Bank of America Reports Third-Quarter 2012 Net Income of $340 Million, or $0.00 per Share

Bank of America Reports Third-Quarter 2012 Net Income of $340 Million, or $0.00 per Share

Previously Announced Items Negatively Impact Earnings

• Valuation Adjustments for Improvement in the Company's Credit Spreads, $1.9 Billion Pretax

• Total Litigation Expense of $1.6 Billion Pretax, Including Merrill Lynch Class Action Settlement

• Charge Related to Reduction in U.K. Tax Rate of $0.8 Billion

• Previously Announced Items Totaled ($0.28) per Share

Capital and Liquidity Continue to Strengthen

• Basel 1 Tier 1 Common Capital Ratio of 11.41 Percent at September 30, 2012

• Estimated Basel 3 Tier 1 Common Capital Ratio of 8.97 Percent at September 30, 2012, up From 7.95 Percent at June 30, 2012 (Fully Phased-in Assuming U.S. Final Rules and U.S. Basel 3 NPRs)¹

• Long-term Debt Down $112 Billion From September 30, 2011, Driven by Maturities and Liability Management Actions; Time-to-required Funding Remains Strong at 35 Months

Core Business Momentum Accelerates

• Total Average Deposit Balances up $17 Billion, or 6 Percent (Annualized), From Prior Quarter

• First-lien Mortgage Production Increased 13 Percent From Prior Quarter

• Global Wealth and Investment Management Had Solid Long-term AUM Flows of $5.7 Billion, up 39 Percent From the Prior Quarter and 27 Percent From the Year-ago Quarter

• Ending Commercial Loans in Global Banking Segment Including Real Estate Loans Grew 13 Percent (Annualized) From Prior Quarter to $236 Billion

• Investment Bank Ranked No. 2 in Global Investment Banking Fees; Revenue Up 17 Percent From Prior Quarter and 42 Percent From the Year-ago Quarter

CHARLOTTE, N.C.--(BUSINESS WIRE)-- Bank of America Corporation today reported net income of $340 million, or $0.00 per diluted share, for the third quarter of 2012, compared to $6.2 billion, or $0.56 per diluted share, in the third quarter of 2011.

As previously reported, the third quarter of 2012 was negatively impacted by $1.9 billion of debit valuation adjustments (DVA) and fair value option (FVO) adjustments related to the improvement in the company's credit spreads, $1.6 billion for total litigation expense, including a charge for the previously announced settlement of the Merrill Lynch class action litigation, and a charge of $0.8 billion related to the repricing of certain deferred tax assets due to a reduction in the U.K. corporate tax rate. Together, these three items totaled a negative $0.28 per share.

The year-ago quarter included $6.2 billion in positive DVA and FVO adjustments, $0.6 billion in total litigation expense and $0.8 billion related to the repricing of certain deferred tax assets due to a reduction in the U.K. corporate tax rate. Together, these three items totaled a positive $0.27 per share in the third quarter of 2011. In addition, the year-ago quarter included, among other significant items, a $3.6 billion pretax gain on the sale of a portion of the company's investment in China Construction Bank (CCB), partially offset by $2.2 billion of net losses related to equity and strategic investments other than CCB.

Relative to the year-ago quarter, the results for the third quarter of 2012 were driven by improved credit quality across most major portfolios, increased sales and trading revenue (excluding impact of DVA), higher mortgage banking income and increased investment banking income.

"We are doing more business with our customers and clients: Deposits are up; mortgage originations are up; we surpassed 11 million in mobile customers; small business lending is up 27 percent year over year; loans to our commercial clients rose for the seventh consecutive quarter; and our corporate clients made us the second-ranked global investment banking firm," said Brian Moynihan, chief executive officer. "Our strategy is taking hold even as we work through a challenging economy and continue to clean up legacy issues."

"Our focus on strengthening the balance sheet continued this quarter," said Chief Financial Officer Bruce Thompson. "We ended the quarter with record Tier 1 common capital ratio of 11.41 percent and an estimated Basel 3 Tier 1 common capital ratio of 8.97 percent, up from 7.95 percent as of the second quarter of 2012¹. With these gains, we have turned our attention to driving core earnings."

