Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

November 6, 2014

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

                

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

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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 "anticipates," "targets," "expects," "hopes," "estimates," "intends," "plans," "goal," "believes," "continue" and other similar expressions or future or conditional verbs such as "will," "may," "might," "should," "would" and "could." The forward-looking statements made represent the Corporation's current expectations, plans or forecasts of its future results and revenues, and future business and economic conditions more generally, and other matters. These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumptions that are difficult to predict and are often beyond the Corporation's control. Actual outcomes and results may differ materially from those expressed in, or implied by, any of these forward-looking statements.

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

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

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


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Table of Contents

Executive Summary
 
Business Overview

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

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

Third-Quarter 2014 Economic and Business Environment

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

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

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


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Recent Events

Foreign Exchange Inquiries and Litigation

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

Department of Justice Settlement

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

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

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

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

Dividends

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

BANA / FIA Merger

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


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Table of Contents

Regulatory Activities

Liquidity Coverage Ratio

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

Supplementary Leverage Ratio

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

Credit Risk Retention

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


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Table of Contents

Selected Financial Data

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

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

 
$
21,743

 
$
66,161

 
$
68,100

Net income (loss)
(232
)
 
2,497

 
1,783

 
7,992

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

 
0.10

 
0.62

Dividends paid per common share
0.05

 
0.01

 
0.07

 
0.03

Performance ratios
 
 
 
 
 

 
 
Return on average assets
n/m

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

 
6.32

 
1.45

 
6.67

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

 
92.08

 
76.22

Asset quality
 
 
 
 
 

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

 
$
19,432

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

 
$
20,028

Net charge-offs (4)
$
1,043

 
$
1,687

 
3,504

 
6,315

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

 
0.75

 
0.53

 
0.96

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

 
0.92

 
0.64

 
1.17

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

 
2.90

 
3.22

 
2.30

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

 
2.42

 
2.88

 
1.92

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

 
2.30

 
2.63

 
1.84

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

 
$
928,233

Total assets
 
 
 
 
2,123,613

 
2,102,273

Total deposits
 
 
 
 
1,111,981

 
1,119,271

Total common shareholders' equity
 
 
 
 
220,768

 
219,333

Total shareholders' equity
 
 
 
 
238,681

 
232,685

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

Tier 1 common capital
 
 
 
 
n/a

 
10.9
%
Tier 1 capital
 
 
 
 
12.8

 
12.2

Total capital
 
 
 
 
15.8

 
15.1

Tier 1 leverage
 
 
 
 
7.9

 
7.7

(1) 
Fully taxable-equivalent basis (FTE), return on average tangible shareholders' equity and the efficiency ratio are non-GAAP financial measures. Other companies may define or calculate these measures differently. For more information on these measures and ratios, and a corresponding reconciliation to GAAP financial measures, see Supplemental Financial Data on page 17.
(2) 
The diluted earnings (loss) per common share excludes the effect of any equity instruments that are antidilutive to earnings per share. There were no potential common shares that were dilutive in the third quarter of 2014 because of the net loss applicable to common shareholders.
(3) 
Balances and ratios do not include loans accounted for under the fair value option. For additional exclusions from nonperforming loans, leases and foreclosed properties, see Consumer Portfolio Credit Risk Management – Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity on page 100 and corresponding Table 46, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 109 and corresponding Table 55.
(4) 
Net charge-offs exclude $246 million and $797 million of write-offs in the purchased credit-impaired loan portfolio for the three and nine months ended September 30, 2014 compared to $443 million and $1.6 billion for the same periods in 2013. These write-offs decreased the purchased credit-impaired valuation allowance included as part of the allowance for loan and lease losses. For more information on purchased credit-impaired write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 95.
(5) 
On January 1, 2014, the Basel 3 rules became effective, subject to transition provisions primarily related to regulatory deductions and adjustments impacting common equity tier 1 capital and Tier 1 capital. We reported under Basel 1 (which included the Market Risk Final Rules) at December 31, 2013.
n/a = not applicable
n/m = not meaningful

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Table of Contents

Financial Highlights

The results for the three months ended September 30, 2014 were a net loss of $232 million, or a loss of $0.04 per share, and net income of $1.8 billion, or $0.10 per diluted share for the nine months ended September 30, 2014 compared to net income of $2.5 billion, or $0.20 and $8.0 billion, or $0.62 for the same periods in 2013. Litigation expense increased $4.9 billion and $12.2 billion for the three and nine months ended September 30, 2014, as the result of the DoJ Settlement and other litigation charges, and in the nine-month period, also the settlement with the Federal Housing Finance Agency (FHFA).

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

 
$
10,479

 
$
30,956

 
$
32,125

Noninterest income
10,990

 
11,264

 
35,205

 
35,975

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

 
21,743

 
66,161

 
68,100

Provision for credit losses
636

 
296

 
2,056

 
3,220

Noninterest expense
20,142

 
16,389

 
60,921

 
51,907

Income before income taxes
656

 
5,058

 
3,184

 
12,973

Income tax expense (FTE basis) (1)
888

 
2,561

 
1,401

 
4,981

Net income (loss)
(232
)
 
2,497

 
1,783

 
7,992

Preferred stock dividends
238

 
279

 
732

 
1,093

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

 
$
1,051

 
$
6,899

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

 
$
0.10

 
$
0.64

Diluted earnings (loss)
(0.04
)
 
0.20

 
0.10

 
0.62

(1)
FTE basis is a non-GAAP financial measure. For more information on this measure and for a corresponding reconciliation to GAAP financial measures, see Supplemental Financial Data on page 17.

Net Interest Income

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

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

 
$
1,444

 
$
4,334

 
$
4,323

Service charges
1,907

 
1,884

 
5,599

 
5,520

Investment and brokerage services
3,327

 
2,995

 
9,887

 
9,165

Investment banking income
1,351

 
1,297

 
4,524

 
4,388

Equity investment income
9

 
1,184

 
1,150

 
2,427

Trading account profits
1,899

 
1,266

 
6,198

 
6,193

Mortgage banking income
272

 
585

 
1,211

 
3,026

Gains on sales of debt securities
432

 
356

 
1,191

 
881

Other income
293

 
253

 
1,111

 
52

Total noninterest income
$
10,990

 
$
11,264

 
$
35,205

 
$
35,975


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

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

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

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

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

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

Provision for Credit Losses

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

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

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Table of Contents

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

 
$
8,310

 
$
26,094

 
$
26,732

Occupancy
1,070

 
1,096

 
3,264

 
3,359

Equipment
514

 
538

 
1,594

 
1,620

Marketing
446

 
511

 
1,338

 
1,377

Professional fees
611

 
702

 
1,795

 
2,045

Amortization of intangibles
234

 
270

 
708

 
820

Data processing
754

 
779

 
2,348

 
2,370

Telecommunications
311

 
397

 
1,005

 
1,217

Other general operating
8,163

 
3,786

 
22,775

 
12,367

Total noninterest expense
$
20,142

 
$
16,389

 
$
60,921

 
$
51,907


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

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

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

 
$
4,845

 
$
2,545

 
$
12,327

Income tax expense
663

 
2,348

 
762

 
4,335

Effective tax rate
153.8
%
 
48.5
%
 
29.9
%
 
35.2
%

The effective tax rate for the three months ended September 30, 2014 was driven by the non-deductible treatment of charges for the FX Matters and for a portion of the DoJ Settlement, partially offset by recurring tax preference items, the impact of the resolution of several tax examinations and tax benefits from a non-U.S. restructuring. The effective tax rate for the nine months ended September 30, 2014 was impacted by the recurring preference and other tax benefit items previously mentioned, which more than offset the impact of the non-deductible charges. We expect an effective tax rate of approximately 31 percent, absent any unusual items, for the fourth quarter of 2014.

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


10
Table of Contents

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

 
$
131,322

 
(2
)%
 
$
135,996

 
$
113,064

 
20
 %
 
$
142,577

 
$
103,540

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

 
190,328

 
17

 
223,978

 
223,434

 
—

 
224,001

 
231,379

 
(3
)
Trading account assets
188,489

 
200,993

 
(6
)
 
202,385

 
194,324

 
4

 
202,439

 
220,343

 
(8
)
Debt securities
368,124

 
323,945

 
14

 
359,653

 
327,493

 
10

 
345,194

 
342,278

 
1

Loans and leases
891,315

 
928,233

 
(4
)
 
899,241

 
923,978

 
(3
)
 
910,360

 
914,888

 
—

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

 
344,880

 
(2
)
 
330,394

 
361,610

 
(9
)
 
340,079

 
382,767

 
(11
)
Total assets
$
2,123,613

 
$
2,102,273

 
1

 
$
2,136,109

 
$
2,123,430

 
1

 
$
2,148,298

 
$
2,173,164

 
(1
)
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
$
1,111,981

 
$
1,119,271

 
(1
)
 
$
1,127,488

 
$
1,090,611

 
3

 
$
1,124,777

 
$
1,082,005

 
4

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

 
198,106

 
10

 
216,244

 
235,205

 
(8
)
 
214,566

 
268,737

 
(20
)
Trading account liabilities
76,867

 
83,469

 
(8
)
 
84,988

 
84,648

 
—

 
90,176

 
90,321

 
—

Short-term borrowings
33,275

 
45,999

 
(28
)
 
38,866

 
44,220

 
(12
)
 
45,218

 
42,749

 
6

Long-term debt
250,115

 
249,674

 
—

 
251,772

 
258,717

 
(3
)
 
255,084

 
267,582

 
(5
)
All other liabilities
194,769

 
173,069

 
13

 
178,717

 
179,637

 
(1
)
 
181,677

 
187,644

 
(3
)
Total liabilities
1,884,932

 
1,869,588

 
1

 
1,898,075

 
1,893,038

 
—

 
1,911,498

 
1,939,038

 
(1
)
Shareholders' equity
238,681

 
232,685

 
3

 
238,034

 
230,392

 
3

 
236,800

 
234,126

 
1

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

 
$
2,102,273

 
1

 
$
2,136,109

 
$
2,123,430

 
1

 
$
2,148,298

 
$
2,173,164

 
(1
)

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

Balance Sheet Management Actions in Third Quarter 2014

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

Balance Sheet Analysis

Assets

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

11
Table of Contents

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

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

Liabilities and Shareholders' Equity

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

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

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

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

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

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



12
Table of Contents

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

 
$
10,013

 
$
10,085

 
$
10,786

 
$
10,266

Noninterest income
10,990

 
11,734

 
12,481

 
10,702

 
11,264

Total revenue, net of interest expense
21,209

 
21,747

 
22,566

 
21,488

 
21,530

Provision for credit losses
636

 
411

 
1,009

 
336

 
296

Noninterest expense
20,142

 
18,541

 
22,238

 
17,307

 
16,389

Income (loss) before income taxes
431

 
2,795

 
(681
)
 
3,845

 
4,845

Income tax expense (benefit)
663

 
504

 
(405
)
 
406

 
2,348

Net income (loss)
(232
)
 
2,291

 
(276
)
 
3,439

 
2,497

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

 
(514
)
 
3,183

 
2,218

Average common shares issued and outstanding
10,516

 
10,519

 
10,561

 
10,633

 
10,719

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

 
11,265

 
10,561

 
11,404

 
11,482

Performance ratios
 
 
 
 
 
 
 
 
 
Return on average assets
n/m

 
0.42
%
 
n/m

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

 
0.45
%
 
0.53

 
0.40

Return on average common shareholders' equity
n/m

 
3.68

 
n/m

 
5.74

 
4.06

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

 
5.47

 
n/m

 
8.61

 
6.15

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

 
5.64

 
n/m

 
8.53

 
6.32

Total ending equity to total ending assets
11.24

 
10.94

 
10.79

 
11.07

 
10.92

Total average equity to total average assets
11.14

 
10.87

 
11.06

 
10.93

 
10.85

Dividend payout
n/m

 
5.16

 
n/m

 
3.33

 
4.82

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

 
$
(0.05
)
 
$
0.30

 
$
0.21

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

 
(0.05
)
 
0.29

 
0.20

Dividends paid
0.05

 
0.01

 
0.01

 
0.01

 
0.01

Book value
20.99

 
21.16

 
20.75

 
20.71

 
20.50

Tangible book value (3)
14.09

 
14.24

 
13.81

 
13.79

 
13.62

Market price per share of common stock
 
 
 
 
 
 
 
 
 
Closing
$
17.05

 
$
15.37

 
$
17.20

 
$
15.57

 
$
13.80

High closing
17.18

 
17.34

 
17.92

 
15.88

 
14.95

Low closing
14.98

 
14.51

 
16.10

 
13.69

 
12.83

Market capitalization
$
179,296

 
$
161,628

 
$
181,117

 
$
164,914

 
$
147,429

(1) 
The diluted earnings (loss) per common share excluded the effect of any equity instruments that are antidilutive to earnings per share. There were no potential common shares that were dilutive in the third and first quarters of 2014 because of the net loss applicable to common shareholders.
(2) 
Calculated as total net income (loss) for four consecutive quarters divided by annualized average assets for four consecutive quarters.
(3) 
Tangible equity ratios and tangible book value per share of common stock are non-GAAP financial measures. Other companies may define or calculate these measures differently. For more information on these ratios and for corresponding reconciliations to GAAP financial measures, see Supplemental Financial Data on page 17.
(4) 
For more information on the impact of the purchased credit-impaired loan portfolio on asset quality, see Consumer Portfolio Credit Risk Management on page 83.
(5) 
Includes the allowance for loan and lease losses and the reserve for unfunded lending commitments.
(6) 
Balances and ratios do not include loans accounted for under the fair value option. For additional exclusions from nonperforming loans, leases and foreclosed properties, see Consumer Portfolio Credit Risk Management – Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity on page 100 and corresponding Table 46, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 109 and corresponding Table 55.
(7) 
Primarily includes amounts allocated to the U.S. credit card and unsecured consumer lending portfolios in CBB, purchased credit-impaired loans and the non-U.S. credit card portfolio in All Other.
(8) 
Net charge-offs exclude $246 million, $160 million, $391 million, $741 million and $443 million of write-offs in the purchased credit-impaired loan portfolio in the third, second and first quarters of 2014 and in the fourth and third quarters of 2013, respectively. These write-offs decreased the purchased credit-impaired valuation allowance included as part of the allowance for loan and lease losses. For more information on purchased credit-impaired write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 95.
(9) 
On January 1, 2014, the Basel 3 rules became effective, subject to transition provisions primarily related to regulatory deductions and adjustments impacting common equity tier 1 capital and Tier 1 capital. We reported under Basel 1 (which included the Market Risk Final Rules) for 2013.
n/a = not applicable
n/m = not meaningful

13
Table of Contents

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

 
$
912,580

 
$
919,482

 
$
929,777

 
$
923,978

Total assets
2,136,109

 
2,169,555

 
2,139,266

 
2,134,875

 
2,123,430

Total deposits
1,127,488

 
1,128,563

 
1,118,178

 
1,112,674

 
1,090,611

Long-term debt
251,772

 
259,825

 
253,678

 
251,055

 
258,717

Common shareholders' equity
222,368

 
222,215

 
223,201

 
220,088

 
216,766

Total shareholders' equity
238,034

 
235,797

 
236,553

 
233,415

 
230,392

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

 
$
16,314

 
$
17,127

 
$
17,912

 
$
19,912

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

 
15,300

 
17,732

 
17,772

 
20,028

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

 
108

 
97

 
102

 
100

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

 
95

 
85

 
87

 
84

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

 
$
6,488

 
$
7,143

 
$
7,680

 
$
8,972

Allowance for loan and lease losses as a percentage of total nonperforming loans and leases, excluding the allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases (6, 7)
67
%
 
64
%
 
55
%
 
57
%
 
54
%
Net charge-offs (8)
$
1,043

 
$
1,073

 
$
1,388

 
$
1,582

 
$
1,687

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

 
0.49

 
0.64

 
0.70

 
0.75

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

 
0.55

 
0.79

 
1.00

 
0.92

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

 
1.63

 
1.89

 
1.87

 
2.10

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

 
1.70

 
1.96

 
1.93

 
2.17

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

 
3.67

 
2.95

 
2.78

 
2.90

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

 
3.25

 
2.58

 
2.38

 
2.42

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

 
3.20

 
2.30

 
1.89

 
2.30

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

 
n/a

Tier 1 common capital
n/a

 
n/a

 
n/a

 
10.9
%
 
10.8
%
Tier 1 capital
12.8

 
12.5

 
11.9

 
12.2

 
12.1

Total capital
15.8

 
15.3

 
14.8

 
15.1

 
15.1

Tier 1 leverage
7.9

 
7.7

 
7.4

 
7.7

 
7.6

Tangible equity (3)
8.10

 
7.85

 
7.65

 
7.86

 
7.73

Tangible common equity (3)
7.22

 
7.14

 
7.00

 
7.20

 
7.08

For footnotes see page 13.

14
Table of Contents

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

 
$
31,479

Noninterest income
35,205

 
35,975

Total revenue, net of interest expense
65,522

 
67,454

Provision for credit losses
2,056

 
3,220

Noninterest expense
60,921

 
51,907

Income before income taxes
2,545

 
12,327

Income tax expense
762

 
4,335

Net income
1,783

 
7,992

Net income applicable to common shareholders
1,051

 
6,899

Average common shares issued and outstanding
10,532

 
10,764

Average diluted common shares issued and outstanding
10,588

 
11,524

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

 
4.23

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

 
6.40

Return on average tangible shareholders' equity (1)
1.45

 
6.67

Total ending equity to total ending assets
11.24

 
10.92

Total average equity to total average assets
11.02

 
10.77

Dividend payout
70.06

 
4.68

Per common share data
 
 
 
Earnings
$
0.10

 
$
0.64

Diluted earnings
0.10

 
0.62

Dividends paid
0.07

 
0.03

Book value
20.99

 
20.50

Tangible book value (1)
14.09

 
13.62

Market price per share of common stock
 
 
 
Closing
$
17.05

 
$
13.80

High closing
17.92

 
14.95

Low closing
14.51

 
11.03

Market capitalization
$
179,296

 
$
147,429

(1) 
Tangible equity ratios and tangible book value per share of common stock are non-GAAP financial measures. Other companies may define or calculate these measures differently. For more information on these ratios and for corresponding reconciliations to GAAP financial measures, see Supplemental Financial Data on page 17.
(2) 
For more information on the impact of the purchased credit-impaired loan portfolio on asset quality, see Consumer Portfolio Credit Risk Management on page 83.
(3) 
Includes the allowance for loan and lease losses and the reserve for unfunded lending commitments.
(4) 
Balances and ratios do not include loans accounted for under the fair value option. For additional exclusions from nonperforming loans, leases and foreclosed properties, see Consumer Portfolio Credit Risk Management – Nonperforming Consumer Loans, Leases and Foreclosed Properties Activity on page 100 and corresponding Table 46, and Commercial Portfolio Credit Risk Management – Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 109 and corresponding Table 55.
(5) 
Primarily includes amounts allocated to the U.S. credit card and unsecured consumer lending portfolios in CBB, purchased credit-impaired loans and the non-U.S. credit card portfolio in All Other.
(6) 
Net charge-offs exclude $797 million and $1.6 billion of write-offs in the purchased credit-impaired loan portfolio for the nine months ended September 30, 2014 and 2013. These write-offs decreased the purchased credit-impaired valuation allowance included as part of the allowance for loan and lease losses. For more information on purchased credit-impaired write-offs, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 95.


15
Table of Contents

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

 
$
914,888

Total assets
2,148,298

 
2,173,164

Total deposits
1,124,777

 
1,082,005

Long-term debt
255,084

 
267,582

Common shareholders' equity
222,591

 
217,922

Total shareholders' equity
236,800

 
234,126

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

 
$
19,912

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

 
20,028

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

 
100

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

 
84

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

 
$
8,972

Allowance for loan and lease losses as a percentage of total nonperforming loans and leases, excluding the allowance for loan and lease losses for loans and leases that are excluded from nonperforming loans and leases (4, 5)
67
%
 
54
%
Net charge-offs (6)
$
3,504

 
$
6,315

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

 
0.96

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

 
1.17

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

 
2.10

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

 
2.17

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

 
2.30

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

 
1.92

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

 
1.84

For footnotes see page 15.

16
Table of Contents

Supplemental Financial Data

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

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

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

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

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

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

The aforementioned supplemental data and performance measures are presented in Tables 7 and 8.

We evaluate our business segment results based on measures that utilize average allocated capital. Return on average allocated capital is calculated as net income adjusted for cost of funds and earnings credits and certain expenses related to intangibles, divided by average allocated capital. Allocated capital and the related return both represent non-GAAP financial measures. In addition, for purposes of goodwill impairment testing, the Corporation utilizes allocated equity as a proxy for the carrying value of its reporting units. Allocated equity in the reporting units is comprised of allocated capital plus capital for the portion of goodwill and intangibles specifically assigned to the reporting unit. For additional information, see Business Segment Operations on page 28 and Note 8 – Goodwill and Intangible Assets to the Consolidated Financial Statements.

Tables 9, 10 and 11 provide reconciliations of these non-GAAP financial measures to GAAP financial measures. We believe the use of these non-GAAP financial measures provides additional clarity in assessing the results of the Corporation and our segments. Other companies may define or calculate these measures and ratios differently.

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

 
$
10,226

 
$
10,286

 
$
10,999

 
$
10,479

Total revenue, net of interest expense
21,434

 
21,960

 
22,767

 
21,701

 
21,743

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

 
84.43

 
97.68

 
79.75

 
75.38

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

17
Table of Contents

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

 
$
10,013

 
$
10,085

 
$
10,786

 
$
10,266

Fully taxable-equivalent adjustment
225

 
213

 
201

 
213

 
213

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

 
$
10,226

 
$
10,286

 
$
10,999

 
$
10,479

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

 
$
21,747

 
$
22,566

 
$
21,488

 
$
21,530

Fully taxable-equivalent adjustment
225

 
213

 
201

 
213

 
213

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

 
$
21,960

 
$
22,767

 
$
21,701

 
$
21,743

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

 
$
504

 
$
(405
)
 
$
406

 
$
2,348

Fully taxable-equivalent adjustment
225

 
213

 
201

 
213

 
213

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

 
$
717

 
$
(204
)
 
$
619

 
$
2,561

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

 
$
222,215

 
$
223,201

 
$
220,088

 
$
216,766

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

 
2,100

 
2,165

 
2,231

 
2,296

Tangible common shareholders' equity
$
149,661

 
$
149,258

 
$
150,050

 
$
146,730

 
$
143,166

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

 
$
235,797

 
$
236,553

 
$
233,415

 
$
230,392

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

 
2,100

 
2,165

 
2,231

 
2,296

Tangible shareholders' equity
$
165,327

 
$
162,840

 
$
163,402

 
$
160,057

 
$
156,792

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

 
$
222,565

 
$
218,536

 
$
219,333

 
$
218,967

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

 
2,078

 
2,100

 
2,166

 
2,231

Tangible common shareholders' equity
$
148,154

 
$
149,734

 
$
145,457

 
$
146,081

 
$
145,464

Reconciliation of period-end shareholders' equity to period-end tangible shareholders' equity
 
 
 
 
 
 
 
 
 
Shareholders' equity
$
238,681

 
$
237,411

 
$
231,888

 
$
232,685

 
$
232,282

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

 
2,078

 
2,100

 
2,166

 
2,231

Tangible shareholders' equity
$
166,067

 
$
164,580

 
$
158,809

 
$
159,433

 
$
158,779

Reconciliation of period-end assets to period-end tangible assets
 
 
 
 
 
 
 
 
 
Assets
$
2,123,613

 
$
2,170,557

 
$
2,149,851

 
$
2,102,273

 
$
2,126,653

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

 
2,078

 
2,100

 
2,166

 
2,231

Tangible assets
$
2,050,999

 
$
2,097,726

 
$
2,076,772

 
$
2,029,021

 
$
2,053,150


18
Table of Contents

Table 10
Year-to-Date Supplemental Financial Data and Reconciliations to GAAP Financial Measures
 
Nine Months Ended September 30
(Dollars in millions, except per share information)
2014
 
2013
Fully taxable-equivalent basis data
 
 
 
Net interest income
$
30,956

 
$
32,125

Total revenue, net of interest expense
66,161

 
68,100

Net interest yield (1)
2.27
%
 
2.35
%
Efficiency ratio
92.08

 
76.22

Reconciliation of net interest income to net interest income on a fully taxable-equivalent basis
 
 
 
Net interest income
$
30,317

 
$
31,479

Fully taxable-equivalent adjustment
639

 
646

Net interest income on a fully taxable-equivalent basis
$
30,956

 
$
32,125

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
$
65,522

 
$
67,454

Fully taxable-equivalent adjustment
639

 
646

Total revenue, net of interest expense on a fully taxable-equivalent basis
$
66,161

 
$
68,100

Reconciliation of income tax expense to income tax expense on a fully taxable-equivalent basis
 
 
 
Income tax expense
$
762

 
$
4,335

Fully taxable-equivalent adjustment
639

 
646

Income tax expense on a fully taxable-equivalent basis
$
1,401

 
$
4,981

Reconciliation of average common shareholders' equity to average tangible common shareholders' equity
 
 
 
Common shareholders' equity
$
222,591

 
$
217,922

Goodwill
(69,818
)
 
(69,926
)
Intangible assets (excluding MSRs)
(5,232
)
 
(6,269
)
Related deferred tax liabilities
2,114

 
2,360

Tangible common shareholders' equity
$
149,655

 
$
144,087

Reconciliation of average shareholders' equity to average tangible shareholders' equity
 
 
 
Shareholders' equity
$
236,800

 
$
234,126

Goodwill
(69,818
)
 
(69,926
)
Intangible assets (excluding MSRs)
(5,232
)
 
(6,269
)
Related deferred tax liabilities
2,114

 
2,360

Tangible shareholders' equity
$
163,864

 
$
160,291

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

19
Table of Contents

Table 11
 
 
 
 
 
 
 
Segment Supplemental Financial Data Reconciliations to GAAP Financial Measures (1)
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Consumer & Business Banking
 
 
 
 
 
 
 
Reported net income
$
1,856

 
$
1,787

 
$
5,327

 
$
4,638

Adjustment related to intangibles (2)
1

 
2

 
3

 
6

Adjusted net income
$
1,857

 
$
1,789

 
$
5,330

 
$
4,644

 
 
 
 
 
 
 
 
Average allocated equity (3)
$
61,441

 
$
62,024

 
$
61,458

 
$
62,050

Adjustment related to goodwill and a percentage of intangibles
(31,941
)
 
(32,024
)
 
(31,958
)
 
(32,050
)
Average allocated capital
$
29,500

 
$
30,000

 
$
29,500

 
$
30,000

 
 
 
 
 
 
 
 
Deposits
 
 
 
 
 
 
 
Reported net income
$
799

 
$
564

 
$
2,157

 
$
1,434

Adjustment related to intangibles (2)
—

 
—

 
—

 
1

Adjusted net income
$
799

 
$
564

 
$
2,157

 
$
1,435

 
 
 
 
 
 
 
 
Average allocated equity (3)
$
36,485

 
$
35,390

 
$
36,484

 
$
35,395

Adjustment related to goodwill and a percentage of intangibles
(19,985
)
 
(19,990
)
 
(19,984
)
 
(19,995
)
Average allocated capital
$
16,500

 
$
15,400

 
$
16,500

 
$
15,400

 
 
 
 
 
 
 
 
Consumer Lending
 
 
 
 
 
 
 
Reported net income
$
1,057

 
$
1,223

 
$
3,170

 
$
3,204

Adjustment related to intangibles (2)
1

 
2

 
3

 
5

Adjusted net income
$
1,058

 
$
1,225

 
$
3,173

 
$
3,209

 
 
 
 
 
 
 
 
Average allocated equity (3)
$
24,956

 
$
26,634

 
$
24,974

 
$
26,655

Adjustment related to goodwill and a percentage of intangibles
(11,956
)
 
(12,034
)
 
(11,974
)
 
(12,055
)
Average allocated capital
$
13,000

 
$
14,600

 
$
13,000

 
$
14,600

 
 
 
 
 
 
 
 
Global Wealth & Investment Management
 
 
 
 
 
 
 
Reported net income
$
813

 
$
720

 
$
2,268

 
$
2,199

Adjustment related to intangibles (2)
4

 
4

 
10

 
13

Adjusted net income
$
817

 
$
724

 
$
2,278

 
$
2,212

 
 
 
 
 
 
 
 
Average allocated equity (3)
$
22,204

 
$
20,283

 
$
22,223

 
$
20,302

Adjustment related to goodwill and a percentage of intangibles
(10,204
)
 
(10,283
)
 
(10,223
)
 
(10,302
)
Average allocated capital
$
12,000

 
$
10,000

 
$
12,000

 
$
10,000

 
 
 
 
 
 
 
 
Global Banking
 
 
 
 
 
 
 
Reported net income
$
1,414

 
$
1,137

 
$
4,002

 
$
3,718

Adjustment related to intangibles (2)
1

 
1

 
1

 
2

Adjusted net income
$
1,415

 
$
1,138

 
$
4,003

 
$
3,720

 
 
 
 
 
 
 
 
Average allocated equity (3)
$
53,402

 
$
45,413

 
$
53,405

 
$
45,412

Adjustment related to goodwill and a percentage of intangibles
(22,402
)
 
(22,413
)
 
(22,405
)
 
(22,412
)
Average allocated capital
$
31,000

 
$
23,000

 
$
31,000

 
$
23,000

 
 
 
 
 
 
 
 
Global Markets
 
 
 
 
 
 
 
Reported net income (loss)
$
369

 
$
(875
)
 
$
2,778

 
$
1,199

Adjustment related to intangibles (2)
3

 
2

 
7

 
6

Adjusted net income (loss)
$
372

 
$
(873
)
 
$
2,785

 
$
1,205

 
 
 
 
 
 
 
 
Average allocated equity (3)
$
39,371

 
$
35,369

 
$
39,373

 
$
35,366

Adjustment related to goodwill and a percentage of intangibles
(5,371
)
 
(5,369
)
 
(5,373
)
 
(5,366
)
Average allocated capital
$
34,000

 
$
30,000

 
$
34,000

 
$
30,000

(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 plus capital for the portion of goodwill and intangibles specifically assigned to the business segment. For more information on allocated capital, see Business Segment Operations on page 28 and Note 8 – Goodwill and Intangible Assets to the Consolidated Financial Statements.
 
