XNYS:BAC Bank of America Corporation Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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BAC-3.31.2012-10Q


 
 
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ü] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2012
or
[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from          to
Commission file number:
1-6523
Exact Name of Registrant as Specified in its Charter:
Bank of America Corporation
State or Other Jurisdiction of Incorporation or Organization:
Delaware
IRS Employer Identification Number:
56-0906609
Address of Principal Executive Offices:
Bank of America Corporate Center
100 N. Tryon Street
Charlotte, North Carolina 28255
Registrant’s telephone number, including area code:
(704) 386-5681
Former name, former address and former fiscal year, if changed since last report:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ü     No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ü     No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one).
Large accelerated filer ü
     
Accelerated filer
     
Non-accelerated filer
(do not check if a smaller
reporting company)
 
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes     No ü
On April 30, 2012, there were 10,776,690,824 shares of Bank of America Corporation Common Stock outstanding.
 
 
 
 
 

                


Bank of America Corporation
 
March 31, 2012
 
Form 10-Q
 
 
 
INDEX
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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

This report on Form 10-Q, the documents that it incorporates by reference and the documents into which it may be incorporated by reference may contain, and from time to time Bank of America Corporation (collectively with its subsidiaries, the Corporation) and its management may make certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often use words such as “expects,” “anticipates,” “believes,” “estimates,” “targets,” “intends,” “plans,” “goal” and other similar expressions or future or conditional verbs such as “will,” “may,” “might,” “should,” “would” and “could.” The forward-looking statements made represent the current expectations, plans or forecasts of the Corporation regarding the Corporation’s future results and revenues, and future business and economic conditions more generally, including statements concerning: the potential impacts of the European Union sovereign debt crisis; completion of tender offers for the repurchase of certain of our outstanding subordinated debt and trust preferred securities; the charge to income for each one percent reduction in the U.K. corporate income tax rate; the programs expected to be developed pursuant to the settlement agreements with the state attorneys general and U.S. Department of Justice; that the financial impact of the settlements is not expected to cause any additional provision or reserves as of March 31, 2012 based on the expected impact of the borrower assistance program and operating costs; that certain amounts may be reduced by credits earned for principal reductions; that our payment obligations under the settlement agreements with the Board of Governors of the Federal Reserve System (Federal Reserve) and the Office of the Comptroller of the Currency would be deemed satisfied by payments and provisions of relief under the settlement agreements; the planned schedule and details for implementation and completion of, and the expected impact from, Phase 1 and Phase 2 of Project New BAC, including estimated cost savings, including declines in certain noninterest expense categories; the impact of and costs associated with each of the agreements with the Bank of New York Mellon (as trustee for certain legacy Countrywide Financial Corporation (Countrywide) private-label securitization trusts), and each of the government-sponsored enterprises, Fannie Mae (FNMA) and Freddie Mac (collectively, the GSEs), to resolve bulk representations and warranties claims; our expectation that the $1.7 billion in claims from private-label securitization investors in the covered trusts under the private-label securitization settlement with the Bank of New York Mellon (the BNY Mellon Settlement) would be extinguished upon final court approval of the BNY Mellon Settlement; the belief that the provisions recorded in connection with the BNY Mellon Settlement and the additional non-GSE representations and warranties provisions recorded in 2011 have provided for a substantial portion of the Corporation’s non-GSE repurchase claims; the estimated range of possible loss for non-GSE representations and warranties exposure as of March 31, 2012 of up to $5 billion over existing accruals and the effect of adverse developments with respect to one or more of the assumptions underlying the liability for non-GSE representations and warranties and the corresponding estimated range of possible loss; the continually evolving behavior of the GSEs, and the Corporation’s intention to monitor and repurchase loans to the extent required under the contracts and standards that govern our relationships with the GSEs and update its processes related to these changing GSE behaviors; our expressed intention not to pay compensatory fees under the new GSE servicing guides; the adequacy of the liability for the remaining representations and warranties exposure to the GSEs and the future impact to earnings, including the impact on such estimated liability arising from the announcement by FNMA regarding mortgage rescissions, cancellations and claim denials; our beliefs regarding our ability to resolve rescissions before the expiration of the appeal period allowed by FNMA; our expectation that mortgage-related assessments, waivers and similar costs will remain elevated as additional loans are delayed in the foreclosure process; our expectation that higher costs related to resources necessary to implement new servicing standards mandated for the industry and to implement other operational changes, will continue; the expected repurchase claims on the 2004-2008 loan vintages, including the belief regarding reduced exposure related to loans originated after 2008; the Corporation’s intention to vigorously contest any requests for repurchase for which it concludes that a valid basis does not exist; future impact of complying with the terms of the consent orders with federal bank regulators regarding the foreclosure process; the impact of delays in foreclosure sales in connection with the Corporation’s continued process enhancements and any issues that may arise out of alleged irregularities in the Corporation's foreclosure process; continued cooperation with investigations; the potential materiality of liability with respect to potential servicing-related claims; net interest income continuing to be muted in 2012; our estimates regarding the percentages of loans expected to prepay, default or reset in 2012 and thereafter; the net recovery projections for credit default swaps with monoline financial guarantors; the impact on economic conditions and on the Corporation arising from any further changes to the credit rating or perceived creditworthiness of instruments issued, insured or guaranteed by the U.S. government, or of institutions, agencies or instrumentalities directly linked to the U.S. government; the realizability of deferred tax assets prior to expiration of any carryforward periods; credit trends and conditions, including credit losses, credit reserves, the allowance for credit losses, the allowance for loan and lease losses, charge-offs, delinquency, collection and bankruptcy trends, and nonperforming asset levels, including continued expected reductions in the allowance for loan and lease losses in 2012; the role of non-core asset sales in our capital strategy; investment banking fees; consumer and commercial service charges, including the impact of changes in the Corporation’s overdraft policy and the Corporation’s ability to mitigate a decline in revenues; the effects of new accounting pronouncements; capital levels determined by or established in accordance with accounting principles generally accepted in the United States of America and with the requirements of various regulatory agencies, including our estimates of and ability to comply with any Basel capital and liquidity requirements endorsed by U.S. regulators within any applicable regulatory timelines; the revenue impact and the impact on the value of our assets and liabilities resulting from, and any mitigation actions taken in response to, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Financial Reform Act), including, but not limited to, the Durbin Amendment; our expectations regarding the December 2011 amendment to the notice of proposed rulemaking on the Risk-based Capital Guidelines for Market Risk initially issued in December 2010; CRES’s ceasing to deliver purchase money first mortgage products into FNMA mortgage-backed

