10-Q 1 bac-9302013x10q.htm 10-Q BAC-9.30.2013-10Q


 
 
 
 
 

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 September 30, 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 October 29, 2013, there were 10,666,133,943 shares of Bank of America Corporation Common Stock outstanding.
 
 
 
 
 

                


Bank of America Corporation
 
September 30, 2013
 
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: expectations regarding the pace of international economic growth: the expectation that, if the economy and home prices continue to improve, there will be additional reductions in the allowance for credit losses in future periods, although at a lower level than the third quarter; expectations regarding the anticipated transfers of mortgage servicing rights and their impact on the Corporation; expectations regarding incremental credit provision due to borrower assistance programs; expectations regarding future levels of net 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; the possibility that the Corporation may conduct additional redemptions, tender offers, exercises and other transactions in the future depending on market conditions, capital, liquidity and other factors; the expectation that the Corporation will continue to streamline processes and achieve cost savings; expectations that, in the fourth quarter of 2013, noninterest expense in Legacy Assets & Servicing (excluding litigation expense) will be below $2.0 billion and the number of 60 days or more past due residential mortgage loans in the Legacy and Non-Legacy Residential Mortgage Serviced Portfolios will decline below 375,000; expectations regarding representations and warranties repurchase and other claims, including levels of unresolved repurchase claims related to private-label securitizations and the possibility of additional settlements in the future; the belief that there will likely be additional requests for loan files in the future leading to repurchase claims; the possibility that the Corporation may purchase common stock, preferred stock and outstanding debt instruments in various transactions depending on prevailing market conditions, liquidity and other factors; the possibility that the Corporation will need to register additional entities as swap dealers and major swap participants; the possibility that the Corporation will be required to restructure certain businesses as a result of final derivatives regulations and this may negatively impact our results of operations; expectations regarding the timing, content and impact of final regulatory capital rules, including the Corporation's ability to meet the final Basel 3 liquidity standards within regulatory timelines and the approval of the Corporation's analytical models for capital measurement under Basel 3 by U.S. regulatory agencies; expectations regarding the impact of the Financial Reform Act on the Corporation; expectations regarding whether the Corporation's issued and outstanding Qualifying Trust Preferred Securities will be classified as Tier 1 or Tier 2 capital beginning in 2016; expectations regarding the Standardized Approach as compared to the Advanced Approach; expectations related to reimbursement of delinquent FHA-insured loans; expectations regarding benefits to be obtained from the Corporation's centralized funding strategy; estimates concerning the Corporation's additional capital requirements as a global systemically important financial institution; the belief that default-related servicing costs peaked in late 2012 and have continued to decline in 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 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; the estimation that lifetime losses on loans originated after 2008 will be significantly less than the losses experienced with respect to vintages prior to 2009; expectations regarding loans in the pay option portfolio; the belief that the Corporation's current market capitalization does not reflect the aggregate fair value of its individual reporting units; effects of the ongoing debt crisis in certain European 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 net losses on derivative instruments that qualify as cash flow hedges will be reclassified into earnings; the expectation that the maximum potential exposure for chargebacks would not exceed the total amount of merchant transactions processed through Visa and MasterCard 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.

3


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 potential impact of the recent and any future government shutdown and/or debt ceiling impasse; 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 Eurozone, the risk that those countries may default on their sovereign debt or exit the Eurozone and related stresses on financial markets, the Euro and the Eurozone and the Corporation's exposures to such risks, including direct, indirect and operational; uncertainties related to the timing and pace of Federal Reserve tapering of quantitative easing, and the impact on global interest rates, currency exchange rates, and economic conditions in a number of countries; the possibility of future inquiries or investigations regarding pending or completed foreclosure activities; 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; the potential impact on debit card interchange fee revenue in connection with the U.S. District Court for the District of Columbia's ruling on July 31, 2013 regarding the Federal Reserve's rules implementing the Financial Reform Act's Durbin Amendment; 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; the possibility that the European Commission will impose remedial measures in relation to its investigation of the Corporation's competitive practices; the impact of continued refund payments to customers and potential regulatory enforcement action relating to optional identity theft protection services; the impact of potential regulatory enforcement action relating to certain optional credit card debt cancellation products; unexpected claims, damages, penalties and fines resulting from pending or future litigation and regulatory proceedings including proceedings instituted by members of the Financial Fraud Enforcement Task Force; 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; the impact on the Corporation's business, financial condition and results of operations of a potential higher interest rate environment; 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). On October 1, 2013, we completed the merger of our Merrill Lynch & Co., Inc. subsidiary into Bank of America Corporation. This merger has no effect on the Merrill Lynch name and brand and will have no impact on customers or clients. At September 30, 2013, the Corporation had approximately $2.1 trillion in assets and approximately 248,000 full-time equivalent employees.

As of September 30, 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 51 million consumer and small business relationships with approximately 5,200 banking centers, 16,200 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.

4


Table 1 provides selected consolidated financial data for the three and nine months ended September 30, 2013 and 2012, and at September 30, 2013 and December 31, 2012.

Table 1
Selected Financial Data
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions, except per share information)
2013
 
2012
 
2013
 
2012
Income statement
 
 
 
 
 
 
 
Revenue, net of interest expense (FTE basis) (1)
$
21,743

 
$
20,657

 
$
68,100

 
$
65,344

Net income
2,497

 
340

 
7,992

 
3,456

Diluted earnings (loss) per common share (2)
0.20

 
0.00

 
0.62

 
0.22

Dividends paid per common share
0.01

 
0.01

 
0.03

 
0.03

Performance ratios
 
 
 
 
 

 
 
Return on average assets
0.47
%
 
0.06
%
 
0.49
%
 
0.21
%
Return on average tangible shareholders' equity (1)
6.32

 
0.84

 
6.67

 
2.89

Efficiency ratio (FTE basis) (1)
75.38

 
84.93

 
76.22

 
82.23

Asset quality
 
 
 
 
 

 
 
Allowance for loan and lease losses at period end
 
 
 
 
$
19,432

 
$
26,233

Allowance for loan and lease losses as a percentage of total loans and leases outstanding at period end (3)
 
 
 
 
2.10
%
 
2.96
%
Nonperforming loans, leases and foreclosed properties at period end (3)
 
 
 
 
$
20,028

 
$
24,925

Net charge-offs (4)
$
1,687

 
$
4,122

 
6,315

 
11,804

Annualized net charge-offs as a percentage of average loans and leases outstanding (3, 4)
0.73
%
 
1.86
%
 
0.93
%
 
1.77
%
Annualized net charge-offs as a percentage of average loans and leases outstanding, excluding the purchased credit-impaired loan portfolio (3)
0.75

