UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | ||
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended September 30, 2018 | ||
OR | ||
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
Commission File Number: 1-15081
MUFG Americas Holdings Corporation
(Exact name of registrant as specified in its charter)
Delaware | 94-1234979 | |||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||
1251 Avenue of the Americas, New York, NY | 10020 | |||
(Address of principal executive offices) | (Zip Code) | |||
(Registrant's telephone number, including area code) (212) 782-6800 | ||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | ||
Non-accelerated filer x (Do not check if a smaller reporting company) | Smaller reporting company o | ||
Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Number of shares of Common Stock outstanding at October 31, 2018: 147,589,713
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
MUFG Americas Holdings Corporation and Subsidiaries
Table of Contents
2
Glossary of Defined Terms
The following acronyms and abbreviations are used throughout this Form 10-Q, particularly in Part I, Item 1. “Financial Statements," Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Item 3. “Quantitative and Qualitative Disclosures About Market Risk” and Part II, Item 1A. “Risk Factors.”
Agency Securities | Securities guaranteed by a U.S. government agency |
ALCO | Asset Liability Management Committee |
ALM | Asset Liability Management |
AOCI | Accumulated other comprehensive income |
ARC | Americas Risk Committee |
ASU | Accounting Standards Update |
BCBS | Basel Committee on Banking Supervision |
BHC | U.S. Bank Holding Company |
CCAR | Comprehensive Capital Analysis and Review |
CCPA | California Consumer Privacy Act of 2018 |
CD | Certificate of deposit |
CFPB | Consumer Financial Protection Bureau |
CLO | Collateralized loan obligation |
CMBS | Commercial mortgage-backed security |
Dodd-Frank Act | Dodd-Frank Wall Street Reform and Consumer Protection Act |
EGRRCPA | Economic Growth, Regulatory Relief and Consumer Protection Act |
ESBP | Executive Supplemental Benefit Plan |
EURIBOR | Euro Interbank Offered Rate |
Exchange Act | U.S. Securities Exchange Act of 1934 |
FASB | Financial Accounting Standards Board |
FBO | Foreign banking organization |
FDIC | Federal Deposit Insurance Corporation |
Federal Reserve | Board of Governors of the Federal Reserve System |
FHLB | Federal Home Loan Bank |
FICO | Fair Isaac Corporation |
GAAP | Accounting principles generally accepted in the United States of America |
GLBA | Gramm-Leach-Bliley Act |
GSE | Government-sponsored enterprise |
GSIB | Global systemically important bank |
IHC | Intermediate Holding Company |
LIHC | Low income housing tax credit |
LTV | Loan-to-value |
MBS | Mortgage-backed securities |
MRM | Market Risk Management |
MRMC | Market Risk Management Committee |
MUAH | MUFG Americas Holdings Corporation |
MUB | MUFG Union Bank, N.A. |
MUFG | Mitsubishi UFJ Financial Group, Inc. |
MUSA | MUFG Securities Americas Inc. |
nm | Not meaningful |
OCI | Other comprehensive income |
OREO | Other real estate owned |
RMBS | Residential mortgage-backed security |
SEC | Securities and Exchange Commission |
SERP | Supplemental Executive Retirement Plan |
SLR | Supplementary leverage ratio |
TCJA | Tax Cuts and Jobs Act |
TDR | Troubled debt restructuring |
TLAC | Total Loss Absorbing Capacity |
VaR | Value-at-risk |
VIE | Variable interest entity |
3
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements, which include expectations for our operations and business and our assumptions for those expectations. Do not rely unduly on forward-looking statements. Actual results might differ significantly compared to our expectations. See Part I, Item 1A. “Risk Factors,” in our 2017 Form 10-K, Part II, Item 1A. “Risk Factors” in this Form 10-Q, and the other risks described in this Form 10-Q and in our 2017 Form 10-K, for factors to be considered when reading any forward-looking statements in this filing.
Forward-looking statements are subject to the "safe harbor" created by section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. We may make forward-looking statements in our SEC filings, press releases, news articles and when we are speaking on behalf of MUFG Americas Holdings Corporation and its subsidiaries. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include the words "believe," "expect," "target," "anticipate," "intend," "plan," "seek," "estimate," "potential," "project," "forecast," "outlook," words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could," "might," or "may." These forward-looking statements are intended to provide investors with additional information with which they may assess our future potential. All of these forward-looking statements are based on assumptions about an uncertain future and are based on information known to our management at the date of these statements. We do not undertake to update forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date any forward-looking statements are made.
In this document and other reports to the SEC, for example, we make forward-looking statements, which discuss our expectations about:
• | Our business objectives, strategies and initiatives, organizational structure, business growth, competitive position and prospects, and the effect of competition on our business and strategies |
• | Our assessment of significant factors and developments that have affected or may affect our results |
• | Our assessment of economic conditions and trends, economic and credit cycles and their impact on our business |
• | The economic outlook for the U.S. in general, West Coast states and global economies |
• | The impact of changes in interest rates resulting from changes in Federal Reserve policy or for other reasons, our strategy to manage our interest rate risk profile and other market risks, our outlook for short-term and long-term interest rates and their effect on our net interest margin, our investment portfolio, our balance sheet composition, and our borrowers’ ability to service their loans and on residential mortgage loans and refinancings |
• | Pending and recent legislative and regulatory actions, and future legislative and regulatory developments, including the effects of legislation and other governmental measures, including the monetary policies of the Federal Reserve introduced in response to the financial crisis, and the ensuing recession affecting the banking system, financial markets and the U.S. economy, the Dodd-Frank Act, the EGRRCPA, changes to the deposit insurance assessment policies of the FDIC, the effect on and application of foreign and other laws and regulations to our business and operations, and anticipated fees, costs or other impacts on our business and operations as a result of these developments |
• | Our strategies and expectations regarding capital levels and liquidity, our funding base, deposits, long-term debt, issuance of additional notes under the bank's unsecured bank note program, our expectations regarding the capital, liquidity and enhanced prudential standards adopted by the U.S. bank regulators as a result of or under the Dodd-Frank Act and the BCBS capital and liquidity standards including the Federal banking agencies' TLAC regulation (and our expectation that we will restructure existing debt issued to our parent and replace a portion of our externally-placed debt with debt issued to our parent to comply with this regulation), and other recently adopted and proposed regulations by the U.S. federal banking agencies, and the effect of the foregoing on our business and expectations regarding compliance |
4
• | Regulatory and compliance controls and processes and their impact on our business, including our operating costs and revenues |
• | The costs and effects of legal actions, investigations, regulatory actions, criminal proceedings or similar matters, our anticipated litigation strategies, our assessment of the timing and ultimate outcome of legal actions, or adverse facts and developments related thereto |
• | Our allowance for credit losses, including the conditions we consider in determining the unallocated allowance and our portfolio credit quality, probability of default and credit migration trends, and severity of loss upon default |
• | Loan portfolio composition and risk rating trends, residential loan delinquency rates compared to the industry average, portfolio credit quality, our strategy regarding TDRs, and our intent to sell or hold loans we originate |
• | Our intent to sell or hold, and the likelihood that we would be required to sell, or expectations regarding recovery of the amortized cost basis of, various investment securities |
• | Our hedging strategies, positions, expectations regarding reclassifications of gains or losses on hedging instruments into earnings; and the sensitivity of our net income to various factors, including customer behavior relating to mortgage prepayments and deposit repricing |
• | Expected rates of return, maturities, yields, loss exposure, growth rates, pension plan strategies, contributions and benefit payments, forecasted balance sheet activity and projected results |
• | Tax rates and taxes, the possible effect of changes in taxable profits of the U.S. operations of MUFG on our state tax obligations and of expected tax credits or benefits |
• | Critical accounting policies and estimates, the impact or anticipated impact of recent accounting pronouncements, guidance or changes in accounting principles and future recognition of impairments for the fair value of assets, including goodwill, financial instruments, intangible assets and other assets |
• | Decisions to downsize, sell or close units, dissolve subsidiaries, expand our branch network, pursue acquisitions, purchase banking facilities and equipment, realign our business model or otherwise restructure, reorganize or change our business mix, or the transfer to MUAH by MUFG of its interests in U.S. subsidiaries, and their timing and impact on our business |
• | Our expectations regarding the formation of our IHC and the impact of acquisitions on our business and results of operations |
• | The impact of changes in our credit ratings including methodology changes adopted by rating agencies |
• | Maintenance of casualty and liability insurance coverage appropriate for our operations |
• | The relationship between our business and that of MUFG Bank, Ltd. and MUFG, the impact of their credit ratings, operations or prospects on our credit ratings and actions that may or may not be taken by MUFG Bank, Ltd. and MUFG |
• | Threats to the banking sector and our business due to cyber-security issues and attacks on financial institutions and other businesses, such as large retailers, and regulatory expectations relating to cyber-security |
• | Our understanding that MUFG Bank, Ltd. will continue to limit its participation in transactions with Iranian entities and individuals to certain types of transactions |
• | The objectives and effects on operations of our business integration initiative and its near term effect on our balance sheet, earnings and capital ratios |
• | The effect of a possible return of the California drought on its economy and related governmental actions and the potential consequences of recent California wildfires or other natural disasters |
• | Descriptions of assumptions underlying or relating to any of the foregoing |
5
Readers of this document should not rely unduly on any forward-looking statements, which reflect only our management’s belief as of the date of this report. There are numerous risks and uncertainties that could cause actual outcomes and results to differ materially from those discussed in our forward-looking statements. Many of these factors are beyond our ability to control or predict and could have a material adverse effect on our financial condition, results of operations or prospects. Such risks and uncertainties include, but are not limited to, those described or referred to in Part I, Item 1. “Business” under the captions “Competition” and “Supervision and Regulation” in our 2017 Form 10-K, and in Part II, Item 1A. “Risk Factors” and Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q, and in our other reports to the SEC.
Any factor described in this report or in our other reports could by itself, or together with one or more other factors, adversely affect our business, prospects, results of operations or financial condition.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
MUFG Americas Holdings Corporation and Subsidiaries
Consolidated Financial Highlights
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||
(Dollars in millions) | September 30, 2018 | September 30, 2017 | Percent Change | September 30, 2018 | September 30, 2017 | Percent Change | ||||||||||||||||
Results of operations: | ||||||||||||||||||||||
Net interest income | $ | 832 | $ | 816 | 2 | % | $ | 2,482 | $ | 2,405 | 3 | % | ||||||||||
Noninterest income | 626 | 515 | 22 | 1,604 | 1,492 | 8 | ||||||||||||||||
Total revenue | 1,458 | 1,331 | 10 | 4,086 | 3,897 | 5 | ||||||||||||||||
Noninterest expense | 1,059 | 982 | 8 | 3,226 | 2,945 | 10 | ||||||||||||||||
Pre-tax, pre-provision income(1) | 399 | 349 | 14 | 860 | 952 | (10 | ) | |||||||||||||||
(Reversal of) provision for credit losses | 64 | 18 | 256 | 43 | (34 | ) | 226 | |||||||||||||||
Income before income taxes and including noncontrolling interests | 335 | 331 | 1 | 817 | 986 | (17 | ) | |||||||||||||||
Income tax expense (benefit) | 35 | 109 | (68 | ) | 21 | 255 | (92 | ) | ||||||||||||||
Net income including noncontrolling interests | 300 | 222 | 35 | 796 | 731 | 9 | ||||||||||||||||
Deduct: Net loss from noncontrolling interests | 6 | 10 | (40 | ) | 20 | 25 | (20 | ) | ||||||||||||||
Net income attributable to MUAH | $ | 306 | $ | 232 | 32 | $ | 816 | $ | 756 | 8 | ||||||||||||
Balance sheet (period average): | ||||||||||||||||||||||
Total assets | $ | 160,811 | $ | 152,695 | 5 | % | $ | 159,209 | $ | 150,613 | 6 | % | ||||||||||
Total securities | 27,078 | 27,104 | — | 27,216 | 25,799 | 5 | ||||||||||||||||
Securities borrowed or purchased under resale agreements | 20,316 | 20,614 | (1 | ) | 20,402 | 20,565 | (1 | ) | ||||||||||||||
Total loans held for investment | 83,164 | 79,047 | 5 | 81,955 | 78,514 | 4 | ||||||||||||||||
Earning assets | 147,432 | 138,995 | 6 | 145,734 | 137,429 | 6 | ||||||||||||||||
Total deposits | 86,783 | 85,263 | 2 | 84,933 | 85,723 | (1 | ) | |||||||||||||||
Securities loaned or sold under repurchase agreements | 26,679 | 26,183 | 2 | 26,898 | 25,926 | 4 | ||||||||||||||||
MUAH stockholders' equity | 18,682 | 18,485 | 1 | 18,376 | 17,827 | 3 | ||||||||||||||||
Performance ratios: | ||||||||||||||||||||||
Return on average assets(2) | 0.76 | % | 0.61 | % | 0.68 | % | 0.67 | % | ||||||||||||||
Return on average MUAH stockholders' equity(2) | 6.55 | 5.02 | 5.92 | 5.64 | ||||||||||||||||||
Return on average MUAH tangible common equity(2)(3) | 8.22 | 6.35 | 7.47 | 7.10 | ||||||||||||||||||
Efficiency ratio(4) | 72.59 | 73.78 | 78.93 | 75.57 | ||||||||||||||||||
Net interest margin(2)(5) | 2.27 | 2.37 | 2.30 | 2.36 | ||||||||||||||||||
Net loans charged-off to average total loans held for investment(2) | 0.03 | 0.03 | 0.03 | 0.17 |
7
MUFG Americas Holdings Corporation and Subsidiaries
Consolidated Financial Highlights (Continued)
As of | |||||||||||
September 30, 2018 | December 31, 2017 | Percent Change | |||||||||
Balance sheet (end of period): | |||||||||||
Total assets | $ | 161,036 | $ | 154,550 | 4 | % | |||||
Total securities | 28,397 | 27,448 | 3 | ||||||||
Securities borrowed or purchased under resale agreements | 21,265 | 20,894 | 2 | ||||||||
Total loans held for investment | 83,653 | 80,014 | 5 | ||||||||
Nonperforming assets | 411 | 466 | (12 | ) | |||||||
Total deposits | 87,811 | 84,787 | 4 | ||||||||
Securities loaned or sold under repurchase agreements | 27,032 | 26,437 | 2 | ||||||||
Long-term debt | 12,796 | 12,162 | 5 | ||||||||
MUAH stockholders' equity | 18,742 | 18,255 | 3 | ||||||||
Credit ratios: | |||||||||||
Allowance for loan losses to total loans held for investment(6) | 0.60 | % | 0.59 | % | |||||||
Allowance for loan losses to nonaccrual loans(6) | 122.04 | 102.37 | |||||||||
Allowance for credit losses to total loans held for investment(7) | 0.74 | 0.75 | |||||||||
Allowance for credit losses to nonaccrual loans(7) | 151.64 | 128.75 | |||||||||
Nonperforming assets to total loans held for investment and OREO | 0.49 | 0.58 | |||||||||
Nonperforming assets to total assets | 0.26 | 0.30 | |||||||||
Nonaccrual loans to total loans held for investment | 0.49 | 0.58 | |||||||||
Capital ratios: | |||||||||||
Regulatory(8): | |||||||||||
Common Equity Tier 1 risk-based capital ratio | 16.58 | % | 16.31 | % | |||||||
Tier 1 risk-based capital ratio | 16.58 | 16.31 | |||||||||
Total risk-based capital ratio | 17.54 | 17.76 | |||||||||
Tier 1 leverage ratio | 10.38 | 10.06 | |||||||||
Other: | |||||||||||
Tangible common equity ratio(9) | 9.65 | % | 9.73 | % | |||||||
Common Equity Tier 1 risk-based capital ratio (U.S. Basel III standardized approach; fully phased-in)(10) | 16.58 | 16.27 |
8
MUFG Americas Holdings Corporation and Subsidiaries
Consolidated Financial Highlights (Continued)
(1) | Pre-tax, pre-provision income is total revenue less noninterest expense. Management believes that this is a useful financial measure because it enables investors and others to assess the Company's ability to generate capital to cover credit losses through a credit cycle. |
(2) | Annualized. |
(3) | Return on tangible common equity, a non-GAAP financial measure, is net income excluding intangible asset amortization divided by average tangible common equity. Management believes that this ratio provides useful supplemental information regarding the Company's business results. The methodology for determining tangible common equity may differ among companies. See "Non-GAAP Financial Measures" in Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Form 10-Q for additional information. |
(4) | The efficiency ratio is total noninterest expense as a percentage of total revenue (net interest income and noninterest income). |
(5) | Yields, interest income and net interest margin are presented on a taxable-equivalent basis using the federal statutory tax rates of 21% and 35% for 2018 and 2017, respectively. |
(6) | The allowance for loan losses ratios are calculated using the allowance for loan losses as a percentage of end of period total loans held for investment or total nonaccrual loans, as appropriate. |
(7) | The allowance for credit losses ratios include the allowances for loan losses and for losses on unfunded credit commitments as a percentage of end of period total loans held for investment or total nonaccrual loans, as appropriate. |
(8) | These capital ratios are calculated in accordance with the transition guidelines set forth in the U.S. federal banking agencies' final U.S. Basel III regulatory capital rules. |
(9) | The tangible common equity ratio, a non-GAAP financial measure, is calculated as tangible common equity divided by tangible assets. The methodology for determining tangible common equity may differ among companies. The tangible common equity ratio facilitates the understanding of the Company's capital structure and is used to assess and compare the quality and composition of the Company's capital structure to other financial institutions. See "Capital Management" in Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Form 10-Q for additional information. |
(10) | Common Equity Tier 1 risk-based capital (standardized, fully phased-in basis) is a non-GAAP financial measure that is used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies as if the transition provisions of the U.S. Basel III rules were fully phased in for the periods in which the ratio is disclosed. Management reviews this ratio, which excludes components of accumulated other comprehensive loss, along with other measures of capital as part of its financial analyses and has included this non-GAAP information because of current interest in such information by market participants. See "Capital Management" in Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Form 10-Q for additional information. |
9
Please refer to our Consolidated Financial Statements and the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 (2017 Form 10-K) along with the following discussion and analysis of our consolidated financial position and results of operations for the period ended September 30, 2018 in this Form 10-Q. Averages, as presented in the following tables, are substantially all based upon daily average balances.
As used in this Form 10-Q, terms such as the "Company,” “we,” “us” and “our” refer to MUFG Americas Holdings Corporation (MUAH), one or more of its consolidated subsidiaries, or to all of them together.
Introduction
We are a financial holding company, bank holding company and intermediate holding company whose principal subsidiaries are MUFG Union Bank, N.A. (MUB or the Bank) and MUSA. We are owned by MUFG Bank, Ltd. (formerly The Bank of Tokyo-Mitsubishi UFJ, Ltd.) and MUFG. MUFG Bank, Ltd. is a wholly-owned subsidiary of MUFG.
The Company has four reportable segments: Regional Bank, U.S. Wholesale & Investment Banking, Transaction Banking and MUSA. We service U.S. Wholesale & Investment Banking, certain Transaction Banking, and MUSA customers through the MUFG brand and serve Regional Bank and Transaction Banking customers through the Union Bank brand. We provide a wide range of financial services to consumers, small businesses, middle-market companies and major corporations, both nationally and internationally.
The Company also provides various business, banking, financial, administrative and support services, and facilities for MUFG Bank, Ltd. in connection with the operation and administration of MUFG Bank, Ltd.'s business in the U.S. (including MUFG Bank, Ltd.'s U.S. branches). The Bank and MUFG Bank, Ltd. are parties to a master services agreement whereby the Bank earns fee income in exchange for services and facilities provided.
The Company’s leadership team is bicoastal with Regional Bank and Transaction Banking leaders on the West Coast while U.S. Wholesale & Investment Banking and MUSA leaders are based in New York City. The corporate headquarters (principal executive office) for MUB, MUSA and MUAH is in New York City. MUB's main banking office is in San Francisco. The Company had consolidated assets of $161.0 billion at September 30, 2018.
Executive Overview
We are providing you with an overview of what we believe are the most significant factors and developments that affected our third quarter 2018 results and that could influence our future results. Further detailed information can be found elsewhere in this Form 10-Q. In addition, you should carefully read this entire document and any other reports that we refer to in this Form 10-Q for more detailed information to assist your understanding of trends, events and uncertainties that impact us.
Our sources of revenue are net interest income and noninterest income (collectively “total revenue”). Net interest income is generated predominantly from interest earned from loans, investment securities, securities borrowed or purchased under resale agreements, trading account assets and other interest-earning assets, less interest incurred on deposits and borrowings, securities loaned or sold under repurchase agreements and other interest-bearing liabilities. The primary sources of noninterest income are revenues from investment banking and syndication fees, service charges on deposit accounts, trust and investment management fees, trading account activities, credit facility fees, and fees from affiliates. Changes in interest rates, credit quality, economic trends and the capital markets are primary factors that affect our revenue sources. In the third quarter of 2018, revenue was comprised of 57% net interest income and 43% noninterest income. A summary of our financial results is discussed below.
Our primary sources of liquidity are core deposits, securities and wholesale funding. Core deposits exclude brokered deposits, foreign time deposits, domestic time deposits greater than $250,000, and certain other deposits not considered to be core customer relationships. Wholesale funding includes unsecured funds raised from MUFG Bank, Ltd. and affiliates, interbank and other sources, both domestic and international, funding secured by certain assets, or by borrowing from the FHLB. We evaluate and monitor the stability and reliability of our various funding sources to help ensure that we have sufficient liquidity when adverse situations arise.
10
Performance Highlights
Net income attributable to MUAH was $306 million and $816 million for the three and nine months ended September 30, 2018, respectively. Net income attributable to MUAH increased $74 million and $60 million, respectively, compared with the same periods in 2017, primarily due to higher net interest income from an increase in earning assets, higher fees from affiliates, and lower tax expense as a result of the TCJA. These increases in net income were partially offset by higher salaries and benefits expense. Net income for the nine months ended September 30, 2018 was also reduced by losses on certain renewable energy investments in the first quarter of 2018 as a result of the TCJA.
The provision for credit losses was $43 million for the nine months ended September 30, 2018, compared with a reversal of $34 million for the nine months ended September 30, 2017. The provision for credit losses in 2018 was primarily due to the impact of specific reserves for credit losses on impaired loans during the third quarter of 2018. The reversal of provision for credit losses in 2017 reflected general improvement in portfolio credit quality and composition.
Capital Ratios
The Company's capital ratios continued to exceed all well-capitalized and minimum regulatory thresholds for BHCs, as applicable. The U.S. Basel III Common Equity Tier 1, Tier 1 and Total risk-based capital ratios were 16.58%, 16.58% and 17.54%, respectively, at September 30, 2018. The Tier 1 leverage ratio was 10.38% at September 30, 2018.
11
Financial Performance
Net Interest Income
The following tables show the major components of net interest income and the net interest margin.
For the Three Months Ended | ||||||||||||||||||||||
September 30, 2018 | September 30, 2017 | |||||||||||||||||||||
Average Balance | Interest Income/ Expense(1) | Average Yield/ Rate(1)(2) | Average Balance | Interest Income/ Expense(1) | Average Yield/ Rate(1)(2) | |||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||
Assets | ||||||||||||||||||||||
Loans held for investment:(3) | ||||||||||||||||||||||
Commercial and industrial | $ | 23,517 | $ | 259 | 4.35 | % | $ | 24,619 | $ | 229 | 3.68 | % | ||||||||||
Commercial mortgage | 14,817 | 154 | 4.17 | 14,126 | 144 | 4.10 | ||||||||||||||||
Construction | 1,513 | 20 | 5.23 | 1,859 | 21 | 4.58 | ||||||||||||||||
Lease financing | 1,433 | 15 | 4.32 | 1,838 | 17 | 3.69 | ||||||||||||||||
Residential mortgage | 37,813 | 334 | 3.53 | 33,254 | 282 | 3.38 | ||||||||||||||||
Home equity and other consumer loans | 4,071 | 65 | 6.36 | 3,351 | 50 | 5.91 | ||||||||||||||||
Total loans held for investment | 83,164 | 847 | 4.06 | 79,047 | 743 | 3.75 | ||||||||||||||||
Securities | 27,078 | 171 | 2.51 | 27,104 | 154 | 2.28 | ||||||||||||||||
Securities borrowed or purchased under resale agreements | 20,316 | 171 | 3.35 | 20,614 | 97 | 1.87 | ||||||||||||||||
Interest bearing deposits in banks | 4,374 | 24 | 2.10 | 2,093 | 10 | 1.56 | ||||||||||||||||
Federal funds sold | — | — | — | 2 | — | 1.76 | ||||||||||||||||
Trading account assets | 12,094 | 109 | 3.58 | 9,802 | 89 | 3.62 | ||||||||||||||||
Other earning assets | 406 | 1 | 1.32 | 333 | — | 1.43 | ||||||||||||||||
Total earning assets | 147,432 | 1,323 | 3.57 | 138,995 | 1,093 | 3.13 | ||||||||||||||||
Allowance for loan losses | (441 | ) | (517 | ) | ||||||||||||||||||
Cash and due from banks | 1,774 | 1,895 | ||||||||||||||||||||
Premises and equipment, net | 616 | 609 | ||||||||||||||||||||
Other assets(4) | 11,430 | 11,713 | ||||||||||||||||||||
Total assets | $ | 160,811 | $ | 152,695 | ||||||||||||||||||
Liabilities | ||||||||||||||||||||||
Interest bearing deposits: | ||||||||||||||||||||||
Transaction and money market accounts | $ | 36,734 | $ | 66 | 0.72 | % | $ | 38,144 | $ | 37 | 0.39 | % | ||||||||||
Savings | 9,398 | 18 | 0.76 | 8,255 | 8 | 0.38 | ||||||||||||||||
Time | 8,165 | 40 | 1.92 | 5,549 | 17 | 1.20 | ||||||||||||||||
Total interest bearing deposits | 54,297 | 124 | 0.91 | 51,948 | 62 | 0.48 | ||||||||||||||||
Commercial paper and other short-term borrowings | 8,870 | 46 | 2.03 | 6,328 | 17 | 1.08 | ||||||||||||||||
Securities loaned or sold under repurchase agreements | 26,679 | 193 | 2.87 | 26,183 | 102 | 1.54 | ||||||||||||||||
Long-term debt | 13,871 | 92 | 2.66 | 10,935 | 66 | 2.39 | ||||||||||||||||
Total borrowed funds | 49,420 | 331 | 2.66 | 43,446 | 185 | 1.69 | ||||||||||||||||
Trading account liabilities | 3,812 | 30 | 3.06 | 3,157 | 20 | 2.53 | ||||||||||||||||
Total interest bearing liabilities | 107,529 | 485 | 1.79 | 98,551 | 267 | 1.08 | ||||||||||||||||
Noninterest bearing deposits | 32,486 | 33,315 | ||||||||||||||||||||
Other liabilities(5) | 2,030 | 2,218 | ||||||||||||||||||||
Total liabilities | 142,045 | 134,084 | ||||||||||||||||||||
Equity | ||||||||||||||||||||||
MUAH stockholders' equity | 18,682 | 18,485 | ||||||||||||||||||||
Noncontrolling interests | 84 | 126 | ||||||||||||||||||||
Total equity | 18,766 | 18,611 | ||||||||||||||||||||
Total liabilities and equity | $ | 160,811 | $ | 152,695 | ||||||||||||||||||
Net interest income/spread (taxable-equivalent basis) | 838 | 1.78 | % | 826 | 2.05 | % | ||||||||||||||||
Impact of noninterest bearing deposits | 0.42 | 0.28 | ||||||||||||||||||||
Impact of other noninterest bearing sources | 0.07 | 0.04 | ||||||||||||||||||||
Net interest margin | 2.27 | 2.37 | ||||||||||||||||||||
Less: taxable-equivalent adjustment | 6 | 10 | ||||||||||||||||||||
Net interest income | $ | 832 | $ | 816 |
(1) | Yields, interest income and net interest margin are presented on a taxable-equivalent basis using the federal statutory tax rates of 21% and 35% for 2018 and 2017, respectively. |
(2) | Annualized. |
(3) | Average balances of loans held for investment include nonaccrual loans. The amortized portion of net loan origination fees (costs) is included in interest income on loans, representing an adjustment to the yield. |
(4) | Other assets include noninterest bearing trading account assets. |
(5) | Other liabilities include noninterest bearing trading account liabilities. |
12
For the Nine Months Ended | ||||||||||||||||||||||
September 30, 2018 | September 30, 2017 | |||||||||||||||||||||
Average Balance | Interest Income/ Expense(1) | Average Yield/ Rate(1)(2) | Average Balance | Interest Income/ Expense(1) | Average Yield/ Rate(1)(2) | |||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||
Assets | ||||||||||||||||||||||
Loans held for investment:(3) | ||||||||||||||||||||||
Commercial and industrial | $ | 23,504 | $ | 726 | 4.13 | % | $ | 25,146 | $ | 677 | 3.60 | % | ||||||||||
Commercial mortgage | 14,552 | 454 | 4.16 | 14,347 | 437 | 4.06 | ||||||||||||||||
Construction | 1,680 | 60 | 4.79 | 2,016 | 64 | 4.30 | ||||||||||||||||
Lease financing | 1,472 | 47 | 4.26 | 1,795 | 50 | 3.70 | ||||||||||||||||
Residential mortgage | 36,998 | 969 | 3.49 | 31,820 | 807 | 3.38 | ||||||||||||||||
Home equity and other consumer loans | 3,749 | 179 | 6.37 | 3,390 | 147 | 5.81 | ||||||||||||||||
Total loans held for investment | 81,955 | 2,435 | 3.97 | 78,514 | 2,182 | 3.71 | ||||||||||||||||
Securities | 27,216 | 500 | 2.45 | 25,799 | 424 | 2.19 | ||||||||||||||||
Securities borrowed or purchased under resale agreements | 20,402 | 454 | 2.98 | 20,565 | 243 | 1.58 | ||||||||||||||||
Interest bearing deposits in banks | 3,671 | 53 | 1.90 | 2,591 | 23 | 1.15 | ||||||||||||||||
Federal funds sold | 7 | — | — | 2 | — | 1.58 | ||||||||||||||||
Trading account assets | 12,036 | 308 | 3.42 | 9,496 | 245 | 3.45 | ||||||||||||||||
Other earning assets | 447 | 5 | 1.62 | 462 | 5 | 1.53 | ||||||||||||||||
Total earning assets | 145,734 | 3,755 | 3.44 | 137,429 | 3,122 | 3.03 | ||||||||||||||||
Allowance for loan losses | (457 | ) | (578 | ) | ||||||||||||||||||
Cash and due from banks | 1,809 | 1,866 | ||||||||||||||||||||
Premises and equipment, net | 611 | 603 | ||||||||||||||||||||
Other assets(4) | 11,512 | 11,293 | ||||||||||||||||||||
Total assets | $ | 159,209 | $ | 150,613 | ||||||||||||||||||
Liabilities | ||||||||||||||||||||||
Interest bearing deposits: | ||||||||||||||||||||||
Transaction and money market accounts | $ | 36,695 | $ | 158 | 0.58 | % | $ | 38,748 | $ | 106 | 0.37 | % | ||||||||||
Savings | 8,977 | 43 | 0.64 | 7,427 | 15 | 0.27 | ||||||||||||||||
Time | 6,480 | 77 | 1.59 | 5,507 | 48 | 1.16 | ||||||||||||||||
Total interest bearing deposits | 52,152 | 278 | 0.71 | 51,682 | 169 | 0.44 | ||||||||||||||||
Commercial paper and other short-term borrowings | 8,860 | 121 | 1.82 | 4,514 | 35 | 1.04 | ||||||||||||||||
Securities loaned or sold under repurchase agreements | 26,898 | 509 | 2.53 | 25,926 | 245 | 1.26 | ||||||||||||||||
Long-term debt | 14,116 | 266 | 2.51 | 11,079 | 183 | 2.20 | ||||||||||||||||
Total borrowed funds | 49,874 | 896 | 2.40 | 41,519 | 463 | 1.49 | ||||||||||||||||
Trading account liabilities | 3,718 | 81 | 2.90 | 2,885 | 56 | 2.58 | ||||||||||||||||
Total interest-bearing liabilities | 105,744 | 1,255 | 1.58 | 96,086 | 688 | 0.96 | ||||||||||||||||
Noninterest bearing deposits | 32,781 | 34,041 | ||||||||||||||||||||
Other liabilities(5) | 2,214 | 2,524 | ||||||||||||||||||||
Total liabilities | 140,739 | 132,651 | ||||||||||||||||||||
Equity | ||||||||||||||||||||||
MUAH stockholders' equity | 18,376 | 17,827 | ||||||||||||||||||||
Noncontrolling interests | 94 | 135 | ||||||||||||||||||||
Total equity | 18,470 | 17,962 | ||||||||||||||||||||
Total liabilities and equity | $ | 159,209 | $ | 150,613 | ||||||||||||||||||
Net interest income/spread (taxable-equivalent basis) | 2,500 | 1.86 | % | 2,434 | 2.07 | % | ||||||||||||||||
Impact of noninterest bearing deposits | 0.38 | 0.25 | ||||||||||||||||||||
Impact of other noninterest bearing sources | 0.06 | 0.04 | ||||||||||||||||||||
Net interest margin | 2.30 | 2.36 | ||||||||||||||||||||
Less: taxable-equivalent adjustment | 18 | 29 | ||||||||||||||||||||
Net interest income | $ | 2,482 | $ | 2,405 |
(1) | Yields, interest income and net interest margin are presented on a taxable-equivalent basis using the federal statutory tax rates of 21% and 35% for 2018 and 2017, respectively. |
(2) | Annualized. |
(3) | Average balances of loans held for investment include nonaccrual loans. The amortized portion of net loan origination fees (costs) is included in interest income on loans, representing an adjustment to the yield. |
(4) | Other assets include noninterest bearing trading account assets. |
(5) | Other liabilities include noninterest bearing trading account liabilities. |
13
Net interest income for the three and nine months ended September 30, 2018 increased $16 million and $77 million, respectively, compared with the same periods in 2017, due to an increase in earning assets, partially offset by a decline in the net interest margin. Earning assets increased largely due to increases in residential mortgages and trading assets, partially offset by a decrease in commercial and industrial loan balances. The net interest margin decreased ten and six basis points during the three and nine months ended September 30, 2018, respectively, due primarily to an increase in funding costs resulting from an increase in borrowed funds and a flatter yield curve, partially offset by the favorable effect of noninterest bearing deposits in a rising rate environment.
Noninterest Income and Noninterest Expense
The following tables display our noninterest income and noninterest expense for the three and nine months ended September 30, 2018 and 2017.