 
 
 


20
Table of Contents

Net Interest Income Excluding Trading-related Net Interest Income

We manage net interest income on an FTE basis and excluding the impact of trading-related activities. As discussed in Global Markets on page 48, 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 an FTE basis, is shown below. We believe the use of this non-GAAP presentation in Table 12 provides additional clarity in assessing our results.

Table 12
 
 
 
 
Net Interest Income Excluding Trading-related Net Interest Income
 
 
 
 
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions)
2014
 
2013
 
2014
 
2013
Net interest income (FTE basis)
 
 
 
 
 
 
 
As reported
$
10,444

 
$
10,479

 
$
30,956

 
$
32,125

Impact of trading-related net interest income
(900
)
 
(883
)
 
(2,658
)
 
(2,806
)
Net interest income excluding trading-related net interest income (1)
$
9,544

 
$
9,596

 
$
28,298

 
$
29,319

Average earning assets (2)
 
 
 
 
 
 
 
As reported
$
1,813,482

 
$
1,789,045

 
$
1,819,247

 
$
1,826,575

Impact of trading-related earning assets
(441,661
)
 
(446,181
)
 
(449,248
)
 
(476,853
)
Average earning assets excluding trading-related earning assets (1)
$
1,371,821

 
$
1,342,864

 
$
1,369,999

 
$
1,349,722

Net interest yield contribution (FTE basis) (2, 3)
 
 
 
 
 
 
 
As reported
2.29
%
 
2.33
%
 
2.27
%
 
2.35
%
Impact of trading-related activities
0.47

 
0.51

 
0.48

 
0.55

Net interest yield on earning assets excluding trading-related activities (1)
2.76
%
 
2.84
%
 
2.75
%
 
2.90
%
(1) 
Represents a non-GAAP financial measure.
(2) 
Beginning in 2014, interest-bearing deposits placed with the Federal Reserve and certain non-U.S. central banks are included in earning assets. In prior periods, these balances were included with cash and due from banks in the cash and cash equivalents line, consistent with the Consolidated Balance Sheet presentation. Prior periods have been reclassified to conform to current period presentation.
(3) 
Calculated on an annualized basis.

For the three and nine months ended September 30, 2014, net interest income excluding trading-related net interest income decreased $52 million to $9.5 billion, and $1.0 billion to $28.3 billion compared to the same periods in 2013. The decreases were primarily due to lower loan yields, lower consumer loan balances and lower income from the asset and liability management (ALM) portfolio, partially offset by reductions in funding yields and balances and higher commercial loan balances. In addition to the factors described above, the nine-month decrease was also driven by the impact of market-related premium amortization on debt securities, which declined $1.1 billion from a benefit of $575 million to an expense of $531 million. For more information on the impact of interest rates, see Interest Rate Risk Management for Non-trading Activities on page 128.

Average earning assets excluding trading-related earning assets for the three and nine months ended September 30, 2014 increased $29.0 billion to $1,371.8 billion, and $20.3 billion to $1,370.0 billion compared to the same periods in 2013. The increases were primarily in interest-bearing deposits with the Federal Reserve and commercial loans, partially offset by declines in other earning assets and consumer loans. An increase in investment securities also contributed to the increase for the three months ended September 30, 2014.

For the three and nine months ended September 30, 2014, net interest yield on earning assets excluding trading-related activities decreased eight bps to 2.76 percent, and 15 bps to 2.75 percent compared to the same periods in 2013 due to the same factors as described above.


21
Table of Contents

Table 13
Quarterly Average Balances and Interest Rates – FTE Basis
 
Third Quarter 2014
 
Second Quarter 2014
(Dollars in millions)
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
Earning assets
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits with the Federal Reserve and non-U.S. central banks (1)
$
110,876

 
$
77

 
0.28
%
 
$
123,582

 
$
85

 
0.28
%
Time deposits placed and other short-term investments
10,457

 
41

 
1.54

 
10,509

 
39

 
1.51

Federal funds sold and securities borrowed or purchased under agreements to resell
223,978

 
239

 
0.42

 
235,393

 
297

 
0.51

Trading account assets
143,282

 
1,148

 
3.18

 
147,798

 
1,214

 
3.29

Debt securities (2)
359,653

 
2,236

 
2.48

 
345,889

 
2,134

 
2.46

Loans and leases (3):
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage (4)
235,271

 
2,083

 
3.54

 
243,405

 
2,195

 
3.61

Home equity
88,590

 
836

 
3.76

 
90,729

 
842

 
3.72

U.S. credit card
88,866

 
2,093

 
9.34

 
88,058

 
2,042

 
9.30

Non-U.S. credit card
11,784

 
304

 
10.25

 
11,759

 
308

 
10.51

Direct/Indirect consumer (5)
82,669

 
523

 
2.51

 
82,102

 
524

 
2.56

Other consumer (6)
2,111

 
19

 
3.44

 
2,012

 
17

 
3.60

Total consumer
509,291

 
5,858

 
4.58

 
518,065

 
5,928

 
4.58

U.S. commercial
230,891

 
1,659

 
2.85

 
230,486

 
1,673

 
2.91

Commercial real estate (7)
46,071

 
344

 
2.96

 
48,315

 
357

 
2.97

Commercial lease financing
24,325

 
211

 
3.48

 
24,409

 
193

 
3.16

Non-U.S. commercial
88,663

 
560

 
2.51

 
91,305

 
569

 
2.50

Total commercial
389,950

 
2,774

 
2.83

 
394,515

 
2,792

 
2.84

Total loans and leases
899,241

 
8,632

 
3.82

 
912,580

 
8,720

 
3.83

Other earning assets
65,995

 
710

 
4.27

 
65,099

 
665

 
4.09

Total earning assets (8)
1,813,482

 
13,083

 
2.87

 
1,840,850

 
13,154

 
2.86

Cash and due from banks (1)
25,120

 
 
 
 
 
27,377

 
 
 
 
Other assets, less allowance for loan and lease losses
297,507

 
 
 
 
 
301,328

 
 
 
 
Total assets
$
2,136,109

 
 
 
 
 
$
2,169,555

 
 
 
 
(1) 
Beginning in 2014, interest-bearing deposits placed with the Federal Reserve and certain non-U.S. central banks are included in earning assets. In prior periods, these balances were included with cash and due from banks in the cash and cash equivalents line, consistent with the Consolidated Balance Sheet presentation. Prior periods have been reclassified to conform to current period presentation.
(2) 
Beginning in 2014, yields on debt securities carried at fair value are calculated on the cost basis. Prior to 2014, yields on debt securities carried at fair value were 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 generally 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 $3 million, $2 million and $0 in the third, second and first quarters of 2014, and $56 million and $83 million in the fourth and third quarters of 2013, respectively.
(5) 
Includes non-U.S. consumer loans of $4.3 billion, $4.4 billion and $4.6 billion in the third, second and first quarters of 2014, and $5.1 billion and $6.7 billion in the fourth and third quarters of 2013, respectively.
(6) 
Includes consumer finance loans of $1.1 billion, $1.1 billion and $1.2 billion in the third, second and first quarters of 2014, and $1.2 billion and $1.3 billion in the fourth and third quarters of 2013, respectively; consumer leases of $887 million, $762 million and $656 million in the third, second and first quarters of 2014, and $549 million and $431 million in the fourth and third quarters of 2013, respectively; consumer overdrafts of $161 million, $137 million and $140 million in the third, second and first quarters of 2014, and $163 million and $172 million in the fourth and third quarters of 2013, respectively; and other non-U.S. consumer loans of $3 million for each of the quarters of 2014 and $2 million for each of the quarters of 2013.
(7) 
Includes U.S. commercial real estate loans of $45.0 billion, $46.7 billion and $47.0 billion in the third, second and first quarters of 2014, and $44.5 billion and $41.5 billion in the fourth and third quarters of 2013, respectively; and non-U.S. commercial real estate loans of $1.0 billion, $1.6 billion and $1.8 billion in the third, second and first quarters of 2014, and $1.8 billion and $1.7 billion in the fourth and third quarters of 2013, respectively.
(8) 
Interest income includes the impact of interest rate risk management contracts, which decreased interest income on the underlying assets by $30 million, $13 million and $5 million in the third, second and first quarters of 2014, and $0 and $1 million in the fourth and third quarters of 2013, respectively. Interest expense includes the impact of interest rate risk management contracts, which decreased interest expense on the underlying liabilities by $602 million, $621 million and $592 million in the third, second and first quarters of 2014, and $588 million and $556 million in the fourth and third quarters of 2013, respectively. For more information on interest rate contracts, see Interest Rate Risk Management for Non-trading Activities on page 128.

22
Table of Contents

Table 13
 
 
 
 
 
 
Quarterly Average Balances and Interest Rates – FTE Basis (continued)
 
First Quarter 2014
 
Fourth Quarter 2013
 
Third Quarter 2013
(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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits with the Federal Reserve and non-U.S. central banks (1)
$
112,570

 
$
72

 
0.26
%
 
$
90,196

 
$
59

 
0.26
%
 
$
78,360

 
$
50

 
0.26
%
Time deposits placed and other short-term investments
13,880

 
49

 
1.43

 
15,782

 
48

 
1.21

 
17,256

 
47

 
1.07

Federal funds sold and securities borrowed or purchased under agreements to resell
212,504

 
265

 
0.51

 
203,415

 
304

 
0.59

 
223,434

 
291

 
0.52

Trading account assets
147,583

 
1,213

 
3.32

 
156,194

 
1,182

 
3.01

 
144,502

 
1,093

 
3.01

Debt securities (2)
329,711

 
2,005

 
2.41

 
325,119

 
2,455

 
3.02

 
327,493

 
2,211

 
2.70

Loans and leases (3):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage (4)
247,561

 
2,238

 
3.62

 
253,988

 
2,374

 
3.74

 
256,297

 
2,359

 
3.68

Home equity
92,754

 
853

 
3.71

 
95,374

 
953

 
3.98

 
98,172

 
930

 
3.77

U.S. credit card
89,545

 
2,092

 
9.48

 
90,057

 
2,125

 
9.36

 
90,005

 
2,226

 
9.81

Non-U.S. credit card
11,554

 
308

 
10.79

 
11,171

 
310

 
11.01

 
10,633

 
317

 
11.81

Direct/Indirect consumer (5)
81,728

 
530

 
2.63

 
82,990

 
565

 
2.70

 
83,773

 
587

 
2.78

Other consumer (6)
1,962

 
18

 
3.66

 
1,929

 
17

 
3.73

 
1,876

 
19

 
3.88

Total consumer
525,104

 
6,039

 
4.64

 
535,509

 
6,344

 
4.72

 
540,756

 
6,438

 
4.74

U.S. commercial
228,058

 
1,651

 
2.93

 
225,596

 
1,700

 
2.99

 
221,541

 
1,704

 
3.05

Commercial real estate (7)
48,753

 
368

 
3.06

 
46,341

 
374

 
3.20

 
43,164

 
352

 
3.24

Commercial lease financing
24,727

 
234

 
3.78

 
24,468

 
206

 
3.37

 
23,862

 
203

 
3.41

Non-U.S. commercial
92,840

 
543

 
2.37

 
97,863

 
544

 
2.21

 
94,655

 
529

 
2.22

Total commercial
394,378

 
2,796

 
2.87

 
394,268

 
2,824

 
2.84

 
383,222

 
2,788

 
2.89

Total loans and leases
919,482

 
8,835

 
3.88

 
929,777

 
9,168

 
3.92

 
923,978

 
9,226

 
3.97

Other earning assets
67,568

 
697

 
4.18

 
78,214

 
709

 
3.61

 
74,022

 
677

 
3.62

Total earning assets (8)
1,803,298

 
13,136

 
2.93

 
1,798,697

 
13,925

 
3.08

 
1,789,045

 
13,595

 
3.02

Cash and due from banks (1)
28,258

 
 
 
 
 
35,063

 
 
 
 
 
34,704

 
 
 
 
Other assets, less allowance for loan and lease losses
307,710

 
 
 
 
 
301,115

 
 
 
 
 
299,681

 
 
 
 
Total assets
$
2,139,266

 
 
 
 
 
$
2,134,875

 
 

 
 
 
$
2,123,430

 
 
 
 
For footnotes see page 22.


23
Table of Contents

Table 13
Quarterly Average Balances and Interest Rates – FTE Basis (continued)
 
Third Quarter 2014
 
Second Quarter 2014
(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
$
46,803

 
$
1

 
0.01
%
 
$
47,450

 
$
—

 
—
%
NOW and money market deposit accounts
517,043

 
78

 
0.06

 
519,399

 
79

 
0.06

Consumer CDs and IRAs
65,579

 
58

 
0.35

 
68,706

 
70

 
0.41

Negotiable CDs, public funds and other deposits
31,806

 
28

 
0.34

 
33,412

 
29

 
0.35

Total U.S. interest-bearing deposits
661,231

 
165

 
0.10

 
668,967

 
178

 
0.11

Non-U.S. interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
Banks located in non-U.S. countries
8,022

 
22

 
1.10

 
10,538

 
19

 
0.72

Governments and official institutions
1,706

 
1

 
0.15

 
1,754

 
—

 
0.14

Time, savings and other
61,331

 
82

 
0.54

 
64,091

 
85

 
0.53

Total non-U.S. interest-bearing deposits
71,059

 
105

 
0.59

 
76,383

 
104

 
0.55

Total interest-bearing deposits
732,290

 
270

 
0.15

 
745,350

 
282

 
0.15

Federal funds purchased, securities loaned or sold under agreements to repurchase and short-term borrowings
255,111

 
591

 
0.92

 
271,247

 
763

 
1.13

Trading account liabilities
84,988

 
392

 
1.83

 
95,153

 
398

 
1.68

Long-term debt
251,772

 
1,386

 
2.19

 
259,825

 
1,485

 
2.29

Total interest-bearing liabilities (8)
1,324,161

 
2,639

 
0.79

 
1,371,575

 
2,928

 
0.86

Noninterest-bearing sources:
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing deposits
395,198

 
 
 
 
 
383,213

 
 
 
 
Other liabilities
178,716

 
 
 
 
 
178,970

 
 
 
 
Shareholders' equity
238,034

 
 
 
 
 
235,797

 
 
 
 
Total liabilities and shareholders' equity
$
2,136,109

 
 
 
 
 
$
2,169,555

 
 
 
 
Net interest spread
 
 
 
 
2.08
%
 
 
 
 
 
2.00
%
Impact of noninterest-bearing sources
 
 
 
 
0.21

 
 
 
 
 
0.22

Net interest income/yield on earning assets
 
 
$
10,444

 
2.29
%
 
 
 
$
10,226

 
2.22
%
For footnotes see page 22.


24
Table of Contents

Table 13
 
 
 
 
 
 
Quarterly Average Balances and Interest Rates – FTE Basis (continued)
 
First Quarter 2014
 
Fourth Quarter 2013
 
Third Quarter 2013
(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
$
45,196

 
$
1

 
0.01
%
 
$
43,665

 
$
5

 
0.05
%
 
$
43,968

 
$
5

 
0.05
%
NOW and money market deposit accounts
523,237

 
83

 
0.06

 
514,220

 
89

 
0.07

 
508,136

 
100

 
0.08

Consumer CDs and IRAs
71,141

 
84

 
0.48

 
74,635

 
96

 
0.51

 
78,161

 
113

 
0.57

Negotiable CDs, public funds and other deposits
29,826

 
27

 
0.37

 
29,060

 
29

 
0.39

 
27,108

 
28

 
0.41

Total U.S. interest-bearing deposits
669,400

 
195

 
0.12

 
661,580

 
219

 
0.13

 
657,373

 
246

 
0.15

Non-U.S. interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Banks located in non-U.S. countries
11,071

 
21

 
0.75

 
13,902

 
22

 
0.62

 
12,799

 
17

 
0.54

Governments and official institutions
1,857

 
1

 
0.14

 
1,734

 
1

 
0.18

 
1,551

 
1

 
0.19

Time, savings and other
60,506

 
74

 
0.50

 
58,529

 
72

 
0.49

 
54,926

 
70

 
0.51

Total non-U.S. interest-bearing deposits
73,434

 
96

 
0.53

 
74,165

 
95

 
0.51

 
69,276

 
88

 
0.50

Total interest-bearing deposits
742,834

 
291

 
0.16

 
735,745

 
314

 
0.17

 
726,649

 
334

 
0.18

Federal funds purchased, securities loaned or sold under agreements to repurchase and short-term borrowings
252,971

 
609

 
0.98

 
271,538

 
682

 
1.00

 
279,425

 
683

 
0.97

Trading account liabilities
90,448

 
435

 
1.95

 
82,393

 
364

 
1.75

 
84,648

 
375

 
1.76

Long-term debt
253,678

 
1,515

 
2.41

 
251,055

 
1,566

 
2.48

 
258,717

 
1,724

 
2.65

Total interest-bearing liabilities (8)
1,339,931

 
2,850

 
0.86

 
1,340,731

 
2,926

 
0.87

 
1,349,439

 
3,116

 
0.92

Noninterest-bearing sources:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing deposits
375,344

 
 
 
 
 
376,929

 
 

 
 
 
363,962

 
 
 
 
Other liabilities
187,438

 
 
 
 
 
183,800

 
 

 
 
 
179,637

 
 
 
 
Shareholders' equity
236,553

 
 
 
 
 
233,415

 
 

 
 
 
230,392

 
 
 
 
Total liabilities and shareholders' equity
$
2,139,266

 
 
 
 
 
$
2,134,875

 
 
 
 
 
$
2,123,430

 
 
 
 
Net interest spread
 
 
 
 
2.07
%
 
 
 
 
 
2.21
%
 
 
 
 
 
2.10
%
Impact of noninterest-bearing sources
 
 
 
 
0.22

 
 
 
 
 
0.23

 
 
 
 
 
0.23

Net interest income/yield on earning assets
 
 
$
10,286

 
2.29
%
 
 
 
$
10,999

 
2.44
%
 
 
 
$
10,479

 
2.33
%
For footnotes see page 22.

25
Table of Contents

Table 14
Year-to-Date Average Balances and Interest Rates – FTE Basis
 
Nine Months Ended September 30
 
2014
 
2013
(Dollars in millions)
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
Earning assets
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits with the Federal Reserve and non-U.S. central banks (1)
$
115,670

 
$
234

 
0.27
%
 
$
66,636

 
$
123

 
0.25
%
Time deposits placed and other short-term investments
11,603

 
129

 
1.49

 
16,162

 
139

 
1.15

Federal funds sold and securities borrowed or purchased under agreements to resell
224,001

 
801

 
0.48

 
231,379

 
925

 
0.53

Trading account assets
146,205

 
3,575

 
3.27

 
173,312

 
3,697

 
2.85

Debt securities (2)
345,194

 
6,375

 
2.45

 
342,278

 
7,324

 
2.85

Loans and leases (3):
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage (4)
242,034

 
6,516

 
3.59

 
257,393

 
6,944

 
3.60

Home equity
90,676

 
2,531

 
3.73

 
101,911

 
2,880

 
3.78

U.S. credit card
88,820

 
6,227

 
9.37

 
90,473

 
6,667

 
9.85

Non-U.S. credit card
11,700

 
920

 
10.51

 
10,757

 
961

 
11.95

Direct/Indirect consumer (5)
82,170

 
1,577

 
2.57

 
82,879

 
1,805

 
2.91

Other consumer (6)
2,029

 
54

 
3.56

 
1,766

 
56

 
4.13

Total consumer
517,429

 
17,825

 
4.60

 
545,179

 
19,313

 
4.73

U.S. commercial
229,822

 
4,983

 
2.90

 
216,609

 
5,108

 
3.15

Commercial real estate (7)
47,703

 
1,069

 
3.00

 
41,000

 
1,018

 
3.32

Commercial lease financing
24,485

 
638

 
3.48

 
23,659

 
645

 
3.63

Non-U.S. commercial
90,921

 
1,672

 
2.46

 
88,441

 
1,539

 
2.33

Total commercial
392,931

 
8,362

 
2.84

 
369,709

 
8,310

 
3.00

Total loans and leases
910,360

 
26,187

 
3.84

 
914,888

 
27,623

 
4.03

Other earning assets
66,214

 
2,072

 
4.18

 
81,920

 
2,123

 
3.46

Total earning assets (8)
1,819,247

 
39,373

 
2.89

 
1,826,575

 
41,954

 
3.07

Cash and due from banks (1)
26,907

 
 
 
 
 
36,904

 
 
 
 
Other assets, less allowance for loan and lease losses
302,144

 
 
 
 
 
309,685

 
 

 
 
Total assets
$
2,148,298

 
 
 
 
 
$
2,173,164

 
 

 
 
(1) 
Beginning in 2014, interest-bearing deposits placed with the Federal Reserve and certain non-U.S. central banks are included in earning assets. In prior periods, these balances were included with cash and due from banks in the cash and cash equivalents line, consistent with the Consolidated Balance Sheet presentation. Prior periods have been reclassified to conform to current period presentation.
(2) 
Beginning in 2014, yields on debt securities carried at fair value are calculated on the cost basis. Prior to 2014, yields on debt securities carried at fair value were 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 generally 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 $2 million and $86 million for the nine months ended September 30, 2014 and 2013.
(5) 
Includes non-U.S. consumer loans of $4.5 billion and $7.3 billion for the nine months ended September 30, 2014 and 2013.
(6) 
Includes consumer finance loans of $1.1 billion and $1.3 billion, consumer leases of $769 million and $288 million, consumer overdrafts of $146 million and $150 million, and other non-U.S. consumer loans of $3 million and $2 million for the nine months ended September 30, 2014 and 2013.
(7) 
Includes U.S. commercial real estate loans of $46.2 billion and $39.4 billion, and non-U.S. commercial real estate loans of $1.5 billion and $1.6 billion for the nine months ended September 30, 2014 and 2013.
(8) 
Interest income includes the impact of interest rate risk management contracts, which decreased interest income on the underlying assets by $48 million and $205 million for the nine months ended September 30, 2014 and 2013. Interest expense includes the impact of interest rate risk management contracts, which decreased interest expense on the underlying liabilities by $1.8 billion and $1.8 billion for the nine months ended September 30, 2014 and 2013. For more information on interest rate contracts, see Interest Rate Risk Management for Non-trading Activities on page 128.


