BAC-9.30.2014-10Q


 
 
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ü] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2014
or
[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from          to
Commission file number:
1-6523
Exact name of registrant as specified in its charter:
Bank of America Corporation
State or other jurisdiction of incorporation or organization:
Delaware
IRS Employer Identification No.:
56-0906609
Address of principal executive offices:
Bank of America Corporate Center
100 N. Tryon Street
Charlotte, North Carolina 28255
Registrant's telephone number, including area code:
(704) 386-5681
Former name, former address and former fiscal year, if changed since last report:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ü     No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ü     No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (check one).
Large accelerated filer ü
 
Accelerated filer
 
Non-accelerated filer
(do not check if a smaller
reporting company)
 
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes      No ü
On November 5, 2014, there were 10,516,450,466 shares of Bank of America Corporation Common Stock outstanding.
 
 
 
 
 

                


Bank of America Corporation
 
September 30, 2014
 
Form 10-Q
 
 
 
INDEX
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report on Form 10-Q, the documents that it incorporates by reference and the documents into which it may be incorporated by reference may contain, and from time to time Bank of America Corporation (collectively with its subsidiaries, the Corporation) and its management may make, certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often use words such as "anticipates," "targets," "expects," "hopes," "estimates," "intends," "plans," "goal," "believes," "continue" and other similar expressions or future or conditional verbs such as "will," "may," "might," "should," "would" and "could." The forward-looking statements made represent the Corporation's current expectations, plans or forecasts of its future results and revenues, and future business and economic conditions more generally, and other matters. These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumptions that are difficult to predict and are often beyond the Corporation's control. Actual outcomes and results may differ materially from those expressed in, or implied by, any of these forward-looking statements.

You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties more fully discussed elsewhere in this report, under Item 1A. Risk Factors of the Corporation's 2013 Annual Report on Form 10-K, and in any of the Corporation's subsequent Securities and Exchange Commission filings for further information about factors that could affect such forward-looking statements: the Corporation's ability to resolve representations and warranties repurchase claims made by monolines and private-label and other investors, including as a result of any adverse court rulings, and the chance that the Corporation could face related servicing, securities, fraud, indemnity or other claims from one or more counterparties, including monolines or private-label and other investors; the possibility that final court approval of negotiated settlements is not obtained; the possibility that the court decision with respect to the BNY Mellon Settlement is overturned on appeal in whole or in part; potential claims, damages, penalties and fines resulting from pending or future litigation, governmental proceedings or inquiries, and regulatory proceedings; 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, including the potential imposition by certain U.S. banking regulators of mandatory remedial measures and penalties associated with the Corporation's foreign exchange business, including the conduct of the business and its systems and controls; the possibility that the Corporation will not obtain waivers from disqualifications for certain activities as a result of the resolution of an SEC action as part of the settlement with the DoJ; the possibility that future representations and warranties losses may occur in excess of the Corporation's recorded liability and estimated range of possible loss for its representations and warranties exposures; the possibility that the Corporation may not collect mortgage insurance claims; the possibility that future claims, damages, penalties and fines may occur in excess of the Corporation's recorded liability and estimated range of possible losses for litigation exposures; uncertainties about the financial stability, growth rates and the geopolitical environment 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 possibility of future inquiries or investigations regarding pending or completed foreclosure activities; the possibility that unexpected foreclosure delays could impact the rate of decline of default-related servicing costs; uncertainty regarding timing and the potential impact of regulatory capital and liquidity requirements (including Basel 3) and regulatory approval of the Corporation's internal analytical models used to calculate risk-weighted assets; the negative impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act on the Corporation's businesses and earnings, including as a result of additional regulatory interpretation and rulemaking and the success of the Corporation's actions to mitigate such impacts; the potential impact of implementing and conforming to the Volcker Rule; the potential impact of future derivative regulations; adverse changes to the Corporation's credit ratings from the major credit rating agencies; estimates of the fair value of certain of the Corporation's assets and liabilities; reputational damage that may result from negative publicity, fines and penalties from regulatory violations and judicial proceedings; the Corporation's ability to fully realize the anticipated cost savings in Legacy Assets & Servicing, including in accordance with currently anticipated timeframes; a failure in or breach of the Corporation's operational or security systems or infrastructure, or those of third parties with which we do business, including as a result of cyber attacks; the impact on the Corporation's business, financial condition and results of operations of a potential higher interest rate environment; and other similar matters.

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

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


3

Table of Contents

Executive Summary
 
Business Overview

The Corporation is a Delaware corporation, a bank holding company (BHC) and a financial holding company. When used in this report, "the Corporation" may refer to Bank of America Corporation individually, Bank of America Corporation and its subsidiaries, or certain of Bank of America Corporation's subsidiaries or affiliates. Our principal executive offices are located in Charlotte, North Carolina. Through our banking and various nonbanking subsidiaries throughout the U.S. and in international markets, we provide a diversified range of banking and nonbanking financial services and products through five business segments: Consumer & Business Banking (CBB), Consumer Real Estate Services (CRES), Global Wealth & Investment Management (GWIM), Global Banking and Global Markets, with the remaining operations recorded in All Other. Prior to October 1, 2014, we operated our banking activities primarily under two charters: Bank of America, National Association (Bank of America, N.A. or BANA) and, to a lesser extent, FIA Card Services, National Association (FIA Card Services, N.A. or FIA). On October 1, 2014, FIA was merged into BANA. At September 30, 2014, the Corporation had approximately $2.1 trillion in assets and approximately 230,000 full-time equivalent employees.

As of September 30, 2014, we operated in all 50 states, the District of Columbia and more than 40 countries. Our retail banking footprint covers approximately 80 percent of the U.S. population, and we serve approximately 48 million consumer and small business relationships with approximately 4,900 banking centers, 15,700 ATMs, nationwide call centers, and leading online (www.bankofamerica.com) and mobile banking platforms. We offer industry-leading support to more than three million small business owners. We are a global leader in corporate and investment banking and trading across a broad range of asset classes serving corporations, governments, institutions and individuals around the world.

Third-Quarter 2014 Economic and Business Environment

In the U.S., economic growth remained relatively stable in the third quarter of 2014 following a rebound in the second quarter of 2014. Moderate retail spending gains, highlighted by continued steady business and residential investment, and sustained export gains characterized the economic environment in the U.S. Employment gains softened during the quarter and the unemployment rate stabilized. Inflation remained below the Board of Governors of the Federal Reserve System's (Federal Reserve) longer-term target of two percent.

