BAC-9.30.2011-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ü] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2011
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number:
1-6523
Exact Name of Registrant as Specified in its Charter:
Bank of America Corporation
State or Other Jurisdiction of Incorporation or Organization:
Delaware
IRS Employer Identification Number:
56-0906609
Address of Principal Executive Offices:
Bank of America Corporate Center
100 N. Tryon Street
Charlotte, North Carolina 28255
Registrant’s telephone number, including area code:
(704) 386-5681
Former name, former address and former fiscal year, if changed since last report:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ü No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ü No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one).
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Large accelerated filer ü | | Accelerated filer | | Non-accelerated filer (do not check if a smaller reporting company) | | Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes No ü
On October 31, 2011, there were 10,135,871,814 shares of Bank of America Corporation Common Stock outstanding.
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Bank of America Corporation | |
September 30, 2011 | |
Form 10-Q | |
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This report on Form 10-Q, the documents that it incorporates by reference and the documents into which it may be incorporated by reference may contain, and from time to time Bank of America Corporation (collectively with its subsidiaries, the Corporation) and its management may make, certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often use words such as “expects,” “anticipates,” “believes,” “estimates,” “targets,” “intends,” “plans,” “goal” and other similar expressions or future or conditional verbs such as “will,” “may,” “might,” “should,” “would” and “could.” The forward-looking statements made represent the current expectations, plans or forecasts of the Corporation regarding the Corporation's future results and revenues, and future business and economic conditions more generally, including statements concerning: the Federal Reserve's plans to purchase U.S. treasury bonds and agency mortgage-backed securities (MBS) and sell short-dated securities between October 2011 and June 2012; the expected closing of the Canada consumer card business in the fourth quarter of 2011; the Corporation's intention to exit its consumer card businesses in Europe; the planned schedule and details for implementation and completion of, and the expected impact from, Phase 1 and Phase 2 of Project New BAC, including expected personnel reductions and estimated expense reductions; the potential impact of the European Union (EU) financial relief plan, including on European banks, as well as any other European sovereign bailout proposals; the future favorable effects of the United Kingdom (U.K.) corporate income tax rate reductions and the effect on income tax expense of the possible additional U.K. corporate income tax rate reduction announced by the U.K. Treasury; the transformation of the Corporation's mortgage business, including the Corporation's intention to wind down its correspondent channel; the Corporation's expectation that it will maintain limited commercial paper exposure; the expected normalized levels of credits losses and noninterest expense; recent developments with regard to the agreement to resolve nearly all of the legacy Countrywide-issued first-lien non government-sponsored enterprise (GSE) residential mortgage-backed securitization repurchase exposures (the BNY Mellon Settlement); the impact of and costs associated with each of the agreements with The Bank of New York Mellon (as trustee for certain legacy Countrywide private-label securitization trusts), Assured Guaranty Ltd. and subsidiaries (Assured Guaranty), and each of the government-sponsored enterprises Fannie Mae (FNMA) and Freddie Mac (FHLMC) (collectively, the GSEs) to resolve bulk representations and warranties claims; the continually evolving behavior of the GSEs, and the Corporation's intention to monitor and update its processes related to these changing GSE behaviors; the adequacy of the liability for the remaining representations and warranties exposure to the GSEs and the future impact to earnings, including the impact on such estimated liability arising from the recent announcement by FNMA regarding mortgage rescissions, cancellations and claim denials; our expectation that mortgage-related assessment and waiver costs will remain elevated as additional loans are delayed in the foreclosure process and as the GSEs assert more aggressive criteria; the expected repurchase claims on the 2004-2008 loan vintages; the Corporation's belief that with the provision recorded in connection with the BNY Mellon Settlement, and the additional representations and warranties provisions recorded in the nine months ended September 30, 2011, the Corporation has provided for a substantial portion of its non-GSE representations and warranties exposure; the potential assertion and impact of additional claims not addressed by the BNY Mellon Settlement or any of the prior agreements entered into between the Corporation and the GSEs, monoline insurers and other investors; representations and warranties liabilities (also commonly referred to as reserves), and the estimated range of possible loss, expenses and repurchase claims and resolution of those claims, and any related servicing, securities, fraud, indemnity or other claims; the Corporation's intention to vigorously contest any requests for repurchase for which it concludes that a valid basis does not exist; future impact of complying with the terms of the consent orders with federal bank regulators regarding the foreclosure process and potential civil monetary penalties that may be levied in connection therewith; the impact of delays in connection with the Corporation's temporary halt of foreclosure proceedings in late 2010; the potential impact of changes in the Corporation's procedures and controls, as well as governmental, regulatory and judicial actions, on the timing of resuming foreclosure proceedings and foreclosure sales and on the collection of certain fees and expenses; negotiations to settle or any other resolution of various state and federal investigations into alleged irregularities in the practices of residential mortgage originators and servicers, including the Corporation; the net recovery projections for credit default swaps with monoline financial guarantors; the impact on economic conditions and on the Corporation arising from any further changes to the credit rating or perceived creditworthiness of instruments issued, insured or guaranteed by the U.S. government, or of institutions, agencies or instrumentalities directly linked to the U.S. government; future payment protection insurance (PPI) claims in the U.K.; future risk-weighted assets and any mitigation efforts to reduce risk-weighted assets; credit trends and conditions, including credit losses, credit reserves, the allowance for loan and lease losses, charge-offs, delinquency, collection and bankruptcy trends, and nonperforming asset levels, including expected reductions in the allowance for loan and lease losses; sales and trading revenue; consumer and commercial service charges, including the impact of changes in the Corporation's overdraft policy and the Corporation's ability to mitigate a decline in revenues; liquidity; the Corporation's anticipation that it will continue to reduce its long-term debt as appropriate through 2013; capital levels determined by or established in accordance with accounting principles generally accepted in the United States of America (GAAP) and with the requirements of various regulatory agencies, including our ability to comply with any Basel capital requirements endorsed by U.S. regulators without raising additional capital and within any applicable regulatory timelines; the revenue impact of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the CARD Act); the revenue impact and the impact on the value of our assets and liabilities resulting from, and any mitigation actions taken in response to, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Financial Reform Act), including the impact of the Durbin Amendment, the Volcker Rule, and activity of the Consumer Financial Protection Bureau; the risk retention rules and derivatives regulations; the Corporation's intention to comply with certain requirements relating to fraud prevention in debit card transactions pursuant to the final rule issued by the Federal Reserve
under the Durbin Amendment; the Corporation's ability to substitute or make changes to certain over-the-counter (OTC) derivative contracts; run-off of loan portfolios; that it is the Corporation's objective to maintain high-quality credit ratings; the expected impacts of certain privately-negotiated exchange transactions, including allowing the retirement of certain long-term junior subordinated debt issued to the trust companies, increasing Tier 1 common capital and reducing dividends paid on preferred stock and interest expense on certain long-term junior subordinated debt, increasing interest expense associated with newly issued senior notes and being accretive to earnings per common share and slightly dilutive to earnings per share; the estimated range of possible loss and the impact of various legal proceedings discussed in “Litigation and Regulatory Matters” in Note 11 - Commitments and Contingencies to the Consolidated Financial Statements; the number of delayed foreclosure sales and the resulting financial impact and other similar matters; and other matters relating to the Corporation and the securities that it may offer from time to time. The foregoing is not an exclusive list of all forward-looking statements the Corporation makes. These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumptions that are difficult to predict and often are beyond the Corporation's control. Actual outcomes and results may differ materially from those expressed in, or implied by, the Corporation's 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 2010 Annual Report on Form 10-K and the Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, and in any of the Corporation's subsequent Securities and Exchange Commission (SEC) filings: the Corporation's ability to implement, manage and realize the anticipated benefits, revenue increases and cost savings from Project New BAC; the Corporation's timing and determinations regarding any potential revised comprehensive capital plan submission and the Federal Reserve's response; the Corporation's intent to build capital through retaining earnings, reducing legacy asset portfolios and implementing other non-dilutive capital related initiatives; the accuracy and variability of estimates and assumptions in determining the expected total cost of the BNY Mellon Settlement to the Corporation; the accuracy and variability of estimates and assumptions in determining the estimated liability and/or estimated range of possible loss for representations and warranties exposures to the GSEs, monolines and private-label and other investors; the accuracy and the variability of estimates and assumptions in determining the portion of the Corporation's repurchase obligations for residential mortgage obligations sold by the Corporation and its affiliates to investors that has been paid or reserved after giving effect to the BNY Mellon Settlement and the charges in the nine months ended September 30, 2011; the possibility that objections to the approval of the BNY Mellon Settlement, including objections by parties that have already filed notices of intent to object or motions to intervene, will delay or prevent receipt of final court approval; whether the conditions to the BNY Mellon Settlement will be satisfied, including the receipt of final court approval and private letter rulings from the IRS and other tax rulings and opinions; the Corporation and certain of its affiliates' ability to comply with the servicing and documentation obligations under the BNY Mellon Settlement; the potential assertion and impact of additional claims not addressed by the BNY Mellon Settlement or any of the prior agreements entered into between the Corporation and the GSEs, monoline insurers and other investors; the accuracy and variability of estimates and assumptions in determining the expected value of the loss-sharing reinsurance arrangement relating to the agreement with Assured Guaranty and the total cost of the agreement to the Corporation; the Corporation's resolution of certain representations and warranties obligations with the GSEs and our ability to resolve the GSEs' remaining claims; the Corporation's ability to resolve its representations and warranties obligations, and any related servicing, securities, fraud, indemnity or other claims with monolines, and private-label investors and other investors, including those monolines and investors from whom the Corporation has not yet received claims or with whom it has not yet reached any resolutions; failure to satisfy its obligations as servicer in the residential mortgage securitization process; the adequacy of the liability and/or the estimated range of possible loss for the representations and warranties exposures to the GSEs, monolines and private-label and other investors; the foreclosure review and assessment process, the effectiveness of the Corporation's response and any governmental findings or penalties or private third-party claims asserted in connection with these foreclosure matters; the ability to achieve resolution in negotiations with law enforcement authorities and federal agencies, including the U.S. Department of Justice (DOJ) and U.S. Department of Housing and Urban Development (HUD), involving mortgage servicing practices, including the timing and any settlement terms; the adequacy of the reserve for future PPI claims in the U.K.; the risk of a subsequent credit rating downgrade of the U.S. government; negative economic conditions generally including continued weakness in the U.S. housing market, high unemployment in the U.S., as well as economic challenges in many non-U.S. countries in which the Corporation operates; the Corporation's mortgage modification policies and related results; the level and volatility of the capital markets, interest rates, currency values and other market indices; changes in consumer, investor and counterparty confidence in, and the related impact on, financial markets and institutions, including the Corporation as well as its business partners; the Corporation's credit ratings and the credit ratings of its securitizations, including the risk that the Corporation or its securities will be the subject of additional or further credit rating downgrades in addition to the downgrade by Moody's Investors Service, Inc. (Moody's) in the third quarter of 2011; the Corporation's ability to substitute or make changes to certain OTC derivative contracts, including as a result of certain limitations such as counterparty willingness, regulatory limitations on naming Bank of America, N.A. as the new counterparty, and the type or amount of collateral required; the impact resulting from international and domestic sovereign credit uncertainties, including the effectiveness of the EU financial relief plan; the timing and amount of any potential dividend increase; estimates of the fair value of certain of the Corporation's assets and liabilities; legislative and regulatory actions in the U.S. (including the impact of the Financial Reform Act, the Electronic Fund Transfer Act, the CARD Act and related regulations and interpretations) and internationally; the identification and effectiveness of any initiatives to mitigate the negative impact of the Financial Reform Act; the impact of litigation and regulatory investigations, including costs, expenses, settlements and judgments as well as any collateral effects on our ability to do business and access the capital markets; various monetary, tax and fiscal policies and regulations of the U.S. and non-U.S. governments;
changes in accounting standards, rules and interpretations, inaccurate estimates or assumptions in the application of accounting policies, including in determining reserves, and of applicable guidance regarding goodwill accounting and the impact on the Corporation's financial statements; increased globalization of the financial services industry and competition with other U.S. and international financial institutions; adequacy of the Corporation's risk management framework; the Corporation's ability to attract new employees and retain and motivate existing employees; technology changes instituted by the Corporation, its counterparties or competitors; mergers and acquisitions and their integration into the Corporation, including the Corporation's ability to realize the benefits and cost savings from the Merrill Lynch & Co., Inc. (Merrill Lynch) and Countrywide Financial Corporation (Countrywide) acquisitions; the Corporation's reputation, including the effects of continuing intense public and regulatory scrutiny of the Corporation and the financial services industry; the effects of any unauthorized disclosures of our or our customers' private or confidential information and any negative publicity directed toward the Corporation; and decisions to downsize, sell or close units or otherwise change the business mix of the Corporation.
