10-Q 1 bac-930201510xq.htm 10-Q 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 September 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 October 29, 2015, there were 10,412,479,671 shares of Bank of America Corporation Common Stock outstanding.
 
 
 
 
 

                


Bank of America Corporation
 
September 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 decision or to assert other claims seeking to avoid the impact of the ACE decision; 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 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 possibility that future credit losses may be higher than currently expected, due to changes in economic assumptions, customer behavior and other uncertainties; 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 the adoption of total loss-absorbing capacity requirements; the potential for payment protection insurance exposure to increase as a result of Financial Conduct Authority actions; 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, FDIC assessments, the Volcker Rule and derivatives regulations; impacts of the October 6, 2015 European Court of Justice judgment invalidating the Safe Harbor Data Transfer Framework; 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 September 30, 2015, the Corporation had approximately $2.2 trillion in assets and approximately 215,200 full-time equivalent employees.

As of September 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 47 million consumer and small business relationships with approximately 4,700 financial centers, 16,100 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 businesses, with client balances of $2.4 trillion, provide tailored solutions to meet client needs through a full set of investment management, 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.

Third-Quarter 2015 Economic and Business Environment

In the U.S., the economy grew at a moderate pace in the third quarter of 2015, following uneven but accelerating growth in the first half of the year. Capital spending picked up following several weak quarters, while nonresidential construction continued to expand though restrained by oil price declines. In addition, retail spending increased driven by continued strengthening in vehicle sales, solid employment gains and lower energy costs. Residential construction also continued to improve during the third quarter, reflecting low mortgage rates and rising consumer confidence. U.S. Dollar appreciation resumed during the third quarter, adding to consumer purchasing power while restraining export gains. After widening in the first quarter, the U.S. trade gap narrowed slightly in the second quarter before widening again in the third quarter.

Unemployment continued to decline in the third quarter of 2015. Payroll gains slowed in the second half of the quarter, and there was little evidence of an increase in wage gains. Energy costs fell, offsetting the second quarter’s modest rebound. However, inflation was stable, though the core measure remains 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, rates remained unchanged during the third quarter, with the Federal Reserve citing restraint on economic activity and downward pressure on inflation stemming from recent global economic and financial developments. Longer-term U.S. Treasury yields moved moderately lower during the quarter as equities weakened.

Internationally, the eurozone and Japanese economies continued to be supported by accommodative monetary policies, weaker currencies and low energy costs. Challenges remain in Greece, although recent elections indicated a restoration of some measure of political stability. Meanwhile, rising emigration from the war-torn Middle East posed a new challenge to the eurozone. Despite Asia’s economic slowdown, growth continued in Japan. Russia and Brazil remained in recession, while economic growth in China slowed, though Chinese equities stabilized and policy easing provided some support to the Chinese economy. Emerging markets in Asia and Latin America were pressured by softer demand from China, as well as low commodity prices.

4


Recent Events

Settlement with Bank of New York Mellon

On April 22, 2015, the New York County Supreme Court entered final judgment approving the settlement with the Bank of New York Mellon (BNY Mellon). In October 2015, BNY Mellon obtained certain state tax opinions and an Internal Revenue Service (IRS) private letter ruling confirming that the settlement will not impact the real estate mortgage investment conduit tax status of the trusts. The final conditions of the settlement have thus been satisfied, requiring the Corporation to make the settlement payment of $8.5 billion (excluding legal fees) on or before February 9, 2016. The settlement payment and legal fees were previously fully reserved. BNY Mellon is required to determine the share of the settlement payment that will be allocated to each of the trusts covered by the settlement and then to distribute those amounts.

For more information on servicing matters associated with the settlement with the BNY Mellon, see Off-Balance Sheet Arrangements and Contractual Obligations Mortgage-related Settlements Servicing Matters on page 54 of the MD&A of the Corporation's 2014 Annual Report on Form 10-K.

Capital Management

During the nine months ended September 30, 2015, we repurchased approximately $1.6 billion 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 were required to resubmit our CCAR capital plan by September 30, 2015 and address certain weaknesses the Federal Reserve identified in our capital planning process. We have established plans and taken actions which we believe address the identified weaknesses, and we resubmitted our CCAR capital plan on September 30, 2015. The Federal Reserve has 75 days to review our resubmitted CCAR capital plan and our capital planning revisions. Following that review, the Federal Reserve may determine that the capital plan is not adequate or the identified weaknesses are not being satisfactorily addressed, and may restrict our future capital actions.

As an Advanced approaches institution under Basel 3, we were required to complete a qualification period (parallel run) to demonstrate compliance with the Basel 3 Advanced approaches capital framework to the satisfaction of U.S. banking regulators. On September 3, 2015, we received approval from the Federal Reserve and the Office of the Comptroller of the Currency to exit parallel run and begin using the Basel 3 Advanced approaches capital framework to determine risk-based capital requirements beginning October 1, 2015. Beginning in the fourth quarter of 2015, we will be required to report regulatory risk-based capital ratios and risk-weighted assets under both the Standardized and Advanced approaches. The approach that yields the lower ratio is to be used to assess capital adequacy including under the Prompt Corrective Action (PCA) framework. For additional information, see Capital Management on page 56.