 
1.93

 
0.96

 
1.83

Annualized net charge-offs and purchased credit-impaired write-offs as a percentage of average loans and leases outstanding (3)
0.92

 
2.63

 
1.17

 
2.02

Ratio of the allowance for loan and lease losses at period end to annualized
net charge-offs (4)
2.90

 
1.60

 
2.30

 
1.66

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs, excluding the purchased credit-impaired loan portfolio
2.42

 
1.17

 
1.92

 
1.21

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs and purchased credit-impaired write-offs
2.30

 
1.13

 
1.84

 
1.46

 
 
 
 
 
 
 
 
 
 
 
 
 
September 30
2013
 
December 31
2012
Balance sheet
 
 
 
 
 
 
 
Total loans and leases
 
 
 
 
$
934,392

 
$
907,819

Total assets
 
 
 
 
2,126,653

 
2,209,974

Total deposits
 
 
 
 
1,110,118

 
1,105,261

Total common shareholders' equity
 
 
 
 
218,967

 
218,188

Total shareholders' equity
 
 
 
 
232,282

 
236,956

Capital ratios (5)
 
 
 
 
 
 
 
Tier 1 common capital
 
 
 
 
11.08
%
 
11.06
%
Tier 1 capital
 
 
 
 
12.33

 
12.89

Total capital
 
 
 
 
15.36

 
16.31

Tier 1 leverage
 
 
 
 
7.79

 
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 more information on these measures and ratios, and a corresponding reconciliation to GAAP financial measures, see Supplemental Financial Data on page 18.
(2) 
Due to a net loss applicable to common shareholders for the three months ended September 30, 2012, the impact of antidilutive equity instruments was excluded from diluted earnings (loss) per share and average diluted common shares.
(3) 
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, Leases and Foreclosed Properties Activity on page 104 and corresponding Table 42, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 113 and corresponding Table 51.
(4) 
Net charge-offs exclude $443 million and $1.6 billion of write-offs in the purchased credit-impaired loan portfolio for the three and nine months ended September 30, 2013 compared to $1.7 billion for both of the same periods in 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 98.
(5) 
Presents capital ratios in accordance with the Basel 1 – 2013 Rules, which include the Market Risk Final Rule at September 30, 2013. Basel 1 did not include the Basel 1 – 2013 Rules at December 31, 2012.

5


Third Quarter 2013 Economic and Business Environment

In the U.S., economic growth continued at a modest pace in the third quarter of 2013, led by retail sales and a continued recovery in the housing market. However, the economy was adversely affected by weak service spending gains and the continued impact of lower federal government expenditures. Modest employment gains continued during the quarter, with minor declines in the unemployment rate. Core inflation fell, ending the quarter near one percent on an annual basis, below the longer-term inflation target of two percent set by the Board of Governors of the Federal Reserve System (Federal Reserve).

The Federal Reserve announced during the quarter its decision to await more evidence that economic progress will be sustained before adjusting the pace of its securities purchases of agency mortgage-backed securities (MBS) and 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. Sequestration remained in effect at quarter-end. Despite ongoing fiscal uncertainties and international economic difficulties, U.S. equities posted gains during the third quarter. As the third quarter ended, uncertainty increased surrounding the extension of the federal government's budget and an extension of the debt ceiling. However, both issues were temporarily resolved on October 16, 2013 with the extension of the federal government's budget until January 15, 2014 and the extension of the debt ceiling until February 7, 2014, setting the stage for potential further uncertainty.

Internationally, most key European and Asian economies demonstrated economic growth, with particularly robust economic growth in the U.K. and Japan. The Eurozone continued to demonstrate a reduced level of financial anxiety as its recession ended with a return to economic growth. China also demonstrated signs of economic stability, though a now slower pace of growth seems likely to prevail. For more information on our international exposure, see Non-U.S. Portfolio on page 119.

Recent Events

Basel 3 Rules

Basel 3 Regulatory Capital Rules

In July 2013, U.S. banking regulators approved final Basel 3 Regulatory Capital rules (Basel 3). The Basel 3 rules will be effective January 1, 2014; however, various aspects of Basel 3 will be subject to multi-year transition periods ending December 31, 2018. Basel 3 generally continues to be subject to interpretation by the U.S. banking regulators. Basel 3 will materially change our Tier 1 common, Tier 1 and Total capital calculations. It introduces new minimum capital ratios and buffer requirements, proposes a supplementary leverage ratio, changes the composition of regulatory capital, expands and modifies the calculation of risk-weighted assets for credit and market risk (the Advanced Approach), revises the adequately capitalized minimum requirements under the Prompt Corrective Action framework and introduces a Standardized Approach for the calculation of risk-weighted assets, which will replace the current rules (Basel 1 2013 Rules) effective January 1, 2015. Under Basel 3, we will be required to calculate regulatory capital ratios and risk-weighted assets under both the Standardized and Advanced Approaches. The approach that yields the lower ratios is to be used to assess capital adequacy under the Prompt Corrective Action framework. The Prompt Corrective Action framework establishes categories of capitalization, including "well capitalized," based on regulatory ratio requirements. The Basel 3 Advanced Approach requires approval by the U.S. regulatory agencies of analytical models used as part of capital measurement. If these models are not approved, it would likely lead to an increase in our risk-weighted assets, which in some cases could be significant. While we continue to evaluate the impact of both the Standardized and Advanced Approaches, we generally expect that initially the Standardized Approach will yield the lower ratios. For additional information, see Capital Management – Regulatory Capital Changes on page 74.

Proposed Supplementary Leverage Ratio

In July 2013, U.S. banking regulators issued a notice of proposed rulemaking (NPR) to modify the supplementary leverage ratio minimum requirements under Basel 3 effective in 2018. Under the proposed rule, the largest bank holding companies (BHCs), including the Corporation, would be required to maintain a minimum supplementary leverage ratio of three percent, plus a supplementary leverage buffer of two percent, for a total of five percent. If the Corporation's supplementary leverage buffer is not greater than or equal to two percent, then the Corporation would be subject to mandatory limits on its ability to make distributions of capital to shareholders, whether through dividends, stock repurchases or otherwise. In addition, the insured depository institutions of such BHCs, which for the Corporation would include primarily BANA and FIA, would be required to maintain a minimum six percent leverage ratio to be considered "well capitalized." The proposal is not yet final and, when finalized, could have provisions significantly different from those currently proposed. For additional information, see Capital Management – Regulatory Capital Changes on page 74.

6


Liquidity Standards

The Basel Committee on Banking Supervision (the Basel Committee) has issued two liquidity risk-related standards that are considered part of the Basel 3 liquidity standards: the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). For additional information, see Liquidity Risk – Basel 3 Liquidity Standards on page 82.