Forward-looking statements speak only as of the date they are made, and the Corporation undertakes no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.
Notes to the Consolidated Financial Statements referred to in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) are incorporated by reference into the MD&A. Certain prior period amounts have been reclassified to conform to current period presentation. Throughout the MD&A, the Corporation uses certain acronyms and abbreviations which are defined in the Glossary.
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Executive Summary |
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Business Overview |
The Corporation is a Delaware corporation, a bank holding company and a financial holding company. When used in this report, “the Corporation” may refer to the Corporation individually, the Corporation and its subsidiaries, or certain of the Corporation’s subsidiaries or affiliates. Our principal executive offices are located in the Bank of America Corporate Center in Charlotte, North Carolina. Through our banking and various nonbanking subsidiaries throughout the United States and in certain international markets, we provide a diversified range of banking and nonbanking financial services and products through six business segments: Deposits, Card Services (formerly Global Card Services), Consumer Real Estate Services (CRES), Global Commercial Banking, Global Banking & Markets (GBAM) and Global Wealth & Investment Management (GWIM), with the remaining operations recorded in All Other. At September 30, 2011, the Corporation had $2.2 trillion in assets and approximately 290,000 full-time equivalent employees.
As of September 30, 2011, we operated in all 50 states, the District of Columbia and more than 40 countries. Our retail banking footprint covers approximately 80 percent of the U.S. population and in the U.S., we serve 58 million consumer and small business relationships with approximately 5,700 banking centers, 17,750 ATMs, nationwide call centers, and leading online and mobile banking platforms. We offer industry-leading support to approximately four million small business owners. We are a global leader in corporate and investment banking and trading across a broad range of asset classes serving corporations, governments, institutions and individuals around the world.
Table 1 provides selected consolidated financial data for the three and nine months ended September 30, 2011 and 2010 and at September 30, 2011 and December 31, 2010.
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Table 1 |
Selected Financial Data |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in millions, except per share information) | 2011 | | 2010 | | 2011 | | 2010 |
Income statement | | | | | | | |
Revenue, net of interest expense (FTE basis) (1) | $ | 28,702 |
| | $ | 26,982 |
| | $ | 69,280 |
| | $ | 88,722 |
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Net income (loss) | 6,232 |
| | (7,299 | ) | | (545 | ) | | (994 | ) |
Net income, excluding goodwill impairment charge (2) | 6,232 |
| | 3,101 |
| | 2,058 |
| | 9,406 |
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Diluted earnings (loss) per common share (3) | 0.56 |
| | (0.77 | ) | | (0.15 | ) | | (0.21 | ) |
Diluted earnings per common share, excluding goodwill impairment charge (2) | 0.56 |
| | 0.27 |
| | 0.11 |
| | 0.82 |
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Dividends paid per common share | 0.01 |
| | 0.01 |
| | 0.03 |
| | 0.03 |
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Performance ratios | |
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Return on average assets | 1.07 | % | | n/m |
| | n/m |
| | n/m |
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Return on average assets, excluding goodwill impairment charge (2) | 1.07 |
| | 0.52 | % | | 0.12 | % | | 0.51 | % |
Return on average tangible shareholders’ equity (1) | 17.03 |
| | n/m |
| | n/m |
| | n/m |
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Return on average tangible shareholders’ equity, excluding goodwill impairment charge (1, 2) | 17.03 |
| | 8.54 | % | | 1.83 | % | | 9.01 | % |
Efficiency ratio (FTE basis) (1) | 61.37 |
| | 100.87 |
| | 87.69 |
| | 70.16 |
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Efficiency ratio (FTE basis), excluding goodwill impairment charge (1, 2) | 61.37 |
| | 62.33 |
| | 83.93 |
| | 58.43 |
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Asset quality | |
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Allowance for loan and lease losses at period end | |
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| | $ | 35,082 |
| | $ | 43,581 |
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Allowance for loan and lease losses as a percentage of total loans and leases outstanding at period end (4) | |
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| | 3.81 | % | | 4.69 | % |
Nonperforming loans, leases and foreclosed properties at period end (4) | |
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| | $ | 29,059 |
| | $ | 34,556 |
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Net charge-offs | $ | 5,086 |
| | $ | 7,197 |
| | 16,779 |
| | 27,551 |
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Annualized net charge-offs as a percentage of average loans and leases outstanding (4) | 2.17 | % | | 3.07 | % | | 2.41 | % | | 3.84 | % |
Annualized net charge-offs as a percentage of average loans and leases outstanding excluding purchased credit-impaired loans (4) | 2.25 |
| | 3.18 |
| | 2.50 |
| | 3.98 |
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Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs (4) | 1.74 |
| | 1.53 |
| | 1.56 |
| | 1.18 |
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Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs excluding purchased credit-impaired loans (4) | 1.33 |
| | 1.34 |
| | 1.20 |
| | 1.04 |
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| | | | | September 30
2011 | | December 31
2010 |
Balance sheet | | | | | | | |
Total loans and leases | | | | | $ | 932,531 |
| | $ | 940,440 |
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Total assets | | | | | 2,219,628 |
| | 2,264,909 |
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Total deposits | | | | | 1,041,353 |
| | 1,010,430 |
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Total common shareholders’ equity | | | | | 210,772 |
| | 211,686 |
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Total shareholders’ equity | | | | | 230,252 |
| | 228,248 |
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Capital ratios | | | | | | | |
Tier 1 common equity | | | | | 8.65 | % | | 8.60 | % |
Tier 1 capital | | | | | 11.48 |
| | 11.24 |
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Total capital | | | | | 15.86 |
| | 15.77 |
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Tier 1 leverage | | | | | 7.11 |
| | 7.21 |
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(1) | Fully taxable-equivalent (FTE) basis, return on average tangible shareholders’ equity and the efficiency ratio are non-GAAP measures. Other companies may define or calculate these measures differently. For additional information on these measures and ratios, and for a corresponding reconciliation to GAAP financial measures, see Supplemental Financial Data on page 21. |
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(2) | Net income (loss), diluted earnings (loss) per common share, return on average assets, return on average tangible shareholders’ equity and the efficiency ratio have been calculated excluding the impact of the goodwill impairment charges of $2.6 billion in the second quarter of 2011 and $10.4 billion in the third quarter of 2010, and accordingly, these are non-GAAP measures. For additional information on these measures and ratios, and for a corresponding reconciliation to GAAP financial measures, see Supplemental Financial Data on page 21. |
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(3) | Due to a net loss applicable to common shareholders for the three months ended September 30, 2010 and the nine months ended September 30, 2011 and 2010, the impact of antidilutive equity instruments was excluded from diluted earnings (loss) per share and average diluted common shares. |
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(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 Nonperforming Consumer Loans and Foreclosed Properties Activity on page 100 and corresponding Table 42, and Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 110 and corresponding Table 51. |
n/m = not meaningful
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Third Quarter 2011 Economic and Business Environment |
The economic and financial environment for banking was unsettled in the third quarter. Financial market uncertainty surrounding the U.S. debt ceiling debate in Washington, D.C., the Standard & Poor's Financial Services LLC (S&P) downgrade of the U.S. government's credit rating, the European financial crisis, and continued soft economic growth in the U.S. resulted in concerns about a double-dip recession. Following economic weakness in the first half of 2011, U.S. retail sales and real consumption rose at a modest pace in the third quarter. Employment gains were modest, and the unemployment rate remained at 9.1 percent during the quarter. Slower growth in wages and salaries, and higher inflation contributed to subdued gains in real disposable personal income, while sharp declines in global stock markets reduced household net worth and undercut consumer confidence. Recovering vehicle sales, reflecting the easing of supply chain issues related to the Japanese earthquake, provided a boost, while flat-to-lower energy costs also added some relief. The housing sector remained soft, with low levels of new and existing home sales and construction. Business investment in equipment and software grew as did U.S. exports. In addition, the public perception of certain financial services firms and practices appeared to fall during the quarter.
During the third quarter, the Federal Reserve took two steps to stimulate the economy. In August, it announced that it expected to keep the federal funds rate target at zero through mid-2013, and as a result, bond yields fell and the yield curve flattened. In September, the Federal Reserve announced a new program designed to lower bond yields and mortgage rates under which the Federal Reserve plans to purchase U.S. treasury bonds and agency MBS, and sell short-dated securities between October 2011 and June 2012.
Global financial markets were in turmoil during the quarter. European policymakers continued their efforts to address the joint problems posed by certain troubled EU countries, in particular Greece, and Europe's fragile banking system. Concerns about the inability of Greece to service its sovereign debt spread to other EU nations, most notably Italy, and as a result sovereign bond yields rose. The European Central Bank purchased the sovereign bonds of Greece, Spain and Italy. Fears of a EU financial crisis adversely affected the U.S. financial system and economic performance, and weighed heavily on global financial markets, particularly impacting financial sector stocks. For more information, see Recent Events – European Union Sovereign Risks on page 10.
