10-Q 1 bac-630201510xq.htm 10-Q BAC-6.30.2015 10-Q


 
 
 
 
 

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 June 30, 2015
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 July 28, 2015, there were 10,468,545,156 shares of Bank of America Corporation Common Stock outstanding.
 
 
 
 
 

                


Bank of America Corporation
 
June 30, 2015
 
Form 10-Q
 
 
 
INDEX
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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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," "suggests" 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 future matters. These statements are not guarantees of future results or performance and involve certain known and unknown 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, and under Item 1A. Risk Factors of the Corporation's 2014 Annual Report on Form 10-K and in any of the Corporation's subsequent Securities and Exchange Commission filings: the Corporation's ability to resolve representations and warranties repurchase and related claims, including claims brought by investors or trustees seeking to distinguish certain aspects of the ACE ruling or to assert other claims seeking to avoid the impact of the ACE ruling; the possibility that the Corporation could face related servicing, securities, fraud, indemnity, contribution or other claims from one or more counterparties, including trustees, purchasers of loans, underwriters, issuers, other parties involved in securitizations, monolines or private-label and other investors; the possibility that final court approval of negotiated settlements is not obtained, including the possibility that all of the conditions necessary to obtain final approval of the BNY Mellon Settlement do not occur; 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; potential claims, damages, penalties, fines and reputational damage resulting from pending or future litigation and regulatory proceedings, including the possibility that amounts may be in excess of the Corporation's recorded liability and estimated range of possible losses for litigation exposures; 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; 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; the impact of U.S. and global interest rates, currency exchange rates and economic conditions; the impact on the Corporation's business, financial condition and results of operations of a potential higher interest rate environment; 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; uncertainty regarding the content, timing and impact of regulatory capital and liquidity requirements, including, but not limited to, any G-SIB surcharge; the possibility that in connection with our effort to exit our Advanced approaches parallel run, our internal analytical models (including the internal models methodology) will either not be approved by U.S. banking regulators, or will be approved with significant modifications, which could, for example, increase our risk-weighted assets and, as a result, negatively impact our capital ratios under the Advanced approaches; the possible impact of Federal Reserve actions on the Corporation's capital plans; the impact of implementation and compliance with new and evolving U.S. and international regulations, including, but not limited to, recovery and resolution planning requirements, the Volcker Rule and derivatives regulations; the impact of recent proposed U.K. tax law changes, including a reduction to the U.K. corporate tax rate, and the creation of a bank surcharge tax, which together, if enacted, will result in a tax charge upon enactment and higher tax expense going forward, as well as a reduction in the bank levy; a failure in or breach of the Corporation's operational or security systems or infrastructure, or those of third parties, including as a result of cyber attacks and other similar matters.

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

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

The Corporation's Annual Report on Form 10-K for the year ended December 31, 2014 as supplemented by a Current Report on Form 8-K filed on April 29, 2015 to reflect reclassified business segment information is referred to herein as the 2014 Annual Report on Form 10-K. These unaudited Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements of the Corporation's 2014 Annual Report on Form 10-K.

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 nonbank subsidiaries throughout the U.S. and in international markets, we provide a diversified range of banking and nonbank financial services and products through five business segments: Consumer Banking, Global Wealth & Investment Management (GWIM), Global Banking, Global Markets and Legacy Assets & Servicing (LAS), with the remaining operations recorded in All Other. Effective January 1, 2015, we aligned the segments with how we are managing the businesses in 2015. For more information on this realignment, see Note 18 – Business Segment Information to the Consolidated Financial Statements. Prior periods have been reclassified to conform to the current period presentation. We operate our banking activities primarily under the Bank of America, National Association (Bank of America, N.A. or BANA) charter. At June 30, 2015, the Corporation had approximately $2.1 trillion in assets and approximately 216,700 full-time equivalent employees.

As of June 30, 2015, we operated in all 50 states, the District of Columbia, the U.S. Virgin Islands, Puerto Rico and more than 35 countries. Our retail banking footprint covers approximately 80 percent of the U.S. population, and we serve approximately 48 million consumer and small business relationships with approximately 4,800 financial centers, 16,000 ATMs, nationwide call centers, and leading online and mobile banking platforms (www.bankofamerica.com). We offer industry-leading support to approximately three million small business owners. Our wealth management and trust businesses, with client balances of $2.5 trillion, provide tailored solutions to meet client needs through a full set of brokerage, banking, trust and retirement products. 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.

Second-Quarter 2015 Economic and Business Environment

In the U.S., economic growth rebounded in the second quarter of 2015, as the first-quarter adverse impacts of severe winter weather and other temporary factors receded. Capital spending grew slowly, while nonresidential construction picked up. In addition, led by a surge in vehicle sales, retail spending increased, partially supported by solid employment gains and lower energy costs. Housing indicators also improved during the second quarter. The U.S. Dollar stabilized but the impact of its recent strengthening contributed to continued export weakness during the quarter.

Payroll gains increased modestly following a first-quarter slowdown, while wage gains remained historically low. The unemployment rate continued to fall, ending the quarter at 5.3 percent. A limited rebound in energy costs drove inflation during the quarter; however, core inflation (excluding food and energy) remained well below the Board of Governors of the Federal Reserve System's (Federal Reserve) longer-term annual target of two percent.

While the Federal Reserve has continued to indicate that it would likely be appropriate to raise the target range for the federal funds rate, we believe the Federal Reserve is unlikely to actually raise the target until late in the third quarter at the earliest. Furthermore, the Federal Open Market Committee has indicated that it expects a more gradual firming of monetary policy once tightening is underway. Longer-term U.S. Treasury yields moved higher during the quarter while equities remained relatively unchanged.

Internationally, economic growth continued in the eurozone, where certain nations benefited from quantitative easing and a weaker Euro. In addition, last year's energy cost declines have continued to support solid domestic demand growth in Japan, while Russia and Brazil remain in recession. Heightened concern about China surrounded its substantial equity market declines, which persisted even with direct government intervention. Lower commodity prices have also pressured Latin American economies. Puerto Rico's debt problems remain a concern, although it avoided default at the end of the quarter and is currently preparing a new fiscal plan. As the quarter ended, attention was directed toward Greece; however, financial markets remained stable through the end of the quarter, and subsequently reacted positively to news of a potential settlement and bailout in exchange for austerity measures. Despite heightened economic uncertainty surrounding Greece, we do not currently anticipate widespread contagion from a potential Greek default or eurozone exit.