Noninterest Income
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||||||
Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||||||||
September 30, 2018 | September 30, 2017 | September 30, 2018 | September 30, 2017 | |||||||||||||||||||||||||||
(Dollars in millions) | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||
Service charges on deposit accounts | $ | 44 | $ | 47 | $ | (3 | ) | (6 | )% | $ | 134 | $ | 142 | $ | (8 | ) | (6 | )% | ||||||||||||
Trust and investment management fees | 30 | 32 | (2 | ) | (6 | ) | 89 | 91 | (2 | ) | (2 | ) | ||||||||||||||||||
Trading account activities | (5 | ) | (3 | ) | (2 | ) | (67 | ) | (13 | ) | (10 | ) | (3 | ) | (30 | ) | ||||||||||||||
Securities gains, net | 1 | 6 | (5 | ) | (83 | ) | 4 | 15 | (11 | ) | (73 | ) | ||||||||||||||||||
Credit facility fees | 23 | 26 | (3 | ) | (12 | ) | 69 | 75 | (6 | ) | (8 | ) | ||||||||||||||||||
Brokerage commissions and fees | 18 | 16 | 2 | 13 | 55 | 52 | 3 | 6 | ||||||||||||||||||||||
Card processing fees, net | 12 | 10 | 2 | 20 | 37 | 34 | 3 | 9 | ||||||||||||||||||||||
Investment banking and syndication fees | 108 | 106 | 2 | 2 | 285 | 288 | (3 | ) | (1 | ) | ||||||||||||||||||||
Fees from affiliates | 306 | 209 | 97 | 46 | 881 | 639 | 242 | 38 | ||||||||||||||||||||||
Other, net | 89 | 66 | 23 | 35 | 63 | 166 | (103 | ) | (62 | ) | ||||||||||||||||||||
Total noninterest income | $ | 626 | $ | 515 | $ | 111 | 22 | $ | 1,604 | $ | 1,492 | $ | 112 | 8 |
Noninterest income increased during the three and nine months ended September 30, 2018 compared with the prior year periods largely due to an increase in fees from affiliates. During the nine months ended September 30, 2018, noninterest income also increased due to fund administration fees from entities transferred to the Company on July 1, 2017 (included in other, net). These increases were offset by the Company's share of losses on certain renewable energy investments of $164 million recorded in the first quarter of 2018 as a result of the TCJA (included in other, net). The increase in fees from affiliates during 2018 was due to higher fees earned under the master services agreement with MUFG Bank, Ltd. and a change in presentation of certain expenses beginning January 1, 2018, as a result of adopting ASU 2016-08, Principal versus Agent Considerations. During the three and nine months ended September 30, 2018, expenses of $49 million and $127 million, respectively, were presented as noninterest expense, rather than a reduction of fees from affiliates as they were presented through December 31, 2017.
14
Noninterest Expense
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||||||
Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||||||||
September 30, 2018 | September 30, 2017 | September 30, 2018 | September 30, 2017 | |||||||||||||||||||||||||||
(Dollars in millions) | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||
Salaries and employee benefits | $ | 652 | $ | 621 | $ | 31 | 5 | % | $ | 2,000 | $ | 1,881 | $ | 119 | 6 | % | ||||||||||||||
Net occupancy and equipment | 89 | 87 | 2 | 2 | 264 | 256 | 8 | 3 | ||||||||||||||||||||||
Professional and outside services | 110 | 101 | 9 | 9 | 356 | 316 | 40 | 13 | ||||||||||||||||||||||
Software | 73 | 49 | 24 | 49 | 213 | 142 | 71 | 50 | ||||||||||||||||||||||
Regulatory assessments | 24 | 22 | 2 | 9 | 69 | 61 | 8 | 13 | ||||||||||||||||||||||
Intangible asset amortization | 6 | 8 | (2 | ) | (25 | ) | 20 | 22 | (2 | ) | (9 | ) | ||||||||||||||||||
Other | 105 | 94 | 11 | 12 | 304 | 267 | 37 | 14 | ||||||||||||||||||||||
Total noninterest expense | $ | 1,059 | $ | 982 | $ | 77 | 8 | $ | 3,226 | $ | 2,945 | $ | 281 | 10 |
The increase in noninterest expense for the three and nine months ended September 30, 2018 compared with the prior year periods was driven primarily by the change in presentation of certain expenses and an increase in salaries and employee benefits expense. The increases in professional and outside services and software expenses were largely due to the change in presentation of certain expenses beginning January 1, 2018, as a result of adopting ASU 2016-08, Principal versus Agent Considerations, as discussed in Noninterest Income above. The increase in salaries and employee benefits expense included the impact of higher headcount.
Income Tax Expense
In the third quarter of 2018, income tax expense was $35 million and the effective tax rate was 10%, compared with 33% in the third quarter of 2017. For the nine months ended September 30, 2018, income tax expense was $21 million and the effective tax rate was 3%, compared with 26% in the comparative prior year period.
Income tax expense and the effective tax rate for the three and nine months ended September 30, 2018 were lower than the comparative prior year periods as a result of the TCJA. Income tax expense during the nine months ended September 30, 2018 also included an adjustment to certain prior period state income taxes during the first quarter of 2018. Excluding that adjustment, the effective tax rate for the nine months ended September 30, 2018 would have been 9%.
For additional information regarding income tax expense, see "Income Tax Expense" in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations ", “The changes in the U.S. tax laws, the majority of which were effective January 1, 2018, will impact our business and results of operations in a variety of ways, some of which are expected to be positive and others which may be negative” and “Our effective tax rates, and our future results can also be affected by our participation for state income tax purposes as a member of MUFG’s unitary group in the U.S. and by other factors” in Part I, Item 1A. "Risk Factors" and Note 17 "Income Taxes" to our Consolidated Financial Statements in Part II, Item 8. “Financial Statements and Supplementary Data” in our 2017 Form 10-K.
15
Balance Sheet Analysis
Securities
Our securities portfolio is primarily used for liquidity and interest rate risk management purposes, to invest cash resulting from excess liquidity, and to a lesser extent, to support our business development objectives. We strive to maximize total return while managing this objective within appropriate risk parameters. Securities available for sale are principally comprised of U.S. Treasury securities, U.S. government-sponsored agency securities, RMBSs, CMBSs, Cash Flow CLOs, and direct bank purchase bonds. Direct bank purchase bonds are instruments that are issued in bond form, accounted for as securities, but underwritten as loans with features that are typically found in commercial loans. Securities held to maturity consist of U.S. Treasury securities, U.S. government-sponsored agency securities and U.S. government-sponsored agency RMBSs and CMBSs.
The amortized cost, gross unrealized gains, gross unrealized losses and fair values of securities are detailed in Note 2 "Securities" to our Consolidated Financial Statements in Part I, Item 1. "Financial Statements" in this Form 10-Q.
Loans Held for Investment
The following table shows loans held for investment outstanding by loan type at the end of each period presented.
Increase (Decrease) | |||||||||||||||
September 30, 2018 | December 31, 2017 | ||||||||||||||
(Dollars in millions) | Amount | Percent | |||||||||||||
Loans held for investment: | |||||||||||||||
Commercial and industrial | $ | 23,349 | $ | 23,281 | $ | 68 | — | % | |||||||
Commercial mortgage | 15,031 | 14,320 | 711 | 5 | |||||||||||
Construction | 1,480 | 1,775 | (295 | ) | (17 | ) | |||||||||
Lease financing | 1,417 | 1,533 | (116 | ) | (8 | ) | |||||||||
Total commercial portfolio | 41,277 | 40,909 | 368 | 1 | |||||||||||
Residential mortgage | 38,059 | 35,643 | 2,416 | 7 | |||||||||||
Home equity and other consumer loans | 4,317 | 3,462 | 855 | 25 | |||||||||||
Total consumer portfolio | 42,376 | 39,105 | 3,271 | 8 | |||||||||||
Total loans held for investment | $ | 83,653 | $ | 80,014 | $ | 3,639 | 5 |
Loans held for investment increased from December 31, 2017 to September 30, 2018, primarily due to growth in the residential mortgage portfolio.
Deposits
The table below presents our deposits as of September 30, 2018 and December 31, 2017.
Increase (Decrease) | |||||||||||||||
September 30, 2018 | December 31, 2017 | ||||||||||||||
(Dollars in millions) | Amount | Percent | |||||||||||||
Interest checking | $ | 3,710 | $ | 5,209 | $ | (1,499 | ) | (29 | )% | ||||||
Money market | 32,615 | 33,245 | (630 | ) | (2 | ) | |||||||||
Total interest bearing transaction and money market accounts | 36,325 | 38,454 | (2,129 | ) | (6 | ) | |||||||||
Savings | 9,304 | 8,426 | 878 | 10 | |||||||||||
Time | 9,957 | 5,305 | 4,652 | 88 | |||||||||||
Total interest bearing deposits | 55,586 | 52,185 | 3,401 | 7 | |||||||||||
Noninterest bearing deposits | 32,225 | 32,602 | (377 | ) | (1 | ) | |||||||||
Total deposits | $ | 87,811 | $ | 84,787 | $ | 3,024 | 4 |
16
Total deposits increased $3.0 billion from December 31, 2017 to September 30, 2018 due to an increase in time deposits, partially offset by a decrease in transaction and money market accounts. The increase in time deposits was primarily related to Consumer Banking and PurePoint Financial, the online division of the Bank. The decrease in transaction and money market accounts was primarily due to a decrease in high rate money market deposits within Consumer Banking.
Securities Financing Arrangements
The Company enters into securities purchased under agreements to resell, securities sold under agreements to repurchase, and securities borrowing and lending transactions to facilitate customer match-book activity, cover short positions and to fund the Company's trading inventory. These balances are almost entirely attributable to MUSA. See Note 5 "Securities Financing Arrangements" to our Consolidated Financial Statements in Part I, Item 1. "Financial Statements" in this Form 10-Q for more information.
Capital Management
Both MUAH and MUB are subject to various capital adequacy regulations issued by the U.S. federal banking agencies, including requirements to file an annual capital plan and to maintain minimum regulatory capital ratios. As of September 30, 2018, management believes the capital ratios of MUAH and MUB met all regulatory requirements of “well-capitalized” institutions. The Company has under consideration a common stock repurchase from its parent companies in the fourth quarter of 2018, subject to the approval of the Company’s board of directors. The Company’s capital ratios will continue to be significantly in excess of the requirements for “well-capitalized” institutions after any such transaction.
The Company timely filed its annual capital plan under the Federal Reserve's CCAR program in April 2018. CCAR evaluates capital planning processes and assesses capital adequacy levels under various scenarios to determine if BHCs would have sufficient capital to continue operations throughout times of economic and financial market stress. The Company's 2018 CCAR submission encompassed a range of expected and stressed economic and financial market scenarios, and included an assessment of expected sources and uses of capital over a prescribed planning horizon, a description of all capital actions within that time frame, and a discussion of any proposed business plan changes that are likely to have a material impact on capital adequacy. In June 2018, the Company received notice that the Federal Reserve did not object to the Company's capital plan. In accordance with regulatory requirements, the Company subsequently disclosed the results of its annual company-run Dodd-Frank Act stress test. In October 2018, the Company submitted its mid-cycle Dodd-Frank Act Stress Test results to the Federal Reserve and subsequently disclosed the results of those stress tests.
MUAH and MUB are required to maintain minimum capital ratios in accordance with rules issued by the U.S. federal banking agencies. In July 2013, the U.S. federal banking agencies issued final rules to implement the BCBS capital guidelines for U.S. banking organizations (U.S. Basel III). These rules supersede the U.S. federal banking agencies’ general risk-based capital rules (commonly known as “Basel I”), advanced approaches rules (commonly known as “Basel II”) that are applicable to certain large banking organizations, and leverage rules, and are subject to certain transition provisions. Among other requirements, the U.S. Basel III rules revised the definition of capital; increased minimum capital ratios; introduced a minimum Common Equity Tier 1 capital ratio of 4.5% and a capital conservation buffer of 2.5% (for a total minimum Common Equity Tier 1 capital ratio of 7.0%) and, for advanced approaches institutions, a potential countercyclical buffer of up to 2.5%, which would be imposed by regulators at their discretion if it is determined that a period of excessive credit growth is contributing to an increase in financial institution systemic risk; mandated a Tier 1 leverage ratio of 4%; introduced, for large and internationally active BHCs, a Tier 1 SLR that is currently set at 3% and which incorporates off-balance sheet exposures; revised Basel I rules for calculating risk-weighted assets under a standardized approach; modified the existing Basel II advanced approaches rules for calculating risk-weighted assets under U.S. Basel III; and phased-out, for advanced approaches institutions, the exclusion of AOCI that had applied under Basel I and Basel II rules, over a four-year transition period beginning on January 1, 2014. Banking organizations not subject to the advanced approaches rules, such as MUAH, were required to comply with the standardized approach capital rules beginning on January 1, 2015.
As required under U.S. Basel III rules, the 2.5% capital conservation buffer is being implemented on a phased-in basis in equal increments of 0.625% per year over a four-year period that commenced on January 1,
17
2016. MUAH and MUB would satisfy the minimum capital requirements including the capital conservation buffer on a fully phased-in basis if those requirements were effective as of September 30, 2018.
The following tables summarize the calculation of MUAH’s risk-based capital ratios in accordance with the U.S. Basel III rules as of September 30, 2018 and December 31, 2017.
MUFG Americas Holdings Corporation
U.S. Basel III | ||||||||
(Dollars in millions) | September 30, 2018 | December 31, 2017 | ||||||
Capital Components | ||||||||
Common Equity Tier 1 capital | $ | 16,467 | $ | 15,708 | ||||
Tier 1 capital | $ | 16,467 | $ | 15,708 | ||||
Tier 2 capital | 958 | 1,398 | ||||||
Total risk-based capital | $ | 17,425 | $ | 17,106 | ||||
Risk-weighted assets | $ | 99,339 | $ | 96,330 | ||||
Average total assets for leverage capital purposes | $ | 158,674 | $ | 156,126 |
U.S. Basel III | Minimum Capital Requirement with Capital Conservation Buffer (1) | ||||||||||||||||||||||
(Dollars in millions) | September 30, 2018 | December 31, 2017 | September 30, 2018 | ||||||||||||||||||||
Capital Ratios | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||
Common Equity Tier 1 capital (to risk-weighted assets) | $ | 16,467 | 16.58 | % | $ | 15,708 | 16.31 | % | ≥ | $ | 6,333 | 6.375 | % | ||||||||||
Tier 1 capital (to risk-weighted assets) | 16,467 | 16.58 | 15,708 | 16.31 | ≥ | 7,823 | 7.875 | ||||||||||||||||
Total capital (to risk-weighted assets) | 17,425 | 17.54 | 17,106 | 17.76 | ≥ | 9,810 | 9.875 | ||||||||||||||||
Tier 1 leverage(2) | 16,467 | 10.38 | 15,708 | 10.06 | ≥ | 6,347 | 4.000 |
(1)Beginning January 1, 2018, the minimum capital requirement includes a capital conservation buffer of 1.875%.
(2)Tier 1 capital divided by quarterly average assets (excluding certain disallowed assets, primarily goodwill and other intangibles).
18
The following tables summarize the calculation of MUB’s risk-based capital ratios in accordance with the transition guidelines set forth in the U.S. Basel III rules as of September 30, 2018 and December 31, 2017.
MUFG Union Bank, N.A.
U.S. Basel III | ||||||||
(Dollars in millions) | September 30, 2018 | December 31, 2017 | ||||||
Capital Components | ||||||||
Common Equity Tier 1 capital | $ | 14,750 | $ | 14,028 | ||||
Tier 1 capital | $ | 14,750 | $ | 14,028 | ||||
Tier 2 capital | 592 | 1,307 | ||||||
Total risk-based capital | $ | 15,342 | $ | 15,335 | ||||
Risk-weighted assets | $ | 89,011 | $ | 86,730 | ||||
Average total assets for leverage capital purposes | $ | 121,612 | $ | 119,052 |
U.S. Basel III | Minimum Capital Requirement with Capital Conservation Buffer (1) | To Be Well-Capitalized under Prompt Corrective Action Provisions | ||||||||||||||||||||||||||||||
(Dollars in millions) | September 30, 2018 | December 31, 2017 | September 30, 2018 | |||||||||||||||||||||||||||||
Capital Ratios | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||
Common Equity Tier 1 capital (to risk-weighted assets) | $ | 14,750 | 16.57 | % | $ | 14,028 | 16.17 | % | ≥ | $ | 5,674 | 6.375 | % | ≥ | $ | 5,786 | 6.50 | % | ||||||||||||||
Tier 1 capital (to risk-weighted assets) | 14,750 | 16.57 | 14,028 | 16.17 | ≥ | 7,010 | 7.875 | ≥ | 7,121 | 8.00 | ||||||||||||||||||||||
Total capital (to risk-weighted assets) | 15,342 | 17.24 | 15,335 | 17.68 | ≥ | 8,790 | 9.875 | ≥ | 8,901 | 10.00 | ||||||||||||||||||||||
Tier 1 leverage(2) | 14,750 | 12.13 | 14,028 | 11.78 | ≥ | 4,864 | 4.000 | ≥ | 6,081 | 5.00 |
(1)Beginning January 1, 2018, the minimum capital requirement includes a capital conservation buffer of 1.875%.
(2)Tier 1 capital divided by quarterly average assets (excluding certain disallowed assets, primarily goodwill and other intangibles).
During the second quarter of 2018, the Company repaid $750 million of subordinated debt due to MUFG Bank, Ltd. resulting in the decline in Tier 2 capital.
In addition to capital ratios determined in accordance with regulatory requirements, we consider the tangible common equity ratio when evaluating capital utilization and adequacy. This capital ratio is monitored by management, and presented below, to further facilitate the understanding of our capital structure and for use in assessing and comparing the quality and composition of the Company’s capital structure to other financial institutions. This ratio is not codified within GAAP or federal banking regulations in effect at September 30, 2018. Therefore, it is considered a non-GAAP financial measure. Our tangible common equity ratio calculation method may differ from those used by other financial services companies.
19
The following table summarizes the calculation of the Company's tangible common equity ratio as of September 30, 2018 and December 31, 2017.
September 30, 2018 | December 31, 2017 | |||||||
(Dollars in millions) | ||||||||
Total MUAH stockholders' equity | $ | 18,742 | $ | 18,255 | ||||
Goodwill | (3,301 | ) | (3,301 | ) | ||||
Intangible assets, except mortgage servicing rights | (293 | ) | (313 | ) | ||||
Deferred tax liabilities related to goodwill and intangible assets | 58 | 55 | ||||||
Tangible common equity (a) | $ | 15,206 | $ | 14,696 | ||||
Total assets | $ | 161,036 | $ | 154,550 | ||||
Goodwill | (3,301 | ) | (3,301 | ) | ||||
Intangible assets, except mortgage servicing rights | (293 | ) | (313 | ) | ||||
Deferred tax liabilities related to goodwill and intangible assets | 58 | 55 | ||||||
Tangible assets (b) | $ | 157,500 | $ | 150,991 | ||||
Tangible common equity ratio (a)/(b) | 9.65 | % | 9.73 | % |
The Company’s fully phased-in Common Equity Tier 1 capital ratio calculated under the U.S. Basel III standardized approach at September 30, 2018 and December 31, 2017 was estimated to be 16.58% and 16.27%, respectively. Management believes that the Company would satisfy all capital adequacy requirements under the U.S. Basel III rules on a fully phased-in basis if those requirements had been effective at both September 30, 2018 and December 31, 2017.
The following table summarizes the calculation of the Company's fully phased-in Common Equity Tier 1 capital to total risk-weighted assets ratio under the U.S. Basel III standardized approach as of September 30, 2018 and December 31, 2017.
Common Equity Tier 1 capital under U.S. Basel III (standardized approach; fully phased-in) | ||||||||
September 30, 2018 | December 31, 2017 | |||||||
(Dollars in millions) | (Estimated) | (Estimated) | ||||||
Common Equity Tier 1 capital under U.S. Basel III (transitional) | $ | 16,467 | $ | 15,708 | ||||
Other | — | (51 | ) | |||||
Common Equity Tier 1 capital estimated under U.S. Basel III (standardized approach; fully phased-in) (a) | $ | 16,467 | $ | 15,657 | ||||
Risk-weighted assets, estimated under U.S. Basel III (standardized; transitional) | $ | 99,339 | $ | 96,330 | ||||
Adjustments | — | (107 | ) | |||||
Total risk-weighted assets, estimated under U.S. Basel III (standardized approach; fully phased-in) (b) | $ | 99,339 | $ | 96,223 | ||||
Common Equity Tier 1 capital to total risk-weighted assets estimated under U.S. Basel III (standardized approach; fully phased-in)(1) (a)/(b) | 16.58 | % | 16.27 | % |
(1) | Common Equity Tier 1 risk-based capital (standardized, fully phased-in basis) is a non-GAAP financial measure that is used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies as if the transition provisions of the U.S. Basel III rules were fully phased-in for the period in which the ratio is disclosed. Management reviews this ratio, which excludes components of accumulated other comprehensive loss, along with other measures of capital as part of its financial analyses and has included this non-GAAP information, and the corresponding reconciliation from Common Equity Tier 1 capital (calculated according to the transition provisions under U.S. Basel III rules) because of current interest in such information by market participants. |
For additional information regarding our regulatory capital requirements, see "Supervision and Regulation – Regulatory Capital and Liquidity Standards" in Part I, Item 1. "Business" in our 2017 Form 10-K.
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Risk Management
All financial institutions must manage and control a variety of business risks that can significantly affect their financial condition and performance. Some of the key risks that the Company must manage include credit, market, liquidity, operational, interest rate, compliance, reputation and strategic risks. The Board, directly or through its appropriate committees, provides oversight and approves our various risk management policies. Management has established a risk management structure that is designed to provide a comprehensive approach for identifying, measuring, monitoring, controlling and reporting on the significant risks faced by the Company. For additional information regarding our risk management structure and framework, refer to “Risk Management” in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2017 Form 10-K.
Credit Risk Management
One of our principal business activities is the extension of credit to individuals and businesses. Our policies and the applicable laws and regulations governing the extension of credit require risk analysis, including an extensive evaluation of the purpose of the request and the borrower’s ability and willingness to repay as scheduled. Our process also includes ongoing portfolio and credit management through portfolio diversification, lending limit constraints, credit review and approval policies, and extensive internal monitoring. For additional information regarding our credit risk management policies, refer to “Credit Risk Management” in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2017 Form 10-K.
Allowance for Credit Losses
We maintain an allowance for credit losses (defined as both the allowance for loan losses and the allowance for losses on unfunded credit commitments) to absorb losses inherent in the loan portfolio as well as for unfunded credit commitments. Understanding our policies on the allowance for credit losses is fundamental to understanding our consolidated financial condition and consolidated results of operations. Accordingly, our significant accounting policies on the allowance for credit losses are discussed in detail in Note 1 "Summary of Significant Accounting Policies and Nature of Operations" to our Consolidated Financial Statements in Part II, Item 8. “Financial Statements and Supplementary Data” and in “Allowance for Credit Losses” in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2017 Form 10-K. During the first quarter of 2018, the Company refined its methodology for estimating the allowance for commercial loans collectively evaluated for impairment and the allowance for losses on unfunded credit commitments. Previously the Company derived the allowance for these loans by assigning a loss factor based on an internal risk rating that estimated the probability that a credit facility may ultimately default (i.e. probability of default). The refinement implemented during the first quarter of 2018 now utilizes a dual factor internal risk rating system that encompasses both the probability of default and an estimate of the severity of the loss that would be realized upon such default (i.e. the loss-given default). During the second quarter of 2018, the Company implemented refinements to the qualitative considerations used in our reserve methodology. For additional information regarding our allowance for loan losses, refer to Note 3 "Loans and Allowance for Loan Losses" to our Consolidated Financial Statements in Part I, Item 1. “Financial Statements” in this Form 10-Q.
The allowance for loan losses was $501 million at September 30, 2018 compared with $476 million at December 31, 2017. Our ratio of allowance for loan losses to total loans held for investment was 0.60% as of September 30, 2018 and 0.59% as of December 31, 2017. The provision for loan losses was $62 million and $44 million for the three and nine months ended September 30, 2018, respectively, primarily due to the impact of specific reserves for impaired loans to discrete customers during the third quarter of 2018. The unallocated allowance for loan losses decreased from $30 million at December 31, 2017 to $10 million at September 30, 2018. This decrease resulted from refinements to the methodology used to measure credit risk ascribed to the commercial loan portfolio segment, which previously had been estimated within the unallocated allowance for loan losses. Net loans charged off to average total loans held for investment were 0.03% for the three and nine months ended September 30, 2018, respectively, compared with 0.03% and 0.17% for the three and nine months ended September 30, 2017, respectively.
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Nonaccrual loans were $411 million at September 30, 2018 compared with $465 million at December 31, 2017. The decrease in nonaccrual loans outstanding during the nine months ended September 30, 2018 was primarily driven by paydowns, payoffs, and loans returned to accrual, largely offset by new nonaccrual loans. Our ratio of nonaccrual loans to total loans held for investment decreased to 0.49% at September 30, 2018 from 0.58% at December 31, 2017. Our ratio of allowance for loan losses to nonaccrual loans increased to 122.04% at September 30, 2018 from 102.37% at December 31, 2017. Criticized credits in the commercial segment were $1.5 billion at September 30, 2018 and $1.6 billion at December 31, 2017. Refer to Note 3 "Loans and Allowance for Loan Losses" to our Consolidated Financial Statements in Part I, Item 1. "Financial Statements" in this Form 10-Q for a description of criticized credits.
Change in the Allowance for Loan Losses
The following table sets forth a reconciliation of changes in our allowance for loan losses.
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Allowance for loan losses, beginning of period | $ | 445 | $ | 513 | $ | 476 | $ | 639 | ||||||||
(Reversal of) provision for loan losses | 62 | 33 | 44 | (1 | ) | |||||||||||
Other | — | 2 | — | 2 | ||||||||||||
Loans charged off: | ||||||||||||||||
Commercial and industrial | (7 | ) | (5 | ) | (14 | ) | (83 | ) | ||||||||
Commercial and industrial - transfer to held for sale | — | (1 | ) | — | (7 | ) | ||||||||||
Commercial mortgage | (1 | ) | (1 | ) | (1 | ) | (1 | ) | ||||||||
Total commercial portfolio | (8 | ) | (7 | ) | (15 | ) | (91 | ) | ||||||||
Residential mortgage | 1 | 1 | 1 | 2 | ||||||||||||
Home equity and other consumer loans | (9 | ) | (11 | ) | (28 | ) | (34 | ) | ||||||||
Total consumer portfolio | (8 | ) | (10 | ) | (27 | ) | (32 | ) | ||||||||
Total loans charged-off | (16 | ) | (17 | ) | (42 | ) | (123 | ) | ||||||||
Recoveries of loans previously charged-off: | ||||||||||||||||
Commercial and industrial | 7 | 8 | 17 | 20 | ||||||||||||
Commercial mortgage | 1 | — | 1 | 1 | ||||||||||||
Total commercial portfolio | 8 | 8 | 18 | 21 | ||||||||||||
Home equity and other consumer loans | 2 | 3 | 5 | 4 | ||||||||||||
Total consumer portfolio | 2 | 3 | 5 | 4 | ||||||||||||
Total recoveries of loans previously charged-off | 10 | 11 | 23 | 25 | ||||||||||||
Net loans recovered (charged-off) | (6 | ) | (6 | ) | (19 | ) | (98 | ) | ||||||||
Ending balance of allowance for loan losses | 501 | 542 | 501 | 542 | ||||||||||||
Allowance for losses on unfunded credit commitments | 122 | 129 | 122 | 129 | ||||||||||||
Total allowance for credit losses | $ | 623 | $ | 671 | $ | 623 | $ | 671 |
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Nonperforming Assets
Nonperforming assets consist of nonaccrual loans and OREO. Nonaccrual loans are those for which management has discontinued accrual of interest because there exists significant uncertainty as to the full and timely collection of either principal or interest, or such loans have become contractually past due 90 days with respect to principal or interest. OREO includes property where the Bank acquired title through foreclosure or “deed in lieu” of foreclosure. For a more detailed discussion of the accounting for nonaccrual loans, see Note 1 "Summary of Significant Accounting Policies and Nature of Operations" to our Consolidated Financial Statements in Part II, Item 8. “Financial Statements and Supplementary Data” in our 2017 Form 10-K.
The following table sets forth the components of nonperforming assets and TDRs.
September 30, 2018 | December 31, 2017 | Increase (Decrease) | |||||||||||||
(Dollars in millions) | Amount | Percent | |||||||||||||
Nonaccrual loans: | |||||||||||||||
Commercial and industrial | $ | 268 | $ | 319 | $ | (51 | ) | (16 | )% | ||||||
Commercial mortgage | 12 | 20 | (8 | ) | (40 | ) | |||||||||
Total commercial portfolio | 280 | 339 | (59 | ) | (17 | ) | |||||||||
Residential mortgage | 111 | 104 | 7 | 7 | |||||||||||
Home equity and other consumer loans | 20 | 22 | (2 | ) | (9 | ) | |||||||||
Total consumer portfolio | 131 | 126 | 5 | 4 | |||||||||||
Total nonaccrual loans | 411 | 465 | (54 | ) | (12 | ) | |||||||||
OREO | — | 1 | (1 | ) | (100 | ) | |||||||||
Total nonperforming assets | $ | 411 | $ | 466 | $ | (55 | ) | (12 | ) | ||||||
Troubled debt restructurings: | |||||||||||||||
Accruing | $ | 354 | $ | 348 | $ | 6 | 2 | % | |||||||
Nonaccruing (included in total nonaccrual loans above) | 252 | 229 | 23 | 10 | |||||||||||
Total troubled debt restructurings | $ | 606 | $ | 577 | $ | 29 | 5 |
Total nonperforming assets as of September 30, 2018 were $411 million, or 0.26% of total assets, compared with $466 million, or 0.30% of total assets at December 31, 2017. The decrease in nonperforming assets of $55 million from December 31, 2017 to September 30, 2018 was driven primarily by paydowns, payoffs, and loans returned to accrual, largely offset by new nonaccrual loans.
Troubled Debt Restructurings
TDRs are loans where we have granted a concession to a borrower as a result of the borrower experiencing financial difficulty and, consequently, we receive less than the current market-based compensation for loans with similar risk characteristics. Such loans are reviewed for impairment either individually or in pools with similar risk characteristics. Our loss mitigation strategies are designed to minimize economic loss and, at times, may result in changes to the original terms, including interest rate changes, maturity extensions, forbearance, principal paydowns, covenant waivers or changes, payment deferrals, or some combination thereof. We evaluate whether these changes to the terms and conditions of our loans meet the TDR criteria after considering the specific situation of the borrower and all relevant facts and circumstances related to the modification. For our consumer portfolio segment, TDRs are typically initially placed on nonaccrual and a minimum of six consecutive months of sustained performance is required before returning to accrual status. For our commercial portfolio segment, we generally determine accrual status for TDRs by performing an individual assessment of each loan, which may include, among other factors, borrower performance under previous loan terms.
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The following table provides a summary of TDRs by loan type, including nonaccrual loans and loans that have been returned to accrual status, as of September 30, 2018 and December 31, 2017. See Note 3 "Loans and Allowance for Loan Losses" to our Consolidated Financial Statements in Part I, Item 1. "Financial Statements" in this Form 10-Q for more information.
As a Percentage of Ending Loan Balances | ||||||||||||||
(Dollars in millions) | September 30, 2018 | December 31, 2017 | September 30, 2018 | December 31, 2017 | ||||||||||
Commercial and industrial | $ | 253 | $ | 202 | 1.02 | % | 0.87 | % | ||||||
Commercial mortgage | 53 | 7 | 0.36 | 0.05 | ||||||||||
Construction | 78 | 128 | 5.27 | 7.21 | ||||||||||
Total commercial portfolio | 384 | 337 | 0.93 | 0.82 | ||||||||||
Residential mortgage | 200 | 215 | 0.53 | 0.60 | ||||||||||
Home equity and other consumer loans | 22 | 25 | 0.51 | 0.72 | ||||||||||
Total consumer portfolio | 222 | 240 | 0.52 | 0.61 | ||||||||||
Total restructured loans | $ | 606 | $ | 577 | 0.72 | 0.72 |
Loans 90 Days or More Past Due and Still Accruing
Loans held for investment 90 days or more past due and still accruing totaled $11 million and $12 million at September 30, 2018 and at December 31, 2017, respectively.
Concentration of Risk
Commercial and industrial loans are extended principally to corporations, middle-market businesses and small businesses and are originated primarily through our commercial banking offices. Our commercial and industrial portfolio is comprised primarily of the following industry sectors: finance and insurance, real estate and leasing, power and utilities, information and manufacturing. No individual industry sector exceeded 10% of our total loans held for investment at either September 30, 2018 or December 31, 2017.
Construction and commercial mortgage loans are secured by deeds of trust or mortgages. Construction loans are extended primarily to commercial property developers and to residential builders. At September 30, 2018, 59% of the Company’s construction loan portfolio was concentrated in California, 18% to borrowers in New York and 7% to borrowers in Texas. The commercial mortgage loan portfolio consists of loans secured by commercial income properties. At September 30, 2018, 66% of the Company’s commercial mortgage loans were made to borrowers located in California, 7% to borrowers in the state of Washington, and 6% to borrowers in New York.
Residential mortgage loans are originated and secured by one-to-four family residential properties, through our multi-channel network, including branches, private bankers, mortgage brokers, telephone services and web-based and mobile internet banking applications. We do not have a program for originating or purchasing subprime loan products and we hold the majority of the loans we originate.
At September 30, 2018, payment terms on 36% of our residential mortgage loans required a monthly payment that covers the full amount of interest due, but did not reduce the principal balance. At origination, these interest-only loans had strong credit profiles and had weighted average LTV ratios of approximately 65%. The remainder of the portfolio consisted of regularly amortizing loans.
Home equity and other consumer loans are originated principally through our branch network and Private Banking offices. Approximately 28% and 29% of these home equity loans and lines were supported by first liens on residential properties as of September 30, 2018 and December 31, 2017, respectively. To manage risk associated with lending commitments, we review all equity-secured lines annually for creditworthiness and may reduce or freeze limits, to the extent permitted by laws and regulations. See Note 3 "Loans and Allowance for Loan Losses" to our Consolidated Financial Statements in Part I, Item 1. “Financial Statements” in this Form 10-Q for additional information on refreshed FICO scores and refreshed LTV ratios for our residential mortgage and home equity and other consumer loans at September 30, 2018 and December 31, 2017.