Sale of China Construction Bank Corporation Shares

In the third quarter of 2013, we sold our remaining equity investment in China Construction Bank Corporation (CCB), representing two billion shares, or approximately one percent of all CCB shares outstanding. The sale resulted in a pre-tax gain of $753 million.

The strategic assistance agreement (SAA) between the Corporation and CCB, which was recently extended to 2016, will continue. Under the SAA, the Corporation provides advice and assistance to CCB in specified business areas, focusing on processes and systems including customer service and sales models.

Common Stock Repurchases and Liability Management Actions

As disclosed in prior filings, the capital plan that the Corporation submitted to the Federal Reserve in January 2013 as part of our 2013 Comprehensive Capital Analysis and Review (CCAR) included a request to repurchase up to $5.0 billion of common stock and redeem $5.5 billion in preferred stock over four quarters beginning in the second quarter of 2013, and continue the quarterly common stock dividend at $0.01 per share. During the three months ended September 30, 2013, we repurchased and retired 60.0 million common shares for an aggregate purchase price of approximately $866 million. During the nine months ended September 30, 2013, we repurchased and retired 139.6 million common shares for an aggregate purchase price of approximately $1.9 billion and redeemed our Series H and 8 preferred stock for $5.5 billion.

In addition to the CCAR actions, during the three months ended September 30, 2013, we redeemed $951 million of the Corporation's 7.25% Non-Cumulative Preferred Stock, Series J. During the nine months ended September 30, 2013, we redeemed $76 million of our Non-Cumulative Preferred Stock, Series 6 and 7 and issued $1.0 billion of our Fixed-to-Floating Rate Semi-annual Non-Cumulative Preferred Stock, Series U. For additional information, see Capital Management – Regulatory Capital on page 71 and Note 12 – Shareholders' Equity to the Consolidated Financial Statements.

During the nine months ended September 30, 2013, we repurchased certain of our debt and trust preferred securities with an aggregate carrying value of $6.1 billion for $6.2 billion in cash. The majority of this activity occurred during the third quarter of 2013. In addition, on October 17, 2013, we announced a $4.0 billion cash tender offer for certain senior notes maturing in 2014. As of the October 30, 2013 early tender deadline, more than $4.0 billion in senior notes had been tendered. We may conduct additional redemptions, tender offers, exercises and other transactions in the future depending on prevailing market conditions, capital, liquidity and other factors.

Impact of U.K. Corporate Income Tax Rate Reduction

On July 17, 2013, the United Kingdom (U.K.) 2013 Finance Act was enacted, which reduced the U.K. corporate income tax rate by three percent to 20 percent. Two percent of the reduction will become effective on April 1, 2014 and the additional one percent reduction on April 1, 2015. These reductions, which represented the final in a series of announced reductions, will favorably affect income tax expense on future U.K. earnings but also required the Corporation to remeasure, in the three months ended September 30, 2013, its U.K. net deferred tax assets using the lower tax rates. This resulted in a charge to income tax expense of approximately $1.1 billion in aggregate for these reductions. Because our deferred tax assets in excess of a certain amount are disallowed in calculating regulatory capital, this charge did not impact our capital ratios.


7


Performance Overview

Net income was $2.5 billion, or $0.20 per diluted share and $8.0 billion, or $0.62 per diluted share for the three and nine months ended September 30, 2013 compared to $340 million, or $0.00 and $3.5 billion, or $0.22 for the same periods in 2012. The results for the three and nine months ended September 30, 2013 reflect our efforts to stabilize revenue, decrease costs, strengthen the balance sheet and improve credit quality. The following highlights the most significant changes from the prior-year periods.

Net interest income on a fully taxable-equivalent (FTE) basis increased $312 million to $10.5 billion, and $1.1 billion to $32.1 billion for the three and nine months ended September 30, 2013. For more information on the significant drivers of net interest income, see Financial Highlights on page 9.

Noninterest income increased $774 million to $11.3 billion, and $1.6 billion to $36.0 billion for the three and nine months ended September 30, 2013. The significant drivers for the increase in the three-month period were higher equity investment income primarily related to the gain on the sale of the company's remaining CCB shares in the current quarter, partially offset by lower mortgage banking income. Also impacting results were negative fair value adjustments on structured liabilities of $152 million for the three months ended September 30, 2013 compared to a negative $1.3 billion for the same period in 2012 and debit valuation adjustment (DVA) losses on derivatives, net of hedges, of $292 million compared to losses of $583 million.

The significant drivers for the increase in noninterest income for the nine-month period were increases in equity investment income, investment banking income and investment and brokerage services income, partially offset by lower mortgage banking income and lower gains on sales of debt securities. Also impacting results were negative fair value adjustments on structured liabilities of $232 million for the nine months ended September 30, 2013 compared to a negative $4.7 billion for the same period in 2012 and DVA losses on derivatives, net of hedges, of $307 million compared to losses of $2.2 billion. The year-ago period included gains of $1.7 billion related to liability management actions.

The provision for credit losses decreased $1.5 billion to $296 million, and $2.7 billion to $3.2 billion for the three and nine months ended September 30, 2013 due to continued improvement in the home loans portfolio primarily as a result of increased home prices, and improvement in credit card portfolios.

Noninterest expense decreased $1.2 billion to $16.4 billion, and $1.8 billion to $51.9 billion for the three and nine months ended September 30, 2013. The decrease for the three-month period was driven by a $889 million decrease in other general operating expense primarily due to lower litigation expense, a decrease in professional fees due in part to reduced Legacy Assets & Servicing expenses, and a decrease in personnel expense as we have continued to streamline processes and achieve cost savings. The decrease for the nine-month period was driven by decreases in personnel expense and professional fees due to the same factors as described in the three-month discussion above. Also contributing to the nine-month decrease was a $540 million decrease in other general operating expense as a result of lower Federal Deposit Insurance Corporation (FDIC) expense and lower default-related servicing expenses, partially offset by higher litigation expense. Litigation expense was $1.1 billion and $3.8 billion for the three and nine months ended September 30, 2013 compared to $1.6 billion and $3.3 billion for the same periods in 2012.

Income tax expense was $2.3 billion on $4.8 billion of pre-tax income and $4.3 billion on $12.3 billion of pre-tax income, resulting in effective tax rates of 48.5 percent and 35.2 percent for the three and nine months ended September 30, 2013. This was compared to $770 million on $1.1 billion of pre-tax income and $1.5 billion on $5.0 billion of pre-tax income that resulted in effective tax rates of 69.4 percent and 30.5 percent for the same periods in 2012. The effective tax rates for the three and nine months ended September 30, 2013 were primarily driven by the $1.1 billion impact of the U.K. corporate income tax rate reduction compared to $788 million for the same periods in 2012.