3


securities pools and our expectation that this cessation will not have a material impact on CRES’s business; our expectations regarding losses in the event of legitimate mortgage insurance rescissions related to loans held for investment; our expressed intended actions in the response to repurchase requests with which we do not agree; the continued reduction of our long-term debt as appropriate through 2013; our expressed intention to consider additional repurchases and exchanges of our debt depending on prevailing market conditions, liquidity and other factors; the estimated range of possible loss from and the impact of various legal proceedings discussed in “Litigation and Regulatory Matters” in Note 10 – Commitments and Contingencies to the Consolidated Financial Statements; our management processes; credit protection maintained and the effects of certain events on those positions; our estimates of contributions to be made to pension plans; our expectations regarding probable losses related to unfunded lending commitments; our funding strategies including contingency plans; our trading risk management processes; our interest rate and mortgage banking risk management strategies and models; our expressed intention to build capital through retaining earnings, actively reducing legacy asset portfolios and implementing other capital-related initiatives, including focusing on reducing both higher risk-weighted assets and assets currently deducted or expected to be deducted under Basel III, from capital; and other matters relating to the Corporation and the securities that it may offer from time to time. The foregoing is not an exclusive list of all forward-looking statements the Corporation makes. These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumptions that are difficult to predict and are often beyond Bank of America’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 2011 Annual Report on Form 10-K, and in any of the Corporation’s subsequent Securities and Exchange Commission filings: the accuracy and variability of estimates and assumptions in determining the expected value of the loss-sharing reinsurance arrangement relating to the agreement with Assured Guaranty and the total cost of the agreement to the Corporation; the Corporation’s resolution of certain representations and warranties obligations with the GSEs and our ability to resolve the GSEs’ remaining claims; the Corporation’s ability to resolve its representations and warranties obligations, and any related servicing, securities, fraud, indemnity or other claims with monolines, and private-label investors and other investors, including those monolines and investors from whom the Corporation has not yet received claims or with whom it has not yet reached any resolutions; the Corporation’s mortgage modification policies and related results; the timing and amount of any potential dividend increase, including any necessary approvals; adverse changes to the Corporation's credit ratings from the three major credit rating agencies; estimates of the fair value of certain of the Corporation’s assets and liabilities; the identification and effectiveness of any initiatives to mitigate the negative impact of the Financial Reform Act; the Corporation’s ability to limit liabilities acquired as a result of the Merrill Lynch & Co., Inc. and Countrywide acquisitions; and decisions to downsize, sell or close units or otherwise change the business mix of the Corporation.

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

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

Executive Summary
 
Business Overview

The Corporation is a Delaware corporation, a bank holding company and a financial holding company. When used in this report, “the Corporation” may refer to the Corporation individually, the Corporation and its subsidiaries, or certain of the Corporation’s subsidiaries or affiliates. Our principal executive offices are located in Charlotte, North Carolina. Through our banking and various nonbanking subsidiaries throughout the U.S. and in international markets, we provide a diversified range of banking and nonbanking financial services and products through five business segments: Consumer & Business Banking (CBB), Consumer Real Estate Services (CRES), Global Banking, Global Markets and Global Wealth & Investment Management (GWIM), with the remaining operations recorded in All Other. Effective January 1, 2012, the Corporation changed its basis of presentation from six to the above five segments. For more information on this realignment, see Business Segment Operations on page 26. At March 31, 2012, the Corporation had $2.2 trillion in assets and approximately 279,000 full-time equivalent employees.


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As of March 31, 2012, 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 in the U.S., we serve 57 million consumer and small business relationships with approximately 5,700 banking centers, 17,250 ATMs, nationwide call centers, and leading online and mobile banking platforms. We offer industry-leading support to approximately four 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.

Table 1 provides selected consolidated financial data for the three months ended March 31, 2012 and 2011 and at March 31, 2012 and December 31, 2011.

Table 1
Selected Financial Data
 
Three Months Ended March 31
(Dollars in millions, except per share information)
2012
 
2011
Income statement
 
 
 
Revenue, net of interest expense (FTE basis) (1)
$
22,485

 
$
27,095

Net income
653

 
2,049

Diluted earnings per common share
0.03

 
0.17

Dividends paid per common share
0.01

 
0.01

Performance ratios
 

 
 
Return on average assets
0.12
%
 
0.36
%
Return on average tangible shareholders’ equity (1)
1.67

 
5.54

Efficiency ratio (FTE basis) (1)
85.13

 
74.86

Asset quality
 

 
 
Allowance for loan and lease losses at period end
$
32,211

 
$
39,843

Allowance for loan and lease losses as a percentage of total loans and leases outstanding at period end (2)
3.61
%
 
4.29
%
Nonperforming loans, leases and foreclosed properties at period end (2)
$
27,790

 
$
31,643

Net charge-offs
4,056

 
6,028

Annualized net charge-offs as a percentage of average loans and leases outstanding (2)
1.80
%
 
2.61
%
Annualized net charge-offs as a percentage of average loans and leases outstanding excluding purchased credit-impaired loans (2)
1.87

 
2.71

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs
1.97

 
1.63

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs excluding purchased credit-impaired loans
1.43

 
1.31

 
 
 
 
 
March 31
2012
 
December 31
2011
Balance sheet
 
 
 
Total loans and leases
$
902,294

 
$
926,200

Total assets
2,181,449

 
2,129,046

Total deposits
1,041,311

 
1,033,041

Total common shareholders’ equity
213,711

 
211,704

Total shareholders’ equity
232,499

 
230,101

Capital ratios
 
 
 
Tier 1 common capital
10.78
%
 
9.86
%
Tier 1 capital
13.37

 
12.40

Total capital
17.49

 
16.75

Tier 1 leverage
7.79

 
7.53

(1) 
Fully taxable-equivalent (FTE) basis, return on average tangible shareholders’ equity and the efficiency ratio are non-GAAP financial measures. Other companies may define or calculate these measures differently. For additional information on these measures and ratios, and for a corresponding reconciliation to GAAP financial measures, see Supplemental Financial Data on page 16.
(2) 
Balances and ratios do not include loans accounted for under the fair value option. For additional exclusions from nonperforming loans, leases and foreclosed properties, see Nonperforming Consumer Loans and Foreclosed Properties Activity on page 81 and corresponding Table 39, and Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 91 and corresponding Table 48.


5


First Quarter 2012 Economic and Business Environment

The economic and financial environment for banking showed signs of improvement in the first quarter, as labor market recovery and rising equity values combined to raise consumer and business confidence. However, many key indicators of sustainable economic growth remain under pressure. While still elevated, the unemployment rate continued its recent decline ending the quarter at 8.2 percent compared to 8.5 percent at December 31, 2011. The solid equity market performance, supported by less volatile European financial conditions, provided a boost to consumer confidence. Consumer spending categories rose modestly. Retail spending was soft at the beginning of the year but gathered momentum as the quarter progressed. Despite the improvements, economic growth remained moderate as households continued to reduce debt and spend cautiously, businesses held cash and state and local government purchases continued to decline. Export activity was solid. Real estate activity showed some encouraging signs of stability although home prices continued to decline in many parts of the U.S. during the quarter. Business spending gains were moderate, largely related to the expiration of tax incentives for equipment and software purchases at the end of 2011. Rising gasoline prices were a concern during the quarter but oil price gains remained relatively stable. Despite the overall improvements in U.S. economic performance in the past two quarters, anxiety that the economy will lose momentum near mid-year persists.

During the quarter, the Board of Governors of the Federal Reserve System (Federal Reserve) extended its guidance for the exceptionally low level of the federal funds rate at least through late 2014. It also continued its program of extending the maturity of its portfolio by buying longer term Treasury securities and selling short-term holdings, which is scheduled to be complete by mid-year. Market speculation about extending the maturity extension program or initiating further outright security purchases after the completion of the current program increased during the quarter, as the Federal Reserve acknowledged economic and labor market improvement while stressing that conditions have not normalized.

An agreement on a Greek debt restructuring and a large European Central Bank program establishing long-term lending to European banks helped stabilize European sovereign debt markets and improve worldwide financial conditions during the quarter. Nevertheless, a mild, but uneven economic recession continued in most European Union nations especially nations undertaking substantial fiscal and market reforms. Late in the first quarter, concern about Spain's contracting economy and large budget deficit, and renewed anxiety over Italy's economic reforms pushed European sovereign yields higher, offsetting a portion of earlier yield declines. This trend continued early in the second quarter, as concern about Europe continued, stemming from the negative impacts of the economic recession, resistance to implementing economic reforms and fiscal measures, as well as rising government debt-to-gross domestic product ratios. In response to rising bond yields, an enhanced financial support package was established by the International Monetary Fund in March 2012 to slow further deterioration in Europe.

