Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

August 1, 2013

Documents



 
 
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ü] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2013
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 July 31, 2013, there were 10,743,127,450 shares of Bank of America Corporation Common Stock outstanding.
 
 
 
 
 

                
Table of Contents

Bank of America Corporation
 
June 30, 2013
 
Form 10-Q
 
 
 
INDEX
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1
Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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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: expectations regarding European and certain Asian economies; the expectation that, if the pace of improvement in the economy continues, there will be reductions in the allowance for credit losses; expected levels of net charge-offs; expectations regarding the impact of interest rate increases on future net interest income, accumulated OCI and mortgage loan originations; expectations regarding the anticipated transfers of mortgage servicing rights; expectations regarding planned actions pursuant to the Corporation's capital plan; the expectation that borrower assistance programs will not result in any incremental credit provision and that the existing allowance for credit losses is adequate to absorb any costs that have not already been recorded as charge-offs; expectations of achieving cost savings as a result of Project New BAC of $8 billion per year on an annualized basis, or $2 billion per quarter, by mid-2015, with $1.5 billion in quarterly cost savings achieved by the fourth quarter of 2013; expectations regarding the impact of U.K. corporate income tax rate reductions on the Corporation's income tax expense and regulatory capital ratios; expectations that, in the fourth quarter of 2013, noninterest expense in Legacy Assets & Servicing (excluding litigation expense) will be below $2.0 billion and the number of 60 days or more past due residential mortgage loans in the Legacy and Non-Legacy Mortgage Serviced Portfolios will decline below 375,000; the expectation that unresolved repurchase claims related to private-label securitizations will continue to increase; the resolution of representation and warranties repurchase and other claims; the possibility of additional settlements in the future; the belief that there will likely be additional requests for loan files in the future leading to repurchase claims; the possibility that the Corporation may purchase common stock and outstanding debt securities depending on prevailing market conditions, liquidity and other factors; beliefs and expectations concerning the impact of the National Mortgage Settlement, including the impact of uniform servicing standards; predictions concerning the impact of possible foreclosure delays; the possibility that the Corporation will need to register additional entities as swap dealers and major swap participants; the possibility that the Corporation will be required to restructure certain businesses as a result of final derivatives regulations that impose additional operational and compliance costs; expectations regarding the planned merger of certain pension plans, including its effect on the Corporation's regulatory capital; expectations regarding capital requirements under proposed regulatory rulemaking, including the approved final Basel 3 rules, which have not yet been published in the Federal Register, and the possibility of capital distribution-related impacts of these requirements on the Corporation; expectations that the Corporation will meet proposed Basel 3 liquidity standards within the regulatory timelines; the expectation that, if the Corporation's analytical models for capital measurement under Basel 3 are not approved by the U.S. regulatory agencies, it would likely lead to an increase in the Corporation's risk-weighted assets, which in some cases could be significant; expectations regarding benefits to be obtained from the Corporation's centralized funding strategy; estimates concerning the Corporation's additional capital requirements as a global systemically important financial institution; beliefs that default-related servicing costs peaked in late 2012 and will continue to decline in 2013; expectations regarding preferred stock dividends; the Corporation's belief that it can quickly obtain cash for certain securities, even in stressed market conditions, through repurchase agreements or outright sales; the Corporation's belief that a portion of structured liability obligations will remain outstanding beyond the earliest put or redemption date; the Corporation's anticipation that debt levels will decline due to maturities through 2013; the estimation that lifetime losses on loans originated after 2008 will be significantly less than the losses experienced with respect to vintages prior to 2009; expectations regarding loans in the pay option portfolio; the possibility that the Corporation may add credit exposure within an industry, borrower or counterparty group by selling protection; effects of the ongoing debt crisis in certain European countries, including the expectation of continued market volatility, the expectation that the Corporation will continue to support client activities in the region and that exposures may vary over time as the Corporation monitors the situation and manages its risk profile; the expectation that net losses on derivative instruments that qualify as cash flow hedges will be reclassified into earnings during the next 12 months; the possibility that the Corporation may hedge debt securities with risk management derivatives; the expectation that the maximum potential exposure for chargebacks would not exceed the total amount of merchant transactions processed through Visa, MasterCard and Discover for the last six months; expectations regarding the Corporation's contributions to pension plans; and other matters relating to the Corporation and the securities that it may offer from time to time or steps it may take to manage the risk of these securities. 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 the Corporation's control. Actual outcomes and results may differ materially from those expressed in, or implied by, any of these forward-looking statements.

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Table of Contents

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 2012 Annual Report on Form 10-K, and in any of the Corporation's subsequent Securities and Exchange Commission filings: the Corporation's ability to resolve representations and warranties repurchase 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 of the government-sponsored enterprises, monolines or private-label and other investors; the possibility that future representations and warranties losses may occur in excess of the Corporation's recorded liability and estimated range of possible loss for its representations and warranties exposures; the possibility that the Corporation may not collect mortgage insurance claims; the possible impact of a future FASB standard on accounting for credit losses; uncertainties about the financial stability of several countries in the EU, the risk that those countries may default on their sovereign debt or exit the EU and related stresses on financial markets, the Euro and the EU 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 negative impact of the Financial Reform 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 on debit card interchange fee revenue in connection with the U.S. District Court for the District of Columbia's ruling on July 31, 2013 regarding the Federal Reserve's rules implementing the Financial Reform Act's Durbin Amendment; 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; the possibility that the European Commission will impose remedial measures in relation to its investigation of the Corporation's competitive practices; the impact of continued refund payments to customers and potential regulatory enforcement action relating to optional identity theft protection services; the impact of potential regulatory enforcement action relating to certain optional credit card debt cancellation products; unexpected claims, damages and fines resulting from pending or future litigation and regulatory proceedings; the Corporation's ability to fully realize the cost savings and other anticipated benefits from Project New BAC, including in accordance with currently anticipated timeframes; 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.

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 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 Banking, Global Markets and Global Wealth & Investment Management (GWIM), with the remaining operations recorded in All Other. We operate our banking activities primarily under two national bank charters: Bank of America, National Association (Bank of America, N.A. or BANA) and FIA Card Services, National Association (FIA Card Services, N.A. or FIA). At June 30, 2013, the Corporation had approximately $2.1 trillion in assets and approximately 257,000 full-time equivalent employees.

As of June 30, 2013, 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 51 million consumer and small business relationships with approximately 5,300 banking centers, 16,350 ATMs, nationwide call centers, and leading online 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.


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Table 1 provides selected consolidated financial data for the three and six months ended June 30, 2013 and 2012, and at June 30, 2013 and December 31, 2012.

Table 1
Selected Financial Data
 
Three Months Ended June 30
 
Six Months Ended June 30
(Dollars in millions, except per share information)
2013
 
2012
 
2013
 
2012
Income statement
 
 
 
 
 
 
 
Revenue, net of interest expense (FTE basis) (1)
$
22,949

 
$
22,202

 
$
46,357

 
$
44,687

Net income
4,012

 
2,463

 
5,495

 
3,116

Diluted earnings per common share
0.32

 
0.19

 
0.42

 
0.22

Dividends paid per common share
0.01

 
0.01

 
0.02

 
0.02

Performance ratios
 
 
 
 
 

 
 
Return on average assets
0.74
%
 
0.45
%
 
0.50
%
 
0.29
%
Return on average tangible shareholders' equity (1)
9.98

 
6.16

 
6.84

 
3.94

Efficiency ratio (FTE basis) (1)
69.80

 
76.79

 
76.62

 
80.98

Asset quality
 
 
 
 
 

 
 
Allowance for loan and lease losses at period end
 
 
 
 
$
21,235

 
$
30,288

Allowance for loan and lease losses as a percentage of total loans and leases outstanding at period end (2)
 
 
 
 
2.33
%
 
3.43
%
Nonperforming loans, leases and foreclosed properties at period end (2)
 
 
 
 
$
21,280

 
$
25,377

Net charge-offs (3)
$
2,111

 
$
3,626

 
4,628

 
7,682

Annualized net charge-offs as a percentage of average loans and leases outstanding (2, 3)
0.94
%
 
1.64
%
 
1.04
%
 
1.72
%
Annualized net charge-offs as a percentage of average loans and leases outstanding, excluding the purchased credit-impaired loan portfolio (2)
0.97

 
1.69

 
1.07

 
1.78

Annualized net charge-offs and purchased credit-impaired write-offs as a percentage of average loans and leases outstanding (2, 4)
1.07

 
1.64

 
1.29

 
1.72

Ratio of the allowance for loan and lease losses at period end to annualized
net charge-offs (3)
2.51

 
2.08

 
2.28

 
1.96

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs, excluding the purchased credit-impaired loan portfolio
2.04

 
1.46

 
1.85

 
1.38

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs and purchased credit-impaired write-offs (4)
2.18

 
2.08

 
1.82

 
1.96

 
 
 
 
 
 
 
 
 
 
 
 
 
June 30
2013
 
December 31
2012
Balance sheet
 
 
 
 
 
 
 
Total loans and leases
 
 
 
 
$
921,570

 
$
907,819

Total assets
 
 
 
 
2,123,320

 
2,209,974

Total deposits
 
 
 
 
1,080,783

 
1,105,261

Total common shareholders' equity
 
 
 
 
216,791

 
218,188

Total shareholders' equity
 
 
 
 
231,032

 
236,956

Capital ratios (5)
 
 
 
 
 
 
 
Tier 1 common capital
 
 
 
 
10.83
%
 
11.06
%
Tier 1 capital
 
 
 
 
12.16

 
12.89

Total capital
 
 
 
 
15.27

 
16.31

Tier 1 leverage
 
 
 
 
7.49

 
7.37

(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 more information on these measures and ratios, and a corresponding reconciliation to GAAP financial measures, see Supplemental Financial Data on page 18.
(2) 
Balances and ratios do not include loans accounted for under the fair value option. For additional exclusions from nonperforming loans, leases and foreclosed properties, see Consumer Portfolio Credit Risk Management – Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity on page 101 and corresponding Table 41, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 110 and corresponding Table 50.
(3) 
Net charge-offs exclude $313 million and $1.2 billion of write-offs in the purchased credit-impaired loan portfolio for the three and six months ended June 30, 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.
(4) 
There were no write-offs of purchased credit-impaired loans in the three and six months ended June 30, 2012.
(5) 
Presents capital ratios in accordance with the Basel 1 – 2013 Rules, which includes the Market Risk Final Rule at June 30, 2013. Basel 1 did not include the Basel 1 – 2013 Rules at December 31, 2012.

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Table of Contents

Second Quarter 2013 Economic and Business Environment

In the U.S., economic growth continued but at a restrained pace in the second quarter of 2013 as the housing sector continued to show signs of further improvement, coupled with modest growth in consumer and business spending. However, the economy was adversely affected by the continued impact of lower federal government expenditures. Employment gains were moderate during the quarter, with little change in the unemployment rate. Measures of core inflation also fell during the second quarter of 2013, with core personal consumption deflator ending the quarter near one percent on an annual basis, well below the longer-term inflation target of two percent set by the Board of Governors of the Federal Reserve System (Federal Reserve).

The Federal Reserve continued its $40 billion in monthly purchases of agency mortgage-backed securities (MBS) and $45 billion in monthly purchases of long-term U.S. Treasury securities and maintained its forward guidance on interest rates expressed in terms of economic thresholds, which began in December 2012. Sequestration became effective on March 1, 2013, which restrained federal expenditures during the second quarter, and remained in effect at quarter-end. Despite remaining fiscal uncertainties and international economic difficulties, U.S. equities posted modest gains at the end of the second quarter. After the Federal Reserve's announcement on June 19, 2013, there was considerable market concern around potential tapering of the bond buying program. This resulted in a rise in long-term U.S. Treasury yields as the yield curve steepened during the second quarter and volatility in interest rate markets increased, which led to an extensive market sell off for interest rate sensitive products including, for example, municipal bonds and MBS.

Most European economies continued to contract during the quarter but at a diminishing pace with forward-looking indicators favoring a resumption of growth later in the year. Despite uncertainty ahead of upcoming German elections and continued political uncertainty in Greece, the Eurozone continued to demonstrate a reduced level of financial anxiety. Japan's economy continued to demonstrate signs of economic improvement, although uncertainties remain as to whether the impacts of a depreciating Yen could be sustained with the implementation of longer-term reforms. China's economic growth has slowed as the present leadership clarified a greater emphasis on other objectives such as financial reform, which has slowed the credit markets, therefore posing a risk of slowdown for bordering economies. For more information on our international exposure, see Non-U.S. Portfolio on page 116.

Recent Events

Common Stock Repurchases and Liability Management Actions

As disclosed in prior filings, the capital plan that the Corporation submitted to the Federal Reserve in January 2013 as part of our 2013 Comprehensive Capital Analysis and Review project (CCAR), and to which the Federal Reserve did not object, included a request to repurchase up to $5.0 billion of common stock and redeem $5.5 billion in preferred stock over four quarters with both beginning in the second quarter of 2013, and a continuation of the quarterly common stock dividend at $0.01 per share. In the second quarter, we repurchased and retired 79.6 million common shares for an aggregate purchase price of approximately $1.0 billion and redeemed our Series H and 8 preferred stock for $5.5 billion.

In addition to the CCAR actions, during the three months ended June 30, 2013, we redeemed $76 million of Noncumulative Perpetual Preferred Stock, Series 6 and 7 and issued approximately $1.0 billion of Fixed-to-Floating Rate Non-Cumulative Semi-annual Preferred Stock, Series U (the Series U Preferred Stock). On August 1, 2013, we redeemed $951 million of the Corporation's 7.25% Non-Cumulative Preferred Stock, Series J (the Series J Preferred Stock). For additional information, see Capital Management – Regulatory Capital on page 70 and Note 12 – Shareholders' Equity to the Consolidated Financial Statements.


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Final Basel 3 Rules and Proposed Supplementary Leverage Ratio

In July 2013, U.S. banking regulators approved the final Basel 3 rules (Basel 3). While not yet published in the Federal Register, Basel 3 will be effective January 1, 2014. Various aspects of Basel 3 will be subject to multi-year transition periods ending December 31, 2018 and Basel 3 generally continues to be subject to further evaluation and interpretation by the U.S. banking regulators. Basel 3 will materially change our Tier 1 common, Tier 1 and Total capital calculations. Basel 3 introduces new minimum capital ratios and buffer requirements, changes the composition of regulatory capital, expands and modifies the calculation of risk-weighted assets for credit and market risk (the Advanced Approach), revises the adequately capitalized minimum requirements under the Prompt Corrective Action framework and introduces, effective January 1, 2015, a Standardized Approach for the calculation of risk-weighted assets, which will replace the Basel 1 – 2013 Rules. Under Basel 3, we will be required to calculate regulatory capital ratios and risk-weighted assets under both the Standardized and Advanced Approaches. The approach that yields the lower ratio is to be used to assess capital adequacy including under the Prompt Corrective Action framework. The Prompt Corrective Action framework establishes categories of capitalization, including "well-capitalized," based on regulatory ratio requirements. U.S. banking regulators are required to take certain mandatory actions depending on the category of capitalization, with no mandatory actions required for "well-capitalized" banking entities. We continue to evaluate the impact of both the Standardized and Advanced Approaches on us. The Basel 3 Advanced Approach requires approval by the U.S. regulatory agencies of analytical models used as part of capital measurement. If these models are not approved, it would likely lead to an increase in our risk-weighted assets, which in some cases could be significant.

In addition, in July 2013, the U.S. banking regulators also proposed changes to the capital ratio requirements that would be effective beginning in 2018. Under the proposed rule, the largest bank holding companies (BHCs), including the Corporation, would be required to maintain a minimum supplementary leverage ratio of three percent, plus a supplementary leverage buffer of two percent, for a total of five percent. If the Corporation does not maintain the supplementary leverage buffer at a level greater than or equal to two percent, it would be subject to limitations on returning capital distributions to its shareholders, whether through dividends, stock repurchases or otherwise. The proposed rule would also require insured depository institutions of such BHCs, which for the Corporation would include primarily BANA and FIA, to have a six percent supplementary leverage ratio to be considered "well capitalized.” The proposal is not yet final and, when finalized, could have provisions significantly different from those currently proposed. For additional information, see Capital Management – Regulatory Capital on page 72.

Impact of U.K. Corporate Income Tax Rate Reduction

On July 17, 2013, the United Kingdom (U.K.) 2013 Finance Bill was enacted, which reduced the U.K. corporate income tax rate by three percent to 20 percent. Two percent of the reduction will become effective on April 1, 2014 and the additional one percent reduction on April 1, 2015. These reductions will favorably affect income tax expense on future U.K. earnings but also require the Corporation to remeasure, in the period of enactment, its U.K. net deferred tax assets using the lower tax rates. As a result, in the three months ending September 30, 2013, the Corporation will record a charge to income tax expense of approximately $1.1 billion in aggregate for these reductions. Because our deferred tax assets in excess of a certain amount are disallowed in calculating regulatory capital, this charge will not impact our capital ratios. For additional information, see Note 21 – Subsequent Event to the Consolidated Financial Statements.


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MBIA Settlement

On May 7, 2013, we entered into a comprehensive settlement with MBIA Inc. and certain of its affiliates (MBIA) to resolve all outstanding litigation between the parties, as well as other claims between the parties, including outstanding and potential claims from MBIA related to alleged representations and warranties breaches and other claims involving certain first- and second-lien residential mortgage-backed securities (RMBS) trusts for which MBIA provided financial guarantee insurance, certain of which claims were the subject of litigation (MBIA Settlement). Under the MBIA Settlement, all pending litigation between the parties was dismissed and each party received a global release of those claims.

Under the MBIA Settlement, all pending litigation between the parties was dismissed and each party received a global release of those claims. The Corporation made a settlement payment to MBIA of $1.565 billion in cash and transferred to MBIA approximately $95 million in fair market value of notes issued by MBIA and previously held by the Corporation. The Corporation was fully reserved at March 31, 2013 for the MBIA Settlement. In addition, MBIA issued to the Corporation warrants to purchase up to approximately 4.9 percent of MBIA's currently outstanding common stock, at an exercise price of $9.59 per share, which may be exercised at any time prior to May 2018. In addition, the Corporation provided a senior secured $500 million credit facility to an affiliate of MBIA.

The parties also terminated various credit default swaps (CDS) transactions entered into between the Corporation and an MBIA-affiliate, LaCrosse Financial Products, LLC, and guaranteed by MBIA, which constituted all of the outstanding CDS protection agreements purchased by the Corporation from MBIA on commercial mortgage-backed securities (CMBS). Collectively, those CDS transactions had a notional value of $7.4 billion and a fair value of $813 million as of March 31, 2013. The parties also terminated certain other trades in order to close out positions between the parties; the termination of these trades did not have a material impact on the Corporation's financial statements. For additional information, see Off-Balance Sheet Arrangements and Contractual Obligations – Representations and Warranties on page 58 and Note 8 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements.

Performance Overview

Net income was $4.0 billion, or $0.32 per diluted share and $5.5 billion, or $0.42 per diluted share for the three and six months ended June 30, 2013 compared to $2.5 billion, or $0.19 and $3.1 billion, or $0.22 for the same periods in 2012. The results for the first half of 2013 reflect our efforts to stabilize revenue, decrease costs, strengthen the balance sheet and improve credit quality. The following highlights the most significant changes from the prior-year periods.

Net interest income on a fully taxable-equivalent (FTE) basis increased $989 million to $10.8 billion, and $811 million to $21.6 billion for the three and six months ended June 30, 2013. The increases in net interest income were primarily due to reductions in long-term debt balances, positive market-related premium amortization and hedge ineffectiveness on debt securities, improved trading-related net interest income, higher commercial loan balances and lower rates paid on deposits, partially offset by lower consumer loan balances as well as lower asset yields driven by the low rate environment. The net interest yield on a FTE basis increased 23 basis points (bps) and eight bps to 2.44 percent for both the three and six months ended June 30, 2013 due to the same factors described above.

Noninterest income decreased $242 million to $12.2 billion, and increased $859 million to $24.7 billion for the three and six months ended June 30, 2013. The significant drivers for the three-month period were lower mortgage banking income reflecting lower servicing income, partially offset by increases in investment banking income, equity investment income, and investment and brokerage services income. The year-ago period included gains of $505 million related to liability management actions.


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The significant drivers of noninterest income for the six-month period were negative fair value adjustments on structured liabilities of $80 million compared to $3.4 billion, debit valuation adjustment (DVA) losses on derivatives, net of hedges, of $15 million compared to $1.6 billion and increases in investment banking income and investment and brokerage services income. These improvements were partially offset by lower mortgage banking income and lower gains on sales of debt securities. The year-ago period included gains of $1.7 billion related to liability management actions.

The provision for credit losses decreased $562 million to $1.2 billion, and $1.3 billion to $2.9 billion for the three and six months ended June 30, 2013. The improvement was primarily in the home loans portfolio, due to improved portfolio trends as well as the impact of increased home prices.

Noninterest expense decreased $1.0 billion to $16.0 billion, and $671 million to $35.5 billion for the three and six months ended June 30, 2013. The decrease for the three-month period was driven by a $604 million decrease in other general operating expense primarily due to lower litigation expense as well as a decrease in professional fees due in part to reduced Legacy Assets & Servicing expenses, and a decrease in personnel expense as we continue to streamline processes and achieve cost savings. The decrease for the six-month period was driven by the same factors described in the three-month discussion above, partially offset by higher litigation expense due in part to the MBIA Settlement.

Income tax expense was $1.5 billion on $5.5 billion of pre-tax income and $2.0 billion on $7.5 billion of pre-tax income, resulting in effective tax rates of 27.0 percent and 26.6 percent for the three and six months ended June 30, 2013. This was compared to $684 million on $3.1 billion of pre-tax income and $750 million on $3.9 billion of pre-tax income that resulted in effective tax rates of 21.7 percent and 19.4 percent for the same periods in 2012.

For additional summary information on the Corporation's results, see Financial Highlights on page 10.

Table 2
Summary Income Statement
 
Three Months Ended June 30
 
Six Months Ended June 30
(Dollars in millions)
2013
 
2012
 
2013
 
2012
Net interest income (FTE basis) (1)
$
10,771

 
$
9,782

 
$
21,646

 
$
20,835

Noninterest income
12,178

 
12,420

 
24,711

 
23,852

Total revenue, net of interest expense (FTE basis) (1)
22,949

 
22,202

 
46,357

 
44,687

Provision for credit losses
1,211

 
1,773

 
2,924

 
4,191

Noninterest expense
16,018

 
17,048

 
35,518

 
36,189

Income before income taxes
5,720

 
3,381

 
7,915

 
4,307

Income tax expense (FTE basis) (1)
1,708

 
918

 
2,420

 
1,191

Net income
4,012

 
2,463

 
5,495

 
3,116

Preferred stock dividends
441

 
365

 
814

 
690

Net income applicable to common shareholders
$
3,571

 
$
2,098

 
$
4,681

 
$
2,426

 
 
 
 
 
 
 
 
Per common share information
 
 
 
 
 
 
 
Earnings
$
0.33

 
$
0.19

 
$
0.43

 
$
0.23

Diluted earnings
0.32

 
0.19

 
0.42

 
0.22

(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 18.


9
Table of Contents

Financial Highlights

Net Interest Income

Net interest income on a FTE basis increased $989 million to $10.8 billion, and $811 million to $21.6 billion for the three and six months ended June 30, 2013 compared to the same periods in 2012. The increases were primarily due to reductions in long-term debt balances, positive market-related premium amortization and hedge ineffectiveness on debt securities, improved trading-related net interest income, higher commercial loan balances and lower rates paid on deposits, partially offset by lower consumer loan balances as well as lower asset yields driven by the low rate environment. The net interest yield on a FTE basis increased 23 bps and eight bps to 2.44 percent for both the three and six months ended June 30, 2013 compared to the same periods in 2012 due to the same factors described above.

Noninterest Income
Table 3
Noninterest Income
 
Three Months Ended June 30
 
Six Months Ended June 30
(Dollars in millions)
2013
 
2012
 
2013
 
2012
Card income
$
1,469

 
$
1,578

 
$
2,879

 
$
3,035

Service charges
1,837

 
1,934

 
3,636

 
3,846

Investment and brokerage services
3,143

 
2,847

 
6,170

 
5,723

Investment banking income
1,556

 
1,146

 
3,091

 
2,363

Equity investment income
680

 
368

 
1,243

 
1,133

Trading account profits
1,938

 
1,764

 
4,927

 
3,839

Mortgage banking income
1,178

 
1,659

 
2,441

 
3,271

Gains on sales of debt securities
457

 
400

 
525

 
1,152

Other income (loss)
(76
)
 
730

 
(188
)
 
(464
)
Net impairment losses recognized in earnings on AFS debt securities
(4
)
 
(6
)
 
(13
)
 
(46
)
Total noninterest income
$
12,178

 
$
12,420

 
$
24,711

 
$
23,852


Noninterest income decreased $242 million to $12.2 billion, and increased $859 million to $24.7 billion for the three and six months ended June 30, 2013 compared to the same periods in 2012. The following highlights the significant changes.

•
Card income decreased $109 million and $156 million primarily driven by decreased revenue due to the exit of consumer protection products.

•
Investment and brokerage services increased $296 million and $447 million primarily driven by higher market levels, impact of long-term assets under management (AUM) flows and increased transactional activity.

•
Investment banking income increased $410 million and $728 million due to strong debt underwriting performance, primarily within leveraged finance and investment grade, and equity underwriting performance due to significant increases in global initial public offering (IPO) markets, partially offset by a decline in advisory fees.

•
Equity investment income increased $312 million and $110 million primarily due to a gain on the sale of an equity investment in the three and six months ended June 30, 2013, partially offset by a gain on the sale of an investment in Global Markets in the same periods in 2012.

•
Trading account profits increased $174 million and $1.1 billion. Net DVA gains on derivatives were $39 million and net DVA losses were $15 million for the three and six months ended June 30, 2013 compared to net DVA losses of $158 million and $1.6 billion in the year-ago periods. Excluding net DVA, trading account profits decreased $23 million and $514 million primarily due to decreases in our fixed income, currencies and commodities (FICC) businesses reflecting less favorable market conditions, related to the Federal Reserve's policy announcement in June, primarily in structured credit and interest rate products.

•
Mortgage banking income decreased $481 million and $830 million primarily driven by a decrease in servicing income due to a smaller servicing portfolio and the divestiture of certain servicing business units in the prior year. The decline in the servicing portfolio was due primarily to mortgage servicing rights (MSR) sales in 2013.


10
Table of Contents

•
Other income (loss) decreased $806 million to a loss of $76 million for the three months ended June 30, 2013 compared to the same period in 2012 and improved $276 million to a loss of $188 million for the six months ended June 30, 2013. Fair value adjustments on structured liabilities were positive $10 million and negative $80 million for the three and six months ended June 30, 2013 compared to negative fair value adjustments of $62 million and $3.4 billion in the year-ago periods. The six months ended June 30, 2013 included a $450 million write-down of a receivable. The prior-year periods included gains related to liability management actions of $505 million and $1.7 billion.

Provision for Credit Losses

The provision for credit losses decreased $562 million to $1.2 billion, and $1.3 billion to $2.9 billion for the three and six months ended June 30, 2013 compared to the same periods in 2012. For the three and six months ended June 30, 2013, the provision for credit losses was $900 million and $1.7 billion lower than net charge-offs, resulting in a reduction in the allowance for credit losses due to continued improvement in the home loans portfolio primarily as a result of increased home prices and improvement in credit card portfolios. If the pace of improvement in the economy continues, we anticipate additional reductions in the allowance for credit losses, particularly in our consumer real estate portfolios.

Net charge-offs totaled $2.1 billion, or 0.94 percent, and $4.6 billion, or 1.04 percent of average loans and leases for the three and six months ended June 30, 2013 compared to $3.6 billion, or 1.64 percent, and $7.7 billion, or 1.72 percent for the same periods in 2012. The decrease in net charge-offs was driven by credit quality improvement across all portfolios. Given the improving trend in delinquencies and other credit quality metrics, we expect net charge-offs to be below $2.0 billion for the three months ending September 30, 2013. For more information on the provision for credit losses, see Provision for Credit Losses on page 120.

Noninterest Expense
Table 4
Noninterest Expense
 
Three Months Ended June 30
 
Six Months Ended June 30
(Dollars in millions)
2013
 
2012
 
2013
 
2012
Personnel
$
8,531

 
$
8,729

 
$
18,422

 
$
18,917

Occupancy
1,109

 
1,117

 
2,263

 
2,259

Equipment
532

 
546

 
1,082

 
1,157

Marketing
437

 
449

 
866

 
914

Professional fees
694

 
922

 
1,343

 
1,705

Amortization of intangibles
274

 
321

 
550

 
640

Data processing
779

 
692

 
1,591

 
1,548

Telecommunications
411

 
417

 
820

 
817

Other general operating
3,251

 
3,855

 
8,581

 
8,232

Total noninterest expense
$
16,018

 
$
17,048

 
$
35,518

 
$
36,189


Noninterest expense decreased $1.0 billion to $16.0 billion, and $671 million to $35.5 billion for the three and six months ended June 30, 2013 compared to same periods in 2012. The decrease for the three months ended June 30, 2013 was driven by a $604 million decrease in other general operating expense primarily due to lower litigation expense, a $228 million decrease in professional fees due in part to reduced default management activities in Legacy Assets & Servicing, and a $198 million decrease in personnel expense as we continue to streamline processes and achieve cost savings. The decrease for the six months ended June 30, 2013 was driven by a $495 million decrease in personnel expense and a $362 million decrease in professional fees as a result of the same factors described in the three-month discussion above, partially offset by a $349 million increase in other general operating expense. The increase in other general operating expense was the result of higher litigation expense due in part to the MBIA Settlement.

In connection with Project New BAC, which was first announced in the third quarter of 2011, we continue to achieve cost savings in certain noninterest expense categories as we further streamline workflows, simplify processes and align expenses with our overall strategic plan and operating principles. We expect total cost savings from Project New BAC to reach $8 billion per year on an annualized basis, or $2 billion per quarter, by mid-2015. We expect to achieve approximately $1.5 billion in quarterly cost savings by the fourth quarter of 2013, representing 75 percent of the quarterly target.


11
Table of Contents

Income Tax Expense

Income tax expense was $1.5 billion on $5.5 billion of pre-tax income and $2.0 billion on $7.5 billion of pre-tax income, resulting in effective tax rates of 27.0 percent and 26.6 percent for the three and six months ended June 30, 2013. This was compared to $684 million on $3.1 billion of pre-tax income and $750 million on $3.9 billion of pre-tax income that resulted in effective tax rates of 21.7 percent and 19.4 percent for the same periods in 2012.

The effective tax rates for the three and six months ended June 30, 2013 were primarily driven by our recurring tax preference items and an increase in tax benefits from the 2012 non-U.S. restructurings as compared to amounts previously recognized. The effective tax rates in the year-ago periods were primarily driven by our recurring tax preference items and discrete tax benefits.

On July 17, 2013, the U.K. 2013 Finance Bill was enacted, which reduced the U.K. corporate income tax rate by three percent to 20 percent. Two percent of the reduction will become effective on April 1, 2014 and the additional one percent reduction on April 1, 2015. These reductions will favorably affect income tax expense on future U.K. earnings but also require us to remeasure, in the period of enactment, our U.K. net deferred tax assets using the lower tax rates. As a result, in the three months ending September 30, 2013, we will record a charge to income tax expense of approximately $1.1 billion in aggregate for these reductions. Because our deferred tax assets in excess of a certain amount are disallowed in calculating regulatory capital, this charge will not impact our capital ratios.

Balance Sheet Overview
 
 
 
 
 
Table 5
Selected Balance Sheet Data
 
 
 
 
 
Average Balance
 
June 30
2013
 
December 31
2012
 
Three Months Ended
June 30
 
Six Months Ended
June 30
(Dollars in millions)
 
 
2013
 
2012
 
2013
 
2012
Assets
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold and securities borrowed or purchased under agreements to resell
$
224,168

 
$
219,924

 
$
233,394

 
$
234,148

 
$
235,417

 
$
233,604

Trading account assets
191,234

 
227,775

 
227,241

 
196,710

 
233,568

 
195,034

Debt securities
336,403

 
360,331

 
343,260

 
357,081

 
349,794

 
349,350

Loans and leases
921,570

 
907,819

 
914,234

 
899,498

 
910,269

 
906,610

Allowance for loan and lease losses
(21,235
)
 
(24,179
)
 
(22,060
)
 
(31,463
)
 
(22,822
)
 
(32,336
)
All other assets
471,180

 
518,304

 
488,541

 
538,589

 
492,217

 
538,606

Total assets
$
2,123,320

 
$
2,209,974

 
$
2,184,610

 
$
2,194,563

 
$
2,198,443

 
$
2,190,868

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Deposits
$
1,080,783

 
$
1,105,261

 
$
1,079,956

 
$
1,032,888

 
$
1,077,631

 
$
1,031,500

Federal funds purchased and securities loaned or sold under agreements to repurchase
232,609

 
293,259

 
270,790

 
279,496

 
285,781

 
267,950

Trading account liabilities
82,381

 
73,587

 
94,349

 
84,728

 
93,204

 
78,300

Short-term borrowings
46,470

 
30,731

 
47,238

 
39,413

 
42,001

 
38,031

Long-term debt
262,480

 
275,585

 
270,198

 
333,173

 
272,088

 
348,346

All other liabilities
187,565

 
194,595

 
187,016

 
189,307

 
191,714

 
192,679

Total liabilities
1,892,288

 
1,973,018

 
1,949,547

 
1,959,005

 
1,962,419

 
1,956,806

Shareholders' equity
231,032

 
236,956

 
235,063

 
235,558

 
236,024

 
234,062

Total liabilities and shareholders' equity
$
2,123,320

 
$
2,209,974

 
$
2,184,610

 
$
2,194,563

 
$
2,198,443

 
$
2,190,868


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.


12
Table of Contents

Assets

At June 30, 2013, total assets were approximately $2.1 trillion, a decrease of $86.7 billion, or four percent, from December 31, 2012. This decrease was driven by lower trading account assets due to a reduction in U.S. government and agency securities, lower debt securities driven by net sales of U.S. Treasuries, paydowns and decreases in the fair value of available-for-sale (AFS) debt securities resulting from the impact of higher interest rates, a decrease in consumer loan balances driven by continued run-off in certain portfolios as well as paydowns and charge-offs outpacing originations, and lower cash and cash equivalent balances. These decreases were partially offset by higher commercial loan balances.

Average total assets decreased $10.0 billion for the three months ended June 30, 2013 compared to the same period in 2012 primarily driven by lower debt securities due to net sales of U.S. Treasuries, paydowns and decreases in fair value of AFS debt securities, a decrease in consumer loan balances driven by continued run-off in certain portfolios as well as paydowns and charge-offs outpacing originations, lower cash and cash equivalent balances, and lower derivative dealer assets largely due to MSR sales resulting in a decrease in derivative contracts used to hedge certain market risks on MSRs. These declines were partially offset by higher commercial loan balances and higher trading account assets primarily due to increased securities inventory and client-based activity.

Average total assets increased $7.6 billion for the six months ended June 30, 2013 compared to the same period in 2012 primarily driven by higher commercial loan balances and higher trading account assets resulting from increased securities inventory and client-based activity. These increases were partially offset by lower consumer loan balances driven by continued run-off in certain portfolios as well as paydowns and charge-offs outpacing originations, lower cash and cash equivalent balances, and a decrease in derivative dealer assets.

Liabilities and Shareholders' Equity

At June 30, 2013, total liabilities were approximately $1.9 trillion, a decrease of $80.7 billion, or four percent, from December 31, 2012. This decrease was driven by lower securities sold under agreement to repurchase due to lower matched-book activity and trading inventory, lower deposits and reductions in long-term debt. These decreases were partially offset by higher short-term borrowings due to an increase in advances from the Federal Home Loan Bank (FHLB).

Average total liabilities decreased $9.5 billion for the three months ended June 30, 2013 compared to the same period in 2012 primarily driven by reductions in long-term debt, partially offset by growth in deposits and higher trading account liabilities.

Average total liabilities increased $5.6 billion for the six months ended June 30, 2013 compared to the same period in 2012 primarily driven by growth in deposits, higher securities loaned or sold under agreement to repurchase due to funding of trading inventory and higher trading account liabilities, partially offset by reductions in long-term debt.

At June 30, 2013, shareholders' equity was $231.0 billion, a decrease of $5.9 billion from December 31, 2012 driven by a decrease in the fair value of AFS debt securities resulting from the impact of higher interest rates, which is recorded in accumulated other comprehensive income (OCI), redemptions of preferred stock and common stock repurchases, partially offset by earnings and issuances of preferred stock.

Average shareholders' equity decreased $495 million for the three months ended June 30, 2013 compared to the same period in 2012 driven by redemptions of preferred stock, a decrease in the fair value of AFS debt securities and common stock repurchases. These decreases were partially offset by earnings, common stock issued under employee benefit plans and issuances of preferred stock.

Average shareholders' equity increased $2.0 billion for the six months ended June 30, 2013 compared to the same period in 2012 driven by earnings, common stock issued under employee benefit plans and issuances of preferred stock. These increases were partially offset by redemptions of preferred stock, a decrease in the fair value of AFS debt securities and common stock repurchases.