Amid continued international tensions and expectations that accommodative monetary policy would be only gradually removed, longer-term U.S. Treasury yields declined during the quarter, while equity markets remained relatively unchanged. The Federal Reserve continued to reduce its securities purchases, bringing targeted monthly purchases to $15 billion in October. In October, the Federal Reserve announced that it will end its securities purchases in the fourth quarter of 2014.

Internationally, subdued economic growth continued in the eurozone in the third quarter of 2014, while healthy expansion continued in the U.K. Japan's economy stabilized and China's economy grew moderately in the third quarter of 2014. Growth in Russia and Brazil continued to decelerate with political uncertainties and declining commodity prices. For more information on our international exposure, see Non-U.S. Portfolio on page 114.


4

Table of Contents

Recent Events

Foreign Exchange Inquiries and Litigation

Subsequent to our October 15, 2014 earnings announcement for the quarter ended September 30, 2014, the Corporation has been engaged in separate advanced discussions with certain U.S. banking regulatory agencies to resolve matters related to our foreign exchange (FX) business (FX Matters). There can be no assurances that these discussions will lead to a resolution of these matters, or of the amounts for and time frames within which such resolution might be obtained. As a result of those discussions, the Corporation recorded a $400 million non-deductible charge and adjusted the third-quarter 2014 financial results reported on October 15, 2014 to a net loss of $232 million. For additional information, see Global Markets on page 48 and Note 10 – Commitments and Contingencies to the Consolidated Financial Statements.

Department of Justice Settlement

On August 20, 2014, the Corporation reached a comprehensive settlement with the U.S. Department of Justice (DoJ), certain federal agencies and six states (DoJ Settlement). The settlement included releases on the securitization, origination, sale and other specified conduct relating to residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs), and an origination release on residential mortgage loans sold to government-sponsored enterprises (GSEs) and private-label RMBS trusts, or guaranteed by the Federal Housing Authority (FHA).

The DoJ Settlement resolved certain actual and potential civil claims by the DoJ, the Securities and Exchange Commission (SEC) and State Attorneys General from six states (State AGs), the FHA and the Government National Mortgage Association (GNMA), as well as all pending RMBS claims against Bank of America entities brought by the Federal Deposit Insurance Corporation (FDIC).

Under the DoJ Settlement, the Corporation agreed to pay a total of $9.65 billion in cash and provide $7.0 billion worth of consumer relief. The cash portion consists of $5.02 billion in civil monetary penalties and $4.63 billion in compensatory remediation payments, of which $9.16 billion was paid in October 2014 with the balance paid in November 2014. After considering previously established reserves, we recorded a pretax charge of $5.3 billion in the third quarter of 2014 to pay the costs associated with the DoJ Settlement. Of this third-quarter charge, $4.9 billion was recorded in litigation expense and $400 million was recorded in the provision for credit losses for additional costs associated with the consumer relief portion of the settlement.

For additional information, see Off-Balance Sheet Arrangements and Contractual Obligations – Department of Justice Settlement on page 59 and Note 10 – Commitments and Contingencies to the Consolidated Financial Statements.

Dividends

On August 6, 2014, the Federal Reserve informed us that it did not object to our requested capital actions, which included an increase in the common stock dividend, but no additional common stock repurchases. The requested capital actions cover the period from the third quarter of 2014 through the first quarter of 2015. On August 6, 2014, our Board of Directors (the Board) approved an increase in the quarterly common stock dividend to $0.05 per share, from $0.01 per share, for the third-quarter dividend paid on September 26, 2014. On October 23, 2014, our Board declared our fourth-quarter common stock dividend of $0.05 per share, payable on December 26, 2014 to shareholders of record as of December 5, 2014. For additional information, see Capital Management on page 64.

BANA / FIA Merger

Prior to October 1, 2014, we operated our banking activities primarily under two charters: BANA and, to a lesser extent, FIA. On October 1, 2014, FIA was merged into BANA. See Capital Management – Bank of America, N.A. and FIA Card Services, N.A. Regulatory Capital on page 70 and Capital Management – Other Regulatory Capital Matters on page 71 for additional information including the capital amounts and ratios as of September 30, 2014.


5

Table of Contents

Regulatory Activities

Liquidity Coverage Ratio

On September 3, 2014, the U.S. banking agencies finalized the Liquidity Coverage Ratio (LCR) rule. The LCR is a measure of short-term liquidity intended to ensure that a banking organization maintains a sufficient pool of liquid assets to cover net cash outflows over a 30-day stress period. The rule is subject to a two-year phase-in from January 2015 to full implementation in January 2017. For additional information, see Liquidity Risk – Basel 3 Liquidity Standards on page 76.

Supplementary Leverage Ratio

On September 3, 2014, the U.S. banking agencies finalized the Supplementary Leverage Ratio (SLR) rule. Effective January 1, 2018, the Corporation will be required to maintain a minimum SLR of three percent, plus a supplementary leverage buffer of two percent, for a total of five percent. In addition, insured depository institutions of such bank holding companies, which for the Corporation is primarily BANA, will be required to maintain a minimum six percent SLR to be considered "well capitalized." For additional information, see Capital Management – Other Regulatory Capital Matters on page 71.

Credit Risk Retention

In October 2014, U.S. regulators jointly approved a final rule regarding credit risk retention that will, among other things, require sponsors in certain circumstances to retain at least five percent of the credit risk of the assets underlying certain securitizations. The rule will become effective after it is published in the Federal Register, one year after for RMBS and two years after for all other asset classes. For additional information, see Regulatory Matters – Credit Risk Retention on page 63.


6

Table of Contents

Selected Financial Data

Table 1 provides selected consolidated financial data for the three and nine months ended September 30, 2014 and 2013, and at September 30, 2014 and December 31, 2013.