Japan continued to recover moderately from the earthquake in early 2011. China's economic growth slowed during the quarter. Other Asian nations continued to expand during the quarter. For more information on our exposure in Europe, Asia, Latin America and Japan, see Non-U.S. Portfolio on page 96.

Recent Events

U.S. Department of Justice / Attorney General Matters

On March 12, 2012, the Corporation and certain of its affiliates and subsidiaries, together with the U.S. Department of Justice, the U.S. Department of Housing and Urban Development (HUD) and other federal agencies (together, the Federal Agencies) and 49 state attorneys general (the State AGs), caused a consent judgment (the Consent Judgment) concerning the terms of a global settlement resolving investigations into certain origination, servicing and foreclosure practices (the Global Settlement Agreement) to be filed in the U.S. District Court for the District of Columbia. The Global Settlement Agreement embodies the agreements related to the previously announced agreements in principle reached on February 9, 2012 with (1) the Federal Agencies and State AGs to resolve federal and state investigations into certain origination, servicing and foreclosure practices, and (2) the Federal Housing Administration (FHA) to resolve certain claims relating to the origination of FHA-insured mortgage loans, primarily by legacy Countrywide prior to and for a period following the Corporation's acquisition of that company. The Consent Judgment was entered by the court on April 5, 2012, and separate settlement agreements with the Federal Reserve and the Office of the Comptroller of the Currency (OCC) relating to servicing and foreclosure practices also became effective. For additional information, see Off-Balance Sheet Arrangements and Contractual Obligations – Servicing Matters and Foreclosure Processes on page 51 and Item 1A. Risk Factors of the Corporation's 2011 Annual Report on Form 10-K.


6


Stress Test Results

On March 13, 2012, the Federal Reserve announced the results of its 2012 Comprehensive Capital Analysis and Review project (CCAR). The Federal Reserve's stress scenario projections for the Corporation estimated a minimum Tier 1 common capital ratio of 5.9 percent under severe adverse economic conditions with all proposed capital actions through the end of 2013, exceeding the 5 percent reference rate for all institutions involved in the CCAR. The capital plan submitted by the Corporation to the Federal Reserve did not include a request to return capital to stockholders for 2012 above the current dividend rate. The Federal Reserve did not object to our planned capital actions. For additional information, see Capital Management – Regulatory Capital Changes on page 55.

Capital and Liquidity Related Matters

During the three months ended March 31, 2012, we entered into a series of transactions involving repurchases of our subordinated debt, and exchanges of preferred stock and trust preferred securities. In a tender offer and certain open market transactions, we repurchased subordinated debt with a carrying value of $4.8 billion for $3.8 billion in cash, and recorded gains of $1.0 billion. Also, we exchanged various series of our outstanding non-convertible perpetual preferred stock with a carrying value of $296 million and trust preferred securities issued by various unconsolidated trusts for approximately 50 million shares of the Corporation's common stock, with a fair value of $412 million, and $398 million in cash. The trust preferred securities were then exchanged with the unconsolidated trusts for an equal principal amount of junior subordinated debt that had a carrying value of $760 million, effectively retiring the debt. In connection with these exchanges, we recorded gains of $202 million and a $44 million reduction to preferred stock dividends. These transactions in the aggregate increased Tier 1 common capital by $1.7 billion or 13 basis points (bps) under Basel I.

As credit spreads for many financial institutions, including the Corporation, remain at wide levels, the market value of debt previously issued by financial institutions has decreased making it economically advantageous to repurchase and retire certain of our outstanding debt. On April 25, 2012, we commenced tender offers for the repurchase of certain of our outstanding subordinated debt and trust preferred securities for aggregate consideration payable in these transactions of up to $1.75 billion in cash (such aggregate consideration is subject to increase). The Federal Reserve Bank of Richmond, in consultation with the Board of Governors of the Federal Reserve System, has informed us that it has approved this capital action. We will consider additional repurchases and exchanges in the future depending on prevailing market conditions, liquidity and other factors. If the purchase of any debt instruments is at an amount less than the carrying value, such purchases would be accretive to earnings and capital.

Credit Ratings

On February 15, 2012, Moody's Investors Service, Inc. (Moody's) placed the Corporation's long-term debt rating and Bank of America, N.A.'s (BANA's) long-term and short-term debt ratings on review for possible downgrade as part of its review of 17 financial institutions with global capital markets operations. On April 13, 2012, Moody's indicated that the review is expected to conclude between early May and the end of June 2012. Any adjustment to our ratings will be determined based on Moody's review; however, the agency offered guidance that downgrades to our ratings, if any, would likely be limited to one notch.

The major rating agencies (Moody's, Standard & Poor's Ratings Services (S&P) and Fitch Ratings (Fitch)) have each indicated that, as a systemically important financial institution, our credit ratings currently reflect their expectation that, if necessary, we would receive significant support from the U.S. government, and that they will continue to assess such support in the context of sovereign financial strength and regulatory and legislative developments. For information regarding the risks associated with adverse changes in our credit ratings, see Liquidity Risk – Credit Ratings on page 65, Note 3 – Derivatives to the Consolidated Financial Statements and Item 1A. Risk Factors of the Corporation's 2011 Annual Report on Form 10-K.


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Performance Overview

Net income was $653 million for the three months ended March 31, 2012 compared to $2.0 billion for the same period in 2011. After preferred stock dividends of $325 million and $310 million for the three months ended March 31, 2012 and 2011, net income applicable to common shareholders was $328 million, or $0.03 per diluted common share, compared to $1.7 billion, or $0.17 per diluted common share. Certain items that affected pre-tax income for the three months ended March 31, 2012 were the following: provision for credit losses of $2.4 billion which included a reserve reduction of $1.6 billion, gains of $1.2 billion on debt repurchases and exchanges of trust preferred securities, equity investment income of $765 million and $752 million of gains on sales of debt securities. These items were more than offset by negative fair value adjustments of $3.3 billion on structured liabilities related to tightening of our own credit spreads, DVA losses on derivatives of $1.5 billion, net of hedges, annual retirement-eligible incentive compensation costs of $892 million and litigation expense of $793 million.

Table 2
Summary Income Statement
 
 
 
Three Months Ended March 31
(Dollars in millions)
 
 
 
 
2012
 
2011
Net interest income (FTE basis) (1)
 
 
 
 
$
11,053

 
$
12,397

Noninterest income
 
 
 
 
11,432

 
14,698

Total revenue, net of interest expense (FTE basis) (1)
 
 
 
 
22,485

 
27,095

Provision for credit losses
 
 
 
 
2,418

 
3,814

All other noninterest expense
 
 
 
 
19,141

 
20,283

Income before income taxes
 
 
 
 
926

 
2,998

Income tax expense (FTE basis) (1)
 
 
 
 
273

 
949

Net income
 
 
 
 
653

 
2,049

Preferred stock dividends
 
 
 
 
325

 
310

Net income applicable to common shareholders
 
 
 
 
$
328

 
$
1,739

 
 
 
 
 
 
 
 
Per common share information
 
 
 
 
 
 
 
Earnings
 
 
 
 
$
0.03

 
$
0.17

Diluted earnings
 
 
 
 
0.03

 
0.17

(1) 
FTE basis is a non-GAAP financial measure. For additional information on this measure and for a corresponding reconciliation to GAAP financial measures, see Supplemental Financial Data on page 16.