For additional summary information on the Corporation's results, see Financial Highlights on page 9.


8


Table 2
Summary Income Statement
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions)
2013
 
2012
 
2013
 
2012
Net interest income (FTE basis) (1)
$
10,479

 
$
10,167

 
$
32,125

 
$
31,002

Noninterest income
11,264

 
10,490

 
35,975

 
34,342

Total revenue, net of interest expense (FTE basis) (1)
21,743

 
20,657

 
68,100

 
65,344

Provision for credit losses
296

 
1,774

 
3,220

 
5,965

Noninterest expense
16,389

 
17,544

 
51,907

 
53,733

Income before income taxes
5,058

 
1,339

 
12,973

 
5,646

Income tax expense (FTE basis) (1)
2,561

 
999

 
4,981

 
2,190

Net income
2,497

 
340

 
7,992

 
3,456

Preferred stock dividends
279

 
373

 
1,093

 
1,063

Net income (loss) applicable to common shareholders
$
2,218

 
$
(33
)
 
$
6,899

 
$
2,393

 
 
 
 
 
 
 
 
Per common share information
 
 
 
 
 
 
 
Earnings
$
0.21

 
$
0.00

 
$
0.64

 
$
0.22

Diluted earnings
0.20

 
0.00

 
0.62

 
0.22

(1) 
FTE basis is a non-GAAP financial measure. For more information on this measure and for a corresponding reconciliation to GAAP financial measures, see Supplemental Financial Data on page 18.

Financial Highlights

Net Interest Income

Net interest income on a FTE basis increased $312 million to $10.5 billion, and $1.1 billion to $32.1 billion for the three and nine months ended September 30, 2013 compared to the same periods in 2012. The increases were primarily due to reductions in long-term debt balances, higher yields on debt securities including the impact of market-related premium amortization expense, lower rates paid on deposits, higher commercial loan balances and increased trading-related net interest income, partially offset by lower consumer loan balances as well as lower asset yields driven by the low rate environment. The net interest yield on a FTE basis increased 12 basis points (bps) and nine bps to 2.44 percent for both the three and nine months ended September 30, 2013 compared to the same periods in 2012 due to the same factors as described above.

Noninterest Income
Table 3
Noninterest Income
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions)
2013
 
2012
 
2013
 
2012
Card income
$
1,444

 
$
1,538

 
$
4,323

 
$
4,573

Service charges
1,884

 
1,934

 
5,520

 
5,780

Investment and brokerage services
2,995

 
2,781

 
9,165

 
8,504

Investment banking income
1,297

 
1,336

 
4,388

 
3,699

Equity investment income
1,184

 
238

 
2,427

 
1,371

Trading account profits
1,266

 
1,239

 
6,193

 
5,078

Mortgage banking income
585

 
2,019

 
3,026

 
5,290

Gains on sales of debt securities
356

 
339

 
881

 
1,491

Other income (loss)
260

 
(928
)
 
72

 
(1,392
)
Net impairment losses recognized in earnings on AFS debt securities
(7
)
 
(6
)
 
(20
)
 
(52
)
Total noninterest income
$
11,264

 
$
10,490

 
$
35,975

 
$
34,342



9


Noninterest income increased $774 million to $11.3 billion, and $1.6 billion to $36.0 billion for the three and nine months ended September 30, 2013 compared to the same periods in 2012. The following highlights the significant changes.

Card income decreased $94 million and $250 million primarily driven by lower revenue as a result of our exit of consumer protection products.

Investment and brokerage services increased $214 million and $661 million primarily driven by the impact of long-term assets under management (AUM) inflows, higher market levels and increased transactional activity.

Investment banking income decreased $39 million for the three months ended September 30, 2013 driven by declines in debt underwriting fees, and increased $689 million for the nine months ended September 30, 2013 primarily due to an increase in debt and equity underwriting fees.

Equity investment income increased $946 million and $1.1 billion primarily due to a $753 million gain on the sale of our remaining investment in CCB and gains on the sales of a portion of an equity investment in the three and nine months ended September 30, 2013, partially offset by gains on the sales of an investment in Global Markets in the nine months ended September 30, 2012.

Trading account profits increased $27 million and $1.1 billion. Net DVA losses on derivatives were $292 million and $307 million for the three and nine months ended September 30, 2013 compared to losses of $583 million and $2.2 billion in the year-ago periods. Excluding net DVA, trading account profits decreased $264 million and $778 million primarily due to decreases in our fixed income, currencies and commodities (FICC) businesses driven by unfavorable market conditions.

Mortgage banking income decreased $1.4 billion and $2.3 billion for the three and nine months ended September 30, 2013 primarily driven by a decrease in servicing income due to a smaller servicing portfolio as a result of mortgage servicing rights (MSR) sales and portfolio runoff, less favorable MSR net-of-hedge performance and the divestiture of an ancillary servicing business in the prior year. Also contributing to the decreases were declines in production income. The decrease for the three months ended September 30, 2013 was due to lower volumes combined with continued industry-wide margin compression, and the decrease for the nine months ended September 30, 2013 was primarily driven by lower margins.

Other income (loss) increased $1.2 billion to $260 million, and $1.5 billion to $72 million for the three and nine months ended September 30, 2013. Negative fair value adjustments on structured liabilities were $152 million and $232 million for the three and nine months ended September 30, 2013 compared to negative adjustments of $1.3 billion and $4.7 billion in the year-ago periods. The nine months ended September 30, 2013 included a $450 million write-down of a receivable. The nine months ended September 30, 2012 included gains related to liability management actions of $1.7 billion.

Provision for Credit Losses

The provision for credit losses decreased $1.5 billion to $296 million, and $2.7 billion to $3.2 billion for the three and nine months ended September 30, 2013 compared to the same periods in 2012. For the three and nine months ended September 30, 2013, the provision for credit losses was $1.4 billion and $3.1 billion lower than net charge-offs, resulting in a reduction in the allowance for credit losses due to continued improvement in the home loans and credit card portfolios. This compared to reductions of $2.3 billion and $5.8 billion in the allowance for credit losses for the three and nine months ended September 30, 2012. If the economy and home prices continue to improve, we anticipate additional reductions in the allowance for credit losses in future periods, although at a lower level than the third quarter.