5


Selected Financial Data

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

Table 1
 
 
 
 
Selected Financial Data
 
 
 
 
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions, except per share information)
2015
 
2014
 
2015
 
2014
Income statement
 
 
 
 
 
 
 
Revenue, net of interest expense (FTE basis) (1)
$
20,913

 
$
21,434

 
$
64,679

 
$
66,161

Net income (loss)
4,508

 
(232
)
 
13,185

 
1,783

Diluted earnings (loss) per common share (2)
0.37

 
(0.04
)
 
1.09

 
0.10

Dividends paid per common share
0.05

 
0.05

 
0.15

 
0.07

Performance ratios
 
 
 
 
 

 
 
Return on average assets
0.82
%
 
n/m

 
0.82
%
 
0.11
%
Return on average tangible common shareholders' equity (1)
10.11

 
n/m

 
10.29

 
0.94

Efficiency ratio (FTE basis) (1)
66.03

 
93.97
%
 
66.98

 
92.08

Asset quality
 
 
 
 
 

 
 
Allowance for loan and lease losses at period end
 
 
 
 
$
12,657

 
$
15,106

Allowance for loan and lease losses as a percentage of total loans and leases outstanding at period end (3)
 
 
 
 
1.44
%
 
1.71
%
Nonperforming loans, leases and foreclosed properties at period end (3)
 
 
 
 
$
10,336

 
$
14,232

Net charge-offs (4)
$
932

 
$
1,043

 
3,194

 
3,504

Annualized net charge-offs as a percentage of average loans and leases outstanding (3, 4)
0.42
%
 
0.46
%
 
0.49
%
 
0.52
%
Annualized net charge-offs as a percentage of average loans and leases outstanding, excluding the purchased credit-impaired loan portfolio (3)
0.43

 
0.48

 
0.50

 
0.53

Annualized net charge-offs and purchased credit-impaired write-offs as a percentage of average loans and leases outstanding (3)
0.49

 
0.57

 
0.60

 
0.64

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs (4)
3.42

 
3.65

 
2.96

 
3.22

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs, excluding the purchased credit-impaired loan portfolio
3.18

 
3.27

 
2.76

 
2.88

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs and purchased credit-impaired write-offs
2.95

 
2.95

 
2.41

 
2.63

 
 
 
 
 
 
 
 
 
 
 
 
 
September 30
2015
 
December 31
2014
Balance sheet
 
 
 
 
 
 
 
Total loans and leases
 
 
 
 
$
887,689

 
$
881,391

Total assets
 
 
 
 
2,153,006

 
2,104,534

Total deposits
 
 
 
 
1,162,009

 
1,118,936

Total common shareholders' equity
 
 
 
 
233,632

 
224,162

Total shareholders' equity
 
 
 
 
255,905

 
243,471

Capital ratios under Basel 3 Standardized – Transition
 
 
 
 
 
 
 
Common equity tier 1 capital
 
 
 
 
11.6
%
 
12.3
%
Tier 1 capital
 
 
 
 
12.9

 
13.4

Total capital
 
 
 
 
15.8

 
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 16.
(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 in the third quarter of 2014 because of the net loss applicable to common shareholders.
(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 92 and corresponding Table 49, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 101 and corresponding Table 58.
(4) 
Net charge-offs exclude $148 million and $726 million of write-offs in the purchased credit-impaired loan portfolio for the three and nine months ended September 30, 2015 compared to $246 million and $797 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 87.
n/m = not meaningful

6


Financial Highlights

Net income was $4.5 billion, or $0.37 per diluted share, and $13.2 billion, or $1.09 per diluted share for the three and nine months ended September 30, 2015 compared to a net loss of $232 million, or a loss of $0.04 per share, and net income of $1.8 billion, or $0.10 per share for the same periods in 2014. The results for the three and nine months ended September 30, 2015 compared to the same periods in 2014 were primarily driven by decreases of $5.7 billion and $15.2 billion in litigation expense, as well as declines in nearly all other noninterest expense categories, partially offset by a decline in net interest income on a fully taxable-equivalent (FTE) basis, higher provision for credit losses and lower revenue. Included in net interest income on an FTE basis were negative market-related adjustments on debt securities of $597 million and $412 million for the three and nine months ended September 30, 2015 compared to negative market-related adjustments of $55 million and $503 million for the same periods in 2014.

Total assets increased $48.5 billion from December 31, 2014 to $2.2 trillion at September 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 nine months ended September 30, 2015, we returned $3.1 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 11. From a capital management perspective, during the nine months ended September 30, 2015, we maintained our strong capital position with Common equity tier 1 capital of $161.6 billion, risk-weighted assets of $1,392 billion and a Common equity tier 1 capital ratio of 11.6 percent at September 30, 2015 compared to $155.4 billion, $1,262 billion and 12.3 percent at December 31, 2014 as measured under Basel 3 Standardized – Transition. The decline in the Common equity tier 1 capital ratio is primarily due to an increase in risk-weighted assets due to the change in the calculation of risk-weighted assets from the general risk-based approach at December 31, 2014 to the Basel 3 Standardized approach, starting in 2015. On September 3, 2015, we received approval to exit parallel run and begin using the Basel 3 Advanced approaches capital framework to determine risk-based capital requirements in the fourth quarter of 2015. Additionally, the Corporation's supplementary leverage ratio was 6.4 percent and 5.9 percent at September 30, 2015 and December 31, 2014, both above the 5.0 percent required minimum. Our Global Excess Liquidity Sources were $499 billion with time-to-required funding at 42 months at September 30, 2015 compared to $439 billion and 39 months at December 31, 2014. For additional information, see Capital Management on page 56 and Liquidity Risk on page 68.