Net interest income on a fully taxable-equivalent (FTE) basis decreased $1.3 billion to $11.1 billion for the three months ended March 31, 2012 compared to the same period in 2011. The decrease was primarily driven by lower consumer loan balances and yields. Lower trading-related net interest income also negatively impacted the results. These decreases were partially offset by ongoing reductions in long-term debt balances. The net interest yield on a FTE basis was 2.51 percent and 2.67 percent for the three months ended March 31, 2012 and 2011.

Noninterest income decreased $3.3 billion to $11.4 billion for the three months ended March 31, 2012 compared to the same period in 2011. The most significant contributors to the decline were the negative fair value adjustments on structured liabilities, net DVA losses and a $710 million decrease in equity investment income. These declines were partially offset by gains on debt repurchases and exchanges of trust preferred securities and a $731 million decrease in representations and warranties provision. For additional information on the repurchases and exchanges, see Liquidity Risk on page 60.

The provision for credit losses decreased $1.4 billion to $2.4 billion for the three months ended March 31, 2012 compared to the same period in 2011. The provision for credit losses was $1.6 billion lower than net charge-offs for the three months ended March 31, 2012, resulting in a reduction in the allowance for credit losses primarily driven by improvement in bankruptcies and delinquencies across the U.S. credit card and unsecured consumer lending portfolios, reductions in the home equity portfolio and improvement in economic conditions impacting the core commercial portfolio partially offset by additions to the consumer purchased credit-impaired (PCI) loan portfolio reserves. This compared to a $2.2 billion reduction in the allowance for credit losses for the three months ended March 31, 2011.


8


Noninterest expense decreased $1.1 billion to $19.1 billion for the three months ended March 31, 2012 compared to the same period in 2011. The decline was driven by a decrease of $1.1 billion in other general operating expense which included declines of $464 million in mortgage-related assessments, waivers and similar costs related to delayed foreclosures, and $147 million in litigation expense. The decline in litigation expense was primarily due to lower mortgage-related litigation expense.

Income tax expense on a FTE basis was $273 million on pre-tax income of $926 million for three months ended March 31, 2012 compared to $949 million on pre-tax income of $3.0 billion for same period in 2011. For more information, see Financial Highlights – Income Tax Expense on page 12.

Segment Results
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table 3
 
 
 
 
 
 
 
Business Segment Results
 
 
 
 
 
 
 
 
Three Months Ended March 31
 
Total Revenue (1)
 
Net Income (Loss)
(Dollars in millions)
2012
 
2011
 
2012
 
2011
Consumer & Business Banking (CBB)
$
7,420

 
$
8,464

 
$
1,454

 
$
2,041

Consumer Real Estate Services (CRES)
2,674

 
2,063

 
(1,145
)
 
(2,400
)
Global Banking
4,451

 
4,702

 
1,590

 
1,584

Global Markets
4,193

 
5,272

 
798

 
1,394

Global Wealth & Investment Management (GWIM)
4,360

 
4,496

 
547

 
542

All Other
(613
)
 
2,098

 
(2,591
)
 
(1,112
)
Total FTE basis
22,485

 
27,095

 
653

 
2,049

FTE adjustment
(207
)
 
(218
)
 

 

Total Consolidated
$
22,278

 
$
26,877

 
$
653

 
$
2,049

(1) 
Total revenue is net of interest expense and is on a FTE basis which for consolidated revenue is a non-GAAP financial measure. For more information on this measure and for a corresponding reconciliation to a GAAP financial measure, see Supplemental Financial Data on page 16.

The following discussion provides an overview of the results of our business segments and All Other for the three months ended March 31, 2012 compared to the same period in 2011. For additional information on these results, see Business Segment Operations on page 26.

CBB net income decreased due to a decline in revenue and an increase in the provision for credit losses, partially offset by lower noninterest expense. Revenue decreased driven by a decline in net interest income from lower average loans and yields and lower noninterest income from the impact of the Durbin Amendment. The provision for credit losses increased, primarily within the Card Services business, which included lower reserve reductions during the three months ended March 31, 2012. Noninterest expense declined due to lower Federal Deposit Insurance Corporation (FDIC), marketing and operating expenses.

CRES net loss, which was primarily driven by continued high costs of managing delinquent and defaulted loans in the servicing portfolio, decreased due to an increase in revenue and decreases in noninterest expense and provision for credit losses. Revenue rose due to increased mortgage banking income driven by a decrease in representations and warranties provision and higher core production income, partially offset by lower insurance income. Noninterest expense decreased due to a decline in litigation expense, lower mortgage-related assessments, waivers and similar costs related to delayed foreclosures, lower production and insurance expenses. The decrease in insurance income and expense was driven by the sale of Balboa Insurance Company's lender-placed insurance business (Balboa) in June 2011.

Global Banking net income remained relatively unchanged as lower noninterest expense and provision for credit losses offset a decline in revenue. Revenue decreased driven by lower investment banking fees mainly from a decline in advisory and equity underwriting fees and lower accretion on acquired portfolios. Provision for credit losses improved due to improving asset quality in the commercial real estate portfolio. Noninterest expense decreased primarily due to lower personnel expenses.

Global Markets net income decreased driven by net DVA losses partially offset by an improved market environment. Net DVA losses increased due to significant tightening of our credit spreads. Sales and trading revenue, excluding net DVA losses, increased resulting from higher fixed income, currencies and commodities (FICC) sales and trading revenue partially offset by a decrease in equity sales and trading revenue.


9


GWIM net income remained relatively unchanged as lower noninterest expense was offset by lower revenue. Revenue decreased primarily driven by lower transactional activity. Noninterest expense decreased driven by lower FDIC expense and volume-driven expenses, lower litigation expense and other reductions related to expense discipline, partially offset by expenses related to the continued investment in the business.

All Other net loss increased primarily due to an increase in negative fair value adjustments on structured liabilities and lower equity investment income, partially offset by gains on subordinated debt repurchases and exchanges of trust preferred securities. Equity investment income decreased as the year-ago quarter included a gain on an equity investment in connection with an initial public offering (IPO). Provision for credit losses decreased primarily driven by lower reserve additions to the PCI discontinued real estate and residential mortgage portfolios, as well as improvement in delinquencies and bankruptcies in the non-U.S. credit card portfolio. Noninterest expense increased due to higher litigation expense.

Financial Highlights
 
Net Interest Income

Net interest income on a FTE basis decreased $1.3 billion to $11.1 billion for the three months ended March 31, 2012 compared to the same period in 2011. The decrease was primarily driven by lower consumer loan balances and yields. Lower trading-related net interest income also negatively impacted the results. These decreases were partially offset by ongoing reductions in long-term debt balances. The net interest yield on a FTE basis decreased 16 bps to 2.51 percent for the three months ended March 31, 2012 compared to the same period in 2011 as the yield continues to be under pressure due to the aforementioned items and the low rate environment. We expect net interest income to continue to be muted in 2012 based on the current forward yield curve.

Noninterest Income
 
Table 4
Noninterest Income
 
 
 
 
Three Months Ended March 31
(Dollars in millions)
 
 
 
 
 
2012
 
2011
Card income
 
 
 
 
 
$
1,457

 
$
1,828

Service charges
 
 
 
 
 
1,912

 
2,032

Investment and brokerage services
 
 
 
 
 
2,876

 
3,101

Investment banking income
 
 
 
 
 
1,217

 
1,578

Equity investment income
 
 
 
 
 
765

 
1,475

Trading account profits
 
 
 
 
 
2,075

 
2,722

Mortgage banking income
 
 
 
 
 
1,612

 
630

Insurance income (loss)
 
 
 
 
 
(60
)
 
613

Gains on sales of debt securities
 
 
 
 
 
752

 
546

Other income (loss)
 
 
 
 
 
(1,134
)
 
261

Net impairment losses recognized in earnings on AFS debt securities
 
 
 
 
 
(40
)
 
(88
)
Total noninterest income
 
 
 
 
 
$
11,432

 
$
14,698


Noninterest income decreased $3.3 billion to $11.4 billion for the three months ended March 31, 2012 compared to the same period in 2011. The following highlights the significant changes.

