UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
|
|
(Mark One) |
|
|
X
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the quarterly period ended June 30, 2006 |
|
OR |
|
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period
from
to
Commission file number 1-7182
MERRILL LYNCH & CO., INC.
(Exact name of Registrant as specified in its charter)
|
|
|
Delaware
|
|
13-2740599 |
|
(State or Other Jurisdiction of
Incorporation or Organization) |
|
(I.R.S. Employer Identification No.) |
|
4 World Financial Center,
New York, New York |
|
10080 |
|
(Address of Principal Executive Offices) |
|
(Zip Code) |
(212) 449-1000
Registrants telephone number, Including Area Code:
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 X NO
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2 of the
Exchange Act. (Check one):
|
|
|
Large Accelerated Filer X |
Accelerated Filer
|
Non-Accelerated Filer |
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Exchange Act).
YES NO X
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest
practicable date.
883,809,515 shares of Common Stock and 2,663,196
Exchangeable Shares as of the close of business on July 28,
2006. The Exchangeable Shares, which were issued by Merrill
Lynch & Co., Canada Ltd. in connection with the merger
with Midland Walwyn Inc., are exchangeable at any time into
Common Stock on a one-for-one basis and entitle holders to
dividend, voting, and other rights equivalent to Common Stock.
MERRILL LYNCH & CO., INC. QUARTERLY REPORT ON
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
TABLE OF CONTENTS
2
Available Information
Merrill Lynch & Co., Inc. (ML &
Co. or Merrill Lynch) files annual, quarterly
and current reports, proxy statements and other information with
the Securities and Exchange Commission (SEC). You
may read and copy any document we file with the SEC at the
SECs Public Reference Room at 100 F Street, NE,
Room 1580, Washington, DC 20549. Please call the SEC at
1-800-SEC-0330 for
information on the Public Reference Room. The SEC maintains an
internet site that contains annual, quarterly and current
reports, proxy and information statements and other information
that issuers (including Merrill Lynch) file electronically with
the SEC. The SECs internet site is www.sec.gov.
ML & Co.s internet address is www.ml.com, and the
investor relations section of our website can be accessed
directly at www.ir.ml.com. ML & Co. makes available,
free of charge, our proxy statements, Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q, Current
Reports on
Form 8-K and
amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934. These reports are available through our website as soon as
reasonably practicable after such reports are electronically
filed with, or furnished to, the SEC. Also posted on our website
are corporate governance materials including Merrill
Lynchs Guidelines for Business Conduct, Code of Ethics for
Financial Professionals, Director Independence Standards,
Corporate Governance Guidelines and charters for the committees
of our Board of Directors. In addition, our website includes
information on purchases and sales of our equity securities by
our executive officers and directors, as well as disclosures
relating to certain non-GAAP financial measures (as defined in
the SECs Regulation G) that we may make public
orally, telephonically, by webcast, by broadcast or by similar
means from time to time.
We will post on our website amendments to our Guidelines for
Business Conduct and Code of Ethics and any waivers that are
required to be disclosed by the rules of either the SEC or the
New York Stock Exchange. The information on Merrill Lynchs
website is not incorporated by reference into this Report.
Shareholders may obtain printed copies of these documents, free
of charge, upon written request to Judith A. Witterschein,
Corporate Secretary, Merrill Lynch & Co., Inc., 222
Broadway, 17th Floor, New York, NY 10038 or by email at
corporate secretary@ml.com.
3
PART I. FINANCIAL INFORMATION
|
|
ITEM 1. |
Financial Statements |
Merrill Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended | |
|
|
|
|
| |
|
|
|
|
June 30, | |
|
July 1, | |
|
Percent | |
|
|
2006 | |
|
2005 | |
|
Inc. (Dec.) | |
(in millions, except per share amounts) |
|
| |
|
| |
|
| |
Net Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset management and portfolio service fees
|
|
$ |
1,773 |
|
|
$ |
1,431 |
|
|
|
23.9 |
% |
|
Commissions
|
|
|
1,586 |
|
|
|
1,247 |
|
|
|
27.2 |
|
|
Principal transactions
|
|
|
1,182 |
|
|
|
1,006 |
|
|
|
17.5 |
|
|
Investment banking
|
|
|
1,162 |
|
|
|
920 |
|
|
|
26.3 |
|
|
Revenues from consolidated investments
|
|
|
186 |
|
|
|
84 |
|
|
|
121.4 |
|
|
Other
|
|
|
1,110 |
|
|
|
664 |
|
|
|
67.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
6,999 |
|
|
|
5,352 |
|
|
|
30.8 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend revenues
|
|
|
9,690 |
|
|
|
5,974 |
|
|
|
62.2 |
|
|
Less interest expense
|
|
|
8,531 |
|
|
|
5,007 |
|
|
|
70.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest profit
|
|
|
1,159 |
|
|
|
967 |
|
|
|
19.9 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Revenues
|
|
|
8,158 |
|
|
|
6,319 |
|
|
|
29.1 |
|
|
|
|
|
|
|
|
|
|
|
Non-Interest Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
3,980 |
|
|
|
3,148 |
|
|
|
26.4 |
|
|
Communications and technology
|
|
|
429 |
|
|
|
395 |
|
|
|
8.6 |
|
|
Brokerage, clearing, and exchange fees
|
|
|
253 |
|
|
|
216 |
|
|
|
17.1 |
|
|
Occupancy and related depreciation
|
|
|
249 |
|
|
|
227 |
|
|
|
9.7 |
|
|
Professional fees
|
|
|
196 |
|
|
|
183 |
|
|
|
7.1 |
|
|
Advertising and market development
|
|
|
191 |
|
|
|
160 |
|
|
|
19.4 |
|
|
Expenses of consolidated investments
|
|
|
145 |
|
|
|
35 |
|
|
|
314.3 |
|
|
Office supplies and postage
|
|
|
57 |
|
|
|
51 |
|
|
|
11.8 |
|
|
Other
|
|
|
309 |
|
|
|
309 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Interest Expenses
|
|
|
5,809 |
|
|
|
4,724 |
|
|
|
23.0 |
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes
|
|
|
2,349 |
|
|
|
1,595 |
|
|
|
47.3 |
|
Income tax expense
|
|
|
716 |
|
|
|
460 |
|
|
|
55.7 |
|
|
|
|
|
|
|
|
|
|
|
Net Earnings
|
|
$ |
1,633 |
|
|
$ |
1,135 |
|
|
|
43.9 |
|
Preferred Stock Dividends
|
|
|
45 |
|
|
|
17 |
|
|
|
164.7 |
|
|
|
|
|
|
|
|
|
|
|
Net Earnings Applicable to Common Stockholders
|
|
$ |
1,588 |
|
|
$ |
1,118 |
|
|
|
42.0 |
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.79 |
|
|
$ |
1.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
1.63 |
|
|
$ |
1.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend Paid Per Common Share
|
|
$ |
0.25 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Shares Used in Computing
Earnings Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
885.4 |
|
|
|
897.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
973.3 |
|
|
|
978.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
4
Merrill Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended | |
|
|
|
|
| |
|
|
|
|
June 30, | |
|
July 1, | |
|
Percent | |
|
|
2006 | |
|
2005 | |
|
Inc. (Dec.) | |
(in millions, except per share amounts) |
|
| |
|
| |
|
| |
Net Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset management and portfolio service fees
|
|
$ |
3,452 |
|
|
$ |
2,866 |
|
|
|
20.4 |
% |
|
Commissions
|
|
|
3,188 |
|
|
|
2,588 |
|
|
|
23.2 |
|
|
Principal transactions
|
|
|
3,175 |
|
|
|
1,951 |
|
|
|
62.7 |
|
|
Investment banking
|
|
|
2,127 |
|
|
|
1,733 |
|
|
|
22.7 |
|
|
Revenues from consolidated investments
|
|
|
290 |
|
|
|
211 |
|
|
|
37.4 |
|
|
Other
|
|
|
1,664 |
|
|
|
1,034 |
|
|
|
60.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
13,896 |
|
|
|
10,383 |
|
|
|
33.8 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend revenues
|
|
|
18,354 |
|
|
|
11,505 |
|
|
|
59.5 |
|
|
Less interest expense
|
|
|
16,130 |
|
|
|
9,337 |
|
|
|
72.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest profit
|
|
|
2,224 |
|
|
|
2,168 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Revenues
|
|
|
16,120 |
|
|
|
12,551 |
|
|
|
28.4 |
|
|
|
|
|
|
|
|
|
|
|
Non-Interest Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
9,730 |
|
|
|
6,244 |
|
|
|
55.8 |
|
|
Communications and technology
|
|
|
882 |
|
|
|
791 |
|
|
|
11.5 |
|
|
Brokerage, clearing, and exchange fees
|
|
|
501 |
|
|
|
435 |
|
|
|
15.2 |
|
|
Occupancy and related depreciation
|
|
|
490 |
|
|
|
460 |
|
|
|
6.5 |
|
|
Professional fees
|
|
|
396 |
|
|
|
361 |
|
|
|
9.7 |
|
|
Advertising and market development
|
|
|
335 |
|
|
|
286 |
|
|
|
17.1 |
|
|
Expenses of consolidated investments
|
|
|
192 |
|
|
|
120 |
|
|
|
60.0 |
|
|
Office supplies and postage
|
|
|
114 |
|
|
|
103 |
|
|
|
10.7 |
|
|
Other
|
|
|
538 |
|
|
|
487 |
|
|
|
10.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Interest Expenses
|
|
|
13,178 |
|
|
|
9,287 |
|
|
|
41.9 |
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes
|
|
|
2,942 |
|
|
|
3,264 |
|
|
|
(9.9 |
) |
Income tax expense
|
|
|
834 |
|
|
|
917 |
|
|
|
(9.1 |
) |
|
|
|
|
|
|
|
|
|
|
Net Earnings
|
|
$ |
2,108 |
|
|
$ |
2,347 |
|
|
|
(10.2 |
) |
Preferred Stock Dividends
|
|
|
88 |
|
|
|
24 |
|
|
|
266.7 |
|
|
|
|
|
|
|
|
|
|
|
Net Earnings Applicable to Common Stockholders
|
|
$ |
2,020 |
|
|
$ |
2,323 |
|
|
|
(13.0 |
) |
|
|
|
|
|
|
|
|
|
|
Earnings Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
2.28 |
|
|
$ |
2.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
2.07 |
|
|
$ |
2.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend Paid Per Common Share
|
|
$ |
0.50 |
|
|
$ |
0.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Shares Used in Computing
Earnings Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
884.6 |
|
|
|
902.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
977.2 |
|
|
|
985.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
5
Merrill Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
Dec. 30, | |
(dollars in millions) |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
22,450 |
|
|
$ |
14,586 |
|
Cash and securities segregated for regulatory purposes or
deposited with clearing organizations
|
|
|
18,307 |
|
|
|
11,949 |
|
Securities financing transactions
|
|
|
|
|
|
|
|
|
|
Receivables under resale agreements
|
|
|
210,268 |
|
|
|
163,021 |
|
|
Receivables under securities borrowed transactions
|
|
|
111,580 |
|
|
|
92,484 |
|
|
|
|
|
|
|
|
|
|
|
321,848 |
|
|
|
255,505 |
|
|
|
|
|
|
|
|
Trading assets, at fair value (includes securities
pledged as collateral that can be sold
or repledged of $50,594 in 2006 and $38,678 in 2005)
|
|
|
|
|
|
|
|
|
|
Equities and convertible debentures
|
|
|
35,395 |
|
|
|
32,933 |
|
|
Mortgages, mortgage-backed, and asset-backed
|
|
|
31,601 |
|
|
|
29,233 |
|
|
Corporate debt and preferred stock
|
|
|
30,883 |
|
|
|
27,436 |
|
|
Contractual agreements
|
|
|
30,818 |
|
|
|
26,216 |
|
|
Non-U.S. governments and agencies
|
|
|
17,782 |
|
|
|
15,157 |
|
|
U.S. Government and agencies
|
|
|
11,747 |
|
|
|
8,936 |
|
|
Municipals and money markets
|
|
|
6,083 |
|
|
|
5,694 |
|
|
Commodities and related contracts
|
|
|
2,621 |
|
|
|
3,105 |
|
|
|
|
|
|
|
|
|
|
|
166,930 |
|
|
|
148,710 |
|
|
|
|
|
|
|
|
Investment securities
|
|
|
66,647 |
|
|
|
69,273 |
|
Securities received as collateral
|
|
|
20,721 |
|
|
|
16,808 |
|
Other receivables
|
|
|
|
|
|
|
|
|
|
Customers (net of allowance for doubtful accounts of $47 in 2006
and $46 in 2005)
|
|
|
44,890 |
|
|
|
40,451 |
|
|
Brokers and dealers
|
|
|
13,844 |
|
|
|
12,127 |
|
|
Interest and other
|
|
|
23,279 |
|
|
|
15,619 |
|
|
|
|
|
|
|
|
|
|
|
82,013 |
|
|
|
68,197 |
|
|
|
|
|
|
|
|
Loans, notes, and mortgages (net of allowances for loan
losses of $463 in 2006 and $406 in 2005)
|
|
|
70,442 |
|
|
|
66,041 |
|
Separate accounts assets
|
|
|
15,876 |
|
|
|
16,185 |
|
Equipment and facilities (net of accumulated depreciation
and amortization of $5,137
in 2006 and $4,865 in 2005)
|
|
|
2,546 |
|
|
|
2,313 |
|
Goodwill and other intangible assets
|
|
|
6,936 |
|
|
|
6,035 |
|
Other assets
|
|
|
4,472 |
|
|
|
5,413 |
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
799,188 |
|
|
$ |
681,015 |
|
|
|
|
|
|
|
|
6
Merrill Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
Dec. 30, | |
(dollars in millions, except per share amount) |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
LIABILITIES
|
|
|
|
|
|
|
|
|
Securities financing transactions
|
|
|
|
|
|
|
|
|
|
Payables under repurchase agreements
|
|
$ |
254,014 |
|
|
$ |
198,152 |
|
|
Payables under securities loaned transactions
|
|
|
23,299 |
|
|
|
19,335 |
|
|
|
|
|
|
|
|
|
|
|
277,313 |
|
|
|
217,487 |
|
|
|
|
|
|
|
|
Commercial paper and other short-term borrowings
|
|
|
13,402 |
|
|
|
3,902 |
|
Deposits
|
|
|
79,442 |
|
|
|
80,016 |
|
Trading liabilities, at fair value
|
|
|
|
|
|
|
|
|
|
Contractual agreements
|
|
|
33,183 |
|
|
|
28,755 |
|
|
Equities and convertible debentures
|
|
|
24,692 |
|
|
|
19,119 |
|
|
Non-U.S. governments and agencies
|
|
|
20,707 |
|
|
|
19,217 |
|
|
U.S. Government and agencies
|
|
|
11,296 |
|
|
|
12,478 |
|
|
Corporate debt and preferred stock
|
|
|
6,736 |
|
|
|
6,203 |
|
|
Commodities and related contracts
|
|
|
1,725 |
|
|
|
2,029 |
|
|
Municipals, money markets and other
|
|
|
1,398 |
|
|
|
1,132 |
|
|
|
|
|
|
|
|
|
|
|
99,737 |
|
|
|
88,933 |
|
|
|
|
|
|
|
|
Obligation to return securities received as collateral
|
|
|
20,721 |
|
|
|
16,808 |
|
Other payables
|
|
|
|
|
|
|
|
|
|
Customers
|
|
|
47,079 |
|
|
|
35,619 |
|
|
Brokers and dealers
|
|
|
26,110 |
|
|
|
19,528 |
|
|
Interest and other
|
|
|
37,033 |
|
|
|
28,501 |
|
|
|
|
|
|
|
|
|
|
|
110,222 |
|
|
|
83,648 |
|
|
|
|
|
|
|
|
|
Liabilities of insurance subsidiaries
|
|
|
2,852 |
|
|
|
2,935 |
|
Separate accounts liabilities
|
|
|
15,876 |
|
|
|
16,185 |
|
Long-term borrowings
|
|
|
139,990 |
|
|
|
132,409 |
|
Long-term debt issued to
TOPrSSM
partnerships
|
|
|
3,092 |
|
|
|
3,092 |
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
762,647 |
|
|
|
645,415 |
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Preferred Stockholders Equity (liquidation
preference of $30,000 per share;
issued: 2006 - 105,000 shares; 2005 -
93,000 shares)
|
|
|
3,147 |
|
|
|
2,773 |
|
|
Less: Treasury stock, at cost (2005 - 3,315 shares)
|
|
|
|
|
|
|
100 |
|
|
|
|
|
|
|
|
Total Preferred Stockholders Equity
|
|
|
3,147 |
|
|
|
2,673 |
|
Common Stockholders Equity
|
|
|
|
|
|
|
|
|
|
Shares exchangeable into common stock
|
|
|
39 |
|
|
|
41 |
|
|
Common stock (par value
$1.331/3
per share; authorized: 3,000,000,000 shares;
issued: 2006 - 1,192,313,740 shares; 2005 -
1,148,714,008 shares)
|
|
|
1,589 |
|
|
|
1,531 |
|
|
Paid-in capital
|
|
|
17,270 |
|
|
|
13,320 |
|
|
Accumulated other comprehensive loss (net of tax)
|
|
|
(1,062 |
) |
|
|
(844 |
) |
|
Retained earnings
|
|
|
28,383 |
|
|
|
26,824 |
|
|
|
|
|
|
|
|
|
|
|
46,219 |
|
|
|
40,872 |
|
|
Less: Treasury stock, at cost (2006 -
297,531,184 shares; 2005 - 233,112,271 shares)
|
|
|
12,825 |
|
|
|
7,945 |
|
|
|
|
|
|
|
|
Total Common Stockholders Equity
|
|
|
33,394 |
|
|
|
32,927 |
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
36,541 |
|
|
|
35,600 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$ |
799,188 |
|
|
$ |
681,015 |
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
7
Merrill Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the | |
|
|
Six Months Ended | |
|
|
| |
|
|
June 30, | |
|
July 1, | |
|
|
2006 | |
|
2005 | |
(dollars in millions) |
|
| |
|
| |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
2,108 |
|
|
$ |
2,347 |
|
Noncash items included in earnings:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
243 |
|
|
|
242 |
|
|
Stock-based compensation plan expense
|
|
|
2,462 |
|
|
|
517 |
|
|
Deferred taxes
|
|
|
(586 |
) |
|
|
256 |
|
|
Policyholder reserves
|
|
|
62 |
|
|
|
65 |
|
|
Undistributed earnings from equity investments
|
|
|
(189 |
) |
|
|
(168 |
) |
|
Other
|
|
|
631 |
|
|
|
465 |
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Trading assets
|
|
|
(18,321 |
) |
|
|
6,877 |
|
|
Cash and securities segregated for regulatory purposes or
deposited with clearing organizations
|
|
|
(5,303 |
) |
|
|
3,108 |
|
|
Receivables under resale agreements
|
|
|
(47,247 |
) |
|
|
(14,769 |
) |
|
Receivables under securities borrowed transactions
|
|
|
(19,096 |
) |
|
|
14,526 |
|
|
Customer receivables
|
|
|
(4,430 |
) |
|
|
(1,522 |
) |
|
Brokers and dealers receivables
|
|
|
(1,718 |
) |
|
|
190 |
|
|
Proceeds from loans, notes, and mortgages held for sale
|
|
|
10,152 |
|
|
|
8,982 |
|
|
Other changes in loans, notes, and mortgages held for sale
|
|
|
(15,212 |
) |
|
|
(9,510 |
) |
|
Trading liabilities
|
|
|
6,078 |
|
|
|
(3,332 |
) |
|
Payables under repurchase agreements
|
|
|
55,862 |
|
|
|
(10,697 |
) |
|
Payables under securities loaned transactions
|
|
|
3,964 |
|
|
|
(1,478 |
) |
|
Customer payables
|
|
|
11,460 |
|
|
|
4,996 |
|
|
Brokers and dealers payables
|
|
|
6,582 |
|
|
|
(715 |
) |
|
Other, net
|
|
|
465 |
|
|
|
(4,081 |
) |
|
|
|
|
|
|
|
|
|
Cash used for operating activities
|
|
|
(12,033 |
) |
|
|
(3,701 |
) |
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from (payments for):
|
|
|
|
|
|
|
|
|
|
Maturities of available-for-sale securities
|
|
|
7,969 |
|
|
|
13,816 |
|
|
Sales of available-for-sale securities
|
|
|
9,721 |
|
|
|
19,632 |
|
|
Purchases of available-for-sale securities
|
|
|
(14,500 |
) |
|
|
(32,984 |
) |
|
Maturities of held-to-maturity securities
|
|
|
2 |
|
|
|
13 |
|
|
Loans, notes, and mortgages held for investment, net
|
|
|
650 |
|
|
|
(6,013 |
) |
|
Other investments and other assets
|
|
|
(904 |
) |
|
|
105 |
|
|
Equipment and facilities, net
|
|
|
(476 |
) |
|
|
(94 |
) |
|
|
|
|
|
|
|
|
|
Cash provided by (used for) investing activities
|
|
|
2,462 |
|
|
|
(5,525 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from (payments for):
|
|
|
|
|
|
|
|
|
|
Commercial paper and other short-term borrowings
|
|
|
9,500 |
|
|
|
2,859 |
|
|
Issuance and resale of long-term borrowings
|
|
|
29,409 |
|
|
|
16,430 |
|
|
Settlement and repurchases of long-term borrowings
|
|
|
(22,521 |
) |
|
|
(14,925 |
) |
|
Deposits
|
|
|
(574 |
) |
|
|
(277 |
) |
|
Derivative and other financing transactions
|
|
|
4,959 |
|
|
|
2,968 |
|
|
Issuance of common stock
|
|
|
945 |
|
|
|
426 |
|
|
Issuance of preferred stock
|
|
|
360 |
|
|
|
1,110 |
|
|
Common stock repurchases
|
|
|
(5,008 |
) |
|
|
(2,131 |
) |
|
Other stock transactions
|
|
|
572 |
|
|
|
91 |
|
|
Dividends paid on common and preferred stock
|
|
|
(549 |
) |
|
|
(364 |
) |
|
Excess tax benefits related to stock-based compensation
|
|
|
342 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Cash provided by financing activities
|
|
|
17,435 |
|
|
|
6,187 |
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
7,864 |
|
|
|
(3,039 |
) |
Cash and cash equivalents, beginning of period
|
|
|
14,586 |
|
|
|
20,790 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$ |
22,450 |
|
|
$ |
17,751 |
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$ |
1,569 |
|
|
$ |
655 |
|
|
Interest
|
|
|
15,564 |
|
|
|
8,803 |
|
See Notes to Condensed Consolidated Financial Statements.