4


Recent Events

New York Court Decision on Statute of Limitations

On June 11, 2015, the New York Court of Appeals, New York's highest appellate court, issued its opinion in ACE Securities Corp. v. DB Structured Products, Inc. (ACE). The Court of Appeals held that, under New York law, a claim for breach of contractual representations and warranties begins to run at the time the representations and warranties are made, and rejected the argument that the six-year statute of limitations does not begin to run until the time repurchase is refused. The Court of Appeals also held that compliance with the contractual notice and cure period was a pre-condition to filing suit, and claims that did not comply with such contractual requirements prior to the expiration of the statute of limitations were invalid. While no entity affiliated with the Corporation was a party to this litigation, the vast majority of the private-label residential mortgage-backed securities (RMBS) trusts to which entities affiliated with the Corporation sold loans and made representations and warranties are governed by New York law. The ACE decision resulted in a reduction in our unresolved repurchase claims, a benefit in the provision for representations and warranties and a decrease to both our accrued liability and estimated range of possible loss for representations and warranties exposures. For additional information, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements.

Capital Management

In the second quarter of 2015, we repurchased $775 million of common stock in connection with our 2015 Comprehensive Capital Analysis and Review (CCAR) capital plan, which included a request to repurchase $4.0 billion of common stock over five quarters beginning in the second quarter of 2015, and to maintain the quarterly common stock dividend at the current rate of $0.05 per share. Based on the conditional non-objection we received from the Federal Reserve on our 2015 CCAR submission, we are required to resubmit our CCAR capital plan by September 30, 2015 and address certain weaknesses identified in the capital planning process. We have responded to the Federal Reserve with action plans to review and make improvements to our CCAR process to better align with regulatory expectations. We are currently in the process of executing on this plan. For additional information, see Capital Management on page 58.

Global Systemically Important Bank Surcharge

In July 2015, the Federal Reserve finalized a regulation requiring global systemically important bank holding companies (G-SIBs) to hold additional capital. The final rule established the criteria for identifying a G-SIB and the methods used to calculate a risk-based capital surcharge (G-SIB surcharge), which is calibrated to each G-SIB's overall systemic risk. The G-SIB surcharge must be satisfied with Common equity tier 1 capital and will be phased in beginning on January 1, 2016, becoming fully effective on January 1, 2019. Under certain assumptions, we estimate that our G-SIB surcharge will increase our risk-based capital ratio requirements by 3.0 percent. For additional information, see Capital Management – Regulatory Developments on page 67.

Management Team Changes

On July 22, 2015, we announced certain changes to the Corporation's executive management team. For additional information, see the Corporation's Form 8-K filed on July 23, 2015.


5


Selected Financial Data

Table 1 provides selected consolidated financial data for the three and six months ended June 30, 2015 and 2014, and at June 30, 2015 and December 31, 2014.

Table 1
 
 
 
 
Selected Financial Data
 
 
 
 
 
Three Months Ended June 30
 
Six Months Ended June 30
(Dollars in millions, except per share information)
2015
 
2014
 
2015
 
2014
Income statement
 
 
 
 
 
 
 
Revenue, net of interest expense (FTE basis) (1)
$
22,345

 
$
21,960

 
$
43,766

 
$
44,727

Net income
5,320

 
2,291

 
8,677

 
2,015

Diluted earnings per common share
0.45

 
0.19

 
0.72

 
0.14

Dividends paid per common share
0.05

 
0.01

 
0.10

 
0.02

Performance ratios
 
 
 
 
 

 
 
Return on average assets
0.99
%
 
0.42
%
 
0.82
%
 
0.19
%
Return on average tangible common shareholders' equity (1)
12.78

 
5.47

 
10.38

 
2.05

Efficiency ratio (FTE basis) (1)
61.84

 
84.43

 
67.43

 
91.17

Asset quality
 
 
 
 
 

 
 
Allowance for loan and lease losses at period end
 
 
 
 
$
13,068

 
$
15,811

Allowance for loan and lease losses as a percentage of total loans and leases outstanding at period end (2)
 
 
 
 
1.49
%
 
1.75
%
Nonperforming loans, leases and foreclosed properties at period end (2)
 
 
 
 
$
11,565

 
$
15,300

Net charge-offs (3)
$
1,068

 
$
1,073

 
2,262

 
2,461

Annualized net charge-offs as a percentage of average loans and leases outstanding (2, 3)
0.49
%
 
0.48
%
 
0.53
%
 
0.55
%
Annualized net charge-offs as a percentage of average loans and leases outstanding, excluding the purchased credit-impaired loan portfolio (2)
0.50

 
0.49

 
0.54

 
0.56

Annualized net charge-offs and purchased credit-impaired write-offs as a percentage of average loans and leases outstanding (2)
0.62

 
0.55

 
0.66

 
0.67

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs (3)
3.05

 
3.67

 
2.86

 
3.19

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs, excluding the purchased credit-impaired loan portfolio
2.79

 
3.25

 
2.62

 
2.82

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs and purchased credit-impaired write-offs
2.40

 
3.20

 
2.28

 
2.60

 
 
 
 
 
 
 
 
 
 
 
 
 
June 30
2015
 
December 31
2014
Balance sheet
 
 
 
 
 
 
 
Total loans and leases
 
 
 
 
$
886,449

 
$
881,391

Total assets
 
 
 
 
2,149,034

 
2,104,534

Total deposits
 
 
 
 
1,149,560

 
1,118,936

Total common shareholders' equity
 
 
 
 
229,386

 
224,162

Total shareholders' equity
 
 
 
 
251,659

 
243,471

Capital ratios under Basel 3 Standardized – Transition
 
 
 
 
 
 
 
Common equity tier 1 capital
 
 
 
 
11.2
%
 
12.3
%
Tier 1 capital
 
 
 
 
12.5

 
13.4

Total capital
 
 
 
 
15.5

 
16.5

Tier 1 leverage
 
 
 
 
8.5

 
8.2

(1) 
Fully taxable-equivalent (FTE) basis, return on average tangible common 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 17.
(2) 
Balances and ratios do not include loans accounted for under the fair value option. For additional exclusions from nonperforming loans, leases and foreclosed properties, see Consumer Portfolio Credit Risk Management – Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity on page 95 and corresponding Table 50, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 105 and corresponding Table 59.
(3) 
Net charge-offs exclude $290 million and $578 million of write-offs in the purchased credit-impaired loan portfolio for the three and six months ended June 30, 2015 compared to $160 million and $551 million for the same periods in 2014. 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 90.