Card income decreased $371 million primarily driven by the implementation of interchange fee rules under the Durbin Amendment, which became effective on October 1, 2011.

Equity investment income decreased $710 million as the year-ago quarter included a $1.1 billion gain related to an IPO of an equity investment.

Trading account profits decreased $647 million primarily driven by net DVA losses on derivatives of $1.5 billion compared to net DVA losses of $357 million for the same period in 2011 as a result of significant tightening of our credit spreads. The impact of the net DVA losses was partially offset by increased sales and trading results, particularly within our FICC businesses reflecting some stabilization of the European debt crisis and improved market sentiment during the quarter.

10



Mortgage banking income increased $982 million primarily driven by a $731 million decrease in the representations and warranties provision and higher margins on production volume.

Insurance income decreased $673 million primarily driven by the sale of Balboa in June 2011 and a $200 million provision related to payment protection insurance (PPI) claims in the U.K.

Other income decreased $1.4 billion primarily driven by negative fair value adjustments on our structured liabilities of $3.3 billion compared to $586 million for the same period in 2011, partially offset by $1.2 billion of gains related to subordinated debt repurchases and exchanges of trust preferred securities during this quarter.

Provision for Credit Losses

The provision for credit losses decreased $1.4 billion to $2.4 billion for the three months ended March 31, 2012 compared to the same period in 2011. The provision for credit losses was $1.6 billion lower than net charge-offs for three months ended March 31, 2012 resulting in a reduction in the allowance for credit losses. For the three months ended March 31, 2012, the reduction in the allowance for credit losses was primarily driven by improvement in delinquencies and bankruptcies across the U.S. credit card and unsecured consumer lending portfolios, reductions in the home equity portfolio and improvement in economic conditions impacting the core commercial portfolio, as evidenced by continued declines in reservable criticized and commercial nonperforming balances. The reduction in the allowance for credit losses was partially offset by additions to the consumer PCI loan portfolio reserves. This compared to a $2.2 billion reduction in the allowance for credit losses for the three months ended March 31, 2011.

The provision for credit losses related to our consumer portfolio decreased $1.3 billion to $2.6 billion for the three months ended March 31, 2012 compared to the same period in 2011. The provision for credit losses related to our commercial portfolio including the provision for unfunded lending commitments decreased $113 million to a benefit of $226 million.

Net charge-offs totaled $4.1 billion, or 1.80 percent of average loans and leases for the three months ended March 31, 2012 compared to $6.0 billion, or 2.61 percent for the same period in 2011. The decrease in net charge-offs was primarily driven by fewer delinquent loans, improved collection rates and lower bankruptcy filings across the U.S. credit card and unsecured consumer lending portfolios, as well as lower net charge-offs in the home equity and core commercial portfolios. For more information on the provision for credit losses, see Provision for Credit Losses on page 100.

Noninterest Expense
 
Table 5
Noninterest Expense
 
 
 
 
Three Months Ended March 31
(Dollars in millions)
 
 
 
 
 
2012
 
2011
Personnel
 
 
 
 
 
$
10,188

 
$
10,168

Occupancy
 
 
 
 
 
1,142

 
1,189

Equipment
 
 
 
 
 
611

 
606

Marketing
 
 
 
 
 
465

 
564

Professional fees
 
 
 
 
 
783

 
646

Amortization of intangibles
 
 
 
 
 
319

 
385

Data processing
 
 
 
 
 
856

 
695

Telecommunications
 
 
 
 
 
400

 
371

Other general operating
 
 
 
 
 
4,377

 
5,457

Merger and restructuring charges
 
 
 
 
 

 
202

Total noninterest expense
 
 
 
 
 
$
19,141

 
$
20,283



11


Noninterest expense decreased $1.1 billion to $19.1 billion for the three months ended March 31, 2012 compared to the same period in 2011. The decrease was driven by a $1.1 billion decrease in other general operating expenses primarily as a result of a $464 million decrease in mortgage-related assessments, waivers and similar costs related to delayed foreclosures, and a decrease of $147 million in litigation expense. The decline in litigation expense was primarily due to lower mortgage-related litigation expense. Professional fees and data processing expenses both increased due to the build-out and continuing default management activities in Legacy Assets & Servicing within CRES.

We expect to achieve cost savings in certain noninterest expense categories as we continue to streamline workflows, simplify processes and align expenses with our overall strategic plan and operating principles as part of Project New BAC. Phase 1 implementation continued during the three months ended March 31, 2012 and we are nearing completion of Phase 2 evaluations. We anticipate that more than 20 percent of the $5 billion per year in Phase 1 cost savings could be achieved by the end of 2012 and that all aspects of Project New BAC will be fully implemented by the end of 2014. For additional information, see Recent Events – Project New BAC on page 30 of the MD&A of the Corporation's 2011 Annual Report on Form 10-K.

Income Tax Expense

Income tax expense was $66 million for the three months ended March 31, 2012 compared to $731 million for the same period in 2011 and resulted in an effective tax rate of 9.2 percent compared to 26.3 percent in the prior year.

The effective tax rate for the three months ended March 31, 2012 was primarily driven by $128 million of discrete tax benefits and by our recurring tax preference items. The percentage impact of the discrete benefits and tax preference items on the effective tax rate was due to the low level of pre-tax earnings. The effective tax rate for the three months ended March 31, 2011 was primarily driven by the impact of our recurring tax preference items.

The proposal to reduce the U.K. corporate income tax rate by two percent to 23 percent is expected to be enacted in July 2012. The first proposed one percent reduction would be effective on April 1, 2012 and the second on April 1, 2013. These reductions would favorably affect income tax expense on future U.K. earnings but also would require us to remeasure our U.K. net deferred tax assets using the lower tax rates. Upon enactment, we would record a charge to income tax expense of approximately $800 million for these reductions. If the corporate income tax rate were reduced to 22 percent by 2014 as suggested in U.K. Treasury announcements and assuming no change in the deferred tax asset balance, we would record a charge to income tax expense of approximately $400 million in the period of enactment.


12


Balance Sheet Overview
 
Table 6
Selected Balance Sheet Data
 
 
 
 
 
Average Balance
 
March 31
2012
 
December 31
2011
 
Three Months Ended March 31
(Dollars in millions)
 
 
2012
 
2011
Assets
 
 
 
 
 
 
 
Federal funds sold and securities borrowed or purchased under agreements to resell
$
225,784

 
$
211,183

 
$
233,061

 
$
227,379

Trading account assets
209,775

 
169,319

 
175,778

 
221,041

Debt securities
331,245

 
311,416

 
327,758

 
335,847

Loans and leases
902,294

 
926,200

 
913,722

 
938,966

Allowance for loan and lease losses
(32,211
)
 
(33,783
)
 
(33,210
)
 
(40,760
)
All other assets
544,562

 
544,711

 
570,065

 
656,065

Total assets
$
2,181,449

 
$
2,129,046

 
$
2,187,174

 
$
2,338,538

Liabilities
 
 
 
 
 
 
 
Deposits
$
1,041,311

 
$
1,033,041

 
$
1,030,112

 
$
1,023,140

Federal funds purchased and securities loaned or sold under agreements to repurchase
258,491

 
214,864

 
256,405

 
306,415

Trading account liabilities
70,414

 
60,508

 
71,872

 
83,914

Commercial paper and other short-term borrowings
39,254

 
35,698

 
36,651

 
65,158

Long-term debt
354,912

 
372,265

 
363,518

 
440,511

All other liabilities
184,568

 
182,569

 
196,050

 
188,631

Total liabilities
1,948,950

 
1,898,945

 
1,954,608

 
2,107,769

Shareholders’ equity
232,499

 
230,101

 
232,566

 
230,769

Total liabilities and shareholders’ equity
$
2,181,449

 
$
2,129,046

 
$
2,187,174

 
$
2,338,538


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, that 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 metrics, Tier 1 leverage ratio, is calculated based on adjusted quarterly average total assets.