¹ Fully taxable-equivalent (FTE) basis is a non-GAAP financial measure. For reconciliation to GAAP financial measures, refer to pages 25-28 of this press release. Net interest income on a GAAP basis was $9.9 billion, $9.5 billion and $10.5 billion for the three months ended September 30, 2012, June 30, 2012 and September 30, 2011. Total revenue, net of interest expense, on a GAAP basis was $20.4 billion, $22.0 billion and $28.5 billion for the three months ended September 30, 2012, June 30, 2012 and September 30, 2011.

² Total revenue, net of interest expense, on an FTE basis excluding DVA and FVO adjustments is a non-GAAP financial measure. DVA gains(losses) were $(583) million, $(158) million and $1.7 billion for the three months ended September 30, 2012, June 30, 2012 and September 30, 2011. Valuation gains (losses) related to FVO were $(1.3) billion, $(62) million and $4.5 billion for the three months ended September 30, 2012, June 30, 2012 and September 30, 2011.

Key Business Highlights

The company made significant progress in the third quarter of 2012 in line with its operating principles, including the following developments:

Be customer-driven

• Bank of America extended approximately $117 billion in credit in the third quarter of 2012. This included $73.7 billion in commercial non-real estate loans, $20.3 billion in residential first mortgages, $10.6 billion in commercial real estate loans, $4.5 billion in U.S. consumer and small business card, $933 million in home equity products and $6.8 billion in other consumer credit.

• The $20.3 billion in residential first mortgages funded in the third quarter helped more than 80,000 homeowners either purchase a home or refinance an existing mortgage. This included more than 4,400 first-time homebuyer mortgages originated by retail channels, and more than 25,000 mortgages to low- and moderate-income borrowers. Approximately 17 percent of funded first mortgages were for home purchases and 83 percent were refinances.

• The company originated approximately $6.2 billion in small business loans and commitments in the first nine months of 2012, up 27 percent from the year-ago period, reflecting its continued focus on supporting small businesses.

• Total client balances in Global Wealth and Investment Management increased 3 percent from the prior quarter to $2.3 trillion, led primarily by market gains, as well as gains in deposit balances, long-term assets under management (AUM) flows and loan balances.

• The company continued to deepen relationships with customers. The number of mobile banking customers rose 30 percent from the year-ago quarter to 11.1 million customers, and the number of new U.S. credit card accounts opened year-to-date grew 8 percent from 2011.

• Merrill Edge brokerage assets increased $13.9 billion from the year-ago quarter to $75.9 billion, driven by market improvement and asset growth from new accounts.

• The company continued to increase the number of Financial Solutions Advisors, mortgage loan officers and small business bankers during the quarter to approximately 5,800 at the end of the third quarter of 2012, approximately 3,200 of whom were deployed in banking centers.

• The company continued to support the economy by:

  • Helping clients raise $145 billion in capital in the third quarter of 2012, up from $125 billion in the prior quarter.

  • Providing incremental credit to businesses with ending loans in the Global Banking business rising 2.5 percent from the prior quarter to $272.1 billion.

• Bank of America Merrill Lynch (BofA Merrill) continued to rank No. 2 globally in net investment banking fees during the first nine months of 2012, as reported by Dealogic.

Continue to build a fortress balance sheet

• Regulatory capital ratios increased with the Tier 1 common capital ratio under Basel 1 increasing to 11.41 percent in the third quarter of 2012, up 17 bps from the second quarter of 2012 and 276 bps higher than the third quarter of 2011.

• The Tier 1 common capital ratio under Basel 3 on a fully phased-in basis was estimated at 8.97 percent as of September 30, 2012, up from 7.95 percent at June 30, 2012.¹

• The company continued to maintain strong liquidity while significantly reducing long-term debt. Global Excess Liquidity Sources totaled $380 billion at the end of the third quarter of 2012, compared to $378 billion at the end of the prior quarter and $363 billion at September 30, 2011. Long-term debt declined to $287 billion at the end of the third quarter of 2012 from $302 billion at the end of the prior quarter and $399 billion at September 30, 2011.

Manage risk well

• The provision for credit losses was flat compared to the second quarter of 2012 but down 48 percent from the year-ago quarter, reflecting improved credit quality across most major consumer and commercial portfolios and the impact of underwriting changes implemented over the past several years.

