Bank of America Corporation
2013 Annual Report
Bank of America Corporation
2013 Annual Report
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Wherever we do business,
our success depends on
understanding what’s important
to our customers and clients
and connecting them to what
they need to help make
their financial lives better.
Life’s better when
we’re connected™
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Please recycle
Bank of America Corporation
2013 Annual Report
00-04-1368B 3/2014
Brian T. Moynihan
Chief Executive Officer
To our shareholders,
In 2013, the earnings power of our company
began to shine through more clearly. The
strategy we outlined several years ago is
driving growth as we better connect the
outstanding capabilities of our company for
the three groups of customers we serve:
people, companies and institutional investors.
We are helping our teams to connect more
deeply with each other so that we can bring
everything to bear that customers and
clients need to live their financial lives.
For the year, net income increased to $11.4 billion from $4.2 billion
a year ago. These results are some of the best we have seen in
recent years and a testament to the work the team is doing every
day to win in the marketplace.
Last year, Tier 1 common capital grew by 9 percent, and our
regulatory capital measures exceed all long-term requirements.
Liquidity and time-to-required funding also strengthened, and
long-term debt has been reduced by more than $200 billion
from its peak, all of which enabled our company to return more
than $3 billion in capital to shareholders last year through common
share repurchases. We know this is important to you as shareholders
and let me assure you the company is committed to returning
excess capital over time through both repurchases and dividends.
Life’s better when we’re connected
For Bank of America,
growth means making
everyday connections —
every day. Here’s how:
50M
consumer and small
business relationships
in the U.S.
14M+
banking customers are now
making mobile connections,
staying in touch with their
finances anytime, anywhere
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Bank of America Corporation (“Bank of America”) is a financial holding company that, through its subsidiaries and affiliated companies, provides banking and non-
banking financial services. Global Wealth and Investment Management is a division of Bank of America Corporation (“BAC”). Merrill Lynch, Merrill Edge™, U.S. Trust,
Bank of America Merrill Lynch and BofA™ Global Capital Management are affiliated subdivisions within Global Wealth and Investment Management. Merrill Lynch
Wealth makes available products and services offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”) and other subsidiaries of BAC. Merrill Edge is
available through MLPF&S, and consists of the Merrill Edge Advisory Center (investment guidance) and self-directed online investing. U.S. Trust, Bank of America Private
Wealth Management operates through Bank of America, N.A., and other subsidiaries of BAC. Bank of America Merrill Lynch is a marketing name for the Retirement and
Philanthropic Services businesses of BAC. BofA™ Global Capital Management Group, LLC (“BofA Global Capital Management”), is an asset management division of BAC.
BofA Global Capital Management entities furnish investment management services and products for institutional and individual investors.
“Bank of America Merrill Lynch” is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives,
and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC.
Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation
(“Investment Banking Affiliates”), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp., both
of which are registered broker-dealers and members of SIPC, and, in other jurisdictions, by locally registered entities. Merrill Lynch, Pierce, Fenner & Smith Incorporated
and Merrill Lynch Professional Clearing Corp. are registered as futures commission merchants with the CFTC and are members of the NFA.
Case studies are intended to illustrate products and services available at Bank of America and Merrill Lynch. You should not consider these as an endorsement of
Merrill Lynch as an investment advisor or as a testimonial about a client’s experiences with us as an investment advisor. Case studies do not necessarily represent the
experiences of other clients, nor do they indicate future performance. Investment results may vary. The investment strategies discussed are not appropriate for every
investor and should be considered given a person’s investment objectives, financial situation and particular needs. Clients should review with their advisor the terms,
conditions and risks involved with specific products and services.
Banking products are provided by Bank of America, N.A., and affiliated banks, members FDIC and wholly owned subsidiaries of BAC.
Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value
MLPF&S is a registered broker-dealer, member SIPC and a wholly owned subsidiary of BAC.
Please recycle. The annual report is printed on 30% post-consumer waste (PCW) recycled paper.
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At the same time, we are making more loans, attracting more deposits, achieving
record results in our wealth management business, and maintaining our leadership
positions in investment banking. We continue to invest in many areas of the
company — averaging about $3.5 billion in initiative spending each year for the
past three years.
We’re investing in our industry-leading online and mobile banking platforms.
We’re also investing in growth areas, including small business and wealth
management. And, we’re investing in the systems that serve our large corporate
clients and institutional investors.
We have commercial banking relationships with
83 percent of the 2013 Global Fortune 500
and 98 percent of the 2013 U.S. Fortune 500.
While our earnings nearly tripled from 2012 to 2013, we know we have more work
to do to reach our full earnings potential.
As we think about the opportunities we have, we are focused on a very straight-
forward purpose: to help make fi nancial lives better, through the power of every
connection. What you will see throughout this report are examples where we are
doing that in markets across the United States and beyond. Everywhere we operate,
our teams are exchanging information and opportunities about the customers
and clients they serve, and we are tracking closely to ensure that we are giving
those customers the opportunity to do with us all the things they must do to
live their fi nancial lives.
8M
mass affluent clients and 3 million
entrepreneurs and small business
clients connected to 5,151 banking
centers and 16,259 ATMs
1
The results are on vivid display throughout these pages…from a brewery in
Brooklyn to a lumberyard in Los Angeles…from the second-largest mergers
and acquisitions deal in history to supporting a company bringing clean water
to the developing world…the stories here demonstrate the power of building
relationships, the power of meeting our clients in the markets where they
operate and connecting them to the resources they need.
For people, customers benefi t from our focus on helping them achieve their
goals. Deposits and total client balances both are at record levels as clients are
bringing more of their business to us. For the year, we issued nearly 4 million
new credit cards and helped 365,000 customers purchase or refi nance a home.
Our wealth management business had a banner year with record revenue,
pretax margin and net income.
For companies, they understand the value in our relationship approach and see
it as a competitive differentiator. For the year, we extended $10.7 billion in credit to
small business clients — an increase of 24 percent over last year. We also had
strong commercial loan growth and our global banking loan fl ows have been growing
for six consecutive quarters. Most notably, our investment banking team has had a
consistent No. 2 global ranking for the past several years — and in the fourth
quarter of 2013 we surpassed the competition to become No. 1. We advised on half
of the top 20 deals of last year, including Verizon, HJ Heinz and Silver Lake/Dell.
For institutional investors, we have the size, scale and global markets
capabilities important to these clients. And, we have the No. 1 research fi rm in the
world, for the third straight year. Our sales and trading platform is strong and
had $13.1 billion in revenue for the year — an 11 percent increase from last year.
Net income
(in billions, full year)
.
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1
1
$
Capital
raised
for clients
(in billions, full year)
2
.
4
$
.
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Life’s better when we’re connected
ATM with Teller Assist
This next-generation banking offering combines the
technology and convenience of an ATM with the human
touch of a teller. Customers have access to a range of
services during extended hours to address their daily
banking needs, and it provides convenience, control and
fl exibility over how, when and where they bank.
2
Exact change at the ATM
New technology allows our customers
to get exactly what they need, straight
out of the machine.
We are helping customers live their fi nancial lives
everywhere we serve them; in 2013, deposit levels
reached a record $1.12 trillion while we increased
our loans and leases by $20 billion to $928 billion,
led by strong lending to commercial businesses.
Tier 1
common
capital ratio
(at year-end)
%
6
0
1
1
.
%
9
1
1
1
.
%
6
8
9
.
No matter where I’ve traveled, our employees have energy and optimism about
the future. All over the world, our team is hard at work serving customers and
improving the communities where they live and work. Last year alone, Bank of
America employees gave more than 2 million volunteer hours investing in the
causes important to them, fulfi lling a longstanding tradition of volunteerism
that our company is proud to support.
All of these efforts are in keeping with our Corporate Social Responsibility (CSR)
philosophy, which informs our company’s values and provides a platform to support
partnerships in the public and private sectors, and reinforces our mission of helping
local economies and communities grow and prosper.
Whether it’s our partnership with (RED) to help end mother-to-child transmission
of AIDS, or our work with military veterans to help them transition from active
duty with jobs, training and education, or how we are improving fi nancial literacy
through our Better Money Habits program in partnership with Khan Academy,
these and many other initiatives demonstrate our commitment to helping our
customers, clients, employees and community partners address a wide range of
issues that are important to them.
’11
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Tangible
book value
per share
(at year-end)
.
9
7
3
1
$
6
3
.
3
1
$
.
5
9
2
1
$
In 2013, we partnered with Sal Khan and Khan Academy to develop Better Money
Habits™, a program designed to help everyone learn about personal fi nance. Every
day we connect people to free, engaging and informative videos and resources
on www.BetterMoneyHabits.com, and reinforce the lessons through our interactions
with customers and the community.
Better Money HabitsTM
Powered by
in partnership with
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’12 ’13
3
Our fi nancial advisors are deepening relationships
with their clients. In 2013, our Global Wealth
and Investment Management business reported
record revenue of $17.8 billion and record net
income of $3 billion.
As we look ahead, we will continue to pursue the same strategy that has served
us well these past several years — a strategy to make our company more
straightforward; a strategy to serve the core fi nancial needs of our customers;
a strategy to manage risk, maintain strong capital and liquidity, and to operate
efficiently and reduce costs. This is what will drive results and progress.
In the summer of 2014, Bank of America will celebrate 230 years of operations.
Our company traces its roots almost to the very beginning of our country’s history.
Today, our commitment to our customers and communities, and to help be an
engine of economic growth, is as strong as it has ever been.
We value your investment greatly and thank you for continuing to share this
journey with us.
Thank you,
Brian T. Moynihan
Chief Executive Officer
March 14, 2014
The power of global connections
$700B
in capital raised for clients
No.1
Global research fi rm
(2011, 2012, 2013) according to
Institutional Investor magazine
4
No two places are exactly
the same, but every
customer and client needs
the right connections,
whether creating a start-up
in Charlotte, starting a
family in Brooklyn, investing
for retirement in Houston
or seeking to leverage
opportunities in markets
across the globe.
Life’s better when
we’re connected
5
Supporting Panda Express as it
continues on its path of rapid growth
Panda Express is one of the largest privately held, fast casual
restaurant companies in the U.S., with annual sales of more
than $1.8 billion. Bank of America is proud to have helped
fi nance the company’s massive growth, from just 100 stores
when the relationship started to nearly 1,650 locations and
more than 24,000 associates today. Through the years, we’ve
worked closely with Panda Express to provide a broad array
of advisory and strategic services, including working capital,
fi nancing, and cash management and depository services.
Panda Express is optimistic about the future, with a goal of
becoming a global brand. Bank of America is also optimistic,
providing the resources and expertise to help Panda Express
achieve its long-term goals.
Helping the oldest lumberyard in California
In 1884, an Austrian immigrant named Christian Ganahl and
his brother Frank hopped on a train in St. Louis and came
to Los Angeles with hopes of capitalizing on the booming
construction under way in California. They opened a lumber
store and, with business fl ourishing, in 1923 turned to
Bank of America to help fi nance their ambitious plans for
a network of stores throughout the greater Los Angeles
region. Bank of America has served as Ganahl’s primary bank
ever since, providing credit to acquire more lumberyards,
open stores, and build a cutting-edge distribution center.
From its trade mark giant band saw in the front of its
Anaheim store to its continued focus on “doing ordinary
things extraordinarily well,” Ganahl is shaping the California
landscape and supporting the local economy, and Bank of
America is proud to be part of the company’s success.
Helping L.A. thrive
O(cid:2) en described as the
creative capital of the world,
Los Angeles is home to
dynamic entrepreneurs who
are turning innovative ideas
into global brands, as well as
leaders in fashion, design,
entertainment and arts. It’s
also where 15,000 Bank of
America employees work
every day to serve the core
fi nancial needs of people,
companies and institutional
investors by connecting
them to what’s important.
L .A . C ONN ECTI ONS
• Through our lending and investing activities,
Bank of America is helping to support
businesses and communities throughout
the Southland, from the revitalization of
downtown Los Angeles to our work in the
Atlantic Corridor of Long Beach and the
ongoing transformation of Boyle Heights.
• Our partnerships with iconic institutions
such as the Walt Disney Concert Hall,
the Los Angeles Dodgers, the University
of Southern California and the Getty
Museum are all part of our commitment
to spur economic opportunity and enrich
the quality of life in Los Angeles.
6
Spicing up the
small business
community
When the aerospace company
that employed Jose-Luis
Saavedra shuttered in 1971,
he seized the opportunity
to turn a longtime hobby into
his life’s work, creating Tapatío
Hot Sauce. He took on part-time
jobs to pay the bills and spent
the rest of his time making and
selling hot sauce. Large, repeat
orders from local grocery stores
and restaurants eventually led
to full-time operations, and
in 1984, Saavedra came to
Bank of America with a dream
of quadrupling his business.
Bank of America helped the
family purchase its current
facility in 1995 and has since
connected the growing business
with everything from equipment
loans to wealth management
services. Today, the company
distributes its products nation -
wide with exports to many
countries. Their entrepreneurial
spirit — com bined with support
from family and friends like
Bank of America — have
made Tapatío Hot Sauce an
inter national sensation.
7
Supporting the second-largest
M&A deal in history
In September, Verizon Communications
agreed to spend $130 billion for Vodafone
Group’s 45 percent stake in Verizon Wireless.
Bank of America Merrill Lynch stepped
in to provide $61 billion in fi nancing for Verizon
to fund operations during the transaction.
We played a leading role in Verizon’s execution
of of the largest high-grade bond transaction.
of the largest high-grade bond transaction.
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Setting records in London
London is one of the world’s
leading fi nancial centers, with
a highly diverse population.
From Covent Garden to Canary
Wharf, London is a center
of excellence for fi nance, the
arts, education and global
industry. We opened our fi rst
office in London 83 years
ago with 13 employees. And
while we continue to expand
our capabilities to serve
a new generation of clients
in London and the United
Kingdom, the one thing
that hasn’t changed is our
commitment to our clients.
LOND ON CO NNECTIONS
• Global Ambassadors Programme —
We believe strong leaders can be drivers
of economic opportunities and that
women are a force to drive economic,
political and social change. This is the
reason why we partnered with the
charity Vital Voices to develop our
Global Ambassadors Programme.
Global Ambassadors invests in the
potential of emerging women leaders
around the world by matching them
with mentors who are established
leaders, including our Bank of America
Merrill Lynch leaders.
• As a part of our focus on making
connections to help improve lives,
Bank of America is working with
several partner organizations to support
global health issues. In recognition
of World AIDS Day on December 1, we
made a $250,000 contribution to the
George W. Bush Institute that will
build on efforts to control and treat
HIV. We also recently partnered
with the Global HIV/AIDS fundraising
organization (RED) and rock group
U2 to generate more than $10 million
to fi ght AIDS.
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Global connections
From the tip of Latin America to
the coast of Australia, clients
across the globe are looking for
new ways to grow businesses and
make a difference in the world.
About Water.org
Twenty years ago, Gary White walked into a Bank of
America banking center to open a checking account —
forging a relationship that would help him bring safe
water to areas in need. Water.org was created in
2009 by White and Matt Damon to raise awareness of
the large and growing global need for safe water.
Through a variety of fi nancial solutions, Bank of America
Merrill Lynch has helped the company connect inter-
national resources to local suppliers and manage
currency, fraud risk and cash fl ow, as well as increase
donation processing. Most importantly, we helped keep
Water.org’s capital working hard on behalf of people in
need worldwide. A relationship that began 20 years
ago with a simple checking account has now grown to
fi nancing international development projects in Africa,
Asia, Latin America and the Caribbean. There is no
telling where Water.org will continue to fl ow as they
work to solve the global water crisis, and how Bank of
America Merrill Lynch will help them get there.
Establishing “green bonds”
Connecting our clients and customers to what’s
important to them is our core function, and nowhere
is this more evident than in our experience supporting
the market for “green bonds.” Since 2007, when
Merrill Lynch managed the world’s fi rst “green bond”
for the European Investment Bank, we’ve been an
ardent supporter of this investment theme, where the
proceeds are specifi cally earmarked for projects that
will benefi t the environment. Bank of America Merrill
Lynch has established one of the fi nance industry’s fi rst
global green debt capital markets teams. And in 2013,
we played a leading role in the growth of “green bonds”
with a number of landmark transactions across all time
zones. In November, we issued our own “green bond,”
the fi rst benchmark-size corporate “green bond.”
The proceeds will fund renewable energy and energy
efficiency projects that also contribute toward our
$50 billion, 10-year environmental business initiative.
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Fueling businesses
in Chicago
Innovation has a home in
America’s third-largest
city, Chicago. Home of the
fi rst skyscraper, the fi rst
Ferris wheel, the fi rst steel
railroad and the fi rst modern
commodities exchange,
Chicago visionaries helped
shape the landscape of our
cities and fi nancial system.
CHI C A GO CONNECTIONS
• Bank of America’s presence in the Windy
City is built upon decades of tradition
and commitment, including fi nancing
the rebuilding of the city a(cid:2) er the Great
Chicago Fire of 1871 and supporting
businesses and residents during the
Great Depression.
• We are also creating a more vibrant
city today through our sponsorships of
the Chicago Symphony Orchestra,
Chicago Botanic Garden, Art Institute
of Chicago, Winter Wonderfest at Navy
Pier and the Chicago Cubs.
Spinning off a fl oral giant
FTD, a premier global provider of fl oral and related products and
services in the U.S., Canada, U.K. and Ireland, has been a client
of Bank of America Merrill Lynch since 1973. The business
uses the highly recognized FTD and Interfl ora brands, which
are represented by the iconic Mercury Man logo, displayed in
40,000 fl oral shops in 150 countries. When FTD planned to spin
off into a separate, publicly traded entity from parent company,
United Online, in 2012, the Bank of America Merrill Lynch team
proposed a debt refi nancing that would save FTD more than
$5 million in interest savings. The successful offering cemented
our relationship with FTD. Throughout 2013, FTD’s management
team became more impressed with our proactive, continued
engagement, creative ideas and proven leadership in the
syndicated loan market. The relationship has now expanded
into additional treasury management, employee benefi ts and
merchant services, with more potential on the horizon.
From interns to mentors
In the summer of 2013, members of Bank of America’s Student
Leaders program were assigned internships at Boys & Girls
Clubs locations throughout Chicago. They worked side by side
with leadership at the youth development organization to
advance the academic achievement, character and leadership,
and healthy lifestyles of their peers. In the process, these
civically minded students learned a lot about themselves and
their aspirations for the future. The work of these students
builds on the decades-long relationship between Bank of
America and the Boys & Girls Clubs of Chicago. The bank
named the organization a Neighborhood Builder last year, in
addition to providing summer interns over the past 10 years.
10
Boosting the local economy
The 36th Bank of America
Chicago Marathon took place on
October 13, bringing together
45,000 runners, 12,000 volunteers
and 1.7 million spectators for an
extraordinary race. Participants,
including elite runners, wheelchair
athletes and nearly 300 employees,
converged on Chicago from
all 50 states and more than
100 countries. The race started
and fi nished in Grant Park, with
runners traversing 29 of the
city’s diverse neighborhoods.
In 2012, the event contributed
$243 million in business activity
and helped charities raise
$15 million. In 2013, we expect
even higher contributions locally
and to have helped create the
equivalent of more than 1,600
full-time jobs and provided millions
worth of wages and salary income.
Every year, the race attracts new
visitors, strengthens Chicago as a
tourist destination and diversifi es
the city’s economic base.
11
Brewing life back into a community
Every beer has a story — and so does every
brewing company. Steve Hindy, founder and
president, launched Brooklyn Brewery in 1988
in a community where people once feared
walking alone — and the business has helped a
community thrive. As the brewery started to
grow and change, so did the neighborhood of
Williamsburg, Brooklyn. When it was time to
expand, Bank of America was there. Today we
also handle the brewery’s banking, payroll and
retirement plans. The Brooklyn Brewery story is
still being written, but for now, it’s a story of
shared success between a local business and
its surrounding neighborhood.
“Feasting on the demand for
organic products”
The Hain Celestial Group, Inc., a leading
organic and natural food and personal care
manufacturer, is 83rd on Fortune’s Fastest-
Growing Companies list and a top supplier to
retailer Whole Foods Market. Bank of America
Merrill Lynch has worked with Hain Celestial
and its entrepreneurial founder, Irwin D. Simon,
since 1999, providing fi nancial support and
mergers and acquisitions advice. In 2013, sales
soared for Hain Celestial, and the company now
commands a market cap of more than $4 billion.
This year, the company has big plans as it
targets distribution into key retailers in the U.S.
and throughout Europe. Hain Celestial’s powerful
and repeatable mergers and acquisitions
capability has been complemented by the
company’s ability to merge cultures and allow
its brands to retain their unique identity while
continuing to fl ourish with new corporate
resources. As Hain Celestial celebrates its 20th
anniversary, Bank of America Merrill Lynch
looks forward to continuing to play a big part
in the company’s success.
Helping New York State
communities thrive
O(cid:2) en described as the
fi nancial capital of the world,
New York City is home to
the New York Stock Exchange
and NASDAQ, the world’s
largest stock exchanges by
market capitalization and
trading activity. But New York
State is also highly diverse
with a vibrant multifaceted
economy that enables it to
be the place where dreams
are made of.
NE W YORK CONNECTIONS
• From Niagara Falls to Latham, N.Y.,
Bank of America has served the needs
of New York customers and small
businesses for more than 200 years —
since The National Bank of Orange
and Ulster Counties opened its doors
in 1812.
• Bank of America is supporting local
businesses, fueling the economy,
addressing critical needs and revitalizing
neighborhoods throughout the state,
including a strong track record of support
for nonprofi t cultural organizations like
Carnegie Hall, Lincoln Center for the
Performing Arts, Brooklyn Academy of
Music, Whitney Museum of American
Art, Albany Institute of History & Art,
Buffalo Philharmonic Orchestra,
Rochester Museum & Science Center
and many others.
12
Brooklyn Brewery was founded in 1988 by Steve Hindy and is helping
revitalize a community as they continue to expand internationally.
The Hain Celestial Group, Inc., a leading
organic and natural food and personal
care manufacturer, is 83rd on Fortune’s
Fastest-Growing Companies list.
1313
Houston is growing in
international prominence
In a state known for being big, bold and
proud, Houston shines in everything from
the arts to the economy. Best known
for its prominence in energy and shipping,
Houston’s diverse economic base also
draws from the many manufacturing,
healthcare and aerospace companies
that call Houston home.
HO US TON CONNECTIONS
• Houston has benefi tted from Bank of America’s lending and
investing in the oil, gas and ancillary industries to help make
this region the energy capital of the world. Houston’s can-do
spirit creates a welcoming environment for people and ideas
from all parts of the country and the world.
• Bank of America is proud to invest in community partners
addressing the area’s most pressing needs such as New
Hope Housing and SER–Jobs for Progress, and support arts
and culture partners, including the Children’s Museum of
Houston and Houston Grand Opera, which are working to
expand their programs to reach a new and vibrantly
diverse population.
Rebuilding with community support
Established in 1978 by Phin and Phac Nguyen, Mai’s Restaurant
was the fi rst Vietnamese restaurant in Houston. When this
local landmark was destroyed by a fi re in early 2010, the
community rallied around its third-generation family owners
and encouraged them to rebuild. Bank of America was integral
in securing the fi nancing the family needed to rebuild with
a second level and expand into a neighboring property. Our
bankers connected the family to the products and services they
needed, and today we continue to serve as a trusted advisor.
Since Mai’s reopened in April 2011, the family has moved
all of their banking over to Bank of America. The restaurant
reemerged stronger than ever and today attracts lines of
customers at all hours of the day and night.
Supporting Phoenix’s
emergent agriculture
Phoenix can trace its civilization as far back
as 700 A.D. and even then its residents
were known as industrious, enterprising
and imaginative. That spirit has continued
through the ages as this civically minded
outpost became a thriving state capital.
PHOEN IX CONNECTIONS
• Through our work with Valley of the Sun United Way, Central
Arizona Shelter Services and Housing Inc., Bank of America
is part of the project to end homelessness in the city of
Phoenix. With our fi nancial support of permanent supportive
housing for youth and veterans, and our volunteer efforts
with Project Homeless Connect, the MANA House and
Tumbleweed Center for Youth Development, the city is seeing
success in its effort to end homelessness for veterans.
• Bank of America continues to support diversity in the arts,
by working with and supporting XICO, Inc., The Phoenix Art
Museum, the Children’s Museum of Phoenix and The Musical
Instrument Museum.
Growing the family agriculture business
It’s a family business, guided by a simple philosophy — to
offer the highest-quality products and services supported by
a staff with years of experience in their respective fi elds.
Northside Hay, Arizona’s largest hay broker, specializes in the
purchase and sale of products and services for dairies, feedlots,
ranchers, stables and horse owners nationwide. The company
was started in 1948 by Olen Dryer, but it is run today by his
grandson Olen Petznick. In 2011, Northside Hay consolidated
its business to Bank of America Merrill Lynch and U.S. Trust.
Northside is looking to expand into the United Arab Emirates
and Asian markets while continuing to provide superior service,
and Bank of America Merrill Lynch is looking forward to
supporting this growth for years to come.
141414444
Boston’s thriving industrial revolution
From its days as a linchpin to colonial trade
in the 1600s to today, Boston has a long
history of leadership in all areas, including
politics, commerce, fi nance and education.
Today, Boston has a solid reputation
as a center of educational and medical
excellence and continues to be regarded
as the unofficial capital of New England.
BO STON CONNECTIO NS
• Since the founding of our fi rst predecessor bank, The
Massachusetts Bank (1784), we’ve remained strongly
committed to lending that strengthens our neighborhoods
through community development fi nancing projects such
as Tropical Foods in Dudley Square, St. Kevin’s in Upham’s
Corner, Center and Main in Brockton, and Highland Terrace
in Chelsea’s Box District.
• We value and invest in connections with our customers,
clients and communities to make Boston as vital as it can
be through partnerships with outstanding organizations,
including the Boston Red Sox, the New England Patriots,
Boys & Girls Clubs of Boston, The Greater Boston Food
Bank, the New England Center for Homeless Veterans and
the Museum of Fine Arts, Boston, to name a few.
A community connects in the
Chelsea Box District
The Box District in Chelsea, Mass., was named for the box
manufacturing companies that opened at the beginning of the
20th century and closed in the 1950s. In 2005, a group called
The Neighborhood Developers set out to revive the area. Eight
years later, they’ve constructed 112 apartments, and with the
City of Chelsea, a public park, a place where parents encourage
their children to play. Bank of America has been a partner with
The Neighborhood Developers since their founding in 1979.
Most recently, we helped fi nance Highland Terrace, the third
such property in the District.
Charlotte is becoming a
new center of commerce
The growing city of Charlotte, with its
vibrant metropolitan area and Southern
charm, is also the second-largest fi nancial
center in the U.S. and home to the Bank
of America corporate headquarters.
CHARLOTTE CON NECTIONS
• Bank of America is committed to supporting education and
workforce development in Charlotte. We believe supporting
nonprofi t organizations that connect people to jobs and
skills is part of our efforts to help improve the fi nancial
lives of individuals and customers in the communities we
serve. We’re proud to support a range of organizations
making a signifi cant impact on education and the workforce
such as Project L.I.F.T., Communities In Schools, Central
Piedmont Community College and Goodwill Industries of
the Southern Piedmont.
• We have a long history of supporting arts and culture
through grants, loaning art collections and sponsorship
events. Recent recipients include the Arts & Science Council,
North Carolina Dance Theatre, Opera Carolina, Daniel
Stowe Botanical Garden and the Harvey B. Gantt Center
for African-American Arts+Culture.
Success through customer service
When Dr. Frank Kendrick decided to start his own dental
practice, he knew he wanted to work with children. In 2006,
he opened his practice without a patient roster in the Charlotte
neighborhood of Eastfi eld. Through advertising and word of
mouth, he saw 13 patients on his fi rst day — unheard of in the
profession. Since then business has grown exponentially and
Dr. Kendrick now sees several hundred patients per week. In
2009, Dr. Kendrick needed a loan to open a second practice.
In 2012, when his client manager from Bank of America
visited to conduct a complementary cash fl ow review, they
determined he was able to refi nance his existing practice as
well as fi nance an entirely new location — Southlake Pediatric
Dentistry. This relationship between Bank of America and
Dr. Kendrick is built on a shared commitment to quality customer
service that is integral to the success of both businesses.
e
t
t
o
l
r
a
h
C
Bank of America Corporation — Financial Highlights
Bank of America Corporation (NYSE: BAC) is headquartered in Charlotte, N.C. As of December 31, 2013, we operated in all
50 states, the District of Columbia and more than 40 countries. Through our banking and various non-banking subsidiaries
throughout the United States and in international markets, we provide a diversifi ed range of banking and non-banking
fi nancial services and products through fi ve business segments: Consumer and Business Banking, Consumer Real Estate
Services, Global Wealth and Investment Management, Global Banking and Global Markets.
Financial Highlights (in millions, except per share information)
For the year
Revenue, net of interest expense (fully taxable-equivalent basis)1
Net income
Net income, excluding goodwill impairment charges1
Earnings per common share
Diluted earnings per common share
Diluted earnings per common share, excluding goodwill impairment charges1
Dividends paid per common share
Return on average assets
Return on average tangible shareholders’ equity1
Efficiency ratio (fully taxable-equivalent basis)1
Average diluted common shares issued and outstanding
At year end
Total loans and leases
Total assets
Total deposits
Total shareholders’ equity
Book value per common share
Tangible book value per common share1
Market price per common share
Common shares issued and outstanding
Tier 1 common capital ratio
Tangible common equity ratio1
$
2013
89,801
11,431
11,431
0.94
0.90
0.90
0.04
0.53%
7.13
77.07
11,491
2013
$ 928,233
2,102,273
1,119,271
232,685
20.71
13.79
15.57
10,592
11.19%
7.20
$
2012
84,235
4,188
4,188
0.26
0.25
0.25
0.04
0.19%
2.60
85.59
10,841
2012
$ 907,819
2,209,974
1,105,261
236,956
20.24
13.36
11.61
10,778
11.06%
6.74
$
2011
94,426
1,446
4,630
0.01
0.01
0.32
0.04
0.06%
0.96
85.01
10,255
2011
$ 926,200
2,129,046
1,033,041
230,101
20.09
12.95
5.56
10,536
9.86%
6.64
1 Represents a non-GAAP financial measure. Net income and diluted earnings per common share have been calculated excluding goodwill impairment charges of $3.2 billion
in 2011. There were no goodwill impairment charges in 2013 or 2012. For more information on these measures and ratios, and a corresponding reconciliation to GAAP financial
measures, see Supplemental Financial Data on page 29 and Statistical Table XV on page 139 of the 2013 Financial Review section.
Total cumulative shareholder return2
$250
$200
$150
$100
$50
$0
2008
2009
2010
2011
2012
2013
December 31
2008
2009
2010
2011
2012
2013
BAC BANK OF AMERICA CORP
$100
$107
SPX S&P 500 COMP
BKX KBW BANK SECTOR INDEX
$100
$100
$126
$98
$95
$145
$121
$40
$148
$93
$84
$172
$124
$113
$228
$170
2 This graph compares the yearly change in the Corporation’s total cumulative shareholder return
on its common stock with (i) the Standard & Poor’s 500 Index and (ii) the KBW Bank Index for
the years ended December 31, 2009 through 2013. The graph assumes an initial investment of
$100 at the end of 2008 and the reinvestment of all dividends during the years indicated.
16
BAC fi ve-year stock performance
$20
$15
$10
$5
$0
2009
2010
2011
2012
2013
HIGH $18.59
$19.48
$15.25
$11.61 $15.88
LOW
3.14
CLOSE 15.06
10.95
13.34
4.99
5.56
5.80
11.61
11.03
15.57
BAC stock price and credit default
swap spread3
$20
$15
$10
$5
e
c
i
r
P
k
c
o
t
S
$0
12/31/11
500
400
300
200
100
0
)
s
p
b
(
S
D
C
6/30/12
12/31/12
6/30/13
12/31/13
STOCK PRICE
BAC 5Y CDS
3 Credit default swap spreads are calculated off of 5-year LIBOR.
2013 Financial Review
76788ba_financials.indd 17
3/7/14 5:18 PM
Financial Review
Table of Contents
Executive Summary
Recent Events
Financial Highlights
Balance Sheet Overview
Supplemental Financial Data
Business Segment Operations
Consumer & Business Banking
Consumer Real Estate Services
Global Wealth & Investment Management
Global Banking
Global Markets
All Other
Off-Balance Sheet Arrangements and Contractual Obligations
Regulatory Matters
Managing Risk
Strategic Risk Management
Capital Management
Liquidity Risk
Credit Risk Management
Consumer Portfolio Credit Risk Management
Commercial Portfolio Credit Risk Management
Non-U.S. Portfolio
Provision for Credit Losses
Allowance for Credit Losses
Market Risk Management
Trading Risk Management
Interest Rate Risk Management for Nontrading Activities
Mortgage Banking Risk Management
Compliance Risk Management
Operational Risk Management
Complex Accounting Estimates
2012 Compared to 2011
Overview
Business Segment Operations
Statistical Tables
Glossary
18 Bank of America 2013
Page
20
21
23
25
29
31
33
36
40
42
44
46
48
55
57
61
61
67
72
73
87
96
100
100
104
105
109
112
112
112
113
120
120
121
122
142
76788ba_financials.indd 18
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
This report, the documents that it incorporates by reference and
the documents into which it may be incorporated by reference may
contain, and from time to time Bank of America Corporation
(collectively with its subsidiaries, the Corporation) and its
management may make certain statements that constitute forward-
looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements can be identified
by the fact that they do not relate strictly to historical or current
facts. Forward-looking statements often use words such as
“expects,” “anticipates,” “believes,” “estimates,” “targets,” “intends,”
“plans,” “goal” and other similar expressions or future or conditional
verbs such as “will,” “may,” “might,” “should,” “would” and “could.” The
forward-looking statements made
the current
expectations, plans or forecasts of the Corporation regarding the
Corporation’s 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.
represent
You should not place undue reliance on any forward-looking
statement and should consider the following uncertainties and risks,
as well as the risks and uncertainties more fully discussed elsewhere
in this report, including under Item 1A. Risk Factors of this Annual
Report on Form 10-K and in any of the Corporation’s subsequent
Securities and Exchange Commission filings: 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 of the government-sponsored
enterprises, 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 appealed and overturned in whole or in
part; the possibility that future representations and warranties
losses may occur in excess of the Corporation’s recorded liability
and estimated range of possible loss for its representations and
warranties exposures; the possibility that the Corporation may not
collect mortgage insurance claims; the possible impact of a future
FASB standard on accounting for credit losses; uncertainties about
the financial stability and growth rates of non-U.S. jurisdictions, the
risk that those jurisdictions may face difficulties servicing their
sovereign debt, and related stresses on financial markets,
currencies and trade, and the Corporation’s exposures to such risks,
including direct, indirect and operational; 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 Dodd-Frank Wall Street Reform
and Consumer Protection 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 on debit card
interchange fee revenue in connection with the U.S. District Court
for the District of Columbia’s ruling on July 31, 2013 regarding the
Federal Reserve’s rules implementing the Financial Reform Act’s
Durbin Amendment; 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 possibility that the European Commission will impose remedial
measures in relation to its investigation of the Corporation’s
competitive practices;
regulatory
enforcement action relating to optional identity theft protection
services and certain optional credit card debt cancellation products;
unexpected claims, damages, penalties and fines resulting from
pending or future litigation 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; the Corporation’s
ability to fully realize the cost savings and other anticipated 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.
impact of potential
the
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.
Bank of America 2013 19
76788ba_financials.indd 19
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Executive Summary
Business Overview
The Corporation is a Delaware corporation, a bank holding company
(BHC) and a financial holding company. When used in this report,
“the Corporation” may refer to Bank of America Corporation
individually, Bank of America Corporation and its subsidiaries, or
certain of Bank of America Corporation’s subsidiaries or affiliates.
Our principal executive offices are located in Charlotte, North
Carolina. Through our banking and various 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 October 1, 2013,
we completed the merger of our Merrill Lynch & Co., Inc. (Merrill
Lynch) subsidiary into Bank of America Corporation. This merger
had no effect on the Merrill Lynch name or brand and is not
expected to have any effect on customers or clients. At
December 31, 2013, the Corporation had approximately $2.1
trillion in assets and approximately 242,000 full-time equivalent
employees.
As of December 31, 2013, 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 50 million consumer and small
business relationships with approximately 5,100 banking centers,
16,300 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.
2013 Economic and Business Environment
In the U.S., economic growth continued in 2013, ending the year
in the midst of its fifth consecutive year of recovery. However, the
year ended amid uncertainty as to whether the upward trend in
economic performance would continue into 2014. Employment
gains were generally steady but moderate, and the unemployment
rate fell to 6.7 percent at year end, but with significant contribution
from a declining labor force participation rate. Retail sales grew
at a solid pace through most of 2013, and following extreme
weakness through mid-2013, service spending also displayed a
modest rebound late in the year. Core inflation fell in 2013 to
almost a full percentage point below the Board of Governors of
the Federal Reserve System’s (Federal Reserve) longer-term target
of two percent.
U.S. household net worth increased significantly in 2013.
Home prices rose approximately 12 percent in 2013, but showed
signs of deceleration late in the year, and equity markets surged.
U.S. Treasury yields rose over the course of the year amid
expectations that the Federal Reserve would adjust the pace of
its purchases of agency mortgage-backed securities (MBS) and
long-term U.S. Treasury securities if economic progress was
sustained.
Despite a partial federal government shutdown in October, the
impact on U.S. economic performance was minimal. The Federal
Reserve announced that it would begin to reduce its securities
purchases early in 2014, but would not raise its federal funds rate
target until significantly after the unemployment rate reached its
6.5 percent threshold. By year end, the U.S. Congress agreed on
a two-year budget framework that reduced fiscal uncertainty, and
pending implementation, restored some of the planned federal
sequester spending for 2014.
Internationally, Europe experienced significant economic
improvement in 2013. European financial anxieties eased,
reflected in sustained narrowing of bond spreads, following the
European Central Bank’s 2012 assertion of its role as lender of
last resort. Economic performance also improved, with the long
six-quarter recession in the European Union ending in the second
quarter of 2013, followed by modest growth and varied
performance in the second half of the year.
Monetary policies in Japan combined with the sharp
depreciation of the yen led to moderate economic expansion in
2013, but economic growth diminished in the second half of 2013.
In Japan, inflation rose gradually during the year, exceeding one
percent annualized by year end. However, doubts remained about
the sustainability of economic improvement in Japan in the
absence of clear plans for long-run economic reform. As China’s
government focused on issues beyond simply maximizing
economic growth, China’s gross domestic product growth in 2013
decelerated.
Additionally, growth rates in a number of emerging nations have
decreased, while select countries are also dealing with greater
social and political unrest and capital markets volatility. Following
the announcement of the Federal Reserve’s intent to reduce
securities purchases
increased
in mid-2013,
withdrawals of capital from certain emerging market countries,
impacting interest rates, foreign exchange rates and credit
spreads. These trends intensified as the Federal Reserve initiated
its securities purchases tapering actions in January 2014, and
investors became more concerned about the implications of a
slowing Chinese economy on its key trading partners. For more
information on our international exposure, see Non-U.S. Portfolio
on page 96.
investors
20 Bank of America 2013
76788ba_financials.indd 20
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Recent Events
BNY Mellon Settlement
In the first quarter of 2014, the New York Supreme Court entered
final 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. The court’s
January 31, 2014 decision, order and judgment remain subject to
appeal and the motion to reargue, and it is not possible to predict
the timetable for appeals or when the court approval process will
be completed. For additional information, including a description
of the BNY Mellon Settlement, see Note 7 – Representations and
Warranties Obligations and Corporate Guarantees
the
Consolidated Financial Statements.
to
Capital and Liquidity Related Matters
In July 2013, U.S. banking regulators approved final Basel 3
Regulatory Capital rules (Basel 3) which became effective January
1, 2014. Basel 3 generally continues to be subject to interpretation
by the U.S. banking regulators. Basel 3 also will require us to
calculate a supplementary
ratio. For additional
information, see Capital Management – Regulatory Capital
Changes on page 64.
leverage
The Basel Committee on Banking Supervision
(Basel
Committee) issued two liquidity risk-related standards that are
considered part of Basel 3: the Liquidity Coverage Ratio (LCR) and
the Net Stable Funding Ratio (NSFR). For additional information,
see Liquidity Risk – Basel 3 Liquidity Standards on page 69.
Freddie Mac Settlement
On November 27, 2013, we entered into an agreement with Freddie
Mac (FHLMC) under which we paid FHLMC a total of $404 million
(less credits of $13 million) to resolve all outstanding and potential
mortgage repurchase and make-whole claims arising out of any
alleged breach of selling representations and warranties related
to loans that had been sold directly to FHLMC by entities related
to Bank of America, N.A. from January 1, 2000 to December 31,
2009, and to compensate FHLMC for certain past losses and
potential future losses relating to denials, rescissions and
cancellations of mortgage insurance (MI).
In 2010, we had entered into an agreement with FHLMC to
resolve all outstanding and potential representations and
warranties claims related to loans sold by Countrywide Financial
Corporation (Countrywide) to FHLMC through 2008.
With these agreements, combined with prior settlements with
Fannie Mae (FNMA), Bank of America has resolved substantially
all outstanding and potential representations and warranties
claims on whole loans sold by legacy Bank of America and
Countrywide to FNMA and FHLMC through 2008 and 2009,
respectively, subject to certain exceptions which we do not believe
are material.
For additional information, see Note 7 – Representations and
the
Warranties Obligations and Corporate Guarantees
Consolidated Financial Statements.
to
Common Stock Repurchases and Liability
Management Actions
As disclosed in prior filings, the capital plan that the Corporation
submitted to the Federal Reserve in January 2013 pursuant to the
2013 Comprehensive Capital Analysis and Review (CCAR),
included a request to repurchase up to $5.0 billion of common
stock and redeem $5.5 billion in preferred stock over four quarters
beginning in the second quarter of 2013, and continue the
quarterly common stock dividend at $0.01 per share. During 2013,
we repurchased and retired 231.7 million common shares for an
aggregate purchase price of approximately $3.2 billion and
redeemed our Series H and 8 preferred stock for $5.5 billion. As
of December 31, 2013, under the capital plan, we can purchase
up to $1.8 billion of additional common stock through the first
quarter of 2014.
In addition to the CCAR actions, during 2013, we redeemed
certain of our preferred stock for $1.0 billion and issued $1.0
billion of our Fixed-to-Floating Rate Semi-annual Non-Cumulative
Preferred Stock, Series U. For additional information, see Capital
Management – Regulatory Capital on page 61 and Note 13 –
Shareholders’ Equity to the Consolidated Financial Statements.
During 2013, we repurchased certain of our debt and trust
preferred securities with an aggregate carrying value of $10.1
billion for $10.2 billion in cash.
We may conduct additional redemptions, tender offers,
exercises and other transactions in the future depending on
prevailing market conditions, capital, liquidity and other factors.
76788ba_financials.indd 21
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Bank of America 2013 21
Selected Financial Data
Table 1 provides selected consolidated financial data for 2013 and 2012.
Table 1 Selected Financial Data
(Dollars in millions, except per share information)
Income statement
Revenue, net of interest expense (FTE basis) (1)
Net income
Diluted earnings per common share
Dividends paid per common share
Performance ratios
Return on average assets
Return on average tangible shareholders’ equity (1)
Efficiency ratio (FTE basis) (1)
Asset quality
2013
2012
$ 89,801
11,431
0.90
0.04
$ 84,235
4,188
0.25
0.04
0.53%
7.13
77.07
0.19%
2.60
85.59
Allowance for loan and lease losses at December 31
Allowance for loan and lease losses as a percentage of total loans and leases outstanding at December 31 (2)
Nonperforming loans, leases and foreclosed properties at December 31 (2)
Net charge-offs (3)
Net charge-offs as a percentage of average loans and leases outstanding (2, 3)
Net charge-offs as a percentage of average loans and leases outstanding, excluding the purchased credit-impaired loan portfolio (2)
Net charge-offs and purchased credit-impaired write-offs as a percentage of average loans and leases outstanding (2)
Ratio of the allowance for loan and lease losses at December 31 to net charge-offs (3)
Ratio of the allowance for loan and lease losses at December 31 to net charge-offs, excluding the purchased credit-impaired loan portfolio
Ratio of the allowance for loan and lease losses at December 31 to net charge-offs and purchased credit-impaired write-offs
$ 17,428
$ 24,179
1.90%
2.69%
$ 17,772
7,897
$ 23,555
14,908
0.87%
0.90
1.13
2.21
1.89
1.70
1.67%
1.73
1.99
1.62
1.25
1.36
Balance sheet at year end
Total loans and leases
Total assets
Total deposits
Total common shareholders’ equity
Total shareholders’ equity
Capital ratios at year end (4)
Tier 1 common capital
Tier 1 capital
Total capital
Tier 1 leverage
$ 928,233
2,102,273
1,119,271
219,333
232,685
$ 907,819
2,209,974
1,105,261
218,188
236,956
11.19%
12.44
15.44
7.86
11.06%
12.89
16.31
7.37
(1) Fully taxable-equivalent (FTE) basis, 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, see Supplemental Financial Data on page 29, and for corresponding reconciliations to GAAP financial measures, see Statistical Table XV.
(2) Balances and ratios do not include loans accounted for under the fair value option. For additional exclusions from nonperforming loans, leases and foreclosed properties, see Consumer Portfolio
Credit Risk Management – Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity on page 85 and corresponding Table 41, and Commercial Portfolio Credit Risk Management –
Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 92 and corresponding Table 50.
(3) Net charge-offs exclude $2.3 billion of write-offs in the purchased credit-impaired loan portfolio for 2013 compared to $2.8 billion for 2012. 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 81.
(4) Presents capital ratios in accordance with the Basel 1 – 2013 Rules, which include the Market Risk Final Rule at December 31, 2013. Basel 1 did not include the Basel 1 – 2013 Rules at December 31,
2012.
22 Bank of America 2013
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Financial Highlights
Net income was $11.4 billion, or $0.90 per diluted share in 2013
compared to $4.2 billion, or $0.25 per diluted share in 2012. The
results for 2013 reflect our efforts to stabilize revenue, decrease
costs, strengthen the balance sheet and improve credit quality.
Table 2 Summary Income Statement
(Dollars in millions)
Net interest income (FTE basis) (1)
Noninterest income
Total revenue, net of interest expense (FTE basis) (1)
Provision for credit losses
Noninterest expense
Income before income taxes
Income tax expense (benefit) (FTE basis) (1)
Net income
Preferred stock dividends
2013
$ 43,124
46,677
89,801
3,556
69,214
17,031
5,600
11,431
1,349
2012
$ 41,557
42,678
84,235
8,169
72,093
3,973
(215)
4,188
1,428
Net income applicable to common shareholders
$ 10,082
$
2,760
Per common share information
Earnings
Diluted earnings
$
$
0.94
0.90
0.26
0.25
(1) FTE basis is a non-GAAP financial measure. For more information on this measure, see
Supplemental Financial Data on page 29, and for a corresponding reconciliation to GAAP financial
measures, see Statistical Table XV.
Net Interest Income
Net interest income on a fully taxable-equivalent (FTE) basis
increased $1.6 billion to $43.1 billion for 2013 compared to 2012.
The increase was primarily due to reductions in long-term debt
balances, higher yields on debt securities including the impact of
market-related premium amortization expense, lower rates paid
on deposits, higher commercial loan balances and increased
trading-related net interest income, partially offset by lower
consumer loan balances as well as lower asset yields and the low
rate environment. The net interest yield on a FTE basis increased
12 basis points (bps) to 2.47 percent for 2013 compared to 2012
due to the same factors as described above.
Noninterest Income
Table 3 Noninterest Income
(Dollars in millions)
Card income
Service charges
Investment and brokerage services
Investment banking income
Equity investment income
Trading account profits
Mortgage banking income
Gains on sales of debt securities
Other loss
Net impairment losses recognized in earnings on AFS
debt securities
Total noninterest income
$
2013
2012
5,826
7,390
12,282
6,126
2,901
7,056
3,874
1,271
(29)
$
6,121
7,600
11,393
5,299
2,070
5,870
4,750
1,662
(2,034)
(20)
(53)
$ 46,677
$ 42,678
Noninterest income increased $4.0 billion to $46.7 billion for
2013 compared to 2012. The following highlights the significant
changes.
leveraged
remaining
investment
fees, primarily within
Card income decreased $295 million primarily driven by lower
revenue as a result of our exit of consumer protection products.
Investment and brokerage services income increased $889
million primarily driven by the impact of long-term assets under
management (AUM) inflows and higher market levels.
Investment banking income increased $827 million primarily
due to strong equity issuance fees attributable to a significant
increase in global equity capital markets volume and higher debt
finance and
issuance
investment-grade underwriting.
Equity investment income increased $831 million. The results
for 2013 included $753 million of gains related to the sale of
our
in China Construction Bank
Corporation (CCB) and gains of $1.4 billion on the sales of a
portion of an equity investment. The results for 2012 included
$1.6 billion of gains related to sales of certain equity and
strategic investments.
Trading account profits increased $1.2 billion. Net debit
valuation adjustment (DVA) losses on derivatives were $508
million in 2013 compared to losses of $2.5 billion in 2012.
Excluding net DVA, trading account profits decreased $783
million due to decreases in our fixed-income, currency and
commodities (FICC) businesses driven by a challenging trading
environment, partially offset by an increase in our equities
businesses.
Mortgage banking income decreased $876 million primarily
driven by lower servicing income and lower core production
revenue, partially offset by lower representations and warranties
provision.
Other loss decreased $2.0 billion due to lower negative fair value
adjustments on our structured liabilities of $649 million
compared to negative fair value adjustments of $5.1 billion in
2012. The prior year included gains of $1.6 billion related to
debt repurchases and exchanges of trust preferred securities.
Provision for Credit Losses
The provision for credit losses decreased $4.6 billion to $3.6
billion for 2013 compared to 2012. The provision for credit losses
was $4.3 billion lower than net charge-offs for 2013, resulting in
a reduction in the allowance for credit losses due to continued
improvement in the home loans and credit card portfolios. This
compared to a reduction of $6.7 billion in the allowance for credit
losses for the prior year. If the economy and our asset quality
continue to improve, we anticipate additional reductions in the
allowance for credit losses in future periods, although at a
significantly lower level than in 2013.
Net charge-offs totaled $7.9 billion, or 0.87 percent of average
loans and leases for 2013 compared to $14.9 billion, or 1.67
percent for 2012. The decrease in net charge-offs was primarily
driven by credit quality improvement across all major portfolios.
Also, the prior year included charge-offs associated with the
National Mortgage Settlement and loans discharged in Chapter 7
bankruptcy due to the implementation of regulatory guidance.
Given improving trends in delinquencies and the Home Price Index,
absent any unexpected changes in the economy, we expect net
charge-offs to continue to improve in 2014, but at a slower pace
than 2013. For more information on the provision for credit losses,
see Provision for Credit Losses on page 100.
Bank of America 2013 23
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Noninterest Expense
Income Tax Expense
Table 4 Noninterest Expense
Table 5 Income Tax Expense
(Dollars in millions)
Personnel
Occupancy
Equipment
Marketing
Professional fees
Amortization of intangibles
Data processing
Telecommunications
Other general operating
Total noninterest expense
2013
$ 34,719
4,475
2,146
1,834
2,884
1,086
3,170
1,593
17,307
$ 69,214
2012
$ 35,648
4,570
2,269
1,873
3,574
1,264
2,961
1,660
18,274
$ 72,093
Noninterest expense decreased $2.9 billion to $69.2 billion
for 2013 compared to 2012 primarily driven by a $967 million
decline in other general operating expense largely due to a
provision of $1.1 billion in 2012 for the 2013 Independent
Foreclosure Review (IFR) Acceleration Agreement, lower Federal
Deposit Insurance Corporation (FDIC) expense, and lower default-
related servicing expenses in Legacy Assets & Servicing and
mortgage-related assessments, waivers and similar costs related
to foreclosure delays. Partially offsetting these declines was a
$1.9 billion increase in litigation expense to $6.1 billion in 2013.
Personnel expense decreased $929 million in 2013 as we
continued to streamline processes and achieve cost savings.
Professional fees decreased $690 million due in part to reduced
default-related management activities in Legacy Assets &
Servicing.
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,
by mid-2015, of which approximately $1.5 billion per quarter has
been realized.
(Dollars in millions)
Income before income taxes
Income tax expense (benefit)
Effective tax rate
2013
$ 16,172
4,741
2012
$ 3,072
(1,116)
29.3%
(36.3)%
The effective tax rate for 2013 was driven by our recurring tax
preference items and by certain tax benefits related to non-U.S.
operations, including additional tax benefits from the 2012 non-
U.S. restructurings. These benefits were partially offset by the
$1.1 billion impact of the U.K. 2013 Finance Act enacted on July
17, 2013, which reduced the U.K. corporate income tax rate by
three percent to 20 percent. Two percent of the reduction will
become effective April 1, 2014 and the additional one percent
reduction on April 1, 2015. These reductions, which represented
the final in a series of announced reductions, are expected to
favorably affect income tax expense on future U.K. earnings but
also required us to remeasure, in the period of enactment, our
U.K. net deferred tax assets using the lower tax rates. Because
our deferred tax assets in excess of a certain amount are
disallowed in calculating regulatory capital, this charge did not
impact our capital ratios.
The negative effective tax rate for 2012 included a $1.7 billion
tax benefit attributable to the excess of foreign tax credits
recognized in the U.S. upon repatriation of the earnings of certain
subsidiaries over the related U.S. tax liability. Partially offsetting
the benefit was the $788 million impact of the U.K. 2012 Finance
Act enacted in July 2012, which reduced the U.K. corporate income
tax rate by two percent.
24 Bank of America 2013
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Balance Sheet Overview
Table 6 Selected Balance Sheet Data
(Dollars in millions)
Assets
Federal funds sold and securities borrowed or purchased under agreements to
resell
Trading account assets
Debt securities
Loans and leases
Allowance for loan and lease losses
All other assets
Total assets
Liabilities
Deposits
Federal funds purchased and securities loaned or sold under agreements to
repurchase
Trading account liabilities
Short-term borrowings
Long-term debt
All other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
December 31
Average Balance
2013
2012
% Change
2013
2012
% Change
$ 190,328
$ 219,924
(13)% $ 224,331
$ 236,042
(5)%
200,993
323,945
928,233
(17,428)
476,202
$2,102,273
227,775
360,331
907,819
(24,179)
518,304
$2,209,974
(12)
(10)
2
(28)
(8)
(5)
217,865
337,953
918,641
(21,188)
485,911
$2,163,513
203,799
353,577
898,768
(29,843)
529,013
$2,191,356
$1,119,271
$1,105,261
1
$1,089,735
$1,047,782
198,106
293,259
83,469
45,999
249,674
173,069
1,869,588
232,685
$2,102,273
73,587
30,731
275,585
194,595
1,973,018
236,956
$2,209,974
(32)
13
50
(9)
(11)
(5)
(2)
(5)
257,601
281,900
88,323
43,816
263,416
186,675
1,929,566
233,947
$2,163,513
78,554
36,500
316,393
194,550
1,955,679
235,677
$2,191,356
7
(4)
2
(29)
(8)
(1)
4
(9)
12
20
(17)
(4)
(1)
(1)
(1)
Year-end balance sheet amounts may vary from average
balance sheet amounts due to liquidity and balance sheet
management activities, primarily involving our portfolios of highly
liquid assets. These portfolios are designed to ensure the
adequacy of capital while enhancing our ability to manage liquidity
requirements for the Corporation and our customers, and to
position the balance sheet in accordance with the Corporation’s
risk appetite. The execution of these activities requires the use of
balance sheet and capital-related limits including spot, average
and risk-weighted asset limits, particularly within the market-
making activities of our trading businesses. One of our key
regulatory metrics, Tier 1 leverage ratio, is calculated based on
adjusted quarterly average total assets.
Assets
Federal Funds Sold and Securities Borrowed or
Purchased Under Agreements to Resell
Federal funds transactions involve lending reserve balances on a
short-term basis. Securities borrowed or purchased under
agreements to resell are collateralized lending transactions
utilized to accommodate customer transactions, earn interest rate
spreads, and obtain securities for settlement and for collateral.
Year-end and average federal funds sold and securities borrowed
or purchased under agreements to resell decreased $29.6 billion
from December 31, 2012 and $11.7 billion in 2013 compared to
2012 driven by a lower matched-book as we adjust our activity to
address the adverse treatment of reverse repurchase agreements
under the proposed supplementary leverage ratio.
Trading Account Assets
Trading account assets consist primarily of long positions in equity
and fixed-income securities including U.S. government and agency
securities, corporate securities, and non-U.S. sovereign debt. Year-
end trading account assets decreased $26.8 billion primarily due
to a reduction in U.S. government and agency securities. Average
trading account assets increased $14.1 billion primarily due to
higher equity securities inventory and client-based activity.
Debt Securities
Debt securities primarily include U.S. Treasury and agency
securities, MBS, principally agency MBS, foreign bonds, corporate
bonds and municipal debt. We use the debt securities portfolio
primarily to manage interest rate and liquidity risk and to take
advantage of market conditions that create more economically
attractive returns on these investments. Year-end and average debt
securities decreased $36.4 billion and $15.6 billion primarily due
to net sales of U.S. Treasuries, paydowns and decreases in the
fair value of available-for-sale (AFS) debt securities resulting from
the impact of higher interest rates. For more information on debt
securities, see Note 3 – Securities to the Consolidated Financial
Statements.
Loans and Leases
Year-end and average loans and leases increased $20.4 billion
and $19.9 billion. The increases were primarily due to higher
commercial loan balances primarily in the U.S. commercial and
non-U.S. commercial product types, partially offset by lower
consumer loan balances driven by continued runoff in certain
portfolios as well as paydowns and charge-offs outpacing
originations. For a more detailed discussion of the loan portfolio,
see Credit Risk Management on page 72.
Allowance for Loan and Lease Losses
Year-end and average allowance for loan and lease losses
decreased $6.8 billion and $8.7 billion primarily due to the impact
of the improving economy, partially offset by increases in reserves
in the commercial portfolio due to loan growth. For a more detailed
discussion, see Allowance for Credit Losses on page 100.
Bank of America 2013 25
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All Other Assets
Year-end other assets decreased $42.1 billion driven by lower
customer and other receivables, other earning assets, loans held-
for-sale and derivative assets, partially offset by increases in cash
and cash equivalents. Average other assets decreased $43.1
billion primarily driven by lower derivative assets, other earning
assets, and cash and cash equivalents.
Liabilities
Deposits
Year-end and average deposits increased $14.0 billion from
December 31, 2012 and $42.0 billion in 2013 compared to 2012.
The increases were primarily driven by customer and client shifts
to more liquid products in the low rate environment.
Federal Funds Purchased and Securities Loaned or Sold
Under Agreements to Repurchase
Federal funds transactions involve borrowing reserve balances on
a short-term basis. Securities loaned or sold under agreements
to repurchase are collateralized borrowing transactions utilized to
accommodate customer transactions, earn interest rate spreads
and finance assets on the balance sheet. Year-end federal funds
purchased and securities loaned or sold under agreements to
repurchase decreased $95.2 billion primarily driven by a lower
matched-book as we adjust our activity to address the adverse
treatment of repurchase agreements under the proposed
supplementary leverage ratio and lower trading inventory. Average
federal funds purchased and securities loaned or sold under
agreements to repurchase decreased $24.3 billion due to lower
matched-book activity.
Trading Account Liabilities
Trading account liabilities consist primarily of short positions in
equity and fixed-income securities including U.S. government and
agency securities, corporate securities, and non-U.S. sovereign
debt. Year-end and average trading account liabilities increased
$9.9 billion and $9.8 billion primarily due to increased short
positions in equity securities.
Short-term Borrowings
Short-term borrowings provide an additional funding source and
primarily consist of Federal Home Loan Bank (FHLB) short-term
borrowings, notes payable and various other borrowings that
generally have maturities of one year or less. Year-end and average
short-term borrowings increased $15.3 billion and $7.3 billion due
to an increase in short-term FHLB advances. For more information
on short-term borrowings, see Note 10 – Federal Funds Sold or
Purchased, Securities Financing Agreements and Short-term
Borrowings to the Consolidated Financial Statements.
Long-term Debt
Year-end and average long-term debt decreased $25.9 billion and
$53.0 billion. The decreases were attributable to planned
reductions in long-term debt as maturities outpaced new
issuances. For more information on long-term debt, see Note 11
– Long-term Debt to the Consolidated Financial Statements.
26 Bank of America 2013
All Other Liabilities
Year-end all other liabilities decreased $21.5 billion driven by
decreases in noninterest payables and derivative liabilities.
Average all other liabilities decreased $7.9 billion driven by a
decrease in derivative liabilities.
Shareholders’ Equity
Year-end and average shareholders’ equity decreased $4.3 billion
and $1.7 billion. The decreases were driven by a decrease in the
fair value of AFS debt securities resulting from the impact of higher
interest
in accumulated other
comprehensive income (OCI), net preferred stock redemptions and
common stock repurchases, partially offset by earnings.
rates, which
recorded
is
Cash Flows Overview
The Corporation’s operating assets and liabilities support our
global markets and lending activities. We believe that cash flows
from operations, available cash balances and our ability to
generate cash through short- and long-term debt are sufficient to
fund our operating liquidity needs. Our investing activities primarily
include the debt securities portfolio and other short-term
investments. Our financing activities reflect cash flows primarily
related to increased customer deposits and net long-term debt
reductions.
Cash and cash equivalents increased $20.6 billion during 2013
due to net cash provided by operating and investing activities,
partially offset by net cash used in financing activities. Cash and
cash equivalents decreased $9.4 billion during 2012 due to net
cash used in operating and investing activities, partially offset by
net cash provided by financing activities.
During 2013, net cash provided by operating activities was
$92.8 billion. The more significant adjustments to net income to
arrive at cash used in operating activities included net decreases
in other assets, and trading and derivative instruments, as well
as net proceeds from sales, securitizations and paydowns of loans
held-for-sale (LHFS). During 2012, net cash used in operating
activities was $16.1 billion. The more significant adjustments to
net income to arrive at cash used in operating activities included
net increases in trading and derivative instruments, and the
provision for credit losses.
During 2013, net cash provided by investing activities was
$25.1 billion primarily driven by a decrease in federal funds sold
and securities borrowed or purchased under agreements to resell
and net sales of debt securities, partially offset by net increases
in loans and leases. During 2012, net cash used in investing
activities was $35.0 billion, primarily driven by net purchases of
debt securities.
During 2013, net cash used in financing activities of $95.4
billion primarily reflected a decrease in federal funds purchased
and securities loaned or sold under agreements to repurchase
and net reductions in long-term debt, partially offset by growth in
short-term borrowings and deposits. During 2012, the net cash
provided by financing activities of $42.4 billion primarily reflected
an increase in federal funds purchased and securities loaned or
sold under agreements to repurchase and growth in deposits,
partially offset by planned reductions in long-term debt.
76788ba_financials.indd 26
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Table 7 Five-year Summary of Selected Financial Data
(In millions, except per share information)
Income statement
Net interest income
Noninterest income
Total revenue, net of interest expense
Provision for credit losses
Goodwill impairment
Merger and restructuring charges
All other noninterest expense (1)
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Net income (loss) applicable to common shareholders
Average common shares issued and outstanding
Average diluted common shares issued and outstanding (2)
Performance ratios
Return on average assets
Return on average common shareholders’ equity
Return on average tangible common shareholders’ equity (3)
Return on average tangible shareholders’ equity (3)
Total ending equity to total ending assets
Total average equity to total average assets
Dividend payout
Per common share data
Earnings (loss)
Diluted earnings (loss) (2)
Dividends paid
Book value
Tangible book value (3)
Market price per share of common stock
Closing
High closing
Low closing
2013
2012
2011
2010
2009
$
$
$
$
42,265
46,677
88,942
3,556
—
—
69,214
16,172
4,741
11,431
10,082
10,731
11,491
0.53%
4.62
6.97
7.13
11.07
10.81
4.25
0.94
0.90
0.04
20.71
13.79
40,656
42,678
83,334
8,169
—
—
72,093
3,072
(1,116)
4,188
2,760
10,746
10,841
0.19%
1.27
1.94
2.60
10.72
10.75
15.86
0.26
0.25
0.04
20.24
13.36
$
$
$
44,616
48,838
93,454
13,410
3,184
638
76,452
(230)
(1,676)
1,446
85
10,143
10,255
0.06%
0.04
0.06
0.96
10.81
9.98
n/m
0.01
0.01
0.04
20.09
12.95
$
$
51,523
58,697
110,220
28,435
12,400
1,820
68,888
(1,323)
915
(2,238)
(3,595)
9,790
9,790
n/m
n/m
n/m
n/m
10.08%
9.56
n/m
(0.37)
(0.37)
0.04
20.99
12.98
$
$
47,109
72,534
119,643
48,570
—
2,721
63,992
4,360
(1,916)
6,276
(2,204)
7,729
7,729
0.26%
n/m
n/m
4.18
10.38
10.01
n/m
(0.29)
(0.29)
0.04
21.48
11.94
$
15.57
15.88
11.03
$ 164,914
$
11.61
11.61
5.80
$ 125,136
5.56
15.25
4.99
58,580
$
13.34
19.48
10.95
$ 134,536
$
15.06
18.59
3.14
$ 130,273
Market capitalization
(1) Excludes merger and restructuring charges and goodwill impairment charges.
(2) Due to a net loss applicable to common shareholders for 2010 and 2009, the impact of antidilutive equity instruments was excluded from diluted earnings (loss) per share and average diluted
$
common shares.
(3) Tangible equity ratios and tangible book value per share of common stock are non-GAAP financial measures. Other companies may define or calculate these measures differently. For more information
on these ratios, see Supplemental Financial Data on page 29, and for corresponding reconciliations to GAAP financial measures, see Statistical Table XV on page 139.
(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 73.
(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 85 and corresponding Table 41, and Commercial Portfolio Credit Risk Management –
Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 92 and corresponding Table 50.
(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 $2.3 billion and $2.8 billion of write-offs in the purchased credit-impaired loan portfolio for 2013 and 2012. 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 81.
(9) There were no write-offs of PCI loans in 2011, 2010, and 2009.
(10) Presents capital ratios in accordance with the Basel 1 – 2013 Rules, which include the Market Risk Final Rule at December 31, 2013. Basel 1 did not include the Basel 1 – 2013 Rules at December 31,
2012.
n/m = not meaningful
76788ba_financials.indd 27
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Bank of America 2013 27
Table 7 Five-year Summary of Selected Financial Data (continued)
(Dollars in millions)
Average balance sheet
Total loans and leases
Total assets
Total deposits
Long-term debt
Common shareholders’ equity
Total shareholders’ equity
Asset quality (4)
Allowance for credit losses (5)
Nonperforming loans, leases and foreclosed properties (6)
Allowance for loan and lease losses as a percentage of total loans and leases
outstanding (6)
2013
2012
2011
2010
2009
$ 918,641
2,163,513
1,089,735
263,416
218,468
233,947
$ 898,768
2,191,356
1,047,782
316,393
216,996
235,677
$ 938,096
2,296,322
1,035,802
421,229
211,709
229,095
$ 958,331
2,439,606
988,586
490,497
212,686
233,235
$ 948,805
2,443,068
980,966
446,634
182,288
244,645
$
17,912
17,772
$
24,692
23,555
$
34,497
27,708
$
43,073
32,664
$
38,687
35,747
1.90%
2.69%
3.68%
4.47%
4.16%
Allowance for loan and lease losses as a percentage of total nonperforming loans and
leases (6)
Allowance for loan and lease losses as a percentage of total nonperforming loans and
leases, excluding the PCI loan portfolio (6)
Amounts included in allowance that are excluded from nonperforming loans and leases (7) $
Allowance as a percentage of total nonperforming loans and leases, excluding amounts
included in the allowance that are excluded from nonperforming loans and leases (7)
102
87
107
82
135
101
136
116
111
99
7,680
$
12,021
$
17,490
$
22,908
$
17,690
57%
54%
65%
62%
58%
$
7,897
$
14,908
$
20,833
$
34,334
$
33,688
0.87%
1.67%
2.24%
3.60%
3.58%
0.90
1.13
1.87
1.93
2.21
1.89
1.70
1.73
1.99
2.52
2.62
1.62
1.25
1.36
2.32
2.24
2.74
3.01
1.62
1.22
1.62
3.73
3.60
3.27
3.48
1.22
1.04
1.22
3.71
3.58
3.75
3.98
1.10
1.00
1.10
11.19%
12.44
15.44
7.86
7.86
7.20
11.06%
12.89
16.31
7.37
7.62
6.74
9.86%
8.60%
7.81%
12.40
16.75
7.53
7.54
6.64
11.24
15.77
7.21
6.75
5.99
10.40
14.66
6.88
6.40
5.56
Net charge-offs (8)
Net charge-offs as a percentage of average loans and leases outstanding (6, 8)
Net charge-offs as a percentage of average loans and leases outstanding, excluding the
PCI loan portfolio (6)
Net charge-offs and PCI write-offs as a percentage of average loans and leases
outstanding (6, 9)
Nonperforming loans and leases as a percentage of total loans and leases
outstanding (6)
Nonperforming loans, leases and foreclosed properties as a percentage of total loans,
leases and foreclosed properties (6)
Ratio of the allowance for loan and lease losses at December 31 to net charge-offs (8)
Ratio of the allowance for loan and lease losses at December 31 to net charge-offs,
excluding the PCI loan portfolio
Ratio of the allowance for loan and lease losses at December 31 to net charge-offs and
PCI write-offs (9)
Capital ratios at year end (10)
Risk-based capital:
Tier 1 common capital
Tier 1 capital
Total capital
Tier 1 leverage
Tangible equity (3)
Tangible common equity (3)
For footnotes see page 27.
28 Bank of America 2013
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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 all use return on average
tangible shareholders’ equity (ROTE) 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.
ROTE 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 Table 7 and Statistical Table XII. In
addition, in Table 8, we have excluded the impact of goodwill
impairment charges of $3.2 billion and $12.4 billion recorded in
2011 and 2010 when presenting certain of these metrics.
Accordingly, these are non-GAAP financial measures.
We evaluate our business segment results based on measures
that utilize return on average allocated capital, and prior to January
1, 2013, the return on average economic capital, both of which
represent non-GAAP financial measures. These ratios are
calculated as net income adjusted for cost of funds and earnings
credits and certain expenses related to intangibles, divided by
average allocated capital or average economic capital, as
applicable. 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 for the
business segments is comprised of allocated capital (or economic
capital prior to 2013) plus capital for the portion of goodwill and
intangibles specifically assigned to the business segment. For
additional information, see Business Segment Operations on page
31 and Note 8 – Goodwill and Intangible Assets to the Consolidated
Financial Statements.
In 2009, Common Equivalent Securities were reflected in our
reconciliations given the expectation that the underlying Common
Equivalent Junior Preferred Stock, Series S would convert into
common stock following shareholder approval of additional
authorized shares. Shareholders approved the increase in the
number of authorized shares of common stock and the Common
Equivalent Stock converted into common stock on February 24,
2010.
Statistical Tables XV, XVI and XVII on pages 139, 140 and 141
provide reconciliations of these non-GAAP financial measures to
GAAP financial measures. We believe the use of these non-GAAP
financial measures provides additional clarity in assessing the
results of the Corporation and our segments. Other companies
may define or calculate these measures and ratios differently.
Table 8 Five-year Supplemental Financial Data
(Dollars in millions, except per share information)
Fully taxable-equivalent basis data
Net interest income (1)
Total revenue, net of interest expense
Net interest yield (1)
Efficiency ratio
Performance ratios, excluding goodwill impairment charges (2)
Per common share information
Earnings
Diluted earnings
Efficiency ratio (FTE basis)
Return on average assets
Return on average common shareholders’ equity
Return on average tangible common shareholders’ equity
Return on average tangible shareholders’ equity
2013
2012
2011
2010
2009
$
43,124
89,801
$
41,557
84,235
$
45,588
94,426
$
52,693
111,390
$
48,410
120,944
2.47%
77.07
2.35%
85.59
2.48%
85.01
2.78%
74.61
2.65%
55.16
$
$
0.32
0.32
81.64%
0.20
1.54
2.46
3.08
0.87
0.86
63.48%
0.42
4.14
7.03
7.11
(1) Net interest income and net interest yield include fees earned on overnight deposits placed with the Federal Reserve and fees earned on deposits, primarily overnight, placed with certain non-U.S.
central banks.
(2) Performance ratios are calculated excluding the impact of goodwill impairment charges of $3.2 billion and $12.4 billion recorded in 2011 and 2010.
Bank of America 2013 29
76788ba_financials.indd 29
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Net interest income excluding trading-related net interest
income increased $1.0 billion to $39.3 billion for 2013 compared
to 2012. The increase was primarily due to reductions in long-term
debt balances and yields, market-related premium amortization
expense due to an increase in long-end rates, and lower rates paid
on deposits, partially offset by lower consumer loan balances and
yields as well as lower net interest income from the discretionary
asset and liability management (ALM) portfolio. For more
information on the impacts of interest rates, see Interest Rate
Risk Management for Nontrading Activities on page 109.
Average earning assets excluding trading-related earning
assets decreased $42.4 billion to $1,277.9 billion, or three
percent, for 2013 compared to 2012. The decrease was primarily
due to declines in consumer loans, debt securities and other
earning assets, partially offset by an increase in commercial loans.
Net interest yield on earning assets excluding trading-related
activities increased 17 bps to 3.07 percent for 2013 compared
to 2012 due to the same factors as described above.
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 44, 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 9 provides additional
clarity in assessing our results.
Table 9 Net Interest Income Excluding Trading-related
Net Interest Income
(Dollars in millions)
2013
2012
Net interest income (FTE basis)
As reported (1)
Impact of trading-related net interest income
Net interest income excluding trading-related
$
43,124
(3,868)
$
41,557
(3,308)
net interest income (2)
$
39,256
$
38,249
Average earning assets
As reported
Impact of trading-related earning assets
Average earning assets excluding trading-
$ 1,746,974
(469,048)
$1,769,969
(449,660)
related earning assets (2)
$ 1,277,926
$1,320,309
Net interest yield contribution (FTE basis)
As reported (1)
Impact of trading-related activities
Net interest yield on earning assets excluding
trading-related activities (2)
2.47%
0.60
2.35%
0.55
3.07%
2.90%
(1) Net interest income and net interest yield include fees earned on overnight deposits placed
with the Federal Reserve and fees earned on deposits, primarily overnight, placed with certain
non-U.S. central banks.
(2) Represents a non-GAAP financial measure.
30 Bank of America 2013
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Business Segment Operations
Segment Description and Basis of Presentation
We report the results of our operations through five business segments: CBB, CRES, GWIM, Global Banking and Global Markets, with
the remaining operations recorded in All Other. The primary activities, products or businesses of the business segments and All Other
are shown below. For additional detailed information, see the business segment and All Other discussions which follow.
76788ba_financials.indd 31
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Bank of America 2013 31
We prepare and evaluate segment results using certain non-GAAP financial measures. For additional information, see Supplemental
Financial Data on page 29. Table 10 provides selected summary financial data for our business segments and All Other for 2013
compared to 2012.
Table 10 Business Segment Results
(Dollars in millions)
Consumer & Business Banking
Consumer Real Estate Services
Global Wealth & Investment Management
Global Banking
Global Markets
All Other
Total FTE basis
FTE adjustment
Total Consolidated
Total Revenue (1)
2013
$ 29,867
7,716
17,790
16,481
16,058
1,889
89,801
(859)
$ 88,942
2012
$ 29,790
8,751
16,518
15,674
14,284
(782)
84,235
(901)
$ 83,334
$
$
Provision for Credit
Losses
2013
2012
3,107
(156)
56
1,075
140
(666)
3,556
—
3,556
$
$
4,148
1,442
266
(342)
34
2,621
8,169
—
8,169
Noninterest Expense
Net Income (Loss)
2013
$ 16,357
16,013
13,038
7,552
12,013
4,241
69,214
—
$ 69,214
2012
$ 16,995
17,190
12,721
7,619
11,295
6,273
72,093
—
$ 72,093
2013
2012
$
$
6,588
(5,155)
2,974
4,974
1,563
487
11,431
—
11,431
$
$
5,546
(6,439)
2,245
5,344
1,229
(3,737)
4,188
—
4,188
(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, see Supplemental Financial
Data on page 29, and for a corresponding reconciliation to a GAAP financial measure, see Statistical Table X V.
The management accounting and reporting process derives
results by utilizing allocation
segment and business
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 ALM activities.
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.
Effective January 1, 2013, on a prospective basis, we adjusted
the amount of capital being allocated to our business segments.
The adjustment reflected a refinement to the prior-year
methodology (economic capital) which focused solely on internal
risk-based economic capital models. The refined methodology
(allocated capital) now also considers the effect of regulatory
capital requirements in addition to internal risk-based economic
capital models. The Corporation’s internal risk-based capital
models use a risk-adjusted methodology incorporating each
segment’s credit, market, interest rate, business and operational
risk components. For more information on the nature of these
risks, see Managing Risk on page 57 and Strategic Risk
Management on page 61. The capital allocated to the business
segments is currently referred to as allocated capital and, prior to
January 1, 2013, was referred to as economic capital, both of
which represent non-GAAP financial measures. For purposes of
goodwill impairment testing, the Corporation utilizes allocated
equity as a proxy for the carrying value of its reporting units. For
additional information, see Note 8 – Goodwill and Intangible Assets
to the Consolidated Financial Statements.
Allocated capital is subject to change over time, and as part of
our normal annual planning process, the capital being allocated
to our business segments is expected to change in the first quarter
of 2014. We expect that this change will result in a reduction of
unallocated tangible capital and an aggregate increase to the
amount of capital being allocated to the business segments.
For more information on the business segments and
reconciliations to consolidated total revenue, net income (loss)
and year-end total assets, see Note 24 – Business Segment
Information to the Consolidated Financial Statements.
32 Bank of America 2013
76788ba_financials.indd 32
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Consumer & Business Banking
(Dollars in millions)
Net interest income (FTE basis)
Noninterest income:
Card income
Service charges
All other income (loss)
Total noninterest income
Total revenue, net of interest expense (FTE basis)
Provision for credit losses
Noninterest expense
Income before income taxes
Income tax expense (FTE basis)
Net income
Net interest yield (FTE basis)
Return on average allocated capital (1)
Return on average economic capital (1)
Efficiency ratio (FTE basis)
Balance Sheet
Average
Total loans and leases
Total earning assets (2)
Total assets (2)
Total deposits
Allocated capital (1)
Economic capital (1)
Deposits
Consumer
Lending
Total Consumer &
Business Banking
2013
2012
$
9,808
$
9,046
2013
$ 10,243
2012
$ 10,807
2013
$ 20,051
2012
$ 19,853
% Change
1%
60
4,208
509
4,777
14,585
299
10,927
3,359
1,232
2,127
62
4,277
397
4,736
13,782
488
11,310
1,984
723
1,261
$
$
4,744
—
295
5,039
15,282
2,808
5,430
7,044
2,583
4,461
$
5,253
—
(52)
5,201
16,008
3,660
5,685
6,663
2,378
4,285
$
$
4,804
4,208
804
9,816
29,867
3,107
16,357
10,403
3,815
6,588
5,315
4,277
345
9,937
29,790
4,148
16,995
8,647
3,101
5,546
$
1.88%
13.82
—
74.92
1.90%
—
9.72
82.07
7.18%
30.60
—
35.53
7.18%
—
38.83
35.51
3.72%
21.98
—
54.76
4.04%
—
23.12
57.05
$ 22,437
522,870
555,653
518,470
15,400
—
$ 23,369
477,142
510,384
474,822
—
12,985
$ 142,133
142,725
151,443
n/m
14,600
—
$149,667
150,515
158,333
n/m
—
11,066
$ 164,570
539,213
580,714
518,980
30,000
—
$173,036
491,767
532,827
475,180
—
24,051
(10)
(2)
133
(1)
—
(25)
(4)
20
23
19
(5)
10
9
9
n/m
n/m
Year end
Total loans and leases
Total earning assets (2)
Total assets (2)
Total deposits
(1) Effective January 1, 2013, we revised, on a prospective basis, the methodology for allocating capital to the business segments. In connection with the change in methodology, we updated the
$ 142,516
143,917
153,394
n/m
$146,359
146,809
155,408
n/m
$ 22,907
498,147
531,354
495,711
$ 22,574
534,946
567,837
530,947
$ 165,090
550,610
592,978
531,707
$169,266
513,109
554,915
496,159
(2)
7
7
7
applicable terminology in the above table to allocated capital from economic capital as reported in prior periods. For additional information, see Business Segment Operations on page 31.
(2) 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
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 5,100
banking centers, 16,300 ATMs, nationwide call centers, and online
and mobile platforms. During 2013, Business Banking results
were moved into Deposits as we continue to integrate these
businesses. Also during 2013, consumer Dealer Financial
Services (DFS) results were moved into CBB from Global Banking
to align this business more closely with our consumer lending
activity and better serve the needs of our customers. As a result,
Card Services was renamed Consumer Lending. Prior periods were
reclassified to conform to current period presentation.
CBB Results
Net income for CBB increased $1.0 billion to $6.6 billion in 2013
compared to 2012 primarily driven by lower provision for credit
losses and noninterest expense. Net interest income of $20.1
billion remained relatively unchanged as the impact of higher
deposit balances was offset by the impact of lower average loan
balances. Noninterest income of $9.8 billion remained relatively
unchanged as the allocation of certain card revenue to GWIM for
clients with a credit card, as described below, and lower deposit
service charges were offset by the net impact of consumer
protection products, primarily due to charges recorded in 2012.
The provision for credit losses decreased $1.0 billion to $3.1
billion in 2013 primarily as a result of improvements in credit
quality. Noninterest expense decreased $638 million to $16.4
billion driven by lower operating, personnel and FDIC expenses.
76788ba_financials.indd 33
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Bank of America 2013 33
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 40.
Net income for Deposits increased $866 million to $2.1 billion
in 2013 driven by higher revenue, a decrease in noninterest
expense and lower provision for credit losses. Net interest income
increased $762 million to $9.8 billion driven by the impact of
higher deposit balances, a customer shift to higher spread liquid
products and continued pricing discipline, partially offset by
compressed deposit spreads due to the continued low rate
environment. Noninterest income of $4.8 billion remained
relatively unchanged.
The provision for credit losses decreased $189 million to $299
million in 2013 due to improvements in credit quality in Business
Banking. Noninterest expense decreased $383 million to $10.9
billion due to lower operating, personnel and FDIC expenses.
Average loans decreased $932 million to $22.4 billion in 2013
primarily driven by continued run-off of non-core portfolios. Average
deposits increased $43.6 billion to $518.5 billion in 2013 driven
by a customer shift to more liquid products in the low rate
environment. Additionally, $15.5 billion of the increase in average
deposits was due to net transfers from other businesses, largely
GWIM. Growth in checking, traditional savings and money market
savings of $49.5 billion was partially offset by a decline in time
deposits of $5.9 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 seven bps to 11 bps.
Key Statistics
Total deposit spreads (excludes noninterest costs)
1.52%
1.81%
2013
2012
Year end
Client brokerage assets (in millions)
Online banking active accounts (units in thousands)
Mobile banking active accounts (units in thousands)
Banking centers
ATMs
$96,048
29,950
14,395
5,151
16,259
$75,946
29,638
12,013
5,478
16,347
Client brokerage assets increased $20.1 billion in 2013 driven
by market valuations and increased account flows. Mobile banking
customers increased 2.4 million reflecting continuing changes in
our customers’ banking preferences. The number of banking
centers declined 327 and ATMs declined 88 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.
Beginning in March 2013, the revenue and expense associated
with GWIM clients that hold credit cards was allocated to GWIM.
Beginning in the fourth quarter of 2013, Consumer Lending
migrated these related credit card loan balances to GWIM. For
more information on the migration of customer balances to GWIM,
see GWIM on page 40.
On July 31, 2013, the U.S. District Court for the District of
Columbia issued a ruling regarding the Federal Reserve’s rules
implementing the Dodd-Frank Wall Street Reform and Consumer
Protection Act’s (Financial Reform Act) Durbin Amendment. The
ruling requires the Federal Reserve to reconsider the current $0.21
per transaction cap on debit card interchange fees. The Federal
Reserve is appealing the ruling and final resolution is expected in
the first half of 2014. If the Federal Reserve, upon final resolution,
implements a lower per transaction cap than the initial range, it
may have a significant adverse impact on our debit card
interchange fee revenue.
Net income for Consumer Lending increased $176 million to
$4.5 billion in 2013 as lower provision for credit losses and
noninterest expense were partially offset by a decrease in revenue.
Net interest income decreased $564 million to $10.2 billion driven
by the impact of lower average loan balances. Noninterest income
decreased $162 million to $5.0 billion driven by the allocation of
certain card revenue to GWIM for clients with a credit card and the
net impact of portfolio sales, partially offset by the net impact of
consumer protection products, primarily due to charges recorded
in 2012.
34 Bank of America 2013
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The provision for credit losses decreased $852 million to $2.8
billion in 2013 due to improvements in credit quality. Noninterest
expense decreased $255 million to $5.4 billion driven by lower
operating and personnel expenses.
Average loans decreased $7.5 billion to $142.1 billion in 2013
primarily driven by charge-offs and continued run-off of non-core
portfolios.
During 2013, the total Corporation U.S. credit card risk-
adjusted margin increased 114 bps due to an improvement in
credit quality. During 2013, total Corporation U.S. credit card
purchase volumes increased $12.4 billion, or six percent, to
$205.9 billion and debit card purchase volumes increased $8.7
billion, or three percent, to $267.1 billion, reflecting higher levels
of consumer spending.
Key Statistics
(Dollars in millions)
Total Corporation U.S. credit card (1)
Gross interest yield
Risk-adjusted margin
New accounts (in thousands)
Purchase volumes
2013
2012
9.73%
8.68
3,911
$ 205,914
$ 267,087
10.02%
7.54
3,258
$193,500
$258,363
Debit card purchase volumes
(1) In addition to the U.S. credit card portfolio in CBB, the remaining U.S. credit card portfolio is in
GWIM.
76788ba_financials.indd 35
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Bank of America 2013 35
Consumer Real Estate Services
(Dollars in millions)
Net interest income (FTE basis)
Noninterest income:
Mortgage banking income
All other income (loss)
Total noninterest income
Total revenue, net of interest expense (FTE basis)
Provision for credit losses
Noninterest expense
Income (loss) before income taxes
Income tax expense (benefit) (FTE basis)
Net income (loss)
Net interest yield (FTE basis)
Efficiency ratio (FTE basis)
Balance Sheet
Average
Total loans and leases
Total earning assets
Total assets
Allocated capital (1)
Economic capital (1)
Home Loans
Legacy Assets &
Servicing
Total Consumer Real
Estate Services
2013
2012
2013
2012
2013
2012
% Change
$
1,349
$
1,361
$
1,541
$
1,569
$
2,890
$
2,930
(1)%
1,916
(6)
1,910
3,259
127
3,318
(186)
(68)
(118) $
$
3,284
1
3,285
4,646
72
3,195
1,379
502
877
2,669
247
2,916
4,457
2,269
267
2,536
4,105
4,585
241
4,826
7,716
5,553
268
5,821
8,751
(283)
12,695
(7,955)
(2,918)
1,370
13,995
(11,260)
(3,944)
$ (5,037) $ (7,316)
(156)
16,013
(8,141)
(2,986)
1,442
17,190
(9,881)
(3,442)
$ (5,155) $ (6,439)
2.54%
n/m
2.41%
68.77
3.19%
n/m
2.45%
n/m
2.85%
n/m
2.43%
n/m
$ 47,675
53,148
53,429
6,000
—
$ 50,023
56,581
57,552
—
3,734
$ 42,603
48,272
67,131
18,000
—
$ 53,501
64,055
87,817
—
9,942
$ 90,278
101,420
120,560
24,000
—
$103,524
120,636
145,369
—
13,676
(17)
(10)
(17)
(12)
n/m
(7)
(18)
(13)
(20)
(13)
(16)
(17)
n/m
n/m
Year end
Total loans and leases
Total earning assets
Total assets
(1) Effective January 1, 2013, we revised, on a prospective basis, the methodology for allocating capital to the business segments. In connection with the change in methodology, we updated the
$ 46,918
52,580
75,594
$ 94,660
106,974
131,059
$ 89,753
97,163
113,386
$ 51,021
54,071
53,927
$ 47,742
54,394
55,465
$ 38,732
43,092
59,459
(5)
(9)
(13)
applicable terminology in the above table to allocated capital from economic capital as reported in prior periods. For additional information, see Business Segment Operations on page 31.
n/m = not meaningful
CRES operations include Home Loans and Legacy Assets &
Servicing. Home Loans is responsible for ongoing 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 37. In addition,
Legacy Assets & Servicing is responsible for managing legacy
exposures related to CRES (e.g., 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 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 customers and their
related loan balances between GWIM and CRES. For more
information on the transfer of customer balances, see GWIM on
page 40.
CRES Results
The net loss for CRES decreased $1.3 billion to $5.2 billion for
2013 compared to 2012 primarily driven by lower provision for
credit losses and lower noninterest expense, partially offset by
lower mortgage banking income. Mortgage banking income
decreased $1.0 billion due to both lower servicing income and
lower core production revenue, partially offset by a decrease of
$3.1 billion in representations and warranties provision as 2012
included provision related to the January 6, 2013 settlement with
FNMA (the FNMA Settlement). The provision for credit losses
improved $1.6 billion to a benefit of $156 million primarily driven
by improved delinquencies, increased home prices and continued
36 Bank of America 2013
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loan balance run-off. Noninterest expense decreased $1.2 billion
primarily due to lower operating expenses in Legacy Assets &
Servicing, partially offset by higher litigation expense.
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 3,200 mortgage loan officers, including 1,700
banking center mortgage loan officers covering nearly 2,500
banking centers, and a 900-person centralized sales force based
in five call centers.
Net income for Home Loans decreased $995 million to a loss
of $118 million driven by a decrease in noninterest income, an
increase in noninterest expense and higher provision for credit
losses. Noninterest income decreased $1.4 billion due to lower
mortgage banking income driven by a decline in core production
revenue as a result of continued industry-wide margin compression
and lower loan application volumes. The provision for credit losses
increased $55 million reflecting a slower rate of credit quality
improvement than in 2012. Noninterest expense increased $123
million primarily due to higher production costs. The higher
production costs were primarily personnel-related as we added
mortgage loan officers earlier in 2013, primarily in banking centers,
and other employees in sales and fulfillment areas in order to
expand capacity and enhance customer service. While staffing
increased in early 2013, total staffing at year end decreased
approximately 21 percent from December 31, 2012 following a
sharp decline in the market demand for mortgages late in 2013,
which is expected to continue into 2014.
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 30 percent, 38 percent and 42 percent of the
total mortgage serviced portfolio, as measured by unpaid principal
balance, at December 31, 2013, 2012 and 2011, respectively.
Legacy Assets & Servicing results reflect the net cost of legacy
exposures that are included in the results of CRES, including
representations and warranties provision, litigation expense,
financial results of the CRES home equity portfolio selected as
part of the Legacy Owned Portfolio, the financial results of the
servicing operations and the results of MSR activities, including
net hedge results. The financial results of the servicing operations
reflect certain revenues and expenses on loans serviced for
others, including owned loans serviced for Home Loans, GWIM
and All Other.
Servicing activities include collecting cash for principal,
interest and escrow payments from borrowers, disbursing
customer draws for lines of credit, accounting for and remitting
principal and interest payments to investors and escrow payments
to third parties, and responding to customer inquiries. Our home
retention efforts, including single point of contact resources, are
also part of our servicing activities, along with the 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 53.
The net loss for Legacy Assets & Servicing decreased $2.3
billion to $5.0 billion driven by a decrease in the provision for credit
losses, a decrease in noninterest expense and an increase in
noninterest income. Noninterest income increased $380 million
due to lower representations and warranties provision, largely
offset by lower servicing income primarily driven by a decline in
favorable MSR net-of-hedge
the servicing portfolio,
performance and the divestiture of an ancillary servicing business
in 2012. The provision for credit losses decreased $1.7 billion to
a benefit of $283 million primarily driven by
improved
delinquencies, increased home prices and continued loan balance
run-off.
less
Noninterest expense decreased $1.3 billion primarily due to a
$1.6 billion decrease in default-related staffing and other default-
related servicing expenses, lower costs as a result of the
divestiture of an ancillary servicing business in 2012 and lower
mortgage-related assessments, waivers and similar costs related
to foreclosure delays. Noninterest expense in 2012 included a
$1.1 billion provision for the 2013 IFR Acceleration Agreement.
These improvements were partially offset by an increase of $2.2
billion in litigation expense driven by residential mortgage-backed
securities (RMBS) exposures and the settlement with MBIA Inc.
and certain of its affiliates (MBIA) in 2013 (the MBIA Settlement).
For more information on the 2013 IFR Acceleration Agreement,
see Off-Balance Sheet Arrangements and Contractual Obligations
on page 48 and for more information on RMBS litigation, see Note
12 – Commitments and Contingencies to the Consolidated Financial
Statements. We expect noninterest expense in Legacy Assets &
Servicing, excluding litigation, to decrease to approximately $1.1
billion per quarter by the fourth quarter of 2014 compared to $1.8
billion during the fourth quarter of 2013.
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)
portfolios as well as certain loans that met a pre-defined
delinquency status or probability of default threshold as of January
1, 2011 are also included in the Legacy Portfolios. Since
determining the pool of loans to be included in the Legacy Portfolios
as of January 1, 2011, the criteria have not changed for these
portfolios, but will continue to be evaluated over time.
Legacy Owned Portfolio
The Legacy Owned Portfolio includes those loans that met the
criteria as described above and are on the balance sheet of the
Corporation. The home equity loan portfolio is held on the balance
sheet of Legacy Assets & Servicing, and the residential mortgage
loan portfolio is held on the balance sheet of All Other. The financial
results of the on-balance sheet loans are reported in the segment
that owns the loans or in All Other. Total loans in the Legacy Owned
Portfolio decreased $19.0 billion in 2013 to $112.1 billion at
December 31, 2013, of which $38.7 billion was 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
Bank of America 2013 37
76788ba_financials.indd 37
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to paydowns, PCI write-offs, charge-offs and loan sales, partially
offset by the addition of loans repurchased in connection with the
FNMA Settlement. For more information on the loans repurchased
in connection with the FNMA Settlement, see Consumer Portfolio
Credit Risk Management on page 73.
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 28 percent, 38 percent and 41 percent of the total
residential mortgage serviced portfolio of $719 billion, $1.2 trillion
and $1.6 trillion as measured by unpaid principal balance at
December 31, 2013, 2012 and 2011, respectively. The decline in
the Legacy Residential Mortgage Serviced Portfolio in 2013 was
primarily due to MSR sales, loan sales and other servicing
transfers, modifications, paydowns and payoffs.
Legacy Residential Mortgage Serviced Portfolio, a subset
of the Residential Mortgage Serviced Portfolio (1, 2)
(Dollars in billions)
Unpaid principal balance
Residential mortgage loans
Total
60 days or more past due
December 31
2012
2011
2013
$
$
203
49
$
467
137
659
235
Number of loans serviced (in thousands)
Residential mortgage loans
Total
60 days or more past due
1,083
258
2,542
649
3,440
1,061
(1) Excludes loans for which servicing transferred to third parties as of December 31, 2013, with
an effective MSR sale date of January 2, 2014, totaling $57 million of unpaid principal balance.
(2) Excludes $39 billion, $52 billion and $84 billion of home equity loans and HELOCs at
December 31, 2013, 2012 and 2011, respectively.
Non-Legacy Portfolio
As previously discussed, Legacy Assets & Servicing is responsible
for all of our servicing activities. The table below summarizes the
balances of the residential mortgage loans that are not included
in the Legacy Serviced Portfolio (the Non-Legacy Residential
Mortgage Serviced Portfolio) representing 72 percent, 62 percent
and 59 percent of the total residential mortgage serviced portfolio,
as measured by unpaid principal balance, at December 31, 2013,
2012 and 2011, respectively. The decline in the Non-Legacy
Residential Mortgage Serviced Portfolio was primarily due to MSR
sales and other servicing transfers, paydowns and payoffs.
Non-Legacy Residential Mortgage Serviced Portfolio, a
subset of the Residential Mortgage Serviced Portfolio (1, 2)
(Dollars in billions)
Unpaid principal balance
Residential mortgage loans
Total
60 days or more past due
December 31
2012
2011
2013
$
$
516
12
$
755
22
953
17
Number of loans serviced (in thousands)
Residential mortgage loans
Total
60 days or more past due
3,267
67
4,764
124
5,731
95
(1) Excludes loans for which servicing transferred to third parties as of December 31, 2013, with
an effective MSR sale date of January 2, 2014, totaling $163 million of unpaid principal balance.
(2) Excludes $52 billion, $58 billion and $67 billion of home equity loans and HELOCs at
December 31, 2013, 2012 and 2011, respectively.
Mortgage Banking Income
CRES mortgage banking income is categorized into production and
servicing income. Core production income is comprised primarily
of revenue from the fair value gains and losses recognized on our
interest rate lock commitments (IRLCs) and LHFS, the related
secondary market execution, 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
(Dollars in millions)
Production income:
Core production revenue
Representations and warranties provision
Total production income (loss)
Servicing income:
Servicing fees
Amortization of expected cash flows (1)
Fair value changes of MSRs, net of risk management
activities used to hedge certain market risks (2)
Other servicing-related revenue
Total net servicing income
Total CRES mortgage banking income
Eliminations (3)
Total consolidated mortgage banking income
2013
2012
$ 2,543
(840)
1,703
$ 3,760
(3,939)
(179)
3,030
(1,043)
4,729
(1,484)
867
1,852
28
2,882
4,585
(711)
$ 3,874
635
5,732
5,553
(803)
$ 4,750
(1) Represents the net change in fair value of the MSR asset due to the recognition of modeled
cash flows.
Includes gains (losses) on sales of MSRs.
Includes the effect of transfers of mortgage loans from CRES to the ALM portfolio in All Other.
(2)
(3)
38 Bank of America 2013
76788ba_financials.indd 38
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Core production revenue decreased $1.2 billion due to
industry-wide margin compression combined with lower loan
application volumes as described below.
The representations and warranties provision decreased $3.1
billion in 2013 to $840 million as 2012 included $2.5 billion in
provision related to the FNMA Settlement and $500 million for
obligations to FNMA related to MI rescissions. Net servicing
income decreased $2.9 billion to $2.9 billion driven by lower
servicing fees due to a smaller servicing portfolio, less favorable
MSR net-of-hedge performance and lower ancillary income due to
the divestiture of an ancillary business in 2012. The decline in
the size of our servicing portfolio was driven by strategic sales of
MSRs as well as loan prepayment activity, which exceeded new
originations primarily due to our exit from non-retail channels. For
more information on sales of MSRs, see Sales of Mortgage
Servicing Rights on page 39.
Key Statistics
(Dollars in millions, except as noted)
2013
2012
Loan production
Total Corporation (1):
First mortgage
Home equity
CRES:
First mortgage
Home equity
$ 83,421
6,355
$ 75,074
3,585
$ 66,914
5,498
$ 55,518
2,832
Year end
Mortgage serviced portfolio (in billions) (2, 3)
Mortgage loans serviced for investors
(in billions)
Mortgage servicing rights:
Balance
Capitalized mortgage servicing rights
(% of loans serviced for investors)
$
810
$
1,332
550
1,045
5,042
5,716
92 bps
55 bps
(1)
In addition to loan production in CRES, the remaining first mortgage and home equity loan
production is primarily in GWIM.
(2) Servicing of residential mortgage loans, HELOCs and home equity loans.
(3) Excludes loans for which servicing transferred to third parties as of December 31, 2013, with
an effective MSR sale date of January 2, 2014, totaling $220 million.
Despite a decline in the overall mortgage market because of
higher interest rates during the second half of 2013, first mortgage
loan originations in CRES increased $11.4 billion, or 21 percent,
to $66.9 billion in 2013, and for the total Corporation, increased
$8.3 billion to $83.4 billion as we increased market share due to
higher fulfillment capacity. The increase in interest rates also had
an adverse impact on our mortgage loan applications, particularly
for refinance mortgage loans. Our volume of mortgage applications
decreased 15 percent in 2013 corresponding to a decline in the
estimated overall U.S. demand for mortgages.
During 2013, 82 percent of our first mortgage production
volume was for refinance originations and 18 percent was for
purchase originations compared to 84 percent and 16 percent in
2012. HARP refinance originations were 23 percent of all refinance
originations compared to 31 percent in 2012. Making Home
Affordable non-HARP refinance originations were 19 percent of all
refinance originations as compared to 12 percent in 2012. The
remaining 58 percent of refinance originations was conventional
refinances, and remained relatively unchanged from 2012.
Home equity production was $6.4 billion for 2013 compared
to $3.6 billion for 2012 with the increase due to a higher demand
in the market based on improving housing trends, and increased
market share driven by improved banking center engagement with
customers and more competitive pricing.
Mortgage Servicing Rights
At December 31, 2013, the consumer MSR balance was $5.0
billion, which represented 92 bps of the related unpaid principal
balance compared to $5.7 billion, or 55 bps of the related unpaid
principal balance at December 31, 2012. The consumer MSR
balance decreased $674 million during 2013 primarily driven by
MSR sales and the recognition of modeled cash flows. These
declines were partially offset by the increase in value driven by
higher mortgage rates, which resulted in lower forecasted
prepayment speeds and was the primary driver for the increase in
the MSRs as a percentage of unpaid principal balance. For more
information on our servicing activities, see Off-Balance Sheet
Arrangements and Contractual Obligations – Servicing,
Foreclosure and Other Mortgage Matters on page 53. For more
information on MSRs, see Note 23 – Mortgage Servicing Rights to
the Consolidated Financial Statements.
Sales of Mortgage Servicing Rights
As previously disclosed, during 2013, we entered into definitive
agreements with certain counterparties to sell the servicing rights
on certain residential mortgage loans serviced for others, with an
aggregate unpaid principal balance of approximately $301 billion.
The sales involved approximately two million loans serviced by us
as of the applicable contract dates, including approximately
180,000 residential mortgage loans and 11,700 home equity
loans that were 60 days or more past due based upon current
estimates.
The transfers of servicing rights were substantially completed
in the first nine months of 2013. These sales led to a reduction
in servicing revenue in the fourth quarter of 2013 of approximately
$150 million compared to the fourth quarter of 2012.
76788ba_financials.indd 39
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Bank of America 2013 39
Global Wealth & Investment Management
(Dollars in millions)
Net interest income (FTE basis)
Noninterest income:
Investment and brokerage services
All other income
Total noninterest income
Total revenue, net of interest expense (FTE basis)
Provision for credit losses
Noninterest expense
Income before income taxes
Income tax expense (FTE basis)
Net income
Net interest yield (FTE basis)
Return on average allocated capital (1)
Return on average economic capital (1)
Efficiency ratio (FTE basis)
Balance Sheet
Average
Total loans and leases
Total earning assets
Total assets
Total deposits
Allocated capital (1)
Economic capital (1)
2013
2012
% Change
$
6,064
$
5,827
4%
9,709
2,017
11,726
17,790
56
13,038
4,696
1,722
2,974
8,849
1,842
10,691
16,518
266
12,721
3,531
1,286
2,245
$
$
2.41%
29.90
—
73.29
2.35%
—
30.80
77.02
$ 111,023
251,394
270,788
242,161
10,000
—
$ 100,456
248,475
268,475
242,384
—
7,359
10
10
10
8
(79)
2
33
34
32
11
1
1
—
n/m
n/m
Year end
Total loans and leases
Total earning assets
Total assets
Total deposits
(1) Effective January 1, 2013, we revised, on a prospective basis, the methodology for allocating capital to the business segments. In connection with the change in methodology, we updated the
$ 105,928
277,121
297,326
266,188
$ 115,846
254,031
274,112
244,901
9
(8)
(8)
(8)
applicable terminology in the above table to allocated capital from economic capital as reported in prior periods. For additional information, see Business Segment Operations on page 31.
n/m = not meaningful
GWIM consists of two primary businesses: Merrill Lynch Global
Wealth Management (MLGWM) and U.S. Trust, Bank of America
Private Wealth Management (U.S. Trust).
MLGWM’s advisory business provides a high-touch client
experience through a network of financial advisors focused on
clients with over $250,000 in total investable assets. MLGWM
provides tailored solutions to meet our clients’ needs through a
full set of brokerage, banking and retirement products.
U.S. Trust, together with MLGWM’s Private Banking &
Investments Group, provides comprehensive wealth management
solutions targeted to high net-worth and ultra high net-worth
clients, as well as customized solutions to meet clients’ wealth
structuring, investment management, trust and banking needs,
including specialty asset management services.
Net income increased $729 million to $3.0 billion in 2013
compared to 2012 driven by higher revenue and lower provision
for credit losses, partially offset by higher noninterest expense.
Revenue increased $1.3 billion to $17.8 billion primarily driven by
higher asset management fees related to long-term AUM inflows
and higher market levels, as well as higher net interest income.
The provision for credit losses decreased $210 million to $56
million driven by continued improvement in the home equity
portfolio. Noninterest expense increased $317 million to $13.0
billion primarily due to higher volume-driven expenses and higher
support costs, partially offset by lower other personnel costs.
In 2013, revenue from MLGWM was $14.8 billion, up eight
percent, and revenue from U.S. Trust was $3.0 billion, up nine
percent, both driven by the same factors as described above.
40 Bank of America 2013
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Net Migration Summary
GWIM results are impacted by the net migration of clients and their
related deposit and loan balances to or from CBB, CRES and the
ALM portfolio, as presented in the table below. We move clients
between business segments to better meet their needs. Transfers
in 2013 were primarily comprised of the following: net deposit
balances of $21 billion to CBB; HELOC balances of $5 billion to
CRES; and credit card balances of $3 billion from CBB. Beginning
in March 2013, revenue and expense related to credit card balance
transfers are included in GWIM and included in CBB for all prior
periods. The balances in the table below represent transfers that
occurred during 2013 and 2012.
Net Migration Summary
(Dollars in millions)
Total deposits, net – GWIM from / (to) CBB
Total loans, net – GWIM from / (to) CBB, CRES and the
December 31
2013
2012
$ (20,974) $
1,170
ALM portfolio
(1,356)
(335)
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)
Assets under management
Brokerage assets
Assets in custody
Deposits
Loans and leases (1)
Total client balances
December 31
$
2013
821,449
1,045,122
136,190
244,901
118,776
$ 2,366,438
2012
$ 698,095
960,351
117,686
266,188
109,305
$ 2,151,625
(1) Includes margin receivables which are classified in customer and other receivables on the
Consolidated Balance Sheet.
The increase of $214.8 billion, or 10 percent, in client balances
was driven by higher market levels and record long-term AUM
inflows, partially offset by the deposit balance transfer of $21.0
billion to CBB as described in the Net Migration Summary section.
76788ba_financials.indd 41
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Bank of America 2013 41
Global Banking
(Dollars in millions)
Net interest income (FTE basis)
Noninterest income:
Service charges
Investment banking fees
All other income
Total noninterest income
Total revenue, net of interest expense (FTE basis)
Provision for credit losses
Noninterest expense
Income before income taxes
Income tax expense (FTE basis)
Net income
Net interest yield (FTE basis)
Return on average allocated capital (1)
Return on average economic capital (1)
Efficiency ratio (FTE basis)
Balance Sheet
Average
Total loans and leases
Total earning assets
Total assets
Total deposits
Allocated equity (1)
Economic capital (1)
2013
2012
% Change
$
8,914
$
8,135
10%
2,787
3,235
1,545
7,567
16,481
1,075
7,552
7,854
2,880
4,974
2.96%
21.64
—
45.82
$
2,867
2,793
1,879
7,539
15,674
(342)
7,619
8,397
3,053
5,344
2.90%
—
27.69
48.61
$
$ 257,245
301,204
343,464
237,457
23,000
—
$ 224,336
280,605
322,701
223,940
—
19,312
(3)
16
(18)
—
5
n/m
(1)
(6)
(6)
(7)
15
7
6
6
n/m
n/m
Year end
Total loans and leases
Total earning assets
Total assets
Total deposits
(1) Effective January 1, 2013, we revised, on a prospective basis, the methodology for allocating capital to the business segments. In connection with the change in methodology, we updated the
$ 242,340
288,072
331,611
243,306
$ 269,469
337,154
379,207
265,718
11
17
14
9
applicable terminology in the above table to allocated capital from economic capital as reported in prior periods. For additional information, see Business Segment Operations on page 31.
n/m = not meaningful
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.
During 2013, consumer DFS results were moved to CBB from
Global Banking to align this business more closely with our
consumer lending activity and better serve the needs of our
customers. Prior periods were reclassified to conform to current
period presentation.
Net income for Global Banking decreased $370 million to $5.0
billion in 2013 compared to 2012 primarily driven by an increase
in the provision for credit losses, partially offset by higher revenue.
Revenue increased $807 million to $16.5 billion in 2013 as higher
net interest income due to the impact of loan growth and higher
investment banking fees were partially offset by lower other income
due to gains on the liquidation of certain portfolios in 2012.
The provision for credit losses increased $1.4 billion to $1.1
billion in 2013 compared to a benefit of $342 million in 2012
primarily due to increased reserves as a result of commercial loan
growth.
Noninterest expense of $7.6 billion remained relatively
unchanged in 2013 primarily due to lower personnel expense as
we continue to streamline our business operations and achieve
cost savings, largely offset by higher litigation expense.
42 Bank of America 2013
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Global Corporate and Global Commercial Banking
Global Corporate and Global Commercial Banking each include
Business Lending and 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. Treasury
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 excludes certain capital
markets activity in Global Banking.
Global Corporate and Global Commercial Banking
(Dollars in millions)
Revenue
Business Lending
Treasury Services
Total revenue, net of interest expense
Balance Sheet
Average
Total loans and leases
Total deposits
Year end
Total loans and leases
Total deposits
Global Corporate Banking
Global Commercial Banking
Total
2013
2012
2013
2012
2013
2012
$
$
$
$
3,407
2,815
6,222
$
$
3,201
2,633
5,834
126,669
128,198
$ 110,130
114,200
130,092
144,312
$ 116,239
131,184
$
$
$
$
3,967
2,939
6,906
$
$
3,622
2,988
6,610
130,563
109,225
$ 113,640
109,704
139,374
121,407
$ 126,093
112,083
$
$
$
$
7,374
5,754
13,128
$
$
6,823
5,621
12,444
257,232
237,423
$ 223,770
223,904
269,466
265,719
$ 242,332
243,267
Global Corporate and Global Commercial Banking revenue
increased $684 million in 2013 due to higher revenue in both
Business Lending and Treasury Services.
Business Lending revenue in Global Corporate Banking
increased $206 million in 2013 due to higher net interest income
driven by the impact of loan growth, partially offset by lower
accretion on acquired portfolios, and gains on the liquidation of
certain portfolios in 2012. Business Lending revenue in Global
Commercial Banking increased $345 million due to higher net
interest income driven by the impact of loan growth in the
commercial and industrial, and commercial real estate portfolios,
as well as higher accretion on acquired portfolios.
Treasury Services revenue in Global Corporate Banking
increased $182 million in 2013 driven by growth in U.S. and non-
U.S. deposit balances, partially offset by the impact of the low rate
environment. Treasury Services revenue in Global Commercial
Banking declined $49 million due to the impacts of lower average
deposit balances and the low rate environment.
Average loans and leases in Global Corporate and Global
Commercial Banking increased 15 percent in 2013 driven by
growth in the commercial and industrial, and commercial real
estate portfolios. Average deposits in Global Corporate and Global
Commercial Banking increased six percent 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
contribution by and involvement of 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
(Dollars in millions)
Products
Advisory
Debt issuance
Equity issuance
Gross investment banking
$
fees
Self-led
Total investment banking
fees
Global Banking
2013
2012
Total Corporation
2013
2012
$
1,022
1,620
593
3,235
(92)
995
1,390
408
2,793
(43)
$
1,131
3,805
1,469
$ 1,066
3,362
1,026
6,405
(279)
5,454
(155)
$
3,143
$ 2,750
$
6,126
$ 5,299
Total Corporation investment banking fees of $6.1 billion,
excluding self-led deals, included within Global Banking and Global
Markets, increased 16 percent in 2013 due to strong equity
issuance fees attributable to a significant increase in global equity
capital markets volume and higher debt issuance fees, primarily
within leveraged finance and investment-grade underwriting.
Bank of America 2013 43
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Global Markets
(Dollars in millions)
Net interest income (FTE basis)
Noninterest income:
Investment and brokerage services
Investment banking fees
Trading account profits
All other income
Total noninterest income
Total revenue, net of interest expense (FTE basis)
Provision for credit losses
Noninterest expense
Income before income taxes
Income tax expense (FTE basis)
Net income
Return on average allocated capital (1)
Return on average economic capital (1)
Efficiency ratio (FTE basis)
Balance Sheet
Average
Total trading-related assets (2)
Total earning assets (2)
Total assets
Allocated capital (1)
Economic capital (1)
2013
2012
% Change
$
4,239
$
3,672
15%
2,046
2,722
6,734
317
11,819
16,058
140
12,013
3,905
2,342
1,563
1,820
2,214
5,706
872
10,612
14,284
34
11,295
2,955
1,726
1,229
$
$
5.24%
—
74.81
—
8.95%
79.08
$ 468,934
481,482
632,804
30,000
—
$ 466,045
461,487
606,249
—
13,824
12
23
18
(64)
11
12
n/m
6
32
36
27
1
4
4
n/m
n/m
Year end
Total trading-related assets (2)
Total earning assets (2)
Total assets
(1) Effective January 1, 2013, we revised, on a prospective basis, the methodology for allocating capital to the business segments. In connection with the change in methodology, we updated the
$ 465,836
486,470
632,263
$ 411,080
432,821
575,709
(12)
(11)
(9)
applicable terminology in the above table to allocated capital from economic capital as reported in prior periods. For additional information, see Business Segment Operations on page 31.
