Bank Of America Corp (BAC) SEC Quarterly Report (10-Q) for Q1 2017

Bank of America Corporation (the "Corporation") and its management may make certain statements that constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often use words such as "anticipates," "targets," "expects," "hopes," "estimates," "intends," "plans," "goals," "believes," "continue," "suggests" and other similar expressions or future or conditional verbs such as "will," "may," "might," "should," "would" and "could." Forward-looking statements represent the Corporation's current expectations, plans or forecasts of its future results, revenues, expenses, efficiency ratio, capital measures, and future business and economic conditions more generally, and other future matters. These statements are not guarantees of future results or performance and involve certain known and unknown risks, uncertainties and assumptions that are difficult to predict and are often beyond the Corporation's control. Actual outcomes and results may differ materially from those expressed in, or implied by, any of these forward-looking statements.

You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties more fully discussed under Item 1A. Risk Factors of our 2016 Annual Report on Form 10-K and in any of the Corporation's subsequent Securities and Exchange Commission filings: potential claims, damages, penalties, fines and reputational damage resulting from pending or future litigation and regulatory proceedings, including inquiries into our retail sales practices, and the possibility that amounts may be in excess of the Corporation's recorded liability and estimated range of possible loss for litigation exposures; the possibility that the Corporation could face increased servicing, securities, fraud, indemnity, contribution or other claims from one or more counterparties, including trustees, purchasers of loans, underwriters, issuers, other parties involved in securitizations, monolines or private-label and other investors; 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 Corporation's ability to resolve representations and warranties repurchase and related claims, including claims brought by investors or trustees seeking to avoid the statute of limitations for repurchase claims; uncertainties about the financial stability and growth rates of non-U.S. jurisdictions, the risk that those jurisdictions may face difficulties servicing their sovereign debt, and related stresses on financial markets, currencies and trade, and the Corporation ' s exposures to such risks, including direct, indirect and operational; the impact of U.S. and global interest rates, currency

exchange rates and economic conditions; the impact on the Corporation's business, financial condition and results of operations of a potential higher interest rate environment; the possibility that future credit losses may be higher than currently expected due to changes in economic assumptions, customer behavior, adverse developments with respect to U.S. or global economic conditions, and other uncertainties; the impact on the Corporation ' s business, financial condition and results of operations from a protracted period of lower oil prices or ongoing volatility with respect to oil prices; the Corporation's ability to achieve its expense targets or net interest income or other projections; adverse changes to the Corporation ' s credit ratings from the major credit rating agencies; estimates of the fair value of certain of the Corporation ' s assets and liabilities; uncertainty regarding the content, timing and impact of regulatory capital and liquidity requirements, including the approval of our internal models methodology for calculating counterparty credit risk for derivatives; the potential impact of total loss-absorbing capacity requirements; potential adverse changes to our global systemically important bank (G-SIB) surcharge; the impact of Federal Reserve actions on the Corporation's capital plans; the possible impact of the Corporation's failure to remediate shortcomings identified by banking regulators in the Corporation's Resolution Plan; the impact of implementation and compliance with U.S. and international laws, regulations and regulatory interpretations, including, but not limited to, recovery and resolution planning requirements, Federal Deposit Insurance Corporation (FDIC) assessments, the Volcker Rule, fiduciary standards and derivatives regulations; a failure in or breach of the Corporation's operational or security systems or infrastructure, or those of third parties, including as a result of cyberattacks; the impact on the Corporation's business, financial condition and results of operations from the planned exit of the United Kingdom (U.K.) from the European Union (EU); and other similar matters.

Forward-looking statements speak only as of the date they are made, and the Corporation undertakes no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.

Notes to the Consolidated Financial Statements referred to in the Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) are incorporated by reference into the MD&A. Certain prior-year amounts have been reclassified to conform to current-year presentation. Throughout the MD&A, the Corporation uses certain acronyms and abbreviations which are defined in the Glossary.

The Corporation is a Delaware corporation, a bank holding company (BHC) and a financial holding company. When used in this report, "the Corporation" may refer to Bank of America Corporation individually, Bank of America Corporation and its subsidiaries, or certain of Bank of America Corporation's subsidiaries or affiliates. Our principal executive offices are located in Charlotte, North Carolina. Through our banking and various nonbank subsidiaries throughout the U.S. and in international markets, we provide a diversified range of banking and nonbank financial services and products through four business segments: Consumer Banking , Global Wealth & Investment Management (GWIM) , Global Banking and Global Markets , with the remaining operations recorded in All Other . We operate our banking activities primarily under the Bank of America, National Association (Bank of America, N.A. or BANA) charter. At March 31, 2017 , the Corporation had approximately $2.2 trillion in assets and approximately 209,000 full-time equivalent employees.

