10-Q 1 bac-9302012x10q.htm 10-Q BAC-9.30.2012-10Q


 
 
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ü] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2012
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:
1-6523
Exact Name of Registrant as Specified in its Charter:
Bank of America Corporation
State or Other Jurisdiction of Incorporation or Organization:
Delaware
IRS Employer Identification Number:
56-0906609
Address of Principal Executive Offices:
Bank of America Corporate Center
100 N. Tryon Street
Charlotte, North Carolina 28255
Registrant’s telephone number, including area code:
(704) 386-5681
Former name, former address and former fiscal year, if changed since last report:
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 ü     No
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 ü     No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one).
Large accelerated filer ü
 
Accelerated filer
 
Non-accelerated filer
(do not check if a smaller
reporting company)
 
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes     No ü
On October 31, 2012, there were 10,778,078,165 shares of Bank of America Corporation Common Stock outstanding.
 
 
 
 
 

                


Bank of America Corporation
 
September 30, 2012
 
Form 10-Q
 
 
 
INDEX
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report on Form 10-Q, the documents that it incorporates by reference and the documents into which it may be incorporated by reference may contain, and from time to time Bank of America Corporation (collectively with its subsidiaries, the Corporation) and its management may make certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often use words such as “expects,” “anticipates,” “believes,” “estimates,” “targets,” “intends,” “plans,” “goal” and other similar expressions or future or conditional verbs such as “will,” “may,” “might,” “should,” “would” and “could.” The forward-looking statements made represent the current expectations, plans or forecasts of the Corporation regarding the Corporation's future results and revenues, and future business and economic conditions more generally, including statements concerning: the achievement of cost savings in certain noninterest expense categories as the Corporation continues to streamline workflows, simplify processes and align expenses with its overall strategic plan and operating principles; with regard to Phase 1 of Project New BAC, the Corporation expects to realize more than $1 billion of cost savings in 2012 and $5 billion of annualized cost savings by the fourth quarter of 2013 with the full impact realized in 2014; the Corporation expects that Phase 2 of Project New BAC will result in an additional $3 billion of annualized cost savings by mid-2015; that during the fourth quarter of 2012 and the second quarter of 2013 the Corporation will redeem $5.1 billion liquidation amount of trust preferred securities issued by various unconsolidated trusts, that redemption of these trust preferred securities will result in a pre-tax charge of approximately $100 million in the fourth quarter of 2012, and pre-tax net interest income savings of approximately $50 million for the fourth quarter of 2012 and approximately $300 million for 2013; that the Corporation may conduct additional redemptions, tender offers, exercises and other transactions in the future depending on prevailing market conditions, liquidity, regulatory and other factors; the expectation that the Corporation would record a charge to income tax expense of approximately $400 million if the income tax rate were reduced to 22 percent by 2014 as suggested in U.K. Treasury announcements and assuming no change in the deferred tax asset balance; the resolution of representations and warranties repurchase and other claims; that there will likely be additional requests for loan files in the future leading to repurchase claims; the final resolution of the BNY Mellon Settlement, including that ongoing costs incurred in connection with the BNY Mellon Settlement will be in line with current expectations; the final resolution of the Merrill Lynch Class Action Settlement; the estimates of liability and range of possible loss for various representations and warranties claims; the possibility that future representations and warranties losses may occur in excess of the amounts recorded for those exposures; the expectation that unresolved repurchase claims will continue to increase, including those from Fannie Mae and private-label securitization trustees and sponsors; the Corporation's expected response to repurchase requests for which it concludes that a valid basis for repurchase does not exist and the possibility of future settlement actions; that the expiration and mutual non-renewal of certain contractual delivery commitments and variances with Fannie Mae will not have a material impact on our CRES business, as the Corporation expects to rely on other sources of liquidity to actively extend mortgage credit to customers including continuing to deliver such products into Freddie Mac mortgage-backed securities pools; that there continues to be a backlog of foreclosure inventory in judicial states; the ability to resolve mortgage insurance rescission notices with the mortgage insurance companies before the expiration of the appeal period prescribed by the Fannie Mae announcement; the disposition and resolution of servicing matters; beliefs and expectations concerning the servicing National Mortgage Settlement, including expectations about the amounts of credits to be generated by various programs, the effects on annual interest income and the fair value of loans in the programs and whether loans modified under programs will be accounted for as troubled debt restructurings, and the likelihood that the Corporation will fail to meet commitments and be required to make additional cash payments, whether material or not; the impacts of foreclosure delays; that implementation of uniform servicing standards will incrementally increase costs associated with the servicing process, but it will not result in material delays or dislocation in the performance of mortgage servicing obligations, including the completion of foreclosures; the Corporation's belief that default-related servicing costs peaked during the third quarter of 2012 and the expectation that they will decline in the fourth quarter of 2012, with the decline accelerating in 2013; the expectation that the Corporation will comply with the final Basel 3 rules when issued and effective; that, if the Corporation's analytical models for capital measurement under Basel 3 are not approved by the U.S. regulatory agencies, it would likely lead to an increase in the Corporation's risk-weighted assets, which in some cases could be significant; that the Market Risk Amendment and the Basel 3 Advanced Approach, if adopted as proposed, are expected to substantially increase the Corporation's capital requirements; the intention to build capital through retaining earnings, actively managing the Corporation's portfolios and implementing other capital-related initiatives, including focusing on reducing both higher risk-weighted assets and assets proposed to be deducted from capital under Basel 3; the expectations that the Corporation will be required to submit its 2013 capital plan in early January 2013, that it will be required to use stress scenario assumptions provided by the Federal Reserve in the fourth quarter, and that results will be received from the Federal Reserve in the first half of 2013; the Corporation's belief that it can quickly obtain cash for certain securities, even in stressed market conditions, through repurchase agreements or outright sales; the Corporation's liquidity risk management strategies; that funding trading activities in broker/dealer subsidiaries is more cost efficient and less sensitive to changes in credit ratings than unsecured financing; that VaR model results will be supplemented if risks associated with positions that are illiquid and/or unobservable are material; the cost and availability of unsecured funding; the Corporation's belief that a portion of structured liability obligations will remain outstanding beyond the earliest put or redemption date; the Corporation's anticipation that debt levels will continue to decline, both from maturities and liability management, through 2013; that, of the loans in the pay option portfolio at September 30, 2012 that have not already experienced a payment reset, one percent are expected to reset during the remainder of 2012 and 22 percent thereafter, and that eight percent are expected to prepay and 69 percent are expected to default prior to being reset, most of which were severely delinquent as of September 30, 2012; that the

3


sale of the GWIM international wealth management business is not expected to have a significant impact on the Corporation's balance sheet, results of operations or capital ratios, and the expected timing of the closings of the transaction; effects of the ongoing debt crisis in Europe, including the expectation of continued volatility as long as challenges remain, the expectation that the Corporation will continue to support client activities in the region and that exposures may vary over time as the Corporation monitors the situation and manages its risk profile; that, absent unexpected deterioration in the economy, the Corporation expects that reductions in the allowance for loan and lease losses, excluding the valuation allowance for PCI loans, will continue in the near term, though at a slower pace than in 2011; and other matters relating to the Corporation and the securities that it may offer from time to time. The foregoing is not an exclusive list of all forward-looking statements the Corporation makes. These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumptions that are difficult to predict and are often beyond the Corporation's control. Actual outcomes and results may differ materially from those expressed in, or implied by, any of these forward-looking statements.

You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties more fully discussed elsewhere in this report, under Item 1A. Risk Factors of the Corporation's 2011 Annual Report on Form 10-K, and in any of the Corporation's subsequent Securities and Exchange Commission filings: the Corporation's resolution of differences with Fannie Mae regarding representations and warranties repurchase claims, including with respect to mortgage insurance rescissions, and foreclosure delays; the Corporation's ability to resolve representations and warranties claims made by monolines and private-label and other investors, including as a result of any adverse court rulings, and the chance that the Corporation could face related servicing, securities, fraud, indemnity or other claims from one or more of the monolines or private-label and other investors; if future representations and warranties losses occur in excess of the Corporation's recorded liability and estimated range of possible loss for its representations and warranties exposures; uncertainties about the financial stability of several countries in the EU, the increasing risk that those countries may default on their sovereign debt or exit the EU and related stresses on financial markets, the Euro and the EU and the Corporation's exposures to such risks, including direct, indirect and operational; the uncertainty regarding the timing and final substance of any capital or liquidity standards, including the final Basel 3 requirements and their implementation for U.S. banks through rulemaking by the Federal Reserve, including anticipated requirements to hold higher levels of regulatory capital, liquidity and meet higher regulatory capital ratios as a result of final Basel 3 or other capital or liquidity standards; the negative impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act on the Corporation's businesses and earnings, including as a result of additional regulatory interpretation and rulemaking and the success of the Corporation's actions to mitigate such impacts; the Corporation's satisfaction of its borrower assistance programs under the National Mortgage Settlement with federal agencies and state Attorneys General; adverse changes to the Corporation's credit ratings from the major credit rating agencies; estimates of the fair value of certain of the Corporation's assets and liabilities; unexpected claims, damages and fines resulting from pending or future litigation and regulatory proceedings; the Corporation's ability to fully realize the cost savings and other anticipated benefits from Project New BAC, including in accordance with currently anticipated timeframes; and other similar matters.

