0000070858-14-000056.txt : 20140501 0000070858-14-000056.hdr.sgml : 20140501 20140501171524 ACCESSION NUMBER: 0000070858-14-000056 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 20140331 FILED AS OF DATE: 20140501 DATE AS OF CHANGE: 20140501 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANK OF AMERICA CORP /DE/ CENTRAL INDEX KEY: 0000070858 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 560906609 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06523 FILM NUMBER: 14805972 BUSINESS ADDRESS: STREET 1: BANK OF AMERICA CORPORATE CENTER STREET 2: 100 N TRYON ST CITY: CHARLOTTE STATE: NC ZIP: 28255 BUSINESS PHONE: 7043868486 MAIL ADDRESS: STREET 1: BANK OF AMERICA CORPORATE CENTER STREET 2: 100 N TRYON ST CITY: CHARLOTTE STATE: NC ZIP: 28255 FORMER COMPANY: FORMER CONFORMED NAME: BANKAMERICA CORP/DE/ DATE OF NAME CHANGE: 19981022 FORMER COMPANY: FORMER CONFORMED NAME: NATIONSBANK CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: NCNB CORP DATE OF NAME CHANGE: 19920107 10-Q 1 bac-3312014x10q.htm 10-Q BAC-3.31.2014-10Q


 
 
 
 
 

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, 2014
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 No.:
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 April 30, 2014, there were 10,515,659,722 shares of Bank of America Corporation Common Stock outstanding.
 
 
 
 
 

                


Bank of America Corporation
 
March 31, 2014
 
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 "anticipates," "targets," "expects," "hopes," "estimates," "intends," "plans," "goal," "believes," "continue" 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 Corporation's current expectations, plans or forecasts of its future results and revenues, and future business and economic conditions more generally, and other matters. 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 2013 Annual Report on Form 10-K, and in any of the Corporation's subsequent Securities and Exchange Commission filings: the potential negative impacts of the Corporation’s adjustment to its regulatory capital ratios, including, without limitation, that there can be no assurance as to the timing of completion of the third-party review, the results of that review or the Federal Reserve's review of the resubmitted Comprehensive Capital Analysis and Review, or as to the revised capital actions that will be approved by the Federal Reserve, if any; 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 counterparties, including monolines or private-label and other investors; the possibility that final court approval of negotiated settlements is not obtained; the possibility that the court decision with respect to the BNY Mellon Settlement is overturned on appeal in whole or in part; potential claims, damages, penalties and fines resulting from pending or future litigation and regulatory proceedings, including proceedings instituted by the U.S. Department of Justice, state Attorneys General and other members of the RMBS Working Group of the Financial Fraud Enforcement Task Force concerning mortgage-related matters; the possibility that the European Commission will impose remedial measures in relation to its investigation of the Corporation’s competitive practices; the possible outcome of LIBOR, other reference rate and foreign exchange inquiries and investigations; 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 possibility that future claims, damages, penalties and fines may occur in excess of the Corporation's recorded liability and estimated range of possible losses for litigation exposures; uncertainties about the financial stability and growth rates of non-U.S. jurisdictions, the risk that those jurisdictions may face difficulties servicing their sovereign debt, and related stresses on financial markets, currencies and trade, 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 possibility that unexpected foreclosure delays could impact the rate of decline of default-related servicing costs; uncertainty regarding timing and the potential impact of regulatory capital and liquidity requirements (including Basel 3); the negative impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act on the Corporation’s businesses and earnings, including as a result of additional regulatory interpretation and rulemaking and the success of the Corporation’s actions to mitigate such impacts; the potential impact of implementing and conforming to the Volcker Rule; the potential impact of future derivative regulations; 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; reputational damage that may result from negative publicity, fines and penalties from regulatory violations and judicial proceedings; the Corporation’s ability to fully realize the cost savings in Legacy Assets & Servicing and the cost savings and other anticipated benefits from Project New BAC, including in accordance with currently anticipated timeframes; a failure in or breach of the Corporation’s operational or security systems or infrastructure, or those of third parties with which we do business, including as a result of cyber attacks; 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.


3


Executive Summary
 
Business Overview

The Corporation is a Delaware corporation, a bank holding company (BHC) 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 Wealth & Investment Management (GWIM), Global Banking and Global Markets, 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 April 16, 2014, FIA and BANA filed an application with the Office of the Comptroller of the Currency (OCC) for consent to merge FIA into BANA and, if approved, expect to complete the merger on October 1, 2014. At March 31, 2014, the Corporation had approximately $2.1 trillion in assets and approximately 239,000 full-time equivalent employees.

As of March 31, 2014, 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 49 million consumer and small business relationships with approximately 5,100 banking centers, 16,200 ATMs, nationwide call centers, and leading online (www.bankofamerica.com) 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.

First Quarter 2014 Economic and Business Environment

In the U.S., economic growth slowed significantly in the first quarter of 2014 following healthy growth in the second half of 2013. Severe winter weather restrained manufacturing, housing activity and retail spending. Employment gains remained moderate and steady, and the unemployment rate of 6.7 percent remained unchanged from year end. Core inflation also remained unchanged from year end at almost a full percentage point below the Board of Governors of the Federal Reserve System's (Federal Reserve) longer-term target of two percent. Retail spending and manufacturing began to rebound late in the quarter, primarily driven by improved weather conditions.

With financial markets impacted by Russian-Ukrainian tensions, U.S. Treasury yields declined modestly over the quarter, while equity markets were essentially flat. During the first quarter of 2014, the Federal Reserve reduced, as previously announced, its securities purchases, bringing targeted monthly purchases to $55 billion in April. The Federal Reserve also indicated that it was likely to continue to reduce the pace of its purchases.

Internationally, Europe experienced sustained economic improvement in the first quarter of 2014, particularly in the U.K. where unemployment is down and job growth has been steady. Monetary policies in Japan led to accelerated economic expansion in the first quarter of 2014. China’s economy remained stable amid its latest set of reforms designed to address potential imbalances, including its housing market. However, growth rates in a number of emerging nations have decreased amid rising interest rates and uncertainty surrounding increased political unrest and potential international sanctions. For more information on our international exposure, see Non-U.S. Portfolio on page 104.