26
Table of Contents

Table 14
Year-to-Date Average Balances and Interest Rates – FTE Basis (continued)
 
Nine Months Ended September 30
 
2014
 
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
$
46,489

 
$
2

 
0.01
%
 
$
43,937

 
$
17

 
0.05
%
NOW and money market deposit accounts
519,870

 
240

 
0.06

 
503,339

 
324

 
0.09

Consumer CDs and IRAs
68,455

 
212

 
0.41

 
81,694

 
375

 
0.61

Negotiable CDs, public funds and other deposits
31,688

 
84

 
0.35

 
25,707

 
87

 
0.45

Total U.S. interest-bearing deposits
666,502

 
538

 
0.11

 
654,677

 
803

 
0.16

Non-U.S. interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
Banks located in non-U.S. countries
9,866

 
62

 
0.84

 
11,936

 
58

 
0.65

Governments and official institutions
1,772

 
2

 
0.14

 
1,534

 
2

 
0.18

Time, savings and other
61,979

 
241

 
0.52

 
54,651

 
219

 
0.54

Total non-U.S. interest-bearing deposits
73,617

 
305

 
0.55

 
68,121

 
279

 
0.55

Total interest-bearing deposits
740,119

 
843

 
0.15

 
722,798

 
1,082

 
0.20

Federal funds purchased, securities loaned or sold under agreements to repurchase and short-term borrowings
259,786

 
1,963

 
1.01

 
311,486

 
2,241

 
0.96

Trading account liabilities
90,176

 
1,225

 
1.82

 
90,321

 
1,274

 
1.89

Long-term debt
255,084

 
4,386

 
2.30

 
267,582

 
5,232

 
2.61

Total interest-bearing liabilities (8)
1,345,165

 
8,417

 
0.84

 
1,392,187

 
9,829

 
0.94

Noninterest-bearing sources:
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing deposits
384,658

 
 
 
 
 
359,207

 
 
 
 
Other liabilities
181,675

 
 
 
 
 
187,644

 
 
 
 
Shareholders' equity
236,800

 
 
 
 
 
234,126

 
 
 
 
Total liabilities and shareholders' equity
$
2,148,298

 
 
 
 
 
$
2,173,164

 
 
 
 
Net interest spread
 
 
 
 
2.05
%
 
 
 
 
 
2.13
%
Impact of noninterest-bearing sources
 
 
 
 
0.22

 
 
 
 
 
0.22

Net interest income/yield on earning assets
 
 
$
30,956

 
2.27
%
 
 
 
$
32,125

 
2.35
%
For footnotes see page 26.


27
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, GWIM, Global Banking and Global Markets, 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 17. Table 15 provides selected summary financial data for our business segments and All Other for the three and nine months ended September 30, 2014 compared to the same periods in 2013. For additional detailed information on these results, see the business segment and All Other discussions which follow.

Table 15
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Business Segment Results
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30
 
Total Revenue (1)
 
Provision for Credit Losses
 
Noninterest Expense
 
Net Income (Loss)
(Dollars in millions)
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Consumer & Business Banking
$
7,511

 
$
7,524

 
$
617

 
$
761

 
$
3,979

 
$
3,967

 
$
1,856

 
$
1,787

Consumer Real Estate Services
1,093

 
1,577

 
286

 
(308
)
 
7,275

 
3,403

 
(5,184
)
 
(990
)
Global Wealth & Investment Management
4,666

 
4,390

 
(15
)
 
23

 
3,403

 
3,247

 
813

 
720

Global Banking
4,093

 
4,008

 
(32
)
 
322

 
1,904

 
1,923

 
1,414

 
1,137

Global Markets
4,136

 
3,219

 
45

 
47

 
3,336

 
2,881

 
369

 
(875
)
All Other
(65
)
 
1,025

 
(265
)
 
(549
)
 
245

 
968

 
500

 
718

Total FTE basis
21,434

 
21,743

 
636

 
296

 
20,142

 
16,389

 
(232
)
 
2,497

FTE adjustment
(225
)
 
(213
)
 
—

 
—

 
—

 
—

 
—

 
—

Total Consolidated
$
21,209

 
$
21,530

 
$
636

 
$
296

 
$
20,142

 
$
16,389

 
$
(232
)
 
$
2,497

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Consumer & Business Banking
$
22,320

 
$
22,369

 
$
1,963

 
$
2,680

 
$
11,912

 
$
12,287

 
$
5,327

 
$
4,638

Consumer Real Estate Services
3,675

 
6,003

 
291

 
318

 
21,290

 
12,161

 
(13,003
)
 
(4,058
)
Global Wealth & Investment Management
13,802

 
13,310

 
—

 
30

 
10,207

 
9,770

 
2,268

 
2,199

Global Banking
12,541

 
12,176

 
365

 
634

 
5,832

 
5,608

 
4,002

 
3,718

Global Markets
13,731

 
12,192

 
83

 
36

 
9,275

 
8,724

 
2,778

 
1,199

All Other
92

 
2,050

 
(646
)
 
(478
)
 
2,405

 
3,357

 
411

 
296

Total FTE basis
66,161

 
68,100

 
2,056

 
3,220

 
60,921

 
51,907

 
1,783

 
7,992

FTE adjustment
(639
)
 
(646
)
 
—

 
—

 
—

 
—

 
—

 
—

Total Consolidated
$
65,522

 
$
67,454

 
$
2,056

 
$
3,220

 
$
60,921

 
$
51,907

 
$
1,783

 
$
7,992

(1) 
Total revenue is net of interest expense and is on an 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 17.

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 an FTE basis and noninterest income. The adjustment of net interest income to an 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. 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 ALM activities.


28
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.

The Corporation periodically reviews capital allocated to its businesses and allocates capital annually during the strategic and capital planning processes. We utilize a methodology that considers the effect of regulatory capital requirements in addition to internal risk-based 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. For more information on the nature of these risks, see Managing Risk and Strategic Risk Management on page 63. The capital allocated to the business segments is referred to as allocated capital, which represents a non-GAAP financial measure. For purposes of goodwill impairment testing, the Corporation utilizes allocated equity as a proxy for the carrying value of its reporting units. Allocated equity in the reporting units is comprised of allocated capital plus capital for the portion of goodwill and intangibles specifically assigned to the reporting unit. For additional information, see Note 8 – Goodwill and Intangible Assets to the Consolidated Financial Statements.

During the latest annual planning process, we made refinements to the amount of capital allocated to each of our businesses based on multiple considerations that included, but were not limited to, Basel 3 Standardized and Advanced risk-weighted assets, business segment exposures and risk profile, and strategic plans. As a result of this process, in 2014, we adjusted the amount of capital being allocated to our business segments. This change resulted in a reduction of unallocated capital, which is included in All Other, and an aggregate increase in the amount of capital being allocated to the business segments.

For more information on the business segments and reconciliations to consolidated total revenue, net income (loss) and period-end total assets, see Note 18 – Business Segment Information to the Consolidated Financial Statements.



29
Table of Contents

Consumer & Business Banking
 
Three Months Ended September 30
 
 
 
Deposits
 
Consumer
Lending
 
Total Consumer &
Business Banking
 
 
(Dollars in millions)
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
% Change
Net interest income (FTE basis)
$
2,592

 
$
2,457

 
$
2,360

 
$
2,599

 
$
4,952

 
$
5,056

 
(2
)%
Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Card income
17

 
15

 
1,217

 
1,160

 
1,234

 
1,175

 
5

Service charges
1,137

 
1,063

 
—

 
—

 
1,137

 
1,063

 
7

All other income
144

 
126

 
44

 
104

 
188

 
230

 
(18
)
Total noninterest income
1,298

 
1,204

 
1,261

 
1,264

 
2,559

 
2,468

 
4

Total revenue, net of interest expense (FTE basis)
3,890

 
3,661

 
3,621

 
3,863

 
7,511

 
7,524

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for credit losses
61

 
96

 
556

 
665

 
617

 
761

 
(19
)
Noninterest expense
2,573

 
2,682

 
1,406

 
1,285

 
3,979

 
3,967

 
—

Income before income taxes
1,256

 
883

 
1,659

 
1,913

 
2,915

 
2,796

 
4

Income tax expense (FTE basis)
457

 
319

 
602

 
690

 
1,059

 
1,009

 
5

Net income
$
799

 
$
564

 
$
1,057

 
$
1,223

 
$
1,856

 
$
1,787

 
4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest yield (FTE basis)
1.87
%
 
1.85
%
 
6.75
%
 
7.17
%
 
3.45
%
 
3.70
%
 
 
Return on average allocated capital
19.21

 
14.55

 
32.29

 
33.28

 
24.97

 
23.67

 
 
Efficiency ratio (FTE basis)
66.17

 
73.26

 
38.80

 
33.25

 
52.98

 
52.72

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30
 
 
Average
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
% Change
Total loans and leases
$
22,314

 
$
22,383

 
$
138,565

 
$
143,336

 
$
160,879

 
$
165,719

 
(3
)%
Total earning assets (1)
550,136

 
526,108

 
138,756

 
143,771

 
569,084

 
542,614

 
5

Total assets (1)
582,637

 
558,714

 
148,246

 
152,436

 
611,075

 
583,885

 
5

Total deposits
544,274

 
521,510

 
n/m

 
n/m

 
545,116

 
522,009

 
4

Allocated capital
16,500

 
15,400

 
13,000

 
14,600

 
29,500

 
30,000

 
(2
)
(1)
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

30
Table of Contents

 
Nine Months Ended September 30
 
 
 
Deposits
 
Consumer
Lending
 
Total Consumer &
Business Banking
 
 
(Dollars in millions)
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
% Change
Net interest income (FTE basis)
$
7,737

 
$
7,317

 
$
7,096

 
$
7,787

 
$
14,833

 
$
15,104

 
(2
)%
Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Card income
51

 
45

 
3,512

 
3,523

 
3,563

 
3,568

 
—

Service charges
3,272

 
3,110

 
1

 
1

 
3,273

 
3,111

 
5

All other income
388

 
344

 
263

 
242

 
651

 
586

 
11

Total noninterest income
3,711

 
3,499

 
3,776

 
3,766

 
7,487

 
7,265

 
3

Total revenue, net of interest expense (FTE basis)
11,448

 
10,816

 
10,872

 
11,553

 
22,320

 
22,369

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for credit losses
194

 
194

 
1,769

 
2,486

 
1,963

 
2,680

 
(27
)
Noninterest expense
7,835

 
8,333

 
4,077

 
3,954

 
11,912

 
12,287

 
(3
)
Income before income taxes
3,419

 
2,289

 
5,026

 
5,113

 
8,445

 
7,402

 
14

Income tax expense (FTE basis)
1,262

 
855

 
1,856

 
1,909

 
3,118

 
2,764

 
13

Net income
$
2,157

 
$
1,434

 
$
3,170

 
$
3,204

 
$
5,327

 
$
4,638

 
15

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest yield (FTE basis)
1.89
%
 
1.88
%
 
6.82
%
 
7.28
%
 
3.52
%
 
3.77
%
 
 
Return on average allocated capital
17.48

 
12.46

 
32.64

 
29.39

 
24.16

 
20.70

 
 
Efficiency ratio (FTE basis)
68.44

 
77.04

 
37.50

 
34.22

 
53.37

 
54.93

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30
 
 
Average
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
% Change
Total loans and leases
$
22,443

 
$
22,477

 
$
138,612

 
$
142,575

 
$
161,055

 
$
165,052

 
(2
)%
Total earning assets (1)
545,988

 
519,824

 
139,149

 
143,014

 
562,807

 
536,290

 
5

Total assets (1)
578,653

 
552,533

 
148,527

 
151,633

 
604,850

 
577,618

 
5

Total deposits
540,337

 
515,190

 
n/m

 
n/m

 
541,119

 
515,655

 
5

Allocated capital
16,500

 
15,400

 
13,000

 
14,600

 
29,500

 
30,000

 
(2
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period end
September 30
2014
 
December 31
2013
 
September 30
2014
 
December 31
2013
 
September 30
2014
 
December 31
2013
 
% Change
Total loans and leases
$
22,394

 
$
22,578

 
$
138,951

 
$
142,516

 
$
161,345

 
$
165,094

 
(2
)%
Total earning assets (1)
551,501

 
535,121

 
139,038

 
143,917

 
570,678

 
550,757

 
4

Total assets (1)
583,827

 
567,978

 
148,718

 
153,376

 
612,684

 
593,074

 
3

Total deposits
545,696

 
530,920

 
n/m

 
n/m

 
546,791

 
531,669

 
3

For footnotes see page 30.

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 31 states and the District of Columbia. The franchise network includes approximately 4,900 banking centers, 15,700 ATMs, nationwide call centers, and online and mobile platforms.

CBB Results

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

Net income for CBB increased $69 million to $1.9 billion primarily driven by lower provision for credit losses and higher noninterest income, partially offset by lower net interest income. Net interest income decreased $104 million to $5.0 billion due to lower average loan balances and card yields, partially offset by higher deposit balances. Noninterest income increased $91 million to $2.6 billion primarily due to higher deposit service charges and card income.

The provision for credit losses decreased $144 million to $617 million primarily as a result of improvements in credit quality. Noninterest expense of $4.0 billion remained relatively unchanged.

The return on average allocated capital was 24.97 percent, up from 23.67 percent, reflecting an increase in net income combined with a small decrease in allocated capital. For more information on capital allocated to the business segments, see Business Segment Operations on page 28.


31
Table of Contents

Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

Net income for CBB increased $689 million to $5.3 billion primarily driven by lower provision for credit losses, lower noninterest expense and higher noninterest income, partially offset by lower net interest income. Net interest income decreased $271 million to $14.8 billion driven by the same factors as described in the three-month discussion above. Noninterest income increased $222 million to $7.5 billion primarily due to portfolio divestiture gains and higher service charges, partially offset by lower revenue from consumer protection products.

The provision for credit losses decreased $717 million to $2.0 billion driven by the same factor as described in the three-month discussion above. Noninterest expense decreased $375 million to $11.9 billion primarily driven by lower operating, FDIC and litigation expenses.

The return on average allocated capital was 24.16 percent, up from 20.70 percent, reflecting an increase in net income combined with a small decrease in allocated capital.

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, client brokerage asset services, a self-directed online investing platform and key banking capabilities including access to the Corporation's network of banking centers and ATMs.

Business Banking within Deposits 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 42.

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

Net income for Deposits increased $235 million to $799 million driven by higher revenue, and lower noninterest expense and provision for credit losses. Net interest income increased $135 million to $2.6 billion primarily driven by a combination of pricing discipline and the beneficial impact of an increase in investable assets as a result of higher deposit balances. Noninterest income increased $94 million to $1.3 billion primarily due to higher deposit service charges.

The provision for credit losses decreased $35 million to $61 million as a result of a slight improvement in credit quality. Noninterest expense decreased $109 million to $2.6 billion due to lower operating expenses, partially offset by higher personnel and litigation expenses.

Average deposits increased $22.8 billion to $544.3 billion driven by a continuing customer shift to more liquid products in the low rate environment. Growth in checking, traditional savings and money market savings of $33.5 billion was partially offset by a decline in time deposits of $10.7 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 four bps to six bps.


32
Table of Contents

Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

Net income for Deposits increased $723 million to $2.2 billion driven by higher revenue and a decrease in noninterest expense. Net interest income increased $420 million to $7.7 billion primarily driven by the same factors as described in the three-month discussion above. Noninterest income increased $212 million to $3.7 billion primarily due to higher deposit service charges and investment and brokerage income.

The provision for credit losses of $194 million remained relatively unchanged. Noninterest expense decreased $498 million to $7.8 billion due to lower operating, FDIC and litigation expenses.

Average deposits increased $25.1 billion to $540.3 billion driven by a continuing customer shift to more liquid products in the low rate environment. Additionally, $3.5 billion of the increase in average deposits was due to net transfers from other businesses, largely GWIM.

Key Statistics
 
 
 
 
 
 
 
 
Three Months Ended September 30
 
Nine Months Ended
September 30
 
2014
 
2013
 
2014
 
2013
Total deposit spreads (excludes noninterest costs)
1.60
%
 
1.52
%
 
1.58
%
 
1.52
%
 
 
 
 
 
 
 
 
Period end
 
 
 
 
 
 
 
Client brokerage assets (in millions)
 
 
 
 
$
108,533

 
$
89,517

Online banking active accounts (units in thousands)
 
 
 
 
30,821

 
30,197

Mobile banking active accounts (units in thousands)
 
 
 
 
16,107

 
13,967

Banking centers
 
 
 
 
4,947

 
5,243

ATMs
 
 
 
 
15,675

 
16,201


Client brokerage assets increased $19.0 billion driven by increased account flows and market valuations. Mobile banking customers increased 2.1 million reflecting continuing changes in our customers' banking preferences. The number of banking centers declined 296 and ATMs declined 526 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 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.

Consumer Lending includes the net impact of migrating customers and their related credit card loan balances between Consumer Lending and GWIM.

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

Net income for Consumer Lending decreased $166 million to $1.1 billion primarily driven by lower net interest income and higher noninterest expense, partially offset by lower provision for credit losses. Net interest income decreased $239 million to $2.4 billion driven by the impact of lower average loan balances and card yields. Noninterest income of $1.3 billion remained relatively unchanged.

The provision for credit losses decreased $109 million to $556 million due to continued improvement in credit quality, due in part to lower delinquencies. Noninterest expense increased $121 million to $1.4 billion primarily driven by higher operating expenses.

Average loans decreased $4.8 billion to $138.6 billion primarily driven by the net migration of credit card loan balances to GWIM as described above, portfolio divestitures and continued run-off of non-core portfolios, partially offset by an increase in small business lending.


33
Table of Contents

Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

Net income for Consumer Lending decreased $34 million to $3.2 billion primarily due to lower net interest income and higher noninterest expense, partially offset by lower provision for credit losses. Net interest income decreased $691 million to $7.1 billion driven by the same factors as described in the three-month discussion above. Noninterest income of $3.8 billion remained relatively unchanged.

The provision for credit losses decreased $717 million to $1.8 billion due to the same factors as described in the three-month discussion above. Noninterest expense increased $123 million to $4.1 billion driven by higher operating expenses, partially offset by lower litigation expense.

Average loans decreased $4.0 billion to $138.6 billion primarily driven by the net migration of credit card loan balances to GWIM as described above, continued run-off of non-core portfolios and portfolio divestitures, partially offset by an increase in consumer auto loans and small business lending.

Key Statistics
 
 
 
 
 
 
 
 
Three Months Ended September 30
 
Nine Months Ended
September 30
(Dollars in millions)
2014
 
2013
 
2014
 
2013
Total U.S. credit card (1)
 
 
 
 
 
 
 
Gross interest yield
9.34
%
 
9.82
%
 
9.37
%
 
9.85
%
Risk-adjusted margin
9.33

 
8.68

 
9.26

 
8.54

New accounts (in thousands)
1,202

 
1,048

 
3,357

 
2,912

Purchase volumes
$
53,784

 
$
52,823

 
$
156,231

 
$
151,400

Debit card purchase volumes
$
67,990

 
$
66,712

 
$
203,372

 
$
199,087

(1) 
Total U.S. credit card includes portfolios in CBB and GWIM.

During the three and nine months ended September 30, 2014, the total U.S. credit card risk-adjusted margin increased 65 bps and 72 bps compared to the same periods in 2013 due to an improvement in credit quality, and for the nine months ended September 30, 2014, portfolio divestiture gains. Total U.S. credit card purchase volumes increased $961 million to $53.8 billion, and $4.8 billion to $156.2 billion and debit card purchase volumes increased $1.3 billion to $68.0 billion, and $4.3 billion to $203.4 billion compared to the same periods in 2013, reflecting higher levels of consumer spending.

34
Table of Contents

Consumer Real Estate Services
 
Three Months Ended September 30
 
 
 
Home Loans
 
Legacy Assets
& Servicing
 
Total Consumer Real
Estate Services
 
 
(Dollars in millions)
2014
 
2013
 
2014
 
2013

2014
 
2013
 
% Change
Net interest income (FTE basis)
$
332

 
$
329

 
$
387

 
$
404

 
$
719

 
$
733

 
(2
)%
Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage banking income
206

 
345

 
152

 
430

 
358

 
775

 
(54
)
All other income (loss)
(2
)
 
35

 
18

 
34

 
16

 
69

 
(77
)
Total noninterest income
204

 
380

 
170

 
464

 
374

 
844

 
(56
)
Total revenue, net of interest expense (FTE basis)
536

 
709

 
557

 
868

 
1,093

 
1,577

 
(31
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for credit losses
18

 
(11
)
 
268

 
(297
)
 
286

 
(308
)
 
n/m

Noninterest expense
629

 
885

 
6,646

 
2,518

 
7,275

 
3,403

 
114

Loss before income taxes
(111
)
 
(165
)
 
(6,357
)
 
(1,353
)
 
(6,468
)
 
(1,518
)
 
n/m

Income tax benefit (FTE basis)
(40
)
 
(63
)
 
(1,244
)
 
(465
)
 
(1,284
)
 
(528
)
 
143

Net loss
$
(71
)
 
$
(102
)
 
$
(5,113
)
 
$
(888
)
 
$
(5,184
)
 
$
(990
)
 
n/m

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest yield (FTE basis)
2.38
%
 
2.50
%
 
4.01
%
 
3.36
%
 
3.13
%
 
2.91
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30
 
 
Average
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
% Change
Total loans and leases
$
52,733

 
$
46,878

 
$
35,238

 
$
41,528

 
$
87,971

 
$
88,406

 
—
 %
Total earning assets (1)
55,214

 
52,074

 
38,330

 
47,685

 
91,244

 
99,759

 
(9
)
Total assets (1)
55,295

 
52,305

 
51,455

 
65,917

 
104,451

 
118,222

 
(12
)
Allocated capital
6,000

 
6,000

 
17,000

 
18,000

 
23,000

 
24,000

 
(4
)
(1)
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 CRES.
n/m = not meaningful

35
Table of Contents

 
Nine Months Ended September 30
 
 
 
Home Loans
 
Legacy Assets
& Servicing
 
Total Consumer Real
Estate Services
 
 
(Dollars in millions)
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
% Change
Net interest income (FTE basis)
$
990

 
$
1,020

 
$
1,127

 
$
1,154

 
$
2,117

 
$
2,174

 
(3
)%
Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage banking income
620

 
1,696

 
812

 
1,976

 
1,432

 
3,672

 
(61
)
All other income (loss)
22

 
(23
)
 
104

 
180

 
126

 
157

 
(20
)
Total noninterest income
642

 
1,673

 
916

 
2,156

 
1,558

 
3,829

 
(59
)
Total revenue, net of interest expense (FTE basis)
1,632

 
2,693

 
2,043

 
3,310

 
3,675

 
6,003

 
(39
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for credit losses
50

 
145

 
241

 
173

 
291

 
318

 
(8
)
Noninterest expense
2,012

 
2,576

 
19,278

 
9,585

 
21,290

 
12,161

 
75

Loss before income taxes
(430
)
 
(28
)
 
(17,476
)
 
(6,448
)
 
(17,906
)
 
(6,476
)
 
n/m

Income tax benefit (FTE basis)
(159
)
 
(10
)
 
(4,744
)
 
(2,408
)
 
(4,903
)
 
(2,418
)
 
103

Net loss
$
(271
)
 
$
(18
)
 
$
(12,732
)
 
$
(4,040
)
 
$
(13,003
)
 
$
(4,058
)
 
n/m

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest yield (FTE basis)
2.45
%
 
2.56
%
 
3.90
%
 
3.13
%
 
3.05
%
 
2.84
%
 
 
Efficiency ratio (FTE basis)
n/m

 
95.65

 
n/m

 
n/m

 
n/m

 
n/m

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30
 
 
Average
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
% Change
Total loans and leases
$
51,705

 
$
46,990

 
$
36,673

 
$
43,488

 
$
88,378

 
$
90,478

 
(2
)%
Total earning assets (1)
54,144

 
53,180

 
38,626

 
49,318

 
92,770

 
102,498

 
(9
)
Total assets (1)
54,146

 
53,594

 
54,031

 
69,312

 
108,177

 
122,906

 
(12
)
Allocated capital
6,000

 
6,000

 
17,000

 
18,000

 
23,000

 
24,000

 
(4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period end
September 30
2014
 
December 31
2013
 
September 30
2014
 
December 31
2013
 
September 30
2014
 
December 31
2013
 
% Change
Total loans and leases
$
53,478

 
$
51,021

 
$
34,484

 
$
38,732

 
$
87,962

 
$
89,753

 
(2
)%
Total earning assets (1)
56,690

 
54,071

 
40,869

 
43,092

 
91,973

 
97,163

 
(5
)
Total assets (1)
56,042

 
53,933

 
52,852

 
59,458

 
103,309

 
113,391

 
(9
)
For footnotes see page 35.

CRES operations include Home Loans and Legacy Assets & Servicing. Home Loans is responsible for ongoing residential first mortgage and home equity 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 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. 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 originated prior to January 1, 2011 that would not have been originated under our established underwriting standards as of December 31, 2010. For more information on our Legacy Portfolios, see page 38. In addition, Legacy Assets & Servicing is responsible for managing legacy exposures related to CRES (e.g., litigation, 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 its 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 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 Home Loans or 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 certain customers and their related loan balances from GWIM to CRES.


36
Table of Contents

CRES Results

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

The net loss for CRES increased $4.2 billion to a net loss of $5.2 billion primarily driven by higher litigation expense, which is included in noninterest expense, related to the DoJ Settlement and a lower tax benefit rate resulting from the non-deductible treatment of a portion of the DoJ Settlement, higher provision for credit losses and lower mortgage banking income. Mortgage banking income decreased $417 million due to both lower servicing income and lower core production revenue, partially offset by lower representations and warranties provision. The provision for credit losses increased $594 million due to $400 million of additional costs associated with the consumer relief portion of the DoJ Settlement and a slower pace of credit quality improvement. Noninterest expense increased $3.9 billion due to a $5.0 billion increase in litigation expense primarily for the DoJ Settlement. Excluding litigation, noninterest expense decreased $1.1 billion to $2.0 billion due to a decline in default-related servicing expenses and lower mortgage-related assessments, waivers and similar costs related to foreclosure delays in Legacy Assets & Servicing and a decline in personnel expense resulting from lower loan originations in Home Loans.

Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

The net loss for CRES increased $8.9 billion to a net loss of $13.0 billion primarily driven by higher litigation expense as a result of both the DoJ Settlement and the settlement with FHFA as well as the same factors as described in the three-month discussion above. Mortgage banking income decreased $2.2 billion driven by the same factors as described in the three-month discussion above. The provision for credit losses decreased $27 million to $291 million driven by the continued improvement in portfolio trends including increased home prices, partially offset by additional costs associated with the consumer relief portion of the DoJ Settlement. Noninterest expense increased $9.1 billion primarily due to a $12.4 billion increase in litigation expense as a result of the DoJ Settlement and the settlement with FHFA. Excluding litigation, noninterest expense decreased $3.2 billion to $6.3 billion driven by the same factors as described in the three-month discussion above.

Home Loans

Home Loans products are available to our customers through our retail network, direct telephone and online access delivered by a sales force of approximately 2,600 mortgage loan officers, including nearly 1,500 banking center mortgage loan officers covering nearly 2,800 banking centers, and a nearly 700-person centralized sales force based in five call centers.

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

The net loss for Home Loans decreased $31 million to a net loss of $71 million driven by lower noninterest expense, partially offset by a decrease in noninterest income and higher provision for credit losses. Noninterest income decreased $176 million due to lower mortgage banking income driven by a decline in core production revenue as a result of lower origination volumes. The provision for credit losses increased $29 million due to a slower pace of credit quality improvement. Noninterest expense decreased $256 million primarily due to lower personnel expense resulting from lower loan originations.

Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

The net loss for Home Loans increased $253 million to a net loss of $271 million driven by lower noninterest income, partially offset by lower noninterest expense and lower provision for credit losses. Noninterest income decreased $1.0 billion due to the same factors as described in the three-month discussion above and continued industry-wide margin compression. The provision for credit losses decreased $95 million reflecting continued improvement in portfolio trends including increased home prices. Noninterest expense decreased $564 million 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 in-house 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 represented 27 percent and 33 percent of the total mortgage serviced portfolio, as measured by unpaid principal balance, at September 30, 2014 and 2013. In addition, Legacy Assets & Servicing is responsible for managing subservicing arrangements.


37
Table of Contents

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 expense, 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.

Servicing activities include collecting cash for principal, interest and escrow payments from borrowers, disbursing customer draws for lines of credit, accounting for and remitting principal and interest payments to investors and escrow payments to third parties, and responding to customer inquiries. Our home retention efforts, including single point of contact resources, are also part of our servicing activities, along with supervision of foreclosures and property dispositions. In an effort to help our customers avoid foreclosure, Legacy Assets & Servicing evaluates various workout options prior to foreclosure which, combined with legislative changes at the state level and ongoing foreclosure delays in states where foreclosure requires a court order following a legal proceeding (judicial states), have resulted in elongated default timelines. For more information on our servicing activities, including the impact of foreclosure delays, see Off-Balance Sheet Arrangements and Contractual Obligations – Servicing, Foreclosure and Other Mortgage Matters on page 57 of the MD&A of the Corporation's 2013 Annual Report on Form 10-K.

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

The net loss for Legacy Assets & Servicing increased $4.2 billion to a net loss of $5.1 billion driven by higher litigation expense, which is included in noninterest expense, related to the DoJ Settlement and a lower tax benefit rate resulting from the non-deductible treatment of a portion of the DoJ Settlement, higher provision for credit losses and lower mortgage banking income. Mortgage banking income decreased $278 million driven by a decline in servicing income due to a smaller servicing portfolio combined with less favorable MSR, net-of-hedge performance, partially offset by lower representations and warranties provision. The provision for credit losses increased $565 million due to $400 million of additional costs associated with the consumer relief portion of the DoJ Settlement and a slower pace of credit quality improvement.

Noninterest expense increased $4.1 billion due to a $5.0 billion increase in litigation expense as discussed in CRES results above, partially offset by a decrease in default-related servicing expenses and lower mortgage-related assessments, waivers and similar costs related to foreclosure delays. Excluding litigation, noninterest expense decreased $839 million to $1.3 billion. We expect that noninterest expense in Legacy Assets & Servicing, excluding litigation expense, will decline to $1.1 billion for the first quarter of 2015.

Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

The net loss for Legacy Assets & Servicing increased $8.7 billion to a net loss of $12.7 billion driven by an increase in noninterest expense, a lower tax benefit rate resulting from the non-deductible treatment of a portion of the DoJ Settlement, lower mortgage banking income and higher provision for credit losses. Mortgage banking income decreased $1.2 billion due to the same factors as described in three-month discussion above. The provision for credit losses increased $68 million due to the DoJ Settlement as described in the three-month discussion above, partially offset by continued improvement in portfolio trends including increased home prices.

Noninterest expense increased $9.7 billion due to higher litigation expense as a result of the DoJ Settlement and the settlement with FHFA, partially offset by the same factors as described in the three-month discussion above. Excluding litigation, noninterest expense decreased $2.7 billion to $4.3 billion.

Legacy Portfolios

The Legacy Portfolios (both owned and serviced) include those loans originated prior to January 1, 2011 that would not have been originated under our established underwriting standards in place as of December 31, 2010. The purchased credit-impaired (PCI) portfolio, 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, and 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 $17.1 billion during the nine months ended September 30, 2014 to $95.0 billion, of which $34.5 billion were held 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 paydowns, loan sales, PCI write-offs and charge-offs.


38
Table of Contents

Legacy Serviced Portfolio

The Legacy Serviced Portfolio includes loans serviced by Legacy Assets & Servicing in both 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 25 percent and 32 percent of the total residential mortgage serviced portfolio of $636.0 billion and $795.0 billion, as measured by unpaid principal balance, at September 30, 2014 and 2013. The decline in the Legacy Residential Mortgage Serviced Portfolio was primarily due to MSR sales, loan sales and other servicing transfers, paydowns and payoffs.

Legacy Residential Mortgage Serviced Portfolio, a subset of the Residential Mortgage Serviced Portfolio (1, 2)
 
September 30
(Dollars in billions)
2014
 
2013
Unpaid principal balance
 
 
 
Residential mortgage loans
 
 
 
Total
$
160

 
$
251

60 days or more past due
32

 
67

 
 
 
 
Number of loans serviced (in thousands)
 
 
 
Residential mortgage loans
 
 
 
Total
853

 
1,290

60 days or more past due
163

 
327

(1) 
Excludes loans for which servicing transferred to third parties as of September 30, 2014 with an effective MSR sale date of October 1, 2014, totaling $78 million.
(2) 
Excludes $36 billion and $41 billion of home equity loans and HELOCs at September 30, 2014 and 2013.

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 75 percent and 68 percent of the total residential mortgage serviced portfolio, as measured by unpaid principal balance, at September 30, 2014 and 2013. The decline in the Non-Legacy Residential Mortgage Serviced Portfolio was primarily due to MSR sales and other servicing transfers, paydowns and payoffs.

Non-Legacy Residential Mortgage Serviced Portfolio, a subset of the Residential Mortgage Serviced Portfolio (1, 2)
 
September 30
(Dollars in billions)
2014
 
2013
Unpaid principal balance
 
 
 
Residential mortgage loans
 
 
 
Total
$
476

 
$
544

60 days or more past due
10

 
13

 
 
 
 
Number of loans serviced (in thousands)
 
 
 
Residential mortgage loans
 
 
 
Total
3,035

 
3,450

60 days or more past due
58

 
71

(1) 
Excludes loans for which servicing transferred to third parties as of September 30, 2014 with an effective MSR sale date of October 1, 2014, totaling $439 million.
(2) 
Excludes $50 billion and $53 billion of home equity loans and HELOCs at September 30, 2014 and 2013.


39
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 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 revenue 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 September 30
 
Nine Months Ended September 30
(Dollars in millions)
2014
 
2013
 
2014
 
2013
Production income:
 
 
 
 
 
 
 
Core production revenue
$
293

 
$
465

 
$
884

 
$
2,140

Representations and warranties provision
(167
)
 
(323
)
 
(432
)
 
(770
)
Total production income
126

 
142

 
452

 
1,370

Servicing income:
 
 
 
 
 
 
 
Servicing fees
452

 
700

 
1,441

 
2,400

Amortization of expected cash flows (1)
(201
)
 
(240
)
 
(620
)
 
(814
)
Fair value changes of MSRs, net of risk management activities used to hedge certain market risks (2)
(19
)
 
167

 
152

 
693

Other servicing-related revenue
—

 
6

 
7

 
23

Total net servicing income
232

 
633

 
980

 
2,302

Total CRES mortgage banking income
358

 
775

 
1,432

 
3,672

Eliminations (3)
(86
)
 
(190
)
 
(221
)
 
(646
)
Total consolidated mortgage banking income
$
272

 
$
585

 
$
1,211

 
$
3,026

(1) 
Represents the net change in fair value of the MSR asset due to the recognition of modeled cash flows.
(2) 
Includes gains (losses) on sales of MSRs.
(3) 
Includes the effect of transfers of mortgage loans from CRES to the ALM portfolio included in All Other.

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

Core production revenue decreased $172 million due to lower origination volumes as described below. The representations and warranties provision decreased $156 million to $167 million. The provision was primarily related to non-government-sponsored enterprises exposures, partially offset by lower exposure to mortgage insurance rescissions due to settlements with certain mortgage insurance companies in 2014.

Net servicing income decreased $401 million driven by lower servicing fees due to a smaller servicing portfolio and less favorable MSR net-of-hedge performance, partially offset by lower amortization of expected cash flows. The decline in the size of our servicing portfolio was driven by strategic sales of MSRs during 2014 and 2013 as well as loan prepayment activity, which exceeded new originations primarily due to our exit from non-retail channels.

Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

Core production revenue decreased $1.3 billion due to the same factors as described in the three-month discussion above, combined with industry-wide margin compression. The representations and warranties provision decreased $338 million to $432 million. The provision was related to the same factors as described in the three-month discussion above.

Net servicing income decreased $1.3 billion driven by the same factors as described in the three-month discussion above.


40
Table of Contents

Key Statistics
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions, except as noted)
2014
 
2013
 
2014
 
2013
Loan production (1)
 
 
 
 
 
 
 
 
 
 
 
Total (2):
 
 
 
 
 
 
 
 
 
 
 
First mortgage
$
11,725

 
 
$
22,601

 
 
$
31,674

 
 
$
71,797

 
Home equity
3,224

 
 
1,831

 
 
7,812

 
 
4,446

 
CRES:
 
 
 
 
 
 
 
 
 
 
 
First mortgage
$
8,861

 
 
$
17,833

 
 
$
24,024

 
 
$
57,611

 
Home equity
2,970

 
 
1,599

 
 
7,157

 
 
3,824

 
 
 
 
 
 
 
 
 
 
 
Period end
 
 
 
 
September 30
2014
 
December 31
2013
Mortgage serviced portfolio (in billions) (1, 3)
 
 
 
 
 
 
$
722

 
 
$
810

 
Mortgage loans serviced for investors (in billions) (1)
 
 
 
 
 
 
491

 
 
550

 
Mortgage servicing rights:
 
 
 
 
 
 
 
 
 
 
 
Balance (4)
 
 
 
 
 
 
3,986

 
 
5,042

 
Capitalized mortgage servicing rights (% of loans serviced for investors)
 
 
 
 
 
 
81

bps
 
92

bps
(1) 
The above loan production and period-end servicing portfolio and mortgage loans serviced for investors represent the unpaid principal balance of loans.
(2) 
In addition to loan production in CRES, the remaining first mortgage and home equity loan production is primarily in GWIM.
(3) 
Servicing of residential mortgage loans, HELOCs and home equity loans by Legacy Assets & Servicing.
(4) 
At September 30, 2014, excludes $257 million of certain non-U.S. residential mortgage MSR balances that are recorded in Global Markets.

First mortgage loan originations in CRES and for the total Corporation declined for the three and nine months ended September 30, 2014 compared to the same periods in 2013 reflecting a decline in the overall mortgage market as higher interest rates drove a decrease in refinances. The increase in interest rates also had an adverse impact on our mortgage loan applications, particularly for refinance mortgage loans compared to the same periods in 2013.

During the three months ended September 30, 2014, 57 percent of our first mortgage production volume was for refinance originations and 43 percent was for purchase originations compared to 78 percent and 22 percent for the same period in 2013. Home Affordable Refinance Program (HARP) refinance originations were five percent of all refinance originations compared to 17 percent for the same period in 2013. Making Home Affordable non-HARP refinance originations were 15 percent of all refinance originations compared to 17 percent for the same period in 2013. The remaining 80 percent of refinance originations was conventional refinances compared to 66 percent for the same period in 2013.

During the nine months ended September 30, 2014, 58 percent of our first mortgage production volume was for refinance originations and 42 percent was for purchase originations compared to 84 percent and 16 percent for the same period in 2013. HARP refinance originations were seven percent of all refinance originations compared to 24 percent for the same period in 2013. Making Home Affordable non-HARP refinance originations were 18 percent of all refinance originations compared to 19 percent for the same period in 2013. The remaining 75 percent of refinance originations was conventional refinances compared to 57 percent for the same period in 2013.

Home equity production for the total Corporation was $3.2 billion and $7.8 billion for the three and nine months ended September 30, 2014 compared to $1.8 billion and $4.4 billion for the same periods in 2013, 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.

Mortgage Servicing Rights

At September 30, 2014, the balance of consumer MSRs managed within CRES, which excludes $257 million of certain non-U.S. residential mortgage MSRs recorded in Global Markets, was $4.0 billion, which represented 81 bps of the related unpaid principal balance compared to $5.0 billion, or 92 bps of the related unpaid principal balance at December 31, 2013. The consumer MSR balance managed within CRES decreased $1.1 billion in the nine months ended September 30, 2014 primarily driven by a decrease in value due to lower mortgage rates compared to December 31, 2013, which resulted in higher forecasted prepayment speeds, and the recognition of modeled cash flows, partially offset by additions to the portfolio. For more information on our servicing activities, see Off-Balance Sheet Arrangements and Contractual Obligations – Servicing, Foreclosure and Other Mortgage Matters on page 60. For more information on MSRs, see Note 17 – Mortgage Servicing Rights to the Consolidated Financial Statements.

41
Table of Contents

Global Wealth & Investment Management
 
Three Months Ended September 30
 
 
 
Nine Months Ended September 30
 
 
(Dollars in millions)
2014
 
2013
 
% Change
 
2014

2013
 
% Change
Net interest income (FTE basis)
$
1,460

 
$
1,478

 
(1
)%
 
$
4,430

 
$
4,579

 
(3
)%
Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
Investment and brokerage services
2,713

 
2,413

 
12

 
7,959

 
7,185

 
11

All other income
493

 
499

 
(1
)
 
1,413

 
1,546

 
(9
)
Total noninterest income
3,206

 
2,912

 
10

 
9,372

 
8,731

 
7

Total revenue, net of interest expense (FTE basis)
4,666

 
4,390

 
6

 
13,802

 
13,310

 
4

 
 
 
 
 
 
 
 
 
 
 
 
Provision for credit losses
(15
)
 
23

 
n/m

 
—

 
30

 
(100
)
Noninterest expense
3,403

 
3,247

 
5

 
10,207

 
9,770

 
4

Income before income taxes
1,278

 
1,120

 
14

 
3,595

 
3,510

 
2

Income tax expense (FTE basis)
465

 
400

 
16

 
1,327

 
1,311

 
1

Net income
$
813

 
$
720

 
13

 
$
2,268

 
$
2,199

 
3

 
 
 
 
 
 
 
 
 
 
 
 
Net interest yield (FTE basis)
2.32
%
 
2.35
%
 
 
 
2.36
%
 
2.42
%
 
 
Return on average allocated capital
26.98

 
28.71

 
 
 
25.37

 
29.57

 
 
Efficiency ratio (FTE basis)
72.94

 
73.97

 
 
 
73.95

 
73.41

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30
 
 
 
Nine Months Ended September 30
 
 
Average
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
Total loans and leases
$
121,002

 
$
112,752

 
7
 %
 
$
118,505

 
$
109,499

 
8
 %
Total earning assets
249,738

 
249,204

 
—

 
251,042

 
252,487

 
(1
)
Total assets
267,840

 
268,611

 
—

 
269,719

 
271,498

 
(1
)
Total deposits
239,352

 
239,663

 
—

 
240,716

 
242,757

 
(1
)
Allocated capital
12,000

 
10,000

 
20

 
12,000

 
10,000

 
20

 
 
 
 
 
 
 
 
 
 
 
 
Period end
 
 
 
 
 
 
September 30
2014
 
December 31
2013
 
% Change
Total loans and leases
 
 
 
 
 
 
$
122,395

 
$
115,846

 
6
 %
Total earning assets
 
 
 
 
 
 
249,586

 
254,031

 
(2
)
Total assets
 
 
 
 
 
 
267,753

 
274,113

 
(2
)
Total deposits
 
 
 
 
 
 
238,710

 
244,901

 
(3
)
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 high net worth and ultra high net worth clients, as well as customized solutions to meet clients' wealth structuring, investment management, trust and banking needs, including specialty asset management services.

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

Net income increased $93 million to $813 million driven by higher noninterest income, partially offset by higher noninterest expense. Noninterest income increased $294 million to $3.2 billion primarily driven by increased asset management fees due to higher market

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valuation and the impact of long-term AUM flows. Noninterest expense increased $156 million to $3.4 billion primarily due to higher revenue-related incentive compensation and other volume-related expenses.

Revenue from MLGWM was $3.9 billion, up six percent, and revenue from U.S. Trust was $775 million, also up six percent, both driven by an increase in asset management fees related to higher market valuation and long-term AUM flows.

Return on average allocated capital was 26.98 percent, down from 28.71 percent as improved earnings were more than offset by increased capital allocations. For more information on capital allocated to the business segments, see Business Segment Operations on page 28.

Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

Net income increased $69 million to $2.3 billion driven by higher noninterest income, partially offset by lower net interest income and higher noninterest expense. Noninterest income increased $641 million to $9.4 billion driven by the same factors as described in the three-month discussion above. Noninterest expense increased $437 million to $10.2 billion driven by higher revenue-related incentive compensation and support expenses. Net interest income decreased $149 million to $4.4 billion as a result of the low rate environment, partially offset by loan growth.

Revenue from MLGWM was $11.4 billion, up three percent, and revenue from U.S. Trust was $2.3 billion, up six percent, both driven by the same factors as described in the three-month discussion above.

Return on average allocated capital was 25.37 percent, down from 29.57 percent driven by the same factors as described in the three-month discussion above.

Net Migration Summary

GWIM results are impacted by the net migration of clients and their related deposit and loan balances to or from CBB, Global Banking, CRES and the ALM portfolio, as presented in the table below. Migrations result from the movement of clients between business segments to better align with client needs. During the first quarter of 2013, GWIM identified and transferred deposit balances of approximately $19 billion to CBB. Additionally, beginning in March 2013, the revenue and expense associated with GWIM clients who hold credit cards are included in GWIM; prior periods are in CBB.

Net Migration Summary
 
 
 
 
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions)
2014
 
2013
 
2014
 
2013
Total deposits, net – GWIM from (to) CBB and Global Banking
$
(41
)
 
$
627

 
$
1,794

 
$
(17,261
)
Total loans, net – GWIM from (to) CBB, CRES and the ALM portfolio
(40
)
 
(34
)
 
(58
)
 
(93
)

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)
September 30
2014
 
December 31
2013
Assets under management
$
888,006

 
$
821,449

Brokerage assets
1,073,858

 
1,045,122

Assets in custody
135,886

 
136,190

Deposits
238,710

 
244,901

Loans and leases (1)
125,625

 
118,776

Total client balances
$
2,462,085

 
$
2,366,438

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

The increase of $95.6 billion, or four percent, in client balances was driven by higher market valuation and long-term AUM flows.

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Global Banking
 
Three Months Ended September 30
 
 
 
Nine Months Ended September 30
 
 
(Dollars in millions)
2014
 
2013
 
% Change
 
2014

2013
 
% Change
Net interest income (FTE basis)
$
2,249

 
$
2,201

 
2
 %
 
$
6,791

 
$
6,613

 
3
 %
Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
Service charges
684

 
716

 
(4
)
 
2,050

 
2,103

 
(3
)
Investment banking fees
727

 
693

 
5

 
2,383

 
2,276

 
5

All other income
433

 
398

 
9

 
1,317

 
1,184

 
11

Total noninterest income
1,844

 
1,807

 
2

 
5,750

 
5,563

 
3

Total revenue, net of interest expense (FTE basis)
4,093

 
4,008

 
2

 
12,541

 
12,176

 
3

 
 
 
 
 
 
 
 
 
 
 
 
Provision for credit losses
(32
)
 
322

 
(110
)
 
365

 
634

 
(42
)
Noninterest expense
1,904

 
1,923

 
(1
)
 
5,832

 
5,608

 
4

Income before income taxes
2,221

 
1,763

 
26

 
6,344

 
5,934

 
7

Income tax expense (FTE basis)
807

 
626

 
29

 
2,342

 
2,216

 
6

Net income
$
1,414

 
$
1,137

 
24

 
$
4,002

 
$
3,718

 
8

 
 
 
 
 
 
 
 
 
 
 
 
Net interest yield (FTE basis)
2.52
%
 
2.87
%
 
 
 
2.60
%
 
3.07
%
 
 
Return on average allocated capital
18.09

 
19.63

 
 
 
17.27

 
21.62

 
 
Efficiency ratio (FTE basis)
46.54

 
47.94

 
 
 
46.50

 
46.05

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30
 
 
 
Nine Months Ended September 30
 
 
Average
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
Total loans and leases
$
267,047

 
$
260,085

 
3
 %
 
$
269,963

 
$
253,335

 
7
 %
Total earning assets
353,829

 
304,726

 
16

 
349,827

 
288,427

 
21

Total assets
395,185

 
346,412

 
14

 
393,094

 
330,251

 
19

Total deposits
265,721

 
239,189

 
11

 
260,398

 
229,206

 
14

Allocated capital
31,000

 
23,000

 
35

 
31,000

 
23,000

 
35

 
 
 
 
 
 
 
 
 
 
 
 
Period end
 
 
 
 
 
 
September 30
2014
 
December 31
2013
 
% Change
Total loans and leases
 
 
 
 
 
 
$
268,612

 
$
269,469

 
—
 %
Total earning assets
 
 
 
 
 
 
345,282

 
336,606

 
3

Total assets
 
 
 
 
 
 
386,919

 
378,659

 
2

Total deposits
 
 
 
 
 
 
255,177

 
265,171

 
(4
)

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 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.


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Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

Net income for Global Banking increased $277 million to $1.4 billion primarily driven by a reduction in the provision for credit losses and an increase in revenue. Revenue increased $85 million to $4.1 billion, reflecting higher investment banking fees and net interest income.

The provision for credit losses decreased $354 million to a benefit of $32 million as the prior-year period included increased reserves from loan growth. Noninterest expense of $1.9 billion remained relatively unchanged.

Return on average allocated capital was 18.09 percent, down from 19.63 percent as growth in earnings was more than offset by increased capital allocations. For more information on capital allocated to the business segments, see Business Segment Operations on page 28.

Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

Net income for Global Banking increased $284 million to $4.0 billion primarily driven by the same factors as described in the three-month discussion above, partially offset by higher noninterest expense. Revenue increased $365 million to $12.5 billion driven by the same factors as described in the three-month discussion above.

The provision for credit losses decreased $269 million to $365 million driven by improved credit quality in the current year, and the prior-year period included increased reserves from loan growth. Noninterest expense increased $224 million to $5.8 billion primarily from additional client-facing personnel expense and higher litigation expense.

Return on average allocated capital was 17.27 percent, down from 21.62 percent driven by the same factors as described in the three-month discussion above.

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Global Corporate and Global Commercial Banking

Global Corporate and Global Commercial Banking each include Business Lending and Global Transaction Services (formerly 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 Transaction 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, which exclude certain capital markets activity in Global Banking.

Global Corporate and Global Commercial Banking
 
 
 
 
 
Three Months Ended September 30
 
Global Corporate Banking
 
Global Commercial Banking
 
Total
(Dollars in millions)
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Revenue
 
 
 
 
 
 
 
 
 
 
 
Business Lending
$
878

 
$
891

 
$
932

 
$
960

 
$
1,810

 
$
1,851

Global Transaction Services
776

 
711

 
729

 
741

 
1,505

 
1,452

Total revenue, net of interest expense
$
1,654

 
$
1,602

 
$
1,661

 
$
1,701

 
$
3,315

 
$
3,303

 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
Average
 
 
 
 
 
 
 
 
 
 
 
Total loans and leases
$
127,534

 
$
128,805

 
$
139,499

 
$
131,303

 
$
267,033

 
$
260,108

Total deposits
147,451

 
129,056

 
118,270

 
110,090

 
265,721

 
239,146

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Revenue
 
 
 
 
 
 
 
 
 
 
 
Business Lending
$
2,621

 
$
2,609

 
$
2,946

 
$
2,956

 
$
5,567

 
$
5,565

Global Transaction Services
2,272

 
2,073

 
2,183

 
2,192

 
4,455

 
4,265

Total revenue, net of interest expense
$
4,893

 
$
4,682

 
$
5,129

 
$
5,148

 
$
10,022

 
$
9,830

 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
Average
 
 
 
 
 
 
 
 
 
 
 
Total loans and leases
$
129,513

 
$
124,802

 
$
140,436

 
$
128,526

 
$
269,949

 
$
253,328

Total deposits
143,803

 
123,946

 
116,596

 
105,218

 
260,399

 
229,164

 
 
 
 
 
 
 
 
 
 
 
 
Period end
 
 
 
 
 
 
 
 
 
 
 
Total loans and leases
$
130,029

 
$
132,682

 
$
138,581

 
$
134,481

 
$
268,610

 
$
267,163

Total deposits
139,541

 
149,095

 
115,637

 
113,364

 
255,178

 
262,459


Global Corporate and Global Commercial Banking revenue remained relatively unchanged for the three months ended September 30, 2014 compared to the same period in 2013. Global Corporate and Global Commercial Banking revenue increased $192 million for the nine months ended September 30, 2014 compared to the same period in 2013 due to higher revenue in Global Transaction Services.

Business Lending revenue in Global Corporate Banking and Global Commercial Banking declined $13 million and $28 million for the three months ended September 30, 2014 compared to the same period in 2013 primarily due to lower net interest margin and credit service charges. Business Lending revenue in Global Corporate Banking and Global Commercial Banking remained relatively unchanged for the nine months ended September 30, 2014 compared to the same period in 2013.


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Global Transaction Services revenue in Global Corporate Banking increased $65 million and $199 million for the three and nine months ended September 30, 2014 compared to the same periods in 2013 driven by the impact of growth in U.S. and non-U.S. deposit balances. Global Transaction Services revenue in Global Commercial Banking remained relatively unchanged for the three and nine months ended September 30, 2014 compared to the same periods in 2013.

Average loans and leases in Global Corporate and Global Commercial Banking increased three percent and seven percent for the three and nine months ended September 30, 2014 compared to the same periods in 2013 primarily driven by growth in the commercial and industrial and commercial real estate portfolios. Average deposits in Global Corporate and Global Commercial Banking increased 11 percent and 14 percent for the three and nine months ended September 30, 2014 compared to the same periods in 2013 due to client liquidity and international growth.

Investment Banking

Client teams and product specialists underwrite and distribute debt, equity and 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 activities performed by 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 September 30
 
Nine Months Ended September 30
 
Global Banking
 
Total Corporation
 
Global Banking
 
Total Corporation
(Dollars in millions)
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Products
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advisory
$
291

 
$
226

 
$
316

 
$
255

 
$
782

 
$
699

 
$
866

 
$
773

Debt issuance
318

 
343

 
784

 
809

 
1,153

 
1,177

 
2,700

 
2,818

Equity issuance
118

 
124

 
315

 
329

 
448

 
400

 
1,142

 
1,008

Gross investment banking fees
727

 
693

 
1,415

 
1,393

 
2,383

 
2,276

 
4,708

 
4,599

Self-led deals
(26
)
 
(30
)
 
(64
)
 
(96
)
 
(77
)
 
(65
)
 
(184
)
 
(211
)
Total investment banking fees
$
701

 
$
663

 
$
1,351

 
$
1,297

 
$
2,306

 
$
2,211

 
$
4,524

 
$
4,388


Total Corporation investment banking fees of $1.4 billion, excluding self-led deals, included within Global Banking and Global Markets, increased four percent for the three months ended September 30, 2014 compared to the same period in 2013 as strong advisory fees were partially offset by lower debt and equity underwriting fees. Total Corporation investment banking fees of $4.5 billion, excluding self-led deals, included within Global Banking and Global Markets, increased three percent for the nine months ended September 30, 2014 compared to the same period in 2013 as strong equity underwriting, investment-grade underwriting and advisory fees were partially offset by lower underwriting fees for other debt products.

