Sale of Certain Private Banking Client Relationships

In August 2017, our Private Banking business entered into an agreement to refer parts of its Latin America portfolio, consisting primarily of clients based in areas where we do not have a corporate presence, including Central America and the Andean Pact, to UBS Wealth Management Americas (“UBS”). Under the terms of the agreement, we facilitate the referral of these client relationships to UBS, including the transfer of their client assets as well as the transfer of the relationship managers and client service employees that support these clients. At the time the agreement was signed, total client assets associated with these relationships consisted of approximately $3.5 billion in client investments (which were not reported on our balance sheet) and $1.7 billion in client deposits (which were reported on our balance sheet). Loans associated with these client relationships were not included in the agreement. UBS will pay us a fee of 0.5 percent of the aggregate client assets transferred during the first two years after the agreement was signed. Therefore, the consideration we expect to receive is contingent upon the clients’ decisions to transfer their accounts to UBS, the timing and amounts of client assets transferred and the acceptance of the client assets by UBS. As a result of entering into the agreement, we recorded the contingent consideration expected to be received of $15 million as a receivable at estimated fair value within other assets and recognized a pre-tax gain on sale, net of allocated goodwill and transaction costs, of $8 million in other income during the third quarter of 2017. The fair value of the contingent consideration is estimated using a discounted cash flow methodology with changes in fair value recognized in other income. During the second quarter of 2018, we reduced the contingent consideration receivable to $12 million and recognized a $3 million loss in other income as a result of a decline in estimated fair value based on the amount of client assets transferred to date and a revised estimate of the amount of remaining client assets that we expect will be transferred.

Through June 30, 2018, we have completed the transfers of approximately $1.3 billion of client investments and $0.7 billion of client deposits to UBS. We have estimated the amount of remaining client deposits that we expect will be transferred to UBS, which was approximately $0.1 billion at June 30, 2018 compared with $0.7 billion at December 31, 2017, and have classified them as held for sale in our consolidated balance sheet. No lower of cost or fair value adjustment was required as a result of the transfer of deposits to held for sale. An additional $0.1 billion of deposits at June 30, 2018 could be transferred in the event all remaining client deposits associated with these client relationships were to be transferred.