Table 1
Selected Financial Data
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions, except per share information)
2014
 
2013
 
2014
 
2013
Income statement
 
 
 
 
 
 
 
Revenue, net of interest expense (FTE basis) (1)
$
21,434

 
$
21,743

 
$
66,161

 
$
68,100

Net income (loss)
(232
)
 
2,497

 
1,783

 
7,992

Diluted earnings (loss) per common share (2)
(0.04
)
 
0.20

 
0.10

 
0.62

Dividends paid per common share
0.05

 
0.01

 
0.07

 
0.03

Performance ratios
 
 
 
 
 

 
 
Return on average assets
n/m

 
0.47
%
 
0.11
%
 
0.49
%
Return on average tangible shareholders' equity (1)
n/m

 
6.32

 
1.45

 
6.67

Efficiency ratio (FTE basis) (1)
93.97
%
 
75.38

 
92.08

 
76.22

Asset quality
 
 
 
 
 

 
 
Allowance for loan and lease losses at period end
 
 
 
 
$
15,106

 
$
19,432

Allowance for loan and lease losses as a percentage of total loans and leases outstanding at period end (3)
 
 
 
 
1.71
%
 
2.10
%
Nonperforming loans, leases and foreclosed properties at period end (3)
 
 
 
 
$
14,232

 
$
20,028

Net charge-offs (4)
$
1,043

 
$
1,687

 
3,504

 
6,315

Annualized net charge-offs as a percentage of average loans and leases outstanding (3, 4)
0.46
%
 
0.73
%
 
0.52
%
 
0.93
%
Annualized net charge-offs as a percentage of average loans and leases outstanding, excluding the purchased credit-impaired loan portfolio (3)
0.48

 
0.75

 
0.53

 
0.96

Annualized net charge-offs and purchased credit-impaired write-offs as a percentage of average loans and leases outstanding (3)
0.57

 
0.92

 
0.64

 
1.17

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs (4)
3.65

 
2.90

 
3.22

 
2.30

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs, excluding the purchased credit-impaired loan portfolio
3.27

 
2.42

 
2.88

 
1.92

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

 
2.30

 
2.63

 
1.84

 
 
 
 
 
 
 
 
 
 
 
 
 
September 30
2014
 
December 31
2013
Balance sheet
 
 
 
 
 
 
 
Total loans and leases
 
 
 
 
$
891,315

 
$
928,233

Total assets
 
 
 
 
2,123,613

 
2,102,273

Total deposits
 
 
 
 
1,111,981

 
1,119,271

Total common shareholders' equity
 
 
 
 
220,768

 
219,333

Total shareholders' equity
 
 
 
 
238,681

 
232,685

Capital ratios (5)
 
 
 
 
 
 
 
Common equity tier 1 capital
 
 
 
 
12.0
%
 
n/a

Tier 1 common capital
 
 
 
 
n/a

 
10.9
%
Tier 1 capital
 
 
 
 
12.8

 
12.2

Total capital
 
 
 
 
15.8

 
15.1

Tier 1 leverage
 
 
 
 
7.9

 
7.7

(1) 
Fully taxable-equivalent basis (FTE), return on average tangible shareholders' equity and the efficiency ratio are non-GAAP financial measures. Other companies may define or calculate these measures differently. For more information on these measures and ratios, and a corresponding reconciliation to GAAP financial measures, see Supplemental Financial Data on page 17.
(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 100 and corresponding Table 46, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 109 and corresponding Table 55.
(4) 
Net charge-offs exclude $246 million and $797 million of write-offs in the purchased credit-impaired loan portfolio for the three and nine months ended September 30, 2014 compared to $443 million and $1.6 billion for the same periods in 2013. These write-offs decreased the purchased credit-impaired valuation allowance included as part of the allowance for loan and lease losses. For more information on purchased credit-impaired write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 95.
(5) 
On January 1, 2014, the Basel 3 rules became effective, subject to transition provisions primarily related to regulatory deductions and adjustments impacting common equity tier 1 capital and Tier 1 capital. We reported under Basel 1 (which included the Market Risk Final Rules) at December 31, 2013.
n/a = not applicable
n/m = not meaningful

7

Table of Contents

Financial Highlights

The results for the three months ended September 30, 2014 were 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 diluted share for the nine months ended September 30, 2014 compared to net income of $2.5 billion, or $0.20 and $8.0 billion, or $0.62 for the same periods in 2013. Litigation expense increased $4.9 billion and $12.2 billion for the three and nine months ended September 30, 2014, as the result of the DoJ Settlement and other litigation charges, and in the nine-month period, also the settlement with the Federal Housing Finance Agency (FHFA).

Table 2
 
 
 
 
 
 
 
Summary Income Statement
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions)
2014
 
2013
 
2014
 
2013
Net interest income (FTE basis) (1)
$
10,444

 
$
10,479

 
$
30,956

 
$
32,125

Noninterest income
10,990

 
11,264

 
35,205

 
35,975

Total revenue, net of interest expense (FTE basis) (1)
21,434

 
21,743

 
66,161

 
68,100

Provision for credit losses
636

 
296

 
2,056

 
3,220

Noninterest expense
20,142

 
16,389

 
60,921

 
51,907

Income before income taxes
656

 
5,058

 
3,184

 
12,973

Income tax expense (FTE basis) (1)
888

 
2,561

 
1,401

 
4,981

Net income (loss)
(232
)
 
2,497

 
1,783

 
7,992

Preferred stock dividends
238

 
279

 
732

 
1,093

Net income (loss) applicable to common shareholders
$
(470
)
 
$
2,218

 
$
1,051

 
$
6,899

 
 
 
 
 
 
 
 
Per common share information
 
 
 
 
 
 
 
Earnings (loss)
$
(0.04
)
 
$
0.21

 
$
0.10

 
$
0.64

Diluted earnings (loss)
(0.04
)
 
0.20

 
0.10

 
0.62

(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.

Net Interest Income

Net interest income on a fully taxable-equivalent (FTE) basis decreased $35 million to $10.4 billion, and $1.2 billion to $31.0 billion for the three and nine months ended September 30, 2014 compared to the same periods in 2013. The net interest yield on an FTE basis decreased four basis points (bps) to 2.29 percent, and eight bps to 2.27 percent for the three and nine months ended September 30, 2014 compared to the same periods in 2013. The decreases were primarily due to lower loan yields, lower consumer loan balances and lower income from the asset and liability management (ALM) portfolio, partially offset by reductions in funding yields and balances and higher commercial loan balances. In addition to the factors described above, the nine-month decrease was also driven by the impact of market-related premium amortization on debt securities, which declined $1.1 billion from a benefit of $575 million to an expense of $531 million, as well as lower trading-related net interest income. For more information on the decreases in net interest income and net interest yield, see Supplemental Financial Data – Net Interest Income Excluding Trading-related Net Interest Income on page 21.