4


Recent Events

Capital Management

On March 26, 2014, we announced that the Federal Reserve had informed us that it completed its 2014 Comprehensive Capital Analysis and Review (CCAR) and did not object to our 2014 capital plan, which included a request to repurchase up to $4.0 billion of common stock over four quarters and to increase the quarterly common stock dividend to $0.05 per share with both actions beginning in the second quarter of 2014. However, on April 28th, we announced the revision of certain regulatory capital amounts and ratios that were included in an April 16th announcement of our results for the first quarter of 2014 (earnings announcement). The April 28th announcement also refers to the suspension of our previously announced planned 2014 capital actions and stated that we will resubmit the Corporation’s capital plan pursuant to the 2014 CCAR to the Federal Reserve.
More specifically, with regard to the regulatory capital revisions, our earnings announcement included estimated preliminary Basel 3 capital amounts and ratios under the Standardized approach on both a transition and fully phased-in basis and under the Advanced approaches on a fully phased-in basis, as well as Basel 1 capital amounts and ratios for 2013. Subsequent to the earnings announcement, we discovered an incorrect adjustment being applied in the determination of regulatory capital related to the treatment of the fair value option adjustment for structured notes assumed in the Merrill Lynch & Co, Inc. acquisition in 2009, resulting in an overstatement of regulatory capital amounts and ratios. The Corporation's historical consolidated financial statements, including shareholders' equity, have been properly stated in accordance with accounting principles generally accepted in the United States of America (GAAP).

We are required to update and resubmit our 2014 CCAR submission by May 27th, unless that period is extended by the Federal Reserve. We must address the quantitative errors in our capital plan as part of the resubmission and will undertake a third-party review of our regulatory capital reporting. We expect any requested capital actions that may be included in our revised 2014 CCAR capital plan to be less than the capital actions announced on March 26th.
Until the Federal Reserve acts on our 2014 CCAR resubmission, we must obtain the Federal Reserve's approval prior to any capital distributions. However, the Federal Reserve has approved certain capital actions, including continued payment of a quarterly common stock dividend of $0.01 per share, the amendment to the terms of the Corporation’s 6% Cumulative Perpetual Preferred Stock, Series T (Series T Preferred Stock) as described below and the redemption or repurchase of a limited amount of trust preferred securities and subordinated debt. Additional common share buybacks were not included in this approval.
During the first quarter, pursuant to the share repurchase authorization announced in March 2013, we repurchased and retired 86.7 million common shares for an aggregate purchase price of approximately $1.4 billion. In April 2014, prior to the suspension of our 2014 CCAR capital plan, we repurchased and retired 14.4 million common shares for an aggregate purchase price of approximately $233 million.
See Capital Management on page 54 for additional information including the capital amounts and ratios for the three months ended March 31, 2014 and the revised ratios for 2013.

Regulatory and Governmental Investigations

We are subject to inquiries and investigations, and may be subject to penalties and fines by the U.S. Department of Justice (DOJ), state Attorneys General and other members of the RMBS Working Group of the Financial Fraud Enforcement Task Force (collectively, the Governmental Authorities), regarding our residential mortgage-backed securities (RMBS) and other mortgage-related matters. We are also a party to civil litigation proceedings brought by the DOJ and certain other Governmental Authorities regarding our RMBS. We continue to cooperate with and have had discussions about a potential resolution of these matters with certain Governmental Authorities. There can be no assurances that these discussions will lead to a resolution of any or all of the matters. For more information, see Item 1A. Risk Factors of the Corporation's 2013 Annual Report on Form 10-K.

Recent Settlements

FHFA

On March 25, 2014, we entered into a settlement with the Federal Housing Finance Agency (FHFA) as conservator of Fannie Mae (FNMA) and Freddie Mac (FHLMC) to resolve (1) all outstanding RMBS litigation between FHFA, FNMA and FHLMC, and the Corporation and its affiliates, and (2) other legacy contract claims related to representations and warranties (collectively, the FHFA Settlement). In connection with the FHFA Settlement, on April 1, 2014, we paid FNMA and FHLMC, collectively, $9.5 billion and received from them RMBS with a fair market value of approximately $3.2 billion, for a net cost of $6.3 billion. The total costs associated with the FHFA Settlement were covered by previously established reserves and an additional charge of $3.7 billion recorded as of

5


March 31, 2014. For additional information, including a description of the FHFA Settlement, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees and Note 10 – Commitments and Contingencies to the Consolidated Financial Statements.

FGIC

On April 7, 2014, we entered into a settlement with Financial Guaranty Insurance Company (FGIC) for certain second-lien RMBS trusts for which FGIC provided financial guarantee insurance. In addition, on April 11, 2014, separate settlements were entered into with The Bank of New York Mellon (BNY Mellon) as trustee with respect to seven of those trusts. The agreements resolve all outstanding litigation between FGIC and the Corporation, as well as outstanding and potential claims by FGIC and the trustee related to alleged representations and warranties breaches and other claims involving second-lien RMBS trusts for which FGIC provided financial guarantee insurance.

In addition to the seven trust settlements with BNY Mellon that have already been completed, two remaining trust settlements are subject to additional investor approval. The process is scheduled to be completed on or before May 27, 2014. We have made payments totaling $900 million under the FGIC and the completed trust settlements and will pay an additional $50 million if and when the remaining two trust settlements are completed. The total costs of the FGIC and trust settlements were covered by previously established reserves. For additional information, including a description of the settlements, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees and Note 10 – Commitments and Contingencies to the Consolidated Financial Statements.

CFPB and OCC

On April 9, 2014, we announced a settlement with the Consumer Financial Protection Bureau (CFPB) and the OCC to resolve issues related to the marketing and sale of credit card debt cancellation products and billing of identity theft protection products. Under the terms of the settlement, we paid, in April 2014, $45 million in civil monetary penalties and will provide approximately $738 million in refunds to affected consumers, a substantial amount of which has previously been refunded to consumers. The penalties and customer refund payments are covered by previously established reserves. In addition, we have agreed to certain enhancements in our vendor, third-party provider and risk management programs for certain products. For additional information, see Note 10 – Commitments and Contingencies to the Consolidated Financial Statements.

BNY Mellon

In the first quarter of 2014, the New York Supreme Court entered final judgment approving the BNY Mellon Settlement. The court overruled the objections to the settlement, holding that the Trustee, BNY Mellon, acted in good faith, within its discretion and within the bounds of reasonableness in determining that the settlement agreement was in the best interests of the covered trusts. The court declined to approve the Trustee's conduct only with respect to the Trustee's consideration of a potential claim that a loan must be repurchased if the servicer modifies its terms. The court's January 31, 2014 decision, order and judgment remain subject to ongoing appeals, as well as two motions to reargue, and it is not possible at this time to predict the timing of appeals or when the court approval process will be completed. For additional information, including a description of the BNY Mellon Settlement, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements.