Net charge-offs totaled $1.7 billion, or 0.73 percent, and $6.3 billion, or 0.93 percent of average loans and leases for the three and nine months ended September 30, 2013 compared to $4.1 billion, or 1.86 percent, and $11.8 billion, or 1.77 percent for the same periods in 2012. The decrease in net charge-offs was primarily driven by credit quality improvement across nearly all major portfolios. Also, the prior-year periods included charge-offs associated with the National Mortgage Settlement and loans discharged in Chapter 7 bankruptcy due to the implementation of regulatory guidance. Given improving trends in delinquencies and the Home Price Index, absent any unexpected changes in the economy, we expect net charge-offs to decline again in the fourth quarter of 2013 and stabilize sometime in 2014 at approximately $1.5 billion per quarter. For more information on the provision for credit losses, see Provision for Credit Losses on page 123.


10


Noninterest Expense
Table 4
Noninterest Expense
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions)
2013
 
2012
 
2013
 
2012
Personnel
$
8,310

 
$
8,431

 
$
26,732

 
$
27,348

Occupancy
1,096

 
1,160

 
3,359

 
3,419

Equipment
538

 
561

 
1,620

 
1,718

Marketing
511

 
479

 
1,377

 
1,393

Professional fees
702

 
873

 
2,045

 
2,578

Amortization of intangibles
270

 
315

 
820

 
955

Data processing
779

 
640

 
2,370

 
2,188

Telecommunications
397

 
410

 
1,217

 
1,227

Other general operating
3,786

 
4,675

 
12,367

 
12,907

Total noninterest expense
$
16,389

 
$
17,544

 
$
51,907

 
$
53,733


Noninterest expense decreased $1.2 billion to $16.4 billion, and $1.8 billion to $51.9 billion for the three and nine months ended September 30, 2013 compared to the same periods in 2012. The decrease for the three months ended September 30, 2013 was driven by a $889 million decrease in other general operating expense primarily due to a $450 million decrease in litigation expense, a $171 million decrease in professional fees due in part to reduced default management activities in Legacy Assets & Servicing, and a $121 million decrease in personnel expense as we continue to streamline processes and achieve cost savings. The decrease for the nine months ended September 30, 2013 was driven by a $616 million decrease in personnel expense and a $533 million decrease in professional fees as a result of the same factors as described in the three-month discussion above. Also contributing to the nine-month decrease was a $540 million decrease in other general operating expense as a result of lower FDIC expense and lower default-related servicing expenses, partially offset by a $494 million increase in litigation expense.

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 $2.3 billion on pre-tax income of $4.8 billion for the three months ended September 30, 2013 compared to $770 million on pre-tax income of $1.1 billion for the same period in 2012 and resulted in effective tax rates of 48.5 percent and 69.4 percent. Income tax expense was $4.3 billion on pre-tax income of $12.3 billion for the nine months ended September 30, 2013 compared to $1.5 billion on pre-tax income of $5.0 billion for the same period in 2012 and resulted in effective tax rates of 35.2 percent and 30.5 percent.

The effective tax rate for the three months ended September 30, 2013 included the $1.1 billion impact of the U.K. corporate income tax rate reduction enacted in July 2013, partially offset by our recurring tax preference items. The effective tax rate for the three months ended September 30, 2012 included the $788 million impact of the U.K. corporate income tax rate reduction that was enacted in July 2012, 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 rates for the nine months ended September 30, 2013 and 2012 were driven by the same factors as described in the three-month discussion above. The effective tax rate for the nine months ended September 30, 2013 also included the impact of increased tax benefits from the 2012 non-U.S. restructurings as compared to amounts previously recognized.

On July 17, 2013, the U.K. 2013 Finance Act was enacted, which reduced the U.K. corporate income tax rate by three percent to 20 percent. Two percent of the reduction will become effective on April 1, 2014 and the additional one percent reduction on April 1, 2015. These reductions, which represented the final in a series of announced reductions, will favorably affect future U.K. earnings but also required us to remeasure, in the period of enactment, our U.K. net deferred tax assets using the lower tax rates. As a result, in the three months ended September 30, 2013, we recorded a charge to income tax expense of $1.1 billion in aggregate for these reductions. Because our deferred tax assets in excess of a certain amount are disallowed in calculating regulatory capital, this charge did not impact our capital ratios.

11


Balance Sheet Overview
 
 
 
 
 
Table 5
Selected Balance Sheet Data
 
 
 
 
 
Average Balance
 
September 30
2013
 
December 31
2012
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
(Dollars in millions)
 
 
2013
 
2012
 
2013
 
2012
Assets
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold and securities borrowed or purchased under agreements to resell
$
212,007

 
$
219,924

 
$
223,434

 
$
234,955

 
$
231,379

 
$
234,058

Trading account assets
201,206

 
227,775

 
194,324

 
199,039

 
220,343

 
196,379

Debt securities
320,998

 
360,331

 
327,493

 
355,302

 
342,278

 
351,348

Loans and leases
934,392

 
907,819

 
923,978

 
888,859

 
914,888

 
900,650

Allowance for loan and lease losses
(19,432
)
 
(24,179
)
 
(20,473
)
 
(29,478
)
 
(22,031
)
 
(31,377
)
All other assets
477,482

 
518,304

 
474,674

 
524,635

 
486,307

 
533,916

Total assets
$
2,126,653

 
$
2,209,974

 
$
2,123,430

 
$
2,173,312

 
$
2,173,164

 
$
2,184,974

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Deposits
$
1,110,118

 
$
1,105,261

 
$
1,090,611

 
$
1,049,697

 
$
1,082,005

 
$
1,037,610

Federal funds purchased and securities loaned or sold under agreements to repurchase
226,274

 
293,259

 
235,205

 
287,142

 
268,737

 
274,395

Trading account liabilities
82,713

 
73,587

 
84,648

 
77,528

 
90,321

 
78,041

Short-term borrowings
40,769

 
30,731

 
44,220

 
37,881

 
42,749

 
37,981

Long-term debt
255,331

 
275,585

 
258,717

 
291,684

 
267,582

 
329,320

All other liabilities
179,166

 
194,595

 
179,637

 
193,341

 
187,644

 
192,901

Total liabilities
1,894,371

 
1,973,018

 
1,893,038

 
1,937,273

 
1,939,038

 
1,950,248

Shareholders' equity
232,282

 
236,956

 
230,392

 
236,039

 
234,126

 
234,726

Total liabilities and shareholders' equity
$
2,126,653

 
$
2,209,974

 
$
2,123,430

 
$
2,173,312

 
$
2,173,164

 
$
2,184,974


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.

Assets

At September 30, 2013, total assets were approximately $2.1 trillion, a decrease of $83.3 billion, or four percent, from December 31, 2012. The decrease over the nine months was driven by lower debt securities due to net sales of U.S. Treasuries, paydowns and decreases in the fair value of available-for-sale (AFS) debt securities resulting from the impact of higher interest rates, lower trading account assets due to a reduction in U.S. government and agency securities, a decline in consumer loan balances driven by continued run-off in certain portfolios as well as paydowns and charge-offs outpacing originations, and a decline in securities borrowed or purchased under agreements to resell due to lower matched-book activity. These decreases were partially offset by higher commercial loan balances.

