Management’s Discussion and Analysis of Financial Condition and Results of Operations Table of Contents
Page Executive Summary 26 Recent Developments 27 Financial Highlights 28 Balance Sheet Overview 30 Supplemental Financial Data 31 Business Segment Operations 36 Consumer Banking 37 Global Wealth & Investment Management 40 Global Banking 42 Global Markets 44 All Other 45 Managing Risk 46
Strategic Risk Management49 Capital Management 49 Liquidity Risk 54 Credit Risk Management 59 Consumer Portfolio Credit Risk Management 60 Commercial Portfolio Credit Risk Management 65 Non- U.S.Portfolio 71 Loan and Lease Contractual Maturities 72 Allowance for Credit Losses 73 Market Risk Management 75 Trading Risk Management 76 Interest Rate Risk Management for the Banking Book 79 Mortgage Banking Risk Management 80 Compliance and Operational Risk Management 80 Reputational Risk Management 81 Climate Risk Management 81 Complex Accounting Estimates 82 Non-GAAP Reconciliations 85 25 Bank of America
Management report and analysis of the financial situation and operating results
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, provision for credit losses, expenses, efficiency ratio, capital measures, strategy 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 this Annual Report on Form 10-K: and in any of the Corporation's subsequent Securities and Exchange Commission Filings: the Corporation's potential judgments, orders, settlements, penalties, fines and reputational damage resulting from pending or future litigation and regulatory investigations, proceedings and enforcement actions, including as a result of our participation in and execution of government programs related to the Coronavirus Disease 2019 (COVID-19) pandemic, such as the processing of unemployment benefits for
Californiaand certain other states; the possibility that the Corporation's future liabilities may be in excess of its recorded liability and estimated range of possible loss for litigation, and regulatory and government actions; the possibility that the Corporation could face increased claims from one or more parties involved in mortgage securitizations; the Corporation's ability to resolve representations and warranties repurchase and related claims; the risks related to the discontinuation of the London Interbank Offered Rate and other reference rates, including increased expenses and litigation and the effectiveness of hedging strategies; 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, inflation, currency exchange rates, economic conditions, trade policies and tensions, including tariffs, and potential geopolitical instability; the impact of the interest rate and inflationary environment on the Corporation's business, financial condition and results of operations; 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, including the impact of supply chain disruptions, inflationary pressures and labor shortages on the economic recovery and our business; the Corporation's concentration of credit risk; the Corporation's ability to achieve its expense targets and expectations regarding revenue, net interest income, provision for credit losses, net charge-offs, effective tax rate, loan growth or other projections; adverse changes to the Corporation's credit ratings from the major credit rating agencies; an inability to access capital markets or maintain deposits or borrowing costs; estimates of the fair value and other accounting values, subject to impairment assessments, of certain of the Corporation's assets and liabilities; the estimated or actual impact of changes in accounting standards or assumptions in applying those standards; uncertainty regarding the content, timing and impact of regulatory capital and liquidity requirements; the impact of adverse changes to total loss-absorbing capacity requirements, stress capital buffer requirements and/or global systemically important bank surcharges; the potential impact of actions of the Board of Governorsof the Federal Reserve Systemon the Corporation's capital plans; the effect of changes in or interpretations of income tax laws and regulations; 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 Corporationassessments, the Volcker Rule, fiduciary standards, derivatives regulations and the Coronavirus Aid, Relief, and Economic Security Act and any similar or related rules and regulations; a failure or disruption in or breach of the Corporation's operational or security systems or infrastructure, or those of third parties, including as a result of cyberattacks or campaigns; the transition and physical impacts of climate change; our ability to achieve environmental, social and governance goals and commitments or the impact of any changes in the Corporation's sustainability strategy or commitments generally; the impact of any future federal government shutdown and uncertainty regarding the federal government's debt limit or changes in fiscal, monetary or regulatory policy; the emergence of widespread health emergencies or pandemics, including the magnitude and duration of the COVID-19 pandemic and its impact on the U.S.and/or global, financial market conditions and our business, results of operations, financial condition and prospects; the impact of natural disasters, extreme weather events, military conflict, terrorism or other geopolitical events; and other 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. Executive Summary Business Overview The Corporation is a Delawarecorporation, a bank holding company (BHC) and a financial holding company. When used in this report, "the Corporation," "we," "us" and "our" 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 various bank and 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 December 31, 2021, the Corporation had $3.2 trillionin assets and a headcount of approximately 208,000 employees. As of December 31, 2021, we served clients through operations across the U.S., its territories and approximately 35 countries. Our retail banking footprint covers all major markets in the U.S., and we serve approximately 67 million consumer and small business clients with approximately 4,200 retail financial centers, approximately 16,000 ATMs, and leading digital banking platforms (www.bankofamerica.com) with approximately 41 million active users, including approximately 33 million active mobile users. We offer industry-leading support to approximately three million small business households. Our GWIM businesses, with client balances of $3.8 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.