8
Merrill Lynch & Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2006
|
|
Note 1. |
Summary of Significant Accounting Policies |
For a complete discussion of Merrill Lynchs accounting
policies, refer to the Annual Report on
Form 10-K for the
year ended December 30, 2005 (2005 Annual
Report).
Basis of Presentation
The Condensed Consolidated Financial Statements include the
accounts of Merrill Lynch & Co., Inc.
(ML & Co.) and subsidiaries (collectively,
Merrill Lynch), whose subsidiaries are generally
controlled through a majority voting interest but may be
controlled by means of a significant minority ownership, by
contract, lease or otherwise. In certain cases, Merrill Lynch
subsidiaries (i.e., Variable Interest Entities
(VIEs)) may also be consolidated based on a risks
and rewards approach as required by Financial Accounting
Standards Board (FASB) revised Interpretation
No. 46 (FIN 46R). Intercompany
transactions and balances have been eliminated. The interim
Condensed Consolidated Financial Statements for the three- and
six-month periods are unaudited; however, in the opinion of
Merrill Lynch management, all adjustments (consisting of normal
recurring accruals) necessary for a fair statement of the
Condensed Consolidated Financial Statements have been included.
These unaudited Condensed Consolidated Financial Statements
should be read in conjunction with the audited consolidated
financial statements included in the 2005 Annual Report. The
December 30, 2005 unaudited Condensed Consolidated Balance
Sheet was derived from the audited 2005 Consolidated Financial
Statements. The nature of Merrill Lynchs business is such
that the results of any interim period are not necessarily
indicative of results for a full year. In presenting the
Condensed Consolidated Financial Statements, management makes
estimates that affect the reported amounts and disclosures in
the financial statements. Estimates, by their nature, are based
on judgment and available information. Therefore, actual results
could differ from those estimates and could have a material
impact on the Condensed Consolidated Financial Statements, and
it is possible that such changes could occur in the near term.
Certain reclassifications have been made to the prior period
financial statements to conform to the current period
presentation. During the second quarter of 2006, Merrill Lynch
reclassified cash flows from loans held for sale to operating
activities, whereas in prior periods, these loans were
classified as investing activities. Merrill Lynch believes that
classifying cash flows from loans held for sale as operating
activities correctly presents the cash flows associated with
these loans as they have been acquired primarily for resale. All
prior period amounts have been reclassified to conform to the
current period presentation.
Merrill Lynch offers a broad array of products and services to
its diverse client base of individuals, small to mid-size
businesses, employee benefit plans, corporations, financial
institutions, and governments around the world. These products
and services are offered from a number of locations around the
world. In some cases, the same or similar products and services
may be offered to both individual and institutional clients,
utilizing the same infrastructure. In other cases, a single
infrastructure may be used to support multiple products and
services offered to clients. When Merrill Lynch analyzes
its profitability, it does not focus on the profitability of a
single product or service. Instead, Merrill Lynch looks at the
profitability of businesses offering an array of products and
services to various types of clients. The profitability of the
products and services offered to individuals, small to mid-size
businesses, and employee benefit plans is analyzed separately
from the profitability of products and services offered to
corporations, financial institutions, and governments,
9
regardless of whether there is commonality in products and
services infrastructure. As such, we do not separately disclose
the costs associated with the products and services sold or our
general and administrative costs, in total or by product.
When pricing its various products and services, Merrill Lynch
considers multiple factors, including prices being offered in
the market for similar products and services, the
competitiveness of its pricing compared to competitors, the
profitability of its businesses and its overall profitability,
as well as the profitability, creditworthiness, and importance
of the overall client relationships.
Expenses which are incurred to support products and services and
infrastructures shared by businesses are allocated to the
businesses based on various methodologies which may include
headcount, square footage, and certain other criteria.
Similarly, certain revenues may be shared based upon agreed
methodologies. When looking at the profitability of various
businesses, Merrill Lynch considers all expenses incurred,
including overhead and the costs of shared services, as all are
considered integral to the operation of the businesses.
New Accounting Pronouncements
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an Interpretation
of FASB Statement No. 109 (FIN 48).
FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in a companys financial statements and
prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The
Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 will be
effective for Merrill Lynch beginning in the first quarter of
2007. Merrill Lynch is currently evaluating the impact of
adopting the Interpretation.
In April 2006, the FASB issued a FASB Staff Position
FIN 46(R)-6, Determining the Variability to be
Considered in Applying FIN 46R ( the FSP).
The FSP requires that the variability to be included when
applying FIN 46R be based on a by-design
approach and should consider what risks the variable interest
entity was designed to create. The FSP is effective beginning in
the third quarter of 2006 for all new entities with which
Merrill Lynch becomes involved, and to all entities previously
required to be analyzed under FIN 46R when a
reconsideration event occurs as defined under paragraph 7
of the Interpretation. Merrill Lynch does not expect the
adoption of the FSP to have a material impact on the Condensed
Consolidated Financial Statements.
In March 2006, the FASB issued Statement No. 156,
Accounting for Servicing of Financial Assets
(SFAS No. 156). SFAS No. 156
amends Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities, to require all separately recognized servicing
assets and servicing liabilities to be initially measured at
fair value, if practicable. SFAS No. 156 also permits
servicers to subsequently measure each separate class of
servicing assets and liabilities at fair value rather than at
the lower of cost or market. For those companies that elect to
measure their servicing assets and liabilities at fair value,
SFAS No. 156 requires the difference between the
carrying value and fair value at the date of adoption to be
recognized as a cumulative-effect adjustment to retained
earnings as of the beginning of the fiscal year in which the
election is made. Merrill Lynch will adopt
SFAS No. 156 beginning in the first quarter of 2007.
Merrill Lynch is currently assessing the impact of adopting
SFAS No. 156 but does not expect the standard to have
a material impact on the Condensed Consolidated Financial
Statements.
In February 2006, the FASB issued Statement No. 155,
Accounting for Certain Hybrid Financial Instruments an
amendment of FASB Statements No. 133 and 140
(SFAS No. 155). SFAS No. 155
clarifies the bifurcation requirements for certain financial
instruments and permits interests in hybrid financial
instruments that contain an embedded derivative that would
otherwise require bifurcation to
10
be accounted for as a single financial instrument at fair value
with changes in fair value recognized in earnings. This election
is permitted on an instrument-by-instrument basis for all hybrid
financial instruments held, obtained, or issued as of the
adoption date. Merrill Lynch will adopt SFAS No. 155
beginning in the first quarter of 2007. At adoption, any
difference between the total carrying amount of the individual
components of the existing bifurcated hybrid financial
instruments and the fair value of the combined hybrid financial
instruments will be recognized as a cumulative-effect adjustment
to beginning retained earnings. Merrill Lynch is currently
assessing the impact of adopting SFAS No. 155.
During the first quarter of 2006, Merrill Lynch adopted the
provisions of Statement No. 123 (revised 2004),
Share-Based Payment, a revision of
SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123R). Under
SFAS No. 123R, compensation expenses for share-based
awards that do not require future service are recorded
immediately, and share-based awards that require future service
continue to be amortized into expense over the relevant service
period. Merrill Lynch adopted SFAS No. 123R under the
modified prospective method whereby the provisions of
SFAS No. 123R are generally applied only to
share-based awards granted or modified subsequent to adoption.
Thus, for Merrill Lynch, SFAS No. 123R required the
immediate expensing of share-based awards granted or modified in
2006 to retirement-eligible employees, including awards that are
subject to non-compete provisions.
Prior to the adoption of SFAS No. 123R, Merrill Lynch
had recognized expense for share-based compensation over the
vesting period stipulated in the grant for all employees. This
included those who had satisfied retirement eligibility criteria
but were subject to a non-compete agreement that applied from
the date of retirement through each applicable vesting period.
Previously, Merrill Lynch had accelerated any unrecognized
compensation cost for such awards if a retirement-eligible
employee left Merrill Lynch. However, because
SFAS No. 123R applies only to awards granted or
modified in 2006, expenses for share-based awards granted prior
to 2006 to employees who were retirement-eligible with respect
to those awards must continue to be amortized over the stated
vesting period.
In addition, beginning with performance year 2006, for which
Merrill Lynch expects to grant stock awards in early 2007,
Merrill Lynch will accrue the expense for future awards granted
to retirement-eligible employees over the award performance year
instead of recognizing the entire expense related to the award
on the grant date. Compensation expense for all future stock
awards granted to employees not eligible for retirement with
respect to those awards will be recognized over the applicable
vesting period.
SFAS No. 123R also requires expected forfeitures of
share-based compensation awards for non-retirement-eligible
employees to be included in determining compensation expense.
Prior to the adoption of SFAS No. 123R, any benefits
of employee forfeitures of such awards were recorded as a
reduction of compensation expense when the employee left Merrill
Lynch and forfeited the award. In the first quarter of 2006,
Merrill Lynch recorded a benefit based on expected forfeitures
which was not material to the results of operations for the
quarter.
The adoption of SFAS No. 123R resulted in a first
quarter charge to compensation expense of approximately
$550 million on a pre-tax basis and $370 million on an
after-tax basis.
The adoption of SFAS No. 123R, combined with other
business and competitive considerations, prompted Merrill Lynch
to undertake a comprehensive review of the companys
stock-based incentive compensation awards, including vesting
schedules and retirement eligibility requirements, examining
their impact to both Merrill Lynch and its employees. Upon the
completion of this review, the Management Development and
Compensation Committee of Merrill Lynchs Board of
Directors determined that to fulfill the objective of retaining
high quality personnel, future stock grants should
11
contain more stringent retirement provisions. These provisions
include a combination of increased age and length of service
requirements. While the stock awards of employees who retire
continue to vest, retired employees are subject to continued
compliance with the strict non-compete provisions of those
awards. To facilitate transition to the more stringent future
requirements, the terms of most outstanding stock awards
previously granted to employees, including certain executive
officers, were modified, effective March 31, 2006, to
permit employees to be immediately eligible for retirement with
respect to those earlier awards. While Merrill Lynch modified
the retirement-related provisions of the previous stock awards,
the vesting and non-compete provisions for those awards remain
in force.
Since the provisions of SFAS No. 123R apply to awards
modified in 2006, these modifications required Merrill Lynch to
record additional one-time compensation expense in the first
quarter of 2006 for the remaining unamortized amount of all
awards to employees who had not previously been
retirement-eligible under the original provisions of those
awards.
The one-time, non-cash charge associated with the adoption of
SFAS No. 123R, and the policy modifications to
previous awards resulted in a net charge to compensation expense
in the first quarter of 2006 of approximately $1.8 billion
pre-tax, and $1.2 billion after-tax, or a net impact of
$1.34 and $1.21 on basic and diluted earnings per share,
respectively. Policy modifications to previously granted awards
amounted to $1.2 billion of the pre-tax charge and impacted
approximately 6,300 employees.
Prior to the adoption of SFAS No. 123R, Merrill Lynch
presented the cash flows related to income tax deductions in
excess of the compensation expense recognized on share-based
compensation as operating cash flows in the Condensed
Consolidated Statements of Cash Flows. SFAS No. 123R
requires cash flows resulting from tax deductions in excess of
the grant-date fair value of share-based awards to be included
in cash flows from financing activities. The excess tax benefits
of $283 million related to total share-based compensation
included in cash flows from financing activities in the first
quarter of 2006 would have been included in cash flows from
operating activities if Merrill Lynch had not adopted
SFAS No. 123R.
As a result of adopting SFAS No. 123R, approximately
$600 million of liabilities associated with the Financial
Advisor Capital Accumulation Award Plan (FACAAP)
were reclassified to stockholders equity. In addition, as
a result of adopting SFAS No. 123R, the unamortized
portion of employee stock grants, which was previously reported
as a separate component of stockholders equity on the
Condensed Consolidated Balance Sheets, has been reclassified to
Paid-in Capital. Refer to Note 12 to the Condensed
Consolidated Financial Statements for additional information.
In June 2005, the FASB ratified the consensus reached by the
Emerging Issues Task Force on
Issue 04-5,
Determining Whether a General Partner, or the General
Partners as a Group, Controls a Limited Partnership or Similar
Entity When the Limited Partners Have Certain Rights
(EITF 04-5).
EITF 04-5 presumes
that a general partner controls a limited partnership, and
should therefore consolidate a limited partnership, unless the
limited partners have the substantive ability to remove the
general partner without cause based on a simple majority vote or
can otherwise dissolve the limited partnership, or unless the
limited partners have substantive participating rights over
decision making. The guidance in
EITF 04-5 was
effective beginning in the third quarter of 2005 for all new
limited partnership agreements and any limited partnership
agreements that were modified. For those partnership agreements
that existed at the date
EITF 04-5 was
issued, the guidance became effective in the first quarter of
2006. The adoption of this guidance did not have a material
impact on the Condensed Consolidated Financial Statements.
12
66
|
|
Note 2. |
Segment Information |
Merrill Lynchs operations are organized into three
business segments: Global Markets and Investment Banking
(GMI), Global Private Client (GPC), and
Merrill Lynch Investment Managers (MLIM). Prior
period amounts have been reclassified to conform to the current
period presentation. For information on each segments
business activities, refer to Note 3 to the 2005 Annual
Report.
The six month comparisons in the results by business segment
table below include the impact of the $1.8 billion,
pre-tax, one-time compensation expenses incurred in the first
quarter of 2006. These one-time compensation expenses were
recorded as follows: $1.4 billion to GMI, $281 million
to GPC and $109 million to MLIM; refer to Note 1 to
the Condensed Consolidated Financial Statements for further
information on one-time compensation expenses.
Results by business segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) | |
|
|
|
|
| |
|
|
Corporate Items | |
|
|
|
|
(including | |
|
|
|
|
intersegment | |
|
|
|
|
GMI | |
|
GPC | |
|
MLIM | |
|
eliminations) | |
|
Total | |
|
|
| |
Three Months Ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest revenues
|
|
$ |
3,920 |
|
|
$ |
2,500 |
|
|
$ |
618 |
|
|
$ |
(39 |
)(1) |
|
$ |
6,999 |
|
Net interest
profit(2)
|
|
|
660 |
|
|
|
545 |
|
|
|
12 |
|
|
|
(58 |
)(3) |
|
|
1,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
4,580 |
|
|
|
3,045 |
|
|
|
630 |
|
|
|
(97 |
) |
|
|
8,158 |
|
Non-interest expenses
|
|
|
3,087 |
|
|
|
2,344 |
|
|
|
390 |
|
|
|
(12 |
)(1) |
|
|
5,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings (loss)
|
|
$ |
1,493 |
|
|
$ |
701 |
|
|
$ |
240 |
|
|
$ |
(85 |
) |
|
$ |
2,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter-end total assets
|
|
$ |
705,854 |
|
|
$ |
77,139 |
|
|
$ |
8,711 |
|
|
$ |
7,484 |
|
|
$ |
799,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 1, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest revenues
|
|
$ |
2,759 |
|
|
$ |
2,190 |
|
|
$ |
403 |
|
|
$ |
|
(1) |
|
$ |
5,352 |
|
Net interest
profit(2)
|
|
|
680 |
|
|
|
378 |
|
|
|
2 |
|
|
|
(93 |
)(3) |
|
|
967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
3,439 |
|
|
|
2,568 |
|
|
|
405 |
|
|
|
(93 |
) |
|
|
6,319 |
|
Non-interest expenses
|
|
|
2,341 |
|
|
|
2,111 |
|
|
|
284 |
|
|
|
(12 |
)(1) |
|
|
4,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings (loss)
|
|
$ |
1,098 |
|
|
$ |
457 |
|
|
$ |
121 |
|
|
$ |
(81 |
) |
|
$ |
1,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter-end total assets
|
|
$ |
540,230 |
|
|
$ |
70,250 |
|
|
$ |
9,366 |
|
|
$ |
6,294 |
|
|
$ |
626,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest revenues
|
|
$ |
7,780 |
|
|
$ |
4,919 |
|
|
$ |
1,174 |
|
|
$ |
23 |
(1) |
|
$ |
13,896 |
|
Net interest
profit(2)
|
|
|
1,353 |
|
|
|
1,065 |
|
|
|
26 |
|
|
|
(220 |
)(3) |
|
|
2,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
9,133 |
|
|
|
5,984 |
|
|
|
1,200 |
|
|
|
(197 |
) |
|
|
16,120 |
|
Non-interest expenses
|
|
|
7,428 |
|
|
|
4,918 |
|
|
|
847 |
|
|
|
(15 |
)(1) |
|
|
13,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings (loss)
|
|
$ |
1,705 |
|
|
$ |
1,066 |
|
|
$ |
353 |
|
|
$ |
(182 |
) |
|
$ |
2,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended July 1, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest revenues
|
|
$ |
5,141 |
|
|
$ |
4,422 |
|
|
$ |
821 |
|
|
$ |
(1 |
)(1) |
|
$ |
10,383 |
|
Net interest
profit(2)
|
|
|
1,615 |
|
|
|
749 |
|
|
|
(3 |
) |
|
|
(193 |
)(3) |
|
|
2,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
6,756 |
|
|
|
5,171 |
|
|
|
818 |
|
|
|
(194 |
) |
|
|
12,551 |
|
Non-interest expenses
|
|
|
4,534 |
|
|
|
4,204 |
|
|
|
570 |
|
|
|
(21 |
)(1) |
|
|
9,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings (loss)
|
|
$ |
2,222 |
|
|
$ |
967 |
|
|
$ |
248 |
|
|
$ |
(173 |
) |
|
$ |
3,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Primarily represents the elimination of intersegment revenues
and expenses. |
|
|
(2) |
Management views interest income net of interest expense in
evaluating results. |
(3) |
Represents acquisition financing costs and other corporate
interest, including the impact of Trust Originated
Preferred Securities
(TOPrSSM). |
13
|
|
Note 3. |
Securities Financing Transactions |
Merrill Lynch enters into secured borrowing and lending
transactions in order to meet customers needs and earn
residual interest rate spreads, obtain securities for settlement
and finance trading inventory positions.