China's economy continued to grow in the third quarter, but at a moderating pace, and its inflation rose further. Japan's economy continued to recover from the adverse effects of the natural disaster earlier this year. Among key emerging nations, Brazil, following a period of sustained growth and sharp currency appreciation, incurred a significant economic slowdown and a depreciating currency. For more information on our exposure in Europe, Asia, Latin America and Japan, see Non-U.S. Portfolio on page 115.
Berkshire Investment
On September 1, 2011, we closed our sale to Berkshire Hathaway Inc. (Berkshire) of 50,000 shares of the Corporation's 6% Cumulative Perpetual Preferred Stock, Series T (the Series T Preferred Stock) and a warrant to purchase 700 million shares of the Corporation's common stock (the Warrant), for an aggregate purchase price of $5.0 billion in cash. The Warrant is exercisable at the holder's option at any time, in whole or in part until September 1, 2021, at an exercise price of $7.142857 per share which may be settled in cash or by exchanging all or a portion of the Series T Preferred Stock. For additional information about the Series T Preferred Stock and the Warrant, see Note 12 – Shareholders' Equity to the Consolidated Financial Statements.
Divestitures and Asset Dispositions
During the three months ended September 30, 2011, we continued to sell certain business units and assets as part of our capital management and enterprise wide initiatives. We closed our sale of approximately 13.1 billion common shares of China Construction Bank Corporation (CCB), representing approximately half of our investment in CCB, resulting in a pre-tax gain of $3.6 billion. The sale also generated approximately $3.5 billion of Tier 1 common capital and reduced our risk-weighted assets by $7.3 billion under Basel I. Following the sale, we continue to hold approximately five percent of the outstanding common shares of CCB.
On August 15, 2011, we announced an agreement to sell our consumer card business in Canada and the sale is expected to close in the fourth quarter of 2011. Further, we announced that we intend to exit our consumer card business in Europe. In light of these actions, the international consumer card business results were moved to All Other and prior period results have been reclassified. For additional information, see Card Services on page 37, All Other on page 55 and Note 10 – Goodwill and Intangible Assets to the Consolidated Financial Statements.
In October 2011, we announced that we intend to wind down the correspondent mortgage channel by the end of 2011 as part of our ongoing strategy to focus on retail distribution for our consumer mortgage products and services. On February 4, 2011, we announced that we were exiting the reverse mortgage origination business.
Project New BAC
Project New BAC is a two-phase, enterprise-wide initiative to streamline workflows and processes, align businesses and expenses more closely with our overall strategic plan and operating principles, and increase revenues. Phase 1 evaluations focused on the consumer businesses, including Deposits, Card Services and CRES, related support, and technology and operations functions. Phase 2 evaluations will focus on Global Commercial Banking, GBAM and GWIM, related support, and technology and operations functions not subject to evaluation under Phase 1.
Phase 1 evaluations were completed during September 2011, and resulted in the recently-announced management reorganization and the clarification of initiatives to align our businesses with specific customer groups. Implementation of Phase 1 recommendations began during the fourth quarter of 2011. Phase 1 has a stated goal of a reduction of approximately 30,000 positions, with natural attrition and the elimination of unfilled positions expected to represent a significant part of the reduction. A stated goal of the full implementation of Phase 1 is to reduce annual expenses by $5 billion per year by 2014, or approximately 18 percent of Phase 1 baseline annual expenses. As implementation of the Phase 1 recommendations continues, reductions in staffing levels in the affected areas will result in some incremental costs including severance.
Phase 2 evaluations began in October 2011 and are expected to continue through April 2012. Reductions in the areas subject to evaluation for Phase 2 have not yet been fully identified; however they are expected to be lower than Phase 1. All aspects of New BAC are expected to be implemented by the end of 2014.
When reductions in employment levels associated with the implementation of Phases 1 and 2 of New BAC are probable of occurring and the amounts can be reasonably estimated, the associated severance costs will be recognized. There were no material expenses related to New BAC recorded in the three and nine months ended September 30, 2011.
Credit Ratings Actions
On September 21, 2011, Moody's downgraded the Corporation's long-term senior unsecured debt rating to Baa1 from A2 and our short-term debt rating to Prime-2 from Prime-1. These long-term credit ratings now incorporate two notches of uplift due to systemic support, down from four notches previously. On the same day, Moody's downgraded the long-term senior debt rating of Bank of America, N.A. (BANA) to A2 from Aa3, and its short-term debt rating was affirmed at Prime-1. These long-term credit ratings now incorporate three notches of uplift due to systemic support, down from five notches previously. The outlook on our and BANA's long-term senior unsecured ratings remained negative. These actions concluded a review for downgrade announced on June 2, 2011.
In addition, the other two major credit ratings agencies, S&P and Fitch, Inc. (Fitch), have indicated they will reevaluate, and could reduce the uplift they include in our ratings for government support, for reasons arising from financial services regulatory reform proposals or legislation. There can be no assurance that S&P and Fitch will refrain from downgrading our credit ratings. While certain potential impacts of a downgrade are contractual and quantifiable, the full scope of consequences of a credit ratings downgrade is inherently uncertain, as it depends upon numerous dynamic, complex and inter-related factors and assumptions, including whether any downgrade of our long-term credit ratings precipitates downgrades to our short-term credit ratings, and assumptions about the behavior of various customers, investors and counterparties whose responses to a downgrade cannot be determined in advance. Under the terms of certain OTC derivative contracts and other trading agreements, certain counterparties to those agreements have required us to provide additional collateral or to terminate these contracts or agreements or provide other remedies.
For information regarding the risks associated with adverse changes in our credit ratings, see Liquidity Risk – Credit Ratings on page 82, Regulatory Matters – Transactions with Affiliates on page 69, Note 4 – Derivatives to the Consolidated Financial Statements, Item 1A. Risk Factors of the Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, Note 14 – Commitments and Contingencies to the Consolidated Financial Statements of the Corporation's 2010 Annual Report on Form 10-K and Item 1A. Risk Factors of the Corporation's 2010 Annual Report on Form 10-K.
Private-label Securitization Settlement with the Bank of New York Mellon
Under an order entered by the court in connection with the settlement agreement (the BNY Mellon Settlement) we entered into with The Bank of New York Mellon (BNY Mellon), as trustee (Trustee), potentially interested persons had the opportunity to give notice of intent to object to the settlement (including on the basis that more information was needed) until August 30, 2011. Approximately 44 groups or entities appeared prior to the deadline. Certain of these groups or entities filed notices of intent to object, made motions to intervene, or both, filed notice of intent to object and made motions to intervene. The parties filing motions to intervene include the Attorneys General of the states of New York and Delaware, the Federal Deposit Insurance Corporation (FDIC) and the Federal Housing Finance Agency (FHFA). These motions have not yet been ruled on by the court. Certain of the motions to intervene and/or notices of intent to object allege various purported bases for opposition to the settlement, including challenges to the nature of the court proceeding and the lack of an opt-out mechanism, alleged conflicts of interest on the part of the institutional investor group and/or the Trustee, the inadequacy of the settlement amount and the method of allocating the settlement amount among the 525 legacy Countrywide first-lien and five second-lien non-GSE residential mortgage-backed securitization trusts (Covered Trusts), while other motions do not make substantive objections but state that they need more information about the settlement. A number of investors opposed to the settlement removed the proceeding to federal court. On October 19, 2011, the federal court denied BNY Mellon's motion to remand the proceeding to state court, and BNY Mellon, as well as investors that have intervened in support of the BNY Mellon Settlement, have petitioned to appeal the denial of this motion.
It is not currently possible to predict how many of the parties who have appeared in the court proceeding will ultimately object to the BNY Mellon Settlement, whether the objections will prevent receipt of final court approval or the ultimate outcome of the court approval process, which can include appeals and could take a substantial period of time. In particular, the conduct of discovery and the resolution of the objections to the settlement, and any appeals could take a substantial period of time and these factors, along with the recent removal of the proceeding to federal court, could materially delay the timing of final court approval. There can be no assurance that final court approval of the BNY Mellon Settlement will be obtained, that all conditions to the BNY Mellon Settlement will be satisfied or, if certain conditions to the BNY Mellon Settlement permitting withdrawal are met, that we and legacy Countrywide will not determine to withdraw from the BNY Mellon Settlement. Accordingly, it is not possible to predict when the court approval process will be completed.
For additional information about the BNY Mellon Settlement, see Off-Balance Sheet Arrangements and Contractual Obligations – Representations and Warranties on page 58, and Off-Balance Sheet Arrangements and Contractual Obligations – Other Mortgage-related Matters on page 66 and Note 9 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements. For more information about the risks associated with the BNY Mellon Settlement, see Item 1A. Risk Factors of the Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011.
Department of Justice / Attorney General Matters
Law enforcement authorities in all 50 states, the DOJ and other federal agencies continue to investigate alleged irregularities in the foreclosure practices of residential mortgage servicers, including us. Authorities have publicly stated that the scope of the investigations extends beyond foreclosure documentation practices to mortgage loan origination, loan modification and loss mitigation practices, including compliance with HUD requirements related to Federal Housing Administration (FHA)-insured loans. We continue to cooperate with these investigations and are dedicating significant resources to addressing these issues. We and the other largest mortgage originators and servicers continue to engage in ongoing negotiations regarding these matters with law enforcement authorities and federal agencies. Although certain Attorneys General have recently withdrawn from global settlement negotiations related to these matters, the negotiations remain ongoing and are focused on the amount and form of any settlement payment or commitment and additional settlement terms, including principal forgiveness, servicing standards, enforcement mechanisms and releases. We cannot be certain as to the ultimate outcome that may result from these negotiations or the timing of such outcome. For additional information, see Off-Balance Sheet Arrangements and Contractual Obligations – Other Mortgage-related Matters on page 66.
