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Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)  

ý


[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended JuneSeptember 30, 2014

OR

oOR


[ ]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: 1-15081

MUFG Americas Holdings Corporation
(Exact name of registrant as specified in its charter)


Delaware

Delaware

94-1234979
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer Identification No.)

1251 Avenue of the Americas, New York, NY

10020
(Address of principal executive offices) (Zip Code)

(Registrant's telephone number, including area code) (212) 782-5911

UnionBanCal Corporation
400 California Street, San Francisco, California 94104-1302
(Former Name or former address, 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 þx    No o

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 þx    No o

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.

 
Large accelerated filero
 
Accelerated filero

 

Non-accelerated filerþ(Dox  (Do not check if a smaller reporting company)

 

Smaller reporting companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o   No þx

Number of shares of Common Stock outstanding at JulyOctober 31, 2014: 136,330,831

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.



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MUFG Americas Holdings Corporation and Subsidiaries

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Statements of Income (Unaudited)

Consolidated Statements of Comprehensive Income (Unaudited)

Consolidated Balance Sheets (Unaudited)

Consolidated Statements of Changes in Stockholder's Equity (Unaudited)

Consolidated Statements of Cash Flows (Unaudited)

Note 1—Summary of Significant Accounting Policies, Nature of Operations and Other Developments

Note 2—Correction of Prior Period Amounts

Business Combinations

Note 3—Business Combinations

Securities

Note 4—Securities

50

Note 5—Loans and Allowance for Loan Losses

Note 6—5—Variable Interest Entities

Note 7—6—Commercial Paper and Other Short-Term Borrowings

Note 8—7—Long-Term Debt

Note 9—8—Fair Value Measurement and Fair Value of Financial Instruments

Note 10—9—Derivative Instruments and Other Financial Instruments Used for Hedging

Note 11—10—Accumulated Other Comprehensive Loss

Note 12—11—Employee Pension and Other Postretirement Benefits

Note 13—12—Commitments, Contingencies and Guarantees

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Consolidated Financial Highlights

Introduction

Introduction

Executive Overview

Financial Performance

Balance Sheet Analysis

Capital Management

Risk Management

Business Segments

Critical Accounting Estimates

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

Item 6. Exhibits

SIGNATURES

SIGNATURES


2



NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report includes forward-looking statements, which include expectations for our operations and business and our assumptions for those expectations. Do not rely unduly on forward-looking statements. Actual results might differ significantly compared to our expectations. See Part I, Item 1A. "Risk“Risk Factors," in our 2013 Annual Report on Form 10-K, Part II, Item 1A. "Risk Factors"“Risk Factors” in this Form 10-Q, and the other risks described in this Form 10-Q and in our 2013 Annual Report on Form 10-K, for factors to be considered when reading any forward-looking statements in this filing.

This report includes forward-looking statements, which are subject to the "safe harbor"‘‘safe harbor’’ created by section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. We may make forward-looking statements in our Securities and Exchange Commission (SEC) filings, press releases, news articles and when we are speaking on behalf of MUFG Americas Holdings Corporation. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include the words "believe," "expect," "target," "anticipate," "intend," "plan," "seek," "estimate," "potential," "project," "forecast," "outlook,"‘‘believe,’’ ‘‘expect,’’ ‘‘target,’’ ‘‘anticipate,’’ ‘‘intend,’’ ‘‘plan,’’ ‘‘seek,’’ ‘‘estimate,’’ ‘‘potential,’’ ‘‘project,’’ “forecast,” “outlook,” words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could," "might,"‘‘will,’’ ‘‘would,’’ ‘‘should,’’ ‘‘could,’’ ‘‘might,’’ or "may."‘‘may.’’ These forward-looking statements are intended to provide investors with additional information with which they may assess our future potential. All of these forward-looking statements are based on assumptions about an uncertain future and are based on information known to our management at the date of these statements. We do not undertake to update forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date any forward-looking statements are made.

In this document and other reports to the SEC, for example, we make forward-looking statements, which discuss our expectations about:

Our business objectives, strategies and initiatives, organizational structure, business growth, competitive position and prospects, and the effect of competition on our business and strategies

Our assessment of significant factors and developments that have affected or may affect our results

Our assessment of economic conditions and trends, economic and credit cycles and their impact on our business

The economic outlook for the U.S.United States of America (U.S.) in general, West Coast states and global economies

The impact of changes in interest rates resulting from changes in Federal Reserve policy or for other reasons, our strategy to manage our interest rate risk profile, our outlook for short-term and long-term interest rates and their effect on our net interest margin, investment portfolio and our borrowers'borrowers’ ability to service their loans and on residential mortgage loans and refinancings

Our sensitivity to and management of market risk, including changes in interest rates, and the economic outlook within specific industries, for the U.S. in general, West Coast states in particular and foreign countries (including Japan and the Eurozone)

Pending and recent legislative and regulatory actions, and future legislative and regulatory developments, including the effects of legislation and other governmental measures, including the monetary policies of the Federal Reserve introduced in response to the 2008-2009 financial crises, and the following recession affecting the banking system, financial markets and the U.S. economy, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), changes to the deposit insurance assessment policies of the Federal Deposit Insurance Corporation (FDIC), the effect on and application of foreign and other laws and regulations to our business and operations, and anticipated fees, costs or other impacts on our business and operations as a result of these developments

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Regulatory and compliance controls and processes and their impact on our business, including our operating costs and revenues

The costs and effects of legal actions, investigations, regulatory actions, criminal proceedings or similar matters, our anticipated litigation strategies, our assessment of the timing and ultimate outcome of legal actions, or adverse facts and developments related thereto

Our allowance for credit losses, including the conditions we consider in determining the unallocated allowance and our portfolio credit quality, risk rating and credit migration trends and loss factors

3


Loan portfolio composition and risk rating trends, residential loan delinquency rates compared to the industry average, portfolio credit quality, our strategy regarding troubled debt restructurings (TDRs), and our intent to sell or hold loans we originate

Our intent to sell or hold, and the likelihood that we would be required to sell, or expectations regarding recovery of the amortized cost basis of, various investment securities

Our hedging strategies, positions, expectations regarding reclassifications of gains or losses on hedging instruments into earnings; and the sensitivity of our net income to various factors, including customer behavior relating to mortgage pre-payments and deposit repricing

Expected rates of return, maturities, yields, loss exposure, growth rates, pension plan strategies, contributions and benefit payments, and projected results

Tax rates and taxes, the possible effect of changes in taxable profits of the U.S. operations of Mitsubishi UFJ Financial Group, Inc. (MUFG) on our state tax obligations and of expected tax credits or benefits

Critical accounting policies and estimates, the impact or anticipated impact of recent accounting pronouncements, guidance or changes in accounting principles and future recognition of impairments for the fair value of assets, including goodwill, financial instruments, intangible assets and other assets acquired in our acquisitions of Pacific Capital Bancorp, PB Capital Corporation'sCorporation’s institutional commercial real estate lending portfolio, First Bank Association Bank Services, Smartstreet and our April 2010 FDIC-assisted acquisitions

Decisions to downsize, sell or close units, dissolve subsidiaries, expand our branch network, pursue acquisitions, purchase banking facilities and equipment, or otherwise restructure, reorganize or change our business mix, and their timing and impact on our business

Our expectations regarding the impact of acquisitions on our business and results of operations and amounts we expect to collect from or must pay to the FDIC under loss share agreements

The impact of changes in our credit rating

including from a recent change by one rating agency placing our Company on review for downgrade
Maintenance of casualty and liability insurance coverage appropriate for our operations

The relationship between our business and that of The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU) and MUFG, the impact of their credit ratings, operations or prospects on our credit ratings and actions that may or may not be taken by BTMU and MUFG

Threats to the banking sector and our business due to cybersecurity issues and attacks

The reorganization of our affiliated HighMark Funds into shares of unaffiliated mutual funds on financial institutions and the impact on our business and activities
other businesses, such as large retailers

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Readers of this document should not rely unduly on any forward-looking statements, which reflect only our management'smanagement’s belief as of the date of this report. There are numerous risks and uncertainties that could cause actual outcomes and results to differ materially from those discussed in our forward-looking statements. Many of these factors are beyond our ability to control or predict and could have a material adverse effect on our financial condition, results of operations or prospects. Such risks and uncertainties include, but are not limited to, those described or referred to in Part I, Item 1. "Business"“Business” under the captions "Competition"“Competition” and "Supervision“Supervision and Regulation"Regulation” of our 2013 Annual Report on Form 10-K, and in Part II, Item 1A. "Risk Factors"“Risk Factors” and Part I, Item 2. "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” of this Form 10-Q, and in our other reports to the SEC.

Any factor described in this report could by itself, or together with one or more other factors, adversely affect our business, prospects, results of operations or financial condition.



4

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Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations

MUFG Americas Holdings Corporation and Subsidiaries
Consolidated Financial Highlights

 
 For the Three Months
Ended
  
 For the Six Months
Ended
  
 
(Dollars in millions) June 30,
2014
 June 30,
2013(1)
 Percent
Change
 June 30,
2014
 June 30,
2013(1)
 Percent
Change
 

Results of operations:

                   

Net interest income

 $763 $672  14%$1,446 $1,325  9%

Noninterest income

  202  201    383  452  (15)
                

Total revenue

  965  873  11  1,829  1,777  3 

Noninterest expense

  649  702  (8) 1,309  1,415  (7)
                

Pre-tax, pre-provision income(2)

  316  171  85  520  362  44 

(Reversal of) provision for loan losses

  9  (3) 400  (7) (6) (17)
                

Income before income taxes and including noncontrolling interests

  307  174  76  527  368  43 

Income tax expense

  62  35  77  112  85  32 
                

Net income including noncontrolling interests

  245  139  76  415  283  47 

Deduct: Net loss from noncontrolling interests

  4  3  33  9  7  29 
                

Net income attributable to MUAH

 $249 $142  75 $424 $290  46 
                
                

Balance sheet (period average):

                   

Total assets

 $107,871 $98,714  9%$107,185 $97,687  10%

Total securities

  22,865  23,183  (1) 22,739  22,507  1 

Total loans held for investment

  71,104  63,673  12  70,203  62,122  13 

Earning assets

  97,405  89,292  9  96,756  88,179  10 

Total deposits

  81,221  75,350  8  80,829  74,807  8 

MUAH stockholder's equity

  14,657  12,599  16  14,524  12,591  15 

Performance ratios:

                   

Return on average assets(3)

  0.92% 0.58%    0.79% 0.59%   

Return on average MUAH stockholder's equity(3)

  6.80  4.53     5.84  4.61    

Efficiency ratio(4)

  67.23  80.37     71.56  79.59    

Adjusted efficiency ratio(5)

  60.30  69.45     63.91  68.56    

Net interest margin(3)(6)

  3.15  3.03     3.02  3.03    

Net loans charged-off (recovered) to average total loans held for investment(3)

  0.04  0.05       0.07    

Net loans charged-off to average total loans held for investment, excluding purchased credit-impaired loans and FDIC covered other real estate owned (OREO)(3)(10)

  0.04  0.06       0.07    
  For the Three Months Ended   For the Nine Months Ended  
(Dollars in millions) September 30, 2014 September 30, 2013 
Percent
Change
 September 30, 2014 September 30, 2013 
Percent
Change
Results of operations:            
Net interest income $707
 $685
 3 % $2,153
 $2,010
 7 %
Noninterest income 388
 234
 66
 771
 686
 12
Total revenue 1,095
 919
 19
 2,924
 2,696
 8
Noninterest expense 805
 689
 17
 2,114
 2,104
 
Pre-tax, pre-provision income(1)
 290
 230
 26
 810
 592
 37
(Reversal of) provision for loan losses (18) (16) (13) (25) (22) (14)
Income before income taxes and including
   noncontrolling interests
 308
 246
 25
 835
 614
 36
Income tax expense 67
 55
 22
 179
 140
 28
Net income including noncontrolling
   interests
 241
 191
 26
 656
 474
 38
Deduct: Net loss from noncontrolling
   interests               
 5
 7
 (29) 14
 14
 
Net income attributable to MUAH $246
 $198
 24
 $670
 $488
 37
Balance sheet (period average):     
     
Total assets $109,739
 $101,534
 8 % $108,039
 $98,984
 9 %
Total securities 22,592
 22,909
 (1) 22,689
 22,643
 
Total loans held for investment 73,353
 66,608
 10
 71,264
 63,633
 12
Earning assets 98,933
 92,035
 7
 97,486
 89,479
 9
Total deposits 82,239
 77,434
 6
 81,298
 75,692
 7
MUAH stockholder's equity 14,969
 12,210
 23
 14,675
 12,463
 18
Performance ratios:            
Return on average assets(2)
 0.90% 0.78 %  
 0.83% 0.66%  
Return on average MUAH stockholder's
   equity(2)
 6.57
 6.50
  
 6.08
 5.23
  
Efficiency ratio(3)
 73.51
 75.01
  
 72.29
 78.03
  
Adjusted efficiency ratio(4)
 63.42
 67.21
  
 63.74
 68.10
  
Net interest margin(2)(5)
 2.87
 2.99
  
 2.97
 3.02
  
Net loans charged-off (recovered) to
   average total loans held for investment(2)
 0.06
 (0.01)  
 0.02
 0.04
  
Net loans charged-off to average total loans
   held for investment, excluding purchased
   credit-impaired loans and FDIC covered
   other real estate owned (OREO)(2)(9)
 0.07
 0.01
  
 0.02
 0.05
  


5

 
 As of  
 
 
 June 30,
2014
 December 31,
2013(1)
 Percent
Change
 

Balance sheet (end of period):

          

Total assets

 $108,820 $105,894  3%

Total securities

  22,847  22,326  2 

Total loans held for investment

  72,369  68,312  6 

Nonperforming assets

  547  499  10 

Core deposits(7)

  72,058  69,155  4 

Total deposits

  81,566  80,101  2 

Long-term debt

  6,995  6,547  7 

MUAH stockholder's equity

  14,815  14,215  4 

Credit ratios:

          

Allowance for loan losses to total loans held for investment(8)

  0.77% 0.83%   

Allowance for loan losses to nonaccrual loans(8)

  108.90  128.42    

Allowance for credit losses to total loans held for investment(9)

  0.97  1.02    

Allowance for credit losses to nonaccrual loans(9)

  137.13  158.30    

Nonperforming assets to total loans held for investment and OREO

  0.75  0.74    

Nonperforming assets to total assets

  0.50  0.48    

Nonaccrual loans to total loans held for investment

  0.71  0.65    

Credit ratios, excluding purchased credit-impaired loans and FDIC covered OREO(10):

          

Allowance for loan losses to total loans held for investment(9)

  0.78% 0.84%   

Allowance for loan losses to nonaccrual loans(8)

  111.88  132.82    

Allowance for credit losses to total loans held for investment(9)

  0.98  1.04    

Allowance for credit losses to nonaccrual loans(9)

  141.06  163.78    

Nonperforming assets to total loans held for investment and OREO

  0.71  0.66    

Nonperforming assets to total assets

  0.47  0.43    

Nonaccrual loans to total loans held for investment

  0.69  0.63    

Capital ratios:

          

Common equity tier 1 risk-based capital ratio(11)

  12.58% n/a    

Tier 1 common capital ratio(12)

  n/a  12.34% �� 

Tier 1 risk-based capital ratio(11)

  12.62  12.41    

Total risk-based capital ratio(11)

  14.57  14.61    

Tier 1 leverage ratio(11)

  11.35  11.27    

Tangible common equity ratio(13)

  10.84  10.54    

Common equity tier 1 risk-based capital ratio (U.S. Basel III standardized approach; fully phased-in)(14)

  11.60  11.14    

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MUFG Americas Holdings Corporation and Subsidiaries
(1)
During the third quarter of 2013, the Company corrected prior period errors related to the recognition of income and expense associated with market-linked certificates of deposits. The Company concluded that these errors were not material to the periods in which the corrections were made. For additional information, see Note 2 to our Consolidated Financial Statements in Part I, Item 1. "Financial Statements" of this Form 10-Q.
(2)
Pre-tax, pre-provision income is total revenue less noninterest expense. Management believes that this is a useful financial measure because it enables investors and others to assess the Company's ability to generate capital to cover loan losses through a credit cycle.
(3)
Annualized.
(4)
The efficiency ratio is total noninterest expense as a percentage of total revenue (net interest income and noninterest income).
(5)
The adjusted efficiency ratio, a non-GAAP financial measure, is adjusted noninterest expense (noninterest expense excluding foreclosed asset expense and other credit costs, (reversal of) provision for losses on unfunded credit commitments, certain costs related to productivity initiatives, low income housing credit (LIHC) investment amortization expense, expenses of the LIHC consolidated variable interest entities, merger and business integration costs, privatization-related expenses, and intangible asset amortization) as a percentage of adjusted total revenue (net interest income (taxable-equivalent basis) and noninterest income), excluding the impact of gains from productivity initiatives related to the sale of certain business units and premises, accretion related to privatization-related fair value adjustments, and other credit costs. Management discloses the adjusted efficiency ratio as a measure of the efficiency of our operations, focusing on those costs most relevant to our business activities. Please refer to Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations—Noninterest Income and Noninterest Expense" of this Form 10-Q for further information.
(6)
Net interest margin is presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent.
(7)
Core deposits exclude brokered deposits, foreign time deposits and domestic time deposits greater than $250,000.
(8)
The allowance for loan losses ratios are calculated using the allowance for loan losses against end of period total loans held for investment or total nonaccrual loans, as appropriate.
(9)
The allowance for credit losses ratios include the allowances for loan losses and for losses on unfunded credit commitments against end of period total loans held for investment or total nonaccrual loans, as appropriate.
(10)
These ratios exclude the impact of all purchased credit-impaired loans and FDIC covered OREO. Purchased credit-impaired loans and OREO related to the April 2010 acquisitions of certain assets and assumption of certain liabilities of Frontier Bank and Tamalpais Bank are covered under loss share agreements between the Bank and the FDIC. Management believes the exclusion of purchased credit-impaired loans and FDIC covered OREO from certain asset quality ratios that include nonaccrual loans, nonperforming assets, net loans charged-off, total loans held for investment and the allowance for loan losses or credit losses in the numerator or denominator provides a better perspective into underlying asset quality trends.
(11)
The capital ratios displayed as of June 30, 2014 are calculated in accordance with the transition guidelines set forth in the U.S. federal banking agencies' revised capital framework for implementing the final U.S. Basel III regulatory capital rules. The capital ratios as of December 31, 2013 are calculated under Basel I rules.
(12)
The Tier 1 common capital ratio, calculated under Basel I rules, is the ratio of Tier 1 capital, less qualifying trust preferred securities, to risk-weighted assets. The Tier 1 common capital ratio, a non-GAAP financial measure, facilitates the understanding of the Company's capital structure and is used to assess and compare the quality and composition of the Company's capital structure to other financial institutions. Refer to Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations—Capital Management" in this Form 10-Q for further information.
(13)
The tangible common equity ratio, a non-GAAP financial measure, is calculated as tangible common equity divided by tangible assets. The methodology for determining tangible common equity may differ among companies. The tangible common equity ratio facilitates the understanding of the Company's capital structure and is used to assess and compare the quality and composition of the Company's capital structure to other financial institutions. Refer to Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations—Capital Management" in this Form 10-Q for further information.
(14)
Common equity tier 1 risk-based capital is a non-GAAP financial measure that is used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies as if the U.S. Basel III rules (standardized approach on a fully phased-in basis, which includes accumulated other comprehensive loss elements as prescribed by the U.S. Basel III rules) were effective at December 31, 2013. Management reviews Common equity tier 1 risk-based capital along with other measures of capital as part of its financial analyses and has included this non-GAAP financial information, and the corresponding reconciliation from Tier 1 capital determined in accordance with Basel I regulatory requirements, because of current interest in such information on the part of market participants.
n/a
not applicable.
Highlights (Continued)

  As of  
  September 30, 2014 December 31, 2013 
Percent
Change
Balance sheet (end of period):      
Total assets $110,879
 $105,894
 5 %
Total securities 22,522
 22,326
 1
Total loans held for investment 74,635
 68,312
 9
Nonperforming assets 428
 499
 (14)
Core deposits(6)
 73,608
 69,155
 6
Total deposits 82,356
 80,101
 3
Long-term debt 6,984
 6,547
 7
MUAH stockholder's equity 15,051
 14,215
 6
Credit ratios:      
Allowance for loan losses to total loans held for investment(7)
 0.71% 0.83%  
Allowance for loan losses to nonaccrual loans(7)
 131.28
 128.42
  
Allowance for credit losses to total loans held for investment(8)
 0.92
 1.02
  
Allowance for credit losses to nonaccrual loans(8)
 171.42
 158.30
  
Nonperforming assets to total loans held for investment and OREO 0.57
 0.74
  
Nonperforming assets to total assets 0.39
 0.48
  
Nonaccrual loans to total loans held for investment 0.54
 0.65
  
Credit ratios, excluding purchased credit-impaired loans and FDIC covered
   OREO(9):
      
Allowance for loan losses to total loans held for investment(7)
 0.71% 0.84%  
Allowance for loan losses to nonaccrual loans(7)
 134.80
 132.82
  
Allowance for credit losses to total loans held for investment(8)
 0.93
 1.04
  
Allowance for credit losses to nonaccrual loans(8)
 176.28
 163.78
  
Nonperforming assets to total loans held for investment and OREO 0.54
 0.66
  
Nonperforming assets to total assets 0.36
 0.43
  
Nonaccrual loans to total loans held for investment 0.53
 0.63
  
Capital ratios:      
Common Equity Tier 1 risk-based capital ratio(10)
 12.66% n/a
  
Tier 1 common capital ratio(11)
 n/a
 12.34%  
Tier 1 risk-based capital ratio(10)
 12.70
 12.41
  
Total risk-based capital ratio(10)
 14.60
 14.61
  
Tier 1 leverage ratio(10)
 11.43
 11.27
  
Tangible common equity ratio(12)
 10.79
 10.54
  
Common Equity Tier 1 risk-based capital ratio (U.S. Basel III standardized
   approach; fully phased-in)(13)
 11.93
 11.14
  

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Table of Contents


MUFG Americas Holdings Corporation and Subsidiaries
Consolidated Financial Highlights (Continued)


(1)Pre-tax, pre-provision income is total revenue less noninterest expense. Management believes that this is a useful financial measure because it enables investors and others to assess the Company's ability to generate capital to cover loan losses through a credit cycle.
(2)Annualized.
(3)The efficiency ratio is total noninterest expense as a percentage of total revenue (net interest income and noninterest income).
(4)The adjusted efficiency ratio, a non-GAAP financial measure, is adjusted noninterest expense (noninterest expense excluding staff costs associated with fees from affiliates - support services, foreclosed asset expense and other credit costs, (reversal of) provision for losses on unfunded credit commitments, certain costs related to productivity initiatives, low income housing credit (LIHC) investment amortization expense, expenses of the LIHC consolidated variable interest entities, merger and business integration costs, privatization-related expenses, and intangible asset amortization) as a percentage of adjusted total revenue (net interest income (taxable-equivalent basis) and noninterest income), excluding the impact of fees from affiliates - support services, gains from productivity initiatives related to the sale of certain business units and premises, accretion related to privatization-related fair value adjustments, and other credit costs. Management discloses the adjusted efficiency ratio as a measure of the efficiency of our operations, focusing on those costs most relevant to our business activities. Please refer to Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Noninterest Income and Noninterest Expense" of this Form 10-Q for further information.
(5)Net interest margin is presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent.
(6)Core deposits exclude brokered deposits, foreign time deposits and domestic time deposits greater than $250,000.
(7)The allowance for loan losses ratios are calculated using the allowance for loan losses against end of period total loans held for investment or total nonaccrual loans, as appropriate.
(8)The allowance for credit losses ratios include the allowances for loan losses and for losses on unfunded credit commitments against end of period total loans held for investment or total nonaccrual loans, as appropriate.
(9)These ratios exclude the impact of all purchased credit-impaired loans and FDIC covered OREO. Purchased credit-impaired loans and OREO related to the April 2010 acquisitions of certain assets and assumption of certain liabilities of Frontier Bank and Tamalpais Bank are covered under loss share agreements between the Bank and the FDIC. Management believes the exclusion of purchased credit-impaired loans and FDIC covered OREO from certain asset quality ratios that include nonaccrual loans, nonperforming assets, net loans charged-off, total loans held for investment and the allowance for loan losses or credit losses in the numerator or denominator provides a better perspective into underlying asset quality trends.
(10)The capital ratios displayed as of September 30, 2014 are calculated in accordance with the transition guidelines set forth in the U.S. federal banking agencies' revised capital framework for implementing the final U.S. Basel III regulatory capital rules. The capital ratios as of December 31, 2013 are calculated under Basel I rules.
(11)The Tier 1 common capital ratio, calculated under Basel I rules, is the ratio of Tier 1 capital, less qualifying trust preferred securities, to risk-weighted assets. The Tier 1 common capital ratio, a non-GAAP financial measure, facilitates the understanding of the Company's capital structure and is used to assess and compare the quality and composition of the Company's capital structure to other financial institutions. Refer to Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital Management" in this Form 10-Q for further information.
(12)The tangible common equity ratio, a non-GAAP financial measure, is calculated as tangible common equity divided by tangible assets. The methodology for determining tangible common equity may differ among companies. The tangible common equity ratio facilitates the understanding of the Company's capital structure and is used to assess and compare the quality and composition of the Company's capital structure to other financial institutions. Refer to Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital Management" in this Form 10-Q for further information.
(13)Common Equity Tier 1 risk-based capital (standardized, fully phased-in basis) is a non-GAAP financial measure that is used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies as if the transition provisions of the U.S. Basel III rules were fully phased-in for the periods in which the ratio is disclosed.  Management reviews this ratio, which includes components of accumulated other comprehensive loss, along with other measures of capital as part of its financial analyses and has included this non-GAAP information, and the corresponding reconciliation from Common Equity Tier 1 capital (calculated according to the transition provisions under U.S. Basel III rules) because of current interest in such information by market participants. 
n/anot applicable.

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Please refer to our Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K10‑K for the year ended December 31, 2013 (2013 Form 10-K)10‑K) along with the following discussion and analysis of our consolidated financial position and results of operations for the period ended JuneSeptember 30, 2014 in this Form 10-Q.10‑Q. Averages, as presented in the following tables, are substantially all based upon daily average balances.

As used in this Form 10-Q,10‑Q, terms such as "the“the Company," "we," "us"” “we,” “us” and "our"“our” refer to MUFG Americas Holdings Corporation (MUAH), one or more of its consolidated subsidiaries, or to all of them together.

Introduction

We are a financial holding company and bank holding company whose principal subsidiary is MUFG Union Bank, N.A. (MUB or the Bank). We are a wholly-owned subsidiary of The Bank of Tokyo-MitsubishiTokyo - Mitsubishi UFJ, Ltd. (BTMU) which is a wholly-owned subsidiary of Mitsubishi UFJ Financial Group, Inc. (MUFG). Prior to July 1, 2014, MUFG Americas Holdings Corporation was named UnionBanCal Corporation and MUFG Union Bank, N.A. was named Union Bank, N.A.

We service Corporate Banking, Investment Banking & Markets, and certain Transaction Banking customers through the MUFG brand and continue to serve Retail Banking & Wealth Markets, Commercial Banking, and Transaction Banking customers through the Union Bank brand. We provide a wide range of financial services to consumers, small businesses, middle-market companies and major corporations, both nationally and internationally. The Company had consolidated assets of $108.8$110.9 billion at JuneSeptember 30, 2014.

The Company'sCompany’s leadership is bi-coastalbicoastal with Retail Banking & Wealth Markets, Commercial Banking, and Transaction Banking leaders on the West Coast. Corporate Banking and Investment Banking & Markets leaders are based in New York City. The corporate headquarters (principal executive office) for MUB and MUAH is in New York City. MUB's main banking office is in San Francisco.

References to the privatization transaction in this report refer to the transaction on November 4, 2008, when we became a privately held company. All of our issued and outstanding shares of common stock are owned by BTMU.

In Novemberthe fourth quarter of 2013, we completed the acquisition of First Bank Association Bank Services, a unit of First Bank, which provides a full range of banking services to homeowners associations and community management companies. We acquired approximately $570 million in deposits in this transaction.

In the second quarter of 2013, we completed the purchase of PB Capital Corporation'sCorporation’s (PB Capital) $3.5 billion institutional commercial real estate (CRE) lending portfolio. The acquisition expanded our CRE presence in the U.S., and provided geographic and asset class diversification.

Executive Overview

We are providing you with an overview of what we believe are the most significant factors and developments that affected our secondthird quarter 2014 results and that could influence our future results. Further detailed information can be found elsewhere in this Form 10-Q. In addition, we ask that you carefully read this entire document and any other reports that we refer to in this Form 10-Q for more detailed information that will assist your understanding of trends, events and uncertainties that impact us.

Our sources of revenue are net interest income and noninterest income (collectively "total revenue"“total revenue”). Net interest income is generated predominantly from interest earned from loans, investment securities and other interest-earning assets, less interest incurred on deposits and borrowings. The primary sources of noninterest income are revenues from service charges on deposit accounts, trust and investment management fees, trading account activities, credit facility fees, and merchant banking fees.fees, and fees from affiliates. In the secondthird quarter of 2014, revenue was comprised of 7965 percent net interest income and 2135 percent noninterest income. Changes in


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interest rates, credit quality, economic trends and the capital markets are primary factors that affect our revenue sources. A summary of our financial results is discussed below.

Our primary sources of liquidity are core deposits, securities and wholesale funding. Core deposits exclude brokered deposits, foreign time deposits and domestic time deposits greater than $250,000. Wholesale funding includes unsecured funds raised from interbank and other sources, both domestic and international, and secured funds raised by selling securities under repurchase agreements and by borrowing from the Federal Home Loan Bank of San Francisco (FHLB). We evaluate and monitor the stability and reliability of our various funding sources to help ensure that we have sufficient liquidity when adverse situations arise.

Performance Highlights

In the secondthird quarter of 2014, net income attributable to MUAH was $249$246 million, compared with $142$198 million in the secondthird quarter of 2013, substantially driven by higher net interest income.2013. Net interest income was $763$707 million in the secondthird quarter of 2014, compared with $672$685 million in the secondthird quarter of 2013. The increase in net interest income was primarilysubstantially due to growth in loans held for investment and a 12 basis point increase in the net interest margin driven by higher interest income on our purchased credit-impaired (PCI) loan portfolio, which was mostly due to early payoffs of certain loans.growth. In the secondthird quarter of 2014, noninterest expense was down $53income

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increased $154 million, or 8%, primarily driven by lower current quarter salaries66 percent, and noninterest expense increased $116 million, or 17 percent. The increases in noninterest income and noninterest expense were largely due to fees from affiliates and increased employee benefits expense. Noninterest income was $202 million in the second quarter of 2014, up $1 millioncosts resulting from the second quarter of 2013.

business integration initiative discussed below.

Continued discipline in underwriting standards produced another solid quarter of strong credit quality with low nonperforming assets and charge-offs. Total nonperforming assets were $547$428 million and $499 million as of JuneSeptember 30, 2014 and December 31, 2013, respectively. Net charge-offs were $7$12 million for the secondthird quarter of 2014 compared with $8net recoveries of $1 million for the secondthird quarter of 2013. For the quarter ended JuneSeptember 30, 2014, the provision for credit losses was $6$1 million compared with a provision reversal of $5$15 million for the quarter ended JuneSeptember 30, 2013.

Capital Ratios

The Common equity tierEquity Tier 1, Tier 1 and Total risk-based capital ratios, calculated in accordance with the transition guidelines set forth in the U.S. federal banking agencies' revised capital framework for implementing the final U.S. Basel III regulatory capital rules, were 12.5812.66 percent, 12.6212.70 percent and 14.5714.60 percent, respectively, at JuneSeptember 30, 2014. The tangible common equity ratio was 10.8410.79 percent at JuneSeptember 30, 2014.

Business Integration Initiative

Effective July 1, 2014, the U.S. branch banking operations of BTMU were integrated withunder the Bank.Bank's operations. The integration did not involve a legal entity combination, but rather an integration of personnel and certain business and support activities. As a result of this initiative, all of BTMU's banking activities in the Americas will beare managed by employees of the Bank, which includes the addition of approximately 2,300 U.S. employees offormerly employed by BTMU. This initiative also included the transfer of ownership of BTMU'sBTMU’s U.S. corporate customer list to the Bank. BTMU and the Bank agreed to certain policies, which generally contemplate that transactions entered into with BTMU'sBTMU’s U.S. corporate customers will have the opportunity to be booked at the Bank, subject to its independent credit evaluation and other considerations, such as complying with underwriting standards and lending limits, meeting financial return objectives, and other risk management and regulatory considerations. BTMU'sBTMU’s New York, Chicago and Los Angeles branches continue to record transactions and maintain relationships with BTMU'sBTMU’s customers not on the aforementioned customer list but supported by the consolidated workforce at the Bank. The BTMU branches also retain their functions and current roles in the foreign exchange and settlement businesses, and continue to provide services to Japanese customers. The operation of BTMU'sBTMU’s businesses in the Americas located outside of the U.S. (in Latin America and Canada) remains unchanged, but under the oversight of the Company.


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As a result of this initiative, the Bank and BTMU entered into a master services agreement , which provides for employees of the Bank to perform and make available various business, banking, financial, and administrative and support services (the Services) and facilities for BTMU in connection with the operation and administration of BTMU's businessBTMU’s businesses in the U.S. (including BTMU'sBTMU’s U.S. branches). In consideration for the Services, BTMU will paypays to the Bank fee income, which will reflectreflects market-based pricing. Costs related to the Services performed by the transferred employees will be recordedare primarily reflected in salaries and benefits.employee benefits expense. While this initiative will havehad the effect of increasing noninterest income and noninterest expense, it isdid not expected to have a significant impact on the Company's net income financial condition or capital ratiosduring the third quarter of 2014. For additional information, see “Noninterest Income and Noninterest Expense” in the near term.

this Form 10-Q.


Through this business integration, MUFG, BTMU, and the Company aim to deliver enhanced products and services, strengthened U.S. dollar funding capabilities, and an advanced governance and risk management structure, which should also facilitate compliance with the Federal Reserve'sReserve’s recently released enhanced prudential standards for foreign banking organizations operating in the U.S. For additional information, see "Supervision“Supervision and Regulation—Regulation - Principal Federal Banking Laws—Laws - Dodd-Frank Act"Act” in Part I, Item 11. of our 2013 Form 10-K.



9

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Financial Performance

Net Interest Income

The following tables show the major components of net interest income and net interest margin:

 
 For the Three Months Ended 
 
 June 30, 2014 June 30, 2013 
(Dollars in millions) Average
Balance
 Interest
Income/
Expense(1)
 Average
Yield/
Rate(1)(2)
 Average
Balance
 Interest
Income/
Expense(1)
 Average
Yield/
Rate(1)(2)
 

Assets

                   

Loans held for investment:(3)

                   

Commercial and industrial

 $24,421 $202  3.33%$21,701 $185  3.42%

Commercial mortgage

  13,529  124  3.66  11,851  112  3.79 

Construction

  1,146  10  3.24  800  7  3.30 

Lease financing

  840  14  6.74  1,056  9  3.53 

Residential mortgage

  27,063  247  3.66  23,428  220  3.77 

Home equity and other consumer loans

  3,191  32  4.04  3,500  33  3.85 
                

Loans, before purchased credit-impaired loans

  70,190  629  3.59  62,336  566  3.64 

Purchased credit-impaired loans

  914  120  52.45  1,337  83  24.69 
                

Total loans held for investment

  71,104  749  4.22  63,673  649  4.08 

Securities

  22,865  120  2.10  23,183  121  2.11 

Interest bearing deposits in banks

  2,878  2  0.25  1,923  1  0.25 

Federal funds sold and securities purchased under resale agreements

  102    0.02  123    0.16 

Trading account assets

  194  1  1.04  162    0.36 

Other earning assets

  262    0.83  228  1  0.53 
                

Total earning assets

  97,405  872  3.58  89,292  772  3.47 
                  

Allowance for loan losses

  (561)       (642)      

Cash and due from banks

  1,450        1,355       

Premises and equipment, net

  642        704       

Other assets

  8,935        8,005       
                  

Total assets

 $107,871       $98,714       
                  
                  

Liabilities

                   

Interest bearing deposits:

                   

Transaction and money market accounts

 $37,646 $35  0.38 $32,296 $26  0.32 

Savings

  5,590  1  0.09  5,666  2  0.13 

Time

  10,761  25  0.91  12,710  33  1.06 
                

Total interest bearing deposits           

  53,997  61  0.45  50,672  61  0.49 
                

Commercial paper and other short-term borrowings(4)

  2,521  2  0.20  3,224  1  0.18 

Long-term debt

  6,923  41  2.39  5,326  35  2.64 
                

Total borrowed funds

  9,444  43  1.80  8,550  36  1.71 
                

Total interest-bearing liabilities

  63,441  104  0.65  59,222  97  0.66 
                  

Noninterest bearing deposits

  27,224        24,678       

Other liabilities

  2,298        1,945       
                  

Total liabilities

  92,963        85,845       

Equity

                   

MUAH stockholder's equity

  14,657        12,599       

Noncontrolling interests

  251        270       
                  

Total equity

  14,908        12,869       
                  

Total liabilities and equity

 $107,871       $98,714       
                  
                  

Net interest income/spread (taxable-equivalent basis)

     768  2.93%    675  2.81%

Impact of noninterest bearing deposits

        0.19        0.19 

Impact of other noninterest bearing sources

        0.03        0.03 

Net interest margin

        3.15        3.03 

Less: taxable-equivalent adjustment

     5        3    
                  

Net interest income

    $763       $672    
                  
                  
  For the Three Months Ended 
  September 30, 2014 September 30, 2013 
   
  
Average
Balance
 
Interest
Income/
Expense(1)
 
Average
Yield/
Rate(1)(2)
 
Average
Balance
 
Interest
Income/
Expense(1)
 
Average
Yield/
Rate(1)(2)
 
(Dollars in millions)  
Assets             
Loans held for investment:(3)
             
Commercial and industrial $25,746
 $220
 3.39%$22,930
 $192
 3.32%
Commercial mortgage 13,643
 122
 3.57 12,936
 117
 3.62 
Construction 1,336
 10
 3.12 827
 7
 3.30 
Lease financing 811
 12
 5.69 973
 12
 4.92 
Residential mortgage 27,967
 250
 3.58 24,157
 225
 3.72 
Home equity and other consumer loans 3,164
 32
 4.08 3,384
 33
 3.87 
Loans, before purchased credit-impaired loans 72,667
 646
 3.54 65,207
 586
 3.58 
Purchased credit-impaired loans 686
 48
 27.70 1,401
 82
 23.46 
Total loans held for investment 73,353
 694
 3.77 66,608
 668
 4.00 
Securities 22,592
 117
 2.08 22,909
 122
 2.12 
Interest bearing deposits in banks 2,380
 2
 0.26 2,050
 1
 0.25 
Federal funds sold and securities purchased under resale agreements 106
 
  101
 
 0.13 
Trading account assets 164
 
 0.66 134
 1
 0.43 
Other earning assets 338
 1
 0.73 233
 
 0.97 
Total earning assets 98,933
 814
 3.28 92,035
 792
 3.43 
Allowance for loan losses (566)  
   (633)  
   
Cash and due from banks 1,597
  
   1,315
  
   
Premises and equipment, net 626
  
   694
  
   
Other assets 9,149
  
   8,123
  
   
Total assets $109,739
  
   $101,534
  
   
Liabilities             
Interest bearing deposits:             
Transaction and money market accounts $39,128
 $33
 0.34 $34,912
 $31
 0.36 
Savings 5,574
 2
 0.08 5,633
 2
 0.13 
Time 9,766
 23
 0.96 12,017
 30
 0.98 
Total interest bearing deposits 54,468
 58
 0.42 52,562
 63
 0.47 
Commercial paper and other short-term borrowings(4)
 2,820
 1
 0.17 3,376
 2
 0.20 
Long-term debt 6,994
 42
 2.38 6,135
 38
 2.47 
Total borrowed funds 9,814
 43
 1.75 9,511
 40
 1.66 
Total interest-bearing liabilities 64,282
 101
 0.63 62,073
 103
 0.66 
Noninterest bearing deposits 27,771
  
   24,872
  
   
Other liabilities 2,474
  
   2,110
  
   
Total liabilities 94,527
  
   89,055
  
   
Equity             
MUAH stockholder's equity 14,969
  
   12,210
  
   
Noncontrolling interests 243
  
   269
  
   
Total equity 15,212
  
   12,479
  
   
Total liabilities and equity $109,739
  
   $101,534
  
   
              
Net interest income/spread (taxable-equivalent basis)  
 713
 2.65% 
 689
 2.77%
Impact of noninterest bearing deposits  
  
 0.19  
  
 0.19 
Impact of other noninterest bearing sources  
  
 0.03  
  
 0.03 
Net interest margin  
  
 2.87  
  
 2.99 
Less: taxable-equivalent adjustment  
 6
    
 4
   
Net interest income                 
 $707
    
 $685
   
(1)Yields and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent.
(2)Annualized.
(3)Average balances on loans outstanding include all nonperforming loans. The amortized portion of net loan origination fees (costs) is included in interest income on loans, representing an adjustment to the yield.
(4)Includes interest bearing trading liabilities.

10

(1)
Yields and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent.
(2)
Annualized.
(3)
Average balances on loans outstanding include all nonperforming loans. The amortized portion of net loan origination fees (costs) is included in interest income on loans, representing an adjustment to the yield.
(4)
Includes interest bearing trading liabilities

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 For the Six Months Ended 
 
 June 30, 2014 June 30, 2013 
(Dollars in millions) Average
Balance
 Interest
Income/
Expense(1)
 Average
Yield/
Rate(1)(2)
 Average
Balance
 Interest
Income/
Expense(1)
 Average
Yield/
Rate(1)(2)
 

Assets

                   

Loans held for investment:(3)

                   

Commercial and industrial

 $24,196 $400  3.34%$21,522 $362  3.39%

Commercial mortgage

  13,380  243  3.63  10,880  213  3.93 

Construction

  1,047  18  3.43  725  15  4.15 

Lease financing

  845  25  6.07  1,059  16  3.01 

Residential mortgage

  26,529  485  3.66  23,145  442  3.82 

Home equity and other consumer loans

  3,212  64  4.01  3,551  67  3.84 
                

Loans, before purchased credit-impaired loans

  69,209  1,235  3.58  60,882  1,115  3.68 

Purchased credit-impaired loans

  994  181  36.49  1,240  163  26.36 
                

Total loans held for investment

  70,203  1,416  4.05  62,122  1,278  4.13 

Securities

  22,739  240  2.11  22,507  243  2.16 

Interest bearing deposits in banks

  3,219  4  0.25  2,986  4  0.25 

Federal funds sold and securities purchased under resale agreements

  116    0.11  147    0.18 

Trading account assets

  231  3  2.21  156    0.33 

Other earning assets

  248  1  1.10  261  1  0.46 
                

Total earning assets

  96,756  1,664  3.45  88,179  1,526  3.47 
                  

Allowance for loan losses

  (569)       (647)      

Cash and due from banks

  1,475        1,377       

Premises and equipment, net

  643        704       

Other assets

  8,880        8,074       
                  

Total assets

 $107,185       $97,687       
                  
                  

Liabilities

                   

Interest bearing deposits:

                   

Transaction and money market accounts

 $37,583 $71  0.38 $32,002 $48  0.30 

Savings

  5,581  2  0.10  5,760  4  0.13 

Time

  10,986  50  0.92  12,514  69  1.11 
                

Total interest bearing deposits           

  54,150  123  0.46  50,276  121  0.49 
                

Commercial paper and other short-term borrowings(4)

  2,576  3  0.21  2,534  2  0.19 

Long-term debt

  6,736  82  2.43  5,366  71  2.66 
                

Total borrowed funds

  9,312  85  1.82  7,900  73  1.86 
                

Total interest bearing liabilities           

  63,462  208  0.66  58,176  194  0.67 
                  

Noninterest bearing deposits

  26,679        24,531       

Other liabilities

  2,268        2,122       
                  

Total liabilities

  92,409        84,829       

Equity

                   

MUAH stockholder's equity

  14,524        12,591       

Noncontrolling interests

  252        267       
                  

Total equity

  14,776        12,858       
                  

Total liabilities and equity

 $107,185       $97,687       
                  
                  

Net interest income/spread (taxable-equivalent basis)

     1,456  2.79%    1,332  2.80%

Impact of noninterest bearing deposits

        0.19        0.20 

Impact of other noninterest bearing sources

        0.04        0.03 

Net interest margin

        3.02        3.03 

Less: taxable-equivalent adjustment

     10        7    
                  

Net interest income

    $1,446       $1,325    
                  
                  

(1)
Yields and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent.
(2)
Annualized.
(3)
Average balances on loans outstanding include all nonperforming loans. The amortized portion of net loan origination fees (costs) is included in interest income on loans, representing an adjustment to the yield.
(4)
Includes interest bearing trading liabilities.
  For the Nine Months Ended 
  September 30, 2014 September 30, 2013 
  
Average
Balance
 
Interest
Income/
Expense(1)
 
Average
Yield/
Rate(1)(2)
 
Average
Balance
 
Interest
Income/
Expense(1)
 
Average
Yield/
Rate(1)(2)
 
(Dollars in millions)  
Assets             
Loans held for investment:(3)
             
Commercial and industrial $24,708
 $620
 3.36%$21,996
 $554
 3.37%
Commercial mortgage 13,469
 365
 3.61 11,573
 330
 3.81 
Construction 1,154
 28
 3.30 760
 22
 3.84 
Lease financing 833
 37
 5.95 1,030
 28
 3.61 
Residential mortgage 27,014
 735
 3.63 23,485
 667
 3.79 
Home equity and other consumer loans 3,196
 96
 4.04 3,495
 100
 3.85 
Loans, before purchased credit-impaired loans 70,374
 1,881
 3.57 62,339
 1,701
 3.64 
Purchased credit-impaired loans 890
 229
 34.27 1,294
 245
 25.30 
Total loans held for investment 71,264
 2,110
 3.95 63,633
 1,946
 4.08 
Securities 22,689
 357
 2.10 22,643
 365
 2.15 
Interest bearing deposits in banks 2,934
 6
 0.25 2,671
 5
 0.25 
Federal funds sold and securities purchased under
resale agreements
 113
 
 0.06 131
 
 0.17 
Trading account assets 208
 3
 1.80 149
 1
 0.36 
Other earning assets 278
 2
 0.95 252
 1
 0.62 
Total earning assets                        97,486
 2,478
 3.39 89,479
 2,318
 3.46 
Allowance for loan losses (568)  
   (642)  
   
Cash and due from banks 1,512
  
   1,356
  
   
Premises and equipment, net 638
  
   701
  
   
Other assets 8,971
  
   8,090
  
   
Total assets $108,039
  
   $98,984
  
   
Liabilities             
Interest bearing deposits:             
Transaction and money market accounts $38,097
 $104
 0.37 $32,983
 $79
 0.32 
Savings 5,579
 4
 0.09 5,717
 6
 0.13 
Time 10,575
 73
 0.93 12,346
 99
 1.07 
Total interest bearing deposits                                54,251
 181
 0.45 51,046
 184
 0.48 
Commercial paper and other short-term borrowings(4)
 2,658
 4
 0.19 2,814
 4
 0.19 
Long-term debt 6,822
 124
 2.42 5,629
 109
 2.57 
Total borrowed funds                9,480
 128
 1.79 8,443
 113
 1.78 
Total interest bearing liabilities                                63,731
 309
 0.65 59,489
 297
 0.67 
Noninterest bearing deposits 27,047
  
   24,646
  
   
Other liabilities 2,337
  
   2,118
  
   
Total liabilities 93,115
  
   86,253
  
   
Equity             
MUAH stockholder's equity 14,675
  
   12,463
  
   
Noncontrolling interests 249
  
   268
  
   
Total equity 14,924
  
   12,731
  
   
Total liabilities and equity                $108,039
  
   $98,984
  
   
              
Net interest income/spread (taxable-equivalent basis)  
 2,169
 2.74% 
 2,021
 2.79%
Impact of noninterest bearing deposits  
  
 0.19  
  
 0.20 
Impact of other noninterest bearing sources  
  
 0.04  
  
 0.03 
Net interest margin  
  
 2.97  
  
 3.02 
Less: taxable-equivalent adjustment  
 16
    
 11
   
Net interest income                 
 $2,153
    
 $2,010
   
(1)Yields and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent.
(2)Annualized.
(3)Average balances on loans outstanding include all nonperforming loans. The amortized portion of net loan origination fees (costs) is included in interest income on loans, representing an adjustment to the yield.
(4)Includes interest bearing trading liabilities.