Table 2
 
 
 
 
 
 
 
Summary Income Statement
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions)
2015
 
2014
 
2015
 
2014
Net interest income (FTE basis) (1)
$
9,742

 
$
10,444

 
$
30,128

 
$
30,956

Noninterest income
11,171

 
10,990

 
34,551

 
35,205

Total revenue, net of interest expense (FTE basis) (1)
20,913

 
21,434

 
64,679

 
66,161

Provision for credit losses
806

 
636

 
2,351

 
2,056

Noninterest expense
13,807

 
20,142

 
43,320

 
60,921

Income before income taxes (FTE basis) (1)
6,300

 
656

 
19,008

 
3,184

Income tax expense (FTE basis) (1)
1,792

 
888

 
5,823

 
1,401

Net income (loss)
4,508

 
(232
)
 
13,185

 
1,783

Preferred stock dividends
441

 
238

 
1,153

 
732

Net income (loss) applicable to common shareholders
$
4,067

 
$
(470
)
 
$
12,032

 
$
1,051

 
 
 
 
 
 
 
 
Per common share information
 
 
 
 
 
 
 
Earnings (loss)
$
0.39

 
$
(0.04
)
 
$
1.15

 
$
0.10

Diluted earnings (loss)
0.37

 
(0.04
)
 
1.09

 
0.10

 
 
 
 
 
 
 
 
Capital ratios under Basel 3 Standardized – Transition (2)
 
 
 
 
September 30
2015
 
December 31
2014
Common equity tier 1 capital
 
 
 
 
11.6
%
 
12.3
%
Tier 1 capital
 
 
 
 
12.9

 
13.4

Total capital
 
 
 
 
15.8

 
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 16.
(2) 
For more information on capital management and the related capital ratios, see Capital Management on page 56.

7


Net Interest Income

Net interest income on an FTE basis decreased $702 million to $9.7 billion, and $828 million to $30.1 billion for the three and nine months ended September 30, 2015 compared to the same periods in 2014. The net interest yield on an FTE basis decreased 19 basis points (bps) to 2.10 percent, and six bps to 2.21 percent for the same periods. The decrease for the three-month period was driven by negative market-related adjustments on debt securities, as well as lower loan yields and consumer loan balances, partially offset by commercial loan growth. Market-related adjustments on debt securities resulted in an expense of $597 million for the three months ended September 30, 2015 compared to an expense of $55 million for the same period in 2014. Negative market-related adjustments on debt securities were due to the acceleration of premium amortization on debt securities as the decline in long-term interest rates shortened the estimated lives of mortgage-related debt securities. Also included in market-related adjustments is hedge ineffectiveness that impacted net interest income.

The decrease for the nine-month period was primarily driven by lower loan yields and consumer loan balances, partially offset by lower long-term debt balances, commercial loan growth and a $91 million improvement in market-related adjustments on debt securities. Market-related adjustments on debt securities resulted in an expense of $412 million for the nine months ended September 30, 2015 compared to an expense of $503 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.

Noninterest Income
Table 3
 
 
 
 
Noninterest Income
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions)
2015
 
2014
 
2015
 
2014
Card income
$
1,510

 
$
1,500

 
$
4,381

 
$
4,334

Service charges
1,898

 
1,907

 
5,519

 
5,599

Investment and brokerage services
3,336

 
3,327

 
10,101

 
9,887

Investment banking income
1,287

 
1,351

 
4,300

 
4,524

Equity investment income (loss)
(31
)
 
9

 
84

 
1,150

Trading account profits
1,616

 
1,899

 
5,510

 
6,198

Mortgage banking income
407

 
272

 
2,102

 
1,211

Gains on sales of debt securities
385

 
432

 
821

 
1,191

Other income
763

 
293

 
1,733

 
1,111

Total noninterest income
$
11,171

 
$
10,990

 
$
34,551

 
$
35,205


Noninterest income increased $181 million to $11.2 billion, and decreased $654 million to $34.6 billion for the three and nine months ended September 30, 2015 compared to the same periods in 2014. The following highlights the significant changes.

Investment and brokerage services income remained relatively unchanged for the three-month period and increased $214 million for the nine-month period primarily driven by increased asset management fees due to the impact of long-term assets under management (AUM) flows and higher market levels, partially offset by lower transactional revenue.

Investment banking income decreased $64 million and $224 million driven by lower debt and equity issuance fees, partially offset by higher advisory fees.