Forward-looking statements speak only as of the date they are made, and the Corporation undertakes no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.

Notes to the Consolidated Financial Statements referred to in the Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) are incorporated by reference into the MD&A. Certain prior period amounts have been reclassified to conform to current period presentation. Throughout the MD&A, the Corporation uses certain acronyms and abbreviations which are defined in the Glossary.

The Corporation's Annual Report on Form 10-K for the year ended December 31, 2011 as supplemented by a Current Report on Form 8-K filed on May 4, 2012 to reflect reclassified business segment information is referred to herein as the 2011 Annual Report on Form 10-K.


4


Executive Summary
 
Business Overview

The Corporation is a Delaware corporation, a bank holding company and a financial holding company. When used in this report, “the Corporation” may refer to the Corporation individually, the Corporation and its subsidiaries, or certain of the Corporation’s subsidiaries or affiliates. Our principal executive offices are located in Charlotte, North Carolina. Through our banking and various nonbanking subsidiaries throughout the U.S. and in international markets, we provide a diversified range of banking and nonbanking financial services and products through five business segments: Consumer & Business Banking (CBB), Consumer Real Estate Services (CRES), Global Banking, Global Markets and Global Wealth & Investment Management (GWIM), with the remaining operations recorded in All Other. Effective January 1, 2012, the Corporation changed its basis of presentation from six to the above five segments. For more information on this realignment, see Business Segment Operations on page 32. At September 30, 2012, the Corporation had approximately $2.2 trillion in assets and approximately 272,600 full-time equivalent employees.

As of September 30, 2012, we operated in all 50 states, the District of Columbia and more than 40 countries. Our retail banking footprint covers approximately 80 percent of the U.S. population and we serve more than 55 million consumer and small business relationships with approximately 5,500 banking centers, 16,300 ATMs, nationwide call centers, and leading online and mobile banking platforms. We offer industry-leading support to more than three million small business owners. We are a global leader in corporate and investment banking and trading across a broad range of asset classes serving corporations, governments, institutions and individuals around the world.


5


Table 1 provides selected consolidated financial data for the three and nine months ended September 30, 2012 and 2011, and at September 30, 2012 and December 31, 2011.

Table 1
Selected Financial Data
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions, except per share information)
2012
 
2011
 
2012
 
2011
Income statement
 
 
 
 
 
 
 
Revenue, net of interest expense (FTE basis) (1)
$
20,657

 
$
28,702

 
$
65,344

 
$
69,280

Net income (loss)
340

 
6,232

 
3,456

 
(545
)
Net income, excluding goodwill impairment charge (2)
340

 
6,232

 
3,456

 
2,058

Diluted earnings (loss) per common share (3)
0.00

 
0.56

 
0.22

 
(0.15
)
Diluted earnings (loss) per common share, excluding goodwill impairment charge (2)
0.00

 
0.56

 
0.22

 
0.11

Dividends paid per common share
0.01

 
0.01

 
0.03

 
0.03

Performance ratios
 
 
 
 
 

 
 
Return on average assets
0.06
%
 
1.07
%
 
0.21
%
 
n/m

Return on average assets, excluding goodwill impairment charge (2)
0.06

 
1.07

 
0.21

 
0.12
%
Return on average tangible shareholders’ equity (1)
0.84

 
17.03

 
2.89

 
n/m

Return on average tangible shareholders’ equity, excluding goodwill impairment charge (1, 2)
0.84

 
17.03

 
2.89

 
1.83

Efficiency ratio (FTE basis) (1)
84.93

 
61.37

 
82.23

 
87.69

Efficiency ratio (FTE basis), excluding goodwill impairment charge (1, 2)
84.93

 
61.37

 
82.23

 
83.93

Asset quality
 
 
 
 
 

 
 
Allowance for loan and lease losses at period end
 
 
 
 
$
26,233

 
$
35,082

Allowance for loan and lease losses as a percentage of total loans and leases outstanding at period end (4)
 
 
 
 
2.96
%
 
3.81
%
Nonperforming loans, leases and foreclosed properties at period end (4)
 
 
 
 
$
24,925

 
$
29,059

Net charge-offs (5)
$
4,122

 
$
5,086

 
11,804

 
16,779

Annualized net charge-offs as a percentage of average loans and leases outstanding (4, 5)
1.86
%
 
2.17
%
 
1.77
%
 
2.41
%
Annualized net charge-offs as a percentage of average loans and leases outstanding excluding purchased credit-impaired loans (4)
1.93

 
2.25

 
1.83

 
2.50

Ratio of the allowance for loan and lease losses at period end to annualized
net charge-offs (5)
1.60

 
1.74

 
1.66

 
1.56

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs excluding purchased credit-impaired loans
1.17

 
1.33

 
1.21

 
1.20

 
 
 
 
 
 
 
 
 
 
 
 
 
September 30
2012
 
December 31
2011
Balance sheet
 
 
 
 
 
 
 
Total loans and leases
 
 
 
 
$
893,035

 
$
926,200

Total assets
 
 
 
 
2,166,162

 
2,129,046

Total deposits
 
 
 
 
1,063,307

 
1,033,041

Total common shareholders’ equity
 
 
 
 
219,838

 
211,704

Total shareholders’ equity
 
 
 
 
238,606

 
230,101

Capital ratios
 
 
 
 
 
 
 
Tier 1 common capital
 
 
 
 
11.41
%
 
9.86
%
Tier 1 capital
 
 
 
 
13.64

 
12.40

Total capital
 
 
 
 
17.16

 
16.75

Tier 1 leverage
 
 
 
 
7.84

 
7.53

(1) 
Fully taxable-equivalent (FTE) basis, return on average tangible shareholders’ equity and the efficiency ratio are non-GAAP financial measures. Other companies may define or calculate these measures differently. For additional information on these measures and ratios, and a corresponding reconciliation to GAAP financial measures, see Supplemental Financial Data on page 19.
(2) 
Net income, diluted earnings per common share, return on average assets, return on average tangible shareholders' equity and the efficiency ratio have been calculated excluding the impact of the goodwill impairment charge of $2.6 billion in the second quarter of 2011, and accordingly, these are non-GAAP measures. For additional information on these measures and for a corresponding reconciliation to GAAP financial measures, see Supplemental Financial Data on page 19.
(3) 
Due to a net loss applicable to common shareholders for the three months ended September 30, 2012 and the nine months ended September 30, 2011, the impact of antidilutive equity instruments was excluded from diluted earnings (loss) per share and average diluted common shares.
(4) 
Balances and ratios do not include loans accounted for under the fair value option. For additional exclusions from nonperforming loans, leases and foreclosed properties, see Nonperforming Consumer Loans and Foreclosed Properties Activity on page 106 and corresponding Table 45, and Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 118 and corresponding Table 54.
(5) 
Net charge-offs exclude $1.7 billion of write-offs in the Countrywide home equity purchased credit-impaired portfolio for the three and nine months ended September 30, 2012. These write-offs decreased the purchased credit-impaired valuation allowance included as part of the allowance for loan and lease losses.
n/m = not meaningful

6


Third Quarter 2012 Economic and Business Environment

In the U.S., the slow pace of economic growth experienced in Spring 2012 continued through the third quarter. Consumer spending grew slowly, as household deleveraging continued, vehicle sales remained firm and store sales rebounded. Employment rose moderately despite considerable domestic and foreign uncertainty and the unemployment rate ended the quarter at 7.8 percent. Business spending on equipment and software, as well as structures, sustained further weakening. The housing market continued its recent improvement with a sixth consecutive quarterly rise in residential building activity and a rise in home prices. Equity markets partially reversed losses from the previous quarter and ended the third quarter just below their high for the year. Stock prices benefited from an easing in the Eurozone crisis, with the European Central Bank announcing its willingness to intervene in sovereign debt markets under specified conditions, and the announcement in mid-September of further monetary easing by the Board of Governors of the Federal Reserve System (Federal Reserve). Nevertheless, financial market uncertainty was elevated by recession and political anxieties in Europe, and the scheduled year-end expiration of income tax cuts, extended unemployment insurance, the temporary payroll tax cut and the steadily approaching deadline for automatic federal spending reductions agreed to in last year's debt ceiling bill (referred to as the “fiscal cliff”) in the U.S. Consumer confidence ended the quarter slightly higher than a year earlier and business confidence reversed its early-year gains.