11

Table of Contents


Net interest income for the secondthird quarter of 2014 increased $91$22 million compared with the secondthird quarter of 2013. The increase in net interest income was primarilysubstantially due to growth in loans held for investment. Average loans held for investment before PCI loans increased $7.9$7.5 billion during the quarter ended JuneSeptember 30, 2014, compared with the quarter ended JuneSeptember 30, 2013, primarily due to organic growth in core customer segments within our commercial and our PB Capital acquisition, which closed late in the second quarter of 2013. Higher interest income from our PCI loan portfolio also contributed to theindustrial and residential mortgage portfolios. The increase in net interest income andfrom the loan growth described above was partially offset by lower average balances from our higher yielding PCI loan portfolio, which drove a net 12 basis point increasedecrease in the net interest margin. For the quarter ended June 30, 2014, interest income on our PCI portfolio, which declined 32 percent compared with the same period a year ago, included approximately $56 million resulting from early payoffs of certain commercial mortgage loans due to improving industry conditions.

Average interest-bearing deposits increased $3.3$1.9 billion, and average non-interest bearing deposits increased $2.5$2.9 billion, in the secondthird quarter of 2014 compared with the secondthird quarter of 2013, substantially due to core deposit growth including certain large escrow deposits.

Noninterest Income and Noninterest Expense
In accordance with the market-based pricing terms of the Services related to the business integration initiative, the Company recorded $151 million in fee income during the quarter ended September 30, 2014, including $94 million related to support services provided by the Company to BTMU. Substantially offsetting the fee income was $88 million, primarily in salaries and employee benefits expense, related to these support services. The remaining fee income was recognized through revenue sharing agreements with BTMU, which was primarily offset by associated costs recorded in noninterest expense.

The following tables detail our noninterest income and noninterest expense for the three and sixnine months ended JuneSeptember 30, 2014 and 2013:

Noninterest Income


 For the Three Months Ended For the Six Months Ended  For the Three Months Ended For the Nine Months Ended 

  
  
 Increase
(Decrease)
  
  
 Increase
(Decrease)
      
Increase
(Decrease)
      
Increase
(Decrease)
 

 June 30,
2014
 June 30,
2013
 June 30,
2014
 June 30,
2013
  September 30, 2014 September 30, 2013 September 30, 2014 September 30, 2013  
(Dollars in millions) Amount Percent Amount Percent  Amount Percent Amount Percent 

Service charges on deposit accounts

 $50 $52 $(2) (4)%$101 $105 $(4) (4)% $52
 $53
 $(1) (2)% $153
 $158
 $(5) (3)%
Trust and investment management fees 26
 34
 (8) (24) 78
 107
 (29) (27) 
Trading account activities 33
 15
 18
 120
 63
 41
 22
 54
 

Securities gains, net

 1 27 (26) (96) 3 123 (120) (98) 13
 47
 (34) (72) 16
 170
 (154) (91) 

Trust and investment management fees

 26 38 (12) (32) 52 73 (21) (29)

Credit facility fees

 31 26 5 19 59 52 7 13  30
 31
 (1) (3) 89
 83
 6
 7
 

Merchant banking fees

 27 23 4 17 51 39 12 31  38
 29
 9
 31
 89
 68
 21
 31
 

Brokerage commissions and fees

 13 11 2 18 26 22 4 18  14
 12
 2
 17
 40
 34
 6
 18
 

Trading account activities

 14 21 (7) (33) 30 26 4 15 

Card processing fees, net

 9 9   17 18 (1) (6) 8
 8
 
 
 25
 26
 (1) (4) 
Fees from affiliates(1)
 151
 
 151
 nm
 151
 
 151
 nm
 

Other investment income

 7 9 (2) (22) 19 12 7 58  11
 7
 4
 57
 30
 19
 11
 58
 

Other, net

 24 (15) 39 260 25 (18) 43 239  12
 (2) 14
 nm
 37
 (20) 57
 285
 
                 

Total noninterest income

 $202 $201 $1 %$383 $452 $(69) (15)% $388
 $234
 $154
 66
% $771
 $686
 $85
 12
%
                 
                 

(1)Fees from affiliates represents income resulting from the July 1, 2014 business integration initiative.
nmnot meaningful
Noninterest income in the secondthird quarter of 2014 was $202$388 million, compared with $201$234 million in the secondthird quarter of 2013. In addition to the effects from our business integration initiative, trading account income increased due to an enhancement in the methodology used to measure counterparty credit quality and the Company's creditworthiness in the estimation of fair values on assets and liabilities held for trading purposes. Lower FDIC indemnification asset amortization expense during the third quarter of 2014 resulted in an increase in Other noninterest income. Noninterest income for the nine months ended September 30, 2014 increased to $771 million from $686 million in the same period in 2013. The increase was primarilysubstantially due to fees from affiliates resulting from the business integration initiative, lower FDIC indemnification asset amortization expense, which is included within other noninteresthigher trading account income and gains on the sale of other investments, whichhigher merchant banking fees. This increase was largely offset by decreases in gains on salessale of securities as well asand lower trust and investment management income. Noninterest income for the six months ended June 30, 2014 decreased to $383 million from $452 million in the same period in 2013. The decrease was substantially due to decreases in gains from the sale of securities and trust and investment management income partially offset by lower FDIC indemnification asset amortization expense and an increase in merchant banking fees. Trust and investment management income decreased in both periods largely due to the reorganization of the affiliated HighMark Funds into shares of unaffiliated mutual funds completed in the third quarter of 2013.



12



Noninterest Expense


 For the Three Months Ended For the Six Months Ended  For the Three Months Ended For the Nine Months Ended 

  
  
 Increase
(Decrease)
  
  
 Increase
(Decrease)
    
Increase
(Decrease)
      
Increase
(Decrease)
 

 June 30,
2014
 June 30,
2013
 June 30,
2014
 June 30,
2013
  September 30, 2014 September 30, 2013 September 30, 2014 September 30, 2013  
(Dollars in millions) Amount Percent Amount Percent  Amount Percent Amount Percent 

Salaries and other compensation

 $318 $323 $(5) (2)%$619 $635 $(16) (3)% $423
 $310
 $113
 36
% $1,042
 $946
 $96
 10
%

Employee benefits

 60 90 (30) (33) 147 199 (52) (26) 69
 81
 (12) (15) 216
 279
 (63) (23) 
                 

Salaries and employee benefits

 378 413 (35) (8) 766 834 (68) (8) 492
 391
 101
 26
 1,258
 1,225
 33
 3
 

Net occupancy and equipment

 75 84 (9) (11) 146 159 (13) (8) 74
 77
 (3) (4) 220
 236
 (16) (7) 

Professional and outside services

 63 62 1 2 118 120 (2) (2) 66
 66
 
 
 184
 186
 (2) (1) 
Intangible asset amortization 13
 16
 (3) (19) 39
 49
 (10) (20) 
Regulatory assessments 13
 20
 (7) (35) 44
 60
 (16) (27) 
(Reversal of) provision for losses on unfunded credit commitments 19
 1
 18
 nm
 32
 14
 18
 129
 

Software

 22 19 3 16 42 40 2 5  26
 20
 6
 30
 68
 60
 8
 13
 

Regulatory assessments

 16 20 (4) (20) 31 40 (9) (23)

Low income housing credit investment amortization

 20 20   40 35 5 14  25
 17
 8
 47
 65
 52
 13
 25
 

Intangible asset amortization

 13 17 (4) (24) 26 33 (7) (21)

Advertising and public relations

 9 14 (5) (36) 16 31 (15) (48) 12
 15
 (3) (20) 28
 46
 (18) (39) 

Communications

 10 11 (1) (9) 21 22 (1) (5) 9
 11
 (2) (18) 30
 33
 (3) (9) 

Data processing

 8 10 (2) (20) 16 20 (4) (20) 8
 8
 
 
 24
 29
 (5) (17) 

(Reversal of) provision for losses on unfunded credit commitments

 (3) (2) (1) (50) 13 13   

Other

 38 34 4 12 74 68 6 9  48
 47
 1
 2
 122
 114
 8
 7
 
                 

Total noninterest expense

 $649 $702 $(53) (8)%$1,309 $1,415 $(106) (7)% $805
 $689
 $116
 17
% $2,114
 $2,104
 $10
 
%
                 
                 


nmnot meaningful
Noninterest expense was $805 million in the secondthird quarter of 2014 was $649 million compared with $702$689 million in the secondthird quarter of 2013 and $2.1 billion for the nine months ended September 30, 2014 and 2013. Salaries and employee benefits decreased $35 million largelyincreased in both the three and nine months ended September 30, 2014 compared to the same periods in the prior year primarily due to increased employee costs as a result of our business integration initiative as discussed above, partially offset by lower pension expense, including the impact of pension plan amendments in April 2014. Noninterest expense for the six months ended June 30, 2014 decreased $106 million compared with the same period in 2013 largely due to lower pension expense and lower acquisition-related staff expenses. Advertising expense was lower during the six months ended June 30, 2014 due to a large advertising campaign in the comparable 2013 period.



13


The adjusted efficiency ratio is a non-GAAP financial measure used by management to measure the efficiency of our operations, focusing on those costs management believes to be most relevant to our regular and ongoing business activities. Productivity initiative costs primarily consist of salaries and benefits associated with operational


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efficiency enhancements. The following table shows the calculation of this ratio for the three and sixnine months ended JuneSeptember 30, 2014 and 2013:


 For the Three Months
Ended
 For the Six Months
Ended
  For the Three Months Ended For the Nine Months Ended
(Dollars in millions) June 30,
2014
 June 30,
2013
 June 30,
2014
 June 30,
2013
  September 30, 2014 September 30, 2013 September 30, 2014 September 30, 2013

Noninterest Expense

 $649 $702 $1,309 $1,415  $805
 $689
 $2,114
 $2,104
Less: Staff costs associated with fees from affiliates - support services 88
 
 88
 

Less: Foreclosed asset expense and other credit costs

 1 (3)  (4) (1) (2) (1) (6)

Less: (Reversal of) provision for losses on off-balance sheet commitments

 (3) (2) 13 13  19
 1
 32
 14

Less: Productivity initiative costs

 4 13 5 17  6
 14
 11
 31

Less: LIHC investment amortization expense

 20 20 40 35  25
 17
 65
 52

Less: Expenses of the LIHC consolidated variable interest entities (VIEs)

 8 6 16 12  8
 11
 23
 23

Less: Merger and business integration costs

 25 44 42 84  22
 25
 64
 109

Less: Net adjustments related to privatization transaction

 10 14 20 28  11
 13
 31
 41

Less: Intangible asset amortization

 3 4 7 7  3
 3
 10
 10
         

Net noninterest expense, as adjusted (a)

 $581 $606 $1,166 $1,223  $624
 $607
 $1,791
 $1,830
         

Total Revenue

 $965 $873 $1,829 $1,777  $1,095
 $919
 $2,924
 $2,696

Add: Net interest income taxable-equivalent adjustment

 5 3 10 7  6
 4
 16
 11
Less: Fees from affiliates - support services 94
 
 94
 
Less: Productivity initiative gains 
 11
 
 11

Less: Accretion related to privatization-related fair value adjustments

 9 3 16 8  4
 8
 20
 16

Less: Other credit costs

 (2) 2 1 (7) 17
 1
 18
 (6)
         

Total revenue, as adjusted (b)

 $963 $871 $1,822 $1,783  $986
 $903
 $2,808
 $2,686
         

Adjusted efficiency ratio (a)/(b)

 60.30% 69.45% 63.91% 68.56% 63.42% 67.21% 63.74% 68.10%
         
         

Income Tax Expense

The effective income tax rate was 2022 percent in the secondthird quarter of both 2014 and 2013. The effective income tax rate was 21 percent in the six monthnine-month period ended JuneSeptember 30, 2014, compared with 23 percent for the six monthnine-month period ended JuneSeptember 30, 2013. The overall decrease in the effective tax rate for the six monthnine-month period ended JuneSeptember 30, 2014 was primarily driven by a discrete tax benefit of $6.4 million.

benefits totaling $9 million for the current year-to-date period.

For further information regarding income tax expense, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Operations - Income Tax Expense" and "Changes in our tax rates could affect our future results" in "Risk Factors"“Risk Factors” in Part I, Item 1A. and Note 18 to the Consolidated Financial Statements in Part II, Item 8. "Financial“Financial Statements and Supplementary Data"Data” in our 2013 Form 10-K.

Balance Sheet Analysis

Securities

Our securities portfolio is primarily used for liquidity and interest rate risk management purposes, to invest cash resulting from excess liquidity, and to a lesser extent, to support our business development objectives. We strive to maximize total return while managing this objective within appropriate risk parameters. Securities available for sale are principally comprised of residential mortgage-backed securities and commercial mortgage-backed securities (CMBS), cash flow collateralized loan obligations (CLOs) and direct bank purchase bonds. Direct bank purchase bonds are instruments that are issued in bond form, accounted for as securities, but underwritten as loans with features that are typically found in commercial loans. Securities held to maturity consist of U.S. government and government-sponsored agency residential and CMBS, U.S. Treasury bonds and U.S. government-sponsored agencies.


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The amortized cost, gross unrealized gains, gross unrealized losses and fair values of securities are detailed in Note 43 to our Consolidated Financial Statements included in this Form 10-Q.


14


Loans Held for Investment

The following table shows loans held for investment outstanding by loan type at the end of each period presented:


  
  
 Increase (Decrease)      Increase (Decrease)

 June 30, 2014 December 31,
2013
  September 30, 2014 December 31, 2013 
(Dollars in millions) Amount Percent  Amount Percent

Loans held for investment:

                 

Commercial and industrial

 $25,162 $23,528 $1,634 7% $26,429
 $23,528
 $2,901
 12 %

Commercial mortgage

 13,549 13,092 457 3  13,766
 13,092
 674
 5

Construction

 1,248 905 343 38  1,436
 905
 531
 59

Lease financing

 829 854 (25) (3) 811
 854
 (43) (5)
         

Total commercial portfolio

 40,788 38,379 2,409 6  42,442
 38,379
 4,063
 11
         

Residential mortgage

 27,619 25,547 2,072 8  28,425
 25,547
 2,878
 11

Home equity and other consumer loans

 3,178 3,280 (102) (3) 3,141
 3,280
 (139) (4)
         

Total consumer portfolio

 30,797 28,827 1,970 7  31,566
 28,827
 2,739
 10
         

Total loans held for investment, before purchased credit-impaired loans

 71,585 67,206 4,379 7  74,008
 67,206
 6,802
 10

Purchased credit-impaired loans

 784 1,106 (322) (29) 627
 1,106
 (479) (43)
         

Total loans held for investment

 $72,369 $68,312 $4,057 6% $74,635
 $68,312
 $6,323
 9 %
         
         

Loans held for investment increased from December 31, 2013 to JuneSeptember 30, 2014 primarily due to organic growth in the residential mortgage and commercial and industrial and residential mortgage portfolios.

Cross-Border Outstandings

Our cross-bordercross‑border outstandings reflect certain additional economic and political risks that differ from or are notgreater than those reflected in domestic outstandings. These risks include those arising from exchange rate fluctuations and restrictions on the transfer of funds. Our total cross-border outstandings for Canada, the only country where such outstandings exceeded one percent of total assets, were $1.7$1.6 billion and $1.4 billion at JuneSeptember 30, 2014 and December 31, 2013, respectively. The cross-border outstandings are based on category and domicile of ultimate risk and are comprised of balances with banks, trading account assets, securities available for sale, securities purchased under resale agreements, loans, accrued interest receivable, acceptances outstanding and investments with foreign entities.

As of JuneSeptember 30, 2014, our sovereign and non-sovereign debt exposure to European countries was not material.



15


Deposits

The table below presents our deposits as of JuneSeptember 30, 2014 and December 31, 2013.


  
  
 Increase
(Decrease)
      Increase (Decrease)

 June 30,
2014
 December 31,
2013
  September 30, 2014 December 31, 2013 
(Dollars in millions) Amount Percent  Amount Percent

Interest checking

 $6,100 $3,978 $2,122 53% $6,163
 $3,978
 $2,185
 55 %

Money market

 32,405 32,639 (234) (1) 32,875
 32,639
 236
 1
         

Total interest bearing transaction and money market accounts

 38,505 36,617 1,888 5  39,038
 36,617
 2,421
 7

Savings

 5,571 5,495 76 1  5,549
 5,495
 54
 1

Time

 10,044 11,494 (1,450) (13) 9,093
 11,494
 (2,401) (21)
         

Total interest bearing deposits

 54,120 53,606 514 1  53,680
 53,606
 74
 

Noninterest bearing deposits

 27,446 26,495 951 4  28,676
 26,495
 2,181
 8
         

Total deposits

 $81,566 $80,101 $1,465 2% $82,356
 $80,101
 $2,255
 3 %
         
         

Total interest bearing deposits include the following brokered deposits:

                 

Interest bearing transaction and money market accounts

 $2,698 $3,109 $(411) (13)% $2,676
 $3,109
 $(433) (14)%

Time

 3,065 3,384 (319) (9) 2,946
 3,384
 (438) (13)
         

Total brokered deposits

 $5,763 $6,493 $(730) (11)% $5,622
 $6,493
 $(871) (13)%
         
         

Core Deposits:

                 

Total deposits

 $81,566 $80,101 $1,465 2% $82,356
 $80,101
 $2,255
 3 %

Less: Total brokered deposits

 5,763 6,493 (730) (11) 5,622
 6,493
 (871) (13)

Less: Total foreign deposits and non-brokered domestic time deposits of over $250,000

 3,745 4,453 (708) (16) 3,126
 4,453
 (1,327) (30)
         

Total core deposits

 $72,058 $69,155 $2,903 4% $73,608
 $69,155
 $4,453
 6 %
         
         

Total deposits and core deposits increased $1.5$2.3 billion and $2.9$4.5 billion, respectively, from December 31, 2013 to JuneSeptember 30, 2014, substantially due to certain large escrow deposits.deposits and overall deposit growth. Core deposits as a percentage of total deposits were 8889 percent at JuneSeptember 30, 2014 and 86 percent at December 31, 2013.

Capital Management

Both the Company and MUB are subject to various capital adequacy regulations issued by the federal banking agencies, including requirements to file an annual capital plan and to maintain minimum regulatory capital ratios. As of JuneSeptember 30, 2014, management believes the capital ratios of the Company and MUB met all regulatory requirements of "well-capitalized"“well-capitalized” institutions.

The Company timely filed its annual capital plan under the Federal Reserve'sReserve’s Comprehensive Capital Analysis and Review (CCAR) program in January 2014. The CCAR evaluates capital planning processes and assesses capital adequacy levels under various scenarios to determine if bank holding companies would have sufficient capital to continue operations throughout times of economic and financial market stress. In March 2014, the Company disclosed the results of its annual company-run capital stress test in accordance with regulatory requirements and was subsequently informed by the Federal Reserve that it did not object to the Company'sCompany’s capital plan.

The Company and MUB are required to maintain minimum capital ratios in accordance with rules issued by the U.S. Federal banking agencies. In July 2013, the U.S. Federal banking agencies issued final rules to implement the Basel Committee on Banking Supervision capital guidelines for U.S. banking organizations


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(U.S. (U.S. Basel III). These rules supersede the U.S. federal banking agencies'agencies’ general risk-based capital rules (commonly known as "Basel I"“Basel I”), advanced approaches rules (commonly known as "Basel II"“Basel II”) that are applicable to certain large banking organizations, and leverage rules, and are subject to certain transition provisions.

Consistent with the Collins Amendment to the Dodd-Frank Act, banking organizations that have been approved by the Federal Reserve to use the U.S. Basel III advanced approaches methodology to determine applicable minimum risk-based capital ratios must use the higher of their risk-weighted assets as calculated under (i) the U.S. Basel III advanced approaches rules, and (ii) from January 1, 2014 to December 31, 2014, the general risk-based capital rules and, commencing on January 1, 2015 and thereafter, the risk weightings under the U.S. Basel III standardized approach. Banking organizations not subject to the advanced approaches rules are required to comply with the standardized approach capital rules beginning January 2015.


16


MUB and MUAH previously opted-in to the advanced approaches risk-based capital rules in the U.S. and were therefore required to comply with the U.S. Basel III capital rules beginning January 2014, with certain provisions subject to phase-in periods. However, MUAH is in discussions with the Federal Reserve to explore opting-out of the advanced approaches for the holding company only. MUB's status as an advanced approaches institution will not be affected by the outcome of these discussions. Should the holding company receive approval to opt out, MUAH would no longer be subject to the advanced approaches rules.

The following tables summarize the calculation of MUAH'sMUAH’s and MUB'sMUB’s risk-based capital ratios as of JuneSeptember 30, 2014 in accordance with the transition guidelines set forth in the U.S. Basel III rules. Risk-basedRisk‑based capital, risk-weighted assets, and risk-based capital ratios as of December 31, 2013 were calculated in accordance with the Basel I rules.

MUFG Americas Holdings Corporation

 
 U.S. Basel III  
 U.S. Basel I  
  
  
  
  
  
 
(Dollars in millions) June 30,
2014
  
 December 31,
2013
  
  
  
  
  
  
 

Capital Components

                            

Common equity tier 1 capital

 $11,900     n/a                   

Tier 1 capital

  11,933     11,471                   

Tier 2 capital

  1,845     2,028                   
                           

Total risk-based capital

 $13,778    $13,499                   
                           
                           

Risk-weighted assets

 $94,556    $92,410                   
                           
                           

Average total assets for leverage capital purposes

 $105,123    $101,813                   
                           
                           


 
 U.S. Basel III U.S. Basel I  
  
 
 
 June 30, 2014 December 31,
2013
 June 30, 2014
Minimum
Regulatory
Requirement
 
(Dollars in millions) Amount Ratio Amount Ratio Amount Ratio 

Capital Ratios

                   

Common equity tier 1 capital (to risk-weighted assets)

 $11,900  12.58% n/a  n/a ³$3,782  4.0%

Tier 1 capital (to risk-weighted assets)

  11,933  12.62  11,471  12.41%³5,201  5.5 

Total capital (to risk-weighted assets)

 $13,778  14.57  13,499  14.61 ³7,564  8.0 

Tier 1 leverage(1)

  11,933  11.35  11,471  11.27 ³4,205  4.0 

  U.S. Basel III U.S. Basel I
(Dollars in millions) September 30, 2014 December 31, 2013
Capital Components    
Common Equity Tier 1 capital $12,189
 n/a
Tier 1 capital 12,219
 $11,471
Tier 2 capital 1,832
 2,028
Total risk-based capital $14,051
 $13,499
Risk-weighted assets $96,239
 $92,410
Average total assets for leverage capital purposes $106,874
 $101,813
  U.S. Basel III U.S. Basel I 
Minimum
Regulatory
Requirement
(Dollars in millions) September 30, 2014 December 31, 2013 September 30, 2014
Capital Ratios Amount Ratio Amount Ratio Amount Ratio
Common Equity Tier 1 capital (to risk-weighted assets) $12,189
 12.66% n/a
 n/a
  $3,850
 4.0%
Tier 1 capital (to risk-weighted assets) 12,219
 12.70
 $11,471
 12.41%  5,293
 5.5
Total capital (to risk-weighted assets) 14,051
 14.60
 13,499
 14.61
  7,699
 8.0
Tier 1 leverage(1)
 12,219
 11.43
 11,471
 11.27
  4,275
 4.0

(1)
Tier 1 capital divided by average total assets for leverage capital purposes (excluding certain intangible assets).
n/a
not applicable
applicable.


17



MUFG Union Bank, N.A.

 
 U.S. Basel III  
 U.S. Basel I  
  
  
  
  
  
 
(Dollars in millions) June 30,
2014
  
 December 31,
2013
  
  
  
  
  
  
 

Capital Components

                            

Common equity tier 1 capital

 $11,724     n/a                   

Tier 1 capital

  11,724     11,274                   

Tier 2 capital

  1,578     1,716                   
                           

Total risk-based capital

 $13,302    $12,990                   
                           
                           

Risk-weighted assets

 $89,923    $87,129                   
                           
                           

Average total assets for leverage capital purposes

 $104,586    $101,269                   
                           
                           


 
 U.S. Basel III U.S. Basel I June 30, 2014 
 
 June 30, 2014 December 31,
2013
 Minimum
Regulatory
Requirement
 To Be
Well-Capitalized
Under Prompt
Corrective
Action
Provisions
 
(Dollars in millions) Amount Ratio Amount Ratio Amount Ratio Amount Ratio 

Capital Ratios

                         

Common equity tier 1 capital (to risk-weighted assets)

 $11,724  13.04% n/a  n/a ³$3,597  4.0%³n/a  n/a 

Tier 1 capital (to risk-weighted assets)

  11,724  13.04  11,274  12.94 ³4,946  5.5 ³5,395  6.0 

Total capital (to risk-weighted assets)

  13,302  14.79  12,990  14.91 ³7,194  8.0 ³8,992  10.0 

Tier 1 leverage(1)

  11,724  11.21  11,274  11.13 ³4,183  4.0 ³5,229  5.0 

  U.S. Basel III U.S. Basel I
(Dollars in millions) September 30, 2014 December 31, 2013
Capital Components    
Common Equity Tier 1 capital $11,987
 n/a
Tier 1 capital 11,987
 $11,274
Tier 2 capital 1,570
 1,716
Total risk-based capital $13,557
 $12,990
Risk-weighted assets $91,566
 $87,129
Average total assets for leverage capital purposes $106,278
 $101,269
  U.S. Basel III U.S. Basel I 
Minimum
Regulatory
Requirement
 To Be Well-Capitalized Under Prompt Corrective Action Provisions
(Dollars in millions) September 30, 2014 December 31, 2013 September 30, 2014
Capital Ratios Amount Ratio Amount Ratio Amount Ratio Amount Ratio
Common Equity Tier 1 capital (to risk-weighted assets) $11,987
 13.09% n/a
 n/a
  $3,663
 4.0%  n/a
 n/a
Tier 1 capital (to risk-weighted assets) 11,987
 13.09
 $11,274
 12.94%  5,036
 5.5
  $5,494
 6.0%
Total capital (to risk-weighted assets) 13,557
 14.81
 12,990
 14.91
  7,325
 8.0
  9,157
 10.0
Tier 1 leverage(1)
 11,987
 11.28
 11,274
 11.13
  4,251
 4.0
  5,314
 5.0

(1)
Tier 1 capital divided by average total assets for leverage capital purposes (excluding certain intangible assets).
n/a
not applicable
applicable.


In addition to capital ratios determined in accordance with regulatory requirements, we consider the tangible common equity ratio and the Tier 1 common capital ratio when evaluating capital utilization and adequacy. These capital ratios are viewed by management, and presented below, to further facilitate the understanding of our capital structure and for use in assessing and comparing the quality and composition of the Company'sCompany’s capital structure to other financial institutions. These ratios are not codified within U.S. GAAP or federal banking regulations in effect at JuneSeptember 30, 2014. Therefore, they are considered non-GAAP financial measures. Our tangible common equity ratio calculation methods may differ from those used by other financial services companies.

The following tables summarize the calculation of our tangible common equity and Tier 1 common capital ratios as of JuneSeptember 30, 2014 and December 31, 2013:


 September 30, 2014 December 31, 2013
(Dollars in millions) June 30, 2014 December 31, 2013  

Total MUAH stockholder's equity

 $14,815 $14,215  $15,051
 $14,215

Goodwill

 (3,227) (3,228) (3,227) (3,228)

Intangible assets, except mortgage servicing rights (MSRs)

 (262) (288) (249) (288)

Deferred tax liabilities related to goodwill and intangible assets

 99 105  20
 105
     

Tangible common equity (a)

 $11,425 $10,804  $11,595
 $10,804
     

Total assets

 $108,820 $105,894  $110,879
 $105,894

Goodwill

 (3,227) (3,228) (3,227) (3,228)

Intangible assets, except MSRs

 (262) (288) (249) (288)

Deferred tax liabilities related to goodwill and intangible assets

 99 105  20
 105
     

Tangible assets (b)

 $105,430 $102,483  $107,423
 $102,483
     
     

Tangible common equity ratio (a)/(b)

 10.84% 10.54% 10.79% 10.54%


18


(Dollars in millions) December 31, 2013  
  December 31, 2013

Tier 1 capital under Basel I

 $11,471    $11,471

Junior subordinated debt payable to trusts

 (66)    (66)
     

Tier 1 common equity (a)

 $11,405    11,405
     

Risk-weighted assets under Basel I (b)

 $92,410    $92,410
     
     

Tier 1 common capital ratio (a)/(b)

 12.34%    12.34%


The Company'sCompany’s fully phased-in Common equity tierEquity Tier 1 capital ratio calculated under the U.S. Basel III standardized approach at JuneSeptember 30, 2014 and December 31, 2013 was estimated to be 11.6011.93 percent and 11.14 percent, respectively. Management believes that the Company would satisfy all capital adequacy requirements under the U.S. Basel III rules on a fully phased-in basis if those requirements had been effective at both JuneSeptember 30, 2014 and December 31, 2013.


The following tables summarize the calculation of our Common equity tierEquity Tier 1 capital to total risk-weighted assets ratio under the U.S. Basel III standardized approach as of JuneSeptember 30, 2014 and December 31, 2013:

Common equity tier 1 capital under U.S. Basel III (standardized approach; fully phased-in)

(Dollars in millions) June 30, 2014
(Estimated)
 

Common equity tier 1 capital under U.S. Basel III (transitional)

 $11,900 

Adjustments from U.S. Basel III (transitional) to U.S. Basel III (standardized approach; fully phased-in):

    

Accumulated other comprehensive loss related to securities, pension and other benefits

  (377)

Other

  (130)
    

Total adjustments from U.S. Basel III (transitional) to U.S. Basel III (standardized approach; fully phased-in)

  (507)
    

Common equity tier 1 capital estimated under U.S. Basel III (standardized approach; fully phased-in) (a)

 $11,393 
    
    

Risk-weighted assets under U.S. Basel III (transitional)

 $94,556 

Adjustments from U.S. Basel III (transitional) to U.S. Basel III (standardized approach; fully phased-in)

  3,638 
    

Total risk-weighted assets, estimated under U.S. Basel III (standardized approach; fully phased-in) (b)

 $98,194 
    
    

Common equity tier 1 capital to total risk-weighted assets estimated under U.S. Basel III (standardized approach; fully phased-in)(1) (a)/(b)

  11.60%

(1)
Common equity tier 1 capital on a fully phased-in basis is a non-GAAP financial measure that is used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies as if the fully phased-in U.S. Basel III rules were effective at June 30, 2014. Management reviews Common equity tier 1 capital along with other measures of capital as part of its financial analyses and has included this non-GAAP financial information, and the corresponding reconciliation from Common equity tier 1 capital under Basel III (transitional), because of current interest in such information on the part of market participants.

Common Equity Tier 1 capital under U.S. Basel III (standardized approach; fully phased-in)  
  September 30, 2014
(Dollars in millions) (Estimated)
Common Equity Tier 1 capital under U.S. Basel III (transitional) $12,189
Adjustments from U.S. Basel III (transitional) to U.S. Basel III (standardized approach; fully phased-in):  
Accumulated other comprehensive loss related to securities, pension and other benefits (388)
Other (122)
Total adjustments from U.S. Basel III (transitional) to U.S. Basel III (standardized approach; fully phased-in) (510)
Common Equity Tier 1 capital estimated under U.S. Basel III (standardized approach; fully phased-in) (a) $11,679
   
Risk-weighted assets under U.S. Basel III (transitional) $96,239
Adjustments from U.S. Basel III (transitional) to U.S. Basel III (standardized approach; fully phased-in) 1,679
Total risk-weighted assets, estimated under U.S. Basel III (standardized approach; fully phased-in) (b) $97,918
   
Common Equity Tier 1 capital to total risk-weighted assets estimated under U.S. Basel III (standardized approach; fully phased-in) (1) (a)/(b)
 11.93%

(1)Common Equity Tier 1 risk-based capital (standardized, fully phased-in basis) is a non-GAAP financial measure that is used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies as if the transition provisions of the U.S. Basel III rules were fully phased-in for the period in which the ratio is disclosed.  Management reviews this ratio, which includes components of accumulated other comprehensive loss, along with other measures of capital as part of its financial analyses and has included this non-GAAP information, and the corresponding reconciliation from Common Equity Tier 1 capital (calculated according to the transition provisions under U.S. Basel III rules) because of current interest in such information by market participants.


19


(Dollars in millions) December 31, 2013
(Estimated)
 

Tier 1 capital under Basel I

 $11,471 

Junior subordinated debt payable to trusts

  (66)
    

Basel I Tier 1 common capital

  11,405 
    

Adjustments from Basel I to U.S. Basel III:

    

Accumulated other comprehensive loss related to securities available for sale, pension and other benefits

  (522)

Other

  (95)
    

Total adjustments from Basel I to U.S. Basel III

  (617)
    

Common equity tier 1 capital estimated under U.S. Basel III (a)

 $10,788 
    
    

Risk-weighted assets under Basel I

 $92,410 

Adjustments from Basel I to U.S. Basel III

  4,444 
    

Total risk-weighted assets, estimated under U.S. Basel III (b)

 $96,854 
    
    

Common equity tier 1 capital to total risk-weighted assets estimated under U.S. Basel III (standardized approach; fully phased-in)(1) (a)/(b)

  11.14%

(1)
Common equity tier 1 capital on a fully phased-in basis is a non-GAAP financial measure that is used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies as if the fully phased-in U.S. Basel III rules were effective at December 31, 2013. Management reviews Common equity tier 1 capital along with other measures of capital as part of its financial analyses and has included this non-GAAP financial information, and the corresponding reconciliation from Tier 1 capital determined in accordance with Basel I, because of current interest in such information on the part of market participants.
  December 31, 2013
(Dollars in millions) (Estimated)
Tier 1 capital under Basel I $11,471
Junior subordinated debt payable to trusts (66)
Basel I Tier 1 common capital 11,405
Adjustments from Basel I to U.S. Basel III:  
Accumulated other comprehensive loss related to securities available for sale, pension and other benefits (522)
Other (95)
Total adjustments from Basel I to U.S. Basel III (617)
Common Equity Tier 1 capital estimated under U.S. Basel III (a) $10,788
   
Risk-weighted assets under Basel I $92,410
Adjustments from Basel I to U.S. Basel III 4,444
Total risk-weighted assets, estimated under U.S. Basel III (b) $96,854
   
Common Equity Tier 1 capital to total risk-weighted assets estimated under U.S. Basel III (standardized approach; fully phased-in) (1) (a)/(b)
 11.14%


(1)Common Equity Tier 1 risk-based capital (standardized, fully phased-in basis) is a non-GAAP financial measure that is used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies as if the transition provisions of the U.S. Basel III rules were fully phased-in for the period in which the ratio is disclosed.  Management reviews this ratio, which includes components of accumulated other comprehensive loss, along with other measures of capital as part of its financial analyses and has included this non-GAAP information, and the corresponding reconciliation from Common Equity Tier 1 capital (calculated according to the transition provisions under U.S. Basel III rules) because of current interest in such information by market participants.

Risk Management


All financial institutions must manage and control a variety of business risks that can significantly affect their financial condition and performance. Some of the key risks the Company must manage include credit, market, liquidity and operational risks. The Board of Directors, directly or through its appropriate committee, provides oversight and approves our various risk management policies. Management has established an enterprise-wide risk management structure that is designed to provide a structured approach for identifying, measuring, monitoring, controlling and reporting on the significant risks faced by the Company.


Credit Risk Management

One of our principal business activities is the extension of credit to individuals and businesses. Our policies and the applicable laws and regulations governing the extension of credit require risk analysis, including an extensive evaluation of the purpose of the request and the borrower'sborrower’s ability and willingness to repay as scheduled. Our process also includes ongoing portfolio and credit management through portfolio diversification, lending limit constraints, credit review and approval policies, and extensive internal monitoring. For additional information regarding our credit risk management policies, refer to the section "Credit“Credit Risk Management"Management” included in "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” in our 2013 Form 10-K.

    10‑K.


Allowance for Credit Losses

Allowance Policy and Methodology

We maintain an allowance for credit losses (defined as both the allowance for loan losses and the allowance for losses on unfunded credit commitments) to absorb losses inherent in the loan portfolio as well as for unfunded credit commitments. Understanding our policies on the allowance for credit losses is fundamental to understanding our consolidated financial condition and consolidated results of operations.


Table of Contents

Accordingly, our significant accounting policies on the allowance for credit losses are discussed in detail in Note 1 to our Consolidated Financial Statements in Part II, Item 8. "Financial“Financial Statements and Supplementary Data"Data” and in the section "Allowance“Allowance for Credit Losses"Losses” included in Part II, Item 7. "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” in our 2013 Form 10-K.10‑K. For additional information regarding our allowance for loan losses, refer to Note 54 of our Consolidated Financial Statements in Part I, Item 1. "Financial Statements"“Financial Statements” of this Form 10-Q.



20


Allowance and Related Provision for Credit Losses

The allowance for loan losses decreased $9$39 million to $559$529 million as of JuneSeptember 30, 2014, compared with $568 million at December 31, 2013. This decrease is primarilywas due to improving credit quality in our consumercommercial portfolio, which was partially offset by an extension of the loss emergence period observed within the commercial loan portfolio. The unallocated allowance was $25$20 million at JuneSeptember 30, 2014, compared with $77 million at December 31, 2013. This decrease primarily resulted from refinements to the methodology used to measure credit risk ascribed to the commercial loan portfolio segment, which previously had been estimated within the unallocated allowance for loan losses.


Our ratio of nonaccrual loans to total loans held for investment was 0.710.54 percent at JuneSeptember 30, 2014 and 0.65 percent at December 31, 2013. Our ratio of allowance for loan losses to total loans held for investment decreased to 0.770.71 percent at JuneSeptember 30, 2014 from 0.83 percent at December 31, 2013. Annualized net loans charged-off to average total loans held for investment was 0.040.06 percent for the quarter ended JuneSeptember 30, 2014, compared with an annualized net loans charged-offrecovered to average total loans held for investment of 0.050.01 percent for the quarter ended JuneSeptember 30, 2013. Criticized credits in the commercial segment were $1.5$1.2 billion at JuneSeptember 30, 2014 and $1.3 billion at December 31, 2013. Criticized credits are those that have regulatory risk grades of "special“special mention," "substandard"” “substandard” or "doubtful."“doubtful.” Special mention credits are potentially weak, as the borrower has begun to exhibit deteriorating trends, which, if not corrected, could jeopardize repayment of the loan and result in further downgrade. Adversely classified credits are those that are internally risk graded as substandard or doubtful. Substandard credits have well-defined weaknesses, which, if not corrected, could jeopardize the full satisfaction of the debt. A credit classified as doubtful has critical weaknesses that make full collection improbable on the basis of currently existing facts and conditions.



21



Change in the Allowance for Loan Losses

The following table sets forth a reconciliation of changes in our allowance for loan losses:


 For the Three
Months
Ended June 30,
 For the Six
Months
Ended June 30,
  For the Three Months Ended September 30, For the Nine Months Ended September 30,
(Dollars in millions) 2014 2013 2014 2013  2014 2013 2014 2013

Balance, beginning of period

 $557 $638 $568 $653  $559
 $625
 $568
 $653

(Reversal of) provision for loan losses, excluding purchased credit-impaired loans

 9 (3) (9) (6) (18) (16) (27) (22)

(Reversal of) provision for purchased credit-impaired loan losses not subject to FDIC indemnification

   2   
 
 2
 

Increase/(Decrease) in allowance covered by FDIC indemnification

  (2)    
 (2) 
 (2)

Other

   (1)   
 
 (1) 

Loans charged-off:

                 

Commercial and industrial

 (6) (11) (11) (12) (15) (6) (26) (18)

Commercial mortgage

 (2) (1) (3) (3) 
 (2) (3) (5)
         
Construction 
 (1) 
 (1)

Total commercial portfolio

 (8) (12) (14) (15) (15) (9) (29) (24)
         

Residential mortgage

 (2) (3) (3) (10) 
 (2) (3) (12)

Home equity and other consumer loans

 (2) (5) (4) (11) (2) (2) (6) (13)
         

Total consumer portfolio

 (4) (8) (7) (21) (2) (4) (9) (25)
         

Purchased credit-impaired loans

    (3) (1) 
 (1) (3)
         

Total loans charged-off

 (12) (20) (21) (39) (18) (13) (39) (52)
         

Recoveries of loans previously charged-off:

                 

Commercial and industrial

 3 7 14 10  3
 5
 17
 15

Commercial mortgage

 1 2 1 2  2
 4
 3
 6

Construction

   3   
 1
 3
 1
         

Total commercial portfolio

 4 9 18 12  5
 10
 23
 22
         

Home equity and other consumer loans

 1 1 2 2  
 2
 2
 4
         

Total consumer portfolio

 1 1 2 2  
 2
 2
 4
         

Purchased credit-impaired loans

  2  3  1
 2
 1
 5
         

Total recoveries of loans previously charged-off

 5 12 20 17  6
 14
 26
 31
         

Net loans recovered (charged-off)

 (7) (8) (1) (22) (12) 1
 (13) (21)
         

Ending balance of allowance for loan losses

 $559 $625 $559 $625  $529
 $608
 $529
 $608
         
         

Components of allowance for loan losses and credit losses:

                 

Allowance for loan losses, excluding allowance on purchased credit-impaired loans

 $556 $624 $556 $624  $526
 $607
 $526
 $607

Allowance for loan losses on purchased credit-impaired loans

 3 1 3 1  3
 1
 3
 1
         

Total allowance for loan losses

 559 625 559 625  529
 608
 529
 608
         

Allowance for losses on unfunded credit commitments

 145 136 145 136  162
 131
 162
 131
         

Total allowance for credit losses

 $704 $761 $704 $761  $691
 $739
 $691
 $739
         
         

Table of Contents

Nonperforming assets consist of nonaccrual loans and other real estate owned (OREO).OREO. Nonaccrual loans are those for which management has discontinued accrual of interest because there exists significant uncertainty as to the full and timely collection of either principal or interest, or such loans have become contractually past due 90 days with respect to principal or interest. OREO includes property where the Bank acquired title through foreclosure or "deed“deed in lieu"lieu” of foreclosure. For a more detailed discussion of the accounting for nonaccrual loans, see Note 1 to our Consolidated Financial Statements included in Part II, Item 8. "Financial“Financial Statements and Supplementary Data"Data” in our 2013 Form 10-K.



22


The following table sets forth an analysis of nonperforming assets:



  
  
 Increase (Decrease) 

 June 30, 2014 December 31, 2013  September 30, 2014 December 31, 2013 Increase (Decrease)
(Dollars in millions) Amount Percent  Amount Percent

Commercial and industrial

 $161 $44 $117 266% $71
 $44
 $27
 61 %

Commercial mortgage

 47 51 (4) (8) 34
 51
 (17) (33)
         

Total commercial portfolio

 208 95 113 119  105
 95
 10
 11
         

Residential mortgage

 243 286 (43) (15) 239
 286
 (47) (16)

Home equity and other consumer loans

 46 46    46
 46
 
 
         

Total consumer portfolio

 289 332 (43) (13) 285
 332
 (47) (14)
         

Total nonaccrual loans, before purchased credit-impaired loans

 497 427 70 16  390
 427
 (37) (9)

Purchased credit-impaired loans

 17 15 2 13  13
 15
 (2) (13)
         

Total nonaccrual loans

 514 442 72 16  403
 442
 (39) (9)

OREO, before FDIC covered OREO

 14 20 (6) (30) 12
 20
 (8) (40)

FDIC covered OREO

 19 37 (18) (49) 13
 37
 (24) (65)
         

Total nonperforming assets

 $547 $499 $48 10% $428
 $499
 $(71) (14)%
         
         

Total nonperforming assets, excluding purchased credit-impaired loans and FDIC covered OREO

 $511 $447 $64 14% $402
 $447
 $(45) (10)%
         
         

Troubled debt restructurings:

                 

Accruing

 $297 $367 $(70) (19)% $300
 $367
 $(67) (18)%
         
         

Nonaccruing (included in total nonaccrual loans above)

 $248 $225 $23 10% $189
 $225
 $(36) (16)%
         
         

Total troubled debt restructurings

 $545 $592 $(47) (8)% $489
 $592
 $(103) (17)%
         
         

        A significant portion of the increase of $117 million in nonperforming commercial and industrial loans from December 31, 2013 to June 30, 2014 was due to one large loan, which was placed on nonaccrual status in the second quarter of 2014 and subsequently paid off.

Troubled Debt Restructurings

TDRs are loans where we have granted a concession to a borrower as a result of the borrower experiencing financial difficulty and, consequently, we receive less than the current market-based compensation for loans with similar risk characteristics. Such loans are classified as impaired and are reviewed for specific reserves either individually or in pools with similar risk characteristics. Our loss mitigation strategies are designed to minimize economic loss and, at times, may result in changes to original terms, including interest rate changes, maturity extensions, principal paydowns, covenant waivers or changes, and payment deferrals, or some combination thereof. We evaluate whether these changes to the terms and conditions of our loans meet the TDR criteria


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after considering the specific situation of the borrower and all relevant facts and circumstances related to the modification. For our consumer portfolio segment, TDRs are typically initially placed on nonaccrual and a minimum of six consecutive months of sustained performance is required before returning to accrual status. For our commercial portfolio segment, we generally determine accrual status for TDRs by performing an individual assessment of each loan, which may include, among other factors, the consideration of demonstrated performance by the borrower under the previous terms.

Modifications of purchased credit-impaired loans that are accounted for within loan pools do not result in the removal of these loans from the pool even if the modification would otherwise be considered a TDR. Each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Accordingly, modifications of loans within such pools are not considered TDRs.


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The following table provides a summary of TDRs by loan type, including nonaccrual loans and loans that have been returned to accrual status, as of JuneSeptember 30, 2014 and December 31, 2013. Refer to Note 54 to our Consolidated Financial Statements in Part I, Item 1. "Financial Statements" in this Form 10-Q for more information.

 
  
  
 As a Percentage of
Ending Loan Balances
 
(Dollars in millions) June 30,
2014
 December 31,
2013
 June 30,
2014
 December 31,
2013
 

Commercial and industrial

 $173 $212  0.69% 0.90%

Commercial mortgage

  36  38  0.27  0.29 
            

Total commercial portfolio

  209  250  0.51  0.65 
            

Residential mortgage

  308  315  1.12  1.23 

Home equity and other consumer loans

  26  24  0.83  0.73 
            

Total consumer portfolio

  334  339  1.09  1.18 
            

Total restructured loans, excluding purchased credit-impaired loans(1)

 $543 $589  0.76% 0.88%
            
            

(1)
Amounts exclude $2 million and $3 million of TDRs covered by FDIC loss share agreements at June 30, 2014 and December 31, 2013, respectively.

      
As a Percentage of
Ending Loan Balances
(Dollars in millions) September 30, 2014 December 31, 2013 September 30, 2014 December 31, 2013
Commercial and industrial $125
 $212
 0.47% 0.90%
Commercial mortgage 26
 38
 0.19
 0.29
Total commercial portfolio 151
 250
 0.36
 0.65
Residential mortgage 306
 315
 1.08
 1.23
Home equity and other consumer loans 30
 24
 0.97
 0.73
Total consumer portfolio 336
 339
 1.07
 1.18
Total restructured loans, excluding purchased credit-impaired loans(1)
 $487
 $589
 0.66% 0.88%
(1)Amounts exclude $2 million and $3 million of TDRs covered by FDIC loss share agreements at September 30, 2014 and December 31, 2013, respectively.

Loans 90 Days or More Past Due and Still Accruing

Loans held for investment 90 days or more past due and still accruing totaled $11$4 million and $5 million at JuneSeptember 30, 2014 and December 31, 2013, respectively. These amounts exclude purchased credit-impaired loans, which are generally accounted for within loan pools, of $103$65 million and $124 million at JuneSeptember 30, 2014 and December 31, 2013, respectively. The past due status of individual loans included within purchased credit-impaired loan pools is not a meaningful indicator of credit quality, as potential credit losses are measured at the loan pool level against prior expectations of cash flow performance.

Concentration of Risk

Commercial and industrial loans are extended principally to corporations, middle-market businesses and small businesses and are originated primarily through our commercial banking offices. We are active in, among other sectors, oil and gas, manufacturing, finance and insurance services, wholesale trade, real estate and leasing, and communications. These industries comprise the majority of our commercial and industrial portfolio. While loans extended within these sectors comprise the majority of our commercial and industrial portfolio, no individual industry sector exceeded 10 percent of our total loans held for investment at either JuneSeptember 30, 2014 or December 31, 2013.