Capital Management On
February 2, 2022, the Corporation announced that the Board of Directors declared a quarterly cash common stock dividend of $0.21per share, payable on March 25, 2022to shareholders of record as of March 4, 2022. For more information on our capital resources and regulatory developments, see Capital Management on page 49. COVID-19 Pandemic The Coronavirus Disease 2019 (COVID-19) pandemic (the pandemic) has impacted the Corporation and may continue to do so, as uncertainty remains about the duration of the pandemic and the timing and strength of the global economic recovery. As the pandemic continues to evolve, we regularly evaluate protocols and processes in place to execute our business continuity plans. In conjunction with our efforts to support clients affected by the pandemic, we have cumulatively originated $35.4 billionin loans under the Paycheck Protection Program (PPP) with amounts outstanding of $4.7 billionand $22.7 billionat December 31, 2021and 2020. For more information on PPP loans, see Note 1 - Summary of Significant Accounting Principles to the Consolidated Financial Statements. The future direct and indirect impact of the pandemic on our businesses, results of operations and financial condition remains uncertain. Should current economic conditions deteriorate or if the pandemic worsens due to various factors, including through the spread of more easily communicable variants of COVID-19, such conditions could have an adverse effect on our businesses and results of operations and could adversely affect our financial condition. For more information on how the risks related to the pandemic adversely affect our businesses, results of operations and financial condition, see Part 1. Item 1A. Risk Factors on page 8. LIBOR and Other Benchmark Rates Subject to the continued publication of certain non-representative LondonInterbank Offered Rate (LIBOR) benchmark settings based on a modified calculation (i.e., on a "synthetic" basis), British Pound Sterling, Euro, Swiss Franc and Japanese Yen LIBOR settings and one-week and two-month U.S.dollar (USD) LIBOR settings ceased or became no longer representative of the underlying market the rates seek to measure (i.e., non-representative) immediately after December 31, 2021, and the remaining USD LIBOR settings (i.e., overnight, one month, three month, six month and 12 month) will cease or become non-representative immediately after June 30, 2023. Separately, the Federal Reserve, the Office of the Comptroller of the Currency(OCC) and the Federal Deposit Insurance Corporation(FDIC) issued supervisory guidance encouraging banks to cease entering into new contracts that use USD LIBOR as a reference rate by December 31, 2021subject to certain regulatory-approved exceptions (USD LIBOR Guidance). As a result, a major transition has been and continues to be in progress in the global financial markets with respect to the replacement of Interbank Offered Rates (IBORs). This is a complex process impacting a variety of our businesses and operations. IBORs have historically been used in many of the Corporation's products and contracts, including derivatives, consumer and commercial loans, mortgages, floating-rate notes and other adjustable-rate products and financial instruments. In response, the Corporation established an enterprise-wide IBOR transition program, with active involvement of senior management and regular reports to the Management Risk Committee(MRC) and Enterprise Risk Committee(ERC). The program continues to drive the Corporation's industry and regulatory engagement, client and financial contract changes, internal and external communications, technology and operations modifications, including updates to its operational models, systems and processes, introduction of new products, migration of existing clients, and program strategy and governance. As of December 31, 2021, the Corporation has transitioned or otherwise addressed IBOR-based products and contracts referencing the rates that ceased or became non-representative after December 31, 2021, including LIBOR-linked commercial loans, LIBOR-based adjustable-rate consumer mortgages, LIBOR-linked derivatives and interdealer trading of certain USD LIBOR and other interest rate swaps, and related hedging 27 Bank of America