8

Table of Contents

Noninterest Income
Table 3
 
 
 
 
Noninterest Income
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions)
2014
 
2013
 
2014
 
2013
Card income
$
1,500

 
$
1,444

 
$
4,334

 
$
4,323

Service charges
1,907

 
1,884

 
5,599

 
5,520

Investment and brokerage services
3,327

 
2,995

 
9,887

 
9,165

Investment banking income
1,351

 
1,297

 
4,524

 
4,388

Equity investment income
9

 
1,184

 
1,150

 
2,427

Trading account profits
1,899

 
1,266

 
6,198

 
6,193

Mortgage banking income
272

 
585

 
1,211

 
3,026

Gains on sales of debt securities
432

 
356

 
1,191

 
881

Other income
293

 
253

 
1,111

 
52

Total noninterest income
$
10,990

 
$
11,264

 
$
35,205

 
$
35,975


Noninterest income decreased $274 million to $11.0 billion, and $770 million to $35.2 billion for the three and nine months ended September 30, 2014 compared to the same periods in 2013. The following highlights the significant changes.

Investment and brokerage services income increased $332 million and $722 million primarily driven by increased asset management fees from higher market levels and the impact of long-term assets under management (AUM) inflows.

Equity investment income decreased $1.2 billion and $1.3 billion. The declines were primarily due to a $753 million gain on the sale of our remaining investment in China Construction Bank Corporation (CCB) and gains on the sales of a portion of an equity investment in All Other for the three and nine months ended September 30, 2013. The nine months ended September 30, 2014 included gains on the sales of a portion of an equity investment in All Other and a gain related to an initial public offering of an equity investment in Global Markets.

Trading account profits increased $633 million and $5 million and included positive debit valuation adjustments (DVA) on derivatives of $68 million and negative DVA of $16 million for the three and nine months ended September 30, 2014 compared to negative DVA of $292 million and $309 million for the same periods in 2013. Excluding net DVA, trading account profits increased $273 million and decreased $288 million compared to the same periods in 2013. The three-month improvement was primarily due to increased market volatility and client activity and the nine-month decline was due to lower market volumes and volatility.

Mortgage banking income decreased $313 million and $1.8 billion primarily driven by lower servicing income and core production revenue, partially offset by lower representations and warranties provision.

Other income increased $40 million and $1.1 billion due to increases of $289 million and $634 million in net DVA on structured liabilities and gains associated with the bulk sales of residential mortgage loans. These gains were partially offset by increases in U.K. consumer payment protection insurance (PPI) costs compared to the same periods in 2013. The first quarter of 2013 also included a write-down of $450 million on a monoline receivable.

Provision for Credit Losses

The provision for credit losses increased $340 million to $636 million, and decreased $1.2 billion to $2.1 billion for the three and nine months ended September 30, 2014 compared to the same periods in 2013. The provision for credit losses was $407 million and $1.4 billion lower than net charge-offs, resulting in reductions in the allowance for credit losses. The three-month increase in the provision was due to $400 million of additional costs associated with the consumer relief portion of the DoJ Settlement. The reduction in the provision for the nine months ended September 30, 2014 was driven by portfolio improvement, including increased home prices in the home loans portfolio, as well as lower levels of delinquencies in the consumer lending portfolio within CBB, and improved asset quality in the commercial portfolio.

Net charge-offs totaled $1.0 billion, or 0.46 percent, and $3.5 billion, or 0.52 percent of average loans and leases for the three and nine months ended September 30, 2014 compared to $1.7 billion, or 0.73 percent, and $6.3 billion, or 0.93 percent for the same periods in 2013. The decreases in net charge-offs were due to credit quality improvement across all major portfolios. For more information on the provision for credit losses, see Provision for Credit Losses on page 116.

9

Table of Contents

Noninterest Expense
Table 4
 
 
 
 
 
 
 
Noninterest Expense
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions)
2014
 
2013
 
2014
 
2013
Personnel
$
8,039

 
$
8,310

 
$
26,094

 
$
26,732

Occupancy
1,070

 
1,096

 
3,264

 
3,359

Equipment
514

 
538

 
1,594

 
1,620

Marketing
446

 
511

 
1,338

 
1,377

Professional fees
611

 
702

 
1,795

 
2,045

Amortization of intangibles
234

 
270

 
708

 
820

Data processing
754

 
779

 
2,348

 
2,370

Telecommunications
311

 
397

 
1,005

 
1,217

Other general operating
8,163

 
3,786

 
22,775

 
12,367

Total noninterest expense
$
20,142

 
$
16,389

 
$
60,921

 
$
51,907


Noninterest expense increased $3.8 billion to $20.1 billion, and $9.0 billion to $60.9 billion for the three and nine months ended September 30, 2014 compared to the same periods in 2013, primarily driven by higher litigation expense in other general operating expense. Litigation expense increased $4.9 billion to $6.0 billion for the three months ended September 30, 2014 driven by the DoJ Settlement and other litigation charges, and increased $12.2 billion to $16.0 billion for the nine months ended September 30, 2014 also due to the settlement with FHFA. Personnel expense decreased $271 million and $638 million as we continued to streamline processes and achieve cost savings.

In connection with Project New BAC, which was first announced in the third quarter of 2011, we expected to achieve cost savings in certain noninterest expense categories as we streamlined workflows, simplified processes and aligned expenses with our overall strategic plan and operating principles. We expected total cost savings from Project New BAC to reach $8 billion on an annualized basis, or $2 billion per quarter, by mid-2015. During the three months ended September 30, 2014, we successfully completed our Project New BAC expense program ahead of schedule by reaching our target of $2 billion in cost savings per quarter.

Income Tax Expense
Table 5
 
 
 
 
 
 
 
Income Tax Expense
 
 
 
 
 
 
 
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions)
2014
 
2013
 
2014
 
2013
Income before income taxes
$
431

 
$
4,845

 
$
2,545

 
$
12,327

Income tax expense
663

 
2,348

 
762

 
4,335

Effective tax rate
153.8
%
 
48.5
%
 
29.9
%
 
35.2
%

The effective tax rate for the three months ended September 30, 2014 was driven by the non-deductible treatment of charges for the FX Matters and for a portion of the DoJ Settlement, 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. We expect an effective tax rate of approximately 31 percent, absent any unusual items, for the fourth quarter of 2014.

The effective tax rates for the three and nine months ended September 30, 2013 were primarily driven by the $1.1 billion negative impact of the U.K. corporate income tax rate reduction enacted in July 2013 on deferred tax assets, partially offset by our recurring tax preference items. Also reflected in the effective tax rate for the nine months ended September 30, 2013 was an increase in benefits from the 2012 non-U.S. restructurings.