(2) Trading-related assets include derivative assets, which are considered non-earning assets.
n/m = not meaningful
Global Markets offers sales and trading services, including
research, to institutional clients across fixed-income, credit,
currency, commodity and equity businesses. Global Markets
product coverage includes securities and derivative products in
both the primary and secondary markets. Global Markets provides
market-making, financing, securities clearing, settlement and
custody services globally to our institutional investor clients in
support of their investing and trading activities. We also work with
our commercial and corporate clients to provide risk management
products using interest rate, equity, credit, currency and commodity
derivatives, foreign exchange, fixed-income and mortgage-related
products. As a result of our market-making activities in these
products, we may be required to manage risk in a broad range of
financial products including government securities, equity and
equity-linked securities, high-grade and high-yield corporate debt
securities, syndicated loans, MBS, commodities and asset-backed
securities (ABS). In addition, the economics of most investment
banking and underwriting activities are shared primarily between
Global Markets and Global Banking based on the activities
performed by each segment. Global Banking originates certain
deal-related transactions with our corporate and commercial
clients that are executed and distributed by Global Markets. For
more information on investment banking fees on a consolidated
basis, see page 43.
Net income for Global Markets increased $334 million to $1.6
billion in 2013 compared to 2012. Excluding net DVA and charges
related to the U.K. corporate income tax rate reduction, net income
decreased $543 million to $3.0 billion primarily driven by lower
FICC revenue due to a challenging trading environment and higher
noninterest expense, partially offset by an increase in equities
revenue. Net DVA losses on derivatives were $508 million
compared to losses of $2.4 billion in 2012. The U.K. corporate
income tax rate reduction enacted in 2013 resulted in a $1.1
billion charge to income tax expense in Global Markets for
remeasurement of certain deferred tax assets compared to a
similar charge of $781 million in 2012. Noninterest expense
increased $718 million to $12.0 billion due to an increase in
litigation expense.
Average earning assets increased $20.0 billion to $481.5
billion in 2013 largely driven by increased client financing activity
in the equities business.
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
44 Bank of America 2013
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FICC revenue, including net DVA, increased $70 million to $8.9
billion in 2013 compared to 2012. Excluding the impact of credit
spreads on net DVA, FICC revenue decreased $1.6 billion to $9.4
billion driven by a challenging trading environment arising from
investor concerns around the Federal Reserve’s position on
economic stimulus, political uncertainty both domestically and
abroad as well as the write-down of a receivable related to the
MBIA Settlement in 2013. For more information on the MBIA
Settlement, see Note 7 – Representations and Warranties
Obligations and Corporate Guarantees to the Consolidated
Financial Statements. Equities revenue, including net DVA,
increased $1.2 billion to $4.2 billion. Excluding net DVA, equities
revenue increased $950 million to $4.2 billion primarily due to
continued gains in market share, higher market volumes and
increased client financing balances. Sales and trading revenue
included total commissions and brokerage fee revenue of $2.0
billion in 2013 compared to $1.8 billion in 2012, substantially all
from equities, with the $226 million increase due to a higher
market share and increased market volumes in equities.
obligations, commercial mortgage-backed securities, RMBS,
collateralized debt obligations (CDOs), 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 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)
(Dollars in millions)
Sales and trading revenue
2013
2012
Fixed income, currencies and commodities
Equities
Total sales and trading revenue
$
8,882
4,200
$ 13,082
$
8,812
3,014
$ 11,826
Sales and trading revenue, excluding net DVA (3)
Fixed income, currencies and commodities
Equities
$
9,373
4,217
$ 11,007
3,267
Total sales and trading revenue, excluding net DVA $ 13,590
$ 14,274
(1)
(2)
Includes FTE adjustments of $179 million and $220 million for 2013 and 2012. For more
information on sales and trading revenue, see Note 2 – Derivatives to the Consolidated Financial
Statements.
Includes Global Banking sales and trading revenue of $385 million and $522 million for 2013
and 2012.
(3) For this presentation, sales and trading revenue excludes the impact of credit spreads on DVA,
which represents a non-GAAP financial measure. Net DVA losses of $491 million and $2.2
billion were included in FICC revenue, and net DVA losses of $17 million and $253 million were
included in equities revenue in 2013 and 2012.
76788ba_financials.indd 45
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Bank of America 2013 45
All Other
(Dollars in millions)
Net interest income (FTE basis)
Noninterest income:
Card income
Equity investment income
Gains on sales of debt securities
All other loss
Total noninterest income (loss)
Total revenue, net of interest expense (FTE basis)
Provision for credit losses
Noninterest expense
Loss before income taxes
Income tax benefit (FTE basis)
Net income (loss)
Balance Sheet
Average
Loans and leases:
Residential mortgage
Non-U.S. credit card
Other
Total loans and leases
Total assets (1)
Total deposits
Year end
Loans and leases:
Residential mortgage
Non-U.S. credit card
Other
Total loans and leases
2013
2012
% Change
$
966
$
1,140
(15)%
328
2,610
1,230
(3,245)
923
1,889
(666)
4,241
(1,686)
(2,173)
487
$
360
1,135
1,510
(4,927)
(1,922)
(782)
2,621
6,273
(9,676)
(5,939)
(3,737)
208,535
10,861
16,058
235,454
215,183
34,617
$ 223,795
13,549
21,897
259,241
315,735
43,087
(9)
130
(19)
(34)
n/m
n/m
n/m
(32)
(83)
(63)
n/m
(7)
(20)
(27)
(9)
(32)
(20)
197,061
11,541
12,092
220,694
166,881
27,702
$ 211,476
11,697
18,808
241,981
262,800
36,061
(7)
(1)
(36)
(9)
(36)
(23)
$
$
$
Total assets (1)
Total deposits
(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 $539.5 billion and $504.2 billion for 2013 and 2012, and $570.3 billion and $537.6 billion at
December 31, 2013 and 2012.
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,
gains/losses on structured liabilities, 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 109.
Equity investments include Global Principal Investments (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. Equity investments included
our remaining investment in CCB which was sold during 2013, and
certain other
investments. Additionally, certain residential
mortgage loans that are managed by Legacy Assets & Servicing
are held in All Other.
Net income for All Other increased $4.2 billion to $487 million
in 2013 primarily due to negative fair value adjustments on
structured liabilities of $649 million related to the improvement
in our credit spreads during 2013 compared to a negative $5.1
billion in 2012, a $3.3 billion reduction in the provision for credit
losses, a decrease in noninterest expense of $2.0 billion and an
increase in equity investment income of $1.5 billion. Partially
offsetting the increases were $1.6 billion in gains related to debt
repurchases and exchanges of trust preferred securities in 2012
and a decrease of $280 million in gains on sales of debt securities.
The provision for credit losses improved $3.3 billion to a benefit
of $666 million in 2013 primarily driven by continued improvement
in portfolio trends including increased home prices in the
residential mortgage portfolio.
Noninterest expense decreased $2.0 billion to $4.2 billion
primarily due to lower litigation expense. The income tax benefit
was $2.2 billion in 2013 compared to a benefit of $5.9 billion in
2012. The decrease was driven by the decline in the pre-tax loss
in All Other and lower tax benefits as 2012 included a $1.7 billion
tax benefit attributable to the excess of foreign tax credits
recognized in the U.S. upon repatriation of the earnings of certain
subsidiaries over the related U.S. tax liability.
46 Bank of America 2013
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Equity Investment Activity
The following tables present the components of equity investments
in All Other at December 31, 2013 and 2012, and also a
reconciliation to the total consolidated equity investment income
for 2013 and 2012.
Equity Investments
(Dollars in millions)
Global Principal Investments
Strategic and other investments
Total equity investments included in All Other
December 31
2013
2012
$
$
1,604
807
2,411
$
$
3,470
2,038
5,508
Equity investments included in All Other decreased $3.1 billion
to $2.4 billion during 2013, with the decrease due to sales in the
GPI and Strategic investments portfolios. GPI had unfunded equity
commitments of $127 million at December 31, 2013 compared
to $224 million at December 31, 2012.
Equity Investment Income
(Dollars in millions)
Global Principal Investments
Strategic and other investments
Total equity investment income included in All Other
Total equity investment income included in the
2013
2012
$
$
378
2,232
2,610
589
546
1,135
business segments
291
935
Total consolidated equity investment income
$
2,901
$
2,070
Equity investment income included in All Other was $2.6 billion
in 2013, an increase of $1.5 billion from 2012. The increase was
primarily due to the $753 million gain on the sale of our remaining
investment in CCB shares and gains of $1.4 billion on the sales
of a portion of an equity investment. Total Corporation equity
investment income was $2.9 billion in 2013, an increase of $831
million from 2012, due to the same factors as described above,
partially offset by gains in 2012 on equity investments included
in the business segments.
76788ba_financials.indd 47
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Bank of America 2013 47
that are
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
legally binding
unaffiliated parties. Obligations
agreements whereby we agree to purchase products or services
with a specific minimum quantity at a fixed, minimum or variable
price over a specified period of time are defined as purchase
obligations. Included in purchase obligations are commitments to
purchase loans of $1.5 billion and vendor contracts of $18.4
billion. The most significant vendor contracts
include
communication services, processing services and software
contracts. Other long-term liabilities include our contractual
funding obligations related to the Qualified Pension Plans, Non-
U.S. Pension Plans, Nonqualified and Other Pension Plans, and
Postretirement Health and Life Plans (collectively, the Plans).
Obligations to the Plans are based on the current and projected
Table 11 Contractual Obligations
obligations of the Plans, performance of the Plans’ assets and
any participant contributions, if applicable. During 2013 and 2012,
we contributed $290 million and $381 million to the Plans, and
we expect to make $292 million of contributions during 2014.
Debt, lease, equity and other obligations are more fully
discussed in Note 11 – Long-term Debt and Note 12 – Commitments
and Contingencies to the Consolidated Financial Statements. The
Plans are more fully discussed in Note 17 – Employee Benefit Plans
to the Consolidated Financial Statements.
We enter into commitments to extend credit such as loan
commitments, standby letters of credit (SBLCs) and commercial
letters of credit to meet the financing needs of our customers. For
a summary of the total unfunded, or off-balance sheet, credit
extension commitment amounts by expiration date, see Credit
Extension Commitments in Note 12 – Commitments and
Contingencies to the Consolidated Financial Statements.
Table 11
includes certain contractual obligations at
December 31, 2013.
(Dollars in millions)
December 31, 2013
Due After
One Year
Through
Three Years
Due After
Three Years
Through
Five Years
Due in One
Year or Less
Due After
Five Years
Total
Long-term debt
Operating lease obligations
Purchase obligations
Time deposits
Other long-term liabilities
Estimated interest expense on long-term debt and time deposits (1)
249,674
16,047
20,775
111,235
4,056
37,562
439,349
(1) Represents estimated, forecasted net interest expense on long-term debt and time deposits. Forecasts are based on the contractual maturity dates of each liability, and are net of derivative hedges.
46,076
2,841
6,205
98,201
1,289
5,189
159,801
77,527
5,672
3,838
2,278
1,132
13,247
103,694
62,830
3,003
3,873
1,972
720
9,081
81,479
63,241
4,531
6,859
8,784
915
10,045
94,375
Total contractual obligations
$
$
$
$
$
$
$
$
$
$
Representations and Warranties
We securitize first-lien residential mortgage loans generally in the
form of MBS 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 (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, we would be exposed to any credit loss on the repurchased
mortgage loans after accounting for any mortgage insurance or
mortgage guarantee payments that we may receive.
48 Bank of America 2013
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 and Item 1A. Risk Factors of this 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, or agreements for bulk settlements, certain of which
have been for significant amounts, in lieu of a loan-by-loan review
process, including with the GSEs, with three monoline insurers
and with the Bank of New York Mellon (the BNY Mellon Settlement),
as trustee (the Trustee) for certain Countrywide private-label
securitization trusts in 2011. 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 2008 and 2009, respectively.
76788ba_financials.indd 48
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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 MBS litigation including purported class action
suits, actions brought by individual MBS purchases, actions
brought by FHFA as conservator for the GSEs and governmental
actions. 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.
The 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 can include 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 4, 2014, one of the objectors filed
a motion to stay entry of judgment and to hold additional
proceedings in the trial court on issues it alleged had not been
litigated or decided by the court in its January 31, 2014 decision,
order and judgment. On February 18, 2014, the same objector
also filed a motion for reargument of the trial court’s January 31,
2014 decision. The court held a hearing on the motion to stay on
February 19, 2014, and rejected the application for stay and for
further proceedings in the trial court. The court also ruled it would
not hold oral argument on the objector’s motion for reargument
before April 2014. 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. The
court’s January 31, 2014 decision, order and judgment remain
subject to appeal and the motion to reargue, and it is not possible
to predict the timetable for appeals or 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.
For a summary of the larger bulk settlement actions and the
related impact on the representations and warranties provision
and liability, see Note 7 – Representations and Warranties
Obligations and Corporate Guarantees and Note 12 – Commitments
and Contingencies 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, the claim is rescinded by the counterparty or the
claim is otherwise settled. 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 12 presents unresolved
repurchase claims by
counterparty at December 31, 2013 and 2012.
Table 12 Unresolved Repurchase Claims by
Counterparty (1, 2)
(Dollars in millions)
Private-label securitization trustees, whole-loan
investors, including third-party securitization
sponsors and other (3)
Monolines
GSEs
Total unresolved repurchase claims (3)
December 31
2013
2012
$ 17,953
$ 12,222
1,532
170
$ 19,655
2,442
13,437
$ 28,101
(1) The total notional amount of unresolved repurchase claims does not include any repurchase
claims related to the trusts covered by the BNY Mellon Settlement.
(2) At December 31, 2013 and 2012, unresolved repurchase claims did not include repurchase
demands of $1.2 billion and $1.6 billion where the Corporation believes the claimants have
not satisfied the contractual thresholds.
Includes $13.8 billion and $11.7 billion of claims based on individual file reviews and $4.1
billion and $519 million of claims submitted without individual file reviews at December 31,
2013 and 2012.
(3)
trustees, whole-loan
The notional amount of unresolved repurchase claims from
private-label securitization
investors,
including third-party securitization sponsors, and others included
$13.8 billion and $11.7 billion of claims based on individual file
reviews and $4.1 billion and $519 million of claims submitted
without individual file reviews at December 31, 2013 and 2012.
The increase in the notional amount of unresolved repurchase
claims during 2013 is primarily due to continued submission of
claims by private-label securitization trustees; the level of detail,
support and analysis accompanying such claims, which impact
overall claim quality and, therefore, claims resolution; and the lack
of an established process to resolve disputes related to these
claims. For example, claims submitted without individual file
reviews lack the level of detail and analysis of individual loans
found in other claims that is necessary for us to respond to the
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.
Bank of America 2013 49
76788ba_financials.indd 49
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In addition to, and not included in, the total unresolved
repurchase claims, we have received repurchase demands from
private-label securitization investors and a master servicer where
we believe the claimants have not satisfied the contractual
thresholds to direct the securitization trustee to take action and/
or that these demands are otherwise procedurally or substantively
invalid. The total amount outstanding of such demands was $1.2
billion, comprised of $945 million of demands received during
2012 and $273 million of demands related to trusts covered by
the BNY Mellon Settlement at December 31, 2013 compared to
$1.6 billion at December 31, 2012. The decrease in outstanding
demands is a result of certain demands that were replaced by
repurchase claims submitted by trustees, which are included in
Table 12. We do not believe that the demands outstanding at
December 31, 2013 represent valid repurchase claims and,
therefore, it is not possible to predict the resolution with respect
to such demands.
The decline in unresolved monoline claims is primarily due to
the MBIA Settlement. Substantially all of the remaining unresolved
monoline claims pertain to second-lien loans and are currently the
subject of litigation.
During 2013, we received $8.4 billion in new repurchase
claims,
including $6.3 billion submitted by private-label
securitization trustees and a financial guarantee provider, $1.8
billion submitted by the GSEs for both Countrywide and legacy
Bank of America originations not covered by the bulk settlements
with the GSEs, $222 million submitted by whole-loan investors
and $50 million submitted by monoline insurers. During 2013,
$16.7 billion in claims were resolved, including $646 million and
$12.2 billion in GSE claims resolved through settlements with
FHLMC and FNMA and $945 million resolved through the MBIA
Settlement. Of the remaining claims that were resolved, $1.7
billion were resolved through rescissions and $1.2 billion were
resolved
repurchases and make-whole
payments, primarily with the GSEs.
through mortgage
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 (loss) in the Consolidated
Statement 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 52.
Income. For additional discussion of
At December 31, 2013 and 2012,
for
representations and warranties was $13.3 billion and $19.0
billion, with the decrease primarily driven by the FNMA Settlement.
For 2013, the representations and warranties provision was $840
million compared to $3.9 billion for 2012. The provision for 2013
liability
the
was driven by our remaining GSE exposures, including the FHLMC
Settlement and our obligations related to MI rescissions. The
provision for 2012 included $2.5 billion in provision related to the
FNMA Settlement and $500 million for obligations to FNMA related
to MI rescissions.
Our estimated liability at December 31, 2013 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
for certain potential private-label
securitization and whole-loan exposures where we have had little
to no claim activity, these exposures are included in the estimated
range of possible loss.
liability
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 2008
and 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 $13.7 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 December 31, 2013, of the $13.7 billion,
approximately $10.8 billion in principal has been paid, $941
million in principal has defaulted or was severely delinquent and
the notional amount of unresolved repurchase claims submitted
by the GSEs was $144 million related to these vintages.
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), of
which $552 billion in principal has been paid, $192 billion in
principal has defaulted, $53 billion in principal was severely
delinquent, and $168 billion in principal was current or less than
180 days past due at December 31, 2013.
50 Bank of America 2013
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Table 13 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 December 31, 2013.
Table 13 Overview of Non-Agency Securitization and Whole-loan Balances
Principal Balance
Defaulted or Severely Delinquent
(Dollars in billions)
By Entity
Bank of America
Countrywide
Merrill Lynch
First Franklin
Total (1, 2)
By Product
Prime
Alt-A
Pay option
Subprime
Home equity
Other
$
$
$
Original
Principal
Balance
100
716
67
82
965
$
$
$
302
172
150
247
88
6
965
Outstanding
Principal
Balance
December
31, 2013
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
$
$
$
18
173
15
15
221
66
50
37
55
11
2
221
$
$
$
3
43
3
4
53
8
11
14
18
—
2
53
$
$
$
7
144
16
25
192
26
39
41
66
18
2
192
10
187
19
29
245
34
50
55
84
18
4
245
$
$
$
$
1
24
3
5
33
2
7
5
17
2
—
33
$
$
$
$
2
45
4
6
57
6
12
13
20
5
1
57
$
$
$
$
2
45
3
5
55
7
12
15
16
4
1
55
$
$
$
$
5
73
9
13
100
19
19
22
31
7
2
100
Total
$
(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 have been, and continue to be, 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
December 31, 2013, 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, $109 billion was defaulted or
severely delinquent at December 31, 2013.
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,
included in Table 13, were originated between 2004 and 2008, of
which $449.9 billion have been paid in full and $191.3 billion were
defaulted or severely delinquent at December 31, 2013. At least
25 payments have been made on approximately 64 percent of the
defaulted and severely delinquent loans. We have received
approximately $25.9 billion of representations and warranties
repurchase claims related to these vintages, including $16.9
billion from private-label securitization trustees and a financial
guarantee provider, $8.2 billion from whole-loan investors and
$809 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
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.
the applicable statute of
limitations
relating
toll
A recent 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). If upheld, this decision may impact the timeliness of
representations and warranties claims and/or lawsuits, where
these claims have not already been tolled by agreement. We
believe this ruling may lead to an increase in requests for tolling
agreements as well as an increase in the pace of representations
and warranties claims and/or the filing of lawsuits by private-label
Bank of America 2013 51
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securitization trustees prior the expiration of the statute of
limitations.
We have resolved $8.0 billion of the $25.9 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 $3.3 billion of these claims were resolved through
repurchase or indemnification and $4.7 billion were rescinded by
the investor. At December 31, 2013, for loans originated between
2004 and 2008, the notional amount of unresolved repurchase
claims submitted by private-label securitization trustees, whole-
loan investors and a financial guarantee provider was $17.9 billion.
We have performed an initial review with respect to $14.6 billion
of these claims and do not believe a valid basis for repurchase
has been established by the claimant and are still in the process
of reviewing the remaining $3.3 billion of these claims. 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,
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 December 31,
2013 included possible losses related to these whole-loan sales
and private-label securitizations sponsored by third-party whole-
loan investors.
require
The representations and warranties, as governed by the private-
label securitization agreements, generally
that
counterparties have the ability to both assert a claim and 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.
52 Bank of America 2013
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 13. At December 31, 2013, for loans originated
between 2004 and 2008, the unpaid principal balance of loans
related to unresolved monoline repurchase claims was $1.5 billion
compared to $2.4 billion at December 31, 2012. The decrease in
unresolved monoline repurchase claims was driven by the
resolution of claims through the MBIA Settlement.
During 2013, there was minimal repurchase claim activity with
the monolines and the monolines did not request any loan files
for review through the representations and warranties process.
However, there may be additional claims or file requests in the
future.
The MBIA Settlement in 2013 resolved outstanding and
potential claims between the parties to the settlement involving
31 first- and 17 second-lien RMBS trusts for which MBIA provided
financial guarantee insurance, including $945 million of monoline
repurchase claims outstanding at December 31, 2012. For more
information on the MBIA Settlement, see Note 7 – Representations
and Warranties Obligations and Corporate Guarantees to the
Consolidated Financial Statements.
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.
At December 31, 2013, we had approximately 101,000 open
MI rescission notices compared to 110,000 at December 31,
2012. Open MI rescission notices at December 31, 2013 included
39,000 pertaining principally to first-lien mortgages serviced for
others, 10,000 pertaining to loans held-for-investment (HFI) and
52,000 pertaining to ongoing litigation for second-lien mortgages.
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 billion
over existing accruals at December 31, 2013. 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
76788ba_financials.indd 52
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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 12 – 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.
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, 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
this Annual Report on Form 10-K and Note 7 – Representations
and Warranties Obligations and Corporate Guarantees to the
Consolidated Financial Statements and, for more information
related to the sensitivity of the assumptions used to estimate our
liability for obligations under representations and warranties, see
Complex Accounting Estimates – Representations and Warranties
Liability on page 118.
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
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.
loan repurchase requirements
limited to,
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 for 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
We entered into the 2011 Office of the Comptroller of the Currency
(OCC) Consent Order on April 13, 2011. This consent order
required servicers to make several enhancements to their
servicing operations, including implementation of a single point of
contact model for borrowers throughout the loss mitigation and
foreclosure processes, adoption of measures designed to ensure
that foreclosure activity is halted once a borrower has been
approved for a modification unless the borrower fails to make
payments under the modified loan and implementation of
enhanced controls over third-party vendors that provide default
servicing support services. In addition, the 2011 OCC Consent
Order required that we retain an independent consultant, approved
by the OCC, to conduct a review of all foreclosure actions pending
or foreclosure sales that occurred between January 1, 2009 and
December 31, 2010 and submit a plan to the OCC to remediate
all financial injury to borrowers caused by any deficiencies
identified through the review.
On January 7, 2013, we and other mortgage servicing
institutions entered into an agreement in principle with the OCC
and the Federal Reserve to cease the Independent Foreclosure
Review (IFR) that had commenced pursuant to consent orders
entered into by Bank of America with the Federal Reserve (2011
FRB Consent Order) and the 2011 OCC Consent Order entered
into between BANA and the OCC and replaced it with an accelerated
remediation process (2013 IFR Acceleration Agreement). The
2013 IFR Acceleration Agreement requires us to provide $1.8
billion of borrower assistance in the form of loan modifications
and other foreclosure prevention actions, and in addition, we made
a cash payment of $1.1 billion into a qualified settlement fund in
2013, which was fully reserved at December 31, 2012. The
borrower assistance program is not expected to result in any
incremental credit provision, as we believe that the existing
allowance for credit losses is adequate to absorb any costs that
have not already been recorded as charge-offs.
National Mortgage Settlement
In March 2012, we entered into settlement agreements
(collectively, the National Mortgage Settlement) with (1) the U.S.
Department of Justice, various federal regulatory agencies and 49
state Attorneys General to resolve federal and state investigations
into certain residential mortgage origination, servicing and
foreclosure practices, (2) HUD to resolve certain claims relating
to the origination of FHA-insured mortgage loans, primarily
originated by Countrywide prior to and for a period following our
acquisition of that lender, and (3) each of the Federal Reserve and
the OCC regarding civil monetary penalties related to conduct that
was the subject of consent orders entered into with the banking
regulators in April 2011. The National Mortgage Settlement was
entered by the court as a consent judgment on April 5, 2012. The
National Mortgage Settlement provided for the establishment of
certain uniform servicing standards, upfront cash payments of
approximately $1.9 billion to the state and federal governments
and for borrower restitution, approximately $7.6 billion in borrower
assistance in the form of, among other things, credits earned for
principal reduction, short sales, deeds-in-lieu of foreclosure and
approximately $1.0 billion of credits earned for interest rate
reduction modifications. In addition, the settlement with HUD
provided for an upfront cash payment of $500 million to settle
certain claims related to FHA-insured loans. We will also be
Bank of America 2013 53
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obligated to provide additional cash payments of up to $850 million
if we fail to earn an additional $850 million of credits stemming
from incremental first-lien principal reductions and satisfy certain
solicitation requirements over a three-year period.
We also entered into agreements with several states under
which we committed to perform certain minimum levels of principal
reduction and related activities within those states in connection
with the National Mortgage Settlement, and under which we could
be required to make additional payments if we fail to meet such
minimum levels.
Subject to confirmation by the independent monitor appointed
as a result of the National Mortgage Settlement to review and
certify compliance with its provisions, we believe we have
substantially fulfilled all borrower assistance, rate reduction
modification and principal reduction commitments and, therefore,
we do not expect to be required to make additional cash payments.
The monitor has validated that through December 31, 2012, we
have earned nearly $7.8 billion in credits towards our total
obligation and we are awaiting confirmation on the remaining
credits. The borrower assistance program did not result in any
incremental credit losses as of the settlement date, as the existing
allowance for credit losses was adequate to absorb any losses
that had not already been charged-off. Under the interest rate
reduction program, modifications of approximately 24,000 loans
with an aggregate unpaid principal balance of $6.4 billion have
been completed as of December 31, 2013. These modifications,
which are not accounted for as troubled debt restructurings (TDRs),
provided for an average interest rate reduction of approximately
two percent, resulting in an estimated decrease in fair value of the
modified loans of approximately $740 million and a reduction in
annual interest income of approximately $120 million.
Under the terms of the National Mortgage Settlement, the
federal and participating state governments agreed to release us
from further liability for certain alleged residential mortgage
origination, servicing and foreclosure deficiencies. In settling
origination issues related to FHA-guaranteed loans originated on
or before April 30, 2009, we received a release from further liability
for all origination claims with respect to such loans if an insurance
claim had been submitted to the FHA prior to January 1, 2012 and
a release of multiple damages and penalties, but not
administrative indemnification claims for single damages, if no
such claim had been submitted. In addition, provided we meet our
assistance and remediation commitments, the OCC agreed not to
assess, and we will not be obligated to pay to the Federal Reserve,
any civil monetary penalties.
The National Mortgage Settlement does not cover certain
claims arising out of origination, securitization
(including
representations made to investors with respect to MBS), criminal
claims, private claims by borrowers, claims by certain states for
injunctive relief or actual economic damages to borrowers related
to the Mortgage Electronic Registration Systems, Inc. (MERS), and
claims by the GSEs (including repurchase demands), among other
items.
Mortgage Electronic Registration Systems, Inc.
Mortgage notes, assignments or other documents are often
required to be maintained and are often necessary to enforce
mortgage loans. There has been significant public commentary
regarding the common industry practice of recording mortgages
in the name of MERS, as nominee on behalf of the note holder,
and whether securitization trusts own the loans purported to be
conveyed to them and have valid liens securing those loans. We
54 Bank of America 2013
currently use the MERS system for a substantial portion of the
residential mortgage loans that we originate, including loans that
have been sold to investors or securitization trusts. A component
of the OCC consent order requires significant changes in the
manner in which we service loans that identify MERS as the
mortgagee. Additionally, certain local and state governments have
commenced legal actions against us, MERS and other MERS
members, questioning the validity of the MERS model. Other
challenges have also been made to the process for transferring
mortgage loans to securitization trusts, asserting that having a
mortgagee of record that is different than the holder of the
mortgage note could “break the chain of title” and cloud the
ownership of the loan. In order to foreclose on a mortgage loan,
in certain cases it may be necessary or prudent for an assignment
of the mortgage to be made to the holder of the note, which in the
case of a mortgage held in the name of MERS as nominee would
need to be completed by a MERS signing officer. As such, our
practice is to obtain assignments of mortgages from MERS prior
to instituting foreclosure. If certain required documents are
missing or defective, or if the use of MERS is found not to be valid,
we could be obligated to cure certain defects or in some
circumstances be subject to additional costs and expenses. Our
use of MERS as nominee for the mortgage may also create
reputational risks for us.
Impact of Foreclosure Delays
Foreclosure delays impact our default-related servicing costs. We
believe default-related servicing costs peaked in mid-2013 and
they began to decline in late 2013, and we anticipate that this
decline will accelerate 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.
Other areas of our operations are also impacted by foreclosure
delays. In 2013, we recorded $514 million of mortgage-related
assessments, waivers and similar costs related to foreclosure
delays compared to $867 million, including $258 million related
to compensatory fees as part of the FNMA Settlement for 2012.
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, MBS 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
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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 MBS 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 may subject us
to
governmental or regulatory inquiries, investigations, actions,
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, 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. 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 (FCA). 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 Federal Housing Administration’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 FCA
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 regulatory investigations, see Note 12
– Commitments and Contingencies to the Consolidated Financial
Statements.
Mortgage-related Settlements – Servicing Matters
In connection with the BNY Mellon Settlement, BANA has agreed
to implement certain servicing changes. The Trustee and BANA
have agreed to clarify and conform certain servicing standards
related to loss mitigation. In particular, the BNY Mellon Settlement
clarifies that it is permissible to apply the same loss mitigation
strategies to the Covered Trusts as are applied to BANA affiliates’
HFI portfolios. This portion of the agreement was effective in the
second quarter of 2011 and is not conditioned on final court
approval.
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 will reduce 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.
requirements associated with
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
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
For more information regarding regulatory matters and risks, see
Item 1A. Risk Factors of this Annual Report on Form 10-K, Capital
Management – Regulatory Capital on page 61 and Note 12 –
Commitments and Contingencies to the Consolidated Financial
Statements.
Financial Reform Act
The Financial Reform Act, which was signed into law on July 21,
2010, enacted sweeping financial regulatory reform and has
altered and will continue to alter the way in which we conduct
certain businesses, increase our costs and reduce our revenues.
Many aspects of the Financial Reform Act remain subject to final
rulemaking which will take effect over several years, making it
difficult to anticipate the precise impact on the Corporation, our
customers or the financial services industry.
Debit Interchange Fees
On June 29, 2011, the Federal Reserve adopted a final rule with
respect to the Durbin Amendment effective on October 1, 2011
which, among other things, established a regulatory cap for many
types of debit interchange transactions to equal no more than
$0.21 plus five bps of the value of the transaction. The Federal
Reserve also adopted a rule to allow a debit card issuer to recover
$0.01 per transaction for fraud prevention purposes if the issuer
complies with certain fraud-related requirements, with which we
are currently in compliance. The Federal Reserve also approved
rules governing routing and exclusivity, requiring issuers to offer
two unaffiliated networks for routing transactions on each debit
Bank of America 2013 55
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or prepaid product, which became effective April 1, 2012. On July
31, 2013, the U.S. District Court for the District of Columbia issued
a ruling regarding the Federal Reserve’s rules implementing the
Financial Reform Act’s Durbin Amendment. The ruling requires the
Federal Reserve to reconsider the $0.21 per transaction cap on
debit card interchange fees. The Federal Reserve has appealed
the ruling and a decision on the appeal is expected in the first half
of 2014. It is possible that revised rules could have a significant
adverse impact on debit interchange revenue as well as
transaction routing.
Limitations on Proprietary Trading; Sponsorship and
Investment in Hedge Funds and Private Equity Funds
On December 10, 2013, the Federal Reserve, OCC, FDIC,
Securities and Exchange Commission (SEC) and Commodity
Futures Trading Commission (CFTC) issued final regulations under
the Financial Reform Act implementing limitations on proprietary
trading as well as the sponsorship of or investment in hedge funds
and private equity funds (the Volcker Rule) and set a conformance
period that will expire on July 21, 2015. The Volcker Rule prohibits
insured depository institutions and companies affiliated with
insured depository institutions (collectively, banking entities) from
engaging in short-term proprietary trading of certain securities,
derivatives, commodity futures and options for their own account.
The Volcker Rule also imposes limits on banking entities’
investments in, and other relationships with, hedge funds or private
equity funds. The Volcker Rule provides exemptions for certain
activities, including market making, underwriting, hedging, trading
in government obligations, insurance company activities, and
organizing and offering hedge funds or private equity funds. The
Volcker Rule also clarifies that certain activities are not prohibited,
including acting as agent, broker or custodian. A banking entity
with significant trading operations, such as the Corporation, will
be required to establish a detailed compliance program to comply
with the restrictions of the Volcker Rule.
The statutory provisions of the Volcker Rule became effective
on July 21, 2012 and gave financial institutions two years from
the effective date, with the possibility for extensions for certain
investments, to bring activities and investments into compliance
with the statutory provisions. The Federal Reserve has now
extended the conformance period to July 21, 2015.
Although we exited our stand-alone proprietary trading
business as of June 30, 2011 in anticipation of the Volcker Rule
and to further our initiative to optimize our balance sheet, we are
still in the process of evaluating the full impact of the Volcker Rule
on our current trading activities and our ownership interests in and
transactions with hedge funds, private equity funds, commodity
pools and other subsidiary operations. The Volcker Rule will likely
increase our operational and compliance costs, reduce our trading
revenues, and adversely affect our results of operations. For more
information about our trading business, see Global Markets on
page 44.
Derivatives
The Financial Reform Act includes measures to broaden the scope
of derivative instruments subject to regulation by requiring clearing
and exchange trading of certain derivatives; imposing new capital,
margin, reporting, registration and business conduct requirements
for certain market participants; and imposing position limits on
certain over-the-counter (OTC) derivatives. The Financial Reform
Act grants to the CFTC and the SEC substantial new authority and
56 Bank of America 2013
requires numerous rulemakings by these agencies. Swap dealers
conducting dealing activity with U.S. persons above a specified
dollar threshold were required to register with the CFTC on or before
December 31, 2012, and this registration requirement was
extended to guaranteed non-U.S. entities, requiring registration of
such entities by December 31, 2013. Upon registration, swap
dealers become subject to additional CFTC rules, including
measures regarding clearing and exchange trading of certain
derivatives, new capital and margin requirements and additional
internal business conduct, swap
reporting, external and
documentation, portfolio compression and
reconciliation
requirements for derivatives. Most of these requirements, with the
exception of margin, capital and exchange/swap execution facility
trading, have gone into effect for us, except with respect to swaps
between our non-U.S. swap dealers and some non-U.S. branches
of BANA with certain non-U.S. counterparties. Swap dealers are
now required to clear certain interest rate and index credit
derivative transactions when facing all counterparty types unless
either counterparty qualifies for the “end-user exception” to the
clearing mandate. These products will also likely become subject
to exchange/swap execution
requirements
beginning in the first quarter of 2014. The timing for margin and
capital implementation remains unknown. The 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. The Financial Reform Act also requires banking
entities to “push out” certain derivatives activity to one or more
non-bank affiliates.
trading
facility
In Europe, the European Commission and European Securities
and Markets Authority (ESMA) have been granted authority to adopt
and implement the European Market Infrastructure Regulation
(EMIR), which regulates OTC derivatives, central counterparties
and trade repositories, and imposes requirements for certain
market participants with respect to derivatives reporting, clearing,
business conduct and collateral. Several of our entities are subject
to EMIR requirements regarding record keeping, marking to market,
timely confirmation, derivative contract reporting, portfolio
reconciliation and dispute resolution. Further EMIR-implementing
measures are expected, but the timing is currently unknown.
The ultimate impact of the derivatives regulations that have
not yet been finalized and the time it will take to comply remain
uncertain. The final regulations will impose additional operational
and compliance costs on us and may require us to restructure
certain businesses and may negatively impact our results of
operations.
Resolution Planning
The Federal Reserve and the FDIC require that the Corporation
and other BHCs with assets of $50 billion or more, as well as
companies designated as systemically important by the Financial
Stability Oversight Council, submit annually their plans for a rapid
and orderly resolution in the event of material financial distress
or failure.
A resolution plan is intended to be a detailed roadmap for the
orderly resolution of the BHC and material entities pursuant to the
U.S. Bankruptcy Code and other applicable resolution regimes
under one or more hypothetical scenarios assuming no
extraordinary government assistance. If the Federal Reserve and
the FDIC determine that our plan is not credible and we fail to cure
the deficiencies in a timely manner, the Federal Reserve and the
FDIC may jointly impose more stringent capital, leverage or liquidity
requirements or restrictions on growth, activities or operations.
76788ba_financials.indd 56
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We submitted our 2013 plan in October and are required to update
it annually.
Similarly, in the U.K., the Prudential Regulation Authority (PRA)
has issued proposed 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.
Orderly Liquidation Authority
Under the Financial Reform Act, when a systemically important
financial institution such as the Corporation is in default or danger
of default, the FDIC may be appointed receiver in order to conduct
an orderly liquidation of such systemically important financial
institution. In the event of such appointment, the FDIC could invoke
a new form of resolution authority, the orderly liquidation authority,
instead of the U.S. Bankruptcy Code, if the Secretary of the
Treasury makes certain financial distress and systemic risk
determinations. The orderly liquidation authority is modeled in part
on the Federal Deposit Insurance Act, but also adopts certain
concepts from the U.S. Bankruptcy Code.
The orderly liquidation authority contains certain differences
from the U.S. Bankruptcy Code. For example, in certain
circumstances, the FDIC could permit payment of obligations it
determines to be systemically significant (e.g., short-term
creditors or operating creditors) in lieu of paying other obligations
(e.g., long-term creditors) without the need to obtain creditors’
consent or prior court review. The insolvency and resolution
process could also lead to a large reduction or total elimination
of the value of a BHC’s outstanding equity. For example, the FDIC
could follow a “single point of entry” approach and replace a
distressed BHC with a bridge holding company, which could
continue operations and result in an orderly resolution of the
underlying bank, but whose equity is held solely for the benefit of
creditors of the original BHC. Additionally, under the orderly
liquidation authority, amounts owed to the U.S. government
generally receive a statutory payment priority.
Credit Risk Retention
On August 28, 2013, federal regulators jointly issued a re-proposal
of a rule regarding credit risk retention (Credit Risk Retention Rule)
that would, among other things, require sponsors to retain at least
five percent of the credit risk of the assets underlying certain ABS
and MBS securitizations and would limit sponsors’ ability to
transfer or hedge that credit risk. The proposed rule, as currently
written, would likely have some adverse impacts on our ability to
engage in many types of MBS and ABS securitizations and
resecuritizations, impose additional operational and compliance
costs, and negatively
liquidity and
transferability of ABS or MBS, loans and other assets. However, it
remains unclear what requirements will be included in the final
rule and what the ultimate impact will be on our results of
operations.
the value,
influence
Consumer
Certain federal consumer finance laws to which the Corporation
is subject, including, but not limited to, the Equal Credit Opportunity
Act, Home Mortgage Disclosure Act, Electronic Fund Transfer Act,
Fair Credit Reporting Act, Real Estate Settlement Procedures Act
(RESPA), Truth in Lending (TILA) and Truth in Savings Act are
enforced by the Consumer Financial Protection Bureau (CFPB),
subject to certain statutory limitations. Through its rulemaking
authority, the CFPB has promulgated several proposed and final
rules that will affect our consumer businesses. On January 10,
2014, several significant CFPB rulemakings became effective,
including the Ability-to-Repay and Qualified Mortgage Rule and new
mortgage servicing standards. In addition, the CFPB has either
proposed or is considering rulemakings related to debt collection,
prepaid cards, integrated disclosures under RESPA and TILA, and
disclosures
transactions.
remittance
Additionally, as noted above, in August 2013 several federal
agencies jointly re-proposed the Credit Risk Retention Rule, which
will impose credit risk retention requirements on sponsors
securitizing certain mortgage loans that do not meet the standards
of a “qualified residential mortgage” to be defined in the final
version of the Credit Risk Retention Rule. The Corporation is
evaluating the various rules and proposals to facilitate compliance
with these rules.
transfer
related
to
Managing Risk
Overview
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.
Strategic risk is the risk that results from adverse business
decisions, inappropriate business plans, ineffective business
strategy execution, or failure to respond in a timely manner to
changes in the macroeconomic environment, such as business
cycles, competitor actions, changing customer preferences,
product obsolescence, technology developments and regulatory
environment. Credit risk is the risk of loss arising from a borrower’s
or counterparty’s inability to meet its obligations. Market risk is
the risk that values of assets and liabilities, or revenues will be
adversely affected by changes in market conditions such as
interest rate movements. Liquidity risk is the risk of an inability to
meet contractual and contingent financial obligations, on- or off-
balance sheet, as they come due. Compliance risk is the risk that
arises from the failure to adhere to laws, rules, regulations, or
internal policies and procedures. Operational risk is the risk of
loss resulting from inadequate or failed internal processes, people
and systems, or external events. Reputational risk is the potential
that negative publicity regarding an organization’s conduct or
business practices will adversely affect its profitability, operations
or customer base, or result in costly litigation or require other
measures. Reputational risk is evaluated along with all of the risk
categories and throughout the risk management process, and as
such is not discussed separately herein. The following sections,
Strategic Risk Management and Capital Management both on
page 61, Liquidity Risk on page 67, Credit Risk Management on
page 72, Market Risk Management on page 104, Compliance Risk
Management and Operational Risk Management both on
page 112, address in more detail the specific procedures,
Bank of America 2013 57
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measures and analyses of the major categories of risk that we
manage.
In choosing when and how to take risks, we evaluate our
capacity for risk and seek to protect our brand and reputation, our
financial flexibility, the value of our assets and the strategic
potential of the Corporation. We intend to maintain a strong and
flexible financial position. We also intend to focus on maintaining
to customers, employees and
our
shareholders. As part of our efforts to achieve these objectives,
we continue to build a comprehensive risk management culture
and to implement governance and control measures to strengthen
that culture.
relevance and value
We take a comprehensive approach to risk management. We
have a defined risk framework and articulated risk appetite which
are approved annually by the Corporation’s Board of Directors (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.
Executive management assesses, with Board oversight, the
risk-adjusted returns of each business segment. Management
reviews and approves strategic and financial operating plans, and
recommends to the Board for approval a financial plan annually.
Our strategic plan takes into consideration return objectives and
financial resources, which must align with risk capacity and risk
appetite. Management sets financial objectives for each business
by allocating capital and setting a target for return on capital for
each business. Capital allocations and operating limits are
regularly evaluated as part of our overall governance processes
as the businesses and the economic environment in which we
operate continue to evolve.
In addition to reputational considerations, businesses operate
within their credit, market, compliance and operational risk
standards and limits in order to adhere to the risk appetite. These
limits are based on analyses of risk and reward in each business.
Executive management is responsible for tracking and reporting
performance measurements as well as any exceptions to
guidelines or limits. The Board, and its committees when
appropriate, monitor financial performance, execution of the
strategic and financial operating plans, compliance with the risk
appetite and the adequacy of internal controls.
As part of its annual review, the Board approved both the Risk
Framework and Risk Appetite Statement in January 2014. The Risk
Framework defines the accountability of the Corporation and its
employees and the Risk Appetite Statement defines the
parameters under which we will take risk. Both documents are
intended to enable us to maximize our long-term results and ensure
the integrity of our assets and the quality of our earnings. The Risk
Framework is designed to be used by our employees to understand
risk management activities, including their individual roles and
accountabilities. It also defines how risk management is integrated
into our core business processes, and it defines the risk
management governance structure, including management’s
involvement. The risk management responsibilities of the
businesses, governance and control functions, and Corporate
Audit are also clearly defined. The risk management process
58 Bank of America 2013
includes four critical elements: identify and measure risk, mitigate
and control risk, monitor and test risk, and report and review risk,
and is applied across all business activities to enable an integrated
and comprehensive review of risk consistent with the Risk Appetite
Statement.
Risk Management Processes and Methods
To support our corporate goals and objectives, risk appetite, and
business and risk strategies, we maintain a governance structure
that delineates the responsibilities for risk management activities,
as well as governance and oversight of those activities, by
management and the Board. All employees have accountability for
risk management. Each employee’s
risk management
responsibilities fall into one of three major categories: businesses,
governance and control, and Corporate Audit.
Business managers and employees are accountable for
identifying, managing and escalating attention to all risks in their
business units, including existing and emerging risks. Business
managers must ensure that their business activities are conducted
within the risk appetite defined by management and approved by
the Board. The limits and controls for each business must be
consistent with the Risk Appetite Statement. Employees in client
and customer facing businesses are responsible for day-to-day
business activities, including developing and delivering profitable
products and services,
requests and
maintaining desirable customer relationships. These employees
are accountable for conducting their daily work in accordance with
policies and procedures. It is the responsibility of each employee
to protect the Corporation and defend the interests of the
shareholders.
fulfilling customer
Governance and control functions are comprised of Global Risk
Management, Global Compliance, Legal and the enterprise control
functions, and are tasked with independently overseeing and
managing risk activities. Global Compliance (which includes
Regulatory Relations) and Legal report to the Global General
Counsel and Head of Compliance and Regulatory Relations
Executive. Enterprise control functions consist of the Chief
Financial Officer (CFO) Group, Global Technology and Operations,
Global Human Resources, and Global Marketing and Corporate
Affairs.
Global Risk Management is led by the Chief Risk Officer (CRO).
The CRO leads senior management in managing risk, is
independent from the Corporation’s businesses and enterprise
control functions, and maintains sufficient autonomy to develop
and implement meaningful risk management measures. This
position serves to protect the Corporation and its shareholders.
The CRO reports to the Chief Executive Officer (CEO) and is the
management team lead or a participant in Board-level risk
governance committees. The CRO has the mandate to ensure that
appropriate risk management practices are in place, and are
effective and consistent with our overall business strategy and
risk appetite. Global Risk Management is comprised of two types
of risk teams, Enterprise risk teams and independent business
risk teams, which report to the CRO and are independent from the
business and enterprise control functions.
Enterprise risk teams are responsible for setting and
establishing enterprise policies, programs and standards,
assessing program adherence, providing enterprise-level risk
oversight, and reporting and monitoring systemic and emerging
risk issues. In addition, the enterprise risk teams are responsible
for monitoring and ensuring that risk limits are reasonable and
76788ba_financials.indd 58
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consistent with the risk appetite. These risk teams also carry out
risk-based oversight of the enterprise control functions.
for
Independent business risk teams are responsible
establishing policies, limits, standards, controls, metrics and
thresholds within the defined corporate standards for the
businesses to which they are aligned. The independent business
risk teams are also responsible for ensuring that risk limits and
standards are reasonable and consistent with the risk appetite.
Enterprise control functions are independent of the businesses
and have risk governance and control responsibilities for
enterprise programs. In this role, they are responsible for setting
policies, standards and limits; providing risk reporting; monitoring
systemic risk issues including existing and emerging; and
implementing procedures and controls at the enterprise and
business levels for their respective control functions.
The Corporate Audit function maintains independence from the
businesses and governance and control functions by reporting
directly to the Audit Committee of the Board. Corporate Audit
provides independent assessment and validation through testing
of key processes and controls across the Corporation. Corporate
independent assessment of the
Audit also provides an
internal control systems.
Corporation’s management and
Corporate Audit activities are designed to provide reasonable
assurance that resources are adequately protected; significant
financial, managerial and operating information is materially
complete, accurate and reliable; and employees’ actions are in
compliance with the Corporation’s policies, standards, procedures,
and applicable laws and regulations.
To assist the Corporation in achieving its goals and objectives,
risk appetite, and business and risk strategies, we utilize a risk
management process that is applied across the execution of all
business activities. This risk management process, which is an
integral part of our Risk Framework, enables the Corporation to
review risk in an integrated and comprehensive manner across all
risk categories and make strategic and business decisions based
on that comprehensive view. Corporate goals and objectives are
established by management, and management reflects these
goals and objectives in our risk appetite.
One of the key tools of the risk management process is the
use of Risk and Control Self Assessments (RCSAs). RCSAs are
the primary method for facilitating management of the business
environment and internal control factor data. The end-to-end RCSA
process incorporates risk identification and assessment of the
control environment; monitoring, reporting and escalating risk;
quality assurance and data validation; and integration with the risk
appetite. The RCSA process also incorporates documentation by
either the business or governance and control functions of the
business environment, risks, controls, and monitoring and
reporting. This results in a comprehensive risk management view
that enables understanding of and action on operational risks and
controls for all of our processes, products, activities and systems.
The formal processes used to manage risk represent a part of
our overall risk management process. Corporate culture and the
actions of our employees are also critical to effective risk
management. Through our Code of Conduct, we set a high standard
for our employees. The Code of Conduct provides a framework for
all of our employees to conduct themselves with the highest
integrity. We instill a strong and comprehensive risk management
culture through communications, training, policies, procedures,
and organizational roles and responsibilities. Additionally, we
continue to strengthen the link between the employee performance
management process and individual compensation to encourage
employees to work toward enterprise-wide risk goals.
Enterprise-wide Stress Testing
As a part of our core risk management practices, we conduct
enterprise-wide stress tests on a periodic basis to better
understand balance sheet, earnings, capital and liquidity
sensitivities to certain economic and business scenarios,
including economic and market conditions that are more severe
than anticipated. These enterprise-wide stress tests provide
illustrative hypothetical potential impacts from our risk profile on
our balance sheet, earnings, capital and liquidity and serve as a
key component of our capital, liquidity and risk management
practices. Scenarios are recommended by the Asset Liability and
Market Risk Committee (ALMRC) and approved by the CFO and
the CRO. Impacts to each business from each scenario are then
determined and analyzed, primarily by leveraging the models and
processes utilized in everyday management routines. Impacts are
assessed along with potential mitigating actions that may be
taken. Analysis from such stress scenarios is compiled for and
reviewed through our Chief Financial Officer Risk Committee
(CFORC), ALMRC and the Board’s Enterprise Risk Committee.
Contingency Planning Routines
We have developed and maintain contingency plans that prepare
us in advance to respond in the event of potential adverse
outcomes and scenarios. These contingency planning routines
include capital contingency planning, liquidity contingency funding
plans, recovery planning and enterprise resiliency, and provide
monitoring, escalation routines and response plans. Contingency
response plans are designed to enable us to increase capital,
access funding sources and reduce risk through consideration of
potential actions that includes asset sales, business sales, capital
or debt issuances and other de-risking strategies.
Board Oversight of Risk
The Board is comprised of a substantial majority of independent
directors. The Board is committed to strong, independent oversight
of management and risk through a governance structure that
includes Board committees and management committees. The
Board’s standing committees that oversee the management of the
majority of the risks faced by the Corporation include the Audit
and Enterprise Risk Committees, comprised of independent
directors, and the Credit Committee, comprised of non-
management directors. This governance structure is designed to
align the interests of the Board and management with those of
our shareholders and to foster integrity over risk management
throughout the Corporation.
76788ba_financials.indd 59
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Bank of America 2013 59
The chart below illustrates the inter-relationship among the Board, Board committees and management committees with the majority
of risk oversight responsibilities for the Corporation.
(1) Chart is not comprehensive; there may be additional subcommittees not represented in this chart. This presentation does not include committees for other legal entities.
(2) Reports through the Audit Committee for compliance and through the Enterprise Risk Committee for operational and reputational risk.
(3) Reports to the CEO and CFO with oversight by the Audit Committee.
Our Board’s Audit, Credit and Enterprise Risk Committees have
the principal responsibility for assisting the Board with enterprise-
wide oversight of the Corporation’s management and handling of
risk.
legal and
Our Audit Committee assists the Board in the oversight of,
among other things, the integrity of our consolidated financial
statements, our compliance with
regulatory
requirements, and the overall effectiveness of our system of
internal controls. Our Audit Committee also, taking into
consideration the Board’s allocation of the review of risk among
various committees of the Board, discusses with management
guidelines and policies to govern the process by which risk
assessment and risk management are undertaken, including the
assessment of our major financial risk exposures and the steps
management has taken to monitor and control such exposures.
Our Credit Committee oversees, among other things, the
identification and management of our credit exposures on an
enterprise-wide basis, our responses to trends affecting those
exposures, the adequacy of the allowance for credit losses and
our credit-related policies.
Our Enterprise Risk Committee oversees, among other things,
our identification of, management of and planning for material risks
on an enterprise-wide basis, including market risk, interest rate
risk, liquidity risk, operational risk and reputational risk. Our
Enterprise Risk Committee also oversees our capital management
and liquidity planning.
Each of these committees regularly reports to our Board on
risk-related matters within the committee’s responsibilities, which
collectively provides our Board with integrated, thorough insight
about our management of enterprise-wide risks. At meetings of
our Audit, Credit and Enterprise Risk Committees and our Board,
directors receive updates from management regarding enterprise
risk management, including our performance against our risk
appetite and risk framework.
Executive management develops for Board approval the
Corporation’s Risk Framework, Risk Appetite Statement, strategic
plans, capital plans and financial operating plans. Management
monitors, and the Board oversees, through the Credit, Enterprise
Risk and Audit Committees, financial performance, execution of
the strategic and financial operating plans, compliance with the
risk appetite and the adequacy of internal controls.
60 Bank of America 2013
from adverse business decisions,
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
ineffective or
inappropriate business plans, or failure to respond to changes in
the macroeconomic environment, such as business cycles,
competitor actions, customer preferences, product obsolescence,
technology developments and the regulatory environment. We face
significant strategic risk due to the changing regulatory
environment and the fast-paced development of new products and
technologies in the financial services industries. Our appetite for
strategic risk is assessed based on the strategic plan, with
strategic risks selectively and carefully considered against the
backdrop of the evolving marketplace. Strategic risk is managed
in the context of our overall financial condition, risk appetite and
stress test results, among other considerations. The CEO and
executive management team manage and act on significant
strategic actions, such as divestitures, consolidation of legal
entities or capital actions subsequent to required review and
approval by the Board.
Executive management develops and approves a strategic plan
each year, which is reviewed and approved by the Board. Annually,
executive management develops a financial operating plan, which
is reviewed and approved by the Board, that implements the
strategic goals for that year. With oversight by the Board, executive
management ensures that consistency is applied while executing
the Corporation’s strategic plan, core operating tenets and risk
appetite. The following are assessed in the executive reviews:
forecasted earnings and returns on capital, the current risk profile,
current capital and liquidity requirements, staffing levels and
changes required to support the plan, stress testing results, and
other qualitative factors such as market growth rates and peer
analysis. At the business level, as we introduce new products, we
monitor their performance to evaluate expectations (e.g., for
earnings and returns on capital). With oversight by the Board,
executive management performs similar analyses throughout the
year, and evaluates changes to the financial forecast or the risk,
capital or liquidity positions as deemed appropriate to balance
and optimize achieving the targeted risk appetite, shareholder
returns and maintaining the targeted financial strength.
We use proprietary models to measure the capital requirements
for credit, country, market, operational and strategic risks. The
allocated capital assigned to each business is based on its unique
risk exposures. With oversight by
the Board, executive
management assesses the risk-adjusted returns of each business
in approving strategic and financial operating plans. The
businesses use allocated capital to define business strategies,
and price products and transactions. For more information on how
this measure is calculated, see Supplemental Financial Data on
page 29.
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 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.
the effect of
Effective January 1, 2013, on a prospective basis, we adjusted
the amount of capital being allocated to our business segments.
The adjustment reflects a refinement to the prior-year methodology
(economic capital) which focused solely on internal risk-based
economic capital models. The refined methodology (allocated
regulatory capital
capital) also considers
requirements in addition to internal risk-based economic capital
models. The Corporation’s internal risk-based capital models use
a risk-adjusted methodology incorporating each segment’s credit,
market, interest rate, business and operational risk components.
For more information on the nature of these risks, see Managing
Risk on page 57 and Strategic Risk Management on page 61. The
capital allocated to the business segments is currently referred
to as allocated capital and, prior to January 1, 2013, was referred
to as economic capital, both of which represent non-GAAP financial
measures. Allocated capital is reviewed periodically based on
business segment exposures and risk profile, regulatory
constraints and strategic plans, and is subject to change over time.
For more information on the refined methodology, see Business
Segment Operations on page 31.
Regulatory Capital
As a financial services holding company, we are subject to the
general risk-based capital rules issued by federal banking
regulators which was Basel 1 through December 31, 2012. On
January 1, 2013, Basel 1 was amended prospectively, introducing
changes to the measurement of risk-weighted assets for
exposures subject to market risk (Market Risk Final Rule) and is
referred to herein as the Basel 1 – 2013 Rules. The Corporation
and its primary affiliated banking entities, BANA and FIA, measure
regulatory capital adequacy based upon these rules. For more
information on the Market Risk Final Rule, see Capital
Management – Regulatory Capital Changes on page 64.
Bank of America 2013 61
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alternative uses of capital, stock trading price, and general market
conditions, and may be suspended at any time. The remaining
common stock repurchases may be effected through open market
purchases or privately negotiated
including
repurchase plans that satisfy the conditions of Rule 10b5-1 of the
Securities Exchange Act of 1934.
transactions,
In January 2014, we submitted our 2014 CCAR plan and related
supervisory stress tests. The Federal Reserve has announced that
it will release summary results, including supervisory projections
of capital ratios, losses and revenues under stress scenarios, and
publish the results of stress tests conducted under the supervisory
adverse scenario in March 2014.
For more
information on these and other regulatory
requirements, see Note 16 – Regulatory Requirements and
Restrictions to the Consolidated Financial Statements.
Capital Composition and Ratios
Table 14 presents Bank of America Corporation’s capital ratios
and related information in accordance with the Basel 1 – 2013
Rules as measured at December 31, 2013 and Basel 1 at
December 31, 2012.
Table 14 Bank of America Corporation Regulatory
Capital – Actual and Pro-Forma
(Dollars in billions)
December 31
2013
2012
Tier 1 common capital ratio
Tier 1 common capital ratio (pro forma) (1)
Tier 1 capital ratio
Total capital ratio
Tier 1 leverage ratio
Risk-weighted assets
Adjusted quarterly average total assets (2)
(1) Pro-forma Tier 1 common capital ratio at December 31, 2012 includes the estimated impact
of the Basel 1 – 2013 Rules. Represents a non-GAAP financial measure. On a pro-forma basis,
risk-weighted assets would have been approximately $1,285 billion with the inclusion of $78.8
billion in pro-forma risk-weighted assets.
11.06%
10.38
12.89
16.31
7.37
1,206
2,111
11.19%
n/a
12.44
15.44
7.86
1,298
2,053
$
$
(2) Reflects adjusted average total assets for the three months ended December 31, 2013 and
2012.
n/a = not applicable
Tier 1 common capital under the Basel 1 – 2013 Rules was
$145.2 billion at December 31, 2013, an increase of $11.8 billion
under Basel 1 at December 31, 2012. The increase was due to
earnings eligible to be included in capital, partially offset by the
impact of the common stock repurchases. At December 31, 2012,
pro-forma Tier 1 common capital of $133.4 billion would have been
unchanged, assuming the Basel 1 – 2013 Rules had been in effect
at that time. During 2013, total capital increased $3.6 billion to
$200.3 billion primarily driven by the increase in Tier 1 common
capital and the portion of the allowance for loan and lease losses
eligible to be included in capital, partially offset by decreases in
qualifying preferred stock, qualifying subordinated debt and Trust
Securities. For additional information, see Tables 14 and 16.
Federal banking regulators, in connection with the Supervisory
Capital Assessment Program in 2009, introduced an additional
measure of capital, Tier 1 common capital. Tier 1 common capital
is not an official regulatory ratio and is defined as Tier 1 capital
less preferred stock, trust preferred securities (Trust Securities),
hybrid securities and qualifying noncontrolling
in
subsidiaries.
interest
Risk-weighted assets are calculated for credit risk for all on-
and off-balance sheet credit exposures and for market risk on
trading assets and liabilities, including derivative exposures. Credit
risk-weighted assets are calculated by assigning a prescribed risk-
weight to all on-balance sheet assets and to the credit equivalent
amount of certain off-balance sheet exposures. The risk-weight is
defined in the regulatory rules based upon the obligor or guarantor
type and collateral, if applicable. Off-balance sheet exposures
include financial guarantees, unfunded lending commitments,
letters of credit and derivatives. Market risk-weighted assets are
calculated using risk models for trading account positions,
including all foreign exchange and commodity positions regardless
of the applicable accounting guidance. Any assets that are a direct
deduction from the computation of capital are excluded from risk-
weighted assets and adjusted average total assets consistent with
regulatory guidance. Under Basel 1, there are no risk-weighted
assets calculated for operational risk.
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). The CCAR 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
2013, we submitted our 2013 capital plan, and received results
on March 14, 2013. The Federal Reserve’s stress scenario
projections for the Corporation, based on the 2013 capital plan,
estimated a minimum Tier 1 common capital ratio under the Basel
1 – 2013 Rules of 6.0 percent under severe adverse economic
conditions with all proposed capital actions through the end of
2014, exceeding the five percent reference rate for all institutions
involved in the CCAR. The capital plan submitted by the Corporation
included a request to repurchase up to $5.0 billion of common
stock and redeem $5.5 billion in preferred stock over four quarters
beginning in the second quarter of 2013, and continue the
quarterly common stock dividend at $0.01 per share. As of
December 31, 2013, in connection with the 2013 CCAR capital
plan, we have repurchased and retired approximately 231.7 million
common shares for an aggregate purchase price of approximately
$3.2 billion and we redeemed $5.5 billion of preferred stock
consisting of Series H and 8. As of December 31, 2013, under
the capital plan, we can purchase up to $1.8 billion of additional
common stock through the first quarter of 2014.
The timing and amount of common stock repurchases through
March 31, 2014 have been and will continue to be consistent with
the Corporation’s 2013 capital plan and will be subject to various
factors, including the Corporation’s capital position, liquidity,
applicable legal considerations, financial performance and
62 Bank of America 2013
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In 2013, we entered into an agreement with Berkshire
Hathaway, Inc. and its affiliates (Berkshire), who hold all the
outstanding shares of the Corporation’s 6% Cumulative Perpetual
Preferred Stock, Series T (Series T Preferred Stock) to amend the
terms of the Series T Preferred Stock. As of December 31, 2013,
the Series T Preferred Stock has a carrying value of $2.9 billion,
which does not qualify as Tier 1 capital. The material changes to
the terms of the Series T Preferred Stock proposed in the
amendment are: (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. Under Delaware law and our certificate
of incorporation, the amendment must be approved by the holders
of the Series T Preferred Stock, voting as a separate class, and a
majority of the outstanding shares of our common stock, Series
B Preferred Stock and Series 1 through 5 Preferred Stock, voting
together as a class. The amendment will be presented to our
stockholders for approval at the annual meeting of stockholders
scheduled to be held on May 7, 2014. Berkshire has granted us
an irrevocable proxy to vote their shares of Series T Preferred Stock
in favor of the amendment at the annual meeting. If our
stockholders approve the amendment and it becomes effective,
our Tier 1 capital will increase by approximately $2.9 billion, which
will benefit our Tier 1 capital and leverage ratios. We do not expect
any impact to our financial condition or results of operations as a
result of this amendment. For more information on the Series T
Preferred Stock, see Note 13 – Shareholders’ Equity to the
Consolidated Financial Statements.
At December 31, 2013, an increase or decrease in our Tier 1
common, Tier 1 or Total capital ratios by one bp would require a
change of $130 million in Tier 1 common, Tier 1 or Total capital.
We could also increase our Tier 1 common, Tier 1 or Total capital
ratios by one bp on such date by a reduction in risk-weighted assets
of $1.2 billion, $1.0 billion or $840 million, respectively. An
increase in our Tier 1 leverage ratio by one bp on such date would
Table 16 Capital Composition
(Dollars in millions)
require $205 million of additional Tier 1 capital or a reduction of
$2.6 billion in adjusted average assets.
Risk-weighted assets increased $91.6 billion in 2013 to
$1,298 billion at December 31, 2013. The increase was primarily
due to the net impact of the Basel 1 – 2013 Rules which increased
risk-weighted assets by approximately $87 billion and reduced the
Tier 1 common capital ratio by an estimated 77 bps. The Tier 1
leverage ratio increased 49 bps in 2013 primarily driven by the
increase in Tier 1 capital and a reduction in adjusted quarterly
average total assets.
Table 15 presents Bank of America Corporation’s risk-weighted
assets activity for 2013.
Table 15 Risk-weighted Asset Activity
(Dollars in billions)
Risk-weighted assets, January 1
Changes to risk-weighted assets
Increase related to Comprehensive Risk Measure (1)
Increase related to Incremental Risk Charge (1)
Increase related to market risk regulatory VaR
Standard specific risk (2)
Increase due to items no longer eligible to be included in
market risk
2013
$
1,206
22
7
21
28
9
Increases related to implementation of Basel 1 – 2013 Rules
Decrease related to trading and banking book exposures
Other changes
87
(3)
8
1,298
(1) For additional information, see Capital Management – Regulatory Capital Changes on page 64.
(2) A measure of the risk of loss on a position that could result from factors other than broad
Total risk-weighted assets, December 31
$
market movements.
Table 16 presents the capital composition in accordance with
the Basel 1 – 2013 Rules as measured at December 31, 2013
and Basel 1 at December 31, 2012.
December 31
2013
2012
Total common shareholders’ equity
Goodwill
Nonqualifying intangible assets (includes core deposit intangibles, affinity relationships, customer relationships and other intangibles)
Net unrealized (gains) losses on AFS debt and marketable equity securities and net losses on derivatives recorded in accumulated
$
$
219,333
(69,844)
(4,263)
OCI, net-of-tax
Unamortized net periodic benefit costs recorded in accumulated OCI, net-of-tax
Fair value adjustments related to structured liabilities (1)
Disallowed deferred tax asset
Other
Total Tier 1 common capital
Qualifying preferred stock
Trust preferred securities
Total Tier 1 capital
Long-term debt qualifying as Tier 2 capital
Allowance for loan and lease losses
Reserve for unfunded lending commitments
Allowance for loan and lease losses exceeding 1.25 percent of risk-weighted assets
45 percent of the pre-tax net unrealized gains (losses) on AFS marketable equity securities
Other
Total capital
$
(1) Represents loss on structured liabilities, net-of-tax, that is excluded from Tier 1 common capital, Tier 1 capital and Total capital for regulatory capital purposes.
5,538
2,407
4,485
(13,974)
1,553
145,235
10,435
5,786
161,456
21,175
17,428
484
(1,637)
(3)
1,378
200,281
$
218,188
(69,976)
(4,994)
(2,036)
4,456
4,084
(17,940)
1,621
133,403
15,851
6,207
155,461
24,287
24,179
513
(9,459)
329
1,370
196,680
Bank of America 2013 63
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Regulatory Capital Changes
Market Risk Final Rule
At December 31, 2013, we measured and reported our capital
ratios and related information in accordance with the Basel 1 –
2013 Rules, which introduced 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, all of which were
effective January 1, 2013. The CRM is used to determine the risk-
weighted assets for correlation trading positions. With approval
from U.S. banking regulators, but not sooner than one year
following compliance with the Market Risk Final Rule, we may
remove a surcharge applicable to the CRM. This benefit is not yet
included in our reported results. The implementation of the Basel
1 – 2013 Rules was the primary driver of the changes in total risk-
weighted assets, and the Tier 1, Tier 1 common and Total capital
ratios from December 31, 2012.
In December 2013, U.S. banking regulators issued an
amendment to the Market Risk Final Rule, effective on April 1,
2014, to reflect certain aspects of the final Basel 3 Regulatory
Capital rules (Basel 3). Revisions were made to the treatment of
sovereign exposures and certain traded securitization positions
as well as clarification as to the timing of required disclosures.
These revisions are not expected to materially impact us.
Basel 3 Regulatory Capital Rules
The final Basel 3 rules became effective on January 1, 2014.
Various aspects of Basel 3 will be subject to multi-year transition
periods ending December 31, 2018 and Basel 3 generally
continues to be subject to interpretation by the U.S. banking
regulators. Basel 3 will materially change our Tier 1 common, Tier
1 and Total capital calculations. 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 calculation of risk-weighted assets for credit and market risk
(the Advanced approach); and introduces a Standardized approach
for the calculation of risk-weighted assets. This will replace the
Basel 1 – 2013 Rules effective January 1, 2015. For more
information on the Standardized approach, see page 65.
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 anytime on or after January 1, 2014, the Advanced
approach. For 2014, the Standardized approach uses risk-
weighted assets as measured under the Basel 1 – 2013 Rules
and Basel 3 capital in the determination of the Basel 3
Standardized approach capital ratios. 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-
64 Bank of America 2013
capitalized” banking entities. While we continue to evaluate the
impact of both the Standardized and Advanced approaches, we
generally expect that initially the Standardized approach will yield
lower ratios.
through
financial
institutions
requirement
loss absorbency
In November 2011, the Basel Committee on Banking
Supervision (Basel Committee) published a methodology to
identify global systematically important banks (G-SIBs) and impose
the
an additional
introduction of a buffer of up to 3.5 percent for systemically
important
(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 require 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 December 31, 2013, 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.
Regulatory Capital Transitions
Important differences in determining the composition of regulatory
capital between 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.
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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 Tier 1 common 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 17 summarizes how certain regulatory capital deductions
and adjustments will be transitioned from 2014 through 2018 for
Tier 1 common and Tier 1 capital.
Table 17 Summary of Certain Basel 3 Regulatory Capital Transition Provisions
Beginning on January 1 of each year
Tier 1 common capital
2014
2015
2016
2017
2018
Percent of total amount deducted from Tier 1 common 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 gains (losses) related to changes in own credit risk on liabilities, including derivatives, measured at fair value; direct and indirect investments
in own Tier 1 common capital instruments; certain amounts exceeding the threshold by 10 percent individually and 15 percent in aggregate
Percent of total amount used to adjust Tier 1 common 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 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).
In addition, 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
December 31, 2013, our qualifying Trust Securities were $5.8
billion (approximately 45 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 previously described.
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 the same basis as the Market Risk Final Rule,
described previously. Credit risk exposures are measured by
applying fixed risk weights to the 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 approach includes a
measure of operational risk and a credit valuation adjustment
(CVA) capital charge in credit risk and relies on internal analytical
models to measure credit risk-weighted assets, as more fully
described below. Under the Basel 3 Standardized approach, we
estimate our Tier 1 common capital ratio, on a fully phased-in
basis, to be just above nine percent at December 31, 2013.
Advanced Approach
Under the Basel 3 Advanced approach, risk-weighted assets are
determined primarily for market risk, credit risk and 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 advanced 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 advanced internal models which rely on both
internal and external operational loss experience and data. The
Basel 3 Advanced approach requires 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.
Prior to calculating and assessing capital adequacy and
reporting regulatory capital ratios using Basel 3 Advanced
approach risk-weighted assets, we must receive notification of
approval to do so from the U.S banking regulators. Under the Basel
3 Advanced approach, we estimated our Tier 1 common capital
ratio, on a fully phased-in basis, to be 9.96 percent at
December 31, 2013. As of December 31, 2013, we estimated
that our Tier 1 common capital would be $132.3 billion and total
risk-weighted assets would be $1,329 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 Comprehensive Risk
Measure (CRM). The calculations under Basel 3 require
management to make estimates, assumptions and interpre-
tations, including the probability of future events based on
historical experience. Realized results could differ from those
estimates and assumptions.
Bank of America 2013 65
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Table 18 presents a reconciliation of our Tier 1 common capital
and risk-weighted assets in accordance with the Basel 1 – 2013
Rules to our Basel 3 fully phased-in estimates at December 31,
2013 and Basel 1 to Basel 3 fully phased-in estimates at
December 31, 2012. Our estimates under the Basel 3 Advanced
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. Basel 3 regulatory capital
metrics are considered non-GAAP financial measures until January
1, 2014 when they are fully adopted and required by U.S. banking
regulators.
Table 18 Basel 1 to Basel 3 (fully phased-in) Reconciliation (1)
(Dollars in millions)
Regulatory capital – Basel 1 to Basel 3 (fully phased-in)
Basel 1 Tier 1 capital
Deduction of qualifying preferred stock and trust preferred securities
Basel 1 Tier 1 common capital
Deduction of defined benefit pension assets
Deferred tax assets and threshold deductions (deferred tax asset temporary differences, MSRs and significant investments)
Net unrealized gains (losses) in accumulated OCI on AFS debt and certain marketable equity securities, and employee benefit plans
Other deductions, net
Basel 3 Advanced approach (fully phased-in) Tier 1 common capital
Risk-weighted assets – Basel 1 to Basel 3 (fully phased-in)
Basel 1 risk-weighted assets
Credit and other risk-weighted assets
Increase due to Market Risk Final Rule (2)
Basel 3 Advanced approach (fully phased-in) risk-weighted assets
Tier 1 common capital ratios
Basel 1
Basel 3 Advanced approach (fully phased-in)
December 31
2013
2012
$
$
161,456
(16,221)
145,235
(829)
(4,803)
(5,668)
(1,620)
132,315
$
$
155,461
(22,058)
133,403
(737)
(3,020)
449
(1,469)
128,626
$ 1,297,534
31,510
—
$ 1,329,044
$ 1,205,976
103,085
81,811
$ 1,390,872
11.19%
9.96
11.06%
9.25
(1) Includes the Market Risk Final Rule at December 31, 2013. Basel 1 did not include the Market Risk Final Rule at December 31, 2012.
(2) Excludes the benefit of certain hedges at December 31, 2012. Including these hedges, the increase due to the Market Risk Final Rule would have been $78.8 billion. For additional information, see
Capital Management – Capital Composition and Ratios on page 62.
Supplementary Leverage Ratio
Basel 3 also will require us to calculate a supplementary leverage
ratio, determined by dividing Tier 1 capital by total leverage
exposure for each month-end during a fiscal quarter, and then
calculating the simple average. Total 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, OTC derivatives, repo-style
transactions and margin loan commitments. The minimum
supplementary leverage ratio requirement of three percent is not
effective until January 1, 2018. We will be required to disclose our
supplementary leverage ratio effective January 1, 2015.
In July 2013, U.S. banking regulators issued a notice of
proposed rulemaking (NPR) to modify the supplementary leverage
ratio minimum requirements under Basel 3 effective in 2018. This
proposal would only be applicable to BHCs with more than $700
billion in total assets or more than $10 trillion in total assets under
custody. If adopted, it would require the Corporation 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 would
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 would include
primarily BANA and FIA, would be required to maintain a minimum
six percent leverage ratio to be considered “well capitalized.” As
the Corporation’s
of December 31, 2013, we estimate
supplementary leverage ratio to be in excess of five percent based
66 Bank of America 2013
on these proposed requirements, and our primary bank
subsidiaries, BANA and FIA, to be in excess of the six percent
minimum proposed requirement. The proposal is not yet final and,
when finalized, could have provisions significantly different from
those currently proposed. The provisions of the NPR on the
supplementary leverage ratio, 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.
On January 12, 2014, the Basel Committee issued final
guidance introducing changes to the method of calculating total
leverage exposure under the international Basel 3 framework. The
total leverage exposure was revised to measure derivatives on a
gross basis with cash variation margin reducing the exposure if
include off-balance sheet
certain conditions are met,
commitments measured using the notional amount multiplied by
conversion factors between 10 percent and 100 percent
consistent with the general risk-based capital rules and a change
to measure written credit derivatives using a notional-based
approach capped at the maximum loss with limited netting
permitted. U.S. banking regulators may consider the Basel
Committee’s final guidance in connection with the July 2013 NPR.
Other Regulatory Matters
On February 18, 2014, the Federal Reserve approved a final rule
implementing certain enhanced supervisory and prudential
requirements established under the Financial Reform Act. The final
rule formalizes risk management requirements primarily related
to governance and liquidity risk management and reiterates the
provisions of previously issued final rules related to risk-based
76788ba_financials.indd 66
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and leverage capital and stress test requirements. Also, a debt-
to-equity limit may be enacted for an individual BHC if determined
to pose a grave threat to the financial stability of the U.S., at the
discretion of the Financial Stability Oversight Council (FSOC) or
the Federal Reserve on behalf of the FSOC.
For more information regarding Basel 3 and other proposed
regulatory capital changes, see Note 16 – Regulatory Requirements
and Restrictions to the Consolidated Financial Statements.
Bank of America, N.A. and FIA Card Services, N.A.
Regulatory Capital
Table 19 presents regulatory capital information for BANA and FIA
at December 31, 2013 and 2012.
Table 19 Bank of America, N.A. and
FIA Card Services, N.A. Regulatory Capital (1)
(Dollars in millions)
Tier 1 capital
December 31
2013
2012
Ratio
Amount
Ratio
Amount
Bank of America, N.A.
FIA Card Services, N.A.
12.34% $ 125,886
20,135
16.83
12.44% $ 118,431
22,061
17.34
Total capital
Bank of America, N.A.
FIA Card Services, N.A.
Tier 1 leverage
Bank of America, N.A.
FIA Card Services, N.A.
13.84
18.12
9.21
12.91
141,232
21,672
125,886
20,135
14.76
18.64
8.59
13.67
140,434
23,707
118,431
22,061
(1) BANA regulatory capital information included the Basel 1 – 2013 Rules at December 31, 2013.
At December 31, 2012, BANA regulatory capital information did not include the Basel 1 – 2013
Rules. FIA is not impacted by the Basel 1 – 2013 Rules.
BANA’s Tier 1 capital ratio decreased 10 bps to 12.34 percent
and the Total capital ratio decreased 92 bps to 13.84 percent at
December 31, 2013 compared to December 31, 2012. The Tier
1 leverage ratio increased 62 bps to 9.21 percent at December 31,
2013 compared to December 31, 2012. The decrease in the Tier
1 capital ratio was driven by an increase in risk-weighted assets
of $68.5 billion compared to the prior year, dividends and returns
of capital to the Corporation of $8.5 billion and $2.2 billion during
2013, partially offset by earnings eligible to be included in capital
of $16.5 billion. The increase in risk-weighted assets was primarily
due to the impact of implementing the Basel 1 – 2013 Rules and
an increase in loans. The decrease in the Total capital ratio was
driven by the same factors as the Tier 1 capital ratio as well as a
$7.0 billion decrease in qualifying subordinated debt during 2013.
The increase in the Tier 1 leverage ratio was driven by an increase
in Tier 1 capital and a decrease in adjusted quarterly average total
assets of $11.6 billion.
FIA’s Tier 1 capital ratio decreased 51 bps to 16.83 percent
and the Total capital ratio decreased 52 bps to 18.12 percent at
December 31, 2013 compared to December 31, 2012. The Tier
1 leverage ratio decreased 76 bps to 12.91 percent at
December 31, 2013 compared to December 31, 2012. The
decrease in the Tier 1 capital and Total capital ratios was driven
by returns of capital of $6.5 billion to the Corporation during 2013,
partially offset by earnings eligible to be included in capital of $4.3
billion and a decrease in risk-weighted assets of $7.6 billion
primarily due to a decrease in loans. 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 of
$5.3 billion. FIA was not impacted by the implementation of the
Basel 1 – 2013 Rules.
Broker/Dealer Regulatory Capital and Securities
Regulation
The Corporation’s principal U.S. broker/dealer subsidiaries are
Merrill Lynch, Pierce, Fenner & Smith (MLPF&S) and Merrill Lynch
Professional Clearing Corp (MLPCC). MLPCC is a fully-guaranteed
subsidiary of MLPF&S and provides clearing and settlement
services. Both entities are subject to the net capital requirements
of SEC Rule 15c3-1. Both entities are also registered as futures
commission merchants and are subject to the Commodity Futures
Trading Commission Regulation 1.17.
MLPF&S has elected to compute the minimum capital
requirement in accordance with the Alternative Net Capital
Requirement as permitted by SEC Rule 15c3-1. At December 31,
2013, MLPF&S’s regulatory net capital as defined by Rule 15c3-1
was $10.0 billion and exceeded the minimum requirement of $951
million by $9.0 billion. MLPCC’s net capital of $2.2 billion exceeded
the minimum requirement of $366 million by $1.8 billion.
In accordance with the Alternative Net Capital Requirements,
MLPF&S is required to maintain tentative net capital in excess of
$1.0 billion, net capital in excess of $500 million and notify the
SEC in the event its tentative net capital is less than $5.0 billion.
At December 31, 2013, 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 PRA and the FCA and is subject to certain
regulatory capital requirements. Following an increase in capital
resources in advance of the implementation of Basel 3 in 2014,
at December 31, 2013, MLI’s capital resources were $28.2 billion
and exceeded the minimum requirement of $10.8 billion and had
enough excess to cover any additional requirements as set by the
regulators.
Common Stock Dividends
For a summary of our declared quarterly cash dividends on
common stock during 2013 and through February 25, 2014, see
Note 13 – Shareholders’ Equity to the Consolidated Financial
Statements.
Liquidity Risk
Funding and Liquidity Risk Management
We define liquidity risk as the potential inability to meet our
contractual and contingent financial obligations, on- or off-balance
sheet, as they come due. Our primary liquidity objective is to
provide adequate funding for our businesses throughout market
cycles, including periods of financial stress. To achieve that
objective, we analyze and monitor our liquidity risk, maintain excess
liquidity and access diverse funding sources including our stable
deposit base. We define excess liquidity as readily available
assets, limited to cash and high-quality, liquid, unencumbered
securities that we can use to meet our funding requirements as
those obligations arise.
Global funding and 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.
Bank of America 2013 67
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The Enterprise Risk Committee approves the Corporation’s
liquidity policy and contingency funding plan, including establishing
liquidity risk tolerance levels. The ALMRC monitors our liquidity
position and reviews the impact of strategic decisions on our
liquidity. ALMRC is responsible for managing liquidity risks and
maintaining exposures within the established tolerance levels.
ALMRC delegates additional oversight responsibilities to the
CFORC, which reports to the ALMRC. The CFORC reviews and
monitors our liquidity position, cash flow forecasts, stress testing
scenarios and results, and implements our liquidity limits and
guidelines. For additional information, see Managing Risk – Board
Oversight of Risk on page 59. Under this governance framework,
we have developed certain funding and liquidity risk management
practices which include: maintaining excess liquidity at the parent
company and selected subsidiaries,
including our bank
subsidiaries and other regulated entities; determining what
amounts of excess liquidity are appropriate for these entities
based on analysis of debt maturities and other potential cash
outflows, including those that we may experience during stressed
market conditions; diversifying funding sources, considering our
asset profile and legal entity structure; and performing contingency
planning.
Global Excess Liquidity Sources and Other
Unencumbered Assets
We maintain excess liquidity available to Bank of America
Corporation, or the parent company and selected subsidiaries in
the form of cash and high-quality, liquid, unencumbered securities.
These assets, which we call our Global Excess Liquidity Sources,
serve as our primary means of liquidity risk mitigation. Our cash
is primarily on deposit with the Federal Reserve and 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 metric is similar to
High Quality Liquid Assets in the proposed LCR rulemaking. For
more information on the proposed rulemaking, see Liquidity Risk
– Basel 3 Liquidity Standards on page 69.
Our Global Excess Liquidity Sources were $376 billion and
$372 billion at December 31, 2013 and 2012 and were maintained
as presented in Table 20.
Table 20 Global Excess Liquidity Sources
(Dollars in billions)
Parent company
Bank subsidiaries
Other regulated entities
$
Total Global Excess Liquidity Sources
$
Average for
Three Months
Ended
December 31
2013
December 31
2013
2012
95
249
32
376
$
$
103 $
247
22
372 $
92
248
30
370
As shown in Table 20, parent company Global Excess Liquidity
Sources totaled $95 billion and $103 billion at December 31,
2013 and 2012. The decrease in parent company liquidity was
primarily due to debt maturities and capital actions, partially offset
by capital returns from subsidiaries and debt issuances. Typically,
parent company cash is deposited overnight with BANA.
Global Excess Liquidity Sources available to our bank
subsidiaries totaled $249 billion and $247 billion at December
31, 2013 and 2012. The bank subsidiaries’ liquidity remained
relatively unchanged as deposit growth and an increase in short-
term borrowings was largely offset by loan growth, a decrease in
the fair value of debt securities and capital returns to the parent
company. Liquidity amounts are distinct from 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 $218 billion and $194 billion at December 31, 2013
and 2012. 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.
Global Excess Liquidity Sources available to our other regulated
entities totaled $32 billion and $22 billion at December 31, 2013
and 2012. 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 21 presents the composition of Global Excess Liquidity
Sources at December 31, 2013 and 2012.
Table 21 Global Excess Liquidity Sources Composition
(Dollars in billions)
Cash on deposit
U.S. Treasuries
U.S. agency securities and mortgage-backed securities
Non-U.S. government and supranational securities
Total Global Excess Liquidity Sources
December 31
2013
2012
$
$
90
20
245
21
376
$
$
65
21
271
15
372
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 and 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
68 Bank of America 2013
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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 December 31, 2013, which
is above the Corporation’s target minimum of 21 months. For
purposes of calculating Time
to Required Funding, at
December 31, 2013, 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. For information on current developments
related to the BNY Mellon Settlement see, Recent Events – BNY
Mellon Settlement on page 21. The merger of Merrill Lynch & Co.,
Inc. into Bank of America Corporation on October 1, 2013 had no
impact on the unsecured contractual obligations included in this
metric.
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
that
Variable Rate Demand Notes; additional collateral
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 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.
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 expects the minimum
standard to be 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
through a centralized, globally
coordinated funding strategy. We diversify our funding globally
across products, programs, markets, currencies and investor
groups.
liabilities
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.
76788ba_financials.indd 69
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Bank of America 2013 69
Table 22 presents our long-term debt by major currency at
December 31, 2013 and 2012.
Table 22 Long-term Debt by Major Currency
(Dollars in millions)
U.S. Dollar
Euro
British Pound
Japanese Yen
Canadian Dollar
Australian Dollar
Swiss Franc
Other
Total long-term debt
December 31
2013
$ 176,294
46,029
9,772
9,115
2,402
1,870
1,274
2,918
$ 249,674
2012
$ 180,329
58,985
11,126
12,749
3,560
2,760
1,917
4,159
$ 275,585
Total long-term debt decreased $25.9 billion, or nine percent,
in 2013, primarily driven by maturities outpacing new issuances.
This reflects our ongoing initiative to reduce our debt balances
over time and we anticipate that debt levels will continue to decline
through 2014, although at a slower pace than 2013. We may, from
time to time, purchase outstanding debt instruments in various
transactions, depending on prevailing market conditions, liquidity
and other factors. In addition, our other regulated entities may
make markets in our debt instruments to provide liquidity for
investors. For more information on long-term debt funding, see
Note 11 – Long-term Debt to the Consolidated Financial
Statements.
We use derivative transactions to manage the duration, interest
rate and currency risks of our borrowings, considering the
characteristics of the assets they are funding. For further details
on our ALM activities, see Interest Rate Risk Management for
Nontrading Activities on page 109.
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 $48.4 billion and
$51.7 billion at December 31, 2013 and 2012.
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.
We fund a substantial portion of our lending activities through
our deposits, which were $1.12 trillion and $1.11 trillion at
December 31, 2013 and 2012. 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
and
borrowings,
securitizations with GSEs, the FHA and private-label investors, as
well as FHLB loans.
securitizations
including
credit
card
Our trading activities in other regulated entities are primarily
funded on a secured basis through securities lending and
repurchase agreements and these amounts will vary based on
customer activity and market conditions. We believe funding these
activities in the secured financing markets is more cost-efficient
and less sensitive to changes in our credit ratings than unsecured
financing. Repurchase agreements are generally short-term and
often overnight. Disruptions in secured financing markets for
financial institutions have occurred in prior market cycles which
resulted in adverse changes in terms or significant reductions in
the availability of such financing. We manage the liquidity risks
arising from secured funding by sourcing funding globally from a
diverse group of counterparties, providing a range of securities
collateral and pursuing longer durations, when appropriate. For
more information on secured financing agreements, see Note 10
– Federal Funds Sold or Purchased, Securities Financing
Agreements and Short-term Borrowings to the Consolidated
Financial Statements.
We issue the majority of our long-term unsecured debt at the
parent company. During 2013, we issued $31.4 billion of long-
term unsecured debt, including structured liabilities of $8.4 billion.
We may 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
2013, we issued $2.5 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.
In 2013, we redeemed $9.0 billion of certain senior notes
maturing in 2014 through tender offers. In January 2014, we
issued $1.25 billion of 2.6% notes due January 2019, $400 million
of floating-rate notes due January 2019, $2.5 billion of 4.125%
notes due January 2024 and $2.0 billion of 5.0% notes due
January 2044. The Corporation converted substantially all of this
newly issued fixed-rate debt to floating-rate exposure with
derivative transactions.
70 Bank of America 2013
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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
Table 23 Senior Debt Ratings
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
Investor Service, Inc. (Moody’s), only the ratings of Bank of America,
N.A.) currently reflect the expectation that, if necessary, we would
receive significant support from the U.S. government, and that
they will continue to assess such support in the context of
sovereign financial strength and regulatory and legislative
developments.
On December 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 our ratings to stable. On May 16, 2013, Fitch
Ratings (Fitch) announced the results of its periodic review of its
ratings for 12 large, complex securities trading and universal
banks, including Bank of America. As part of this action, Fitch
affirmed the Corporation’s senior credit ratings and upgraded the
rating of our stand-alone creditworthiness, as well as the ratings
for our subordinated debt, trust preferred and preferred stock,
each by one notch.
Table 23 presents the Corporation’s current long-term/short-
term senior debt ratings and outlooks expressed by the rating
agencies.
Bank of America Corporation
Bank of America, N.A.
Merrill Lynch, Pierce, Fenner & Smith
Merrill Lynch International
NR = not rated
Moody’s Investor Service
Standard & Poor’s
Fitch Ratings
Long-term Short-term
P-2
P-1
NR
NR
Baa2
A2
NR
NR
Outlook
Stable
Stable
NR
NR
Long-term Short-term
A-2
A-1
A-1
A-1
A-
A
A
A
Outlook
Negative
Negative
Negative
Negative
Long-term Short-term
F1
F1
F1
F1
A
A
A
A
Outlook
Stable
Stable
Stable
Stable
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.
Bank of America 2013 71
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Table 24 presents the amount of additional collateral
contractually required by derivative contracts and other trading
agreements at December 31, 2013 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 24 Additional Collateral Required to be Posted
Upon Downgrade
(Dollars in millions)
Bank of America Corporation
Bank of America, N.A. and subsidiaries (1)
(1)
Included in Bank of America Corporation collateral requirements in this table.
December 31, 2013
One
Second
incremental
incremental
notch
notch
$
1,302 $
881
4,101
3,039
Table 25 presents the derivative liability that would be subject
to unilateral termination by counterparties and the amounts of
collateral that would have been posted at December 31, 2013, 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 25 Derivative Liability Subject to Unilateral
Termination Upon Downgrade
(Dollars in millions)
Derivative liability
Collateral posted
December 31, 2013
Second
One
incremental
incremental
notch
notch
$
927 $
733
1,878
1,467
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 68.
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 this Annual Report on Form 10-K.
On October 15, 2013, Fitch placed its AAA long-term and F1+
short-term sovereign credit rating on the U.S. government on rating
watch negative. 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. On June
10, 2013, S&P affirmed its AA+ long-term and A-1+ short-term
sovereign credit rating on the U.S. government, as the outlook on
the long-term credit rating was revised to stable from negative.
72 Bank of America 2013
Credit Risk Management
Credit quality improved during 2013 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 – 2013 Economic and
Business Environment on page 20.
Credit risk is the risk of loss arising from the inability or failure
of a borrower or counterparty to meet its obligations. Credit risk
can also arise from operational failures that result in an erroneous
advance, commitment or investment of funds. We define the credit
exposure to a borrower or counterparty as the loss potential arising
from all product classifications including loans and leases, deposit
overdrafts, derivatives, assets held-for-sale and unfunded lending
commitments which include loan commitments, letters of credit
and financial guarantees. Derivative positions are recorded at fair
value and assets held-for-sale are recorded at either fair value or
the lower of cost or fair value. Certain loans and unfunded
commitments are accounted for under the fair value option. Credit
risk for categories of assets carried at fair value is not accounted
for as part of the allowance for credit losses but as part of the fair
value adjustments recorded in earnings. For derivative positions,
our credit risk is measured as the net cost in the event the
counterparties with contracts in which we are in a gain position
fail to perform under the terms of those contracts. We use the
current fair value to represent credit exposure without giving
consideration to future mark-to-market changes. The credit risk
amounts take into consideration the effects of legally enforceable
master netting agreements and cash collateral. Our consumer and
commercial credit extension and review procedures encompass
funded and unfunded credit exposures. For more information on
derivative and credit extension commitments, see Note 2 –
Derivatives and Note 12 – Commitments and Contingencies to the
Consolidated Financial Statements.
We manage credit risk based on the risk profile of the borrower
or counterparty, repayment sources, the nature of underlying
collateral, and other support given current events, conditions and
expectations. We classify our portfolios as either consumer or
commercial and monitor credit risk in each as discussed below.
We proactively refine our underwriting and credit management
practices as well as credit standards to meet the changing
economic environment. To actively mitigate losses and enhance
customer support in our consumer businesses, we have in place
collection programs and
loan modification and customer
assistance infrastructures. We utilize a number of actions to
mitigate losses in the commercial businesses including increasing
the frequency and intensity of portfolio monitoring, hedging activity
and our practice of transferring management of deteriorating
commercial exposures to independent special asset officers as
credits enter criticized categories.
We have non-U.S. exposure largely in Europe and Asia Pacific.
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
96 and Item 1A. Risk Factors of this Annual Report on Form 10-
K.
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For more information on our credit risk management activities,
see Consumer Portfolio Credit Risk Management on page 73,
Commercial Portfolio Credit Risk Management on page 87, Non-
U.S. Portfolio on page 96, Provision for Credit Losses and
Allowance for Credit Losses both on page 100, Note 1 – Summary
of Significant Accounting Principles, Note 4 – Outstanding Loans
and Leases and Note 5 – Allowance for Credit Losses to the
Consolidated Financial Statements.
Consumer Portfolio Credit Risk Management
Credit risk management for the consumer portfolio begins with
initial underwriting and continues throughout a borrower’s credit
cycle. Statistical techniques in conjunction with experiential
judgment are used in all aspects of portfolio management
including underwriting, product pricing, risk appetite, setting credit
limits, and establishing operating processes and metrics to
quantify and balance risks and returns. Statistical models are built
using detailed behavioral information from external sources such
as credit bureaus and/or internal historical experience. These
models are a component of our consumer credit risk management
process and are used in part to assist in making both new and
ongoing credit decisions, as well as portfolio management
strategies, including authorizations and line management,
collection practices and strategies, and determination of the
allowance for loan and lease losses and allocated capital for credit
risk.
From January 2008 through 2013, Bank of America and
Countrywide have completed more than 1.3 million loan
modifications with customers. During 2013, we completed nearly
170,000 customer loan modifications with a total unpaid principal
balance of approximately $35 billion, including approximately
52,000 permanent modifications under the U.S. government’s
Making Home Affordable Program. Of the loan modifications
completed in 2013, in terms of both the volume of modifications
and the unpaid principal balance associated with the underlying
loans, most were in the portfolio serviced for investors and were
not on our balance sheet. The most common types of modifications
include a combination of rate reduction and/or capitalization of
past due amounts which represented 66 percent of the volume of
modifications completed in 2013, while principal reductions and
forgiveness represented 14 percent, principal forbearance
represented 11 percent and capitalization of past due amounts
represented six percent. For modified loans on our balance sheet,
these modification types are generally considered 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 85 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 2013 resulting in improved credit quality and
lower credit losses across nearly all major consumer portfolios
compared to 2012. Consumer loans 30 days or more past due
declined during 2013 across all consumer portfolios and
nonperforming consumer loans and foreclosed property continued
to decline as outflows, including the impact of loans sales,
outpaced inflows 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 $7.7
billion decrease in 2013 to $13.4 billion in the consumer
allowance for loan and lease losses. For additional information,
see Allowance for Credit Losses on page 100.
In 2013, we entered into the FNMA Settlement to resolve
substantially all outstanding and potential repurchase and certain
other claims relating to the origination, sale and delivery of
residential mortgage loans originated and sold directly to FNMA
from January 1, 2000 through December 31, 2008 by entities
related to Countrywide and BANA. In connection with the FNMA
Settlement, we repurchased certain loans from FNMA and, as of
December 31, 2013, these loans had an unpaid principal balance
of $5.7 billion and a carrying value of $4.9 billion of which $5.3
billion of unpaid principal balance and $4.6 billion of carrying value
were classified as PCI loans. All of these loans are included in the
Legacy Assets & Servicing portfolio in Table 29. For more
information on PCI loans, see Consumer Portfolio Credit Risk
Management – Purchased Credit-impaired Loan Portfolio on page
81 and Note 4 – Outstanding Loans and Leases to the Consolidated
Financial Statements. For more information on the FNMA
Settlement, see Note 7 – Representations and Warranties
Obligations and Corporate Guarantees to the Consolidated
Financial Statements.
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.
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Bank of America 2013 73
Table 26 presents our outstanding consumer loans and leases,
and the PCI loan portfolio. In addition to being included in the
“Outstandings” columns in Table 26, 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. Given the continued run-off of our discontinued
real estate portfolio, effective January 1, 2013, pay option loans
Table 26 Consumer Loans and Leases
(Dollars in millions)
Residential mortgage (1)
Home equity
U.S. credit card
Non-U.S. credit card
Direct/Indirect consumer (2)
Other consumer (3)
Consumer loans excluding loans accounted for under the fair value option
Loans accounted for under the fair value option (4)
Total consumer loans and leases
are included as part of our residential mortgage and home equity
portfolios. The majority of these loans were considered credit-
impaired and were written down to fair value upon acquisition. Prior
periods were
to current period
presentation. For more information on pay option loans, see
Consumer Portfolio Credit Risk Management – Purchased Credit-
impaired Residential Mortgage Loan Portfolio on page 82.
to conform
reclassified
December 31
Outstandings
2013
248,066
93,672
92,338
11,541
82,192
1,977
529,786
2,164
531,950
$
$
2012
252,929
108,140
94,835
11,697
83,205
1,628
552,434
1,005
553,439
$
$
$
$
Purchased Credit-impaired
Loan Portfolio
2013
2012
18,672
6,593
n/a
n/a
n/a
n/a
25,265
n/a
25,265
$
$
17,451
8,667
n/a
n/a
n/a
n/a
26,118
n/a
26,118
(1) Outstandings include pay option loans of $4.4 billion and $6.7 billion and non-U.S. residential mortgage loans of $0 and $93 million at December 31, 2013 and 2012. We no longer originate pay
option loans.
(2) Outstandings include dealer financial services loans of $38.5 billion and $35.9 billion, consumer lending loans of $2.7 billion and $4.7 billion, U.S. securities-based lending loans of $31.2 billion
and $28.3 billion, non-U.S. consumer loans of $4.7 billion and $8.3 billion, student loans of $4.1 billion and $4.8 billion and other consumer loans of $1.0 billion and $1.2 billion at December 31,
2013 and 2012.
(3) Outstandings include consumer finance loans of $1.2 billion and $1.4 billion, consumer leases of $606 million and $34 million, consumer overdrafts of $176 million and $177 million and other
non-U.S. consumer loans of $5 million and $5 million at December 31, 2013 and 2012.
(4) Consumer loans accounted for under the fair value option include residential mortgage loans of $2.0 billion and $1.0 billion and home equity loans of $147 million and $0 at December 31, 2013
and 2012. 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 85 and Note 21 –
Fair Value Option to the Consolidated Financial Statements.
n/a = not applicable
74 Bank of America 2013
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Table 27 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 27 Consumer Credit Quality
(Dollars in millions)
Residential mortgage (1)
Home equity
U.S. credit card
Non-U.S. credit card
Direct/Indirect consumer
Other consumer
Total (2)
Consumer loans and leases as a percentage of outstanding consumer loans and leases (2)
Consumer loans and leases as a percentage of outstanding loans and leases, excluding PCI and fully-
December 31
Nonperforming
Accruing Past Due
90 Days or More
2013
2012
2013
2012
$
$
11,712
4,075
n/a
n/a
35
18
15,840
$
$
15,055
4,282
n/a
n/a
92
2
19,431
$
$
16,961
—
1,053
131
408
2
18,555
$
$
22,157
—
1,437
212
545
2
24,353
2.99%
3.52%
3.50%
4.41%
insured loan portfolios (2)
3.80
4.46
0.38
0.50
(1) Residential mortgage loans accruing past due 90 days or more are fully-insured loans. At December 31, 2013 and 2012, residential mortgage included $13.0 billion and $17.8 billion of loans on
which interest has been curtailed by the FHA, and therefore are no longer accruing interest, although principal is still insured, and $4.0 billion and $4.4 billion of loans on which interest was still
accruing.
(2) Balances exclude consumer loans accounted for under the fair value option. At December 31, 2013 and 2012, $445 million and $391 million of loans accounted for under the fair value option were
past due 90 days or more and not accruing interest.
n/a = not applicable
Table 28 presents net charge-offs and related ratios for consumer loans and leases.
Table 28 Consumer Net Charge-offs and Related Ratios
(Dollars in millions)
Residential mortgage
Home equity
U.S. credit card
Non-U.S. credit card
Direct/Indirect consumer
Other consumer
Total
Net Charge-offs (1)
Net Charge-off Ratios (1, 2)
2013
2012
2013
2012
$
$
1,084
1,803
3,376
399
345
234
7,241
$
$
3,111
4,242
4,632
581
763
232
13,561
0.42%
1.80
3.74
3.68
0.42
12.96
1.34
1.18%
3.62
4.88
4.29
0.90
9.85
2.36
(1) Net charge-offs exclude write-offs in the PCI loan portfolio of $1.2 billion in home equity and $1.1 billion in residential mortgage in 2013 compared to $2.8 billion in home equity in 2012. These
write-offs decreased the PCI valuation allowance included as part of the allowance for loan and lease losses. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management
– Purchased Credit-impaired Loan Portfolio on page 81.
(2) Net charge-off ratios are calculated as net charge-offs divided by average outstanding loans and leases excluding loans accounted for under the fair value option.
Net charge-off ratios, excluding the PCI and fully-insured loan
portfolios, were 0.74 percent and 2.04 percent for residential
mortgage, 1.94 percent and 3.99 percent for home equity and
1.71 percent and 2.99 percent for the total consumer portfolio
for 2013 and 2012. 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
$1.2 billion in home equity and $1.1 billion in residential mortgage
for 2013, and $2.8 billion in home equity for 2012. 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 3.05 percent for home equity and 0.85
percent for residential mortgage in 2013, and 6.02 percent for
home equity in 2012. For more information on PCI write-offs, see
Consumer Portfolio Credit Risk Management – Purchased Credit-
impaired Loan Portfolio on page 81.
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Bank of America 2013 75
Table 29 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 36.
Table 29 Home Loans Portfolio (1)
(Dollars in millions)
Core portfolio
Residential mortgage
Home equity
Total Core portfolio
Legacy Assets & Servicing portfolio
Residential mortgage
Home equity
Total Legacy Assets & Servicing portfolio
Home loans portfolio
Residential mortgage
Home equity
Total home loans portfolio
Core portfolio
Residential mortgage
Home equity
Total Core portfolio
Legacy Assets & Servicing portfolio
Residential mortgage
Home equity
Total Legacy Assets & Servicing portfolio
Home loans portfolio
Residential mortgage
Home equity
Total home loans portfolio
544
811
1,355
2,567
3,431
5,998
3,111
4,242
7,353
December 31
Outstandings
Nonperforming
Net Charge-offs (2)
2013
2012
2013
2012
2013
2012
$ 177,336
54,499
231,835
$ 170,116
60,851
230,967
$
$
3,316
1,431
4,747
$
3,193
1,265
4,458
$
274
439
713
70,730
39,173
109,903
82,813
47,289
130,102
248,066
93,672
$ 341,738
252,929
108,140
$ 361,069
$
$
$
8,396
2,644
11,040
11,712
4,075
15,787
$
11,862
3,017
14,879
15,055
4,282
19,337
$
810
1,364
2,174
1,084
1,803
2,887
$
December 31
Allowance for Loan
and Lease Losses
Provision for Loan
and Lease Losses
2013
2012
2013
2012
728
965
1,693
3,356
3,469
6,825
4,084
4,434
8,518
$
$
$
829
1,286
2,115
$
166
119
285
6,259
6,559
12,818
7,088
7,845
14,933
(979)
(430)
(1,409)
(813)
(311)
(1,124) $
$
523
256
779
1,802
1,492
3,294
2,325
1,748
4,073
(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 $1.0 billion and home equity loans of $147 million and $0 at December 31, 2013 and 2012. 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 85 and Note 21 – Fair Value Option to the Consolidated Financial Statements.
(2) Net charge-offs exclude write-offs in the PCI loan portfolio of $1.2 billion in home equity and $1.1 billion in residential mortgage in 2013, which are included in the Legacy Assets & Servicing portfolio,
compared to $2.8 billion in home equity in 2012. 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 81.
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 81.
Residential Mortgage
The residential mortgage portfolio makes up the largest
percentage of our consumer loan portfolio at 47 percent of
consumer loans and leases at December 31, 2013. Approximately
19 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, loans repurchased in connection with
the FNMA Settlement, 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 $4.9 billion during 2013 due to paydowns, charge-offs,
transfers to foreclosed properties and sales. These were partially
offset by new origination volume retained on our balance sheet,
loans repurchased as part of the FNMA Settlement, as well as
repurchases of delinquent loans pursuant to our servicing
agreements with GNMA, which is part of our mortgage banking
activities.
At December 31, 2013 and 2012, the residential mortgage
portfolio included $87.2 billion and $90.9 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 December 31, 2013 and 2012, $59.0 billion and
$66.6 billion had FHA insurance with the remainder protected by
76 Bank of America 2013
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long-term stand-by agreements. At December 31, 2013 and 2012,
$22.5 billion and $25.5 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.
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
December 31, 2013 and 2012, the synthetic securitization
vehicles referenced principal balances of $12.5 billion and $17.6
billion of residential mortgage loans and provided loss protection
up to $339 million and $500 million. At December 31, 2013 and
2012, the Corporation had a receivable of $198 million and $305
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.
Adjusting for the benefit of the credit protection from the synthetic
securitizations, the residential mortgage net charge-off ratio,
excluding the PCI and fully-insured loan portfolios, in 2013 and
2012 would have been reduced by three bps and nine bps.
The long-term stand-by agreements with FNMA and FHLMC and
to a lesser extent the synthetic securitizations together reduce our
regulatory risk-weighted assets due to the transfer of a portion of
our credit risk to unaffiliated parties. At December 31, 2013 and
2012, these programs had the cumulative effect of reducing our
risk-weighted assets by $8.4 billion and $7.2 billion and
increasing our Tier 1 capital ratio by eight bps and increasing our
Tier 1 common capital ratio by seven bps at both year ends.
Table 30 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 81.
Table 30 Residential Mortgage – Key Credit Statistics
(Dollars in millions)
Outstandings
Accruing past due 30 days or more
Accruing past due 90 days or more
Nonperforming loans
Percent of portfolio
Refreshed LTV greater than 90 but less than or equal to 100
Refreshed LTV greater than 100
Refreshed FICO below 620
2006 and 2007 vintages (2)
December 31
Excluding Purchased
Credit-impaired and
Fully-insured Loans
Reported Basis (1)
2013
$ 248,066
23,052
16,961
11,712
2012
$ 252,929
28,815
22,157
15,055
2013
$ 142,147
2,371
—
11,712
2012
$ 144,624
3,117
—
15,055
12%
13
21
21
0.42
15%
28
23
25
1.18
7%
10
11
27
0.74
10%
20
14
34
2.04
Net charge-off ratio (3)
(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 and $1.0 billion of residential
mortgage loans accounted for under the fair value option at December 31, 2013 and 2012. 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 85 and Note 21 – Fair Value Option to the Consolidated Financial Statements.
(2) These vintages of loans account for 53 percent and 61 percent of nonperforming residential mortgage loans at December 31, 2013 and 2012, and 60 percent and 71 percent of residential mortgage
net charge-offs in 2013 and 2012.
(3) Net charge-off ratios are calculated as net charge-offs divided by average outstanding loans excluding loans accounted for under the fair value option.
Nonperforming residential mortgage loans decreased $3.3
billion in 2013 as paydowns, returns to performing status, charge-
offs and transfers to foreclosed properties outpaced new inflows.
Also impacting the decrease were sales of nonperforming
residential mortgage loans of $1.5 billion and transfers to held-
for-sale of $663 million, of which $273 million had been sold prior
to December 31, 2013.
At December 31, 2013, borrowers were current on contractual
payments with respect to $3.9 billion, or 34 percent of
nonperforming residential mortgage loans, and $5.8 billion, or
49 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 $746 million in 2013.
Net charge-offs decreased $2.0 billion to $1.1 billion in 2013,
or 0.74 percent of total average residential mortgage loans,
compared to $3.1 billion, or 2.04 percent in 2012. This decrease
in net charge-offs was primarily driven by favorable portfolio trends
and decreased write-downs on loans greater than 180 days past
due which were written down to the estimated fair value of the
collateral less costs to sell, due in part to improvement in home
prices and the U.S. economy.
Loans in the residential mortgage portfolio with certain
characteristics have greater risk of loss than others. These
characteristics include loans with a high refreshed loan-to-value
(LTV), loans originated at the peak of home prices in 2006 and
2007, interest-only loans and loans to borrowers located in
California and Florida where we have concentrations and where
significant declines in home prices had been experienced.
Although the disclosures in this section address each of these
risk characteristics separately, there is significant overlap in loans
with these characteristics, which contributed to a disproportionate
Bank of America 2013 77
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share of the losses in the portfolio. The residential mortgage loans
with all of these higher risk characteristics comprised two percent
and four percent of the residential mortgage portfolio at December
31, 2013 and 2012, and accounted for 10 percent and 20 percent
of the residential mortgage net charge-offs in 2013 and 2012.
Residential mortgage loans with a greater than 90 percent but
less than or equal to 100 percent refreshed LTV represented seven
percent and 10 percent of the residential mortgage portfolio at
December 31, 2013 and 2012. Loans with a refreshed LTV greater
than 100 percent represented 10 percent and 20 percent of the
residential mortgage loan portfolio at December 31, 2013 and
2012. Of the loans with a refreshed LTV greater than 100 percent,
94 percent and 92 percent were performing at December 31, 2013
and 2012. 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 recent appreciation. Loans to
borrowers with refreshed FICO scores below 620 represented 11
percent and 14 percent of the residential mortgage portfolio at
December 31, 2013 and 2012.
Of the $142.1 billion in total residential mortgage loans
outstanding at December 31, 2013, as shown in Table 31, 40
percent were originated as interest-only loans. The outstanding
balance of interest-only residential mortgage loans that have
entered the amortization period was $15.4 billion, or 27 percent,
at December 31, 2013. Residential mortgage loans that have
entered the amortization period generally have experienced a
higher rate of early stage delinquencies and nonperforming status
compared to the residential mortgage portfolio as a whole. At
December 31, 2013, $320 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 $2.4 billion, or two percent for the entire residential
mortgage portfolio. In addition, at December 31, 2013, $2.5
billion, or 17 percent of outstanding interest-only residential
mortgages that had entered the amortization period were
nonperforming compared to $11.7 billion, or eight percent for the
entire residential mortgage portfolio. 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 will not be
required to make a fully-amortizing payment until 2015 or later.
Table 31 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 and 12 percent of outstandings at December 31, 2013
and 2012. Loans within this MSA comprised only three percent
and eight percent of net charge-offs in 2013 and 2012. In the New
York area, the New York-Northern New Jersey-Long Island MSA
made up 10 percent of outstandings at both December 31, 2013
and 2012. Loans within this MSA comprised 11 percent and five
percent of net charge-offs in 2013 and 2012.
Table 31 Residential Mortgage State Concentrations
(Dollars in millions)
California
New York (3)
Florida (3)
Texas
Virginia
Other U.S./Non-U.S.
Residential mortgage loans (4)
Fully-insured loan portfolio
Purchased credit-impaired residential mortgage loan portfolio
Total residential mortgage loan portfolio
December 31
Outstandings (1)
Nonperforming (1)
Net Charge-offs (2)
2013
2012
2013
2012
2013
2012
$
47,885
11,787
10,777
6,766
4,774
60,158
$ 142,147
87,247
18,672
$ 248,066
$
48,671
11,290
11,100
6,928
5,096
61,539
$ 144,624
90,854
17,451
$ 252,929
$
$
3,396
789
1,359
407
369
5,392
11,712
$
$
4,580
972
1,773
498
410
6,822
15,055
$
$
148
59
117
25
31
704
1,084
$
$
1,139
82
371
55
52
1,412
3,111
(1) Outstandings and nonperforming amounts exclude loans accounted for under the fair value option. There were $2.0 billion and $1.0 billion of residential mortgage loans accounted for under the fair
value option at December 31, 2013 and 2012. 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 85 and Note 21 – Fair Value Option to the Consolidated Financial Statements.
(2) Net charge-offs exclude $1.1 billion of write-offs in the residential mortgage PCI loan portfolio in 2013 compared to none in 2012. These write-offs decreased the PCI valuation allowance included
as part of the allowance for loan and lease losses. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 81.
In these states, foreclosure requires a court order following a legal proceeding (judicial states).
(3)
(4) Amount excludes the PCI residential mortgage and fully-insured loan portfolios.
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 $10.3 billion and $11.3 billion at
December 31, 2013 and 2012, or seven percent and eight percent
of the residential mortgage portfolio. The CRA portfolio included
$1.7 billion and $2.5 billion of nonperforming loans at December
31, 2013 and 2012 representing 14 percent and 16 percent of
total nonperforming residential mortgage loans. Net charge-offs
in the CRA portfolio were $260 million and $641 million in 2013
and 2012, or 24 percent and 21 percent of total net charge-offs
for the residential mortgage portfolio.