Basel 3 Standardized and Advanced Approaches

The final Basel 3 rules became effective on January 1, 2014, and for 2014, we will report under Basel 3 under the Standardized approach on a transition basis. Various aspects of Basel 3 will be subject to multi-year transition periods through December 31, 2018 and Basel 3 generally continues to be subject to interpretation by the U.S. banking regulators. Basel 3 materially changes Tier 1 and Total capital calculations and formally establishes a common equity tier 1 capital ratio. Basel 3 introduces new minimum capital ratios and buffer requirements and a supplementary leverage ratio; changes the composition of regulatory capital; revises the adequately capitalized minimum requirements under the Prompt Corrective Action framework; expands and modifies the risk-sensitive calculation of risk-weighted assets for credit and market risk (the Advanced approaches); and introduces a Standardized approach for the calculation of risk-weighted assets. On April 8, 2014, U.S. banking regulators voted to adopt a final rule to modify the supplementary leverage ratio minimum requirements under Basel 3 effective in 2018. For additional information, see Capital Management – Regulatory Capital on page 56.

Series T Preferred Stock

In 2013, we entered into an agreement with Berkshire Hathaway, Inc. and its affiliates (Berkshire), who hold all the outstanding shares of the Corporation’s Series T Preferred Stock to amend the terms of the Series T Preferred Stock such that it will qualify as Tier 1 capital. If our stockholders approve the Series T Preferred Stock amendment at the annual meeting of stockholders to be held on May 7, 2014 and it becomes effective, our Tier 1 capital will increase by approximately $2.9 billion, which will benefit our Tier 1 capital and leverage ratios. For more information on the Series T Preferred Stock, see Capital Management – Regulatory Capital on page 56.

6


Selected Financial Data

Table 1 provides selected consolidated financial data for the three months ended March 31, 2014 and 2013, and at March 31, 2014 and December 31, 2013.

Table 1
Selected Financial Data
 
Three Months Ended March 31
(Dollars in millions, except per share information)
2014
 
2013
Income statement
 
 
 
Revenue, net of interest expense (FTE basis) (1)
$
22,767

 
$
23,408

Net income (loss)
(276
)
 
1,483

Diluted earnings (loss) per common share (2)
(0.05
)
 
0.10

Dividends paid per common share
0.01

 
0.01

Performance ratios
 
 
 
Return on average assets
n/m

 
0.27
%
Return on average tangible shareholders' equity (1)
n/m

 
3.69

Efficiency ratio (FTE basis) (1)
97.68
%
 
83.31

Asset quality
 
 
 
Allowance for loan and lease losses at period end
$
16,618

 
$
22,441

Allowance for loan and lease losses as a percentage of total loans and leases outstanding at period end (3)
1.84
%
 
2.49
%
Nonperforming loans, leases and foreclosed properties at period end (3)
$
17,732

 
$
22,842

Net charge-offs (4)
1,388

 
2,517

Annualized net charge-offs as a percentage of average loans and leases outstanding (3, 4)
0.62
%
 
1.14
%
Annualized net charge-offs as a percentage of average loans and leases outstanding, excluding the purchased credit-impaired loan portfolio (3)
0.64

 
1.18

Annualized net charge-offs and purchased credit-impaired write-offs as a percentage of average loans and leases outstanding (3)
0.79

 
1.52

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs (4)
2.95

 
2.20

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs, excluding the purchased credit-impaired loan portfolio
2.58

 
1.76

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

 
1.65

 
 
 
 
 
March 31
2014
 
December 31
2013
Balance sheet
 
 
 
Total loans and leases
$
916,217

 
$
928,233

Total assets
2,149,851

 
2,102,273

Total deposits
1,133,650

 
1,119,271

Total common shareholders' equity
218,536

 
219,333

Total shareholders' equity
231,888

 
232,685

Capital ratios (5, 6)
 
 
 
Common equity tier 1 capital
11.8
%
 
n/a

Tier 1 common capital
n/a

 
10.9
%
Tier 1 capital
11.9

 
12.2

Total capital
14.8

 
15.1

Tier 1 leverage
7.4

 
7.7

(1)
Fully taxable-equivalent basis (FTE), 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 15.
(2) 
The diluted earnings (loss) per common share excludes the effect of any equity instruments that are antidilutive to earnings per share. There were no potential common shares that were dilutive for the three months ended March 31, 2014 because of the net loss.
(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 90 and corresponding Table 43, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 99 and corresponding Table 52.
(4) 
Net charge-offs exclude $391 million of write-offs in the purchased credit-impaired loan portfolio for the three months ended March 31, 2014 compared to $839 million for the same period in 2013. 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 84.
(5) 
On January 1, 2014, the Basel 3 rules became effective, subject to transition provisions primarily related to regulatory deductions and adjustments impacting common equity tier 1 capital and Tier 1 capital. We reported under Basel 1 (which included the Market Risk Final Rules) at December 31, 2013.
(6) 
Capital ratios for December 31, 2013 were adjusted as more fully described in Capital Management – CCAR and Capital Planning on page 55.
n/a = not applicable
n/m = not meaningful

7


Financial Highlights

The results for the three months ended March 31, 2014 were a net loss of $276 million, or $0.05 per diluted share compared to net income of $1.5 billion, or $0.10 per diluted share for the same period in 2013. Although the FHFA Settlement and the establishment of additional reserves primarily for legacy mortgage-related matters resulted in an increase of $3.8 billion in litigation expense compared to the same period in 2013, our capital and liquidity levels remained strong, credit quality continued to improve, and we continue to focus on streamlining processes and achieving cost savings.

Table 2
 
 
 
Summary Income Statement
 
Three Months Ended March 31
(Dollars in millions)
2014
 
2013
Net interest income (FTE basis) (1)
$
10,286

 
$
10,875

Noninterest income
12,481

 
12,533

Total revenue, net of interest expense (FTE basis) (1)
22,767

 
23,408

Provision for credit losses
1,009

 
1,713

Noninterest expense
22,238

 
19,500

Income (loss) before income taxes
(480
)
 
2,195

Income tax expense (benefit) (FTE basis) (1)
(204
)
 
712

Net income (loss)
(276
)
 
1,483

Preferred stock dividends
238

 
373

Net income (loss) applicable to common shareholders
$
(514
)
 
$
1,110

 
 
 
 
Per common share information
 
 
 
Earnings (loss)
$
(0.05
)
 
$
0.10

Diluted earnings (loss)
(0.05
)
 
0.10

(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 15.