The Federal Reserve announced at its mid-September meeting that, while continuing its program of extending the average maturity of its portfolio by buying longer term U.S. Treasury securities and selling short-term holdings, it would commence a new program in which it would purchase $40 billion per month in agency mortgage-backed securities until substantial labor market improvement was achieved subject to maintaining the Federal Reserve's price stability objective. In addition, the Federal Reserve modified its forward guidance on interest rates, anticipating that exceptionally low levels for the federal funds rate would likely be warranted at least through mid-2015. This monetary easing helped push down longer term U.S. Treasury and secondary market mortgage yields. Concerns regarding federal tax and spending policies also continued ahead of the anticipated fiscal cliff.

Recent Events

Merrill Lynch Class Action Settlement

On September 28, 2012, the Corporation announced an agreement, subject to the execution of a written settlement agreement and court approval, to settle a class action lawsuit brought in 2009 on behalf of investors who purchased or held Bank of America securities at the time we announced plans to acquire Merrill Lynch (the Merrill Lynch Class Action Settlement).

Under the terms of the proposed Merrill Lynch Class Action Settlement, we will pay a total of $2.4 billion and institute and/or continue certain corporate governance policies until January 1, 2015. The amount to be paid under the proposed Merrill Lynch Class Action Settlement will be covered by litigation reserves at September 30, 2012. For additional information, see Note 10 – Commitments and Contingencies to the Consolidated Financial Statements.

Capital and Liquidity Related Matters

During the three months ended September 30, 2012, we repurchased certain of our debt and trust preferred securities with an aggregate carrying value of $6.0 billion resulting in a pre-tax charge of $25 million.

On October 4, 2012, we announced that during the fourth quarter of 2012 and the second quarter of 2013, we will redeem $5.1 billion liquidation amount of trust preferred securities issued by various unconsolidated trusts. We expect that redemption of these trust preferred securities will result in a pre-tax charge of approximately $100 million in the fourth quarter of 2012, and pre-tax net interest income savings of approximately $50 million for the fourth quarter of 2012 and approximately $300 million for 2013.

We may conduct additional redemptions, tender offers, exercises and other transactions in the future depending on prevailing market conditions, liquidity, regulatory and other factors.

Weather Events

In the last few days in October, the mid-Atlantic and northeast regions of the U.S. experienced a major storm resulting in wide-spread flooding, power outages, transportation and telecommunication service interruptions and other impacts including but not limited to closures of the New York City based securities exchanges. Certain services have been restored and others will require longer periods of recovery time. Our operations in the affected areas have been impacted, including certain branch closures. We are continuing to support the needs of our clients and customers during this difficult time.


7


Performance Overview

Summary results for the three and nine months ended September 30, 2012 and 2011 are presented in Table 2. Certain selected items that affected pre-tax income for the three and nine months ended September 30, 2012 were the following: provision for credit losses of $1.8 billion and $6.0 billion which included reserve reductions of $2.3 billion and $5.8 billion, net gains of $1.7 billion on repurchases of debt and trust preferred securities for the nine-month period, and $339 million and $1.5 billion of gains on sales of debt securities. These items were offset by negative fair value adjustments of $1.3 billion and $4.7 billion on structured liabilities related to improvement in our own credit spreads, debit valuation adjustment (DVA) losses on derivatives of $583 million and $2.2 billion, net of hedges, litigation expense of $1.6 billion and $3.3 billion, which included the incremental litigation reserves recorded during the third quarter of 2012 for the Merrill Lynch Class Action Settlement, and annual retirement-eligible incentive compensation costs of $892 million recorded in the first quarter of 2012. In addition, the representations and warranties provision increased $29 million to $307 million for the three-month period and decreased $14.3 billion to $984 million for the nine-month period as the prior-year nine-month period included $8.6 billion related to the agreement entered into with the Bank of New York Mellon (BNY Mellon Settlement) and $6.7 billion related to other non-government-sponsored enterprise (GSE) exposures, and to a lesser extent, GSE exposures. For the three and nine months ended September 30, 2012, income tax expense included a $788 million charge to remeasure certain deferred tax assets due to decreases in the U.K. corporate tax rate compared to a similar charge of $782 million for the same periods in 2011.

Table 2
Summary Income Statement
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions)
2012
 
2011
 
2012
 
2011
Net interest income (FTE basis) (1)
$
10,167

 
$
10,739

 
$
31,002

 
$
34,629

Noninterest income
10,490

 
17,963

 
34,342

 
34,651

Total revenue, net of interest expense (FTE basis) (1)
20,657

 
28,702

 
65,344

 
69,280

Provision for credit losses
1,774

 
3,407

 
5,965

 
10,476

Goodwill impairment

 

 

 
2,603

All other noninterest expense
17,544

 
17,613

 
53,733

 
58,149

Income (loss) before income taxes
1,339

 
7,682

 
5,646

 
(1,948
)
Income tax expense (benefit) (FTE basis) (1)
999

 
1,450

 
2,190

 
(1,403
)
Net income (loss)
340

 
6,232

 
3,456

 
(545
)
Preferred stock dividends
373

 
343

 
1,063

 
954

Net income (loss) applicable to common shareholders
$
(33
)
 
$
5,889

 
$
2,393

 
$
(1,499
)
 
 
 
 
 
 
 
 
Per common share information
 
 
 
 
 
 
 
Earnings (loss)
$
0.00

 
$
0.58

 
$
0.22

 
$
(0.15
)
Diluted earnings (loss) (2)
0.00

 
0.56

 
0.22

 
(0.15
)
(1) 
FTE basis is a non-GAAP financial measure. For additional information on this measure and for a corresponding reconciliation to GAAP financial measures, see Supplemental Financial Data on page 19.
(2) 
Due to a net loss applicable to common shareholders for the three months ended September 30, 2012 and the nine months ended September 30, 2011, the impact of antidilutive equity instruments was excluded from diluted earnings (loss) per share and average diluted common shares.


8


Net interest income on a fully taxable-equivalent (FTE) basis decreased $572 million to $10.2 billion, and $3.6 billion to $31.0 billion for the three and nine months ended September 30, 2012 compared to the same periods in 2011. The decreases were primarily driven by lower consumer loan balances and yields. Lower trading-related net interest income also negatively impacted the results. These were partially offset by reductions in long-term debt balances and lower rates paid on deposits. The net interest yield on a FTE basis was 2.32 percent and 2.35 percent for the three and nine months ended September 30, 2012 compared to 2.32 percent and 2.50 percent for the same periods in 2011.

Noninterest income decreased $7.5 billion to $10.5 billion, and $309 million to $34.3 billion for the three and nine months ended September 30, 2012 compared to the same periods in 2011. The most significant contributors to the decreases were negative fair value adjustments on structured liabilities for the three and nine months ended September 30, 2012 compared to positive fair value adjustments for the same periods in 2011, a decrease in equity investment income and net DVA losses. For the nine-month period, these were partially offset by a significantly lower representations and warranties provision and net gains on repurchases of certain debt and trust preferred securities in 2012. For additional information on the repurchases and exchanges, see Liquidity Risk on page 78.

The provision for credit losses decreased $1.6 billion to $1.8 billion, and $4.5 billion to $6.0 billion for the three and nine months ended September 30, 2012 compared to the same periods in 2011. The improvement was primarily in the home equity and residential mortgage loan portfolios due to improved portfolio trends and an improved home price outlook in our purchased credit-impaired (PCI) loan portfolios. The provision for credit losses was $2.3 billion and $5.8 billion lower than net charge-offs for the three and nine months ended September 30, 2012, resulting in a reduction in the allowance for credit losses. This compared to reductions of $1.7 billion and $6.3 billion in the allowance for credit losses for the three and nine months ended September 30, 2011. For more information on the provision for credit losses, see Provision for Credit Losses on page 129.

