10-Q 1 bac-3312013x10q.htm 10-Q BAC-3.31.2013-10Q


 
 
 
 
 

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 March 31, 2013
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 May 3, 2013, there were 10,780,377,285 shares of Bank of America Corporation Common Stock outstanding.
 
 
 
 
 

                


Bank of America Corporation
 
March 31, 2013
 
Form 10-Q
 
 
 
INDEX
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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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: expectations regarding the effects of U.S. budget sequestration; expectations regarding the anticipated transfers of, and the possibility of future additional agreements to sell, mortgage servicing rights; expectations regarding planned actions pursuant to the Corporation's capital plan; the expectation that borrower assistance programs will not result in any incremental credit provision and that the existing allowance for credit losses is adequate to absorb any costs that have not already been recorded as charge-offs; expectations of achieving cost savings as a result of Project New BAC of $8 billion per year on an annualized basis, or $2 billion per quarter, by mid-2015, with $1.5 billion in quarterly cost savings achieved by the fourth quarter of 2013; that the Corporation may purchase outstanding debt instruments depending on prevailing market conditions, liquidity and other factors; expectations regarding the timing and impact of proposed U.K. corporate income tax rate reductions; the expectation that unresolved repurchase claims related to private-label securitizations will continue to increase; the resolution of representation and warranties repurchase and other claims; the belief that increases in requests for loan files from certain private-label securitization trustees and requests for tolling agreements to toll the applicable statutes of limitation related to representations and warranties repurchase claims will likely lead to an increase in repurchase claims from private-label securitization trustees with standing to bring such claims; expectations regarding the MBIA Settlement, the payments to be made thereunder, the claims to be extinguished by the settlement and the actions to be taken by the parties in furtherance thereof; beliefs and expectations concerning the impact of the National Mortgage Settlement, including the impact of uniform servicing standards; the substance and timing of the final rules implementing Basel 3; the expectation that the Corporation will comply with the final Basel 3 rules when issued and effective; that estimates under the Basel 3 Advanced Approach will be refined over time as a result of further rulemaking or clarification by U.S. banking regulators and as the Corporation's understanding and interpretation of the rules evolve; that the final rules when adopted and fully implemented are likely to influence regulatory capital and liquidity planning processes and may impose additional operational and compliance costs on the Corporation; 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 Basel 3 Advanced Approach, if adopted as proposed, is expected to substantially increase the Corporation's capital requirements; expectations regarding preferred dividends; 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 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 decline due to maturities through 2013; expectations regarding loans in the pay option portfolio; effects of the ongoing debt crisis in certain EU countries, including the expectation of continued market volatility, 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; the expectation that, absent unexpected deterioration in the economy, there will be reductions in the allowance for credit losses; the expectation that the maximum potential exposure for chargebacks would not exceed the total amount of merchant transactions processed through Visa, MasterCard and Discover for the last six months; and other matters relating to the Corporation and the securities that it may offer from time to time or steps it may take to manage the risk of these securities. 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 2012 Annual Report on Form 10-K, and in any of the Corporation's subsequent Securities and Exchange Commission filings: the Corporation's ability to resolve representations and warranties repurchase 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 government-sponsored enterprises, monolines or private-label and other investors; the possibility that future representations and warranties losses may occur in excess of the Corporation's recorded liability and estimated range of possible loss for its representations and warranties exposures; the possibility that the Corporation may not collect mortgage insurance claims; the possible impact of a future FASB standard on accounting for credit losses; 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 possibility of future inquiries or investigations regarding pending or completed foreclosure activities; the uncertainty regarding the timing and final substance of any capital or liquidity standards, including the final Basel 3 requirements and their

3


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 Financial Reform 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; 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.

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 Bank of America Corporation individually, Bank of America Corporation and its subsidiaries, or certain of Bank of America Corporation's subsidiaries or affiliates. Our principal executive offices are located in Charlotte, North Carolina. Through our banking and various 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. We operate our banking activities primarily under two national bank charters: Bank of America, National Association (Bank of America, N.A. or BANA) and FIA Card Services, National Association (FIA Card Services, N.A. or FIA). At March 31, 2013, the Corporation had approximately $2.2 trillion in assets and approximately 263,000 full-time equivalent employees.

As of March 31, 2013, 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 approximately 52 million consumer and small business relationships with approximately 5,400 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.


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Table 1 provides selected consolidated financial data for the three months ended March 31, 2013 and 2012, and at March 31, 2013 and December 31, 2012.

Table 1
Selected Financial Data
 
Three Months Ended March 31
(Dollars in millions, except per share information)
2013
 
2012
Income statement
 
 
 
Revenue, net of interest expense (FTE basis) (1)
$
23,408

 
$
22,485

Net income
1,483

 
653

Diluted earnings per common share
0.10

 
0.03

Dividends paid per common share
0.01

 
0.01

Performance ratios
 
 
 
Return on average assets
0.27
%
 
0.12
%
Return on average tangible shareholders' equity (1)
3.69

 
1.67

Efficiency ratio (FTE basis) (1)
83.31

 
85.13

Asset quality
 
 
 
Allowance for loan and lease losses at period end
$
22,441

 
$
32,211

Allowance for loan and lease losses as a percentage of total loans and leases outstanding at period end (2)
2.49
%
 
3.61
%
Nonperforming loans, leases and foreclosed properties at period end (2)
$
22,842

 
$
27,790

Net charge-offs (3)
2,517

 
4,056

Annualized net charge-offs as a percentage of average loans and leases outstanding (2, 3)
1.14
%
 
1.80
%
Annualized net charge-offs as a percentage of average loans and leases outstanding, excluding the purchased credit-impaired loan portfolio (2)
1.18

 
1.87

Annualized net charge-offs and purchased credit-impaired write-offs as a percentage of average loans and leases outstanding (2, 4)
1.52

 
1.80

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs (3)
2.20

 
1.97

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs, excluding the purchased credit-impaired loan portfolio
1.76

 
1.43

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs and purchased credit-impaired write-offs (4)
1.65

 
1.97

 
 
 
 
 
March 31
2013
 
December 31
2012
Balance sheet
 
 
 
Total loans and leases
$
911,592

 
$
907,819

Total assets
2,174,819

 
2,209,974

Total deposits
1,095,183

 
1,105,261

Total common shareholders' equity
218,513

 
218,188

Total shareholders' equity
237,293

 
236,956

Capital ratios (5)
 
 
 
Tier 1 common capital
10.49
%
 
11.06
%
Tier 1 capital
12.22

 
12.89

Total capital
15.50

 
16.31

Tier 1 leverage
7.49

 
7.37

(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 16.
(2) 
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 Consumer Portfolio Credit Risk Management – Nonperforming Consumer Loans and Foreclosed Properties Activity on page 89 and corresponding Table 38, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 98 and corresponding Table 47.
(3) 
Net charge-offs exclude $839 million of write-offs in the purchased credit-impaired loan portfolio for the three months ended March 31, 2013. These write-offs decreased the purchased credit-impaired valuation allowance included as part of the allowance for loan and lease losses. For information on purchased credit-impaired write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 83.
(4) 
There were no write-offs of purchased credit-impaired loans in the three months ended March 31, 2012.
(5) 
Presents capital ratios in accordance with the Basel 1 – 2013 Rules, which includes the Market Risk Final Rule at March 31, 2013. Basel 1 did not include the Basel 1 – 2013 Rules at December 31, 2012.