Net Interest Income

Net interest income on a fully taxable-equivalent (FTE) basis decreased $589 million to $10.3 billion for the three months ended March 31, 2014 compared to the same period in 2013. The decrease was primarily due to lower yields on debt securities including the impact of market-related premium amortization expense, lower consumer loan balances as well as lower loan yields, and decreased trading-related net interest income, partially offset by reductions in long-term debt balances and yields, higher commercial loan balances and lower rates paid on deposits. The net interest yield on a FTE basis decreased seven basis points (bps) to 2.29 percent for the three months ended March 31, 2014 compared to the same period in 2013 due to the same factors as described above. Given the additional liquidity during the quarter, coupled with the average balance impact of seasonally lower consumer loan balances, we expect that net interest income in the second quarter of 2014 may be slightly lower compared to the level for the first quarter, excluding market-related adjustments, before increasing modestly throughout the second half of 2014.


8


Noninterest Income
Table 3
Noninterest Income
 
Three Months Ended March 31
(Dollars in millions)
2014
 
2013
Card income
$
1,393

 
$
1,410

Service charges
1,826

 
1,799

Investment and brokerage services
3,269

 
3,027

Investment banking income
1,542

 
1,535

Equity investment income
784

 
563

Trading account profits
2,467

 
2,989

Mortgage banking income
412

 
1,263

Gains on sales of debt securities
377

 
68

Other income (loss)
412

 
(112
)
Net impairment losses recognized in earnings on AFS debt securities
(1
)
 
(9
)
Total noninterest income
$
12,481

 
$
12,533


Noninterest income decreased $52 million to $12.5 billion for the three months ended March 31, 2014 compared to the same period in 2013. The following highlights the significant changes.

Investment and brokerage services income increased $242 million primarily driven by higher market levels and the impact of long-term assets under management (AUM) inflows.

Equity investment income increased $221 million primarily due to a gain on the sale of the remaining portion of an equity investment.

Trading account profits decreased $522 million. Net debit valuation adjustment (DVA) losses on derivatives were $85 million for the three months ended March 31, 2014 compared to $55 million in the prior-year period. Excluding net DVA on derivatives, trading account profits decreased $492 million primarily due to decreases in our rates and currencies businesses driven by declines in market volumes and reduced volatility.

Mortgage banking income decreased $851 million primarily driven by lower servicing income and core production revenue, partially offset by lower representations and warranties provision.

Other income increased to $412 million from a loss of $112 million in the prior-year period. The increase was due to the write-down of a monoline receivable in the prior-year period and positive DVA on structured liabilities of $197 million compared to negative DVA of $90 million for the same period in 2013.

Provision for Credit Losses

The provision for credit losses decreased $704 million to $1.0 billion compared to the prior-year period. The provision for credit losses was $379 million lower than net charge-offs resulting in a reduction in the allowance for credit losses compared to a reduction of $804 million in the prior-year period. The reduction in provision was driven by portfolio improvement, including increased home prices in the consumer real estate portfolio, as well as lower levels of delinquencies in the consumer lending portfolio within CBB. This was partially offset by higher provision for credit losses in the commercial portfolio as the decline in net charge-offs was more than offset by increased reserves.

Net charge-offs totaled $1.4 billion, or 0.62 percent of average loans and leases for the three months ended March 31, 2014 compared to $2.5 billion, or 1.14 percent for the same period in 2013. The decrease in net charge-offs was due to credit quality improvement across nearly all major portfolios.

If the economy and our asset quality continue to improve, we anticipate moderate reductions in both the allowance for credit losses and net charge-offs in subsequent quarters in 2014. For more information on the provision for credit losses, see Provision for Credit Losses on page 108.


9


Noninterest Expense
Table 4
 
 
 
Noninterest Expense
 
Three Months Ended March 31
(Dollars in millions)
2014
 
2013
Personnel
$
9,749

 
$
9,891

Occupancy
1,115

 
1,154

Equipment
546

 
550

Marketing
442

 
429

Professional fees
558

 
649

Amortization of intangibles
239

 
276

Data processing
833

 
812

Telecommunications
370

 
409

Other general operating
8,386

 
5,330

Total noninterest expense
$
22,238

 
$
19,500


Noninterest expense increased $2.7 billion to $22.2 billion for the three months ended March 31, 2014 compared to the same period in 2013 primarily driven by a $3.1 billion increase in other general operating expense. The increase in other general operating expense reflected a $3.8 billion increase in litigation expense to $6.0 billion as a result of the FHFA Settlement and the establishment of additional reserves primarily for legacy mortgage-related matters, partially offset by a decline in other operating expenses in Legacy Assets & Servicing. Personnel expense decreased $142 million as we continued to streamline processes and achieve cost savings. Noninterest expense also included $956 million of annual expense associated with retirement-eligible stock compensation for the three months ended March 31, 2014 compared to $893 million for the same period in 2013.

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, since inception of the project, to reach $8 billion on an annualized basis, or $2 billion per quarter. We are on track to achieve the quarterly savings by mid-2015.

Income Tax Expense
Table 5
 
 
 
Income Tax Expense (Benefit)
 
 
 
 
Three Months Ended March 31
(Dollars in millions)
2014
 
2013
Income (loss) before income taxes
$
(681
)
 
$
1,984

Income tax expense (benefit)
(405
)
 
501

Effective tax rate
(59.5
)%
 
25.3
%

The effective tax rate for the three months ended March 31, 2014 was primarily driven by our recurring tax preference items and by certain accruals estimated to be nondeductible, largely offset by discrete tax benefits, principally from the resolution of certain tax matters. The effective tax rate for the three months ended March 31, 2013 was primarily driven by our recurring tax preference items. We expect an effective tax rate of approximately 31 percent, absent any unusual items, for the remainder of 2014.