Under these transactions, Merrill Lynch either receives or
provides collateral, including U.S. Government and
agencies, asset-backed, corporate debt, equity, and
non-U.S. governments
and agencies securities. Merrill Lynch receives collateral in
connection with resale agreements, securities borrowed
transactions, customer margin loans, and other loans. Under many
agreements, Merrill Lynch is permitted to sell or repledge
the securities received (e.g., use the securities to secure
repurchase agreements, enter into securities lending
transactions, or deliver to counterparties to cover short
positions). At June 30, 2006 and December 30, 2005,
the fair value of securities received as collateral where
Merrill Lynch is permitted to sell or repledge the securities
was $575 billion and $538 billion, respectively, and
the fair value of the portion that has been sold or repledged
was $461 billion and $402 billion, respectively.
Merrill Lynch may use securities received as collateral for
resale agreements to satisfy regulatory requirements such as
Rule 15c3-3 of the SEC. At June 30, 2006 and
December 30, 2005, the fair value of collateral used for
this purpose was $19.3 billion, and $15.5 billion,
respectively.
Merrill Lynch pledges firm-owned assets to collateralize
repurchase agreements and other secured financings. Pledged
securities that can be sold or repledged by the secured party
are parenthetically disclosed in trading assets on the Condensed
Consolidated Balance Sheets. The carrying value and
classification of securities owned by Merrill Lynch that have
been pledged to counterparties where those counterparties do not
have the right to sell or repledge at June 30, 2006 and
December 30, 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
(dollars in millions) | |
| |
|
|
June 30, 2006 | |
|
Dec. 30, 2005 | |
|
|
| |
Trading asset category
|
|
|
|
|
|
|
|
|
|
Mortgages, mortgage-backed, and asset-backed
|
|
$ |
14,520 |
|
|
$ |
14,457 |
|
|
Corporate debt and preferred stock
|
|
|
12,179 |
|
|
|
10,394 |
|
|
U.S. Government and agencies
|
|
|
8,145 |
|
|
|
6,711 |
|
|
Non-U.S. governments and agencies
|
|
|
3,474 |
|
|
|
3,353 |
|
|
Equities and convertible debentures
|
|
|
3,262 |
|
|
|
4,019 |
|
|
Municipals and money markets
|
|
|
1,044 |
|
|
|
100 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
42,624 |
|
|
$ |
39,034 |
|
|
14
|
|
Note 4. |
Investment Securities |
Investment securities at June 30, 2006 and
December 30, 2005 are presented below:
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
| |
|
|
June 30, 2006 | |
|
Dec. 30, 2005 | |
|
|
| |
Investment securities
|
|
|
|
|
|
|
|
|
|
Available-for-sale(1)
|
|
$ |
50,799 |
|
|
$ |
54,471 |
|
|
Trading
|
|
|
6,855 |
|
|
|
5,666 |
|
|
Held-to-maturity
|
|
|
280 |
|
|
|
271 |
|
|
Non-qualifying(2)
|
|
|
|
|
|
|
|
|
|
|
Equity investments
|
|
|
10,537 |
|
|
|
9,795 |
|
|
|
Investments of insurance
subsidiaries(3)
|
|
|
1,142 |
|
|
|
1,174 |
|
|
|
Deferred compensation
hedges(4)
|
|
|
1,600 |
|
|
|
1,457 |
|
|
|
Investments in
TOPrSSM
partnerships and other investments
|
|
|
788 |
|
|
|
738 |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
72,001 |
|
|
$ |
73,572 |
|
|
|
|
(1) |
At June 30, 2006 and December 30, 2005, includes
$5.4 billion and $4.3 billion, respectively, of
investment securities reported in cash and securities segregated
for regulatory purposes or deposited with clearing
organizations. |
(2) |
Non-qualifying for SFAS No. 115 purposes. |
(3) |
Primarily represents insurance policy loans. |
(4) |
Represents investments which economically hedge deferred
compensation liabilities. |
|
|
Note 5. |
Securitization Transactions and Transactions with Special
Purpose Entities (SPEs) |
Securitizations
In the normal course of business, Merrill Lynch securitizes:
commercial and residential mortgage and home equity loans;
municipal, government, and corporate bonds; and other types of
financial assets. SPEs, frequently referred to as Variable
Interest Entities, or VIEs, are often used when entering into or
facilitating securitization transactions. Merrill Lynchs
involvement with SPEs used to securitize financial assets
includes: structuring and/or establishing SPEs; selling assets
to SPEs; managing or servicing assets held by SPEs;
underwriting, distributing, and making loans to SPEs; making
markets in securities issued by SPEs; engaging in derivative
transactions with SPEs; owning notes or certificates issued by
SPEs; and/or providing liquidity facilities and other guarantees
to SPEs.
Merrill Lynch securitized assets of approximately
$63.9 billion and $45.9 billion for the six months
ended June 30, 2006 and July 1, 2005, respectively.
For the six months ended June 30, 2006 and July 1,
2005, Merrill Lynch received $64.3 billion and
$46.3 billion, respectively, of proceeds, and other cash
inflows, from securitization transactions, and recognized net
securitization gains of $259.9 million and
$263.7 million, respectively, in Merrill Lynchs
Condensed Consolidated Statements of Earnings.
15
For the first six months of 2006 and 2005, cash inflows from
securitizations related to the following asset types:
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
| |
|
|
Six Months Ended | |
|
|
| |
|
|
June 30, 2006 | |
|
July 1, 2005 | |
|
|
| |
Asset category
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans
|
|
$ |
43,767 |
|
|
$ |
30,810 |
|
|
Municipal bonds
|
|
|
9,770 |
|
|
|
8,637 |
|
|
Corporate and government bonds
|
|
|
1,698 |
|
|
|
1,374 |
|
|
Commercial loans and other
|
|
|
9,106 |
|
|
|
5,517 |
|
|
|
|
|
|
|
|
|
|
$ |
64,341 |
|
|
$ |
46,338 |
|
|
Retained interests in securitized assets were approximately
$5.2 billion and $4.0 billion at June 30, 2006
and December 30, 2005, which related primarily to
residential mortgage loan and municipal bond securitization
transactions. The majority of the retained interest balance
consists of mortgage-backed securities that have observable
market prices. These retained interests include mortgage-backed
securities that Merrill Lynch has committed to purchase and
expects to sell to investors in the normal course of its
underwriting activity.
The following table presents information on retained interests,
excluding the offsetting benefit of financial instruments used
to hedge risks, held by Merrill Lynch as of June 30, 2006
arising from Merrill Lynchs residential mortgage loan,
municipal bond and other securitization transactions. The
sensitivities of the current fair value of the retained
interests to immediate 10% and 20% adverse changes in
assumptions and parameters are also shown.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
|
|
| |
|
|
Residential | |
|
Municipal | |
|
|
|
|
Mortgage Loans | |
|
Bonds | |
|
Other | |
| |
Retained interest amount
|
|
$ |
4,445 |
|
|
$ |
669 |
|
|
$ |
70 |
|
Weighted average credit losses (rate per annum)
|
|
|
0.8% |
|
|
|
0.0% |
|
|
|
0.6% |
|
|
Range
|
|
|
0.0 9.4% |
|
|
|
0.0% |
|
|
|
0.0 8.0% |
|
|
|
Impact on fair value of 10% adverse change
|
|
$ |
(68) |
|
|
$ |
|
|
|
$ |
(2) |
|
|
|
Impact on fair value of 20% adverse change
|
|
$ |
(114) |
|
|
$ |
|
|
|
$ |
(3) |
|
Weighted average discount rate
|
|
|
8.1% |
|
|
|
4.3% |
|
|
|
10.3% |
|
|
Range
|
|
|
0.0 63.0% |
|
|
|
0.5 10.0% |
|
|
|
0.0 23.2% |
|
|
|
Impact on fair value of 10% adverse change
|
|
$ |
(137) |
|
|
$ |
(52) |
|
|
$ |
(7) |
|
|
|
Impact on fair value of 20% adverse change
|
|
$ |
(262) |
|
|
$ |
(88) |
|
|
$ |
(14) |
|
Weighted average life (in years)
|
|
|
3.6 |
|
|
|
1.5 |
|
|
|
4.5 |
|
|
Range
|
|
|
0.0 27.1 |
|
|
|
0.4 3.0 |
|
|
|
1.5 16.6 |
|
Weighted average prepayment speed (CPR)
|
|
|
16.5% |
|
|
|
11.0% |
(1) |
|
|
15.0% |
|
|
Range
|
|
|
0.0 70.0% |
|
|
|
2.0 23.9% |
(1) |
|
|
15.0 44.0% |
|
|
|
Impact on fair value of 10% adverse change
|
|
$ |
(82) |
|
|
$ |
|
|
|
$ |
(1) |
|
|
|
Impact on fair value of 20% adverse change
|
|
$ |
(133) |
|
|
$ |
|
|
|
$ |
(2) |
|
|
CPR = Constant Prepayment Rate
|
|
(1) |
Relates to select securitization transactions where assets
are prepayable. |
The preceding sensitivity analysis is hypothetical and should be
used with caution. In particular, the effect of a variation in a
particular assumption on the fair value of the retained interest
is calculated independent of changes in any other assumption; in
practice, changes in one factor may result in changes in
another, which might magnify or counteract the sensitivities.
Further, changes in fair value based on a 10% or 20% variation
in an assumption or parameter generally cannot be extrapolated
16
because the relationship of the change in the assumption to the
change in fair value may not be linear. Also, the sensitivity
analysis does not include the offsetting benefit of financial
instruments that Merrill Lynch utilizes to hedge risks,
including credit, interest rate, and prepayment risk, that are
inherent in the retained interests. These hedging strategies are
structured to take into consideration the hypothetical stress
scenarios above such that they would be effective in principally
offsetting Merrill Lynchs exposure to loss in the
event these scenarios occur.
The weighted average assumptions and parameters used initially
to value retained interests relating to securitizations that
were still held by Merrill Lynch as of June 30, 2006 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Residential | |
|
Municipal | |
|
|
|
|
Mortgage Loans | |
|
Bonds | |
|
Other | |
| |
Credit losses (rate per annum)
|
|
|
0.8 |
% |
|
|
0.0 |
% |
|
|
0.3% |
|
Weighted average discount rate
|
|
|
8.1 |
% |
|
|
3.9 |
% |
|
|
10.4% |
|
Weighted average life (in years)
|
|
|
3.6 |
|
|
|
3.5 |
|
|
|
3.0 |
|
Prepayment speed assumption (CPR)
|
|
|
15.6 |
% |
|
|
9.0 |
% |
|
|
9.1% |
|
|
CPR = Constant Prepayment Rate
For residential mortgage loan and other securitizations, the
investors and the securitization trust generally have no
recourse to Merrill Lynchs other assets for failure of
mortgage holders to pay when due.
For municipal bond securitization SPEs, in the normal course of
dealer market-making activities, Merrill Lynch acts as liquidity
provider. Specifically, the holders of beneficial interests
issued by municipal bond securitization SPEs have the right to
tender their interests for purchase by Merrill Lynch on
specified dates at a specified price. Beneficial interests that
are tendered are then sold by Merrill Lynch to investors through
a best efforts remarketing where Merrill Lynch is the
remarketing agent. If the beneficial interests are not
successfully remarketed, the holders of beneficial interests are
paid from funds drawn under a standby liquidity letter of credit
issued by Merrill Lynch.
In addition to standby letters of credit, in certain municipal
bond securitizations, Merrill Lynch also provides default
protection or credit enhancement to investors in securities
issued by certain municipal bond securitization SPEs. Interest
and principal payments on beneficial interests issued by these
SPEs are secured by a guarantee issued by Merrill Lynch. In the
event that the issuer of the underlying municipal bond defaults
on any payment of principal and/or interest when due, the
payments on the bonds will be made to beneficial interest
holders from an irrevocable guarantee by Merrill Lynch.
The maximum commitment under these liquidity and default
guarantees totaled $30.9 billion and $29.9 billion at
June 30, 2006 and December 30, 2005, respectively. The
fair value of the guarantees approximated $34 million and
$14 million at June 30, 2006 and December 30,
2005, respectively, which is reflected in the Condensed
Consolidated Financial Statements. Of these arrangements,
$6.6 billion and $6.9 billion at June 30, 2006
and December 30, 2005, respectively, represent agreements
where the guarantee is provided to the SPE by a third-party
financial intermediary and Merrill Lynch enters into a
reimbursement agreement with the financial intermediary. In
these arrangements, if the financial intermediary incurs losses,
Merrill Lynch has up to one year to fund those losses.
Additional information regarding these commitments is provided
in Note 10 to the Condensed Consolidated Financial
Statements and in Note 12 of the 2005 Annual Report.
17
The following table summarizes principal amounts outstanding and
delinquencies of securitized financial assets as of
June 30, 2006 and December 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
|
|
| |
|
|
Residential | |
|
Municipal | |
|
|
|
|
Mortgage Loans | |
|
Bonds | |
|
Other | |
| |
June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount Outstanding
|
|
$ |
104,845 |
|
|
$ |
15,486 |
|
|
$ |
10,005 |
|
Delinquencies
|
|
|
502 |
|
|
|
- |
|
|
|
11 |
|
|
December 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount Outstanding
|
|
$ |
82,468 |
|
|
$ |
19,745 |
|
|
$ |
10,416 |
|
Delinquencies
|
|
|
688 |
|
|
|
- |
|
|
|
- |
|
|
Net credit losses associated with securitized financial assets
for the six months ended June 30, 2006 and July 1,
2005 approximated $45 million and $3 million,
respectively.
Variable Interest Entities
In January 2003, the FASB issued FIN 46, which provided
additional guidance on the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements,
for enterprises that have interests in entities that meet
the definition of a VIE, and on December 24, 2003, the FASB
issued FIN 46R. FIN 46R requires that an entity shall
consolidate a VIE if that enterprise has a variable interest
that will absorb a majority of the VIEs expected losses,
receive a majority of the VIEs expected residual returns,
or both.
QSPEs are a type of VIE that holds financial instruments and
distributes cash flows to investors based on preset terms. QSPEs
are commonly used in mortgage and other securitization
transactions. In accordance with Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, and FIN 46R,
Merrill Lynch does not consolidate QSPEs. Information regarding
QSPEs can be found in the Securitization section of this Note
and the Guarantees section in Note 10 to the Condensed
Consolidated Financial Statements.
18
The following tables summarize Merrill Lynchs involvement
with VIEs as of June 30, 2006 and December 30, 2005,
respectively. The table below does not include information on
QSPEs.
Where an entity is a significant variable interest holder,
FIN 46R requires that entity to disclose its maximum
exposure to loss as a result of its interest in the VIE. It
should be noted that this measure does not reflect Merrill
Lynchs estimate of the actual losses that could result
from adverse changes because it does not reflect the economic
hedges Merrill Lynch enters into to reduce its exposure.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) | |
| |
|
|
Significant | |
|
|
|
|
|
|
Variable | |
|
Other Involvement | |
|
|
Primary Beneficiary | |
|
Interest Holder | |
|
with VIEs | |
|
|
| |
|
|
Total | |
|
Net | |
|
Recourse | |
|
Total | |
|
|
|
Total | |
|
|
|
|
Asset | |
|
Asset | |
|
to Merrill | |
|
Asset | |
|
Maximum | |
|
Asset | |
|
Maximum | |
Description |
|
Size(4) | |
|
Size(5) | |
|
Lynch(6) | |
|
Size(4) | |
|
Exposure | |
|
Size(4) | |
|
Exposure | |
| |
June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and Real Estate VIEs
|
|
$ |
5,369 |
|
|
$ |
5,121 |
|
|
$ |
- |
|
|
$ |
186 |
|
|
$ |
186 |
|
|
$ |
- |
|
|
$ |
- |
|
Tax Planning
VIEs(1)(2)
|
|
|
30,871 |
|
|
|
9,407 |
|
|
|
6,125 |
|
|
|
657 |
|
|
|
27 |
|
|
|
- |
|
|
|
- |
|
Guaranteed and Other Funds
|
|
|
2,022 |
|
|
|
1,530 |
|
|
|
535 |
|
|
|
2,984 |
|
|
|
2,973 |
|
|
|
- |
|
|
|
- |
|
Credit Linked Note and Other
VIEs(3)
|
|
|
155 |
|
|
|
55 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,909 |
|
|
|
695 |
|
|
December 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and Real Estate VIEs
|
|
$ |
5,144 |
|
|
$ |
5,140 |
|
|
$ |
- |
|
|
$ |
116 |
|
|
$ |
63 |
|
|
$ |
- |
|
|
$ |
- |
|
Tax Planning
VIEs(1)(2)
|
|
|
29,617 |
|
|
|
8,365 |
|
|
|
5,823 |
|
|
|
5,416 |
|
|
|
2,297 |
|
|
|
- |
|
|
|
- |
|
Guaranteed and Other Funds
|
|
|
1,802 |
|
|
|
1,349 |
|
|
|
464 |
|
|
|
2,981 |
|
|
|
2,973 |
|
|
|
- |
|
|
|
- |
|
Credit Linked Note and Other
VIEs(3)
|
|
|
130 |
|
|
|
30 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,835 |
|
|
|
780 |
|
|
|
|
(1) |
Recourse to Merrill Lynch associated with Tax Planning VIEs
primarily relates to transactions where the investors in the
debt issued by the VIEs have recourse to both the assets of the
VIEs and to Merrill Lynch, as well as certain indemnifications
made by Merrill Lynch to the investors in the VIEs. |
(2) |
The maximum exposure for Tax Planning VIEs reflects the fair
value of investments in the VIEs and derivatives entered into
with the VIEs, as well as the maximum exposure to loss
associated with indemnifications made by Merrill Lynch to
investors in the VIEs. |
(3) |
The maximum exposure for Credit-Linked Note and Other VIEs is
the fair value of the derivatives entered into with the VIEs if
they are in an asset position as of June 30, 2006 and
December 30, 2005, respectively. |
(4) |
This column reflects the total size of the assets held in the
VIE. |
(5) |
This column reflects the size of the assets held in the VIE
after accounting for intercompany eliminations and any balance
sheet netting of assets and liabilities as permitted by FASB
Interpretation No. 39. |
(6) |
This column reflects the extent, if any, to which investors
have recourse to Merrill Lynch beyond the assets held in the
VIE. |
19
|
|
Note 6. |
Loans, Notes, Mortgages and Related Commitments to Extend
Credit |
Loans, Notes, Mortgages and related commitments to extend credit
at June 30, 2006 and December 30, 2005, are presented
below. This disclosure includes commitments to extend credit
that may result in loans held for investment and loans held for
sale.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) | |
| |
|
|
Loans | |
|
Commitments(1) | |
|
|
| |
|
|
June 30, | |
|
Dec. 30, | |
|
June 30, | |
|
Dec. 30, | |
|
|
2006 | |
|
2005 | |
|
2006(2)(3) | |
|
2005(3) | |
| |
Consumer and small- and middle-market business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages
|
|
$ |
17,073 |
|
|
$ |
18,172 |
|
|
$ |
7,539 |
|
|
$ |
6,376 |
|
|
Small- and middle-market business
|
|
|
3,851 |
|
|
|
4,994 |
|
|
|
2,406 |
|
|
|
3,062 |
|
|
Other
|
|
|
2,936 |
|
|
|
2,558 |
|
|
|
77 |
|
|
|
75 |
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
|
|
|
41,067 |
|
|
|
36,571 |
|
|
|
44,190 |
|
|
|
34,583 |
|
|
Unsecured investment grade
|
|
|
4,481 |
|
|
|
3,283 |
|
|
|
21,680 |
|
|
|
22,061 |
|
|
Unsecured non-investment grade
|
|
|
1,497 |
|
|
|
869 |
|
|
|
1,571 |
|
|
|
980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,905 |
|
|
|
66,447 |
|
|
|
77,463 |
|
|
|
67,137 |
|
|
Allowance for loan losses
|
|
|
(463 |
) |
|
|
(406 |
) |
|
|
- |
|
|
|
- |
|
|
Reserve for lending-related commitments
|
|
|
- |
|
|
|
- |
|
|
|
(310 |
) |
|
|
(281 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total, net
|
|
$ |
70,442 |
|
|
$ |
66,041 |
|
|
$ |
77,153 |
|
|
$ |
66,856 |
|
|
|
|
(1) |
Commitments are outstanding as of the date the commitment
letter is issued and are comprised of closed and contingent
commitments. Closed commitments represent the unfunded portion
of existing commitments available for draw down. Contingent
commitments are contingent on the borrower fulfilling certain
conditions or upon a particular event, such as an acquisition. A
portion of these contingent commitments may be syndicated among
other lenders or replaced with capital markets funding. |
(2) |
See Note 10 to the Condensed Consolidated Financial
Statements for a maturity profile of these commitments. |
(3) |
In addition to the loan origination commitments included in
the table above, at June 30, 2006, Merrill Lynch entered
into agreements to purchase $222 million of loans that,
upon settlement date, are likely to be classified in loans held
for investment and loans held for sale. Similar loan purchase
commitments totaled $96 million at December 30, 2005.