• Excluding the impact of charge-offs related to the previously disclosed settlement reached in March 2012 with the Department of Justice (DOJ) and 49 state attorneys general regarding mortgage servicing issues (National Mortgage Settlement) and new regulatory guidance for loans discharged in bankruptcies, consumer loan loss rates in the third quarter of 2012 were at their lowest level since the fourth quarter of 2007³.

• Commercial loan loss rates were at their lowest level since the third quarter of 2007.

Deliver for our shareholders

• Tangible book value per share² increased to $13.48 at September 30, 2012, compared to $13.22 at both June 30, 2012 and September 30, 2011. Book value per share was $20.40 at September 30, 2012, compared to $20.16 at June 30, 2012 and $20.80 at September 30, 2011.

Manage efficiency well

• Noninterest expense was relatively flat compared to the year-ago quarter due to an increase in other general operating expenses primarily related to costs associated with the previously announced Merrill Lynch class action settlement and other litigation, and higher mortgage-related and default-related servicing costs. This was partially offset by a decrease in personnel expense as the company continued to streamline processes and achieve cost savings.

• At September 30, 2012, the company had 272,594 full-time employees, down 2,866 from the end of the prior quarter, and 16,145 fewer than September 30, 2011. Excluding full-time equivalent employee increases in Legacy Assets and Servicing to handle increasing government and private programs for housing, the number of full-time equivalent employees was down nearly 21,000 from the year-ago quarter to 230,900.

Business Segment Results

The company reports results through five business segments: Consumer and Business Banking (CBB), Consumer Real Estate Services (CRES), Global Wealth and Investment Management (GWIM), Global Banking and Global Markets, with the remaining operations recorded in All Other.

¹ Return on average economic capital is a non-GAAP financial measure. For reconciliation to GAAP financial measures, refer to pages 25-28 of this press release.

Business Highlights

• Average deposit balances increased 3 percent from the year-ago quarter, driven by growth in liquid products in a low-rate environment. The average rate paid on deposits declined 5 basis points in the third quarter of 2012 from the year-ago quarter due to pricing discipline and a shift in the mix of deposits.

• In the nine months ended September 30, 2012, the company extended approximately $6.2 billion in small business loans and commitments, reflecting the company's continued focus on supporting small businesses.

• During the third quarter of 2012, the number of BankAmericard Cash Rewards cards increased by nearly 400,000 to a total of 1.7 million cards since the product launched in the third quarter of 2011.

Financial Overview

Consumer and Business Banking reported net income of $1.3 billion, down $379 million from the year-ago quarter, due to lower revenue partially offset by lower noninterest expense and credit costs.

Revenue decreased by $1.1 billion from the year-ago quarter to $7.1 billion, primarily from the implementation of debit card interchange fee rules in October 2011 as a result of the Durbin Amendment, lower average loan balances, the continued low-rate environment and the negative impact of the company's consumer protection products.

Provision for credit losses decreased $162 million, primarily within the Card Services business, from the year-ago quarter to $970 million due to improvement in delinquencies and bankruptcies. Noninterest expense decreased $286 million to $4.1 billion compared to the third quarter of 2011 as a result of lower FDIC expense and lower operating expenses.

Business Highlights

• Bank of America funded $21.2 billion in residential home loans and home equity loans during the third quarter of 2012, up 12 percent from the second quarter of 2012, and 18 percent higher than the third quarter of 2011, excluding correspondent originations of $15.9 billion in the year-ago quarter. The company exited the correspondent business in late 2011.

• The number of 60+ days delinquent first mortgage loans serviced by Legacy Assets and Servicing declined by 126,000 loans, or 12 percent, during the third quarter of 2012 to 936,000 loans from 1.06 million at the end of the second quarter of 2012, and 1.23 million loans at the end of the third quarter of 2011.

Financial Overview

Consumer Real Estate Services reported a net loss of $877 million for the third quarter of 2012, compared to a net loss of $1.1 billion for the same period in 2011. The improvement was due primarily to higher mortgage banking income and lower provision for credit losses, partially offset by higher expenses.

While the Home Loans business was profitable in the quarter, the continued high costs of managing delinquent and defaulted loans in the servicing portfolio combined with the costs associated with managing other legacy mortgage exposures resulted in the overall net loss for CRES for the quarter.