European Union Sovereign Risks
In 2010, a financial crisis emerged in Europe triggered by high sovereign budget deficits and rising direct and contingent sovereign debt in Greece, Ireland, Italy, Portugal and Spain, which created concerns about the ability of these EU countries to continue to service their sovereign debt obligations. These conditions impacted financial markets and resulted in credit ratings downgrades for, and high and volatile bond yields on, the sovereign debt of many EU countries. Certain European countries continue to experience varying degrees of financial stress, and yields on government-issued bonds in Greece, Ireland, Italy, Portugal and Spain have risen and remain volatile. Despite assistance packages to certain of these countries, the creation of a joint EU-IMF European Financial Stability Facility (EFSF) in May 2010 and additional expanded financial assistance to Greece, uncertainty over the outcome of the EU governments' financial support programs and worries about sovereign finances persisted. Market concerns over the direct and indirect exposure of certain European banks and insurers to these EU countries resulted in a widening of credit spreads and increased costs of funding for these financial institutions. On October 27, 2011, representatives of 17 EU countries announced a financial relief plan that involves a write-off of certain sovereign debt by European banks, requirements regarding European bank capital ratios and increases in available rescue funds. Although financial markets initially responded favorably to the announcement of this plan, details remain to be negotiated, and implementation is subject to certain contingencies and risks. For a further discussion of our direct sovereign and non-sovereign exposures in Europe, see Non-U.S. Portfolio on page 115.
Debt and Capital Exchanges
During the third quarter, global economic uncertainty and volatility continued as described more fully in the Executive Summary – Third Quarter 2011 Economic and Business Environment discussion on page 7. Concerns over these and other issues contributed to a widening of credit spreads for many financial institutions, including the Corporation, resulting in lowering of market values of debt and preferred stock issued by financial institutions. The uncertainty in the market evidenced by, among other things, volatility in credit spread movements, makes it economically advantageous at this time to consider retirement of issued junior subordinated debt and preferred stock. As a result of these matters, we intend to explore the issuance of common stock and senior notes in exchange for shares of preferred stock and, subject to any required amendments to the applicable governing documents, certain trust preferred capital debt securities (Trust Securities) issued by unconsolidated trust companies, in privately negotiated transactions. If we pursue the exchange of Trust Securities, we would immediately use the purchased Trust Securities to retire a corresponding amount of our junior subordinated debt that we previously issued to the unconsolidated trust companies. These transactions would increase Tier 1 common capital and, on an after-tax basis, reduce the combined level of interest expense and dividends paid on the combined junior subordinated debt and preferred stock. The senior notes and common stock would be recorded at fair value at issuance, which is expected to be less than the par and carrying value of the preferred stock and/or junior subordinated debt, which would result in the exchanges being accretive to earnings per common share for the period in which completed. The ultimate impact on earnings per common share is not expected to be significant for periods subsequent to the exchange and will not be known until the level of earnings per common share for the period and the exact combination of exchanged preferred stock and Trust Securities are known. We will not issue more than 400 million shares of common stock or $3 billion in new senior notes in connection with these exchanges.
Net income (loss) was $6.2 billion and $(545) million for the three and nine months ended September 30, 2011 compared to $(7.3) billion and $(994) million for the same periods in 2010. The principal contributors to pre-tax income for the three-month period were the following: $4.5 billion positive fair value adjustments on structured liabilities, a gain of $3.6 billion from the sale of approximately half of our investment in CCB shares, DVA gains of $1.7 billion and losses of $2.2 billion related to other equity and strategic investments. Net income for the third quarter of 2011 was also positively impacted by a favorable tax rate. The principal contributors to the pre-tax loss for the nine-month period, including the items noted above for the three-month period, were the following: $14.0 billion of representations and warranties provision in the second quarter of 2011 largely related to the BNY Mellon Settlement as well as other mortgage-related costs, including a $2.6 billion non-cash, non-tax deductible goodwill impairment charge in CRES, higher mortgage-related litigation expense and increased mortgage assessments and waivers costs.
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| | | | | | | | | | | | | | | |
Table 2 |
Summary Income Statement |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in millions) | 2011 | | 2010 | | 2011 | | 2010 |
Net interest income, FTE basis (1) | $ | 10,739 |
| | $ | 12,717 |
| | $ | 34,629 |
| | $ | 39,984 |
|
Noninterest income | 17,963 |
| | 14,265 |
| | 34,651 |
| | 48,738 |
|
Total revenue, net of interest expense, FTE basis (1) | 28,702 |
| | 26,982 |
| | 69,280 |
| | 88,722 |
|
Provision for credit losses | 3,407 |
| | 5,396 |
| | 10,476 |
| | 23,306 |
|
Goodwill impairment | — |
| | 10,400 |
| | 2,603 |
| | 10,400 |
|
All other noninterest expense | 17,613 |
| | 16,816 |
| | 58,149 |
| | 51,844 |
|
Income (loss) before income taxes | 7,682 |
| | (5,630 | ) | | (1,948 | ) | | 3,172 |
|
Income tax expense (benefit), FTE basis (1) | 1,450 |
| | 1,669 |
| | (1,403 | ) | | 4,166 |
|
Net income (loss) | 6,232 |
| | (7,299 | ) | | (545 | ) | | (994 | ) |
Preferred stock dividends | 343 |
| | 348 |
| | 954 |
| | 1,036 |
|
Net income (loss) applicable to common shareholders | $ | 5,889 |
| | $ | (7,647 | ) | | $ | (1,499 | ) | | $ | (2,030 | ) |
| | | | | | | |
Per common share information | | | | | | | |
Earnings (loss) | $ | 0.58 |
| | $ | (0.77 | ) | | $ | (0.15 | ) | | $ | (0.21 | ) |
Diluted earnings (loss) | 0.56 |
| | (0.77 | ) | | (0.15 | ) | | (0.21 | ) |
| |
(1) | FTE basis is a non-GAAP measure. Other companies may define or calculate this measure differently. For additional information on this measure and for a corresponding reconciliation to GAAP financial measures, see Supplemental Financial Data on page 21. |
Net interest income on a fully taxable-equivalent (FTE) basis decreased $2.0 billion and $5.4 billion for the three and nine months ended September 30, 2011 compared to the same periods in 2010. The decrease was primarily due to lower consumer loan balances and yields and decreased investment yields, including the acceleration of purchase premium amortization from an increase in modeled prepayment expectations and increased hedge ineffectiveness. Also negatively impacting net interest income was lower trading-related net interest income. Net interest income benefited from ongoing reductions in long-term debt balances and lower rates paid on deposits. The net interest yield on a FTE basis was 2.32 percent and 2.50 percent for the three and nine months ended September 30, 2011.
Noninterest income increased $3.7 billion and decreased $14.1 billion for the three and nine months ended September 30, 2011 compared to the same periods in 2010. The increase for the three-month period was primarily the result of the positive fair value adjustments on structured liabilities due to widening of our credit spreads, the gain on the sale of CCB shares and DVA gains partially offset by adverse market conditions and extreme volatility in the credit markets in 2011 and losses related to other equity and strategic investments. The decrease for the nine-month period resulted from the above mentioned representations and warranties provision which is included in mortgage banking income. For additional information on representations and warranties, see Off-Balance Sheet Arrangements and Contractual Obligations – Representations and Warranties on page 58. Other components of the nine-month period-over-period change in noninterest income included a decrease in service charges due to the impact of overdraft policy changes in conjunction with the implementation of Regulation E and a decrease in trading account profits due to strong first quarter 2010.
The provision for credit losses decreased $2.0 billion to $3.4 billion, and $12.8 billion to $10.5 billion for the three and nine months ended September 30, 2011 compared to the same periods in 2010. The provision for credit losses reflected $1.7 billion and $6.3 billion of reserve reductions for the three and nine months ended September 30, 2011 as portfolio trends improved across most of the consumer and commercial businesses, particularly the Card Services and commercial real estate portfolios. The improvement for the nine-month period was offset in part by additions to consumer purchased credit-impaired (PCI) loan portfolio reserves in the first half of 2011.
Noninterest expense decreased $9.6 billion and $1.5 billion for the three and nine months ended September 30, 2011 compared to the same periods in 2010. The decreases were driven by a $10.4 billion goodwill impairment charge recorded during the third quarter of 2010 partially offset, for the nine-month period, by the $2.6 billion goodwill impairment charge recorded during the second quarter of 2011. In addition, offsetting the decrease for the nine-month period was an increase in other general operating expense which includes mortgage-related assessments and waivers costs and litigation expense both of which increased significantly compared to the same period in 2010 and an increase in personnel costs due to the continued build-out of several businesses and technology.
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Segment Results |
|
Table 3 |
Business Segment Results |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| Total Revenue (1) | | Net Income (Loss) | | Total Revenue (1) | | Net Income (Loss) |
(Dollars in millions) | 2011 | | 2010 | | 2011 | | 2010 | | 2011 | | 2010 | | 2011 | | 2010 |
Deposits | $ | 3,119 |
| | $ | 3,146 |
| | $ | 276 |
| | $ | 198 |
| | $ | 9,609 |
| | $ | 10,559 |
| | $ | 1,051 |
| | $ | 1,562 |
|
Card Services | 4,507 |
| | 5,377 |
| | 1,264 |
| | (9,844 | ) | | 14,085 |
| | 16,984 |
| | 4,767 |
| | (8,269 | ) |
Consumer Real Estate Services | 2,822 |
| | 3,612 |
| | (1,137 | ) | | (392 | ) | | (6,430 | ) | | 9,849 |
| | (18,070 | ) | | (4,010 | ) |
Global Commercial Banking | 2,533 |
| | 2,633 |
| | 1,050 |
| | 644 |
| | 7,997 |
| | 8,611 |
| | 3,354 |
| | 2,165 |
|
Global Banking & Markets | 5,222 |
| | 7,073 |
| | (302 | ) | | 1,468 |
| | 19,896 |
| | 22,584 |
| | 3,400 |
| | 5,628 |
|
Global Wealth & Investment Management | 4,230 |
| | 3,898 |
| | 347 |
| | 269 |
| | 13,212 |
| | 12,128 |
| | 1,386 |
| | 1,022 |
|
All Other | 6,269 |
| | 1,243 |
| | 4,734 |
| | 358 |
| | 10,911 |
| | 8,007 |
| | 3,567 |
| | 908 |
|
Total FTE basis | 28,702 |
| | 26,982 |
| | 6,232 |
| | (7,299 | ) | | 69,280 |
| | 88,722 |
| | (545 | ) | | (994 | ) |
FTE adjustment | (249 | ) | | (282 | ) | | — |
| | — |
| | (714 | ) | | (900 | ) | | — |
| | — |
|
Total Consolidated | $ | 28,453 |
| | $ | 26,700 |
| | $ | 6,232 |
| | $ | (7,299 | ) | | $ | 68,566 |
| | $ | 87,822 |
| | $ | (545 | ) | | $ | (994 | ) |
| |
(1) | Total revenue is net of interest expense and is on a FTE basis which is a non-GAAP measure. For more information on this measure and for a corresponding reconciliation to a GAAP financial measure, see Supplemental Financial Data on page 21. |
The following discussion provides an overview of the results of our business segments and All Other for the three and nine months ended September 30, 2011 compared to the same periods in 2010. For additional information on these results, see Business Segment Operations on page 34.