See Note 10 to the Condensed Consolidated Financial
Statements for further information. |
Activity in the allowance for loan losses is presented below:
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
| |
|
|
Six Months Ended | |
|
|
| |
|
|
June 30, | |
|
July 1, | |
|
|
2006 | |
|
2005 | |
| |
Allowance for loan losses at beginning of period
|
|
$ |
406 |
|
|
$ |
283 |
|
Provision for loan losses
|
|
|
74 |
|
|
|
84 |
|
|
Charge-offs
|
|
|
(26 |
) |
|
|
(45 |
) |
|
Recoveries
|
|
|
7 |
|
|
|
6 |
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(19 |
) |
|
|
(39 |
) |
Other
|
|
|
2 |
|
|
|
- |
|
|
|
|
|
|
|
|
Allowance for loan losses at end of period
|
|
$ |
463 |
|
|
$ |
328 |
|
|
Consumer and small- and middle-market business loans, which are
substantially secured, consisted of approximately 297,000
individual loans at June 30, 2006, and included residential
mortgages, home
20
equity loans, small- and middle-market business loans, and other
loans to individuals for household, family, or other personal
expenditures. Commercial loans, which at June 30, 2006
consisted of approximately 12,000 separate loans, include
corporate and institutional loans, commercial mortgages,
asset-based loans, and other loans to businesses. The principal
balance of nonaccrual loans was $217 million at
June 30, 2006 and $256 million at December 30,
2005. The investment grade and non-investment grade
categorization is determined using the credit rating agency
equivalent of internal credit ratings. Non-investment grade
counterparties are those rated lower than BBB. In some cases,
Merrill Lynch enters into credit default swaps to mitigate
credit exposure related to funded and unfunded commercial loans.
The notional value of these swaps totaled $9.2 billion and
$7.9 billion at June 30, 2006 and December 30,
2005, respectively. For information on credit risk management
see Note 6 of the 2005 Annual Report.
The above amounts include $17.3 billion and
$12.3 billion of loans held for sale at June 30, 2006
and December 30, 2005, respectively. Loans held for sale
are loans that management expects to sell prior to maturity. At
June 30, 2006, such loans consisted of $5.0 billion of
consumer loans, primarily residential mortgages and automobile
loans, and $12.3 billion of commercial loans, approximately
23% of which are to investment grade counterparties. At
December 30, 2005, such loans consisted of
$3.4 billion of consumer loans, primarily automobile loans
and residential mortgages, and $8.9 billion of commercial
loans, approximately 22% of which are to investment grade
counterparties.
For further information on loans, notes and mortgages, see
Notes 1 and 8 of the 2005 Annual Report.
|
|
Note 7. |
Commercial Paper, Short- and Long-Term Borrowings, and
Deposits |
ML & Co. is the primary issuer of all debt instruments.
For local tax or regulatory reasons, debt is also issued by
certain subsidiaries.
On May 16, 2006, ML & Co. issued $2.0 billion
of subordinated debt. ML & Co. pays interest on this
subordinated debt at an annual rate of 6.05%. The subordinated
debt matures on May 16, 2016 and is junior in right of
payment to all of ML & Co.s senior indebtedness.
Total borrowings at June 30, 2006 and December 30,
2005, which is comprised of commercial paper and other
short-term borrowings, long-term borrowings and long-term debt
issued to
TOPrSSM
partnerships, consisted of the following:
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
| |
|
|
June 30, | |
|
Dec. 30, | |
|
|
2006 | |
|
2005 | |
| |
Senior debt issued by ML & Co.
|
|
$ |
121,625 |
|
|
$ |
111,533 |
|
Senior debt issued by subsidiaries guaranteed by
ML & Co.
|
|
|
16,907 |
|
|
|
13,036 |
|
Subordinated debt issued by ML & Co.
|
|
|
1,970 |
|
|
|
- |
|
Subordinated debt issued to
TOPrSSM
partnerships
|
|
|
3,092 |
|
|
|
3,092 |
|
Other subsidiary financing not guaranteed by
ML & Co.
|
|
|
1,676 |
|
|
|
1,391 |
|
Other subsidiary financing non-recourse
|
|
|
11,214 |
|
|
|
10,351 |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
156,484 |
|
|
$ |
139,403 |
|
|
These borrowing activities may create exposure to market risk,
most notably interest rate, equity, and currency risk. Refer to
Note 1 of the 2005 Annual Report, Derivatives section, for
additional information on the use of derivatives to hedge these
risks and the accounting for derivatives embedded in these
instruments. Other subsidiary financing non-recourse
is primarily attributable to
21
consolidated entities that are VIEs. Additional information
regarding VIEs is provided in Note 5 to the Condensed
Consolidated Financial Statements.
Borrowings and Deposits at June 30, 2006 and
December 30, 2005, are presented below:
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
| |
|
|
June 30, | |
|
Dec. 30, | |
|
|
2006 | |
|
2005 | |
| |
Commercial paper and other short-term borrowings
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$ |
12,827 |
|
|
$ |
3,420 |
|
|
Other
|
|
|
575 |
|
|
|
482 |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
13,402 |
|
|
$ |
3,902 |
|
|
|
|
|
|
|
|
Long-term
borrowings(1)
|
|
|
|
|
|
|
|
|
|
Fixed-rate
obligations(2)(4)
|
|
$ |
47,263 |
|
|
$ |
54,104 |
|
|
Variable-rate
obligations(3)(4)
|
|
|
93,579 |
|
|
|
79,071 |
|
|
Zero-coupon contingent convertible debt
(LYONs®)
|
|
|
2,240 |
|
|
|
2,326 |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
143,082 |
|
|
$ |
135,501 |
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$ |
59,819 |
|
|
$ |
61,784 |
|
|
Non U.S.
|
|
|
19,623 |
|
|
|
18,232 |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
79,442 |
|
|
$ |
80,016 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes long-term debt issued to
TOPrSSM
partnerships. |
(2) |
Fixed-rate obligations are generally swapped to floating
rates. |
(3) |
Variable interest rates are generally based on rates such as
LIBOR, the U.S. Treasury Bill Rate, or the Federal Funds
Rate. |
(4) |
Included are various equity-linked or other indexed
instruments. |
Long-term borrowings, including adjustments related to fair
value hedges and various equity-linked or other indexed
instruments, and long-term debt issued to
TOPrSSM
partnerships at June 30, 2006, mature as follows:
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
| |
Less than 1 year
|
|
$ |
24,628 |
|
|
|
17 |
% |
1 2 years
|
|
|
28,174 |
|
|
|
20 |
|
2+
3 years
|
|
|
17,169 |
|
|
|
12 |
|
3+
4 years
|
|
|
21,041 |
|
|
|
15 |
|
4+
5 years
|
|
|
14,783 |
|
|
|
10 |
|
Greater than 5 years
|
|
|
37,287 |
|
|
|
26 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
143,082 |
|
|
|
100 |
% |
|
Certain long-term borrowing agreements contain provisions
whereby the borrowings are redeemable at the option of the
holder at specified dates prior to maturity. These borrowings
are reflected in the above table as maturing at their put dates,
rather than their contractual maturities. Management believes,
however, that a portion of such borrowings will remain
outstanding beyond their earliest redemption date.
A limited number of notes whose coupon or repayment terms are
linked to the performance of equity, other indices, or baskets
of securities may be accelerated based on the value of a
referenced index or security, in which case Merrill Lynch may be
required to immediately settle the obligation for cash or other
securities. Refer to Note 1 of the 2005 Annual Report,
Embedded Derivatives section for additional information.
22
Except for the $2.2 billion of
LYONs®
that were outstanding at June 30, 2006, senior debt
obligations issued by ML & Co. and senior debt issued
by subsidiaries and guaranteed by ML & Co. do not
contain provisions that could, upon an adverse change in
ML & Co.s credit rating, financial ratios,
earnings, cash flows, or stock price, trigger a requirement for
an early payment, additional collateral support, changes in
terms, acceleration of maturity, or the creation of an
additional financial obligation.
The fair values of long-term borrowings and related hedges
approximated the carrying amounts at June 30, 2006 and
December 30, 2005.
The effective weighted-average interest rates for borrowings, at
June 30, 2006 and December 30, 2005 were:
|
|
|
|
|
|
|
|
|
| |
|
|
June 30, | |
|
Dec. 30, | |
|
|
2006 | |
|
2005 | |
| |
Commercial paper and other short-term borrowings
|
|
|
4.62 |
% |
|
|
3.46 |
% |
Long-term borrowings, contractual rate
|
|
|
4.01 |
|
|
|
3.70 |
|
Long-term debt issued to
TOPrSsm
partnerships
|
|
|
7.31 |
|
|
|
7.31 |
|
|
See Note 9 of the 2005 Annual Report for additional
information on Borrowings.
Other
Merrill Lynch also obtains standby letters of credit from
issuing banks to satisfy various counterparty collateral
requirements, in lieu of depositing cash or securities
collateral. Such standby letters of credit aggregated
$3.3 billion and $1.1 billion at June 30, 2006
and December 30, 2005, respectively.
|
|
Note 8. |
Comprehensive Income |
The components of comprehensive income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
|
|
|
|
| |
|
|
Three Months | |
|
Six Months | |
|
|
Ended | |
|
Ended | |
|
|
| |
|
|
June 30, | |
|
July 1, | |
|
June 30, | |
|
July 1, | |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Net Earnings
|
|
$ |
1,633 |
|
|
$ |
1,135 |
|
|
$ |
2,108 |
|
|
$ |
2,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(42 |
) |
|
|
(146 |
) |
|
|
(44 |
) |
|
|
(205 |
) |
|
Net unrealized gain (loss) on investment securities
available-
for-sale
|
|
|
(107 |
) |
|
|
61 |
|
|
|
(175 |
) |
|
|
19 |
|
|
Deferred gain (loss) on cash flow hedges
|
|
|
1 |
|
|
|
2 |
|
|
|
- |
|
|
|
(20 |
) |
|
Minimum pension liability
|
|
|
1 |
|
|
|
(1 |
) |
|
|
1 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss, net of tax
|
|
|
(147 |
) |
|
|
(84 |
) |
|
|
(218 |
) |
|
|
(207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$ |
1,486 |
|
|
$ |
1,051 |
|
|
$ |
1,890 |
|
|
$ |
2,140 |
|
|
23
|
|
Note 9. |
Stockholders Equity and Earnings Per Share |
The following table presents the computations of basic and
diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions, except per share amounts) |
|
|
|
|
|
|
|
|
| |
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
| |
|
|
June 30, | |
|
July 1, | |
|
June 30, | |
|
July 1, | |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Net earnings
|
|
$ |
1,633 |
|
|
$ |
1,135 |
|
|
$ |
2,108 |
|
|
$ |
2,347 |
|
Preferred stock dividends
|
|
|
(45 |
) |
|
|
(17 |
) |
|
|
(88 |
) |
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings applicable to common shareholders for
basic EPS
|
|
$ |
1,588 |
|
|
$ |
1,118 |
|
|
$ |
2,020 |
|
|
$ |
2,323 |
|
Interest expense on
LYONs®(1)
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings applicable to common shareholders for
diluted EPS
|
|
$ |
1,588 |
|
|
$ |
1,118 |
|
|
$ |
2,021 |
|
|
$ |
2,324 |
|
|
(shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average basic shares
outstanding(2)
|
|
|
885,373 |
|
|
|
897,524 |
|
|
|
884,555 |
|
|
|
902,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock
options(3)
|
|
|
40,088 |
|
|
|
38,363 |
|
|
|
42,577 |
|
|
|
41,306 |
|
|
FACAAP
shares(3)
|
|
|
21,460 |
|
|
|
21,438 |
|
|
|
21,262 |
|
|
|
21,363 |
|
|
Restricted shares and
units(3)
|
|
|
25,979 |
|
|
|
18,617 |
|
|
|
27,708 |
|
|
|
17,691 |
|
|
Convertible
LYONs®(1)
|
|
|
415 |
|
|
|
2,551 |
|
|
|
1,090 |
|
|
|
2,854 |
|
|
ESPP
shares(3)
|
|
|
9 |
|
|
|
11 |
|
|
|
13 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
87,951 |
|
|
|
80,980 |
|
|
|
92,650 |
|
|
|
83,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Shares(4)
|
|
|
973,324 |
|
|
|
978,504 |
|
|
|
977,205 |
|
|
|
985,889 |
|
|
Basic EPS
|
|
$ |
1.79 |
|
|
$ |
1.25 |
|
|
$ |
2.28 |
|
|
$ |
2.57 |
|
Diluted EPS
|
|
|
1.63 |
|
|
|
1.14 |
|
|
|
2.07 |
|
|
|
2.36 |
|
|
|
|
(1) |
See Note 9 of the 2005 Annual Report for further
information on
LYONs®. |
(2) |
Includes shares exchangeable into common stock. |
(3) |
See Note 14 of the 2005 Annual Report for a description
of these instruments. |
(4) |
Excludes 33 million instruments for the three and six
month periods ended June 30, 2006, and 43 million
instruments for the three and six month periods ended
July 1, 2005 that were considered
anti-dilutive and thus
were not included in the above calculations. |
The Board of Directors authorized the repurchase of an
additional $6 billion of Merrill Lynchs outstanding
common shares under a program announced on February 26,
2006. During the second quarter of 2006, Merrill Lynch
repurchased 41.4 million common shares at an average
repurchase price of $73.26 per share.
On February 28, 2006, Merrill Lynch issued
$360 million face value of floating rate, non-cumulative,
perpetual preferred stock.
On January 18, 2006, the Board of Directors declared an
additional 25% increase in the regular quarterly dividend to 25
cents per common share.
24
|
|
Note 10. |
Commitments, Contingencies and Guarantees |
Litigation
Merrill Lynch has been named as a defendant in various legal
actions, including arbitrations, class actions, and other
litigation arising in connection with its activities as a global
diversified financial services institution. The general decline
of equity securities prices between 2000 and 2003 resulted in
increased legal actions against many firms, including Merrill
Lynch.
Some of the legal actions include claims for substantial
compensatory and/or punitive damages or claims for indeterminate
amounts of damages. In some cases, the issuers who would
otherwise be the primary defendants in such cases are bankrupt
or otherwise in financial distress. Merrill Lynch is also
involved in investigations and/or proceedings by governmental
and self-regulatory agencies. The number of these investigations
has also increased in recent years with regard to many firms,
including Merrill Lynch.
Merrill Lynch believes it has strong defenses to, and where
appropriate, will vigorously contest, many of these matters.
Given the number of these matters, it is likely that some may
result in adverse judgments, penalties, injunctions, fines, or
other relief. Merrill Lynch may explore potential settlements
before a case is taken through trial because of the uncertainty
and risks inherent in the litigation process. In accordance with
SFAS No. 5, Accounting for Contingencies,
Merrill Lynch will accrue a liability when it is probable that a
liability has been incurred and the amount of the loss can be
reasonably estimated. In many lawsuits and arbitrations,
including almost all of the class action lawsuits, it is not
possible to determine whether a liability has been incurred or
to estimate the ultimate or minimum amount of that liability
until the case is close to resolution, in which case no accrual
is made until that time. In view of the inherent difficulty of
predicting the outcome of such matters, particularly in cases in
which claimants seek substantial or indeterminate damages,
Merrill Lynch cannot predict what the eventual loss or
range of loss related to such matters will be.
Merrill Lynch continues to assess these cases and believes,
based on information available to it, that the resolution of
these matters will not have a material adverse effect on the
financial condition of Merrill Lynch as set forth in the
Condensed Consolidated Financial Statements, but may be material
to Merrill Lynchs operating results or cash flows for
any particular period and may impact ML & Co.s
credit ratings.
Tax Matters
Merrill Lynch is under examination by the Internal Revenue
Service (IRS) and other tax authorities in major
countries such as Japan and the United Kingdom, and states in
which Merrill Lynch has significant business operations, such as
New York. The tax years under examination vary by jurisdiction.
An IRS examination covering the years 2001-2003 is expected to
be completed in 2006, subject to the resolution of the Japanese
issue discussed below. There are carryback claims from the years
of 2001 and 2002 of approximately $250 million to
$300 million, which are now under Joint Committee review. A
tax benefit would be recorded to the extent that Merrill Lynch
is successful in obtaining the tax benefit from these carryback
claims. IRS audits have also commenced for the 2004 and 2005 tax
years.
In the second quarter of 2005, Merrill Lynch paid a tax
assessment from the Tokyo Regional Tax Bureau for the years
1998-2002. The assessment reflected the Japanese tax
authoritys view that certain income on which Merrill Lynch
previously paid income tax to other international jurisdictions,
primarily the United States, should have been allocated to
Japan. Merrill Lynch has begun the process of obtaining
clarification from international authorities on the appropriate
allocation of income among multiple jurisdictions to prevent
double taxation.
25
Merrill Lynch regularly assesses the likelihood of additional
assessments in each of the tax jurisdictions resulting from
these examinations. Tax reserves have been established, which
Merrill Lynch believes to be adequate in relation to the
potential for additional assessments. However, there is a
reasonable possibility that additional amounts may be incurred.
The estimated additional possible amounts are no more than
$150 million. Merrill Lynch will adjust the level of
reserves when there is more information available, or when an
event occurs requiring a change to the reserves. The
reassessment of tax reserves could have a material impact on
Merrill Lynchs effective tax rate in the period in which
it occurs.
Commitments
At June 30, 2006, Merrill Lynchs commitments had the
following expirations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitment expiration |
|
|
|
|
|
Less than |
|
|
1 3 |
|
|
3+ 5 |
|
|
Over 5 |
|
|
|
Total | |
|
1 Year | |
|
Years | |
|
Years | |
|
Years | |
|
Commitments to extend
credit(1)
|
|
$ |
77,463 |
|
|
$ |
39,141 |
|
|
$ |
11,036 |
|
|
$ |
19,423 |
|
|
$ |
7,863 |
|
Purchasing and other commitments
|
|
|
7,748 |
|
|
|
5,548 |
|
|
|
675 |
|
|
|
576 |
|
|
|
949 |
|
Operating leases
|
|
|
3,243 |
|
|
|
561 |
|
|
|
1,016 |
|
|
|
815 |
|
|
|
851 |
|
Commitments to enter into resale agreements
|
|
|
12,169 |
|
|
|
12,169 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
100,623 |
|
|
$ |
57,419 |
|
|
$ |
12,727 |
|
|
$ |
20,814 |
|
|
$ |
9,663 |
|
|
|
|
(1) |
See Note 6 to the Condensed Consolidated Financial
Statements. |
Lending Commitments
Merrill Lynch primarily enters into commitments to extend
credit, predominantly at variable interest rates, in connection
with corporate finance, corporate and institutional transactions
and asset-based lending transactions. Clients may also be
extended loans or lines of credit collateralized by first and
second mortgages on real estate, certain liquid assets of small
businesses, or securities. These commitments usually have a
fixed expiration date and are contingent on certain contractual
conditions that may require payment of a fee by the
counterparty. Once commitments are drawn upon, Merrill Lynch may
require the counterparty to post collateral depending upon
creditworthiness and general market conditions. See Note 6
to the Condensed Consolidated Financial Statements for
additional information.