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Global Markets
 
Three Months Ended September 30
 
 
 
Nine Months Ended September 30
 
 
(Dollars in millions)
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
Net interest income (FTE basis)
$
988

 
$
969

 
2
 %
 
$
2,937

 
$
3,086

 
(5
)%
Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
Investment and brokerage services
522

 
480

 
9

 
1,623

 
1,557

 
4

Investment banking fees
577

 
622

 
(7
)
 
2,073

 
1,969

 
5

Trading account profits
1,786

 
1,201

 
49

 
5,921

 
5,939

 
—

All other income (loss)
263

 
(53
)
 
n/m

 
1,177

 
(359
)
 
n/m

Total noninterest income
3,148

 
2,250

 
40

 
10,794

 
9,106

 
19

Total revenue, net of interest expense (FTE basis)
4,136

 
3,219

 
28

 
13,731

 
12,192

 
13

 
 
 
 
 
 
 
 
 
 
 
 
Provision for credit losses
45

 
47

 
(4
)
 
83

 
36

 
131

Noninterest expense
3,336

 
2,881

 
16

 
9,275

 
8,724

 
6

Income before income taxes
755

 
291

 
159

 
4,373

 
3,432

 
27

Income tax expense (FTE basis)
386

 
1,166

 
(67
)
 
1,595

 
2,233

 
(29
)
Net income (loss)
$
369

 
$
(875
)
 
(142
)
 
$
2,778

 
$
1,199

 
132

 
 
 
 
 
 
 
 
 
 
 
 
Return on average allocated capital
4.33
%
 
n/m

 
 
 
10.95
%
 
5.37
%
 
 
Efficiency ratio (FTE basis)
80.65

 
89.52
%
 
 
 
67.55

 
71.56

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30
 
 
 
Nine Months Ended September 30
 
 
Average
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
Total trading-related assets (1)
$
446,490

 
$
442,597

 
1
 %
 
$
447,886

 
$
479,052

 
(7
)%
Total loans and leases
62,939

 
64,491

 
(2
)
 
63,402

 
57,886

 
10

Total earning assets (1)
457,815

 
458,626

 
—

 
464,298

 
489,007

 
(5
)
Total assets
599,893

 
602,565

 
—

 
606,140

 
642,674

 
(6
)
Allocated capital
34,000

 
30,000

 
13

 
34,000

 
30,000

 
13

 
 
 
 
 
 
 
 
 
 
 
 
Period end
 
 
 
 
 
 
September 30
2014
 
December 31
2013
 
% Change
Total trading-related assets (1)
 
 
 
 
 
 
$
433,597

 
$
411,080

 
5
 %
Total loans and leases
 
 
 
 
 
 
62,645

 
67,381

 
(7
)
Total earning assets (1)
 
 
 
 
 
 
443,364

 
432,807

 
2

Total assets
 
 
 
 
 
 
598,668

 
575,482

 
4

(1) 
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 a broad range of financial products including government securities, equity and equity-linked securities, high-grade and high-yield corporate debt securities, syndicated loans, mortgage-backed 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 47.


48
Table of Contents

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

Net income for Global Markets increased $1.2 billion to $369 million. Excluding net DVA and charges in 2013 related to the U.K. corporate income tax rate reduction, net income decreased $290 million to $241 million primarily driven by increased litigation expense and lower investment banking fees, partially offset by improved trading performance. Net DVA gains were $205 million compared to losses of $444 million. Noninterest expense increased $455 million to $3.3 billion due to higher litigation expense and revenue-related incentives. The increase in litigation expense was primarily due to the non-deductible charge related to the FX Matters as discussed in Recent Events on page 5. The U.K. corporate income tax rate reduction enacted in the third quarter of 2013 resulted in a $1.1 billion charge to income tax expense for the remeasurement of certain deferred tax assets.

Average earning assets remained relatively unchanged.

The return on average allocated capital was 4.33 percent. Excluding net DVA and charges in 2013 related to the U.K. corporate income tax rate reduction, the return on average allocated capital was 2.84 percent compared to 7.04 percent in the prior-year period, reflecting lower net income and an increase in allocated capital. For more information on capital allocated to the business segments, see Business Segment Operations on page 28.

Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

Net income for Global Markets increased $1.6 billion to $2.8 billion. Excluding net DVA and charges in 2013 related to the U.K. corporate income tax rate reduction, net income decreased $128 million to $2.5 billion primarily driven by higher litigation expense, partially offset by a $240 million gain related to the initial public offering of an equity investment and higher investment banking income. The first quarter of 2013 also included a write-down of a monoline receivable due to the settlement of a legacy matter. Net DVA gains were $386 million compared to losses of $540 million. Noninterest expense increased $551 million to $9.3 billion due to higher litigation expense and technology costs and investment in infrastructure.

Average earning assets decreased $24.7 billion to $464.3 billion largely driven by a decrease in trading assets to further optimize the balance sheet for liquidity purposes. For additional information, see Executive Summary – Balance Sheet Overview on page 11.

The return on average allocated capital was 10.95 percent, up from 5.37 percent, largely driven by increased net income, partially offset by an increase in allocated capital. Excluding net DVA and charges in 2013 related to the U.K. corporate income tax rate reduction, the return on average allocated capital was 10.00 percent, a decrease from 11.90 percent, driven by the same factors as described in the three-month discussion above.


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Table of Contents

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, commercial mortgage-backed securities, RMBS, collateralized loan obligations (CLOs), 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 the impact of net 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 September 30
 
Nine Months Ended September 30
(Dollars in millions)
2014
 
2013
 
2014
 
2013
Sales and trading revenue
 
 
 
 
 
 
 
Fixed income, currencies and commodities
$
2,381

 
$
1,636

 
$
7,833

 
$
6,704

Equities
1,097

 
918

 
3,327

 
3,351

Total sales and trading revenue
$
3,478

 
$
2,554

 
$
11,160

 
$
10,055

 
 
 
 
 
 
 
 
Sales and trading revenue, excluding net DVA (3)
 
 
 
 
 
 
 
Fixed income, currencies and commodities
$
2,247

 
$
2,029

 
$
7,563

 
$
7,283

Equities
1,026

 
969

 
3,211

 
3,312

Total sales and trading revenue, excluding net DVA
$
3,273

 
$
2,998

 
$
10,774

 
$
10,595

(1) 
Includes FTE adjustments of $38 million and $127 million for the three and nine months ended September 30, 2014 compared to $43 million and $137 million for the same periods in 2013. For more information on sales and trading revenue, see Note 2 – Derivatives to the Consolidated Financial Statements.
(2) 
Includes Global Banking sales and trading revenue of $67 million and $219 million for the three and nine months ended September 30, 2014 compared to $108 million and $319 million for the same periods in 2013.
(3) 
FICC and Equities sales and trading revenue, excluding the impact of net DVA, is a non-GAAP financial measure. FICC net DVA gains were $134 million and $270 million for the three and nine months ended September 30, 2014 compared to net DVA losses of $393 million and $579 million for the same periods in 2013. Equities net DVA gains were $71 million and $116 million for the three and nine months ended September 30, 2014 compared to net DVA losses of $51 million and gains of $39 million for the same periods in 2013.

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

Fixed-income, currency and commodities (FICC) revenue, excluding net DVA, increased $218 million to $2.2 billion primarily due to strong results in currencies due to increased volatility as well as gains in mortgages and commodities, partially offset by declines in rates as a result of continued low volatility and lower client activity in that market. Equities revenue, excluding net DVA, increased $57 million to $1.0 billion due to increased client financing revenue. Sales and trading revenue included total commissions and brokerage fee revenue of $522 million, substantially all from equities, which remained relatively unchanged.

Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

FICC revenue, excluding net DVA, increased $280 million to $7.6 billion driven by improvement in the credit-related businesses as well as a $450 million write-down of a monoline receivable in the prior-year period related to the settlement of a legacy matter, partially offset by the cost of financing additional liquid assets. Equities revenue, excluding net DVA, decreased $101 million to $3.2 billion also due to financing additional liquid assets.


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Table of Contents

All Other
 
Three Months Ended September 30
 
 
 
Nine Months Ended September 30
 
 
(Dollars in millions)
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
Net interest income (FTE basis)
$
76

 
$
42

 
81
 %
 
$
(152
)
 
$
569

 
n/m

Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
Card income
93

 
79

 
18

 
267

 
245

 
9
 %
Equity investment income (loss)
(51
)
 
1,122

 
n/m

 
679

 
2,217

 
(69
)
Gains on sales of debt securities
410

 
347

 
18

 
1,149

 
866

 
33

All other loss
(593
)
 
(565
)
 
5

 
(1,851
)
 
(1,847
)
 
—

Total noninterest income
(141
)
 
983

 
n/m

 
244

 
1,481

 
(84
)
Total revenue, net of interest expense (FTE basis)
(65
)
 
1,025

 
n/m

 
92

 
2,050

 
(96
)
 
 
 
 
 
 
 
 
 
 
 
 
Provision for credit losses
(265
)
 
(549
)
 
(52
)
 
(646
)
 
(478
)
 
35

Noninterest expense
245

 
968

 
(75
)
 
2,405

 
3,357

 
(28
)
Income (loss) before income taxes
(45
)
 
606

 
n/m

 
(1,667
)
 
(829
)
 
101

Income tax benefit (FTE basis)
(545
)
 
(112
)
 
n/m

 
(2,078
)
 
(1,125
)
 
85

Net income
$
500

 
$
718

 
(30
)
 
$
411

 
$
296

 
39

 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30
 
 
 
Nine Months Ended September 30
 
 
Average
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
Loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
$
177,184

 
$
206,409

 
(14
)%
 
$
186,280

 
$
210,882

 
(12
)%
Non-U.S. credit card
11,784

 
10,633

 
11

 
11,700

 
10,757

 
9

Other
10,435

 
15,483

 
(33
)
 
11,077

 
16,999

 
(35
)
Total loans and leases
199,403

 
232,525

 
(14
)
 
209,057

 
238,638

 
(12
)
Total assets (1)
157,665

 
203,735

 
(23
)
 
166,318

 
228,217

 
(27
)
Total deposits
29,268

 
35,419

 
(17
)
 
33,147

 
35,063

 
(5
)
 
 
 
 
 
 
 
 
 
 
 
 
Period end
 
 
 
 
 
 
September 30
2014
 
December 31
2013
 
% Change
Loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
 
 
 
 
 
 
$
167,258

 
$
197,061

 
(15
)%
Non-U.S. credit card
 
 
 
 
 
 
11,433

 
11,541

 
(1
)
Other
 
 
 
 
 
 
9,665

 
12,088

 
(20
)
Total loans and leases
 
 
 
 
 
 
188,356

 
220,690

 
(15
)
Total assets (1)
 
 
 
 
 
 
154,280

 
167,554

 
(8
)
Total deposits
 
 
 
 
 
 
25,109

 
27,851

 
(10
)
(1) 
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 $601.9 billion and $593.5 billion for the three and nine months ended September 30, 2014 compared to $540.4 billion and $530.4 billion for the same periods in 2013, and $592.0 billion and $569.9 billion at September 30, 2014 and December 31, 2013.
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, the impact of certain allocation methodologies and accounting hedge ineffectiveness. The results of certain ALM activities are allocated to our business segments. For more information on our ALM activities, see Interest Rate Risk Management for Non-trading Activities on page 128. Equity investments include GPI which is comprised of a 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. In connection with our strategy to focus on our core businesses and to conform with the Volcker Rule, the GPI portfolio has been actively winding down over the last

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several years through a series of portfolio and individual asset sale transactions. Additionally, certain residential mortgage loans that are managed by Legacy Assets & Servicing are held in All Other.

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

Net income for All Other decreased $218 million to $500 million primarily due to a decrease of $1.2 billion in equity investment income, an increase of $232 million in U.K. PPI costs and a $284 million reduction in the benefit in the provision for credit losses, partially offset by a decrease of $723 million in noninterest expense and an increase of $433 million in the income tax benefit.

The benefit in the provision for credit losses declined $284 million to a benefit of $265 million driven by a slower pace of credit quality improvement related to the residential mortgage portfolio.

Noninterest expense decreased $723 million to $245 million primarily due to a decline in litigation expense and lower personnel expense. The income tax benefit was $545 million compared to a benefit of $112 million, with the increase driven by the release of tax reserves attributable to the resolution of certain examinations, and the change in pretax earnings.

Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

Net income for All Other increased $115 million to $411 million primarily due an increase of $283 million in gains on sales of debt securities, a $168 million improvement in the provision for credit losses, a decrease of $952 million in noninterest expense and an increase of $953 million in the income tax benefit, partially offset by a decrease of $1.5 billion in equity investment income and the negative impact of market-related premium amortization expense on debt securities.

The provision for credit losses improved $168 million to a benefit of $646 million primarily driven by the impact of net recoveries on loan sales, partially offset by a slower pace of credit quality improvement related to the residential mortgage portfolio.

Noninterest expense decreased $952 million to $2.4 billion primarily driven by the same factors as described in the three-month discussion above. The income tax benefit was $2.1 billion compared to a benefit of $1.1 billion, with the increase driven by the same factors as described in the three-month discussion above.


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Equity Investment Activity

The tables below present the components of equity investments included in All Other at September 30, 2014 and December 31, 2013, and also a reconciliation to the total consolidated equity investment income for the three and nine months ended September 30, 2014 and 2013.

Equity Investments
 
 
 
 
 
(Dollars in millions)
 
September 30
2014
 
December 31
2013
Global Principal Investments
 
$
1,007

 
$
1,604

Strategic and other investments
 
866

 
822

Total equity investments included in All Other
 
$
1,873

 
$
2,426

 
 
 
 
 
Equity Investment Income
 
 
 
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions)
2014
 
2013
 
2014
 
2013
Global Principal Investments
$
(37
)
 
$
122

 
$
6

 
$
278

Strategic and other investments
(14
)
 
1,000

 
673

 
1,939

Total equity investment income (loss) included in All Other
(51
)
 
1,122

 
679

 
2,217

Total equity investment income included in the business segments
60

 
62

 
471

 
210

Total consolidated equity investment income
$
9

 
$
1,184

 
$
1,150

 
$
2,427


Equity investments included in All Other decreased $553 million to $1.9 billion at September 30, 2014 compared to December 31, 2013, with the decrease due to sales in the GPI portfolio. GPI had unfunded equity commitments of $39 million at September 30, 2014 compared to $127 million at December 31, 2013.

Equity investment results included in All Other were a loss of $51 million and gain of $679 million for the three and nine months ended September 30, 2014, a decrease of $1.2 billion and $1.5 billion compared to the same periods in 2013. The decreases for the three- and nine-month periods were due to a $753 million gain on the sale of our remaining investment in CCB and a gain on the sale of a portion of an equity investment in the prior-year periods. Total Corporation equity investment income was $9 million and $1.2 billion for the three and nine months ended September 30, 2014, a decrease of $1.2 billion and $1.3 billion from the same periods in 2013, due to the same factors as described above, partially offset by a gain in 2014 related to the initial public offering of an equity investment in Global Markets.



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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 obligations and commitments, see Note 10 – Commitments and Contingencies to the Consolidated Financial Statements, Off-Balance Sheet Arrangements and Contractual Obligations on page 52 of the MD&A of the Corporation's 2013 Annual Report on Form 10-K, as well as Note 11 – Long-term Debt and Note 12 – Commitments and Contingencies to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K.

Representations and Warranties

We securitize first-lien residential mortgage loans generally in the form of RMBS guaranteed by the government-sponsored enterprises (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 have resulted in and may continue to 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 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.

For more information on accounting for representations and warranties and our representations and warranties repurchase claims and exposures, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees and Note 12 – Commitments and Contingencies to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K and Item 1A. Risk Factors of the Corporation's 2013 Annual Report on Form 10-K.

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, certain of which have been for significant amounts in lieu of a loan-by-loan review process, including with the GSEs, with four monoline insurers and with the Bank of New York Mellon (BNY Mellon), as trustee (the Trustee) for certain trusts. As a result of various settlements with the GSEs, we have resolved substantially all outstanding and potential representations and warranties repurchase claims on whole loans sold by legacy Bank of America and Countrywide Financial Corporation (Countrywide) to Fannie Mae (FNMA) and Freddie Mac (FHLMC) through June 30, 2012 and December 31, 2009, respectively.

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. These 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. Our liability in connection with the transactions and claims not covered by these settlements could be material to the Corporation's results of operations or cash flows for any particular reporting period.

BNY Mellon Settlement

The settlement with Bank of New York Mellon (BNY Mellon Settlement) remains subject to final court approval and certain other conditions. It is not currently possible to predict the ultimate outcome or timing of the court approval process, which includes appeals and could take a substantial period of time. On January 31, 2014, the court issued a decision, order and judgment approving the BNY Mellon Settlement. The court overruled the objections to the settlement, holding that the Trustee, BNY Mellon, acted in good faith, within its discretion and within the bounds of reasonableness in determining that the settlement agreement was in the best interests of the covered trusts. The court declined to approve the Trustee's conduct only with respect to the Trustee's consideration of a potential claim that a loan must be repurchased if the servicer modifies its terms. On February 21, 2014, final judgment was entered and the Trustee filed a notice of appeal regarding the court's ruling on loan modification claims in the settlement. Certain objectors to the settlement have filed cross-appeals appealing the court's approval of the settlement, some of whom have subsequently withdrawn their objections. All appeals were fully briefed by September 22, 2014, and oral argument occurred on October 23, 2014. The court's January 31, 2014 decision, order and judgment remain subject to these appeals, as well as a motion to reargue to be heard on February 26, 2015, and it is not possible at this time to predict when the court approval process will be completed.


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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 final court approval 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 from existing accruals and the estimated range of possible loss over existing accruals.

For a summary of the larger settlement actions and the related impact on the representations and warranties provision and liability, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements.

Unresolved Repurchase Claims

Repurchase claims received from a counterparty are considered unresolved repurchase claims until the underlying loan is repurchased, the claim is rescinded by the counterparty or the representations and warranties claims with respect to the applicable trust are settled, and fully and finally released. 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. 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. Table 16 presents unresolved repurchase claims by counterparty at September 30, 2014 and December 31, 2013.

Table 16
Unresolved Repurchase Claims by Counterparty
(Dollars in millions)
September 30
2014
 
December 31
2013
Private-label securitization trustees, whole-loan investors, including third-party securitization sponsors and other (1, 2, 3)
$
23,012

 
$
17,953

Monolines (4)
1,087

 
1,532

GSEs
70

 
170

Total unresolved repurchase claims
$
24,169

 
$
19,655

(1) 
At both September 30, 2014 and December 31, 2013, unresolved repurchase claims did not include repurchase demands of $1.2 billion where the Corporation believes that these demands are procedurally or substantively invalid.
(2) 
The total notional amount of unresolved repurchase claims does not include repurchase claims related to the trusts covered by the BNY Mellon Settlement.
(3) 
Includes $14.0 billion and $13.8 billion of claims based on individual file reviews and $9.0 billion and $4.1 billion of claims submitted without individual file reviews at September 30, 2014 and December 31, 2013.
(4) 
At September 30, 2014, substantially all of the unresolved monoline claims pertain to second-lien loans and are currently the subject of litigation with a single monoline insurer.

During the three months ended September 30, 2014, we received $2.4 billion in new repurchase claims, including $2.1 billion of claims submitted without individual loan file reviews and $249 million of claims based on individual loan file reviews submitted by private-label securitization trustees, $60 million submitted by the GSEs for both Countrywide and legacy Bank of America originations not covered by the bulk settlements with the GSEs, and $19 million submitted by whole-loan investors. During the three months ended September 30, 2014, $135 million in claims were resolved. Of the claims resolved, $47 million were resolved through rescissions and $88 million were resolved through mortgage repurchases and make-whole payments with GSEs, private-label securitization trustees and whole-loan investors.

During the nine months ended September 30, 2014, we received $6.1 billion in new repurchase claims, including $4.9 billion of claims submitted without individual loan file reviews and $698 million of claims based on individual loan file reviews submitted by private-label securitization trustees and a financial guarantee provider, $301 million submitted by the GSEs for both Countrywide and legacy Bank of America originations not covered by the bulk settlements with the GSEs, and $217 million submitted by whole-loan investors. During the nine months ended September 30, 2014, $1.8 billion in claims were resolved. Of the claims resolved, $856 million were resolved through settlement, $464 million were resolved through rescissions and $505 million were resolved through mortgage repurchases and make-whole payments with GSEs, private-label securitization trustees and whole-loan investors.


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Table of Contents

The increase in the notional amount of unresolved repurchase claims during the three and nine months ended September 30, 2014 is primarily due to: (1) continued submission of claims by private-label securitization trustees, (2) the level of detail, support and analysis accompanying such claims, which impact overall claim quality and, therefore, claims resolution, and (3) the lack of an established process to resolve disputes related to these claims. For example, claims submitted without individual file reviews generally lack the level of detail and analysis of individual loans found in other claims that is necessary to support a claim. We expect unresolved repurchase claims related to private-label securitizations to increase as such claims continue to be submitted and there is not an established process for the ultimate resolution of such claims on which there is a disagreement.

In addition to, and not included in, the total unresolved repurchase claims of $24.2 billion at September 30, 2014 are repurchase demands we have received from private-label securitization investors and a master servicer where we believe that these demands are procedurally or substantively invalid. The total amount outstanding of such demands was $1.2 billion at both September 30, 2014 and December 31, 2013, comprised of $935 million of demands received during 2012 and $272 million of demands related to trusts covered by the BNY Mellon Settlement. We do not believe that the aforementioned demands outstanding at September 30, 2014 are valid repurchase claims and, therefore, it is not possible to predict the resolution with respect to such demands.

Legacy companies sold $184.5 billion of loans originated between 2004 and 2008 into monoline-insured securitizations. At September 30, 2014 and December 31, 2013, for loans originated between 2004 and 2008, the unpaid principal balance of loans related to unresolved monoline repurchase claims was $1.1 billion and $1.5 billion. Substantially all of the remaining unresolved monoline claims pertain to second-lien loans and are currently the subject of litigation with a single monoline insurer. There may be additional claims or file requests in the future.

As a result of various settlements with the GSEs, we have resolved substantially all outstanding and potential representations and warranties repurchase claims on whole loans sold by legacy Bank of America and Countrywide to FNMA and FHLMC through June 30, 2012 and December 31, 2009, respectively. 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 $14.0 billion and loans with certain defects excluded from the settlements that we do not believe will be material, such as certain specified violations of the GSEs' charters, including fraud and title defects. As of September 30, 2014, of the $14.0 billion, approximately $11.4 billion in principal has been paid and $961 million in principal has defaulted or was severely delinquent. The notional amount of unresolved repurchase claims submitted by the GSEs was $60 million related to these vintages.

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. For more information on the representations and warranties liability and the corresponding estimated range of possible loss, see Off-Balance Sheet Arrangements and Contractual Obligations – Estimated Range of Possible Loss on page 59.

At September 30, 2014 and December 31, 2013, the liability for representations and warranties was $11.9 billion and $13.3 billion. For the three and nine months ended September 30, 2014, the representations and warranties provision was $167 million and $432 million compared to $323 million and $770 million for the same periods in 2013.

Our estimated liability at September 30, 2014 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. Although we have not recorded any representations and warranties liability for certain potential private-label securitization and whole-loan exposures where we have had little to no claim activity, or where the applicable statute of limitations has expired, these exposures are included in the estimated range of possible loss.


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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 $970 billion to investors other than GSEs (although the GSEs are investors in certain private-label securitizations), including $786 billion to private-label and whole-loan investors without monoline insurance and $184 billion with monoline insurance. Of the $970 billion, $571 billion in principal has been paid, $198 billion in principal has defaulted, $47 billion in principal was severely delinquent, and $154 billion in principal was current or less than 180 days past due at September 30, 2014.

Table 17 details the population of loans originated between 2004 and 2008 and sold in non-agency securitizations or as whole loans 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 September 30, 2014.

Table 17
Overview of Non-Agency Securitization and Whole-Loan Balances
 
Principal Balance
 
Defaulted or Severely Delinquent
(Dollars in billions)
Original
Principal Balance
 
Outstanding Principal Balance September 30
2014
 
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

 
$
16

 
$
3

 
$
7

 
$
10

 
$
1

 
$
2

 
$
2

 
$
5

Countrywide
716

 
157

 
38

 
148

 
186

 
24

 
44

 
44

 
74

Merrill Lynch
72

 
14

 
2

 
18

 
20

 
3

 
4

 
3

 
10

First Franklin
82

 
14

 
4

 
25

 
29

 
5

 
6

 
5

 
13

Total (1, 2)
$
970

 
$
201

 
$
47

 
$
198

 
$
245

 
$
33

 
$
56

 
$
54

 
$
102

By Product
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prime
$
302

 
$
58

 
$
7

 
$
27

 
$
34

 
$
2

 
$
6

 
$
7

 
$
19

Alt-A
173

 
46

 
10

 
39

 
49

 
7

 
12

 
11

 
19

Pay option
150

 
33

 
11

 
43

 
54

 
5

 
13

 
15

 
21

Subprime
251

 
51

 
15

 
69

 
84

 
17

 
20

 
16

 
31

Home equity
88

 
10

 
—

 
18

 
18

 
2

 
5

 
4

 
7

Other
6

 
3

 
4

 
2

 
6

 
—

 
—

 
1

 
5

Total
$
970

 
$
201

 
$
47

 
$
198

 
$
245

 
$
33

 
$
56

 
$
54

 
$
102

(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.

As it relates to private-label securitizations, a contractual liability to repurchase mortgage loans generally arises only if counterparties prove there is a breach of representations and warranties that materially and adversely affects the interest of the investor or all the investors in a securitization trust or of the monoline insurer or other financial guarantor (as applicable). We believe many of the loan defaults observed in these securitizations and whole-loan balances were 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 September 30, 2014, 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, $109 billion was defaulted or severely delinquent at September 30, 2014.


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Experience with Private-label Securitizations and Whole Loans

Legacy entities, and to a lesser extent Bank of America, sold loans to investors via private-label securitizations or as whole loans. 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 $785.8 billion, without monoline insurance, included in Table 17, were originated between 2004 and 2008. Of the $785.8 billion, $466.6 billion have been paid in full and $192.5 billion were defaulted or severely delinquent at September 30, 2014. At least 25 payments have been made on approximately 64 percent of the defaulted and severely delinquent loans. We have received approximately $31.8 billion of representations and warranties repurchase claims related to these vintages, including $22.6 billion from private-label securitization trustees and a financial guarantee provider, $8.4 billion from whole-loan investors and $816 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. In addition, private-label securitization trustees may have obtained loan files through other means, including litigation and administrative subpoenas, which may increase our total exposure.