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Construction and commercial mortgage loans are secured by deeds of trust or mortgages. Construction loans are extended primarily to commercial property developers and to residential builders. At JuneSeptember 30, 2014, 4944 percent of the Company'sCompany’s construction loan portfolio was domiciled in California. The commercial mortgage loan portfolio consists of loans secured by commercial income properties. At JuneSeptember 30, 2014, 6768 percent of the Company'sCompany’s commercial mortgage loans were made to borrowers located in California, 5 percent to borrowers in New York, and 7 percent to borrowers in the state of Washington.

Residential mortgage loans are originated and secured by one-to-four family residential properties, through our multiple channel network, including branches, private bankers, mortgage brokers, telephone services, and web-based and mobile internet banking applications. We do not have a program for originating or purchasing subprime loan products and we hold the majority of the loans we originate.

At JuneSeptember 30, 2014, payment terms on 4846 percent of our residential mortgage loans require a monthly payment that covers the full amount of interest due, but does not reduce the principal balance. At origination, these interest-only loans had strong credit profiles and had weighted average loan-to-value (LTV) ratios of approximately 6766 percent. The remainder of the portfolio consists of regularly amortizing loans.

Home equity and other consumer loans are originated principally through our branch network and Private Banking offices. Approximately 32 percent and 33 percent of these home equity loans and lines were supported by first liens on residential properties at JuneSeptember 30, 2014 and December 31, 2013, respectively. To manage risk associated with lending commitments, we review all equity-secured lines annually for creditworthiness and reduce or freeze limits, to the extent permitted by laws and regulations. See Note 54 to our Consolidated Financial Statements in Part I, Item 1. "Financial Statements"“Financial Statements” in this Form 10-Q for additional

24


information on refreshed Fair Isaac Corporation (FICO) scores and refreshed LTV ratios for our residential mortgage loans at December 31, 2013.

Market Risk Management


The objective of market risk management is to mitigate any adverse impact on earnings and capital arising from changes in interest rates and other market variables. Market risk management supports our broad objective of enhancing shareholder value, which encompasses the achievement of stable earnings growth while promoting capital stability over time. Market risk is defined as the risk of loss arising from an adverse change in the market value of financial instruments caused by fluctuations in market prices or rates. The primary market risk to which we are exposed is interest rate risk. Substantially all of our interest rate risk arises from instruments, positions and transactions entered into for purposes other than trading. These include loans, securities, deposits, borrowings and derivative financial instruments. To a much lesser degree, we are exposed to market risk in our trading portfolio.

Risk Governance

The Board of Directors (Board), directly or through its appropriate committee, approves our Asset Liability Management Policy (ALM Policy), which governs the management of market and liquidity risks and guides our investment, derivatives, trading and funding activities. The ALM Policy establishes the Company'sCompany’s risk tolerance by outlining standards for measuring market and liquidity risks, creates Board-level limits for specific market risks, establishes Asset Liability Management Committee (ALCO) responsibilities and requires independent review and oversight of market and liquidity risk activities.

The Risk & Capital Committee (RCC), composed of selected senior officers of the Company, strives, among other things, to ensure that the Company has an effective process to identify, monitor, measure, and manage market risk as required by the ALM Policy. The RCC provides the broad and strategic guidance of market risk management by defining the risk and return direction for the Company, delegating to and reviewing market risk management activities of the ALCO and by approving the investment, derivatives and trading policies that govern the Company'sCompany’s activities. ALCO, as authorized by the RCC, is responsible for the


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management of market risk and approves specific risk management programs, including those related to interest rate hedging, investment securities, wholesale funding and trading activities.

The Treasurer is primarily responsible for the implementation of risk management strategies approved by ALCO and for operational management of market risk through the funding, investment and derivatives hedging activities of Corporate Treasury. The manager of Global CapitalCompany's Investment Banking and Markets (GCM)segment is responsible for managing price risk through theit's trading activities conducted in GCM.activities. The Market Risk Management (MRM) unit is responsible for the monitoring of market risk and functions independently of all operating and management units.

The Company has separate and distinct methods for managing the market risk associated with our asset and liability management activities and our trading activities, as described below.

Interest Rate Risk Management (Other Than Trading)

ALCO monitors interest rate risk on a monthly basis through a variety of modeling techniques that are used to quantify the sensitivity of net interest income to changes in interest rates. Our net interest income policy measurement typically involves a simulation in which we estimate the net interest income impact of gradual parallel shifts in the yield curve of up and down 200 basis points over a 12-month horizon using a forecasted balance sheet. Due to the current and persistently low interest rate environment, the decrease of 200 basis point parallel scenario was replaced with a decrease of 100 basis point parallel scenario.

Net Interest Income Sensitivity

The table below presents the estimated increase (decrease) in net interest income given a gradual parallel shift in the yield curve up 200 basis points and down 100 basis points over a 12-month horizon.


(Dollars in millions) June 30,
2014
 December 31,
2013
  September 30, 2014 December 31, 2013

Effect on net interest income:

         

Increase 200 basis points

 $132.9 $153.3  $116.1
 $153.3

as a percentage of base case net interest income

 4.76% 5.63% 4.19 % 5.63 %

Decrease 100 basis points

 $(82.9)$(62.8) $(53.9) $(62.8)

as a percentage of base case net interest income

 (2.98)% (2.31)% (1.95)% (2.31)%


25


An increase in rates increases net interest income. During the secondthird quarter of 2014, the Bank'sBank’s asset sensitive profile decreased slightly due to changes in both the current balance sheet composition and forecasted balance sheet activity over the next twelve months. We believe that our simulation provides management with a comprehensive view of the sensitivity of net interest income to changes in interest rates over the measurement horizon. However, as with any financial model, the underlying assumptions are inherently uncertain and subject to refinement. In particular, two significant models used in interest rate risk measurement address residential mortgage prepayment speeds and non-maturity deposit rate and balance behaviors. The mortgage prepayment model is periodically calibrated to reflect changes in customer behavior, but given the unprecedented rate and credit environment, may be prone to lowered predictive capability when determining the borrower's propensity or ability to prepay their mortgage. The deposit model uses the Company'sCompany’s historical deposit pricing to forecast future deposit pricing in its scenarios. Management'sManagement’s response to future rate scenarios may deviate from historic responses as the financial crisis may have changed future competitive responses and customer behaviors with respect to deposit repricing. Actual results may differ from those derived in the simulation analysis due to extraordinary market events, unanticipated changes in customer behavior, market interest rates, product pricing, and investment, funding and hedging activities.


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Our Asset Liability Management (ALM) securities portfolio includes both securities available for sale and securities held to maturity. At JuneSeptember 30, 2014 and December 31, 2013, our ALM securities portfolio balances were $21.0$20.7 billion and $20.2 billion, respectively. Our ALM securities portfolio consists of securities issued by the U.S. Treasury, U.S. government-sponsored agencies, residential mortgage-backed securities, CMBS, CLOs, and asset-backed securities and had an expected weighted average life of 4.84.7 years at JuneSeptember 30, 2014. At JuneSeptember 30, 2014, approximately $6.1$6.5 billion of the portfolio was pledged to secure trust and public deposits and for other purposes as required or permitted by law. During the secondthird quarter of 2014, we purchased $0.7$1.3 billion and sold $0.3$0.6 billion of securities, as part of our investment portfolio strategy, while $0.8$0.9 billion of ALM securities matured, were paid down, or were called. To reduce the impact of price volatility on accumulated other comprehensive income and in consideration of changes in regulatory capital requirements under U.S. Basel III rules, the Bank increased securities held to maturity from 32 percent of total ALM securities at December 31, 2013 to 3941 percent of total ALM securities at JuneSeptember 30, 2014.

Based on current prepayment projections, the estimated ALM securities portfolio'sportfolio’s effective duration was 3.8 years at JuneSeptember 30, 2014, compared to 4.0 years at December 31, 2013. Effective duration is a measure of price sensitivity of a bond portfolio to immediate parallel shifts in interest rates. An effective duration of 3.8 years suggests an expected price decrease of approximately 3.8 percent for an immediate 1.0 percent parallel increase in interest rates.

In addition to our ALM securities, our securities available for sale portfolio includes approximately $1.9$1.8 billion of direct bank purchase bonds that are largely managed within our Commercial Banking operating segment. These instruments are accounted for as securities, but underwritten as loans with terms that are closely aligned with traditional commercial loan features, and are subject to national bank regulatory lending authority standards. These instruments typically are not issued in bearer form, nor are they registered with the SEC or the Depository Trust Company. Additionally, these instruments generally contain certain transferability restrictions and are not assigned external credit ratings.


26


ALM and Other Risk Management Derivatives

Since December 31, 2013, the notional amount of the ALM derivatives portfolio increased by $4.4$5.8 billion as we entered into receive fixed interest rate swap contracts to hedge floating rate commercial loans and fixed rate debt issuances.

Other risk management derivatives are primarily used to manage non-interest rate related risks. For additional discussion of derivative instruments and our hedging strategies, see Note 109 to our Consolidated Financial Statements in Part I, Item 1. "Financial Statements"“Financial Statements” of this Form 10-Q and Note 13 to our


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Consolidated Financial Statements in Part II, Item 8. "Financial“Financial Statements and Supplementary Data"Data” in our 2013 Form 10-K.

(Dollars in millions) June 30,
2014
 December 31,
2013
 Increase
(Decrease)
  September 30, 2014 December 31, 2013 Increase (Decrease)

Total gross notional amount of ALM and other risk management derivatives

             

ALM derivatives:

             

Interest rate swap receive fixed contracts

 $8,700 $4,300 $4,400  $10,100
 $4,300
 $5,800
       

Total ALM derivatives

 8,700 4,300 4,400  10,100
 4,300
 5,800
       

Other risk management derivatives

 248 185 63  251
 185
 66
       

Total ALM and other risk management derivatives

 $8,948 $4,485 $4,463  $10,351
 $4,485
 $5,866
       
             

Fair value of ALM and other risk management derivatives

            

ALM derivatives:

             

Gross positive fair value

 $40 $8 $32  $6
 $8
 $(2)

Gross negative fair value

 2 13 (11) 34
 13
 21
       

Positive (negative) fair value of ALM derivatives, net

 38 (5) 43  (28) (5) (23)
       
       

Other risk management derivatives:

             

Gross positive fair value

 $2 $2 $  1
 2
 (1)

Gross negative fair value

 5 4 1  4
 4
 
       

Positive (negative) fair value of other risk management derivatives, net

 (3) (2) (1) (3) (2) (1)
       

Positive (negative) fair value of ALM and other risk management derivatives, net

 $35 $(7)$42  $(31) $(7) $(24)
       
       

We enter into trading account activities primarily as a financial intermediary for customers and, to a much lesser extent, for our own account. By acting as a financial intermediary, we are able to provide our customers with access to a range of products from the securities, foreign exchange and derivatives markets. In acting for our own account, we may take positions in certain securities, foreign exchange and interest rate instruments, subject to various limits in amount, tenor and other respects, with the objective of generating trading profits.

We believe that the risks associated with these positions are prudently managed. We utilize a combination of position limits, Value-at-Risk (VaR), and stop-loss limits, applied at an aggregated level and to various sub-components within those limits. Positions are controlled and reported both in notional and VaR terms. Our calculation of VaR estimates how high the loss in fair value might be, at a 99 percent confidence level, due to an adverse shift in market prices over a period of ten business days. VaR at the trading activity level is managed within the maximum limit of $14 million established by Board policy for total trading positions. The VaR model incorporates assumptions on key parameters, including holding period and historical volatility.

Consistent with our business strategy of focusing on the sale of capital markets products to customers, we manage our trading risk exposures at relatively low levels. Our foreign exchange business continues to derive the majority of its revenue from customer-related transactions. We take trading positions with other banks only on a limited basis and we do not take any large or long-term strategic positions in the market for our own portfolio. Similarly, we continue to generate most of our securities trading income from customer-related transactions.

As of JuneSeptember 30, 2014, we had notional amounts of $47.0$46.1 billion of interest rate derivative contracts, $3.6$4.3 billion of foreign exchange derivative contracts and $4.5$4.1 billion of commodity derivative contracts. We


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enter into these agreements for the principal purpose of accommodating the needs of our customers. We generally take offsetting positions in these transactions to mitigate our exposure to market risk. As of JuneSeptember 30, 2014, notional amounts of $1.2$1.2 billion $1.3, $1.2 billion and $4.0$3.9 billion of foreign exchange, commodity and equity contracts, respectively, represented our exposure to the embedded bifurcated derivatives and the related hedges contained in our market-linked certificates of deposit.


27


The following table provides the notional value and the fair value of our trading derivatives portfolio as of JuneSeptember 30, 2014 and December 31, 2013, and the change in fair value between JuneSeptember 30, 2014 and December 31, 2013:

(Dollars in millions) June 30,
2014
 December 31,
2013
 Increase
(Decrease)
 

Total gross notional amount of positions held for trading purposes:

          

Interest rate contracts

 $47,006 $44,427 $2,579 

Commodity contracts

  5,776  5,714  62 

Foreign exchange contracts(1)

  4,835  4,978  (143)

Equity contracts

  4,034  4,027  7 

Other contracts

    140  (140)
        

Total

 $61,651 $59,286 $2,365 
        
        

Fair value of positions held for trading purposes:

          

Gross positive fair value

 $1,225 $1,074  151 

Gross negative fair value

  1,120  952  168 
        

Positive fair value of positions, net

 $105 $122 $(17)
        
        

(1)
Excludes spot contracts with a notional amount of $0.5 billion and $0.7 billion at June 30, 2014 and December 31, 2013, respectively.

(Dollars in millions) September 30, 2014 December 31, 2013 Increase (Decrease)
Total gross notional amount of positions held for trading purposes:      
Interest rate contracts $46,106
 $44,427
 $1,679
Commodity contracts 5,268
 5,714
 (446)
 Foreign exchange contracts(1)
 5,520
 4,978
 542
Equity contracts 3,909
 4,027
 (118)
Other contracts 
 140
 (140)
Total $60,803
 $59,286
 $1,517
Fair value of positions held for trading purposes:     

Gross positive fair value $1,243
 $1,074
 $169
Gross negative fair value 1,048
 952
 96
Positive fair value of positions, net $195
 $122
 $73
(1)Excludes spot contracts with a notional amount of $0.5 billion and $0.7 billion at September 30, 2014 and December 31, 2013, respectively.
Liquidity Risk Management

Liquidity risk is the risk that the Bank'sBank’s financial condition or overall safety and soundness is adversely affected by an inability, or perceived inability, to meet its contractual, including contingent, obligations. The objective of liquidity risk management is to maintain a sufficient amount of liquidity and diversity of funding sources to allow the Bank to meet obligations in both stable and adverse conditions.

The management of liquidity risk is governed by the ALM Policy under the oversight of the RCC and the Audit & Finance Committee of the Board. ALCO oversees liquidity risk management activities.  Corporate Treasury formulates the Bank'sBank’s liquidity and contingency planning strategies and is responsible for identifying, managing and reporting on liquidity risk. MRM, which is part of the Enterprise Wide Risk Reporting and Analysis unit, partners with Corporate Treasury to establish sound policy and effective risk controls. We are also subject to a consolidated Contingency Funding Plan that identifies actions to be taken to help ensure adequate liquidity if an event should occur that disrupts or adversely affects the Bank'sBank’s normal funding activities.

Liquidity risk is managed using a total balance sheet perspective that analyzes all sources and uses of liquidity including loans, investments, deposits and borrowings, as well as off-balance sheet exposures. Management does not rely on any one source of liquidity and manages availability in response to changing balance sheet needs. Various tools are used to measure and monitor liquidity, including pro-forma forecasting of the sources and uses of cash flows over a 12-month time horizon, stress testing of the pro-forma forecast and assessment of the Bank'sBank’s capacity to raise incremental unsecured and secured funding. Stress testing, which incorporates both bank-specific, systemic market scenarios, as well as a combination scenario that adversely affects the Bank'sBank’s liquidity position and profile, facilitates the identification of appropriate remedial measures to help ensure that the Bank maintains adequate liquidity in adverse conditions. Such measures may include extending the maturity profile of liabilities, optimizing liability levels through pricing strategies, adding new funding sources, altering dependency on certain funding sources and financing or selling assets.


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Our primary sources of liquidity are core deposits (described below), our securities portfolio and wholesale funding. Wholesale funding includes unsecured funds raised from interbank and other sources, both domestic and international, including both senior and subordinated debt. Also included are secured funds raised by selling securities under repurchase agreements and by borrowing from the FHLB. We evaluate and monitor the stability and reliability of our various funding sources to help ensure that we have sufficient liquidity in adverse circumstances. We generally view our core deposits to be relatively stable. Secured borrowings via repurchase agreements and advances from the FHLB are also recognized as highly reliable funding sources, and we, therefore, maintain access to these sources primarily to meet our contingency funding needs.

In response to balance sheet changes, wholesale funding increased $0.1$0.6 billion from $11.9 billion at December 31, 2013 to $12.0$12.5 billion at JuneSeptember 30, 2014. Total deposits increased $1.5$2.3 billion from $80.1 billion at December 31, 2013 to $81.6$82.4 billion at JuneSeptember 30, 2014.

Core deposits, which exclude brokered deposits, foreign time deposits and domestic time deposits greater than $250,000, provide us with a sizable source of relatively stable and low-cost funds. At JuneSeptember 30, 2014, our core deposits totaled $72.1$73.6 billion and our total loan-to-total core deposit ratio was 99.7101.4 percent.


28


The Bank maintains a variety of other funding sources, secured and unsecured, which management believes will be adequate to meet the Bank'sBank’s liquidity needs, including the following:

The Bank has secured borrowing facilities with the FHLB and the Federal Reserve Bank. As of JuneSeptember 30, 2014, the Bank had $0.8 billion of borrowings outstanding with the FHLB, and the Bank had a remaining combined unused borrowing capacity from the FHLB and the Federal Reserve Bank of $37.6$38.0 billion.


Our securities portfolio provides liquidity through either securities sales or repurchase agreements. Total unpledged securities increased by $1.0$0.3 billion from $14.1 billion at December 31, 2013 to $15.1$14.4 billion at JuneSeptember 30, 2014.


The Bank has an $8.0 billion unsecured Bank Note Program. Available funding under the Bank Note Program was $1.9 billion at JuneSeptember 30, 2014. In May 2014, the Bank issued $750 million in senior notes under this program.


In addition to the funding provided by the Bank, we raise funds at the holding company level. MUAH has in place a shelf registration statement with the SEC permitting ready access to the public debt markets. As of JuneSeptember 30, 2014, $1.1 billion of debt or other securities were available for issuance under this shelf registration statement. We do not have any firm commitments in place to sell securities under this shelf registration statement.


MUAH has access to a $500 million, three-year committed line of credit from BTMU, which is available for contingent liquidity or capital purposes.


We believe that these sources provide a stable funding base. As a result, we have not historically relied on BTMU for our normal funding needs.

Our costs and ability to raise funds in the capital markets are influenced by our credit ratings. On October 1, 2014, Moody’s Investors Service placed its ratings on the Company and its affiliates (including MUB) on review for downgrade. This action by Moody's Investors Service has not had a significant impact on the Company's cost of funds. Our credit ratings could also be impacted by changes in the credit ratings of BTMU and MUFG. For further information, including information about our ratings and rating agency assessments, of Japan's credit rating and credit ratings of most major Japanese banks, including BTMU, see"The Bank of Tokyo-Mitsubishi UFJ'sUFJ’s and Mitsubishi UFJ Financial Group'sGroup’s credit ratings and financial or regulatory condition could adversely affect our operations"operations”


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in Part I, Item 1A. "Risk Factors" in our 2013 Form 10-K.10-K and "Our credit ratings are important in order to maintain liquidity" in Part II, Item 1A. “Risk Factors” in this Form 10-Q. The following table provides our credit ratings as of JuneSeptember 30, 2014:



MUFG
Union Bank, N.A.
MUFG
Americas
Holdings
Corporation

Standard & Poor's

Long-termA+ A

 Short-termA-1 A-1

Moody's

Long-termA2 

Long-term

A2

A3

 Short-termP-1 

Fitch

Long-termA 

Long-term

A

A

 Short-termF1 F1


In October 2013,September 2014, the OCC, the Federal Reserve and the FDIC jointly issued a proposedadopted the final rule that wouldto implement a standardized quantitative liquidity requirement generally consistent with the liquidity coverage ratio (LCR) standards established by the Basel Committee on Banking Supervision. The LCR would generally apply to banking organizations with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposures. The LCR rules arerule is designed to ensure that covered banking organizations maintain an adequate level of cash and high quality liquid assets (HQLA), such as central bank reserves and government and corporate debt, to meet estimated net liquidity needs in a short-term stress scenario using liquidity inflow and outflow assumptions provided in the rulesrule (net cash outflow). The proposal wouldAn institution’s LCR is the amount of its HQLA, as defined and calculated in accordance with the reductions and limitations in the rule, divided by its net cash outflow, with the quotient expressed as a percentage. While the LCR generally applies to banking organizations with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposures, the final rule also applyapplies a less stringent, modified LCR to bank holding companies that are not internationally active, but have more than $50 billion in total assets (such as the Company). Under the proposed modified LCR rule, financial institutions would have tomust maintain, following a phase-in period, an LCR equal to at least 100 percent based on the entity's total projected net cash outflows over the next 2130 calendar days, effectively using net cash outflow assumptions equal to 70 percent of the outflow assumptions prescribed for internationally active banking organizations. The proposed phase-in period would beginbegins on January 1, 2015,2016, with full compliance required by January 1, 2017.



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The Company is currently evaluating the proposal and its potentialfinal rule's impact on its businesses; however, the Company expects to meet or exceed the final LCR requirementrequirements within the regulatory timelines. For information regarding this proposed rule, see"The effects of changes or increases in, or supervisory enforcement of, banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect us"us” in Part II, Item 1A. "Risk Factors"“Risk Factors” of this Form 10-Q.


Operational Risk Management

Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, which includes exposure to fines, penalties, or punitive damages resulting from supervisory actions, as well as private settlements, but excludes strategic and reputational risk. In particular, information security is a significant operational risk element for the Company, and includes the risk of losses resulting from cyber attacks. See "We are subject to operational risks, including cybersecurity risks" in Part I, Item 1A. "Risk Factors"“Risk Factors” of our 2013 Form 10-K. Operational risk is mitigated through a system of internal controls that are designed to keep these risks at appropriate levels.


Business Segments


During the fourth quarter 2013, the composition of the Company'sCompany’s reportable segments was revised to reflect our new internal management structure resulting from the BTMU Americas Holdings business integration initiative announced in 2013. We now have five reportable segments: Retail Banking & Wealth Markets, Commercial Banking, Corporate Banking, Transaction Banking, and Investment Banking & Markets. Prior period segment results have been revised to conform to the current period presentation. For a more


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detailed description of these reportable segments, refer to Note 14 to our Consolidated Financial Statements included in Part I, Item 1. "Financial Statements"“Financial Statements” of this Form 10-Q.

Unlike accounting principles generally accepted in the United States of America (U.S. GAAP), there is no standardized or authoritative guidance for management accounting. Consequently, reported results are not necessarily comparable with those presented by other companies and they are not necessarily indicative of the results that would be reported by our business units if they were unique economic entities. The information, set forth in the tables that follow, is prepared using various management accounting methodologies to measure the performance of the individual segments. Beginning with the third quarter of 2014, the funds transfer pricing methodology was revised with respect to reference rates for certain commercial deposits. Prior period results have been adjusted to reflect these changes. For a description of these methodologies, see Note 14 to our Consolidated Financial Statements included in Part I, Item 1. "Financial Statements"“Financial Statements” of this Form 10-Q.

Retail Banking & Wealth Markets

Retail Banking & Wealth Markets offers a range of banking products and services to individuals and small businesses, including high net worth individuals and institutional clients, delivered generally through a network of branches, private banking offices, ATMs, broker mortgage referrals, telephone services, and web-based and mobile banking applications. These products and services include mortgages, home equity lines of credit, consumer and commercial loans, deposit accounts, financial planning and investments.


30

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The following tables set forth the results for the Retail Banking & Wealth Markets segment:


 For the Three Months
Ended
June 30,
 Increase
(Decrease)
 For the Six Months
Ended
June 30,
 Increase
(Decrease)
 
Retail Banking & Wealth MarketsRetail Banking & Wealth Markets               
 For the Three Months Ended 
 September 30,
 Increase (Decrease) For the Nine Months Ended 
 September 30,
 Increase (Decrease) 
(Dollars in millions) 2014 2013 Amount Percent 2014 2013 Amount Percent  2014 2013 Amount Percent 2014 2013 Amount Percent 

Results of operations—Market View

                 
Results of operations - Market View                 

Net interest income

 $362 $332 $30 9%$709 $669 $40 6% $340
 $333
 $7
 2
% $1,049
 $1,002
 $47
 5
%

Noninterest income

 87 94 (7) (7) 166 187 (21) (11) 83
 103
 (20) (19) 249
 289
 (40) (14) 
                 

Total revenue

 449 426 23 5 875 856 19 2  423
 436
 (13) (3) 1,298
 1,291
 7
 1
 

Noninterest expense

 340 366 (26) (7) 675 730 (55) (8) 329
 346
 (17) (5) 1,004
 1,075
 (71) (7) 

(Reversal of) provision for loan losses

 (2) (7) 5 71 (8) (15) 7 47  (1) (13) 12
 92
 (9) (28) 19
 68
 
                 

Income before income taxes and including noncontrolling interests

 111 67 44 66 208 141 67 48  95
 103
 (8) (8) 303
 244
 59
 24
 

Income tax expense

 44 27 17 63 82 56 26 46  37
 41
 (4) (8) 119
 96
 23
 24
 
                 

Net income attributable to MUAH

 $67 $40 $27 68 $126 $85 $41 48  $58
 $62
 $(4) (8) $184
 $148
 $36
 24
 
                 
                 

Average balances—Market View

                 
Average balances - Market View                 

Total loans held for investment

 $34,267 $30,858 $3,409 11%$33,725 $30,656 $3,069 10% $35,118
 $31,457
 $3,661
 12
% $34,194
 $30,926
 $3,268
 11
%

Total assets

 35,821 32,583 3,238 10 35,294 32,401 2,893 9  36,699
 33,043
 3,656
 11
 35,767
 32,510
 3,257
 10
 

Total deposits

 40,274 37,049 3,225 9 40,290 36,292 3,998 11  40,278
 38,415
 1,863
 5
 40,285
 37,008
 3,277
 9
 


Net interest income increased due to growth in average loans held for investment, mainly driven by organic growth in residential mortgages, and better than expected interest income on PCI loans, which was due to a loan sale. Offsetting this increase was a decrease in noninterest income largely driven by a decrease in asset management fees due primarily to the reorganization of the affiliated HighMark Funds into shares of unaffiliated mutual funds completed late in the third quarter of 2013. The decrease in noninterest expense was primarily driven by the HighMark Funds reorganization and a decrease in total staff expenses. The reversal of the provision for loan losses was due to an improvement in customer credit quality.


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Average deposits increased 95 percent and 119 percent during the three and sixnine months ended JuneSeptember 30, 2014 compared with the same periods in 2013, driven by organic deposit generation.


31


Commercial Banking

Commercial Banking provides credit products including commercial loans, and accounts receivable, inventory, project, trade and real estate financing to corporate customers with revenues generally less than $2 billion. Commercial Banking also offers its customers a range of noncredit services and products, which include global treasury management and capital markets solutions, foreign exchange and various interest rate risk and commodity risk management products through cooperation with other segments. Commercial Banking provides these products and services to U.S.-based middle-market businesses located in California, Oregon and Washington, as well as nationally through its Petroleum, Expansion Markets, Real Estate and Specialized Products divisions.

The following tables set forth the results for the Commercial Banking segment:

Commercial Banking


 For the Three Months
Ended
June 30,
 Increase
(Decrease)
 For the Six Months
Ended
June 30,
 Increase
(Decrease)
 
Commercial BankingCommercial Banking               
 For the Three Months Ended 
 September 30,
 Increase (Decrease) For the Nine Months Ended 
 September 30,
 Increase (Decrease) 
(Dollars in millions) 2014 2013 Amount Percent 2014 2013 Amount Percent  2014 2013 Amount Percent 2014 2013 Amount Percent 

Results of operations—Market View

                 
Results of operations - Market View                 

Net interest income

 $277 $217 $60 28%$504 $423 $81 19% $249
 $240
 $9
 5
% $764
 $671
 $93
 14
%

Noninterest income

 58 49 9 18 106 92 14 15  57
 51
 6
 14
 163
 142
 21
 15
 
                 

Total revenue

 335 266 69 26 610 515 95 18  306
 291
 15
 6
 927
 813
 114
 14
 

Noninterest expense

 104 102 2 2 209 199 10 5  114
 99
 15
 16
 323
 297
 26
 9
 

(Reversal of) provision for loan losses

 (10) 3 (13) (433) 6 30 (24) (80) 7
 (20) 27
 (129) 12
 9
 3
 33
 
                 

Income before income taxes and including noncontrolling interests

 241 161 80 50 395 286 109 38  185
 212
 (27) (11) 592
 507
 85
 17
 

Income tax expense

 65 40 25 63 99 69 30 43  42
 62
 (20) (28) 146
 134
 12
 9
 
                 

Net income attributable to MUAH

 $176 $121 $55 45 $296 $217 $79 36  $143
 $150
 $(7) (4) $446
 $373
 $73
 20
 
                 
                 

Average balances—Market View

                 
Average balances - Market View                 

Total loans held for investment

 $30,691 $25,598 $5,093 20%$30,106 $24,305 $5,801 24% $32,240
 $28,087
 $4,153
 15
% $30,776
 $25,557
 $5,219
 20
%

Total assets

 34,492 28,577 5,915 21 33,952 27,129 6,823 25  36,068
 31,786
 4,282
 13
 34,616
 28,776
 5,840
 20
 

Total deposits

 13,061 11,685 1,376 12 12,934 11,764 1,170 10  13,126
 11,780
 1,346
 11
 12,931
 11,443
 1,488
 13
 


Net interest income during the three and nine months ended September 30, 2014 increased as a result of strong organic asset growth, includinggrowth. Net interest income during the nine months ended September 30, 2014 also included the effect of our PB Capital acquisition which closed late in the second quarter of 2013, and better than expected interest income on PCI loans, which was mostly due to early payoffs of certain loans. The increase in noninterest income was primarily driven by an increase in credit facility fees, merchant banking fees and trading account activities. The secondthird quarter 20142013 reversal of the provision for loan losses reflected a general improvement in customer credit quality, which for the six months ended June 30, 2014 was offset by modest deterioration in certain customers' credit quality. The six months ended June 30, 2013 provision for loan losses includes the impact of an extension of the wholesale loss emergence period, which previously had been estimated within the unallocated allowance.

Average deposits increased 1211 percent and 1013 percent during the three and sixnine months ended JuneSeptember 30, 2014 compared with the same periods in 2013, driven by organic deposit generation.


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Corporate Banking

Corporate Banking provides commercial lending products, including commercial loans, lines of credit and project financing, to corporate customers with revenues generally greater than $2 billion. The segment employs an industry-focused strategy including dedicated coverage teams in General Industries, Power and Utilities, Oil and Gas, Telecom and Media, Technology, Healthcare, Public Finance, and Financial Institutions (predominantly Insurance and Asset Managers). By working with the Company'sCompany’s other segments, Corporate Banking offers its customers a range of noncredit services, which include global treasury management and capital market solutions, and foreign exchange and various interest rate risk and commodity risk management products.


32



The following tables set forth the results for the Corporate Banking segment:

Corporate Banking


 For the Three Months
Ended
June 30,
 Increase
(Decrease)
 For the Six Months
Ended
June 30,
 Increase
(Decrease)
 
Corporate BankingCorporate Banking               
 For the Three Months Ended 
 September 30,
 Increase (Decrease) For the Nine Months Ended 
 September 30,
 Increase (Decrease) 
(Dollars in millions) 2014 2013 Amount Percent 2014 2013 Amount Percent  2014 2013 Amount Percent 2014 2013 Amount Percent 

Results of operations—Market View

                 
Results of operations - Market View                 

Net interest income

 $43 $31 $12 39%$74 $60 $14 23% $46
 $34
 $12
 22
% $124
 $101
 $23
 23
%

Noninterest income

 22 18 4 22 40 35 5 14  44
 22
 22
 91
 84
 58
 26
 45
 
                 

Total revenue

 65 49 16 33 114 95 19 20  90
 56
 34
 47
 208
 159
 49
 31
 

Noninterest expense

 16 12 4 33 31 26 5 19  40
 13
 27
 173
 72
 41
 31
 76
 

(Reversal of) provision for loan losses

 9 (4) 13 (325) (7) 2 (9) (450) (6) 6
 (12) (220) (13) 7
 (20) (286) 
                 

Income before income taxes and including noncontrolling interests

 40 41 (1) (2) 90 67 23 34  56
 37
 19
 34
 149
 111
 38
 34
 

Income tax expense

 16 15 1 7 35 26 9 35  22
 15
 7
 33
 58
 44
 14
 34
 
                 

Net income attributable to MUAH

 $24 $26 $(2) (8)$55 $41 $14 34  $34
 $22
 $12
 35
 $91
 $67
 $24
 34
 
                 
                 

Average balances—Market View

                 
Average balances - Market View                 

Total loans held for investment

 $4,722 $4,046 $676 17%$4,692 $3,846 $846 22% $4,610
 $4,066
 $544
 13
% $4,713
 $3,943
 $770
 20
%

Total assets

 5,046 4,284 762 18 5,001 4,088 913 22  4,996
 4,344
 652
 15
 5,048
 4,197
 851
 20
 

Total deposits

 4,672 2,002 2,670 133 4,008 2,162 1,846 85  4,718
 2,594
 2,124
 82
 4,314
 2,634
 1,680
 64
 


Noninterest income and noninterest expense increased primarily due to fee income and related expenses associated with the business integration initiative. Net interest income increased due to the organic growth in average loans held for investment. The second quarter 2014reversal of provision for loan losses reflected a modest deterioration in certain customers' credit quality, which for the six months ended June 30, 2014 was offset by a reversal of the provision for loan losses driven by general improvement in overall customer credit quality.

Transaction Banking

Transaction Banking works alongside the Company'sCompany’s other segments to provide working capital management and asset servicing solutions, including deposits and treasury management, trade finance, and institutional trust and custody, to the Company'sCompany’s customers. This segment also manages the digital banking channels for retail, small business, wealth management and commercial clients, as well as commercial product development. The client base consists of financial institutions, corporations, government agencies, insurance companies, mutual funds, investment managers and non-profit organizations.


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The following tables set forth the results for the Transaction Banking segment:

Transaction Banking


 For the Three Months
Ended
June 30,
 Increase
(Decrease)
 For the Six Months
Ended
June 30,
 Increase
(Decrease)
 
Transaction BankingTransaction Banking               
 For the Three Months Ended 
 September 30,
 Increase (Decrease) For the Nine Months Ended 
 September 30,
 Increase (Decrease) 
(Dollars in millions) 2014 2013 Amount Percent 2014 2013 Amount Percent  2014 2013 Amount Percent 2014 2013 Amount Percent 

Results of operations—Market View

                 
Results of operations - Market View                 

Net interest income

 $94 $95 $(1) (1)%$194 $206 $(12) (6)% $110
 $108
 $2
 
% $323
 $335
 $(12) (4)%

Noninterest income

 39 41 (2) (5) 79 79    44
 41
 3
 10
 124
 120
 4
 3
 
                 

Total revenue

 133 136 (3) (2) 273 285 (12) (4) 154
 149
 5
 2
 447
 455
 (8) (2) 

Noninterest expense

 88 91 (3) (3) 177 184 (7) (4) 91
 87
 4
 5
 268
 271
 (3) (1) 

(Reversal of) provision for loan losses

 2 (4) 6 (150) 3 (3) 6 (200) (6) 4
 (10) (250) (3) 1
 (4) (400) 
                 

Income before income taxes and including noncontrolling interests

 43 49 (6) (12) 93 104 (11) (11) 69
 58
 11
 13
 182
 183
 (1) (1) 

Income tax expense

 17 20 (3) (15) 36 41 (5) (12) 27
 23
 4
 16
 71
 72
 (1) 
 
                 

Net income attributable to MUAH

 $26 $29 $(3) (10)$57 $63 $(6) (10) $42
 $35
 $7
 10
 $111
 $111
 $
 (1) 
                 
                 

Average balances—Market View

                 
Average balances - Market View                 

Total loans held for investment

 $173 $55 $118 215%$173 $53 $120 226% $101
 $53
 $48
 91
% $149
 $53
 $96
 181
%

Total assets

 1,722 1,401 321 23 1,641 1,439 202 14  1,822
 1,433
 389
 27
 1,702
 1,442
 260
 18
 

Total deposits

 34,894 31,785 3,109 10 34,254 32,097 2,157 7  36,436
 32,609
 3,827
 12
 34,990
 32,269
 2,721
 8
 


33



Transaction Banking earns revenue primarily from a net interest income transfer pricing credit on deposit liabilities, as well as service charges on deposit accounts and trust management fees. NetFor the nine months ended September 30, 2014, net interest income decreased as a result of a lower funds transfer pricing credit on Transaction Banking'sBanking’s deposit liabilities due to a lower cost of funds partially offset by larger average deposit balances. During the three and sixnine months ended JuneSeptember 30, 2014, average deposits increased 1012 percent and 78 percent compared to the same periods in 2013, reflecting organic growth and the impact of our First Bank Association Bank Services acquisition in the fourth quarter of 2013.

Investment Banking & Markets

Investment Banking & Markets, which includes Global Capital Markets, works with the Company'sCompany’s other segments to provide customers structured credit services, including project finance; foreign exchange, interest rate and energy risk management solutions; and to facilitate merchant and investment banking-related transactions. Additionally, the segment'ssegment’s leasing arm provides lease and other financing services to corporate customers.


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The following tables set forth the results for the Investment Banking & Markets segment:

Investment Banking & Markets


 For the Three Months
Ended
June 30,
 Increase
(Decrease)
 For the Six Months
Ended
June 30,
 Increase
(Decrease)
 
Investment Banking & MarketsInvestment Banking & Markets               
 For the Three Months Ended 
 September 30,
 Increase (Decrease) For the Nine Months Ended 
 September 30,
 Increase (Decrease) 
(Dollars in millions) 2014 2013 Amount Percent 2014 2013 Amount Percent  2014 2013 Amount Percent 2014 2013 Amount Percent 

Results of operations—Market View

                 
Results of operations - Market View                 

Net interest income

 $43 $43 $ %$89 $89 $ % $45
 $47
 $(2) (4)% $134
 $136
 $(2) (1)%

Noninterest income

 57 54 3 6 107 101 6 6  138
 39
 99
 254
 245
 140
 105
 75
 
                 

Total revenue

 100 97 3 3 196 190 6 3  183
 86
 97
 113
 379
 276
 103
 37
 

Noninterest expense

 28 25 3 12 55 50 5 10  54
 25
 29
 116
 109
 75
 34
 45
 

(Reversal of) provision for loan losses

 15 7 8 114 30 4 26 nm  (8) 5
 (13) (240) 23
 9
 14
 156
 
                 

Income before income taxes and including noncontrolling interests

 57 65 (8) (12) 111 136 (25) (18) 137
 56
 81
 143
 247
 192
 55
 29
 

Income tax expense

 12 17 (5) (29) 23 36 (13) (36) 42
 14
 28
 186
 63
 50
 13
 26
 
                 

Net income attributable to MUAH

 $45 $48 $(3) (6)$88 $100 $(12) (12) $95
 $42
 $53
 129
 $184
 $142
 $42
 30
 
                 
                 

Average balances—Market View

                 
Average balances - Market View                 

Total loans held for investment

 $4,006 $4,015 $(9) %$4,073 $4,151 $(78) (2)% $4,026
 $4,278
 $(252) (6)% $4,057
 $4,194
 $(137) (3)%

Total assets

 6,508 6,368 140 2 6,521 6,630 (109) (2) 6,825
 6,489
 336
 5
 6,624
 6,586
 38
 1
 

Total deposits

 3,401 3,399 2  3,474 3,338 136 4  3,270
 3,633
 (363) (10) 3,405
 3,438
 (33) (1) 


Noninterest income increased primarily due to fee income associated with the business integration initiative and merchant banking fees. Noninterest expense increased primarily due to expenses associated with the business integration initiative. The reversal of provision for loan losses during the third quarter of 2014 reflects an improvement in certain customers' credit quality. The provision for loan losses for the three and sixnine months ended JuneSeptember 30, 2014 increased due to modest deterioration in certain customers'customers’ credit quality.

Other

        "Other"

“Other” is comprised of certain corporate activities of the Company; the funds transfer pricing center and credits allocated to the reportable segments; the residual costs of support groups; the unallocated allowance; goodwill, intangible assets, and the related amortization/accretion associated with the Company'sCompany’s privatization transaction; the elimination of the fully taxable-equivalent basis amount; and the difference between the marginal tax rate and the consolidated effective tax rate. In addition, "Other"“Other” includes the Asian Corporate Banking segment, which offers a range of credit, deposit, and investment management products and services to companies located primarily in the U.S. that are affiliated with companies headquartered in Japan and other Asian countries; Corporate Treasury, which is responsible for ALM, wholesale funding, and the ALM investment securities and derivatives hedging portfolios; and the FDIC covered assets.



34



The following tables set forth the results for Other:

Other


 For the Three
Months
Ended June 30,
 Increase
(Decrease)
 For the Six Months
Ended June 30,
 Increase
(Decrease)
 
OtherOther               
 For the Three Months Ended 
 September 30,
 Increase (Decrease) For the Nine Months Ended 
 September 30,
 Increase (Decrease) 
(Dollars in millions) 2014 2013 Amount Percent 2014 2013 Amount Percent  2014 2013 Amount Percent 2014 2013 Amount Percent 

Results of operations—Market View

                 
Results of operations - Market View                 

Net interest income

 $36 $30 $6 20%$48 $31 $17 55% $19
 $9
 $10
 (100)% $48
 $20
 $28
 140
%

Noninterest income

 (6) (4) (2) (50) (13) 50 (63) (126) 86
 32
 54
 150
 72
 84
 (12) (14) 
                 

Total revenue

 30 26 4 15 35 81 (46) (57) 105
 41
 64
 270
 120
 104
 16
 15
 

Noninterest expense

 111 138 (27) (20) 235 291 (56) (19) 218
 151
 67
 44
 452
 442
 10
 2
 

(Reversal of) provision for loan losses

 3 3   (12) (24) 12 50  (13) 4
 (17) (317) (25) (18) (7) (39) 
                 

Income before income taxes and including noncontrolling interests

 (84) (115) 31 27 (188) (186) (2) (1) (100) (114) 14
 11
 (307) (320) 13
 4
 

Income tax expense

 (53) (48) (5) (10) (92) (72) (20) (28) (50) (58) 8
 11
 (148) (137) (11) (9) 
                 

Net income (loss) including noncontrolling interests

 (31) (67) 36 54 (96) (114) 18 16  (50) (56) 6
 12
 (159) (183) 24
 14
 

Deduct: net loss from noncontrolling interests

 4 3 1 33 9 7 2 29  5
 7
 (2) (29) 14
 14
 
 
 
                 

Net income attributable to MUAH

 $(27)$(64)$37 58 $(87)$(107)$20 19  $(45) $(49) $4
 10
 $(145) $(169) $24
 15
 
                 
                 

Average balances—Market View

                 
Average balances - Market View                 

Total loans held for investment

 $275 $538 $(263) (49)%$297 $490 $(193) (39)% $286
 $386
 $(100) (26)% $294
 $454
 $(160) (35)%

Total assets

 27,699 27,340 359 1 28,051 27,788 263 1  26,966
 26,591
 375
 1
 27,680
 27,383
 297
 1
 

Total deposits

 4,333 4,926 (593) (12) 4,529 4,773 (244) (5) 4,040
 4,584
 (544) (12) 4,360
 4,708
 (348) (7) 


For the sixthree months ended JuneSeptember 30, 2014, noninterest income decreased compared to the same period in 2013increased primarily due to a decrease in gains onfee income associated with the sale of securities, partially offset bybusiness integration initiative and a decrease in FDIC indemnification asset amortization expense, which is included within noninterest income.income, partially offset by a decrease in gains from the sale of securities. Noninterest expense decreasedincreased primarily due to a decrease in merger costs andexpenses associated with the business integration initiative, partially offset by lower pension expense during the three and six months ended June 30, 2014 compared to the same periods in 2013.expense. The reversal of the provision for loan losses in the sixnine months ended JuneSeptember 30, 2014 and 2013 reflects the decrease in the unallocated allowance which is included in Other. During the first quarter of 2014, the business segments'segments’ allowances for loan losses were updated to reflect various refinements in the methodology used to measure credit risk ascribed to their loan portfolios, which previously had been estimated within the unallocated allowance. During the first quarter of 2013, Commercial Banking'sBanking’s allowance for loan losses was updated to reflect an extension of the wholesale loss emergence period, which previously had been estimated within the unallocated allowance.

Critical Accounting Estimates

        MUAH's

MUAH’s Consolidated Financial Statements are prepared in accordance with U.S. GAAP, which include management estimates and judgments. The financial information contained within our statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. For example, we use discount factors and other assumptions to measure certain assets and liabilities. A change in the discount factor or other important assumptions could significantly increase or decrease the reported amounts of those assets and liabilities and result in either a beneficial or an adverse impact to our financial results. We use historical loss factors, adjusted for current conditions, to estimate the credit loss inherent in our loan and lease portfolios held for investment and certain off-balance sheet commitments on the balance sheet date. Actual losses could differ significantly from the loss factors that we use. Other significant estimates that we use include the valuation of certain derivatives and securities, the expected cash flows related to our acquired loans, and FDIC indemnification asset, the assumptions used in measuring our pension obligations, and assumptions regarding our effective tax rates.


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For each financial reporting period, our most significant estimates are presented to and discussed with the Audit & Finance Committee of our Board of Directors.


35


Understanding our accounting policies is fundamental to understanding our consolidated financial condition and consolidated results of operations. Accordingly, both our critical accounting estimates and our significant accounting policies are discussed in detail in our 2013 Form 10-K. There have been no material changes to these critical accounting estimates during the secondthird quarter of 2014.

Disclosure of Iranian Activities under Section 13(r) of the Securities Exchange Act of 1934

We are disclosing the following information pursuant to Section 13(r) of the U.S. Securities Exchange Act of 1934 (Exchange1934(Exchange Act), which requires an issuer to disclose whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with natural persons or entities designated by the U.S. government under specified Executive Orders. The scope of activities that must be reported includes activities not prohibited by U.S. law and conducted outside the United States in compliance with applicable local law. Because we are indirectly wholly-owned by MUFG, a Japanese corporation, our disclosure includes activities, transactions or dealings conducted outside the United States by non-U.S. affiliates of MUFG which are not controlled by us. We have requested that MUFG provide us a description of reportable activity under Section 13(r) and have received the following information:

During the quarter ended JuneSeptember 30, 2014, a non-U.S. affiliate of MUFG engaged in business activities with entities in or affiliated with Iran, including counterparties owned or controlled by the Iranian government. These activities were consistent with rules and regulations applicable to MUFG'sMUFG’s non-U.S. affiliate. Specifically, MUFG'sMUFG’s non-U.S. banking subsidiary, BTMU, issued letters of credit and guarantees and provided remittance and other settlement services mainly in connection with customer transactions related to the purchase and exportation of Iranian crude oil to Japan, and in some cases, in connection with other petroleum-related transactions with Iran by its customers. These transactions did not involve U.S. dollars nor clearing services of U.S. banks for the settlement of payments, and were reviewed for compliance with applicable U.S. and non-U.S. laws and regulations. For the quarter ended JuneSeptember 30, 2014, the aggregate interest and fee income relating to these transactions was less than ¥25¥35 million, representing less than 0.005 percent of MUFG'sMUFG’s total interest and fee income. Some of these transactions were conducted through the use of non-U.S. dollar correspondent accounts and other similar settlement accounts maintained with BTMU outside the United States by Iranian financial institutions and other entities in or affiliated with Iran. In addition to such accounts, BTMU receives deposits in Japan from and provides settlement services in Japan to fewer than ten Iranian government-related entities and fewer than 100 Iranian government-related individuals such as Iranian diplomats, and maintains settlement accounts outside the United States for certain other financial institutions specified in Executive Order 13382, which settlement accounts were frozen in accordance with applicable laws and regulations. For the quarter ended JuneSeptember 30, 2014, the average aggregate balance of deposits held in these accounts represented less than 0.05 percent of the average balance of MUFG'sMUFG’s total deposits. The fee income from the transactions attributable to these account holders was less than ¥1 million, representing less than 0.001 percent of MUFG'sMUFG’s total fee income. BTMU also holds loans that were arranged prior to changes in applicable laws and regulations to borrowers in or affiliated with Iran, including entities owned by the Iranian government, the outstanding balance of which was less than ¥500 million, representing less than 0.001 percent of MUFG'sMUFG’s total loans, as of JuneSeptember 30, 2014. For the quarter ended JuneSeptember 30, 2014, the aggregate gross interest and fee income relating to these loan transactions was less than ¥25 million, representing less than 0.005 percent of MUFG'sMUFG’s total interest and fee income.