78 Bank of America 2013
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Home Equity
At December 31, 2013, the home equity portfolio made up 18
percent of the consumer portfolio and is comprised of HELOCs,
home equity loans and reverse mortgages.
At December 31, 2013, our HELOC portfolio had an
outstanding balance of $80.3 billion, or 86 percent of the total
home equity portfolio compared to $91.3 billion, or 85 percent at
December 31, 2012. HELOCs generally have an initial draw period
of 10 years. During the initial draw period, the borrowers are only
required to pay the interest due on the loans on a monthly basis.
After the initial draw period ends, the loans generally convert to
15-year amortizing loans.
At December 31, 2013, our home equity loan portfolio had an
outstanding balance of $12.0 billion, or 13 percent of the total
home equity portfolio compared to $15.3 billion, or 14 percent at
December 31, 2012. Home equity loans are almost all fixed-rate
loans with amortizing payment terms of 10 to 30 years and of the
$12.0 billion at December 31, 2013, 51 percent of these loans
have 25- to 30-year terms. At both December 31, 2013 and 2012,
our reverse mortgage portfolio had an outstanding balance,
excluding loans accounted for under the fair value option, of $1.4
billion, or one percent of the total home equity portfolio. We no
longer originate these products.
At December 31, 2013, 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 $14.5 billion in 2013 primarily due to paydowns
Table 32 Home Equity – Key Credit Statistics
(Dollars in millions)
Outstandings
Accruing past due 30 days or more (2)
Nonperforming loans (2)
Percent of portfolio
Refreshed combined LTV greater than 90 but less than or equal to 100
Refreshed combined LTV greater than 100
Refreshed FICO below 620
2006 and 2007 vintages (3)
and charge-offs outpacing new originations and draws on existing
lines. Of the total home equity portfolio at December 31, 2013
and 2012, $23.0 billion and $24.7 billion, or 25 percent and 23
percent, were in first-lien positions (26 percent and 25 percent
excluding the PCI home equity portfolio). At December 31, 2013,
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 $17.6 billion, or 20 percent of our total
home equity portfolio excluding the PCI loan portfolio.
Unused HELOCs totaled $56.8 billion and $60.9 billion at
December 31, 2013 and 2012. This decrease was primarily due
to customers choosing to close accounts, which more than offset
customer paydowns of principal balances as well as the impact of
new production. The HELOC utilization rate was 59 percent at
December 31, 2013 compared to 60 percent at December 31,
2012.
Table 32 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.
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 81.
December 31
Reported Basis (1)
$
2013
93,672
901
4,075
2012
$ 108,140
1,099
4,282
Excluding Purchased
Credit-impaired Loans
2013
2012
$
87,079
901
4,075
$
99,473
1,099
4,282
9%
22
8
48
1.80
10%
31
9
48
3.62
9%
19
8
45
1.94
10%
29
8
46
3.99
Net charge-off ratio (4)
(1) Outstandings, accruing past due, nonperforming loans and percentages of portfolio exclude loans accounted for under the fair value option. There were $147 million of home equity loans accounted
for under the fair value option at December 31, 2013 compared to none at December 31, 2012. 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 85 and Note 21 – Fair Value Option to the Consolidated Financial Statements.
(2) Accruing past due 30 days or more includes $164 million and $321 million and nonperforming loans includes $410 million and $824 million of loans where we serviced the underlying first-lien at
December 31, 2013 and 2012.
(3) These vintages of loans have higher refreshed combined LTV ratios and accounted for 50 percent and 51 percent of nonperforming home equity loans at December 31, 2013 and 2012, and accounted
for 63 percent and 60 percent of net charge-offs in 2013 and 2012.
(4) Net charge-off ratios are calculated as net charge-offs divided by average outstanding loans excluding loans accounted for under the fair value option.
Nonperforming outstanding balances in the home equity
portfolio decreased $207 million in 2013 due to charge-offs and
returns to performing status outpacing new inflows.
At December 31, 2013, on $2.0 billion, or 48 percent of
nonperforming home equity loans, the borrowers were current on
contractual payments. At December 31, 2013, $1.4 billion, or 35
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 $198 million in
2013.
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 December 31,
2013, we estimate that $2.1 billion of current and $382 million
Bank of America 2013 79
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of 30 to 89 days past due junior-lien loans were behind a delinquent
first-lien loan. We service the first-lien loans on $421 million of
these combined amounts, with the remaining $2.1 billion serviced
by third parties. Of the $2.5 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.
Net charge-offs decreased $2.4 billion to $1.8 billion, or 1.94
percent of the total average home equity portfolio in 2013
compared to $4.2 billion, or 3.99 percent in 2012. The decrease
in net charge-offs was primarily driven by favorable portfolio trends
due in part to improvement in home prices and the U.S. economy.
Also, 2012 included charge-offs associated with the National
Mortgage Settlement and loans discharged in Chapter 7
bankruptcy due to the implementation of regulatory guidance in
2012. The net charge-off ratio in 2013 was impacted by lower
outstanding balances primarily as a result of paydowns and charge-
offs outpacing new originations and draws on existing lines.
There are certain characteristics of the home equity portfolio
that have contributed to higher losses including those loans with
a high refreshed combined loan-to-value (CLTV), loans that were
originated at the peak of home prices in 2006 and 2007, and
loans in geographic areas that have experienced the most
significant declines in home prices. Although we have seen recent
home price appreciation, home price declines since 2006 coupled
with the fact that most home equity outstandings are secured by
second-lien positions have significantly reduced and, in some
cases, eliminated all collateral value after consideration of the
first-lien position. Although the disclosures in this section address
each of these risk characteristics separately, there is significant
overlap in outstanding balances with these characteristics, which
has contributed to a disproportionate share of losses in the
portfolio. Outstanding balances in the home equity portfolio with
all of these higher risk characteristics comprised five percent and
eight percent of the total home equity portfolio at December 31,
2013 and 2012, and accounted for 20 percent of the home equity
net charge-offs in 2013 compared to 24 percent in 2012.
Outstanding balances in the home equity portfolio with greater
than 90 percent but less than or equal to 100 percent refreshed
CLTVs comprised nine percent and 10 percent of the home equity
portfolio at December 31, 2013 and 2012. Outstanding balances
with refreshed CLTVs greater than 100 percent comprised 19
percent and 29 percent of the home equity portfolio at December
31, 2013 and 2012. 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
recent appreciation, has contributed to an increase in CLTV ratios.
Of those outstanding balances with a refreshed CLTV greater than
100 percent, 96 percent of the customers were current on their
home equity loan and 91 percent of second-lien loans with a
refreshed CLTV greater than 100 percent were current on both
their second-lien and underlying first-lien loans at December 31,
2013. Outstanding balances in the home equity portfolio to
borrowers with a refreshed FICO score below 620 represented
eight percent of the home equity portfolio at both December 31,
2013 and 2012.
Of the $87.1 billion in total home equity portfolio outstandings
at December 31, 2013, as shown in Table 33, 76 percent were
interest-only loans, almost all of which were HELOCs. The
outstanding balance of HELOCs that have entered the amortization
period was $2.6 billion, or three percent of total HELOCs at
December 31, 2013. The HELOCs that have entered the
amortization period have experienced a higher percentage of early
stage delinquencies and nonperforming status when compared to
the HELOC portfolio as a whole. At December 31, 2013, $78
million, or three percent of outstanding HELOCs that had entered
the amortization period were accruing past due 30 days or more
compared to $817 million, or one percent for the entire HELOC
portfolio. In addition, at December 31, 2013, $211 million, or eight
percent of outstanding HELOCs that had entered the amortization
period were nonperforming compared to $3.6 billion, or four
percent for the entire HELOC portfolio. Loans in our HELOC
portfolio generally have an initial draw period of 10 years and more
than 85 percent of these loans will not be required to make a fully-
amortizing payment until 2015 or later.
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 2013, approximately 41 percent of these
customers with an outstanding balance did not pay principal on
their HELOCs.
80 Bank of America 2013
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Table 33 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 and 11 percent of the
outstanding home equity portfolio at December 31, 2013 and
2012. Loans within this MSA comprised nine percent and eight
percent of net charge-offs in 2013 and 2012. The Los Angeles-
Long Beach-Santa Ana MSA within California made up 12 percent
of the outstanding home equity portfolio at both December 31,
2013 and 2012. Loans within this MSA comprised nine percent
and 11 percent of net charge-offs in 2013 and 2012.
For more information on representations and warranties related
to our home equity portfolio, see Off-Balance Sheet Arrangements
and Contractual Obligations – Representations and Warranties on
page 48 and Note 7 – Representations and Warranties Obligations
and Corporate Guarantees to the Consolidated Financial
Statements.
Table 33 Home Equity State Concentrations
(Dollars in millions)
California
Florida (3)
New Jersey (3)
New York (3)
Massachusetts
Other U.S./Non-U.S.
Home equity loans (4)
Purchased credit-impaired home equity portfolio
Total home equity loan portfolio
December 31
Outstandings (1)
Nonperforming (1)
Net Charge-offs (2)
2013
2012
2013
2012
2013
2012
$
$
$
25,061
10,604
6,153
6,035
3,881
35,345
87,079
6,593
93,672
$
28,730
11,899
6,789
6,736
4,381
40,938
99,473
8,667
$ 108,140
$
$
$
1,047
643
304
405
144
1,532
4,075
$
$
1,128
706
312
419
140
1,577
4,282
$
$
509
315
93
110
42
734
1,803
$
$
1,333
602
210
222
91
1,784
4,242
(1) Outstandings and nonperforming amounts exclude loans accounted for under the fair value option. There were $147 million of home equity loans accounted for under the fair value option at
December 31, 2013 compared to none at December 31, 2012. 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 85 and Note 21 – Fair Value Option to the Consolidated Financial Statements.
(2) Net charge-offs exclude $1.2 billion of write-offs in the home equity PCI loan portfolio in 2013 compared to $2.8 billion in 2012. These write-offs decreased the PCI valuation allowance included as
part of the allowance for loan and lease losses. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 81.
In these states, foreclosure requires a court order following a legal proceeding (judicial states).
(3)
(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.
In 2013, in connection with the FNMA Settlement, we
repurchased certain residential mortgage loans that had
previously been sold to FNMA, which we have valued at less than
the purchase price. As of December 31, 2013, loans repurchased
in connection with the FNMA Settlement that we classified as PCI
had an unpaid principal balance of $5.3 billion and a carrying value
of $4.6 billion. For additional information, see Note 7 –
Representations and Warranties Obligations and Corporate
Guarantees to the Consolidated Financial Statements.
76788ba_financials.indd 81
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Bank of America 2013 81
Table 34 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 34 Purchased Credit-impaired Loan Portfolio
(Dollars in millions)
Residential mortgage
Home equity
Total purchased credit-impaired loan portfolio
Residential mortgage
Home equity
Total purchased credit-impaired loan portfolio
The total PCI unpaid principal balance decreased $422 million,
or two percent, in 2013 primarily driven by liquidations, including
sales, payoffs, paydowns and write-offs, partially offset by the $5.3
billion of loans repurchased in connection with the FNMA
Settlement.
Of the unpaid principal balance of $26.1 billion at
December 31, 2013, $4.7 billion was 180 days or more past due,
including $4.6 billion of first-lien mortgages and $91 million of
home equity loans. Of the $21.4 billion that was less than 180
days past due, $18.4 billion, or 86 percent of the total unpaid
principal balance was current based on the contractual terms while
$2.0 billion, or nine percent, was in early stage delinquency.
During 2013, we recorded a provision benefit of $707 million
for the PCI loan portfolio including a provision benefit of $552
million for residential mortgage and a provision benefit of $155
million for home equity. This compared to a provision benefit of
$103 million in 2012. The provision benefit in 2013 was primarily
driven by an improvement in our home price outlook.
The PCI valuation allowance declined $3.0 billion during 2013
due to write-offs in the PCI loan portfolio of $1.2 billion in home
equity and $1.1 billion in residential mortgage, and a provision
benefit of $707 million for the PCI loan portfolio. Write-offs during
2013 included certain home equity PCI loans that were ineligible
for
the National Mortgage Settlement, but had similar
characteristics as the eligible loans and the expectation of future
cash proceeds was considered remote.
Purchased Credit-impaired Residential Mortgage Loan
Portfolio
The PCI residential mortgage loan portfolio represented 74 percent
of the total PCI loan portfolio at December 31, 2013. Those loans
to borrowers with a refreshed FICO score below 620 represented
52 percent of the PCI residential mortgage loan portfolio at
December 31, 2013. Loans with a refreshed LTV greater than
90 percent, after consideration of purchase accounting
adjustments and the related valuation allowance, represented 39
percent of the PCI residential mortgage loan portfolio and 51
percent based on the unpaid principal balance at December 31,
2013. Table 35 presents outstandings net of purchase accounting
adjustments and before the related valuation allowance, by certain
state concentrations.
82 Bank of America 2013
December 31, 2013
Unpaid
Principal
Balance
Carrying
Value
Related
Valuation
Allowance
Carrying
Value Net of
Valuation
Allowance
Percent of
Unpaid
Principal
Balance
$
$
$
$
19,558
6,523
26,081
18,069
8,434
26,503
$
$
$
$
18,672
6,593
25,265
$
$
1,446
1,047
2,493
$
$
17,226
5,546
22,772
December 31, 2012
$
$
3,108
2,428
5,536
$
$
17,451
8,667
26,118
14,343
6,239
20,582
88.08%
85.02
87.31
79.38%
73.97
77.66
Table 35 Outstanding Purchased Credit-impaired Loan
Portfolio – Residential Mortgage State
Concentrations
(Dollars in millions)
California
Florida (1)
Virginia
Maryland
Texas
Other U.S./Non-U.S.
$
December 31
2013
2012
$
8,180
1,750
760
728
433
6,821
18,672
9,238
1,797
715
417
192
5,092
17,451
Total
In this state, foreclosure requires a court order following a legal proceeding (judicial state).
$
$
(1)
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.
76788ba_financials.indd 82
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At December 31, 2013, the unpaid principal balance of pay
option loans was $4.5 billion, with a carrying value of $4.4 billion,
including $4.0 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 $2.2 billion
including $137 million of negative amortization. For those
borrowers who are making payments in accordance with their
contractual terms, five percent and 10 percent at December 31,
2013 and 2012 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 December 31, 2013 that have not already experienced
a payment reset, less than one percent are expected to reset
before 2016, 26 percent are expected to reset in 2016 and
approximately 10 percent are expected to reset thereafter. In
addition, 10 percent are expected to prepay and approximately 53
percent are expected to default prior to being reset, most of which
were severely delinquent as of December 31, 2013.
Purchased Credit-impaired Home Equity Loan Portfolio
The PCI home equity portfolio represented 26 percent of the total
PCI loan portfolio at December 31, 2013. Those loans with a
refreshed FICO score below 620 represented 16 percent of the
PCI home equity portfolio at December 31, 2013. Loans with a
refreshed CLTV greater than 90 percent, after consideration of
purchase accounting adjustments and the related valuation
allowance, represented 69 percent of the PCI home equity portfolio
and 71 percent based on the unpaid principal balance at
December 31, 2013. Table 36 presents outstandings net of
purchase accounting adjustments and before the related valuation
allowance, by certain state concentrations.
Table 36 Outstanding Purchased Credit-impaired Loan
Portfolio – Home Equity State Concentrations
U.S. Credit Card
At December 31, 2013, 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 $2.5
billion in 2013 primarily due to higher payment volumes as well
as net charge-offs and the transfer of loans to LHFS, partially offset
by new originations. Net charge-offs decreased $1.3 billion to $3.4
billion in 2013 due to improvements in delinquencies and
bankruptcies as a result of an improved economic environment,
account management on higher risk accounts and the impact of
higher credit quality originations. U.S. credit card loans 30 days
or more past due and still accruing interest decreased $675 million
while loans 90 days or more past due and still accruing interest
declined $384 million in 2013 as a result of the factors mentioned
above that contributed to lower net charge-offs.
Table 37 presents certain key credit statistics for the U.S. credit
card portfolio.
Table 37 U.S. Credit Card – Key Credit Statistics
(Dollars in millions)
Outstandings
Accruing past due 30 days or more
Accruing past due 90 days or more
December 31
2013
$ 92,338
2,073
1,053
2012
$ 94,835
2,748
1,437
2013
2012
Net charge-offs
Net charge-off ratios (1)
(1) Net charge-off ratios are calculated as net charge-offs divided by average outstanding loans.
3.74%
4,632
3,376
4.88%
$
$
Unused lines of credit for U.S. credit card totaled $315.1 billion
and $335.5 billion at December 31, 2013 and 2012. The $20.4
billion decrease was driven by closure of inactive accounts,
partially offset by new originations and credit line increases.
(Dollars in millions)
California
Florida (1)
Virginia
Arizona
Colorado
Other U.S./Non-U.S.
$
December 31
2013
2012
$
1,921
356
310
214
199
3,593
6,593
2,629
524
383
297
264
4,570
8,667
Total
In this state, foreclosure requires a court order following a legal proceeding (judicial state).
$
$
(1)
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Bank of America 2013 83
Table 38 presents certain state concentrations for the U.S. credit card portfolio.
Table 38 U.S. Credit Card State Concentrations
(Dollars in millions)
California
Florida
Texas
New York
New Jersey
Other U.S.
Total U.S. credit card portfolio
December 31
Outstandings
2013
13,689
7,339
6,405
5,624
3,868
55,413
92,338
$
$
2012
$ 14,101
7,469
6,448
5,746
3,959
57,112
$ 94,835
$
$
Accruing Past Due
90 Days or More
Net Charge-offs
2013
2012
2013
2012
162
105
72
70
48
596
1,053
$
$
235
149
92
91
60
810
1,437
$
$
562
359
217
219
150
1,869
3,376
$
$
840
512
290
263
178
2,549
4,632
Non-U.S. Credit Card
Outstandings in the non-U.S. credit card portfolio, which are
recorded in All Other, decreased $156 million in 2013 due to higher
payment volumes as well as net charge-offs, partially offset by new
origination volume and a stronger foreign currency exchange rate.
Net charge-offs decreased $182 million to $399 million in 2013
due primarily to improvement in delinquencies as a result of higher
credit quality originations.
Unused lines of credit for non-U.S. credit card totaled $31.1
billion and $32.2 billion at December 31, 2013 and 2012. The
$1.1 billion decrease was driven by closure of accounts, partially
offset by new originations, credit line increases and a stronger
foreign currency exchange rate.
Table 39 presents certain key credit statistics for the non-U.S.
credit card portfolio.
Table 39 Non-U.S. Credit Card – Key Credit Statistics
(Dollars in millions)
Outstandings
Accruing past due 30 days or more
Accruing past due 90 days or more
December 31
2013
$ 11,541
248
131
2012
$ 11,697
403
212
2013
2012
581
Net charge-offs
4.29%
Net charge-off ratios (1)
(1) Net charge-off ratios are calculated as net charge-offs divided by average outstanding loans.
399
3.68%
$
$
Direct/Indirect Consumer
At December 31, 2013, approximately 50 percent of the direct/
indirect portfolio was included in CBB (consumer dealer financial
services – automotive, marine, aircraft, recreational vehicle loans
and consumer personal loans), 43 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 (IWM) businesses based
outside of the U.S. and student loans).
Outstandings in the direct/indirect portfolio decreased $1.0
billion in 2013 as a loan sale in the securities-based lending
portfolio in connection with the Corporation’s agreement to sell
the IWM businesses and lower outstandings in the unsecured
consumer lending portfolio were partially offset by growth in the
consumer dealer financial services auto portfolio and the
securities-based lending portfolio. Net charge-offs decreased
$418 million to $345 million in 2013, or 0.42 percent of total
average direct/indirect loans, compared to $763 million, or 0.90
percent in 2012. This decrease was primarily driven by
improvements in delinquencies and bankruptcies in the unsecured
consumer lending portfolio as a result of an improved economic
environment as well as reduced outstandings in this portfolio.
Net charge-offs in the unsecured consumer lending portfolio
decreased $295 million to $190 million in 2013, or 5.26 percent
of total average unsecured consumer lending loans compared to
7.68 percent in 2012. Direct/indirect loans that were past due
30 days or more and still accruing interest declined $339 million
to $1.0 billion in 2013 due to improvements in the unsecured
consumer lending, dealer financial services and student lending
portfolios.
84 Bank of America 2013
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Table 40 presents certain state concentrations for the direct/indirect consumer loan portfolio.
Table 40 Direct/Indirect State Concentrations
(Dollars in millions)
California
Texas
Florida
New York
Georgia
Other U.S./Non-U.S.
Total direct/indirect loan portfolio
December 31
Outstandings
Accruing Past Due
90 Days or More
Net Charge-offs
2013
2012
2013
2012
2013
2012
$
$
10,041
7,850
7,634
4,611
2,564
49,492
82,192
$
$
10,793
7,239
7,363
4,794
2,491
50,525
83,205
$
$
57
66
25
33
16
211
408
$
$
53
41
37
28
31
355
545
$
$
42
32
41
20
14
196
345
$
$
102
64
88
43
30
436
763
Other Consumer
At December 31, 2013, approximately 60 percent of the $2.0
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 December 31, 2013 and were
comprised of residential mortgage loans that were previously
classified as held-for-sale, residential mortgage loans held in
consolidated variable interest entities (VIEs) and 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. In
2013, we recorded net losses of $2 million resulting from changes
in the fair value of these loans, including gains of $41 million on
loans held in consolidated VIEs that were offset by losses recorded
on related long-term debt.
Nonperforming Consumer Loans, Leases and Foreclosed
Properties Activity
Table 41 presents nonperforming consumer loans, leases and
foreclosed properties activity during 2013 and 2012.
Nonperforming LHFS are excluded from nonperforming loans as
they are recorded at either fair value or the lower of cost or fair
value. Nonperforming loans do not include past due consumer
credit card loans, other unsecured loans and in general, consumer
non-real estate-secured loans (loans discharged in Chapter 7
bankruptcy are included) as these loans are typically charged off
no later than the end of the month in which the loan becomes
180 days past due. The charge-offs on these loans have no impact
on nonperforming activity and, accordingly, are excluded from this
table. The fully-insured loan portfolio is not reported as
nonperforming as principal repayment is insured. Additionally,
nonperforming loans do not include the PCI loan portfolio or loans
accounted for under the fair value option. For more information on
nonperforming loans, see Note 1 – Summary of Significant
Accounting Principles to the Consolidated Financial Statements.
During 2013, nonperforming consumer loans declined $3.6 billion
to $15.8 billion as outflows, including the impact of loan sales,
outpaced new inflows which continued to improve due to favorable
delinquency trends.
The outstanding balance of a real estate-secured loan that is
in excess of the estimated property value less costs to sell is
charged off no later than the end of the month in which the loan
becomes 180 days past due unless repayment of the loan is fully
insured. At December 31, 2013, $7.7 billion, or 47 percent of
nonperforming consumer real estate loans and foreclosed
properties had been written down to their estimated property value
less costs to sell, including $7.2 billion of nonperforming loans
180 days or more past due and $533 million of foreclosed
properties. In addition, at December 31, 2013, $5.9 billion, or 37
percent of nonperforming consumer loans were modified and are
now current after successful trial periods, or are current loans
classified as nonperforming loans in accordance with applicable
policies.
Foreclosed properties decreased $117 million in 2013 as
liquidations outpaced additions. PCI loans are excluded from
nonperforming loans as these loans were written down to fair value
at the acquisition date; however, once 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 $165 million in 2013. Not
included in foreclosed properties at December 31, 2013 was $1.4
billion of real estate that was acquired upon foreclosure of
delinquent FHA-insured loans. We hold this real estate on our
balance sheet until we convey these properties to the FHA. We
exclude these amounts from our nonperforming loans and
foreclosed properties activity as we expect we will be reimbursed
once the property is conveyed to the FHA for principal and, up to
certain limits, costs incurred during the foreclosure process and
interest incurred during the holding period. For more information
on the review of our foreclosure processes, see Off-Balance Sheet
Arrangements and Contractual Obligations – Servicing,
Foreclosure and Other Mortgage Matters on page 53.
76788ba_financials.indd 85
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Bank of America 2013 85
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 41.
Table 41 Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity (1)
(Dollars in millions)
Nonperforming loans, January 1
Additions to nonperforming loans and leases:
New nonperforming loans and leases
Impact of change in treatment of loans discharged in bankruptcies (2)
Implementation of regulatory interagency guidance (2)
Reductions to nonperforming loans and leases:
Paydowns and payoffs
Sales
Returns to performing status (3)
Charge-offs
Transfers to foreclosed properties (4)
Transfers to loans held-for-sale (5)
Total net additions (reductions) to nonperforming loans and leases
Total nonperforming loans and leases, December 31 (6)
Foreclosed properties, January 1
Additions to foreclosed properties:
New foreclosed properties (4)
Reductions to foreclosed properties:
Sales
Write-downs
Total net reductions to foreclosed properties
Total foreclosed properties, December 31 (7)
Nonperforming consumer loans, leases and foreclosed properties, December 31
Nonperforming consumer loans and leases as a percentage of outstanding consumer loans and leases (8)
Nonperforming consumer loans, leases and foreclosed properties as a percentage of outstanding consumer loans, leases and
foreclosed properties (8)
2013
2012
$
19,431
$
18,768
9,652
n/a
n/a
(2,782)
(1,528)
(4,273)
(3,514)
(483)
(663)
(3,591)
15,840
650
13,084
1,162
1,853
(3,801)
(47)
(4,203)
(6,544)
(841)
—
663
19,431
1,991
936
1,129
(930)
(123)
(117)
533
16,373
$
(2,283)
(187)
(1,341)
650
20,081
2.99%
3.52%
$
3.09
3.63
(1) Balances do not include nonperforming LHFS of $376 million and $622 million and nonaccruing TDRs removed from the PCI loan portfolio prior to January 1, 2010 of $260 million and $521 million
at December 31, 2013 and 2012 as well as loans accruing past due 90 days or more as presented in Table 27 and Note 4 – Outstanding Loans and Leases to the Consolidated Financial Statements.
(2) As a result of the implementation of regulatory guidance in 2012 on loans discharged in Chapter 7 bankruptcy, we added $1.2 billion to nonperforming loans. As a result of the implementation of
regulatory interagency guidance in 2012, we reclassified $1.9 billion of performing home equity loans (of which $1.6 billion were current) to nonperforming.
(3) 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.
(4) 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.
(5) Transfers to loans held-for-sale includes $273 million of loans that were sold prior to December 31, 2013.
(6) At December 31, 2013, 46 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.
(7) Foreclosed property balances do not include loans that are insured by the FHA and have entered foreclosure of $1.4 billion and $2.5 billion at December 31, 2013 and 2012.
(8) Outstanding consumer loans and leases exclude loans accounted for under the fair value option.
n/a = not applicable
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 41 are net of $190 million
and $261 million of charge-offs in 2013 and 2012, recorded during
the first 90 days after transfer.
We classify consumer real estate loans that have been
discharged in Chapter 7 bankruptcy and not reaffirmed by the
borrower as TDRs, irrespective of payment history or delinquency
status, even if the repayment terms for the loan have not been
otherwise modified. We continue to have a lien on the underlying
collateral. At December 31, 2013, $3.6 billion of loans discharged
in Chapter 7 bankruptcy with no change in repayment terms at the
time of discharge were included in TDRs, of which $1.8 billion were
classified as nonperforming and $1.8 billion were loans fully-
insured by the FHA. Of the $3.6 billion of TDRs, approximately 27
percent, 30 percent and 43 percent were discharged in Chapter
7 bankruptcy in 2013, 2012 and years prior to 2012, respectively.
In addition, at December 31, 2013, of the $1.8 billion of
nonperforming loans discharged in Chapter 7 bankruptcy, $1.1
billion were current on their contractual payments while $642
million were 90 days or more past due. Of the contractually current
nonperforming loans, nearly 80 percent were discharged in
Chapter 7 bankruptcy more than 12 months ago, and nearly 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. For more information on the impacts to consumer home loan
TDRs, see Note 4 – Outstanding Loans and Leases to the
Consolidated Financial Statements.
86 Bank of America 2013
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We classify junior-lien home equity loans as nonperforming
when the first-lien loan becomes 90 days past due even if the
junior-lien loan is performing. At December 31, 2013 and 2012,
$1.2 billion and $1.5 billion of such junior-lien home equity loans
were included in nonperforming loans and leases.
Table 42 Home Loans Troubled Debt Restructurings
Table 42 presents TDRs for the home loans portfolio.
Performing TDR balances are excluded from nonperforming loans
in Table 41.
(Dollars in millions)
Residential mortgage (1, 2)
Home equity (3)
Total home loans troubled debt restructurings
December 31
Total
29,312
2,146
31,458
$
$
2013
Nonperforming
7,555
$
1,389
8,944
$
$
$
Performing
Total
21,757
757
22,514
$
$
28,125
2,125
30,250
2012
Nonperforming
9,040
$
1,242
10,282
$
$
$
Performing
19,085
883
19,968
(1) Residential mortgage TDRs deemed collateral dependent totaled $8.2 billion and $9.4 billion, and included $5.7 billion and $6.4 billion of loans classified as nonperforming and $2.5 billion and
$3.0 billion of loans classified as performing at December 31, 2013 and 2012.
(2) Residential mortgage performing TDRs included $14.3 billion and $11.9 billion of loans that were fully-insured at December 31, 2013 and 2012.
(3) Home equity TDRs deemed collateral dependent totaled $1.4 billion and $1.4 billion, and included $1.2 billion and $1.0 billion of loans classified as nonperforming and $227 million and $348
million of loans classified as performing at December 31, 2013 and 2012.
We work with customers that are experiencing financial difficulty
by modifying credit card and other consumer loans, while complying
with Federal Financial Institutions Examination Council (FFIEC)
guidelines. Credit card and other consumer loan modifications
generally involve a reduction in the customer’s interest rate on the
account and placing the customer on a fixed payment plan not
exceeding 60 months, all of which are considered TDRs (the
renegotiated TDR portfolio). In addition, non-U.S. credit card
modifications may involve reducing the interest rate on the account
without placing the customer on a fixed payment plan, and these
are also considered TDRs (also a part of the renegotiated TDR
portfolio).
In all cases, the customer’s available line of credit is canceled.
We make modifications primarily 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 41 as substantially all of the
loans remain on accrual status until either charged off or paid in
full. At December 31, 2013 and 2012, our renegotiated TDR
portfolio was $2.1 billion and $3.9 billion, of which $1.6 billion
and $3.1 billion were current or less than 30 days past due under
the modified terms. The decline in the renegotiated TDR portfolio
was primarily driven by paydowns and charge-offs as well as lower
program enrollments. For more information on the renegotiated
TDR portfolio, see Note 4 – Outstanding Loans and Leases to the
Consolidated Financial Statements.
Commercial Portfolio Credit Risk Management
Credit risk management for the commercial portfolio begins with
an assessment of the credit risk profile of the borrower or
counterparty based on an analysis of its financial position. As part
of the overall credit risk assessment, our commercial credit
exposures are assigned a risk rating and are subject to approval
based on defined credit approval standards. Subsequent to loan
origination, risk ratings are monitored on an ongoing basis, and if
necessary, adjusted to reflect changes in the financial condition,
cash flow, risk profile or outlook of a borrower or counterparty. In
making credit decisions, we consider risk rating, collateral, country,
industry and single name concentration limits while also balancing
this with total borrower or counterparty relationship. Our business
and risk management personnel use a variety of tools to
continuously monitor the ability of a borrower or counterparty to
perform under its obligations. We use risk rating aggregations to
measure and evaluate concentrations within portfolios. In addition,
risk ratings are a factor in determining the level of allocated capital
and the allowance for credit losses.
For
information on our accounting policies
regarding
delinquencies, nonperforming status and net charge-offs for the
commercial portfolio, see Note 1 – Summary of Significant
Accounting Principles to the Consolidated Financial Statements.
Management of Commercial Credit Risk
Concentrations
Commercial credit risk is evaluated and managed with the goal
that concentrations of credit exposure do not result in undesirable
levels of risk. We review, measure and manage concentrations of
credit exposure by industry, product, geography, customer
relationship and loan size. We also review, measure and manage
commercial real estate loans by geographic location and property
type. In addition, within our non-U.S. portfolio, we evaluate
exposures by region and by country. Tables 47, 52, 60 and 61
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.
As part of our ongoing risk mitigation initiatives, we attempt to
work with clients experiencing financial difficulty to modify their
loans to terms that better align with their current ability to pay. In
situations where an economic concession has been granted to a
borrower experiencing financial difficulty, we identify these loans
as TDRs.
We account for certain large corporate loans and loan
commitments, including issued but unfunded letters of credit
which are considered utilized for credit risk management purposes,
that exceed our single name credit risk concentration guidelines
under the fair value option. Lending commitments, both funded
and unfunded, are actively managed and monitored, and as
appropriate, credit risk for these lending relationships may be
mitigated through the use of credit derivatives, with the
Corporation’s credit view and market perspectives determining the
size and timing of the hedging activity. In addition, we purchase
credit protection to cover the funded portion as well as the
unfunded portion of certain other credit exposures. To lessen the
cost of obtaining our desired credit protection levels, credit
exposure may be added within an industry, borrower or
counterparty group by selling protection. These credit derivatives
Bank of America 2013 87
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do not meet the requirements for treatment as accounting hedges.
They are carried at fair value with changes in fair value recorded
in other income (loss).
Commercial Credit Portfolio
During 2013, credit quality in the commercial loan portfolio
continued to show improvement. Reservable criticized balances
and nonperforming loans, leases and foreclosed property
balances declined during 2013 with the declines primarily in the
U.S. commercial and commercial real estate portfolios. Most other
credit quality indicators across the remaining commercial
portfolios also improved. The allowance for loan and lease losses
for the commercial portfolio increased $899 million in 2013 to
$4.0 billion as continued improvement in credit quality was more
than offset by an increase associated with loan growth across the
core commercial portfolio (total commercial products excluding
U.S. small business). For additional information, see Allowance
for Credit Losses on page 100.
Table 43 presents our commercial loans and leases, and
related credit quality information at December 31, 2013 and
2012.
Table 43 Commercial Loans and Leases
(Dollars in millions)
U.S. commercial
Commercial real estate (1)
Commercial lease financing
Non-U.S. commercial
U.S. small business commercial (2)
Commercial loans excluding loans accounted for under the fair value option
Loans accounted for under the fair value option (3)
Total commercial loans and leases
December 31
Outstandings
Nonperforming
Accruing Past Due
90 Days or More
2013
$ 212,557
47,893
25,199
89,462
375,111
13,294
388,405
7,878
$ 396,283
2012
$ 197,126
38,637
23,843
74,184
333,790
12,593
346,383
7,997
$ 354,380
$
$
2013
2012
2013
2012
819
322
16
64
1,221
88
1,309
2
1,311
$
$
1,484
1,513
44
68
3,109
115
3,224
11
3,235
$
$
47
21
41
17
126
78
204
—
204
$
$
65
29
15
—
109
120
229
—
229
(1)
(2)
Includes U.S. commercial real estate loans of $46.3 billion and $37.2 billion and non-U.S. commercial real estate loans of $1.6 billion and $1.5 billion at December 31, 2013 and 2012.
Includes card-related products.
(3) Commercial loans accounted for under the fair value option include U.S. commercial loans of $1.5 billion and $2.3 billion and non-U.S. commercial loans of $6.4 billion and $5.7 billion at December
31, 2013 and 2012. For more information on the fair value option, see Note 21 – Fair Value Option to the Consolidated Financial Statements.
Outstanding commercial loans and leases increased $41.9
billion in 2013, primarily in U.S. commercial and non-U.S.
commercial product types. Nonperforming commercial loans and
leases as a percentage of outstanding commercial loans and
leases improved during 2013 to 0.33 percent from 0.91 percent
(0.34 percent and 0.93 percent excluding loans accounted for
under the fair value option) at December 31, 2012.
Table 44 presents net charge-offs and related ratios for our
commercial loans and leases for 2013 and 2012. Improving trends
across the portfolio drove lower charge-offs.
Table 44 Commercial Net Charge-offs and Related Ratios
(Dollars in millions)
U.S. commercial
Commercial real estate
Commercial lease financing
Non-U.S. commercial
U.S. small business commercial
Total commercial
Net Charge-offs
Net Charge-off Ratios (1)
2013
2012
2013
2012
$
$
128
149
(25)
45
297
359
656
$
$
242
384
(6)
28
648
699
1,347
0.06%
0.35
(0.10)
0.05
0.08
2.84
0.18
0.13%
1.01
(0.03)
0.05
0.21
5.46
0.43
(1) Net charge-off ratios are calculated as net charge-offs divided by average outstanding loans and leases excluding loans accounted for under the fair value option.
88 Bank of America 2013
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Table 45 presents commercial credit exposure by type for
utilized, unfunded and total binding committed credit exposure.
Commercial utilized credit exposure includes SBLCs and financial
guarantees, bankers’ acceptances and commercial letters of
credit for which we are legally bound to advance funds under
prescribed conditions, during a specified time period. Although
funds have not yet been advanced, these exposure types are
considered utilized for credit risk management purposes. Total
commercial committed credit exposure increased $56.8 billion in
2013 primarily driven by increases in loans and leases.
Total commercial utilized credit exposure increased $35.8
billion in 2013 primarily driven by increases in loans and leases.
The utilization rate for loans and leases, SBLCs and financial
guarantees, commercial
letters of credit and bankers’
acceptances was 58 percent at both December 31, 2013 and
2012.
Table 45 Commercial Credit Exposure by Type
(Dollars in millions)
Loans and leases
Derivative assets (4)
Standby letters of credit and financial guarantees
Debt securities and other investments
Loans held-for-sale
Commercial letters of credit
Bankers’ acceptances
Foreclosed properties and other (5)
Total
Commercial
Utilized (1)
December 31
Commercial
Unfunded (2, 3)
Total Commercial
Committed
2013
$ 396,283
47,495
35,893
18,505
6,604
2,054
246
414
$ 507,494
2012
$ 354,380
53,497
41,036
10,937
7,928
2,065
185
1,699
$ 471,727
2013
$ 307,478
—
1,334
6,903
101
515
—
—
$ 316,331
2012
$ 281,915
—
2,119
6,914
3,763
564
3
—
$ 295,278
2013
$ 703,761
47,495
37,227
25,408
6,705
2,569
246
414
$ 823,825
2012
$ 636,295
53,497
43,155
17,851
11,691
2,629
188
1,699
$ 767,005
(1) Total commercial utilized exposure includes loans and issued letters of credit accounted for under the fair value option and is comprised of loans outstanding of $7.9 billion and $8.0 billion and
letters of credit with a notional amount of $503 million and $672 million at December 31, 2013 and 2012.
(2) Total commercial unfunded exposure includes loan commitments accounted for under the fair value option with a notional amount of $12.5 billion and $17.6 billion at December 31, 2013 and 2012.
(3) Excludes unused business card lines which are not legally binding.
(4) Derivative assets are carried at fair value, reflect the effects of legally enforceable master netting agreements and have been reduced by cash collateral of $47.3 billion and $58.1 billion at December
31, 2013 and 2012. Not reflected in utilized and committed exposure is additional derivative collateral held of $17.1 billion and $18.7 billion which consists primarily of other marketable securities.
(5) The net monoline exposure of $1.3 billion at December 31, 2012 was settled during 2013.
Table 46 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 $3.1 billion, or 19
percent, in 2013 primarily in the commercial real estate portfolio
driven largely by continued paydowns, upgrades, charge-offs and
sales outpacing downgrades. At December 31, 2013,
approximately 84 percent of commercial utilized reservable
criticized exposure was secured compared to 82 percent at
December 31, 2012.
Table 46 Commercial Utilized Reservable Criticized Exposure
December 31
2013
2012
(Dollars in millions)
U.S. commercial
Commercial real estate
Commercial lease financing
Non-U.S. commercial
U.S. small business commercial
Total commercial utilized reservable criticized exposure
Amount (1)
8,362
$
1,452
988
1,424
12,226
635
12,861
$
Percent (2)
Amount (1)
8,631
3,782
969
1,614
14,996
940
$ 15,936
3.45% $
2.92
3.92
1.49
2.96
4.77
3.02
Percent (2)
3.72%
9.24
4.06
2.02
3.98
7.45
4.10
(1) Total commercial utilized reservable criticized exposure includes loans and leases of $11.5 billion and $14.6 billion and commercial letters of credit of $1.4 billion and $1.3 billion at December 31,
2013 and 2012.
(2) Percentages are calculated as commercial utilized reservable criticized exposure divided by total commercial utilized reservable exposure for each exposure category.
U.S. Commercial
At December 31, 2013, 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
(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 $15.4 billion,
or eight percent, in 2013 with growth across the majority of core
commercial portfolios. Nonperforming
leases
decreased $665 million in 2013. Net charge-offs decreased $114
million to $128 million in 2013. The declines were broad-based
with respect to clients and industries, driven by improved client
credit profiles and liquidity.
loans and
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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 and 23 percent of
commercial real estate loans and leases at December 31, 2013
and 2012. The commercial real estate portfolio is predominantly
managed in Global Banking and consists of loans made primarily
to public and private developers, and commercial real estate firms.
Outstanding loans increased $9.3 billion, or 24 percent, in 2013
primarily due to new originations in major metropolitan markets.
During 2013, we continued to see improvements in credit
quality in both the residential and non-residential portfolios. We
use a number of proactive risk mitigation initiatives to reduce
adversely rated exposure in the commercial real estate portfolio
including transfers of deteriorating exposures to management by
independent special asset officers and the pursuit of loan
restructurings or asset sales to achieve the best results for our
customers and the Corporation.
Nonperforming commercial real estate loans and foreclosed
properties decreased $1.4 billion, or 77 percent, and reservable
criticized balances decreased $2.3 billion, or 62 percent, in 2013.
Net charge-offs declined $235 million to $149 million in 2013.
These improvements were primarily in the non-residential portfolio.
Table 47 presents outstanding commercial real estate loans
by geographic region, based on the geographic location of the
collateral, and by property type.
Table 47 Outstanding Commercial Real Estate Loans
(Dollars in millions)
By Geographic Region
California
Northeast
Southwest
Southeast
Midwest
Florida
Illinois
Northwest
Midsouth
Non-U.S.
Other (1)
Total outstanding commercial real estate loans
By Property Type
Non-residential
Office
Multi-family rental
Shopping centers/retail
Industrial/warehouse
Hotels/motels
Multi-use
Land and land development
Other
Total non-residential
Residential
Total outstanding commercial real estate loans
December 31
2013
2012
$
$
$
$
10,358
9,487
6,913
5,314
3,109
3,030
2,319
2,037
2,013
1,582
1,731
47,893
12,799
8,559
7,470
4,522
3,926
1,960
855
6,283
46,374
1,519
47,893
$
8,792
7,315
4,612
4,440
3,421
2,148
1,700
1,553
1,980
1,483
1,193
$ 38,637
$
9,324
5,893
5,780
3,839
3,095
2,186
1,157
5,722
36,996
1,641
$ 38,637
(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.
90 Bank of America 2013
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Tables 48 and 49 present commercial real estate credit quality
data by non-residential and residential property types. The
residential portfolio presented in Tables 47, 48 and 49 includes
condominiums and other residential real estate. Other property
types in Tables 47, 48 and 49 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 48 Commercial Real Estate Credit Quality Data
(Dollars in millions)
Non-residential
Office
Multi-family rental
Shopping centers/retail
Industrial/warehouse
Hotels/motels
Multi-use
Land and land development
Other
Total non-residential
Residential
Total commercial real estate
(1)
(2)
Includes commercial foreclosed properties of $90 million and $250 million at December 31, 2013 and 2012.
Includes loans, SBLCs and bankers’ acceptances and excludes loans accounted for under the fair value option.
Table 49 Commercial Real Estate Net Charge-offs and Related Ratios
(Dollars in millions)
Non-residential
Office
Multi-family rental
Shopping centers/retail
Industrial/warehouse
Hotels/motels
Multi-use
Land and land development
Other
Total non-residential
Residential
December 31
Nonperforming Loans and
Foreclosed Properties (1)
Utilized Reservable
Criticized Exposure (2)
2013
2012
2013
2012
$
$
$
96
15
57
22
5
19
73
23
310
102
412
$
$
295
109
230
160
45
123
321
87
1,370
393
1,763
$
$
367
234
144
119
38
157
92
173
1,324
128
1,452
$
$
914
375
464
324
202
309
359
301
3,248
534
3,782
Net Charge-offs
Net Charge-off Ratios (1)
2013
2012
2013
2012
$
42
2
12
23
18
5
23
(23)
102
47
149
106
13
57
49
11
66
(23)
31
310
74
384
0.39%
0.02
0.18
0.55
0.52
0.26
2.35
(0.41)
0.25
3.04
0.35
1.36%
0.23
1.00
1.31
0.39
2.46
(1.73)
0.51
0.86
3.74
1.01
Total commercial real estate
$
(1) Net charge-off ratios are calculated as net charge-offs divided by average outstanding loans excluding loans accounted for under the fair value option.
$
At December 31, 2013, total committed non-residential
exposure was $68.6 billion compared to $54.5 billion at
December 31, 2012, of which $46.4 billion and $37.0 billion were
funded secured loans. Non-residential nonperforming loans and
foreclosed properties declined $1.1 billion, or 77 percent, to $310
million at December 31, 2013 compared to $1.4 billion at
December 31, 2012, which represented 0.67 percent and 3.68
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 all
property types. Non-residential utilized reservable criticized
exposure decreased $1.9 billion, or 59 percent, to $1.3 billion at
December 31, 2013 compared to $3.2 billion at December 31,
2012, which represented 2.75 percent and 8.27 percent of non-
residential utilized reservable exposure, with the decrease
primarily due to continued resolution of legacy criticized exposure.
The decrease in reservable criticized exposure was driven by
decreases across all property types. For the non-residential
portfolio, net charge-offs decreased $208 million to $102 million
in 2013 primarily due to lower overall levels of criticized and
nonperforming assets.
At December 31, 2013, total committed residential exposure
was $3.1 billion compared to $3.2 billion at December 31, 2012,
of which $1.5 billion and $1.6 billion were funded secured loans.
Residential nonperforming loans and foreclosed properties
decreased $291 million, or 74 percent, in 2013 due to repayments,
sales and loan restructuring. Residential utilized reservable
criticized exposure decreased $406 million, or 76 percent, during
2013 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
6.65 percent and 7.81 percent at December 31, 2013 compared
to 23.33 percent and 31.56 percent at December 31, 2012.
Residential portfolio net charge-offs decreased $27 million in
2013 compared to 2012.
At December 31, 2013 and 2012, the commercial real estate
loan portfolio included $7.0 billion and $6.7 billion of funded
construction and land development loans that were originated to
Bank of America 2013 91
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fund the construction and/or rehabilitation of commercial
properties. Reservable criticized construction and
land
development loans totaled $431 million and $1.5 billion, and
nonperforming construction and land development loans and
foreclosed properties totaled $100 million and $730 million at
December 31, 2013 and 2012. During a property’s construction
phase, interest income is typically paid from interest reserves that
are established at the inception of the loan. As construction is
completed and the property is put into service, these interest
reserves are depleted and interest payments from operating cash
flows begin. We do not recognize interest income on nonperforming
loans regardless of the existence of an interest reserve.
Non-U.S. Commercial
At December 31, 2013, 70 percent of the non-U.S. commercial
loan portfolio was managed in Global Banking and 30 percent in
Global Markets. Outstanding loans, excluding loans accounted for
under the fair value option, increased $15.3 billion in 2013
primarily due to increased demand from large corporate clients
and client financing activity. Net charge-offs increased $17 million
to $45 million in 2013. For more information on the non-U.S.
commercial portfolio, see Non-U.S. Portfolio on page 96.
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 and 45
percent of the U.S. small business commercial portfolio at
December 31, 2013 and 2012. Net charge-offs decreased $340
million to $359 million in 2013 driven by lower delinquencies and
bankruptcies resulting from an improvement in credit quality within
the small business loan portfolio, an improved economic
environment, a reduction in higher risk vintages and the impact of
higher credit quality originations. Of the U.S. small business
commercial net charge-offs, 73 percent were credit card-related
products in 2013 compared to 58 percent in 2012.
Commercial Loans Accounted for Under the Fair Value
Option
The portfolio of commercial loans accounted for under the fair
value option is managed primarily in Global Banking. Outstanding
commercial loans accounted for under the fair value option
decreased $119 million to an aggregate fair value of $7.9 billion
at December 31, 2013 primarily due to decreased corporate
borrowings under bank credit facilities. We recorded net gains of
$88 million in 2013 compared to $213 million in 2012 resulting
from changes in the fair value of the 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 $354 million and $528 million at December 31, 2013
and 2012 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 $13.0 billion and $18.3 billion at
December 31, 2013 and 2012. We recorded net gains of $180
million from changes in the fair value of commitments and letters
of credit during 2013 compared to $704 million in 2012 resulting
from maturities and terminations at par value and changes in the
fair value of the 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.
Nonperforming Commercial Loans, Leases and
Foreclosed Properties Activity
Table 50 presents the nonperforming commercial loans, leases
and foreclosed properties activity during 2013 and 2012.
Nonperforming loans do not include loans accounted for under the
fair value option. During 2013, nonperforming commercial loans
and leases decreased $1.9 billion to $1.3 billion driven by
paydowns, charge-offs and sales outpacing new nonperforming
loans. Approximately 91 percent of commercial nonperforming
loans, leases and foreclosed properties were secured and
approximately 55 percent were contractually current. Commercial
nonperforming loans were carried at approximately 71 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.
92 Bank of America 2013
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Table 50 Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity (1, 2)
(Dollars in millions)
Nonperforming loans and leases, January 1
Additions to nonperforming loans and leases:
New nonperforming loans and leases
Advances
Reductions to nonperforming loans and leases:
Paydowns
Sales
Returns to performing status (3)
Charge-offs
Transfers to foreclosed properties (4)
Transfers to loans held-for-sale
Total net reductions to nonperforming loans and leases
Total nonperforming loans and leases, December 31
Foreclosed properties, January 1
Additions to foreclosed properties:
New foreclosed properties (4)
Reductions to foreclosed properties:
Sales
Write-downs
Total net reductions to foreclosed properties
Total foreclosed properties, December 31
Nonperforming commercial loans, leases and foreclosed properties, December 31
Nonperforming commercial loans and leases as a percentage of outstanding commercial loans and leases (5)
Nonperforming commercial loans, leases and foreclosed properties as a percentage of outstanding commercial loans, leases and foreclosed
properties (5)
2013
2012
$
3,224
$
6,337
1,112
30
(1,342)
(498)
(588)
(549)
(54)
(26)
(1,915)
1,309
250
2,334
85
(2,372)
(840)
(808)
(1,164)
(302)
(46)
(3,113)
3,224
612
38
222
(169)
(29)
(160)
90
1,399
(516)
(68)
(362)
250
3,474
$
0.34%
0.93%
$
0.36
1.00
(1) Balances do not include nonperforming LHFS of $296 million and $437 million at December 31, 2013 and 2012.
(2)
Includes U.S. small business commercial activity. Small business card loans are excluded as they are not classified as nonperforming.
(3) Commercial loans and leases may be returned to performing status when all principal and interest is current and full repayment of the remaining contractual principal and interest is expected or
when the loan otherwise becomes well-secured and is in the process of collection. TDRs are generally classified as performing after a sustained period of demonstrated payment performance.
(4) New foreclosed properties represents transfers of nonperforming loans to foreclosed properties net of charge-offs recorded during the first 90 days after transfer of a loan to foreclosed properties.
(5) Outstanding commercial loans exclude loans accounted for under the fair value option.
Table 51 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 51 Commercial Troubled Debt Restructurings
(Dollars in millions)
U.S. commercial
Commercial real estate
Non-U.S. commercial
U.S. small business commercial
Total commercial troubled debt restructurings
Total
1,318
835
48
88
2,289
$
$
2013
Nonperforming
298
$
198
38
—
534
$
December 31
Performing
1,020
$
637
10
88
1,755
$
Total
1,328
1,391
100
202
3,021
$
$
2012
Nonperforming
565
$
740
15
—
1,320
$
Performing
763
$
651
85
202
1,701
$
Industry Concentrations
Table 52 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 committed commercial
credit exposure increased $56.8 billion, or seven percent, to
$823.8 billion at December 31, 2013. The increase in commercial
committed exposure was concentrated in diversified financials,
real estate, retailing and capital goods, partially offset by lower
exposure in food, beverage and tobacco.
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,
experienced an increase in committed exposure of $21.5 billion,
or 22 percent, in 2013, driven by higher funded loans and certain
asset-backed lending products.
Real estate, our second largest industry concentration,
experienced an increase in committed exposure of $10.8 billion,
or 16 percent, in 2013 primarily due to new originations and
renewals outpacing paydowns and sales. Real estate construction
and land development exposure represented 14 percent of the
Bank of America 2013 93
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total real estate industry committed exposure at December 31,
2013 and 2012. For more information on commercial real estate
and related portfolios, see Commercial Portfolio Credit Risk
Management – Commercial Real Estate on page 90.
Retailing, our third largest industry concentration, experienced
an increase in committed exposure of $6.9 billion, or 14 percent,
in 2013 driven by loans to auto dealers and wholesalers, apparel
retail, and specialty stores. Committed exposure to the food,
beverage and tobacco industry decreased $6.8 billion, or 18
percent, in 2013, primarily related to commitment reductions and
paydowns. Capital goods committed exposure increased $3.7
billion, or seven percent, in 2013 driven by heavy electrical
equipment and machinery exposure. Healthcare equipment and
services committed exposure increased $3.6 billion, or eight
percent, in 2013 driven by health care distributors, doctors,
dentists and practitioners, and health care equipment. Energy
committed exposure increased $2.7 billion, or seven percent, in
2013 reflecting higher exposure to the integrated oil and gas, and
exploration and production sectors.
Table 52 Commercial Credit Exposure by Industry (1)
Our committed state and municipal exposure of $35.9 billion
at December 31, 2013 consisted of $29.4 billion of commercial
utilized exposure (including $18.6 billion of funded loans, $7.3
billion of SBLCs and $1.7 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 52. While the
slow pace of economic recovery continues to pressure budgets,
most state and local governments have implemented offsetting
fiscal adjustments 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.
December 31
Commercial
Utilized
Total Commercial
Committed
(Dollars in millions)
Diversified financials
Real estate (2)
Retailing
Capital goods
Healthcare equipment and services
Government and public education
Banking
Materials
Energy
Consumer services
Commercial services and supplies
Food, beverage and tobacco
Utilities
Media
Transportation
Individuals and trusts
Software and services
Pharmaceuticals and biotechnology
Technology hardware and equipment
Insurance, including monolines
Telecommunication services
Consumer durables and apparel
Automobiles and components
Food and staples retailing
Religious and social organizations
Other
2013
$
78,423
54,336
32,859
28,016
30,828
40,253
39,649
22,384
19,739
21,080
19,770
14,437
9,253
13,070
15,280
14,864
6,814
6,455
6,166
5,926
4,541
5,427
3,165
3,950
5,452
5,357
$ 507,494
2012
$ 66,102
47,479
28,065
25,071
29,396
41,441
39,829
21,809
17,661
23,093
19,020
14,738
8,403
13,091
13,791
13,916
5,549
3,846
5,111
8,491
4,008
4,246
3,312
3,528
6,850
3,881
$ 471,727
2013
$ 121,075
76,418
54,616
52,849
49,063
48,322
45,095
42,699
41,156
34,217
32,007
30,541
25,243
22,655
22,595
18,681
14,172
13,986
12,733
12,203
11,423
9,757
8,424
7,909
7,677
8,309
$ 823,825
2012
$ 99,574
65,639
47,719
49,196
45,488
50,277
44,822
40,493
38,441
36,367
30,257
37,344
23,425
21,705
20,255
17,801
12,125
11,401
11,101
14,117
10,276
8,438
7,675
6,838
9,107
7,124
$ 767,005
(8,085) $ (14,657)
Total commercial credit exposure by industry
Net credit default protection purchased on total commitments (3)
Includes U.S. small business commercial exposure.
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.
$
(1)
(2)
(3) Represents net notional credit protection purchased. For additional information, see Commercial Portfolio Credit Risk Management – Risk Mitigation on page 95.
94 Bank of America 2013
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Monoline Exposure
Monoline exposure is reported in the insurance industry and
managed under insurance portfolio industry limits. We have
indirect exposure to monolines primarily in the form of guarantees
supporting our loans, investment portfolios, securitizations and
credit-enhanced securities as part of our public finance business,
and other selected products. Such indirect exposure exists when
we purchase credit protection from monolines to hedge all or a
portion of the credit risk on certain credit exposures including
loans and CDOs. We underwrite our public finance exposure by
evaluating the underlying securities.
We also have indirect exposure to monolines in the form of
guarantees supporting our mortgage and other loan sales. Indirect
exposure may exist when credit protection was purchased from
monolines to hedge all or a portion of the credit risk on certain
mortgage and other loan exposures. A loss may occur when we
are required to repurchase a loan due to a breach of the
representations and warranties, and the market value of the loan
has declined, or we are required to indemnify or provide recourse
for a guarantor’s loss. For more information regarding our exposure
to representations and warranties, see Off-Balance Sheet
Arrangements and Contractual Obligations – Representations and
Warranties on page 48 and Note 7 – Representations and
Warranties Obligations and Corporate Guarantees
the
Consolidated Financial Statements.
to
Table 53 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 $2.9 billion in 2013 due to
terminations, paydowns and maturities of monoline contracts.
Table 53 Derivative Credit Exposures
(Dollars in millions)
Notional amount of monoline exposure
Mark-to-market
Counterparty credit valuation adjustment
Net mark-to-market
Gains from credit valuation changes
December 31
2013
10,631
97
(15)
82
2012
13,547
898
(118)
780
$
$
$
2013
2012
73
$
213
$
$
$
$
Risk Mitigation
We purchase credit protection to cover the funded portion as well
as the unfunded portion of certain credit exposures. To lower the
cost of obtaining our desired credit protection levels, we may add
credit exposure within an industry, borrower or counterparty group
by selling protection.
At December 31, 2013 and 2012, 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 $8.1
billion and $14.7 billion. The mark-to-market effects resulted in
net losses of $356 million in 2013 compared to $1.0 billion in
2012. The gains and losses on these instruments were offset by
gains and losses on the exposures. Table 54 presents the average
VaR statistics at a 99 percent confidence interval for the hedged
credit exposure, the purchased credit protection and the remaining
position. See Trading Risk Management on page 105 for a
description of our VaR calculation for the market-based trading
portfolio.
Table 54 Credit Derivative VaR Statistics
(Dollars in millions)
2013
2012
Hedged credit exposure, average
Purchased credit protection, average
Remaining, average (1)
(1) Reflects the diversification effect between net credit default protection hedging our credit
79
52
24
44
19
28
$
$
exposure and the related credit exposure.
Tables 55 and 56 present the maturity profiles and the credit
exposure debt ratings of the net credit default protection portfolio
at December 31, 2013 and 2012.
Table 55 Net Credit Default Protection by Maturity
Less than or equal to one year
Greater than one year and less than or equal to five
years
Greater than five years
Total net credit default protection
December 31
2013
2012
35%
21%
63
2
100%
75
4
100%
Table 56 Net Credit Default Protection by Credit
Exposure Debt Rating
December 31
2013
2012
Net
Notional (1)
Percent of
Total
Net
Notional (1)
Percent of
Total
$
—
(7)
(2,560)
(3,880)
(1,137)
(452)
(115)
66
—% $
0.1
31.7
48.0
14.1
5.6
1.4
(0.9)
(120)
(474)
(5,861)
(6,067)
(1,101)
(937)
(247)
150
0.8%
3.2
40.0
41.4
7.5
6.4
1.7
(1.0)
(Dollars in millions)
Ratings (2, 3)
AAA
AA
A
BBB
BB
B
CCC and below
NR (4)
Total net credit
default protection
$
(8,085)
100.0% $ (14,657)
100.0%
(1) Represents net credit default protection (purchased) sold.
(2) Ratings are refreshed on a quarterly basis.
(3) Ratings of BBB- or higher are considered to meet the definition of investment grade.
(4) NR is comprised of index positions held and any names that have not been rated.
In addition to our net notional credit default protection
purchased to cover the funded and unfunded portion of certain
credit exposures, credit derivatives are used for market-making
activities for clients and establishing positions intended to profit
from directional or relative value changes. We execute the majority
of our credit derivative trades in the OTC market with large,
multinational financial institutions, including broker/dealers and,
to a lesser degree, with a variety of other investors. Because these
transactions are executed in the OTC market, we are subject to
settlement risk. We are also subject to credit risk in the event that
these counterparties fail to perform under the terms of these
contracts. In most cases, credit derivative transactions are
executed on a daily margin basis. Therefore, events such as a
credit downgrade, depending on the ultimate rating level, or a
breach of credit covenants would typically require an increase in
Bank of America 2013 95
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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 57 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 57 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 57 Credit Derivatives
(Dollars in millions)
Purchased credit derivatives:
Credit default swaps
Total return swaps/other
Total purchased credit derivatives
Written credit derivatives:
Credit default swaps
Total return swaps/other
Total written credit derivatives
n/a = not applicable
December 31
2013
2012
Contract/
Notional
Credit Risk
Contract/
Notional
Credit Risk
$ 1,305,090
38,094
$ 1,343,184
$
$
6,042
402
6,444
$ 1,559,472
43,489
$ 1,602,961
$
$
8,987
402
9,389
$ 1,265,380
63,407
$ 1,328,787
n/a
n/a
n/a
$ 1,531,504
68,811
$ 1,600,315
n/a
n/a
n/a
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 59 presents our total non-U.S. exposure broken out by
region at December 31, 2013 and 2012. Non-U.S. exposure is
presented on an internal risk management basis and includes
sovereign and non-sovereign credit exposure, securities and other
investments issued by or domiciled in countries other than the
U.S. The risk assignments by country can be adjusted for external
guarantees and certain collateral types. Exposures that are subject
to external guarantees are reported under the country of the
guarantor. Exposures with tangible collateral are reflected in the
country where the collateral is held. For securities received, other
than cross-border resale agreements, outstandings are assigned
to the domicile of the issuer of the securities.
Table 58 Credit Valuation Gains and Losses
(Dollars in millions)
Gross
2013
Hedge
Net
Gross
2012
Hedge
Net
Credit valuation
gains (losses)
$
738 $ (834) $
(96) $ 1,022 $ (731) $ 291
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 provided by 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.
96 Bank of America 2013
Table 59 Total Non-U.S. Exposure by Region
(Dollars in millions)
Europe
Asia Pacific
Latin America
Middle East and Africa
Other (1)
Total
December 31
2013
$ 133,303
69,266
21,723
8,691
20,866
$ 253,849
2012
$ 137,778
92,412
21,246
8,200
22,014
$ 281,650
(1) Other includes Canada exposure of $19.8 billion and $20.3 billion at December 31, 2013 and
2012.
Our
total non-U.S. exposure was $253.8 billion at
December 31, 2013, a decrease of $27.8 billion
from
December 31, 2012. The decrease in non-U.S. exposure was
driven by a reduction in Asia Pacific and Europe, partially offset by
growth in other regions. Our non-U.S. exposure remained
concentrated in Europe which accounted for $133.3 billion, or 53
percent of total non-U.S. exposure. The European exposure was
mostly in Western Europe and was distributed across a variety of
industries. Select European countries are further presented in
Table 61. Asia Pacific was our second largest non-U.S. exposure
76788ba_financials.indd 96
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at $69.3 billion, or 27 percent of total non-U.S. exposure. Latin
America accounted for $21.7 billion, or nine percent of total non-
U.S. exposure. Middle East and Africa accounted for $8.7 billion,
or three percent of total non-U.S. exposure. Other non-U.S.
exposure accounted for $20.9 billion or eight percent of total non-
U.S. exposure. For information on country specific exposures, see
Tables 60 and 61.
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
Table 60 Top 20 Non-U.S. Countries Exposure
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.
Table 60 presents our 20 largest non-U.S. country exposures.
These exposures accounted for 88 percent and 89 percent of our
total non-U.S. exposure at December 31, 2013 and 2012. Net
country exposure for these 20 countries decreased $30.5 billion
in 2013 driven by a decrease in funded loans and loan equivalents
in Japan and France resulting from a decrease in central bank
deposits and a reduction in unfunded loan commitments in
Singapore.
(Dollars in millions)
United Kingdom
Canada
Brazil
China
Germany
India
France
Japan
Australia
Netherlands
Russian Federation
South Korea
Switzerland
Hong Kong
Italy
Taiwan
Mexico
Singapore
Spain
Turkey
Total top 20 non-U.S.
countries exposure
Funded Loans
and Loan
Equivalents
Unfunded
Loan
Commitments
Net
Counterparty
Exposure
Securities/
Other
Investments
Country
Exposure at
December 31
2013
Hedges and
Credit Default
Protection
Net Country
Exposure at
December 31
2013
Increase
(Decrease) from
December 31
2012
$
$
25,898
6,075
8,591
10,712
6,262
6,256
1,914
4,340
4,374
3,599
5,824
3,771
2,760
4,296
3,096
2,614
3,030
2,401
3,475
2,354
$
12,046
6,942
698
587
4,973
643
6,790
477
2,136
2,758
960
811
3,150
374
3,573
—
687
138
892
75
$
5,259
1,568
416
642
2,800
361
976
1,827
565
555
230
566
625
81
2,328
132
129
157
115
10
$
4,812
5,223
4,106
1,468
3,173
3,204
5,228
2,854
2,048
2,496
621
2,236
629
847
763
1,385
657
1,280
519
271
$
48,015
19,808
13,811
13,409
17,208
10,464
14,908
9,498
9,123
9,408
7,635
7,384
7,164
5,598
9,760
4,131
4,503
3,976
5,001
2,710
(4,429) $
(1,397)
(179)
(488)
(4,490)
(213)
(4,745)
(1,383)
(1,126)
(1,773)
(913)
(949)
(1,618)
(241)
(4,558)
(59)
(504)
(147)
(1,598)
(17)
$
43,586
18,411
13,632
12,921
12,718
10,251
10,163
8,115
7,997
7,635
6,722
6,435
5,546
5,357
5,202
4,072
3,999
3,829
3,403
2,693
(3,606)
(565)
1,129
3,734
1,698
(3,467)
(6,128)
(15,724)
(1,732)
(3,047)
1,810
(714)
(274)
(86)
364
850
340
(6,345)
749
551
$
111,642
$
48,710
$
19,342
$
43,820
$
223,514
$
(30,827) $
192,687
$
(30,463)
Certain European countries, including Greece, Ireland, Italy,
Portugal and Spain, have experienced varying degrees of financial
stress in recent years. Risks from the ongoing financial instability
in these countries could continue to disrupt the financial markets
which could have a detrimental impact on global economic
conditions and sovereign and non-sovereign debt in these
countries. Market volatility is expected to continue as policymakers
address the fundamental challenges of competitiveness, growth
and fiscal solvency. 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.
Bank of America 2013 97
76788ba_financials.indd 97
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Table 61 presents our direct sovereign and non-sovereign
exposures in these countries at December 31, 2013. Our total
sovereign and non-sovereign exposure to these countries was
$17.1 billion at December 31, 2013 compared to $14.5 billion at
December 31, 2012. The total exposure to these countries, net
of all hedges, was $10.4 billion at December 31, 2013 compared
to $9.5 billion at December 31, 2012. At December 31, 2013 and
2012, hedges and credit default protection purchased, net of credit
default protection sold, was $6.8 billion and $5.1 billion. Net
country exposure increased $901 million in 2013 driven by
increased funded loan and loan equivalents with financial
institutions in Spain and Italy, partially offset by a decrease in total
sovereign exposures.
Table 61 Select European Countries
(Dollars in millions)
Greece
Sovereign
Financial institutions
Corporates
Total Greece
Ireland
Sovereign
Financial institutions
Corporates
Total Ireland
Italy
Sovereign
Financial institutions
Corporates
Total Italy
Portugal
Sovereign
Financial institutions
Corporates
Total Portugal
Spain
Sovereign
Financial institutions
Corporates
Total Spain
Total
Sovereign
Financial institutions
Corporates
Total select European
exposure
Funded Loans
and Loan
Equivalents
Unfunded
Loan
Commitments
Net
Counterparty
Exposure (1)
Securities/
Other
Investments (2)
Country
Exposure at
December 31
2013
Hedges and
Credit Default
Protection (3)
Net Country
Exposure at
December 31
2013
Increase
(Decrease) from
December 31
2012
$
$
$
$
$
$
$
$
$
$
$
$
— $
—
63
63
$
19
812
356
1,187
2
1,938
1,156
3,096
$
$
$
$
— $
4
90
94
$
$
$
$
37
1,223
2,215
3,475
58
3,977
3,880
— $
—
61
61
$
— $
10
338
348
$
— $
348
3,225
3,573
$
— $
—
103
103
$
— $
1
891
892
$
— $
359
4,618
— $
—
2
2
$
$
$
$
$
$
$
$
$
$
19
124
69
212
1,611
179
538
2,328
15
2
—
17
63
14
38
115
1,708
319
647
58
27
13
98
$
$
— $
44
55
99
$
$
$
$
$
$
$
$
269
175
319
763
35
—
40
75
2
131
386
519
364
377
813
$
$
$
$
$
$
$
$
$
$
$
58
27
139
224
38
990
818
1,846
1,882
2,640
5,238
9,760
50
6
233
289
102
1,369
3,530
5,001
2,130
5,032
9,958
— $
(30)
(41)
(71) $
(43) $
(10)
(49)
(102) $
(2,095) $
(1,230)
(1,233)
(4,558) $
(27) $
(108)
(292)
(427) $
(163) $
(421)
(1,014)
(1,598) $
(2,328) $
(1,799)
(2,629)
58
(3)
98
153
$
$
(5) $
980
769
1,744
$
(213) $
1,410
4,005
5,202
$
$
23
(102)
(59)
(138) $
(61) $
948
2,516
3,403
$
(198) $
3,233
7,329
56
2
(211)
(153)
(63)
388
(160)
165
(243)
333
274
364
60
(140)
(144)
(224)
(288)
790
247
749
(478)
1,373
6
7,915
$
4,977
$
2,674
$
1,554
$
17,120
$
(6,756) $
10,364
$
901
(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
$1.1 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 $4.0 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 $4.9 billion and net CDS purchased of $1.9 billion, consisting of $1.5 billion of net single-
name CDS purchased and $406 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, including $4.5 billion, consisting
of $3.0 billion in net single-name CDS purchased and $1.5 billion in net indexed and tranched CDS purchased, to hedge loans and securities, $2.3 billion in additional credit default protection
purchased to hedge derivative assets and $127 million in other short exposures.
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.
98 Bank of America 2013
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Table 62 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 62 includes only single-
name CDS netted at the counterparty level, whereas, Table 61
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 62 Single-Name CDS with Reference Assets in
Greece, Ireland, Italy, Portugal and Spain (1)
December 31, 2013
Notional
Fair Value
(Dollars in billions)
Purchased
Sold
Purchased
Sold
Greece
Aggregate
After legally netting (2)
$
1.4 $
0.3
1.4 $
0.3
0.1 $
—
Ireland
Aggregate
After legally netting (2)
Italy
Aggregate
After legally netting (2)
Portugal
Aggregate
After legally netting (2)
Spain
Aggregate
After legally netting (2)
2.4
0.9
53.8
13.0
7.5
1.2
20.7
3.2
2.2
0.7
47.9
7.0
7.5
1.3
20.8
3.2
0.1
0.1
2.5
1.1
0.4
0.1
0.6
0.1
0.1
—
0.1
—
1.7
0.4
0.4
0.1
0.6
0.1
Spain are primarily with non-Eurozone counterparties.
(2) Amounts listed are after consideration of legally enforceable counterparty 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 financial instability
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 this Annual Report on Form
10-K.
Table 63 presents countries where total cross-border exposure
exceeded one percent of our total assets. At December 31, 2013,
the United Kingdom was the only country where total cross-border
exposure exceeded one percent of our total assets. At
December 31, 2013, France had total cross-border exposure of
$17.8 billion representing 0.85 percent of our total assets. No
other countries had total cross-border exposure that exceeded
0.75 percent of our total assets at December 31, 2013.
Table 63 Total Cross-border Exposure Exceeding One
Percent of Total Assets
Public sector
Banks
Private sector
Cross-border exposure
United Kingdom
2013
2012
$
$
6
7,027
32,466
39,499
$
$
95
5,656
31,595
37,346
Exposure as a percentage of total assets
1.88%
1.69%
Cross-border exposures are calculated using FFIEC guidelines
and not our internal risk management view; therefore, exposures
are not comparable between tables. Exposure includes cross-
border claims by our non-U.S. offices
loans,
acceptances, time deposits placed, trading account assets,
securities, derivative assets, other interest-earning investments
and other monetary assets. Amounts also include unfunded
commitments, letters of credit and financial guarantees, and the
notional amount of cash lent under secured financing transactions.
reporting
Sector definitions are consistent with FFIEC
requirements for preparing the Country Exposure Report.
including
(1) The majority of our CDS contracts on reference assets in Greece, Ireland, Italy, Portugal and
(Dollars in millions)
76788ba_financials.indd 99
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Bank of America 2013 99
Provision for Credit Losses
The provision for credit losses decreased $4.6 billion to $3.6
billion in 2013 compared to 2012. The provision for credit losses
was $4.3 billion lower than net charge-offs for 2013, resulting in
a reduction in the allowance for credit losses due to continued
improvement in the home loans and credit card portfolios. This
compared to a reduction of $6.7 billion in the allowance for credit
losses for 2012. If the economy and our asset quality continue to
improve, we anticipate additional reductions in the allowance for
credit losses in future periods, although at a significantly lower
level than in 2013.
The provision for credit losses for the consumer portfolio
decreased $6.0 billion to $2.0 billion in 2013 compared to 2012,
due to continued improvement in the home loans portfolio primarily
as a result of improved delinquencies, increased home prices, 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 portfolio was a
benefit of $707 million in 2013 primarily due to improvement in
our home price outlook compared to a benefit of $103 million in
2012.
The provision for credit losses for the commercial portfolio,
including unfunded lending commitments, increased $1.3 billion
to $1.5 billion in 2013 compared to 2012 due to stabilization of
credit quality, an increase in reserves due to loan growth and a
higher volume of loan resolutions in the prior year within the core
commercial portfolio.
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
100 Bank of America 2013
leases that have incurred losses which are not yet individually
identifiable. The allowance
for consumer and certain
homogeneous commercial loan and lease products is based on
aggregated portfolio evaluations, generally by product type. Loss
forecast models are utilized that consider a variety of factors
including, but not limited to, historical loss experience, estimated
defaults or foreclosures based on portfolio trends, delinquencies,
economic trends and credit scores. Our consumer real estate loss
forecast model estimates the portion of loans that will default
based on individual loan attributes, the most significant of which
are refreshed LTV or CLTV, and borrower credit score as well as
vintage and geography, all of which are further broken down into
current delinquency status. Additionally, we incorporate the
delinquency status of underlying first-lien loans on our junior-lien
home equity portfolio in our allowance process. Incorporating
refreshed LTV and CLTV into our probability of default allows us to
factor the impact of changes in home prices into our allowance
for loan and lease losses. These loss forecast models are updated
on a quarterly basis to incorporate information reflecting the
current economic environment. As of December 31, 2013, the loss
forecast process resulted in reductions in the allowance for all
major consumer portfolios.
and
trends,
geographic
performance
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
obligor
concentrations within each portfolio and any other pertinent
information. The statistical models for commercial loans are
generally updated annually and utilize our historical database of
actual defaults and other data. The loan risk ratings and
composition of the commercial portfolios used to calculate the
allowance are updated quarterly to incorporate the most recent
data reflecting the current economic environment. For risk-rated
commercial loans, we estimate the probability of default and the
LGD based on our historical experience of defaults and credit
losses. Factors considered when assessing the internal risk rating
include the value of the underlying collateral, if applicable, the
industry in which the obligor operates, the obligor’s liquidity and
other financial indicators, and other quantitative and qualitative
factors relevant to the obligor’s credit risk. As of December 31,
2013, changes in portfolio size and composition resulted in an
increase in the allowance 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. Given the heightened risk of loss with these loans,
additional reserves are recorded to the allowance for loan and
76788ba_financials.indd 100
3/6/14 12:06 PM
lease losses. Further, we consider the inherent uncertainty in
mathematical models that are built upon historical data.
the
During 2013, the factors that impacted the allowance for loan
and lease losses included significant overall improvements in the
credit quality of the portfolios driven by improvements in the U.S.
economy and housing and labor markets, continuing proactive
credit risk management initiatives and the impact of recent higher
resolution of
credit quality originations. Additionally,
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 consumer loans and
reservable criticized commercial loans, but such loans remained
elevated relative to levels experienced prior to the financial crisis.
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 65, was $13.4 billion at
December 31, 2013, a decrease of $7.7 billion
from
December 31, 2012. The decrease was primarily driven by the
home equity and residential mortgage portfolios due to improved
delinquencies and home prices as evidenced by improving LTV
statistics as presented in Tables 30 and 32 as well as continued
loan balance run-off. In addition, the home equity and residential
mortgage 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 $2.1 billion at December 31, 2013
from $2.7 billion (to 2.25 percent from 2.90 percent of outstanding
U.S. credit card loans) at December 31, 2012, and accruing loans
90 days or more past due declined to $1.1 billion at December 31,
2013 from $1.4 billion (to 1.14 percent from 1.52 percent of
outstanding U.S. credit card loans) at December 31, 2012. See
Tables 27, 28, 37 and 39 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 65, was $4.0 billion at
December 31, 2013, a $899 million increase from December 31,
2012, as continued improvement in credit quality was more than
offset by loan growth across the commercial portfolio. The
commercial utilized reservable criticized exposure decreased to
$12.9 billion at December 31, 2013 from $15.9 billion (to 3.02
percent from 4.10 percent of total commercial utilized reservable
exposure) at December 31, 2012. Similarly, nonperforming
commercial loans declined to $1.3 billion at December 31, 2013
from $3.2 billion (to 0.34 percent from 0.93 percent of outstanding
commercial loans) at December 31, 2012. See Tables 43, 44 and
46 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 1.90 percent at
December 31, 2013 compared to 2.69 percent at December 31,
2012. 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 for home equity and residential
mortgage which led to the reduction in the allowance for credit
losses discussed above. The December 31, 2013 and 2012 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 1.67 percent at
December 31, 2013 compared to 2.14 percent at December 31,
2012.
76788ba_financials.indd 101
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Bank of America 2013 101
Table 64 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 2013 and 2012.
Table 64 Allowance for Credit Losses
(Dollars in millions)
Allowance for loan and lease losses, January 1
Loans and leases charged off
Residential mortgage
Home equity
U.S. credit card
Non-U.S. credit card
Direct/Indirect consumer
Other consumer
Total consumer charge-offs
U.S. commercial (1)
Commercial real estate
Commercial lease financing
Non-U.S. commercial
Total commercial charge-offs
Total loans and leases charged off
Recoveries of loans and leases previously charged off
Residential mortgage
Home equity
U.S. credit card
Non-U.S. credit card
Direct/Indirect consumer
Other consumer
Total consumer recoveries
U.S. commercial (2)
Commercial real estate
Commercial lease financing
Non-U.S. commercial
Total commercial recoveries
Total recoveries of loans and leases previously charged off
Net charge-offs
Write-offs of PCI loans
Provision for loan and lease losses
Other (3)
Allowance for loan and lease losses, December 31
Reserve for unfunded lending commitments, January 1
Provision for unfunded lending commitments
Other (4)
Reserve for unfunded lending commitments, December 31
Allowance for credit losses, December 31
(1)
(2)
Includes U.S. small business commercial charge-offs of $457 million and $799 million in 2013 and 2012.
Includes U.S. small business commercial recoveries of $98 million and $100 million in 2013 and 2012.
(3) Primarily represents the net impact of portfolio sales, consolidations and deconsolidations, and foreign currency translation adjustments.
(4) Primarily represents accretion of the Merrill Lynch purchase accounting adjustment.
2013
2012
$
24,179
$
33,783
(1,508)
(2,258)
(4,004)
(508)
(710)
(273)
(9,261)
(774)
(251)
(4)
(79)
(1,108)
(10,369)
424
455
628
109
365
39
2,020
287
102
29
34
452
2,472
(7,897)
(2,336)
3,574
(92)
17,428
513
(18)
(11)
484
17,912
$
(3,276)
(4,573)
(5,360)
(835)
(1,258)
(274)
(15,576)
(1,309)
(719)
(32)
(36)
(2,096)
(17,672)
165
331
728
254
495
42
2,015
368
335
38
8
749
2,764
(14,908)
(2,820)
8,310
(186)
24,179
714
(141)
(60)
513
24,692
$
102 Bank of America 2013
76788ba_financials.indd 102
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Table 64 Allowance for Credit Losses (continued)
(Dollars in millions)
Loan and allowance ratios:
2013
2012
Loans and leases outstanding at December 31 (5)
Allowance for loan and lease losses as a percentage of total loans and leases and outstanding at December 31 (5)
Consumer allowance for loan and lease losses as a percentage of total consumer loans and leases outstanding at December 31 (6)
Commercial allowance for loan and lease losses as a percentage of total commercial loans and leases outstanding at December 31 (7)
Average loans and leases outstanding (5)
Net charge-offs as a percentage of average loans and leases outstanding (5, 8)
Net charge-offs and PCI write-offs as a percentage of average loans and leases outstanding (5)
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases at December 31 (5, 9)
Ratio of the allowance for loan and lease losses at December 31 to net charge-offs (8)
Ratio of the allowance for loan and lease losses at December 31 to net charge-offs and PCI write-offs
Amounts included in the allowance for loan and lease losses that are excluded from nonperforming loans and leases at December 31 (10) $
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases, excluding amounts included in the
$ 918,191
1.90%
2.53
1.03
$ 909,127
0.87%
1.13
102
2.21
1.70
7,680
$ 898,817
2.69%
3.81
0.90
$ 890,337
1.67%
1.99
107
1.62
1.36
$ 12,021
allowance for loan and lease losses that are excluded from nonperforming loans and leases at December 31 (10)
57%
54%
Loan and allowance ratios excluding PCI loans and the related valuation allowance: (11)
Allowance for loan and lease losses as a percentage of total loans and leases outstanding at December 31 (5)
Consumer allowance for loan and lease losses as a percentage of total consumer loans and leases outstanding at December 31 (6)
Net charge-offs as a percentage of average loans and leases outstanding (5)
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases at December 31 (5, 9)
Ratio of the allowance for loan and lease losses at December 31 to net charge-offs
1.67%
2.17
0.90
87
1.89
2.14%
2.95
1.73
82
1.25
(5) Outstanding loan and lease balances and ratios do not include loans accounted for under the fair value option, which were $10.0 billion and $9.0 billion at December 31, 2013 and 2012. Average
loans accounted for under the fair value option were $9.5 billion and $8.4 billion in 2013 and 2012.
(6) Excludes consumer loans accounted for under the fair value option of $2.2 billion and $1.0 billion at December 31, 2013 and 2012.
(7) Excludes commercial loans accounted for under the fair value option of $7.9 billion and $8.0 billion at December 31, 2013 and 2012.
(8) Net charge-offs exclude $2.3 billion and $2.8 billion of write-offs in the PCI loan portfolio in 2013 and 2012. These write-offs decreased the PCI valuation allowance included as part of the allowance
for loan and lease losses. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 81.
(9) For more information on our definition of nonperforming loans, see pages 85 and 92.
(10) 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.
(11) For more information on the PCI loan portfolio and the valuation allowance for PCI loans, see Note 4 – Outstanding Loans and Leases and Note 5 – Allowance for Credit Losses to the Consolidated
Financial Statements.
For reporting purposes, we allocate the allowance for credit losses across products. However, the allowance is generally available
to absorb any credit losses without restriction. Table 65 presents our allocation by product type.
Table 65 Allocation of the Allowance for Credit Losses by Product Type
(Dollars in millions)
Allowance for loan and lease losses
Residential mortgage
Home equity
U.S. credit card
Non-U.S. credit card
Direct/Indirect consumer
Other consumer
Total consumer
U.S. commercial (2)
Commercial real estate
Commercial lease financing
Non-U.S. commercial
Total commercial (3)
Allowance for loan and lease losses
Reserve for unfunded lending commitments
Allowance for credit losses (4)
December 31, 2013
December 31, 2012
Amount
Percent of
Total
Percent of
Loans and
Leases
Outstanding (1)
Amount
Percent of
Total
Percent of
Loans and
Leases
Outstanding (1)
$
$
4,084
4,434
3,930
459
417
99
13,423
2,394
917
118
576
4,005
17,428
484
17,912
23.43%
25.44
22.55
2.63
2.39
0.58
77.02
13.74
5.26
0.68
3.30
22.98
100.00%
1.65% $
4.73
4.26
3.98
0.51
5.02
2.53
1.06
1.91
0.47
0.64
1.03
1.90
$
7,088
7,845
4,718
600
718
104
21,073
1,885
846
78
297
3,106
24,179
513
24,692
29.31%
32.45
19.51
2.48
2.97
0.43
87.15
7.80
3.50
0.32
1.23
12.85
100.00%
2.80%
7.26
4.97
5.13
0.86
6.40
3.81
0.90
2.19
0.33
0.40
0.90
2.69
(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 $1.0 billion and home equity loans of $147 million and $0 at December 31, 2013 and 2012. Commercial loans
accounted for under the fair value option included U.S. commercial loans of $1.5 billion and $2.3 billion and non-U.S. commercial loans of $6.4 billion and $5.7 billion at December 31, 2013 and
2012.
Includes allowance for loan and lease losses for U.S. small business commercial loans of $462 million and $642 million at December 31, 2013 and 2012.
Includes allowance for loan and lease losses for impaired commercial loans of $277 million and $475 million at December 31, 2013 and 2012.
Includes $2.5 billion and $5.5 billion of valuation allowance included as part of the allowance for credit losses related to PCI loans at December 31, 2013 and 2012.
(2)
(4)
(3)
76788ba_financials.indd 103
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Bank of America 2013 103
losses
related
to unfunded
Reserve for Unfunded Lending Commitments
In addition to the allowance for loan and lease losses, we also
lending
estimate probable
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 $484
million at December 31, 2013, a decrease of $29 million from
December 31, 2012. The decrease was driven by improved credit
quality in the unfunded portfolio.
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 109.
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, mortgage, 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
financial
instruments. The key risk management techniques are discussed
in more detail in the Trading Risk Management section.
that encompass a broad
range of
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 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
104 Bank of America 2013
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 that model standards are
consistent with model risk requirements and monitors the effective
challenge in the model validation process across the Corporation.
In addition, the relevant stakeholders must agree on any required
limitations or restrictions to the models and maintain a stringent
monitoring process to ensure continued compliance.
For more information on the fair value of certain financial assets
and liabilities, see Note 20 – Fair Value Measurements to the
Consolidated Financial Statements.
Interest Rate Risk
Interest rate risk represents exposures to instruments whose
values vary with the level or volatility of interest rates. These
instruments include, but are not limited to, loans, debt securities,
certain trading-related assets and liabilities, deposits, borrowings
and derivatives. Hedging instruments used to mitigate these risks
include derivatives such as options, futures, forwards and swaps.
Foreign Exchange Risk
Foreign exchange risk represents exposures to changes in the
values of current holdings and future cash flows denominated in
currencies other than the U.S. dollar. The types of instruments
exposed to this risk include investments in non-U.S. subsidiaries,
foreign currency-denominated loans and securities, future cash
flows in foreign currencies arising from foreign exchange
transactions, foreign currency-denominated debt and various
foreign exchange derivatives whose values fluctuate with changes
in the level or volatility of currency exchange rates or non-
U.S. interest rates. Hedging instruments used to mitigate this risk
include foreign exchange options, currency swaps, futures,
forwards, and foreign currency-denominated debt and deposits.
Mortgage Risk
Mortgage risk represents exposures to changes in the values of
mortgage-related instruments. The values of these instruments
are sensitive to prepayment rates, mortgage rates, agency debt
ratings, default, market liquidity, government participation and
76788ba_financials.indd 104
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certificates,
commercial mortgages
interest rate volatility. Our exposure to these instruments takes
several forms. First, we trade and engage in market-making
activities in a variety of mortgage securities including whole loans,
pass-through
and
collateralized mortgage obligations
including CDOs using
mortgages as underlying collateral. Second, we originate a variety
of MBS which involves the accumulation of mortgage-related loans
in anticipation of eventual securitization. Third, we may hold
positions in mortgage securities and residential mortgage loans
as part of the ALM portfolio. Fourth, we create MSRs as part of
our mortgage origination activities. For more information on MSRs,
see Note 1 – Summary of Significant Accounting Principles and
Note 23 – Mortgage Servicing Rights to the Consolidated Financial
Statements. Hedging instruments used to mitigate this risk include
contracts and derivatives such as options, swaps, futures and
forwards. For additional information, see Mortgage Banking Risk
Management on page 112.
Equity Market Risk
Equity market risk represents exposures to securities that
represent an ownership interest in a corporation in the form of
domestic and foreign common stock or other equity-linked
instruments. Instruments that would lead to this exposure include,
but are not limited to, the following: common stock, exchange-
traded funds, American Depositary Receipts, convertible bonds,
listed equity options (puts and calls), OTC equity options, equity
total return swaps, equity index futures and other equity derivative
products. Hedging instruments used to mitigate this risk include
options, futures, swaps, convertible bonds and cash positions.
Commodity Risk
Commodity risk represents exposures to instruments traded in
the petroleum, natural gas, power and metals markets. These
instruments consist primarily of futures, forwards, swaps and
options. Hedging instruments used to mitigate this risk include
options, futures and swaps in the same or similar commodity
product, as well as cash positions.
Issuer Credit Risk
Issuer credit risk represents exposures to changes in the
creditworthiness of individual issuers or groups of issuers. Our
portfolio is exposed to issuer credit risk where the value of an
asset may be adversely impacted by changes in the levels of credit
spreads, by credit migration or by defaults. Hedging instruments
used to mitigate this risk include bonds, CDS and other credit
fixed-income instruments.
Market Liquidity Risk
Market liquidity risk represents the risk that the level of expected
market activity changes dramatically and, in certain cases, may
even cease. This exposes us to the risk that we will not be able
to transact business and execute trades in an orderly manner
which may impact our results. This impact could be further
exacerbated if expected hedging or pricing correlations are
compromised by disproportionate demand or lack of demand for
certain instruments. We utilize various risk mitigating techniques
as discussed in more detail in Trading Risk Management.
Trading Risk Management
To evaluate risk in our trading activities, we focus on the actual
and potential volatility of revenues generated by individual
positions as well as portfolios of positions. Various techniques
and procedures are utilized to enable the most complete
understanding of these risks. Quantitative measures of market
risk are evaluated on a daily basis from a single position to the
portfolio of the Corporation. These measures include sensitivities
of positions to various market risk factors, such as the potential
impact on revenue from a one basis point change in interest rates,
and statistical measures utilizing both actual and hypothetical
market moves, such as VaR and stress testing. Periods of extreme
market stress influence the reliability of these techniques to
varying degrees. Qualitative evaluations of market risk utilize the
suite of quantitative risk measures while understanding each of
their
risk managers
limitations. Additionally,
independently evaluate the risk of the portfolios under the current
market environment and potential future environments.
respective
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 interval 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 bi-weekly
basis, or more frequently during periods of market stress, and
regularly review the assumptions underlying the model. A relatively
minor portion of risks related to our trading positions are not
included in VaR. These risks are reviewed as part of our ICAAP.
Bank of America 2013 105
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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.
Market risk VaR for trading activities as presented in Table 66
differs from VaR used for regulatory capital calculations (regulatory
VaR). The VaR disclosed in Table 66 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. Regulatory standards require that regulatory VaR only
exclude counterparty CVA but include the corresponding hedges.
The holding period for regulatory VaR 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. For more information on certain components in
regulatory VaR, see Capital Management – Regulatory Capital
Changes on page 64.
The market risk across all business segments to which the
Corporation is exposed is included in the total market-based
trading portfolio VaR results. The majority of this portfolio is within
the Global Markets segment.
Table 66 presents year-end, average, high and low daily trading
VaR for 2013 and 2012.
Table 66 Market Risk VaR for Trading Activities
(Dollars in millions)
Foreign exchange
Interest rate
Credit
Real estate/mortgage
Equities
Commodities
Portfolio diversification
Total market-based trading portfolio
2013
2012
Year
End
Average
High (1)
Low (1)
Year
End
Average
High (1)
Low (1)
$
$
$
16
32
66
35
25
7
(82)
99 $
$
20
34
53
28
29
12
(107)
69 $
42
66
72
44
56
18
—
115
$
$
12
20
33
20
17
7
—
42
$
$
26
49
73
37
27
13
(103)
122
$
$
21
46
50
34
28
13
(117)
75
$
$
34
75
81
45
55
18
—
128
$
$
12
30
31
28
15
7
—
42
(1) The high and low for the total portfolio may have occurred on different trading days than the high and low for the individual components. Therefore the amount of portfolio diversification, which is the
difference between the total portfolio and the sum of the individual components, is not relevant.
The decrease in average VaR during 2013 was driven by lower
levels of exposures in the interest rate and real estate/mortgage
markets.
The graph below presents the daily total market-based trading
portfolio VaR for 2013, corresponding to the data presented in
Table 66.
106 Bank of America 2013
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To enhance the visibility of the market risks to which we are
exposed, additional VaR statistics produced within
the
Corporation’s single VaR model are provided in Table 67. Evaluating
VaR with additional statistics allows
increased
understanding of the risks in the portfolio as the historical market
for an
data used in the VaR calculation does not necessarily follow a
predefined statistical distribution. Table 67 presents average
trading VaR statistics for 99 percent and 95 percent confidence
intervals for 2013 and 2012.
Table 67 Average Market Risk VaR for Trading Activities – Additional VaR Statistics
(Dollars in millions)
Foreign exchange
Interest rate
Credit
Real estate/mortgage
Equities
Commodities
Portfolio diversification
Total market-based trading portfolio
2013
2012
99 percent
20
$
34
53
28
29
12
(107)
69
$
95 percent
13
$
20
23
17
16
7
(63)
33
$
99 percent
21
$
46
50
34
28
13
(117)
75
$
95 percent (1)
12
$
26
24
18
16
7
(65)
38
$
(1) Due to system constraints, the 95 percent VaR for the three months ended March 31, 2012 is not available and therefore average 95 percent VaR for that period has been estimated. It is not
expected that this estimation materially affected the average 95 percent VaR for 2012.
Limits on quantitative risk measures, including VaR, are
monitored on a daily basis. The trading limits are independently
set by market risk management and reviewed on a regular basis
to ensure they remain relevant and within our overall risk appetite
for market risks. Limits are reviewed in the context of market
liquidity, volatility and strategic business priorities. The 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. Trading limits are approved at least annually.
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 2013.
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.
Backtesting
The accuracy of the VaR methodology is evaluated by backtesting,
which compares the daily regulatory VaR results, utilizing a one-
day holding period, against the realized daily profit and loss.
Backtesting excesses occur 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 interval 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 and report the
results 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 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 revenues 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.
There were no days with backtesting excesses for our total
market-based trading portfolio VaR, utilizing a holding period,
during 2013.
Total Trading Revenue
Total trading-related revenue, excluding brokerage fees, represents
the total amount earned from trading positions, including market-
based net interest income, which are taken in a diverse range of
financial instruments and markets. Trading account assets and
liabilities are reported at fair value. For more information on fair
value, see Note 20 – Fair Value Measurements to the Consolidated
Financial Statements. Trading-related revenues can be volatile and
are largely driven by general market conditions and customer
demand. Also, trading-related revenues are dependent on the
volume and type of transactions, the level of risk assumed, and
the volatility of price and rate movements at any given time within
the ever-changing market environment. Significant daily revenues
by business are monitored and the primary drivers of these are
reviewed. When it is deemed material, an explanation of these
revenues is provided to the GMRC.
Bank of America 2013 107
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The histogram below is a graphic depiction of trading volatility
and illustrates the daily level of trading-related revenue for 2013
and 2012. During 2013, positive trading-related revenue was
recorded for 96 percent, or 241 of the 251 trading days, of which
74 percent (186 days) were daily trading gains of over $25 million
and the largest loss was $54 million. This compares to 2012
where positive trading-related revenue was recorded for 98
percent, or 243 of the 249 trading days, of which 80 percent (199
days) were daily trading gains of over $25 million and the largest
loss was $50 million.
Trading Portfolio Stress Testing
Because the very nature of a VaR model suggests results can
exceed our estimates and are 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 – Enterprise-wide Stress Testing on page 59.
108 Bank of America 2013
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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
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.
funding mix, product
in
Table 69 shows the pre-tax dollar impact to forecasted net
interest income over the next 12 months from December 31, 2013
and 2012, 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 30.
During 2013, the 10-year Treasury rate increased more than
120 bps. 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 69 Estimated Net Interest Income Excluding
Trading-related Net Interest Income
(Dollars in millions)
Curve Change
Parallel Shifts
+100 bps
Short
Rate (bps)
Long
Rate (bps)
December 31
2013
2012
instantaneous shift
+100
+100
$
3,229
$
4,350
-50 bps
instantaneous shift
-50
-50
(1,616)
(2,322)
Flatteners
Short end
instantaneous change
+100
Table 68 presents the spot and 12-month forward rates used
Long end
in our baseline forecasts at December 31, 2013 and 2012.
instantaneous change
—
—
-50
2,210
2,130
(641)
(1,669)
Table 68 Forward Rates
December 31, 2013
Three-
Month
LIBOR
10-Year
Swap
Federal
Funds
Spot rates
12-month forward rates
Spot rates
12-month forward rates
0.25%
0.25
0.25%
0.43
3.09%
3.52
December 31, 2012
0.25%
0.25
0.31%
0.37
1.84%
2.10
Steepeners
Short end
instantaneous change
Long end
instantaneous change
-50
—
—
(937)
(648)
+100
1,066
2,238
The sensitivity analysis in Table 69 assumes that we take no
action in response to these rate shocks. As part of our ALM
activities, we use securities, residential mortgages, and interest
rate and foreign exchange derivatives in managing interest rate
sensitivity.
76788ba_financials.indd 109
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Bank of America 2013 109
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 December 31, 2013 and 2012, our
securities portfolio used for ALM positioning had a carrying value
of $323.9 billion and $360.3 billion.
During 2013 and 2012, we purchased debt securities of
$190.4 billion and $185.5 billion, sold $117.7 billion and $72.4
billion, and had maturities and received paydowns of $94.0 billion
and $77.8 billion, respectively. We realized $1.3 billion and $1.7
billion in net gains on sales of AFS debt securities.
At December 31, 2013 and 2012, accumulated OCI included
after-tax net unrealized losses of $3.3 billion and gains of $4.4
billion on AFS debt securities and after-tax net unrealized losses
of $4 million and gains of $462 million on AFS marketable equity
securities. For more information on accumulated OCI, see Note 14
– Accumulated Other Comprehensive Income (Loss) to the
Consolidated Financial Statements. The pre-tax net amounts in
accumulated OCI related to AFS debt securities decreased $12.2
billion during 2013 to a $5.2 billion net unrealized loss primarily
due to the impact of higher interest rates. For more information
on our securities portfolio, see Note 3 – Securities to the
Consolidated Financial Statements.
We recognized $20 million of other-than-temporary impairment
(OTTI) losses in earnings on AFS debt securities in 2013 compared
to losses of $53 million in 2012. The recognition of OTTI losses
is based on a variety of factors, including the length of time and
extent to which the market value has been less than amortized
cost, the financial condition of the issuer of the security including
credit ratings and any specific events affecting the operations of
the issuer, underlying assets that collateralize the debt security,
other industry and macroeconomic conditions, and our intent and
ability to hold the security to recovery.
Residential Mortgage Portfolio
At December 31, 2013 and 2012, our residential mortgage
portfolio was $248.1 billion and $252.9 billion excluding $2.0
billion and $1.0 billion of consumer residential mortgage loans
accounted for under the fair value option. 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 85. The $4.9 billion decrease in 2013 was
primarily due to paydowns, charge-offs, transfers to foreclosed
properties and sales. These were partially offset by new origination
volume retained on our balance sheet, loans repurchased as part
of the FNMA Settlement, as well as repurchases of delinquent
loans pursuant to our servicing agreements with GNMA, which is
part of our mortgage banking activities. For more information on
the FNMA Settlement, see Note 7 – Representations and Warranties
Obligations and Corporate Guarantees to the Consolidated
Financial Statements.
During 2013, CRES and GWIM originated $44.5 billion of first-
lien mortgages that we retained compared to $35.4 billion in 2012.
Additionally, during 2013 in connection with the FNMA Settlement,
we repurchased $5.3 billion of certain residential mortgage loans
as mentioned above. We repurchased, net of loans redelivered,
$5.5 billion of loans pursuant to our servicing agreements with
GNMA, primarily FHA-insured loans, compared to $7.0 billion in
2012. Sales of loans, excluding redelivered FHA loans, during
2013 were $4.0 billion compared to $302 million in 2012.
Substantially all of the loans sold in 2013 were nonperforming or
PCI. Gains recognized on the sales of residential mortgages in
both years were not material. We received paydowns of
$53.0 billion in 2013 compared to $54.3 billion in 2012.
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
2013 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.
110 Bank of America 2013
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Table 70 presents derivatives utilized in our ALM activities including those designated as accounting and economic hedging
instruments and shows the notional amount, fair value, weighted-average receive-fixed and pay-fixed rates, expected maturity and
average estimated durations of our open ALM derivatives at December 31, 2013 and 2012. These amounts do not include derivative
hedges on our MSRs.
Table 70 Asset and Liability Management Interest Rate and Foreign Exchange Contracts
December 31, 2013
Expected Maturity
(Dollars in millions, average estimated duration in
years)
Fair
Value
Receive-fixed interest rate swaps (1, 2)
$
5,074
Total
2014
2015
2016
2017
2018
Thereafter
Notional amount
Weighted-average fixed-rate
Pay-fixed interest rate swaps (1, 2)
Notional amount
Weighted-average fixed-rate
Same-currency basis swaps (3)
Notional amount
Foreign exchange basis swaps (2, 4, 5)
Notional amount
Option products (6)
Notional amount (7)
Foreign exchange contracts (2, 5, 8)
Notional amount (7)
Futures and forward rate contracts
Notional amount (7)
Net ALM contracts
$ 109,539
$
7,604
$ 12,873
$ 15,339
$ 19,803
$ 20,733
$ 33,187
3.42%
3.79%
3.32%
3.12%
3.87%
3.34%
3.29%
427
$ 28,418
$
4,645
$
1.87%
0.54%
520
2.30%
$
1,025
$
1,527
$
8,529
$ 12,172
1.65%
1.84%
1.52%
2.62%
6
$ 145,184
$ 47,529
$ 25,171
$ 28,157
$ 15,283
$
9,156
$ 19,888
1,208
21
1,619
147
$
8,502
205,560
39,151
37,298
27,293
24,304
14,517
62,997
(641)
(649)
(11)
—
—
—
19
(19,515)
(35,991)
1,873
(669)
7,224
2,026
6,022
(19,427)
(19,427)
—
—
—
—
—
December 31, 2012
Expected Maturity
(Dollars in millions, average estimated duration in
years)
Fair
Value
Receive-fixed interest rate swaps (1, 2)
$ 10,491
Total
2013
2014
2015
2016
2017
Thereafter
Notional amount
Weighted-average fixed-rate
Pay-fixed interest rate swaps (1, 2)
Notional amount
Weighted-average fixed-rate
Same-currency basis swaps (3)
Notional amount
Foreign exchange basis swaps (2, 4, 5)
Notional amount
Option products (6)
Notional amount (7)
Foreign exchange contracts (2, 5, 8)
Notional amount (7)
Futures and forward rate contracts
Notional amount (7)
Net ALM contracts
$ 85,899
$ 7,175
$ 7,604
$ 11,785
$ 11,362
$ 19,693
$ 28,280
4.12%
4.06%
3.79%
3.56%
3.98%
3.89%
4.67%
(4,903)
$ 26,548
$
3.09%
27
6.91%
$ 3,989
$
0.79%
520
2.30%
$ 1,025
$ 1,527
$ 19,460
1.65%
1.84%
3.75%
45
$ 213,458
$ 82,716
$ 54,534
$ 19,995
$ 20,361
$ 13,542
$ 22,310
431
(147)
5,636
24
$ 11,577
191,925
32,590
44,732
27,569
15,965
20,134
50,935
4,218
4,000
—
—
—
—
218
(1,200)
(23,438)
8,615
1,303
582
6,183
5,555
(11,595)
(11,595)
—
—
—
—
—
Average
Estimated
Duration
4.67
5.92
Average
Estimated
Duration
5.30
15.47
(1) At December 31, 2013, 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 compared to none at December 31, 2012. The forward starting pay-fixed swap positions at December 31, 2013 and 2012 were $1.1 billion and $520 million.
(2) Does not include basis adjustments on either fixed-rate debt issued by the Corporation or AFS debt securities, which are hedged using derivatives designated as fair value hedging instruments, that
substantially offset the fair values of these derivatives.
(3) At December 31, 2013 and 2012, the notional amount of same-currency basis swaps was comprised of $145.2 billion and $213.5 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 $(641) million at December 31, 2013 was comprised of $(2.0) billion in swaptions, $1.4 billion in foreign exchange options and $19 million in purchased
caps/floors. Option products of $4.2 billion at December 31, 2012 were comprised of $4.2 billion in swaptions and $18 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 $(19.5) billion at December 31, 2013 was 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. Foreign exchange
contracts of $(1.2) billion at December 31, 2012 were comprised of $41.9 billion in foreign currency-denominated and cross-currency receive-fixed swaps, $(10.5) billion in foreign currency-denominated
pay-fixed swaps and $(32.6) billion in net foreign currency forward rate contracts.
Bank of America 2013 111
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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, net-
of-tax, were $2.3 billion and $2.9 billion at December 31, 2013
and 2012. These net losses are expected to be reclassified into
earnings in the same period as the hedged cash flows affect
earnings and will decrease income or increase expense on the
respective hedged cash flows. Assuming no change in open cash
flow derivative hedge positions and no changes in prices or interest
rates beyond what is implied in forward yield curves at
December 31, 2013, the pre-tax net losses are expected to be
reclassified into earnings as follows: $784 million, or 22 percent
within the next year, 58 percent in years two through five, and 14
percent in years six through ten, with the remaining six percent
thereafter. For more information on derivatives designated as cash
flow hedges, see Note 2 – Derivatives to the Consolidated Financial
Statements.
We hedge our net investment in non-U.S. operations determined
to have functional currencies other than the U.S. dollar using
forward foreign exchange contracts that typically settle in less than
180 days, cross-currency basis swaps and foreign exchange
options. We recorded net after-tax losses on derivatives in
accumulated OCI associated with net investment hedges which
were offset by gains on our net investments in consolidated non-
U.S. entities at December 31, 2013.
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 December 31, 2013
and 2012, the notional amounts of derivatives economically
hedging the IRLCs and residential first mortgage LHFS were $7.9
billion and $31.1 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
112 Bank of America 2013
risks of MSRs. The fair value and notional amounts of the derivative
contracts and the fair value of securities hedging the MSRs were
$(2.9) billion, $1.8 trillion and $2.5 billion at December 31, 2013
and $2.3 billion, $1.6 trillion and $2.3 billion at December 31,
2012. In 2013, we recorded in mortgage banking income losses
of $1.1 billion related to the change in fair value of the derivative
contracts and other securities used to hedge the market risks of
the MSRs compared to gains of $2.3 billion for 2012. For more
information on MSRs, see Note 23 – Mortgage Servicing Rights to
the Consolidated Financial Statements and for more information
on mortgage banking income, see CRES on page 36.
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 banking and financial services
laws, rules and 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 risk management
discipline.
The Global Compliance Framework, an addendum to our Risk
Framework, details the high-level requirements of the global
compliance program in one comprehensive document. The Global
Compliance Framework also clearly defines
roles and
responsibilities and is supported by policies that articulate
detailed requirements for implementation and execution of the
global compliance program. As such, the Global Compliance
Framework is designed to support responsible, well-informed
compliance risk management that incorporates an ongoing,
disciplined approach to proactive planning, oversight, escalation
and decision making across the Corporation.
The Global Compliance Framework also provides an outline for
senior management and the Board, and/or appropriate Board-level
committees, such as the Audit Committee, to oversee the
Corporation’s compliance risk management. 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
determination. For more information on Basel 3, see Capital
Management – Regulatory Capital Changes on page 64.
from
risk management
We approach operational
two
perspectives to manage operational risk within the structure of
the Corporation: (1) at the enterprise level to provide independent,
integrated management of operational
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
risk across
76788ba_financials.indd 112
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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 CRO and a variety of management committees and
risk oversight groups aligned to the Corporation’s overall risk
governance framework and practices. Of these, the Compliance
and Operational Risk Committee
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.
(CORC) oversees
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.
Corporate Audit provides independent assessment and
validation through testing of key processes and controls across
the Corporation. An annual Audit Plan ensures that coverage
activities address the significant aspects of the Corporation’s risk
profile. Risk assessments incorporating operational risk are
completed within the audit planning process.
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 RCSAs, operational risk
in conjunction with senior business
executives, working
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.
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 are essential in understanding the MD&A.
Many of our significant accounting principles require complex
judgments to estimate the values of assets and liabilities. We
have procedures and processes in place to facilitate making these
judgments.
The more judgmental estimates are summarized in the following
discussion. We have identified and described the development of
the variables most important in the estimation processes that
involve mathematical models to derive the estimates. In many
cases, there are numerous alternative judgments that could be
used in the process of determining the inputs to the models. Where
alternatives exist, we have used the factors that we believe
represent the most reasonable value in developing the inputs.
Actual performance that differs from our estimates of the key
variables could impact our results of operations. Separate from
the possible future impact to our results of operations from input
and model variables, the value of our lending portfolio and market-
sensitive assets and liabilities may change subsequent to the
balance sheet date, often significantly, due to the nature and
magnitude of future credit and market conditions. Such credit and
market conditions may change quickly and in unforeseen ways and
the resulting volatility could have a significant, negative effect on
future operating results. These fluctuations would not be indicative
of deficiencies in our models or inputs.
Allowance for Credit Losses
The allowance for credit losses, which includes the allowance for
loan and lease losses and the reserve for unfunded lending
commitments, represents management’s estimate of probable
losses inherent in the Corporation’s loan portfolio excluding those
loans accounted for under the fair value option. Our process for
determining the allowance for credit losses is discussed in Note
1 – Summary of Significant Accounting Principles to the
Consolidated Financial Statements. We evaluate our allowance at
the portfolio segment level and our portfolio segments are Home
Loans, Credit Card and Other Consumer, and Commercial. Due to
the variability in the drivers of the assumptions used in this
process, estimates of the portfolio’s inherent risks and overall
collectability change with changes in the economy, individual
industries, countries, and borrowers’ ability and willingness to
repay their obligations. The degree to which any particular
Bank of America 2013 113
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in loss rates but are provided as hypothetical scenarios to assess
the sensitivity of the allowance for loan and lease losses to
changes in key inputs. We believe the risk ratings and loss
severities currently in use are appropriate and that the probability
of the alternative scenarios outlined above occurring within a short
period of time is remote.
The process of determining the level of the allowance for credit
losses requires a high degree of judgment. It is possible that
others, given the same information, may at any point in time reach
different reasonable conclusions.
For a discussion of the Financial Accounting Standards Board’s
proposed standard on accounting for credit losses, see Note 1 –
Summary of Significant Accounting Principles to the Consolidated
Financial Statements.
Mortgage Servicing Rights
MSRs are nonfinancial assets that are created when a mortgage
loan is sold and we retain the right to service the loan. We account
for consumer MSRs, including residential mortgage and home
equity MSRs, at fair value with changes in fair value recorded in
mortgage banking income (loss) in the Consolidated Statement
of Income.
We determine the fair value of our consumer MSRs using a
valuation model that calculates the present value of estimated
future net servicing income. The model incorporates key economic
assumptions including estimates of prepayment rates and
resultant weighted-average lives of the MSRs, and the option-
adjusted spread levels. These variables can, and generally do,
change from quarter to quarter as market conditions and projected
interest rates change. These assumptions are subjective in nature
and changes in these assumptions could materially affect our
operating results. For example, increasing the prepayment rate
assumption used in the valuation of our consumer MSRs by 10
percent while keeping all other assumptions unchanged could have
resulted in an estimated decrease of $244 million in both MSRs
and mortgage banking income (loss) for 2013. This impact does
not reflect any hedge strategies that may be undertaken to mitigate
such risk.
We manage potential changes in the fair value of MSRs through
a comprehensive risk management program. The intent is to
mitigate the effects of changes in the fair value of MSRs through
the use of risk management instruments. To reduce the sensitivity
of earnings to interest rate and market value fluctuations,
securities including MBS and U.S. Treasuries, as well as certain
derivatives such as options and interest rate swaps, may be used
to hedge certain market risks of the MSRs, but are not designated
as accounting hedges. These instruments are carried at fair value
with changes in fair value recognized in mortgage banking income
(loss). For additional information, see Mortgage Banking Risk
Management on page 112.
For more information on MSRs, including the sensitivity of
weighted-average lives and the fair value of MSRs to changes in
modeled assumptions, see Note 23 – Mortgage Servicing Rights
to the Consolidated Financial Statements.
assumption affects the allowance for credit losses depends on
the severity of the change and its relationship to the other
assumptions.
Key judgments used in determining the allowance for credit
losses include risk ratings for pools of commercial loans and
leases, market and collateral values and discount rates for
individually evaluated loans, product type classifications for
consumer and commercial loans and leases, loss rates used for
consumer and commercial loans and leases, adjustments made
to address current events and conditions, considerations
regarding domestic and global economic uncertainty, and overall
credit conditions.