A December 2013 decision by the New York intermediate appellate court held that, under New York law, which governs many RMBS trusts, the six-year statute of limitations starts to run at the time the representations and warranties are made, not the date when the repurchase demand was denied. That decision has been applied by the state and federal courts in several RMBS lawsuits not involving the Corporation, resulting in the dismissal as untimely of claims involving representations and warranties made more than six years prior to the initiation of the lawsuit. Unless overturned by New York's highest appellate court, which has taken the case for review, this decision would apply to claims and lawsuits brought against the Corporation where New York law governs. A significant amount of representations and warranties claims and/or lawsuits that we have received or may receive involve representations and warranties claims where the statute of limitations has expired under this ruling and has not been tolled by agreement, and which we therefore believe would be untimely. The Corporation believes this ruling may have had an influence on recent activity in requests for tolling agreements and the pace of lawsuits filed by private-label securitization trustees prior to the expiration of the statute of limitations. In addition, it is possible that in response to the statute of limitations rulings, parties seeking to pursue representations and warranties claims and/or lawsuits with respect to trusts where the statute of limitations for representations and warranties claims against the sponsor and/or issuer has run, may pursue alternate legal theories of recovery and/or assert claims against other contractual parties. For example, on June 18, 2014, a group of institutional investors filed six lawsuits against six trustees covering more than 2,200 RMBS trusts alleging failure to pursue representations and warranties claims and servicer defaults based upon alleged contractual, statutory and tort theories of liability. The Corporation and its affiliates have not been named as parties to these lawsuits. The impact on the Corporation, if any, of such alternative legal theories or assertions is unclear.

We have resolved $8.9 billion of the $31.8 billion of claims received from whole-loan and private-label securitization counterparties with losses of $2.0 billion. The majority of these resolved claims were from third-party whole-loan investors. Approximately $3.6 billion of these claims were resolved through repurchase or indemnification, $5.0 billion were rescinded by the investor and $331 million were resolved through the settlement with FHFA. At September 30, 2014, for loans originated between 2004 and 2008, the notional amount of unresolved repurchase claims submitted by private-label securitization trustees, whole-loan investors, including third-party securitization sponsors, and others was $22.9 billion. We have performed an initial review with respect to substantially all of these claims and do not believe a valid basis for repurchase has been established by the claimant. 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.

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, including certain private-label securitizations sponsored by third-party whole-loan investors, however, it did not provide sufficient experience to record a liability related to other 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, as well as certain private-label securitizations impacted by recent court rulings on the statute of limitations, 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. As discussed below, our estimated range of possible loss related to representations and warranties exposures as of September 30, 2014 included possible losses related to these whole-loan sales and private-label securitizations.


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The representations and warranties, as governed by the private-label securitization agreements, generally require that counterparties have the ability to both assert a claim and to actually prove that a loan has an actionable defect under the applicable contracts. While the Corporation believes the agreements for private-label securitizations generally contain less rigorous representations and warranties and place higher burdens on claimants seeking repurchases than the express provisions of comparable agreements with the GSEs, without regard to any variations that may have arisen as a result of dealings with the GSEs, the agreements generally include a representation that underwriting practices were prudent and customary. In the case of private-label securitization trustees and third-party sponsors, there is currently no established process in place for the parties to reach a conclusion on an individual loan if there is a disagreement on the resolution of the claim. Private-label securitization investors generally do not have the contractual right to demand repurchase of loans directly or the right to access loan files.

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). We had approximately 81,000 open MI rescission notices at September 30, 2014. This amount includes approximately 24,000 open MI rescission notices at September 30, 2014 pertaining to first-lien mortgages sold to the GSEs and loans HFI, of which approximately 15,000 are expected to be resolved when certain MI company settlement agreements have received the consent of the GSEs. At September 30, 2014, we also had approximately 9,000 open MI rescission notices pertaining principally to first-lien mortgages sold to other investors as well as 48,000 pertaining to second-lien mortgages which are implicated by ongoing litigation where no loan-level review is currently contemplated nor required to preserve the Corporation's legal rights. In this litigation, the litigating mortgage insurance company is also seeking bulk rescission of certain policies, separate and apart from loan-by-loan denials or rescissions. For additional information, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K.

Estimated Range of Possible Loss

We currently estimate that the range of possible loss for representations and warranties exposures could be up to $4 billion over existing accruals at September 30, 2014. The estimated range of possible loss reflects principally non-GSE exposures. It represents a reasonably possible loss, but 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.

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 RMBS litigation or 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 existing accruals or the estimated range of possible loss for litigation and regulatory matters disclosed in Note 10 – Commitments and Contingencies to the Consolidated Financial Statements; however, in light of the inherent uncertainties involved in these matters and the very large or indeterminate damages sought in some of these matters, an adverse outcome in one or more of these matters could be material to our results of operations or cash flows for any particular reporting period.

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, the applicable statute of limitations and a variety of other judgmental factors.

For more information on the methodology used to estimate the representations and warranties liability and the corresponding estimated range of possible loss, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements and Item 1A. Risk Factors of the Corporation's 2013 Annual Report on Form 10-K.

Department of Justice Settlement

On August 20, 2014, we reached a comprehensive settlement with the DoJ, the SEC and State Attorneys General from California, Delaware, Illinois, Kentucky, Maryland and New York (State AGs), all of which are members of the Residential Mortgage Backed Securities Working Group of the Financial Fraud Enforcement Task Force; the FHA; GNMA; and the FDIC. The claims primarily related to mortgage securitization, origination, sale and other specified conduct by Countrywide and Merrill Lynch prior to the Corporation's acquisition of those entities, relating to RMBS, CDOs and residential mortgage loans. The DoJ Settlement also resolved all pending RMBS claims against Bank of America entities brought by the FDIC.


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

Consumer relief will be in the form of mortgage modifications, including first-lien principal and forbearance forgiveness and second-lien extinguishments, low- to moderate-income mortgage originations, and community reinvestment and neighborhood stabilization efforts, with initiatives focused on communities experiencing, or at risk of, urban blight. This includes lien releases, uninhabitable and abandoned property demolition, and remediation and property donations. Also, we will support the expansion of available affordable rental housing. We have committed to complete delivery of the consumer relief by no later than August 31, 2018. The consumer relief is subject to oversight by an independent monitor.

The DoJ Settlement resolved matters pertaining to certain pending civil enforcement investigations, including investigations by the DoJ and the State AGs relating to RMBS, CDOs and related mortgage activities, including origination, by the Corporation, Countrywide, Merrill Lynch and their affiliates. The claims released include current and potential claims for securitization-related conduct occurring prior to January 1, 2009 under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). The DoJ Settlement also included origination releases with respect to all residential mortgage loans originated by the Corporation and its legacy entities that were sold to private-label trusts and securitized prior to January 1, 2009; all residential mortgage loans sold to the GSEs by the Corporation or Countrywide prior to December 31, 2013; and all FHA-guaranteed residential mortgage loans originated by the Corporation or Countrywide on or after May 1, 2009, on which claims were submitted to the FHA on or before December 31, 2013.

Certain civil RMBS actions filed by the DoJ and the SEC in the U.S. District Court for the Western District of North Carolina were resolved by the DoJ Settlement. As a result of the resolution of the SEC action, certain affiliates of the Corporation consented to be enjoined. When the injunctions are issued, the Corporation and certain of its affiliates will be disqualified from certain activities, potentially including the ability to sell certain third-party alternative investment products, unless they obtain waivers from such disqualifications. The Corporation and its affiliates have requested waivers from the disqualifications. If one or more of those waivers are not obtained, it may negatively affect certain of our business activities, which could impact our results of operations. For additional information, see Note 10 – Commitments and Contingencies to the Consolidated Financial Statements.

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. 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 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. 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 to the Corporation's results of operations or cash flows for any particular reporting period.

2011 OCC Consent Order and 2013 IFR Acceleration Agreement

For information on the 2011 OCC Consent Order and 2013 IFR Acceleration Agreement, see Off-Balance Sheet Arrangements and Contractual Obligations – 2011 OCC Consent Order and 2013 IFR Acceleration Agreement on page 57 of the MD&A of the Corporation's 2013 Annual Report on Form 10-K.


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National Mortgage Settlement

In March 2012, we entered into the National Mortgage Settlement with the DoJ, various federal regulatory agencies and 49 State Attorneys General to resolve federal and state investigations into certain residential mortgage origination, servicing and foreclosure practices. Our compliance with these servicing standards is subject to ongoing review by an independent monitor who has confirmed that we have fulfilled all national and state obligations with respect to borrower assistance.

For more information on the National Mortgage Settlement, see Off-Balance Sheet Arrangements and Contractual Obligations – National Mortgage Settlement on page 57 of the MD&A of the Corporation's 2013 Annual Report on Form 10-K.

Mortgage Electronic Registration Systems, Inc.

For information on Mortgage Electronic Registration Systems, Inc., see Off-Balance Sheet Arrangements and Contractual Obligations – Mortgage Electronic Registration Systems, Inc. on page 58 of the MD&A of the Corporation's 2013 Annual Report on Form 10-K.

Impact of Foreclosure Delays

Foreclosure delays impact our default-related servicing costs, which include mortgage-related assessments, waivers and similar costs, which have been declining since late 2012. We recorded $74 million of mortgage-related assessments, waivers and similar costs related to foreclosure delays in the nine months ended September 30, 2014 compared to $459 million in the same period in 2013. 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 or the DoJ Settlement. This scrutiny may extend beyond our pending foreclosure matters to issues arising out of alleged irregularities with respect to previously completed foreclosure activities. For more information on management's estimate of the aggregate range of possible loss and on regulatory investigations, see Note 10 – Commitments and Contingencies to the Consolidated Financial Statements.

Mortgage-related Settlements – Servicing Matters

In connection with the BNY Mellon Settlement, BANA has agreed to implement certain servicing changes related to loss mitigation activities. 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 has reduced the servicing fees payable to BANA. Upon final court approval of the BNY Mellon Settlement, failure to meet the established benchmarking standards for loans not in subservicing arrangements can trigger 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 has contributed 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.


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Regulatory Matters

Derivatives

Under Commodity Futures Trading Commission (CFTC) rules, swap dealers are now required to clear certain interest rate and index credit derivative transactions as well as execute those transactions on designated contract markets or swap execution facilities when facing all counterparty types unless either counterparty is exempt from the clearing mandate. The timing for margin and capital implementation remains unknown, although the prudential regulators and the CFTC have re-proposed, but not finalized, their margin rules for uncleared swaps.

In Europe, final rules for clearing certain interest rate swaps under the European Market Infrastructure Regulation have been published and are expected to take effect in February 2015, subject to certain phase-in provisions. Draft rules for clearing some credit default swaps and foreign exchange non-deliverable forwards have also been published. Final rules for margin requirements for non-cleared derivatives are expected by the end of 2014, with variation margin expected to apply from December 1, 2015 and initial margin phased in from December 1, 2015 to December 1, 2019.

Resolution Planning

The Federal Reserve and the FDIC require that BHCs with assets of $50 billion or more, as well as companies designated as systemically important by the Financial Stability Oversight Council, submit annually their plans for a rapid and orderly resolution in the event of material financial distress or failure. If both the Federal Reserve and the FDIC determine that our (or any other BHC's) plan is not credible and we fail to cure the deficiencies in a timely manner, the Federal Reserve and the FDIC may jointly impose more stringent capital, leverage or liquidity requirements or restrictions on growth, activities or operations of the Corporation. We submitted our 2014 plan in July 2014 and are required to update it annually.

In August 2014, the Federal Reserve and the FDIC completed their reviews of the resolution plans submitted in 2013 by 11 large, complex banking organizations, including Bank of America, and issued letters to each of these banking organizations. Separately, in August 2014, the Federal Reserve and the FDIC issued a joint press release stating that the Board of Directors of the FDIC had determined that the plans submitted by each of the 11 banks were not credible and do not facilitate an orderly resolution under the U.S. Bankruptcy Code. However, the Federal Reserve did not join the FDIC in its determination that the submitted plans were not credible.

Focus areas identified in the regulatory reviews include the amendment of certain early termination rights in financial contracts, continuity of shared services, operational capabilities for resolution preparedness and legal entity rationalization, including a holding company structure that supports resolvability. Management intends to address these focus areas in our next Resolution Plan, which must be submitted by July 2015.

Resolution Planning in the U.K.

In the U.K., the Prudential Regulation Authority (PRA) has issued rules requiring the submission of significant information about certain U.K.-incorporated subsidiaries and other financial institutions, as well as branches of non-U.K. banks located in the U.K. (including information on intra-group dependencies, legal entity separation and barriers to resolution) to allow the PRA to develop resolution plans. As a result of the PRA review, we could be required to take certain actions over the next several years which could impose operating costs and potentially result in the restructuring of certain business and subsidiaries.

Debit Interchange Fees

On July 31, 2013, the U.S. District Court for the District of Columbia issued a ruling regarding the Federal Reserve's 2011 rules implementing the Durbin Amendment. The ruling requires the Federal Reserve to reconsider the $0.21 per transaction cap on debit card interchange fees. However, on March 21, 2014, the U.S. Court of Appeals for the D.C. Circuit overturned the ruling, leaving the Federal Reserve's rule intact. On August 18, 2014, the merchant plaintiffs petitioned the U.S. Supreme Court to review the decision of the U.S. Court of Appeals for the D.C. Circuit. The U.S. Supreme Court has not yet indicated whether it will review the decision.

For more information on other significant regulatory matters, see Capital Management – Regulatory Capital on page 64, Note 10 – Commitments and Contingencies to the Consolidated Financial Statements herein, Regulatory Matters on page 59 of the MD&A of the Corporation's 2013 Annual Report on Form 10-K, and Item 1A. Risk Factors of the Corporation's 2013 Annual Report on Form 10-K. For more information on the SLR final rules, see Capital Management – Other Regulatory Capital Matters on page 71, and on the LCR final rules, see Liquidity Risk – Basel 3 Liquidity Standards on page 76.


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Credit Risk Retention

In October 2014, U.S. regulators jointly approved a final rule regarding credit risk retention that will, among other things, require sponsors in certain circumstances to retain at least five percent of the credit risk of the assets underlying certain ABS and MBS securitizations and would limit sponsors' ability to transfer or hedge that credit risk. We are evaluating the final rule and anticipate that it will likely adversely impact our ability to engage in certain types of MBS and ABS securitizations and resecuritizations. It will likely also impose additional operational and compliance costs, and may negatively influence the value, liquidity and transferability of some ABS or MBS, loans and other assets. However, the ultimate impacts remain unclear. The rule will become effective after it is published in the Federal Register, one year after for RMBS and two years after for all other asset classes.

Managing Risk

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 are approved annually by 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. For a more detailed discussion of our risk management activities, see the discussion below and pages 61 through 117 of the MD&A of the Corporation's 2013 Annual Report on Form 10-K.

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 incorrect assumptions, unsuitable business plans, ineffective strategy execution, or failure to respond in a timely manner to changes in the regulatory, macroeconomic and competitive environments, customer preferences, and technology developments in the geographic locations in which we operate.

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 test results, among other considerations. The chief executive officer and executive management team manage and act on significant strategic actions, such as divestitures, consolidation of legal entities or capital actions subsequent to required review and approval by the Board.

For more information on our strategic risk management activities, see page 65 of the MD&A of the Corporation's 2013 Annual Report on Form 10-K.


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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 potential 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. 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.

We set goals for capital ratios to meet key stakeholder expectations, including investors, regulators and rating agencies, and to achieve our financial performance objectives and strategic goals, while maintaining adequate capital, including during periods of stress. We assess capital adequacy at least on a quarterly basis to operate in a safe and sound manner and maintain adequate capital in relation to the risks associated with our business activities and strategy.

We conduct an Internal Capital Adequacy Assessment Process (ICAAP) on a quarterly basis. The ICAAP is a forward-looking assessment of our projected capital needs and resources, incorporating earnings, balance sheet and risk forecasts under baseline and adverse economic and market conditions. We utilize quarterly stress tests to assess the potential impacts to our balance sheet, earnings, regulatory capital and liquidity under a variety of stress scenarios. We perform qualitative risk assessments to identify and assess material risks not fully captured in our forecasts, stress tests or economic capital. We assess the capital impacts of proposed changes to regulatory capital requirements. Management assesses ICAAP results and provides documented quarterly assessments of the adequacy of our capital guidelines and capital position to the Board or its committees.

The Corporation periodically reviews capital allocated to its businesses and allocates capital annually during the strategic and capital planning processes. We utilize a methodology that considers the effect of regulatory capital requirements in addition to internal risk-based 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. For more information on the nature of these risks, see Managing Risk and Strategic Risk Management on page 63. The capital allocated to the business segments is referred to as allocated capital, which represents a non-GAAP financial measure. During the latest annual planning process, we made refinements to the amount of capital allocated to each of our businesses based on multiple considerations that included, but were not limited to, Basel 3 Standardized and Advanced risk-weighted assets, business segment exposures and risk profile, and strategic plans. As a result of this process, in 2014, we adjusted the amount of capital being allocated to our business segments. For more information on the refined methodology, see Business Segment Operations on page 28.

CCAR and Capital Planning

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 Comprehensive Capital Analysis and Review (CCAR) capital plan. The CCAR capital plan is the central element of the Federal Reserve's approach to ensure that large BHCs have adequate capital and robust processes for managing their capital.

On August 6, 2014, the Federal Reserve informed us that it did not object to the requested capital actions in our revised 2014 CCAR capital plan. The requested capital actions included an increase in the quarterly common stock dividend to $0.05 per share from $0.01 per share, but no additional common stock repurchases. The requested actions cover the period from the third quarter of 2014 through the first quarter of 2015. For more information on our previously announced 2014 capital actions, see Capital Management on page 64 of the Corporation's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014.

Regulatory Capital

As a financial services holding company, we are subject to regulatory capital rules issued by U.S. banking regulators. On January 1, 2014, we became subject to the Basel 3 rules, which include certain transition provisions through 2018. Basel 3 generally continues to be subject to interpretation by U.S. banking regulators. The Corporation and its primary affiliated banking entity, BANA, meet the definition of an advanced approaches bank and measure regulatory capital adequacy based on the Basel 3 rules. Through December 31, 2013, we were subject to the Basel 1 general risk-based capital rules which included 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 to Basel 1 (the Basel 1 – 2013 Rules). For more information on the regulatory capital amounts and calculations, see Basel 3 below.

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Basel 3

Basel 3 materially changes Tier 1 and Total capital calculations and formally establishes a common equity tier 1 capital ratio. Basel 3 introduces new minimum capital ratios and buffer requirements and a supplementary leverage ratio; changes the composition of regulatory capital; revises the adequately capitalized minimum requirements under the Prompt Corrective Action framework; expands and modifies the risk-sensitive calculation of risk-weighted assets for credit and market risk (the Advanced approaches); and introduces a Standardized approach for the calculation of risk-weighted assets. For more information on the supplementary leverage ratio, see Capital Management – Other Regulatory Capital Matters on page 71.

As an advanced approaches bank, under Basel 3, we are required to complete a qualification period (parallel run) to demonstrate compliance with the final Basel 3 rules to the satisfaction of U.S. banking regulators. Upon notification of approval by U.S. banking regulators to exit the parallel run, we will be required to calculate regulatory capital ratios and risk-weighted assets under both the Standardized approach 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. Prior to receipt of notification of approval, we are required to assess our capital adequacy under the Standardized approach only. 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. On January 1, 2015, common equity tier 1 capital will be included in the "well-capitalized" category.

Under the Basel 3 transition provisions in effect through December 31, 2014, the Standardized approach uses risk-weighted assets as measured under the Basel 1 – 2013 Rules in the determination of the Basel 3 Standardized approach capital ratios (Basel 3 Standardized – Transition). For more information on how risk-weighted assets are measured under the Basel 1 – 2013 Rules, see Capital Management – Regulatory Capital on page 65 of the MD&A of the Corporation's 2013 Annual Report on Form 10-K. Effective January 1, 2015, the Prompt Corrective Action framework is amended to reflect the new capital requirements under Basel 3.

Regulatory Capital Composition – Transition

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

Changes to the composition of regulatory capital under Basel 3, such as recognizing the impact of unrealized gains or losses on AFS debt securities in common equity tier 1 capital, are subject to a transition period where the impact is recognized in 20 percent annual increments. These regulatory capital adjustments and deductions will be fully recognized in 2018. The phase-in period for the new minimum capital ratio requirements and related buffers under Basel 3 is from January 1, 2014 through December 31, 2018. When presented on a fully phased-in basis, capital, risk-weighted assets and the capital ratios assume all regulatory capital adjustments and deductions are fully recognized. Table 18 summarizes how certain regulatory capital deductions and adjustments have been or will be transitioned from 2014 through 2018 for common equity tier 1 and Tier 1 capital.

Table 18
Summary of Certain Basel 3 Regulatory Capital Transition Provisions
Beginning on January 1 of each year
2014
 
2015
 
2016
 
2017
 
2018
Common equity tier 1 capital
 
 
 
 
 
 
 
 
 
Percent of total amount deducted from common equity tier 1 capital includes:
20%
 
40%
 
60%
 
80%
 
100%
Deferred tax assets arising from net operating loss and tax credit carryforwards; intangibles, other than mortgage servicing rights and goodwill; defined benefit pension fund net assets; net unrealized cumulative gains (losses) related to changes in own credit risk on liabilities, including derivatives, measured at fair value; direct and indirect investments in own common equity tier 1 capital instruments; certain amounts exceeding the threshold by 10 percent individually and 15 percent in aggregate
Percent of total amount used to adjust common equity tier 1 capital includes (1):
80%
 
60%
 
40%
 
20%
 
0%
Net unrealized gains (losses) on AFS debt and certain marketable equity securities recorded in accumulated OCI; employee benefit plan adjustments recorded in accumulated OCI
Tier 1 capital
 
 
 
 
 
 
 
 
 
Percent of total amount deducted from Tier 1 capital includes:
80%
 
60%
 
40%
 
20%
 
0%
Deferred tax assets arising from net operating loss and tax credit carryforwards; defined benefit pension fund net assets; net unrealized cumulative gains (losses) related to changes in own credit risk on liabilities, including derivatives, measured at fair value
(1) 
Represents the phase-out percentage of the exclusion by year (e.g., 20 percent of net unrealized gains (losses) on AFS debt and certain marketable equity securities recorded in accumulated OCI will be included in 2014).

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Additionally, Basel 3 revised the regulatory capital treatment for Trust Securities, requiring them to be partially transitioned from Tier 1 capital into Tier 2 capital in 2014 and 2015, until fully excluded from Tier 1 capital in 2016, and partially transitioned and excluded from Tier 2 capital beginning in 2016. The exclusion from Tier 2 capital starts at 40 percent on January 1, 2016, increasing 10 percent each year until the full amount is excluded from Tier 2 capital beginning on January 1, 2022. As of September 30, 2014, our qualifying Trust Securities were $2.9 billion (approximately 23 bps of Tier 1 capital) and will no longer qualify as Tier 1 capital or Tier 2 capital beginning in 2016, subject to the transition provisions.

Standardized Approach

The Basel 3 Standardized approach measures risk-weighted assets primarily for market risk and credit risk exposures. Exposures subject to market risk, as defined under the rules, are measured on a basis generally consistent with how market risk-weighted assets were measured under the Basel 1 – 2013 Rules. Credit risk exposures are measured by applying fixed risk weights to each exposure, determined based on the characteristics of the exposure, such as type of obligor, Organization for Economic Cooperation and Development (OECD) country risk code and maturity, among others. Under the Standardized approach, no distinction is made for variations in credit quality for corporate exposures, and the economic benefit of collateral is restricted to a limited list of eligible securities and cash. Some key differences between the Standardized and Advanced approaches are that the Advanced approaches include a measure of operational risk and a credit valuation adjustment (CVA) capital charge in credit risk and rely on internal analytical models to measure credit risk-weighted assets. We estimate our common equity tier 1 capital ratio under the Basel 3 Standardized approach, on a fully phased-in basis, to be 9.5 percent at September 30, 2014. As of September 30, 2014, we estimated that our Basel 3 Standardized common equity tier 1 capital would be $135.1 billion and total risk-weighted assets would be $1,418 billion, on a fully phased-in basis. This does not include the benefit of the removal of the surcharge applicable to the CRM. For a reconciliation of Basel 3 Standardized – Transition to Basel 3 Standardized estimates on a fully phased-in basis for common equity tier 1 capital and risk-weighted assets, see Table 21. Our estimates under the Basel 3 Standardized 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. Actual results could differ from those estimates and assumptions.

Advanced Approaches

Under the Basel 3 Advanced approaches, risk-weighted assets are determined primarily for market risk and credit risk, similar to the Standardized approach, and also incorporate operational risk. Market risk capital measurements are consistent with the Standardized approach, except for securitization exposures, where the Supervisory Formula Approach is also permitted, and certain differences arising from the inclusion of the CVA capital charge in the credit risk capital measurement. Credit risk exposures are measured using internal ratings-based models to determine the applicable risk weight by estimating the probability of default, loss-given default (LGD) and, in certain instances, exposure at default (EAD). The internal analytical models primarily rely on internal historical default and loss experience. Operational risk is measured using internal analytical models which rely on both internal and external operational loss experience and data. The calculations under Basel 3 require management to make estimates, assumptions and interpretations, including the probability of future events based on historical experience. Actual results could differ from those estimates and assumptions. The Basel 3 Advanced approaches require approval by the U.S. regulatory agencies of our internal analytical models used to calculate risk-weighted assets. We estimated our common equity tier 1 capital ratio under the Basel 3 Advanced approaches, on a fully phased-in basis, to be 9.6 percent at September 30, 2014. As of September 30, 2014, we estimated that our Basel 3 Advanced common equity tier 1 capital would be $135.1 billion and total risk-weighted assets would be $1,410 billion, on a fully phased-in basis. These estimates assume approval by U.S. banking regulators of our internal analytical models, but do not include the benefit of the removal of the surcharge applicable to the CRM. Our estimates under the Basel 3 Advanced approaches 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. If our internal analytical models are not approved, it would likely lead to an increase in our risk-weighted assets, which in some cases could be significant.


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Capital Composition and Ratios

Table 19 presents Bank of America Corporation's capital ratios and related information in accordance with Basel 3 Standardized – Transition as measured at September 30, 2014 and the Basel 1 – 2013 Rules at December 31, 2013.