In addition, in accordance with the Joint Plan of Action agreed to among the P5+1 (the United States, United Kingdom, Germany, France, Russia and China) and Iran in November 2013, BTMU has been providing settlement services in connection with humanitarian trade to assist Iran in meeting its domestic needs, namely food, agricultural products, medicine and medical devices, since April 2014. The overall framework for these settlement services was based on an agreement between U.S. and Japanese authorities, and the relevant U.S. regulator has authorized the settlement services as compliant with applicable U.S. laws and regulations. The


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purchasers of the humanitarian goods were entities in or affiliated with Iran, including entities related to the Iranian government. The sellers of the humanitarian goods were entities permitted by U.S. and Japanese regulators. These transactions did not involve U.S. dollars nor clearing services of U.S. banks for the settlement of payments. These transactions were conducted through the use of special purpose yen accounts maintained with BTMU outside the United States by an Iranian financial institution which is affiliated with the Iranian government but through which these transactions were permitted to be settled. We understand that BTMU intends to continue to provide the settlement services in connection with the exports of humanitarian goods to Iran in close coordination with U.S. and Japanese authorities.

We understand that BTMU will continue to limit its participation in these types of transactions mainly to arrange financing transactions relating to customer imports of Iranian crude oil into Japan or authorized exports of humanitarian goods to Iran, maintain accounts in Japan of Iranian entities and individuals, and obtain interest and fee income and repayment of principal in connection with existing loans to borrowers in or affiliated with Iran, in each case to the extent permitted by applicable laws and regulations.




36


Item 3.   Quantitative and Qualitative Disclosures About Market Risk

A discussion of our market risk exposure is incorporated by reference to Part I, Item 2. of this Form 10-Q10‑Q under the caption "Risk Management—“Risk Management - Market Risk Management"Management” and to Part II, Item 1A. of this Form 10-Q10‑Q under the caption "Risk“Risk Factors."

Item 4.   Controls and Procedures

Disclosure Controls and Procedures.Procedures. Our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) have concluded that the design and operation of our disclosure controls and procedures are effective as of JuneSeptember 30, 2014. This conclusion is based on an evaluation conducted under the supervision, and with the participation, of management. Disclosure controls and procedures are those controls and procedures that are designed to ensure that information required to be disclosed in this filing is recorded, processed, summarized and reported in a timely manner and in accordance with the SEC'sSEC’s rules and regulations and to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting.Reporting. During the secondthird quarter of 2014, there were no changes in our internal control over financial reporting that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.



37



PART I. FINANCIAL INFORMATION

Item 1.   Financial Statements


MUFG Americas Holdings Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)


 For the
Three Months
Ended June 30,
 For the
Six Months
Ended June 30,
  For the Three Months Ended 
 September 30,
 For the Nine Months Ended 
 September 30,
(Dollars in millions) 2014 2013 2014 2013  2014 2013 2014 2013

Interest Income

                 

Loans

 $749 $649 $1,416 $1,278  $693
 $668
 $2,109
 $1,946

Securities

 115 118 230 236  113
 118
 343
 354

Other

 3 2 8 5  2
 2
 10
 7
         

Total interest income

 867 769 1,654 1,519  808
 788
 2,462
 2,307
         

Interest Expense

                 

Deposits

 61 61 123 121  58
 63
 181
 184

Commercial paper and other short-term borrowings

 2 1 3 2  1
 2
 4
 4

Long-term debt

 41 35 82 71  42
 38
 124
 109
         

Total interest expense

 104 97 208 194  101
 103
 309
 297
         

Net Interest Income

 763 672 1,446 1,325  707
 685
 2,153
 2,010

(Reversal of) provision for loan losses

 9 (3) (7) (6) (18) (16) (25) (22)
         

Net interest income after (reversal of) provision for loan losses

 754 675 1,453 1,331  725
 701
 2,178
 2,032
         

Noninterest Income

                 

Service charges on deposit accounts

 50 52 101 105  52
 53
 153
 158

Trust and investment management fees

 26 38 52 73  26
 34
 78
 107

Trading account activities

 14 21 30 26  33
 15
 63
 41

Securities gains, net

 1 27 3 123  13
 47
 16
 170

Credit facility fees

 31 26 59 52  30
 31
 89
 83

Merchant banking fees

 27 23 51 39  38
 29
 89
 68

Brokerage commissions and fees

 13 11 26 22  14
 12
 40
 34

Card processing fees, net

 9 9 17 18  8
 8
 25
 26
Fees from affiliates 151
 
 151
 

Other, net

 31 (6) 44 (6) 23
 5
 67
 (1)
         

Total noninterest income

 202 201 383 452  388
 234
 771
 686
         

Noninterest Expense

                 

Salaries and employee benefits

 378 413 766 834  492
 391
 1,258
 1,225

Net occupancy and equipment

 75 84 146 159  74
 77
 220
 236

Professional and outside services

 63 62 118 120  66
 66
 184
 186

Intangible asset amortization

 13 17 26 33  13
 16
 39
 49

Regulatory assessments

 16 20 31 40  13
 20
 44
 60

(Reversal of) provision for losses on unfunded credit commitments

 (3) (2) 13 13  19
 1
 32
 14

Other

 107 108 209 216  128
 118
 337
 334
         

Total noninterest expense

 649 702 1,309 1,415  805
 689
 2,114
 2,104
         

Income before income taxes and including noncontrolling interests

 307 174 527 368  308
 246
 835
 614

Income tax expense

 62 35 112 85  67
 55
 179
 140
         

Net Income Including Noncontrolling Interests

 245 139 415 283  241
 191
 656
 474

Deduct: Net loss from noncontrolling interests

 4 3 9 7  5
 7
 14
 14
         

Net Income Attributable to MUFG Americas Holdings Corporation (MUAH)

 $249 $142 $424 $290  $246
 $198
 $670
 $488
         
         

See accompanying notes to consolidated financial statements.



38



MUFG Americas Holdings Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)


 For the Three
Months
Ended June 30,
 For the Six
Months
Ended June 30,
 For the Three Months Ended September 30, For the Nine Months Ended September 30,
(Dollars in millions) 2014 2013 2014 2013 2014 2013 2014 2013

Net Income Attributable to MUAH

 $249 $142 $424 $290 $246
 $198
 $670
 $488

Other Comprehensive Income (Loss), Net of Tax:

                

Net change in cash flow hedges

 25 (3) 16 (3)(40) 11
 (24) 8

Net change in securities

 87 (330) 155 (394)(22) (55) 133
 (449)

Net change in foreign currency translation adjustments

 2 (2)  (3)(3) 
 (3) (3)

Net change in pension and other postretirement benefits

 4 17 12 35 7
 18
 19
 53
         

Total other comprehensive income (loss)

 118 (318) 183 (365)(58) (26) 125
 (391)
         

Comprehensive Income (Loss) Attributable to MUAH

 367 (176) 607 (75)188
 172
 795
 97

Comprehensive loss from noncontrolling interests

 (4) (3) (9) (7)(5) (7) (14) (14)
         

Total Comprehensive Income (Loss)

 $363 $(179)$598 $(82)$183
 $165
 $781
 $83
         
         

See accompanying notes to consolidated financial statements.



39


MUFG Americas Holdings Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)

(Dollars in millions except for per share amount) June 30,
2014
 December 31,
2013
 
(Dollars in millions, except per share amount) September 30,
2014
 December 31,
2013

Assets

         

Cash and due from banks

 $1,911 $1,863  $1,593
 $1,863

Interest bearing deposits in banks

 2,353 4,329  2,772
 4,329

Federal funds sold and securities purchased under resale agreements

 65 11  154
 11
     

Total cash and cash equivalents

 4,329 6,203  4,519
 6,203

Trading account assets (includes $25 at June 30, 2014 and $8 at December 31, 2013 of assets pledged as collateral)

 941 851 
Trading account assets (includes $14 at September 30, 2014 and $8 at December 31, 2013 of assets pledged as collateral) 883
 851

Securities available for sale

 14,670 15,817  14,064
 15,817

Securities held to maturity (Fair value: June 30, 2014, $8,251; December 31, 2013, $6,439)

 8,177 6,509 
Securities held to maturity (Fair value $8,491 at September 30, 2014 and $6,439 at December 31, 2013) 8,458
 6,509

Loans held for investment

 72,369 68,312  74,635
 68,312

Allowance for loan losses

 (559) (568) (529) (568)
     

Loans held for investment, net

 71,810 67,744  74,106
 67,744

Premises and equipment, net

 632 688  617
 688

Goodwill

 3,227 3,228  3,227
 3,228

Other assets

 5,034 4,854  5,005
 4,854
     

Total assets

 $108,820 $105,894  $110,879
 $105,894
     
     

Liabilities

         

Deposits:

         

Noninterest bearing

 $27,446 $26,495  $28,676
 $26,495

Interest bearing

 54,120 53,606  53,680
 53,606
     

Total deposits

 81,566 80,101  82,356
 80,101

Commercial paper and other short-term borrowings

 2,870 2,563  3,876
 2,563

Long-term debt

 6,995 6,547  6,984
 6,547

Trading account liabilities

 664 540  596
 540

Other liabilities

 1,666 1,675  1,777
 1,675
     

Total liabilities

 93,761 91,426  95,589
 91,426
     

Commitments, contingencies and guarantees—See Note 13

     
Commitments, contingencies and guarantees—See Note 12 
  

Equity

 
 
 
 
     

MUAH stockholder's equity:

         

Preferred stock:

         

Authorized 5,000,000 shares; no shares issued or outstanding

    
 

Common stock, par value $1 per share:

         

Authorized 300,000,000 shares, 136,330,830 shares issued and outstanding as of June 30, 2014 and December 31, 2013

 136 136 
Authorized 300,000,000 shares, 136,330,831 shares issued and outstanding as of September 30, 2014 and 136,330,830 as of December 31, 2013 136
 136

Additional paid-in capital

 7,184 7,191  7,223
 7,191

Retained earnings

 7,936 7,512  8,191
 7,512

Accumulated other comprehensive loss

 (441) (624) (499) (624)
     

Total MUAH stockholder's equity

 14,815 14,215  15,051
 14,215

Noncontrolling interests

 244 253  239
 253
     

Total equity

 15,059 14,468  15,290
 14,468
     

Total liabilities and equity

 $108,820 $105,894  $110,879
 $105,894
     
     

See accompanying notes to consolidated financial statements.



40



MUFG Americas Holdings Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholder's Equity
(Unaudited)

 
 MUAH Stockholder's Equity  
  
 
(in millions, except shares) Common
Stock
 Additional
Paid-in
Capital
 Retained
Earnings
 Accumulated
Other
Comprehensive
Income (Loss)
 Noncontrolling
Interests
 Total
Equity
 

Balance December 31, 2012

 $136 $5,994 $6,845 $(514)$264 $12,725 
              

Net income (loss)

      290    (7) 283 

Other comprehensive income (loss), net of tax

        (365)   (365)

Compensation—restricted stock units

    (15)       (15)

Other

          13  13 
              

Net change

    (15) 290  (365) 6  (84)
              

Balance June 30, 2013

 $136 $5,979 $7,135 $(879)$270 $12,641 
              
              

Balance December 31, 2013

 $136 $7,191 $7,512 $(624)$253 $14,468 
              

Net income (loss)

      424    (9) 415 

Other comprehensive income (loss), net of tax

        183    183 

Compensation—restricted stock units

    (7)       (7)
              

Net change

    (7) 424  183  (9) 591 
              

Balance June 30, 2014

 $136 $7,184 $7,936 $(441)$244 $15,059 
              
              
  MUAH Stockholder's Equity    
(Dollars in millions) Common
Stock
 Additional
Paid-in
Capital
 Retained
Earnings
 Accumulated
Other
Comprehensive
Income (Loss)
 Noncontrolling
Interests
 Total
Equity
Balance December 31, 2012 $136
 $5,994
 $6,845
 $(514) $264
 $12,725
Net income (loss) 
 
 488
 
 (14) 474
Other comprehensive income (loss), net of tax 
 
 
 (391) 
 (391)
Compensation—restricted stock units 
 (9) 
 
 
 (9)
Other 
 
 
 
 8
 8
Net change 
 (9) 488
 (391) (6) 82
Balance September 30, 2013 $136
 $5,985
 $7,333
 $(905) $258
 $12,807
             
Balance December 31, 2013 $136
 $7,191
 $7,512
 $(624) $253
 $14,468
Net income (loss) 
 
 670
 
 (14) 656
Other comprehensive income (loss), net of tax 
 
 
 125
 
 125
Compensation—restricted stock units 
 1
 
 
 
 1
Capital contribution from BTMU(1)
 
 31
 
 
 
 31
Other(1)
 
 
 9
 
 
 9
Net change 
 32
 679
 125
 (14) 822
Balance September 30, 2014 $136
 $7,223
 $8,191
 $(499) $239
 $15,290

(1)    For additional information refer to Note 13 to these consolidated financial statements.
See accompanying notes to consolidated financial statements.



41



MUFG Americas Holdings Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)


 For the Six
Months
Ended June 30,
  For the Nine Months Ended September 30,
(Dollars in millions) 2014 2013  2014 2013

Cash Flows from Operating Activities:

         

Net income including noncontrolling interests

 $415 $283  $656
 $474

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 
 
 
 
     

(Reversal of) provision for loan losses

 (7) (6) (25) (22)

(Reversal of) provision for losses on unfunded credit commitments

 13 13  32
 14

Depreciation, amortization and accretion, net

 201 229  237
 381

Stock-based compensation—restricted stock units

 13 10  24
 15

Deferred income taxes

 71 (28) 88
 38

Net gains on sales of securities

 (3) (123) (16) (170)

Net decrease (increase) in trading account assets

 (90) 364  (31) 432

Net decrease (increase) in other assets

 106 145  309
 (63)

Net increase (decrease) in trading account liabilities

 124 (329) 56
 (281)

Net increase (decrease) in other liabilities

 (211) 64  (203) 50

Loans originated for sale

 (96) (52) (309) (183)

Net proceeds from sale of loans originated for sale

 181 76  327
 155

Pension and other benefits adjustment

 (91) (347) (80) (285)

Other, net

 (9) (9) (19) 33
     

Total adjustments

 202 7  390
 114
     

Net cash provided by (used in) operating activities

 617 290  1,046
 588
     

Cash Flows from Investing Activities:

         

Proceeds from sales of securities available for sale

 598 5,585  1,200
 8,109

Proceeds from paydowns and maturities of securities available for sale

 1,169 2,015  1,789
 2,925

Purchases of securities available for sale and held to maturity

 (2,426) (9,996) (3,627) (11,666)

Proceeds from paydowns and maturities of securities held to maturity

 374 212  773
 344

Purchases of premises and equipment

 (45) (53) (62) (84)

Proceeds from sales of loans

 190 199  330
 365

Net decrease (increase) in loans

 (4,270) (2,640) (6,690) (4,132)

Proceeds from FDIC loss share agreements

 (11) 7 
Proceeds from (payments to) FDIC under loss share agreements (12) 6

Net cash paid for acquisitions

  (3,688) 
 (3,688)

Other, net

 (270) 13  (421) 47
     

Net cash provided by (used in) investing activities

 (4,691) (8,346) (6,720) (7,774)
     

Cash Flows from Financing Activities:

         

Net increase (decrease) in deposits

 1,465 3,052  2,255
 5,111

Net increase (decrease) in commercial paper and other short-term borrowings

 307 2,429  1,313
 1,715

Proceeds from issuance of subordinated debt due to BTMU

  750  
 750

Proceeds from issuance of long-term debt

 749   749
 1,999

Repayment of long-term debt

 (300) (300) (305) (550)

Other, net

 (21) (25) (22) (26)

Change in noncontrolling interests

  13  
 8
     

Net cash provided by (used in) financing activities

 2,200 5,919  3,990
 9,007
     

Net change in cash and cash equivalents

 (1,874) (2,137) (1,684) 1,821

Cash and cash equivalents at beginning of period

 6,203 5,491  6,203
 5,491
     

Cash and cash equivalents at end of period

 $4,329 $3,354  $4,519
 $7,312
     
     

Cash Paid During the Period For:

     

Interest

 $210 $204 

Income taxes, net

 (13) 21 

Supplemental Schedule of Noncash Investing and Financing Activities:

     

Net transfer of loans held for investment to loans held for sale

 199 214 

Transfer of loans held for investment to other real estate owned assets (OREO)

  17 

See accompanying notes to consolidated financial statements.







MUFG Americas Holdings Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(Unaudited)
  For the Nine Months Ended September 30,
(Dollars in millions) 2014 2013
Cash Paid During the Period For:    
Interest $294
 $266
Income taxes, net 19
 25
Supplemental Schedule of Noncash Investing and Financing Activities:    
Net transfer of loans held for investment to loans held for sale 386
 381
Transfer of loans held for investment to other real estate owned assets 11
 30
Transfer of assets and liabilities from BTMU(1):
    
Carrying amount of assets acquired 70
 
Carrying amount of liabilities acquired 30
 
(1)    For additional information on the transfer of assets and liabilities from BTMU, refer to Note 13 to these consolidated financial statements.
See accompanying notes to consolidated financial statements.

42



Note 1—Summary of Significant Accounting Policies, Nature of Operations and Other Developments

MUFG Americas Holdings Corporation (MUAH) is a financial holding company and bank holding company whose principal subsidiary is MUFG Union Bank, N.A. (the Bank or MUB). MUAH provides a wide range of financial services to consumers, small businesses, middle-market companies and major corporations nationally and internationally. The unaudited Consolidated Financial Statements of MUFG Americas Holdings Corporation, its subsidiaries, and its consolidated variable interest entities (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial reporting and the instructions to Form 10-Q10‑Q and Rule 10-0110‑1 of Regulation S-X of the Rules and Regulations of the Securities and Exchange Commission (SEC). However, they do not include all of the disclosures necessary for annual financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. The results of operations for the secondthird quarter of 2014 are not necessarily indicative of the operating results anticipated for the full year. These unaudited Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements included in MUFG Americas Holdings Corporation'sour Annual Report on Form 10-K10‑K for the year ended December 31, 2013 (2013 Form 10-K)10‑K).

The preparation of financial statements in conformity with U.S. GAAP also requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Although such estimates contemplate current conditions and management'smanagement’s expectations of how they may change in the future, it is reasonably possible that actual results could differ significantly from those estimates. This could materially affect the Company'sCompany’s results of operations and financial condition in the near term. Significant estimates made by management in the preparation of the Company'sCompany’s financial statements include, but are not limited to, the fair value of assets acquired and liabilities assumed (Note 3)2), the evaluation of other-than-temporary impairment on investment securities (Note 4)3), the allowance for credit losses (Note 5)4), purchased credit-impaired loans (Note 5)4), goodwill impairment, pension accounting (Note 12), income taxes, fair value of financial instruments (Note 9)8), and hedge accounting (Note 10).

        MUFG Americas Holdings Corporation (MUAH) is a financial holding company9) and bank holding company whose principal subsidiary is MUFG Union Bank, N.A. (the Bank or MUB)pension accounting (Note 11). The Company provides a wide range of financial services to consumers, small businesses, middle-market companies and major corporations nationally and internationally. Effective July 1, 2014, the U.S. branch banking operations of the Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU) were integrated with the Bank. The integration did not involve a legal entity combination, but rather an integration of personnel and certain business activities. As part of this integration, approximately 2,300 U.S. employees of BTMU became employees of the Bank and BTMU's U.S. corporate customer list was transferred to the Bank. As a result, the Bank and BTMU entered into a master services agreement, which provides for employees of the Bank to perform and make available various business, banking, financial, and administrative and support services (the Services) and facilities for BTMU in connection with the operation and administration of BTMU's business in the U.S. (including BTMU's U.S. branches). In consideration for the Services, BTMU will pay to the Bank fee income, which will reflect market-based pricing. Costs related to the Services performed by the transferred employees will be recorded in salaries and benefits. While this initiative will have the effect of increasing noninterest income and noninterest expense, it is not expected to have a significant impact on the Company's net income, financial condition or capital ratios in the near term.

Recently Issued Accounting Pronouncements That Are Not Yet Effective

Accounting for Investments in Qualified Affordable Housing Projects

In January 2014, the FASBFinancial Accounting Standards Board (FASB) issued ASU 2014-01,Accounting Standards Update (ASU) 2014-1, Accounting for Investments in Qualified Affordable Housing Projects,whichamends guidance on the accounting for investments in qualified affordable housing projects and permits reporting entities to make an accounting policy election to account for investments in qualified affordable housing projects using the proportional amortization method, if certain conditions are met.


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Note 1—Summary of Significant Accounting Policies, Nature of Operations and Other Developments (Continued)

Under the proportional amortization method, reporting entities amortize the initial cost of the investment in proportion to tax credits and tax benefits received and recognize the amortization as a component of income tax expense. This guidance is effective for interim and annual periods beginning on January 1, 2015.2015 with early adoption permitted. The guidance is required to be applied retrospectively to all periods presented. Management is currently assessingpresented upon adoption. The Company does not expect the impactadoption of this guidance onto significantly impact the Company'sCompany’s financial position andor results of operations, and is considering adopting the standard in 2014.


Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure


In January 2014, the FASB issued ASU 2014-04,2014-4,Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, which provides guidance on when an in-substance repossession or foreclosure of residential real estate has occurred and when a creditor should derecognize the consumer mortgage loan and recognize the residential real estate. The guidance clarifies that an in-substance repossession or foreclosure occurs upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure, or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. In addition, the standard requires additional interim and annual disclosures. The guidance is effective for interim and annual periods beginning on January 1, 2015, with early adoption permitted.  Management does not expect the adoption of this guidance to significantly impact the Company'sCompany’s financial position or results of operations.


Presentation of Financial Statements and Property, Plant and Equipment and Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity


In April 2014, the FASB issued ASU 2014-08,2014-8, Presentation of Financial Statements and Property, Plant and Equipment and Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which amends the criteria for reporting discontinued operations and requires additional disclosures for discontinued operations which meet the new criteria. The amendments in ASU 2014-082014-8 limit discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have or will have a major effect on an entity'sentity’s operations and financial results. The guidance is effective for interim and

43

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Note 1—Summary of Significant Accounting Policies, Nature of Operations and Other Developments (Continued)

annual periods beginning on January 1, 2015 with early adoption permitted. Management does not expect the adoption of this guidance to significantly impact the Company'sCompany’s financial position andor results of operations.


Revenue from Contracts with Customers


In May 2014, the FASB issued ASU 2014-09,2014-9, Revenue from Contracts with Customers, which provides guidance on the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This standard applies to all contracts with customers, except financial instruments, guarantees, lease contracts, insurance contracts, and certain non-monetary exchanges. It provides the following five-step revenue recognition model: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. In addition, the standard requires additional disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The standard is effective for interim and annual periods beginning on January 1, 2017. Management is currently assessing the impact of this guidance on the Company'sCompany’s financial position and results of operations.


Table of ContentsT

Note 1—Summary of Significant Accounting Policies, Nature of Operationsransfers and Other Developments (Continued)


In June 2014, the FASB issued ASU 2014-11,Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures, which changes the accounting for repurchase-to-maturity transactions and repurchase financing arrangements. The guidance requires that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. Additionally, the guidance requires separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. It also requires enhanced disclosures about repurchase agreements and other similar transactions. The guidance is effective on January 1, 2015. Earlier application is prohibited. Management does not expect the adoption of this guidance to significantly impact the Company'sCompany’s financial position or results of operations.


Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period


In June 2014, the FASB issued ASU 2014-12,Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, which provides guidance that a performance target that affects vesting of a share-based payment and that could be achieved after the completion of the employee'semployee’s requisite service period is a performance condition under the accounting guidance for share-based awards.The standard clarifies that the performance target would not be reflected in estimating the fair value of the award at the grant date. Instead, compensation cost for the award would be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The guidance is effective for interim and annual periods beginning on January 1, 2016, with early adoption permitted. Management does not expect the adoption of this guidance to significantly impact the Company'sCompany’s financial position or results of operations.

Note 2—Correction


Classification of Prior Period Amounts

Certain Government-Guaranteed Residential Mortgage Loans upon Foreclosure


        DuringIn August 2014, the third quarterFASB issued ASU 2014-14, Classification of 2013,Certain Government-Guaranteed Residential Mortgage Loans upon Foreclosure, which provides guidance on the Company corrected prior period errors relatedaccounting for the classification of foreclosed loans that are fully-government-guaranteed.  The guidance clarifies that a residential mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the loan has both of the following characteristics: (1) The loan has a government guarantee that is not separable from the loan before foreclosure entitling the creditor to the recognitionfull unpaid principal balance of incomethe loan, and expense associated with market-linked certificates(2) At the time of deposit. These errors affected historicalforeclosure, the creditor has the intent to make a claim on the guarantee and the ability to recover the full unpaid principal balance of the loan through the guarantee.  The guidance is effective for interim and annual periods beginning in 2009 through June 30, 2013. The Company recognized certain noninterest income amounts inon January 1, 2015, with early adoption permitted.  Management does not expect the period in whichadoption of this guidance to significantly impact the market-linked certificatesCompany’s financial position or results of deposit originated. These amounts should have been deferred and recognized as a reduction of interest expense over the contractual term of the related certificates of deposit. These errors were not material to any of the Company's previously issued financial statements. In accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 108,operations.Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108), the consolidated statements of income and comprehensive income for the three and six months ended June 30, 2013 and changes in stockholder's equity for the year ended December 31, 2012 have been adjusted to reflect the correction of these errors.



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Note 1—Summary of Significant Accounting Policies, Nature of Operations and Other Developments (Continued)

Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity
In November 2014, the FASB issued ASU 2014-16,

Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity, which provides guidance on identifying whether the host contract in certain hybrid instruments is in the form of debt or equity. Such identification impacts the analysis of whether an embedded derivative exists in the instrument. The standard requires an entity to determine the nature of the host contract by considering all stated and implied substantive terms and features of the hybrid financial instrument, weighing each term and feature on the basis of the relevant facts and circumstances (commonly referred to as the whole-instrument approach). Under this approach, an entity would determine the nature of the host contract by considering the economic characteristics and risks of the entire hybrid financial instrument, including the embedded derivative feature that is being evaluated for separate accounting from the host contract. The guidance is effective for interim and annual periods beginning on January 1, 2016, with early adoption permitted. Management does not expect the adoption of this guidance to significantly impact the Company’s financial position or result of operations.


Note 2—Correction of Prior Period Amounts (Continued)

        The following tables show the affected line items within the consolidated financial statements:

Consolidated Statements of Income:

 
 For the Three Months Ended
June 30, 2013
 For the Six Months Ended
June 30, 2013
 
(Dollars in millions) As Previously
Reported
 Adjustment As
Corrected
 As Previously
Reported
 Adjustment As
Corrected
 

Net interest income

                   

Interest expense—deposits

 $67 $(6)$61 $132 $(11)$121 

Noninterest income

  
 
  
 
  
 
  
 
  
 
  
 
 

Trading account activities

  24  (3) 21  32  (6) 26 

Brokerage commissions and fees

  12  (1) 11  24  (2) 22 

Income before income taxes and including noncontrolling interests

  172  2  174  365  3  368 

Net Income Attributable to MUAH

  
141
  
1
  
142
  
288
  
2
  
290
 

Consolidated Balance Sheet and Statements of Changes in Stockholder's Equity:

 
 December 31, 2012 
(Dollars in millions) As Previously
Reported
 Adjustment As
Corrected
 

Retained earnings

 $6,875 $(30)$6,845 

Note 3—Business Combinations

Acquisition of PB Capital

Corporation

During the second quarter of 2013, the Company acquired PB Capital Corporation's (PB Capital)Corporation’s institutional commercial real estate (CRE) lending division for $3.7 billion in cash. The acquisition expands the Company'sCompany’s CRE presence in the U.S., and provides geographic and asset class diversification. Excluding the effects of purchase accounting adjustments, the Company acquired approximately $3.5 billion in loans. The final values of the assets acquired totaled $3.4 billion, resulting in goodwill of $238 million, which was allocated to the Company'sCompany’s Commercial Banking reporting segment.


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Note 4—3—Securities

Securities Available for Sale

At JuneSeptember 30, 2014 and December 31, 2013, the amortized cost, gross unrealized gains, gross unrealized losses, and fair values of securities are presented below.


 June 30, 2014  September 30, 2014
(Dollars in millions) Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Fair
Value
  
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value

Asset Liability Management securities:

                

U.S. government-sponsored agencies

 $ $ $ $ 
U.S. Treasury $70
 $
 $
 $70

Residential mortgage-backed securities:

                 

U.S. government agency and government-sponsored agencies

 8,281 3 127 8,157  7,886
 1
 148
 7,739

Privately issued

 188 4 1 191  175
 3
 1
 177

Privately issued—commercial mortgage-backed securities

 1,824 14 25 1,813 
Privately issued - commercial mortgage-backed securities 1,770
 9
 34
 1,745

Collateralized loan obligations

 2,543 13 22 2,534  2,438
 5
 21
 2,422

Asset-backed and other

 18 1  19  13
 1
 
 14
         

Asset Liability Management securities

 12,854 35 175 12,714  12,352
 19
 204
 12,167

Other debt securities:

                 

Direct bank purchase bonds

 1,888 42 33 1,897  1,819
 42
 28
 1,833

Other

 54  2 52  54
 
 2
 52

Equity securities

 6 1  7  10
 3
 1
 12
         

Total securities available for sale

 $14,802 $78 $210 $14,670  $14,235
 $64
 $235
 $14,064
         
         


45

 
 December 31, 2013 
(Dollars in millions) Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Fair
Value
 

Asset Liability Management securities:

             

U.S. government-sponsored agencies

 $73 $ $ $73 

Residential mortgage-backed securities:

             

U.S. government agency and government-sponsored agencies

  9,194  2  296  8,900 

Privately issued

  220  4  2  222 

Privately issued—commercial mortgage-backed securities

  1,947  8  85  1,870 

Collateralized loan obligations

  2,670  25  22  2,673 

Asset-backed and other

  34  1    35 
          

Asset Liability Management securities          

  14,138  40  405  13,773 

Other debt securities:

             

Direct bank purchase bonds

  1,968  35  43  1,960 

Other

  81    5  76 

Equity securities

  7  1    8 
          

Total securities available for sale

 $16,194 $76 $453 $15,817 
          
          

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Note 4—3—Securities (Continued)


  December 31, 2013
(Dollars in millions) 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Asset Liability Management securities:        
U.S. government-sponsored agencies $73
 $
 $
 $73
Residential mortgage-backed securities:        
U.S. government agency and government-sponsored agencies 9,194
 2
 296
 8,900
Privately issued 220
 4
 2
 222
Privately issued - commercial mortgage-backed securities 1,947
 8
 85
 1,870
Collateralized loan obligations 2,670
 25
 22
 2,673
Asset-backed and other 34
 1
 
 35
Asset Liability Management securities 14,138
 40
 405
 13,773
Other debt securities:        
Direct bank purchase bonds 1,968
 35
 43
 1,960
Other 81
 
 5
 76
Equity securities 7
 1
 
 8
Total securities available for sale $16,194
 $76
 $453
 $15,817

The Company'sCompany’s securities available for sale with a continuous unrealized loss position at JuneSeptember 30, 2014 and December 31, 2013 are shown below, identified for periods less than 12 months, and 12 months or more.


 June 30, 2014  September 30, 2014

 Less than 12 months 12 months or more Total  Less than 12 months 12 months or more Total
(Dollars in millions) Fair
Value
 Unrealized
Losses
 Fair
Value
 Unrealized
Losses
 Fair
Value
 Unrealized
Losses
  
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses

Asset Liability Management securities:

                         

Residential mortgage-backed securities:

                         

U.S. government agency and government-sponsored agencies

 $429 $1 $7,195 $126 $7,624 $127  $598
 $2
 $6,849
 $146
 $7,447
 $148

Privately issued

 7  56 1 63 1  10
 
 52
 1
 62
 1

Privately issued—commercial mortgage-backed securities

 115  931 25 1,046 25 
Privately issued - commercial mortgage-backed securities 219
 1
 922
 33
 1,141
 34

Collateralized loan obligations

 1,697 18 224 4 1,921 22  465
 2
 1,244
 19
 1,709
 21

Asset-backed and other

   1  1   
 
 1
 
 1
 
             

Asset Liability Management securities

 2,248 19 8,407 156 10,655 175  1,292
 5
 9,068
 199
 10,360
 204

Other debt securities:

                         

Direct bank purchase bonds

 301 7 939 26 1,240 33  190
 6
 865
 22
 1,055
 28

Other

   24 2 24 2  4
 
 22
 2
 26
 2

Equity securities

 5    5   2
 
 5
 1
 7
 1
             

Total securities available for sale

 $2,554 $26 $9,370 $184 $11,924 $210  $1,488
 $11
 $9,960
 $224
 $11,448
 $235
             
             


46

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Note 4—3—Securities (Continued)



 December 31, 2013  December 31, 2013

 Less than 12 months 12 months or more Total  Less than 12 months 12 months or more Total
(Dollars in millions) Fair
Value
 Unrealized
Losses
 Fair
Value
 Unrealized
Losses
 Fair
Value
 Unrealized
Losses
  
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses

Asset Liability Management securities:

                         

Residential mortgage-backed securities:

                         

U.S. government agency and government-sponsored agencies

 $8,508 $293 $147 $3 $8,655 $296  $8,508
 $293
 $147
 $3
 $8,655
 $296

Privately issued

 72 2 18  90 2  72
 2
 18
 
 90
 2

Privately issued—commercial mortgage-backed securities

 1,274 80 58 5 1,332 85 
Privately issued - commercial mortgage-backed securities 1,274
 80
 58
 5
 1,332
 85

Collateralized loan obligations

 1,879 21 10 1 1,889 22  1,879
 21
 10
 1
 1,889
 22

Asset-backed and other

   1  1   
 
 1
 
 1
 
             

Asset Liability Management securities

 11,733 396 234 9 11,967 405  11,733
 396
 234
 9
 11,967
 405

Other debt securities:

                         

Direct bank purchase bonds

 537 18 778 25 1,315 43  537
 18
 778
 25
 1,315
 43

Other

 15 1 34 4 49 5  15
 1
 34
 4
 49
 5

Equity securities

 5    5   5
 
 
 
 5
 
             

Total securities available for sale

 $12,290 $415 $1,046 $38 $13,336 $453  $12,290
 $415
 $1,046
 $38
 $13,336
 $453
             
             


At JuneSeptember 30, 2014, the Company did not have the intent to sell any securities in an unrealized loss position before a recovery of the amortized cost, which may be at maturity. The Company also believes that it is more likely than not that it will not be required to sell the securities prior to recovery of amortized cost.

Agency residential mortgage-backed securities consist of securities guaranteed by a U.S. government corporationagency or a government-sponsored enterprise (GSE)agency such as Fannie Mae, Freddie Mac, and Ginnie Mae. These securities are collateralized by residential mortgage loans and may be prepaid at par prior to maturity. The unrealized losses on agency residential mortgage-backed securities resulted from changes in interest rates and not from changes in credit quality. At JuneSeptember 30, 2014, the Company expects to recover the entire amortized cost basis of these securities because the Company determined that the strength of the issuers'issuers’ guarantees through direct obligations or support from the U.S. government is sufficient to protect the Company from losses.

Commercial mortgage-backed securities are collateralized by commercial mortgage loans and are generally subject to prepayment penalties. The unrealized losses on commercial mortgage-backed securities resulted from higher market yields since purchase. The Company estimated the unrealized loss for each security by assessing the loans collateralizing each security. The Company estimates the portion of loss attributable to credit based on the expected cash flowsCash flow analysis of the underlying collateral using estimatesprovides an estimate of current key assumptions, such as default rates, loss severity and prepayment rates.other-than-temporary impairment, which is performed quarterly when the fair value of a security is lower than its amortized cost. Based on the analysis performed as of JuneSeptember 30, 2014, the Company expects to recover the entire amortized cost basis of these securities.

The Company'sCompany’s collateralized loan obligations (CLOs) consist of Cash Flow CLOs. A Cash Flow CLO is a structured finance product that securitizes a diversified pool of loan assets into multiple classes of notes. Cash Flow CLOs pay the note holders through the receipt of interest and principal repayments from the underlying


Table of Contents

Note 4—Securities (Continued)

loans unlike other types of CLOs that pay note holders through the trading and sale of underlying collateral. Unrealized losses typically arise from widening credit spreads and deteriorating credit quality of the underlying collateral. Cash flow analysis of the underlying collateral provides an estimate of other-than-temporary impairment, which is performed quarterly when the fair value of a security is lower than its amortized cost. Based on the analysis performed as of JuneSeptember 30, 2014, the Company expects to recover the entire amortized cost basis of these securities.

Other debt securities primarily consist of direct bank purchase bonds, which are not rated by external credit rating agencies. The unrealized losses on these bonds resulted from a higher return on capital expected by the secondary market compared with the return on capital required at the time of origination when the bonds were purchased. The Company estimated the unrealized loss for each security by assessing the underlying collateral of each security. The Company estimates the portion of loss attributable to credit based on the expected cash flows of the underlying collateral using estimates of current key assumptions, such as probability of default and loss severity. Cash flow analysis of the underlying collateral provides an estimate of other-than-temporary impairment, which is performed quarterly when the fair value of a security is lower than its amortized cost and potential impairment is identified. Based on the analysis performed as of JuneSeptember 30, 2014, the Company expects to recover the entire amortized cost basis of these securities.


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Table of Contents

Note 3—Securities (Continued)

The fair value of debt securities available for sale by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.


 June 30, 2014  September 30, 2014
(Dollars in millions) One Year or Less Over One Year
Through Five
Years
 Over Five Years
Through Ten
Years
 Over Ten Years Total Fair Value  
One Year
or Less
 
Over One Year
Through
Five Years
 
Over Five Years
Through
Ten Years
 
Over
Ten Years
 
Total
Fair Value

Asset Liability Management securities:

                     

U.S. government-sponsored agencies

 $ $ $ $ $ 
U.S. Treasury $70
 $
 $
 $
 $70

Residential mortgage-backed securities:

                     

U.S. government agency and government-sponsored agencies

 1 35 559 7,562 8,157  
 15
 477
 7,247
 7,739

Privately issued

   5 186 191  
 4
 
 173
 177

Privately issued—commercial mortgage-backed securities

   35 1,778 1,813 
Privately issued - commercial mortgage-
backed securities
 
 
 35
 1,710
 1,745

Collateralized loan obligations

  263 467 1,804 2,534  
 146
 384
 1,892
 2,422

Asset-backed and other

  11 8  19  
 7
 7
 
 14
           

Asset Liability Management securities

 1 309 1,074 11,330 12,714  70
 172
 903
 11,022
 12,167

Other debt securities:

                     

Direct bank purchase bonds

 28 457 917 495 1,897  33
 640
 676
 484
 1,833

Other

  17 4 31 52  
 17
 4
 31
 52
           

Total debt securities available for sale

 $29 $783 $1,995 $11,856 $14,663  $103
 $829
 $1,583
 $11,537
 $14,052
           
           

Table of Contents

Note 4—Securities (Continued)

The proceeds from sales of securities available for sale and gross realized gains and losses are shown below. The specific identification method is used to calculate realized gains and losses on sales.


 For the Three
Months Ended
June 30,
 For the Six
Months Ended
June 30,
  For the Three Months Ended September 30, For the Nine Months Ended September 30,
(Dollars in millions) 2014 2013 2014 2013  2014 2013 2014 2013

Proceeds from sales

 $264 $487 $598 $5,585  $602
 $2,524
 $1,200
 $8,109

Gross realized gains

 6 27 8 126  13
 55
 21
 181

Gross realized losses

      
 3
 
 3



48


Note 3—Securities (Continued)

Securities Held to Maturity

The securities held to maturity consist of residential mortgage-backed securities, commercial mortgage-backed securities, U.S. Treasury securities and U.S. government-sponsored agencies. Management has asserted the positive intent and ability to hold these securities to maturity. At JuneSeptember 30, 2014 and December 31, 2013, the amortized cost, gross unrealized gains and losses recognized in other comprehensive income (OCI), carrying amount, gross unrealized gains and losses not recognized in OCI, and fair values of securities held to maturity are presented below.

 
 June 30, 2014 
 
  
 Recognized in OCI  
 Not Recognized in OCI  
 
(Dollars in millions) Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Carrying
Amount
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Fair
Value
 

U.S. government agency and government-sponsored agencies—residential mortgage backed securities

 $5,734 $6 $71 $5,669 $42 $13 $5,698 

U.S. government agency and government-sponsored agencies—commercial mortgage-backed securities

  1,836    87  1,749  48  5  1,792 

U.S. Treasury

  484      484  2    486 

U.S. government-sponsored agencies

  275      275  1  1  275 
                

Total securities held to maturity

 $8,329 $6 $158 $8,177 $93 $19 $8,251 
                
                
  September 30, 2014
    Recognized in OCI   Not Recognized in OCI  
(Dollars in millions) 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Carrying
Amount
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
U.S. Treasury $485
 $
 $
 $485
 $
 $1
 $484
U.S. government-sponsored agencies 125
 
 
 125
 
 
 125
U.S. government agency and government-sponsored agencies - residential mortgage-backed securities 6,165
 6
 69
 6,102
 30
 25
 6,107
U.S. government agency and government-sponsored agencies - commercial mortgage-backed securities 1,830
 
 84
 1,746
 37
 8
 1,775
Total securities held to maturity $8,605
 $6
 $153
 $8,458
 $67
 $34
 $8,491


 
 December 31, 2013 
 
  
 Recognized in OCI  
 Not Recognized in OCI  
 
(Dollars in millions) Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Carrying
Amount
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Fair
Value
 

U.S. government agency and government-sponsored agencies—residential mortgage backed securities

 $5,065 $7 $77 $4,995 $8 $69 $4,934 

U.S. government agency and government-sponsored agencies—commercial mortgage-backed securities

  1,606    92  1,514  3  12  1,505 
                

Total securities held to maturity

 $6,671 $7 $169 $6,509 $11 $81 $6,439 
                
                
  December 31, 2013
    Recognized in OCI   Not Recognized in OCI  
(Dollars in millions) 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Carrying
Amount
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
U.S. government agency and government-sponsored agencies - residential mortgage-backed securities $5,065
 $7
 $77
 $4,995
 $8
 $69
 $4,934
U.S. government agency and government-sponsored agencies - commercial mortgage-backed securities 1,606
 
 92
 1,514
 3
 12
 1,505
Total securities held to maturity $6,671
 $7
 $169
 $6,509
 $11
 $81
 $6,439


For securities held to maturity, the amount recognized in OCI primarily reflects the unrealized gain or loss at date of transfer to the held to maturity classification, net of amortization. Amortized cost is defined as the


Table of Contents

Note 4—Securities (Continued)

original purchase cost, adjusted for any accretion or amortization of a purchase discount or premium, less principal payments and any impairment previously recognized in earnings.


49

Table of Contents

Note 3—Securities (Continued)

The Company'sCompany’s securities held to maturity with a continuous unrealized loss position at JuneSeptember 30, 2014 and December 31, 2013 are shown below, separately for periods less than 12 months, and 12 months or more.

 
 June 30, 2014 
 
 Less than 12 months 12 months or more Total 
 
  
 Unrealized Losses  
 Unrealized Losses  
 Unrealized Losses 
(Dollars in millions) Fair
Value
 Recognized
in OCI
 Not
Recognized
in OCI
 Fair
Value
 Recognized
in OCI
 Not
Recognized
in OCI
 Fair
Value
 Recognized
in OCI
 Not
Recognized
in OCI
 

U.S. government agency and government-sponsored agencies—residential mortgage backed securities

 $496 $ $3 $2,758 $71 $10 $3,254 $71 $13 

U.S. government agency and government-sponsored agencies—commercial mortgage-backed securities

  146    1  1,456  87  4  1,602  87  5 

U.S. Treasury

                   

U.S. government-sponsored agencies

  150    1        150    1 
                    

Total securities held to maturity                

 $792 $ $5 $4,214 $158 $14 $5,006 $158 $19 
                    
                    
  September 30, 2014
  Less than 12 months 12 months or more Total
    Unrealized Losses   Unrealized Losses   Unrealized Losses
(Dollars in millions) 
Fair
Value
 
Recognized
in OCI
 
Not
Recognized
in OCI
 
Fair
Value
 
Recognized
in OCI
 
Not
Recognized
in OCI
 
Fair
Value
 
Recognized
in OCI
 
Not
Recognized
in OCI
U.S. Treasury $340
 $
 $1
 $
 $
 $
 $340
 $
 $1
U.S. government agency and government-sponsored agencies - residential mortgage-backed securities 1,520
 
 11
 2,609
 69
 14
 4,129
 69
 25
U.S. government agency and government-sponsored agencies - commercial mortgage-backed securities 138
 
 
 1,537
 84
 8
 1,675
 84
 8
Total securities held to maturity $1,998
 $
 $12
 $4,146
 $153
 $22
 $6,144
 $153
 $34


 
 December 31, 2013 
 
 Less than 12 months 12 months or more Total 
 
  
 Unrealized Losses  
 Unrealized Losses  
 Unrealized Losses 
(Dollars in millions) Fair
Value
 Recognized
in OCI
 Not
Recognized
in OCI
 Fair
Value
 Recognized
in OCI
 Not
Recognized
in OCI
 Fair
Value
 Recognized
in OCI
 Not
Recognized
in OCI
 

U.S. government agency and government-sponsored agencies—residential mortgage backed securities

 $3,873 $76 $68 $54 $1 $1 $3,927 $77 $69 

U.S. government agency and government-sponsored agencies—commercial mortgage-backed securities

  1,016  46  10  489  46  2  1,505  92  12 
                    

Total securities held to maturity                

 $4,889 $122 $78 $543 $47 $3 $5,432 $169 $81 
                    
                    
  December 31, 2013
  Less than 12 months 12 months or more Total
    Unrealized Losses   Unrealized Losses   Unrealized Losses
(Dollars in millions) 
Fair
Value
 
Recognized
in OCI
 
Not
Recognized
in OCI
 
Fair
Value
 
Recognized
in OCI
 
Not
Recognized
in OCI
 
Fair
Value
 
Recognized
in OCI
 
Not
Recognized
in OCI
U.S. government agency and government-sponsored agencies - residential mortgage-backed securities $3,873
 $76
 $68
 $54
 $1
 $1
 $3,927
 $77
 $69
U.S. government agency and government-sponsored agencies - commercial mortgage-backed securities 1,016
 46
 10
 489
 46
 2
 1,505
 92
 12
Total securities held to maturity $4,889
 $122
 $78
 $543
 $47
 $3
 $5,432
 $169
 $81

Table of Contents

Note 4—Securities (Continued)

The carrying amount and fair value of securities held to maturity by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.


50

Table of Contents

Note 3—Securities (Continued)

 
 June 30, 2014 
 
 Over One Year
Through Five
Years
 Over Five Years
Through Ten
Years
 Over Ten Years Total 
(Dollars in millions) Carrying
Amount
 Fair
Value
 Carrying
Amount
 Fair
Value
 Carrying
Amount
 Fair
Value
 Carrying
Amount
 Fair
Value
 

U.S. government agency and government-sponsored agencies—residential mortgage backed securities

 $2 $2 $ $ $5,667 $5,696 $5,669 $5,698 

U.S. government agency and government-sponsored agencies—commercial mortgage backed securities

  49  50  789  828  911  914  1,749  1,792 

U.S. Treasury

  244  245  240  241      484  486 

U.S. government-sponsored agencies

      275  275      275  275 
                  

Total securities held to maturity

 $295 $297 $1,304 $1,344 $6,578 $6,610 $8,177 $8,251 
                  
                  
  September 30, 2014
  
Over One Year
Through
Five Years
 
Over Five Years
Through
Ten Years
 Over Ten Years Total
(Dollars in millions) 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
U.S. Treasury $485
 $484
 $
 $
 $
 $
 $485
 $484
U.S. government-sponsored agencies 25
 25
 100
 100
 
 
 125
 125
U.S. government agency and government-sponsored agencies - residential mortgage-backed securities 2
 2
 
 
 6,100
 6,105
 6,102
 6,107
U.S. government agency and government-sponsored agencies - commercial mortgage-backed securities 49
 50
 791
 820
 906
 905
 1,746
 1,775
Total securities held to maturity $561
 $561
 $891
 $920
 $7,006
 $7,010
 $8,458
 $8,491


Securities Pledged as Collateral

Transactions involving purchases of securities under agreements to resell (reverse repurchase agreements or reverse repos) or sales of securities under agreements to repurchase (repurchase agreements or repos) are accounted for as collateralized financings except where the Company does not have an agreement to sell (or purchase) the same or substantially the same securities before maturity at a fixed or determinable price. The Company'sCompany’s policy is to obtain possession of collateral with a market value equal to or in excess of the principal amount loaned under resale agreements. Collateral is valued daily, and the Company may require counterparties to deposit additional collateral or return collateral pledged, when appropriate.