Noninterest expense was relatively unchanged for the three months ended September 30, 2012 and decreased $7.0 billion to $53.7 billion for the nine months ended September 30, 2012 compared to the same periods in 2011. The decline for the nine-month period was driven by a decrease in other general operating expense primarily related to lower litigation expense and mortgage-related assessments, waivers and similar costs related to foreclosure delays, and a decrease in personnel expense. The decrease in noninterest expense for the nine-month period was also the result of a $2.6 billion non-cash, non-tax deductible goodwill impairment charge recorded during the second quarter of 2011 as well as $537 million of merger and restructuring charges recorded during the nine-month period in 2011.

Income tax expense on a FTE basis was $999 million on pre-tax income of $1.3 billion, and $2.2 billion on pre-tax income of $5.6 billion for three and nine months ended September 30, 2012 compared to income tax expense of $1.5 billion on a pre-tax income of $7.7 billion and a benefit of $1.4 billion on a pre-tax loss of $1.9 billion for same periods in 2011. For more information, see Financial Highlights – Income Tax Expense on page 14.


9


Segment Results
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table 3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Business Segment Results
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30
 
Nine Months Ended September 30
 
Total Revenue (1)
 
Net Income (Loss)
 
Total Revenue (1)
 
Net Income (Loss)
(Dollars in millions)
2012
 
2011
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Consumer & Business Banking (CBB)
$
7,070

 
$
8,127

 
$
1,285

 
$
1,664

 
$
21,819

 
$
25,274

 
$
3,893

 
$
6,204

Consumer Real Estate Services (CRES)
3,096

 
2,822

 
(877
)
 
(1,121
)
 
8,291

 
(6,430
)
 
(2,786
)
 
(18,023
)
Global Banking
4,147

 
3,951

 
1,295

 
1,206

 
12,882

 
13,311

 
4,292

 
4,709

Global Markets
3,106

 
3,294

 
(359
)
 
(553
)
 
10,664

 
12,980

 
900

 
1,753

Global Wealth & Investment Management (GWIM)
4,278

 
4,238

 
542

 
362

 
12,954

 
13,229

 
1,639

 
1,424

All Other
(1,040
)
 
6,270

 
(1,546
)
 
4,674

 
(1,266
)
 
10,916

 
(4,482
)
 
3,388

Total FTE basis
20,657

 
28,702

 
340

 
6,232

 
65,344

 
69,280

 
3,456

 
(545
)
FTE adjustment
(229
)
 
(249
)
 

 

 
(670
)
 
(714
)
 

 

Total Consolidated
$
20,428

 
$
28,453

 
$
340

 
$
6,232

 
$
64,674

 
$
68,566

 
$
3,456

 
$
(545
)
(1) 
Total revenue is net of interest expense and is on a FTE basis which for consolidated revenue is a non-GAAP financial measure. For more information on this measure and for a corresponding reconciliation to a GAAP financial measure, see Supplemental Financial Data on page 19.

The following discussion provides an overview of the results of our business segments and All Other for the three and nine months ended September 30, 2012 compared to the same periods in 2011. For additional information on these results, see Business Segment Operations on page 32.

CBB net income decreased in the three and nine months ended September 30, 2012 compared to the same periods in 2011. Revenue decreased in both periods driven by the impact of the Durbin Amendment, lower average loan balances, the continued low rate environment and the net impact of charges related to our consumer protection products. Revenue for the nine-month period also decreased driven by the net impact of portfolio sales. The provision for credit losses decreased in the three-month period due to improvements in delinquencies and bankruptcies and increased in the nine-month period as portfolio trends began to stabilize during 2012. Noninterest expense declined due to lower Federal Deposit Insurance Corporation (FDIC) and operating expenses, partially offset by an increase in litigation expense in the nine-month period.

CRES net loss decreased in the three and nine months ended September 30, 2012 compared to the same periods in 2011 primarily driven by an increase in noninterest income and lower provision for credit losses. Noninterest income increased for the three-month period driven by improved mortgage servicing rights (MSR) results, net of hedges, and increases in production revenue. Noninterest income increased in the nine-month period primarily because the prior-year period included provisions recorded in connection with the BNY Mellon Settlement. The provision for credit losses decreased in both periods driven by improved portfolio trends in the home equity portfolio. Noninterest expense increased in the three-month period due to an increase in default-related servicing costs and litigation expense. This was partially offset by lower production expenses and a reduction in mortgage-related assessments, waivers and similar costs related to foreclosure delays. Noninterest expense decreased in the nine-month period due to the absence of a goodwill impairment charge, a decline in litigation expense and lower mortgage-related assessments, waivers and similar costs related to foreclosure delays, partially offset by higher default-related servicing costs.


10


Global Banking net income increased in the three months ended and decreased for the nine months ended September 30, 2012 compared to the same periods in 2011. Revenues for the three-month period increased primarily due to gains on fair value option loans compared to the same period in 2011. Revenues for the nine-month period decreased as a result of lower investment banking fees, lower net interest income as a result of spread compression and benefits from accretion on certain acquired portfolios in the year-ago period, partially offset by the impact of higher average loan and deposit balances and gains from certain legacy portfolios. The provision for credit losses increased in both periods primarily driven by stabilization in asset quality and core commercial loan growth in the portfolio. Noninterest expense decreased in both periods primarily due to lower personnel expense and operating costs.

Global Markets net loss decreased in the three months ended September 30, 2012 compared to the same period in 2011. Excluding net DVA, net income increased primarily driven by higher sales and trading revenue, higher investment banking fees from an increase in capital markets underwriting activity and lower noninterest expense due to decreased personnel-related expenses and operational costs. Net income decreased in the nine months ended September 30, 2012. Excluding net DVA, net income increased primarily driven by higher sales and trading revenue as well as lower personnel-related expenses, brokerage, clearing and exchange fees, and operational costs.

GWIM net income increased in the three and nine months ended September 30, 2012 compared to the same periods in 2011 primarily due to lower noninterest expense driven by lower FDIC expense, lower support and personnel costs, and other expense reductions. Revenue increased in the three-month period due to higher all other income driven by market origination revenue and higher net interest income, partially offset by lower investment and brokerage services revenue. Revenue decreased in the nine-month period due to lower investment and brokerage services revenue resulting from lower transactional activity and lower net interest income. In addition, the provision for credit losses declined for the three- and nine-month periods due to lower delinquencies and improving portfolio trends within the residential mortgage portfolio.

All Other decreased to a net loss in the three and nine months ended September 30, 2012 compared to net income in the same periods in 2011 primarily due to negative fair value adjustments on structured liabilities for the three- and nine-month periods ended September 30, 2012 compared to positive fair value adjustments on structured liabilities for the same periods in 2011 and a decrease in equity investment income, partially offset by a reduction in the provision for credit losses and net gains resulting from the repurchase of certain debt and trust preferred securities in the nine-month period. In addition, for the three- and nine-month periods, the provision for credit losses decreased primarily due to continued improvement in credit quality in the residential mortgage portfolio and noninterest expense increased due to higher litigation expense related to the Merrill Lynch Class Action Settlement and other litigation.


11


Financial Highlights
 
Net Interest Income

Net interest income on a FTE basis decreased $572 million to $10.2 billion, and $3.6 billion to $31.0 billion for the three and nine months ended September 30, 2012 compared to the same periods in 2011. The decreases were primarily driven by lower consumer loan balances and yields. Lower trading-related net interest income also negatively impacted the results. These were partially offset by ongoing reductions in long-term debt balances and lower rates paid on deposits. The net interest yield on a FTE basis was 2.32 percent for the three months ended September 30, 2012 and 2011. The net interest yield on a FTE basis decreased 15 basis points (bps) to 2.35 percent for the nine months ended September 30, 2012 compared to the same period in 2011 as the yield continued to be under pressure due to the aforementioned items and the low rate environment.

Noninterest Income
 
Table 4
Noninterest Income
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions)
2012
 
2011
 
2012
 
2011
Card income
$
1,538

 
$
1,911

 
$
4,573

 
$
5,706

Service charges
1,934

 
2,068

 
5,780

 
6,112

Investment and brokerage services
2,781

 
3,022

 
8,504

 
9,132

Investment banking income
1,336

 
942

 
3,699

 
4,204

Equity investment income
238

 
1,446

 
1,371

 
4,133

Trading account profits
1,239

 
1,604

 
5,078

 
6,417

Mortgage banking income (loss)
2,019

 
1,617

 
5,290

 
(10,949
)
Insurance income (loss)
(138
)
 
190

 
(71
)
 
1,203

Gains on sales of debt securities
339

 
737

 
1,491

 
2,182

Other income (loss)
(790
)
 
4,511

 
(1,321
)
 
6,729

Net impairment losses recognized in earnings on AFS debt securities
(6
)
 
(85
)
 
(52
)
 
(218
)
Total noninterest income
$
10,490

 
$
17,963

 
$
34,342

 
$
34,651


Noninterest income decreased $7.5 billion to $10.5 billion, and $309 million to $34.3 billion for the three and nine months ended September 30, 2012 compared to the same periods in 2011. The following highlights the significant changes.