6


Financial Highlights

Net income was $5.3 billion, or $0.45 per diluted share, and $8.7 billion, or $0.72 per diluted share for the three and six months ended June 30, 2015 compared to $2.3 billion, or $0.19, and $2.0 billion, or $0.14 for the same periods in 2014. The results for the three and six months ended June 30, 2015 compared to the prior-year periods were primarily driven by decreases of $3.8 billion and $9.5 billion in litigation expense, as well as decreases in certain other noninterest expense categories, partially offset by lower noninterest income and higher provision for credit losses. Net interest income on a fully taxable-equivalent (FTE) basis increased in the three-month period largely due to positive market-related adjustments on debt securities.

Consumer Banking average deposits increased six percent for the six months ended June 30, 2015 compared to the same period in 2014, and total corporate mortgage and home equity loan production was $36.1 billion compared to $24.5 billion for the same period in 2014. GWIM client balances were a record $2.5 trillion at June 30, 2015, an increase of $53 billion from June 30, 2014 including record assets under management (AUM) balances of $930 billion at June 30, 2015. Global Banking period-end loans increased seven percent at June 30, 2015 compared to June 30, 2014, and Bank of America Merrill Lynch maintained a leadership position with total firmwide investment banking fees (excluding self-led deals) of $3.0 billion for the six months ended June 30, 2015. Global Markets equities sales and trading revenue improved primarily driven by increased client activity in the Asia-Pacific region; while fixed-income, currencies and commodities (FICC) was down within the credit-related businesses due to lower trading volumes, partially offset by improvement in rates, currencies and commodities products as increased volatility led to higher client activity. The number of 60 plus days delinquent first-lien mortgage loans serviced by LAS declined to 132 thousand loans at June 30, 2015 from 263 thousand loans at June 30, 2014, and noninterest expense, excluding litigation, decreased due to lower default-related staffing and other default-related servicing expenses.

Total assets increased $44.5 billion from December 31, 2014 to $2.1 trillion at June 30, 2015 primarily due to higher cash and cash equivalents as a result of strong deposit inflows driven by growth in customer and client activity, as well as continued commercial loan growth. During the six months ended June 30, 2015, we returned $1.8 billion in capital to common shareholders through common stock repurchases and dividends. For more information on the increase in total assets and other significant balance sheet items, see Executive Summary – Balance Sheet Overview on page 12. During the first half of 2015, we maintained our strong capital position with Common equity tier 1 capital of $158.3 billion and a Common equity tier 1 capital ratio of 11.2 percent at June 30, 2015 compared to $155.4 billion and 12.3 percent at December 31, 2014 as measured under Basel 3 Standardized – Transition. The Corporation's supplementary leverage ratio was 6.3 percent and 5.9 percent at June 30, 2015 and December 31, 2014, both above the 5.0 percent required minimum. Our Global Excess Liquidity Sources were $484 billion with time-to-required funding at 40 months at June 30, 2015 compared to $439 billion and 39 months at December 31, 2014. For additional information, see Capital Management on page 58 and Liquidity Risk on page 70.

7


Table 2
 
 
 
 
 
 
 
Summary Income Statement
 
Three Months Ended June 30
 
Six Months Ended June 30
(Dollars in millions)
2015
 
2014
 
2015
 
2014
Net interest income (FTE basis) (1)
$
10,716

 
$
10,226

 
$
20,386

 
$
20,512

Noninterest income
11,629

 
11,734

 
23,380

 
24,215

Total revenue, net of interest expense (FTE basis) (1)
22,345

 
21,960

 
43,766

 
44,727

Provision for credit losses
780

 
411

 
1,545

 
1,420

Noninterest expense
13,818

 
18,541

 
29,513

 
40,779

Income before income taxes (FTE basis) (1)
7,747

 
3,008

 
12,708

 
2,528

Income tax expense (FTE basis) (1)
2,427

 
717

 
4,031

 
513

Net income
5,320

 
2,291

 
8,677

 
2,015

Preferred stock dividends
330

 
256

 
712

 
494

Net income applicable to common shareholders
$
4,990

 
$
2,035

 
$
7,965

 
$
1,521

 
 
 
 
 
 
 
 
Per common share information
 
 
 
 
 
 
 
Earnings
$
0.48

 
$
0.19

 
$
0.76

 
$
0.14

Diluted earnings
0.45

 
0.19

 
0.72

 
0.14

 
 
 
 
 
 
 
 
Capital ratios under Basel 3 Standardized – Transition (2)
 
 
 
 
June 30
2015
 
December 31
2014
Common equity tier 1 capital
 
 
 
 
11.2
%
 
12.3
%
Tier 1 capital
 
 
 
 
12.5

 
13.4

Total capital
 
 
 
 
15.5

 
16.5

Tier 1 leverage
 
 
 
 
8.5

 
8.2

(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 17.
(2) 
For more information on capital management and the related capital ratios, see Capital Management on page 58.

Net Interest Income

Net interest income on an FTE basis increased $490 million to $10.7 billion, and decreased $126 million to $20.4 billion for the three and six months ended June 30, 2015 compared to the same periods in 2014. The net interest yield on an FTE basis increased 15 basis points (bps) to 2.37 percent, and increased one bp to 2.27 percent for the three and six months ended June 30, 2015 compared to the same periods in 2014. The increase for the three months ended June 30, 2015 compared to the same period in 2014 was driven by an $844 million improvement in market-related adjustments on debt securities, lower long-term debt balances and commercial loan growth, partially offset by lower loan yields and consumer loan balances. Market-related adjustments on debt securities resulted in a benefit of $669 million for the three months ended June 30, 2015 compared to an expense of $175 million for the same period in 2014. The improvement in market-related adjustments on debt securities was primarily due to the increase in long-term interest rates which extended the estimated lives of mortgage-related debt securities resulting in a reinstatement of previously amortized purchase premium and a corresponding increase to interest income. Also included in market-related adjustments is hedge ineffectiveness that impacted net interest income.