The Company separately identifies in the consolidated balance sheets, securities pledged as collateral in secured borrowings, and other arrangements when the secured party can sell or repledge the securities. If the secured party cannot resell or repledge the securities that have been placed as collateral, those securities are not separately identified. At JuneSeptember 30, 2014, the Company had $6.1$6.5 billion of securities available for sale pledged as collateral where the secured party cannot resell or repledge such securities. Available for sale securities of $0.6 billion have been pledged to secure borrowing, $0.3borrowings, $0.2 billion to support unrealized losses on derivative transactions reported in trading liabilities and $5.2$5.7 billion to secure public and trust deposits.

At JuneSeptember 30, 2014 and December 31, 2013, the Company accepted securities as collateral that it is permitted by contract to sell or repledge of $44$153 million (none($61 million of which has been repledged) and $10 million (none of which has been repledged), respectively. These securities were received as collateral for secured lending.

lending activities and are not recognized on the Company's balance sheet.


51


Table of Contents


Note 5—4—Loans and Allowance for Loan Losses

The following table provides the outstanding balances of loans at JuneSeptember 30, 2014 and December 31, 2013:

(Dollars in millions) June 30,
2014
 December 31,
2013
 

Loans held for investment:

       

Commercial and industrial

 $25,162 $23,528 

Commercial mortgage

  13,549  13,092 

Construction

  1,248  905 

Lease financing

  829  854 
      

Total commercial portfolio

  40,788  38,379 
      

Residential mortgage

  27,619  25,547 

Home equity and other consumer loans

  3,178  3,280 
      

Total consumer portfolio

  30,797  28,827 
      

Total loans held for investment, before purchased credit-impaired loans

  71,585  67,206 

Purchased credit-impaired loans(1)

  784  1,106 
      

Total loans held for investment(2)

  72,369  68,312 

Allowance for loan losses

  (559) (568)
      

Loans held for investment, net

 $71,810 $67,744 
      
      

(1)
Includes $199 million and $251 million as of June 30, 2014 and December 31, 2013 respectively, of loans for which the Company will be reimbursed a substantial portion of any future losses under the terms of the FDIC loss share agreements. Of these FDIC covered loans, $16 million and $15 million as of June 30, 2014 and December 31, 2013, respectively, were not accounted for under accounting guidance for loans acquired with deteriorated credit quality.
(2)
Includes $130 million and $88 million at June 30, 2014 and December 31, 2013, respectively, for net unamortized discounts and premiums and deferred fees and costs.
:
(Dollars in millions) September 30, 2014 December 31, 2013
Loans held for investment:    
Commercial and industrial $26,429
 $23,528
Commercial mortgage 13,766
 13,092
Construction 1,436
 905
Lease financing 811
 854
Total commercial portfolio 42,442
 38,379
Residential mortgage 28,425
 25,547
Home equity and other consumer loans 3,141
 3,280
Total consumer portfolio 31,566
 28,827
Total loans held for investment, before purchased credit-impaired loans 74,008
 67,206
Purchased credit-impaired loans(1)
 627
 1,106
Total loans held for investment(2)
 74,635
 68,312
Allowance for loan losses (529) (568)
Loans held for investment, net $74,106
 $67,744
(1)Includes $165 million and $251 million as of September 30, 2014 and December 31, 2013, respectively, of loans for which the Company will be reimbursed a portion of any future losses under the terms of the Federal Deposit Insurance Corporation (FDIC) loss share agreements. Of these FDIC covered loans, $13 million and $15 million as of September 30, 2014 and December 31, 2013, respectively, were not accounted for under accounting guidance for loans acquired with deteriorated credit quality.
(2)Includes $124 million and $88 million at September 30, 2014 and December 31, 2013, respectively, for net unamortized discounts and premiums and deferred fees and costs.

Allowance for Loan Losses


The following tables provide a reconciliation of changes in the allowance for loan losses by portfolio segment:


 For the Three Months Ended June 30, 2014  For the Three Months Ended September 30, 2014
(Dollars in millions) Commercial Consumer Purchased
Credit-
Impaired
 Unallocated Total  Commercial Consumer 
Purchased
Credit-
Impaired
 Unallocated Total

Allowance for loan losses, beginning of period

 $479 $55 $3 $20 $557  $482
 $49
 $3
 $25
 $559

(Reversal of) provision for loan losses

 7 (3)  5 9  (15) 2
 
 (5) (18)

Loans charged-off

 (8) (4)   (12) (15) (2) (1) 
 (18)

Recoveries of loans previously charged-off

 4 1   5  5
 
 1
 
 6
           

Allowance for loan losses, end of period

 $482 $49 $3 $25 $559  $457
 $49
 $3
 $20
 $529
           
           

  For the Three Months Ended September 30, 2013
(Dollars in millions) Commercial Consumer 
Purchased
Credit-
Impaired
 Unallocated Total
Allowance for loan losses, beginning of period $480
 $106
 $1
 $38
 $625
(Reversal of) provision for loan losses (27) (35) 
 46
 (16)
Decrease in allowance covered by FDIC
   indemnification
 
 
 (2) 
 (2)
Loans charged-off (9) (4) 
 
 (13)
Recoveries of loans previously charged-off 10
 2
 2
 
 14
Allowance for loan losses, end of period $454
 $69
 $1
 $84
 $608


52

Table of Contents

Note 5—4—Loans and Allowance for Loan Losses (Continued)



 For the Three Months Ended June 30, 2013  For the Nine Months Ended September 30, 2014
(Dollars in millions) Commercial Consumer Purchased
Credit-
Impaired
 Unallocated Total  Commercial Consumer 
Purchased
Credit-
Impaired
 Unallocated Total

Allowance for loan losses, beginning of period

 $486 $113 $1 $38 $638  $421
 $69
 $1
 $77
 $568

(Reversal of) provision for loan losses

 (3)    (3) 43
 (13) 
 (57) (27)

Decrease in allowance covered by FDIC indemnification

   (2)  (2)
Provision for purchased credit-impaired loan losses not subject to FDIC indemnification 
 
 2
 
 2
Other (1) 
 
 
 (1)

Loans charged-off

 (12) (8)   (20) (29) (9) (1) 
 (39)

Recoveries of loans previously charged-off

 9 1 2  12  23
 2
 1
 
 26
           

Allowance for loan losses, end of period

 $480 $106 $1 $38 $625  $457
 $49
 $3
 $20
 $529
           
           


 
 For the Six Months Ended June 30, 2014 
(Dollars in millions) Commercial Consumer Purchased
Credit-
Impaired
 Unallocated Total 

Allowance for loan losses, beginning of period

 $421 $69 $1 $77 $568 

(Reversal of) provision for loan losses

  58  (15)   (52) (9)

Provision for purchased credit-impaired loan losses not subject to FDIC indemnification

      2    2 

Other

  (1)       (1)

Loans charged-off

  (14) (7)     (21)

Recoveries of loans previously charged-off

  18  2      20 
            

Allowance for loan losses, end of period

 $482 $49 $3 $25 $559 
            
            



 For the Six Months Ended June 30, 2013  For the Nine Months Ended September 30, 2013
(Dollars in millions) Commercial Consumer Purchased
Credit-
Impaired
 Unallocated Total  Commercial Consumer 
Purchased
Credit-
Impaired
 Unallocated Total

Allowance for loan losses, beginning of period

 $418 $124 $1 $110 $653  $418
 $124
 $1
 $110
 $653

(Reversal of) provision for loan losses

 65 1  (72) (6) 38
 (34) 
 (26) (22)
Decrease in allowance covered by FDIC
indemnification
 
 
 (2) 
 (2)

Loans charged-off

 (15) (21) (3)  (39) (24) (25) (3) 
 (52)

Recoveries of loans previously charged-off

 12 2 3  17  22
 4
 5
 
 31
           

Allowance for loan losses, end of period

 $480 $106 $1 $38 $625  $454
 $69
 $1
 $84
 $608
           
           

Table of Contents

Note 5—Loans and Allowance for Loan Losses (Continued)

The following tables show the allowance for loan losses and related loan balances by portfolio segment as of JuneSeptember 30, 2014 and December 31, 2013:

2013:


 June 30, 2014  September 30, 2014
(Dollars in millions) Commercial Consumer Purchased
Credit-
Impaired
 Unallocated Total  Commercial Consumer 
Purchased
Credit-
Impaired
 Unallocated Total

Allowance for loan losses:

                     

Individually evaluated for impairment

 $43 $20 $ $ $63  $27
 $17
 $
 $
 $44

Collectively evaluated for impairment

 439 29  25 493  430
 32
 
 20
 482

Purchased credit-impaired loans

   3  3  
 
 3
 
 3
           

Total allowance for loan losses

 $482 $49 $3 $25 $559  $457
 $49
 $3
 $20
 $529
           
                     

Loans held for investment:

                     

Individually evaluated for impairment

 $284 $334 $2 $ $620  $187
 $337
 $2
 $
 $526

Collectively evaluated for impairment

 40,504 30,463   70,967  42,255
 31,229
 
 
 73,484

Purchased credit-impaired loans

   782  782  
 
 625
 
 625
           

Total loans held for investment

 $40,788 $30,797 $784 $ $72,369  $42,442
 $31,566
 $627
 $
 $74,635
           
           


53
 
 December 31, 2013 
(Dollars in millions) Commercial Consumer Purchased
Credit-
Impaired
 Unallocated Total 

Allowance for loan losses:

                

Individually evaluated for impairment

 $19 $20 $ $ $39 

Collectively evaluated for impairment

  402  49    77  528 

Purchased credit-impaired loans

      1    1 
            

Total allowance for loan losses

 $421 $69 $1 $77 $568 
            
            

Loans held for investment:

                

Individually evaluated for impairment

 $266 $339 $3 $ $608 

Collectively evaluated for impairment

  38,113  28,488      66,601 

Purchased credit-impaired loans

      1,103    1,103 
            

Total loans held for investment

 $38,379 $28,827 $1,106 $ $68,312 
            
            


Table of Contents

Note 5—4—Loans and Allowance for Loan Losses (Continued)


  December 31, 2013
(Dollars in millions) Commercial Consumer 
Purchased
Credit-
Impaired
 Unallocated Total
Allowance for loan losses:          
Individually evaluated for impairment $19
 $20
 $
 $
 $39
Collectively evaluated for impairment 402
 49
 
 77
 528
Purchased credit-impaired loans 
 
 1
 
 1
Total allowance for loan losses $421
 $69
 $1
 $77
 $568
           
Loans held for investment:          
Individually evaluated for impairment $266
 $339
 $3
 $
 $608
Collectively evaluated for impairment 38,113
 28,488
 
 
 66,601
Purchased credit-impaired loans 
 
 1,103
 
 1,103
Total loans held for investment $38,379
 $28,827
 $1,106
 $
 $68,312

Nonaccrual and Past Due Loans

The following table presents nonaccrual loans as of JuneSeptember 30, 2014 and December 31, 2013:

2013
:

(Dollars in millions) June 30,
2014
 December 31,
2013
  September 30, 2014 December 31, 2013

Commercial and industrial

 $161 $44  $71
 $44

Commercial mortgage

 47 51  34
 51
     

Total commercial portfolio

 208 95  105
 95
     

Residential mortgage

 243 286  239
 286

Home equity and other consumer loans

 46 46  46
 46
     

Total consumer portfolio

 289 332  285
 332
     

Total nonaccrual loans, before purchased credit-impaired loans

 497 427  390
 427

Purchased credit-impaired loans

 17 15  13
 15
     

Total nonaccrual loans

 $514 $442  $403
 $442
     
     

Troubled debt restructured loans that continue to accrue interest

 $297 $367  $300
 $367
     
     

Troubled debt restructured nonaccrual loans (included in the total nonaccrual loans above)

 $248 $225  $189
 $225
     
     



54

Table of Contents
Note 4—Loans and Allowance for Loan Losses (Continued)

The following table shows an aging of the balance of loans held for investment, excluding purchased credit-impaired loans, by class as of JuneSeptember 30, 2014 and December 31, 2013:

2013
:



 June 30, 2014  September 30, 2014

 Aging Analysis of Loans  Aging Analysis of Loans
(Dollars in millions) Current 30 to 89
Days Past
Due
 90 Days
or More
Past Due
 Total Past
Due
 Total  Current 
30 to 89
Days Past
Due
 
90 Days
or More
Past Due
 
Total Past
Due
 Total

Commercial and industrial

 $25,946 $33 $12 $45 $25,991  $27,126
 $91
 $23
 $114
 $27,240

Commercial mortgage

 13,444 98 7 105 13,549  13,715
 45
 6
 51
 13,766

Construction

 1,248    1,248  1,432
 4
 
 4
 1,436
           

Total commercial portfolio

 40,638 131 19 150 40,788  42,273
 140
 29
 169
 42,442
           

Residential mortgage

 27,419 120 80 200 27,619  28,231
 118
 76
 194
 28,425

Home equity and other consumer loans

 3,144 17 17 34 3,178  3,109
 18
 14
 32
 3,141
           

Total consumer portfolio

 30,563 137 97 234 30,797  31,340
 136
 90
 226
 31,566
           

Total loans held for investment, excluding purchased credit-impaired loans

 $71,201 $268 $116 $384 $71,585  $73,613
 $276
 $119
 $395
 $74,008
           
           
  December 31, 2013
  Aging Analysis of Loans
(Dollars in millions) Current 
30 to 89
Days Past
Due
 
90 Days
or More
Past Due
 
Total
Past
Due
 Total
Commercial and industrial $24,310
 $66
 $6
 $72
 $24,382
Commercial mortgage 13,004
 68
 20
 88
 13,092
Construction 891
 14
 
 14
 905
  Total commercial portfolio 38,205
 148
 26
 174
 38,379
Residential mortgage 25,342
 114
 91
 205
 25,547
Home equity and other consumer loans 3,238
 23
 19
 42
 3,280
  Total consumer portfolio 28,580
 137
 110
 247
 28,827
   Total loans held for investment, excluding
        purchased credit-impaired loans
 $66,785
 $285
 $136
 $421
 $67,206

Table of Contents

Note 5—Loans and Allowance for Loan Losses (Continued)

 
 December 31, 2013 
 
 Aging Analysis of Loans 
(Dollars in millions) Current 30 to 89
Days Past
Due
 90 Days
or More
Past Due
 Total Past
Due
 Total 

Commercial and industrial

 $24,310 $66 $6 $72 $24,382 

Commercial mortgage

  13,004  68  20  88  13,092 

Construction

  891  14    14  905 
            

Total commercial portfolio

  38,205  148  26  174  38,379 
            

Residential mortgage

  25,342  114  91  205  25,547 

Home equity and other consumer loans

  3,238  23  19  42  3,280 
            

Total consumer portfolio

  28,580  137  110  247  28,827 
            

Total loans held for investment, excluding purchased credit-impaired loans

 $66,785 $285 $136 $421 $67,206 
            
            

Loans 90 days or more past due and still accruing totaled $11$4 million and $5 million at JuneSeptember 30, 2014 and December 31, 2013, respectively. Purchased credit-impaired loans that were 90 days or more past due and still accruing totaled $103$65 million and $124 million at JuneSeptember 30, 2014 and December 31, 2013, respectively.

Management analyzes the Company'sCompany’s loan portfolios by applying specific monitoring policies and procedures that vary according to the relative risk profile and other characteristics within the various loan portfolios. For further information related to the credit quality indicators the Company uses to monitor the portfolio, see Note 5 to the Consolidated Financial Statements in Part II, Item 8. "Financial“Financial Statements and Supplementary Data"Data” in our 2013 Form 10-K.


55

Table of Contents
Note 4—Loans and Allowance for Loan Losses (Continued)

The following tables summarize the loans in the commercial portfolio segment and commercial loans within the purchased credit-impaired loans segment monitored for credit quality based on internal ratings, excluding $167$135 million and $213 million covered by Federal Deposit Insurance Corporation (FDIC)FDIC loss share agreements, at JuneSeptember 30, 2014 and December 31, 2013, respectively. The amounts presented reflect unpaid principal balances less charge-offs.



 June 30, 2014  September 30, 2014
(Dollars in millions) Pass Special Mention Classified Total  Pass Special Mention Classified Total

Commercial and industrial

 $24,701 $603 $439 $25,743  $26,271
 $552
 $340
 $27,163

Construction

 1,254 9  1,263  1,416
 21
 
 1,437

Commercial mortgage

 12,975 182 217 13,374  13,240
 140
 192
 13,572
         

Total commercial portfolio

 38,930 794 656 40,380  40,927
 713
 532
 42,172

Purchased credit-impaired loans

 49 127 187 363  43
 51
 160
 254
         

Total

 $38,979 $921 $843 $40,743  $40,970
 $764
 $692
 $42,426
         
         

Table of Contents

Note 5—Loans and Allowance for Loan Losses (Continued)



 December 31, 2013  December 31, 2013
(Dollars in millions) Pass Special Mention Classified Total  Pass Special Mention Classified Total

Commercial and industrial

 $23,346 $576 $313 $24,235  $23,346
 $576
 $313
 $24,235

Construction

 879 14  893  879
 14
 
 893

Commercial mortgage

 12,562 142 228 12,932  12,562
 142
 228
 12,932
         

Total commercial portfolio

 36,787 732 541 38,060  36,787
 732
 541
 38,060

Purchased credit-impaired loans

 48 204 362 614  48
 204
 362
 614
         

Total

 $36,835 $936 $903 $38,674  $36,835
 $936
 $903
 $38,674
         
         


The Company monitors the credit quality of its consumer portfolio segment and consumer loans within the purchased credit-impaired loans segment based primarily on payment status. The following tables summarize the loans in the consumer portfolio segment and purchased credit-impaired loans segment, which excludes $32$30 million and $38 million of loans covered by FDIC loss share agreements, at JuneSeptember 30, 2014 and December 31, 2013, respectively:


 June 30, 2014  September 30, 2014
(Dollars in millions) Accrual Nonaccrual Total  Accrual Nonaccrual Total

Residential mortgage

 $27,376 $243 $27,619  $28,186
 239
 $28,425

Home equity and other consumer loans

 3,132 46 3,178  3,095
 46
 3,141
       

Total consumer portfolio

 30,508 289 30,797  31,281
 285
 31,566

Purchased credit-impaired loans

 222  222  208
 
 208
       

Total

 $30,730 $289 $31,019  $31,489
 $285
 $31,774
       
       



 December 31, 2013  December 31, 2013
(Dollars in millions) Accrual Nonaccrual Total  Accrual Nonaccrual Total

Residential mortgage

 $25,261 $286 $25,547  $25,261
 $286
 $25,547

Home equity and other consumer loans

 3,234 46 3,280  3,234
 46
 3,280
       

Total consumer portfolio

 28,495 332 28,827  28,495
 332
 28,827

Purchased credit-impaired loans

 242  242  242
 
 242
       

Total

 $28,737 $332 $29,069  $28,737
 $332
 $29,069
       
       


The Company also monitors the credit quality for substantially all of its consumer portfolio segment using credit scores provided by Fair Isaac Corporation (FICO) and refreshed loan-to-value (LTV) ratios. FICO credit scores are refreshed at least quarterly to monitor the quality of the portfolio. Refreshed LTV measures the principal balance of the loan as a percentage of the estimated current value of the property securing the loan. Home equity loans are evaluated using combined LTV, which measures

56

Table of Contents
Note 4—Loans and Allowance for Loan Losses (Continued)

the principal balance of the combined loans that have liens against the property (including unused credit lines for home equity products) as a percentage of the estimated current value of the property securing the loans. The LTV ratios are refreshed on a quarterly basis, using the most recent home pricing index (HPI) data available for the property location.


The following tables summarize the loans in the consumer portfolio segment and consumer loans within the purchased credit-impaired loans segment monitored for credit quality based on refreshed FICO scores and refreshed LTV ratios at JuneSeptember 30, 2014 and December 31, 2013.2013. These tables exclude loans covered by FDIC


Table of Contents

Note 5—Loans and Allowance for Loan Losses (Continued)

loss share agreements, as discussed above. The amounts presented reflect unpaid principal balances less partial charge-offs.

 
 June 30, 2014 
 
 FICO scores 
(Dollars in millions) 720 and above Below 720 No FICO
Available(1)
 Total 

Residential mortgage

 $21,339 $5,554 $515 $27,408 

Home equity and other consumer loans

  2,248  790  80  3,118 
          

Total consumer portfolio

  23,587  6,344  595  30,526 

Purchased credit-impaired loans

  87  123  12  222 
          

Total

 $23,674 $6,467 $607 $30,748 
          
          

Percentage of total

  77% 21% 2% 100%


 
 December 31, 2013 
 
 FICO scores 
(Dollars in millions) 720 and above Below 720 No FICO
Available(1)
 Total 

Residential mortgage

 $19,614 $5,301 $459 $25,374 

Home equity and other consumer loans

  2,283  839  81  3,203 
          

Total consumer portfolio

  21,897  6,140  540  28,577 

Purchased credit-impaired loans

  94  135  15  244 
          

Total

 $21,991 $6,275 $555 $28,821 
          
          

Percentage of total

  76% 22% 2% 100%

  September 30, 2014
  FICO scores
(Dollars in millions) 720 and above Below 720 
No FICO
Available(1)
 Total
Residential mortgage $22,103
 $5,604
 $488
 $28,195
Home equity and other consumer loans 2,209
 777
 83
 3,069
  Total consumer portfolio 24,312
 6,381
 571
 31,264
Purchased credit-impaired loans 84
 110
 14
 208
  Total $24,396
 $6,491
 $585
 $31,472
Percentage of total 77% 21% 2% 100%
(1)
Represents loans for which management was not able to obtain an updated FICO score (e.g., due to recent profile changes).


 June 30, 2014  December 31, 2013

 LTV ratios  FICO scores
(Dollars in millions) Less than
80 Percent
 80-100 Percent Greater than
100 Percent
 No LTV
Available(1)
 Total  720 and above Below 720 
No FICO
Available(1)
 Total

Residential mortgage

 $25,486 $1,733 $134 $55 $27,408  $19,614
 $5,301
 $459
 $25,374

Home equity loans

 2,445 299 149 51 2,944 
           
Home equity and other consumer loans 2,283
 839
 81
 3,203

Total consumer portfolio

 27,931 2,032 283 106 30,352  21,897
 6,140
 540
 28,577

Purchased credit-impaired loans

 150 50 20  220  94
 135
 15
 244
           

Total

 $28,081 $2,082 $303 $106 $30,572  $21,991
 $6,275
 $555
 $28,821
           
           

Percentage of total

 92% 7% 1% % 100% 76% 22% 2% 100%
(1)Represents loans for which management was not able to obtain an updated FICO score (e.g., due to recent profile changes).

  September 30, 2014
  LTV ratios
(Dollars in millions) Less than 80
Percent
 80-100 Percent Greater than 100 Percent 
No LTV
Available(1)
 Total
Residential mortgage $26,442
 $1,611
 $101
 $41
 $28,195
Home equity loans 2,412
 276
 129
 49
 2,866
Total consumer portfolio 28,854
 1,887
 230
 90
 31,061
Purchased credit-impaired loans 142
 44
 20
 
 206
Total $28,996
 $1,931
 $250
 $90
 $31,267
Percentage of total 93% 6% 1% % 100%


57

Table of Contents

Note 5—4—Loans and Allowance for Loan Losses (Continued)


 
 December 31, 2013 
 
 LTV ratios 
(Dollars in millions) Less than
80 Percent
 80-100 Percent Greater than
100 Percent
 No LTV
Available(1)
 Total 

Residential mortgage

 $23,209 $1,884 $228 $53 $25,374 

Home equity loans

  2,487  362  202  52  3,103 
            

Total consumer portfolio

  25,696  2,246  430  105  28,477 

Purchased credit-impaired loans

  152  57  31    240 
            

Total

 $25,848 $2,303 $461 $105 $28,717 
            
            

Percentage of total

  90% 8% 2% % 100%

(1)
Represents loans for which management was not able to obtain refreshed property values.
  December 31, 2013
  LTV ratios
(Dollars in millions) 
Less than 80
Percent
 80-100 Percent 
Greater than 100
Percent
 
No LTV
Available(1)
 Total
Residential mortgage $23,209
 $1,884
 $228
 $53
 $25,374
Home equity loans 2,487
 362
 202
 52
 3,103
Total consumer portfolio 25,696
 2,246
 430
 105
 28,477
Purchased credit-impaired loans 152
 57
 31
 
 240
Total $25,848
 $2,303
 $461
 $105
 $28,717
Percentage of total 90% 8% 2% % 100%

The following table provides a summary of the Company'sCompany’s recorded investment in troubled debt restructurings (TDRs) as of JuneSeptember 30, 2014 and December 31, 2013.2013. The summary includes those TDRs that are on nonaccrual status and those that continue to accrue interest. The Company had $52$31 million and $43 million in commitments to lend additional funds to borrowers with loan modifications classified as TDRs as of JuneSeptember 30, 2014 and December 31, 2013, respectively.

(Dollars in millions) June 30,
2014
 December 31,
2013
 

Commercial and industrial

 $173 $212 

Commercial mortgage

  36  38 
      

Total commercial portfolio

  209  250 
      

Residential mortgage

  308  315 

Home equity and other consumer loans

  26  24 
      

Total consumer portfolio

  334  339 
      

Total restructured loans, excluding purchased credit-impaired loans(1)

 $543 $589 
      
      

(1)
Amounts exclude $2 million and $3 million of TDRs covered by FDIC loss share agreements at June 30, 2014 and December 31, 2013, respectively.

(Dollars in millions) September 30, 2014 December 31, 2013
Commercial and industrial $125
 $212
Commercial mortgage 26
 38
Total commercial portfolio 151
 250
Residential mortgage 306
 315
Home equity and other consumer loans 30
 24
Total consumer portfolio 336
 339
Total restructured loans, excluding purchased credit-impaired loans(1)
 $487
 $589
(1)Amounts exclude $2 million and $3 million of TDRs covered by FDIC loss share agreements at September 30, 2014 and December 31, 2013, respectively.

For the secondthird quarter of 2014, TDR modifications in the commercial portfolio segment were primarily composed of interest rate changes, maturity extensions, covenant waivers, conversions from revolving lines of credit to term loans, or some combination thereof. In the consumer portfolio segment, primarily all of the modifications were composed of interest rate reductions and maturity extensions. There were no charge-offs of $2 million related to TDR modifications for the sixnine months ended JuneSeptember 30, 2014 and none for the year ended December 31, 2013. For the commercial and consumer portfolio segments, the allowance for loan losses for TDRs is measured on an individual loan basis or in pools with similar risk characteristics.



58

Note 5—4—Loans and Allowance for Loan Losses (Continued)


The following table provides the pre- and post-modification outstanding recorded investment amounts of TDRs as of the date of the restructuring that occurred during the three and sixnine months ended JuneSeptember 30, 2014 and 2013:

 
 For the Three Months Ended
June 30, 2014
 For the Six Months Ended
June 30, 2014
 
(Dollars in millions) Pre-Modification
Outstanding Recorded
Investment(1)
 Post-Modification
Outstanding Recorded
Investment(2)
 Pre-Modification
Outstanding Recorded
Investment(1)
 Post-Modification
Outstanding Recorded
Investment(2)
 

Commercial and industrial

 $76 $76 $80 $80 

Commercial mortgage

  7  7  18  18 
          

Total commercial portfolio

  83  83  98  98 
          

Residential mortgage

  4  4  10  9 

Home equity and other consumer loans

  2  2  4  4 
          

Total consumer portfolio

  6  6  14  13 
          

Total

 $89 $89 $112 $111 
          
          
  For the Three Months Ended September 30, 2014 For the Nine Months Ended September 30, 2014
(Dollars in millions) 
Pre-Modification
Outstanding
Recorded
Investment
(1)
 
Post-Modification
Outstanding
Recorded
Investment
(2)
 
Pre-Modification
Outstanding
Recorded
Investment
(1)
 
Post-Modification
Outstanding
Recorded
Investment
(2)
Commercial and industrial $25
 $25
 $105
 $105
Commercial mortgage 2
 2
 20
 20
Total commercial portfolio 27
 27
 125
 125
Residential mortgage 7
 7
 17
 16
Home equity and other consumer loans 5
 5
 9
 9
Total consumer portfolio 12
 12
 26
 25
Total $39
 $39
 $151
 $150

(1)Represents the recorded investment in the loan immediately prior to the restructuring event.
(2)Represents the recorded investment in the loan immediately following the restructuring event. It includes the effect of paydowns that were required as part of the restructuring terms.
  For the Three Months Ended September 30, 2013 For the Nine Months Ended September 30, 2013
(Dollars in millions) 
Pre-Modification
Outstanding
Recorded
Investment
(1)
 
Post-Modification
Outstanding
Recorded
Investment
(2)
 
Pre-Modification
Outstanding
Recorded
Investment
(1)
 
Post-Modification
Outstanding
Recorded
Investment
(2)
Commercial and industrial $2
 $2
 $127
 $124
Commercial mortgage 45
 45
 60
 60
Total commercial portfolio 47
 47
 187
 184
Residential mortgage 20
 20
 75
 74
Home equity and other consumer loans 2
 2
 6
 5
Total consumer portfolio 22
 22
 81
 79
Total $69
 $69
 $268
 $263
(1)Represents the recorded investment in the loan immediately prior to the restructuring event.
(2)Represents the recorded investment in the loan immediately following the restructuring event. It includes the effect of paydowns that were required as part of the restructuring terms.

Amounts above exclude TDRs covered by FDIC loss share agreements with pre-modification and post-modification balances of $3 million and $3 million, respectively, for the three and nine months ended September 30, 2014. There were no restructurings related to loans covered by FDIC loss share agreements for the three and nine months ended September 30, 2013.

59

(1)
Represents the recorded investment in the loan immediately prior to the restructuring event.
(2)
Represents the recorded investment in the loan immediately following the restructuring event. It includes the effect of paydowns that were required as part of the restructuring terms.
Note 4—Loans and Allowance for Loan Losses (Continued)

 
 For the Three Months Ended
June 30, 2013
 For the Six Months Ended
June 30, 2013
 
(Dollars in millions) Pre-Modification
Outstanding Recorded
Investment(1)
 Post-Modification
Outstanding Recorded
Investment(2)
 Pre-Modification
Outstanding Recorded
Investment(1)
 Post-Modification
Outstanding Recorded
Investment(2)
 

Commercial and industrial

 $49 $47 $125 $121 

Commercial mortgage

  4  4  15  15 
          

Total commercial portfolio

  53  51  140  136 
          

Residential mortgage

  30  30  55  54 

Home equity and other consumer loans

  3  2  4  3 
          

Total consumer portfolio

  33  32  59  57 
          

Total

 $86 $83 $199 $193 
          
          

(1)
Represents the recorded investment in the loan immediately prior to the restructuring event.
(2)
Represents the recorded investment in the loan immediately following the restructuring event. It includes the effect of paydowns that were required as part of the restructuring terms.

The following table provides the recorded investment amounts of TDRs at the date of default, for which there was a payment default during the three and sixnine months ended JuneSeptember 30, 2014 and 2013, and where the


Table of Contents

Note 5—Loans and Allowance for Loan Losses (Continued)

default occurred within the first twelve months after modification into a TDR. A payment default is defined as the loan being 60 days or more past due.

(Dollars in millions) For the Three
Months Ended
June 30,
2014
 For the Six
Months Ended
June 30,
2014
  For the Three Months Ended September 30, 2014 For the Nine Months Ended September 30, 2014

Commercial and industrial

 $6 $6  $4
 $10

Commercial mortgage

 3 3  4
 7
     

Total commercial portfolio

 9 9  8
 17
     

Residential mortgage

 2 4  1
 5

Home equity and other consumer loans

  1  
 1
     

Total consumer portfolio

 2 5  1
 6
     

Total

 $11 $14  $9
 $23
     
     


(Dollars in millions) For the Three
Months Ended
June 30,
2013
 For the Six
Months Ended
June 30,
2013
  For the Three Months Ended September 30, 2013 For the Nine Months Ended September 30, 2013

Commercial and industrial

 $3 $8  $2
 $10
     

Total commercial portfolio

 3 8  2
 10
     

Residential mortgage

 7 9  3
 12

Home equity and other consumer loans

 1 1  
 1
     

Total consumer portfolio

 8 10  3
 13
     

Total

 $11 $18  $5
 $23
     
     


For the consumer portfolio, historical payment defaults and the propensity to redefault are some of the factors considered when determining the allowance for loan losses for situations where impairment is measured using the present value of expected future cash flows discounted at the loan'sloan’s effective interest rate.

Loan Impairment

Loans that are individually evaluated for impairment include larger nonaccruing loans within the commercial and industrial, construction, commercial mortgage loan portfolios and loans modified in a TDR. WhenThe Company records an impairment allowance, when the value of an impaired loan is less than the recorded investment in the loan, the Company records an impairment allowance.

loan.

Table of Contents

Note 5—Loans and Allowance for Loan Losses (Continued)

The following tables show information about impaired loans by class as of JuneSeptember 30, 2014 and December 31, 2013:

 
 June 30, 2014 
 
 Recorded Investment  
 Unpaid Principal Balance 
(Dollars in millions) With an
Allowance
 Without an
Allowance
 Total Allowance
for Impaired
Loans
 With an
Allowance
 Without an
Allowance
 

Commercial and industrial

 $242 $4 $246 $40 $250 $7 

Commercial mortgage

  31  7  38  3  35  9 
              

Total commercial portfolio

  273  11  284  43  285  16 
              

Residential mortgage

  215  93  308  20  231  107 

Home equity and other consumer loans

  5  21  26    6  35 
              

Total consumer portfolio

  220  114  334  20  237  142 
              

Total, excluding purchased credit-impaired loans

  493  125  618  63  522  158 

Purchased credit-impaired loans

  2    2    2  1 
              

Total

 $495 $125 $620 $63 $524 $159 
              
              



 December 31, 2013  September 30, 2014

 Recorded Investment  
 Unpaid Principal Balance  Recorded Investment   Unpaid Principal Balance
(Dollars in millions) With an
Allowance
 Without an
Allowance
 Total Allowance
for Impaired
Loans
 With an
Allowance
 Without an
Allowance
  
With an
Allowance
 
Without
an
Allowance
 Total 
Allowance
for Impaired
Loans
 
With an
Allowance
 
Without
an
Allowance

Commercial and industrial

 $117 $104 $221 $16 $121 $114  $123
 $36
 $159
 $25
 $144
 $39

Commercial mortgage

 33 12 45 3 36 15  28
 
 28
 2
 32
 
             

Total commercial portfolio

 150 116 266 19 157 129  151
 36
 187
 27
 176
 39
             

Residential mortgage

 220 95 315 20 236 108  195
 111
 306
 17
 208
 128

Home equity and other consumer loans

 4 20 24  4 34  6
 25
 31
 
 7
 38
             

Total consumer portfolio

 224 115 339 20 240 142  201
 136
 337
 17
 215
 166
             

Total, excluding purchased credit-impaired loans

 374 231 605 39 397 271  352
 172
 524
 44
 391
 205

Purchased credit-impaired loans

 2 1 3  2 6  1
 1
 2
 
 1
 2
             

Total

 $376 $232 $608 $39 $399 $277  $353
 $173
 $526
 $44
 $392
 $207
             
             


60

Table of Contents

Note 5—4—Loans and Allowance for Loan Losses (Continued)


  December 31, 2013
  Recorded Investment   Unpaid Principal Balance
(Dollars in millions) 
With an
Allowance
 
Without
an
Allowance
 Total 
Allowance
for Impaired
Loans
 
With an
Allowance
 
Without
an
Allowance
Commercial and industrial $117
 $104
 $221
 $16
 $121
 $114
Commercial mortgage 33
 12
 45
 3
 36
 15
Total commercial portfolio 150
 116
 266
 19
 157
 129
Residential mortgage 220
 95
 315
 20
 236
 108
Home equity and other consumer loans 4
 20
 24
 
 4
 34
Total consumer portfolio 224
 115
 339
 20
 240
 142
Total, excluding purchased credit-impaired loans             374
 231
 605
 39
 397
 271
Purchased credit-impaired loans 2
 1
 3
 
 2
 6
Total $376
 $232
 $608
 $39
 $399
 $277

The following table presents the average recorded investment in impaired loans and the amount of interest income recognized for impaired loans during the three and sixnine months ended JuneSeptember 30, 2014 and 2013 for the commercial, consumer and purchased credit-impaired loans portfolio segments.



 For the Three Months Ended June 30, For the Six Months Ended June 30,  For the Three Months Ended September 30, For the Nine Months Ended September 30,

 2014 2013 2014 2013  2014 2013 2014 2013
(Dollars in millions) Average
Recorded
Investment
 Recognized
Interest
Income
 Average
Recorded
Investment
 Recognized
Interest
Income
 Average
Recorded
Investment
 Recognized
Interest
Income
 Average
Recorded
Investment
 Recognized
Interest
Income
  
Average
Recorded
Investment
 
Recognized
Interest
Income
 
Average
Recorded
Investment
 
Recognized
Interest
Income
 
Average
Recorded
Investment
 
Recognized
Interest
Income
 
Average
Recorded
Investment
 
Recognized
Interest
Income

Commercial and industrial

 $219 $1 $265 $5 $219 $4 $250 $8  $203
 $
 $257
 $2
 $204
 $4
 $249
 $8

Commercial mortgage

 35  53 1 37 2 60 1  33
 
 48
 
 35
 2
 56
 1

Construction

  1 2   1 13   
 
 2
 
 
 1
 10
 
                 

Total commercial portfolio

 254 2 320 6 256 7 323 9  236
 
 307
 2
 239
 7
 315
 9
                 

Residential mortgage

 310 3 288 2 312 6 282 5  307
 2
 300
 3
 310
 8
 287
 8

Home equity and other consumer loans

 26  22 1 25 1 21 1  28
 
 23
 
 27
 1
 22
 1
                 

Total consumer portfolio

 336 3 310 3 337 7 303 6  335
 2
 323
 3
 337
 9
 309
 9
                 
���

Total, excluding purchased credit-impaired loans

 590 5 630 9 593 14 626 15  571
 2
 630
 5
 576
 16
 624
 18

Purchased credit-impaired loans

 2  4  2  4   2
 
 4
 
 2
 
 4
 
                 

Total

 $592 $5 $634 $9 $595 $14 $630 $15  $573
 $2
 $634
 $5
 $578
 $16
 $628
 $18
                 
                 


The Company transferred a net $199$386 million and $214$381 million of loans from held for investment to held for sale and sold $190$330 million and $199$365 million in loans during the sixnine months ended JuneSeptember 30, 2014 and 2013, respectively.


Loans Acquired in Business Combinations

The Company accounts for certain loans acquired in business combinations in accordance with accounting guidance related to loans acquired with deteriorated credit quality (purchased credit-impaired loans). The following table presents the outstanding balances and carrying amounts of the Company'sCompany’s purchased credit-impaired loans as of JuneSeptember 30, 2014 and December 31, 2013.

(Dollars in millions) June 30,
2014
 December 31,
2013
 

Total outstanding balance

 $1,196 $1,733 
      
      

Carrying amount

 $768 $1,091 
      
      
(Dollars in millions) September 30, 2014 December 31, 2013
Total outstanding balance $1,054
 $1,733
Carrying amount $614
 $1,091



61

Table of Contents
Note 4—Loans and Allowance for Loan Losses (Continued)

The accretable yield for purchased credit-impaired loans for the three and sixnine months ended JuneSeptember 30, 2014 and 2013 was as follows:


 For the Three
Months Ended
June 30,
 For the Six
Months Ended
June 30,
  For the Three Months Ended September 30, For the Nine Months Ended September 30,
(Dollars in millions) 2014 2013 2014 2013  2014 2013 2014 2013

Accretable yield, beginning of period

 $382 $501 $378 $590  $347
 $479
 $378
 $590

Additions

  31  31  
 
 
 31

Accretion

 (118) (81) (178) (160) (47) (81) (225) (241)

Reclassifications from nonaccretable difference during the period

 83 28 147 18  14
 17
 161
 35
         

Accretable yield, end of period

 $347 $479 $347 $479  $314
 $415
 $314
 $415
         
         


Table of Contents

Note 6—5—Variable Interest Entities

In the normal course of business, the Company has certain financial interests in entities which have been determined to be variable interest entities (VIEs). Generally, a VIE is a corporation, partnership, trust or other legal structure where the equity investors do not have substantive voting rights, an obligation to absorb the entity'sentity’s losses or the right to receive the entity'sentity’s returns, or the ability to direct the significant activities of the entity. The following discusses the Company'sCompany’s consolidated and unconsolidated VIEs.

Consolidated VIEs

The following tables present the assets and liabilities of consolidated VIEs recorded on the Company'sCompany’s consolidated balance sheet at JuneSeptember 30, 2014.

2014
.


 June 30, 2014 

 Consolidated Assets  
  
  
 

 Consolidated Liabilities  September 30, 2014

 Interest
Bearing
Deposits in
Banks
 Loans
Held for
Investment,
net
  
  
  Consolidated Assets Consolidated Liabilities
(Dollars in millions) Other
Assets
 Total
Assets
 Long-Term
Debt
 Other
Liabilities
 Total
Liabilities
  Interest Bearing Deposits in Banks Loans Held for Investment, net Other Assets Total Assets Long-Term Debt Other Liabilities Total Liabilities

Low-income housing credit investments

 $9 $ $251 $260 $4 $ $4  $9
 $
 $239
 $248
 $
 $
 $

Leasing investments

 5 712 101 818  83 83  6
 654
 157
 817
 
 80
 80
               

Total consolidated VIEs

 $14 $712 $352 $1,078 $4 $83 $87  $15
 $654
 $396
 $1,065
 $
 $80
 $80
               
               


The Company sponsors, manages and syndicates two LIHC investment fund structures. These investments are designed to generate a return primarily through the realization of U.S. federal tax credits and deductions. The Company is considered a primary beneficiary and has consolidated these investments because the Company has the power to direct activities that most significantly impact the funds'funds’ economic performances and also has the obligation to absorb losses of the funds that could potentially be significant to the funds. Neither creditors nor equity investors in the LIHC investments have any recourse to the general credit of the Company, and the Company'sCompany’s creditors do not have any recourse to the assets of the consolidated LIHC investments.


Leasing Investments


The Company has leasing investments primarily in the wind, rail and coal industries. The Company is considered the primary beneficiary and has consolidated these investments because the Company has the power to direct the activities of these entities that significantly impact the entities'entities’ economic performances. The Company also has the right to receive potentially significant benefits or the obligation to absorb potentially significant losses of these entities.

investments.


62

Note 5—Variable Interest Entities (Continued)

Unconsolidated VIEs

The following table presents the Company'sCompany’s carrying amounts related to the unconsolidated VIEs and location on the consolidated balance sheetssheet at JuneSeptember 30, 2014.2014. The table also presents the Company'sCompany’s maximum exposure to loss resulting from its involvement with these VIEs. The maximum exposure to loss


Table of Contents

Note 6—Variable Interest Entities (Continued)

represents the carrying amount of the Company'sCompany’s involvement plus any legally binding unfunded commitments in the unlikely event that all of the assets in the VIEs become worthless.


 June 30, 2014  September 30, 2014

 Unconsolidated Assets Unconsolidated
Liabilities
  
  Unconsolidated Assets Unconsolidated Liabilities  
(Dollars in millions) Securities
Available
for Sale
 Loans
Held for
Investment
 Other
Assets
 Total
Assets
 Other
Liabilities
 Total
Liabilities
 Maximum
Exposure to
Loss
  Securities Available for Sale Loans Held for Investment Other Assets Total Assets Other Liabilities Total Liabilities Maximum Exposure to Loss

LIHC investments

 $26 $132 $1,053 $1,211 $398 $398 $1,211  $25
 $137
 $1,020
 $1,182
 $352
 $352
 $1,182

Leasing investments

  44 838 882   898  
 43
 832
 875
 
 
 892

Other investments

  21 27 48   50  
 21
 29
 50
 
 
 52
               

Total unconsolidated VIEs

 $26 $197 $1,918 $2,141 $398 $398 $2,159  $25
 $201
 $1,881
 $2,107
 $352
 $352
 $2,126
               
               

The Company makes investments in partnerships and funds formed by third parties. The primary purpose of the partnerships and funds is to invest in low-income housing units and distribute tax credits and tax benefits associated with the underlying properties to investors. The Company is a limited partner investor and is allocated tax credits and deductions, but has no voting or other rights to direct the activities of the funds, and therefore is not considered the primary beneficiary and does not consolidate these investments.


Leasing Investments

The unconsolidated VIEs related to leasing investments are primarily renewable energy investments. Through its subsidiaries, the Company makes equity investments in LLCs established by a third party sponsor. The LLCs are created to operate and manage wind, solar, hydroelectric and cogeneration power plant projects. Power generated by the projects is sold to third parties through long-term purchase power agreements. As a limited investor member, the Company is allocated production tax credits and taxable income or losses associated with the projects. The Company has no voting or other rights to direct the activities of the LLCs, and therefore is not considered the primary beneficiary and does not consolidate these entities.


Other Investments

The Company has direct equity investments in structures formed by third parties. The Company has no voting or other rights to direct the activities of the investments that would most significantly impact the entities'entities’ performance, and therefore is not considered the primary beneficiary and does not consolidate these entities.investments.