Average total assets decreased $49.9 billion and $11.8 billion for the three and nine months ended September 30, 2013 compared to the same periods in 2012. The decreases were driven by a decline in consumer loan balances driven by continued run-off in certain portfolios as well as paydowns and charge-offs outpacing originations, lower debt securities due to net sales of U.S. Treasuries, paydowns and decreases in the fair value of AFS debt securities resulting from the impact of higher interest rates, a decline in securities borrowed or purchased under agreements to resell due to lower matched-book activity, and reductions in all other assets primarily due to lower derivative dealer assets and cash and cash equivalents. These declines were partially offset by higher commercial loan balances and the nine-month comparison was also impacted by higher trading account assets due to increased securities inventory and client-based activity.


12


Liabilities and Shareholders' Equity

At September 30, 2013, total liabilities were approximately $1.9 trillion, a decrease of $78.6 billion, or four percent, from December 31, 2012 primarily driven by decreases in securities loaned or sold under agreements to repurchase due to lower matched-book activity and trading inventory, and reductions in long-term debt. These decreases were partially offset by higher short-term borrowings due to an increase in advances from the Federal Home Loan Bank (FHLB), an increase in trading account liabilities, and growth in deposits.

Average total liabilities decreased $44.2 billion and $11.2 billion for the three and nine months ended September 30, 2013 compared to the same periods in 2012. The decreases were primarily driven by a decline in securities loaned or sold under agreements to repurchase due to lower matched-book activity, and reductions in long-term debt, partially offset by growth in deposits.

At September 30, 2013, shareholders' equity was $232.3 billion, a decrease of $4.7 billion from December 31, 2012 driven by net preferred stock redemptions, common stock repurchases and a decrease in the fair value of AFS debt securities resulting from the impact of higher interest rates, which is recorded in accumulated other comprehensive income (OCI). These decreases were partially offset by earnings and the positive impact of a remeasurement of pension plan assets and liabilities.

Average shareholders' equity decreased $5.6 billion for the three months ended September 30, 2013 compared to the same period in 2012 primarily driven by net preferred stock redemptions and common stock repurchases, partially offset by earnings.

Average shareholders' equity remained relatively unchanged for the nine months ended September 30, 2013 compared to the same period in 2012 as net preferred stock redemptions and common stock repurchases were offset by earnings.


13


Table 6
 
 
 
 
Selected Quarterly Financial Data
 
 
 
 
 
2013 Quarters
 
2012 Quarters
(In millions, except per share information)
Third
 
Second
 
First
 
Fourth
 
Third
Income statement
 
 
 
 
 
 
 
 
 
Net interest income
$
10,266

 
$
10,549

 
$
10,664

 
$
10,324

 
$
9,938

Noninterest income
11,264

 
12,178

 
12,533

 
8,336

 
10,490

Total revenue, net of interest expense
21,530

 
22,727

 
23,197

 
18,660

 
20,428

Provision for credit losses
296

 
1,211

 
1,713

 
2,204

 
1,774

Noninterest expense
16,389

 
16,018

 
19,500

 
18,360

 
17,544

Income (loss) before income taxes
4,845

 
5,498

 
1,984

 
(1,904
)
 
1,110

Income tax expense (benefit)
2,348

 
1,486

 
501

 
(2,636
)
 
770

Net income
2,497

 
4,012

 
1,483

 
732

 
340

Net income (loss) applicable to common shareholders
2,218

 
3,571

 
1,110

 
367

 
(33
)
Average common shares issued and outstanding
10,719

 
10,776

 
10,799

 
10,777

 
10,776

Average diluted common shares issued and outstanding (1)
11,482

 
11,525

 
11,155

 
10,885

 
10,776

Performance ratios
 
 
 
 
 
 
 
 
 
Return on average assets
0.47
%
 
0.74
%
 
0.27
%
 
0.13
%
 
0.06
%
Four quarter trailing return on average assets (2)
0.40

 
0.30

 
0.23

 
0.19

 
0.25

Return on average common shareholders' equity
4.06

 
6.55

 
2.06

 
0.67

 
n/m

Return on average tangible common shareholders' equity (3)
6.15

 
9.88

 
3.12

 
1.01

 
n/m

Return on average tangible shareholders' equity (3)
6.32

 
9.98

 
3.69

 
1.77

 
0.84

Total ending equity to total ending assets
10.92

 
10.88

 
10.91

 
10.72

 
11.02

Total average equity to total average assets
10.85

 
10.76

 
10.71

 
10.79

 
10.86

Dividend payout
4.82

 
3.01

 
9.75

 
29.33

 
n/m

Per common share data
 
 
 
 
 
 
 
 
 
Earnings
$
0.21

 
$
0.33

 
$
0.10

 
$
0.03

 
$
0.00

Diluted earnings (1)
0.20

 
0.32

 
0.10

 
0.03

 
0.00

Dividends paid
0.01

 
0.01

 
0.01

 
0.01

 
0.01

Book value
20.50

 
20.18

 
20.19

 
20.24

 
20.40

Tangible book value (3)
13.62

 
13.32

 
13.36

 
13.36

 
13.48

Market price per share of common stock
 
 
 
 
 
 
 
 
 
Closing
$
13.80

 
$
12.86

 
$
12.18

 
$
11.61

 
$
8.83

High closing
14.95

 
13.83

 
12.78

 
11.61

 
9.55

Low closing
12.83

 
11.44

 
11.03

 
8.93

 
7.04

Market capitalization
$
147,429

 
$
138,156

 
$
131,817

 
$
125,136

 
$
95,163

(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 more information on these ratios and for corresponding reconciliations to GAAP financial measures, see Supplemental Financial Data on page 18.
(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 87.
(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, Leases and Foreclosed Properties Activity on page 104 and corresponding Table 42, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 113 and corresponding Table 51.
(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 $443 million, $313 million, $839 million, $1.1 billion and $1.7 billion of write-offs in the purchased credit-impaired loan portfolio for the third, second and first quarters 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 98.
(9) 
Presents capital ratios in accordance with the Basel 1 – 2013 Rules, which include the Market Risk Final Rule at September 30, 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 Quarters
 
2012 Quarters
(Dollars in millions)
Third
 
Second
 
First
 
Fourth
 
Third
Average balance sheet
 
 
 
 
 
 
 
 
 