Equity investment income decreased $40 million and $1.1 billion as the year-ago period included a gain on the sale of a portion of an equity investment and gains from an initial public offering (IPO) of an equity investment in Global Markets.

Trading account profits decreased $283 million and $688 million driven by declines in credit-related businesses due to lower client activity, partially offset by strong performance in equity derivatives and improvement in rates, currencies and commodities products within fixed-income, currencies and commodities (FICC). For more information on trading account profits, see Global Markets on page 41.

Mortgage banking income increased $135 million for the three-month period primarily due to improved mortgage servicing rights (MSR) net-of-hedge performance and a lower provision for representations and warranties, partially offset by a decline in servicing fees. Mortgage banking income increased $891 million for the nine-month period primarily due to a benefit in the provision for representations and warranties compared to an expense in the prior-year period, improved MSR net-of-hedge performance and an increase in core production revenue, partially offset by a decline in servicing fees.

8


Other income increased $470 million for the three-month period due to higher gains on asset sales and higher net debit valuation adjustment (DVA) gains on structured liabilities in the current year period. Other income increased $622 million for the nine-month period due to the same factors as described in the three-month discussion above, as well as lower U.K. consumer payment protection insurance (PPI) costs.

Provision for Credit Losses
Table 4
Credit Quality Data
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions)
2015
 
2014
 
2015
 
2014
Provision for credit losses
 
 
 
 
 
 
 
Consumer
$
542

 
$
544

 
$
1,714

 
$
1,351

Commercial
264

 
92

 
637

 
705

Total provision for credit losses
$
806

 
$
636

 
$
2,351

 
$
2,056

 
 
 
 
 
 
 
 
Net charge-offs (1)
$
932

 
$
1,043

 
$
3,194

 
$
3,504

Net charge-off ratio (2)
0.42
%
 
0.46
%
 
0.49
%
 
0.52
%
(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 $170 million to $806 million, and $295 million to $2.4 billion for the three and nine months ended September 30, 2015 compared to the same periods in 2014. The provision for credit losses was $126 million and $843 million lower than net charge-offs, resulting in a reduction in the allowance for credit losses. The prior-year periods included $400 million of additional costs associated with the consumer relief portion of the settlement with the U.S. Department of Justice (DoJ). Excluding these additional costs, the provision for credit losses in the consumer portfolio increased compared to the same periods in 2014 as we continue to release reserves, but at a slower pace than in the prior-year periods, and also due to a lower level of recoveries on nonperforming loan sales and other recoveries in the nine-month period. The provision for credit losses in the commercial portfolio increased during the three-month period primarily due to loan growth. The decreases in net charge-offs for the three and nine months ended September 30, 2015 were primarily due to credit quality improvement in the consumer portfolio.

We currently expect that, if economic conditions remain unchanged, the provision for credit losses would be generally consistent with present levels through mid-2016. For more information on the provision for credit losses, see Provision for Credit Losses on page 108.

Noninterest Expense
Table 5
 
 
 
 
 
 
 
Noninterest Expense
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions)
2015
 
2014
 
2015
 
2014
Personnel
$
7,829

 
$
8,039

 
$
25,333

 
$
26,094

Occupancy
1,028

 
1,070

 
3,082

 
3,264

Equipment
499

 
514

 
1,511

 
1,594

Marketing
445

 
446

 
1,330

 
1,338

Professional fees
673

 
611

 
1,588

 
1,795

Amortization of intangibles
207

 
234

 
632

 
708

Data processing
731

 
754

 
2,298

 
2,348

Telecommunications
210

 
311

 
583

 
1,005

Other general operating
2,185

 
8,163

 
6,963

 
22,775

Total noninterest expense
$
13,807

 
$
20,142

 
$
43,320

 
$
60,921



9


Noninterest expense decreased $6.3 billion to $13.8 billion, and $17.6 billion to $43.3 billion for the three and nine months ended September 30, 2015 compared to the same periods in 2014. The following highlights the significant changes.

Personnel expense decreased $210 million and $761 million as we continue to streamline processes, reduce headcount and achieve cost savings.

Professional fees increased $62 million for the three-month period primarily due to higher consulting fees related to the CCAR resubmission. Professional fees decreased $207 million for the nine-month period due to lower default-related servicing expenses and legal fees.

Telecommunications expense decreased $101 million and $422 million due to efficiencies gained as we have simplified our operating model, including in-sourcing certain functions.

Other general operating expense decreased $6.0 billion and $15.8 billion primarily due to decreases in litigation expense which were primarily related to previously disclosed legacy mortgage-related matters and other litigation charges in the prior-year periods.

Income Tax Expense
Table 6
 
 
 
 
 
 
 
Income Tax Expense
 
 
 
 
 
 
 
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions)
2015
 
2014
 
2015
 
2014
Income before income taxes
$
6,069

 
$
431

 
$
18,330

 
$
2,545

Income tax expense
1,561

 
663

 
5,145

 
762

Effective tax rate
25.7
%
 
153.8
%
 
28.1
%
 
29.9
%

The effective tax rates for the three and nine months ended September 30, 2015 were driven by our recurring tax preference benefits and also reflected tax benefits related to certain non-U.S. restructurings. The effective tax rate for the three months ended September 30, 2014 was driven by the impact of accruals estimated to be nondeductible, partially offset by recurring tax preference items, the impact of the resolution of several tax examinations and tax benefits from a non-U.S. restructuring. The effective tax rate for the nine months ended September 30, 2014 was impacted by the recurring preference and other tax benefit items previously mentioned, which more than offset the impact of the non-deductible charges.