Note 7—6—Commercial Paper and Other Short-Term Borrowings

The following table is a summary of the Company's commercial paper and other short-term borrowings:

(Dollars in millions) June 30,
2014
 December 31,
2013
 

Federal funds purchased and securities sold under repurchase agreements with weighted average interest rates of 0.11% and 0.07% at June 30, 2014 and December 31, 2013

 $137 $39 

Commercial paper, with weighted average interest rates of 0.16% and 0.19% at June 30, 2014 and December 31, 2013, respectively

  2,733  2,524 
      

Total commercial paper and other short-term borrowings

 $2,870 $2,563 
      
      
(Dollars in millions) September 30, 2014 December 31, 2013
Federal funds purchased and securities sold under repurchase agreements, with weighted average interest rates of 0.09% and 0.07% at September 30, 2014 and December 31, 2013 $302
 $39
Commercial paper, with weighted average interest rates of 0.14% and 0.19% at September 30, 2014 and December 31, 2013, respectively 3,322
 2,524
 Term federal funds purchased, with a weighted average interest rate of 0.14% at September 30, 2014 252
 
Total commercial paper and other short-term borrowings $3,876
 $2,563


63

Table of Contents


Note 8—7—Long-Term Debt

The following is a summary of the Company's long-term debt:

(Dollars in millions) June 30,
2014
 December 31,
2013
 

Debt issued by MUFG Americas Holdings Corporation

       

Senior debt:

       

Fixed rate 3.50% notes due June 2022

 $397 $397 

Subordinated debt:

       

Floating rate subordinated debt due December 2023. This note, which bears interest at 1.38% above 3-month LIBOR, had a rate of 1.61% at June 30, 2014 and 1.63% at December 31, 2013

  300  300 

Junior subordinated debt payable to trusts(1):

       

Floating rate notes with maturities ranging from March 2033 to September 2036. These notes bear a combined weighted-average rate of 2.57% at June 30, 2014 and 2.60% at December 31, 2013

  66  66 
      

Total debt issued by MUFG Americas Holdings Corporation

  763  763 
      

Debt issued by MUFG Union Bank, N.A. and other subsidiaries

       

Senior debt:

       

Fixed and floating Federal Home Loan Bank advances with maturities ranging from February 2015 to February 2016. These notes bear a combined weighted-average rate of 2.56% at June 30, 2014 and 2.55% at December 31, 2013

 $800 $800 

Floating rate notes due June 2014. These notes, which bear interest at 0.95% above 3-month LIBOR, had a rate of 1.19% at December 31, 2013

    300 

Fixed rate 3.00% notes due June 2016

  699  699 

Fixed rate 1.50% notes due September 2016

  499  499 

Floating rate notes due September 2016. These notes, which bear interest at 0.75% above 3-month LIBOR, had a rate of 0.98% at June 30, 2014 and 1.00% at December 31, 2013

  500  500 

Fixed rate 2.125% notes due June 2017

  499  499 

Fixed rate 2.625% notes due September 2018

  1,000  1,000 

Fixed rate 2.250% notes due May 2019

  502   

Floating rate notes due May 2017. These notes, which bear interest at 0.40% above 3-month LIBOR, had a rate of 0.62% at June 30, 2014

  250   

Note payable:

       

Fixed rate 6.03% notes due July 2014 (related to consolidated VIE)

  4  4 

Subordinated debt:

       

Fixed rate 5.95% notes due May 2016

  715  718 

Subordinated debt due to BTMU:

       

Floating rate subordinated debt due June 2023. This note, which bears interest at 1.2% above 3-month LIBOR, had a rate of 1.43% at June 30, 2014 and 1.45% at December 31, 2013

  750  750 

Capital lease obligations with a combined weighted-average interest rate of 4.88% at both June 30, 2014 and December 31, 2013

  14  15 
      

Total debt issued by MUFG Union Bank, N.A. and other subsidiaries

  6,232  5,784 
      

Total long-term debt

 $6,995 $6,547 
      
      
(Dollars in millions) September 30, 2014 December 31, 2013
Debt issued by MUFG Americas Holdings Corporation    
Senior debt:    
Fixed rate 3.50% notes due June 2022 $398
 $397
Subordinated debt:    
Floating rate subordinated debt due December 2023. This note, which bears interest at 1.38% above 3-month LIBOR, had a rate of 1.61% at September 30, 2014 and 1.63% at December 31, 2013 300
 300
Junior subordinated debt payable to trusts(1):
    
Floating rate notes with maturities ranging from March 2033 to September 2036. These notes bear a combined weighted-average rate of 2.58% at September 30, 2014 and 2.60% at December 31, 2013 66
 66
Total debt issued by MUFG Americas Holdings Corporation 764
 763
Debt issued by MUFG Union Bank, N.A. and other subsidiaries    
Senior debt:    
Fixed Federal Home Loan Bank advances with maturities ranging from February 2015 to February 2016. These notes bear a combined weighted-average rate of 2.56% at September 30, 2014 and 2.55% at December 31, 2013 $800
 $800
Floating rate notes due June 2014. These notes, which bear interest at 0.95% above 3-month LIBOR, had a rate of 1.19% at December 31, 2013 
 300
Fixed rate 3.00% notes due June 2016 699
 699
Fixed rate 1.50% notes due September 2016 499
 499
Floating rate notes due September 2016. These notes, which bear interest at 0.75% above 3-month LIBOR, had a rate of 0.99% at September 30, 2014 and 1.00% at December 31, 2013 500
 500
Fixed rate 2.125% notes due June 2017 499
 499
Fixed rate 2.625% notes due September 2018 1,000
 1,000
Fixed rate 2.250% notes due May 2019 497
 
Floating rate notes due May 2017. These notes, which bear interest at 0.40% above 3-month LIBOR, had a rate of 0.64% at September 30, 2014 250
 
Note payable:    
Fixed rate 6.03% notes due July 2014 (related to consolidated VIE) 
 4
Subordinated debt:    
Fixed rate 5.95% notes due May 2016 712
 718
Subordinated debt due to BTMU:    
Floating rate subordinated debt due June 2023. This note, which bears interest at 1.2% above 3-month LIBOR, had a rate of 1.43% at September 30, 2014 and 1.45% at December 31, 2013 750
 750
Capital lease obligations with a combined weighted-average interest rate of 4.88% at both September 30, 2014 and December 31, 2013(1)
 14
 15
Total debt issued by MUFG Union Bank, N.A. and other subsidiaries 6,220
 5,784
Total long-term debt $6,984
 $6,547
(1)Long-term debt assumed through acquisitions

64

(1)
Long-term debt assumed through PCBC acquisition

Table of Contents

Note 8—Long-Term7—Long Term Debt (Continued)


Senior Debt

On May 6, 2014, the Bank issued $250 million in aggregate principal amount of Floating Rate Senior Bank Notes due 2017 (2017 Floating Rate Notes) and $500 million in aggregate principal amount of Fixed Rate Senior Bank Notes due 2019 (2019 Fixed Rate Notes) and, together with the 2017 Floating Rate Notes, the Senior Notes. The 2017 Floating Rate Notes were issued to purchasers at a price of 100% of their principal amount. The 2019 Fixed Rate Notes were issued to purchasers at a price of 99.774% of their principal amount. The 2017 Floating Rate Notes will bear interest at a rate equal to three-month U.S. Dollar LIBOR plus 0.40% and will mature on May 5, 2017. Interest payments are due quarterly. The 2019 Fixed Rate Notes will bear interest at a rate of 2.25% per annum and will mature on May 6, 2019. Interest payments are due semi-annually.

     The Bank may redeem any of the 2017 Floating Rate Notes, in whole or in part, on May 5, 2016 at a redemption price equal to 100% of the principal amount being redeemed plus accrued interest. The Bank may redeem any of the 2019 Fixed Rate Notes, in whole or in part, on or after April 6, 2019 at a redemption price equal to 100% of the principal amount being redeemed plus accrued interest. None of the Senior Notes are subject to repayment at the option of the holders prior to maturity.

     The net proceeds from the sale of the Senior Notes were used by the Bank for general corporate purposes in the ordinary course of its banking business. The Senior Notes were issued as part of the Bank'sBank’s $8 billion bank note program under which the Bank may issue, from time to time, senior unsecured debt obligations with maturities of more than one year from their respective dates of issue and subordinated debt obligations with maturities of five5 years or more from their respective dates of issue. After issuing the Senior Notes, there is $1.9 billion available for issuance under the program.

Note 9—8—Fair Value Measurement and Fair Value of Financial Instruments

Valuation Methodologies

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., an exit price) in an orderly transaction between willing market participants at the measurement date. The Company has an established and documented process for determining fair value for financial assets and liabilities that are measured at fair value on either a recurring or nonrecurring basis. When available, quoted market prices are used to determine fair value. If quoted market prices are not available, fair value is based upon valuation techniques that use, where possible, current market-based or independently sourced parameters, such as yield curves, foreign exchange rates, credit spreads, commodity prices, and implied volatilities. Valuation adjustments may be made to ensure the financial instruments are recorded at fair value. These adjustments include amounts that reflect counterparty credit quality and that consider the Company'sCompany’s creditworthiness in determining the fair value of its trading assets and liabilities. For further information related to the valuation methodologies used for certain financial assets and financial liabilities measured at fair value, see Note 12 to the Consolidated Financial Statements in Part II, Item 8. "Financial“Financial Statements and Supplementary Data"Data” in our 2013 Form 10-K.

Fair Value Hierarchy

In determining fair value, the Company maximizes the use of observable market inputs and minimizes the use of unobservable inputs. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect the Company'sCompany’s estimate about market data. Based on the observability of the significant inputs used, the Company classifies its fair value measurements in accordance with the three-level hierarchy as defined by U.S. GAAP. This hierarchy is based on the quality, observability, and reliability of the information used to determine fair value. For further information related to


Table of Contents

Note 9—Fair Value Measurement and Fair Value of Financial Instruments (Continued)

the fair value hierarchy, see Note 12 to the Consolidated Financial Statements in Part II, Item 8. "Financial“Financial Statements and Supplementary Data"Data” in our 2013 Form 10-K.

Valuation Processes

The Company has established a Valuation Committee (VC) to oversee its valuation framework for measuring fair value and to establish valuation policies and procedures. The VC'sVC’s responsibilities include reviewing fair value measurements and categorizations within the fair value hierarchy and monitoring the use of pricing sources, mark-to-model valuations, dealer quotes, and other valuation processes. The VC reports to the Company'sCompany’s Risk & Capital Committee and meets at least quarterly.


Independent Price Verification (IPV) is performed periodically by the Company to test the market data and valuations of substantially all instruments measured at fair value on a recurring basis. As part of its IPV procedures, the Company compares pricing sources, tests data variance within certain thresholds and performs variance analysis, utilizing third party valuations and both internal and external models. Results are formally reported on a quarterly basis to the VC. For further information related to valuation processes, see Note 12 to the Consolidated Financial Statements in Part II, Item 8. "Financial“Financial Statements and Supplementary Data"Data” in our 2013 Form 10-K.



65

Table of Contents

Note 9—8—Fair Value Measurement and Fair Value of Financial Instruments (Continued)


Fair Value Measurements on a Recurring Basis

The following tables present financial assets and financial liabilities measured at fair value on a recurring basis as of JuneSeptember 30, 2014 and December 31, 2013, by major category and by valuation hierarchy level:

 
 June 30, 2014 
(Dollars in millions) Level 1 Level 2 Level 3 Netting
Adjustment(1)
 Fair Value 

Assets

                

Trading account assets:

                

U.S. Treasury

 $ $25 $ $ $25 

U.S. government sponsored agencies

    121      121 

State and municipal

    24      24 

Interest rate derivative contracts

  1  790  6  (150) 647 

Commodity derivative contracts

    108  9  (48) 69 

Foreign exchange derivative contracts

    23  2  (10) 15 

Equity derivative contracts

      286  (246) 40 
            

Total trading account assets

  1  1,091  303  (454) 941 

Securities available for sale:

                

U.S. government sponsored agencies

           

Residential mortgage-backed securities:

                

U.S. government and government sponsored agencies                        

    8,157      8,157 

Privately issued

    191      191 

Privately issued—commercial mortgage-backed securities

    1,813      1,813 

Collateralized loan obligations

    2,534      2,534 

Asset-backed and other

    19      19 

Other debt securities:

                

Direct bank purchase bonds

      1,897    1,897 

Other

    4  48    52 

Equity securities

  7        7 
            

Total securities available for sale

  7  12,718  1,945    14,670 
            

Other assets:

                

Interest rate hedging contracts

    40      40 

Other derivative contracts

      2    2 
            

Total other assets

    40  2    42 
            

Total assets

 $8 $13,849 $2,250 $(454)$15,653 
            
            

Percentage of Total

  % 89% 14% (3)% 100%

Percentage of Total Company Assets

  % 12% 2% % 14%

Liabilities

                

Trading account liabilities:

                

Interest rate derivative contracts

 $4 $667 $ $(408)$263 

Commodity derivative contracts

    98  9  (79) 28 

Foreign exchange derivative contracts

    53  2  (23) 32 

Equity derivative contracts

      287    287 

Securities sold, not yet purchased

    54      54 
            

Total trading account liabilities

  4  872  298  (510) 664 

Other liabilities:

                

FDIC clawback liability

      102    102 

Interest rate hedging contracts

    2      2 

Other derivative contracts

    2  3    5 
            

Total other liabilities

    4  105    109 
            

Total liabilities

 $4 $876 $403 $(510)$773 
            
            

Percentage of Total

  1% 113% 52% (66)% 100%

Percentage of Total Company Liabilities

  % 1% % % 1%

(1)
Amounts represent the impact of legally enforceable master netting agreements between the same counterparties that allow the Company to net settle all contracts.
  September 30, 2014
(Dollars in millions) Level 1 Level 2 Level 3 
Netting
Adjustment(1)
 Fair Value
Assets          
Trading account assets:          
U.S. Treasury securities $
 $15
 $
 $
 $15
U.S. government sponsored agency securities 
 125
 
 
 125
State and municipal securities 
 11
 
 
 11
Interest rate derivative contracts 1
 786
 6
 (178) 615
Commodity derivative contracts 
 89
 5
 (85) 9
Foreign exchange derivative contracts 1
 91
 1
 (59) 34
Equity derivative contracts 
 
 264
 (190) 74
Total trading account assets 2
 1,117
 276
 (512) 883
Securities available for sale:          
U.S. Treasury 
 70
 
 
 70
Residential mortgage-backed securities:          
U.S. government and government sponsored agencies 
 7,739
 
 
 7,739
Privately issued 
 177
 
 
 177
Privately issued - commercial mortgage-backed securities 
 1,745
 
 
 1,745
Collateralized loan obligations 
 2,422
 
 
 2,422
Asset-backed and other 
 14
 
 
 14
Other debt securities:          
Direct bank purchase bonds 
 
 1,833
 
 1,833
Other 
 4
 48
 
 52
Equity securities 12
 
 
 
 12
Total securities available for sale 12
 12,171
 1,881
 
 14,064
Other assets:          
Interest rate hedging contracts 
 6
 
 (6) 
Other derivative contracts 
 
 1
 
 1
Total other assets 
 6
 1
 (6) 1
Total assets $14
   $13,294
   $2,158
   $(518) $14,948
Percentage of Total 1% 88% 14% (3)% 100%
Percentage of Total Company Assets % 12% 2%  % 14%
Liabilities          
Trading account liabilities:          
Interest rate derivative contracts $
 $651
 $
 $(507) $144
Commodity derivative contracts 
 76
 5
 (26) 55
Foreign exchange derivative contracts 1
 52
 1
 (12) 42
Equity derivative contracts 
 
 263
 
 263
Securities sold, not yet purchased 
 92
 
 
 92
Total trading account liabilities 1
 871
 269
 (545) 596
Other liabilities:          
FDIC clawback liability 
 
 103
 
 103
Interest rate hedging contracts 
 34
 
 (31) 3
Other derivative contracts 
 1
 3
 
 4
Total other liabilities 
 35
 106
 (31) 110
Total liabilities $1
  $906
  $375
  $(576) $706
Percentage of Total % 128% 53% (81)% 100%
Percentage of Total Company Liabilities % 1% 1% (1)% 1%

(1)Amounts represent the impact of legally enforceable master netting agreements between the same counterparties that allow the Company to net settle all contracts.

66

Note 9—8—Fair Value Measurement and Fair Value of Financial Instruments (Continued)


 
 December 31, 2013 
(Dollars in millions) Level 1 Level 2 Level 3 Netting
Adjustment(1)
 Fair Value 

Assets

                

Trading account assets:

                

U.S. Treasury

 $ $8 $ $ $8 

U.S. government sponsored agencies

    116      116 

State and municipal

    5      5 

Other loans

    140      140 

Interest rate derivative contracts

  1  705  7  (212) 501 

Commodity derivative contracts

    67  9  (66) 10 

Foreign exchange derivative contracts

  1  30  2  (18) 15 

Equity derivative contracts

      253  (197) 56 
            

Total trading account assets

  2  1,071  271  (493) 851 

Securities available for sale:

                

U.S. government sponsored agencies

    73      73 

Residential mortgage-backed securities:

                

U.S government and government sponsored agencies                        

    8,900      8,900 

Privately issued

    222      222 

Privately issued—commercial mortgage-backed securities

    1,870      1,870 

Collateralized loan obligations

    2,673      2,673 

Asset-backed and other

    35      35 

Other debt securities:

                

Direct bank purchase bonds

      1,960    1,960 

Other

    18  58    76 

Equity securities

  8        8 
            

Total securities available for sale

  8  13,791  2,018    15,817 

Other assets:

                

Interest rate hedging contracts

    8      8 

Other derivative contracts

    1  1    2 
            

Total other assets

    9  1    10 
            

Total assets

 $10 $14,871 $2,290 $(493)$16,678 
            
            

Percentage of Total

  % 89% 14% (3)% 100%

Percentage of Total Company Assets

  % 14% 2% % 16%

Liabilities

                

Trading account liabilities:

                

Interest rate derivative contracts

 $3 $606 $ $(379)$230 

Commodity derivative contracts

    53  8  (33) 28 

Foreign exchange derivative contracts

  1  26  2  (11) 18 

Equity derivative contracts

      254    254 

Securities sold, not yet purchased

    10      10 
            

Total trading account liabilities

  4  695  264  (423) 540 

Other liabilities:

                

FDIC clawback liability

      96    96 

Interest rate hedging contracts

    13      13 

Other derivative contracts

    1  3    4 
            

Total other liabilities

    14  99    113 
            

Total liabilities

 $4 $709 $363 $(423)$653 
            
            

Percentage of Total

  1% 109% 55% (65)% 100%

Percentage of Total Company Liabilities

  % 1% % % 1%

(1)
Amounts represent the impact of legally enforceable master netting agreements between the same counterparties that allow the Company to net settle all contracts.
  December 31, 2013
(Dollars in millions) Level 1 Level 2 Level 3 
Netting
Adjustment(1)
 Fair Value
Assets          
Trading account assets:          
U.S. Treasury securities $
 $8
 $
 $
 $8
U.S. government sponsored agency securities 
 116
 
 
 116
State and municipal securities 
 5
 
 
 5
Other loans 
 140
 
 
 140
Interest rate derivative contracts 1
 705
 7
 (212) 501
Commodity derivative contracts 
 67
 9
 (66) 10
Foreign exchange derivative contracts 1
 30
 2
 (18) 15
Equity derivative contracts 
 
 253
 (197) 56
Total trading account assets 2
 1,071
 271
 (493) 851
Securities available for sale:          
U.S. government sponsored agencies 
 73
 
 
 73
Residential mortgage-backed securities:          
U.S government and government sponsored agencies 
 8,900
 
 
 8,900
Privately issued 
 222
 
 
 222
Privately issued - commercial mortgage-backed securities 
 1,870
 
 
 1,870
Collateralized loan obligations 
 2,673
 
 
 2,673
Asset-backed and other 
 35
 
 
 35
Other debt securities:          
Direct bank purchase bonds 
 
 1,960
 
 1,960
Other 
 18
 58
 
 76
Equity securities 8
 
 
 
 8
Total securities available for sale 8
 13,791
 2,018
 
 15,817
Other assets:          
Interest rate hedging contracts 
 8
 
 
 8
Other derivative contracts 
 1
 1
 
 2
Total other assets 
 9
 1
 
 10
Total assets $10
   $14,871
   $2,290
   $(493) $16,678
Percentage of Total % 89% 14% (3)% 100%
Percentage of Total Company Assets % 14% 2%  % 16%
Liabilities          
Trading account liabilities:          
Interest rate derivative contracts $3
 $606
 $
 $(379) $230
Commodity derivative contracts 
 53
 8
 (33) 28
Foreign exchange derivative contracts 1
 26
 2
 (11) 18
Equity derivative contracts 
 
 254
 
 254
Securities sold, not yet purchased 
 10
 
 
 10
Total trading account liabilities 4
 695
 264
 (423) 540
Other liabilities:          
FDIC clawback liability 
 
 96
 
 96
Interest rate hedging contracts 
 13
 
 
 13
   Other derivative contracts 
 1
 3
 
 4
Total other liabilities 
 14
 99
 
 113
Total liabilities $4
  $709
  $363
  $(423) $653
Percentage of Total 1% 109% 55% (65)% 100%
Percentage of Total Company Liabilities % 1% %  % 1%

(1)Amounts represent the impact of legally enforceable master netting agreements between the same counterparties that allow the Company to net settle all contracts.


67

Note 9—8—Fair Value Measurement and Fair Value of Financial Instruments (Continued)


The following tables present a reconciliation of the assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and sixnine months ended JuneSeptember 30, 2014 and 2013. Level 3 available for sale securities at JuneSeptember 30, 2014 and 2013 primarily consist of direct bank purchase bonds. The Company'sCompany’s policy is to recognize transfers in and out of Level 1, 2 and 3 as of the end of a reporting period.


 For the Three Months Ended  For the Three Months Ended

 June 30, 2014 June 30, 2013  September 30, 2014 September 30, 2013
(Dollars in millions) Trading
Assets
 Securities
Available
for Sale
 Other
Assets
 Trading
Liabilities
 Other
Liabilities
 Trading
Assets
 Securities
Available
for Sale
 Other
Assets
 Trading
Liabilities
 Other
Liabilities
  
Trading
Assets
 
Securities
Available
for Sale
 
Other
Assets
 
Trading
Liabilities
 
Other
Liabilities
 
Trading
Assets
 
Securities
Available
for Sale
 Other Assets 
Trading
Liabilities
 
Other
Liabilities

Asset (liability) balance, beginning of period

 $273 $2,046 $1 $(266)$(103)$186 $1,592 $1 $(187)$(96) $303
 $1,945

$2
 $(298) $(105) $182
  $1,762
  $2
 $(183) $(94)

Total gains (losses) (realized/unrealized):

                                            

Included in income before taxes

 35  1 (36) (2) (5)  1 5 2  (17) 
 (1) 19
  (1) 39
 
  
 (38) (3)

Included in other comprehensive income

  7     18     
 5
 
 
 
 
 (7) 
 
 

Purchases/additions

  14    1 192     
 53
 
 
  
 13
  237
  
 
 

Sales

    (1)     (1)   
 
 
 
 
 
 
 
 (5) 

Settlements

 (5) (122)  5   (40)     (10) (122) 
 10
 
 (8) (29) 
 8
 
                     

Asset (liability) balance, end of period

 $303 $1,945 $2 $(298)$(105)$182 $1,762 $2 $(183)$(94) $276
 $1,881
 $1
 $(269) $(106) $226
 $1,963
 $2
 $(218) $(97)
                     
                     

Changes in unrealized gains (losses) included in income before taxes for assets and liabilities still held at end of period

 $35 $ $1 $(36)$(2)$(5)$ $1 $5 $2  $(17) $
 $(1) $19
  $(1) $39
 $
 $
 $(38) $(3)



 For the Six Months Ended  For the Nine Months Ended

 June 30, 2014 June 30, 2013  September 30, 2014 September 30, 2013
(Dollars in millions) Trading
Assets
 Securities
Available
for Sale
 Other
Assets
 Trading
Liabilities
 Other
Liabilities
 Trading
Assets
 Securities
Available
for Sale
 Other
Assets
 Trading
Liabilities
 Other
Liabilities
  
Trading
Assets
 
Securities
Available
for Sale
 
Other
Assets
 
Trading
Liabilities
 
Other
Liabilities
 
Trading
Assets
 
Securities
Available
for Sale
 Other Assets 
Trading
Liabilities
 
Other
Liabilities

Asset (liability) balance, beginning of period

 $271 $2,018 $1 $(264)$(99)$136 $1,499 $ $(136)$(95) $271
 $2,018
  $1
 $(264) $(99) $136
 $1,499
 $
 $(136) $(95)

Total gains (losses) (realized/unrealized):

                                          

Included in income before taxes

 36  1 (37) (6) 42  1 (43) 1  19
 
 
 (18)  (7) 81
 
 1
 (81) (2)

Included in other comprehensive income

  15     37     
 20
 
 
 
 
 30
 
 
 

Purchases/additions

 3 137    4 329 1    3
 190
 
 
  
 17
 566
 1
 
 

Sales

    (4)   (14)  (4)   
 
 
 (4) 
 
 (14) 
 (9) 

Settlements

 (7) (225)  7   (89)     (17) (347) 
 17
 
 (8) (118) 
 8
 
                     

Asset (liability) balance, end of period

 $303 $1,945 $2 $(298)$(105)$182 $1,762 $2 $(183)$(94) $276
 $1,881
 $1
 $(269) $(106) $226
 $1,963
 $2
 $(218) $(97)
                     
                     

Changes in unrealized gains (losses) included in income before taxes for assets and liabilities still held at end of period

 $36 $ $1 $(37)$(6)$42 $ $1 $(43)$1  $19
 $
 $
 $(18)  $(7) $81
 $
 $1
 $(81) $(2)


68

Table of Contents

Note 9—8—Fair Value Measurement and Fair Value of Financial Instruments (Continued)


The following table presents information about significant unobservable inputs related to the Company'sCompany’s significant Level 3 assets and liabilities at JuneSeptember 30, 2014.


 June 30, 2014 
(Dollars in millions) Level 3 Fair
Value
 Valuation Technique(s) Significant Unobservable Input(s) Range of Inputs Weighted
Average
  
Level 3
Fair Value
 Valuation Technique(s) Significant Unobservable Input(s) Range of Inputs Weighted Average

Securities available for sale:

                  

Direct bank purchase bonds

 $1,897 Return on equity Market-required return on capital 8.0 - 10.0% 9.9% $1,833
 Return on equity Market-required return on capital 8.0 - 10.0% 9.9%

   Probability of default 0.0 - 8.0% 0.5%     Probability of default 0.0 - 25.0% 0.5%

   Loss severity 10.0 - 60.0% 31.6%     Loss severity 10.0 - 60.0% 31.3%

Other liabilities:

               

FDIC clawback liability

 $102 Discounted cash flow Probability of default 0.1 - 100.0% 56.2% $103
 Discounted cash flow Probability of default 0.1 - 100.0% 53.1%

   Loss severity 0.0 - 100.0% 40.0%  
   Loss severity 0.0 - 100.0% 41.3%


The direct bank purchase bonds use a return on equity valuation technique. This technique uses significant unobservable inputs such as market-required return on capital, probability of default, and loss severity. Increases (decreases) in any of these inputs in isolation would result in a lower (higher) fair value measurement.


The FDIC clawback liability uses a discounted cash flow valuation technique. This technique uses significant unobservable inputs such as probability of default and loss severity. Increases (decreases) in probability of default and loss severity would result in a lower (higher) liability.


Fair Value Measurement on a Nonrecurring Basis

Certain assets may be measured at fair value on a nonrecurring basis. These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis during the three and sixnine months ended JuneSeptember 30, 2014 and 2013 that were still held on the consolidated balance sheet as of the respective periods ended, the following tables present the fair value of such financial instrumentsassets by the level of valuation assumptions used to determine each fair value adjustment.


 June 30, 2014  
  
 

 Loss for the
Three Months
Ended
June 30, 2014
 Loss for the
Six Months
Ended
June 30, 2014
  September 30, 2014 
Gain (Loss) for the
Three Months Ended
September 30, 2014
 
Gain (Loss) for the
Nine Months Ended
September 30, 2014
(Dollars in millions) Fair
Value
 Level 1 Level 2 Level 3  
Fair
Value
 Level 1 Level 2 Level 3 

Loans:

                         

Impaired loans

 $198 $ $ $198 $(6)$(35) $89
 $
 $
 $89
 $2
 $(33)

Other assets:

                         

OREO

 14   14 (1) (3)
             
Other real estate owned (OREO) 13
 
 
 13
 (2) (5)

Total

 $212 $ $ $212 $(7)$(38) $102
 $
 $
 $102
 $
 $(38)
             
             



 June 30, 2013  
  
 

 Loss for the
Three Months
Ended
June 30, 2013
 Loss for the
Six Months
Ended
June 30, 2013
  September 30, 2013 
Gain (Loss) for the
Three Months Ended
September 30, 2013
 
Gain (Loss) for the
Nine Months Ended
September 30, 2013
(Dollars in millions) Fair
Value
 Level 1 Level 2 Level 3  Fair Value Level 1 Level 2 Level 3 

Loans:

                         

Impaired loans

 $91 $ $ $91 $(11)$(23) $85
 $
 $
 $85
 $(12) $(35)

Other assets:

                         

OREO

 37   37 (3) (6) 21
 
 
 21
 (1) (7)
             
Private equity investments 
 
 
 
 (5) (5)

Total

 $128 $ $ $128 $(14)$(29) $106
 $
 $
 $106
 $(18) $(47)
             
             

Table of Contents

Note 9—Fair Value Measurement and Fair Value of Financial Instruments (Continued)

Loans include individually impaired loans that are measured based on the fair value of the underlying collateral or the fair value of the loan. The fair value of impaired loans was determined based on appraised values of the underlying collateral or market pricing for the loan, adjusted for management judgment, as of the measurement date. The fair value of OREO was primarily

69

Table of Contents
Note 8—Fair Value Measurement and Fair Value of Financial Instruments (Continued)

based on independent appraisals.

Fair Value of Financial Instruments Disclosures

The tables below present the carrying amount and estimated fair value of certain financial instruments by the level of valuation assumptions held by the Company as of JuneSeptember 30, 2014 and as of December 31, 2013:

 
 June 30, 2014 
(Dollars in millions) Carrying
Amount
 Fair
Value
 Level 1 Level 2 Level 3 

Assets

                

Cash and cash equivalents

 $4,329 $4,329 $4,329 $ $ 

Securities held to maturity

  8,177  8,251    8,251   

Loans held for investment, net of allowance for loan losses(1)

  70,988  71,934      71,934 

FDIC indemnification asset

  101  11      11 

Other assets

  4  4      4 

Liabilities

  
 
  
 
  
 
  
 
  
 
 

Deposits

 $81,566 $81,713 $ $81,713 $ 

Commercial paper and other short-term borrowings

  2,870  2,870    2,870   

Long-term debt

  6,995  7,167    7,167   

Off-Balance Sheet Instruments

  
 
  
 
  
 
  
 
  
 
 

Commitments to extend credit and standby and commercial letters of credit

 $290 $290 $ $ $290 

2013
:
(1)
Excludes lease financing, net of related allowance.

 
 December 31, 2013 
(Dollars in millions) Carrying
Amount
 Fair
Value
 Level 1 Level 2 Level 3 

Assets

                

Cash and cash equivalents

 $6,203 $6,203 $6,203 $ $ 

Securities held to maturity

  6,509  6,439    6,439   

Loans held for investment, net of allowance for loan losses(1)

  66,898  68,132      68,132 

FDIC indemnification asset

  141  95      95 

Other assets

  3  3      3 

Liabilities

  
 
  
 
  
 
  
 
  
 
 

Deposits

 $80,101 $80,228 $ $80,228 $ 

Commercial paper and other short-term borrowings

  2,563  2,563    2,563   

Long-term debt

  6,547  6,709    6,709   

Off-Balance Sheet Instruments

  
 
  
 
  
 
  
 
  
 
 

Commitments to extend credit and standby and commercial letters of credit

 $273 $273 $ $ $273 

  September 30, 2014
(Dollars in millions) 
Carrying
Amount
 
Fair
Value
 Level 1 Level 2 Level 3
Assets          
Cash and cash equivalents $4,519
 $4,519
 $4,519
 $
 $
Securities held to maturity 8,458
 8,491
 
 8,491
 
Loans held for investment, net of allowance for loan losses(1)
 73,304
 74,355
 
 
 74,355
FDIC indemnification asset 78
 4
 
 
 4
Other assets 5
 5
 
 
 5
Liabilities          
Deposits $82,356
 $82,435
 $
 $82,435
 $
Commercial paper and other short-term borrowings 3,876
 3,876
 
 3,876
 
Long-term debt 6,984
 7,108
 
 7,108
 
Off-Balance Sheet Instruments          
Commitments to extend credit and standby and commercial letters of credit $267
 $267
 $
 $
 $267
(1)
Excludes lease financing, net of related allowance.

Table of Contents

Note 9—Fair Value Measurement and Fair Value of Financial Instruments (Continued)

(1)Excludes lease financing, net of related allowance.

  December 31, 2013
(Dollars in millions) 
Carrying
Amount
 
Fair
Value
 Level 1 Level 2 Level 3
Assets          
Cash and cash equivalents $6,203
 $6,203
 $6,203
 $
 $
Securities held to maturity 6,509
 6,439
 
 6,439
 
Loans held for investment, net of allowance for loan losses(1)
 66,898
 68,132
 
 
 68,132
FDIC indemnification asset 141
 95
 
 
 95
Other assets 3
 3
 
 
 3
Liabilities          
Deposits $80,101
 $80,228
 $
 $80,228
 $
Commercial paper and other short-term borrowings 2,563
 2,563
 
 2,563
 
Long-term debt 6,547
 6,709
 
 6,709
 
Off-Balance Sheet Instruments          
Commitments to extend credit and standby and commercial letters of credit $273
 $273
 $
 $
 $273
(1)Excludes lease financing, net of related allowance.
For further information on methodologies for approximating fair values, see Note 12 to the Consolidated Financial Statements in Part II, Item 8. "Financial“Financial Statements and Supplementary Data"Data” in our 2013 Form 10-K.

70


Note 10—9—Derivative Instruments and Other Financial Instruments Used For Hedging

The Company enters into certain derivative and other financial instruments primarily to assist customers with their risk management objectives and to manage the Company'sCompany’s exposure to interest rate risk. When entering into derivatives on behalf of customers the Company generally acts as a financial intermediary by offsetting a significant portion of the market risk for these derivatives with third parties. The Company may also enter into derivatives for other risk management purposes and, subject to certain limits, may take market risk when buying and selling derivatives for its own account. All derivative instruments are recognized as assets or liabilities on the consolidated balance sheets at fair value.

Counterparty credit risk is inherent in derivative instruments. In order to reduce its exposure to counterparty credit risk, the Company utilizes credit approvals, limits, monitoring procedures and master netting and collateral support annex (CSA) agreements. Additionally, the Company considers counterparty credit quality and the potential loss increditworthiness of the event of counterparty defaultCompany in estimating the fair value amount of the derivative instrument.

The table below presents the notional amounts and fair value amounts of the Company's derivative instruments reported on the consolidated balance sheets, segregated between derivative instruments designated and qualifying as hedging instruments and derivative instruments not designated and qualifying as hedging instruments as of JuneSeptember 30, 2014 and December 31, 2013, respectively. Asset and liability values are presented gross, excluding the impact of legally enforceable master netting and CSA agreements. The fair value of asset and liability derivatives designated and qualifying as hedging instruments and derivatives designated as other risk management are included in other assets and other liabilities, respectively. The fair value of asset


Table of Contents

Note 10—Derivative Instruments and Other Financial Instruments Used For Hedging (Continued)

and liability trading derivatives are included in trading account assets and trading account liabilities, respectively.

 September 30, 2014 December 31, 2013

 June 30, 2014 December 31, 2013    Fair Value   Fair Value

  
 Fair Value  
 Fair Value  Notional Asset Liability Notional Asset Liability
(Dollars in millions) Notional
Amount
 Asset
Derivatives
 Liability
Derivatives
 Notional
Amount
 Asset
Derivatives
 Liability
Derivatives
  Amount Derivatives Derivatives Amount Derivatives Derivatives

Designated and qualifying as hedging instruments:

                         

Cash flow hedges

 
 
 
 
 
 
 
 
 
 
 
 
             

Interest rate contracts

 $8,200 $37 $2 $4,300 $8 $13  $9,600
 $6
 $32
 $4,300
 $8
 $13

Fair value hedges

 
 
 
 
 
 
 
 
 
 
 
 
             

Interest rate contracts

 500 3      500
 
 2
 
 
 

Not designated and qualifying as hedging instruments:

 
 
 
 
 
 
 
 
 
 
 
 
             

Trading

 
 
 
 
 
 
 
 
 
 
 
 
             

Interest rate contracts

 47,006 797 671 44,427 713 609  46,106
 793
 651
 44,427
 713
 609

Commodity contracts

 5,776 117 107 5,714 76 61  5,268
 94
 81
 5,714
 76
 61

Foreign exchange contracts

 5,329 25 55 5,645 33 29  5,998
 93
 54
 5,645
 33
 29

Equity contracts

 4,034 286 287 4,027 253 254  3,909
 264
 263
 4,027
 253
 254

Other contracts

    140    
 
 
 140
 
 
             

Total Trading

 62,145 1,225 1,120 59,953 1,075 953  61,281
 1,244
 1,049
 59,953
 1,075
 953

Other risk management

 
248
 
2
 
5
 
185
 
2
 
4
  251
 1
 4
 185
 2
 4
             

Total derivative instruments

 $71,093 $1,267 $1,127 $64,438 $1,085 $970  $71,632
 $1,251
 $1,087
 $64,438
 $1,085
 $970
             
             


We recognized net gains of $1 million and net losses of $1 million and $2 million on other risk management derivatives for the three and sixnine months ended JuneSeptember 30, 2014, respectively, compared to net losses of $1 million and net losses of $5 million on other risk management derivatives for the three and sixnine months ended JuneSeptember 30, 2013, respectively, which are included in other noninterest income.


Derivatives Designated and Qualifying as Hedging Instruments

The Company uses interest rate derivatives to manage the financial impact on the Company from changes in market interest rates. These instruments are used to manage interest rate risk relating to specified groups of assets and liabilities, primarily LIBOR-based commercial loans, certificates of deposit (CDs), borrowings, and debt issuances. Derivatives that qualify for hedge accounting are designated as either fair value or cash flow hedges. For further information related to the Company'sCompany’s hedging strategy, see Note 13 to the Consolidated Financial Statements in Part II, Item 8. "Financial“Financial Statements and Supplementary Data"Data” in our 2013 Form 10-K.


71

Note 9—Derivative Instruments and Other Financial Instruments Used For Hedging (Continued)


Cash Flow Hedges

The Company used interest rate swaps with a notional amount of $8.2$9.6 billion at JuneSeptember 30, 2014 to hedge the risk of changes in cash flows attributable to changes in the designated benchmark interest rate on LIBOR indexed loans. To the extent effective, payments received (or paid) under the swap contract offset fluctuations


Table of Contents

Note 10—Derivative Instruments and Other Financial Instruments Used For Hedging (Continued)

in interest income on loans caused by changes in the relevant LIBOR index. At JuneSeptember 30, 2014, the weighted average remaining life of the active cash flow hedges was approximately 3.853.54 years.

For cash flow hedges, the effective portion of the gain or loss on the hedging instruments is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged cash flows are recognized in net interest income. Gains and losses representing hedge ineffectiveness are recognized in earnings in the period in which they arise. At JuneSeptember 30, 2014, the Company expects to reclassify approximately $95$115 million of income from accumulated other comprehensive income to net interest income during the twelve months ending JuneSeptember 30, 2015. This amount could differ from amounts actually realized due to changes in interest rates, hedge terminations and the addition of other hedges subsequent to JuneSeptember 30, 2014.

The following tables present the amount and location of the net gains and losses recorded in the Company'sCompany’s consolidated statements of income and changes in stockholder'sstockholder’s equity for derivatives designated as cash flow hedges for the three and sixnine months ended JuneSeptember 30, 2014 and 2013:


 Amount of Gain or
(Loss) Recognized in
OCI on Derivative
Instruments
(Effective Portion)
 Gain or (Loss) Reclassified
from Accumulated OCI into
Income (Effective Portion)
 Gain or (Loss) Recognized in
Income on Derivative
Instruments (Ineffective
Portion and Amount Excluded
from Effectiveness Testing)
  
Amount of Gain or
(Loss) Recognized in
OCI on Derivative
Instruments
(Effective Portion)
  
Gain or (Loss) Reclassified
from Accumulated OCI into
Income (Effective Portion)
  
Gain or (Loss) Recognized in
Income on Derivative
Instruments (Ineffective
Portion and Amount Excluded
from Effectiveness Testing)

 For the Three Months
Ended June 30,
  
 For the Three Months
Ended June 30,
  
 For the Three Months
Ended June 30,
  For the Three Months Ended September 30,   For the Three Months Ended September 30,   For the Three Months Ended September 30,
(Dollars in millions) 2014 2013 Location 2014 2013 Location 2014 2013  2014 2013 Location 2014 2013 Location 2014 2013

Derivatives in cash flow hedging relationships

                             

     Interest income $27 $8       
  
 Interest income $32
 $13
    
  

Interest rate contracts

 $70 $3 Interest expense 2 (1)Noninterest expense $(1)$  $(32) $30
 Interest expense 2
 (1) Noninterest expense $(1) $
             

Total

 $70 $3 $29 $7 $(1)$  $(32) $30
   $34
 $12
   $(1) $
             
             



 Amount of Gain or
(Loss) Recognized in
OCI on Derivative
Instruments
(Effective Portion)
 Gain or (Loss) Reclassified
from Accumulated OCI into
Income (Effective Portion)
 Gain or (Loss) Recognized in
Income on Derivative
Instruments (Ineffective
Portion and Amount Excluded
from Effectiveness Testing)
  
Amount of Gain or
(Loss) Recognized in
OCI on Derivative
Instruments
(Effective Portion)
  
Gain or (Loss) Reclassified
from Accumulated OCI into
Income (Effective Portion)
  
Gain or (Loss) Recognized in
Income on Derivative
Instruments (Ineffective
Portion and Amount Excluded
from Effectiveness Testing)

 For the Six Months
Ended June 30,
  
 For the Six Months
Ended June 30,
  
 For the Six Months
Ended June 30,
  For the Nine Months Ended September 30,   For the Nine Months Ended September 30,   For the Nine Months Ended September 30,
(Dollars in millions) 2014 2013 Location 2014 2013 Location 2014 2013  2014 2013 Location 2014 2013 Location 2014 2013

Derivatives in cash flow hedging relationships

                             

     Interest income $49 $15       
  
 Interest income $81
 $28
    
  

Interest rate contracts

 $78 $9 Interest expense 3 (1)Noninterest expense $(1)$  $46
 $39
 Interest expense 5
 (1) Noninterest expense $
 $
             

Total

 $78 $9 $52 $14 $(1)$  $46
 $39
   $86
 $27
   $
 $
             
���
             

The Company engages in an interest rate hedging strategy in which one or more interest rate swaps are associated with a specified interest bearing liability, in order to convert the liability from a fixed rate to a floating rate instrument. This strategy mitigates the changes in fair value of the hedged liability caused by changes in the designated benchmark interest rate, U.S. dollar LIBOR.

For fair value hedges, the effective portion of the gain or loss on the hedging instruments is reported in interest expense and the ineffective portion is recorded in noninterest expense.


Table of Contents

Note 10—Derivative Instruments and Other Financial Instruments Used For Hedging (Continued)

The following table presents the gains (losses) on the Company's fair value hedges for the three and sixnine months ended JuneSeptember 30, 2014:

 
 For the Three Months Ended
June 30, 2014
 For the Six Months Ended
June 30, 2014
 
(Dollars in millions) Derivative Hedged
Item
 Hedge
Ineffectiveness
 Derivative Hedged
Item
 Hedge
Ineffectiveness
 

Interest rate risk on long-term debt

 $3 $(3)$ $3 $(3)$ 
              

Total

 $3 $(3)$ $3 $(3)$ 
              
              
   For the Three Months Ended September 30, 2014 For the Nine Months Ended September 30, 2014
 (Dollars in millions)Derivative Hedged Item Hedge Ineffectiveness Derivative Hedged Item Hedge Ineffectiveness
 
 Interest rate risk on long-term debt$(5)$6
$1
$(2)$3
$1
  Total$(5)$6
$1
$(2)$3
$1

Derivative instruments classified as trading include both derivatives entered into as an accommodation for customers and, subject to certain limits, for the Company's own account. Trading derivatives are included in trading assets or trading liabilities with changes in fair value reflected in income from trading account activities. The majority of the Company's derivative transactions for customers were essentially offset by contracts with third parties that reduce or eliminate market risk exposures.

The Company offers market-linked CDs, which allow the client to earn the higher of either a minimum fixed rate of interest or a return tied to either equity, commodity or currency indices. The Company offsets its exposure to the embedded derivative contained in market-linkedmarket‑linked CDs with a matched over-the-counter option. Both the embedded derivative (when bifurcated) and hedge options are recorded at fair value with the realized and unrealized changes in fair value recorded in noninterest income within trading account activities.

The following table presents the amount of the net gains and losses for derivative instruments classified as trading reported in the consolidated statementstatements of income under the heading trading account activities for the three and sixnine months ended JuneSeptember 30, 2014 and 2013:


 Gain or (Loss)
Recognized in Income on
Derivative Instruments
  
  
 

 Gain or (Loss)
Recognized in Income on
Derivative Instruments
 

 For the Three Months Ended  
Gain or (Loss) Recognized in
Income on Derivative Instruments
 
Gain or (Loss) Recognized in
Income on Derivative Instruments

 For the Six Months Ended  For the Three Months Ended For the Nine Months Ended
(Dollars in millions) June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013  September 30, 2014 September 30, 2013 September 30, 2014 September 30, 2013

Trading derivatives:

                 

Interest rate contracts

 $9 $10 $19 $9  $15
 $12
 $34
 $21

Equity contracts

   1   2
 (10) 3
 (4)

Foreign exchange contracts

 2 5 6 8  7
 5
 13
 13

Commodity contracts

 (1) 1 1   6
 1
 7
 1

Other contracts

 2  1 1  
 1
 1
 2
         

Total

 $12 $16 $28 $18  $30
 $9
 $58
 $33
         
         

The Company primarily enters into derivative contracts and repurchase agreements with counterparties utilizing standard International Swaps and Derivatives Association master netting agreements (ISDA MNA) or master repurchase agreements, which generally establish the terms and conditions of the transactions, including a legal right to set-off amounts payable and receivable between the Company and a counterparty, regardless of whether or not such amounts have matured or have contingency features.


Table of Contents

Note 10—Derivative Instruments and Other Financial Instruments Used For Hedging (Continued)

The following tables present the offsetting of financial assets and liabilities as of JuneSeptember 30, 2014 and December 31, 2013:


 June 30, 2014  September 30, 2014

  
  
  
 Gross Amounts Not Offset in
Balance Sheet
  
        
Gross Amounts Not Offset in
Balance Sheet
  
(Dollars in millions) Gross Amounts
of Recognized
Assets/Liabilities
 Gross Amounts
Offset in
Balance Sheet
 Net Amounts
Presented in
Balance Sheet
 Financial
Instruments
 Cash Collateral
Received/Pledged
 Net Amount  
Gross Amounts
of Recognized
Assets/Liabilities
 
Gross Amounts
Offset in
Balance Sheet
 
Net Amounts
Presented in
Balance Sheet
 
Financial
Instruments
 
Cash Collateral
Received/Pledged
 Net Amount

Financial Assets:

                         

Derivative Assets

 $1,267 $454 $813 $50 $ $763  $1,251
 $518
 $733
 $75
 $
 $658

Securities purchased under resale agreements

 45  45 44  1  153
 
 153
 153
 
 
             

Total

 $1,312 $454 $858 $94 $ $764  $1,404
 $518
 $886
 $228
 $
 $658
             
             

Financial Liabilities:

                         

Derivative Liabilities

 $1,127 $510 $617 $220 $ $397  $1,087
 $576
 $511
 $126
 $
 $385

Securities sold under repurchase agreements

 25  25 25    74
 
 74
 74
 
 
             

Total

 $1,152 $510 $642 $245 $ $397  $1,161
 $576
 $585
 $200
 $
 $385
             
             



 December 31, 2013  December 31, 2013

  
  
  
 Gross Amounts Not Offset in
Balance Sheet
  
        
Gross Amounts Not Offset in
Balance Sheet
  
(Dollars in millions) Gross Amounts
of Recognized
Assets/Liabilities
 Gross Amounts
Offset in
Balance Sheet
 Net Amounts
Presented in
Balance Sheet
 Financial
Instruments
 Cash Collateral
Received/Pledged
 Net Amount  
Gross Amounts
of Recognized
Assets/Liabilities
 
Gross Amounts
Offset in
Balance Sheet
 
Net Amounts
Presented in
Balance Sheet
 
Financial
Instruments
 
Cash Collateral
Received/Pledged
 Net Amount

Financial Assets:

                         

Derivative Assets

 $1,085 $493 $592 $79 $ $513  $1,085
 $493
 $592
 $79
 $
 $513

Securities purchased under resale agreements

 10  10 10    10
 
 10
 10
 
 
             

Total

 $1,095 $493 $602 $89 $ $513  $1,095
 $493
 $602
 $89
 $
 $513
             
��
             

Financial Liabilities:

                         

Derivative Liabilities

 $970 $423 $547 $144 $ $403  $970
 $423
 $547
 $144
 $
 $403

Securities sold under repurchase agreements

 8  8 8    8
 
 8
 8
 
 
             

Total

 $978 $423 $555 $152 $ $403  $978
 $423
 $555
 $152
 $
 $403
             
             


74


Table of Contents


Note 11—10—Accumulated Other Comprehensive Loss

The following table presents the change in each of the components of accumulated other comprehensive loss and the related tax effect of the change allocated to each component for the three months ended JuneSeptember 30, 2014 and 2013:

2013:

(Dollars in millions) Before
Tax
Amount
 Tax
Effect
 Net of
Tax
 

For the Three Months Ended June 30, 2013

          

Cash flow hedge activities:

          

Unrealized net gains (losses) on hedges arising during the period

 $3 $(1)$2 

Less: Reclassification adjustment for net (gains) losses on hedges included in interest income for loans and interest expense on long-term debt           

  (7) 2  (5)
        

Net change

  (4) 1  (3)
        

Securities:

          

Unrealized holding gains (losses) arising during the period on securities available for sale

  (503) 197  (306)

Reclassification adjustment for net (gains) losses on securities available for sale included in securities gains, net           

  (27) 11  (16)

Less: accretion of fair value adjustment on securities available for sale           

  (23) 10  (13)

Less: accretion of fair value adjustment on held to maturity securities           

  (3) 1  (2)

Less: amortization of net unrealized (gains) losses on held to maturity securities           

  11  (4) 7 
        

Net change

  (545) 215  (330)
        

Foreign currency translation adjustment

  (3) 1  (2)
        

Pension and other benefits:

          

Recognized net actuarial gain (loss)(1)

  29  (12) 17 
        

Net change(1)

  29  (12) 17 
        

Net change in accumulated other comprehensive loss

 $(523)$205 $(318)
        
        

For the Three Months Ended June 30, 2014

          

Cash flow hedge activities:

          

Unrealized net gains (losses) on hedges arising during the period

 $70 $(28)$42 

Less: Reclassification adjustment for net (gains) losses on hedges included in interest income for loans and interest expense on long-term debt           

  (29) 12  (17)
        

Net change

  41  (16) 25 
        

Securities:

          

Unrealized holding gains (losses) arising during the period on securities available for sale           

  156  (61) 95 

Reclassification adjustment for net (gains) losses on securities available for sale included in securities gains, net           

  (1)   (1)

Less: accretion of fair value adjustment on securities available for sale           

  (18) 8  (10)

Less: amortization of net unrealized (gains) losses on held to maturity securities

  5  (2) 3 
        

Net change

  142  (55) 87 
        
��

Foreign currency translation adjustment

  4  (2) 2 
        

Pension and other benefits:

          

Pension and other benefits arising during the period

  (4) 2  (2)

Amortization of prior service costs(1)

  (4) 2  (2)

Recognized net actuarial gain (loss)(1)

  15  (7) 8 
        

Net change

  7  (3) 4 
        

Net change in accumulated other comprehensive loss

 $194 $(76)$118 
        
        
(Dollars in millions) 
Before
Tax
Amount
 
Tax
Effect
 
Net of
Tax
For the Three Months Ended September 30, 2013      
Cash flow hedge activities:      
Unrealized net gains (losses) on hedges arising during the period $30
 $(12) $18
Less: Reclassification adjustment for net (gains) losses on hedges included in interest income for loans and interest expense on long-term debt            (13) 6
 (7)
     Net change 17
 (6) 11
Securities:     
Unrealized holding gains (losses) arising during the period on securities available for sale 145
 (56) 89
Reclassification adjustment for net (gains) losses on securities available for sale included in securities gains, net (47) 18
 (29)
Less: accretion of fair value adjustment on securities available for sale (31) 11
 (20)
Less: accretion of fair value adjustment on held to maturity securities            (1) 1
 
Less: amortization of net unrealized (gains) losses on held to maturity securities (156) 61
 (95)
     Net change (90) 35
 (55)
Foreign currency translation adjustment 1
 (1) 
Pension and other benefits:     
Recognized net actuarial gain (loss)(1)
 29
 (11) 18
     Net change(1)
 29
 (11) 18
Net change in accumulated other comprehensive loss $(43) $17
 $(26)
       
For the Three Months Ended September 30, 2014     
Cash flow hedge activities:     
Unrealized net gains (losses) on hedges arising during the period $(32) $13
 $(19)
Less: Reclassification adjustment for net (gains) losses on hedges included in interest income for loans and interest expense on long-term debt            (34) 13
 (21)
     Net change (66) 26
 (40)
Securities:     
Unrealized holding gains (losses) arising during the period on securities available for sale 10
 (4) 6
Reclassification adjustment for net (gains) losses on securities available for sale included in securities gains, net (13) 5
 (8)
Less: accretion of fair value adjustment on securities available for sale (35) 13
 (22)
Less: amortization of net unrealized (gains) losses on held to maturity securities 4
 (2) 2
     Net change (34) 12
 (22)
Foreign currency translation adjustment (6) 3
 (3)
Pension and other benefits:     
Amortization of prior service costs(1)
 (6) 2
 (4)
Recognized net actuarial gain (loss)(1)
 16
 (5) 11
     Net change(1)
 10
 (3) 7
Net change in accumulated other comprehensive loss $(96) $38
 $(58)
(1)These amounts are included in the computation of net periodic pension cost. For further information, see Note 11 to these consolidated financial statements.