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First Quarter 2013 Economic and Business Environment

In the U.S., economic growth accelerated in the first quarter of 2013 and many key economic factors continued to gradually improve. With economic growth suppressed in the fourth quarter of 2012 by a combination of weather-related events and an unusually sharp decline in federal defense expenditures, some acceleration had been anticipated, but actual economic performance exceeded consensus expectations in the first quarter, especially in light of fiscal cliff related anxiety. Consumer spending advanced at its most rapid pace in at least two years, with strong merchandise sales even as service spending continued to lag. In addition to the continued improvement of the housing sector and a pickup in business spending, real gross domestic product grew approximately 2.5 percent annualized during the first quarter of 2013. Employment gains were steady during the quarter, while the unemployment rate continued its gradual decline to 7.6 percent at March 31, 2013.

The Board of Governors of the Federal Reserve System (Federal Reserve) continued its $40 billion in monthly purchases of agency mortgage-backed securities (MBS), began the $45 billion in monthly purchases of long-term U.S. Treasury securities and maintained its forward guidance on interest rates expressed in terms of economic thresholds, which began in December 2012. Following the compromise on the fiscal cliff reached in early 2013, which allowed the two-year reduction in payroll taxes to expire and put in place select income tax rate hikes, attention turned to extending the continuing resolution authorizing federal spending and avoiding the automatic spending cuts (the sequestration) mandated if deficit reduction could not be achieved by other means. The continuing resolution was extended, avoiding any government shutdown and sequestration became effective on March 1, 2013. However, we expect that the impact of sequestration will likely be modest. Despite remaining fiscal uncertainties and international economic difficulties, U.S. equities posted a strong quarter and long-term U.S. Treasury yields rose moderately early in the quarter, but reversed their gains late in the quarter.

International developments in the first quarter of 2013 reflected increased economic momentum. Most European economies continued to contract but at a diminishing pace. As a whole, yield spreads for periphery nations continued to benefit from the 2012 European Central Bank clarification of its role as lender of last resort. Japan's economy also improved as the impacts of a depreciating Yen and expectations of increased monetary accommodation proved beneficial. China's economy exhibited signs of stabilization, while other emerging Asian economies have accelerated. For more information on our international exposure, see Non-U.S. Portfolio on page 104.

Recent Events

MBIA Settlement

On May 7, 2013, we entered into our previously announced comprehensive settlement (MBIA Settlement) with MBIA Inc. and certain of its affiliates (MBIA) to resolve all outstanding litigation between the parties, as well as other claims between the parties, including outstanding and potential claims from MBIA related to alleged representations and warranties breaches and other claims involving certain first- and second-lien residential mortgage-backed securities (RMBS) trusts for which MBIA provided financial guarantee insurance, certain of which claims are the subject of litigation. As of March 31, 2013, the mortgages (first- and second-lien) in RMBS trusts covered by the MBIA Settlement had an original principal balance of $54.8 billion and an unpaid principal balance of $19.2 billion.

Under the MBIA Settlement, all pending litigation between the parties will be dismissed and each party will receive a global release of those claims. The Corporation will make a settlement payment to MBIA of $1.565 billion in cash and transfer to MBIA approximately $95 million in fair market value of notes issued by MBIA and currently held by the Corporation. In addition, MBIA will issue to the Corporation warrants to purchase up to approximately 4.9 percent of MBIA's currently outstanding common stock, at an exercise price of $9.59 per share, which may be exercised at any time prior to May 2018. In addition, we will provide a senior secured $500 million credit facility to an affiliate of MBIA.

The parties will also terminate various credit default swap (CDS) transactions entered into between us and a MBIA-affiliate, LaCrosse Financial Products, LLC, and guaranteed by MBIA, which constitute all of the outstanding CDS protection agreements purchased by us from MBIA on commercial mortgage-backed securities (CMBS). Collectively, those CDS transactions had a notional value of $7.4 billion and a fair value of $813 million as of March 31, 2013. The parties will also terminate certain other trades in order to close out positions between the parties; the termination of these trades will not have a material impact on the financial statements.


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The cost associated with the MBIA Settlement and related matters is covered by pre-existing reserves and additional charges recorded as of March 31, 2013. Because the MBIA Settlement occurred after quarter end, but before the Corporation filed this Form 10-Q and the MBIA Settlement related to conditions that existed at March 31, 2013, it is considered to be a subsequent event under the applicable accounting guidance. Accordingly, the Corporation recorded approximately $1.6 billion of pre-tax additional charges in the first quarter of 2013, of which approximately $1.3 billion is litigation expense and $300 million is a related receivable write-down recorded in other noninterest income. The litigation expense includes charges related to the MBIA Settlement as well as adjustments to litigation reserves for other monoline matters, primarily as a result of the experience gained in connection with the MBIA Settlement. For additional information, see Global Markets – Sales and Trading Revenue on page 40, Off-Balance Sheet Arrangements and Contractual Obligations – Representations and Warranties on page 45, Commercial Portfolio Credit Risk Management – Monoline Exposure on page 100, Note 8 – Representations and Warranties Obligations and Corporate Guarantees and Note 11 – Commitments and Contingencies to the Consolidated Financial Statements.

Countrywide RMBS Class Action Settlement

On April 16, 2013, we reached an agreement in principle to settle three class action lawsuits involving certain Countrywide Financial Corporation (Countrywide) entities and various institutional and individual plaintiffs (Maine State Retirement System v. Countrywide Financial Corporation, David H. Luther v. Countrywide Financial Corporation, and Western Conference of Teamsters Pension Trust Fund v. Countrywide Financial Corporation) concerning RMBS issued by subsidiaries of Countrywide (RMBS Settlement).

The first of these class action lawsuits was filed in November 2007, and they collectively concern the disclosures that were made in connection with 429 Countrywide RMBS offerings issued from 2005 through 2007. The original principal balance of the RMBS involved in these cases exceeded $350 billion, and the unpaid principal balance of these securities as of February 2013, excluding securities that are the subject of filed or threatened individual actions, was $95 billion.