13
Table of Contents

Table 6
 
 
 
 
Selected Quarterly Financial Data
 
 
 
 
 
2013 Quarters
 
2012 Quarters
(In millions, except per share information)
Second
 
First
 
Fourth
 
Third
 
Second
Income statement
 
 
 
 
 
 
 
 
 
Net interest income
$
10,549

 
$
10,664

 
$
10,324

 
$
9,938

 
$
9,548

Noninterest income
12,178

 
12,533

 
8,336

 
10,490

 
12,420

Total revenue, net of interest expense
22,727

 
23,197

 
18,660

 
20,428

 
21,968

Provision for credit losses
1,211

 
1,713

 
2,204

 
1,774

 
1,773

Noninterest expense
16,018

 
19,500

 
18,360

 
17,544

 
17,048

Income (loss) before income taxes
5,498

 
1,984

 
(1,904
)
 
1,110

 
3,147

Income tax expense (benefit)
1,486

 
501

 
(2,636
)
 
770

 
684

Net income
4,012

 
1,483

 
732

 
340

 
2,463

Net income (loss) applicable to common shareholders
3,571

 
1,110

 
367

 
(33
)
 
2,098

Average common shares issued and outstanding
10,776

 
10,799

 
10,777

 
10,776

 
10,776

Average diluted common shares issued and outstanding (1)
11,525

 
11,155

 
10,885

 
10,776

 
11,556

Performance ratios
 
 
 
 
 
 
 
 
 
Return on average assets
0.74
%
 
0.27
%
 
0.13
%
 
0.06
%
 
0.45
%
Four quarter trailing return on average assets (2)
0.30

 
0.23

 
0.19

 
0.25

 
0.51

Return on average common shareholders' equity
6.55

 
2.06

 
0.67

 
n/m

 
3.89

Return on average tangible common shareholders' equity (3)
9.88

 
3.12

 
1.01

 
n/m

 
5.95

Return on average tangible shareholders' equity (3)
9.98

 
3.69

 
1.77

 
0.84

 
6.16

Total ending equity to total ending assets
10.88

 
10.91

 
10.72

 
11.02

 
10.92

Total average equity to total average assets
10.76

 
10.71

 
10.79

 
10.86

 
10.73

Dividend payout
3.01

 
9.75

 
29.33

 
n/m

 
5.60

Per common share data
 
 
 
 
 
 
 
 
 
Earnings
$
0.33

 
$
0.10

 
$
0.03

 
$
0.00

 
$
0.19

Diluted earnings (1)
0.32

 
0.10

 
0.03

 
0.00

 
0.19

Dividends paid
0.01

 
0.01

 
0.01

 
0.01

 
0.01

Book value
20.18

 
20.19

 
20.24

 
20.40

 
20.16

Tangible book value (3)
13.32

 
13.36

 
13.36

 
13.48

 
13.22

Market price per share of common stock
 
 
 
 
 
 
 
 
 
Closing
$
12.86

 
$
12.18

 
$
11.61

 
$
8.83

 
$
8.18

High closing
13.83

 
12.78

 
11.61

 
9.55

 
9.68

Low closing
11.44

 
11.03

 
8.93

 
7.04

 
6.83

Market capitalization
$
138,156

 
$
131,817

 
$
125,136

 
$
95,163

 
$
88,155

(1) 
Due to a net loss applicable to common shareholders for the third quarter of 2012, the impact of antidilutive equity instruments was excluded from diluted earnings per share and average diluted common shares.
(2) 
Calculated as total net income for four consecutive quarters divided by annualized average assets for four consecutive quarters.
(3) 
Tangible equity ratios and tangible book value per share of common stock are non-GAAP financial measures. Other companies may define or calculate these measures differently. For more information on these ratios and for corresponding reconciliations to GAAP financial measures, see Supplemental Financial Data on page 18.
(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 101 and corresponding Table 41, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 110 and corresponding Table 50.
(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 $313 million, $839 million, $1.1 billion and $1.7 billion of write-offs in the purchased credit-impaired loan portfolio for the second and first quarters of 2013 and the fourth and third quarters of 2012. 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) 
There were no write-offs in the purchased credit-impaired loan portfolio for the second quarter of 2012.
(10)  
Presents capital ratios in accordance with the Basel 1 – 2013 Rules at June 30, 2013. Basel 1 did not include the Basel 1 – 2013 Rules at December 31, 2012.
n/m = not meaningful

14
Table of Contents

Table 6
 
 
 
 
Selected Quarterly Financial Data (continued)
 
 
 
 
 
2013 Quarters
 
2012 Quarters
(Dollars in millions)
Second
 
First
 
Fourth
 
Third
 
Second
Average balance sheet
 
 
 
 
 
 
 
 
 
Total loans and leases
$
914,234

 
$
906,259

 
$
893,166

 
$
888,859

 
$
899,498

Total assets
2,184,610

 
2,212,430

 
2,210,365

 
2,173,312

 
2,194,563

Total deposits
1,079,956

 
1,075,280

 
1,078,076

 
1,049,697

 
1,032,888

Long-term debt
270,198

 
273,999

 
277,894

 
291,684

 
333,173

Common shareholders' equity
218,790

 
218,225

 
219,744

 
217,273

 
216,782

Total shareholders' equity
235,063

 
236,995

 
238,512

 
236,039

 
235,558

Asset quality (4)
 
 
 
 
 
 
 
 
 
Allowance for credit losses (5)
$
21,709

 
$
22,927

 
$
24,692

 
$
26,751

 
$
30,862

Nonperforming loans, leases and foreclosed properties (6)
21,280

 
22,842

 
23,555

 
24,925

 
25,377

Allowance for loan and lease losses as a percentage of total loans and leases outstanding (6)
2.33
%
 
2.49
%
 
2.69
%
 
2.96
%
 
3.43
%
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (6)
103

 
102

 
107

 
111

 
127

Allowance for loan and lease losses as a percentage of total nonperforming loans and leases, excluding the PCI loan portfolio (6)
84

 
82

 
82

 
81

 
90

Amounts included in allowance that are excluded from nonperforming loans and leases (7)
$
9,919

 
$
10,690

 
$
12,021

 
$
13,978

 
$
16,327

Allowance as a percentage of total nonperforming loans and leases, excluding amounts included in the allowance that are excluded from nonperforming loans and leases (7)
55
%
 
53
%
 
54
%
 
52
%
 
59
%
Net charge-offs (8)
$
2,111

 
$
2,517

 
$
3,104

 
$
4,122

 
$
3,626

Annualized net charge-offs as a percentage of average loans and leases outstanding (6, 8)
0.94
%
 
1.14
%
 
1.40
%
 
1.86
%
 
1.64
%
Annualized net charge-offs as a percentage of average loans and leases outstanding, excluding the PCI loan portfolio (6)
0.97

 
1.18

 
1.44

 
1.93

 
1.69

Annualized net charge-offs and PCI write-offs as a percentage of average loans and leases outstanding (6, 9)
1.07

 
1.52

 
1.90

 
2.63

 
1.64

Nonperforming loans and leases as a percentage of total loans and leases outstanding (6)
2.26

 
2.44

 
2.52

 
2.68

 
2.70

Nonperforming loans, leases and foreclosed properties as a percentage of total loans, leases and foreclosed properties (6)
2.33

 
2.53

 
2.62

 
2.81

 
2.87

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs (8)
2.51

 
2.20

 
1.96

 
1.60

 
2.08

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs, excluding the PCI loan portfolio
2.04

 
1.76

 
1.51

 
1.17

 
1.46

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs and PCI write-offs (9)
2.18

 
1.65

 
1.44

 
1.13

 
2.08

Capital ratios (period end) (10)
 
 
 
 
 
 
 
 
 
Risk-based capital:
 
 
 
 
 
 
 
 
 
Tier 1 common capital
10.83
%
 
10.49
%
 
11.06
%
 
11.41
%
 
11.24
%
Tier 1 capital
12.16

 
12.22

 
12.89

 
13.64

 
13.80

Total capital
15.27

 
15.50

 
16.31

 
17.16

 
17.51

Tier 1 leverage
7.49

 
7.49

 
7.37

 
7.84

 
7.84

Tangible equity (3)
7.67

 
7.78

 
7.62

 
7.85

 
7.73

Tangible common equity (3)
6.98

 
6.88

 
6.74

 
6.95

 
6.83

For footnotes see page 14.

15
Table of Contents

Table 7
 
 
 
Selected Year-to-Date Financial Data
 
 
 
 
Six Months Ended June 30
(In millions, except per share information)
2013
 
2012
Income statement
 
 
 
Net interest income
$
21,213

 
$
20,394

Noninterest income
24,711

 
23,852

Total revenue, net of interest expense
45,924

 
44,246

Provision for credit losses
2,924

 
4,191

Noninterest expense
35,518

 
36,189

Income before income taxes
7,482

 
3,866

Income tax expense
1,987

 
750

Net income
5,495

 
3,116

Net income applicable to common shareholders
4,681

 
2,426

Average common shares issued and outstanding
10,787

 
10,715

Average diluted common shares issued and outstanding
11,550

 
11,510

Performance ratios
 
 
 
Return on average assets
0.50
%
 
0.29
%
Return on average common shareholders' equity
4.32

 
2.26

Return on average tangible common shareholders' equity (1)
6.53

 
3.47

Return on average tangible shareholders' equity (1)
6.84

 
3.94

Total ending equity to total ending assets
10.88

 
10.92

Total average equity to total average assets
10.74

 
10.68

Dividend payout
4.61

 
9.56

Per common share data
 
 
 
Earnings
$
0.43

 
$
0.23

Diluted earnings
0.42

 
0.22

Dividends paid
0.02

 
0.02

Book value
20.18

 
20.16

Tangible book value (1)
13.32

 
13.22

Market price per share of common stock
 
 
 
Closing
$
12.86

 
$
8.18

High closing
13.83

 
9.93

Low closing
11.03

 
5.80

Market capitalization
$
138,156

 
$
88,155

(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 18.
(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 101 and corresponding Table 41, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 110 and corresponding Table 50.
(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 $1.2 billion of write-offs in the purchased credit-impaired loan portfolio for the six months ended June 30, 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.
(7) 
There were no write-offs in the purchased credit-impaired loan portfolio for the six months ended June 30, 2012.

16
Table of Contents

Table 7
 
 
 
Selected Year-to-Date Financial Data (continued)
 
 
 
 
Six Months Ended June 30
(Dollars in millions)
2013
 
2012
Average balance sheet
 
 
 
Total loans and leases
$
910,269

 
$
906,610

Total assets
2,198,443

 
2,190,868

Total deposits
1,077,631

 
1,031,500

Long-term debt
272,088

 
348,346

Common shareholders' equity
218,509

 
215,466

Total shareholders' equity
236,024

 
234,062

Asset quality (2)
 
 
 
Allowance for credit losses (3)
$
21,709

 
$
30,862

Nonperforming loans, leases and foreclosed properties (4)
21,280

 
25,377

Allowance for loan and lease losses as a percentage of total loans and leases outstanding (4)
2.33
%
 
3.43
%
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (4)
103

 
127

Allowance for loan and lease losses as a percentage of total nonperforming loans and leases, excluding the PCI loan portfolio (4)
84

 
90

Amounts included in allowance that are excluded from nonperforming loans and leases (5)
$
9,919

 
$
16,327

Allowance as a percentage of total nonperforming loans and leases, excluding amounts included in the allowance that are excluded from nonperforming loans and leases (5)
55
%
 
59
%
Net charge-offs (6)
$
4,628

 
$
7,682

Annualized net charge-offs as a percentage of average loans and leases outstanding (4, 6)
1.04
%
 
1.72
%
Annualized net charge-offs as a percentage of average loans and leases outstanding, excluding the PCI loan portfolio (4)
1.07

 
1.78

Annualized net charge-offs and PCI write-offs as a percentage of average loans and leases outstanding (4, 7)
1.29

 
1.72

Nonperforming loans and leases as a percentage of total loans and leases outstanding (4)
2.26

 
2.70

Nonperforming loans, leases and foreclosed properties as a percentage of total loans, leases and foreclosed properties (4)
2.33

 
2.87

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs (6)
2.28

 
1.96

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs, excluding the PCI loan portfolio
1.85

 
1.38

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs and PCI write-offs (7)
1.82

 
1.96

For footnotes see page 16.

17
Table of Contents

Supplemental Financial Data

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

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

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

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

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

•
Tangible book value per common share represents adjusted ending common shareholders' equity divided by ending common shares outstanding.

The aforementioned supplemental data and performance measures are presented in Tables 6 and 7.

We evaluate our business segment results based on measures that utilize return on average allocated capital, and prior to January 1, 2013, the return on average economic capital, both of which represent non-GAAP financial measures. These ratios are calculated as net income adjusted for cost of funds and earnings credits and certain expenses related to intangibles, divided by average allocated capital or average economic capital, as applicable. 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 for the business segments is comprised of allocated capital (or economic capital prior to 2013) plus capital for the portion of goodwill and intangibles specifically assigned to the business segment. For additional information, see Business Segment Operations on page 30 and Note 9 – Goodwill and Intangible Assets to the Consolidated Financial Statements.

Tables 8, 9 and 10 provide reconciliations of these non-GAAP financial measures to GAAP financial measures. We believe the use of these non-GAAP financial measures provides additional clarity in assessing the results of the Corporation and our segments. Other companies may define or calculate these measures and ratios differently.

Table 8
Quarterly Supplemental Financial Data and Reconciliations to GAAP Financial Measures
 
2013 Quarters
 
2012 Quarters
(Dollars in millions)
Second
 
First
 
Fourth
 
Third
 
Second
Fully taxable-equivalent basis data
 
 
 
 
 
 
 
 
 
Net interest income
$
10,771

 
$
10,875

 
$
10,555

 
$
10,167

 
$
9,782

Total revenue, net of interest expense
22,949

 
23,408

 
18,891

 
20,657

 
22,202

Net interest yield (1)
2.44
%
 
2.43
%
 
2.35
%
 
2.32
%
 
2.21
%
Efficiency ratio
69.80

 
83.31

 
97.19

 
84.93

 
76.79

(1)  
Calculation includes fees earned on overnight deposits placed with the Federal Reserve and, beginning in the third quarter of 2012, fees earned on deposits, primarily overnight, placed with certain non-U.S. central banks, of $40 million and $33 million for the second and first quarters of 2013, and $42 million, $48 million and $52 million for the fourth, third and second quarters of 2012, respectively.

18
Table of Contents

Table 8
Quarterly Supplemental Financial Data and Reconciliations to GAAP Financial Measures (continued)
 
2013 Quarters
 
2012 Quarters
(Dollars in millions)
Second
 
First
 
Fourth
 
Third
 
Second
Reconciliation of net interest income to net interest income on a fully taxable-equivalent basis
 
 
 
 
 
 
 
 
 
Net interest income
$
10,549

 
$
10,664

 
$
10,324

 
$
9,938

 
$
9,548

Fully taxable-equivalent adjustment
222

 
211

 
231

 
229

 
234

Net interest income on a fully taxable-equivalent basis
$
10,771

 
$
10,875

 
$
10,555

 
$
10,167

 
$
9,782

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
$
22,727

 
$
23,197

 
$
18,660

 
$
20,428

 
$
21,968

Fully taxable-equivalent adjustment
222

 
211

 
231

 
229

 
234

Total revenue, net of interest expense on a fully taxable-equivalent basis
$
22,949

 
$
23,408

 
$
18,891

 
$
20,657

 
$
22,202

Reconciliation of income tax expense (benefit) to income tax expense (benefit) on a fully taxable-equivalent basis
 
 
 
 
 
 
 
 
 
Income tax expense (benefit)
$
1,486

 
$
501

 
$
(2,636
)
 
$
770

 
$
684

Fully taxable-equivalent adjustment
222

 
211

 
231

 
229

 
234

Income tax expense (benefit) on a fully taxable-equivalent basis
$
1,708

 
$
712

 
$
(2,405
)
 
$
999

 
$
918

Reconciliation of average common shareholders' equity to average tangible common shareholders' equity
 
 
 
 
 
 
 
 
 
Common shareholders' equity
$
218,790

 
$
218,225

 
$
219,744

 
$
217,273

 
$
216,782

Goodwill
(69,930
)
 
(69,945
)
 
(69,976
)
 
(69,976
)
 
(69,976
)
Intangible assets (excluding MSRs)
(6,270
)
 
(6,549
)
 
(6,874
)
 
(7,194
)
 
(7,533
)
Related deferred tax liabilities
2,360

 
2,425

 
2,490

 
2,556

 
2,626

Tangible common shareholders' equity
$
144,950

 
$
144,156

 
$
145,384

 
$
142,659

 
$
141,899

Reconciliation of average shareholders' equity to average tangible shareholders' equity
 
 
 
 
 
 
 
 
 
Shareholders' equity
$
235,063

 
$
236,995

 
$
238,512

 
$
236,039

 
$
235,558

Goodwill
(69,930
)
 
(69,945
)
 
(69,976
)
 
(69,976
)
 
(69,976
)
Intangible assets (excluding MSRs)
(6,270
)
 
(6,549
)
 
(6,874
)
 
(7,194
)
 
(7,533
)
Related deferred tax liabilities
2,360

 
2,425

 
2,490

 
2,556

 
2,626

Tangible shareholders' equity
$
161,223

 
$
162,926

 
$
164,152

 
$
161,425

 
$
160,675

Reconciliation of period-end common shareholders' equity to period-end tangible common shareholders' equity
 
 
 
 
 
 
 
 
 
Common shareholders' equity
$
216,791

 
$
218,513

 
$
218,188

 
$
219,838

 
$
217,213

Goodwill
(69,930
)
 
(69,930
)
 
(69,976
)
 
(69,976
)
 
(69,976
)
Intangible assets (excluding MSRs)
(6,104
)
 
(6,379
)
 
(6,684
)
 
(7,030
)
 
(7,335
)
Related deferred tax liabilities
2,297

 
2,363

 
2,428

 
2,494

 
2,559

Tangible common shareholders' equity
$
143,054

 
$
144,567

 
$
143,956

 
$
145,326

 
$
142,461

Reconciliation of period-end shareholders' equity to period-end tangible shareholders' equity
 
 
 
 
 
 
 
 
 
Shareholders' equity
$
231,032

 
$
237,293

 
$
236,956

 
$
238,606

 
$
235,975

Goodwill
(69,930
)
 
(69,930
)
 
(69,976
)
 
(69,976
)
 
(69,976
)
Intangible assets (excluding MSRs)
(6,104
)
 
(6,379
)
 
(6,684
)
 
(7,030
)
 
(7,335
)
Related deferred tax liabilities
2,297

 
2,363

 
2,428

 
2,494

 
2,559

Tangible shareholders' equity
$
157,295

 
$
163,347

 
$
162,724

 
$
164,094

 
$
161,223

Reconciliation of period-end assets to period-end tangible assets
 
 
 
 
 
 
 
 
 
Assets
$
2,123,320

 
$
2,174,819

 
$
2,209,974

 
$
2,166,162

 
$
2,160,854

Goodwill
(69,930
)
 
(69,930
)
 
(69,976
)
 
(69,976
)
 
(69,976
)
Intangible assets (excluding MSRs)
(6,104
)
 
(6,379
)
 
(6,684
)
 
(7,030
)
 
(7,335
)
Related deferred tax liabilities
2,297

 
2,363

 
2,428

 
2,494

 
2,559

Tangible assets
$
2,049,583

 
$
2,100,873

 
$
2,135,742

 
$
2,091,650

 
$
2,086,102



19
Table of Contents

Table 9
Year-to-Date Supplemental Financial Data and Reconciliations to GAAP Financial Measures
 
Six Months Ended June 30
(Dollars in millions, except per share information)
2013
 
2012
Fully taxable-equivalent basis data
 
 
 
Net interest income
$
21,646

 
$
20,835

Total revenue, net of interest expense
46,357

 
44,687

Net interest yield (1)
2.44
%
 
2.36
%
Efficiency ratio
76.62

 
80.98

Reconciliation of net interest income to net interest income on a fully taxable-equivalent basis
 
 
 
Net interest income
$
21,213

 
$
20,394

Fully taxable-equivalent adjustment
433

 
441

Net interest income on a fully taxable-equivalent basis
$
21,646

 
$
20,835

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
$
45,924

 
$
44,246

Fully taxable-equivalent adjustment
433

 
441

Total revenue, net of interest expense on a fully taxable-equivalent basis
$
46,357

 
$
44,687

Reconciliation of income tax expense to income tax expense on a fully taxable-equivalent basis
 
 
 
Income tax expense
$
1,987

 
$
750

Fully taxable-equivalent adjustment
433

 
441

Income tax expense on a fully taxable-equivalent basis
$
2,420

 
$
1,191

Reconciliation of average common shareholders' equity to average tangible common shareholders' equity
 
 
 
Common shareholders' equity
$
218,509

 
$
215,466

Goodwill
(69,937
)
 
(69,971
)
Intangible assets (excluding MSRs)
(6,409
)
 
(7,701
)
Related deferred tax liabilities
2,393

 
2,663

Tangible common shareholders' equity
$
144,556

 
$
140,457

Reconciliation of average shareholders' equity to average tangible shareholders' equity
 
 
 
Shareholders' equity
$
236,024

 
$
234,062

Goodwill
(69,937
)
 
(69,971
)
Intangible assets (excluding MSRs)
(6,409
)
 
(7,701
)
Related deferred tax liabilities
2,393

 
2,663

Tangible shareholders' equity
$
162,071

 
$
159,053

(1) Calculation includes fees earned on overnight deposits placed with the Federal Reserve and, beginning in the third quarter of 2012, fees earned on deposits, primarily overnight, placed with certain non-U.S. central banks, of $73 million and $99 million for the six months ended June 30, 2013 and 2012.

20
Table of Contents

Table 10
Segment Supplemental Financial Data Reconciliations to GAAP Financial Measures (1)
 
Three Months Ended June 30
 
Six Months Ended June 30
(Dollars in millions)
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Consumer & Business Banking
 
 
 
 
 
 
 
Reported net income
$
1,392

 
$
1,208

 
$
2,831

 
$
2,740

Adjustment related to intangibles (2)
2

 
4

 
4

 
7

Adjusted net income
$
1,394

 
$
1,212

 
$
2,835

 
$
2,747

 
 
 
 
 
 
 
 
Average allocated equity (3)
$
62,058

 
$
55,987

 
$
62,070

 
$
55,880

Adjustment related to goodwill and a percentage of intangibles
(32,058
)
 
(32,180
)
 
(32,070
)
 
(32,198
)
Average allocated capital/economic capital
$
30,000

 
$
23,807

 
$
30,000

 
$
23,682

 
 
 
 
 
 
 
 
Global Banking
 
 
 
 
 
 
 
Reported net income
$
1,291

 
$
1,318

 
$
2,575

 
$
2,802

Adjustment related to intangibles (2)
—

 
1

 
1

 
2

Adjusted net income
$
1,291

 
$
1,319

 
$
2,576

 
$
2,804

 
 
 
 
 
 
 
 
Average allocated equity (3)
$
45,416

 
$
41,903

 
$
45,412

 
$
41,677

Adjustment related to goodwill and a percentage of intangibles
(22,416
)
 
(22,431
)
 
(22,412
)
 
(22,434
)
Average allocated capital/economic capital
$
23,000

 
$
19,472

 
$
23,000

 
$
19,243

 
 
 
 
 
 
 
 
Global Markets
 
 
 
 
 
 
 
Reported net income
$
959

 
$
497

 
$
2,128

 
$
1,326

Adjustment related to intangibles (2)
2

 
3

 
4

 
5

Adjusted net income
$
961

 
$
500

 
$
2,132

 
$
1,331

 
 
 
 
 
 
 
 
Average allocated equity (3)
$
35,372

 
$
18,655

 
$
35,372

 
$
19,207

Adjustment related to goodwill and a percentage of intangibles
(5,372
)
 
(5,339
)
 
(5,372
)
 
(5,358
)
Average allocated capital/economic capital
$
30,000

 
$
13,316

 
$
30,000

 
$
13,849

 
 
 
 
 
 
 
 
Global Wealth & Investment Management
 
 
 
 
 
 
 
Reported net income
$
758

 
$
548

 
$
1,478

 
$
1,098

Adjustment related to intangibles (2)
5

 
6

 
9

 
12

Adjusted net income
$
763

 
$
554

 
$
1,487

 
$
1,110

 
 
 
 
 
 
 
 
Average allocated equity (3)
$
20,300

 
$
17,391

 
$
20,311

 
$
17,107

Adjustment related to goodwill and a percentage of intangibles
(10,300
)
 
(10,380
)
 
(10,311
)
 
(10,391
)
Average allocated capital/economic capital
$
10,000

 
$
7,011

 
$
10,000

 
$
6,716

(1) 
There are no adjustments to reported net income (loss) or average allocated equity for CRES.
(2) 
Represents cost of funds, earnings credits and certain expenses related to intangibles.
(3) 
Average allocated equity is comprised of average allocated capital (or economic capital prior to 2013) plus capital for the portion of goodwill and intangibles specifically assigned to the business segment. For more information on allocated capital and economic capital, see Business Segment Operations on page 30 and Note 9 – Goodwill and Intangible Assets to the Consolidated Financial Statements.

21
Table of Contents

Table 10
Segment Supplemental Financial Data Reconciliations to GAAP Financial Measures (continued) (1)
 
Three Months Ended June 30
 
Six Months Ended June 30
(Dollars in millions)
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Consumer & Business Banking
 
 
 
 
 
 
 
Deposits
 
 
 
 
 
 
 
Reported net income
$
484

 
$
225

 
$
882

 
$
637

Adjustment related to intangibles (2)
—

 
1

 
—

 
1

Adjusted net income
$
484

 
$
226

 
$
882

 
$
638

 
 
 
 
 
 
 
 
Average allocated equity (3)
$
35,403

 
$
32,862

 
$
35,404

 
$
32,540

Adjustment related to goodwill and a percentage of intangibles
(20,003
)
 
(20,025
)
 
(20,004
)
 
(20,027
)
Average allocated capital/economic capital
$
15,400

 
$
12,837

 
$
15,400

 
$
12,513

 
 
 
 
 
 
 
 
Consumer Lending
 
 
 
 
 
 
 
Reported net income
$
908

 
$
983

 
$
1,949

 
$
2,103

Adjustment related to intangibles (2)
2

 
3

 
4

 
6

Adjusted net income
$
910

 
$
986

 
$
1,953

 
$
2,109

 
 
 
 
 
 
 
 
Average allocated equity (3)
$
26,655

 
$
23,125

 
$
26,666

 
$
23,340

Adjustment related to goodwill and a percentage of intangibles
(12,055
)
 
(12,155
)
 
(12,066
)
 
(12,171
)
Average allocated capital/economic capital
$
14,600

 
$
10,970

 
$
14,600

 
$
11,169

For footnotes see page 21.

22
Table of Contents

Net Interest Income Excluding Trading-related Net Interest Income

We manage net interest income on a FTE basis and excluding the impact of trading-related activities. As discussed in Global Markets on page 49, we evaluate our sales and trading results and strategies on a total market-based revenue approach by combining net interest income and noninterest income for Global Markets. An analysis of net interest income, average earning assets and net interest yield on earning assets, all of which adjust for the impact of trading-related net interest income from reported net interest income on a FTE basis, is shown below. We believe the use of this non-GAAP presentation in Table 11 provides additional clarity in assessing our results.

Table 11
 
 
 
 
Net Interest Income Excluding Trading-related Net Interest Income
 
 
 
 
 
Three Months Ended June 30
 
Six Months Ended June 30
(Dollars in millions)
2013
 
2012
 
2013
 
2012
Net interest income (FTE basis)
 
 
 
 
 
 
 
As reported (1)
$
10,771

 
$
9,782

 
$
21,646

 
$
20,835

Impact of trading-related net interest income
(919
)
 
(653
)
 
(1,929
)
 
(1,449
)
Net interest income excluding trading-related net interest income (2)
$
9,852

 
$
9,129

 
$
19,717

 
$
19,386

Average earning assets
 
 
 
 
 
 
 
As reported
$
1,769,336

 
$
1,772,568

 
$
1,784,975

 
$
1,770,336

Impact of trading-related earning assets
(487,345
)
 
(444,584
)
 
(492,510
)
 
(434,499
)
Average earning assets excluding trading-related earning assets (2)
$
1,281,991

 
$
1,327,984

 
$
1,292,465

 
$
1,335,837

Net interest yield contribution (FTE basis) (3)
 
 
 
 
 
 
 
As reported (1)
2.44
%
 
2.21
%
 
2.44
%
 
2.36
%
Impact of trading-related activities
0.64

 
0.55

 
0.62

 
0.55

Net interest yield on earning assets excluding trading-related activities (2)
3.08
%
 
2.76
%
 
3.06
%
 
2.91
%
(1) 
Net interest income and net interest yield include fees earned on overnight deposits placed with the Federal Reserve and, beginning in the third quarter of 2012, fees earned on deposits, primarily overnight, placed with certain non-U.S. central banks, of $40 million and $73 million for the three and six months ended June 30, 2013 and $52 million and $99 million for the three and six months ended June 30, 2012.
(2) 
Represents a non-GAAP financial measure.
(3) 
Calculated on an annualized basis.

For the three and six months ended June 30, 2013, net interest income excluding trading-related net interest income increased $723 million to $9.9 billion, and $331 million to $19.7 billion compared to the same periods in 2012. The increases were primarily due to reductions in long-term debt balances, positive market-related premium amortization and hedge ineffectiveness on debt securities, higher commercial loan balances and lower rates paid on deposits, partially offset by lower consumer loan balances as well as lower asset yields driven by the low rate environment. For more information on the impacts of rising interest rates, see Interest Rate Risk Management for Nontrading Activities on page 130.

Average earning assets excluding trading-related earning assets for the three and six months ended June 30, 2013 decreased $46.0 billion to $1,282.0 billion, and $43.4 billion to $1,292.5 billion compared to the same periods in 2012. The decreases were primarily due to declines in consumer loans and time deposits placed, partially offset by increases in commercial loans. In addition, for the three months ended June 30, 2013, the decrease was also driven by lower investment securities balances.

For the three and six months ended June 30, 2013, net interest yield on earning assets excluding trading-related activities increased 32 bps to 3.08 percent, and 15 bps to 3.06 percent compared to the same periods in 2012 due to the same factors described above.

23
Table of Contents

Table 12
Quarterly Average Balances and Interest Rates – FTE Basis
 
Second Quarter 2013
 
First Quarter 2013
(Dollars in millions)
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
Earning assets
 
 
 
 
 
 
 
 
 
 
 
Time deposits placed and other short-term investments (1)
$
15,088

 
$
46

 
1.21
%
 
$
16,129

 
$
46

 
1.17
%
Federal funds sold and securities borrowed or purchased under agreements to resell
233,394

 
319

 
0.55

 
237,463

 
315

 
0.54

Trading account assets
181,620

 
1,224

 
2.70

 
194,364

 
1,380

 
2.87

Debt securities (2)
343,260

 
2,557

 
2.98

 
356,399

 
2,556

 
2.87

Loans and leases (3):
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage (4)
257,275

 
2,246

 
3.49

 
258,630

 
2,340

 
3.62

Home equity
101,708

 
951

 
3.74

 
105,939

 
997

 
3.80

U.S. credit card
89,722

 
2,192

 
9.80

 
91,712

 
2,249

 
9.95

Non-U.S. credit card
10,613

 
315

 
11.93

 
11,027

 
329

 
12.10

Direct/Indirect consumer (5)
82,485

 
598

 
2.90

 
82,364

 
620

 
3.06

Other consumer (6)
1,756

 
17

 
4.17

 
1,666

 
19

 
4.36

Total consumer
543,559

 
6,319

 
4.66

 
551,338

 
6,554

 
4.79

U.S. commercial
217,464

 
1,741

 
3.21

 
210,706

 
1,666

 
3.20

Commercial real estate (7)
40,612

 
340

 
3.36

 
39,179

 
326

 
3.38

Commercial lease financing
23,579

 
205

 
3.48

 
23,534

 
236

 
4.01

Non-U.S. commercial
89,020

 
543

 
2.45

 
81,502

 
467

 
2.32

Total commercial
370,675

 
2,829

 
3.06

 
354,921

 
2,695

 
3.07

Total loans and leases
914,234

 
9,148

 
4.01

 
906,259

 
9,249

 
4.12

Other earning assets
81,740

 
713

 
3.50

 
90,172

 
733

 
3.29

Total earning assets (8)
1,769,336

 
14,007

 
3.17

 
1,800,786

 
14,279

 
3.20

Cash and cash equivalents (1)
104,486

 
40

 
 
 
92,846

 
33

 
 
Other assets, less allowance for loan and lease losses
310,788

 
 
 
 
 
318,798

 
 
 
 
Total assets
$
2,184,610

 
 
 
 
 
$
2,212,430

 
 
 
 
(1) 
For this presentation, fees earned on overnight deposits placed with the Federal Reserve are included in the cash and cash equivalents line, consistent with the Consolidated Balance Sheet presentation of these deposits. In addition, beginning in the third quarter of 2012, fees earned on deposits, primarily overnight, placed with certain non-U.S. central banks, which are included in the time deposits placed and other short-term investments line in prior periods, have been included in the cash and cash equivalents line. Net interest income and net interest yield are calculated excluding these fees.
(2) 
Yields on debt securities carried at fair value are calculated based on fair value rather than the cost basis. The use of fair value does not have a material impact on net interest yield.
(3) 
Nonperforming loans are included in the respective average loan balances. Income on these nonperforming loans is recognized on a cost recovery basis. PCI loans were recorded at fair value upon acquisition and accrete interest income over the remaining life of the loan.
(4) 
Includes non-U.S. residential mortgage loans of $86 million and $90 million in the second and first quarters of 2013, and $93 million, $92 million and $89 million in the fourth, third and second quarters of 2012, respectively.
(5) 
Includes non-U.S. consumer loans of $7.5 billion and $7.7 billion in the second and first quarters of 2013, and $8.1 billion, $7.8 billion and $7.8 billion in the fourth, third and second quarters of 2012, respectively.
(6) 
Includes consumer finance loans of $1.3 billion and $1.4 billion in the second and first quarters of 2013, and $1.4 billion, $1.5 billion and $1.6 billion in the fourth, third and second quarters of 2012, respectively; consumer leases of $291 million and $138 million in the second and first quarters of 2013, $3 million in the fourth quarter of 2012, and none in third and second quarters of 2012; other non-U.S. consumer loans of $5 million in both the second and first quarters of 2013, and $4 million, $997 million and $895 million in the fourth, third and second quarters of 2012, respectively; and consumer overdrafts of $136 million and $142 million in the second and first quarters of 2013, and $156 million, $158 million and $108 million in the fourth, third and second quarters of 2012, respectively.
(7) 
Includes U.S. commercial real estate loans of $39.1 billion and $37.7 billion in the second and first quarters of 2013, and $36.7 billion, $35.4 billion and $36.0 billion in the fourth, third and second quarters of 2012, respectively; and non-U.S. commercial real estate loans of $1.5 billion in both the second and first quarters of 2013, and $1.5 billion, $1.5 billion and $1.6 billion in the fourth, third and second quarters of 2012, respectively.
(8) 
Interest income includes the impact of interest rate risk management contracts, which decreased interest income on the underlying assets by $63 million and $141 million in the second and first quarters of 2013, and $146 million, $136 million and $366 million in the fourth, third and second quarters of 2012, respectively. Interest expense includes the impact of interest rate risk management contracts, which decreased interest expense on the underlying liabilities by $660 million and $618 million in the second and first quarters of 2013, and $598 million, $454 million and $591 million in the fourth, third and second quarters of 2012, respectively. For further information on interest rate contracts, see Interest Rate Risk Management for Nontrading Activities on page 130.

24
Table of Contents

Table 12
 
 
 
 
 
 
Quarterly Average Balances and Interest Rates – FTE Basis (continued)
 
Fourth Quarter 2012
 
Third Quarter 2012
 
Second Quarter 2012
(Dollars in millions)
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
Earning assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Time deposits placed and other short-term investments (1)
$
16,967

 
$
50

 
1.14
%
 
$
15,849

 
$
58

 
1.47
%
 
$
27,476

 
$
64

 
0.94
%
Federal funds sold and securities borrowed or purchased under agreements to resell
241,950

 
329

 
0.54

 
234,955

 
353

 
0.60

 
234,148

 
360

 
0.62

Trading account assets
186,252

 
1,362

 
2.91

 
166,192

 
1,243

 
2.98

 
165,906

 
1,302

 
3.15

Debt securities (2)
360,213

 
2,201

 
2.44

 
355,302

 
2,068

 
2.33

 
357,081

 
1,910

 
2.14

Loans and leases (3):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage (4)
256,564

 
2,292

 
3.57

 
261,337

 
2,409

 
3.69

 
266,365

 
2,555

 
3.84

Home equity
110,270

 
1,068

 
3.86

 
116,308

 
1,100

 
3.77

 
119,785

 
1,091

 
3.66

U.S. credit card
92,849

 
2,336

 
10.01

 
93,292

 
2,353

 
10.04

 
95,018

 
2,356

 
9.97

Non-U.S. credit card
13,081

 
383

 
11.66

 
13,329

 
385

 
11.48

 
13,641

 
396

 
11.68

Direct/Indirect consumer (5)
82,583

 
662

 
3.19

 
82,635

 
704

 
3.39

 
84,198

 
733

 
3.50

Other consumer (6)
1,602

 
19

 
4.57

 
2,654

 
40

 
6.03

 
2,565

 
41

 
6.41

Total consumer
556,949

 
6,760

 
4.84

 
569,555

 
6,991

 
4.89

 
581,572

 
7,172

 
4.95

U.S. commercial
209,496

 
1,729

 
3.28

 
201,072

 
1,752

 
3.47

 
199,644

 
1,742

 
3.51

Commercial real estate (7)
38,192

 
341

 
3.55

 
36,929

 
329

 
3.54

 
37,627

 
323

 
3.46

Commercial lease financing
22,839

 
184

 
3.23

 
21,545

 
202

 
3.75

 
21,446

 
216

 
4.02

Non-U.S. commercial
65,690

 
433

 
2.62

 
59,758

 
401

 
2.67

 
59,209

 
369

 
2.50

Total commercial
336,217

 
2,687

 
3.18

 
319,304

 
2,684

 
3.35

 
317,926

 
2,650

 
3.35

Total loans and leases
893,166

 
9,447

 
4.21

 
888,859

 
9,675

 
4.34

 
899,498

 
9,822

 
4.38

Other earning assets
90,388

 
771

 
3.40

 
89,118

 
760

 
3.40

 
88,459

 
716

 
3.24

Total earning assets (8)
1,788,936

 
14,160

 
3.16

 
1,750,275

 
14,157

 
3.22

 
1,772,568

 
14,174

 
3.21

Cash and cash equivalents (1)
111,671

 
42

 
 
 
122,716

 
48

 
 
 
116,025

 
52

 
 
Other assets, less allowance for loan and lease losses
309,758

 
 
 
 
 
300,321

 
 
 
 
 
305,970

 
 
 
 
Total assets
$
2,210,365

 
 
 
 
 
$
2,173,312

 
 

 
 
 
$
2,194,563

 
 
 
 
For footnotes see page 24.