The contractual amounts of these commitments represent the
amounts at risk should the contract be fully drawn upon, the
client defaults, and the value of the existing collateral
becomes worthless. The total amount of outstanding commitments
may not represent future cash requirements, as commitments may
expire without being drawn upon.
Purchasing and Other Commitments
Merrill Lynch had commitments to purchase partnership interests,
primarily related to private equity and principal investing
activities, of $1,048 million and $734 million at
June 30, 2006 and December 30, 2005, respectively.
Merrill Lynch also has entered into agreements with providers of
market data, communications, systems consulting, and other
office-related services. At June 30, 2006 and
December 30, 2005, minimum fee commitments over the
remaining life of these agreements aggregated $310 million
and $517 million, respectively. Merrill Lynch entered into
commitments to purchase loans of $5.5 billion
($5.3 billion of which may be included in trading assets
and $221 million of which may be included in loans, notes,
and mortgages) at June 30, 2006. Such
26
commitments totaled $3.3 billion at December 30, 2005.
In addition, Merrill Lynch entered into institutional and
margin-lending transactions, some of which are on a committed
basis, but most of which are not. Merrill Lynchs binding
margin lending commitments totaled $434 million at
June 30, 2006 and $381 million at December 30,
2005. Other purchasing commitments amounted to $468 million
and $856 million at June 30, 2006 and
December 30, 2005, respectively.
On July 24, 2006, Merrill Lynch, along with a consortium of
additional investors, announced the execution of an agreement to
acquire HCA Inc. HCA Inc. is a holding company whose affiliates
own and operate hospitals and related health care entities.
MLIM
On February 15, 2006, Merrill Lynch announced that it had
signed a definitive agreement under which it would combine its
MLIM investment management business with BlackRock, Inc.
(BlackRock) in exchange for a 49.8% interest in the
combined firm, including a 45% voting interest. Merrill Lynch
expects to recognize a gain upon the closing of this transaction
which, based upon the price at the time of the announcement, is
estimated to be over $1 billion. This transaction is
expected to close around the end of the third quarter of 2006,
subject to regulatory and shareholder approvals. The actual gain
will be contingent upon BlackRocks share price at closing,
as well as closing adjustments. Merrill Lynch plans to account
for its investment in BlackRock under the equity method of
accounting.
Leases
As disclosed in Note 12 of the 2005 Annual Report, Merrill
Lynch has entered into various noncancellable long-term lease
agreements for premises that expire through 2024. Merrill Lynch
has also entered into various noncancellable short-term lease
agreements, which are primarily commitments of less than one
year under equipment leases.
Guarantees
The derivatives in the following table meet the FASB issued
Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others an
interpretation of FASB Statements No. 5, 57, and 107 and
rescission of FASB Interpretation No. 34
(FIN 45), definition of guarantees and include
certain written options and credit default swaps that
contingently require Merrill Lynch to make payments based on
changes in an underlying. Because the maximum exposure to loss
could be unlimited for certain derivatives (e.g., interest rate
caps) and the maximum exposure to loss is not considered when
assessing the risk of contracts, the notional value of these
contracts has been included to provide information about the
magnitude of Merrill Lynchs involvement with these types
of transactions. Merrill Lynch records all derivative
instruments at fair value on its Condensed Consolidated Balance
Sheets.
The liquidity facilities and default facilities in the following
table relate primarily to municipal bond securitization SPEs and
Merrill Lynch-sponsored asset-backed commercial paper conduits.
Merrill Lynch acts as liquidity provider to municipal bond
securitization SPEs. As of June 30, 2006, the value of the
assets held by the SPE plus any additional collateral pledged to
Merrill Lynch exceeds the amount of beneficial interests issued,
which provides additional support to Merrill Lynch in the event
that the standby facility is drawn. As of June 30, 2006,
the maximum payout if the standby facilities are drawn was
$26.0 billion and the value of the municipal bond assets to
which Merrill Lynch has recourse in the event of a draw was
$29.6 billion. In certain instances, Merrill Lynch also
provides default protection in addition to liquidity facilities.
If the default protection is drawn, Merrill Lynch may claim the
underlying assets held by the SPEs. As of June 30, 2006,
the maximum payout if an issuer defaults was $4.9 billion,
and the value of the assets to which Merrill
27
Lynch has recourse, in the event that an issuer of a municipal
bond held by the SPE defaults on any payment of principal and/or
interest when due, was $6.2 billion. In addition, Merrill
Lynch provides a $3.0 billion liquidity facility and
$60 million credit facility to a Merrill Lynch-sponsored
asset-backed commercial paper conduit. The maximum exposure to
loss for these two facilities combined is $3.1 billion and
assumes a total loss on a portfolio of highly rated assets. In
June 2006, Merrill Lynch sponsored a second asset backed
commercial paper conduit where Merrill Lynch provides a
$5 billion liquidity facility and a $400 million
standby letter of credit to a conduit that holds asset backed
loans. The combined maximum exposure is zero and no letters of
credit were issued pursuant to the commitment as of
June 30, 2006. For additional information on these
facilities, see Note 12 of the 2005 Annual Report and
Note 5 to the Condensed Consolidated Balance Sheets.
In addition, Merrill Lynch makes guarantees to counterparties in
the form of standby letters of credit. Merrill Lynch holds
marketable securities of $570 million as collateral to
secure these guarantees.
Further, in conjunction with certain principal-protected mutual
funds, Merrill Lynch guarantees the return of the initial
principal investment at the termination date of the fund. At
June 30, 2006, Merrill Lynchs maximum potential
exposure to loss with respect to these guarantees is
$634 million assuming that the funds are invested
exclusively in other general investments (i.e., the funds hold
no risk-free assets), and that those other general investments
suffer a total loss. As such, this measure significantly
overstates Merrill Lynchs exposure or expected loss at
June 30, 2006. These transactions met the FASB issued
Statement No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities
(SFAS No. 149) definition of
derivatives and, as such, were carried as a liability with a
fair value of $7 million at June 30, 2006.
Merrill Lynch also provides indemnifications related to the
U.S. tax treatment of certain foreign tax planning
transactions. The maximum exposure to loss associated with these
transactions at June 30, 2006 is $165 million;
however, Merrill Lynch believes that the likelihood of loss with
respect to these arrangements is remote.
These guarantees and their expiration are summarized at
June 30, 2006 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Maximum | |
|
|
|
|
Payout/ | |
|
Less than | |
|
1 3 | |
|
3+ 5 | |
|
Over | |
|
Carrying | |
|
|
Notional | |
|
1 Year | |
|
Years | |
|
Years | |
|
5 Years | |
|
Value | |
| |
Derivative
contracts(1)
|
|
$ |
1,397,508 |
|
|
$ |
330,612 |
|
|
$ |
378,340 |
|
|
$ |
240,228 |
|
|
$ |
448,328 |
|
|
$ |
37,779 |
|
|
Liquidity facilities with
SPEs(2)
|
|
|
29,094 |
|
|
|
28,651 |
|
|
|
333 |
|
|
|
110 |
|
|
|
- |
|
|
|
33 |
|
|
Liquidity and default facilities with
SPEs(3)
|
|
|
10,359 |
|
|
|
9,013 |
|
|
|
1,100 |
|
|
|
- |
|
|
|
246 |
|
|
|
3 |
|
|
Residual value
guarantees(4)
|
|
|
1,069 |
|
|
|
66 |
|
|
|
169 |
|
|
|
330 |
|
|
|
504 |
|
|
|
25 |
|
|
Standby letters of credit and other
guarantees(5)(6)(7)
|
|
|
3,918 |
|
|
|
1,547 |
|
|
|
584 |
|
|
|
1,475 |
|
|
|
312 |
|
|
|
19 |
|
|
|
(1) |
As noted above, the notional value of derivative contracts is
provided rather than the maximum payout amount, although the
notional value should not be considered as a reliable indicator
of Merrill Lynchs exposure to these contracts. |
(2) |
Amounts relate primarily to facilities provided to municipal
bond securitization SPEs. Includes $6.6 billion of
guarantees provided to SPEs by third-party financial
institutions where Merrill Lynch has agreed to reimburse the
financial institution if losses occur, and has up to one year to
fund losses. |
(3) |
Amounts relate to liquidity facilities and credit default
protection provided to municipal bond securitization SPEs and
asset-backed commercial paper conduits sponsored by Merrill
Lynch. |
(4) |
Includes residual value guarantees associated with the
Hopewell campus and aircraft leases of $322 million. |
28
|
|
(5) |
Includes $173 million of reimbursement agreements with
the
Mortgage 100SM
program. |
(6) |
Includes guarantees related to principal-protected mutual
funds. |
(7) |
Includes certain indemnifications related to foreign tax
planning strategies. |
See Note 12 of the 2005 Annual Report for additional
information on guarantees.
|
|
Note 11. |
Employee Benefit Plans |
Merrill Lynch provides pension and other postretirement benefits
to its employees worldwide through defined contribution pension,
defined benefit pension, and other postretirement plans. These
plans vary based on the country and local practices. Merrill
Lynch reserves the right to amend or terminate these plans at
any time. Refer to Note 13 of the 2005 Annual Report for a
complete discussion of employee benefit plans.
Defined Benefit Pension Plans
Pension cost for the three and six month periods ended
June 30, 2006 and July 1, 2005, for Merrill
Lynchs defined benefit pension plans, included the
following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Three Months Ended | |
|
|
| |
|
|
June 30, 2006 | |
|
July 1, 2005 | |
|
|
| |
|
|
U.S. | |
|
Non-U.S. | |
|
|
|
U.S. | |
|
Non-U.S. | |
|
|
|
|
Plans | |
|
Plans | |
|
Total | |
|
Plans | |
|
Plans | |
|
Total | |
| |
Service cost
|
|
$ |
- |
|
|
$ |
7 |
|
|
$ |
7 |
|
|
$ |
- |
|
|
$ |
5 |
|
|
$ |
5 |
|
Interest cost
|
|
|
24 |
|
|
|
15 |
|
|
|
39 |
|
|
|
24 |
|
|
|
14 |
|
|
|
38 |
|
Expected return on plan assets
|
|
|
(28 |
) |
|
|
(15 |
) |
|
|
(43 |
) |
|
|
(24 |
) |
|
|
(12 |
) |
|
|
(36 |
) |
Amortization of unrecognized items and other
|
|
|
- |
|
|
|
5 |
|
|
|
5 |
|
|
|
- |
|
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total defined benefit pension cost
|
|
$ |
(4 |
) |
|
$ |
12 |
|
|
$ |
8 |
|
|
$ |
- |
|
|
$ |
11 |
|
|
$ |
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Six Months Ended | |
|
|
| |
|
|
June 30, 2006 | |
|
July 1, 2005 | |
|
|
| |
|
|
U.S. | |
|
Non-U.S. | |
|
|
|
U.S. | |
|
Non-U.S. | |
|
|
|
|
Plans | |
|
Plans | |
|
Total | |
|
Plans | |
|
Plans | |
|
Total | |
| |
Service cost
|
|
$ |
- |
|
|
$ |
14 |
|
|
$ |
14 |
|
|
$ |
- |
|
|
$ |
11 |
|
|
$ |
11 |
|
Interest cost
|
|
|
48 |
|
|
|
31 |
|
|
|
79 |
|
|
|
48 |
|
|
|
29 |
|
|
|
77 |
|
Expected return on plan assets
|
|
|
(56 |
) |
|
|
(30 |
) |
|
|
(86 |
) |
|
|
(48 |
) |
|
|
(25 |
) |
|
|
(73 |
) |
Amortization of unrecognized items and other
|
|
|
- |
|
|
|
9 |
|
|
|
9 |
|
|
|
- |
|
|
|
8 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total defined benefit pension cost
|
|
$ |
(8 |
) |
|
$ |
24 |
|
|
$ |
16 |
|
|
$ |
- |
|
|
$ |
23 |
|
|
$ |
23 |
|
|
Merrill Lynch disclosed in its 2005 Annual Report that it
expected to pay $3 million of benefit payments to
participants in the U.S. non-qualified pension plans and
Merrill Lynch expected to contribute $103 million to its
non-U.S. defined
benefit pension plans in 2006. Merrill Lynch periodically
updates these estimates, and currently expects to contribute
$7 million to its U.S. non-qualified pension plans and
$65 million to its
non-U.S. defined
benefit pension plans in 2006. The overall decrease in total
estimated contributions can primarily be attributed to changes
in funding requirements relating to the U.K. pension plan.
29
Postretirement Benefits Other Than Pensions
Other postretirement benefit cost for the three and six month
periods ended June 30, 2006 and July 1, 2005, included
the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
|
|
|
|
| |
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
| |
|
|
June 30, 2006 | |
|
July 1, 2005 | |
|
June 30, 2006 | |
|
July 1, 2005 | |
| |
Service cost
|
|
$ |
2 |
|
|
$ |
4 |
|
|
$ |
4 |
|
|
$ |
9 |
|
Interest cost
|
|
|
4 |
|
|
|
8 |
|
|
|
8 |
|
|
|
16 |
|
Other
|
|
|
(2 |
) |
|
|
3 |
|
|
|
(3 |
) |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other postretirement benefits
cost(1)
|
|
$ |
4 |
|
|
$ |
15 |
|
|
$ |
9 |
|
|
$ |
30 |
|
|
|
|
(1) |
The decrease in postretirement benefits cost can primarily be
attributed to amendments to the U.S. postretirement plan. |
Approximately 87% of the postretirement benefit cost components
for the period relate to the U.S. postretirement plan.
Note 12. Employee Incentive Plans
Merrill Lynch adopted the provisions of SFAS No. 123R
in the first quarter of 2006. See Note 1, Summary of
Significant Accounting Policies New Accounting
Pronouncements, to the Condensed Consolidated Financial
Statements for further information.
To align the interests of employees with those of stockholders,
Merrill Lynch sponsors several employee compensation plans that
provide eligible employees with shares of ML & Co.
common stock or options to purchase such stock. The total
pre-tax compensation cost and related tax benefits recognized in
earnings for share-based compensation plans for the three months
ended June 30, 2006 was $321 million and
$129 million, respectively. The total pre-tax compensation
cost and related tax benefits recognized in earnings for
share-based compensation plans for the six months ended
June 30, 2006 was $2.5 billion and $846 million,
respectively, which includes approximately $1.8 billion
associated with one-time, non-cash compensation expenses further
described in Note 1 to the Condensed Consolidated Financial
Statements. For the three months ended July 1, 2005, the
total pre-tax compensation cost and related tax benefits
recognized in earnings for stock-based compensation plans was
$270 million and $96 million, respectively. For the
six months ended July 1, 2005, the total pre-tax
compensation cost and related tax benefits recognized in
earnings for stock-based compensation plans was
$520 million and $179 million, respectively.
As of June 30, 2006, there was $2.1 billion of total
unrecognized compensation cost related to non-vested share-based
compensation arrangements. This cost is expected to be
recognized over a weighted average period of 2.3 years.
Below is a description of our share-based incentive plans.
Long-Term Incentive Compensation Plans (LTIC
Plans), Employee Stock Compensation Plan
(ESCP) and Equity Capital Accumulation Plan
(ECAP)
LTIC Plans, ESCP and ECAP provide for grants of equity and
equity-related instruments to certain employees. LTIC Plans
consist of the Long-Term Incentive Compensation Plan, a
shareholder approved plan used for grants to executive officers,
and the Long-Term Incentive Compensation Plan
30
for Managers and Producers, a broad-based plan which was
approved by the Board of Directors, but has not been shareholder
approved. LTIC Plans provide for the issuance of Restricted
Shares, Restricted Units, and Non-qualified Stock Options, as
well as Incentive Stock Options, Performance Shares, Performance
Units, Performance Options, Stock Appreciation Rights, and other
securities of Merrill Lynch. ESCP, a broad-based plan approved
by shareholders in 2003, provides for the issuance of Restricted
Shares, Restricted Units, Non-qualified Stock Options and Stock
Appreciation Rights. ECAP, a shareholder-approved plan, provides
for the issuance of Restricted Shares and Performance Shares.
All plans under LTIC, ESCP and ECAP may be satisfied using
either treasury or newly issued shares. As of June 30,
2006, no instruments other than Restricted Shares, Restricted
Units, Non-qualified Stock Options, Performance Options,
Participation Units and Stock Appreciation Rights had been
granted.
Restricted Shares and Units
Restricted Shares are shares of ML & Co. common stock
carrying voting and dividend rights. A Restricted Unit is deemed
equivalent in fair market value to one share of common stock.
Substantially all awards are settled in shares of common stock.
Recipients of Restricted Unit awards receive cash payments
equivalent to dividends. Under these plans, such shares and
units are restricted from sale, transfer, or assignment until
the end of the restricted period. Such shares and units are
subject to forfeiture during the vesting period, for grants
under LTIC Plans, or the restricted period for grants under
ECAP. Restricted Share and Restricted Unit grants made prior to
2003 generally cliff vest in three years. Restricted Share and
Restricted Unit grants made in 2003 through 2005 generally cliff
vest in four years. Restricted Shares and Restricted Units
granted in January 2006 generally vest ratably over four years.
In January 2006, Participation Units were granted from the
Long-Term Incentive Compensation Plan under Merrill Lynchs
Managing Partners Incentive Program. The awards granted under
this program are fully at risk, and the potential payout will
vary depending on Merrill Lynchs financial performance
against pre-determined return on average common
stockholders equity (ROE) targets. One-third
of the Participation Units shall convert into Restricted Shares
on each of January 31, 2007, January 31, 2008 and
January 31, 2009 (each a Conversion Date),
based on ROE determined for the most recently completed fiscal
year. Participation Units converted on the Conversion Date will
cease to be outstanding immediately following conversion. If the
minimum target is not met, the Participation Units will expire
without being converted.
The activity for Restricted Shares and Units (including
Restricted Units and Participation Units) under these plans
during the six months ended June 30, 2006 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
LTIC Plans | |
|
ECAP | |
|
ESCP | |
|
Total | |
|
|
| |
|
|
|
|
Restricted | |
|
|
Restricted | |
|
|
|
Restricted | |
|
Restricted | |
|
Restricted | |
|
Shares and | |
|
|
Shares | |
|
Units | |
|
Shares | |
|
Shares | |
|
Units | |
|
Units | |
| |
Authorized for issuance at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006
|
|
|
660,000,000 |
|
|
|
N/A |
|
|
|
104,800,000 |
|
|
|
75,000,000 |
|
|
|
N/A |
|
|
|
N/A |
|
July l, 2005
|
|
|
660,000,000 |
|
|
|
N/A |
|
|
|
104,800,000 |
|
|
|
75,000,000 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for issuance at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006
|
|
|
64,470,541 |
|
|
|
N/A |
|
|
|
10,831,281 |
|
|
|
39,312,483 |
|
|
|
N/A |
|
|
|
N/A |
|
July 1, 2005
|
|
|
65,837,103 |
|
|
|
N/A |
|
|
|
10,832,121 |
|
|
|
56,862,843 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 30, 2005
|
|
|
28,967,539 |
|
|
|
4,720,546 |
|
|
|
20,856 |
|
|
|
15,683,787 |
|
|
|
2,157,894 |
|
|
|
51,550,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted 2006
|
|
|
1,401,356 |
|
|
|
3,537,944 |
|
|
|
840 |
|
|
|
15,746,146 |
|
|
|
2,899,131 |
|
|
|
23,585,417 |
|
Delivered
|
|
|
(564,526 |
) |
|
|
(285,436 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(849,962 |
) |
Forfeited
|
|
|
(746,929 |
) |
|
|
(88,600 |
) |
|
|
- |
|
|
|
(673,032 |
) |
|
|
(126,409 |
) |
|
|
(1,634,970 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2006
|
|
|
29,057,440 |
|
|
|
7,884,454 |
|
|
|
21,696 |
|
|
|
30,756,901 |
|
|
|
4,930,616 |
|
|
|
72,651,107 |
|
|
N/A = Not Applicable
31
SFAS No. 123R requires the immediate expensing of
share-based awards granted or modified in 2006 to
retirement-eligible employees, including awards that are subject
to non-compete provisions. The above activity contains awards
with or without a future service requirement, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
No Future Service Required | |
|
Future Service Required | |
|
|
| |
|
|
|
|
Weighted Avg | |
|
|
|
Weighted Avg | |
|
|
Shares/ Units | |
|
Grant Price | |
|
Shares/ Units | |
|
Grant Price | |
| |
Outstanding, December 30, 2005
|
|
|
38,877,644 |
|
|
|
51.00 |
|
|
|
12,672,978 |
|
|
|
54.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted 2006
|
|
|
7,429,380 |
|
|
|
71.57 |
|
|
|
16,156,037 |
|
|
|
71.58 |
|
Delivered
|
|
|
(849,962 |
) |
|
|
48.78 |
|
|
|
- |
|
|
|
- |
|
Forfeited
|
|
|
(1,221,155 |
) |
|
|
57.35 |
|
|
|
(413,815 |
) |
|
|
61.78 |
|
Service Criteria
Satisfied(1)
|
|
|
20,211,184 |
|
|
|
64.71 |
|
|
|
(20,211,184 |
) |
|
|
64.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2006
|
|
|
64,447,091 |
|
|
|
57.58 |
|
|
|
8,204,016 |
|
|
|
61.85 |
|
|
|
|
(1) |
Represents those awards where employees attained
retirement-eligibility during 2006, subsequent to the grant
date. |
The total fair value of Restricted Shares and Units granted to
retirement-eligible employees or for which service criteria were
satisfied during the three and six months ended June 30,
2006 was $18 million and $2.1 billion respectively.