Under the RMBS Settlement, the lawsuits will be dismissed in their entirety and defendants will receive a global release in exchange for a settlement payment of $500 million. The settlement will not affect investors' rights to receive trust distributions upon final court approval of the $8.5 billion settlement with Bank of New York Mellon, as trustee. The RMBS Settlement is subject to final court approval. There can be no assurance that final court approval of the RMBS Settlement will be obtained or that all conditions to such settlement will be satisfied. If approved, and all class members who have not already filed or threatened individual suits participate, the settlement is expected to resolve approximately 80 percent of the unpaid principal balance of the Countrywide-issued RMBS as to which securities disclosure claims have been filed or threatened, and approximately 70 percent of the unpaid principal balance of all RMBS as to which securities disclosure claims have been filed or threatened as to all Bank of America-related entities. The amounts to be paid in the RMBS Settlement are covered by a combination of pre-existing litigation reserves and additional litigation reserves recorded in the first quarter of 2013.

Capital and Liquidity Related Matters

On March 14, 2013, the Federal Reserve announced the results of its 2013 Comprehensive Capital Analysis and Review project (CCAR). The Federal Reserve's stress scenario projections for the Corporation estimated a minimum Tier 1 common capital ratio under the Basel 1 2013 Rules, which includes the Market Risk Final Rule, based on the 2013 capital plan, of 6.0 percent under severe adverse economic conditions with all proposed capital actions through the end of 2014, exceeding the five percent reference rate for all institutions involved in the CCAR. The capital plan that the Corporation submitted to the Federal Reserve included a request to repurchase up to $5.0 billion of common stock over the next four quarters, beginning in the second quarter of 2013, the redemption of approximately $5.5 billion in preferred stock and the continuation of the quarterly common stock dividend at $0.01 per share. The Federal Reserve did not object to the Corporation's 2013 capital plan, including all proposed capital actions. On April 1, 2013, a notice of redemption was sent to holders of the Corporation's 8.625% Non-Cumulative Preferred Stock, Series 8, including holders of depositary shares representing interests therein, to redeem approximately $2.7 billion of the Series 8 Preferred Stock on May 28, 2013. On May 1, 2013, pursuant to the capital plan, we redeemed approximately $2.9 billion of our 8.20% Non-Cumulative Preferred Stock, Series H. For additional information, see Capital Management – Regulatory Capital on page 58.


7


Sales of Mortgage Servicing Rights

As previously disclosed, during the first quarter of 2013, Bank of America entered into definitive agreements with three counterparties to sell the servicing rights on certain residential mortgage loans serviced for Fannie Mae (FNMA), Freddie Mac (FHLMC), the Government National Mortgage Association (GNMA) and certain private-label securitizations. In addition, on April 1, 2013, we entered into a definitive agreement with an additional counterparty to sell mortgage servicing rights (MSRs) for additional loans serviced for FNMA. In total, the aggregate unpaid principal balance of these serviced loans is approximately $327 billion. The sales involve 2.2 million loans serviced by us as of the applicable contract dates, including approximately 245,000 residential mortgage loans and approximately 24,000 home equity loans that were 60 days or more past due.

The transfers of servicing rights are expected to occur in stages throughout 2013, and began in the first quarter. Certain of the transfers are subject to the approval or consent of certain third parties. There is no assurance that all the required approvals and consents will be obtained, and accordingly, some of these transfers may not be consummated. For additional information, see CRES Mortgage Servicing Rights on page 35.

Fannie Mae Settlement

As previously disclosed, on January 6, 2013, we entered into an agreement with FNMA to resolve substantially all outstanding and potential repurchase and certain other claims relating to the origination, sale and delivery of residential mortgage loans originated and sold directly to FNMA from January 1, 2000 through December 31, 2008 by entities related to Countrywide and BANA. As part of this agreement, in the first quarter of 2013, we made a cash payment to FNMA of $3.6 billion and also repurchased for $6.6 billion certain residential mortgage loans that had previously been sold to FNMA, which we have valued at less than the purchase price. The Corporation was fully reserved at December 31, 2012 for the settlement with FNMA. For additional information, see Note 8 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements and to the Consolidated Financial Statements of the Corporation's 2012 Annual Report on Form 10-K, and Consumer Portfolio Credit Risk Management on page 72.



8


Performance Overview

Net income was $1.5 billion, or $0.10 per diluted share for the three months ended March 31, 2013 compared to $653 million, or $0.03 per diluted share for the same period in 2012. The following highlights the significant changes.

Net interest income on a fully taxable-equivalent (FTE) basis decreased $178 million to $10.9 billion for the three months ended March 31, 2013. The decrease was primarily due to the impact of lower consumer loan balances as well as lower asset yields, partially offset by reductions in long-term debt balances, lower rates paid on deposits and improved trading-related net interest income.

Noninterest income increased $1.1 billion to $12.5 billion for the three months ended March 31, 2013. The most significant drivers of the increase were lower negative fair value adjustments on structured liabilities of $90 million compared to $3.3 billion and debit valuation adjustment (DVA) losses on derivatives, net of hedges, of $54 million compared to $1.5 billion for the three months ended March 31, 2013 and 2012. These items were partially offset by $1.2 billion of gains related to subordinated debt repurchases and exchanges of trust preferred securities in the year-ago quarter, lower mortgage banking income and lower net gains on sales of debt securities of $68 million compared to $752 million.

The provision for credit losses decreased $705 million to $1.7 billion for the three months ended March 31, 2013. The improvement was primarily in the home loans portfolio, due to improved portfolio trends as well as the impact of increased home prices.

Noninterest expense increased $359 million for the three months ended March 31, 2013. The most significant driver of the increase was higher litigation expense primarily associated with the MBIA Settlement, partially offset by cost savings associated with Project New BAC initiatives to streamline processes.

Income tax expense was $501 million on $2.0 billion of pre-tax income for the three months ended March 31, 2013 compared to $66 million on $719 million of pre-tax income and resulted in an effective tax rate of 25.3 percent compared to 9.2 percent.

For additional summary information on the Corporation's results, see Financial Highlights on page 10 and Business Segment Operations on page 25.

Table 2
Summary Income Statement
 
Three Months Ended March 31
(Dollars in millions)
2013
 
2012
Net interest income (FTE basis) (1)
$
10,875

 
$
11,053

Noninterest income
12,533

 
11,432

Total revenue, net of interest expense (FTE basis) (1)
23,408

 
22,485

Provision for credit losses
1,713

 
2,418

Noninterest expense
19,500

 
19,141

Income before income taxes
2,195

 
926

Income tax expense (FTE basis) (1)
712

 
273

Net income
1,483

 
653

Preferred stock dividends
373

 
325

Net income applicable to common shareholders
$
1,110

 
$
328

 
 
 
 
Per common share information
 
 
 
Earnings
$
0.10

 
$
0.03

Diluted earnings
0.10

 
0.03

(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 16.



