Bank of America - 10-Q quarterly report FY2011 Q2

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On July 31, 2011, there were 10,134,295,342 shares of Bank of America Corporation Common Stock outstanding.

     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: 2011 expense levels; higher revenue and expense reductions in 2012; improving performance in retail businesses; home price assumptions and Home Price Index (HPI) estimates; the impact of the agreement with Assured Guaranty Ltd. and its subsidiaries (Assured Guaranty) and its cost, including the expected valueof the loss-sharing reinsurance arrangement; the adequacy of the liability for the remaining representations and warranties exposure to government-sponsored enterprises, Fannie Mae (FNMA) and Freddie Mac (FHLMC) (collectively, 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 and the Corporation’s ability to resolve such rescissions, cancellations or claim denials within the appeal period allowed by FNMA; the expected repurchase claims on the 2004-2008 loan vintages; the Corporation’s belief that with the provision recorded in connection with the agreement to resolve nearly all of the legacy Countrywide-issued first-lien non-GSE residential mortgage-backed securitization repurchase exposures (the BNY Mellon Settlement), and the additional representations and warranties provisions recorded in the six months ended June 30, 2011, the Corporation will provide for a substantial portion of its non-GSE representations and warranties exposure; in connection with the BNY Mellon Settlement, the Corporation’s obligations to pay, and estimates of, attorneys’ fees and costs of the group of 22 institutional investors supporting the BNY Mellon Settlement (the Investor Group) and the fees and expenses incurred by the trustee; the impact of the BNY Mellon Settlement on costs related to mortgage servicing obligations; 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 resolution of certain related claims being litigated by investors in the event that final court approval of the BNY Mellon Settlement is obtained; the Corporation’s belief that private letter rulings from the U.S. Internal Revenue Service (IRS) and other tax rulings and opinions will be obtained during the period prior to final court approval of the BNY Mellon Settlement; 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 recent 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 progress toward achieving a resolution in negotiations with law enforcement authorities and federal agencies, including the U.S. Department of Justice (DOJ) and the U.S. Department of Housing and Urban Development (HUD), involving mortgage servicing practices; the impact on economic conditions and on the Corporation arising from any 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; charges to income tax expense resulting from reductions in the United Kingdom (U.K.) corporate income tax rate; future payment protection insurance (PPI) claims in the U.K.; future risk-weighted assets and any mitigation efforts to reduce risk-weighted assets; net interest income; credit trends and conditions, including credit losses, credit reserves, charge-offs, delinquency, collection and bankruptcy trends, and nonperforming asset levels; 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; 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, the Consumer Financial Protection Bureau (the CFPB); the risk retention rules and derivatives regulations; mortgage production levels; long-term debt levels; short-term debt levels, including the expected reduction of certain short-term unsecured borrowings, including commercial paper, in the

third quarter of 2011; run-off of loan portfolios; that it is the Corporation’s objective to maintain high-quality credit ratings; 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; the amount and timing of any clawback or earn-out payments relating to the sale of certain assets and liabilities of Balboa Insurance Company (Balboa); 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 in any of the Corporation’s subsequent Securities and Exchange Commission (SEC) filings: 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 quarter ended June 30, 2011; the possibility that a substantial number of objections to the approval of the BNY Mellon Settlement will be made and that these objections 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; whether conditions in the BNY Mellon Settlement that would permit the Corporation and legacy Countrywide to withdraw from the settlement will occur and whether the Corporation and legacy Countrywide will determine to withdraw from the settlement pursuant to the terms of the BNY Mellon Settlement; the impact of performance and enforcement of obligations under, and provisions contained in, the BNY Mellon Settlement and the agreement with the Investor Group, including performance of obligations under the BNY Mellon Settlement by the Corporation and the trustee and the performance of obligations under the agreement with the Investor Group by the Corporation and the Investor Group; 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 resolutionof certainrepresentations and warranties obligations with the GSEs and our ability to resolve its 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 we have not yet received claims or with whom we have not yet reached any resolutions; failure to satisfy our 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 DOJ and 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.; and the risk of a 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 we operate and sovereign debt challenges; 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; the impact resulting from international and domestic sovereign credit uncertainties; 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

     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, we use certain acronyms and abbreviations which are defined in the Glossary.

     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, 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 June 30, 2011, the Corporation had $2.3 trillion in assets and approximately 288,000 full-time equivalent employees.