Card income decreased $373 million and $1.1 billion for the three and nine months ended September 30, 2012 primarily driven by the implementation of interchange fee rules under the Durbin Amendment, which became effective on October 1, 2011.

Investment and brokerage services income decreased $241 million to $2.8 billion, and $628 million to $8.5 billion for the three and nine months ended September 30, 2012 primarily driven by lower transactional volumes.

Investment banking income increased $394 million for the three months ended September 30, 2012 driven by an increase in capital markets underwriting, partially offset by lower advisory fees. Investment banking income for the nine-month period decreased $505 million primarily driven by lower advisory and equity underwriting fees, and an overall decline in global fee pools.

Equity investment income decreased $1.2 billion and $2.8 billion for the three and nine months ended September 30, 2012. The three-month period a year ago included a $3.6 billion gain from the sale of a portion of our investment in China Construction Bank Corporation (CCB), partially offset by $2.2 billion of net losses related to equity and strategic investments other than CCB. The nine-month period in 2011 also included an $836 million CCB dividend, $500 million of additional impairment write-downs on our merchant services joint venture and a $377 million gain related to the sale of an equity investment.


12


Trading account profits decreased $365 million and $1.3 billion for the three and nine months ended September 30, 2012. Net DVA losses on derivatives were $583 million and $2.2 billion in the current-year periods compared to net DVA gains of $1.7 billion and $1.5 billion for the same periods in 2011. Excluding net DVA, trading account profits increased $1.9 billion and $2.3 billion for the three and nine months ended September 30, 2012 compared to the same periods in 2011 as credit markets improved and volatility declined.

Mortgage banking income increased $402 million and $16.2 billion for the three and nine months ended September 30, 2012. The increase for the three-month period was primarily driven by an increase in servicing income. The nine-month increase was driven by a $14.3 billion decrease in the representations and warranties provision as the prior-year period included $15.3 billion in provision related to the agreement to resolve nearly all legacy Countrywide Financial Corporation (Countrywide)-issued first-lien non-GSE residential mortgage-backed securities (RMBS) repurchase exposures, other non-GSE exposures, and to a lesser extent, GSE exposures.

Insurance income decreased $328 million and $1.3 billion for the three and nine months ended September 30, 2012. The three- month decrease was driven by provision in the current-year period related to payment protection insurance in the U.K. and the nine-month decrease was also due to the impact of the sale of Balboa Insurance Company's lender-placed insurance business (Balboa) in the second quarter of 2011.

Other income decreased $5.3 billion and $8.1 billion for the three and nine months ended September 30, 2012 primarily driven by negative fair value adjustments on our structured liabilities of $1.3 billion and $4.7 billion compared to positive fair value adjustments of $4.5 billion and $4.1 billion for the same periods in 2011. The nine months ended September 30, 2012 also included $1.7 billion of gains related to debt repurchases and exchanges of trust preferred securities. The nine-month period in 2011 included a net gain of $752 million on the sale of Balboa.

Provision for Credit Losses

The provision for credit losses decreased $1.6 billion to $1.8 billion, and $4.5 billion to $6.0 billion for the three and nine months ended September 30, 2012 compared to the same periods in 2011. For the three and nine months ended September 30, 2012, the provision for credit losses was $2.3 billion and $5.8 billion lower than net charge-offs, resulting in reductions in the allowance for credit losses compared to reductions of $1.7 billion and $6.3 billion in the allowance for credit losses for the three and nine months ended September 30, 2011. The reduction in the allowance for the three and nine months ended September 30, 2012 included $435 million of reserves on the loans forgiven as a part of the National Mortgage Settlement. For more information on the National Mortgage Settlement, see Consumer Portfolio Credit Risk Management on page 86. The provision for credit losses related to the PCI loan portfolios was a benefit of $166 million and an expense of $327 million for the three and nine months ended September 30, 2012.

The provision for credit losses related to our consumer portfolio decreased $1.9 billion to $1.6 billion, and $5.2 billion to $6.0 billion for the three and nine months ended September 30, 2012 compared to the same periods in 2011. The improvement was primarily in the home equity and residential mortgage loan portfolios due to improved portfolio trends and an improved home price outlook in our PCI portfolios. This was partially offset by the impact of new regulatory guidance regarding the treatment of loans discharged in Chapter 7 bankruptcy. The provision for credit losses related to our commercial portfolio, including the provision benefit for unfunded lending commitments, increased $256 million to $197 million, and $706 million to $11 million for the three and nine months ended September 30, 2012 compared to the same periods in 2011 due to stabilization in the credit quality of the core commercial portfolio.

Net charge-offs totaled $4.1 billion, or 1.86 percent, and $11.8 billion, or 1.77 percent of average loans and leases for the three and nine months ended September 30, 2012 compared to $5.1 billion, or 2.17 percent, and $16.8 billion, or 2.41 percent, for the same periods in 2011. Included in net charge-offs in the three and nine months ended September 30, 2012 were $478 million of charge-offs related to the impact of new regulatory guidance regarding the treatment of loans discharged in Chapter 7 bankruptcy and $435 million of charge-offs related to loans forgiven as a part of the National Mortgage Settlement. The decrease in net charge-offs was primarily driven by fewer delinquent loans and lower bankruptcy filings across the U.S. credit card and unsecured consumer lending portfolios, as well as lower net charge-offs in the consumer real estate and core commercial portfolios in the three and nine months ended September 30, 2012. For more information on the provision for credit losses, see Provision for Credit Losses on page 129.


13


Noninterest Expense
 
Table 5
Noninterest Expense
 
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions)
 
2012
 
2011
 
2012
 
2011
Personnel
 
$
8,431

 
$
8,865

 
$
27,348

 
$
28,204

Occupancy
 
1,160

 
1,183

 
3,419

 
3,617

Equipment
 
561

 
616

 
1,718

 
1,815

Marketing
 
479

 
556

 
1,393

 
1,680

Professional fees
 
873

 
937

 
2,578

 
2,349

Amortization of intangibles
 
315

 
377

 
955

 
1,144

Data processing
 
640

 
626

 
2,188

 
1,964

Telecommunications
 
410

 
405

 
1,227

 
1,167

Other general operating
 
4,675

 
3,872

 
12,907

 
15,672

Goodwill impairment
 

 

 

 
2,603

Merger and restructuring charges
 

 
176

 

 
537

Total noninterest expense
 
$
17,544

 
$
17,613

 
$
53,733

 
$
60,752


Noninterest expense was relatively unchanged for the three months ended September 30, 2012 as an increase in other general operating expense primarily related to costs associated with the Merrill Lynch Class Action Settlement and other litigation was offset by a decrease in personnel expense as the company continued to streamline processes and achieve cost savings. Noninterest expense decreased $7.0 billion to $53.7 billion for the nine months ended September 30, 2012 compared to the same period in 2011 with the decrease primarily driven by a $2.8 billion decrease in other general operating expense primarily related to lower litigation expense and mortgage-related assessments, waivers and similar costs related to foreclosure delays and an $856 million decrease in personnel expense as we continue to streamline processes and achieve cost savings. The nine months ended September 30, 2011 also included a $2.6 billion non-cash non-tax deductible goodwill impairment charge as well as $537 million of merger and restructuring charges.

In connection with Project New BAC, we expect to continue to achieve cost savings in certain noninterest expense categories as we continue to further streamline workflows, simplify processes and align expenses with our overall strategic plan and operating principles. During the nine months ended September 30, 2012, we continued implementation of Phase 1 initiatives, completed Phase 2 evaluations and began implementation of certain Phase 2 initiatives. With regard to Phase 1, we expect to realize more than $1 billion of cost savings in 2012 and $5 billion of annualized cost savings by the fourth quarter of 2013 with the full impact realized in 2014. We expect that Phase 2 will result in an additional $3 billion of annualized cost savings by mid-2015.

Income Tax Expense

Income tax expense was $770 million for the three months ended September 30, 2012 compared to $1.2 billion for the same period in 2011 and resulted in an effective tax rate of 69.4 percent compared to 16.2 percent in the year-ago quarter. Income tax expense was $1.5 billion for the nine months ended September 30, 2012 compared to an income tax benefit of $2.1 billion for the same period in 2011 and resulted in an effective tax rate of 30.5 percent compared to 79.5 percent in the year-ago period.