75

(1)
These amounts are included in the computation of net periodic pension cost. For further information, see Note 12 to these consolidated financial statements.

Table of Contents

Note 11—10—Accumulated Other Comprehensive Loss (Continued)


The following table presents the change in each of the components of accumulated other comprehensive loss and the related tax effect of the change allocated to each component for the sixnine months ended JuneSeptember 30, 2014 and 2013:

2013:

(Dollars in millions) Before
Tax
Amount
 Tax
Effect
 Net of
Tax
 

For the Six Months Ended June 30, 2013

          

Cash flow hedge activities:

          

Unrealized net gains (losses) on hedges arising during the period

 $9 $(3)$6 

Less: Reclassification adjustment for net (gains) losses on hedges included in interest income for loans and interest expense on long-term debt           

  (14) 5  (9)
        

Net change

  (5) 2  (3)
        

Securities:

          

Unrealized holding gains (losses) arising during the period on securities available for sale           

  (503) 197  (306)

Reclassification adjustment for net (gains) losses on securities available for sale included in securities gains, net           

  (123) 49  (74)

Less: accretion of fair value adjustment on securities available for sale           

  (38) 16  (22)

Less: accretion of fair value adjustment on held to maturity securities           

  (11) 4  (7)

Less: amortization of net unrealized (gains) losses on held to maturity securities           

  25  (10) 15 
        

Net change

  (650) 256  (394)
        

Foreign currency translation adjustment

  (5) 2  (3)
        

Pension and other benefits:

          

Recognized net actuarial gain (loss)(1)

  58  (23) 35 
        

Net change(1)

  58  (23) 35 
        

Net change in accumulated other comprehensive loss

 $(602)$237 $(365)
        
        

For the Six Months Ended June 30, 2014

          

Cash flow hedge activities:

          

Unrealized net gains (losses) on hedges arising during the period

 $78 $(31)$47 

Less: Reclassification adjustment for net (gains) losses on hedges included in interest income for loans and interest expense on long-term debt           

  (52) 21  (31)
        

Net change

  26  (10) 16 
        

Securities:

          

Unrealized holding gains (losses) arising during the period on securities available for sale           

  272  (107) 165 

Reclassification adjustment for net (gains) losses on securities available for sale included in securities gains, net           

  (3) 1  (2)

Less: accretion of fair value adjustment on securities available for sale           

  (24) 10  (14)

Less: amortization of net unrealized (gains) losses on held to maturity securities           

  10  (4) 6 
        

Net change

  255  (100) 155 
        

Pension and other benefits:

          

Pension and other benefits arising during the period

  (4) 2  (2)

Amortization of prior service costs(1)

  (4) 2  (2)

Recognized net actuarial gain (loss)(1)

  29  (13) 16 
        

Net change

  21  (9) 12 
        

Net change in accumulated other comprehensive loss

 $302 $(119)$183 
        
        
(Dollars in millions) 
Before
Tax
Amount
 
Tax
Effect
 
Net of
Tax
For the Nine Months Ended September 30, 2013      
Cash flow hedge activities:      
Unrealized net gains (losses) on hedges arising during the period $39
 $(15) $24
Less: Reclassification adjustment for net (gains) losses on hedges included in interest income for loans and interest expense on long-term debt            (27) 11
 (16)
     Net change 12
 (4) 8
Securities:     
Unrealized holding gains (losses) arising during the period on securities available for sale (358) 141
 (217)
Reclassification adjustment for net (gains) losses on securities available for sale included in securities gains, net (170) 67
 (103)
Less: accretion of fair value adjustment on securities available for sale (69) 27
 (42)
Less: accretion of fair value adjustment on held to maturity securities            (12) 5
 (7)
Less: amortization of net unrealized (gains) losses on held to maturity securities (131) 51
 (80)
     Net change (740) 291
 (449)
Foreign currency translation adjustment (4) 1
 (3)
Pension and other benefits:     
Recognized net actuarial gain (loss)(1)
 87
 (34) 53
     Net change(1)
 87
 (34) 53
Net change in accumulated other comprehensive loss $(645) $254
 $(391)
       
For the Nine Months Ended September 30, 2014     
Cash flow hedge activities:     
Unrealized net gains (losses) on hedges arising during the period $46
 $(18) $28
Less: Reclassification adjustment for net (gains) losses on hedges included in interest income for loans and interest expense on long-term debt            (86) 34
 (52)
     Net change (40) 16
 (24)
Securities:     
Unrealized holding gains (losses) arising during the period on securities available for sale 282
 (111) 171
Reclassification adjustment for net (gains) losses on securities available for sale included in securities gains, net (16) 6
 (10)
Less: accretion of fair value adjustment on securities available for sale (59) 23
 (36)
Less: amortization of net unrealized (gains) losses on held to maturity securities 14
 (6) 8
     Net change 221
 (88) 133
Foreign currency translation adjustment (6) 3
 (3)
Pension and other benefits:     
Pension and other benefits arising during the period (4) 2
 (2)
Amortization of prior service costs(1)
 (10) 4
 (6)
Recognized net actuarial gain (loss)(1)
 45
 (18) 27
     Net change(1)
 31
 (12) 19
Net change in accumulated other comprehensive loss $206
 $(81) $125
(1)These amounts are included in the computation of net periodic pension cost. For further information, see Note 11 to these consolidated financial statements.

76

(1)
These amounts are included in the computation of net periodic pension cost. For further information, see Note 12 to these consolidated financial statements.

Table of Contents

Note 11—10—Accumulated Other Comprehensive Loss (Continued)


The following tables present the change in accumulated other comprehensive loss balances:

For the Three Months Ended June 30, 2013 and 2014:

(Dollars in millions) Net
Unrealized
Gains (Losses)
on Cash Flow
Hedges
 Net
Unrealized
Gains (Losses)
on Securities
 Foreign
Currency
Translation
Adjustment
 Pension and
Other
Benefits
Adjustment
 Accumulated
Other
Comprehensive
Loss
 

Balance, March 31, 2013

 $24 $95 $ $(680)$(561)

Other comprehensive income (loss) before reclassifications

  2  (314) (2)   (314)

Amounts reclassified from accumulated other comprehensive loss

  (5) (16)   17  (4)
            

Balance, June 30, 2013

 $21 $(235)$(2)$(663)$(879)
            
            

Balance, March 31, 2014

 $7 $(260)$(5)$(301)$(559)

Other comprehensive income (loss) before reclassifications

  42  95  2  (2) 137 

Amounts reclassified from accumulated other comprehensive loss

  (17) (8)   6  (19)
            

Balance, June 30, 2014

 $32 $(173)$(3)$(297)$(441)
            
            
For the Three Months Ended September 30, 2013 and 2014:
  
Net Unrealized
Gains (Losses) on Cash Flow Hedges
 
Net
Unrealized
Gains (Losses)
on Securities
 
Foreign
Currency
Translation
Adjustment
 
Pension and
Other
Benefits
Adjustment
 
Accumulated
Other
Comprehensive
Loss
(Dollars in millions)     
Balance, June 30, 2013 $21
 $(235) $(2) $(663) $(879)
Other comprehensive income (loss) before reclassifications 18
 (26) 
 
 (8)
Amounts reclassified from accumulated other comprehensive loss (7) (29) 
 18
 (18)
Balance, September 30, 2013 $32
 $(290) $(2) $(645) $(905)
Balance, June 30, 2014 $32
 $(173) $(3) $(297) $(441)
Other comprehensive income (loss) before reclassifications (19) (14) (3) 
 (36)
Amounts reclassified from accumulated other comprehensive loss (21) (8) 
 7
 (22)
Balance, September 30, 2014 $(8) $(195) $(6) $(290) $(499)

For the Six Months Ended June 30, 2013 and 2014:


(Dollars in millions) Net
Unrealized
Gains (Losses)
on Cash Flow
Hedges
 Net
Unrealized
Gains (Losses)
on Securities
 Foreign
Currency
Translation
Adjustment
 Pension and
Other
Benefits
Adjustment
 Accumulated
Other
Comprehensive
Loss
 

Balance, December 31, 2012

 $24 $159 $1 $(698)$(514)

Other comprehensive income (loss) before reclassifications

  6  (320) (3)   (317)

Amounts reclassified from accumulated other comprehensive loss

  (9) (74)   35  (48)
            

Balance, June 30, 2013

 $21 $(235)$(2)$(663)$(879)
            
            

Balance, December 31, 2013

 $16 $(328)$(3)$(309)$(624)

Other comprehensive income (loss) before reclassifications

  47  165    (2) 210 

Amounts reclassified from accumulated other comprehensive loss

  (31) (10)   14  (27)
            

Balance, June 30, 2014

 $32 $(173)$(3)$(297)$(441)
            
            
For the Nine Months Ended September 30, 2013 and 2014:
           
  
Net
Unrealized
Gains (Losses)
on Cash Flow
Hedges
 
Net
Unrealized
Gains (Losses)
on Securities
 
Foreign
Currency
Translation
Adjustment
 
Pension and
Other
Benefits
Adjustment
 
Accumulated
Other
Comprehensive
Loss
(Dollars in millions)     
Balance, December 31, 2012 $24
 $159
 $1
 $(698) $(514)
Other comprehensive income (loss) before reclassifications 24
 (346) (3) 
 (325)
Amounts reclassified from accumulated other comprehensive loss (16) (103) 
 53
 (66)
Balance, September 30, 2013 $32
 $(290) $(2) $(645) $(905)
Balance, December 31, 2013 $16
 $(328) $(3) $(309) $(624)
Other comprehensive income (loss) before reclassifications 28
 143
 (3) (2) 166
Amounts reclassified from accumulated other comprehensive loss (52) (10) 
 21
 (41)
Balance, September 30, 2014 $(8) $(195) $(6) $(290) $(499)


Note 12—11—Employee Pension and Other Postretirement Benefits

In April 2014, the pension plan was amended. Pension benefits accrued after December 31, 2014 for the majority of eligible employees will be earned under the cash balance plan formula, which was established effective October 1, 2012 for all future eligible employees. For those employees whose benefits will be earned under the cash balance plan formula, benefits earned under the previous final average pay formula will become fixed as of December 31, 2014. The health benefit plan was also amended on April 2014 to discontinue the availability of retiree health benefits for the majority of employees. As a result of these amendments, key assumptions used in computing plan benefit obligations and net periodic benefit cost were updated and the Company remeasured the plans' assets and benefit obligations as of April 30, 2014. For further information regarding key assumptions and measurement of pension plan assets and benefit obligations, see Note 16 to the Consolidated Financial Statements in Part II, Item 8 "Financial Statements and Supplementary Data" in our 2013 Form 10-K.



77


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Note 12—11—Employee Pension and Other Postretirement Benefits (Continued)



The following table summarizes the discount rates used in computing the present value of the pension and other benefit obligations at April 30, 2014 and December 31, 2013.

 
 Pension Benefits Other Benefits 
 
 April 30,
2014
 December 31,
2013
 April 30,
2014
 December 31,
2013
 

Discount rate in determining benefit obligations

  4.50% 4.90% 4.20% 4.60%
  Pension Benefits Other Benefits 
  April 30, 2014 December 31, 2013 April 30, 2014 December 31, 2013 
Discount rate in determining benefit obligations 4.50%4.90%4.20%4.60%

The plan amendments decreased the pension plan's and health plan's benefit obligation by $150 million and $29 million, respectively, and changes in discount rates and actuarial revisions increased the pension plan's and health plan's benefit obligations by $162 million and $21 million, respectively. These changes also resulted in an increase in accumulated other comprehensive loss before income taxes of $4 million. As a result of these amendments to the plans, estimated future benefit payments from 2014 through 2023 increased $93 million.

The following tables summarize the components of net periodic benefit cost for the three and sixnine months ended JuneSeptember 30, 2014 and 2013.2013. As a result of the amendments to the pension and health benefit plans and resulting remeasurements, 2014 total net periodic benefit cost will decrease from approximately $71 million to approximately $39 million.


 Pension
Benefits
 Other Benefits Superannuation,
SERP(1)
and ESBP(2)
  Pension Benefits Other Benefits 
Superannuation,
SERP(1) and
ESBP(2)

 For the Three
Months
Ended
June 30,
 For the Three
Months
Ended
June 30,
 For the Three
Months
Ended
June 30,
  For the Three Months Ended 
 September 30,
 For the Three Months Ended 
 September 30,
 For the Three Months Ended 
 September 30,
(Dollars in millions) 2014 2013 2014 2013 2014 2013  2014 2013 2014 2013 2014 2013

Components of net periodic benefit cost:

                         

Service cost

 $18 $21 $2 $3 $ $  $21
 $23
 $2
 $4
 $
 $

Interest cost

 26 24 3 3 1 1  25
 25
 3
 2
 1
 1

Expected return on plan assets

 (47) (42) (4) (4)    (49) (42) (5) (4) 
 

Amortization of prior service cost

 (3)  (1)     (4) 
 (2) 
 
 

Recognized net actuarial loss

 14 27  2 1   16
 26
 
 2
 
 1
             

Total net periodic benefit cost

 $8 $30 $ $4 $2 $1  $9
 $32
 $(2) $4
 $1
 $2
             
             

  Pension Benefits Other Benefits 
Superannuation,
SERP(1) and
ESBP(2)
  For the Nine Months Ended 
 September 30,
 For the Nine Months Ended 
 September 30,
 For the Nine Months Ended 
 September 30,
(Dollars in millions) 2014 2013 2014 2013 2014 2013
Components of net periodic benefit cost:            
Service cost $60
 $66
 $8
 $11
 $1
 $
Interest cost 79
 74
 9
 8
 3
 3
Expected return on plan assets (144) (125) (14) (12) 
 
Amortization of prior service cost (7) 
 (3) 
 
 
Recognized net actuarial loss 43
 80
 1
 5
 1
 2
Total net periodic benefit cost $31
 $95
 $1
 $12
 $5
 $5
(1)Supplemental Executives Retirement Plan (SERP).
(2)Executive Supplemental Benefit Plans (ESBP).

78

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Note 12—Employee Pension and Other Postretirement Benefits (Continued)


 
 Pension
Benefits
 Other Benefits Superannuation,
SERP(1)
and ESBP(2)
 
 
 For the Six
Months
Ended
June 30,
 For the Six
Months
Ended
June 30,
 For the Six
Months
Ended
June 30,
 
(Dollars in millions) 2014 2013 2014 2013 2014 2013 

Components of net periodic benefit cost:

                   

Service cost

 $39 $43 $5 $7 $1 $ 

Interest cost

  54  49  6  6  2  2 

Expected return on plan assets

  (95) (83) (9) (8)    

Amortization of prior service cost

  (3)   (1)      

Recognized net actuarial loss

  28  54    3  1  1 
              

Total net periodic benefit cost

 $23 $63 $1 $8 $4 $3 
              
              

(1)
Supplemental Executives Retirement Plan (SERP).
(2)
Executive Supplemental Benefit Plans (ESBP).

Note 13—Commitments, Contingencies and Guarantees

The following table summarizes the Company's commitments:

(Dollars in millions) June 30, 2014  September 30, 2014

Commitments to extend credit

 $34,724  $34,899

Issued standby and commercial letters of credit

 5,887  $6,106

Other commitments

 180  $179

Commitments to extend credit are legally binding agreements to lend to a customer provided there are no violations of any condition established in the contract. Commitments have fixed expiration dates or other termination clauses and may require maintenance of compensatory balances. Since many of the commitments to extend credit may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements.

Standby and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party, while commercial letters of credit are issued specifically to facilitate foreign or domestic trade transactions. Additionally, the Company enters into risk participations in bankers' acceptances wherein a fee is received to guarantee a portion of the credit risk on an acceptance of another bank. The majority of these types of commitments have terms of one year or less. At JuneSeptember 30, 2014, the carrying amount of the Company's risk participations in bankers' acceptances and standby and commercial letters of credit totaled $4.4$4.3 million. Estimated exposure to loss related to these commitments is covered by the allowance for losses on off-balance sheet commitments. The carrying amounts of the standby and commercial letters of credit and the allowance for losses on off-balance sheet commitments are included in other liabilities on the consolidated balance sheet.

The credit risk involved in issuing loan commitments and standby and commercial letters of credit is essentially the same as that involved in extending loans to customers and is represented by the contractual amount of these instruments. Collateral may be obtained based on management's credit assessment of the customer.

Other commitments include commitments to fund principal investments and other securities.


Table of Contents

Note 13—Commitments, Contingencies and Guarantees (Continued)

Principal investments include direct investments in private and public companies. The Company issues commitments to provide equity and mezzanine capital financing to private and public companies through direct investments. The timing of future cash requirements to fund such commitments is generally dependent on the investment cycle. This cycle, the period over which privately held companies are funded by private equity investors and ultimately sold, merged, or taken public through an initial offering, can vary based on overall market conditions as well as the nature and type of industry in which the companies operate.

The Company occasionally enters into financial guarantee contracts where a premium is received from another financial institution counterparty to guarantee a portion of the credit risk on interest rate swap contracts entered into between the financial institution and its customer. The Company becomes liable to pay the financial institution only if the financial institution is unable to collect amounts owed to them by their customer. As of JuneSeptember 30, 2014, the current exposure to loss under these contracts totaled $23$14 million, and the maximum potential exposure to loss in the future was estimated at $48$38 million.

The Company is subject to various pending and threatened legal actions that arise in the normal course of business. The Company maintains liabilities for losses from legal actions that are recorded when they are determined to be both probable in their occurrence and can be reasonably estimated. Management believes the disposition of all claims currently pending, including potential losses from claims that may exceed the liabilities recorded, and claims for loss contingencies that are considered reasonably possible to occur, will not have a material effect, either individually or in the aggregate, on the Company's consolidated financial condition, results of operations or liquidity.
Note 13—Related Party Transactions
Effective July 1, 2014, the U.S. branch banking operations of BTMU were integrated under the Bank's operations. The integration did not involve a legal entity combination, but rather an integration of personnel and certain business and support activities. As a result of this initiative, all of BTMU's banking activities in the Americas are managed by employees of the Bank, which includes the addition of approximately 2,300 U.S. employees formerly employed by BTMU. This initiative also included the transfer of ownership of BTMU’s U.S. corporate customer list, available-for-sale securities of $70 million and employee-related liabilities totaling $30 million to the Bank. The Company's additional paid-in capital increased by $31 million. Immediately


79

Note 13—Related Party Transactions (Continued)

subsequent to the transfer, the transferred liabilities were adjusted to conform to the Company's U.S. GAAP accounting policies resulting in a $9 million increase in retained earnings.
As a result of this initiative, the Bank and BTMU entered into a master services agreement, which provides for employees of the Bank to perform and make available various business, banking, financial, and administrative and support services (the Services) and facilities for BTMU in connection with the operation and administration of BTMU's businesses in the U.S. (including BTMU's U.S. branches). In consideration for the Services, BTMU pays to the Bank fee income, which reflects market-based pricing. Costs related to the Services performed by the transferred employees are primarily reflected in salaries and employee benefits expense. For the quarter ended September 30, 2014, the Company recorded $151 million in fee income from this initiative, including $94 million related to support services provided by the Company to BTMU. Substantially offsetting the fee income was $88 million, primarily in salaries and benefits expense, related to these support services. The remaining fee income was recognized through revenue sharing agreements with BTMU, with associated costs included within the Company’s third quarter results. The Company also recorded $10 million of expenses due to BTMU, which are included within noninterest expense. Amounts due from and to BTMU, which are included in other assets and other liabilities, respectively, are generally settled monthly and were $41 million and $4 million, respectively, at September 30, 2014.

Note 14—Business Segments

During the fourth quarter 2013, the composition of the Company'sCompany’s reporting segments were revised to reflect a new internal management structure resulting from the BTMU Americas Holdings business integration initiative announced in 2013. The Company now has five reportable segments: Retail Banking & Wealth Markets, Commercial Banking, Corporate Banking, Transaction Banking, and Investment Banking & Markets. Prior period segment results have been revised to conform to current period presentation. Below is a detailed description of these reportable segments.

Retail Banking & Wealth Markets

Retail Banking & Wealth Markets offers a range of banking products and services to individuals and small businesses, including high net worth individuals and institutional clients, delivered generally through a network of branches, private banking offices, ATMs, broker mortgage referrals, telephone services, and web-based and mobile banking applications. These products and services include mortgages, home equity lines of credit, consumer and commercial loans, deposit accounts, financial planning and investments.

The Consumer Lending Division provides the centralized origination, underwriting, processing, servicing, collection and administration for consumer assets including residential mortgages.

The Community Banking Division serves its customers through 358354 full-service branches in California and 4546 full-service branches in Washington and Oregon, as well as through ATMs, call centers, web-based and mobile internet banking applications and through alliances with other financial institutions. Community Banking provides checking and deposit products and services; bill and loan payment, merchant, and various types of financing and investment services; and products including credit cards.

The Wealth Markets Division serves its customers through the Private Bank; UnionBanc Investment Services LLC (UBIS), a subsidiary of MUFG Union Bank and a registered broker-dealer and investment advisor; and Asset Management which includes HighMark Capital Management, Inc., a subsidiary of MUFG Union Bank and a registered investment advisor. Wealth Markets provides investment management and advisory


Table of Contents

Note 14—Business Segments (Continued)

services to institutional clients, wealth planning, deposits and risk management strategies, trust and estate administration, as well as investment sub-advisory services to unaffiliated funds. Products provided to its customers include traditional brokerage, managed accounts, annuities, mutual funds, fixed income products and insurance and customized lending.

Commercial Banking

Commercial Banking provides credit products including commercial loans, and accounts receivable, inventory, project, trade and real estate financing to corporate customers with revenues generally less than $2 billion. Commercial Banking also offers its customers a range of noncredit services and products, which include global treasury management and capital markets solutions, foreign exchange and various interest rate risk and commodity risk management products through cooperation with other segments.


80

Note 14—Business Segments (Continued)

Commercial Banking is comprised of five main divisions: Western Markets, which serves companies primarily in California, Oregon and Washington; Petroleum, which serves oil and gas companies; Expansion Markets, which serves clients nationally, outside of the western states, and also targets certain defined industries such as entertainment and technology; Specialized Products, which focuses on specific industries on a national basis including commercial finance, funds finance, environmental services, non-profits, healthcare, and transportation, aerospace and defense; and Real Estate Industries, which serves professional real estate investors and developers. Additionally, through its Community Development Finance unit, tax credit investments are made in affordable housing projects, as well as construction and permanent financing.

Corporate Banking

Corporate Banking provides commercial lending products, including commercial loans, lines of credit and project financing, to corporate customers with revenues generally greater than $2 billion. The segment employs an industry-focused strategy including dedicated coverage teams in General Industries, Power and Utilities, Oil and Gas, Telecom and Media, Technology, Healthcare, Public Finance, and Financial Institutions (predominantly Insurance and Asset Managers). By working with the Company'sCompany’s other segments, Corporate Banking offers its customers a range of noncredit services, which include global treasury management and capital market solutions, and foreign exchange and various interest rate risk and commodity risk management products.

Transaction Banking

Transaction Banking works alongside the Company'sCompany’s other segments to provide working capital management and asset servicing solutions, including deposits and treasury management, trade finance, and institutional trust and custody, to the Company'sCompany’s customers. This segment also manages the digital banking channels for retail, small business, wealth management and commercial clients, as well as commercial product development. The client base consists of financial institutions, corporations, government agencies, insurance companies, mutual funds, investment managers and non-profit organizations.

Investment Banking & Markets

Investment Banking & Markets, which includes Global Capital Markets, works with the Company'sCompany’s other segments to provide customers structured credit services, including project finance; foreign exchange, interest rate and energy risk management solutions; and to facilitate merchant and investment banking-related transactions. Additionally, the segment'ssegment’s leasing arm provides lease and other financing services to corporate customers.


Other

Table of Contents

Note 14—Business Segments (Continued)

Other

        "Other"

“Other” includes the Asian Corporate Banking segment, Corporate Treasury and the impact of certain corporate activities. The Asian Corporate Banking segment offers a range of credit, deposit, and investment management products and services to companies located primarily in the U.S. that are affiliated with companies headquartered in Japan and other Asian countries. Corporate Treasury is responsible for ALM, wholesale funding and the ALM investment and derivatives hedging portfolios. These Treasury management activities are carried out to manage the net interest rate and liquidity risks of the Company'sCompany’s balance sheet and to manage those risks within the guidelines established by ALCO. For additional discussion regarding these risk management activities, see Part I, Item 2. "Quantitative“Quantitative and Qualitative Disclosures About Market Risk"Risk” in this Form 10-Q.

Additionally, "Other"“Other” is comprised of certain corporate activities of the Company; the net impact of the funds transfer pricing charges and credits allocated to the reportable segments; the residual costs of support groups; the unallocated allowance; goodwill, intangible assets, and the related amortization/accretion associated with the Company'sCompany’s privatization transaction; the elimination of the fully taxable-equivalent basis amount; the difference between the marginal tax rate and the consolidated effective tax rate; and the FDIC covered assets.

The information, set forth in the tables that follow, is prepared using various management accounting methodologies to measure the performance of the individual segments. Unlike U.S. GAAP there is no standardized or authoritative guidance for management accounting. Consequently, reported results are not necessarily comparable with those presented by other companies and they are not necessarily indicative of the results that would be reported by the business units if they were unique economic entities. The management reporting accounting methodologies, which are enhanced from time to time, measure segment profitability by assigning balance sheet and income statement items to each operating segment. Methodologies that are applied to the measurement of segment profitability include a funds transfer pricing system, an activity-based costing methodology, other indirect costs and a methodology to allocate the provision for credit losses. The fund transfer pricing system assigns a cost of funds or a credit for funds to assets or liabilities based on their type, maturity or repricing characteristics. The activity-based costing methodology allocates certain indirect costs, such as operations and technology expense, to the segments based on studies of billable unit costs for product or data processing. Other indirect costs, such as corporate overhead, are allocated to the segments based on internal surveys and metrics that serve as proxies for estimated usage. The Company periodically changes or updates its

81

Note 14—Business Segments (Continued)

management accounting methodologies in the normal course of business. Beginning with the third quarter of 2014, the funds transfer pricing methodology was revised with respect to reference rates for certain commercial deposits. Prior period results have been adjusted to reflect these changes. The Company reflects a "market view"“market view” perspective in measuring the business segments. The market view is a measurement of customer markets aggregated to show all revenues generated and expenses incurred from all products and services sold to those customers regardless of where product areas organizationally report. Therefore, revenues and expenses are included in both the business segment that provides the service and the business segment that manages the customer relationship. The duplicative results from this internal management accounting view are eliminated in "Reconciling“Reconciling Items."

As of and for the Three Months Ended September 30, 2014:
                 
(Dollars in millions) Retail Banking & Wealth Markets Commercial Banking Corporate Banking Transaction Banking Investment Banking & Markets Other Reconciling Items MUFG Americas Holdings Corporation
Results of operations - Market View                
Net interest income (expense) $340
 $249
 $46
 $110
 $45
 $19
 $(102) $707
Noninterest income (expense) 83
 57
 44
 44
 138
 86
 (64) 388
Total revenue 423
 306
 90
 154
 183
 105
 (166) 1,095
Noninterest expense 329
 114
 40
 91
 54
 218
 (41) 805
(Reversal of) provision for loan losses (1) 7
 (6) (6) (8) (13) 9
 (18)
Income (loss) before income taxes and including noncontrolling interests 95
 185

56

69

137

(100)
(134)
308
Income tax expense (benefit) 37
 42
 22
 27
 42
 (50) (53) 67
Net income (loss) including noncontrolling interests 58
 143
 34
 42
 95
 (50) (81) 241
Deduct: net loss from noncontrolling interests 
 
 
 
 
 5
 
 5
Net income (loss) attributable to MUAH $58
 $143
 $34
 $42
 $95
 $(45) $(81) $246
                 
Total assets, end of period $37,224
 $37,088
 $5,077
 $1,814
 $6,160
 $27,157
 $(3,641) $110,879


82

Note 14—Business Segments (Continued)

As of and for the Three Months Ended June 30, 2014:


(Dollars in millions) Retail
Banking &
Wealth
Markets
 Commercial
Banking
 Corporate
Banking
 Transaction
Banking
 Investment
Banking &
Markets
 Other Reconciling
Items
 MUFG
Americas
Holdings
Corporation
 

Results of operations—Market View

                         

Net interest income (expense)

 $362 $277 $43 $94 $43 $36 $(92)$763 

Noninterest income (expense)

  87  58  22  39  57  (6) (55) 202 
                  

Total revenue

  449  335  65  133  100  30  (147) 965 

Noninterest expense

  340  104  16  88  28  111  (38) 649 

(Reversal of) provision for loan losses

  (2) (10) 9  2  15  3  (8) 9 
                  

Income (loss) before income taxes and including noncontrolling interests

  111  241  40  43  57  (84) (101) 307 

Income tax expense (benefit)

  44  65  16  17  12  (53) (39) 62 
                  

Net income (loss) including noncontrolling interests

  67  176  24  26  45  (31) (62) 245 
                  

Deduct: net loss from noncontrolling interests

            4    4 
                  

Net income (loss) attributable to MUAH

 $67 $176 $24 $26 $45 $(27)$(62)$249 
                  
                  

Total assets, end of period

 $36,417 $35,423 $4,916 $1,938 $6,199 $27,485 $(3,558)$108,820 

As of and for the Three Months Ended June 30, 2013:

As of and for the Three Months Ended September 30, 2013:As of and for the Three Months Ended September 30, 2013:
                
(Dollars in millions) Retail
Banking &
Wealth
Markets
 Commercial
Banking
 Corporate
Banking
 Transaction
Banking
 Investment
Banking &
Markets
 Other Reconciling
Items
 MUFG
Americas
Holdings
Corporation
  Retail Banking & Wealth Markets Commercial Banking Corporate Banking Transaction Banking Investment Banking & Markets Other Reconciling Items MUFG Americas Holdings Corporation

Results of operations—Market View

                 
Results of operations - Market View                

Net interest income (expense)

 $332 $217 $31 $95 $43 $30 $(76)$672  $333
 $240
 $34
 $108
 $47
 $9
 $(86) $685

Noninterest income (expense)

 94 49 18 41 54 (4) (51) 201  103
 51
 22
 41
 39
 32
 (54) 234
                 

Total revenue

 426 266 49 136 97 26 (127) 873  436
 291
 56
 149
 86
 41
 (140) 919

Noninterest expense

 366 102 12 91 25 138 (32) 702  346
 99
 13
 87
 25
 151
 (32) 689

(Reversal of) provision for loan losses

 (7) 3 (4) (4) 7 3 (1) (3) (13) (20) 6
 4
 5
 4
 (2) (16)
                 

Income (loss) before income taxes and including noncontrolling interests

 67 161 41 49 65 (115) (94) 174  103
 212
 37
 58
 56
 (114) (106) 246

Income tax expense (benefit)

 27 40 15 20 17 (48) (36) 35  41
 62
 15
 23
 14
 (58) (42) 55
                 

Net income (loss) including noncontrolling interests

 40 121 26 29 48 (67) (58) 139  62
 150
 22
 35
 42
 (56) (64) 191
                 

Deduct: net loss from noncontrolling interests

      3  3  
 
 
 
 
 7
 
 7
                 

Net income (loss) attributable to MUAH

 $40 $121 $26 $29 $48 $(64)$(58)$142  $62
 $150
 $22
 $35
 $42
 $(49) $(64) $198
                                 
                 

Total assets, end of period

 $33,008 $31,153 $4,364 $1,507 $5,585 $28,525 $(1,863)$102,279  $33,550
 $32,219
 $4,649
 $1,569
 $6,380
 $29,648
 $(2,531) $105,484


83

Note 14—Business Segments (Continued)

As of and for the Six Months Ended June 30, 2014:


(Dollars in millions) Retail
Banking &
Wealth
Markets
 Commercial
Banking
 Corporate
Banking
 Transaction
Banking
 Investment
Banking &
Markets
 Other Reconciling
Items
 MUFG
Americas
Holdings
Corporation
 

Results of operations—Market View

                         

Net interest income (expense)

 $709 $504 $74 $194 $89 $48 $(172)$1,446 

Noninterest income (expense)

  166  106  40  79  107  (13) (102) 383 
                  

Total revenue

  875  610  114  273  196  35  (274) 1,829 

Noninterest expense

  675  209  31  177  55  235  (73) 1,309 

(Reversal of) provision for loan losses

  (8) 6  (7) 3  30  (12) (19) (7)
                  

Income (loss) before income taxes and including noncontrolling interests

  208  395  90  93  111  (188) (182) 527 

Income tax expense (benefit)

  82  99  35  36  23  (92) (71) 112 
                  

Net income (loss) including noncontrolling interests

  126  296  55  57  88  (96) (111) 415 
                  

Deduct: net loss from noncontrolling interests

            9    9 
                  

Net income (loss) attributable to MUAH

 $126 $296 $55 $57 $88 $(87)$(111)$424 
                  
                  

Total assets, end of period

 $36,417 $35,423 $4,916 $1,938 $6,199 $27,485 $(3,558)$108,820 

As of and for the Six Months Ended June 30, 2013:

As of and for the Nine Months Ended September 30, 2014:As of and for the Nine Months Ended September 30, 2014:
                
(Dollars in millions) Retail
Banking &
Wealth
Markets
 Commercial
Banking
 Corporate
Banking
 Transaction
Banking
 Investment
Banking & Markets
 Other Reconciling
Items
 MUFG
Americas
Holdings
Corporation
  Retail Banking & Wealth Markets Commercial Banking Corporate Banking Transaction Banking Investment Banking & Markets Other Reconciling Items MUFG Americas Holdings Corporation

Results of operations—Market View

                 
Results of operations - Market View                

Net interest income (expense)

 $669 $423 $60 $206 $89 $31 $(153)$1,325  $1,049
 $764
 $124
 $323
 $134
 $48
 $(289) $2,153

Noninterest income (expense)

 187 92 35 79 101 50 (92) 452  249
 163
 84
 124
 245
 72
 (166) 771
                 

Total revenue

 856 515 95 285 190 81 (245) 1,777  1,298
 927
 208
 447
 379
 120
 (455) 2,924

Noninterest expense

 730 199 26 184 50 291 (65) 1,415  1,004
 323
 72
 268
 109
 452
 (114) 2,114

(Reversal of) provision for loan losses

 (15) 30 2 (3) 4 (24)  (6) (9) 12
 (13) (3) 23
 (25) (10) (25)
                 

Income (loss) before income taxes and including noncontrolling interests

 141 286 67 104 136 (186) (180) 368  303
 592
 149
 182
 247
 (307) (331) 835

Income tax expense (benefit)

 56 69 26 41 36 (72) (71) 85  119
 146
 58
 71
 63
 (148) (130) 179
                 

Net income (loss) including noncontrolling interests

 85 217 41 63 100 (114) (109) 283  184
 446
 91
 111
 184
 (159) (201) 656
                 

Deduct: net loss from noncontrolling interests

      7  7  
 
 
 
 
 14
 
 14
                 

Net income (loss) attributable to MUAH

 $85 $217 $41 $63 $100 $(107)$(109)$290  $184
 $446
 $91
 $111
 $184
 $(145) $(201) $670
                                 
                 

Total assets, end of period

 $33,008 $31,153 $4,364 $1,507 $5,585 $28,525 $(1,863)$102,279  $37,224
 $37,088
 $5,077
 $1,814
 $6,160
 $27,157
 $(3,641) $110,879


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Note 14—Business Segments (Continued)

As of and for the Nine Months Ended September 30, 2013:
                 
(Dollars in millions) Retail Banking & Wealth Markets Commercial Banking Corporate Banking Transaction Banking Investment Banking & Markets Other Reconciling Items MUFG Americas Holdings Corporation
Results of operations - Market View                
Net interest income (expense) $1,002
 $671
 $101
 $335
 $136
 $20
 $(255) $2,010
Noninterest income (expense) 289
 142
 58
 120
 140
 84
 (147) 686
Total revenue 1,291
 813
 159
 455
 276
 104
 (402) 2,696
Noninterest expense 1,075
 297
 41
 271
 75
 442
 (97) 2,104
(Reversal of) provision for loan losses (28) 9
 7
 1
 9
 (18) (2) (22)
Income (loss) before income taxes and including noncontrolling interests 244
 507
 111
 183
 192
 (320) (303) 614
Income tax expense (benefit) 96
 134
 44
 72
 50
 (137) (119) 140
Net income (loss) including noncontrolling interests 148
 373
 67
 111
 142
 (183) (184) 474
Deduct: net loss from noncontrolling interests 
 
 
 
 
 14
 
 14
Net income (loss) attributable to MUAH $148
 $373
 $67
 $111
 $142
 $(169) $(184) $488
                 
Total assets, end of period $33,550
 $32,219
 $4,649
 $1,569
 $6,380
 $29,648
 $(2,531) $105,484

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PART II. OTHER INFORMATION

Item 1.   Legal Proceedings

We are subject to various pending and threatened legal actions that arise in the normal course of business. We maintain liabilities for losses from legal actions that are recorded when they are determined to be both probable in their occurrence and can be reasonably estimated. We believe the disposition of all claims currently pending, including potential losses from claims that may exceed the liabilities recorded, and claims for loss contingencies that are considered reasonably possible to occur, will not have a material effect, either individually or in the aggregate, on our consolidated financial position, results of operations, or liquidity.

Item 1A.   Risk Factors

For a discussion of risk factors relating to our business, please refer to Part I, Item 1A. of our 2013 Form 10-K, which is incorporated by reference herein, in addition to the following information.

Industry Factors

We are subject to numerous risks and uncertainties, including but not limited to the following information:
Difficult market conditions have adversely affected the U.S. banking industry

Dramatic declines in the housing market in the U.S. in general, and in California in particular, during 2008 and continuing through 2011, with falling or sluggish home prices and increasing foreclosures, unemployment and under-employment,under‑employment, negatively impacted the credit performance of mortgage loans and resulted in significant write-downswrite‑downs of asset values by financial institutions, including government-sponsoredgovernment‑sponsored entities as well as commercial and investment banks. These write-downs,write‑downs, initially of mortgage-backedmortgage‑backed securities but spreading to credit default swaps and other derivative securities, residential and commercial real estate loans and small business and other commercial loans, in turn, caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. These adverse economic conditions also led to an increased level of commercial and consumer delinquencies, reduced consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic pressure on consumers and lack of confidence in the financial markets adversely affected our business, financial condition and results of operations in 2009 and this effect continued, although to a lesser degree, in 2010. Although the economic conditions in our markets, including California in particular, and in the U.S. generally have shown improvement since 2011, there can be no assurance that these conditions will continue to improve. California is facing a severe drought which may negatively impact its economy, particularly in the agricultural sector, as other markets improve. These conditions may again decline in the near future and could be influenced by any continuing controversy over federal spending and debt limits. In addition, turbulent political and economic conditions in foreign countries have negatively impacted the U.S. financial markets and economy in general and may do so in the future. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry. In particular, we may face the following risks in connection with these events:

Our ability to assess the creditworthiness of our customers and counterparties may be impaired if the applications and approaches we use to select, manage, and underwrite our customers and counterparties become less predictive of future behaviors.

We may not be able to accurately estimate credit exposure losses because the process we use to estimate these losses requires difficult, subjective, and complex judgments with respect to predictions which may not be amenable to precise estimates, including forecasts of economic conditions and how these economic predictions might impair the ability of our borrowers to repay their loans.

Our ability to borrow from other financial institutions on favorable terms or at all could be adversely affected by further disruptions in the capital markets or other events, including actions by rating agencies and deteriorating investor expectations.

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The effects of changes or increases in, or supervisory enforcement of, banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect us

We are subject to significant federal and state banking regulation and supervision, which is primarily for the benefit and protection of our customers and the Federal Deposit Insurance Fund and not for the benefit of investors in our securities. In the past, our business has been materially affected by these regulations. This will continue and likely intensify in the future. Laws, regulations or policies, including accounting standards and interpretations, currently affecting us and our subsidiaries may change at any time. Regulatory authorities may also change their interpretation of and intensify their examination of compliance with these statutes and regulations. Therefore, our business may be adversely affected by changes in laws, regulations, policies or interpretations or regulatory approaches to compliance and enforcement, as well as by supervisory action or criminal proceedings taken as a result of noncompliance, which could result in the imposition of significant civil money penalties or fines. Changes in laws and regulations may also increase our expenses by imposing additional supervision, fees, taxes or restrictions on our operations. Compliance with laws and regulations, especially new laws and regulations, increases our operating expenses and may divert management attention from our business operations.

On July 21, 2010, President Obama signed into law the Dodd-FrankDodd‑Frank Act. This important legislation has affected U.S. financial institutions, including MUAH and MUB, in many ways, some of which have increased, or may increase in the future, the cost of doing business and present other challenges to the financial services industry. Due to our size of over $50 billion in assets, we are regarded as "systemically significant"“systemically significant” to the financial health of the U.S. economy and, as a result, are subject to additional regulations as discussed further below. Various provisions of the law have been implemented by rules and regulations of the federal banking agencies, but certain provisions of the law are yet to be implemented by the federal banking agencies and therefore the full scope and impact of the law on banking institutions generally and on our business cannot be fully determined at this time. The law contains many provisions that may have particular relevance to the business of MUAH and the Bank.MUB. The Dodd-FrankDodd‑Frank Act created the CFPB, which has direct supervision and examination authority over banks with more than $10 billion in assets, including the Bank.MUB. While the full effect of these provisions of the Dodd-FrankDodd‑Frank Act on the BankMUB cannot be predicted at this time, they have resulted in adjustments to our FDIC deposit insurance premiums, and can be expected to result in increased capital and


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liquidity requirements, increased supervision, increased regulatory and compliance risks and costs and other operational costs and expenses, reduced fee-basedfee‑based revenues and restrictions on some aspects of our operations, as well as increased interest expense on our demand deposits, some or all of which may be material.

The Federal Reserve published proposed rules in December 2011 to implement the provisions of the Dodd-FrankDodd‑Frank Act regarding enhanced prudential standards for large bank holding companies like the Company and other systemically important firms. The proposed rules included new requirements relating to capital planning, liquidity risk management, counterparty credit exposure limits, overall risk management standards, stress testing, debt-to-equitydebt‑to‑equity limits, resolution planning and early remediation. In November 2012, the Federal Reserve issued final rules regarding stress testing requirements. The OCC also adopted similar rules for large national banks such as MUB. The stress testing rules govern the timing and type of stress testing activities required of large bank holding companies and banks as well as rules governing testing controls, oversight and disclosure requirements. In July 2014, the Federal Reserve and the OCC published proposed rules which would amend certain aspects of the capital plan and stress test rules, subject to a transition period, to adjust the timing of the annual stress testing cycle from January 5 to April 5 each year. In October 2014, the Federal Reserve adopted final rules largely identical to the proposed rules and also published the summary instructions and guidance for the 2015 CCAR exercise.  Among other changes, the proposed amended rulefinal rules would limit a bank holding company'sBHC’s ability to make capital distributions to the extent that its actual capital issuances are less than the amount indicated in its capital

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plan, measured on a quarterly basis.

 In addition, for FBOs, if a BHC designates its existing BHC as its intermediate holding company (IHC), as discussed further below, then that existing BHC is not required to reflect any reorganization required in its 2015 capital plan and stress test results.  However, the BHC subsidiary of the FBO is expected to reflect the effects of any transfers associated with the IHC rule in the BHC’s capital plan due April 5, 2016.


In December 2012, the Federal Reserve published proposed rules regarding enhanced prudential standards for large FBOs, such as MUFG and BTMU, operating in the U.S. which were similar in many respects to the December 2011 proposed rules for large U.S. bank holding companies.

In February 2014, the Federal Reserve adopted final rules regarding enhanced prudential standards for both large U.S. BHCs, such as the Company, and large FBOs operating in the U.S. The enhanced prudential standards final rule is part of an integrated set of rules promulgated by the Federal Reserve for both large BHCs and large FBOs operating in the U.S. These integrated rules include the Federal Reserve'sReserve’s resolution plan, capital plan, and stress testing rules, as well as the final rule regarding enhanced prudential standards. (The resolution, capital plan and stress testing rules are discussed below in this section.risk factor.) The final enhanced prudential standards rule addresses a diverse array of regulatory areas, each of which is highly complex. In some instances, the rule implements new financial regulatory requirements and in other instances it overlaps other regulatory reforms already in existence (such as the Basel III capital and liquidity reforms and stress testing requirements discussed elsewhere in this report). For larger domestic BHC's,BHC’s, the final enhanced prudential standards rule formalizes governance and oversight processes with respect to various prudential standards already in place through the Federal Reserve'sReserve’s other rule-makings,rule‑makings, as noted above and elsewhere in this section, but also imposes certain additional requirements such as an internal liquidity stress testing regime (intended to be complementary to the Federal Reserve'sReserve’s liquidity coverage ratio proposal discussed below) and maintenance of a related liquidity buffer.