10


Balance Sheet Overview
 
 
 
Table 6
Selected Balance Sheet Data
 
 
 
 
 
 
 
Average Balance
 
 
 
March 31
2014
 
December 31
2013
 
% Change
 
Three Months Ended
March 31
 
% Change
(Dollars in millions)
 
 
 
2014
 
2013
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
151,645

 
$
131,322

 
15
 %
 
$
140,828

 
$
92,846

 
52
 %
Federal funds sold and securities borrowed or purchased under agreements to resell
215,299

 
190,328

 
13

 
212,504

 
237,463

 
(11
)
Trading account assets
195,949

 
200,993

 
(3
)
 
203,836

 
239,964

 
(15
)
Debt securities
340,696

 
323,945

 
5

 
329,711

 
356,399

 
(7
)
Loans and leases
916,217

 
928,233

 
(1
)
 
919,482

 
906,259

 
1

Allowance for loan and lease losses
(16,618
)
 
(17,428
)
 
(5
)
 
(17,144
)
 
(23,593
)
 
(27
)
All other assets
346,663

 
344,880

 
1

 
350,049

 
403,092

 
(13
)
Total assets
$
2,149,851

 
$
2,102,273

 
2

 
$
2,139,266

 
$
2,212,430

 
(3
)
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Deposits
$
1,133,650

 
$
1,119,271

 
1

 
$
1,118,178

 
$
1,075,280

 
4

Federal funds purchased and securities loaned or sold under agreements to repurchase
203,108

 
198,106

 
3

 
204,804

 
300,938

 
(32
)
Trading account liabilities
89,076

 
83,469

 
7

 
90,448

 
92,047

 
(2
)
Short-term borrowings
51,409

 
45,999

 
12

 
48,167

 
36,706

 
31

Long-term debt
254,785

 
249,674

 
2

 
253,678

 
273,999

 
(7
)
All other liabilities
185,935

 
173,069

 
7

 
187,438

 
196,465

 
(5
)
Total liabilities
1,917,963

 
1,869,588

 
3

 
1,902,713

 
1,975,435

 
(4
)
Shareholders' equity
231,888

 
232,685

 

 
236,553

 
236,995

 

Total liabilities and shareholders' equity
$
2,149,851

 
$
2,102,273

 
2

 
$
2,139,266

 
$
2,212,430

 
(3
)

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 March 31, 2014, total assets were approximately $2.1 trillion, up $47.6 billion from December 31, 2013. The key drivers were higher securities borrowed or purchased under agreements to resell to cover an increase in client short positions, an increase in cash and cash equivalents primarily due to higher interest-bearing deposits with the Federal Reserve and non-U.S. central banks in connection with anticipated Basel 3 Liquidity Coverage Ratio (LCR) requirements, and higher debt securities driven by treasury purchases in the investment portfolio. These increases were partially offset by a decline in consumer loan balances due to paydowns and net charge-offs outpacing new originations and repurchases of certain consumer loans.

Average total assets decreased $73.2 billion for the three months ended March 31, 2014 compared to the same period in 2013. The decrease was driven by a decline in trading account assets due to a reduction in treasuries inventory, lower debt securities driven by paydowns, sales, and decreases in fair value of available-for-sale (AFS) debt securities, a decline in consumer loans due to run-off and paydowns outpacing originations, and a decline in securities borrowed or purchased under agreements to repurchase due to a lower matched-book. The decrease in average total assets was also driven by a decline in all other assets primarily due to decreases in customer and other receivables, derivative dealer assets, other earning assets and loans held-for-sale (LHFS). The decrease in average total assets was offset by increases in cash and cash equivalents primarily driven by higher interest-bearing deposits with the Federal Reserve and non-U.S. central banks and commercial lending driven by higher customer demand.

11


Liabilities and Shareholders' Equity

At March 31, 2014, total liabilities were approximately $1.9 trillion, up $48.4 billion from December 31, 2013 primarily driven by an increase in deposits and higher all other liabilities primarily due to higher cash clearing balances and dealer payables. The increase in total liabilities was also driven by higher trading account liabilities, an increase in short-term borrowings due to increases in Federal Home Loan Bank (FHLB) advances and long-term debt, as well as higher securities loaned or sold under agreements to repurchase due to increased funding of trading inventory.

Average total liabilities decreased $72.7 billion for the three months ended March 31, 2014 compared to the same period in 2013. The decrease was primarily driven by a decline in securities loaned or sold under agreements to repurchase due to a lower matched-book, lower funding inventory and planned reductions in long-term debt, partially offset by growth in deposits.

At March 31, 2014, shareholders' equity of $231.9 billion remained relatively unchanged from December 31, 2013 driven by common stock repurchases and a net loss, partially offset by an increase in the fair value of AFS debt securities, which is recorded in accumulated other comprehensive income (OCI).

Average shareholders' equity of $236.6 billion remained relatively unchanged for the three months ended March 31, 2014 compared to the same period in 2013 as net preferred stock redemptions, decreases in the fair value of AFS debt securities, which is recorded in accumulated OCI, and common stock repurchases were partially offset by earnings.

 
 
 
 


12


Table 7
 
 
 
 
Selected Quarterly Financial Data
 
 
 
 
 
2014 Quarter
 
2013 Quarters
(In millions, except per share information)
First
 
Fourth
 
Third
 
Second
 
First
Income statement
 
 
 
 
 
 
 
 
 
Net interest income
$
10,085

 
$
10,786

 
$
10,266

 
$
10,549

 
$
10,664

Noninterest income
12,481

 
10,702

 
11,264

 
12,178

 
12,533

Total revenue, net of interest expense
22,566

 
21,488

 
21,530

 
22,727

 
23,197

Provision for credit losses
1,009

 
336

 
296

 
1,211

 
1,713

Noninterest expense
22,238

 
17,307

 
16,389

 
16,018

 
19,500

Income (loss) before income taxes
(681
)
 
3,845

 
4,845

 
5,498

 
1,984

Income tax expense (benefit)
(405
)
 
406

 
2,348

 
1,486

 
501

Net income (loss)
(276
)
 
3,439

 
2,497

 
4,012

 
1,483

Net income (loss) applicable to common shareholders
(514
)
 
3,183

 
2,218

 
3,571

 
1,110

Average common shares issued and outstanding
10,561

 
10,633

 
10,719

 
10,776

 
10,799

Average diluted common shares issued and outstanding (1)
10,561

 
11,404

 
11,482

 
11,525

 
11,155

Performance ratios
 
 
 
 
 
 
 
 
 
Return on average assets
n/m

 
0.64
%
 
0.47
%
 
0.74
%
 
0.27
%
Four quarter trailing return on average assets (2)
0.45
%
 
0.53

 
0.40

 
0.30

 
0.23

Return on average common shareholders' equity
n/m

 
5.74

 
4.06

 
6.55

 
2.06

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

 
8.61

 
6.15

 
9.88

 
3.12

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

 
8.53

 
6.32

 
9.98

 
3.69

Total ending equity to total ending assets
10.79

 
11.07

 
10.92

 
10.88

 
10.91

Total average equity to total average assets
11.06

 
10.93

 
10.85

 
10.76

 
10.71

Dividend payout
n/m

 
3.33

 
4.82

 
3.01

 
9.75

Per common share data
 
 
 
 
 
 
 
 
 
Earnings (loss)
$
(0.05
)
 
