
4
|
|
|||||||||||||||
|
Total
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
|
U.S. commercial
|
$
|
1,867
|
|
$
|
18
|
|
$
|
2,089
|
|
$
|
13
|
|
$
|
1,846
|
|
$
|
35
|
|
$
|
2,131
|
|
$
|
27
|
|
|||||||
|
Commercial real estate
|
825
|
|
7
|
|
1,495
|
|
7
|
|
873
|
|
15
|
|
1,731
|
|
16
|
|
|||||||||||||||
|
Non-U.S. commercial
|
68
|
|
1
|
|
183
|
|
2
|
|
75
|
|
2
|
|
168
|
|
5
|
|
|||||||||||||||
|
U.S. small business commercial
(1)
|
159
|
|
1
|
|
253
|
|
2
|
|
165
|
|
2
|
|
270
|
|
4
|
|
|||||||||||||||
|
(1)
|
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.
|
182
The table below presents the
June 30, 2014 and 2013
unpaid principal balance and carrying value of commercial loans that were modified as TDRs during the
three and six months ended June 30, 2014 and 2013
, and net charge-offs that were recorded during the period on loans that were modified as TDRs during the
six months ended June 30, 2014 and 2013
. 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 the Three Months Ended June 30, 2014 and 2013
|
|||||||||||
|
|
June 30, 2014
|
Three Months Ended June 30, 2014
|
|||||||||
|
(Dollars in millions)
|
Unpaid Principal Balance
|
Carrying
Value
|
Net Charge-offs
|
||||||||
|
U.S. commercial
|
$
|
493
|
|
$
|
488
|
|
$
|
—
|
|
||
|
Commercial real estate
|
39
|
|
39
|
|
—
|
|
|||||
|
Non-U.S. commercial
|
46
|
|
46
|
|
—
|
|
|||||
|
U.S. small business commercial
(1)
|
3
|
|
3
|
|
—
|
|
|||||
|
Total
|
$
|
581
|
|
$
|
576
|
|
$
|
—
|
|
||
|
June 30, 2013
|
Three Months Ended June 30, 2013
|
||||||||||
|
U.S. commercial
|
$
|
487
|
|
$
|
460
|
|
$
|
5
|
|
||
|
Commercial real estate
|
210
|
|
193
|
|
1
|
|
|||||
|
Non-U.S. commercial
|
74
|
|
73
|
|
—
|
|
|||||
|
U.S. small business commercial
(1)
|
3
|
|
3
|
|
—
|
|
|||||
|
Total
|
$
|
774
|
|
$
|
729
|
|
$
|
6
|
|
||
|
Commercial – TDRs Entered into During the Six Months Ended June 30, 2014 and 2013
|
|||||||||||
|
June 30, 2014
|
Six Months Ended June 30, 2014
|
||||||||||
|
U.S. commercial
|
$
|
740
|
|
$
|
726
|
|
$
|
2
|
|
||
|
Commercial real estate
|
282
|
|
282
|
|
—
|
|
|||||
|
Non-U.S. commercial
|
46
|
|
46
|
|
—
|
|
|||||
|
U.S. small business commercial
(1)
|
4
|
|
4
|
|
—
|
|
|||||
|
Total
|
$
|
1,072
|
|
$
|
1,058
|
|
$
|
2
|
|
||
|
June 30, 2013
|
Six Months Ended June 30, 2013
|
||||||||||
|
U.S. commercial
|
$
|
840
|
|
$
|
813
|
|
$
|
2
|
|
||
|
Commercial real estate
|
438
|
|
381
|
|
3
|
|
|||||
|
Non-U.S. commercial
|
74
|
|
73
|
|
—
|
|
|||||
|
U.S. small business commercial
(1)
|
5
|
|
6
|
|
1
|
|
|||||
|
Total
|
$
|
1,357
|
|
$
|
1,273
|
|
$
|
6
|
|
||
|
(1)
|
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
$63 million
and
$104 million
for U.S. commercial,
$82 million
and
$288 million
for commercial real estate and
$0.2 million
and
$1 million
for U.S. small business commercial at
June 30, 2014 and 2013
.
183
|
Purchased Credit-impaired Loans
|
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
of the Corporation's 2013 Annual Report on Form 10-K
. 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 reclassification to nonaccretable difference during the
three months ended June 30, 2014
was due to an increase in forecasted prepayment speeds as a result of lower interest rates. The reclassification from nonaccretable difference during the
six months ended June 30, 2014
was due to lower expected loss rates primarily driven by improved home prices. 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.
|
Rollforward of Accretable Yield
|
||||||
|
(Dollars in millions)
|
Three Months Ended June 30, 2014
|
Six Months Ended June 30, 2014
|
||||
|
Accretable yield, beginning of period
|
$
|
6,706
|
|
$
|
6,694
|
|
|
Accretion
|
(273
|
)
|
(554
|
)
|
||
|
Disposals/transfers
|
(92
|
)
|
(183
|
)
|
||
|
Reclassifications (to)/from nonaccretable difference
|
(122
|
)
|
262
|
|
||
|
Accretable yield, June 30, 2014
|
$
|
6,219
|
|
$
|
6,219
|
|
For more information on PCI loans, see
Note 1 – Summary of Significant Accounting Principles
to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K
, 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
$9.2 billion
and
$11.4 billion
at
June 30, 2014
and
December 31, 2013
. Proceeds, including cash and securities, from sales and paydowns of loans originally classified as LHFS were
$19.8 billion
and
$46.4 billion
for the
six months ended June 30, 2014 and 2013
. Amounts used for originations and purchases of LHFS were
$18.8 billion
and
$40.1 billion
for the
six months ended June 30, 2014 and 2013
.
184
|
|
The table below summarizes the changes in the allowance for credit losses by portfolio segment for the
three and six months ended June 30, 2014 and 2013
.
|
|
Three Months Ended June 30, 2014
|
||||||||||||||
|
(Dollars in millions)
|
Home Loans
|
Credit Card
and Other Consumer |
Commercial
|
Total
|
|||||||||||
|
Allowance for loan and lease losses, April 1
|
$
|
7,556
|
|
$
|
4,775
|
|
$
|
4,287
|
|
$
|
16,618
|
|
|||
|
Loans and leases charged off
|
(632
|
)
|
(1,051
|
)
|
(161
|
)
|
(1,844
|
)
|
|||||||
|
Recoveries of loans and leases previously charged off
|
428
|
|
241
|
|
102
|
|
771
|
|
|||||||
|
Net charge-offs
|
(204
|
)
|
(810
|
)
|
(59
|
)
|
(1,073
|
)
|
|||||||
|
Write-offs of PCI loans
|
(160
|
)
|
—
|
|
—
|
|
(160
|
)
|
|||||||
|
Provision for loan and lease losses
|
(284
|
)
|
441
|
|
260
|
|
417
|
|
|||||||
|
Other
(1)
|
—
|
|
11
|
|
(2
|
)
|
9
|
|
|||||||
|
Allowance for loan and lease losses, June 30
|
6,908
|
|
4,417
|
|
4,486
|
|
15,811
|
|
|||||||
|
Reserve for unfunded lending commitments, April 1
|
—
|
|
—
|
|
509
|
|
509
|
|
|||||||
|
Provision for unfunded lending commitments
|
—
|
|
—
|
|
(6
|
)
|
(6
|
)
|
|||||||
|
Reserve for unfunded lending commitments, June 30
|
—
|
|
—
|
|
503
|
|
503
|
|
|||||||
|
Allowance for credit losses, June 30
|
$
|
6,908
|
|
$
|
4,417
|
|
$
|
4,989
|
|
$
|
16,314
|
|
|||
|
Three Months Ended June 30, 2013
|
|||||||||||||||
|
Allowance for loan and lease losses, April 1
|
$
|
13,438
|
|
$
|
5,874
|
|
$
|
3,129
|
|
$
|
22,441
|
|
|||
|
Loans and leases charged off
|
(936
|
)
|
(1,489
|
)
|
(325
|
)
|
(2,750
|
)
|
|||||||
|
Recoveries of loans and leases previously charged off
|
179
|
|
331
|
|
129
|
|
639
|
|
|||||||
|
Net charge-offs
|
(757
|
)
|
(1,158
|
)
|
(196
|
)
|
(2,111
|
)
|
|||||||
|
Write-offs of PCI loans
|
(313
|
)
|
—
|
|
—
|
|
(313
|
)
|
|||||||
|
Provision for loan and lease losses
|
27
|
|
957
|
|
236
|
|
1,220
|
|
|||||||
|
Other
(1)
|
1
|
|
(2
|
)
|
(1
|
)
|
(2
|
)
|
|||||||
|
Allowance for loan and lease losses, June 30
|
12,396
|
|
5,671
|
|
3,168
|
|
21,235
|
|
|||||||
|
Reserve for unfunded lending commitments, April 1
|
—
|
|
—
|
|
486
|
|
486
|
|
|||||||
|
Provision for unfunded lending commitments
|
—
|
|
—
|
|
(9
|
)
|
(9
|
)
|
|||||||
|
Other
|
—
|
|
—
|
|
(3
|
)
|
(3
|
)
|
|||||||
|
Reserve for unfunded lending commitments, June 30
|
—
|
|
—
|
|
474
|
|
474
|
|
|||||||
|
Allowance for credit losses, June 30
|
$
|
12,396
|
|
$
|
5,671
|
|
$
|
3,642
|
|
$
|
21,709
|
|
|||
|
|
Six Months Ended June 30, 2014
|
||||||||||||||
|
Allowance for loan and lease losses, January 1
|
$
|
8,518
|
|
$
|
4,905
|
|
$
|
4,005
|
|
$
|
17,428
|
|
|||
|
Loans and leases charged off
|
(1,228
|
)
|
(2,179
|
)
|
(305
|
)
|
(3,712
|
)
|
|||||||
|
Recoveries of loans and leases previously charged off
|
595
|
|
459
|
|
197
|
|
1,251
|
|
|||||||
|
Net charge-offs
|
(633
|
)
|
(1,720
|
)
|
(108
|
)
|
(2,461
|
)
|
|||||||
|
Write-offs of PCI loans
|
(551
|
)
|
—
|
|
—
|
|
(551
|
)
|
|||||||
|
Provision for loan and lease losses
|
(425
|
)
|
1,232
|
|
594
|
|
1,401
|
|
|||||||
|
Other
(1)
|
(1
|
)
|
—
|
|
(5
|
)
|
(6
|
)
|
|||||||
|
Allowance for loan and lease losses, June 30
|
6,908
|
|
4,417
|
|
4,486
|
|
15,811
|
|
|||||||
|
Reserve for unfunded lending commitments, January 1
|
—
|
|
—
|
|
484
|
|
484
|
|
|||||||
|
Provision for unfunded lending commitments
|
—
|
|
—
|
|
19
|
|
19
|
|
|||||||
|
Reserve for unfunded lending commitments, June 30
|
—
|
|
—
|
|
503
|
|
503
|
|
|||||||
|
Allowance for credit losses, June 30
|
$
|
6,908
|
|
$
|
4,417
|
|
$
|
4,989
|
|
$
|
16,314
|
|
|||
|
Six Months Ended June 30, 2013
|
|||||||||||||||
|
Allowance for loan and lease losses, January 1
|
$
|
14,933
|
|
$
|
6,140
|
|
$
|
3,106
|
|
$
|
24,179
|
|
|||
|
Loans and leases charged off
|
(2,129
|
)
|
(3,042
|
)
|
(641
|
)
|
(5,812
|
)
|
|||||||
|
Recoveries of loans and leases previously charged off
|
305
|
|
649
|
|
230
|
|
1,184
|
|
|||||||
|
Net charge-offs
|
(1,824
|
)
|
(2,393
|
)
|
(411
|
)
|
(4,628
|
)
|
|||||||
|
Write-offs of PCI loans
|
(1,152
|
)
|
—
|
|
—
|
|
(1,152
|
)
|
|||||||
|
Provision for loan and lease losses
|
511
|
|
1,964
|
|
476
|
|
2,951
|
|
|||||||
|
Other
(1)
|
(72
|
)
|
(40
|
)
|
(3
|
)
|
(115
|
)
|
|||||||
|
Allowance for loan and lease losses, June 30
|
12,396
|
|
5,671
|
|
3,168
|
|
21,235
|
|
|||||||
|
Reserve for unfunded lending commitments, January 1
|
—
|
|
—
|
|
513
|
|
513
|
|
|||||||
|
Provision for unfunded lending commitments
|
—
|
|
—
|
|
(27
|
)
|
(27
|
)
|
|||||||
|
Other
|
—
|
|
—
|
|
(12
|
)
|
(12
|
)
|
|||||||
|
Reserve for unfunded lending commitments, June 30
|
—
|
|
—
|
|
474
|
|
474
|
|
|||||||
|
Allowance for credit losses, June 30
|
$
|
12,396
|
|
$
|
5,671
|
|
$
|
3,642
|
|
$
|
21,709
|
|
|||
|
(1)
|
Primarily represents the net impact of portfolio sales, consolidations and deconsolidations, and foreign currency translation adjustments.
|
185
During both the
three and six months ended June 30, 2014
, for the PCI loan portfolio, the Corporation recorded a
benefit
of
$106 million
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. This compared to a
benefit
of
$252 million
and
$459 million
in the provision for credit losses for the
same periods in 2013
. Write-offs in the PCI loan portfolio totaled
$160 million
and
$551 million
with a corresponding decrease in the PCI valuation allowance during the
three and six months ended June 30, 2014
compared to
$313 million
and
$1.2 billion
for the
same periods in 2013
. The valuation allowance associated with the PCI loan portfolio was
$1.8 billion
and
$2.5 billion
at
June 30, 2014
and
December 31, 2013
.
The table below presents the allowance and the carrying value of outstanding loans and leases by portfolio segment at
June 30, 2014
and
December 31, 2013
.
|
Allowance and Carrying Value by Portfolio Segment
|
|||||||||||||||
|
|
June 30, 2014
|
||||||||||||||
|
(Dollars in millions)
|
Home Loans
|
Credit Card
and Other Consumer |
Commercial
|
Total
|
|||||||||||
|
Impaired loans and troubled debt restructurings
(1)
|
|
|
|||||||||||||
|
Allowance for loan and lease losses
(2)
|
$
|
1,069
|
|
$
|
438
|
|
$
|
278
|
|
$
|
1,785
|
|
|||
|
Carrying value
(3)
|
27,520
|
|
1,541
|
|
2,881
|
|
31,942
|
|
|||||||
|
Allowance as a percentage of carrying value
|
3.88
|
%
|
28.42
|
%
|
9.65
|
%
|
5.59
|
%
|
|||||||
|
Loans collectively evaluated for impairment
|
|
|
|
|
|||||||||||
|
Allowance for loan and lease losses
|
$
|
4,003
|
|
$
|
3,979
|
|
$
|
4,208
|
|
$
|
12,190
|
|
|||
|
Carrying value
(3, 4)
|
275,711
|
|
184,143
|
|
385,798
|
|
845,652
|
|
|||||||
|
Allowance as a percentage of carrying value
(4)
|
1.45
|
%
|
2.16
|
%
|
1.09
|
%
|
1.44
|
%
|
|||||||
|
Purchased credit-impaired loans
|
|
|
|
||||||||||||
|
Valuation allowance
|
$
|
1,836
|
|
n/a
|
|
n/a
|
|
$
|
1,836
|
|
|||||
|
Carrying value gross of valuation allowance
|
23,404
|
|
n/a
|
|
n/a
|
|
23,404
|
|
|||||||
|
Valuation allowance as a percentage of carrying value
|
7.84
|
%
|
n/a
|
|
n/a
|
|
7.84
|
%
|
|||||||
|
Total
|
|
|
|
|
|||||||||||
|
Allowance for loan and lease losses
|
$
|
6,908
|
|
$
|
4,417
|
|
$
|
4,486
|
|
$
|
15,811
|
|
|||
|
Carrying value
(3, 4)
|
326,635
|
|
185,684
|
|
388,679
|
|
900,998
|
|
|||||||
|
Allowance as a percentage of carrying value
(4)
|
2.11
|
%
|
2.38
|
%
|
1.15
|
%
|
1.75
|
%
|
|||||||
|
|
December 31, 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
$39 million
and
$36 million
related to impaired U.S. small business commercial at
June 30, 2014
and
December 31, 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
$10.9 billion
and
$10.0 billion
at
June 30, 2014
and
December 31, 2013
.
|
n/a = not applicable
186
|
|
The Corporation utilizes VIEs in the ordinary course of business to support its own and its customers' financing and investing needs. The Corporation routinely securitizes loans and debt securities using VIEs as a source of funding for the Corporation and as a means of transferring the economic risk of the loans or debt securities to third parties. The assets are transferred into a trust or other securitization vehicle such that the assets are legally isolated from the creditors of the Corporation and are not available to satisfy its obligations. These assets can only be used to settle obligations of the trust or other securitization vehicle. The Corporation also administers, structures or invests in other VIEs including CDOs, investment vehicles and other entities. For more information on the Corporation's utilization of VIEs, see
Note 1 – Summary of Significant Accounting Principles
and
Note 6 – Securitizations and Other Variable Interest Entities
to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K
.
The tables within this Note present the assets and liabilities of consolidated and unconsolidated VIEs at
June 30, 2014
and
December 31, 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
June 30, 2014
and
December 31, 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 14 – Fair Value Measurements
and
Note 3 – Securities
.
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
to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K
. 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
, to provide investment opportunities for clients. These VIEs, which are not consolidated by the Corporation, are not included in the tables within this Note.
Except as described below and in
Note 6 – Securitizations and Other Variable Interest Entities
to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K
, the Corporation did not provide financial support to consolidated or unconsolidated VIEs during the
three and six months ended June 30, 2014
or the year ended
December 31, 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.
187
The table below summarizes select information related to first-lien mortgage securitizations for the
three and six months ended June 30, 2014 and 2013
.
|
First-lien Mortgage Securitizations
|
||||||||||||||||||||
|
Three Months Ended June 30
|
||||||||||||||||||||
|
Residential Mortgage
|
||||||||||||||||||||
|
|
Agency
|
Non-agency - Subprime
|
Commercial Mortgage
|
|||||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
||||||||||||||
|
Cash proceeds from new securitizations
(1)
|
$
|
7,552
|
|
$
|
15,363
|
|
$
|
809
|
|
$
|
—
|
|
$
|
1,508
|
|
$
|
208
|
|
||
|
Gain (loss) on securitizations
(2)
|
(21
|
)
|
27
|
|
—
|
|
—
|
|
24
|
|
—
|
|
||||||||
|
Six Months Ended June 30
|
||||||||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
|||||||||||||||
|
Cash proceeds from new securitizations
(1)
|
$
|
15,018
|
|
$
|
27,376
|
|
$
|
809
|
|
$
|
—
|
|
$
|
2,212
|
|
$
|
208
|
|
||
|
Gain (loss) on securitizations
(2)
|
(32
|
)
|
56
|
|
—
|
|
—
|
|
51
|
|
—
|
|
||||||||
|
(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
$185 million
and
$383 million
of gains, net of hedges, on loans securitized during the
three and six months ended June 30, 2014
compared to
$661 million
and
$1.3 billion
for the
same periods in 2013
.
|
In addition to cash proceeds as reported in the table above, the Corporation received securities with an initial fair value of
$354 million
and
$860 million
in connection with first-lien mortgage securitizations for the
three and six months ended June 30, 2014
compared to
$1.5 billion
and
$2.5 billion
for the
same periods in 2013
. All of these securities were initially classified as Level 2 assets within the fair value hierarchy. During the
three and six months ended June 30, 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
$454 million
and
$948 million
during the
three and six months ended June 30, 2014
compared to
$768 million
and
$1.7 billion
for the
same periods in 2013
. Servicing advances on consumer mortgage loans, including securitizations where the Corporation has continuing involvement, were
$10.9 billion
and
$14.1 billion
at
June 30, 2014
and
December 31, 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 the
three and six months ended June 30, 2014
,
$1.1 billion
and
$2.4 billion
of loans were repurchased from first-lien securitization trusts primarily as a result of loan delinquencies or to perform modifications compared to
$3.1 billion
and
$6.2 billion
for the
same periods in 2013
. The majority of these loans repurchased were FHA-insured mortgages collateralizing GNMA securities. For more information on MSRs, see
Note 17 – Mortgage Servicing Rights
.
188
The table below summarizes select information related to first-lien mortgage securitization trusts in which the Corporation held a variable interest at
June 30, 2014
and
December 31, 2013
.
|
First-lien Mortgage VIEs
|
||||||||||||||||||||||||||||||||||
|
|
Residential Mortgage
|
|
||||||||||||||||||||||||||||||||
|
|
|
|
Non-agency
|
|
||||||||||||||||||||||||||||||
|
|
Agency
|
Prime
|
Subprime
|
Alt-A
|
Commercial Mortgage
|
|||||||||||||||||||||||||||||
|
(Dollars in millions)
|
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
||||||||||||||||||||||||
|
Unconsolidated VIEs
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Maximum loss exposure
(1)
|
$
|
12,611
|
|
$
|
21,140
|
|
$
|
1,446
|
|
$
|
1,527
|
|
$
|
2,905
|
|
$
|
591
|
|
$
|
699
|
|
$
|
437
|
|
$
|
341
|
|
$
|
432
|
|
||||
|
On-balance sheet assets
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Senior securities held
(2)
:
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Trading account assets
|
$
|
512
|
|
$
|
650
|
|
$
|
4
|
|
$
|
—
|
|
$
|
29
|
|
$
|
1
|
|
$
|
52
|
|
$
|
3
|
|
$
|
53
|
|
$
|
14
|
|
||||
|
Debt securities carried at fair value
|
11,142
|
|
19,451
|
|
932
|
|
988
|
|
2,490
|
|
220
|
|
378
|
|
109
|
|
79
|
|
306
|
|
||||||||||||||
|
Held-to-maturity securities
|
932
|
|
1,012
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
65
|
|
—
|
|
||||||||||||||
|
Subordinate securities held
(2)
:
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Trading account assets
|
—
|
|
—
|
|
—
|
|
—
|
|
28
|
|
8
|
|
1
|
|
—
|
|
12
|
|
13
|
|
||||||||||||||
|
Debt securities carried at fair value
|
—
|
|
—
|
|
13
|
|
15
|
|
5
|
|
6
|
|
—
|
|
—
|
|
52
|
|
53
|
|
||||||||||||||
|
Residual interests held
|
—
|
|
—
|
|
27
|
|
13
|
|
—
|
|
—
|
|
—
|
|
—
|
|
53
|
|
16
|
|
||||||||||||||
|
All other assets
(3)
|
25
|
|
27
|
|
56
|
|
71
|
|
1
|
|
1
|
|
268
|
|
325
|
|
—
|
|
—
|
|
||||||||||||||
|
Total retained positions
|
$
|
12,611
|
|
$
|
21,140
|
|
$
|
1,032
|
|
$
|
1,087
|
|
$
|
2,553
|
|
$
|
236
|
|
$
|
699
|
|
$
|
437
|
|
$
|
314
|
|
$
|
402
|
|
||||
|
Principal balance outstanding
(4)
|
$
|
417,123
|
|
$
|
437,765
|
|
$
|
23,564
|
|
$
|
25,104
|
|
$
|
35,790
|
|
$
|
36,854
|
|
$
|
53,870
|
|
$
|
56,454
|
|
$
|
22,978
|
|
$
|
19,730
|
|
||||
|
Consolidated VIEs
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Maximum loss exposure
(1)
|
$
|
39,795
|
|
$
|
42,420
|
|
$
|
77
|
|
$
|
79
|
|
$
|
181
|
|
$
|
183
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
||||
|
On-balance sheet assets
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Trading account assets
|
$
|
727
|
|
$
|
1,640
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
||||
|
Loans and leases
|
38,427
|
|
40,316
|
|
138
|
|
140
|
|
796
|
|
803
|
|
—
|
|
—
|
|
—
|
|
—
|
|
||||||||||||||
|
Allowance for loan and lease losses
|
(2
|
)
|
(3
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
||||||||||||||
|
All other assets
|
649
|
|
474
|
|
1
|
|
—
|
|
10
|
|
7
|
|
—
|
|
—
|
|
—
|
|
—
|
|
||||||||||||||
|
Total assets
|
$
|
39,801
|
|
$
|
42,427
|
|
$
|
139
|
|
$
|
140
|
|
$
|
806
|
|
$
|
810
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
||||
|
On-balance sheet liabilities
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Long-term debt
|
$
|
6
|
|
$
|
7
|
|
$
|
59
|
|
$
|
61
|
|
$
|
795
|
|
$
|
803
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
||||
|
All other liabilities
|
—
|
|
—
|
|
3
|
|
—
|
|
11
|
|
7
|
|
—
|
|
—
|
|
—
|
|
—
|
|
||||||||||||||
|
Total liabilities
|
$
|
6
|
|
$
|
7
|
|
$
|
62
|
|
$
|
61
|
|
$
|
806
|
|
$
|
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 17 – Mortgage Servicing Rights
.
|
|
(2)
|
As a holder of these securities, the Corporation receives scheduled principal and interest payments. During the
three and six months ended June 30, 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
$999 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
$999 million
and
$1.6 billion
, representing the principal amount that would be payable to the securitization vehicles if the Corporation were to exercise the repurchase option, at
June 30, 2014
and
December 31, 2013
.
|
|
(4)
|
Principal balance outstanding includes loans the Corporation transferred with which it has continuing involvement, which may include servicing the loans.
|
189
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 the
three and six months ended June 30, 2014 and 2013
, and all of the home equity trusts have entered the rapid amortization phase.