As of March 31, 2017 , we operated in all 50 states, the District of Columbia, the U.S. Virgin Islands, Puerto Rico and more than 35 countries. Our retail banking footprint covers approximately 83 percent of the U.S. population, and we serve approximately 47 million consumer and small business relationships with approximately 4,600 retail financial centers, approximately 15,900 ATMs, and leading digital banking platforms (www.bankofamerica.com) with approximately 35 million active users, including more than 22 million mobile active users. We offer industry-leading support to approximately three million small business owners. Our wealth management businesses, with client balances of approximately $2.6 trillion , provide tailored solutions to meet client needs through a full set of investment management, brokerage, banking, trust and retirement products. We are a global leader in corporate and investment banking and trading across a broad range of asset classes serving corporations, governments, institutions and individuals around the world.

Macroeconomic trends in the U.S. were largely stable during the first quarter. Following a pronounced deceleration in economic growth in the fourth quarter of 2016, there was little sign of a first quarter acceleration to start 2017. Consumer spending softened, as vehicle sales flattened at high levels and utility consumption was restrained by warmer than normal temperatures. Partially offsetting slower consumer spending, business investment (including energy-related equipment and infrastructure) strengthened on stabilizing energy costs and a lift in business confidence. Domestic final sales growth may have declined slightly below two percent on an annualized basis despite solid growth in housing construction. The labor market remained healthy, with sustained strong non-farm payroll gains in excess of 200,000 in both January and February. With signs of gradually firming inflation, the Federal Reserve raised the federal funds rate target range by 25 basis points (bps) to a range of 0.75 percent to one percent in March, in line with market expectations.

Consumer and business attitudes on the economy improved markedly, continuing trends that began with the Presidential election last November. Financial markets also responded to several ongoing developments: first, in response to the March rate hike and the potential for several additional hikes over 2017, the treasury yield curve flattened as short-term yields rose while longer term rates remained relatively unchanged. Second, with expectations of more expansionary fiscal policy and regulatory relief from the new Presidential Administration, equity markets rallied, with the S&P 500 index gaining over five percent in the first quarter of 2017. Meanwhile, the U.S. Dollar weakened, erasing some of the previous quarter's gains. Forward markets captured the shift in financial market expectations and risks with federal fund futures falling and equity volatility remaining stable at historically low levels throughout the quarter.

Abroad, the impact of the U.K. vote to exit the EU (Brexit) has been muted to date, even as the British government approached and then triggered Article 50 of the Treaty on EU in late March. The resilient economic outlook, combined with a stronger than expected pickup in inflation, has shifted the Bank of England from a loosening to a tightening bias. Recent indicators suggest that the recovery in the eurozone has continued to gain momentum and move closer to historical trends. Inflationary pressures showed signs of building, as headline inflation moved closer to the European Central Bank's inflation target. However, the pickup was mainly driven by food and energy prices; core inflation remained at historical low levels. As a result, although the European Central Bank kept its policy rate unchanged, it adopted a slightly more hawkish tone.

The upward revision of the fourth quarter GDP indicated that the Japanese recovery has gathered momentum, driven by a strengthening of domestic demand. The new monetary policy regime of yield curve targeting has kept the Japanese yield curve in check against the global rise in long-term interest rates. Underlying inflation also showed signs of bottoming and turning positive over the quarter. In China, the service sector remained a key driver of economic growth amid signs that activity in the industrial sector could pick up steam in the coming months. The Yuan was stable against the dollar during the quarter as efforts to stem capital outflows by the government started to show improvements.

Recent Events

During the first quarter of 2017 , we repurchased approximately $2.7 billion of common stock pursuant to the Board of Directors' (the Board) authorization of our 2016 Comprehensive Capital Analysis and Review (CCAR) capital plan and to offset equity-based compensation awards. This also included repurchases related to the January 13, 2017 announcement of our plan to repurchase an additional $1.8 billion of common stock during the first half of 2017. For additional information, see Capital Management on page 21 .

Financial Highlights

Net income was $4.9 billion , or $0.41 per diluted share for the three months ended March 31, 2017 compared to $3.5 billion , or $0.28 per diluted share for the same period in 2016 . The results for the three months ended March 31, 2017 compared to the same period in 2016 were driven by higher revenue and lower provision for credit losses.

Total assets increased $60.0 billion from December 31, 2016 to $2.2 trillion at March 31, 2017 primarily driven by higher cash and cash equivalents from seasonal increases in deposits and higher short-term bank funding as well as seasonal increases in trading account assets due to increased client financing activities and securities borrowed or purchased under agreements to resell. Total liabilities increased $58.7 billion from December 31, 2016 to $2.0 trillion at March 31, 2017 primarily driven by higher securities loaned or sold under agreements to repurchase and short-term borrowings due to increased Federal Home Loan Bank (FHLB) advances for liquidity purposes as well as increases in trading account liabilities and a seasonal increase in deposits. Shareholders' equity increased $1.3 billion from December 31, 2016 primarily due to net income, partially offset by $2.7 billion of common stock repurchases.