Our estimate for the allowance for loan and lease losses is
sensitive to the loss rates and expected cash flows from our Home
Loans and Credit Card and Other Consumer portfolio segments,
as well as our U.S. small business commercial portfolio within the
Commercial portfolio segment. For each one percent increase in
the loss rates on loans collectively evaluated for impairment in
our Home Loans portfolio segment, excluding PCI loans, coupled
with a one percent decrease in the discounted cash flows on those
loans individually evaluated for impairment within this portfolio
segment, the allowance for loan and lease losses at December 31,
2013 would have increased by $127 million. PCI loans within our
Home Loans portfolio segment are initially recorded at fair value.
Applicable accounting guidance prohibits carry-over or creation of
valuation allowances
initial accounting. However,
subsequent decreases in the expected cash flows from the date
of acquisition result in a charge to the provision for credit losses
and a corresponding increase to the allowance for loan and lease
losses. We subject our PCI portfolio to stress scenarios to evaluate
the potential impact given certain events. A one percent decrease
in the expected cash flows could result in a $205 million
impairment of the portfolio. For each one percent increase in the
loss rates on loans collectively evaluated for impairment within
our Credit Card and Other Consumer portfolio segment and U.S.
small business commercial portfolio coupled with a one percent
decrease in the expected cash flows on those loans individually
evaluated for impairment within the portfolio segment and the U.S.
small business commercial portfolio, the allowance for loan and
lease losses at December 31, 2013 would have increased by $59
million.
the
in
Our allowance for loan and lease losses is sensitive to the risk
ratings assigned to loans and leases within the Commercial
portfolio segment (excluding the U.S. small business commercial
portfolio). Assuming a downgrade of one level in the internal risk
ratings for commercial loans and leases, except loans and leases
already risk-rated Doubtful as defined by regulatory authorities,
the allowance for loan and lease losses would have increased by
$2.2 billion at December 31, 2013.
The allowance for loan and lease losses as a percentage of
total loans and leases at December 31, 2013 was 1.90 percent
and these hypothetical increases in the allowance would raise the
ratio to 2.18 percent.
These sensitivity analyses do not represent management’s
expectations of the deterioration in risk ratings or the increases
114 Bank of America 2013
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Fair Value of Financial Instruments
We classify the fair values of financial instruments based on the
fair value hierarchy established under applicable accounting
guidance which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs
when measuring fair value. Applicable accounting guidance
establishes three levels of inputs used to measure fair value. We
carry trading account assets and liabilities, derivative assets and
liabilities, AFS debt and equity securities, other debt securities
carried at fair value, certain MSRs and certain other assets at fair
value. Also, we account for certain loans and loan commitments,
LHFS, short-term borrowings, securities financing agreements,
asset-backed secured financings, long-term deposits and long-
term debt under the fair value option. For additional information,
see Note 20 – Fair Value Measurements and Note 21 – Fair Value
Option to the Consolidated Financial Statements.
The fair values of assets and liabilities may include
adjustments, such as market liquidity and credit quality, where
appropriate. Valuations of products using models or other
techniques are sensitive to assumptions used for the significant
inputs. Where market data is available, the inputs used for
valuation reflect that information as of our valuation date. Inputs
to valuation models are considered unobservable if they are
supported by little or no market activity. In periods of extreme
volatility, lessened liquidity or in illiquid markets, there may be
more variability in market pricing or a lack of market data to use
in the valuation process. In keeping with the prudent application
of estimates and management judgment in determining the fair
value of assets and liabilities, we have in place various processes
and controls that include: a model validation policy that requires
review and approval of quantitative models used for deal pricing,
risk
financial statement
quantification; a trading product valuation policy that requires
verification of all traded product valuations; and a periodic review
and substantiation of daily profit and loss reporting for all traded
products. Primarily through validation controls, we utilize both
broker and pricing service inputs which can and do include both
market-observable and internally-modeled values and/or valuation
inputs. Our reliance on this information is tempered by the
knowledge of how the broker and/or pricing service develops its
data with a higher degree of reliance applied to those that are
more directly observable and lesser reliance applied to those
developed through their own internal modeling. Similarly, broker
quotes that are executable are given a higher level of reliance than
indicative broker quotes, which are not executable. These
processes and controls are performed independently of the
business.
value determination and
fair
Trading account assets and liabilities are carried at fair value
based primarily on actively traded markets where prices are based
on either direct market quotes or observed transactions. Liquidity
is a significant factor in the determination of the fair values of
trading account assets and liabilities. 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. 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.
Trading account profits, which represent the net amount earned
from our trading positions, can be volatile and are largely driven
by general market conditions and customer demand. Trading
account profits 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. To evaluate risk in our trading activities, we
focus on the actual and potential volatility of individual positions
as well as portfolios. At a portfolio and corporate level, we use
trading limits, stress testing and tools such as VaR modeling, which
estimates a potential daily loss that we do not expect to exceed
with a specified confidence level, to measure and manage market
risk. For more information on VaR, see Trading Risk Management
on page 105.
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.
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 our own credit risk. An estimate of severity of loss
is also used in the determination of fair value, primarily based on
market data. 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.
Bank of America 2013 115
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techniques
Level 3 Assets and Liabilities
Financial assets and liabilities where values are based on
that are both
valuation
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,
require
inputs
that
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 71 Level 3 Asset and Liability Summary
(Dollars in millions)
Trading account assets
Derivative assets
AFS debt securities
All other Level 3 assets at fair value
Total Level 3 assets at fair value (1)
Derivative liabilities
Long-term debt
All other Level 3 liabilities at fair value
Total Level 3 liabilities at fair value (1)
2013
As a %
of Total
Level 3
Assets
28.46%
22.90
14.98
33.66
100.00%
As a %
of Total
Level 3
Liabilities
78.20%
21.32
0.48
100.00%
December 31
As a %
of Total
Assets
Level 3
Fair Value
0.43% $
0.35
0.23
0.50
1.51% $
9,559
8,073
5,091
13,865
36,588
As a %
of Total
Liabilities
Level 3
Fair Value
0.39% $
0.11
—
0.50% $
6,605
2,301
79
8,985
2012
As a %
of Total
Level 3
Assets
26.13%
22.06
13.91
37.90
100.00%
As a %
of Total
Level 3
Liabilities
73.51%
25.61
0.88
100.00%
As a %
of Total
Assets
0.43%
0.37
0.23
0.63
1.66%
As a %
of Total
Liabilities
0.33%
0.12
0.01
0.46%
Level 3
Fair Value
9,044
7,277
4,760
10,697
31,778
Level 3
Fair Value
7,301
1,990
45
9,336
$
$
$
$
(1) Level 3 total assets and liabilities are shown before the impact of cash collateral and counterparty netting related to our derivative positions.
During 2013, we recognized net gains of $2.0 billion on Level
3 assets and liabilities. The net gains were primarily gains on
MSRs and trading account assets, partially offset by losses on
net derivative assets and other assets. Gains on MSRs were
primarily due to the impact of the increase in interest rates on
forecasted prepayments. Gains on trading account assets were
primarily due to realized gains on the sale of corporate bonds as
well as distributions received on secondary loan positions held in
inventory, partially offset by unrealized losses on certain
collateralized loan and debt obligations. Losses on net derivative
assets were driven by unrealized losses associated with certain
structured products and credit default and total return swaps,
partially offset by unrealized gains associated with the
performance of various index option contracts as well as gains on
IRLCs. Losses on other assets were primarily due to a write-down
of a receivable. There were net unrealized gains of $40 million
(pre-tax) in accumulated OCI on Level 3 assets and liabilities at
December 31, 2013. For more information on the components of
net realized and unrealized gains and losses during 2013, see
Note 20 – 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 2013, see Note 20 – Fair
Value Measurements to the Consolidated Financial Statements.
Accrued Income Taxes and Deferred Tax Assets
Accrued income taxes, reported as a component of accrued
expenses and other liabilities on the Consolidated Balance Sheet,
represent the net amount of current income taxes we expect to
pay to or receive from various taxing jurisdictions attributable to
our operations to date. We currently file income tax returns in more
than 100 jurisdictions and consider many factors, including
statutory, judicial and regulatory guidance, in estimating the
appropriate accrued income taxes for each jurisdiction.
Consistent with the applicable accounting guidance, we monitor
relevant tax authorities and change our estimate of accrued
income taxes due to changes in income tax laws and their
interpretation by the courts and regulatory authorities. These
revisions of our estimate of accrued income taxes, which also may
result from our income tax planning and from the resolution of
income tax controversies, may be material to our operating results
for any given period.
Net deferred tax assets, reported as a component of other
assets on the Consolidated Balance Sheet, represent the net
decrease in taxes expected to be paid in the future because of
net operating loss (NOL) and tax credit carryforwards and because
of future reversals of temporary differences in the bases of assets
and liabilities as measured by tax laws and their bases as reported
in the financial statements. NOL and tax credit carryforwards result
in reductions to future tax liabilities, and many of these attributes
can expire if not utilized within certain periods. We consider the
116 Bank of America 2013
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need for valuation allowances to reduce net deferred tax assets
to the amounts that we estimate are more-likely-than-not to be
realized.
While we have established some valuation allowances for
certain state and non-U.S. deferred tax assets, we have concluded
that no valuation allowance was necessary with respect to all U.S.
federal and U.K. deferred tax assets, including NOL and tax credit
carryforwards, that are not subject to any special limitations (such
as change-in-control
to any expiration.
limitations) prior
Management’s conclusion is supported by recent financial results
and forecasts, the reorganization of certain business activities and
the indefinite period to carry forward NOLs. The majority of our
U.K. net deferred tax assets, which consist primarily of NOLs, are
expected to be realized by certain subsidiaries over an extended
number of years. However, significant changes to our estimates,
such as changes that would be caused by substantial and
prolonged worsening of the condition of Europe’s capital markets,
could lead management to reassess its U.K. valuation allowance
conclusions. See Note 19 – Income Taxes to the Consolidated
Financial Statements for a table of significant tax attributes and
additional information.
Goodwill and Intangible Assets
Background
The nature of and accounting for goodwill and intangible assets
are discussed in Note 1 – Summary of Significant Accounting
Principles and Note 8 – Goodwill and Intangible Assets to the
Consolidated Financial Statements. Goodwill is reviewed for
potential impairment at the reporting unit level on an annual basis,
which for the Corporation is as of June 30, and in interim periods
if events or circumstances indicate a potential impairment. A
reporting unit is an operating segment or one level below. As
reporting units are determined after an acquisition or evolve with
changes in business strategy, goodwill is assigned to reporting
units and it no longer retains its association with a particular
acquisition. All of the revenue streams and related activities of a
reporting unit, whether acquired or organic, are available to support
the value of the goodwill.
Effective January 1, 2013, on a prospective basis, the
Corporation adjusted the amount of capital being allocated to the
business segments. The adjustment reflects a refinement to the
prior-year methodology (economic capital), which focused solely
on internal risk-based economic capital models. The refined
methodology (allocated capital) now also considers the effect of
regulatory capital requirements in addition to internal risk-based
economic capital models. For purposes of goodwill impairment
testing, we utilized allocated equity as a proxy for the carrying value
of our reporting units. Allocated equity in the reporting units is
comprised of allocated capital plus capital for the portion of
goodwill and intangibles specifically assigned to the reporting unit.
The Corporation’s common stock price improved during 2013;
however, our market capitalization remained below our recorded
book value. We estimate that the fair value of all reporting units
with assigned goodwill in aggregate as of the June 30, 2013 annual
goodwill impairment test was $290.9 billion and the aggregate
carrying value of all reporting units with assigned goodwill, as
measured by allocated equity, was $163.5 billion. The common
stock market capitalization of the Corporation as of June 30, 2013
was $138.2 billion ($164.9 billion at December 31, 2013). As
none of our reporting units are publicly traded, individual reporting
unit fair value determinations do not directly correlate to the
Corporation’s stock price. Although we believe it is reasonable to
conclude that market capitalization could be an indicator of fair
value over time, we do not believe that our current market
capitalization reflects the aggregate fair value of our individual
reporting units.
Estimating the fair value of reporting units is a subjective
process that involves the use of estimates and judgments,
particularly related to cash flows, the appropriate discount rates
and an applicable control premium. We determined the fair values
of the reporting units using a combination of valuation techniques
consistent with the market approach and the income approach
and also utilized independent valuation specialists.
The market approach we used estimates the fair value of the
individual reporting units by incorporating any combination of the
tangible capital, book capital and earnings multiples from
comparable publicly-traded companies in industries similar to that
of the reporting unit. The relative weight assigned to these
multiples varies among the reporting units based on qualitative
and quantitative characteristics, primarily the size and relative
profitability of the reporting unit as compared to the comparable
publicly-traded companies. Since the fair values determined under
the market approach are representative of a noncontrolling
interest, we added a control premium to arrive at the reporting
units’ estimated fair values on a controlling basis.
For purposes of the income approach, we calculated
discounted cash flows by taking the net present value of estimated
future cash flows and an appropriate terminal value. Our
discounted cash flow analysis employs a capital asset pricing
model in estimating the discount rate (i.e., cost of equity financing)
for each reporting unit. The inputs to this model include the risk-
free rate of return, beta, which is a measure of the level of non-
diversifiable risk associated with comparable companies for each
specific reporting unit, size premium to reflect the historical
incremental return on stocks, market equity risk premium and in
certain cases an unsystematic (company-specific) risk factor. The
unsystematic risk factor is the input that specifically addresses
uncertainty related to our projections of earnings and growth,
including the uncertainty related to loss expectations. We utilized
discount rates that we believe adequately reflect the risk and
uncertainty in the financial markets generally and specifically in
our internally developed forecasts. We estimated expected rates
of equity returns based on historical market returns and risk/return
rates for similar industries of each reporting unit. We use our
internal forecasts to estimate future cash flows and actual results
may differ from forecasted results.
In 2013, the consumer DFS business, including $1.7 billion of
goodwill, was moved from Global Banking to CBB in order to align
this business more closely with our consumer lending activity and
better serve the needs of our customers. In 2012, the International
Wealth Management businesses within GWIM, including $230
million of goodwill, were moved to All Other in connection with our
agreement to sell these businesses in a series of transactions.
Certain of the sales transactions were completed in 2013 and
most of the remaining sales transactions are expected to close
over the next year. Prior periods were reclassified to conform to
current period presentation.
2013 Annual Impairment Test
During the three months ended September 30, 2013, we
completed our annual goodwill impairment test as of June 30,
2013 for all of our reporting units that had goodwill. In performing
the first step of the annual goodwill impairment analysis, we
Bank of America 2013 117
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2012 Annual Impairment Tests
During the three months ended September 30, 2012, we
completed our annual goodwill impairment test as of June 30,
2012 for all of our reporting units which had goodwill. Additionally,
we also evaluated the U.K. Card business within All Other as the
U.K. Card business comprises the majority of the goodwill included
in All Other.
Based on the results of step one of the annual goodwill
impairment test, we determined that step two was not required
for any of the reporting units as their respective fair values
exceeded their carrying values indicating there was no impairment.
Representations and Warranties Liability
The methodology used to estimate the liability for obligations under
representations and warranties related to transfers of residential
mortgage loans is a function of the representations and warranties
given and considers a variety of factors. Depending upon the
counterparty, these factors include actual defaults, estimated
future defaults, historical loss experience, estimated home prices,
other economic conditions, estimated probability that we will
receive a repurchase request, including consideration of whether
presentation thresholds will be met, number of payments made
by the borrower prior to default and estimated probability that we
will be required to repurchase a loan. It also considers other
relevant facts and circumstances, such as bulk settlements and
identity of the counterparty or type of counterparty, as appropriate.
The estimate of the liability for obligations under representations
and warranties is based upon currently available information,
significant judgment, and a number of factors, including those set
forth above, that are subject to change. Changes to any one of
these factors could significantly impact the estimate of our liability.
The representations and warranties provision may vary
significantly each period as the methodology used to estimate the
expense continues to be refined based on the level and type of
repurchase requests presented, defects identified, the latest
experience gained on repurchase requests, and other relevant
facts and circumstances. The estimate of the liability for
representations and warranties is sensitive to future defaults, loss
severity and the net repurchase rate. An assumed simultaneous
increase or decrease of 10 percent in estimated future defaults,
loss severity and the net repurchase rate would result in an
increase or decrease of approximately $550 million in the
representations and warranties liability as of December 31, 2013.
These sensitivities are hypothetical and are intended to provide
an indication of the impact of a significant change in these key
assumptions on the representations and warranties liability. In
reality, changes in one assumption may result in changes in other
assumptions, which may or may not counteract the sensitivity.
For more information on representations and warranties
exposure and the corresponding estimated range of possible loss,
see Off-Balance Sheet Arrangements and Contractual Obligations
– Representations and Warranties on page 48, as well as Note 7
– Representations and Warranties Obligations and Corporate
Guarantees and Note 12 – Commitments and Contingencies to the
Consolidated Financial Statements.
compared the fair value of each reporting unit to its estimated
carrying value as measured by allocated equity, which includes
goodwill. During our 2013 annual goodwill impairment test, we
also evaluated the U.K. Card business, which is a reporting unit,
within All Other, as the U.K. Card business comprises the majority
of the goodwill included in All Other. To determine fair value, we
utilized a combination of the market approach and the income
approach. Under the market approach, we compared earnings and
equity multiples of the individual reporting units to multiples of
public companies comparable to the individual reporting units. The
control premium used in the June 30, 2013 annual goodwill
impairment test was 35 percent for all reporting units. Under the
income approach, we updated our assumptions to reflect the
current market environment. The discount rates used in the June
30, 2013 annual goodwill impairment test ranged from 11 percent
to 14 percent depending on the relative risk of a reporting unit.
Growth rates developed by management for individual revenue and
expense items in each reporting unit ranged from (5.4) percent to
11.4 percent.
Based on the results of step one of the annual goodwill
impairment test, we determined that step two was not required
for any of the reporting units as their fair value exceeded their
carrying value indicating there was no impairment.
As described above, during the three months ended June 30,
2013, the consumer DFS business was moved from Global Banking
to CBB and subsequently constitutes a new separate reporting
unit. The goodwill allocated to this reporting unit was reviewed for
impairment as part of the goodwill testing process. Based on the
results of step one of the annual goodwill impairment test, we
determined that the fair value of the reporting unit exceeded its
carrying value. Although not required, given the recent move and
the results of step one, and to further substantiate the value of
goodwill, we performed step two of the goodwill impairment test
for this reporting unit. The fair value of the reporting unit was
estimated based on
income approach. Significant
assumptions for the valuation of consumer DFS under the income
approach included cash flow estimates, including expected new
account growth, the discount rate and the terminal value. In
performing step two, significant assumptions used in measuring
the fair value of the assets and liabilities of the reporting unit
included discount rates, loss rates and interest rates. The results
of step two further supported that the goodwill for the consumer
DFS reporting unit was not impaired.
the
On July 31, 2013, the U.S. District Court for the District of
Columbia issued a ruling regarding the Federal Reserve’s rules
implementing the Financial Reform Act’s Durbin Amendment. The
ruling requires the Federal Reserve to reconsider the $0.21 per
transaction cap on debit card interchange fees. The Federal
Reserve is appealing the ruling and final resolution is expected in
the first half of 2014. In performing the annual goodwill impairment
test for Card Services within CBB, we considered the impact of the
recent ruling in determining the fair value of the reporting unit and,
assuming the range initially included in the Federal Reserve’s rule
is used for forecasting interchange fees, no goodwill impairment
would result. If the Federal Reserve, upon final resolution,
implements a lower per transaction cap than the initial range, it
may have a significant adverse impact on our debit card
interchange fee revenue and the associated goodwill allocated to
the Card Services reporting unit.
118 Bank of America 2013
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Litigation Reserve
In accordance with applicable accounting guidance,
the
Corporation establishes an accrued liability for litigation and
regulatory 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. When
a loss contingency is not both probable and estimable, the
Corporation does not establish an accrued liability. As a litigation
or regulatory 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
both probable and estimable. If, at the time of evaluation, the loss
contingency related to a litigation or regulatory 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 or regulatory 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 will continue
to monitor the matter for further developments that could affect
the amount of the accrued liability that has been previously
established.
For a limited number of the matters disclosed in Note 12 –
Commitments and Contingencies to the Consolidated Financial
Statements for which a loss is probable or reasonably possible in
future periods, whether in excess of a related accrued liability or
where there is no accrued liability, we are able to estimate a range
of possible loss. In determining whether it is possible to provide
an estimate of loss or range of possible loss, the Corporation
reviews and evaluates its material litigation and regulatory matters
on an ongoing basis, in conjunction with any outside counsel
handling the matter, in light of potentially relevant factual and legal
developments. These may include information learned through the
discovery process, rulings on dispositive motions, settlement
discussions, and other rulings by courts, arbitrators or others. In
cases in which the Corporation possesses sufficient information
to develop an estimate of loss or range of possible loss, that
estimate is aggregated and disclosed in Note 12 – Commitments
and Contingencies to the Consolidated Financial Statements. For
other disclosed matters for which a loss is probable or reasonably
possible, such an estimate is not possible. Those matters for
which an estimate is not possible are not included within this
estimated range. Therefore, the estimated range of possible loss
represents what we believe to be an estimate of possible loss only
for certain matters meeting these criteria. It does not represent
the Corporation’s maximum loss exposure. Information is provided
in Note 12 – Commitments and Contingencies to the Consolidated
Financial Statements regarding the nature of all of these
contingencies and, where specified, the amount of the claim
associated with these loss contingencies.
Consolidation and Accounting for Variable Interest
Entities
In accordance with applicable accounting guidance, an entity that
has a controlling financial interest in a VIE is referred to as the
primary beneficiary and consolidates the VIE. The Corporation is
deemed to have a controlling financial interest and is the primary
beneficiary of a VIE if it has both the power to direct the activities
of the VIE that most significantly impact the VIE’s economic
performance and an obligation to absorb losses or the right to
receive benefits that could potentially be significant to the VIE.
Determining whether an entity has a controlling financial
interest in a VIE requires significant judgment. An entity must
assess the purpose and design of the VIE, including explicit and
implicit contractual arrangements, and the entity’s involvement in
both the design of the VIE and its ongoing activities. The entity
must then determine which activities have the most significant
impact on the economic performance of the VIE and whether the
entity has the power to direct such activities. For VIEs that hold
financial assets, the party that services the assets or makes
investment management decisions may have the power to direct
the most significant activities of a VIE. Alternatively, a third party
that has the unilateral right to replace the servicer or investment
manager or to liquidate the VIE may be deemed to be the party
with power. If there are no significant ongoing activities, the party
that was responsible for the design of the VIE may be deemed to
have power. If the entity determines that it has the power to direct
the most significant activities of the VIE, then the entity must
determine if it has either an obligation to absorb losses or the
right to receive benefits that could potentially be significant to the
VIE. Such economic interests may include investments in debt or
equity instruments issued by the VIE, liquidity commitments, and
explicit and implicit guarantees.
On a quarterly basis, we reassess whether we have a controlling
financial interest and are the primary beneficiary of a VIE. The
quarterly reassessment process considers whether we have
acquired or divested the power to direct the activities of the VIE
through changes in governing documents or other circumstances.
The reassessment also considers whether we have acquired or
disposed of a financial interest that could be significant to the VIE,
or whether an interest in the VIE has become significant or is no
longer significant. The consolidation status of the VIEs with which
we are involved may change as a result of such reassessments.
Changes in consolidation status are applied prospectively, with
assets and liabilities of a newly consolidated VIE initially recorded
at fair value. A gain or loss may be recognized upon deconsolidation
of a VIE depending on the carrying values of deconsolidated assets
and liabilities compared to the fair value of retained interests and
ongoing contractual arrangements.
76788ba_financials.indd 119
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Bank of America 2013 119
2012 Compared to 2011
The following discussion and analysis provide a comparison of our
results of operations for 2012 and 2011. This discussion should
be read in conjunction with the Consolidated Financial Statements
and related Notes. Tables 7 and 8 contain financial data to
supplement this discussion.
Overview
Net Income
Net income was $4.2 billion in 2012 compared to $1.4 billion in
2011. Including preferred stock dividends, net income applicable
to common shareholders was $2.8 billion, or $0.25 per diluted
share for 2012 and $85 million, or $0.01 per diluted share for
2011.
Net Interest Income
Net interest income on a FTE basis was $41.6 billion for 2012, a
decrease of $4.0 billion compared to 2011. The decline was
primarily due to lower consumer loan balances and yields,
recouponing of the ALM portfolio to a lower yield and decreased
commercial loan yields. Lower trading-related net interest income
also negatively impacted 2012 results. These decreases were
partially offset by ongoing reductions in long-term debt and lower
rates paid on deposits. The net interest yield on a FTE basis was
2.35 percent for 2012, a decrease of 13 bps compared to 2011
as the yield continued to be under pressure due to the
aforementioned items and the low rate environment.
Noninterest Income
Noninterest income was $42.7 billion in 2012, a decrease of $6.2
billion compared to 2011.
Card income decreased $1.1 billion primarily driven by the
implementation of interchange fee rules under the Durbin
Amendment, which became effective on October 1, 2011.
Service charges decreased $494 million primarily due to the
impact of lower accretion on acquired portfolios and reduced
reimbursed merchant processing fees.
Investment and brokerage services income decreased $433
million primarily driven by lower transactional volumes.
Equity investment income decreased $5.3 billion. The results
for 2012 included $1.6 billion of gains which primarily related
to the sales of certain equity and strategic investments. The
results for 2011 included $6.5 billion of gains on the sale of
CCB shares, $836 million of CCB dividends and a $377 million
gain on the sale of our investment in BlackRock, Inc., partially
offset by $1.1 billion of impairment charges on our merchant
services joint venture.
Trading account profits decreased $827 million. Net DVA losses
on derivatives were $2.5 billion in 2012 compared to net DVA
gains of $1.0 billion in 2011. Excluding net DVA, trading account
profits increased $2.7 billion in 2012 compared to 2011 due
to an improved market environment.
Mortgage banking income increased $13.6 billion primarily due
to an $11.7 billion decrease in the representations and
warranties provision. The 2012 results included $2.5 billion in
provision related to the FNMA Settlement, a $500 million
provision for obligations to FNMA related to MI rescissions,
partially offset by an increase in servicing income of $1.1 billion
due to improved MSR results. The 2011 results included $15.6
120 Bank of America 2013
billion in representations and warranties provision related to the
agreement to resolve nearly all legacy Countrywide-issued first-
lien non-GSE RMBS repurchase exposures and other non-GSE
exposures.
Other income decreased $10.2 billion due to negative fair value
adjustments on our structured liabilities of $5.1 billion
compared to positive fair value adjustments of $3.3 billion in
2011. In addition, 2012 included $1.6 billion of gains related
to debt repurchases and exchanges of trust preferred securities
compared to gains of $1.2 billion in the prior year.
Provision for Credit Losses
The provision for credit losses was $8.2 billion for 2012, a
decrease of $5.2 billion compared to 2011. The provision for credit
losses was $6.7 billion lower than net charge-offs for 2012,
resulting in a reduction in the allowance for credit losses driven
by improved portfolio trends and increasing home prices in
consumer real estate products, lower bankruptcy filings and
delinquencies affecting the credit card portfolio, and improvement
in overall credit quality within the core commercial portfolio.
Net charge-offs totaled $14.9 billion, or 1.67 percent of
average loans and leases for 2012 compared to $20.8 billion, or
2.24 percent for 2011. The decrease in net charge-offs was
primarily driven by fewer delinquent loans and lower bankruptcy
filings in the credit card portfolio, as well as lower net charge-offs
in the consumer real estate and core commercial portfolios in
2012.
Noninterest Expense
Noninterest expense was $72.1 billion for 2012, a decrease of
$8.2 billion compared to 2011. The decrease was primarily driven
by $3.2 billion of goodwill impairment charges in 2011 and none
in 2012, a $2.8 billion decrease in other general operating expense
primarily related to lower litigation expense and mortgage-related
assessments, waivers and similar costs related to foreclosure
delays, partially offset by a provision of $1.1 billion in 2012 related
to the 2013 IFR Acceleration Agreement. Personnel expense
decreased $1.3 billion in 2012 as we continued to streamline
processes and achieve cost savings. Partially offsetting the
decreases were increases in professional fees and data
processing expenses due to continuing default management
activities in Legacy Assets & Servicing. Also, 2011 included $638
million in merger and restructuring charges.
Income Tax Benefit
The income tax benefit was $1.1 billion on pre-tax income of $3.1
billion for 2012 compared to an income tax benefit of $1.7 billion
on the pre-tax loss of $230 million for 2011. Included in the income
tax benefit for 2012 was a $1.7 billion tax benefit attributable to
the excess of foreign tax credits recognized in the U.S. upon
repatriation of the earnings of certain subsidiaries over the related
U.S. tax liability. Also included in the income tax benefit was a
$788 million charge to reduce the carrying value of certain U.K.
deferred tax assets due to the two percent U.K. corporate income
tax rate reduction enacted in 2012. Our effective tax rate for 2012
excluding these two items was a benefit of seven percent and
differed from the statutory rate due to the impact of our recurring
tax preference items (e.g., affordable housing credits and tax-
exempt income) on the level of pre-tax earnings.
76788ba_financials.indd 120
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The income tax benefit for 2011 was driven by our recurring
tax preference items, a $1.0 billion benefit from the release of the
remaining valuation allowance applicable to the Merrill Lynch
capital loss carryover deferred tax asset and a benefit of $823
million for planned realization of previously unrecognized deferred
tax assets related to the tax basis in certain subsidiaries. These
benefits were partially offset by a $782 million charge for the two
percent U.K. corporate income tax rate reduction enacted in 2011.
The $3.2 billion of goodwill impairment charges recorded during
2011 were non-deductible.
relatively unchanged as an increase in asset management fees
due to higher AUM flows and higher market levels was offset by
lower transactional revenue and lower net interest income due to
the impact of the continued low rate environment. The provision
for credit losses decreased $132 million to $266 million driven
by lower delinquencies and improving portfolio trends within the
residential mortgage portfolio. Noninterest expense decreased
$615 million to $12.7 billion due to lower FDIC expense, lower
litigation costs and other expense reductions, partially offset by
higher production-related expenses.
Business Segment Operations
Consumer & Business Banking
CBB recorded net income of $5.5 billion in 2012 compared to
$7.8 billion in 2011 with the decrease primarily due to lower
revenue and higher provision for credit losses, partially offset by
lower noninterest expense. Net interest income decreased $2.4
billion to $19.9 billion due to lower average loan balances as well
as compressed deposit spreads due to the continued low rate
environment. Noninterest income decreased $1.6 billion to $9.9
billion due to lower interchange fees as a result of implementing
the Durbin Amendment, lower gains on sales of portfolios and the
impact of charges related to our consumer protection products.
The provision for credit losses increased $471 million to $4.1
billion as portfolio trends stabilized during 2012. Noninterest
expense decreased $917 million to $17.0 billion primarily due to
lower FDIC and operating expenses, partially offset by an increase
in litigation expense.
Consumer Real Estate Services
CRES recorded a net loss of $6.4 billion in 2012 compared to
$19.4 billion in 2011 with the decrease in the net loss primarily
driven by mortgage banking income of $5.6 billion in 2012
compared to a loss of $8.1 billion in 2011. The representations
and warranties provision for 2011, which is included in mortgage
banking income, included $8.6 billion related to the settlement
with BNY Mellon and $7.0 billion related to other non-GSE, and to
a lesser extent, GSE exposures. Also contributing to the decrease
in the net loss was a decrease in the provision for credit losses
and a decline in noninterest expense, partially offset by lower other
noninterest income. Mortgage banking income increased $13.7
billion due to an $11.7 decrease in the representations and
warranties provision, and higher servicing income and core
production revenue. The provision for credit losses decreased $3.1
billion to $1.4 billion due to improved portfolio trends and
increasing home prices in both the non-PCI and PCI home equity
loan portfolios. Noninterest expense decreased $4.5 billion to
$17.2 billion due to a decline in litigation expense and lower
mortgage-related assessments, waivers and similar costs related
to foreclosure delays, partially offset by higher default-related
servicing costs and a provision for the 2013 IFR Acceleration
Agreement. Noninterest expense in 2011 included a $2.6 billion
goodwill impairment charge.
Global Wealth & Investment Management
GWIM recorded net income of $2.2 billion in 2012 compared to
$1.7 billion in 2011 with the increase driven by lower noninterest
expense and lower provision for credit losses. Revenue remained
remained
Global Banking
Global Banking recorded net income of $5.3 billion in 2012
compared to $5.6 billion in 2011 with the decrease primarily driven
by an increase in the provision for credit losses, partially offset by
lower noninterest expense. Revenue
relatively
unchanged with lower investment banking fees and lower net
interest income as a result of spread compression and the benefit
in the prior year from higher accretion on acquired portfolios, largely
offset by the impact of higher average loan and deposit balances
and gains on liquidation of certain legacy portfolios. The provision
for credit losses was a benefit of $342 million compared to a
benefit of $1.3 billion in 2011 with the reduction in the benefit
reflecting stabilization of asset quality, core commercial loan
growth and the impact of a higher volume of loan resolutions in
the commercial real estate portfolio in the prior year. Noninterest
expense decreased $410 million to $7.6 billion primarily due to
lower personnel and operating expenses.
Global Markets
Global Markets recorded net income of $1.2 billion in 2012
compared to $1.1 billion in 2011. Sales and trading revenue
decreased due to net DVA losses compared to net DVA gains in
the prior year. Excluding net DVA, sales and trading revenue
increased $2.4 billion primarily driven by our FICC business as a
result of improved performance in our rates and currencies, and
credit-related businesses due to an improved global economic
climate, and a gain on the sale of an equity investment. Noninterest
expense decreased $1.6 billion to $11.3 billion due to a reduction
in personnel-related expenses and in brokerage, clearing and
exchange fees, and other operating expenses. Income tax expense
included a $781 million charge for remeasurement of certain
deferred tax assets due to decreases in the U.K. corporate tax
rate compared to a similar charge of $774 million in 2011.
All Other
All Other recorded a net loss of $3.7 billion in 2012 compared to
net income of $4.6 billion in 2011 primarily due to negative fair
value adjustments on structured liabilities of $5.1 billion related
to the improvement in our credit spreads in 2012 compared to
$3.3 billion of positive fair value adjustments in 2011, a $6.0
billion decrease in equity investment income as 2011 included a
$6.5 billion gain on the sale of portion of our investment in CCB,
and lower gains on sales of debt securities. Partially offsetting
these items was a reduction in the provision for credit losses of
$3.6 billion to $2.6 billion. The income tax benefit included $1.7
billion attributable to the excess of foreign tax credits recognized
in the U.S. upon repatriation of the earnings of certain subsidiaries
over the related U.S. tax liability.
Bank of America 2013 121
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Statistical Tables
Table of Contents
Table I – Average Balances and Interest Rates – FTE Basis
Table II – Analysis of Changes in Net Interest Income – FTE Basis
Table III – Preferred Stock Cash Dividend Summary
Table IV – Outstanding Loans and Leases
Table V – Nonperforming Loans, Leases and Foreclosed Properties
Table VI – Accruing Loans and Leases Past Due 90 Days or More
Table VII – Allowance for Credit Losses
Table VIII – Allocation of the Allowance for Credit Losses by Product Type
Table IX – Selected Loan Maturity Data
Table X – Non-exchange Traded Commodity Contracts
Table XI – Non-exchange Traded Commodity Contract Maturities
Table XII – Selected Quarterly Financial Data
Table XIII – Quarterly Average Balances and Interest Rates – FTE Basis
Table XIV – Quarterly Supplemental Financial Data
Table XV – Five-year Reconciliations to GAAP Financial Measures
Table XVI – Two-year Reconciliations to GAAP Financial Measures
Table XVII – Quarterly Reconciliations to GAAP Financial Measures
Page
123
124
125
127
128
129
130
132
133
133
133
134
136
138
139
140
141
122 Bank of America 2013
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Table I Average Balances and Interest Rates – FTE Basis
(Dollars in millions)
Earning assets
2013
Interest
Income/
Expense
Average
Balance
Yield/
Rate
Average
Balance
2012
Interest
Income/
Expense
Yield/
Rate
Average
Balance
2011
Interest
Income/
Expense
Yield/
Rate
Time deposits placed and other short-term investments (1)
$
16,066
$
187
1.16% $
22,888
$
237
1.03% $
28,242
$
366
1.29%
Federal funds sold and securities borrowed or purchased under
agreements to resell
Trading account assets
Debt securities (2)
Loans and leases (3):
Residential mortgage (4)
Home equity
U.S. credit card
Non-U.S. credit card
Direct/Indirect consumer (5)
Other consumer (6)
Total consumer
U.S. commercial
Commercial real estate (7)
Commercial lease financing
Non-U.S. commercial
Total commercial
Total loans and leases
Other earning assets
Total earning assets (8)
Cash and cash equivalents (1)
Other assets, less allowance for loan and lease losses
Total assets
Interest-bearing liabilities
U.S. interest-bearing deposits:
Savings
NOW and money market deposit accounts
Consumer CDs and IRAs
Negotiable CDs, public funds and other deposits
Total U.S. interest-bearing deposits
Non-U.S. interest-bearing deposits:
Banks located in non-U.S. countries
Governments and official institutions
Time, savings and other
Total non-U.S. interest-bearing deposits
Total interest-bearing deposits
Federal funds purchased, securities loaned or sold under
agreements to repurchase and short-term borrowings
Trading account liabilities
Long-term debt
Total interest-bearing liabilities (8)
Noninterest-bearing sources:
Noninterest-bearing deposits
Other liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Net interest spread
Impact of noninterest-bearing sources
224,331
168,998
337,953
256,531
100,267
90,369
10,861
82,907
1,805
542,740
218,875
42,346
23,865
90,815
375,901
918,641
80,985
1,746,974
109,014
307,525
$ 2,163,513
$
43,868
$
506,082
82,963
23,504
656,417
12,419
1,032
56,193
69,644
1,229
4,879
9,779
9,319
3,831
8,792
1,271
2,370
72
25,655
6,811
1,392
851
2,082
11,136
36,791
2,832
55,697
182
22
413
481
106
1,022
70
2
302
374
726,061
1,396
2,923
1,638
6,798
12,755
301,417
88,323
263,416
1,379,217
363,674
186,675
233,947
$ 2,163,513
Net interest income/yield on earning assets (1)
$
42,942
0.55
2.89
2.89
3.63
3.82
9.73
11.70
2.86
4.02
4.73
3.11
3.29
3.56
2.29
2.96
4.00
3.50
3.19
236,042
170,647
353,577
264,164
117,339
94,863
13,549
84,424
2,359
576,698
201,352
37,982
21,879
60,857
322,070
898,768
88,047
1,769,969
115,739
305,648
$ 2,191,356
1,502
5,306
8,931
9,845
4,426
9,504
1,572
2,900
140
28,387
6,979
1,332
874
1,594
10,779
39,166
2,970
58,112
189
0.64
3.11
2.53
3.73
3.77
10.02
11.60
3.44
5.95
4.92
3.47
3.51
4.00
2.62
3.35
4.36
3.36
3.28
245,069
181,996
342,650
280,112
130,945
105,478
24,049
90,163
2,760
633,507
192,524
44,406
21,383
46,276
304,589
938,096
98,606
1,834,659
112,616
349,047
$ 2,296,322
0.05% $
0.08
0.58
0.45
0.16
0.56
0.24
0.54
0.54
0.19
0.97
1.85
2.58
0.92
41,453
$
466,096
95,559
20,928
624,036
14,737
1,019
53,318
69,074
45
693
693
128
1,559
94
4
333
431
693,110
1,990
3,572
1,763
9,419
16,744
318,400
78,554
316,393
1,406,457
354,672
194,550
235,677
$ 2,191,356
0.11% $
40,364
$
470,519
110,922
17,227
639,032
20,782
1,985
61,632
84,399
0.15
0.73
0.61
0.25
0.64
0.35
0.63
0.62
0.29
1.12
2.24
2.98
1.19
723,431
3,002
4,599
2,212
11,807
21,620
324,269
84,689
421,229
1,553,618
312,371
201,238
229,095
$ 2,296,322
2.27%
0.19
2.46%
2.09%
0.25
2.34%
$
41,368
$
45,402
2,147
6,142
9,606
11,588
5,050
10,808
2,656
3,716
176
33,994
7,360
1,522
1,001
1,382
11,265
45,259
3,502
67,022
186
100
1,060
1,045
120
2,325
138
7
532
677
0.88
3.37
2.80
4.14
3.86
10.25
11.04
4.12
6.39
5.37
3.82
3.43
4.68
2.99
3.70
4.82
3.55
3.65
0.25%
0.23
0.94
0.70
0.36
0.66
0.35
0.86
0.80
0.42
1.42
2.61
2.80
1.39
2.26%
0.21
2.47%
(1) For this presentation, fees earned on overnight deposits placed with the Federal Reserve are included in the cash and cash equivalents line, consistent with the Consolidated Balance Sheet
presentation of these deposits. In addition, beginning in the third quarter of 2012, fees earned on deposits, primarily overnight, placed with certain non-U.S. central banks, which are included in the
time deposits placed and other short-term investments line in prior periods, are included in the cash and cash equivalents line. Net interest income and net interest yield are calculated excluding
the fees included in the cash and cash equivalents line.
(2) Yields on debt securities carried at fair value are 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
(4)
(5)
(6)
(7)
(8)
value upon acquisition and accrete interest income over the remaining life of the loan.
Includes non-U.S. residential mortgage loans of $79 million, $90 million and $91 million in 2013, 2012 and 2011, respectively.
Includes non-U.S. consumer loans of $6.7 billion, $7.8 billion and $8.5 billion in 2013, 2012 and 2011, respectively.
Includes consumer finance loans of $1.3 billion, $1.5 billion and $1.8 billion; consumer leases of $351 million, $0 and $0; other non-U.S. consumer loans of $5 million, $699 million and $878
million; and consumer overdrafts of $153 million, $128 million and $93 million in 2013, 2012 and 2011, respectively.
Includes U.S. commercial real estate loans of $40.7 billion, $36.4 billion and $42.1 billion, and non-U.S. commercial real estate loans of $1.6 billion, $1.6 billion and $2.3 billion in 2013, 2012
and 2011, respectively.
Interest income includes the impact of interest rate risk management contracts, which decreased interest income on the underlying assets by $205 million, $754 million and $2.6 billion in 2013,
2012 and 2011, respectively. Interest expense includes the impact of interest rate risk management contracts, which decreased interest expense on the underlying liabilities by $2.4 billion, $2.3
billion and $2.6 billion in 2013, 2012 and 2011, respectively. For more information on interest rate contracts, see Interest Rate Risk Management for Nontrading Activities on page 109.
Bank of America 2013 123
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Table II Analysis of Changes in Net Interest Income – FTE Basis
(Dollars in millions)
Increase (decrease) in interest income
Time deposits placed and other short-term investments (2)
Federal funds sold and securities borrowed or purchased under agreements to resell
Trading account assets
Debt securities
Loans and leases:
From 2012 to 2013
From 2011 to 2012
Due to Change in (1)
Due to Change in (1)
Volume
Rate
Net
Change
Volume
Rate
Net
Change
$
(72) $
(66)
(50)
(381)
22
(207)
(377)
1,229
$
(50) $
(273)
(427)
848
(71) $
(70)
(391)
294
(58) $
(575)
(445)
(969)
(129)
(645)
(836)
(675)
Residential mortgage
Home equity
U.S. credit card
Non-U.S. credit card
Direct/Indirect consumer
Other consumer
Total consumer
U.S. commercial
Commercial real estate
Commercial lease financing
Non-U.S. commercial
Total commercial
Total loans and leases
Other earning assets
Total interest income
Increase (decrease) in interest expense
U.S. interest-bearing deposits:
Savings
NOW and money market deposit accounts
Consumer CDs and IRAs
Negotiable CDs, public funds and other deposits
Total U.S. interest-bearing deposits
Non-U.S. interest-bearing deposits:
Banks located in non-U.S. countries
Governments and official institutions
Time, savings and other
Total non-U.S. interest-bearing deposits
Total interest-bearing deposits
(276)
(646)
(449)
(312)
(48)
(33)
616
154
81
785
(249)
3
66
(87)
15
(15)
—
21
$
(250)
51
(263)
11
(482)
(35)
(784)
(94)
(104)
(297)
(526)
(595)
(712)
(301)
(530)
(68)
(2,732)
(168)
60
(23)
488
357
(2,375)
(138)
$ (2,415)
111
$
(26) $
(23) $
(346)
(125)
(37)
(9)
(2)
(52)
(280)
(212)
(22)
(537)
(24)
(2)
(31)
(57)
(594)
(652)
(521)
(1,085)
(1,160)
(238)
(25)
332
(219)
23
438
(376)
4
12
(147)
26
(41)
(3)
(73)
(1,091)
(103)
(219)
76
(578)
(11)
(713)
29
(150)
(226)
(156)
(1,743)
(624)
(1,304)
(1,084)
(816)
(36)
(5,607)
(381)
(190)
(127)
212
(486)
(6,093)
(532)
$ (8,910)
$
(59) $
(379)
(205)
(18)
(3)
—
(126)
(55)
(367)
(352)
8
(766)
(44)
(3)
(199)
(246)
(1,012)
Federal funds purchased, securities loaned or sold under agreements to repurchase and
short-term borrowings
(196)
(453)
(649)
(78)
(949)
(1,027)
Trading account liabilities
Long-term debt
(449)
(2,388)
(4,876)
$ (4,034)
(1) The changes for each category of interest income and expense are divided between the portion of change attributable to the variance in volume and the portion of change attributable to the variance
Total interest expense
Net increase (decrease) in net interest income (2)
(125)
(2,621)
(3,989)
1,574
(162)
(2,948)
(340)
(1,052)
215
(1,569)
(287)
560
$
in rate for that category. The unallocated change in rate or volume variance is allocated between the rate and volume variances.
(2) For this presentation, fees earned on overnight deposits placed with the Federal Reserve are included in the cash and cash equivalents line, consistent with the Consolidated Balance Sheet
presentation of these deposits. In addition, beginning in the third quarter of 2012, fees earned on deposits, primarily overnight, placed with certain non-U.S. central banks, which are included in the
time deposits placed and other short-term investments line in prior periods, are included in the cash and cash equivalents line. Net interest income in the table is calculated excluding the fees
included in the cash and cash equivalents line.
124 Bank of America 2013
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Table III Preferred Stock Cash Dividend Summary (as of February 25, 2014)
Preferred Stock
Series B (1)
December 31, 2013
Outstanding
Notional
Amount
(in millions)
$
1
Series D (2)
$
654
Series E (2)
$
317
Series F
$
141
Series G
$
493
Series H (2, 3)
Series I (2)
Series J (2, 4)
Series K (5, 6)
Series L
Series M (5, 6)
Series T (1, 7)
$
$
$
$
$
$
$
—
365
—
1,544
3,080
1,310
5,000
Declaration Date
Record Date
Payment Date
Per Annum
Dividend Rate
Dividend Per
Share
February 11, 2014
October 24, 2013
July 24, 2013
April 30, 2013
January 23, 2013
January 13, 2014
October 15, 2013
July 2, 2013
April 2, 2013
January 3, 2013
January 13, 2014
October 15, 2013
July 2, 2013
April 2, 2013
January 3, 2013
January 13, 2014
October 15, 2013
July 2, 2013
April 2, 2013
January 3, 2013
January 13, 2014
October 15, 2013
July 2, 2013
April 2, 2013
January 3, 2013
April 2, 2013
January 3, 2013
January 13, 2014
October 15, 2013
July 2, 2013
April 2, 2013
January 3, 2013
July 2, 2013
April 2, 2013
January 3, 2013
January 13, 2014
July 2, 2013
January 3, 2013
December 16, 2013
September 16, 2013
June 17, 2013
March 15, 2013
October 15, 2013
April 2, 2013
December 16, 2013
September 16, 2013
June 17, 2013
March 15, 2013
October 15, 2013
April 11, 2014
January 10, 2014
October 11, 2013
July 11, 2013
April 11, 2013
February 28, 2014
November 29, 2013
August 30, 2013
May 31, 2013
February 28, 2013
January 31, 2014
October 31, 2013
July 31, 2013
April 30, 2013
January 31, 2013
February 28, 2014
November 29, 2013
August 30, 2013
May 31, 2013
February 28, 2013
February 28, 2014
November 29, 2013
August 30, 2013
May 31, 2013
February 28, 2013
April 15, 2013
January 15, 2013
March 15, 2014
December 15, 2013
September 15, 2013
June 15, 2013
March 15, 2013
July 15, 2013
April 15, 2013
January 15, 2013
January 15, 2014
July 15, 2013
January 15, 2013
January 1, 2014
October 1, 2013
July 1, 2013
April 1, 2013
October 31, 2013
April 30, 2013
December 26, 2013
September 25, 2013
June 25, 2013
March 26, 2013
November 15, 2013
April 25, 2014
January 24, 2014
October 25, 2013
July 25, 2013
April 25, 2013
March 14, 2014
December 16, 2013
September 16, 2013
June 14, 2013
March 14, 2013
February 18, 2014
November 15, 2013
August 15, 2013
May 15, 2013
February 15, 2013
March 17, 2014
December 16, 2013
September 16, 2013
June 17, 2013
March 15, 2013
March 17, 2014
December 16, 2013
September 16, 2013
June 17, 2013
March 15, 2013
May 1, 2013
February 1, 2013
April 1, 2014
January 2, 2014
October 1, 2013
July 1, 2013
April 1, 2013
August 1, 2013
May 1, 2013
February 1, 2013
January 30, 2014
July 30, 2013
January 30, 2013
January 30, 2014
October 30, 2013
July 30, 2013
April 30, 2013
November 15, 2013
May 15, 2013
January 10, 2014
October 10, 2013
July 10, 2013
April 10, 2013
December 2, 2013
$
$
$
7.00% $
7.00
7.00
7.00
7.00
6.204% $
6.204
6.204
6.204
6.204
Floating
Floating
Floating
Floating
Floating
Floating
Floating
Floating
Floating
Floating
Adjustable
Adjustable
Adjustable
Adjustable
Adjustable
1.75
1.75
1.75
1.75
1.75
0.38775
0.38775
0.38775
0.38775
0.38775
0.25556
0.25556
0.25556
0.24722
0.25556
1,000.00
1,011.1111
1,022.2222
1,044.44
1,000.00
1,000.00
1,011.1111
1,022.2222
1,044.44
1,000.00
0.51250
0.51250
6.625% $ 0.4140625
0.4140625
6.625
0.4140625
6.625
0.41406
6.625
0.41406
6.625
0.453125
0.453125
0.45312
40.00
40.00
40.00
18.125
18.125
18.125
18.125
40.62500
40.62500
1,500.00
1,500.00
1,500.00
1,500.00
$ 26.288889
8.20% $
8.20
$
7.25% $
7.25
7.25
Fixed-to-floating
Fixed-to-floating
Fixed-to-floating
7.25% $
7.25
7.25
7.25
Fixed-to-floating
Fixed-to-floating
$
6.00% $
6.00
6.00
6.00
Fixed-to-floating
Series U
(1) Dividends are cumulative.
(2) Dividends per depositary share, each representing a 1/1,000th interest in a share of preferred stock.
(3) This series was redeemed on May 1, 2013.
(4) This series was redeemed on August 1, 2013.
(5)
1,000
Initially pays dividends semi-annually.
$
(6) Dividends per depositary share, each representing a 1/25th interest in a share of preferred stock.
(7) For more information on the restructuring of the Series T Preferred Stock, which is subject to shareholder approval, see Capital Management – Capital Composition and Ratios on page 62.
Bank of America 2013 125
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Table III Preferred Stock Cash Dividend Summary (as of February 25, 2014) (continued)
Preferred Stock
Series 1 (8)
December 31, 2013
Outstanding
Notional
Amount
(in millions)
$
98
Series 2 (8)
$
299
Series 3 (8)
$
653
Series 4 (8)
$
210
Series 5 (8)
$
422
Series 6 (9, 10)
Series 7 (9, 10)
Series 8 (8, 11)
$
$
$
—
—
—
Declaration Date
Record Date
Payment Date
Per Annum
Dividend Rate
Dividend Per
Share
January 13, 2014
October 15, 2013
July 2, 2013
April 2, 2013
January 3, 2013
January 13, 2014
October 15, 2013
July 2, 2013
April 2, 2013
January 3, 2013
January 13, 2014
October 15, 2013
July 2, 2013
April 2, 2013
January 3, 2013
January 13, 2014
October 15, 2013
July 2, 2013
April 2, 2013
January 3, 2013
January 13, 2014
October 15, 2013
July 2, 2013
April 2, 2013
January 3, 2013
April 2, 2013
January 3, 2013
April 2, 2013
January 3, 2013
April 2, 2013
January 3, 2013
February 15, 2014
November 15, 2013
August 15, 2013
May 15, 2013
February 15, 2013
February 15, 2014
November 15, 2013
August 15, 2013
May 15, 2013
February 15, 2013
February 15, 2014
November 15, 2013
August 15, 2013
May 15, 2013
February 15, 2013
February 15, 2014
November 15, 2013
August 15, 2013
May 15, 2013
February 15, 2013
February 1, 2014
November 1, 2013
August 1, 2013
May 1, 2013
February 1, 2013
June 15, 2013
March 15, 2013
June 15, 2013
March 15, 2013
May 15, 2013
February 15, 2013
February 28, 2014
November 29, 2013
August 28, 2013
May 28, 2013
February 28, 2013
February 28, 2014
November 29, 2013
August 28, 2013
May 28, 2013
February 28, 2013
February 28, 2014
November 29, 2013
August 28, 2013
May 28, 2013
February 28, 2013
February 28, 2014
November 29, 2013
August 28, 2013
May 28, 2013
February 28, 2013
February 21, 2014
November 21, 2013
August 21, 2013
May 21, 2013
February 21, 2013
June 28, 2013
March 29, 2013
June 28, 2013
March 29, 2013
May 28, 2013
February 28, 2013
$
$
0.18750
Floating
0.18750
Floating
0.18750
Floating
0.18750
Floating
0.18750
Floating
0.19167
Floating
0.19167
Floating
0.19167
Floating
0.18542
Floating
Floating
0.19167
6.375% $ 0.3984375
0.39844
6.375
0.3984375
6.375
0.39843
6.375
0.39843
6.375
0.25556
Floating
0.25556
Floating
0.25556
Floating
0.24722
Floating
0.25556
Floating
0.25556
Floating
0.25556
Floating
0.25556
Floating
0.24722
Floating
0.25556
Floating
0.41875
0.41875
0.390625
0.39062
0.53906
0.53906
6.70% $
6.70
6.25% $
6.25
8.625% $
8.625
$
$
(8) Dividends per depositary share, each representing a 1/1,200th interest in a share of preferred stock.
(9) Dividends per depositary share, each representing a 1/40th interest in a share of preferred stock.
(10) These series were redeemed on June 28, 2013.
(11) This series was redeemed on May 28, 2013.
126 Bank of America 2013
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Table IV Outstanding Loans and Leases (1)
(Dollars in millions)
Consumer
Residential mortgage (2)
Home equity
U.S. credit card
Non-U.S. credit card
Direct/Indirect consumer (3)
Other consumer (4)
Total consumer loans excluding loans accounted for under the fair value option
Consumer loans accounted for under the fair value option (5)
Total consumer
Commercial
U.S. commercial (6)
Commercial real estate (7)
Commercial lease financing
Non-U.S. commercial
225,851
47,893
25,199
89,462
388,405
7,878
396,283
$ 928,233
(1) 2013, 2012, 2011 and 2010 are presented in accordance with consolidation guidance that was effective January 1, 2010.
(2)
Total commercial loans excluding loans accounted for under the fair value option
Commercial loans accounted for under the fair value option (5)
Total commercial
Total loans and leases
2013
2012
December 31
2011
2010
2009
$ 248,066
93,672
92,338
11,541
82,192
1,977
529,786
2,164
531,950
$ 252,929
108,140
94,835
11,697
83,205
1,628
552,434
1,005
553,439
209,719
38,637
23,843
74,184
346,383
7,997
354,380
$ 907,819
$ 273,228
124,856
102,291
14,418
89,713
2,688
607,194
2,190
609,384
193,199
39,596
21,989
55,418
310,202
6,614
316,816
$ 926,200
$ 270,901
138,161
113,785
27,465
90,308
2,830
643,450
—
643,450
190,305
49,393
21,942
32,029
293,669
3,321
296,990
$ 940,440
$ 256,748
149,361
49,453
21,656
97,236
3,110
577,564
—
577,564
198,903
69,447
22,199
27,079
317,628
4,936
322,564
$ 900,128
(3)
(4)
Includes pay option loans of $4.4 billion, $6.7 billion, $9.9 billion, $11.8 billion and $13.4 billion, and non-U.S. residential mortgage loans of $0, $93 million, $85 million, $90 million and $552
million at December 31, 2013, 2012, 2011, 2010 and 2009, respectively. The Corporation no longer originates pay option loans
Includes dealer financial services loans of $38.5 billion, $35.9 billion, $43.0 billion, $43.3 billion and $41.6 billion; consumer lending loans of $2.7 billion, $4.7 billion, $8.0 billion, $12.4 billion
and $19.7 billion; U.S. securities-based lending loans of $31.2 billion, $28.3 billion, $23.6 billion, $16.6 billion and $12.9 billion; non-U.S. consumer loans of $4.7 billion, $8.3 billion, $7.6 billion,
$8.0 billion and $8.0 billion; student loans of $4.1 billion, $4.8 billion, $6.0 billion, $6.8 billion and $10.8 billion; and other consumer loans of $1.0 billion, $1.2 billion, $1.5 billion, $3.2 billion
and $4.2 billion at December 31, 2013, 2012, 2011, 2010 and 2009, respectively.
Includes consumer finance loans of $1.2 billion, $1.4 billion, $1.7 billion, $1.9 billion and $2.3 billion; consumer leases of $606 million, $34 million, $0, $0 and $0; consumer overdrafts of $176
million, $177 million, $103 million, $88 million and $144 million; and other non-U.S. consumer loans of $5 million, $5 million, $929 million, $803 million and $709 million at December 31, 2013,
2012, 2011, 2010 and 2009, respectively.
(5) Consumer loans accounted for under the fair value option were residential mortgage loans of $2.0 billion, $1.0 billion and $2.2 billion, and home equity loans of $147 million, $0 and $0 at
December 31, 2013, 2012 and 2011, respectively. There were no consumer loans accounted for under the fair value option prior to 2011. Commercial loans accounted for under the fair value option
were U.S. commercial loans of $1.5 billion, $2.3 billion, $2.2 billion, $1.6 billion and $3.0 billion; commercial real estate loans of $0, $0, $0, $79 million and $90 million; and non-U.S. commercial
loans of $6.4 billion, $5.7 billion, $4.4 billion, $1.7 billion and $1.9 billion at December 31, 2013, 2012, 2011, 2010 and 2009, respectively.
Includes U.S. small business commercial loans, including card-related products, of $13.3 billion, $12.6 billion, $13.3 billion, $14.7 billion and $17.5 billion at December 31, 2013, 2012, 2011,
2010 and 2009, respectively.
Includes U.S. commercial real estate loans of $46.3 billion, $37.2 billion, $37.8 billion, $46.9 billion and $66.5 billion, and non-U.S. commercial real estate loans of $1.6 billion, $1.5 billion, $1.8
billion, $2.5 billion and $3.0 billion at December 31, 2013, 2012, 2011, 2010 and 2009, respectively.
(7)
(6)
76788ba_financials.indd 127
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Bank of America 2013 127
Table V Nonperforming Loans, Leases and Foreclosed Properties (1)
(Dollars in millions)
Consumer
Residential mortgage
Home equity
Direct/Indirect consumer
Other consumer
Total consumer (2)
Commercial
U.S. commercial
Commercial real estate
Commercial lease financing
Non-U.S. commercial
U.S. small business commercial
Total commercial (3)
Total nonperforming loans and leases
Foreclosed properties
Total nonperforming loans, leases and foreclosed properties
2013
2012
December 31
2011
2010
2009
$
$
11,712
4,075
35
18
15,840
819
322
16
64
1,221
88
1,309
17,149
623
17,772
$
$
15,055
4,282
92
2
19,431
1,484
1,513
44
68
3,109
115
3,224
22,655
900
23,555
$
$
16,259
2,454
40
15
18,768
2,174
3,880
26
143
6,223
114
6,337
25,105
2,603
27,708
$
$
18,020
2,696
90
48
20,854
3,453
5,829
117
233
9,632
204
9,836
30,690
1,974
32,664
$
$
16,841
3,808
86
104
20,839
4,925
7,286
115
177
12,503
200
12,703
33,542
2,205
35,747
(2)
(1) Balances do not include PCI loans even though the customer may be contractually past due. PCI loans were recorded at fair value upon acquisition and accrete interest income over the remaining
life of the loan. In addition, balances do not include foreclosed properties that are insured by the FHA and have entered foreclosure of $1.4 billion, $2.5 billion and $1.4 billion at December 31,
2013, 2012 and 2011, respectively.
In 2013, $2.3 billion in interest income was estimated to be contractually due on consumer loans and leases classified as nonperforming and TDRs classified as performing, if these loans and
leases had been paying according to their terms and conditions. At December 31, 2013, the TDRs classified as performing of $22.5 billion are not included in the table above. Approximately $1.4
billion of the estimated $2.3 billion in contractual interest was received and included in interest income for 2013.
In 2013, $157 million in interest income was estimated to be contractually due on commercial loans and leases classified as nonperforming and TDRs classified as performing, if these loans and
leases had been paying according to their terms and conditions. At December 31, 2013, the TDRs classified as performing of $1.8 billion are not included in the table above. Approximately $75
million of the estimated $157 million in contractual interest was received and included in interest income for 2013.
(3)
128 Bank of America 2013
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Table VI Accruing Loans and Leases Past Due 90 Days or More (1)
(Dollars in millions)
Consumer
Residential mortgage (2)
U.S. credit card
Non-U.S. credit card
Direct/Indirect consumer
Other consumer
Total consumer
Commercial
U.S. commercial
Commercial real estate
Commercial lease financing
Non-U.S. commercial
U.S. small business commercial
Total commercial
Total accruing loans and leases past due 90 days or more (3)
2013
2012
December 31
2011
2010
2009
$
$
16,961
1,053
131
408
2
18,555
47
21
41
17
126
78
204
18,759
$
$
22,157
1,437
212
545
2
24,353
65
29
15
—
109
120
229
24,582
$
$
21,164
2,070
342
746
2
24,324
75
7
14
—
96
216
312
24,636
$
$
16,768
3,320
599
1,058
2
21,747
236
47
18
6
307
325
632
22,379
$
$
11,680
2,158
515
1,488
3
15,844
213
80
32
67
392
624
1,016
16,860
(1) Our policy is to classify consumer real estate-secured loans as nonperforming at 90 days past due, except the PCI loan portfolio, the fully-insured loan portfolio and loans accounted for under the
fair value option as referenced in footnote 3.
(2) Balances are fully-insured loans.
(3) Balances exclude loans accounted for under the fair value option. At December 31, 2013 and 2009, $8 million and $87 million of loans accounted for under the fair value option were past due 90
days or more and still accruing interest. At December 31, 2012, 2011 and 2010, there were no loans accounted for under the fair value option that were past due 90 days or more and still accruing
interest.
76788ba_financials.indd 129
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Bank of America 2013 129
Table VII Allowance for Credit Losses
(Dollars in millions)
Allowance for loan and lease losses, January 1 (1)
Loans and leases charged off
Residential mortgage
Home equity
U.S. credit card
Non-U.S. credit card
Direct/Indirect consumer
Other consumer
Total consumer charge-offs
U.S. commercial (2)
Commercial real estate
Commercial lease financing
Non-U.S. commercial
Total commercial charge-offs
Total loans and leases charged off
Recoveries of loans and leases previously charged off
Residential mortgage
Home equity
U.S. credit card
Non-U.S. credit card
Direct/Indirect consumer
Other consumer
Total consumer recoveries
U.S. commercial (3)
Commercial real estate
Commercial lease financing
Non-U.S. commercial
Total commercial recoveries
Total recoveries of loans and leases previously charged off
Net charge-offs
Write-offs of PCI loans
Provision for loan and lease losses
Other (4)
Allowance for loan and lease losses, December 31
Reserve for unfunded lending commitments, January 1
Provision for unfunded lending commitments
Other (5)
Reserve for unfunded lending commitments, December 31
Allowance for credit losses, December 31
2013
2012
2011
2010
2009
$
24,179
$
33,783
$
41,885
$
47,988
$
23,071
(1,508)
(2,258)
(4,004)
(508)
(710)
(273)
(9,261)
(774)
(251)
(4)
(79)
(1,108)
(10,369)
424
455
628
109
365
39
2,020
287
102
29
34
452
2,472
(7,897)
(2,336)
3,574
(92)
17,428
513
(18)
(11)
484
17,912
$
(3,276)
(4,573)
(5,360)
(835)
(1,258)
(274)
(15,576)
(1,309)
(719)
(32)
(36)
(2,096)
(17,672)
165
331
728
254
495
42
2,015
368
335
38
8
749
2,764
(14,908)
(2,820)
8,310
(186)
24,179
714
(141)
(60)
513
24,692
$
(4,294)
(4,997)
(8,114)
(1,691)
(2,190)
(252)
(21,538)
(1,690)
(1,298)
(61)
(155)
(3,204)
(24,742)
377
517
838
522
714
50
3,018
500
351
37
3
891
3,909
(20,833)
—
13,629
(898)
33,783
1,188
(219)
(255)
714
34,497
$
(3,843)
(7,072)
(13,818)
(2,424)
(4,303)
(320)
(31,780)
(3,190)
(2,185)
(96)
(139)
(5,610)
(37,390)
117
279
791
217
967
59
2,430
391
168
39
28
626
3,056
(34,334)
—
28,195
36
41,885
1,487
240
(539)
1,188
43,073
$
(4,525)
(7,220)
(6,753)
(1,332)
(6,406)
(491)
(26,727)
(5,237)
(2,744)
(217)
(558)
(8,756)
(35,483)
89
155
206
93
943
63
1,549
161
42
22
21
246
1,795
(33,688)
—
48,366
(549)
37,200
421
204
862
1,487
38,687
$
(1) The 2010 balance includes $10.8 billion of allowance for loan and lease losses related to the adoption of consolidation guidance that was effective January 1, 2010.
(2)
Includes U.S. small business commercial charge-offs of $457 million, $799 million, $1.1 billion, $2.0 billion and $3.0 billion in 2013, 2012, 2011, 2010 and 2009, respectively.
Includes U.S. small business commercial recoveries of $98 million, $100 million, $106 million, $107 million and $65 million in 2013, 2012, 2011, 2010 and 2009, respectively.
(3)
(4) The 2013, 2012 and 2011 amounts primarily represent the net impact of portfolio sales, consolidations and deconsolidations, and foreign currency translation adjustments. In addition, the 2011
amount includes a $449 million reduction in the allowance for loan and lease losses related to Canadian consumer card loans that were transferred to LHFS. The 2009 amount includes a $750
million reduction in the allowance for loan and lease losses related to credit card loans of $8.5 billion which were exchanged for $7.8 billion in held-to-maturity debt securities that were issued by
the Corporation’s U.S. Credit Card Securitization Trust and retained by the Corporation.
(5) The 2013, 2012, 2011 and 2010 amounts primarily represent accretion of the Merrill Lynch purchase accounting adjustment and the impact of funding previously unfunded positions. The 2009
amount includes the remaining balance of the acquired Merrill Lynch reserve excluding those commitments accounted for under the fair value option, net of accretion, and the impact of funding
previously unfunded positions.
130 Bank of America 2013
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Table VII Allowance for Credit Losses (continued)
(Dollars in millions)
Loan and allowance ratios:
Loans and leases outstanding at December 31 (6)
Allowance for loan and lease losses as a percentage of total loans and leases
outstanding at December 31 (6)
Consumer allowance for loan and lease losses as a percentage of total consumer loans
and leases outstanding at December 31 (7)
Commercial allowance for loan and lease losses as a percentage of total commercial
loans and leases outstanding at December 31 (8)
Average loans and leases outstanding (6)
Net charge-offs as a percentage of average loans and leases outstanding (6, 9)
Net charge-offs and PCI write-offs as a percentage of average loans and leases
outstanding (6, 10)
Allowance for loan and lease losses as a percentage of total nonperforming loans and
leases at December 31 (6, 11)
Ratio of the allowance for loan and lease losses at December 31 to net charge-offs (9)
Ratio of the allowance for loan and lease losses at December 31 to net charge-offs and
PCI write-offs (10)
Amounts included in allowance for loan and lease losses that are excluded from
nonperforming loans and leases at December 31 (12)
Allowance for loan and lease losses as a percentage of total nonperforming loans and
leases, excluding amounts included in the allowance for loan and lease losses that are
excluded from nonperforming loans and leases at December 31 (12)
Loan and allowance ratios excluding PCI loans and the related valuation allowance: (13)
Allowance for loan and lease losses as a percentage of total loans and leases
outstanding at December 31 (6)
Consumer allowance for loan and lease losses as a percentage of total consumer loans
and leases outstanding at December 31 (7)
Net charge-offs as a percentage of average loans and leases outstanding (6)
Allowance for loan and lease losses as a percentage of total nonperforming loans and
leases at December 31 (6, 11)
Ratio of the allowance for loan and lease losses at December 31 to net charge-offs
2013
2012
2011
2010
2009
$ 918,191
$ 898,817
$ 917,396
$ 937,119
$ 895,192
1.90%
2.69%
3.68%
4.47%
4.16%
2.53
1.03
3.81
0.90
4.88
1.33
5.40
2.44
4.81
2.96
$ 909,127
$ 890,337
$ 929,661
$ 954,278
$ 941,862
0.87%
1.67%
2.24%
3.60%
3.58%
1.13
102
2.21
1.70
1.99
107
1.62
1.36
2.24
135
1.62
1.62
3.60
136
1.22
1.22
3.58
111
1.10
1.10
$
7,680
$
12,021
$
17,490
$
22,908
$
17,690
57%
54%
65%
62%
58%
1.67%
2.14%
2.86%
3.94%
3.88%
2.17
0.90
87
1.89
2.95
1.73
82
1.25
3.68
2.32
101
1.22
4.66
3.73
116
1.04
4.43
3.71
99
1.00
(6) Outstanding loan and lease balances and ratios do not include loans accounted for under the fair value option, which were $10.0 billion, $9.0 billion, $8.8 billion, $3.3 billion and $4.9 billion at
December 31, 2013, 2012, 2011, 2010 and 2009, respectively. Average loans accounted for under the fair value option were $9.5 billion, $8.4 billion, $8.4 billion, $4.1 billion and $6.9 billion in
2013, 2012, 2011, 2010 and 2009, respectively.
(7) Excludes consumer loans accounted for under the fair value option of $2.2 billion, $1.0 billion and $2.2 billion at December 31, 2013, 2012 and 2011. There were no consumer loans accounted
for under the fair value option prior to 2011.
(8) Excludes commercial loans accounted for under the fair value option of $7.9 billion, $8.0 billion, $6.6 billion, $3.3 billion and $4.9 billion at December 31, 2013, 2012, 2011, 2010 and 2009,
respectively.
(9) Net charge-offs exclude $2.3 billion and $2.8 billion of write-offs in the PCI loan portfolio in 2013 and 2012. These write-offs decreased the PCI valuation allowance included as part of the allowance
for loan and lease losses. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 81.
(10) There were no write-offs of PCI loans in 2011, 2010 and 2009.
(11) For more information on our definition of nonperforming loans, see pages 85 and 92.
(12) Primarily includes amounts allocated to the U.S. credit card and unsecured lending portfolios in CBB, PCI loans and the non-U.S. credit portfolio in All Other.
(13) For more information on the PCI loan portfolio and the valuation allowance for PCI loans, see Note 4 – Outstanding Loans and Leases and Note 5 – Allowance for Credit Losses to the Consolidated
Financial Statements.
76788ba_financials.indd 131
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Bank of America 2013 131
Table VIII Allocation of the Allowance for Credit Losses by Product Type
(Dollars in millions)
Allowance for loan and lease losses
Residential mortgage
Home equity
U.S. credit card
Non-U.S. credit card
Direct/Indirect consumer
Other consumer
Total consumer
U.S. commercial (1)
Commercial real estate
Commercial lease financing
Non-U.S. commercial
Total commercial (2)
Allowance for loan and lease losses
Reserve for unfunded lending commitments
Allowance for credit losses (3)
2013
2012
December 31
2011
2010
2009
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
$ 4,084
4,434
3,930
459
417
99
13,423
2,394
917
118
576
4,005
17,428
484
$ 17,912
23.43% $ 7,088
25.44
7,845
22.55
4,718
2.63
600
2.39
718
0.58
104
77.02
21,073
13.74
1,885
5.26
846
0.68
78
3.30
297
22.98
3,106
100.00%
24,179
513
$ 24,692
29.31% $ 7,985
13,094
32.45
6,322
19.51
946
2.48
1,153
2.97
148
0.43
29,648
87.15
2,441
7.80
1,349
3.50
92
0.32
253
1.23
4,135
12.85
33,783
100.00%
714
$ 34,497
23.64% $ 6,365
12,887
38.76
10,876
18.71
2,045
2.80
2,381
3.41
161
0.44
34,715
87.76
3,576
7.23
3,137
3.99
126
0.27
331
0.75
7,170
12.24
41,885
100.00%
1,188
$ 43,073
15.20% $ 5,640
10,116
30.77
6,017
25.97
1,581
4.88
4,227
5.68
204
0.38
27,785
82.88
5,152
8.54
3,567
7.49
291
0.30
405
0.79
9,415
17.12
37,200
100.00%
1,487
$ 38,687
15.17%
27.19
16.17
4.25
11.36
0.55
74.69
13.85
9.59
0.78
1.09
25.31
100.00%
(1)
(2)
(3)
Includes allowance for loan and lease losses for U.S. small business commercial loans of $462 million, $642 million, $893 million, $1.5 billion and $2.4 billion at December 31, 2013, 2012, 2011,
2010 and 2009, respectively.
Includes allowance for loan and lease losses for impaired commercial loans of $277 million, $475 million, $545 million, $1.1 billion and $1.2 billion at December 31, 2013, 2012, 2011, 2010 and
2009, respectively.
Includes $2.5 billion, $5.5 billion, $8.5 billion, $6.4 billion and $3.9 billion of valuation allowance included as part of the allowance for credit losses related to PCI loans at December 31, 2013,
2012, 2011, 2010 and 2009, respectively.
132 Bank of America 2013
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Table IX Selected Loan Maturity Data (1, 2)
(Dollars in millions)
U.S. commercial
U.S. commercial real estate
Non-U.S. and other (3)
Total selected loans
Percent of total
Sensitivity of selected loans to changes in interest rates for loans due after one year:
Fixed interest rates
Floating or adjustable interest rates
Total
(1) Loan maturities are based on the remaining maturities under contractual terms.
(2)
Includes loans accounted for under the fair value option.
(3) Loan maturities include non-U.S. commercial and commercial real estate loans.
Table X Non-exchange Traded Commodity Contracts
(Dollars in millions)
Net fair value of contracts outstanding, January 1, 2013
Effects of legally enforceable master netting agreements
Gross fair value of contracts outstanding, January 1, 2013
Contracts realized or otherwise settled
Fair value of new contracts
Other changes in fair value
Gross fair value of contracts outstanding, December 31, 2013
Effects of legally enforceable master netting agreements
Net fair value of contracts outstanding, December 31, 2013
Table XI Non-exchange Traded Commodity Contract Maturities
(Dollars in millions)
Less than one year
Greater than or equal to one year and less than three years
Greater than or equal to three years and less than five years
Greater than or equal to five years
Gross fair value of contracts outstanding
Effects of legally enforceable master netting agreements
Net fair value of contracts outstanding
December 31, 2013
Due in One
Year or Less
$
$
58,522
7,244
78,201
143,967
Due After
One Year
Through
Five Years
$
$
122,739
32,826
14,026
169,591
39%
46%
$
$
12,668
156,923
169,591
$
$
$
$
Due After
Five Years
46,114
6,242
5,170
57,526
$
$
Total
227,375
46,312
97,397
371,084
15%
100%
28,463
29,063
57,526
December 31, 2013
Asset
Positions
Liability
Positions
$
$
4,041
5,110
9,151
(5,494)
4,076
1,268
9,001
(4,625)
4,376
$
$
3,977
5,110
9,087
(5,229)
4,023
984
8,865
(4,625)
4,240
December 31, 2013
Asset
Positions
Liability
Positions
$
$
4,737
2,108
494
1,662
9,001
(4,625)
4,376
$
$
4,575
2,411
489
1,390
8,865
(4,625)
4,240
Bank of America 2013 133
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Table XII Selected Quarterly Financial Data
(In millions, except per share information)
Income statement
Net interest income
Noninterest income
Total revenue, net of interest expense
Provision for credit losses
Noninterest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income
Net income (loss) applicable to common shareholders
Average common shares issued and outstanding
Average diluted common shares issued and outstanding (1)
Performance ratios
Return on average assets
Four quarter trailing return on average assets (2)
Return on average common shareholders’ equity
Return on average tangible common shareholders’ equity (3)
Return on average tangible shareholders’ equity (3)
Total ending equity to total ending assets
Total average equity to total average assets
Dividend payout
Per common share data
Earnings
Diluted earnings (1)
Dividends paid
Book value
Tangible book value (3)
Market price per share of common stock
Closing
High closing
Low closing
Market capitalization
2013 Quarters
2012 Quarters
Fourth
Third
Second
First
Fourth
Third
Second
First
$
10,786
$
10,266
$
10,549
$
10,664
$
10,324
$
9,938
$
9,548
$
10,846
10,702
21,488
336
17,307
3,845
406
3,439
3,183
10,633
11,404
11,264
21,530
296
16,389
4,845
2,348
2,497
2,218
10,719
11,482
12,178
22,727
1,211
16,018
5,498
1,486
4,012
3,571
10,776
11,525
12,533
23,197
1,713
19,500
1,984
501
1,483
1,110
10,799
11,155
8,336
18,660
2,204
18,360
(1,904)
(2,636)
732
367
10,777
10,885
0.64%
0.47%
0.74%
0.27%
0.13%
0.53
5.74
8.61
8.53
11.07
10.93
3.33
0.30
0.29
0.01
20.71
13.79
15.57
15.88
0.40
4.06
6.15
6.32
10.92
10.85
4.82
0.21
0.20
0.01
20.50
13.62
13.80
14.95
$
$
0.30
6.55
9.88
9.98
10.88
10.76
3.01
0.33
0.32
0.01
20.18
13.32
12.86
13.83
$
$
0.23
2.06
3.12
3.69
10.91
10.71
9.75
0.10
0.10
0.01
20.19
13.36
12.18
12.78
$
$
0.19
0.67
1.01
1.77
10.72
10.79
29.33
0.03
0.03
0.01
20.24
13.36
11.61
11.61
$
$
$
$
13.69
$ 164,914
12.83
$ 147,429
11.44
$ 138,156
11.03
$ 131,817
8.93
$ 125,136
$
$
$
10,490
20,428
1,774
17,544
1,110
770
340
(33)
10,776
10,776
0.06%
0.25
n/m
n/m
0.84
11.02
10.86
n/m
0.00
0.00
0.01
20.40
13.48
8.83
9.55
7.04
95,163
$
$
$
12,420
21,968
1,773
17,048
3,147
684
2,463
2,098
10,776
11,556
0.45%
0.51
3.89
5.95
6.16
10.92
10.73
5.60
0.19
0.19
0.01
20.16
13.22
8.18
9.68
6.83
88,155
11,432
22,278
2,418
19,141
719
66
653
328
10,651
10,762
0.12%
n/m
0.62
0.95
1.67
10.66
10.63
34.97
0.03
0.03
0.01
19.83
12.87
9.57
9.93
$
$
5.80
$ 103,123
(1) Due to a net loss applicable to common shareholders for the third quarter of 2012, the impact of antidilutive equity instruments was excluded from diluted earnings per share and average diluted
common shares.
(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, see Supplemental Financial Data on page 29, and for corresponding reconciliations to GAAP financial measures, see Statistical Table XVII.
(4) For more information on the impact of the PCI loan portfolio on asset quality, see Consumer Portfolio Credit Risk Management on page 73.
(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 85 and corresponding Table 41, and Commercial Portfolio Credit Risk Management –
Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 92 and corresponding Table 50.
(7) Primarily includes amounts allocated to the U.S. credit card and unsecured consumer lending portfolios in CBB, PCI loans and the non-U.S. credit card portfolio in All Other.
(8) Net charge-offs exclude $741 million, $443 million, $313 million and $839 million of write-offs in the PCI loan portfolio for the fourth, third, second and first quarters of 2013, respectively, and $1.1
billion and $1.7 billion for the fourth and third quarters of 2012. These write-offs decreased the PCI valuation allowance included as part of the allowance for loan and lease losses. For more
information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 81.
(9) There were no write-offs of PCI loans in the second and first quarters of 2012.
(10) Presents capital ratios in accordance with the Basel 1 – 2013 Rules, which include the Market Risk Final Rule at December 31, 2013. Basel 1 did not include the Basel 1 – 2013 Rules at December 31,
2012.
n/m = not meaningful
134 Bank of America 2013
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Table XII Selected Quarterly Financial Data (continued)
(Dollars in millions)
Average balance sheet
Total loans and leases
Total assets
Total deposits
Long-term debt
Common shareholders’ equity
Total shareholders’ equity
Asset quality (4)
Allowance for credit losses (5)
2013 Quarters
2012 Quarters
Fourth
Third
Second
First
Fourth
Third
Second
First
$ 929,777
$ 923,978
$ 914,234
$ 906,259
$ 893,166
$ 888,859
$ 899,498
$ 913,722
2,134,875
1,112,674
251,055
220,088
233,415
2,123,430
2,184,610
2,212,430
2,210,365
2,173,312
2,194,563
2,187,174
1,090,611
1,079,956
1,075,280
1,078,076
1,049,697
1,032,888
1,030,112
258,717
216,766
230,392
270,198
218,790
235,063
273,999
218,225
236,995
277,894
219,744
238,512
291,684
217,273
236,039
333,173
216,782
235,558
363,518
214,150
232,566
$ 17,912
$ 19,912
$ 21,709
$ 22,927
$ 24,692
$ 26,751
$ 30,862
$ 32,862
Nonperforming loans, leases and foreclosed properties (6)
17,772
20,028
21,280
22,842
23,555
24,925
25,377
27,790
Allowance for loan and lease losses as a percentage of total loans
and leases outstanding (6)
1.90%
2.10%
2.33%
2.49%
2.69%
2.96%
3.43%
3.61%
Allowance for loan and lease losses as a percentage of total
nonperforming loans and leases (6)
Allowance for loan and lease losses as a percentage of total
nonperforming loans and leases, excluding the PCI loan portfolio (6)
Amounts included in allowance that are excluded from nonperforming
102
87
100
84
103
84
102
82
107
82
111
81
127
90
126
91
loans and leases (7)
$
7,680
$
8,972
$
9,919
$ 10,690
$ 12,021
$ 13,978
$ 16,327
$ 17,006
Allowance as a percentage of total nonperforming loans and leases,
excluding amounts included in the allowance that are excluded from
nonperforming loans and leases (7)
57%
54%
55%
53%
54%
52%
59%
60%
Net charge-offs (8)
$
1,582
$
1,687
$
2,111
$
2,517
$
3,104
$
4,122
$
3,626
$
4,056
Annualized net charge-offs as a percentage of average loans and
leases outstanding (6, 8)
Annualized net charge-offs as a percentage of average loans and
leases outstanding, excluding the PCI loan portfolio (6)
Annualized net charge-offs and PCI write-offs as a percentage of
average loans and leases outstanding (6, 9)
Nonperforming loans and leases as a percentage of total loans and
leases outstanding (6)
Nonperforming loans, leases and foreclosed properties as a
percentage of total loans, leases and foreclosed properties (6)
Ratio of the allowance for loan and lease losses at period end to
annualized net charge-offs (8)
Ratio of the allowance for loan and lease losses at period end to
annualized net charge-offs, excluding the PCI loan portfolio
Ratio of the allowance for loan and lease losses at period end to
annualized net charge-offs and PCI write-offs (9)
0.68%
0.73%
0.94%
1.14%
1.40%
1.86%
1.64%
1.80%
0.70
1.00
1.87
1.93
2.78
2.38
1.89
0.75
0.92
2.10
2.17
2.90
2.42
2.30
0.97
1.07
2.26
2.33
2.51
2.04
2.18
1.18
1.52
2.44
2.53
2.20
1.76
1.65
1.44
1.90
2.52
2.62
1.96
1.51
1.44
1.93
2.63
2.68
2.81
1.60
1.17
1.13
1.69
1.64
2.70
2.87
2.08
1.46
2.08
1.87
1.80
2.85
3.10
1.97
1.43
1.97
Capital ratios at period end (10)
Risk-based capital:
Tier 1 common capital
Tier 1 capital
Total capital
Tier 1 leverage
Tangible equity (3)
Tangible common equity (3)
For footnotes see page 134.
11.19%
12.44
15.44
7.86
7.86
7.20
11.08%
10.83%
10.49%
11.06%
11.41%
11.24%
10.78%
12.33
15.36
7.79
7.73
7.08
12.16
15.27
7.49
7.67
6.98
12.22
15.50
7.49
7.78
6.88
12.89
16.31
7.37
7.62
6.74
13.64
17.16
7.84
7.85
6.95
13.80
17.51
7.84
7.73
6.83
13.37
17.49
7.79
7.48
6.58
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Bank of America 2013 135
Table XIII Quarterly Average Balances and Interest Rates – FTE Basis
(Dollars in millions)
Earning assets
Time deposits placed and other short-term investments (1)
Federal funds sold and securities borrowed or purchased under agreements to resell
Trading account assets
Debt securities (2)
Loans and leases (3):
Residential mortgage (4)
Home equity
U.S. credit card
Non-U.S. credit card
Direct/Indirect consumer (5)
Other consumer (6)
Total consumer
U.S. commercial
Commercial real estate (7)
Commercial lease financing
Non-U.S. commercial
Total commercial
Total loans and leases
Other earning assets
Total earning assets (8)
Cash and cash equivalents (1)
Other assets, less allowance for loan and lease losses
Total assets
Interest-bearing liabilities
U.S. interest-bearing deposits:
Savings
NOW and money market deposit accounts
Consumer CDs and IRAs
Negotiable CDs, public funds and other deposits
Total U.S. interest-bearing deposits
Non-U.S. interest-bearing deposits:
Banks located in non-U.S. countries
Governments and official institutions
Time, savings and other
Total non-U.S. interest-bearing deposits
Total interest-bearing deposits
Federal funds purchased, securities loaned or sold under agreements to repurchase and short-term
borrowings
Trading account liabilities
Long-term debt
Total interest-bearing liabilities (8)
Noninterest-bearing sources:
Noninterest-bearing deposits
Other liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Net interest spread
Fourth Quarter 2013
Third Quarter 2013
Average
Balance
Interest
Income/
Expense
Yield/
Rate
Average
Balance
Interest
Income/
Expense
Yield/
Rate
48
304
1,182
2,455
2,374
953
2,125
310
565
17
6,344
1,700
374
206
544
2,824
9,168
709
13,866
59
5
89
97
28
219
18
—
77
95
314
682
364
1,566
2,926
$
15,782
$
203,415
156,194
325,119
253,974
95,388
90,057
11,171
82,990
1,929
535,509
225,596
46,341
24,468
97,863
394,268
929,777
78,214
1,708,501
125,259
301,115
$ 2,134,875
$
43,665
$
514,220
77,424
26,271
661,580
13,878
1,258
59,029
74,165
735,745
271,538
82,393
251,055
1,340,731
376,929
183,800
233,415
$ 2,134,875
17,256
$
223,434
144,502
327,493
256,297
98,172
90,005
10,633
83,773
1,867
540,747
221,542
43,164
23,869
94,656
383,231
923,978
74,022
43,968
$
508,136
81,190
24,079
657,373
12,789
1,041
55,446
69,276
726,649
1,710,685
113,064
299,681
$ 2,123,430
279,425
84,648
258,717
1,349,439
363,962
179,637
230,392
$ 2,123,430
1.21% $
0.59
3.01
3.02
3.74
3.97
9.36
11.01
2.70
3.73
4.72
2.99
3.20
3.37
2.20
2.84
3.92
3.61
3.23
0.05% $
0.07
0.50
0.40
0.13
0.52
0.22
0.51
0.51
0.17
1.00
1.75
2.48
0.87
2.36%
0.19
2.55%
47
291
1,093
2,211
2,359
930
2,226
317
587
19
6,438
1,704
352
204
528
2,788
9,226
677
13,545
50
5
100
116
25
246
16
1
71
88
334
683
375
1,724
3,116
1.07%
0.52
3.01
2.70
3.68
3.77
9.81
11.81
2.78
3.89
4.74
3.05
3.24
3.41
2.22
2.89
3.97
3.62
3.15
0.05%
0.08
0.56
0.42
0.15
0.47
0.25
0.52
0.50
0.18
0.97
1.76
2.65
0.92
2.23%
Impact of noninterest-bearing sources
Net interest income/yield on earning assets (1)
0.20
2.43%
(1) For this presentation, fees earned on overnight deposits placed with the Federal Reserve are included in the cash and cash equivalents line, consistent with the Consolidated Balance Sheet
presentation of these deposits. In addition, beginning in the third quarter of 2012, fees earned on deposits, primarily overnight, placed with certain non-U.S. central banks, which are included in the
time deposits placed and other short-term investments line in prior periods, are included in the cash and cash equivalents line. Net interest income and net interest yield are calculated excluding
the fees included in the cash and cash equivalents line.
10,429
10,940
$
$
(2) Yields on debt securities carried at fair value are 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
(4)
(5)
(6)
(7)
(8)
value upon acquisition and accrete interest income over the remaining life of the loan.
Includes non-U.S. residential mortgage loans of $56 million, $83 million, $86 million and $90 million in the fourth, third, second and first quarters of 2013, respectively, and $93 million in the fourth
quarter of 2012.
Includes non-U.S. consumer loans of $5.1 billion, $6.7 billion, $7.5 billion and $7.7 billion in the fourth, third, second and first quarters of 2013, respectively, and $8.1 billion in the fourth quarter
of 2012.
Includes consumer finance loans of $1.2 billion, $1.3 billion, $1.3 billion and $1.4 billion in the fourth, third, second and first quarters of 2013, respectively, and $1.4 billion in the fourth quarter
of 2012; consumer leases of $549 million, $422 million, $291 million and $138 million in the fourth, third, second and first quarters of 2013, respectively, and $3 million in the fourth quarter of
2012; other non-U.S. consumer loans of $5 million for each of the quarters of 2013, and $4 million in the fourth quarter of 2012; and consumer overdrafts of $163 million, $172 million, $136
million and $142 million in the fourth, third, second and first quarters of 2013, respectively, and $156 million in the fourth quarter of 2012.
Includes U.S. commercial real estate loans of $44.5 billion, $41.5 billion, $39.1 billion and $37.7 billion in the fourth, third, second and first quarters of 2013, respectively, and $36.7 billion in the
fourth quarter of 2012; and non-U.S. commercial real estate loans of $1.8 billion, $1.7 billion, $1.5 billion and $1.5 billion in the fourth, third, second and first quarters of 2013, respectively, and
$1.5 billion in the fourth quarter of 2012.
Interest income includes the impact of interest rate risk management contracts, which decreased interest income on the underlying assets by $0, $1 million, $63 million and $141 million in the
fourth, third, second and first quarters of 2013, respectively, and $146 million in the fourth quarter of 2012. Interest expense includes the impact of interest rate risk management contracts, which
decreased interest expense on the underlying liabilities by $588 million, $556 million, $660 million and $618 million in the fourth, third, second and first quarters of 2013, respectively, and $598
million in the fourth quarter of 2012. For more information on interest rate contracts, see Interest Rate Risk Management for Nontrading Activities on page 109.
136 Bank of America 2013
76788ba_financials.indd 136
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Table XIII Quarterly Average Balances and Interest Rates – FTE Basis (continued)
(Dollars in millions)
Earning assets
Second Quarter 2013
First Quarter 2013
Fourth Quarter 2012
Average
Balance
Interest
Income/
Expense
Yield/
Rate
Average
Balance
Interest
Income/
Expense
Yield/
Rate
Average
Balance
Interest
Income/
Expense
Yield/
Rate
Time deposits placed and other short-term investments (1)
$
15,088
$
46
1.21% $
16,129
$
46
1.17% $
16,967
$
50
1.14%
Federal funds sold and securities borrowed or purchased under
agreements to resell
Trading account assets
Debt securities (2)
Loans and leases (3):
Residential mortgage (4)
Home equity
U.S. credit card
Non-U.S. credit card
Direct/Indirect consumer (5)
Other consumer (6)
Total consumer
U.S. commercial
Commercial real estate (7)
Commercial lease financing
Non-U.S. commercial
Total commercial
Total loans and leases
Other earning assets
Total earning assets (8)
Cash and cash equivalents (1)
Other assets, less allowance for loan and lease losses
Total assets
Interest-bearing liabilities
U.S. interest-bearing deposits:
Savings
NOW and money market deposit accounts
Consumer CDs and IRAs
Negotiable CDs, public funds and other deposits
Total U.S. interest-bearing deposits
Non-U.S. interest-bearing deposits:
Banks located in non-U.S. countries
Governments and official institutions
Time, savings and other
Total non-U.S. interest-bearing deposits
Total interest-bearing deposits
Federal funds purchased, securities loaned or sold under
agreements to repurchase and short-term borrowings
Trading account liabilities
Long-term debt
Total interest-bearing liabilities (8)
Noninterest-bearing sources:
Noninterest-bearing deposits
Other liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Net interest spread
Impact of noninterest-bearing sources
319
1,224
2,557
2,246
951
2,192
315
598
17
6,319
1,741
340
205
543
2,829
9,148
713
14,007
40
6
107
130
27
270
17
—
79
96
366
809
427
1,674
3,276
233,394
181,620
343,260
257,275
101,708
89,722
10,613
82,485
1,756
543,559
217,464
40,612
23,579
89,020
370,675
914,234
81,740
1,769,336
104,486
310,788
$ 2,184,610
$
44,897
$
500,628
85,001
22,721
653,247
10,832
924
55,661
67,417
720,664
318,028
94,349
270,198
1,403,239
359,292
187,016
235,063
$ 2,184,610
315
1,380
2,556
2,340
997
2,249
329
620
19
6,554
1,666
326
236
467
2,695
9,249
733
14,279
33
6
117
138
26
287
19
1
75
95
382
749
472
1,834
3,437
0.55
2.70
2.98
3.49
3.74
9.80
11.93
2.90
4.17
4.66
3.21
3.36
3.48
2.45
3.06
4.01
3.50
3.17
237,463
194,364
356,399
258,630
105,939
91,712
11,027
82,364
1,666
551,338
210,706
39,179
23,534
81,502
354,921
906,259
90,172
1,800,786
92,846
318,798
$ 2,212,430
0.05% $
42,934
$
0.09
0.62
0.46
0.17
0.64
0.26
0.56
0.57
0.20
1.02
1.82
2.48
0.94
501,177
88,376
20,880
653,367
12,155
901
54,597
67,653
721,020
337,644
92,047
273,999
1,424,710
354,260
196,465
236,995
$ 2,212,430
329
1,362
2,201
2,292
1,068
2,336
383
662
19
6,760
1,729
341
184
433
2,687
9,447
771
14,160
42
6
146
156
27
335
22
1
80
103
438
855
420
1,934
3,647
0.54
2.87
2.87
3.62
3.80
9.95
12.10
3.06
4.36
4.79
3.20
3.38
4.01
2.32
3.07
4.12
3.29
3.20
241,950
186,252
360,213
256,564
110,270
92,849
13,081
82,583
1,602
556,949
209,496
38,192
22,839
65,690
336,217
893,166
90,388
1,788,936
111,671
309,758
$ 2,210,365
0.05% $
41,294
$
0.09
0.63
0.52
0.18
0.64
0.23
0.56
0.57
0.22
0.90
2.08
2.70
0.98
479,130
91,256
19,904
631,584
11,970
876
53,649
66,495
698,079
336,341
80,084
277,894
1,392,398
379,997
199,458
238,512
$ 2,210,365
2.23%
0.20
2.43%
2.22%
0.21
2.43%
$
10,842
$
10,513
0.54
2.91
2.44
3.57
3.86
10.01
11.66
3.19
4.57
4.84
3.28
3.55
3.23
2.62
3.18
4.21
3.40
3.16
0.06%
0.12
0.68
0.54
0.21
0.71
0.29
0.60
0.62
0.25
1.01
2.09
2.77
1.04
2.12%
0.22
2.34%
Net interest income/yield on earning assets (1)
$
10,731
For footnotes see page 136.
76788ba_financials.indd 137
3/6/14 12:06 PM
Bank of America 2013 137
Table XIV Quarterly Supplemental Financial Data
(Dollars in millions, except per share information)
Fully taxable-equivalent basis data (1)
Net interest income (2)
Total revenue, net of interest expense
Net interest yield (2)
Efficiency ratio
2013 Quarters
2012 Quarters
Fourth
Third
Second
First
Fourth
Third
Second
First
$ 10,999
21,701
$ 10,479
21,743
$ 10,771
22,949
$ 10,875
23,408
$ 10,555
18,891
$ 10,167
20,657
$ 9,782
22,202
$ 11,053
22,485
2.56%
2.44%
2.44%
2.43%
2.35%
2.32%
2.21%
2.51%
75.38
(1) FTE basis is a non-GAAP financial measure. For more information on these performance measures and ratios, see Supplemental Financial Data on page 29 and for corresponding reconciliations to
97.19
76.79
84.93
69.80
83.31
85.13
79.75
GAAP financial measures, see Statistical Table XVII.
(2) Net interest income and net interest yield include fees earned on overnight deposits placed with the Federal Reserve and fees earned on deposits, primarily overnight, placed with certain non-U.S.
central banks.
138 Bank of America 2013
76788ba_financials.indd 138
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Table XV Five-year Reconciliations to GAAP Financial Measures (1)
(Dollars in millions, shares in thousands)
Reconciliation of net interest income to net interest income on a fully taxable-equivalent basis
2013
2012
2011
2010
2009
Net interest income
Fully taxable-equivalent adjustment
Net interest income on a fully taxable-equivalent basis
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
Fully taxable-equivalent adjustment
Total revenue, net of interest expense on a fully taxable-equivalent basis
Reconciliation of total noninterest expense to total noninterest expense, excluding goodwill impairment
charges
Total noninterest expense
Goodwill impairment charges
Total noninterest expense, excluding goodwill impairment charges
Reconciliation of income tax expense (benefit) to income tax expense (benefit) on a fully taxable-equivalent
basis
Income tax expense (benefit)
Fully taxable-equivalent adjustment
Income tax expense (benefit) on a fully taxable-equivalent basis
Reconciliation of net income (loss) to net income, excluding goodwill impairment charges
Net income (loss)
Goodwill impairment charges
Net income, excluding goodwill impairment charges
Reconciliation of net income (loss) applicable to common shareholders to net income (loss) applicable to
common shareholders, excluding goodwill impairment charges
Net income (loss) applicable to common shareholders
Goodwill impairment charges
Net income (loss) applicable to common shareholders, excluding goodwill impairment charges
Reconciliation of average common shareholders’ equity to average tangible common shareholders’ equity
Common shareholders’ equity
Common Equivalent Securities
Goodwill
Intangible assets (excluding MSRs)
Related deferred tax liabilities
Tangible common shareholders’ equity
Reconciliation of average shareholders’ equity to average tangible shareholders’ equity
Shareholders’ equity
Goodwill
Intangible assets (excluding MSRs)
Related deferred tax liabilities
Tangible shareholders’ equity
Reconciliation of year-end common shareholders’ equity to year-end tangible common shareholders’ equity
Common shareholders’ equity
Common Equivalent Securities
Goodwill
Intangible assets (excluding MSRs)
Related deferred tax liabilities
Tangible common shareholders’ equity
Reconciliation of year-end shareholders’ equity to year-end tangible shareholders’ equity
Shareholders’ equity
Goodwill
Intangible assets (excluding MSRs)
Related deferred tax liabilities
Tangible shareholders’ equity
Reconciliation of year-end assets to year-end tangible assets
Assets
Goodwill
Intangible assets (excluding MSRs)
Related deferred tax liabilities
Tangible assets
Reconciliation of year-end common shares outstanding to year-end tangible common shares outstanding
Common shares outstanding
Assumed conversion of common equivalent shares (2)
Tangible common shares outstanding
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
42,265
859
43,124
88,942
859
89,801
69,214
—
69,214
4,741
859
5,600
11,431
—
11,431
10,082
—
10,082
218,468
—
(69,910)
(6,132)
2,328
144,754
233,947
(69,910)
(6,132)
2,328
160,233
219,333
—
(69,844)
(5,574)
2,166
146,081
232,685
(69,844)
(5,574)
2,166
159,433
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
40,656
901
41,557
83,334
901
84,235
72,093
—
72,093
$
$
$
$
$
$
44,616
972
45,588
93,454
972
94,426
80,274
(3,184)
77,090
$
$
$
$
$
$
51,523
1,170
52,693
110,220
1,170
111,390
83,108
(12,400)
70,708
(1,116) $
901
(215) $
(1,676) $
972
(704) $
915
1,170
2,085
$
$
$
$
$
$
$
$
4,188
—
4,188
2,760
—
2,760
216,996
—
(69,974)
(7,366)
2,593
142,249
235,677
(69,974)
(7,366)
2,593
160,930
218,188
—
(69,976)
(6,684)
2,428
143,956
236,956
(69,976)
(6,684)
2,428
162,724
$
$
$
$
$
$
$
$
$
$
$
$
1,446
3,184
4,630
85
3,184
3,269
211,709
—
(72,334)
(9,180)
2,898
133,093
229,095
(72,334)
(9,180)
2,898
150,479
211,704
—
(69,967)
(8,021)
2,702
136,418
230,101
(69,967)
(8,021)
2,702
154,815
$
$
$
$
$
$
$
$
$
$
$
$
(2,238) $
12,400
10,162
$
(3,595) $
12,400
8,805
212,686
2,900
(82,600)
(10,985)
3,306
125,307
233,235
(82,600)
(10,985)
3,306
142,956
211,686
—
(73,861)
(9,923)
3,036
130,938
228,248
(73,861)
(9,923)
3,036
147,500
$
$
$
$
$
$
$
$
$
47,109
1,301
48,410
119,643
1,301
120,944
66,713
—
66,713
(1,916)
1,301
(615)
6,276
—
6,276
(2,204)
—
(2,204)
182,288
1,213
(86,034)
(12,220)
3,831
89,078
244,645
(86,034)
(12,220)
3,831
150,222
194,236
19,244
(86,314)
(12,026)
3,498
118,638
231,444
(86,314)
(12,026)
3,498
136,602
$ 2,102,273
(69,844)
(5,574)
2,166
$ 2,029,021
$ 2,209,974
(69,976)
(6,684)
2,428
$ 2,135,742
$ 2,129,046
(69,967)
(8,021)
2,702
$ 2,053,760
$ 2,264,909
(73,861)
(9,923)
3,036
$ 2,184,161
$ 2,230,232
(86,314)
(12,026)
3,498
$ 2,135,390
10,591,808
—
10,591,808
10,778,264
—
10,778,264
10,535,938
—
10,535,938
10,085,155
—
10,085,155
8,650,244
1,286,000
9,936,244
(1) Presents reconciliations of non-GAAP financial measures to GAAP financial measures. We believe the use of these non-GAAP financial measures provides additional clarity in assessing the results
of the Corporation. Other companies may define or calculate these measures differently. For more information on non-GAAP financial measures and ratios we use in assessing the results of the
Corporation, see Supplemental Financial Data on page 29.
(2) On February 24, 2010, the common equivalent shares converted into common shares.
Bank of America 2013 139
76788ba_financials.indd 139
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Table XVI Two-year Reconciliations to GAAP Financial Measures (1, 2)
(Dollars in millions)
Consumer & Business Banking
Reported net income
Adjustment related to intangibles (3)
Adjusted net income
Average allocated equity (4)
Adjustment related to goodwill and a percentage of intangibles
Average allocated capital/economic capital
Deposits
Reported net income
Adjustment related to intangibles (3)
Adjusted net income
Average allocated equity (4)
Adjustment related to goodwill and a percentage of intangibles
Average allocated capital/economic capital
Consumer Lending
Reported net income
Adjustment related to intangibles (3)
Adjusted net income
Average allocated equity (4)
Adjustment related to goodwill and a percentage of intangibles
Average allocated capital/economic capital
Global Wealth & Investment Management
Reported net income
Adjustment related to intangibles (3)
Adjusted net income
Average allocated equity (4)
Adjustment related to goodwill and a percentage of intangibles
Average allocated capital/economic capital
Global Banking
Reported net income
Adjustment related to intangibles (3)
Adjusted net income
Average allocated equity (4)
Adjustment related to goodwill and a percentage of intangibles
Average allocated capital/economic capital
Global Markets
Reported net income
Adjustment related to intangibles (3)
Adjusted net income
Average allocated equity (4)
Adjustment related to goodwill and a percentage of intangibles
Average allocated capital/economic capital
2013
2012
6,588
7
6,595
62,045
(32,045)
30,000
2,127
1
2,128
35,400
(20,000)
15,400
4,461
7
4,468
26,644
(12,044)
14,600
2,974
16
2,990
20,292
(10,292)
10,000
4,974
2
4,976
45,412
(22,412)
23,000
1,563
8
1,571
35,373
(5,373)
30,000
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
5,546
13
5,559
56,214
(32,163)
24,051
1,261
2
1,263
33,006
(20,021)
12,985
4,285
12
4,297
23,208
(12,142)
11,066
2,245
22
2,267
17,729
(10,370)
7,359
5,344
4
5,348
41,742
(22,430)
19,312
1,229
9
1,238
19,193
(5,369)
13,824
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(1) Presents reconciliations of non-GAAP financial measures to GAAP financial measures. We believe the use of these non-GAAP financial measures provides additional clarity in assessing the results
of the Corporation and our segments. Other companies may define or calculate these measures differently. For more information on non-GAAP financial measures and ratios we use in assessing the
results of the Corporation, see Supplemental Financial Data on page 29.
(2) There are no adjustments to reported net income (loss) or average allocated equity for CRES.
(3) Represents cost of funds, earnings credits and certain expenses related to intangibles.
(4) Average allocated equity is comprised of average allocated capital (or economic capital prior to 2013) plus capital for the portion of goodwill and intangibles specifically assigned to the business
segment. For more information on allocated capital and economic capital, see Business Segment Operations on page 31 and Note 8 – Goodwill and Intangible Assets to the Consolidated Financial
Statements.
140 Bank of America 2013
76788ba_financials.indd 140
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Table XVII Quarterly Reconciliations to GAAP Financial Measures (1)
(Dollars in millions)
Fourth
Third
Second
First
Fourth
Third
Second
First
2013 Quarters
2012 Quarters
Reconciliation of net interest income to net interest income on a fully
taxable-equivalent basis
Net interest income
Fully taxable-equivalent adjustment
Net interest income on a fully taxable-equivalent basis
Reconciliation of total revenue, net of interest expense to total revenue,
net of interest expense on a fully taxable-equivalent basis
$
$
10,786
213
10,999
$
$
10,266
213
10,479
$
$
10,549
222
10,771
$
$
10,664
211
10,875
$
$
10,324
231
10,555
$
$
9,938
229
10,167
$
$
9,548
234
9,782
$
$
10,846
207
11,053
Total revenue, net of interest expense
Fully taxable-equivalent adjustment
$
21,488
$
213
21,530
213
$
22,727
$
23,197
$
18,660
$
20,428
$
21,968
$
22,278
222
211
231
229
234
207
Total revenue, net of interest expense on a fully taxable-equivalent
basis
$
21,701
$
21,743
$
22,949
$
23,408
$
18,891
$
20,657
$
22,202
$
22,485
Reconciliation of income tax expense (benefit) to income tax expense
(benefit) on a fully taxable-equivalent basis
Income tax expense (benefit)
Fully taxable-equivalent adjustment
Income tax expense (benefit) on a fully taxable-equivalent basis
Reconciliation of average common shareholders’ equity to average
tangible common shareholders’ equity
Common shareholders’ equity
Goodwill
Intangible assets (excluding MSRs)
Related deferred tax liabilities
Tangible common shareholders’ equity
Reconciliation of average shareholders’ equity to average tangible
shareholders’ equity
$
$
406
213
619
$
$
2,348
213
2,561
$
$
1,486
222
1,708
$
$
501
211
712
$
$
(2,636) $
231
(2,405) $
770
229
999
$
$
684
234
918
$
$
66
207
273
$ 220,088
$ 216,766
$ 218,790
$ 218,225
$ 219,744
$ 217,273
$ 216,782
(69,864)
(5,725)
(69,903)
(5,993)
(69,930)
(6,270)
(69,945)
(6,549)
(69,976)
(6,874)
(69,976)
(7,194)
(69,976)
(7,533)
2,231
$ 146,730
2,296
$ 143,166
2,360
$ 144,950
2,425
$ 144,156
2,490
$ 145,384
2,556
$ 142,659
2,626
$ 141,899
Shareholders’ equity
Goodwill
Intangible assets (excluding MSRs)
Related deferred tax liabilities
Tangible shareholders’ equity
$ 233,415
(69,864)
$ 230,392
(69,903)
$ 235,063
(69,930)
$ 236,995
(69,945)
$ 238,512
(69,976)
$ 236,039
(69,976)
$ 235,558
(69,976)
(5,725)
(5,993)
(6,270)
(6,549)
(6,874)
(7,194)
(7,533)
2,231
$ 160,057
2,296
$ 156,792
2,360
$ 161,223
2,425
$ 162,926
2,490
$ 164,152
2,556
$ 161,425
2,626
$ 160,675
Reconciliation of period-end common shareholders’ equity to period-end
tangible common shareholders’ equity
Common shareholders’ equity
Goodwill
Intangible assets (excluding MSRs)
Related deferred tax liabilities
Tangible common shareholders’ equity
Reconciliation of period-end shareholders’ equity to period-end tangible
shareholders’ equity
Shareholders’ equity
Goodwill
Intangible assets (excluding MSRs)
Related deferred tax liabilities
Tangible shareholders’ equity
Reconciliation of period-end assets to period-end tangible assets
Assets
Goodwill
Intangible assets (excluding MSRs)
Related deferred tax liabilities
Tangible assets
$ 219,333
$ 218,967
$ 216,791
$ 218,513
$ 218,188
$ 219,838
$ 217,213
(69,844)
(5,574)
(69,891)
(5,843)
(69,930)
(6,104)
(69,930)
(6,379)
(69,976)
(6,684)
(69,976)
(7,030)
(69,976)
(7,335)
2,166
$ 146,081
2,231
$ 145,464
2,297
$ 143,054
2,363
$ 144,567
2,428
$ 143,956
2,494
$ 145,326
2,559
$ 142,461
$ 232,685
(69,844)
$ 232,282
(69,891)
$ 231,032
(69,930)
$ 237,293
(69,930)
$ 236,956
(69,976)
$ 238,606
(69,976)
$ 235,975
(69,976)
(5,574)
(5,843)
(6,104)
(6,379)
(6,684)
(7,030)
(7,335)
2,166
$ 159,433
2,231
$ 158,779
2,297
$ 157,295
2,363
$ 163,347
2,428
$ 162,724
2,494
$ 164,094
2,559
$ 161,223
$ 2,102,273
$2,126,653
$2,123,320
$2,174,819
$2,209,974
$2,166,162
(69,844)
(5,574)
(69,891)
(5,843)
(69,930)
(6,104)
(69,930)
(6,379)
(69,976)
(6,684)
(69,976)
(7,030)
$2,160,854
(69,976)
(7,335)
2,166
$ 2,029,021
2,231
$2,053,150
2,297
$2,049,583
2,363
$2,100,873
2,428
$2,135,742
2,494
$2,091,650
2,559
$2,086,102
$ 214,150
(69,967)
(7,869)
2,700
$ 139,014
$ 232,566
(69,967)
(7,869)
2,700
$ 157,430
$ 213,711
(69,976)
(7,696)
2,628
$ 138,667
$ 232,499
(69,976)
(7,696)
2,628
$ 157,455
$2,181,449
(69,976)
(7,696)
2,628
$2,106,405
(1) Presents reconciliations of non-GAAP financial measures to GAAP financial measures. We believe the use of these non-GAAP financial measures provides additional clarity in assessing the results
of the Corporation. Other companies may define or calculate these measures differently. For more information on non-GAAP financial measures and ratios we use in assessing the results of the
Corporation, see Supplemental Financial Data on page 29.
76788ba_financials.indd 141
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Bank of America 2013 141
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-
trust assets excluding brokerage assets
discretionary
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.
Basel 1 – 2013 Rules – Financial services holding companies are
subject to the general risk-based capital rules issued by federal
banking regulators which was Basel 1 through December 31,
2012. As of January 1, 2013, Basel 1 was amended prospectively,
introducing changes to the measurement of risk-weighted assets
for exposures subject to market risk.
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.
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 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.
142 Bank of America 2013
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Margin Receivable – An extension of credit secured by eligible
securities in certain brokerage accounts.
Tier 1 Common Capital – Tier 1 capital less preferred stock,
qualifying trust preferred securities, hybrid securities and
qualifying noncontrolling interest in subsidiaries.
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.