The total fair value of Restricted Shares and Units vested
during the six months ended July 1, 2005 was
$680 million. No Restricted Shares and Units vested during
the three months ended July 1, 2005.
The weighted-average fair value per share or unit granted for
the three and six months ended June 30, 2006 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
|
|
|
June 30, 2006 |
|
June 30, 2006 |
|
LTIC Plans
|
|
|
|
|
|
|
|
|
|
Restricted Shares
|
|
|
$76.76 |
|
|
|
$72.34 |
|
|
Restricted Units
|
|
|
77.35 |
|
|
|
71.37 |
|
ECAP Restricted Shares
|
|
|
N/A |
|
|
|
71.49 |
|
ESCP Plans
|
|
|
|
|
|
|
|
|
|
Restricted Shares
|
|
|
N/A |
|
|
|
71.54 |
|
|
Restricted Units
|
|
|
77.35 |
|
|
|
71.67 |
|
|
N/A = Not Applicable
Non-Qualified Stock Options
Non-qualified Stock Options granted under LTIC Plans in 1996
through 2000 generally became exercisable over five years;
options granted in 2001 and 2002 became exercisable after
approximately six months. Option and Stock Appreciation Right
grants made after 2002 generally become exercisable over four
years. The exercise price of these grants is equal to 100% of
the fair market value (as defined in LTIC Plans) of a share of
ML & Co. common stock on the date of grant. Options and
Stock Appreciation Rights expire ten years after their grant
date.
32
The activity for Options and Stock Appreciation Rights under
LTIC Plans for the six months ended June 30, 2006 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
Quantity |
|
Weighted-Average |
|
Remaining Life |
|
|
Outstanding |
|
Exercise Price |
|
(in years) |
|
Outstanding, December 30, 2005
|
|
|
176,713,075 |
|
|
|
$49.10 |
|
|
|
4.44 |
|
|
Granted
|
|
|
333,598 |
|
|
|
71.43 |
|
|
|
4.01 |
|
|
Exercised
|
|
|
(25,879,934 |
) |
|
|
36.53 |
|
|
|
3.26 |
|
|
Forfeited
|
|
|
(218,906 |
) |
|
|
48.12 |
|
|
|
7.04 |
|
|
Outstanding, June 30, 2006
|
|
|
150,947,833 |
|
|
|
51.31 |
|
|
|
4.48 |
|
|
Exercisable, June 30, 2006
|
|
|
140,445,057 |
|
|
|
51.46 |
|
|
|
4.31 |
|
|
All Options and Stock Appreciation Rights outstanding as of
June 30, 2006 are fully vested or expected to vest.
The weighted-average fair value of options granted in the three
months ended July 1, 2005 was $17.98 per option. No
options were granted in the three months ended June 30,
2006. The weighted-average fair value of options granted in the
six months ended June 30, 2006 and July 1, 2005 was
$17.86 and $17.99, respectively. The fair value of each option
award is estimated on the date of grant based on a Black-Scholes
option pricing model using the following weighted-average
assumptions. Expected volatilities are based on historical
volatility of ML & Co. common stock. The expected life
of options granted is equal to the contractual life of the
options. The risk-free rate for periods within the contractual
life of the option is based on the U.S. Treasury yield
curve in effect at the time of grant. The dividend yield is
based on the current dividend rate at the time of grant.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
|
|
|
June 30, 2006(1) |
|
July 1, 2005 |
|
June 30, 2006 |
|
July 1, 2005 |
|
Risk-free interest rate
|
|
|
N/A |
|
|
|
4.0 |
% |
|
|
4.3 |
% |
|
|
3.8 |
% |
Expected life
|
|
|
N/A |
|
|
|
5.0 yrs |
|
|
|
4.4 yrs |
|
|
|
4.6 yrs |
|
Expected volatility
|
|
|
N/A |
|
|
|
34.95 |
% |
|
|
29.49 |
% |
|
|
35.43 |
% |
Dividend yield
|
|
|
N/A |
|
|
|
1.44 |
% |
|
|
1.44 |
% |
|
|
1.14 |
% |
|
N/A = Not Applicable
|
|
(1) |
No options were granted during the second quarter of 2006. |
Merrill Lynch received approximately $238 million and
$919 million in cash from the exercise of stock options
during the three and six months ended June 30, 2006. The
net tax benefit realized from the exercise of these options was
$52 million and $231 million, respectively.
The total intrinsic value of options exercised during the
quarters ended June 30, 2006 and July 1, 2005 was
$233 million and $52 million, respectively. The total
intrinsic value of options exercised during the six months ended
June 30, 2006 and July 1, 2005 was $985 million
and $413 million, respectively. As of June 30, 2006,
the total intrinsic value of options outstanding and exercisable
was $2.8 billion and $2.6 billion, respectively.
33
Financial Advisor Capital Accumulation Award Plans
(FACAAP)
Under FACAAP, eligible employees in GPC are granted awards
generally based upon their prior years performance.
Payment for an award is contingent upon continued employment for
a period of time and is subject to forfeiture during that
period. Awards granted in 2003 and thereafter are generally
payable eight years from the date of grant in a fixed number of
shares of ML & Co. common stock. For outstanding awards
granted prior to 2003, payment is generally made ten years from
the date of grant in a fixed number of shares of ML &
Co. common stock unless the fair market value of such shares is
less than a specified minimum value, in which case the minimum
value is paid in cash. Eligible participants may defer awards
beyond the scheduled payment date. Only shares of common stock
held as treasury stock may be issued under FACAAP. FACAAP, which
was approved by the Board of Directors, has not been shareholder
approved.
At June 30, 2006, shares subject to outstanding awards
totaled 35,684,312 while 15,247,382 shares were available
for issuance through future awards. The weighted-average fair
value of awards granted under FACAAP during the three and six
months ended June 30, 2006 was $77.35 and $73.82
respectively.
|
|
Note 13. |
Regulatory Requirements |
Effective January 1, 2005, Merrill Lynch became a
consolidated supervised entity (CSE) as defined by
the SEC. As a CSE, Merrill Lynch is subject to group-wide
supervision, which requires Merrill Lynch to compute
allowable capital and risk allowances on a consolidated basis.
As of June 30, 2006, Merrill Lynch is in compliance
with applicable CSE standards.
Certain U.S. and
non-U.S. subsidiaries
are subject to various securities, banking, and insurance
regulations and capital adequacy requirements promulgated by the
regulatory and exchange authorities of the countries in which
they operate. These regulatory restrictions may impose
regulatory capital requirements and limit the amounts that these
subsidiaries can pay in dividends or advance to
Merrill Lynch. Merrill Lynchs principal
regulated subsidiaries are discussed below.
Securities Regulation
As a registered broker-dealer and futures commission merchant,
MLPF&S is subject to the net capital requirements of
Rule 15c3-1 under
the Securities Exchange Act of 1934 (the Rule).
Under the alternative method permitted by the Rule, the minimum
required net capital, as defined, shall be the greater of 2% of
aggregate debit items (ADI) arising from customer
transactions or $500 million. At June 30, 2006,
MLPF&Ss regulatory net capital of $2,579 million
was approximately 15.3% of ADI, and its regulatory net capital
in excess of the minimum required was $2,072 million.
MLPF&S is also subject to the capital requirements of the
Commodity Futures Trading Commission, which requires that
minimum net capital should not be less than 8% of the total
customer risk margin requirement plus 4% of the total
non-customer risk margin requirement. MLPF&S substantially
exceeds both standards.
Merrill Lynch International (MLI), a U.K. regulated
investment firm, is subject to capital requirements of the U.K.
Financial Services Authority (FSA). Financial
resources, as defined, must exceed the total financial resources
requirement of the FSA. At June 30, 2006, MLIs
financial resources were $11,689 million, exceeding the
minimum requirement by $1,655 million.
34
Merrill Lynch Government Securities Inc. (MLGSI), a
primary dealer in U.S. Government securities, is subject to
the capital adequacy requirements of the Government Securities
Act of 1986. This rule requires dealers to maintain liquid
capital in excess of market and credit risk, as defined, by 20%
(a 1.2-to-1
capital-to-risk
standard). At June 30, 2006, MLGSIs liquid capital of
$1,461 million was 217% of its total market and credit
risk, and liquid capital in excess of the minimum required was
$654 million.
Merrill Lynch Japan Securities Co. Ltd. (MLJS), a
Japan-based regulated broker-dealer, is subject to capital
requirements of the Japanese Financial Services Agency
(JFSA). Net capital, as defined, must exceed 120% of
the total risk equivalents requirement of the JFSA. At
June 30, 2006, MLJSs net capital was
$1,360 million, exceeding the minimum requirement by
$768 million.
Banking Regulation
Merrill Lynch Bank USA (MLBUSA) is a Utah-chartered
industrial bank, regulated by the Federal Deposit Insurance
Corporation (FDIC) and the State of Utah Department
of Financial Institutions. Merrill Lynch Bank & Trust
Co. (MLB&T) is a New Jersey-chartered state bank
regulated by the FDIC and the New Jersey Department of Banking
and Insurance. Both MLBUSA and MLB&T are required to
maintain capital levels that at least equal minimum capital
levels specified in federal banking laws and regulations.
Failure to meet the minimum levels will result in certain
mandatory, and possibly additional discretionary, actions by the
regulators that, if undertaken, could have a direct material
effect on the banks. The following table illustrates the actual
capital ratios and capital amounts for MLBUSA and MLB&T as
of June 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
MLBUSA |
|
MLB&T |
|
|
Well |
|
|
|
|
Capitalized |
|
Actual |
|
Actual |
|
Actual |
|
Actual |
|
|
Minimum |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Tier 1 leverage (to average assets)
|
|
|
5 |
% |
|
|
10.39 |
% |
|
$ |
6,101 |
|
|
|
8.32 |
% |
|
$ |
853 |
|
Tier 1 capital (to risk-weighted assets)
|
|
|
6 |
% |
|
|
9.55 |
|
|
|
6,101 |
|
|
|
24.05 |
|
|
|
853 |
|
Total capital (to risk-weighted assets)
|
|
|
10 |
% |
|
|
10.61 |
|
|
|
6,776 |
|
|
|
24.19 |
|
|
|
859 |
|
|
Merrill Lynch Capital Markets Bank Limited (MLCMBL),
an Ireland-based regulated bank, is required to meet minimum
regulatory capital requirements under the European Union
(EU) banking law as implemented in Ireland by the
Financial Regulator. At June 30, 2006, MLCMBLs
capital ratio was above the minimum requirement at 10.2% and its
financial resources, as defined, were $3,487 million,
exceeding the minimum requirement by $472 million.
Merrill Lynch International Bank Limited (MLIB), a
U.K.-based regulated bank, is required to meet minimum
regulatory capital requirements under the EU banking law as
implemented in the U.K. MLIBs consolidated capital ratio
(including its subsidiary Merrill Lynch Bank (Suisse) S.A.), is
above the minimum capital requirements established by the FSA.
At June 30, 2006, MLIBs consolidated capital ratio
was 11.3% and its consolidated financial resources were
$3,948 million, exceeding the minimum requirement by
$350 million.
Prior to April 28, 2006, MLCMBL and MLIB were subsidiaries
of Merrill Lynch International Finance Corporation
(MLIFC) and were subject to capital requirements
imposed by the State of New York Banking Department. Pursuant to
an internal corporate reorganization, MLIFC is no longer a
direct or indirect parent company of MLCMBL or MLIB, and
therefore is no longer subject to such capital requirements.
35
On July 28, 2006, the High Court of Justice of England and
Wales approved the transfer to MLCMBL of substantially all the
business of MLIB. It is anticipated that the asset transfer will
be completed at the end of the third quarter 2006, subject to
appropriate regulatory approvals, court recognition of the
English court order in Singapore and execution of business
transfer agreements in jurisdictions where the English court
order is not recognized. On the asset transfer date, MLCMBL will
be renamed Merrill Lynch International Bank Limited, with the
existing UK entity being renamed mlib (historic) Limited.
In July 2006, Merrill Lynch Trust Company, FSB
(MLTC-FSB) received approval from the Office of
Thrift Supervision (OTS) to become a full service
thrift institution as the first step in an internal
reorganization of certain banking businesses of Merrill Lynch.
The reorganization is expected to provide Merrill Lynch with a
more efficient platform to deliver banking products and services
to clients and to provide a more effective avenue for future
growth. As the second step in the internal reorganization,
during the third quarter of 2006, MLB&T is expected to be
merged with MLTC-FSB, and MLTC-FSB will be renamed Merrill Lynch
Bank & Trust Co., FSB (MLBT-FSB). The new
entity will be regulated by the OTS and its deposits insured by
the FDIC.
36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Merrill
Lynch & Co., Inc.:
We have reviewed the accompanying condensed consolidated balance
sheet of Merrill Lynch & Co., Inc. and subsidiaries
(Merrill Lynch) as of June 30, 2006, and the
related condensed consolidated statements of earnings for the
three-month and six-month periods ended June 30, 2006 and
July 1, 2005, and the condensed consolidated statements of
cash flows for the six-month periods ended June 30, 2006
and July 1, 2005. These interim financial statements are
the responsibility of Merrill Lynchs management.
We conducted our reviews in accordance with the standards of the
Public Company Accounting Oversight Board (United States). A
review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons
responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting
Oversight Board (United States), the objective of which is the
expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to such condensed consolidated
interim financial statements for them to be in conformity with
accounting principles generally accepted in the United States of
America.
As discussed in Note 1 to the condensed consolidated
financial statements, in 2006 Merrill Lynch changed its method
of accounting for share-based payments to conform to Statement
of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment.
We have previously audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States),
the consolidated balance sheet of Merrill Lynch as of
December 30, 2005, and the related consolidated statements
of earnings, changes in stockholders equity, comprehensive
income and cash flows for the year then ended (not presented
herein); and in our report dated February 27, 2006, we
expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of
December 30, 2005 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from
which it has been derived.
/s/ Deloitte & Touche LLP
New York, New York
August 4, 2006
37
|
|
ITEM 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
Forward-Looking Statements
Certain statements in this report may be considered
forward-looking, including those about management expectations,
strategic objectives, growth opportunities, business prospects,
anticipated financial results, the impact of off balance sheet
arrangements, significant contractual obligations, anticipated
results of litigation and regulatory investigations and
proceedings, and other similar matters. These forward-looking
statements represent only Merrill Lynch & Co.,
Inc.s (ML & Co. and, together with
its subsidiaries, Merrill Lynch) beliefs regarding
future performance, which is inherently uncertain. There are a
variety of factors, many of which are beyond Merrill
Lynchs control, which affect its operations, performance,
business strategy and results and could cause its actual results
and experience to differ materially from the expectations and
objectives expressed in any forward-looking statements. These
factors include, but are not limited to, actions and initiatives
taken by both current and potential competitors, general
economic conditions, the effects of current, pending and future
legislation, regulation and regulatory actions, and the other
risks and uncertainties detailed in this report. See Risk
Factors that Could Affect Our Business in the Annual Report on
Form 10-K for the
year ended December 30, 2005 (2005 Annual
Report). Accordingly, readers are cautioned not to place
undue reliance on forward-looking statements, which speak only
as of the dates on which they are made. Merrill Lynch does not
undertake to update forward-looking statements to reflect the
impact of circumstances or events that arise after the dates
they are made. The reader should, however, consult further
disclosures Merrill Lynch may make in future filings of its
Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q and
Current Reports on
Form 8-K.
Overview
Introduction
Merrill Lynch was formed in 1914 and became a publicly traded
company on June 23, 1971. In 1973, Merrill Lynch created
the holding company, ML & Co., a Delaware corporation
that, through its subsidiaries, provides broker-dealer,
investment banking, financing, wealth management, advisory,
asset management, insurance, lending, and related products and
services on a global basis.
Merrill Lynchs activities are conducted through three
business segments:
|
|
|
Global Markets and Investment Banking Group
(GMI), Merrill Lynchs institutional
business segment provides equity, debt and commodities trading,
capital market services, investment banking and advisory
services to corporations, financial institutions, and
governments around the world. GMIs Global Markets division
facilitates client transactions and is a market maker in
securities, derivatives, currencies, commodities and other
financial instruments to satisfy client demands, and in
connection with proprietary trading activities. Global Markets
also provides clients with financing, securities clearing,
settlement, and custody services and also engages in principal
investments and private equity investing for the account of
Merrill Lynch. GMIs Investment Banking division provides a
wide range of origination and strategic advisory services for
issuer clients, including underwriting and placement of public
and private equity, debt and related securities, as well as
lending and other financing activities for clients globally.
These services also include advising clients on strategic
issues, valuation, mergers, acquisitions and restructurings.
GMIs growth strategy entails a program of significant
investments in personnel and technology to gain further scale in
certain asset classes and geographies. |
38
|
|
|
Global Private Client (GPC), Merrill
Lynchs full-service retail wealth management segment,
provides brokerage and investment advisory services, offering a
broad range of both proprietary and third-party wealth
management products and services globally to individuals,
small-to mid-size businesses, investment advisors and employee
benefit plans. The largest portion of this business is offered
through the Advisory Division, where services are delivered by
Merrill Lynch Financial Advisors (FAs) through a
global network of branch offices. GPCs offerings include
commission and fee-based investment accounts; banking, cash
management, and credit services, including consumer and small
business lending and credit cards; trust and generational
planning; retirement services; and insurance products.
GPCs growth priorities include the hiring of additional
FAs, client segmentation, annuitization of revenues through
fee-based products, diversification of revenues through adding
products and services, investments in technology to enhance
productivity and efficiency, and disciplined expansion into
additional geographic areas globally. |
|
|
Merrill Lynch Investment Managers (MLIM),
Merrill Lynchs asset management segment, offers a wide
range of investment management capabilities to retail and
institutional investors through proprietary and third-party
distribution channels globally. Asset management capabilities
include equity, fixed income, money market, index, enhanced
index and alternative investments (including hedge funds,
private equity and property), which are offered through vehicles
such as mutual funds, privately managed accounts, and both
retail and institutional separate accounts. MLIMs growth
priorities include driving strong relative long-term investment
performance and broadening the distribution of its products
through multiple channels, while maintaining discipline on
expenses. MLIM is committed to increasing sales in both the
proprietary and non-proprietary channels in the United States,
as well as
non-U.S. regions.
On February 15, 2006, Merrill Lynch entered into an
agreement with BlackRock, Inc. (BlackRock), to
combine the MLIM business with BlackRock. This transaction is
expected to close around the end of the third quarter of 2006,
subject to regulatory and shareholder approvals. |
Critical Accounting
Policies and Estimates
The following is a summary of Merrill Lynchs critical
accounting policies. For a full description of these and other
accounting policies see Note 1 of the 2005 Annual Report
and Note 1 to the Condensed Consolidated Financial
Statements.