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Market Risk Management
The objective of market risk management is to mitigate any adverse impact on earnings and capital arising from changes in interest rates and other market variables. Market risk management supports our broad objective of enhancing shareholder value, which encompasses the achievement of stable earnings growth while promoting capital stability over time. Market risk is defined as the risk of loss arising from an adverse change in the market value of financial instruments caused by fluctuations in market prices or rates. The primary market risk to which we are exposed is interest rate risk. Interest rate risk arises from instruments, positions and transactions entered into for purposes other than trading and for trading. Other than trading interest rate risk arises from loans, securities, deposits, borrowings, securities purchased under agreements to resell, securities sold under agreements to repurchase, securities borrowing and lending transactions, and derivative instruments. Trading interest rate risk primarily arises from trading activities at MUAH's broker-dealer subsidiary, MUSA, and derivative contracts MUB enters into as a financial intermediary for customers.
Market Risk Governance
The MRM Policy, adopted by the Risk Committee of the Board of Directors, governs the Company’s management and oversight of market risk. The MRM Policy establishes the Company’s risk tolerance by outlining standards for measuring market risk, creates Board-level limits for specific market risks, and establishes MRMC responsibilities and oversight of market risk activities.
ARC, composed of selected senior officers of the Company, supports the MRM Policy setting process by striving to ensure that the Company has an effective process to identify, monitor, measure and manage market risk as required by the MRM Policy. ARC provides oversight of the risk management framework and reviews and discusses market risk management reports and trends. MRMC approves the trading policies that govern the Company’s activities. ALCO is responsible for the approval of specific interest rate risk management programs, including those related to interest rate hedging, investment securities and wholesale funding of MUAH, along with approval of capital policies.
The Treasurer is primarily responsible for the implementation of interest rate risk management strategies approved by ALCO and for operational management of market risk, as defined above, through funding, investment and derivative hedging activities. The MRM unit is responsible for monitoring market risk and functions independently of all operating and management units and subsidiaries.
The Company has separate and distinct methods for managing the market risk associated with our asset and liability management activities and our trading activities, as described below.
Interest Rate Risk Management
ALCO monitors interest rate risk from ALM activities on a monthly basis through a variety of modeling techniques that are used to quantify the sensitivity of net interest income to changes in interest rates. Our net interest income sensitivity analysis typically involves a simulation in which we estimate the net interest income impact of gradual parallel shifts in the yield curve of up 200 basis points and down 100 basis points over a 12-month horizon using a forecasted balance sheet.
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Net Interest Income Sensitivity
The table below presents the estimated increase (decrease) in the Company's net interest income given a gradual parallel shift in the yield curve up 200 basis points and down 100 basis points over a 12-month horizon.
(Dollars in millions) | September 30, 2018 | December 31, 2017 | ||||||
Effect on net interest income: | ||||||||
Increase 200 basis points | $ | 130.1 | $ | 100.2 | ||||
as a percentage of base case net interest income | 3.96 | % | 3.21 | % | ||||
Decrease 100 basis points | $ | (79.9 | ) | $ | (75.7 | ) | ||
as a percentage of base case net interest income | (2.43 | )% | (2.42 | )% |
An increase in rates increases net interest income. During the nine months ended September 30, 2018, the Company's asset sensitive profile increased due to changes in balance sheet composition, changes in the ALM derivatives portfolio and forecasted balance sheet activity over the next twelve months. During the second quarter of 2018, the Company terminated receive fixed swap contracts used to hedge floating rate commercial loans, which contributed to an increase in the Company's asset sensitivity.
MUSA's securities borrowed or purchased under resale agreements and securities loaned or sold under repurchase agreements are included in the Company's net interest income sensitivity analysis. However, due to the short-term nature of these interest-bearing assets and liabilities, the Company also monitors net interest income sensitivity excluding these balances. Excluding the impact of MUSA, the Company would have a slightly greater asset sensitive risk profile at September 30, 2018.
We believe that our simulation provides management with a comprehensive view of the sensitivity of net interest income to changes in interest rates over the measurement horizon. However, as with any financial model, the underlying assumptions are inherently uncertain and subject to refinement. In particular, two significant models used in interest rate risk measurement address residential mortgage prepayment speeds and non-maturity deposit rate and balance behaviors. The mortgage prepayment model is periodically calibrated to reflect changes in customer behavior. Model performance may be adversely affected by rapid changes in interest rates, home prices and the credit environment. The deposit model uses the Company’s historical deposit pricing to forecast future deposit pricing in its scenarios. Management’s response to future rate scenarios may deviate from historical responses and actual results may differ from those derived in the simulation analysis due to unexpected market events, unanticipated changes in customer behavior, market interest rates, product pricing, and investment, funding and hedging activities.
Investment Securities
Our ALM securities portfolio includes both securities available for sale and securities held to maturity. At September 30, 2018 and December 31, 2017, our ALM securities portfolio fair values were $26.6 billion and $25.7 billion, respectively. Our ALM securities portfolio is comprised of RMBSs, Cash Flow CLOs, CMBSs, U.S. Treasury securities and government-sponsored agency securities. The portfolio had an expected weighted average life of 4.9 years at September 30, 2018. At September 30, 2018, approximately $1.7 billion of the portfolio was pledged to secure trust and public deposits and for other purposes as required or permitted by law. During the nine months ended September 30, 2018, we purchased $5.6 billion and sold $854 million of securities as part of our investment portfolio strategy, while $3.3 billion of ALM securities matured, were paid down, or were called.
Based on current prepayment projections, the estimated ALM securities portfolio’s effective duration was 3.9 at September 30, 2018, compared with 3.7 at December 31, 2017. Effective duration is a measure of price sensitivity of a bond portfolio to immediate parallel shifts in interest rates. An effective duration of 3.9 suggests an expected price decrease of approximately 3.9% for an immediate 1.0% parallel increase in interest rates.
In addition to our ALM securities, our securities available for sale portfolio includes approximately $1.3 billion of direct bank purchase bonds that are largely managed within our Regional Bank and U.S. Wholesale & Investment Banking operating segments. These instruments are accounted for as securities, but underwritten
26
as loans with terms that are closely aligned with traditional commercial loan features, and are subject to national bank regulatory lending authority standards. These instruments typically are not issued in bearer form, nor are they registered with the SEC or the Depository Trust Company. Additionally, these instruments generally contain certain transferability restrictions and are not assigned external credit ratings.
ALM and Other Risk Management Derivatives
The notional amount and gross fair value of the ALM derivatives portfolio decreased during the nine months ended September 30, 2018 as the Company terminated receive fixed swap contracts used to hedge floating rate commercial loans in order to increase earnings at risk sensitivity given expectations of rising rates. Other risk management derivatives are primarily used to manage non-interest rate related risks. For additional discussion of derivative instruments and our hedging strategies, see Note 9 "Derivative Instruments and Other Financial Instruments Used for Hedging" to our Consolidated Financial Statements in Part I, Item 1. “Financial Statements” in this Form 10-Q.
(Dollars in millions) | September 30, 2018 | December 31, 2017 | Increase (Decrease) | |||||||||
Total gross notional amount of ALM and other risk management derivatives | ||||||||||||
ALM derivatives: | ||||||||||||
Interest rate swap receive fixed contracts | $ | 179 | $ | 7,498 | $ | (7,319 | ) | |||||
Total ALM derivatives | 179 | 7,498 | (7,319 | ) | ||||||||
Other risk management derivatives | 1,232 | 1,345 | (113 | ) | ||||||||
Total ALM and other risk management derivatives | $ | 1,411 | $ | 8,843 | $ | (7,432 | ) | |||||
Fair value of ALM and other risk management derivatives | ||||||||||||
ALM derivatives: | ||||||||||||
Gross positive fair value | $ | 4 | $ | 2 | $ | 2 | ||||||
Gross negative fair value | — | 149 | (149 | ) | ||||||||
Positive (negative) fair value of ALM derivatives, net | 4 | (147 | ) | 151 | ||||||||
Other risk management derivatives: | ||||||||||||
Gross positive fair value | 1 | 3 | (2 | ) | ||||||||
Gross negative fair value | 25 | 9 | 16 | |||||||||
Positive (negative) fair value of other risk management derivatives, net | (24 | ) | (6 | ) | (18 | ) | ||||||
Positive (negative) fair value of ALM and other risk management derivatives, net | $ | (20 | ) | $ | (153 | ) | $ | 133 |
Trading Activities
Trading activities consist primarily of activities at MUAH's broker-dealer subsidiary, MUSA, and derivative contracts MUB enters into as a financial intermediary for customers. MUSA transacts as principal and agent for a variety of securities and exchange traded derivatives. By acting as a financial intermediary, MUB is able to provide our customers with access to a range of products from the securities, foreign exchange and derivatives markets. We generally take offsetting positions to mitigate our exposure to market risk.
The Company monitors market risk from trading activities by utilizing a combination of position limits, VaR, and stop-loss limits, applied at an aggregated level and to various sub-components within those limits. Positions are controlled and reported both in notional and VaR terms. Our calculation of VaR estimates how high the loss in fair value might be, at a 99% confidence level, due to an adverse shift in market prices over a period of ten business days. VaR at the trading activity level is managed within the maximum limit of $38 million established by Board policy for total trading positions. The VaR model incorporates assumptions on key parameters, including holding period and historical volatility.
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The following table sets forth the average, high and low 10-day 99% confidence level VaR for our trading activities for the three months ended September 30, 2018 and September 30, 2017.
(Dollars in millions) | September 30, 2018 | September 30, 2017 | ||||||
Average VaR | $ | 11.8 | $ | 9.3 | ||||
High VaR | 14.7 | 12.7 | ||||||
Low VaR | 7.8 | 7.0 |
Consistent with our business strategy of focusing on the sale of capital markets products to customers, we manage our trading risk exposures at relatively low levels. Our foreign exchange business continues to derive the majority of its revenue from customer-related transactions.
The following table provides the fair value of our trading account portfolio as of September 30, 2018 and December 31, 2017, and the change in fair value between September 30, 2018 and December 31, 2017.
(Dollars in millions) | September 30, 2018 | December 31, 2017 | Increase (Decrease) | |||||||||
Fair value of trading account assets: | ||||||||||||
U.S. Treasury securities | $ | 2,968 | $ | 1,926 | $ | 1,042 | ||||||
Corporate bonds | 1,428 | 1,054 | 374 | |||||||||
Mortgage-backed securities | 5,511 | 6,339 | (828 | ) | ||||||||
Derivatives (including netting adjustment) | 461 | 712 | (251 | ) | ||||||||
Other | 845 | 536 | 309 | |||||||||
Trading account assets | $ | 11,213 | $ | 10,567 | $ | 646 | ||||||
Fair value of trading account liabilities: | ||||||||||||
U.S. Treasury securities | $ | 2,518 | $ | 2,709 | $ | (191 | ) | |||||
Corporate bonds | 853 | 348 | 505 | |||||||||
Derivatives (including netting adjustment) | 548 | 501 | 47 | |||||||||
Other | 110 | 42 | 68 | |||||||||
Trading account liabilities | $ | 4,029 | $ | 3,600 | $ | 429 | ||||||
Additional trading account derivative detail: | ||||||||||||
Total gross notional amount of positions held for trading purposes: | ||||||||||||
Interest rate contracts | $ | 120,613 | $ | 132,214 | $ | (11,601 | ) | |||||
Commodity contracts | 453 | 1,244 | (791 | ) | ||||||||
Foreign exchange contracts | 8,099 | 7,053 | 1,046 | |||||||||
Equity contracts | 503 | 1,496 | (993 | ) | ||||||||
Other contracts | 39 | 4 | 35 | |||||||||
Total | $ | 129,707 | $ | 142,011 | $ | (12,304 | ) | |||||
Fair value of positions held for trading purposes: | ||||||||||||
Gross positive fair value | $ | 767 | $ | 1,317 | $ | (550 | ) | |||||
Gross negative fair value | 838 | 969 | (131 | ) | ||||||||
Positive (negative) fair value of positions, net | $ | (71 | ) | $ | 348 | $ | (419 | ) |
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Liquidity Risk Management
Liquidity risk is the risk that an institution's financial condition or overall safety and soundness is adversely affected by an inability, or perceived inability, to meet its contractual, including contingent, obligations. The objective of liquidity risk management is to maintain a sufficient amount of liquidity and diversity of funding sources to allow an institution to meet obligations in both stable and adverse conditions.
The management of liquidity risk is governed by MUAH ALM and Liquidity Risk Management Policies. The MUAH ALM Policy is under the oversight of ALCO, which oversees first line liquidity risk management activities conducted by Treasury. Treasury formulates the funding, liquidity and contingency planning strategies for the Company, the Bank and MUSA, and is responsible for identifying, managing and reporting on liquidity risk. The Liquidity Risk Management Policies for the Company, the Bank and MUSA are under the oversight of the ARC and the Risk Committee of the Board. MRM conducts independent oversight and governance of liquidity risk management activities to establish sound policies and effective risk and independent monitoring controls. We are also subject to a Contingency Funding Plan framework that identifies actions to be taken to help ensure adequate liquidity if an event should occur that disrupts or adversely affects the normal funding activities of the Company, the Bank or MUSA.
Liquidity risk is managed using a total balance sheet perspective that analyzes all sources and uses of liquidity including loans, investments, deposits and borrowings, as well as off-balance sheet exposures. Although we make an effort to diversify our sources of liquidity, as discussed below, we will be required to maintain a minimum amount of TLAC-eligible debt due to affiliates beginning January 1, 2019. Various tools are used to measure and monitor liquidity, including forecasting of the sources and uses of cash flows over multiple time horizons and stress testing of the forecasts under various scenarios. Stress testing, which incorporates both institution-specific and systemic market scenarios, as well as a combination scenario that adversely affects the Company's liquidity position and profile, facilitates the identification of appropriate remedial measures to help ensure that the Company maintains adequate liquidity in adverse conditions. Such measures may include extending the maturity profile of liabilities, optimizing liability levels through pricing strategies, adding new funding sources, altering dependency on certain funding sources, adjusting asset growth and financing or selling assets.
In December 2016, the Federal Reserve finalized rules imposing new TLAC requirements on GSIBs with operations in the U.S., such as MUFG. The final rule includes an Internal TLAC requirement which sets a minimum amount of loss-absorbing instruments, which must be issued by the Company to MUFG or MUFG Bank, Ltd. (or another wholly-owned non-U.S. subsidiary of MUFG) due to MUFG's single point of entry resolution approach. These loss absorbing instruments are comprised of Tier 1 regulatory capital and long-term debt. TLAC Tier 1 regulatory capital is designed to absorb ongoing losses, while the conversion of TLAC-eligible long-term debt into common equity of the Company is intended to recapitalize the Company prior to any bankruptcy or insolvency proceedings. The Company will be required to comply with these new rules by January 1, 2019. During the fourth quarter of 2018, the Company expects to restructure existing debt issued to MUFG Bank, Ltd. and replace a portion of its externally-placed debt with the issuance of internal TLAC-eligible debt issued to MUFG Bank, Ltd. in order to comply with the new rules. See "Supervision and Regulation – Dodd-Frank Act and Related Regulations" in Part I, Item 1. "Business" in our 2017 Form 10-K.
We maintain a substantial level of available liquidity in the form of on-balance sheet and off-balance sheet funding sources. Sources of liquidity include cash at the Federal Reserve, unencumbered liquid securities, and capacity to borrow on a secured basis at the FHLB of San Francisco and the Federal Reserve Bank’s Discount Window. Total unpledged securities were $24.8 billion at September 30, 2018. Our primary funding sources are customer deposits, secured FHLB advances, and unsecured short-term and long-term debt. Total deposits increased $3.0 billion from $84.8 billion at December 31, 2017 to $87.8 billion at September 30, 2018. As of September 30, 2018, the Bank had $11.9 billion of borrowings outstanding with the FHLB of San Francisco, and the Bank had a remaining unused borrowing capacity from the FHLB of San Francisco of $19.9 billion. The Bank maintains a $12.0 billion unsecured bank note program. Available funding under the bank note program was $5.9 billion at September 30, 2018. Subject to market conditions, the Bank may, in the fourth quarter of 2018, issue additional notes under its unsecured bank note program. We do not have any firm commitments in place to sell additional notes under this program.
In addition to managing liquidity risk on a consolidated basis and at each of the major subsidiaries (the Bank and MUSA), we assess and monitor liquidity at the parent company (MUAH) and the other non-bank subsidiaries. The parent company maintains sufficient liquidity to meet expected obligations, without access to
29
the wholesale funding markets or dividends from subsidiaries, for at least 20 months. At September 30, 2018, the parent company’s liquidity exceeded 20 months.
MUAH and its subsidiaries may borrow on a long-term basis from MUFG Bank, Ltd. and affiliates. As of September 30, 2018, the Company had total long-term debt issued to MUFG Bank, Ltd. and affiliates of $5.2 billion.
The Company’s total wholesale funding included $12.3 billion of long-term debt (excluding nonrecourse debt) and $8.3 billion of short-term debt at September 30, 2018. For additional information regarding our outstanding debt, refer to Note 6 "Commercial Paper and Other Short-Term Borrowings" and Note 7 "Long-Term Debt" to our Consolidated Financial Statements in Part I, Item 1. “Financial Statements” in this Form 10-Q. On October 5, 2018, the Company gave notice of its election to redeem $100,000,000 principal amount of its outstanding 3.000% Senior Notes due 2025, leaving $400,000,000 principal amount of such notes outstanding and also gave notice of its election to redeem all of the $1,000,000,000 principal amount outstanding of its 2.250% Senior Notes due 2020. We evaluate and monitor the stability and reliability of our various funding sources to help ensure that we have sufficient liquidity in adverse circumstances.
Our costs and ability to raise funds in the capital markets are influenced by our credit ratings. In April 2018, Standard & Poor's revised the outlook on MUAH, MUB and MUSA to positive from stable following a similar revision to MUFG’s outlook. The change in MUFG’s outlook is a result of Standard & Poor's revising the outlook on the long-term sovereign rating of Japan to positive from stable. The following table provides our credit ratings as of September 30, 2018.
MUFG Union Bank, N.A. | MUFG Securities Americas Inc. | MUFG Americas Holdings Corporation | |||||||
Deposits | Senior Debt | Senior Debt | Senior Debt | ||||||
Standard & Poor's | Long-term | – | A | A | A- | ||||
Short-term | – | A-1 | A-1 | A-2 | |||||
Moody's | Long-term | Aa2 | A2 | – | A2 | ||||
Short-term | P-1 | P-1 | – | – | |||||
Fitch | Long-term | A+ | A | A | A | ||||
Short-term | F1 | F1 | F1 | F1 |
For additional information, including information about rating agency assessments, see “The Bank of Tokyo-Mitsubishi UFJ’s and Mitsubishi UFJ Financial Group’s credit ratings and financial or regulatory condition could adversely affect our operations” and "Our credit ratings are important in order to maintain liquidity" in Part I, Item 1A. "Risk Factors" in our 2017 Form 10-K.
Operational Risk Management
Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk includes legal risk, which includes exposure to fines, penalties, or punitive damages resulting from supervisory actions, as well as private settlements, but excludes strategic and reputation risk. In particular, information security is a significant operational risk element for the Company and includes the risk of losses resulting from cyber-attacks or other related cyber incidents. See “We are subject to a wide array of operational risks, including, but not limited to, cyber-security risks” in Part I, Item 1A. “Risk Factors” in our 2017 Form 10-K. Operational risk is mitigated through a system of internal controls that are designed to keep these risks at appropriate levels. For additional information regarding our operational risk management policies, see “Operational Risk Management” in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2017 Form 10-K.
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Business Segments
The Company has four reportable segments: Regional Bank, U.S. Wholesale & Investment Banking, Transaction Banking, and MUSA. For a more detailed description of these reportable segments, refer to Note 13 "Business Segments" to our Consolidated Financial Statements in Part I, Item 1. “Financial Statements” in this Form 10-Q.
Unlike U.S. Generally Accepted Accounting Principles (GAAP), there is no standardized or authoritative guidance for management accounting. Consequently, reported results are not necessarily comparable with those presented by other companies and they are not necessarily indicative of the results that would be reported by our business units if they were separate economic entities. The information set forth in the tables that follow is prepared using various management accounting methodologies to measure the performance of the individual segments. During the normal course of business, the Company occasionally changes or updates its management accounting methodologies or organizational structure. Certain non-bank subsidiaries, including MUSA, are reported based on their GAAP results. For a description of these methodologies, see Note 13 "Business Segments" to our Consolidated Financial Statements in Part I, Item 1. “Financial Statements” in this Form 10-Q.
In the second quarter of 2018, the Company began measuring the performance of its business segments by reporting revenues and expenses from products and services sold entirely within the business segment that manages the customer relationship. The Company previously applied a “market view” perspective in measuring the business segments, which reported revenues and expenses from products and services sold in both the business segment that provided the product and the business segment that managed the customer relationship. Prior period results have been revised to conform to the current period presentation.
Regional Bank
The Regional Bank offers a wide range of financial products and services to individuals and businesses on the West Coast. Capabilities are delivered through a network of retail and private banking offices, digital channels, relationship managers, call centers and ATMs.
Consumers have access to checking and deposit accounts, residential mortgage loans, consumer loans, home equity lines of credit, credit cards, bill and loan payment services, and merchant services. Additionally, online deposit savings products are offered through PurePoint Financial which provides services to customers online and through a call center and a network of financial centers.
Commercial clients with up to $1 billion in annual revenue have access to commercial and asset-based loans, and professional real estate developers are offered financing solutions for existing properties and construction projects. Through partnerships with other areas of the Bank, these clients also have access to non-credit products and services including global treasury management, capital markets solutions, foreign exchange, interest rate risk and commodity risk management products and services.
The Wealth Markets Division serves corporate, institutional, non-profit and individual clients. Products and services include wealth planning, trust and estate services, investment management, brokerage and private wealth management.
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The following table sets forth the results for the Regional Bank segment.
Regional Bank | ||||||||||||||||||||||||||||||||
For the Three Months Ended September 30, | Increase (Decrease) | For the Nine Months Ended September 30, | Increase (Decrease) | |||||||||||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | Amount | Percent | 2018 | 2017 | Amount | Percent | ||||||||||||||||||||||||
Results of operations | ||||||||||||||||||||||||||||||||
Net interest income | $ | 553 | $ | 516 | $ | 37 | 7 | % | $ | 1,620 | $ | 1,527 | $ | 93 | 6 | % | ||||||||||||||||
Noninterest income | 111 | 108 | 3 | 3 | 338 | 326 | 12 | 4 | ||||||||||||||||||||||||
Total revenue | 664 | 624 | 40 | 6 | 1,958 | 1,853 | 105 | 6 | ||||||||||||||||||||||||
Noninterest expense | 518 | 487 | 31 | 6 | 1,552 | 1,483 | 69 | 5 | ||||||||||||||||||||||||
(Reversal of) provision for credit losses | 45 | 19 | 26 | 137 | 52 | 39 | 13 | 33 | ||||||||||||||||||||||||
Income before income taxes and including noncontrolling interests | 101 | 118 | (17 | ) | (14 | ) | 354 | 331 | 23 | 7 | ||||||||||||||||||||||
Income tax expense (1) | 17 | 31 | (14 | ) | (45 | ) | �� | 68 | 87 | (19 | ) | (22 | ) | |||||||||||||||||||
Net income (loss) attributable to MUAH | $ | 84 | $ | 87 | $ | (3 | ) | (3 | ) | $ | 286 | $ | 244 | $ | 42 | 17 | ||||||||||||||||
Average balances | ||||||||||||||||||||||||||||||||
Total loans held for investment | $ | 66,911 | $ | 61,101 | $ | 5,810 | 10 | % | $ | 65,697 | $ | 60,276 | $ | 5,421 | 9 | % | ||||||||||||||||
Total assets | 70,681 | 64,902 | 5,779 | 9 | 69,465 | 64,140 | 5,325 | 8 | ||||||||||||||||||||||||
Total deposits | 56,442 | 54,964 | 1,478 | 3 | 54,884 | 54,388 | 496 | 1 |
(1) | Income tax expense includes certain management accounting classification adjustments. |
Net interest income increased during the three and nine months ended September 30, 2018 compared with the prior year periods, primarily due to balance sheet growth in loans and higher spreads on deposits, partially offset by continued margin compression on loans. Noninterest expense increased in the three and nine months ended September 30, 2018, due primarily to the launch of new business lines and increased support function costs. The provision for credit losses during 2018 was primarily due to specific reserves for credit losses in the third quarter of 2018 and increases in outstanding balances related to marketplace lending. The provision for credit losses during 2017 was primarily due to a reserve build related to the commercial portfolio and retail credit card losses.
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U.S. Wholesale & Investment Banking
U.S. Wholesale & Investment Banking delivers the full suite of MUAH products and services to large and mid-corporate customers. The segment employs an industry-focused strategy including dedicated coverage teams in General Industries, Power and Utilities, Oil and Gas, Telecom and Media, Technology, Healthcare and Nonprofit, Public Finance, and Financial Institutions (predominantly Insurance and Asset Managers). U.S. Wholesale & Investment Banking provides customers general corporate credit and structured credit services, including project finance, leasing and equipment finance, commercial finance, funds finance and securitizations. By working with the Company's other segments, U.S. Wholesale & Investment Banking offers its customers a range of noncredit services, which include global treasury management, capital market solutions, and various foreign exchange, interest rate risk and commodity risk management products.
The following table sets forth the results for the U.S. Wholesale & Investment Banking segment.
U.S. Wholesale & Investment Banking | ||||||||||||||||||||||||||||||||
For the Three Months Ended September 30, | Increase (Decrease) | For the Nine Months Ended September 30, | Increase (Decrease) | |||||||||||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | Amount | Percent | 2018 | 2017 | Amount | Percent | ||||||||||||||||||||||||
Results of operations | ||||||||||||||||||||||||||||||||
Net interest income | $ | 104 | $ | 107 | $ | (3 | ) | (3 | )% | $ | 307 | $ | 333 | $ | (26 | ) | (8 | )% | ||||||||||||||
Noninterest income | 103 | 91 | 12 | 13 | 283 | 296 | (13 | ) | (4 | ) | ||||||||||||||||||||||
Total revenue | 207 | 198 | 9 | 5 | 590 | 629 | (39 | ) | (6 | ) | ||||||||||||||||||||||
Noninterest expense | 106 | 98 | 8 | 8 | 310 | 298 | 12 | 4 | ||||||||||||||||||||||||
(Reversal of) provision for credit losses | 27 | (9 | ) | 36 | 400 | 3 | (51 | ) | 54 | 106 | ||||||||||||||||||||||
Income (loss) before income taxes and including noncontrolling interests | 74 | 109 | (35 | ) | (32 | ) | 277 | 382 | (105 | ) | (27 | ) | ||||||||||||||||||||
Income tax expense (benefit) (1) | (3 | ) | 19 | (22 | ) | (116 | ) | 133 | 89 | 44 | 49 | |||||||||||||||||||||
Net income (loss) attributable to MUAH | $ | 77 | $ | 90 | $ | (13 | ) | (14 | ) | $ | 144 | $ | 293 | $ | (149 | ) | (51 | ) | ||||||||||||||
Average balances | ||||||||||||||||||||||||||||||||
Total loans held for investment | $ | 15,761 | $ | 17,280 | $ | (1,519 | ) | (9 | )% | $ | 15,756 | $ | 17,880 | $ | (2,124 | ) | (12 | )% | ||||||||||||||
Total assets | 19,825 | 21,709 | (1,884 | ) | (9 | ) | 19,943 | 22,525 | (2,582 | ) | (11 | ) | ||||||||||||||||||||
Total deposits | 7,864 | 8,558 | (694 | ) | (8 | ) | 8,065 | 9,016 | (951 | ) | (11 | ) |
(1) | Income tax expense (benefit) includes certain management accounting classification adjustments. |
Net interest income decreased during the three and nine months ended September 30, 2018 compared with the same prior year periods due primarily to lower average loan balances. Noninterest income decreased during the nine months ended September 30, 2018 due to lower fees from capital markets activities. The provision for credit losses during 2018 was primarily due to the impact of specific reserves for credit losses during the third quarter of 2018. The reversal of provision for credit losses during 2017 was due to general improvement in customer credit quality.
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Transaction Banking
Transaction Banking works alongside the Company's other segments to provide working capital management and asset servicing solutions, including deposits and treasury management, trade finance, and institutional trust and custody, to the Company's customers. The client base consists of financial institutions, corporations, government agencies, insurance companies, mutual funds, investment managers and non-profit organizations.
The following table sets forth the results for the Transaction Banking segment.
Transaction Banking | ||||||||||||||||||||||||||||||||
For the Three Months Ended September 30, | Increase (Decrease) | For the Nine Months Ended September 30, | Increase (Decrease) | |||||||||||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | Amount | Percent | 2018 | 2017 | Amount | Percent | ||||||||||||||||||||||||
Results of operations | ||||||||||||||||||||||||||||||||
Net interest income | $ | 66 | $ | 64 | $ | 2 | 3 | % | $ | 197 | $ | 179 | $ | 18 | 10 | % | ||||||||||||||||
Noninterest income | 15 | 19 | (4 | ) | (21 | ) | 44 | 48 | (4 | ) | (8 | ) | ||||||||||||||||||||
Total revenue | 81 | 83 | (2 | ) | (2 | ) | 241 | 227 | 14 | 6 | ||||||||||||||||||||||
Noninterest expense | 65 | 56 | 9 | 16 | 186 | 171 | 15 | 9 | ||||||||||||||||||||||||
(Reversal of) provision for credit losses | (3 | ) | (1 | ) | (2 | ) | (200 | ) | (4 | ) | (1 | ) | (3 | ) | (300 | ) | ||||||||||||||||
Income before income taxes and including noncontrolling interests | 19 | 28 | (9 | ) | (32 | ) | 59 | 57 | 2 | 4 | ||||||||||||||||||||||
Income tax expense (1) | 5 | 11 | (6 | ) | (55 | ) | 16 | 23 | (7 | ) | (30 | ) | ||||||||||||||||||||
Net income (loss) attributable to MUAH | $ | 14 | $ | 17 | $ | (3 | ) | (18 | ) | $ | 43 | $ | 34 | $ | 9 | 26 | ||||||||||||||||
Average balances | ||||||||||||||||||||||||||||||||
Total loans held for investment | $ | 38 | $ | 33 | $ | 5 | 15 | % | $ | 35 | $ | 44 | $ | (9 | ) | (20 | )% | |||||||||||||||
Total assets | 890 | 1,063 | (173 | ) | (16 | ) | 943 | 1,116 | (173 | ) | (16 | ) | ||||||||||||||||||||
Total deposits | 15,048 | 16,943 | (1,895 | ) | (11 | ) | 15,370 | 16,966 | (1,596 | ) | (9 | ) |
(1) | Income tax expense includes certain management accounting classification adjustments. |
Transaction Banking earns revenue primarily from a net interest income funds transfer pricing credit on deposit liabilities, as well as service charges on deposit accounts and trust management fees. The increase in net interest income during the three and nine months ended September 30, 2018 compared with the prior year periods was driven by widening spreads on deposits, partially offset by lower average deposit balances. The increase in noninterest expense during the three and nine months ended September 30, 2018 compared with the prior year periods was primarily due to increased support function costs.
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MUFG Securities Americas
MUSA is MUAH's broker-dealer subsidiary which engages in capital markets origination transactions, private placements, collateralized financings, securities borrowing and lending transactions, and domestic and foreign debt and equity securities transactions.
The following table sets forth the results for the MUSA segment.
MUSA | ||||||||||||||||||||||||||||||||
For the Three Months Ended September 30, | Increase (Decrease) | For the Nine Months Ended September 30, | Increase (Decrease) | |||||||||||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | Amount | Percent | 2018 | 2017 | Amount | Percent | ||||||||||||||||||||||||
Results of operations | ||||||||||||||||||||||||||||||||
Net interest income | $ | 52 | $ | 62 | $ | (10 | ) | (16 | )% | $ | 157 | $ | 178 | $ | (21 | ) | (12 | )% | ||||||||||||||
Noninterest income | 94 | 100 | (6 | ) | (6 | ) | 259 | 272 | (13 | ) | (5 | ) | ||||||||||||||||||||
Total revenue | 146 | 162 | (16 | ) | (10 | ) | 416 | 450 | (34 | ) | (8 | ) | ||||||||||||||||||||
Noninterest expense | 121 | 119 | 2 | 2 | 353 | 336 | 17 | 5 | ||||||||||||||||||||||||
Income before income taxes and including noncontrolling interests | 25 | 43 | (18 | ) | (42 | ) | 63 | 114 | (51 | ) | (45 | ) | ||||||||||||||||||||
Income tax expense (1) | 6 | 18 | (12 | ) | (67 | ) | 15 | 45 | (30 | ) | (67 | ) | ||||||||||||||||||||
Net income (loss) attributable to MUAH | $ | 19 | $ | 25 | $ | (6 | ) | (24 | ) | $ | 48 | $ | 69 | $ | (21 | ) | (30 | ) | ||||||||||||||
Average balances | ||||||||||||||||||||||||||||||||
Total loans held for investment | $ | — | $ | — | $ | — | — | % | $ | — | $ | — | $ | — | — | % | ||||||||||||||||
Total assets | 33,473 | 31,764 | 1,709 | 5 | 33,494 | 31,202 | 2,292 | 7 | ||||||||||||||||||||||||
Total deposits | — | — | — | — | — | — | — | — |
(1) | Income tax expense includes certain management accounting classification adjustments. |
Net interest income decreased during the three and nine months ended September 30, 2018 compared with the three and nine months ended September 30, 2017, primarily due to an increase in short term interest rates on borrowings to fund trading assets. Noninterest income decreased during the nine months ended September 30, 2018 due primarily to decreases in trading account income and investment banking fees, largely offset by higher fees from affiliates. Noninterest expense increased primarily due to increases in affiliate revenue sharing expense.
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Other
"Other" includes the MUFG Fund Services segment, Markets segment, Japanese Corporate Banking segment, Corporate Treasury, and certain corporate activities of the Company. MUFG Fund Services provides comprehensive investment fund administrative solutions. Markets provides risk management solutions, including foreign exchange, interest rate and energy risk management solutions. Japanese Corporate Banking offers a range of credit, deposit, and investment management products and services to companies located primarily in the U.S. that are affiliated with companies headquartered in Japan. Corporate Treasury is responsible for ALM, wholesale funding, and the ALM investment securities and derivatives hedging portfolios.
In addition, "Other" includes the net impact of funds transfer pricing charges and credits allocated to the reportable segments; the residual costs of support groups; fees from affiliates and noninterest expenses associated with MUFG Bank, Ltd.'s U.S. branch banking operations; the unallocated allowance; goodwill, intangible assets, and the related amortization/accretion associated with the Company's privatization transaction; the elimination of the fully taxable-equivalent basis amount; the difference between the marginal tax rate and the consolidated effective tax rate; and FDIC covered assets.
The following table sets forth the results for Other.