Deposits net income increased for the three-month period due to a decrease in noninterest expense partially offset by lower revenue. Revenue declined primarily due to the impact of overdraft policy changes in conjunction with Regulation E that were fully implemented during the third quarter of 2010. Noninterest expense was lower due to a decrease in operating expenses. Net income decreased for the nine-month period as the result of a decrease in noninterest income due to the impact of overdraft policy changes in conjunction with Regulation E.
Card Services net income increased for the three- and nine-month periods primarily due to a decrease in noninterest expense as a result of the goodwill impairment charge in 2010 and a decrease in the provision for credit losses. Revenue decreased as a result of a decline in net interest income from lower average loan balances and yields as well as lower noninterest income. Noninterest income declined for the nine-month period due to the impact of the CARD Act and the gain on the sale of our MasterCard position in the second quarter of 2010. Provision for credit losses decreased for the three- and nine-month periods reflecting lower delinquencies, improved collection rates and fewer bankruptcy filings as a result of improving economic conditions and lower average loans.
CRES net loss increased for the three- and nine-month periods due to a decline in revenue and increased noninterest expense, partially offset by a decline in provision for credit losses. Revenue declined for the nine-month period due to an increase in representations and warranties provision, lower core production income and a decrease in insurance income due to the sale of Balboa's lender-placed insurance business in the second quarter of 2011. The revenue decline for the three-month period was driven by lower core production income and a decrease in insurance income, partially offset by a decrease in representations and warranties provision. Noninterest expense increased in the three- and nine-month periods due to higher default-related and other loss mitigation expenses, increased mortgage-related assessments and waivers costs and higher litigation expense. Noninterest expense for the nine-month period was also impacted by a non-cash goodwill impairment charge.
Global Commercial Banking net income increased for the three- and nine-month periods driven by lower credit costs from improved asset quality. Revenue decreased for the three- and nine-month periods driven by lower net interest income related to asset and liability management (ALM) activities and lower loan volumes. Noninterest expense decreased for the three-month period driven by lower support costs and increased for the nine-month period due to an increase in technology investments.
GBAM reported a net loss for the three months ended September 30, 2011 compared to net income for the same period in the prior year driven by decreased sales and trading activity due to a less favorable market environment which was partially offset by DVA gains, lower investment banking fees and the U.K corporate income tax rate change enacted during the quarter which reduced the carrying value of the related deferred tax assets. Net income decreased for the nine-month period driven by decreased sales and trading activity due to a less favorable market environment which was partially offset by DVA gains, and higher noninterest expense driven by increased costs related to investments in infrastructure.
GWIM net income increased for the three- and nine-month periods driven by higher revenue, partially offset by higher noninterest expense. Revenue increased driven by higher asset management fees from higher market levels and long-term assets under management (AUM) inflows as well as higher net interest income. The provision for credit losses increased for the three-month period due to increased reserves in the residential mortgage portfolio. During the nine-month period, the provision for credit losses decreased driven by improving portfolio trends. Noninterest expense increased due to higher revenue-related expenses and personnel costs associated with the continued build-out of the business.
All Other net income increased for the three- and nine-month periods due to higher noninterest income and lower noninterest expense partially offset by higher provision for credit losses. Noninterest income increased due to positive fair value adjustments related to structured liabilities as well as the gain on sale of approximately half of our equity interest in CCB partially offset by losses related to equity and strategic investments excluding CCB. The increase in provision for credit losses was driven primarily by a slower pace of improvement in the residential mortgage portfolio. The decrease in noninterest expense was due to a decline in merger and restructuring charges.
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|
Financial Highlights |
|
Net Interest Income |
Net interest income on a FTE basis decreased $2.0 billion to $10.7 billion and $5.4 billion to $34.6 billion for the three and nine months ended September 30, 2011 compared to the same periods in 2010. The decrease was primarily due to lower consumer loan balances and yields and decreased investment yields, including the acceleration of purchase premium amortization from an increase in modeled prepayment expectations and increased hedge ineffectiveness due to lower interest rates. Also negatively impacting net interest income was lower trading-related net interest income. Net interest income benefited from ongoing reductions in long-term debt balances and lower rates paid on deposits. The net interest yield on a FTE basis decreased 40 basis points (bps) to 2.32 percent and 31 bps to 2.50 percent for the three and nine months ended September 30, 2011 compared to the same periods in 2010 as the margin continues to be under pressure due to the low rate environment.
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| | | | | | | | | | | | | | | | |
Noninterest Income |
|
Table 4 |
Noninterest Income |
| | Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in millions) | | 2011 | | 2010 | | 2011 | | 2010 |
Card income | | $ | 1,911 |
| | $ | 1,982 |
| | $ | 5,706 |
| | $ | 5,981 |
|
Service charges | | 2,068 |
| | 2,212 |
| | 6,112 |
| | 7,354 |
|
Investment and brokerage services | | 3,022 |
| | 2,724 |
| | 9,132 |
| | 8,743 |
|
Investment banking income | | 942 |
| | 1,371 |
| | 4,204 |
| | 3,930 |
|
Equity investment income | | 1,446 |
| | 357 |
| | 4,133 |
| | 3,748 |
|
Trading account profits | | 1,604 |
| | 2,596 |
| | 6,417 |
| | 9,059 |
|
Mortgage banking income (loss) | | 1,617 |
| | 1,755 |
| | (10,949 | ) | | 4,153 |
|
Insurance income | | 190 |
| | 75 |
| | 1,203 |
| | 1,468 |
|
Gains on sales of debt securities | | 737 |
| | 883 |
| | 2,182 |
| | 1,654 |
|
Other income | | 4,511 |
| | 433 |
| | 6,729 |
| | 3,498 |
|
Net impairment losses recognized in earnings on AFS debt securities | | (85 | ) | | (123 | ) | | (218 | ) | | (850 | ) |
Total noninterest income | | $ | 17,963 |
| | $ | 14,265 |
| | $ | 34,651 |
| | $ | 48,738 |
|
Noninterest income increased $3.7 billion to $18.0 billion and decreased $14.1 billion to $34.7 billion for the three and nine months ended September 30, 2011 compared to the same periods in 2010. The following highlights the significant changes.
| |
• | Service charges decreased $144 million and $1.2 billion for the three and nine months ended September 30, 2011 largely due to the impact of overdraft policy changes in conjunction with Regulation E, that were fully implemented during the third quarter of 2010. |
| |
• | Investment banking income decreased $429 million and increased $274 million for the three and nine months ended September 30, 2011. The decrease for the three-month period was due to weakening markets for debt and equity issuance fees as a result of market uncertainty and a decrease in global fee pools. The increase for the nine-month period was primarily due to higher advisory fees. |
| |
• | Equity investment income increased $1.1 billion and $385 million for the three and nine months ended September 30, 2011. The three months ended September 30, 2011 included a $3.6 billion gain on the sale of approximately one-half of our investment in CCB, partially offset by losses of $2.2 billion related to equity and strategic investments excluding CCB. The nine months ended September 30, 2011 included the CCB gain and a $377 million gain on the sale of our investment in BlackRock, Inc. (BlackRock), partially offset by $1.1 billion of impairment write-downs on our merchant services joint venture. The nine-month period in the prior year included a $1.2 billion gain on the sale of a strategic investment and $1.2 billion of positive valuation adjustments in Global Principal Investments (GPI). |
| |
• | Trading account profits decreased $992 million and $2.6 billion for the three and nine months ended September 30, 2011 primarily due to adverse market conditions and extreme volatility in the credit markets compared to the prior year. DVA gains on derivatives of $1.7 billion and $1.5 billion were recorded for the three and nine months ended September 30, 2011 as a result of the widening of our credit spreads during the period, compared to losses of $34 million and gains of $212 million for the same periods in the prior year. Also, in conjunction with regulatory reform measures and our initiative to optimize our balance sheet, the proprietary trading business was completely exited as of June 30, 2011. Proprietary trading revenue was $434 million for the six months ended June 30, 2011 compared to $1.2 billion in the nine months ended September 30, 2010. |
| |
• | Mortgage banking income decreased $138 million and $15.1 billion for the three and nine months ended September 30, 2011 with the nine-month change driven by a $12.7 billion increase in the representations and warranties provision which was primarily related to the BNY Mellon Settlement as well as lower production volume due to a reduction in new loan origination volumes and less favorable mortgage servicing rights (MSR) results. |
| |
• | Other income increased $4.1 billion and $3.2 billion for the three and nine months ended September 30, 2011. For the three months ended September 30, 2011, the increase was primarily due to positive fair value adjustments of $4.5 billion on structured liabilities due to widening of our credit spreads, compared to negative fair value adjustments of $190 million for the same period in 2010. For the nine months ended September 30, 2011, the increase was primarily due to positive fair value adjustments of $4.1 billion on structured liabilities compared to positive fair value adjustments of $1.2 billion in the same period in 2010. In addition to the factors described above, the nine months ended September 30, 2011 included a $771 million gain on the sale of the lender-placed insurance business of Balboa. |
|
|
Provision for Credit Losses |
The provision for credit losses decreased $2.0 billion to $3.4 billion, and $12.8 billion to $10.5 billion for the three and nine months ended September 30, 2011 compared to the same periods in 2010. The provision for credit losses included $1.7 billion and $6.3 billion of reserve reductions for the three and nine months ended September 30, 2011 driven primarily by lower delinquencies, improved collection rates and fewer bankruptcy filings across the Card Services portfolio, and improvement in overall credit quality in the commercial real estate portfolio.
The provision for credit losses related to our consumer portfolio decreased $1.3 billion to $3.5 billion and $9.1 billion to $11.2 billion for the three and nine months ended September 30, 2011 compared to the same periods in 2010. The provision for credit losses related to our commercial portfolio including the provision for unfunded lending commitments decreased $653 million to a benefit of $59 million and $3.8 billion to a benefit of $695 million for the three and nine months ended September 30, 2011 compared to the same periods in 2010.
Net charge-offs totaled $5.1 billion, or 2.17 percent and $16.8 billion, or 2.41 percent of average loans and leases for the three and nine months ended September 30, 2011 compared with $7.2 billion, or 3.07 percent, and $27.6 billion, or 3.84 percent, for the three and nine months ended September 30, 2010. The decrease in net charge-offs was primarily driven by improvements in general economic conditions that resulted in lower delinquencies, improved collection rates and fewer bankruptcy filings across the Card Services portfolio as well as lower losses in the home equity portfolio driven by fewer delinquent loans. For more information on the provision for credit losses, see Provision for Credit Losses on page 119.