     As of June 30, 2011, we operated in all 50 states, the District of Columbia and more than 40 non-U.S. countries. Our retail banking footprint covers approximately 80 percent of the U.S. population and in the U.S., we serve approximately 58 million consumer and small business relationships with approximately 5,700 banking centers, 18,000 ATMs, nationwide call centers, and leading online and mobile banking platforms. We have banking centers in 13 of the 15 fastest growing states and have leadership positions in market share for deposits in seven of those states. 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 six months ended June 30, 2011 and 2010 and at June 30, 2011 and December 31, 2010.

     The housing market remained depressed, with weak sales and continued modest declines in home prices as measured by the HPI. Declines in home prices added uncertainty about future home prices, dampening home sales. The magnitude of distressed mortgages remained very high, and there were ongoing delays in foreclosure processes. Loans to businesses rose modestly, while loans to households remained weak. Credit quality of bank loans to businesses and households continued to improve.

     While the global economy showed signs of moderating, the impact of Japan’s disaster is expected to be temporary and the focus has once more shifted to Europe’s financial crisis. Core European economies, led by Germany’s strength, were healthy, but peripheral European Union nations were mired in recession-type conditions and Greece teetered toward a debt service liquidity crisis. As the second quarter of 2011 ended, a coordinated European financial support package for Greece temporarily eased financial market concerns.

     Key emerging nations, particularly China, experienced further inflation pressures during the second quarter of 2011, and their central banks tightened monetary policy and credit in efforts to constrain excess demand. Although there was some concern that these restrictive policies would generate sharper-than-desired economic slowdowns that would adversely impact global economic performance, economic growth in those countries remained healthy. For more information on our exposure in Europe, Asia, Latin America and Japan, see Non-U.S. Portfolio on page 103.

     As previously announced, on June 28, 2011, the Corporation, BAC Home Loans Servicing, LP (BAC HLS, which subsequently merged with and into Bank of America, N.A. (BANA) in July 2011), and certain Countrywide affiliates entered into a settlement agreement with The Bank of New York Mellon (BNY Mellon), as trustee (Trustee), to resolve all outstanding and potential claims related to alleged representations and warranties breaches (including repurchase claims), substantially all historical loan servicing claims and certain other historical claims with respect to 525 legacy Countrywide first-lien and five second-lien non-GSE residential mortgage-backed securitization trusts (the Covered Trusts) with loans principally originated between 2004 and 2008 and for which BNY Mellon acts as trustee or indenture trustee (the BNY Mellon Settlement). The Covered Trusts had an original principal balance of approximately $424 billion, of which $409 billion was originated between 2004 and 2008, and a total current unpaid principal balance (calculated as outstanding principal plus the unpaid principal balance of defaulted loans) of approximately $220 billion, of which $217 billion was originated between 2004 and 2008, as of June 28, 2011. The BNY Mellon Settlement is supported by a group of 22 institutional investors (the Investor Group) and is subject to final court approval and certain other conditions. The BNY Mellon Settlement provides for a cash payment of $8.5 billion (the Settlement Payment) to the Trustee for distribution to the Covered Trusts after final court approval of the settlement and an estimated $100 million in additional expenses and fees to the Investor Group’s counsel and the Trustee. We are also obligated to pay certain other fees and expenses of the Trustee and the Investor Group. The BNY Mellon Settlement also includes provisions related to specific mortgage servicing standards and other servicing matters.

     The Trustee has determined that the BNY Mellon Settlement is in the best interests of the Covered Trusts and is seeking the necessary court approval of the BNY Mellon Settlement. Under an order entered by the court, certificateholders and noteholders in the Covered Trusts have the opportunity to file objections until August 30, 2011 and responses to those objections and statements in support of the settlement until October 31, 2011. In connection with the BNY Mellon Settlement, we entered into an agreement with the Investor Group, which provides that, among other things, the Investor Group will use reasonable best efforts and cooperate in good faith to effectuate the settlement, including obtaining final court approval. The Investor Group has filed, and the court has granted, a petition to intervene as a party to the proceeding so that it may support of the BNY Mellon Settlement. Several alleged investors outside the Investor Group have filed, and the court has granted, petitions to intervene as parties in the pending court proceeding. Certain of these intervenors have stated that they intend to object to the BNY Mellon Settlement, while others have said that they need more information in order to determine whether to object, and indicated that they, therefore, intend to seek discovery. In addition, it is possible that a substantial number of additional investors outside the Investor Group will also seek to intervene as parties, and some intervenors and other investors may object to the BNY Mellon Settlement. The resolutions of the objections of intervenors and/or other investors who object may delay or ultimately prevent receipt of final court approval. There can be no assurance that final court approval of the BNY Mellon Settlement will be obtained, that all conditions 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. The court is scheduled to hold a hearing on the Trustee’s request for entry of an order approving the BNY Mellon Settlement on November 17, 2011.