Total loans and leases
$
923,978

 
$
914,234

 
$
906,259

 
$
893,166

 
$
888,859

Total assets
2,123,430

 
2,184,610

 
2,212,430

 
2,210,365

 
2,173,312

Total deposits
1,090,611

 
1,079,956

 
1,075,280

 
1,078,076

 
1,049,697

Long-term debt
258,717

 
270,198

 
273,999

 
277,894

 
291,684

Common shareholders' equity
216,766

 
218,790

 
218,225

 
219,744

 
217,273

Total shareholders' equity
230,392

 
235,063

 
236,995

 
238,512

 
236,039

Asset quality (4)
 
 
 
 
 
 
 
 
 
Allowance for credit losses (5)
$
19,912

 
$
21,709

 
$
22,927

 
$
24,692

 
$
26,751

Nonperforming loans, leases and foreclosed properties (6)
20,028

 
21,280

 
22,842

 
23,555

 
24,925

Allowance for loan and lease losses as a percentage of total loans and leases outstanding (6)
2.10
%
 
2.33
%
 
2.49
%
 
2.69
%
 
2.96
%
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (6)
100

 
103

 
102

 
107

 
111

Allowance for loan and lease losses as a percentage of total nonperforming loans and leases, excluding the PCI loan portfolio (6)
84

 
84

 
82

 
82

 
81

Amounts included in allowance that are excluded from nonperforming loans and leases (7)
$
8,972

 
$
9,919

 
$
10,690

 
$
12,021

 
$
13,978

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)
54
%
 
55
%
 
53
%
 
54
%
 
52
%
Net charge-offs (8)
$
1,687

 
$
2,111

 
$
2,517

 
$
3,104

 
$
4,122

Annualized net charge-offs as a percentage of average loans and leases outstanding (6, 8)
0.73
%
 
0.94
%
 
1.14
%
 
1.40
%
 
1.86
%
Annualized net charge-offs as a percentage of average loans and leases outstanding, excluding the PCI loan portfolio (6)
0.75

 
0.97

 
1.18

 
1.44

 
1.93

Annualized net charge-offs and PCI write-offs as a percentage of average loans and leases outstanding (6)
0.92

 
1.07

 
1.52

 
1.90

 
2.63

Nonperforming loans and leases as a percentage of total loans and leases outstanding (6)
2.10

 
2.26

 
2.44

 
2.52

 
2.68

Nonperforming loans, leases and foreclosed properties as a percentage of total loans, leases and foreclosed properties (6)
2.17

 
2.33

 
2.53

 
2.62

 
2.81

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs (8)
2.90

 
2.51

 
2.20

 
1.96

 
1.60

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs, excluding the PCI loan portfolio
2.42

 
2.04

 
1.76

 
1.51

 
1.17

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs and PCI write-offs
2.30

 
2.18

 
1.65

 
1.44

 
1.13

Capital ratios (period end) (9)
 
 
 
 
 
 
 
 
 
Risk-based capital:
 
 
 
 
 
 
 
 
 
Tier 1 common capital
11.08
%
 
10.83
%
 
10.49
%
 
11.06
%
 
11.41
%
Tier 1 capital
12.33

 
12.16

 
12.22

 
12.89

 
13.64

Total capital
15.36

 
15.27

 
15.50

 
16.31

 
17.16

Tier 1 leverage
7.79

 
7.49

 
7.49

 
7.37

 
7.84

Tangible equity (3)
7.73

 
7.67

 
7.78

 
7.62

 
7.85

Tangible common equity (3)
7.08

 
6.98

 
6.88

 
6.74

 
6.95

For footnotes see page 14.

15


Table 7
 
 
 
Selected Year-to-Date Financial Data
 
 
 
 
Nine Months Ended September 30
(In millions, except per share information)
2013
 
2012
Income statement
 
 
 
Net interest income
$
31,479

 
$
30,332

Noninterest income
35,975

 
34,342

Total revenue, net of interest expense
67,454

 
64,674

Provision for credit losses
3,220

 
5,965

Noninterest expense
51,907

 
53,733

Income before income taxes
12,327

 
4,976

Income tax expense
4,335

 
1,520

Net income
7,992

 
3,456

Net income applicable to common shareholders
6,899

 
2,393

Average common shares issued and outstanding
10,764

 
10,735

Average diluted common shares issued and outstanding
11,524

 
10,827

Performance ratios
 
 
 
Return on average assets
0.49
%
 
0.21
%
Return on average common shareholders' equity
4.23

 
1.48

Return on average tangible common shareholders' equity (1)
6.40

 
2.26

Return on average tangible shareholders' equity (1)
6.67

 
2.89

Total ending equity to total ending assets
10.92

 
11.02

Total average equity to total average assets
10.77

 
10.74

Dividend payout
4.68

 
13.79

Per common share data
 
 
 
Earnings
$
0.64

 
$
0.22

Diluted earnings
0.62

 
0.22

Dividends paid
0.03

 
0.03

Book value
20.50

 
20.40

Tangible book value (1)
13.62

 
13.48

Market price per share of common stock
 
 
 
Closing
$
13.80

 
$
8.83

High closing
14.95

 
9.93

Low closing
11.03

 
5.80

Market capitalization
$
147,429

 
$
95,163

(1) 
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 more information on these ratios and for corresponding reconciliations to GAAP financial measures, see Supplemental Financial Data on page 18.
(2) 
For more information on the impact of the purchased credit-impaired loan portfolio on asset quality, see Consumer Portfolio Credit Risk Management on page 87.
(3) 
Includes the allowance for loan and lease losses and the reserve for unfunded lending commitments.
(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 Consumer Portfolio Credit Risk Management – Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity on page 104 and corresponding Table 42, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 113 and corresponding Table 51.
(5) 
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.
(6) 
Net charge-offs exclude $1.6 billion and $1.7 billion of write-offs in the purchased credit-impaired loan portfolio for the nine months ended September 30, 2013 and 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 98.