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| | | | | | | | | | | | | | | |
Noninterest Expense |
|
Table 5 |
Noninterest Expense |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in millions) | 2011 | | 2010 | | 2011 | | 2010 |
Personnel | $ | 8,865 |
| | $ | 8,402 |
| | $ | 28,204 |
| | $ | 26,349 |
|
Occupancy | 1,183 |
| | 1,150 |
| | 3,617 |
| | 3,504 |
|
Equipment | 616 |
| | 619 |
| | 1,815 |
| | 1,845 |
|
Marketing | 556 |
| | 497 |
| | 1,680 |
| | 1,479 |
|
Professional fees | 937 |
| | 651 |
| | 2,349 |
| | 1,812 |
|
Amortization of intangibles | 377 |
| | 426 |
| | 1,144 |
| | 1,311 |
|
Data processing | 626 |
| | 602 |
| | 1,964 |
| | 1,882 |
|
Telecommunications | 405 |
| | 361 |
| | 1,167 |
| | 1,050 |
|
Other general operating | 3,872 |
| | 3,687 |
| | 15,672 |
| | 11,162 |
|
Goodwill impairment | — |
| | 10,400 |
| | 2,603 |
| | 10,400 |
|
Merger and restructuring charges | 176 |
| | 421 |
| | 537 |
| | 1,450 |
|
Total noninterest expense | $ | 17,613 |
| | $ | 27,216 |
| | $ | 60,752 |
| | $ | 62,244 |
|
Noninterest expense decreased $9.6 billion to $17.6 billion, and $1.5 billion to $60.8 billion for the three and nine months ended September 30, 2011 compared to the same periods in 2010. The largest drivers in the comparisons were goodwill impairment charges of $10.4 billion in the third quarter of 2010 and $2.6 billion in the second quarter of 2011.
Personnel expense increased $1.9 billion for the nine months ended September 30, 2011 compared to the same period in 2010 attributable to personnel costs related to the continued build-out of certain businesses, technology costs as well as increases in default-related servicing. Additionally, for the same period, professional fees increased $537 million related to consulting fees for regulatory initiatives as well as higher legal expenses and other general operating expenses increased $4.5 billion largely as a result of $1.9 billion in mortgage-related assessments and waivers costs and an increase of $2.6 billion in litigation expense, predominantly related to mortgage issues. Merger and restructuring expenses decreased by $913 million for the nine months ended September 30, 2011 compared to the same period in 2010.
Income tax expense was $1.2 billion on pre-tax income of $7.4 billion for the three months ended September 30, 2011 resulting in an effective tax rate of 16.2 percent compared to income tax expense of $1.4 billion on the pre-tax loss of $5.9 billion for the same period in 2010. For the nine months ended September 30, 2011, the income tax benefit was $2.1 billion on the pre-tax loss of $2.7 billion resulting in an effective tax rate of 79.5 percent benefit on the loss compared to income tax expense of $3.3 billion on the pre-tax income of $2.3 billion for the same period in 2010. The effective tax rates for the three and nine months ended September 30, 2010 were not meaningful due to the impact of the non-deductible $10.4 billion goodwill impairment charge in the third quarter of 2010.
The effective tax rate of 16.2 percent for the three months ended September 30, 2011 was driven by a $619 million reduction of a valuation allowance established against the Merrill Lynch capital loss carryover deferred tax asset, a $593 million benefit for capital loss deferred tax assets recognized in connection with the liquidation of certain subsidiaries and recurring tax preference items, such as tax-exempt income and affordable housing credits. These were partially offset by the $782 million impact of the U.K. corporate income tax rate reduction referred to below.
The effective tax rate of 79.5 percent benefit for the nine months ended September 30, 2011 was driven by the same factors as above, as well as by the effect of those net tax benefits on the level of the year-to-date pre-tax loss, partially offset by the impact of the non-deductible $2.6 billion goodwill impairment charge in the second quarter of 2011.
On July 19, 2011, the U.K. 2011 Finance Bill was enacted which reduced the corporate income tax rate to 26 percent beginning on April 1, 2011, and then to 25 percent effective April 1, 2012. These rate reductions will favorably affect income tax expense on future U.K. earnings but also required us to remeasure our U.K. net deferred tax assets using the lower tax rates. As noted above, income tax expense (benefit) for the three and nine months ended September 30, 2011 included a $782 million charge for the remeasurement. If corporate income tax rates were to be reduced to 23 percent by 2014 as suggested in U.K. Treasury announcements and assuming no change in the deferred tax asset balance, a charge to income tax expense of approximately $400 million for each one percent reduction in the rate would result in each period of enactment.
|
| | | | | | | | | | | | | | | | | | | | | | | |
Balance Sheet Overview |
|
Table 6 |
Selected Balance Sheet Data |
| | | | | Average Balance |
| September 30
2011 | | December 31
2010 | | Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in millions) | | | 2011 | | 2010 | | 2011 | | 2010 |
Assets | | | | | | | | | | | |
Federal funds sold and securities borrowed or purchased under agreements to resell | $ | 249,998 |
| | $ | 209,616 |
| | $ | 256,143 |
| | $ | 254,820 |
| | $ | 247,635 |
| | $ | 261,444 |
|
Trading account assets | 176,398 |
| | 194,671 |
| | 180,438 |
| | 210,529 |
| | 195,931 |
| | 212,985 |
|
Debt securities | 350,725 |
| | 338,054 |
| | 344,327 |
| | 328,097 |
| | 338,512 |
| | 317,906 |
|
Loans and leases | 932,531 |
| | 940,440 |
| | 942,032 |
| | 934,860 |
| | 939,848 |
| | 964,302 |
|
Allowance for loan and lease losses | (35,082 | ) | | (41,885 | ) | | (36,429 | ) | | (45,232 | ) | | (38,632 | ) | | (46,678 | ) |
All other assets | 545,058 |
| | 624,013 |
| | 614,943 |
| | 696,323 |
| | 642,938 |
| | 753,018 |
|
Total assets | $ | 2,219,628 |
| | $ | 2,264,909 |
| | $ | 2,301,454 |
| | $ | 2,379,397 |
| | $ | 2,326,232 |
| | $ | 2,462,977 |
|
Liabilities | | | | | | | | | | | |
Deposits | $ | 1,041,353 |
| | $ | 1,010,430 |
| | $ | 1,051,320 |
| | $ | 973,846 |
| | $ | 1,036,905 |
| | $ | 982,132 |
|
Federal funds purchased and securities loaned or sold under agreements to repurchase | 248,116 |
| | 245,359 |
| | 261,830 |
| | 318,368 |
| | 281,476 |
| | 372,311 |
|
Trading account liabilities | 68,026 |
| | 71,985 |
| | 87,841 |
| | 95,265 |
| | 89,302 |
| | 95,159 |
|
Commercial paper and other short-term borrowings | 33,869 |
| | 59,962 |
| | 41,404 |
| | 72,780 |
| | 56,107 |
| | 78,437 |
|
Long-term debt | 398,965 |
| | 448,431 |
| | 420,273 |
| | 485,588 |
| | 431,902 |
| | 498,794 |
|
All other liabilities | 199,047 |
| | 200,494 |
| | 216,376 |
| | 199,572 |
| | 201,155 |
| | 203,679 |
|
Total liabilities | 1,989,376 |
| | 2,036,661 |
| | 2,079,044 |
| | 2,145,419 |
| | 2,096,847 |
| | 2,230,512 |
|
Shareholders’ equity | 230,252 |
| | 228,248 |
| | 222,410 |
| | 233,978 |
| | 229,385 |
| | 232,465 |
|
Total liabilities and shareholders’ equity | $ | 2,219,628 |
| | $ | 2,264,909 |
| | $ | 2,301,454 |
| | $ | 2,379,397 |
| | $ | 2,326,232 |
| | $ | 2,462,977 |
|
Period-end balance sheet amounts may vary from average balance sheet amounts due to liquidity and balance sheet management activities, primarily involving our portfolios of highly liquid assets, that are designed to ensure the adequacy of capital while enhancing our ability to manage liquidity requirements for the Corporation and our customers, and to position the balance sheet in accordance with the Corporation’s risk appetite. The execution of these activities requires the use of balance sheet and capital-related limits including spot, average and risk-weighted asset limits, particularly in our trading businesses. One of our key metrics, Tier 1 leverage ratio, is calculated based on adjusted quarterly average total assets. Risk mitigation activities that contributed to the decrease in average assets during the three and nine months ended September 30, 2011 included reduction of exposure within various types of low quality and alternative investments, significant loan run-off and the exit of proprietary trading.
At September 30, 2011, total assets were $2.2 trillion, a decrease of $45.3 billion, or two percent, from December 31, 2010 driven by a decline in cash held overnight at the Federal Reserve, the sale of certain strategic investments, lower trading asset levels due to reduced long inventory hedges, lower yield trading activity and a decline in the market value of inventory hedges.
Average total assets decreased $77.9 billion and $136.7 billion for the three and nine months ended September 30, 2011 compared to the same periods in 2010. The most significant decreases were due to lower overnight cash deposits with the Federal Reserve and a reduction in goodwill. For the nine months ended September 30, 2011, certain actions were taken to reduce risk-weighted assets, including reducing certain capital markets risk exposures, selling assets, reducing our loan run-off portfolio and exiting proprietary trading activities. For more information, see Capital Management – Regulatory Capital on page 70.
|
|
Liabilities and Shareholders’ Equity |
At September 30, 2011, total liabilities were $2.0 trillion, a decrease of $47.3 billion, or two percent, from December 31, 2010 driven by planned reductions in long-term debt and short-term borrowings, partially offset by deposit growth.
Average total liabilities decreased $66.4 billion and $133.7 billion for the three and nine months ended September 30, 2011 compared to the same periods in 2010. The decreases were primarily driven by the same factors described above for ending liabilities and reductions in securities sold under agreement to repurchase partially offset by a higher representations and warranties reserve.
Shareholders’ equity increased $2.0 billion to $230.3 billion at September 30, 2011 compared to December 31, 2010. The increase was driven primarily by the sale of preferred stock and related warrant to Berkshire, partially offset by a decrease in accumulated other comprehensive income (OCI). For more information, see Note 12 – Shareholders' Equity to the Consolidated Financial Statements.