The decrease for the six months ended June 30, 2015 was driven by lower loan yields and consumer loan balances, and lower net interest income from the asset and liability management (ALM) portfolio, partially offset by a $633 million improvement in market-related adjustments on debt securities, lower long-term debt balances and commercial loan growth. Market-related adjustments on debt securities resulted in a benefit of $185 million for the six months ended June 30, 2015 compared to an expense of $448 million for the same period in 2014. For additional information, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements of the Corporation's 2014 Annual Report on Form 10-K.


8


Noninterest Income
Table 3
 
 
 
 
Noninterest Income
 
Three Months Ended June 30
 
Six Months Ended June 30
(Dollars in millions)
2015
 
2014
 
2015
 
2014
Card income
$
1,477

 
$
1,441

 
$
2,871

 
$
2,834

Service charges
1,857

 
1,866

 
3,621

 
3,692

Investment and brokerage services
3,387

 
3,291

 
6,765

 
6,560

Investment banking income
1,526

 
1,631

 
3,013

 
3,173

Equity investment income
88

 
357

 
115

 
1,141

Trading account profits
1,647

 
1,832

 
3,894

 
4,299

Mortgage banking income
1,001

 
527

 
1,695

 
939

Gains on sales of debt securities
168

 
382

 
436

 
759

Other income
478

 
407

 
970

 
818

Total noninterest income
$
11,629

 
$
11,734

 
$
23,380

 
$
24,215


Noninterest income decreased $105 million to $11.6 billion, and $835 million to $23.4 billion for the three and six months ended June 30, 2015 compared to the same periods in 2014. The following highlights the significant changes.

Investment and brokerage services income increased $96 million and $205 million primarily driven by increased asset management fees due to the impact of long-term AUM flows and higher market levels, partially offset by lower transactional revenue.

Investment banking income decreased $105 million for the three months ended June 30, 2015 compared to the same period in 2014 due to lower equity issuance fees as the prior-year period included record equity issuance fees. Investment banking income decreased $160 million for the six months ended June 30, 2015 compared to the same period in 2014 driven by lower debt and equity issuance fees, partially offset by higher advisory fees.

Equity investment income decreased $269 million and $1.0 billion as the prior-year periods included gains from an initial public offering (IPO) of an equity investment in Global Markets. The decline for the six-month period was also driven by a gain on the sale of a portion of an equity investment in the prior year.

Trading account profits decreased $185 million and $405 million due to declines in credit-related businesses due to lower trading volumes, partially offset by increased client activity in equities and improvement in rates, currencies and commodities products within FICC. For more information on trading account profits, see Global Markets on page 43.

Mortgage banking income increased $474 million and $756 million primarily due to a benefit in the provision for representations and warranties, improved mortgage servicing rights (MSR) net-of-hedge performance and an increase in core production revenue, partially offset by a decline in servicing fees.

Other income increased $71 million for the three months ended June 30, 2015 compared to the same period in 2014 due to gains associated with the sales of residential mortgage loans, higher net debit valuation adjustment (DVA) gains on structured liabilities and lower U.K. consumer payment protection insurance (PPI) costs. Other income increased $152 million for the six months ended June 30, 2015 compared to the same period in 2014 due to the same factors as described in the three-month discussion above, partially offset by lower net DVA gains on structured liabilities.


9


Provision for Credit Losses
Table 4
Credit Quality Data
 
Three Months Ended June 30
 
Six Months Ended June 30
(Dollars in millions)
2015
 
2014
 
2015
 
2014
Provision for credit losses
 
 
 
 
 
 
 
Consumer
$
553

 
$
157

 
$
1,172

 
$
807

Commercial
227

 
254

 
373

 
613

Total provision for credit losses
$
780

 
$
411

 
$
1,545

 
$
1,420

 
 
 
 
 
 
 
 
Net charge-offs (1)
$
1,068

 
$
1,073

 
$
2,262

 
$
2,461

Net charge-off ratio (2)
0.49
%
 
0.48
%
 
0.53
%
 
0.55
%
(1) 
Net charge-offs exclude write-offs in the purchased credit-impaired loan portfolio.
(2) 
Net charge-off ratios are calculated as annualized net charge-offs divided by average outstanding loans and leases excluding loans accounted for under the fair value option.

The provision for credit losses increased $369 million to $780 million, and $125 million to $1.5 billion for the three and six months ended June 30, 2015 compared to the same periods in 2014. The provision for credit losses was $288 million and $717 million lower than net charge-offs, resulting in a reduction in the allowance for credit losses. The provision for credit losses in the consumer portfolio increased from the prior-year periods as we continue to release reserves, but at a slower pace than prior-year periods and also due to a lower level of recoveries on nonperforming loan sales. This was partially offset by lower provision in the commercial portfolio, primarily in U.S. commercial. The decreases in net charge-offs were due to credit quality improvement across most major portfolios. We expect net charge-offs and the provision for credit losses to more closely align throughout the remainder of 2015. For more information on the provision for credit losses, see Provision for Credit Losses on page 112.

Noninterest Expense
Table 5
 
 
 
 
 
 
 
Noninterest Expense
 
Three Months Ended June 30
 
Six Months Ended June 30
(Dollars in millions)
2015
 
2014
 
2015
 
2014
Personnel
$
7,890

 
$
8,306

 
$
17,504

 
$
18,055

Occupancy
1,027

 
1,079

 
2,054

 
2,194

Equipment
500

 
534

 
1,012

 
1,080

Marketing
445

 
450

 
885

 
892

Professional fees
494

 
626

 
915

 
1,184

Amortization of intangibles
212

 
235

 
425

 
474

Data processing
715

 
761

 
1,567

 
1,594

Telecommunications
202

 
324

 
373

 
694

Other general operating
2,333

 
6,226

 
4,778

 
14,612

Total noninterest expense
$
13,818

 
$
18,541

 
$
29,513

 
$
40,779


Noninterest expense decreased $4.7 billion to $13.8 billion, and $11.3 billion to $29.5 billion for the three and six months ended June 30, 2015 compared to the same periods in 2014. The following highlights the significant changes.

