Bank Of America Corp (BAC) SEC Quarterly Report (10-Q) for Q3 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 and 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 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 or failure to take actions identified therein; 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 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 cyber attacks; the impact on the Corporation's business, financial condition and results of operations from the planned exit of the United Kingdom from the European Union; 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 September 30, 2017 , the Corporation had approximately $2.3 trillion in assets and a headcount of approximately 210,000 employees. Headcount remained relatively unchanged since December 31, 2016.

As of September 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 approximately 24 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 $2.7 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.

U.S. macroeconomic trends in the third quarter were characterized by a softening in economic growth and low inflation. GDP advanced at a slower pace than the previous quarter. At the same time, inflation remained subdued overall despite some energy-related pressure stemming from the hurricanes that impacted the southern U.S.

Despite sustained growth in the third quarter, the hurricanes added uncertainty to economic forecasts and distorted economic data releases. As a result of the hurricanes, there was an estimated 0.1 to 0.5 percent reduction from annualized GDP growth. Consumer spending slowed in August but recovered, especially vehicle sales, the following month. Business investment in equipment remained buoyant. While nonfarm payroll growth decelerated, the unemployment rate remained low. Despite tight labor market conditions, wage gains were modest.

The Federal Reserve, as expected, kept its target federal funds rate corridor at 1 to 1.25 percent, while announcing that balance

sheet normalization would begin in October. U.S. equities rose in the quarter, in part due to improvement in corporate earnings and despite the realization that domestic fiscal policy changes will likely take longer than previously expected. Despite a late rally, the U.S. dollar index fell primarily on the strength of the euro. Amid a weaker dollar, gold and oil prices both rose. The U.S. yield curve flattened modestly while interest rates increased.

Abroad, eurozone recovery remained robust in the third quarter, maintaining momentum following its best quarter in two years. 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 it has been carefully evaluating how to extend the ongoing quantitative easing program into next year.

Many survey indicators suggest that the subdued momentum from the first half of the year in the United Kingdom (U.K.) economy has extended into the third quarter. 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, business surveys suggest that moderate economic momentum remained intact in the third quarter. In China, the service sector remained a key driver of economic growth. The yuan had a volatile third quarter, reaching a one-year high in September with Chinese foreign exchange reserves rising steadily over the quarter.

Recent Events

During the third quarter of 2017 , we repurchased approximately $3.0 billion of common stock pursuant to the Board's 2017 repurchase authorization of $12.9 billion announced on June 28, 2017. For additional information, see Capital Management on page 28 . 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.

In connection with an investment in the Corporation's Series T 6% Non-cumulative preferred stock (Series T) in 2011, the Series T holders also received warrants to purchase 700 million shares of the Corporation's common stock at an exercise price of $7.142857 per share. On August 24, 2017, the Series T holders exercised the warrants and acquired the 700 million shares of our common stock using the Series T preferred stock as consideration for the exercise price, which increased the number of common shares outstanding, but had no effect on diluted earnings per share as this conversion had been included in the Corporation's diluted earnings per share calculation under the applicable accounting guidance. The carrying amount of the Series T was $2.9 billion and, upon conversion, was recorded as additional paid-in capital, increasing the Common equity tier 1 capital ratio by 20 basis points.

Financial Highlights

Net income was $5.6 billion and $15.7 billion , or $0.48 and $1.35 per diluted share for the three and nine months ended September 30, 2017 compared to $5.0 billion and $13.2 billion , or $0.41 and $1.10 per diluted share for the same periods in 2016 . The results for the three- and nine-month periods compared to the same periods in 2016 were primarily driven by higher revenue, lower provision for credit losses and noninterest expense.

Total assets increased $ 96.2 billion from December 31, 2016 to $2.3 trillion at September 30, 2017 due to higher trading account assets primarily driven by additional inventory in fixed-income, currencies and commodities (FICC) to meet expected client demand, and increased client financing activities in equities, growth in cash and cash equivalents primarily due to an increase in deposits, as well as higher loans and leases and securities

borrowed or purchased under agreements to resell. These increases were partially offset by the impact of the sale of the non-U.S. consumer credit card business to a third party in the second quarter of 2017. Total liabilities increased $90.6 billion from December 31, 2016 to $2.0 trillion at September 30, 2017 primarily driven by higher deposits due to strong organic growth, an increase in trading account liabilities, higher securities loaned or sold under agreements to repurchase due to increased matched-book activity, as well as increases in long-term debt and accrued expenses and other liabilities. Shareholders' equity increased $5.6 billion from December 31, 2016 primarily due to net income, partially offset by returns of capital to shareholders of $12.0 billion through common stock repurchases and common and preferred stock dividends.

Noninterest income decreased $756 million to $10.7 billion , and increased $804 million to $33.7 billion for the three and nine months ended September 30, 2017 compared to the same periods in 2016 . The following highlights the more significant changes.

The provision for credit losses decreased $16 million to $834 million , and $428 million to $2.4 billion for the three and nine months ended September 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 declined $342 million to $13.1 billion for the three months ended September 30, 2017 compared to the same period in 2016. The decrease was primarily due to lower personnel and other general operating expense, including the reduction related to the sale of the non-U.S. credit card business.

Noninterest expense for the nine-month period remained relatively unchanged as a $295 million impairment charge related to certain data centers in the process of being sold and higher Federal Deposit Insurance Corporation (FDIC) expense were largely offset by lower litigation expense.

The effective tax rates for both the three and nine months ended September 30, 2017 were driven by the impact of our recurring tax preference benefits. The nine-month 2017 effective tax rate also included tax expense of $690 million recognized in connection with the sale of the non-U.S. consumer credit card business in the second quarter of 2017.

The effective tax rates for the three and nine months ended September 30, 2016 were driven by our recurring tax preference benefits, and the third quarter of 2016 included a $350 million charge for the impact of the U.K. tax law changes enacted in September 2016.

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