76788ba_financials.indd 143
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Bank of America 2013 143
Acronyms
ABS
AFS
ALM
Asset-backed securities
Available-for-sale
Asset and liability management
ALMRC
Asset Liability and Market Risk Committee
ARM
BHC
CCAR
CDO
CLO
CMBS
CRA
CRC
EAD
FDIC
FHA
Adjustable-rate mortgage
Bank holding company
Comprehensive Capital Analysis and Review
Collateralized debt obligation
Collateralized loan obligation
Commercial mortgage-backed securities
Community Reinvestment Act
Credit Risk Committee
Exposure at default
Federal Deposit Insurance Corporation
Federal Housing Administration
FHLMC
Freddie Mac
FICC
FICO
FNMA
FTE
GAAP
GMRC
GNMA
GSE
Fixed income, currencies and commodities
Fair Isaac Corporation (credit score)
Fannie Mae
Fully taxable-equivalent
Accounting principles generally accepted in the United States of America
Global Markets Risk Committee
Government National Mortgage Association
Government-sponsored enterprise
HELOC
Home equity lines of credit
HFI
HUD
LCR
LGD
LHFS
LIBOR
MBS
MD&A
MI
MSA
NSFR
OCC
OCI
OTC
OTTI
PPI
RMBS
SBLCs
SEC
VA
VIE
Held-for-investment
U.S. Department of Housing and Urban Development
Liquidity Coverage Ratio
Loss-given default
Loans held-for-sale
London InterBank Offered Rate
Mortgage-backed securities
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Mortgage insurance
Metropolitan statistical area
Net Stable Funding Ratio
Office of the Comptroller of the Currency
Other comprehensive income
Over-the-counter
Other-than-temporary impairment
Payment protection insurance
Residential mortgage-backed securities
Standby letters of credit
Securities and Exchange Commission
U.S. Department of Veterans Affairs
Variable interest entity
144 Bank of America 2013
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Financial Statements and Notes
Table of Contents
Consolidated Statement of Income
Consolidated Statement of Comprehensive Income
Consolidated Balance Sheet
Consolidated Statement of Changes in Shareholders’ Equity
Consolidated Statement of Cash Flows
Note 1 – Summary of Significant Accounting Principles
Note 2 – Derivatives
Note 3 – Securities
Note 4 – Outstanding Loans and Leases
Note 5 – Allowance for Credit Losses
Note 6 – Securitizations and Other Variable Interest Entities
Note 7 – Representations and Warranties Obligations and Corporate Guarantees
Note 8 – Goodwill and Intangible Assets
Note 9 – Deposits
Note 10 – Federal Funds Sold or Purchased, Securities Financing Agreements and Short-term Borrowings
Note 11 – Long-term Debt
Note 12 – Commitments and Contingencies
Note 13 – Shareholders’ Equity
Note 14 – Accumulated Other Comprehensive Income (Loss)
Note 15 – Earnings Per Common Share
Note 16 – Regulatory Requirements and Restrictions
Note 17 – Employee Benefit Plans
Note 18 – Stock-based Compensation Plans
Note 19 – Income Taxes
Note 20 – Fair Value Measurements
Note 21 – Fair Value Option
Note 22 – Fair Value of Financial Instruments
Note 23 – Mortgage Servicing Rights
Note 24 – Business Segment Information
Note 25 – Parent Company Information
Note 26 – Performance by Geographical Area
Page
148
149
150
152
153
154
165
175
180
195
197
203
212
213
213
215
219
230
234
236
237
241
248
249
252
266
268
270
271
275
276
76788ba_financials.indd 145
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Bank of America 2013 145
Report of Management on Internal Control Over Financial Reporting
Bank of America Corporation and Subsidiaries
The management of Bank of America Corporation is responsible
for establishing and maintaining adequate internal control over
financial reporting.
The Corporation’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting
principles generally accepted in the United States of America. The
Corporation’s internal control over financial reporting includes
those policies and procedures that: (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the Corporation;
(ii) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the
United States of America, and that receipts and expenditures of
the Corporation are being made only in accordance with
authorizations of management and directors of the Corporation;
and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition
of the Corporation’s assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
Management assessed the effectiveness of the Corporation’s
internal control over financial reporting as of December 31, 2013
based on the framework set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control –
Integrated Framework (1992). Based on that assessment,
management concluded that, as of December 31, 2013, the
Corporation’s internal control over financial reporting is effective
based on the criteria established in Internal Control – Integrated
Framework (1992).
The Corporation’s internal control over financial reporting
has
of December 31, 2013
as
by
PricewaterhouseCoopers, LLP, an independent registered public
accounting firm, as stated in their accompanying report which
expresses an unqualified opinion on the effectiveness of the
Corporation’s internal control over financial reporting as of
December 31, 2013.
audited
been
Brian T. Moynihan
Chief Executive Officer and President
Bruce R. Thompson
Chief Financial Officer
146 Bank of America 2013
76788ba_financials.indd 146
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Report of Independent Registered Public Accounting Firm
Bank of America Corporation and Subsidiaries
financial
internal control over
To the Board of Directors and Shareholders of Bank
of America Corporation:
In our opinion, the accompanying Consolidated Balance Sheet and
the related Consolidated Statement of Income, Consolidated
Statement of Comprehensive Income, Consolidated Statement of
Changes in Shareholders’ Equity and Consolidated Statement of
Cash Flows present fairly, in all material respects, the financial
position of Bank of America Corporation and its subsidiaries at
December 31, 2013 and 2012, and the results of their operations
and their cash flows for each of the three years in the period ended
December 31, 2013 in conformity with accounting principles
generally accepted in the United States of America. Also in our
opinion, the Corporation maintained, in all material respects,
effective
reporting as of
December 31, 2013, based on criteria established in Internal
Control – Integrated Framework (1992) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
The Corporation’s management is responsible for these financial
statements, for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying
Report of Management on Internal Control Over Financial
Reporting. Our responsibility is to express opinions on these
financial statements and on the Corporation’s internal control over
financial reporting based on our integrated audits. We conducted
our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of
material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating
the overall financial statement presentation. Our audit of internal
included obtaining an
reporting
control over
understanding of internal control over financial reporting,
financial
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in
the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations
of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
Charlotte, North Carolina
February 25, 2014
76788ba_financials.indd 147
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Bank of America 2013 147
Bank of America Corporation and Subsidiaries
Consolidated Statement of Income
(Dollars in millions, except per share information)
Interest income
Loans and leases
Debt securities
Federal funds sold and securities borrowed or purchased under agreements to resell
Trading account assets
Other interest income
Total interest income
Interest expense
Deposits
Short-term borrowings
Trading account liabilities
Long-term debt
Total interest expense
Net interest income
Noninterest income
Card income
Service charges
Investment and brokerage services
Investment banking income
Equity investment income
Trading account profits
Mortgage banking income (loss)
Gains on sales of debt securities
Other income (loss)
Other-than-temporary impairment losses on available-for-sale debt securities:
Total other-than-temporary impairment losses
Less: Portion of other-than-temporary impairment losses recognized in other comprehensive income
Net impairment losses recognized in earnings on available-for-sale debt securities
Total noninterest income
Total revenue, net of interest expense
Provision for credit losses
Noninterest expense
Personnel
Occupancy
Equipment
Marketing
Professional fees
Amortization of intangibles
Data processing
Telecommunications
Other general operating
Goodwill impairment
Merger and restructuring charges
Total noninterest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income
Preferred stock dividends
Net income applicable to common shareholders
Per common share information
Earnings
Diluted earnings
Dividends paid
Average common shares issued and outstanding (in thousands)
Average diluted common shares issued and outstanding (in thousands)
148 Bank of America 2013
See accompanying Notes to Consolidated Financial Statements.
2013
2012
2011
$
36,470
9,749
1,229
4,706
2,866
55,020
1,396
2,923
1,638
6,798
12,755
42,265
5,826
7,390
12,282
6,126
2,901
7,056
3,874
1,271
(29)
(21)
1
(20)
46,677
88,942
$
38,880
8,908
1,502
5,094
3,016
57,400
1,990
3,572
1,763
9,419
16,744
40,656
6,121
7,600
11,393
5,299
2,070
5,870
4,750
1,662
(2,034)
(57)
4
(53)
42,678
83,334
44,966
9,525
2,147
5,961
3,637
66,236
3,002
4,599
2,212
11,807
21,620
44,616
7,184
8,094
11,826
5,217
7,360
6,697
(8,830)
3,374
8,215
(360)
61
(299)
48,838
93,454
3,556
8,169
13,410
34,719
4,475
2,146
1,834
2,884
1,086
3,170
1,593
17,307
—
—
69,214
16,172
4,741
11,431
1,349
10,082
$
$
35,648
4,570
2,269
1,873
3,574
1,264
2,961
1,660
18,274
—
—
72,093
3,072
(1,116)
4,188
1,428
2,760
$
$
36,965
4,748
2,340
2,203
3,381
1,509
2,652
1,553
21,101
3,184
638
80,274
(230)
(1,676)
1,446
1,361
85
$
$
$
$
0.94
0.90
0.04
10,731,165
11,491,418
$
0.26
0.25
0.04
10,746,028
10,840,854
$
0.01
0.01
0.04
10,142,625
10,254,824
76788ba_financials.indd 148
3/6/14 12:06 PM
Bank of America Corporation and Subsidiaries
Consolidated Statement of Comprehensive Income
(Dollars in millions)
Net income
Other comprehensive income (loss), net-of-tax:
Net change in available-for-sale debt and marketable equity securities
Net change in derivatives
Employee benefit plan adjustments
Net change in foreign currency translation adjustments
Other comprehensive income (loss)
Comprehensive income (loss)
2013
2012
2011
$
11,431
$
4,188
$
1,446
(8,166)
592
2,049
(135)
(5,660)
5,771
$
1,802
916
(65)
(13)
2,640
6,828
$
(4,270)
(549)
(444)
(108)
(5,371)
(3,925)
$
See accompanying Notes to Consolidated Financial Statements.
Bank of America 2013 149
76788ba_financials.indd 149
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Bank of America Corporation and Subsidiaries
Consolidated Balance Sheet
(Dollars in millions)
Assets
Cash and cash equivalents
Time deposits placed and other short-term investments
Federal funds sold and securities borrowed or purchased under agreements to resell (includes $75,614 and $98,670 measured at fair
value)
Trading account assets (includes $111,817 and $115,821 pledged as collateral)
Derivative assets
Debt securities:
Carried at fair value (includes $51,408 and $63,349 pledged as collateral)
Held-to-maturity, at cost (fair value – $52,430 and $50,270; $20,869 and $22,461 pledged as collateral)
Total debt securities
Loans and leases (includes $10,042 and $9,002 measured at fair value and $74,166 and $50,289 pledged as collateral)
Allowance for loan and lease losses
Loans and leases, net of allowance
Premises and equipment, net
Mortgage servicing rights (includes $5,042 and $5,716 measured at fair value)
Goodwill
Intangible assets
Loans held-for-sale (includes $6,656 and $11,659 measured at fair value)
Customer and other receivables
Other assets (includes $18,055 and $26,490 measured at fair value)
Total assets
Assets of consolidated variable interest entities included in total assets above (isolated to settle the liabilities of the variable interest entities)
Trading account assets
Derivative assets
Loans and leases
Allowance for loan and lease losses
Loans and leases, net of allowance
Loans held-for-sale
All other assets
Total assets of consolidated variable interest entities
December 31
2013
2012
$
131,322
11,540
$ 110,752
18,694
190,328
200,993
47,495
219,924
227,775
53,497
268,795
55,150
323,945
928,233
(17,428)
910,805
10,475
5,052
69,844
5,574
11,362
59,448
124,090
$ 2,102,273
310,850
49,481
360,331
907,819
(24,179)
883,640
11,858
5,851
69,976
6,684
19,413
71,467
150,112
$ 2,209,974
$
$
8,412
185
109,118
(2,674)
106,444
1,384
4,577
121,002
$
7,906
333
123,227
(3,658)
119,569
1,969
4,654
$ 134,431
150 Bank of America 2013
See accompanying Notes to Consolidated Financial Statements.
76788ba_financials.indd 150
3/6/14 12:06 PM
Bank of America Corporation and Subsidiaries
Consolidated Balance Sheet (continued)
(Dollars in millions)
Liabilities
Deposits in U.S. offices:
Noninterest-bearing
Interest-bearing (includes $1,899 and $2,262 measured at fair value)
Deposits in non-U.S. offices:
Noninterest-bearing
Interest-bearing
Total deposits
Federal funds purchased and securities loaned or sold under agreements to repurchase (includes $33,684 and $42,639 measured at fair
value)
Trading account liabilities
Derivative liabilities
Short-term borrowings (includes $1,520 and $4,074 measured at fair value)
Accrued expenses and other liabilities (includes $11,233 and $16,594 measured at fair value and $484 and $513 of reserve for
unfunded lending commitments)
Long-term debt (includes $47,035 and $49,161 measured at fair value)
Total liabilities
Commitments and contingencies (Note 6 – Securitizations and Other Variable Interest Entities, Note 7 – Representations and Warranties
Obligations and Corporate Guarantees and Note 12 – Commitments and Contingencies)
Shareholders’ equity
Preferred stock, $0.01 par value; authorized – 100,000,000 shares; issued and outstanding – 3,407,790 and 3,685,410 shares
Common stock and additional paid-in capital, $0.01 par value; authorized – 12,800,000,000 shares; issued and outstanding –
10,591,808,296 and 10,778,263,628 shares
Retained earnings
Accumulated other comprehensive income (loss)
Total shareholders’ equity
Total liabilities and shareholders’ equity
Liabilities of consolidated variable interest entities included in total liabilities above
Short-term borrowings (includes $77 and $872 of non-recourse borrowings)
Long-term debt (includes $16,209 and $29,476 of non-recourse debt)
All other liabilities (includes $138 and $149 of non-recourse liabilities)
Total liabilities of consolidated variable interest entities
December 31
2013
2012
$
373,092
667,714
$ 372,546
654,332
8,233
70,232
1,119,271
7,573
70,810
1,105,261
198,106
293,259
83,469
37,407
45,999
73,587
46,016
30,731
135,662
148,579
249,674
1,869,588
275,585
1,973,018
13,352
18,768
155,293
158,142
72,497
(8,457)
232,685
$ 2,102,273
62,843
(2,797)
236,956
$ 2,209,974
$
$
1,150
19,448
253
20,851
$
$
3,731
34,256
360
38,347
See accompanying Notes to Consolidated Financial Statements.
Bank of America 2013 151
76788ba_financials.indd 151
3/6/14 12:06 PM
Preferred
Stock
Common Stock and
Additional Paid-in
Capital
Shares
Amount
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Total
Shareholders’
Equity
Other
$ 16,562
10,085,155
$
150,905
$
60,849
1,446
$
(66) $
(2) $
228,248
1,446
Bank of America Corporation and Subsidiaries
Consolidated Statement of Changes in Shareholders’ Equity
(Dollars in millions, shares in thousands)
Balance, December 31, 2010
Net income
Net change in available-for-sale debt and marketable
equity securities
Net change in derivatives
Employee benefit plan adjustments
Net change in foreign currency translation adjustments
Dividends paid:
Common
Preferred
Issuance of preferred stock and warrants
Common stock issued in connection with exchanges of
2,918
2,082
2,754
preferred stock and trust preferred securities
(1,083)
400,000
Common stock issued under employee plans and
related tax effects
Other
Balance, December 31, 2011
Net income
Net change in available-for-sale debt and marketable
equity securities
Net change in derivatives
Employee benefit plan adjustments
Net change in foreign currency translation adjustments
Dividends paid:
Common
Preferred
Net Issuance of preferred stock
Common stock issued in connection with exchanges of
50,783
880
18,397
10,535,938
156,621
667
(4,270)
(549)
(444)
(108)
(5,437)
1,802
916
(65)
(13)
2
—
(413)
(1,325)
(36)
(1)
60,520
4,188
(437)
(1,472)
preferred stock and trust preferred securities
(296)
49,867
412
44
Common stock issued under employee plans and
related tax effects
Balance, December 31, 2012
Net income
Net change in available-for-sale debt and marketable
equity securities
Net change in derivatives
Employee benefit plan adjustments
Net change in foreign currency translation adjustments
Dividends paid:
Common
Preferred
Issuance of preferred stock
Redemption of preferred stock
Common stock issued under employee plans and
related tax effects
Common stock repurchased
Other
Balance, December 31, 2013
192.459
1,109
18,768
10,778,264
158,142
62,843
11,431
(2,797)
—
(8,166)
592
2,049
(135)
(428)
(1,249)
(100)
45,288
(231,744)
371
(3,220)
10,591,808
$
155,293
$
72,497
$
(8,457) $
— $
1,008
(6,461)
37
13,352
$
(4,270)
(549)
(444)
(108)
(413)
(1,325)
5,000
1,635
882
(1)
230,101
4,188
1,802
916
(65)
(13)
(437)
(1,472)
667
160
1,109
236,956
11,431
(8,166)
592
2,049
(135)
(428)
(1,249)
1,008
(6,561)
371
(3,220)
37
232,685
152 Bank of America 2013
See accompanying Notes to Consolidated Financial Statements.
76788ba_financials.indd 152
3/6/14 12:06 PM
Bank of America Corporation and Subsidiaries
Consolidated Statement of Cash Flows
(Dollars in millions)
Operating activities
Net income
Reconciliation of net income to net cash provided by (used in) operating activities:
Provision for credit losses
Goodwill impairment
Gains on sales of debt securities
Fair value adjustments on structured liabilities
Depreciation and premises improvements amortization
Amortization of intangibles
Net amortization of premium/discount on debt securities
Deferred income taxes
Originations and purchases of loans held-for-sale
Proceeds from sales, securitizations and paydowns of loans held-for-sale
Net (increase) decrease in trading and derivative instruments
Net (increase) decrease in other assets
Net increase (decrease) in accrued expenses and other liabilities
Other operating activities, net
Net cash provided by (used in) operating activities
Investing activities
Net decrease in time deposits placed and other short-term investments
Net (increase) decrease in federal funds sold and securities borrowed or purchased under agreements to resell
Proceeds from sales of debt securities carried at fair value
Proceeds from paydowns and maturities of debt securities carried at fair value
Purchases of debt securities carried at fair value
Proceeds from paydowns and maturities of held-to-maturity debt securities
Purchases of held-to-maturity debt securities
Proceeds from sales of loans and leases
Purchases of loans and leases
Other changes in loans and leases, net
Net sales (purchases) of premises and equipment
Proceeds from sales of foreclosed properties
Proceeds from sales of investments
Other investing activities, net
Net cash provided by (used in) investing activities
Financing activities
Net increase in deposits
Net increase (decrease) in federal funds purchased and securities loaned or sold under agreements to repurchase
Net increase (decrease) in short-term borrowings
Proceeds from issuance of long-term debt
Retirement of long-term debt
Proceeds from issuance of preferred stock and warrants
Redemption of preferred stock
Common stock repurchased
Cash dividends paid
Excess tax benefits on share-based payments
Other financing activities, net
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at January 1
Cash and cash equivalents at December 31
2013
2012
2011
$
11,431
$
4,188
$
1,446
3,556
—
(1,271)
649
1,597
1,086
1,577
3,262
(65,688)
77,707
33,870
35,154
(12,919)
2,806
92,817
7,154
29,596
119,013
85,554
(175,983)
8,472
(14,388)
12,331
(16,734)
(34,256)
(521)
1,099
4,818
(1,097)
25,058
14,010
(95,153)
16,009
45,658
(65,602)
1,008
(6,461)
(3,220)
(1,677)
12
(26)
(95,442)
(1,863)
20,570
110,752
131,322
$
8,169
—
(1,662)
5,107
1,774
1,264
2,580
(2,735)
(59,540)
54,817
(47,606)
(11,424)
24,061
4,951
(16,056)
7,310
(8,741)
74,068
71,509
(164,491)
6,261
(20,991)
1,837
(9,178)
2,557
5
2,799
2,396
(320)
(34,979)
13,410
3,184
(3,374)
(3,320)
1,976
1,509
2,046
(1,949)
(118,168)
141,862
25,481
21,285
(18,124)
(2,816)
64,448
105
(1,567)
120,125
56,732
(99,536)
602
(35,552)
3,124
(9,638)
2,864
(1,307)
2,532
14,840
(895)
52,429
72,220
78,395
(5,017)
22,200
(124,389)
667
—
—
(1,909)
13
236
42,416
(731)
(9,350)
120,102
$ 110,752
22,611
(30,495)
(24,264)
26,001
(101,814)
5,000
—
—
(1,738)
42
3
(104,654)
(548)
11,675
108,427
$ 120,102
Supplemental cash flow disclosures
25,207
Interest paid
1,653
Income taxes paid
(781)
Income taxes refunded
During 2011, the Corporation entered into an agreement with Assured Guaranty Ltd. and subsidiaries which resulted in non-cash increases to loans of $2.2 billion, other assets of $82 million and long-
term debt of $2.3 billion.
During 2011, the Corporation exchanged preferred stock, with a carrying value of $1.1 billion, for 92 million common shares valued at $522 million and senior notes valued at $360 million.
During 2011, the Corporation exchanged trust preferred securities for 308 million common shares valued at $1.7 billion and senior notes valued at $2.0 billion. The trust preferred securities, and
underlying junior subordinated notes and stock purchase agreements, with a carrying value of $5.2 billion, were immediately canceled.
18,268
1,372
(338)
12,912
1,559
(244)
$
$
$
See accompanying Notes to Consolidated Financial Statements.
Bank of America 2013 153
76788ba_financials.indd 153
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Bank of America Corporation and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 1 Summary of Significant Accounting
Principles
Bank of America Corporation (together with its consolidated
subsidiaries, the Corporation), a bank holding company (BHC) and
a financial holding company, provides a diverse range of financial
services and products throughout the U.S. and in certain
international markets. The term “the Corporation” as used herein
may refer to Bank of America Corporation individually, Bank of
America Corporation and its subsidiaries, or certain of Bank of
America Corporation’s subsidiaries or affiliates.
The Corporation conducts its activities through banking and
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.
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
Effective January 1, 2013, the Corporation retrospectively adopted
new accounting guidance from the Financial Accounting Standards
Board (FASB) requiring additional disclosures on the effect of
netting arrangements on an entity’s financial position. The
disclosures relate to derivatives and securities financing
agreements that are either offset on the balance sheet under
existing accounting guidance or are subject to a legally enforceable
master netting or similar agreement. This new guidance addresses
only disclosures and, accordingly, did not have an impact on the
Corporation’s consolidated financial position or results of
operations.
154 Bank of America 2013
for Level 3
Effective January 1, 2012,
the Corporation adopted
amendments from the FASB to the fair value accounting guidance.
The amendments clarify the application of the highest and best
use, and valuation premise concepts, preclude the application of
“blockage factors” in the valuation of all financial instruments and
include criteria for applying the fair value measurement principles
to portfolios of financial instruments. The amendments also
prescribe additional disclosures
fair value
measurements and financial instruments not carried at fair value.
The adoption of this guidance did not have a material impact on
the Corporation’s consolidated financial position or results of
operations. For the related disclosures, see Note 20 – Fair Value
Measurements and Note 22 – Fair Value of Financial Instruments.
Effective January 1, 2012, the Corporation adopted new
accounting guidance from the FASB on the presentation of
comprehensive income in financial statements. The Corporation
adopted the new guidance by reporting the components of
comprehensive
two separate but consecutive
statements. For the new statement and related information, see
the Consolidated Statement of Comprehensive Income and Note
14 – Accumulated Other Comprehensive Income (Loss).
income
in
On January 15, 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
proportionate 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
proportionate amortization method. If such method is adopted,
the Corporation does not expect it to have a material impact on
the consolidated financial position or results of operations.
In December 2012, the FASB issued a proposed standard on
accounting for credit losses. It would replace multiple existing
impairment models, including an “incurred loss” model for loans,
with an “expected loss” model. The FASB announced it would
establish the effective date when it issues the final standard. The
Corporation cannot predict at this time whether or when a final
standard will be issued, when it will be effective or what its final
provisions will be. The final standard may materially reduce
retained earnings in the period of adoption.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash items in
the process of collection, cash segregated under federal and other
brokerage regulations, and amounts due from correspondent
banks, the Federal Reserve Bank and certain non-U.S. central
banks.
Securities Financing Agreements
Securities borrowed or purchased under agreements to resell and
securities loaned or sold under agreements to repurchase
(securities financing agreements) are treated as collateralized
financing transactions except in instances where the transaction
is required to be accounted for as individual sale and purchase
transactions. Generally, these agreements are recorded at the
amounts at which the securities were acquired or sold plus accrued
interest, except for certain securities financing agreements that
the Corporation accounts for under the fair value option. Changes
76788ba_financials.indd 154
3/6/14 12:06 PM
in the fair value of securities financing agreements that are
accounted for under the fair value option are recorded in trading
account profits in the Consolidated Statement of Income. For more
information on securities
the
Corporation accounts for under the fair value option, see Note 21
– Fair Value Option.
financing agreements
that
The Corporation’s policy is to obtain possession of collateral
with a market value equal to or in excess of the principal amount
loaned under resale agreements. To ensure that the market value
of the underlying collateral remains sufficient, collateral is
generally valued daily and
require
counterparties to deposit additional collateral or may return
collateral pledged when appropriate. Securities
financing
agreements give rise to negligible credit risk as a result of these
collateral provisions and, accordingly, no allowance for loan losses
is considered necessary.
the Corporation may
legally enforceable master
Substantially all repurchase and resale activities are
transacted under
repurchase
agreements that give the Corporation, in the event of default by
the counterparty, the right to liquidate securities held and to offset
receivables and payables with the same counterparty. The
Corporation offsets repurchase and resale transactions with the
same counterparty on the Consolidated Balance Sheet where it
has such a legally enforceable master netting agreement and the
transactions have the same maturity date.
In transactions where the Corporation acts as the lender in a
securities lending agreement and receives securities that can be
pledged or sold as collateral, it recognizes an asset on the
Consolidated Balance Sheet at fair value, representing the
securities received, and a liability for the same amount,
representing the obligation to return those securities.
(RTM)
transactions.
In repurchase transactions, typically, the termination date for
a repurchase agreement is before the maturity date of the
underlying security. However, in certain situations, the Corporation
may enter into repurchase agreements where the termination date
of the repurchase transaction is the same as the maturity date of
the underlying security and these transactions are referred to as
“repo-to-maturity”
In accordance with
applicable accounting guidance, the Corporation accounts for RTM
transactions as sales and purchases when the transferred
securities are highly liquid. In instances where securities are
considered sold or purchased, the Corporation removes the
securities from or recognizes the securities on the Consolidated
Balance Sheet and, in the case of sales, recognizes a gain or loss,
where applicable, in the Consolidated Statement of Income. At
December 31, 2013 and 2012, the Corporation had no
outstanding RTM transactions that had been accounted for as
sales and an immaterial amount of transactions that had been
accounted for as purchases.
Collateral
The Corporation accepts securities as collateral that it is permitted
by contract or custom to sell or repledge. At December 31, 2013
and 2012, the fair value of this collateral was $575.3 billion and
$513.2 billion, of which $361.5 billion and $362.0 billion was
sold or repledged. The primary source of this collateral is securities
borrowed or purchased under agreements to resell. The
Corporation also pledges company-owned securities and loans as
collateral in transactions that include repurchase agreements,
securities loaned, public and trust deposits, U.S. Treasury tax and
loan notes, and short-term borrowings. This collateral, which in
some cases can be sold or repledged by the counterparties to the
transactions, is parenthetically disclosed on the Consolidated
Balance Sheet.
In certain cases, the Corporation has transferred assets to
consolidated VIEs where those restricted assets serve as
collateral for the interests issued by the VIEs. These assets are
included on the Consolidated Balance Sheet in Assets of
Consolidated VIEs.
In addition, the Corporation obtains collateral in connection
with its derivative contracts. Required collateral levels vary
depending on the credit risk rating and the type of counterparty.
Generally, the Corporation accepts collateral in the form of cash,
U.S. Treasury securities and other marketable securities. Based
on provisions contained in master netting agreements, the
Corporation nets cash collateral received against derivative
assets. The Corporation also pledges collateral on its own
derivative positions which can be applied against derivative
liabilities.
Trading Instruments
Financial instruments utilized in trading activities are carried at
fair value. Fair value is generally based on quoted market prices
or quoted market prices for similar assets and liabilities. If these
market prices are not available, fair values are estimated based
on dealer quotes, pricing models, discounted cash flow
methodologies, or similar techniques where the determination of
fair value may require significant management judgment or
estimation. Realized and unrealized gains and losses are
recognized in trading account profits.
include derivatives
Derivatives and Hedging Activities
Derivatives are entered into on behalf of customers, for trading or
to support risk management activities. Derivatives used in risk
management activities
that are both
designated in qualifying accounting hedge relationships and
derivatives used to hedge market risks in relationships that are
not designated in qualifying accounting hedge relationships
(referred to as other risk management activities). Derivatives
utilized by the Corporation include swaps, financial futures and
forward settlement contracts, and option contracts. A swap
agreement is a contract between two parties to exchange cash
flows based on specified underlying notional amounts, assets
and/or indices. Financial futures and forward settlement contracts
are agreements to buy or sell a quantity of a financial instrument
(including another derivative financial instrument), index, currency
or commodity at a predetermined rate or price during a period or
at a date in the future. Option agreements can be transacted on
organized exchanges or directly between parties.
All derivatives are recorded on the Consolidated Balance Sheet
at fair value, taking into consideration the effects of legally
enforceable master netting agreements that allow the Corporation
to settle positive and negative positions and offset cash collateral
held with the same counterparty on a net basis. For exchange-
traded contracts, fair value is based on quoted market prices in
active or inactive markets or is derived from observable market-
based pricing parameters, similar to those applied to over-the-
counter (OTC) derivatives. For non-exchange traded contracts, fair
value is based on dealer quotes, pricing models, discounted cash
flow methodologies or similar techniques
for which the
determination of fair value may require significant management
judgment or estimation.
Bank of America 2013 155
76788ba_financials.indd 155
3/6/14 12:06 PM
Valuations of derivative assets and liabilities reflect the value
of the instrument including counterparty credit risk. These values
also take into account the Corporation’s own credit standing.
Trading Derivatives and Other Risk Management
Activities
Derivatives held for trading purposes are included in derivative
assets or derivative liabilities on the Consolidated Balance Sheet
with changes in fair value included in trading account profits.
Derivatives used for other risk management activities are
included in derivative assets or derivative liabilities. Derivatives
used in other risk management activities have not been designated
in a qualifying accounting hedge relationship because they did not
qualify or the risk that is being mitigated pertains to an item that
is reported at fair value through earnings so that the effect of
measuring the derivative instrument and the asset or liability to
which the risk exposure pertains will offset in the Consolidated
Statement of Income to the extent effective. The changes in the
fair value of derivatives that serve to mitigate certain risks
associated with mortgage servicing rights (MSRs), interest rate
lock commitments (IRLCs) and first mortgage loans held-for-sale
(LHFS) that are originated by the Corporation are recorded in
mortgage banking income (loss). Changes in the fair value of
derivatives that serve to mitigate interest rate risk and foreign
currency risk are included in other income (loss). Credit derivatives
are also used by the Corporation to mitigate the risk associated
with various credit exposures. The changes in the fair value of
these derivatives are included in other income (loss).
Derivatives Used For Hedge Accounting Purposes
(Accounting Hedges)
For accounting hedges, the Corporation formally documents at
inception all relationships between hedging instruments and
hedged items, as well as the risk management objectives and
strategies for undertaking various accounting hedges. Additionally,
the Corporation primarily uses regression analysis at the inception
of a hedge and for each reporting period thereafter to assess
whether the derivative used in a hedging transaction is expected
to be and has been highly effective in offsetting changes in the
fair value or cash flows of a hedged item or forecasted transaction.
The Corporation discontinues hedge accounting when it is
determined that a derivative is not expected to be or has ceased
to be highly effective as a hedge, and then reflects changes in fair
value of the derivative in earnings after termination of the hedge
relationship.
The Corporation uses its accounting hedges as either fair value
hedges, cash flow hedges or hedges of net investments in foreign
operations. The Corporation manages interest rate and foreign
currency exchange rate sensitivity predominantly through the use
of derivatives. Fair value hedges are used to protect against
changes in the fair value of the Corporation’s assets and liabilities
that are attributable to interest rate or foreign exchange volatility.
Cash flow hedges are used primarily to minimize the variability in
cash flows of assets or liabilities, or forecasted transactions
caused by interest rate or foreign exchange fluctuations. For
terminated cash flow hedges, the maximum length of time over
which forecasted transactions are hedged is approximately 25
years, with a substantial portion of the hedged transactions being
less than 10 years. For open or future cash flow hedges, the
maximum length of time over which forecasted transactions are
or will be hedged is less than seven years.
156 Bank of America 2013
Changes in the fair value of derivatives designated as fair value
hedges are recorded in earnings, together and in the same income
statement line item with changes in the fair value of the related
hedged item. Changes in the fair value of derivatives designated
as cash flow hedges are recorded in accumulated other
comprehensive income (OCI) and are reclassified into the line item
in the income statement in which the hedged item is recorded in
the same period the hedged item affects earnings. Hedge
ineffectiveness and gains and losses on the excluded component
of a derivative in assessing hedge effectiveness are recorded in
earnings in the same income statement line item. The Corporation
records changes in the fair value of derivatives used as hedges
of the net investment in foreign operations, to the extent effective,
as a component of accumulated OCI.
If a derivative instrument in a fair value hedge is terminated or
the hedge designation removed, the previous adjustments to the
carrying value of the hedged asset or liability are subsequently
accounted for in the same manner as other components of the
carrying value of that asset or liability. For interest-earning assets
and interest-bearing liabilities, such adjustments are amortized to
earnings over the remaining life of the respective asset or liability.
If a derivative instrument in a cash flow hedge is terminated or
the hedge designation
in
accumulated OCI are reclassified into earnings in the same period
or periods during which the hedged forecasted transaction affects
earnings. If it becomes probable that a forecasted transaction will
not occur, any related amounts in accumulated OCI are reclassified
into earnings in that period.
related amounts
removed,
is
Interest Rate Lock Commitments
The Corporation enters into IRLCs in connection with its mortgage
banking activities to fund residential mortgage loans at specified
times in the future. IRLCs that relate to the origination of mortgage
loans that will be classified as held-for-sale are considered
derivative instruments under applicable accounting guidance. As
such, these IRLCs are recorded at fair value with changes in fair
value recorded in mortgage banking income (loss), typically
resulting in recognition of a gain when the Corporation enters into
IRLCs.
In estimating the fair value of an IRLC, the Corporation assigns
a probability that the loan commitment will be exercised and the
loan will be funded. The fair value of the commitments is derived
from the fair value of related mortgage loans which is based on
observable market data and includes the expected net future cash
flows related to servicing of the loans. Changes in the fair value
of IRLCs are recognized based on interest rate changes, changes
in the probability that the commitment will be exercised and the
passage of time. Changes from the expected future cash flows
related to the customer relationship are excluded from the
valuation of IRLCs.
Outstanding IRLCs expose the Corporation to the risk that the
price of the loans underlying the commitments might decline from
inception of the rate lock to funding of the loan. To manage this
risk, the Corporation utilizes forward loan sales commitments and
other derivative instruments, including interest rate swaps and
options, to economically hedge the risk of potential changes in
the value of the loans that would result from the commitments.
The changes in the fair value of these derivatives are recorded in
mortgage banking income (loss).
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Securities
Debt securities are recorded on the Consolidated Balance Sheet
as of their trade date. Debt securities bought principally with the
intent to buy and sell in the short term as part of the Corporation’s
trading activities are reported at fair value in trading account
assets with unrealized gains and losses included in trading
account profits. Debt securities purchased for longer term
investment purposes, as part of asset and liability management
(ALM) and other strategic activities are generally reported at fair
value as available-for-sale (AFS) securities with net unrealized
gains and losses included in accumulated OCI. Certain other debt
securities purchased for ALM and other strategic purposes are
reported at fair value with unrealized gains and losses reported
in other income (loss). These are referred to as other debt
securities carried at fair value. AFS securities and other debt
securities carried at fair value are reported in debt securities on
the Consolidated Balance Sheet. The Corporation may hedge
these other debt securities with risk management derivatives with
the unrealized gains and losses also reported in other income
(loss). The debt securities are carried at fair value with unrealized
gains and losses reported in other income (loss) to mitigate
accounting asymmetry with the risk management derivatives and
to achieve operational simplifications. Debt securities which
management has the intent and ability to hold to maturity are
reported at amortized cost. Certain debt securities purchased for
use in other risk management activities, such as hedging certain
market risks related to MSRs, are reported in other assets at fair
value with unrealized gains and losses reported in the same line
item as the item being hedged.
The Corporation regularly evaluates each AFS and held-to-
maturity (HTM) debt security where the value has declined below
amortized cost to assess whether the decline in fair value is other
than temporary. In determining whether an impairment is other
than temporary, the Corporation considers the severity and
duration of the decline in fair value, the length of time expected
for recovery, the financial condition of the issuer, and other
qualitative factors, as well as whether the Corporation either plans
to sell the security or it is more-likely-than-not that it will be required
to sell the security before recovery of the amortized cost. If the
impairment of the AFS or HTM debt security is credit-related, an
other-than-temporary impairment (OTTI) loss is recorded in
the non-credit-related
earnings. For AFS debt securities,
impairment loss is recognized in accumulated OCI. If the
Corporation intends to sell an AFS debt security or believes it will
more-likely-than-not be required to sell a security, the Corporation
records the full amount of the impairment loss as an OTTI loss.
Interest on debt securities, including amortization of premiums
and accretion of discounts, is included in interest income. Realized
gains and losses from the sales of debt securities are determined
using the specific identification method.
Marketable equity securities are classified based on
management’s intention on the date of purchase and recorded on
the Consolidated Balance Sheet as of the trade date. Marketable
equity securities that are bought and held principally for the
purpose of resale in the near term are classified as trading and
are carried at fair value with unrealized gains and losses included
in trading account profits. Other marketable equity securities are
accounted for as AFS and classified in other assets. All AFS
marketable equity securities are carried at fair value with net
unrealized gains and losses included in accumulated OCI on an
after-tax basis. If there is an other-than-temporary decline in the
fair value of any individual AFS marketable equity security, the cost
basis is reduced and the Corporation reclassifies the associated
net unrealized loss out of accumulated OCI with a corresponding
charge to equity investment income. Dividend income on AFS
marketable equity securities is included in equity investment
income. Realized gains and losses on the sale of all AFS
marketable equity securities, which are recorded in equity
the specific
investment
identification method.
income, are determined using
Certain equity investments held by Global Principal Investments
(GPI), the Corporation’s diversified equity investor in private equity,
real estate and other alternative investments, are subject to
investment company accounting under applicable accounting
guidance and, accordingly, are carried at fair value with changes
in fair value reported in equity investment income. These
investments are included in other assets. Initially, the transaction
price of the investment is generally considered to be the best
indicator of fair value. Thereafter, valuation of direct investments
is based on an assessment of each individual investment using
methodologies that include publicly-traded comparables derived
by multiplying a key performance metric (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. Certain
factors that may influence changes in fair value include but are
not limited to recapitalizations, subsequent rounds of financing
and offerings in the equity or debt capital markets. For fund
investments, the Corporation generally records the fair value of its
proportionate interest in the fund’s capital as reported by the
respective fund managers. Other investments held by GPI are
accounted for under either the equity method or at cost, depending
on the Corporation’s ownership interest, and are reported in other
assets.
Loans and Leases
Loans, with the exception of loans accounted for under the fair
value option, are measured at historical cost and reported at their
outstanding principal balances net of any unearned income,
charge-offs, unamortized deferred fees and costs on originated
loans, and for purchased loans, net of any unamortized premiums
or discounts. Loan origination fees and certain direct origination
costs are deferred and recognized as adjustments to interest
income over the lives of the related loans. Unearned income,
discounts and premiums are amortized to interest income using
a level yield methodology. The Corporation elects to account for
certain consumer and commercial loans under the fair value option
with changes in fair value reported in other income (loss).
Under applicable accounting guidance, for reporting purposes,
the loan and lease portfolio is categorized by portfolio segment
and, within each portfolio segment, by class of financing
receivables. A portfolio segment is defined as the level at which
an entity develops and documents a systematic methodology to
determine the allowance for credit losses, and a class of financing
receivables is defined as the level of disaggregation of portfolio
segments based on the initial measurement attribute, risk
characteristics and methods for assessing risk. The Corporation’s
three portfolio segments are Home Loans, Credit Card and Other
Consumer, and Commercial. The classes within the Home Loans
portfolio segment are core portfolio residential mortgage, Legacy
Assets & Servicing residential mortgage, core portfolio home
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equity and Legacy Assets & Servicing home equity. The classes
within the Credit Card and Other Consumer portfolio segment are
U.S. credit card, non-U.S. credit card, direct/indirect consumer and
other consumer. The classes within the Commercial portfolio
segment are U.S. commercial, commercial real estate, commercial
lease financing, non-U.S. commercial and U.S. small business
commercial.
Purchased Credit-impaired Loans
The Corporation purchases loans with and without evidence of
credit quality deterioration since origination. Evidence of credit
quality deterioration as of the purchase date may include statistics
such as past due status, refreshed borrower credit scores and
refreshed loan-to-value (LTV) ratios, some of which are not
immediately available as of the purchase date. Purchased loans
with evidence of credit quality deterioration for which it is probable
that the Corporation will not receive all contractually required
payments receivable are accounted for as purchased credit-
impaired (PCI) loans. The excess of the cash flows expected to be
collected on PCI loans, measured as of the acquisition date, over
the estimated fair value is referred to as the accretable yield and
is recognized in interest income over the remaining life of the loan
using a level yield methodology. The difference between
contractually required payments as of the acquisition date and the
cash flows expected to be collected is referred to as the
nonaccretable difference. PCI loans that have similar risk
characteristics, primarily credit risk, collateral type and interest
rate risk, are pooled and accounted for as a single asset with a
single composite interest rate and an aggregate expectation of
cash flows. Once a pool is assembled, it is treated as if it was one
loan for purposes of applying the accounting guidance for PCI
loans. An individual loan is removed from a PCI loan pool if it is
sold, foreclosed, forgiven or the expectation of any future proceeds
is remote. When a loan is removed from a PCI loan pool and the
foreclosure or recovery value of the loan is less than the loan’s
carrying value, the difference is first applied against the PCI pool’s
nonaccretable difference. If the nonaccretable difference has been
fully utilized, only then is the PCI pool’s basis applicable to that
loan written-off against its valuation reserve; however, the integrity
of the pool is maintained and it continues to be accounted for as
if it was one loan.
The Corporation continues to estimate cash flows expected to
be collected over the life of the PCI loans using internal credit risk,
interest rate and prepayment risk models that incorporate
management’s best estimate of current key assumptions such as
default rates, loss severity and payment speeds. If, upon
subsequent evaluation, the Corporation determines it is probable
that the present value of the expected cash flows has decreased,
the PCI loan is considered to be further impaired resulting in a
charge to the provision for credit losses and a corresponding
increase to a valuation allowance included in the allowance for
loan and lease losses. The present value of the expected cash
flows is then recalculated each period, which may result in
additional impairment or a reduction of the valuation allowance.
If there is no valuation allowance and it is probable that there is
a significant increase in the present value of the expected cash
flows, the Corporation recalculates the amount of accretable yield
as the excess of the revised expected cash flows over the current
carrying value resulting in a reclassification from nonaccretable
difference
from
nonaccretable difference can also occur if there is a change in the
expected lives of the loans. The present value of the expected
yield. Reclassifications
to accretable
cash flows is determined using the PCI loans’ effective interest
rate, adjusted for changes in the PCI loans’ interest rate indices.
Leases
The Corporation provides equipment financing to its customers
through a variety of lease arrangements. Direct financing leases
are carried at the aggregate of lease payments receivable plus
estimated residual value of the leased property less unearned
income. Leveraged leases, which are a form of financing leases,
are reported net of non-recourse debt. Unearned income on
leveraged and direct financing leases is accreted to interest
income over the lease terms using methods that approximate the
interest method.
Allowance for Credit Losses
The allowance for credit losses, which includes the allowance for
loan and lease losses and the reserve for unfunded lending
commitments, represents management’s estimate of probable
losses inherent in the Corporation’s lending activities. The
allowance for loan and lease losses and the reserve for unfunded
lending commitments exclude amounts for loans and unfunded
lending commitments accounted for under the fair value option as
the fair values of these instruments reflect a credit component.
The allowance for loan and lease losses does not include amounts
related to accrued interest receivable, other than billed interest
and fees on credit card receivables, as accrued interest receivable
is reversed when a loan is placed on nonaccrual status. The
allowance for loan and lease losses represents the estimated
probable credit losses on funded consumer and commercial loans
and leases while the reserve for unfunded lending commitments,
including standby letters of credit and binding unfunded loan
commitments, represents estimated probable credit losses on
these unfunded credit
instruments based on utilization
assumptions. Lending-related credit exposures deemed to be
uncollectible, excluding loans carried at fair value, are charged off
against these accounts. Write-offs on PCI loans on which there is
a valuation allowance are written-off against the valuation
allowance. For additional information, see the Purchased Credit-
impaired Loans in this Note. Cash recovered on previously charged
off amounts is recorded as a recovery to these accounts.
Management evaluates the adequacy of the allowance for credit
losses based on the combined total of the allowance for loan and
lease losses and the reserve for unfunded lending commitments.
The Corporation performs periodic and systematic detailed
reviews of its lending portfolios to identify credit risks and to
assess the overall collectability of those portfolios. The allowance
on certain homogeneous consumer loan portfolios, which
generally consist of consumer real estate within the Home Loans
portfolio segment and credit card loans within the Credit Card and
Other Consumer portfolio segment, is based on aggregated
portfolio segment evaluations generally by product type. Loss
forecast models are utilized for these portfolios which consider a
variety of factors including, but not limited to, historical loss
experience, estimated defaults or foreclosures based on portfolio
trends, delinquencies, bankruptcies, economic conditions and
credit scores.
The Corporation’s Home Loans portfolio segment is comprised
primarily of large groups of homogeneous consumer loans secured
by residential real estate. The amount of losses incurred in the
homogeneous loan pools is estimated based on the number of
loans that will default and the loss in the event of default. Using
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modeling methodologies, the Corporation estimates the number
of homogeneous loans that will default based on the individual
loans’ attributes aggregated into pools of homogeneous loans with
similar attributes. The attributes that are most significant to the
probability of default and are used to estimate defaults include
refreshed LTV or, in the case of a subordinated lien, refreshed
combined loan-to-value, borrower credit score, months since
origination (referred to as vintage) and geography, all of which are
further broken down by present collection status (whether the loan
is current, delinquent, in default or in bankruptcy). This estimate
is based on the Corporation’s historical experience with the loan
portfolio. The estimate is adjusted to reflect an assessment of
environmental factors not yet reflected in the historical data
underlying the loss estimates, such as changes in real estate
values, local and national economies, underwriting standards and
the regulatory environment. The probability of default on a loan is
based on an analysis of the movement of loans with the measured
attributes from either current or any of the delinquency categories
to default over a 12-month period. On home equity loans where
the Corporation holds only a second-lien position and foreclosure
is not the best alternative, the loss severity is estimated at 100
percent.
The allowance on certain commercial loans (except business
card and certain small business loans) is calculated using loss
rates delineated by risk rating and product type. Factors considered
when assessing loss rates include the value of the underlying
collateral, if applicable, the industry of the obligor, and the obligor’s
liquidity and other financial indicators along with certain qualitative
factors. These statistical models are updated regularly for changes
in economic and business conditions. Included in the analysis of
consumer and commercial loan portfolios are reserves which are
maintained to cover uncertainties that affect the Corporation’s
estimate of probable losses including domestic and global
economic uncertainty and large single name defaults.
The remaining portfolios, including nonperforming commercial
loans, as well as consumer and commercial loans modified in a
troubled debt restructuring (TDR) are reviewed in accordance with
applicable accounting guidance on impaired loans and TDRs. If
necessary, a specific allowance is established for these loans if
they are deemed to be impaired. A loan is considered impaired
when, based on current information and events, it is probable that
the Corporation will be unable to collect all amounts due, including
principal and/or interest, in accordance with the contractual terms
of the agreement or the loan has been modified in a TDR. Once a
loan has been identified as impaired, management measures
impairment primarily based on the present value of payments
expected to be received, discounted at the loans’ original effective
contractual interest rates, or discounted at the portfolio average
contractual annual percentage rate, excluding promotionally priced
loans, in effect prior to restructuring. Impaired loans and TDRs
may also be measured based on observable market prices, or for
loans that are solely dependent on the collateral for repayment,
the estimated fair value of the collateral less costs to sell. If the
recorded investment in impaired loans exceeds this amount, a
specific allowance is established as a component of the allowance
for loan and lease losses unless these are secured consumer
loans that are solely dependent on the collateral for repayment,
in which case the amount that exceeds the fair value of the
collateral is charged off.
Generally, when determining the fair value of the collateral
securing consumer real estate-secured loans that are solely
dependent on the collateral for repayment, prior to performing a
detailed property valuation including a walk-through of a property,
the Corporation initially estimates the fair value of the collateral
securing these consumer loans using an automated valuation
method (AVM). An AVM is a tool that estimates the value of a
property by reference to market data including sales of comparable
properties and price trends specific to the Metropolitan Statistical
Area in which the property being valued is located. In the event
that an AVM value is not available, the Corporation utilizes
publicized indices or if these methods provide less reliable
valuations, the Corporation uses appraisals or broker price
opinions to estimate the fair value of the collateral. While there is
inherent imprecision in these valuations, the Corporation believes
that they are representative of the portfolio in the aggregate.
In addition to the allowance for loan and lease losses, the
Corporation also estimates probable losses related to unfunded
lending commitments, such as letters of credit and financial
guarantees, and binding unfunded loan commitments. The reserve
for unfunded lending commitments excludes commitments
accounted for under the fair value option. Unfunded lending
commitments are subject to individual reviews and are analyzed
and segregated by risk according to the Corporation’s internal risk
rating scale. These risk classifications, in conjunction with an
analysis of historical loss experience, utilization assumptions,
current economic conditions, performance trends within the
portfolio and any other pertinent information, result in the
estimation of the reserve for unfunded lending commitments.
The allowance for credit losses related to the loan and lease
portfolio is reported separately on the Consolidated Balance Sheet
whereas the reserve for unfunded lending commitments is
reported on the Consolidated Balance Sheet in accrued expenses
and other liabilities. The provision for credit losses related to the
loan and lease portfolio and unfunded lending commitments is
reported in the Consolidated Statement of Income.
Nonperforming Loans and Leases, Charge-offs and
Delinquencies
Nonperforming loans and leases generally include loans and
leases that have been placed on nonaccrual status, including
nonaccruing
terms have been
restructured in a manner that grants a concession to a borrower
experiencing financial difficulties. Loans accounted for under the
fair value option, PCI loans and LHFS are not reported as
nonperforming.
loans whose contractual
In accordance with the Corporation’s policies, consumer real
estate-secured loans, including residential mortgages and home
equity loans, are generally placed on nonaccrual status and
classified as nonperforming at 90 days past due unless repayment
of the loan is insured by the Federal Housing Administration or
through individually insured long-term standby agreements with
Fannie Mae or Freddie Mac (the fully-insured portfolio). Residential
mortgage loans in the fully-insured portfolio are not placed on
nonaccrual status and,
reported as
nonperforming. Junior-lien home equity loans are placed on
nonaccrual status and classified as nonperforming when the
underlying first-lien mortgage loan becomes 90 days past due even
if the junior-lien loan is current. Accrued interest receivable is
reversed when a consumer loan is placed on nonaccrual status.
Interest collections on nonaccruing consumer loans for which the
ultimate collectability of principal is uncertain are generally applied
as principal reductions; otherwise, such collections are credited
to interest income when received. These loans may be restored
therefore, are not
Bank of America 2013 159
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to accrual status when all principal and interest is current and full
repayment of the remaining contractual principal and interest is
expected, or when the loan otherwise becomes well-secured and
is in the process of collection. The outstanding balance of real
estate-secured loans that is in excess of the estimated property
value less costs to sell is charged off no later than the end of the
month in which the loan becomes 180 days past due unless the
loan is fully insured. The estimated property value less costs to
sell is determined using the same process as described for
impaired loans in the Allowance for Credit Losses in this Note.
Consumer loans secured by personal property, credit card loans
and other unsecured consumer loans are not placed on nonaccrual
status prior to charge-off and, therefore, are not reported as
nonperforming loans, except for certain secured consumer loans,
including those that have been modified in a TDR. Personal
property-secured loans are charged off to collateral value no later
than the end of the month in which the account becomes 120
days past due or, for loans in bankruptcy, 60 days past due. Credit
card and other unsecured consumer loans are charged off no later
than the end of the month in which the account becomes 180
days past due or within 60 days after receipt of notification of
death or bankruptcy.
Commercial loans and leases, excluding business card loans,
that are past due 90 days or more as to principal or interest, or
where reasonable doubt exists as to timely collection, including
loans that are individually identified as being impaired, are
generally placed on nonaccrual status and classified as
nonperforming unless well-secured and in the process of
collection.
Accrued interest receivable is reversed when commercial loans
and leases are placed on nonaccrual status. Interest collections
on nonaccruing commercial loans and leases for which the
ultimate collectability of principal is uncertain are applied as
principal reductions; otherwise, such collections are credited to
income when received. Commercial loans and leases may be
restored to accrual status when all principal and interest is current
and full repayment of the remaining contractual principal and
interest is expected, or when the loan otherwise becomes well-
secured and is in the process of collection. Business card loans
are charged off no later than the end of the month in which the
account becomes 180 days past due or 60 days after receipt of
notification of death or bankruptcy. These loans are not placed on
nonaccrual status prior to charge-off and, therefore, are not
reported as nonperforming loans. Other commercial loans and
leases are generally charged off when all or a portion of the
principal amount is determined to be uncollectible.
The entire balance of a consumer loan or commercial loan or
lease is contractually delinquent if the minimum payment is not
received by the specified due date on the customer’s billing
statement. Interest and fees continue to accrue on past due loans
and leases until the date the loan is placed on nonaccrual status,
if applicable.
PCI loans are recorded at fair value at the acquisition date.
Although the PCI loans may be contractually delinquent, the
Corporation does not classify these loans as nonperforming as
the loans were written down to fair value at the acquisition date
and the accretable yield is recognized in interest income over the
remaining life of the loan. In addition, reported net charge-offs
exclude write-offs on PCI loans as the fair value already considers
the estimated credit losses.
Troubled Debt Restructurings
Consumer loans and commercial loans and leases whose
contractual terms have been restructured in a manner that grants
a concession to a borrower experiencing financial difficulties are
classified as TDRs. Concessions could include a reduction in the
interest rate to a rate that is below market on the loan, payment
extensions, forgiveness of principal, forbearance, or other actions
designed to maximize collections. Secured consumer loans that
have been discharged in Chapter 7 bankruptcy and have not been
reaffirmed by the borrower are classified as TDRs at the time of
discharge. Consumer real estate-secured loans for which a binding
offer to restructure has been extended are also classified as TDRs.
Loans classified as TDRs are considered impaired loans. Loans
that are carried at fair value, LHFS and PCI loans are not classified
as TDRs.
Secured consumer loans whose contractual terms have been
modified in a TDR and are current at the time of restructuring
generally remain on accrual status if there is demonstrated
performance prior to the restructuring and payment in full under
the restructured terms is expected. Otherwise, the loans are
placed on nonaccrual status and reported as nonperforming,
except for the fully-insured loans, until there is sustained
repayment performance for a reasonable period, generally six
months. If accruing consumer TDRs cease to perform in
accordance with their modified contractual terms, they are placed
on nonaccrual status and reported as nonperforming TDRs.
Consumer TDRs that bear a below-market rate of interest are
generally reported as TDRs throughout their remaining lives.
Secured consumer loans that have been discharged in Chapter 7
bankruptcy are placed on nonaccrual status and written down to
the estimated collateral value less costs to sell no later than at
the time of discharge. If these loans are contractually current,
interest collections are generally recorded in interest income on
a cash basis. Credit card and other unsecured consumer loans
that have been renegotiated in a TDR are not placed on nonaccrual
status. Credit card and other unsecured consumer loans that have
been renegotiated and placed on a fixed payment plan after July
1, 2012 are generally charged off no later than the end of the
month in which the account becomes 120 days past due.
If
Commercial loans and leases whose contractual terms have
been modified in a TDR are typically placed on nonaccrual status
and reported as nonperforming until the loans or leases have
performed for an adequate period of time under the restructured
agreement, generally six months.
the borrower had
demonstrated performance under the previous terms and the
underwriting process shows the capacity to continue to perform
under the modified terms, the loan may remain on accrual status.
Accruing commercial TDRs are reported as performing TDRs
through the end of the calendar year in which the loans are returned
to accrual status. In addition, if accruing commercial TDRs bear
less than a market rate of interest at the time of modification, they
are reported as performing TDRs throughout their remaining lives
unless and until they cease to perform in accordance with their
modified contractual terms, at which time they are placed on
nonaccrual status and reported as nonperforming TDRs.
A loan that had previously been modified in a TDR and is
subsequently refinanced under current underwriting standards at
a market rate with no concessionary terms is accounted for as a
new loan and is no longer reported as a TDR.
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Loans Held-for-sale
Loans that are intended to be sold in the foreseeable future,
including residential mortgages, loan syndications, and to a lesser
degree, commercial real estate, consumer finance and other loans,
are reported as LHFS and are carried at the lower of aggregate
cost or fair value. The Corporation accounts for certain LHFS,
including first mortgage LHFS, under the fair value option.
Mortgage loan origination costs related to LHFS that the
Corporation accounts for under the fair value option are recognized
in noninterest expense when incurred. Mortgage loan origination
costs for LHFS carried at the lower of cost or fair value are
capitalized as part of the carrying value of the loans and recognized
as a reduction of mortgage banking income (loss) upon the sale
of such loans. LHFS that are on nonaccrual status and are reported
as nonperforming, as defined in the policy herein, are reported
separately from nonperforming loans and leases.
Premises and Equipment
Premises and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation and amortization are
recognized using the straight-line method over the estimated
useful lives of the assets. Estimated lives range up to 40 years
for buildings, up to 12 years for furniture and equipment, and the
shorter of lease term or estimated useful life for leasehold
improvements.
The Corporation capitalizes the costs associated with certain
computer hardware, software and internally developed software,
and amortizes the costs over the expected useful life. Direct project
costs of internally developed software are capitalized when it is
probable that the project will be completed and the software will
be used for its intended function.
for consumer MSRs,
Mortgage Servicing Rights
The Corporation accounts
including
residential mortgage and home equity MSRs, at fair value with
changes in fair value recorded in mortgage banking income (loss).
To reduce the volatility of earnings related to interest rate and
market value fluctuations, U.S. Treasury securities, mortgage-
backed securities and derivatives such as options and interest
rate swaps may be used to hedge certain market risks of the
MSRs. Such derivatives are not designated as qualifying
accounting hedges. These instruments are carried at fair value
with changes in fair value recognized in mortgage banking income
(loss).
The Corporation estimates the fair value of consumer MSRs
using a valuation model that calculates the present value of
estimated future net servicing income and, when available, quoted
prices from independent parties. The present value calculation is
based on an option-adjusted spread (OAS) valuation approach that
factors in prepayment risk. This approach consists of projecting
servicing cash flows under multiple interest rate scenarios and
discounting these cash flows using risk-adjusted discount rates.
The key economic assumptions used in MSR valuations include
weighted-average lives of the MSRs and the OAS levels. The OAS
represents the spread that is added to the discount rate so that
the sum of the discounted cash flows equals the market price;
therefore, it is a measure of the extra yield over the reference
discount factor that the Corporation expects to earn by holding the
asset.
Goodwill and Intangible Assets
Goodwill is the purchase premium after adjusting for the fair value
of net assets acquired. Goodwill is not amortized but is reviewed
for potential impairment on an annual basis, or when events or
circumstances indicate a potential impairment, at the reporting
unit level. A reporting unit, as defined under applicable accounting
guidance, is a business segment or one level below a business
segment. The goodwill impairment analysis is a two-step test. The
first step of the goodwill impairment test involves comparing the
fair value of each reporting unit with its carrying value, including
goodwill, as measured by allocated equity.
In certain
circumstances, the first step may be performed using a qualitative
assessment. If the fair value of the reporting unit exceeds its
carrying value, goodwill of the reporting unit is considered not
impaired; however, if the carrying value of the reporting unit
exceeds its fair value, the second step must be performed to
measure potential impairment.
The second step involves calculating an implied fair value of
goodwill for each reporting unit for which the first step indicated
possible impairment. The implied fair value of goodwill is
determined in the same manner as the amount of goodwill
recognized in a business combination, which is the excess of the
fair value of the reporting unit, as determined in the first step, over
the aggregate fair values of the assets, liabilities and identifiable
intangibles as if the reporting unit was being acquired in a business
combination. Measurement of the fair values of the assets and
liabilities of a reporting unit is consistent with the requirements
of the fair value measurements accounting guidance, as described
in Fair Value in this Note. The adjustments to measure the assets,
liabilities and intangibles at fair value are for the purpose of
measuring the implied fair value of goodwill and such adjustments
are not reflected in the Consolidated Balance Sheet. If the implied
fair value of goodwill exceeds the goodwill assigned to the reporting
unit, there is no impairment. If the goodwill assigned to a reporting
unit exceeds the implied fair value of goodwill, an impairment
charge is recorded for the excess. An impairment loss recognized
cannot exceed the amount of goodwill assigned to a reporting unit.
An impairment loss establishes a new basis in the goodwill and
subsequent reversals of goodwill impairment losses are not
permitted under applicable accounting guidance.
For intangible assets subject to amortization, an impairment
loss is recognized if the carrying value of the intangible asset is
not recoverable and exceeds fair value. The carrying value of the
intangible asset is considered not recoverable if it exceeds the
sum of the undiscounted cash flows expected to result from the
use of the asset.
Variable Interest Entities
A VIE is an entity that lacks equity investors or whose equity
investors do not have a controlling financial interest in the entity
through their equity investments. The entity that has a controlling
financial interest in a VIE is referred to as the primary beneficiary
and consolidates the VIE. The Corporation is deemed to have a
controlling financial interest and is the primary beneficiary of a VIE
if it has both the power to direct the activities of the VIE that most
significantly impact the VIE’s economic performance and an
obligation to absorb losses or the right to receive benefits that
could potentially be significant to the VIE. On a quarterly basis,
the Corporation reassesses whether it has a controlling financial
interest in and is the primary beneficiary of a VIE. The quarterly
reassessment process considers whether the Corporation has
Bank of America 2013 161
76788ba_financials.indd 161
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acquired or divested the power to direct the activities of the VIE
through changes in governing documents or other circumstances.
The reassessment also considers whether the Corporation has
acquired or disposed of a financial interest that could be significant
to the VIE, or whether an interest in the VIE has become significant
or is no longer significant. The consolidation status of the VIEs
with which the Corporation is involved may change as a result of
such reassessments. Changes in consolidation status are applied
prospectively, with assets and liabilities of a newly consolidated
VIE initially recorded at fair value. A gain or loss may be recognized
upon deconsolidation of a VIE depending on the carrying values
of deconsolidated assets and liabilities compared to the fair value
of retained interests and ongoing contractual arrangements.
The Corporation primarily uses VIEs for its securitization
activities, in which the Corporation transfers whole loans or debt
securities into a trust or other vehicle such that the assets are
legally isolated from the creditors of the Corporation. Assets held
in a trust can only be used to settle obligations of the trust. The
creditors of these trusts typically have no recourse to the
Corporation except
in accordance with the Corporation’s
obligations under standard representations and warranties.
When the Corporation is the servicer of whole loans held in a
securitization trust, including non-agency residential mortgages,
home equity loans, credit cards, automobile loans and student
loans, the Corporation has the power to direct the most significant
activities of the trust. The Corporation does not have the power
to direct the most significant activities of a residential mortgage
agency trust unless the Corporation holds substantially all of the
issued securities and has the unilateral right to liquidate the trust.
The power to direct the most significant activities of a commercial
mortgage securitization trust is typically held by the special
servicer or by the party holding specific subordinate securities
which embody certain controlling rights. The Corporation
consolidates a whole-loan securitization trust if it has the power
to direct the most significant activities and also holds securities
issued by the trust or has other contractual arrangements, other
than standard representations and warranties, that could
potentially be significant to the trust.
The Corporation may also transfer trading account securities
and AFS securities into municipal bond or resecuritization trusts.
The Corporation consolidates a municipal bond or resecuritization
trust if it has control over the ongoing activities of the trust such
as the remarketing of the trust’s liabilities or, if there are no ongoing
activities, sole discretion over the design of the trust, including
the identification of securities to be transferred in and the structure
of securities to be issued, and also retains securities or has
liquidity or other commitments that could potentially be significant
to the trust. The Corporation does not consolidate a municipal
bond or resecuritization trust if one or a limited number of third-
party investors share responsibility for the design of the trust or
have control over the significant activities of the trust through
liquidation or other substantive rights.
Other VIEs used by the Corporation include collateralized debt
obligations (CDOs), investment vehicles created on behalf of
customers and other investment vehicles. The Corporation does
not routinely serve as collateral manager for CDOs and, therefore,
does not typically have the power to direct the activities that most
significantly impact the economic performance of a CDO. However,
following an event of default, if the Corporation is a majority holder
of senior securities issued by a CDO and acquires the power to
manage the assets of the CDO, the Corporation consolidates the
CDO.
162 Bank of America 2013
The Corporation consolidates a customer or other investment
vehicle if it has control over the initial design of the vehicle or
manages the assets in the vehicle and also absorbs potentially
significant gains or losses through an investment in the vehicle,
derivative contracts or other arrangements. The Corporation does
not consolidate an investment vehicle if a single investor controlled
the initial design of the vehicle or manages the assets in the
vehicles or if the Corporation does not have a variable interest
that could potentially be significant to the vehicle.
Retained interests in securitized assets are initially recorded
at fair value. In addition, the Corporation may invest in debt
securities issued by unconsolidated VIEs. Fair values of these debt
securities, which are AFS debt securities or trading account assets,
are based primarily on quoted market prices in active or inactive
markets. Generally, quoted market prices for retained residual
interests are not available; therefore, the Corporation estimates
fair values based on the present value of the associated expected
future cash flows. This may require management to estimate credit
losses, prepayment speeds, forward interest yield curves, discount
rates and other factors that impact the value of retained interests.
Retained residual interests in unconsolidated securitization trusts
are classified in trading account assets or other assets with
changes in fair value recorded in income. The Corporation may
also enter into derivatives with unconsolidated VIEs, which are
carried at fair value with changes in fair value recorded in income.
Fair Value
The Corporation measures the fair values of its financial
instruments in accordance with accounting guidance that requires
an entity to base fair value on exit price. A three-level hierarchy,
provided in the applicable accounting guidance, for inputs is
utilized in measuring fair value which maximizes the use of
observable inputs and minimizes the use of unobservable inputs
by requiring that observable inputs be used to determine the exit
price when available. Under applicable accounting guidance, the
Corporation categorizes its financial instruments, based on the
priority of inputs to the valuation technique, into this three-level
hierarchy, as described below. Trading account assets and
liabilities, derivative assets and liabilities, AFS debt and equity
securities, other debt securities carried at fair value, certain MSRs
and certain other assets are carried at fair value in accordance
with applicable accounting guidance. The Corporation has also
elected to account for certain assets and liabilities under the fair
value option, including certain commercial and consumer loans
and loan commitments, LHFS, other short-term borrowings,
financing agreements, asset-backed secured
securities
financings, long-term deposits and long-term debt. The following
describes the three-level hierarchy.
Level 1 Unadjusted quoted prices in active markets for identical
assets or liabilities. Level 1 assets and liabilities include
debt and equity securities and derivative contracts that
are traded in an active exchange market, as well as
certain U.S. Treasury securities that are highly liquid and
are actively traded in OTC markets.
Level 2 Observable inputs other than Level 1 prices, such as
quoted prices for similar assets or liabilities, quoted
prices in markets that are not active, or other inputs that
are observable or can be corroborated by observable
market data for substantially the full term of the assets
or liabilities. Level 2 assets and liabilities include debt
76788ba_financials.indd 162
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than exchange-traded
securities with quoted prices that are traded less
frequently
instruments and
derivative contracts where fair value is determined using
a pricing model with inputs that are observable in the
market or can be derived principally from or corroborated
by observable market data. This category generally
includes U.S. government and agency mortgage-backed
debt securities, corporate debt securities, derivative
contracts, residential mortgage loans and certain LHFS.
Level 3 Unobservable inputs that are supported by little or no
market activity and that are significant to the overall fair
value of the assets or liabilities. Level 3 assets and
liabilities include financial instruments for which the
determination of
requires significant
management judgment or estimation. The fair value for
such assets and liabilities is generally determined using
pricing models, market comparables, discounted cash
flow methodologies or similar
that
incorporate the assumptions a market participant would
use in pricing the asset or liability. This category generally
includes certain private equity investments and other
principal investments, retained residual interests in
securitizations, residential MSRs, certain asset-backed
securities, highly structured, complex or long-dated
derivative contracts, certain LHFS, IRLCs and certain
CDOs where independent pricing information cannot be
obtained for a significant portion of the underlying assets.
fair value
techniques
Income Taxes
There are two components of income tax expense: current and
deferred. Current income tax expense reflects taxes to be paid or
refunded for the current period. Deferred income tax expense
results from changes in deferred tax assets and liabilities between
periods. These gross deferred tax assets and liabilities represent
decreases or increases in taxes expected to be paid in the future
because of future reversals of temporary differences in the bases
of assets and liabilities as measured by tax laws and their bases
as reported in the financial statements. Deferred tax assets are
also recognized for tax attributes such as net operating loss
carryforwards and tax credit carryforwards. Valuation allowances
are recorded to reduce deferred tax assets to the amounts
management concludes are more-likely-than-not to be realized.
Income tax benefits are recognized and measured based upon
a two-step model: first, a tax position must be more-likely-than-not
to be sustained based solely on its technical merits in order to be
recognized, and second, the benefit is measured as the largest
dollar amount of that position that is more-likely-than-not to be
sustained upon settlement. The difference between the benefit
recognized and the tax benefit claimed on a tax return is referred
to as an unrecognized tax benefit. The Corporation records income
tax-related interest and penalties, if applicable, within income tax
expense.
Retirement Benefits
The Corporation has retirement plans covering substantially all
full-time and certain part-time employees. Pension expense under
these plans is charged to current operations and consists of
several components of net pension cost based on various actuarial
assumptions regarding future experience under the plans.
In addition, the Corporation has unfunded supplemental benefit
plans and supplemental executive retirement plans (SERPs) for
selected officers of the Corporation and its subsidiaries that
provide benefits that cannot be paid from a qualified retirement
plan due to Internal Revenue Code restrictions. The Corporation’s
current executive officers do not earn additional retirement income
under SERPs. These plans are nonqualified under the Internal
Revenue Code and assets used to fund benefit payments are not
segregated from other assets of the Corporation; therefore, in
general, a participant’s or beneficiary’s claim to benefits under
these plans is as a general creditor. In addition, the Corporation
has several postretirement healthcare and life insurance benefit
plans.
Accumulated Other Comprehensive Income
The Corporation records unrealized gains and losses on AFS debt
and marketable equity securities, gains and losses on cash flow
accounting hedges, certain employee benefit plan adjustments,
foreign currency translation adjustments and related hedges of
net investments in foreign operations, and the cumulative
adjustment related to certain accounting changes in accumulated
OCI, net-of-tax. Unrealized gains and losses on AFS debt and
marketable equity securities are reclassified to earnings as the
gains or losses are realized upon sale of the securities. Unrealized
losses on AFS securities deemed to represent OTTI are reclassified
to earnings at the time of the impairment charge. For AFS debt
securities that the Corporation does not intend to sell or it is not
more-likely-than-not that it will be required to sell, only the credit
component of an unrealized loss is reclassified to earnings. Gains
or losses on derivatives accounted for as cash flow hedges are
reclassified to earnings when the hedged transaction affects
earnings. Translation gains or losses on foreign currency
translation adjustments are reclassified to earnings upon the
substantial sale or liquidation of investments in foreign operations.
Revenue Recognition
The following summarizes the Corporation’s revenue recognition
policies as they relate to certain noninterest income line items in
the Consolidated Statement of Income.
Card income is derived from fees such as interchange, cash
advance, annual, late, over-limit and other miscellaneous fees,
which are recorded as revenue when earned, primarily on an
accrual basis. Uncollected fees are included in the customer card
receivables balances with an amount recorded in the allowance
for loan and lease losses for estimated uncollectible card
receivables. Uncollected fees are written off when a card receivable
reaches 180 days past due.
Service charges include fees for insufficient funds, overdrafts
and other banking services and are recorded as revenue when
earned. Uncollected fees are included in outstanding loan
balances with an amount recorded for estimated uncollectible
service fees receivable. Uncollected fees are written off when a
fee receivable reaches 60 days past due.
Investment and brokerage services revenue consists primarily
of asset management fees and brokerage income that are
recognized over the period the services are provided or when
commissions are earned. Asset management fees consist
primarily of fees for investment management and trust services
and are generally based on the dollar amount of the assets being
managed. Brokerage
from
commissions and fees earned on the sale of various financial
products.
is generally derived
income
76788ba_financials.indd 163
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Bank of America 2013 163
Credit Card and Deposit Arrangements
Endorsing Organization Agreements
The Corporation contracts with other organizations to obtain their
endorsement of the Corporation’s loan and deposit products. This
endorsement may provide to the Corporation exclusive rights to
market to the organization’s members or to customers on behalf
of the Corporation. These organizations endorse the Corporation’s
loan and deposit products and provide the Corporation with their
mailing lists and marketing activities. These agreements generally
have terms that range from two to five years. The Corporation
typically pays royalties in exchange for the endorsement.
Compensation costs related to the credit card agreements are
recorded as contra-revenue in card income.
Cardholder Reward Agreements
The Corporation offers reward programs that allow its cardholders
to earn points that can be redeemed for a broad range of rewards
including cash, travel, gift cards and discounted products. The
Corporation establishes a rewards liability based upon the points
earned that are expected to be redeemed and the average cost
per point redeemed. The points to be redeemed are estimated
based on past redemption behavior, card product type, account
transaction activity and other historical card performance. The
liability is reduced as the points are redeemed. The estimated
cost of the rewards programs is recorded as contra-revenue in card
income.
Accounting Policies
All significant accounting policies are discussed either in this Note
or included in the Notes herein listed below.
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 12 – Commitments and Contingencies
Note 15 – Earnings Per Common Share
Note 17 – Employee Benefit Plans
Note 18 – Stock-based Compensation Plans
Note 19 – Income Taxes
Note 20 – Fair Value Measurements
Note 23 – Mortgage Servicing Rights
Page
165
175
180
197
203
219
236
241
248
249
252
270
Investment banking income consists primarily of advisory and
underwriting fees that are recognized in income as the services
are provided and no contingencies exist. Revenues are generally
recognized net of any direct expenses. Non-reimbursed expenses
are recorded as noninterest expense.
Earnings Per Common Share
Earnings per common share (EPS) is computed by dividing net
income (loss) allocated to common shareholders by the weighted-
average common shares outstanding, except that it does not
include unvested common shares subject to repurchase or
cancellation. Net income (loss) allocated to common shareholders
represents net income (loss) applicable to common shareholders
which is net income (loss) adjusted for preferred stock dividends
including dividends declared, accretion of discounts on preferred
stock including accelerated accretion when preferred stock is
repaid early, and cumulative dividends related to the current
dividend period that have not been declared as of period end, less
income allocated to participating securities (see below for more
information). Diluted EPS is computed by dividing income (loss)
allocated to common shareholders plus dividends on dilutive
convertible preferred stock and preferred stock that can be
tendered to exercise warrants, by the weighted-average common
shares outstanding plus amounts representing the dilutive effect
of stock options outstanding, restricted stock, restricted stock
units, outstanding warrants and the dilution resulting from the
conversion of convertible preferred stock, if applicable.
Unvested share-based payment awards
that contain
nonforfeitable rights to dividends are participating securities that
are included in computing EPS using the two-class method. The
two-class method is an earnings allocation formula under which
EPS is calculated for common stock and participating securities
according to dividends declared and participating rights in
undistributed earnings. Under this method, all earnings,
distributed and undistributed, are allocated to participating
securities and common shares based on their respective rights to
receive dividends.
In an exchange of non-convertible preferred stock, income
allocated to common shareholders is adjusted for the difference
between the carrying value of the preferred stock and the fair value
of the consideration exchanged. In an induced conversion of
convertible preferred stock, income allocated to common
shareholders is reduced by the excess of the fair value of the
consideration exchanged over the fair value of the common stock
that would have been issued under the original conversion terms.
Foreign Currency Translation
Assets, liabilities and operations of foreign branches and
subsidiaries are recorded based on the functional currency of each
entity. For certain of the foreign operations, the functional currency
is the local currency, in which case the assets, liabilities and
operations are translated, for consolidation purposes, from the
local currency to the U.S. dollar reporting currency at period-end
rates for assets and liabilities and generally at average rates for
results of operations. The resulting unrealized gains or losses as
well as gains and losses from certain hedges, are reported as a
component of accumulated OCI, net-of-tax. When the foreign
entity’s functional currency is determined to be the U.S. dollar, the
resulting remeasurement gains or losses on foreign currency-
denominated assets or liabilities are included in earnings.
164 Bank of America 2013
76788ba_financials.indd 164
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NOTE 2 Derivatives
Derivative Balances
Derivatives are entered into on behalf of customers, for trading,
or to support risk management activities. Derivatives used in risk
management activities include derivatives that may or may not be
relationships.
designated
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
in qualifying hedge accounting
activities, see Note 1 – Summary of Significant Accounting
Principles. The following tables present derivative instruments
included on the Consolidated Balance Sheet in derivative assets
and liabilities at December 31, 2013 and 2012. 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.
Gross Derivative Assets
Gross Derivative Liabilities
December 31, 2013
(Dollars in billions)
Interest rate contracts
Swaps
Futures and forwards
Written options
Purchased options
Foreign exchange contracts
Swaps
Spot, futures and forwards
Written options
Purchased options
Equity contracts
Swaps
Futures and forwards
Written options
Purchased options
Commodity contracts
Swaps
Futures and forwards
Written options
Purchased options
Credit derivatives
Purchased credit derivatives:
Credit default swaps
Total return swaps/other
Written credit derivatives:
Credit default swaps
Total return swaps/other
Trading
Derivatives
and Other Risk
Management
Derivatives
Contract/
Notional (1)
Qualifying
Accounting
Hedges
Total
Trading
Derivatives
and Other Risk
Management
Derivatives
Qualifying
Accounting
Hedges
$
$ 33,272.0
8,217.6
2,065.4
2,028.3
$
659.9
1.6
—
65.4
$
$
667.4
1.6
—
65.4
$
658.4
1.5
64.4
—
7.5
—
—
—
1.0
0.7
—
—
—
—
—
—
—
—
—
—
—
—
44.1
33.2
—
8.8
3.6
1.1
—
30.4
3.8
4.7
—
5.2
15.7
2.0
—
—
9.2
$
$
$
29.3
4.0
920.3
(825.5)
(47.3)
47.5
42.7
33.5
9.2
—
4.2
1.4
29.6
—
5.7
2.5
5.0
—
28.1
3.2
13.8
0.2
903.4
$
Total
$
659.3
1.5
64.4
—
43.7
34.6
9.2
—
4.2
1.4
29.6
—
5.7
2.5
5.0
—
28.1
3.2
0.9
—
—
—
1.0
1.1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3.0
$
$
13.8
0.2
906.4
(825.5)
(43.5)
37.4
2,284.1
2,922.5
412.4
392.4
162.0
71.4
315.6
266.7
73.1
454.4
157.3
164.0
1,305.1
38.1
1,265.4
63.4
43.1
32.5
—
8.8
3.6
1.1
—
30.4
3.8
4.7
—
5.2
15.7
2.0
29.3
4.0
911.1
$
Gross derivative assets/liabilities
$
Less: Legally enforceable master netting agreements
Less: Cash collateral received/paid
Total derivative assets/liabilities
(1) Represents the total contract/notional amount of derivative assets and liabilities outstanding.
76788ba_financials.indd 165
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Bank of America 2013 165
(Dollars in billions)
Interest rate contracts
Swaps
Futures and forwards
Written options
Purchased options
Foreign exchange contracts
Swaps
Spot, futures and forwards
Written options
Purchased options
Equity contracts
Swaps
Futures and forwards
Written options
Purchased options
Commodity contracts
Swaps
Futures and forwards
Written options
Purchased options
Credit derivatives
Purchased credit derivatives:
Credit default swaps
Total return swaps/other
Written credit derivatives:
Credit default swaps
Total return swaps/other
Gross Derivative Assets
Gross Derivative Liabilities
December 31, 2012
Trading
Derivatives
and Other Risk
Management
Derivatives
Contract/
Notional (1)
Qualifying
Accounting
Hedges
Total
Trading
Derivatives
and Other Risk
Management
Derivatives
Qualifying
Accounting
Hedges
$
$ 34,667.4
11,950.5
2,343.5
2,162.6
$
1,075.4
2.8
—
105.5
$
13.8
—
—
—
$
1,089.2
2.8
—
105.5
$
1,062.6
2.7
106.0
—
47.4
31.5
—
6.5
1.6
1.0
—
20.4
2.5
4.8
—
7.1
35.6
2.5
1.4
0.4
—
—
—
—
—
—
0.1
—
—
—
—
—
48.8
31.9
—
6.5
1.6
1.0
—
20.4
2.6
4.8
—
7.1
35.6
2.5
53.2
30.5
7.3
—
2.0
1.0
20.2
—
4.0
2.7
7.4
—
22.1
2.9
2,489.0
3,023.0
363.3
321.8
127.1
58.4
295.3
271.0
60.5
498.9
166.4
168.2
1,559.5
43.5
1,531.5
68.8
Total
$
1,067.3
2.7
106.0
—
55.0
31.3
7.3
—
2.0
1.0
20.2
—
4.0
2.7
7.4
—
22.1
2.9
4.7
—
—
—
1.8
0.8
—
—
—
—
—
—
—
—
—
—
—
—
Gross derivative assets/liabilities
$
Less: Legally enforceable master netting agreements
Less: Cash collateral received/paid
Total derivative assets/liabilities
23.0
0.2
1,367.8
$
—
—
15.7
$
$
32.6
0.3
1,357.5
$
$
23.0
0.2
1,383.5
(1,271.9)
(58.1)
53.5
—
—
7.3
$
$
32.6
0.3
1,364.8
(1,271.9)
(46.9)
46.0
(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.
The Offsetting of Derivatives table below presents derivative
instruments included in derivative assets and liabilities on the
Consolidated Balance Sheet at December 31, 2013 and 2012 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
the Corporation and a particular
transactions between
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 and have been reduced by the cash collateral received
or paid.
Other gross derivative assets and liabilities in the table
represent derivatives entered
into under master netting
agreements where uncertainty exists as to the enforceability of
these agreements under bankruptcy laws in some countries or
industries and, accordingly, receivables and payables with
counterparties in these countries or industries are reported on a
gross basis.
Also included in the table is financial instrument collateral
related to legally enforceable master netting agreements that
represents securities collateral received or pledged and customer
cash collateral held at third-party custodians. These amounts are
not offset on the Consolidated Balance Sheet but are shown as
a reduction to total derivative assets and liabilities in the table to
derive net derivative assets and liabilities.
For more information on offsetting of securities financing
agreements, see Note 10 – Federal Funds Sold or Purchased,
Securities Financing Agreements and Short-term Borrowings.
166 Bank of America 2013
76788ba_financials.indd 166
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Offsetting of Derivatives
(Dollars in billions)
Interest rate contracts
Over-the-counter
Exchange-traded
Over-the-counter cleared
Foreign exchange contracts
Over-the-counter
Equity contracts
Over-the-counter
Exchange-traded
Commodity contracts
Over-the-counter
Exchange-traded
Credit derivatives
Over-the-counter
Over-the-counter cleared
Total gross derivative assets/liabilities, before netting
Over-the-counter
Exchange-traded
Over-the-counter cleared
Less: Legally enforceable master netting agreements and cash collateral received/paid
Over-the-counter
Exchange-traded
Over-the-counter cleared
Derivative assets/liabilities, after netting
Other gross derivative assets/liabilities
Total derivative assets/liabilities
Less: Financial instruments collateral (1)
December 31, 2013
December 31, 2012
Derivative
Assets
Derivative
Liabilities
Derivative
Assets
Derivative
Liabilities
$
$
381.7
0.4
351.2
$
365.9
0.3
356.5
$
646.7
—
539.5
82.9
20.3
8.4
6.3
3.3
44.0
5.8
535.2
12.1
357.0
(505.0)
(11.2)
(356.6)
31.5
16.0
47.5
(10.1)
37.4
83.9
17.6
9.8
7.4
2.9
38.9
5.9
513.7
13.0
362.4
(495.4)
(11.2)
(362.4)
20.1
17.3
37.4
(4.6)
32.8
$
84.1
15.2
4.8
6.9
3.4
56.0
3.8
808.9
8.2
543.3
(780.8)
(5.9)
(543.3)
30.4
23.1
53.5
(11.5)
42.0
$
623.4
—
545.1
88.7
13.3
4.7
7.9
3.2
53.9
3.4
787.2
7.9
548.5
(764.4)
(5.9)
(548.5)
24.8
21.2
46.0
(14.6)
31.4
Total net derivative assets/liabilities
(1) These amounts are limited to the derivative asset/liability balance and, accordingly, do not include excess collateral received/pledged.
$
$
ALM and Risk Management Derivatives
The Corporation’s asset and liability management (ALM) and risk
management activities include the use of derivatives to mitigate
risk to the Corporation including derivatives designated in
qualifying hedge accounting relationships and derivatives used in
other risk management activities. Interest rate, foreign exchange,
equity, commodity and credit contracts are utilized in the
Corporation’s ALM and risk management activities.
The Corporation maintains an overall interest rate risk
management strategy that incorporates the use of interest rate
contracts, which are generally non-leveraged generic interest rate
and basis swaps, options, futures and forwards, to minimize
significant fluctuations in earnings 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
MSRs. For more information on MSRs, see Note 23 – Mortgage
Servicing Rights.
The Corporation uses foreign exchange contracts to manage
the foreign exchange risk associated with certain foreign currency-
denominated assets and liabilities, as well as the Corporation’s
investments in non-U.S. subsidiaries. Foreign exchange contracts,
which include spot and forward contracts, represent agreements
to exchange the currency of one country for the currency of another
country at an agreed-upon price on an agreed-upon settlement
date. Exposure to loss on these contracts will increase or decrease
over their respective lives as currency exchange and interest rates
fluctuate.
76788ba_financials.indd 167
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Bank of America 2013 167
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).
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 2013, 2012 and 2011, including hedges of
interest rate risk on long-term debt that were acquired as part of
a business combination and redesignated. At redesignation, the
fair value of the derivatives was positive. As the derivatives mature,
the fair value will approach zero. As a result, ineffectiveness will
occur and the fair value changes in the derivatives and the long-
term debt being hedged may be directionally the same in certain
scenarios. Based on a regression analysis, the derivatives
continue to be highly effective at offsetting changes in the fair
value of the long-term debt attributable to interest rate risk.
Derivatives Designated as Fair Value Hedges
Gains (Losses)
(Dollars in millions)
Interest rate risk on long-term debt (1)
Interest rate and foreign currency risk on long-term debt (1)
Interest rate risk on available-for-sale securities (2)
Price risk on commodity inventory (3)
Total
Interest rate risk on long-term debt (1)
Interest rate and foreign currency risk on long-term debt (1)
Interest rate risk on available-for-sale securities (2)
Price risk on commodity inventory (3)
Total
Interest rate risk on long-term debt (1)
Interest rate and foreign currency risk on long-term debt (1)
Interest rate risk on available-for-sale securities (2)
Price risk on commodity inventory (3)
Total
Derivative
2013
Hedged
Item
Hedge
Ineffectiveness
$
$
$
$
$
$
(4,704) $
(1,291)
839
(13)
(5,169) $
(195) $
(1,482)
(4)
(6)
(1,687) $
$
4,384
780
(11,386)
16
(6,206) $
3,925
1,085
(840)
11
4,181
$
$
2012
(770) $
1,225
91
6
552
$
2011
(4,969) $
(1,057)
10,490
(16)
4,448
$
(779)
(206)
(1)
(2)
(988)
(965)
(257)
87
—
(1,135)
(585)
(277)
(896)
—
(1,758)
(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. Hedged AFS securities positions were sold during 2013 and the related hedges were terminated.
(3) Amounts relating to commodity inventory are recorded in trading account profits.
168 Bank of America 2013
76788ba_financials.indd 168
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Cash Flow and Net Investment Hedges
The table below summarizes certain information related to cash
flow hedges and net investment hedges for 2013, 2012 and 2011.
During the next 12 months, net losses in accumulated other
comprehensive income (OCI) of $784 million ($494 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 commodity price risk reclassified from accumulated OCI
are recorded in trading account profits with the underlying hedged
item. Amounts related to price risk on restricted stock awards
reclassified from accumulated OCI are recorded in personnel
expense.
Amounts related to foreign exchange risk recognized in
accumulated OCI on derivatives exclude pre-tax losses of $7
million and pre-tax gains of $82 million related to long-term debt
designated as a net investment hedge for 2012 and 2011. There
were no such hedges for 2013.
Derivatives Designated as Cash Flow and Net Investment Hedges
(Dollars in millions, amounts pre-tax)
Cash flow hedges
Interest rate risk on variable-rate portfolios
Price risk on restricted stock awards
Total
Net investment hedges
Foreign exchange risk
Cash flow hedges
Interest rate risk on variable-rate portfolios
Price risk on restricted stock awards
Total
Net investment hedges
Foreign exchange risk
Cash flow hedges
Interest rate risk on variable-rate portfolios
Commodity price risk on forecasted purchases and sales
Price risk on restricted stock awards
Total
2013
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)
$
$
$
$
$
$
$
$
(321) $
477
156
$
(1,102) $
329
(773) $
—
—
—
1,024
$
(355) $
(134)
2012
10
420
430
$
$
(957) $
(78)
(1,035) $
—
—
—
(771) $
(26) $
(269)
2011
(2,079) $
(3)
(408)
(2,490) $
(1,392) $
6
(231)
(1,617) $
(8)
(3)
—
(11)
Net investment hedges
Foreign exchange risk
(572)
(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
(1,055) $
384
$
$
testing.
76788ba_financials.indd 169
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Bank of America 2013 169
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 2013, 2012 and
2011. These gains (losses) are largely offset by the income or
expense that is recorded on the hedged item.
Other Risk Management Derivatives
Gains (Losses)
(Dollars in millions)
Price risk on mortgage banking production income (1, 2)
Market-related risk on mortgage banking servicing income (1)
Credit risk on loans (3)
Interest rate and foreign currency risk on ALM activities (4)
Price risk on restricted stock awards (5)
Other
Total
2013
2012
2011
$
$
968
(1,108)
(47)
2,501
865
(19)
3,160
$
$
3,022
2,000
(95)
424
1,008
58
6,417
$
$
2,852
3,612
30
(48)
(610)
281
6,117
(1) Net gains on these derivatives are recorded in mortgage banking income.
(2)
Includes net gains on interest rate lock commitments related to the origination of mortgage loans that are held-for-sale, which are considered derivative instruments, of $927 million, $3.0 billion
and $3.8 billion for 2013, 2012 and 2011, respectively.
(3) Net gains (losses) on these derivatives are recorded in other income (loss).
(4) 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).
(5) 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, all 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.
170 Bank of America 2013
76788ba_financials.indd 170
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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 2013, 2012 and 2011. The
difference between total trading account profits in the table below
and in the Consolidated Statement of Income represents trading
activities in business segments other than Global Markets. This
table includes debit valuation adjustment (DVA) gains (losses), net
of hedges. Global Markets results in Note 24 – Business Segment
Information are presented on a fully taxable-equivalent (FTE) basis.
The table below is not presented on a FTE basis.
Sales and Trading Revenue
(Dollars in millions)
Interest rate risk
Foreign exchange risk
Equity risk
Credit risk
Other risk
Total sales and trading revenue
Interest rate risk
Foreign exchange risk
Equity risk
Credit risk
Other risk
Total sales and trading revenue
Interest rate risk
Foreign exchange risk
Equity risk
Credit risk
Other risk
Total sales and trading revenue
2013
Trading
Account
Profits
Net
Interest
Income
Other (1)
Total
$
$
$
$
$
$
1,120
1,170
1,994
2,075
375
6,734
583
909
1,180
2,522
512
5,706
2,148
1,090
1,482
1,067
630
6,417
$
$
$
$
$
$
1,104
4
112
2,711
(203)
3,728
$
$
83
(26)
2,094
88
202
2,441
$
$
2,307
1,148
4,200
4,874
374
12,903
2012
$
1,040
5
(57)
2,321
(219)
3,090
923
8
129
2,605
(184)
3,481
2011
$
$
$
(6) $
6
1,891
961
(42)
2,810
1,617
920
3,014
5,804
251
$ 11,606
(63) $
(10)
2,347
552
(72)
2,754
3,008
1,088
3,958
4,224
374
$ 12,652
(1) Represents amounts in investment and brokerage services and other income (loss) that are recorded in Global Markets and included in the definition of sales and trading revenue. Includes investment
and brokerage services revenue of $2.0 billion, $1.8 billion and $2.2 billion for 2013, 2012 and 2011, respectively.
Credit Derivatives
The Corporation enters into credit derivatives primarily to facilitate
client transactions and to manage credit risk exposures. Credit
derivatives derive value based on an underlying third-party
referenced obligation or a portfolio of referenced obligations and
generally require the Corporation, as the seller of credit protection,
to make payments to a buyer upon the occurrence of a pre-defined
credit event. Such credit events generally include bankruptcy of
the referenced credit entity and failure to pay under the obligation,
as well as acceleration of indebtedness and payment repudiation
or moratorium. For credit derivatives based on a portfolio of
referenced credits or credit indices, the Corporation may not be
required to make payment until a specified amount of loss has
occurred and/or may only be required to make payment up to a
specified amount.
76788ba_financials.indd 171
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Bank of America 2013 171
Credit derivative instruments where the Corporation is the
seller of credit protection and their expiration are summarized at
December 31, 2013 and 2012 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
(Dollars in millions)
Credit default swaps:
Investment grade
Non-investment grade
Total
Total return swaps/other:
Investment grade
Non-investment grade
Total
Total credit derivatives
Credit-related notes: (1)
Investment grade
Non-investment grade
Total credit-related notes
Credit default swaps:
Investment grade
Non-investment grade
Total
Total return swaps/other:
Investment grade
Non-investment grade
Total
Total credit derivatives
Credit default swaps:
Investment grade
Non-investment grade
Total
Total return swaps/other:
Investment grade
Non-investment grade
Total
Total credit derivatives
Credit-related notes: (1)
Investment grade
Non-investment grade
Total credit-related notes
Credit default swaps:
Investment grade
Non-investment grade
Total
Total return swaps/other:
Investment grade
Non-investment grade
Total
Total credit derivatives
December 31, 2013
Carrying Value
Less than
One Year
One to
Three Years
Three to
Five Years
Over Five
Years
Total
$
$
$
$
$
$
$
$
$
$
2
424
426
22
29
51
477
$
$
— $
145
145
170,764
53,316
224,080
21,771
27,784
49,555
273,635
52
923
975
39
57
96
1,071
4
116
120
$
$
$
$
$
$
$
220
1,924
2,144
—
38
38
2,182
$
$
974
2,469
3,443
—
2
2
3,445
$
$
$
$
278
107
385
Maximum Payout/Notional
595
756
1,351
$
$
1,134
6,667
7,801
—
86
86
7,887
4,457
946
5,403
379,273
90,986
470,259
—
8,150
8,150
478,409
$
$
411,426
95,319
506,745
—
4,103
4,103
510,848
$
$
36,039
28,257
64,296
—
1,599
1,599
65,895
$
$
$
$
$
2,330
11,484
13,814
22
155
177
13,991
5,330
1,954
7,284
997,502
267,878
1,265,380
21,771
41,636
63,407
$ 1,328,787
December 31, 2012
Carrying Value
757
4,403
5,160
—
104
104
5,264
$
$
5,595
7,030
12,625
—
39
39
12,664
$
$
$
$
12
161
173
Maximum Payout/Notional
441
314
755
$
$
2,903
10,959
13,862
—
37
37
13,899
3,849
1,425
5,274
$
$
$
$
9,307
23,315
32,622
39
237
276
32,898
4,306
2,016
6,322
$ 260,177
79,861
340,038
$ 349,125
99,043
448,168
$ 500,038
110,248
610,286
$
90,453
42,559
133,012
$ 1,199,793
331,711
1,531,504
43,536
5,566
49,102
$ 389,140
15
11,028
11,043
$ 459,211
—
7,631
7,631
$ 617,917
—
1,035
1,035
$ 134,047
43,551
25,260
68,811
$ 1,600,315
(1) For credit-related notes, maximum payout/notional is the same as carrying value.
172 Bank of America 2013
76788ba_financials.indd 172
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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 $8.1 billion and $1.0
trillion at December 31, 2013 and $20.7 billion and $1.1 trillion
at December 31, 2012.
Credit-related notes in the table on page 172 include
investments in securities issued by collateralized debt obligation
(CDO), collateralized loan obligation (CLO) and credit-linked note
vehicles. These instruments are primarily classified as trading
securities. The carrying value of these instruments equals the
Corporation’s maximum exposure to loss. The Corporation is not
obligated to make any payments to the entities under the terms
of the securities owned.
cash and securities collateral of $56.1 billion and $74.1 billion in
the normal course of business under derivative agreements.
In connection with certain OTC derivative contracts and other
trading agreements, the Corporation can be required to provide
additional collateral or to terminate transactions with certain
counterparties in the event of a downgrade of the senior debt
ratings of the Corporation or certain subsidiaries. The amount of
additional collateral required depends on the contract and is
usually a fixed incremental amount and/or the market value of the
exposure.
At December 31, 2013, 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 $700 million for Bank of America, N.A. (BANA).
Some counterparties are currently able to unilaterally
terminate certain contracts, or the Corporation or certain
subsidiaries may be required to take other action such as find a
suitable replacement or obtain a guarantee. At December 31,
2013, the current liability recorded for these derivative contracts
was $385 million, against which the Corporation and certain
subsidiaries had posted approximately $350 million of collateral.
The table below presents the amount of additional collateral
contractually required by derivative contracts and other trading
agreements at December 31, 2013 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.
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 165, the
Corporation enters into legally enforceable master netting
agreements which reduce risk by permitting the closeout and
netting of transactions with the same counterparty upon the
occurrence of certain events.
A majority of the Corporation’s derivative contracts contain
credit risk-related contingent features, primarily in the form of ISDA
master netting agreements and credit support documentation that
enhance the creditworthiness of these instruments compared to
other obligations of the respective counterparty with whom the
Corporation has transacted. These contingent features may be for
the benefit of the Corporation as well as its counterparties with
respect to changes in the Corporation’s creditworthiness and the
mark-to-market exposure under the derivative transactions. At
December 31, 2013 and 2012, the Corporation held cash and
securities collateral of $74.4 billion and $85.6 billion, and posted
Additional Collateral Required to be Posted Upon
Downgrade
(Dollars in millions)
December 31, 2013
Second
One
incremental
incremental
notch
notch
Bank of America Corporation
Bank of America, N.A. and subsidiaries (1)
(1)
1,302 $
881
Included in Bank of America Corporation collateral requirements in this table.
$
4,101
3,039
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
December 31, 2013 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
(Dollars in millions)
Derivative liability
Collateral posted
December 31, 2013
Second
One
incremental
incremental
notch
notch
$
927 $
733
1,878
1,467
Bank of America 2013 173
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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
in collateral
exposure, and other
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.
like changes
factors
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 and often hedges the
other market risks in both CVA and DVA primarily with currency and
interest rate swaps. Since the components of the valuation
adjustments on derivatives move
independently and the
Corporation may not hedge all of the market driven exposures, the
effect of a hedge may increase the gross valuation adjustments
on derivatives or may result in a gross positive valuation
adjustment on derivatives becoming a negative adjustment (or the
reverse).
In 2013, the Corporation refined its methodology for calculating
CVA and DVA on a prospective basis, to adjust the way it values
mutual termination clauses in derivatives contracts and to more
fully incorporate the potential for the counterparties to default prior
to a change in their credit ratings. This change in estimate
increased CVA by $361 million and DVA by $433 million resulting
in a net positive earnings impact of $72 million at the time of the
change and is included in the results for 2013. The net CVA and
DVA excluding the impact of these refinements was a gain of $265
million and a loss of $508 million for 2013.
The table below presents CVA and DVA gains (losses), which
are recorded in trading account profits on a gross and net of hedge
basis.
Valuation Adjustments on Derivatives
(Dollars in millions)
2013
2012
2011
Gross
Net
Gross
Net
Gross
Net
Derivative assets (CVA) (1)
Derivative liabilities (DVA) (2)
(1) At December 31, 2013, 2012 and 2011, the cumulative CVA reduced the derivative assets balance by $1.6 billion, $2.4 billion and $2.8 billion, respectively.
(2) At December 31, 2013, 2012 and 2011, the cumulative DVA reduced the derivative liabilities balance by $803 million, $807 million and $2.4 billion, respectively.
(96) $ 1,022 $
(75)
738 $
(39)
(2,212)
$
291
(2,477)
$ (1,863) $
1,385
(606)
1,000
174 Bank of America 2013
76788ba_financials.indd 174
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NOTE 3 Securities
The Corporation’s debt securities carried at fair value include debt
securities purchased for longer term investment purposes and are
used as part of ALM and other strategic activities. Generally, debt
securities carried at fair value are accounted for as available-for-
sale (AFS) debt securities with unrealized gains and losses
reported in accumulated OCI. For certain other debt securities
purchased for ALM and other strategic purposes, the Corporation
has elected to report those securities at fair value with unrealized
gains and losses reported in other income (loss) in the
Consolidated Statement of Income.
As a result of growth in the portfolio of debt securities carried
at fair value with unrealized gains and losses recorded in other
income (loss) and to better reflect how such a portfolio is managed
as part of the ALM activities, the Corporation changed the
presentation of such securities in 2013 to combine debt securities
carried at fair value into one line item on the Consolidated Balance
Sheet. Previously, the portfolio of debt securities carried at fair
value with unrealized gains and losses recorded in other income
(loss) was classified in other assets. The Corporation may hedge
these debt securities with risk management derivatives with the
unrealized gains and losses also reported in other income (loss).
Certain debt securities are carried at fair value with unrealized
gains and losses reported in other income (loss) to mitigate
accounting asymmetry with the risk management derivatives and
to achieve operational simplifications. Prior-period amounts have
been reclassified to conform to the current period presentation.
The table below presents the amortized cost, gross unrealized
gains and losses, and fair value of AFS debt securities, other debt
securities carried at fair value, held-to-maturity (HTM) debt
securities and AFS marketable equity securities at December 31,
2013 and 2012.
Debt Securities and Available-for-Sale Marketable Equity Securities
(Dollars in millions)
Available-for-sale debt securities
U.S. Treasury and agency securities
Mortgage-backed securities:
Agency
Agency-collateralized mortgage obligations
Non-agency residential (1)
Commercial
Non-U.S. securities
Corporate/Agency bonds
Other taxable securities, substantially all asset-backed securities
Total taxable securities
Tax-exempt securities
Total available-for-sale debt securities
Other debt securities carried at fair value
Total debt securities carried at fair value
Held-to-maturity debt securities, substantially all U.S. agency mortgage-backed securities
Total debt securities
Available-for-sale marketable equity securities (2)
Available-for-sale debt securities
U.S. Treasury and agency securities
Mortgage-backed securities:
Agency
Agency-collateralized mortgage obligations
Non-agency residential (1)
Non-agency commercial
Non-U.S. securities
Corporate/Agency bonds
Other taxable securities, substantially all asset-backed securities
Total taxable securities
Tax-exempt securities
Total available-for-sale debt securities
Other debt securities carried at fair value
Total debt securities carried at fair value
Held-to-maturity debt securities, substantially all U.S. agency mortgage-backed securities
Total debt securities
December 31, 2013
Gross
Gross
Unrealized
Unrealized
Losses
Gains
Fair
Value
Amortized
Cost
$
8,910
$
106
$
(62) $
8,954
170,112
22,731
6,124
2,429
7,207
860
16,805
235,178
5,967
241,145
34,145
275,290
55,150
330,440
230
$
$
$
$
777
76
238
63
37
20
30
1,347
10
1,357
34
1,391
20
1,411
$
— $
(5,954)
(315)
(123)
(12)
(24)
(7)
(5)
(6,502)
(49)
(6,551)
(1,335)
(7,886)
(2,740)
(10,626) $
(7) $
164,935
22,492
6,239
2,480
7,220
873
16,830
230,023
5,928
235,951
32,844
268,795
52,430
321,225
223
December 31, 2012
$
24,232
$
324
$
(84) $
24,472
183,247
36,329
9,231
3,576
5,574
1,415
12,089
275,693
4,167
279,860
23,927
303,787
49,481
353,268
780
5,048
1,427
391
348
50
51
54
7,693
13
7,706
120
7,826
815
8,641
732
(146)
(218)
(128)
—
(6)
(16)
(15)
(613)
(47)
(660)
(103)
(763)
(26)
(789) $
— $
188,149
37,538
9,494
3,924
5,618
1,450
12,128
282,773
4,133
286,906
23,944
310,850
50,270
361,120
1,512
$
$
$
$
$
$
Available-for-sale marketable equity securities (2)
(1) At December 31, 2013 and 2012, the underlying collateral type included approximately 89 percent and 91 percent prime, seven percent and six percent Alt-A, and four percent and three percent
subprime.
(2) Classified in other assets on the Consolidated Balance Sheet.
Bank of America 2013 175
76788ba_financials.indd 175
3/6/14 12:06 PM
At December 31, 2013, the accumulated net unrealized loss
on AFS debt securities included in accumulated OCI was $3.3
billion, net of the related income tax benefit of $1.9 billion. At
December 31, 2013 and 2012,
the Corporation had
nonperforming AFS debt securities of $103 million and $91 million.
The following table presents the components of other debt
securities carried at fair value where the changes in fair value are
reported in other income (loss) at December 31, 2013 and 2012.
In 2013, the Corporation recorded unrealized mark-to-market net
losses in other income (loss) of $1.3 billion and realized losses
of $1.0 billion 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). Amounts in 2012 were
insignificant.
Other Debt Securities Carried at Fair Value
(Dollars in millions)
U.S. Treasury and agency securities
Mortgage-backed securities:
Agency
Agency-collateralized mortgage obligations
Commercial
Non-U.S. securities (1)
Total
December 31
2013
2012
$
4,062
$
491
16,500
218
749
11,315
32,844
$
13,073
929
—
9,451
23,944
$
(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 2013, 2012 and 2011 are presented in the table
below.
Gains and Losses on Sales of AFS Debt Securities
(Dollars in millions)
Gross gains
Gross losses
Net gains on sales of AFS debt securities
Income tax expense attributable to realized
net gains on sales of AFS debt securities
2013
$ 1,302
(31)
$ 1,271
2012
$ 2,128
(466)
$ 1,662
2011
$ 3,685
(311)
$ 3,374
$
470
$
615
$ 1,248
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) and Freddie Mac (FHLMC), where the investment exceeded
10 percent of consolidated shareholders’ equity at December 31,
2013 and 2012, are presented in the table below.
Selected Securities Exceeding 10 Percent of
Shareholders’ Equity
December 31
2013
2012
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$ 123,813
$ 118,708
$ 121,522
$ 123,933
(Dollars in millions)
Fannie Mae
Government National
Mortgage Association
118,700
115,314
124,348
127,541
Freddie Mac
24,908
24,075
22,995
23,502
176 Bank of America 2013
76788ba_financials.indd 176
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The table below presents the fair value and the associated gross unrealized losses on AFS debt securities and whether these
securities have had gross unrealized losses for less than 12 months or for 12 months or longer at December 31, 2013 and 2012.
Temporarily Impaired and Other-than-temporarily Impaired AFS Debt Securities
(Dollars in millions)
Temporarily impaired available-for-sale debt securities
U.S. Treasury and agency securities
Mortgage-backed securities:
Agency
Agency-collateralized mortgage obligations
Non-agency residential
Commercial
Non-U.S. securities
Corporate/Agency bonds
Other taxable securities, substantially all asset-backed securities
Total taxable securities
Tax-exempt securities
Total temporarily impaired available-for-sale debt securities
Other-than-temporarily impaired available-for-sale debt securities (1)
Less than Twelve Months
Fair
Value
Gross
Unrealized
Losses
December 31, 2013
Twelve Months or Longer
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
$
5,770
$
(61) $
19
$
(1) $
5,789
$
(62)
132,032
13,438
819
286
—
106
116
152,567
1,789
154,356
(5,457)
(210)
(15)
(12)
—
(3)
(2)
(5,760)
(30)
(5,790)
9,324
2,661
1,237
—
45
282
280
13,848
990
14,838
(497)
(105)
(106)
—
(24)
(4)
(3)
(740)
(19)
(759)
(1)
141,356
16,099
2,056
286
45
388
396
166,415
2,779
169,194
(5,954)
(315)
(121)
(12)
(24)
(7)
(5)
(6,500)
(49)
(6,549)
3
(2)
Non-agency residential mortgage-backed securities
2
(1)
1
Total temporarily impaired and other-than-temporarily impaired available-for-
sale securities (2)
$ 154,358
$
(5,791) $
14,839
$
(760) $ 169,197
$
(6,551)
Temporarily impaired available-for-sale debt securities
U.S. Treasury and agency securities
Mortgage-backed securities:
Agency
Agency-collateralized mortgage obligations
Non-agency residential
Non-U.S. securities
Corporate/Agency bonds
Other taxable securities, substantially all asset-backed securities
Total taxable securities
Tax-exempt securities
Total temporarily impaired available-for-sale debt securities
Other-than-temporarily impaired available-for-sale debt securities (1)
December 31, 2012
$
— $
— $
5,608
$
(84) $
5,608
$
(84)
15,593
5,135
592
1,715
—
1,678
24,713
1,609
26,322
(133)
(121)
(13)
(1)
—
(1)
(269)
(9)
(278)
735
4,994
1,555
563
277
1,436
15,168
1,072
16,240
(13)
(97)
(110)
(5)
(16)
(14)
(339)
(38)
(377)
16,328
10,129
2,147
2,278
277
3,114
39,881
2,681
42,562
(146)
(218)
(123)
(6)
(16)
(15)
(608)
(47)
(655)
Non-agency residential mortgage-backed securities
14
(1)
74
(4)
88
(5)
Total temporarily impaired and other-than-temporarily impaired available-for-
sale securities (2)
$
26,336
$
(279) $
16,314
$
(381) $
42,650
$
(660)
(1)
Includes other-than-temporarily impaired AFS debt securities on which an OTTI loss remains in accumulated OCI.
(2) At December 31, 2013 and 2012, the amortized cost of approximately 4,700 and 2,600 AFS debt securities exceeded their fair value by $6.6 billion and $660 million.
76788ba_financials.indd 177
3/6/14 12:06 PM
Bank of America 2013 177
The Corporation recorded other-than-temporary impairment
(OTTI) losses on AFS debt securities in 2013, 2012 and 2011 as
presented in the table below. A debt security is impaired when its
fair value is less than its amortized cost. If the Corporation intends
or will more-likely-than-not be required to sell a debt security prior
to recovery, the entire impairment loss is recorded in the
Consolidated Statement of Income. For AFS debt securities the
Corporation does not intend or will not more-likely-than-not be
required to sell, an analysis is performed to determine if any of
the impairment is due to credit or whether it is due to other factors
(e.g., interest rate). Credit losses are considered unrecoverable
and are recorded in the Consolidated Statement of Income with
the remaining unrealized losses recorded in accumulated OCI. In
certain instances, the credit loss on a debt security may exceed
the total impairment, in which case, the portion of the credit loss
that exceeds the total impairment is recorded as an unrealized
gain in accumulated OCI.
Net Impairment Losses Recognized in Earnings
(Dollars in millions)
Total OTTI losses (unrealized and realized)
Unrealized OTTI losses recognized in accumulated OCI
Net impairment losses recognized in earnings
Total OTTI losses (unrealized and realized)
Unrealized OTTI losses recognized in accumulated OCI
Net impairment losses recognized in earnings
Total OTTI losses (unrealized and realized)
Unrealized OTTI losses recognized in accumulated OCI
Net impairment losses recognized in earnings
2013
Non-agency
Residential
MBS
Non-agency
Commercial
MBS
Other
Taxable
Securities
Total
$
$
$
$
$
$
(21) $
1
(20) $
(50) $
4
(46) $
(348) $
61
(287) $
— $
—
— $
2012
(7) $
—
(7) $
2011
(10) $
—
(10) $
— $
—
— $
— $
—
— $
(2) $
—
(2) $
(21)
1
(20)
(57)
4
(53)
(360)
61
(299)
The Corporation’s net impairment losses recognized in earnings
consist of credit losses in 2013, 2012 and 2011. Also included
in 2011 were write-downs to fair value on AFS debt securities the
Corporation had the intent to sell.
The table below presents a rollforward of the credit losses
recognized in earnings in 2013, 2012 and 2011 on AFS debt
securities that the Corporation does not have the intent to sell or
will not more-likely-than-not be required to sell.
Rollforward of Credit Losses Recognized
(Dollars in millions)
Balance, January 1
Additions for credit losses recognized on AFS debt securities that had no previous impairment losses
Additions for credit losses recognized on AFS debt securities that had previously incurred impairment losses
Reductions for AFS debt securities matured, sold or intended to be sold
Balance, December 31
2013
2012
243
6
14
(51)
212
$
$
310
7
46
(120)
243
$
$
$
$
2011
2,148
72
149
(2,059)
310
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.
178 Bank of America 2013
Significant assumptions used in estimating the expected cash
flows for measuring credit losses on non-agency residential
follows at
mortgage-backed securities
December 31, 2013.
(RMBS) were as
Significant Assumptions
Range (1)
Weighted-
average
10th
Percentile (2)
90th
Percentile (2)
Prepayment speed
Loss severity
Life default rate
(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.
11.6%
41.3
39.4
14.7
0.9
1.8%
23.6%
52.1
99.6
76788ba_financials.indd 178
3/6/14 12:06 PM
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 38.1 percent for prime, 42.0 percent
for Alt-A and 49.9 percent for subprime at December 31, 2013.
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 27.7 percent for prime, 49.1 percent for Alt-
A and 34.1 percent for subprime at December 31, 2013.