9


Financial Highlights

Net Interest Income

Net interest income on a FTE basis decreased $178 million to $10.9 billion for the three months ended March 31, 2013 compared to the same period in 2012. The decrease was primarily due to the impact of lower consumer loan balances as well as lower asset yields driven by the low rate environment, partially offset by reductions in long-term debt balances, lower rates paid on deposits and improved trading-related net interest income. The net interest yield on a FTE basis decreased eight basis points (bps) for the three months ended March 31, 2013 compared to the same period in 2012 as the yield continued to be under pressure due to the aforementioned items.

Noninterest Income
Table 3
Noninterest Income
 
Three Months Ended March 31
(Dollars in millions)
2013
 
2012
Card income
$
1,410

 
$
1,457

Service charges
1,799

 
1,912

Investment and brokerage services
3,027

 
2,876

Investment banking income
1,535

 
1,217

Equity investment income
563

 
765

Trading account profits
2,989

 
2,075

Mortgage banking income
1,263

 
1,612

Gains on sales of debt securities
68

 
752

Other loss
(112
)
 
(1,194
)
Net impairment losses recognized in earnings on AFS debt securities
(9
)
 
(40
)
Total noninterest income
$
12,533

 
$
11,432


Noninterest income increased $1.1 billion to $12.5 billion for the three months ended March 31, 2013 compared to the same period in 2012. The following highlights the significant changes.

Service charges decreased $113 million primarily due to a shift in product mix on consumer checking accounts and lower commercial banking fees.

Investment and brokerage services income increased $151 million primarily driven by higher market levels and long-term assets under management (AUM) flows.

Investment banking income increased $318 million due to an increase in capital markets underwriting and advisory fees.

Equity investment income decreased $202 million due primarily to lower gains in our Global Principal Investments (GPI) portfolio.

Trading account profits increased $914 million. Net DVA losses on derivatives were $54 million for the three months ended March 31, 2013 compared to $1.5 billion a year ago. Excluding net DVA, trading account profits decreased $491 million primarily due to decreases within our fixed income, currencies and commodities (FICC) businesses reflecting less favorable market conditions primarily in credit-related products and commodities.

Mortgage banking income decreased $349 million primarily driven by a decrease in servicing income due to a smaller servicing portfolio and to a lesser extent, a decline in core production income.

Other loss of $112 million in the current-year period decreased from a loss a year ago of $1.2 billion primarily driven by lower negative fair value adjustments on our structured liabilities of $90 million compared to $3.3 billion a year ago, partially offset by $1.2 billion of gains related to subordinated debt repurchases and exchanges of trust preferred securities a year ago.


10


Provision for Credit Losses

The provision for credit losses decreased $705 million to $1.7 billion for the three months ended March 31, 2013 compared to the same period in 2012. For the three months ended March 31, 2013, the provision for credit losses was $804 million lower than net charge-offs, resulting in a reduction in the allowance for credit losses primarily due to continued improvement in the home loans portfolio, as well as improvement in the credit card portfolio. Absent unexpected deterioration in the economy, we expect reductions in the allowance for credit losses to continue in the near term, though at a slower pace than in 2012.

Net charge-offs totaled $2.5 billion, or 1.14 percent of average loans and leases for the three months ended March 31, 2013 compared to $4.1 billion, or 1.80 percent for the same period in 2012. The decrease in net charge-offs was primarily driven by credit quality improvement across all portfolios. For more information on the provision for credit losses, see Provision for Credit Losses on page 108.

Noninterest Expense
Table 4
Noninterest Expense
 
Three Months Ended March 31
(Dollars in millions)
2013
 
2012
Personnel
$
9,891

 
$
10,188

Occupancy
1,154

 
1,142

Equipment
550

 
611

Marketing
429

 
465

Professional fees
649

 
783

Amortization of intangibles
276

 
319

Data processing
812

 
856

Telecommunications
409

 
400

Other general operating
5,330

 
4,377

Total noninterest expense
$
19,500

 
$
19,141


Noninterest expense increased $359 million to $19.5 billion for the three months ended March 31, 2013 compared to same period in 2012. The increase was driven by a $953 million increase in other general operating expense primarily due to higher litigation expense associated with the MBIA Settlement, partially offset by a $297 million decrease in personnel expense as we continue to streamline processes and achieve cost savings. Noninterest expense also included $893 million of annual expense associated with retirement-eligible stock compensation for the three months ended March 31, 2013 compared to $892 million in the year ago quarter.

In connection with Project New BAC, which was first announced in the third quarter of 2011, we continue to achieve cost savings in certain noninterest expense categories as we further streamline workflows, simplify processes and align expenses with our overall strategic plan and operating principles. We expect total cost savings from Project New BAC to reach $8 billion per year on an annualized basis, or $2 billion per quarter, by mid-2015. We expect to achieve approximately $1.5 billion in quarterly cost savings by the fourth quarter of 2013, representing 75 percent of the quarterly target.

Income Tax Expense

Income tax expense was $501 million on pre-tax income of $2.0 billion for the three months ended March 31, 2013 compared to $66 million on pre-tax income of $719 million a year ago and resulted in an effective tax rate of 25.3 percent compared to 9.2 percent.

The effective tax rate for the three months ended March 31, 2013 was primarily driven by our recurring tax preference items, and the effective tax rate in the year-ago quarter was primarily driven by discrete tax benefits and recurring tax preference items.

A proposal to further reduce the U.K. corporate income tax rate by three percent to 20 percent is expected to be enacted in July 2013. It is expected that two percent of the reduction will be effective on April 1, 2014 and the additional one percent reduction on April 1, 2015. These reductions would favorably affect income tax expense on future U.K. earnings but also would require us to remeasure, in the period of enactment, our U.K. net deferred tax assets using the lower tax rates. Upon enactment, we would expect to record a charge to income tax expense of nearly $1.2 billion for these aggregate reductions, assuming no change in the deferred tax asset balance.


11


Balance Sheet Overview
 
Table 5
Selected Balance Sheet Data
 
 
 
 
 
Average Balance
 
March 31
2013
 
December 31
2012
 
Three Months Ended
March 31
(Dollars in millions)
 
 
2013
 
2012
Assets
 
 
 
 
 
 
 
Federal funds sold and securities borrowed or purchased under agreements to resell
$
220,623

 
$
219,924

 
$
237,463

 
$
233,061

Trading account assets
223,028

 
227,775

 
239,964

 
193,359

Debt securities
354,709

 
360,331

 
356,399

 
341,619

Loans and leases
911,592

 
907,819

 
906,259

 
913,722

Allowance for loan and lease losses
(22,441
)
 
(24,179
)
 
(23,593
)
 
(33,210
)
All other assets
487,308

 
518,304

 
495,938

 
538,623

Total assets
$
2,174,819

 
$
2,209,974

 
$
2,212,430

 
$
2,187,174

Liabilities
 
 
 
 
 
 
 
Deposits
$
1,095,183

 
$
1,105,261

 
$
1,075,280

 
$
1,030,112

Federal funds purchased and securities loaned or sold under agreements to repurchase
248,149

 
293,259

 
300,938

 
256,405

Trading account liabilities
90,547

 
73,587

 
92,047

 
71,872

Short-term borrowings
42,148

 
30,731

 
36,706

 
36,651

Long-term debt
279,641

 
275,585

 
273,999

 
363,518

All other liabilities
181,858

 
194,595

 
196,465

 
196,050

Total liabilities
1,937,526

 
1,973,018

 
1,975,435

 
1,954,608

Shareholders' equity
237,293

 
236,956

 
236,995

 
232,566

Total liabilities and shareholders' equity
$
2,174,819

 
$
2,209,974

 
$
2,212,430

 
$
2,187,174


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. These portfolios 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.