Assets

At March 31, 2012, total assets were $2.2 trillion, an increase of $52.4 billion, or two percent, from December 31, 2011. This increase was driven by trading account assets due to increases in U.S. Treasuries and EMEA sovereign debt and hedges in leveraged credit trading; debt securities primarily driven by net purchases of agency mortgage-backed securities (MBS); federal funds sold and securities borrowed or purchased under agreements to resell to cover increases in client short positions; and customer financing activity through the match book and collateral requirements. These increases were partially offset by lower consumer loan balances primarily due to paydowns and charge-offs outpacing new originations.

Average total assets decreased $151.4 billion for the three months ended March 31, 2012 compared to the same period in 2011 driven by lower consumer loan balances primarily due to a reduction in the home equity portfolio, run-off of non-core portfolios and divestitures; sales of strategic investments; lower cash balances held at the Federal Reserve and a decrease in our mortgage servicing rights (MSR) asset.


13


Liabilities and Shareholders’ Equity

At March 31, 2012, total liabilities were $1.9 trillion, an increase of $50.0 billion, or three percent, from December 31, 2011 primarily driven by securities sold under agreement to repurchase due to funding trading inventory resulting from customer demand. Partially offsetting this increase were reductions in long-term debt primarily driven by maturities and buybacks outpacing issuances as part of the Corporation's strategy to reduce our long-term debt levels.

Average total liabilities decreased $153.2 billion for the three months ended March 31, 2012 compared to the same period in 2011. The decreases were primarily driven by planned reductions in long-term debt due to the Corporation's strategy to reduce our long-term debt levels, reductions in our use of federal funds purchased and securities loaned or sold under agreements to repurchase, and a decrease in short-term borrowings due to the Corporation's reduced use of commercial paper and master notes.

At March 31, 2012, shareholders’ equity was $232.5 billion, an increase of $2.4 billion, or one percent, from December 31, 2011 due to positive earnings, common stock issued under employee plans and in connection with exchanges of preferred and trust preferred securities, and adjustments to employee benefit plans driven by a curtailment of the Corporation's Qualified Pension Plans, offset by a decrease in unrealized gains on available-for-sale (AFS) debt securities in other comprehensive income (OCI).

Average shareholders' equity increased $1.8 billion for the three months ended March 31, 2012 compared to the same period in 2011 primarily driven by the same factors as noted above, offset by a decrease in unrealized gains on AFS marketable equity securities in OCI.


14


Table 7
 
 
 
 
Selected Quarterly Financial Data
 
 
 
 
 
2012 Quarter
 
2011 Quarters
(In millions, except per share information)
First
 
Fourth
 
Third
 
Second
 
First
Income statement
 
 
 
 
 
 
 
 
 
Net interest income
$
10,846

 
$
10,701

 
$
10,490

 
$
11,246

 
$
12,179

Noninterest income
11,432

 
14,187

 
17,963

 
1,990

 
14,698

Total revenue, net of interest expense
22,278

 
24,888

 
28,453

 
13,236

 
26,877

Provision for credit losses
2,418

 
2,934

 
3,407

 
3,255

 
3,814

Goodwill impairment

 
581

 

 
2,603

 

Merger and restructuring charges

 
101

 
176

 
159

 
202

All other noninterest expense (1)
19,141

 
18,840

 
17,437

 
20,094

 
20,081

Income (loss) before income taxes
719

 
2,432

 
7,433

 
(12,875
)
 
2,780

Income tax expense (benefit)
66

 
441

 
1,201

 
(4,049
)
 
731

Net income (loss)
653

 
1,991

 
6,232

 
(8,826
)
 
2,049

Net income (loss) applicable to common shareholders
328

 
1,584

 
5,889

 
(9,127
)
 
1,739

Average common shares issued and outstanding
10,651

 
10,281

 
10,116

 
10,095

 
10,076

Average diluted common shares issued and outstanding (2)
10,762

 
11,125

 
10,464

 
10,095

 
10,181

Performance ratios
 
 
 
 
 
 
 
 
 
Return on average assets
0.12
%
 
0.36
%
 
1.07
%
 
n/m

 
0.36
%
Four quarter trailing return on average assets (3)
n/m

 
0.06

 
n/m

 
n/m

 
n/m

Return on average common shareholders’ equity
0.62

 
3.00

 
11.40

 
n/m

 
3.29

Return on average tangible common shareholders’ equity (4)
0.95

 
4.72

 
18.30

 
n/m

 
5.28

Return on average tangible shareholders’ equity (4)
1.67

 
5.20

 
17.03

 
n/m

 
5.54

Total ending equity to total ending assets
10.66

 
10.81

 
10.37

 
9.83
%
 
10.15

Total average equity to total average assets
10.63

 
10.34

 
9.66

 
10.05

 
9.87

Dividend payout
34.97

 
6.60

 
1.73

 
n/m

 
6.06

Per common share data
 
 
 
 
 
 
 
 
 
Earnings (loss)
$
0.03

 
$
0.15

 
$
0.58

 
$
(0.90
)
 
$
0.17

Diluted earnings (loss) (2)
0.03

 
0.15

 
0.56

 
(0.90
)
 
0.17

Dividends paid
0.01

 
0.01

 
0.01

 
0.01

 
0.01

Book value
19.83

 
20.09

 
20.80

 
20.29

 
21.15

Tangible book value (4)
12.87

 
12.95

 
13.22

 
12.65

 
13.21

Market price per share of common stock
 
 
 
 
 
 
 
 
 
Closing
$
9.57

 
$
5.56

 
$
6.12

 
$
10.96

 
$
13.33

High closing
9.93

 
7.35

 
11.09

 
13.72

 
15.25

Low closing
5.80

 
4.99

 
6.06

 
10.50

 
13.33

Market capitalization
$
103,123

 
$
58,580

 
$
62,023

 
$
111,060

 
$
135,057

Average balance sheet
 
 
 
 
 
 
 
 
 
Total loans and leases
$
913,722

 
$
932,898

 
$
942,032

 
$
938,513

 
$
938,966

Total assets
2,187,174

 
2,207,567

 
2,301,454

 
2,339,110

 
2,338,538

Total deposits
1,030,112

 
1,032,531

 
1,051,320

 
1,035,944

 
1,023,140

Long-term debt
363,518

 
389,557

 
420,273

 
435,144

 
440,511

Common shareholders’ equity
214,150

 
209,324

 
204,928

 
218,505

 
214,206

Total shareholders’ equity
232,566

 
228,235

 
222,410

 
235,067

 
230,769

Asset quality(5)
 
 
 
 
 
 
 
 
 
Allowance for credit losses (6)
$
32,862

 
$
34,497

 
$
35,872

 
$
38,209

 
$
40,804

Nonperforming loans, leases and foreclosed properties (7)
27,790

 
27,708

 
29,059

 
30,058

 
31,643

Allowance for loan and lease losses as a percentage of total loans and leases outstanding (7)
3.61
%
 