The expected maturity distribution of the Corporation’s MBS,
the contractual maturity distribution of the Corporation’s debt
securities carried at fair value and HTM debt securities, and the
yields on the Corporation’s debt securities carried at fair value and
HTM debt securities at December 31, 2013 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
(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
$
535
0.62% $
2,337
1.71% $
8,844
2.44% $
1,339
3.84% $ 13,055
2.38%
Due in One
Year or Less
Due after One Year
through Five Years
December 31, 2013
Due after Five Years
through Ten Years
Due after
Ten Years
Total
Mortgage-backed securities:
Agency
Agency-collateralized mortgage obligations
Non-agency residential
Commercial
Non-U.S. securities
Corporate/Agency bonds
Other taxable securities, substantially all asset-backed
securities
Total taxable securities
Tax-exempt securities
11
1,482
815
1,683
16,288
395
6,655
27,864
195
Total amortized cost of debt securities carried at fair value $ 28,059
4.44
0.01
4.10
5.01
1.04
2.48
1.58
1.46
1.66
1.47
9,649
3,373
2,200
466
2,074
206
7,274
27,579
2,324
$ 29,903
2.93
2.09
4.06
6.43
3.98
5.69
1.37
2.56
1.49
2.46
1.79
90,407
18,036
1,149
1,089
149
112
2,105
121,891
2,429
$ 124,320
$ 53,699
3.10
2.96
3.13
2.51
3.34
4.12
2.06
3.01
1.90
2.99
2.60
87,728
29
1,960
7
8
147
771
91,989
1,019
$ 93,008
$
1,326
2.96
0.93
2.59
4.09
3.10
1.38
0.84
2.95
0.61
2.92
2.72
187,795
22,920
6,124
3,245
18,519
860
16,805
269,323
5,967
$ 275,290
$ 55,150
3.03
2.63
3.42
4.37
1.39
3.27
1.50
2.78
1.54
2.75
2.61
Amortized cost of held-to-maturity debt securities (2)
Debt securities carried at fair value
U.S. Treasury and agency securities
Mortgage-backed securities:
Agency
Agency-collateralized mortgage obligations
Non-agency residential
Commercial
Non-U.S. securities
Corporate/Agency bonds
Other taxable securities, substantially all asset-backed
securities
Total taxable securities
Tax-exempt securities
Total debt securities carried at fair value
Fair value of held-to-maturity debt securities (2)
—
— $
125
$
$
537
$
2,333
$
8,831
$
1,315
$ 13,016
11
1,480
805
1,715
16,273
395
6,656
27,872
194
$ 28,066
$
—
9,708
3,284
2,236
494
2,099
220
7,280
27,654
2,319
$ 29,973
$
125
88,191
17,916
1,173
1,013
155
116
2,120
119,515
2,409
$ 121,924
$ 51,062
83,525
30
2,025
7
8
142
774
87,826
1,006
$ 88,832
$
1,243
181,435
22,710
6,239
3,229
18,535
873
16,830
262,867
5,928
$ 268,795
$ 52,430
(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 of 2.0
billion shares of China Construction Bank Corporation (CCB) and
realized a pre-tax gain of $753 million reported in equity investment
income in the Consolidated Statement of Income. At December
31, 2012, these shares, representing approximately one percent
of CCB, were classified as AFS marketable equity securities and
carried at fair value with the after-tax unrealized gain included in
accumulated OCI. The strategic assistance agreement between
the Corporation and CCB, which includes cooperation in specific
business areas, has been extended through 2016.
The Corporation’s 49 percent investment in a merchant
services joint venture, which is recorded in Consumer & Business
Banking (CBB), had a carrying value of $3.2 billion and $3.3 billion
at December 31, 2013 and 2012. For additional information, see
Note 12 – Commitments and Contingencies.
76788ba_financials.indd 179
3/6/14 12:06 PM
Bank of America 2013 179
NOTE 4 Outstanding Loans and Leases
The following tables present total outstanding loans and leases and an aging analysis for the Corporation’s Home Loans, Credit Card
and Other Consumer, and Commercial portfolio segments, by class of financing receivables, at December 31, 2013 and 2012.
30-59 Days
Past Due (1)
60-89 Days
Past Due (1)
90 Days or
More
Past Due (2)
December 31, 2013
Total
Current or
Less Than
30 Days
Past Due (3)
Total Past
Due 30
Days
or More
Loans
Accounted
for Under
the Fair
Value Option
Purchased
Credit-
impaired (4)
(Dollars in millions)
Home loans
Core portfolio
Residential mortgage
Home equity
$
Legacy Assets & Servicing portfolio
Residential mortgage (5)
Home equity
Credit card and other consumer
U.S. credit card
Non-U.S. credit card
Direct/Indirect consumer (6)
Other consumer (7)
Total consumer
Consumer loans accounted for under
the fair value option (8)
2,151
243
2,758
444
598
63
431
24
6,712
$
$
754
113
7,188
693
$
10,093
1,049
$ 167,243
53,450
1,412
221
422
54
175
8
3,159
16,746
1,292
1,053
131
410
20
27,533
20,916
1,957
2,073
248
1,016
52
37,404
31,142
30,623
$
18,672
6,593
90,265
11,293
81,176
1,925
467,117
25,265
Total consumer loans and leases
6,712
3,159
27,533
37,404
467,117
25,265
$
2,164
2,164
Commercial
U.S. commercial
Commercial real estate (9)
Commercial lease financing
Non-U.S. commercial
U.S. small business commercial
Total commercial
Commercial loans accounted for under
the fair value option (8)
363
30
110
103
87
693
151
29
37
8
55
280
309
243
48
17
113
730
823
302
195
128
255
1,703
211,734
47,591
25,004
89,334
13,039
386,702
Total commercial loans and leases
Total loans and leases
$
693
7,405
$
280
3,439
730
28,263
$
1,703
39,107
$
386,702
$ 853,819
$
25,265
$
7,878
7,878
10,042
$
Total
Outstandings
$
177,336
54,499
70,730
39,173
92,338
11,541
82,192
1,977
529,786
2,164
531,950
212,557
47,893
25,199
89,462
13,294
388,405
7,878
396,283
928,233
Percentage of outstandings
(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
91.99%
0.37%
3.04%
0.80%
4.21%
1.08%
2.72%
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, consumer lending loans of $2.7 billion, U.S. securities-based lending loans of $31.2 billion, non-U.S. consumer loans of
$4.7 billion, student loans of $4.1 billion and other consumer loans of $1.0 billion.
(7) Total outstandings includes consumer finance loans of $1.2 billion, consumer leases of $606 million, consumer overdrafts of $176 million and other non-U.S. consumer loans of $5 million.
(8) Consumer loans accounted for under the fair value option were residential mortgage loans of $2.0 billion and home equity loans of $147 million. Commercial loans accounted for under the fair value
option were U.S. commercial loans of $1.5 billion and non-U.S. commercial loans of $6.4 billion. For additional information, see Note 20 – Fair Value Measurements and Note 21 – Fair Value Option.
(9) Total outstandings includes U.S. commercial real estate loans of $46.3 billion and non-U.S. commercial real estate loans of $1.6 billion.
180 Bank of America 2013
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December 31, 2012
90 Days or
More
Past Due (2)
Total Past
Due 30
Days
or More
Total
Current or
Less Than
30 Days
Past Due (3)
Loans
Accounted
for Under
the Fair
Value Option
Purchased
Credit-
impaired (4)
30-59 Days
Past Due (1)
60-89 Days
Past Due (1)
(Dollars in millions)
Home loans
Core portfolio
Residential mortgage (5)
Home equity
$
Legacy Assets & Servicing portfolio
Residential mortgage (6)
Home equity
Credit card and other consumer
U.S. credit card
Non-U.S. credit card
Direct/Indirect consumer (7)
Other consumer (8)
Total consumer
Consumer loans accounted for under
the fair value option (9)
2,274
273
2,938
608
729
106
569
48
7,545
$
$
806
146
6,227
591
$
9,307
1,010
$ 160,809
59,841
1,714
357
582
85
239
19
3,948
26,728
1,444
1,437
212
573
4
37,216
31,380
2,409
2,748
403
1,381
71
48,709
33,982
36,213
$
17,451
8,667
92,087
11,294
81,824
1,557
477,607
26,118
Total consumer loans and leases
7,545
3,948
37,216
48,709
477,607
26,118
$
1,005
1,005
Commercial
U.S. commercial
Commercial real estate (10)
Commercial lease financing
Non-U.S. commercial
U.S. small business commercial
Total commercial
Commercial loans accounted for under
the fair value option (9)
323
79
84
2
101
589
133
144
79
—
75
431
639
983
30
—
168
1,820
1,095
1,206
193
2
344
2,840
196,031
37,431
23,650
74,182
12,249
343,543
Total commercial loans and leases
Total loans and leases
$
589
8,134
$
431
4,379
1,820
39,036
$
2,840
51,549
$
343,543
$ 821,150
$
26,118
$
7,997
7,997
9,002
$
Total
Outstandings
$
170,116
60,851
82,813
47,289
94,835
11,697
83,205
1,628
552,434
1,005
553,439
197,126
38,637
23,843
74,184
12,593
346,383
7,997
354,380
907,819
Percentage of outstandings
(1) Home loans 30-59 days past due includes fully-insured loans of $2.3 billion and nonperforming loans of $702 million. Home loans 60-89 days past due includes fully-insured loans of $1.3 billion
90.45%
0.99%
0.90%
4.30%
5.68%
0.48%
2.88%
and nonperforming loans of $558 million.
(2) Home loans includes fully-insured loans of $22.2 billion.
(3) Home loans includes $5.5 billion and direct/indirect consumer includes $63 million of nonperforming loans.
(4) PCI loan amounts are shown gross of the valuation allowance.
(5) Total outstandings includes non-U.S. residential mortgage loans of $93 million.
(6) Total outstandings includes pay option loans of $6.7 billion. The Corporation no longer originates this product.
(7) Total outstandings includes dealer financial services loans of $35.9 billion, consumer lending loans of $4.7 billion, U.S. securities-based lending loans of $28.3 billion, non-U.S. consumer loans of
$8.3 billion, student loans of $4.8 billion and other consumer loans of $1.2 billion.
(8) Total outstandings includes consumer finance loans of $1.4 billion, consumer leases of $34 million, consumer overdrafts of $177 million and other non-U.S. consumer loans of $5 million.
(9) Consumer loans accounted for under the fair value option were residential mortgage loans of $1.0 billion. Commercial loans accounted for under the fair value option were U.S. commercial loans
of $2.3 billion and non-U.S. commercial loans of $5.7 billion. For additional information, see Note 20 – Fair Value Measurements and Note 21 – Fair Value Option.
(10) Total outstandings includes U.S. commercial real estate loans of $37.2 billion and non-U.S. commercial real estate loans of $1.5 billion.
76788ba_financials.indd 181
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Bank of America 2013 181
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 $339 million
and $500 million at December 31, 2013 and 2012. 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 December 31,
2013 and 2012, the Corporation had a receivable of $198 million
and $305 million from these vehicles for reimbursement of losses,
and principal of $12.5 billion and $17.6 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
$28.2 billion and $24.3 billion at December 31, 2013 and 2012,
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 December 31, 2013
and 2012, $1.2 billion and $1.5 billion of such junior-lien home
equity loans were included in nonperforming loans.
The Corporation classifies consumer real estate loans that
have been discharged in Chapter 7 bankruptcy and not reaffirmed
by the borrower as troubled debt restructurings (TDRs), irrespective
of payment history or delinquency status, even if the repayment
terms for the loan have not been otherwise modified. The
Corporation continues to have a lien on the underlying collateral.
At December 31, 2013, nonperforming loans discharged in
Chapter 7 bankruptcy with no change in repayment terms at the
time of discharge were $1.8 billion of which $1.1 billion were
current on their contractual payments while $642 million were 90
days or more past due. Of the contractually current nonperforming
loans, nearly 80 percent were discharged in Chapter 7 bankruptcy
more than 12 months ago, and nearly 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.
182 Bank of America 2013
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The table below presents the Corporation’s nonperforming
loans and leases including nonperforming TDRs, and loans
accruing past due 90 days or more at December 31, 2013 and
2012. Nonperforming loans held-for-sale (LHFS) are excluded from
nonperforming loans and leases as they are recorded at either fair
value or the lower of cost or fair value. For more information on
the criteria for classification as nonperforming, see Note 1 –
Summary of Significant Accounting Principles.
Credit Quality
(Dollars in millions)
Home loans
Core portfolio
Residential mortgage (2)
Home equity
Legacy Assets & Servicing portfolio
Residential mortgage (2)
Home equity
Credit card and other consumer
U.S. credit card
Non-U.S. credit card
Direct/Indirect consumer
Other consumer
Total consumer
Commercial
U.S. commercial
Commercial real estate
Commercial lease financing
Non-U.S. commercial
U.S. small business commercial
Total commercial
Total loans and leases
December 31
Nonperforming Loans
and Leases (1)
Accruing Past Due
90 Days or More
2013
2012
2013
2012
$
$
3,316
1,431
$
3,193
1,265
$
5,137
—
3,984
—
8,396
2,644
n/a
n/a
35
18
15,840
819
322
16
64
88
1,309
17,149
$
11,862
3,017
n/a
n/a
92
2
19,431
1,484
1,513
44
68
115
3,224
$ 22,655
$
11,824
—
1,053
131
408
2
18,555
47
21
41
17
78
204
18,759
18,173
—
1,437
212
545
2
24,353
65
29
15
—
120
229
$ 24,582
(1) Nonperforming loan balances do not include nonaccruing TDRs removed from the PCI loan portfolio prior to January 1, 2010 of $260 million and $521 million at December 31, 2013 and 2012.
(2) Residential mortgage loans in the Core and Legacy Assets & Servicing portfolios accruing past due 90 days or more are fully-insured loans. At December 31, 2013 and 2012, residential mortgage
includes $13.0 billion and $17.8 billion of loans on which interest has been curtailed by the FHA, and therefore are no longer accruing interest, although principal is still insured, and $4.0 billion
and $4.4 billion of loans on which interest is still accruing.
n/a = not applicable
Credit Quality Indicators
The Corporation monitors credit quality within its Home Loans,
Credit Card and Other Consumer, and Commercial portfolio
segments based on primary credit quality indicators. For more
information on the portfolio segments, see Note 1 – Summary of
Significant Accounting Principles. Within the Home Loans portfolio
segment, the primary credit quality indicators are refreshed LTV
and refreshed FICO score. Refreshed LTV measures the carrying
value of the loan as a percentage of the value of 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.
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Bank of America 2013 183
The following tables present certain credit quality indicators for the Corporation’s Home Loans, Credit Card and Other Consumer,
and Commercial portfolio segments, by class of financing receivables, at December 31, 2013 and 2012.
Home Loans – Credit Quality Indicators (1)
(Dollars in millions)
Refreshed LTV (4)
Less than or equal to 90 percent
Greater than 90 percent but less than or equal to 100 percent
Greater than 100 percent
Fully-insured loans (5)
Total home loans
Refreshed FICO score
Less than 620
Greater than or equal to 620 and less than 680
Greater than or equal to 680 and less than 740
Greater than or equal to 740
Fully-insured loans (5)
Total home loans
December 31, 2013
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
$
$
$
95,833
$
22,391
$
11,400
$
45,898
$
16,714
$
5,541
6,250
69,712
177,336
5,924
7,863
24,034
69,803
69,712
$
$
$
$
4,134
7,998
17,535
52,058
10,391
5,452
7,791
10,889
17,535
$
$
2,653
4,619
—
18,672
9,792
3,135
3,034
2,711
—
$
$
3,659
4,942
—
54,499
2,343
4,057
11,276
36,823
—
$
$
4,233
11,633
—
32,580
4,229
5,050
9,032
14,269
—
$
177,336
$
52,058
$
18,672
$
54,499
$
32,580
$
2,036
698
3,859
—
6,593
1,072
1,165
1,935
2,421
—
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
(Dollars in millions)
Refreshed FICO score
Less than 620
Greater than or equal to 620 and less than 680
Greater than or equal to 680 and less than 740
Greater than or equal to 740
Other internal credit metrics (2, 3, 4)
Total credit card and other consumer
December 31, 2013
U.S. Credit
Card
Non-U.S.
Credit Card
Direct/Indirect
Consumer
Other
Consumer (1)
$
4,989
$
— $
1,220
$
12,753
35,413
39,183
—
—
—
—
11,541
3,345
9,887
26,220
41,520
539
264
199
188
787
$
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)
(Dollars in millions)
Risk ratings
Pass rated
Reservable criticized
Refreshed FICO score (3)
Less than 620
Greater than or equal to 620 and less than 680
Greater than or equal to 680 and less than 740
Greater than or equal to 740
Other internal credit metrics (3, 4)
Total commercial
December 31, 2013
U.S.
Commercial
Commercial
Real Estate
Commercial
Lease
Financing
Non-U.S.
Commercial
U.S. Small
Business
Commercial (2)
$
205,416
$
46,507
$
24,211
$
88,138
$
7,141
1,386
988
1,324
1,191
346
224
534
1,567
2,779
6,653
$
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.
184 Bank of America 2013
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Home Loans – Credit Quality Indicators (1)
(Dollars in millions)
Refreshed LTV (4)
December 31, 2012
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
Less than or equal to 90 percent
$
80,585
$
20,613
$
8,581
$
44,971
$
15,922
$
Greater than 90 percent but less than or equal to 100 percent
Greater than 100 percent
Fully-insured loans (5)
Total home loans
Refreshed FICO score
Less than 620
Greater than or equal to 620 and less than 680
Greater than or equal to 680 and less than 740
Greater than or equal to 740
Fully-insured loans (5)
Total home loans
$
$
8,891
12,984
67,656
170,116
6,366
8,561
25,141
62,392
67,656
$
$
$
$
5,097
16,454
23,198
65,362
14,320
6,157
8,611
13,076
23,198
$
$
2,368
6,502
—
17,451
8,647
2,712
2,976
3,116
—
$
$
5,825
10,055
—
60,851
2,586
4,500
12,625
41,140
—
$
$
4,507
18,193
—
38,622
5,411
5,921
10,395
16,895
—
$
170,116
$
65,362
$
17,451
$
60,851
$
38,622
$
2,074
805
5,788
—
8,667
1,989
1,529
2,299
2,850
—
8,667
(1) Excludes $1.0 billion of loans accounted for under the fair value option.
(2) Excludes PCI loans.
(3)
Includes $6.1 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
(Dollars in millions)
Refreshed FICO score
Less than 620
Greater than or equal to 620 and less than 680
Greater than or equal to 680 and less than 740
Greater than or equal to 740
Other internal credit metrics (2, 3, 4)
Total credit card and other consumer
December 31, 2012
U.S. Credit
Card
Non-U.S.
Credit Card
Direct/Indirect
Consumer
Other
Consumer (1)
$
6,188
$
— $
1,896
$
13,947
37,167
37,533
—
—
—
—
11,697
3,367
9,592
25,164
43,186
668
301
232
212
215
$
94,835
$
11,697
$
83,205
$
1,628
(1) 87 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 $36.5 billion of securities-based lending which is overcollateralized and therefore has minimal credit risk and $4.8 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 December 31, 2012, 97 percent of this portfolio was
current or less than 30 days past due, one percent was 30-89 days past due and two percent was 90 days or more past due.
Commercial – Credit Quality Indicators (1)
(Dollars in millions)
Risk ratings
Pass rated
Reservable criticized
Refreshed FICO score (3)
Less than 620
Greater than or equal to 620 and less than 680
Greater than or equal to 680 and less than 740
Greater than or equal to 740
Other internal credit metrics (3, 4)
Total commercial
December 31, 2012
U.S.
Commercial
Commercial
Real Estate
Commercial
Lease
Financing
Non-U.S.
Commercial
U.S. Small
Business
Commercial (2)
$
189,602
$
34,968
$
22,874
$
72,688
$
7,524
3,669
969
1,496
1,690
573
400
580
1,553
2,496
5,301
$
197,126
$
38,637
$
23,843
$
74,184
$
12,593
(1) Excludes $8.0 billion of loans accounted for under the fair value option.
(2) U.S. small business commercial includes $366 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, 2012, 98 percent of the balances where internal credit metrics are used was current or less than 30 days past due.
(3) Refreshed FICO score and other internal credit metrics are applicable only to the U.S. small business commercial portfolio.
(4) Other internal credit metrics may include delinquency status, application scores, geography or other factors.
Bank of America 2013 185
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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. For
additional information, see Note 1 – Summary of Significant
Accounting Principles. 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 194.
Home Loans
Impaired home loans within the Home Loans portfolio segment
consist entirely of TDRs. Excluding PCI loans, most modifications
of home loans meet the definition of TDRs when a binding offer
is extended to a borrower. Modifications of home loans are done
in accordance with the government’s Making Home Affordable
Program (modifications under government programs) or the
Corporation’s proprietary programs
(modifications under
proprietary programs). These modifications are considered to be
TDRs if concessions have been granted to borrowers experiencing
financial difficulties. Concessions may include reductions in
interest rates, capitalization of past due amounts, principal and/
or interest forbearance, payment extensions, principal and/or
interest forgiveness, or combinations thereof. During 2012, the
Corporation implemented a borrower assistance program that
provides forgiveness of principal balances in connection with the
settlement agreement among the Corporation and certain of its
affiliates and subsidiaries, together with the U.S. Department of
Justice (DOJ), the U.S. Department of Housing and Urban
Development (HUD) and other federal agencies, and 49 state
Attorneys General concerning the terms of a global settlement
resolving investigations into certain origination, servicing and
foreclosure practices (National Mortgage Settlement). In addition,
the Corporation also provides interest rate modifications to
qualified borrowers pursuant to the National Mortgage Settlement
and these interest rate modifications are not considered to be
TDRs.
to
Prior to permanently modifying a loan, the Corporation may
enter into trial modifications with certain borrowers under both
government and proprietary programs, including the borrower
assistance program pursuant
the National Mortgage
Settlement. 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
$3.6 billion were included in TDRs at December 31, 2013, of which
$1.8 billion were classified as nonperforming and $1.8 billion were
loans fully-insured by the Federal Housing Administration (FHA).
Of the $3.6 billion of home loan TDRs, approximately 27 percent,
30 percent and 43 percent were discharged in Chapter 7
bankruptcy in 2013, 2012 and in years prior to 2012, respectively.
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
before they were modified as TDRs in accordance with established
policy. Therefore, modifications of home loans that are 180 or
more days past due as TDRs do not have an impact on the
allowance for loan and lease losses nor are additional charge-offs
required at the time of modification. Subsequent declines in the
fair value of the collateral after a loan has reached 180 days past
due are recorded as charge-offs. Fully-insured loans are protected
against principal loss, and therefore, the Corporation does not
record an allowance for loan and lease losses on the outstanding
principal balance, even after they have been modified in a TDR.
The net present value of the estimated cash flows used to
measure impairment is based on model-driven estimates of
projected payments, prepayments, defaults and loss-given-default
(LGD). Using statistical modeling methodologies, the Corporation
estimates the probability that a loan will default prior to maturity
based on the attributes of each loan. The factors that are most
relevant to the probability of default are the refreshed LTV, or in
the case of a subordinated lien, refreshed CLTV, borrower credit
score, months since origination (i.e., vintage) and geography. Each
of these factors is further broken down by present collection status
(whether the loan is current, delinquent, in default or in
bankruptcy). Severity (or LGD) is estimated based on the refreshed
LTV for first mortgages or CLTV for subordinated liens. The
estimates are based on the Corporation’s historical experience as
adjusted to reflect an assessment of environmental factors that
may not be reflected in the historical data, such as changes in
real estate values, local and national economies, underwriting
standards and the regulatory environment. The probability of
incorporate
default models also
recent experience with
modification programs
including redefaults subsequent to
modification, a loan’s default history prior to modification and the
change in borrower payments post-modification.
At December 31, 2013 and 2012, 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 $533 million and $650 million at December 31,
2013 and 2012.
186 Bank of America 2013
76788ba_financials.indd 186
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The table below provides information for impaired loans in the Corporation’s Home Loans portfolio segment at December 31, 2013
and 2012, and for 2013, 2012 and 2011, 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
(Dollars in millions)
With no recorded allowance
Residential mortgage
Home equity
With an allowance recorded
Residential mortgage
Home equity
Total
Residential mortgage
Home equity
With no recorded allowance
Residential mortgage
Home equity
With an allowance recorded
Residential mortgage
Home equity
Total
December 31, 2013
December 31, 2012
Unpaid
Principal
Balance
Carrying
Value
Related
Allowance
Unpaid
Principal
Balance
Carrying
Value
Related
Allowance
$
$
$
21,567
3,249
$
16,450
1,385
$
— $
—
20,226
2,624
$
14,967
1,103
$
13,341
893
12,862
761
34,908
4,142
$
29,312
2,146
$
991
240
991
240
14,223
1,256
13,158
1,022
$
34,449
3,880
$
28,125
2,125
$
—
—
1,252
448
1,252
448
2013
2012
2011
Average
Carrying
Value
Interest
Income
Recognized (1)
Average
Carrying
Value
Interest
Income
Recognized (1)
Average
Carrying
Value
Interest
Income
Recognized (1)
16,625
1,245
$
13,926
912
621
76
616
41
$
10,937
734
$
11,575
1,145
366
49
423
44
$
$
6,507
442
9,552
1,357
241
23
325
34
Residential mortgage
Home equity
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.
22,512
1,879
16,059
1,799
30,551
2,157
1,237
117
566
57
789
93
$
$
$
$
$
$
(1)
The table below presents the December 31, 2013, 2012 and
2011 unpaid principal balance, carrying value, and average pre-
and post-modification interest rates of home loans that were
modified in TDRs during 2013, 2012 and 2011, and net charge-
offs that were recorded during the period in which the modification
occurred. The following Home Loans portfolio segment tables
include loans that were initially classified as TDRs during the period
and also loans that had previously been classified as TDRs and
were modified again during the period. These TDRs are managed
by Legacy Assets & Servicing.
Home Loans – TDRs Entered into During 2013, 2012 and 2011 (1)
(Dollars in millions)
Residential mortgage
Home equity
Total
Residential mortgage
Home equity
Total
Residential mortgage
Home equity
Total
Unpaid
Principal
Balance
$
$
$
$
$
$
11,233
878
12,111
15,088
1,721
16,809
11,764
1,112
12,876
$
$
$
$
$
$
December 31, 2013
Pre-
Modification
Interest Rate
Carrying
Value
2013
Post-
Modification
Interest Rate
Net
Charge-offs (2)
10,016
521
10,537
5.30%
5.29
5.30
4.27% $
3.92
4.24
$
235
192
427
December 31, 2012
12,228
858
13,086
5.52%
5.22
5.49
December 31, 2011
9,991
556
10,547
5.94%
6.58
6.01
4.70% $
4.39
4.66
$
5.16% $
5.25
5.17
$
2012
523
716
1,239
2011
308
239
547
(1) TDRs entered into during 2013 include residential mortgage modifications with principal forgiveness of $467 million. TDRs entered into during 2012 include residential mortgage modifications with
principal forgiveness of $778 million and home equity modifications of $9 million. Prior to 2012, the principal forgiveness amount was not significant.
(2) Net charge-offs include amounts recorded on loans modified during the period that are no longer held by the Corporation at December 31, 2013, 2012 and 2011 due to sales and other dispositions.
Bank of America 2013 187
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The table below presents the December 31, 2013, 2012 and 2011 carrying value for home loans that were modified in a TDR
during 2013, 2012 and 2011 by type of modification.
Home Loans – Modification Programs
(Dollars in millions)
Modifications under government programs
Contractual interest rate reduction
Principal and/or interest forbearance
Other modifications (1)
Total modifications under government programs
Modifications under proprietary programs
Contractual interest rate reduction
Capitalization of past due amounts
Principal and/or interest forbearance
Other modifications (1)
Total modifications under proprietary programs
Trial modifications
Loans discharged in Chapter 7 bankruptcy (2)
Total modifications
Modifications under government programs
Contractual interest rate reduction
Principal and/or interest forbearance
Other modifications (1)
Total modifications under government programs
Modifications under proprietary programs
Contractual interest rate reduction
Capitalization of past due amounts
Principal and/or interest forbearance
Other modifications (1)
Total modifications under proprietary programs
Trial modifications
Loans discharged in Chapter 7 bankruptcy (2)
Total modifications
Modifications under government programs
Contractual interest rate reduction
Principal and/or interest forbearance
Other modifications (1)
Total modifications under government programs
Modifications under proprietary programs
Contractual interest rate reduction
Capitalization of past due amounts
Principal and/or interest forbearance
Other modifications (1)
Total modifications under proprietary programs
Trial modifications
Total modifications
TDRs Entered into During 2013
Residential
Mortgage
Home
Equity
Total Carrying
Value
$
$
$
$
$
$
1,815
35
100
1,950
2,799
132
469
105
3,505
3,410
1,151
10,016
$
$
48
24
—
72
40
2
17
25
84
87
278
521
$
$
TDRs Entered into During 2012
$
642
51
37
730
3,350
144
424
97
4,015
4,547
2,936
12,228
$
78
31
1
110
44
—
16
21
81
69
598
858
$
$
TDRs Entered into During 2011
994
189
64
1,247
3,531
410
946
441
5,328
3,416
9,991
$
$
189
36
5
230
101
1
49
34
185
141
556
$
$
1,863
59
100
2,022
2,839
134
486
130
3,589
3,497
1,429
10,537
720
82
38
840
3,394
144
440
118
4,096
4,616
3,534
13,086
1,183
225
69
1,477
3,632
411
995
475
5,513
3,557
10,547
(1)
(2)
Includes other modifications such as term or payment extensions and repayment plans.
Includes loans discharged in Chapter 7 bankruptcy with no change in repayment terms that are classified as TDRs. The amount for 2012 represents the cumulative impact upon adoption of the
regulatory guidance. During 2013, home loans of $587 million, or 41 percent of loans discharged in Chapter 7 bankruptcy were current or less than 60 days past due.
188 Bank of America 2013
76788ba_financials.indd 188
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The table below presents the carrying value of loans that
entered into payment default during 2013, 2012 and 2011 that
were modified in a TDR during the 12 months preceding payment
default. Included in the table are loans with a carrying value of
$2.4 billion, $667 million and $514 million that entered payment
default during 2013, 2012 and 2011 but were no longer held by
the Corporation as of December 31, 2013, 2012 and 2011 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
(Dollars in millions)
Modifications under government programs
Modifications under proprietary programs
Loans discharged in Chapter 7 bankruptcy (2)
Trial modifications
Total modifications
Modifications under government programs
Modifications under proprietary programs
Loans discharged in Chapter 7 bankruptcy (2)
Trial modifications
Total modifications
Modifications under government programs
Modifications under proprietary programs
Trial modifications
Total modifications
Residential
Mortgage
2013
Home
Equity
Total Carrying
Value (1)
$
$
$
$
$
$
454
1,117
964
4,376
6,911
202
942
1,228
2,351
4,723
352
2,098
1,101
3,551
$
$
$
$
$
$
2
4
30
14
50
8
14
53
20
95
2
42
17
61
$
$
$
$
$
$
2012
2011
456
1,121
994
4,390
6,961
210
956
1,281
2,371
4,818
354
2,140
1,118
3,612
(1) Total carrying value includes loans with a carrying value of $2.4 billion, $667 million and $514 million that entered into payment default during 2013, 2012 and 2011 but were no longer held by the
Corporation as of December 31, 2013, 2012 and 2011 due to sales and other dispositions.
Includes loans discharged in Chapter 7 bankruptcy with no change in repayment terms that are classified as TDRs.
(2)
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 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, non-U.S. credit card modifications may involve reducing
the interest rate on the account without placing the customer on
a fixed payment plan, and are also considered TDRs. 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 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
(internal programs). Additionally,
the Corporation
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
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.
in effect prior
loans,
76788ba_financials.indd 189
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Bank of America 2013 189
The table below provides information on the Corporation’s renegotiated TDR portfolio in the Credit Card and Other Consumer portfolio
segment at December 31, 2013 and 2012, and for 2013, 2012 and 2011.
Impaired Loans – Credit Card and Other Consumer – Renegotiated TDRs
(Dollars in millions)
With an allowance recorded
U.S. credit card
Non-U.S. credit card
Direct/Indirect consumer
Other consumer
With no recorded allowance
Direct/Indirect consumer
Other consumer
Total
U.S. credit card
Non-U.S. credit card
Direct/Indirect consumer
Other consumer
With an allowance recorded
U.S. credit card
Non-U.S. credit card
Direct/Indirect consumer
Other consumer
With no recorded allowance
Direct/Indirect consumer
Other consumer
Total
December 31, 2013
December 31, 2012
Unpaid
Principal
Balance
Carrying
Value (1)
Related
Allowance
Unpaid
Principal
Balance
Carrying
Value (1)
Related
Allowance
$
$
$
$
$
$
$
$
1,384
200
242
27
75
34
1,384
200
317
61
1,465
240
282
26
32
34
1,465
240
314
60
2013
Average
Carrying
Value
Interest
Income
Recognized (2)
$
2,144
266
456
28
42
34
134
7
24
2
—
2
$
$
337
149
84
9
—
—
337
149
84
9
2,856
311
633
30
105
35
2,856
311
738
65
2012
Average
Carrying
Value
Interest
Income
Recognized (2)
$
4,085
464
929
29
58
35
253
10
50
2
—
2
$
$
$
$
$
2,871
316
636
30
58
35
2,871
316
694
65
719
198
210
12
—
—
719
198
210
12
2011
Average
Carrying
Value
Interest
Income
Recognized (2)
$
7,211
759
1,582
30
—
30
433
6
85
2
—
2
U.S. credit card
Non-U.S. credit card
Direct/Indirect consumer
Other consumer
Includes accrued interest and fees.
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.
7,211
759
1,582
60
4,085
464
987
64
2,144
266
498
62
433
6
85
4
253
10
50
4
134
7
24
4
$
$
$
$
$
$
(1)
(2)
The table below provides information on the Corporation’s primary modification programs for the renegotiated TDR portfolio at
December 31, 2013 and 2012.
Credit Card and Other Consumer – Renegotiated TDRs by Program Type
Internal Programs
External Programs
Other
Total
(Dollars in millions)
U.S. credit card
Non-U.S. credit card
Direct/Indirect consumer
Other consumer
Total renegotiated TDRs
2013
$
$
842
71
170
60
1,143
2012
$ 1,887
99
405
65
$ 2,456
$
$
2013
2012
2013
2012
2013
607
26
106
—
739
$
953
38
225
—
$ 1,216
$
$
16
143
38
—
197
$
$
31
179
64
—
274
$
$
1,465
240
314
60
2,079
2012
$ 2,871
316
694
65
$ 3,946
Percent of Balances Current or
Less Than 30 Days Past Due
2013
2012
82.77%
49.01
84.29
71.08
78.77
81.48%
43.71
83.11
72.73
78.58
December 31
190 Bank of America 2013
76788ba_financials.indd 190
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The table below provides information on the Corporation’s renegotiated TDR portfolio including the December 31, 2013, 2012 and
2011 unpaid principal balance, carrying value and average pre- and post-modification interest rates of loans that were modified in TDRs
during 2013, 2012 and 2011, and net charge-offs that were recorded during the period in which the modification occurred.
Credit Card and Other Consumer – Renegotiated TDRs Entered into During 2013, 2012 and 2011
(Dollars in millions)
U.S. credit card
Non-U.S. credit card
Direct/Indirect consumer
Other consumer
Total
U.S. credit card
Non-U.S. credit card
Direct/Indirect consumer
Other consumer
Total
U.S. credit card
Non-U.S. credit card
Direct/Indirect consumer
Other consumer
Total
Includes accrued interest and fees.
(1)
Unpaid
Principal
Balance
December 31, 2013
Pre-
Modification
Interest Rate
Carrying
Value (1)
Post-
Modification
Interest Rate
2013
Net
Charge-offs
$
$
$
$
$
$
299
134
47
8
488
396
196
160
9
761
890
305
198
17
1,410
$
$
$
$
$
$
329
147
38
8
522
16.84%
25.90
11.53
9.28
18.89
5.84% $
0.95
4.74
5.25
4.37
$
December 31, 2012
2012
400
206
113
9
728
17.59%
26.19
9.59
9.97
18.68
6.36% $
1.15
5.72
6.44
4.79
$
December 31, 2011
2011
902
322
199
17
1,440
19.04%
26.32
15.63
10.01
20.09
6.16% $
1.04
5.22
6.53
4.89
$
30
138
15
—
183
45
190
52
—
287
106
291
23
—
420
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 2013, 2012 and 2011.
Credit Card and Other Consumer – Renegotiated TDRs Entered into During the Period by Program Type
(Dollars in millions)
U.S. credit card
Non-U.S. credit card
Direct/Indirect consumer
Other consumer
Total renegotiated TDRs
U.S. credit card
Non-U.S. credit card
Direct/Indirect consumer
Other consumer
Total renegotiated TDRs
U.S. credit card
Non-U.S. credit card
Direct/Indirect consumer
Other consumer
Total renegotiated TDRs
2013
Internal
Programs
External
Programs
Other
Total
$
$
$
$
$
$
192
73
15
8
288
248
112
36
9
405
492
163
112
17
784
$
$
$
$
$
$
137
74
8
—
219
$
$
2012
$
152
94
19
—
265
407
158
87
—
652
2011
$
$
$
— $
—
15
—
15
$
— $
—
58
—
58
$
3
1
—
—
4
$
$
329
147
38
8
522
400
206
113
9
728
902
322
199
17
1,440
Bank of America 2013 191
76788ba_financials.indd 191
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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 21 percent of new U.S.
credit card TDRs, 70 percent of new non-U.S. credit card TDRs and
13 percent of new direct/indirect consumer TDRs may be in
payment default within 12 months after modification. Loans that
entered into payment default during 2013, 2012 and 2011 that
had been modified in a TDR during the preceding 12 months were
$61 million, $203 million and $863 million for U.S. credit card,
$236 million, $298 million and $409 million for non-U.S. credit
card, and $12 million, $35 million and $180 million for direct/
indirect consumer, respectively.
Commercial Loans
Impaired commercial loans, which include nonperforming loans
and TDRs (both performing and nonperforming), are primarily
measured based on the present value of payments expected to
be received, discounted at the loan’s original effective interest
rate. Commercial impaired loans may also be measured based on
observable market prices or, for loans that are solely dependent
on the collateral for repayment, the estimated fair value of
collateral less costs to sell. If the carrying value of a loan exceeds
this amount, a specific allowance is recorded as a component of
the allowance for loan and lease losses.
Modifications of loans to commercial borrowers that are
experiencing financial difficulty are designed to reduce the
Corporation’s loss exposure while providing the borrower with an
(below market)
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
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.
rate of
At the time of restructuring, the loans are remeasured to reflect
the impact, if any, on projected cash flows resulting from the
modified terms. If there was no forgiveness of principal and the
interest rate was not decreased, the modification may have little
or no impact on the allowance established for the loan. If a portion
of the loan is deemed to be uncollectible, a charge-off may be
recorded at the time of restructuring. Alternatively, a charge-off
may have already been recorded in a previous period such that no
charge-off is required at the time of modification. For more
information on modifications for the U.S. small business
commercial portfolio, see Credit Card and Other Consumer in this
Note.
At December 31, 2013 and 2012, remaining commitments to
lend additional funds to debtors whose terms have been modified
in a commercial loan TDR were immaterial. Commercial foreclosed
properties totaled $90 million and $250 million at December 31,
2013 and 2012.
192 Bank of America 2013
76788ba_financials.indd 192
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The table below provides information for impaired loans in the Corporation’s Commercial loan portfolio segment at December 31,
2013 and 2012, and for 2013, 2012 and 2011. 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
(Dollars in millions)
With no recorded allowance
U.S. commercial
Commercial real estate
Non-U.S. commercial
With an allowance recorded
U.S. commercial
Commercial real estate
Non-U.S. commercial
U.S. small business commercial (1)
Total
U.S. commercial
Commercial real estate
Non-U.S. commercial
U.S. small business commercial (1)
With no recorded allowance
U.S. commercial
Commercial real estate
Non-U.S. commercial
With an allowance recorded
U.S. commercial
Commercial real estate
Non-U.S. commercial
U.S. small business commercial (1)
Total
$
$
$
December 31, 2013
December 31, 2012
Unpaid
Principal
Balance
Carrying
Value
Related
Allowance
Unpaid
Principal
Balance
Carrying
Value
Related
Allowance
$
609
254
10
$
577
228
10
— $
—
—
$
571
370
155
$
476
316
36
1,581
1,066
254
186
2,190
1,320
264
186
$
1,262
731
64
176
1,839
959
74
176
2013
Average
Carrying
Value
Interest
Income
Recognized (2)
$
442
269
28
1,553
1,148
109
236
6
3
—
47
28
5
6
$
$
164
61
16
36
164
61
16
36
$
2,431
2,920
365
361
3,002
3,290
520
361
2012
Average
Carrying
Value
Interest
Income
Recognized (2)
$
588
1,119
104
2,104
2,126
77
409
9
3
—
55
29
4
13
$
$
—
—
—
159
201
18
97
159
201
18
97
1,771
1,848
117
317
2,247
2,164
153
317
$
2011
Average
Carrying
Value
Interest
Income
Recognized (2)
$
774
1,994
101
2,422
3,309
76
666
7
7
—
13
19
3
23
U.S. commercial
Commercial real estate
Non-U.S. commercial
U.S. small business commercial (1)
Includes U.S. small business commercial renegotiated TDR loans and related allowance.
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.
3,196
5,303
177
666
2,692
3,245
181
409
1,995
1,417
137
236
20
26
3
23
64
32
4
13
53
31
5
6
$
$
$
$
$
$
(1)
(2)
76788ba_financials.indd 193
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Bank of America 2013 193
The table below presents the December 31, 2013, 2012 and
2011 unpaid principal balance and carrying value of commercial
loans that were modified as TDRs during 2013, 2012 and 2011,
and net charge-offs that were recorded during the period in which
the modification occurred. The table below includes loans that
were initially classified as TDRs during the period and, beginning
in the first quarter of 2013, also loans that had previously been
classified as TDRs and were modified again during the period.
Purchased Loans at Acquisition Date
(Dollars in millions)
Contractually required payments including interest
Less: Nonaccretable difference
Cash flows expected to be collected (1)
Less: Accretable yield
Fair value of loans acquired
$
$
8,274
2,159
6,115
1,125
4,990
(1) Represents undiscounted expected principal and interest cash flows at acquisition.
The table below shows activity for the accretable yield on PCI
loans, which includes the Countrywide Financial Corporation
(Countrywide) portfolio and loans repurchased in connection with
the FNMA Settlement. For more information on the FNMA
Settlement, see Note 7 – Representations and Warranties
Obligations and Corporate Guarantees. The amount of accretable
yield is affected by changes in credit outlooks, including metrics
such as default rates and loss severities, prepayments 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
from
nonaccretable difference during 2013 were due to increases in
expected cash flows driven by improved home prices and lower
expected defaults, along with a decrease in forecasted prepayment
speeds as a result of rising interest rates. 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.
loans. The reclassifications
Rollforward of Accretable Yield
(Dollars in millions)
Accretable yield, January 1, 2012
Accretion
Disposals/transfers
Reclassifications from nonaccretable difference
Accretable yield, December 31, 2012
Accretion
Loans purchased
Disposals/transfers
Reclassifications from nonaccretable difference
Accretable yield, December 31, 2013
$ 4,990
(1,034)
(109)
797
4,644
(1,194)
1,125
(361)
2,480
$ 6,694
For more information on PCI loans, see Note 1 – Summary of
Significant Accounting Principles, and for the carrying value and
valuation allowance for PCI loans, see Note 5 – Allowance for Credit
Losses.
Loans Held-for-sale
The Corporation had LHFS of $11.4 billion and $19.4 billion at
December 31, 2013 and 2012. Proceeds, including cash and
securities, from sales, securitizations and paydowns of LHFS were
$81.0 billion, $58.0 billion and $142.4 billion for 2013, 2012 and
2011, respectively. Amounts used for originations and purchases
of LHFS were $65.7 billion, $59.5 billion and $118.2 billion for
2013, 2012 and 2011, respectively.
Commercial – TDRs Entered into During 2013, 2012 and
2011
(Dollars in millions)
U.S. commercial
Commercial real estate
Non-U.S. commercial
U.S. small business commercial (1)
Total
U.S. commercial
Commercial real estate
Non-U.S. commercial
U.S. small business commercial (1)
Total
U.S. commercial
Commercial real estate
Non-U.S. commercial
U.S. small business commercial (1)
$
$
$
$
$
December 31, 2013
Unpaid
Principal
Balance
Carrying
Value
2013
Net
Charge-offs
926
483
61
8
1,478
$
$
910
425
44
9
1,388
December 31, 2012
590
793
90
22
1,495
$
$
558
721
89
22
1,390
December 31, 2011
$
1,381
1,604
44
58
3,087
1,211
1,333
44
59
2,647
$
$
$
$
$
33
3
7
1
44
34
20
1
5
60
2012
2011
74
152
—
10
236
Total
$
(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 losses. TDRs that were in payment default
had a carrying value of $55 million, $130 million and $164 million
for U.S. commercial, $128 million, $455 million and $446 million
for commercial real estate, and $0, $18 million and $68 million
for U.S. small business commercial at December 31, 2013, 2012
and 2011, respectively.
Purchased Credit-impaired Loans
PCI loans are acquired loans with evidence of credit quality
deterioration since origination for which it is probable at purchase
date that the Corporation will be unable to collect all contractually
required payments. The following table provides details on PCI
loans acquired in connection with the January 6, 2013 settlement
with FNMA (the FNMA Settlement).
194 Bank of America 2013
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NOTE 5 Allowance for Credit Losses
The table below summarizes the changes in the allowance for credit losses by portfolio segment for 2013, 2012 and 2011.
(Dollars in millions)
Allowance for loan and lease losses, January 1
Loans and leases charged off
Recoveries of loans and leases previously charged off
Net charge-offs
Write-offs of PCI loans
Provision for loan and lease losses
Other
Allowance for loan and lease losses, December 31
Reserve for unfunded lending commitments, January 1
Provision for unfunded lending commitments
Other
Reserve for unfunded lending commitments, December 31
Allowance for credit losses, December 31
Allowance for loan and lease losses, January 1
Loans and leases charged off
Recoveries of loans and leases previously charged off
Net charge-offs
Write-offs of PCI loans
Provision for loan and lease losses
Other
Allowance for loan and lease losses, December 31
Reserve for unfunded lending commitments, January 1
Provision for unfunded lending commitments
Other
Reserve for unfunded lending commitments, December 31
Allowance for credit losses, December 31
Allowance for loan and lease losses, January 1
Loans and leases charged off
Recoveries of loans and leases previously charged off
Net charge-offs
Provision for loan and lease losses
Other
Allowance for loan and lease losses, December 31
Reserve for unfunded lending commitments, January 1
Provision for unfunded lending commitments
Other
Reserve for unfunded lending commitments, December 31
Allowance for credit losses, December 31
In 2013, for the PCI loan portfolio, the Corporation recorded a
benefit of $707 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 $103 million in 2012 and expense of $2.2 billion in
2011. Write-offs in the PCI loan portfolio totaled $2.3 billion and
$2.8 billion with a corresponding decrease in the PCI valuation
allowance during 2013 and 2012. There were no write-offs in the
PCI loan portfolio in 2011. Write-offs in 2013 included certain PCI
loans that were ineligible for the National Mortgage Settlement,
but had characteristics similar to the eligible loans and the
expectation of future cash proceeds was considered remote. Write-
offs of PCI loans in 2012 primarily related to the National Mortgage
2013
Home
Loans
Credit Card
and Other
Consumer
Commercial
Total
Allowance
$
$
$
$
$
$
14,933
(3,766)
879
(2,887)
(2,336)
(1,124)
(68)
8,518
—
—
—
—
8,518
21,079
(7,849)
496
(7,353)
(2,820)
4,073
(46)
14,933
—
—
—
—
14,933
19,252
(9,291)
894
(8,397)
10,300
(76)
21,079
—
—
—
—
21,079
$
$
$
$
$
$
6,140
(5,495)
1,141
(4,354)
—
3,139
(20)
4,905
—
—
—
—
4,905
$
$
2012
$
8,569
(7,727)
1,519
(6,208)
—
3,899
(120)
6,140
—
—
—
—
6,140
15,463
(12,247)
2,124
(10,123)
4,025
(796)
8,569
—
—
—
—
8,569
$
2011
$
$
3,106
(1,108)
452
(656)
—
1,559
(4)
4,005
513
(18)
(11)
484
4,489
4,135
(2,096)
749
(1,347)
—
338
(20)
3,106
714
(141)
(60)
513
3,619
7,170
(3,204)
891
(2,313)
(696)
(26)
4,135
1,188
(219)
(255)
714
4,849
$
$
$
$
$
$
24,179
(10,369)
2,472
(7,897)
(2,336)
3,574
(92)
17,428
513
(18)
(11)
484
17,912
33,783
(17,672)
2,764
(14,908)
(2,820)
8,310
(186)
24,179
714
(141)
(60)
513
24,692
41,885
(24,742)
3,909
(20,833)
13,629
(898)
33,783
1,188
(219)
(255)
714
34,497
Settlement. The valuation allowance associated with the PCI loan
portfolio was $2.5 billion, $5.5 billion and $8.5 billion at
December 31, 2013, 2012 and 2011, respectively.
the net
represents
The “Other” amount under allowance for loan and lease losses
primarily
impact of portfolio sales,
consolidations and deconsolidations, and foreign currency
translation adjustments. The 2011 amount also includes a $449
million reduction in the allowance for loan and lease losses related
to Canadian consumer card loans that were transferred to LHFS.
The “Other” amount under the reserve for unfunded lending
commitments primarily represents accretion of the Merrill Lynch
& Co., Inc. (Merrill Lynch) purchase accounting adjustment.
76788ba_financials.indd 195
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Bank of America 2013 195
The table below presents the allowance and the carrying value of outstanding loans and leases by portfolio segment at December
31, 2013 and 2012.
Allowance and Carrying Value by Portfolio Segment
(Dollars in millions)
Impaired loans and troubled debt restructurings (1)
Allowance for loan and lease losses (2)
Carrying value (3)
Allowance as a percentage of carrying value
Loans collectively evaluated for impairment
Allowance for loan and lease losses
Carrying value (3, 4)
Allowance as a percentage of carrying value (4)
Purchased credit-impaired loans
Valuation allowance
Carrying value gross of valuation allowance
Valuation allowance as a percentage of carrying value
Total
Allowance for loan and lease losses
Carrying value (3, 4)
Allowance as a percentage of carrying value (4)
Impaired loans and troubled debt restructurings (1)
Allowance for loan and lease losses (2)
Carrying value (3)
Allowance as a percentage of carrying value
Loans collectively evaluated for impairment
Allowance for loan and lease losses
Carrying value (3, 4)
Allowance as a percentage of carrying value (4)
Purchased credit-impaired loans
Valuation allowance
Carrying value gross of valuation allowance
Valuation allowance as a percentage of carrying value
Total
December 31, 2013
Home
Loans
Credit Card
and Other
Consumer
Commercial
Total
$
1,231
31,458
$
3.91%
$
579
2,079
27.85%
277
3,048
9.09%
$
2,087
36,585
5.70%
$
4,794
285,015
$
4,326
185,969
$
3,728
385,357
$ 12,848
856,341
1.68%
2.33%
0.97%
1.50%
$
2,493
25,265
9.87%
n/a
n/a
n/a
n/a
n/a
n/a
$
2,493
25,265
9.87%
$
8,518
341,738
$
4,905
188,048
$
4,005
388,405
$ 17,428
918,191
2.49%
2.61%
1.03%
1.90%
December 31, 2012
$
1,700
30,250
$
5.62%
$
1,139
3,946
28.86%
475
4,881
9.73%
$
3,314
39,077
8.48%
$
7,697
304,701
$
5,001
187,419
$
2,631
341,502
$ 15,329
833,622
2.53%
2.67%
0.77%
1.84%
$
5,536
26,118
21.20%
n/a
n/a
n/a
n/a
n/a
n/a
$
5,536
26,118
21.20%
Allowance for loan and lease losses
Carrying value (3, 4)
Allowance as a percentage of carrying value (4)
2.69%
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.
$ 14,933
361,069
$ 24,179
898,817
3,106
346,383
6,140
191,365
0.90%
4.14%
3.21%
$
$
(1)
(2) Allowance for loan and lease losses includes $36 million and $97 million related to impaired U.S. small business commercial loans at December 31, 2013 and 2012.
(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 $10.0 billion and $9.0 billion at December 31, 2013 and 2012.
n/a = not applicable
196 Bank of America 2013
76788ba_financials.indd 196
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NOTE 6 Securitizations and Other Variable
Interest Entities
The Corporation utilizes variable interest entities (VIEs) in the
ordinary course of business to support its own and its customers’
financing and
investing needs. The Corporation routinely
securitizes loans and debt securities using VIEs as a source of
funding for the Corporation and as a means of transferring the
economic risk of the loans or debt securities to third parties. The
assets are transferred into a trust or other securitization vehicle
such that the assets are legally isolated from the creditors of the
Corporation and are not available to satisfy its obligations. These
assets can only be used to settle obligations of the trust or other
securitization vehicle. The Corporation also administers,
structures or invests in other VIEs including CDOs, investment
vehicles and other entities. For more information on the
Corporation’s utilization of VIEs, see Note 1 – Summary of
Significant Accounting Principles.
The tables within this Note present the assets and liabilities
of consolidated and unconsolidated VIEs at December 31, 2013
and 2012, in situations where the Corporation has continuing
involvement with transferred assets or if the Corporation otherwise
has a variable interest in the VIE. The tables also present the
Corporation’s maximum loss exposure at December 31, 2013 and
2012 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 20 – 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. The Corporation also uses VIEs in the form of
synthetic securitization vehicles to mitigate a portion of the credit
risk on its residential mortgage loan portfolio, as described in Note
4 – Outstanding Loans and Leases. The Corporation uses VIEs,
such as cash funds managed within Global Wealth & Investment
Management (GWIM), to provide investment opportunities for
clients. These VIEs, which are not consolidated by the Corporation,
are not included in the tables within this Note.
Except as described below, the Corporation did not provide
financial support to consolidated or unconsolidated VIEs during
2013 or 2012 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 MBS guaranteed by government-sponsored enterprises, FNMA
and FHLMC (collectively the GSEs), or GNMA in the case of FHA-
insured and U.S. Department of Veterans Affairs (VA)-guaranteed
mortgage loans. Securitization usually occurs in conjunction with
or shortly after origination or purchase. In addition, the Corporation
may, from time to time, securitize commercial mortgages it
originates or purchases from other entities. The Corporation
typically services the loans it securitizes. Further, the Corporation
may retain beneficial interests in the securitization trusts including
senior and subordinate securities and equity tranches issued by
the trusts. Except as described below and in Note 7 –
Representations and Warranties Obligations and Corporate
Guarantees, the Corporation does not provide guarantees or
recourse to the securitization trusts other than standard
representations and warranties.
The table below summarizes select information related to first-
lien mortgage securitizations for 2013 and 2012.
First-lien Mortgage Securitizations
(Dollars in millions)
Residential Mortgage - Agency
2013
2012
Commercial Mortgage
2013
2012
Cash proceeds from new securitizations (1)
Gain (loss) on securitizations (2)
(1) The Corporation sells residential mortgage loans to GSEs in the normal course of business and receives MBS in exchange which may then be sold into the market to third-party investors for cash
49,888 $
81
5,326 $
119
39,526
(212)
2,664
65
$
$
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 $2.0 billion of gains, net of hedges, on loans securitized during both 2013 and 2012.
In addition to cash proceeds as reported in the table above,
the Corporation received securities with an initial fair value of $3.3
billion and $3.2 billion in connection with first-lien mortgage
securitizations in 2013 and 2012. All of these securities were
initially classified as Level 2 assets within the fair value hierarchy.
During 2013 and 2012, 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 $2.9 billion and $4.7 billion in 2013 and 2012.
Servicing advances on consumer mortgage loans, including
securitizations where the Corporation has continuing involvement,
were $14.1 billion and $23.2 billion at December 31, 2013 and
2012. 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 2013
and 2012, $10.8 billion and $9.2 billion of loans were repurchased
from first-lien securitization trusts as a result of loan delinquencies
or to perform modifications. The majority of these loans
repurchased were FHA-insured mortgages collateralizing GNMA
securities. For more information on MSRs, see Note 23 – Mortgage
Servicing Rights.
Bank of America 2013 197
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The table below summarizes select information related to first-lien mortgage securitization trusts in which the Corporation held a
variable interest at December 31, 2013 and 2012.
First-lien Mortgage VIEs
(Dollars in millions)
Unconsolidated VIEs
Maximum loss exposure (1)
On-balance sheet assets
Senior securities held (2):
Trading account assets
Debt securities carried at fair value
Subordinate securities held (2):
Trading account assets
Debt securities carried at fair value
Residual interests held
All other assets (3)
Total retained positions
Principal balance outstanding (4)
Consolidated VIEs
Maximum loss exposure (1)
On-balance sheet assets
Trading account assets
Loans and leases
Allowance for loan and lease losses
Loans held-for-sale
All other assets
Total assets
On-balance sheet liabilities
Short-term borrowings
Long-term debt
All other liabilities
Total liabilities
$
$
$
$
$
$
$
$
$
Residential Mortgage
Agency
December 31
Prime
Non-agency
Subprime
December 31
Alt-A
Commercial
Mortgage
December 31
2013
2012
2013
2012
2013
2012
2013
2012
2013
2012
21,140 $
28,591
$
1,527 $ 2,038
$
406 $
410
$
437 $
367
$
432 $
702
650 $
19,451
619
26,421
$
— $
988
16
1,388
$
1 $
220
14
210
$
3 $
— $
14 $
109
128
306
12
581
—
—
—
1,039
21,140 $
—
—
—
1,551
28,591
437,765 $ 780,202
—
15
13
71
—
21
18
64
1,087 $ 1,507
$
$ 25,104 $ 47,348
8
6
—
1
236 $
3
9
9
1
$
246
$ 36,854 $ 63,813
—
—
—
325
437 $
—
—
—
239
$
367
$ 56,454 $ 80,860
13
53
16
—
402 $
13
—
40
—
$
646
$ 19,730 $ 56,733
42,420 $
46,959
$
79 $
104
$
368 $
390
$
— $
— $
— $
1,640 $
40,316
(3)
—
474
42,427 $
— $
45,991
(4)
—
972
46,959
$
— $
7
—
7 $
— $
—
—
— $
— $
140
—
—
—
140 $
— $
61
—
61 $
— $
— $
— $
283
—
—
10
293
$
— $
212
—
212
$
803
—
—
7
722
—
914
91
810 $ 1,727
— $
803
7
741
941
—
810 $ 1,682
$
$
$
— $
—
—
—
—
— $
— $
—
—
— $
— $
—
—
—
—
— $
— $
—
—
— $
— $
—
—
—
—
— $
— $
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
(1) Maximum loss exposure excludes the liability for representations and warranties obligations and corporate guarantees and also excludes servicing advances and MSRs. For additional information,
see Note 7 – Representations and Warranties Obligations and Corporate Guarantees and Note 23 – Mortgage Servicing Rights.
(2) As a holder of these securities, the Corporation receives scheduled principal and interest payments. During 2013 and 2012, 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 $1.6 billion and $12.1 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 $1.6 billion and $12.1 billion, representing the principal amount that would be payable to the securitization
vehicles if the Corporation were to exercise the repurchase option, at December 31, 2013 and 2012.
(4) Principal balance outstanding includes loans the Corporation transferred with which the Corporation has continuing involvement, which may include servicing the loans.
During 2013 and 2012, the Corporation deconsolidated
several non-agency residential mortgage trusts with total assets
of $871 million and $1.2 billion following the sale of retained
interests or the transfer of servicing to a third party.
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 also 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 2013 and 2012 and
all of the home equity trusts have entered the rapid amortization
phase.
198 Bank of America 2013
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The table below summarizes select information related to home equity loan securitization trusts in which the Corporation held a
variable interest at December 31, 2013 and 2012.
Home Equity Loan VIEs
(Dollars in millions)
Maximum loss exposure (1)
On-balance sheet assets
Trading account assets
Debt securities carried at fair value
Loans and leases
Allowance for loan and lease losses
All other assets
Total
On-balance sheet liabilities
Long-term debt
All other liabilities
Total
2013
December 31
Consolidated
VIEs
Unconsolidated
VIEs
Total
Consolidated
VIEs
2012
Unconsolidated
VIEs
Total
1,269
$
6,217
— $
—
1,329
(80)
20
1,269
$
12
25
—
—
—
37
$
$
$
7,486
12
25
1,329
(80)
20
1,306
2,004
$
6,707
— $
—
2,197
(193)
—
2,004
$
8
14
—
—
—
22
$
$
$
8,711
8
14
2,197
(193)
—
2,026
1,450
90
1,540
1,329
$
$
$
— $
—
— $
$
1,450
90
1,540
8,871
2,331
92
2,423
2,197
$
$
$
— $
—
— $
$
2,331
92
2,423
14,841
$
$
$
$
$
$
$
$
$
$
$
$
Principal balance outstanding
(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
12,644
7,542
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
December 31, 2013 and 2012, home equity loan securitizations
in rapid amortization for which the Corporation has a subordinated
funding
and
unconsolidated trusts, had $7.6 billion and $9.0 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 $82 million and $196 million at December 31, 2013
and 2012, as well as performance of the loans, the amount of
subsequent draws and the timing of related cash flows. At
consolidated
obligation,
including
both
December 31, 2013 and 2012, 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 and $51 million.
The Corporation has consumer MSRs from the sale or
securitization of home equity loans. The Corporation recorded $47
million and $59 million of servicing fee income related to home
equity loan securitizations during 2013 and 2012. The Corporation
repurchased $287 million and $87 million of loans from home
equity securitization trusts during 2013 and 2012 to perform
modifications.
During 2013, the Corporation transferred servicing for
consolidated home equity securitization trusts with total assets
of $475 million and total liabilities of $616 million to a third party.
As the Corporation no longer services the underlying loans, these
trusts were deconsolidated, resulting in a gain of $141 million that
was recorded in other income (loss) in the Consolidated Statement
of Income.
76788ba_financials.indd 199
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Bank of America 2013 199
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 December 31, 2013 and
2012.
Credit Card VIEs
(Dollars in millions)
Consolidated VIEs
Maximum loss exposure
On-balance sheet assets
Derivative assets
Loans and leases (1)
Allowance for loan and lease losses
Loans held-for-sale
All other assets (2)
Total
On-balance sheet liabilities
Long-term debt
All other liabilities
Total
December 31
2013
2012
$
$
$
$
$
49,621
182
61,241
(2,585)
386
2,281
61,505
11,822
62
11,884
$
$
$
$
$
42,487
323
66,427
(3,445)
—
1,567
64,872
22,291
94
22,385
(1) At December 31, 2013 and 2012, loans and leases included $41.2 billion and $33.5 billion of seller’s interest and $14 million and $124 million of discount receivables.
(2) At December 31, 2013 and 2012, all other assets included restricted cash and short-term investment accounts and unbilled accrued interest and fees.
The Corporation holds subordinate securities with a notional
principal amount of $7.9 billion and $10.1 billion at December 31,
2013 and 2012, and a stated interest rate of zero percent issued
by certain credit card securitization trusts. 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.
During 2012, the Corporation transferred $553 million of credit
card receivables to a third-party sponsored securitization vehicle.
The Corporation no longer services the credit card receivables and
does not consolidate the vehicle. At December 31, 2013 and
2012, the Corporation held a senior interest of $272 million and
$309 million in these receivables, classified in loans and leases,
that is not included in the table above.
200 Bank of America 2013
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Other Asset-backed Securitizations
Other asset-backed securitizations include resecuritization trusts, municipal bond trusts, and automobile and other securitization trusts.
The table below summarizes select information related to other asset-backed securitizations in which the Corporation held a variable
interest at December 31, 2013 and 2012.
Other Asset-backed VIEs
(Dollars in millions)
Unconsolidated VIEs
Maximum loss exposure
On-balance sheet assets
Senior securities held (1, 2):
Trading account assets
Debt securities carried at fair value
Subordinate securities held (1, 2):
Debt securities carried at fair value
Residual interests held (3)
All other assets
Total retained positions
Total assets of VIEs (4)
Consolidated VIEs
Maximum loss exposure
On-balance sheet assets
Trading account assets
Loans and leases
Allowance for loan and lease losses
All other assets
Total assets
On-balance sheet liabilities
Short-term borrowings
Long-term debt
All other liabilities
Total liabilities
Resecuritization Trusts
Municipal Bond Trusts
December 31
December 31
Automobile and Other
Securitization Trusts
December 31
2013
2012
2013
2012
2013
2012
11,913
$
20,715
$
2,192
$
3,341
$
81
$
122
971
10,866
$
1,281
19,343
$
$
53
—
$
12
540
71
5
—
11,913
40,924
164
319
—
—
—
319
$
$
$
$
$
75
16
—
20,715
42,818
126
220
—
—
—
220
$
$
$
$
$
— $
155
—
155
$
— $
94
—
94
$
—
—
—
53
3,643
2,667
2,684
—
—
—
2,684
1,073
17
—
1,090
$
$
$
$
$
$
$
—
—
—
552
4,980
2,505
2,505
—
—
—
2,505
2,859
—
—
2,859
$
$
$
$
$
$
$
$
1
70
—
—
10
81
1,788
$
$
37
74
—
—
11
122
1,890
94
$
1,255
— $
680
—
61
741
$
— $
646
1
647
$
—
2,523
(2)
250
2,771
—
1,513
82
1,595
$
$
$
$
$
$
$
$
$
(1) As a holder of these securities, the Corporation receives scheduled principal and interest payments. During 2013 and 2012, there were no OTTI losses recorded on those securities classified as
AFS debt securities.
(2) The retained senior and subordinate securities were valued using quoted market prices or observable market inputs (Level 2 of the fair value hierarchy).
(3) The retained residual interests are carried at fair value which was derived using model valuations (Level 2 of the fair value hierarchy).
(4) Total assets include loans the Corporation transferred with which the Corporation has continuing involvement, which may include servicing the loan.
Resecuritization Trusts
The Corporation transfers existing securities, typically MBS, into
resecuritization vehicles at the request of customers seeking
securities with specific characteristics. The Corporation may also
resecuritize securities within its investment portfolio for purposes
of improving liquidity and capital, and managing credit or interest
rate risk. Generally, there are no significant ongoing activities
performed in a resecuritization trust and no single investor has
the unilateral ability to liquidate the trust.
The Corporation resecuritized $22.2 billion of securities in
2013 and $37.4 billion in 2012. All of the securities transferred
into resecuritization vehicles during 2013 and 2012 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.
During 2013 and 2012, the Corporation was the transferor of
assets into unconsolidated municipal bond trusts and received
cash proceeds from new securitizations of $188 million and $879
million. The securities transferred into municipal bond trusts
during 2013 and 2012 were primarily classified as trading account
assets. As such, changes in fair value were recorded in trading
account profits prior to the transfer and no gain or loss on sale
was recorded.
Bank of America 2013 201
76788ba_financials.indd 201
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The Corporation’s liquidity commitments to unconsolidated
municipal bond trusts, including those for which the Corporation
was transferor, totaled $2.1 billion and $2.8 billion at
December 31, 2013 and 2012. The weighted-average remaining
life of bonds held in the trusts at December 31, 2013 was 8.2
years. There were no material write-downs or downgrades of assets
or issuers during 2013 and 2012.
of $2.4 billion and recording a loss on sale of $7 million. At
December 31, 2013 and 2012, the Corporation serviced assets
or otherwise had continuing involvement with automobile and other
securitization trusts with outstanding balances of $2.5 billion and
$4.7 billion, including trusts collateralized by automobile loans of
$877 million and $3.5 billion, student loans of $741 million and
$897 million, and other loans of $911 million and $290 million.
Automobile and Other Securitization Trusts
The Corporation transfers automobile and other loans into
securitization trusts, typically to improve liquidity or manage credit
risk. During 2012, the Corporation transferred automobile loans
into an unconsolidated automobile trust, receiving cash proceeds
Other Variable Interest Entities
The table below summarizes select information related to other
VIEs in which the Corporation held a variable interest at
December 31, 2013 and 2012.
Other VIEs
(Dollars in millions)
Maximum loss exposure
On-balance sheet assets
Trading account assets
Derivative assets
Debt securities carried at fair value
Loans and leases
Allowance for loan and lease losses
Loans held-for-sale
All other assets
Total
On-balance sheet liabilities
Short-term borrowings
Long-term debt (1)
All other liabilities
Total
Consolidated
9,716
2013
Unconsolidated
12,523
$
December 31
Total
Consolidated
2012
Unconsolidated
9,269
$
$
$
$
$
$
$
3,769
3
—
4,609
(6)
998
1,734
11,107
77
4,487
93
4,657
11,107
$
$
$
$
$
$
$
$
22,239
5,189
742
1,944
4,879
(6)
1,083
7,901
21,732
1,420
739
1,944
270
—
85
6,167
10,625
— $
—
2,538
2,538
38,505
$
$
77
4,487
2,631
7,195
49,612
$
$
$
$
$
$
10,803
5,181
10
—
5,084
(14)
1,055
1,764
13,080
131
6,874
92
7,097
13,080
$
$
$
$
$
Total
20,072
5,537
1,287
39
5,151
(14)
1,212
7,608
20,820
$
$
$
356
1,277
39
67
—
157
5,844
7,740
— $
—
2,092
2,092
39,700
$
$
131
6,874
2,184
9,189
52,780
Total assets of VIEs
(1) Includes $1.3 billion, $1.2 billion and $780 million of long-term debt at December 31, 2013 and $2.8 billion, $1.2 billion and $780 million of long-term debt at December 31, 2012 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 $5.9 billion and $4.4
billion at December 31, 2013 and 2012, 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 $748 million and $742 million at
December 31, 2013 and 2012, that are included in the table
above.
Collateralized Debt Obligation Vehicles
The Corporation receives fees for structuring CDO vehicles, which
hold diversified pools of fixed-income securities, typically corporate
debt or ABS, which they fund by issuing multiple tranches of debt
and equity securities. Synthetic CDOs enter into a portfolio of CDS
to synthetically create exposure to fixed-income securities. CLOs,
which are a subset of CDOs, hold pools of loans, typically corporate
loans or commercial mortgages. 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.
202 Bank of America 2013
76788ba_financials.indd 202
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The Corporation’s maximum loss exposure to consolidated and
unconsolidated CDOs totaled $2.1 billion and $3.6 billion at
December 31, 2013 and 2012. This exposure is calculated on a
gross basis and does not reflect any benefit from insurance
purchased from third parties.
At December 31, 2013, the Corporation had $1.3 billion of
aggregate liquidity exposure, included in the Other VIEs table net
of previously recorded losses, to unconsolidated CDOs which hold
senior CDO debt securities or other debt securities on the
Corporation’s behalf. For additional information, see Note 12 –
Commitments and Contingencies.
Investment Vehicles
The Corporation sponsors, invests in or provides financing, which
may be in connection with the sale of assets, to a variety of
investment vehicles that hold loans, real estate, debt securities
or other financial instruments and are designed to provide the
desired investment profile to investors or the Corporation. At
December 31, 2013 and 2012, the Corporation’s consolidated
investment vehicles had total assets of $1.2 billion and $1.3
billion. The Corporation also held investments in unconsolidated
vehicles with total assets of $5.5 billion and $3.0 billion at
December 31, 2013 and 2012. The Corporation’s maximum loss
exposure associated with both consolidated and unconsolidated
investment vehicles totaled $4.2 billion and $2.1 billion at
December 31, 2013 and 2012 comprised primarily of on-balance
sheet assets less non-recourse liabilities.
During 2013, 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 $2.5 billion, including a funded balance
of $1.9 billion at December 31, 2013, which was classified in
other debt securities carried at fair value.
Leveraged Lease Trusts
The Corporation’s net investment in consolidated leveraged lease
trusts totaled $3.8 billion and $4.4 billion at December 31, 2013
and 2012. 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.
investments
Real Estate Vehicles
The Corporation held investments in unconsolidated real estate
vehicles of $5.8 billion and $5.4 billion at December 31, 2013
and 2012, which primarily consisted of
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 securities to certain
independent third parties and provided financing for up to 75
percent of the purchase price under asset-backed financing
arrangements. At December 31, 2013 and 2012,
the
Corporation’s maximum loss exposure under these financing
arrangements was $1.1 billion and $2.5 billion, substantially all
of which is classified in loans and leases. All principal and interest
payments have been received when due in accordance with their
contractual terms. These arrangements are not included in the
Other VIEs table because the purchasers are not VIEs.
NOTE 7 Representations and Warranties
Obligations and Corporate Guarantees
Background
The Corporation securitizes first-lien residential mortgage loans
generally in the form of MBS 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, 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.
the case of private-label
In
securitizations, the applicable agreements may permit investors,
which may include the GSEs, with contractually 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
Bank of America 2013 203
76788ba_financials.indd 203
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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.
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, or agreements for bulk
settlements, 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 the larger bulk settlement actions
during the past few years.
Freddie Mac Settlement
On November 27, 2013, the Corporation entered into an
agreement with Freddie Mac (FHLMC) under which the Corporation
paid FHLMC a total of $404 million (less credits of $13 million)
to resolve all outstanding and potential mortgage repurchase and
make-whole claims arising out of any alleged breach of selling
representations and warranties related to loans that had been
sold directly to FHLMC by entities related to Bank of America, N.A.
from January 1, 2000 to December 31, 2009, and to compensate
FHLMC for certain past losses and potential future losses relating
to denials, rescissions and cancellations of mortgage insurance.
In 2010, the Corporation had entered into an agreement with
FHLMC to resolve all outstanding and potential representations
and warranties claims related to loans sold by Countrywide to
FHLMC through 2008.
With these agreements, combined with prior settlements with
Fannie Mae (FNMA), the Corporation has resolved substantially all
outstanding and potential representations and warranties claims
on whole loans sold by legacy Bank of America and Countrywide
to FNMA and FHLMC through 2008 and 2009, respectively, subject
204 Bank of America 2013
to certain exceptions which the Corporation does not believe are
material. For further discussion of the settlements with the GSEs,
see Fannie Mae Settlement and Government-sponsored
Enterprises Experience in this Note.
Fannie Mae Settlement
On January 6, 2013, the Corporation entered into an agreement
with FNMA to resolve substantially all outstanding and potential
repurchase and certain other claims relating to the origination,
sale and delivery of residential mortgage loans originated from
January 1, 2000 through December 31, 2008 and sold directly to
FNMA by entities related to Countrywide and BANA.
This agreement covers loans with an aggregate original
principal balance of approximately $1.4 trillion and an aggregate
outstanding principal balance of approximately $300 billion.
Unresolved repurchase claims submitted by FNMA for alleged
breaches of selling representations and warranties with respect
to these loans totaled $12.2 billion of unpaid principal balance at
December 31, 2012. This agreement extinguished substantially
all of those unresolved repurchase claims, as well as any future
representations and warranties repurchase claims associated with
such loans, subject to certain exceptions which the Corporation
does not expect to be material.
In January 2013, the Corporation made a cash payment to
FNMA of $3.6 billion and also repurchased for $6.6 billion certain
residential mortgage loans that had previously been sold to FNMA,
which the Corporation has valued at less than the purchase price.
This agreement also clarified the parties’ obligations with
respect to MI including establishing timeframes for certain
payments and other actions, setting parameters for potential bulk
settlements and providing for cooperation in future dealings with
mortgage insurers. For additional information, see Mortgage
Insurance Rescission Notices in this Note.
In addition, pursuant to a separate agreement, the Corporation
settled substantially all of FNMA’s outstanding and future claims
for compensatory fees arising out of foreclosure delays through
December 31, 2012.
Collectively, these agreements are referred to herein as the
FNMA Settlement. The Corporation was fully reserved at December
31, 2012 for the FNMA Settlement.
Monoline Settlements
MBIA Settlement
On May 7, 2013, the Corporation entered into a comprehensive
settlement with MBIA Inc. and certain of its affiliates (the MBIA
Settlement) which resolved all outstanding litigation between the
parties, as well as other claims between the parties, including
outstanding and potential claims from MBIA related to alleged
representations and warranties breaches and other claims
involving certain first- and second-lien RMBS trusts for which MBIA
provided financial guarantee insurance, certain of which claims
were the subject of litigation. At the time of the settlement, the
mortgages (first- and second-lien) in RMBS trusts covered by the
MBIA Settlement had an original principal balance of $54.8 billion
and an unpaid principal balance of $19.1 billion.
Under the MBIA Settlement, all pending litigation between the
parties was dismissed and each party received a global release
of those claims. The Corporation made a settlement payment to
MBIA of $1.6 billion in cash and transferred to MBIA approximately
$95 million in fair market value of notes issued by MBIA and
previously held by the Corporation. In addition, MBIA issued to the
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Corporation warrants to purchase up to approximately 4.9 percent
of MBIA’s currently outstanding common stock, at an exercise price
of $9.59 per share, which may be exercised at any time prior to
May 2018. In addition, the Corporation provided a senior secured
$500 million credit facility to an affiliate of MBIA, which has since
been closed.
The parties also terminated various CDS transactions entered
into between the Corporation and a MBIA-affiliate, LaCrosse
Financial Products, LLC, and guaranteed by MBIA, which
constituted all of the outstanding CDS protection agreements
purchased by the Corporation from MBIA on commercial mortgage-
backed securities (CMBS). Collectively, those CDS transactions
had a notional amount of $7.4 billion and a fair value of $813
million as of March 31, 2013. The parties also terminated certain
other trades in order to close out positions between the parties.
The termination of these trades did not have a material impact on
the Corporation’s financial statements.
Syncora Settlement
On July 17, 2012, the Corporation entered into a settlement with
a monoline insurer, Syncora Guarantee Inc. and Syncora Holdings,
Ltd. (Syncora), to resolve all of Syncora’s outstanding and potential
claims related to alleged representations and warranties breaches
involving eight first- and six second-lien private-label securitization
trusts where it provided financial guarantee insurance. The
settlement covers private-label securitization trusts that had an
original principal balance of first-lien mortgages of approximately
$9.6 billion and second-lien mortgages of approximately $7.7
billion. The settlement provided for a cash payment of $375 million
to Syncora and other transactions to terminate certain other
relationships among the parties.
Assured Guaranty Settlement
On April 14, 2011, the Corporation, including its Countrywide
affiliates, entered into a settlement with Assured Guaranty to
resolve all of Assured Guaranty’s outstanding and potential
repurchase claims related to alleged representations and
warranties breaches involving 21 first- and eight second-lien RMBS
trusts where Assured Guaranty provided financial guarantee
insurance. The settlement resolves historical loan servicing issues
and other potential liabilities with respect to those trusts. The
settlement covers RMBS trusts that had an original principal
balance of approximately $35.8 billion and total unpaid principal
balance of approximately $20.2 billion as of April 14, 2011. The
settlement provided for cash payments totaling approximately
$1.1 billion to Assured Guaranty, a loss-sharing reinsurance
arrangement with an expected value of approximately $470 million
at the time of the settlement and other terms, including termination
of certain derivative contracts.
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 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
(including repurchase claims), substantially all historical loan
servicing claims and certain other historical claims with respect
to 525 Countrywide first-lien and five second-lien non-GSE
residential mortgage-backed securitization trusts (the Covered
Trusts) containing loans principally originated between 2004 and
2008 for which BNY Mellon acts as trustee or indenture trustee
(BNY Mellon Settlement). The Covered Trusts had an original
principal balance of approximately $424 billion, of which $409
billion was originated between 2004 and 2008, and total
outstanding principal and unpaid principal balance of loans that
had defaulted
(collectively unpaid principal balance) of
approximately $220 billion at June 28, 2011, of which $217 billion
was originated between 2004 and 2008. The BNY Mellon
Settlement is supported by a group of 22 institutional investors
(the Investor Group) and is subject to final court approval and
certain other conditions.
The BNY Mellon Settlement provides for a cash payment of
$8.5 billion (the Settlement Payment) to the Trustee for distribution
to the Covered Trusts after final court approval of the BNY Mellon
Settlement. In addition to the Settlement Payment, the Corporation
is obligated to pay attorneys’ fees and costs to the Investor Group’s
counsel as well as all fees and expenses incurred by the Trustee
related to obtaining final court approval of the BNY Mellon
Settlement and certain tax rulings.
The BNY Mellon Settlement does not cover a small number of
Countrywide-issued first-lien non-GSE RMBS transactions with
loans originated principally between 2004 and 2008 for various
reasons, including for example, six Countrywide-issued first-lien
non-GSE RMBS transactions in which BNY Mellon is not the
trustee. The BNY Mellon Settlement also does not cover
Countrywide-issued second-lien securitization transactions in
which a monoline insurer or other financial guarantor provides
financial guaranty insurance. In addition, because the settlement
is with the Trustee on behalf of the Covered Trusts and releases
rights under the governing agreements for the Covered Trusts, the
settlement does not release investors’ securities law or fraud
claims based upon disclosures made in connection with their
decision to purchase, sell or hold securities issued by the Covered
Trusts. To date, various investors are pursuing securities law or
fraud claims related to one or more of the Covered Trusts. The
Corporation is not able to determine whether any additional
securities law or fraud claims will be made by investors in the
Covered Trusts. For information about mortgage-related securities
law or fraud claims, see Litigation and Regulatory Matters in Note
12 – Commitments and Contingencies. For those Covered Trusts
where a monoline insurer or other financial guarantor has an
independent right to assert repurchase claims directly, the BNY
Mellon Settlement does not release such insurer’s or guarantor’s
repurchase claims.
Under an order entered by the court in connection with the BNY
Mellon Settlement, potentially interested persons had the
opportunity to give notice of intent to object to the settlement
(including on the basis that more information was needed) until
August 30, 2011. Approximately 44 groups or entities appeared
prior to the deadline. Certain of these groups or entities filed
notices of intent to object, made motions to intervene, or both.
On May 3, 2013, pursuant to the court-ordered schedule for filing
objections, 13 groups or entities filed five briefs formally objecting
to the BNY Mellon Settlement. Several former intervenor-objectors
either expressly withdrew from the proceeding or elected not to
file an objection at the objection deadline, including the Attorneys
General of New York and Delaware, the Federal Deposit Insurance
Corporation (FDIC) and the Federal Housing Finance Agency (FHFA).
After additional withdrawals, 11 objectors remained in the
proceeding at the conclusion of the court approval hearing.
Bank of America 2013 205
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The 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 can include 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 4, 2014, one of the objectors filed
a motion to stay entry of judgment and to hold additional
proceedings in the trial court on issues it alleged had not been
litigated or decided by the court in its January 31, 2014 decision,
order and judgment. On February 18, 2014, the same objector
also filed a motion for reargument of the trial court’s January 31,
2014 decision. The court held a hearing on the motion to stay on
February 19, 2014, and rejected the application for stay and for
further proceedings in the trial court. The court also ruled it would
not hold oral argument on the objector’s motion for reargument
before April 2014. 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. The
court’s January 31, 2014 decision, order and judgment remain
subject to appeal and the motion to reargue, and it is not possible
to predict the timetable for appeals or 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.
There can be no assurance that final court approval of the
settlement will be obtained, that all conditions to the BNY Mellon
Settlement will be satisfied or, if certain conditions to the BNY
Mellon Settlement permitting withdrawal are met, that the
Corporation and Countrywide will not withdraw from the settlement.
If final court approval is not obtained or if the Corporation and
Countrywide withdraw from the BNY Mellon Settlement in
accordance with
future
representations and warranties losses could be substantially
different from existing accruals and the estimated range of
possible loss over existing accruals described under Whole-loan
Sales and Private-label Securitizations Experience in this Note.
the Corporation’s
terms,
its
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
206 Bank of America 2013
some cases, MI or mortgage guarantee payments. Claims received
from a counterparty remain outstanding until the underlying loan
is repurchased, the claim is rescinded by the counterparty, or the
claim is otherwise resolved. 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
December 31, 2013 and 2012. 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 Whole-loan Sales and Private-label
Securitizations Experience in this Note and Note 12 – Commitments
and Contingencies. These repurchase claims do not include any
repurchase claims related to the BNY Mellon Settlement regarding
the Covered Trusts.
Unresolved Repurchase Claims by Counterparty and
Product Type (1, 2)
December 31
2013
2012
$ 17,953
$ 12,222
(Dollars in millions)
By counterparty
Private-label securitization trustees, whole-loan
investors, including third-party securitization
sponsors and other (3)
Monolines
GSEs
1,532
170
Total unresolved repurchase claims by counterparty (3) $ 19,655
By product type
Prime loans
Alt-A
Home equity
Pay option
Subprime
Other
623
1,536
1,889
5,776
7,502
2,329
Total unresolved repurchase claims by product type (3) $ 19,655
$
2,442
13,437
$ 28,101
$ 8,724
5,422
2,390
5,877
4,227
1,461
$ 28,101
(1) The total notional amount of unresolved repurchase claims does not include any repurchase
claims related to the trusts covered by the BNY Mellon Settlement.
(2) At December 31, 2013 and 2012, unresolved repurchase claims did not include repurchase
demands of $1.2 billion and $1.6 billion where the Corporation believes the claimants have
not satisfied the contractual thresholds as noted on page 206.
Includes $13.8 billion and $11.7 billion of claims based on individual file reviews and $4.1
billion and $519 million of claims submitted without individual file reviews at December 31,
2013 and 2012.
(3)
trustees, whole-loan
The notional amount of unresolved repurchase claims from
private-label securitization
investors,
including third-party securitization sponsors, and others totaled
$18.0 billion at December 31, 2013 compared to $12.2 billion at
December 31, 2012, including $13.8 billion and $11.7 billion of
claims based on individual file reviews and $4.1 billion and $519
million of claims submitted without individual file reviews. The
increase in the notional amount of unresolved repurchase claims
during 2013 is primarily due to continued submission of claims
by private-label securitization trustees; the level of detail, support
and analysis accompanying such claims, which impacts overall
claim quality and, therefore, claims resolution; and the lack of an
established process to resolve disputes related to these claims.
For example, claims submitted without individual file reviews lack
the level of detail and analysis of individual loans found in other
claims that is necessary for the Corporation to respond to the
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
76788ba_financials.indd 206
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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 Whole-loan Sales and Private-label
Securitizations Experience in this Note.
The notional amount of unresolved monoline repurchase
claims totaled $1.5 billion at December 31, 2013 compared to
$2.4 billion at December 31, 2012. As a result of the MBIA
Settlement, $945 million of monoline repurchase claims
outstanding at December 31, 2012 were resolved in May 2013.
Substantially all of the unresolved monoline claims pertain to
second-lien loans and are currently the subject of litigation. As a
result, the Corporation has had limited loan-level repurchase
claims experience with the remaining monoline insurers. In the
Corporation’s experience, the monolines have been generally
unwilling to withdraw repurchase claims, regardless of whether
and what evidence was offered to refute a claim. 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 12 – Commitments and
Contingencies.
The notional amount of unresolved GSE repurchase claims
totaled $170 million at December 31, 2013 compared to $13.4
billion at December 31, 2012. As of December 31, 2013, the
Corporation has resolved substantially all GSE-related claims due
primarily to the settlements with FHLMC and FNMA. As a result of
the FNMA Settlement, $12.2 billion of GSE repurchase claims
outstanding at December 31, 2012 were resolved in January 2013.
As a result of the FHLMC Settlement, $646 million of claims were
resolved at the time of the settlement, of which $322 million were
outstanding at December 31, 2012. For further discussion of the
Corporation’s experience with the GSEs, see Government-
sponsored Enterprises Experience in this Note.
In addition to, and not included in, the total unresolved
repurchase claims of $19.7 billion at December 31, 2013, the
Corporation has received repurchase demands from private-label
securitization investors and a master servicer where it believes
the claimants have not satisfied the contractual thresholds to
direct the securitization trustee to take action and/or that these
demands are otherwise procedurally or substantively invalid. The
total amount outstanding of such demands was $1.2 billion,
comprised of $945 million of demands received during 2012 and
$273 million of demands related to trusts covered by the BNY
Mellon Settlement at December 31, 2013 compared to $1.6
billion at December 31, 2012. The Corporation does not believe
that the $1.2 billion of demands outstanding at December 31,
2013 are valid repurchase claims and, therefore, it is not possible
to predict the resolution with respect to such demands.
During 2013, the Corporation received $8.4 billion in new
repurchase claims, including $6.3 billion submitted by private-label
securitization trustees and a financial guarantee provider, $1.8
billion submitted by the GSEs for both Countrywide and legacy
Bank of America originations not covered by the bulk settlements
with the GSEs, $222 million submitted by whole-loan investors
and $50 million submitted by monoline insurers. During 2013,
$16.7 billion in claims were resolved, primarily with the GSEs and
through the MBIA Settlement. Of the remaining claims that were
resolved, $1.7 billion were resolved through rescissions and $1.2
billion were resolved through mortgage repurchases and make-
whole payments, primarily with the GSEs.
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 (loss) in the Consolidated
Statement of Income. The liability for representations and
warranties is established when those obligations are both
probable and reasonably estimable.
The Corporation’s estimated liability at December 31, 2013 for
obligations under representations and warranties given to the
GSEs and the corresponding estimated range of possible loss
considers, and is necessarily dependent on, and limited by, a
number of factors, including the Corporation’s experience related
to actual defaults, projected future defaults, historical loss
experience, estimated home prices and other economic
conditions. The methodology also considers such factors as the
number of payments made by the borrower prior to default as well
as certain other assumptions and judgmental factors.
The Corporation’s estimate of the non-GSE representations and
warranties liability and the corresponding estimated range of
possible loss at December 31, 2013 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 and other facts
and circumstances, such as bulk settlements, as the Corporation
believes appropriate.
76788ba_financials.indd 207
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Bank of America 2013 207
that
repurchase claimants must prove
Additional factors that impact 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 include: (1) contractual material adverse
effect requirements, (2) the representations and warranties
provided, and (3) the requirement to meet certain presentation
thresholds. The first factor is based on the Corporation’s belief
that a non-GSE contractual liability to repurchase a loan generally
arises only if the counterparties prove there is a breach of
representations and warranties that materially and adversely
affects the interest of the investor or all investors, or of the
monoline insurer or other financial guarantor (as applicable), in a
securitization trust and, accordingly, the Corporation believes that
the
the alleged
representations and warranties breach was the cause of the loss.
The second factor is based on the differences in the types of
representations and warranties given in non-GSE securitizations
from those provided to the GSEs. The Corporation believes the
non-GSE securitizations’ representations and warranties are less
rigorous and actionable than the explicit 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 third
factor is related to certain presentation thresholds that need to
be met 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
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, the estimated
range of possible loss assumes that the presentation threshold
can be met for all 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
(Dollars in millions)
Liability for representations and warranties and
corporate guarantees, January 1
Additions for new sales
Net reductions
Provision
2013
2012
$ 19,021
$ 15,858
36
(6,615)
840
28
(804)
3,939
Liability for representations and warranties and
corporate guarantees, December 31
$ 13,282
$ 19,021
For 2013, the provision for representations and warranties and
corporate guarantees was $840 million compared to $3.9 billion
for 2012. The provision in 2012 included $2.5 billion in provision
related to the FNMA Settlement and $500 million for obligations
to FNMA related to MI rescissions.
The representations and warranties liability represents the
Corporation’s best estimate of probable incurred losses as of
December 31, 2013. 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, 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
December 31, 2008 and to FHLMC through December 31, 2009,
subject to certain exclusions, which the Corporation does not
believe are material.
208 Bank of America 2013
76788ba_financials.indd 208
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toll
relating
limitations
the applicable statute of
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
to
representations and warranties repurchase claims and the
Corporation believes it is likely that these requests will lead to an
increase in repurchase claims for 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 recent
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). If upheld, this
decision may impact the timeliness of representations and
warranties claims and/or lawsuits, where these claims have not
already been tolled by agreement. The Corporation believes this
ruling may lead to an increase in requests for tolling agreements
as well as an increase in the pace of representations and
warranties claims and/or the filing of lawsuits by private-label
securitization trustees prior to the expiration of the statute of
limitations.
require
The representations and warranties, as governed by the private-
label securitization agreements, generally
that
counterparties have the ability to both assert a claim and 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
investors. The
from third-party whole-loan
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 December 31, 2013, 16 percent of the whole-
loan claims that the Corporation initially denied have subsequently
been resolved through repurchase or make-whole payments and
44 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 December 31, 2013, for loans originated between 2004 and
2008, the notional amount of unresolved repurchase claims
submitted by private-label securitization trustees, a financial
guarantee provider and whole-loan investors was $17.9 billion.
The Corporation has performed an initial review with respect to
$14.6 billion of these claims and does not believe a valid basis
for repurchase has been established by the claimant and is still
in the process of reviewing the remaining $3.3 billion of these
claims.
Monoline Insurers Experience
The Corporation has had limited representations and warranties
repurchase claims experience with the monoline insurers due to
ongoing litigation against Countrywide and/or Bank of America. To
the extent the Corporation received repurchase claims from the
monolines that are properly presented, it generally reviews them
on a loan-by-loan basis. Where a breach of representations and
warranties given by the Corporation or subsidiaries or legacy
companies is confirmed on a given loan, settlement is generally
reached as to that loan within 60 to 90 days. For more information
related to the monolines, see Note 12 – Commitments and
Contingencies.
The MBIA Settlement resolved outstanding and potential
claims between the parties to the settlement involving 31 first-
and 17 second-lien RMBS trusts for which MBIA provided financial
guarantee insurance, including $945 million of monoline
repurchase claims outstanding at December 31, 2012. The first-
and second-lien mortgages in the covered RMBS trusts had an
original principal balance of $29.3 billion and $25.5 billion, and
an unpaid principal balance of $9.8 billion and $9.3 billion at the
time of the settlement.
During 2013, there was minimal loan-level repurchase claim
activity with the monolines and the monolines did not request any
loan files for review through the representations and warranties
process.
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
Bank of America 2013 209
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3/6/14 12:06 PM
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. See below for a discussion of
the impact of the FNMA and FHLMC Settlements. 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 December 31, 2013, the Corporation had approximately
101,000 open MI rescission notices compared to 110,000 at
December 31, 2012. Open MI rescission notices at December 31,
2013 included 39,000 pertaining principally to first-lien mortgages
serviced for others, 10,000 pertaining to loans held-for-investment
and 52,000 pertaining to ongoing litigation for second-lien
mortgages. Approximately 28,000 of the open MI rescission
notices pertaining to first-lien mortgages serviced for others are
related to loans sold to the GSEs. As of December 31, 2013, 43
percent of the MI rescission notices received have been resolved.
Of those resolved, 16 percent were resolved through the
Corporation’s acceptance of the MI rescission, 59 percent were
resolved through reinstatement of coverage or payment of the
claim by the mortgage insurance company, and 25 percent were
resolved on an aggregate basis through settlement, policy
commutation or similar arrangement. As of December 31, 2013,
57 percent of the MI rescission notices the Corporation has
received have not yet been resolved. Of those not yet resolved,
52 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 eight
percent of the remaining open MI rescission notices, and it has
reviewed and is contesting the MI rescission with respect to 92
percent of these remaining open MI rescission notices. Of the
remaining open MI rescission notices, 42 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.
the settlement,
Although the GSE settlements did not resolve underlying MI
rescission notices, the FNMA Settlement clarified the parties’
obligations with respect to MI rescission notices pertaining to
loans covered by
including establishing
timeframes for certain payments and other actions, setting
parameters for potential bulk settlements and providing for
cooperation in future dealings with mortgage insurers while the
FHLMC Settlement clarified the requirements of their guidelines.
As a result, the Corporation is required to pay or has paid the
amount of MI coverage to the GSEs for 26,200 MI claims
rescissions pertaining to loans covered by the settlements, which
are included in the 28,000 open MI rescission notices referenced
in the paragraph above, in advance of collection from the mortgage
insurance companies. In certain cases, the Corporation may not
ultimately collect all such amounts from the mortgage insurance
companies.
Estimated Range of Possible Loss
The Corporation currently estimates that the range of possible
loss for representations and warranties exposures could be up to
$4 billion over existing accruals at December 31, 2013. 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
12 – Commitments and Contingencies; however, such loss could
be material.
from
Future provisions and/or ranges of possible loss for
representations and warranties may be significantly impacted if
actual experiences are different
the Corporation’s
assumptions in its 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, 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
210 Bank of America 2013
76788ba_financials.indd 210
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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 table below presents first-lien and home equity loan
repurchases and indemnification payments for 2013 and 2012.
During 2013 and 2012, the Corporation paid $1.2 billion and $1.8
billion to resolve $1.5 billion and $2.1 billion 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
$609 million and $847 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
Loan Repurchases and Indemnification Payments
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
representations and
underwriting procedures. The actual
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 below exclude a cash payment
of $391 million paid to FHLMC for the FHLMC Settlement. 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
FNMA Settlement. Additionally, the amounts shown in the table
below exclude $1.8 billion and $669 million paid in monoline
settlements during 2013 and 2012.
(Dollars in millions)
First-lien
Repurchases
Indemnification payments
Total first-lien
Home equity
Repurchases
Indemnification payments
Total home equity
Total first-lien and home equity
December 31
Unpaid
Principal
Balance
2013
Cash Paid
for
Repurchases
Loss
Unpaid
Principal
Balance
2012
Cash Paid
for
Repurchases
Loss
$
$
746
661
1,407
—
74
74
1,481
$
$
784
383
1,167
—
77
77
1,244
$
$
149
383
532
—
77
77
609
$
$
1,184
831
2,015
24
36
60
2,075
$
$
1,273
425
1,698
24
33
57
1,755
$
$
389
425
814
—
33
33
847
76788ba_financials.indd 211
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Bank of America 2013 211
NOTE 8 Goodwill and Intangible Assets
Goodwill
The table below presents goodwill balances by business segment
at December 31, 2013 and 2012. The reporting units utilized for
goodwill impairment testing are the operating segments or one
level below.
Goodwill
(Dollars in millions)
Consumer & Business Banking
Global Wealth & Investment Management
Global Banking
Global Markets
All Other
Total goodwill
December 31
2013
31,681
9,698
22,377
5,197
891
69,844
$
$
2012
$ 31,681
9,698
22,377
5,181
1,039
$ 69,976
Effective January 1, 2013, on a prospective basis, the
Corporation adjusted the amount of capital being allocated to the
business segments. The adjustment reflects a refinement to the
prior-year methodology (economic capital), which focused solely
on internal risk-based economic capital models. The refined
methodology (allocated capital) now also considers the effect of
regulatory capital requirements in addition to internal risk-based
economic capital models. 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.
There was no goodwill in Consumer Real Estate Services (CRES)
at December 31, 2013 and 2012.
In 2013, the consumer Dealer Financial Services (DFS)
business, including $1.7 billion of goodwill, was moved from Global
Banking to CBB in order to align this business more closely with
the Corporation’s consumer lending activity and better serve the
needs of its customers. In 2012, the International Wealth
Management businesses within GWIM, including $230 million of
goodwill, were moved to All Other in connection with the
Corporation’s agreement to sell these businesses in a series of
transactions. Certain of the sales transactions were completed in
2013 and most of the remaining sales transactions are expected
to close over the next year. The decrease in goodwill in 2013 was
related to the completed sales transactions. Prior periods were
reclassified to conform to current period presentation.
Annual Impairment Tests
During the three months ended September 30, 2013 and 2012,
the Corporation completed its annual goodwill impairment test as
of June 30 for all applicable reporting units. Based on the results
of the annual goodwill impairment test, the Corporation determined
there was no impairment.
Intangible Assets
The table below presents the gross carrying value and accumulated
amortization for intangible assets at December 31, 2013 and
2012.
Intangible Assets (1)
(Dollars in millions)
Purchased credit card relationships
Core deposit intangibles
Customer relationships
Affinity relationships
Other intangibles
Total intangible assets
(1) Excludes fully amortized intangible assets.
2013
December 31
Gross
Carrying Value
Accumulated
Amortization
Net
Carrying Value
Gross
Carrying Value
2012
Accumulated
Amortization
Net
Carrying Value
$
$
6,160
3,592
4,025
1,575
2,045
17,397
$
$
4,849
3,055
2,281
1,197
441
11,823
$
$
1,311
537
1,744
378
1,604
5,574
$
$
6,184
3,592
4,025
1,572
2,139
17,512
$
$
4,494
2,858
1,884
1,087
505
10,828
$
$
1,690
734
2,141
485
1,634
6,684
At December 31, 2013 and 2012, none of the intangible assets
were impaired. Amortization of intangibles expense was $1.1
billion, $1.3 billion and $1.5 billion in 2013, 2012 and 2011,
respectively.
The Corporation estimates aggregate amortization expense will
be $938 million, $836 million, $739 million, $647 million and
$567 million for 2014 through 2018, respectively.
212 Bank of America 2013
76788ba_financials.indd 212
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NOTE 9 Deposits
The Corporation had U.S. certificates of deposit and other U.S. time deposits of $100 thousand or more totaling $38.3 billion and
$41.9 billion at December 31, 2013 and 2012. Non-U.S. certificates of deposit and other non-U.S. time deposits of $100 thousand
or more totaled $26.2 billion and $29.1 billion at December 31, 2013 and 2012. The table below presents the contractual maturities
for time deposits of $100 thousand or more at December 31, 2013.
Time Deposits of $100 Thousand or More
(Dollars in millions)
U.S. certificates of deposit and other time deposits
Non-U.S. certificates of deposit and other time deposits
Three Months
or Less
Over Three
Months to
Twelve Months
Thereafter
Total
$
16,246
23,726
$
17,943
1,983
$
$
4,155
481
38,344
26,190
The scheduled contractual maturities for total time deposits at December 31, 2013 are presented in the table below.
Contractual Maturities of Total Time Deposits
(Dollars in millions)
Due in 2014
Due in 2015
Due in 2016
Due in 2017
Due in 2018
Thereafter
Total time deposits
U.S.
Non-U.S.
Total
$
$
71,895
6,523
1,719
1,308
649
2,274
84,368
$
$
26,306
227
315
14
1
4
26,867
$
$
98,201
6,750
2,034
1,322
650
2,278
111,235
NOTE 10 Federal Funds Sold or Purchased, Securities Financing Agreements and Short-term
Borrowings
The table below presents federal funds sold or purchased, securities financing agreements which include securities borrowed or
purchased under agreements to resell and securities loaned or sold under agreements to repurchase, and short-term borrowings.
(Dollars in millions)
Federal funds sold
At December 31
Average during year
Maximum month-end balance during year
Securities borrowed or purchased under agreements to resell
At December 31
Average during year
Maximum month-end balance during year
Federal funds purchased
At December 31
Average during year
Maximum month-end balance during year
Securities loaned or sold under agreements to repurchase
At December 31
Average during year
Maximum month-end balance during year
Short-term borrowings
At December 31
Average during year
Maximum month-end balance during year
n/a = not applicable
2013
2012
2011
Amount
Rate
Amount
Rate
Amount
Rate
$
—
7
550
190,328
224,324
249,791
186
192
1,272
197,920
257,409
319,608
45,999
43,816
48,387
—% $
0.69
n/a
0.60
0.55
n/a
—
0.06
n/a
0.92
0.81
n/a
1.55
1.89
n/a
600
351
600
0.54% $
0.43
n/a
100
273
782
0.71%
0.39
n/a
219,324
235,691
252,985
1,151
384
1,211
292,108
281,516
319,401
30,731
36,500
40,129
0.92
0.64
n/a
0.17
0.11
n/a
1.11
0.98
n/a
3.08
2.22
n/a
211,083
244,796
270,201
243
1,658
4,133
214,621
270,718
293,519
35,698
51,893
62,621
0.76
0.88
n/a
0.06
0.08
n/a
1.08
1.31
n/a
2.36
2.00
n/a
Bank of America, N.A. maintains a global program to offer up
to a maximum of $75 billion outstanding at any one time, of bank
notes with fixed or floating rates and maturities of at least seven
days from the date of issue. Short-term bank notes outstanding
under this program totaled $15.1 billion and $3.9 billion at
December 31, 2013 and 2012. These short-term bank notes,
along with Federal Home Loan Bank (FHLB) advances, U.S.
Treasury tax and loan notes, and term federal funds purchased,
are included in short-term borrowings on the Consolidated Balance
Sheet. For information regarding the long-term notes that have
been issued under the $75 billion bank note program, see Note
11 – Long-term Debt.
Bank of America 2013 213
76788ba_financials.indd 213
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Offsetting of Securities Financing Agreements
Substantially all of the Corporation’s repurchase and resale
activities are transacted under legally enforceable master
repurchase agreements that give the Corporation, in the event of
default by the counterparty, the right to liquidate securities held
and to offset receivables and payables with the same counterparty.
The Corporation offsets repurchase and resale transactions with
the same counterparty on the Consolidated Balance Sheet where
it has such a legally enforceable master netting agreement and
the transactions have the same maturity date.
Substantially all securities borrowing and lending activities are
transacted under legally enforceable master securities lending
agreements that give the Corporation, in the event of default by
the counterparty, the right to liquidate securities held and to offset
receivables and payables with the same counterparty. The
Corporation offsets securities borrowing and lending transactions
with the same counterparty on the Consolidated Balance Sheet
where it has such a legally enforceable master netting agreement
and the transactions have the same maturity date.
The Securities Financing Agreements table presents securities
financing agreements included on the Consolidated Balance Sheet
in federal funds sold and securities borrowed or purchased under
agreements to resell, and in federal funds purchased and
securities loaned or sold under agreements to repurchase at
December 31, 2013 and 2012. 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 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. The “other”
amount is included on the Consolidated Balance Sheet in other
assets and in accrued expenses and other liabilities.
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
the 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
(Dollars in millions)
Securities borrowed or purchased under agreements to resell
Securities loaned or sold under agreements to repurchase
Other
Total
Securities borrowed or purchased under agreements to resell
Securities loaned or sold under agreements to repurchase
Other
Total
December 31, 2013
Gross Assets/
Liabilities
Amounts
Offset
Net Balance
Sheet Amount
Financial
Instruments
Net Assets/
Liabilities
$
$
$
$
$
$
272,296
279,888
10,871
290,759
366,238
439,022
12,306
451,328
$
$
$
$
$
$
(81,968) $
190,328
(81,968) $
—
(81,968) $
197,920
10,871
208,791
December 31, 2012
(146,914) $
219,324
(146,914) $
—
(146,914) $
292,108
12,306
304,414
$
$
$
$
$
$
(157,132) $
33,196
(160,111) $
(10,871)
(170,982) $
37,809
—
37,809
(173,593) $
45,731
(217,817) $
(12,302)
(230,119) $
74,291
4
74,295
214 Bank of America 2013
76788ba_financials.indd 214
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NOTE 11 Long-term Debt
Long-term debt consists of borrowings having an original maturity of one year or more. The table below presents the balance of long-
term debt at December 31, 2013 and 2012, and the related contractual rates and maturity dates as of December 31, 2013.
(Dollars in millions)
Notes issued by Bank of America Corporation (1)
Senior notes:
Fixed, with a weighted-average rate of 4.99%, ranging from 1.25% to 8.83%, due 2014 to 2042
Floating, with a weighted-average rate of 0.99%, ranging from 0.05% to 4.99%, due 2014 to 2044
Senior structured notes
Subordinated notes:
Fixed, with a weighted-average rate of 5.83%, ranging from 2.40% to 10.20%, due 2014 to 2038
Floating, with a weighted-average rate of 1.13%, ranging from 0.57% to 2.97%, due 2016 to 2026
Junior subordinated notes (related to trust preferred securities):
Fixed, with a weighted-average rate of 6.84%, ranging from 5.25% to 8.05%, due 2027 to perpetual
Floating, with a weighted-average rate of 0.92%, ranging from 0.79% to 1.24%, due 2027 to 2056
Total notes issued by Bank of America Corporation
Notes issued by Bank of America, N.A.
Senior notes:
Fixed, with a weighted-average rate of 2.97%, ranging from 0.07% to 7.72%, due 2014 to 2187
Floating, with a weighted-average rate of 0.70%, ranging from 0.35% to 0.75%, due 2016 to 2041
Subordinated notes:
Fixed, with a weighted-average rate of 5.68%, ranging from 5.30% to 6.10%, due 2016 to 2036
Floating, with a weighted-average rate of 0.53%, ranging from 0.25% to 0.54%, due 2016 to 2019
Advances from Federal Home Loan Banks:
Fixed, with a weighted-average rate of 4.91%, ranging from 0.01% to 7.72%, due 2014 to 2034
Floating, with a weighted-average rate of 0.28%, ranging from 0.27% to 0.29%, due 2015 to 2016
Total notes issued by Bank of America, N.A.
Other debt
Senior notes:
Fixed, with a weighted-average rate of 5.01%, ranging from 4.00% to 5.50%, due 2014 to 2021
Floating, with a weighted-average rate of 2.55%, ranging from 1.93% to 2.71%, due 2014 to 2015
Structured liabilities
Junior subordinated notes (related to trust preferred securities):
Fixed, with a weighted-average rate of 7.14%, ranging from 7.00% to 7.28%, perpetual
Floating, with a weighted-average rate of 0.87%, due 2027
Other
Total other debt
Total long-term debt excluding consolidated VIEs
Long-term debt of consolidated VIEs
Total long-term debt
December 31
2013
2012
$ 109,845
22,268
30,575
$ 114,493
24,698
33,962
22,379
1,798
24,118
1,767
6,685
553
194,103
6,655
567
206,260
1,670
3,684
4,876
1,401
1,441
3,001
16,073
194
115
16,913
181
2,686
5,230
1,401
6,225
—
15,723
262
705
16,127
340
66
2,422
20,050
230,226
19,448
$ 249,674
340
979
933
19,346
241,329
34,256
$ 275,585
(1) On October 1, 2013, the merger of Merrill Lynch & Co., Inc. into Bank of America Corporation was completed. Effective with this merger, Bank of America Corporation assumed outstanding Merrill
Lynch & Co., Inc. debt including trust preferred securities.
Bank of America Corporation and Bank of America, N.A.
maintain various U.S. and non-U.S. debt programs to offer both
senior and subordinated notes. The notes may be denominated
in U.S. dollars or foreign currencies. At December 31, 2013 and
2012, the amount of foreign currency-denominated debt translated
into U.S. dollars included in total long-term debt was $73.4 billion
and $95.3 billion. Foreign currency contracts may be used to
convert certain foreign currency-denominated debt into U.S.
dollars.
At December 31, 2013, long-term debt of consolidated VIEs in
the table above included debt of credit card, home equity and all
other VIEs of $11.8 billion, $1.5 billion and $6.2 billion,
respectively. Long-term debt of VIEs is collateralized by the assets
of the VIEs. For additional information, see Note 6 – Securitizations
and Other Variable Interest Entities.
At December 31, 2013 and 2012, Bank of America Corporation
had approximately $131.3 billion and $154.9 billion of authorized,
but unissued corporate debt and other securities under its existing
U.S. shelf registration statements. At December 31, 2013 and
2012, Bank of America, N.A. had $51.8 billion and $65.5 billion
of authorized, but unissued bank notes under its existing $75
billion bank note program. Long-term bank notes issued and
outstanding under the program totaled $8.1 billion and $5.6 billion
at December 31, 2013 and 2012. At both December 31, 2013
and 2012, Bank of America, N.A. had $20.6 billion of authorized,
but unissued mortgage notes under its $30 billion mortgage bond
program.
The weighted-average effective interest rates for total long-term
debt (excluding senior structured notes), total fixed-rate debt and
total floating-rate debt were 4.37 percent, 5.14 percent and 0.92
percent, respectively, at December 31, 2013 and 4.71 percent,
5.52 percent and 0.93 percent, respectively, at December 31,
2012. The Corporation’s ALM activities maintain an overall interest
rate risk management strategy that incorporates the use of
interest rate contracts to manage fluctuations in earnings that are
caused by interest rate volatility. The Corporation’s goal is to
manage interest rate sensitivity so that movements in interest
rates do not significantly adversely affect earnings and capital.
Bank of America 2013 215
76788ba_financials.indd 215
3/6/14 12:06 PM
The weighted-average rates are the contractual interest rates on
the debt and do not reflect the impacts of derivative transactions.
Certain senior structured notes are accounted for under the
fair value option. For more information on these senior structured
notes, see Note 21 – Fair Value Option.
The table below shows the carrying value for aggregate annual
contractual maturities of long-term debt as of December 31, 2013.
Included in the table are certain structured notes issued by the
Corporation that contain provisions whereby the borrowings are
redeemable at the option of the holder (put options) at specified
dates prior to maturity. Other structured notes have coupon or
repayment terms linked to the performance of debt or equity
securities, indices, currencies or commodities and the maturity
may be accelerated based on the value of a referenced index or
security. In both cases, the Corporation or a subsidiary may be
required to settle the obligation for cash or other securities prior
to the contractual maturity date. These borrowings are reflected
in the table as maturing at their contractual maturity date.
In 2013 and 2012, in a combination of tender offers, calls and
open-market transactions, the Corporation purchased senior and
subordinated long-term debt with a carrying value of $9.2 billion
and $12.4 billion, and recorded net losses of $59 million and net
gains of $1.3 billion in connection with these transactions. During
2013, the Corporation had total long-term debt maturities and
purchases of $65.6 billion consisting of $39.3 billion for Bank of
America Corporation, $4.8 billion for Bank of America, N.A., $7.0
billion of other debt and $14.5 billion for consolidated VIEs.
Long-term Debt by Maturity
(Dollars in millions)
Bank of America Corporation (1)
Senior notes
Senior structured notes
Subordinated notes
Junior subordinated notes
Total Bank of America Corporation
Bank of America, N.A.
Senior notes
Subordinated notes
Advances from Federal Home Loan Banks
Total Bank of America, N.A.