25
Table of Contents

Table 12
Quarterly Average Balances and Interest Rates – FTE Basis (continued)
 
Second Quarter 2013
 
First Quarter 2013
(Dollars in millions)
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
Interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
U.S. interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
Savings
$
44,897

 
$
6

 
0.05
%
 
$
42,934

 
$
6

 
0.05
%
NOW and money market deposit accounts
500,628

 
107

 
0.09

 
501,177

 
117

 
0.09

Consumer CDs and IRAs
85,001

 
130

 
0.62

 
88,376

 
138

 
0.63

Negotiable CDs, public funds and other deposits
22,721

 
27

 
0.46

 
20,880

 
26

 
0.52

Total U.S. interest-bearing deposits
653,247

 
270

 
0.17

 
653,367

 
287

 
0.18

Non-U.S. interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
Banks located in non-U.S. countries
10,832

 
17

 
0.64

 
12,153

 
19

 
0.64

Governments and official institutions
924

 
—

 
0.26

 
901

 
1

 
0.23

Time, savings and other
55,661

 
79

 
0.56

 
54,599

 
75

 
0.56

Total non-U.S. interest-bearing deposits
67,417

 
96

 
0.57

 
67,653

 
95

 
0.57

Total interest-bearing deposits
720,664

 
366

 
0.20

 
721,020

 
382

 
0.22

Federal funds purchased, securities loaned or sold under agreements to repurchase and short-term borrowings
318,028

 
809

 
1.02

 
337,644

 
749

 
0.90

Trading account liabilities
94,349

 
427

 
1.82

 
92,047

 
472

 
2.08

Long-term debt
270,198

 
1,674

 
2.48

 
273,999

 
1,834

 
2.70

Total interest-bearing liabilities (8)
1,403,239

 
3,276

 
0.94

 
1,424,710

 
3,437

 
0.98

Noninterest-bearing sources:
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing deposits
359,292

 
 
 
 
 
354,260

 
 
 
 
Other liabilities
187,016

 
 
 
 
 
196,465

 
 
 
 
Shareholders' equity
235,063

 
 
 
 
 
236,995

 
 
 
 
Total liabilities and shareholders' equity
$
2,184,610

 
 
 
 
 
$
2,212,430

 
 
 
 
Net interest spread
 
 
 
 
2.23
%
 
 
 
 
 
2.22
%
Impact of noninterest-bearing sources
 
 
 
 
0.20

 
 
 
 
 
0.21

Net interest income/yield on earning assets (1)
 
 
$
10,731

 
2.43
%
 
 
 
$
10,842

 
2.43
%
For footnotes see page 24.


26
Table of Contents

Table 12
 
 
 
 
 
 
Quarterly Average Balances and Interest Rates – FTE Basis (continued)
 
Fourth Quarter 2012
 
Third Quarter 2012
 
Second Quarter 2012
(Dollars in millions)
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
Interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Savings
$
41,294

 
$
6

 
0.06
%
 
$
41,581

 
$
11

 
0.10
%
 
$
42,394

 
$
14

 
0.13
%
NOW and money market deposit accounts
479,130

 
146

 
0.12

 
465,679

 
173

 
0.15

 
460,788

 
188

 
0.16

Consumer CDs and IRAs
91,256

 
156

 
0.68

 
94,140

 
172

 
0.73

 
96,858

 
171

 
0.71

Negotiable CDs, public funds and other deposits
19,904

 
27

 
0.54

 
19,587

 
30

 
0.61

 
21,661

 
35

 
0.65

Total U.S. interest-bearing deposits
631,584

 
335

 
0.21

 
620,987

 
386

 
0.25

 
621,701

 
408

 
0.26

Non-U.S. interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Banks located in non-U.S. countries
11,964

 
22

 
0.71

 
13,883

 
19

 
0.56

 
14,598

 
25

 
0.69

Governments and official institutions
876

 
1

 
0.29

 
1,019

 
1

 
0.31

 
895

 
1

 
0.37

Time, savings and other
53,655

 
80

 
0.60

 
52,175

 
78

 
0.59

 
52,584

 
85

 
0.65

Total non-U.S. interest-bearing deposits
66,495

 
103

 
0.62

 
67,077

 
98

 
0.58

 
68,077

 
111

 
0.65

Total interest-bearing deposits
698,079

 
438

 
0.25

 
688,064

 
484

 
0.28

 
689,778

 
519

 
0.30

Federal funds purchased, securities loaned or sold under agreements to repurchase and short-term borrowings
336,341

 
855

 
1.01

 
325,023

 
893

 
1.09

 
318,909

 
943

 
1.19

Trading account liabilities
80,084

 
420

 
2.09

 
77,528

 
418

 
2.14

 
84,728

 
448

 
2.13

Long-term debt
277,894

 
1,934

 
2.77

 
291,684

 
2,243

 
3.07

 
333,173

 
2,534

 
3.05

Total interest-bearing liabilities (8)
1,392,398

 
3,647

 
1.04

 
1,382,299

 
4,038

 
1.16

 
1,426,588

 
4,444

 
1.25

Noninterest-bearing sources:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing deposits
379,997

 
 
 
 
 
361,633

 
 

 
 
 
343,110

 
 
 
 
Other liabilities
199,458

 
 
 
 
 
193,341

 
 

 
 
 
189,307

 
 
 
 
Shareholders' equity
238,512

 
 
 
 
 
236,039

 
 

 
 
 
235,558

 
 
 
 
Total liabilities and shareholders' equity
$
2,210,365

 
 
 
 
 
$
2,173,312

 
 
 
 
 
$
2,194,563

 
 
 
 
Net interest spread
 
 
 
 
2.12
%
 
 
 
 
 
2.06
%
 
 
 
 
 
1.96
%
Impact of noninterest-bearing sources
 
 
 
 
0.22

 
 
 
 
 
0.25

 
 
 
 
 
0.24

Net interest income/yield on earning assets (1)
 
 
$
10,513

 
2.34
%
 
 
 
$
10,119

 
2.31
%
 
 
 
$
9,730

 
2.20
%
For footnotes see page 24.

27
Table of Contents

Table 13
Year-to-Date Average Balances and Interest Rates – FTE Basis
 
Six Months Ended June 30
 
2013
 
2012
(Dollars in millions)
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
Earning assets
 
 
 
 
 
 
 
 
 
 
 
Time deposits placed and other short-term investments (1)
$
15,606

 
$
92

 
1.19
%
 
$
29,440

 
$
129

 
0.88
%
Federal funds sold and securities borrowed or purchased under agreements to resell
235,417

 
634

 
0.54

 
233,604

 
820

 
0.71

Trading account assets
187,957

 
2,604

 
2.79

 
165,010

 
2,701

 
3.29

Debt securities (2)
349,794

 
5,113

 
2.92

 
349,350

 
4,662

 
2.67

Loans and leases (3):
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage (4)
257,949

 
4,586

 
3.56

 
269,436

 
5,145

 
3.82

Home equity
103,812

 
1,948

 
3.77

 
121,433

 
2,257

 
3.73

U.S. credit card
90,712

 
4,441

 
9.87

 
96,676

 
4,815

 
10.02

Non-U.S. credit card
10,819

 
644

 
12.01

 
13,896

 
804

 
11.64

Direct/Indirect consumer (5)
82,425

 
1,218

 
2.98

 
86,259

 
1,534

 
3.58

Other consumer (6)
1,710

 
36

 
4.26

 
2,592

 
81

 
6.33

Total consumer
547,427

 
12,873

 
4.73

 
590,292

 
14,636

 
4.98

U.S. commercial
214,103

 
3,407

 
3.21

 
197,377

 
3,498

 
3.56

Commercial real estate (7)
39,899

 
666

 
3.37

 
38,408

 
662

 
3.47

Commercial lease financing
23,556

 
441

 
3.75

 
21,563

 
488

 
4.52

Non-U.S. commercial
85,284

 
1,010

 
2.39

 
58,970

 
760

 
2.59

Total commercial
362,842

 
5,524

 
3.07

 
316,318

 
5,408

 
3.44

Total loans and leases
910,269

 
18,397

 
4.07

 
906,610

 
20,044

 
4.44

Other earning assets
85,932

 
1,446

 
3.39

 
86,322

 
1,439

 
3.35

Total earning assets (8)
1,784,975

 
28,286

 
3.18

 
1,770,336

 
29,795

 
3.38

Cash and cash equivalents (1)
98,698

 
73

 
 
 
114,268

 
99

 
 
Other assets, less allowance for loan and lease losses
314,770

 
 
 
 
 
306,264

 
 

 
 
Total assets
$
2,198,443

 
 
 
 
 
$
2,190,868

 
 

 
 
(1) 
For this presentation, fees earned on overnight deposits placed with the Federal Reserve are included in the cash and cash equivalents line, consistent with the Consolidated Balance Sheet presentation of these deposits. In addition, beginning in the third quarter of 2012, fees earned on deposits, primarily overnight, placed with certain non-U.S. central banks, which are included in the time deposits placed and other short-term investments line in prior periods, have been included in the cash and cash equivalents line. Net interest income and net interest yield are calculated excluding these fees.
(2) 
Yields on debt securities carried at fair value are calculated based on fair value rather than the cost basis. The use of fair value does not have a material impact on net interest yield.
(3) 
Nonperforming loans are included in the respective average loan balances. Income on these nonperforming loans is recognized on a cost recovery basis. PCI loans were recorded at fair value upon acquisition and accrete interest income over the remaining life of the loan.
(4) 
Includes non-U.S. residential mortgage loans of $88 million for both the six months ended June 30, 2013 and 2012.
(5) 
Includes non-U.S. consumer loans of $7.6 billion and $7.7 billion for the six months ended June 30, 2013 and 2012.
(6) 
Includes consumer finance loans of $1.4 billion and $1.6 billion, consumer leases of $215 million and none, other non-U.S. consumer loans of $5 million and $899 million, and consumer overdrafts of $139 million and $99 million for the six months ended June 30, 2013 and 2012.
(7) 
Includes U.S. commercial real estate loans of $38.4 billion and $36.7 billion, and non-U.S. commercial real estate loans of $1.5 billion and $1.7 billion for the six months ended June 30, 2013 and 2012.
(8) 
Interest income includes the impact of interest rate risk management contracts, which decreased interest income on the underlying assets by $204 million and $472 million for the six months ended June 30, 2013 and 2012. Interest expense includes the impact of interest rate risk management contracts, which decreased interest expense on the underlying liabilities by $1.3 billion and $1.2 billion for the six months ended June 30, 2013 and 2012. For further information on interest rate contracts, see Interest Rate Risk Management for Nontrading Activities on page 130.


28
Table of Contents

Table 13
Year-to-Date Average Balances and Interest Rates – FTE Basis (continued)
 
Six Months Ended June 30
 
2013
 
2012
(Dollars in millions)
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
Interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
U.S. interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
Savings
$
43,921

 
$
12

 
0.05
%
 
$
41,468

 
$
28

 
0.13
%
NOW and money market deposit accounts
500,901

 
224

 
0.09

 
459,718

 
374

 
0.16

Consumer CDs and IRAs
86,679

 
268

 
0.62

 
98,451

 
365

 
0.75

Negotiable CDs, public funds and other deposits
21,806

 
53

 
0.49

 
22,125

 
71

 
0.64

Total U.S. interest-bearing deposits
653,307

 
557

 
0.17

 
621,762

 
838

 
0.27

Non-U.S. interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
Banks located in non-U.S. countries
11,489

 
36

 
0.64

 
16,384

 
53

 
0.65

Governments and official institutions
912

 
1

 
0.24

 
1,091

 
2

 
0.40

Time, savings and other
55,133

 
154

 
0.56

 
53,912

 
175

 
0.65

Total non-U.S. interest-bearing deposits
67,534

 
191

 
0.57

 
71,387

 
230

 
0.65

Total interest-bearing deposits
720,841

 
748

 
0.21

 
693,149

 
1,068

 
0.31

Federal funds purchased, securities loaned or sold under agreements to repurchase and short-term borrowings
327,782

 
1,558

 
0.96

 
305,981

 
1,824

 
1.20

Trading account liabilities
93,204

 
899

 
1.95

 
78,300

 
925

 
2.38

Long-term debt
272,088

 
3,508

 
2.59

 
348,346

 
5,242

 
3.02

Total interest-bearing liabilities (8)
1,413,915

 
6,713

 
0.96

 
1,425,776

 
9,059

 
1.28

Noninterest-bearing sources:
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing deposits
356,790

 
 
 
 
 
338,351

 
 
 
 
Other liabilities
191,714

 
 
 
 
 
192,679

 
 
 
 
Shareholders' equity
236,024

 
 
 
 
 
234,062

 
 
 
 
Total liabilities and shareholders' equity
$
2,198,443

 
 
 
 
 
$
2,190,868

 
 
 
 
Net interest spread
 
 
 
 
2.22
%
 
 
 
 
 
2.10
%
Impact of noninterest-bearing sources
 
 
 
 
0.21

 
 
 
 
 
0.25

Net interest income/yield on earning assets (1)
 
 
$
21,573

 
2.43
%
 
 
 
$
20,736

 
2.35
%
For footnotes see page 28.


29
Table of Contents

Business Segment Operations
 
Segment Description and Basis of Presentation

We report the results of our operations through five business segments: CBB, CRES, Global Banking, Global Markets and GWIM, with the remaining operations recorded in All Other. We prepare and evaluate segment results using certain non-GAAP financial measures. For additional information, see Supplemental Financial Data on page 18. Table 14 provides selected summary financial data for our business segments and All Other for the three and six months ended June 30, 2013 compared to the same periods in 2012. For additional detailed information on these results, see the business segment and All Other discussions which follow.

Table 14
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Business Segment Results
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30
 
Total Revenue (1)
 
Provision for Credit Losses
 
Noninterest Expense
 
Net Income (Loss)
(Dollars in millions)
2013
 
2012
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Consumer & Business Banking
$
7,434

 
$
7,495

 
$
967

 
$
1,157

 
$
4,183

 
$
4,420

 
$
1,392

 
$
1,208

Consumer Real Estate Services
2,115

 
2,529

 
291

 
187

 
3,394

 
3,524

 
(937
)
 
(744
)
Global Banking
4,139

 
3,908

 
163

 
(152
)
 
1,859

 
1,967

 
1,291

 
1,318

Global Markets
4,189

 
3,578

 
(16
)
 
(1
)
 
2,769

 
2,855

 
959

 
497

Global Wealth & Investment Management
4,499

 
4,094

 
(15
)
 
47

 
3,272

 
3,177

 
758

 
548

All Other
573

 
598

 
(179
)
 
535

 
541

 
1,105

 
549

 
(364
)
Total FTE basis
22,949

 
22,202

 
1,211

 
1,773

 
16,018

 
17,048

 
4,012

 
2,463

FTE adjustment
(222
)
 
(234
)
 
—

 
—

 
—

 
—

 
—

 
—

Total Consolidated
$
22,727

 
$
21,968

 
$
1,211

 
$
1,773

 
$
16,018

 
$
17,048

 
$
4,012

 
$
2,463

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Consumer & Business Banking
$
14,846

 
$
15,128

 
$
1,919

 
$
2,064

 
$
8,353

 
$
8,725

 
$
2,831

 
$
2,740

Consumer Real Estate Services
4,427

 
5,193

 
626

 
694

 
8,800

 
7,404

 
(3,094
)
 
(1,879
)
Global Banking
8,169

 
7,937

 
312

 
(427
)
 
3,696

 
3,928

 
2,575

 
2,802

Global Markets
9,058

 
7,985

 
(11
)
 
(14
)
 
5,842

 
6,090

 
2,128

 
1,326

Global Wealth & Investment Management
8,920

 
8,241

 
7

 
93

 
6,525

 
6,409

 
1,478

 
1,098

All Other
937

 
203

 
71

 
1,781

 
2,302

 
3,633

 
(423
)
 
(2,971
)
Total FTE basis
46,357

 
44,687

 
2,924

 
4,191

 
35,518

 
36,189

 
5,495

 
3,116

FTE adjustment
(433
)
 
(441
)
 
—

 
—

 
—

 
—

 
—

 
—

Total Consolidated
$
45,924

 
$
44,246

 
$
2,924

 
$
4,191

 
$
35,518

 
$
36,189

 
$
5,495

 
$
3,116

(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 18.

The management accounting and reporting process derives segment and business results by utilizing allocation methodologies for revenue and expense. The net income derived for the businesses is dependent upon revenue and cost allocations using an activity-based costing model, funds transfer pricing, and other methodologies and assumptions management believes are appropriate to reflect the results of the business.

Total revenue, net of interest expense, includes net interest income on a FTE basis and noninterest income. The adjustment of net interest income to a FTE basis results in a corresponding increase in income tax expense. The segment results also reflect certain revenue and expense methodologies that are utilized to determine net income. The net interest income of the businesses includes the results of a funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics. For presentation purposes, in segments where the total of liabilities and equity exceeds assets, which are generally deposit-taking segments, we allocate assets to match liabilities. Net interest income of the business segments also includes an allocation of net interest income generated by certain of our asset and liability management (ALM) activities.


30
Table of Contents

Our ALM activities include an overall interest rate risk management strategy that incorporates the use of various derivatives and cash instruments to manage fluctuations in earnings and capital that are caused by interest rate volatility. Our goal is to manage interest rate sensitivity so that movements in interest rates do not significantly adversely affect earnings and capital. The results of a majority of our ALM activities are allocated to the business segments and fluctuate based on the performance of the ALM activities. ALM activities include external product pricing decisions including deposit pricing strategies, the effects of our internal funds transfer pricing process and the net effects of other ALM activities.

Certain expenses not directly attributable to a specific business segment are allocated to the segments. The most significant of these expenses include data and item processing costs and certain centralized or shared functions. Data processing costs are allocated to the segments based on equipment usage. Item processing costs are allocated to the segments based on the volume of items processed for each segment. The costs of certain other centralized or shared functions are allocated based on methodologies that reflect utilization.

Effective January 1, 2013, on a prospective basis, we adjusted the amount of capital being allocated to our business segments. The adjustment reflects a refinement to the prior-year methodology (economic capital) which focused solely on internal risk-based economic capital models. The refined methodology (allocated capital) now also considers the effect of regulatory capital requirements in addition to internal risk-based economic capital models. The Corporation's internal risk-based capital models use a risk-adjusted methodology incorporating each segment's credit, market, interest rate, business and operational risk components. See Managing Risk on page 68 and Strategic Risk Management on page 69 for more information on the nature of these risks. The capital allocated to the business segments is currently referred to as allocated capital and, prior to January 1, 2013, was referred to as economic capital, both of which represent non-GAAP financial measures. Allocated capital in the business segments is subject to change over time.

For purposes of goodwill impairment testing, the Corporation utilizes allocated equity as a proxy for the carrying value of its reporting units. For additional information, see Note 9 – Goodwill and Intangible Assets to the Consolidated Financial Statements.

For more information on the business segments and reconciliations to consolidated total revenue, net income (loss) and period-end total assets, see Note 20 – Business Segment Information to the Consolidated Financial Statements.



31
Table of Contents

Consumer & Business Banking
 
Three Months Ended June 30
 
 
 
Deposits
 
Consumer
Lending
 
Total Consumer &
Business Banking
 
 
(Dollars in millions)
2013
 
2012
 
2013
 
2012
 
2013
 
2012
 
% Change
Net interest income (FTE basis)
$
2,472

 
$
2,216

 
$
2,562

 
$
2,662

 
$
5,034

 
$
4,878

 
3
 %
Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Card income
15

 
19

 
1,171

 
1,326

 
1,186

 
1,345

 
(12
)
Service charges
1,035

 
1,081

 
—

 
—

 
1,035

 
1,081

 
(4
)
All other income
117

 
97

 
62

 
94

 
179

 
191

 
(6
)
Total noninterest income
1,167

 
1,197

 
1,233

 
1,420

 
2,400

 
2,617

 
(8
)
Total revenue, net of interest expense (FTE basis)
3,639

 
3,413

 
3,795

 
4,082

 
7,434

 
7,495

 
(1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for credit losses
35

 
191

 
932

 
966

 
967

 
1,157

 
(16
)
Noninterest expense
2,812

 
2,865

 
1,371

 
1,555

 
4,183

 
4,420

 
(5
)
Income before income taxes
792

 
357

 
1,492

 
1,561

 
2,284

 
1,918

 
19

Income tax expense (FTE basis)
308

 
132

 
584

 
578

 
892

 
710

 
26

Net income
$
484

 
$
225

 
$
908

 
$
983

 
$
1,392

 
$
1,208

 
15

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest yield (FTE basis)
1.88
%
 
1.87
%
 
7.26
%
 
7.09
%
 
3.72
%
 
4.00
%
 
 
Return on average allocated capital (1)
12.62

 
—

 
24.98

 
—

 
18.64

 
—

 
 
Return on average economic capital (1)
—

 
7.06

 
—

 
36.15

 
—

 
20.46

 
 
Efficiency ratio (FTE basis)
77.24

 
83.91

 
36.14

 
38.14

 
56.26

 
58.98

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans and leases
$
22,434

 
$
23,609

 
$
141,159

 
$
149,956

 
$
163,593

 
$
173,565

 
(6
)
Total earning assets (2)
526,322

 
475,573

 
141,599

 
151,031

 
542,697

 
490,845

 
11

Total assets (2)
559,119

 
509,052

 
150,248

 
158,702

 
584,143

 
531,995

 
10

Total deposits
521,784

 
473,992

 
n/m

 
n/m

 
522,259

 
474,328

 
10

Allocated capital (1)
15,400

 
—

 
14,600

 
—

 
30,000

 
—

 
n/m

Economic capital (1)
—

 
12,837

 
—

 
10,970

 
—

 
23,807

 
n/m

(1)
Effective January 1, 2013, we revised, on a prospective basis, the methodology for allocating capital to the business segments. In connection with the change in methodology, we updated the applicable terminology in the above table to allocated capital from economic capital as reported in prior periods. For additional information, see Business Segment Operations on page 30.
(2)
For presentation purposes, in segments and businesses where the total of liabilities and equity exceeds assets, we allocate assets from All Other to match the segments' and businesses' liabilities and allocated shareholders' equity. As a result, total earning assets and total assets of the businesses may not equal total CBB.
n/m = not meaningful

32
Table of Contents

 
Six Months Ended June 30
 
 
 
Deposits
 
Consumer
Lending
 
Total Consumer &
Business Banking
 
 
(Dollars in millions)
2013
 
2012
 
2013
 
2012
 
2013
 
2012
 
% Change
Net interest income (FTE basis)
$
4,859

 
$
4,669

 
$
5,188

 
$
5,491

 
$
10,047

 
$
10,160

 
(1
)%
Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Card income
30

 
31

 
2,363

 
2,603

 
2,393

 
2,634

 
(9
)
Service charges
2,048

 
2,143

 
—

 
—

 
2,048

 
2,143

 
(4
)
All other income
219

 
183

 
139

 
8

 
358

 
191

 
87

Total noninterest income
2,297

 
2,357

 
2,502

 
2,611

 
4,799

 
4,968

 
(3
)
Total revenue, net of interest expense (FTE basis)
7,156

 
7,026

 
7,690

 
8,102

 
14,846

 
15,128

 
(2
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for credit losses
98

 
278

 
1,821

 
1,786

 
1,919

 
2,064

 
(7
)
Noninterest expense
5,633

 
5,739

 
2,720

 
2,986

 
8,353

 
8,725

 
(4
)
Income before income taxes
1,425

 
1,009

 
3,149

 
3,330

 
4,574

 
4,339

 
5

Income tax expense (FTE basis)
543

 
372

 
1,200

 
1,227

 
1,743

 
1,599

 
9

Net income
$
882

 
$
637

 
$
1,949

 
$
2,103

 
$
2,831

 
$
2,740

 
3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest yield (FTE basis)
1.90
%
 
1.99
%
 
7.33
%
 
7.11
%
 
3.80
%
 
4.19
%
 
 
Return on average allocated capital (1)
11.55

 
—

 
26.97

 
—

 
19.06

 
—

 
 
Return on average economic capital (1)
—

 
10.25

 
—

 
37.98

 
—

 
23.32

 
 
Efficiency ratio (FTE basis)
78.71

 
81.68

 
35.37

 
36.86

 
56.26

 
57.68

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans and leases
$
22,525

 
$
23,842

 
$
142,188

 
$
154,129

 
$
164,713

 
$
177,971

 
(7
)
Total earning assets (2)
516,481

 
471,292

 
142,629

 
155,323

 
532,966

 
487,268

 
9

Total assets (2)
549,273

 
504,744

 
151,231

 
162,717

 
574,360

 
528,114

 
9

Total deposits
511,978

 
468,854

 
n/m

 
n/m

 
512,438

 
469,181

 
9

Allocated capital (1)
15,400

 
—

 
14,600

 
—

 
30,000

 
—

 
n/m

Economic capital (1)
—

 
12,513

 
—

 
11,169

 
—

 
23,682

 
n/m

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period end
June 30
2013
 
December 31
2012
 
June 30
2013
 
December 31
2012
 
June 30
2013
 
December 31
2012
 
 
Total loans and leases
$
22,467

 
$
22,907

 
$
142,384

 
$
146,359

 
$
164,851

 
$
169,266

 
(3
)
Total earning assets (2)
528,738

 
498,151

 
142,824

 
146,809

 
545,685

 
513,114

 
6

Total assets (2)
561,657

 
531,353

 
151,796

 
155,408

 
587,576

 
554,915

 
6

Total deposits
523,928

 
495,711

 
n/m

 
n/m

 
525,099

 
496,159

 
6

For footnotes see page 32.

CBB, which is comprised of Deposits and Consumer Lending, offers a diversified range of credit, banking and investment products and services to consumers and businesses. Our customers and clients have access to a franchise network that stretches coast to coast through 32 states and the District of Columbia. The franchise network includes approximately 5,300 banking centers, 16,350 ATMs, nationwide call centers, and online and mobile platforms. During the first quarter of 2013, Business Banking results were moved into Deposits as we continue to integrate these businesses. During the second quarter of 2013, consumer Dealer Financial Services results were moved into CBB from Global Banking to align this business more closely with our consumer lending activity and better serve the needs of our customers. As a result, Card Services was renamed Consumer Lending. Prior periods were reclassified to conform to current period presentation.


33
Table of Contents

CBB Results

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Net income for CBB increased $184 million to $1.4 billion primarily due to lower noninterest expense and provision for credit losses, partially offset by lower revenue. Net interest income increased $156 million to $5.0 billion reflecting higher ALM activities and growth in deposit balances, partially offset by compressed deposit spreads due to the continued low rate environment and the impact of lower average loan balances primarily in Consumer Lending. Noninterest income decreased $217 million to $2.4 billion driven by lower card income primarily from the exit of consumer protection products and the allocation of certain card revenue to GWIM for its clients with a credit card, lower deposit service charges, and the net impact of portfolio sales.

The provision for credit losses decreased $190 million to $967 million largely due to improvements in credit quality in the small business portfolio within Deposits. Noninterest expense decreased $237 million to $4.2 billion primarily due to lower litigation and operating expenses.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Net income for CBB increased $91 million to $2.8 billion primarily driven by the same factors as described in the three-month discussion above. Net interest income decreased $113 million to $10.0 billion reflecting compressed deposit spreads due to the continued low rate environment and the impact of lower average loan balances primarily in Consumer Lending, partially offset by higher ALM activities and growth in deposit balances. Noninterest income decreased $169 million to $4.8 billion driven by lower card income primarily from the allocation of certain card revenue to GWIM for its clients with a credit card, lower deposit service charges and the net impact of portfolio sales.

The provision for credit losses decreased $145 million to $1.9 billion and noninterest expense decreased $372 million to $8.4 billion driven by the same factors as described in the three-month discussion above.

Deposits

Deposits includes the results of consumer deposit activities which consist of a comprehensive range of products provided to consumers and small businesses. Our deposit products include traditional savings accounts, money market savings accounts, CDs and IRAs, noninterest- and interest-bearing checking accounts, as well as investment accounts and products. The revenue is allocated to the deposit products using our funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics. Deposits generates fees such as account service fees, non-sufficient funds fees, overdraft charges and ATM fees, as well as investment and brokerage fees from Merrill Edge accounts. Merrill Edge is an integrated investing and banking service targeted at customers with less than $250,000 in investable assets. Merrill Edge provides investment advice and guidance, brokerage services, a self-directed online investing platform and key banking capabilities including access to the Corporation's network of banking centers and ATMs.

Deposits also provides a wide range of lending-related products and services, integrated working capital management and treasury solutions to clients through our network of offices and client relationship teams along with various product partners. Our clients include U.S.-based companies generally with annual sales of $1 million to $50 million. Our lending products and services include commercial loans, lines of credit and real estate lending. Our capital management and treasury solutions include treasury management, foreign exchange and short-term investing options. Deposits also includes the results of our merchant services joint venture.

Deposits includes the net impact of migrating customers and their related deposit balances between Deposits and GWIM as well as other client-managed businesses. For more information on the migration of customer balances to or from GWIM, see GWIM on page 52.

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Net income for Deposits increased $259 million to $484 million primarily due to higher revenue, and lower provision for credit losses and noninterest expense. Net interest income increased $256 million to $2.5 billion reflecting higher ALM activities, growth in deposit balances, a customer shift to higher spread liquid products and continued pricing discipline, partially offset by compressed deposit spreads due to the continued low rate environment. Noninterest income decreased $30 million to $1.2 billion primarily due to lower deposit service charges.

The provision for credit losses decreased $156 million to $35 million due to improvements in credit quality in the small business portfolio. Noninterest expense decreased $53 million to $2.8 billion primarily due to lower operating expense.


34
Table of Contents

Average loans decreased $1.2 billion to $22.4 billion primarily driven by loan prepayments and continued run-off of non-core portfolios. Average deposits increased $47.8 billion to $521.8 billion driven by a customer shift to more liquid products in the low rate environment. Additionally, $17.6 billion of the increase in average deposits was due to net transfers of deposits from other businesses, largely GWIM. Growth in checking, traditional savings and money market savings of $52.3 billion was partially offset by a decline in time deposits of $4.5 billion. As a result of our continued pricing discipline and the shift in the mix of deposits, the rate paid on average deposits declined by seven bps to twelve bps.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Net income for Deposits increased $245 million to $882 million driven by the same factors as described in the three-month discussion above. Net interest income increased $190 million to $4.9 billion, noninterest income decreased $60 million to $2.3 billion and the provision for credit losses decreased $180 million to $98 million. These changes were driven by the same factors as described in the three-month discussion. Noninterest expense decreased $106 million to $5.6 billion as lower operating expense was partially offset by higher litigation expense.

Average loans decreased $1.3 billion to $22.5 billion and average deposits increased $43.1 billion to $512.0 billion driven by the same factors as described in the three-month discussion above. Of the increase in average deposits, $12.2 billion was due to net transfers of deposits from other businesses, largely GWIM.

Key Statistics
 
 
 
 
 
 
 
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2013
 
2012
 
2013
 
2012
Total deposit spreads (excludes noninterest costs)
1.51
%
 
1.88
%
 
1.51
%
 
1.92
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period end
 
 
 
 
 
 
 
Client brokerage assets (in millions)
 
 
 
 
$
84,182

 
$
72,226

Online banking active accounts (units in thousands)
 
 
 
 
29,867

 
30,232

Mobile banking active accounts (units in thousands)
 
 
 
 
13,214

 
10,290

Banking centers
 
 
 
 
5,328

 
5,594

ATMs
 
 
 
 
16,354

 
16,220


Mobile banking customers increased 2.9 million reflecting continuing changes in our customers' banking preferences. The number of banking centers declined by 266 and ATMs increased by 134 as we continue to optimize our consumer banking network and improve our cost-to-serve.

Consumer Lending

Consumer Lending is one of the leading issuers of credit and debit cards to consumers and small businesses in the U.S. Our lending products and services also include direct and indirect consumer loans such as automotive, marine, aircraft, recreational vehicle loans and consumer personal loans. In addition to earning net interest spread revenue on its lending activities, Consumer Lending generates interchange revenue from credit and debit card transactions as well as annual credit card fees and other miscellaneous fees.

On July 31, 2013, the U.S. District Court for the District of Columbia issued a ruling regarding the Federal Reserve's rules implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act's (Financial Reform Act) Durbin Amendment. The ruling requires the Federal Reserve to reconsider the current $0.21 per transaction cap on debit card interchange fees. If the Federal Reserve implements a lower per transaction cap, it may have a significant adverse impact on our debit card interchange fee revenue in future periods. We cannot predict the actions that the Federal Reserve may take, or the timing thereof, in response to the ruling.

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Net income for Consumer Lending decreased $75 million to $908 million primarily driven by a decrease in revenue, partially offset by lower noninterest expense and a decrease in the provision for credit losses. Net interest income decreased $100 million to $2.6 billion driven by the impact of lower average loan balances. The net interest yield increased 17 bps to 7.26 percent primarily due to lower funding costs. Noninterest income decreased $187 million to $1.2 billion driven by lower card income primarily from the exit of consumer protection products and the allocation of certain card revenue to GWIM for its clients with a credit card, and the net impact of portfolio sales.

35
Table of Contents

The provision for credit losses decreased $34 million to $932 million due to improvements in credit quality. Noninterest expense decreased $184 million to $1.4 billion primarily due to lower litigation and operating expenses.

Average loans decreased $8.8 billion to $141.2 billion primarily driven by charge-offs and continued run-off of non-core portfolios.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Net income for Consumer Lending decreased $154 million to $1.9 billion primarily driven by a decrease in revenue, partially offset by lower noninterest expense. Net interest income decreased $303 million to $5.2 billion while the net interest yield increased 22 bps to 7.33 percent. These changes were driven by the same factors as described in the three-month discussion. Noninterest income decreased $109 million to $2.5 billion driven by lower card income primarily from the allocation of certain card revenue to GWIM for its clients with a credit card and the net impact of portfolio sales.

The provision for credit losses of $1.8 billion remained relatively unchanged. Noninterest expense decreased $266 million to $2.7 billion driven by the same factors as described in the three-month discussion.

Average loans decreased $11.9 billion to $142.2 billion primarily driven by the same factors as described in the three-month discussion.

Key Statistics
 
 
 
 
 
 
 
 
Three Months Ended June 30
 
Six Months Ended June 30
(Dollars in millions)
2013
 
2012
 
2013
 
2012
U.S. credit card
 
 
 
 
 
 
 
Gross interest yield
9.80
%
 
9.97
%
 
9.87
%
 
10.02
%
Risk-adjusted margin
8.11

 
7.51

 
8.25

 
7.02

New accounts (in thousands)
957

 
782

 
1,863

 
1,564

Purchase volumes
$
51,945

 
$
48,886

 
$
98,577

 
$
93,683

Debit card purchase volumes
$
67,740

 
$
64,993

 
$
132,375

 
$
128,025


During the three and six months ended June 30, 2013, the U.S. credit card risk-adjusted margin increased 60 bps and 123 bps from the same periods in 2012 due to a decrease in net charge-offs driven by an improvement in credit quality. U.S. credit card purchase volumes increased $3.1 billion to $51.9 billion, and $4.9 billion to $98.6 billion and debit card purchase volumes increased $2.7 billion to $67.7 billion, and $4.4 billion to $132.4 billion compared to the same periods in 2012, reflecting higher levels of consumer spending.