Table 19
Bank of America Corporation Regulatory Capital
 
September 30, 2014
 
December 31, 2013
(Dollars in millions)
Ratio
 
Amount
 
Minimum
Required (1)
 
Ratio
 
Amount
 
Minimum
Required (1)
Common equity tier 1 capital (2)
12.0
%
 
$
152,444

 
4.0
%
 
n/a

 
n/a

 
n/a

Tier 1 common capital
n/a

 
n/a

 
n/a

 
10.9
%
 
$
141,522

 
n/a

Tier 1 capital
12.8

 
163,040

 
6.0

 
12.2

 
157,742

 
6.0
%
Total capital
15.8

 
200,759

 
10.0

 
15.1

 
196,567

 
10.0

Tier 1 leverage
7.9

 
163,040

 
4.0

 
7.7

 
157,742

 
4.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30
2014
 
December 31
2013
Risk-weighted assets (in billions) (2)
 
 
 
 
 
 
 
 
$
1,272

 
$
1,298

Adjusted quarterly average total assets (in billions) (3)
 
 
 
 
 
 
 
2,058

 
2,052

(1) 
Percent required to meet guidelines to be considered well capitalized under the Prompt Corrective Action framework, except for common equity tier 1 capital which reflects capital adequacy minimum requirements as an advanced approaches bank under Basel 3 during a transition period in 2014.
(2) 
On a pro-forma basis, under Basel 3 Standardized – Transition, the December 31, 2013 common equity tier 1 capital and ratio would have been $152.7 billion and 11.6 percent, and risk-weighted assets would have been $1,316 billion.
(3) 
Reflects adjusted average total assets for the three months ended September 30, 2014 and December 31, 2013.
n/a = not applicable

Common equity tier 1 capital under Basel 3 Standardized – Transition was $152.4 billion at September 30, 2014, an increase of $10.9 billion from Tier 1 common capital under the Basel 1 – 2013 Rules at December 31, 2013. The increase was largely attributable to the impact of certain transition provisions under Basel 3 Standardized – Transition, particularly in regard to deferred tax assets, and earnings. For more information on Basel 3 transition provisions, see Table 18. During the nine months ended September 30, 2014, Total capital increased $4.2 billion primarily driven by the increase in common equity tier 1 capital, partially offset by the impact of certain transition provisions under Basel 3 Standardized – Transition, particularly in regard to long-term debt that qualifies as Tier 2 capital. The Tier 1 leverage ratio increased 23 bps for the nine months ended September 30, 2014 compared to December 31, 2013 primarily driven by an increase in Tier 1 capital. For additional information, see Tables 19 and 20.


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At September 30, 2014, an increase or decrease in our common equity tier 1, Tier 1 or Total capital ratios by one bp would require a change of $127 million in common equity tier 1, Tier 1 or Total capital. We could also increase our common equity tier 1, Tier 1 or Total capital ratios by one bp on such date by a reduction in risk-weighted assets of $1.1 billion, $991 million or $805 million, respectively. An increase in our Tier 1 leverage ratio by one bp on such date would require $206 million of additional Tier 1 capital or a reduction of $2.6 billion in adjusted average assets.

Risk-weighted assets decreased $26 billion during the nine months ended September 30, 2014 to $1,272 billion primarily due to decreases in residential mortgage and consumer credit card balances, partially offset by the impact of certain transition provisions under the Basel 3 Standardized – Transition and an increase in commercial loans.

Table 20 presents the capital composition as measured under Basel 3 Standardized – Transition at September 30, 2014 and the Basel 1 – 2013 Rules at December 31, 2013.

Table 20
Capital Composition
(Dollars in millions)
September 30
2014
 
December 31
2013
Total common shareholders' equity
$
220,768

 
$
219,333

Goodwill
(69,243
)
 
(69,844
)
Intangibles, other than mortgage servicing rights and goodwill
(674
)
 
—

Nonqualifying intangible assets (includes core deposit intangibles, affinity relationships, customer relationships and other intangibles)
—

 
(4,263
)
Net unrealized losses on AFS debt securities and net losses on derivatives recorded in accumulated OCI, net-of-tax
2,391

 
5,538

Unamortized net periodic benefit costs recorded in accumulated OCI, net-of-tax
1,874

 
2,407

DVA related to liabilities and derivatives (1)
244

 
2,188

Deferred tax assets arising from net operating loss and tax credit carryforwards (2)
(2,625
)
 
(15,391
)
Other
(291
)
 
1,554

Common equity tier 1 capital (3)
152,444

 
141,522

Qualifying preferred stock, net of issuance cost
17,913

 
10,435

Deferred tax assets arising from net operating loss and tax credit carryforwards under transition
(10,502
)
 
—

DVA related to liabilities and derivatives under transition
974

 
—

Defined benefit pension fund assets
(664
)
 
—

Trust preferred securities
2,893

 
5,785

Other
(18
)
 
—

Total Tier 1 capital
163,040

 
157,742

Long-term debt qualifying as Tier 2 capital
16,006

 
21,175

Nonqualifying trust preferred securities subject to phase out from Tier 2 capital
3,865

 
—

Allowance for loan and lease losses
15,106

 
17,428

Reserve for unfunded lending commitments
529

 
484

Allowance for loan and lease losses exceeding 1.25 percent of risk-weighted assets
(950
)
 
(1,637
)
Other
3,163

 
1,375

Total capital
$
200,759

 
$
196,567

(1) 
Represents loss on structured liabilities and derivatives, net-of-tax, that is excluded from common equity tier 1, Tier 1 and Total capital for regulatory capital purposes.
(2) 
September 30, 2014 amount represents phase-in portion under Basel 3 Standardized – Transition. The December 31, 2013 amount represents the full Basel 1 deferred tax asset disallowance.
(3) 
Tier 1 common capital under the Basel 1 – 2013 Rules at December 31, 2013.


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Table 21 presents reconciliations of our common equity tier 1 capital and risk-weighted assets in accordance with the Basel 1 – 2013 Rules and Basel 3 Standardized – Transition to the Basel 3 Standardized approach fully phased-in estimates and Basel 3 Advanced approaches fully phased-in estimates at September 30, 2014 and December 31, 2013. Basel 3 regulatory capital ratios on a fully phased-in basis are considered non-GAAP financial measures until the end of the transition period on January 1, 2018 when adopted and required by U.S. banking regulators.

Table 21
Regulatory Capital Reconciliations (1, 2)
(Dollars in millions)
 
December 31
2013
Regulatory capital – Basel 1 to Basel 3 (fully phased-in)
Basel 1 Tier 1 capital
 
$
157,742

Deduction of qualifying preferred stock and trust preferred securities
 
(16,220
)
Basel 1 Tier 1 common capital
 
141,522

Deduction of defined benefit pension assets
 
(829
)
Deferred tax assets and threshold deductions (deferred tax asset temporary differences, MSRs and significant investments)
 
(5,459
)
Net unrealized losses in accumulated OCI on AFS debt and certain marketable equity securities, and employee benefit plans
 
(5,664
)
Other deductions, net
 
(1,624
)
Basel 3 common equity tier 1 capital (fully phased-in)
 
$
127,946

 
 
 
 
September 30
2014
 
Regulatory capital – Basel 3 transition to fully phased-in
 
 
Common equity tier 1 capital (transition)
$
152,444

 
Adjustments and deductions recognized in Tier 1 capital during transition (3)
(10,191
)
 
Other adjustments and deductions phased in during transition
(7,147
)
 
Common equity tier 1 capital (fully phased-in)
$
135,106

 
 
 
 
 
September 30
2014
December 31
2013
Risk-weighted assets – As reported to Basel 3 (fully phased-in)
 
 
As reported risk-weighted assets
$
1,271,723

$
1,297,593

Changes in risk-weighted assets from reported to fully phased-in
146,516

162,731

Basel 3 Standardized approach risk-weighted assets (fully phased-in)
1,418,239

1,460,324

Changes in risk-weighted assets for advanced models
(8,375
)
(133,027
)
Basel 3 Advanced approaches risk-weighted assets (fully phased-in)
$
1,409,864

$
1,327,297

 
 
 
Regulatory capital ratios
 
 
Basel 1 Tier 1 common
n/a

10.9
%
Basel 3 Standardized approach common equity tier 1 (transition)
12.0
%
n/a

Basel 3 Standardized approach common equity tier 1 (fully phased-in)
9.5

8.8

Basel 3 Advanced approaches common equity tier 1 (fully phased-in)
9.6

9.6

(1) 
Fully phased-in Basel 3 estimates are based on our current understanding of the Standardized and Advanced approaches under the Basel 3 rules, assuming all relevant regulatory model approvals, except for the potential reduction to risk-weighted assets resulting from the removal of the Comprehensive Risk Measure surcharge.
(2) 
On January 1, 2014, the Basel 3 rules became effective, subject to transition provisions primarily related to regulatory deductions and adjustments impacting common equity tier 1 capital and Tier 1 capital. We reported under the Basel 1 – 2013 Rules at December 31, 2013.
(3) 
For more information on the composition of adjustments and deductions, see Table 20.
n/a = not applicable


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

Prior to October 1, 2014, we operated our banking activities primarily under two charters: BANA and, to a lesser extent, FIA. On October 1, 2014, FIA was merged into BANA. Table 22 presents regulatory capital information for BANA and FIA at September 30, 2014 and December 31, 2013.

Table 22
Bank of America, N.A. and FIA Card Services, N.A. Regulatory Capital
 
September 30, 2014
 
December 31, 2013
 
Actual
 
 
 
Actual
 
 
(Dollars in millions)
Ratio
 
Amount
 
Minimum
Required (1)
 
Ratio
 
Amount
 
Minimum
Required (1)
Common equity tier 1 capital
 
 
 
 
 
 
 
 
 
 
 
Bank of America, N.A.
12.5
%
 
$
126,065

 
4.0
%
 
n/a

 
n/a

 
n/a

FIA Card Services, N.A.
16.1

 
18,277

 
4.0

 
n/a

 
n/a

 
n/a

Tier 1 capital
 
 
 
 
 
 
 
 
 
 
 
Bank of America, N.A.
12.5

 
126,065

 
6.0

 
12.3
%
 
$
125,886

 
6.0
%
FIA Card Services, N.A.
17.1

 
19,341

 
6.0

 
16.8

 
20,135

 
6.0

Total capital
 
 
 
 
 
 
 
 
 
 
 
Bank of America, N.A.
13.9

 
140,360

 
10.0

 
13.8

 
141,232

 
10.0

FIA Card Services, N.A.
18.3

 
20,792

 
10.0

 
18.1

 
21,672

 
10.0

Tier 1 leverage
 
 
 
 
 
 
 
 
 
 
 
Bank of America, N.A.
9.0

 
126,065

 
5.0

 
9.2

 
125,886

 
5.0

FIA Card Services, N.A.
13.5

 
19,341

 
5.0

 
12.9

 
20,135

 
5.0

(1) 
Percent required to meet guidelines to be considered well capitalized under the Prompt Corrective Action framework, except for common equity tier 1 capital which reflects capital adequacy minimum requirements as an advanced approaches bank under Basel 3 during a transition period in 2014.
n/a = not applicable

BANA's Tier 1 capital ratio under Basel 3 Standardized – Transition was 12.5 percent at September 30, 2014, an increase of 17 bps from December 31, 2013 as net income in excess of dividends to the parent company and lower risk-weighted assets were partially offset by the impact of net unrealized gains and losses in accumulated OCI under the Basel 3 transition provisions. The Total capital ratio increased seven bps to 13.9 percent at September 30, 2014 compared to December 31, 2013. The Tier 1 leverage ratio decreased 19 bps to 9.0 percent at September 30, 2014 compared to December 31, 2013. The increase in the Total capital ratio was driven by the same factors as the Tier 1 capital ratio. The decrease in the Tier 1 leverage ratio was driven by an increase in adjusted quarterly average total assets, partially offset by a slight increase in Tier 1 capital.

FIA's Tier 1 capital ratio under Basel 3 Standardized – Transition was 17.1 percent at September 30, 2014, an increase of 23 bps from December 31, 2013. The Total capital ratio increased 22 bps to 18.3 percent at September 30, 2014 compared to December 31, 2013. The Tier 1 leverage ratio increased 55 bps to 13.5 percent at September 30, 2014 compared to December 31, 2013. The increases in the Tier 1 capital and Total capital ratios were driven by a decrease in risk-weighted assets and earnings, partially offset by returns of capital to the parent company compared to December 31, 2013. The increase in the Tier 1 leverage ratio was driven by a decrease in adjusted quarterly average total assets, partially offset by a decrease in Tier 1 capital.

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Other Regulatory Capital Matters

Supplementary Leverage Ratio

Basel 3 also will require the calculation of a supplementary leverage ratio (SLR). The SLR is determined by dividing Tier 1 capital, using quarter-end Basel 3 Tier 1 capital on a fully phased-in basis, by supplementary leverage exposure calculated as the daily average of the sum of on-balance sheet as well as the simple average of certain off-balance sheet exposures at the end of each month in the quarter. Supplementary leverage exposure is comprised of all on-balance sheet assets, plus a measure of certain off-balance sheet exposures, including among other items, lending commitments, letters of credit, over-the-counter (OTC) derivatives, repo-style transactions and margin loan commitments. We will be required to disclose our SLR effective January 1, 2015. Effective January 1, 2018, the Corporation will be required to maintain a minimum SLR of three percent, plus a supplementary leverage buffer of two percent, for a total SLR of five percent. If the Corporation's supplementary leverage buffer is not greater than or equal to two percent, then the Corporation will be subject to mandatory limits on 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 is primarily BANA, will be required to maintain a minimum six percent SLR to be considered "well capitalized."

On September 3, 2014, U.S. banking regulators adopted a final rule to revise the definition and scope of the denominator of the SLR. The final rule prescribes the calculation of total leverage exposure, the frequency of calculation and required disclosures. The definition of total leverage exposure is revised to include the effective notional principal amount of credit derivatives and other similar instruments through which credit protection is sold. Calculations of the components of total leverage exposure for derivative and repo-style transactions are modified. The credit conversion factors (CCF) applied to certain off-balance sheet exposures are conformed to the graduated CCF used by the Standardized approach, subject to the minimum 10 percent credit conversion factor.

As of September 30, 2014, based on the proposed changes to the supplementary leverage exposure, we estimate the Corporation's SLR to be approximately 5.5 percent, which exceeds the 5.0 percent minimum for BHCs. On October 1, 2014, we successfully completed the merger of FIA and BANA. The estimated pro-forma SLR for the combined entity was approximately 6.8 percent.

Systemically Important Financial Institution Buffer

In November 2011, the Basel Committee published a methodology to identify global systemically important banks (G-SIBs) and impose an additional loss absorbency requirement through the introduction of a buffer of up to 3.5 percent for systemically important financial institutions (SIFIs). The assessment methodology relies on an indicator-based measurement approach to determine a score relative to the global banking industry. The chosen indicators are size, complexity, cross-jurisdictional activity, interconnectedness and substitutability/financial institution infrastructure. Institutions with the highest scores are designated as G-SIBs and are assigned to one of four loss absorbency buckets from one percent to 2.5 percent, in 0.5 percent increments based on each institution's relative score and supervisory judgment. The fifth loss absorbency bucket of 3.5 percent is currently empty and serves to discourage banks from becoming more systemically important.

In July 2013, the Basel Committee updated the November 2011 methodology to recalibrate the substitutability/financial institution infrastructure indicator by introducing a cap on the weighting of that component, and requiring the annual publication by the Financial Stability Board (FSB) of key information necessary to permit each G-SIB to calculate its score and observe its position within the buckets and relative to the industry total for each indicator. Every three years, beginning on January 1, 2016, the Basel Committee will reconsider and recalibrate the bucket thresholds. The Basel Committee and FSB expect banks to change their behavior in response to the incentives of the G-SIB framework, as well as other aspects of Basel 3 and jurisdiction-specific regulations.

The SIFI buffer requirement will begin to phase in effective January 2016, with full implementation in January 2019. Data from 2013, measured as of December 31, 2013, will be used to determine the SIFI buffer that will be effective for us in 2016.

As of September 30, 2014, we estimate our SIFI buffer would be 1.5 percent, based on the publication of the key information used in the SIFI methodology by the Basel Committee in November 2013, and considering the FSB's report, "Update of group of global systemically important banks." Our SIFI buffer could change each year based on our actions and those of our peers, as the score used to determine each G-SIB's SIFI buffer is based on the industry total and actions of U.S. banking regulators. If our score were to increase, we could be subject to a higher SIFI buffer requirement. U.S. banking regulators have not yet issued proposed or final rules related to the SIFI buffer or disclosure requirements.

For more information on regulatory capital, see Note 16 – Regulatory Requirements and Restrictions to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K.


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Broker-dealer Regulatory Capital and Securities Regulation

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 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 September 30, 2014, MLPF&S's regulatory net capital as defined by Rule 15c3-1 was $10.4 billion and exceeded the minimum requirement of $1.2 billion by $9.2 billion. MLPCC's net capital of $1.8 billion exceeded the minimum requirement of $316 million by $1.5 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 September 30, 2014, MLPF&S had tentative net capital and net capital in excess of the minimum and notification requirements.

Merrill Lynch International (MLI), a U.K. investment firm, is regulated by the PRA and the Financial Conduct Authority, and is subject to certain regulatory capital requirements. At September 30, 2014, MLI's capital resources were $32.2 billion which exceeded the minimum requirement of $17.9 billion with enough excess to cover any additional requirements as set by the regulators.

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Common and Preferred Stock Dividends

For a summary of our declared quarterly cash dividends on common stock during the third quarter of 2014 and through November 6, 2014, see Note 11 – Shareholders' Equity to the Consolidated Financial Statements. The Corporation has certain warrants outstanding and exercisable to purchase 150.4 million shares of its common stock, expiring on January 16, 2019 and warrants outstanding and exercisable to purchase 121.8 million shares of its common stock, expiring on October 18, 2018. These warrants were originally issued in connection with preferred stock issuances to the U.S. Treasury in 2009 and 2008, and are listed on the New York Stock Exchange. The terms of the warrants expiring on January 16, 2019 include a provision that requires an adjustment to the exercise price when the Corporation declares quarterly dividends at a level greater than $0.01 per common share. As a result of our third-quarter 2014 dividend of $0.05 per common share paid on September 26, 2014, the exercise price of the warrants expiring on January 16, 2019 was adjusted from $13.30 to $13.27. The exercise price of these warrants is subject to continued adjustment each time the quarterly cash dividend is in excess of $0.01 per common share to compensate the shareholder for dilution resulting from an increased dividend, including as a result of the declaration of a quarterly common stock dividend of $0.05 per common share payable on December 26, 2014 to shareholders of record on December 5, 2014. The warrants expiring on October 18, 2018 also contain this anti-dilution provision except the adjustment is triggered only when the Corporation declares quarterly dividends at a level greater than $0.32 per common share.

Table 23 is a summary of our cash dividend declarations on preferred stock during the third quarter of 2014 and through November 6, 2014. During the third quarter of 2014, cash dividends declared on preferred stock were $238 million. For more information on preferred stock, including the preferred issuances of Series X and Series Z, see Note 11 – Shareholders' Equity to the Consolidated Financial Statements.

Table 23
 
 
 
 
 
 
 
 
 
 
 
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

 
August 6, 2014
 
October 10, 2014
 
October 24, 2014
 
7.00
%
 
$
1.75


 
 
October 23, 2014
 
January 9, 2015
 
January 23, 2015
 
7.00

 
1.75

Series D (2)
$
654

 
July 9, 2014
 
August 29, 2014
 
September 15, 2014
 
6.204
%
 
$
0.38775

 
 
 
October 9, 2014
 
November 28, 2014
 
December 15, 2014
 
6.204

 
0.38775

Series E (2)
$
317

 
July 9, 2014
 
July 31, 2014
 
August 15, 2014
 
Floating

 
$
0.25556

 
 
 
October 9, 2014
 
October 31, 2014
 
November 17, 2014
 
Floating

 
0.25556

Series F
$
141

 
July 9, 2014
 
August 29, 2014
 
September 15, 2014
 
Floating

 
$
1,022.22222

 
 
 
October 9, 2014
 
November 28, 2014
 
December 15, 2014
 
Floating

 
1,011.11111

Series G
$
493

 
July 9, 2014
 
August 29, 2014
 
September 15, 2014
 
Adjustable

 
$
1,022.22222

 
 
 
October 9, 2014
 
November 28, 2014
 
December 15, 2014
 
Adjustable

 
1,011.11111

Series I (2)
$
365

 
July 9, 2014
 
September 15, 2014
 
October 1, 2014
 
6.625
%
 
$
0.4140625

 
 
 
October 9, 2014
 
December 15, 2014
 
January 2, 2015
 
6.625

 
0.4140625

Series K (3, 4)
$
1,544

 
July 9, 2014
 
July 15, 2014
 
July 30, 2014
 
Fixed-to-floating

 
$
40.00

Series L
$
3,080

 
September 16, 2014
 
October 1, 2014
 
October 30, 2014
 
7.25
%
 
$
18.125

Series M (3, 4)
$
1,310

 
October 9, 2014
 
October 31, 2014
 
November 17, 2014
 
Fixed-to-floating

 
$
40.625

Series T
$
5,000

 
August 6, 2014
 
September 25, 2014
 
October 10, 2014
 
6.00
%
 
$
1,500.00

 
 
 
October 23, 2014
 
December 25, 2014
 
January 10, 2015
 
6.00

 
1,500.00

Series U (3, 4)
$
1,000

 
October 9, 2014
 
November 15, 2014
 
December 1, 2014
 
Fixed-to-floating

 
$
26.00

Series V (3,4)
$
1,500

 
October 9, 2014
 
December 1, 2014
 
December 17, 2014
 
Fixed-to-floating

 
$
25.625

Series W (2)
$
1,100

 
October 9, 2014
 
November 15, 2014
 
December 9, 2014
 
Fixed

 
$
0.41406

(1)
Dividends are cumulative.
(2)
Dividends per depositary share, each representing a 1/1,000th interest in a share of preferred stock.
(3) 
Initially pays dividends semi-annually.
(4) 
Dividends per depositary share, each representing a 1/25th interest in a share of preferred stock.




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Table of Contents

Table 23
 
 
 
 
 
 
 
 
 
 
 
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 (5)
$
98

 
July 9, 2014
 
August 15, 2014
 
August 28, 2014
 
Floating

 
$
0.18750

 
 
 
October 9, 2014
 
November 15, 2014
 
November 28, 2014
 
Floating

 
0.18750

Series 2 (5)
$
299

 
July 9, 2014
 
August 15, 2014
 
August 28, 2014
 
Floating

 
$
0.19167

 
 
 
October 9, 2014
 
November 15, 2014
 
November 28, 2014
 
Floating

 
0.19167

Series 3 (5)
$
653

 
July 9, 2014
 
August 15, 2014
 
August 28, 2014
 
6.375
%
 
$
0.3984375

 
 
 
October 9, 2014
 
November 15, 2014
 
November 28, 2014
 
6.375

 
0.3984375

Series 4 (5)
$
210

 
July 9, 2014
 
August 15, 2014
 
August 28, 2014
 
Floating

 
$
0.25556

 
 
 
October 9, 2014
 
November 15, 2014
 
November 28, 2014
 
Floating

 
0.25556

Series 5 (5)
$
422

 
July 9, 2014
 
August 1, 2014
 
August 21, 2014
 
Floating

 
$
0.25556

 
 
 
October 9, 2014
 
November 1, 2014
 
November 21, 2014
 
Floating

 
0.25556

(5) 
Dividends per depositary share, each representing a 1/1,200th interest in a share of preferred stock.

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 71 of the MD&A of the Corporation's 2013 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. Our Global Excess Liquidity Sources are similar in composition to what qualifies as High Quality Liquid Assets (HQLA) under the final LCR rules. For more information on the final rulemaking, see Liquidity Risk – Basel 3 Liquidity Standards on page 76.

Our Global Excess Liquidity Sources were $429 billion and $376 billion at September 30, 2014 and December 31, 2013 and were maintained as presented in Table 24.


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Table 24
Global Excess Liquidity Sources
(Dollars in billions)
September 30
2014
 
December 31
2013
 
Average for Three Months Ended September 30, 2014
Parent company
$
93

 
$
95

 
$
89

Bank subsidiaries
302

 
249

 
307

Other regulated entities
34

 
32

 
34

Total Global Excess Liquidity Sources
$
429

 
$
376

 
$
430


As shown in Table 24, parent company Global Excess Liquidity Sources totaled $93 billion and $95 billion at September 30, 2014 and December 31, 2013. The decrease in parent company liquidity was primarily due to the impact of litigation settlements, partially offset by bank subsidiary inflows. Typically, parent company cash is deposited with BANA.

Global Excess Liquidity Sources available to our bank subsidiaries totaled $302 billion and $249 billion at September 30, 2014 and December 31, 2013. The increase in bank subsidiaries' liquidity was primarily due to the decrease in loans and increased long-term debt, partially offset by dividends and returns of capital to the parent company. Liquidity amounts at bank subsidiaries exclude the cash deposited by the parent company. Our bank subsidiaries can also generate incremental liquidity by pledging a range of other unencumbered loans and securities to certain Federal Home Loan Banks (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 $209 billion and $218 billion at September 30, 2014 and December 31, 2013. 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 non-bank subsidiaries with prior regulatory approval.

Global Excess Liquidity Sources available to our other regulated entities totaled $34 billion and $32 billion at September 30, 2014 and December 31, 2013. Our other regulated entities also held other unencumbered investment-grade securities and equities that we believe could be used to generate additional liquidity. Liquidity held in an other regulated entity is primarily available to meet the obligations of that entity and transfers to the parent company or to any other subsidiary may be subject to prior regulatory approval due to regulatory restrictions and minimum requirements.

Table 25 presents the composition of Global Excess Liquidity Sources at September 30, 2014 and December 31, 2013.

Table 25
Global Excess Liquidity Sources Composition
(Dollars in billions)
September 30
2014
 
December 31
2013
Cash on deposit
$
89

 
$
90

U.S. Treasuries
62

 
20

U.S. agency securities and mortgage-backed securities
255

 
245

Non-U.S. government and supranational securities
23

 
21

Total Global Excess Liquidity Sources
$
429

 
$
376


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, our bank subsidiaries and other regulated entities. 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. 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 38 months at September 30, 2014. For purposes of calculating time-to-required funding at September 30, 2014, we have included in the amount of unsecured contractual obligations $8 billion related to the DoJ Settlement and $8.6 billion related to the BNY Mellon Settlement. In October 2014, we paid $9.2 billion related to the DoJ Settlement of which $7.8 billion was funded by the parent company. The BNY Mellon Settlement is subject to final court approval and certain other conditions, and the timing of payment is not certain.

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We utilize liquidity stress models to assist us in determining the appropriate amounts of excess liquidity to maintain at the parent company, our bank subsidiaries and other regulated entities. 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

The Basel Committee has issued two liquidity risk-related standards that are considered part of the Basel 3 liquidity standards: the LCR and the Net Stable Funding Ratio (NSFR). The LCR is calculated as the amount of a financial institution's unencumbered, HQLA relative to the estimated net cash outflows the institution could encounter over a 30-day period of significant liquidity stress, expressed as a percentage. The Basel Committee's liquidity risk-related standards do not directly apply to U.S. financial institutions currently, and only apply once U.S. rules are finalized by the U.S. banking regulators as has occurred for LCR.