The table below summarizes select information related to home equity loan securitization trusts in which the Corporation held a variable interest at
June 30, 2014
and
December 31, 2013
.
|
Home Equity Loan VIEs
|
|||||||||||||||||||||||
|
|
June 30, 2014
|
December 31, 2013
|
|||||||||||||||||||||
|
(Dollars in millions)
|
Consolidated
VIEs |
Unconsolidated
VIEs |
Total
|
Consolidated
VIEs |
Unconsolidated
VIEs |
Total
|
|||||||||||||||||
|
Maximum loss exposure
(1)
|
$
|
1,166
|
|
$
|
5,560
|
|
$
|
6,726
|
|
$
|
1,269
|
|
$
|
6,217
|
|
$
|
7,486
|
|
|||||
|
On-balance sheet assets
|
|
|
|
|
|
|
|||||||||||||||||
|
Trading account assets
|
$
|
—
|
|
$
|
11
|
|
$
|
11
|
|
$
|
—
|
|
$
|
12
|
|
$
|
12
|
|
|||||
|
Debt securities carried at fair value
|
—
|
|
29
|
|
29
|
|
—
|
|
25
|
|
25
|
|
|||||||||||
|
Loans and leases
|
1,210
|
|
—
|
|
1,210
|
|
1,329
|
|
—
|
|
1,329
|
|
|||||||||||
|
Allowance for loan and lease losses
|
(73
|
)
|
—
|
|
(73
|
)
|
(80
|
)
|
—
|
|
(80
|
)
|
|||||||||||
|
All other assets
|
29
|
|
—
|
|
29
|
|
20
|
|
—
|
|
20
|
|
|||||||||||
|
Total
|
$
|
1,166
|
|
$
|
40
|
|
$
|
1,206
|
|
$
|
1,269
|
|
$
|
37
|
|
$
|
1,306
|
|
|||||
|
On-balance sheet liabilities
|
|
|
|
|
|
|
|||||||||||||||||
|
Long-term debt
|
$
|
1,264
|
|
$
|
—
|
|
$
|
1,264
|
|
$
|
1,450
|
|
$
|
—
|
|
$
|
1,450
|
|
|||||
|
All other liabilities
|
—
|
|
—
|
|
—
|
|
90
|
|
—
|
|
90
|
|
|||||||||||
|
Total
|
$
|
1,264
|
|
$
|
—
|
|
$
|
1,264
|
|
$
|
1,540
|
|
$
|
—
|
|
$
|
1,540
|
|
|||||
|
Principal balance outstanding
|
$
|
1,210
|
|
$
|
7,095
|
|
$
|
8,305
|
|
$
|
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 certain 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
June 30, 2014
and
December 31, 2013
, home equity loan securitizations in rapid amortization for which the Corporation has a subordinated funding obligation, including both consolidated and unconsolidated trusts, had
$6.8 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
$61 million
and
$82 million
at
June 30, 2014
and
December 31, 2013
, as well as performance of the loans, the amount of subsequent draws and the timing of related cash flows. At both
June 30, 2014
and
December 31, 2013
, the reserve for losses on expected future draw obligations on the home equity loan securitizations in rapid amortization for which the Corporation has a subordinated funding obligation was
$12 million
.
The Corporation has consumer MSRs from the sale or securitization of home equity loans. The Corporation recorded
$8 million
and
$17 million
of servicing fee income related to home equity loan securitizations during the
three and six months ended June 30, 2014
compared to
$13 million
and
$26 million
for the
same periods in 2013
. The Corporation repurchased
$107 million
and
$209 million
of loans from home equity securitization trusts to perform modifications during the
three and six months ended June 30, 2014
compared to
$77 million
and
$116 million
for the
same periods in 2013
.
190
|
Credit Card Securitizations
|
The Corporation securitizes originated and purchased credit card loans. The Corporation's continuing involvement with the securitization trusts includes servicing the receivables, retaining an undivided interest (seller's interest) in the receivables, and holding certain retained interests including senior and subordinate securities, discount receivables, subordinate interests in accrued interest and fees on the securitized receivables, and cash reserve accounts. The seller's interest in the trusts, which is pari passu to the investors' interest, and the discount receivables are classified in loans and leases.
The table below summarizes select information related to consolidated credit card securitization trusts in which the Corporation held a variable interest at
June 30, 2014
and
December 31, 2013
.
|
Credit Card VIEs
|
|||||||
|
(Dollars in millions)
|
June 30
2014 |
December 31
2013 |
|||||
|
Consolidated VIEs
|
|
|
|||||
|
Maximum loss exposure
|
$
|
46,699
|
|
$
|
49,621
|
|
|
|
On-balance sheet assets
|
|
|
|||||
|
Derivative assets
|
$
|
21
|
|
$
|
182
|
|
|
|
Loans and leases
(1)
|
57,297
|
|
61,241
|
|
|||
|
Allowance for loan and lease losses
|
(2,246
|
)
|
(2,585
|
)
|
|||
|
Loans held-for-sale
|
—
|
|
386
|
|
|||
|
All other assets
(2)
|
1,560
|
|
2,281
|
|
|||
|
Total
|
$
|
56,632
|
|
$
|
61,505
|
|
|
|
On-balance sheet liabilities
|
|
|
|||||
|
Long-term debt
|
$
|
9,896
|
|
$
|
11,822
|
|
|
|
All other liabilities
|
37
|
|
62
|
|
|||
|
Total
|
$
|
9,933
|
|
$
|
11,884
|
|
|
|
(1)
|
At
June 30, 2014
and
December 31, 2013
, loans and leases included
$39.4 billion
and
$41.2 billion
of seller's interest and
$5 million
and
$14 million
of discount receivables.
|
|
(2)
|
At
June 30, 2014
and
December 31, 2013
, all other assets included restricted cash and short-term investment accounts and unbilled accrued interest and fees.
|
During the
three and six months ended June 30, 2014
,
$1.3 billion
and
$3.0 billion
of new senior debt securities were issued to third-party investors from the credit card securitization trusts and
none
were issued during
2013
.
The Corporation held subordinate securities with a notional principal amount of
$7.6 billion
and
$7.9 billion
at
June 30, 2014
and
December 31, 2013
, and a stated interest rate of
zero percent
issued by certain credit card securitization trusts, including
$202 million
and
$484 million
issued during the
three and six months ended June 30, 2014
and
none
issued during
2013
. In addition, during 2010 and 2009, the Corporation elected to designate a specified percentage of new receivables transferred to the trusts as "discount receivables" such that principal collections thereon are added to finance charges which increases the yield in the trust. Through the designation of newly transferred receivables as discount receivables, the Corporation subordinated a portion of its seller's interest to the investors' interest. These actions were taken to address the decline in the excess spread of the U.S. and U.K. credit card securitization trusts at that time.
In addition to the amounts included in the table above, the Corporation held a senior interest in credit card receivables that had been transferred to an unconsolidated third-party sponsored securitization vehicle of
$245 million
and
$272 million
at
June 30, 2014
and
December 31, 2013
, classified in loans and leases.
191
|
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
June 30, 2014
and
December 31, 2013
.
|
Other Asset-backed VIEs
|
|||||||||||||||||||||||
|
|
Resecuritization Trusts
|
Municipal Bond Trusts
|
Automobile and Other
Securitization Trusts |
||||||||||||||||||||
|
(Dollars in millions)
|
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
June 30
2014 |
December 31
2013 |
|||||||||||||||||
|
Unconsolidated VIEs
|
|
|
|
|
|
|
|||||||||||||||||
|
Maximum loss exposure
|
$
|
10,029
|
|
$
|
11,913
|
|
$
|
2,032
|
|
$
|
2,192
|
|
$
|
79
|
|
$
|
81
|
|
|||||
|
On-balance sheet assets
|
|
|
|
|
|
|
|||||||||||||||||
|
Senior securities held
(1, 2)
:
|
|
|
|
|
|
|
|||||||||||||||||
|
Trading account assets
|
$
|
1,272
|
|
$
|
971
|
|
$
|
8
|
|
$
|
53
|
|
$
|
4
|
|
$
|
1
|
|
|||||
|
Debt securities carried at fair value
|
7,919
|
|
10,866
|
|
—
|
|
—
|
|
65
|
|
70
|
|
|||||||||||
|
Held-to-maturity securities
|
746
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||||
|
Subordinate securities held
(1, 2)
:
|
|
|
|
|
|
|
|||||||||||||||||
|
Trading account assets
|
15
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||||
|
Debt securities carried at fair value
|
73
|
|
71
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||||
|
Residual interests held
(3)
|
4
|
|
5
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||||
|
All other assets
|
—
|
|
—
|
|
—
|
|
—
|
|
10
|
|
10
|
|
|||||||||||
|
Total retained positions
|
$
|
10,029
|
|
$
|
11,913
|
|
$
|
8
|
|
$
|
53
|
|
$
|
79
|
|
$
|
81
|
|
|||||
|
Total assets of VIEs
(4)
|
$
|
30,846
|
|
$
|
40,924
|
|
$
|
3,371
|
|
$
|
3,643
|
|
$
|
1,504
|
|
$
|
1,788
|
|
|||||
|
Consolidated VIEs
|
|
|
|
|
|
|
|||||||||||||||||
|
Maximum loss exposure
|
$
|
827
|
|
$
|
164
|
|
$
|
2,210
|
|
$
|
2,667
|
|
$
|
124
|
|
$
|
94
|
|
|||||
|
On-balance sheet assets
|
|
|
|
|
|
|
|||||||||||||||||
|
Trading account assets
|
$
|
1,792
|
|
$
|
319
|
|
$
|
2,227
|
|
$
|
2,684
|
|
$
|
63
|
|
$
|
—
|
|
|||||
|
Loans and leases
|
—
|
|
—
|
|
—
|
|
—
|
|
616
|
|
680
|
|
|||||||||||
|
All other assets
|
—
|
|
—
|
|
—
|
|
—
|
|
59
|
|
61
|
|
|||||||||||
|
Total assets
|
$
|
1,792
|
|
$
|
319
|
|
$
|
2,227
|
|
$
|
2,684
|
|
$
|
738
|
|
$
|
741
|
|
|||||
|
On-balance sheet liabilities
|
|
|
|
|
|
|
|||||||||||||||||
|
Short-term borrowings
|
$
|
—
|
|
$
|
—
|
|
$
|
927
|
|
$
|
1,073
|
|
$
|
—
|
|
$
|
—
|
|
|||||
|
Long-term debt
|
965
|
|
155
|
|
17
|
|
17
|
|
613
|
|
646
|
|
|||||||||||
|
All other liabilities
|
—
|
|
—
|
|
—
|
|
—
|
|
1
|
|
1
|
|
|||||||||||
|
Total liabilities
|
$
|
965
|
|
$
|
155
|
|
$
|
944
|
|
$
|
1,090
|
|
$
|
614
|
|
$
|
647
|
|
|||||
|
(1)
|
As a holder of these securities, the Corporation receives scheduled principal and interest payments. During the
three and six months ended June 30, 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.
|
192
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
$3.1 billion
and
$5.2 billion
of securities during the
three and six months ended June 30, 2014
compared to
$4.7 billion
and
$11.5 billion
for the
same periods in 2013
. Resecuritizations during the
three months ended June 30, 2014
included
$943 million
of AFS securities, and gains on sale of
$62 million
were recorded. Other securities transferred into resecuritization vehicles during the
three and six months ended June 30, 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 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.
The Corporation's liquidity commitments to unconsolidated municipal bond trusts, including those for which the Corporation was transferor, totaled
$2.0 billion
and
$2.1 billion
at
June 30, 2014
and
December 31, 2013
. The weighted-average remaining life of bonds held in the trusts at
June 30, 2014
was
7.5
years. There were no material write-downs or downgrades of assets or issuers during the
three and six months ended June 30, 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
June 30, 2014
and
December 31, 2013
, the Corporation serviced assets or otherwise had continuing involvement with automobile and other securitization trusts with outstanding balances of
$2.2 billion
and
$2.5 billion
, including trusts collateralized by automobile loans of
$611 million
and
$877 million
, student loans of
$738 million
and
$741 million
, and other loans of
$893 million
and
$911 million
.
193
|
Other Variable Interest Entities
|
The table below summarizes select information related to other VIEs in which the Corporation held a variable interest at
June 30, 2014
and
December 31, 2013
.
|
Other VIEs
|
|||||||||||||||||||||||
|
|
June 30, 2014
|
December 31, 2013
|
|||||||||||||||||||||
|
(Dollars in millions)
|
Consolidated
|
Unconsolidated
|
Total
|
Consolidated
|
Unconsolidated
|
Total
|
|||||||||||||||||
|
Maximum loss exposure
|
$
|
7,965
|
|
$
|
10,063
|
|
$
|
18,028
|
|
$
|
9,716
|
|
$
|
12,523
|
|
$
|
22,239
|
|
|||||
|
On-balance sheet assets
|
|
|
|
|
|
|
|||||||||||||||||
|
Trading account assets
|
$
|
2,427
|
|
$
|
480
|
|
$
|
2,907
|
|
$
|
3,769
|
|
$
|
1,420
|
|
$
|
5,189
|
|
|||||
|
Derivative assets
|
4
|
|
693
|
|
697
|
|
3
|
|
739
|
|
742
|
|
|||||||||||
|
Debt securities carried at fair value
|
—
|
|
882
|
|
882
|
|
—
|
|
1,944
|
|
1,944
|
|
|||||||||||
|
Loans and leases
|
4,315
|
|
295
|
|
4,610
|
|
4,609
|
|
270
|
|
4,879
|
|
|||||||||||
|
Allowance for loan and lease losses
|
(5
|
)
|
—
|
|
(5
|
)
|
(6
|
)
|
—
|
|
(6
|
)
|
|||||||||||
|
Loans held-for-sale
|
601
|
|
12
|
|
613
|
|
998
|
|
85
|
|
1,083
|
|
|||||||||||
|
All other assets
|
1,638
|
|
5,888
|
|
7,526
|
|
1,734
|
|
6,167
|
|
7,901
|
|
|||||||||||
|
Total
|
$
|
8,980
|
|
$
|
8,250
|
|
$
|
17,230
|
|
$
|
11,107
|
|
$
|
10,625
|
|
$
|
21,732
|
|
|||||
|
On-balance sheet liabilities
|
|
|
|
|
|
|
|||||||||||||||||
|
Short-term borrowings
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
77
|
|
$
|
—
|
|
$
|
77
|
|
|||||
|
Long-term debt
(1)
|
2,718
|
|
46
|
|
2,764
|
|
4,487
|
|
—
|
|
4,487
|
|
|||||||||||
|
All other liabilities
|
41
|
|
2,260
|
|
2,301
|
|
93
|
|
2,538
|
|
2,631
|
|
|||||||||||
|
Total
|
$
|
2,759
|
|
$
|
2,306
|
|
$
|
5,065
|
|
$
|
4,657
|
|
$
|
2,538
|
|
$
|
7,195
|
|
|||||
|
Total assets of VIEs
|
$
|
8,980
|
|
$
|
33,524
|
|
$
|
42,504
|
|
$
|
11,107
|
|
$
|
38,505
|
|
$
|
49,612
|
|
|||||
|
(1)
|
Includes
$0
,
$963 million
and
$780 million
of long-term debt at
June 30, 2014
and
$1.3 billion
,
$1.2 billion
and
$780 million
of long-term debt at
December 31, 2013
issued by consolidated CDO vehicles, customer 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 price 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
$4.6 billion
and
$5.9 billion
at
June 30, 2014
and
December 31, 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
$568 million
and
$748 million
at
June 30, 2014
and
December 31, 2013
, that are included in the table above.
194
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.
The Corporation's maximum loss exposure to consolidated and unconsolidated CDOs totaled
$821 million
and
$2.1 billion
at
June 30, 2014
and
December 31, 2013
. This exposure is calculated on a gross basis and does not reflect any benefit from insurance purchased from third parties.
At
June 30, 2014
, the Corporation had
$1.1 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 10 – 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
June 30, 2014
and
December 31, 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
$4.2 billion
and
$5.5 billion
at
June 30, 2014
and
December 31, 2013
. The Corporation's maximum loss exposure associated with both consolidated and unconsolidated investment vehicles totaled
$3.2 billion
and
$4.2 billion
at
June 30, 2014
and
December 31, 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
$1.5 billion
and
$2.5 billion
, including a funded balance of
$882 million
and
$1.9 billion
at
June 30, 2014
and
December 31, 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
$3.4 billion
and
$3.8 billion
at
June 30, 2014
and
December 31, 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
$5.6 billion
and
$5.8 billion
at
June 30, 2014
and
December 31, 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
June 30, 2014
and
December 31, 2013
, the Corporation's maximum loss exposure under these financing arrangements was
$89 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.
195
|
|
|
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. 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, monolines or 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,
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, 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 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. Generally the volume of unresolved repurchase claims from the FHA and VA for loans in GNMA-guaranteed securities is not significant because the requests are limited in number and 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. For additional information, see
Note 7 – Representations and Warranties Obligations and Corporate Guarantees
to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K
.
|
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.
The following provides a summary of certain large bulk settlement actions. For a discussion of the larger settlement actions prior to
2014
, see
Note 7 – Representations and Warranties Obligations and Corporate Guarantees
to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K
.
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 The Bank of New York Mellon (BNY Mellon), as trustee (the Trustee), to resolve all outstanding and potential claims related to alleged representations and warranties breaches
196
(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.
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 have filed cross-appeals appealing the court's approval of the settlement.
Pursuant to the Corporation's settlement with AIG
on July 15, 2014, AIG withdrew its objection to the BNY Mellon Settlement, including its participation in all pending appeals and cross-appeals. Under the current schedule, all appeals will be fully briefed by September 22, 2014.
The court's January 31, 2014 decision, order and judgment remain subject to these appeals, as well as a motion to reargue to be heard on September 24, 2014, and it is not possible at this time to predict when the court approval process will be completed.
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.
For more information about the BNY Mellon Settlement, see
Note 7 – Representations and Warranties Obligations and Corporate Guarantees
to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K
.
FHFA Settlement
On March 25, 2014, the Corporation entered into a settlement with the Federal Housing Finance Agency (FHFA) as conservator of FNMA and 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
. The total costs associated with the FHFA Settlement were covered by previously established reserves and an additional charge of
$3.7 billion
, of which
$103 million
was representations and warranties provision, recorded as of
March 31, 2014
. For additional information, see
Note 10 – Commitments and Contingencies
.
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 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 resolve 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. The total costs of the FGIC and trust settlements were covered by previously established reserves. For additional information, including a description of the settlements, see
Note 10 – Commitments and Contingencies
.
197
|
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 or the claim is rescinded by the counterparty.
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
.
The table below presents unresolved repurchase claims at
June 30, 2014
and
December 31, 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 10 – Commitments and Contingencies
.
|
Unresolved Repurchase Claims by Counterparty and Product Type
(1)
|
|
|
|||||
|
(Dollars in millions)
|
June 30
2014 |
December 31
2013 |
|||||
|
By counterparty
|
|
|
|||||
|
Private-label securitization trustees, whole-loan investors, including third-party securitization sponsors and other
(2, 3)
|
$
|
20,551
|
|
$
|
17,953
|
|
|
|
Monolines
(4)
|
1,085
|
|
1,532
|
|
|||
|
GSEs
|
76
|
|
170
|
|
|||
|
Total unresolved repurchase claims by counterparty
(3)
|
$
|
21,712
|
|
$
|
19,655
|
|
|
|
By product type
|
|
|
|||||
|
Prime loans
|
$
|
522
|
|
$
|
623
|
|
|
|
Alt-A
|
2,292
|
|
2,259
|
|
|||
|
Home equity
|
1,472
|
|
1,905
|
|
|||
|
Pay option
|
5,734
|
|
5,780
|
|
|||
|
Subprime
|
11,632
|
|
8,928
|
|
|||
|
Other
|
60
|
|
160
|
|
|||
|
Total unresolved repurchase claims by product type
(3)
|
$
|
21,712
|
|
$
|
19,655
|
|
|
|
(1)
|
At
June 30, 2014
and
December 31, 2013
, unresolved repurchase claims did not include repurchase demands of
$1.2 billion
where the Corporation believes that these demands are procedurally or substantively invalid as noted on page
199
.
|
|
(2)
|
The total notional amount of unresolved repurchase claims does not include repurchase claims related to the trusts covered by the BNY Mellon Settlement.
|
|
(3)
|
Includes
$13.7 billion
and
$13.8 billion
of claims based on individual file reviews and
$6.8 billion
and
$4.1 billion
of claims submitted without individual file reviews at
June 30, 2014
and
December 31, 2013
.
|
|
(4)
|
At
June 30, 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.
|
During the
three months ended June 30, 2014
, the Corporation
received
$2.4 billion
in new repurchase claims, including
$1.9 billion
of claims submitted without individual loan file reviews and
$258 million
of claims based on individual loan file reviews
submitted by private-label securitization trustees
,
$88 million
submitted by the GSEs for both Countrywide and legacy Bank of America originations not covered by the bulk settlements with the GSEs and
$168 million
submitted by whole-loan investors
.
During the
three months ended June 30, 2014
,
$964 million
in claims were resolved.
Of the claims resolved,
$469 million
were resolved through settlements, including
$450 million
related to the FGIC Settlement
,
$255 million
were resolved through rescissions and
$240 million
were resolved through mortgage repurchases and make-whole payments with private-label securitization trustees, whole-loan investors and the GSEs
.
During the
six months ended June 30, 2014
, the Corporation
received
$3.7 billion
in new repurchase claims, including
$2.8 billion
of claims submitted without an individual loan file review and
$449 million
of claims based on individual loan file reviews
submitted by private-label securitization trustees and a financial guarantee provider
,
$241 million
submitted by the GSEs for both Countrywide and legacy Bank of America originations not covered by the bulk settlements with the GSEs and
$198 million
submitted by whole-loan investors
.