Personnel expense decreased $416 million and $551 million as we continue to streamline processes and achieve cost savings.

Professional fees decreased $132 million and $269 million due to lower default-related servicing expenses and legal fees.

Telecommunications expense decreased $122 million and $321 million due to efficiencies gained as we have simplified our operating model, including in-sourcing certain functions.

Other general operating expense decreased $3.9 billion and $9.8 billion primarily due to decreases in litigation expense which were primarily related to previously disclosed legacy mortgage-related matters in the prior-year periods.

10


Income Tax Expense
Table 6
 
 
 
 
 
 
 
Income Tax Expense
 
 
 
 
 
 
 
 
Three Months Ended June 30
 
Six Months Ended June 30
(Dollars in millions)
2015
 
2014
 
2015
 
2014
Income before income taxes
$
7,519

 
$
2,795

 
$
12,261

 
$
2,114

Income tax expense
2,199

 
504

 
3,584

 
99

Effective tax rate
29.2
%
 
18.0
%
 
29.2
%
 
4.7
%

The effective tax rates increased for the three and six months ended June 30, 2015 compared to the same periods in 2014 as the impact of recurring tax preference benefits had less of an impact on the effective tax rate in 2015 than in 2014. Also reflected in the effective tax rate for the six months ended June 30, 2014 was the impact of certain accruals estimated to be nondeductible, largely offset by discrete tax benefits, principally from the resolution of certain tax matters. We expect an effective tax rate of approximately 30 percent, absent any unusual items, such as any impact of U.K. proposed tax law changes described below, for the remainder of 2015.

On July 8, 2015, the U.K. Chancellor's Budget (the Budget) was released, proposing to reduce the U.K. corporate income tax rate by two percent to 18 percent. The first one percent reduction would be effective on April 1, 2017 and the second on April 1, 2020. The Budget also proposed a tax surcharge on banking institutions of eight percent, to be effective on January 1, 2016, and proposed that existing net operating loss carryforwards may not reduce the additional surcharge income tax liability. These proposals, which may become law later in 2015, would require us to remeasure our U.K. deferred tax assets, which we estimate would result in a charge of approximately $200 million to $300 million in the period of enactment.


11


Balance Sheet Overview
 
Table 7
Selected Balance Sheet Data
(Dollars in millions)
June 30
2015
 
December 31
2014
 
% Change
Assets
 
 
 
 
 
Cash and cash equivalents
$
163,514

 
$
138,589

 
18
 %
Federal funds sold and securities borrowed or purchased under agreements to resell
199,903

 
191,823

 
4

Trading account assets
189,106

 
191,785

 
(1
)
Debt securities
392,379

 
380,461

 
3

Loans and leases
886,449

 
881,391

 
1

Allowance for loan and lease losses
(13,068
)
 
(14,419
)
 
(9
)
All other assets
330,751

 
334,904

 
(1
)
Total assets
$
2,149,034

 
$
2,104,534

 
2

Liabilities
 
 
 
 
 
Deposits
$
1,149,560

 
$
1,118,936

 
3
 %
Federal funds purchased and securities loaned or sold under agreements to repurchase
213,024

 
201,277

 
6

Trading account liabilities
72,596

 
74,192

 
(2
)
Short-term borrowings
39,903

 
31,172

 
28

Long-term debt
243,414

 
243,139

 

All other liabilities
178,878

 
192,347

 
(7
)
Total liabilities
1,897,375

 
1,861,063

 
2

Shareholders' equity
251,659

 
243,471

 
3

Total liabilities and shareholders' equity
$
2,149,034

 
$
2,104,534

 
2


Balance Sheet Analysis

Assets

At June 30, 2015, total assets were approximately $2.1 trillion, up $44.5 billion from December 31, 2014. The key driver of the increase in assets was increased cash and cash equivalents primarily due to strong deposit inflows driven by growth in customer and client activity. Also contributing to the increase were net purchases of mortgage-backed securities (MBS), higher securities borrowed or purchased under agreements to resell primarily due to deployment of excess liquidity and an increase in commercial loan balances. These increases were partially offset by a decline in consumer loan balances due to loan sales and portfolio run-off outpacing new originations, and a reduction in trading account assets. The Corporation took certain actions during the six months ended June 30, 2015 to further optimize liquidity in response to the Basel 3 Liquidity Coverage Ratio (LCR) requirements. Most notably, we exchanged loans supported by long-term standby agreements with Fannie Mae (FNMA) and Freddie Mac (FHLMC) into debt securities guaranteed by FNMA and FHLMC, which further improved liquidity in the ALM portfolio.

Liabilities and Shareholders' Equity

At June 30, 2015, total liabilities were approximately $1.9 trillion, up $36.3 billion from December 31, 2014, primarily driven by an increase in deposits, as well as increases in securities loaned or sold under agreements to repurchase and short-term borrowings. These increases were partially offset by declines in payables and derivative liabilities included in all other liabilities. Long-term debt remained relatively unchanged.

Shareholders' equity of $251.7 billion at June 30, 2015 increased $8.2 billion from December 31, 2014 driven by earnings and preferred stock issuances, partially offset by returns of capital to shareholders through share repurchases and common dividends, and a decrease in accumulated other comprehensive income (OCI) due to a negative net change in the fair value of available-for-sale (AFS) debt securities as a result of the increase in interest rates.