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. On October 26, 2015, these and other proposals were passed by the U.K. House of Commons, and they are expected to be fully enacted via Royal Assent before the end of 2015. Enactment would require us to remeasure our U.K. deferred tax assets, which we estimate would result in a charge of up to $300 million. We expect the effective tax rate to be approximately 30 percent in the fourth quarter, excluding unusual items and specifically the recent U.K. tax proposals, and approximately 30 percent for the full-year 2015, including the impact of the recent U.K. tax proposals, but absent other unusual items.

10


Balance Sheet Overview
 
Table 7
Selected Balance Sheet Data
(Dollars in millions)
September 30
2015
 
December 31
2014
 
% Change
Assets
 
 
 
 
 
Cash and cash equivalents
$
170,426

 
$
138,589

 
23
 %
Federal funds sold and securities borrowed or purchased under agreements to resell
206,681

 
191,823

 
8

Trading account assets
180,018

 
191,785

 
(6
)
Debt securities
391,651

 
380,461

 
3

Loans and leases
887,689

 
881,391

 
1

Allowance for loan and lease losses
(12,657
)
 
(14,419
)
 
(12
)
All other assets
329,198

 
334,904

 
(2
)
Total assets
$
2,153,006

 
$
2,104,534

 
2

Liabilities
 
 
 
 
 
Deposits
$
1,162,009

 
$
1,118,936

 
4
 %
Federal funds purchased and securities loaned or sold under agreements to repurchase
199,238

 
201,277

 
(1
)
Trading account liabilities
74,252

 
74,192

 

Short-term borrowings
34,518

 
31,172

 
11

Long-term debt
237,288

 
243,139

 
(2
)
All other liabilities
189,796

 
192,347

 
(1
)
Total liabilities
1,897,101

 
1,861,063

 
2

Shareholders' equity
255,905

 
243,471

 
5

Total liabilities and shareholders' equity
$
2,153,006

 
$
2,104,534

 
2


Assets

At September 30, 2015, total assets were approximately $2.2 trillion, up $48.5 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. Debt securities increased primarily due to the deployment of deposit inflows. The increase in loans and leases was driven by strong demand for commercial loans, outpacing consumer loan sales and run-off. The increase in securities borrowed or purchased under agreements to resell was driven by sales and trading activities, partially offset by a reduction in trading account assets. The Corporation took certain actions during the nine months ended September 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 asset and liability management (ALM) portfolio.

Liabilities and Shareholders' Equity

At September 30, 2015, total liabilities were approximately $1.9 trillion, up $36.0 billion from December 31, 2014, primarily driven by an increase in deposits, partially offset by a decline in long-term debt.

Shareholders' equity of $255.9 billion at September 30, 2015 increased $12.4 billion from December 31, 2014 driven by earnings, preferred stock issuances and an increase in accumulated other comprehensive income (OCI) due to a positive net change in the fair value of available-for-sale (AFS) debt securities, partially offset by returns of capital to shareholders through share repurchases, as well as common and preferred dividends.

11


Table 8
 
 
 
 
Selected Quarterly Financial Data
 
 
 
 
 
2015 Quarters
 
2014 Quarters
(In millions, except per share information)
Third
 
Second
 
First
 
Fourth
 
Third
Income statement
 
 
 
 
 
 
 
 
 
Net interest income
$
9,511

 
$
10,488

 
$
9,451

 
$
9,635

 
$
10,219

Noninterest income
11,171

 
11,629

 
11,751

 
9,090

 
10,990

Total revenue, net of interest expense
20,682

 
22,117

 
21,202

 
18,725

 
21,209

Provision for credit losses
806

 
780

 
765

 
219

 
636

Noninterest expense
13,807

 
13,818

 
15,695

 
14,196

 
20,142

Income before income taxes
6,069

 
7,519

 
4,742

 
4,310

 
431

Income tax expense
1,561

 
2,199

 
1,385

 
1,260

 
663

Net income (loss)
4,508

 
5,320

 
3,357

 
3,050

 
(232
)
Net income (loss) applicable to common shareholders
4,067

 
4,990

 
2,975

 
2,738

 
(470
)
Average common shares issued and outstanding
10,444

 
10,488

 
10,519

 
10,516

 
10,516

Average diluted common shares issued and outstanding (1)
11,197

 
11,238

 
11,267

 
11,274

 
10,516

Performance ratios
 
 
 
 
 
 
 
 
 