3.68
%
 
3.81
%
 
4.00
%
 
4.29
%
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (7)
126

 
135

 
133

 
135

 
135

Allowance for loan and lease losses as a percentage of total nonperforming loans and leases excluding the PCI loan portfolio (6)
91

 
101

 
101

 
105

 
108

Amounts included in allowance that are excluded from nonperforming loans (8)
$
17,006

 
$
17,490

 
$
18,317

 
$
19,935

 
$
22,110

Allowance as a percentage of total nonperforming loans and leases excluding the amounts included in the allowance that are excluded from nonperforming loans (8)
60
%
 
65
%
 
63
%
 
63
%
 
60
%
Net charge-offs
$
4,056

 
$
4,054

 
$
5,086

 
$
5,665

 
$
6,028

Annualized net charge-offs as a percentage of average loans and leases outstanding (7)
1.80
%
 
1.74
%
 
2.17
%
 
2.44
%
 
2.61
%
Nonperforming loans and leases as a percentage of total loans and leases outstanding (7)
2.85

 
2.74

 
2.87

 
2.96

 
3.19

Nonperforming loans, leases and foreclosed properties as a percentage of total loans, leases and foreclosed properties (7)
3.10

 
3.01

 
3.15

 
3.22

 
3.40

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs
1.97

 
2.10

 
1.74

 
1.64

 
1.63

Capital ratios (period end)
 
 
 
 
 
 
 
 
 
Risk-based capital:
 
 
 
 
 
 
 
 
 
Tier 1 common
10.78
%
 
9.86
%
 
8.65
%
 
8.23
%
 
8.64
%
Tier 1
13.37

 
12.40

 
11.48

 
11.00

 
11.32

Total
17.49

 
16.75

 
15.86

 
15.65

 
15.98

Tier 1 leverage
7.79

 
7.53

 
7.11

 
6.86

 
7.25

Tangible equity (4)
7.48

 
7.54

 
7.16

 
6.63

 
6.85

Tangible common equity (4)
6.58

 
6.64

 
6.25

 
5.87

 
6.10

(1) 
Excludes merger and restructuring charges and goodwill impairment charges.
(2) 
Due to a net loss applicable to common shareholders for the second quarter of 2011, the impact of antidilutive equity instruments was excluded from diluted earnings (loss) per share and average diluted common shares.
(3) 
Calculated as total net income for four consecutive quarters divided by annualized average assets for four consecutive quarters.
(4) 
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 additional information on these ratios and corresponding reconciliations to GAAP financial measures, see Supplemental Financial Data on page 16 and Table 8 on pages 17 through 20.
(5) 
For more information on the impact of the PCI loan portfolio on asset quality, see Consumer Portfolio Credit Risk Management on page 67.
(6) 
Includes the allowance for loan and lease losses and the reserve for unfunded lending commitments.
(7) 
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 Nonperforming Consumer Loans and Foreclosed Properties Activity on page 81 and corresponding Table 39, and Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 91 and corresponding Table 48.
(8) 
Amounts included in allowance that are excluded from nonperforming loans primarily include amounts allocated to the U.S. credit card and unsecured consumer lending portfolios in CBB, PCI loans and the non-U.S. credit card portfolio in All Other.
n/m = not meaningful

15


Supplemental Financial Data

We view net interest income and related ratios and analyses on a FTE basis, which are non-GAAP financial measures. We believe managing the business with net interest income on a FTE basis provides a more accurate picture of the interest margin for comparative purposes. To derive the FTE basis, net interest income is adjusted to reflect tax-exempt income on an equivalent before-tax basis with a corresponding increase in income tax expense. For purposes of this calculation, we use the federal statutory tax rate of 35 percent. This measure ensures comparability of net interest income arising from taxable and tax-exempt sources.

As mentioned above, certain performance measures including the efficiency ratio and net interest yield utilize net interest income (and thus total revenue) on a FTE basis. The efficiency ratio measures the costs expended to generate a dollar of revenue, and net interest yield measures the bps we earn over the cost of funds.

We also evaluate our business based on certain ratios that utilize tangible equity, a non-GAAP financial measure. Tangible equity represents an adjusted shareholders’ equity or common shareholders’ equity amount which has been reduced by goodwill and intangible assets (excluding MSRs), net of related deferred tax liabilities. These measures are used to evaluate our use of equity. In addition, profitability, relationship and investment models all use return on average tangible shareholders’ equity (ROTE) as key measures to support our overall growth goals.




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 common shareholders’ equity divided by total assets less goodwill and intangible assets (excluding MSRs), net of related deferred tax liabilities.




ROTE measures our earnings contribution as a percentage of adjusted average total shareholders’ equity. The tangible equity ratio represents adjusted total 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.

In addition, we evaluate our business segment results based on measures that utilize return on economic capital, a non-GAAP financial measure, including the following:




Return on average economic capital for the segments is calculated as net income, adjusted for cost of funds and earnings credits and certain expenses related to intangibles, divided by average economic capital.




Economic capital represents allocated equity less goodwill and a percentage of intangible assets (excluding MSRs).

16


The aforementioned supplemental data and performance measures are presented in Tables 7 and 8. In addition, in Table 8 we have excluded the impact of goodwill impairment charges of $581 million and $2.6 billion recorded in the fourth and second quarters of 2011 when presenting certain of these metrics. Accordingly, these are non-GAAP financial measures. Table 8 provides reconciliations of these non-GAAP financial measures with financial measures defined by GAAP. We believe the use of these non-GAAP financial measures provides additional clarity in assessing the results of the Corporation and our segments. Other companies may define or calculate these measures and ratios differently.

Table 8
Quarterly Supplemental Financial Data and Reconciliations to GAAP Financial Measures
 
2012 Quarter
 
2011 Quarters
(Dollars in millions, except per share information)
First
 
Fourth
 
Third
 
Second
 
First
Fully taxable-equivalent basis data
 
 
 
 
 
 
 
 
 
Net interest income
$
11,053

 
$
10,959

 
$
10,739

 
$
11,493

 
$
12,397

Total revenue, net of interest expense
22,485

 
25,146

 
28,702

 
13,483

 
27,095

Net interest yield
2.51
%
 
2.45
%
 
2.32
%
 
2.50
%
 
2.67
%
Efficiency ratio
85.13

 
77.64

 
61.37

 
n/m

 
74.86

 
 
 
 
 
 
 
 
 
 
Performance ratios, excluding goodwill impairment charges (1)
 
 
 
 
 
 
 
 
 
Per common share information
 
 
 
 
 
 
 
 
 
Earnings (loss)
 
 
$
0.21

 
 
 
$
(0.65
)
 
 
Diluted earnings (loss)
 
 
0.20

 
 
 
(0.65
)
 
 
Efficiency ratio (FTE basis)
 
 
75.33
%
 
 
 
n/m

 
 
Return on average assets
 
 
0.46

 
 
 
n/m

 
 
Four quarter trailing return on average assets (2)
 
 
0.20

 
 
 
n/m

 
 
Return on average common shareholders’ equity
 
 
4.10

 
 
 
n/m

 
 
Return on average tangible common shareholders’ equity
 
 
6.46

 
 
 
n/m

 
 
Return on average tangible shareholders’ equity
 
 
6.72

 
 
 
n/m

 
 

(1)

 
Performance ratios are calculated excluding the impact of the goodwill impairment charges of $581 million and $2.6 billion recorded during the fourth and second quarters of 2011.