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Table of Contents

Consumer Real Estate Services
 
Three Months Ended June 30
 
 
 
Home Loans
 
Legacy Assets
& Servicing
 
Total Consumer Real
Estate Services
 
 
(Dollars in millions)
2013
 
2012
 
2013
 
2012

2013
 
2012
 
% Change
Net interest income (FTE basis)
$
344

 
$
330

 
$
355

 
$
383

 
$
699

 
$
713

 
(2
)%
Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage banking income
654

 
826

 
757

 
994

 
1,411

 
1,820

 
(22
)
All other income (loss)
6

 
(31
)
 
(1
)
 
27

 
5

 
(4
)
 
n/m

Total noninterest income
660

 
795

 
756

 
1,021

 
1,416

 
1,816

 
(22
)
Total revenue, net of interest expense (FTE basis)
1,004

 
1,125

 
1,111

 
1,404

 
2,115

 
2,529

 
(16
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for credit losses
64

 
(35
)
 
227

 
222

 
291

 
187

 
56

Noninterest expense
863

 
791

 
2,531

 
2,733

 
3,394

 
3,524

 
(4
)
Income (loss) before income taxes
77

 
369

 
(1,647
)
 
(1,551
)
 
(1,570
)
 
(1,182
)
 
33

Income tax expense (benefit) (FTE basis)
30

 
136

 
(663
)
 
(574
)
 
(633
)
 
(438
)
 
45

Net income (loss)
$
47

 
$
233

 
$
(984
)
 
$
(977
)
 
$
(937
)
 
$
(744
)
 
26

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest yield (FTE basis)
2.57
%
 
2.29
%
 
2.95
%
 
2.27
%
 
2.75
%
 
2.28
%
 
 
Efficiency ratio (FTE basis)
85.96

 
70.31

 
n/m

 
n/m

 
n/m

 
n/m

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans and leases
$
46,870

 
$
50,580

 
$
43,244

 
$
54,927

 
$
90,114

 
$
105,507

 
(15
)
Total earning assets
53,739

 
57,869

 
48,347

 
67,731

 
102,086

 
125,600

 
(19
)
Total assets
54,000

 
58,898

 
68,275

 
92,616

 
122,275

 
151,514

 
(19
)
Allocated capital (1)
6,000

 
—

 
18,000

 
—

 
24,000

 
—

 
n/m

Economic capital (1)
—

 
3,700

 
—

 
10,420

 
—

 
14,120

 
n/m

(1)
Effective January 1, 2013, we revised, on a prospective basis, the methodology for allocating capital to the business segments. In connection with the change in methodology, we updated the applicable terminology in the above table to allocated capital from economic capital as reported in prior periods. For additional information, see Business Segment Operations on page 30.
n/m = not meaningful


37
Table of Contents

 
Six Months Ended June 30
 
 
 
Home Loans
 
Legacy Assets
& Servicing
 
Total Consumer Real
Estate Services
 
 
(Dollars in millions)
2013
 
2012
 
2013
 
2012
 
2013
 
2012
 
% Change
Net interest income (FTE basis)
$
691

 
$
677

 
$
751

 
$
804

 
$
1,442

 
$
1,481

 
(3
)%
Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage banking income
1,351

 
1,541

 
1,547

 
2,107

 
2,898

 
3,648

 
(21
)
All other income (loss)
(58
)
 
(4
)
 
145

 
68

 
87

 
64

 
36

Total noninterest income
1,293

 
1,537

 
1,692

 
2,175

 
2,985

 
3,712

 
(20
)
Total revenue, net of interest expense (FTE basis)
1,984

 
2,214

 
2,443

 
2,979

 
4,427

 
5,193

 
(15
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for credit losses
156

 
19

 
470

 
675

 
626

 
694

 
(10
)
Noninterest expense
1,676

 
1,644

 
7,124

 
5,760

 
8,800

 
7,404

 
19

Income (loss) before income taxes
152

 
551

 
(5,151
)
 
(3,456
)
 
(4,999
)
 
(2,905
)
 
72

Income tax expense (benefit) (FTE basis)
58

 
203

 
(1,963
)
 
(1,229
)
 
(1,905
)
 
(1,026
)
 
86

Net income (loss)
$
94

 
$
348

 
$
(3,188
)
 
$
(2,227
)
 
$
(3,094
)
 
$
(1,879
)
 
65

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest yield (FTE basis)
2.59
%
 
2.36
%
 
3.02
%
 
2.32
%
 
2.80
%
 
2.34
%
 
 
Efficiency ratio (FTE basis)
84.48

 
74.25

 
n/m

 
n/m

 
n/m

 
n/m

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans and leases
$
47,048

 
$
51,122

 
$
44,483

 
$
56,432

 
$
91,531

 
$
107,554

 
(15
)
Total earning assets
53,743

 
57,672

 
50,147

 
69,648

 
103,890

 
127,320

 
(18
)
Total assets
54,251

 
58,623

 
71,035

 
96,113

 
125,286

 
154,736

 
(19
)
Allocated capital (1)
6,000

 
—

 
18,000

 
—

 
24,000

 
—

 
n/m

Economic capital (1)
—

 
3,583

 
—

 
10,872

 
—

 
14,455

 
n/m

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period end
June 30
2013
 
December 31
2012
 
June 30
2013
 
December 31
2012
 
June 30
2013
 
December 31
2012
 
 
Total loans and leases
$
46,891

 
$
47,742

 
$
42,366

 
$
46,918

 
$
89,257

 
$
94,660

 
(6
)
Total earning assets
53,571

 
54,394

 
48,640

 
52,580

 
102,211

 
106,974

 
(4
)
Total assets
53,674

 
55,463

 
70,357

 
75,584

 
124,031

 
131,047

 
(5
)
For footnotes see page 37.

CRES operations include Home Loans and Legacy Assets & Servicing. Home Loans is responsible for ongoing loan production activities and the CRES home equity loan portfolio not selected for inclusion in the Legacy Assets & Servicing owned portfolio. Legacy Assets & Servicing is responsible for all of our mortgage servicing activities related to loans serviced for others and loans held by the Corporation, including loans that have been designated as the Legacy Assets & Servicing Portfolios. For more information on MSRs, see page 44. The Legacy Assets & Servicing Portfolios (both owned and serviced), herein referred to as the Legacy Owned and Legacy Serviced Portfolios, respectively (together, the Legacy Portfolios), and as further defined below, include those loans that would not have been originated under our underwriting standards prior to January 1, 2011. For more information on our Legacy Portfolios, see page 40. In addition, Legacy Assets & Servicing is responsible for managing legacy exposures related to CRES (e.g., representations and warranties). This alignment allows CRES management to lead the ongoing Home Loans business while also providing focus on legacy mortgage issues and servicing activities.

CRES, primarily through Home Loans operations, generates revenue by providing an extensive line of consumer real estate products and services to customers nationwide. CRES products offered by Home Loans include fixed- and adjustable-rate first-lien mortgage loans for home purchase and refinancing needs, home equity lines of credit (HELOCs) and home equity loans. First mortgage products are generally either sold into the secondary mortgage market to investors, while we generally retain MSRs (which are on the balance sheet of Legacy Assets & Servicing) and the Bank of America customer relationships, or are held on the balance sheet in All Other for ALM purposes. Home Loans is compensated for loans held for ALM purposes on a management accounting basis with the corresponding offset in All Other. Newly originated HELOCs and home equity loans are retained on the CRES balance sheet in Home Loans.

CRES includes the impact of migrating customers and their related loan balances between GWIM and CRES. For more information on the transfer of customer balances, see GWIM on page 52.


38
Table of Contents

CRES Results

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

The net loss for CRES increased $193 million to $937 million primarily driven by lower mortgage banking income and higher provision for credit losses, partially offset by lower noninterest expense. Mortgage banking income decreased $409 million due to both lower servicing income and lower core production income, partially offset by lower representations and warranties provision. The decrease in servicing income was due to a decline in the size of our servicing portfolio driven by strategic sales of MSRs as well as loan prepayment activity. Loan prepayment activity exceeded new originations during the second quarter largely due to our exit from the correspondent lending channel in late 2011. The provision for credit losses increased $104 million reflecting a slower rate of credit quality improvement than the year-ago period. Noninterest expense decreased $130 million primarily due to lower expenses in Legacy Assets & Servicing, partially offset by higher loan production costs due to higher loan originations.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

The net loss for CRES increased $1.2 billion to $3.1 billion primarily driven by higher noninterest expense and lower mortgage banking income, partially offset by lower provision for credit losses. Mortgage banking income decreased $750 million driven by the same factors as described in the three-month discussion above. The provision for credit losses decreased $68 million primarily driven by an improved home price outlook in the purchased credit-impaired (PCI) portfolio. Noninterest expense increased $1.4 billion primarily due to higher litigation expense driven in large part by the MBIA Settlement, partially offset by lower costs due to the divestiture of certain ancillary servicing business units in 2012 and lower default-related servicing expenses.

Home Loans

Home Loans products are available to our customers through our retail network of approximately 5,300 banking centers, mortgage loan officers in approximately 320 locations and a sales force offering our customers direct telephone and online access to our products.

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Net income for Home Loans decreased $186 million to $47 million primarily driven by a decrease in noninterest income, higher provision for credit losses and an increase in noninterest expense. Noninterest income decreased $135 million primarily due to lower mortgage banking income driven by a decline in core production revenue as a result of industry-wide margin compression. The provision for credit losses increased $99 million reflecting a slower rate of credit quality improvement than the year-ago period. Noninterest expense increased $72 million primarily due to higher production costs associated with higher origination volume. The higher production costs were primarily personnel related as we continued to add mortgage loan officers, primarily in banking centers, and other employees in sales and fulfillment areas in order to expand capacity and enhance customer service.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Net income for Home Loans decreased $254 million to $94 million primarily driven by a decrease in noninterest income, higher provision for credit losses and an increase in noninterest expense. Noninterest income decreased $244 million, the provision for credit losses increased $137 million and noninterest expense increased $32 million. These changes were driven by the same factors as described in the three-month discussion above.

Legacy Assets & Servicing

Legacy Assets & Servicing is responsible for all of our servicing activities related to the residential mortgage and home equity loan portfolios, including owned loans and loans serviced for others (collectively, the mortgage serviced portfolio). A portion of this portfolio has been designated as the Legacy Serviced Portfolio, which represents 34 percent and 41 percent of the total mortgage serviced portfolio, as measured by unpaid principal balance, at June 30, 2013 and 2012.

Legacy Assets & Servicing results reflect the net cost of legacy exposures that are included in the results of CRES, including representations and warranties provision, litigation costs, financial results of the CRES home equity portfolio selected as part of the Legacy Owned Portfolio, the financial results of the servicing operations and the results of MSR activities, including net hedge results. The financial results of the servicing operations reflect certain revenues and expenses on loans serviced for others, including owned loans serviced for Home Loans, GWIM and All Other.


39
Table of Contents

Servicing activities include collecting cash for principal, interest and escrow payments from borrowers, and disbursing customer draws for lines of credit and accounting for and remitting principal and interest payments to investors and escrow payments to third parties along with responding to customer inquiries. Our home retention efforts, including single point of contact resources, are also part of our servicing activities, along with supervising foreclosures and property dispositions. In an effort to help our customers avoid foreclosure, Legacy Assets & Servicing evaluates various workout options prior to foreclosure sales which, combined with ongoing foreclosure delays in states where foreclosure requires a court order following a legal proceeding (judicial states), has resulted in elongated default timelines. Although we have resumed foreclosure proceedings in all states, there continues to be significant inventory levels in judicial states. For more information on our servicing activities, including the impact of foreclosure delays, see Off-Balance Sheet Arrangements and Contractual Obligations – Other Mortgage-related Matters on page 61 of the MD&A of the Corporation's 2012 Annual Report on Form 10-K.

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

The net loss for Legacy Assets & Servicing was relatively unchanged at $984 million primarily driven by a decrease in noninterest income, largely offset by a decline in noninterest expense. Noninterest income decreased $265 million primarily due to lower servicing income driven by a decline in the servicing portfolio and the divestiture of certain ancillary servicing business units in 2012, partially offset by lower representations and warranties provision and higher revenues from the sale of loans that had returned to performing status. The provision for credit losses was relatively unchanged at $227 million.

Noninterest expense decreased $202 million primarily due to a $255 million reduction in default-related servicing expenses and a $133 million decrease due to the divestiture of certain ancillary servicing business units in 2012. These decreases were partially offset by a $146 million increase in mortgage-related assessments, waivers and similar costs related to foreclosure delays and a $40 million increase in litigation expense. We expect that noninterest expense in Legacy Assets & Servicing, excluding litigation costs, will be below $2.0 billion in the fourth quarter of 2013.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

The net loss for Legacy Assets & Servicing increased $961 million to $3.2 billion primarily driven by an increase in noninterest expense and a decrease in noninterest income, partially offset by a decrease in the provision for credit losses. Noninterest income decreased $483 million due to the same factors described in the three-month discussion above. The provision for credit losses decreased $205 million due to an improved home price outlook in the PCI home equity loan portfolio.

Noninterest expense increased $1.4 billion primarily due to a $1.8 billion increase in litigation expense driven in large part by the MBIA Settlement, partially offset by a $253 million decline in costs due to the divestiture of certain ancillary servicing business units in 2012, a reduction of $77 million in default-related servicing expenses and a $65 million decrease in mortgage-related assessments, waivers and similar costs related to foreclosure delays.

Legacy Portfolios

The Legacy Portfolios (both owned and serviced) include those loans that would not have been originated under our underwriting standards prior to January 1, 2011. The PCI portfolios as well as certain loans that met a pre-defined delinquency status or probability of default threshold as of January 1, 2011 are also included in the Legacy Portfolios. Since determining the pool of loans to be included in the Legacy Portfolios as of January 1, 2011, the criteria have not changed for these portfolios, but will continue to be evaluated over time.

Legacy Owned Portfolio

The Legacy Owned Portfolio includes those loans that met the criteria as described above and are on the balance sheet of the Corporation. The home equity loan portfolio is held on the balance sheet of Legacy Assets & Servicing; whereas, the residential mortgage loan portfolio is held on the balance sheet of All Other. The financial results of the on-balance sheet loans are reported in the segment that owns the loans or in All Other. Total loans in the Legacy Owned Portfolio decreased $5.7 billion during the six months ended June 30, 2013 to $125.4 billion, of which $42.4 billion was reflected on the Legacy Assets & Servicing balance sheet and the remainder was held on the balance sheet of All Other. The decrease was primarily related to payoffs, paydowns, charge-offs and PCI write-offs, largely offset by the addition of loans repurchased in connection with the Fannie Mae (FNMA) Settlement. For more information on the loans repurchased in connection with the FNMA Settlement, see Consumer Portfolio Credit Risk Management on page 83.


40
Table of Contents

Legacy Serviced Portfolio

The Legacy Serviced Portfolio includes the Legacy Owned Portfolio and those loans serviced for outside investors that met the criteria as described above. The table below summarizes the balances of the residential mortgage loans included in the Legacy Serviced Portfolio (the Legacy Residential Mortgage Serviced Portfolio) representing 33 percent and 40 percent of the total residential mortgage serviced portfolio, as measured by unpaid principal balance, of $887 billion and $1.5 trillion at June 30, 2013 and 2012. The decline in the Legacy Residential Mortgage Serviced Portfolio was primarily related to servicing transfers, paydowns and payoffs. We expect that by the end of the fourth quarter of 2013, the number of 60 days or more past due residential mortgage loans in the Legacy and Non-Legacy Residential Mortgage Serviced Portfolios will decline below 375,000 from 492,000 at June 30, 2013.

Legacy Residential Mortgage Serviced Portfolio, a subset of the Residential Mortgage Serviced Portfolio (1, 2)
 
June 30
(Dollars in billions)
2013
 
2012
Unpaid principal balance
 
 
 
Residential mortgage loans
 
 
 
Total
$
289

 
$
586

60 days or more past due
96

 
207

 
 
 
 
Number of loans serviced (in thousands)
 
 
 
Residential mortgage loans
 
 
 
Total
1,468

 
3,092

60 days or more past due
404

 
939

(1) 
Excludes $45 billion and $72 billion of home equity loans and HELOCs at June 30, 2013 and 2012.
(2) 
Excludes 190,000 loans for which servicing transferred to third parties as of June 30, 2013, with an effective MSR sale date of July 1, 2013, totaling approximately $41 billion of unpaid principal balance.

Non-Legacy Portfolio

As previously discussed, Legacy Assets & Servicing is responsible for all of our servicing activities. The table below summarizes the balances of the residential mortgage loans that are not included in the Legacy Serviced Portfolio (the Non-Legacy Residential Mortgage Serviced Portfolio) representing 67 percent and 60 percent of the total residential mortgage serviced portfolio, as measured by unpaid principal balance, at June 30, 2013 and 2012. The decline in the Non-Legacy Residential Mortgage Serviced Portfolio was primarily related to servicing transfers, paydowns and payoffs.

Non-Legacy Residential Mortgage Serviced Portfolio, a subset of the Residential Mortgage Serviced Portfolio (1, 2)
 
June 30
(Dollars in billions)
2013
 
2012
Unpaid principal balance
 
 
 
Residential mortgage loans
 
 
 
Total
$
598

 
$
876

60 days or more past due
16

 
22

 
 
 
 
Number of loans serviced (in thousands)
 
 
 
Residential mortgage loans
 
 
 
Total
3,790

 
5,342

60 days or more past due
88

 
124

(1) 
Excludes $54 billion and $60 billion of home equity loans and HELOCs at June 30, 2013 and 2012.
(2) 
Excludes approximately 96,000 loans for which servicing transferred to third parties as of June 30, 2013, with an effective MSR sale date of July 1, 2013, totaling approximately $8 billion of unpaid principal balance.


41
Table of Contents

Mortgage Banking Income

CRES mortgage banking income is categorized into production and servicing income. Core production income is comprised primarily of revenue from the fair value gains and losses recognized on our interest rate lock commitments (IRLCs) and loans held-for-sale (LHFS), the related secondary market execution, costs related to representations and warranties in the sales transactions along with other obligations incurred in the sales of mortgage loans and revenues earned in production-related ancillary businesses. Ongoing costs related to representations and warranties and other obligations that were incurred in the sales of mortgage loans in prior periods are also included in production income.

Servicing income includes income earned in connection with servicing activities and MSR valuation adjustments, net of results from risk management activities used to hedge certain market risks of the MSRs. The costs associated with our servicing activities are included in noninterest expense.

The table below summarizes the components of mortgage banking income.

Mortgage Banking Income
 
 
 
 
 
 
 
 
Three Months Ended June 30
 
Six Months Ended June 30
(Dollars in millions)
2013
 
2012
 
2013
 
2012
Production income:
 
 
 
 
 
 
 
Core production revenue
$
860

 
$
902

 
$
1,675

 
$
1,830

Representations and warranties provision
(197
)
 
(395
)
 
(447
)
 
(677
)
Total production income
663

 
507

 
1,228

 
1,153

Servicing income:
 
 
 
 
 
 
 
Servicing fees
785

 
1,205

 
1,698

 
2,534

Impact of customer payments (1)
(260
)
 
(282
)
 
(574
)
 
(803
)
Fair value changes of MSRs, net of risk management activities used to hedge certain market risks (2)
215

 
194

 
527

 
388

Other servicing-related revenue
8

 
196

 
19

 
376

Total net servicing income
748

 
1,313

 
1,670

 
2,495

Total CRES mortgage banking income
1,411

 
1,820

 
2,898

 
3,648

Eliminations (3)
(233
)
 
(161
)
 
(457
)
 
(377
)
Total consolidated mortgage banking income
$
1,178

 
$
1,659

 
$
2,441

 
$
3,271

(1) 
Represents the change in the value of the MSR asset due to the impact of customer payments received during the period.
(2) 
Includes gains (losses) on sales of MSRs.
(3) 
Includes the effect of transfers of mortgage loans from CRES to the ALM portfolio in All Other.

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

CRES first mortgage loan originations increased $6.3 billion, or 44 percent, reflecting an increase in our estimated retail market share combined with a higher market demand for both purchase and refinance transactions. Our increase in market share was due to expanded fulfillment capacity which allowed us to reduce the outstanding pipeline of applications and improve our competitive pricing position. Core production revenue decreased $42 million as higher origination volumes were more than offset by lower margins primarily due to industry-wide margin compression. This decline was partially offset by higher revenue from sales of loans that had returned to performing status. During the three months ended June 30, 2013, 83 percent of our first mortgage production volume was for refinance originations and 17 percent was for purchase originations compared to 81 percent and 19 percent for the same period in 2012. Home Affordable Refinance Program (HARP) refinance originations were 20 percent of all refinance originations, down from 31 percent for the same period in 2012 primarily due to the sales of MSRs. Making Home Affordable non-HARP refinance originations were 25 percent of all refinance originations as compared to 19 percent for the same period in 2012. The remaining 55 percent of refinance originations were conventional refinances as compared to 50 percent for the same period in 2012.

The representations and warranties provision decreased $198 million as the year-ago period included provision related to non-government-sponsored enterprise (GSE) exposures based on activity with certain counterparties.


42
Table of Contents

Net servicing income decreased $565 million driven by lower servicing fees due to a smaller servicing portfolio and lower ancillary income due to the divestiture of certain servicing business units in 2012. The decline in the size of our servicing portfolio was driven by strategic sales of MSRs as well as loan prepayment activity, which exceeded new originations primarily due to our exit from the correspondent lending channel in late 2011. For more information on sales of MSRs, see Mortgage Servicing Rights – Sales of Mortgage Servicing Rights on page 44.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

CRES first mortgage loan originations increased $13.4 billion, or 51 percent, while core production revenue decreased $155 million due to the same factors noted in the three-month discussion. During the six months ended June 30, 2013, 87 percent of our first mortgage production volume was for refinance originations and 13 percent was for purchase originations compared to 82 percent and 18 percent for the same period in 2012. HARP refinance originations were 23 percent of all refinance originations compared to 24 percent for the same period in 2012. Making Home Affordable non-HARP refinance originations were 23 percent of all refinance originations as compared to 16 percent for the same period in 2012. The remaining 54 percent of refinance originations related to conventional refinances as compared to 60 percent for the same period in 2012.

The representations and warranties provision was $230 million lower due to the same factors as described in the three-month discussion.

Net servicing income decreased $825 million driven by lower servicing fees and ancillary income due to the same factors noted in the three-month discussion above. These declines were partially offset by a $229 million reduction in the impact of customer payments driven by a lower MSR asset combined with more favorable MSR results, net of hedges.

Key Statistics
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30
 
Six Months Ended June 30
(Dollars in millions, except as noted)
2013
 
2012
 
2013
 
2012
Loan production
 
 
 
 
 
 
 
 
 
 
 
Total Corporation (1):
 
 
 
 
 
 
 
 
 
 
 
First mortgage
$
25,276

 
 
$
18,005

 
 
$
49,196

 
 
$
33,243

 
Home equity
1,496

 
 
930

 
 
2,612

 
 
1,690

 
CRES:
 
 
 
 
 
 
 
 
 
 
 
First mortgage
$
20,509

 
 
$
14,206

 
 
$
39,778

 
 
$
26,391

 
Home equity
1,283

 
 
724

 
 
2,225

 
 
1,321

 
 
 
 
 
 
 
 
 
 
 
Period end
 
 
 
 
 
 
June 30
2013
 
December 31
2012
Mortgage serviced portfolio (in billions) (2, 3)
 
 
 
 
 
 
$
986

 
 
$
1,332

 
Mortgage loans serviced for investors (in billions)
 
 
 
 
 
 
759

 
 
1,045

 
Mortgage servicing rights:
 
 
 
 
 
 
 
 
 
 
 
Balance
 
 
 
 
 
 
5,827

 
 
5,716

 
Capitalized mortgage servicing rights (% of loans serviced for investors)
 
 
 
 
 
 
77

bps
 
55

bps
(1) 
In addition to loan production in CRES, the remaining first mortgage and home equity loan production is primarily in GWIM.
(2) 
Servicing of residential mortgage loans, HELOCs and home equity loans.
(3) 
Excludes approximately 286,000 loans for which servicing transferred to third parties as of June 30, 2013, with an effective MSR sale date of July 1, 2013, totaling approximately $49 billion of unpaid principal balance.

Retail first mortgage loan originations for the total Corporation were $25.3 billion and $49.2 billion for the three and six months ended June 30, 2013 compared to $18.0 billion and $33.2 billion for the same periods in 2012. The increase of $7.3 billion for the three-month period and $16.0 billion for the six-month period was primarily driven by increased market share due to increased fulfillment capacity and an increase in the overall market demand for mortgages. Given the recent increase in interest rates, we expect the overall mortgage market to decline which will have an adverse impact on our mortgage loan originations, particularly our refinance originations. Our mortgage origination pipeline decreased five percent at June 30, 2013 compared to March 31, 2013.

Home equity production was $1.5 billion and $2.6 billion for the three and six months ended June 30, 2013 compared to $930 million and $1.7 billion for the same periods in 2012 with the increase due to a higher demand in the market based on improving housing trends, and increased market share driven by improved banking center engagement with customers and more competitive pricing.

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Table of Contents

Mortgage Servicing Rights

At June 30, 2013, the consumer MSR balance was $5.8 billion, which represented 77 bps of the related unpaid principal balance compared to $5.7 billion, or 55 bps of the related unpaid principal balance at December 31, 2012. The consumer MSR balance increased $111 million in the six months ended June 30, 2013 primarily driven by higher mortgage rates, which resulted in lower forecasted prepayment speeds, largely offset by MSR sales and the change in the MSR asset value due to the impact of customer payments received during the period. For more information on our servicing activities, see Off-Balance Sheet Arrangements and Contractual Obligations – Servicing, Foreclosure and Other Mortgage Matters on page 65. For more information on MSRs, see Note 19 – Mortgage Servicing Rights to the Consolidated Financial Statements.

Sales of Mortgage Servicing Rights

As previously disclosed, during the first quarter of 2013, we entered into definitive agreements with certain counterparties, and on April 1, 2013 with an additional counterparty to sell the servicing rights on certain residential mortgage loans serviced for others, with an aggregate unpaid principal balance of approximately $314 billion. The sales involve approximately 2.1 million loans serviced by us as of the applicable contract dates, including approximately 202,000 residential mortgage loans and approximately 15,000 home equity loans that were 60 days or more past due based upon current estimates.

The transfers of servicing rights are occurring in stages throughout 2013, and more than half of the servicing had been transferred as of June 30, 2013. Certain of the transfers are subject to the approval or consent of certain third parties. There is no assurance that all the required approvals and consents will be obtained, and accordingly, some of these transfers may not be consummated. We expect that the sales, when completed, will ultimately lead to a reduction in servicing revenue of approximately $150 million per quarter compared to the fourth quarter of 2012.

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Table of Contents

Global Banking (1)
 
Three Months Ended June 30
 
 
 
Six Months Ended June 30
 
 
(Dollars in millions)
2013
 
2012
 
% Change
 
2013

2012
 
% Change
Net interest income (FTE basis)
$
2,252

 
$
1,940

 
16
 %
 
$
4,412

 
$
4,027

 
10
 %
Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
Service charges
701

 
726

 
(3
)
 
1,387

 
1,448

 
(4
)
Investment banking fees
792

 
638

 
24

 
1,582

 
1,289

 
23

All other income
394

 
604

 
(35
)
 
788

 
1,173

 
(33
)
Total noninterest income
1,887

 
1,968

 
(4
)
 
3,757

 
3,910

 
(4
)
Total revenue, net of interest expense (FTE basis)
4,139

 
3,908

 
6

 
8,169

 
7,937

 
3

 
 
 
 
 
 
 
 
 
 
 
 
Provision for credit losses
163

 
(152
)
 
n/m

 
312

 
(427
)
 
n/m

Noninterest expense
1,859

 
1,967

 
(5
)
 
3,696

 
3,928

 
(6
)
Income before income taxes
2,117

 
2,093

 
1

 
4,161

 
4,436

 
(6
)
Income tax expense (FTE basis)
826

 
775

 
7

 
1,586

 
1,634

 
(3
)
Net income
$
1,291

 
$
1,318

 
(2
)
 
$
2,575

 
$
2,802

 
(8
)
 
 
 
 
 
 
 
 
 
 
 
 
Net interest yield (FTE basis)
3.15
%
 
2.89
%
 
 
 
3.16
%
 
2.96
%
 
 
Return on average allocated capital (2)
22.52

 
—

 
 
 
22.58

 
—

 
 
Return on average economic capital (2)
—

 
27.24

 
 
 
—

 
29.31

 
 
Efficiency ratio (FTE basis)
44.94

 
50.33

 
 
 
45.25

 
49.48

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average
 
 
 
 
 
 
 
 
 
 
 
Total loans and leases
$
255,674

 
$
219,504

 
16

 
$
249,903

 
$
221,854

 
13

Total earning assets
286,522

 
270,190

 
6

 
281,743

 
273,170

 
3

Total assets
327,531

 
311,043

 
5

 
322,814

 
314,088

 
3

Total deposits
227,668

 
213,862

 
6

 
224,909

 
212,638

 
6

Allocated capital (2)
23,000

 
—

 
n/m

 
23,000

 
—

 
n/m

Economic capital (2)
—

 
19,472

 
n/m

 
—

 
19,243

 
n/m

 
 
 
 
 
 
 
 
 
 
 
 
Period end
 
 
 
 
 
 
June 30
2013
 
December 31
2012
 
 
Total loans and leases
 
 
 
 
 
 
$
258,502

 
$
242,340

 
7

Total earning assets
 
 
 
 
 
 
293,733

 
289,036

 
2

Total assets
 
 
 
 
 
 
334,820

 
331,611

 
1

Total deposits
 
 
 
 
 
 
229,586

 
243,306

 
(6
)
(1) 
During the second quarter of 2013, the results of consumer Dealer Financial Services, previously reported in Global Banking, were moved to CBB. Prior periods have been reclassified to conform to current period presentation.
(2) 
Effective January 1, 2013, we revised, on a prospective basis, the methodology for allocating capital to the business segments. In connection with the change in methodology, we updated the applicable terminology in the above table to allocated capital from economic capital as reported in prior periods. For additional information, see Business Segment Operations on page 30.
n/m = not meaningful

Global Banking, which includes Global Corporate and Global Commercial Banking, and Investment Banking, provides a wide range of lending-related products and services, integrated working capital management and treasury solutions to clients, and underwriting and advisory services through our network of offices and client relationship teams. Our lending products and services include commercial loans, leases, commitment facilities, trade finance, real estate lending and asset-based lending. Our treasury solutions business includes treasury management, foreign exchange and short-term investing options. We also work with our clients to provide investment banking products such as debt and equity underwriting and distribution, and merger-related and other advisory services. Underwriting debt and equity issuances, fixed-income and equity research, and certain market-based activities are executed through our global broker/dealer

45
Table of Contents

affiliates which are our primary dealers in several countries. Within Global Banking, Global Commercial Banking clients generally include middle-market companies, commercial real estate firms, auto dealerships and not-for-profit companies. Global Corporate Banking includes large global corporations, financial institutions and leasing clients.

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Net income for Global Banking remained relatively unchanged as an increase in the provision for credit losses was largely offset by higher revenue and lower noninterest expense.

Revenue increased $231 million to $4.1 billion as higher net interest income and investment banking fees were partially offset by lower other income due to gains on liquidation of certain portfolios in the prior-year period.

The provision for credit losses increased $315 million to $163 million from a benefit of $152 million primarily as a result of commercial loan growth. In the year-ago quarter, charge-offs exceeded provision, which resulted in a net reduction in the reserve of $272 million.

Noninterest expense decreased $108 million to $1.9 billion primarily due to lower personnel expenses.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Net income for Global Banking decreased $227 million to $2.6 billion primarily driven by an increase in the provision for credit losses partially offset by higher revenue and lower noninterest expense, primarily driven by the same factors as described in the three-months discussion above.

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Table of Contents

Global Corporate and Global Commercial Banking

Global Corporate and Global Commercial Banking each include Business Lending and Global Treasury Services activities. Business Lending includes various lending-related products and services including commercial loans, leases, commitment facilities, trade finance, real estate lending and asset-based lending. Global Treasury Services includes deposits, treasury management, credit card, foreign exchange, and short-term investment and custody solutions to corporate and commercial banking clients. The table below presents a summary of Global Corporate and Global Commercial Banking results.

Global Corporate and Global Commercial Banking
 
 
 
 
 
Three Months Ended June 30
 
Global Corporate Banking
 
Global Commercial Banking
 
Total
(Dollars in millions)
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Revenue
 
 
 
 
 
 
 
 
 
 
 
Business Lending
$
855

 
$
836

 
$
1,053

 
$
912

 
$
1,908

 
$
1,748

Global Treasury Services
702

 
630

 
731

 
732

 
1,433

 
1,362

Total revenue, net of interest expense
$
1,557

 
$
1,466

 
$
1,784

 
$
1,644

 
$
3,341

 
$
3,110

 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
Average
 
 
 
 
 
 
 
 
 
 
 
Total loans and leases
$
126,771

 
$
108,388

 
$
128,873

 
$
110,966

 
$
255,644

 
$
219,354

Total deposits
123,482

 
108,600

 
104,141

 
105,237

 
227,623

 
213,837

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Revenue
 
 
 
 
 
 
 
 
 
 
 
Business Lending
$
1,706

 
$
1,697

 
$
2,001

 
$
1,800

 
$
3,707

 
$
3,497

Global Treasury Services
1,368

 
1,286

 
1,447

 
1,512

 
2,815

 
2,798

Total revenue, net of interest expense
$
3,074

 
$
2,983

 
$
3,448

 
$
3,312

 
$
6,522

 
$
6,295

 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
Average
 
 
 
 
 
 
 
 
 
 
 
Total loans and leases
$
122,803

 
$
110,690

 
$
127,079

 
$
110,641

 
$
249,882

 
$
221,331

Total deposits
121,348

 
107,181

 
103,519

 
105,429

 
224,867

 
212,610

 
 
 
 
 
 
 
 
 
 
 
 
Period end
 
 
 
 
 
 
 
 
 
 
 
Total loans and leases
$
127,341

 
$
107,151

 
$
131,134

 
$
111,361

 
$
258,475

 
$
218,512

Total deposits
124,646

 
111,762

 
104,895

 
104,739

 
229,541

 
216,501


Global Corporate and Global Commercial Banking revenue increased $231 million and $227 million for the three and six months ended June 30, 2013 compared to the same periods in 2012 due to higher revenue in both Business Lending and Global Treasury Services.

Business Lending revenue in Global Corporate Banking improved slightly for the three and six months ended June 30, 2013 compared to the same periods in 2012 as the impact on revenue of growth in loan balances was offset by lower accretion on acquired portfolios and gains on liquidation of certain portfolios in the prior-year periods. Business Lending revenue in Global Commercial Banking increased $141 million and $201 million as growth in the commercial and industrial, and commercial real estate portfolios, as well as higher accretion on acquired portfolios compared to the prior-year periods, offset the impact of the low rate environment.

Global Treasury Services revenue increased $71 million and $17 million for the three and six months ended June 30, 2013 compared to the same periods in 2012 driven by growth in U.S. and non-U.S. deposit balances and the impact of the low rate environment.


47
Table of Contents

Average loans and leases in Global Corporate and Global Commercial Banking increased 17 percent and 13 percent for the three and six months ended June 30, 2013 compared to the same periods in 2012 driven by growth in commercial and industrial, and commercial real estate portfolios from higher client demand. Average deposits in Global Corporate and Global Commercial Banking increased six percent for both the three and six months ended June 30, 2013 compared to the same periods in 2012 due to client liquidity, international growth and limited alternative investment options.

Investment Banking

Client teams and product specialists underwrite and distribute debt, equity and other loan products, and provide advisory services and tailored risk management solutions. The economics of most investment banking and underwriting activities are shared primarily between Global Banking and Global Markets based on the contribution by and involvement of each segment. To provide a complete discussion of our consolidated investment banking fees, the table below presents total Corporation investment banking fees as well as the portion attributable to Global Banking.

Investment Banking Fees
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30
 
Six Months Ended June 30
 
Global Banking
 
Total Corporation
 
Global Banking
 
Total Corporation
(Dollars in millions)
2013
 
2012
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Products
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advisory
$
240

 
$
314

 
$
262

 
$
340

 
$
473

 
$
503

 
$
519

 
$
544

Debt issuance
405

 
253

 
987

 
646

 
833

 
599

 
2,009

 
1,419

Equity issuance
147

 
71

 
356

 
192

 
276

 
187

 
679

 
497

Gross investment banking fees
792

 
638

 
1,605

 
1,178

 
1,582

 
1,289

 
3,207

 
2,460

Self-led
(7
)
 
(5
)
 
(49
)
 
(32
)
 
(35
)
 
(27
)
 
(116
)
 
(97
)
Total investment banking fees
$
785

 
$
633

 
$
1,556

 
$
1,146

 
$
1,547

 
$
1,262

 
$
3,091

 
$
2,363


Total Corporation investment banking fees of $1.6 billion and $3.1 billion, excluding self-led deals, included within Global Banking and Global Markets, increased 36 percent and 31 percent for the three and six months ended June 30, 2013 compared to the same periods in 2012 due to strong debt underwriting performance, primarily within leveraged finance and investment grade, and equity underwriting performance due to significant increases in global IPO markets. These increases were partially offset by a decline in advisory fees.


48
Table of Contents

Global Markets
 
Three Months Ended June 30
 
 
 
Six Months Ended June 30
 
 
(Dollars in millions)
2013
 
2012
 
% Change
 
2013
 
2012
 
% Change
Net interest income (FTE basis)
$
1,013

 
$
721

 
40
 %
 
$
2,122

 
$
1,628

 
30
 %
Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
Investment and brokerage services
549

 
448

 
23

 
1,077

 
962

 
12

Investment banking fees
668

 
438

 
53

 
1,347

 
994

 
36

Trading account profits
1,848

 
1,706

 
8

 
4,738

 
3,744

 
27

All other income (loss)
111

 
265

 
(58
)
 
(226
)
 
657

 
n/m

Total noninterest income
3,176

 
2,857

 
11

 
6,936

 
6,357

 
9

Total revenue, net of interest expense (FTE basis)
4,189

 
3,578

 
17

 
9,058

 
7,985

 
13

 
 
 
 
 
 
 
 
 
 
 
 
Provision for credit losses
(16
)
 
(1
)
 
n/m

 
(11
)
 
(14
)
 
(21
)
Noninterest expense
2,769

 
2,855

 
(3
)
 
5,842

 
6,090

 
(4
)
Income before income taxes
1,436

 
724

 
98

 
3,227

 
1,909

 
69

Income tax expense (FTE basis)
477

 
227

 
110

 
1,099

 
583

 
89

Net income
$
959

 
$
497

 
93

 
$
2,128

 
$
1,326

 
60

 
 
 
 
 
 
 
 
 
 
 
 
Return on average allocated capital (1)
12.85
%
 
—

 
 
 
14.33
%
 
—

 
 
Return on average economic capital (1)
—

 
15.10
%
 
 
 
—

 
19.32
%
 
 
Efficiency ratio (FTE basis)
66.12

 
79.79

 
 
 
64.50

 
76.27

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average
 
 
 
 
 
 
 
 
 
 
 
Total trading-related assets (2)
$
490,972

 
$
459,869

 
7

 
$
497,582

 
$
454,300

 
10

Total earning assets (2)
499,396

 
456,552

 
9

 
504,516

 
446,695

 
13

Total assets
653,116

 
596,861

 
9

 
660,151

 
585,423

 
13

Allocated capital (1)
30,000

 
—

 
n/m

 
30,000

 
—

 
n/m

Economic capital (1)
—

 
13,316

 
n/m

 
—

 
13,849

 
n/m

 
 
 
 
 
 
 
 
 
 
 
 
Period end
 
 
 
 
 
 
June 30
2013
 
December 31
2012
 
 
Total trading-related assets (2)
 
 
 
 
 
 
$
446,505

 
$
465,836

 
(4
)
Total earning assets (2)
 
 
 
 
 
 
465,166

 
486,470

 
(4
)
Total assets
 
 
 
 
 
 
607,050

 
630,570

 
(4
)
(1) 
Effective January 1, 2013, we revised, on a prospective basis, the methodology for allocating capital to the business segments. In connection with the change in methodology, we updated the applicable terminology in the above table to allocated capital from economic capital as reported in prior periods. For additional information, see Business Segment Operations on page 30.
(2) 
Trading-related assets include derivative assets, which are considered non-earning assets.
n/m = not meaningful

Global Markets offers sales and trading services, including research, to institutional clients across fixed-income, credit, currency, commodity and equity businesses. Global Markets product coverage includes securities and derivative products in both the primary and secondary markets. Global Markets provides market-making, financing, securities clearing, settlement and custody services globally to our institutional investor clients in support of their investing and trading activities. We also work with our commercial and corporate clients to provide risk management products using interest rate, equity, credit, currency and commodity derivatives, foreign exchange, fixed-income and mortgage-related products. As a result of our market-making activities in these products, we may be required to manage risk in government securities, equity and equity-linked securities, high-grade and high-yield corporate debt securities, MBS, commodities and asset-backed securities (ABS). In addition, the economics of most investment banking and underwriting activities are shared primarily between Global Markets and Global Banking based on the activities performed by each segment. Global Banking originates certain deal-related transactions with our corporate and commercial clients that are executed and distributed by Global Markets. For more information on investment banking fees on a consolidated basis, see page 48.