On September 3, 2014, the U.S. banking regulators finalized LCR requirements for the largest U.S. financial institutions on a consolidated basis and for their subsidiary depository institutions with total assets greater than $10 billion. Under the final rule, an initial minimum LCR of 80 percent will be required in January 2015, and will thereafter increase in 10 percentage point increments annually through January 2017. These minimum requirements will be applicable to the Corporation on a consolidated basis and to our insured depository institutions. We expect to meet or exceed the final LCR requirements within the regulatory timelines. For more information on our balance sheet actions to reduce risk and increase liquidity related to LCR, see Executive Summary – Balance Sheet Overview on page 11.

On October 31, 2014, the Basel Committee issued a final standard for the NSFR, the standard that is intended to reduce funding risk over a longer time horizon. The NSFR is designed to ensure an appropriate amount of stable funding, generally capital and liabilities maturing beyond one year, given the mix of assets and off-balance sheet items. The final standard aligns the NSFR to the LCR and gives more credit to a wider range of funding. The final standard also includes adjustments to the stable funding required for certain types of assets, some of which reduce the stable funding requirement and some of which increase it. Assuming adoption by the U.S. banking regulators, we expect to meet the final NSFR requirement within the regulatory timelines.


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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 $1.11 trillion and $1.12 trillion at September 30, 2014 and December 31, 2013. 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 FDIC. 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 credit card securitizations and securitizations with GSEs, the FHA and private-label investors, as well as FHLB loans. During the three and nine months ended September 30, 2014, $1.1 billion and $4.1 billion of new senior debt was issued to third-party investors from the credit card securitization trusts.

Our trading activities in other regulated entities 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 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. For more information on secured financing agreements, see Note 9 – Federal Funds Sold or Purchased, Securities Financing Agreements and Short-term Borrowings to the Consolidated Financial Statements.

We issue the majority of our long-term unsecured debt at the parent company. During the three and nine months ended September 30, 2014, we issued $8.3 billion and $26.5 billion of long-term unsecured debt, including structured liabilities of $756 million and $1.9 billion, a majority of which were issued at the parent company. Additionally, in October 2014, we issued $2.0 billion of 4.25% subordinated notes due October 2026. We 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. There were no new issuances through BANA during the three months ended September 30, 2014 and $3.3 billion during the nine months ended September 30, 2014. 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.

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Table 26 presents the carrying value of aggregate annual contractual maturities of long-term debt at September 30, 2014. During the nine months ended September 30, 2014, we had total long-term debt maturities and purchases of $44.6 billion consisting of $29.3 billion for Bank of America Corporation, $519 million for Bank of America, N.A., $6.1 billion of other debt and $8.7 billion of consolidated variable interest entities (VIEs).

Table 26
Long-term Debt By Maturity
 
Remainder of
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions)
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
 
Total
Bank of America Corporation
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior notes
$
2,171

 
$
15,086

 
$
17,613

 
$
19,217

 
$
20,084

 
$
55,845

 
$
130,016

Senior structured notes
1,308

 
5,666

 
2,984

 
1,821

 
1,922

 
10,342

 
24,043

Subordinated notes
—

 
1,232

 
5,126

 
5,405

 
3,091

 
12,255

 
27,109

Junior subordinated notes
—

 
—

 
—

 
—

 
—

 
7,266

 
7,266

Total Bank of America Corporation
3,479

 
21,984

 
25,723

 
26,443

 
25,097

 
85,708

 
188,434

Bank of America, N.A.
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior notes
38

 
765

 
2,496

 
5,160

 
—

 
147

 
8,606

Subordinated notes
—

 
—

 
1,072

 
3,575

 
—

 
1,634

 
6,281

Advances from Federal Home Loan Banks
750

 
4,503

 
6,003

 
10

 
11

 
158

 
11,435

Total Bank of America, N.A.
788

 
5,268

 
9,571

 
8,745

 
11

 
1,939

 
26,322

Other debt
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior notes
—

 
23

 
—

 
1

 
—

 
—

 
24

Structured liabilities
780

 
2,446

 
2,126

 
2,420

 
1,297

 
7,849

 
16,918

Junior subordinated notes
—

 
—

 
—

 
—

 
—

 
405

 
405

Other
201

 
55

 
929

 
432

 
44

 
447

 
2,108

Total other debt
981

 
2,524

 
3,055

 
2,853

 
1,341

 
8,701

 
19,455

Total long-term debt excluding consolidated VIEs
5,248

 
29,776

 
38,349

 
38,041

 
26,449

 
96,348

 
234,211

Long-term debt of consolidated VIEs
1,565

 
1,192

 
1,662

 
3,827

 
119

 
7,539

 
15,904

Total long-term debt
$
6,813

 
$
30,968

 
$
40,011

 
$
41,868

 
$
26,568

 
$
103,887

 
$
250,115


Table 27 presents our long-term debt by major currency at September 30, 2014 and December 31, 2013.

Table 27
Long-term Debt By Major Currency
(Dollars in millions)
September 30
2014
 
December 31
2013
U.S. Dollar
$
193,046

 
$
176,294

Euro
32,478

 
46,029

British Pound
8,606

 
9,772

Japanese Yen
7,890

 
9,115

Australian Dollar
2,376

 
1,870

Canadian Dollar
1,875

 
2,402

Swiss Franc
1,173

 
1,274

Other
2,671

 
2,918

Total long-term debt
$
250,115

 
$
249,674


Total long-term debt remained relatively unchanged at September 30, 2014 compared to December 31, 2013. 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 other regulated entities may make markets in our debt instruments to provide liquidity for investors. For more information on long-term debt funding, see Note 11 – Long-term Debt to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K and for more information regarding funding and liquidity risk management, see page 71 of the MD&A of the Corporation's 2013 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 Non-trading Activities on page 128.

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 $41.8 billion and $48.4 billion at September 30, 2014 and December 31, 2013.

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 OTC derivatives. Thus, it is our objective to maintain high-quality credit ratings, and management maintains an active dialogue with the rating agencies.

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, and they 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.

All three agencies have indicated that, as a systemically important financial institution, the senior credit ratings of the Corporation and Bank of America, N.A. (or in the case of Moody's Investors Service, Inc. (Moody's), only the ratings of Bank of America, N.A.) currently reflect the 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.


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On September 29, 2014, Standard & Poor's Ratings Services (S&P) completed its application of its newly adopted hybrid security rating criteria to U.S. banks. As a result, and consistent with its treatment of other large U.S. banks, S&P downgraded the ratings of Bank of America's preferred stock and trust preferred securities to BB from BB+. At the same time, the agency affirmed Bank of America's subordinated debt rating at BBB+. Also, on August 22, 2014, S&P affirmed Bank of America's ratings following the announcement of the DoJ Settlement. On March 26, 2014, Fitch Ratings (Fitch) concluded their periodic review of 12 large, complex securities trading and universal banks, including Bank of America Corporation. As a result of this review, Fitch affirmed all of the Corporation's credit ratings and revised its outlook on the ratings to negative from stable. The revised outlook reflects Fitch's expectation that the probability of the U.S. government providing support to a systemically important financial institution during a crisis is likely to decline due to the orderly liquidation provisions of the Financial Reform Act. On November 14, 2013, Moody's concluded its review of the ratings for Bank of America and certain other systemically important U.S. BHCs, affirming our current ratings and noting that those ratings no longer incorporate any uplift for U.S. government support. Concurrently, Moody's upgraded Bank of America, N.A.'s senior debt and stand-alone ratings by one notch, citing a number of positive developments at Bank of America. Moody's also moved its outlook for all of our ratings to stable.

Table 28 presents the Corporation's current long-term/short-term senior debt ratings and outlooks expressed by the rating agencies.

Table 28
Senior Debt Ratings
 
 
Moody's Investors Service
 
Standard & Poor's
 
Fitch Ratings
 
Long-term
 
Short-term
 
Outlook
 
Long-term
 
Short-term
 
Outlook
 
Long-term
 
Short-term
 
Outlook
Bank of America Corporation
Baa2
 
P-2
 
Stable
 
A-
 
A-2
 
Negative
 
A
 
F1
 
Negative
Bank of America, N.A.
A2
 
P-1
 
Stable
 
A
 
A-1
 
Negative
 
A
 
F1
 
Negative
Merrill Lynch, Pierce, Fenner & Smith
NR
 
NR
 
NR
 
A
 
A-1
 
Negative
 
A
 
F1
 
Negative
Merrill Lynch International
NR
 
NR
 
NR
 
A
 
A-1
 
Negative
 
A
 
F1
 
Negative
NR = not rated

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.

Table 29 presents the amount of additional collateral contractually required by derivative contracts and other trading agreements at September 30, 2014 if the rating agencies had downgraded their long-term senior debt ratings for the Corporation or certain subsidiaries by one incremental notch and by an additional second incremental notch.

Table 29
Additional Collateral Required to be Posted Upon Downgrade
 
September 30, 2014
(Dollars in millions)
One incremental notch
 
Second incremental notch
Bank of America Corporation
$
1,326

 
$
3,136

Bank of America, N.A. and subsidiaries (1)
1,020

 
2,137

(1) 
Included in Bank of America Corporation collateral requirements in this table.


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Table 30 presents the derivative liability that would be subject to unilateral termination by counterparties and the amounts of collateral that would have been posted at September 30, 2014 if the rating agencies had downgraded their long-term senior debt ratings for the Corporation or certain subsidiaries by one incremental notch and by an additional second incremental notch.

Table 30
Derivative Liability Subject to Unilateral Termination Upon Downgrade
 
September 30, 2014
(Dollars in millions)
One incremental notch
 
Second incremental notch
Derivative liability
$
1,435

 
$
2,824

Collateral posted
1,273

 
2,193


While certain potential impacts are contractual and quantifiable, the full scope of the consequences of a credit rating 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 company'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 75.

For more information on 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 2 – Derivatives to the Consolidated Financial Statements and Item 1A. Risk Factors of the Corporation's 2013 Annual Report on Form 10-K.

On June 6, 2014, S&P affirmed its AA+ long-term and A-1+ short-term sovereign credit rating on the U.S. government with a stable outlook. On March 21, 2014, Fitch affirmed its AAA long-term and F1+ short-term sovereign credit rating on the U.S. government with a stable outlook. This resolved the rating watch negative that was placed on the ratings on October 15, 2013. 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.


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Credit Risk Management

Credit quality continued to improve during the third quarter of 2014 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. For additional information, see Executive Summary – Third-Quarter 2014 Economic and Business Environment on page 4.

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.

We have non-U.S. exposure largely in Europe and Asia Pacific. For more information on our exposures and related risks in non-U.S. countries, see Non-U.S. Portfolio on page 114 and Item 1A. Risk Factors of the Corporation's 2013 Annual Report on Form 10-K.

For more information on our credit risk management activities, see Consumer Portfolio Credit Risk Management on page 83, Commercial Portfolio Credit Risk Management on page 103, Non-U.S. Portfolio on page 114, Provision for Credit Losses on page 116, Allowance for Credit Losses on page 117, and Note 4 – Outstanding Loans and Leases and Note 5 – Allowance for Credit Losses to the Consolidated Financial Statements.


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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 assist in making both new and ongoing credit decisions, as well as portfolio management strategies, including authorizations and line management, collection practices and strategies, and determination of the allowance for loan and lease losses and allocated capital for credit risk.

During the nine months ended September 30, 2014, we completed approximately 58,000 customer loan modifications with a total unpaid principal balance of approximately $10 billion, including approximately 26,700 permanent modifications, under the U.S. government's Making Home Affordable Program. Of the loan modifications completed during the nine months ended September 30, 2014, in terms of both the volume of modifications and the unpaid principal balance associated with the underlying loans, approximately half were in the Corporation's HFI portfolio. For modified loans on our balance sheet, these modification types are generally considered troubled debt restructurings (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 100 and Note 4 – Outstanding Loans and Leases to the Consolidated Financial Statements.

Consumer Credit Portfolio

Improvement in the U.S. economy, labor markets and home prices continued during the three and nine months ended September 30, 2014 resulting in improved credit quality and lower credit losses across all major consumer portfolios compared to the same periods in 2013. Consumer loans 30 days or more past due declined during the nine months ended September 30, 2014 across all consumer portfolios as a result of improved delinquency trends. Although home prices have shown steady improvement since the beginning of 2012, they have not fully recovered to their 2006 levels.

Improved credit quality, increased home prices and continued loan balance run-off across the consumer portfolio drove a $2.7 billion decrease in the consumer allowance for loan and lease losses during the nine months ended September 30, 2014 to $10.7 billion at September 30, 2014. For additional information, see Allowance for Credit Losses on page 117.

For more 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 2013 Annual Report on Form 10-K. For more information on representations and warranties related to our residential mortgage and home equity portfolios, see Off-Balance Sheet Arrangements and Contractual Obligations – Representations and Warranties on page 54 and Note 7 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements.


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Table 31 presents our outstanding consumer loans and leases, and the PCI loan portfolio. In addition to being included in the "Outstandings" columns in Table 31, PCI loans are also shown separately, net of purchase accounting adjustments, in the "Purchased Credit-impaired Loan Portfolio" columns. The impact of the PCI loan portfolio on certain credit statistics is reported where appropriate. For more information on PCI loans, see Consumer Portfolio Credit Risk Management – Purchased Credit-impaired Loan Portfolio on page 95 and Note 4 – Outstanding Loans and Leases to the Consolidated Financial Statements.

Table 31
Consumer Loans and Leases
 
Outstandings
 
Purchased Credit-impaired Loan Portfolio
(Dollars in millions)
September 30
2014
 
December 31
2013
 
September 30
2014
 
December 31
2013
Residential mortgage (1)
$
224,728

 
$
248,066

 
$
15,588

 
$
18,672

Home equity
87,508

 
93,672

 
5,821

 
6,593

U.S. credit card
89,026

 
92,338

 
n/a

 
n/a

Non-U.S. credit card
11,433

 
11,541

 
n/a

 
n/a

Direct/Indirect consumer (2)
83,118

 
82,192

 
n/a

 
n/a

Other consumer (3)
2,152

 
1,977

 
n/a

 
n/a

Consumer loans excluding loans accounted for under the fair value option
497,965

 
529,786

 
21,409

 
25,265

Loans accounted for under the fair value option (4)
2,129

 
2,164

 
n/a

 
n/a

Total consumer loans and leases
$
500,094

 
$
531,950

 
$
21,409

 
$
25,265

(1) 
Outstandings include pay option loans of $3.3 billion and $4.4 billion at September 30, 2014 and December 31, 2013. We no longer originate pay option loans.
(2) 
Outstandings include dealer financial services loans of $37.9 billion and $38.5 billion, unsecured consumer lending loans of $1.7 billion and $2.7 billion, U.S. securities-based lending loans of $34.6 billion and $31.2 billion, non-U.S. consumer loans of $4.3 billion and $4.7 billion, student loans of $3.6 billion and $4.1 billion and other consumer loans of $894 million and $1.0 billion at September 30, 2014 and December 31, 2013.
(3) 
Outstandings include consumer finance loans of $1.0 billion and $1.2 billion, consumer leases of $937 million and $606 million, consumer overdrafts of $173 million and $176 million and other non-U.S. consumer loans of $3 million and $5 million at September 30, 2014 and December 31, 2013.
(4) 
Consumer loans accounted for under the fair value option include residential mortgage loans of $2.0 billion and $2.0 billion and home equity loans of $179 million and $147 million at September 30, 2014 and December 31, 2013. For more information on the fair value option, see Consumer Portfolio Credit Risk Management – Consumer Loans Accounted for Under the Fair Value Option on page 99 and Note 15 – Fair Value Option to the Consolidated Financial Statements.
n/a = not applicable


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Table 32 presents consumer nonperforming loans and accruing consumer loans past due 90 days or more. Nonperforming loans do not include past due consumer credit card loans, other unsecured loans and in general, consumer non-real estate-secured loans (loans discharged in Chapter 7 bankruptcy are included) 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 standby 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.

Table 32
Consumer Credit Quality
 
Nonperforming
 
Accruing Past Due 90 Days or More
(Dollars in millions)
September 30
2014
 
December 31
2013
 
September 30
2014
 
December 31
2013
Residential mortgage (1)
$
8,118

 
$
11,712

 
$
13,045

 
$
16,961

Home equity
4,026

 
4,075

 
—

 
—

U.S. credit card
n/a

 
n/a

 
831

 
1,053

Non-U.S. credit card
n/a

 
n/a

 
104

 
131

Direct/Indirect consumer
30

 
35

 
332

 
408

Other consumer
14

 
18

 
1

 
2

Total (2)
$
12,188

 
$
15,840

 
$
14,313

 
$
18,555

Consumer loans and leases as a percentage of outstanding consumer loans and leases (2)
2.45
%
 
2.99
%
 
2.87
%
 
3.50
%
Consumer loans and leases as a percentage of outstanding loans and leases, excluding PCI and fully-insured loan portfolios (2)
3.01

 
3.80

 
0.31

 
0.38

(1) 
Residential mortgage loans accruing past due 90 days or more are fully-insured loans. At September 30, 2014 and December 31, 2013, residential mortgage included $9.1 billion and $13.0 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 $3.9 billion and $4.0 billion of loans on which interest was still accruing.
(2) 
Balances exclude consumer loans accounted for under the fair value option. At September 30, 2014 and December 31, 2013, $433 million and $445 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 33 presents net charge-offs and related ratios for consumer loans and leases.

Table 33
 
 
 
 
 
 
 
 
Consumer Net Charge-offs and Related Ratios
 
 
 
 
 
 
 
 
 
Net Charge-offs (1)
 
Net Charge-off Ratios (1, 2)
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
(Dollars in millions)
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Residential mortgage
$
53

 
$
221

 
$
145

 
$
875

 
0.09
%
 
0.35
%
 
0.08
%
 
0.46
%
Home equity
89

 
302

 
630

 
1,472

 
0.40

 
1.22

 
0.93

 
1.93

U.S. credit card
625

 
788

 
2,026

 
2,652

 
2.79

 
3.47

 
3.05

 
3.92

Non-U.S. credit card
67

 
89

 
190

 
305

 
2.26

 
3.32

 
2.17

 
3.80

Direct/Indirect consumer
34

 
62

 
125

 
272

 
0.17

 
0.30

 
0.20

 
0.44

Other consumer
56

 
65

 
161

 
168

 
10.48

 
13.75

 
10.58

 
12.74

Total
$
924

 
$
1,527

 
$
3,277

 
$
5,744

 
0.72

 
1.12

 
0.85

 
1.41

(1) 
Net charge-offs exclude write-offs in the PCI loan portfolio of $196 million and $547 million in residential mortgage and $50 million and $250 million in home equity for the three and nine months ended September 30, 2014 compared to $351 million and $648 million in residential mortgage and $92 million and $947 million in home equity for the three and nine months ended September 30, 2013. 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 and leases excluding loans accounted for under the fair value option.

Net charge-off ratios, excluding the PCI and fully-insured loan portfolios, were 0.15 percent and 0.14 percent for residential mortgage, 0.43 percent and 1.00 percent for home equity, and 0.90 percent and 1.07 percent for the total consumer portfolio for the three and nine months ended September 30, 2014, respectively. Net charge-off ratios, excluding the PCI and fully-insured loan portfolios, were 0.60 percent and 0.80 percent for residential mortgage, 1.31 percent and 2.09 percent for home equity, and 1.43 percent and 1.80 percent for the total consumer portfolio for the three and nine months ended September 30, 2013, 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 portfolio of $196 million and $547 million in residential mortgage and $50 million and $250 million in home equity for the three and nine months ended September 30, 2014, respectively. Net charge-offs exclude write-offs in the PCI loan portfolio of $351 million and $648 million in residential mortgage and $92 million and $947 million in home equity for the three and nine months ended September 30, 2013, respectively. 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 0.42 percent and 0.38 percent for residential mortgage and 0.63 percent and 1.30 percent for home equity for the three and nine months ended September 30, 2014, respectively. Net charge-off ratios including the PCI write-offs were 0.89 percent and 0.79 percent for residential mortgage and 1.59 percent and 3.17 percent for home equity for the three and nine months ended September 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 34 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 35.

Table 34
 
 
 
 
Home Loans Portfolio (1)
 
 
 
 
 
Outstandings
 
Nonperforming
 
Net Charge-offs (2)
 
September 30
2014
 
December 31
2013
 
September 30
2014
 
December 31
2013
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
(Dollars in millions)
 
 
 
 
2014
 
2013
 
2014
 
2013
Core portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
$
167,014

 
$
177,336

 
$
2,725

 
$
3,316

 
$
42

 
$
51

 
$
141

 
$
220

Home equity
52,343

 
54,499

 
1,500

 
1,431

 
47

 
76

 
201

 
357

Total Core portfolio
219,357

 
231,835

 
4,225

 
4,747

 
89

 
127

 
342

 
577

Legacy Assets & Servicing portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
57,714

 
70,730

 
5,393

 
8,396

 
11

 
170

 
4

 
655

Home equity
35,165

 
39,173

 
2,526

 
2,644

 
42

 
226

 
429

 
1,115

Total Legacy Assets & Servicing portfolio
92,879

 
109,903

 
7,919

 
11,040

 
53

 
396

 
433

 
1,770

Home loans portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
224,728

 
248,066

 
8,118

 
11,712

 
53

 
221

 
145

 
875

Home equity
87,508

 
93,672

 
4,026

 
4,075

 
89

 
302

 
630

 
1,472

Total home loans portfolio
$
312,236

 
$
341,738

 
$
12,144

 
$
15,787

 
$
142

 
$
523

 
$
775

 
$
2,347

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan
and lease losses
 
Provision for loan
and lease losses
 
 
 
 
 
September 30
2014
 
December 31
2013
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
 
 
 
 
 
 
2014
 
2013
 
2014
 
2013
Core portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
 
 
 
 
$
678

 
$
728

 
$
(6
)
 
$
(3
)
 
$
(2
)
 
$
141

Home equity
 
 
 
 
794

 
965

 
4

 
(9
)
 
22

 
138

Total Core portfolio

 

 
1,472

 
1,693

 
(2
)
 
(12
)
 
20

 
279

Legacy Assets & Servicing portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
 
 
 
 
2,344

 
3,356

 
63

 
(600
)
 
(359
)
 
(788
)
Home equity
 
 
 
 
2,660

 
3,469

 
(103
)
 
(308
)
 
(128
)
 
100

Total Legacy Assets & Servicing portfolio


 


 
5,004

 
6,825

 
(40
)
 
(908
)
 
(487
)
 
(688
)
Home loans portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
 
 
 
 
3,022

 
4,084

 
57

 
(603
)
 
(361
)
 
(647
)
Home equity
 
 
 
 
3,454

 
4,434

 
(99
)
 
(317
)
 
(106
)
 
238

Total home loans portfolio
 
 
 
 
$
6,476

 
$
8,518

 
$
(42
)
 
$
(920
)
 
$
(467
)
 
$
(409
)
(1) 
Outstandings and nonperforming amounts exclude loans accounted for under the fair value option. Consumer loans accounted for under the fair value option include residential mortgage loans of $2.0 billion and $2.0 billion and home equity loans of $179 million and $147 million at September 30, 2014 and December 31, 2013. For more information on the fair value option, see Consumer Portfolio Credit Risk Management – Consumer Loans Accounted for Under the Fair Value Option on page 99 and Note 15 – Fair Value Option to the Consolidated Financial Statements.
(2) 
Net charge-offs exclude write-offs in the PCI loan portfolios of $196 million and $547 million in residential mortgage and $50 million and $250 million in home equity for the three and nine months ended September 30, 2014, which are included in the Legacy Assets & Servicing portfolio, compared to $351 million and $648 million in residential mortgage and $92 million and $947 million in home equity for the three and nine months ended September 30, 2013. 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.


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Table of Contents

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 45 percent of consumer loans and leases at September 30, 2014. Approximately 22 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, 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 loans accounted for under the fair value option, decreased $23.3 billion during the nine months ended September 30, 2014 due to paydowns, sales, charge-offs and transfers to foreclosed properties. These were partially offset by new origination volume retained on our balance sheet, as well as repurchases of delinquent loans pursuant to our servicing agreements with GNMA, which are part of our mortgage banking activities.

At September 30, 2014 and December 31, 2013, the residential mortgage portfolio included $72.0 billion and $87.2 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 standby agreements with FNMA and FHLMC. At September 30, 2014 and December 31, 2013, $50.7 billion and $59.0 billion had FHA insurance with the remainder protected by long-term standby agreements. At September 30, 2014 and December 31, 2013, $17.5 billion and $22.5 billion of the FHA-insured loan population were repurchases of delinquent FHA loans pursuant to our servicing agreements with GNMA. 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.

The long-term standby agreements with FNMA and FHLMC reduce our regulatory risk-weighted assets due to the transfer of a portion of our credit risk to unaffiliated parties. At September 30, 2014, these programs had the cumulative effect of reducing our risk-weighted assets by $6.4 billion, increasing both our Tier 1 capital ratio and common equity tier 1 capital ratio by six bps under the Basel 3 Standardized – Transition. This compared to reducing our risk-weighted assets by $8.4 billion, increasing our Tier 1 capital ratio by eight bps and increasing our Tier 1 common capital ratio by seven bps at December 31, 2013 under Basel 1 (which included the Market Risk Final Rules).

In addition to the long-term standby 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 4 – Outstanding Loans and Leases to the Consolidated Financial Statements. At September 30, 2014 and December 31, 2013, the synthetic securitization vehicles referenced principal balances of $7.4 billion and $12.5 billion of residential mortgage loans and provided loss protection up to $293 million and $339 million. At September 30, 2014 and December 31, 2013, the Corporation had a receivable of $155 million and $198 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.


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Table 35 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, our fully-insured loan portfolio and loans accounted for under the fair value option. Additionally, in the "Reported Basis" columns in the table below, accruing balances past due and nonperforming loans do not include the PCI loan portfolio, in accordance with our accounting policies, even though the customer may be contractually past due. 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 35
Residential Mortgage – Key Credit Statistics
 
 
 
Reported Basis (1)
 
Excluding Purchased
Credit-impaired and
Fully-insured Loans
(Dollars in millions)
 
 
 
 
 
 
 
 
September 30
2014
 
December 31
2013
 
September 30
2014
 
December 31
2013
Outstandings
 
 
 
 
 
 
 
 
$
224,728

 
$
248,066

 
$
137,174

 
$
142,147

Accruing past due 30 days or more
 
 
 
 
 
 
 
18,256

 
23,052

 
1,976

 
2,371

Accruing past due 90 days or more
 
 
 
 
 
 
 
13,045

 
16,961

 
—

 
—

Nonperforming loans
 
 
 
 
 
 
 
 
8,118

 
11,712

 
8,118

 
11,712

Percent of portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Refreshed LTV greater than 90 but less than or equal to 100
 
9
%
 
12
%
 
6
%
 
7
%
Refreshed LTV greater than 100
 
 
 
 
 
8

 
13

 
7