During the
six months ended June 30, 2014
,
$1.7 billion
in claims were resolved.
Of the claims resolved,
$856 million
were resolved through settlement, including
$450 million
related to the FGIC Settlement and
$387 million
related to the FHFA Settlement
,
$417 million
were resolved through rescissions and
$417 million
were resolved through mortgage repurchases and make-whole payments with private-label securitization trustees, whole-loan investors and the GSEs
.
198
The increase in the notional amount of unresolved repurchase claims during the
three and six months ended June 30, 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, and (3) the lack of an established process to resolve disputes related to these claims
.
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
. The Corporation expects
unresolved repurchase claims related to private-label securitizations to increase
as claims continue to be submitted by private-label securitization trustees and there is not an established process for the ultimate resolution of claims on which there is a disagreement. For further discussion of the Corporation's experience with whole loans and private-label securitizations, see
Private-label Securitizations and Whole-loan Sales Experience
in this Note.
In addition to, and not included in, the total unresolved repurchase claims
of
$21.7 billion
at
June 30, 2014
, are repurchase demands the Corporation has received from private-label securitization investors and a master servicer where it believes
that these demands are procedurally or substantively invalid. The total amount outstanding of such demands was
$1.2 billion
at both
June 30, 2014
and
December 31, 2013
,
comprised of
$931 million
of demands received during 2012 and
$272 million
of demands related to trusts covered by the BNY Mellon Settlement
. The Corporation does
not believe that the
$1.2 billion
of
demands outstanding
at
June 30, 2014
are
valid repurchase claims and, therefore, it is not possible to predict the resolution with respect to such demands.
The notional amount of unresolved monoline repurchase claims totaled
$1.1 billion
and
$1.5 billion
at
June 30, 2014
and
December 31, 2013
. Substantially all of the unresolved monoline claims pertain to second-lien loans and are currently the subject of litigation with a single monoline insurer. For further discussion of the Corporation's practices regarding litigation accruals and estimated range of possible loss for litigation and regulatory matters, which includes the status of its monoline litigation, see Estimated Range of Possible Loss in this Note and Litigation and Regulatory Matters in
Note 10 – Commitments and Contingencies
.
The notional amount of unresolved GSE repurchase claims totaled
$76 million
at
June 30, 2014
compared to
$170 million
at
December 31, 2013
. As of
December 31, 2013
, the Corporation has resolved substantially all GSE-related claims due primarily to the settlements with FHLMC and FNMA. For further discussion of the Corporation's experience with the GSEs, see Government-sponsored Enterprises Experience in this Note.
|
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
June 30, 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
June 30, 2014
considers, among other things, 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, 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.
An additional 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 requirement to meet certain presentation thresholds in order for any repurchase claim to be asserted on the initiative of investors under the non-GSE 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
199
agreements, investors may file suit. In addition to this, most agreements also allow investors to direct the securitization trustee to 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. Although the Corporation continues to believe that presentation thresholds are a factor in the determination of probable loss, given the BNY Mellon Settlement and subsequent activity with certain counterparties, the estimated range of possible loss assumes that the presentation threshold can be met for a significant amount of the non-GSE securitization transactions. 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, other claimants have come forward and the Corporation believes it is probable that other claimants in certain types of securitizations may continue to come forward with claims that meet the requirements of the terms of the securitizations. See Estimated Range of Possible Loss in this Note for additional discussion of the representations and warranties liability and the corresponding estimated range of possible loss.
The table below presents a rollforward of the liability for representations and warranties and corporate guarantees.
|
Representations and Warranties and Corporate Guarantees
|
|||||||||||||||
|
|
Three Months Ended June 30
|
Six Months Ended June 30
|
|||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Liability for representations and warranties and corporate guarantees, beginning of period
|
$
|
13,411
|
|
$
|
14,076
|
|
$
|
13,282
|
|
$
|
19,021
|
|
|||
|
Additions for new sales
|
2
|
|
12
|
|
5
|
|
22
|
|
|||||||
|
Net reductions
|
(1,416
|
)
|
(265
|
)
|
(1,468
|
)
|
(5,470
|
)
|
|||||||
|
Provision
|
87
|
|
197
|
|
265
|
|
447
|
|
|||||||
|
Liability for representations and warranties and corporate guarantees, June 30
|
$
|
12,084
|
|
$
|
14,020
|
|
$
|
12,084
|
|
$
|
14,020
|
|
|||
The representations and warranties liability represents the Corporation's best estimate of probable incurred losses as of
June 30, 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
|
The various 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 believe are material.
|
Private-label Securitizations and Whole-loan Sales Experience
|
In private-label securitizations, certain presentation thresholds need to be met in order for investors to direct a trustee to assert repurchase claims. Continued high levels of new private-label claims are primarily related to repurchase requests received from trustees and third-party sponsors for private-label securitization transactions not included in the BNY Mellon Settlement, including claims related to first-lien third-party sponsored securitizations that include monoline insurance. Over time, there has been an increase in requests for loan files from certain private-label securitization trustees, as well as requests for tolling agreements to toll the applicable statute of limitations relating to representations and warranties repurchase claims and
the Corporation believes
it is likely that these requests will lead to an increase in repurchase claims from private-label securitization trustees with standing to bring such claims. In addition, private-label securitization trustees may have obtained loan files through other means, including litigation and administrative subpoenas, which may increase
the Corporation's
total exposure.
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 (i.e., the date the transaction closed and not when the repurchase demand was denied). That decision has been applied by the state and federal courts in several RMBS lawsuits not involving the Corporation, 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 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
200
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 recent activity in 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, on June 18, 2014, a group of institutional investors filed
six
lawsuits against
six
trustees covering more than
2,200
RMBS trusts alleging failure to pursue representations and warranties claims and servicer defaults based upon alleged contractual, statutory and tort theories of liability. The Corporation and its affiliates have not been named as parties to these lawsuits. The impact on the Corporation, if any, of such alternative legal theories or assertions is unclear.
The representations and warranties, as governed by the private-label securitization agreements, generally require that counterparties have the ability to both assert a 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. For more information on repurchase demands, see Unresolved Repurchase Claims in this Note.
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 and the whole-loan investors may retain those rights even when the loans were aggregated with other collateral into private-label securitizations sponsored by the whole-loan investors. 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. As of
June 30, 2014
,
16 percent
of the whole-loan claims that the Corporation initially denied have subsequently been resolved through repurchase or make-whole payments and
47 percent
have been resolved through rescission or repayment in full by the borrower. Although the timeline for resolution varies, once an actionable breach is identified on a given loan, settlement is generally reached as to that loan within
60
days. When a claim has been denied and the Corporation does not have communication with the counterparty for
six
months, the Corporation views these claims as inactive; however, they remain in the outstanding claims balance until resolution.
At
June 30, 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
$20.5 billion
. The Corporation has
performed an initial review with respect to
substantially all of these claims and
does
not believe a valid basis for repurchase has been established by the claimant
.
|
Monoline Insurers Experience
|
The Corporation has 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 12 – Commitments and Contingencies
to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K
.
The FGIC Settlement resolved outstanding and potential claims between the parties to the settlement involving certain second-lien RMBS trusts for which FGIC provided financial guarantee insurance, including
$450 million
of monoline repurchase claims outstanding at
March 31, 2014
.
201
|
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). Although the number of such open notices has remained elevated, they have decreased over the last several quarters as the resolution of open notices exceeded new notices. By way of background, MI compensates lenders or investors for certain losses resulting from borrower default on a mortgage loan. When there is disagreement with the mortgage insurer as to the resolution of a MI rescission notice, meaningful dialogue and negotiation between the mortgage insurance company and the Corporation are generally necessary to reach a resolution on an individual notice. The level of engagement of the mortgage insurance companies varies and ongoing litigation involving some of the mortgage insurance companies over individual and bulk rescissions or claims for rescission limits the ability of the Corporation to engage in constructive dialogue leading to resolution.
For loans sold to GSEs or private-label securitization trusts (including those wrapped by the monoline bond insurers), when the Corporation receives a MI rescission notice from a mortgage insurance company, it may give rise to a claim for breach of the applicable representations and warranties from the GSEs or private-label securitization trusts, depending on the governing sales contracts and on whether the loan in question is subject to a settlement. In those cases where the governing contract contains MI-related representations and warranties, which upon rescission requires the Corporation to repurchase the affected loan or indemnify the investor for the related loss, the Corporation realizes 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, which if successful, would reduce the MI proceeds available to reduce the loss on the loan.
At
June 30, 2014
and
December 31, 2013
, the Corporation had approximately
91,000
and
101,000
open MI rescission notices. The decline was primarily due to settlements with MI companies. Open MI rescission notices at
June 30, 2014
included
30,000
pertaining principally to first-lien mortgages serviced for others
,
8,000
pertaining to loans held for investment and
53,000
pertaining to ongoing litigation for second-lien mortgages
. Approximately
20,000
of the open MI rescission notices pertaining to first-lien mortgages serviced for others are related to loans sold to the GSEs. As of
June 30, 2014
,
49 percent
of the MI rescission notices received have been resolved. Of those resolved,
12 percent
were resolved through the Corporation's acceptance of the MI rescission,
52 percent
were resolved through reinstatement of coverage or payment of the claim by the mortgage insurance company, and
36 percent
were resolved on an aggregate basis through settlement, policy commutation or similar arrangement. As of
June 30, 2014
,
51 percent
of the MI rescission notices the Corporation has received have not yet been resolved. Of those not yet resolved,
58 percent
are implicated by ongoing litigation where no loan-level review is currently contemplated nor required to preserve the Corporation's legal rights. In this litigation, the litigating mortgage insurance companies are also seeking bulk rescission of certain policies, separate and apart from loan-by-loan denials or rescissions. The Corporation is in the process of reviewing
five percent
of the remaining open MI rescission notices, and it has reviewed and is contesting the MI rescission with respect to
95 percent
of these remaining open MI rescission notices. Of the remaining open MI rescission notices,
29 percent
are also the subject of ongoing litigation; although, at present, these MI rescissions are being processed in a manner generally consistent with those not affected by litigation.
On July 15, 2014, certain of the Corporation's subsidiaries entered into a settlement
agreement to resolve all outstanding MI disputes brought by the Corporation against three United Guaranty entities. This settlement will resolve all of the Corporation's pending MI litigation with the United Guaranty entities regarding legacy first- and second-lien mortgages originated or acquired by certain of
the Corporation's
subsidiaries prior to 2009. In addition, the settlement will resolve
14,000
rescission notices open as of
June 30, 2014
.
The settlement with the United Guaranty entities with respect to policies related to first-lien mortgages is subject to the consent of the GSEs; and the inclusion of loans other than GSE-insured loans is subject to obtaining any other necessary consents.
202
|
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
June 30, 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 any losses related to litigation matters, including RMBS litigation or litigation brought by monoline insurers, nor do they include any separate foreclosure costs and related costs, assessments and compensatory fees or any other possible losses related to potential claims for breaches of performance of servicing obligations (except as such losses are included as potential costs of the BNY Mellon Settlement), potential securities law or fraud claims or potential indemnity or other claims against
the Corporation,
including claims related to loans insured by the FHA
. The Corporation is not able to
reasonably estimate the amount of any possible loss with respect to any such servicing, securities law, fraud or other claims against
the Corporation,
except to the extent reflected in existing accruals or the estimated range of possible loss for litigation and regulatory matters disclosed in
Note 10 – Commitments and Contingencies
;
however, such loss could be material.
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. For example, an appellate court, in the context of claims brought by a monoline insurer, disagreed with the Corporation's interpretation that a loan must be in default in order to satisfy the underlying agreements' requirement that a breach have a material and adverse effect. If that decision is extended to non-monoline contexts, it could significantly impact the Corporation's provision and/or the estimated range of possible loss. Additionally, if court rulings, including one related to the Corporation, that have allowed sampling of loan files instead of requiring a loan-by-loan review to determine if a representations and warranties breach has occurred, are followed generally by the courts, private-label securitization counterparties may view litigation as a more attractive alternative compared to a loan-by-loan review. Finally, although the Corporation believes that the representations and warranties typically given in non-GSE transactions are less rigorous and actionable 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 for the
three and six months ended June 30, 2014 and 2013
. During the
three and six months ended June 30, 2014
, the Corporation paid
$146 million
and
$236 million
to resolve
$203 million
and
$361 million
of repurchase claims through repurchase or reimbursement to the investor or securitization trust for losses they incurred, resulting in a loss on the related loans at the time of repurchase or reimbursement of
$103 million
and
$154 million
. During the
three and six months ended June 30, 2013
, the Corporation paid
$250 million
and
$758 million
to resolve
$284 million
and
$848 million
of repurchase claims through repurchase or reimbursement to the investor or securitization trust for losses they incurred, resulting in a loss on the related loans at the time of repurchase or reimbursement of
$171 million
and
$298 million
. 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. Transactions to repurchase loans or make indemnification payments related to first-lien residential mortgages primarily involved the GSEs while transactions to repurchase loans or make indemnification payments for home equity loans primarily involved the monoline insurers. The amounts in the table exclude payments made in connection with the FHFA Settlement, where 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
. The amounts in the table also exclude a cash payment of
$3.6 billion
made in 2013 to FNMA and the repurchase for
$6.6 billion
of certain residential mortgage loans which the Corporation valued at less than the purchase price, both of which were part of the settlement with FNMA. Additionally, the amounts shown in the Loan Repurchases and Indemnification Payments table exclude
$976 million
and
$1.7 billion
paid in monoline settlements during the
six months ended June 30, 2014 and 2013
, including payments made directly to securitization trusts.
203
|
Loan Repurchases and Indemnification Payments
|
|||||||||||||||||||||||
|
|
Three Months Ended June 30
|
||||||||||||||||||||||
|
|
2014
|
2013
|
|||||||||||||||||||||
|
(Dollars in millions)
|
Unpaid
Principal
Balance
|
Cash Paid
for
Repurchases
|
Loss
|
Unpaid
Principal
Balance
|
Cash Paid
for
Repurchases
|
Loss
|
|||||||||||||||||
|
First-lien
|
|
|
|
|
|
|
|||||||||||||||||
|
Repurchases
|
$
|
58
|
|
$
|
63
|
|
$
|
20
|
|
$
|
112
|
|
$
|
120
|
|
$
|
41
|
|
|||||
|
Indemnification payments
|
142
|
|
80
|
|
80
|
|
156
|
|
114
|
|
114
|
|
|||||||||||
|
Total first-lien
|
200
|
|
143
|
|
100
|
|
268
|
|
234
|
|
155
|
|
|||||||||||
|
Home equity, indemnification payments
|
3
|
|
3
|
|
3
|
|
16
|
|
16
|
|
16
|
|
|||||||||||
|
Total first-lien and home equity
|
$
|
203
|
|
$
|
146
|
|
$
|
103
|
|
$
|
284
|
|
$
|
250
|
|
$
|
171
|
|
|||||
|
Six Months Ended June 30
|
|||||||||||||||||||||||
|
2014
|
2013
|
||||||||||||||||||||||
|
First-lien
|
|||||||||||||||||||||||
|
Repurchases
|
$
|
104
|
|
$
|
114
|
|
$
|
32
|
|
$
|
533
|
|
$
|
557
|
|
$
|
97
|
|
|||||
|
Indemnification payments
|
243
|
|
108
|
|
108
|
|
291
|
|
176
|
|
176
|
|
|||||||||||
|
Total first-lien
|
347
|
|
222
|
|
140
|
|
824
|
|
733
|
|
273
|
|
|||||||||||
|
Home equity, indemnification payments
|
14
|
|
14
|
|
14
|
|
24
|
|
25
|
|
25
|
|
|||||||||||
|
Total first-lien and home equity
|
$
|
361
|
|
$
|
236
|
|
$
|
154
|
|
$
|
848
|
|
$
|
758
|
|
$
|
298
|
|
|||||
|
|
|
Goodwill
|
The table below presents goodwill balances by business segment at
June 30, 2014
and
December 31, 2013
. The reporting units utilized for goodwill impairment testing are the operating segments or one level below. For additional information, see
Note 8 – Goodwill and Intangible Assets
to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K
.
|
Goodwill
|
|||||||
|
(Dollars in millions)
|
June 30
2014 |
December 31
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
|
857
|
|
891
|
|
|||
|
Total goodwill
|
$
|
69,810
|
|
$
|
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. During the latest annual planning process, 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, 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, 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. Prior periods were not restated.
There was no goodwill in
Consumer Real Estate Services
at
June 30, 2014
and
December 31, 2013
.
204
|
Intangible Assets
|
The table below presents the gross carrying value and accumulated amortization for intangible assets at
June 30, 2014
and
December 31, 2013
.
|
Intangible Assets
(1, 2)
|
|||||||||||||||||||||||
|
|
June 30, 2014
|
December 31, 2013
|
|||||||||||||||||||||
|
(Dollars in millions)
|
Gross
Carrying Value
|
Accumulated
Amortization
|
Net
Carrying Value
|
Gross
Carrying Value
|
Accumulated
Amortization
|
Net
Carrying Value |
|||||||||||||||||
|
Purchased credit card relationships
|
$
|
5,599
|
|
$
|
4,445
|
|
$
|
1,154
|
|
$
|
6,160
|
|
$
|
4,849
|
|
$
|
1,311
|
|
|||||
|
Core deposit intangibles
|
1,779
|
|
1,314
|
|
465
|
|
3,592
|
|
3,055
|
|
537
|
|
|||||||||||
|
Customer relationships
|
4,025
|
|
2,468
|
|
1,557
|
|
4,025
|
|
2,281
|
|
1,744
|
|
|||||||||||
|
Affinity relationships
|
1,581
|
|
1,249
|
|
332
|
|
1,575
|
|
1,197
|
|
378
|
|
|||||||||||
|
Other intangibles
|
2,045
|
|
454
|
|
1,591
|
|
2,045
|
|
441
|
|
1,604
|
|
|||||||||||
|
Total intangible assets
|
$
|
15,029
|
|
$
|
9,930
|
|
$
|
5,099
|
|
$
|
17,397
|
|
$
|
11,823
|
|
$
|
5,574
|
|
|||||
|
(1)
|
Excludes fully amortized intangible assets.
|
|
(2)
|
At
June 30, 2014
and
December 31, 2013
, none of the intangible assets were impaired.
|
The table below presents intangible asset amortization expense for the
three and six months ended June 30, 2014 and 2013
.
|
Amortization Expense
|
|||||||||||||||
|
|
Three Months Ended June 30
|
Six Months Ended June 30
|
|||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Purchased credit card and Affinity relationships
|
$
|
102
|
|
$
|
118
|
|
$
|
207
|
|
$
|
237
|
|
|||
|
Core deposit intangibles
|
36
|
|
50
|
|
72
|
|
125
|
|
|||||||
|
Customer relationships
|
91
|
|
95
|
|
182
|
|
165
|
|
|||||||
|
Other intangibles
|
6
|
|
11
|
|
13
|
|
23
|
|
|||||||
|
Total amortization expense
|
$
|
235
|
|
$
|
274
|
|
$
|
474
|
|
$
|
550
|
|
|||
The table below presents estimated future intangible asset amortization expense at
June 30, 2014
.
|
Estimated Future Amortization Expense
|
|||||||||||||||||||||||
|
(Dollars in millions)
|
Remainder of
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
|||||||||||||||||
|
Purchased credit card and Affinity relationships
|
$
|
208
|
|
$
|
358
|
|
$
|
299
|
|
$
|
239
|
|
$
|
180
|
|
$
|
121
|
|
|||||
|
Core deposit intangibles
|
68
|
|
122
|
|
105
|
|
91
|
|
80
|
|
7
|
|
|||||||||||
|
Customer relationships
|
174
|
|
340
|
|
325
|
|
310
|
|
302
|
|
286
|
|
|||||||||||
|
Other intangibles
|
12
|
|
16
|
|
9
|
|
6
|
|
3
|
|
1
|
|
|||||||||||
|
Total estimated future amortization expense
|
$
|
462
|
|
$
|
836
|
|
$
|
738
|
|
$
|
646
|
|
$
|
565
|
|
$
|
415
|
|
|||||
205
|
|
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.
|
|
Three Months Ended June 30
|
Six Months Ended June 30
|
|||||||||||||||||||||||||
|
|
Amount
|
Rate
|
Amount
|
Rate
|
|||||||||||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
|||||||||||||||||||
|
Average during period
|
|
|
|
|
|||||||||||||||||||||||
|
Federal funds sold
|
$
|
6
|
|
$
|
13
|
|
0.90
|
%
|
0.65
|
%
|
$
|
4
|
|
$
|
8
|
|
0.85
|
%
|
0.64
|
%
|
|||||||
|
Securities borrowed or purchased under agreements to resell
|
235,387
|
|
233,381
|
|
0.51
|
|
0.55
|
|
224,008
|
|
235,409
|
|
0.51
|
|
0.54
|
|
|||||||||||
|
Total
|
$
|
235,393
|
|
$
|
233,394
|
|
0.51
|
|
0.55
|
|
$
|
224,012
|
|
$
|
235,417
|
|
0.51
|
|
0.54
|
|
|||||||
|
Federal funds purchased
|
$
|
166
|
|
$
|
188
|
|
0.05
|
%
|
0.09
|
%
|
$
|
170
|
|
$
|
191
|
|
0.04
|
%
|
0.07
|
%
|
|||||||
|
Securities loaned or sold under agreements to repurchase
|
222,358
|
|
270,602
|
|
1.10
|
|
0.85
|
|
213,544
|
|
285,590
|
|
1.07
|
|
0.78
|
|
|||||||||||
|
Short-term borrowings
|
48,723
|
|
47,238
|
|
1.26
|
|
1.98
|
|
48,447
|
|
42,001
|
|
1.01
|
|
2.15
|
|
|||||||||||
|
Total
|
$
|
271,247
|
|
$
|
318,028
|
|
1.13
|
|
1.02
|
|
$
|
262,161
|
|
$
|
327,782
|
|
1.06
|
|
0.96
|
|
|||||||
|
Maximum month-end balance during period
|
|
|
|
|
|||||||||||||||||||||||
|
Federal funds sold
|
$
|
12
|
|
$
|
5
|
|
$
|
12
|
|
$
|
5
|
|
|||||||||||||||
|
Securities borrowed or purchased under agreements to resell
|
240,110
|
|
240,881
|
|
240,110
|
|
249,791
|
|
|||||||||||||||||||
|
Federal funds purchased
|
$
|
170
|
|
$
|
195
|
|
|
|
$
|
213
|
|
$
|
195
|
|
|||||||||||||
|
Securities loaned or sold under agreements to repurchase
|
239,984
|
|
290,699
|
|
|
|
239,984
|
|
319,608
|
|
|||||||||||||||||
|
Short-term borrowings
|
50,071
|
|
46,470
|
|
|
|
51,409
|
|
46,470
|
|
|||||||||||||||||
|
|
June 30, 2014
|
December 31, 2013
|
|||||||||||||||||||||||||
|
|
Amount
|
Rate
|
Amount
|
Rate
|
|||||||||||||||||||||||
|
Period-end
|
|
|
|||||||||||||||||||||||||
|
Securities borrowed or purchased under agreements to resell
|
$
|
229,449
|
|
0.32
|
%
|
$
|
190,328
|
|
0.60
|
%
|
|||||||||||||||||
|
Total
|
$
|
229,449
|
|
0.32
|
|
$
|
190,328
|
|
0.60
|
|
|||||||||||||||||
|
Federal funds purchased
|
$
|
122
|
|
0.03
|
%
|
$
|
186
|
|
—
|
%
|
|||||||||||||||||
|
Securities loaned or sold under agreements to repurchase
|
217,707
|
|
0.85
|
|
197,920
|
|
0.92
|
|
|||||||||||||||||||
|
Short-term borrowings
|
45,873
|
|
1.08
|
|
45,999
|
|
1.55
|
|
|||||||||||||||||||
|
Total
|
$
|
263,702
|
|
0.89
|
|
$
|
244,105
|
|
1.03
|
|
|||||||||||||||||
206
|
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
June 30, 2014
and
December 31, 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 Securities Financing Agreements table, which is included on the Consolidated Balance Sheet in other assets and 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 for the same amount, representing the obligation to return those securities.