49
Table of Contents

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Net income for Global Markets increased $462 million to $959 million. Net DVA gains on derivatives were $38 million compared to net DVA losses of $156 million. Excluding net DVA, net income increased $340 million to $935 million primarily driven by higher equities revenue and lower noninterest expense, partially offset by lower FICC revenue. Noninterest expense decreased $86 million to $2.8 billion due to a reduction in operating costs.

Average earning assets increased $42.8 billion to $499.4 billion largely driven by increased client financing activity in the equities business.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Net income for Global Markets increased $802 million to $2.1 billion. Net DVA losses on derivatives were $17 million compared to $1.6 billion. Excluding net DVA, net income decreased $189 million to $2.1 billion primarily driven by lower FICC revenue partially offset by higher equities revenue and lower noninterest expense. Noninterest expense decreased $248 million to $5.8 billion due to the same factor as described in the three-month discussion above.

Average earning assets increased $57.8 billion to $504.5 billion largely driven by the same factor described in the three-month discussion above.

Sales and Trading Revenue

Sales and trading revenue includes unrealized and realized gains and losses on trading and other assets, net interest income, and fees primarily from commissions on equity securities. Sales and trading revenue is segregated into fixed income (government debt obligations, investment and non-investment grade corporate debt obligations, CMBS, RMBS, collateralized debt obligations (CDOs), interest rate and credit derivative contracts), currencies (interest rate and foreign exchange contracts), commodities (primarily futures, forwards, swaps and options) and equities (equity-linked derivatives and cash equity activity). The table below and related discussion present sales and trading revenue, substantially all of which is in Global Markets with the remainder in Global Banking. In addition, the table below and related discussion present sales and trading revenue excluding DVA, which is a non-GAAP financial measure. We believe the use of this non-GAAP financial measure provides clarity in assessing the underlying performance of these businesses.

Sales and Trading Revenue (1, 2)
 
 
 
 
 
 
 
 
Three Months Ended June 30
 
Six Months Ended June 30
(Dollars in millions)
2013
 
2012
 
2013
 
2012
Sales and trading revenue
 
 
 
 
 
 
 
Fixed income, currencies and commodities
$
2,292

 
$
2,418

 
$
5,228

 
$
5,261

Equities
1,199

 
761

 
2,358

 
1,673

Total sales and trading revenue
$
3,491

 
$
3,179

 
$
7,586

 
$
6,934

 
 
 
 
 
 
 
 
Sales and trading revenue, excluding net DVA (3)
 
 
 
 
 
 
 
Fixed income, currencies and commodities
$
2,259

 
$
2,555

 
$
5,260

 
$
6,685

Equities
1,194

 
780

 
2,343

 
1,839

Total sales and trading revenue, excluding net DVA
$
3,453

 
$
3,335

 
$
7,603

 
$
8,524

(1) 
Includes FTE adjustments of $44 million and $90 million for the three and six months ended June 30, 2013 compared to $59 million and $109 million for the same periods in 2012. For more information on sales and trading revenue, see Note 3 – Derivatives to the Consolidated Financial Statements.
(2) 
Includes Global Banking sales and trading revenue of $142 million and $210 million for the three and six months ended June 30, 2013 compared to $248 million and $363 million for the same periods in 2012.
(3) 
For this presentation, sales and trading revenue excludes the impact of credit spreads on DVA which represents a non-GAAP financial measure. Net DVA gains of $33 million and net DVA losses of $32 million were included in FICC revenue, and net DVA gains of $5 million and $15 million were included in equities revenue for the three and six months ended June 30, 2013 compared to net DVA losses of $137 million and $1.4 billion, and $19 million and $166 million for the same periods in 2012.


50
Table of Contents

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

FICC revenue, including net DVA, decreased $126 million to $2.3 billion. Excluding net DVA, FICC revenue decreased $296 million to $2.3 billion primarily driven by a challenging trading environment toward the end of the quarter as fixed-income assets sold off due to market concerns related to the Federal Reserve's policy announcement in June, primarily in interest rate sensitive products, as well as the result of a gain on the sale of an equity investment in the prior-year period and less favorable conditions in structured credit markets. Equities revenue, including net DVA, increased $438 million to $1.2 billion. Excluding net DVA, equities revenue increased $414 million to $1.2 billion primarily due to increased market share across the cash equities businesses, improved performance in equity derivatives and increased financing activity. Sales and trading revenue included total commissions and brokerage fee revenue of $549 million compared to $448 million, substantially all from equities. The $101 million increase in commissions and brokerage fee revenue was primarily due to a higher market share in equities.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

FICC revenue, including net DVA, decreased $33 million to $5.2 billion. Excluding the impact of credit spreads on net DVA, FICC revenue decreased $1.4 billion to $5.3 billion primarily resulting from a write-down of a receivable related to the MBIA Settlement in the first quarter of 2013 as well as the same factors described in the three-month discussion above. For more information on the MBIA Settlement, see Note 8 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements. Equities revenue, including net DVA, increased $685 million to $2.4 billion. Excluding the impact of credit spreads on net DVA, equities revenue increased $504 million to $2.3 billion due to the same factors as described in the three-month discussion above. Sales and trading revenue included total commissions and brokerage fee revenue of $1.1 billion compared to $962 million, substantially all from equities. Commissions and brokerage fee revenue increased $115 million due to the same factor described in the three-month discussion above.


51
Table of Contents

Global Wealth & Investment Management
 
Three Months Ended June 30
 
 
 
Six Months Ended June 30
 
 
(Dollars in millions)
2013
 
2012
 
% Change
 
2013

2012
 
% Change
Net interest income (FTE basis)
$
1,505

 
$
1,393

 
8
 %
 
$
3,101

 
$
2,924

 
6
 %
Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
Investment and brokerage services
2,441

 
2,221

 
10

 
4,772

 
4,396

 
9

All other income
553

 
480

 
15

 
1,047

 
921

 
14

Total noninterest income
2,994

 
2,701

 
11

 
5,819

 
5,317

 
9

Total revenue, net of interest expense (FTE basis)
4,499

 
4,094

 
10

 
8,920

 
8,241

 
8

 
 
 
 
 
 
 
 
 
 
 
 
Provision for credit losses
(15
)
 
47

 
n/m

 
7

 
93

 
(92
)
Noninterest expense
3,272

 
3,177

 
3

 
6,525

 
6,409

 
2

Income before income taxes
1,242

 
870

 
43

 
2,388

 
1,739

 
37

Income tax expense (FTE basis)
484

 
322

 
50

 
910

 
641

 
42

Net income
$
758

 
$
548

 
38

 
$
1,478

 
$
1,098

 
35

 
 
 
 
 
 
 
 
 
 
 
 
Net interest yield (FTE basis)
2.47
%
 
2.31
%
 
 
 
2.46
%
 
2.38
%
 
 
Return on average allocated capital (1)
30.57

 
—

 
 
 
29.98

 
—

 
 
Return on average economic capital (1)
—

 
31.76

 
 
 
—

 
33.24

 
 
Efficiency ratio (FTE basis)
72.72

 
77.61

 
 
 
73.15

 
77.77

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average
 
 
 
 
 
 
 
 
 
 
 
Total loans and leases
$
109,589

 
$
98,964

 
11

 
$
107,845

 
$
98,490

 
9

Total earning assets
244,845

 
242,843

 
1

 
254,113

 
246,785

 
3

Total assets
263,735

 
262,124

 
1

 
272,965

 
265,899

 
3

Total deposits
235,344

 
238,540

 
(1
)
 
244,329

 
239,200

 
2

Allocated capital (1)
10,000

 
—

 
n/m

 
10,000

 
—

 
n/m

Economic capital (1)
—

 
7,011

 
n/m

 
—

 
6,716

 
n/m

 
 
 
 
 
 
 
 
 
 
 
 
Period end
 
 
 
 
 
 
June 30
2013
 
December 31
2012
 
 
Total loans and leases
 
 
 
 
 
 
$
111,785

 
$
105,928

 
6

Total earning assets
 
 
 
 
 
 
244,361

 
277,103

 
(12
)
Total assets
 
 
 
 
 
 
263,867

 
297,326

 
(11
)
Total deposits
 
 
 
 
 
 
235,012

 
266,188

 
(12
)
(1) 
Effective January 1, 2013, we revised, on a prospective basis, the methodology for allocating capital to the business segments. In connection with the change in methodology, we updated the applicable terminology in the above table to allocated capital from economic capital as reported in prior periods. For additional information, see Business Segment Operations on page 30.
n/m = not meaningful

GWIM consists of two primary businesses: Merrill Lynch Global Wealth Management (MLGWM) and U.S. Trust, Bank of America Private Wealth Management (U.S. Trust).

MLGWM's advisory business provides a high-touch client experience through a network of financial advisors focused on clients with over $250,000 in total investable assets. MLGWM provides tailored solutions to meet our clients' needs through a full set of brokerage, banking and retirement products.

U.S. Trust, together with MLGWM's Private Banking & Investments Group, provides comprehensive wealth management solutions targeted to wealthy and ultra-wealthy clients with investable assets of more than $5 million, as well as customized solutions to meet clients' wealth structuring, investment management, trust and banking needs, including specialty asset management services.

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Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Net income increased $210 million to $758 million, a record since the Merrill Lynch & Co., Inc. (Merrill Lynch) merger, driven by higher revenue and lower provision for credit losses, partially offset by higher noninterest expense. Revenue increased $405 million to $4.5 billion, also a post-merger record, primarily driven by higher asset management fees related to higher market levels and long-term AUM flows, increased transactional revenue and higher net interest income. The provision for credit losses decreased $62 million to a benefit of $15 million driven by continued credit quality improvement. Noninterest expense increased $95 million to $3.3 billion as higher volume-driven expenses and support costs were partially offset by lower non-volume driven personnel costs.

Revenue from MLGWM was $3.7 billion, up 10 percent, and revenue from U.S. Trust was $740 million, up eight percent, both driven by higher noninterest income and net interest income.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Net income increased $380 million to $1.5 billion driven by higher revenue and lower provision for credit losses, partially offset by higher noninterest expense. Revenue increased $679 million to $8.9 billion. The provision for credit losses decreased $86 million to $7 million. These changes were driven by the same factors as described in the three-month discussion above. Noninterest expense increased $116 million to $6.5 billion driven by the same factors as described in the three-month discussion above, as well as higher litigation expenses.

Revenue from MLGWM was $7.4 billion, up nine percent, and revenue from U.S. Trust was $1.5 billion, up seven percent, both driven by higher noninterest income and net interest income.

Net Migration Summary

GWIM results are impacted by the migration of clients and their related deposit and loan balances to or from CBB, CRES and the ALM portfolio, as presented in the table below. We move clients between business segments to better meet the needs of our clients. The table below includes the first quarter transfer whereby GWIM identified and transferred deposit balances of approximately $19 billion to CBB. Additionally, beginning in 2013, the revenue and expense associated with GWIM clients that hold credit cards is included in GWIM. Revenue and expense for prior periods are in CBB.

Migration Summary
 
 
 
 
 
Three Months Ended June 30
 
Six Months Ended June 30
(Dollars in millions)
2013
 
2012
 
2013
 
2012
Average
 
 
 
 
 
 
 
Total deposits, net – GWIM from / (to) CBB
$
(18,072
)
 
$
355

 
$
(12,712
)
 
$
133

Total loans, net – GWIM to CRES and the ALM portfolio
(39
)
 
(198
)
 
(27
)
 
(146
)
Period end
 
 
 
 
 
 
 
Total deposits, net – GWIM from / (to) CBB
$
660

 
$
738

 
$
(17,888
)
 
$
651

Total loans, net – GWIM to CRES and the ALM portfolio
(30
)
 
(79
)
 
(59
)
 
(223
)


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Client Balances

The table below presents client balances which consist of AUM, brokerage assets, assets in custody, deposits, and loans and leases.

Client Balances by Type
(Dollars in millions)
June 30
2013
 
December 31
2012
Assets under management
$
743,613

 
$
698,095

Brokerage assets
992,664

 
960,351

Assets in custody
128,854

 
117,686

Deposits
235,012

 
266,188

Loans and leases (1)
114,908

 
109,305

Total client balances
$
2,215,051

 
$
2,151,625

(1) 
Includes margin receivables which are classified in customer and other receivables on the Consolidated Balance Sheet.

The increase of $63.4 billion, or three percent, in client balances was primarily driven by higher market levels and post-merger record long-term AUM flows, partially offset by the deposit balance transfer of approximately $19 billion to CBB as described above.

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All Other
 
Three Months Ended June 30
 
 
 
Six Months Ended June 30
 
 
(Dollars in millions)
2013
 
2012
 
% Change
 
2013
 
2012
 
% Change
Net interest income (FTE basis)
$
268

 
$
137

 
96
 %
 
$
522

 
$
615

 
(15
)%
Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
Card income
81

 
84

 
(4
)
 
166

 
171

 
(3
)
Equity investment income (loss)
576

 
(36
)
 
n/m

 
1,096

 
394

 
178

Gains on sales of debt securities
452

 
354

 
28

 
519

 
1,066

 
(51
)
All other income (loss)
(804
)
 
59

 
n/m

 
(1,366
)
 
(2,043
)
 
(33
)
Total noninterest income (loss)
305

 
461

 
(34
)
 
415

 
(412
)
 
n/m

Total revenue, net of interest expense (FTE basis)
573

 
598

 
(4
)
 
937

 
203

 
n/m

 
 
 
 
 
 
 
 
 
 
 
 
Provision for credit losses
(179
)
 
535

 
n/m

 
71

 
1,781

 
(96
)
Noninterest expense
541

 
1,105

 
(51
)
 
2,302

 
3,633

 
(37
)
Income (loss) before income taxes
211

 
(1,042
)
 
n/m

 
(1,436
)
 
(5,211
)
 
(72
)
Income tax benefit (FTE basis)
(338
)
 
(678
)
 
(50
)
 
(1,013
)
 
(2,240
)
 
(55
)
Net income (loss)
$
549

 
$
(364
)
 
n/m

 
$
(423
)
 
$
(2,971
)
 
(86
)
 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average
 
 
 
 
 
 
 
 
 
 
 
Loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
$
211,137

 
$
227,098

 
(7
)
 
$
213,156

 
$
229,872

 
(7
)
Non-U.S. credit card
10,613

 
13,641

 
(22
)
 
10,819

 
13,896

 
(22
)
Other
17,160

 
22,910

 
(25
)
 
17,743

 
23,170

 
(23
)
Total loans and leases
238,910

 
263,649

 
(9
)
 
241,718

 
266,938

 
(9
)
Total assets (1)
233,810

 
341,026

 
(31
)
 
242,867

 
342,608

 
(29
)
Total deposits
33,774

 
43,722

 
(23
)
 
34,657

 
48,125

 
(28
)
 
 
 
 
 
 
 
 
 
 
 
 
Period end
 
 
 
 
 
 
June 30
2013
 
December 31
2012
 
 
Loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
 
 
 
 
 
 
$
207,138

 
$
211,476

 
(2
)
Non-U.S. credit card
 
 
 
 
 
 
10,340

 
11,697

 
(12
)
Other
 
 
 
 
 
 
16,569

 
18,808

 
(12
)
Total loans and leases
 
 
 
 
 
 
234,047

 
241,981

 
(3
)
Total assets (1)
 
 
 
 
 
 
205,976

 
264,505

 
(22
)
Total deposits
 
 
 
 
 
 
34,597

 
36,061

 
(4
)
(1) 
For presentation purposes, in segments where the total of liabilities and equity exceeds assets, which are generally deposit-taking segments, we allocate assets from All Other to those segments to match liabilities (i.e., deposits) and allocated shareholders' equity. Such allocated assets were $525.9 billion and $526.7 billion for the three and six months ended June 30, 2013 compared to $492.7 billion and $489.9 billion for the same periods in 2012, and $530.3 billion and $538.5 billion at June 30, 2013 and December 31, 2012.
n/m = not meaningful

All Other consists of ALM activities, equity investments, the international consumer card business, liquidating businesses, residual expense allocations and other. ALM activities encompass the whole-loan residential mortgage portfolio and investment securities, interest rate and foreign currency risk management activities including the residual net interest income allocation, gains/losses on structured liabilities, the impact of certain allocation methodologies and accounting hedge ineffectiveness. For more information on our ALM activities, see Interest Rate Risk Management for Nontrading Activities on page 130. Equity investments include Global Principal Investments (GPI) which is comprised of a diversified portfolio of equity, real estate and other alternative investments. These investments are made either directly in a company or held through a fund with related income recorded in equity investment income. Equity investments

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Table of Contents

also include strategic investments, which include our investment in China Construction Bank Corporation (CCB) and certain other investments. Additionally, All Other includes certain residential mortgage loans that are managed by Legacy Assets & Servicing.

In January 2013, in connection with the FNMA Settlement, we repurchased certain residential mortgage loans, all of which are held in All Other. For additional information, see Note 8 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements.

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Net income for All Other increased $913 million to $549 million primarily due to a $714 million reduction in the provision for credit losses, an increase of $612 million in equity investment income and a decrease in noninterest expense of $564 million. Partially offsetting these items were $505 million in gains related to liability management actions in the prior-year period. Fair value adjustments on structured liabilities related to the widening of our credit spreads were positive $10 million compared to negative $62 million in the prior-year period.

The provision for credit losses decreased $714 million to a benefit of $179 million primarily driven by continued improvement in portfolio trends including increased home prices in the residential mortgage portfolio.

Noninterest expense decreased $564 million to $541 million primarily due to lower litigation expense and personnel expense. The income tax benefit was $338 million compared to a benefit of $678 million, with the decrease primarily attributable to the change in pre-tax income (loss) in All Other.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

The net loss for All Other decreased $2.5 billion to $423 million primarily due to negative fair value adjustments on structured liabilities of $80 million related to the improvement in our credit spreads compared to $3.4 billion in the same period in 2012, a $1.7 billion reduction in the provision for credit losses, a decrease in noninterest expense of $1.3 billion and an increase in equity investment income of $702 million. Partially offsetting these items were $1.7 billion in gains related to liability management actions in the prior-year period and a decrease of $547 million in gains on sales of debt securities.

The provision for credit losses decreased $1.7 billion to $71 million primarily driven by the same factors as described in the three-month discussion above.

Noninterest expense decreased $1.3 billion to $2.3 billion due to lower litigation and personnel expenses. The income tax benefit was $1.0 billion compared to a benefit of $2.2 billion, with the decrease primarily attributable to the decrease in the pre-tax loss in All Other.


56
Table of Contents

Equity Investment Activity

The tables below present the components of equity investments included in All Other at June 30, 2013 and December 31, 2012, and also a reconciliation to the total consolidated equity investment income for the three and six months ended June 30, 2013 and 2012.

Equity Investments
 
 
 
 
 
(Dollars in millions)
 
June 30
2013
 
December 31
2012
Global Principal Investments
 
$
2,214

 
$
3,470

Strategic and other investments
 
1,958

 
2,038

Total equity investments included in All Other
 
$
4,172

 
$
5,508

 
 
 
 
 
Equity Investment Income
 
 
 
 
Three Months Ended June 30
 
Six Months Ended June 30
(Dollars in millions)
2013
 
2012
 
2013
 
2012
Global Principal Investments
$
52

 
$
(137
)
 
$
156

 
$
267

Strategic and other investments
524

 
101

 
940

 
127

Total equity investment income (loss) included in All Other
576

 
(36
)
 
1,096

 
394

Total equity investment income included in the business segments
104

 
404

 
147

 
739

Total consolidated equity investment income
$
680

 
$
368

 
$
1,243

 
$
1,133


Equity investments included in All Other decreased $1.3 billion to $4.2 billion at June 30, 2013 compared to December 31, 2012, with the decrease due to sales in the GPI portfolio. GPI had unfunded equity commitments of $161 million at June 30, 2013 compared to $224 million at December 31, 2012.

At June 30, 2013 and December 31, 2012, we owned 2.0 billion shares representing approximately one percent of CCB. Sales restrictions on these shares continue until the end of August 2013. Because the sales restrictions on these shares will expire within one year, these securities are classified as AFS marketable equity securities and carried at fair value with the after-tax unrealized gain included in accumulated OCI. At June 30, 2013, the cost basis was $716 million and the fair value was $1.3 billion.

Equity investment income included in All Other was $576 million and $1.1 billion in the three and six months ended June 30, 2013, an increase of $612 million and $702 million from the same periods in 2012. The increases in the three and six months ended June 30, 2013 were primarily due to a gain on the sale of an equity investment. Total Corporation equity investment income was $680 million and $1.2 billion in the three and six months ended June 30, 2013, an increase of $312 million and $110 million from the same periods in 2012, as the gains on the sales of an equity investment in All Other were partially offset by prior-year periods gains on the sales of an equity investment in Global Markets.



57
Table of Contents

Off-Balance Sheet Arrangements and Contractual Obligations

We have contractual obligations to make future payments on debt and lease agreements. Additionally, in the normal course of business, we enter into contractual arrangements whereby we commit to future purchases of products or services from unaffiliated parties. For more information on our obligations and commitments, see Note 11 – Commitments and Contingencies to the Consolidated Financial Statements, Off-Balance Sheet Arrangements and Contractual Obligations on page 54 of the MD&A of the Corporation's 2012 Annual Report on Form 10-K, as well as Note 12 – Long-term Debt and Note 13 – Commitments and Contingencies to the Consolidated Financial Statements of the Corporation's 2012 Annual Report on Form 10-K.

Representations and Warranties

We securitize first-lien residential mortgage loans generally in the form of MBS guaranteed by the GSEs or by the Government National Mortgage Association (GNMA) in the case of Federal Housing Administration (FHA)-insured, U.S. Department of Veterans Affairs (VA)-guaranteed and Rural Housing Service-guaranteed mortgage loans. In addition, in prior years, legacy companies and certain subsidiaries sold pools of first-lien residential mortgage loans and home equity loans as private-label securitizations (in certain of these securitizations, monolines or financial guarantee providers insured all or some of the securities) or in the form of whole loans. In connection with these transactions, we or certain of our subsidiaries or legacy companies make or have made various representations and warranties. Breaches of these representations and warranties may result in the requirement to repurchase mortgage loans or to otherwise make whole or provide other remedies to the GSEs, U.S. Department of Housing and Urban Development (HUD) with respect to FHA-insured loans, VA, whole-loan investors, securitization trusts, monoline insurers or other financial guarantors (collectively, repurchases). In all such cases, we would be exposed to any credit loss on the repurchased mortgage loans after accounting for any mortgage insurance (MI) or mortgage guarantee payments that we may receive.

Subject to the requirements and limitations of the applicable sales and securitization agreements, these representations and warranties can be enforced by the GSEs, HUD, VA, the whole-loan investor, the securitization trustee or others as governed by the applicable agreement or, in certain first-lien and home equity securitizations where monoline insurers or other financial guarantee providers have insured all or some of the securities issued, by the monoline insurer or other financial guarantor, where the contract so provides. In the case of private-label securitizations, the applicable agreements may permit investors, which may include the GSEs, with contractually sufficient holdings to direct or influence action by the securitization trustee. In the case of loans sold to parties other than the GSEs or GNMA, the contractual liability to repurchase typically arises only if there is a breach of the representations and warranties that materially and adversely affects the interest of the investor, or investors, or of the monoline insurer or other financial guarantor (as applicable) in the loan. Contracts with the GSEs do not contain equivalent language, while GNMA generally limits repurchases to loans that are not insured or guaranteed as required.

For additional information about accounting for representations and warranties and our representations and warranties repurchase claims and exposures, see Note 8 – Representations and Warranties Obligations and Corporate Guarantees and Note 13 – Commitments and Contingencies to the Consolidated Financial Statements of the Corporation's 2012 Annual Report on Form 10-K and Item 1A. Risk Factors of the Corporation's 2012 Annual Report on Form 10-K.

Representations and Warranties Bulk Settlement Actions

We have settled, or entered into agreements to settle, certain bulk representations and warranties claims (1) with each of the GSEs in 2010 (2010 GSE Agreements), (2) with a trustee (the Trustee) for certain Countrywide Financial Corporation (Countrywide) private-label securitization trusts in 2011 (the BNY Mellon Settlement), (3) with three monoline insurers, Assured Guaranty Ltd. and subsidiaries in 2011 (the Assured Guaranty Settlement), Syncora Guarantee Inc. and Syncora Holdings, Ltd. in 2012 (the Syncora Settlement) and MBIA pursuant to the MBIA Settlement in 2013, and (4) with FNMA pursuant to the FNMA Settlement in 2013.

We have vigorously contested any request for repurchase when we conclude that a valid basis for repurchase does not exist and will continue to do so in the future. However, in an effort to resolve these legacy mortgage-related issues, we have reached bulk settlements, or agreements for bulk settlements, including settlement amounts which have been material, with the above-referenced counterparties in lieu of a loan-by-loan review process. For instance, in the first quarter of 2013, we entered into the FNMA Settlement to resolve substantially all outstanding and potential repurchase and certain other claims relating to the origination, sale and delivery of residential mortgage loans originated from January 1, 2000 through December 31, 2008 and sold directly to FNMA by entities related to Countrywide and BANA. We may reach other settlements in the future if opportunities arise on terms we believe to be advantageous. However, there can be no assurance that we will reach future settlements or, if we do, that the terms of past settlements can be relied upon to predict the terms of future settlements. For a summary of the larger bulk settlement actions and the related impact on the representations and warranties provision and liability, see Note 8 – Representations and Warranties Obligations and Corporate Guarantees herein and Note 13 – Commitments and Contingencies to the Consolidated Financial Statements of the Corporation's 2012 Annual Report on Form 10-K. These

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Table of Contents

bulk settlements generally did not cover all transactions with the relevant counterparties or all potential claims that may arise, including in some instances securities law, fraud and servicing claims, and our liability in connection with the transactions and claims not covered by these settlements could be material.

BNY Mellon Settlement

The BNY Mellon Settlement, entered into in June 2011, is subject to final court approval and certain other conditions. The court approval hearing on the settlement began on June 3, 2013 in the New York Supreme Court, New York County, and additional hearing days are currently scheduled in September 2013. Although we are not a party to the proceeding, certain of our rights and obligations under the settlement agreement are conditioned on final court approval of the settlement.

There can be no assurance that final court approval of the BNY Mellon Settlement will be obtained, that all conditions to the BNY Mellon Settlement will be satisfied or, if certain conditions to the BNY Mellon Settlement permitting withdrawal are met, that we and Countrywide will not withdraw from the settlement. If final court approval is not obtained or if we and Countrywide withdraw from the BNY Mellon Settlement in accordance with its terms, our future representations and warranties losses could be substantially different than existing accruals and the estimated range of possible loss over existing accruals. For more information about the risks associated with the BNY Mellon Settlement, see Item 1A. Risk Factors of the Corporation's 2012 Annual Report on Form 10-K.

MBIA Settlement

On May 7, 2013, we entered into the MBIA Settlement which resolved all outstanding litigation between the parties, as well as other claims between the parties, including outstanding and potential claims from MBIA related to alleged representations and warranties breaches and other claims involving certain first- and second-lien RMBS trusts for which MBIA provided financial guarantee insurance, certain of which claims were the subject of litigation. At the time of the settlement, the mortgages (first- and second-lien) in RMBS trusts covered by the MBIA Settlement had an original principal balance of $54.8 billion and an unpaid principal balance of $19.1 billion. For additional information, see Recent Events – MBIA Settlement on page 8, the Experience with Investors Other than Government-sponsored Enterprises – Monoline Insurers section herein, and Note 8 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements.

Unresolved Claims Status

Unresolved Repurchase Claims

During the three months ended June 30, 2013, we received $1.3 billion in new repurchase claims, including $529 million submitted by the GSEs for both Countrywide and legacy Bank of America originations not covered by the bulk settlements with the GSEs, $666 million submitted by private-label securitization trustees, $134 million submitted by whole-loan investors and $2 million submitted by monoline insurers. During the three months ended June 30, 2013, $1.7 billion in claims were resolved, including $945 million resolved through the MBIA Settlement. Of the remaining claims that were resolved, $436 million were resolved through rescissions and $364 million were resolved through mortgage repurchases and make-whole payments primarily with the GSEs.

During the six months ended June 30, 2013, we received $3.1 billion in new repurchase claims, including $927 million submitted by the GSEs for both Countrywide and legacy Bank of America originations not covered by the bulk settlements with the GSEs, $1.9 billion submitted by private-label securitization trustees, $268 million submitted by whole-loan investors and $44 million submitted by monoline insurers. During the six months ended June 30, 2013, $14.7 billion in claims were resolved, primarily with the GSEs, including $12.2 billion in GSE claims resolved through the FNMA Settlement and $945 million resolved through the MBIA Settlement. Of the remaining claims that were resolved, $845 million were resolved through rescissions and $675 million were resolved through mortgage repurchases and make-whole payments, primarily with the GSEs. For more information on unresolved repurchase claims from the GSEs, monoline insurers, private-label securitization trustees, whole-loan investors and others, and the resolution of such claims, see Note 8 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements.

At June 30, 2013, the total notional amount of our unresolved representations and warranties repurchase claims was $16.6 billion compared to $28.3 billion at December 31, 2012. These repurchase claims do not include any repurchase claims related to the trusts covered by the BNY Mellon Settlement. Unresolved repurchase claims represent the notional amount of repurchase claims made by counterparties, typically the outstanding principal balance or the unpaid principal balance at the time of default. In the case of first-lien mortgages, the claim amount is often significantly greater than the expected loss amount due to the benefit of collateral and, in some cases, MI or mortgage guarantee payments. Claims received from a counterparty remain outstanding until the underlying loan is repurchased, the claim is rescinded by the counterparty, or the claim is otherwise resolved. When a claim is denied and we do not receive a response from the counterparty, the claim remains in the unresolved repurchase claims balance until resolution.


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The notional amount of unresolved GSE repurchase claims totaled $1.1 billion at June 30, 2013 compared to $13.5 billion at December 31, 2012. As a result of the FNMA Settlement, $12.2 billion of GSE repurchase claims outstanding at December 31, 2012 were resolved in January 2013.

The notional amount of unresolved monoline repurchase claims totaled $1.5 billion at June 30, 2013 compared to $2.4 billion at December 31, 2012. We have had limited loan-level repurchase claims experience with the majority of the monoline insurers due to ongoing litigation. In our experience, the monolines have been generally unwilling to withdraw repurchase claims, regardless of whether and what evidence was offered to refute a claim. Substantially all of the unresolved monoline claims pertain to second-lien loans and are currently the subject of litigation. As a result of the MBIA Settlement, $945 million of monoline repurchase claims outstanding at December 31, 2012 were resolved in May 2013.

The notional amount of unresolved repurchase claims from private-label securitization trustees, whole-loan investors, including third-party securitization sponsors and others totaled $14.0 billion at June 30, 2013 compared to $12.3 billion at December 31, 2012. The increase in the notional amount of unresolved repurchase claims is primarily due to continued submission of claims by private-label securitization trustees; the level of detail, support and analysis which impacts overall claim quality and, therefore, claims resolution; and the lack of an established process to resolve disputes related to these claims. We expect unresolved repurchase claims related to private-label securitizations to continue to increase as claims continue to be submitted by private-label securitization trustees and there is not an established process for the ultimate resolution of claims on which there is a disagreement.

In addition to, and not included in, the total unresolved repurchase claims of $16.6 billion at June 30, 2013, we have received repurchase demands from private-label securitization investors and a master servicer where we believe the claimants have not satisfied the contractual thresholds to direct the securitization trustee to take action and/or that these demands are otherwise procedurally or substantively invalid. The total amounts outstanding of such demands were $1.5 billion and $1.6 billion at June 30, 2013 and December 31, 2012, comprised of $1.3 billion of demands received during 2012 and approximately $300 million of demands related to trusts covered by the BNY Mellon Settlement. We do not believe that the $1.5 billion of demands outstanding at June 30, 2013 represents valid repurchase claims and, therefore, it is not possible to predict the resolution with respect to such demands.

Open Mortgage Insurance Rescission Notices

In addition to repurchase claims, we receive notices from mortgage insurance companies of claim denials, cancellations or coverage rescission (collectively, MI rescission notices). Although the number of such notices has remained elevated, they have decreased over the last several quarters as the resolution of open notices exceeded new notices. At June 30, 2013, we had approximately 106,000 open MI rescission notices compared to 110,000 at December 31, 2012. Open MI rescission notices at June 30, 2013 included 45,000 pertaining principally to first-lien mortgages serviced for others, 10,000 pertaining to loans held-for-investment (HFI) and 51,000 pertaining to ongoing litigation for second-lien mortgages. Approximately 25,000 of the open MI rescission notices pertaining to first-lien mortgages serviced for others are related to loans sold to FNMA. As of June 30, 2013, 38 percent of the MI rescission notices received have been resolved. Of those resolved, 18 percent were resolved through our acceptance of the MI rescission, 61 percent were resolved through reinstatement of coverage or payment of the claim by the mortgage insurance company, and 21 percent were resolved on an aggregate basis through settlement, policy commutation or similar arrangement. As of June 30, 2013, 62 percent of the MI rescission notices we have received have not yet been resolved. Of those not yet resolved, 48 percent are implicated by ongoing litigation where no loan-level review is currently contemplated or required to preserve our legal rights. In this litigation, the litigating mortgage insurance companies are also seeking bulk rescission of certain policies, separate and apart from loan-by-loan denials or rescissions. We are in the process of reviewing 41 percent of the remaining open MI rescission notices, and we have reviewed and are contesting the MI rescission with respect to 59 percent of these remaining open MI rescission notices. Of the remaining open MI rescission notices, 44 percent are also the subject of ongoing litigation; although, at present, these MI rescissions are being processed in a manner generally consistent with those not affected by litigation.

Although the FNMA Settlement did not resolve underlying MI rescission notices, the FNMA Settlement resolved significant representations and warranties exposures, including unresolved and potential repurchase claims from FNMA resulting solely from MI rescission notices relating to loans covered by the FNMA Settlement. Our pipeline of unresolved repurchase claims from the GSEs resulting solely from MI rescission notices was $466 million at June 30, 2013 compared to $2.3 billion at December 31, 2012. The FNMA Settlement resolved approximately $1.9 billion of such unresolved repurchase claims which were outstanding at December 31, 2012. Many of these claims represent repurchase claims on loans for which we received a MI rescission notice that is included in the 25,000 open MI rescission notices referenced in the paragraph above. In addition, the FNMA Settlement clarified the parties' obligations with respect to MI rescission notices including establishing timeframes for certain payments and other actions, setting parameters for potential bulk settlements and providing for cooperation in future dealings with mortgage insurers. As a result, we are required to pay the amount of certain MI coverage to FNMA as a result of MI claims rescissions in advance of collection from the mortgage insurance companies and have remitted the amounts required under the agreement related to the 25,000 open MI rescission notices. In certain cases, we may not ultimately collect all such amounts from the mortgage insurance companies. For additional information, see Off-Balance Sheet

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Arrangements and Contractual Obligations – Unresolved Claims Status – Open Mortgage Insurance Rescission Notices on page 57 of the MD&A of the Corporation's 2012 Annual Report on Form 10-K.

Representations and Warranties Liability

The liability for representations and warranties and corporate guarantees is included in accrued expenses and other liabilities on the Consolidated Balance Sheet and the related provision is included in mortgage banking income in the Consolidated Statement of Income.

The liability for representations and warranties exposures and the corresponding estimated range of possible loss do not consider any losses related to litigation matters, including litigation brought by monoline insurers, nor do they include any separate foreclosure costs and related costs, assessments and compensatory fees or any other possible losses related to potential claims for breaches of performance of servicing obligations, except as such losses are included as potential costs of the BNY Mellon Settlement, potential securities law or fraud claims or potential indemnity or other claims against us, including claims related to loans insured by the FHA. We are not able to reasonably estimate the amount of any possible loss with respect to any such servicing, securities law, fraud or other claims against us, except to the extent reflected in the estimated range of possible loss for litigation and regulatory matters disclosed in Note 11 – Commitments and Contingencies to the Consolidated Financial Statements; however, such loss could be material.

At June 30, 2013 and December 31, 2012, the liability for representations and warranties and corporate guarantees was $14.0 billion and $19.0 billion, with the decrease primarily driven by the payment and repurchase of loans related to the FNMA Settlement. For the three and six months ended June 30, 2013, the representations and warranties and corporate guarantees provision was $197 million and $447 million compared to $395 million and $677 million for the same periods in 2012. The provision for the three and six months ended June 30, 2013 was primarily driven by remaining GSE exposures and, to a lesser extent, by our obligations related to MI rescissions.

Estimated Range of Possible Loss

Our estimated liability at June 30, 2013 for obligations under representations and warranties is necessarily dependent on, and limited by, a number of factors, including for private-label securitizations, the implied repurchase experience based on the BNY Mellon Settlement, as well as certain other assumptions and judgmental factors. Accordingly, future provisions associated with obligations under representations and warranties may be materially impacted if actual experiences are different from historical experience or our understandings, interpretations or assumptions.

In the case of non-GSE exposures, including private-label securitizations, our estimate of the representations and warranties liability and the corresponding estimated range of possible loss considers, among other things, repurchase experience based on the BNY Mellon Settlement, adjusted to reflect differences between the trusts covered by the BNY Mellon Settlement (Covered Trusts) and the remainder of the population of private-label securitizations, and assumes that the conditions to the BNY Mellon Settlement will be met. Where relevant, we also take into account more recent experience, such as increased claim activity, our experience with various counterparties and other facts and circumstances, such as bulk settlements, as we believe appropriate.