Revenue increased $274 million from the third quarter of 2011 to $3.1 billion in the third quarter of 2012, driven by higher mortgage banking income and other noninterest income, partially offset by lower net interest income. Mortgage banking income increased from the year-ago quarter due to more favorable MSR results, net of hedges, and higher production income.

While loan fundings declined by $12.6 billion compared to the same period in 2011, largely due to the exit from the correspondent channel in late 2011, core production revenue increased by $139 million from the year-ago quarter primarily due to higher margins on a increased volume of direct originations.

Representations and warranties provision was $307 million in the third quarter of 2012, compared to $395 million in the second quarter of 2012 and $278 million in the third quarter of 2011.

The provision for credit losses in the third quarter of 2012 decreased $654 million from the year-ago quarter to $264 million, driven by improved portfolio trends in the non-purchased credit-impaired (PCI) portfolio and reserve reductions in the PCI home equity portfolio partially offset by the impact of new regulatory guidance for loans discharged in bankruptcies.

Noninterest expense increased from the third quarter of 2011 to $4.2 billion, primarily due to higher default-related servicing expenses and litigation expense. This was partially offset by lower production expenses and a reduction in mortgage-related assessments, waivers and other similar costs associated with foreclosure delays.

¹ Return on average economic capital is a non-GAAP financial measure. For reconciliation to GAAP financial measures, refer to pages 25-28 of this press release.

² Total client balances are defined as assets under management, assets in custody, client brokerage assets, client deposits and loans (including margin receivables).

Business Highlights

• Period-end loan balances for Global Wealth and Investment Management grew $5.1 billion, or 5 percent, from the third quarter of 2011 to a record $107.5 billion due to higher securities-based lending and residential mortgage production.

• Period-end deposit balances grew $4.9 billion, or 2 percent, from the third quarter of 2011 to $256.1 billion.

• Long-term AUM flows of $5.7 billion, up 27 percent from the third quarter of 2011, marking the 13th consecutive quarter of positive flows.

• The third quarter of 2012 pretax margin was 20 percent, up from 14 percent in the third quarter of 2011.

Financial Overview

Net income for GWIM rose 50 percent from the third quarter of 2011 to $542 million due to lower expenses and credit costs and higher revenue. Revenue increased 1 percent to $4.3 billion largely as a result of higher net interest income.

Noninterest expense decreased 4 percent from the third quarter of 2011 to $3.4 billion due to lower FDIC expense and lower support and personnel costs. The provision for credit losses decreased $101 million from the third quarter of 2011 to $61 million due to lower delinquencies and improving portfolio trends within the residential mortgage portfolio.

Assets under management rose $90.9 billion from the third quarter of 2011 to $707.8 billion, driven by higher market levels and long-term AUM flows.

¹ Return on average economic capital is a non-GAAP financial measure. For reconciliation to GAAP financial measures, refer to pages 25-28 of this press release.

Business Highlights

• Period-end loan balances were $272.1 billion at the end of the third quarter of 2012, compared to $265.4 billion at the end of the second quarter of 2012 and $273.5 billion at the end of the third quarter of 2011.

• Period-end deposits rose to $260.0 billion at the end of the third quarter of 2012 from $241.5 billion at the end of the second quarter of 2012 and $236.6 billion at the end of the third quarter of 2011.

• BofA Merrill was ranked No. 2 globally in investment banking fees, for the first nine months of 2012 according to Dealogic. Based on deal volume, BofA Merrill was ranked among the top three banks in high-yield corporate debt, leveraged loans, investment-grade corporate debt, asset-backed securities and syndicated loans for the same period.

• Nonperforming assets declined by $2.7 billion, or 51 percent, and total reservable criticized loans declined by $10.5 billion, or 46 percent, compared to a year ago.

Financial Overview

Global Bankingreported net incomeof $1.3 billion, up $89 million from the year-ago quarter, as higher revenue and a decline in noninterest expense were partially offset by an increase in provision expense. Revenue of $4.1 billion was up 5 percent from the year-ago quarter, primarily due to gains on the fair value option loan book in the most recent quarter.

In the third quarter of 2012, Global Corporate Banking revenue was $1.4 billion and Globa