12


Assets

At March 31, 2013, total assets were approximately $2.2 trillion, a decrease of $35.2 billion, or two percent, from December 31, 2012. This decrease was driven by declines in cash and cash equivalent balances; other earning assets primarily driven by a decrease in margin loan balances; consumer loan balances due to paydowns and charge-offs outpacing new originations; debt securities as sales, maturities and paydowns outpaced purchases; and trading account assets primarily due to reduced holdings of U.S. government and agency securities. These decreases were partially offset by higher commercial loan balances.

Average total assets increased $25.3 billion for the three months ended March 31, 2013 compared to the same period in 2012. The increase was driven by higher trading account assets primarily due to increases in short-term U.S. government and agency securities, an increase in debt securities primarily driven by net purchases of agency MBS, higher commercial loan balances, and lower allowance for loan and lease losses primarily due to improvements in the home loans and credit card portfolios. These increases were partially offset by declines in consumer loan balances due to paydowns and charge-offs outpacing new originations, cash and cash equivalent balances, and derivative dealer assets.

Liabilities and Shareholders' Equity

At March 31, 2013, total liabilities were approximately $1.9 trillion, a decrease of $35.5 billion, or two percent, from December 31, 2012. This decrease was driven by lower securities sold under agreements to repurchase due to lower matched-book activity and trading inventory, and a decline in noninterest-bearing deposits primarily due to the expiration of the Transaction Account Guarantee Program at December 31, 2012. These decreases were partially offset by higher trading account liabilities due to increased short positions in equity securities.

Average total liabilities increased $20.8 billion for the three months ended March 31, 2013 compared to the same period in 2012. The increase was primarily driven by growth in deposits driven by higher client balances, higher securities loaned or sold under agreements to repurchase driven by funding of trading inventory resulting from customer demand, and higher trading account liabilities. These increases were partially offset by planned reductions in long-term debt.

At March 31, 2013, shareholders' equity was $237.3 billion, an increase of $337 million from December 31, 2012 driven by earnings, partially offset by a decrease in unrealized gains in accumulated other comprehensive income (OCI) on available-for-sale (AFS) debt securities.

Average shareholders' equity increased $4.4 billion for the three months ended March 31, 2013 compared to the same period in 2012 driven by earnings, an increase in unrealized gains in accumulated OCI on AFS debt securities, and common stock issued under employee benefit plans and in connection with exchanges of preferred stock and trust preferred securities in 2012.

13


Table 6
 
 
 
 
Selected Quarterly Financial Data
 
 
 
 
 
2013 Quarter
 
2012 Quarters
(In millions, except per share information)
First
 
Fourth
 
Third
 
Second
 
First
Income statement
 
 
 
 
 
 
 
 
 
Net interest income
$
10,664

 
$
10,324

 
$
9,938

 
$
9,548

 
$
10,846

Noninterest income
12,533

 
8,336

 
10,490

 
12,420

 
11,432

Total revenue, net of interest expense
23,197

 
18,660

 
20,428

 
21,968

 
22,278

Provision for credit losses
1,713

 
2,204

 
1,774

 
1,773

 
2,418

Noninterest expense
19,500

 
18,360

 
17,544

 
17,048

 
19,141

Income (loss) before income taxes
1,984

 
(1,904
)
 
1,110

 
3,147

 
719

Income tax expense (benefit)
501

 
(2,636
)
 
770

 
684

 
66

Net income
1,483

 
732

 
340

 
2,463

 
653

Net income (loss) applicable to common shareholders
1,110

 
367

 
(33
)
 
2,098

 
328

Average common shares issued and outstanding
10,799

 
10,777

 
10,776

 
10,776

 
10,651

Average diluted common shares issued and outstanding (1)
11,155

 
10,885

 
10,776

 
11,556

 
10,762

Performance ratios
 
 
 
 
 
 
 
 
 
Return on average assets
0.27
%
 
0.13
%
 
0.06
%
 
0.45
%
 
0.12
%
Four quarter trailing return on average assets (2)
0.23

 
0.19

 
0.25

 
0.51

 
n/m

Return on average common shareholders' equity
2.06

 
0.67

 
n/m

 
3.89

 
0.62

Return on average tangible common shareholders' equity (3)
3.12

 
1.01

 
n/m

 
5.95

 
0.95

Return on average tangible shareholders' equity (3)
3.69

 
1.77

 
0.84

 
6.16

 
1.67

Total ending equity to total ending assets
10.91

 
10.72

 
11.02

 
10.92

 
10.66

Total average equity to total average assets
10.71

 
10.79

 
10.86

 
10.73

 
10.63

Dividend payout
9.75

 
29.33

 
n/m

 
5.60

 
34.97

Per common share data
 
 
 
 
 
 
 
 
 
Earnings
$
0.10

 
$
0.03

 
$
0.00

 
$
0.19

 
$
0.03

Diluted earnings (1)
0.10

 
0.03

 
0.00

 
0.19

 
0.03

Dividends paid
0.01

 
0.01

 
0.01

 
0.01

 
0.01

Book value
20.19

 
20.24

 
20.40

 
20.16

 
19.83

Tangible book value (3)
13.36

 
13.36

 
13.48

 
13.22

 
12.87

Market price per share of common stock
 
 
 
 
 
 
 
 
 
Closing
$
12.18

 
$
11.61

 
$
8.83

 
$
8.18

 
$
9.57

High closing
12.78

 
11.61

 
9.55

 
9.68

 
9.93

Low closing
11.03

 
8.93

 
7.04

 
6.83

 
5.80

Market capitalization
$
131,817

 
$
125,136

 
$
95,163

 
$
88,155

 
$
103,123

(1) 
Due to a net loss applicable to common shareholders for the third quarter of 2012, the impact of antidilutive equity instruments was excluded from diluted earnings per share and average diluted common shares.
(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 16.
(4) 
For more information on the impact of the purchased credit-impaired loan portfolio on asset quality, see Consumer Portfolio Credit Risk Management on page 72.
(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 Consumer Portfolio Credit Risk Management – Nonperforming Consumer Loans and Foreclosed Properties Activity on page 89 and corresponding Table 38, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 98 and corresponding Table 47.
(7) 
Primarily includes amounts allocated to the U.S. credit card and unsecured consumer lending portfolios in CBB, purchased credit-impaired loans and the non-U.S. credit card portfolio in All Other.
(8) 
Net charge-offs exclude $839 million, $1.1 billion and $1.7 billion of write-offs in the purchased credit-impaired loan portfolio for the first quarter of 2013 and the fourth and third quarters of 2012. These write-offs decreased the purchased credit-impaired valuation allowance included as part of the allowance for loan and lease losses. For more information on purchased credit-impaired write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 83.
(9) 
There were no write-offs in the purchased credit-impaired loan portfolio for the second and first quarters of 2012.
(10)  
Presents capital ratios in accordance with the Basel 1 – 2013 Rules at March 31, 2013. Basel 1 did not include the Basel 1 – 2013 Rules at December 31, 2012.
n/m = not meaningful