The representations and warranties liability represents our best estimate of probable incurred losses as of June 30, 2013. However, it is reasonably possible that future representations and warranties losses may occur in excess of the amounts recorded for these exposures. In addition, we have not recorded any representations and warranties liability for certain potential private-label securitization and whole-loan exposures where we have little to no claim activity. We currently estimate that the range of possible loss for representations and warranties exposures could be up to $4 billion over accruals at June 30, 2013. The estimated range of possible loss reflects principally non-GSE exposures. The estimated range of possible loss related to these representations and warranties exposures does not represent a probable loss, and is based on currently available information, significant judgment and a number of assumptions that are subject to change. Our estimated range of possible loss related to representations and warranties exposures does not include possible losses related to monoline insurers.

Future provisions and/or ranges of possible loss for representations and warranties may be significantly impacted if actual experiences are different from our assumptions in our predictive models, including, without limitation, ultimate resolution of the BNY Mellon Settlement, estimated repurchase rates, estimated MI rescission rates, economic conditions, estimated home prices, consumer and counterparty behavior, and a variety of other judgmental factors. Adverse developments with respect to one or more of the assumptions underlying the liability for representations and warranties and the corresponding estimated range of possible loss could result in significant increases to future provisions and/or the estimated range of possible loss. For example, an appellate court, in the context of claims brought by a monoline insurer, disagreed with our interpretation that a loan must be in default in order to satisfy the underlying agreements' requirement that a breach have a material and adverse effect. If that decision is extended to non-monoline contexts, it could significantly impact our provision and/or the estimated range of possible loss. Additionally, if court rulings related to monoline litigation, including one related to us, that have allowed sampling of loan files instead of requiring a loan-by-loan review to determine if a representations and warranties breach has occurred, are followed generally by the courts in future monoline litigation, private-label securitization counterparties may view litigation as a more attractive alternative compared to a loan-by-loan review. Finally, although we believe that

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the representations and warranties typically given in non-GSE transactions are less rigorous and actionable than those given in GSE transactions, we do not have significant experience resolving loan-level claims in non-GSE transactions to measure the impact of these differences on the probability that a loan will be required to be repurchased.

For more information about the methodology used to estimate the representations and warranties liability and the corresponding estimated range of possible loss for representations and warranties exposures, see Note 8 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements and, for information related to the sensitivity of the assumptions used to estimate our liability for obligations under representations and warranties, see Complex Accounting Estimates – Representations and Warranties on page 126 of the MD&A of the Corporation's 2012 Annual Report on Form 10-K.

Experience with Government-sponsored Enterprises

As a result of the FNMA Settlement and earlier bulk settlements with the GSEs, our exposure to repurchase claims from the GSEs for vintages prior to 2009 has been significantly reduced. After these settlements, our exposure to representations and warranties liability for loans originated prior to 2009 and sold to the GSEs is limited to loans with an original principal balance of $113.3 billion, sold primarily to Freddie Mac (FHLMC), and loans with certain defects excluded from the settlements that we do not believe will be material, such as title defects and certain specified violations of FNMA's charter. As of June 30, 2013, of the $113.3 billion, approximately $75.2 billion in principal has been paid, $10.5 billion in principal has defaulted or was severely delinquent and the notional amount of unresolved repurchase claims submitted by the GSEs was $945 million related to these vintages. We have performed an initial review with respect to $724 million of these claims and do not believe a valid basis for repurchase has been established by the claimant and are still in the process of reviewing the remaining $221 million of these claims.

The FNMA Settlement and earlier bulk settlements did not address loans originated after 2008. However, we believe that changes made to our operations and underwriting policies have reduced our exposure to the GSEs related to loans originated after 2008. In addition, we estimate that lifetime losses on these vintages will be significantly less than the losses we have experienced with respect to vintages prior to 2009. We have sold $513.6 billion of loans originated after 2008 to the GSEs. At June 30, 2013, approximately $235.8 billion in principal has been paid, $4.4 billion in principal has defaulted or was severely delinquent and the notional amount of unresolved repurchase claims submitted by the GSEs was $175 million related to these vintages. We have performed an initial review with respect to $145 million of these claims and do not believe a valid basis for repurchase has been established by the claimant and are still in the process of reviewing the remaining $30 million of these claims.

Experience with Investors Other than Government-sponsored Enterprises

In prior years, legacy companies and certain subsidiaries sold pools of first-lien residential mortgage loans and home equity loans as private-label securitizations or in the form of whole loans originated from 2004 through 2008 with an original principal balance of $963 billion to investors other than GSEs (although the GSEs are investors in certain private-label securitizations), of which $541 billion in principal has been paid, $185 billion in principal has defaulted, $60 billion in principal was severely delinquent and $177 billion in principal was current or less than 180 days past due at June 30, 2013.

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Table 15 details the population of loans originated between 2004 and 2008 and the population of loans sold as whole loans or in non-agency securitizations by entity and product together with the defaulted and severely delinquent loans stratified by the number of payments the borrower made prior to default or becoming severely delinquent as of June 30, 2013. We believe many of the defaults observed in these securitizations have been, and continue to be, driven by external factors like the substantial depreciation in home prices, persistently high unemployment and other negative economic trends, diminishing the likelihood that any loan defect (assuming one exists at all) was the cause of a loan's default. As of June 30, 2013, approximately 25 percent of the loans sold to non-GSEs that were originated between 2004 and 2008 have defaulted or are severely delinquent. Of the original principal balance for Countrywide, $409 billion is included in the BNY Mellon Settlement and, of this amount, $110 billion was defaulted or severely delinquent at June 30, 2013.

Table 15
Overview of Non-Agency Securitization and Whole Loan Balances
 
Principal Balance
 
Defaulted or Severely Delinquent
(Dollars in billions)
Original
Principal Balance
 
Outstanding Principal Balance June 30
2013
 
Outstanding
Principal
Balance 180 Days
or More Past Due
 
Defaulted
Principal Balance
 
Defaulted
or Severely
Delinquent
 
Borrower Made
Less than 13
Payments
 
Borrower Made
13 to 24
Payments
 
Borrower Made
25 to 36
Payments
 
Borrower Made
More than 36
Payments
By Entity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank of America
$
100

 
$
20

 
$
4

 
$
6

 
$
10

 
$
1

 
$
2

 
$
2

 
$
5

Countrywide
716

 
186

 
47

 
141

 
188

 
25

 
45

 
45

 
73

Merrill Lynch
65

 
15

 
4

 
14

 
18

 
3

 
4

 
3

 
8

First Franklin
82

 
16

 
5

 
24

 
29

 
5

 
6

 
5

 
13

Total (1, 2)
$
963

 
$
237

 
$
60

 
$
185

 
$
245

 
$
34

 
$
57

 
$
55

 
$
99

By Product
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prime
$
302

 
$
73

 
$
9

 
$
25

 
$
34

 
$
2

 
$
6

 
$
7

 
$
19

Alt-A
172

 
54

 
13

 
38

 
51

 
8

 
12

 
12

 
19

Pay option
150

 
39

 
15

 
41

 
56

 
5

 
14

 
16

 
21

Subprime
245

 
58

 
21

 
62

 
83

 
17

 
20

 
16

 
30

Home equity
88

 
11

 
—

 
18

 
18

 
2

 
5

 
4

 
7

Other
6

 
2

 
2

 
1

 
3

 
—

 
—

 
—

 
3

Total
$
963

 
$
237

 
$
60

 
$
185

 
$
245

 
$
34

 
$
57

 
$
55

 
$
99

(1) 
Excludes transactions sponsored by Bank of America and Merrill Lynch where no representations or warranties were made.
(2) 
Includes exposures on third-party sponsored transactions related to legacy entity originations.

Monoline Insurers

Legacy companies sold $184.5 billion of loans originated between 2004 and 2008 into monoline-insured securitizations, which are included in Table 15, including $103.9 billion of first-lien mortgages and $80.6 billion of second-lien mortgages. Of these balances, $48.6 billion of the first-lien mortgages and $52.5 billion of the second-lien mortgages have been paid in full, and $34.9 billion of the first-lien mortgages and $17.8 billion of the second-lien mortgages have defaulted or are severely delinquent at June 30, 2013. At least 25 payments have been made on approximately 58 percent of the defaulted and severely delinquent loans. Of the first-lien mortgages sold, $39.1 billion, or 38 percent, were sold as whole loans to other institutions which subsequently included these loans with those of other originators in private-label securitization transactions in which the monolines insured one or more securities. During the three and six months ended June 30, 2013, there was minimal repurchase claim activity with the monolines.

At June 30, 2013, for loans originated between 2004 and 2008, the unpaid principal balance of loans related to unresolved monoline repurchase claims was $1.5 billion compared to $2.4 billion at December 31, 2012. At June 30, 2013, the unpaid principal balance of loans in these vintages for which the monolines had requested loan files for review but for which no repurchase claim had been received was $2.7 billion, excluding loans that had been paid in full or resolved through settlements. Of these file requests, $1.4 billion are aged and subject to ongoing litigation. There will likely be additional requests for loan files in the future leading to repurchase claims. In addition, we have received claims from private-label securitization trustees and a third-party securitization sponsor related to first-lien third-party sponsored securitizations that include monoline insurance.


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The MBIA Settlement resolved outstanding and potential claims between the parties to the settlement involving 31 first- and 17 second-lien RMBS trusts for which MBIA provided financial guarantee insurance, including $945 million of monoline repurchase claims outstanding at December 31, 2012. In addition, this settlement covered loans with an unpaid principal balance of $2.6 billion for which we have received file requests but for which no repurchase claims were received as of December 31, 2012. The first- and second-lien mortgages in the covered RMBS trusts had an original principal balance of $29.3 billion and $25.5 billion, and an unpaid principal balance of $9.8 billion and $9.3 billion at the time of the settlement.

For additional information, see Off-Balance Sheet Arrangements and Contractual Obligations – Experience with Investors Other than Government-sponsored Enterprises on page 59 of the MD&A of the Corporation's 2012 Annual Report on Form 10-K.

Whole Loans and Private-label Securitizations

Legacy entities, and to a lesser extent Bank of America, sold loans to investors as whole loans or via private-label securitizations. The majority of the loans sold were included in private-label securitizations, including third-party sponsored transactions. We provided representations and warranties to the whole-loan investors and these investors may retain those rights even when the whole loans were aggregated with other collateral into private-label securitizations sponsored by the whole-loan investors. The loans sold with an original total principal balance of $778.2 billion, included in Table 15, were originated between 2004 and 2008, of which $439.5 billion have been paid in full and $192.3 billion were defaulted or severely delinquent at June 30, 2013. At least 25 payments have been made on approximately 64 percent of the defaulted and severely delinquent loans. We have received approximately $21.7 billion of representations and warranties repurchase claims from whole-loan investors, including third-party sponsors, and private-label securitization investors and trustees related to these vintages, including $12.6 billion from private-label securitization trustees, $8.3 billion from whole-loan investors and $811 million from one private-label securitization counterparty. In private-label securitizations, certain presentation thresholds need to be met in order for investors to direct a trustee to assert repurchase claims. Continued high levels of new private-label claims are primarily related to repurchase requests received from trustees and third-party sponsors for private-label securitization transactions not included in the BNY Mellon Settlement, including claims related to first-lien third-party sponsored securitizations that include monoline insurance. Over time, there has been an increase in requests for loan files from certain private-label securitization trustees, as well as requests for tolling agreements to toll the applicable statute of limitations relating to representations and warranties repurchase claims, and we believe it is likely that these requests will lead to an increase in repurchase claims from private-label securitization trustees with standing to bring such claims. In addition, private-label securitization trustees may have obtained loan files through other means, including litigation and administrative subpoenas.

We have resolved $7.8 billion of the claims received from whole-loan investors and private-label securitization investors and trustees with losses of $1.8 billion. The majority of these resolved claims were from third-party whole-loan investors. Approximately $3.2 billion of these claims were resolved through repurchase or indemnification and $4.6 billion were rescinded by the investor. At June 30, 2013, for loans originated between 2004 and 2008, the notional amount of unresolved repurchase claims submitted by private-label securitization trustees and whole-loan investors was $13.9 billion. We have performed an initial review with respect to $13.4 billion of these claims and do not believe a valid basis for repurchase has been established by the claimant and are still in the process of reviewing the remaining $545 million of these claims.

Certain whole-loan investors have engaged with us in a consistent repurchase process and we have used that and other experience to record a liability related to existing and future claims from such counterparties. The BNY Mellon Settlement and subsequent activity with certain counterparties led to the determination that we had sufficient experience to record a liability related to our exposure on certain private-label securitizations but did not provide sufficient experience related to certain private-label securitizations sponsored by third-party whole-loan investors. As it relates to the other private-label securitizations sponsored by third-party whole-loan investors and certain other whole loan sales, it is not possible to determine whether a loss has occurred or is probable and, therefore, no representations and warranties liability has been recorded in connection with these transactions. Until we receive a repurchase claim, we generally do not review loan files related to private-label securitizations sponsored by third-party whole-loan investors (and are not required by the governing documents to do so). Our estimated range of possible loss related to representations and warranties exposures as of June 30, 2013 included possible losses related to these whole-loan sales and private-label securitizations sponsored by third-party whole-loan investors.

Private-label securitization investors generally do not have the contractual right to demand repurchase of loans directly or the right to access loan files. We have received repurchase demands totaling $1.5 billion from private-label securitization investors and a master servicer where in each case we believe the claimant has not satisfied the contractual thresholds to direct the securitization trustee to take action and/or that the demands are otherwise procedurally or substantively invalid.


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Servicing, Foreclosure and Other Mortgage Matters

We service a large portion of the loans we or our subsidiaries have securitized and also service loans on behalf of third-party securitization vehicles and other investors. Our servicing obligations are set forth in servicing agreements with the applicable counterparty. These obligations may include, but are not limited to, loan repurchase requirements in certain circumstances, indemnifications, payment of fees, advances for foreclosure costs that are not reimbursable, or responsibility for losses in excess of partial guarantees for VA loans.

Servicing agreements with the GSEs generally provide the GSEs with broader rights relative to the servicer than are found in servicing agreements with private investors. For example, each GSE typically claims the right to demand that the servicer repurchase loans that breach the seller's representations and warranties made in connection with the initial sale of the loans even if the servicer was not the seller. The GSEs claim that they have the contractual right to demand indemnification or loan repurchase for certain servicing breaches. In addition, the GSEs' first-lien mortgage seller/servicer guides provide for timelines to resolve delinquent loans through workout efforts or liquidation, if necessary, and purport to require the imposition of compensatory fees if those deadlines are not satisfied except for reasons beyond the control of the servicer, although we believe that the governing contracts, our course of dealing, and collective past practices and understandings should inform resolution of these matters. In addition, many non-agency RMBS and whole-loan servicing agreements state that the servicer may be liable for failure to perform its servicing obligations in keeping with industry standards or for acts or omissions that involve willful malfeasance, bad faith or gross negligence in the performance of, or reckless disregard of, the servicer's duties.

It is not possible to reasonably estimate our liability with respect to certain potential servicing-related claims. While we have recorded certain accruals for servicing-related claims, the amount of potential liability in excess of existing accruals could be material. For additional information, see Off-Balance Sheet Arrangements and Contractual Obligations – Servicing Matters and Foreclosure Processes on page 61 of the MD&A of the Corporation's 2012 Annual Report on Form 10-K.

2013 IFR Acceleration Agreement

On January 7, 2013, Bank of America and other mortgage servicing institutions entered into an agreement in principle with the Office of the Comptroller of the Currency (OCC) and the Federal Reserve to cease the Independent Foreclosure Review (IFR) that had commenced pursuant to consent orders entered into by Bank of America with the Federal Reserve (2011 FRB Consent Order) and by BANA with the OCC on April 13, 2011 (2011 OCC Consent Order) and replace it with an accelerated remediation process (2013 IFR Acceleration Agreement). This agreement in principle was memorialized in amendments to the 2011 FRB Consent Order and the 2011 OCC Consent Order on February 28, 2013. The 2013 IFR Acceleration Agreement requires us to provide $1.8 billion of borrower assistance in the form of loan modifications and other foreclosure prevention actions, and in addition, we made a cash payment of $1.1 billion into a qualified settlement fund in the first quarter of 2013, which was fully reserved at December 31, 2012. The borrower assistance program is not expected to result in any incremental credit provision, as we believe that the existing allowance for credit losses is adequate to absorb any costs that have not already been recorded as charge-offs.

National Mortgage Settlement

In March 2012, we entered into settlement agreements (collectively, the National Mortgage Settlement) with (1) the U.S. Department of Justice, various federal regulatory agencies and 49 state Attorneys General to resolve federal and state investigations into certain residential mortgage origination, servicing and foreclosure practices, (2) HUD to resolve certain claims relating to the origination of FHA-insured mortgage loans, primarily originated by Countrywide prior to and for a period following our acquisition of that lender, and (3) each of the Federal Reserve and the OCC regarding civil monetary penalties related to conduct that was the subject of consent orders entered into with the banking regulators in April 2011. The National Mortgage Settlement was entered by the court as a consent judgment on April 5, 2012. The National Mortgage Settlement provided for the establishment of certain uniform servicing standards, upfront cash payments of approximately $1.9 billion to the state and federal governments and for borrower restitution, approximately $7.6 billion in borrower assistance in the form of, among other things, credits earned for principal reduction, short sales, deeds-in-lieu of foreclosure and approximately $1.0 billion of credits earned for interest rate reduction modifications. In addition, the settlement with HUD provided for an upfront cash payment of $500 million to settle certain claims related to FHA-insured loans. We will also be obligated to provide additional cash payments of up to $850 million if we fail to earn an additional $850 million of credits stemming from incremental first-lien principal reductions and satisfy certain solicitation requirements over a three-year period.

We also entered into agreements with several states under which we committed to perform certain minimum levels of principal reduction and related activities within those states in connection with the National Mortgage Settlement, and under which we could be required to make additional payments if we fail to meet such minimum levels.


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Subject to confirmation by the independent monitor appointed as a result of the National Mortgage Settlement to review and certify compliance with its provisions, we believe we have substantially fulfilled all borrower assistance, rate reduction modification and principal reduction commitments and, therefore, do not expect to be required to make additional cash payments. The borrower assistance program did not result in any incremental credit losses as of the settlement date, as the existing allowance for credit losses was adequate to absorb any losses that had not already been charged-off. Under the interest rate reduction program, modifications of approximately 23,500 loans with an aggregate unpaid principal balance of $6.2 billion have been completed as of June 30, 2013, including approximately 3,300 modifications that were completed during the second quarter. These modifications, which are not accounted for as troubled debt restructurings (TDRs), provided for an average interest rate reduction of approximately two percent, resulting in an estimated decrease in fair value of the modified loans of approximately $720 million and a reduction in annual interest income of approximately $120 million.

Under the terms of the National Mortgage Settlement, the federal and participating state governments agreed to release us from further liability for certain alleged residential mortgage origination, servicing and foreclosure deficiencies. In settling origination issues related to FHA-guaranteed loans originated on or before April 30, 2009, we received a release from further liability for all origination claims with respect to such loans if an insurance claim had been submitted to the FHA prior to January 1, 2012 and a release of multiple damages and penalties, but not single damages, if no such claim had been submitted. In addition, provided we meet our assistance and remediation commitments, the OCC agreed not to assess, and we will not be obligated to pay to the Federal Reserve, any civil monetary penalties.

The National Mortgage Settlement does not cover certain claims arising out of origination, securitization (including representations made to investors with respect to MBS), criminal claims, private claims by borrowers, claims by certain states for injunctive relief or actual economic damages to borrowers related to the Mortgage Electronic Registration Systems, Inc. (MERS), and claims by the GSEs (including repurchase demands), among other items. For more information on MERS, see Off-Balance Sheet Arrangements and Contractual Obligations – Mortgage Electronic Registration Systems, Inc. on page 63 of the MD&A of the Corporation's 2012 Annual Report on Form 10-K.

Impact of Foreclosure Delays

Foreclosure delays impact our default-related servicing costs. We believe default-related servicing costs peaked in late 2012 and we anticipate that these costs will continue to decline in 2013. However, unexpected foreclosure delays in 2013 could impact the rate of decline. Default-related servicing costs include costs related to resources needed for implementing new servicing standards mandated for the industry, including as part of the National Mortgage Settlement, other operational changes and operational costs due to delayed foreclosures, and do not include mortgage-related assessments, waivers and similar costs related to foreclosure delays.

Other areas of our operations are also impacted by foreclosure delays. In the six months ended June 30, 2013, we recorded $334 million of mortgage-related assessments, waivers and similar costs related to foreclosure delays compared to $399 million for the same period in 2012. It is also possible that the delays in foreclosure sales may result in additional costs and expenses, including costs associated with the maintenance of properties or possible home price declines while foreclosures are delayed. Finally, the time to complete foreclosure sales may continue to be protracted, which may result in a greater number of nonperforming loans and increased servicing advances, and may impact the collectability of such advances and the value of our MSR asset, MBS and real estate owned properties. Accordingly, the ultimate resolution of disagreements with counterparties, delays in foreclosure sales beyond those currently anticipated, and any issues that may arise out of alleged irregularities in our foreclosure process could significantly increase the costs associated with our mortgage operations.

Other Mortgage-related Matters

We continue to be subject to additional borrower and non-borrower litigation and governmental and regulatory scrutiny related to our past and current origination, servicing, transfer of servicing and servicing rights and foreclosure activities, including those claims not covered by the National Mortgage Settlement. This scrutiny may extend beyond our pending foreclosure matters to issues arising out of alleged irregularities with respect to previously completed foreclosure activities. We are also subject to inquiries, investigations, actions and claims from regulators, trustees, investors and other third parties relating to other mortgage-related activities such as the purchase, sale, pooling, and origination and securitization of loans, as well as structuring, marketing, underwriting and issuance of MBS and other securities, including claims relating to the adequacy and accuracy of disclosures in offering documents and representations and warranties made in connection with whole-loan sales or securitizations. The current environment of heightened scrutiny may subject us to regulatory and other inquiries or investigations that could significantly adversely affect our reputation and result in material costs to us.


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Mortgage-related Settlements – Servicing Matters

In connection with the BNY Mellon Settlement, BANA has agreed to implement certain servicing changes. The Trustee and BANA have agreed to clarify and conform certain servicing standards related to loss mitigation. In particular, the BNY Mellon Settlement clarifies that it is permissible to apply the same loss mitigation strategies to the Covered Trusts as are applied to BANA affiliates' HFI portfolios. This portion of the agreement was effective in the second quarter of 2011 and is not conditioned on final court approval.

BANA also agreed to transfer the servicing rights related to certain high-risk loans to qualified subservicers on a schedule that began with the signing of the BNY Mellon Settlement. This servicing transfer protocol will reduce the servicing fees payable to BANA in the future. Upon final court approval of the BNY Mellon Settlement, failure to meet the established benchmarking standards for loans not in subservicing arrangements can trigger the payment of agreed-upon fees. Additionally, we and Countrywide have agreed to work to resolve with the Trustee certain mortgage documentation issues related to the enforceability of mortgages in foreclosure and to reimburse the related Covered Trust for any loss if BANA is unable to foreclose on the mortgage and the Covered Trust is not made whole by a title policy because of these issues. These agreements will terminate if final court approval of the BNY Mellon Settlement is not obtained, although we could still have exposure under the pooling and servicing agreements related to the mortgages in the Covered Trusts for these issues.

In connection with the National Mortgage Settlement, BANA has agreed to implement certain additional servicing changes. The uniform servicing standards established under the National Mortgage Settlement are broadly consistent with the residential mortgage servicing practices imposed by the 2011 OCC Consent Order; however, they are more prescriptive and cover a broader range of our residential mortgage servicing activities. These standards are intended to strengthen procedural safeguards and documentation requirements associated with foreclosure, bankruptcy and loss mitigation activities, as well as addressing the imposition of fees and the integrity of documentation, with a goal of ensuring greater transparency for borrowers. These uniform servicing standards also obligate us to implement compliance processes reasonably designed to provide assurance of the achievement of these objectives. Compliance with the uniform servicing standards is being assessed by a monitor based on the measurement of outcomes with respect to these objectives. Implementation of these uniform servicing standards is expected to contribute to elevated costs associated with the servicing process, but is not expected to result in material delays or dislocation in the performance of our mortgage servicing obligations, including the completion of foreclosures. For additional information, see Off-Balance Sheet Arrangements and Contractual Obligations – Mortgage-related Settlements – Servicing Matters on page 63 of the MD&A of the Corporation's 2012 Annual Report on Form 10-K.

Regulatory Matters

U.K. Regulatory Framework

Prior to April 1, 2013, our financial services operations in the U.K. were subject to regulation by and supervision of the Financial Services Authority (FSA). On April 1, 2013, the U.K. abolished the FSA, replacing it with two new regulators, the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA). The PRA operates as a subsidiary of the Bank of England with responsibility for prudential regulation and supervision of banks, insurers and systemically significant investment firms. The FCA regulates and supervises the market conduct of all U.K. financial firms and prudentially regulates those firms not within the scope of the PRA. Our financial services operations in the U.K. are now subject to regulation and supervision by both the PRA and FCA.

Financial Reform Act

The Financial Reform Act, which was signed into law on July 21, 2010, enacted sweeping financial regulatory reform and has altered and will continue to alter the way in which we conduct certain businesses, increase our costs and reduce our revenues. Many aspects of the Financial Reform Act remain subject to final rulemaking which will take effect over several years, making it difficult to anticipate the precise impact on the Corporation, our customers or the financial services industry.

Derivatives

Pursuant to the Financial Reform Act and subsequent Commodity Futures Trading Commission (CFTC) rulemaking, we have registered BANA and certain other subsidiaries as swap dealers with the CFTC and we may need to register additional entities as swap dealers or major swap participants as a result of the CFTC's July 2013 final cross-border guidance discussed below. Upon registration, swap dealers and major swap participants become subject to certain CFTC rules, including measures regarding clearing and exchange trading of certain derivatives, new capital and margin requirements, additional reporting, external and internal business conduct, swap documentation and portfolio compression and reconciliation requirements for derivatives. Most of these requirements, with the exception of margin, capital and exchange trading, have gone into effect, except with respect to swaps between our non-U.S. swap dealers and non-U.S. branches of BANA with certain non-U.S. counterparties. Swap dealers are now required to clear certain interest rate and index credit derivative transactions when facing all counterparty types other than corporate counterparties and third-party subaccounts and, after

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September 9, 2013, will be required to clear all such interest rate and index credit derivative transactions, unless either counterparty qualifies for the “end-user exception” to the clearing mandate. These products will also become subject to exchange trading requirements beginning in the fourth quarter of 2013. The timing for margin implementation remains unknown. The Financial Reform Act and subsequent OCC rulemaking also require BANA to "push out" certain derivatives activity to one or more non-bank affiliates by July 2015.

On July 12, 2013, the CFTC provided temporary exemptive relief from application of derivatives requirements of the Financial Reform Act for certain non-U.S. derivatives activity and adopted a final cross-border framework to apply CFTC requirements outside the U.S. Europe and various G-20 jurisdictions are also enacting their own derivatives regulation, although the overall pace of non-U.S. reform is behind that of the U.S. The ultimate impact on us of the derivatives regulations that have not yet been finalized and the time it will take us to comply with unfinalized requirements remains uncertain. Final regulations will impose additional operational and compliance costs on us, may require us to restructure certain businesses and may negatively impact our results of operations.

For information regarding other significant regulatory matters, see Capital Management – Regulatory Capital on page 70, Note 11 – Commitments and Contingencies to the Consolidated Financial Statements herein, Regulatory Matters on page 64 of the MD&A of the Corporation's 2012 Annual Report on Form 10-K, and Item 1A. Risk Factors of the Corporation's 2012 Annual Report on Form 10-K.

Managing Risk
 
Overview

Risk is inherent in every material business activity that we undertake. Our business exposes us to strategic, credit, market, liquidity, compliance, operational and reputational risks. We must manage these risks to maximize our long-term results by ensuring the integrity of our assets and the quality of our earnings.

We take a comprehensive approach to risk management. We have a defined risk framework and articulated risk appetite which was approved on January 23, 2013 by the Corporation's Board of Directors (the Board). Risk management planning is integrated with strategic, financial and customer/client planning so that goals and responsibilities are aligned across the organization. Risk is managed in a systematic manner by focusing on the Corporation as a whole as well as managing risk across the enterprise and within individual business units, products, services and transactions, and across all geographic locations. We maintain a governance structure that delineates the responsibilities for risk management activities, as well as governance and oversight of those activities.

Enterprise-wide Stress Testing

As a part of our core risk management practices, we conduct enterprise-wide stress tests on a periodic basis to better understand balance sheet, earnings, capital and liquidity sensitivities to certain economic and business scenarios, including economic and market conditions that are more severe than anticipated. These enterprise-wide stress tests provide illustrative hypothetical potential impacts from our risk profile on our balance sheet, earnings, capital and liquidity and serve as a key component of our capital, liquidity and risk management practices. Scenarios are selected by the Asset Liability and Market Risk Committee (ALMRC) and approved by the Chief Financial Officer and the Chief Risk Officer. Impacts to each business from each scenario are then determined and analyzed, primarily by leveraging the models and processes utilized in everyday management routines. Impacts are assessed along with potential mitigating actions that may be taken. Analysis from such stress scenarios is compiled for and reviewed through our Chief Financial Officer Risk Committee, ALMRC and the Board's Enterprise Risk Committee. For a more detailed discussion of our risk management activities, see pages 66 through 121 of the MD&A of the Corporation's 2012 Annual Report on Form 10-K.


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Strategic Risk Management

Strategic risk is embedded in every business and is one of the major risk categories along with credit, market, liquidity, compliance, operational and reputational risks. It is the risk that results from adverse business decisions, ineffective or inappropriate business plans, or failure to respond to changes in the macroeconomic environment, such as business cycles, competitor actions, changing customer preferences, product obsolescence, technology developments and regulatory environment. We face significant strategic risk due to the changing regulatory environment and the fast-paced development of new products and technologies in the financial services industries. Our appetite for strategic risk is assessed based on the strategic plan, with strategic risks selectively and carefully considered against the backdrop of the evolving marketplace. Strategic risk is managed in the context of our overall financial condition, risk appetite, and stress results, among other considerations. The Chief Executive Officer and executive management team manage and act on significant strategic actions, such as material acquisitions or capital actions subsequent to required review and approval by the Board.

For more information on our Strategic Risk Management activities, see page 70 of the MD&A of the Corporation's 2012 Annual Report on Form 10-K.

Capital Management

The Corporation manages its capital position to maintain sufficient capital to support its business activities and maintain capital, risk and risk appetite commensurate with one another. Additionally, we seek to maintain safety and soundness at all times including under adverse conditions, take advantage of organic growth opportunities, maintain ready access to financial markets, continue to serve as a credit intermediary, remain a source of strength for our subsidiaries, and satisfy current and future regulatory capital requirements.

To determine the appropriate level of capital, we assess the results of our Internal Capital Adequacy Assessment Process (ICAAP), the current economic and market environment, and feedback from key stakeholders including investors, rating agencies and regulators. Based upon this analysis, we set goals for capital ratios to maintain an adequate capital position, including in severe adverse economic scenarios.

The ICAAP incorporates capital forecasts, stress test results, economic capital (which is a component of allocated capital), qualitative risk assessments and assessment of regulatory changes. Throughout the year, we generate regulatory capital and economic capital forecasts that are aligned to the most recent earnings, balance sheet and risk forecasts. We utilize quarterly stress tests to assess the potential impacts to our balance sheet, earnings, capital and liquidity under a variety of stress scenarios. We perform qualitative risk assessments to identify and assess material risks not fully captured in the forecasts, stress tests or economic capital. We regularly assess the capital impacts of proposed changes to regulatory capital requirements. Management regularly assesses ICAAP results and provides documented quarterly assessments of the adequacy of the capital guidelines and capital position to the Board or its committees.

Capital management is integrated into our risk and governance processes, as capital is a key consideration in the development of the strategic plan, risk appetite and risk limits. Effective January 1, 2013, on a prospective basis, we adjusted the amount of capital being allocated to our business segments. The adjustment reflects a refinement to the prior-year methodology (economic capital) which focused solely on internal risk-based economic capital models. The refined methodology (allocated capital) now also considers the effect of regulatory capital requirements in addition to internal risk-based economic capital models. The Corporation's internal risk-based capital models use a risk-adjusted methodology incorporating each segment's credit, market, interest rate, business and operational risk components. See Managing Risk on page 68 and Strategic Risk Management on page 69 for more information on the nature of these risks. The capital allocated to the business segments is currently referred to as allocated capital and, prior to January 1, 2013, was referred to as economic capital, both of which represent non-GAAP financial measures. Allocated capital in the business segments is subject to change over time. For more information on the refined methodology, see Business Segment Operations on page 30.


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Regulatory Capital

As a financial services holding company, we are subject to the general risk-based capital rules issued by federal banking regulators which was Basel 1 through December 31, 2012. On January 1, 2013, Basel 1 was amended prospectively, introducing changes to the measurement of risk-weighted assets for exposures subject to market risk (Market Risk Final Rule) and is referred to herein as the Basel 1 – 2013 Rules. Under these rules, the Corporation and its affiliated banking entities, BANA and FIA, measure capital adequacy based on Tier 1 common capital, Tier 1 capital and Total capital (Tier 1 plus Tier 2 capital). Capital ratios are calculated by dividing each capital amount by risk-weighted assets. Additionally, Tier 1 capital is divided by adjusted quarterly average total assets to derive the Tier 1 leverage ratio. For more information on the Market Risk Final Rule, see Capital Management – Regulatory Capital Changes on page 72.

The Federal Reserve requires BHCs to submit a capital plan and requests for capital actions on an annual basis, consistent with the rules governing the CCAR. The CCAR is the central element to the Federal Reserve's approach to ensuring that large BHCs have adequate capital and robust processes for managing their capital. In January 2013, we submitted our 2013 capital plan, and received results on March 14, 2013. The Federal Reserve's stress scenario projections for the Corporation, based on the 2013 capital plan, estimated a Basel 1 – 2013 minimum Tier 1 common capital ratio of 6.0 percent under severe adverse economic conditions with all proposed capital actions through the end of 2014, exceeding the five percent reference rate for all institutions involved in the CCAR. The capital plan submitted by the Corporation included a request to repurchase up to $5.0 billion of common stock over four quarters, beginning in the second quarter of 2013, the redemption of $5.5 billion in preferred stock and a continuation of the quarterly common stock dividend at $0.01 per share. The Federal Reserve did not object to our 2013 capital plan, including all proposed capital actions. As of June 30, 2013, in connection with the CCAR capital plan, we have repurchased and retired 79.6 million common shares for an aggregate purchase price of approximately $1.0 billion and we redeemed $5.5 billion of preferred stock consisting of Series H and 8.

The timing and exact amount of common stock repurchases will be consistent with the Corporation's capital plan and will be subject to various factors, including the Corporation's capital position, liquidity, applicable legal considerations, financial performance and alternative uses of capital, stock trading price, and general market conditions, and may be suspended at any time. The common stock repurchases may be effected through open market purchases or privately negotiated transactions, including Rule 10b5-1 plans.

For additional information, see Capital Management – Regulatory Capital on page 70 of the MD&A of the Corporation's 2012 Annual Report on Form 10-K and Note 17 – Regulatory Requirements and Restrictions to the Consolidated Financial Statements of the Corporation's 2012 Annual Report on Form 10-K.

Capital Composition and Ratios

Tier 1 common capital under the Basel 1 – 2013 Rules was $139.5 billion at June 30, 2013, an increase of $6.1 billion compared to $133.4 billion under Basel 1 at December 31, 2012. For comparative purposes, we have also provided pro-forma Tier 1 common capital and the related ratio as of December 31, 2012 as if the Basel 1 – 2013 Rules existed at that time. At December 31, 2012, the pro-forma Tier 1 common capital of $133.4 billion was unchanged and the difference between the pro-forma Tier 1 common capital ratio of 10.38 percent compared to 11.06 percent on an as-reported basis was the result of additional risk-weighted assets of $78.8 billion as measured under the Basel 1 – 2013 Rules. At June 30, 2013, the Tier 1 common capital ratio was 10.83 percent, a 45 bps increase from the pro-forma Tier 1 common capital ratio of 10.38 percent at December 31, 2012. The increase was due to earnings eligible to be included in capital, partially offset by the impact of the common stock repurchases and a modest increase in risk-weighted assets. During the six months ended June 30, 2013, total capital remained relatively unchanged at $196.8 billion with increases in Tier 1 common capital and the portion of the allowance for loan and lease losses eligible to be included in capital offset by decreases in qualifying preferred stock, term subordinated debt and qualifying trust preferred securities (Trust Securities). For additional information, see Tables 17 and 18.

Risk-weighted assets increased $82.2 billion during the six months ended June 30, 2013 to $1,288 billion. This increase adversely impacted Tier 1 common, Tier 1 and Total capital ratios by 72 bps, 82 bps and 104 bps, respectively. The increase was primarily due to the net impact of the Basel 1 – 2013 Rules which added approximately $87 billion in risk-weighted assets and reduced the Tier 1 common capital ratio by approximately 76 bps. The Tier 1 leverage ratio increased 12 bps during the six months ended June 30, 2013 primarily driven by the increase in Tier 1 capital. For additional information, see Table 16.


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Table 16 presents Bank of America Corporation's risk-weighted assets activity for the six months ended June 30, 2013.

Table 16
 
Risk-weighted Assets Activity
 
(Dollars in billions)
Six Months Ended June 30, 2013
Risk-weighted assets, January 1
$
1,206

Changes to risk-weighted assets
 
Increase related to Comprehensive Risk Measure (1)
22

Increase related to Incremental Risk Charge (1)
7

Increase related to market risk regulatory VaR
21

Standard specific risk (2)
28

Increase due to items no longer eligible to be included in market risk
9

Increases related to implementation of Basel 1 – 2013 Rules
87

Decrease related to trading and banking book exposures
(9
)
Other changes
4

Total risk-weighted assets, June 30
$
1,288

(1)
For additional information, see Capital Management – Regulatory Capital Changes on page 72.
(2) 
A measure of the risk of loss on a position that could result from factors other than broad market movements.

Table 17 presents Bank of America Corporation's capital ratios and related information in accordance with the Basel 1 – 2013 Rules as measured at June 30, 2013 and Basel 1 at December 31, 2012.