Return on average assets
0.82
%
 
0.99
%
 
0.64
%
 
0.57
%
 
n/m

Four quarter trailing return on average assets (2)
0.76

 
0.54

 
0.39

 
0.23

 
0.24
%
Return on average common shareholders' equity
6.97

 
8.75

 
5.35

 
4.84

 
n/m

Return on average tangible common shareholders' equity (3)
10.11

 
12.78

 
7.88

 
7.15

 
n/m

Return on average tangible shareholders' equity (3)
9.84

 
11.93

 
7.85

 
7.08

 
n/m

Total ending equity to total ending assets
11.89

 
11.71

 
11.67

 
11.57

 
11.24

Total average equity to total average assets
11.71

 
11.67

 
11.49

 
11.39

 
11.14

Dividend payout
12.82

 
10.49

 
17.68

 
19.21

 
n/m

Per common share data
 
 
 
 
 
 
 
 
 
Earnings (loss)
$
0.39

 
$
0.48

 
$
0.28

 
$
0.26

 
$
(0.04
)
Diluted earnings (loss) (1)
0.37

 
0.45

 
0.27

 
0.25

 
(0.04
)
Dividends paid
0.05

 
0.05

 
0.05

 
0.05

 
0.05

Book value
22.41

 
21.91

 
21.66

 
21.32

 
20.99

Tangible book value (3)
15.50

 
15.02

 
14.79

 
14.43

 
14.09

Market price per share of common stock
 
 
 
 
 
 
 
 
 
Closing
$
15.58

 
$
17.02

 
$
15.39

 
$
17.89

 
$
17.05

High closing
18.45

 
17.67

 
17.90

 
18.13

 
17.18

Low closing
15.26

 
15.41

 
15.15

 
15.76

 
14.98

Market capitalization
$
162,457

 
$
178,231

 
$
161,909

 
$
188,141

 
$
179,296

(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 16.
(4) 
For more information on the impact of the purchased credit-impaired loan portfolio on asset quality, see Consumer Portfolio Credit Risk Management on page 75.
(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 92 and corresponding Table 49, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 101 and corresponding Table 58.
(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 $148 million, $290 million, $288 million, $13 million and $246 million of write-offs in the purchased credit-impaired loan portfolio in the third, second and first quarters of 2015 and in the fourth and third 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 87.
n/m = not meaningful

12


Table 8
 
 
 
 
Selected Quarterly Financial Data (continued)
 
 
 
 
 
2015 Quarters
 
2014 Quarters
(Dollars in millions)
Third
 
Second
 
First
 
Fourth
 
Third
Average balance sheet
 
 
 
 
 
 
 
 
 
Total loans and leases
$
882,841

 
$
881,415

 
$
872,393

 
$
884,733

 
$
899,241

Total assets
2,168,993

 
2,151,966

 
2,138,574

 
2,137,551

 
2,136,109

Total deposits
1,159,231

 
1,146,789

 
1,130,726

 
1,122,514

 
1,127,488

Long-term debt
240,520

 
242,230

 
240,127

 
249,221

 
251,772

Common shareholders' equity
231,620

 
228,780

 
225,357

 
224,479

 
222,374

Total shareholders' equity
253,893

 
251,054

 
245,744

 
243,454

 
238,040

Asset quality (4)
 
 
 
 
 
 
 
 
 
Allowance for credit losses (5)
$
13,318

 
$
13,656

 
$
14,213

 
$
14,947

 
$
15,635

Nonperforming loans, leases and foreclosed properties (6)
10,336

 
11,565

 
12,101

 
12,629

 
14,232

Allowance for loan and lease losses as a percentage of total loans and leases outstanding (6)
1.44
%
 
1.49
%
 
1.57
%
 
1.65
%
 
1.71
%
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (6)
129

 
122

 
122

 
121

 
112

Allowance for loan and lease losses as a percentage of total nonperforming loans and leases, excluding the PCI loan portfolio (6)
120

 
111

 
110

 
107

 
100

Amounts included in allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases (7)
$
4,682

 
$
5,050

 
$
5,492

 
$
5,944

 
$
6,013

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)
81
%
 
75
%
 
73
%
 
71
%
 
67
%
Net charge-offs (8)
$
932

 
$
1,068

 
$
1,194

 
$
879

 
$
1,043

Annualized net charge-offs as a percentage of average loans and leases outstanding (6, 8)
0.42
%
 
0.49
%
 
0.56
%
 
0.40
%
 
0.46
%
Annualized net charge-offs as a percentage of average loans and leases outstanding, excluding the PCI loan portfolio (6)
0.43

 
0.50

 
0.57

 
0.41

 
0.48

Annualized net charge-offs and PCI write-offs as a percentage of average loans and leases outstanding (6)
0.49

 
0.62

 
0.70

 
0.40

 
0.57

Nonperforming loans and leases as a percentage of total loans and leases outstanding (6)
1.11

 
1.22

 
1.29

 
1.37

 
1.53

Nonperforming loans, leases and foreclosed properties as a percentage of total loans, leases and foreclosed properties (6)
1.17

 
1.31

 
1.39

 
1.45

 
1.61

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs (8)
3.42

 
3.05

 
2.82

 
4.14

 
3.65

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs, excluding the PCI loan portfolio
3.18