-------------------------------------------------------------------------------- arrangements. Additionally, in accordance with the USD LIBOR Guidance, the Corporation has ceased entering into new contracts that use USD LIBOR as a reference rate, subject to certain regulatory-approved exceptions. The Corporation launched capabilities and services to support the issuance and trading in products indexed to various alternative reference rates (ARRs) and developed employee training programs as well as other internal and external sources of information on the various challenges and opportunities that the replacement of IBORs has presented and continues to present. The Corporation continues to monitor a variety of market scenarios as part of its transition efforts, including risks associated with insufficient preparation by individual market participants or the overall market ecosystem, ability of market participants to meet regulatory and industry-wide recommended milestones and access and demand by clients and market participants to liquidity in certain products, including LIBOR products. With respect to the transition of LIBOR products referencing USD LIBOR settings ceasing or becoming non-representative as of
June 30, 2023, a significant majority of the Corporation's notional contractual exposure to such LIBOR currencies, of which the significant majority is derivatives contracts, have been remediated (i.e., updated to include fallback provisions to ARRs based on market driven protocols, regulatory guidance and industry-recommended fallback provisions and related mechanisms) and the Corporation is continuing to remediate the remaining USD LIBOR exposure. The remaining exposure, a majority of which is made up of derivatives and commercial loans and which represents a small minority of outstanding USD LIBOR notional contractual exposure of the Corporation, will require active dialogue with clients to modify the contracts. For any residual exposures after June 2023that continue to have no fallback provisions, the Corporation is assessing and planning to leverage relevant contractual and statutory solutions, including relevant state legislation and any future federal legislation, to transition such exposure to ARRs. The Corporation has implemented regulatory, tax and accounting changes and continues to monitor current and potential impacts of the transition, including Internal Revenue Service tax regulations and guidance and Financial Accounting Standards Boardguidance. In addition, the Corporation has engaged impacted clients in connection with the transition by providing ARRs education and the timing of transition events. The Corporation is also working actively with global regulators, industry working groups and trade associations. For more information on the expected replacement of LIBOR and other benchmark rates, see Item 1A. Risk Factors - Other on page 21. Changes to Overdraft Services In January 2022, the Corporation announced changes to its overdraft services for consumer and small business clients, which include eliminating non-sufficient funds (NSF) fees beginning in February 2022and reducing overdraft fees from $35to $10beginning in May 2022. Fees from overdraft services were approximately $1 billionin 2021 and recorded in Consumer Banking as service charges in the Consolidated Statement of Income. Due to the policy changes, in 2022 the Corporation expects a significant reduction in NSF and overdraft fees. Financial Highlights Table 1 Summary Income Statement and Selected Financial Data (Dollars in millions, except per share information) 2021 2020 Income statement Net interest income $ 42,934 $ 43,360Noninterest income 46,179 42,168 Total revenue, net of interest expense 89,113 85,528 Provision for credit losses (4,594) 11,320 Noninterest expense 59,731 55,213 Income before income taxes 33,976 18,995 Income tax expense 1,998 1,101 Net income 31,978 17,894 Preferred stock dividends 1,421 1,421 Net income applicable to common shareholders $ 30,557 $ 16,473Per common share information Earnings $ 3.60 $ 1.88 Diluted earnings 3.57 1.87 Dividends paid 0.78 0.72 Performance ratios Return on average assets (1) 1.05 % 0.67 % Return on average common shareholders' equity (1) 12.23
Return on average tangible common shareholders' equity (2) 17.02 9.48 Efficiency ratio (1) 67.03 64.55 Balance sheet at year end Total loans and leases