Gross assets and liabilities 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.
The column titled "Financial Instruments" in the Securities Financing Agreements 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 Financing Agreements
|
|||||||||||||||||||
|
June 30, 2014
|
|||||||||||||||||||
|
(Dollars in millions)
|
Gross Assets/Liabilities
|
Amounts Offset
|
Net Balance Sheet Amount
|
Financial Instruments
|
Net Assets/Liabilities
|
||||||||||||||
|
Securities borrowed or purchased under agreements to resell
|
$
|
333,523
|
|
$
|
(104,074
|
)
|
$
|
229,449
|
|
$
|
(173,314
|
)
|
$
|
56,135
|
|
||||
|
Securities loaned or sold under agreements to repurchase
|
$
|
321,781
|
|
$
|
(104,074
|
)
|
$
|
217,707
|
|
$
|
(166,331
|
)
|
$
|
51,376
|
|
||||
|
Other
|
11,348
|
|
—
|
|
11,348
|
|
(11,348
|
)
|
—
|
|
|||||||||
|
Total
|
$
|
333,129
|
|
$
|
(104,074
|
)
|
$
|
229,055
|
|
$
|
(177,679
|
)
|
$
|
51,376
|
|
||||
|
December 31, 2013
|
|||||||||||||||||||
|
Securities borrowed or purchased under agreements to resell
|
$
|
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
|
|
||||
207
|
|
In the normal course of business, the Corporation enters into a number of off-balance sheet commitments. These commitments expose the Corporation to varying degrees of credit and market risk and are subject to the same credit and market risk limitation reviews as those instruments recorded on the Consolidated Balance Sheet. For more information on commitments and contingencies, see
Note 12 – Commitments and Contingencies
to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K
.
|
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
$17.8 billion
and
$21.9 billion
at
June 30, 2014
and
December 31, 2013
. At
June 30, 2014
, the carrying value of these commitments, excluding commitments accounted for under the fair value option, was
$521 million
, including deferred revenue of
$18 million
and a reserve for unfunded lending commitments of
$503 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
$10.1 billion
and
$13.0 billion
at
June 30, 2014
and
December 31, 2013
that are accounted for under the fair value option. However, the table below excludes cumulative net fair value adjustments of
$330 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 15 – Fair Value Option
.
|
Credit Extension Commitments
|
|||||||||||||||||||
|
|
June 30, 2014
|
||||||||||||||||||
|
(Dollars in millions)
|
Expire in
One Year
or Less
|
Expire After
One Year Through
Three Years |
Expire After Three Years Through
Five Years |
Expire After Five Years
|
Total
|
||||||||||||||
|
Notional amount of credit extension commitments
|
|
|
|
|
|
||||||||||||||
|
Loan commitments
|
$
|
75,710
|
|
$
|
111,200
|
|
$
|
132,908
|
|
$
|
19,534
|
|
$
|
339,352
|
|
||||
|
Home equity lines of credit
|
5,674
|
|
18,437
|
|
17,012
|
|
13,856
|
|
54,979
|
|
|||||||||
|
Standby letters of credit and financial guarantees
(1)
|
21,030
|
|
8,439
|
|
4,165
|
|
1,939
|
|
35,573
|
|
|||||||||
|
Letters of credit
|
2,537
|
|
249
|
|
63
|
|
31
|
|
2,880
|
|
|||||||||
|
Legally binding commitments
|
104,951
|
|
138,325
|
|
154,148
|
|
35,360
|
|
432,784
|
|
|||||||||
|
Credit card lines
(2)
|
370,401
|
|
—
|
|
—
|
|
—
|
|
370,401
|
|
|||||||||
|
Total credit extension commitments
|
$
|
475,352
|
|
$
|
138,325
|
|
$
|
154,148
|
|
$
|
35,360
|
|
$
|
803,185
|
|
||||
|
|
December 31, 2013
|
||||||||||||||||||
|
Notional amount of credit extension commitments
|
|
|
|
|
|
||||||||||||||
|
Loan commitments
|
$
|
80,799
|
|
$
|
105,175
|
|
$
|
133,290
|
|
$
|
21,864
|
|
$
|
341,128
|
|
||||
|
Home equity lines of credit
|
4,580
|
|
16,855
|
|
21,074
|
|
14,301
|
|
56,810
|
|
|||||||||
|
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
$26.2 billion
and
$9.0 billion
at
June 30, 2014
, and
$27.6 billion
and
$9.6 billion
at
December 31, 2013
. Amounts include consumer SBLCs of
$411 million
and
$453 million
at
June 30, 2014
and
December 31, 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.
208
|
Other Commitments
|
At
June 30, 2014
and
December 31, 2013
, the Corporation had unfunded equity investment commitments of
$92 million
and
$195 million
.
At
June 30, 2014
and
December 31, 2013
, the Corporation had commitments to purchase loans (e.g., residential mortgage and commercial real estate) of
$3.2 billion
and
$1.5 billion
, which upon settlement will be included in loans or LHFS.
At
June 30, 2014
and
December 31, 2013
, the Corporation had commitments to enter into forward-dated resale and securities borrowing agreements of
$105.3 billion
and
$75.5 billion
, and commitments to enter into forward-dated repurchase and securities lending agreements of
$72.8 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
$1.4 billion
,
$2.5 billion
,
$2.2 billion
,
$1.8 billion
and
$1.4 billion
for the remainder of
2014
and the years through
2018
, respectively, and
$5.9 billion
in the aggregate for all years
thereafter
.
|
Other Guarantees
|
Bank-owned Life Insurance Book Value Protection
The Corporation sells products that offer book value protection to insurance carriers who offer group life insurance policies to corporations, primarily banks. 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
June 30, 2014
and
December 31, 2013
, the notional amount of these guarantees totaled
$13.5 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 2030 and 2045. The net fair value including the fee receivable associated with these guarantees was
$32 million
and
$39 million
at
June 30, 2014
and
December 31, 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 at fair value in the trading portfolio. At
June 30, 2014
and
December 31, 2013
, the notional amount of these guarantees totaled
$2.0 billion
and
$4.6 billion
with estimated maturity dates up to 2018 if the exit option is exercised on all deals. The decline in notional amount during the
six months ended June 30, 2014
was primarily the result of plan sponsors terminating contracts pursuant to exit options. As of
June 30, 2014
, the Corporation had not made a payment under these products.
209
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. For the
three and six months ended June 30, 2014
, the sponsored entities processed and settled
$164.3 billion
and
$313.7 billion
of transactions and recorded losses of
$4 million
and
$8 million
. For the
three and six months ended June 30, 2013
, the sponsored entities processed and settled
$157.9 billion
and
$306.2 billion
of transactions and recorded losses of
$4 million
and
$8 million
. A significant portion of this activity was processed by a joint venture in which the Corporation holds a
49 percent
ownership. At
June 30, 2014
and
December 31, 2013
, the sponsored merchant processing servicers held as collateral
$116 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
June 30, 2014
and
December 31, 2013
, the maximum potential exposure for sponsored transactions totaled
$253.0 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.
Other Derivative Contracts
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
$656 million
and
$1.8 billion
with commercial banks at
June 30, 2014
and
December 31, 2013
, and
$1.1 billion
and
$1.3 billion
with VIEs at
June 30, 2014
and
December 31, 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
$6.5 billion
and
$6.9 billion
at
June 30, 2014
and
December 31, 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
$242 million
and
$381 million
at
June 30, 2014
and
December 31, 2013
. The Corporation recorded
$43 million
and
$184 million
of expense for the
three and six months ended June 30, 2014
compared to
$29 million
for both the same periods in
2013
. 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.
210
|
Litigation and Regulatory Matters
|
The following supplements the disclosure in
Note 12 – Commitments and Contingencies
to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K
and in
Note 10 – Commitments and Contingencies
to the Consolidated Financial Statements
of the Corporation's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2014
(the prior commitments and contingencies disclosure).
In the ordinary course of business, the Corporation and its subsidiaries are routinely defendants in or parties to many pending and threatened legal 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. 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 by those agencies, such subsidiaries receive numerous requests, subpoenas and orders for documents, testimony and information in connection with various aspects of their 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 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
$4.0 billion
and
$10.0 billion
was recognized for the
three and six months ended June 30, 2014
compared to
$471 million
and
$2.7 billion
for the same periods in
2013
.
For a limited number of the matters disclosed in this Note, and in the prior commitments and contingencies disclosure, for which a loss, whether in excess of a related accrued liability or where there is no accrued liability, is reasonably possible in future periods, the Corporation is able to estimate a range of possible loss. In 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
$5.0 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.
211
Information is provided below, or in the prior commitments and contingencies disclosure, 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, and in the prior commitments and contingencies disclosure, will have a material adverse effect on the consolidated financial position or liquidity of the Corporation. However, in light of the inherent uncertainties involved in these matters, some of which are beyond the Corporation's control, and the very large or indeterminate damages sought in some of these matters, an adverse outcome in one or more of these matters could be material to the Corporation's results of operations or cash flows for any particular reporting period.
Bond Insurance Litigation
FGIC
On May 15, 2014 and May 28, 2014, following the receipt of the requisite investor approvals, the Corporation entered into
two
remaining trust settlements with BNY Mellon.
Interchange and Related Litigation
On July 18, 2014, the U.S. District Court for the Eastern District of New York, the court in which all but
one
of the opt-out suits have been consolidated, denied defendants’ motion to dismiss the opt-out complaints, including the complaint in the consolidated proceedings naming the Corporation as a defendant.
LIBOR, Other Reference Rate and Foreign Exchange (FX) Inquiries and Litigation
On June 23, 2014, the U.S. District Court for the Southern District of New York resolved various outstanding motions to dismiss and motions for reconsideration related to the LIBOR matters. As to the Corporation and BANA, the court further limited manipulation claims under the Commodities Exchange Act based on the statute of limitations, dismissed manipulation claims based on alleged trader conduct, and dismissed certain common law claims brought by plaintiffs who alleged no direct dealings with the Corporation or BANA. The court’s rulings will be applicable to later filed actions to the extent they assert similar claims.
BANA (Singapore Branch) has completed the actions required by the previously disclosed Monetary Authority of Singapore (MAS) review, including completing the enhancements to its submission practices with the MAS. For more information, see
Note 12 – Commitments and Contingencies
to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K
.
Mortgage-backed Securities Litigation and Other Government Mortgage Origination Investigations
AIG Litigation
On July 15, 2014, the Corporation and certain of its subsidiaries entered into a settlement agreement with AIG to resolve all RMBS claims asserted in
American International Group, Inc., et al. v. Bank of America Corp.
,
et al.
, the action pending in the U.S. District Court for the Southern District of New York, as well as the Countrywide MBS claims pending in a related proceeding in the U.S. District Court for the Central District of California. The settlement provides for dismissal with prejudice of both actions and the release by AIG of the Corporation and its affiliates from the claims asserted therein. The settlement also provides for the withdrawal by AIG of its objection in the BNY Mellon Settlement court approval proceeding, including its participation in all pending appeals. The Corporation paid AIG
$650 million
in this settlement. The settlement amount was fully accrued as of June 30, 2014. For more information regarding the BNY Mellon Settlement, see
Note 7 – Representations and Warranties Obligations and Corporate Guarantees
.
212
Civil RMBS Matters Filed by the DOJ and the SEC
On August 6, 2013, the U.S. Department of Justice (DOJ) and the SEC filed separate civil actions in the U.S. District Court for the Western District of North Carolina against Merrill Lynch, Pierce, Fenner & Smith, BANA and Banc of America Mortgage Securities, Inc. (and, in the DOJ case, the Corporation). Both cases allege generally that the offering materials for a
single
2008 RMBS offering contained material misstatements and omissions regarding,
inter alia
, the concentration of loans originated in the wholesale loan channel. The DOJ case asserts violations of FIRREA and the SEC case asserts claims under Sections 17(a)(2) and (3) and Section 5(b)(1) of the Securities Act of 1933. The complaints demand unspecified damages and other relief. Defendants moved to dismiss both complaints on November 8, 2013.
On June 19, 2014, the court granted the DOJ leave to amend, which it held rendered the motion to dismiss moot as a matter of law. On the same date, the court denied defendants' motion to dismiss the SEC complaint.
Prudential Insurance Litigation
On April 17, 2014, the court granted in part and denied in part defendants' motion to dismiss the complaint.
Regulatory and Governmental Investigations
The Corporation is subject to inquiries and investigations, and may be subject to litigation, penalties and fines by the DOJ, state Attorneys General and other members of the RMBS Working Group of the Financial Fraud Enforcement Task Force (collectively, the Governmental Authorities) regarding the Corporation's RMBS and other mortgage-related matters. The Corporation is also a party to civil litigation proceedings brought by the DOJ and certain other Governmental Authorities regarding the Corporation's RMBS. The Corporation continues to cooperate with and has had discussions about a potential resolution of these matters with certain Governmental Authorities. There can be no assurances that these discussions will lead to a resolution of any or all of these matters and additional litigation may be filed by the DOJ or certain other Governmental Authorities regarding the Corporation’s RMBS. For more information, see
Item 1A. Risk Factors of the Corporation's 2013 Annual Report on Form 10-K
.
Mortgage Repurchase Litigation
U.S. Bank Litigation
On March 31, 2014 and May 27, 2014, plaintiff filed notices of appeal from the court's February 13, 2014 order.
Ocala Litigation
FDIC Action
On June 10, 2014, the Federal Deposit Insurance Corporation (FDIC) published a Notice of Withdrawal of the No Value Determination in the Federal Register. On June 20, 2014, the U.S. District Court for the District of Columbia vacated its August 26, 2013 order granting the FDIC's motion to dismiss BANA's claims against the FDIC in its capacity as receiver for Colonial Bank.
Policemen's Annuity Litigation
On June 5, 2014, the parties informed the court that they have 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 and the court.
213
|
|
|
Common Stock
|
The table below presents the declared quarterly cash dividends on common stock in
2014
and through
July 29, 2014
.
|
Declaration Date
|
Record Date
|
Payment Date
|
Dividend Per Share
|
|||
|
June 18, 2014
|
June 24, 2014
|
June 30, 2014
|
$
|
0.01
|
|
|
|
February 11, 2014
|
March 7, 2014
|
March 28, 2014
|
0.01
|
|
||
During the
three months ended June 30, 2014
, prior to the suspension of the 2014 common stock repurchase program, the Corporation repurchased and retired
14.4 million
shares of common stock, which reduced shareholders' equity by
$233 million
. During the three months ended
March 31, 2014
, under the 2013 common stock repurchase program, the Corporation repurchased and retired
86.7 million
shares of common stock, which reduced shareholders' equity by
$1.4 billion
.
During the
six months ended June 30, 2014
, in connection with employee stock plans, the Corporation issued approximately
41 million
shares and repurchased approximately
16 million
shares of its common stock to satisfy tax withholding obligations. At
June 30, 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
|
During the three months ended
March 31, 2014
and
June 30, 2014
, the cash dividends declared on preferred stock were
$238 million
and
$256 million
, or a total of
$494 million
for the
six months ended June 30, 2014
.
During the
three months ended June 30, 2014
, the Corporation issued
60,000
shares of its Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series V for
$1.5 billion
. The Series V 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. Dividends are paid semi-annually commencing on December 17, 2014 through June 17, 2019 and thereafter are paid quarterly.
At the Corporation's annual meeting of stockholders on May 7, 2014, the stockholders approved an amendment to the Corporation's 6% Cumulative Perpetual Preferred Stock, Series T (the Series T Preferred Stock) such that it qualifies as Tier 1 capital, and the amendment became effective during 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.
|
Restricted Stock Units
|
During the
six months ended June 30, 2014
, the Corporation granted
133 million
restricted stock unit (RSU) awards to certain employees under the Key Associate Stock Plan. Generally, one-third of the RSUs vest on each of the first three anniversaries of the grant date provided that the employee remains continuously employed with the Corporation during that time. Except for
two million
RSUs that are authorized to settle in shares of common stock of the Corporation, the RSUs will be paid in cash to the employees on the vesting date based on the fair value of the Corporation's common stock as of the vesting date. The RSUs are expensed ratably over the vesting period, net of estimated forfeitures, for non-retirement eligible employees based upon the fair value of the Corporation's common stock on the accrual date. For RSUs granted to employees who are retirement eligible or will become retirement eligible during the vesting period, the RSUs are expensed as of the grant date or ratably over the period from the grant date to the date the employee becomes retirement eligible, net of estimated forfeitures. The accrued liability for the RSUs is adjusted to fair value based on changes in the fair value of the Corporation's common stock. The Corporation enters into cash-settled equity derivatives for a significant portion of the RSUs to minimize the change in expense driven by fluctuations in the fair value of the RSUs over the applicable vesting period. For additional information, see
Note 18 – Stock-based Compensation Plans
to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K
.
214
|
|
The table below presents the changes in accumulated OCI after-tax for the
six months ended June 30, 2014 and 2013
.
|
(Dollars in millions)
|
Available-for-sale Debt Securities
|
Available-for-sale
Marketable
Equity Securities
|
Derivatives
|
Employee
Benefit Plans
|
Foreign
Currency
(1)
|
Total
|
|||||||||||||||||
|
Balance, December 31, 2012
|
$
|
4,443
|
|
$
|
462
|
|
$
|
(2,869
|
)
|
$
|
(4,456
|
)
|
$
|
(377
|
)
|
$
|
(2,797
|
)
|
|||||
|
Net change
|
(5,088
|
)
|
(51
|
)
|
185
|
|
133
|
|
(91
|
)
|
(4,912
|
)
|
|||||||||||
|
Balance, June 30, 2013
|
$
|
(645
|
)
|
$
|
411
|
|
$
|
(2,684
|
)
|
$
|
(4,323
|
)
|
$
|
(468
|
)
|
$
|
(7,709
|
)
|
|||||
|
Balance, December 31, 2013
|
$
|
(3,257
|
)
|
$
|
(4
|
)
|
$
|
(2,277
|
)
|
$
|
(2,407
|
)
|
$
|
(512
|
)
|
$
|
(8,457
|
)
|
|||||
|
Net change
|
3,612
|
|
(18
|
)
|
215
|
|
56
|
|
(119
|
)
|
3,746
|
|
|||||||||||
|
Balance, June 30, 2014
|
$
|
355
|
|
$
|
(22
|
)
|
$
|
(2,062
|
)
|
$
|
(2,351
|
)
|
$
|
(631
|
)
|
$
|
(4,711
|
)
|
|||||
|
(1)
|
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 the
six months ended June 30, 2014 and 2013
.
|
Changes in OCI Components Before- and After-tax
|
|||||||||||||||||||||||
|
Six Months Ended June 30
|
|||||||||||||||||||||||
|
2014
|
2013
|
||||||||||||||||||||||
|
(Dollars in millions)
|
Before-tax
|
Tax effect
|
After-tax
|
Before-tax
|
Tax effect
|
After-tax
|
|||||||||||||||||
|
Available-for-sale debt securities:
|
|||||||||||||||||||||||
|
Net increase (decrease) in fair value
|
$
|
6,497
|
|
$
|
(2,421
|
)
|
$
|
4,076
|
|
$
|
(7,565
|
)
|
$
|
2,799
|
|
$
|
(4,766
|
)
|
|||||
|
Net realized gains reclassified into earnings
|
(748
|
)
|
284
|
|
(464
|
)
|
(512
|
)
|
190
|
|
(322
|
)
|
|||||||||||
|
Net change
|
5,749
|
|
(2,137
|
)
|
3,612
|
|
(8,077
|
)
|
2,989
|
|
(5,088
|
)
|
|||||||||||
|
Available-for-sale marketable equity securities:
|
|||||||||||||||||||||||
|
Net decrease in fair value
|
(29
|
)
|
11
|
|
(18
|
)
|
(83
|
)
|
33
|
|
(50
|
)
|
|||||||||||
|
Net realized gains reclassified into earnings
|
—
|
|
—
|
|
—
|
|
(1
|
)
|
—
|
|
(1
|
)
|
|||||||||||
|
Net change
|
(29
|
)
|
11
|
|
(18
|
)
|
(84
|
)
|
33
|
|
(51
|
)
|
|||||||||||
|
Derivatives:
|
|||||||||||||||||||||||
|
Net increase (decrease) in fair value
|
(19
|
)
|
25
|
|
6
|
|
(125
|
)
|
45
|
|
(80
|
)
|
|||||||||||
|
Net realized losses reclassified into earnings
|
335
|
|
(126
|
)
|
209
|
|
421
|
|
(156
|
)
|
265
|
|
|||||||||||
|
Net change
|
316
|
|
(101
|
)
|
215
|
|
296
|
|
(111
|
)
|
185
|
|
|||||||||||
|
Employee benefit plans:
|
|||||||||||||||||||||||
|
Net realized losses reclassified into earnings
|
25
|
|
(10
|
)
|
15
|
|
146
|
|
(45
|
)
|
101
|
|
|||||||||||
|
Settlements, curtailments and other
|
—
|
|
41
|
|
41
|
|
42
|
|
(10
|
)
|
32
|
|
|||||||||||
|
Net change
|
25
|
|
31
|
|
56
|
|
188
|
|
(55
|
)
|
133
|
|
|||||||||||
|
Foreign currency:
|
|||||||||||||||||||||||
|
Net decrease in fair value
|
(368
|
)
|
250
|
|
(118
|
)
|
711
|
|
(801
|
)
|
(90
|
)
|
|||||||||||
|
Net realized gains (losses) reclassified into earnings
|
(2
|
)
|
1
|
|
(1
|
)
|
32
|
|
(33
|
)
|
(1
|
)
|
|||||||||||
|
Net change
|
(370
|
)
|
251
|
|
(119
|
)
|
743
|
|
(834
|
)
|
(91
|
)
|
|||||||||||
|
Total other comprehensive income (loss)
|
$
|
5,691
|
|
$
|
(1,945
|
)
|
$
|
3,746
|
|
$
|
(6,934
|
)
|
$
|
2,022
|
|
$
|
(4,912
|
)
|
|||||
215
The table below presents impacts on net income of significant amounts reclassified out of each component of accumulated OCI before- and after-tax for the
six months ended June 30, 2014 and 2013
. Amounts reclassified out of AFS marketable equity securities were immaterial for both the
six months ended June 30, 2014 and 2013
.