Table 17
Bank of America Corporation Regulatory Capital
 
June 30, 2013
 
December 31, 2012
 
Actual
 
 
 
Actual
 
 
(Dollars in millions)
Ratio
 
Amount
 
Minimum
Required (1)
 
Ratio
 
Amount
 
Minimum
Required (1)
Tier 1 common capital
10.83
%
 
$
139,519

 
n/a

 
11.06
%
 
$
133,403

 
n/a

Tier 1 common capital (pro-forma) (2)
n/a

 
n/a

 
n/a

 
10.38

 
133,403

 
n/a

Tier 1 capital
12.16

 
156,689

 
$
77,290

 
12.89

 
155,461

 
$
72,359

Total capital
15.27

 
196,752

 
128,816

 
16.31

 
196,680

 
120,598

Tier 1 leverage
7.49

 
156,689

 
83,689

 
7.37

 
155,461

 
84,429

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30
2013
 
December 31
2012
Risk-weighted assets (in billions)
 
 
 
 
 
 
 
 
$
1,288

 
$
1,206

Adjusted quarterly average total assets (in billions) (3)
 
 
 
 
 
 
 
2,092

 
2,111

(1) 
Dollar amount required to meet guidelines to be considered well-capitalized.
(2) 
Pro-forma Tier 1 common capital ratio at December 31, 2012 includes the estimated impact of the Basel 1 – 2013 Rules. Represents a non-GAAP financial measure. On a pro-forma basis, risk-weighted assets would have been approximately $1,285 billion with the inclusion of $78.8 billion in pro-forma risk-weighted assets.
(3) 
Reflects adjusted average total assets for the three months ended June 30, 2013 and December 31, 2012.
n/a = not applicable


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Table 18 presents capital composition in accordance with the Basel 1 – 2013 Rules as measured at June 30, 2013 and Basel 1 at December 31, 2012.

Table 18
Capital Composition
(Dollars in millions)
June 30
2013
 
December 31
2012
Total common shareholders' equity
$
216,791

 
$
218,188

Goodwill
(69,930
)
 
(69,976
)
Nonqualifying intangible assets (includes core deposit intangibles, affinity relationships, customer relationships and other intangibles)
(4,621
)
 
(4,994
)
Net unrealized (gains) losses on AFS debt and marketable equity securities and net losses on derivatives recorded in accumulated OCI, net-of-tax
2,918

 
(2,036
)
Unamortized net periodic benefit costs recorded in accumulated OCI, net-of-tax
4,323

 
4,456

Fair value adjustments related to structured liabilities (1)
4,133

 
4,084

Disallowed deferred tax asset
(15,656
)
 
(17,940
)
Other
1,561

 
1,621

Total Tier 1 common capital
139,519

 
133,403

Qualifying preferred stock
11,324

 
15,851

Trust preferred securities
5,846

 
6,207

Total Tier 1 capital
156,689

 
155,461

Long-term debt qualifying as Tier 2 capital
22,194

 
24,287

Allowance for loan and lease losses
21,235

 
24,179

Reserve for unfunded lending commitments
474

 
513

Allowance for loan and lease losses exceeding 1.25 percent of risk-weighted assets
(5,503
)
 
(9,459
)
45 percent of the pre-tax net unrealized gains on AFS marketable equity securities
292

 
329

Other
1,371

 
1,370

Total capital
$
196,752

 
$
196,680

(1) 
Represents loss on structured liabilities, net-of-tax, that is excluded from Tier 1 common capital, Tier 1 capital and Total capital for regulatory capital purposes.

Regulatory Capital Changes

At June 30, 2013, we measured and reported our capital ratios and related information in accordance with the Basel 1 – 2013 Rules, which introduced new measures of market risk including a charge related to stressed Value-at-Risk (VaR), an incremental risk charge and the comprehensive risk measure (CRM), as well as other technical modifications. The implementation of the Basel 1 – 2013 Rules was the primary driver of the changes in total risk-weighted assets, and Tier 1 capital, Tier 1 common capital and Total capital ratios from December 31, 2012. We manage regulatory capital to adhere to internal capital guidelines and regulatory standards of capital adequacy based on our current understanding of the rules and the application of such rules to our business as currently conducted.

The regulatory capital rules continue to expand and evolve. In December 2007, U.S. banking regulators published final Basel 2 rules (Basel 2). We measure and report our capital ratios and related information under Basel 2 on a confidential basis to U.S. banking regulators during the required parallel period, during which we provide the U.S. banking regulators both the Basel 1 – 2013 Rules and Basel 2 related information in parallel. The parallel period will continue until we receive regulatory approval to exit parallel reporting and subsequently begin publicly reporting our Basel 2 regulatory capital results and related disclosures.

In July 2013, U.S. banking regulators approved the final Basel 3 rules (Basel 3). While not yet published in the Federal Register, Basel 3 will be effective January 1, 2014. Various aspects of Basel 3 will be subject to multi-year transition periods ending December 31, 2018 and Basel 3 generally continues to be subject to further evaluation and interpretation by the U.S. banking regulators. Basel 3 will materially change our Tier 1 common, Tier 1 and Total capital calculations. Basel 3 introduces new minimum capital ratios and buffer requirements, changes the composition of regulatory capital, expands and modifies the calculation of risk-weighted assets for credit and market risk (the Advanced Approach), revises the adequately capitalized minimum requirements under the Prompt Corrective Action framework and introduces, effective January 1, 2015, a Standardized Approach for the calculation of risk-weighted assets, which will replace the Basel 1 – 2013 Rules. Under Basel 3, we will be required to calculate regulatory capital ratios and risk-weighted assets under both the Standardized and Advanced Approaches. The approach that yields the lower ratio is to be used to assess capital adequacy including under the Prompt Corrective Action framework. The Prompt Corrective Action framework establishes categories of capitalization, including "well-capitalized," based on regulatory ratio requirements. U.S. banking regulators are required to take certain mandatory

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actions depending on the category of capitalization, with no mandatory actions required for "well-capitalized" banking entities. We continue to evaluate the impact of both the Standardized and Advanced Approaches on us. The Basel 3 Advanced Approach requires approval by the U.S. regulatory agencies of analytical models used as part of capital measurement. If these models are not approved, it would likely lead to an increase in our risk-weighted assets, which in some cases could be significant.

Important differences between Basel 1, Basel 1 – 2013 Rules and Basel 3 include capital deductions related to our MSRs, deferred tax assets and defined benefit pension assets, and the inclusion of unrealized gains and losses on debt and equity securities recognized in accumulated OCI, each of which will be impacted by future changes in interest rates, overall earnings performance or other corporate actions.

In July 2013, U.S. banking regulators also issued a notice of proposed rulemaking to modify the supplementary leverage ratio minimum requirements under Basel 3 which would be effective in 2018. This proposal would only be applicable to BHCs with more than $700 billion in total assets or more than $10 trillion in total assets under custody. If adopted, it would require the Corporation to maintain a minimum supplementary leverage ratio of three percent, plus a supplementary leverage buffer of two percent, for a total of five percent. If the Corporation's supplementary leverage buffer is not greater than or equal to two percent, then the Corporation would be required to maintain higher capital levels which could limit its ability to make distributions of capital to shareholders, whether through dividends, stock repurchases or otherwise. In addition, the insured depository institutions of such BHCs, which for the Corporation would include primarily BANA and FIA, would be required to maintain a minimum six percent leverage ratio to be considered "well capitalized." As of June 30, 2013, we estimate the Corporation's supplementary leverage ratio to be in the range of 4.9 percent to 5.0 percent based on these proposed requirements. As of June 30, 2013, we estimate that the supplementary leverage ratio for our primary bank subsidiaries, BANA and FIA, were both in excess of the six percent proposed minimum. The proposal is not yet final and, when finalized, could have provisions significantly different from those currently proposed.

Changes to the composition of regulatory capital under Basel 3, such as recognizing the impact of unrealized gains or losses on AFS debt securities on Tier 1 common capital, are subject to a transition period where the impact is recognized in 20 percent annual increments. The transition period for these regulatory capital adjustments and deductions extends from the effective date through December 31, 2017. The phase-in period for the new minimum capital ratio requirements and related buffers under Basel 3 will occur from January 1, 2014 through December 31, 2018. When presented on a fully phased-in basis, the capital ratio, capital and risk-weighted assets assume all regulatory capital adjustments and deductions are fully recognized.

In addition, Basel 3 established regulatory capital treatment for Trust Securities, which requires that Trust Securities be: (1) excluded from Tier 1 capital, but included in Tier 2 capital in 2014 and 2015; and (2) subsequently excluded from both Tier 1 and Tier 2 capital beginning in 2016. Our previously issued and outstanding Trust Securities in the aggregate qualifying amount of $5.8 billion (approximately 45 bps of Tier 1 capital) at June 30, 2013 will no longer qualify as Tier 1 capital or Tier 2 capital beginning in 2016.

Under the Basel 3 Advanced Approach, we estimated our Tier 1 common capital ratio, on a fully phased-in basis, to be 9.60 percent at June 30, 2013. As of June 30, 2013, we estimated that our Tier 1 common capital would be $125.8 billion and total risk-weighted assets would be $1,310 billion, on a fully phased-in basis. This assumes approval by U.S. banking regulators of our internal analytical models, but does not include the benefit of the removal of the surcharge applicable to the CRM. The CRM is used to determine the risk-weighted assets for correlation trading positions. The calculations under Basel 3 require management to make estimates, assumptions and interpretations, including the probability of future events based on historical experience. Realized results could differ from those estimates and assumptions. Basel 3 regulatory capital metrics are considered non-GAAP financial measures until January 1, 2014 when they are fully adopted and required by U.S. banking regulators. We have provided these measures in accordance with the Advanced Approach for comparability to our peers. Table 19 presents a reconciliation of our Tier 1 common capital and risk-weighted assets in accordance with the Basel 1 – 2013 Rules to our Basel 3 estimates at June 30, 2013 and Basel 1 to Basel 3 estimates at December 31, 2012, assuming fully phased-in measures according to the Basel 3 Advanced Approach. Our estimates under the Basel 3 Advanced Approach may be refined over time as a result of further rulemaking or clarification by U.S. banking regulators or as our understanding and interpretation of the rules evolve. For additional information, see Table 19.

In 2011, the Basel Committee on Banking Supervision (the Basel Committee) issued proposed guidance on capital requirements for global systemically important financial institutions, including the methodology for measuring systemic importance, the additional capital required (the SIFI buffer), and the arrangements by which the guidance will be phased in (the 2011 G-SIFI Proposal). Under this proposal, the SIFI buffer would increase minimum capital requirements for Tier 1 common capital from one percent to 2.5 percent, and in certain circumstances, 3.5 percent. As of June 30, 2013, we estimate our SIFI buffer would be 1.5 percent, in line with the Financial Stability Board's report, "Update of Group of Global Systemically Important Banks," issued on November 1, 2012 and based on the 2011 G-SIFI Proposal. Subsequently, in July 2013, the Basel Committee issued a new proposal that updates and replaces the 2011 G-SIFI Proposal. This new proposal modifies and recalibrates the assessment methodology and introduces public disclosure requirements. U.S. banking regulators have not yet issued proposed or final rules related to the SIFI buffer or disclosure requirements.


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On December 20, 2011, the Federal Reserve issued proposed rules to implement enhanced supervisory and prudential requirements, and the early remediation requirements established under the Financial Reform Act. The enhanced standards include liquidity standards, requirements for overall risk management, single-counterparty credit limits, stress test requirements and a debt-to-equity limit for certain companies determined to pose a threat to financial stability. The final rules, when adopted and fully implemented, are likely to influence our regulatory capital and liquidity planning process, and may impose additional operational and compliance costs on us.

For more information regarding Basel 2, Basel 3 and other proposed regulatory capital changes, see Note 17 – Regulatory Requirements and Restrictions to the Consolidated Financial Statements of the Corporation's 2012 Annual Report on Form 10-K.

Table 19
Basel 1 to Basel 3 (fully phased-in) Reconciliation (1)
(Dollars in millions)
June 30
2013
December 31
2012
Regulatory capital – Basel 1 to Basel 3 (fully phased-in)
Basel 1 Tier 1 capital
$
156,689

$
155,461

Deduction of qualifying preferred stock and trust preferred securities
(17,170
)
(22,058
)
Basel 1 Tier 1 common capital
139,519

133,403

Deduction of defined benefit pension assets
(787
)
(737
)
Change in deferred tax assets and threshold deductions (deferred tax asset temporary differences, MSRs and significant investments)
(6,761
)
(3,020
)
Change in all other deductions, net (2)
(6,125
)
(1,020
)
Basel 3 (fully phased-in) Tier 1 common capital
$
125,846

$
128,626

 
 
 
Risk-weighted assets – Basel 1 to Basel 3 (fully phased-in)
 
 
Basel 1 risk-weighted assets
$
1,288,159

$
1,205,976

Net change in credit and other risk-weighted assets
22,276

103,085

Increase due to Market Risk Final Rule (3)
—

81,811

Basel 3 (fully phased-in) risk-weighted assets
$
1,310,435

$
1,390,872

 
 
 
Tier 1 common capital ratios
 
 
Basel 1
10.83
%
11.06
%
Basel 3 (fully phased-in)
9.60

9.25

(1) 
Includes the Market Risk Final Rule at June 30, 2013. At December 31, 2012, the Basel 1 information did not include the Market Risk Final Rule.
(2) 
Includes net unrealized losses of $4.5 billion in accumulated OCI and $1.5 billion related to certain intangibles at June 30, 2013. At December 31, 2012, this included net unrealized gains of $0.4 billion in accumulated OCI and $1.7 billion related to certain intangibles.
(3) 
Excludes the benefit of certain hedges at December 31, 2012. Including these hedges, the increase due to the Market Risk Final Rule would have been $78.8 billion. For additional information, see Capital Management – Capital Composition and Ratios on page 70.

We expect to merge certain pension plans during the third quarter of 2013. The plan merger will require a remeasurement of the qualified pension obligations and plan assets at fair value as of the merger date. The remeasurement is expected to marginally benefit our Tier 1 common capital under Basel 3. The actual amount is subject to market conditions at the time of the merger and will change as markets change. For additional information, see Note 15 – Pension, Postretirement and Certain Compensation Plans to the Consolidated Financial Statements.


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Bank of America, N.A. and FIA Card Services, N.A. Regulatory Capital

Table 20 presents regulatory capital information for BANA and FIA at June 30, 2013 and December 31, 2012.

Table 20
Bank of America, N.A. and FIA Card Services, N.A. Regulatory Capital (1)
 
June 30, 2013
 
December 31, 2012
 
Actual
 
 
 
Actual
 
 
(Dollars in millions)
Ratio
 
Amount
 
Minimum
Required (2)
 
Ratio
 
Amount
 
Minimum
Required (2)
Tier 1 capital
 
 
 
 
 
 
 
 
 
 
 
Bank of America, N.A.
12.30
%
 
$
123,827

 
$
60,425

 
12.44
%
 
$
118,431

 
$
57,099

FIA Card Services, N.A.
16.78

 
20,141

 
7,200

 
17.34

 
22,061

 
7,632

Total capital
 
 
 
 
 
 
 
 
 
 
 
Bank of America, N.A.
14.06

 
141,590

 
100,709

 
14.76

 
140,434

 
95,165

FIA Card Services, N.A.
18.08

 
21,693

 
12,000

 
18.64

 
23,707

 
12,719

Tier 1 leverage
 
 
 
 
 
 
 
 
 
 
 
Bank of America, N.A.
8.97

 
123,827

 
68,997

 
8.59

 
118,431

 
68,957

FIA Card Services, N.A.
12.72

 
20,141

 
7,919

 
13.67

 
22,061

 
8,067

(1) 
BANA regulatory capital information included the Basel 1 – 2013 Rules at June 30, 2013. At December 31, 2012, BANA regulatory capital information did not include the Basel 1 – 2013 Rules. FIA is not impacted by the Basel 1 – 2013 Rules.
(2) 
Dollar amount required to meet guidelines for well-capitalized institutions.

BANA's Tier 1 capital ratio decreased 14 bps to 12.30 percent and the Total capital ratio decreased 70 bps to 14.06 percent at June 30, 2013 compared to December 31, 2012. The Tier 1 leverage ratio increased 38 bps to 8.97 percent at June 30, 2013 compared to December 31, 2012. The decrease in the Tier 1 capital ratio was driven by an increase in risk-weighted assets of $55.4 billion compared to December 31, 2012, returns of capital and dividends paid to the Corporation of $3.0 billion and $5.2 billion for the three and six months ended June 30, 2013, partially offset by earnings eligible to be included in capital of $3.9 billion and $9.0 billion. The decrease in the Total capital ratio was driven by the same factors as discussed for the Tier 1 capital ratio above as well as a $2.5 billion and $4.9 billion decrease in qualifying subordinated debt for the three and six months ended June 30, 2013. The increase in the Tier 1 leverage ratio was primarily driven by an increase in Tier 1 capital. The increase in risk-weighted assets was primarily due to the impact of implementing the Basel 1 – 2013 Rules and an increase in loans.

FIA's Tier 1 capital ratio and the Total capital ratio decreased 56 bps to 16.78 percent and 18.08 percent at June 30, 2013 compared to December 31, 2012. The Tier 1 leverage ratio decreased 95 bps to 12.72 percent at June 30, 2013 compared to December 31, 2012. The decrease in the Tier 1 capital and Total capital ratios was driven by returns of capital of $1.8 billion and $3.9 billion to the Corporation, partially offset by earnings eligible to be included in capital of $937 million and $1.9 billion for the three and six months ended June 30, 2013 and a decrease in risk-weighted assets of $7.2 billion compared to December 31, 2012, primarily due to a decrease in loans. The decrease in the Tier 1 leverage ratio was driven by the decrease in Tier 1 capital, partially offset by a decrease in adjusted quarterly average total assets of $3.0 billion. FIA was not impacted by the implementation of the Basel 1 – 2013 Rules.

Broker/Dealer Regulatory Capital

The Corporation's principal U.S. broker/dealer subsidiaries are Merrill Lynch, Pierce, Fenner & Smith (MLPF&S) and Merrill Lynch Professional Clearing Corp (MLPCC). MLPCC is a fully-guaranteed subsidiary of MLPF&S and provides clearing and settlement services. Both entities are subject to the net capital requirements of Securities and Exchange Commission (SEC) Rule 15c3-1. Both entities are also registered as futures commission merchants and are subject to the Commodity Futures Trading Commission Regulation 1.17.

MLPF&S has elected to compute the minimum capital requirement in accordance with the Alternative Net Capital Requirement as permitted by SEC Rule 15c3-1. At June 30, 2013, MLPF&S's regulatory net capital as defined by Rule 15c3-1 was $11.6 billion and exceeded the minimum requirement of $793 million by $10.9 billion. MLPCC's net capital of $1.8 billion exceeded the minimum requirement of $242 million by $1.6 billion. In accordance with the Alternative Net Capital Requirements, MLPF&S is required to maintain tentative net capital in excess of $1.0 billion, net capital in excess of $500 million and notify the SEC in the event its tentative net capital is less than $5.0 billion. At June 30, 2013, MLPF&S had tentative net capital and net capital in excess of the minimum and notification requirements.


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Common and Preferred Stock Dividends

For a summary of our declared quarterly cash dividends on common stock during the second quarter of 2013 and through August 1, 2013, see Note 12 – Shareholders' Equity to the Consolidated Financial Statements.

Table 21 is a summary of our cash dividend declarations on preferred stock during the second quarter of 2013 and through August 1, 2013. During the second quarter of 2013, preferred dividends were $441 million, including $365 million in dividends declared during the second quarter plus approximately $76 million, representing the difference between the redemption price at par and the carrying value of securities redeemed in the second quarter. We expect the third quarter of 2013 preferred stock dividends to include $255 million, which includes dividends on the Series J Preferred Stock, plus approximately $24 million, representing the difference between the redemption price at par and the carrying value of securities redeemed in the third quarter. We currently expect the fourth quarter of 2013 preferred stock dividends to be $255 million, which includes the semi-annual dividend on the Series U Preferred Stock. For more information on preferred stock, see Note 14 – Shareholders' Equity to the Consolidated Financial Statements of the Corporation's 2012 Annual Report on Form 10-K.

Table 21
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock Cash Dividend Summary
Preferred Stock
Outstanding
Notional
Amount
(in millions)
 
Declaration Date
 
Record Date
 
Payment Date
 
Per Annum
Dividend Rate
 
Dividend Per
Share
Series B (1)
$
1

 
April 30, 2013
 
July 11, 2013
 
July 25, 2013
 
7.00
%
 
$
1.75


 
 
July 24, 2013
 
October 11, 2013
 
October 25, 2013
 
7.00

 
1.75

Series D (2)
$
654

 
April 2, 2013
 
May 31, 2013
 
June 14, 2013
 
6.204
%
 
$
0.38775

 
 
 
July 2, 2013
 
August 30, 2013
 
September 16, 2013
 
6.204

 
0.38775

Series E (2)
$
317

 
April 2, 2013
 
April 30, 2013
 
May 15, 2013
 
Floating

 
$
0.24722

 
 
 
July 2, 2013
 
July 31, 2013
 
August 15, 2013
 
Floating

 
0.25556

Series F
$
141

 
April 2, 2013
 
May 31, 2013
 
June 17, 2013
 
Floating

 
$
1,044.44

 
 
 
July 2, 2013
 
August 30, 2013
 
September 16, 2013
 
Floating

 
1022.22222

Series G
$
493

 
April 2, 2013
 
May 31, 2013
 
June 17, 2013
 
Adjustable

 
$
1,044.44

 
 
 
July 2, 2013
 
August 30, 2013
 
September 16, 2013
 
Adjustable

 
1022.22222

Series H (2, 3)
$
2,862

 
April 2, 2013
 
April 15, 2013
 
May 1, 2013
 
8.20
%
 
$
0.51250

Series I (2)
$
365

 
April 2, 2013
 
June 15, 2013
 
July 1, 2013
 
6.625
%
 
$
0.4140625

 
 
 
July 2, 2013
 
September 15, 2013
 
October 1, 2013
 
6.625

 
0.4140625

Series J (2, 4)
$
951

 
April 2, 2013
 
April 15, 2013
 
May 1, 2013
 
7.25
%
 
$
0.453125

 
 
 
July 2, 2013
 
July 15, 2013
 
August 1, 2013
 
7.25

 
0.453125

Series K (5, 6)
$
1,544

 
July 2, 2013
 
July 15, 2013
 
July 30, 2013
 
Fixed-to-floating

 
$
40.00

Series L
$
3,080

 
June 17, 2013
 
July 1, 2013
 
July 30, 2013
 
7.25
%
 
$
18.125

Series M (5, 6)
$
1,310

 
April 2, 2013
 
April 30, 2013
 
May 15, 2013
 
Fixed-to-floating

 
$
40.62500

Series T (1)
$
5,000

 
June 17, 2013
 
June 25, 2013
 
July 10, 2013
 
6.00
%
 
$
1,500.00

(1)
Dividends are cumulative.
(2)
Dividends per depositary share, each representing a 1/1,000th interest in a share of preferred stock.
(3)
This series was redeemed on May 1, 2013.
(4)
Notice of redemption sent on July 2, 2013; preferred stock to be redeemed on August 1, 2013.
(5)
Initially pays dividends semi-annually.
(6)
Dividends per depositary share, each representing a 1/25th interest in a share of preferred stock.

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Table 21
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock Cash Dividend Summary (continued)
Preferred Stock
Outstanding
Notional
Amount
(in millions)
 
Declaration Date
 
Record Date
 
Payment Date
 
Per Annum
Dividend Rate
 
Dividend Per
Share
Series 1 (7)
$
98

 
April 2, 2013
 
May 15, 2013
 
May 28, 2013
 
Floating

 
$
0.18750

 
 
 
July 2, 2013
 
August 15, 2013
 
August 28, 2013
 
Floating

 
0.18750

Series 2 (7)
$
299

 
April 2, 2013
 
May 15, 2013
 
May 28, 2013
 
Floating

 
$
0.18542

 
 
 
July 2, 2013
 
August 15, 2013
 
August 28, 2013
 
Floating

 
0.19167

Series 3 (7)
$
653

 
April 2, 2013
 
May 15, 2013
 
May 28, 2013
 
6.375
%
 
$
0.3984375

 
 
 
July 2, 2013
 
August 15, 2013
 
August 28, 2013
 
6.375

 
0.3984375

Series 4 (7)
$
210

 
April 2, 2013
 
May 15, 2013
 
May 28, 2013
 
Floating

 
$
0.24722

 
 
 
July 2, 2013
 
August 15, 2013
 
August 28, 2013
 
Floating

 
0.25556

Series 5 (7)
$
422

 
April 2, 2013
 
May 1, 2013
 
May 21, 2013
 
Floating

 
$
0.24722

 
 
 
July 2, 2013
 
August 1, 2013
 
August 21, 2013
 
Floating

 
0.25556

Series 6 (8, 9)
$
59

 
April 2, 2013
 
June 15, 2013
 
June 28, 2013
 
6.70
%
 
$
0.41875

Series 7 (8, 9)
$
17

 
April 2, 2013
 
June 15, 2013
 
June 28, 2013
 
6.25
%
 
$
0.390625

Series 8 (7, 10)
$
2,673

 
April 2, 2013
 
May 15, 2013
 
May 28, 2013
 
8.625
%
 
$
0.5390625

(7) 
Dividends per depositary share, each representing a 1/1,200th interest in a share of preferred stock.
(8) 
Dividends per depositary share, each representing a 1/40th interest in a share of preferred stock.
(9) 
These series were redeemed on June 28, 2013.
(10) 
This series was redeemed on May 28, 2013.

Liquidity Risk
 
Funding and Liquidity Risk Management

We define liquidity risk as the potential inability to meet our contractual and contingent financial obligations, on- or off-balance sheet, as they come due. Our primary liquidity objective is to provide adequate funding for our businesses throughout market cycles, including periods of financial stress. To achieve that objective, we analyze and monitor our liquidity risk, maintain excess liquidity and access diverse funding sources including our stable deposit base. We define excess liquidity as readily available assets, limited to cash and high-quality, liquid, unencumbered securities that we can use to meet our funding requirements as those obligations arise.

Global funding and liquidity risk management activities are centralized within Corporate Treasury. We believe that a centralized approach to funding and liquidity risk management enhances our ability to monitor liquidity requirements, maximizes access to funding sources, minimizes borrowing costs and facilitates timely responses to liquidity events. For more information regarding global funding and liquidity risk management, see Liquidity Risk – Funding and Liquidity Risk Management on page 75 of the MD&A of the Corporation's 2012 Annual Report on Form 10-K.

Global Excess Liquidity Sources and Other Unencumbered Assets

We maintain excess liquidity available to Bank of America Corporation, or the parent company and selected subsidiaries in the form of cash and high-quality, liquid, unencumbered securities. These assets, which we call our Global Excess Liquidity Sources, serve as our primary means of liquidity risk mitigation. Our cash is primarily on deposit with the Federal Reserve and central banks outside of the U.S. We limit the composition of high-quality, liquid, unencumbered securities to U.S. government securities, U.S. agency securities, U.S. agency MBS and a select group of non-U.S. government and supranational securities. We believe we can quickly obtain cash for these securities, even in stressed market conditions, through repurchase agreements or outright sales. We hold our Global Excess Liquidity Sources in entities that allow us to meet the liquidity requirements of our global businesses, and we consider the impact of potential regulatory, tax, legal and other restrictions that could limit the transferability of funds among entities.


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Our Global Excess Liquidity Sources were $342 billion and $372 billion at June 30, 2013 and December 31, 2012 and were maintained as presented in Table 22.

Table 22
Global Excess Liquidity Sources
(Dollars in billions)
June 30
2013
 
December 31
2012
 
Average for Three Months Ended June 30, 2013
Parent company
$
95

 
$
103

 
$
94

Bank subsidiaries
221

 
247

 
235

Broker/dealers
26

 
22

 
25

Total global excess liquidity sources
$
342

 
$
372

 
$
354


As shown in Table 22, parent company Global Excess Liquidity Sources totaled $95 billion and $103 billion at June 30, 2013 and December 31, 2012. The decrease in parent company liquidity was primarily due to debt maturities and capital actions. Typically, parent company cash is deposited overnight with BANA.

Global Excess Liquidity Sources available to our bank subsidiaries totaled $221 billion and $247 billion at June 30, 2013 and December 31, 2012. The decrease in bank subsidiaries' liquidity was primarily due to expected deposit outflows and securities revaluation. Liquidity amounts are distinct from the cash deposited by the parent company. In addition to their Global Excess Liquidity Sources, our bank subsidiaries hold other unencumbered investment-grade securities that we believe could also be used to generate liquidity. Our bank subsidiaries can also generate incremental liquidity by pledging a range of other unencumbered loans and securities to certain FHLBs and the Federal Reserve Discount Window. The cash we could have obtained by borrowing against this pool of specifically-identified eligible assets was approximately $198 billion and $194 billion at June 30, 2013 and December 31, 2012. We have established operational procedures to enable us to borrow against these assets, including regularly monitoring our total pool of eligible loans and securities collateral. Eligibility is defined by guidelines outlined by the FHLBs and the Federal Reserve and is subject to change at their discretion. Due to regulatory restrictions, liquidity generated by the bank subsidiaries can only be used to fund obligations within the bank subsidiaries and can only be transferred to the parent company or nonbank subsidiaries with prior regulatory approval.

Global Excess Liquidity Sources available to our broker/dealer subsidiaries totaled $26 billion and $22 billion at June 30, 2013 and December 31, 2012. Our broker/dealers also held other unencumbered investment-grade securities and equities that we believe could be used to generate additional liquidity. Liquidity held in a broker/dealer subsidiary is available to meet the obligations of that entity and can only be transferred to the parent company or to any other subsidiary with prior regulatory approval due to regulatory restrictions and minimum requirements.

Table 23 presents the composition of Global Excess Liquidity Sources at June 30, 2013 and December 31, 2012.

Table 23
Global Excess Liquidity Sources Composition
(Dollars in billions)
June 30
2013
 
December 31
2012
Cash on deposit
$
54

 
$
65

U.S. Treasuries
12

 
21

U.S. agency securities and mortgage-backed securities
261

 
271

Non-U.S. government and supranational securities
15

 
15

Total global excess liquidity sources
$
342

 
$
372


Time to Required Funding and Stress Modeling

We use a variety of metrics to determine the appropriate amounts of excess liquidity to maintain at the parent company and our bank and broker/dealer subsidiaries. One metric we use to evaluate the appropriate level of excess liquidity at the parent company is "Time to Required Funding." This debt coverage measure indicates the number of months that the parent company can continue to meet its unsecured contractual obligations as they come due using only its Global Excess Liquidity Sources without issuing any new debt or accessing any additional liquidity sources. We define unsecured contractual obligations for purposes of this metric as maturities of senior or subordinated debt issued or guaranteed by Bank of America Corporation or Merrill Lynch. These include certain unsecured debt instruments, primarily structured liabilities, which we may be required to settle for cash prior to maturity. Our Time to Required Funding was 32 months at June 30, 2013, which is above the Corporation's target minimum of 21 months. For purposes of calculating Time to Required Funding,

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at June 30, 2013, we have included in the amount of unsecured contractual obligations $9.6 billion, which includes the $8.6 billion liability related to the BNY Mellon Settlement and $951 million related to the August 1, 2013 redemption of the Series J Preferred Stock. The BNY Mellon Settlement is subject to final court approval and certain other conditions, and the timing of payment is not certain.

We utilize liquidity stress models to assist us in determining the appropriate amounts of excess liquidity to maintain at the parent company and our bank and broker/dealer subsidiaries. These models are risk sensitive and have become increasingly important in analyzing our potential contractual and contingent cash outflows beyond those outflows considered in the Time to Required Funding analysis. We evaluate the liquidity requirements under a range of scenarios with varying levels of severity and time horizons. The scenarios we consider and utilize incorporate market-wide and Corporation-specific events, including potential credit rating downgrades for the parent company and our subsidiaries, and are based on historical experience, regulatory guidance, and both expected and unexpected future events.

The types of potential contractual and contingent cash outflows we consider in our scenarios may include, but are not limited to, upcoming contractual maturities of unsecured debt and reductions in new debt issuance; diminished access to secured financing markets; potential deposit withdrawals; increased draws on loan commitments, liquidity facilities and letters of credit, including Variable Rate Demand Notes; additional collateral that counterparties could call if our credit ratings were downgraded; collateral and margin requirements arising from market value changes; and potential liquidity required to maintain businesses and finance customer activities. Changes in certain market factors, including, but not limited to, credit rating downgrades, could negatively impact potential contractual and contingent outflows and the related financial instruments, and in some cases these impacts could be material to our financial results.

We consider all sources of funds that we could access during each stress scenario and focus particularly on matching available sources with corresponding liquidity requirements by legal entity. We also use the stress modeling results to manage our asset-liability profile and establish limits and guidelines on certain funding sources and businesses.

Basel 3 Liquidity Standards

In December 2010, the Basel Committee proposed two measures of liquidity risk which are considered part of Basel 3. The first proposed liquidity measure is the Liquidity Coverage Ratio (LCR), which is calculated as the amount of a financial institution's unencumbered, high-quality, liquid assets relative to the net cash outflows the institution could encounter under a significant 30-day stress scenario. The Basel Committee announced in January 2013 that an initial minimum LCR requirement of 60 percent will be implemented in January 2015, and will thereafter increase in 10 percent annual increments through January 2019. The second proposed liquidity measure is the Net Stable Funding Ratio (NSFR), which measures the amount of longer-term, stable sources of funding employed by a financial institution relative to the liquidity profiles of the assets funded and the potential for contingent calls on funding liquidity arising from off-balance sheet commitments and obligations over a one-year period. The Basel Committee is currently reviewing the NSFR requirement and announced that it intends to implement the requirement by January 2018, following an observation period that is currently underway. We continue to monitor the development and the potential impact of these proposals, and assuming adoption by U.S. banking regulators, we expect to meet the final standards within the regulatory timelines.

Diversified Funding Sources

We fund our assets primarily with a mix of deposits and secured and unsecured liabilities through a centralized, globally coordinated funding strategy. We diversify our funding globally across products, programs, markets, currencies and investor groups.

The primary benefits expected from our centralized funding strategy include greater control, reduced funding costs, wider name recognition by investors and greater flexibility to meet the variable funding requirements of subsidiaries. Where regulations, time zone differences or other business considerations make parent company funding impractical, certain other subsidiaries may issue their own debt.

We fund a substantial portion of our lending activities through our deposits, which were $1.08 trillion and $1.11 trillion at June 30, 2013 and December 31, 2012. Deposits are primarily generated by our CBB, GWIM and Global Banking segments. These deposits are diversified by clients, product type and geography, and the majority of our U.S. deposits are insured by the Federal Deposit Insurance Corporation. We consider a substantial portion of our deposits to be a stable, low-cost and consistent source of funding. We believe this deposit funding is generally less sensitive to interest rate changes, market volatility or changes in our credit ratings than wholesale funding sources. Our lending activities may also be financed through secured borrowings, including securitizations with GSEs, the FHA and private-label investors, as well as FHLB loans.

Our trading activities in broker/dealer subsidiaries are primarily funded on a secured basis through securities lending and repurchase agreements and these amounts will vary based on customer activity and market conditions. We believe funding these activities in the secured financing markets is more cost-efficient and less sensitive to changes in our credit ratings than unsecured financing. Repurchase agreements are generally short-term and often overnight. Disruptions in secured financing markets for financial institutions have occurred in prior market cycles which resulted in adverse changes in terms or significant reductions in the availability of such financing. We manage

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the liquidity risks arising from secured funding by sourcing funding globally from a diverse group of counterparties, providing a range of securities collateral and pursuing longer durations, when appropriate.

We issue the majority of our long-term unsecured debt at the parent company. During the three and six months ended June 30, 2013, the parent company issued $3.0 billion and $16.0 billion of long-term unsecured debt, including structured liabilities of $1.7 billion and $3.2 billion. We may also issue long-term unsecured debt through BANA in a variety of maturities and currencies to achieve cost-efficient funding and to maintain an appropriate maturity profile, although there were no new issuances through BANA during the six months ended June 30, 2013. While the cost and availability of unsecured funding may be negatively impacted by general market conditions or by matters specific to the financial services industry or the Corporation, we seek to mitigate refinancing risk by actively managing the amount of our borrowings that we anticipate will mature within any month or quarter.

On July 18, 2013, we announced an "any and all" cash tender offer and a maximum cash tender offer for certain senior notes maturing in 2014. The "any and all" tender offer expired on July 31, 2013 and the aggregate consideration payable for securities accepted for purchase in this tender was $2.1 billion. The maximum tender offer will expire on August 14, 2013 and the maximum aggregate consideration available for securities accepted for purchase in this tender is $2.9 billion. In addition, we issued $2.0 billion of 4.1% notes due July 2023 and €1.5 billion of 2.5% notes due July 2020. Substantially all of this newly issued debt has been converted to floating-rate debt with derivative transactions.

Table 24 presents the carrying value of aggregate annual contractual maturities of long-term debt at June 30, 2013.

Table 24
Long-term Debt By Maturity
(Dollars in millions)
2013
 
2014
 
2015
 
2016
 
2017
 
Thereafter
 
Total
Bank of America Corporation
$
5,907

 
$
21,616

 
$
17,278

 
$
22,091

 
$
19,320

 
$
52,024

 
$
138,236

Merrill Lynch & Co., Inc.
6,940

 
16,280

 
3,795

 
2,878

 
5,773

 
26,138

 
61,804

Merrill Lynch & Co., Inc. subsidiaries
899

 
3,608

 
2,371

 
1,411

 
2,331

 
8,121

 
18,741

Bank of America, N.A. and subsidiaries
—

 
2

 
—

 
1,087

 
6,370

 
1,739

 
9,198

Other debt
3,080

 
1,484

 
1,647

 
1,915

 
17

 
412

 
8,555

Total long-term debt excluding consolidated VIEs
16,826

 
42,990

 
25,091

 
29,382

 
33,811

 
88,434

 
236,534

Long-term debt of consolidated VIEs
5,741

 
9,555

 
1,470

 
2,089

 
1,630

 
5,461

 
25,946

Total long-term debt
$
22,567

 
$
52,545

 
$
26,561

 
$
31,471

 
$
35,441

 
$
93,895

 
$
262,480


Table 25 presents our long-term debt by major currency at June 30, 2013 and December 31, 2012.