(2)

 
Calculated as total net income for four consecutive quarters divided by average assets for the period.
n/m = not meaningful


17


Table 8
Quarterly Supplemental Financial Data and Reconciliations to GAAP Financial Measures (continued)
 
2012 Quarter
 
2011 Quarters
(Dollars in millions)
First
 
Fourth
 
Third
 
Second
 
First
Reconciliation of net interest income to net interest income on a fully taxable-equivalent basis
 
 
 
 
 
 
 
 
 
Net interest income
$
10,846

 
$
10,701

 
$
10,490

 
$
11,246

 
$
12,179

Fully taxable-equivalent adjustment
207

 
258

 
249

 
247

 
218

Net interest income on a fully taxable-equivalent basis
$
11,053

 
$
10,959

 
$
10,739

 
$
11,493

 
$
12,397

Reconciliation of total revenue, net of interest expense to total revenue, net of interest expense on a fully taxable-equivalent basis
 
 
 
 
 
 
 
 
 
Total revenue, net of interest expense
$
22,278

 
$
24,888

 
$
28,453

 
$
13,236

 
$
26,877

Fully taxable-equivalent adjustment
207

 
258

 
249

 
247

 
218

Total revenue, net of interest expense on a fully taxable-equivalent basis
$
22,485

 
$
25,146

 
$
28,702

 
$
13,483

 
$
27,095

Reconciliation of total noninterest expense to total noninterest expense, excluding goodwill impairment charges
 
 
 
 
 
 
 
 
 
Total noninterest expense
$
19,141

 
$
19,522

 
$
17,613

 
$
22,856

 
$
20,283

Goodwill impairment charges

 
(581
)
 

 
(2,603
)
 

Total noninterest expense, excluding goodwill impairment charges
$
19,141

 
$
18,941

 
$
17,613

 
$
20,253

 
$
20,283

Reconciliation of income tax expense (benefit) to income tax expense (benefit) on a fully taxable-equivalent basis
 
 
 
 
 
 
 
 
 
Income tax expense (benefit)
$
66

 
$
441

 
$
1,201

 
$
(4,049
)
 
$
731

Fully taxable-equivalent adjustment
207

 
258

 
249

 
247

 
218

Income tax expense (benefit) on a fully taxable-equivalent basis
$
273

 
$
699

 
$
1,450

 
$
(3,802
)
 
$
949

Reconciliation of net income (loss) to net income (loss), excluding goodwill impairment charges
 
 
 
 
 
 
 
 
 
Net income (loss)
$
653

 
$
1,991

 
$
6,232

 
$
(8,826
)
 
$
2,049

Goodwill impairment charges

 
581

 

 
2,603

 

Net income (loss), excluding goodwill impairment charges
$
653

 
$
2,572

 
$
6,232

 
$
(6,223
)
 
$
2,049

Reconciliation of net income (loss) applicable to common shareholders to net income (loss) applicable to common shareholders, excluding goodwill impairment charges
 
 
 
 
 
 
 
 
 
Net income (loss) applicable to common shareholders
$
328

 
$
1,584

 
$
5,889

 
$
(9,127
)
 
$
1,739

Goodwill impairment charges

 
581

 

 
2,603

 

Net income (loss) applicable to common shareholders, excluding goodwill impairment charges
$
328

 
$
2,165

 
$
5,889

 
$
(6,524
)
 
$
1,739

Reconciliation of average common shareholders’ equity to average tangible common shareholders’ equity
 
 
 
 
 
 
 
 
 
Common shareholders’ equity
$
214,150

 
$
209,324

 
$
204,928

 
$
218,505

 
$
214,206

Goodwill
(69,967
)
 
(70,647
)
 
(71,070
)
 
(73,748
)
 
(73,922
)
Intangible assets (excluding MSRs)
(7,869
)
 
(8,566
)
 
(9,005
)
 
(9,394
)
 
(9,769
)
Related deferred tax liabilities
2,700

 
2,775

 
2,852

 
2,932

 
3,035

Tangible common shareholders’ equity
$
139,014

 
$
132,886

 
$
127,705

 
$
138,295

 
$
133,550

Reconciliation of average shareholders’ equity to average tangible shareholders’ equity
 
 
 
 
 
 
 
 
 
Shareholders’ equity
$
232,566

 
$
228,235

 
$
222,410

 
$
235,067

 
$
230,769

Goodwill
(69,967
)
 
(70,647
)
 
(71,070
)
 
(73,748
)
 
(73,922
)
Intangible assets (excluding MSRs)
(7,869
)
 
(8,566
)
 
(9,005
)
 
(9,394
)
 
(9,769
)
Related deferred tax liabilities
2,700

 
2,775

 
2,852

 
2,932

 
3,035

Tangible shareholders’ equity
$
157,430

 
$
151,797

 
$
145,187

 
$
154,857

 
$
150,113

Reconciliation of period-end common shareholders’ equity to period-end tangible common shareholders’ equity
 
 
 
 
 
 
 
 
 
Common shareholders’ equity
$
213,711

 
$
211,704

 
$
210,772

 
$
205,614

 
$
214,314

Goodwill
(69,976
)
 
(69,967
)
 
(70,832
)
 
(71,074
)
 
(73,869
)
Intangible assets (excluding MSRs)
(7,696
)
 
(8,021
)
 
(8,764
)
 
(9,176
)
 
(9,560
)
Related deferred tax liabilities
2,628

 
2,702

 
2,777

 
2,853

 
2,933

Tangible common shareholders’ equity
$
138,667

 
$
136,418

 
$
133,953

 
$
128,217

 
$
133,818

Reconciliation of period-end shareholders’ equity to period-end tangible shareholders’ equity
 
 
 
 
 
 
 
 
 
Shareholders’ equity
$
232,499

 
$
230,101

 
$
230,252

 
$
222,176

 
$
230,876

Goodwill
(69,976
)
 
(69,967
)
 
(70,832
)
 
(71,074
)
 
(73,869
)
Intangible assets (excluding MSRs)
(7,696
)
 
(8,021
)
 
(8,764
)
 
(9,176
)
 
(9,560
)
Related deferred tax liabilities
2,628

 
2,702

 
2,777

 
2,853

 
2,933

Tangible shareholders’ equity
$
157,455

 
$
154,815

 
$
153,433

 
$
144,779

 
$
150,380

Reconciliation of period-end assets to period-end tangible assets
 
 
 
 
 
 
 
 
 
Assets
$
2,181,449

 
$
2,129,046

 
$
2,219,628

 
$
2,261,319

 
$
2,274,532

Goodwill
(69,976
)
 
(69,967
)
 
(70,832
)
 
(71,074
)
 
(73,869
)
Intangible assets (excluding MSRs)
(7,696
)
 
(8,021
)
 
(8,764
)
 
(9,176
)
 
(9,560
)
Related deferred tax liabilities
2,628

 
2,702

 
2,777

 
2,853

 
2,933

Tangible assets
$
2,106,405

 
$
2,053,760

 
$
2,142,809

 
$
2,183,922

 
$
2,194,036


18


Table 8
Quarterly Supplemental Financial Data and Reconciliations to GAAP Financial Measures (continued)
 
2012 Quarter
 
2011 Quarters
(Dollars in millions)
First
 
Fourth
 
Third
 
Second
 
First
 
 
 
 
 
 
 
 
 
 
Consumer & Business Banking
 
 
 
 
 
 
 
 
 
Reported net income
$
1,454

 
$
1,243

 
$
1,666

 
$
2,502

 
$
2,041

Adjustment related to intangibles (1)
3

 
5

 
6

 
2

 
7

Adjusted net income
$
1,457