Bank Of America Corp (BAC) SEC Quarterly Report (10-Q) for Q2 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" 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, regulatory proceedings, or enforcement actions, 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 expectations or other projections or expectations; 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 potential 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-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.

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 June 30, 2017 , the Corporation had approximately $2.3 trillion in assets and a headcount of approximately 211,000 employees. Headcount remained relatively unchanged since December 31, 2016. Beginning in the second quarter of 2017, we changed from reporting full-time equivalent employees to reporting headcount. Prior-period amounts have been reclassified.

As of June 30, 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 4,500 retail financial centers, approximately 16,000 ATMs, and leading digital banking platforms (www.bankofamerica.com) with approximately 34 million active users, including 23 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. in the second quarter were characterized by continued economic growth and low inflation, after GDP growth decelerated in the first quarter. Consumer and business attitudes on the economy have remained broadly unchanged from the high historical levels reached in the first quarter. The labor market remained healthy, with sustained strong non-farm payroll gains in the second quarter. Contrary to the Federal Open Market Committee projections, inflation fell during the quarter as year-over-year growth in headline CPI decreased by approximately half a percentage point. In June, the Federal Reserve raised its target federal funds rate corridor, in line with market

expectations. Financial markets also responded to several ongoing developments: first, in response to the June rate hike and the potential for additional hikes over 2017, the Treasury yield curve continued to flatten. Second, the equity markets continued to rally, albeit with weaker momentum, with the S&P 500 index gaining over 2.5 percent. The U.S. Dollar weakened, erasing all the gains that followed the November presidential election.

Abroad, after eurozone GDP grew in the first quarter at the fastest pace in two years, the recovery continued to gain momentum; although, political uncertainty remained elevated ahead of the French elections. The more robust economic momentum has failed to translate into stronger inflationary pressures, which remained depressed over the quarter. As a result, the European Central Bank remained cautious about the outlook for monetary policy and its quantitative easing program despite the improved growth outlook.

The U.K. gained center-stage on both the economic and political front. The impact of Brexit has started to materialize in the economy with the first quarter GDP growth coming close to stagnation and many indicators weakening further over the second quarter, albeit still pointing to positive growth. At the same time, inflation continued in an upward trend and reached the highest level since 2012, well above the Bank of England target, driven by the pass-through from the Sterling depreciation that followed the Brexit referendum.

In Japan, economic momentum remained intact in the second quarter, though business investment had slowed early in the year. The monetary policy stance remained unchanged while underlying inflation strengthened slightly over the quarter. In China, the service sector remained a key driver of economic growth. The Yuan had a volatile quarter reaching a seven-month high in June which contributed to a softening of supply chain inflationary pressures over the quarter.

Recent Events

On June 28, 2017, following the Federal Reserve's non-objection to our 2017 Comprehensive Capital Analysis and Review (CCAR) capital plan, the Board of Directors (the Board) authorized the repurchase of $12.9 billion in common stock from July 1, 2017 through June 30, 2018, including approximately $900 million to offset the effect of equity-based compensation plans during the same period. The common stock repurchase authorization includes both common stock and warrants. Also in connection with the non-objection to our CCAR plan, on July 26, 2017, the Board declared a quarterly common stock dividend of $0.12 per share, payable on September 29, 2017 to shareholders of record as of September 1, 2017. For additional information, see the Corporation's Current Report on Form 8-K filed on June 28, 2017.

During the second quarter of 2017 , we repurchased approximately $2.2 billion of common stock pursuant to the Board's repurchase authorizations announced on June 29, 2016 and January 13, 2017. These repurchase authorizations expired on June 30, 2017. For additional information, see Capital Management on page 28 .

On June 1, 2017, the Corporation completed the previously-announced sale of its non-U.S. consumer credit card business to a third party and recorded an after-tax gain of $103 million. As previously disclosed, the sale improved our transitional Basel 3 Common equity tier 1 capital ratio by 11 basis points (bps) under the Advanced approaches and 15 bps under the Standardized approach. This sale completes the transformation of our consumer credit card business from a multi-country, multi-brand business to a single-brand business serving core retail customers in the United States. For more information, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements .

In connection with an investment in the Corporation's Series T preferred stock in 2011, the holder of the Series T 6% Non-cumulative Preferred Stock (Series T preferred stock) received warrants to purchase up to 700 million shares of the Corporation's common stock at an exercise price of $7.142857 per share. The holder of the Series T preferred stock publicly announced on June 30, 2017, consistent with similar statements made in its 2016 Annual Report to Shareholders, that it intends to exercise the warrants and acquire all 700 million shares of our common stock using the Series T preferred stock to satisfy the exercise price

given its expectation of an increase in our common stock dividend. Upon exercise of the warrants, common shares outstanding will increase; however, there will be no effect on diluted earnings per share as this conversion has been previously included in the Corporation's diluted earnings per share calculation.

Table 1 provides selected consolidated financial data for the three and six months ended June 30, 2017 and 2016 , and at June 30, 2017 and December 31, 2016 .

Financial Highlights

Net income was $5.3 billion and $10.1 billion , or $0.46 and $0.87 per diluted share for the three and six months ended June 30, 2017 compared to $4.8 billion and $8.3 billion , or $0.41 and $0.68 per diluted share for the same periods in 2016 . The results for the three and six months ended June 30, 2017 compared to the same periods in 2016 were driven by higher revenue and lower provision for credit losses and an increase in noninterest expense.

Total assets increased $ 66.8 billion from December 31, 2016 to $2.3 trillion at June 30, 2017 due to higher trading account assets primarily driven by increased client financing activities in equities, growth in securities borrowed or purchased under agreements to resell primarily due to increased matched-book

activity, as well as higher cash and cash equivalents and loans and leases. These increases were partially offset by the impact of the sale of the non-U.S. consumer credit card business. Total liabilities increased $62.7 billion from December 31, 2016 to $2.0 trillion at June 30, 2017 primarily driven by higher securities loaned or sold under agreements to repurchase due to increased matched-book activity, an increase in trading account liabilities as well as an increase in short-term borrowings. Shareholders' equity increased $4.1 billion from December 31, 2016 primarily due to net income, partially offset by returns of capital to shareholders of $7.3 billion through common stock repurchases and common and preferred stock dividends.

Noninterest income increased $675 million to $11.8 billion , and $1.6 billion to $23.0 billion for the three and six months ended June 30, 2017 compared to the same periods in 2016 . The following highlights the more significant changes.

The provision for credit losses decreased $250 million to $726 million , and $412 million to $1.6 billion for the three and six months ended June 30, 2017 compared to the same periods in 2016 primarily due to credit quality improvements in the consumer real estate portfolio and reductions in energy exposures in the commercial portfolio, partially offset by portfolio seasoning and loan growth in the U.S. credit card portfolio. For more information on the provision for credit losses, see Provision for Credit Losses on page 57 .

Noninterest expense increased $233 million to $13.7 billion , and $265 million to $28.6 billion for the three and six months ended June 30, 2017 compared to the same periods in 2016 . The increases were primarily due to higher other general operating expense which included a $295 million impairment charge related

to certain data centers in the process of being sold and higher FDIC expense, partially offset by lower litigation expense. The increase in the six-months period was also driven by an increase in personnel expense due in part to higher revenue-related incentive costs.

The effective tax rates for both the three and six months ended June 30, 2017 were driven by the impact of our recurring tax preference benefits, offset by $690 million of tax expense recognized in connection with the sale of the non-U.S. consumer credit card business, which related to gains on derivatives used

to hedge the currency risk of the net investment. The six-month effective tax rate also included a tax benefit related to a new accounting standard on share-based compensation. The effective tax rates for the three and six months ended June 30, 2016 were driven by our recurring tax preference 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 mortgage servicing rights (MSRs)), net of related deferred tax liabilities. These measures are used to evaluate our use of equity. In addition, profitability, relationship and investment models use both return on average tangible common shareholders' equity and return on average tangible shareholders' equity as key measures to support our overall growth goals. These ratios are as follows:

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 Tables 6 and 7 . Table 8 presents certain non-GAAP financial measures and performance measurements on an FTE basis.