Use of Estimates
In presenting the Condensed Consolidated Financial Statements,
management makes estimates regarding:
|
|
|
Valuations of assets and liabilities requiring fair value
estimates including: |
|
|
|
|
|
Trading inventory and investment securities; |
|
|
Private equity investments; |
|
|
Loans and allowance for loan losses; |
|
|
|
The outcome of litigation; |
|
The realization of deferred tax assets and tax reserves; |
|
Assumptions and cash flow projections used in determining
whether variable interest entities (VIEs) should be
consolidated and the determination of the qualifying status of
special purpose entities (QSPEs); |
|
The carrying amount of goodwill and other intangible assets; |
|
Valuation of employee stock options; |
|
Insurance reserves and recovery of insurance deferred
acquisition costs; |
39
|
|
|
Interim compensation and benefits accruals, particularly cash
and stock incentive awards and FA compensation; and |
|
Other matters that affect the reported amounts and disclosure of
contingencies in the financial statements. |
Estimates, by their nature, are based on judgment and available
information. Therefore, actual results could differ from those
estimates and could have a material impact on the Condensed
Consolidated Financial Statements, and it is possible that such
changes could occur in the near term. For more information
regarding the specific methodologies used in determining
estimates, refer to Use of Estimates in Note 1 of the 2005
Annual Report.
The following is a summary of Merrill Lynchs critical
accounting policies and estimates.
Valuation of Financial Instruments
Proper valuation of financial instruments is a critical
component of Merrill Lynchs financial statement
preparation. Fair values for exchange-traded securities and
certain exchange-traded derivatives, principally futures and
certain options, are based on quoted market prices. Fair values
for over-the-counter
(OTC) derivative financial instruments, principally
forwards, options, and swaps, represent amounts estimated to be
received from or paid to a third party in settlement of these
instruments. These derivatives are valued using pricing models
based on the net present value of estimated future cash flows,
and directly observed prices from exchange-traded derivatives,
other OTC trades, or external pricing services, while taking
into account the counterpartys credit ratings, or Merrill
Lynchs own credit ratings as appropriate.
New and/or complex instruments may have immature or limited
markets. As a result, the pricing models used for valuation
often incorporate significant estimates and assumptions, which
may impact the level of precision in the Condensed Consolidated
Financial Statements. For long-dated and illiquid contracts,
extrapolation methods are applied to observed market data in
order to estimate inputs and assumptions that are not directly
observable. This enables Merrill Lynch to
mark-to-market all
positions consistently when only a subset of prices is directly
observable. Values for OTC derivatives are verified using
observed information about the costs of hedging the risk and
other trades in the market. As the markets for these products
develop, Merrill Lynch continually refines its pricing models
based on experience to correlate more closely to the market risk
of these instruments. Obtaining the fair value for OTC
derivative contracts requires the use of management judgment and
estimates. At the inception of the contract, unrealized gains
for these instruments are not recognized unless significant
inputs to the valuation model are observable in the market.
Merrill Lynch holds investments that may have quoted market
prices but that are subject to restrictions (e.g., consent of
the issuer or other investors to sell) that may limit Merrill
Lynchs ability to realize the quoted market price.
Accordingly, Merrill Lynch estimates the fair value of these
securities based on managements best estimate, which
incorporates pricing models based on projected cash flows,
earnings multiples, comparisons based on similar market
transactions and/or review of underlying financial conditions
and other market factors.
Valuation adjustments are an integral component of the
mark-to-market process
and may be taken where either the sheer size of the trade or
other specific features of the trade or particular market (such
as counterparty credit quality, concentration or market
liquidity) requires adjustment to the values derived by the
pricing models.
Because valuation may involve significant estimation where
readily observable prices are not available, a categorization of
Merrill Lynchs financial instruments based on liquidity of
the instrument and the amount of estimation required in
determining its value as recorded in the Condensed Consolidated
40
Financial Statements is provided below. In preparing the
categorization, certain estimates have been made regarding the
allocation of netting adjustments permitted under FASB
Interpretation No. 39, Offsetting of Amounts Related to
Certain Contracts, and other adjustments.
Assets and liabilities recorded on the Condensed Consolidated
Balance Sheets can be broadly categorized as follows:
|
|
Category 1. |
Highly liquid cash and derivative instruments, primarily carried
at fair value, for which quoted market prices are readily
available (for example, exchange-traded equity securities,
certain listed options, and U.S. Government securities). |
|
Category 2. |
Liquid instruments, primarily carried at fair value, including: |
|
|
|
|
a) |
Cash instruments for which quoted prices are available but which
trade less frequently such that there may not be complete
pricing transparency for these instruments across all market
cycles (for example, corporate and municipal bonds and certain
physical commodities); |
|
|
b) |
Derivative instruments that are valued using a model, where
inputs to the model are directly observable in the market (for
example, U.S. dollar interest rate swaps); and |
|
|
c) |
Instruments that are priced with reference to financial
instruments whose parameters can be directly observed (for
example, certain mortgage loans). |
|
|
Category 3. |
Less liquid instruments that are valued using managements
best estimate of fair value and instruments which are valued
using a model, where either the inputs to the model and/or the
models themselves require significant judgment by management.
Areas where these valuation methodologies are primarily applied
include private equity investments, long-dated or complex
derivatives such as certain foreign exchange options and credit
default swaps, distressed debt and commodity derivatives, such
as long-dated options on gas and power and weather derivatives.
In applying these models, management considers such factors as
projected cash flows, market comparables, slope to the yield
curve, volatility, and various market inputs. |
41
At June 30, 2006 and December 30, 2005, certain assets
and liabilities on the Condensed Consolidated Balance Sheets can
be categorized using the above classification scheme as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) | |
| |
June 30, 2006 |
|
Category 1 | |
|
Category 2 | |
|
Category 3 | |
|
Total | |
| |
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets, excluding contractual agreements
|
|
$ |
64,995 |
|
|
$ |
68,723 |
|
|
$ |
2,394 |
|
|
$ |
136,112 |
|
Contractual agreements
|
|
|
6,628 |
|
|
|
19,216 |
|
|
|
4,974 |
|
|
|
30,818 |
|
Investment securities
|
|
|
5,883 |
|
|
|
49,432 |
|
|
|
11,332 |
|
|
|
66,647 |
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities, excluding contractual agreements
|
|
$ |
50,570 |
|
|
$ |
15,954 |
|
|
$ |
30 |
|
|
$ |
66,554 |
|
Contractual agreements
|
|
|
5,271 |
|
|
|
20,472 |
|
|
|
7,440 |
|
|
|
33,183 |
|
|
|
December 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets, excluding contractual agreements
|
|
$ |
56,556 |
|
|
$ |
63,344 |
|
|
$ |
2,594 |
|
|
$ |
122,494 |
|
Contractual agreements
|
|
|
5,008 |
|
|
|
18,177 |
|
|
|
3,031 |
|
|
|
26,216 |
|
Investment securities
|
|
|
6,115 |
|
|
|
54,805 |
|
|
|
8,353 |
|
|
|
69,273 |
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities, excluding contractual agreements
|
|
$ |
48,688 |
|
|
$ |
11,248 |
|
|
$ |
242 |
|
|
$ |
60,178 |
|
Contractual agreements
|
|
|
4,623 |
|
|
|
17,490 |
|
|
|
6,642 |
|
|
|
28,755 |
|
|
In addition, other trading-related assets recorded in the
Condensed Consolidated Balance Sheets at June 30, 2006 and
December 30, 2005, include $321.8 billion and
$255.5 billion, respectively, of receivables under resale
agreements and receivables under securities borrowed
transactions. Trading-related liabilities recorded in the
Condensed Consolidated Balance Sheets at June 30, 2006 and
December 30, 2005, include $277.3 billion and
$217.5 billion, respectively, of payables under repurchase
agreements and payables under securities loaned transactions.
These securities financing transactions are recorded at their
contractual amounts, which approximate fair value, and for which
little or no estimation is required by management.
Litigation
Merrill Lynch has been named as a defendant in various legal
actions, including arbitrations, class actions, and other
litigation arising in connection with its activities as a global
diversified financial services institution. Merrill Lynch is
also involved in investigations and/or proceedings by
governmental and self-regulatory agencies. In accordance with
SFAS No. 5, Accounting for Contingencies,
Merrill Lynch will accrue a liability when it is probable that a
liability has been incurred and the amount of the loss can be
reasonably estimated. In many lawsuits and arbitrations,
including class action lawsuits, it is not possible to determine
whether a liability has been incurred or to estimate the
ultimate or minimum amount of that liability until the case is
close to resolution, in which case no accrual is made until that
time. In view of the inherent difficulty of predicting the
outcome of such matters, particularly in cases in which
claimants seek substantial or indeterminate damages, Merrill
Lynch cannot predict what the eventual loss or range of loss
related to such matters will be. See Note 12 and Other
Information (Unaudited) Legal Proceedings of the
2005 Annual Report for further information.
Variable Interest Entities
In the normal course of business, Merrill Lynch enters into a
variety of transactions with VIEs. The applicable accounting
guidance requires Merrill Lynch to perform a qualitative and/or
quantitative analysis of each new VIE at inception to determine
whether it must consolidate the VIE. In
42
performing this analysis, Merrill Lynch makes assumptions
regarding future performance of assets held by the VIE, taking
into account estimates of credit risk, estimates of the fair
value of assets, timing of cash flows, and other significant
factors. Although a VIEs actual results may differ from
projected outcomes, a revised consolidation analysis is
generally not required subsequent to the initial assessment. If
a VIE meets the conditions to be considered a QSPE, it is
typically not required to be consolidated by Merrill Lynch. A
QSPEs activities must be significantly limited. A servicer
of the assets held by a QSPE may have discretion in
restructuring or working out assets held by the QSPE as long as
the discretion is significantly limited and the parameters of
that discretion are fully described in the legal documents that
established the QSPE. Determining whether the activities of a
QSPE and its servicer meet these conditions requires the use of
judgment by management.
Income Taxes
Merrill Lynch is under examination by the Internal Revenue
Service (IRS) and other tax authorities in major
countries such as Japan and the United Kingdom, and states in
which Merrill Lynch has significant business operations, such as
New York. The tax years under examination vary by jurisdiction.
An IRS examination covering the years 20012003 is expected
to be completed in 2006, subject to the resolution of the
Japanese issue discussed below. There are carryback claims from
the years 2001 and 2002 of approximately $250 million to
$300 million, which are now under Joint Committee review. A
tax benefit would be recorded to the extent that Merrill Lynch
is successful in obtaining the tax benefit from these carryback
claims. IRS audits have also commenced for the 2004 and 2005 tax
years.
In the second quarter of 2005, Merrill Lynch paid a tax
assessment from the Tokyo Regional Tax Bureau for the years
19982002. The assessment reflected the Japanese tax
authoritys view that certain income on which Merrill Lynch
previously paid income tax to other international jurisdictions,
primarily the United States, should have been allocated to
Japan. Merrill Lynch has begun the process of obtaining
clarification from international authorities on the appropriate
allocation of income among multiple jurisdictions to prevent
double taxation.
Merrill Lynch regularly assesses the likelihood of additional
assessments in each of the tax jurisdictions resulting from
these examinations. Tax reserves have been established, which
Merrill Lynch believes to be adequate in relation to the
potential for additional assessments. However, there is a
reasonable possibility that additional amounts may be incurred.
The estimated additional possible amounts are no more than
$150 million. Merrill Lynch will adjust the level of
reserves when there is more information available, or when an
event occurs requiring a change to the reserves. The
reassessment of tax reserves could have a material impact on
Merrill Lynchs effective tax rate in the period in which
it occurs.
43
Business
Environment(1)
Following a generally strong first quarter global market
conditions initially remained robust, but became less favorable
midway through the second quarter. Market sentiment became
cautious amid signs of inflation, high oil prices and fears that
the Federal Reserve would raise interest rates more than
expected. During the second quarter, both debt and equity
markets conditions weakened as concerns grew over the tightening
of monetary policy world-wide. The yield curve remained
relatively flat, and for much of June became inverted as
long-term Treasury yields dropped slightly below those of
shorter term Treasury notes. Long-term interest rates, as
measured by the 10-year
U.S. Treasury bond, ended the quarter at 5.15%, up from
4.86% at the end of the first quarter. The U.S. Federal
Reserve Systems Federal Open Market Committee raised the
federal funds rate twice during the quarter to 5.25%, up from
4.75%.
Major U.S. equity indices generally declined from where
they ended the first quarter, with particular weakness in May.
The Nasdaq Composite declined 7.2% over the quarter and 1.5% on
a year-to-date basis,
while the Standard & Poors 500 index fell 1.9%
for the quarter but was up 1.8% compared to where it started the
year. The exception was the Dow Jones Industrial Average which
rose 0.4% for the quarter and was up 4.0% since the start of the
year.
International equity indices experienced similar declines during
the second quarter as a result of indications that authorities
in Europe and Asia would continue raising interest rates. The
FTSE 100 Index declined 2.2% in the quarter but was up 3.8%
year-to-date, while the
Dow Jones Stoxx 50 Index declined 3.7% sequentially, but rose
0.9% year-to-date. In
Japan, the Nikkei Stock Exchange Index fell 9.1% in the quarter
and 3.8% year-to-date.
After a particularly strong first quarter, emerging market
indices also declined in the second quarter. Brazils
Bovespa Index declined 3.5% in the second quarter, but was up
9.5% from the start of the year, while Indias Sensex Index
declined 5.9% sequentially, but was up 12.9%
year-to-date.
Second quarter global debt and equity underwriting volumes of
$1.7 trillion were down 6% compared to the first quarter, but
were essentially unchanged from the year-ago quarter. Global
debt underwriting volumes of $1.5 trillion were down 9% compared
to the first quarter and 5% compared to the year-ago quarter,
while global equity underwriting volumes of $196 billion
were up 14% compared to the first quarter and 73% compared to
the year-ago quarter. Global debt and equity underwriting fees
for the second quarter were $9.8 billion, up 2%
sequentially and 23% from the second quarter of 2005.
Merger and acquisition (M&A) activity maintained
the strong momentum experienced in the first quarter as the
value of global announced deals rose to $1 trillion, up 9% from
the first quarter and 36% from the year-ago quarter. In the
United States, the value of announced deals increased to
$371 billion, up 17% from the first quarter and 12% from
the year-ago quarter. Globally, completed M&A activity
totaled $640 billion in the second quarter, down 9% from
the first quarter, but up 16% from the year-ago quarter. In the
United States, completed deal volume totaled $235 billion,
down 24% sequentially, but up 21% from the 2005 second quarter.
Merrill Lynch continually evaluates its businesses for
profitability, performance, and client service to ensure
alignment with its long-term strategic objectives under varying
market and competitive conditions. The strategy of maintaining
long-term client relationships, closely monitoring costs and
risks, diversifying revenue sources, and growing fee-based and
recurring revenues all continue as objectives to mitigate the
effects of a volatile market environment on Merrill Lynchs
business as a whole.
|
|
(1) |
Debt and equity underwriting and merger and acquisition
statistics were obtained from Dealogic. |
44
Results of
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions, except per share amounts) | |
| |
|
|
For the Three Months | |
|
For the Six Months | |
|
|
Ended | |
|
Ended | |
|
|
| |
|
|
June 30, | |
|
July 1, | |
|
June 30, | |
|
July 1, | |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Net Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset management and portfolio service fees
|
|
$ |
1,773 |
|
|
$ |
1,431 |
|
|
$ |
3,452 |
|
|
$ |
2,866 |
|
|
|
Commissions
|
|
|
1,586 |
|
|
|
1,247 |
|
|
|
3,188 |
|
|
|
2,588 |
|
|
|
Principal transactions
|
|
|
1,182 |
|
|
|
1,006 |
|
|
|
3,175 |
|
|
|
1,951 |
|
|
|
Investment banking
|
|
|
1,162 |
|
|
|
920 |
|
|
|
2,127 |
|
|
|
1,733 |
|
|
|
Revenues from consolidated investments
|
|
|
186 |
|
|
|
84 |
|
|
|
290 |
|
|
|
211 |
|
|
|
Other
|
|
|
1,110 |
|
|
|
664 |
|
|
|
1,664 |
|
|
|
1,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
6,999 |
|
|
|
5,352 |
|
|
|
13,896 |
|
|
|
10,383 |
|
Interest and dividend revenues
|
|
|
9,690 |
|
|
|
5,974 |
|
|
|
18,354 |
|
|
|
11,505 |
|
Less interest expense
|
|
|
8,531 |
|
|
|
5,007 |
|
|
|
16,130 |
|
|
|
9,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest profit
|
|
|
1,159 |
|
|
|
967 |
|
|
|
2,224 |
|
|
|
2,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Revenues
|
|
|
8,158 |
|
|
|
6,319 |
|
|
|
16,120 |
|
|
|
12,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
3,980 |
|
|
|
3,148 |
|
|
|
9,730 |
|
|
|
6,244 |
|
|
|
Communications and technology
|
|
|
429 |
|
|
|
395 |
|
|
|
882 |
|
|
|
791 |
|
|
|
Brokerage, clearing, and exchange fees
|
|
|
253 |
|
|
|
216 |
|
|
|
501 |
|
|
|
435 |
|
|
|
Occupancy and related depreciation
|
|
|
249 |
|
|
|
227 |
|
|
|
490 |
|
|
|
460 |
|
|
|
Professional fees
|
|
|
196 |
|
|
|
183 |
|
|
|
396 |
|
|
|
361 |
|
|
|
Advertising and market development
|
|
|
191 |
|
|
|
160 |
|
|
|
335 |
|
|
|
286 |
|
|
|
Expenses of consolidated investments
|
|
|
145 |
|
|
|
35 |
|
|
|
192 |
|
|
|
120 |
|
|
|
Office supplies and postage
|
|
|
57 |
|
|
|
51 |
|
|
|
114 |
|
|
|
103 |
|
|
|
Other
|
|
|
309 |
|
|
|
309 |
|
|
|
538 |
|
|
|
487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses
|
|
|
5,809 |
|
|
|
4,724 |
|
|
|
13,178 |
|
|
|
9,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
$ |
2,349 |
|
|
$ |
1,595 |
|
|
$ |
2,942 |
|
|
$ |
3,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
1,633 |
|
|
$ |
1,135 |
|
|
$ |
2,108 |
|
|
$ |
2,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.79 |
|
|
$ |
1.25 |
|
|
$ |
2.28 |
|
|
$ |
2.57 |
|
|
Diluted
|
|
|
1.63 |
|
|
|
1.14 |
|
|
|
2.07 |
|
|
|
2.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized return on average common stockholders equity
|
|
|
18.6 |
% |
|
|
14.3 |
% |
|
|
11.9 |
% |
|
|
14.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax profit margin
|
|
|
28.8 |
% |
|
|
25.2 |
% |
|
|
18.3 |
% |
|
|
26.0 |
% |
|
Compensation and benefits as a percentage of net revenues
|
|
|
48.8 |
% |
|
|
49.8 |
% |
|
|
60.4 |
% |
|
|
49.7 |
% |
Non-compensation expenses as a percentage of net revenues
|
|
|
22.4 |
% |
|
|
24.9 |
% |
|
|
21.4 |
% |
|
|
24.2 |
% |
Book value per common share
|
|
$ |
37.18 |
|
|
$ |
33.63 |
|
|
$ |
37.18 |
|
|
$ |
33.63 |
|
|
Quarterly Results of Operations
Merrill Lynchs second quarter 2006 net earnings were
$1.6 billion, on record net revenues of $8.2 billion,
up 44% and 29%, respectively, from the second quarter of 2005.
Earnings per common share were $1.79 basic and $1.63 diluted for
the 2006 second quarter, both up 43% from the year-ago quarter.
Pre-tax earnings were $2.3 billion, an increase of 47% from
the prior-year period, and the pre-tax profit margin was 28.8%,
up from 25.2% in the year-ago quarter.