10

Table of Contents

Balance Sheet Overview
 
 
 
 
 
 
 
 
 
 
 
Table 6
 
 
Selected Balance Sheet Data
 
 
 
 
 
 
 
 
 
Average Balance
 
September 30
2014
 
December 31
2013
 
% Change
 
Three Months Ended
September 30
 
% Change
 
Nine Months Ended
September 30
 
% Change
(Dollars in millions)
 
 
 
2014
 
2013
 
 
2014
 
2013
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
128,659

 
$
131,322

 
(2
)%
 
$
135,996

 
$
113,064

 
20
 %
 
$
142,577

 
$
103,540

 
38
 %
Federal funds sold and securities borrowed or purchased under agreements to resell
223,310

 
190,328

 
17

 
223,978

 
223,434

 

 
224,001

 
231,379

 
(3
)
Trading account assets
188,489

 
200,993

 
(6
)
 
202,385

 
194,324

 
4

 
202,439

 
220,343

 
(8
)
Debt securities
368,124

 
323,945

 
14

 
359,653

 
327,493

 
10

 
345,194

 
342,278

 
1

Loans and leases
891,315

 
928,233

 
(4
)
 
899,241

 
923,978

 
(3
)
 
910,360

 
914,888

 

Allowance for loan and lease losses
(15,106
)
 
(17,428
)
 
(13
)
 
(15,538
)
 
(20,473
)
 
(24
)
 
(16,352
)
 
(22,031
)
 
(26
)
All other assets
338,822

 
344,880

 
(2
)
 
330,394

 
361,610

 
(9
)
 
340,079

 
382,767

 
(11
)
Total assets
$
2,123,613

 
$
2,102,273

 
1

 
$
2,136,109

 
$
2,123,430

 
1

 
$
2,148,298

 
$
2,173,164

 
(1
)
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
$
1,111,981

 
$
1,119,271

 
(1
)
 
$
1,127,488

 
$
1,090,611

 
3

 
$
1,124,777

 
$
1,082,005

 
4

Federal funds purchased and securities loaned or sold under agreements to repurchase
217,925

 
198,106

 
10

 
216,244

 
235,205

 
(8
)
 
214,566

 
268,737

 
(20
)
Trading account liabilities
76,867

 
83,469

 
(8
)
 
84,988

 
84,648

 

 
90,176

 
90,321

 

Short-term borrowings
33,275

 
45,999

 
(28
)
 
38,866

 
44,220

 
(12
)
 
45,218

 
42,749

 
6

Long-term debt
250,115

 
249,674

 

 
251,772

 
258,717

 
(3
)
 
255,084

 
267,582

 
(5
)
All other liabilities
194,769

 
173,069

 
13

 
178,717

 
179,637

 
(1
)
 
181,677

 
187,644

 
(3
)
Total liabilities
1,884,932

 
1,869,588

 
1

 
1,898,075

 
1,893,038

 

 
1,911,498

 
1,939,038

 
(1
)
Shareholders' equity
238,681

 
232,685

 
3

 
238,034

 
230,392

 
3

 
236,800

 
234,126

 
1

Total liabilities and shareholders' equity
$
2,123,613

 
$
2,102,273

 
1

 
$
2,136,109

 
$
2,123,430

 
1

 
$
2,148,298

 
$
2,173,164

 
(1
)

Period-end balance sheet amounts may vary from average balance sheet amounts due to liquidity and balance sheet management activities, primarily involving our portfolios of highly liquid assets. These portfolios are designed to ensure the adequacy of capital while enhancing our ability to manage liquidity requirements for the Corporation and our customers, and to position the balance sheet in accordance with the Corporation's risk appetite. The execution of these activities requires the use of balance sheet and capital-related limits including spot, average and risk-weighted asset limits, particularly within the market-making activities of our trading businesses. One of our key regulatory metrics, Tier 1 leverage ratio, is calculated based on adjusted quarterly average total assets.

Balance Sheet Management Actions in Third Quarter 2014

The Corporation took certain actions in the third quarter of 2014 to further optimize the balance sheet, resulting in a decrease in total assets of $47 billion compared to June 30, 2014. We shifted the mix of certain discretionary assets out of less liquid loans to more liquid debt securities. This included the conversion of $6.5 billion of residential mortgage loans with standby insurance agreements into agency securities and the sale of $2.5 billion of nonperforming and delinquent loans. We reduced the Global Markets balance sheet and associated funding by $11.7 billion, including a decrease of $3.3 billion in low-margin prime brokerage loans. The $22 billion decline in deposits was also driven by optimization efforts, including the reduction of deposits with less LCR benefit. Additionally, from a capital standpoint, $3.1 billion of preferred stock was issued in the quarter improving Basel 3 Tier 1 regulatory capital at the parent company.

Balance Sheet Analysis

Assets

At September 30, 2014, total assets were approximately $2.1 trillion, up $21.3 billion from December 31, 2013. The key drivers were increased debt securities due to purchases of U.S. treasuries, and higher securities borrowed or purchased under agreements to resell from higher matched-book trading activity. These increases were partially offset by a decline in consumer loan balances due to paydowns, net charge-offs and nonperforming and delinquent loan sales outpacing new originations, a reduction in trading account assets, and a decline in commercial loan balances.

11

Table of Contents

Average total assets increased $12.7 billion for the three months ended September 30, 2014 compared to the same period in 2013. The increase was driven by increases in cash and cash equivalents primarily driven by higher interest-bearing deposits with the Federal Reserve and non-U.S. central banks in connection with anticipated Basel 3 LCR requirements and increases in debt securities due to purchases of U.S. treasuries. These increases were partially offset by declines in consumer balances due to paydowns, net charge-offs and nonperforming and delinquent loan sales outpacing new originations, and declines in all other assets driven by decreases in customer and other receivables and time deposits placed.

Average total assets decreased $24.9 billion for the nine months ended September 30, 2014 compared to the same period in 2013. The decrease was driven by declines in all other assets primarily due to decreases in other earning assets, customer and other receivables, derivative dealer assets and loans held-for-sale (LHFS). The decrease in average total assets was also driven by a decline in trading account assets due to a reduction in U.S. treasuries inventory and agency pass-throughs, and a decline in securities borrowed or purchased under agreements to resell due to a lower matched-book. The decrease in average total assets was partially offset by increases in cash and cash equivalents primarily driven by higher interest-bearing deposits with the Federal Reserve and non-U.S. central banks.