$
0.30

 
$
0.21

 
$
0.33

 
$
0.10

Diluted earnings (loss) (1)
(0.05
)
 
0.29

 
0.20

 
0.32

 
0.10

Dividends paid
0.01

 
0.01

 
0.01

 
0.01

 
0.01

Book value
20.75

 
20.71

 
20.50

 
20.18

 
20.19

Tangible book value (3)
13.81

 
13.79

 
13.62

 
13.32

 
13.36

Market price per share of common stock
 
 
 
 
 
 
 
 
 
Closing
$
17.20

 
$
15.57

 
$
13.80

 
$
12.86

 
$
12.18

High closing
17.92

 
15.88

 
14.95

 
13.83

 
12.78

Low closing
16.10

 
13.69

 
12.83

 
11.44

 
11.03

Market capitalization
$
181,117

 
$
164,914

 
$
147,429

 
$
138,156

 
$
131,817

(1) 
The diluted earnings (loss) per common share excluded the effect of any equity instruments that are antidilutive to earnings per share. There were no potential common shares that were dilutive in the first quarter of 2014 because of the net loss.
(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 15.
(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 73.
(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 90 and corresponding Table 43, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 99 and corresponding Table 52.
(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 $391 million, $741 million, $443 million, $313 million and $839 million of write-offs in the purchased credit-impaired loan portfolio in the first quarter of 2014 and in the fourth, third, second and first quarters of 2013, respectively. 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 84.
(9) 
On January 1, 2014, the Basel 3 rules became effective, subject to transition provisions primarily related to regulatory deductions and adjustments impacting common equity tier 1 capital and Tier 1 capital. We reported under Basel 1 (which included the Market Risk Final Rules) for 2013.
(10) 
Capital ratios for 2013 were adjusted as more fully described in Capital Management – CCAR and Capital Planning on page 55.
n/a = not applicable; n/m = not meaningful

13


Table 7
 
 
 
 
Selected Quarterly Financial Data (continued)
 
 
 
 
 
2014 Quarter
 
2013 Quarters
(Dollars in millions)
First
 
Fourth
 
Third
 
Second
 
First
Average balance sheet
 
 
 
 
 
 
 
 
 
Total loans and leases
$
919,482

 
$
929,777

 
$
923,978

 
$
914,234

 
$
906,259

Total assets
2,139,266

 
2,134,875

 
2,123,430

 
2,184,610

 
2,212,430

Total deposits
1,118,178

 
1,112,674

 
1,090,611

 
1,079,956

 
1,075,280

Long-term debt
253,678

 
251,055

 
258,717

 
270,198

 
273,999

Common shareholders' equity
223,201

 
220,088

 
216,766

 
218,790

 
218,225

Total shareholders' equity
236,553

 
233,415

 
230,392

 
235,063

 
236,995

Asset quality (4)
 
 
 
 
 
 
 
 
 
Allowance for credit losses (5)
$
17,127

 
$
17,912

 
$
19,912

 
$
21,709

 
$
22,927

Nonperforming loans, leases and foreclosed properties (6)
17,732

 
17,772

 
20,028

 
21,280

 
22,842

Allowance for loan and lease losses as a percentage of total loans and leases outstanding (6)
1.84
%
 
1.90
%
 
2.10
%
 
2.33
%
 
2.49
%
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (6)
97

 
102

 
100

 
103

 
102

Allowance for loan and lease losses as a percentage of total nonperforming loans and leases, excluding the PCI loan portfolio (6)
85

 
87

 
84

 
84

 
82

Amounts included in allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases (7)
$
7,143

 
$
7,680

 
$
8,972

 
$
9,919

 
$
10,690

Allowance for loan and lease losses as a percentage of total nonperforming loans and leases, excluding the allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases (6, 7)
55
%
 
57
%
 
54
%
 
55
%
 
53
%
Net charge-offs (8)
$
1,388

 
$
1,582

 
$
1,687

 
$
2,111

 
$
2,517

Annualized net charge-offs as a percentage of average loans and leases outstanding (6, 8)
0.62
%
 
0.68
%
 
0.73
%
 
0.94
%
 
1.14
%
Annualized net charge-offs as a percentage of average loans and leases outstanding, excluding the PCI loan portfolio (6)
0.64

 
0.70

 
0.75

 
0.97

 
1.18

Annualized net charge-offs and PCI write-offs as a percentage of average loans and leases outstanding (6)
0.79

 
1.00

 
0.92

 
1.07

 
1.52

Nonperforming loans and leases as a percentage of total loans and leases outstanding (6)
1.89

 
1.87

 
2.10

 
2.26

 
2.44

Nonperforming loans, leases and foreclosed properties as a percentage of total loans, leases and foreclosed properties (6)
1.96

 
1.93

 
2.17

 
2.33

 
2.53

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs (8)
2.95

 
2.78

 
2.90

 
2.51

 
2.20

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs, excluding the PCI loan portfolio
2.58

 
2.38

 
2.42

 
2.04

 
1.76

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

 
1.89

 
2.30

 
2.18

 
1.65

Capital ratios at period end (9)
 
 
 
 
 
 
 
 
 
Risk-based capital:
 
 
 
 
 
 
 
 
 
Common equity tier 1 capital (10)
11.8
%
 
n/a

 
n/a

 
n/a

 
n/a

Tier 1 common capital (10)
n/a

 
10.9
%
 
10.8
%
 
10.6
%
 
10.3
%
Tier 1 capital (10)
11.9

 
12.2

 
12.1

 
11.9

 
12.0

Total capital (10)
14.8

 
15.1

 
15.1

 
15.0

 
15.3

Tier 1 leverage (10)
7.4

 
7.7

 
7.6

 
7.4

 
7.4

Tangible equity (3)
7.65

 
7.86

 
7.73

 
7.67

 
7.78

Tangible common equity (3)
7.00

 
7.20

 
7.08

 
6.98

 
6.88

For footnotes see page 13.
 
 
 
 

14


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 mortgage servicing rights (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 Table 7.


15


We evaluate our business segment results based on measures that utilize average allocated capital. Return on average allocated capital is calculated as net income adjusted for cost of funds and earnings credits and certain expenses related to intangibles, divided by average allocated capital. Allocated capital and the related return both represent non-GAAP financial measures. 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 in the reporting units is comprised of allocated capital plus capital for the portion of goodwill and intangibles specifically assigned to the reporting unit. For additional information, see Business Segment Operations on page 24 and Note 8 – Goodwill and Intangible Assets to the Consolidated Financial Statements.