The effective tax rate for the three months ended September 30, 2012 was primarily driven by the $788 million impact of the U.K. corporate income tax rate reduction, as described in the next paragraph, partially offset by our recurring tax preference items and by tax benefits related to certain non-U.S. jurisdictions, including an increase in our accumulated earnings presumed to be permanently reinvested offshore. The effective tax rate for the three months ended September 30, 2011 was driven by a $619 million valuation allowance reduction, a $593 million benefit for the recognition of certain deferred tax related assets and recurring tax preference items, partially offset by the $782 million impact of the U.K. corporate income tax rate reduction that was enacted in July 2011. The effective tax rates for the nine months ended September 30, 2012 and 2011 were primarily driven by the same factors described in the three-month discussion above and, for the prior-year period, included the impact of the $2.6 billion non-deductible goodwill impairment charge.


14


On July 17, 2012, the U.K. 2012 Finance Bill was enacted, which reduced the U.K. corporate income tax rate by two percent to 23 percent. The first one percent reduction was effective on April 1, 2012 and the second reduction will be effective April 1, 2013. These reductions favorably affect income tax expense on future U.K. earnings, but also required us to remeasure our U.K. net deferred tax assets using the lower tax rates. If the corporate income tax rate is reduced to 22 percent by 2014 as suggested in U.K. Treasury announcements and assuming no change in the deferred tax asset balance, we would record a charge to income tax expense of approximately $400 million in the period of enactment.
Balance Sheet Overview
 
 
 
 
 
Table 6
Selected Balance Sheet Data
 
 
 
 
 
Average Balance
 
September 30
2012
 
December 31
2011
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
(Dollars in millions)
 
 
2012
 
2011
 
2012
 
2011
Assets
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold and securities borrowed or purchased under agreements to resell
$
234,034

 
$
211,183

 
$
234,955

 
$
256,143

 
$
234,058

 
$
247,635

Trading account assets
211,090

 
169,319

 
177,075

 
180,438

 
177,846

 
195,931

Debt securities
345,847

 
311,416

 
340,773

 
344,327

 
336,939

 
338,512

Loans and leases
893,035

 
926,200

 
888,859

 
942,032

 
900,650

 
939,848

Allowance for loan and lease losses
(26,233
)
 
(33,783
)
 
(29,478
)
 
(36,429
)
 
(31,377
)
 
(38,632
)
All other assets
508,389

 
544,711

 
561,128

 
614,943

 
566,858

 
642,938

Total assets
$
2,166,162

 
$
2,129,046

 
$
2,173,312

 
$
2,301,454

 
$
2,184,974

 
$
2,326,232

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Deposits
$
1,063,307

 
$
1,033,041

 
$
1,049,697

 
$
1,051,320

 
$
1,037,610

 
$
1,036,905

Federal funds purchased and securities loaned or sold under agreements to repurchase
273,900

 
214,864

 
287,142

 
261,830

 
274,395

 
281,476

Trading account liabilities
72,179

 
60,508

 
77,528

 
87,841

 
78,041

 
89,302

Commercial paper and other short-term borrowings
35,291

 
35,698

 
37,881

 
41,404

 
37,981

 
56,107

Long-term debt
286,534

 
372,265

 
291,684

 
420,273

 
329,320

 
431,902

All other liabilities
196,345

 
182,569

 
193,341

 
216,376

 
192,901

 
201,155

Total liabilities
1,927,556

 
1,898,945

 
1,937,273

 
2,079,044

 
1,950,248

 
2,096,847

Shareholders’ equity
238,606

 
230,101

 
236,039

 
222,410

 
234,726

 
229,385

Total liabilities and shareholders’ equity
$
2,166,162

 
$
2,129,046

 
$
2,173,312

 
$
2,301,454

 
$
2,184,974

 
$
2,326,232


Period-end balance sheet amounts may vary from average balance sheet amounts due to liquidity and balance sheet management activities, primarily involving our portfolios of highly liquid assets, that are designed to ensure the adequacy of capital while enhancing our ability to manage liquidity requirements for the Corporation and our customers, and to position the balance sheet in accordance with the Corporation’s risk appetite. The execution of these activities requires the use of balance sheet and capital-related limits including spot, average and risk-weighted asset limits, particularly within the market-making activities of our trading businesses. One of our key regulatory metrics, Tier 1 leverage ratio, is calculated based on adjusted quarterly average total assets.


15


Assets

At September 30, 2012, total assets were approximately $2.2 trillion, an increase of $37.1 billion, or two percent, from December 31, 2011. This increase was driven by trading account assets due to increases in U.S. Treasuries, EMEA sovereign debt and hedges in leveraged credit trading; debt securities primarily driven by net purchases of agency mortgage-backed securities (MBS); and federal funds sold and securities borrowed or purchased under agreements to resell to cover increases in client short positions, customer financing activities through the matched book and collateral requirements. These increases were partially offset by lower consumer loan balances due to continued run-off in targeted portfolios, lower card balances and asset sales, as well as lower cash and cash equivalents.

Average total assets decreased $128.1 billion and $141.3 billion for the three and nine months ended September 30, 2012 compared to the same periods in 2011. The decreases were driven by lower consumer loan balances as described above and the sale of strategic investments. The nine-month comparison to the same period in 2011 was also impacted by reduced trading account assets.

Liabilities and Shareholders’ Equity

At September 30, 2012, total liabilities were approximately $1.9 trillion, an increase of $28.6 billion, or two percent, from December 31, 2011 primarily driven by an increase in securities sold under agreements to repurchase due to funding of trading inventory resulting from customer demand and funding of higher trading account assets and securities, and an increase in deposits. Partially offsetting this increase were planned reductions in long-term debt.

Average total liabilities decreased $141.8 billion and $146.6 billion for the three and nine months ended September 30, 2012 compared to the same periods in 2011. The decreases were primarily driven by planned reductions in long-term debt, lower short-term borrowings due to the Corporation's reduced use of commercial paper and master notes, and lower trading account liabilities. The three-month comparison to the same period in 2011 was also impacted by an increase in securities sold under agreements to repurchase due to funding trading inventory resulting from customer demand and funding of trading account assets and securities, and matched book activity.

At September 30, 2012, shareholders’ equity was $238.6 billion, an increase of $8.5 billion, or four percent, from December 31, 2011 due to earnings, an increase in unrealized gains on available-for-sale (AFS) debt securities in other comprehensive income (OCI), common stock issued under employee plans and exchanges of preferred and trust preferred securities, and a gain on curtailment of the Corporation's Qualified Pension Plans.

Average shareholders' equity increased $13.6 billion and $5.3 billion for the three and nine months ended September 30, 2012 compared to the same periods in 2011 driven by earnings, common stock issued under employee plans, and the sale of preferred stock and related warrants to Berkshire Hathaway, Inc. in the third quarter of 2011. The nine-month increase was also impacted by exchanges of preferred and trust preferred securities and a gain on curtailment of the Corporation's Qualified Pension Plans. These increases were partially offset by lower unrealized gains on AFS debt securities in accumulated OCI in 2012.

16


Table 7
 
 
 
 
Selected Quarterly Financial Data
 
 
 
 
 
2012 Quarters
 
2011 Quarters
(In millions, except per share information)
Third
 
Second
 
First
 
Fourth
 
Third
Income statement
 
 
 
 
 
 
 
 
 
Net interest income
$
9,938

 
$
9,548

 
$
10,846

 
$
10,701

 
$
10,490

Noninterest income
10,490

 
12,420

 
11,432

 
14,187

 
17,963

Total revenue, net of interest expense
20,428

 
21,968

 
22,278

 
24,888

 
28,453

Provision for credit losses
1,774

 
1,773

 
2,418

 
2,934

 
3,407

Goodwill impairment

 

 

 
581

 

Merger and restructuring charges

 

 

 
101

 
176

All other noninterest expense (1)
17,544

 
17,048

 
19,141

 
18,840

 
17,437

Income before income taxes
1,110

 
3,147

 
719

 
2,432

 
7,433

Income tax expense
770

 
684

 
66

 
441

 
1,201

Net income
340

 
2,463

 
653

 
1,991

 
6,232

Net income (loss) applicable to common shareholders
(33
)
 
2,098

 
328

 
1,584

 
5,889

Average common shares issued and outstanding
10,776

 
10,776

 
10,651

 
10,281

 
10,116

Average diluted common shares issued and outstanding
10,776

 
11,556

 
10,762

 
11,125

 
10,464

Performance ratios
 
 
 