     For additional information about the BNY Mellon Settlement, see Off-Balance Sheet Arrangements and Contractual Obligations – Representations and Warranties on page 51 and Other Mortgage-related Matters on page 60. For more information about the risks associated with the BNY Mellon Settlement, see Item 1A. Risk Factors on page 219.

     The U.S. government recently increased its borrowing capacity under the federal debt ceiling. However, there continues to be a perceived risk of a sovereign credit ratings downgrade of the U.S. government, including the ratings of U.S. Treasury securities. In July 2011, Moody’s Investors Service, Inc. (Moody’s) placed the U.S. government under review for a possible credit rating downgrade, and on August 2, 2011 it confirmed the U.S. government’s existing sovereign rating, but stated that the U.S. government’s rating outlook is negative. Also in July 2011 Standard & Poor’s Financial Services LLC (S&P) placed its sovereign credit ratings of the U.S. government on CreditWatch with negative implications. On August 2, 2011 Fitch, Inc. (Fitch) affirmed its existing sovereign rating of the U.S. government, but stated that the rating is under review. A downgrade of U.S. sovereign credit ratings could correspondingly impact the credit ratings of instruments issued, insured or guaranteed by institutions, agencies or instrumentalities directly linked to the U.S. government. We cannot predict if, when or how any changes to the credit ratings of these organizations will affect economic conditions or the resulting impact on the Corporation. Such ratings actions could result in a significant adverse impact to the Corporation. For additional information about the risks associated with the statutory debt limit and any resulting downgrade of the U.S. government, see Item 1A. Risk Factors on page 219.

     In addition, certain European nations 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 Greece, Ireland and Portugal, the creation of a joint EU-IMF European Financial Stability Facility in May 2010, and a recently announced plan to expand financial assistance to Greece, uncertainty over the outcome of the EU governments’ financial support programs and worries about sovereign finances persist. Market concerns over the direct and indirect exposure of European banks and insurers to these EU peripheral nations has resulted in a widening of credit spreads and increased costs of funding for some European financial institutions. For additional information about the risks associated with the financial stability of certain EU sovereigns, see Item 1A. Risk Factors on page 219.

     Law enforcement authorities in all 50 states and the DOJ and other federal agencies continue to investigate alleged irregularities in the foreclosure practices of residential mortgage servicers, including the Corporation. Authorities have publicly stated that the scope of the investigations extends beyond foreclosure documentation practices to mortgage loan modification and loss mitigation practices, including compliance with the HUD requirements related to Federal Housing Administration (FHA)-insured loans. We continue to cooperate with these investigations and are dedicating significant resources to address these issues. We and the other largest mortgage servicers continue to engage in ongoing negotiations regarding these matters with law enforcement authorities and federal agencies. The negotiations continue to focus on the amount of any settlement payment and settlement terms, including principal forgiveness, servicing standards, enforcement mechanisms and releases. Although we cannot be certain as to the ultimate outcome that may result from these negotiations or the timing of such outcome, the parties continue to make progress toward achieving a resolution of these matters. For additional information, see Off-Balance Sheet Arrangement and Contractual Obligations – Other Mortgage-related Matters on page 60.

     Net interest income on a fully taxable-equivalent (FTE) basis decreased $1.7 billion and $3.4 billion for the three and six months ended June 30, 2011 compared to the same periods in 2010. The decrease was mainly due to lower consumer loan balances and yields, partially offset by the benefits of reductions in long-term debt and lower rates paid on deposits. The net interest yield on a FTE basis was 2.50 percent and 2.58 percent for the three and six months ended June 30, 2011.

     Noninterest income decreased by $14.3 billion and $17.8 billion for the three and six months ended June 30, 2011 compared to the same periods in 2010 as a result of the aforementioned increase in representations and warranties provision. For additional information about representations and warranties, see Off-Balance Sheet Arrangements and Contractual Obligations – Representations and Warranties on page 51. Other components of the 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, a decrease in equity investment income as gains on sales of certain investments in the prior-year period outpaced those in 2011 and an increase in trading account profits for the three-month period due to a strong second quarter in 2011, and a decrease for the six month period due to very strong first quarter 2010 results.