Tables 8 and 9 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
 
2014 Quarter
 
2013 Quarters
(Dollars in millions)
First
 
Fourth
 
Third
 
Second
 
First
Fully taxable-equivalent basis data
 
 
 
 
 
 
 
 
 
Net interest income
$
10,286

 
$
10,999

 
$
10,479

 
$
10,771

 
$
10,875

Total revenue, net of interest expense
22,767

 
21,701

 
21,743

 
22,949

 
23,408

Net interest yield (1)
2.29
%
 
2.44
%
 
2.33
%
 
2.35
%
 
2.36
%
Efficiency ratio
97.68

 
79.75

 
75.38

 
69.80

 
83.31

(1) 
Beginning in the first quarter of 2014, interest-bearing deposits placed with the Federal Reserve and certain non-U.S. central banks are included in earning assets. Prior period yields have been reclassified to conform to current period presentation.

16


Table 8
Quarterly Supplemental Financial Data and Reconciliations to GAAP Financial Measures (continued)
 
2014 Quarter
 
2013 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
$
10,085

 
$
10,786

 
$
10,266

 
$
10,549

 
$
10,664

Fully taxable-equivalent adjustment
201

 
213

 
213

 
222

 
211

Net interest income on a fully taxable-equivalent basis
$
10,286

 
$
10,999

 
$
10,479

 
$
10,771

 
$
10,875

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
$
22,566

 
$
21,488

 
$
21,530

 
$
22,727

 
$
23,197

Fully taxable-equivalent adjustment
201

 
213

 
213

 
222

 
211

Total revenue, net of interest expense on a fully taxable-equivalent basis
$
22,767

 
$
21,701

 
$
21,743

 
$
22,949

 
$
23,408

Reconciliation of income tax expense (benefit) to income tax expense (benefit) on a fully taxable-equivalent basis
 
 
 
 
 
 
 
 
 
Income tax expense (benefit)
$
(405
)
 
$
406

 
$
2,348

 
$
1,486

 
$
501

Fully taxable-equivalent adjustment
201

 
213

 
213

 
222

 
211

Income tax expense (benefit) on a fully taxable-equivalent basis
$
(204
)
 
$
619

 
$
2,561

 
$
1,708

 
$
712

Reconciliation of average common shareholders' equity to average tangible common shareholders' equity
 
 
 
 
 
 
 
 
 
Common shareholders' equity
$
223,201

 
$
220,088

 
$
216,766

 
$
218,790

 
$
218,225

Goodwill
(69,842
)
 
(69,864
)
 
(69,903
)
 
(69,930
)
 
(69,945
)
Intangible assets (excluding MSRs)
(5,474
)
 
(5,725
)
 
(5,993
)
 
(6,270
)
 
(6,549
)
Related deferred tax liabilities
2,165

 
2,231

 
2,296

 
2,360

 
2,425

Tangible common shareholders' equity
$
150,050

 
$
146,730

 
$
143,166

 
$
144,950

 
$
144,156

Reconciliation of average shareholders' equity to average tangible shareholders' equity
 
 
 
 
 
 
 
 
 
Shareholders' equity
$
236,553

 
$
233,415

 
$
230,392

 
$
235,063

 
$
236,995

Goodwill
(69,842
)
 
(69,864
)
 
(69,903
)
 
(69,930
)
 
(69,945
)
Intangible assets (excluding MSRs)
(5,474
)
 
(5,725
)
 
(5,993
)
 
(6,270
)
 
(6,549
)
Related deferred tax liabilities
2,165

 
2,231

 
2,296

 
2,360

 
2,425

Tangible shareholders' equity
$
163,402

 
$
160,057

 
$
156,792

 
$
161,223

 
$
162,926

Reconciliation of period-end common shareholders' equity to period-end tangible common shareholders' equity
 
 
 
 
 
 
 
 
 
Common shareholders' equity
$
218,536

 
$
219,333

 
$
218,967

 
$
216,791

 
$
218,513

Goodwill
(69,842
)
 
(69,844
)
 
(69,891
)
 
(69,930
)
 
(69,930
)
Intangible assets (excluding MSRs)
(5,337
)
 
(5,574
)
 
(5,843
)
 
(6,104
)
 
(6,379
)
Related deferred tax liabilities
2,100

 
2,166

 
2,231

 
2,297

 
2,363

Tangible common shareholders' equity
$
145,457

 
$
146,081

 
$
145,464

 
$
143,054

 
$
144,567

Reconciliation of period-end shareholders' equity to period-end tangible shareholders' equity
 
 
 
 
 
 
 
 
 
Shareholders' equity
$
231,888

 
$
232,685

 
$
232,282

 
$
231,032

 
$
237,293

Goodwill
(69,842
)
 
(69,844
)
 
(69,891
)
 
(69,930
)
 
(69,930
)
Intangible assets (excluding MSRs)
(5,337
)
 
(5,574
)
 
(5,843
)
 
(6,104
)
 
(6,379
)
Related deferred tax liabilities
2,100

 
2,166

 
2,231

 
2,297

 
2,363

Tangible shareholders' equity
$
158,809

 
$
159,433

 
$
158,779

 
$
157,295

 
$
163,347

Reconciliation of period-end assets to period-end tangible assets
 
 
 
 
 
 
 
 
 
Assets
$
2,149,851

 
$
2,102,273

 
$
2,126,653

 
$
2,123,320

 
$
2,174,819

Goodwill
(69,842
)
 
(69,844
)
 
(69,891
)
 
(69,930
)
 
(69,930
)
Intangible assets (excluding MSRs)
(5,337
)
 
(5,574
)
 
(5,843
)
 
(6,104
)
 
(6,379
)
Related deferred tax liabilities
2,100

 
2,166

 
2,231

 
2,297

 
2,363

Tangible assets
$
2,076,772

 
$
2,029,021

 
$
2,053,150

 
$
2,049,583

 
$
2,100,873

 
 
 
 

17


Table 9
 
 
 
Segment Supplemental Financial Data Reconciliations to GAAP Financial Measures (1)
 
Three Months Ended March 31
(Dollars in millions)
2014
 
2013
 
 
 
 
Consumer & Business Banking
 
 
 
Reported net income
$
1,658

 
$
1,448

Adjustment related to intangibles (2)
1

 
2

Adjusted net income
$
1,659

 
$
1,450

 
 
 
 
Average allocated equity (3)
$
61,483

 
$
62,084

Adjustment related to goodwill and a percentage of intangibles
(31,983
)
 
(32,084
)
Average allocated capital
$
29,500

 
$
30,000

 
 