Table 25
Long-term Debt By Major Currency
(Dollars in millions)
June 30
2013
 
December 31
2012
U.S. Dollar
$
178,213

 
$
180,329

Euro
52,565

 
58,985

Japanese Yen
10,599

 
12,749

British Pound
9,349

 
11,126

Canadian Dollar
3,252

 
3,560

Australian Dollar
3,098

 
2,760

Swiss Franc
1,530

 
1,917

Other
3,874

 
4,159

Total long-term debt
$
262,480

 
$
275,585


Total long-term debt decreased $13.1 billion, or five percent, during the six months ended June 30, 2013, primarily driven by maturities outpacing new issuances. We anticipate that debt levels will decline due to maturities through 2013, reflecting our ongoing initiative to reduce our debt balances over time. We may, from time to time, purchase outstanding debt instruments in various transactions, depending on prevailing market conditions, liquidity and other factors. In addition, our broker/dealer subsidiaries may make markets in our debt instruments to provide liquidity for investors. For more information on long-term debt funding, see Note 12 – Long-term Debt to the Consolidated Financial Statements of the Corporation's 2012 Annual Report on Form 10-K and for more information regarding funding and liquidity risk management, see pages 75 through 79 of the MD&A of the Corporation's 2012 Annual Report on Form 10-K.

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We use derivative transactions to manage the duration, interest rate and currency risks of our borrowings, considering the characteristics of the assets they are funding. For further details on our ALM activities, see Interest Rate Risk Management for Nontrading Activities on page 130.

We also diversify our unsecured funding sources by issuing various types of debt instruments including structured liabilities, which are debt obligations that pay investors returns linked to other debt or equity securities, indices, currencies or commodities. We typically hedge the returns we are obligated to pay on these liabilities with derivative positions and/or investments in the underlying instruments, so that from a funding perspective, the cost is similar to our other unsecured long-term debt. We could be required to settle certain structured liability obligations for cash or other securities prior to maturity under certain circumstances, which we consider for liquidity planning purposes. We believe, however, that a portion of such borrowings will remain outstanding beyond the earliest put or redemption date. We had outstanding structured liabilities with a carrying value of $49.1 billion and $51.7 billion at June 30, 2013 and December 31, 2012.

Substantially all of our senior and subordinated debt obligations contain no provisions that could trigger a requirement for an early repayment, require additional collateral support, result in changes to terms, accelerate maturity or create additional financial obligations upon an adverse change in our credit ratings, financial ratios, earnings, cash flows or stock price.

Contingency Planning

We maintain contingency funding plans that outline our potential responses to liquidity stress events at various levels of severity. These policies and plans are based on stress scenarios and include potential funding strategies and communication and notification procedures that we would implement in the event we experienced stressed liquidity conditions. We periodically review and test the contingency funding plans to validate efficacy and assess readiness.

Our U.S. bank subsidiaries can access contingency funding through the Federal Reserve Discount Window. Certain non-U.S. subsidiaries have access to central bank facilities in the jurisdictions in which they operate. While we do not rely on these sources in our liquidity modeling, we maintain the policies, procedures and governance processes that would enable us to access these sources if necessary.

Credit Ratings

Our borrowing costs and ability to raise funds are impacted by our credit ratings. In addition, credit ratings may be important to customers or counterparties when we compete in certain markets and when we seek to engage in certain transactions, including over-the-counter (OTC) derivatives. Thus, it is our objective to maintain high-quality credit ratings.

Credit ratings and outlooks are opinions expressed by rating agencies on our creditworthiness and that of our obligations or securities, including long-term debt, short-term borrowings, preferred stock and other securities, including asset securitizations. Our credit ratings are subject to ongoing review by the rating agencies which consider a number of factors, including our own financial strength, performance, prospects and operations as well as factors not under our control. The rating agencies could make adjustments to our ratings at any time and they provide no assurances that they will maintain our ratings at current levels.

Other factors that influence our credit ratings include changes to the rating agencies' methodologies for our industry or certain security types, the rating agencies' assessment of the general operating environment for financial services companies, our mortgage exposures (including litigation), our relative positions in the markets in which we compete, reputation, liquidity position, diversity of funding sources, funding costs, the level and volatility of earnings, corporate governance and risk management policies, capital position, capital management practices, and current or future regulatory and legislative initiatives.

The major rating agencies 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.

On June 11, 2013, Standard & Poor's Ratings Services (S&P) published a report that affirmed all its current ratings for Bank of America Corporation and seven other BHCs that the agency views as having high systemic importance. That report also indicated that S&P is reconsidering, and may remove, the uplift for government support in its holding company ratings for those companies. As a result, the agency maintained its negative outlook on the Corporation's holding company ratings. S&P also maintained its negative outlook on the Corporation's operating company ratings, citing company-specific factors. On May 16, 2013, Fitch Ratings (Fitch) announced the results of its periodic review of its ratings for 12 large, complex securities trading and universal banks, including Bank of America Corporation. As part of this action, Fitch affirmed the Corporation's senior credit ratings and upgraded the rating of its stand-alone creditworthiness, as well as the ratings for its subordinated debt, trust preferred and preferred stock issuances, each by one notch. On March 27, 2013, Moody's Investor Service, Inc. (Moody's) published an update on systemic support in U.S. bank ratings and indicated

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the agency expects to resolve the current negative outlooks on its ratings for systemically important U.S. BHCs, including that of the Corporation, during 2013.

Currently, the Corporation's long-term/short-term senior debt ratings and outlooks expressed by the rating agencies are as follows: Baa2/P-2 (negative) by Moody's, A-/A-2 (negative) by S&P, and A/F1 (stable) by Fitch. BANA's long-term/short-term senior debt ratings and outlooks are as follows: A3/P-2 (stable) by Moody's, A/A-1 (negative) by S&P, and A/F1 (stable) by Fitch. The credit ratings of Merrill Lynch from the three major credit rating agencies are the same as those of the Corporation. The major credit rating agencies have indicated that the primary drivers of Merrill Lynch's credit ratings are the Corporation's credit ratings. MLPF&S's long-term/short-term senior debt ratings and outlooks are A/A-1 (negative) by S&P and A/F1 (stable) by Fitch. Merrill Lynch International's long-term/short-term senior debt rating is A/A-1 (negative) by S&P.

A reduction in certain of our credit ratings or the ratings of certain asset-backed securitizations may have a material adverse effect on our liquidity, potential loss of access to credit markets, the related cost of funds, our businesses and on certain trading revenues, particularly in those businesses where counterparty creditworthiness is critical. In addition, under the terms of certain OTC derivative contracts and other trading agreements, in the event of downgrades of our or our rated subsidiaries' credit ratings, the counterparties to those agreements may require us to provide additional collateral, or to terminate these contracts or agreements, which could cause us to sustain losses and/or adversely impact our liquidity. If the short-term credit ratings of our parent company, bank or broker/dealer subsidiaries were downgraded by one or more levels, the potential loss of access to short-term funding sources such as repo financing and the effect on our incremental cost of funds could be material.

At June 30, 2013, if the rating agencies had downgraded their long-term senior debt ratings for the Corporation or certain subsidiaries by one incremental notch, the amount of additional collateral contractually required by derivative contracts and other trading agreements would have been approximately $3.0 billion, comprised of $2.6 billion for BANA and $0.4 billion for Merrill Lynch and certain of its subsidiaries. If the rating agencies had downgraded their long-term senior debt ratings for these entities by a second incremental notch, approximately $5.4 billion in additional incremental collateral, comprised of $1.3 billion for BANA and $4.1 billion for Merrill Lynch and certain of its subsidiaries, would have been required.

Also, if the rating agencies had downgraded their long-term senior debt ratings for the Corporation or certain subsidiaries by one incremental notch, the derivative liability that would be subject to unilateral termination by counterparties as of June 30, 2013 was $2.7 billion, against which $2.1 billion of collateral has been posted. If the rating agencies had downgraded their long-term senior debt ratings for the Corporation and certain subsidiaries by a second incremental notch, the derivative liability that would be subject to unilateral termination by counterparties as of June 30, 2013 was an incremental $1.8 billion, against which $1.2 billion of collateral has been posted.

While certain potential impacts are contractual and quantifiable, the full scope of consequences of a credit ratings downgrade to a financial institution is inherently uncertain, as it depends upon numerous dynamic, complex and inter-related factors and assumptions, including whether any downgrade of a firm's long-term credit ratings precipitates downgrades to its short-term credit ratings, and assumptions about the potential behaviors of various customers, investors and counterparties. For more information on potential impacts of credit rating downgrades, see Liquidity Risk – Time to Required Funding and Stress Modeling on page 78.

For information regarding the additional collateral and termination payments that could be required in connection with certain OTC derivative contracts and other trading agreements as a result of such a credit rating downgrade, see Note 3 – Derivatives to the Consolidated Financial Statements and Item 1A. Risk Factors of the Corporation's 2012 Annual Report on Form 10-K.

On July 18, 2013, Moody's revised its outlook on the U.S. government to stable from negative and affirmed its Aaa long-term sovereign credit rating on the U.S. government. On June 28, 2013, Fitch affirmed its AAA long-term and F1+ short-term sovereign credit rating on the U.S. government, but the outlook remains negative. On June 10, 2013, S&P affirmed its AA+ long-term and A-1+ short-term sovereign credit rating on the U.S. government, as the outlook on the long-term credit rating was revised to stable from negative.


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Credit Risk Management

Credit quality continued to improve during the second quarter of 2013 due in part to improving economic conditions. In addition, our proactive credit risk management activities positively impacted the credit portfolio as charge-offs and delinquencies continued to improve, primarily in the consumer portfolios and risk ratings improved in the commercial portfolios. For additional information, see Executive Summary – Second Quarter 2013 Economic and Business Environment on page 6.

We proactively refine our underwriting and credit management practices as well as credit standards to meet the changing economic environment. To actively mitigate losses and enhance customer support in our consumer businesses, we have in place collection programs and loan modification and customer assistance infrastructures. We utilize a number of actions to mitigate losses in the commercial businesses including increasing the frequency and intensity of portfolio monitoring, hedging activity and our practice of transferring management of deteriorating commercial exposures to independent special asset officers as credits enter criticized categories.

Certain European countries, including Greece, Ireland, Italy, Portugal and Spain, have experienced varying degrees of financial stress. For more information on our exposures and related risks in non-U.S. countries, see Non-U.S. Portfolio on page 116 and Item 1A. Risk Factors of the Corporation's 2012 Annual Report on Form 10-K.

For information on our Credit Risk Management activities, see Consumer Portfolio Credit Risk Management on page 83, Commercial Portfolio Credit Risk Management on page 104, Non-U.S. Portfolio on page 116, Provision for Credit Losses and Allowance for Credit Losses both on page 120, Note 5 – Outstanding Loans and Leases and Note 6 – Allowance for Credit Losses to the Consolidated Financial Statements.

Consumer Portfolio Credit Risk Management

Credit risk management for the consumer portfolio begins with initial underwriting and continues throughout a borrower's credit cycle. Statistical techniques in conjunction with experiential judgment are used in all aspects of portfolio management including underwriting, product pricing, risk appetite, setting credit limits, and establishing operating processes and metrics to quantify and balance risks and returns. Statistical models are built using detailed behavioral information from external sources such as credit bureaus and/or internal historical experience. These models are a component of our consumer credit risk management process and are used in part to help make both new and ongoing credit decisions, as well as portfolio management strategies, including authorizations and line management, collection practices and strategies, determination of the allowance for loan and lease losses, and allocated capital for credit risk.

Since January 2008, and through the second quarter of 2013, Bank of America and Countrywide have completed approximately 1.3 million loan modifications with customers. During the second quarter of 2013, we completed more than 38,000 customer loan modifications with a total unpaid principal balance of approximately $8 billion, including approximately 8,300 permanent modifications under the government's Making Home Affordable Program. Of the loan modifications completed during the second quarter of 2013, in terms of both the volume of modifications and the unpaid principal balance associated with the underlying loans, most were in the portfolio serviced for investors and were not on our balance sheet. The most common types of modifications include a combination of rate reduction and/or capitalization of past due amounts which represented 63 percent of the volume of modifications completed during the second quarter of 2013, while principal reductions and forgiveness represented 14 percent, principal forbearance represented 12 percent and capitalization of past due amounts represented six percent. For modified loans on our balance sheet, these modification types are generally considered TDRs. For more information on TDRs and portfolio impacts, see Consumer Portfolio Credit Risk Management – Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity on page 101 and Note 5 – Outstanding Loans and Leases to the Consolidated Financial Statements.


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Consumer Credit Portfolio

Improvement in the U.S. economy, labor markets and home prices during 2012 and through the six months ended June 30, 2013 resulted in lower credit losses across all major consumer portfolios compared to the six months ended June 30, 2012. Although home prices have shown steady improvement over the past year and a half, it was not enough to offset the adverse impact in the home loans portfolio since 2006.

Improved credit quality across the consumer portfolio drove a $3.0 billion decrease during the six months ended June 30, 2013 in the consumer allowance for loan and lease losses. For additional information, see Allowance for Credit Losses on page 120.

In January 2013, we entered into the FNMA Settlement to resolve substantially all outstanding and potential repurchase and certain other claims relating to the origination, sale and delivery of residential mortgage loans originated and sold directly to FNMA from January 1, 2000 through December 31, 2008 by entities related to Countrywide and BANA. In connection with the FNMA Settlement, we repurchased certain loans from FNMA and, as of June 30, 2013, these loans had an unpaid principal balance of $6.1 billion and a carrying value of $5.1 billion of which $5.7 billion of unpaid principal balance and $4.8 billion of carrying value were classified as PCI loans. All of these loans are included in the Legacy Assets & Servicing portfolio in Table 29. For more information on PCI loans, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 95 and Note 5 – Outstanding Loans and Leases to the Consolidated Financial Statements. For more information on the FNMA Settlement, see Note 8 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements.

For further information on our accounting policies regarding delinquencies, nonperforming status, charge-offs and TDRs for the consumer portfolio, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements of the Corporation's 2012 Annual Report on Form 10-K.


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Table 26 presents our outstanding consumer loans, leases and the PCI loan portfolio. In addition to being included in the "Outstandings" columns in Table 26, PCI loans are also shown separately, net of purchase accounting adjustments, in the "Purchased Credit-impaired Loan Portfolio" columns. For additional information, see Note 5 – Outstanding Loans and Leases to the Consolidated Financial Statements. The impact of the PCI loan portfolio on certain credit statistics is reported where appropriate. For additional information, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 95. In addition, given the continued run-off of our discontinued real estate portfolio, effective January 1, 2013, the pay option loans previously included in discontinued real estate loans are now included as part of our residential mortgage and home equity portfolios. The majority of these loans were considered credit-impaired and were written down to fair value upon acquisition. Prior periods were reclassified to conform to current period presentation. For more information on pay option loans, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Residential Mortgage Loan Portfolio on page 97.

Table 26
Consumer Loans and Leases
 
Outstandings
 
Purchased Credit-impaired Loan Portfolio
(Dollars in millions)
June 30
2013
 
December 31
2012
 
June 30
2013
 
December 31
2012
Residential mortgage (1)
$
253,959

 
$
252,929

 
$
21,224

 
$
17,451

Home equity
100,011

 
108,140

 
7,431

 
8,667

U.S. credit card
90,523

 
94,835

 
n/a

 
n/a

Non-U.S. credit card
10,340

 
11,697

 
n/a

 
n/a

Direct/Indirect consumer (2)
83,358

 
83,205

 
n/a

 
n/a

Other consumer (3)
1,803

 
1,628

 
n/a

 
n/a

Consumer loans excluding loans accounted for under the fair value option
539,994

 
552,434

 
28,655

 
26,118

Loans accounted for under the fair value option (4)
1,052

 
1,005

 
n/a

 
n/a

Total consumer loans and leases
$
541,046

 
$
553,439

 
$
28,655

 
$
26,118

(1) 
Outstandings include pay option loans of $5.8 billion and $6.7 billion and non-U.S. residential mortgage loans of $83 million and $93 million at June 30, 2013 and December 31, 2012. We no longer originate pay option loans.
(2) 
Outstandings include dealer financial services loans of $36.8 billion and $35.9 billion, consumer lending loans of $3.6 billion and $4.7 billion, U.S. securities-based lending loans of $30.0 billion and $28.3 billion, non-U.S. consumer loans of $7.5 billion and $8.3 billion, student loans of $4.4 billion and $4.8 billion and other consumer loans of $1.1 billion and $1.2 billion at June 30, 2013 and December 31, 2012.
(3) 
Outstandings include consumer finance loans of $1.3 billion and $1.4 billion, consumer leases of $351 million and $34 million, consumer overdrafts of $149 million and $177 million and other non-U.S. consumer loans of $5 million at both June 30, 2013 and December 31, 2012.
(4) 
Consumer loans accounted for under the fair value option represent residential mortgage loans at both June 30, 2013 and December 31, 2012. See Consumer Portfolio Credit Risk Management – Consumer Loans Accounted for Under the Fair Value Option on page 100 and Note 17 – Fair Value Option to the Consolidated Financial Statements for additional information on the fair value option.
n/a = not applicable


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Table 27 presents accruing consumer loans past due 90 days or more and consumer nonperforming loans. Nonperforming loans do not include past due consumer credit card loans, other unsecured loans and in general, consumer non-real estate-secured loans (excluding those loans discharged in Chapter 7 bankruptcy) as these loans are typically charged off no later than the end of the month in which the loan becomes 180 days past due. Real estate-secured past due consumer loans that are insured by the FHA or individually insured under long-term stand-by agreements with FNMA and FHLMC (collectively, the fully-insured loan portfolio) are reported as accruing as opposed to nonperforming since the principal repayment is insured. Fully-insured loans included in accruing past due 90 days or more are primarily from our repurchases of delinquent FHA loans pursuant to our servicing agreements with GNMA. Additionally, nonperforming loans and accruing balances past due 90 days or more do not include the PCI loan portfolio or loans accounted for under the fair value option even though the customer may be contractually past due. For more information on FHA loans, see Off-Balance Sheet Arrangements and Contractual Obligations – Servicing, Foreclosure and Other Mortgage Matters on page 65.

Table 27
Consumer Credit Quality
 
Nonperforming
 
Accruing Past Due 90 Days or More
(Dollars in millions)
June 30
2013
 
December 31
2012
 
June 30
2013
 
December 31
2012
Residential mortgage (1)
$
14,316

 
$
15,055

 
$
20,604

 
$
22,157

Home equity
4,151

 
4,282

 
—

 
—

U.S. credit card
n/a

 
n/a

 
1,167

 
1,437

Non-U.S. credit card
n/a

 
n/a

 
158

 
212

Direct/Indirect consumer
72

 
92

 
462

 
545

Other consumer
1

 
2

 
2

 
2

Total (2)
$
18,540

 
$
19,431

 
$
22,393

 
$
24,353

Consumer loans and leases as a percentage of outstanding consumer loans and leases (2)
3.43
%
 
3.52
%
 
4.15
%
 
4.41
%
Consumer loans and leases as a percentage of outstanding loans and leases, excluding PCI and fully-insured loan portfolios (2)
4.39

 
4.46

 
0.42

 
0.50

(1) 
Residential mortgage loans accruing past due 90 days or more are fully-insured loans. At June 30, 2013 and December 31, 2012, residential mortgage included $16.0 billion and $17.8 billion of loans on which interest has been curtailed by the FHA, and therefore are no longer accruing interest, although principal is still insured, and $4.6 billion and $4.4 billion of loans on which interest was still accruing.
(2) 
Balances exclude consumer loans accounted for under the fair value option. At June 30, 2013 and December 31, 2012, $396 million and $391 million of loans accounted for under the fair value option were past due 90 days or more and not accruing interest.
n/a = not applicable


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Table 28 presents net charge-offs and related ratios for consumer loans and leases.

Table 28
 
 
 
 
 
 
 
 
Consumer Net Charge-offs and Related Ratios
 
 
 
 
 
 
 
 
 
Net Charge-offs (1)
 
Net Charge-off Ratios (1, 2)
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
Three Months Ended
June 30
 
Six Months Ended
June 30
(Dollars in millions)
2013
 
2012
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Residential mortgage
$
271

 
$
749

 
$
654

 
$
1,662

 
0.43
%
 
1.14
%
 
0.51
%
 
1.25
%
Home equity
486

 
893

 
1,170

 
1,851

 
1.92

 
3.00

 
2.27

 
3.07

U.S. credit card
917

 
1,244

 
1,864

 
2,575

 
4.10

 
5.27

 
4.14

 
5.36

Non-U.S. credit card
104

 
135

 
216

 
338

 
3.93

 
3.97

 
4.03

 
4.89

Direct/Indirect consumer
86

 
181

 
210

 
407

 
0.42

 
0.86

 
0.51

 
0.95

Other consumer
51

 
49

 
103

 
105

 
11.57

 
7.71

 
12.15

 
8.15

Total
$
1,915

 
$
3,251

 
$
4,217

 
$
6,938

 
1.42

 
2.25

 
1.56

 
2.37

(1) 
Net charge-offs exclude write-offs in the PCI loan portfolios of $110 million and $855 million for home equity and $203 million and $297 million for residential mortgage for the three and six months ended June 30, 2013 compared to none for the same periods in 2012. These write-offs decreased the PCI valuation allowance included as part of the allowance for loan and lease losses. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 95.
(2) 
Net charge-off ratios are calculated as annualized net charge-offs divided by average outstanding loans excluding loans accounted for under the fair value option.

Net charge-off ratios, excluding the PCI and fully-insured loan portfolios, were 0.74 percent and 0.90 percent for residential mortgage, 2.07 percent and 2.46 percent for home equity, and 1.81 percent and 1.99 percent for the total consumer portfolio for the three and six months ended June 30, 2013, respectively. Net charge-off ratios, excluding the PCI and fully-insured loan portfolios, were 1.97 percent and 2.15 percent for residential mortgage, 3.32 percent and 3.40 percent for home equity, and 2.86 percent and 3.00 percent for the total consumer portfolio for the three and six months ended June 30, 2012, respectively. These are the only product classifications that include PCI and fully-insured loans for these periods.

Net charge-offs exclude write-offs in the PCI loan portfolios of $110 million and $855 million in home equity and $203 million and $297 million in residential mortgage for the three and six months ended June 30, 2013, respectively. This compared to none for the same periods in 2012. These write-offs decreased the PCI valuation allowance included as part of the allowance for loan and lease losses. Net charge-off ratios including the PCI write-offs were 2.35 percent and 3.93 percent for home equity and 0.74 percent and 0.75 percent for residential mortgage for the three and six months ended June 30, 2013, respectively. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 95.


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Table 29 presents outstandings, nonperforming balances, net charge-offs, allowance for loan and lease losses and provision for loan and lease losses for the Core portfolio and the Legacy Assets & Servicing portfolio within the home loans portfolio. For more information on Legacy Assets & Servicing, see CRES on page 37.

Table 29
 
 
 
 
Home Loans Portfolio
 
 
 
 
 
Outstandings
 
Nonperforming
 
Net Charge-offs (1)
 
June 30
2013
 
December 31
2012
 
June 30
2013
 
December 31
2012
 
Three Months Ended
June 30
 
Six Months Ended
June 30
(Dollars in millions)
 
 
 
 
2013
 
2012
 
2013
 
2012
Core portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
$
172,257

 
$
170,116

 
$
3,404

 
$
3,193

 
$
68

 
$
141

 
$
169

 
$
285

Home equity
57,407

 
60,851

 
1,355

 
1,265

 
115

 
172

 
281

 
355

Total Core portfolio
229,664

 
230,967

 
4,759

 
4,458

 
183

 
313

 
450

 
640

Legacy Assets & Servicing portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage (2)
81,702

 
82,813

 
10,912

 
11,862

 
203

 
608

 
485

 
1,377

Home equity
42,604

 
47,289

 
2,796

 
3,017

 
371

 
721

 
889

 
1,496

Total Legacy Assets & Servicing portfolio
124,306

 
130,102

 
13,708

 
14,879

 
574

 
1,329

 
1,374

 
2,873

Home loans portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
253,959

 
252,929

 
14,316

 
15,055

 
271

 
749

 
654

 
1,662

Home equity
100,011

 
108,140

 
4,151

 
4,282

 
486

 
893

 
1,170

 
1,851

Total home loans portfolio
$
353,970

 
$
361,069

 
$
18,467

 
$
19,337

 
$
757

 
$
1,642

 
$
1,824

 
$
3,513

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan
and lease losses
 
Provision for loan
and lease losses
 
 
 
 
 
June 30
2013
 
December 31
2012
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
 
 
 
 
 
 
2013
 
2012
 
2013
 
2012
Core portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
 
 
 
 
$
803

 
$
829

 
$
39

 
$
107

 
$
144

 
$
307

Home equity
 
 
 
 
1,151

 
1,286

 
40

 
9

 
147

 
114

Total Core portfolio

 

 
1,954

 
2,115

 
79

 
116

 
291

 
421

Legacy Assets & Servicing portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
 
 
 
 
5,268

 
6,259

 
(222
)
 
341

 
(188
)
 
1,364

Home equity
 
 
 
 
5,174

 
6,559

 
170

 
222

 
408

 
659

Total Legacy Assets & Servicing portfolio


 


 
10,442

 
12,818

 
(52
)
 
563

 
220

 
2,023

Home loans portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
 
 
 
 
6,071

 
7,088

 
(183
)
 
448

 
(44
)
 
1,671

Home equity
 
 
 
 
6,325

 
7,845

 
210

 
231

 
555

 
773

Total home loans portfolio
 
 
 
 
$
12,396

 
$
14,933

 
$
27

 
$
679

 
$
511

 
$
2,444

(1) 
Net charge-offs exclude write-offs in the PCI loan portfolios of $110 million and $855 million for home equity and $203 million and $297 million for residential mortgage for the three and six months ended June 30, 2013, which are included in the Legacy Assets & Servicing portfolio, compared to none for the same periods in 2012. Write-offs in the PCI loan portfolio decrease the PCI valuation allowance included as part of the allowance for loan and lease losses. For more information on PCI write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 95.
(2) 
Outstandings and nonperforming amounts exclude loans accounted for under the fair value option. There were $1.1 billion and $1.0 billion of residential mortgage loans accounted for under the fair value option at June 30, 2013 and December 31, 2012. See Consumer Portfolio Credit Risk Management – Consumer Loans Accounted for Under the Fair Value Option on page 100 and Note 17 – Fair Value Option to the Consolidated Financial Statements for additional information on the fair value option.


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We believe that the presentation of information adjusted to exclude the impact of the PCI loan portfolio, the fully-insured loan portfolio and loans accounted for under the fair value option is more representative of the ongoing operations and credit quality of the business. As a result, in the following discussions of the residential mortgage and home equity portfolios, we provide information that excludes the impact of the PCI loan portfolio, the fully-insured loan portfolio and loans accounted for under the fair value option in certain credit quality statistics. We separately disclose information on the PCI loan portfolio on page 95.

Residential Mortgage

The residential mortgage portfolio makes up the largest percentage of our consumer loan portfolio at 47 percent of consumer loans at June 30, 2013. Approximately 17 percent of the residential mortgage portfolio is in GWIM and represents residential mortgages that are originated for the home purchase and refinancing needs of our wealth management clients. The remaining portion of the portfolio is primarily in All Other and is comprised of originated loans, purchased loans used in our overall ALM activities, loans repurchased in connection with the FNMA Settlement, delinquent FHA loans repurchased pursuant to our servicing agreements with GNMA as well as loans repurchased related to our representations and warranties.

Outstanding balances in the residential mortgage portfolio, excluding $1.1 billion of loans accounted for under the fair value option, increased $1.0 billion during the six months ended June 30, 2013 as new origination volume retained on our balance sheet and loans repurchased as part of the FNMA Settlement were partially offset by paydowns and charge-offs.

At June 30, 2013 and December 31, 2012, the residential mortgage portfolio included $89.3 billion and $90.9 billion of outstanding fully-insured loans. On this portion of the residential mortgage portfolio, we are protected against principal loss as a result of either FHA insurance or long-term stand-by agreements with FNMA and FHLMC. At June 30, 2013 and December 31, 2012, $63.8 billion and $66.6 billion had FHA insurance with the remainder protected by long-term stand-by agreements. All of these loans are individually insured and therefore the Corporation does not record a significant allowance for credit losses with respect to these loans.

At June 30, 2013 and December 31, 2012, $25.4 billion and $25.5 billion of the FHA-insured loan population were repurchases of delinquent FHA loans pursuant to our servicing agreements with GNMA.

In addition to the long-term stand-by agreements with FNMA and FHLMC, we have mitigated a portion of our credit risk on the residential mortgage portfolio through the use of synthetic securitization vehicles as described in Note 5 – Outstanding Loans and Leases to the Consolidated Financial Statements. At June 30, 2013 and December 31, 2012, the synthetic securitization vehicles referenced principal balances of $14.8 billion and $17.6 billion of residential mortgage loans and provided loss protection up to $420 million and $500 million. At June 30, 2013 and December 31, 2012, the Corporation had a receivable of $230 million and $305 million from these vehicles for reimbursement of losses. The Corporation records an allowance for credit losses on loans referenced by the synthetic securitization vehicles. The reported net charge-offs for the residential mortgage portfolio do not include the benefit of amounts reimbursable from these vehicles. Adjusting for the benefit of the credit protection from the synthetic securitizations, the residential mortgage net charge-off ratio, excluding the PCI and fully-insured loan portfolios, for the three and six months ended June 30, 2013 would have been reduced by four bps for both periods compared to nine bps and eight bps for the same periods in 2012.

The long-term stand-by agreements with FNMA and FHLMC and to a lesser extent the synthetic securitizations together reduce our regulatory risk-weighted assets due to the transfer of a portion of our credit risk to unaffiliated parties. At June 30, 2013 and December 31, 2012, these programs had the cumulative effect of reducing our risk-weighted assets by $7.5 billion and $7.2 billion, and increasing our Tier 1 capital ratio by seven bps and eight bps, and our Tier 1 common capital ratio by six bps and seven bps.


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Table 30 presents certain residential mortgage key credit statistics on both a reported basis excluding loans accounted for under the fair value option, and excluding the PCI loan portfolio, fully-insured loan portfolio and loans accounted for under the fair value option. Additionally, in the table below (in the "Reported Basis" columns) accruing balances past due and nonperforming loans do not include the PCI loan portfolio even though the customer may be contractually past due. We believe the presentation of information adjusted to exclude these loan portfolios is more representative of the credit risk in the residential mortgage loan portfolio. As such, the following discussion presents the residential mortgage portfolio excluding the PCI loan portfolio, the fully-insured loan portfolio and loans accounted for under the fair value option. For more information on the PCI loan portfolio, see page 95.

Table 30
Residential Mortgage – Key Credit Statistics
 
 
 
Reported Basis (1)
 
Excluding Purchased
Credit-impaired and
Fully-insured Loans
(Dollars in millions)
 
 
 
 
 
 
 
 
June 30
2013
 
December 31
2012
 
June 30
2013
 
December 31
2012
Outstandings
 
 
 
 
 
 
 
 
$
253,959

 
$
252,929

 
$
143,474

 
$
144,624

Accruing past due 30 days or more
 
 
 
 
 
 
 
26,625

 
28,815

 
2,553

 
3,117

Accruing past due 90 days or more
 
 
 
 
 
 
 
20,604

 
22,157

 
—

 
—

Nonperforming loans
 
 
 
 
 
 
 
 
14,316

 
15,055

 
14,316

 
15,055

Percent of portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Refreshed LTV greater than 90 but less than or equal to 100
 
16
%
 
15
%
 
9
%
 
10
%
Refreshed LTV greater than 100
 
 
 
 
 
18

 
28

 
14

 
20

Refreshed FICO below 620
 
 
 
 
 
 
 
23

 
23

 
13

 
14

2006 and 2007 vintages (2)
 
 
 
 
 
 
 
24

 
25

 
31

 
34

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reported Basis
 
Excluding Purchased Credit-impaired and Fully-insured Loans
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Net charge-off ratio (3)
0.43
%
 
1.14
%
 
0.51
%
 
1.25
%
 
0.74
%
 
1.97
%
 
0.90
%
 
2.15
%
(1) 
Outstandings, accruing past due, nonperforming loans and percentages of portfolio exclude loans accounted for under the fair value option. There were $1.1 billion and $1.0 billion of residential mortgage loans accounted for under the fair value option at June 30, 2013 and December 31, 2012. See Consumer Portfolio Credit Risk Management – Consumer Loans Accounted for Under the Fair Value Option on page 100 and Note 17 – Fair Value Option to the Consolidated Financial Statements for additional information on the fair value option.
(2) 
These vintages of loans account for 59 percent and 61 percent of nonperforming residential mortgage loans at June 30, 2013 and December 31, 2012, and 67 percent and 66 percent of residential mortgage net charge-offs for the three and six months ended June 30, 2013 and 72 percent for both the three and six months ended June 30, 2012.
(3) 
Net charge-off ratios are calculated as annualized net charge-offs divided by average outstanding loans excluding loans accounted for under the fair value option.

Nonperforming residential mortgage loans decreased $739 million during the six months ended June 30, 2013 as paydowns, returns to performing status, charge-offs, transfers to foreclosed property and the impact of sales outpaced new inflows. At June 30, 2013, borrowers were current on contractual payments with respect to $4.3 billion, or 30 percent of nonperforming residential mortgage loans, and $7.6 billion, or 53 percent of nonperforming residential mortgage loans were 180 days or more past due and had been written down to the estimated fair value of the collateral less costs to sell. Accruing loans past due 30 days or more decreased $564 million during the six months ended June 30, 2013.

Net charge-offs decreased $478 million to $271 million for the three months ended June 30, 2013, or 0.74 percent of total average residential mortgage loans, compared to $749 million, or 1.97 percent for the same period in 2012. Net charge-offs decreased $1.0 billion to $654 million for the six months ended June 30, 2013, or 0.90 percent of total average residential mortgage loans, compared to $1.7 billion, or 2.15 percent for the same period in 2012. These decreases in net charge-offs for the three- and six-month periods were primarily driven by favorable portfolio trends and decreased write-downs on loans greater than 180 days past due which were written down to the estimated fair value of the collateral less costs to sell, due in part to improvement in home prices and the U.S. economy. Net charge-off ratios were also impacted by lower loan balances primarily due to paydowns and charge-offs outpacing new originations.


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Loans in the residential mortgage portfolio with certain characteristics have greater risk of loss than others. These characteristics include loans with a high refreshed loan-to-value (LTV), loans originated at the peak of home prices in 2006 and 2007, interest-only loans and loans to borrowers located in California and Florida where we have concentrations and where significant declines in home prices have been experienced. Although the disclosures in this section address each of these risk characteristics separately, there is significant overlap in loans with these characteristics, which contributed to a disproportionate share of the losses in the portfolio. The residential mortgage loans with all of these higher risk characteristics comprised three and four percent of the residential mortgage portfolio at June 30, 2013 and December 31, 2012, and accounted for 12 percent and 16 percent of the residential mortgage net charge-offs during the three and six months ended June 30, 2013 compared to 20 percent and 21 percent for the same periods in 2012.

Residential mortgage loans with a greater than 90 percent but less than or equal to 100 percent refreshed LTV represented nine percent and 10 percent of the residential mortgage portfolio at June 30, 2013 and December 31, 2012. Loans with a refreshed LTV greater than 100 percent represented 14 percent and 20 percent of the residential mortgage loan portfolio at June 30, 2013 and December 31, 2012. Of the loans with a refreshed LTV greater than 100 percent, 93 percent and 92 percent were performing at June 30, 2013 and December 31, 2012. Loans with a refreshed LTV greater than 100 percent reflect loans where the outstanding carrying value of the loan is greater than the most recent valuation of the property securing the loan. The majority of these loans have a refreshed LTV greater than 100 percent primarily due to home price deterioration since 2006. Loans to borrowers with refreshed FICO scores below 620 represented 13 percent and 14 percent of the residential mortgage portfolio at June 30, 2013 and December 31, 2012.

Of the $143.5 billion and $144.6 billion in total residential mortgage loans outstanding at June 30, 2013 and December 31, 2012, as shown in Table 31, 40 percent were originated as interest-only loans for both periods. The outstanding balance of interest-only residential mortgage loans that have entered the amortization period was $15.8 billion, or 27 percent at June 30, 2013. Residential mortgage loans that have entered the amortization period generally have experienced a higher rate of early stage delinquencies and nonperforming status compared to the residential mortgage portfolio as a whole. At June 30, 2013, $349 million, or two percent of outstanding interest-only residential mortgages that had entered the amortization period were accruing past due 30 days or more compared to $2.6 billion, or two percent of accruing past due 30 days or more for the entire residential mortgage portfolio. In addition, at June 30, 2013, $2.4 billion, or 15 percent of outstanding interest-only residential mortgages that had entered the amortization period were nonperforming compared to $14.3 billion, or 10 percent of nonperforming loans for the entire residential mortgage portfolio. Loans in our interest-only residential mortgage portfolio have an interest-only period of three to ten years and more than 90 percent of these loans will not be required to make a fully-amortizing payment until 2015 or later.


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Table 31 presents outstandings, nonperforming loans and net charge-offs by certain state concentrations for the residential mortgage portfolio. The Los Angeles-Long Beach-Santa Ana Metropolitan Statistical Area (MSA) within California represented 12 percent of outstandings at both June 30, 2013 and December 31, 2012. Loans within this MSA comprised only six percent charge-offs for both the three and six months ended June 30, 2013 and eight percent of net charge-offs for both the three and six months ended June 30, 2012.

Table 31
 
 
 
 
Residential Mortgage State Concentrations
 
 
 
 
 
Outstandings (1)
 
Nonperforming (1)
 
Net Charge-offs (2)
 
June 30
2013
 
December 31
2012
 
June 30
2013
 
December 31
2012
 
Three Months Ended
June 30
 
Six Months Ended
June 30
(Dollars in millions)
 
 
 
 
2013
 
2012
 
2013
 
2012
California
$
48,108

 
$
48,671

 
$
4,306

 
$
4,580

 
$
61

 
$