14


Table 6
 
 
 
 
Selected Quarterly Financial Data (continued)
 
 
 
 
 
2013 Quarter
 
2012 Quarters
(Dollars in millions)
First
 
Fourth
 
Third
 
Second
 
First
Average balance sheet
 
 
 
 
 
 
 
 
 
Total loans and leases
$
906,259

 
$
893,166

 
$
888,859

 
$
899,498

 
$
913,722

Total assets
2,212,430

 
2,210,365

 
2,173,312

 
2,194,563

 
2,187,174

Total deposits
1,075,280

 
1,078,076

 
1,049,697

 
1,032,888

 
1,030,112

Long-term debt
273,999

 
277,894

 
291,684

 
333,173

 
363,518

Common shareholders' equity
218,225

 
219,744

 
217,273

 
216,782

 
214,150

Total shareholders' equity
236,995

 
238,512

 
236,039

 
235,558

 
232,566

Asset quality (4)
 
 
 
 
 
 
 
 
 
Allowance for credit losses (5)
$
22,927

 
$
24,692

 
$
26,751

 
$
30,862

 
$
32,862

Nonperforming loans, leases and foreclosed properties (6)
22,842

 
23,555

 
24,925

 
25,377

 
27,790

Allowance for loan and lease losses as a percentage of total loans and leases outstanding (6)
2.49
%
 
2.69
%
 
2.96
%
 
3.43
%
 
3.61
%
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (6)
102

 
107

 
111

 
127

 
126

Allowance for loan and lease losses as a percentage of total nonperforming loans and leases, excluding the PCI loan portfolio (5)
82

 
82

 
81

 
90

 
91

Amounts included in allowance that are excluded from nonperforming loans and leases (7)
$
10,690

 
$
12,021

 
$
13,978

 
$
16,327

 
$
17,006

Allowance as a percentage of total nonperforming loans and leases, excluding amounts included in the allowance that are excluded from nonperforming loans and leases (7)
53
%
 
54
%
 
52
%
 
59
%
 
60
%
Net charge-offs (8)
$
2,517

 
$
3,104

 
$
4,122

 
$
3,626

 
$
4,056

Annualized net charge-offs as a percentage of average loans and leases outstanding (6, 8)
1.14
%
 
1.40
%
 
1.86
%
 
1.64
%
 
1.80
%
Annualized net charge-offs as a percentage of average loans and leases outstanding, excluding the PCI loan portfolio (6)
1.18

 
1.44

 
1.93

 
1.69

 
1.87

Annualized net charge-offs and PCI write-offs as a percentage of average loans and leases outstanding (6, 9)
1.52

 
1.90

 
2.63

 
1.64

 
1.80

Nonperforming loans and leases as a percentage of total loans and leases outstanding (6)
2.44

 
2.52

 
2.68

 
2.70

 
2.85

Nonperforming loans, leases and foreclosed properties as a percentage of total loans, leases and foreclosed properties (6)
2.53

 
2.62

 
2.81

 
2.87

 
3.10

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs (8)
2.20

 
1.96

 
1.60

 
2.08

 
1.97

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs, excluding the PCI loan portfolio
1.76

 
1.51

 
1.17

 
1.46

 
1.43

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs and PCI write-offs (9)
1.65

 
1.44

 
1.13

 
2.08

 
1.97

Capital ratios (period end) (10)
 
 
 
 
 
 
 
 
 
Risk-based capital:
 
 
 
 
 
 
 
 
 
Tier 1 common capital
10.49
%
 
11.06
%
 
11.41
%
 
11.24
%
 
10.78
%
Tier 1 capital
12.22

 
12.89

 
13.64

 
13.80

 
13.37

Total capital
15.50

 
16.31

 
17.16

 
17.51

 
17.49

Tier 1 leverage
7.49

 
7.37

 
7.84

 
7.84

 
7.79

Tangible equity (3)
7.78

 
7.62

 
7.85

 
7.73

 
7.48

Tangible common equity (3)
6.88

 
6.74

 
6.95

 
6.83

 
6.58

For footnotes see page 14.
 
 
 
 


15


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 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.

Return on average tangible shareholders' equity 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 Table 6.

We evaluate our business segment results based on measures that utilize return on average allocated capital, and prior to January 1, 2013, the return on average economic capital, both of which represent non-GAAP measures. These ratios are calculated as net income adjusted for cost of funds and earnings credits and certain expenses related to intangibles, divided by average allocated capital or average economic capital, as applicable. In addition, for purposes of goodwill impairment testing, the Corporation utilizes allocated equity as a proxy for the carrying value of its reporting units. Allocated equity for the business segments is comprised of allocated capital (or economic capital prior to 2013) plus capital for the portion of goodwill and intangibles specifically assigned to the business segment. For more information, see Business Segment Operations on page 25 and Note 9 – Goodwill and Intangible Assets to the Consolidated Financial Statements.

Tables 7 and 8 provide reconciliations of these non-GAAP financial measures with 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 7
Quarterly Supplemental Financial Data and Reconciliations to GAAP Financial Measures
 
2013 Quarter
 
2012 Quarters
(Dollars in millions)
First
 
Fourth
 
Third
 
Second
 
First
Fully taxable-equivalent basis data
 
 
 
 
 
 
 
 
 
Net interest income
$
10,875

 
$
10,555

 
$
10,167

 
$
9,782

 
$
11,053

Total revenue, net of interest expense
23,408

 
18,891

 
20,657

 
22,202

 
22,485

Net interest yield (1)
2.43
%
 
2.35
%
 
2.32
%
 
2.21
%
 
2.51
%
Efficiency ratio
83.31

 
97.19

 
84.93

 
76.79

 
85.13

(1)  
Calculation includes fees earned on overnight deposits placed with the Federal Reserve and, beginning in the third quarter of 2012, fees earned on deposits, primarily overnight, placed with certain non-U.S. central banks, of $33 million for the first quarter of 2013, and $42 million, $48 million, $52 million and $47 million for the fourth, third, second and first quarters of 2012, respectively.