$ 979,124 $ 927,861Total assets 3,169,495 2,819,627 Total deposits 2,064,446 1,795,480 Total liabilities 2,899,429 2,546,703 Total common shareholders' equity 245,358 248,414 Total shareholders' equity 270,066 272,924 (1)For definitions, see Key Metrics on page 169. (2)Return on average tangible common shareholders' equity is a non-GAAP financial measure. For more information and a corresponding reconciliation to the most closely related financial measures defined by accounting principles generally accepted in the United States of America(GAAP), see Non-GAAP Reconciliations on page 85. Net income was $32.0 billionor $3.57per diluted share in 2021 compared to $17.9 billionor $1.87per diluted share in 2020. The increase in net income was due to improvement in the provision for credit losses and higher revenue, partially offset by higher noninterest expense. For discussion and analysis of our consolidated and business segment results of operations for 2020 compared to 2019, see the Financial Highlights and Business Segment Operations sections in the MD&A of the Corporation's 2020 Annual Report on Form 10-K. Net Interest Income Net interest income decreased $426 millionto $42.9 billionin 2021 compared to 2020. Net interest yield on a fully taxable-equivalent (FTE) basis decreased 24 basis points (bps) to 1.66 percent for 2021. The decrease in net interest income was primarily driven by lower interest rates and average loan balances, partially offset by higher average balances of debt securities. For more information on net interest yield and the FTE basis, see Supplemental Financial Data on page 31, and for more information on interest rate risk management, see Interest Rate Risk Management for the Banking Book on page 79. Bank of America28
Table 2 Non-interest income
(Dollars in millions) 2021 2020 Fees and commissions: Card income
$ 6,218 $ 5,656Service charges 7,504 7,141 Investment and brokerage services 16,690 14,574 Investment banking fees 8,887 7,180 Total fees and commissions 39,299 34,551 Market making and similar activities 8,691 8,355 Other income (1,811) (738) Total noninterest income $ 46,179 $ 42,168
Non-interest income increased
? Card income increased
$562 millionprimarily driven by increased client activity and merchant services revenue. ? Service charges increased $363 millionprimarily due to higher treasury and credit service charges and increased client activity. ? Investment and brokerage services increased $2.1 billionprimarily driven by higher market valuations and assets under management (AUM) flows, partially offset by declines in AUM pricing. ? Investment banking fees increased $1.7 billionprimarily due to higher advisory fees as well as higher debt and equity issuance fees. ? Market making and similar activities increased $336 millionprimarily driven by strong sales and trading performance in Equities, partially offset by a weaker performance in Fixed Income, Currencies and Commodities (FICC), which benefited from a more favorable market environment in 2020. ? Other income decreased $1.1 billionprimarily due to a $704 milliongain on sales of certain mortgage loans in the prior year, as well as higher partnership losses on tax credit investments. Provision for Credit Losses The provision for credit losses improved $15.9 billionto a benefit of $4.6 billionin 2021 compared to 2020. The benefit was primarily due to improvements in the macroeconomic outlook and credit quality. For more information on the provision for credit losses, see Allowance for Credit Losses on page 73.
Table 3 Noninterest Expense (Dollars in millions) 2021 2020 Compensation and benefits
$ 36,140 $ 32,725Occupancy and equipment 7,138 7,141 Information processing and communications 5,769
Product delivery and transaction related 3,881 3,433 Marketing 1,939 1,701 Professional fees 1,775 1,694 Other general operating 3,089 3,297 Total noninterest expense
$ 59,731 $ 55,213Noninterest expense increased $4.5 billionto $59.7 billionin 2021 compared to 2020. The increase was primarily due to higher compensation and benefits expense, higher costs associated with processing transactional card claims related to state unemployment benefits, a contribution to the Bank of America Foundationand an impairment charge for real estate rationalization.