Other debt
Senior notes
Structured liabilities
Junior subordinated notes
Other
Total other debt
Total long-term debt excluding consolidated VIEs
Long-term debt of consolidated VIEs
Total long-term debt
2014
2015
2016
2017
2018
Thereafter
Total
$ 24,820
6,360
4
—
31,184
$ 15,365
5,561
1,263
—
22,189
$ 18,164
3,429
5,247
—
26,840
$ 18,273
1,421
5,676
—
25,370
$ 20,311
1,989
3,312
—
25,612
$ 35,180
11,815
8,675
7,238
62,908
$ 132,113
30,575
24,177
7,238
194,103
19
—
1,263
1,282
284
3,614
—
200
4,098
36,564
9,512
46,076
—
—
1,503
1,503
24
2,049
—
56
2,129
25,821
1,255
27,076
$
$
2,492
1,082
1,504
5,078
—
1,520
—
930
2,450
34,368
1,797
36,165
2,664
3,664
11
6,339
1
1,723
—
743
2,467
34,176
1,522
35,698
—
—
11
11
—
1,281
—
37
1,318
26,941
191
27,132
$
$
179
1,531
150
1,860
—
6,726
406
456
7,588
72,356
5,171
77,527
5,354
6,277
4,442
16,073
309
16,913
406
2,422
20,050
230,226
19,448
$ 249,674
$
$
(1) On October 1, 2013, the merger of Merrill Lynch & Co., Inc. into Bank of America Corporation was completed. Effective with this merger, Bank of America Corporation assumed outstanding Merrill
Lynch & Co., Inc. debt including trust preferred securities.
Trust Preferred and Hybrid Securities
Trust preferred securities (Trust Securities) are primarily issued by
trust companies (the Trusts) that are not consolidated. These Trust
Securities are mandatorily
redeemable preferred security
obligations of the Trusts. The sole assets of the Trusts generally
are junior subordinated deferrable interest notes of the
Corporation or its subsidiaries (the Notes). The Trusts generally
are 100 percent-owned finance subsidiaries of the Corporation.
Obligations associated with the Notes are included in the long-
term debt table on page 215.
Certain of the Trust Securities were issued at a discount and
may be redeemed prior to maturity at the option of the Corporation.
The Trusts generally have invested the proceeds of such Trust
Securities in the Notes. Each issue of the Notes has an interest
rate equal to the corresponding Trust Securities distribution rate.
The Corporation has the right to defer payment of interest on the
Notes at any time or from time to time for a period not exceeding
five years provided that no extension period may extend beyond
the stated maturity of the relevant Notes. During any such
extension period, distributions on the Trust Securities will also be
deferred and the Corporation’s ability to pay dividends on its
common and preferred stock will be restricted.
The Trust Securities generally are subject to mandatory
redemption upon repayment of the related Notes at their stated
maturity dates or their earlier redemption at a redemption price
equal to their liquidation amount plus accrued distributions to the
date fixed for redemption and the premium, if any, paid by the
Corporation upon concurrent repayment of the related Notes.
Periodic cash payments and payments upon liquidation or
redemption with respect to Trust Securities are guaranteed by the
Corporation or its subsidiaries to the extent of funds held by the
Trusts (the Preferred Securities Guarantee). The Preferred
Securities Guarantee, when taken together with the Corporation’s
other obligations including its obligations under the Notes,
generally will constitute a full and unconditional guarantee, on a
subordinated basis, by the Corporation of payments due on the
Trust Securities.
216 Bank of America 2013
76788ba_financials.indd 216
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In 2013, the Corporation entered into various agreements with
certain Trust Securities holders pursuant to which the Corporation
paid $933 million in cash in exchange for $934 million aggregate
liquidation amount of previously issued Trust Securities. Upon the
exchange, the Corporation immediately surrendered the Trust
Securities to the unconsolidated Trusts for cancellation, resulting
in the cancellation of an equal amount of junior subordinated notes
that had a carrying value of $934 million, resulting in an
insignificant gain.
In 2012, as described in Note 13 – Shareholders’ Equity, the
Corporation entered into separate agreements with certain Trust
Securities holders pursuant to which the Corporation issued 19
million shares of common stock valued at $159 million and paid
$9.4 billion in cash in exchange for $9.8 billion aggregate
liquidation amount of previously issued Trust Securities. Upon the
exchange, the Corporation immediately surrendered the Trust
Securities to the unconsolidated Trusts for cancellation, resulting
in the cancellation of an equal amount of junior subordinated notes
that had a carrying value of $9.9 billion, resulting in a gain on
extinguishment of debt of $282 million.
During 2012, the Corporation remarketed the remaining
outstanding $141 million in aggregate principal amount of its BAC
Capital Trust XIII Floating-Rate Preferred Hybrid Income Term
Securities (HITS) and the remaining outstanding $493 million in
aggregate principal amount of its BAC Capital Trust XIV Fixed-to-
Floating Rate Preferred HITS. The Corporation repurchased and
retired all of the remarketable notes in the remarketings. The net
proceeds from the remarketing of the BAC Capital Trust XIII
Floating-Rate Preferred HITS were used to satisfy the obligations
of Trust XIII under a stock purchase contract agreement, pursuant
to which Trust XIII was obligated to purchase, and the Corporation
was obligated to sell, 1,409 shares of the Corporation’s Series F
Floating Rate Non-Cumulative Preferred Stock (Series F Preferred
Stock). The net proceeds from the remarketing of the BAC Capital
Trust XIV Fixed-to-Floating Rate Preferred HITS were used to satisfy
the obligations of Trust XIV under a stock purchase contract
agreement, pursuant to which Trust XIV was obligated to purchase,
and the Corporation was obligated to sell, 4,926 shares of the
Corporation’s Series G Adjustable Rate Non-Cumulative Preferred
Stock (Series G Preferred Stock). Following the remarketing of the
notes and the subsequent purchase of the Corporation’s preferred
stock under the stock purchase contracts, the preferred stock
constitutes the sole asset of the applicable trust.
On May 25, 2012, the Corporation completed the repurchase
of $134 million aggregate liquidation amount of capital securities
of BAC Capital Trust VI, pursuant to a previously announced tender
offer for such securities, and the related cancellation and
retirement of the underlying 5.625% Junior Subordinated Notes,
due 2035 of the Corporation issued to and held by BAC Capital
Trust VI. As a result of this repurchase of capital securities and
the related cancellation and retirement of the underlying 5.625%
Junior Subordinated Notes, the series of covered debt benefiting
from the Corporation’s replacement capital covenant, executed
February 16, 2007 in connection with the issuance by BAC Capital
Trust XIV of its 5.63% Fixed-to-Floating Rate Preferred Hybrid
Income Term Securities (the Replacement Capital Covenant), was
redesignated. Effective as of May 25, 2012, the 5.625% Junior
Subordinated Notes ceased being the covered debt under the
Replacement Capital Covenant. Also effective as of May 25, 2012,
the Corporation’s 6.875% Junior Subordinated Notes, due 2055
underlying the capital securities of BAC Capital Trust XII, became
the covered debt with respect to and in accordance with the terms
of the Replacement Capital Covenant.
76788ba_financials.indd 217
3/6/14 12:06 PM
Bank of America 2013 217
The Trust Securities Summary table details the outstanding Trust Securities and the related Notes previously issued which remained
outstanding at December 31, 2013. For more information on Trust Securities for regulatory capital purposes, see Note 16 – Regulatory
Requirements and Restrictions.
Trust Securities Summary
(Dollars in millions)
December 31, 2013
Aggregate
Principal
Amount
of Trust
Securities
Aggregate
Principal
Amount
of the
Notes
Stated Maturity
of the Trust
Securities
Per Annum Interest
Rate of the Notes
Interest Payment
Dates
Redemption Period
Issuance Date
March 2005
$
August 2005
August 2005
May 2006
May 2007
February 1997
January 1997
January 1997
December 1998
June 1997
June 1998
January 1997
June 1997
April 2003
November 2006
January 1998
June 1998
November 1998
December 2006
May 2007
August 2007
36
7
524
658
2
131
103
64
79
53
102
70
200
500
1,495
750
400
850
1,050
950
750
$
37
7
540
678
2
March 2035
August 2035
August 2035
May 2036
June 2056
5.63%
5.25
6.00
6.63
Semi-Annual
Semi-Annual
Any time
Any time
Quarterly
On or after 8/25/10
Semi-Annual
Any time
3-mo. LIBOR +80 bps
Quarterly
On or after 6/01/37
136
January 2027
3-mo. LIBOR +55 bps
Quarterly
On or after 1/15/07
106
January 2027
3-mo. LIBOR +57 bps
Quarterly
On or after 1/15/02
66
February 2027
3-mo. LIBOR +62.5 bps
Quarterly
On or after 2/01/07
82
December 2028
3-mo. LIBOR +100 bps
Quarterly
On or after 12/18/03
55
106
June 2027
June 2028
3-mo. LIBOR +75 bps
3-mo. LIBOR +60 bps
Quarterly
Quarterly
On or after 6/15/07
On or after 6/08/03
73
February 2027
3-mo. LIBOR +80 bps
Quarterly
On or after 2/01/07
206
515
June 2027
April 2033
1,496
November 2036
901
480
1,021
1,051
951
751
Perpetual
Perpetual
Perpetual
December 2066
June 2067
September 2067
8.05
6.75
7.00
7.00
7.12
7.28
6.45
6.45
7.375
Semi-Annual
Only under special event
Quarterly
Quarterly
Quarterly
Quarterly
Quarterly
Quarterly
Quarterly
Quarterly
On or after 4/11/08
On or after 11/01/11
On or after 3/08
On or after 6/08
On or after 9/08
On or after 12/11
On or after 6/12
On or after 9/12
$
8,774
$
9,260
Issuer
Bank of America
Capital Trust VI
Capital Trust VII (1)
Capital Trust VIII
Capital Trust XI
Capital Trust XV
NationsBank
Capital Trust III
BankAmerica
Capital III
Barnett
Capital III
Fleet
Capital Trust V
BankBoston
Capital Trust III
Capital Trust IV
MBNA
Capital Trust B
Countrywide
Capital III
Capital IV
Capital V
Merrill Lynch
Preferred Capital Trust III
Preferred Capital Trust IV
Preferred Capital Trust V
Capital Trust I
Capital Trust II
Capital Trust III
Total
(1) Notes are denominated in British Pound. Presentation currency is U.S. Dollar.
218 Bank of America 2013
76788ba_financials.indd 218
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NOTE 12 Commitments and Contingencies
In the normal course of business, the Corporation enters into a
number of off-balance sheet commitments. These commitments
expose the Corporation to varying degrees of credit and market
risk and are subject to the same credit and market risk limitation
reviews as those instruments recorded on the Consolidated
Balance Sheet.
Credit Extension Commitments
The Corporation enters into commitments to extend credit such
as loan commitments, standby letters of credit (SBLCs) and
commercial letters of credit to meet the financing needs of its
customers. The table below includes the notional amount of
unfunded legally binding lending commitments net of amounts
distributed (e.g., syndicated) to other financial institutions of
$21.9 billion and $23.9 billion at December 31, 2013 and 2012.
At December 31, 2013, the carrying value of these commitments,
excluding commitments accounted for under the fair value option,
was $503 million, including deferred revenue of $19 million and
a reserve for unfunded lending commitments of $484 million. At
December 31, 2012, the comparable amounts were $534 million,
$21 million and $513 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 $13.0 billion and $18.3 billion at December 31,
2013 and 2012 that are accounted for under the fair value option.
However, the table below excludes cumulative net fair value
adjustments of $354 million and $528 million on these
commitments, which are classified in accrued expenses and other
liabilities. For more information regarding the Corporation’s loan
commitments accounted for under the fair value option, see Note
21 – Fair Value Option.
Credit Extension Commitments
(Dollars in millions)
Notional amount of credit extension commitments
Loan commitments
Home equity lines of credit
Standby letters of credit and financial guarantees (1)
Letters of credit
Legally binding commitments
Credit card lines (2)
Total credit extension commitments
Notional amount of credit extension commitments
Loan commitments
Home equity lines of credit
Standby letters of credit and financial guarantees (1)
Letters of credit
Legally binding commitments
Credit card lines (2)
Total credit extension commitments
December 31, 2013
Expire After
One
Year Through
Three Years
Expire After
Three
Years Through
Five Years
Expire After
Five
Years
Expire in One
Year or Less
$
$
$
$
80,799
4,580
21,994
1,263
108,636
377,846
486,482
103,791
2,134
24,593
2,003
132,521
397,862
530,383
$
$
$
$
105,175
16,855
8,843
899
131,772
—
131,772
$
$
133,290
21,074
2,876
4
157,244
—
157,244
December 31, 2012
83,885
13,584
11,387
70
108,926
—
108,926
$
$
130,805
23,344
3,094
10
157,253
—
157,253
$
$
$
$
21,864
14,301
3,967
403
40,535
—
40,535
19,942
21,856
4,751
546
47,095
—
47,095
$
$
$
$
Total
341,128
56,810
37,680
2,569
438,187
377,846
816,033
338,423
60,918
43,825
2,629
445,795
397,862
843,657
(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 $27.6 billion and $9.6 billion at December 31, 2013, and $31.5 billion and $11.6 billion at December 31, 2012. Amounts include consumer SBLCs of $453 million and $669 million at
December 31, 2013 and 2012.
(2) Includes business card unused lines of credit.
Legally binding commitments to extend credit generally have
specified rates and maturities. Certain of these commitments have
adverse change clauses that help to protect the Corporation
against deterioration in the borrower’s ability to pay.
Other Commitments
At December 31, 2013 and 2012, the Corporation had unfunded
equity investment commitments of $195 million and $307 million.
At December 31, 2013, the Corporation had a commitment to
purchase $1.4 billion of equity securities and, in the event the
commitment is funded, intends to sell the underlying securities
purchased under this commitment.
At December 31, 2013 and 2012, the Corporation had
commitments to purchase loans (e.g., residential mortgage and
commercial real estate) of $1.5 billion and $1.3 billion, which upon
settlement will be included in loans or LHFS.
At December 31, 2013 and 2012, the Corporation had
commitments to enter into forward-dated resale and securities
borrowing agreements of $75.5 billion and $67.3 billion, and
commitments to enter into forward-dated repurchase and
securities lending agreements of $38.3 billion and $42.3 billion.
These commitments expire within the next 12 months.
The Corporation is a party to operating leases for certain of its
premises and equipment. Commitments under these leases are
approximately $2.8 billion, $2.4 billion, $2.1 billion, $1.7 billion
and $1.3 billion for 2014 through 2018, respectively, and $5.7
billion in the aggregate for all years thereafter.
Bank of America 2013 219
76788ba_financials.indd 219
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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 both December
31, 2013 and 2012, the notional amount of these guarantees
totaled $13.4 billion and the Corporation’s maximum exposure
related to these guarantees totaled $3.0 billion with estimated
maturity dates between 2030 and 2045. The net fair value
including the fee receivable associated with these guarantees was
$39 million and $52 million at December 31, 2013 and 2012,
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
December 31, 2013 and 2012, the notional amount of these
guarantees totaled $4.6 billion and $18.4 billion with estimated
maturity dates up to 2017 if the exit option is exercised on all
deals. The decline in notional amount in 2013 was primarily the
result of plan sponsors terminating contracts pursuant to exit
options. As of December 31, 2013, the Corporation had not made
a payment under these products.
Indemnifications
In the ordinary course of business, the Corporation enters into
various agreements that contain indemnifications, such as tax
indemnifications, whereupon payment may become due if certain
external events occur, such as a change in tax law. The
indemnification clauses are often standard contractual terms and
were entered into in the normal course of business based on an
assessment that the risk of loss would be remote. These
agreements typically contain an early termination clause that
permits the Corporation to exit the agreement upon these events.
220 Bank of America 2013
The maximum potential future payment under indemnification
agreements is difficult to assess for several reasons, including
the occurrence of an external event, the inability to predict future
changes in tax and other laws, the difficulty in determining how
such laws would apply to parties in contracts, the absence of
exposure limits contained in standard contract language and the
timing of the early termination clause. Historically, any payments
made under these guarantees have been de minimis. The
Corporation has assessed the probability of making such
payments in the future as remote.
Merchant Services
In accordance with credit and debit card association rules, the
Corporation sponsors merchant processing servicers that process
credit and debit card transactions on behalf of various merchants.
In connection with these services, a liability may arise in the event
of a billing dispute between the merchant and a cardholder that
is ultimately resolved in the cardholder’s favor. If the merchant
defaults on its obligation to reimburse the cardholder, the
cardholder, through its issuing bank, generally has until six months
after the date of the transaction to present a chargeback to the
merchant processor, which is primarily liable for any losses on
covered transactions. However, if the merchant processor fails to
meet its obligation to reimburse the cardholder for disputed
transactions, then the Corporation, as the sponsor, could be held
liable for the disputed amount. In 2013 and 2012, the sponsored
entities processed and settled $623.7 billion and $604.2 billion
of transactions and recorded losses of $15 million and $10 million.
A significant portion of this activity was processed by a joint venture
in which the Corporation holds a 49 percent ownership. At
December 31, 2013 and 2012, the sponsored merchant
processing servicers held as collateral $203 million and $202
million of merchant escrow deposits which may be used to offset
amounts due from the individual merchants.
The Corporation believes the maximum potential exposure for
chargebacks would not exceed the total amount of merchant
transactions processed through Visa and MasterCard for the last
six months, which represents the claim period for the cardholder,
plus any outstanding delayed-delivery transactions. As of
December 31, 2013 and 2012, the maximum potential exposure
for sponsored transactions totaled $258.5 billion and $263.9
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 $1.8 billion and $2.9 billion with commercial banks
and $1.3 billion and $1.4 billion with VIEs at December 31, 2013
and 2012. 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.
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Other Guarantees
The Corporation has entered into additional guarantee agreements
and commitments, including lease-end obligation agreements,
partial credit guarantees on certain leases, real estate joint
venture guarantees, sold risk participation swaps, divested
business commitments and sold put options that require gross
settlement. The maximum potential future payment under these
agreements was approximately $6.9 billion and $6.8 billion at
December 31, 2013 and 2012. 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 Regulatory 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 $381 million and $510 million at December 31, 2013
and 2012. The Corporation recorded expense of $258 million and
$692 million in 2013 and 2012. It is reasonably possible that the
Corporation will incur additional expense related to PPI claims;
however, the amount of such additional expense cannot be
reasonably estimated.
Litigation and Regulatory Matters
In the ordinary course of business, the Corporation and its
subsidiaries are routinely defendants in or parties to many pending
and threatened legal actions and proceedings, including actions
brought on behalf of various classes of claimants. These actions
and proceedings are generally based on alleged violations of
consumer protection, securities, environmental, banking,
employment, contract and other laws. In some of these actions
and proceedings, claims for substantial monetary damages are
asserted against the Corporation and its subsidiaries. In the
ordinary course of business, the Corporation and its subsidiaries
are also subject to regulatory and governmental examinations,
information gathering requests, inquiries, investigations, and
threatened legal actions and proceedings. 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 $6.1 billion was
recognized for 2013 compared to $4.2 billion for 2012.
For a limited number of the matters disclosed in this Note for
which a loss, whether in excess of a related accrued liability or
where there is no accrued liability, is reasonably possible in future
periods, the Corporation is able to estimate a range of possible
loss. In determining whether it is possible to estimate a range of
possible loss, the Corporation reviews and evaluates its material
litigation, regulatory and governmental matters on an ongoing
basis, in conjunction with any outside counsel handling the matter,
in light of potentially relevant factual and legal developments.
These may include information learned through the discovery
process, rulings on dispositive motions, settlement discussions,
and other rulings by courts, arbitrators or others. In cases in which
the Corporation possesses sufficient appropriate information to
estimate a range of possible loss, that estimate is aggregated and
disclosed below. There may be other disclosed matters for which
a loss is probable or reasonably possible but such an estimate of
the range of possible loss may not be possible. For those matters
where an estimate of the range of possible loss is possible,
management currently estimates the aggregate range of possible
loss is $0 to $6.1 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
Bank of America 2013 221
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what the Corporation believes to be an estimate of possible loss
only for certain matters meeting these criteria. It does not
represent the Corporation’s maximum loss exposure.
Information is provided below regarding the nature of all of
these contingencies and, where specified, the amount of the claim
associated with these loss contingencies. Based on current
knowledge, management does not believe that loss contingencies
arising from pending matters, including the matters described
herein, will have a material adverse effect on the consolidated
financial position or liquidity of the Corporation. However, in light
of the inherent uncertainties involved in these matters, some of
which are beyond the Corporation’s control, and the very large or
indeterminate damages sought in some of these matters, an
adverse outcome in one or more of these matters could be material
to the Corporation’s results of operations or cash flows for any
particular reporting period.
Bond Insurance Litigation
Ambac Countrywide Litigation
The Corporation, Countrywide and other Countrywide entities are
named as defendants in an action filed on September 29, 2010
and as amended on May 28, 2013, by Ambac Assurance
Corporation and the Segregated Account of Ambac Assurance
Corporation
(together, Ambac), entitled Ambac Assurance
Corporation and The Segregated Account of Ambac Assurance
Corporation v. Countrywide Home Loans, Inc., et al. This action,
currently pending in New York Supreme Court, New York County,
relates to bond insurance policies provided by Ambac on certain
securitized pools of second-lien (and in one pool, first-lien) home
equity lines of credit (HELOCs), first-lien subprime home equity
loans and fixed-rate second-lien mortgage loans. Plaintiffs allege
that they have paid claims as a result of defaults in the underlying
loans and assert that the Countrywide defendants misrepresented
the characteristics of the underlying loans and breached certain
contractual
the
underwriting and servicing of the loans. Plaintiffs also allege that
the Corporation is liable based on successor liability theories.
Damages claimed by Ambac are in excess of $2.5 billion and
include the amount of payments for current and future claims it
has paid or claims it will be obligated to pay under the policies,
increasing over time as it pays claims under relevant policies, plus
unspecified punitive damages.
representations and warranties
regarding
Ambac First Franklin Litigation
On April 16, 2012, Ambac sued First Franklin Financial Corp., BANA,
Merrill Lynch, Pierce, Fenner & Smith (MLPF&S), Merrill Lynch
Mortgage Lending, Inc. (MLML), and Merrill Lynch Mortgage
Investors, Inc. in New York Supreme Court, New York County.
Plaintiffs’ claims relate to guaranty insurance Ambac provided on
a First Franklin securitization (Franklin Mortgage Loan Trust, Series
2007-FFC). The securitization was sponsored by MLML, and certain
certificates in the securitization were insured by Ambac. The
complaint alleges that defendants breached representations and
warranties concerning the origination of the underlying mortgage
loans and asserts claims for fraudulent inducement, breach of
contract and indemnification. Plaintiffs also assert breach of
contract claims against BANA based upon its servicing of the loans
in the securitization. The complaint does not specify the amount
of damages sought.
222 Bank of America 2013
On July 19, 2013, the court denied defendants’ motion to
dismiss Ambac’s contract and fraud causes of action but granted
dismissal of Ambac’s indemnification cause of action. In addition,
the court denied defendants’ motion to dismiss Ambac’s claims
for attorneys’ fees and punitive damages.
FGIC
The Corporation, Countrywide and other Countrywide entities are
named as defendants in an action filed on December 11, 2009
by Financial Guaranty Insurance Company (FGIC) entitled Financial
Guaranty Insurance Co. v. Countrywide Home Loans, Inc., et al. This
action, currently pending in New York Supreme Court, New York
County, relates to bond insurance policies provided by FGIC on
securitized pools of HELOCs and fixed-rate second-lien mortgage
loans. Plaintiff alleges that it has paid claims as a result of defaults
in the underlying loans and asserts that the Countrywide
defendants misrepresented the characteristics of the underlying
loans and breached certain contractual representations and
warranties regarding the underwriting and servicing of the loans.
Plaintiffs also allege that the Corporation is liable based on
successor liability theories. Damages claimed by FGIC are in
excess of $1.8 billion and include the amount of payments for
current and future claims it has paid or claims it will be obligated
to pay under the policies, increasing over time as it pays claims
under relevant policies, plus unspecified punitive damages.
Credit Card Debt Cancellation and Identity Theft
Protection Products
FIA has received inquiries from and has been in discussions with
regulatory authorities to address concerns regarding the sale and
marketing of certain optional credit card debt cancellation
products. The Corporation may be subject to a regulatory
enforcement action and will be required to pay restitution or provide
other relief to customers, and pay penalties to one or more
regulators.
In addition, BANA and FIA have been in discussions with
regulatory authorities to address concerns that some customers
may have paid for but did not receive certain benefits of optional
identity theft protection services from third-party vendors of BANA
and FIA, including whether appropriate oversight of such vendors
existed. The Corporation has issued and will continue to issue
refund checks to impacted customers and may be subject to
regulatory enforcement actions and penalties.
European Commission – Credit Default Swaps Antitrust
Investigation
On July 1, 2013, the European Commission (Commission)
announced that it had addressed a Statement of Objections (SO)
to the Corporation, BANA and Banc of America Securities LLC
(together, the Bank of America Entities); a number of other financial
institutions; Markit Group Limited; and the International Swaps
and Derivatives Association (together, the Parties). The SO sets
forth the Commission’s preliminary conclusion that the Parties
infringed European Union competition law by participating in
alleged collusion to prevent exchange trading of CDS and futures.
According to the SO, the conduct of the Bank of America Entities
took place between August 2007 and April 2009. As part of the
Commission’s procedures, the Parties have been given the
opportunity to review the evidence in the investigative file, respond
to the Commission’s preliminary conclusions and request a
hearing before the Commission. If the Commission is satisfied
76788ba_financials.indd 222
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that its preliminary conclusions are proved, the Commission has
stated that it intends to impose a fine and require appropriate
remedial measures.
Fontainebleau Las Vegas Litigation
On June 9, 2009, Avenue CLO Fund Ltd., et al. v. Bank of America,
N.A., Merrill Lynch Capital Corporation, et al. was filed in the U.S.
District Court for the District of Nevada by certain Fontainebleau
Las Vegas, LLC (FBLV) project lenders. Plaintiffs alleged that,
among other things, BANA breached its duties as disbursement
agent under the agreement governing the disbursement of loaned
funds to FBLV, then a Chapter 11 debtor-in-possession. Plaintiffs
seek monetary damages of more than $700 million, plus interest.
This action was subsequently transferred by the U.S. Judicial Panel
on Multidistrict Litigation (JPML) to the U.S. District Court for the
Southern District of Florida.
On March 19, 2012, the district court granted BANA’s motion
for summary judgment on all causes of action against it in its
capacity as disbursement agent and denied plaintiffs’ motion for
summary judgment on those claims. On July 26, 2013, the U.S.
Court of Appeals for the Eleventh Circuit affirmed in part and
reversed in part the district court’s dismissal of the disbursement
agent claims against BANA, holding that there were factual
disputes that could not be resolved on a summary judgment
motion, and remanded the case to the district court for further
proceedings.
Dismissal of the other claims was affirmed on a separate
appeal. On December 13, 2013, the JPML remanded the action
to the District of Nevada for trial.
In re Bank of America Securities, Derivative and
Employee Retirement Income Security Act (ERISA)
Litigation
Beginning in January 2009, the Corporation, as well as certain
current and former officers and directors, among others, were
named as defendants in a variety of actions filed in state and
federal courts. The actions generally concern alleged material
misrepresentations and/or omissions with respect to certain
securities filings by the Corporation. The securities filings
contained information with respect to events that took place from
September 2008 through January 2009 contemporaneous with
the Corporation’s acquisition of Merrill Lynch. Certain federal court
actions were consolidated and/or coordinated in the U.S. District
Court for the Southern District of New York under the caption In
re Bank of America Securities, Derivative and Employee Retirement
Income Security Act (ERISA) Litigation.
Securities Actions
Plaintiffs in the consolidated securities class action (the
Consolidated Securities Class Action) asserted claims under
Sections 14(a), 10(b) and 20(a) of the Securities Exchange Act of
1934, and Sections 11, 12(a)(2) and 15 of the Securities Act of
1933 and asserted damages based on the drop in the stock price
upon subsequent disclosures.
On April 5, 2013, the U.S. District Court for the Southern District
of New York granted final approval to the settlement of the
Consolidated Securities Class Action. Certain class members have
appealed the district court’s final approval of the settlement to the
U.S. Court of Appeals for the Second Circuit.
Certain shareholders opted to pursue their claims apart from
the Consolidated Securities Class Action. These individual
plaintiffs asserted substantially the same facts and claims as the
class action plaintiffs. Following settlements in an aggregate
amount that was fully accrued as of December 31, 2013, the court
has dismissed the claims of these plaintiffs with prejudice.
New York Attorney General (NYAG) Action
On February 4, 2010, the NYAG filed a civil complaint in New York
Supreme Court, New York County, entitled People of the State of
New York v. Bank of America, et al. The complaint named as
defendants the Corporation and the Corporation’s former CEO and
CFO, and alleges violations of Sections 352, 352-c(1)(a), 352-c(1)
(c) and 353 of the Martin Act, and Section 63(12) of the New York
Executive Law. The complaint sought an unspecified amount in
disgorgement, penalties, restitution, and damages and other
equitable relief. The NYAG has stated publicly that it has withdrawn
its demand for damages, but continues to pursue other relief under
the Martin Act and New York Executive Law.
Interchange and Related Litigation
In 2005, a group of merchants filed a series of putative class
actions and individual actions directed at interchange fees
associated with Visa and MasterCard payment card transactions.
These actions, which were consolidated in the U.S. District Court
for the Eastern District of New York under the caption In Re Payment
Card Interchange Fee and Merchant Discount Anti-Trust Litigation
(Interchange), named Visa, MasterCard and several banks and
bank holding companies, including the Corporation, as defendants.
Plaintiffs allege that defendants conspired to fix the level of default
interchange rates, which represent the fee an issuing bank charges
an acquiring bank on every transaction. Plaintiffs also challenged
as unreasonable restraints of trade under Section 1 of the
Sherman Act, certain rules of Visa and MasterCard related to
merchant acceptance of payment cards at the point of sale.
Plaintiffs sought unspecified damages and injunctive relief based
on their assertion that interchange would be lower or eliminated
absent the alleged conduct.
In addition, plaintiffs filed supplemental complaints against
certain defendants, including the Corporation, relating to initial
public offerings (IPOs) of MasterCard and Visa. Plaintiffs alleged
that the IPOs violated Section 7 of the Clayton Act and Section 1
of the Sherman Act. Plaintiffs also asserted that the MasterCard
IPO was a fraudulent conveyance. Plaintiffs sought unspecified
damages and to undo the IPOs.
On October 19, 2012, defendants entered an agreement to
settle the class plaintiffs’ claims. The defendants also separately
agreed to resolve the claims brought by a group of individual
retailers that opted out of the class to pursue independent
litigation. The settlement agreements provide for, among other
things, (i) payments by defendants to the class and individual
plaintiffs
totaling approximately $6.6 billion, allocated
proportionately to each defendant based upon various loss-sharing
agreements; (ii) distribution to class merchants of an amount
equal to 10 bps of default interchange across all Visa and
MasterCard credit card transactions for a period of eight
consecutive months, to begin by July 29, 2013, which otherwise
would have been paid to issuers and which effectively reduces
credit interchange for that period of time; and (iii) modifications
to certain Visa and MasterCard rules regarding merchant point of
sale practices.
Bank of America 2013 223
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The court granted final approval of the class settlement
agreement on December 13, 2013. Several class members have
appealed to the U.S. Court of Appeals for the Second Circuit. In
addition, a number of class members opted out of the settlement
of their past damages claims. The cash portion of the settlement
will be adjusted downward as a result of these opt outs, subject
to certain conditions.
Twenty-seven actions have been filed by merchant class
members who opted out of the settlement. The Corporation has
been named as a defendant in two of these opt out suits and, as
a result of various sharing agreements from the main Interchange
litigation, remains liable for any settlement or judgment in opt out
suits where it is not named as a defendant. All but one of the opt-
out suits filed to date have been consolidated in the U.S. District
Court for the Eastern District of New York.
LIBOR, Other Reference Rate and Foreign Exchange
(FX) Inquiries and Litigation
The Corporation has received subpoenas and information requests
from government authorities in North America, Europe and Asia,
including the DOJ, the U.S. Commodity Futures Trading
Commission and the U.K. Financial Conduct Authority, concerning
submissions made by panel banks in connection with the setting
of London interbank offered rates (LIBOR) and other reference
rates. The Corporation is cooperating with these inquiries.
Government authorities in North America, Europe and Asia are
conducting investigations and making inquiries of a significant
number of FX market participants, including the Corporation,
regarding conduct and practices in certain FX markets over multiple
years. The Corporation is cooperating with these investigations
and inquiries.
In addition, the Corporation and BANA have been named as
defendants along with most of the other LIBOR panel banks in a
series of individual and class actions in various U.S. federal and
state courts relating to defendants’ LIBOR contributions. All cases
naming the Corporation have been or are in the process of being
consolidated for pre-trial purposes in the U.S. District Court for
the Southern District of New York by the JPML. The Corporation
expects that any future cases naming the Corporation will similarly
be consolidated for pre-trial purposes. Plaintiffs allege that they
held or transacted in U.S. dollar LIBOR-based derivatives or other
financial instruments and sustained losses as a result of collusion
or manipulation by defendants regarding the setting of U.S. dollar
LIBOR. Plaintiffs assert a variety of claims, including antitrust and
Racketeer Influenced and Corrupt Organizations claims, and seek
compensatory, treble and punitive damages, and injunctive relief.
On March 29, 2013, the court dismissed the antitrust, RICO
and related state law claims and, based on the statute of
limitations, substantially limited the manipulation claims under
the Commodities Exchange Act that are allowed to proceed. The
court’s rulings will be applicable to later filed actions to the extent
they assert similar claims. The court is continuing to consider
motions regarding the remaining claims.
On June 14, 2013, the Monetary Authority of Singapore (MAS)
announced the results of its review of the submission processes
of panel banks, including BANA (Singapore Branch), relating to
reference rates set in Singapore, including the Singapore Interbank
Offered Rates (SIBOR), Swap Offered Rates (SOR) and reference
rates used to settle non-deliverable forward contracts. All of the
banks, including BANA (Singapore Branch), were found to have
deficiencies in governance, risk management, internal controls
224 Bank of America 2013
and surveillance systems from 2007 to 2011 related to their
submission processes. All of the banks, including BANA (Singapore
Branch), were required to adopt measures to address these
deficiencies, report their progress in addressing these deficiencies
on a quarterly basis, and conduct independent reviews to ensure
the robustness of their remedial measures. Nineteen of the 20
banks were also required to deposit increased statutory reserves
with the MAS at zero percent interest for one year; BANA (Singapore
Branch) was required to deposit 700 million Singapore Dollars
(approximately $551 million U.S. dollars).
Montgomery
The Corporation, several current and former officers and directors,
Banc of America Securities LLC (BAS), MLPF&S and other
unaffiliated underwriters have been named as defendants in a
putative class action filed in the U.S. District Court for the Southern
District of New York entitled Montgomery v. Bank of America, et al.
Plaintiff filed an amended complaint on January 14, 2011. Plaintiff
seeks to sue on behalf of all persons who acquired certain series
of preferred stock offered by the Corporation pursuant to a shelf
registration statement dated May 5, 2006. Plaintiff’s claims arise
from three offerings dated January 24, 2008, January 28, 2008
and May 20, 2008, from which the Corporation allegedly received
proceeds of $15.8 billion. The amended complaint asserts claims
under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933,
and alleges that the prospectus supplements associated with the
offerings: (i) failed to disclose that the Corporation’s loans, leases,
CDOs and commercial MBS were impaired to a greater extent than
disclosed; (ii) misrepresented the extent of the impaired assets
by failing to establish adequate reserves or properly record losses
for its impaired assets; (iii) misrepresented the adequacy of the
Corporation’s internal controls in light of the alleged impairment
of its assets; (iv) misrepresented the Corporation’s capital base
and Tier 1 leverage ratio for risk-based capital in light of the
allegedly
the
thoroughness and adequacy of the Corporation’s due diligence in
connection with its acquisition of Countrywide. The amended
complaint seeks rescission, compensatory and other damages.
On March 16, 2012, the district court granted defendants’ motion
to dismiss the first amended complaint. On December 3, 2013,
the district court denied plaintiffs’ motion to file a second amended
complaint. On February 6, 2014, plaintiffs filed a notice of appeal
to the U.S. Court of Appeals for the Second Circuit as to the district
court’s denial of their motion to amend.
impaired assets; and
(v) misrepresented
Mortgage-backed Securities Litigation and Other
Government Mortgage Origination Investigations
The Corporation and its affiliates, Countrywide entities and their
affiliates, and Merrill Lynch entities and their affiliates have been
named as defendants in a number of cases relating to their various
roles as issuer, originator, seller, depositor, sponsor, underwriter
and/or controlling entity in MBS offerings, pursuant to which the
MBS investors were entitled to a portion of the cash flow from the
underlying pools of mortgages. These cases generally include
purported class action suits, actions by individual MBS purchasers
and governmental actions. Although the allegations vary by lawsuit,
these cases generally allege that the registration statements,
prospectuses and prospectus supplements for securities issued
by securitization trusts contained material misrepresentations and
omissions, in violation of the Securities Act of 1933, the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989
76788ba_financials.indd 224
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(FIRREA) and/or state securities laws and other state statutory
and common laws.
These cases generally involve allegations of false and
misleading statements regarding: (i) the process by which the
properties that served as collateral for the mortgage loans
underlying the MBS were appraised; (ii) the percentage of equity
that mortgage borrowers had in their homes; (iii) the borrowers’
ability to repay their mortgage loans; (iv) the underwriting practices
by which those mortgage loans were originated; (v) the ratings
given to the different tranches of MBS by rating agencies; and (vi)
the validity of each issuing trust’s title to the mortgage loans
comprising the pool for that securitization (collectively, MBS
Claims). Plaintiffs in these cases generally seek unspecified
compensatory damages, unspecified costs and legal fees and, in
some instances, seek rescission. A number of other entities have
threatened legal actions against the Corporation and its affiliates,
Countrywide entities and their affiliates, and Merrill Lynch entities
and their affiliates concerning MBS offerings.
The Corporation, Countrywide, Merrill Lynch and/or their
affiliates may have claims for and/or may be subject to claims for
contractual indemnification in connection with their various roles
in regard to MBS.
On August 15, 2011, the JPML ordered multiple federal court
cases involving Countrywide MBS consolidated for pretrial
purposes in the U.S. District Court for the Central District of
California in a multi-district litigation entitled In re Countrywide
(the
Financial Corp. Mortgage-Backed Securities Litigation
Countrywide RMBS MDL).
AIG Litigation
On August 8, 2011, American International Group, Inc. and certain
of its affiliates (collectively, AIG) filed a complaint in New York
Supreme Court, New York County, in a case entitled American
International Group, Inc., et al. v. Bank of America Corporation, et
al. AIG has named the Corporation, Merrill Lynch, Countrywide
Home loans, Inc. (CHL) and a number of related entities as
defendants. AIG’s complaint asserts certain MBS Claims
pertaining to 347 MBS offerings and two private placements in
which it alleges that it purchased securities between 2005 and
2007. AIG seeks rescission of its purchases or a rescissory
measure of damages or, in the alternative, compensatory damages
of no less than $10 billion, punitive damages and other unspecified
relief. Defendants removed the case to the U.S. District Court for
the Southern District of New York and the district court denied
AIG’s motion to remand. On April 19, 2013, the U.S. Court of
Appeals for the Second Circuit issued a decision vacating the order
denying AIG’s motion to remand, and remanded the case to the
district court for further proceedings concerning whether the court
will exercise its jurisdiction on other grounds.
On December 21, 2011, the JPML transferred the Countrywide
MBS claims to the Countrywide RMBS MDL in the Central District
of California. The non-Countrywide MBS claims remain in the U.S.
District Court for the Southern District of New York.
On May 23, 2012, the district court in the Central District of
California dismissed with prejudice plaintiffs’ federal securities
claims and certain of the state law common law claims. On August
31, 2012, AIG filed an amended complaint, which among other
things, added claims against the Corporation and certain related
entities for constructive fraudulent conveyance and intentional
fraudulent conveyance. On May 6, 2013, the district court
dismissed the fraudulent conveyance and successor liability
claims against the Corporation and related entities. On October
10, 2013, AIG filed a Third Amended Complaint, which is limited
to the claims transferred to the Countrywide RMBS MDL. It
concerns 159 offerings and asserts damages of approximately
$5 billion only with respect to the RMBS at issue in the Countrywide
RMBS MDL.
Civil RMBS Matters Filed by the DOJ and the SEC
On August 6, 2013, the DOJ and the SEC filed separate civil actions
in the U.S. District Court for the Western District of North Carolina
against MLPF&S, 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.
FHFA Litigation
FHFA, as conservator for FNMA and FHLMC, filed an action on
September 2, 2011 against the Corporation and related entities,
Countrywide and related entities, certain former officers of these
entities, and NB Holdings Corporation in New York Supreme Court,
New York County, entitled Federal Housing Finance Agency v.
Countrywide Financial Corporation, et al. (the FHFA Countrywide
Litigation). FHFA’s complaint asserts certain MBS Claims in
connection with allegations that FNMA and FHLMC purchased MBS
issued by Countrywide-related entities in 86 MBS offerings
between 2005 and 2008. FHFA seeks, among other relief,
rescission of the consideration paid for the securities or, in the
alternative, unspecified compensatory damages allegedly incurred
by FNMA and FHLMC, including consequential damages. FHFA also
seeks recovery of punitive damages.
On September 30, 2011, Countrywide removed the FHFA
Countrywide Litigation from New York Supreme Court to the U.S.
District Court for the Southern District of New York. On February
7, 2012, the JPML transferred the matter to the Countrywide RMBS
MDL. On October 18, 2012, the court dismissed as untimely FHFA’s
Section 11 claims as to 24 of the 86 MBS allegedly purchased by
FNMA and FHLMC, but otherwise denied the motion to dismiss on
statute of limitations and statute of repose grounds. On February
6, 2013, FHFA agreed to voluntarily dismiss certain of its Virginia
blue sky claims. On March 15, 2013, the court dismissed the
negligent misrepresentation and aiding and abetting claims as to
all defendants, and the Securities Act of 1933 and Washington,
D.C. blue sky claims as to certain defendants. The court also
dismissed FHFA’s successor liability claims but permitted FHFA
leave to amend its fraudulent conveyance claims. The court
otherwise denied defendants’ motions to dismiss. On June 7,
2013, the court denied with prejudice FHFA’s motion for leave to
amend its successor liability claims, based upon fraudulent
conveyance theories, against the Corporation.
Also on September 2, 2011, FHFA, as conservator for FNMA
and FHLMC, filed complaints in the U.S. District Court for the
Southern District of New York against the Corporation and Merrill
Lynch-related entities, and certain current and former officers and
directors of these entities. The actions are entitled Federal Housing
Finance Agency v. Bank of America Corporation, et al. (the FHFA
Bank of America Litigation) and Federal Housing Finance Agency v.
Bank of America 2013 225
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Merrill Lynch & Co., Inc., et al. (the FHFA Merrill Lynch Litigation).
The complaints assert certain MBS Claims relating to MBS issued
and/or underwritten by the Corporation, Merrill Lynch and related
entities in 23 MBS offerings and in 72 MBS offerings, respectively,
between 2005 and 2008 and allegedly purchased by either FNMA
or FHLMC in their investment portfolio. FHFA seeks, among other
relief, rescission of the consideration paid for the securities or
alternatively damages allegedly incurred by FNMA and FHLMC,
including consequential damages. FHFA also seeks recovery of
punitive damages in the FHFA Merrill Lynch Litigation.
On November 8, 2012 and November 28, 2012, the court
denied motions to dismiss in the FHFA Merrill Lynch Litigation and
the FHFA Bank of America Litigation, respectively.
On December 16, 2013, the district court granted FHFA’s
motion for partial summary judgment, ruling that loss causation
is not an element of, or a defense to, FHFA’s claims under Virginia
or Washington, D.C. blue sky laws. The FHFA Merrill Lynch Litigation
is set for trial in June 2014; the FHFA Bank of America Litigation
is set for trial in January 2015.
Federal Home Loan Bank Litigation
On January 18, 2011, the Federal Home Loan Bank of Atlanta
(FHLB Atlanta) filed a complaint asserting certain MBS Claims
against the Corporation, Countrywide and other Countrywide
entities in Georgia State Court, Fulton County, entitled Federal
Home Loan Bank of Atlanta v. Countrywide Financial Corporation,
et al. FHLB Atlanta sought rescission of its purchases or a
rescissory measure of damages, unspecified punitive damages
and other unspecified relief in connection with its alleged purchase
of 16 MBS offerings issued and/or underwritten by Countrywide-
related entities between 2004 and 2007. Pursuant to a settlement
that was fully accrued as of December 31, 2013 and is not material
to the Corporation’s results of operations, FHLB Atlanta voluntarily
dismissed its claims with prejudice on December 9, 2013.
On March 15, 2010, the Federal Home Loan Bank of San
Francisco (FHLB San Francisco) filed an action in California
Superior Court, San Francisco County, entitled Federal Home Loan
Bank of San Francisco v. Credit Suisse Securities (USA) LLC, et al.
FHLB San Francisco’s complaint asserts certain MBS Claims
against BAS, Countrywide and several related entities in
connection with its alleged purchase of 51 MBS offerings and one
private placement issued and/or underwritten by those defendants
between 2004 and 2007 and seeks rescission and unspecified
damages. FHLB San Francisco dismissed the federal claims with
prejudice on August 11, 2011. On September 8, 2011, the court
denied defendants’ motions to dismiss the state law claims. On
December 20, 2013, FHLB San Francisco voluntarily dismissed
its negligent misrepresentation claims with prejudice.
Luther Class Action Litigation and Related Actions
Beginning in 2007, a number of pension funds and other investors
filed putative class action lawsuits alleging certain MBS Claims
against Countrywide, several of its affiliates, MLPF&S, the
Corporation, NB Holdings Corporation and certain other
defendants. Those class action lawsuits concerned a total of 429
MBS offerings involving over $350 billion in securities issued by
subsidiaries of Countrywide between 2005 and 2007. The actions,
entitled Luther v. Countrywide Financial Corporation, et al., Maine
State Retirement System v. Countrywide Financial Corporation, et
al., Western Conference of Teamsters Pension Trust Fund v.
Countrywide Financial Corporation, et al., and Putnam Bank v.
Countrywide Financial Corporation, et al., were all eventually
assigned to the Countrywide RMBS MDL court. On December 6,
2013, the court granted final approval to a settlement of these
actions in the amount of $500 million. Beginning on January 14,
2014, a number of class members filed notices of appeal in the
U.S. Court of Appeals for the Ninth Circuit.
Prudential Insurance Litigation
On March 14, 2013, The Prudential Insurance Company of America
and certain of its affiliates (collectively Prudential) filed a complaint
in the U.S. District Court for the District of New Jersey, in a case
entitled Prudential Insurance Company of America, et al. v. Bank of
America, N.A., et al. Prudential has named the Corporation, Merrill
Lynch and a number of related entities as defendants. Prudential’s
complaint asserts certain MBS Claims pertaining to 54 MBS
offerings in which Prudential alleges that it purchased securities
between 2004 and 2007. Prudential seeks, among other relief,
compensatory damages, rescission or a rescissory measure of
damages,
treble damages, punitive damages and other
unspecified relief.
Regulatory and Governmental Investigations
The Corporation has received a number of subpoenas and other
requests for information from regulators and governmental
authorities regarding MBS and other mortgage-related matters,
including inquiries, investigations and potential proceedings
related to a number of transactions involving the underwriting and
issuance of MBS by the Corporation (including legacy entities the
Corporation acquired) and participation in certain CDO and
structured investment vehicle offerings. These inquiries and
investigations include, among others, investigations by the RMBS
Working Group of the Financial Fraud Enforcement Task Force,
including the DOJ and state Attorneys General, concerning the
purchase, securitization and underwriting of mortgage loans and
RMBS. The Corporation has provided documents and testimony,
and continues to cooperate fully with these inquiries and
investigations.
The staff of the NYAG has advised that they intend to
recommend filing an action against MLPF&S as a result of their
RMBS investigation. In addition, the staff of a U.S. Attorney’s office
advised that they intend to recommend that the DOJ file a civil
action against affiliates of the Corporation related to the
securitization of RMBS.
The Civil Division of the U.S. Attorney’s office for the Eastern
District of New York is conducting an investigation concerning the
Corporation's compliance with the requirements of the Federal
Housing Administration’s Direct Endorsement Program. The
Corporation is cooperating with this investigation.
On December 12, 2013, the SEC and MLPF&S resolved the
SEC’s investigation related to risk control, valuation, structuring,
marketing and purchase of CDOs by MLPF&S. Without admitting
or denying the SEC’s allegations in the settlement order, MLPF&S
agreed to pay disgorgement, prejudgment interest and a civil
penalty totaling approximately $132 million relating to MLPF&S’s
role in the structuring and marketing of three CDOs that closed in
late 2006 and early 2007.
226 Bank of America 2013
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Mortgage Repurchase Litigation
U.S. Bank Litigation
On August 29, 2011, U.S. Bank, National Association (U.S. Bank),
as trustee for the HarborView Mortgage Loan Trust 2005-10 (the
Trust), a mortgage pool backed by loans originated by CHL, filed a
complaint in New York Supreme Court, New York County, in a case
entitled U.S. Bank National Association, as Trustee for HarborView
Mortgage Loan Trust, Series 2005-10 v. Countrywide Home Loans,
Inc. (dba Bank of America Home Loans), Bank of America
Corporation, Countrywide Financial Corporation, Bank of America,
N.A. and NB Holdings Corporation. U.S. Bank asserts that, as a
result of alleged misrepresentations by CHL in connection with its
sale of the loans, defendants must repurchase all the loans in the
pool, or in the alternative that it must repurchase a subset of those
loans as to which U.S. Bank alleges that defendants have refused
specific repurchase demands. U.S. Bank asserts claims for breach
of contract and seeks specific performance of defendants’ alleged
obligation to repurchase the entire pool of loans (alleged to have
an original aggregate principal balance of $1.75 billion) or
alternatively the aforementioned subset (alleged to have an
aggregate principal balance of “over $100 million”), together with
reimbursement of costs and expenses and other unspecified
relief. On May 29, 2013, New York Supreme Court dismissed U.S.
Bank’s claim for repurchase of all the mortgage loans in the Trust.
The court granted U.S. Bank leave to amend this claim. The court
denied defendants’ motion to dismiss U.S. Bank’s claim that CHL
allegedly refused to repurchase specific mortgage loans which
were the subject of prior repurchase demands. On June 18, 2013,
U.S. Bank filed its second amended complaint seeking to replead
its claim for repurchase of all loans in the Trust. By order dated
February 13, 2014, the court granted defendants’ motion to
dismiss the repleaded claim seeking repurchase of all mortgage
loans in the Trust; the same order denied plaintiff’s motion for
“resettlement and/or clarification” seeking permission to pursue,
under its alternative claim, a remedy with respect to mortgage
loans beyond the subset identified in the complaint.
Ocala Litigation
Ocala Investor Actions
On November 25, 2009, BNP Paribas Mortgage Corporation and
Deutsche Bank AG each filed claims (the 2009 Actions) against
BANA in the U.S. District Court for the Southern District of New
York entitled BNP Paribas Mortgage Corporation v. Bank of America,
N.A and Deutsche Bank AG v. Bank of America, N.A. Plaintiffs allege
that BANA failed to properly perform its duties as indenture trustee,
collateral agent, custodian and depositary for Ocala Funding, LLC
(Ocala), a home mortgage warehousing facility, resulting in the loss
of plaintiffs’ investment in Ocala. Ocala was a wholly-owned
subsidiary of Taylor, Bean & Whitaker Mortgage Corp. (TBW), a
home mortgage originator and servicer which is alleged to have
committed fraud that led to its eventual bankruptcy. Ocala provided
funding for TBW’s mortgage origination activities by issuing notes,
the proceeds of which were to be used by TBW to originate home
mortgages. Such mortgages and other Ocala assets in turn were
pledged to BANA, as collateral agent, to secure the notes. Plaintiffs
lost most or all of their investment in Ocala when, as the result of
the alleged fraud committed by TBW, Ocala was unable to repay
the notes purchased by plaintiffs and there was insufficient
collateral to satisfy Ocala’s debt obligations. Plaintiffs allege that
BANA breached its contractual, fiduciary and other duties to Ocala,
thereby permitting TBW’s alleged fraud to go undetected. Plaintiffs
seek compensatory damages and other relief from BANA, including
interest and attorneys’ fees, in an unspecified amount, but which
plaintiffs allege exceeds $1.6 billion.
On March 23, 2011, the court issued an order granting in part
and denying in part BANA’s motions to dismiss the 2009 Actions.
Plaintiffs filed amended complaints on October 1, 2012 that
included additional contractual, tort and equitable claims. On June
6, 2013, the court issued an order granting BANA’s motion to
dismiss plaintiffs’ claims for failure to sue, negligence, negligent
misrepresentation and equitable relief. On December 9, 2013, the
court issued an order denying plaintiffs’ motion for leave to amend
to include additional failure to sue claims.
In connection with the Ocala bankruptcy proceeding, the
bankruptcy trustee is pursuing litigation against third parties to
mitigate the investor losses at issue in the 2009 Actions.
FDIC Action
On October 1, 2010, BANA filed suit in the U.S. District Court for
the District of Columbia against the FDIC as receiver of Colonial
Bank, TBW’s primary bank, and Platinum Community Bank
(Platinum, a wholly-owned subsidiary of TBW) entitled Bank of
America, National Association as indenture trustee, custodian and
collateral agent for Ocala Funding, LLC v. Federal Deposit Insurance
Corporation (the FDIC Action). The suit seeks judicial review of the
FDIC’s denial of the administrative claims brought by BANA in the
FDIC’s Colonial and Platinum receivership proceedings. BANA’s
claims allege that Ocala’s losses were in whole or in part the result
of Colonial and Platinum’s participation in TBW’s alleged fraud.
BANA seeks a court order requiring the FDIC to allow BANA’s claims
in an amount equal to Ocala’s losses and, accordingly, to permit
BANA, as trustee, collateral agent, custodian and depositary for
Ocala, to share appropriately in distributions of any receivership
assets that the FDIC makes to creditors of the two failed banks.
On August 5, 2011, the FDIC answered and moved to dismiss
the amended complaint, and asserted counterclaims against
BANA in BANA’s individual capacity seeking approximately $900
million in damages. The counterclaims allege that Colonial sent
4,808 loans to BANA as bailee, that BANA converted the loans
into Ocala collateral without first ensuring that Colonial was paid,
and that Colonial was never paid for these loans.
On December 10, 2012, the U.S. District Court for the District
of Columbia granted in part and denied in part the FDIC’s motion
to dismiss BANA’s amended complaint. The court dismissed
BANA’s claims to the extent they were brought on behalf of Ocala,
holding that those claims were not administratively exhausted, and
also dismissed three equitable claims, but allowed BANA to
continue to pursue claims in its individual capacity and on behalf
of Ocala’s secured parties, principally plaintiffs in the 2009
Actions. The court also granted in part and denied in part BANA’s
motion to dismiss the FDIC’s counterclaims, allowing all but one
of the FDIC’s 16 counterclaims to go forward.
On February 5, 2013, BANA filed a motion for clarification of
the court’s December 10, 2012 ruling on BANA’s motion to dismiss
the FDIC’s counterclaims. On March 6, 2013, the court ruled that
certain language in the custodial agreement between BANA and
Colonial Bank purporting to limit BANA’s liability is unenforceable
due to ambiguity, and that BANA is foreclosed from introducing
extrinsic evidence to resolve the ambiguity. On June 17, 2013, the
court denied BANA’s motion seeking certification for interlocutory
appeal of the court’s December 10, 2012 ruling as so clarified.
On February 5, 2014, the U.S. Court of Appeals for the District of
Bank of America 2013 227
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Columbia Circuit denied BANA’s petition for writ of mandamus that
sought to vacate the December 10, 2012 and March 6, 2013
rulings.
Following a trial, on October 23, 2013, a verdict of liability was
returned against CHL, CFSB and BANA. The court may impose civil
monetary penalties under FIRREA.
On May 3, 2013, the FDIC filed a motion to dismiss BANA’s
claims against the FDIC in its capacity as receiver for Colonial
Bank, citing a Notice of No Value Determination, dated April 15,
2013, published by the FDIC in the Federal Register, 78 Fed. Reg.
76, 23565 (the No Value Determination). On July 22, 2013, BANA
filed a complaint against the FDIC in the U.S. District Court for the
District of Columbia entitled Bank of America, N.A. v. Federal Deposit
Insurance Corporation, challenging
the FDIC’s No Value
Determination pursuant to the Administrative Procedure Act (the
APA Action). On August 26, 2013, the U.S. District Court for the
District of Columbia granted the FDIC’s motion to dismiss BANA’s
claims against the FDIC in its capacity as receiver for Colonial
Bank. The court ruled that the order of judgment would be held in
abeyance pending resolution of the APA Action.
O’Donnell Litigation
On February 24, 2012, Edward O’Donnell filed a sealed qui tam
complaint against the Corporation, individually, and as successor
to Countrywide, CHL and a Countrywide business division known
as Full Spectrum Lending. On October 24, 2012, the DOJ filed a
complaint-in-intervention to join the matter, adding BANA,
Countrywide and CHL as defendants. The action is entitled United
States of America, ex rel, Edward O’Donnell, appearing Qui Tam v.
Bank of America Corp, et al., and was filed in the U.S. District Court
for the Southern District of New York. The complaint-in-intervention
asserts certain fraud claims in connection with the sale of loans
to FNMA and FHLMC by Full Spectrum Lending and by the
Corporation and BANA from 2006 continuing through 2009 and
also asserts successor liability against the Corporation and BANA.
Plaintiff originally sought treble damages pursuant to the False
Claims Act and civil penalties pursuant to FIRREA. On January 11,
2013, the government filed an amended complaint which added
Countrywide Bank, FSB (CFSB) and a former officer of the
Corporation as defendants. The court dismissed the False Claims
Act counts on May 8, 2013. On September 24, 2013, the
government dismissed the Corporation as a defendant.
Pennsylvania Public School Employees’ Retirement
System
The Corporation and several current and former officers were
named as defendants in a putative class action filed in the U.S.
District Court for the Southern District of New York entitled
Pennsylvania Public School Employees’ Retirement System v. Bank
of America, et al.
Following the filing of a complaint on February 2, 2011, plaintiff
subsequently filed an amended complaint on September 23, 2011
in which plaintiff sought to sue on behalf of all persons who
acquired the Corporation’s common stock between February 27,
2009 and October 19, 2010 and “Common Equivalent Securities”
sold in a December 2009 offering. The amended complaint
asserted claims under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Sections 11 and 15 of the Securities
Act of 1933, and alleged that the Corporation’s public statements:
(i) concealed problems in the Corporation’s mortgage servicing
business resulting from the widespread use of the Mortgage
Electronic Recording System;
the
Corporation’s exposure to mortgage repurchase claims; (iii)
misrepresented the adequacy of internal controls; and (iv) violated
certain Generally Accepted Accounting Principles. The amended
complaint sought unspecified damages.
to disclose
failed
(ii)
On July 11, 2012, the court granted in part and denied in part
defendants’ motions to dismiss the amended complaint. All claims
under the Securities Act were dismissed against all defendants,
with prejudice. The motion to dismiss the claim against the
Corporation under Section 10(b) of the Exchange Act was denied.
All claims under the Exchange Act against the officers were
dismissed, with leave to replead. Defendants moved to dismiss a
second amended complaint in which plaintiff sought to replead
claims against certain current and former officers under Sections
10(b) and 20(a). On April 17, 2013, the court granted in part and
denied in part the motion to dismiss, sustaining Sections 10(b)
and 20(a) claims against the current and former officers.
228 Bank of America 2013
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Policemen’s Annuity Litigation
On April 11, 2012, the Policemen’s Annuity & Benefit Fund of the
City of Chicago, on its own behalf and on behalf of a proposed
class of purchasers of 41 RMBS trusts collateralized mostly by
Washington Mutual-originated (WaMu) mortgages, filed a proposed
class action complaint against BANA and other unrelated parties
in the United States District Court for the Southern District of New
York, entitled Policemen’s Annuity and Benefit Fund of the City of
Chicago v. Bank of America, N.A. and U.S. Bank National Association.
BANA and U.S. Bank are named as defendants in their capacities
as trustees, with BANA (formerly LaSalle Bank National
Association) having served as the original trustee and U.S. Bank
having replaced BANA as trustee. Plaintiff asserted claims under
the federal Trust Indenture Act as well as state common law claims.
Plaintiff alleged that, in light of the performance of the RMBS at
issue, and in the wake of publicly-available information about the
quality of loans originated by WaMu, the trustees were required to
take certain steps to protect plaintiff’s interest in the value of the
securities, and that plaintiff was damaged by defendants’ failures
to notify it of deficiencies in the loans and of defaults under the
relevant agreements, to ensure that the underlying mortgages
could properly be foreclosed, and to enforce remedies available
for loans that contained breaches of representations and
warranties. Plaintiff sought unspecified compensatory damages
and/or equitable relief, and costs and expenses. On December 7,
2012, the court granted in part and denied in part defendants’
motion to dismiss, and granted plaintiff leave to replead some of
the dismissed claims. The court ruled, among other things, that
plaintiff had standing to pursue claims on behalf of purchasers of
certificates in certain tranches of five trusts, but not on behalf of
purchasers of certificates in the other 36 trusts, in which plaintiff
had not invested. Plaintiffs filed a second amended complaint on
January 13, 2013, which added plaintiffs and asserted claims
concerning 19 trusts in which at least one named plaintiff had
invested. On May 6, 2013, the court denied defendants’ motion
to dismiss the second amended complaint.
On August 23, 2013, the Vermont Pension Investment
Committee and the Washington State Investment Board brought
a new putative class action against BANA and other unrelated
parties in the U.S. District Court for the Southern District of New
York entitled Vermont Pension Investment Committee and the
Washington State Investment Board v. Bank of America, N.A. and
U.S. Bank National Association (Vermont Pension). The Vermont
Pension action was based on similar factual allegations and the
same claims and legal theories as the Policemen’s Annuity action,
but concerned six different RMBS trusts collateralized mostly by
WaMu-originated mortgages for which BANA is the former trustee
and U.S. Bank is the current trustee. As in Policemen’s Annuity,
plaintiffs sought unspecified compensatory damages and/or
equitable relief, and costs and expenses. The case was marked
as related to Policemen’s Annuity and assigned to the same judge.
On October 21, 2013, the court consolidated the two cases
through summary judgment. On October 31, 2013, plaintiffs filed
a consolidated Third Amended Complaint, which asserted
materially identical claims concerning the 25 trusts previously at
issue in the two consolidated cases, as well as 10 new trusts
(also mostly collateralized by WaMu-originated mortgages),
bringing the total number of trusts at issue to 35. The new
complaint also added four new plaintiffs, bringing the total number
of named plaintiffs to 10.
76788ba_financials.indd 229
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Bank of America 2013 229
NOTE 13 Shareholders’ Equity
Common Stock
Declared Quarterly Cash Dividends on Common Stock
Declaration Date
Record Date
Payment Date
Dividend
Per Share
February 11, 2014
October 24, 2013
July 24, 2013
April 30, 2013
January 23, 2013
March 7, 2014
December 6, 2013
September 6, 2013
June 7, 2013
March 1, 2013
March 28, 2014
December 27, 2013
September 27, 2013
June 28, 2013
March 22, 2013
$
0.01
0.01
0.01
0.01
0.01
On March 14, 2013, the Corporation announced that its Board
of Directors (Board) authorized the repurchase of up to $5.0 billion
of common stock over four quarters beginning in the second
quarter of 2013. The timing and amount of common stock
repurchases have been and will continue to be consistent with the
Corporation’s 2013 capital plan and will be subject to various
factors, including the Corporation’s capital position, liquidity,
applicable legal considerations, financial performance and
alternative uses of capital, stock trading price, and general market
conditions, and may be suspended at any time. The remaining
common stock repurchases may be effected through open market
purchases or privately negotiated
including
repurchase plans that satisfy the conditions of Rule 10b5-1 of the
Securities Exchange Act of 1934.
transactions,
In 2013, the Corporation repurchased and retired 231.7 million
shares of common stock, which reduced shareholders’ equity by
$3.2 billion.
In 2012 and 2011, in connection with the exchanges described
in Preferred Stock in this Note, the Corporation issued 50 million
and 400 million shares of common stock.
On September 1, 2011, the Corporation closed the sale to
Berkshire Hathaway, Inc. (Berkshire) of 50,000 shares of the
Corporation’s 6% Cumulative Perpetual Preferred Stock, Series T
(Series T Preferred Stock) and a warrant (the Warrant) to purchase
700 million shares of the Corporation’s common stock for an
aggregate purchase price of $5.0 billion in cash. Of the $5.0 billion
in cash proceeds, $2.9 billion was allocated to preferred stock
and $2.1 billion to the Warrant on a relative fair value basis. The
discount on the Series T Preferred Stock is not subject to accretion.
The portion of proceeds allocated to the Warrant was recorded as
additional paid-in capital. The Warrant is exercisable at the holder’s
option at any time, in whole or in part, until September 1, 2021,
at an exercise price of $7.142857 per share of common stock.
The Warrant may be settled in cash or by exchanging all or a portion
of the Series T Preferred Stock. For more information on the
Berkshire investment and Series T Preferred Stock, see Preferred
Stock in this Note.
At December 31, 2013, the Corporation had warrants
outstanding and exercisable to purchase 121.8 million shares of
common stock at an exercise price of $30.79 per share expiring
on October 28, 2018, and warrants outstanding and exercisable
to purchase 150.4 million shares of common stock at an exercise
price of $13.30 per share expiring on January 16, 2019. These
warrants were originally issued in connection with preferred stock
issuances to the U.S. Department of the Treasury in 2010 and
are listed on the New York Stock Exchange.
230 Bank of America 2013
In connection with employee stock plans, in 2013, the
Corporation
issued approximately 74 million shares and
repurchased approximately 29 million shares of its common stock
to satisfy tax withholding obligations. At December 31, 2013, the
Corporation had reserved 1.8 billion unissued shares of common
stock for future issuances under employee stock plans, common
stock warrants, convertible notes and preferred stock.
Preferred Stock
The cash dividends declared on preferred stock were $1.2 billion,
$1.5 billion and $1.3 billion for 2013, 2012 and 2011.
In 2013, the Corporation redeemed for $6.6 billion its Non-
Cumulative Preferred Stock, Series H, J, 6, 7 and 8. The $100
million difference between the carrying value of $6.5 billion and
the redemption price of the preferred stock was recorded as a
preferred stock dividend. In addition, the Corporation issued $1.0
billion of its Fixed-to-Floating Rate Semi-annual Non-Cumulative
Preferred Stock, Series U.
In 2012, the Corporation entered into various agreements with
certain preferred stock and Trust Securities holders pursuant to
which the Corporation and the holders of these securities agreed
to exchange shares of various series of non-convertible preferred
stock with a carrying value of $296 million and Trust Securities
with a carrying value of $760 million for 50 million shares of the
Corporation’s common stock with a fair value of $412 million, and
$398 million in cash. The $246 million difference between the
carrying value of the preferred stock and Trust Securities retired
and the fair value of consideration issued was a $44 million
reduction to preferred stock dividends recorded in retained
earnings and a $202 million gain recorded in noninterest income.
In 2012, the Corporation issued shares of the Corporation’s Series
F Preferred Stock and Series G Preferred Stock for $633 million
under stock purchase contracts. For additional information, see
the Preferred Stock Summary table in this Note and Note 11 –
Long-term Debt.
In 2011, the Corporation entered into separate agreements
with certain institutional preferred stock and Trust Securities
holders (the Exchange Agreements) pursuant to which the
Corporation and the holders of these securities agreed to
exchange shares, or depository shares representing fractional
interests in shares, of various series of the Corporation’s preferred
stock, par value $0.01 per share, or Trust Securities for an
aggregate of 400 million shares of the Corporation’s common
stock valued at $2.2 billion and $2.3 billion aggregate principal
amount of senior notes. The Exchange Agreements related to Trust
Securities are described in Note 11 – Long-term Debt and the
Exchange Agreements related to preferred stock are described
below.
As part of the Exchange Agreements, the Corporation
exchanged non-convertible preferred stock, with an aggregate
liquidation preference of $815 million and carrying value of $814
million, for 72 million shares of common stock valued at $399
million and senior notes valued at $231 million. The $184 million
difference between the carrying value of the non-convertible
preferred stock and the fair value of the consideration issued to
the holders of the non-convertible preferred stock was recorded
in retained earnings as a non-cash reduction to preferred stock
dividends.
76788ba_financials.indd 230
3/6/14 12:06 PM
Additionally, as a part of the Exchange Agreements, a portion
of the Series L 7.25% Non-Cumulative Perpetual Convertible
Preferred Stock (Series L Preferred Stock) with an aggregate
liquidation preference and carrying value of $269 million was
exchanged for 20 million shares of the Corporation’s common
stock valued at $123 million and senior notes valued at $129
million. The $17 million difference between the carrying value of
the Series L Preferred Stock and the fair value of the consideration
issued to holders of the Series L Preferred Stock was reclassified
from preferred stock to common stock and additional paid-in
capital. Because the number of common shares issued to the
Series L Preferred Stock holders was in excess of the number of
common shares issuable pursuant to the original conversion
terms, the $220 million fair value of consideration transferred to
the Series L Preferred Stock holders in excess of the $32 million
fair value of securities issuable pursuant to the original conversion
terms was recorded as a non-cash preferred stock dividend. The
dividend did not impact total shareholders’ equity since it reduced
retained earnings and increased common stock and additional
paid-in capital by the same amount.
The Series T Preferred Stock issued as part of the Berkshire
investment has a liquidation value of $100,000 per share and
dividends on the Series T Preferred Stock accrue on the liquidation
value at a rate per annum of six percent but will be paid only when
and if declared by the Board out of legally available funds. Subject
to the approval of the Board of Governors of the Federal Reserve
System (Federal Reserve), the Series T Preferred Stock may be
redeemed by the Corporation at any time at a redemption price of
$105,000 per share plus any accrued, unpaid dividends. The
Series T Preferred Stock has no maturity date and ranks senior to
the outstanding common stock with respect to the payment of
dividends and distributions in liquidation. At any time when
dividends on the Series T Preferred Stock have not been paid in
full, the unpaid amounts will accrue dividends at a rate per annum
of eight percent and the Corporation will not be permitted to pay
dividends or other distributions on, or to repurchase, any
outstanding common stock or any of the Corporation’s outstanding
preferred stock of any series. Following payment in full of accrued
but unpaid dividends on the Series T Preferred Stock, the dividend
rate remains at eight percent per annum.
76788ba_financials.indd 231
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Bank of America 2013 231
The table below presents a summary of perpetual preferred stock previously issued by the Corporation and outstanding at
December 31, 2013.
Preferred Stock Summary
(Dollars in millions, except as noted)
Series
Description
Initial
Issuance
Date
June
1997
September
2006
November
2006
March
2012
March
2012
7% Cumulative
Redeemable
6.204% Non-
Cumulative
Floating Rate Non-
Cumulative
Floating Rate Non-
Cumulative
Adjustable Rate Non-
Cumulative
6.625% Non-
Cumulative
September
2007
Fixed-to-Floating Rate
Non-Cumulative
7.25% Non-
Cumulative Perpetual
Convertible
January
2008
January
2008
Total
Shares
Outstanding
Liquidation
Preference
per Share
(in dollars)
Carrying
Value (1)
Per Annum
Dividend Rate
7,571
$
100
$
1
26,174
25,000
654
7.00%
6.204%
12,691
25,000
317
3-mo. LIBOR + 35 bps (5)
1,409
100,000
141
3-mo. LIBOR + 40 bps (5)
4,926
100,000
493
3-mo. LIBOR + 40 bps (5)
14,584
25,000
365
6.625%
61,773
25,000
1,544
8.00% through 1/29/18;
3-mo. LIBOR + 363 bps
thereafter
Redemption Period
n/a
On or after
September 14, 2011
On or after
November 15, 2011
On or after
March 15, 2012
On or after
March 15, 2012
On or after
October 1, 2017
On or after
January 30, 2018
3,080,182
1,000
3,080
7.25%
n/a
Series B (2)
Series D (3, 4)
Series E (3, 4)
Series F (3, 4)
Series G (3, 4)
Series I (3, 4)
Series K (3, 6)
Series L
Series M (3, 6)
Fixed-to-Floating Rate
Non-Cumulative
April
2008
52,399
25,000
1,310
8.125% through
5/14/18;
3-mo. LIBOR + 364 bps
thereafter
Series T
6% Cumulative
Series U
Series 1 (3, 7)
Series 2 (3, 7)
Series 3 (3, 7)
Series 4 (3, 7)
Series 5 (3, 7)
Total
Fixed-to-Floating Rate
Non-Cumulative
Floating Rate Non-
Cumulative
Floating Rate Non-
Cumulative
6.375% Non-
Cumulative
Floating Rate Non-
Cumulative
Floating Rate Non-
Cumulative
September
2011
May
2013
November
2004
March
2005
November
2005
November
2005
March
2007
50,000
100,000
2,918
6.00%
40,000
25,000
1,000
5.2% through 6/1/23;
3-mo. LIBOR + 313.5 bps
thereafter
3,275
30,000
98
3-mo. LIBOR + 75 bps (8)
9,967
30,000
299
3-mo. LIBOR + 65 bps (8)
21,773
30,000
653
6.375%
7,010
30,000
210
3-mo. LIBOR + 75 bps (5)
14,056
3,407,790
30,000
422
3-mo. LIBOR + 50 bps (5)
$ 13,505
On or after
May 15, 2018
See description in
Preferred Stock in this
Note
On or after
June 1, 2023
On or after
November 28, 2009
On or after
November 28, 2009
On or after
November 28, 2010
On or after
November 28, 2010
On or after
May 21, 2012
(1) Amounts shown are before certain GAAP accounting adjustments of $153 million.
(2) Series B Preferred Stock does not have early redemption/call rights.
(3) The Corporation may redeem series of preferred stock on or after the redemption date, in whole or in part, at its option, at the liquidation preference plus declared and unpaid dividends.
(4) Ownership is held in the form of depositary shares, each representing a 1/1,000th interest in a share of preferred stock, paying a quarterly cash dividend, if and when declared.
(5) Subject to 4.00% minimum rate per annum.
(6) Ownership is held in the form of depositary shares, each representing a 1/25th interest in a share of preferred stock, paying a semi-annual cash dividend, if and when declared, until the redemption
date at which time, it adjusts to a quarterly cash dividend, if and when declared, thereafter.
(7) Ownership is held in the form of depositary shares, each representing a 1/1,200th interest in a share of preferred stock, paying a quarterly cash dividend, if and when declared.
(8) Subject to 3.00% minimum rate per annum.
n/a = not applicable
232 Bank of America 2013
76788ba_financials.indd 232
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Series L Preferred Stock listed in the Preferred Stock Summary
table does not have early redemption/call rights. Each share of
the Series L Preferred Stock may be converted at any time, at the
option of the holder, into 20 shares of the Corporation’s common
stock plus cash in lieu of fractional shares. The Corporation may
cause some or all of the Series L Preferred Stock, at its option,
at any time or from time to time, to be converted into shares of
common stock at the then-applicable conversion rate if, for 20
trading days during any period of 30 consecutive trading days, the
closing price of common stock exceeds 130 percent of the then-
applicable conversion price of the Series L Preferred Stock. If a
conversion of Series L Preferred Stock occurs subsequent to a
dividend record date but prior to the dividend payment date, the
Corporation will still pay any accrued dividends payable.
All series of preferred stock in the Preferred Stock Summary
table have a par value of $0.01 per share, are not subject to the
operation of a sinking fund, have no participation rights, and with
the exception of the Series L Preferred Stock, are not convertible.
The holders of the Series B Preferred Stock and Series 1 through
5 Preferred Stock have general voting rights, and the holders of
the other series included in the table have no general voting rights.
All outstanding series of preferred stock of the Corporation have
preference over the Corporation’s common stock with respect to
the payment of dividends and distribution of the Corporation’s
assets in the event of a liquidation or dissolution. With the
exception of the Series T Preferred Stock, if any dividend payable
on these series is in arrears for three or more semi-annual or six
or more quarterly dividend periods, as applicable (whether
consecutive or not), the holders of these series and any other
class or series of preferred stock ranking equally as to payment
of dividends and upon which equivalent voting rights have been
conferred and are exercisable (voting as a single class) will be
entitled to vote for the election of two additional directors. These
voting rights terminate when the Corporation has paid in full
dividends on these series for at least two semi-annual or four
quarterly dividend periods, as applicable, following the dividend
arrearage.
76788ba_financials.indd 233
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Bank of America 2013 233
NOTE 14 Accumulated Other Comprehensive Income (Loss)
The table below presents the changes in accumulated OCI after-tax for 2011, 2012 and 2013.
(Dollars in millions)
Available-for-
Sale Debt
Securities
Available-for-
Sale Marketable
Equity Securities
Derivatives
Employee
Benefit Plans (1)
Foreign
Currency (2)
Total
$
Net change
Net change
Balance, December 31, 2010
Balance, December 31, 2011
(3,947) $
(444)
(4,391) $
(65)
(4,456) $
2,049
(2,407) $
Balance, December 31, 2013
(1) During 2013, the Corporation merged certain pension plans into one plan. For more information on employee benefit plans, see Note 17 – Employee Benefit Plans.
(2) 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.
(3,236) $
(549)
(3,785) $
916
(2,869) $
592
(2,277) $
714
2,386
3,100
1,343
4,443
(7,700)
(3,257) $
6,659
(6,656)
3
459
462
(466)
Balance, December 31, 2012
(256) $
(108)
(364) $
(13)
(377) $
(135)
(512) $
Net change
(4) $
$
$
$
$
$
$
$
$
$
(66)
(5,371)
(5,437)
2,640
(2,797)
(5,660)
(8,457)
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 2013, 2012 and 2011.
Changes in OCI Components Before- and After-tax
(Dollars in millions)
Available-for-sale debt securities:
Net change in fair value
Net realized gains reclassified into earnings
Net change
Available-for-sale marketable equity securities:
Net change in fair value
Net realized gains reclassified into earnings
Net change
Derivatives:
Net change in fair value
Net realized losses reclassified into earnings
Net change
Employee benefit plans:
Net change in fair value
Net realized losses reclassified into earnings
Settlements and curtailments
Net change
Foreign currency:
Before-tax
2013
Tax effect
After-tax
Before-tax
2012
Tax effect
After-tax
Before-tax
2011
Tax effect
After-tax
$ (10,989) $
(1,251)
(12,240)
4,077
463
4,540
$ (6,912) $
(788)
(7,700)
3,676
(1,609)
2,067
$ (1,319) $ 2,357
(1,014)
1,343
595
(724)
$
6,913
(3,075)
3,838
$ (2,590) $ 4,323
(1,937)
2,386
1,138
(1,452)
32
(771)
(739)
156
773
929
2,985
237
46
3,268
(12)
285
273
(51)
(286)
(337)
20
(486)
(466)
105
487
592
(1,128)
(79)
(12)
(1,219)
1,857
158
34
2,049
748
(19)
729
430
1,035
1,465
(1,891)
490
1,378
(23)
(277)
7
(270)
(166)
(383)
(549)
660
(192)
(510)
(42)
471
(12)
459
264
652
916
(1,231)
298
868
(65)
(4,114)
(6,501)
(10,615)
1,575
2,384
3,959
(2,490)
1,617
(873)
(1,171)
437
—
(734)
923
(599)
324
457
(167)
—
290
(2,539)
(4,117)
(6,656)
(1,567)
1,018
(549)
(714)
270
—
(444)
Net change in fair value
Net realized (gains) losses reclassified into earnings
Net change
Total other comprehensive income (loss)
244
138
382
$ (8,400) $
(384)
(133)
(517)
2,740
(140)
5
(135)
$ (5,660) $
(226)
(30)
(256)
3,982
233
10
243
7
(20)
(13)
$ (1,342) $ 2,640
145
(65)
80
(179)
(9)
(188)
$ (8,304) $ 2,933
(34)
(74)
(108)
$ (5,371)
234 Bank of America 2013
76788ba_financials.indd 234
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The table below presents impacts on net income of significant amounts reclassified out of each component of accumulated OCI
Income Statement Line Item Impacted
2013
2012
2011
before- and after-tax for 2013, 2012 and 2011.
Reclassifications Out of Accumulated OCI
(Dollars in millions)
Accumulated OCI Components
Available-for-sale debt securities:
Available-for-sale marketable equity securities:
Derivatives:
Interest rate contracts
Commodity contracts
Interest rate contracts
Equity compensation contracts
Employee benefit plans:
Prior service cost
Transition obligation
Net actuarial losses
Settlements and curtailments
Foreign currency:
Gains on sales of debt securities
Other-than-temporary impairment
Income before income taxes
Income tax expense
Reclassification to net income
Equity investment income
Income before income taxes
Income tax expense
Reclassification to net income
Net interest income
Trading account profits
Other income
Personnel
Loss before income taxes
Income tax benefit
Reclassification to net income
Personnel
Personnel
Personnel
Personnel
Loss before income taxes
Income tax benefit
Reclassification to net income
Other income (loss)
Income (loss) before income taxes
Income tax expense (benefit)
Reclassification to net Income
Total reclassification adjustments
$
$
$
$
1,271
(20)
1,251
463
788
1,662
(53)
1,609
595
1,014
771
771
285
486
(1,119)
(1)
18
329
(773)
(286)
(487)
(4)
—
(225)
(8)
(237)
(79)
(158)
(138)
(138)
(133)
(5)
624
19
19
7
12
(956)
(1)
—
(78)
(1,035)
(383)
(652)
(6)
(32)
(443)
(58)
(539)
(212)
(327)
30
30
10
20
67
$
$
3,374
(299)
3,075
1,138
1,937
6,501
6,501
2,384
4,117
(1,393)
7
—
(231)
(1,617)
(599)
(1,018)
(16)
(31)
(387)
(3)
(437)
(167)
(270)
65
65
(9)
74
4,840
76788ba_financials.indd 235
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Bank of America 2013 235
NOTE 15 Earnings Per Common Share
The calculation of earnings per common share (EPS) and diluted EPS for 2013, 2012 and 2011 is presented below. For more information
on the calculation of EPS, see Note 1 – Summary of Significant Accounting Principles.
(Dollars in millions, except per share information; shares in thousands)
2013
2012
2011
Earnings per common share
Net income
Preferred stock dividends
Net income applicable to common shareholders
Dividends and undistributed earnings allocated to participating securities
Net income allocated to common shareholders
Average common shares issued and outstanding
Earnings per common share
Diluted earnings per common share
Net income applicable to common shareholders
Add preferred stock dividends due to assumed conversions
Dividends and undistributed earnings allocated to participating securities
Net income allocated to common shareholders
Average common shares issued and outstanding
Dilutive potential common shares (1)
Total diluted average common shares issued and outstanding
Diluted earnings per common share
(1)
Includes incremental shares from restricted stock units, restricted stock, stock options and warrants.
$
$
$
$
$
$
11,431
(1,349)
10,082
(2)
10,080
10,731,165
0.94
10,082
300
(2)
10,380
10,731,165
760,253
11,491,418
0.90
$
$
$
$
$
$
4,188
(1,428)
2,760
(2)
2,758
10,746,028
0.26
2,760
—
(2)
2,758
10,746,028
94,826
10,840,854
0.25
$
$
$
$
$
$
1,446
(1,361)
85
(1)
84
10,142,625
0.01
85
—
(1)
84
10,142,625
112,199
10,254,824
0.01
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. For 2013, 700 million average dilutive
potential common shares associated with the Series T Preferred
Stock were included in the diluted share count under the “if-
converted” method. For 2012 and 2011, 700 million and 234
million average dilutive potential common shares associated with
the Series T Preferred Stock were not included in the diluted share
count because the result would have been antidilutive under the
“if-converted” method. For additional information, see Note 13 –
Shareholders’ Equity.
For both 2013 and 2012, 62 million average dilutive potential
common shares associated with the Series L Preferred Stock were
not included in the diluted share count because the result would
have been antidilutive under the “if-converted” method compared
to 66 million for 2011. For 2013, 2012 and 2011, average options
to purchase 126 million, 163 million and 217 million shares of
common stock, respectively, were outstanding but not included in
the computation of EPS because the result would have been
antidilutive under the treasury stock method. For 2013, 2012 and
2011, 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.
In connection with the preferred stock actions described in Note
13 – Shareholders’ Equity, the Corporation recorded a $100 million
non-cash preferred stock dividend in 2013, a $44 million reduction
to preferred stock dividends in 2012 and a net $36 million non-
cash preferred stock dividend in 2011, all of which are included
in the calculation of net
income allocated to common
shareholders.
236 Bank of America 2013
76788ba_financials.indd 236
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NOTE 16 Regulatory Requirements and
Restrictions
The Corporation manages regulatory capital to adhere to internal
capital guidelines and regulatory standards of capital adequacy
based on its current understanding of the rules and the application
of such rules to its business as currently conducted.
The Federal Reserve, Office of the Comptroller of the Currency
(OCC) and FDIC (collectively, joint agencies) establish regulatory
capital guidelines for U.S. banking organizations. The regulatory
capital guidelines measure capital in relation to the credit and
market risks of both on- and off-balance sheet items using various
risk weights. Under the current regulatory capital guidelines, Total
capital consists of three tiers of capital. Tier 1 capital includes
the sum of “core capital elements,” the principal components of
which are qualifying common shareholders’ equity and qualifying
non-cumulative perpetual preferred stock. Also included in Tier 1
capital are qualifying trust preferred securities (Trust Securities),
hybrid securities and qualifying noncontrolling interests in
subsidiaries which are subject to the rules governing “restricted
core capital elements.” Goodwill, other disallowed intangible
assets, disallowed deferred tax assets and the cumulative
changes in fair value of all financial liabilities accounted for under
the fair value option that are included in retained earnings and are
attributable to changes in the company’s own creditworthiness are
excluded from the sum of core capital elements. Tier 2 capital
consists of qualifying subordinated debt, a limited portion of the
allowance for loan and lease losses, a portion of net unrealized
gains on AFS marketable equity securities and other adjustments.
The Corporation’s total capital is the total of Tier 1 capital plus
supplementary Tier 2 capital. Tier 3 capital includes subordinated
debt that is unsecured, fully paid, has an original maturity of at
least two years, is not redeemable before maturity without prior
approval by the Federal Reserve and includes a lock-in clause
precluding payment of either interest or principal if the payment
would cause the issuing bank’s risk-based capital ratio to fall or
remain below the required minimum. Tier 3 capital can only be
used to satisfy the Corporation’s market risk capital requirement
and may not be used to support its credit risk requirement. At
December 31, 2013 and 2012, the Corporation had no
subordinated debt that qualified as Tier 3 capital.
To meet minimum, adequately capitalized
regulatory
requirements, an institution must maintain a Tier 1 capital ratio
of four percent and a Total capital ratio of eight percent. A “well-
capitalized” institution must generally maintain capital ratios
200 bps higher than the minimum guidelines. The risk-based
capital rules have been further supplemented by a Tier 1 leverage
ratio, defined as Tier 1 capital divided by quarterly average total
assets, after certain adjustments. Bank holding companies (BHCs)
must have a minimum Tier 1 leverage ratio of at least four percent.
National banks must maintain a Tier 1 leverage ratio of at least
five percent to be classified as “well-capitalized.” Failure to meet
the capital requirements established by the joint agencies can
lead to certain mandatory and discretionary actions by regulators
that could have a material adverse effect on the Corporation’s
financial position. At December 31, 2013, the Corporation’s Tier
1 capital, Total capital and Tier 1 leverage ratios were 12.44
percent, 15.44 percent and 7.86 percent, respectively.
Current guidelines restrict certain core capital elements to 15
percent of total core capital elements for internationally active
BHCs. Internationally active BHCs are those that have significant
activities in non-U.S. markets with consolidated assets greater
than $250 billion or on-balance sheet non-U.S. exposure greater
than $10 billion, which includes the Corporation. In addition, the
Federal Reserve revised the qualitative standards for capital
instruments included in regulatory capital. At December 31, 2013,
the Corporation’s restricted core capital elements comprised 3.3
percent of total core capital elements. The Corporation is in
compliance with the revised guidelines.
Tier 1 common capital is not an official regulatory ratio, but was
introduced by the Federal Reserve during the Supervisory Capital
Assessment Program in 2009. Tier 1 common capital is Tier 1
capital less preferred stock, Trust Securities, hybrid securities and
qualifying noncontrolling
in subsidiaries. The
Corporation’s Tier 1 common capital was $145.2 billion and the
Tier 1 common capital ratio was 11.19 percent at December 31,
2013.
interests
76788ba_financials.indd 237
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Bank of America 2013 237
The table below presents actual and minimum required regulatory capital amounts at December 31, 2013 and 2012.
Regulatory Capital
(Dollars in millions)
Risk-based capital
Tier 1 common capital
Bank of America Corporation
Tier 1 capital
Bank of America Corporation
Bank of America, N.A.
FIA Card Services, N.A.
Total capital
Bank of America Corporation
Bank of America, N.A.
FIA Card Services, N.A.
Tier 1 leverage
Bank of America Corporation
Bank of America, N.A.
FIA Card Services, N.A.
(1) Dollar amount required to meet guidelines to be considered well-capitalized.
n/a = not applicable
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). The CCAR 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
2013, the Corporation submitted its 2013 capital plan and the
Federal Reserve did not object to the Corporation’s 2013 capital
plan. In January 2014, the Corporation submitted its 2014 CCAR
plan and related supervisory stress tests to the Federal Reserve.
The Federal Reserve announced that it will release summary
results, including supervisory projections of capital ratios, losses
and revenues under stress scenarios, and publish the results of
stress tests conducted under the supervisory adverse scenario in
March 2014.
Regulatory Capital Developments
Market Risk Final Rule
Effective January 1, 2013, Basel 1 was amended by the Market
Risk Final Rule, and is referred to herein as the Basel 1 – 2013
Rules. At December 31, 2013, the Corporation measured and
reported its capital ratios and related information in accordance
with the Basel 1 – 2013 Rules, which introduced 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, all of
which were effective January 1, 2013. The CRM is used to
determine the risk-weighted assets for correlation trading
positions. With approval from U.S. banking regulators, but not
sooner than one year following compliance with the Market Risk
Final Rule, the Corporation may remove a surcharge applicable to
the CRM.
In December 2013, U.S. banking regulators issued an
amendment to the Market Risk Final Rule, effective on April 1,
2014, to reflect certain aspects of the final Basel 3 Regulatory
238 Bank of America 2013
December 31
2013
Actual
2012
Actual
Ratio
Amount
Minimum
Required (1)
Ratio
Amount
Minimum
Required (1)
11.19% $ 145,235
n/a
11.06% $ 133,403
n/a
12.44
12.34
16.83
15.44
13.84
18.12
7.86
9.21
12.91
$
161,456
125,886
20,135
77,852
61,208
7,177
200,281
141,232
21,672
161,456
125,886
20,135
129,753
102,013
11,962
82,125
68,379
7,801
12.89
12.44
17.34
16.31
14.76
18.64
7.37
8.59
13.67
155,461
118,431
22,061
$
72,359
57,099
7,632
196,680
140,434
23,707
155,461
118,431
22,061
120,598
95,165
12,719
84,429
68,957
8,067
Capital rules (Basel 3). Revisions were made to the treatment of
sovereign exposures and certain traded securitization positions
as well as clarification as to the timing of required disclosures.
Basel 3 Regulatory Capital Rules
The final Basel 3 regulatory capital rules (Basel 3) became
effective on January 1, 2014. Various aspects of Basel 3 will be
subject to multi-year transition periods ending December 31, 2018
and Basel 3 generally continues to be subject to interpretation by
the U.S. banking regulators. Basel 3 will materially change the
Corporation’s Tier 1 common, Tier 1 and Total capital calculations.
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 calculation of risk-
weighted assets for credit and market risk (the Advanced
approach); and introduces a Standardized approach for the
calculation of risk-weighted assets. This will replace the Basel 1
– 2013 Rules effective January 1, 2015.
Under Basel 3, the Corporation is 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 anytime on or after January 1, 2014, the
Advanced approach. For 2014, the Standardized approach uses
risk-weighted assets as measured under the Basel 1 – 2013 Rules
and Basel 3 capital in the determination of the Basel 3
Standardized approach capital ratios. 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, the Corporation is required to assess its
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
76788ba_financials.indd 238
3/6/14 12:07 PM
capitalization, with no mandatory actions required for “well-
capitalized” banking entities.
through
financial
institutions
requirement
loss absorbency
In November 2011, the Basel Committee on Banking
Supervision (Basel Committee) published a methodology to
identify global systematically important banks (G-SIBs) and impose
an additional
the
introduction of a buffer of up to 3.5 percent for systemically
(SIFIs). The assessment
important
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,
institution
interconnectedness and substitutability/financial
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 require 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 the Corporation
in 2016. U.S. banking regulators have not yet issued proposed or
final rules related to the SIFI buffer or disclosure requirements.
Regulatory Capital Transitions
Important differences in determining the composition of regulatory
capital between Basel 1 – 2013 Rules and Basel 3 include changes
in capital deductions related to 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 Tier 1 common 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.
In addition, 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.
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 the same basis as the Market Risk Final Rule,
described previously. Credit risk exposures are measured by
applying fixed risk weights to the 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 approach includes a
measure of operational risk and a credit valuation adjustment
capital charge in credit risk and relies on internal analytical models
to measure credit risk-weighted assets, as more fully described
below.
Advanced Approach
Under the Basel 3 Advanced approach, risk-weighted assets are
determined primarily for market risk, credit risk and 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 advanced internal ratings-based models to
determine the applicable risk weight by estimating the probability
of default, LGD and, in certain instances, exposure at default. The
analytical models primarily rely on internal historical default and
loss experience. Operational risk is measured using advanced
internal models which rely on both internal and external operational
loss experience and data. The Basel 3 Advanced approach requires
approval by the U.S. regulatory agencies of the Corporation’s
internal analytical models used to calculate risk-weighted assets.
Supplementary Leverage Ratio
Basel 3 also will require the Corporation to calculate a
supplementary leverage ratio, determined by dividing Tier 1 capital
by total leverage exposure for each month-end during a fiscal
quarter, and then calculating the simple average. Total 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. The minimum supplementary leverage ratio
requirement of three percent is not effective until January 1, 2018.
The Corporation will be required to disclose its supplementary
leverage ratio effective January 1, 2015.
Bank of America 2013 239
76788ba_financials.indd 239
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leverage
In July 2013, U.S. banking regulators issued a notice of
proposed rulemaking to modify the supplementary leverage ratio
minimum requirements under Basel 3 effective in 2018. This
proposal would only apply to BHCs with more than $700 billion in
total assets or more than $10 trillion in total assets under custody.
If adopted, it would require the Corporation to maintain a minimum
supplementary
three percent, plus a
ratio of
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 would
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 would include
primarily BANA and FIA, would be required to maintain a minimum
six percent leverage ratio to be considered “well capitalized.” The
proposal is not yet final and, when finalized, could have provisions
significantly different from those currently proposed.
On January 12, 2014, the Basel Committee issued final
guidance introducing changes to the method of calculating total
leverage exposure under the international Basel 3 framework. The
total leverage exposure was 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 general risk-based capital rules and a change
to measure written credit derivatives using a notional-based
approach capped at the maximum loss with limited netting
permitted. U.S. banking regulators may consider the Basel
Committee’s final guidance in connection with the July 2013 NPR.
Basel 3 Liquidity Standards
The Basel Committee has issued two liquidity risk-related
standards that are considered part of the Basel 3 liquidity
standards: the Liquidity Coverage Ratio (LCR) and the Net Stable
Funding Ratio (NSFR). The LCR is calculated as the amount of a
financial institution’s unencumbered, 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.
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 its
insured depository institutions, including BANA, FIA and Bank of
America California, N.A.
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 expects the minimum
standard to be in place by 2018.
Other Regulatory Matters
On February 18, 2014, the Federal Reserve approved a final rule
implementing certain enhanced supervisory and prudential
requirements established under the Dodd-Frank Wall Street
Reform and Consumer Protection Act. The final rule formalizes risk
management requirements primarily related to governance and
liquidity risk management and reiterates the provisions of
previously issued final rules related to risk-based and leverage
capital and stress test requirements. Also, a debt-to-equity limit
may be enacted for an individual BHC if determined to pose a grave
threat to the financial stability of the U.S., at the discretion of the
Financial Stability Oversight Council (FSOC) or the Federal Reserve
on behalf of the FSOC.
The Federal Reserve requires the Corporation’s banking
subsidiaries to maintain reserve balances based on a percentage
of certain deposits. Average daily reserve balance requirements
for the Corporation by the Federal Reserve were $16.6 billion and
$16.3 billion for 2013 and 2012. Currency and coin residing in
branches and cash vaults (vault cash) are used to partially satisfy
the reserve requirement. The average daily reserve balances, in
excess of vault cash, held with the Federal Reserve amounted to
$7.8 billion and $7.9 billion for 2013 and 2012. As of
December 31, 2013 and 2012, the Corporation had cash in the
amount of $6.0 billion and $8.5 billion, and securities with a fair
value of $8.4 billion and $5.9 billion that were segregated in
compliance with securities regulations or deposited with clearing
organizations.
The primary sources of funds for cash distributions by the
Corporation to its shareholders are capital distributions received
from its banking subsidiaries, BANA and FIA. In 2013, the
Corporation received $8.5 billion in dividends from BANA. BANA
and FIA returned capital of $8.7 billion to the Corporation in 2013.
In 2014, BANA can declare and pay dividends of $8.0 billion to
the Corporation plus an additional amount equal to its retained
net profits for 2014 up to the date of any dividend declaration.
The other subsidiary national banks returned capital of $1.4 billion
to the Corporation in 2013. Bank of America California, N.A. can
pay dividends of $396 million in 2014 plus an additional amount
equal to its retained net profits for 2014 up to the date of any
such dividend declaration. The amount of dividends that each
subsidiary bank may declare in a calendar year is the subsidiary
bank’s net profits for that year combined with its retained net
profits for the preceding two years. Retained net profits, as defined
by the OCC, consist of net income less dividends declared during
the period.
240 Bank of America 2013
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NOTE 17 Employee Benefit Plans
Pension and Postretirement Plans
The Corporation sponsors noncontributory trusteed pension plans,
a number of noncontributory nonqualified pension plans, and
postretirement health and life plans that cover eligible employees.
As discussed below, certain of the pension plans were amended,
effective June 30, 2012, to freeze benefits earned. The pension
plans provide defined benefits based on an employee’s
compensation and years of service. The Bank of America Pension
Plan (the Pension Plan) provides participants with compensation
credits, generally based on years of service. In 2013, the
Corporation merged a defined benefit pension plan, which covered
eligible employees of certain legacy companies, into the Bank of
America Pension Plan. This plan is referred to as the Qualified
Pension Plan (Qualified Pension Plans prior to this merger). For
account balances based on compensation credits prior to January
1, 2008, the Pension Plan allows participants to select from
various earnings measures, which are based on the returns of
certain funds or common stock of the Corporation. The participant-
selected earnings measures determine the earnings rate on the
individual participant account balances in the Pension Plan.
Participants may elect to modify earnings measure allocations on
a periodic basis subject to the provisions of the Pension Plan. For
account balances based on compensation credits subsequent to
December 31, 2007, the account balance earnings rate is based
on a benchmark rate. For eligible employees in the Pension Plan
on or after January 1, 2008, the benefits become vested upon
completion of three years of service. It is the policy of the
Corporation to fund no less than the minimum funding amount
required by ERISA.
The Pension Plan has a balance guarantee feature for account
balances with participant-selected earnings, applied at the time a
benefit payment is made from the plan that effectively provides
principal protection for participant balances transferred and
certain compensation credits. The Corporation is responsible for
funding any shortfall on the guarantee feature.
As a result of acquisitions, the Corporation assumed the
obligations related to the pension plans of certain legacy
companies. The benefit structures under these acquired plans
have not changed and remain intact in the merged plan. Certain
benefit structures are substantially similar to the Pension Plan
discussed above; however, certain of these structures do not allow
participants to select various earnings measures; rather the
earnings rate is based on a benchmark rate. In addition, these
structures include participants with benefits determined under
formulas based on average or career compensation and years of
service rather than by reference to a pension account. Certain of
the other structures provide a participant’s retirement benefits
based on the number of years of benefit service and a percentage
of the participant’s average annual compensation during the five
highest paid consecutive years of the last 10 years of employment.
The 2013 merger of the defined benefit pension plan into the
Qualified Pension Plan required a remeasurement of the qualified
pension obligations and plan assets at fair value as of the merger
date in addition to the required December 31 remeasurement. The
2013 remeasurements resulted in an increase in accumulated
OCI of $2.0 billion, net-of-tax.
In 2012, in connection with a redesign of the Corporation’s
retirement plans, the Compensation and Benefits Committee of
the Board approved amendments to freeze benefits earned in the
Qualified Pension Plans effective June 30, 2012. As a result of
freezing the Qualified Pension Plans, a curtailment was triggered
and a remeasurement of the qualified pension obligations and
plan assets occurred. As of the remeasurement date, the plan
assets had increased in value from the prior measurement date
resulting in an increase in the funded status of the plan and the
curtailment impact reduced the projected benefit obligation. The
combined impact resulted in a $1.3 billion increase to the net
pension assets recognized in other assets and a corresponding
increase in accumulated OCI of $832 million, net-of-tax. The impact
of the immediate recognition of the prior service cost of $58 million
was recorded in personnel expense as a curtailment loss in 2012.
All economic assumptions were consistent with the prior year end
including the weighted-average discount rate of 4.95 percent used
for remeasurement of the Qualified Pension Plans.
As a result of freezing the Qualified Pension Plans, the
amortization period for actuarial gains and losses was changed
from the average working life to the estimated average lifetime of
benefits being paid. In addition, in 2014, the long-term expected
return on assets assumption for the Qualified Pension Plan was
reduced to 6.0 percent from 6.5 percent in 2013 and 8.0 percent
in 2012 to reflect current market conditions and long-term financial
goals.
The Corporation assumed the obligations related to the plans
of Merrill Lynch. These plans include a terminated U.S. pension
plan (the Other Pension Plan), non-U.S. pension plans, nonqualified
pension plans and postretirement plans. The non-U.S. pension
plans vary based on the country and local practices.
The Corporation has an annuity contract, previously purchased
by Merrill Lynch, that guarantees the payment of benefits vested
under the Other Pension Plan. The Corporation, under a
supplemental agreement, may be responsible for, or benefit from
actual experience and investment performance of the annuity
assets. The Corporation made no contribution under this
agreement in 2013 or 2012. Contributions may be required in the
future under this agreement.
The Corporation sponsors a number of noncontributory,
nonqualified pension plans (the Nonqualified Pension Plans). As
a result of acquisitions, the Corporation assumed the obligations
related to the noncontributory, nonqualified pension plans of
certain legacy companies including Merrill Lynch. These plans,
which are unfunded, provide defined pension benefits to certain
employees.
In addition to retirement pension benefits, full-time, salaried
employees and certain part-time employees may become eligible
to continue participation as retirees in health care and/or life
insurance plans sponsored by the Corporation. Based on the other
provisions of the individual plans, certain retirees may also have
the cost of these benefits partially paid by the Corporation. The
obligations assumed as a result of acquisitions are substantially
similar to the Corporation’s postretirement health and life plans,
except for Countrywide which did not have a postretirement health
and life plan. Collectively, these plans are referred to as the
Postretirement Health and Life Plans.
The Pension and Postretirement Plans table summarizes the
changes in the fair value of plan assets, changes in the projected
benefit obligation (PBO), the funded status of both the
accumulated benefit obligation (ABO) and the PBO, and the
weighted-average assumptions used to determine benefit
obligations for the pension plans and postretirement plans at
December 31, 2013 and 2012. Amounts recognized at December
31, 2013 and 2012 are reflected in other assets, and in accrued
expenses and other liabilities on the Consolidated Balance Sheet.
Bank of America 2013 241
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The discount rate assumption is based on a cash flow matching
technique and is subject to change each year. This technique
utilizes yield curves that are based on Aa-rated corporate bonds
with cash flows that match estimated benefit payments of each
of the plans to produce the discount rate assumptions. The asset
valuation method for the Qualified Pension Plan recognizes 60
percent of the prior year’s market gains or losses at the next
measurement date with the remaining 40 percent spread equally
over the subsequent four years.
Pension and Postretirement Plans
The Corporation’s best estimate of its contributions to be made
to the Non-U.S. Pension Plans, Nonqualified and Other Pension
Plans, and Postretirement Health and Life Plans in 2014 is $83
million, $103 million and $106 million, respectively. The
Corporation does not expect to make a contribution to the Qualified
Pension Plan in 2014.
(Dollars in millions)
Change in fair value of plan assets
Fair value, January 1
Actual return on plan assets
Company contributions
Plan participant contributions
Settlements and curtailments
Benefits paid
Federal subsidy on benefits paid
Foreign currency exchange rate changes
Fair value, December 31
Change in projected benefit obligation
Projected benefit obligation, January 1
Service cost
Interest cost
Plan participant contributions
Plan amendments
Settlements and curtailments
Actuarial loss (gain)
Benefits paid
Federal subsidy on benefits paid
Foreign currency exchange rate changes
Projected benefit obligation, December 31
Amount recognized, December 31
Funded status, December 31
Accumulated benefit obligation
Overfunded (unfunded) status of ABO
Provision for future salaries
Projected benefit obligation
Weighted-average assumptions, December 31
Discount rate
Rate of compensation increase
Qualified
Pension Plan (1)
Non-U.S.
Pension Plans (1)
Nonqualified
and Other
Pension Plans (1)
Postretirement
Health and Life
Plans (1)
2013
2012
2013
2012
2013
2012
2013
2012
$ 16,274
2,873
—
—
—
(871)
n/a
n/a
$ 18,276
$ 15,655
—
623
—
—
17
(1,279)
(871)
n/a
n/a
$ 14,145
4,131
$
$ 15,070
2,020
—
—
—
(816)
n/a
n/a
$ 16,274
$ 14,891
236
681
—
—
(889)
1,552
(816)
n/a
n/a
$ 15,655
619
$
$ 14,145
4,131
—
14,145
$ 15,655
619
—
15,655
$
$
$
$
$
$
2,306
146
131
1
(80)
(80)
n/a
33
2,457
2,460
32
98
1
2
(116)
156
(80)
n/a
27
2,580
(123)
2,463
(6)
117
2,580
$
$
$
$
$
$
2,022
115
152
3
—
(77)
n/a
91
2,306
1,984
40
97
3
2
—
328
(77)
n/a
83
2,460
(154)
2,345
(39)
115
2,460
$
$
$
$
$
$
3,063
(217)
98
—
(7)
(217)
n/a
n/a
2,720
3,334
1
120
—
—
(7)
(161)
(217)
n/a
n/a
3,070
(350)
3,067
(347)
3
3,070
$
$
$
$
$
$
3,061
126
112
—
—
(236)
n/a
n/a
3,063
3,137
1
138
—
—
—
294
(236)
n/a
n/a
3,334
(271)
3,334
(271)
—
3,334
$
$
86
9
61
138
—
(237)
15
n/a
72
$
$
91
10
117
139
—
(290)
19
n/a
86
$
1,574
9
54
138
—
—
(197)
(237)
15
—
$
1,356
$ (1,284)
$
1,619
13
71
139
—
—
(4)
(290)
19
7
1,574
$
$ (1,488)
n/a
n/a
n/a
1,356
n/a
n/a
n/a
1,574
$
$
4.85%
n/a
4.00%
n/a
4.30%
3.40
4.23%
4.37
4.55%
4.00
3.65%
4.00
4.50%
n/a
3.65%
n/a
(1) The measurement date for the Qualified Pension Plan, Non-U.S. Pension Plans, Nonqualified and Other Pension Plans, and Postretirement Health and Life Plans was December 31 of each year
reported.
n/a = not applicable
Amounts recognized on the Consolidated Balance Sheet at December 31, 2013 and 2012 are presented in the table below.
Amounts Recognized on Consolidated Balance Sheet
Qualified
Pension Plan
Non-U.S.
Pension Plans
Nonqualified
and Other
Pension Plans
Postretirement
Health and Life
Plans
(Dollars in millions)
Other assets
Accrued expenses and other liabilities
Net amount recognized at December 31
2013
2012
2013
2012
2013
2012
2013
2012
$
$
4,131
—
4,131
$
$
676
(57)
619
$
$
$
205
(328)
(123) $
$
220
(374)
(154) $
777
(1,127)
$
$
908
(1,179)
(350) $
(271) $
— $
(1,284)
(1,284) $
—
(1,488)
(1,488)
242 Bank of America 2013
76788ba_financials.indd 242
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Pension Plans with ABO and PBO in excess of plan assets as of December 31, 2013 and 2012 are presented in the table below.
For the non-qualified plans not subject to ERISA or non-U.S. pension plans, funding strategies vary due to legal requirements and local
practices.
Plans with ABO and PBO in Excess of Plan Assets
(Dollars in millions)
Plans with ABO in excess of plan assets
PBO
ABO
Fair value of plan assets
Plans with PBO in excess of plan assets
PBO
Fair value of plan assets
n/a = not applicable
Qualified
Pension Plan
Non-U.S.
Pension Plans
Nonqualified
and Other
Pension Plans
2013
2012
2013
2012
2013
2012
$
$
n/a
n/a
n/a
n/a
n/a
$
$
7,171
7,171
7,114
7,171
7,114
$
$
617
606
290
720
392
$
$
883
843
510
896
522
$
$
1,129
1,126
2
1,129
2
1,182
1,181
2
1,182
2
Net periodic benefit cost of the Corporation’s plans for 2013, 2012 and 2011 included the following components.
Components of Net Periodic Benefit Cost
(Dollars in millions)
Components of net periodic benefit cost
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of net actuarial loss (gain)
Recognized loss (gain) due to settlements and curtailments
Net periodic benefit cost (income)
Weighted-average assumptions used to determine net cost for years ended December 31
Discount rate
Expected return on plan assets
Rate of compensation increase
(Dollars in millions)
Components of net periodic benefit cost
Service cost
Interest cost
Expected return on plan assets
Amortization of transition obligation
Amortization of prior service cost (credits)
Amortization of net actuarial loss (gain)
Recognized loss due to settlements and curtailments
Net periodic benefit cost (income)
Weighted-average assumptions used to determine net cost for years ended December 31
Discount rate
Expected return on plan assets
Rate of compensation increase
n/a = not applicable
$
$
$
Qualified Pension Plan
2012
2011
2013
$
— $
623
(1,024)
—
242
17
(142)
$
236
681
(1,246)
9
469
58
207
$
$
423
746
(1,296)
20
387
—
280
$
$
4.00%
6.50
n/a
4.95%
8.00
4.00
5.45%
8.00
4.00
Non-U.S. Pension Plans
2012
2011
2013
$
$
32
98
(121)
—
2
(7)
4
4.23%
5.50
4.37
$
$
40
97
(137)
—
(9)
—
(9)
4.87%
6.65
4.42
43
99
(115)
—
—
—
27
5.32%
6.58
4.85
Nonqualified and
Other Pension Plans
Postretirement Health
and Life Plans
2013
2012
2011
2013
2012
2011
$
$
1
120
(109)
—
—
25
2
39
3.65%
3.75
4.00
$
$
1
138
(152)
—
(3)
8
—
(8)
4.65%
5.25
4.00
$
$
3
152
(141)
—
(8)
16
3
25
5.20%
5.25
4.00
9
54
(5)
—
4
(42)
6
26
$
$
13
71
(8)
32
4
(38)
—
74
$
$
15
80
(9)
31
4
(17)
—
104
3.65%
6.50
n/a
4.65%
8.00
n/a
5.10%
8.00
n/a
Net periodic postretirement health and life expense was
determined using the “projected unit credit” actuarial method.
Gains and losses for all benefit plans except postretirement health
care are recognized in accordance with the standard amortization
provisions of the applicable accounting guidance. For the
Postretirement Health Care Plans, 50 percent of the unrecognized
gain or loss at the beginning of the fiscal year (or at subsequent
remeasurement) is recognized on a level basis during the year.
The discount rate and expected return on plan assets impact
the net periodic benefit cost (income) recorded for the plans. With
all other assumptions held constant, a 25 bps decline in the
discount rate would result in an increase of approximately $7
million, while a 25 bps decline in the expected return on plan
assets would result in an increase of approximately $41 million
for the Qualified Pension Plan. For the Postretirement Health and
Life Plans, the 25 bps decline in the discount rate would result in
Bank of America 2013 243
76788ba_financials.indd 243
3/6/14 12:07 PM
an increase of approximately $9 million. For the Non-U.S. Pension
Plans and the Nonqualified and Other Pension Plans, the 25 bps
decline in rates would not have a significant impact.
Assumed health care cost trend rates affect the postretirement
benefit obligation and benefit cost reported for the Postretirement
Health and Life Plans. The assumed health care cost trend rate
used to measure the expected cost of benefits covered by the
Postretirement Health and Life Plans is 7.00 percent for 2014,
reducing in steps to 5.00 percent in 2019 and later years. A one-
percentage-point increase in assumed health care cost trend rates
would have increased the service and interest costs, and the
benefit obligation by $2 million and $54 million in 2013. A one-
percentage-point decrease in assumed health care cost trend
rates would have lowered the service and interest costs, and the
benefit obligation by $2 million and $47 million in 2013.
Pre-tax amounts included in accumulated OCI for employee
benefit plans at December 31, 2013 and 2012 are presented in
the table below.
Pre-tax Amounts included in Accumulated OCI
(Dollars in millions)
Net actuarial loss (gain)
Prior service cost (credits)
Amounts recognized in accumulated OCI
Qualified
Pension Plan
Non-U.S.
Pension Plans
Nonqualified
and Other
Pension Plans
Postretirement
Health and
Life Plans
Total
2013
$ 2,794
—
$ 2,794
2012
$ 6,164
—
$ 6,164
2013
$
$
271
(9)
262
2012
$ 144
5
$ 149
2013
$
$
855
—
855
2012
$ 718
—
$ 718
2013
2012
2013
$ (171) $
24
$ (147) $
(28) $ 3,749
15
29
$ 3,764
1
2012
$ 6,998
34
$ 7,032
Pre-tax amounts recognized in OCI for employee benefit plans in 2013 included the following components.
Pre-tax Amounts Recognized in OCI in 2013
(Dollars in millions)
Current year actuarial loss (gain)
Amortization of actuarial gain (loss)
Current year prior service cost
Amortization of prior service cost
Amounts recognized in OCI
Qualified
Pension Plan
Non-U.S.