     The provision for credit losses was lower than net charge-offs for the three and six months ended June 30, 2011 resulting in reserve reductions reflecting improving portfolio trends across most of the consumer and commercial businesses, particularly the U.S. credit card portfolio. The improvement was offset in part by additions to purchased credit-impaired (PCI) loan portfolio reserves, largely in the consumer portfolios.

     Noninterest expense increased $5.6 billion and $8.1 billion for the three and six months ended June 30, 2010 compared to the same periods in 2010. The increases were driven by the goodwill impairment charge and by increases 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 periods in 2010. Additionally, an increase in personnel costs for the six months ended June 30, 2011 contributed to the increase as we continue the build-out of several businesses and increase default-related staffing levels in the mortgage servicing business.

     Deposits net income decreased for the three and six months ended June 30, 2011 compared to the same periods in the prior year due to a decline in revenue driven by lower noninterest income, partially offset by higher net interest income. Noninterest income decreased due to the impact of overdraft policy changes in conjunction with Regulation E, which became effective in the third quarter of 2010. Net interest income was up slightly due to a customer shift to more liquid products and continued pricing discipline.

     Global Card Services net income increased for the three and six months ended June 30, 2011 compared to the same periods in the prior year due primarily to a decrease in the provision for credit losses. Revenue decreased as a result of a decline in net interest income from lower average loans and yields as well as lower noninterest income. Provision for credit losses decreased reflecting improving economic conditions and continued expectations of improving delinquency, collection and bankruptcy trends.

     CRES net loss increased for the three and six months ended June 30, 2011 compared to the same periods in the prior year due to a decline in revenue and increased noninterest expense. This was partially offset by a decline in provision for credit losses. The decline in revenue was driven primarily by an increase in representations and warranties provision, higher expected servicing costs and lower core production income. Noninterest expense increased due to a non-cash goodwill impairment charge, higher litigation expenses and mortgage-related assessments and waivers costs.

     Global Commercial Banking net income increased for the three and six months ended June 30, 2011 compared to the same periods in the prior year largely due to a decrease in the provision for credit losses from improved asset quality, particularly in the commercial real estate portfolio. Revenue decreased primarily due to lower loan balances partially offset by earnings on higher deposits. Noninterest income increased largely due to a gain on the termination of a purchase contract.

     GBAM net income increased for the three months ended June 30, 2011 compared to the same period in the prior year reflecting higher investment banking fees and increased sales and trading revenue. Net income decreased for the six months ended June 30, 2011 compared to the same period in the prior year due to a less favorable trading environment compared to the first quarter of 2010 and higher noninterest expense driven by investments in infrastructure. This was partially offset by higher investment banking fees as noted above for the three months ended June 30, 2011.

     GWIM net income increased for the three and six months ended June 30, 2011 compared to the same periods in the prior year driven by higher revenue as well as lower credit costs, partially offset by higher noninterest expense. Net income for the three months ended June 30, 2010 included the gain and the tax-related charge from the sale of the Columbia Management long-term asset management business. Revenue increased driven by asset management fees as well as higher net interest income due to strong deposit balance growth. 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 reported a net loss for the three and six months ended June 30, 2011 compared to net income for the same periods in the prior year due to lower revenue and higher provision for credit losses. Revenue decreased due primarily to a decline in equity investment income, including an impairment write-down on our merchant services joint venture during the three months ended June 30, 2011, and lower fair value adjustments on structured liabilities. These items were partially offset by an increase in gains on sales of debt securities. The increase in the provision for credit losses was primarily attributable to reserve additions in the Countrywide PCI discontinued real estate and residential mortgage loan portfolios due to the impact of further declines in home prices. Also, merger and restructuring charges decreased as integration efforts with the Merrill Lynch acquisition continue to progress as planned.

     Noninterest income decreased $14.3 billion to $2.0 billion and $17.8 billion to $16.7 billion for the three and six months ended June 30, 2011 compared to the same periods in 2010. The following highlights the significant changes.