income tax expense
Table 4 Income tax expense
(Dollars in millions) 2021 2020 Income before income taxes
$ 33,976 $ 18,995Income tax expense 1,998 1,101 Effective tax rate 5.9 % 5.8 % Income tax expense was $2.0 billionfor 2021 compared to $1.1 billionin 2020, resulting in an effective tax rate of 5.9 percent compared to 5.8 percent. The effective tax rates for 2021 and 2020 were driven by the impact of our recurring tax preference benefits and positive income tax adjustments from the impact of U.K.tax law changes discussed below. Our recurring tax preference benefits primarily consist of tax credits from environmental, social and governance (ESG) investments in affordable housing and renewable energy, aligning with our responsible growth strategy to address global sustainability challenges. Absent these tax credits, the impact of the U.K.tax law changes and other discrete items, the effective tax rates would have been approximately 25 percent and 26 percent for 2021 and 2020. In June 2021, the U.K.enacted the 2021 Finance Act, which included an increase in the U.K.corporation income tax rate to 25 percent from 19 percent. This change is effective April 1, 2023and unfavorably affects income tax expense on future U.K.earnings. In addition, in July 2020, the U.K.enacted a repeal of the final two percent of scheduled decreases in the U.K.corporation income tax rate. As a result, in 2021 and 2020, the Corporation recorded write-ups of U.K.net deferred tax assets of approximately $2.0 billionand $700 million, with corresponding positive income tax adjustments. These write-ups were reversals of previously recorded write-downs of net deferred tax assets for prior changes in the U.K.corporation income tax rate.
Balance Sheet Overview Table 5 Selected Balance Sheet Data December 31 (Dollars in millions) 2021 2020 $ Change % Change Assets Cash and cash equivalents
$ 348,221 $ 380,463 $ (32,242)(8) % Federal funds sold and securities borrowed or purchased under agreements to resell 250,720 304,058 (53,338) (18) Trading account assets 247,080 198,854 48,226 24 Debt securities 982,627 684,850 297,777 43 Loans and leases 979,124 927,861 51,263 6 Allowance for loan and lease losses (12,387) (18,802) 6,415 (34) All other assets 374,110 342,343 31,767 9 Total assets $ 3,169,495 $ 2,819,627 $ 349,86812 Liabilities Deposits $ 2,064,446 $ 1,795,480 $ 268,96615 Federal funds purchased and securities loaned or sold under agreements to repurchase 192,329 170,323 22,006 13 Trading account liabilities 100,690 71,320 29,370 41 Short-term borrowings 23,753 19,321 4,432 23 Long-term debt 280,117 262,934 17,183 7 All other liabilities 238,094 227,325 10,769 5 Total liabilities 2,899,429 2,546,703 352,726 14 Shareholders' equity 270,066 272,924 (2,858) (1) Total liabilities and shareholders' equity $ 3,169,495 $ 2,819,627 $ 349,86812
December 31, 2021, total assets were approximately $3.2 trillion, up $349.9 billionfrom December 31, 2020. The increase in assets was primarily due to higher debt securities that were primarily funded by deposit growth, an increase in loans and leases and higher trading account assets, partially offset by lower federal funds sold and securities borrowed or purchased under agreements to resell and cash and cash equivalents. Cash and Cash Equivalents Cash and cash equivalents decreased $32.2 billionprimarily driven by higher investments in debt securities. 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. Federal funds sold and securities borrowed or purchased under agreements to resell decreased $53.3 billionprimarily due to the investment of excess cash into debt securities. 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. Trading account assets increased $48.2 billionprimarily due to an increase in inventory within Global Markets. Debt SecuritiesDebt securities primarily include U.S. Treasuryand agency securities, mortgage-backed securities (MBS), principally agency MBS, non- U.S.bonds, corporate bonds and municipal debt. We use the debt securities portfolio primarily to manage interest rate and liquidity risk and to leverage market conditions that create economically attractive returns on these investments. Debt securities increased $297.8 billionprimarily driven by the deployment of deposit inflows. For more information on debt
securities, see Note 4 – Securities to the consolidated financial statements.