Liabilities and Shareholders' Equity

At September 30, 2014, total liabilities were approximately $1.9 trillion, up $15.3 billion from December 31, 2013, driven by an increase in all other liabilities primarily from higher payables primarily related to litigation, and higher securities loaned or sold under agreements to repurchase due to an increase in matched-book trading activity. The increases were partially offset by planned reductions in other short-term borrowings and a decline in deposits.

Average total liabilities increased $5.0 billion for the three months ended September 30, 2014 compared to the same period in 2013 driven by growth in deposits. This increase was partially offset by planned reductions in securities loaned or sold under agreements to repurchase, long-term debt as maturities outpaced new issuances, and short-term borrowings.

Average total liabilities decreased $27.5 billion for the nine months ended September 30, 2014 compared to the same period in 2013. The decrease was due to lower matched-booked trading activity and planned reductions in securities loaned or sold under agreements to repurchase, planned reductions in long-term debt as maturities outpaced new issuances, and decreases in derivative liabilities. These decreases were partially offset by growth in deposits.

Shareholders' equity of $238.7 billion at September 30, 2014 increased $6.0 billion from December 31, 2013 driven by issuances of preferred stock and an increase in accumulated other comprehensive income (OCI) driven by a positive net change in the fair value of available-for-sale (AFS) debt securities, partially offset by common stock repurchases.

Average shareholders' equity of $238.0 billion for the three months ended September 30, 2014 increased $7.6 billion from the same period in 2013 driven by increased retained earnings, an increase in accumulated OCI driven by a positive net change in the fair value of AFS debt securities, and preferred stock issuances, partially offset by common stock repurchases.

Average shareholders' equity of $236.8 billion for the nine months ended September 30, 2014 increased $2.7 billion from the same period in 2013 driven by increased retained earnings, partially offset by common stock repurchases.



12

Table of Contents

Table 7
 
 
 
 
Selected Quarterly Financial Data
 
 
 
 
 
2014 Quarters
 
2013 Quarters
(In millions, except per share information)
Third
 
Second
 
First
 
Fourth
 
Third
Income statement
 
 
 
 
 
 
 
 
 
Net interest income
$
10,219

 
$
10,013

 
$
10,085

 
$
10,786

 
$
10,266

Noninterest income
10,990

 
11,734

 
12,481

 
10,702

 
11,264

Total revenue, net of interest expense
21,209

 
21,747

 
22,566

 
21,488

 
21,530

Provision for credit losses
636

 
411

 
1,009

 
336

 
296

Noninterest expense
20,142

 
18,541

 
22,238

 
17,307

 
16,389

Income (loss) before income taxes
431

 
2,795

 
(681
)
 
3,845

 
4,845

Income tax expense (benefit)
663

 
504

 
(405
)
 
406

 
2,348

Net income (loss)
(232
)
 
2,291

 
(276
)
 
3,439

 
2,497

Net income (loss) applicable to common shareholders
(470
)
 
2,035

 
(514
)
 
3,183

 
2,218

Average common shares issued and outstanding
10,516

 
10,519

 
10,561

 
10,633

 
10,719

Average diluted common shares issued and outstanding (1)
10,516

 
11,265

 
10,561

 
11,404

 
11,482

Performance ratios
 
 
 
 
 
 
 
 
 
Return on average assets
n/m

 
0.42
%
 
n/m

 
0.64
%
 
0.47
%
Four quarter trailing return on average assets (2)
0.24
%
 
0.37

 
0.45
%
 
0.53

 
0.40

Return on average common shareholders' equity
n/m

 
3.68

 
n/m

 
5.74

 
4.06

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

 
5.47

 
n/m

 
8.61

 
6.15

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

 
5.64

 
n/m

 
8.53

 
6.32

Total ending equity to total ending assets
11.24

 
10.94

 
10.79

 
11.07

 
10.92

Total average equity to total average assets
11.14

 
10.87

 
11.06

 
10.93

 
10.85

Dividend payout
n/m

 
5.16

 
n/m

 
3.33

 
4.82

Per common share data
 
 
 
 
 
 
 
 
 
Earnings (loss)
$
(0.04
)
 
$
0.19

 
$
(0.05
)
 
$
0.30

 
$
0.21

Diluted earnings (loss) (1)
(0.04
)
 
0.19

 
(0.05
)
 
0.29

 
0.20

Dividends paid
0.05

 
0.01

 
0.01

 
0.01

 
0.01

Book value
20.99

 
21.16

 
20.75

 
20.71

 
20.50

Tangible book value (3)
14.09

 
14.24

 
13.81

 
13.79

 
13.62

Market price per share of common stock
 
 
 
 
 
 
 
 
 
Closing
$
17.05

 
$
15.37

 
$
17.20

 
$
15.57

 
$
13.80

High closing
17.18

 
17.34

 
17.92

 
15.88

 
14.95

Low closing
14.98

 
14.51

 
16.10

 
13.69

 
12.83

Market capitalization
$
179,296

 
$
161,628

 
$
181,117

 
$
164,914

 
$
147,429

(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 and first quarters 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 83.
(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 100 and corresponding Table 46, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 109 and corresponding Table 55.
(7) 
Primarily includes amounts allocated to the U.S. credit card and unsecured consumer lending portfolios in CBB, purchased credit-impaired loans and the non-U.S. credit card portfolio in All Other.
(8) 
Net charge-offs exclude $246 million, $160 million, $391 million, $741 million and $443 million of write-offs in the purchased credit-impaired loan portfolio in the third, second and first quarters of 2014 and in the fourth and third quarters of 2013, respectively. These write-offs decreased the purchased credit-impaired valuation allowance included as part of the allowance for loan and lease losses. For more information on purchased credit-impaired write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 95.
(9) 
On January 1, 2014, the Basel 3 rules became effective, subject to transition provisions primarily related to regulatory deductions and adjustments impacting common equity tier 1 capital and Tier 1 capital. We reported under Basel 1 (which included the Market Risk Final Rules) for 2013.
n/a = not applicable
n/m = not meaningful

13

Table of Contents

Table 7
 
 
 
 
Selected Quarterly Financial Data (continued)
 
 
 
 
 
2014 Quarters
 
2013 Quarters
(Dollars in millions)
Third
 
Second
 
First
 
Fourth
 
Third
Average balance sheet
 
 
 