Average shareholders’ equity decreased $11.6 billion and $3.1 billion for the three and nine months ended September 30, 2011 compared to the same periods in 2010. The decreases were primarily driven by the impact of the net loss for the three months ended June 30, 2011.
|
| | | | | | | | | | | | | | | | | | | |
Table 7 |
Selected Quarterly Financial Data |
| 2011 Quarters | | 2010 Quarters |
(In millions, except per share information) | Third | | Second | | First | | Fourth | | Third |
Income statement | | | | | | | | | |
Net interest income | $ | 10,490 |
| | $ | 11,246 |
| | $ | 12,179 |
| | $ | 12,439 |
| | $ | 12,435 |
|
Noninterest income | 17,963 |
| | 1,990 |
| | 14,698 |
| | 9,959 |
| | 14,265 |
|
Total revenue, net of interest expense | 28,453 |
| | 13,236 |
| | 26,877 |
| | 22,398 |
| | 26,700 |
|
Provision for credit losses | 3,407 |
| | 3,255 |
| | 3,814 |
| | 5,129 |
| | 5,396 |
|
Goodwill impairment | — |
| | 2,603 |
| | — |
| | 2,000 |
| | 10,400 |
|
Merger and restructuring charges | 176 |
| | 159 |
| | 202 |
| | 370 |
| | 421 |
|
All other noninterest expense (1) | 17,437 |
| | 20,094 |
| | 20,081 |
| | 18,494 |
| | 16,395 |
|
Income (loss) before income taxes | 7,433 |
| | (12,875 | ) | | 2,780 |
| | (3,595 | ) | | (5,912 | ) |
Income tax expense (benefit) | 1,201 |
| | (4,049 | ) | | 731 |
| | (2,351 | ) | | 1,387 |
|
Net income (loss) | 6,232 |
| | (8,826 | ) | | 2,049 |
| | (1,244 | ) | | (7,299 | ) |
Net income (loss) applicable to common shareholders | 5,889 |
| | (9,127 | ) | | 1,739 |
| | (1,565 | ) | | (7,647 | ) |
Average common shares issued and outstanding | 10,116 |
| | 10,095 |
| | 10,076 |
| | 10,037 |
| | 9,976 |
|
Average diluted common shares issued and outstanding (2) | 10,464 |
| | 10,095 |
| | 10,181 |
| | 10,037 |
| | 9,976 |
|
Performance ratios | | | | | | | | | |
Return on average assets | 1.07 | % | | n/m |
| | 0.36 | % | | n/m |
| | n/m |
|
Four quarter trailing return on average assets (3) | n/m |
| | n/m |
| | n/m |
| | n/m |
| | n/m |
|
Return on average common shareholders’ equity | 11.40 |
| | n/m |
| | 3.29 |
| | n/m |
| | n/m |
|
Return on average tangible common shareholders’ equity (4) | 18.30 |
| | n/m |
| | 5.28 |
| | n/m |
| | n/m |
|
Return on average tangible shareholders’ equity (4) | 17.03 |
| | n/m |
| | 5.54 |
| | n/m |
| | n/m |
|
Total ending equity to total ending assets | 10.37 |
| | 9.83 | % | | 10.15 |
| | 10.08 | % | | 9.85 | % |
Total average equity to total average assets | 9.66 |
| | 10.05 |
| | 9.87 |
| | 9.94 |
| | 9.83 |
|
Dividend payout | 1.73 |
| | n/m |
| | 6.06 |
| | n/m |
| | n/m |
|
Per common share data | | | | | | | | | |
Earnings (loss) | $ | 0.58 |
| | $ | (0.90 | ) | | $ | 0.17 |
| | $ | (0.16 | ) | | $ | (0.77 | ) |
Diluted earnings (loss) (2) | 0.56 |
| | (0.90 | ) | | 0.17 |
| | (0.16 | ) | | (0.77 | ) |
Dividends paid | 0.01 |
| | 0.01 |
| | 0.01 |
| | 0.01 |
| | 0.01 |
|
Book value | 20.80 |
| | 20.29 |
| | 21.15 |
| | 20.99 |
| | 21.17 |
|
Tangible book value (4) | 13.22 |
| | 12.65 |
| | 13.21 |
| | 12.98 |
| | 12.91 |
|
Market price per share of common stock | | | | | | | | | |
Closing | $ | 6.12 |
| | $ | 10.96 |
| | $ | 13.33 |
| | $ | 13.34 |
| | $ | 13.10 |
|
High closing | 11.09 |
| | 13.72 |
| | 15.25 |
| | 13.56 |
| | 15.67 |
|
Low closing | 6.06 |
| | 10.50 |
| | 13.33 |
| | 10.95 |
| | 12.32 |
|
Market capitalization | $ | 62,023 |
| | $ | 111,060 |
| | $ | 135,057 |
| | $ | 134,536 |
| | $ | 131,442 |
|
Average balance sheet | | | | | | | | | |
Total loans and leases | $ | 942,032 |
| | $ | 938,513 |
| | $ | 938,966 |
| | $ | 940,614 |
| | $ | 934,860 |
|
Total assets | 2,301,454 |
| | 2,339,110 |
| | 2,338,538 |
| | 2,370,258 |
| | 2,379,397 |
|
Total deposits | 1,051,320 |
| | 1,035,944 |
| | 1,023,140 |
| | 1,007,738 |
| | 973,846 |
|
Long-term debt | 420,273 |
| | 435,144 |
| | 440,511 |
| | 465,875 |
| | 485,588 |
|
Common shareholders’ equity | 204,928 |
| | 218,505 |
| | 214,206 |
| | 218,728 |
| | 215,911 |
|
Total shareholders’ equity | 222,410 |
| | 235,067 |
| | 230,769 |
| | 235,525 |
| | 233,978 |
|
Asset quality(5) | | | | | | | | | |
Allowance for credit losses (6) | $ | 35,872 |
| | $ | 38,209 |
| | $ | 40,804 |
| | $ | 43,073 |
| | $ | 44,875 |
|
Nonperforming loans, leases and foreclosed properties (7) | 29,059 |
| | 30,058 |
| | 31,643 |
| | 32,664 |
| | 34,556 |
|
Allowance for loan and lease losses as a percentage of total loans and leases outstanding (7) | 3.81 | % | | 4.00 | % | | 4.29 | % | | 4.47 | % | | 4.69 | % |
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (7) | 133 |
| | 135 |
| | 135 |
| | 136 |
| | 135 |
|
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases excluding the PCI loan portfolio (6) | 101 |
| | 105 |
| | 108 |
| | 116 |
| | 118 |
|
Amounts included in allowance that are excluded from nonperforming loans (8) | $ | 18,317 |
| | $ | 19,935 |
| | $ | 22,110 |
| | $ | 22,908 |
| | $ | 23,661 |
|
Allowance as a percentage of total nonperforming loans and leases excluding the amounts included in the allowance that are excluded from nonperforming loans (8) | 63 | % | | 63 | % | | 60 | % | | 62 | % | | 62 | % |
Net charge-offs | $ | 5,086 |
| | $ | 5,665 |
| | $ | 6,028 |
| | $ | 6,783 |
| | $ | 7,197 |
|
Annualized net charge-offs as a percentage of average loans and leases outstanding (7) | 2.17 | % | | 2.44 | % | | 2.61 | % | | 2.87 | % | | 3.07 | % |
Nonperforming loans and leases as a percentage of total loans and leases outstanding (7) | 2.87 |
| | 2.96 |
| | 3.19 |
| | 3.27 |
| | 3.47 |
|
Nonperforming loans, leases and foreclosed properties as a percentage of total loans, leases and foreclosed properties (7) | 3.15 |
| | 3.22 |
| | 3.40 |
| | 3.48 |
| | 3.71 |
|
Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs | 1.74 |
| | 1.64 |
| | 1.63 |
| | 1.56 |
| | 1.53 |
|
Capital ratios (period end) | | | | | | | | | |
Risk-based capital: | | | | | | | | | |
Tier 1 common | 8.65 | % | | 8.23 | % | | 8.64 | % | | 8.60 | % | | 8.45 | % |
Tier 1 | 11.48 |
| | 11.00 |
| | 11.32 |
| | 11.24 |
| | 11.16 |
|
Total | 15.86 |
| | 15.65 |
| | 15.98 |
| | 15.77 |
| | 15.65 |
|
Tier 1 leverage | 7.11 |
| | 6.86 |
| | 7.25 |
| | 7.21 |
| | 7.21 |
|
Tangible equity (4) | 7.16 |
| | 6.63 |
| | 6.85 |
| | 6.75 |
| | 6.54 |
|
Tangible common equity (4) | 6.25 |
| | 5.87 |
| | 6.10 |
| | 5.99 |
| | 5.74 |
|
| |
(1) | Excludes merger and restructuring charges and goodwill impairment charges. |
| |
(2) | Due to a net loss applicable to common shareholders for the second quarter of 2011 and the fourth and third quarters of 2010, the impact of antidilutive equity instruments was excluded from diluted earnings (loss) per share and average diluted common shares. |
| |
(3) | Calculated as total net income for four consecutive quarters divided by average assets for the period. |
| |
(4) | Tangible equity ratios and tangible book value per share of common stock are non-GAAP measures. Other companies may define or calculate these measures differently. For additional information on these ratios and corresponding reconciliations to GAAP financial measures, see Supplemental Financial Data on page 21 and Table 9 on pages 22 through 24. |
| |
(5) | For more information on the impact of the PCI loan portfolio on asset quality, see Consumer Portfolio Credit Risk Management on page 84 and Commercial Portfolio Credit Risk Management on page 103. |
| |
(6) | Includes the allowance for loan and lease losses and the reserve for unfunded lending commitments. |
| |
(7) | Balances and ratios do not include loans accounted for under the fair value option. For additional exclusions from nonperforming loans, leases and foreclosed properties, see Nonperforming Consumer Loans and Foreclosed Properties Activity on page 100 and corresponding Table 42, and Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 110 and corresponding Table 51. |
| |
(8) | Amounts included in allowance that are excluded from nonperforming loans primarily include amounts allocated to Card Services portfolios, purchased credit-impaired loans and the non-U.S. credit card portfolio in All Other. |
n/m = not meaningful
|
| | | | | | | |
Table 8 | | | |
Selected Year-to-Date Financial Data |
| Nine Months Ended September 30 |
(In millions, except per share information) | 2011 | | 2010 |
Income statement | | | |
Net interest income | $ | 33,915 |
| | $ | 39,084 |
|
Noninterest income | 34,651 |
| | 48,738 |
|
Total revenue, net of interest expense | 68,566 |
| | 87,822 |
|
Provision for credit losses | 10,476 |
| | 23,306 |
|
Goodwill impairment | 2,603 |
| | 10,400 |
|
Merger and restructuring charges | 537 |
| | 1,450 |
|
All other noninterest expense (1) | 57,612 |
| | 50,394 |
|
Income (loss) before income taxes | (2,662 | ) | | 2,272 |
|
Income tax expense (benefit) | (2,117 | ) | | 3,266 |
|
Net loss | (545 | ) | | (994 | ) |
Net loss available to common shareholders | (1,499 | ) | | (2,030 | ) |
Average common shares issued and outstanding | 10,096 |
| | 9,707 |
|
Average diluted common shares issued and outstanding (2) | 10,096 |
| | 9,707 |
|
Performance ratios | |
| | |
Return on average assets | n/m |
| | n/m |
|
Return on average common shareholders’ equity | n/m |
| | n/m |
|
Return on average tangible common shareholders’ equity (3) | n/m |
| | n/m |
|
Return on average tangible shareholders’ equity (3) | n/m |
| | n/m |
|
Total ending equity to total ending assets | 10.37 | % | | 9.85 | % |
Total average equity to total average assets | 9.86 |
| | 9.44 |
|
Dividend payout | n/m |
| | n/m |
|
Per common share data | | | |
Earnings (loss) | $ | (0.15 | ) | | $ | (0.21 | ) |
Diluted earnings (loss) (2) | (0.15 | ) | | (0.21 | ) |
Dividends paid | 0.03 |
| | 0.03 |
|
Book value | 20.80 |
| | 21.17 |
|
Tangible book value (3) | 13.22 |
| | 12.91 |
|
Market price per share of common stock | | | |
Closing | $ | 6.12 |
| | $ | 13.10 |
|
High closing | 15.25 |
| | 19.48 |
|
Low closing | 6.06 |
| | 12.32 |
|
Market capitalization | $ | 62,023 |
| | $ | 131,442 |
|
Average balance sheet | | | |
Total loans and leases | $ | 939,848 |
| | $ | 964,302 |
|
Total assets | 2,326,232 |
| | 2,462,977 |