|
Reclassifications Out of Accumulated OCI
|
||||||||
|
(Dollars in millions)
|
Six Months Ended June 30
|
|||||||
|
Accumulated OCI Components
|
Income Statement Line Item Impacted
|
2014
|
|
2013
|
||||
|
Available-for-sale debt securities:
|
||||||||
|
Gains on sales of debt securities
|
$
|
759
|
|
$
|
525
|
|
||
|
Other loss
|
(11
|
)
|
(13
|
)
|
||||
|
Income before income taxes
|
748
|
|
512
|
|
||||
|
Income tax expense
|
284
|
|
190
|
|
||||
|
Reclassification to net income
|
464
|
|
322
|
|
||||
|
Derivatives:
|
||||||||
|
Interest rate contracts
|
Net interest income
|
(560
|
)
|
(547
|
)
|
|||
|
Commodity contracts
|
Trading account profits
|
—
|
|
(1
|
)
|
|||
|
Interest rate contracts
|
Other income
|
—
|
|
18
|
|
|||
|
Equity compensation contracts
|
Personnel
|
225
|
|
109
|
|
|||
|
Loss before income taxes
|
(335
|
)
|
(421
|
)
|
||||
|
Income tax benefit
|
(126
|
)
|
(156
|
)
|
||||
|
Reclassification to net income
|
(209
|
)
|
(265
|
)
|
||||
|
Employee benefit plans:
|
||||||||
|
Prior service cost and net actuarial losses
|
Personnel
|
(25
|
)
|
(146
|
)
|
|||
|
Loss before income taxes
|
(25
|
)
|
(146
|
)
|
||||
|
Income tax benefit
|
(10
|
)
|
(45
|
)
|
||||
|
Reclassification to net income
|
(15
|
)
|
(101
|
)
|
||||
|
Foreign currency:
|
|
|
|
|||||
|
Insignificant items
|
Other income (loss)
|
2
|
|
(32
|
)
|
|||
|
Income (loss) before income taxes
|
2
|
|
(32
|
)
|
||||
|
Income tax expense (benefit)
|
1
|
|
(33
|
)
|
||||
|
Reclassification to net income
|
1
|
|
1
|
|
||||
|
Total reclassification adjustments
|
|
$
|
241
|
|
$
|
(43
|
)
|
|
216
|
|
The calculation of earnings per common share (EPS) and diluted EPS for the
three and six months ended June 30, 2014 and 2013
is presented below. For more information on the calculation of EPS, see
Note 1 – Summary of Significant Accounting Principles
to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K
.
|
|
Three Months Ended June 30
|
Six Months Ended June 30
|
|||||||||||||
|
(Dollars in millions, except per share information; shares in thousands)
|
2014
|
2013
|
2014
|
|
2013
|
||||||||||
|
Earnings per common share
|
|
|
|||||||||||||
|
Net income
|
$
|
2,291
|
|
$
|
4,012
|
|
$
|
2,015
|
|
$
|
5,495
|
|
|||
|
Preferred stock dividends
|
(256
|
)
|
(441
|
)
|
(494
|
)
|
(814
|
)
|
|||||||
|
Net income applicable to common shareholders
|
$
|
2,035
|
|
$
|
3,571
|
|
$
|
1,521
|
|
$
|
4,681
|
|
|||
|
Dividends and undistributed earnings allocated to participating securities
|
—
|
|
(1
|
)
|
—
|
|
(1
|
)
|
|||||||
|
Net income allocated to common shareholders
|
$
|
2,035
|
|
$
|
3,570
|
|
$
|
1,521
|
|
$
|
4,680
|
|
|||
|
Average common shares issued and outstanding
|
10,519,359
|
|
10,775,867
|
|
10,539,769
|
|
10,787,357
|
|
|||||||
|
Earnings per common share
|
$
|
0.19
|
|
$
|
0.33
|
|
$
|
0.14
|
|
$
|
0.43
|
|
|||
|
Diluted earnings per common share
|
|||||||||||||||
|
Net income applicable to common shareholders
|
$
|
2,035
|
|
$
|
3,571
|
|
$
|
1,521
|
|
$
|
4,681
|
|
|||
|
Add preferred stock dividends due to assumed conversions
|
75
|
|
75
|
|
—
|
|
150
|
|
|||||||
|
Dividends and undistributed earnings allocated to participating securities
|
—
|
|
(1
|
)
|
—
|
|
(1
|
)
|
|||||||
|
Net income allocated to common shareholders
|
$
|
2,110
|
|
$
|
3,645
|
|
$
|
1,521
|
|
$
|
4,830
|
|
|||
|
Average common shares issued and outstanding
|
10,519,359
|
|
10,775,867
|
|
10,539,769
|
|
10,787,357
|
|
|||||||
|
Dilutive potential common shares
(1)
|
745,764
|
|
748,643
|
|
59,872
|
|
762,336
|
|
|||||||
|
Total diluted average common shares issued and outstanding
|
11,265,123
|
|
11,524,510
|
|
10,599,641
|
|
11,549,693
|
|
|||||||
|
Diluted earnings per common share
|
$
|
0.19
|
|
$
|
0.32
|
|
$
|
0.14
|
|
$
|
0.42
|
|
|||
|
(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 the
three months ended June 30, 2014
, the
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 the
six months ended June 30, 2014
, the
700 million
average dilutive potential common shares were not included in the diluted share count because the result would have been antidilutive under the "if-converted" method. For both the
three and six months ended June 30, 2013
, the
700 million
average dilutive potential common shares were included in the diluted share count under the "if-converted" method.
For both the
three and six months ended June 30, 2014 and 2013
,
62 million
average dilutive potential common shares associated with the 7.25% Non-Cumulative Perpetual Convertible Preferred Stock, Series L were not included in the diluted share count because the result would have been antidilutive under the "if-converted" method. For the
three and six months ended June 30, 2014
, average options to purchase
89 million
and
95 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
124 million
and
129 million
for the
same periods in 2013
. For the
three and six months ended June 30, 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 and average warrants to purchase
150 million
shares of common stock were included in the diluted EPS calculation using the treasury stock method. For the
three and six months ended June 30, 2013
, average warrants to purchase
272 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.
217
|
|
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
to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K
. The Corporation accounts for certain financial instruments under the fair value option. For additional information, see
Note 15 – 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 the
six months ended June 30, 2014
, 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.
218
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 Corporation's own credit risk. 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 (OAS) levels. For more information on MSRs, see
Note 17 – 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.
219
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.
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.
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.
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.
220
|
Recurring Fair Value
|
Assets and liabilities carried at fair value on a recurring basis at
June 30, 2014
and
December 31, 2013
, including financial instruments which the Corporation accounts for under the fair value option, are summarized in the following tables.
|
|
June 30, 2014
|
||||||||||||||||||
|
|
Fair Value Measurements
|
|
|
||||||||||||||||
|
(Dollars in millions)
|
Level 1
(1)
|
Level 2
(1)
|
Level 3
|
Netting
Adjustments
(2)
|
Assets/Liabilities
at Fair Value
|
||||||||||||||
|
Assets
|
|
|
|
|
|
||||||||||||||
|
Federal funds sold and securities borrowed or purchased under agreements to resell
|
$
|
—
|
|
$
|
67,317
|
|
$
|
—
|
|
$
|
—
|
|
$
|
67,317
|
|
||||
|
Trading account assets:
|
|
|
|
|
|
||||||||||||||
|
U.S. government and agency securities
(3)
|
30,412
|
|
19,150
|
|
—
|
|
—
|
|
49,562
|
|
|||||||||
|
Corporate securities, trading loans and other
|
1,161
|
|
34,753
|
|
2,772
|
|
—
|
|
38,686
|
|
|||||||||
|
Equity securities
|
30,843
|
|
23,437
|
|
356
|
|
—
|
|
54,636
|
|
|||||||||
|
Non-U.S. sovereign debt
|
26,660
|
|
13,442
|
|
640
|
|
—
|
|
40,742
|
|
|||||||||
|
Mortgage trading loans and ABS
|
—
|
|
9,015
|
|
4,311
|
|
—
|
|
13,326
|
|
|||||||||
|
Total trading account assets
|
89,076
|
|
99,797
|
|
8,079
|
|
—
|
|
196,952
|
|
|||||||||
|
Derivative assets
(4)
|
2,225
|
|
796,924
|
|
7,136
|
|
(758,393
|
)
|
47,892
|
|
|||||||||
|
AFS debt securities:
|
|
|
|
|
|
||||||||||||||
|
U.S. Treasury and agency securities
|
36,485
|
|
2,218
|
|
—
|
|
—
|
|
38,703
|
|
|||||||||
|
Mortgage-backed securities:
|
|
|
|
|
|
||||||||||||||
|
Agency
|
—
|
|
161,543
|
|
—
|
|
—
|
|
161,543
|
|
|||||||||
|
Agency-collateralized mortgage obligations
|
—
|
|
12,441
|
|
—
|
|
—
|
|
12,441
|
|
|||||||||
|
Non-agency residential
|
—
|
|
5,006
|
|
—
|
|
—
|
|
5,006
|
|
|||||||||
|
Commercial
|
—
|
|
2,278
|
|
—
|
|
—
|
|
2,278
|
|
|||||||||
|
Non-U.S. securities
|
3,791
|
|
3,278
|
|
—
|
|
—
|
|
7,069
|
|
|||||||||
|
Corporate/Agency bonds
|
—
|
|
828
|
|
—
|
|
—
|
|
828
|
|
|||||||||
|
Other taxable securities
|
20
|
|
10,329
|
|
3,266
|
|
—
|
|
13,615
|
|
|||||||||
|
Tax-exempt securities
|
—
|
|
8,054
|
|
735
|
|
—
|
|
8,789
|
|
|||||||||
|
Total AFS debt securities
|
40,296
|
|
205,975
|
|
4,001
|
|
—
|
|
250,272
|
|
|||||||||
|
Other debt securities carried at fair value:
|
|||||||||||||||||||
|
U.S. Treasury and agency securities
|
4,242
|
|
—
|
|
—
|
|
—
|
|
4,242
|
|
|||||||||
|
Mortgage-backed securities:
|
|||||||||||||||||||
|
Agency
|
—
|
|
16,448
|
|
—
|
|
—
|
|
16,448
|
|
|||||||||
|
Non-agency residential
|
—
|
|
3,401
|
|
—
|
|
—
|
|
3,401
|
|
|||||||||
|
Commercial
|
—
|
|
793
|
|
—
|
|
—
|
|
793
|
|
|||||||||
|
Non-U.S. securities
|
15,913
|
|
1,482
|
|
—
|
|
—
|
|
17,395
|
|
|||||||||
|
Other taxable securities
|
—
|
|
310
|
|
—
|
|
—
|
|
310
|
|
|||||||||
|
Total other debt securities carried at fair value
|
20,155
|
|
22,434
|
|
—
|
|
—
|
|
42,589
|
|
|||||||||
|
Loans and leases
|
—
|
|
7,883
|
|
3,018
|
|
—
|
|
10,901
|
|
|||||||||
|
Mortgage servicing rights
|
—
|
|
—
|
|
4,368
|
|
—
|
|
4,368
|
|
|||||||||
|
Loans held-for-sale
|
—
|
|
5,152
|
|
110
|
|
—
|
|
5,262
|
|
|||||||||
|
Other assets
|
15,332
|
|
1,642
|
|
972
|
|
—
|
|
17,946
|
|
|||||||||
|
Total assets
|
$
|
167,084
|
|
$
|
1,207,124
|
|
$
|
27,684
|
|
$
|
(758,393
|
)
|
$
|
643,499
|
|
||||
|
Liabilities
|
|
|
|
|
|
||||||||||||||
|
Interest-bearing deposits in U.S. offices
|
$
|
—
|
|
$
|
1,559
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,559
|
|
||||
|
Federal funds purchased and securities loaned or sold under agreements to repurchase
|
—
|
|
35,965
|
|
—
|
|
—
|
|
35,965
|
|
|||||||||
|
Trading account liabilities:
|
|
|
|
|
|
||||||||||||||
|
U.S. government and agency securities
|
20,699
|
|
380
|
|
—
|
|
—
|
|
21,079
|
|
|||||||||
|
Equity securities
|
31,112
|
|
2,754
|
|
—
|
|
—
|
|
33,866
|
|
|||||||||
|
Non-U.S. sovereign debt
|
20,841
|
|
3,081
|
|
—
|
|
—
|
|
23,922
|
|
|||||||||
|
Corporate securities and other
|
901
|
|
8,537
|
|
27
|
|
—
|
|
9,465
|
|
|||||||||
|
Mortgage trading loans and ABS
|
—
|
|
10
|
|
—
|
|
—
|
|
10
|
|
|||||||||
|
Total trading account liabilities
|
73,553
|
|
14,762
|
|
27
|
|
—
|
|
88,342
|
|
|||||||||
|
Derivative liabilities
(4)
|
1,719
|
|
783,721
|
|
7,932
|
|
(754,725
|
)
|
38,647
|
|
|||||||||
|
Short-term borrowings
|
—
|
|
2,350
|
|
—
|
|
—
|
|
2,350
|
|
|||||||||
|
Accrued expenses and other liabilities
|
10,605
|
|
1,072
|
|
8
|
|
—
|
|
11,685
|
|
|||||||||
|
Long-term debt
|
—
|
|
40,127
|
|
2,416
|
|
—
|
|
42,543
|
|
|||||||||
|
Total liabilities
|
$
|
85,877
|
|
$
|
879,556
|
|
$
|
10,383
|
|
$
|
(754,725
|
)
|
$
|
221,091
|
|
||||
|
(1)
|
During the
six months ended June 30, 2014
, approximately
$2.0 billion
of assets were transferred from Level 1 to Level 2 as a result of additional information related to non-U.S. government securities.
|
|
(2)
|
Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties.
|
|
(3)
|
Includes
$20.5 billion
of government-sponsored enterprise obligations.
|
|
(4)
|
For further disaggregation of derivative assets and liabilities, see
Note 2 – Derivatives
.
|
221
|
|
December 31, 2013
|
||||||||||||||||||
|
|
Fair Value Measurements
|
|
|
||||||||||||||||
|
(Dollars in millions)
|
Level 1
(1)
|
Level 2
(1)
|
Level 3
|
Netting
Adjustments
(2)
|
Assets/Liabilities
at Fair Value
|
||||||||||||||
|
Assets
|
|
|
|
|
|
||||||||||||||
|
Federal funds sold and securities borrowed or purchased under agreements to resell
|
$
|
—
|
|
$
|
75,614
|
|
$
|
—
|
|
$
|
—
|
|
$
|
75,614
|
|
||||
|
Trading account assets:
|
|
|
|
|
|||||||||||||||
|
U.S. government and agency securities
(3)
|
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
(4)
|
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
|
$
|
139,726
|
|
$
|
1,333,946
|
|
$
|
31,778
|
|
$
|
(872,758
|
)
|
$
|
632,692
|
|
||||
|
Liabilities
|
|
|
|
|
|
||||||||||||||
|
Interest-bearing deposits in U.S. offices
|
$
|
—
|
|
$
|
1,899
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,899
|
|
||||
|
Federal funds purchased and securities loaned or sold under agreements to repurchase
|
—
|
|
33,684
|
|
—
|
|
—
|
|
33,684
|
|
|||||||||
|
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
(4)
|
1,968
|
|
897,107
|
|
7,301
|
|
(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
|
$
|
84,160
|
|
$
|
991,720
|
|
$
|
9,336
|
|
$
|
(868,969
|
)
|
$
|
216,247
|
|
||||
|
(1)
|
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.
|
|
(2)
|
Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties.
|
|
(3)
|
Includes
$15.6 billion
of government-sponsored enterprise obligations.
|
|
(4)
|
For further disaggregation of derivative assets and liabilities, see
|
222
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 the
three and six months ended June 30, 2014 and 2013
, including net realized and unrealized gains (losses) included in earnings and accumulated OCI.
|
Level 3 – Fair Value Measurements
(1)
|
||||||||||||||||||||||||||||||
|
|
Three Months Ended June 30, 2014
|
|||||||||||||||||||||||||||||
|
|
Gross
|
|||||||||||||||||||||||||||||
|
(Dollars in millions)
|
Balance
April 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 June 30
2014 |
||||||||||||||||||||
|
Trading account assets:
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Corporate securities, trading loans and other
|
$
|
2,617
|
|
$
|
41
|
|
$
|
—
|
|
$
|
392
|
|
$
|
(87
|
)
|
$
|
—
|
|
$
|
(271
|
)
|
$
|
249
|
|
$
|
(169
|
)
|
$
|
2,772
|
|
|
Equity securities
|
343
|
|
(7
|
)
|
—
|
|
16
|
|
(4
|
)
|
—
|
|
—
|
|
9
|
|
(1
|
)
|
356
|
|
||||||||||
|
Non-U.S. sovereign debt
|
533
|
|
32
|
|
—
|
|
76
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(1
|
)
|
640
|
|
||||||||||
|
Mortgage trading loans and ABS
|
4,287
|
|
123
|
|
—
|
|
453
|
|
(262
|
)
|
—
|
|
(237
|
)
|
—
|
|
(53
|
)
|
4,311
|
|
||||||||||
|
Total trading account assets
|
7,780
|
|
189
|
|
—
|
|
937
|
|
(353
|
)
|
—
|
|
(508
|
)
|
258
|
|
(224
|
)
|
8,079
|
|
||||||||||
|
Net derivative assets
(2)
|
(575
|
)
|
(202
|
)
|
—
|
|
189
|
|
(366
|
)
|
—
|
|
(145
|
)
|
29
|
|
274
|
|
(796
|
)
|
||||||||||
|
AFS debt securities:
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Other taxable securities
|
3,437
|
|
—
|
|
(3
|
)
|
86
|
|
—
|
|
—
|
|
(254
|
)
|
—
|
|
—
|
|
3,266
|
|
||||||||||
|
Tax-exempt securities
|
783
|
|
2
|
|
3
|
|
—
|
|
—
|
|
—
|
|
(54
|
)
|
1
|
|
—
|
|
735
|
|
||||||||||
|
Total AFS debt securities
|
4,220
|
|
2
|
|
—
|
|
86
|
|
—
|
|
—
|
|
(308
|
)
|
1
|
|
—
|
|
4,001
|
|
||||||||||
|
Loans and leases
(3, 4)
|
3,053
|
|
27
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(58
|
)
|
7
|
|
(11
|
)
|
3,018
|
|
||||||||||
|
Mortgage servicing rights
(4)
|
4,765
|
|
(249
|
)
|
—
|
|
—
|
|
(26
|
)
|
113
|
|
(235
|
)
|
—
|
|
—
|
|
4,368
|
|
||||||||||
|
Loans held-for-sale
(3)
|
736
|
|
59
|
|
—
|
|
24
|
|
(711
|
)
|
—
|
|
(11
|
)
|
14
|
|
(1
|
)
|
110
|
|
||||||||||
|
Other assets
(5)
|
1,132
|
|
(26
|
)
|
—
|
|
—
|
|
(112
|
)
|
—
|
|
(22
|
)
|
—
|
|
—
|
|
972
|
|
||||||||||
|
Trading account liabilities – Corporate securities and other
|
(36
|
)
|
—
|
|
—
|
|
9
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(27
|
)
|
||||||||||
|
Accrued expenses and other liabilities
(3)
|
(8
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(8
|
)
|
||||||||||
|
Long-term debt
(3)
|
(1,841
|
)
|
(52
|
)
|
—
|
|
57
|
|
—
|
|
(42
|
)
|
117
|
|
(676
|
)
|
21
|
|
(2,416
|
)
|
||||||||||
|
(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
$7.1 billion
and derivative liabilities of
$7.9 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 the
three months ended June 30, 2014
, the transfers into Level 3 included
$258 million
of trading account assets and
$676 million
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 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 the
three months ended June 30, 2014
, the transfers out of Level 3 included
$224 million
of trading account assets and
$274 million
for net derivative assets. Transfers out of Level 3 for trading account assets were primarily the result of increased market liquidity and availability of third-party prices for certain corporate loans and securities. Transfers out of Level 3 for net derivative assets were primarily due to increased price observability for certain equity derivatives.
223
|
Level 3 – Fair Value Measurements
(1)
|
||||||||||||||||||||||||||||||
|
|
Three Months Ended June 30, 2013
|
|||||||||||||||||||||||||||||
|
|
Gross
|
|||||||||||||||||||||||||||||
|
(Dollars in millions)
|
Balance
April 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 June 30
2013 |
||||||||||||||||||||
|
Trading account assets:
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Corporate securities, trading loans and other
|
$
|
3,607
|
|
$
|
35
|
|
$
|
—
|
|
$
|
712
|
|
$
|
(959
|
)
|
$
|
—
|
|
$
|
(99
|
)
|
$
|
224
|
|
$
|
(757
|
)
|
$
|
2,763
|
|
|
Equity securities
|
497
|
|
8
|
|
—
|
|
28
|
|
(35
|
)
|
—
|
|
—
|
|
29
|
|
(63
|
)
|
464
|
|
||||||||||
|
Non-U.S. sovereign debt
|
417
|
|
(6
|
)
|
—
|
|
11
|
|
—
|
|
—
|
|
(22
|
)
|
1
|
|
—
|
|
401
|
|
||||||||||
|
Mortgage trading loans and ABS
|
4,480
|
|
10
|
|
—
|
|
978
|
|
(691
|
)
|
—
|
|
(70
|
)
|
—
|
|
(22
|
)
|
4,685
|
|
||||||||||
|
Total trading account assets
|
9,001
|
|
47
|
|
—
|
|
1,729
|
|
(1,685
|
)
|
—
|
|
(191
|
)
|
254
|
|
(842
|
)
|
8,313
|
|
||||||||||
|
Net derivative assets
(2)
|
1,063
|
|
392
|
|
—
|
|
204
|
|
(194
|
)
|
—
|
|
(383
|
)
|
(214
|
)
|
305
|
|
1,173
|
|
||||||||||
|
AFS debt securities:
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Commercial MBS
|
10
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(10
|
)
|
—
|
|
—
|
|
—
|
|
||||||||||
|
Non-U.S securities
|
1
|
|
—
|
|
—
|
|
—
|
|
(1
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
||||||||||
|
Corporate/Agency bonds
|
96
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(88
|
)
|
8
|
|
||||||||||
|
Other taxable securities
|
4,045
|
|
3
|
|
10
|
|
367
|
|
—
|
|
—
|
|
(263
|
)
|
—
|
|
(5
|
)
|
4,157
|
|
||||||||||
|
Tax-exempt securities
|
1,041
|
|
—
|
|
11
|
|
—
|
|
—
|
|
—
|
|
(7
|
)
|
—
|
|
(168
|
)
|
877
|
|
||||||||||
|
Total AFS debt securities
|
5,193
|
|
3
|
|
21
|
|
367
|
|
(1
|
)
|
—
|
|
(280
|
)
|
—
|
|
(261
|
)
|
5,042
|
|
||||||||||
|
Loans and leases
(3, 4)
|
2,363
|
|
49
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(505
|
)
|
—
|
|
(6
|
)
|
1,901
|
|
||||||||||
|
Mortgage servicing rights
(4)
|
5,776
|
|
1,026
|
|
—
|
|
—
|
|
(862
|
)
|
147
|
|
(260
|
)
|
—
|
|
—
|
|
5,827
|
|
||||||||||
|
Loans held-for-sale
(3)
|
2,405
|
|
19
|
|
—
|
|
8
|
|
(180
|
)
|
—
|
|
(108
|
)
|
12
|
|
(3
|
)
|
2,153
|
|
||||||||||
|
Other assets
(5)
|
2,629
|
|
121
|
|
—
|
|
25
|
|
(156
|
)
|
—
|
|
(864
|
)
|
—
|
|
(55
|
)
|
1,700
|
|
||||||||||
|
Trading account liabilities – Corporate securities and other
|
(58
|
)
|
6
|
|
—
|
|
11
|
|
(17
|
)
|
(5
|
)
|
—
|
|
(1
|
)
|
9
|
|
(55
|
)
|
||||||||||
|
Accrued expenses and other liabilities
(3)
|
(455
|
)
|
(7
|
)
|
—
|
|
—
|
|
—
|
|
(165
|
)
|
398
|
|
(1
|
)
|
—
|
|
(230
|
)
|
||||||||||
|
Long-term debt
(3)
|
(2,355
|
)
|
92
|
|
—
|
|
170
|
|
—
|
|
(66
|
)
|
66
|
|
(151
|
)
|
354
|
|
(1,890
|
)
|
||||||||||
|
(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
$7.7 billion
and derivative liabilities of
$6.5 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 net monoline exposure to a single counterparty and private equity investments.
|
During the
three months ended June 30, 2013
, the transfers into Level 3 included
$254 million
of trading account assets,
$214 million
of net derivative assets and
$151 million
of long-term debt. Transfers into Level 3 for trading account assets were primarily the result of decreased market liquidity for certain corporate loans. Transfers into Level 3 for net derivative assets were primarily due to decreased price observability (i.e., market comparables for the referenced instruments) for certain forwards and long-dated options and updated information related to certain total return swaps. 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 the
three months ended June 30, 2013
, the transfers out of Level 3 included
$842 million
of trading account assets,
$305 million
of net derivative assets,
$261 million
of AFS debt securities and
$354 million
of long-term debt. Transfers out of Level 3 for trading account assets were primarily the result of increased market liquidity 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 reference 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.