Pension Plans
Nonqualified
and Other
Pension Plans
Postretirement
Health and
Life Plans
$
$
(3,128) $
(242)
—
—
(3,370) $
113
(2)
2
—
113
$
$
164
(27)
—
—
137
$
$
(180) $
36
—
(4)
(148) $
Total
(3,031)
(235)
2
(4)
(3,268)
The estimated pre-tax amounts that will be amortized from accumulated OCI into expense in 2014 are presented in the table below.
Estimated Pre-tax Amounts Amortized from Accumulated OCI into Period Cost in 2014
(Dollars in millions)
Net actuarial loss (gain)
Prior service cost
Total amounts amortized from accumulated OCI
Qualified
Pension Plan
Non-U.S.
Pension Plans
Nonqualified
and Other
Pension Plans
Postretirement
Health and
Life Plans
$
$
108
—
108
$
$
3
1
4
$
$
25
—
25
$
$
(85) $
4
(81) $
Total
51
5
56
244 Bank of America 2013
76788ba_financials.indd 244
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Plan Assets
The Qualified Pension Plan has been established as a retirement
vehicle for participants, and trusts have been established to
secure benefits promised under the Qualified Pension Plan. The
Corporation’s policy is to invest the trust assets in a prudent
manner for the exclusive purpose of providing benefits to
participants and defraying reasonable expenses of administration.
The Corporation’s investment strategy is designed to provide a
total return that, over the long term, increases the ratio of assets
to liabilities. The strategy attempts to maximize the investment
return on assets at a level of risk deemed appropriate by the
Corporation while complying with ERISA and any applicable
regulations and laws. The investment strategy utilizes asset
allocation as a principal determinant for establishing the risk/
return profile of the assets. Asset allocation ranges are
established, periodically reviewed and adjusted as funding levels
and liability characteristics change. Active and passive investment
managers are employed to help enhance the risk/return profile of
the assets. An additional aspect of the investment strategy used
to minimize risk (part of the asset allocation plan) includes
matching the equity exposure of participant-selected earnings
measures. For example, the common stock of the Corporation held
in the trust is maintained as an offset to the exposure related to
participants who elected to receive an earnings measure based
on the return performance of common stock of the Corporation.
No plan assets are expected to be returned to the Corporation
during 2014.
The assets of the Non-U.S. Pension Plans are primarily
attributable to a U.K. pension plan. This U.K. pension plan’s assets
are invested prudently so that the benefits promised to members
are provided with consideration given to the nature and the duration
of the plan’s liabilities. The current investment strategy was set
following an asset-liability study and advice from the trustee’s
investment advisors. The selected asset allocation strategy is
designed to achieve a higher return than the lowest risk strategy
while maintaining a prudent approach to meeting the plan’s
liabilities.
The expected return on asset assumption was developed
through analysis of historical market returns, historical asset class
volatility and correlations, current market conditions, anticipated
future asset allocations, the funds’ past experience, and
expectations on potential future market returns. The expected
return on asset assumption is determined using the calculated
market-related value for the Qualified Pension Plan and the Other
Pension Plan and the fair value for the Non-U.S. Pension Plans
and Postretirement Health and Life Plans. The expected return on
asset assumption represents a long-term average view of the
performance of the assets in the Qualified Pension Plan, the Non-
U.S. Pension Plans, the Other Pension Plan, and Postretirement
Health and Life Plans, a return that may or may not be achieved
during any one calendar year. The terminated Other U.S. Pension
Plan is invested solely in an annuity contract which is primarily
invested in fixed-income securities structured such that asset
maturities match the duration of the plan’s obligations.
The target allocations for 2014 by asset category for the
Qualified Pension Plan, Non-U.S. Pension Plans, Nonqualified and
Other Pension Plans, and Postretirement Health and Life Plans are
presented in the table below.
2014 Target Allocation
Asset Category
Equity securities
Debt securities
Real estate
Other
Percentage
Qualified
Pension Plan
Non-U.S.
Pension Plans
Nonqualified
and Other
Pension Plans
Postretirement
Health and Life
Plans
30 - 60
40 - 70
0 - 10
0 - 5
10 - 35
40 - 80
0 - 15
0 - 15
0 - 5
95 - 100
0 - 5
0 - 5
20 - 50
50 - 80
0 - 5
0 - 5
Equity securities for the Qualified Pension Plan include common stock of the Corporation in the amounts of $200 million (1.10
percent of total plan assets) and $156 million (0.96 percent of total plan assets) at December 31, 2013 and 2012.
76788ba_financials.indd 245
3/6/14 12:07 PM
Bank of America 2013 245
Fair Value Measurements
For information on fair value measurements, including descriptions of Level 1, 2 and 3 of the fair value hierarchy and the valuation
methods employed by the Corporation, see Note 1 – Summary of Significant Accounting Principles and Note 20 – Fair Value Measurements.
Combined plan investment assets measured at fair value by level and in total at December 31, 2013 and 2012 are summarized in
the Fair Value Measurements table.
Fair Value Measurements
(Dollars in millions)
Cash and short-term investments
Money market and interest-bearing cash
Cash and cash equivalent commingled/mutual funds
Fixed income
U.S. government and government agency securities
Corporate debt securities
Asset-backed securities
Non-U.S. debt securities
Fixed income commingled/mutual funds
Equity
Common and preferred equity securities
Equity commingled/mutual funds
Public real estate investment trusts
Real estate
Private real estate
Real estate commingled/mutual funds
Limited partnerships
Other investments (1)
Total plan investment assets, at fair value
Cash and short-term investments
Money market and interest-bearing cash
Cash and cash equivalent commingled/mutual funds
Fixed income
U.S. government and government agency securities
Corporate debt securities
Asset-backed securities
Non-U.S. debt securities
Fixed income commingled/mutual funds
Equity
Common and preferred equity securities
Equity commingled/mutual funds
Public real estate investment trusts
Real estate
Private real estate
Real estate commingled/mutual funds
Limited partnerships
Other investments (1)
Total plan investment assets, at fair value
Level 1
Level 2
Level 3
Total
December 31, 2013
$
$
2,586
—
— $
223
— $
—
1,590
—
—
547
89
7,463
213
127
—
—
—
—
12,615
1,404
—
1,317
—
—
70
99
7,432
290
236
$
$
$
$
$
2,245
1,233
1,455
502
1,279
—
2,308
—
—
7
117
662
10,031
$
December 31, 2012
12
—
—
6
—
—
—
—
119
462
145
135
879
$
— $
96
— $
—
2,829
1,062
1,109
535
1,432
—
2,316
—
—
—
—
22
10,870
$
—
10
110
543
10,042
$
13
—
—
10
—
—
—
—
110
324
231
129
817
$
2,586
223
3,847
1,233
1,455
1,055
1,368
7,463
2,521
127
119
469
262
797
23,525
1,404
96
4,159
1,062
1,109
615
1,531
7,432
2,606
236
110
334
341
694
21,729
(1) Other investments include interest rate swaps of $435 million and $311 million, participant loans of $87 million and $76 million, commodity and balanced funds of $229 million and $239 million
and other various investments of $46 million and $68 million at December 31, 2013 and 2012.
246 Bank of America 2013
76788ba_financials.indd 246
3/6/14 12:07 PM
The Level 3 Fair Value Measurements table presents a reconciliation of all plan investment assets measured at fair value using
significant unobservable inputs (Level 3) during 2013, 2012 and 2011.
Level 3 Fair Value Measurements
(Dollars in millions)
Fixed income
U.S. government and government agency securities
Non-U.S. debt securities
Real estate
Private real estate
Real estate commingled/mutual funds
Limited partnerships
Other investments
Total
Fixed income
U.S. government and government agency securities
Non-U.S. debt securities
Real estate
Private real estate
Real estate commingled/mutual funds
Limited partnerships
Other investments
Total
Fixed income
U.S. government and government agency securities
Non-U.S. debt securities
Real estate
Private real estate
Real estate commingled/mutual funds
Limited partnerships
Other investments
Total
$
$
$
$
$
$
Actual Return on
Plan Assets Still
Held at the
Reporting Date
Balance
January 1
Purchases
Sales and
Settlements
Transfers into/
(out of) Level 3
Balance
December 31
2013
$
13
10
110
324
231
129
817
13
10
113
249
232
122
739
14
9
110
215
230
94
672
$
$
$
$
$
— $
(2)
4
15
8
(6)
19
$
— $
(1)
(2)
13
8
7
25
$
(1) $
—
—
26
(6)
1
20
$
— $
—
(1) $
(2)
7
123
23
13
166
(2)
—
(89)
(1)
$
(95) $
2012
— $
1
2
62
11
4
80
— $
(1)
(3)
—
(20)
(4)
$
(28) $
2011
— $
3
3
9
13
26
54
$
— $
(2)
—
(1)
(5)
—
(8) $
— $
—
—
—
(28)
—
(28) $
— $
1
—
—
—
—
1
$
— $
—
—
—
—
1
1
$
12
6
119
462
145
135
879
13
10
110
324
231
129
817
13
10
113
249
232
122
739
Projected Benefit Payments
Benefit payments projected to be made from the Qualified Pension Plan, Non-U.S. Pension Plans, Nonqualified and Other Pension Plans,
and Postretirement Health and Life Plans are presented in the table below.
Projected Benefit Payments
Postretirement Health and Life Plans
(Dollars in millions)
Qualified
Pension Plan (1)
Non-U.S.
Pension Plans (2)
Nonqualified
and Other
Pension Plans (2)
Net Payments (3)
$
2014
2015
2016
2017
2018
2019 – 2023
(1) Benefit payments expected to be made from the plan’s assets.
(2) Benefit payments expected to be made from a combination of the plans’ and the Corporation’s assets.
(3) Benefit payments (net of retiree contributions) expected to be made from a combination of the plans’ and the Corporation’s assets.
927
920
910
903
894
4,399
60
61
64
69
71
428
$
$
$
243
245
242
239
235
1,132
142
140
137
132
127
558
Medicare
Subsidy
$
17
17
17
17
17
76
76788ba_financials.indd 247
3/6/14 12:07 PM
Bank of America 2013 247
Defined Contribution Plans
The Corporation maintains qualified defined contribution
retirement plans and nonqualified defined contribution retirement
plans. As a result of the Merrill Lynch acquisition, the Corporation
also maintains the Merrill Lynch 401(k) Savings & Investment Plan,
which is closed to new participants, with certain exceptions. The
Corporation contributed $1.1 billion, $886 million and $723
million in 2013, 2012 and 2011, respectively, to the qualified
defined contribution plans. In connection with the 2012 redesign
of the Corporation’s retirement plans, an additional contribution
is being made annually to certain of these plans. The expense in
2013 and 2012 related to the additional annual contribution was
$410 million and $174 million. At December 31, 2013 and 2012,
235 million shares of the Corporation’s common stock were held
by these plans. Payments to the plans for dividends on common
stock were $10 million, $10 million and $9 million in 2013, 2012
and 2011, respectively.
Certain non-U.S. employees are covered under defined
contribution pension plans that are separately administered in
accordance with local laws.
NOTE 18 Stock-based Compensation Plans
The Corporation administers a number of equity compensation
plans, including the Key Associate Stock Plan and the Merrill Lynch
Employee Stock Compensation Plan. Descriptions of the
significant features of the equity compensation plans are below.
Under these plans, the Corporation grants stock-based awards,
including stock options, restricted stock and restricted stock units
(RSUs). Grants in 2013 include RSUs which generally vest in three
equal annual installments beginning one year from the grant date,
and awards which will vest subject to the attainment of specified
performance goals.
For most awards, expense is generally recognized ratably over
the vesting period net of estimated forfeitures, unless the
employee meets certain retirement eligibility criteria. For awards
to employees that meet retirement eligibility criteria, the
Corporation records the expense upon grant. For employees that
become retirement eligible during the vesting period, the
Corporation recognizes expense from the grant date to the date
on which the employee becomes retirement eligible, net of
estimated forfeitures. The compensation cost for the stock-based
plans was $2.3 billion, $2.3 billion and $2.6 billion in 2013, 2012
and 2011, respectively. The related income tax benefit was $842
million, $839 million and $969 million for 2013, 2012 and 2011,
respectively.
Key Associate Stock Plan
The Key Associate Stock Plan became effective January 1, 2003.
It provides for different types of awards, including stock options,
restricted stock and RSUs. As of December 31, 2013, the
shareholders had authorized approximately 1.1 billion shares for
grant under this plan. Additionally, any shares covered by awards
under certain legacy plans that cancel, terminate, expire, lapse or
settle in cash after a specified date may be re-granted under the
Key Associate Stock Plan.
During 2013, the Corporation issued 183 million RSUs to
certain employees under the Key Associate Stock Plan. Certain
awards are earned based on the achievement of specified
performance criteria. RSUs may be settled in cash or in shares of
common stock depending on the terms of the applicable award.
In 2013, two million of these RSUs were authorized to be settled
in shares of common stock with the remainder in cash. Certain
awards contain clawback provisions which permit the Corporation
to cancel all or a portion of the award under specified
circumstances. The compensation cost for cash-settled awards
and awards subject to certain clawback provisions, which in the
aggregate represent substantially all of the awards in 2013, is
accrued over the vesting period and adjusted to fair value based
upon changes in the share price of the Corporation’s common
stock.
From time to time, the Corporation enters into equity total return
swaps to hedge a portion of RSUs granted to certain employees
as part of their compensation in prior periods to minimize the
change in the expense to the Corporation driven by fluctuations
in the fair value of the RSUs. Certain of these derivatives are
designated as cash flow hedges of unrecognized unvested awards
with the changes in fair value of the hedge recorded in accumulated
OCI and reclassified into earnings in the same period as the RSUs
affect earnings. The remaining derivatives are used to hedge the
price risk of cash-settled awards with changes in fair value recorded
in personnel expense.
At December 31, 2013, approximately 108 million options were
outstanding under this plan. There were no options granted under
this plan during 2013, 2012 or 2011.
Other Stock Plans
The Corporation assumed the Merrill Lynch Employee Stock
Compensation Plan with the acquisition of Merrill Lynch.
Approximately eight million RSUs were granted in 2011 which
generally vest in three equal annual installments beginning one
year from the grant date. There were no shares granted under this
plan during 2013 or 2012. At December 31, 2013, there were
approximately two million unvested shares outstanding. The
Corporation also assumed, with the acquisition of Merrill Lynch,
the obligations of outstanding awards granted under the Merrill
Lynch Financial Advisor Capital Accumulation Award Plan (FACAAP).
The FACAAP is no longer an active plan and no awards were granted
in 2013, 2012 or 2011. Awards still outstanding which were
granted in 2003 and thereafter, are generally payable eight years
from the grant date in a fixed number of the Corporation’s common
shares. At December 31, 2013, there were seven million shares
outstanding under this plan.
Restricted Stock/Units
The table below presents the status at December 31, 2013 of the
share-settled restricted stock/units and changes during 2013.
Stock-settled Restricted Stock/Units
Outstanding at January 1, 2013
Granted
Vested
Canceled
Outstanding at December 31, 2013
Shares/Units
147,570,397
2,405,568
(75,422,919)
(3,350,295)
71,202,751
Weighted-
average Grant
Date Fair Value
$
$
13.18
11.80
14.24
12.22
12.05
248 Bank of America 2013
76788ba_financials.indd 248
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The table below presents the status at December 31, 2013 of
the cash-settled RSUs granted under the Key Associate Stock Plan
and changes during 2013.
NOTE 19 Income Taxes
The components of income tax expense (benefit) for 2013, 2012
and 2011 are presented in the table below.
Cash-settled Restricted Units
Income Tax Expense (Benefit)
(Dollars in millions)
2013
2012
2011
Current income tax expense (benefit)
U.S. federal
U.S. state and local
Non-U.S.
Total current expense
$
Deferred income tax expense (benefit)
U.S. federal
U.S. state and local
Non-U.S.
Total deferred expense (benefit)
Total income tax expense (benefit)
$
180
786
513
1,479
2,056
(94)
1,300
3,262
4,741
$
$
$
458
592
569
1,619
(733)
393
613
273
(3,433)
(55)
753
(2,735)
(1,116) $
(2,673)
(584)
1,308
(1,949)
(1,676)
foreign currency
Total income tax expense (benefit) does not reflect the deferred
tax effects of unrealized gains and losses on AFS debt and
translation
marketable equity securities,
adjustments, derivatives and employee benefit plan adjustments
that are included in accumulated OCI. These tax effects resulted
in a benefit of $2.7 billion and $2.9 billion in 2013 and 2011,
respectively, and an expense of $1.3 billion in 2012 recorded in
accumulated OCI. In addition, total income tax expense (benefit)
does not reflect tax effects associated with the Corporation’s
employee stock plans which decreased common stock and
additional paid-in capital $128 million and $277 million in 2013
and 2012, and increased common stock and additional paid-in
capital $19 million in 2011.
Outstanding at January 1, 2013
Granted
Vested
Canceled
Outstanding at December 31, 2013
Units
329,556,468
181,166,560
(137,125,114)
(13,669,045)
359,928,869
At December 31, 2013, there was an estimated $1.9 billion of
total unrecognized compensation cost related to certain share-
based compensation awards that is expected to be recognized
over a period of up to four years, with a weighted-average period
of 1.3 years. The total fair value of restricted stock vested in 2013,
2012 and 2011 was $1.0 billion, $2.9 billion and $1.7 billion,
respectively. In 2013, 2012 and 2011 the amount of cash paid
to settle equity-based awards for all equity compensation plans
was $1.4 billion, $779 million and $489 million, respectively.
Stock Options
The table below presents the status of all option plans at
December 31, 2013 and changes during 2013. Outstanding
options at December 31, 2013 include 108 million options under
the Key Associate Stock Plan and 14 million options to employees
of predecessor company plans assumed in mergers.
Stock Options
Outstanding at January 1, 2013
Forfeited
Outstanding at December 31, 2013
Options vested and exercisable at
December 31, 2013
Weighted-
average
Exercise Price
Options
$
154,923,623
(32,754,932)
122,168,691
122,168,691
46.22
38.73
48.23
48.23
At December 31, 2013, there was no aggregate intrinsic value
of options outstanding, vested and exercisable. The weighted-
average remaining contractual term of options outstanding, vested
and exercisable was 1.9 years at December 31, 2013. These
remaining contractual terms are the same because options have
not been granted since 2008 and they generally vest over three
years.
76788ba_financials.indd 249
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Bank of America 2013 249
Income tax expense (benefit) for 2013, 2012 and 2011 varied from the amount computed by applying the statutory income tax rate
to income (loss) before income taxes. A reconciliation of the expected U.S. federal income tax expense is calculated by applying the
federal statutory tax rate of 35 percent to the Corporation’s actual income tax expense (benefit) and the effective tax rates for 2013,
2012 and 2011 are presented in the table below.
Reconciliation of Income Tax Expense (Benefit)
(Dollars in millions)
Expected U.S. federal income tax expense (benefit)
Increase (decrease) in taxes resulting from:
State tax expense (benefit), net of federal effect
Non-U.S. tax differential (1)
Affordable housing credits/other credits
Tax-exempt income, including dividends
Changes in prior period UTBs, including interest
Non-U.S. statutory rate reductions
Nondeductible expenses
Goodwill – impairment and other goodwill impacts
Change in federal and non-U.S. valuation allowances
Leveraged lease tax differential
Subsidiary sales and liquidations
Other
Total income tax expense (benefit)
2013
2012
2011
Amount
Percent
Amount
Percent
Amount
Percent
$
5,660
35.0 % $
1,075
35.0 % $
(81)
450
(940)
(863)
(524)
(255)
1,133
52
52
26
26
—
(76)
4,741
$
(0.001)%
2.8
(5.8)
(5.3)
(3.2)
(1.6)
7.0
0.3
0.3
0.2
0.2
—
(0.6)
29.3 % $
349
(1,968)
(783)
(576)
(198)
788
231
—
41
83
—
(158)
(1,116)
(0.001)%
11.4
(64.1)
(25.5)
(18.8)
(6.4)
25.7
7.5
—
1.3
2.7
—
(5.1)
(36.3)% $
(124)
(383)
(800)
(614)
(239)
860
119
1,420
(1,102)
121
(823)
(30)
(1,676)
35.0 %
(0.001)%
n/m
(1) Includes in 2012, $1.7 billion income tax benefit attributable to the excess of foreign tax credits recognized in the U.S. upon repatriation of the earnings of certain non-U.S. subsidiaries over the
related U.S. tax liability.
n/m = not meaningful
The reconciliation of the beginning unrecognized tax benefits (UTB) balance to the ending balance is presented in the table below.
Reconciliation of the Change in Unrecognized Tax Benefits
(Dollars in millions)
Balance, January 1
Increases related to positions taken during the current year
Increases related to positions taken during prior years (1)
Decreases related to positions taken during prior years (1)
Settlements
Expiration of statute of limitations
Balance, December 31
2013
2012
2011
$
$
3,677
98
254
(508)
(448)
(5)
3,068
$
$
4,203
352
142
(711)
(205)
(104)
3,677
$
$
5,169
219
879
(1,669)
(277)
(118)
4,203
(1) The sum per year of positions taken during prior years differs from the $255 million, $198 million and $239 million in the Reconciliation of Income Tax Expense (Benefit) table due to temporary
items and jurisdictional offsets, as well as the inclusion of interest in the Reconciliation of Income Tax Expense (Benefit) table.
At December 31, 2013, 2012 and 2011, the balance of the
Corporation’s UTBs which would, if recognized, affect the
Corporation’s effective tax rate was $2.5 billion, $3.1 billion and
$3.3 billion, respectively. Included in the UTB balance are some
items the recognition of which would not affect the effective tax
rate, such as the tax effect of certain temporary differences, the
portion of gross state UTBs that would be offset by the tax benefit
of the associated federal deduction and the portion of gross non-
U.S. UTBs that would be offset by tax reductions in other
jurisdictions.
The Corporation files income tax returns in more than 100 state
and non-U.S. jurisdictions each year. The IRS and other tax
authorities in countries and states in which the Corporation has
significant business operations examine tax returns periodically
(continuously in some jurisdictions). The Tax Examination Status
table summarizes the status of significant examinations (U.S.
federal unless otherwise noted) for the Corporation and various
subsidiaries as of December 31, 2013.
250 Bank of America 2013
Tax Examination Status
Years under
Examination
Status at
December 31
2013
Bank of America Corporation – U.S.
Bank of America Corporation – U.S.
Bank of America Corporation – New York (1)
Merrill Lynch – U.S.
Various – U.K.
(1) All tax years subsequent to the years shown remain open to examination.
2005 – 2009
2010 – 2011
2004 – 2008
2004 – 2008
2012
See below
Field examination
Field examination
See below
Field examination
During 2013, the Corporation and the IRS arrived at final
resolution of the Bank of America Corporation 2001 through 2004
tax years and continued to make progress toward resolving all
federal income tax examinations through 2009, including Merrill
Lynch. While subject to final agreement, including review by the
Joint Committee on Taxation of the U.S. Congress for certain years,
the Corporation believes that these examinations may be
concluded during 2014.
76788ba_financials.indd 250
3/6/14 12:07 PM
Considering all examinations, it is reasonably possible that the
UTB balance may decrease by as much as $2.1 billion during the
next 12 months, since resolved items will be removed from the
balance whether their resolution results in payment or recognition.
If such decrease were to occur, it likely would primarily result from
outcomes consistent with management expectations.
During 2013 and 2012, the Corporation recognized $127
million and $99 million of expense and, in 2011, a benefit of $168
million for interest and penalties, net-of-tax, in income tax expense
(benefit). At December 31, 2013 and 2012, the Corporation’s
accrual for interest and penalties that related to income taxes, net
of taxes and remittances, was $888 million and $775 million.
Significant components of the Corporation’s net deferred tax
assets and liabilities at December 31, 2013 and 2012 are
presented in the table below.
Deferred Tax Assets and Liabilities
(Dollars in millions)
Deferred tax assets
Net operating loss carryforwards
Tax credit carryforwards
Accrued expenses
Allowance for credit losses
Security, loan and debt valuations
Employee compensation and retirement benefits
State income taxes
Available-for-sale securities
Other
Gross deferred tax assets
Valuation allowance
Total deferred tax assets, net of valuation
allowance
Deferred tax liabilities
Equipment lease financing
Long-term borrowings
Mortgage servicing rights
Intangibles
Fee income
Available-for-sale securities
Other
Gross deferred tax liabilities
Net deferred tax assets
December 31
2013
2012
10,967
9,689
6,749
6,100
4,264
2,729
2,643
1,918
722
45,781
(1,940)
$ 13,863
9,529
8,099
8,463
2,712
4,612
2,766
—
725
50,769
(2,211)
43,841
48,558
3,106
3,033
1,547
1,529
798
—
1,472
11,485
32,356
3,371
3,215
1,986
1,708
901
2,877
1,462
15,520
$ 33,038
$
$
The table below summarizes the deferred tax assets and
related valuation allowances recognized for the net operating loss
(NOL) and tax credit carryforwards at December 31, 2013.
Net Operating Loss and Tax Credit Carryforwards
(Dollars in millions)
Deferred
Tax Asset
Valuation
Allowance
Net
Deferred
Tax Asset
First Year
Expiring
Net operating losses – U.S. $ 3,061
Net operating losses – U.K.
7,417
Net operating losses –
$
— $
—
3,061
7,417
After 2027
None (1)
other non-U.S.
489
(366)
123
Various
Net operating losses – U.S.
states (2)
2,039
(1,025)
1,014
Various
General business credits
Foreign tax credits
(1) The U.K. net operating losses may be carried forward indefinitely.
(2) The net operating losses and related valuation allowances for U.S. states before considering
After 2027
After 2017
4,034
5,655
—
(271)
4,034
5,384
the benefit of federal deductions were $3.1 billion and $1.6 billion.
Management concluded that no valuation allowance was
necessary to reduce the U.K. NOL carryforwards and U.S. NOL and
general business credit carryforwards since estimated future
taxable income will be sufficient to utilize these assets prior to
their expiration. The majority of the Corporation’s U.K. net deferred
tax assets, which consist primarily of NOLs, are expected to be
realized by certain subsidiaries over an extended number of years.
Management’s conclusion is supported by recent financial results
and forecasts, the reorganization of certain business activities and
the indefinite period to carry forward NOLs. However, significant
changes to those estimates, such as changes that would be
caused by a substantial and prolonged worsening of the condition
of Europe’s capital markets, could lead management to reassess
its U.K. valuation allowance conclusions.
At December 31, 2013, U.S. federal income taxes had not been
provided on $17.0 billion of undistributed earnings of non-U.S.
subsidiaries that management has determined have been
reinvested for an indefinite period of time. If the Corporation were
to record a deferred tax liability associated with these
undistributed earnings, the amount would be approximately $4.3
billion at December 31, 2013.
76788ba_financials.indd 251
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Bank of America 2013 251
NOTE 20 Fair Value Measurements
Under applicable accounting guidance, fair value is defined as the
exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement
date. The Corporation determines the fair values of its financial
instruments based on the fair value hierarchy established under
applicable accounting guidance which requires an entity to
maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. There are three
levels of inputs used to measure fair value. The Corporation
conducts a review of its fair value hierarchy classifications on a
quarterly basis. Transfers into or out of fair value hierarchy
classifications are made if the significant inputs used in the
financial models measuring the fair values of the assets and
liabilities became unobservable or observable, respectively, in the
current marketplace. These transfers are considered to be
effective as of the beginning of the quarter in which they occur.
For more information regarding the fair value hierarchy and how
the Corporation measures fair value, see Note 1 – Summary of
Significant Accounting Principles. The Corporation accounts for
certain financial instruments under the fair value option. For
additional information, see Note 21 – Fair Value Option.
Valuation Processes and Techniques
The Corporation has various processes and controls in place to
ensure that fair value is reasonably estimated. A model validation
policy governs the use and control of valuation models used to
estimate fair value. This policy requires review and approval of
models by personnel who are independent of the front office, and
periodic reassessments of models to ensure that they are
continuing to perform as designed. In addition, detailed reviews
of trading gains and losses are conducted on a daily basis by
personnel who are independent of the front office. A price
verification group, which is also independent of the front office,
utilizes available market information including executed trades,
market prices and market-observable valuation model inputs to
ensure that fair values are reasonably estimated. The Corporation
performs due diligence procedures over third-party pricing service
providers in order to support their use in the valuation process.
Where market information is not available to support internal
valuations, independent reviews of the valuations are performed
and any material exposures are escalated through a management
review process.
While the Corporation believes its valuation methods are
appropriate and consistent with other market participants, the use
of different methodologies or assumptions to determine the fair
value of certain financial instruments could result in a different
estimate of fair value at the reporting date.
During 2013, 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
252 Bank of America 2013
can be corroborated by observable market data for substantially
the full term of the assets or liabilities. Financial instruments are
considered Level 3 when their values are determined using pricing
models, discounted cash
flow methodologies or similar
techniques, and at least one significant model assumption or input
is unobservable and when determination of the fair value requires
significant management judgment or estimation.
Trading Account Assets and Liabilities and Debt Securities
The fair values of trading account assets and liabilities are primarily
based on actively traded markets where prices are based on either
direct market quotes or observed transactions. The fair values of
debt securities are generally based on quoted market prices or
market prices for similar assets. Liquidity is a significant factor in
the determination of the fair values of trading account assets and
liabilities and debt securities. Market price quotes may not be
readily available for some positions, or positions within a market
sector where trading activity has slowed significantly or ceased.
Some of these instruments are valued using a discounted cash
flow model, which estimates the fair value of the securities using
internal credit risk, interest rate and prepayment risk models that
incorporate management’s best estimate of current key
assumptions such as default rates, loss severity and prepayment
rates. Principal and interest cash flows are discounted using an
observable discount rate for similar instruments with adjustments
that management believes a market participant would consider in
determining fair value for the specific security. Other instruments
are valued using a net asset value approach which considers the
value of the underlying securities. Underlying assets are valued
using external pricing services, where available, or matrix pricing
based on the vintages and ratings. Situations of illiquidity generally
are triggered by the market’s perception of credit uncertainty
regarding a single company or a specific market sector. In these
instances, fair value is determined based on limited available
market information and other factors, principally from reviewing
the issuer’s financial statements and changes in credit ratings
made by one or more rating agencies.
Derivative Assets and Liabilities
The fair values of derivative assets and liabilities traded in the
OTC market are determined using quantitative models that utilize
multiple market inputs including interest rates, prices and indices
to generate continuous yield or pricing curves and volatility factors
to value the position. The majority of market inputs are actively
quoted and can be validated through external sources, including
brokers, market transactions and third-party pricing services.
When third-party pricing services are used, the methods and
assumptions are reviewed by the Corporation. Estimation risk is
greater for derivative asset and liability positions that are either
option-based or have longer maturity dates where observable
market inputs are less readily available, or are unobservable, in
which case, quantitative-based extrapolations of rate, price or
index scenarios are used in determining fair values. The fair values
of derivative assets and liabilities include adjustments for market
liquidity, counterparty credit quality and other instrument-specific
the Corporation
factors, where appropriate.
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
In addition,
76788ba_financials.indd 252
3/6/14 12:07 PM
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 23 – Mortgage Servicing
Rights.
Loans Held-for-sale
The fair values of LHFS are based on quoted market prices, where
available, or are determined by discounting estimated cash flows
using interest rates approximating the Corporation’s current
origination rates for similar loans adjusted to reflect the inherent
credit risk.
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 value 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
rates
discounting estimated cash
approximating the Corporation’s current origination rates for
similar loans adjusted to reflect the inherent credit risk.
flows using
interest
76788ba_financials.indd 253
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Bank of America 2013 253
Recurring Fair Value
Assets and liabilities carried at fair value on a recurring basis at December 31, 2013 and 2012, including financial instruments which
the Corporation accounts for under the fair value option, are summarized in the following tables.
(Dollars in millions)
Assets
Federal funds sold and securities borrowed or purchased under
agreements to resell
Trading account assets:
U.S. government and agency securities (3)
Corporate securities, trading loans and other
Equity securities
Non-U.S. sovereign debt
Mortgage trading loans and ABS
Total trading account assets
Derivative assets (4)
AFS debt securities:
U.S. Treasury and agency securities
Mortgage-backed securities:
Agency
Agency-collateralized mortgage obligations
Non-agency residential
Commercial
Non-U.S. securities
Corporate/Agency bonds
Other taxable securities
Tax-exempt securities
Total AFS debt securities
Other debt securities carried at fair value:
U.S. Treasury and agency securities
Mortgage-backed securities:
Agency
Agency-collateralized mortgage obligations
Commercial
Non-U.S. securities
Total other debt securities carried at fair value
Loans and leases
Mortgage servicing rights
Loans held-for-sale
Other assets
Total assets
Liabilities
Interest-bearing deposits in U.S. offices
Federal funds purchased and securities loaned or sold under
agreements to repurchase
Trading account liabilities:
U.S. government and agency securities
Equity securities
Non-U.S. sovereign debt
Corporate securities and other
Total trading account liabilities
Derivative liabilities (4)
Short-term borrowings
Accrued expenses and other liabilities
Long-term debt
Total liabilities
$
$
$
Fair Value Measurements
December 31, 2013
Level 1 (1)
Level 2 (1)
Level 3
Netting
Adjustments (2)
Assets/Liabilities
at Fair Value
$
— $
75,614
$
— $
— $
75,614
34,222
1,147
41,324
24,357
—
101,050
2,374
6,591
—
—
—
—
3,698
—
20
—
10,309
4,062
—
—
—
7,457
11,519
—
—
—
14,474
139,726
$
14,625
27,746
22,741
12,399
13,388
90,899
910,602
2,363
164,935
22,492
6,239
2,480
3,415
873
12,963
5,122
220,882
—
16,500
218
749
3,858
21,325
6,985
—
5,727
1,912
1,333,946
— $
1,899
—
33,684
26,915
23,874
20,755
518
72,062
1,968
—
10,130
—
84,160
$
348
3,711
1,387
5,926
11,372
897,107
1,520
1,093
45,045
991,720
$
$
$
—
3,559
386
468
4,631
9,044
7,277
—
—
—
—
—
107
—
3,847
806
4,760
—
—
—
—
—
—
3,057
5,042
929
1,669
31,778
—
—
—
—
—
—
(872,758)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
(872,758) $
48,847
32,452
64,451
37,224
18,019
200,993
47,495
8,954
164,935
22,492
6,239
2,480
7,220
873
16,830
5,928
235,951
4,062
16,500
218
749
11,315
32,844
10,042
5,042
6,656
18,055
632,692
— $
— $
1,899
—
—
—
—
35
35
7,301
—
10
1,990
9,336
—
33,684
—
—
—
—
—
(868,969)
—
—
—
$
(868,969) $
27,263
27,585
22,142
6,479
83,469
37,407
1,520
11,233
47,035
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 $17.2 billion of government-sponsored enterprise obligations.
(4) For further disaggregation of derivative assets and liabilities, see Note 2 – Derivatives.
254 Bank of America 2013
76788ba_financials.indd 254
3/6/14 12:07 PM
(Dollars in millions)
Assets
Federal funds sold and securities borrowed or purchased under
agreements to resell
Trading account assets:
U.S. government and agency securities (3)
Corporate securities, trading loans and other
Equity securities
Non-U.S. sovereign debt
Mortgage trading loans and ABS
Total trading account assets
Derivative assets (4)
AFS debt securities:
U.S. Treasury and agency securities
Mortgage-backed securities:
Agency
Agency-collateralized mortgage obligations
Non-agency residential
Non-agency commercial
Non-U.S. securities
Corporate/Agency bonds
Other taxable securities
Tax-exempt securities
Total AFS debt securities
Other debt securities carried at fair value:
U.S. Treasury and agency securities
Mortgage-backed securities:
Agency
Agency-collateralized mortgage obligations
Non-U.S. securities
Total other debt securities carried at fair value
Loans and leases
Mortgage servicing rights
Loans held-for-sale
Other assets
Total assets
Liabilities
Interest-bearing deposits in U.S. offices
Federal funds purchased and securities loaned or sold under
agreements to repurchase
Trading account liabilities:
U.S. government and agency securities
Equity securities
Non-U.S. sovereign debt
Corporate securities and other
Total trading account liabilities
Derivative liabilities (4)
Short-term borrowings
Accrued expenses and other liabilities
Long-term debt
Total liabilities
$
$
$
Fair Value Measurements
December 31, 2012
Level 1 (1)
Level 2 (1)
Level 3
Netting
Adjustments (2)
Assets/Liabilities
at Fair Value
$
— $
98,670
$
— $
— $
98,670
57,655
1,292
28,144
29,254
—
116,345
2,997
21,514
—
—
—
—
2,637
—
20
—
24,171
491
—
—
9,151
9,642
—
—
—
18,535
171,690
$
29,319
32,882
14,626
13,139
11,905
101,871
1,372,398
2,958
188,149
37,538
9,494
3,914
2,981
1,358
8,180
3,072
257,644
—
13,073
929
300
14,302
6,715
—
8,926
4,826
1,865,352
— $
2,262
—
42,639
22,351
19,852
18,875
487
61,565
2,859
—
15,457
—
79,881
$
1,079
2,640
1,369
6,870
11,958
1,355,309
4,074
1,122
46,860
1,464,224
$
$
$
—
3,726
545
353
4,935
9,559
8,073
—
—
—
—
10
—
92
3,928
1,061
5,091
—
—
—
—
—
2,287
5,716
2,733
3,129
36,588
—
—
—
—
—
—
(1,329,971)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
(1,329,971) $
86,974
37,900
43,315
42,746
16,840
227,775
53,497
24,472
188,149
37,538
9,494
3,924
5,618
1,450
12,128
4,133
286,906
491
13,073
929
9,451
23,944
9,002
5,716
11,659
26,490
743,659
— $
— $
2,262
—
—
—
—
64
64
6,605
—
15
2,301
8,985
—
42,639
—
—
—
—
—
(1,318,757)
—
—
—
$
(1,318,757) $
23,430
22,492
20,244
7,421
73,587
46,016
4,074
16,594
49,161
234,333
(1) During 2012, $2.0 billion and $350 million of assets and liabilities were transferred from Level 1 to Level 2, and $785 million and $40 million of assets and liabilities were transferred from Level
2 to Level 1. Of the asset transfers from Level 1 to Level 2, $940 million was due to a restriction that became effective for a private equity investment during 2012, while $535 million of the transfers
from Level 2 to Level 1 was due to the lapse of this restriction during 2012. The remaining transfers were the result of additional information associated with certain equities, derivative contracts
and private equity investments.
(2) Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties.
(3)
Includes $30.6 billion of government-sponsored enterprise obligations.
(4) For further disaggregation of derivative assets and liabilities, see Note 2 – Derivatives.
76788ba_financials.indd 255
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Bank of America 2013 255
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 2013, 2012 and 2011, including net realized and unrealized gains (losses) included in earnings
and accumulated OCI.
Level 3 – Fair Value Measurements (1)
Balance
January 1
2013
Gains
(Losses)
in Earnings
Gains
(Losses)
in OCI
Purchases
Sales
Issuances
Settlements
Gross
Transfers
into
Level 3
Gross
Transfers
out of
Level 3
Balance
December 31
2013
2013
Gross
(Dollars in millions)
Trading account assets:
Corporate securities, trading loans and
other
$ 3,726 $
242 $
— $
3,848 $ (3,110) $
59 $
(651) $
890 $
(1,445) $
Equity securities
Non-U.S. sovereign debt
Mortgage trading loans and ABS
Total trading account assets
Net derivative assets (2)
AFS debt securities:
Commercial MBS
Non-U.S. securities
Corporate/Agency bonds
Other taxable securities
Tax-exempt securities
Total AFS debt securities
Loans and leases (3, 4)
Mortgage servicing rights (4)
Loans held-for-sale (3)
Other assets (5)
Trading account liabilities – Corporate
securities and other
545
353
4,935
9,559
1,468
10
—
92
3,928
1,061
5,091
2,287
5,716
2,733
3,129
74
50
53
419
(297)
—
5
—
9
3
17
98
1,941
62
(288)
(64)
10
—
—
—
—
—
—
2
4
15
19
40
—
—
—
—
—
96
122
2,514
6,580
824
—
1
—
1,055
—
1,056
310
—
8
46
43
Accrued expenses and other liabilities (3)
Long-term debt (3)
(1) Assets (liabilities). For assets, increase (decrease) to Level 3 and for liabilities, (increase) decrease to Level 3.
(2) Net derivatives include derivative assets of $7.3 billion and derivative liabilities of $7.3 billion.
(3) Amounts represent instruments that are accounted for under the fair value option.
(4)
(15)
(2,301)
—
358
30
13
—
—
Issuances represent loan originations and mortgage servicing rights retained following securitizations or whole-loan sales.
(175)
(18)
(1,993)
(5,296)
(1,274)
—
(1)
—
—
—
(1)
(128)
(2,044)
(402)
(383)
—
—
—
59
—
—
—
—
—
—
—
1,252
472
4
—
(100)
(36)
(868)
(1,655)
(1,362)
(10)
—
—
(1,155)
(109)
(1,274)
(757)
(1,043)
(1,507)
(1,019)
70
2
20
982
(10)
—
100
—
—
—
100
19
—
34
239
(124)
(5)
(30)
(1,604)
627
—
—
(96)
(5)
(168)
(269)
(24)
—
(3)
(55)
3,559
386
468
4,631
9,044
(24)
—
107
—
3,847
806
4,760
3,057
5,042
929
1,669
(54)
—
(4)
(5)
(751)
(172)
—
724
258
(9)
(1)
(1,331)
44
3
1,189
(35)
(10)
(1,990)
(5) Other assets is primarily comprised of private equity investments and certain long-term fixed-rate margin loans that are accounted for under the fair value option.
During 2013, the transfers into Level 3 included $982 million
of trading account assets, $100 million of AFS debt securities,
$239 million of other assets and $1.3 billion of long-term debt.
Transfers into Level 3 for trading account assets were primarily
the result of decreased third-party prices available for certain
corporate loans and securities. Transfers into Level 3 for AFS debt
securities were primarily due to decreased price observability.
Transfers into Level 3 for other assets were primarily due to a lack
of independent pricing data for certain receivables. Transfers into
Level 3 for long-term debt were primarily due to changes in the
impact of unobservable inputs on the value of certain structured
liabilities. Transfers occur on a regular basis for these long-term
debt instruments due to changes in the impact of unobservable
inputs on the value of the embedded derivative in relation to the
instrument as a whole.
During 2013, the transfers out of Level 3 included $1.6 billion
of trading account assets, $627 million of net derivative assets,
$269 million for AFS debt securities and $1.2 billion of long-term
debt. Transfers out of Level 3 for trading account assets were
primarily the result of increased market liquidity and third-party
prices available for certain corporate loans and securities.
Transfers out of Level 3 for net derivative assets were primarily
due to increased price observability (i.e., market comparables for
the referenced instruments) for certain options. Transfers out of
Level 3 for AFS debt securities were primarily due to increased
market liquidity. Transfers out of Level 3 for long-term debt were
primarily due to changes in the impact of unobservable inputs on
the value of certain structured liabilities.
256 Bank of America 2013
76788ba_financials.indd 256
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Level 3 – Fair Value Measurements (1)
Balance
January 1
2012
Gains
(Losses)
in Earnings
Gains
(Losses)
in OCI
Purchases
Sales
Issuances
Settlements
Gross
Transfers
into
Level 3
Gross
Transfers
out of
Level 3
Balance
December 31
2012
2012
Gross
(Dollars in millions)
Trading account assets:
Corporate securities, trading loans and
other (2)
$ 6,880 $
195 $
— $ 2,798 $ (4,556) $
— $
(1,077) $
436 $
(950) $
Equity securities
Non-U.S. sovereign debt
Mortgage trading loans and ABS (2)
Total trading account assets
Net derivative assets (3)
AFS debt securities:
Mortgage-backed securities:
Agency
Non-agency residential
Non-agency commercial
Corporate/Agency bonds
Other taxable securities
Tax-exempt securities
Total AFS debt securities
Loans and leases (4, 5)
Mortgage servicing rights (5)
Loans held-for-sale (4)
Other assets (6)
Trading account liabilities – Corporate
securities and other
544
342
3,689
11,455
5,866
37
860
40
162
4,265
2,648
8,012
2,744
7,378
3,387
4,235
31
8
215
449
(221)
—
(69)
—
(2)
23
61
13
334
(430)
352
(54)
(114)
4
—
—
—
—
—
—
19
—
—
26
20
65
—
—
—
—
—
201
388
2,574
5,961
893
—
—
—
(2)
3,196
—
3,194
564
—
794
109
(271)
(359)
(1,536)
(6,722)
(1,012)
—
(306)
(24)
—
(28)
(133)
(491)
(1,520)
(122)
(834)
(1,039)
—
—
—
—
—
—
—
—
—
—
—
—
—
374
—
270
27
(5)
(678)
(1,733)
(3,328)
(4)
(2)
(6)
(39)
(3,345)
(1,535)
(4,931)
(274)
(1,484)
(414)
(381)
90
—
844
1,370
(269)
(77)
(21)
(173)
(1,221)
(461)
—
—
—
—
—
—
—
450
—
80
—
(33)
(502)
—
(27)
(209)
—
(771)
(11)
—
(632)
(11)
3,726
545
353
4,935
9,559
1,468
—
—
10
92
3,928
1,061
5,091
2,287
5,716
2,733
3,129
116
(136)
—
80
(68)
54
(64)
Short-term borrowings (4)
Accrued expenses and other liabilities (4)
Long-term debt (4)
(1) Assets (liabilities). For assets, increase (decrease) to Level 3 and for liabilities, (increase) decrease to Level 3.
(2) During 2012, approximately $900 million was reclassified from Trading account assets – Corporate securities, trading loans and other to Trading account assets – Mortgage trading loans and ABS.
In the table above, this reclassification is presented as a sale of Trading account assets – Corporate securities, trading loans and other and as a purchase of Trading account assets – Mortgage
trading loans and ABS.
—
(14)
(2,943)
—
—
(2,040)
—
(15)
(2,301)
—
4
1,752
232
—
1,239
—
(4)
(307)
(232)
(9)
(259)
—
8
290
—
—
(33)
—
—
—
(3) Net derivatives include derivative assets of $8.1 billion and derivative liabilities of $6.6 billion.
(4) Amounts represent instruments that are accounted for under the fair value option.
(5)
Issuances represent loan originations and mortgage servicing rights retained following securitizations or whole-loan sales.
(6) Other assets is primarily comprised of net monoline exposure to a single counterparty and private equity investments.
During 2012, the transfers into Level 3 included $1.4 billion of
trading account assets, $269 million of net derivative assets,
$450 million of loans and leases, and $2.0 billion of long-term
debt. Transfers into Level 3 for trading account assets were
primarily the result of decreased market liquidity for certain
corporate loans and updated information related to certain CLOs.
Transfers into Level 3 for net derivative assets primarily related to
decreased price observability for certain long-dated equity
derivative liabilities due to a lack of independent pricing. Transfers
into Level 3 for loans and leases were due to updated information
related to certain commercial loans. Transfers into Level 3 for long-
term debt were primarily due to changes in the impact of
unobservable inputs on the value of certain structured liabilities.
Transfers occur on a regular basis for these long-term debt
instruments due to changes in the impact of unobservable inputs
on the value of the embedded derivative in relation to the
instrument as a whole.
During 2012, the transfers out of Level 3 included $1.2 billion
of trading account assets, $461 million of net derivative assets,
$771 million of AFS debt securities, $632 million of LHFS and
$1.8 billion of long-term debt. Transfers out of Level 3 for trading
account assets primarily related to increased market liquidity for
certain corporate and commercial real estate loans. Transfers out
of Level 3 for net derivative assets primarily related to increased
price observability (i.e., market comparables for the referenced
instruments) for certain total return swaps and foreign exchange
swaps. Transfers out of Level 3 for AFS debt securities primarily
related to increased price observability for certain non-agency
RMBS and ABS. Transfers out of Level 3 for LHFS primarily related
to increased observable inputs, primarily liquid comparables.
Transfers out of Level 3 for long-term debt were primarily due to
changes in the impact of unobservable inputs on the value of
certain structured liabilities.
76788ba_financials.indd 257
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Bank of America 2013 257
Level 3 – Fair Value Measurements (1)
Balance
January 1
2011
Consolidation
of VIEs
Gains
(Losses)
in Earnings
Gains
(Losses)
in OCI
Purchases
Sales
Issuances
Settlements
Gross
Transfers
into
Level 3
Gross
Transfers
out of
Level 3
Balance
December 31
2011
2011
Gross
(Dollars in millions)
Trading account assets:
Corporate securities, trading
loans and other
$ 7,751 $
— $
490 $ — $ 5,683 $ (6,664) $
— $
(1,362) $
1,695 $
(713) $
6,880
Equity securities
Non-U.S. sovereign debt
Mortgage trading loans and ABS
Total trading account assets
Net derivative assets (2)
AFS debt securities:
Mortgage-backed securities:
Agency
Agency collateralized-mortgage
obligations
Non-agency residential
Non-agency commercial
Non-U.S. securities
Corporate/Agency bonds
Other taxable securities
Tax-exempt securities
Total AFS debt securities
Loans and leases (3, 4)
Mortgage servicing rights (4)
Loans held-for-sale (3)
Other assets (5)
Trading account liabilities –
Corporate securities and other
Short-term borrowings (3)
Accrued expenses and other
liabilities (3)
557
243
6,908
15,459
7,745
4
—
1,468
19
3
137
13,018
1,224
15,873
3,321
14,900
4,140
6,922
(7)
(706)
(828)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,194
—
—
—
—
—
—
49
87
442
1,068
5,199
—
—
(158)
—
—
(12)
26
21
(123)
(55)
(5,661)
36
140
4
(30)
61
—
—
—
—
—
—
—
41
—
—
(8)
21
(35)
19
—
—
—
—
—
—
—
335
188
2,222
8,428
1,235
14
56
11
15
—
304
3,876
2,862
7,138
21
—
157
1,932
133
—
—
(362)
(137)
(4,713)
(11,876)
(1,553)
(11)
(56)
(307)
—
—
(17)
(2,245)
(92)
(2,728)
(2,644)
(896)
(483)
(2,391)
(189)
—
(2)
(72)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,118
1,656
—
—
—
—
(9)
(520)
(140)
(3)
(440)
(1,945)
(7,779)
—
—
(568)
—
—
—
(5,112)
(697)
(6,377)
(1,830)
(2,621)
(961)
(768)
—
86
3
838
132
8
75
1,910
1,199
34
—
373
6
88
7
2
38
548
5
—
565
375
(65)
—
—
(27)
(44)
(805)
(1,589)
(180)
(4)
—
—
—
(91)
(249)
(5,321)
(673)
(6,338)
(4,386)
—
(67)
(1,975)
10
650
761
544
342
3,689
11,455
5,866
37
—
860
40
—
162
4,265
2,648
8,012
2,744
7,378
3,387
4,235
(114)
—
(14)
(2,111)
1,576
(2,943)
Long-term debt (3)
(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 $14.4 billion and derivative liabilities of $8.5 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.
(2,986)
(188)
520
—
—
(5) Other assets is primarily comprised of net monoline exposure to a single counterparty and private equity investments.
During 2011, the transfers into Level 3 included $1.9 billion of
trading account assets, $1.2 billion of net derivative assets and
$2.1 billion of long-term debt. Transfers into Level 3 for trading
account assets were primarily certain CLOs, corporate loans and
bonds that were transferred due to decreased market activity.
Transfers into Level 3 for net derivative assets were the result of
changes in the valuation methodology for certain total return
swaps, in addition to increases in certain equity derivatives with
significant unobservable inputs. 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 2011, the transfers out of Level 3 included $1.6 billion
of trading account assets, $6.3 billion of AFS debt securities, $4.4
billion of loans and leases, $2.0 billion of other assets and $1.6
billion of long-term debt. Transfers out of Level 3 for trading account
assets were primarily due to increased price observability on
certain RMBS, CMBS and consumer ABS portfolios, as well as
certain corporate bond positions due to increased trading volume.
Transfers out of Level 3 for AFS debt securities primarily related
to auto, credit card and student loan ABS portfolios due to
increased trading volume in the secondary market for similar
securities. Transfers out of Level 3 for loans and leases were due
to increased observable inputs, primarily liquid comparables, for
certain corporate loans. Transfers out of Level 3 for other assets
were primarily the result of an IPO of an equity investment.
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.
258 Bank of America 2013
76788ba_financials.indd 258
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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 2013, 2012 and 2011. 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
(Dollars in millions)
Trading account assets:
Corporate securities, trading loans and other
Equity securities
Non-U.S. sovereign debt
Mortgage trading loans and ABS
Total trading account assets
Net derivative assets
AFS debt securities:
Non-U.S. securities
Other taxable securities
Tax-exempt securities
Total AFS debt securities
Loans and leases (3)
Mortgage servicing rights
Loans held-for-sale (3)
Other assets
Trading account liabilities – Corporate securities and other
Accrued expenses and other liabilities (3)
Long-term debt (3)
Total
Trading account assets:
Corporate securities, trading loans and other
Equity securities
Non-U.S. sovereign debt
Mortgage trading loans and ABS
Total trading account assets
Net derivative assets
AFS debt securities:
Non-agency residential MBS
Corporate/Agency bonds
Other taxable securities
Tax-exempt securities
Total AFS debt securities
Loans and leases (3)
Mortgage servicing rights
Loans held-for-sale (3)
Other assets
Trading account liabilities – Corporate securities and other
Accrued expenses and other liabilities (3)
Long-term debt (3)
Total
2013
Trading
Account
Profits
(Losses)
Mortgage
Banking
Income
(Loss) (1)
Other (2)
Total
$
$
$
$
$
242
74
50
53
419
(1,224)
—
—
—
—
—
—
—
—
10
—
45
(750) $
$
195
31
8
215
449
(3,208)
—
—
2
—
2
—
—
—
—
4
—
(133)
(2,886) $
— $
—
—
—
—
927
—
—
—
—
(38)
1,941
2
122
—
30
—
2,984
$
2012
— $
—
—
—
—
2,987
—
—
—
—
—
—
(430)
148
(74)
—
—
—
2,631
$
— $
—
—
—
—
—
5
9
3
17
136
—
60
(410)
—
—
(32)
(229) $
— $
—
—
—
—
—
(69)
(2)
21
61
11
334
—
204
20
—
(4)
(174)
391
$
242
74
50
53
419
(297)
5
9
3
17
98
1,941
62
(288)
10
30
13
2,005
195
31
8
215
449
(221)
(69)
(2)
23
61
13
334
(430)
352
(54)
4
(4)
(307)
136
(1) Mortgage banking income (loss) does not reflect the impact of Level 1 and Level 2 hedges on MSRs.
(2) Amounts included are primarily recorded in other income (loss). Equity investment gains of $84 million and $97 million recorded on other assets were also included for 2013 and 2012.
(3) Amounts represent instruments that are accounted for under the fair value option.
76788ba_financials.indd 259
3/6/14 12:07 PM
Bank of America 2013 259
Level 3 – Total Realized and Unrealized Gains (Losses) Included in Earnings (continued)
(Dollars in millions)
Trading account assets:
Corporate securities, trading loans and other
Equity securities
Non-U.S. sovereign debt
Mortgage trading loans and ABS
Total trading account assets
Net derivative assets
AFS debt securities:
Non-agency residential MBS
Corporate/Agency bonds
Other taxable securities
Tax-exempt securities
Total AFS debt securities
Loans and leases (3)
Mortgage servicing rights
Loans held-for-sale (3)
Other assets
Trading account liabilities – Corporate securities and other
Short-term borrowings (3)
Accrued expenses and other liabilities (3)
Long-term debt (3)
Total
2011
Trading
Account
Profits
(Losses)
Mortgage
Banking
Income
(Loss) (1)
Other (2)
Total
$
$
490
49
87
442
1,068
1,516
—
—
16
(3)
13
—
—
—
—
4
—
(10)
(106)
2,485
$
$
— $
—
—
—
—
3,683
—
—
—
—
—
(13)
(5,661)
(108)
(51)
—
(30)
71
—
(2,109) $
— $
—
—
—
—
—
(158)
(12)
10
24
(136)
(42)
—
144
191
—
—
—
(82)
75
$
490
49
87
442
1,068
5,199
(158)
(12)
26
21
(123)
(55)
(5,661)
36
140
4
(30)
61
(188)
451
(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 $242 million recorded on other assets were also included for 2011.
(3) Amounts represent instruments that are accounted for under the fair value option.
260 Bank of America 2013
76788ba_financials.indd 260
3/6/14 12:07 PM
The table below summarizes changes in unrealized gains (losses) recorded in earnings during 2013, 2012 and 2011 for Level 3
assets and liabilities that were still held at December 31, 2013, 2012 and 2011. 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
(Dollars in millions)
Trading account assets:
Corporate securities, trading loans and other
Equity securities
Non-U.S. sovereign debt
Mortgage trading loans and ABS
Total trading account assets
Net derivative assets
Loans and leases (3)
Mortgage servicing rights
Loans held-for-sale (3)
Other assets
Long-term debt (3)
Total
Trading account assets:
Corporate securities, trading loans and other
Equity securities
Non-U.S. sovereign debt
Mortgage trading loans and ABS
Total trading account assets
Net derivative assets
AFS debt securities – Other taxable securities
Loans and leases (3)
Mortgage servicing rights
Loans held-for-sale (3)
Other assets
Trading account liabilities – Corporate securities and other
Accrued expenses and other liabilities (3)
Long-term debt (3)
Total
Trading account assets:
Corporate securities, trading loans and other
Equity securities
Non-U.S. sovereign debt
Mortgage trading loans and ABS
Total trading account assets
Net derivative assets
AFS debt securities:
Non-agency residential MBS
Corporate/Agency bonds
Other taxable securities
Total AFS debt securities
Loans and leases (3)
Mortgage servicing rights
Loans held-for-sale (3)
Other assets
Trading account liabilities – Corporate securities and other
Long-term debt (3)
Total
2013
Trading
Account
Profits
(Losses)
Mortgage
Banking
Income
(Loss) (1)
Other (2)
Total
$
$
$
$
$
$
(130) $
40
80
(174)
(184)
(1,375)
—
—
—
—
(4)
(1,563) $
(19) $
17
20
36
54
(2,782)
2
—
—
—
—
4
—
(136)
(2,858) $
(86) $
(60)
101
30
(15)
1,430
—
—
—
—
—
—
—
—
3
(107)
1,311
$
— $
—
—
—
—
42
(34)
1,541
6
166
—
1,721
$
2012
— $
—
—
—
—
456
—
—
(1,100)
112
(71)
—
—
—
(603) $
2011
— $
—
—
—
—
133
—
—
—
—
—
(6,958)
(87)
(53)
—
—
(6,965) $
— $
—
—
—
—
—
152
—
57
14
(32)
191
$
— $
—
—
—
—
—
—
214
—
168
50
—
(2)
(173)
257
$
— $
—
—
—
—
—
(195)
(14)
13
(196)
94
—
5
(772)
—
(94)
(963) $
(130)
40
80
(174)
(184)
(1,333)
118
1,541
63
180
(36)
349
(19)
17
20
36
54
(2,326)
2
214
(1,100)
280
(21)
4
(2)
(309)
(3,204)
(86)
(60)
101
30
(15)
1,563
(195)
(14)
13
(196)
94
(6,958)
(82)
(825)
3
(201)
(6,617)
(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 $60 million and $141 million, and losses of $309 million recorded on other assets were also included for
2013, 2012 and 2011, respectively.
(3) Amounts represent instruments that are accounted for under the fair value option.
Bank of America 2013 261
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The following tables present information about significant unobservable inputs related to the Corporation’s material categories of
Level 3 financial assets and liabilities at December 31, 2013 and 2012.
Quantitative Information about Level 3 Fair Value Measurements at December 31, 2013
(Dollars in millions)
Inputs
Financial Instrument
Loans and Securities (1)
Instruments backed by residential real estate assets
Trading account assets – Mortgage trading loans and ABS
Loans and leases
Loans held-for-sale
Commercial loans, debt securities and other
Trading account assets – Corporate securities, trading loans and other
Trading account assets – Non-U.S. sovereign debt
Trading account assets – Mortgage trading loans and ABS
AFS debt securities – Other taxable securities
Loans and leases
Auction rate securities
Trading account assets – Corporate securities, trading loans and other
AFS debt securities – Other taxable securities
AFS debt securities – Tax-exempt securities
Structured liabilities
Long-term debt
Net derivatives assets
Credit derivatives
Equity derivatives
Commodity derivatives
Interest rate derivatives
Fair
Value
Valuation
Technique
Significant Unobservable
Inputs
Ranges of
Inputs
Weighted
Average
$
3,443
363
2,151
929
$ 12,135
3,462
468
4,268
3,031
906
$
1,719
97
816
806
$ (1,990)
$
1,008
$ (1,596)
$
6
$
558
Yield
Prepayment speed
Default rate
Loss severity
Yield
Enterprise value/EBITDA multiple
Prepayment speed
Default rate
Loss severity
Duration
Projected tender price/
Refinancing level
Discounted cash flow,
Market comparables
Discounted cash flow,
Market comparables
Discounted cash flow,
Market comparables
2% to 25%
0% to 35% CPR
1% to 20% CDR
21% to 80%
0% to 45%
0x to 24x
5% to 40%
1% to 5%
25% to 42%
6%
9%
6%
35%
5%
7x
19%
4%
36%
1 year to 5 years
4 years
60% to 100%
96%
Industry standard
derivative pricing (2, 3)
Equity correlation
Long-dated volatilities
Correlation (IR/IR)
Long-dated inflation rates
Long-dated inflation volatilities
Discounted cash flow,
Stochastic recovery
correlation model
Yield
Upfront points
Spread to index
Credit correlation
Prepayment speed
Default rate
Loss severity
Industry standard
derivative pricing (2)
Equity correlation
Long-dated volatilities
18% to 98%
4% to 63%
24% to 99%
0% to 3%
0% to 2%
3% to 25%
70%
27%
60%
2%
1%
14%
0 points to 100 points
63 points
-1,407 bps to 1,741 bps
91 bps
14% to 99%
3% to 40% CPR
1% to 5% CDR
20% to 42%
18% to 98%
4% to 63%
47%
13%
3%
35%
70%
27%
Discounted cash flow,
Industry standard
derivative pricing (2)
Industry standard
derivative pricing (3)
Natural gas forward price
$3/MMBtu to $11/MMBtu $6/MMBtu
Correlation
Volatilities
Correlation (IR/IR)
Correlation (FX/IR)
Long-dated inflation rates
Long-dated inflation volatilities
Long-dated volatilities (FX)
47% to 89%
9% to 109%
24% to 99%
-30% to 40%
0% to 3%
0% to 2%
0% to 70%
81%
30%
60%
-4%
2%
1%
10%
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 254: 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.
Includes models such as Monte Carlo simulation and Black-Scholes.
Includes models such as Monte Carlo simulation, Black-Scholes and other methods that model the joint dynamics of interest, inflation and foreign exchange rates.
(3)
(2)
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
262 Bank of America 2013
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Quantitative Information about Level 3 Fair Value Measurements for Loans, Securities and Structured Liabilities at December 31, 2012
(Dollars in millions)
Inputs (1)
Financial Instrument
Loans and Securities (2)
Instruments backed by residential real estate assets
Trading account assets – Mortgage trading loans and ABS
Loans and leases
Loans held-for-sale
Instruments backed by commercial real estate assets
Other assets
Commercial loans, debt securities and other
Trading account assets – Corporate securities, trading loans and other
Trading account assets – Mortgage trading loans and ABS
AFS debt securities – Other taxable securities
Loans and leases
Auction rate securities
Trading account assets – Corporate securities, trading loans and other
AFS debt securities – Other taxable securities
AFS debt securities – Tax-exempt securities
Structured liabilities
Long-term debt
Fair
Value
Valuation
Technique
Significant Unobservable
Inputs
Ranges of
Inputs
Weighted
Average
Discounted cash flow,
Market comparables
Discounted cash flow
Yield
Prepayment speed
Default rate
Loss severity
Yield
Loss severity
Yield
Discounted cash flow,
Market comparables
Prepayment speed
Enterprise value/EBITDA multiple
Default rate
Loss severity
Discount rate
Discounted cash flow,
Market comparables
Projected tender price/
Refinancing level
$
4,478
459
1,286
2,733
$
1,910
1,910
$ 10,778
2,289
4,476
3,012
1,001
$
3,414
1,437
916
1,061
2% to 25%
1% to 30% CPR
0% to 44% CDR
6% to 85%
5%
51% to 100%
0% to 25%
2x to 11x
5% to 30%
1% to 5%
25% to 40%
4% to 5%
50% to 100%
6%
10%
6%
43%
n/a
88%
4%
5x
20%
4%
35%
4%
92%
$ (2,301)
Industry standard
derivative pricing (3)
Equity correlation
Long-dated volatilities
30% to 97%
20% to 70%
n/m
n/m
Quantitative Information about Level 3 Fair Value Measurements for Net Derivative Assets at December 31, 2012
(Dollars in millions)
Net derivatives assets
Credit derivatives
Equity derivatives
Commodity derivatives
Interest rate derivatives
Financial Instrument
Fair
Value
Valuation
Technique
Significant Unobservable
Inputs
Ranges of
Inputs
Inputs (1)
$
2,327
Discounted cash flow,
Stochastic recovery
correlation model
Yield
Credit spreads
Upfront points
Spread to index
Credit correlation
Prepayment speed
Default rate
Loss severity
$ (1,295)
Industry standard
derivative pricing (3)
Equity correlation
Long-dated volatilities
2% to 25%
58 bps to 615 bps
25 points to 99 points
-2,080 bps to 1,972 bps
19% to 75%
3% to 30% CPR
0% to 8% CDR
25% to 42%
30% to 97%
20% to 70%
$
$
(5) Discounted cash flow
Natural gas forward price
$3/MMBtu to $12/MMBtu
441
Correlation (IR/IR)
Correlation (FX/IR)
Industry standard
derivative pricing (4)
Long-dated inflation rates
Long--dated inflation volatilities
Long-dated volatilities (FX)
Long-dated swap rates
15% to 99%
-65% to 50%
2% to 3%
0% to 1%
5% to 36%
8% to 10%
Total net derivative assets
$
1,468
(1) At December 31, 2012, weighted averages were disclosed for all loans and securities. For more information on the ranges of inputs for significant unobservable inputs for structured liabilities and
net derivative assets, see the qualitative discussion on page 264.
(2) The categories are aggregated based upon product type which differs from financial statement classification. The following is a reconciliation to the line items in the table on page 257: Trading
account assets – Corporate securities, trading loans and other of $3.7 billion, Trading account assets – Mortgage trading loans and ABS of $4.9 billion, AFS debt securities – Other taxable securities
of $3.9 billion, AFS debt securities – Tax-exempt securities of $1.1 billion, Loans and leases of $2.3 billion, LHFS of $2.7 billion and Other assets of $1.9 billion.
Includes models such as Monte Carlo simulation and Black-Scholes.
Includes models such as Monte Carlo simulation, Black-Scholes and other methods that model the joint dynamics of interest, inflation and foreign exchange rates.
(3)
(4)
n/a = not applicable
n/m = not meaningful
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
76788ba_financials.indd 263
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Bank of America 2013 263
In the tables above, instruments backed by residential and
commercial real estate assets include RMBS, CMBS, whole loans,
mortgage CDOs and net monoline exposure. Commercial loans,
debt securities and other includes 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 $767 million and $1.2 billion of instruments at
December 31, 2013 and 2012 consisting primarily of certain direct
private equity investments and private equity funds that were
classified as Level 3 and reported within other assets. Valuations
of direct private equity investments are based on the most recent
company financial information. Inputs generally include market
and acquisition comparables, entry level multiples, as well as other
variables. The Corporation selects a valuation methodology (e.g.,
market comparables) for each investment and, in certain
instances, multiple inputs are weighted to derive the most
representative value. Discounts are applied as appropriate to
consider the lack of liquidity and marketability versus publicly-
traded companies. For private equity funds, fair value is determined
using the net asset value as provided by the individual fund’s
general partner.
The Corporation uses multiple market approaches in valuing
certain of its Level 3 financial instruments. For example, market
comparables and discounted cash flows are used together. For a
given product, such as corporate debt securities, market
comparables may be used to estimate some of the unobservable
inputs and then these inputs are incorporated into a discounted
cash flow model. Therefore, the balances disclosed encompass
both of these techniques.
The level of aggregation and diversity within the products
disclosed in the tables result in certain ranges of inputs being
wide and unevenly distributed across asset and liability categories.
At December 31, 2013, weighted averages are disclosed for all
loans, securities, structured liabilities and net derivative assets.
At December 31, 2012, weighted averages were disclosed for all
loans and securities.
For credit derivatives, the range of credit spreads represented
positions with varying levels of default risk to the underlying
instruments. The lower end of the credit spread range typically
represented shorter-dated instruments and those with better
perceived credit risk. The higher end of the range represented
longer-dated instruments and those referencing debt issuances
that were more likely to be impaired or nonperforming. At
December 31, 2012, the majority of inputs were concentrated in
the lower end of the range. Similarly, the spread to index could
vary significantly based on the risk of the instrument. The spread
will be positive for instruments that have a higher risk of default
than the index (which is based on a weighted average of its
components) and negative for instruments that have a lower risk
of default than the index. At December 31, 2012, inputs were
distributed evenly throughout the range for spread to index. In
addition, for yield and credit correlation, the majority of the inputs
were concentrated in the center of the range. Inputs were
concentrated in the middle to lower end of the range for upfront
points. The range for loss severity reflected exposures that were
concentrated in the middle to upper end of the range while the
ranges for prepayment speed and default rates reflected
exposures that were concentrated in the lower end of the range.
For equity derivatives at December 31, 2012, including those
embedded in long-term debt, the range for equity correlation
represented exposure primarily concentrated toward the upper end
of the range. The range for long-dated volatilities represented
exposure primarily concentrated toward the lower end of the range.
For interest rate derivatives, the diversity in the portfolio was
reflected in wide ranges of inputs because the variety of currencies
and tenors of the transactions required the use of numerous
foreign exchange and interest rate curves. Since foreign exchange
and interest rate correlations were measured between curves and
across the various tenors on the same curve, the range of potential
values could include both negative and positive values. For the
correlation (IR/IR) range, the exposure represented the valuation
of interest rate correlations on less liquid pairings and was
concentrated at the upper end of the range at December 31, 2012.
For the correlation (FX/IR) range, the exposure was the sensitivity
to a broad mix of interest rate and foreign exchange correlations
and was distributed evenly throughout the range at December 31,
2012. For long-dated inflation rates and volatilities as well as long-
dated volatilities (FX), the inputs were concentrated in the middle
of the range.
For more information on the inputs and techniques used in the
valuation of MSRs, see Note 23 – Mortgage Servicing Rights.
264 Bank of America 2013
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Sensitivity of Fair Value Measurements to Changes in
Unobservable Inputs
Loans and Securities
For instruments backed by residential real estate assets,
commercial 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 closed-end auction rate securities (ARS), a significant
increase in discount rates would result in a significantly lower fair
value. For student loan and municipal ARS, 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), credit spreads,
default rates or loss severities would result in a significantly lower
fair value for protection sellers and higher fair value for protection
buyers. The impact of changes in prepayment speeds would have
differing impacts depending on the seniority of the instrument and,
in the case of CLOs, whether prepayments can be reinvested.
Structured credit derivatives, which include tranched portfolio
CDS and derivatives with derivative product company (DPC) and
monoline counterparties, are impacted by credit correlation,
including default and wrong-way correlation. Default correlation is
a parameter that describes the degree of dependence among
credit default rates within a credit portfolio that underlies a credit
derivative instrument. The sensitivity of this input on the fair value
varies depending on the level of subordination of the tranche. For
senior tranches that are net purchases of protection, a significant
increase in default correlation would result in a significantly higher
fair value. Net short protection positions would be impacted in a
directionally opposite way. Wrong-way correlation is a parameter
that describes the probability that, as exposure to a counterparty
increases, the credit quality of the counterparty decreases. A
significantly higher degree of wrong-way correlation between a DPC
counterparty and underlying derivative exposure would result in a
significantly lower fair value.
For equity derivatives, interest rate derivatives and structured
liabilities, a significant change in long-dated rates and volatilities
and correlation inputs (e.g., the degree of correlation between an
equity security and an index, between two different interest rates,
or between interest rates and foreign exchange rates) would result
in a significant impact to the fair value; however, the magnitude
and direction of the impact depends on whether the Corporation
is long or short the exposure.
Nonrecurring Fair Value
The Corporation holds certain assets that are measured at fair
value, but only in certain situations (e.g., impairment) and these
measurements are referred to herein as nonrecurring. These
assets primarily include LHFS, certain loans and leases, and
foreclosed properties. The amounts below represent only balances
measured at fair value during 2013, 2012 and 2011, and still held
as of the reporting date.
Assets Measured at Fair Value on a Nonrecurring Basis
(Dollars in millions)
Assets
Loans held-for-sale
Loans and leases
Foreclosed properties (1)
Other assets
Assets
Loans held-for-sale
Loans and leases (2)
Foreclosed properties (1)
Other assets
December 31
2013
2012
Level 2
Level 3
Level 2
Level 3
$
2,138
18
12
88
$
115
5,240
1,258
—
$ 5,692
21
33
36
$ 1,136
9,184
1,918
12
Gains (Losses)
2012
2013
2011
$
(71) $
(24) $
(1,104)
(39)
(20)
(3,116)
(47)
(16)
(188)
(4,813)
(167)
—
(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.
(2) Losses represent charge-offs on real estate-secured loans.
76788ba_financials.indd 265
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Bank of America 2013 265
The table below presents information about significant unobservable inputs related to the Corporation’s nonrecurring Level 3 financial
assets and liabilities at December 31, 2013 and 2012.
Quantitative Information about Nonrecurring Level 3 Fair Value Measurements
(Dollars in millions)
Financial Instrument
Instruments backed by residential real estate assets
Loans and leases
Instruments backed by residential real estate assets
Loans held-for-sale
Loans and leases
Fair
Value
$ 5,240
5,240
$ 9,932
748
9,184
December 31, 2013
Inputs
Valuation
Technique
Significant Unobservable
Inputs
Ranges of
Inputs
Weighted
Average
Market comparables
OREO discount
Cost to sell
Discounted cash
flow, Market
comparables
December 31, 2012
Yield
Prepayment speed
Default rate
Loss severity
OREO discount
Cost to sell
Yield
Loss severity
0% to 19%
8%
3% to 5%
3% to 30%
0% to 55%
6% to 66%
0% to 28%
8%
4% to 13%
24% to 88%
8%
n/a
3%
15%
7%
48%
15%
n/a
6%
53%
Instruments backed by commercial real estate assets
Loans held-for-sale
n/a = not applicable
$
388
388
Discounted cash
flow
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 or, in the case of LHFS,
are carried at the lower of cost or fair value. 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.
NOTE 21 Fair Value Option
Loans and Loan Commitments
The Corporation elects to account for certain commercial loans
and loan commitments that exceed the Corporation’s single name
credit risk concentration guidelines under the fair value option.
Lending commitments, both funded and unfunded, are actively
managed and monitored and, as appropriate, credit risk for these
lending relationships may be mitigated through the use of credit
derivatives, with the Corporation’s public side credit view and
market perspectives determining the size and timing of the hedging
activity. These credit derivatives do not meet the requirements for
designation as accounting hedges and therefore are carried at fair
value with changes in fair value recorded in other income (loss).
Electing the fair value option allows the Corporation to carry these
loans and loan commitments at fair value, which is more consistent
with management’s view of the underlying economics and the
manner in which they are managed. In addition, election of the fair
value option allows the Corporation to reduce the accounting
volatility that would otherwise result from the asymmetry created
by accounting for the financial instruments at historical cost and
the credit derivatives at fair value. The Corporation also elected
the fair value option for certain residential mortgage loans that
were classified as held-for-sale and certain loans held in
consolidated VIEs. Of the changes in fair value of these loans,
gains of $315 million and $1.2 billion were attributable to changes
in borrower-specific credit risk in 2013 and 2012.
Loans Held-for-sale
The Corporation elects to account for residential mortgage LHFS,
commercial mortgage LHFS and other LHFS under the fair value
option with interest income on these LHFS recorded in other
interest income. These loans are actively managed and monitored
and, as appropriate, certain market risks of the loans may be
mitigated through the use of derivatives. The Corporation has
elected not to designate the derivatives as qualifying accounting
hedges and therefore they are carried at fair value with changes
in fair value recorded in other income (loss). The changes in fair
value of the loans are largely offset by changes in the fair value
of the derivatives. Of the changes in fair value of these loans,
gains of $225 million and $425 million were attributable to
changes in borrower-specific credit risk in 2013 and 2012. Election
of the fair value option allows the Corporation to reduce the
accounting volatility that would otherwise result from the
asymmetry created by accounting for the financial instruments at
the lower of cost or fair value and the derivatives at fair value. The
Corporation has not elected to account for other LHFS under the
fair value option primarily because these loans are floating-rate
loans that are not hedged using derivative instruments.
Loans Reported as Trading Account Assets
The Corporation elects to account for certain loans that are held
for the purpose of trading and risk-managed on a fair value basis
under the fair value option. An immaterial portion of the changes
in fair value of these loans was attributable to changes in borrower-
specific credit risk in 2013 and 2012.
266 Bank of America 2013
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Other Assets
The Corporation elects to account for certain private equity
investments that are not in an investment company under the fair
value option as this measurement basis is consistent with
applicable accounting guidance for similar investments that are
in an investment company. The Corporation also elects to account
for certain long-term fixed-rate margin loans that are hedged with
derivatives under the fair value option. Election of the fair value
option allows the Corporation to reduce the accounting volatility
that would otherwise result from the asymmetry created by
accounting for the financial instruments at historical cost and the
derivatives at fair value.
Securities Financing Agreements
The Corporation elects to account for certain securities financing
agreements, including resale and repurchase agreements, under
the fair value option based on the tenor of the agreements, which
reflects the magnitude of the interest rate risk. The majority of
securities financing agreements collateralized by U.S. government
securities are not accounted for under the fair value option as
these contracts are generally short-dated and therefore the
interest rate risk is not significant.
Long-term Deposits
The Corporation elects to account for certain long-term fixed-rate
and rate-linked deposits that are hedged with derivatives that do
not qualify for hedge accounting under the fair value option.
Election of the fair value option allows the Corporation to reduce
the accounting volatility that would otherwise result from the
Fair Value Option Elections
asymmetry created by accounting for the financial instruments at
historical cost and the derivatives at fair value. The Corporation
did not elect to carry other long-term deposits at fair value because
they were not hedged using derivatives.
Short-term Borrowings
The Corporation elects to account for certain short-term
borrowings, primarily short-term structured liabilities, under the
fair value option because this debt is risk-managed on a fair value
basis.
The Corporation elects to account for certain asset-backed
secured financings, which are also classified in short-term
borrowings, under the fair value option. Election of the fair value
option allows the Corporation to reduce the accounting volatility
that would otherwise result from the asymmetry created by
accounting for the asset-backed secured financings at historical
cost and the corresponding mortgage LHFS securing these
financings at fair value.
Long-term Debt
The Corporation elects to account for certain long-term debt,
primarily structured liabilities, under the fair value option. This long-
term debt is either risk-managed on a fair value basis or the related
hedges do not qualify for hedge accounting.
The table below provides information about the fair value
carrying amount and the contractual principal outstanding of
assets and liabilities accounted for under the fair value option at
December 31, 2013 and 2012.
(Dollars in millions)
2013
2012
December 31
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)
(1,216)
n/a
Trading inventory - other
(574)
Consumer and commercial loans
(1,017)
Loans held-for-sale
518
Securities financing agreements
183
Other assets
216
Long-term deposits
(435)
Asset-backed secured financings
n/a
Unfunded loan commitments
—
Short-term borrowings
(1,631)
Long-term debt (2, 3)
(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
(2,115) $
n/a
(381)
(340)
266
8
(216)
—
n/a
—
366
2,879
n/a
9,576
12,676
140,791
270
2,046
1,176
n/a
3,333
50,792
1,663
2,170
9,002
11,659
141,309
453
2,262
741
528
3,333
49,161
2,200
5,475
10,042
6,656
109,298
278
1,899
—
354
1,520
47,035
4,315
n/a
10,423
6,996
109,032
270
2,115
—
n/a
1,520
46,669
$
$
near contractual principal outstanding.
(2) The majority of the difference between the fair value carrying amount and contractual principal outstanding at December 31, 2013 and 2012 relates to the impact of the Corporation’s credit spreads
(3)
as well as the fair value of the embedded derivative, where applicable.
Includes structured liabilities with a fair value of $40.7 billion and contractual principal outstanding of $39.7 billion at December 31, 2013 compared to $39.3 billion and $39.9 billion at December 31,
2012.
n/a = not applicable
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Bank of America 2013 267
The table below provides information about where changes in the fair value of assets and liabilities accounted for under the fair
value option are included in the Consolidated Statement of Income for 2013, 2012 and 2011.
Gains (Losses) Relating to Assets and Liabilities Accounted for Under the Fair Value Option
(Dollars in millions)
Loans reported as trading account assets
Trading inventory - other (1)
Consumer and commercial loans
Loans held-for-sale (2)
Securities financing agreements
Other assets
Long-term deposits
Asset-backed secured financings
Unfunded loan commitments
Short-term borrowings
Long-term debt (3)
Total
Loans reported as trading account assets
Trading inventory - other (1)
Consumer and commercial loans
Loans held-for-sale (2)
Securities financing agreements
Other assets
Long-term deposits
Asset-backed secured financings
Unfunded loan commitments
Short-term borrowings
Long-term debt (3)
Total
Loans reported as trading account assets
Consumer and commercial loans
Loans held-for-sale (2)
Securities financing agreements
Other assets
Long-term deposits
Asset-backed secured financings
Unfunded loan commitments
Short-term borrowings
Long-term debt (3)
Total
2013
Trading
Account
Profits
(Losses)
Mortgage
Banking
Income
(Loss)
Other
Income
(Loss)
Total
$
$
$
$
$
$
$
$
$
83
1,355
(28)
7
(80)
—
30
—
—
(70)
(602)
695
232
659
17
75
(90)
—
—
—
—
1
(1,888)
(994) $
73
15
(20)
127
—
—
—
—
261
2,149
2,605
$
$
— $
—
(38)
966
—
—
—
(91)
—
—
—
837
$
2012
— $
—
—
3,048
—
—
—
(180)
—
—
—
2,868
$
2011
— $
—
4,535
—
—
—
(30)
—
—
—
4,505
$
— $
—
240
75
—
(77)
84
—
180
—
(649)
(147) $
— $
—
542
190
—
12
29
—
704
—
(5,107)
(3,630) $
— $
(275)
148
—
196
(77)
—
(429)
—
3,320
2,883
$
83
1,355
174
1,048
(80)
(77)
114
(91)
180
(70)
(1,251)
1,385
232
659
559
3,313
(90)
12
29
(180)
704
1
(6,995)
(1,756)
73
(260)
4,663
127
196
(77)
(30)
(429)
261
5,469
9,993
(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 already sold during the period.
(3) The majority of the net gains (losses) in trading account profits (losses) relate to the embedded derivative in structured liabilities and are offset by gains (losses) on derivatives and securities that
hedge these liabilities. The net gains (losses) in other income (loss) relate to the impact on structured liabilities of changes in the Corporation’s credit spreads.
NOTE 22 Fair Value of Financial Instruments
The fair values of financial instruments and their classifications
within the fair value hierarchy have been derived using
methodologies described in Note 20 – Fair Value Measurements.
The following disclosures include financial instruments where only
a portion of the ending balance at December 31, 2013 and 2012
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
268 Bank of America 2013
76788ba_financials.indd 268
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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.
market interest rates and credit spreads for debt with similar terms
and maturities. The Corporation accounts for certain structured
liabilities under the fair value option.
Fair Value of Financial Instruments
The carrying values and fair values by fair value hierarchy of certain
financial instruments where only a portion of the ending balance
was carried at fair value at December 31, 2013 and 2012 are
presented in the table below.
Held-to-maturity Debt Securities
HTM debt securities, which consist 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.
Long-term Debt
The Corporation uses quoted market prices, when available, to
estimate fair value for its long-term debt. When quoted market
prices are not available, fair value is estimated based on current
Fair Value of Financial Instruments
December 31, 2013
Fair Value
Carrying
Value
Level 2
Level 3
Total
(Dollars in millions)
Financial assets
Loans
Loans held-for-sale
$ 885,724
11,362
$ 102,564
8,872
$ 789,273
2,613
$ 891,837
11,485
Financial liabilities
Deposits
Long-term debt
Financial assets
1,119,271
249,674
1,119,512
257,402
— 1,119,512
259,392
1,990
December 31, 2012
Loans
Loans held-for-sale
$ 859,875
19,413
$ 105,119
15,087
$ 772,761
4,321
$ 877,880
19,408
Financial liabilities
Deposits
Long-term debt
1,105,261
275,585
1,105,669
281,173
— 1,105,669
283,474
2,301
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 $830 million and
$3.7 billion at December 31, 2013, and $1.0 billion and $4.5
billion at December 31, 2012. Commercial unfunded lending
commitments are primarily classified as Level 3. The carrying value
of these commitments is classified in accrued expenses and other
liabilities.
The Corporation does not estimate the fair values of consumer
unfunded lending commitments because, in many instances, the
Corporation can reduce or cancel these commitments by providing
notice to the borrower. For more information on commitments, see
Note 12 – Commitments and Contingencies.
76788ba_financials.indd 269
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Bank of America 2013 269
of the MSRs occurred in stages throughout 2013, and all of the
servicing encompassed by
these agreements had been
transferred as of December 31, 2013.
Significant economic assumptions in estimating the fair value
of MSRs at December 31, 2013 and 2012 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
Weighted-average OAS
Weighted-average life, in years
December 31
2013
2012
Fixed
3.97%
5.70
Adjustable
7.61%
2.86
Fixed
4.00%
3.65
Adjustable
6.63%
2.10
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
(Dollars in millions)
Prepayment rates
Impact of 10% decrease
Impact of 20% decrease
Impact of 10% increase
Impact of 20% increase
OAS level
Impact of 100 bps decrease
Impact of 200 bps decrease
Impact of 100 bps increase
Impact of 200 bps increase
December 31, 2013
Change in
Weighted-average Lives
Fixed
Adjustable
Change in
Fair Value
0.24 years
0.51
(0.22)
(0.42)
$
0.20 years
0.42
(0.17)
(0.32)
$
266
558
(244)
(469)
268
561
(247)
(474)
NOTE 23 Mortgage Servicing Rights
The Corporation accounts for consumer MSRs at fair value with
changes in fair value recorded in mortgage banking income (loss)
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 (loss).
The table below presents activity for residential mortgage and
home equity MSRs for 2013 and 2012. Commercial and
residential reverse MSRs, which are carried at the lower of cost
or market value and accounted for using the amortization method,
totaled $10 million and $135 million at December 31, 2013 and
2012, and are not included in the tables in this Note.
Rollforward of Mortgage Servicing Rights
(Dollars in millions)
Balance, January 1
Additions
Sales
Amortization of expected cash flows (1)
Impact of changes in interest rates and other market
factors (2)
Model and other cash flow assumption changes: (3)
Projected cash flows, primarily due to (increases)
$
2013
5,716
472
(2,044)
(1,043)
2012
$ 7,378
374
(122)
(1,484)
1,524
(867)
decreases in costs to service loans
(27)
443
Impact of changes in the Home Price Index
Impact of changes to the prepayment model
Other model changes (4)
Balance, December 31
(398)
609
233
5,042
550
(112)
435
(329)
$ 5,716
$ 1,045
$
$
Mortgage loans serviced for investors (in billions)
(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 $497 million for 2012 due to changes in OAS rate inputs.
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.
The $2.0 billion of MSR sales during 2013 primarily relate to
transfers completed under definitive agreements the Corporation
entered into during the year to sell certain MSRs. The transfers
270 Bank of America 2013
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NOTE 24 Business Segment Information
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 in the U.S. to consumers and small
businesses. 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
5,100 banking centers, 16,300 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. During 2013, consumer DFS results were moved
to CBB from Global Banking to align this business more closely
with the Corporation’s consumer lending activity and better serve
the needs of its customers. Prior periods were reclassified to
conform to current period presentation.
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, 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 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 business segment that owns the loans or 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. During
2013, the results of consumer DFS, previously reported in Global
Banking, were moved into CBB and prior periods have been
reclassified to conform to current period presentation.
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.
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,
gains/losses on structured liabilities, 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.
Bank of America 2013 271
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Basis of Presentation
The management accounting and reporting process derives
results by utilizing allocation
segment and business
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, primarily CBB, CRES and
GWIM. 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.
272 Bank of America 2013
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The following tables present net income and the components thereto (with net interest income on a FTE basis) for 2013, 2012 and
2011, and total assets at December 31, 2013 and 2012 for each business segment, as well as All Other.
Total Corporation (1)
2012
2013
2011
43,124 $
46,677
89,801
3,556
1,086
—
68,128
17,031
5,600
11,431 $
41,557 $ 45,588
48,838
42,678
94,426
84,235
13,410
8,169
1,509
1,264
3,184
—
75,581
70,829
742
3,973
(704)
(215)
1,446
4,188 $
Consumer & Business Banking
2013
2011
2012
$ 20,051 $ 19,853 $ 22,249
11,572
33,821
3,677
759
—
17,153
12,232
4,431
7,801
9,816
29,867
3,107
505
—
15,852
10,403
3,815
6,588 $
$ 592,978 $554,915
9,937
29,790
4,148
626
—
16,369
8,647
3,101
5,546 $
$
$
$ 2,102,273 $ 2,209,974
Consumer Real Estate Services
2013
2011
2012
$
2,890 $
4,826
7,716
(156)
—
—
16,013
(8,141)
(2,986)
3,209
(6,310)
(3,101)
4,523
11
2,603
19,055
(29,293)
(9,939)
$ (5,155) $ (6,439) $ (19,354)
2,930 $
5,821
8,751
1,442
—
—
17,190
(9,881)
(3,442)
$ 113,386 $131,059
Business Segments
At and for the Year Ended December 31
(Dollars in millions)
Net interest income (FTE basis)
Noninterest income (loss)
$
Total revenue, net of interest expense (FTE basis)
Provision for credit losses
Amortization of intangibles
Goodwill impairment
Other noninterest expense
Income (loss) before income taxes
Income tax expense (benefit) (FTE basis)
Net income (loss)
Year-end total assets
Net interest income (FTE basis)
Noninterest income
Total revenue, net of interest expense (FTE basis)
Provision for credit losses
Amortization of intangibles
Other noninterest expense
Income before income taxes
Income tax expense (FTE basis)
Net income
Year-end total assets
Net interest income (FTE basis)
Noninterest income (loss)
Total revenue, net of interest expense (FTE basis)
Provision for credit losses
Amortization of intangibles
Goodwill impairment
Other noninterest expense
Income (loss) before income taxes
Income tax expense (benefit) (FTE basis)
Net income (loss)
Year-end total assets
(1) There were no material intersegment revenues.
Global Wealth &
Investment Management
Global Banking
2013
2012
2011
2013
2012
2011
$
6,064 $
5,827 $
11,726
17,790
56
387
12,651
4,696
1,722
2,974 $
10,691
16,518
266
410
12,311
3,531
1,286
2,245 $
$
$ 274,112 $297,326
Global Markets
2012
2013
$
4,239 $
3,672 $
11,819
16,058
140
65
—
11,948
3,905
2,342
1,563 $
10,612
14,284
34
64
—
11,231
2,955
1,726
1,229 $
$
$ 575,709 $632,263
5,885
10,610
16,495
398
437
12,899
2,761
1,014
1,747
$
8,914 $
7,567
16,481
1,075
62
7,490
7,854
2,880
4,974 $
$ 379,207 $331,611
8,135 $
7,539
15,674
(342)
79
7,540
8,397
3,053
5,344 $
$
8,233
7,361
15,594
(1,308)
101
7,928
8,873
3,251
5,622
2011
2013
All Other
2012
4,068
11,507
15,575
(53)
66
—
12,824
2,738
1,669
1,069
$
966 $
923
1,889
(666)
67
—
4,174
(1,686)
(2,173)
1,140 $
(1,922)
(782)
2,621
85
—
6,188
(9,676)
(5,939)
$
487 $ (3,737) $
$ 166,881 $262,800
2011
1,944
14,098
16,042
6,173
135
581
5,722
3,431
(1,130)
4,561
Bank of America 2013 273
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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
(Dollars in millions)
Segments’ total revenue, net of interest expense (FTE basis)
Adjustments:
ALM activities (1)
Equity investment income
Liquidating businesses and other
FTE basis adjustment
Consolidated revenue, net of interest expense
Segments’ net income (loss)
Adjustments, net of taxes:
ALM activities
Equity investment income
Liquidating businesses and other
Merger and restructuring charges
Consolidated net income
Segments’ total assets
Adjustments:
ALM activities, including securities portfolio
Equity investments
Liquidating businesses and other
Elimination of segment asset allocations to match liabilities
Consolidated total assets
2013
2012
2011
$
87,912
$
85,017
$
78,384
(986)
2,610
265
(859)
88,942
10,944
(1,207)
1,644
50
—
11,431
$
$
$
(2,412)
1,135
495
(901)
83,334
7,925
(4,087)
715
(365)
—
4,188
$
$
$
7,576
7,105
1,361
(972)
93,454
(3,115)
513
4,476
(26)
(402)
1,446
$
$
$
December 31
2013
$ 1,935,392
2012
$ 1,947,174
664,302
2,411
70,435
(570,267)
$ 2,102,273
655,915
5,508
138,974
(537,597)
$ 2,209,974
(1) Includes negative fair value adjustments on structured liabilities related to changes in the Corporation’s credit spreads of $649 million and $5.1 billion in 2013 and 2012 compared to positive
adjustments of $3.3 billion in 2011.
274 Bank of America 2013
76788ba_financials.indd 274
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NOTE 25 Parent Company Information
The following tables present the Parent Company-only financial information. On October 1, 2013, the merger of Merrill Lynch & Co.,
Inc. into Bank of America Corporation was completed; however, the Parent Company-only financial information is presented in accordance
with bank regulatory reporting requirements and as such prior periods have not been restated.
Condensed Statement of Income
(Dollars in millions)
Income
Dividends from subsidiaries:
Bank holding companies and related subsidiaries
Nonbank companies and related subsidiaries
Interest from subsidiaries
Other income (loss) (1)
Total income
Expense
Interest on borrowed funds
Noninterest expense (2)
Total expense
Income (loss) before income taxes and equity in undistributed earnings of subsidiaries
Income tax benefit
Income (loss) before equity in undistributed earnings of subsidiaries
Equity in undistributed earnings (losses) of subsidiaries:
Bank holding companies and related subsidiaries
Nonbank companies and related subsidiaries
Total equity in undistributed earnings (losses) of subsidiaries
Net income
Net income applicable to common shareholders
2013
2012
2011
$
$
$
8,532
357
2,087
233
11,209
6,379
12,668
19,047
(7,838)
(7,227)
(611)
14,150
(2,108)
12,042
11,431
10,082
$ 16,213
542
627
(304)
17,078
$ 10,277
553
869
10,603
22,302
5,376
11,643
17,019
59
(5,883)
5,942
6,234
11,861
18,095
4,207
(2,783)
6,990
1,072
(2,826)
(1,754)
4,188
2,760
6,650
(12,194)
(5,544)
1,446
85
$
$
$
$
(1) Includes $753 million and $6.5 billion of gains related to the sale of the Corporation’s investment in CCB in 2013 and 2011.
(2) Includes, in aggregate, $1.3 billion, $4.1 billion and $6.9 billion in 2013, 2012 and 2011 of representations and warranties provision, which is presented as a component of mortgage banking
income on the Consolidated Statement of Income, litigation expense and in 2012 an expense related to an agreement with the Federal Reserve and the OCC to cease the Independent Foreclosure
Review and replace it with an accelerated remediation process.
Condensed Balance Sheet
(Dollars in millions)
Assets
Cash held at bank subsidiaries
Securities
Receivables from subsidiaries:
Bank holding companies and related subsidiaries
Banks and related subsidiaries
Nonbank companies and related subsidiaries
Investments in subsidiaries:
Bank holding companies and related subsidiaries
Nonbank companies and related subsidiaries
Other assets
Total assets
Liabilities and shareholders’ equity
Short-term borrowings
Accrued expenses and other liabilities
Payables to subsidiaries:
Bank holding companies and related subsidiaries
Banks and related subsidiaries
Nonbank companies and related subsidiaries
Long-term debt
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
December 31
2013
2012
$
98,679
747
$ 101,831
1,959
23,558
1,682
46,577
33,481
—
3,861
268,234
1,818
19,073
$ 460,368
185,803
65,300
15,208
$ 407,443
$
181
15,428
$
100
34,364
—
1,991
15,980
194,103
227,683
232,685
$ 460,368
1,396
—
688
133,939
170,487
236,956
$ 407,443
Bank of America 2013 275
76788ba_financials.indd 275
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Condensed Statement of Cash Flows
(Dollars in millions)
Operating activities
Net income
Reconciliation of net income to net cash provided by (used in) operating activities:
Equity in undistributed (earnings) losses of subsidiaries
Other operating activities, net
Net cash provided by (used in) operating activities
Investing activities
Net sales of securities
Net payments from subsidiaries
Other investing activities, net
Net cash provided by investing activities
Financing activities
Net increase (decrease) in short-term borrowings
Net increase (decrease) in other advances
Proceeds from issuance of long-term debt
Retirement of long-term debt
Proceeds from issuance of preferred stock and warrants
Redemption of preferred stock
Common stock repurchased
Cash dividends paid
Other financing activities, net
Net cash used in financing activities
Net increase (decrease) in cash held at bank subsidiaries
Cash held at bank subsidiaries at January 1
Cash held at bank subsidiaries at December 31
2013
2012
2011
$ 11,431
$
4,188 $
1,446
(12,042)
(10,422)
(11,033)
459
39,336
3
39,798
1,754
(3,432)
2,510
13
12,973
445
13,431
5,544
6,716
13,706
8,444
5,780
(8)
14,216
178
(14,378)
30,966
(39,320)
1,008
(6,461)
(3,220)
(1,677)
—
(32,904)
(4,139)
102,818
$ 98,679
(616)
10,100
17,176
(63,851)
667
—
—
(1,909)
(668)
(39,101)
(23,160)
124,991
$ 101,831
(13,172)
(4,449)
16,047
(21,742)
5,000
—
—
(1,738)
(1)
(20,055)
7,867
117,124
$ 124,991
NOTE 26 Performance by Geographical Area
Since the Corporation’s operations are highly integrated, certain asset, liability, income and expense amounts must be allocated to
arrive at total assets, total revenue, net of interest expense, income (loss) before income taxes and net income (loss) by geographic
area. The Corporation identifies its geographic performance based on the business unit structure used to manage the capital or expense
deployed in the region as applicable. This requires certain judgments related to the allocation of revenue so that revenue can be
appropriately matched with the related capital or expense deployed in the region.
(Dollars in millions)
U.S. (3)
Asia (4)
Europe, Middle East and Africa
Latin America and the Caribbean
Total Non-U.S.
Total Consolidated
December 31
Year
Total Assets (1)
Total Revenue,
Net of Interest
Expense (2)
Year Ended December 31
Income (Loss)
Before Income
Taxes
Net Income
(Loss)
$
1,803,243 $
2013
1,902,946
2012
2011
98,605
2013
2012
102,492
2011
2013
169,708
171,209
2012
2011
30,717
2013
2012
33,327
2011
299,030
2013
2012
307,028
2011
2,102,273 $
2013
2012
2,209,974
2011
$
76,612 $
72,175
73,613
4,442
3,478
10,890
6,353
6,011
7,320
1,535
1,670
1,631
12,330
11,159
19,841
88,942 $
83,334
93,454
$
$
13,221
1,867
(9,261)
1,382
353
7,598
1,003
323
1,009
566
529
424
2,951
1,205
9,031
16,172
3,072
(230)
10,588
4,116
(3,471)
887
282
4,787
(403)
(543)
(137)
359
333
267
843
72
4,917
11,431
4,188
1,446
(1) Total assets include long-lived assets, which are primarily located in the U.S.
(2) There were no material intercompany revenues between geographic regions for any of the periods presented.
(3)
Includes the Corporation’s Canadian operations, which had total assets of $9.6 billion and $8.3 billion at December 31, 2013 and 2012; total revenue, net of interest expense of $364 million, $317
million and $1.3 billion; income before income taxes of $258 million, $202 million and $621 million; and net income of $199 million, $141 million and $528 million for 2013, 2012 and 2011,
respectively.
(4) Amounts include pre-tax gains of $753 million and $6.5 billion ($474 million and $4.1 billion net-of-tax) on the sale of common shares of CCB during 2013 and 2011.
276 Bank of America 2013
76788ba_financials.indd 276
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Disclosure Controls and Procedures
Bank of America Corporation and Subsidiaries
As of the end of the period covered by this report and pursuant to
Rule 13a-15 of the Securities Exchange Act of 1934 (Exchange
Act), Bank of America’s management, including the Chief Executive
Officer and Chief Financial Officer, conducted an evaluation of the
effectiveness and design of our disclosure controls and
procedures (as that term is defined in Rule 13a-15(e) of the
Exchange Act). Based upon that evaluation, Bank of America’s
Chief Executive Officer and Chief Financial Officer concluded that
Bank of America’s disclosure controls and procedures were
effective, as of the end of the period covered by this report, in
recording, processing, summarizing and reporting information
required to be disclosed by the Corporation in reports that it files
or submits under the Exchange Act, within the time periods
specified in the Securities and Exchange Commission’s rules and
forms.
76788ba_financials.indd 277
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Bank of America 2013 277
Report of Independent Registered Public Accounting Firm
Bank of America Corporation and Subsidiaries
To the Board of Directors of Bank of America
Corporation:
We have examined, based on criteria established in Internal Control
– Integrated Framework (1992) issued by the Committee of
Sponsoring Organizations of the Treadway Commission, Bank of
America Corporation’s (the “Corporation”) assertion, included
under Item 9A, that the Corporation’s disclosure controls and
procedures were effective as of December 31, 2013
(“Management’s Assertion”). Disclosure controls and procedures
mean controls and other procedures of an issuer that are designed
to ensure that information required to be disclosed by an issuer
in reports that it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized, and reported
within the time periods specified in the Securities and Exchange
Commission’s rules and forms, and that information required to
be disclosed by an issuer in reports that it files or submits under
the Securities Exchange Act of 1934 is accumulated and
communicated to the issuer’s management, including its principal
executive and principal financial officer, or persons performing
similar functions, as appropriate, to allow timely decisions
regarding required disclosure. The Corporation’s management is
responsible for maintaining effective disclosure controls and
procedures and for Management’s Assertion of the effectiveness
of its disclosure controls and procedures. Our responsibility is to
express an opinion on Management’s Assertion based on our
examination.
There are inherent limitations to disclosure controls and
procedures. Because of these inherent limitations, effective
disclosure controls and procedures can only provide reasonable
assurance of achieving the intended objectives. Disclosure
controls and procedures may not prevent, or detect and correct,
material misstatements, and they may not identify all information
relating to the Corporation to be accumulated and communicated
to the Corporation’s management to allow timely decisions
regarding required disclosures. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that
disclosure controls and procedures may become inadequate
because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
We conducted our examination in accordance with attestation
standards established by the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the examination to obtain reasonable assurance
about whether effective disclosure controls and procedures were
maintained in all material respects. Our examination included
obtaining an understanding of the Corporation’s disclosure
controls and procedures and testing and evaluating the design
and operating effectiveness of the Corporation’s disclosure
controls and procedures based on the assessed risk. Our
examination also included performing such other procedures as
we considered necessary in the circumstances. We believe that
our examination provides a reasonable basis for our opinion. Our
examination was not conducted for the purpose of expressing an
opinion, and accordingly we express no opinion, on the accuracy
or completeness of the Corporation’s disclosures in its reports,
or whether such disclosures comply with the rules and regulations
adopted by the Securities and Exchange Commission.
In our opinion, Management’s Assertion that the Corporation’s
disclosure controls and procedures were effective as of
December 31, 2013 is fairly stated, in all material respects, based
on criteria established in Internal Control – Integrated Framework
(1992) issued by the Committee of Sponsoring Organizations of
the Treadway Commission.
Charlotte, North Carolina
February 25, 2014
278 Bank of America 2013
76788ba_financials.indd 278
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Executive Management Team and Board of Directors
Bank of America Corporation
Executive Management Team
Brian T. Moynihan*
Chief Executive Officer
Catherine P. Bessant
Global Technology and
Operations Executive
David C. Darnell*
Co-chief Operating Officer
Anne M. Finucane
Global Strategy and
Marketing Officer
Christine P. Katziff
Corporate General Auditor
Terrence P. Laughlin*
Chief Risk Officer
Gary G. Lynch*
Global General Counsel
and Head of Compliance
and Regulatory Relations
Thomas K. Montag*
Co-chief Operating Officer
Andrea B. Smith
Global Head of Human Resources
Ron D. Sturzenegger
Legacy Asset Servicing Executive
Bruce R. Thompson*
Chief Financial Officer
Board of Directors
Charles O. Holliday, Jr.
Chairman of the Board
Bank of America Corporation
Sharon L. Allen
Former Chairman
Deloitte LLP
Susan S. Bies
Former Member
Board of Governors of the
Federal Reserve System
Jack O. Bovender, Jr.
Former Chairman and
Chief Executive Officer
HCA, Inc.
Frank P. Bramble, Sr.
Former Executive Officer
MBNA Corporation
Pierre de Weck
Former Chairman and
Global Head of Private
Wealth Management
Deutsche Bank AG
Arnold W. Donald
President and
Chief Executive Officer
Carnival Corporation and Carnival plc
Charles K. Gifford
Former Chairman
Bank of America Corporation
Linda P. Hudson
CEO Emeritus and Former President
and Chief Executive Officer
BAE Systems, Inc.
Monica C. Lozano
Chairman and Chief Executive Officer
ImpreMedia, LLC
Thomas J. May
Chairman, President and
Chief Executive Officer
Northeast Utilities
Brian T. Moynihan
Chief Executive Officer
Bank of America Corporation
Lionel L. Nowell, III
Former Senior Vice President
and Treasurer
PepsiCo, Inc.
Clayton S. Rose
Professor of Management Practice
Harvard Business School
R. David Yost
Former Chief Executive Officer
AmerisourceBergen Corporation
*Executive Officer
Bank of America 2013 279
76788ba_financials.indd 279
3/10/14 12:23 PM
Corporate Information
Bank of America Corporation
Headquarters
The principal executive offices of Bank of America Corporation
(the Corporation) are located in the Bank of America Corporate
Center, 100 North Tryon Street, Charlotte, NC 28255.
Annual Report on Form 10-K
The Corporation’s 2013 Annual Report on Form 10-K is available
at http://investor.bankofamerica.com. The Corporation also will
provide a copy of the 2013 Annual Report on Form 10-K (without
exhibits) upon written request addressed to:
Stock Listing
The Corporation’s common stock is listed on the New York
Stock Exchange (NYSE) under the symbol BAC. The Corporation’s
common stock is also listed on the London Stock Exchange,
and certain shares are listed on the Tokyo Stock Exchange.
The stock is typically listed as BankAm in newspapers. As of
February 24, 2014, there were 215,755 registered holders of
the Corporation’s common stock.
Investor Relations
Analysts, portfolio managers and other investors seeking
additional information about Bank of America stock should
contact our Equity Investor Relations group at 1.704.386.5681
or i_r@bankofamerica.com. For additional information about
Bank of America from a credit perspective, including debt and
preferred securities, contact our Fixed Income Investor Relations
group at 1.866.607.1234 or fixedincomeir@bankofamerica.com.
Visit the Investor Relations area of the Bank of America website,
http://investor.bankofamerica.com, for stock and dividend
information, financial news releases, links to Bank of America
SEC filings, electronic versions of our annual reports and other
items of interest to the Corporation’s shareholders.
Customers
For assistance with Bank of America products and services,
call 1.800.432.1000, or visit the Bank of America website at
www.bankofamerica.com. Additional toll-free numbers for
specific products and services are listed on our website at
www.bankofamerica.com/contact.
News Media
News media seeking information should visit our online
newsroom at www.bankofamerica.com/newsroom for news
releases, speeches and other items relating to the Corporation,
including a complete list of the Corporation’s media relations
specialists grouped by business specialty or geography.
Bank of America Corporation
Office of the Corporate Secretary
NC1-027-20-05
Hearst Tower, 214 North Tryon Street
Charlotte, NC 28255
Shareholder Inquiries
For inquiries concerning dividend checks, electronic deposit
of dividends, dividend reinvestment, tax statements, electronic
delivery, transferring ownership, address changes or lost or
stolen stock certificates, contact Bank of America Shareholder
Services at Computershare Trust Company, N.A. via the Internet
at www.computershare.com/bac; call 1.800.642.9855; or write
to P.O. Box 43078, Providence, RI 02940-3078. For general
shareholder information, contact Bank of America Office of the
Corporate Secretary at 1.800.521.3984. Shareholders outside
of the United States and Canada may call 1.781.575.2621.
Electronic Delivery
As part of our commitment to reduce paper consumption
by 20% by 2015, we offer electronic methods for customer
communications and transactions. In 2013, we delivered
more than 445 million digital correspondences through Online
Banking and other channels, and continued use of Image ATMs,
electronic payments and an employee print reduction program,
preventing the emissions of 36,314 metric tons of carbon
dioxide equivalent (CO2e). Customers can sign up to receive
online statements through their Bank of America or Merrill Lynch
account website. In 2012, we adopted the SEC’s Notice and
Access rule, which allows certain issuers to inform shareholders
of the electronic availability of Proxy materials, including the
Annual Report, which significantly reduced the number of printed
copies we produce and mail to shareholders. Shareholders
still receiving printed copies can join our efforts by electing
to receive an electronic copy of the Annual Report and Proxy
materials. If you have an account maintained in your name
at Computershare Investor Services, you may sign up for this
service at www.computershare.com/bac. If your shares are held
by a broker, bank or other nominee, you may elect to receive
an electronic copy of the Annual Report and Proxy materials
online at www.proxyvote.com, or contact your broker.
280 Bank of America 2013
76788ba_financials.indd 280
3/10/14 12:23 PM
Brian T. Moynihan
Chief Executive Officer
To our shareholders,
In 2013, the earnings power of our company
began to shine through more clearly. The
strategy we outlined several years ago is
driving growth as we better connect the
outstanding capabilities of our company for
the three groups of customers we serve:
people, companies and institutional investors.
We are helping our teams to connect more
deeply with each other so that we can bring
everything to bear that customers and
clients need to live their financial lives.
For the year, net income increased to $11.4 billion from $4.2 billion
a year ago. These results are some of the best we have seen in
recent years and a testament to the work the team is doing every
day to win in the marketplace.
Last year, Tier 1 common capital grew by 9 percent, and our
regulatory capital measures exceed all long-term requirements.
Liquidity and time-to-required funding also strengthened, and
long-term debt has been reduced by more than $200 billion
from its peak, all of which enabled our company to return more
than $3 billion in capital to shareholders last year through common
share repurchases. We know this is important to you as shareholders
and let me assure you the company is committed to returning
excess capital over time through both repurchases and dividends.
Life’s better when we’re connected
For Bank of America,
growth means making
everyday connections —
every day. Here’s how:
50M
consumer and small
business relationships
in the U.S.
14M+
banking customers are now
making mobile connections,
staying in touch with their
finances anytime, anywhere
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Bank of America Corporation (“Bank of America”) is a financial holding company that, through its subsidiaries and affiliated companies, provides banking and non-
banking financial services. Global Wealth and Investment Management is a division of Bank of America Corporation (“BAC”). Merrill Lynch, Merrill Edge™, U.S. Trust,
Bank of America Merrill Lynch and BofA™ Global Capital Management are affiliated subdivisions within Global Wealth and Investment Management. Merrill Lynch
Wealth makes available products and services offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”) and other subsidiaries of BAC. Merrill Edge is
available through MLPF&S, and consists of the Merrill Edge Advisory Center (investment guidance) and self-directed online investing. U.S. Trust, Bank of America Private
Wealth Management operates through Bank of America, N.A., and other subsidiaries of BAC. Bank of America Merrill Lynch is a marketing name for the Retirement and
Philanthropic Services businesses of BAC. BofA™ Global Capital Management Group, LLC (“BofA Global Capital Management”), is an asset management division of BAC.
BofA Global Capital Management entities furnish investment management services and products for institutional and individual investors.
“Bank of America Merrill Lynch” is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives,
and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC.
Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation
(“Investment Banking Affiliates”), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp., both
of which are registered broker-dealers and members of SIPC, and, in other jurisdictions, by locally registered entities. Merrill Lynch, Pierce, Fenner & Smith Incorporated
and Merrill Lynch Professional Clearing Corp. are registered as futures commission merchants with the CFTC and are members of the NFA.
Case studies are intended to illustrate products and services available at Bank of America and Merrill Lynch. You should not consider these as an endorsement of
Merrill Lynch as an investment advisor or as a testimonial about a client’s experiences with us as an investment advisor. Case studies do not necessarily represent the
experiences of other clients, nor do they indicate future performance. Investment results may vary. The investment strategies discussed are not appropriate for every
investor and should be considered given a person’s investment objectives, financial situation and particular needs. Clients should review with their advisor the terms,
conditions and risks involved with specific products and services.
Banking products are provided by Bank of America, N.A., and affiliated banks, members FDIC and wholly owned subsidiaries of BAC.
Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value
MLPF&S is a registered broker-dealer, member SIPC and a wholly owned subsidiary of BAC.
Please recycle. The annual report is printed on 30% post-consumer waste (PCW) recycled paper.
76788ba_cvr.indd 3
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Bank of America Corporation
2013 Annual Report
Bank of America Corporation
2013 Annual Report
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Wherever we do business,
our success depends on
understanding what’s important
to our customers and clients
and connecting them to what
they need to help make
their financial lives better.
Life’s better when
we’re connected™
76788ba_cvr.indd 3
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Please recycle
Bank of America Corporation
2013 Annual Report
00-04-1368B 3/2014