16


Table 7
Quarterly Supplemental Financial Data and Reconciliations to GAAP Financial Measures (continued)
 
2013 Quarter
 
2012 Quarters
(Dollars in millions)
First
 
Fourth
 
Third
 
Second
 
First
Reconciliation of net interest income to net interest income on a fully taxable-equivalent basis
 
 
 
 
 
 
 
 
 
Net interest income
$
10,664

 
$
10,324

 
$
9,938

 
$
9,548

 
$
10,846

Fully taxable-equivalent adjustment
211

 
231

 
229

 
234

 
207

Net interest income on a fully taxable-equivalent basis
$
10,875

 
$
10,555

 
$
10,167

 
$
9,782

 
$
11,053

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
$
23,197

 
$
18,660

 
$
20,428

 
$
21,968

 
$
22,278

Fully taxable-equivalent adjustment
211

 
231

 
229

 
234

 
207

Total revenue, net of interest expense on a fully taxable-equivalent basis
$
23,408

 
$
18,891

 
$
20,657

 
$
22,202

 
$
22,485

Reconciliation of income tax expense (benefit) to income tax expense (benefit) on a fully taxable-equivalent basis
 
 
 
 
 
 
 
 
 
Income tax expense (benefit)
$
501

 
$
(2,636
)
 
$
770

 
$
684

 
$
66

Fully taxable-equivalent adjustment
211

 
231

 
229

 
234

 
207

Income tax expense (benefit) on a fully taxable-equivalent basis
$
712

 
$
(2,405
)
 
$
999

 
$
918

 
$
273

Reconciliation of average common shareholders' equity to average tangible common shareholders' equity
 
 
 
 
 
 
 
 
 
Common shareholders' equity
$
218,225

 
$
219,744

 
$
217,273

 
$
216,782

 
$
214,150

Goodwill
(69,945
)
 
(69,976
)
 
(69,976
)
 
(69,976
)
 
(69,967
)
Intangible assets (excluding MSRs)
(6,549
)
 
(6,874
)
 
(7,194
)
 
(7,533
)
 
(7,869
)
Related deferred tax liabilities
2,425

 
2,490

 
2,556

 
2,626

 
2,700

Tangible common shareholders' equity
$
144,156

 
$
145,384

 
$
142,659

 
$
141,899

 
$
139,014

Reconciliation of average shareholders' equity to average tangible shareholders' equity
 
 
 
 
 
 
 
 
 
Shareholders' equity
$
236,995

 
$
238,512

 
$
236,039

 
$
235,558

 
$
232,566

Goodwill
(69,945
)
 
(69,976
)
 
(69,976
)
 
(69,976
)
 
(69,967
)
Intangible assets (excluding MSRs)
(6,549
)
 
(6,874
)
 
(7,194
)
 
(7,533
)
 
(7,869
)
Related deferred tax liabilities
2,425

 
2,490

 
2,556

 
2,626

 
2,700

Tangible shareholders' equity
$
162,926

 
$
164,152

 
$
161,425

 
$
160,675

 
$
157,430

Reconciliation of period-end common shareholders' equity to period-end tangible common shareholders' equity
 
 
 
 
 
 
 
 
 
Common shareholders' equity
$
218,513

 
$
218,188

 
$
219,838

 
$
217,213

 
$
213,711

Goodwill
(69,930
)
 
(69,976
)
 
(69,976
)
 
(69,976
)
 
(69,976
)
Intangible assets (excluding MSRs)
(6,379
)
 
(6,684
)
 
(7,030
)
 
(7,335
)
 
(7,696
)
Related deferred tax liabilities
2,363

 
2,428

 
2,494

 
2,559

 
2,628

Tangible common shareholders' equity
$
144,567

 
$
143,956

 
$
145,326

 
$
142,461

 
$
138,667

Reconciliation of period-end shareholders' equity to period-end tangible shareholders' equity
 
 
 
 
 
 
 
 
 
Shareholders' equity
$
237,293

 
$
236,956

 
$
238,606

 
$
235,975

 
$
232,499

Goodwill
(69,930
)
 
(69,976
)
 
(69,976
)
 
(69,976
)
 
(69,976
)
Intangible assets (excluding MSRs)
(6,379
)
 
(6,684
)
 
(7,030
)
 
(7,335
)
 
(7,696
)
Related deferred tax liabilities
2,363

 
2,428

 
2,494

 
2,559

 
2,628

Tangible shareholders' equity
$
163,347

 
$
162,724

 
$
164,094

 
$
161,223

 
$
157,455

Reconciliation of period-end assets to period-end tangible assets
 
 
 
 
 
 
 
 
 
Assets
$
2,174,819

 
$
2,209,974

 
$
2,166,162

 
$
2,160,854

 
$
2,181,449

Goodwill
(69,930
)
 
(69,976
)
 
(69,976
)
 
(69,976
)
 
(69,976
)
Intangible assets (excluding MSRs)
(6,379
)
 
(6,684
)
 
(7,030
)
 
(7,335
)
 
(7,696
)
Related deferred tax liabilities
2,363

 
2,428

 
2,494

 
2,559

 
2,628

Tangible assets
$
2,100,873

 
$
2,135,742

 
$
2,091,650

 
$
2,086,102

 
$
2,106,405

 
 
 
 

17


Table 8
Segment Supplemental Financial Data Reconciliations to GAAP Financial Measures (1)
 
Three Months Ended March 31
(Dollars in millions)
2013
 
2012
 
 
 
 
Consumer & Business Banking
 
 
 
Reported net income
$
1,382

 
$
1,445

Adjustment related to intangibles (2)
2

 
3

Adjusted net income
$
1,384

 
$
1,448

 
 
 
 
Average allocated equity (3)
$
58,388

 
$
52,890

Adjustment related to goodwill and a percentage of intangibles
(30,388
)
 
(30,522
)
Average allocated capital/economic capital
$
28,000

 
$
22,368

 
 
 
 
Global Banking
 
 
 
Reported net income
$
1,338

 
$
1,573

Adjustment related to intangibles (2)
1

 
1

Adjusted net income
$
1,339

 
$
1,574

 
 
 
 
Average allocated equity (3)
$
49,828

 
$
45,060

Adjustment related to goodwill and a percentage of intangibles
(24,828
)
 
(24,860
)
Average allocated capital/economic capital
$
25,000

 
$
20,200

 
 
 
 
Global Markets
 
 
 
Reported net income
$
1,169

 
$
828

Adjustment related to intangibles (2)
2

 
2

Adjusted net income
$
1,171

 
$
830

 
 
 
 
Average allocated equity (3)
$
34,645

 
$
19,032

Adjustment related to goodwill and a percentage of intangibles
(4,645
)
 
(4,648
)
Average allocated capital/economic capital
$
30,000

 
$
14,384

 
 
 
 
Global Wealth & Investment Management
 
 
 
Reported net income
$
720

 
$
550

Adjustment related to intangibles (2)
4

 
6

Adjusted net income
$
724

 
$
556

 
 
 
 
Average allocated equity (3)
$
20,323

 
$
16,822

Adjustment related to goodwill and a percentage of intangibles
(10,323
)
 
(10,402
)
Average allocated capital/economic capital
$
10,000

 
$
6,420

(1) 
There are no adjustments to reported net income (loss) or average allocated equity for CRES.
(2) 
Represents cost of funds, earnings credits and certain expenses related to intangibles.
(3) 
Average allocated equity is comprised of average allocated capital (or economic capital prior to 2013) plus capital for the portion of goodwill and intangibles specifically assigned to the business segment. For more information on allocated capital and economic capital, see Business Segment Operations on page 25 and Note 9 – Goodwill and Intangible Assets to the Consolidated Financial Statements.