12


Table 8
 
 
 
 
Selected Quarterly Financial Data
 
 
 
 
 
2015 Quarters
 
2014 Quarters
(In millions, except per share information)
Second
 
First
 
Fourth
 
Third
 
Second
Income statement
 
 
 
 
 
 
 
 
 
Net interest income
$
10,488

 
$
9,451

 
$
9,635

 
$
10,219

 
$
10,013

Noninterest income
11,629

 
11,751

 
9,090

 
10,990

 
11,734

Total revenue, net of interest expense
22,117

 
21,202

 
18,725

 
21,209

 
21,747

Provision for credit losses
780

 
765

 
219

 
636

 
411

Noninterest expense
13,818

 
15,695

 
14,196

 
20,142

 
18,541

Income before income taxes
7,519

 
4,742

 
4,310

 
431

 
2,795

Income tax expense
2,199

 
1,385

 
1,260

 
663

 
504

Net income (loss)
5,320

 
3,357

 
3,050

 
(232
)
 
2,291

Net income (loss) applicable to common shareholders
4,990

 
2,975

 
2,738

 
(470
)
 
2,035

Average common shares issued and outstanding
10,488

 
10,519

 
10,516

 
10,516

 
10,519

Average diluted common shares issued and outstanding (1)
11,238

 
11,267

 
11,274

 
10,516

 
11,265

Performance ratios
 
 
 
 
 
 
 
 
 
Return on average assets
0.99
%
 
0.64
%
 
0.57
%
 
n/m

 
0.42
%
Four quarter trailing return on average assets (2)
0.54

 
0.39

 
0.23

 
0.24
%
 
0.37

Return on average common shareholders' equity
8.75

 
5.35

 
4.84

 
n/m

 
3.68

Return on average tangible common shareholders' equity (3)
12.78

 
7.88

 
7.15

 
n/m

 
5.47

Return on average tangible shareholders' equity (3)
11.93

 
7.85

 
7.08

 
n/m

 
5.64

Total ending equity to total ending assets
11.71

 
11.67

 
11.57

 
11.24

 
10.94

Total average equity to total average assets
11.67

 
11.49

 
11.39

 
11.14

 
10.87

Dividend payout
10.49

 
17.68

 
19.21

 
n/m

 
5.16

Per common share data
 
 
 
 
 
 
 
 
 
Earnings (loss)
$
0.48

 
$
0.28

 
$
0.26

 
$
(0.04
)
 
$
0.19

Diluted earnings (loss) (1)
0.45

 
0.27

 
0.25

 
(0.04
)
 
0.19

Dividends paid
0.05

 
0.05

 
0.05

 
0.05

 
0.01

Book value
21.91

 
21.66

 
21.32

 
20.99

 
21.16

Tangible book value (3)
15.02

 
14.79

 
14.43

 
14.09

 
14.24

Market price per share of common stock
 
 
 
 
 
 
 
 
 
Closing
$
17.02

 
$
15.39

 
$
17.89

 
$
17.05

 
$
15.37

High closing
17.67

 
17.90

 
18.13

 
17.18

 
17.34

Low closing
15.41

 
15.15

 
15.76

 
14.98

 
14.51

Market capitalization
$
178,231

 
$
161,909

 
$
188,141

 
$
179,296

 
$
161,628

(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 third quarter of 2014 because of the net loss applicable to common shareholders.
(2) 
Calculated as total net income (loss) 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 17.
(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 78.
(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 95 and corresponding Table 50, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 105 and corresponding Table 59.
(7) 
Primarily includes amounts allocated to the U.S. credit card and unsecured consumer lending portfolios in Consumer Banking, purchased credit-impaired loans and the non-U.S. credit card portfolio in All Other.
(8) 
Net charge-offs exclude $290 million, $288 million, $13 million, $246 million and $160 million of write-offs in the purchased credit-impaired loan portfolio in the second and first quarters of 2015 and in the fourth, third and second quarters of 2014, 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 90.
n/m = not meaningful

13


Table 8
 
 
 
 
Selected Quarterly Financial Data (continued)
 
 
 
 
 
2015 Quarters
 
2014 Quarters
(Dollars in millions)
Second
 
First
 
Fourth
 
Third
 
Second
Average balance sheet
 
 
 
 
 
 
 
 
 
Total loans and leases
$
881,415

 
$
872,393

 
$
884,733

 
$
899,241

 
$
912,580

Total assets
2,151,966

 
2,138,574

 
2,137,551

 
2,136,109

 
2,169,555

Total deposits
1,146,789

 
1,130,726

 
1,122,514

 
1,127,488

 
1,128,563

Long-term debt
242,230

 
240,127

 
249,221

 
251,772

 
259,825

Common shareholders' equity
228,780

 
225,357

 
224,479

 
222,374

 
222,221

Total shareholders' equity
251,054

 
245,744

 
243,454

 
238,040

 
235,803

Asset quality (4)
 
 
 
 
 
 
 
 
 
Allowance for credit losses (5)
$
13,656

 
$
14,213

 
$
14,947

 
$
15,635

 
$
16,314

Nonperforming loans, leases and foreclosed properties (6)
11,565

 
12,101

 
12,629

 
14,232

 
15,300

Allowance for loan and lease losses as a percentage of total loans and leases outstanding (6)
1.49
%
 
1.57
%
 
1.65
%
 
1.71
%
 
1.75
%
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (6)
122

 
122

 
121

 
112

 
108

Allowance for loan and lease losses as a percentage of total nonperforming loans and leases, excluding the PCI loan portfolio (6)
111

 
110

 
107

 
100

 
95

Amounts included in allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases (7)
$
5,050

 
$
5,492

 
$
5,944

 
$
6,013

 
$
6,488

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)
75
%
 
73
%
 
71
%
 
67
%
 
64
%
Net charge-offs (8)
$
1,068

 
$
1,194

 
$
879

 
$
1,043

 
$
1,073

Annualized net charge-offs as a percentage of average loans and leases outstanding (6, 8)
0.49
%
 
0.56
%
 
0.40
%
 
0.46
%
 
0.48
%
Annualized net charge-offs as a percentage of average loans and leases outstanding, excluding the PCI loan portfolio (6)
0.50

 
0.57

 
0.41

 
0.48

 
0.49

Annualized net charge-offs and PCI write-offs as a percentage of average loans and leases outstanding (6)
0.62

 
0.70

 
0.40

 
0.57

 
0.55

Nonperforming loans and leases as a percentage of total loans and leases outstanding (6)
1.22

 
1.29

 
1.37

 
1.53

 
1.63

Nonperforming loans, leases and foreclosed properties as a percentage of total loans, leases and foreclosed properties (6)
1.31