Net interest income increased $573 million to $11.1 billion for the three months ended March 31, 2017 compared to the same period in 2016 , and the net interest yield increased six bps to 2.35 percent. Among other factors, these increases were primarily driven by the higher interest rate environment, primarily short-end rates, and growth in loans and deposits. For information regarding interest rate risk management, see Interest Rate Risk Management for the Banking Book on page 58 .

Noninterest income increased $885 million to $11.2 billion for the three months ended March 31, 2017 compared to the same period in 2016 . The following highlights the more significant changes.

The provision for credit losses decreased $162 million to $835 million for the three months ended March 31, 2017 compared to the same period in 2016 primarily driven by credit quality improvements in energy exposures in the commercial portfolio. We expect the provision for credit losses will approximate net charge-offs for the second quarter of 2017. For more information on the provision for credit losses, see Provision for Credit Losses on page 51 . For more information on our energy sector exposure, see Commercial Portfolio Credit Risk Management – Industry Concentrations on page 47 .

Noninterest expense of $14.8 billion remained relatively unchanged for the three months ended March 31, 2017 compared to the same period in 2016 reflecting broad-based reductions in operating and support costs, offset by higher personnel and FDIC expenses. Personnel expense increased $306 million and included retirement-eligible incentive costs of $964 million compared to $850 million as well as seasonally elevated payroll tax costs. Also impacting the increase were higher incentive costs due to the impact of changes in share price on employee stock awards, and higher revenue-related incentive costs. Other general operating expense decreased $114 million largely driven by lower litigation expense.

The effective tax rates for the three months ended March 31, 2017 and 2016 were driven by the impact of our recurring tax preference benefits. The effective tax rate for the three months ended March 31, 2017 also included a tax benefit of $222 million related to new accounting guidance for the tax impact associated with share-based compensation. For additional information, see Note 11 – Shareholders' Equity to the Consolidated Financial Statements . We expect our effective tax rate to be approximately 30 percent for the remainder of 2017, absent unusual items.

In this Form 10-Q, we present certain non-GAAP financial measures. Non-GAAP financial measures exclude certain items or otherwise include components that differ from the most directly comparable measures calculated in accordance with GAAP. Non-GAAP financial measures are provided as additional useful information to assess our financial condition, results of operations (including period-to-period operating performance) or compliance with prospective regulatory requirements. These non-GAAP financial measures are not intended as a substitute for GAAP financial measures and may not be defined or calculated the same way as non-GAAP financial measures used by other companies.

We view net interest income and related ratios and analyses on an fully taxable-equivalent (FTE) basis, which when presented on a consolidated basis, are non-GAAP financial measures. To derive the FTE basis, net interest income is adjusted to reflect tax-exempt income on an equivalent before-tax basis with a corresponding increase in income tax expense. For purposes of this calculation, we use the federal statutory tax rate of 35 percent and a representative state tax rate. In addition, certain performance measures including the efficiency ratio and net interest yield utilize net interest income (and thus total revenue) on an FTE basis. The efficiency ratio measures the costs expended to generate a dollar of revenue, and net interest yield measures the bps we earn over the cost of funds. We believe that presentation of these items on an FTE basis allows for comparison of amounts from both taxable and tax-exempt sources and is consistent with industry practices.

We may present certain key performance indicators and ratios excluding certain items (e.g., debit valuation adjustment (DVA)) which result in non-GAAP financial measures. We believe that the presentation of measures that exclude these items are useful because they provide additional information to assess the underlying operational performance and trends of our businesses and to allow better comparison of period-to-period operating performance.

We also evaluate our business based on certain ratios that utilize tangible equity, a non-GAAP financial measure. Tangible equity represents an adjusted shareholders' equity or common shareholders' equity amount which has been reduced by goodwill and certain acquired intangible assets (excluding MSRs), net of related deferred tax liabilities. These measures are used to evaluate our use of equity. In addition, profitability, relationship and investment models use both return on average tangible common shareholders' equity and return on average tangible shareholders' equity as key measures to support our overall growth goals. These ratios are as follows:

We believe that the use of ratios that utilize tangible equity provides additional useful information because they present measures of those assets that can generate income. Tangible book value per share provides additional useful information about the level of tangible assets in relation to outstanding shares of common stock.

The aforementioned supplemental data and performance measures are presented in Table 6 .

Table 7 presents certain non-GAAP financial measures and performance measurements on an FTE basis.

We report our results of operations through the following four business segments: Consumer Banking , GWIM , Global Banking and Global Markets , with the remaining operations recorded in All Other . We periodically review capital allocated to our businesses and allocate capital annually during the strategic and capital planning processes. We utilize a methodology that considers the effect of regulatory capital requirements in addition to internal risk-

based capital models. Our internal risk-based capital models use a risk-adjusted methodology incorporating each segment's credit, market, interest rate, business and operational risk components. For more information on the nature of these risks, see Managing Risk on page 21 . For more information on the basis of presentation for business segments and reconciliations to consolidated total revenue, net income and period-end total assets, see Note 17 – Business Segment Information to the Consolidated Financial Statements .