Other | |||||||||||||||||||||||||||||||
For the Three Months Ended September 30, | Increase (Decrease) | For the Nine Months Ended September 30, | Increase (Decrease) | ||||||||||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | Amount | Percent | 2018 | 2017 | Amount | Percent | |||||||||||||||||||||||
Results of operations | |||||||||||||||||||||||||||||||
Net interest income | $ | 57 | $ | 67 | $ | (10 | ) | (15 | )% | $ | 201 | $ | 188 | $ | 13 | 7 | % | ||||||||||||||
Noninterest income | 303 | 197 | 106 | 54 | 680 | 550 | 130 | 24 | |||||||||||||||||||||||
Total revenue | 360 | 264 | 96 | 36 | 881 | 738 | 143 | 19 | |||||||||||||||||||||||
Noninterest expense | 249 | 222 | 27 | 12 | 825 | 657 | 168 | 26 | |||||||||||||||||||||||
(Reversal of) provision for credit losses | (5 | ) | 9 | (14 | ) | (156 | ) | (8 | ) | (21 | ) | 13 | 62 | ||||||||||||||||||
Income before income taxes and including noncontrolling interests | 116 | 33 | 83 | 252 | 64 | 102 | (38 | ) | (37 | ) | |||||||||||||||||||||
Income tax benefit (1) | 10 | 30 | (20 | ) | (67 | ) | (211 | ) | 11 | (222 | ) | nm | |||||||||||||||||||
Net income (loss) including noncontrolling interests | 106 | 3 | 103 | nm | 275 | 91 | 184 | 202 | |||||||||||||||||||||||
Deduct: net (income) loss from noncontrolling interests | 6 | 10 | (4 | ) | (40 | ) | 20 | 25 | (5 | ) | (20 | ) | |||||||||||||||||||
Net income (loss) attributable to MUAH | $ | 112 | $ | 13 | $ | 99 | nm | $ | 295 | $ | 116 | $ | 179 | 154 | |||||||||||||||||
Average balances | |||||||||||||||||||||||||||||||
Total loans held for investment | $ | 454 | $ | 633 | $ | (179 | ) | (28 | )% | $ | 467 | $ | 314 | $ | 153 | 49 | % | ||||||||||||||
Total assets | 35,942 | 33,257 | 2,685 | 8 | 35,364 | 31,630 | 3,734 | 12 | |||||||||||||||||||||||
Total deposits | 7,429 | 4,798 | 2,631 | 55 | 6,614 | 5,353 | 1,261 | 24 |
(1) | Income tax benefit includes certain management accounting classification adjustments. |
36
Critical Accounting Estimates
MUAH’s consolidated financial statements are prepared in accordance with GAAP, which includes management estimates and judgments. The financial information contained within our statements is, to a significant extent, financial information that is based on estimates used to measure the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. For example, we use discount factors and other assumptions to measure certain assets and liabilities. A change in the discount factor or other important assumptions could significantly increase or decrease the reported amounts of those assets and liabilities and result in either a beneficial or an adverse impact to our financial results. As discussed in "Allowance for Credit Losses" in Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Form 10-Q, beginning in the first quarter of 2018 we estimate probability of default and the loss severity associated with the default (i.e. the loss-given default) to estimate the credit losses inherent in our loan and lease portfolios held for investment and certain off-balance sheet commitments on the balance sheet date. Actual losses could differ significantly from our loss estimates. Other significant estimates that we use include the valuation of certain derivatives and securities, the assumptions used in measuring our transfer pricing revenue, pension obligations, goodwill impairment, and assumptions regarding our effective tax rates. Management has reviewed and approved these critical accounting policies and has discussed these policies with the Audit & Finance Committee.
Understanding our accounting policies is fundamental to understanding our consolidated financial condition and consolidated results of operations. Accordingly, both our critical accounting estimates and our significant accounting policies are discussed in detail in our 2017 Form 10-K. There were no material changes to these critical accounting estimates during the third quarter of 2018.
Non-GAAP Financial Measures
The following table presents a reconciliation between certain Generally Accepted Accounting Principles (GAAP) amounts and specific non-GAAP measures used to calculate return on average MUAH tangible common equity for the three and nine months ended September 30, 2018 and 2017.
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
(Dollars in millions) | September 30, 2018 | September 30, 2017 | September 30, 2018 | September 30, 2017 | ||||||||||||
Net income attributable to MUAH | $ | 306 | $ | 232 | $ | 816 | $ | 756 | ||||||||
Add: intangible asset amortization, net of tax | 5 | 5 | 15 | 13 | ||||||||||||
Net income attributable to MUAH, excluding intangible asset amortization (a) | $ | 311 | $ | 237 | $ | 831 | $ | 769 | ||||||||
Average MUAH stockholders' equity | $ | 18,682 | $ | 18,485 | $ | 18,376 | $ | 17,827 | ||||||||
Less: Goodwill | 3,301 | 3,301 | 3,301 | 3,250 | ||||||||||||
Less: Intangible assets, except mortgage servicing rights | 296 | 326 | 303 | 253 | ||||||||||||
Less: Deferred tax liabilities related to goodwill and intangible assets | (58 | ) | (76 | ) | (57 | ) | (76 | ) | ||||||||
Average MUAH tangible common equity (b) | $ | 15,143 | $ | 14,934 | $ | 14,829 | $ | 14,400 | ||||||||
Return on average MUAH tangible common equity (1) (a)/(b) | 8.22 | % | 6.35 | % | 7.47 | % | 7.10 | % |
(1) Annualized.
37
Disclosure of Iranian Activities under Section 13(r) of the Securities Exchange Act of 1934
We are disclosing the following information pursuant to Section 13(r) of the Securities Exchange Act of 1934 (Exchange Act), which requires an issuer to disclose whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with natural persons or entities designated by the U.S. government under specified Executive Orders. The scope of activities that must be reported includes activities not prohibited by U.S. law and conducted outside the United States in compliance with applicable local law. Because we are indirectly wholly-owned by MUFG, a Japanese corporation, our disclosure includes activities, transactions or dealings conducted outside the United States by non-U.S. affiliates of MUFG which are not controlled by us. We have requested that MUFG provide us a description of reportable activity under Section 13(r) and have received the following information:
During the quarter ended September 30, 2018, a non-U.S. subsidiary of MUFG engaged in business activities with entities in, or affiliated with, Iran, including counterparties owned or controlled by the Iranian government. Specifically, MUFG’s non-U.S. banking subsidiary, MUFG Bank, issued letters of credit and guarantees and provided remittance and other settlement services mainly in connection with customer transactions related to the purchase and exportation of Iranian crude oil to Japan, and in some cases, in connection with other petroleum-related transactions with Iran by its customers. These transactions did not involve U.S. dollars nor clearing services of U.S. banks for the settlement of payments. For the quarter ended September 30, 2018, the aggregate interest and fee income relating to these transactions was less than ¥40 million, representing less than 0.005 percent of MUFG’s total interest and fee income. Some of these transactions were conducted through the use of non-U.S. dollar correspondent accounts and other similar settlement accounts maintained with MUFG Bank outside the United States by Iranian financial institutions and other entities in, or affiliated with, Iran. In addition to such accounts, MUFG Bank receives deposits in Japan from, and provides settlement services in Japan to, fewer than 10 Iranian government-related entities and fewer than 100 Iranian government-related individuals such as Iranian diplomats, and maintains settlement accounts outside the United States for certain other financial institutions specified in Executive Order 13382, which settlement accounts were frozen in accordance with applicable laws and regulations. For the quarter ended September 30, 2018, the average aggregate balance of deposits held in these accounts represented less than 0.1 percent of the average balance of MUFG’s total deposits. The fee income from the transactions attributable to these account holders was less than ¥8 million, representing less than 0.005 percent of MUFG’s total fee income. Although there was no outstanding balance as of September 30, 2018, MUFG Bank had, during the quarter ended September 30, 2018, loans that were arranged prior to changes in applicable laws and regulations to borrowers in, or affiliated with, Iran, including entities owned by the Iranian government. For the quarter ended September 30, 2018, the agent fee income relating to these loan transactions was less than ¥20 million, representing less than 0.005 percent of MUFG’s total interest and fee income.
We understand that MUFG Bank recognizes that following the withdrawal in May 2018 by the United States from the Joint Comprehensive Plan of Action, the United States has imposed secondary sanctions against non-U.S. persons who engage in or facilitate a broad range of transactions and activities involving Iran. We understand that MUFG Bank will take the recent sanctions related developments into account and monitor any future transactions relating to Iran in order to comply with applicable U.S. and Japanese regulations as well as U.S., Japanese and other international sanctions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
A discussion of our market risk exposure is incorporated by reference to Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the caption “Risk Management - Market Risk Management” and to Part II, Item 1A. "Risk Factors" in this Form 10-Q.
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Item 4. Controls and Procedures
Disclosure Controls and Procedures. As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of the Company's management, including its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that these disclosure controls and procedures were effective.
Internal Control Over Financial Reporting. During the third quarter of 2018, there were no changes in our internal control over financial reporting that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MUFG Americas Holdings Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Interest Income | ||||||||||||||||
Loans | $ | 844 | $ | 738 | $ | 2,426 | $ | 2,170 | ||||||||
Securities | 168 | 149 | 491 | 407 | ||||||||||||
Securities borrowed or purchased under resale agreements | 171 | 97 | 454 | 243 | ||||||||||||
Trading assets | 109 | 89 | 308 | 245 | ||||||||||||
Other | 25 | 10 | 58 | 28 | ||||||||||||
Total interest income | 1,317 | 1,083 | 3,737 | 3,093 | ||||||||||||
Interest Expense | ||||||||||||||||
Deposits | 124 | 62 | 278 | 169 | ||||||||||||
Commercial paper and other short-term borrowings | 46 | 17 | 121 | 35 | ||||||||||||
Long-term debt | 92 | 66 | 266 | 183 | ||||||||||||
Securities loaned or sold under repurchase agreements | 193 | 102 | 509 | 245 | ||||||||||||
Trading liabilities | 30 | 20 | 81 | 56 | ||||||||||||
Total interest expense | 485 | 267 | 1,255 | 688 | ||||||||||||
Net Interest Income | 832 | 816 | 2,482 | 2,405 | ||||||||||||
(Reversal of) provision for credit losses | 64 | 18 | 43 | (34 | ) | |||||||||||
Net interest income after (reversal of) provision for credit losses | 768 | 798 | 2,439 | 2,439 | ||||||||||||
Noninterest Income | ||||||||||||||||
Service charges on deposit accounts | 44 | 47 | 134 | 142 | ||||||||||||
Trust and investment management fees | 30 | 32 | 89 | 91 | ||||||||||||
Trading account activities | (5 | ) | (3 | ) | (13 | ) | (10 | ) | ||||||||
Securities gains, net | 1 | 6 | 4 | 15 | ||||||||||||
Credit facility fees | 23 | 26 | 69 | 75 | ||||||||||||
Brokerage commissions and fees | 18 | 16 | 55 | 52 | ||||||||||||
Card processing fees, net | 12 | 10 | 37 | 34 | ||||||||||||
Investment banking and syndication fees | 108 | 106 | 285 | 288 | ||||||||||||
Fees from affiliates | 306 | 209 | 881 | 639 | ||||||||||||
Other, net | 89 | 66 | 63 | 166 | ||||||||||||
Total noninterest income | 626 | 515 | 1,604 | 1,492 | ||||||||||||
Noninterest Expense | ||||||||||||||||
Salaries and employee benefits | 652 | 621 | 2,000 | 1,881 | ||||||||||||
Net occupancy and equipment | 89 | 87 | 264 | 256 | ||||||||||||
Professional and outside services | 110 | 101 | 356 | 316 | ||||||||||||
Software | 73 | 49 | 213 | 142 | ||||||||||||
Regulatory assessments | 24 | 22 | 69 | 61 | ||||||||||||
Intangible asset amortization | 6 | 8 | 20 | 22 | ||||||||||||
Other | 105 | 94 | 304 | 267 | ||||||||||||
Total noninterest expense | 1,059 | 982 | 3,226 | 2,945 | ||||||||||||
Income before income taxes and including noncontrolling interests | 335 | 331 | 817 | 986 | ||||||||||||
Income tax expense (benefit) | 35 | 109 | 21 | 255 | ||||||||||||
Net Income Including Noncontrolling Interests | 300 | 222 | 796 | 731 | ||||||||||||
Deduct: Net loss from noncontrolling interests | 6 | 10 | 20 | 25 | ||||||||||||
Net Income Attributable to MUAH | $ | 306 | $ | 232 | $ | 816 | $ | 756 |
See accompanying Notes to Consolidated Financial Statements.
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MUFG Americas Holdings Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Net Income Attributable to MUAH | $ | 306 | $ | 232 | $ | 816 | $ | 756 | |||||||
Other Comprehensive Income (Loss), Net of Tax: | |||||||||||||||
Net change in unrealized gains (losses) on cash flow hedges | 8 | (3 | ) | (58 | ) | (11 | ) | ||||||||
Net change in unrealized gains (losses) on investment securities | (46 | ) | 17 | (277 | ) | 76 | |||||||||
Foreign currency translation adjustment | — | 4 | (2 | ) | 7 | ||||||||||
Pension and other postretirement benefit adjustments | 10 | 7 | 30 | 20 | |||||||||||
Other | — | 1 | (1 | ) | 1 | ||||||||||
Total other comprehensive income (loss) | (28 | ) | 26 | (308 | ) | 93 | |||||||||
Comprehensive Income (Loss) Attributable to MUAH | 278 | 258 | 508 | 849 | |||||||||||
Comprehensive income (loss) from noncontrolling interests | (6 | ) | (10 | ) | (20 | ) | (25 | ) | |||||||
Total Comprehensive Income (Loss) | $ | 272 | $ | 248 | $ | 488 | $ | 824 |
See accompanying Notes to Consolidated Financial Statements.
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MUFG Americas Holdings Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
(Dollars in millions, except per share amount) | September 30, 2018 | December 31, 2017 | ||||||
Assets | ||||||||
Cash and due from banks | $ | 1,884 | $ | 2,057 | ||||
Interest bearing deposits in banks | 2,308 | 1,335 | ||||||
Total cash and cash equivalents | 4,192 | 3,392 | ||||||
Securities borrowed or purchased under resale agreements | 21,265 | 20,894 | ||||||
Trading account assets (includes $1,578 at September 30, 2018 and $1,001 at December 31, 2017 pledged as collateral that may be repledged) | 11,213 | 10,567 | ||||||
Securities available for sale (includes $61 at September 30, 2018 and $163 at December 31, 2017 pledged as collateral that may be repledged) | 17,077 | 17,563 | ||||||
Securities held to maturity (fair value $10,972 at September 30, 2018 and $9,799 at December 31, 2017) | 11,320 | 9,885 | ||||||
Loans held for investment | 83,653 | 80,014 | ||||||
Allowance for loan losses | (501 | ) | (476 | ) | ||||
Loans held for investment, net | 83,152 | 79,538 | ||||||
Premises and equipment, net | 624 | 610 | ||||||
Goodwill | 3,301 | 3,301 | ||||||
Other assets | 8,892 | 8,800 | ||||||
Total assets | $ | 161,036 | $ | 154,550 | ||||
Liabilities | ||||||||
Deposits: | ||||||||
Noninterest bearing | $ | 32,225 | $ | 32,602 | ||||
Interest bearing | 55,586 | 52,185 | ||||||
Total deposits | 87,811 | 84,787 | ||||||
Securities loaned or sold under repurchase agreements | 27,032 | 26,437 | ||||||
Commercial paper and other short-term borrowings | 8,309 | 7,066 | ||||||
Long-term debt | 12,796 | 12,162 | ||||||
Trading account liabilities | 4,029 | 3,600 | ||||||
Other liabilities | 2,237 | 2,143 | ||||||
Total liabilities | 142,214 | 136,195 | ||||||
Commitments, contingencies and guarantees—See Note 12 | ||||||||
Equity | ||||||||
MUAH stockholders' equity: | ||||||||
Preferred stock: | ||||||||
Authorized 5,000,000 shares; no shares issued or outstanding | — | — | ||||||
Common stock, par value $1 per share: | ||||||||
Authorized 1,700,000,000 shares, 147,589,713 shares issued and outstanding as of September 30, 2018 and December 31, 2017 | 148 | 148 | ||||||
Additional paid-in capital | 8,158 | 8,197 | ||||||
Retained earnings | 11,749 | 10,936 | ||||||
Accumulated other comprehensive loss | (1,313 | ) | (1,026 | ) | ||||
Total MUAH stockholders' equity | 18,742 | 18,255 | ||||||
Noncontrolling interests | 80 | 100 | ||||||
Total equity | 18,822 | 18,355 | ||||||
Total liabilities and equity | $ | 161,036 | $ | 154,550 |
See accompanying Notes to Consolidated Financial Statements.
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MUFG Americas Holdings Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
MUAH Stockholders' Equity | ||||||||||||||||||||||||
(Dollars in millions) | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interests | Total Equity | ||||||||||||||||||
Balance, December 31, 2016 | $ | 144 | $ | 7,884 | $ | 10,101 | $ | (896 | ) | $ | 153 | $ | 17,386 | |||||||||||
Net income (loss) | — | — | 756 | — | (25 | ) | 731 | |||||||||||||||||
Other comprehensive income (loss), net of tax | — | — | — | 93 | — | 93 | ||||||||||||||||||
Compensation—restricted stock units | — | (26 | ) | — | — | — | (26 | ) | ||||||||||||||||
Issuance of common stock | 3 | 321 | 78 | — | — | 402 | ||||||||||||||||||
Other | 1 | — | — | — | (8 | ) | (7 | ) | ||||||||||||||||
Net change | 4 | 295 | 834 | 93 | (33 | ) | 1,193 | |||||||||||||||||
Balance, September 30, 2017 | $ | 148 | $ | 8,179 | $ | 10,935 | $ | (803 | ) | $ | 120 | $ | 18,579 | |||||||||||
Balance, December 31, 2017 | $ | 148 | $ | 8,197 | $ | 10,936 | $ | (1,026 | ) | $ | 100 | $ | 18,355 | |||||||||||
Net income (loss) | — | — | 816 | — | (20 | ) | 796 | |||||||||||||||||
Other comprehensive income (loss), net of tax | — | — | — | (308 | ) | — | (308 | ) | ||||||||||||||||
Compensation—restricted stock units | — | (18 | ) | (3 | ) | — | — | (21 | ) | |||||||||||||||
Other (1) | — | (21 | ) | — | 21 | — | — | |||||||||||||||||
Net change | — | (39 | ) | 813 | (287 | ) | (20 | ) | 467 | |||||||||||||||
Balance, September 30, 2018 | $ | 148 | $ | 8,158 | $ | 11,749 | $ | (1,313 | ) | $ | 80 | $ | 18,822 |
(1) | For additional information on other, see Note 10 "Accumulated Other Comprehensive Income". |
See accompanying Notes to Consolidated Financial Statements.
43
MUFG Americas Holdings Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended September 30, | ||||||||
(Dollars in millions) | 2018 | 2017 | ||||||
Cash Flows from Operating Activities: | ||||||||
Net income including noncontrolling interests | $ | 796 | $ | 731 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
(Reversal of) provision for credit losses | 43 | (34 | ) | |||||
Depreciation, amortization and accretion, net | 297 | 265 | ||||||
Stock-based compensation—restricted stock units | 58 | 49 | ||||||
Deferred income taxes | (119 | ) | 138 | |||||
Net gains on sales of securities | (4 | ) | (15 | ) | ||||
Net decrease (increase) in securities borrowed or purchased under resale agreements | (371 | ) | (2,144 | ) | ||||
Net decrease (increase) in securities loaned or sold under repurchase agreements | 594 | 2,691 | ||||||
Net decrease (increase) in trading account assets | (646 | ) | (1,281 | ) | ||||
Net decrease (increase) in other assets | (573 | ) | 369 | |||||
Net increase (decrease) in trading account liabilities | 429 | 433 | ||||||
Net increase (decrease) in other liabilities | 62 | (331 | ) | |||||
Loans originated for sale | (1,215 | ) | (473 | ) | ||||
Net proceeds from sale of loans originated for sale | 1,077 | 505 | ||||||
Pension and other benefits adjustment | (37 | ) | (156 | ) | ||||
Other, net | (20 | ) | 12 | |||||
Total adjustments | (425 | ) | 28 | |||||
Net cash provided by (used in) operating activities | 371 | 759 | ||||||
Cash Flows from Investing Activities: | ||||||||
Proceeds from sales of securities available for sale | 853 | 1,953 | ||||||
Proceeds from paydowns and maturities of securities available for sale | 2,252 | 1,836 | ||||||
Purchases of securities available for sale | (4,697 | ) | (7,195 | ) | ||||
Proceeds from paydowns and maturities of securities held to maturity | 1,262 | 1,324 | ||||||
Purchases of securities held to maturity | (772 | ) | (1,235 | ) | ||||
Proceeds from sales of loans | 563 | 751 | ||||||
Net decrease (increase) in loans | (3,735 | ) | (1,793 | ) | ||||
Purchases of other investments | (188 | ) | (131 | ) | ||||
Other, net | (59 | ) | (12 | ) | ||||
Net cash provided by (used in) investing activities | (4,521 | ) | (4,502 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Net increase (decrease) in deposits | 3,017 | (1,495 | ) | |||||
Net increase (decrease) in commercial paper and other short-term borrowings | 1,241 | 3,630 | ||||||
Proceeds from issuance of long-term debt | 4,058 | 4,122 | ||||||
Repayment of long-term debt | (3,367 | ) | (4,591 | ) | ||||
Other, net | (117 | ) | (76 | ) | ||||
Change in noncontrolling interests | — | (8 | ) | |||||
Net cash provided by (used in) financing activities | 4,832 | 1,582 | ||||||
Net change in cash, cash equivalents and restricted cash | 682 | (2,161 | ) | |||||
Cash, cash equivalents and restricted cash at beginning of period | 3,528 | 5,834 | ||||||
Cash, cash equivalents and restricted cash at end of period | $ | 4,210 | $ | 3,673 | ||||
Cash Paid During the Period For: | ||||||||
Interest | $ | 1,180 | $ | 652 | ||||
Income taxes, net | 121 | 168 | ||||||
Supplemental Schedule of Noncash Investing and Financing Activities: | ||||||||
Net transfer of loans held for investment to (from) loans held for sale | $ | 10 | $ | 833 | ||||
Securities available for sale transferred to securities held to maturity | 1,924 | — | ||||||
Transfer of assets and liabilities from MUFG Bank and MUFG: | ||||||||
Carrying amount of assets acquired | — | 1,003 | ||||||
Carrying amount of liabilities assumed | — | 601 | ||||||
Reconciliation of Cash, Cash Equivalents and Restricted Cash: | ||||||||
Cash and cash equivalents | $ | 4,192 | $ | 3,634 | ||||
Restricted cash included in other assets | 18 | 39 | ||||||
Total cash, cash equivalents and restricted cash per consolidated statement of cash flows | $ | 4,210 | $ | 3,673 |
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Notes to Consolidated Financial Statements
Note 1—Summary of Significant Accounting Policies and Nature of Operations
MUFG Americas Holdings Corporation (MUAH) is a financial holding company, bank holding company and intermediate holding company whose principal subsidiaries are MUFG Union Bank, N.A. (MUB or the Bank) and MUFG Securities Americas Inc. (MUSA). MUAH provides a wide range of financial services to consumers, small businesses, middle-market companies and major corporations nationally and internationally. The Company also provides various business, banking, financial, administrative and support services, and facilities for MUFG Bank, Ltd. (formerly The Bank of Tokyo-Mitsubishi UFJ, Ltd.) in connection with the operation and administration of MUFG Bank, Ltd.'s business in the U.S. (including MUFG Bank, Ltd.'s U.S. branches). All of the Company's issued and outstanding shares of common stock are owned by MUFG Bank, Ltd. and MUFG. The unaudited Consolidated Financial Statements of MUFG Americas Holdings Corporation, its subsidiaries, and its consolidated variable interest entities (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Rules and Regulations of the SEC. However, they do not include all of the disclosures necessary for annual financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. The results of operations for the third quarter of 2018 are not necessarily indicative of the operating results anticipated for the full year. These unaudited Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 (2017 Form 10-K).
The preparation of financial statements in conformity with GAAP also requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Although such estimates contemplate current conditions and management’s expectations of how they may change in the future, it is reasonably possible that actual results could differ significantly from those estimates. This could materially affect the Company’s results of operations and financial condition in the near term. Critical estimates made by management in the preparation of the Company’s financial statements include, but are not limited to, the allowance for credit losses (Note 3 "Loans and Allowance for Loan Losses"), goodwill impairment, fair value of financial instruments (Note 8 "Fair Value Measurement and Fair Value of Financial Instruments"), pension accounting (Note 11 "Employee Pension and Other Postretirement Benefits"), income taxes, and transfer pricing.
During the first quarter of 2018, the Company refined its methodology for estimating the allowance for commercial loans collectively evaluated for impairment and the allowance for losses on unfunded credit commitments. Previously the Company derived the allowance for these loans by assigning a loss factor based on an internal risk rating that estimated the probability that a credit facility may ultimately default (i.e. probability of default). The refinement implemented during the first quarter of 2018 utilizes a dual factor internal risk rating system that encompasses both the probability of default and an estimate of the severity of the loss that would be realized upon such default (i.e. the loss-given default). During the second quarter of 2018, the Company implemented refinements to the qualitative considerations used in our reserve methodology.
Recently Issued Accounting Pronouncements
Accounting for Leases
In February 2016, the FASB issued ASU 2016-02, Leases, which will require entities that lease assets (i.e., lessees) to recognize assets and liabilities on their balance sheet for the rights and obligations created by those leases. The accounting by entities that own the assets leased (i.e., lessors) will remain largely unchanged; however, leveraged lease accounting will no longer be permitted for leases that commence after the effective date. The ASU will also require qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from leases. The ASU is effective for interim and annual periods beginning on January 1, 2019 and requires a modified retrospective approach, with early adoption permitted. In July 2018, the FASB issued ASU 2018-11, Leases, which allows entities the option to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company plans to adopt the ASU on January 1, 2019. The Company is in the technology testing phase of this project to support the ongoing lessee accounting
45
Note 1—Summary of Significant Accounting Policies and Nature of Operations (Continued)
required under the ASU. Management is currently assessing the impact of this guidance on the Company's financial position and results of operations.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which provides new guidance on the accounting for credit losses for instruments that are within its scope. This new guidance is commonly referred to as the current expected credit loss (“CECL”) model. For loans and debt securities accounted for at amortized cost, certain off-balance sheet credit exposures, net investments in leases, and trade receivables, the ASU requires an entity to recognize its estimate of credit losses expected over the life of the financial instrument or exposure. Lifetime expected credit losses on purchased financial assets with credit deterioration will be recognized as an allowance with an offset to the cost basis of the asset. For available for sale debt securities, the new standard will require recognition of expected credit losses by recognizing an allowance for credit losses when the fair value of the security is below amortized cost and the recognition of this allowance is limited to the difference between the security’s amortized cost basis and fair value. The ASU is effective for interim and annual periods beginning on January 1, 2020, with early adoption permitted in 2019. The Company plans to adopt the ASU on January 1, 2020. The Company is in the design phase of the implementation. Management is currently assessing the impact of this guidance on the Company’s financial position and results of operations.
Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. The ASU removes Step 2 of the goodwill impairment test, which measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the amendments, a goodwill impairment loss will be measured as the amount by which a reporting unit’s carrying amount exceeds its fair value; however, the loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss. The ASU will be effective for MUAH beginning January 1, 2020 on a prospective basis. Early adoption is permitted for any impairment tests performed after January 1, 2017. Management does not expect the adoption of this guidance to significantly impact the Company’s financial position or results of operations.
Premium Amortization on Purchased Callable Debt Securities
In March 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities, which requires premiums on certain purchased callable debt securities to be amortized to the earliest call date. Under current guidance, premiums on callable debt securities are generally amortized over the contractual life of the security. The amortization period for callable debt securities purchased at a discount will not be impacted. The ASU is effective for interim and annual periods beginning on January 1, 2019 and requires a modified retrospective approach, with early adoption permitted. Management does not expect the adoption of this guidance to significantly impact the Company’s financial position or results of operations.
Targeted Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, which will make more hedging strategies eligible for hedge accounting, simplify the application of hedge accounting, and enhance the transparency and understandability of hedge results. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. It also amends the disclosure requirements and changes how entities assess effectiveness. The guidance will be effective for MUAH beginning January 1, 2019, with early adoption permitted. If the guidance is early adopted in an interim period, any adjustments would be reflected as of the beginning of the fiscal year that includes that interim period. Management is currently assessing the impact of this guidance on the Company’s financial position and results of operations.
46
Note 1—Summary of Significant Accounting Policies and Nature of Operations (Continued)
Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which modifies disclosure requirements on fair value measurements to improve their effectiveness. The guidance permits entities to consider materiality when evaluating fair value measurement disclosures and, among other modifications, requires certain new disclosures related to Level 3 fair value measurements. The guidance will be effective for MUAH beginning January 1, 2020, with early adoption permitted. The guidance only affects disclosures in the notes to the consolidated financial statements and will not affect the Company’s financial position or results of operations.
Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB issued ASU 2018-14, Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans to improve the effectiveness of the disclosures. The guidance includes new requirements to disclose the weighted-average interest crediting rate for cash balance plans and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation. The guidance is effective for years ending after December 15, 2020, with early adoption permitted. This guidance only affects disclosures in the notes to the consolidated financial statements and will not affect the Company’s financial position or results of operations.
Recently Adopted Accounting Pronouncements
Revenue from Contracts with Customers
Effective January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers, which provides guidance on the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU applies to all contracts with customers, except financial instruments, guarantees, lease contracts, insurance contracts and certain non-monetary exchanges. This guidance did not significantly affect the Company's financial position and results of operations. As a result of adopting this guidance, the Company's accounting policies have been updated as summarized below.
Revenues from Contracts with Customers
Revenues from contracts with customers include service charges on deposit accounts, trust and investment management fees, brokerage commissions and fees, card processing fees, net, investment banking and syndication fees, and fees from affiliates. The Company recognizes revenue from contracts with customers according to a five-step revenue recognition model: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The Company’s contracts with customers generally contain a single performance obligation or separately identified performance obligations, each with a stated transaction price and generally do not involve a significant timing difference between satisfaction of the performance obligation and customer payment. Revenues are recognized over time or at a point in time as the performance obligations are satisfied. Certain revenues, primarily included within brokerage commissions and fees, are variable. However, recognition of these variable revenues does not involve significant estimates or constraints.
47
Note 1—Summary of Significant Accounting Policies and Nature of Operations (Continued)
Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
Effective January 1, 2018, the Company adopted ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The ASU amends ASU 2014-09, Revenue from Contracts with Customers, with respect to assessing whether an entity is a principal (and thus presents revenue gross) or an agent (and thus presents revenue net). The amendments retain the guidance that the principal in an arrangement controls a good or service before it is transferred to a customer and clarify: (1) that an entity must first identify the specified good or service being provided to the customer; (2) that the unit of account for the principal versus agent assessment is each specified good or service promised in a contract; (3) indicators and examples to help an entity evaluate whether it is the principal; and (4) how to assess whether an entity controls services performed by another party. As a result of adopting ASU 2016-08, beginning January 1, 2018, certain expenses that were previously presented as a reduction of related fees from affiliates and investment banking and syndication fees are presented in noninterest expense.
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
Effective January 1, 2018, the Company adopted ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which amended the income statement presentation of the components of net periodic benefit cost for sponsored defined benefit pension and other postretirement plans. As a result of adopting ASU 2017-07, the salaries and employee benefits expense and other expense categories in noninterest expense have been adjusted to reflect adoption of this guidance as follows.
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||
September 30, 2017 | September 30, 2017 | |||||||||||||||||||||||
(Dollars in millions) | As Previously Reported | Adjustment | As Reported under New Guidance | As Previously Reported | Adjustment | As Reported under New Guidance | ||||||||||||||||||
Salaries and employee benefits | $ | 589 | $ | 32 | $ | 621 | $ | 1,790 | $ | 91 | $ | 1,881 | ||||||||||||
Other | 126 | (32 | ) | 94 | 358 | (91 | ) | 267 |
48
Note 2—Securities
Securities Available for Sale
At September 30, 2018 and December 31, 2017, the amortized cost, gross unrealized gains, gross unrealized losses and fair values of securities available for sale are presented below.
September 30, 2018 | ||||||||||||||||
(Dollars in millions) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
Asset Liability Management securities: | ||||||||||||||||
U.S. Treasury | $ | 3,964 | $ | — | $ | 234 | $ | 3,730 | ||||||||
Residential mortgage-backed securities: | ||||||||||||||||
U.S. government agency and government-sponsored agencies | 8,739 | 2 | 240 | 8,501 | ||||||||||||
Privately issued | 891 | — | 30 | 861 | ||||||||||||
Privately issued - commercial mortgage-backed securities | 1,109 | — | 31 | 1,078 | ||||||||||||
Collateralized loan obligations | 1,434 | 1 | 1 | 1,434 | ||||||||||||
Other | 4 | — | — | 4 | ||||||||||||
Asset Liability Management securities | 16,141 | 3 | 536 | 15,608 | ||||||||||||
Other debt securities: | ||||||||||||||||
Direct bank purchase bonds | 1,292 | 28 | 39 | 1,281 | ||||||||||||
Other | 188 | 1 | 1 | 188 | ||||||||||||
Total securities available for sale | $ | 17,621 | $ | 32 | $ | 576 | $ | 17,077 |
December 31, 2017 | ||||||||||||||||
(Dollars in millions) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
Asset Liability Management securities: | ||||||||||||||||
U.S. Treasury | $ | 3,370 | $ | — | $ | 118 | $ | 3,252 | ||||||||
Residential mortgage-backed securities: | ||||||||||||||||
U.S. government agency and government-sponsored agencies | 9,338 | 2 | 132 | 9,208 | ||||||||||||
Privately issued | 695 | 3 | 4 | 694 | ||||||||||||
Privately issued - commercial mortgage-backed securities | 823 | 4 | 5 | 822 | ||||||||||||
Collateralized loan obligations | 1,895 | 10 | — | 1,905 | ||||||||||||
Other | 5 | — | — | 5 | ||||||||||||
Asset Liability Management securities | 16,126 | 19 | 259 | 15,886 | ||||||||||||
Other debt securities: | ||||||||||||||||
Direct bank purchase bonds | 1,495 | 38 | 30 | 1,503 | ||||||||||||
Other | 163 | 1 | — | 164 | ||||||||||||
Equity securities | 10 | — | — | 10 | ||||||||||||
Total securities available for sale | $ | 17,794 | $ | 58 | $ | 289 | $ | 17,563 |
49
Note 2—Securities (Continued)
The Company’s securities available for sale with a continuous unrealized loss position at September 30, 2018 and December 31, 2017 are shown below, identified for periods less than 12 months and 12 months or more.