 
1.39

 
1.45

 
1.61

 
1.70

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs (8)
3.05

 
2.82

 
4.14

 
3.65

 
3.67

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs, excluding the PCI loan portfolio
2.79

 
2.55

 
3.66

 
3.27

 
3.25

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs and PCI write-offs
2.40

 
2.28

 
4.08

 
2.95

 
3.20

Capital ratios at period end
Risk-based capital under Basel 3 Standardized – Transition:
 
 
 
 
 
 
 
 
 
Common equity tier 1 capital
11.2
%
 
11.1
%
 
12.3
%
 
12.0
%
 
12.0
%
Tier 1 capital
12.5

 
12.3

 
13.4

 
12.8

 
12.5

Total capital
15.5

 
15.3

 
16.5

 
15.8

 
15.3

Tier 1 leverage
8.5

 
8.4

 
8.2

 
7.9

 
7.7

 
 
 
 
 
 
 
 
 
 
Tangible equity (3)
8.6

 
8.6

 
8.4

 
8.1

 
7.8

Tangible common equity (3)
7.6

 
7.5

 
7.5

 
7.2

 
7.1

For footnotes see page 13.

14


Table 9
 
 
 
Selected Year-to-Date Financial Data
 
 
 
 
Six Months Ended June 30
(In millions, except per share information)
2015
 
2014
Income statement
 
 
 
Net interest income
$
19,939

 
$
20,098

Noninterest income
23,380

 
24,215

Total revenue, net of interest expense
43,319

 
44,313

Provision for credit losses
1,545

 
1,420

Noninterest expense
29,513

 
40,779

Income before income taxes
12,261

 
2,114

Income tax expense
3,584

 
99

Net income
8,677

 
2,015

Net income applicable to common shareholders
7,965

 
1,521

Average common shares issued and outstanding
10,503

 
10,540

Average diluted common shares issued and outstanding
11,252

 
10,600

Performance ratios
 
 
 
Return on average assets
0.82
%
 
0.19
%
Return on average common shareholders' equity
7.07

 
1.38

Return on average tangible common shareholders' equity (1)
10.38

 
2.05

Return on average tangible shareholders' equity (1)
9.93

 
2.49

Total ending equity to total ending assets
11.71

 
10.94

Total average equity to total average assets
11.58

 
10.96

Dividend payout
13.18

 
13.83

Per common share data
 
 
 
Earnings
$
0.76

 
$
0.14

Diluted earnings
0.72

 
0.14

Dividends paid
0.10

 
0.02

Book value
21.91

 
21.16

Tangible book value (1)
15.02

 
14.24

Market price per share of common stock
 
 
 
Closing
$
17.02

 
$
15.37

High closing
17.90

 
17.92

Low closing
15.15

 
14.51

Market capitalization
$
178,231

 
$
161,628

(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 17.
(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 78.
(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 95 and corresponding Table 50, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 105 and corresponding Table 59.
(5) 
Primarily includes amounts allocated to the U.S. credit card and unsecured consumer lending portfolios in Consumer Banking, purchased credit-impaired loans and the non-U.S. credit card portfolio in All Other.
(6) 
Net charge-offs exclude $578 million and $551 million of write-offs in the purchased credit-impaired loan portfolio for the six months ended June 30, 2015 and 2014. 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 90.


15


Table 9
 
 
 
Selected Year-to-Date Financial Data (continued)
 
 
 
 
Six Months Ended June 30
(Dollars in millions)
2015
 
2014
Average balance sheet
 
 
 
Total loans and leases
$
876,929

 
$
916,012

Total assets
2,145,307

 
2,154,494

Total deposits
1,138,801

 
1,123,399

Long-term debt
241,184

 
256,768

Common shareholders' equity
227,078

 
222,711

Total shareholders' equity
248,413

 
236,179

Asset quality (2)
 
 
 
Allowance for credit losses (3)
$
13,656

 
$
16,314

Nonperforming loans, leases and foreclosed properties (4)
11,565

 
15,300

Allowance for loan and lease losses as a percentage of total loans and leases outstanding (4)
1.49
%
 
1.75
%
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (4)
122

 
108

Allowance for loan and lease losses as a percentage of total nonperforming loans and leases, excluding the PCI loan portfolio (4)
111

 
95

Amounts included in allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases (5)
$
5,050

 
$
6,488

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 (4, 5)
75
%
 
64
%
Net charge-offs (6)
$
2,262

 
$
2,461

Annualized net charge-offs as a percentage of average loans and leases outstanding (4, 6)
0.53
%
 
0.55
%
Annualized net charge-offs as a percentage of average loans and leases outstanding, excluding the PCI loan portfolio (4)
0.54

 
0.56

Annualized net charge-offs and PCI write-offs as a percentage of average loans and leases outstanding (4)
0.66

 
0.67

Nonperforming loans and leases as a percentage of total loans and leases outstanding (4)
1.22

 
1.63

Nonperforming loans, leases and foreclosed properties as a percentage of total loans, leases and foreclosed properties (4)
1.31

 
1.70

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs (6)
2.86

 
3.19

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs, excluding the PCI loan portfolio
2.62

 
2.82

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs and PCI write-offs
2.28

 
2.60




16


Supplemental Financial Data

We view net interest income and related ratios and analyses on an FTE basis, which when presented on a consolidated basis, are non-GAAP financial measures. We believe managing the business with net interest income on an 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 an 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 use both return on average tangible common shareholders' equity and return on average tangible shareholders' equity as key measures to support our overall growth goals. These ratios are as follows:

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

Return on average tangible shareholders' equity measures our earnings contribution as a percentage of adjusted average total shareholders' equity. The tangible equity ratio represents adjusted 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 8 and 9.

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 27.