 
 
 
 
 
 
Return on average assets
0.06
%
 
0.45
%
 
0.12
%
 
0.36
%
 
1.07
%
Four quarter trailing return on average assets (2)
0.25

 
0.51

 
n/m

 
0.06

 
n/m

Return on average common shareholders’ equity
n/m

 
3.89

 
0.62

 
3.00

 
11.40

Return on average tangible common shareholders’ equity (3)
n/m

 
5.95

 
0.95

 
4.72

 
18.30

Return on average tangible shareholders’ equity (3)
0.84

 
6.16

 
1.67

 
5.20

 
17.03

Total ending equity to total ending assets
11.02

 
10.92

 
10.66

 
10.81

 
10.37

Total average equity to total average assets
10.86

 
10.73

 
10.63

 
10.34

 
9.66

Dividend payout
n/m

 
5.60

 
34.97

 
6.60

 
1.73

Per common share data
 
 
 
 
 
 
 
 
 
Earnings
$
0.00

 
$
0.19

 
$
0.03

 
$
0.15

 
$
0.58

Diluted earnings
0.00

 
0.19

 
0.03

 
0.15

 
0.56

Dividends paid
0.01

 
0.01

 
0.01

 
0.01

 
0.01

Book value
20.40

 
20.16

 
19.83

 
20.09

 
20.80

Tangible book value (3)
13.48

 
13.22

 
12.87

 
12.95

 
13.22

Market price per share of common stock
 
 
 
 
 
 
 
 
 
Closing
$
8.83

 
$
8.18

 
$
9.57

 
$
5.56

 
$
6.12

High closing
9.55

 
9.68

 
9.93

 
7.35

 
11.09

Low closing
7.04

 
6.83

 
5.80

 
4.99

 
6.06

Market capitalization
$
95,163

 
$
88,155

 
$
103,123

 
$
58,580

 
$
62,023

Average balance sheet
 
 
 
 
 
 
 
 
 
Total loans and leases
$
888,859

 
$
899,498

 
$
913,722

 
$
932,898

 
$
942,032

Total assets
2,173,312

 
2,194,563

 
2,187,174

 
2,207,567

 
2,301,454

Total deposits
1,049,697

 
1,032,888

 
1,030,112

 
1,032,531

 
1,051,320

Long-term debt
291,684

 
333,173

 
363,518

 
389,557

 
420,273

Common shareholders’ equity
217,273

 
216,782

 
214,150

 
209,324

 
204,928

Total shareholders’ equity
236,039

 
235,558

 
232,566

 
228,235

 
222,410

Asset quality (4)
 
 
 
 
 
 
 
 
 
Allowance for credit losses (5)
$
26,751

 
$
30,862

 
$
32,862

 
$
34,497

 
$
35,872

Nonperforming loans, leases and foreclosed properties (6)
24,925

 
25,377

 
27,790

 
27,708

 
29,059

Allowance for loan and lease losses as a percentage of total loans and leases outstanding (6)
2.96
%
 
3.43
%
 
3.61
%
 
3.68
%
 
3.81
%
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (6)
111

 
127

 
126

 
135

 
133

Allowance for loan and lease losses as a percentage of total nonperforming loans and leases excluding the PCI loan portfolio (6)
81

 
90

 
91

 
101

 
101

Amounts included in allowance that are excluded from nonperforming loans (7)
$
13,978

 
$
16,327

 
$
17,006

 
$
17,490

 
$
18,317

Allowance as a percentage of total nonperforming loans and leases excluding the amounts included in the allowance that are excluded from nonperforming loans (7)
52
%
 
59
%
 
60
%
 
65
%
 
63
%
Net charge-offs (8)
$
4,122

 
$
3,626

 
$
4,056

 
$
4,054

 
$
5,086

Annualized net charge-offs as a percentage of average loans and leases outstanding (6, 8)
1.86
%
 
1.64
%
 
1.80
%
 
1.74
%
 
2.17
%
Nonperforming loans and leases as a percentage of total loans and leases outstanding (6)
2.68

 
2.70

 
2.85

 
2.74

 
2.87

Nonperforming loans, leases and foreclosed properties as a percentage of total loans, leases and foreclosed properties (6)
2.81

 
2.87

 
3.10

 
3.01

 
3.15

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs (8)
1.60

 
2.08

 
1.97

 
2.10

 
1.74

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs, excluding the PCI loan portfolio
1.17

 
1.46

 
1.43

 
1.57

 
1.33

Capital ratios (period end)
 
 
 
 
 
 
 
 
 
Risk-based capital:
 
 
 
 
 
 
 
 
 
Tier 1 common
11.41
%
 
11.24
%
 
10.78
%
 
9.86
%
 
8.65
%
Tier 1
13.64

 
13.80

 
13.37

 
12.40

 
11.48

Total
17.16

 
17.51

 
17.49

 
16.75

 
15.86

Tier 1 leverage
7.84

 
7.84

 
7.79

 
7.53

 
7.11

Tangible equity (3)
7.85

 
7.73

 
7.48

 
7.54

 
7.16

Tangible common equity (3)
6.95

 
6.83

 
6.58

 
6.64

 
6.25

(1) 
Excludes merger and restructuring charges and goodwill impairment charges.
(2) 
Calculated as total net income for four consecutive quarters divided by annualized average assets for four consecutive quarters.
(3) 
Tangible equity ratios and tangible book value per share of common stock are non-GAAP financial measures. Other companies may define or calculate these measures differently. For additional information on these ratios and for corresponding reconciliations to GAAP financial measures, see Supplemental Financial Data on page 19 and Table 9 on pages 20 through 21.
(4) 
For more information on the impact of the PCI loan portfolio on asset quality, see Consumer Portfolio Credit Risk Management on page 86.
(5) 
Includes the allowance for loan and lease losses and the reserve for unfunded lending commitments.
(6) 
Balances and ratios do not include loans accounted for under the fair value option. For additional exclusions from nonperforming loans, leases and foreclosed properties, see Nonperforming Consumer Loans and Foreclosed Properties Activity on page 106 and corresponding Table 45, and Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 118 and corresponding Table 54.
(7) 
Amounts included in allowance that are excluded from nonperforming loans primarily include amounts allocated to the U.S. credit card and unsecured consumer lending portfolios in CBB, PCI loans and the non-U.S. credit card portfolio in All Other.
(8) 
Net charge-offs exclude $1.7 billion of write-offs in the Countrywide home equity PCI portfolio for the three months ended September 30, 2012. These write-offs decreased the PCI valuation allowance included as part of the allowance for loan and lease losses.
n/m = not meaningful

17


Table 8
 
 
 
Selected Year-to-Date Financial Data
 
 
 
 
Nine Months Ended September 30
(In millions, except per share information)
2012
 
2011
Income statement
 
 
 
Net interest income
$
30,332

 
$
33,915

Noninterest income
34,342

 
34,651

Total revenue, net of interest expense
64,674

 
68,566

Provision for credit losses
5,965

 
10,476

Goodwill impairment

 
2,603

Merger and restructuring charges

 
537

All other noninterest expense (1)
53,733

 
57,612

Income (loss) before income taxes
4,976

 
(2,662
)
Income tax expense (benefit)
1,520

 
(2,117
)
Net income (loss)
3,456

 
(545
)
Net income (loss) applicable to common shareholders
2,393

 
(1,499
)
Average common shares issued and outstanding
10,735

 
10,096

Average diluted common shares issued and outstanding
10,827

 
10,096

Performance ratios
 
 
 
Return on average assets
0.21
%
 
n/m

Return on average common shareholders’ equity
1.48

 
n/m

Return on average tangible common shareholders’ equity (2)
2.26

 
n/m

Return on average tangible shareholders’ equity (2)
2.89

 
n/m

Total ending equity to total ending assets
11.02

 
10.37
%
Total average equity to total average assets
10.74

 
9.86

Dividend payout
13.79

 
n/m

Per common share data
 
 
 
Earnings (loss)
$
0.22

 
$
(0.15
)
Diluted earnings (loss)
0.22

 
(0.15
)
Dividends paid
0.03

 
0.03

Book value
20.40

 
20.80

Tangible book value (2)
13.48

 
13.22

Market price per share of common stock
 
 
 
Closing
$
8.83

 
$
6.12

High closing
9.93

 
15.25

Low closing
5.80

 
6.06

Market capitalization
$
95,163

 
$
62,023

Average balance sheet
 
 
 