September 30, 2018 | ||||||||||||||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
(Dollars in millions) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
Asset Liability Management securities: | ||||||||||||||||||||||||
U.S. Treasury | $ | 869 | $ | 20 | $ | 2,813 | $ | 214 | $ | 3,682 | $ | 234 | ||||||||||||
Residential mortgage-backed securities: | ||||||||||||||||||||||||
U.S. government agency and government-sponsored agencies | 3,996 | 71 | 3,572 | 169 | 7,568 | 240 | ||||||||||||||||||
Privately issued | 642 | 19 | 193 | 11 | 835 | 30 | ||||||||||||||||||
Privately issued - commercial mortgage-backed securities | 679 | 17 | 299 | 14 | 978 | 31 | ||||||||||||||||||
Collateralized loan obligations | 606 | 1 | — | — | 606 | 1 | ||||||||||||||||||
Asset Liability Management securities | 6,792 | 128 | 6,877 | 408 | 13,669 | 536 | ||||||||||||||||||
Other debt securities: | ||||||||||||||||||||||||
Direct bank purchase bonds | 307 | 10 | 393 | 29 | 700 | 39 | ||||||||||||||||||
Other | 109 | 1 | — | — | 109 | 1 | ||||||||||||||||||
Total securities available for sale | $ | 7,208 | $ | 139 | $ | 7,270 | $ | 437 | $ | 14,478 | $ | 576 |
December 31, 2017 | ||||||||||||||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
(Dollars in millions) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
Asset Liability Management securities: | ||||||||||||||||||||||||
U.S. Treasury | $ | 1,074 | $ | 14 | $ | 2,128 | $ | 104 | $ | 3,202 | $ | 118 | ||||||||||||
Residential mortgage-backed securities: | ||||||||||||||||||||||||
U.S. government agency and government-sponsored agencies | 3,606 | 22 | 4,651 | 110 | 8,257 | 132 | ||||||||||||||||||
Privately issued | 275 | 1 | 164 | 3 | 439 | 4 | ||||||||||||||||||
Privately issued - commercial mortgage-backed securities | 447 | 3 | 80 | 2 | 527 | 5 | ||||||||||||||||||
Collateralized loan obligations | 12 | — | — | — | 12 | — | ||||||||||||||||||
Asset Liability Management securities | 5,414 | 40 | 7,023 | 219 | 12,437 | 259 | ||||||||||||||||||
Other debt securities: | ||||||||||||||||||||||||
Direct bank purchase bonds | 58 | 4 | 563 | 26 | 621 | 30 | ||||||||||||||||||
Other | 79 | — | — | — | 79 | — | ||||||||||||||||||
Equity securities | 10 | — | — | — | 10 | — | ||||||||||||||||||
Total securities available for sale | $ | 5,561 | $ | 44 | $ | 7,586 | $ | 245 | $ | 13,147 | $ | 289 |
At September 30, 2018, the Company did not have the intent to sell any securities in an unrealized loss position before a recovery of the amortized cost, which may be at maturity. The Company also believes that it is more likely than not that it will not be required to sell the securities prior to recovery of amortized cost.
Agency residential mortgage-backed securities consist of securities guaranteed by a U.S. government corporation, such as Ginnie Mae, or a government-sponsored agency such as Freddie Mac or Fannie Mae. These securities are collateralized by residential mortgage loans and may be prepaid at par prior to maturity. The unrealized losses on agency residential mortgage-backed securities resulted from changes in interest rates and not from changes in credit quality. At September 30, 2018, the Company expects to recover the entire amortized cost basis of these securities because the Company determined that the strength of the issuers’ guarantees through direct obligations or support from the U.S. government is sufficient to protect the Company from losses.
50
Note 2—Securities (Continued)
Commercial mortgage-backed securities are collateralized by commercial mortgage loans and are generally subject to prepayment penalties. The unrealized losses on commercial mortgage-backed securities resulted from higher market yields since purchase. Cash flow analysis of the underlying collateral provides an estimate of other-than-temporary impairment, which is performed quarterly when the fair value of a security is lower than its amortized cost. Based on the analysis performed as of September 30, 2018, the Company expects to recover the entire amortized cost basis of these securities.
The Company’s CLOs consist of Cash Flow CLOs. A Cash Flow CLO is a structured finance product that securitizes a diversified pool of loan assets into multiple classes of notes. Cash Flow CLOs pay the note holders through the receipt of interest and principal repayments from the underlying loans unlike other types of CLOs that pay note holders through the trading and sale of underlying collateral. Unrealized losses typically arise from widening credit spreads and deteriorating credit quality of the underlying collateral. Cash flow analysis of the underlying collateral provides an estimate of other-than-temporary impairment, which is performed quarterly when the fair value of a security is lower than its amortized cost. Based on the analysis performed as of September 30, 2018, the Company expects to recover the entire amortized cost basis of these securities.
Other debt securities primarily consist of direct bank purchase bonds, which are not rated by external credit rating agencies. The unrealized losses on these bonds resulted from a higher return on capital expected by the secondary market compared with the return on capital required at the time of origination when the bonds were purchased. The Company estimates the unrealized loss for each security by assessing the underlying collateral of each security. The Company estimates the portion of loss attributable to credit based on the expected cash flows of the underlying collateral using estimates of current key assumptions, such as probability of default and loss severity. Cash flow analysis of the underlying collateral provides an estimate of other-than-temporary impairment, which is performed quarterly when the fair value of a security is lower than its amortized cost and potential impairment is identified. Based on the analysis performed as of September 30, 2018, the Company expects to recover the entire amortized cost basis of these securities.
The fair value of debt securities available for sale by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.
September 30, 2018 | ||||||||||||||||||||
(Dollars in millions) | One Year or Less | Over One Year Through Five Years | Over Five Years Through Ten Years | Over Ten Years | Total Fair Value | |||||||||||||||
Asset Liability Management securities: | ||||||||||||||||||||
U.S. Treasury | $ | — | $ | 1,163 | $ | 2,567 | $ | — | $ | 3,730 | ||||||||||
Residential mortgage-backed securities: | ||||||||||||||||||||
U.S. government agency and government-sponsored agencies | — | 266 | 1,354 | 6,881 | 8,501 | |||||||||||||||
Privately issued | — | — | — | 861 | 861 | |||||||||||||||
Privately issued - commercial mortgage-backed securities | — | — | 42 | 1,036 | 1,078 | |||||||||||||||
Collateralized loan obligations | — | 2 | 389 | 1,043 | 1,434 | |||||||||||||||
Other | 1 | 3 | — | — | 4 | |||||||||||||||
Asset Liability Management securities | 1 | 1,434 | 4,352 | 9,821 | 15,608 | |||||||||||||||
Other debt securities: | ||||||||||||||||||||
Direct bank purchase bonds | 112 | 301 | 741 | 127 | 1,281 | |||||||||||||||
Other | — | 169 | — | 19 | 188 | |||||||||||||||
Total debt securities available for sale | $ | 113 | $ | 1,904 | $ | 5,093 | $ | 9,967 | $ | 17,077 |
51
Note 2—Securities (Continued)
The gross realized gains and losses from sales of available for sale securities for the three and nine months ended September 30, 2018 and 2017 are shown below. The specific identification method is used to calculate realized gains and losses on sales.
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Gross realized gains | $ | 1 | $ | 6 | $ | 4 | $ | 15 |
Securities Held to Maturity
At September 30, 2018 and December 31, 2017, the amortized cost, gross unrealized gains and losses recognized in OCI, carrying amount, gross unrealized gains and losses not recognized in OCI, and fair values of securities held to maturity are presented below. Management has asserted the positive intent and ability to hold these securities to maturity.
September 30, 2018 | ||||||||||||||||||||||||||||
Recognized in OCI | Not Recognized in OCI | |||||||||||||||||||||||||||
(Dollars in millions) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Carrying Amount | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||
U.S. Treasury | $ | 527 | $ | — | $ | — | $ | 527 | $ | 2 | $ | 3 | $ | 526 | ||||||||||||||
U.S. government-sponsored agencies | 772 | — | — | 772 | — | 1 | 771 | |||||||||||||||||||||
U.S. government agency and government-sponsored agencies - residential mortgage-backed securities | 8,651 | 2 | 101 | 8,552 | 3 | 337 | 8,218 | |||||||||||||||||||||
U.S. government agency and government-sponsored agencies - commercial mortgage-backed securities | 1,514 | — | 45 | 1,469 | 8 | 20 | 1,457 | |||||||||||||||||||||
Total securities held to maturity | $ | 11,464 | $ | 2 | $ | 146 | $ | 11,320 | $ | 13 | $ | 361 | $ | 10,972 |
December 31, 2017 | ||||||||||||||||||||||||||||
Recognized in OCI | Not Recognized in OCI | |||||||||||||||||||||||||||
(Dollars in millions) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Carrying Amount | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||
U.S. Treasury | $ | 525 | $ | — | $ | — | $ | 525 | $ | 3 | $ | 1 | $ | 527 | ||||||||||||||
U.S. government agency and government-sponsored agencies - residential mortgage-backed securities | 7,870 | 2 | 31 | 7,841 | 15 | 130 | 7,726 | |||||||||||||||||||||
U.S. government agency and government-sponsored agencies - commercial mortgage-backed securities | 1,571 | — | 52 | 1,519 | 36 | 9 | 1,546 | |||||||||||||||||||||
Total securities held to maturity | $ | 9,966 | $ | 2 | $ | 83 | $ | 9,885 | $ | 54 | $ | 140 | $ | 9,799 |
Amortized cost is defined as the original purchase cost, adjusted for any accretion or amortization of a purchase discount or premium, less principal payments and any impairment previously recognized in earnings. The carrying amount is the difference between the amortized cost and the amount recognized in OCI. The amount recognized in OCI primarily reflects the unrealized gain or loss at date of transfer from available for sale to the held to maturity classification, net of amortization, which is recorded in interest income on securities.
52
Note 2—Securities (Continued)
The Company’s securities held to maturity with a continuous unrealized loss position at September 30, 2018 and December 31, 2017 are shown below, separately for periods less than 12 months and 12 months or more.
September 30, 2018 | ||||||||||||||||||||||||||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||||||||||
Unrealized Losses | Unrealized Losses | Unrealized Losses | ||||||||||||||||||||||||||||||||||
(Dollars in millions) | Fair Value | Recognized in OCI | Not Recognized in OCI | Fair Value | Recognized in OCI | Not Recognized in OCI | Fair Value | Recognized in OCI | Not Recognized in OCI | |||||||||||||||||||||||||||
U.S. Treasury | $ | 494 | $ | — | $ | 3 | $ | — | $ | — | $ | — | $ | 494 | $ | — | $ | 3 | ||||||||||||||||||
U.S. government-sponsored agencies | 720 | — | 1 | — | — | — | 720 | — | 1 | |||||||||||||||||||||||||||
U.S. government agency and government-sponsored agencies - residential mortgage-backed securities | 2,753 | 28 | 73 | 5,300 | 73 | 264 | 8,053 | 101 | 337 | |||||||||||||||||||||||||||
U.S. government agency and government-sponsored agencies - commercial mortgage-backed securities | 46 | — | 1 | 1,411 | 45 | 19 | 1,457 | 45 | 20 | |||||||||||||||||||||||||||
Total securities held to maturity | $ | 4,013 | $ | 28 | $ | 78 | $ | 6,711 | $ | 118 | $ | 283 | $ | 10,724 | $ | 146 | $ | 361 |
December 31, 2017 | ||||||||||||||||||||||||||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||||||||||
Unrealized Losses | Unrealized Losses | Unrealized Losses | ||||||||||||||||||||||||||||||||||
(Dollars in millions) | Fair Value | Recognized in OCI | Not Recognized in OCI | Fair Value | Recognized in OCI | Not Recognized in OCI | Fair Value | Recognized in OCI | Not Recognized in OCI | |||||||||||||||||||||||||||
U.S. Treasury | $ | 494 | $ | — | $ | 1 | $ | — | $ | — | $ | — | $ | 494 | $ | — | $ | 1 | ||||||||||||||||||
U.S. government agency and government-sponsored agencies - residential mortgage-backed securities | 2,649 | — | 31 | 4,000 | 31 | 99 | 6,649 | 31 | 130 | |||||||||||||||||||||||||||
U.S. government agency and government-sponsored agencies - commercial mortgage-backed securities | 19 | — | — | 1,496 | 52 | 9 | 1,515 | 52 | 9 | |||||||||||||||||||||||||||
Total securities held to maturity | $ | 3,162 | $ | — | $ | 32 | $ | 5,496 | $ | 83 | $ | 108 | $ | 8,658 | $ | 83 | $ | 140 |
53
Note 2—Securities (Continued)
The carrying amount and fair value of securities held to maturity by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.
September 30, 2018 | ||||||||||||||||||||||||||||||||||||||||
Within One Year | Over One Year Through Five Years | Over Five Years Through Ten Years | Over Ten Years | Total | ||||||||||||||||||||||||||||||||||||
(Dollars in millions) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | Carrying Amount | Fair Value | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||||||||||||||
U.S. Treasury | $ | 518 | $ | 516 | $ | 9 | $ | 10 | $ | — | $ | — | $ | — | $ | — | $ | 527 | $ | 526 | ||||||||||||||||||||
U.S. government-sponsored agencies | — | — | — | — | 772 | 771 | — | — | 772 | 771 | ||||||||||||||||||||||||||||||
U.S. government agency and government-sponsored agencies - residential mortgage-backed securities | — | — | — | — | 1,058 | 1,022 | 7,494 | 7,196 | 8,552 | 8,218 | ||||||||||||||||||||||||||||||
U.S. government agency and government-sponsored agencies - commercial mortgage-backed securities | 48 | 49 | 794 | 796 | — | — | 627 | 612 | 1,469 | 1,457 | ||||||||||||||||||||||||||||||
Total securities held to maturity | $ | 566 | $ | 565 | $ | 803 | $ | 806 | $ | 1,830 | $ | 1,793 | $ | 8,121 | $ | 7,808 | $ | 11,320 | $ | 10,972 |
Securities Pledged and Received as Collateral
At September 30, 2018 and December 31, 2017, the Company pledged $12.7 billion and $12.3 billion of available for sale and trading securities as collateral, respectively, of which $1.6 billion and $1.2 billion, respectively, was permitted to be sold or repledged. These securities were pledged as collateral for derivative liability positions, securities loaned or sold under repurchase agreements, short-term borrowings and to secure public and trust department deposits.
At September 30, 2018 and December 31, 2017, the Company received $29.3 billion and $31.8 billion, respectively, of collateral, of which $29.3 billion and $31.8 billion, respectively, was permitted to be sold or repledged. Of the collateral received, the Company sold or repledged $28.3 billion and $30.4 billion at September 30, 2018 and December 31, 2017, respectively, for derivative asset positions and securities borrowed or purchased under resale agreements.
For additional information related to the Company's significant accounting policies on securities pledged as collateral, see Note 1 "Summary of Significant Accounting Policies and Nature of Operations" to our Consolidated Financial Statements in Part II, Item 8. "Financial Statements and Supplementary Data" in our 2017 Form 10-K.
54
Note 3—Loans and Allowance for Loan Losses
The following table provides the outstanding balances of loans held for investment at September 30, 2018 and December 31, 2017.
(Dollars in millions) | September 30, 2018 | December 31, 2017 | ||||||
Loans held for investment: | ||||||||
Commercial and industrial | $ | 23,349 | $ | 23,281 | ||||
Commercial mortgage | 15,031 | 14,320 | ||||||
Construction | 1,480 | 1,775 | ||||||
Lease financing | 1,417 | 1,533 | ||||||
Total commercial portfolio | 41,277 | 40,909 | ||||||
Residential mortgage | 38,059 | 35,643 | ||||||
Home equity and other consumer loans | 4,317 | 3,462 | ||||||
Total consumer portfolio | 42,376 | 39,105 | ||||||
Total loans held for investment(1) | 83,653 | 80,014 | ||||||
Allowance for loan losses | (501 | ) | (476 | ) | ||||
Loans held for investment, net | $ | 83,152 | $ | 79,538 |
(1) | Includes $338 million and $301 million at September 30, 2018 and December 31, 2017, respectively, for net unamortized (discounts) and premiums and deferred (fees) and costs. |
55
Allowance for Loan Losses
The following tables provide a reconciliation of changes in the allowance for loan losses by portfolio segment.
For the Three Months Ended September 30, 2018 | ||||||||||||||||
(Dollars in millions) | Commercial | Consumer | Unallocated | Total | ||||||||||||
Allowance for loan losses, beginning of period | $ | 362 | $ | 78 | $ | 5 | $ | 445 | ||||||||
(Reversal of) provision for loan losses | 33 | 24 | 5 | 62 | ||||||||||||
Loans charged-off | (8 | ) | (8 | ) | — | (16 | ) | |||||||||
Recoveries of loans previously charged-off | 8 | 2 | — | 10 | ||||||||||||
Allowance for loan losses, end of period | $ | 395 | $ | 96 | $ | 10 | $ | 501 |
For the Three Months Ended September 30, 2017 | ||||||||||||||||
(Dollars in millions) | Commercial | Consumer | Unallocated | Total | ||||||||||||
Allowance for loan losses, beginning of period | $ | 435 | $ | 78 | $ | — | $ | 513 | ||||||||
(Reversal of) provision for loan losses | (7 | ) | 10 | 30 | 33 | |||||||||||
Other | 2 | — | — | 2 | ||||||||||||
Loans charged-off | (7 | ) | (10 | ) | — | (17 | ) | |||||||||
Recoveries of loans previously charged-off | 8 | 3 | — | 11 | ||||||||||||
Allowance for loan losses, end of period | $ | 431 | $ | 81 | $ | 30 | $ | 542 |
For the Nine Months Ended September 30, 2018 | ||||||||||||||||
(Dollars in millions) | Commercial | Consumer | Unallocated | Total | ||||||||||||
Allowance for loan losses, beginning of period | $ | 360 | $ | 86 | $ | 30 | $ | 476 | ||||||||
(Reversal of) provision for loan losses | 32 | 32 | (20 | ) | 44 | |||||||||||
Loans charged-off | (15 | ) | (27 | ) | — | (42 | ) | |||||||||
Recoveries of loans previously charged-off | 18 | 5 | — | 23 | ||||||||||||
Allowance for loan losses, end of period | $ | 395 | $ | 96 | $ | 10 | $ | 501 |
For the Nine Months Ended September 30, 2017 | ||||||||||||||||
(Dollars in millions) | Commercial | Consumer | Unallocated | Total | ||||||||||||
Allowance for loan losses, beginning of period | $ | 556 | $ | 83 | $ | — | $ | 639 | ||||||||
(Reversal of) provision for loan losses | (57 | ) | 26 | 30 | (1 | ) | ||||||||||
Other | 2 | — | — | 2 | ||||||||||||
Loans charged-off | (91 | ) | (32 | ) | — | (123 | ) | |||||||||
Recoveries of loans previously charged-off | 21 | 4 | — | 25 | ||||||||||||
Allowance for loan losses, end of period | $ | 431 | $ | 81 | $ | 30 | $ | 542 |
56
The following tables show the allowance for loan losses and related loan balances by portfolio segment as of September 30, 2018 and December 31, 2017.
September 30, 2018 | ||||||||||||||||
(Dollars in millions) | Commercial | Consumer | Unallocated | Total | ||||||||||||
Allowance for loan losses: | ||||||||||||||||
Individually evaluated for impairment | $ | 116 | $ | 13 | $ | — | $ | 129 | ||||||||
Collectively evaluated for impairment | 279 | 83 | 10 | 372 | ||||||||||||
Total allowance for loan losses | $ | 395 | $ | 96 | $ | 10 | $ | 501 | ||||||||
Loans held for investment: | ||||||||||||||||
Individually evaluated for impairment | $ | 497 | $ | 289 | $ | — | $ | 786 | ||||||||
Collectively evaluated for impairment | 40,780 | 42,087 | — | 82,867 | ||||||||||||
Total loans held for investment | $ | 41,277 | $ | 42,376 | $ | — | $ | 83,653 |
December 31, 2017 | ||||||||||||||||
(Dollars in millions) | Commercial | Consumer | Unallocated | Total | ||||||||||||
Allowance for loan losses: | ||||||||||||||||
Individually evaluated for impairment | $ | 58 | $ | 15 | $ | — | $ | 73 | ||||||||
Collectively evaluated for impairment | 302 | 71 | 30 | 403 | ||||||||||||
Total allowance for loan losses | $ | 360 | $ | 86 | $ | 30 | $ | 476 | ||||||||
Loans held for investment: | ||||||||||||||||
Individually evaluated for impairment | $ | 544 | $ | 321 | $ | — | $ | 865 | ||||||||
Collectively evaluated for impairment | 40,365 | 38,784 | — | 79,149 | ||||||||||||
Total loans held for investment | $ | 40,909 | $ | 39,105 | $ | — | $ | 80,014 |
Nonaccrual and Past Due Loans
The following table presents nonaccrual loans as of September 30, 2018 and December 31, 2017.
(Dollars in millions) | September 30, 2018 | December 31, 2017 | ||||||
Commercial and industrial | $ | 268 | $ | 319 | ||||
Commercial mortgage | 12 | 20 | ||||||
Total commercial portfolio | 280 | 339 | ||||||
Residential mortgage | 111 | 104 | ||||||
Home equity and other consumer loans | 20 | 22 | ||||||
Total consumer portfolio | 131 | 126 | ||||||
Total nonaccrual loans | $ | 411 | $ | 465 | ||||
Troubled debt restructured loans that continue to accrue interest | $ | 354 | $ | 348 | ||||
Troubled debt restructured nonaccrual loans (included in total nonaccrual loans above) | $ | 252 | $ | 229 |
57
The following tables show the aging of the balance of loans held for investment by class as of September 30, 2018 and December 31, 2017.
September 30, 2018 | ||||||||||||||||||||
Aging Analysis of Loans | ||||||||||||||||||||
(Dollars in millions) | Current | 30 to 89 Days Past Due | 90 Days or More Past Due | Total Past Due | Total | |||||||||||||||
Commercial and industrial | $ | 24,634 | $ | 31 | $ | 101 | $ | 132 | $ | 24,766 | ||||||||||
Commercial mortgage | 14,989 | 38 | 4 | 42 | 15,031 | |||||||||||||||
Construction | 1,480 | — | — | — | 1,480 | |||||||||||||||
Total commercial portfolio | 41,103 | 69 | 105 | 174 | 41,277 | |||||||||||||||
Residential mortgage | 37,855 | 166 | 38 | 204 | 38,059 | |||||||||||||||
Home equity and other consumer loans | 4,284 | 22 | 11 | 33 | 4,317 | |||||||||||||||
Total consumer portfolio | 42,139 | 188 | 49 | 237 | 42,376 | |||||||||||||||
Total loans held for investment | $ | 83,242 | $ | 257 | $ | 154 | $ | 411 | $ | 83,653 |
December 31, 2017 | ||||||||||||||||||||
Aging Analysis of Loans | ||||||||||||||||||||
(Dollars in millions) | Current | 30 to 89 Days Past Due | 90 Days or More Past Due | Total Past Due | Total | |||||||||||||||
Commercial and industrial | $ | 24,734 | $ | 17 | $ | 63 | $ | 80 | $ | 24,814 | ||||||||||
Commercial mortgage | 14,298 | 16 | 6 | 22 | 14,320 | |||||||||||||||
Construction | 1,775 | — | — | — | 1,775 | |||||||||||||||
Total commercial portfolio | 40,807 | 33 | 69 | 102 | 40,909 | |||||||||||||||
Residential mortgage | 35,453 | 151 | 39 | 190 | 35,643 | |||||||||||||||
Home equity and other consumer loans | 3,427 | 23 | 12 | 35 | 3,462 | |||||||||||||||
Total consumer portfolio | 38,880 | 174 | 51 | 225 | 39,105 | |||||||||||||||
Total loans held for investment | $ | 79,687 | $ | 207 | $ | 120 | $ | 327 | $ | 80,014 |
Loans 90 days or more past due and still accruing totaled $11 million at September 30, 2018 and $12 million at December 31, 2017.
Credit Quality Indicators
Management analyzes the Company's loan portfolios by applying specific monitoring policies and procedures that vary according to the relative risk profile and other characteristics within the various loan portfolios. Loans within the commercial portfolio segment are classified as either pass or criticized. Criticized credits are those that have regulatory risk ratings of special mention, substandard or doubtful; classified credits are those that have regulatory risk ratings of substandard or doubtful. Special mention credits are potentially weak, as the borrower has begun to exhibit deteriorating trends, which, if not corrected, may jeopardize repayment of the loan and result in further downgrade. Substandard credits have well-defined weaknesses, which, if not corrected, could jeopardize the full satisfaction of the debt. A credit classified as doubtful has critical weaknesses that make full collection improbable on the basis of currently existing facts and conditions.
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The following tables summarize the loans in the commercial portfolio segment monitored for credit quality based on regulatory risk ratings.
September 30, 2018 | ||||||||||||||||
Criticized | ||||||||||||||||
(Dollars in millions) | Pass | Special Mention | Classified | Total | ||||||||||||
Commercial and industrial | $ | 23,602 | $ | 404 | $ | 760 | $ | 24,766 | ||||||||
Commercial mortgage | 14,769 | 100 | 162 | 15,031 | ||||||||||||
Construction | 1,398 | 4 | 78 | 1,480 | ||||||||||||
Total commercial portfolio | $ | 39,769 | $ | 508 | $ | 1,000 | $ | 41,277 |
December 31, 2017 | ||||||||||||||||
Criticized | ||||||||||||||||
(Dollars in millions) | Pass | Special Mention | Classified | Total | ||||||||||||
Commercial and industrial | $ | 23,632 | $ | 435 | $ | 747 | $ | 24,814 | ||||||||
Commercial mortgage | 14,081 | 80 | 159 | 14,320 | ||||||||||||
Construction | 1,632 | 15 | 128 | 1,775 | ||||||||||||
Total commercial portfolio | $ | 39,345 | $ | 530 | $ | 1,034 | $ | 40,909 |
The Company monitors the credit quality of its consumer portfolio segment based primarily on payment status. The following tables summarize the loans in the consumer portfolio segment, which exclude $6 million and $8 million of loans covered by FDIC loss share agreements, at September 30, 2018 and December 31, 2017, respectively.
September 30, 2018 | ||||||||||||
(Dollars in millions) | Accrual | Nonaccrual | Total | |||||||||
Residential mortgage | $ | 37,944 | $ | 111 | $ | 38,055 | ||||||
Home equity and other consumer loans | 4,295 | 20 | 4,315 | |||||||||
Total consumer portfolio | $ | 42,239 | $ | 131 | $ | 42,370 |
December 31, 2017 | ||||||||||||
(Dollars in millions) | Accrual | Nonaccrual | Total | |||||||||
Residential mortgage | $ | 35,534 | $ | 104 | $ | 35,638 | ||||||
Home equity and other consumer loans | 3,437 | 22 | 3,459 | |||||||||
Total consumer portfolio | $ | 38,971 | $ | 126 | $ | 39,097 |
The Company also monitors the credit quality for substantially all of its consumer portfolio segment using credit scores provided by FICO and refreshed LTV ratios. FICO credit scores are refreshed at least quarterly to monitor the quality of the portfolio. Refreshed LTV measures the principal balance of the loan as a percentage of the estimated current value of the property securing the loan. Home equity loans are evaluated using combined LTV, which measures the principal balance of the combined loans that have liens against the property (including unused credit lines for home equity products) as a percentage of the estimated current value of the property securing the loans. The LTV ratios are refreshed on a quarterly basis, using the most recent home pricing index data available for the property location.
The following tables summarize the loans in the consumer portfolio segment based on refreshed FICO scores and refreshed LTV ratios at September 30, 2018 and December 31, 2017. These tables exclude loans covered by FDIC loss share agreements, as discussed above. The amounts presented reflect unpaid principal balances less partial charge-offs.
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September 30, 2018 | ||||||||||||||||
FICO scores | ||||||||||||||||
(Dollars in millions) | 720 and Above | Below 720 | No FICO Available(1) | Total | ||||||||||||
Residential mortgage | $ | 31,284 | $ | 5,939 | $ | 445 | $ | 37,668 | ||||||||
Home equity and other consumer loans | 3,001 | 1,200 | 55 | 4,256 | ||||||||||||
Total consumer portfolio | $ | 34,285 | $ | 7,139 | $ | 500 | $ | 41,924 | ||||||||
Percentage of total | 82 | % | 17 | % | 1 | % | 100 | % |
(1) | Represents loans for which management was not able to obtain an updated FICO score (e.g., due to recent profile changes). |
December 31, 2017 | ||||||||||||||||
FICO scores | ||||||||||||||||
(Dollars in millions) | 720 and Above | Below 720 | No FICO Available(1) | Total | ||||||||||||
Residential mortgage | $ | 28,786 | $ | 6,082 | $ | 411 | $ | 35,279 | ||||||||
Home equity and other consumer loans | 2,404 | 918 | 84 | 3,406 | ||||||||||||
Total consumer portfolio | $ | 31,190 | $ | 7,000 | $ | 495 | $ | 38,685 | ||||||||
Percentage of total | 81 | % | 18 | % | 1 | % | 100 | % |
(1) | Represents loans for which management was not able to obtain an updated FICO score (e.g., due to recent profile changes). |
September 30, 2018 | ||||||||||||||||||||
LTV ratios | ||||||||||||||||||||
(Dollars in millions) | Less than or Equal to 80 Percent | Greater than 80 and Less than 100 Percent | Greater than or Equal to 100 Percent | No LTV Available(1) | Total | |||||||||||||||
Residential mortgage | $ | 36,985 | $ | 654 | $ | 4 | $ | 25 | $ | 37,668 | ||||||||||
Home equity loans | 1,979 | 215 | 12 | 28 | 2,234 | |||||||||||||||
Total consumer portfolio | $ | 38,964 | $ | 869 | $ | 16 | $ | 53 | $ | 39,902 | ||||||||||
Percentage of total | 98 | % | 2 | % | — | % | — | % | 100 | % |
(1) | Represents loans for which management was not able to obtain refreshed property values. |
December 31, 2017 | ||||||||||||||||||||
LTV ratios | ||||||||||||||||||||
(Dollars in millions) | Less than or Equal to 80 Percent | Greater than 80 and Less than 100 Percent | Greater than or Equal to 100 Percent | No LTV Available(1) | Total | |||||||||||||||
Residential mortgage | $ | 34,472 | $ | 771 | $ | 4 | $ | 32 | $ | 35,279 | ||||||||||
Home equity loans | 2,052 | 248 | 24 | 33 | 2,357 | |||||||||||||||
Total consumer portfolio | $ | 36,524 | $ | 1,019 | $ | 28 | $ | 65 | $ | 37,636 | ||||||||||
Percentage of total | 97 | % | 3 | % | — | % | — | % | 100 | % |
(1) | Represents loans for which management was not able to obtain refreshed property values. |
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Troubled Debt Restructurings
The following table provides a summary of the Company’s recorded investment in TDRs as of September 30, 2018 and December 31, 2017. The summary includes those TDRs that are on nonaccrual status and those that continue to accrue interest. The Company had $39 million and $66 million in commitments to lend additional funds to borrowers with loan modifications classified as TDRs as of September 30, 2018 and December 31, 2017, respectively.
(Dollars in millions) | September 30, 2018 | December 31, 2017 | ||||||
Commercial and industrial | $ | 253 | $ | 202 | ||||
Commercial mortgage | 53 | 7 | ||||||
Construction | 78 | 128 | ||||||
Total commercial portfolio | 384 | 337 | ||||||
Residential mortgage | 200 | 215 | ||||||
Home equity and other consumer loans | 22 | 25 | ||||||
Total consumer portfolio | 222 | 240 | ||||||
Total restructured loans | $ | 606 | $ | 577 |
For the third quarter of 2018, TDR modifications in the commercial portfolio segment were substantially composed of interest rate changes, maturity extensions, forbearance, conversions from revolving lines of credit to term loans, or some combination thereof. In the consumer portfolio segment, modifications were primarily composed of maturity extensions. Charge-offs related to TDR modifications for the nine months ended September 30, 2018 and September 30, 2017 were de minimis. For the commercial and consumer portfolio segments, the allowance for loan losses for TDRs was measured on an individual loan basis or in pools with similar risk characteristics.
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The following tables provide the pre- and post-modification outstanding recorded investment amounts of TDRs as of the date of the restructuring that occurred during the three and nine months ended September 30, 2018 and 2017.
For the Three Months Ended September 30, 2018 | For the Nine Months Ended September 30, 2018 | |||||||||||||||
(Dollars in millions) | Pre-Modification Outstanding Recorded Investment(1) | Post-Modification Outstanding Recorded Investment(2) | Pre-Modification Outstanding Recorded Investment(1) | Post-Modification Outstanding Recorded Investment(2) | ||||||||||||
Commercial and industrial | $ | 59 | $ | 59 | $ | 163 | $ | 163 | ||||||||
Total commercial portfolio | 59 | 59 | 163 | 163 | ||||||||||||
Residential mortgage | 4 | 4 | 6 | 6 | ||||||||||||
Home equity and other consumer loans | 1 | 1 | 2 | 2 | ||||||||||||
Total consumer portfolio | 5 | 5 | 8 | 8 | ||||||||||||
Total | $ | 64 | $ | 64 | $ | 171 | $ | 171 |
(1) | Represents the recorded investment in the loan immediately prior to the restructuring event. |
(2) | Represents the recorded investment in the loan immediately following the restructuring event. It includes the effect of paydowns that were required as part of the restructuring terms. |
For the Three Months Ended September 30, 2017 | For the Nine Months Ended September 30, 2017 | |||||||||||||||
(Dollars in millions) | Pre-Modification Outstanding Recorded Investment(1) | Post-Modification Outstanding Recorded Investment(2) | Pre-Modification Outstanding Recorded Investment(1) | Post-Modification Outstanding Recorded Investment(2) | ||||||||||||
Commercial and industrial | $ | 20 | $ | 20 | $ | 116 | $ | 116 | ||||||||
Commercial mortgage | 2 | 2 | 3 | 3 | ||||||||||||
Construction | — | — | 61 | 61 | ||||||||||||
Total commercial portfolio | 22 | 22 | 180 | 180 | ||||||||||||
Residential mortgage | 6 | 6 | 14 | 14 | ||||||||||||
Home equity and other consumer loans | — | — | 2 | 2 | ||||||||||||
Total consumer portfolio | 6 | 6 | 16 | 16 | ||||||||||||
Total | $ | 28 | $ | 28 | $ | 196 | $ | 196 |
(1) | Represents the recorded investment in the loan immediately prior to the restructuring event. |
(2) | Represents the recorded investment in the loan immediately following the restructuring event. It includes the effect of paydowns that were required as part of the restructuring terms. |
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The following tables provide the recorded investment amounts of TDRs at the date of default, for which there was a payment default during the three and nine months ended September 30, 2018 and 2017, and where the default occurred within the first twelve months after modification into a TDR. A payment default is defined as the loan being 60 days or more past due.