 
2.79

 
2.55

 
3.66

 
3.27

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs and PCI write-offs
2.95

 
2.40

 
2.28

 
4.08

 
2.95

Capital ratios at period end
Risk-based capital under Basel 3 Standardized – Transition:
 
 
 
 
 
 
 
 
 
Common equity tier 1 capital
11.6
%
 
11.2
%
 
11.1
%
 
12.3
%
 
12.0
%
Tier 1 capital
12.9

 
12.5

 
12.3

 
13.4

 
12.8

Total capital
15.8

 
15.5

 
15.3

 
16.5

 
15.8

Tier 1 leverage
8.5

 
8.5

 
8.4

 
8.2

 
7.9

 
 
 
 
 
 
 
 
 
 
Tangible equity (3)
8.8

 
8.6

 
8.6

 
8.4

 
8.1

Tangible common equity (3)
7.8

 
7.6

 
7.5

 
7.5

 
7.2

For footnotes see page 12.

13


Table 9
 
 
 
Selected Year-to-Date Financial Data
 
 
 
 
Nine Months Ended September 30
(In millions, except per share information)
2015
 
2014
Income statement
 
 
 
Net interest income
$
29,450

 
$
30,317

Noninterest income
34,551

 
35,205

Total revenue, net of interest expense
64,001

 
65,522

Provision for credit losses
2,351

 
2,056

Noninterest expense
43,320

 
60,921

Income before income taxes
18,330

 
2,545

Income tax expense
5,145

 
762

Net income
13,185

 
1,783

Net income applicable to common shareholders
12,032

 
1,051

Average common shares issued and outstanding
10,483

 
10,532

Average diluted common shares issued and outstanding
11,234

 
10,588

Performance ratios
 
 
 
Return on average assets
0.82
%
 
0.11
%
Return on average common shareholders' equity
7.04

 
0.63

Return on average tangible common shareholders' equity (1)
10.29

 
0.94

Return on average tangible shareholders' equity (1)
9.90

 
1.45

Total ending equity to total ending assets
11.89

 
11.24

Total average equity to total average assets
11.62

 
11.02

Dividend payout
13.06

 
70.06

Per common share data
 
 
 
Earnings
$
1.15

 
$
0.10

Diluted earnings
1.09

 
0.10

Dividends paid
0.15

 
0.07

Book value
22.41

 
20.99

Tangible book value (1)
15.50

 
14.09

Market price per share of common stock
 
 
 
Closing
$
15.58

 
$
17.05

High closing
18.45

 
17.92

Low closing
15.15

 
14.51

Market capitalization
$
162,457

 
$
179,296

(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 16.
(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 75.
(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 92 and corresponding Table 49, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 101 and corresponding Table 58.
(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 $726 million and $797 million of write-offs in the purchased credit-impaired loan portfolio for the nine months ended September 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 87.


14


Table 9
 
 
 
Selected Year-to-Date Financial Data (continued)
 
 
 
 
Nine Months Ended September 30
(Dollars in millions)
2015
 
2014
Average balance sheet
 
 
 
Total loans and leases
$
878,921

 
$
910,360

Total assets
2,153,289

 
2,148,298

Total deposits
1,145,686

 
1,124,777

Long-term debt
240,960

 
255,084

Common shareholders' equity
228,609

 
222,598

Total shareholders' equity
250,260

 
236,806

Asset quality (2)
 
 
 
Allowance for credit losses (3)
$
13,318

 
$
15,635

Nonperforming loans, leases and foreclosed properties (4)
10,336

 
14,232

Allowance for loan and lease losses as a percentage of total loans and leases outstanding (4)
1.44
%
 
1.71
%
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (4)
129

 
112

Allowance for loan and lease losses as a percentage of total nonperforming loans and leases, excluding the PCI loan portfolio (4)
120

 
100

Amounts included in allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases (5)
$
4,682

 
$
6,013

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)
81
%
 
67
%
Net charge-offs (6)
$
3,194

 
$
3,504

Annualized net charge-offs as a percentage of average loans and leases outstanding (4, 6)
0.49
%
 
0.52
%
Annualized net charge-offs as a percentage of average loans and leases outstanding, excluding the PCI loan portfolio (4)
0.50

 
0.53

Annualized net charge-offs and PCI write-offs as a percentage of average loans and leases outstanding (4)
0.60

 
0.64

Nonperforming loans and leases as a percentage of total loans and leases outstanding (4)
1.11

 
1.53

Nonperforming loans, leases and foreclosed properties as a percentage of total loans, leases and foreclosed properties (4)
1.17

 
1.61

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs (6)
2.96

 
3.22

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs, excluding the PCI loan portfolio
2.76

 
2.88

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs and PCI write-offs
2.41

 
2.63

For footnotes see page 14.



15


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 25.

Table 10 presents certain non-GAAP financial measures and performance measurements on an FTE basis.

Table 10
Supplemental Financial Data
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions)
2015
 
2014
 
2015
 
2014
Fully taxable-equivalent basis data
 
 
 
 
 
 
 
Net interest income
$
9,742

 
$
10,444

 
$
30,128

 
$
30,956

Total revenue, net of interest expense
20,913

 
21,434

 
64,679

 
66,161

Net interest yield
2.10
%
 
2.29
%
 
2.21
%
 
2.27
%
Efficiency ratio
66.03

 
93.97

 
66.98

 
92.08


Tables 11, 12 and 13 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.