16


Table 7
 
 
 
Selected Year-to-Date Financial Data (continued)
 
 
 
 
Nine Months Ended September 30
(Dollars in millions)
2013
 
2012
Average balance sheet
 
 
 
Total loans and leases
$
914,888

 
$
900,650

Total assets
2,173,164

 
2,184,974

Total deposits
1,082,005

 
1,037,610

Long-term debt
267,582

 
329,320

Common shareholders' equity
217,922

 
216,073

Total shareholders' equity
234,126

 
234,726

Asset quality (2)
 
 
 
Allowance for credit losses (3)
$
19,912

 
$
26,751

Nonperforming loans, leases and foreclosed properties (4)
20,028

 
24,925

Allowance for loan and lease losses as a percentage of total loans and leases outstanding (4)
2.10
%
 
2.96
%
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (4)
100

 
111

Allowance for loan and lease losses as a percentage of total nonperforming loans and leases, excluding the PCI loan portfolio (4)
84

 
81

Amounts included in allowance that are excluded from nonperforming loans and leases (5)
$
8,972

 
$
13,978

Allowance as a percentage of total nonperforming loans and leases, excluding amounts included in the allowance that are excluded from nonperforming loans and leases (5)
54
%
 
52
%
Net charge-offs (6)
$
6,315

 
$
11,804

Annualized net charge-offs as a percentage of average loans and leases outstanding (4, 6)
0.93
%
 
1.77
%
Annualized net charge-offs as a percentage of average loans and leases outstanding, excluding the PCI loan portfolio (4)
0.96

 
1.83

Annualized net charge-offs and PCI write-offs as a percentage of average loans and leases outstanding (4)
1.17

 
2.02

Nonperforming loans and leases as a percentage of total loans and leases outstanding (4)
2.10

 
2.68

Nonperforming loans, leases and foreclosed properties as a percentage of total loans, leases and foreclosed properties (4)
2.17

 
2.81

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs (6)
2.30

 
1.66

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs, excluding the PCI loan portfolio
1.92

 
1.21

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs and PCI write-offs
1.84

 
1.46

For footnotes see page 16.

17


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 ending 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 ending 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 6 and 7.

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 financial 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 additional information, see Business Segment Operations on page 30 and Note 9 – Goodwill and Intangible Assets to the Consolidated Financial Statements.

Tables 8, 9 and 10 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 8
Quarterly Supplemental Financial Data and Reconciliations to GAAP Financial Measures
 
2013 Quarters
 
2012 Quarters
(Dollars in millions)
Third
 
Second
 
First
 
Fourth
 
Third
Fully taxable-equivalent basis data
 
 
 
 
 
 
 
 
 
Net interest income
$
10,479

 
$
10,771

 
$
10,875

 
$
10,555

 
$
10,167

Total revenue, net of interest expense
21,743

 
22,949

 
23,408

 
18,891

 
20,657

Net interest yield (1)
2.44
%
 
2.44
%
 
2.43
%
 
2.35
%
 
2.32
%
Efficiency ratio
75.38

 
69.80

 
83.31

 
97.19

 
84.93

(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 $50 million, $40 million and $33 million for the third, second and first quarters of 2013, and $42 million and $48 million for the fourth and third quarters of 2012, respectively.

18


Table 8
Quarterly Supplemental Financial Data and Reconciliations to GAAP Financial Measures (continued)
 
2013 Quarters
 
2012 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
$
10,266

 
$
10,549

 
$
10,664

 
$
10,324

 
$
9,938

Fully taxable-equivalent adjustment
213

 
222

 
211

 
231

 
229

Net interest income on a fully taxable-equivalent basis
$
10,479

 
$
10,771

 
$
10,875

 
$
10,555

 
$
10,167

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
$
21,530

 
$
22,727

 
$
23,197

 
$
18,660

 
$
20,428

Fully taxable-equivalent adjustment
213

 
222

 
211

 
231

 
229

Total revenue, net of interest expense on a fully taxable-equivalent basis
$
21,743

 
$
22,949

 
$
23,408

 
$
18,891

 
$
20,657

Reconciliation of income tax expense (benefit) to income tax expense (benefit) on a fully taxable-equivalent basis
 
 
 
 
 
 
 
 
 
Income tax expense (benefit)
$
2,348

 
$
1,486

 
$
501

 
$
(2,636
)
 
$
770

Fully taxable-equivalent adjustment
213

 
222

 
211

 
231

 
229

Income tax expense (benefit) on a fully taxable-equivalent basis
$
2,561

 
$
1,708

 
$
712

 
$
(2,405
)
 
$
999

Reconciliation of average common shareholders' equity to average tangible common shareholders' equity
 
 
 
 
 
 
 
 
 
Common shareholders' equity
$
216,766

 
$
218,790

 
$
218,225

 
$
219,744

 
$
217,273

Goodwill
(69,903
)
 
(69,930
)
 
(69,945
)
 
(69,976
)
 
(69,976
)
Intangible assets (excluding MSRs)
(5,993
)
 
(6,270
)
 
(6,549
)
 
(6,874
)
 
(7,194
)
Related deferred tax liabilities
2,296

 
2,360

 
2,425

 
2,490

 
2,556

Tangible common shareholders' equity
$
143,166

 
$
144,950

 
$
144,156

 
$
145,384

 
$
142,659

Reconciliation of average shareholders' equity to average tangible shareholders' equity
 
 
 
 
 
 
 
 
 
Shareholders' equity
$
230,392

 
$
235,063

 
$
236,995

 
$
238,512

 
$
236,039

Goodwill
(69,903
)
 
(69,930
)
 
(69,945
)
 
(69,976
)
 
(69,976
)
Intangible assets (excluding MSRs)
(5,993
)
 
(6,270
)
 
(6,549
)
 
(6,874
)
 
(7,194
)
Related deferred tax liabilities
2,296

 
2,360

 
2,425

 
2,490

 
2,556

Tangible shareholders' equity
$
156,792

 
$
161,223

 
$
162,926

 
$
164,152

 
$
161,425

Reconciliation of period-end common shareholders' equity to period-end tangible common shareholders' equity
 
 
 
 
 
 
 
 
 
Common shareholders' equity
$
218,967

 
$
216,791

 
$
218,513

 
$
218,188

 
$
219,838

Goodwill
(69,891
)
 
(69,930
)
 
(69,930
)
 
(69,976
)
 
(69,976
)
Intangible assets (excluding MSRs)
(5,843
)
 
(6,104
)
 
(6,379
)
 
(6,684
)
 
(7,030
)
Related deferred tax liabilities
2,231

 
2,297

 
2,363

 
2,428

 
2,494

Tangible common shareholders' equity
$
145,464

 
$
143,054

 
$
144,567

 
$
143,956

 
$
145,326

Reconciliation of period-end shareholders' equity to period-end tangible shareholders' equity
 
 
 
 
 
 
 
 
 
Shareholders' equity
$
232,282

 
$
231,032

 
$
237,293

 
$
236,956

 
$
238,606

Goodwill
(69,891
)
 
(69,930
)
 
(69,930
)
 
(69,976
)
 
(69,976
)
Intangible assets (excluding MSRs)
(5,843
)
 
(6,104
)
 
(6,379
)
 
(6,684
)
 
(7,030
)
Related deferred tax liabilities
2,231

 
2,297

 
2,363

 
2,428

 
2,494

Tangible shareholders' equity
$
158,779

 
$
157,295

 
$
163,347

 
$
162,724

 
$
164,094

Reconciliation of period-end assets to period-end tangible assets
 
 
 
 
 
 
 
 
 
Assets
$
2,126,653

 
$
2,123,320

 
$
2,174,819

&