224
|
Level 3 – Fair Value Measurements
(1)
|
||||||||||||||||||||||||||||||
|
|
Six Months Ended June 30, 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 June 30
2014 |
||||||||||||||||||||
|
Trading account assets:
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Corporate securities, trading loans and other
|
$
|
3,559
|
|
$
|
163
|
|
$
|
—
|
|
$
|
678
|
|
$
|
(441
|
)
|
$
|
—
|
|
$
|
(509
|
)
|
$
|
397
|
|
$
|
(1,075
|
)
|
$
|
2,772
|
|
|
Equity securities
|
386
|
|
12
|
|
—
|
|
46
|
|
(33
|
)
|
—
|
|
—
|
|
16
|
|
(71
|
)
|
356
|
|
||||||||||
|
Non-U.S. sovereign debt
|
468
|
|
87
|
|
—
|
|
99
|
|
(6
|
)
|
—
|
|
(6
|
)
|
—
|
|
(2
|
)
|
640
|
|
||||||||||
|
Mortgage trading loans and ABS
|
4,631
|
|
201
|
|
—
|
|
819
|
|
(814
|
)
|
—
|
|
(461
|
)
|
—
|
|
(65
|
)
|
4,311
|
|
||||||||||
|
Total trading account assets
|
9,044
|
|
463
|
|
—
|
|
1,642
|
|
(1,294
|
)
|
—
|
|
(976
|
)
|
413
|
|
(1,213
|
)
|
8,079
|
|
||||||||||
|
Net derivative assets
(2)
|
(24
|
)
|
(197
|
)
|
—
|
|
314
|
|
(984
|
)
|
—
|
|
(246
|
)
|
41
|
|
300
|
|
(796
|
)
|
||||||||||
|
AFS debt securities:
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Non-U.S. securities
|
107
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(107
|
)
|
—
|
|
—
|
|
—
|
|
||||||||||
|
Other taxable securities
|
3,847
|
|
8
|
|
(5
|
)
|
133
|
|
—
|
|
—
|
|
(717
|
)
|
—
|
|
—
|
|
3,266
|
|
||||||||||
|
Tax-exempt securities
|
806
|
|
3
|
|
4
|
|
—
|
|
—
|
|
—
|
|
(79
|
)
|
1
|
|
—
|
|
735
|
|
||||||||||
|
Total AFS debt securities
|
4,760
|
|
11
|
|
(1
|
)
|
133
|
|
—
|
|
—
|
|
(903
|
)
|
1
|
|
—
|
|
4,001
|
|
||||||||||
|
Loans and leases
(3, 4)
|
3,057
|
|
59
|
|
—
|
|
—
|
|
(3
|
)
|
689
|
|
(781
|
)
|
13
|
|
(16
|
)
|
3,018
|
|
||||||||||
|
Mortgage servicing rights
(4)
|
5,042
|
|
(539
|
)
|
—
|
|
—
|
|
(46
|
)
|
378
|
|
(467
|
)
|
—
|
|
—
|
|
4,368
|
|
||||||||||
|
Loans held-for-sale
(3)
|
929
|
|
71
|
|
—
|
|
24
|
|
(714
|
)
|
—
|
|
(212
|
)
|
14
|
|
(2
|
)
|
110
|
|
||||||||||
|
Other assets
(5)
|
1,669
|
|
(86
|
)
|
—
|
|
—
|
|
(381
|
)
|
—
|
|
(230
|
)
|
—
|
|
—
|
|
972
|
|
||||||||||
|
Trading account liabilities – Corporate securities and other
|
(35
|
)
|
1
|
|
—
|
|
12
|
|
(7
|
)
|
—
|
|
—
|
|
—
|
|
2
|
|
(27
|
)
|
||||||||||
|
Accrued expenses and other liabilities
(3)
|
(10
|
)
|
1
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1
|
|
(8
|
)
|
||||||||||
|
Long-term debt
(3)
|
(1,990
|
)
|
(119
|
)
|
—
|
|
103
|
|
—
|
|
(51
|
)
|
236
|
|
(820
|
)
|
225
|
|
(2,416
|
)
|
||||||||||
|
(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
$7.1 billion
and derivative liabilities of
$7.9 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 the
six months ended June 30, 2014
, the transfers into Level 3 included
$413 million
of trading account assets and
$820 million
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, primarily municipal bonds. 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 the
six months ended June 30, 2014
, the transfers out of Level 3 included
$1.2 billion
of trading account assets,
$300 million
of net derivative assets and
$225 million
of long-term debt. Transfers out of Level 3 for trading account assets were primarily the result of increased market liquidity and availability of third-party prices for certain corporate loans and securities. 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 long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities.
225
|
Level 3 – Fair Value Measurements
(1)
|
||||||||||||||||||||||||||||||
|
|
Six Months Ended June 30, 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 June 30
2013 |
||||||||||||||||||||
|
Trading account assets:
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Corporate securities, trading loans and other
|
$
|
3,726
|
|
$
|
123
|
|
$
|
—
|
|
$
|
1,517
|
|
$
|
(1,925
|
)
|
$
|
—
|
|
$
|
(239
|
)
|
$
|
442
|
|
$
|
(881
|
)
|
$
|
2,763
|
|
|
Equity securities
|
545
|
|
50
|
|
—
|
|
57
|
|
(144
|
)
|
—
|
|
—
|
|
37
|
|
(81
|
)
|
464
|
|
||||||||||
|
Non-U.S. sovereign debt
|
353
|
|
45
|
|
—
|
|
26
|
|
(1
|
)
|
—
|
|
(22
|
)
|
1
|
|
(1
|
)
|
401
|
|
||||||||||
|
Mortgage trading loans and ABS
|
4,935
|
|
172
|
|
—
|
|
1,631
|
|
(1,334
|
)
|
—
|
|
(701
|
)
|
5
|
|
(23
|
)
|
4,685
|
|
||||||||||
|
Total trading account assets
|
9,559
|
|
390
|
|
—
|
|
3,231
|
|
(3,404
|
)
|
—
|
|
(962
|
)
|
485
|
|
(986
|
)
|
8,313
|
|
||||||||||
|
Net derivative assets
(2)
|
1,468
|
|
685
|
|
—
|
|
383
|
|
(660
|
)
|
—
|
|
(1,043
|
)
|
(162
|
)
|
502
|
|
1,173
|
|
||||||||||
|
AFS debt securities:
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Commercial MBS
|
10
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(10
|
)
|
—
|
|
—
|
|
—
|
|
||||||||||
|
Non-U.S. securities
|
—
|
|
—
|
|
—
|
|
1
|
|
(1
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
||||||||||
|
Corporate/Agency bonds
|
92
|
|
—
|
|
4
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(88
|
)
|
8
|
|
||||||||||
|
Other taxable securities
|
3,928
|
|
3
|
|
12
|
|
610
|
|
—
|
|
—
|
|
(391
|
)
|
—
|
|
(5
|
)
|
4,157
|
|
||||||||||
|
Tax-exempt securities
|
1,061
|
|
1
|
|
14
|
|
—
|
|
—
|
|
—
|
|
(31
|
)
|
—
|
|
(168
|
)
|
877
|
|
||||||||||
|
Total AFS debt securities
|
5,091
|
|
4
|
|
30
|
|
611
|
|
(1
|
)
|
—
|
|
(432
|
)
|
—
|
|
(261
|
)
|
5,042
|
|
||||||||||
|
Loans and leases
(3, 4)
|
2,287
|
|
100
|
|
—
|
|
71
|
|
—
|
|
5
|
|
(546
|
)
|
—
|
|
(16
|
)
|
1,901
|
|
||||||||||
|
Mortgage servicing rights
(4)
|
5,716
|
|
1,460
|
|
—
|
|
—
|
|
(1,045
|
)
|
270
|
|
(574
|
)
|
—
|
|
—
|
|
5,827
|
|
||||||||||
|
Loans held-for-sale
(3)
|
2,733
|
|
(20
|
)
|
—
|
|
8
|
|
(390
|
)
|
—
|
|
(209
|
)
|
34
|
|
(3
|
)
|
2,153
|
|
||||||||||
|
Other assets
(5)
|
3,129
|
|
(327
|
)
|
—
|
|
42
|
|
(183
|
)
|
—
|
|
(906
|
)
|
—
|
|
(55
|
)
|
1,700
|
|
||||||||||
|
Trading account liabilities – Corporate securities and other
|
(64
|
)
|
6
|
|
—
|
|
18
|
|
(31
|
)
|
(5
|
)
|
—
|
|
(9
|
)
|
30
|
|
(55
|
)
|
||||||||||
|
Accrued expenses and other liabilities
(3)
|
(15
|
)
|
22
|
|
—
|
|
—
|
|
—
|
|
(751
|
)
|
514
|
|
(1
|
)
|
1
|
|
(230
|
)
|
||||||||||
|
Long-term debt
(3)
|
(2,301
|
)
|
103
|
|
—
|
|
259
|
|
(4
|
)
|
(102
|
)
|
126
|
|
(532
|
)
|
561
|
|
(1,890
|
)
|
||||||||||
|
(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
$7.7 billion
and derivative liabilities of
$6.5 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 net monoline exposure to a single counterparty and private equity investments.
|
During the
six months ended June 30, 2013
, the transfers into Level 3 included
$485 million
of trading account assets,
$162 million
of net derivative assets and
$532 million
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 securities. Transfers into Level 3 for net derivative assets were primarily due to decreased price observability (i.e., market comparables for the referenced instruments) for certain forwards and long-dated options and updated information related to certain total return swaps. 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 the
six months ended June 30, 2013
, the transfers out of Level 3 included
$986 million
of trading account assets,
$502 million
of net derivative assets,
$261 million
of AFS debt securities and
$561 million
of long-term debt. Transfers out of Level 3 for trading account assets were primarily the result of increased market liquidity 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 option liabilities. 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.
226
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 the
three and six months ended June 30, 2014 and 2013
. 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
|
|||||||||||||||
|
|
Three Months Ended June 30, 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
|
$
|
41
|
|
$
|
—
|
|
$
|
—
|
|
$
|
41
|
|
|||
|
Equity securities
|
(7
|
)
|
—
|
|
—
|
|
(7
|
)
|
|||||||
|
Non-U.S. sovereign debt
|
32
|
|
—
|
|
—
|
|
32
|
|
|||||||
|
Mortgage trading loans and ABS
|
123
|
|
—
|
|
—
|
|
123
|
|
|||||||
|
Total trading account assets
|
189
|
|
—
|
|
—
|
|
189
|
|
|||||||
|
Net derivative assets
|
(427
|
)
|
225
|
|
—
|
|
(202
|
)
|
|||||||
|
AFS debt securities – Tax-exempt securities
|
—
|
|
—
|
|
2
|
|
2
|
|
|||||||
|
Loans and leases
(3)
|
—
|
|
—
|
|
27
|
|
27
|
|
|||||||
|
Mortgage servicing rights
|
17
|
|
(266
|
)
|
—
|
|
(249
|
)
|
|||||||
|
Loans held-for-sale
(3)
|
—
|
|
—
|
|
59
|
|
59
|
|
|||||||
|
Other assets
|
—
|
|
(29
|
)
|
3
|
|
(26
|
)
|
|||||||
|
Long-term debt
(3)
|
(11
|
)
|
—
|
|
(41
|
)
|
(52
|
)
|
|||||||
|
Total
|
$
|
(232
|
)
|
$
|
(70
|
)
|
$
|
50
|
|
$
|
(252
|
)
|
|||
|
|
Three Months Ended June 30, 2013
|
||||||||||||||
|
Trading account assets:
|
|
|
|
|
|||||||||||
|
Corporate securities, trading loans and other
|
$
|
35
|
|
$
|
—
|
|
$
|
—
|
|
$
|
35
|
|
|||
|
Equity securities
|
8
|
|
—
|
|
—
|
|
8
|
|
|||||||
|
Non-U.S. sovereign debt
|
(6
|
)
|
—
|
|
—
|
|
(6
|
)
|
|||||||
|
Mortgage trading loans and ABS
|
10
|
|
—
|
|
—
|
|
10
|
|
|||||||
|
Total trading account assets
|
47
|
|
—
|
|
—
|
|
47
|
|
|||||||
|
Net derivative assets
|
260
|
|
132
|
|
—
|
|
392
|
|
|||||||
|
AFS debt securities – Other taxable securities
|
—
|
|
—
|
|
3
|
|
3
|
|
|||||||
|
Loans and leases
(3)
|
—
|
|
—
|
|
49
|
|
49
|
|
|||||||
|
Mortgage servicing rights
|
—
|
|
1,026
|
|
—
|
|
1,026
|
|
|||||||
|
Loans held-for-sale
(3)
|
—
|
|
(2
|
)
|
21
|
|
19
|
|
|||||||
|
Other assets
|
—
|
|
127
|
|
(6
|
)
|
121
|
|
|||||||
|
Trading account liabilities – Corporate securities and other
|
6
|
|
—
|
|
—
|
|
6
|
|
|||||||
|
Accrued expenses and other liabilities
(3)
|
—
|
|
(7
|
)
|
—
|
|
(7
|
)
|
|||||||
|
Long-term debt
(3)
|
58
|
|
—
|
|
34
|
|
92
|
|
|||||||
|
Total
|
$
|
371
|
|
$
|
1,276
|
|
$
|
101
|
|
$
|
1,748
|
|
|||
|
(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
$2 million
and
$34 million
recorded on other assets were also included for the
three months ended June 30, 2014 and 2013
.
|
|
(3)
|
Amounts represent instruments that are accounted for under the fair value option.
|
227
|
Level 3 – Total Realized and Unrealized Gains (Losses) Included in Earnings
|
|||||||||||||||
|
|
Six Months Ended June 30, 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
|
$
|
163
|
|
$
|
—
|
|
$
|
—
|
|
$
|
163
|
|
|||
|
Equity securities
|
12
|
|
—
|
|
—
|
|
12
|
|
|||||||
|
Non-U.S. sovereign debt
|
87
|
|
—
|
|
—
|
|
87
|
|
|||||||
|
Mortgage trading loans and ABS
|
201
|
|
—
|
|
—
|
|
201
|
|
|||||||
|
Total trading account assets
|
463
|
|
—
|
|
—
|
|
463
|
|
|||||||
|
Net derivative assets
|
(595
|
)
|
398
|
|
—
|
|
(197
|
)
|
|||||||
|
AFS debt securities:
|
|||||||||||||||
|
Other taxable securities
|
—
|
|
—
|
|
8
|
|
8
|
|
|||||||
|
Tax-exempt securities
|
—
|
|
—
|
|
3
|
|
3
|
|
|||||||
|
Total AFS debt securities
|
—
|
|
—
|
|
11
|
|
11
|
|
|||||||
|
Loans and leases
(3)
|
—
|
|
—
|
|
59
|
|
59
|
|
|||||||
|
Mortgage servicing rights
|
12
|
|
(551
|
)
|
—
|
|
(539
|
)
|
|||||||
|
Loans held-for-sale
(3)
|
—
|
|
—
|
|
71
|
|
71
|
|
|||||||
|
Other assets
|
—
|
|
(65
|
)
|
(21
|
)
|
(86
|
)
|
|||||||
|
Trading account liabilities – Corporate securities and other
|
1
|
|
—
|
|
—
|
|
1
|
|
|||||||
|
Accrued expenses and other liabilities
(3)
|
—
|
|
—
|
|
1
|
|
1
|
|
|||||||
|
Long-term debt
(3)
|
(64
|
)
|
—
|
|
(55
|
)
|
(119
|
)
|
|||||||
|
Total
|
$
|
(183
|
)
|
$
|
(218
|
)
|
$
|
66
|
|
$
|
(335
|
)
|
|||
|
|
Six Months Ended June 30, 2013
|
||||||||||||||
|
Trading account assets:
|
|
|
|
|
|||||||||||
|
Corporate securities, trading loans and other
|
$
|
123
|
|
$
|
—
|
|
$
|
—
|
|
$
|
123
|
|
|||
|
Equity securities
|
50
|
|
—
|
|
—
|
|
50
|
|
|||||||
|
Non-U.S. sovereign debt
|
45
|
|
—
|
|
—
|
|
45
|
|
|||||||
|
Mortgage trading loans and ABS
|
172
|
|
—
|
|
—
|
|
172
|
|
|||||||
|
Total trading account assets
|
390
|
|
—
|
|
—
|
|
390
|
|
|||||||
|
Net derivative assets
|
146
|
|
539
|
|
—
|
|
685
|
|
|||||||
|
AFS debt securities:
|
|
|
|
|
|||||||||||
|
Other taxable securities
|
—
|
|
—
|
|
3
|
|
3
|
|
|||||||
|
Tax-exempt securities
|
—
|
|
—
|
|
1
|
|
1
|
|
|||||||
|
Total AFS debt securities
|
—
|
|
—
|
|
4
|
|
4
|
|
|||||||
|
Loans and leases
(3)
|
—
|
|
—
|
|
100
|
|
100
|
|
|||||||
|
Mortgage servicing rights
|
—
|
|
1,460
|
|
—
|
|
1,460
|
|
|||||||
|
Loans held-for-sale
(3)
|
—
|
|
2
|
|
(22
|
)
|
(20
|
)
|
|||||||
|
Other assets
|
—
|
|
124
|
|
(451
|
)
|
(327
|
)
|
|||||||
|
Trading account liabilities – Corporate securities and other
|
6
|
|
—
|
|
—
|
|
6
|
|
|||||||
|
Accrued expenses and other liabilities
(3)
|
—
|
|
22
|
|
—
|
|
22
|
|
|||||||
|
Long-term debt
(3)
|
80
|
|
—
|
|
23
|
|
103
|
|
|||||||
|
Total
|
$
|
622
|
|
$
|
2,147
|
|
$
|
(346
|
)
|
$
|
2,423
|
|
|||
|
(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 losses of
$21 million
and gains of
$36 million
recorded on other assets were also included for the
six months ended June 30, 2014 and 2013
.
|
|
(3)
|
Amounts represent instruments that are accounted for under the fair value option.
|
228
The following tables summarize changes in unrealized gains (losses) recorded in earnings during the
three and six months ended June 30, 2014 and 2013
for Level 3 assets and liabilities that were still held at
June 30, 2014
and
2013
. 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
|
|||||||||||||||
|
|
Three Months Ended June 30, 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
|
$
|
(20
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
(20
|
)
|
|||
|
Equity securities
|
(8
|
)
|
—
|
|
—
|
|
(8
|
)
|
|||||||
|
Non-U.S. sovereign debt
|
32
|
|
—
|
|
—
|
|
32
|
|
|||||||
|
Mortgage trading loans and ABS
|
92
|
|
—
|
|
—
|
|
92
|
|
|||||||
|
Total trading account assets
|
96
|
|
—
|
|
—
|
|
96
|
|
|||||||
|
Net derivative assets
|
(520
|
)
|
74
|
|
—
|
|
(446
|
)
|
|||||||
|
Loans and leases
(3)
|
—
|
|
—
|
|
37
|
|
37
|
|
|||||||
|
Mortgage servicing rights
|
17
|
|
(408
|
)
|
—
|
|
(391
|
)
|
|||||||
|
Loans held-for-sale
(3)
|
—
|
|
—
|
|
9
|
|
9
|
|
|||||||
|
Other assets
|
—
|
|
(23
|
)
|
4
|
|
(19
|
)
|
|||||||
|
Long-term debt
(3)
|
(11
|
)
|
—
|
|
(41
|
)
|
(52
|
)
|
|||||||
|
Total
|
$
|
(418
|
)
|
$
|
(357
|
)
|
$
|
9
|
|
$
|
(766
|
)
|
|||
|
|
Three Months Ended June 30, 2013
|
||||||||||||||
|
Trading account assets:
|
|
|
|
|
|||||||||||
|
Corporate securities, trading loans and other
|
$
|
2
|
|
$
|
—
|
|
$
|
—
|
|
$
|
2
|
|
|||
|
Equity securities
|
4
|
|
—
|
|
—
|
|
4
|
|
|||||||
|
Non-U.S. sovereign debt
|
(18
|
)
|
—
|
|
—
|
|
(18
|
)
|
|||||||
|
Mortgage trading loans and ABS
|
(10
|
)
|
—
|
|
—
|
|
(10
|
)
|
|||||||
|
Total trading account assets
|
(22
|
)
|
—
|
|
—
|
|
(22
|
)
|
|||||||
|
Net derivative assets
|
217
|
|
(16
|
)
|
—
|
|
201
|
|
|||||||
|
Loans and leases
(3)
|
—
|
|
—
|
|
58
|
|
58
|
|
|||||||
|
Mortgage servicing rights
|
—
|
|
954
|
|
—
|
|
954
|
|
|||||||
|
Loans held-for-sale
(3)
|
—
|
|
1
|
|
14
|
|
15
|
|
|||||||
|
Other assets
|
—
|
|
127
|
|
(58
|
)
|
69
|
|
|||||||
|
Trading account liabilities – Corporate securities and other
|
2
|
|
—
|
|
—
|
|
2
|
|
|||||||
|
Accrued expenses and other liabilities
(3)
|
—
|
|
(16
|
)
|
—
|
|
(16
|
)
|
|||||||
|
Long-term debt
(3)
|
58
|
|
—
|
|
34
|
|
92
|
|
|||||||
|
Total
|
$
|
255
|
|
$
|
1,050
|
|
$
|
48
|
|
$
|
1,353
|
|
|||
|
(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
$3 million
and losses of
$18 million
recorded on other assets were also included for the
three months ended June 30, 2014 and 2013
.
|
|
(3)
|
Amounts represent instruments that are accounted for under the fair value option.