(Dollars in millions) | For the Three Months Ended September 30, 2018 | For the Nine Months Ended September 30, 2018 | ||||||
Residential mortgage | $ | — | $ | 2 | ||||
Total consumer portfolio | — | 2 | ||||||
Total | $ | — | $ | 2 | ||||
(Dollars in millions) | For the Three Months Ended September 30, 2017 | For the Nine Months Ended September 30, 2017 | ||||||
Commercial and industrial | $ | — | $ | 19 | ||||
Commercial mortgage | — | 1 | ||||||
Total commercial portfolio | — | 20 | ||||||
Residential mortgage | 1 | 2 | ||||||
Total consumer portfolio | 1 | 2 | ||||||
Total | $ | 1 | $ | 22 |
For loans in the consumer portfolio in which impairment is measured using the present value of expected future cash flows discounted at the loan’s effective interest rate, historical payment defaults and the propensity to redefault are some of the factors considered when determining the allowance for loan losses.
Loan Impairment
Loans that are individually evaluated for impairment include larger nonaccruing loans within the commercial and industrial, construction, and commercial mortgage loan portfolios and loans modified in a TDR. The Company records an impairment allowance when the value of an impaired loan is less than the recorded investment in the loan.
The following tables show information about impaired loans by class as of September 30, 2018 and December 31, 2017.
September 30, 2018 | ||||||||||||||||||||||||
Recorded Investment | Unpaid Principal Balance | |||||||||||||||||||||||
(Dollars in millions) | With an Allowance | Without an Allowance | Total | Allowance for Impaired Loans | With an Allowance | Without an Allowance | ||||||||||||||||||
Commercial and industrial | $ | 321 | $ | 22 | $ | 343 | $ | 112 | $ | 372 | $ | 91 | ||||||||||||
Commercial mortgage | 24 | 53 | 77 | — | 24 | 53 | ||||||||||||||||||
Construction | 70 | 7 | 77 | 4 | 70 | 7 | ||||||||||||||||||
Total commercial portfolio | 415 | 82 | 497 | 116 | 466 | 151 | ||||||||||||||||||
Residential mortgage | 180 | 73 | 253 | 13 | 190 | 87 | ||||||||||||||||||
Home equity and other consumer loans | 23 | 13 | 36 | — | 23 | 22 | ||||||||||||||||||
Total consumer portfolio | 203 | 86 | 289 | 13 | 213 | 109 | ||||||||||||||||||
Total | $ | 618 | $ | 168 | $ | 786 | $ | 129 | $ | 679 | $ | 260 |
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December 31, 2017 | ||||||||||||||||||||||||
Recorded Investment | Unpaid Principal Balance | |||||||||||||||||||||||
(Dollars in millions) | With an Allowance | Without an Allowance | Total | Allowance for Impaired Loans | With an Allowance | Without an Allowance | ||||||||||||||||||
Commercial and industrial | $ | 287 | $ | 93 | $ | 380 | $ | 57 | $ | 348 | $ | 102 | ||||||||||||
Commercial mortgage | 33 | 3 | 36 | 1 | 33 | 3 | ||||||||||||||||||
Construction | — | 128 | 128 | — | — | 128 | ||||||||||||||||||
Total commercial portfolio | 320 | 224 | 544 | 58 | 381 | 233 | ||||||||||||||||||
Residential mortgage | 218 | 59 | 277 | 15 | 234 | 69 | ||||||||||||||||||
Home equity and other consumer loans | 29 | 15 | 44 | — | 30 | 24 | ||||||||||||||||||
Total consumer portfolio | 247 | 74 | 321 | 15 | 264 | 93 | ||||||||||||||||||
Total | $ | 567 | $ | 298 | $ | 865 | $ | 73 | $ | 645 | $ | 326 |
The following table presents the average recorded investment in impaired loans and the amount of interest income recognized for impaired loans during the three and nine months ended September 30, 2018 and 2017 for the commercial and consumer loans portfolio segments.
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||
(Dollars in millions) | Average Recorded Investment | Recognized Interest Income | Average Recorded Investment | Recognized Interest Income | Average Recorded Investment | Recognized Interest Income | Average Recorded Investment | Recognized Interest Income | ||||||||||||||||||||||||
Commercial and industrial | $ | 329 | $ | 3 | $ | 397 | $ | 4 | $ | 306 | $ | 8 | $ | 466 | $ | 15 | ||||||||||||||||
Commercial mortgage | 79 | 5 | 96 | 11 | 56 | 23 | 94 | 33 | ||||||||||||||||||||||||
Construction | 78 | 3 | 9 | 2 | 106 | 7 | 12 | 3 | ||||||||||||||||||||||||
Total commercial portfolio | 486 | 11 | 502 | 17 | 468 | 38 | 572 | 51 | ||||||||||||||||||||||||
Residential mortgage | 257 | 3 | 305 | 3 | 264 | 10 | 310 | 10 | ||||||||||||||||||||||||
Home equity and other consumer loans | 36 | — | 53 | 1 | 39 | 2 | 55 | 5 | ||||||||||||||||||||||||
Total consumer portfolio | 293 | 3 | 358 | 4 | 303 | 12 | 365 | 15 | ||||||||||||||||||||||||
Total | $ | 779 | $ | 14 | $ | 860 | $ | 21 | $ | 771 | $ | 50 | $ | 937 | $ | 66 |
The following table presents loan transfers from held to investment to held for sale and proceeds from
sales of loans during the three and nine months ended September 30, 2018 and 2017 for the commercial and consumer loans portfolio segments.
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||
(Dollars in millions) | Net Transfer of Loans Held for Investment to (from) Loans Held for Sale | Proceeds from Sale | Net Transfer of Loans Held for Investment to (from) Loans Held for Sale | Proceeds from Sale | Net Transfer of Loans Held for Investment to (from) Loans Held for Sale | Proceeds from Sale | Net Transfer of Loans Held for Investment to (from) Loans Held for Sale | Proceeds from Sale | ||||||||||||||||||||||||
Commercial portfolio | $ | 77 | $ | 49 | $ | 477 | $ | 105 | $ | 10 | $ | 563 | $ | 837 | $ | 751 | ||||||||||||||||
Consumer portfolio | — | — | — | — | — | — | (4 | ) | — | |||||||||||||||||||||||
Total | $ | 77 | $ | 49 | $ | 477 | $ | 105 | $ | 10 | $ | 563 | $ | 833 | $ | 751 |
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Note 4—Variable Interest Entities
In the normal course of business, the Company has certain financial interests in entities which have been determined to be VIEs. Generally, a VIE is a corporation, partnership, trust or other legal structure where the equity investors do not have substantive voting rights, an obligation to absorb the entity’s losses or the right to receive the entity’s returns, or the ability to direct the significant activities of the entity. The following discusses the Company’s consolidated and unconsolidated VIEs.
Consolidated VIEs
The following tables present the assets and liabilities of consolidated VIEs recorded on the Company’s consolidated balance sheets at September 30, 2018 and December 31, 2017.
September 30, 2018 | ||||||||||||||||||||||||
Consolidated Assets | Consolidated Liabilities | |||||||||||||||||||||||
(Dollars in millions) | Interest Bearing Deposits in Banks | Loans Held for Investment, Net | Other Assets | Total Assets | Other Liabilities | Total Liabilities | ||||||||||||||||||
LIHC investments | $ | — | $ | — | $ | 48 | $ | 48 | $ | — | $ | — | ||||||||||||
Leasing investments | — | 569 | 140 | 709 | 14 | 14 | ||||||||||||||||||
Total consolidated VIEs | $ | — | $ | 569 | $ | 188 | $ | 757 | $ | 14 | $ | 14 |
December 31, 2017 | ||||||||||||||||||||||||
Consolidated Assets | Consolidated Liabilities | |||||||||||||||||||||||
(Dollars in millions) | Interest Bearing Deposits in Banks | Loans Held for Investment, Net | Other Assets | Total Assets | Other Liabilities | Total Liabilities | ||||||||||||||||||
LIHC investments | $ | — | $ | — | $ | 68 | $ | 68 | $ | — | $ | — | ||||||||||||
Leasing investments | 1 | 583 | 158 | 742 | 24 | 24 | ||||||||||||||||||
Total consolidated VIEs | $ | 1 | $ | 583 | $ | 226 | $ | 810 | $ | 24 | $ | 24 |
LIHC Investments
The Company sponsors, manages and syndicates two LIHC investment fund structures. These investments are designed to generate a return primarily through the realization of U.S. federal tax credits and deductions. The Company is considered the primary beneficiary and has consolidated these investments because the Company has the power to direct activities that most significantly impact the funds’ economic performances and also has the obligation to absorb losses of the funds that could potentially be significant to the funds. Neither creditors nor equity investors in the LIHC investments have any recourse to the general credit of the Company, and the Company’s creditors do not have any recourse to the assets of the consolidated LIHC investments.
Leasing Investments
The Company has leasing investments primarily in the wind energy, rail and coal industries. The Company is considered the primary beneficiary and has consolidated these investments because the Company has the power to direct the activities of these entities that significantly impact the entities’ economic performances. The Company also has the right to receive potentially significant benefits or the obligation to absorb potentially significant losses of these investments.
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Unconsolidated VIEs
The following tables present the Company’s carrying amounts related to the unconsolidated VIEs at September 30, 2018 and December 31, 2017. The tables also present the Company’s maximum exposure to loss resulting from its involvement with these VIEs. The maximum exposure to loss represents the carrying amount of the Company’s involvement plus any legally binding unfunded commitments in the unlikely event that all of the assets in the VIEs become worthless. During the nine months ended September 30, 2018 and September 30, 2017, the Company had noncash increases in unfunded commitments on LIHC investments of $45 million and $22 million, respectively, included within other liabilities.
September 30, 2018 | ||||||||||||||||||||||||||||||||
Unconsolidated Assets | Unconsolidated Liabilities | |||||||||||||||||||||||||||||||
(Dollars in millions) | Interest Bearing Deposits in Banks | Securities Available for Sale | Loans Held for Investment, Net | Other Assets | Total Assets | Other Liabilities | Total Liabilities | Maximum Exposure to Loss | ||||||||||||||||||||||||
LIHC investments | $ | — | $ | 28 | $ | 236 | $ | 971 | $ | 1,235 | $ | 176 | $ | 176 | $ | 1,235 | ||||||||||||||||
Leasing investments | 30 | — | 21 | 1,453 | 1,504 | 44 | 44 | 1,525 | ||||||||||||||||||||||||
Other investments | — | — | 5 | 34 | 39 | — | — | 80 | ||||||||||||||||||||||||
Total unconsolidated VIEs | $ | 30 | $ | 28 | $ | 262 | $ | 2,458 | $ | 2,778 | $ | 220 | $ | 220 | $ | 2,840 |
December 31, 2017 | ||||||||||||||||||||||||||||||||
Unconsolidated Assets | Unconsolidated Liabilities | |||||||||||||||||||||||||||||||
(Dollars in millions) | Interest Bearing Deposits in Banks | Securities Available for Sale | Loans Held for Investment, Net | Other Assets | Total Assets | Other Liabilities | Total Liabilities | Maximum Exposure to Loss | ||||||||||||||||||||||||
LIHC investments | $ | — | $ | 29 | $ | 228 | $ | 1,028 | $ | 1,285 | $ | 254 | $ | 254 | $ | 1,284 | ||||||||||||||||
Leasing investments | 1 | — | 24 | 1,745 | 1,770 | 53 | 53 | 1,792 | ||||||||||||||||||||||||
Other investments | — | — | 24 | 26 | 50 | — | — | 132 | ||||||||||||||||||||||||
Total unconsolidated VIEs | $ | 1 | $ | 29 | $ | 276 | $ | 2,799 | $ | 3,105 | $ | 307 | $ | 307 | $ | 3,208 |
LIHC Investments
The Company makes investments in partnerships and funds formed by third parties. The primary purpose of the partnerships and funds is to invest in low-income housing units and distribute tax credits and tax benefits associated with the underlying properties to investors. The Company is a limited partner investor and is allocated tax credits and deductions, but has no voting or other rights to direct the activities of the funds or partnerships, and therefore is not considered the primary beneficiary and does not consolidate these investments.
The following table presents the impact of the unconsolidated LIHC investments on our consolidated statements of income for the three and nine months ended September 30, 2018 and 2017.
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, 2018 | September 30, 2017 | September 30, 2018 | September 30, 2017 | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Losses from LIHC investments included in other noninterest expense | $ | 2 | $ | 4 | $ | 6 | $ | 8 | ||||||||
Amortization of LIHC investments included in income tax expense | 34 | 37 | 102 | 106 | ||||||||||||
Tax credits and other tax benefits from LIHC investments included in income tax expense | 39 | 49 | 130 | 141 |
66
Leasing Investments
The unconsolidated VIEs related to leasing investments are primarily renewable energy investments. Through its subsidiaries, the Company makes equity investments in LLCs established by third party sponsors. The LLCs are created to operate and manage wind, solar, hydroelectric and cogeneration power plant projects. Power generated by the projects is sold to third parties through long-term purchase power agreements. As a limited investor member, the Company is allocated production tax credits and taxable income or losses associated with the projects. The Company has no voting or other rights to direct the significant activities of the LLCs, and therefore is not considered the primary beneficiary and does not consolidate these investments.
Other Investments
The Company has other investments in structures formed by third parties. The Company has no voting or other rights to direct the activities of the investments that would most significantly impact the entities’ performance, and therefore is not considered the primary beneficiary and does not consolidate these investments.
Note 5—Securities Financing Arrangements
The Company enters into securities purchased under agreements to resell, securities sold under agreements to repurchase, securities borrowed and securities loaned transactions. The Company executes these transactions to facilitate customer match-book activity, cover short positions and fund the Company's trading inventory. The Company manages credit exposure from certain transactions by entering into master netting agreements and collateral arrangements with counterparties. The relevant agreements allow for the efficient closeout of the transaction, liquidation and set-off of collateral against the net amount owed by the counterparty following a default. Under these agreements and transactions, the Company either receives or provides collateral. The Company receives collateral in the form of securities in connection with reverse repurchase agreements and securities borrowed transactions. In many cases, the Company is permitted to sell or repledge these securities held as collateral and use the securities to secure repurchase agreements or enter into securities lending transactions. In certain cases the Company may agree for collateral to be posted to a third party custodian under a tri-party arrangement that enables the Company to take control of such collateral in the event of a counterparty default. Default events generally include, among other things, failure to pay, insolvency or bankruptcy of a counterparty. For additional information related to securities pledged and received as collateral, see Note 2 "Securities".
The following tables present the gross obligations for securities sold under agreements to repurchase and securities loaned by remaining contractual maturity and class of collateral pledged at September 30, 2018 and December 31, 2017.
September 30, 2018 | ||||||||||||||||||||
(Dollars in millions) | Overnight and Continuous | Up to 30 Days | 31 - 90 Days | Greater than 90 Days | Total | |||||||||||||||
Securities sold under agreements to repurchase: | ||||||||||||||||||||
U.S. Treasury securities | $ | 12,283 | $ | 648 | $ | 313 | $ | 250 | $ | 13,494 | ||||||||||
U.S. government-sponsored agency securities | 119 | 166 | 16 | — | 301 | |||||||||||||||
Money market securities | — | — | 289 | — | 289 | |||||||||||||||
Asset-backed securities | — | — | 242 | — | 242 | |||||||||||||||
Mortgage-backed securities | 8,808 | 2,325 | 6,709 | 1,150 | 18,992 | |||||||||||||||
Corporate bonds | 1,346 | 131 | 813 | — | 2,290 | |||||||||||||||
State and municipal securities | 44 | 66 | 394 | — | 504 | |||||||||||||||
Equity securities | 249 | 3 | 274 | — | 526 | |||||||||||||||
Total | $ | 22,849 | $ | 3,339 | $ | 9,050 | $ | 1,400 | $ | 36,638 | ||||||||||
Securities loaned: | ||||||||||||||||||||
U.S. Treasury securities | $ | — | $ | 170 | $ | 41 | $ | — | $ | 211 | ||||||||||
Equity securities | 285 | — | — | — | 285 | |||||||||||||||
Total | $ | 285 | $ | 170 | $ | 41 | $ | — | $ | 496 |
67
Note 5—Securities Financing Arrangements (Continued)
December 31, 2017 | ||||||||||||||||||||
(Dollars in millions) | Overnight and Continuous | Up to 30 Days | 31 - 90 Days | Greater than 90 Days | Total | |||||||||||||||
Securities sold under agreements to repurchase: | ||||||||||||||||||||
U.S. Treasury securities | $ | 8,244 | $ | 2,370 | $ | 1,046 | $ | 1,158 | $ | 12,818 | ||||||||||
U.S. government-sponsored agency securities | 115 | 38 | 63 | — | 216 | |||||||||||||||
Other sovereign government obligations | — | — | 4 | — | 4 | |||||||||||||||
Money market securities | 1 | — | 6 | — | 7 | |||||||||||||||
Asset-backed securities | 32 | — | 164 | — | 196 | |||||||||||||||
Mortgage-backed securities | 8,322 | 4,972 | 5,859 | 250 | 19,403 | |||||||||||||||
Corporate bonds | 580 | 620 | 1,125 | — | 2,325 | |||||||||||||||
State and municipal securities | 283 | — | 276 | — | 559 | |||||||||||||||
Equity securities | 416 | 376 | 189 | — | 981 | |||||||||||||||
Total | $ | 17,993 | $ | 8,376 | $ | 8,732 | $ | 1,408 | $ | 36,509 | ||||||||||
Securities loaned: | ||||||||||||||||||||
Corporate bonds | $ | — | $ | 322 | $ | — | $ | — | $ | 322 | ||||||||||
Equity securities | 446 | 10 | 101 | — | 557 | |||||||||||||||
Total | $ | 446 | $ | 332 | $ | 101 | $ | — | $ | 879 |
Offsetting Financial Assets and Liabilities
The Company primarily enters into derivative contracts, repurchase agreements and securities lending agreements with counterparties utilizing standard International Swaps and Derivatives Association Master Agreements and Credit Support Annex Agreements, Master Repurchase Agreements, and Master Securities Lending Agreements, respectively. These agreements generally establish the terms and conditions of the transactions, including a legal right to set-off amounts payable and receivable between the Company and a counterparty, regardless of whether or not such amounts have matured or have contingency features.
The following tables present the offsetting of financial assets and liabilities at September 30, 2018 and December 31, 2017.
September 30, 2018 | ||||||||||||||||||||||||
Gross Amounts Not Offset in Balance Sheet | ||||||||||||||||||||||||
(Dollars in millions) | Gross Amounts of Recognized Assets/Liabilities | Gross Amounts Offset in Balance Sheet | Net Amounts Presented in Balance Sheet | Financial Instruments | Cash Collateral Received/Pledged | Net Amount | ||||||||||||||||||
Financial Assets: | ||||||||||||||||||||||||
Derivative assets | $ | 772 | $ | 306 | $ | 466 | $ | 18 | $ | — | $ | 448 | ||||||||||||
Securities borrowed or purchased under resale agreements | 31,367 | 10,102 | 21,265 | 21,179 | — | 86 | ||||||||||||||||||
Total | $ | 32,139 | $ | 10,408 | $ | 21,731 | $ | 21,197 | $ | — | $ | 534 | ||||||||||||
Financial Liabilities: | ||||||||||||||||||||||||
Derivative liabilities | $ | 863 | $ | 309 | $ | 554 | $ | 50 | $ | — | $ | 504 | ||||||||||||
Securities loaned or sold under repurchase agreements | 37,134 | 10,102 | 27,032 | 26,250 | — | 782 | ||||||||||||||||||
Total | $ | 37,997 | $ | 10,411 | $ | 27,586 | $ | 26,300 | $ | — | $ | 1,286 |
68
Note 5—Securities Financing Arrangements (Continued)
December 31, 2017 | ||||||||||||||||||||||||
Gross Amounts Not Offset in Balance Sheet | ||||||||||||||||||||||||
(Dollars in millions) | Gross Amounts of Recognized Assets/Liabilities | Gross Amounts Offset in Balance Sheet | Net Amounts Presented in Balance Sheet | Financial Instruments | Cash Collateral Received/Pledged | Net Amount | ||||||||||||||||||
Financial Assets: | ||||||||||||||||||||||||
Derivative assets | $ | 1,322 | $ | 607 | $ | 715 | $ | 25 | $ | — | $ | 690 | ||||||||||||
Securities borrowed or purchased under resale agreements | 31,845 | 10,951 | 20,894 | 20,816 | — | 78 | ||||||||||||||||||
Total | $ | 33,167 | $ | 11,558 | $ | 21,609 | $ | 20,841 | $ | — | $ | 768 | ||||||||||||
Financial Liabilities: | ||||||||||||||||||||||||
Derivative liabilities | $ | 1,127 | $ | 620 | $ | 507 | $ | 142 | $ | — | $ | 365 | ||||||||||||
Securities loaned or sold under repurchase agreements | 37,388 | 10,951 | 26,437 | 25,639 | — | 798 | ||||||||||||||||||
Total | $ | 38,515 | $ | 11,571 | $ | 26,944 | $ | 25,781 | $ | — | $ | 1,163 |
Note 6—Commercial Paper and Other Short-Term Borrowings
The following table is a summary of the Company's commercial paper and other short-term borrowings.
(Dollars in millions) | September 30, 2018 | December 31, 2017 | ||||||
Debt issued by MUB | ||||||||
Commercial paper, with a weighted average interest rate of 2.08% and 1.26% at September 30, 2018 and December 31, 2017, respectively | $ | 293 | $ | 347 | ||||
Federal Home Loan Bank advances, with a weighted average interest rate of 2.22% and 1.42% at September 30, 2018 and December 31, 2017, respectively | 7,000 | 5,750 | ||||||
Total debt issued by MUB | 7,293 | 6,097 | ||||||
Debt issued by other MUAH subsidiaries | ||||||||
Short-term debt due to MUFG Bank, Ltd., with weighted average interest rates of 2.67% and 1.88% at September 30, 2018 and December 31, 2017, respectively | 150 | 168 | ||||||
Short-term debt due to affiliates, with weighted average interest rates of (-0.07)% and (-0.09)% at September 30, 2018 and December 31, 2017, respectively | 866 | 801 | ||||||
Total debt issued by other MUAH subsidiaries | 1,016 | 969 | ||||||
Total commercial paper and other short-term borrowings | $ | 8,309 | $ | 7,066 |
Short-term debt due to MUFG Bank, Ltd. consists of both secured and unsecured fixed and floating rate borrowings.
MUSA maintains an uncommitted, unsecured lending facility with Mitsubishi UFJ Securities Holdings Co., Ltd. under which it may borrow up to JPY 160 billion (USD 1.4 billion equivalent). Under the terms of the facility, MUSA can choose to borrow in Japanese Yen or U.S. Dollars. Japanese Yen denominated borrowings include an extension option allowing MUSA to extend the maturity of an individual draw by 100 days at any time prior to its original, stated maturity. At September 30, 2018, MUSA had JPY 98 billion (USD 866 million equivalent) drawn under this facility.
69
Note 7—Long-Term Debt
Long-term debt consists of borrowings having an original maturity of one year or more. The following is a summary of the Company's long-term debt.
(Dollars in millions) | September 30, 2018 | December 31, 2017 | ||||||
Debt issued by MUAH | ||||||||
Senior debt: | ||||||||
Floating rate senior notes due February 2018. These notes, which bore interest at 0.57% above 3-month LIBOR, had a rate of 1.97% at December 31, 2017 | $ | — | $ | 250 | ||||
Fixed rate 1.625% notes due February 2018 | — | 450 | ||||||
Fixed rate 2.25% notes due February 2020 | 999 | 998 | ||||||
Fixed rate 3.50% notes due June 2022 | 398 | 398 | ||||||
Fixed rate 3.00% notes due February 2025 | 496 | 496 | ||||||
Senior debt due to MUFG Bank, Ltd: | ||||||||
Floating rate debt due March 2020. This note, which bears interest at 0.86% above 3-month LIBOR, had a rate of 3.19% at September 30, 2018 and 2.45% at December 31, 2017 | 545 | 545 | ||||||
Floating rate debt due September 2020. This note, which bears interest at 0.85% above 3-month LIBOR, had a rate of 3.18% at September 30, 2018 and 2.54% at December 31, 2017 | 3,500 | 3,500 | ||||||
Floating rate debt due December 2023. This note, which bears interest at 0.76% above 3-month EURIBOR, had a rate of .76% at September 30, 2018 and 0.76% at December 31, 2017 | 24 | 24 | ||||||
Subordinated debt due to MUFG Bank, Ltd: | ||||||||
Floating rate subordinated debt due December 2023. This note, which bears interest at 1.38% above 3-month LIBOR, had a rate of 3.71% at September 30, 2018 and 3.07% at December 31, 2017 | 300 | 300 | ||||||
Junior subordinated debt payable to trusts: | ||||||||
Floating rate note due September 2036. This note had an interest rate of 4.03% at September 30, 2018 and 3.29% at December 31, 2017 | 36 | 36 | ||||||
Total debt issued by MUAH | 6,298 | 6,997 | ||||||
Debt issued by MUB | ||||||||
Senior debt: | ||||||||
Fixed rate 2.63% notes due September 2018 | — | 1,000 | ||||||
Fixed rate 2.25% notes due May 2019 | 497 | 497 | ||||||
Fixed rate FHLB of San Francisco advances due between October 2018 and June 2020. These notes bear a combined weighted average rate of 2.12% at September 30, 2018 and 1.51% at December 31, 2017 | 4,900 | 1,500 | ||||||
Subordinated debt due to MUFG Bank, Ltd: | ||||||||
Floating rate subordinated debt due June 2023. This note, which bore interest at 1.20% above 3-month LIBOR, had a rate of 2.89% at December 31, 2017 | — | 750 | ||||||
Other | 28 | 63 | ||||||
Total debt issued by MUB | 5,425 | 3,810 | ||||||
Debt issued by other MUAH subsidiaries | ||||||||
Senior debt due to MUFG Bank, Ltd: | ||||||||
Various floating rate borrowings due between December 2020 and May 2021. These notes, which bear interest above 3-month LIBOR had a weighted average interest rate of 2.39% at September 30, 2018 and 1.78% at December 31, 2017 | 250 | 291 | ||||||
Various fixed rate borrowings due between February 2019 and May 2024 with a weighted average interest rate of 1.82% (between 0.14% and 2.44%) at September 30, 2018 and 2.12% (between 1.37% and 2.65%) at December 31, 2017 | 264 | 339 | ||||||
Subordinated debt due to Affiliate: | ||||||||
Various floating rate borrowings due between September 2018 and March 2019. These notes, which bear interest above 6-month LIBOR had an interest rate of 4.13% at September 30, 2018 and 2.95% (between 2.88% and 3.04%) at December 31, 2017 | 75 | 185 | ||||||
70
Non-recourse debt due to MUFG Bank, Ltd: | ||||||||
Various floating rate non-recourse borrowings due between November 2018 and December 2021. These notes, which bear interest above 1- or 3-month LIBOR had a weighted average interest rate of 3.83% (between 3.49% and 4.48%) at September 30, 2018 and 3.07% (between 1.49% and 5.58%) at December 31, 2017 | 77 | 79 | ||||||
Fixed rate non-recourse borrowings due between January 2019 and July 2023 which had an interest rate of 3.06% at September 30, 2018 and 3.27% at December 31, 2017 | 195 | 240 | ||||||
Other non-recourse debt: | ||||||||
Various floating rate non-recourse borrowings due between February 2019 and May 2019. These notes, which bear interest above 1- or 3-month LIBOR had a weighted average interest rate of 3.64% (between 3.34% and 4.23%) at September 30, 2018 and 2.88% (between 2.50% and 3.54%) at December 31, 2017 | 178 | 185 | ||||||
Fixed rate non-recourse borrowings due December 2026 which had an interest rate of 5.34% at September 30, 2018 and December 31, 2017 | 34 | 36 | ||||||
Total debt issued by other MUAH subsidiaries | 1,073 | 1,355 | ||||||
Total long-term debt | $ | 12,796 | $ | 12,162 |
Note 8—Fair Value Measurement and Fair Value of Financial Instruments
Valuation Methodologies
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., an exit price) in an orderly transaction between willing market participants at the measurement date. The Company has an established and documented process for determining fair value for financial assets and liabilities that are measured at fair value on either a recurring or nonrecurring basis. When available, quoted market prices are used to determine fair value. If quoted market prices are not available, fair value is based upon valuation techniques that use, where possible, current market-based or independently sourced parameters, such as yield curves, foreign exchange rates, credit spreads, commodity prices and implied volatilities. Valuation adjustments may be made to ensure the financial instruments are recorded at fair value. These adjustments include amounts that reflect counterparty credit quality and that consider the Company's own creditworthiness in determining the fair value of its trading assets and liabilities. For additional information related to the valuation methodologies used for certain financial assets and financial liabilities measured at fair value, and information about the Company's valuation processes, see Note 11 "Fair Value Measurement and Fair Value of Financial Instruments" to our Consolidated Financial Statements in Part II, Item 8. “Financial Statements and Supplementary Data” in our 2017 Form 10-K.
Fair Value Hierarchy
In determining fair value, the Company maximizes the use of observable market inputs and minimizes the use of unobservable inputs. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect the Company’s estimate about market data. Based on the observability of the significant inputs used, the Company classifies its fair value measurements in accordance with the three-level hierarchy as defined by GAAP. This hierarchy is based on the quality, observability and reliability of the information used to determine fair value. The Company’s policy is to recognize transfers in and out of Level 1, 2 and 3 as of the end of a reporting period. For additional information related to the fair value hierarchy, see Note 11 "Fair Value Measurement and Fair Value of Financial Instruments" to our Consolidated Financial Statements in Part II, Item 8. “Financial Statements and Supplementary Data” in our 2017 Form 10-K.
71
Note 8—Fair Value Measurement and Fair Value of Financial Instruments (Continued)
Fair Value Measurements on a Recurring Basis
The following tables present financial assets and financial liabilities measured at fair value on a recurring basis at September 30, 2018 and December 31, 2017, by major category and by valuation hierarchy level.