     The provision for credit losses decreased $4.9 billion to $3.3 billion and $10.8 billion to $7.1 billion for the three and six months ended June 30, 2011 compared to the same periods in 2010. The provision for credit losses was $2.4 billion and $4.6 billion lower than net charge-offs for the three and six months ended June 30, 2011 which is after an addition to reserves for the PCI loan portfolio of $412 million and $2.0 billion. The reduction in the allowance for credit losses in the three and six months ended June 30, 2011 was driven primarily by improving delinquencies, collections and bankruptcies across the Global Card Services portfolios.

     The provision for credit losses related to our consumer portfolio decreased $3.4 billion to $3.8 billion and $7.7 billion to $7.7 billion for the three and six months ended June 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 $1.5 billion to a benefit of $523 million and $3.1 billion to a benefit of $636 million for the three and six months ended June 30, 2011 compared to the same periods in 2010.

     Net charge-offs totaled $5.7 billion, or 2.44 percent and $11.7 billion, or 2.53 percent of average loans and leases for the three and six months ended June 30, 2011 compared with $9.6 billion, or 3.98 percent and $20.4 billion, or 4.21 percent for the three and six months ended June 30, 2010. The decrease in net charge-offs was primarily driven by improvements in general economic conditions that resulted in fewer delinquencies, improved collection rates and lower bankruptcy filings across the Global Card Services U.S. loan portfolio. For more information on the provision for credit losses, see Provision for Credit Losses on page 107.

     Noninterest expense increased $5.6 billion to $22.9 billion and $8.1 billion to $43.1 billion for the three and six months ended June 30, 2011 compared to the same periods in 2010. The increases were driven by a $2.6 billion goodwill impairment charge in our mortgage business in the three months ended June 30, 2011 and by increases in general operating expense of $2.8 billion and $4.3 billion for the three and six months ended June 30, 2011 compared to the same periods in the prior year. Other general operating expense includes mortgage-related assessments and waivers costs of $716 million and $1.6 billion for the three and six months ended June 30, 2011. Litigation expenses within other general operating expense increased to $2.3 billion and $3.2 billion for the three and six months ended June 30, 2011, of which $2.0 billion and $2.8 billion were in our mortgage business. Additionally, an increase of $1.4 billion in personnel costs for the year-to-date period contributed to the increase in noninterest expense as we continue to add client-facing professionals in GWIM, expand our international capabilities in GBAM and increase default-related staffing levels in the mortgage business.

     The effective tax benefit rates for the three and six months ended June 30, 2011 were higher than the tax rates for the same periods in 2010 because the benefits for net tax preference items increased the income tax benefit recorded on the pre-tax loss while the impact of such benefits was a decrease in tax expense recorded on pre-tax income for the same periods in 2010.

     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 will require us to remeasure our U.K. net deferred tax assets using the lower tax rates. We will record a charge to income tax expense of approximately $800 million for this revaluation in the three months ending September 30, 2011. 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.

     In addition, it is possible that valuation allowance releases may affect the effective income tax rate later this year.

     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 six months ended June 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 June 30, 2011, total assets were $2.3 trillion, a decrease of $3.6 billion, or less than one percent, from December 31, 2010.

     Average total assets decreased $155.3 billion and $166.6 billion for the three and six months ended June 30, 2011 compared to the same periods in 2010. Almost all line items decreased with the most significant decrease in all other assets largely due to the sale of certain strategic investments, reductions in MSR hedging activity and our goodwill balance as a result of impairment charges recorded in 2010.

     In the first half of 2011, we have taken certain actions 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 64.

     At June 30, 2011, total liabilities were $2.0 trillion, an increase of $2.5 billion, or less than one percent, from December 31, 2010.

     Average total liabilities decreased $156.9 billion and $167.9 billion for the three and six months ended June 30, 2011 compared to the same periods in 2010. The decreases were primarily driven by reduced short-term borrowings and long-term debt, and the sale of First Republic Bank in 2010. These decreases were partially offset by deposit growth.

     Shareholders’ equity decreased $6.1 billion to $222.2 billion at June 30, 2011 compared to December 31, 2010. The decrease was driven primarily by the second quarter net loss.

     Average shareholders’ equity increased $1.6 billion and $1.2 billion for the three and six months ended June 30, 2011 compared to the same periods in 2010. The increases were due to an increase in accumulated other comprehensive income (OCI) due in large part to net unrealized gains on available-for-sale (AFS) securities. The charges that drove the net loss for the three and six months ended June 30, 2011 were recorded at period end and accordingly had minimal impact on average shareholders’ equity.

     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.

     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.