|
229
|
Level 3 – Changes in Unrealized Gains (Losses) Relating to Assets and Liabilities Still Held at Reporting Date
|
|||||||||||||||
|
|
Six Months Ended June 30, 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
|
$
|
105
|
|
$
|
—
|
|
$
|
—
|
|
$
|
105
|
|
|||
|
Equity securities
|
2
|
|
—
|
|
—
|
|
2
|
|
|||||||
|
Non-U.S. sovereign debt
|
51
|
|
—
|
|
—
|
|
51
|
|
|||||||
|
Mortgage trading loans and ABS
|
77
|
|
—
|
|
—
|
|
77
|
|
|||||||
|
Total trading account assets
|
235
|
|
—
|
|
—
|
|
235
|
|
|||||||
|
Net derivative assets
|
(509
|
)
|
75
|
|
—
|
|
(434
|
)
|
|||||||
|
Loans and leases
(3)
|
—
|
|
—
|
|
64
|
|
64
|
|
|||||||
|
Mortgage servicing rights
|
12
|
|
(876
|
)
|
—
|
|
(864
|
)
|
|||||||
|
Loans held-for-sale
(3)
|
—
|
|
—
|
|
14
|
|
14
|
|
|||||||
|
Other assets
|
—
|
|
(51
|
)
|
30
|
|
(21
|
)
|
|||||||
|
Trading account liabilities – Corporate securities and other
|
1
|
|
—
|
|
—
|
|
1
|
|
|||||||
|
Long-term debt
(3)
|
(50
|
)
|
—
|
|
(63
|
)
|
(113
|
)
|
|||||||
|
Total
|
$
|
(311
|
)
|
$
|
(852
|
)
|
$
|
45
|
|
$
|
(1,118
|
)
|
|||
|
|
Six Months Ended June 30, 2013
|
||||||||||||||
|
Trading account assets:
|
|
|
|
|
|||||||||||
|
Corporate securities, trading loans and other
|
$
|
53
|
|
$
|
—
|
|
$
|
—
|
|
$
|
53
|
|
|||
|
Equity securities
|
(8
|
)
|
—
|
|
—
|
|
(8
|
)
|
|||||||
|
Non-U.S. sovereign debt
|
63
|
|
—
|
|
—
|
|
63
|
|
|||||||
|
Mortgage trading loans and ABS
|
58
|
|
—
|
|
—
|
|
58
|
|
|||||||
|
Total trading account assets
|
166
|
|
—
|
|
—
|
|
166
|
|
|||||||
|
Net derivative assets
|
13
|
|
(8
|
)
|
—
|
|
5
|
|
|||||||
|
Loans and leases
(3)
|
—
|
|
—
|
|
103
|
|
103
|
|
|||||||
|
Mortgage servicing rights
|
—
|
|
1,290
|
|
—
|
|
1,290
|
|
|||||||
|
Loans held-for-sale
(3)
|
—
|
|
11
|
|
(30
|
)
|
(19
|
)
|
|||||||
|
Other assets
|
—
|
|
139
|
|
(55
|
)
|
84
|
|
|||||||
|
Trading account liabilities – Corporate securities and other
|
1
|
|
—
|
|
—
|
|
1
|
|
|||||||
|
Accrued expenses and other liabilities
(3)
|
—
|
|
(15
|
)
|
—
|
|
(15
|
)
|
|||||||
|
Long-term debt
(3)
|
55
|
|
—
|
|
23
|
|
78
|
|
|||||||
|
Total
|
$
|
235
|
|
$
|
1,417
|
|
$
|
41
|
|
$
|
1,693
|
|
|||
|
(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
$30 million
and losses of
$18 million
recorded on other assets were also included for the
six months ended June 30, 2014 and 2013
.
|
|
(3)
|
Amounts represent instruments that are accounted for under the fair value option.
|
230
The following tables present information about significant unobservable inputs related to the Corporation's material categories of Level 3 financial assets and liabilities at
June 30, 2014
and
December 31, 2013
.
|
Quantitative Information about Level 3 Fair Value Measurements at June 30, 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
|
$
|
2,501
|
|
Discounted cash flow, Market comparables
|
Yield
|
1% to 25%
|
|
6
|
%
|
|
Trading account assets – Mortgage trading loans and ABS
|
305
|
|
Prepayment speed
|
0% to 33% CPR
|
|
11
|
%
|
||
|
Loans and leases
|
2,086
|
|
Default rate
|
5% to 15% CDR
|
|
8
|
%
|
||
|
Loans held-for-sale
|
110
|
|
Loss severity
|
20% to 80%
|
|
31
|
%
|
||
|
Commercial loans, debt securities and other
|
$
|
10,786
|
|
Discounted cash flow, Market comparables
|
Yield
|
0% to 39%
|
|
6
|
%
|
|
Trading account assets – Corporate securities, trading loans and other
|
2,644
|
|
Enterprise value/EBITDA multiple
|
2x to 14x
|
|
6x
|
|
||
|
Trading account assets – Non-U.S. sovereign debt
|
640
|
|
Prepayment speed
|
5% to 40%
|
|
19
|
%
|
||
|
Trading account assets – Mortgage trading loans and ABS
|
4,006
|
|
Default rate
|
1% to 5%
|
|
4
|
%
|
||
|
AFS debt securities – Other taxable securities
|
2,564
|
|
Loss severity
|
25% to 40%
|
|
36
|
%
|
||
|
Loans and leases
|
932
|
|
Duration
|
0 years to 5 years
|
|
3 years
|
|
||
|
Price
|
$0 to $117
|
|
$67
|
||||||
|
Auction rate securities
|
$
|
1,565
|
|
Discounted cash flow, Market comparables
|
Projected tender price/Refinancing level
|
60% to 100%
|
|
96
|
%
|
|
Trading account assets – Corporate securities, trading loans and other
|
128
|
|
|||||||
|
AFS debt securities – Other taxable securities
|
702
|
|
|||||||
|
AFS debt securities – Tax-exempt securities
|
735
|
|
|||||||
|
Structured liabilities
|
|||||||||
|
Long-term debt
|
$
|
(2,416
|
)
|
Industry standard derivative pricing
(2, 3)
|
Equity correlation
|
13% to 98%
|
|
65
|
%
|
|
Long-dated equity volatilities
|
6% to 57%
|
|
25
|
%
|
|||||
|
Long-dated volatilities (IR)
|
0% to 2%
|
|
1
|
%
|
|||||
|
Net derivatives assets
|
|||||||||
|
Credit derivatives
|
$
|
520
|
|
Discounted cash flow, Stochastic recovery correlation model
|
Yield
|
1% to 25%
|
|
15
|
%
|
|
Upfront points
|
1 point to 100 points
|
|
66 points
|
|
|||||
|
Spread to index
|
25 bps to 475 bps
|
|
98 bps
|
|
|||||
|
Credit correlation
|
20% to 99%
|
|
49
|
%
|
|||||
|
Prepayment speed
|
3% to 40% CPR
|
|
14
|
%
|
|||||
|
Default rate
|
4% CDR
|
|
n/a
|
|
|||||
|
Loss severity
|
35
|
%
|
n/a
|
|
|||||
|
Equity derivatives
|
$
|
(1,961
|
)
|
Industry standard derivative pricing
(2)
|
Equity correlation
|
13% to 98%
|
|
65
|
%
|
|
Long-dated equity volatilities
|
6% to 57%
|
|
25
|
%
|
|||||
|
Commodity derivatives
|
$
|
11
|
|
Discounted cash flow, Industry standard derivative pricing
(2)
|
Natural gas forward price
|
$3/MMBtu to $8/MMBtu
|
|
$6/MMBtu
|
|
|
Correlation
|
47% to 89%
|
|
82
|
%
|
|||||
|
Volatilities
|
11% to 120%
|
|
28
|
%
|
|||||
|
Interest rate derivatives
|
$
|
634
|
|
Industry standard derivative pricing
(3)
|
Correlation (IR/IR)
|
14% to 99%
|
|
58
|
%
|
|
Correlation (FX/IR)
|
-30% to 40%
|
|
-8
|
%
|
|||||
|
Long-dated inflation rates
|
0% to 3%
|
|
2
|
%
|
|||||
|
Long-dated inflation volatilities
|
0% to 2%
|
|
1
|
%
|
|||||
|
Total net derivative assets
|
$
|
(796
|
)
|
||||||
|
(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
223
: Trading account assets – Corporate securities, trading loans and other of
$2.8 billion
, Trading account assets – Non-U.S. sovereign debt of
$640 million
, Trading account assets – Mortgage trading loans and ABS of
$4.3 billion
, AFS debt securities – Other taxable securities of
$3.3 billion
, AFS debt securities – Tax-exempt securities of
$735 million
, Loans and leases of
$3.0 billion
and LHFS of
$110 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
231
|
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
|
Project 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 derivatives assets
|
||||||||
|
Credit derivatives
|
$
|
1,008
|
|
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
|
$
|
(24
|
)
|
|||||
|
(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
224
: 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
232
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
$651 million
and
$767 million
of instruments at
June 30, 2014
and
December 31, 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
June 30, 2014
and
December 31, 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 17 – 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 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.
233
|
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 the
three and six months ended June 30, 2014 and 2013
, and still held as of the reporting date.
|
Assets Measured at Fair Value on a Nonrecurring Basis
|
|||||||||||||||
|
|
June 30, 2014
|
Three Months Ended June 30, 2014
|
Six Months Ended June 30, 2014
|
||||||||||||
|
(Dollars in millions)
|
Level 2
|
Level 3
|
Gains (Losses)
|
||||||||||||
|
Assets
|
|
|
|
||||||||||||
|
Loans held-for-sale
|
$
|
1,057
|
|
$
|
127
|
|
$
|
5
|
|
$
|
4
|
|
|||
|
Loans and leases
|
5
|
|
3,244
|
|
(318
|
)
|
(564
|
)
|
|||||||
|
Foreclosed properties
(1)
|
6
|
|
1,156
|
|
(21
|
)
|
(28
|
)
|
|||||||
|
Other assets
|
90
|
|
2
|
|
(16
|
)
|
(16
|
)
|
|||||||
|
|
June 30, 2013
|
Three Months Ended June 30, 2013
|
Six Months Ended June 30, 2013
|
||||||||||||
|
Assets
|
|
|
|
||||||||||||
|
Loans held-for-sale
|
$
|
2,195
|
|
$
|
660
|
|
$
|
(61
|
)
|
$
|
(69
|
)
|
|||
|
Loans and leases
|
14
|
|
4,489
|
|
(525
|
)
|
(1,004
|
)
|
|||||||
|
Foreclosed properties
(1)
|
12
|
|
1,435
|
|
(12
|
)
|
(18
|
)
|
|||||||
|
Other assets
|
99
|
|
12
|
|
(5
|
)
|
(11
|
)
|
|||||||
|
(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
June 30, 2014
and
December 31, 2013
.
|
Quantitative Information about Nonrecurring Level 3 Fair Value Measurements
|
||||||||
|
June 30, 2014
|
||||||||
|
(Dollars in millions)
|
Inputs
|
|||||||
|
Financial Instrument
|
Fair Value
|
Valuation
Technique
|
Significant Unobservable
Inputs
|
Ranges of
Inputs
|
Weighted Average
|
|||
|
Instruments backed by residential real estate assets
|
$
|
3,244
|
|
Market comparables
|
OREO discount
|
0% to 28%
|
10
|
%
|
|
Loans and leases
|
3,244
|
|
Cost to sell
|
8%
|
n/a
|
|
||
|
December 31, 2013
|
||||||||
|
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.
234
|
|
The Corporation elects to account for certain financial instruments under the fair value option. For more information on the primary financial instruments for which the fair value option elections have been made, see
Note 21 – Fair Value Option
to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K
.
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
June 30, 2014
and
December 31, 2013
.
|
Fair Value Option Elections
|
|||||||||||||||||||||||
|
|
June 30, 2014
|
December 31, 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)
|
$
|
3,707
|
|
$
|
6,395
|
|
$
|
(2,688
|
)
|
$
|
2,406
|
|
$
|
4,541
|
|
$
|
(2,135
|
)
|
|||||
|
Trading inventory – other
|
5,478
|
|
n/a
|
|
n/a
|
|
5,475
|
|
n/a
|
|
n/a
|
|
|||||||||||
|
Consumer and commercial loans
|
10,901
|
|
11,151
|
|
(250
|
)
|
10,042
|
|
10,423
|
|
(381
|
)
|
|||||||||||
|
Loans held-for-sale
|
5,262
|
|
5,795
|
|
(533
|
)
|
6,656
|
|
6,996
|
|
(340
|
)
|
|||||||||||
|
Securities financing agreements
|
103,282
|
|
103,391
|
|
(109
|
)
|
109,298
|
|
109,032
|
|
266
|
|
|||||||||||
|
Other assets
|
259
|
|
270
|
|
(11
|
)
|
278
|
|
270
|
|
8
|
|
|||||||||||
|
Long-term deposits
|
1,559
|
|
1,456
|
|
103
|
|
1,899
|
|
1,797
|
|
102
|
|
|||||||||||
|
Unfunded loan commitments
|
330
|
|
n/a
|
|
n/a
|
|
354
|
|
n/a
|
|
n/a
|
|
|||||||||||
|
Short-term borrowings
|
2,350
|
|
2,345
|
|
5
|
|
1,520
|
|
1,520
|
|
—
|
|
|||||||||||
|
Long-term debt
(2)
|
42,543
|
|
41,685
|
|
858
|
|
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
$37.6 billion
and contractual principal outstanding of
$36.5 billion
at
June 30, 2014
compared to
$40.7 billion
and
$39.7 billion
at
December 31, 2013
.
|
n/a = not applicable
235
The following tables provide 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 the
three and six months ended June 30, 2014 and 2013
. Of the changes in fair value for LHFS, gains of
$22 million
and
$49 million
were attributable to changes in borrower-specific credit risk for the
three and six months ended June 30, 2014
compared to losses of
$39 million
and gains of
$67 million
for the
same periods in 2013
. Of the changes in fair value for loans, gains of
$43 million
and
$79 million
were attributable to changes in borrower-specific credit risk for the
three and six months ended June 30, 2014
compared to gains of
$51 million
and
$124 million
for the
same periods in 2013
. Changes to borrower-specific credit risk for loans reported as trading account assets were immaterial for the
three and six months ended June 30, 2014 and 2013
.
|
Gains (Losses) Relating to Assets and Liabilities Accounted for Under the Fair Value Option
|
|||||||||||||||
|
|
Three Months Ended June 30, 2014
|
||||||||||||||
|
(Dollars in millions)
|
Trading
Account
Profits
(Losses)
|
Mortgage
Banking
Income
(Loss)
|
Other
Income
(Loss)
|
Total
|
|||||||||||
|
Loans reported as trading account assets
|
$
|
14
|
|
$
|
—
|
|
$
|
—
|
|
$
|
14
|
|
|||
|
Trading inventory – other
(1)
|
(122
|
)
|
—
|
|
—
|
|
(122
|
)
|
|||||||
|
Consumer and commercial loans
|
13
|
|
—
|
|
53
|
|
66
|
|
|||||||
|
Loans held-for-sale
(2)
|
(3
|
)
|
197
|
|
30
|
|
224
|
|
|||||||
|
Securities financing agreements
|
(13
|
)
|
—
|
|
—
|
|
(13
|
)
|
|||||||
|
Other assets
|
—
|
|
—
|
|
2
|
|
2
|
|
|||||||
|
Long-term deposits
|
(2
|
)
|
—
|
|
(3
|
)
|
(5
|
)
|
|||||||
|
Unfunded loan commitments
|
—
|
|
—
|
|
5
|
|
5
|
|
|||||||
|
Short-term borrowings
|
18
|
|
—
|
|
—
|
|
18
|
|
|||||||
|
Long-term debt
(3)
|
(259
|
)
|
—
|
|
68
|
|
(191
|
)
|
|||||||
|
Total
|
$
|
(354
|
)
|
$
|
197
|
|
$
|
155
|
|
$
|
(2
|
)
|
|||
|
|
Three Months Ended June 30, 2013
|
||||||||||||||
|
Loans reported as trading account assets
|
$
|
10
|
|
$
|
—
|
|
$
|
—
|
|
$
|
10
|
|
|||
|
Trading inventory – other
(1)
|
213
|
|
—
|
|
—
|
|
213
|
|
|||||||
|
Consumer and commercial loans
|
2
|
|
—
|
|
50
|
|
52
|
|
|||||||
|
Loans held-for-sale
(2)
|
(15
|
)
|
61
|
|
(31
|
)
|
15
|
|
|||||||
|
Securities financing agreements
|
(39
|
)
|
—
|
|
—
|
|
(39
|
)
|
|||||||
|
Other assets
|
—
|
|
—
|
|
(44
|
)
|
(44
|
)
|
|||||||
|
Long-term deposits
|
36
|
|
—
|
|
35
|
|
71
|
|
|||||||
|
Asset-backed secured financings
|
—
|
|
(7
|
)
|
—
|
|
(7
|
)
|
|||||||
|
Unfunded loan commitments
|
—
|
|
—
|
|
(19
|
)
|
(19
|
)
|
|||||||
|
Short-term borrowings
|
11
|
|
—
|
|
—
|
|
11
|
|
|||||||
|
Accrued expenses and other liabilities
|
—
|
|
(7
|
)
|
—
|
|
(7
|
)
|
|||||||
|
Long-term debt
(3)
|
1,360
|
|
—
|
|
10
|
|
1,370
|
|
|||||||
|
Total
|
$
|
1,578
|
|
$
|
47
|
|
$
|
1
|
|
$
|
1,626
|
|
|||
|
(1)
|
The gains in trading account profits (losses) are primarily offset by 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 in other income (loss) relate to the impact on structured liabilities of changes in the Corporation's credit spreads.
|
236
|
Gains (Losses) Relating to Assets and Liabilities Accounted for Under the Fair Value Option
|
|||||||||||||||
|
|
Six Months Ended June 30, 2014
|
||||||||||||||
|
(Dollars in millions)
|
Trading
Account
Profits
(Losses)
|
Mortgage
Banking
Income
(Loss)
|
Other
Income
(Loss)
|
Total
|
|||||||||||
|
Loans reported as trading account assets
|
$
|
48
|
|
$
|
—
|
|
$
|
—
|
|
$
|
48
|
|
|||
|
Trading inventory – other
(1)
|
(290
|
)
|
—
|
|
—
|
|
(290
|
)
|
|||||||
|
Consumer and commercial loans
|
18
|
|
—
|
|
105
|
|
123
|
|
|||||||
|
Loans held-for-sale
(2)
|
(4
|
)
|
383
|
|
70
|
|
449
|
|
|||||||
|
Securities financing agreements
|
(35
|
)
|
—
|
|
—
|
|
(35
|
)
|
|||||||
|
Long-term deposits
|
11
|
|
—
|
|
(12
|
)
|
(1
|
)
|
|||||||
|
Unfunded loan commitments
|
—
|
|
—
|
|
14
|
|
14
|
|
|||||||
|
Short-term borrowings
|
54
|
|
—
|
|
—
|
|
54
|
|
|||||||
|
Long-term debt
(3)
|
(627
|
)
|
—
|
|
265
|
|
(362
|
)
|
|||||||
|
Total
|
$
|
(825
|
)
|
$
|
383
|
|
$
|
442
|
|
$
|
—
|
|
|||
|
|
Six Months Ended June 30, 2013
|
||||||||||||||
|
Loans reported as trading account assets
|
$
|
39
|
|
$
|
—
|
|
$
|
—
|
|
$
|
39
|
|
|||
|
Trading inventory – other
(1)
|
499
|
|
—
|
|
—
|
|
499
|
|
|||||||
|
Consumer and commercial loans
|
1
|
|
—
|
|
152
|
|
153
|
|
|||||||
|
Loans held-for-sale
(2)
|
(7
|
)
|
528
|
|
(41
|
)
|
480
|
|
|||||||
|
Securities financing agreements
|
(16
|
)
|
—
|
|
—
|
|
(16
|
)
|
|||||||
|
Other assets
|
—
|
|
—
|
|
(39
|
)
|
(39
|
)
|
|||||||
|
Long-term deposits
|
36
|
|
—
|
|
54
|
|
90
|
|
|||||||
|
Asset-backed secured financings
|
—
|
|
(51
|
)
|
—
|
|
(51
|
)
|
|||||||
|
Unfunded loan commitments
|
—
|
|
—
|
|
46
|
|
46
|
|
|||||||
|
Short-term borrowings
|
(28
|
)
|
—
|
|
—
|
|
(28
|
)
|
|||||||
|
Accrued expenses and other liabilities
|
—
|
|
22
|
|
—
|
|
22
|
|
|||||||
|
Long-term debt
(3)
|
91
|
|
—
|
|
(80
|
)
|
11
|
|
|||||||
|
Total
|
$
|
615
|
|
$
|
499
|
|
$
|
92
|
|
$
|
1,206
|
|
|||
|
(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.
|
237
|
|
The fair values of financial instruments and their classifications within the fair value hierarchy have been derived using methodologies described in
Note 14 – Fair Value Measurements
. The following disclosures include financial instruments where only a portion of the ending balance at
June 30, 2014
and
December 31, 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 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 elected to account 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.
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.
238
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
June 30, 2014
and
December 31, 2013
are presented in the table below.
|
Fair Value of Financial Instruments
|
|||||||||||||||||||||||||||||||
|
June 30, 2014
|
December 31, 2013
|
||||||||||||||||||||||||||||||
|
|
Fair Value
|
Fair Value
|
|||||||||||||||||||||||||||||
|
(Dollars in millions)
|
Carrying
Value
|
Level 2
|
Level 3
|
Total
|
Carrying
Value
|
Level 2
|
Level 3
|
Total
|
|||||||||||||||||||||||
|
Financial assets
|
|
|
|
||||||||||||||||||||||||||||
|
Loans
|
$
|
871,660
|
|
$
|
99,509
|
|
$
|
792,324
|
|
$
|
891,833
|
|
$
|
885,724
|
|
$
|
102,564
|
|
$
|
789,273
|
|
$
|
891,837
|
|
|||||||
|
Loans held-for-sale
|
9,200
|
|
8,517
|
|
693
|
|
9,210
|
|
11,362
|
|
8,872
|
|
2,613
|
|
11,485
|
|
|||||||||||||||
|
Financial liabilities
|
|
|
|
|
|||||||||||||||||||||||||||
|
Deposits
|
1,134,329
|
|
1,134,557
|
|
—
|
|
1,134,557
|
|
1,119,271
|
|
1,119,512
|
|
—
|
|
1,119,512
|
|
|||||||||||||||
|
Long-term debt
|
257,071
|
|
264,466
|
|
2,416
|
|
266,882
|
|
249,674
|
|
257,402
|
|
1,990
|
|
259,392
|
|
|||||||||||||||
Commercial Unfunded Lending Commitments
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
$833 million
and
$3.2 billion
at
June 30, 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 10 – Commitments and Contingencies
.
239
|
|
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. Treasuries, 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 the
three and six months ended June 30, 2014 and 2013
.
|
Rollforward of Mortgage Servicing Rights
|
|||||||||||||||
|
Three Months Ended
June 30 |
Six Months Ended
June 30 |
||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Balance, beginning of period
|
$
|
4,765
|
|
$
|
5,776
|
|
$
|
5,042
|
|
$
|
5,716
|
|
|||
|
Additions
|
113
|
|
147
|
|
378
|
|
270
|
|
|||||||
|
Sales
|
(26
|
)
|
(862
|
)
|
(46
|
)
|
(1,045
|
)
|
|||||||
|
Amortization of expected cash flows
(1)
|
(235
|
)
|
(260
|
)
|
(467
|
)
|
(574
|
)
|
|||||||
|
Impact of changes in interest rates and other market factors
(2)
|
(310
|
)
|
806
|
|
(627
|
)
|
1,138
|
|
|||||||
|
Model and other cash flow assumption changes:
(3)
|
|
|
|||||||||||||
|
Projected cash flows, including changes in costs to service loans
|
82
|
|
148
|
|
46
|
|
14
|
|
|||||||
|
Impact of changes in the Home Price Index
|
4
|
|
(123
|
)
|
(7
|
)
|
(202
|
)
|
|||||||
|
Impact of changes to the prepayment model
|
—
|
|
228
|
|
160
|
|
403
|
|
|||||||
|
Other model changes
(4)
|
(25
|
)
|
(33
|
)
|
(111
|
)
|
107
|
|
|||||||
|
Balance, June 30
|
$
|
4,368
|
|
$
|
5,827
|
|
$
|
4,368
|
|
$
|
5,827
|
|
|||
|
Mortgage loans serviced for investors (in billions)
|
$
|
521
|
|
$
|
759
|
|
$
|
521
|
|
$
|
759
|
|
|||
|
(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
$31 million
and
$127 million
for the
three and six months ended June 30, 2014
due to changes in OAS rate assumptions.
|
The Corporation primarily uses an 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.