September 30, 2018 | ||||||||||||||||||||
(Dollars in millions) | Level 1 | Level 2 | Level 3 | Netting Adjustment(1) | Fair Value | |||||||||||||||
Assets | ||||||||||||||||||||
Trading account assets(2): | ||||||||||||||||||||
U.S. Treasury securities | $ | — | $ | 2,968 | $ | — | $ | — | $ | 2,968 | ||||||||||
U.S. government-sponsored agency securities | — | 115 | — | — | 115 | |||||||||||||||
State and municipal securities | — | 11 | — | — | 11 | |||||||||||||||
Commercial paper | — | 335 | — | — | 335 | |||||||||||||||
Corporate bonds | — | 1,428 | — | — | 1,428 | |||||||||||||||
Asset-backed securities | — | 262 | — | — | 262 | |||||||||||||||
Mortgage-backed securities | — | 5,511 | — | — | 5,511 | |||||||||||||||
Equities | 122 | — | — | — | 122 | |||||||||||||||
Interest rate derivative contracts | 32 | 422 | — | (121 | ) | 333 | ||||||||||||||
Commodity derivative contracts | — | 42 | — | (28 | ) | 14 | ||||||||||||||
Foreign exchange derivative contracts | 1 | 226 | — | (117 | ) | 110 | ||||||||||||||
Equity derivative contracts | 1 | — | 43 | (40 | ) | 4 | ||||||||||||||
Total trading account assets | 156 | 11,320 | 43 | (306 | ) | 11,213 | ||||||||||||||
Securities available for sale(3): | ||||||||||||||||||||
Asset Liability Management securities: | ||||||||||||||||||||
U.S. Treasury | — | 3,730 | — | — | 3,730 | |||||||||||||||
Residential mortgage-backed securities: | ||||||||||||||||||||
U.S government and government-sponsored agencies | — | 8,501 | — | — | 8,501 | |||||||||||||||
Privately issued | — | 861 | — | — | 861 | |||||||||||||||
Privately issued - commercial mortgage-backed securities | — | 1,078 | — | — | 1,078 | |||||||||||||||
Collateralized loan obligations | — | 1,434 | — | — | 1,434 | |||||||||||||||
Other | — | 4 | — | — | 4 | |||||||||||||||
Other debt securities: | ||||||||||||||||||||
Direct bank purchase bonds | — | — | 1,281 | — | 1,281 | |||||||||||||||
Other | — | 44 | 144 | — | 188 | |||||||||||||||
Total securities available for sale | — | 15,652 | 1,425 | — | 17,077 | |||||||||||||||
Other assets: | ||||||||||||||||||||
Mortgage servicing rights(2) | — | — | 176 | — | 176 | |||||||||||||||
Interest rate hedging contracts(3) | — | 4 | — | — | 4 | |||||||||||||||
Other derivative contracts(2) | — | 1 | — | — | 1 | |||||||||||||||
Equity securities(2) | 9 | — | — | — | 9 | |||||||||||||||
Total other assets | 9 | 5 | 176 | — | 190 | |||||||||||||||
Total assets | $ | 165 | $ | 26,977 | $ | 1,644 | $ | (306 | ) | $ | 28,480 | |||||||||
Percentage of total | — | % | 95 | % | 6 | % | (1 | )% | 100 | % | ||||||||||
Percentage of total Company assets | — | 17 | 1 | — | 18 | |||||||||||||||
Liabilities | ||||||||||||||||||||
Trading account liabilities(2): | ||||||||||||||||||||
Securities sold, not yet purchased: | ||||||||||||||||||||
U.S. Treasury | $ | — | $ | 2,518 | $ | — | $ | — | $ | 2,518 | ||||||||||
Commercial paper | — | 22 | — | — | 22 | |||||||||||||||
Corporate bonds | — | 853 | — | — | 853 | |||||||||||||||
Equities | 88 | — | — | — | 88 | |||||||||||||||
Trading derivatives: | ||||||||||||||||||||
Interest rate derivative contracts | 3 | 627 | — | (217 | ) | 413 | ||||||||||||||
Commodity derivative contracts | — | 33 | — | (24 | ) | 9 | ||||||||||||||
Foreign exchange derivative contracts | 1 | 127 | — | (49 | ) | 79 | ||||||||||||||
Equity derivative contracts | 4 | — | 43 | — | 47 | |||||||||||||||
Total trading account liabilities | 96 | 4,180 | 43 | (290 | ) | 4,029 | ||||||||||||||
Other liabilities: | ||||||||||||||||||||
FDIC clawback liability(2) | — | — | 115 | — | 115 | |||||||||||||||
Other derivative contracts(2) | — | 21 | 4 | (19 | ) | 6 | ||||||||||||||
Total other liabilities | — | 21 | 119 | (19 | ) | 121 | ||||||||||||||
Total liabilities | $ | 96 | $ | 4,201 | $ | 162 | $ | (309 | ) | $ | 4,150 | |||||||||
Percentage of total | 2 | % | 101 | % | 4 | % | (7 | )% | 100 | % | ||||||||||
Percentage of total Company liabilities | — | 3 | — | — | 3 |
(1) | Amounts represent the impact of legally enforceable master netting agreements between the same counterparties that allow the Company to net settle all contracts. |
(2) | Fair value through net income. |
(3) | Fair value through other comprehensive income. |
72
Note 8—Fair Value Measurement and Fair Value of Financial Instruments (Continued)
December 31, 2017 | ||||||||||||||||||||
(Dollars in millions) | Level 1 | Level 2 | Level 3 | Netting Adjustment(1) | Fair Value | |||||||||||||||
Assets | ||||||||||||||||||||
Trading account assets(2): | ||||||||||||||||||||
U.S. Treasury securities | $ | — | $ | 1,926 | $ | — | $ | — | $ | 1,926 | ||||||||||
U.S. government-sponsored agency securities | — | 118 | — | — | 118 | |||||||||||||||
State and municipal securities | — | 11 | — | — | 11 | |||||||||||||||
Commercial paper | — | 7 | — | — | 7 | |||||||||||||||
Other sovereign government obligations | — | 8 | — | — | 8 | |||||||||||||||
Corporate bonds | — | 1,054 | — | — | 1,054 | |||||||||||||||
Asset-backed securities | — | 199 | — | — | 199 | |||||||||||||||
Mortgage-backed securities | — | 6,339 | — | — | 6,339 | |||||||||||||||
Equities | 193 | — | — | — | 193 | |||||||||||||||
Interest rate derivative contracts | 7 | 870 | 1 | (353 | ) | 525 | ||||||||||||||
Commodity derivative contracts | — | 50 | — | (49 | ) | 1 | ||||||||||||||
Foreign exchange derivative contracts | — | 249 | 1 | (68 | ) | 182 | ||||||||||||||
Equity derivative contracts | 2 | — | 137 | (135 | ) | 4 | ||||||||||||||
Total trading account assets | 202 | 10,831 | 139 | (605 | ) | 10,567 | ||||||||||||||
Securities available for sale(3): | ||||||||||||||||||||
Asset Liability Management securities: | ||||||||||||||||||||
U.S. Treasury | — | 3,252 | — | — | 3,252 | |||||||||||||||
Residential mortgage-backed securities: | ||||||||||||||||||||
U.S government and government-sponsored agencies | — | 9,208 | — | — | 9,208 | |||||||||||||||
Privately issued | — | 694 | — | — | 694 | |||||||||||||||
Privately issued - commercial mortgage-backed securities | — | 822 | — | — | 822 | |||||||||||||||
Collateralized loan obligations | — | 1,905 | — | — | 1,905 | |||||||||||||||
Other | — | 5 | — | — | 5 | |||||||||||||||
Other debt securities: | ||||||||||||||||||||
Direct bank purchase bonds | — | — | 1,503 | — | 1,503 | |||||||||||||||
Other | — | 68 | 96 | — | 164 | |||||||||||||||
Equity securities | 10 | — | — | — | 10 | |||||||||||||||
Total securities available for sale | 10 | 15,954 | 1,599 | — | 17,563 | |||||||||||||||
Other assets: | ||||||||||||||||||||
Mortgage servicing rights(2) | — | — | 64 | — | 64 | |||||||||||||||
Interest rate hedging contracts(3) | — | 2 | — | — | 2 | |||||||||||||||
Other derivative contracts(2) | — | 2 | 1 | (2 | ) | 1 | ||||||||||||||
Total other assets | — | 4 | 65 | (2 | ) | 67 | ||||||||||||||
Total assets | $ | 212 | $ | 26,789 | $ | 1,803 | $ | (607 | ) | $ | 28,197 | |||||||||
Percentage of total | 1 | % | 95 | % | 6 | % | (2 | )% | 100 | % | ||||||||||
Percentage of total Company assets | — | 17 | 1 | — | 18 | |||||||||||||||
Liabilities | ||||||||||||||||||||
Trading account liabilities(2): | ||||||||||||||||||||
Securities sold, not yet purchased: | ||||||||||||||||||||
U.S. Treasury | $ | — | $ | 2,709 | $ | — | $ | — | $ | 2,709 | ||||||||||
Other sovereign government obligations | — | 7 | — | — | 7 | |||||||||||||||
Corporate bonds | — | 348 | — | — | 348 | |||||||||||||||
Equities | 35 | — | — | — | 35 | |||||||||||||||
Trading derivatives: | ||||||||||||||||||||
Interest rate derivative contracts | 3 | 643 | — | (382 | ) | 264 | ||||||||||||||
Commodity derivative contracts | — | 33 | — | (20 | ) | 13 | ||||||||||||||
Foreign exchange derivative contracts | 1 | 144 | 1 | (66 | ) | 80 | ||||||||||||||
Equity derivative contracts | 7 | — | 137 | — | 144 | |||||||||||||||
Total trading account liabilities | 46 | 3,884 | 138 | (468 | ) | 3,600 | ||||||||||||||
Other liabilities: | ||||||||||||||||||||
FDIC clawback liability(2) | — | — | 113 | — | 113 | |||||||||||||||
Interest rate hedging contracts(3) | — | 149 | — | (149 | ) | — | ||||||||||||||
Other derivative contracts(2) | — | 3 | 6 | (3 | ) | 6 | ||||||||||||||
Total other liabilities | — | 152 | 119 | (152 | ) | 119 | ||||||||||||||
Total liabilities | $ | 46 | $ | 4,036 | $ | 257 | $ | (620 | ) | $ | 3,719 | |||||||||
Percentage of total | 1 | % | 109 | % | 7 | % | (17 | )% | 100 | % | ||||||||||
Percentage of total Company liabilities | — | 3 | — | — | 3 |
(1) | Amounts represent the impact of legally enforceable master netting agreements between the same counterparties that allow the Company to net settle all contracts. |
(2) | Fair value through net income. |
(3) | Fair value through other comprehensive income. |
73
Note 8—Fair Value Measurement and Fair Value of Financial Instruments (Continued)
The following tables present a reconciliation of the assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2018 and 2017. Level 3 available for sale securities at September 30, 2018 and 2017 primarily consist of direct bank purchase bonds.
For the Three Months Ended | ||||||||||||||||||||||||||||||||||||||||
September 30, 2018 | September 30, 2017 | |||||||||||||||||||||||||||||||||||||||
(Dollars in millions) | Trading Account Assets | Securities Available for Sale | Other Assets | Trading Account Liabilities | Other Liabilities | Trading Account Assets | Securities Available for Sale | Other Assets | Trading Account Liabilities | Other Liabilities | ||||||||||||||||||||||||||||||
Asset (liability) balance, beginning of period | $ | 50 | $ | 1,495 | $ | 149 | $ | (49 | ) | $ | (119 | ) | $ | 171 | $ | 1,572 | $ | 49 | $ | (169 | ) | $ | (118 | ) | ||||||||||||||||
Total gains (losses) - realized/unrealized: | ||||||||||||||||||||||||||||||||||||||||
Included in income before taxes | 6 | — | 2 | (7 | ) | — | 17 | — | (1 | ) | (17 | ) | (1 | ) | ||||||||||||||||||||||||||
Included in other comprehensive income | — | (1 | ) | — | — | — | — | 3 | — | — | — | |||||||||||||||||||||||||||||
Purchases/additions | — | 52 | 25 | — | — | — | 4 | 9 | — | — | ||||||||||||||||||||||||||||||
Settlements | (13 | ) | (121 | ) | — | 13 | — | (24 | ) | (10 | ) | — | 24 | — | ||||||||||||||||||||||||||
Asset (liability) balance, end of period | $ | 43 | $ | 1,425 | $ | 176 | $ | (43 | ) | $ | (119 | ) | $ | 164 | $ | 1,569 | $ | 57 | $ | (162 | ) | $ | (119 | ) | ||||||||||||||||
Changes in unrealized gains (losses) included in income before taxes for assets and liabilities still held at end of period | $ | 6 | $ | — | $ | 2 | $ | (7 | ) | $ | — | $ | 17 | $ | — | $ | (1 | ) | $ | (17 | ) | $ | (1 | ) |
74
Note 8—Fair Value Measurement and Fair Value of Financial Instruments (Continued)
For the Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||
September 30, 2018 | September 30, 2017 | |||||||||||||||||||||||||||||||||||||||
(Dollars in millions) | Trading Account Assets | Securities Available for Sale | Other Assets | Trading Account Liabilities | Other Liabilities | Trading Account Assets | Securities Available for Sale | Other Assets | Trading Account Liabilities | Other Liabilities | ||||||||||||||||||||||||||||||
Asset (liability) balance, beginning of period | $ | 139 | $ | 1,600 | $ | 65 | $ | (138 | ) | $ | (119 | ) | $ | 168 | $ | 1,638 | $ | 24 | $ | (166 | ) | $ | (121 | ) | ||||||||||||||||
Total gains (losses) - realized/unrealized): | ||||||||||||||||||||||||||||||||||||||||
Included in income before taxes | — | — | 11 | (1 | ) | — | 58 | — | (3 | ) | (57 | ) | 2 | |||||||||||||||||||||||||||
Included in other comprehensive income | — | (18 | ) | — | — | — | — | 15 | — | — | — | |||||||||||||||||||||||||||||
Purchases/additions | — | 125 | 100 | — | — | — | 6 | 36 | — | — | ||||||||||||||||||||||||||||||
Settlements | (96 | ) | (282 | ) | — | 96 | — | (62 | ) | (90 | ) | — | 61 | — | ||||||||||||||||||||||||||
Asset (liability) balance, end of period | $ | 43 | $ | 1,425 | $ | 176 | $ | (43 | ) | $ | (119 | ) | $ | 164 | $ | 1,569 | $ | 57 | $ | (162 | ) | $ | (119 | ) | ||||||||||||||||
Changes in unrealized gains (losses) included in income before taxes for assets and liabilities still held at end of period | $ | — | $ | — | $ | 11 | $ | (1 | ) | $ | — | $ | 58 | $ | — | $ | (3 | ) | $ | (57 | ) | $ | 2 |
The following table presents information about significant unobservable inputs related to the Company’s significant Level 3 assets and liabilities at September 30, 2018.
September 30, 2018 | ||||||||||||||
(Dollars in millions) | Level 3 Fair Value | Valuation Technique | Significant Unobservable Input(s) | Range of Inputs | Weighted Average | |||||||||
Securities available for sale: | ||||||||||||||
Direct bank purchase bonds | $ | 1,281 | Return on equity | Market-required return on capital | 8.0 - 10.0 | % | 9.5 | % | ||||||
Probability of default | 0.0 - 25.0 | 0.3 | ||||||||||||
Loss severity | 10.0 - 60.0 | 24.3 |
The direct bank purchase bonds generally use a return on equity valuation technique. This technique uses significant unobservable inputs such as market-required return on capital, probability of default and loss severity. Increases (decreases) in any of these inputs in isolation would result in a lower (higher) fair value measurement.
75
Note 8—Fair Value Measurement and Fair Value of Financial Instruments (Continued)
Fair Value Measurement on a Nonrecurring Basis
Certain assets may be measured at fair value in certain situations, such as impairment, and these measurements are referred to as nonrecurring. For assets measured at fair value on a nonrecurring basis during the three and nine months ended September 30, 2018 and 2017 that were still held on the consolidated balance sheet as of the respective periods ended, the following tables present the fair value of such assets by the level of valuation assumptions used to determine each fair value adjustment.
September 30, 2018 | For the Three Months Ended September 30, 2018 | For the Nine Months Ended September 30, 2018 | ||||||||||||||||||||||
(Dollars in millions) | Fair Value | Level 1 | Level 2 | Level 3 | Gains (Losses) | Gains (Losses) | ||||||||||||||||||
Loans held for investment | ||||||||||||||||||||||||
Impaired loans | $ | 183 | $ | — | $ | — | $ | 183 | $ | (59 | ) | $ | (73 | ) | ||||||||||
Other assets | ||||||||||||||||||||||||
Software | — | — | — | — | (1 | ) | (3 | ) | ||||||||||||||||
Private equity investments | 10 | — | — | 10 | — | (2 | ) | |||||||||||||||||
Renewable energy investment | 2 | — | — | 2 | — | (2 | ) | |||||||||||||||||
Consolidated LIHC VIE | 48 | — | — | 48 | — | (8 | ) | |||||||||||||||||
Total | $ | 243 | $ | — | $ | — | $ | 243 | $ | (60 | ) | $ | (88 | ) |
September 30, 2017 | For the Three Months Ended September 30, 2017 | For the Nine Months Ended September 30, 2017 | ||||||||||||||||||||||
(Dollars in millions) | Fair Value | Level 1 | Level 2 | Level 3 | Gains (Losses) | Gains (Losses) | ||||||||||||||||||
Loans held for investment | ||||||||||||||||||||||||
Impaired loans | $ | 97 | $ | — | $ | — | $ | 97 | $ | (21 | ) | $ | (42 | ) | ||||||||||
Other assets | ||||||||||||||||||||||||
Software | — | — | — | — | (1 | ) | (4 | ) | ||||||||||||||||
Loans held for sale | 7 | — | — | 7 | (1 | ) | (3 | ) | ||||||||||||||||
Renewable energy investment | — | — | — | — | — | 2 | ||||||||||||||||||
Consolidated LIHC VIE | 81 | — | — | 81 | (3 | ) | (11 | ) | ||||||||||||||||
Total | $ | 185 | $ | — | $ | — | $ | 185 | $ | (26 | ) | $ | (58 | ) |
76
Note 8—Fair Value Measurement and Fair Value of Financial Instruments (Continued)
Fair Value of Financial Instruments Disclosures
The tables below present the carrying amount and estimated fair value of certain financial instruments, all of which are accounted for at amortized cost, classified by valuation hierarchy level at September 30, 2018 and December 31, 2017.
September 30, 2018 | ||||||||||||||||||||
(Dollars in millions) | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 4,192 | $ | 4,192 | $ | 4,192 | $ | — | $ | — | ||||||||||
Securities borrowed or purchased under resale agreements | 21,265 | 21,262 | — | 21,262 | — | |||||||||||||||
Securities held to maturity | 11,320 | 10,972 | — | 10,972 | — | |||||||||||||||
Loans held for investment(1) | 81,765 | 81,445 | — | — | 81,445 | |||||||||||||||
Other assets | 18 | 18 | 18 | — | — | |||||||||||||||
Liabilities | ||||||||||||||||||||
Time deposits | $ | 9,957 | $ | 9,899 | $ | — | $ | 9,899 | $ | — | ||||||||||
Securities loaned or sold under repurchase agreements | 27,032 | 27,030 | — | 27,030 | — | |||||||||||||||
Commercial paper and other short-term borrowings | 8,309 | 8,309 | — | 8,309 | — | |||||||||||||||
Long-term debt | 12,796 | 12,764 | — | 12,764 | — | |||||||||||||||
Off-Balance Sheet Instruments | ||||||||||||||||||||
Commitments to extend credit and standby and commercial letters of credit | $ | 102 | $ | 230 | $ | — | $ | — | $ | 230 |
(1) | Excludes lease financing. The carrying amount is net of the allowance for loan losses. |
December 31, 2017 | ||||||||||||||||||||
(Dollars in millions) | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 3,392 | $ | 3,392 | $ | 3,392 | $ | — | $ | — | ||||||||||
Securities borrowed or purchased under resale agreements | 20,894 | 20,894 | ��� | 20,894 | — | |||||||||||||||
Securities held to maturity | 9,885 | 9,799 | — | 9,799 | — | |||||||||||||||
Loans held for investment(1) | 78,023 | 79,051 | — | — | 79,051 | |||||||||||||||
Liabilities | ||||||||||||||||||||
Deposits | $ | 84,787 | $ | 84,743 | $ | — | $ | 84,743 | $ | — | ||||||||||
Securities loaned or sold under repurchase agreements | 26,437 | 26,437 | — | 26,437 | — | |||||||||||||||
Commercial paper and other short-term borrowings | 7,066 | 7,066 | — | 7,066 | — | |||||||||||||||
Long-term debt | 12,162 | 12,162 | — | 12,162 | — | |||||||||||||||
Off-Balance Sheet Instruments | ||||||||||||||||||||
Commitments to extend credit and standby and commercial letters of credit | $ | 174 | $ | 174 | $ | — | $ | — | $ | 174 |
(1) | Excludes lease financing. The carrying amount is net of the allowance for loan losses. |
77
Note 9—Derivative Instruments and Other Financial Instruments Used For Hedging
The Company enters into certain derivative and other financial instruments primarily to assist customers with their risk management objectives and to manage the Company’s exposure to interest rate risk. When entering into derivatives on behalf of customers, the Company generally acts as a financial intermediary by offsetting a significant portion of the market risk for these derivatives with third parties. The Company may also enter into derivatives for other risk management purposes. All derivative instruments are recognized as assets or liabilities on the consolidated balance sheets at fair value.
Counterparty credit risk is inherent in derivative instruments. In order to reduce its exposure to counterparty credit risk, the Company utilizes credit approvals, limits, monitoring procedures and master netting and credit support annex agreements. Additionally, the Company considers counterparty credit quality and the creditworthiness of the Company in estimating the fair value of derivative instruments.
The table below presents the notional amounts and fair value amounts of the Company's derivative instruments reported on the consolidated balance sheets, segregated between derivative instruments designated and qualifying as hedging instruments and derivative instruments not designated as hedging instruments at September 30, 2018 and December 31, 2017. Asset and liability values are presented gross, excluding the impact of legally enforceable master netting and credit support annex agreements. The fair value of asset and liability derivatives designated and qualifying as hedging instruments and derivatives designated as other risk management are included in other assets and other liabilities, respectively. The fair value of asset and liability trading derivatives are included in trading account assets and trading account liabilities, respectively.
September 30, 2018 | December 31, 2017 | |||||||||||||||||||||||
Fair Value | Fair Value | |||||||||||||||||||||||
(Dollars in millions) | Notional Amount | Asset Derivatives | Liability Derivatives | Notional Amount | Asset Derivatives | Liability Derivatives | ||||||||||||||||||
Derivative instruments | ||||||||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||||||||
Interest rate contracts | $ | 179 | $ | 4 | $ | — | $ | 6,998 | $ | 2 | $ | 149 | ||||||||||||
Fair value hedges: | ||||||||||||||||||||||||
Interest rate contracts | — | — | — | 500 | — | — | ||||||||||||||||||
Not designated as hedging instruments: | ||||||||||||||||||||||||
Trading: | ||||||||||||||||||||||||
Interest rate contracts | 120,613 | 454 | 630 | 132,214 | 878 | 646 | ||||||||||||||||||
Commodity contracts | 453 | 42 | 33 | 1,244 | 50 | 33 | ||||||||||||||||||
Foreign exchange contracts | 8,099 | 227 | 128 | 7,053 | 250 | 146 | ||||||||||||||||||
Equity contracts | 503 | 44 | 47 | 1,496 | 139 | 144 | ||||||||||||||||||
Other contracts | 39 | — | — | 4 | — | — | ||||||||||||||||||
Total Trading | 129,707 | 767 | 838 | 142,011 | 1,317 | 969 | ||||||||||||||||||
Other risk management | 1,232 | 1 | 25 | 1,345 | 3 | 9 | ||||||||||||||||||
Total derivative instruments | $ | 131,118 | $ | 772 | $ | 863 | $ | 150,854 | $ | 1,322 | $ | 1,127 |
We recognized net losses of $28 million and $26 million on other risk management derivatives for the three and nine months ended September 30, 2018, respectively, and net losses of $3 million and $9 million for the three and nine months ended September 30, 2017, respectively, which are included in other noninterest income.
Derivatives Designated and Qualifying as Hedging Instruments
The Company uses interest rate derivatives to manage the financial impact on the Company from changes in market interest rates. These instruments are used to manage interest rate risk relating to specified groups of assets and liabilities, primarily LIBOR-based commercial loans and debt issuances. Derivatives that qualify for hedge accounting are designated as either fair value or cash flow hedges.
78
Note 9—Derivative Instruments and Other Financial Instruments Used For Hedging (Continued)
Cash Flow Hedges
From time to time, the Company uses interest rate swaps to hedge the risk of changes in cash flows attributable to changes in the designated benchmark interest rate on LIBOR indexed loans, and to a lesser extent, to hedge interest rate risk on rollover debt.
The Company used interest rate swaps with an aggregate notional amount of $179 million at September 30, 2018 to hedge the risk of changes in cash flows attributable to changes in the designated benchmark interest rate on LIBOR indexed short-term borrowings. At September 30, 2018, the weighted average remaining life of the active cash flow hedges was 1.9 years.
For cash flow hedges, the effective portion of the gain or loss on the hedging instruments is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged cash flows are recognized in net interest income. Gains and losses representing hedge ineffectiveness are recognized in noninterest expense in the period in which they arise. At September 30, 2018, the Company expects to reclassify approximately $81 million of losses from AOCI as a reduction to net interest income during the twelve months ending September 30, 2019. This amount could differ from amounts actually realized due to changes in interest rates, hedge terminations and the addition of other hedges subsequent to September 30, 2018.
The following tables present the amount and location of the net gains and losses recorded in the Company’s consolidated statements of income and changes in stockholders' equity for derivatives designated as cash flow hedges for the three and nine months ended September 30, 2018 and 2017.
Gains (Losses) Recognized in OCI (Effective Portion) | Gains (Losses) Reclassified from AOCI into Income (Effective Portion) | (Gains) Losses Recognized in Income (Ineffective Portion) | ||||||||||||||||||||||||||
For the Three Months Ended September 30, | For the Three Months Ended September 30, | For the Three Months Ended September 30, | ||||||||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | Location | 2018 | 2017 | Location | 2018 | 2017 | ||||||||||||||||||||
Derivatives in cash flow hedging relationships | ||||||||||||||||||||||||||||
Interest income | $ | (11 | ) | $ | 11 | |||||||||||||||||||||||
Interest rate contracts | $ | — | $ | 6 | Interest expense | — | — | Noninterest expense | $ | — | $ | — | ||||||||||||||||
Total | $ | — | $ | 6 | $ | (11 | ) | $ | 11 | $ | — | $ | — |
Gains (Losses) Recognized in OCI (Effective Portion) | Gains (Losses) Reclassified from AOCI into Income (Effective Portion) | Gains (Losses) Recognized in Income (Ineffective Portion) | ||||||||||||||||||||||||||
For the Nine Months Ended September 30, | For the Nine Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | Location | 2018 | 2017 | Location | 2018 | 2017 | ||||||||||||||||||||
Derivatives in cash flow hedging relationships | ||||||||||||||||||||||||||||
Interest income | $ | (19 | ) | $ | 60 | |||||||||||||||||||||||
Interest rate contracts | $ | (98 | ) | $ | 42 | Interest expense | — | — | Noninterest expense | $ | (1 | ) | $ | 3 | ||||||||||||||
Total | $ | (98 | ) | $ | 42 | $ | (19 | ) | $ | 60 | $ | (1 | ) | $ | 3 |
Fair Value Hedges
The Company engages in an interest rate hedging strategy in which one or more interest rate swaps are associated with a specified interest bearing liability, in order to convert the liability from a fixed rate to a floating rate instrument. This strategy mitigates the changes in fair value of the hedged liability caused by changes in the designated benchmark interest rate, LIBOR.
79
Note 9—Derivative Instruments and Other Financial Instruments Used For Hedging (Continued)
For fair value hedges, any ineffectiveness is recognized in noninterest expense in the period in which it arises. The change in the fair value of the hedged item and the hedging instrument, to the extent completely effective, offset with no impact on earnings.
The following tables present the gains (losses) on the Company's fair value hedges and hedged item for the three and nine months ended September 30, 2018 and 2017.
For the Three Months Ended September 30, 2018 | For the Nine Months Ended September 30, 2018 | |||||||||||||||||||||||||
(Dollars in millions) | Derivative | Hedged Item | Hedge Ineffectiveness | Derivative | Hedged Item | Hedge Ineffectiveness | ||||||||||||||||||||
Interest rate risk on long-term debt | $ | — | $ | — | $ | — | $ | (2 | ) | $ | 2 | $ | — | |||||||||||||
Total | $ | — | $ | — | $ | — | $ | (2 | ) | $ | 2 | $ | — |
For the Three Months Ended September 30, 2017 | For the Nine Months Ended September 30, 2017 | |||||||||||||||||||||||||
(Dollars in millions) | Derivative | Hedged Item | Hedge Ineffectiveness | Derivative | Hedged Item | Hedge Ineffectiveness | ||||||||||||||||||||
Interest rate risk on long-term debt | $ | (1 | ) | $ | 1 | $ | — | $ | (2 | ) | $ | 1 | $ | (1 | ) | |||||||||||
Total | $ | (1 | ) | $ | 1 | $ | — | $ | (2 | ) | $ | 1 | $ | (1 | ) |
Derivatives Not Designated as Hedging Instruments
Trading Derivatives
Derivative instruments classified as trading are primarily derivatives entered into as an accommodation for customers. Trading derivatives are included in trading assets or trading liabilities with changes in fair value reflected in income from trading account activities. The majority of the Company's derivative transactions for customers were essentially offset by contracts with third parties that reduce or eliminate market risk exposures.
The following table presents the amount of the net gains and losses for derivative instruments classified as trading reported in the consolidated statements of income under the heading trading account activities for the three and nine months ended September 30, 2018 and 2017.
Gains (Losses) Recognized in Income on Trading Derivatives | Gains (Losses) Recognized in Income on Trading Derivatives | |||||||||||||||
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
(Dollars in millions) | September 30, 2018 | September 30, 2017 | September 30, 2018 | September 30, 2017 | ||||||||||||
Trading derivatives | ||||||||||||||||
Interest rate contracts | $ | 64 | $ | (11 | ) | $ | 194 | $ | (69 | ) | ||||||
Equity contracts | 5 | — | 23 | — | ||||||||||||
Foreign exchange contracts | 11 | 11 | 32 | 32 | ||||||||||||
Commodity contracts | — | — | — | 1 | ||||||||||||
Total | $ | 80 | $ | — | $ | 249 | $ | (36 | ) |
Offsetting Financial Assets and Liabilities
The Company primarily enters into derivative contracts with counterparties utilizing standard International Swaps and Derivatives Association Master Agreements and Credit Support Annex Agreements. These agreements generally establish the terms and conditions of the transactions, including a legal right to set-off amounts payable and receivable between the Company and a counterparty, regardless of whether or not such amounts have matured or have contingency features. For additional information related to offsetting of financial assets and liabilities, see Note 5 "Securities Financing Arrangements".
80
Note 10—Accumulated Other Comprehensive Income
The following tables present the change in each of the components of accumulated other comprehensive income and the related tax effect of the change allocated to each component for the three and nine months ended September 30, 2018 and 2017.
(Dollars in millions) | Before Tax Amount | Tax Effect | Net of Tax | |||||||||
For the Three Months Ended September 30, 2018 | ||||||||||||
Cash flow hedge activities: | ||||||||||||
Reclassification adjustment for net (gains) losses on hedges included in interest income for loans and interest expense on long-term debt | $ | 11 | $ | (3 | ) | $ | 8 | |||||
Net change | 11 | (3 | ) | 8 | ||||||||
Securities: | ||||||||||||
Unrealized holding gains (losses) arising during the period on securities available for sale | (70 | ) | 19 | (51 | ) | |||||||
Reclassification adjustment for net (gains) losses on securities available for sale included in securities gains, net | (1 | ) | — | (1 | ) | |||||||
Amortization of net unrealized (gains) losses on held to maturity securities | 8 | (2 | ) | 6 | ||||||||
Net change | (63 | ) | 17 | (46 | ) | |||||||
Pension and other benefits: | ||||||||||||
Amortization of prior service credit(1) | (10 | ) | 2 | (8 | ) | |||||||
Recognized net actuarial (gain) loss(1) | 24 | (6 | ) | 18 | ||||||||
Net change | 14 | (4 | ) | 10 | ||||||||
Net change in AOCI | $ | (38 | ) | $ | 10 | $ | (28 | ) |
(1) | These amounts are included in the computation of net periodic pension cost. For additional information, see Note 11 "Employee Pension and Other Postretirement Benefits". |
(Dollars in millions) | Before Tax Amount | Tax Effect | Net of Tax | |||||||||
For the Three Months Ended September 30, 2017 | ||||||||||||
Cash flow hedge activities: | ||||||||||||
Unrealized net gains (losses) on hedges arising during the period | $ | 6 | $ | (2 | ) | $ | 4 | |||||
Reclassification adjustment for net (gains) losses on hedges included in interest income for loans and interest expense on long-term debt | (11 | ) | 4 | (7 | ) | |||||||
Net change | (5 | ) | 2 | (3 | ) | |||||||
Securities: | ||||||||||||
Unrealized holding gains (losses) arising during the period on securities available for sale | 32 | (14 | ) | 18 | ||||||||
Reclassification adjustment for net (gains) losses on securities available for sale included in securities gains, net | (6 | ) | 2 | (4 | ) | |||||||
Less: accretion of fair value adjustment on securities available for sale | (1 | ) | — | (1 | ) | |||||||
Amortization of net unrealized (gains) losses on held to maturity securities | 6 | (2 | ) | 4 | ||||||||
Net change | 31 | (14 | ) | 17 | ||||||||
Foreign currency translation adjustment | 7 | (3 | ) | 4 | ||||||||
Pension and other benefits: | ||||||||||||
Amortization of prior service credit(1) | (12 | ) | 5 | (7 | ) | |||||||
Recognized net actuarial (gain) loss(1) | 21 | (7 | ) | 14 | ||||||||
Net change | 9 | (2 | ) | 7 | ||||||||
Other | 1 | — | 1 | |||||||||
Net change in AOCI | $ | 43 | $ | (17 | ) | $ | 26 |
(1) | These amounts are included in the computation of net periodic pension cost. For additional information, see Note 11 "Employee Pension and Other Postretirement Benefits". |
81
(Dollars in millions) | Before Tax Amount | Tax Effect | Net of Tax | |||||||||
For the Nine Months Ended September 30, 2018 | ||||||||||||
Cash flow hedge activities: | ||||||||||||
Unrealized net gains (losses) on hedges arising during the period | $ | (98 | ) | $ | 26 | $ | (72 | ) | ||||
Reclassification adjustment for net (gains) losses on hedges included in interest income for loans and interest expense on long-term debt | 19 | (5 | ) | 14 | ||||||||
Net change | (79 | ) | 21 | (58 | ) | |||||||
Securities: | ||||||||||||
Unrealized holding gains (losses) arising during the period on securities available for sale | (392 | ) | 103 | (289 | ) | |||||||
Reclassification adjustment for net (gains) losses on securities available for sale included in securities gains, net | (4 | ) | 1 | (3 | ) | |||||||
Amortization of net unrealized (gains) losses on held to maturity securities | 20 | (5 | ) | 15 | ||||||||
Net change | (376 | ) | 99 | (277 | ) | |||||||
Foreign currency translation adjustment | (3 | ) | 1 | (2 | ) | |||||||
Pension and other benefits: | ||||||||||||
Amortization of prior service credit(1) | (31 | ) | 8 | (23 | ) | |||||||
Recognized net actuarial (gain) loss(1) | 72 | (19 | ) | 53 | ||||||||
Net change | 41 | (11 | ) | 30 | ||||||||
Other | (1 | ) | — | (1 | ) | |||||||
Net change in AOCI | $ | (418 | ) | $ | 110 | $ | (308 | ) |
(1) | These amounts are included in the computation of net periodic pension cost. For additional information, see Note 11 "Employee Pension and Other Postretirement Benefits". |
(Dollars in millions) | Before Tax Amount | Tax Effect | Net of Tax | |||||||||
For the Nine Months Ended September 30, 2017 | ||||||||||||
Cash flow hedge activities: | ||||||||||||
Unrealized net gains (losses) on hedges arising during the period | $ | 42 | $ | (16 | ) | $ | 26 | |||||
Reclassification adjustment for net (gains) losses on hedges included in interest income for loans and interest expense on long-term debt | (60 | ) | 23 | (37 | ) | |||||||
Net change | (18 | ) | 7 | (11 | ) | |||||||
Securities: | ||||||||||||
Unrealized holding gains (losses) arising during the period on securities available for sale | 129 | (52 | ) | 77 | ||||||||
Reclassification adjustment for net (gains) losses on securities available for sale included in securities gains, net | (15 | ) | 6 | (9 | ) | |||||||
Less: accretion of fair value adjustment on securities available for sale | (1 | ) | — | (1 | ) | |||||||
Amortization of net unrealized (gains) losses on held to maturity securities | 15 | (6 | ) | 9 | ||||||||
Net change | 128 | (52 | ) | 76 | ||||||||
Foreign currency translation adjustment | 12 | (5 | ) | 7 | ||||||||
Pension and other benefits: | ||||||||||||
Amortization of prior service credit (1) | (36 | ) | 14 | (22 | ) | |||||||
Recognized net actuarial (gain) loss(1) | 67 | (25 | ) | 42 | ||||||||
Net change | 31 | (11 | ) | 20 | ||||||||
Other | 1 | — | 1 | |||||||||
Net change in AOCI | $ | 154 | $ | (61 | ) | $ | 93 |
(1) | These amounts are included in the computation of net periodic pension cost. For additional information, see Note 11 "Employee Pension and Other Postretirement Benefits". |
82
The following tables present the change in accumulated other comprehensive loss balances.