The Federal Reserve delayed finalizing single counterparty credit limit requirements that had been proposed pending the Basel Committee'sCommittee’s completion of its work on developing a large financial institution exposure framework, which was completed in April 2014. The Basel Committee's final large exposures framework includes a general limit applied to all of a bank's exposures to a single counterparty or group of connected counterparties (i.e., counterparties that are interdependent and likely to fail simultaneously), which is set at 25% of a bank's Tier 1 capital, and a stricter limit of 15% of Tier 1 capital that will apply to exposures between global systemically important banks. The Federal Reserve also delayed adopting proposed rules implementing the early remediation requirements under the Dodd-FrankDodd‑Frank Act, which remain under consideration.

The final rules relating to FBOs address enhanced prudential standards similar in various respects to those adopted for larger BHCs, such as enhanced requirements relating to risk management, including liquidity risk management and capital and liquidity stress testing. However, the final FBO rules differ in various respects


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from the BHC rules. For example, a larger FBO must certify to the Federal Reserve that it meets capital adequacy standards established by its home country supervisor that are consistent with the Basel Committee framework. If the FBO does not satisfy such requirements, the Federal Reserve may impose requirements, conditions or restrictions on its U.S. activities.

In addition, the final FBO rules require that an FBO with $50 billion or more of non-branchnon‑branch assets in the U.S. operate in the U.S. through an intermediate holding company (IHC) structure. The FBO is required to hold its interest in any U.S. subsidiary through the IHC, which will be its top-tiertop‑tier U.S. subsidiary. U.S. branches of FBOs, such as those of BTMU, and foreign bank agencies are excluded from this requirement. The final FBO rules provide for an initial compliance date for FBOs of July 1, 2016 and generally defer application of a leverage ratio to IHC'sIHC’s until 2018. However, larger BHCs, such as the Company, will become subject to enhanced prudential standards applicable to larger BHCs on January 1, 2015, whether or not they are also a subsidiary of an FBO, and those BHCs that are also FBO subsidiaries will remain subject to the BHC standards until a U.S. IHC is formed or designated and becomes subject to the parallel requirements under the FBO rules. The FBO rules allow an IHC, with the prior written approval of the Federal Reserve, to opt out of the "advanced approaches"“advanced approaches” rules of the Federal Reserve for calculating risk-weighted assets under the Federal Reserve'sReserve’s Basel III capital rules; an IHC which elects to opt out of the advanced approaches would calculate its risk-weighted assets under a "standardized"“standardized” approach. MUAH has initiated discussions with the Federal Reserve to explore opting-out of the advanced approaches for the holding company only. For additional information, see "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Operations - Capital Management"Management” in this Form 10-Q. MUFG, BTMU and the Company are analyzing the impact of these rules on their U.S. operations and will make appropriate structural, operational and financial changes to comply with these rules, as well as preparing a requiredwhich will be described in the Company’s enhanced prudential standards implementation plan that will be filed with the Federal Reserve by January 1, 2015.  Further changes may be required following the Federal Reserve’s review of the implementation plan. For additional information, see "Supervision“Supervision and Regulation—Regulation - Regulatory Capital and Liquidity Standards"Standards” and "—Principal“ -Principal Federal Banking Laws-Dodd-Frank Act"Laws-Dodd‑Frank Act” in Part I, Item 1 of our 2013 Form 10-K.

10‑K.


88


In July 2013, the Federal Reserve and the other U.S. federal banking agencies adopted final rules making significant changes to the U.S. regulatory capital framework for U.S. banking organizations. For additional information, see "Supervision“Supervision and Regulation-Regulatory Capital and Liquidity Standards"Standards” in Item 1 of Part I of our 2013 Form 10-K10‑K and "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations-Regulatory Capital Changes"Changes” in Item 7 of Part II of our 2013 Form 10-K.10‑K. MUAH timely filed its annual capital plan under the Federal Reserve'sReserve’s Comprehensive Capital Analysis and Review ("CCAR"(“CCAR”) Program in January 2014. The CCAR evaluates capital planning processes and assesses capital adequacy levels under various scenarios to determine if bank holding companies would have sufficient capital to continue operations throughout times of economic and financial market stress. In March 2014, MUAH disclosed the results of its annual company-run capital stress test in accordance with regulatory requirements and was subsequently informed by the Federal Reserve that it did not object to the Company'sCompany’s capital plan. However, it has been reported that various other bank holding companies did receive objections to their CCAR submissions from the Federal Reserve and there can be no assurance that MUAH will not receive such objections with respect to its future annual submissions under the CCAR Program. If the Federal Reserve were to object to a future CCAR submission by MUAH, this could have adverse consequences for our business prospects including limiting our ability to grow either organically or otherwise.

In October 2013,September 2014, the U.S. banking agencies requested comment on proposed rules that wouldOCC, the Federal Reserve and the FDIC jointly adopted the final rule to implement the LCR, which is a standardized quantitative liquidity requirement generally consistent with the liquidity coverage ratio (LCR) standard included inestablished by the Basel III framework of the Basel Committee.Committee on Banking Supervision. The proposed rules areLCR rule is designed to ensure that covered banking organizations maintain an adequate level of cash and high quality liquid assets (HQLA), such as central bank reserves and government and corporate debt, to meet estimated net liquidity needs in a short-term stress scenario using liquidity inflow and outflow assumptions provided in the rulesrule (net cash outflow). An institution'sinstitution’s LCR is the amount of its HQLA, as defined and calculated in accordance with the reductions and limitations in the rules,rule, divided by its net cash outflow, with the quotient expressed as a ratio. The comment period closed January 31, 2014, but a final rule has yetpercentage. While the LCR generally applies to be published.


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        The LCR standard would apply to all internationally active banking organizations-generally, thoseorganizations with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure. The proposalexposures, the final rule also would applyapplies a less stringent, modified LCR to bank holding companies that are not internationally active, but have more than $50 billion in total assets (such as the Company). Under the proposed modified LCR rules,rule, financial institutions would have tomust maintain, following a phase-in period, an LCR equal to at least 100 percent based on the entity's total projected net cash outflows over the next 2130 calendar days, effectively using net cash outflow assumptions equal to 70 percent of the outflow assumptions prescribed for internationally active banking organizations.

The proposed phase-in period begins on January 1, 2016, with full compliance required by January 1, 2017.


While the proposed modified LCR rules arerule is generally less stringent thanconsistent with the LCR requirement included in the Basel III framework, in certain respects they areit is more restrictive. For example, the proposed rule requires daily calculation of the LCR and would phase-in the LCR more quickly than required under the Basel III framework, with full compliance required beginning January 1, 2017. Although the impact on the Company will not be fully known until the rules are final,rule is fully-implemented, we expect to be in compliance with the requirements of the rule when they becomeit becomes effective.


The need to maintain more and higher quality capital, as well as greater liquidity, could limit the Company'sCompany’s business activities, including lending, and its ability to expand, either organically or through acquisitions. It could also result in the Company taking steps to increase its capital or being limited in its ability to pay dividends or otherwise return capital to its shareholder, or selling or refraining from acquiring assets. In addition, the new liquidity standards could require the Company to increase its holdings of highly liquid short-termshort‑term investments, thereby reducing the Company'sCompany’s ability to invest in longer-termlonger‑term or less liquid assets even if more desirable from a balance sheet management perspective. Moreover, although these new requirements are being phased in over time, U.S. federal banking agencies have been taking into account expectations regarding the ability of banks to meet these new requirements, including under stressed conditions, in approving actions that represent uses of capital, such as dividend increases and acquisitions.


In December 2013, the financial regulatory agencies adopted final rules implementing Section 619 of the Dodd-FrankDodd‑Frank Act, commonly known as the Volcker Rule. The final rule generally prohibits banking entities from engaging in short-termshort‑term proprietary trading of securities, derivatives, commodity futures and options on these instruments for their own account. The final rules provide exemptions for certain activities, including certain types of market making, underwriting, hedging of specific, identifiable risks of individual or aggregated positions, and trading in U.S. government, agency, state and municipal obligations. These exemptions are limited if they involve a material conflict of interest, a material exposure to high-riskhigh‑risk assets or trading strategies, or a threat to the institution'sinstitution’s safety and soundness or to that of the U.S. financial system. The rules also exempt trading for customers in a fiduciary capacity or in riskless principal trades, subject to certain requirements.

The Volcker Rule also prohibits banking entities from owning and sponsoring hedge funds and private equity funds, subject to certain exclusions. MUB sold the vast majority of its non-conformingnon‑conforming private equity brandfund interests after the Volker Rule was proposed.


89


The Volcker Rule also provides compliance requirements generally requiring banking entities to establish an internal compliance program reasonably designed to ensure and monitor compliance with the final rules. Larger banking entities, such as the Company, will be required to establish a more detailed compliance program, including a required CEO attestation.

The final Volcker Rule is effective April 1, 2014 but the banking agencies have extended the full conformance period until July 2015, except as noted below.

We are presently evaluating the potential impact of the Volcker Rule on our business. We are analyzing the extent to which some of our collateralized loan obligations may need to be modified or divested by the end of the conformance period; we do not believe that any such divestiture would have a material impact on the Company. In April 2014, the Federal Reserve announced that it intends to grant banking entities two


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additional one-year extensions to conform their ownership interests in and sponsorship of certain collateralized loan obligations. These extensions would give banks until July 2017 to conform to the Act'sAct’s requirements in this respect. We do expect our compliance costs to increase as a result of the rule. See "Supervision“Supervision and Regulation"Regulation” in Part I, Item 1 of our 2013 Form 10-K10‑K for additional information.

The Dodd-FrankDodd‑Frank Act will have a significant impact on our Global Capital Markets activities due to enhanced oversight of derivatives and swap activities by multiple regulatory agencies (the U.S. Commodities Futures Trading Commission, the SEC and the bank regulators). In addition, certain types of non-conformingnon‑conforming swap transactions, such as commodity derivatives, may be required to be "pushed out"“pushed out” of the Bank into a separate non-banknon‑bank affiliate.

In JanuarySeptember 2014, the OCC proposedadopted guidelines that would establish minimum standards for the design and implementation of a risk governance framework for large national banks with average total consolidated assets of $50 billion or more, as well as potentially smaller insured depository institutions. The proposed guidelines are intended to build upon and formalize "heightened expectations"“heightened expectations” for risk governance developed by the OCC in 2010 and are intended to improve examiners'examiners’ ability to assess compliance with the OCC'sOCC’s expectations. The proposed guidelines establish specific risk management-relatedmanagement‑related roles and responsibilities for three designated functions: a bank's "front line"bank’s “front line” units, independent risk management, and internal audit. The guidelines would require these three designated functions to maintain independence from each other and impose substantial risk management-relatedmanagement‑related and other responsibilities on a bank'sbank’s board of directors and chief executive officer. Although the Company has had in place a robust corporate governance framework which substantially complies with the proposed guidelines, these guidelines if adopted as proposed, could require changes in our management and internal processes and may result in an increased level of regulatory oversight into our management and internal processes, which could potentially result in increased regulatory and compliance risks and an increase in our compliance and operational costs and expenses.

The newly-adoptednewly‑adopted capital rules of the federal banking agencies and the FBO rules of the Federal Reserve, referred to above, as well as the various proposed regulations described above, if adopted, along with other regulations which may be adopted in the future, may also generally increase our cost of doing business and lead us to stop or reduce our offerings of various credit products.

In October 2013, the OCC provided additional guidance to national banks for assessing and managing risks associated with third-party relationships, including any business relationship between a bank and another entity, by contract or otherwise.  The guidance includes descriptions of planning, due diligence, third-party selection, contract negotiation and ongoing monitoring of third-party relationships that banks should consider when outsourcing bank functions.  The guidance could have an impact on MUB’s selection of vendors to which it outsources certain functions and on MUB’s contract negotiations, particularly with respect to representations and warranties and indemnification with the vendors it and they select.

Proposals to reform the housing finance market in the U.S. could also significantly affect our business. These proposals, among other things, consider winding down the government-sponsoredgovernment‑sponsored entities Fannie Mae and Freddie Mac (GSEs) and reducing or eliminating over time the role of the GSEs in guaranteeing mortgages and providing funding for mortgage loans, as well as the implementation of reforms relating to borrowers, lenders, and investors in the mortgage market, including reducing the maximum size of a loan that the GSEs can guarantee, phasing in a minimum down payment requirement for borrowers, improving underwriting standards, and increasing accountability and transparency in the securitization process. While the specific nature of these reforms and their impact on the financial services industry in general, and on MUB in particular, is uncertain at this time, such reforms, if enacted, are likely to have a substantial impact on the mortgage market and could potentially reduce our income from mortgage originations by increasing mortgage costs or lowering originations. The GSE reforms could also reduce real estate prices, which could reduce the value of collateral securing outstanding mortgage loans. This reduction of collateral value could negatively impact the value or perceived collectability of these mortgage loans and may increase our allowance for loan losses. Such reforms may also include changes to the Federal Home Loan Bank System, which could adversely affect a significant source of funding for lending activities by the banking industry, including the Bank. These reforms may also result in higher interest rates on residential mortgage loans, thereby reducing demand, which could have an adverse impact on our residential mortgage lending business.


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President Obama'sObama’s proposed 2015 U.S. budget includes a "Financial“Financial Crisis Responsibility Fee"Fee” that would apply to banks with greater than $50 billion in assets. This fee would be effective January 1, 2016 and would be intended to recover taxpayer funds provided to U.S. financial institutions through the U.S. Treasury'sTreasury’s Troubled Asset Relief Program (TARP). On May 21, 2012, the U.S. Treasury announced its final rule to


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establish an assessment fee on all institutions with greater than $50 billion in assets to fund the Office of Financial Research. As we have greater than $50 billion in assets, under the final rule we are subject to this fee at the MUFG level. In August 2013, the Federal Reserve issued a final rule to implement Section 318 of the Dodd-FrankDodd‑ Frank Act which imposed a new supervisory assessment on all institutions with greater than $50 billion in assets, which is being assessed at the MUFG level, and is based on an average of the total combined assets of MUFG from U.S. operations, net of U.S. intercompany balances and allowed transactions. Therefore, our operating costs over time can be expected to increase due to these assessments, which are based, among other things, on the projected operating expenses of this new office and the aggregate assessable assets of the subject banks.

Several cities in the United States (including Los Angeles and San Diego) have adopted so-called "responsibleso‑called “responsible banking acts"acts”, and other cities are considering the adoption of similar ordinances. These city ordinances generally require banks that hold city government deposits to provide detailed accounts of their lending practices in low-incomelow‑income communities, as well as their participation in foreclosure prevention and home loan principal reduction programs. Performance under these ordinances is used as a basis for awarding the city'scity’s financial services contracts. The adoption of these ordinances by municipalities for which the Bank is a provider of cash management or other banking services could result in increased regulatory and compliance costs and other operational costs and expenses, making this business less desirable to the Bank and potentially resulting in reduced opportunities for the Bank to provide these services.

International laws, regulations and policies affecting us, our subsidiaries and the business we conduct may change at any time and affect our business opportunities and competitiveness in these jurisdictions. Due to our ownership by BTMU, laws, regulations, policies, fines and other supervisory actions adopted or enforced by the Government of Japan, and the Federal Reserve and other regulators may adversely affect our activities and investments and those of our subsidiaries in the future.

We maintain systems and procedures designed to comply with applicable laws and regulations. However, some legal/regulatory frameworks provide for the imposition of criminal or civil penalties (which can be substantial) for noncompliance. In some cases, liability may attach even if the noncompliance was inadvertent or unintentional and even if compliance systems and procedures were in place at the time. There may be other negative consequences from a finding of noncompliance, including restrictions on certain activities and damage to our reputation.

Additionally, our business is affected significantly by the fiscal and monetary policies of the U.S. federal government and its agencies. We are particularly affected by the policies of the Federal Reserve, which regulates the supply of money and credit in the U.S. Under the Dodd-FrankDodd‑Frank Act and a long-standinglong‑standing policy of the Federal Reserve, a bank holding company is expected to act as a source of financial and managerial strength for its subsidiary banks. As a result of that policy, we may be required to commit financial and other resources to our subsidiary bank in circumstances where we might not otherwise do so. Among the instruments of monetary policy available to the Federal Reserve are (a) conducting open market operations in U.S. Government securities, (b) changing the discount rates on borrowings by depository institutions and the federal funds rate, and (c) imposing or changing reserve requirements against certain borrowings by banks and their affiliates. These methods are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. The policies of the Federal Reserve can be expected to have a material effect on our business, prospects, results of operations and financial condition.

Refer to "Supervision“Supervision and Regulation"Regulation” in Part I, Item 1 of our 2013 Form 10-K10‑K for discussion of certain additional existing and proposed laws and regulations that may affect our business.

The increasing regulation of the financial services industry has required and can be expected to continue to require significant investments in technology, personnel or other resources. Our competitors may be subject to different or reduced degrees of regulation due to their asset size or types of products offered and may also be


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able to more efficiently utilize resources to comply with regulations and to more efficiently absorb increased regulatory compliance costs into their existing cost structure.

Legislative or regulatory actions responding to perceived financial and market problems could impair our rights against borrowers, decrease our revenue from other customers and make it more difficult to originate loans to individual borrowers

Under current bankruptcy laws, courts cannot force a modification of mortgage and home equity loans secured by primary residences. In response to the financial crisis, in 2009, legislation was proposed to allow mortgage loan "cram-downs,"“cram‑downs,” which would empower courts to modify the terms of mortgage and home equity loans including the ability to reduce the principal amounts to reflect lower underlying property values. Although this legislation has not moved forward at this time, legislation of this type

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could result in our writing down the value of our residential mortgage and home equity loans to reflect their lower loan values. There is also risk that home equity loans in a second lien position (i.e., behind a mortgage) could experience significantly higher losses to the extent they become unsecured as a result of a cram-down.cram‑down. The availability of principal reductions or other mortgage loan modifications could make bankruptcy a more attractive option for troubled borrowers, leading to increased bankruptcy filings and accelerated defaults.

Changes in federal rules have imposed new restrictions on banks'banks’ abilities to charge overdraft services and interchange fees on debit card transactions. Under the final rule, effective October 1, 2011, the maximum permissible interchange fee that a bank may receive is the sum of $0.21 per transaction and five basis points multiplied by the value of the transaction, with an additional upward adjustment of no more than $0.01 per transaction if a bank develops and implements policies and procedures reasonably designed to achieve fraud-fraud‑ prevention standards set by regulation. In July 2013, a Federal district court, in a case brought by a retailer trade association, held that this rule was not valid under the Dodd-Frank Act'sAct’s standard that the fee be "reasonable“reasonable and proportional"proportional” to the cost of processing the debit card transactions and improperly included certain categories of costs in applying the statutory standard. The Federal Reserve appealed the decision, and the ruling was stayed. The district court'scourt’s decision could have had the effect of leading to further restrictions on the fee revenues that banks receive from the business of debit card transactions. However, in March 2014, a panel of the U.S. Court of Appeals for the District of Columbia Circuit issued a ruling reversing the district court'scourt’s ruling almost in its entirety. The appellate court concluded that the Federal Reserve had reasonably interpreted the statute to allow card issuers to recover certain costs that are incremental to costs incurred in the authorization, clearance and settlement of debit card transactions. The retailer trade association has taken actions to seek an appeal.appealed the decision, filing a writ of certiorari with the U.S. Supreme Court. Pending the effect of any further appeals or other proceedings in the litigation, the appellate court'scourt’s decision will generally leave in place the Federal Reserve'sReserve’s new restrictions on charges for overdraft services and interchange fees on debit card transactions. These restrictions are resulting in decreased revenues and increased compliance costs for the banking industry and MUB, and there can be no assurance that alternative sources of revenues can be implemented to offset the impact of these developments. See "Supervision“Supervision and Regulation-Other Federal Laws and Regulations Affecting Banks-Overdraft and Interchange Fees; Interest on Demand Deposits"Deposits” in Item 1 of Part I of our 2013 Form 10-K10‑K for additional information.

In 2013, the CFPB issued its final Ability-to-PayAbility‑to‑Pay and Qualified Mortgage Rule that all newly originated residential mortgages must meet, effective with new applications received as of January 10, 2014. The Ability-to-PayAbility‑to‑Pay and Qualified Mortgage Rule establishes guidelines that the lender must follow when reviewing an applicant'sapplicant’s income, obligations, assets, liabilities and credit history and requires that the lender make a reasonable and good faith determination of an applicant'sapplicant’s ability to repay the loan according to its terms. The rule also establishes the concept of a "Qualified Mortgage"“Qualified Mortgage” which is defined under the rule to include those mortgage loans with regularly scheduled, substantially equal periodic payments, terms of thirty years or less, and total points and fees not exceeding three percent of the loan amount, among other criteria. Loans meeting the criteria for a "Qualified Mortgage"“Qualified Mortgage” are entitled to a presumption that the lender complied with the rule's Ability-to-Payrule’s Ability‑to‑Pay requirements. Under the rule, the borrower has a defense to foreclosure unless the lender establishes the borrower'sborrower’s ability to repay or that the loan was a Qualified Mortgage or met other exceptions to


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the rule. The Company has established a compliance program which aims to ensure compliance with the rule for all new loans made after January 10, 2014. The Ability-to-Pay and Qualified Mortgage RuleCFPB has also issued a rule providing for simplified disclosure forms for mortgage transactions, which will be required to be given to consumers for mortgage applications received on or after August 1, 2015. These rules and any new regulatory requirements promulgated by the CFPB could have an adverse impact on our residential mortgage lending business as the industry adapts to the rule and any additional regulations. Our business strategy, product offerings and profitability may change as the market adjusts to the new rulerules and any additional regulations and as these requirements are interpreted by the regulators and courts.


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Fluctuations in interest rates on deposits or other funding sources could adversely affect our net interest margin

Changes in market interest rates on deposits or other funding sources, including changes in the relationship between short-termshort‑term and long-termlong‑term market interest rates or between different interest rate indices, can impact, and has in past years impacted, our net interest margin (that is, the difference between the interest rates we charge on interest earning assets, such as loans, and the interest rates we pay on interest-bearinginterest‑bearing liabilities, such as deposits or other borrowings). This impact could result in a decrease in our interest income relative to interest expense. Increases in interest rates may also adversely impact the value of our investment securities portfolio and impact loan performance by making it more difficult for borrowers with adjustable rate loans to service their debts. For the past several years, the banking industry has operated in an extremely low interest rate environment relative to historical averages, and the Federal Reserve has pursued highly accommodative monetary policies (including a very low federal funds rate and substantial purchases of long-termlong‑term U.S. Treasury and agency securities) in an effort to facilitate growth in the U.S. economy and a reduction in levels of unemployment. This environment has placed downward pressure on the net interest margins of U.S. banks, including the Company. We cannot predict with any certainty whether or to what extent these Federal Reserve policies will continue.

During the first quarter of 2014, in light of improving conditions in the U.S. labor markets, the Federal Reserve began to reduce the rate of its purchases of long-term U.S. Treasury and agency securities. In late October 2014, the Federal Reserve announced that it had determined to end its asset purchase program by the end of that month.  It indicated that it would continue its existing policy of reinvesting principal payments from its holdings of agency debt and mortgage-backed securities into agency mortgage-backed securities and of rolling over Treasury securities at auction in order to keep its holdings of longer-term securities at sizeable levels to help maintain accommodative financial conditions. The Federal Reserve indicated in June 2014 that it expects to further reduce and ultimately end its asset purchases by October 2014. However, the Federal Reserve has continued to indicateindicated that it expects to maintain the current very low target range for the federal funds rate for a considerable periodsome time while it assesses progress toward its objectives of maximum employment and 2 percent inflation and that even after employment and inflation are near its objectives, economic conditions may warrant for some time after its asset purchase program has ended.keeping the target federal funds rate below longer-term normal levels. We cannot predict with any certainty the time during which, nor the extent to which, these Federal Reserve policies will continue. It is also unclear when the Federal Reserve will begin and how rapidly the Federal Reserve willto unwind its asset holdings.holdings, as well as the pace at which it may do so. However, as the Federal Reserve unwinds its position, it is expected that excess reserves will be drained from the banking system, which will decrease the overall level of deposits in the system. This could lead to a decline in deposits at some institutions and to increased price competition for stable deposits, which could hamper the improvement in net interest margins that banks are anticipating from rising rates.

Our deposit customers may pursue alternatives to bank deposits or seek higher yielding deposits, which may increase our funding costs and adversely affect our liquidity position
Checking and savings account balances and other forms of deposits can decrease when our deposit customers perceive alternative investments, such as the stock market, other non‑depository investments or higher yielding deposits, as providing superior expected returns. Technology and other changes has made it more convenient for bank customers to transfer funds into alternative investments or other deposit accounts, including products offered by other financial institutions or non‑bank service providers. Future increases in short‑term interest rates could increase such transfers of deposits to higher yielding deposits or other investments either with us or with external providers. In addition, our level of deposits may be affected by lack of consumer confidence in financial institutions, which have caused fewer depositors to be willing to maintain deposits that are not fully insured by the FDIC. Depositors may withdraw certain deposits from MUB and place them in other institutions or invest uninsured funds in investments perceived as being more secure, such as securities issued by the U.S. Treasury. These consumer preferences may force us to pay higher interest rates or reduce fees to retain certain deposits and may constrain liquidity as we seek to meet funding needs caused by reduced deposit levels.
In addition, we have benefited from a “flight to quality” by consumers and businesses seeking the relative safety of bank deposits over the past few years. As interest rates rise from historically low levels during the current period, our newly acquired deposits may not be as stable or as interest rate insensitive as similar deposits may have been in the past, and as the recovery in the U.S. economy continues, some existing or prospective deposit customers of banks generally, including MUB, may be inclined to pursue other investment alternatives.
Efforts and initiatives we undertake to retain and increase deposits, including deposit pricing, can increase our costs. When bank customers move money out of bank deposits in favor of alternative investments or into higher yielding deposits, we can lose a relatively inexpensive source of funds, increasing our funding cost. As our assets grow, we may face increasing pressure to seek new deposits through expanded channels from new customers at favorable pricing, further increasing our costs.

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Company Factors

Adverse economic factors affecting certain industries we serve could adversely affect our business

We are subject to certain industry-specificindustry‑specific economic factors. For example, a significant portion of our total loan portfolio is related to residential real estate, especially in California. Increases in residential mortgage loan interest rates could have an adverse effect on our operations by depressing new mortgage loan originations, and could negatively impact our title and escrow deposit levels. Additionally,California markets have experienced a continued or further downturnstrong recovery in home prices since the areashousing market crisis; however, home price growth has begun to moderate and some fundamentals of the residential real estate and housing industries in California whichmarket have not experienced recovery, orremained soft through the recovery.  A renewed downturn in those which have, could have an adverse effect on our operations and the quality of our real estate loan portfolio. These factors could adversely impact the quality of our residential construction and residential mortgage portfolios in various ways, including by decreasing the value of the collateral for our mortgage loans. Furthermore, California is facing a severe drought which may adversely affect commercial loan customers, particularly in the agricultural sector. These factors could also negatively affect the economy in general and thereby our overall loan portfolio.


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The temporary upper limit of $729,750 for a residential mortgage loan that may be purchased by the government-sponsoredgovernment‑sponsored enterprises Fannie Mae and Freddie Mac expired on September 30, 2011, and the high balance loan limit was reduced to $625,500. This limit applied to high cost areas where the median home price exceeded the conforming loan limit, including many areas within our markets. This reduction could result in higher mortgage rates for borrowers purchasing homes that exceed the new limit, which, in turn, could reduce the pool of eligible buyers for high value homes, reduce mortgage originations and negatively impact the collateral value of homes in high cost areas. Any of these results could have an adverse impact on our residential mortgage lending business.

The mortgage industry is in the midst of unprecedented change triggered by the significant economic downturn which commenced in 2008. Lawmakers and regulators continue to take steps to protect residential mortgage borrowers and establish a common framework for response to the concerns of residential mortgage customers, especially related to default and foreclosure. Included in these measures have been litigation by 49 state attorneys general against the largest mortgage servicers in the U.S., enhanced federal regulatory guidance regarding foreclosure practices and other matters and legislation at the state level, including in California. These increased standards and restrictions are expected to impact the overall mortgage loan servicing industry in general, increase the cost of residential mortgage lending, require mortgage loan principal write-downs,write‑downs, and could put downward pressure on property values and have other adverse impacts on our residential lending business.

We provide financing to businesses in a number of other industries that may be particularly vulnerable to industry-specificindustry‑specific economic factors and are impacting the performance of our commercial real estate and commercial and industrial portfolios. The commercial real estate industry in the U.S., and in California in particular, was adversely impacted by the recessionary environment and lack of liquidity in the financial markets. The home building and mortgage industry in California also were especially adversely impacted by the deterioration in residential real estate markets. Poor economic conditions and financial access for commercial real estate developers and homebuilders could adversely affect property values, resulting in higher nonperforming assets and charge-offscharge‑offs in this sector. Our commercial and industrial portfolio, and the communications and media industry, the retail industry, and the energy industry in particular, were also adversely impacted by recessionary market conditions. Continued volatility in fuel prices and energy costs could adversely affect businesses in several of these industries, while a prolonged slump in natural gas and coal prices could have adverse consequences for some of our borrowers in the energy sector. Conditions remain uncertain in various industries and could produce elevated levels of charge-offs. Industry-charge‑offs. Industry‑ specific risks are beyond our control and could adversely affect our portfolio of loans, potentially resulting in an increase in nonperforming loans or charge-offscharge‑offs and a slowing of growth or reduction in our loan portfolio.

Adverse California economic conditions could adversely affect our business

        For

Over the last several years, economic conditions in California have been subject to various challenges, including significant deterioration in the residential real estate sector and the California state government'sgovernment’s budgetary and fiscal difficulties. California continues to have a relatively high unemployment rate. Also, certainCertain California real estate markets have experienced some of the worst property value declines in the U.S.

California continues to have a relatively high unemployment rate. While California markets, including home prices, and the California economy in general have experienced a recovery, there can be no assurance that the recovery will continue.

In addition, until 2013, the State of California had experienced budget shortfalls or deficits that led to protracted negotiations between the Governor and the State Legislature over how to address the budget gap. The California electorate approved, in the November 2012 general elections, certain increases in the rate of income taxation in California. As a consequence, California's 2013-14California’s

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2013‑14 budget proposal does not reflect a deficit; however, there can be no assurance that the state'sstate’s fiscal and budgetary challenges will be readily resolved. In addition, the impact of increased rates of income taxation on the level of economic activity in California cannot be predicted at this time. Also, municipalities and other governmental units within California have been experiencing budgetary difficulties, and several California municipalities have filed for protection under the Bankruptcy Code. As a result, concerns also have arisen regarding the outlook for the governmental obligations of California municipalities and other governmental units.


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A substantial majority of our assets, deposits and interest and fee income is generated in California. As a result, poor economic conditions in California may cause us to incur losses associated with higher default rates and decreased collateral values in our loan portfolio. If the budgetary and fiscal difficulties of the California State government and California municipalities and other governmental units continue or economic conditions in California decline, further, we expect that our level of problem assets could increase and our prospects for growth could be impaired. The severe drought being experienced by California may also cause further difficulties for the California economy, particularly in the agricultural sector.

Potential conflicts of interest with The Bank of Tokyo-MitsubishiTokyo‑Mitsubishi UFJ could adversely affect us

The views of BTMU and MUFG regarding possible new businesses, strategies, acquisitions, divestitures or other initiatives, including compliance and risk management processes, may differ from ours. This may prevent, delay or hinder us from pursuing individual initiatives or cause us to incur additional costs and subject us to additional oversight.

Also, as part of BTMU'sBTMU’s risk management processes, BTMU manages global credit and other types of exposures and concentrations on an aggregate basis, including exposures and concentrations at MUAH. Therefore, at certain levels or in certain circumstances, our ability to approve certain credits or other banking transactions and categories of customers is subject to the concurrence of BTMU. We may wish to extend credit or furnish other banking services to the same customers as BTMU. Our ability to do so may be limited for various reasons, including BTMU'sBTMU’s aggregate exposure and marketing policies.

Certain of our directors'directors’ and officers'officers’ ownership interests in MUFG'sMUFG’s common stock or service as a director or officer or other employee of both us and BTMU could create or appear to create potential conflicts of interest, especially since both we and BTMU compete in U.S. banking markets. As a result of the business integration initiative involving the operations in the United States and elsewhere in the Americas of MUAH, MUB, MUFG and BTMU, as described in "Management's”Management’s Discussion and Analysis of Financial Condition and Results of Operations—Operations - Executive Overview—Overview - Business Integration Initiative"Initiative” in Part I, Item 2 of this Form 10-Q,10-Q; a number of the executive officers of MUAH and MUB have also become executive officers of BTMU'sBTMU’s U.S. branch operations, which could increase or appear to increase the risks of potential conflicts of interests with MUFG and BTMU. While the corporate governance policies adopted by MUAH, MUB, MUFG and BTMU address such potential conflicts of interest, there can be no assurance that these policies will prevent conflicts of interest which may have an adverse impact on our business.

Risks associated with potential acquisitions, divestitures, integrations or restructurings may adversely affect us

We have in the past sought, and may in the future seek, to expand our business by acquiring other businesses which we believe will enhance our business. We cannot predict the frequency, size or timing of our acquisitions, as this will depend on the availability of prospective target opportunities at valuation levels we find attractive and the competition for such opportunities from other parties. There can be no assurance that our acquisitions will have the anticipated positive results, including results related to: the total cost of integration; the retention of key personnel; the time required to complete the integration; the amount of longer-termlonger‑term cost savings; continued growth; or the overall performance of the acquired company or combined entity. We also may encounter difficulties in obtaining required regulatory approvals and unexpected contingent liabilities can arise from the businesses we acquire. Acquisitions may also lead us to enter geographic and product markets in which we have limited or no direct prior experience. Further, the asset quality or other financial characteristics of a business or assets we may acquire may deteriorate after an acquisition closes, which could result in impairment or other expenses and charges which would reduce our operating results.

Integration of an acquired business can be complex and costly. If we are not able to integrate successfully past or future acquisitions, there is a risk that results of operations could be adversely affected.


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In February 2014, the Boards and management bodies of MUAH and MUB, as well as BTMU and MUFG, approved a business integration initiative described in "Management's“Management’s Discussion & Analysis of Financial Condition and Results of Operations—Executive Overview—BusinessAnalysis-Executive Overview-Business Integration Initiative"Initiative” in Part I, Item 2 of this formForm 10-Q. This integration initiative became effective July 1, 2014. While not a legal entity combination but an integration of operations and management, there are risks involved with this initiative, including regulatory and execution risks comparable to those of any business combination. As part of this integration initiative, ownership of the U.S.

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corporate customer list of BTMU was transferred from BTMU'sBTMU’s U.S. business to the Bank, and BTMU and the Bank agreed to certain policies which generally contemplate that new credit and other transactions entered into with BTMU'sBTMU’s U.S. corporate customers will have the opportunity to be booked at the Bank, subject to its independent credit evaluation and other considerations, such as complying with underwriting considerations and lending limits, meeting financial return objectives, and other risk management and regulatory considerations. In addition, on July 1, 2014, approximately 2,300 BTMU U.S. employees became employees of the Bank, and BTMU and the Bank entered into a master services agreementMaster Services Agreement under which the Bank will perform and make available various business, banking, financial and administrative support services and facilities for BTMU in connection with the operation and administration of BTMU'sBTMU’s business in the U.S. (including at the BTMU U.S. branches). In consideration for these services, in accordance with applicable regulatory requirements requiring market-based pricing, BTMU will pay to the Bank fee income which will reflect market-based pricing in accordance with applicable regulatory requirements. Costs related tofor the Bank’s provision of certain transaction and support services, performed byincluding the transferred employees will be recorded incosts of employee salaries and benefits. The extent, if any, that this expectation is not fulfilled, could have a negative effect on the Bank's results of operations. These new customer relationships and new lines of business present significant opportunities for the Bank, but, as with any such major initiative, there are various risks and challenges to successfully implementing this initiative, including the possibility of customer reluctance to change their relationships from BTMU to the Bank, challenges in successfully integrating the personnel whose employment has moved from BTMU to the Bank, responses from competitors, generating sufficient business revenues and service fee income to offset increased operating costs at the Bank, regulatory considerations, and other risks and challenges. There can be no assurance that we can successfully manage these risks and challenges, and failure to do so could have a material adverse effect on our financial condition and results of operation.

In addition, we continue to evaluate the performance of all of our businesses and may sell or restructure a business. Any divestitures or restructurings may result in significant expenses and write-offs,write‑offs, including those related to goodwill and other intangible assets, which could have a material adverse effect on our business, results of operations and financial condition and may involve additional risks, including difficulties in obtaining any required regulatory approvals, the diversion of management'smanagement’s attention from other business concerns, the disruption of our business and the potential loss of key employees.

We may not be successful in addressing these or any other significant risks encountered in connection with any acquisition, divestiture, integration or restructuring we might make.

The challenging operating environment and current operational initiatives may strain our available resources

There are an increasing number of matters in addition to our core operations which require our attention and resources. These matters include implementation of our technology enhancement projects, meeting the needs of our customers through the use of technology to provide improved products and services that will satisfy customer demands, and which will meet our competitors'competitors’ similar initiatives, including the business integration initiative effective July 1, 2014, as described in "Management's“Management’s Discussion &and Analysis of Financial Condition and Results of Operations—Operations - Executive Overview—Overview - Business Integration Initiative"Initiative” in Part I, Item 2 of this form 10-Q,Form 10-Q; adoption of the U.S. Basel III and other enhanced capital and liquidity guidelines, various strategic initiatives, an uncertain economic environment, a challenging regulatory environment, including the effects of the Dodd-FrankDodd‑Frank Act and regulations adopted thereunder, and integration of new employees, including key members of management. Our ability to execute our core operations and to implement other important initiatives may be adversely affected if our resources are insufficient or if we are unable to allocate available


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resources effectively. Also, our ability to constrain or reduce operating expense levels may be limited by the costs of increasing regulatory requirements and expectations.

Our credit ratings are important in order to maintain liquidity
Major credit rating agencies regularly evaluate the securities of MUAH and the securities and deposits of MUB. Their ratings of our long‑term debt and other securities, and also of our short‑term obligations, are based on a number of factors including our financial strength, ability to generate earnings, and other factors, some of which are not entirely within our control, such as conditions affecting the financial services industry and the economy. In addition, Moody’s Investors Service recently announced that it is proposing revisions to its bank rating methodology, which if finalized, may also adversely impact some of our credit ratings. In light of the continually evolving conditions in the financial services industry, the financial markets and the economy, and the change in bank rating methodology proposed by Moody’s Investors Service, there can be no assurance that we will maintain our current long‑term and short‑term ratings. On October 1, 2014, Moody’s Investors Service placed its ratings on MUAH and its affiliates (including MUB) on review for downgrade. If our long‑term or short‑term credit ratings suffer substantial downgrades, particularly if lowered below investment grade, such downgrades could adversely affect access to liquidity and could significantly increase our cost of funds (especially our wholesale funding), trigger additional collateral or funding requirements, and decrease the number of commercial depositors, investors and counterparties willing or permitted to lend to us, thereby curtailing our business operations and reducing our ability to generate income.
Certain of our derivative instruments contain provisions that require us to maintain a specified credit rating. If our credit rating were to fall below the specified rating, the counterparties to these derivative instruments could terminate the contract and

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demand immediate payment or demand immediate and ongoing full overnight collateralization for those derivative instruments in net liability positions.
Adverse changes in the credit ratings, operations or prospects of our parent companies, BTMU and MUFG, could also adversely impact our credit ratings. For additional information, refer to the discussion appearing above under the caption “The Bank of Tokyo‑Mitsubishi UFJ’s and Mitsubishi UFJ Financial Group’s credit ratings and financial or regulatory condition could adversely affect our operations.”
We are subject to operational risks, including cybersecurity risks
We are subject to many types of operational risks throughout our organization. Operational risk is the potential loss from our operations due to factors, such as failures in internal control, systems failures, cybersecurity risks or external events, that do not fall into the market risk or credit risk categories described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Operational risk includes execution risk related to operational initiatives, such as implementation of our technology enhancement projects; increased reliance on internally developed models for risk and finance management, including models associated with regulatory capital requirements; reputational, legal and compliance risk; the risk of fraud or theft by employees, customers or outsiders; unauthorized transactions by employees or operational errors, including clerical or record‑keeping errors or those resulting from faulty or disabled computer or telecommunications systems; and operational risks related to use of third party service providers. A discussion of risks associated with regulatory compliance appears above under the caption “The effects of changes or increases in, or supervisory enforcement of, banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect us.”
Our operations rely on the secure processing, storage, transmission and reporting of personal, confidential and other sensitive information or data in our computer systems, networks and business applications. Although we take protective measures, our computer systems may be vulnerable to breaches, unauthorized access, misuse, computer viruses or other malicious code, and other events that could have significant negative consequences to us. Such events could result in interruptions or malfunctions in our operations or our customers’ operations; interception, misuse or mishandling of personal, confidential or proprietary information and data; or processing of unauthorized transactions or loss of funds. These events could result in litigation and financial losses that are either not insured against or not fully covered by our insurance, and regulatory consequences or reputational harm, any of which could harm our competitive position, operating results and financial condition. These types of incidents can remain undetected for extended periods of time, thereby increasing the associated risks. We may also be required to expend significant resources to modify our protective measures or to investigate and remediate vulnerabilities or exposures arising from cybersecurity risks. We may also be required to expend significant resources to cover costs imposed on us as a result of breaches of bank card information occurring at retail merchants and other businesses.
We depend on the continued efficacy of our technical systems, operational infrastructure, relationships with third parties and our employees in our day‑to‑day and ongoing operations. Our dependence upon automated systems to record and process transactions may further increase the risk that technical system flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect or data which is not reliable. With regard to the physical infrastructure that supports our operations, we have taken measures to implement backup systems and other safeguards, but our ability to conduct business may be adversely affected by any disruption to that infrastructure. Failures in our internal control or operational systems, security breaches or service interruptions, or those of our third-party service providers, could impair our ability to operate our business and result in potential liability to customers, reputational damage and regulatory intervention, any of which could harm our operating results and financial condition.
MUB and reportedly other financial institutions have been the target of various denial‑of‑service or other cyber attacks (including attempts to inject malicious code and viruses into our computer systems) as part of what appears to be a coordinated effort to disrupt the operations of financial institutions and potentially test their cybersecurity in advance of future and more advanced cyber attacks. These denial‑of‑service and other attacks have not breached the Company’s data security systems, but require substantial resources to defend, and may affect customer satisfaction and behavior. To date we have not experienced any material losses relating to cyber attacks or other information security breaches, but there can be no assurance that we will not suffer such losses or information security breaches in the future. While we have a variety of cybersecurity measures in place, the consequences to our business of such attacks cannot be predicted with any certainty.
In addition, there have been increasing efforts on the part of third parties to breach data security at financial institutions as well as at other types of companies, such as large retailers, or with respect to financial transactions, including through the use of social engineering schemes such as “phishing.” The ability of our customers to bank remotely, including online and through mobile devices, requires secure transmissions of confidential information and increases the risk of data security breaches which would expose us to financial claims by customers or others and which could adversely affect our reputation. Even if cyber attacks

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and similar tactics are not directed specifically at MUB or our third-party service providers, such attacks on other large financial institutions could disrupt the overall functioning of the financial system and undermine consumer confidence in banks generally, to the detriment of other financial institutions, including MUB.

Recent data security breaches at a number of large U.S. retailers have resulted in the compromise of data related to a large number of credit and debit cards, requiring many banks, including MUB, to reissue credit and debit cards for many of the affected customers and reimburse these customers for losses sustained. Proposals have been advanced to replace the magnetic‑stripe cards commonly used in the U.S. with more secure smart‑chip technology to reduce the risk of such data breaches. The costs of such a conversion could be considerable and it remains unclear at this time how much of such costs would be borne by retailers, card issuers and the banking industry.

We may also be subject to disruptions of our operating systems arising from other events that are wholly or partially beyond our control, such as electrical, internet or telecommunications outages, natural disasters, terrorist attacks or unexpected difficulties with the implementation of our technology enhancement projects, which may give rise to disruption of service to customers and to financial loss or liability. Our business recovery plan may not work as intended or may not prevent significant interruptions of our operations.
Negative public opinion could damage our reputation and adversely impact our business and revenues

As a financial institution, our business and revenues are subject to risks associated with negative public opinion. The reputation of the financial services industry in general has been damaged as a result of the financial crisis and other matters affecting the financial services industry, including mortgage foreclosure issues. Negative public opinion about us could result from our actual or alleged conduct in any number of activities, including lending practices, the failure of any product or service sold by us to meet our customers'customers’ expectations or applicable regulatory requirements, governmental enforcement actions, corporate governance and acquisitions, social media, cyber-securitycyber‑ security breaches, or from actions taken by regulators and community organizations in response to those activities. We fund our operations, in substantial part, independently of BTMU and MUFG and believe our business is not necessarily closely related to the global business or outlook of BTMU or MUFG. However, negative public opinion could also result from regulatory concerns regarding, or supervisory or other governmental actions in the U.S. or Japan against us or MUB, or BTMU or MUFG. Negative public opinion can adversely affect our ability to keep, attract and retain lending, deposit and other customers and employees and can expose us to claims and litigation and regulatory actions and increased liquidity risk. Actual or alleged conduct by one of our businesses can result in negative public opinion about our other businesses. If we are not successful in managing the risks and challenges to implementing the business integration initiative effective July 1, 2014, as described in "Management's”Management’s Discussion &and Analysis of Financial Condition and Results of Operations—Operations - Executive Overview—Overview - Business Integration Initiative"Initiative” in Part I, Item 2 of this form 10-Q,Form 10-Q; there could be negative reactions on the part of our customer base.

Our framework for managing risks may not be effective in mitigating risk and loss to the Company

Our risk management framework is made up of various processes and strategies to manage our risk exposure. Types of risk to which we are subject include liquidity risk, credit risk, market and investment risk, interest rate risk, operational risk, legal risk, compliance risk, reputation risk, fiduciary risk, counterparty risk and private equity risk, among others. Our framework to manage risk, including the framework'sframework’s underlying assumptions, such as our modeling methodologies, may not be effective under all conditions and circumstances. If our risk management framework proves ineffective, we could suffer unexpected losses and our business, financial condition, results of operations or prospects could be materially adversely affected, and there also could be consequent adverse regulatory implications in any such event. Implementation of the business integration initiative effective July 1, 2014, as described in "Management's”Management’s Discussion &and Analysis of Financial Condition and Results of Operations—Operations - Executive Overview—Overview - Business Integration Initiative"Initiative” in Part I, Item 2 of this formForm 10-Q, could increase our risk management challenges in light of the new customer relationships and lines of business, among other reasons.


Item 6.   Exhibits

A list of exhibits to this Form 10-Q is set forth on the Exhibit Index immediately preceding such exhibits and is incorporated herein by reference.



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Table of Contents


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 MUFG AMERICAS HOLDINGS CORPORATION (Registrant)

Date: August 8,November 7, 2014

By:

By:


/s/ KATSUMI HATAO

Katsumi Hatao
President and Chief Executive Officer
(Principal Executive Officer)

Date: August 8,November 7, 2014

By:

By:


/s/ JOHN F. WOODS

John F. Woods
Chief Financial Officer
(Principal Financial Officer)

Date: August 8,November 7, 2014

By:

By:


/s/ ROLLAND D. JURGENS

Rolland D. Jurgens
Controller and Chief Accounting Officer
(Principal Accounting Officer)


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Table of Contents


EXHIBIT INDEX

Exhibit
No.
Description
31.1 Description
3.1
Second Amended and Restated Certificate of Incorporation of the Registrant(3)
3.2
Amended and Restated Bylaws of the Registrant(4)
10.1
Contribution Agreement by and among MUFG Americas Holdings Corporation, MUFG Union Bank, N.A. and The Bank of Tokyo-Mitsubishi UFJ, Ltd. effective July 1, 2014(1)
10.2
Master Services Agreement by and between MUFG Union Bank, N.A. and The Bank of Tokyo-Mitsubishi UFJ, Ltd. effective July 1, 2014(1)
31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)

31.2

31.2

 

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)

32.1

32.1

 

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)(2)

32.2

32.2

 

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)(2)

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101

 

Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company's Quarterly Report on Form 10-Q for the quarterly period ended JuneSeptember 30, 2014, is formatted in XBRL interactive data files: (i) Consolidated Statements of Income; (ii) Consolidated Statements of Comprehensive Income; (iii) Consolidated Balance Sheets; (iv) Consolidated Statements of Changes in Stockholder's Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Financial Statements(1)

(1)
Filed herewith.
(2)
In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed "filed" for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.

(1)Filed herewith.
(2)In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed "filed" for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.
(3)Incorporated by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K filed July 1, 2014.
(4)Incorporated by reference to Exhibit 3.2 of the Company's Current Report on Form 8-K filed July 1, 2014.



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