Total loans and leases
$
900,650

 
$
939,848

Total assets
2,184,974

 
2,326,232

Total deposits
1,037,610

 
1,036,905

Long-term debt
329,320

 
431,902

Common shareholders’ equity
216,073

 
212,512

Total shareholders’ equity
234,726

 
229,385

Asset quality (3)
 
 
 
Allowance for credit losses (4)
$
26,751

 
$
35,872

Nonperforming loans, leases and foreclosed properties (5)
24,925

 
29,059

Allowance for loan and lease losses as a percentage of total loans and leases outstanding (5)
2.96
%
 
3.81
%
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (5)
111

 
133

Allowance for loan and lease losses as a percentage of total nonperforming loans and leases excluding the PCI loan portfolio (5)
81

 
101

Amounts included in allowance that are excluded from nonperforming loans (6)
$
13,978

 
$
18,317

Allowance as a percentage of total nonperforming loans and leases excluding the amounts included in the allowance that are excluded from nonperforming loans (6)
52
%
 
63
%
Net charge-offs (7)
$
11,804

 
$
16,779

Annualized net charge-offs as a percentage of average loans and leases outstanding (5, 7)
1.77
%
 
2.41
%
Nonperforming loans and leases as a percentage of total loans and leases outstanding (5)
2.68

 
2.87

Nonperforming loans, leases and foreclosed properties as a percentage of total loans, leases and foreclosed properties (5)
2.81

 
3.15

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs (7)
1.66

 
1.56

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs, excluding the PCI loan portfolio
1.21

 
1.20

(1) 
Excludes merger and restructuring charges and goodwill impairment charges.
(2) 
Tangible equity ratios and tangible book value per share of common stock are non-GAAP financial measures. Other companies may define or calculate these measures differently. For additional information on these ratios and for corresponding reconciliations to GAAP financial measures, see Supplemental Financial Data on page 19 and Table 9 on pages 20 through 21.
(3) 
For more information on the impact of the PCI loan portfolio on asset quality, see Consumer Portfolio Credit Risk Management on page 86.
(4) 
Includes the allowance for loan and lease losses and the reserve for unfunded lending commitments.
(5) 
Balances and ratios do not include loans accounted for under the fair value option. For additional exclusions from nonperforming loans, leases and foreclosed properties, see Nonperforming Consumer Loans and Foreclosed Properties Activity on page 106 and corresponding Table 45, and Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 118 and corresponding Table 54.
(6) 
Amounts included in allowance that are excluded from nonperforming loans primarily include amounts allocated to the U.S. credit card and unsecured consumer lending portfolios in CBB, PCI loans and the non-U.S. credit card portfolio in All Other.
(7) 
Net charge-offs exclude $1.7 billion of write-offs in the Countrywide home equity PCI portfolio for the nine months ended September 30, 2012. These write-offs decreased the PCI valuation allowance included as part of the allowance for loan and lease losses.
n/m = not meaningful

18


Supplemental Financial Data

We view net interest income and related ratios and analyses on a FTE basis, which when presented on a consolidated basis, are non-GAAP financial measures. We believe managing the business with net interest income on a FTE basis provides a more accurate picture of the interest margin for comparative purposes. To derive the FTE basis, net interest income is adjusted to reflect tax-exempt income on an equivalent before-tax basis with a corresponding increase in income tax expense. For purposes of this calculation, we use the federal statutory tax rate of 35 percent. This measure ensures comparability of net interest income arising from taxable and tax-exempt sources.

Certain performance measures including the efficiency ratio and net interest yield utilize net interest income (and thus total revenue) on a FTE basis. The efficiency ratio measures the costs expended to generate a dollar of revenue, and net interest yield measures the bps we earn over the cost of funds.

We also evaluate our business based on certain ratios that utilize tangible equity, a non-GAAP financial measure. Tangible equity represents an adjusted shareholders’ equity or common shareholders’ equity amount which has been reduced by goodwill and intangible assets (excluding MSRs), net of related deferred tax liabilities. These measures are used to evaluate our use of equity. In addition, profitability, relationship and investment models all use return on average tangible shareholders’ equity (ROTE) as key measures to support our overall growth goals. These ratios are as follows:

Return on average tangible common shareholders’ equity measures our earnings contribution as a percentage of adjusted common shareholders’ equity. The tangible common equity ratio represents adjusted common shareholders’ equity divided by total assets less goodwill and intangible assets (excluding MSRs), net of related deferred tax liabilities.

ROTE measures our earnings contribution as a percentage of adjusted average total shareholders’ equity. The tangible equity ratio represents adjusted total shareholders’ equity divided by total assets less goodwill and intangible assets (excluding MSRs), net of related deferred tax liabilities.

Tangible book value per common share represents adjusted ending common shareholders’ equity divided by ending common shares outstanding.

The aforementioned supplemental data and performance measures are presented in Tables 7 and 8.

In addition, we evaluate our business segment results based on measures that utilize return on economic capital, a non-GAAP financial measure, including the following:

Return on average economic capital for the segments is calculated as net income, adjusted for cost of funds and earnings credits and certain expenses related to intangibles, divided by average economic capital.

Economic capital represents allocated equity less goodwill and a percentage of intangible assets (excluding MSRs).

19


Certain of the information presented in Table 9 excludes the impact of a goodwill impairment charge of $581 million recorded in the fourth quarter of 2011 and certain of the information presented in Table 10 excludes the impact of a goodwill impairment charge of $2.6 billion recorded in the second quarter of 2011. Accordingly, these are non-GAAP financial measures. Tables 9, 10 and 11 provide reconciliations of these non-GAAP financial measures to GAAP financial measures. We believe the use of these non-GAAP financial measures provides additional clarity in assessing the results of the Corporation and our segments. Other companies may define or calculate these measures and ratios differently.

Table 9
Quarterly Supplemental Financial Data and Reconciliations to GAAP Financial Measures
 
2012 Quarters
 
2011 Quarters
(Dollars in millions, except per share information)
Third
 
Second
 
First
 
Fourth
 
Third
Fully taxable-equivalent basis data
 
 
 
 
 
 
 
 
 
Net interest income
$
10,167

 
$
9,782

 
$
11,053

 
$
10,959

 
$
10,739

Total revenue, net of interest expense
20,657

 
22,202

 
22,485

 
25,146

 
28,702

Net interest yield
2.32
%
 
2.21
%
 
2.51
%
 
2.45
%
 
2.32
%
Efficiency ratio
84.93

 
76.79

 
85.13

 
77.64

 
61.37

 
 
 
 
 
 
 
 
 
 
Performance ratios, excluding goodwill impairment charge (1)
 
 
 
 
 
 
 
 
 
Per common share information
 
 
 
 
 
 
 
 
 
Earnings
 
 
 
 
 
 
$
0.21

 
 
Diluted earnings
 
 
 
 
 
 
0.20

 
 
Efficiency ratio (FTE basis)
 
 
 
 
 
 
75.33
%
 
 
Return on average assets
 
 
 
 
 
 
0.46

 
 
Four quarter trailing return on average assets (2)
 
 
 
 
 
 
0.20

 
 
Return on average common shareholders’ equity
 
 
 
 
 
 
4.10

 
 
Return on average tangible common shareholders’ equity
 
 
 
 
 
 
6.46

 
 
Return on average tangible shareholders’ equity
 
 
 
 
 
 
6.72

 
 
(1) 
Performance ratios are calculated excluding the impact of the goodwill impairment charge of $581 million recorded during the fourth quarter of 2011.
(2) 
Calculated as total net income for four consecutive quarters divided by annualized average assets for four consecutive quarters.


20


Table 9
Quarterly Supplemental Financial Data and Reconciliations to GAAP Financial Measures (continued)
 
2012 Quarters
 
2011 Quarters
(Dollars in millions)
Third
 
Second
 
First
 
Fourth
 
Third
Reconciliation of net interest income to net interest income on a fully taxable-equivalent basis
 
 
 
 
 
 
 
 
 
Net interest income
$
9,938

 
$
9,548

 
$
10,846

 
$
10,701

 
$
10,490

Fully taxable-equivalent adjustment
229

 
234

 
207

 
258

 
249

Net interest income on a fully taxable-equivalent basis
$
10,167

 
$
9,782

 
$
11,053

 
$
10,959

 
$
10,739

Reconciliation of total revenue, net of interest expense to total revenue, net of interest expense on a fully taxable-equivalent basis
 
 
 
 
 
 
 
 
 
Total revenue, net of interest expense
$
20,428

 
$
21,968

 
$
22,278