 
 
 
 
 
 
Total loans and leases
$
899,241

 
$
912,580

 
$
919,482

 
$
929,777

 
$
923,978

Total assets
2,136,109

 
2,169,555

 
2,139,266

 
2,134,875

 
2,123,430

Total deposits
1,127,488

 
1,128,563

 
1,118,178

 
1,112,674

 
1,090,611

Long-term debt
251,772

 
259,825

 
253,678

 
251,055

 
258,717

Common shareholders' equity
222,368

 
222,215

 
223,201

 
220,088

 
216,766

Total shareholders' equity
238,034

 
235,797

 
236,553

 
233,415

 
230,392

Asset quality (4)
 
 
 
 
 
 
 
 
 
Allowance for credit losses (5)
$
15,635

 
$
16,314

 
$
17,127

 
$
17,912

 
$
19,912

Nonperforming loans, leases and foreclosed properties (6)
14,232

 
15,300

 
17,732

 
17,772

 
20,028

Allowance for loan and lease losses as a percentage of total loans and leases outstanding (6)
1.71
%
 
1.75
%
 
1.84
%
 
1.90
%
 
2.10
%
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (6)
112

 
108

 
97

 
102

 
100

Allowance for loan and lease losses as a percentage of total nonperforming loans and leases, excluding the PCI loan portfolio (6)
100

 
95

 
85

 
87

 
84

Amounts included in allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases (7)
$
6,013

 
$
6,488

 
$
7,143

 
$
7,680

 
$
8,972

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)
67
%
 
64
%
 
55
%
 
57
%
 
54
%
Net charge-offs (8)
$
1,043

 
$
1,073

 
$
1,388

 
$
1,582

 
$
1,687

Annualized net charge-offs as a percentage of average loans and leases outstanding (6, 8)
0.46
%
 
0.48
%
 
0.62
%
 
0.68
%
 
0.73
%
Annualized net charge-offs as a percentage of average loans and leases outstanding, excluding the PCI loan portfolio (6)
0.48

 
0.49

 
0.64

 
0.70

 
0.75

Annualized net charge-offs and PCI write-offs as a percentage of average loans and leases outstanding (6)
0.57

 
0.55

 
0.79

 
1.00

 
0.92

Nonperforming loans and leases as a percentage of total loans and leases outstanding (6)
1.53

 
1.63

 
1.89

 
1.87

 
2.10

Nonperforming loans, leases and foreclosed properties as a percentage of total loans, leases and foreclosed properties (6)
1.61

 
1.70

 
1.96

 
1.93

 
2.17

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs (8)
3.65

 
3.67

 
2.95

 
2.78

 
2.90

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs, excluding the PCI loan portfolio
3.27

 
3.25

 
2.58

 
2.38

 
2.42

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

 
3.20

 
2.30

 
1.89

 
2.30

Capital ratios at period end (9)
 
 
 
 
 
 
 
 
 
Risk-based capital:
 
 
 
 
 
 
 
 
 
Common equity tier 1 capital
12.0
%
 
12.0
%
 
11.8
%
 
n/a

 
n/a

Tier 1 common capital
n/a

 
n/a

 
n/a

 
10.9
%
 
10.8
%
Tier 1 capital
12.8

 
12.5

 
11.9

 
12.2

 
12.1

Total capital
15.8

 
15.3

 
14.8

 
15.1

 
15.1

Tier 1 leverage
7.9

 
7.7

 
7.4

 
7.7

 
7.6

Tangible equity (3)
8.10

 
7.85

 
7.65

 
7.86

 
7.73

Tangible common equity (3)
7.22

 
7.14

 
7.00

 
7.20

 
7.08

For footnotes see page 13.

14

Table of Contents

Table 8
 
 
 
Selected Year-to-Date Financial Data
 
 
 
 
Nine Months Ended September 30
(In millions, except per share information)
2014
 
2013
Income statement
 
 
 
Net interest income
$
30,317

 
$
31,479

Noninterest income
35,205

 
35,975

Total revenue, net of interest expense
65,522

 
67,454

Provision for credit losses
2,056

 
3,220

Noninterest expense
60,921

 
51,907

Income before income taxes
2,545

 
12,327

Income tax expense
762

 
4,335

Net income
1,783

 
7,992

Net income applicable to common shareholders
1,051

 
6,899

Average common shares issued and outstanding
10,532

 
10,764

Average diluted common shares issued and outstanding
10,588

 
11,524

Performance ratios
 
 
 
Return on average assets
0.11
%
 
0.49
%
Return on average common shareholders' equity
0.63

 
4.23

Return on average tangible common shareholders' equity (1)
0.94

 
6.40

Return on average tangible shareholders' equity (1)
1.45

 
6.67

Total ending equity to total ending assets
11.24

 
10.92

Total average equity to total average assets
11.02

 
10.77

Dividend payout
70.06

 
4.68

Per common share data
 
 
 
Earnings
$
0.10

 
$
0.64

Diluted earnings
0.10

 
0.62

Dividends paid
0.07

 
0.03

Book value
20.99

 
20.50

Tangible book value (1)
14.09

 
13.62

Market price per share of common stock
 
 
 
Closing
$
17.05

 
$
13.80

High closing
17.92

 
14.95

Low closing
14.51

 
11.03

Market capitalization
$
179,296

 
$
147,429

(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 83.
(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 100 and corresponding Table 46, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 109 and corresponding Table 55.
(5) 
Primarily includes amounts allocated to the U.S. credit card and unsecured consumer lending portfolios in CBB, purchased credit-impaired loans and the non-U.S. credit card portfolio in All Other.
(6) 
Net charge-offs exclude $797 million and $1.6 billion of write-offs in the purchased credit-impaired loan portfolio for the nine months ended September 30, 2014 and 2013. These write-offs decreased the purchased credit-impaired valuation allowance included as part of the allowance for loan and lease losses. For more information on purchased credit-impaired write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 95.