240
Significant economic assumptions in estimating the fair value of MSRs at
June 30, 2014
and
December 31, 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
|
|||||||||||
|
|
June 30, 2014
|
December 31, 2013
|
|||||||||
|
Fixed
|
Adjustable
|
Fixed
|
Adjustable
|
||||||||
|
Weighted-average OAS
|
4.49
|
%
|
7.57
|
%
|
3.97
|
%
|
7.61
|
%
|
|||
|
Weighted-average life, in years
|
5.09
|
|
2.83
|
|
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.
|
Sensitivity Impacts
|
|||||||||||||
|
|
June 30, 2014
|
||||||||||||
|
Change in Weighted-average Lives
|
|||||||||||||
|
(Dollars in millions)
|
Fixed
|
Adjustable
|
Change in
Fair Value
|
||||||||||
|
Prepayment rates
|
|
|
|
|
|
||||||||
|
Impact of 10% decrease
|
0.24
|
|
years
|
0.19
|
|
years
|
$
|
264
|
|
||||
|
Impact of 20% decrease
|
0.51
|
|
|
0.41
|
|
|
558
|
|
|||||
|
Impact of 10% increase
|
(0.22
|
)
|
(0.16
|
)
|
(238
|
)
|
|||||||
|
Impact of 20% increase
|
(0.41
|
)
|
(0.31
|
)
|
(455
|
)
|
|||||||
|
OAS level
|
|
|
|
|
|
||||||||
|
Impact of 100 bps decrease
|
|
$
|
217
|
|
|||||||||
|
Impact of 200 bps decrease
|
|
453
|
|
||||||||||
|
Impact of 100 bps increase
|
|
(199
|
)
|
||||||||||
|
Impact of 200 bps increase
|
|
(382
|
)
|
||||||||||
241
|
|
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
.
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
31
states and the District of Columbia.
The franchise network includes approximately
5,000
banking centers,
16,000
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
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 works with clients to provide investment banking products 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.
242
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. 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
.
On January 1, 2014,
the results for structured liabilities including DVA were moved into
Global Markets
from
All Other
to better align the performance and risk management of these instruments. As such, net DVA in
Global Markets
represents the combined total of net DVA on derivatives and structured liabilities. Prior periods have been reclassified to conform to current period presentation.
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.
The results of certain ALM activities are allocated to
the
business segments
. Additionally,
certain residential mortgage loans that are managed by
CRES
are held in
All Other
.
On January 1, 2014,
the results for structured liabilities including DVA (previously referred to as fair value adjustments on structured liabilities) were moved from
All Other
into
Global Markets
to better align the performance and risk management of these instruments. Prior periods have been reclassified to conform to current period presentation.
|
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 a FTE basis and noninterest income. The adjustment of net interest income to a 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. For presentation purposes, 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 and loan 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.
243
The following tables present net income and the components thereto (with net interest income on a FTE basis) for the
three and six months ended June 30, 2014 and 2013
, and total assets at
June 30, 2014
and
2013
for each business segment, as well as
All Other
.
|
Business Segments
|
|||||||||||||||||||||||
|
At and for the Three Months Ended June 30
|
|||||||||||||||||||||||
|
|
Total Corporation
(1)
|
Consumer & Business Banking
|
Consumer Real Estate Services
|
||||||||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
|||||||||||||||||
|
Net interest income (FTE basis)
|
$
|
10,226
|
|
$
|
10,771
|
|
$
|
4,929
|
|
$
|
5,034
|
|
$
|
697
|
|
$
|
699
|
|
|||||
|
Noninterest income
|
11,734
|
|
12,178
|
|
2,444
|
|
2,400
|
|
693
|
|
1,416
|
|
|||||||||||
|
Total revenue, net of interest expense (FTE basis)
|
21,960
|
|
22,949
|
|
7,373
|
|
7,434
|
|
1,390
|
|
2,115
|
|
|||||||||||
|
Provision for credit losses
|
411
|
|
1,211
|
|
534
|
|
967
|
|
(20
|
)
|
291
|
|
|||||||||||
|
Amortization of intangibles
|
235
|
|
274
|
|
98
|
|
127
|
|
—
|
|
—
|
|
|||||||||||
|
Other noninterest expense
|
18,306
|
|
15,744
|
|
3,902
|
|
4,057
|
|
5,902
|
|
3,383
|
|
|||||||||||
|
Income (loss) before income taxes
|
3,008
|
|
5,720
|
|
2,839
|
|
2,283
|
|
(4,492
|
)
|
(1,559
|
)
|
|||||||||||
|
Income tax expense (benefit) (FTE basis)
|
717
|
|
1,708
|
|
1,051
|
|
892
|
|
(1,690
|
)
|
(629
|
)
|
|||||||||||
|
Net income (loss)
|
$
|
2,291
|
|
$
|
4,012
|
|
$
|
1,788
|
|
$
|
1,391
|
|
$
|
(2,802
|
)
|
$
|
(930
|
)
|
|||||
|
Period-end total assets
|
$
|
2,170,557
|
|
$
|
2,123,320
|
|
$
|
612,200
|
|
$
|
587,655
|
|
$
|
107,650
|
|
$
|
124,032
|
|
|||||
|
|
|||||||||||||||||||||||
|
|
Global Wealth &
Investment Management |
Global Banking
|
|||||||||||||||||||||
|
|
2014
|
2013
|
2014
|
2013
|
|||||||||||||||||||
|
Net interest income (FTE basis)
|
$
|
1,485
|
|
$
|
1,505
|
|
$
|
2,239
|
|
$
|
2,252
|
|
|||||||||||
|
Noninterest income
|
3,104
|
|
2,994
|
|
1,940
|
|
1,886
|
|
|||||||||||||||
|
Total revenue, net of interest expense (FTE basis)
|
4,589
|
|
4,499
|
|
4,179
|
|
4,138
|
|
|||||||||||||||
|
Provision for credit losses
|
(8
|
)
|
(15
|
)
|
132
|
|
163
|
|
|||||||||||||||
|
Amortization of intangibles
|
94
|
|
99
|
|
12
|
|
16
|
|
|||||||||||||||
|
Other noninterest expense
|
3,353
|
|
3,171
|
|
1,887
|
|
1,833
|
|
|||||||||||||||
|
Income before income taxes
|
1,150
|
|
1,244
|
|
2,148
|
|
2,126
|
|
|||||||||||||||
|
Income tax expense (FTE basis)
|
426
|
|
485
|
|
795
|
|
829
|
|
|||||||||||||||
|
Net income
|
$
|
724
|
|
$
|
759
|
|
$
|
1,353
|
|
$
|
1,297
|
|
|||||||||||
|
Period-end total assets
|
$
|
265,581
|
|
$
|
263,867
|
|
$
|
407,367
|
|
$
|
334,167
|
|
|||||||||||
|
|
|
||||||||||||||||||||||
|
|
Global Markets
|
All Other
|
|||||||||||||||||||||
|
|
2014
|
2013
|
2014
|
2013
|
|||||||||||||||||||
|
Net interest income (FTE basis)
|
$
|
952
|
|
$
|
1,009
|
|
$
|
(76
|
)
|
$
|
272
|
|
|||||||||||
|
Noninterest income
|
3,631
|
|
3,185
|
|
(78
|
)
|
297
|
|
|||||||||||||||
|
Total revenue, net of interest expense (FTE basis)
|
4,583
|
|
4,194
|
|
(154
|
)
|
569
|
|
|||||||||||||||
|
Provision for credit losses
|
19
|
|
(16
|
)
|
(246
|
)
|
(179
|
)
|
|||||||||||||||
|
Amortization of intangibles
|
16
|
|
16
|
|
15
|
|
16
|
|
|||||||||||||||
|
Other noninterest expense
|
2,846
|
|
2,754
|
|
416
|
|
546
|
|
|||||||||||||||
|
Income (loss) before income taxes
|
1,702
|
|
1,440
|
|
(339
|
)
|
186
|
|
|||||||||||||||
|
Income tax expense (benefit) (FTE basis)
|
601
|
|
478
|
|
(466
|
)
|
(347
|
)
|
|||||||||||||||
|
Net income
|
$
|
1,101
|
|
$
|
962
|
|
$
|
127
|
|
$
|
533
|
|
|||||||||||
|
Period-end total assets
|
$
|
610,395
|
|
$
|
608,760
|
|
$
|
167,364
|
|
$
|
204,839
|
|
|||||||||||
|
(1)
|
There were no material intersegment revenues.
|
244
|
Business Segments
|
|||||||||||||||||||||||
|
At and for the Six Months Ended June 30
|
|||||||||||||||||||||||
|
|
Total Corporation
(1)
|
Consumer & Business Banking
|
Consumer Real Estate Services
|
||||||||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
2014
|
2013
|
|||||||||||||||||
|
Net interest income (FTE basis)
|
$
|
20,512
|
|
$
|
21,646
|
|
$
|
9,880
|
|
$
|
10,047
|
|
$
|
1,398
|
|
$
|
1,442
|
|
|||||
|
Noninterest income
|
24,215
|
|
24,711
|
|
4,931
|
|
4,799
|
|
1,184
|
|
2,985
|
|
|||||||||||
|
Total revenue, net of interest expense (FTE basis)
|
44,727
|
|
46,357
|
|
14,811
|
|
14,846
|
|
2,582
|
|
4,427
|
|
|||||||||||
|
Provision for credit losses
|
1,420
|
|
2,924
|
|
1,346
|
|
1,919
|
|
5
|
|
626
|
|
|||||||||||
|
Amortization of intangibles
|
474
|
|
550
|
|
199
|
|
254
|
|
—
|
|
—
|
|
|||||||||||
|
Other noninterest expense
|
40,305
|
|
34,968
|
|
7,764
|
|
8,095
|
|
14,031
|
|
8,788
|
|
|||||||||||
|
Income (loss) before income taxes
|
2,528
|
|
7,915
|
|
5,502
|
|
4,578
|
|
(11,454
|
)
|
(4,987
|
)
|
|||||||||||
|
Income tax expense (benefit) (FTE basis)
|
513
|
|
2,420
|
|
2,048
|
|
1,745
|
|
(3,625
|
)
|
(1,901
|
)
|
|||||||||||
|
Net income (loss)
|
$
|
2,015
|
|
$
|
5,495
|
|
$
|
3,454
|
|
$
|
2,833
|
|
$
|
(7,829
|
)
|
$
|
(3,086
|
)
|
|||||
|
Period-end total assets
|
$
|
2,170,557
|
|
$
|
2,123,320
|
|
$
|
612,200
|
|
$
|
587,655
|
|
$
|
107,650
|
|
$
|
124,032
|
|
|||||
|
|
|||||||||||||||||||||||
|
|
Global Wealth &
Investment Management |
Global Banking
|
|||||||||||||||||||||
|
|
2014
|
2013
|
2014
|
2013
|
|||||||||||||||||||
|
Net interest income (FTE basis)
|
$
|
2,970
|
|
$
|
3,101
|
|
$
|
4,541
|
|
$
|
4,411
|
|
|||||||||||
|
Noninterest income
|
6,166
|
|
5,819
|
|
3,907
|
|
3,757
|
|
|||||||||||||||
|
Total revenue, net of interest expense (FTE basis)
|
9,136
|
|
8,920
|
|
8,448
|
|
8,168
|
|
|||||||||||||||
|
Provision for credit losses
|
15
|
|
7
|
|
397
|
|
312
|
|
|||||||||||||||
|
Amortization of intangibles
|
188
|
|
198
|
|
24
|
|
32
|
|
|||||||||||||||
|
Other noninterest expense
|
6,618
|
|
6,325
|
|
3,903
|
|
3,653
|
|
|||||||||||||||
|
Income before income taxes
|
2,315
|
|
2,390
|
|
4,124
|
|
4,171
|
|
|||||||||||||||
|
Income tax expense (FTE basis)
|
862
|
|
911
|
|
1,535
|
|
1,590
|
|
|||||||||||||||
|
Net income
|
$
|
1,453
|
|
$
|
1,479
|
|
$
|
2,589
|
|
$
|
2,581
|
|
|||||||||||
|
Period-end total assets
|
$
|
265,581
|
|
$
|
263,867
|
|
$
|
407,367
|
|
$
|
334,167
|
|
|||||||||||
|
|
Global Markets
|
All Other
|
|||||||||||||||||||||
|
|
2014
|
2013
|
2014
|
2013
|
|||||||||||||||||||
|
Net interest income (FTE basis)
|
$
|
1,949
|
|
$
|
2,117
|
|
$
|
(226
|
)
|
$
|
528
|
|
|||||||||||
|
Noninterest income
|
7,646
|
|
6,856
|
|
381
|
|
495
|
|
|||||||||||||||
|
Total revenue, net of interest expense (FTE basis)
|
9,595
|
|
8,973
|
|
155
|
|
1,023
|
|
|||||||||||||||
|
Provision for credit losses
|
38
|
|
(11
|
)
|
(381
|
)
|
71
|
|
|||||||||||||||
|
Amortization of intangibles
|
32
|
|
33
|
|
31
|
|
33
|
|
|||||||||||||||
|
Other noninterest expense
|
5,907
|
|
5,810
|
|
2,082
|
|
2,297
|
|
|||||||||||||||
|
Income (loss) before income taxes
|
3,618
|
|
3,141
|
|
(1,577
|
)
|
(1,378
|
)
|
|||||||||||||||
|
Income tax expense (benefit) (FTE basis)
|
1,209
|
|
1,067
|
|
(1,516
|
)
|
(992
|
)
|
|||||||||||||||
|
Net income (loss)
|
$
|
2,409
|
|
$
|
2,074
|
|
$
|
(61
|
)
|
$
|
(386
|
)
|
|||||||||||
|
Period-end total assets
|
$
|
610,395
|
|
$
|
608,760
|
|
$
|
167,364
|
|
$
|
204,839
|
|
|||||||||||
|
(1)
|
There were no material intersegment revenues.
|
245
The table below presents a reconciliation of the
five
business segments' total revenue, net of interest expense, on a 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
|
|||||||||||||||
|
Three Months Ended June 30
|
Six Months Ended June 30
|
||||||||||||||
|
(Dollars in millions)
|
2014
|
2013
|
2014
|
2013
|
|||||||||||
|
Segments' total revenue, net of interest expense (FTE basis)
|
$
|
22,114
|
|
$
|
22,380
|
|
$
|
44,572
|
|
$
|
45,334
|
|
|||
|
Adjustments:
|
|
|
|||||||||||||
|
ALM activities
|
175
|
|
(103
|
)
|
258
|
|
(332
|
)
|
|||||||
|
Equity investment income
|
56
|
|
576
|
|
730
|
|
1,096
|
|
|||||||
|
Liquidating businesses and other
|
(385
|
)
|
96
|
|
(833
|
)
|
259
|
|
|||||||
|
FTE basis adjustment
|
(213
|
)
|
(222
|
)
|
(414
|
)
|
(433
|
)
|
|||||||
|
Consolidated revenue, net of interest expense
|
$
|
21,747
|
|
$
|
22,727
|
|
$
|
44,313
|
|
$
|
45,924
|
|
|||
|
Segments' net income
|
$
|
2,164
|
|
$
|
3,479
|
|
$
|
2,076
|
|
$
|
5,881
|
|
|||
|
Adjustments, net of taxes:
|
|
|
|||||||||||||
|
ALM activities
|
(6
|
)
|
(172
|
)
|
307
|
|
(629
|
)
|
|||||||
|
Equity investment income
|
35
|
|
363
|
|
456
|
|
690
|
|
|||||||
|
Liquidating businesses and other
|
98
|
|
342
|
|
(824
|
)
|
(447
|
)
|
|||||||
|
Consolidated net income
|
$
|
2,291
|
|
$
|
4,012
|
|
$
|
2,015
|
|
$
|
5,495
|
|
|||
|
June 30
|
|||||||||||||||
|
2014
|
2013
|
||||||||||||||
|
Segments' total assets
|
$
|
2,003,193
|
|
$
|
1,918,481
|
|
|||||||||
|
Adjustments:
|
|
||||||||||||||
|
ALM activities, including securities portfolio
|
694,042
|
|
656,243
|
|
|||||||||||
|
Equity investments
|
1,963
|
|
4,187
|
|
|||||||||||
|
Liquidating businesses and other
|
80,145
|
|
73,413
|
|
|||||||||||
|
Elimination of segment asset allocations to match liabilities
|
(608,786
|
)
|
(529,004
|
)
|
|||||||||||
|
Consolidated total assets
|
$
|
2,170,557
|
|
$
|
2,123,320
|
|
|||||||||
246
|
|
|
|
See Litigation and Regulatory Matters in
Note 10 – Commitments and Contingencies
to the Consolidated Financial Statements
, which is incorporated by reference in this Item 1, for litigation and regulatory disclosure that supplements the disclosure in
Note 12 – Commitments and Contingencies
to the Consolidated Financial Statements
of the Corporation's 2013 Annual Report on Form 10-K
.
|
|
There are no material changes from the risk factors set forth under Part 1,
Item 1A. Risk Factors of the Corporation's 2013 Annual Report on Form 10-K
.
|
|
The table below presents share repurchase activity for the
three months ended June 30, 2014
. The primary source of funds for cash distributions by the Corporation to its shareholders is dividends received from its banking subsidiaries. Each of the banking subsidiaries is subject to various regulatory policies and requirements relating to the payment of dividends, including requirements to maintain capital above regulatory minimums. All of the Corporation's preferred stock outstanding has preference over the Corporation's common stock with respect to the payment of dividends.
|
(Dollars in millions, except per share information; shares in thousands)
|
Common Shares
Repurchased
(1)
|
Weighted-Average
Per Share Price
|
Shares Purchased as
Part of Publicly
Announced Programs
|
Remaining Buyback Authority Amounts
(2)
|
|||||||||
|
April 1 - 30, 2014
|
14,482
|
|
$
|
16.17
|
|
14,445
|
|
$
|
3,767
|
|
|||
|
May 1 - 31, 2014
|
58
|
|
15.09
|
|
—
|
|
3,767
|
|
|||||
|
June 1 - 30, 2014
|
19
|
|
16.19
|
|
—
|
|
3,767
|
|
|||||
|
Three Months Ended June 30, 2014
|
14,559
|
|
16.16
|
|
|
|
|||||||
|
(1)
|
Includes shares of the Corporation's common stock acquired by the Corporation in connection with satisfaction of tax withholding obligations on vested restricted stock or restricted stock units and certain forfeitures and terminations of employment-related awards under equity incentive plans.
|
|
(2)
|
On 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 our 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. Amounts shown in the column reflect remaining buyback authority under the March 26, 2014 authorization notwithstanding the suspension announced on April 28, 2014. For additional information, see
Capital Management – CCAR and Capital Planning
on page
65
.
|
The Corporation did not have any unregistered sales of its equity securities during the
three months ended June 30, 2014
.
247
|
|
||
|
Exhibit 3(a)
|
Amended and Restated Certificate of Incorporation of the Corporation, as in effect on the date hereof
(1)
|
|
|
Exhibit 3(b)
|
Amended and Restated Bylaws of the Corporation, as in effect on the date hereof, incorporated by reference to Exhibit 3.1 of registrant's Current Report on Form 8-K (File No. 1-6523) filed on August 22, 2013
|
|
|
Exhibit 11
|
Earnings Per Share Computation – included in
Note 13 – Earnings Per Common Share
to the Consolidated Financial Statements
(1)
|
|
|
Exhibit 12
|
Ratio of Earnings to Fixed Charges
(1)
Ratio of Earnings to Fixed Charges and Preferred Dividends
(1)
|
|
|
Exhibit 31(a)
|
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(1)
|
|
|
Exhibit 31(b)
|
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(1)
|
|
|
Exhibit 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
(1)
|
|
|
Exhibit 32(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
(1)
|
|
|
Exhibit 101.INS
|
XBRL Instance Document
(1)
|
|
|
Exhibit 101.SCH
|
XBRL Taxonomy Extension Schema Document
(1)
|
|
|
Exhibit 101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document
(1)
|
|
|
Exhibit 101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document
(1)
|
|
|
Exhibit 101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document
(1)
|
|
|
Exhibit 101.DEF
|
XBRL Taxonomy Extension Definitions Linkbase Document
(1)
|
|
|
(1)
|
Filed herewith
|
248
SIGNATURE
Pursuant to the requirements 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.
|
|
Bank of America Corporation
Registrant
|
|
|||
|
Date:
|
July 29, 2014
|
|
/s/ Neil A. Cotty
|
|
|
|
Neil A. Cotty
Chief Accounting Officer
|
|||||
249
Bank of America Corporation
Form 10-Q
Index to Exhibits
|
Exhibit
|
Description
|
|
|
Exhibit 3(a)
|
Amended and Restated Certificate of Incorporation of the Corporation, as in effect on the date hereof
(1)
|
|
|
Exhibit 3(b)
|
Amended and Restated Bylaws of the Corporation, as in effect on the date hereof, incorporated by reference to Exhibit 3.1 of registrant's Current Report on Form 8-K (File No. 1-6523) filed on August 22, 2013
|
|
|
Exhibit 11
|
Earnings Per Share Computation – included in
|
|
|
Exhibit 12
|
Ratio of Earnings to Fixed Charges
(1)
Ratio of Earnings to Fixed Charges and Preferred Dividends
(1)
|
|
|
Exhibit 31(a)
|
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(1)
|
|
|
Exhibit 31(b)
|
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(1)
|
|
|
Exhibit 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
(1)
|
|
|
Exhibit 32(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
(1)
|
|
|
Exhibit 101.INS
|
XBRL Instance Document
(1)
|
|
|
Exhibit 101.SCH
|
XBRL Taxonomy Extension Schema Document
(1)
|
|
|
Exhibit 101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document
(1)
|
|
|
Exhibit 101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document
(1)
|
|
|
Exhibit 101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document
(1)
|
|
|
Exhibit 101.DEF
|
XBRL Taxonomy Extension Definitions Linkbase Document
(1)
|
|
|
(1)
|
Filed herewith
|
250
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsNote 6 Securitizations and Other Variable Interest Entities, Note 7 RepresentationsNote 10 Commitments and Contingencies)Note 1 Summary Of Significant Accounting PrinciplesNote 2 Derivatives Derivative BalancesNote 2 DerivativesNote 9 Federal Funds Sold Or Purchased, Securities Financing Agreements and Short-term BorrowingsNote 17 Mortgage Servicing RightsNote 18 Business Segment InformationNote 3 SecuritiesNote 10 Commitments and ContingenciesNote 4 Outstanding Loans and LeasesNote 14 Fair Value MeasurementsNote 15 Fair Value OptionNote 7 Representations and Warranties Obligations and Corporate GuaranteesNote 5 Allowance For Credit LossesNote 6 Securitizations and Other Variable Interest EntitiesNote 11 Long-term DebtNote 7 Representations and Warranties Obligations and Corporate Guarantees BackgroundNote 12 Commitments and ContingenciesNote 8 Goodwill and Intangible Assets GoodwillNote 8 Goodwill and Intangible AssetsItem 1A. Risk Factors Of The Corporation's 2013 Annual Report on Form 10-kNote 11 Shareholders' Equity Common StockNote 11 Shareholders' EquityNote 18 Stock-based Compensation PlansNote 12 Accumulated Other Comprehensive Income (loss)Note 13 Earnings Per Common ShareNote 21 Fair Value OptionNote 16 Fair Value Of Financial InstrumentsPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 6. Exhibits