|
Total deposits | 1,036,905 |
| | 982,132 |
|
Long-term debt | 431,902 |
| | 498,794 |
|
Common shareholders’ equity | 212,512 |
| | 210,649 |
|
Total shareholders’ equity | 229,385 |
| | 232,465 |
|
Asset quality (4) | | | |
Allowance for credit losses (5) | $ | 35,872 |
| | $ | 44,875 |
|
Nonperforming loans, leases and foreclosed properties (6) | 29,059 |
| | 34,556 |
|
Allowance for loan and lease losses as a percentage of total loans and leases outstanding (6) | 3.81 | % | | 4.69 | % |
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (6) | 133 |
| | 135 |
|
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases excluding the PCI loan portfolio (6) | 101 |
| | 118 |
|
Amounts included in allowance that are excluded from nonperforming loans (7) | $ | 18,317 |
| | $ | 23,661 |
|
Allowance as a percentage of total nonperforming loans and leases excluding the amounts included in the allowance that are excluded from nonperforming loans (7) | 63 | % | | 62 | % |
Net charge-offs | $ | 16,779 |
| | $ | 27,551 |
|
Annualized net charge-offs as a percentage of average loans and leases outstanding (6) | 2.41 | % | | 3.84 | % |
Nonperforming loans and leases as a percentage of total loans and leases outstanding (6) | 2.87 |
| | 3.47 |
|
Nonperforming loans, leases and foreclosed properties as a percentage of total loans, leases and foreclosed properties (6) | 3.15 |
| | 3.71 |
|
Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs | 1.56 |
| | 1.18 |
|
| |
(1) | Excludes merger and restructuring charges and goodwill impairment charge. |
| |
(2) | Due to a net loss applicable to common shareholders for the nine months ended September 30, 2011 and 2010, the impact of antidilutive equity instruments was excluded from diluted earnings (loss) per share and average diluted common shares. |
| |
(3) | Tangible equity ratios and tangible book value per share of common stock are non-GAAP measures. Other companies may define or calculate these measures differently. For additional information on these ratios and corresponding reconciliations to GAAP financial measures, see Supplemental Financial Data on page 21 and Table 10 on pages 25 and 26. |
| |
(4) | For more information on the impact of the PCI loan portfolio on asset quality, see Consumer Portfolio Credit Risk Management on page 84 and Commercial Portfolio Credit Risk Management on page 103. |
| |
(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 on nonperforming loans, leases and foreclosed properties, see Nonperforming Consumer Loans and Foreclosed Properties Activity on page 100 and corresponding Table 42 and Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity on page 110 and corresponding Table 51. |
| |
(7) | Amounts included in allowance that are excluded from nonperforming loans primarily include amounts allocated to Card Services portfolios, purchased credit-impaired loans and the non-U.S. credit card portfolio in All Other. |
n/m = not meaningful
|
|
Supplemental Financial Data |
We view net interest income and related ratios and analyses (i.e., efficiency ratio and net interest yield) on a FTE basis. Although these are non-GAAP measures, we believe managing the business with net interest income on a FTE basis provides a more accurate picture of the interest margin for comparative purposes. To derive the FTE basis, net interest income is adjusted to reflect tax-exempt income on an equivalent before-tax basis with a corresponding increase in income tax expense. For purposes of this calculation, we use the federal statutory tax rate of 35 percent. This measure ensures comparability of net interest income arising from taxable and tax-exempt sources.
As mentioned above, certain performance measures including the efficiency ratio and net interest yield utilize net interest income (and thus total revenue) on a FTE basis. The efficiency ratio measures the costs expended to generate a dollar of revenue, and net interest yield evaluates the bps we earn over the cost of funds. During our annual planning process, we set efficiency targets for the Corporation and each line of business. We believe the use of these non-GAAP measures provides additional clarity in assessing our results. Targets vary by year and by business and are based on a variety of factors including maturity of the business, competitive environment, market factors and other items including our risk appetite.
We also evaluate our business based on the following ratios that utilize tangible equity, a non-GAAP measure. Return on average tangible common shareholders’ equity measures our earnings contribution as a percentage of common shareholders’ equity plus any Common Equivalent Securities (CES) less goodwill and intangible assets (excluding MSRs), net of related deferred tax liabilities. Return on average tangible shareholders’ equity (ROTE) measures our earnings contribution as a percentage of average shareholders’ equity less goodwill and intangible assets (excluding MSRs), net of related deferred tax liabilities. The tangible common equity ratio represents common shareholders’ equity plus any CES less goodwill and intangible assets (excluding MSRs), net of related deferred tax liabilities divided by total assets less goodwill and intangible assets (excluding MSRs), net of related deferred tax liabilities. The tangible equity ratio represents total shareholders’ equity less goodwill and intangible assets (excluding MSRs), net of related deferred tax liabilities divided by total assets less goodwill and intangible assets (excluding MSRs), net of related deferred tax liabilities. Tangible book value per common share represents ending common shareholders’ equity less goodwill and intangible assets (excluding MSRs), net of related deferred tax liabilities divided by ending common shares outstanding. These measures are used to evaluate our use of equity (i.e., capital). In addition, profitability, relationship and investment models all use ROTE as key measures to support our overall growth goals.
In addition, we evaluate our business segment results based on return on average economic capital, a non-GAAP financial measure. Return on average economic capital for the segments is calculated as net income, adjusted for cost of funds and earnings credits and certain expenses related to intangibles, divided by average economic capital. Economic capital represents allocated equity less goodwill and a percentage of intangible assets. We also believe the use of this non-GAAP measure provides additional clarity in assessing the segments.
The aforementioned supplemental data and performance measures are presented in Tables 7 and 8. In addition, in Tables 9 and 10 we excluded the impact of goodwill impairment charges of $2.6 billion recorded in the second quarter of 2011, and $10.4 billion and $2.0 billion recorded in the third and fourth quarters of 2010 when presenting earnings (loss) and diluted earnings (loss) per common share, the efficiency ratio, return on average assets, four quarter trailing return on average assets, return on average common shareholders’ equity, return on average tangible common shareholders’ equity and ROTE. Accordingly, these are non-GAAP measures. Tables 9 and 10 provide reconciliations of these non-GAAP measures with financial measures defined by GAAP. We believe the use of these non-GAAP measures provides additional clarity in assessing the results of the Corporation. Other companies may define or calculate these measures and ratios differently.
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| | | | | | | | | | | | | | | | | | | |
Table 9 |
Quarterly Supplemental Financial Data and Reconciliations to GAAP Financial Measures |
| 2011 Quarters | | 2010 Quarters |
(Dollars in millions, except per share information) | Third | | Second | | First | | Fourth | | Third |
Fully taxable-equivalent basis data | | | | | | | | | |
Net interest income | $ | 10,739 |
| | $ | 11,493 |
| | $ | 12,397 |
| | $ | 12,709 |
| | $ | 12,717 |
|
Total revenue, net of interest expense | 28,702 |
| | 13,483 |
| | 27,095 |
| | 22,668 |
| | 26,982 |
|
Net interest yield | 2.32 | % | | 2.50 | % | | 2.67 | % | | 2.69 | % | | 2.72 | % |
Efficiency ratio | 61.37 |
| | n/m |
| | 74.86 |
| | 92.04 |
| | 100.87 |
|
Performance ratios, excluding goodwill impairment charges (1) | | | | | | | | | |
Per common share information | | | | | | | | | |
Earnings (loss) |
|
| | $ | (0.65 | ) | |
|
| | $ | 0.04 |
| | $ | 0.27 |
|
Diluted earnings (loss) |
|
| | (0.65 | ) | |
|
| | 0.04 |
| | 0.27 |
|
Efficiency ratio |
|
| | n/m |
| |
|
| | 83.22 | % | | 62.33 | % |
Return on average assets |
|
| | n/m |
| |
|
| | 0.13 |
| | 0.52 |
|
Four quarter trailing return on average assets (2) |
|
| | n/m |
| |
|
| | 0.43 |
| | 0.39 |
|
Return on average common shareholders’ equity |
|
| | n/m |
| |
|
| | 0.79 |
| | 5.06 |
|
Return on average tangible common shareholders’ equity |
|
| | n/m |
| |
|
| | 1.27 |
| | 8.67 |
|
Return on average tangible shareholders’ equity |
|
| | n/m |
| |
|
| | 1.96 |
| | 8.54 |
|
| |
(1) | Performance ratios have been calculated excluding the impact of the goodwill impairment charges of $2.6 billion recorded during the second quarter of 2011, and $2.0 billion and $10.4 billion recorded during the fourth and third quarters of 2010, respectively. |
| |
(2) | Calculated as total net income for four consecutive quarters divided by average assets for the period. |
n/m = not meaningful
|
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Table 9 |
Quarterly Supplemental Financial Data and Reconciliations to GAAP Financial Measures (continued) |
| 2011 Quarters | | 2010 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 | $ | 10,490 |
| | $ | 11,246 |
| | $ | 12,179 |
| | $ | 12,439 |
| | $ | 12,435 |
|
FTE adjustment | 249 |
| | 247 |
| | 218 |
| | 270 |
| | 282 |
|
Net interest income on a fully taxable-equivalent basis | $ | 10,739 |
| | $ | 11,493 |
| | $ | 12,397 |
| | $ | 12,709 |
| | $ | 12,717 |
|
Reconciliation of total revenue, net of interest expense to total revenue, net of interest expense on a fully taxable-equivalent basis | | | | | | | | | |
|