For the Three Months Ended September 30, 2017 and 2018: | ||||||||||||||||||||||||
Net Unrealized Gains (Losses) on Cash Flow Hedges | Net Unrealized Gains (Losses) on Securities | Foreign Currency Translation Adjustment | Pension and Other Postretirement Benefits Adjustment | Other | Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||
Balance, June 30, 2017 | $ | (85 | ) | $ | (149 | ) | $ | (19 | ) | $ | (576 | ) | $ | — | $ | (829 | ) | |||||||
Other comprehensive income (loss) before reclassifications | 4 | 18 | 4 | — | — | 26 | ||||||||||||||||||
Amounts reclassified from AOCI | (7 | ) | (1 | ) | — | 7 | 1 | — | ||||||||||||||||
Balance, September 30, 2017 | $ | (88 | ) | $ | (132 | ) | $ | (15 | ) | $ | (569 | ) | $ | 1 | $ | (803 | ) | |||||||
Balance, June 30, 2018 | $ | (240 | ) | $ | (464 | ) | $ | — | $ | (580 | ) | $ | (1 | ) | $ | (1,285 | ) | |||||||
Other comprehensive income (loss) before reclassifications | — | (51 | ) | — | — | — | (51 | ) | ||||||||||||||||
Amounts reclassified from AOCI | 8 | 5 | — | 10 | — | 23 | ||||||||||||||||||
Balance, September 30, 2018 | $ | (232 | ) | $ | (510 | ) | $ | — | $ | (570 | ) | $ | (1 | ) | $ | (1,313 | ) |
For the Nine Months Ended September 30, 2017 and 2018: | ||||||||||||||||||||||||
Net Unrealized Gains (Losses) on Cash Flow Hedges | Net Unrealized Gains (Losses) on Securities | Foreign Currency Translation Adjustment | Pension and Other Postretirement Benefits Adjustment | Other | Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||
Balance, December 31, 2016 | $ | (77 | ) | $ | (208 | ) | $ | (22 | ) | $ | (589 | ) | $ | — | $ | (896 | ) | |||||||
Other comprehensive income (loss) before reclassifications | 26 | 77 | 7 | — | — | 110 | ||||||||||||||||||
Amounts reclassified from AOCI | (37 | ) | (1 | ) | — | 20 | 1 | (17 | ) | |||||||||||||||
Balance, September 30, 2017 | $ | (88 | ) | $ | (132 | ) | $ | (15 | ) | $ | (569 | ) | $ | 1 | $ | (803 | ) | |||||||
Balance, December 31, 2017 | $ | (174 | ) | $ | (233 | ) | $ | (19 | ) | $ | (600 | ) | $ | — | $ | (1,026 | ) | |||||||
Other comprehensive income (loss) before reclassifications | (72 | ) | (289 | ) | (2 | ) | — | (1 | ) | (364 | ) | |||||||||||||
Amounts reclassified from AOCI | 14 | 12 | — | 30 | — | 56 | ||||||||||||||||||
Transfer to additional paid-in capital(1) | — | — | 21 | — | — | 21 | ||||||||||||||||||
Balance, September 30, 2018 | $ | (232 | ) | $ | (510 | ) | $ | — | $ | (570 | ) | $ | (1 | ) | $ | (1,313 | ) |
(1) | Transfer of accumulated foreign currency translation to additional paid-in capital resulted from the transfer of the Company's investment in a Canadian entity to MUFG Bank, Ltd. during the first quarter of 2018. |
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Note 11—Employee Pension and Other Postretirement Benefits
The following tables summarize the components of net periodic benefit cost for the three and nine months ended September 30, 2018 and 2017. The components of net periodic benefit cost other than the service cost component are included in other noninterest expense in the income statement.
Pension Benefits | Other Postretirement Benefits | Superannuation, SERP and ESBP | ||||||||||||||||||||||
For the Three Months Ended September 30, | For the Three Months Ended September 30, | For the Three Months Ended September 30, | ||||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||
Components of net periodic benefit cost: | ||||||||||||||||||||||||
Service cost | $ | 21 | $ | 18 | $ | — | $ | 1 | $ | — | $ | — | ||||||||||||
Interest cost | 25 | 25 | 2 | 2 | 1 | 1 | ||||||||||||||||||
Expected return on plan assets | (67 | ) | (64 | ) | (6 | ) | (5 | ) | — | — | ||||||||||||||
Amortization of prior service credit | (7 | ) | (7 | ) | (3 | ) | (5 | ) | — | — | ||||||||||||||
Recognized net actuarial loss | 21 | 19 | 2 | 2 | 1 | — | ||||||||||||||||||
Total net periodic benefit (income) cost | $ | (7 | ) | $ | (9 | ) | $ | (5 | ) | $ | (5 | ) | $ | 2 | $ | 1 |
Pension Benefits | Other Postretirement Benefits | Superannuation, SERP and ESBP | ||||||||||||||||||||||
For the Nine Months Ended September 30, | For the Nine Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||
Components of net periodic benefit cost: | ||||||||||||||||||||||||
Service cost | $ | 60 | $ | 53 | $ | 3 | $ | 4 | $ | — | $ | — | ||||||||||||
Interest cost | 75 | 75 | 6 | 6 | 2 | 2 | ||||||||||||||||||
Expected return on plan assets | (201 | ) | (191 | ) | (16 | ) | (14 | ) | — | — | ||||||||||||||
Amortization of prior service credit | (20 | ) | (20 | ) | (11 | ) | (16 | ) | — | — | ||||||||||||||
Recognized net actuarial loss | 65 | 59 | 4 | 6 | 3 | 2 | ||||||||||||||||||
Total net periodic benefit (income) cost | $ | (21 | ) | $ | (24 | ) | $ | (14 | ) | $ | (14 | ) | $ | 5 | $ | 4 |
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Note 12—Commitments, Contingencies and Guarantees
The following table summarizes the Company's commitments.
(Dollars in millions) | September 30, 2018 | |||
Commitments to extend credit | $ | 34,125 | ||
Issued standby and commercial letters of credit | 4,858 | |||
Commitments to enter into forward-starting resale agreements | 1,300 | |||
Other commitments | 493 |
Commitments to extend credit are legally binding agreements to lend to a customer provided there are no violations of any condition established in the contract. Commitments have fixed expiration dates or other termination clauses and may require maintenance of compensatory balances. Since many of the commitments to extend credit may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements.
Standby and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit are generally contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party, while commercial letters of credit are issued specifically to facilitate foreign or domestic trade transactions. The majority of these types of commitments have terms of 1 year or less. As of September 30, 2018, the carrying amount of the Company's standby and commercial letters of credit totaled $3 million. Estimated exposure to loss related to these commitments is covered by the allowance for losses on unfunded commitments. The carrying amounts of the standby and commercial letters of credit and the allowance for losses on unfunded credit commitments are included in other liabilities on the consolidated balance sheet.
The credit risk involved in issuing loan commitments and standby and commercial letters of credit is essentially the same as that involved in extending loans to customers and is represented by the contractual amount of these instruments. Collateral may be obtained based on management's credit assessment of the customer.
Other commitments include collateralized financing activities, commitments to fund principal investments, other securities, and residual value guarantees.
Principal investments include direct investments in private and public companies. The Company issues commitments to provide equity and mezzanine capital financing to private and public companies through direct investments. The timing of future cash requirements to fund such commitments is generally dependent on the investment cycle. This cycle, the period over which privately held companies are funded by private equity investors and ultimately sold, merged, or taken public through an initial offering, can vary based on overall market conditions as well as the nature and type of industry in which the companies operate.
The Company occasionally enters into financial guarantee contracts where a premium is received from another financial institution counterparty to guarantee a portion of the credit risk on interest rate swap contracts entered into between the financial institution and its customer. The Company becomes liable to pay the financial institution only if the financial institution is unable to collect amounts owed to them by their customer. As of September 30, 2018, there is no current exposure to loss under these contracts, and the maximum potential exposure to loss in the future was estimated at $35 million.
The Company is subject to various pending and threatened legal actions that arise in the normal course of business. The Company maintains liabilities for losses from legal actions that are recorded when they are determined to be both probable in their occurrence and can be reasonably estimated. Management believes the disposition of all claims currently pending, including potential losses from claims that may exceed the liabilities recorded, and claims for loss contingencies that are considered reasonably possible to occur, will not have a material effect, either individually or in the aggregate, on the Company's consolidated financial condition, results of operations or liquidity.
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Note 13—Business Segments
The Company has four reportable segments: Regional Bank, U.S. Wholesale & Investment Banking, Transaction Banking, and MUSA. The Company uses various management accounting methodologies to measure the performance of its segments. Unlike GAAP, there is no standardized or authoritative guidance for management accounting. Consequently, reported results are not necessarily comparable with those presented by other companies and they are not necessarily indicative of the results that would be reported by the business units if they were separate economic entities.
Methodologies that are applied to the measurement of segment profitability, which are enhanced from time to time, include a funds transfer pricing system, an activity-based costing methodology, other indirect costs and a methodology to allocate the provision for credit losses. In the second quarter of 2018, the Company began measuring the performance of its business segments by reporting revenues and expenses from products and services sold entirely within the business segment that manages the customer relationship. The Company previously applied a “market view” perspective in measuring the business segments, which reported revenues and expenses from products and services sold in both the business segment that provided the product and the business segment that managed the customer relationship. Prior period results have been revised to conform to the current period presentation.
The funds transfer pricing system assigns a cost of funds or a credit for funds to assets or liabilities based on their type, maturity or repricing characteristics between Corporate Treasury and the operating segments. A segment receives a credit from Corporate Treasury for its funding sources. Conversely, a segment is assigned a charge by Corporate Treasury to fund its assets. Certain indirect costs, such as operations and technology expense, are allocated to the segments based on an activity-based costing methodology. Other indirect costs, such as corporate overhead, are allocated to the segments based on internal surveys and metrics that serve as proxies for estimated usage. During the normal course of business, the Company occasionally changes or updates its management accounting methodologies or organizational structure. Certain non-bank subsidiaries, including MUSA, are reported based on their GAAP results.
Regional Bank
The Regional Bank provides banking products and services to individuals, businesses, and trust customers through five lines of business.
Consumer Banking serves consumers and small businesses through 345 full-service branches, digital channels, call centers, ATMs and alliances with other financial institutions. Products and services include checking and deposit accounts; residential mortgage loans; consumer loans; home equity lines of credit; credit cards; bill and loan payment services; and merchant services.
Commercial Banking provides commercial and asset-based loans to clients across a wide range of industries with annual revenues up to $1 billion. Through partnerships with other areas of the Bank, Commercial Banking clients also have access to non-credit products and services including global treasury management, capital markets solutions, foreign exchange, interest rate risk and commodity risk management products and services.
Real Estate Industries serves professional real estate investors and developers with products such as construction loans, commercial mortgages, bridge financing and unsecured financing. Property types supported include apartment, office, retail, industrial and single-family residential on the West Coast and in select metropolitan areas across the country. Real Estate Industries also makes tax credit investments in affordable housing projects through its Community Development Finance unit. Through partnerships with other areas of the bank, Real Estate Industries clients also have access to non-credit products and services including global treasury management, capital markets solutions, foreign exchange, interest rate risk and commodity risk management products and services.
Wealth Markets serves corporate, institutional, non-profit and individual clients. Capabilities include Wealth Planning / Trust & Estate Services; Investment Management through HighMark Capital Management, Inc., an SEC-registered investment advisory firm wholly-owned by the bank; Brokerage through UnionBanc
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Investment Services, LLC, an SEC-registered broker-dealer/investment advisory firm wholly-owned by the bank; and Private Wealth Management.
PurePoint Financial serves consumers through a national deposit platform offering savings accounts and CD products to customers through an online platform with services provided through a call center and a network of financial centers in New York, Florida, Illinois and Texas.
U.S. Wholesale & Investment Banking
U.S. Wholesale & Investment Banking delivers the full suite of MUAH products and services to large and mid-corporate customers. The segment employs an industry-focused strategy including dedicated coverage teams in General Industries, Power and Utilities, Oil and Gas, Telecom and Media, Technology, Healthcare and Nonprofit, Public Finance, and Financial Institutions (predominantly Insurance and Asset Managers). U.S. Wholesale & Investment Banking provides customers general corporate credit and structured credit services, including project finance, leasing and equipment finance, commercial finance, funds finance and securitizations. By working with the Company's other segments, U.S. Wholesale & Investment Banking offers its customers a range of noncredit services, which include global treasury management, capital market solutions, and various foreign exchange, interest rate risk and commodity risk management products.
Transaction Banking
Transaction Banking works alongside the Company's other segments to provide working capital management and asset servicing solutions, including deposits and treasury management, trade finance, and institutional trust and custody, to the Company's customers. The client base consists of financial institutions, corporations, government agencies, insurance companies, mutual funds, investment managers and non-profit organizations.
MUFG Securities Americas
MUSA is MUAH's broker-dealer subsidiary which engages in capital markets origination transactions, private placements, collateralized financings, securities borrowing and lending transactions, and domestic and foreign debt and equity securities transactions.
Other
"Other" includes the MUFG Fund Services segment, Markets segment, Japanese Corporate Banking segment and Corporate Treasury. MUFG Fund Services provides comprehensive investment fund administrative solutions. Markets provides risk management solutions, including foreign exchange, interest rate and energy risk management solutions. The Japanese Corporate Banking segment offers a range of credit, deposit, and investment management products and services to companies located primarily in the U.S. that are affiliated with companies headquartered in Japan. Corporate Treasury is responsible for ALM, wholesale funding and the ALM investment and derivatives hedging portfolios. These treasury management activities are carried out to manage the net interest rate and liquidity risks of the Company's balance sheet and to manage those risks within the guidelines established by ALCO. For additional discussion regarding these risk management activities, see Part I, Item 3. “Quantitative and Qualitative Disclosures About Market Risk” in this Form 10-Q.
Additionally, "Other" is comprised of certain corporate activities of the Company; the net impact of funds transfer pricing charges and credits allocated to the reportable segments; the residual costs of support groups; fees from affiliates and noninterest expenses associated with MUFG Bank, Ltd. U.S. branch banking operations; the unallocated allowance; goodwill, intangible assets, and the related amortization/accretion associated with the Company's privatization transaction; the elimination of the fully taxable-equivalent basis amount; the difference between the marginal tax rate and the consolidated effective tax rate; and FDIC covered assets.
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As of and for the Three Months Ended September 30, 2018: | ||||||||||||||||||||||||
(Dollars in millions) | Regional Bank | U.S. Wholesale & Investment Banking | Transaction Banking | MUSA | Other | MUFG Americas Holdings Corporation | ||||||||||||||||||
Results of operations | ||||||||||||||||||||||||
Net interest income | $ | 553 | $ | 104 | $ | 66 | $ | 52 | $ | 57 | $ | 832 | ||||||||||||
Noninterest income | 111 | 103 | 15 | 94 | 303 | 626 | ||||||||||||||||||
Total revenue | 664 | 207 | 81 | 146 | 360 | 1,458 | ||||||||||||||||||
Noninterest expense | 518 | 106 | 65 | 121 | 249 | 1,059 | ||||||||||||||||||
(Reversal of) provision for credit losses | 45 | 27 | (3 | ) | — | (5 | ) | 64 | ||||||||||||||||
Income (loss) before income taxes and including noncontrolling interests | 101 | 74 | 19 | 25 | 116 | 335 | ||||||||||||||||||
Income tax expense (benefit) (1) | 17 | (3 | ) | 5 | 6 | 10 | 35 | |||||||||||||||||
Net income (loss) including noncontrolling interests | 84 | 77 | 14 | 19 | 106 | 300 | ||||||||||||||||||
Deduct: net (income) loss from noncontrolling interests | — | — | — | — | 6 | 6 | ||||||||||||||||||
Net income (loss) attributable to MUAH | $ | 84 | $ | 77 | $ | 14 | $ | 19 | $ | 112 | $ | 306 | ||||||||||||
Total assets, end of period | $ | 71,501 | $ | 19,467 | $ | 882 | $ | 33,366 | $ | 35,820 | $ | 161,036 |
(1) | Income tax expense (benefit) includes certain management accounting classification adjustments. |
As of and for the Three Months Ended September 30, 2017: | ||||||||||||||||||||||||
(Dollars in millions) | Regional Bank | U.S. Wholesale & Investment Banking | Transaction Banking | MUSA | Other | MUFG Americas Holdings Corporation | ||||||||||||||||||
Results of operations | ||||||||||||||||||||||||
Net interest income | $ | 516 | $ | 107 | $ | 64 | $ | 62 | $ | 67 | $ | 816 | ||||||||||||
Noninterest income | 108 | 91 | 19 | 100 | 197 | 515 | ||||||||||||||||||
Total revenue | 624 | 198 | 83 | 162 | 264 | 1,331 | ||||||||||||||||||
Noninterest expense | 487 | 98 | 56 | 119 | 222 | 982 | ||||||||||||||||||
(Reversal of) provision for credit losses | 19 | (9 | ) | (1 | ) | — | 9 | 18 | ||||||||||||||||
Income (loss) before income taxes and including noncontrolling interests | 118 | 109 | 28 | 43 | 33 | 331 | ||||||||||||||||||
Income tax expense (benefit) (1) | 31 | 19 | 11 | 18 | 30 | 109 | ||||||||||||||||||
Net income (loss) including noncontrolling interests | 87 | 90 | 17 | 25 | 3 | 222 | ||||||||||||||||||
Deduct: net (income) loss from noncontrolling interests | — | — | — | — | 10 | 10 | ||||||||||||||||||
Net income (loss) attributable to MUAH | $ | 87 | $ | 90 | $ | 17 | $ | 25 | $ | 13 | $ | 232 | ||||||||||||
Total assets, end of period | $ | 66,025 | $ | 20,813 | $ | 1,042 | $ | 32,538 | $ | 34,434 | $ | 154,852 |
(1) | Income tax expense (benefit) includes certain management accounting classification adjustments. |
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As of and for the Nine Months Ended September 30, 2018: | ||||||||||||||||||||||||
(Dollars in millions) | Regional Bank | U.S. Wholesale & Investment Banking | Transaction Banking | MUSA | Other | MUFG Americas Holdings Corporation | ||||||||||||||||||
Results of operations | ||||||||||||||||||||||||
Net interest income | $ | 1,620 | $ | 307 | $ | 197 | $ | 157 | $ | 201 | $ | 2,482 | ||||||||||||
Noninterest income | 338 | 283 | 44 | 259 | 680 | 1,604 | ||||||||||||||||||
Total revenue | 1,958 | 590 | 241 | 416 | 881 | 4,086 | ||||||||||||||||||
Noninterest expense | 1,552 | 310 | 186 | 353 | 825 | 3,226 | ||||||||||||||||||
(Reversal of) provision for loan losses | 52 | 3 | (4 | ) | — | (8 | ) | 43 | ||||||||||||||||
Income (loss) before income taxes and including noncontrolling interests | 354 | 277 | 59 | 63 | 64 | 817 | ||||||||||||||||||
Income tax expense (benefit) (1) | 68 | 133 | 16 | 15 | (211 | ) | 21 | |||||||||||||||||
Net income (loss) including noncontrolling interests | 286 | 144 | 43 | 48 | 275 | 796 | ||||||||||||||||||
Deduct: net (income) loss from noncontrolling interests | — | — | — | — | 20 | 20 | ||||||||||||||||||
Net income (loss) attributable to MUAH | $ | 286 | $ | 144 | $ | 43 | $ | 48 | $ | 295 | $ | 816 | ||||||||||||
Total assets, end of period | $ | 71,501 | $ | 19,467 | $ | 882 | $ | 33,366 | $ | 35,820 | $ | 161,036 |
(1) | Income tax expense (benefit) includes certain management accounting classification adjustments. |
As of and for the Nine Months Ended September 30, 2017: | ||||||||||||||||||||||||
(Dollars in millions) | Regional Bank | U.S. Wholesale & Investment Banking | Transaction Banking | MUSA | Other | MUFG Americas Holdings Corporation | ||||||||||||||||||
Results of operations | ||||||||||||||||||||||||
Net interest income | $ | 1,527 | $ | 333 | $ | 179 | $ | 178 | $ | 188 | $ | 2,405 | ||||||||||||
Noninterest income | 326 | 296 | 48 | 272 | 550 | 1,492 | ||||||||||||||||||
Total revenue | 1,853 | 629 | 227 | 450 | 738 | 3,897 | ||||||||||||||||||
Noninterest expense | 1,483 | 298 | 171 | 336 | 657 | 2,945 | ||||||||||||||||||
(Reversal of) provision for loan losses | 39 | (51 | ) | (1 | ) | — | (21 | ) | (34 | ) | ||||||||||||||
Income (loss) before income taxes and including noncontrolling interests | 331 | 382 | 57 | 114 | 102 | 986 | ||||||||||||||||||
Income tax expense (benefit) (1) | 87 | 89 | 23 | 45 | 11 | 255 | ||||||||||||||||||
Net income (loss) including noncontrolling interests | 244 | 293 | 34 | 69 | 91 | 731 | ||||||||||||||||||
Deduct: net (income) loss from noncontrolling interests | — | — | — | — | 25 | 25 | ||||||||||||||||||
Net income (loss) attributable to MUAH | $ | 244 | $ | 293 | $ | 34 | $ | 69 | $ | 116 | $ | 756 | ||||||||||||
Total assets, end of period | $ | 66,025 | $ | 20,813 | $ | 1,042 | $ | 32,538 | $ | 34,434 | $ | 154,852 |
(1) | Income tax expense (benefit) includes certain management accounting classification adjustments. |
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are subject to various pending and threatened legal actions that arise in the normal course of business. We maintain liabilities for losses from legal actions that are recorded when they are determined to be both probable in their occurrence and can be reasonably estimated. We believe the disposition of all claims currently pending, including potential losses from claims that may exceed the liabilities recorded, and claims for loss contingencies that are considered reasonably possible to occur, will not have a material effect, either individually or in the aggregate, on our consolidated financial position, results of operations, or liquidity.
Item 1A. Risk Factors
For a discussion of risk factors relating to our business, please refer to Part I, Item 1A. "Risk Factors" in our 2017 Form 10-K, which is incorporated by reference herein, in addition to the following information.
Industry Factors
The effects of changes or increases in, or supervisory enforcement of, banking, securities, competition, or other laws and regulations or governmental fiscal, monetary, or tax policies could adversely affect us or make strategic planning more difficult
We are subject to significant federal banking and federal and state securities regulation and supervision, which is primarily for the benefit and protection of our depositors and other customers and the Federal Deposit Insurance Fund and the banking system as a whole and not for the benefit of investors in our securities. In the past, our business has been materially affected by these regulations. This can be expected to continue in the future. Laws, regulations or policies, including accounting standards and interpretations, currently affecting us and our subsidiaries may change at any time. Regulatory authorities may also change their interpretation of and intensify their examination of compliance with these statutes and regulations. Therefore, our business may be adversely affected by changes in laws, regulations, policies or interpretations or regulatory approaches to compliance and enforcement, as well as by supervisory action or criminal proceedings taken as a result of perceived noncompliance, which could result in the imposition of significant penalties or fines. Changes in laws and regulations may also increase our expenses by imposing additional supervision, fees, taxes or restrictions on our operations. Compliance with laws and regulations, especially new laws and regulations, increases our operating expenses and may require additional management time and attention.
In July 2010, President Obama signed into law the Dodd-Frank Act. The Dodd-Frank Act was adopted in response to the financial crisis that ensued in 2008. The Act, among other things, created a new CFPB with broad powers to regulate consumer financial products such as credit cards and mortgages, created a Financial Stability Oversight Council comprised of the heads of other regulatory agencies, has led to new capital requirements from U.S. federal banking agencies, placed new limits on electronic debit card interchange fees, and required the SEC and national stock exchanges to adopt significant new corporate governance and executive compensation reforms.
This important legislation has affected U.S. financial institutions, including MUAH and MUB, in many ways, some of which have increased, or may increase in the future, the cost of doing business and present other challenges to the financial services industry. For additional information regarding the impact on our business of the Dodd-Frank Act and related regulations, see "Supervision and Regulation – Principal Federal Banking Laws - Dodd-Frank Act and Related Regulations" in Part I, Item 1. "Business" in our 2017 Form 10-K.
Following the 2008 financial crisis, the Federal Reserve and the other U.S. federal banking agencies adopted final rules making significant changes to the U.S. regulatory capital framework for U.S. banking organizations. For additional information, see "Supervision and Regulation – Regulatory Capital and Liquidity Standards" in Part I, Item I. "Business" and "Regulatory Capital" in Part II, Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our 2017 Form 10-K.
On May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief and Consumer Protection Act (the “EGRRCPA”) which amended various provisions of the Dodd-Frank Act as well as other federal banking statutes. Among other actions, the EGRRCPA raised the threshold for designation as a systemically important financial institution from $50 billion to $250 billion in assets. The new law, upon
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enactment, removes BHCs with less than $100 billion in assets from the application of enhanced prudential standards, and, 18 months after enactment, eliminates the applicability of enhanced prudential standards to BHCs with between $100 billion and $250 billion in assets unless the Federal Reserve by order or rule determines to apply enhanced prudential standards to any such institution. The Federal Reserve is authorized to establish by order or rule tailored enhanced prudential standards, including periodic stress tests and liquidity requirements, for BHCs with between $100 billion and $250 billion in assets and is required to tailor the application of enhanced prudential standards to BHCs of any size based on certain factors, including capital structure, riskiness, complexity, financial activities, size and other risk-related factors that the Federal Reserve deems appropriate. With respect to foreign banking organizations (“FBOs”), a provision of the EGRRCPA specifically states that the new law does not affect the continued applicability of enhanced prudential standards to FBOs with global assets equal to or greater than $100 billion. In addition, the new law does not limit the authority of the Federal Reserve to impose enhanced prudential standards requirements with respect to, or tailor the regulation of, an FBO with total assets equal to or greater than $100 billion, including the requirement for an IHC. Because MUFG, as an FBO, has total assets in excess of $100 billion, the Company expects that it will remain subject to the Federal Reserve’s enhanced prudential standards rules, even though various domestic BHCs with a size comparable to MUAH will be relieved from compliance with such rules.
The need to maintain more and higher quality capital under the banking agencies capital rules, as well as greater liquidity, could limit the Company’s lending and other business activities and its ability to expand, either organically or through acquisitions. It could also result in the Company taking steps to increase its capital or being limited in its ability to pay dividends or otherwise return capital to its shareholder, or selling or refraining from acquiring assets. In addition, the regulatory liquidity standards could limit the Company’s ability to invest in longer-term or less liquid assets even if more desirable from a balance sheet management perspective.
The capital rules of the U.S. federal banking agencies as well as the various other regulations referred to above, along with other regulations which may be adopted in the future, may also generally increase our cost of doing business or lead us to stop, reduce or modify our products and services.
Proposals to reform the housing finance market in the U.S. could also significantly affect our business. These proposals, among other things, include reducing or eliminating over time the role of the GSEs (Fannie Mae and Freddie Mac) in guaranteeing mortgages and providing funding for mortgage loans, as well as the implementation of reforms relating to borrowers, lenders, and investors in the mortgage market, including reducing the maximum size of a loan that the GSEs can guarantee, phasing in a minimum down payment requirement for borrowers, improving underwriting standards, and increasing accountability and transparency in the securitization process. While the specific nature of these reforms and their impact on the financial services industry in general, and on MUB in particular, is uncertain at this time, such reforms, if enacted, are likely to have a substantial impact on the mortgage market and could potentially reduce our income from mortgage originations by increasing mortgage costs or lowering originations. The GSE reforms could also reduce real estate prices, which could reduce the value of collateral securing outstanding mortgage loans. This reduction of collateral value could negatively impact the value or perceived collectability of these mortgage loans and may increase our allowance for loan losses. Such reforms may also include changes to the Federal Home Loan Bank System, which could adversely affect a significant source of funding for lending activities by the banking industry, including the Bank. These reforms may also result in higher interest rates on residential mortgage loans, thereby reducing demand, which could have an adverse impact on the Bank’s residential mortgage lending business. In addition, any impact of such changes upon the credit quality of GSE’s and, therefore, upon agency MBS securities held by MUAH could result in material reductions in valuations, as well as adverse impacts upon MUSA’s agency MBS trading business.
Several cities in the United States (including New York, Los Angeles, San Diego, San Francisco, San Jose and Seattle) have adopted responsible banking ordinances and other cities are considering the adoption of similar ordinances. These ordinances generally require banks that hold city government deposits to provide detailed accounts of their lending practices in low-income communities, as well as their participation in foreclosure prevention and home loan principal reduction programs. Performance under these ordinances is used as a basis for awarding the city’s financial services contracts. The adoption of these ordinances by municipalities for which the Bank is a provider of cash management or other banking services could result in increased regulatory and compliance costs and other operational costs and expenses, making this business less desirable to the Bank and potentially resulting in reduced opportunities for the Bank to provide these services. In August of 2015, the United States District Court for the Southern District of New York issued an order which invalidated the New York City ordinance on the ground that it was pre-empted by federal and state banking laws. The case has now
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been dismissed. Whether and to what extent other responsible banking ordinances will be challenged and invalidated cannot be predicted at this time.
As a result of supervisory actions against Wells Fargo Bank, N.A., highlighting customer abuses in the banks’ retail branch network which may have arisen at least in part from incentive compensation arrangements related to cross-selling of products and services, the federal bank regulators conducted a horizontal examination of large and mid-sized banks in the U.S. in which they issued requests for information on sales practices and incentive compensation programs at such banks. The increased regulatory focus on these subjects could lead to additional regulations and compliance costs which could impact the retail banking industry in the U.S.
International laws, regulations and policies affecting us, our subsidiaries and the business we conduct may change at any time and affect our business opportunities and competitiveness in these jurisdictions. Due to our ownership by MUFG and MUFG Bank, Ltd., laws, regulations, policies, fines and other supervisory actions adopted or enforced by the Government of Japan, the Federal Reserve and other regulators may adversely affect our activities and investments and those of our subsidiaries in the future.
We maintain systems and procedures designed to comply with applicable laws and regulations. However, some legal/regulatory frameworks provide for the imposition of criminal or civil penalties (which can be substantial) for noncompliance. In some cases, liability may attach even if the noncompliance was inadvertent or unintentional and even if reasonably designed compliance systems and procedures were in place at the time. There may be other negative consequences from a finding of noncompliance, including restrictions on certain activities and damage to our reputation. Legal or regulatory compliance failure may also adversely affect our ability to obtain regulatory approvals for future strategic initiatives. Furthermore, failure to take necessary corrective action, or the discovery of violations of laws in the process of implementing any corrective measures, could result in further regulatory action.
Additionally, our business is affected significantly by the fiscal and monetary policies of the U.S. federal government and its agencies. We are particularly affected by the policies of the Federal Reserve, which regulates the supply of money and credit in the U.S. under the Dodd-Frank Act and a long-standing policy of the Federal Reserve, a BHC is expected to act as a source of financial and managerial strength for its subsidiary banks. As a result of that policy, we may be required to commit financial and other resources to our subsidiary bank in circumstances where we might not otherwise do so. Among the instruments of monetary policy available to the Federal Reserve are (a) conducting open market operations in U.S. Government securities, (b) changing the discount rates on borrowings by depository institutions and the federal funds rate, and (c) imposing or changing reserve requirements against certain deposits accepted by banks and borrowings by banks and their affiliates. These methods are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. In the fall of 2017, the Federal Reserve began the process of reducing its $4.5 trillion balance sheet by ceasing the reinvestment of principal on the maturing U.S. bonds that it holds. The impact of the Federal Reserve’s unwinding of quantitative easing on the U.S. economy and financial markets cannot be predicted with certainty at this time; however, this change in the Federal Reserve’s monetary policy could result in increased interest rates, changes in customer deposit behavior, and volatility in the financial markets. The policies of the Federal Reserve can be expected to have a material effect on our business, prospects, results of operations and financial condition.
Refer to "Supervision and Regulation" in Part I, Item 1. "Business" in our 2017 Form 10-K for discussion of certain additional existing and proposed laws and regulations that may affect our business.
The increasing regulation of the financial services industry has required and can be expected to continue to require significant investments in technology, personnel or other resources. Our competitors may be subject to different or reduced degrees of regulation due to their asset size or types of products offered and may also be able to more efficiently utilize resources to comply with regulations and to more efficiently absorb increased regulatory compliance costs into their existing cost structure.
The sweeping reform of the federal taxation system in the U.S., including a reduction in corporate and personal tax rates, as contained in the federal tax legislation which was enacted in December 2017, made many changes in the tax laws relevant to our business. While such reform could have positive long-term effects on corporate profitability which could benefit the Company and its customers, there could be other potential adverse consequences such as a decrease in the value of tax credits on certain investments we may make. There could also be possible adverse consequences for the economy and the business climate, such as a large increase in the federal deficits and increasing interest rates generally, including for the federal government’s borrowing costs.
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The potential long-run impact of these possible developments remains uncertain. For additional information regarding the possible effects of the changes in the U.S. federal tax laws on our business, see “The changes in the U.S. tax laws effective January 1, 2018, will impact our business and results of operations in a variety of ways, some of which are expected to be positive and some of which may be negative” in Part I, Item 1A. "Risk Factors" in our 2017 Form 10-K.
Company Factors
The California Consumer Privacy Act of 2018 or other such laws could result in increased operating expenses as well as additional exposure to the risk of litigation by or on behalf of customers
In June of 2018, the Governor of California signed into law The California Consumer Privacy Act of 2018 (the “CCPA”). The new law, which becomes effective on January 1, 2020, provides consumers with expansive rights and control over their personal information which is obtained by or shared with “covered businesses” (which includes most banking institutions). The CCPA will give consumers the right to request disclosure of information collected about them, and whether that information has been sold or shared with others, the right to request deletion of personal information (subject to certain exceptions), the right to opt out of the sale of the consumer’s personal information, and the right not to be discriminated against because of choices regarding the consumer’s personal information.
The CCPA provides for certain monetary penalties and for enforcement of the statute by the California Attorney General or by consumers whose rights under the law are not observed. It also provides for damages, as well as injunctive or declaratory relief, if there has been unauthorized access, theft or disclosure of personal information due to failure to implement reasonable security procedures. The CCPA contains several exemptions, including a provision to the effect that the CCPA does not apply where the information is collected, processed, sold or disclosed pursuant to the GLBA if the GLBA is in conflict with the CCPA. The impact of the CCPA on the business of MUB is yet to be determined, but it could result in increased operating expenses, as well as, additional exposure to the risk of litigation by or on behalf of consumers. It is possible that other states where we have customers could enact similar laws. For additional information, see “Supervision and Regulation – Other Federal Laws and Regulations Affecting Banks – Privacy” in Part I, Item 1. "Business" in our 2017 Form 10-K.
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Item 6. Exhibits
EXHIBIT INDEX
Exhibit No. | Description | |
3.1 | ||
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
101 | Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018, is formatted in XBRL interactive data files: (i) Consolidated Statements of Income; (ii) Consolidated Statements of Comprehensive Income; (iii) Consolidated Balance Sheets; (iv) Consolidated Statements of Changes in Stockholders' Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Financial Statements(1) |
(1) | Incorporated by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K filed September 13, 2018 |
(2) | Filed herewith. |
(3) | Furnished herewith. In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed "filed" for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MUFG AMERICAS HOLDINGS CORPORATION (Registrant) | |||
Date: November 7, 2018 | By: | /s/ STEPHEN E. CUMMINGS | |
Stephen E. Cummings President and Chief Executive Officer (Principal Executive Officer) | |||
Date: November 7, 2018 | By: | /s/ JOHANNES WORSOE | |
Johannes Worsoe Chief Financial Officer (Principal Financial Officer) | |||
Date: November 7, 2018 | By: | /s/ NEAL HOLLAND | |
Neal Holland Controller and Chief Accounting Officer (Principal Accounting Officer) |
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