15

Table of Contents

Table 8
 
 
 
Selected Year-to-Date Financial Data (continued)
 
 
 
 
Nine Months Ended September 30
(Dollars in millions)
2014
 
2013
Average balance sheet
 
 
 
Total loans and leases
$
910,360

 
$
914,888

Total assets
2,148,298

 
2,173,164

Total deposits
1,124,777

 
1,082,005

Long-term debt
255,084

 
267,582

Common shareholders' equity
222,591

 
217,922

Total shareholders' equity
236,800

 
234,126

Asset quality (2)
 
 
 
Allowance for credit losses (3)
$
15,635

 
$
19,912

Nonperforming loans, leases and foreclosed properties (4)
14,232

 
20,028

Allowance for loan and lease losses as a percentage of total loans and leases outstanding (4)
1.71
%
 
2.10
%
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (4)
112

 
100

Allowance for loan and lease losses as a percentage of total nonperforming loans and leases, excluding the PCI loan portfolio (4)
100

 
84

Amounts included in allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases (5)
$
6,013

 
$
8,972

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)
67
%
 
54
%
Net charge-offs (6)
$
3,504

 
$
6,315

Annualized net charge-offs as a percentage of average loans and leases outstanding (4, 6)
0.52
%
 
0.93
%
Annualized net charge-offs as a percentage of average loans and leases outstanding, excluding the PCI loan portfolio (4)
0.53

 
0.96

Annualized net charge-offs and PCI write-offs as a percentage of average loans and leases outstanding (4)
0.64

 
1.17

Nonperforming loans and leases as a percentage of total loans and leases outstanding (4)
1.53

 
2.10

Nonperforming loans, leases and foreclosed properties as a percentage of total loans, leases and foreclosed properties (4)
1.61

 
2.17

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs (6)
3.22

 
2.30

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs, excluding the PCI loan portfolio
2.88

 
1.92

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs and PCI write-offs
2.63

 
1.84

For footnotes see page 15.

16

Table of Contents

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 mortgage servicing rights (MSRs)), net of related deferred tax liabilities. These measures are used to evaluate our use of equity. In addition, profitability, relationship and investment models 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 7 and 8.

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 28 and Note 8 – Goodwill and Intangible Assets to the Consolidated Financial Statements.

Tables 9, 10 and 11 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 9
Quarterly Supplemental Financial Data and Reconciliations to GAAP Financial Measures
 
2014 Quarters
 
2013 Quarters
(Dollars in millions)
Third
 
Second
 
First
 
Fourth
 
Third
Fully taxable-equivalent basis data
 
 
 
 
 
 
 
 
 
Net interest income
$
10,444

 
$
10,226

 
$
10,286

 
$
10,999

 
$
10,479

Total revenue, net of interest expense
21,434

 
21,960

 
22,767

 
21,701

 
21,743

Net interest yield (1)
2.29
%
 
2.22
%
 
2.29
%
 
2.44
%
 
2.33
%
Efficiency ratio
93.97

 
84.43

 
97.68

 
79.75

 
75.38

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

17

Table of Contents

Table 9
Quarterly Supplemental Financial Data and Reconciliations to GAAP Financial Measures (continued)
 
2014 Quarters
 
2013 Quarters
(Dollars in millions)
Third
 
Second
 
First
 
Fourth
 
Third
Reconciliation of net interest income to net interest income on a fully taxable-equivalent basis
 
 
 
 
 
 
 
 
 
Net interest income
$
10,219

 
$
10,013

 
$
10,085

 
$
10,786

 
$
10,266

Fully taxable-equivalent adjustment
225

 
213

 
201

 
213

 
213

Net interest income on a fully taxable-equivalent basis
$
10,444

 
$
10,226

 
$
10,286

 
$
10,999

 
$
10,479

Reconciliation of total revenue, net of interest expense to total revenue, net of interest expense on a fully taxable-equivalent basis
 
 
 
 
 
 
 
 
 
Total revenue, net of interest expense
$
21,209

 
$
21,747

 
$
22,566

 
$
21,488

 
$
21,530

Fully taxable-equivalent adjustment
225

 
213

 
201

 
213

 
213

Total revenue, net of interest expense on a fully taxable-equivalent basis
$
21,434

 
$
21,960

 
$
22,767

 
$
21,701

 
$
21,743

Reconciliation of income tax expense (benefit) to income tax expense (benefit) on a fully taxable-equivalent basis
 
 
 
 
 
 
 
 
 
Income tax expense (benefit)
$
663

 
$
504

 
$
(405
)
 
$
406

 
$
2,348

Fully taxable-equivalent adjustment
225

 
213

 
201

 
213

 
213

Income tax expense (benefit) on a fully taxable-equivalent basis
$
888

 
$
717

 
$
(204
)
 
$
619

 
$
2,561

Reconciliation of average common shareholders' equity to average tangible common shareholders' equity
 
 
 
 
 
 
 
 
 
Common shareholders' equity
$
222,368

 
$
222,215

 
$
223,201

 
$
220,088

 
$
216,766

Goodwill
(69,792
)
 
(69,822
)
 
(69,842
)
 
(69,864
)
 
(69,903
)
Intangible assets (excluding MSRs)
(4,992
)
 
(5,235
)
 
(5,474
)
 
(5,725
)
 
(5,993
)
Related deferred tax liabilities
2,077

 
2,100

 
2,165

 
2,231

 
2,296

Tangible common shareholders' equity
$
149,661

 
$
149,258

 
$
150,050

 
$
146,730

 
$
143,166

Reconciliation of average shareholders' equity to average tangible shareholders' equity
 
 
 
 
 
 
 
 
 
Shareholders' equity
$
238,034

 
$
235,797

 
$
236,553

 
$
233,415

 
$
230,392

Goodwill
(69,792
)
 
(69,822
)
 
(69,842
)
 
(69,864
)
 
(69,903
)
Intangible assets (excluding MSRs)
(4,992
)
 
(5,235
)
 
(5,474
)
 
(5,725
)
 
(5,993
)
Related deferred tax liabilities
2,077

 
2,100

 
2,165

 
2,231

 
2,296

Tangible shareholders' equity
$
165,327

 
$
162,840

 
$
163,402

 
$
160,057

 
$
156,792

Reconciliation of period-end common shareholders' equity to period-end tangible common shareholders' equity
 
 
 
 
 
 
 
 
 
Common shareholders' equity
$
220,768

 
$
222,565

 
$
218,536

 
$
219,333

 
$
218,967

Goodwill
(69,784
)
 
(69,810
)
 
(69,842
)
 
(69,844
)
 
(69,891
)
Intangible assets (excluding MSRs)
(4,849
)
 
(5,099
)
 
(5,337
)
 
(5,574
)
 
(5,843
)
Related deferred tax liabilities
2,019

 
2,078

 
2,100

 
2,166

 
2,231

Tangible common shareholders' equity
$
148,154