Tables 10, 11 and 12 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 10
Quarterly Supplemental Financial Data and Reconciliations to GAAP Financial Measures
 
2015 Quarters
 
2014 Quarters
(Dollars in millions)
Second
 
First
 
Fourth
 
Third
 
Second
Fully taxable-equivalent basis data
 
 
 
 
 
 
 
 
 
Net interest income
$
10,716

 
$
9,670

 
$
9,865

 
$
10,444

 
$
10,226

Total revenue, net of interest expense
22,345

 
21,421

 
18,955

 
21,434

 
21,960

Net interest yield
2.37
%
 
2.17
%
 
2.18
%
 
2.29
%
 
2.22
%
Efficiency ratio
61.84

 
73.27

 
74.90

 
93.97

 
84.43


17


Table 10
Quarterly Supplemental Financial Data and Reconciliations to GAAP Financial Measures (continued)
 
2015 Quarters
 
2014 Quarters
(Dollars in millions)
Second
 
First
 
Fourth
 
Third
 
Second
Reconciliation of net interest income to net interest income on a fully taxable-equivalent basis
 
 
 
 
 
 
 
 
 
Net interest income
$
10,488

 
$
9,451

 
$
9,635

 
$
10,219

 
$
10,013

Fully taxable-equivalent adjustment
228

 
219

 
230

 
225

 
213

Net interest income on a fully taxable-equivalent basis
$
10,716

 
$
9,670

 
$
9,865

 
$
10,444

 
$
10,226

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
$
22,117

 
$
21,202

 
$
18,725

 
$
21,209

 
$
21,747

Fully taxable-equivalent adjustment
228

 
219

 
230

 
225

 
213

Total revenue, net of interest expense on a fully taxable-equivalent basis
$
22,345

 
$
21,421

 
$
18,955

 
$
21,434

 
$
21,960

Reconciliation of income tax expense to income tax expense on a fully taxable-equivalent basis
 
 
 
 
 
 
 
 
 
Income tax expense
$
2,199

 
$
1,385

 
$
1,260

 
$
663

 
$
504

Fully taxable-equivalent adjustment
228

 
219

 
230

 
225

 
213

Income tax expense on a fully taxable-equivalent basis
$
2,427

 
$
1,604

 
$
1,490

 
$
888

 
$
717

Reconciliation of average common shareholders' equity to average tangible common shareholders' equity
 
 
 
 
 
 
 
 
 
Common shareholders' equity
$
228,780

 
$
225,357

 
$
224,479

 
$
222,374

 
$
222,221

Goodwill
(69,775
)
 
(69,776
)
 
(69,782
)
 
(69,792
)
 
(69,822
)
Intangible assets (excluding MSRs)
(4,307
)
 
(4,518
)
 
(4,747
)
 
(4,992
)
 
(5,235
)
Related deferred tax liabilities
1,885

 
1,959

 
2,019

 
2,077

 
2,100

Tangible common shareholders' equity
$
156,583

 
$
153,022

 
$
151,969

 
$
149,667

 
$
149,264

Reconciliation of average shareholders' equity to average tangible shareholders' equity
 
 
 
 
 
 
 
 
 
Shareholders' equity
$
251,054

 
$
245,744

 
$
243,454

 
$
238,040

 
$
235,803

Goodwill
(69,775
)
 
(69,776
)
 
(69,782
)
 
(69,792
)
 
(69,822
)
Intangible assets (excluding MSRs)
(4,307
)
 
(4,518
)
 
(4,747
)
 
(4,992
)
 
(5,235
)
Related deferred tax liabilities
1,885

 
1,959

 
2,019

 
2,077

 
2,100

Tangible shareholders' equity
$
178,857

 
$
173,409

 
$
170,944

 
$
165,333

 
$
162,846

Reconciliation of period-end common shareholders' equity to period-end tangible common shareholders' equity
 
 
 
 
 
 
 
 
 
Common shareholders' equity
$
229,386

 
$
227,915

 
$
224,162

 
$
220,768

 
$
222,565

Goodwill
(69,775
)
 
(69,776
)
 
(69,777
)
 
(69,784
)
 
(69,810
)
Intangible assets (excluding MSRs)
(4,188
)
 
(4,391
)
 
(4,612
)
 
(4,849
)
 
(5,099
)
Related deferred tax liabilities
1,813

 
1,900

 
1,960

 
2,019

 
2,078

Tangible common shareholders' equity
$
157,236

 
$
155,648

 
$
151,733

 
$
148,154

 
$
149,734

Reconciliation of period-end shareholders' equity to period-end tangible shareholders' equity
 
 
 
 
 
 
 
 
 
Shareholders' equity
$
251,659

 
$
250,188

 
$
243,471

 
$
238,681

 
$
237,411

Goodwill
(69,775
)
 
(69,776
)
 
(69,777
)
 
(69,784
)
 
(69,810
)
Intangible assets (excluding MSRs)
(4,188
)
 
(4,391
)
 
(4,612
)
 
(4,849
)
 
(5,099
)
Related deferred tax liabilities
1,813

 
1,900

 
1,960

 
2,019

 
2,078

Tangible shareholders' equity
$
179,509

 
$
177,921

 
$
171,042

 
$
166,067

 
$
164,580

Reconciliation of period-end assets to period-end tangible assets
 
 
 
 
 
 
 
 
 
Assets
$
2,149,034

 
$
2,143,545

 
$
2,104,534

 
$
2,123,613

 
$
2,170,557

Goodwill
(69,775
)
 
(69,776
)
 
(69,777
)
 
(69,784
)
 
(69,810
)
Intangible assets (excluding MSRs)
(4,188
)
 
(4,391
)
 
(4,612
)
 
(4,849
)
 
(5,099
)
Related deferred tax liabilities
1,813

 
1,900

 
1,960

 
2,019

 
2,078

Tangible assets
$
2,076,884

 
$
2,071,278

 
$
2,032,105

 
$
2,050,999

 
$
2,097,726


18


Table 11
Year-to-Date Supplemental Financial Data and Reconciliations to GAAP Financial Measures
 
Six Months Ended June 30
(Dollars in millions, except per share information)
2015
 
2014
Fully taxable-equivalent basis data
 
 
 
Net interest income
$
20,386

 
$
20,512

Total revenue, net of interest expense
43,766

 
44,727

Net interest yield
2.27
%
 
2.26
%
Efficiency ratio
67.43

 
91.17

Reconciliation of net interest income to net interest income on a fully taxable-equivalent basis
 
 
 
Net interest income
$
19,939

 
$
20,098

Fully taxable-equivalent adjustment
447

 
414

Net interest income on a fully taxable-equivalent basis
$
20,386

 
$
20,512

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
$
43,319

 
$
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