 
 
Deposits
 
 
 
Reported net income
$
620

 
$
397

Adjustment related to intangibles (2)

 

Adjusted net income
$
620

 
$
397

 
 
 
 
Average allocated equity (3)
$
36,490

 
$
35,407

Adjustment related to goodwill and a percentage of intangibles
(19,990
)
 
(20,007
)
Average allocated capital
$
16,500

 
$
15,400

 
 
 
 
Consumer Lending
 
 
 
Reported net income
$
1,038

 
$
1,051

Adjustment related to intangibles (2)
1

 
2

Adjusted net income
$
1,039

 
$
1,053

 
 
 
 
Average allocated equity (3)
$
24,993

 
$
26,676

Adjustment related to goodwill and a percentage of intangibles
(11,993
)
 
(12,076
)
Average allocated capital
$
13,000

 
$
14,600

 
 
 
 
Global Wealth & Investment Management
 
 
 
Reported net income
$
729

 
$
721

Adjustment related to intangibles (2)
3

 
4

Adjusted net income
$
732

 
$
725

 
 
 
 
Average allocated equity (3)
$
22,243

 
$
20,323

Adjustment related to goodwill and a percentage of intangibles
(10,243
)
 
(10,323
)
Average allocated capital
$
12,000

 
$
10,000

 
 
 
 
Global Banking
 
 
 
Reported net income
$
1,236

 
$
1,281

Adjustment related to intangibles (2)

 
1

Adjusted net income
$
1,236

 
$
1,282

 
 
 
 
Average allocated equity (3)
$
53,407

 
$
45,406

Adjustment related to goodwill and a percentage of intangibles
(22,407
)
 
(22,406
)
Average allocated capital
$
31,000

 
$
23,000

 
 
 
 
Global Markets
 
 
 
Reported net income
$
1,310

 
$
1,112

Adjustment related to intangibles (2)
2

 
2

Adjusted net income
$
1,312

 
$
1,114

 
 
 
 
Average allocated equity (3)
$
39,377

 
$
35,372

Adjustment related to goodwill and a percentage of intangibles
(5,377
)
 
(5,372
)
Average allocated capital
$
34,000

 
$
30,000

(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 plus capital for the portion of goodwill and intangibles specifically assigned to the business segment. For more information on allocated capital, see Business Segment Operations on page 24 and Note 8 – Goodwill and Intangible Assets to the Consolidated Financial Statements.
 
 
 
 


18


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 40, 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 10 provides additional clarity in assessing our results.

Table 10
Net Interest Income Excluding Trading-related Net Interest Income
 
Three Months Ended March 31
(Dollars in millions)
2014
 
2013
Net interest income (FTE basis)
 
 
 
As reported
$
10,286

 
$
10,875

Impact of trading-related net interest income
(903
)
 
(1,010
)
Net interest income excluding trading-related net interest income (1)
$
9,383

 
$
9,865

Average earning assets (2)
 
 
 
As reported
$
1,803,298

 
$
1,857,894

Impact of trading-related earning assets
(442,732
)
 
(497,730
)
Average earning assets excluding trading-related earning assets (1)
$
1,360,566

 
$
1,360,164

Net interest yield contribution (FTE basis) (2, 3)
 
 
 
As reported
2.29
%
 
2.36
%
Impact of trading-related activities
0.48

 
0.56

Net interest yield on earning assets excluding trading-related activities (1)
2.77
%
 
2.92
%
(1) 
Represents a non-GAAP financial measure.
(2) 
Beginning in the first quarter of 2014, interest-bearing deposits placed with the Federal Reserve and certain non-U.S. central banks are included in earning assets. In prior periods, these balances were included with cash and due from banks in the cash and cash equivalents line, consistent with the Consolidated Balance Sheet presentation. Prior periods have been reclassified to conform to current period presentation.
(3) 
Calculated on an annualized basis.

For the three months ended March 31, 2014, net interest income excluding trading-related net interest income decreased $482 million to $9.4 billion compared to the same period in 2013. The decrease was primarily due to lower yields on debt securities including the impact of market-related premium amortization expense, lower consumer loan balances as well as lower loan yields, partially offset by reductions in long-term debt balances and yields, higher commercial loan balances and lower rates paid on deposits. For more information on the impacts of interest rates, see Interest Rate Risk Management for Nontrading Activities on page 119.

Average earning assets excluding trading-related earning assets increased slightly to $1,360.6 billion compared to the same period in 2013. The net change was primarily driven by increases in interest-bearing deposits with the Federal Reserve and commercial loans, largely offset by declines in debt securities, consumer loans and other earning assets.

For the three months ended March 31, 2014, net interest yield on earning assets excluding trading-related activities decreased 15 bps to 2.77 percent compared to the same period in 2013 due to the same factors as described above.

19


Table 11
Quarterly Average Balances and Interest Rates – FTE Basis
 
First Quarter 2014
 
Fourth Quarter 2013
(Dollars in millions)
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
Earning assets
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits with the Federal Reserve and non-U.S. central banks (1)
$
112,570

 
$
72

 
0.26
%
 
$
90,196

 
$
59

 
0.26
%
Time deposits placed and other short-term investments
13,880

 
49

 
1.43

 
15,782

 
48

 
1.21

Federal funds sold and securities borrowed or purchased under agreements to resell
212,504

 
265

 
0.51

 
203,415

 
304

 
0.59

Trading account assets
147,583

 
1,213

 
3.32

 
156,194

 
1,182

 
3.01

Debt securities (2)
329,711

 
2,005

 
2.41

 
325,119

 
2,455

 
3.02

Loans and leases (3):
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage (4)
247,556

 
2,240

 
3.62

 
253,974

 
2,374

 
3.74

Home equity
92,759

 
851

 
3.71

 
95,388

 
953

 
3.97

U.S. credit card
89,545

 
2,092

 
9.48

 
90,057

 
2,125

 
9.36

Non-U.S. credit card
11,554

 
308

 
10.79

 
11,171

 
310

 
11.01

Direct/Indirect consumer (5)
81,728

 
530

 
2.63

 
82,990

 
565

 
2.70

Other consumer (6)
1,962

 
18

 
3.66

 
1,929

 
17

 
3.73

Total consumer
525,104

 
6,039

 
4.64

 
535,509

 
6,344

 
4.72

U.S. commercial
228,058

 
1,651

 
2.93

 
225,596

 
1,700

 
2.99

Commercial real estate (7)
48,753

 
368

 
3.06

 
46,341

 
374

 
3.20

Commercial lease financing
24,727