16


Table 11
Quarterly and Year-to-Date Supplemental Financial Data and Reconciliations to GAAP Financial Measures
 
Three Months Ended September 30
 
2015
 
2014
(Dollars in millions)
As Reported
 
Fully taxable-equivalent adjustment
 
Fully taxable-equivalent basis
 
As Reported
 
Fully taxable-equivalent adjustment
 
Fully taxable-equivalent basis
Net interest income
$
9,511

 
$
231

 
$
9,742

 
$
10,219

 
$
225

 
$
10,444

Total revenue, net of interest expense
20,682

 
231

 
20,913

 
21,209

 
225

 
21,434

Income tax expense
1,561

 
231

 
1,792

 
663

 
225

 
888

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30
 
2015
 
2014
Net interest income
$
29,450

 
$
678

 
$
30,128

 
$
30,317

 
$
639

 
$
30,956

Total revenue, net of interest expense
64,001

 
678

 
64,679

 
65,522

 
639

 
66,161

Income tax expense
5,145

 
678

 
5,823

 
762

 
639

 
1,401


Table 12
Period-end and Average Supplemental Financial Data and Reconciliations to GAAP Financial Measures
 
 
 
 
 
Average
 
Period-end
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions)
September 30
2015
 
December 31
2014
 
2015
 
2014
 
2015
 
2014
Common shareholders' equity
$
233,632

 
$
224,162

 
$
231,620

 
$
222,374

 
$
228,609

 
$
222,598

Goodwill
(69,761
)
 
(69,777
)
 
(69,774
)
 
(69,792
)
 
(69,775
)
 
(69,818
)
Intangible assets (excluding MSRs)
(3,973
)
 
(4,612
)
 
(4,099
)
 
(4,992
)
 
(4,307
)
 
(5,232
)
Related deferred tax liabilities
1,762

 
1,960

 
1,811

 
2,077

 
1,885

 
2,114

Tangible common shareholders' equity
$
161,660

 
$
151,733

 
$
159,558

 
$
149,667

 
$
156,412

 
$
149,662

 
 
 
 
 
 
 
 
 
 
 
 
Shareholders' equity
$
255,905

 
$
243,471

 
$
253,893

 
$
238,040

 
$
250,260

 
$
236,806

Goodwill
(69,761
)
 
(69,777
)
 
(69,774
)
 
(69,792
)
 
(69,775
)
 
(69,818
)
Intangible assets (excluding MSRs)
(3,973
)
 
(4,612
)
 
(4,099
)
 
(4,992
)
 
(4,307
)
 
(5,232
)
Related deferred tax liabilities
1,762

 
1,960

 
1,811

 
2,077

 
1,885

 
2,114

Tangible shareholders' equity
$
183,933

 
$
171,042

 
$
181,831

 
$
165,333

 
$
178,063

 
$
163,870

 
 
 
 
 
 
 
 
 
 
 
 
Assets
$
2,153,006

 
$
2,104,534

 
 
 
 
 
 
 
 
Goodwill
(69,761
)
 
(69,777
)
 
 
 
 
 
 
 
 
Intangible assets (excluding MSRs)
(3,973
)
 
(4,612
)
 
 
 
 
 
 
 
 
Related deferred tax liabilities
1,762

 
1,960

 
 
 
 
 
 
 
 
Tangible Assets
$
2,081,034

 
$
2,032,105

 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


17


Table 13
 
 
 
 
 
 
 
Segment Supplemental Financial Data Reconciliations to GAAP Financial Measures (1)
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions)
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Consumer Banking
 
 
 
 
 
 
 
Reported net income
$
1,759

 
$
1,669

 
$
4,940

 
$
4,781

Adjustment related to intangibles (2)
1

 
1

 
3

 
3

Adjusted net income
$
1,760

 
$
1,670

 
$
4,943

 
$
4,784

 
 
 
 
 
 
 
 
Average allocated equity (3)
$
59,312

 
$
60,385

 
$
59,330

 
$
60,401

Adjustment related to goodwill and a percentage of intangibles
(30,312
)
 
(30,385
)
 
(30,330
)
 
(30,401
)
Average allocated capital
$
29,000

 
$
30,000

 
$
29,000

 
$
30,000

 
 
 
 
 
 
 
 
Deposits
 
 
 
 
 
 
 
Reported net income
$
695

 
$
651

 
$
1,957

 
$
1,852

Adjustment related to intangibles (2)

 

 

 

Adjusted net income
$
695

 
$
651

 
$
1,957

 
$
1,852

 
 
 
 
 
 
 
 
Average allocated equity (3)
$
30,421

 
$
29,427

 
$
30,422

 
$
29,426

Adjustment related to goodwill and a percentage of intangibles
(18,421
)
 
(18,427
)
 
(18,422
)
 
(18,426
)
Average allocated capital
$
12,000

 
$
11,000

 
$
12,000

 
$
11,000