Loans and Leases Loans and leases increased
$51.3 billionprimarily driven by growth in commercial loans and higher securities-based lending within consumer loans. For more information on the loan portfolio, see Credit Risk Management on page 59. Allowance for Loan and Lease Losses The allowance for loan and lease losses decreased $6.4 billionprimarily due to improvements in the macroeconomic outlook and credit quality. For more information, see Allowance for Credit Losses on page 73. All Other Assets All other assets increased $31.8 billionprimarily driven by higher margin loans and loans held-for-sale (LHFS).
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. Federal funds purchased and securities loaned or sold under agreements to repurchase increased
$22.0 billionprimarily driven by client activity within Global Markets. Trading Account Liabilities Trading account liabilities consist primarily of short positions in equity and fixed-income securities including U.S. Treasuryand agency securities, corporate securities and non- U.S.sovereign
debt. Trading account liabilities increased
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. Short-term borrowings increased $4.4 billionprimarily due to an increase in short-term commercial paper issuances to manage liquidity needs. For more information on short-term borrowings, see Note 10 - Securities Financing Agreements, Short-term Borrowings and Restricted Cash to the Consolidated Financial Statements. Long-term Debt Long-term debt increased $17.2 billionprimarily due to debt issuances, partially offset by maturities, redemptions and valuation adjustments. For more information on long-term debt, see Note 11 - Long-term Debt to the Consolidated Financial Statements. Shareholders' Equity Shareholders' equity decreased $2.9 billionprimarily due to returns of capital to shareholders through common stock repurchases and common and preferred stock dividends, market value decreases on derivatives and debt securities and the redemption of preferred stock, partially offset by net income. 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 loans and leases. Our financing activities reflect cash flows primarily related to customer deposits, securities financing agreements, long-term debt and common and preferred stock. For more information on liquidity, see Liquidity Risk on page 54.
Additional financial data
Non-GAAP Financial Measures In this Form 10-K, 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 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 21 percent and a representative state tax rate. Net interest yield, which measures the basis points we earn over the cost of funds, utilizes net interest income on an FTE basis. 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) gains (losses)) which result in non-GAAP financial measures. We believe that the presentation of measures that exclude these items is useful because such measures 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 shareholders' equity or common shareholders' equity reduced by goodwill and intangible assets (excluding mortgage servicing rights (MSRs)), net of related deferred tax liabilities ("adjusted" shareholders' equity or common shareholders' equity). 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 objectives. These ratios are as follows: ? Return on average tangible common shareholders' equity measures our net income applicable to common shareholders as a percentage of adjusted average common shareholders' equity. The tangible common equity ratio represents adjusted ending common shareholders' equity divided by total tangible assets. ? Return on average tangible shareholders' equity measures our net income as a percentage of adjusted average total shareholders' equity. The tangible equity ratio represents adjusted ending shareholders' equity divided by total tangible assets. ? Tangible book value per common share represents adjusted ending common shareholders' equity divided by ending common shares outstanding. We believe ratios utilizing tangible equity provide additional useful information because they present measures of those assets that can generate income. Tangible book value per common 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. For more information on the reconciliation of these non-GAAP financial measures to the corresponding GAAP financial measures, see Non-GAAP Reconciliations on page 85. Key Performance Indicators We present certain key financial and nonfinancial performance indicators (key performance indicators) that management uses when assessing our consolidated and/or segment results. We believe they are useful to investors because they provide additional information about our underlying operational performance and trends. These key performance indicators (KPIs) may not be defined or calculated in the same way as similar KPIs used by other companies. For information on how these metrics are defined, see Key Metrics on page 169. Our consolidated key performance indicators, which include various equity and credit metrics, are presented in Table 1 on page 28, Table 6 on page 32 and Table 7 on page 33. For information on key segment performance metrics, see Business Segment Operations on page 36. 31
Bank of America
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