18


Table 8
Segment Supplemental Financial Data Reconciliations to GAAP Financial Measures (continued) (1)
 
Three Months Ended March 31
(Dollars in millions)
2013
 
2012
 
 
 
 
Consumer & Business Banking
 
 
 
Deposits
 
 
 
Reported net income
$
398

 
$
403

Adjustment related to intangibles (2)

 

Adjusted net income
$
398

 
$
403

 
 
 
 
Average allocated equity (3)
$
35,407

 
$
32,219

Adjustment related to goodwill and a percentage of intangibles
(20,007
)
 
(20,030
)
Average allocated capital/economic capital
$
15,400

 
$
12,189

 
 
 
 
Card Services
 
 
 
Reported net income
$
984

 
$
1,042

Adjustment related to intangibles (2)
2

 
3

Adjusted net income
$
986

 
$
1,045

 
 
 
 
Average allocated equity (3)
$
22,981

 
$
20,671

Adjustment related to goodwill and a percentage of intangibles
(10,381
)
 
(10,492
)
Average allocated capital/economic capital
$
12,600

 
$
10,179

For footnotes see page 18.

19


Net Interest Income Excluding Trading-related Net Interest Income

We manage net interest income on a FTE basis and excluding the impact of trading-related activities. As discussed in Global Markets on page 39, we evaluate our sales and trading results and strategies on a total market-based revenue approach by combining net interest income and noninterest income for Global Markets. An analysis of net interest income, average earning assets and net interest yield on earning assets, all of which adjust for the impact of trading-related net interest income from reported net interest income on a FTE basis, is shown below. We believe the use of this non-GAAP presentation in Table 9 provides additional clarity in assessing our results.

Table 9
Net Interest Income Excluding Trading-related Net Interest Income
 
Three Months Ended March 31
(Dollars in millions)
2013
 
2012
Net interest income (FTE basis)
 
 
 
As reported (1)
$
10,875

 
$
11,053

Impact of trading-related net interest income
(1,010
)
 
(796
)
Net interest income excluding trading-related net interest income (2)
$
9,865

 
$
10,257

Average earning assets
 
 
 
As reported
$
1,800,786

 
$
1,768,105

Impact of trading-related earning assets
(497,730
)
 
(424,414
)
Average earning assets excluding trading-related earning assets (2)
$
1,303,056

 
$
1,343,691

Net interest yield contribution (FTE basis) (3)
 
 
 
As reported (1)
2.43
%
 
2.51
%
Impact of trading-related activities
0.62

 
0.55

Net interest yield on earning assets excluding trading-related activities (2)
3.05
%
 
3.06
%
(1) 
Net interest income and net interest yield include fees earned on overnight deposits placed with the Federal Reserve and, beginning in the third quarter of 2012, fees earned on deposits, primarily overnight, placed with certain non-U.S. central banks, of $33 million and $47 million for the three months ended March 31, 2013 and 2012.
(2) 
Represents a non-GAAP financial measure.
(3) 
Calculated on an annualized basis.

For the three months ended March 31, 2013, net interest income excluding trading-related net interest income decreased $392 million to $9.9 billion compared to the same period in 2012. The decrease was primarily due to the impact of lower consumer loan balances as well as lower asset yields driven by the low rate environment, partially offset by reductions in long-term debt balances and lower rates paid on deposits.

Average earning assets excluding trading-related earning assets decreased $40.6 billion to $1,303.1 billion compared to the same period in 2012. The decrease was primarily due to declines in consumer loans and time deposits placed, partially offset by increases in commercial loans and investment securities.

For the three months ended March 31, 2013, net interest yield on earning assets excluding trading-related activities decreased one bp to 3.05 percent compared to the same period in 2012 as the yield continued to be under pressure due to the factors noted above for net interest income.

20


Table 10
Quarterly Average Balances and Interest Rates – FTE Basis
 
First Quarter 2013
 
Fourth Quarter 2012
(Dollars in millions)
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
Earning assets
 
 
 
 
 
 
 
 
 
 
 
Time deposits placed and other short-term investments (1)
$
16,129

 
$
46

 
1.17
%
 
$
16,967

 
$
50

 
1.14
%
Federal funds sold and securities borrowed or purchased under agreements to resell
237,463

 
315

 
0.54

 
241,950

 
329

 
0.54

Trading account assets
194,364

 
1,380

 
2.87

 
186,252

 
1,362

 
2.91

Debt securities (2)
356,399

 
2,556

 
2.87

 
360,213

 
2,201

 
2.44

Loans and leases (3):
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage (4)
258,772

 
2,342

 
3.62

 
256,729

 
2,293

 
3.57

Home equity
105,797

 
995

 
3.80

 
110,105

 
1,067

 
3.86

U.S. credit card
91,712

 
2,249

 
9.95

 
92,849

 
2,336

 
10.01

Non-U.S. credit card
11,027

 
329

 
12.10

 
13,081

 
383

 
11.66

Direct/Indirect consumer (5)
82,364

 
620

 
3.06

 
82,583

 
662

 
3.19

Other consumer (6)
1,666

 
19

 
4.36

 
1,602

 
19

 
4.57

Total consumer
551,338

 
6,554

 
4.79

 
556,949

 
6,760

 
4.84

U.S. commercial
210,706

 
1,666

 
3.20

 
209,496

 
1,729

 
3.28

Commercial real estate (7)
39,179

 
326

 
3.38

 
38,192

 
341

 
3.55

Commercial lease financing
23,534

 
236

 
4.01

 
22,839

 
184

 
3.23

Non-U.S. commercial
81,502

 
467

 
2.32

 
65,690

 
433

 
2.62

Total commercial
354,921

 
2,695

 
3.07

 
336,217

 
2,687

 
3.18

Total loans and leases
906,259

 
9,249

 
4.12

 
893,166

 
9,447

 
4.21

Other earning assets
90,172

 
733

 
3.29

 
90,388

 
771

 
3.40

Total earning assets (8)
1,800,786

 
14,279

 
3.20

 
1,788,936

 
14,160

 
3.16

Cash and cash equivalents (1)
92,846

 
33