45
Asset management and portfolio services fees primarily consist
of (i) fees earned from the management and administration
of retail mutual funds and separately managed accounts for
retail investors, as well as institutional funds such as pension
assets, (ii) performance fees earned on certain separately
managed accounts and institutional money management
arrangements, (iii) servicing fees related to these
accounts and (iv) annual account fees and certain other
account-related fees. Asset management and portfolio service
fees were $1.8 billion, up 24% from the second quarter of
2005. The increase in asset management fees reflects the impact
of net inflows of higher-yielding assets as well as higher
average equity market values. The increase in portfolio service
fees reflects the impact of net inflows into asset-priced
accounts.
Commissions revenues primarily arise from agency transactions in
listed and OTC equity securities and commodities, insurance
products and options. Commissions revenues also include
distribution fees for promoting and distributing mutual funds
(12b-1
fees), as well as contingent deferred sales charges earned
when a shareholder redeems shares prior to the required holding
period. Commissions revenues were $1.6 billion, up 27% from
the 2005 second quarter, due primarily to an increase in global
transaction volumes, particularly in listed equities and mutual
funds.
Principal transactions revenues include realized gains and
losses from the purchase and sale of securities, such as equity
securities, fixed income securities, including government bonds
and municipal securities, in which Merrill Lynch acts as
principal, as well as unrealized gains and losses on trading
assets and liabilities, including commodities, derivatives, and
loans. Principal transactions revenues were $1.2 billion,
17% higher than the year-ago quarter, due primarily to increased
revenues in the trading of equity products.
Net interest profit is a function of (i) the level and mix
of total assets and liabilities, including trading assets owned,
deposits, financing and lending transactions, and trading
strategies associated with the institutional securities
business, and (ii) the prevailing level, term structure and
volatility of interest rates. Net interest profit was
$1.2 billion, up 20% from the 2005 second quarter, due
primarily to the impact of rising short-term interest rates on
deposit spreads earned, partially offset by the higher interest
expenses. Net interest profit is an integral component of
trading activity. In assessing the profitability of its client
facilitation and trading activities, Merrill Lynch views
principal transactions and net interest profit in the aggregate
as net trading revenues. Changes in the composition of trading
inventories and hedge positions can cause the mix of principal
transactions and net interest profit to fluctuate.
Investment banking revenues include (i) origination
revenues representing fees earned from the underwriting of debt,
equity and equity-linked securities, as well as loan syndication
and commitment fees and (ii) strategic advisory services
revenues including merger and acquisition and other investment
banking advisory fees. Investment banking revenues were
$1.2 billion, up 26% from the year-ago quarter, driven
primarily by increased equity origination and merger and
acquisition advisory revenues, partially offset by a slight
decline in debt origination revenues.
Revenues from consolidated investments include revenues from
consolidated investments which are less than 100% owned.
Revenues from consolidated investments were $186 million,
up from $84 million in the 2005 second quarter, reflecting
higher investment gains and additional investments.
Other revenues include realized investment gains and losses,
equity income from unconsolidated subsidiaries, distributions on
cost method investments, fair value adjustments on private
equity investments that are held for capital appreciation and/or
current income, gains related to the sale of mortgages,
write-downs of certain available-for-sale securities, and
translation gains and losses on foreign denominated assets and
liabilities. Other revenues were $1.1 billion, 67% higher
than the 2005 second quarter, due principally to revenues from
private equity investments. The increase in private equity
revenues was driven primarily by gains from several private
equity investments that resulted from fair value adjustments
associated with initial public offerings, the recapitalization
of an underlying company, and the application of valuation
methodologies. Revenues recorded in other
46
revenues associated with gains from private equity investments were almost three
times the amount recorded during the second quarter of 2005.
Compensation and benefits expenses were $4.0 billion in the
second quarter of 2006, or 48.8% of net revenues, down from
49.8% in the year-ago quarter.
Non-compensation expenses were $1.8 billion in the second
quarter of 2006, up 16% from the year-ago quarter. The ratio of
total non-compensation expenses to total net revenues was 22.4%
during the second quarter of 2006, down from 24.9% in the
year-ago quarter. Communications and technology costs were
$429 million, up 9% from the second quarter of 2005 due
primarily to higher market information and communications costs
and system consulting costs related to investments for growth.
Brokerage, clearing and exchange fees were $253 million, up
17% from the 2005 second quarter, due primarily to higher
transaction volumes. Occupancy costs and related depreciation of
$249 million increased 10% from the year-ago quarter,
principally due to higher office rental expenses. Professional
fees were $196 million, up 7% from the prior-year quarter
due to higher legal and other professional fees. Advertising and
market development expenses were $191 million, up 19% from
the year-ago quarter due primarily to higher travel expenses
associated with increased activity levels and increased
advertising costs. Expenses of consolidated investments were
$145 million, up from $35 million in the 2005 second
quarter, principally due to increased minority interest expenses
associated with the related increase in revenues from
consolidated investments. Other expenses were $309 million,
essentially unchanged from the year-ago quarter.
Year-to-date Results
of Operations
For the first six months of 2006, net earnings were
$2.1 billion, on record net revenues of $16.1 billion
that grew 28% from the first half of 2005. Net earnings for the
first six months of 2006 included $1.2 billion, after-tax,
or $1.21 per diluted share, of one-time non-cash
compensation expenses ($1.8 billion pre-tax) incurred in
the first quarter 2006, arising from modifications to the
retirement eligibility requirements for existing stock-based
employee compensation awards and the adoption of
SFAS No. 123 as revised in 2004
(SFAS No. 123R); (together, one-time
compensation expenses). Refer to Note 1 to the
Condensed Consolidated Financial Statements for further detail
on the one-time compensation expenses.
Excluding the one-time compensation expenses, net earnings of
$3.3 billion for the first six months of 2006 were up 40%
from the prior-year period, and pre-tax earnings would have been
$4.7 billion, up 44% from the first six months of 2005. On
the same basis the pre-tax profit margin would have been 29.2%,
up 3.2 percentage points from the first half of 2005, and
the annualized return on average common equity was 19.0%, up
4.1 percentage points from the 14.9% in the first six
months of 2005. Also on the same basis, earnings per common
share would have been $3.63 basic and $3.28 diluted, up 41% and
39%, respectively, from the prior-year period. Management
believes that, while the results excluding the one-time
compensation expenses are considered non-GAAP
measures, they depict the operating performance of the company
more clearly and enable more meaningful
period-to-period
comparisons. See Exhibit 99.1 for a reconciliation of
non-GAAP measures.
Merrill Lynchs second quarter 2006 effective tax rate was
30.5%, bringing the
year-to-date effective
tax rate to 28.3%. Excluding the one-time compensation expenses,
the effective tax rate for the first six months of 2006 was
30.1%, up from 28.1% for the prior-year period.
47
Business
Segments
The following discussion provides details of net revenues by
segment. Certain prior period amounts have been reclassified to
conform to the current year presentation.
Merrill Lynch reports its results in three business segments:
GMI, GPC, and MLIM. GMI provides full service global markets and
origination capabilities, products and services to corporate,
institutional, and government clients around the world, and in
connection with proprietary trading activities. GPC provides
wealth management products and services globally to individuals,
small- to mid-size businesses, and employee benefit plans. MLIM
manages financial assets for individual, institutional and
corporate clients.
Certain MLIM and GMI products are distributed through GPC
distribution channels, and, to a lesser extent, certain MLIM
products are distributed through GMI. Revenues and expenses
associated with these inter-segment activities are recognized in
each segment and eliminated at the corporate level. In addition,
revenue and expense sharing agreements for joint activities
between segments are in place, and the results of each segment
reflect the agreed-upon apportionment of revenues and expenses
associated with these activities. The following segment results
represent the information that is relied upon by management in
its decision-making processes. These results exclude items
reported in the Corporate segment. Business segment results are
reclassified to reflect reallocations of revenues and expenses
that result from changes in Merrill Lynchs business
strategy and organizational structure. See Note 2 to the
Condensed Consolidated Financial Statements for further
information.
Global Markets and Investment Banking
GMIs Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) | |
| |
|
|
For the Three Months Ended | |
|
For the Six Months Ended | |
|
|
| |
|
|
June 30, | |
|
July 1, | |
|
% Inc. | |
|
June 30, | |
|
July 1, | |
|
% Inc. | |
|
|
2006 | |
|
2005 | |
|
(Dec.) | |
|
2006 | |
|
2005 | |
|
(Dec.) | |
| |
Global Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
$ |
1,725 |
|
|
$ |
1,606 |
|
|
|
7 |
% |
|
$ |
3,816 |
|
|
$ |
3,268 |
|
|
|
17 |
% |
|
|
Equity
|
|
|
1,877 |
|
|
|
1,022 |
|
|
|
84 |
|
|
|
3,450 |
|
|
|
1,993 |
|
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Global Markets net revenues
|
|
|
3,602 |
|
|
|
2,628 |
|
|
|
37 |
|
|
|
7,266 |
|
|
|
5,261 |
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Banking
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination Debt
|
|
|
367 |
|
|
|
374 |
|
|
|
(2 |
) |
|
|
762 |
|
|
|
656 |
|
|
|
16 |
|
|
|
Equity
|
|
|
315 |
|
|
|
223 |
|
|
|
41 |
|
|
|
552 |
|
|
|
465 |
|
|
|
19 |
|
|
|
Strategic Advisory Services
|
|
|
296 |
|
|
|
214 |
|
|
|
38 |
|
|
|
553 |
|
|
|
374 |
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Banking net revenues
|
|
|
978 |
|
|
|
811 |
|
|
|
21 |
|
|
|
1,867 |
|
|
|
1,495 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
4,580 |
|
|
|
3,439 |
|
|
|
33 |
|
|
|
9,133 |
|
|
|
6,756 |
|
|
|
35 |
|
Non-interest expenses before one-time compensation expenses
|
|
|
3,087 |
|
|
|
2,341 |
|
|
|
32 |
|
|
|
6,059 |
|
|
|
4,534 |
|
|
|
34 |
|
One-time compensation expenses
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,369 |
|
|
|
- |
|
|
|
N/M |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings
|
|
$ |
1,493 |
|
|
$ |
1,098 |
|
|
|
36 |
|
|
$ |
1,705 |
|
|
$ |
2,222 |
|
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax profit margin
|
|
|
32.6 |
% |
|
|
31.9 |
% |
|
|
|
|
|
|
18.7 |
% |
|
|
32.9 |
% |
|
|
|
|
|
N/ M = Not Meaningful
Despite challenging market conditions during the second quarter
of 2006, each of GMIs major business lines
Debt Markets, Equity Markets and Investment Banking
recorded increased net
48
revenues compared with the second quarter of 2005. GMIs
record net revenues of $4.6 billion were up 33% from the
year-ago quarter. Pre-tax earnings were $1.5 billion, 36%
higher from the prior-year period, driven by strong revenue
growth and operating leverage. The pre-tax profit margin was
32.6%, up from 31.9% in the year-ago quarter.
For the first six months of 2006, GMIs net revenues were a
record at $9.1 billion, an increase of 35% from the first
half of 2005. Pre-tax earnings of $1.7 billion and the
pre-tax profit margin of 18.7% included $1.4 billion in
one-time compensation expenses incurred in the first quarter of
2006. Excluding these one-time compensation expenses, pre-tax
earnings for the first six months of 2006 were
$3.1 billion, up 38% from the year-ago period, and the
pre-tax profit margin was 33.7%, up from 32.9% in the prior year
period. Refer to Note 1 to the Condensed Consolidated
Financial Statements and Exhibit 99.1 for further detail on
the one-time compensation expenses.
From a geographic perspective, Europe, Middle East and Africa
(EMEA) and the United States were the largest dollar
contributors to growth over the prior year quarter, whereas the
Pacific Rim and Canada had the strongest growth on a percentage
basis compared to the prior year quarter.
A detailed discussion of GMIs net revenues follows:
Global Markets
In the second quarter of 2006, Global Markets net revenues were
$3.6 billion, up 37% from the year-ago period. For the
first half of 2006, Global Markets net revenues were
$7.3 billion, up 38% from the prior-year period.
Debt Markets
Debt Markets net revenues include principal transactions and net
interest profit (which management believes should be viewed in
aggregate to assess trading results), commissions, revenues from
principal investments, fair value adjustments on private equity
investments made by non-broker-dealer subsidiaries that are held
for capital appreciation and/or current income, and other
revenues. In the second quarter of 2006, Debt Markets net
revenues were $1.7 billion, up 7% from the second quarter
of 2005, driven primarily by revenues in the principal investing
and secured finance business and increased revenues from foreign
exchange. These increases were partially offset by lower net
revenues in trading interest rate products and commodities.
Year-to-date Debt
Markets net revenues were $3.8 billion, up 17% from the
year-ago period, driven principally by the increased net
revenues in the principal investing and secured finance business
and the trading of credit products.
Equity Markets
Equity Markets net revenues include commissions, principal
transactions and net interest profit (which management believes
should be viewed in aggregate to assess trading results),
revenues from equity method investments, fair value adjustments
on private equity investments that are held for capital
appreciation and/or current income, and other revenues. During
the second quarter of 2006, Equity Markets net revenues were
$1.9 billion, an increase of 84% over the year-ago quarter
with strong performances in every major revenue category,
including a nearly threefold increase in revenues from private
equity investments. The increase in private equity revenues was
driven primarily by gains from several private equity
investments that resulted from fair value adjustments associated
with initial public offerings, the recapitalization of an underlying
company, and the application of valuation methodologies.
49
Year-to-date Equity
Markets net revenues were $3.5 billion, up 73% from the
year-ago period, driven primarily by private equity-related
gains, increased equity-linked and cash trading revenues, and
higher equity financing net revenues.
Investment Banking
Investment Banking net revenues of $978 million were 21%
higher than the 2005 second quarter, driven by increases in
equity origination mandates and merger and acquisition advisory
services, partly offset by a slight decline in debt origination
revenues. For the first half of 2006, Investment Banking net
revenues were $1.9 billion, up 25% from the prior-year
period.
Origination
Origination revenues represent fees earned from the underwriting
of debt, equity and equity-linked securities as well as loan
syndication fees.
Origination revenues in the second quarter of 2006 were
$682 million, up 14% from the year-ago quarter on higher
equity origination revenues, which increased 41% from a year
ago, as a result of a more robust environment, including a
higher volume of convertible deals, as well as the benefits of
continued investments in the business. The increase was
partially offset by a 2% decline in debt origination revenues.
Year-to-date
origination revenues increased 17% to $1.3 billion from the
year-ago period, as a result of a more robust environment and
benefits of continued investment in the business. Equity and
debt origination revenues were up 19% and 16%, respectively,
compared with the first six months of 2005.
Strategic Advisory Services
Strategic advisory services revenues, which include merger and
acquisition and other advisory fees, were $296 million in
the second quarter of 2006, up 38% from the year-ago quarter as
overall deal volume as well as Merrill Lynchs share of
global completed merger and acquisition volume increased.
Year-to-date strategic
advisory services revenues increased 48% from the year-ago
period, to $553 million on higher activity.
For additional information on GMIs segment results, refer
to Note 2 to the Condensed Consolidated Financial
Statements.
50
Global Private Client
GPCs Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) | |
| |
|
|
For the Three Months Ended | |
|
For the Six Months Ended | |
|
|
| |
|
|
June 30, | |
|
July 1, | |
|
% Inc. | |
|
June 30, | |
|
July 1, | |
|
% Inc. | |
|
|
2006 | |
|
2005 | |
|
(Dec.) | |
|
2006 | |
|
2005 | |
|
(Dec.) | |
| |
Fee-based revenues
|
|
$ |
1,533 |
|
|
$ |
1,286 |
|
|
|
19 |
% |
|
$ |
2,991 |
|
|
$ |
2,557 |
|
|
|
17 |
% |
Transactional and origination revenues
|
|
|
902 |
|
|
|
786 |
|
|
|
15 |
|
|
|
1,801 |
|
|
|
1,643 |
|
|
|
10 |
|
Net interest profit and related
hedges(1)
|
|
|
554 |
|
|
|
420 |
|
|
|
32 |
|
|
|
1,081 |
|
|
|
821 |
|
|
|
32 |
|
Other revenues
|
|
|
56 |
|
|
|
76 |
|
|
|
(26 |
) |
|
|
111 |
|
|
|
150 |
|
|
|
(26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
3,045 |
|
|
|
2,568 |
|
|
|
19 |
|
|
|
5,984 |
|
|
|
5,171 |
|
|
|
16 |
|
Non-interest expenses before one-time compensation expenses
|
|
|
2,344 |
|
|
|
2,111 |
|
|
|
11 |
|
|
|
4,637 |
|
|
|
4,204 |
|
|
|
10 |
|
One-time compensation expenses
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
281 |
|
|
|
- |
|
|
|
N/M |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings
|
|
$ |
701 |
|
|
$ |
457 |
|
|
|
53 |
|
|
$ |
1,066 |
|
|
$ |
967 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax profit margin
|
|
|
23.0 |
% |
|
|
17.8 |
% |
|
|
|
|
|
|
17.8 |
% |
|
|
18.7 |
% |
|
|
|
|
|
N/ M = Not Meaningful
|
|
(1) |
Includes interest component of non-qualifying derivatives
which are included in other revenues on the Condensed
Consolidated Statement of Earnings. |
GPCs second quarter 2006 net revenues were
$3.0 billion, up 19% from the year-ago quarter. The
increase was primarily driven by record fee-based revenues,
including record fees from annuitized-revenue products, record
net interest profit as spreads on deposits increased with
interest rates, and also higher transactional and origination
revenues. GPCs second quarter 2006 pre-tax earnings were a
record $701 million, up 53% from the 2005 second quarter,
and the pre-tax profit margin was also a record 23.0%, up by
more than five percentage points from the prior-year period.
Total client assets in GPC accounts increased 11% from the
year-ago quarter, to $1.5 trillion. Second quarter net inflows
of client assets into annuitized-revenue products were
$10 billion, bringing the
year-to-date total to
$23 billion. Total net new money for the second quarter and
first six months of 2006 was $7 billion and
$25 billion, respectively.
Financial Advisor headcount reached 15,520 at the end of the
second quarter of 2006, a net increase of 1,100 since the second
quarter of 2005, reflecting low turnover rates, recruiting
efforts and the acquisition of Advest.
From a geographic viewpoint, GPCs
non-U.S. revenue
growth was stronger than in the U.S. during the first half
of 2006. Additionally, GPC continues to invest in the business
internationally as evidenced by the private banking joint
venture launched during the second quarter of 2006 with
Mitsubishi UFJ Financial Group (MUFG) in Japan,
bringing GPCs private banking platform to MUFGs
large high-net-worth client base.
For the first six months of 2006, GPCs net revenues
increased 16% to $6.0 billion, driven by growth in nearly
every major revenue category.
Year-to-date pre-tax
earnings of $1.1 billion and the pre-tax profit margin of
17.8% included $281 million in one-time compensation
expenses incurred in the first quarter of 2006. Excluding these
one-time compensation expenses, GPCs
year-to-date pre-tax
earnings were $1.3 billion, up 39% from the year-ago
period, and the pre-tax margin was 22.5%.
51
Refer to Note 1 to the Condensed Consolidated Financial
Statements and Exhibit 99.1 for further detail on the
one-time compensation expenses.
A detailed discussion of GPCs revenues follows:
Fee-based revenues
Fee-based revenues are comprised of portfolio service fees which
are primarily derived from accounts that charge an annual fee
based on net asset value, such as Merrill Lynch
Consults®
(a separately managed account product) and Unlimited
AdvantageSM
(a fee based brokerage account), as well as fees from insurance
products, taxable and tax-exempt money market funds, and
alternative investment products. Also included in fee-based
revenues are fixed annual account fees and other account-related
fees, and commissions related to distribution fees on mutual
funds.
GPC generated $1.5 billion of fee-based revenues in the
2006 second quarter, up 19% from the year-ago quarter. On a
year-to-date basis,
fee-based revenues increased 17% from the year-ago period to
$3.0 billion. This increase reflected growth in client
assets due to higher market valuations and net inflows into
annuitized products. This asset growth resulted in higher
portfolio service fees and increased distribution fees related
to mutual fund sales.
The value of client assets in GPC accounts at June 30, 2006
and July 1, 2005 follows.
|
|
|
|
|
|
|
|
|
|
(dollars in billions) | |
| |
|
|
June 30, | |
|
July 1, | |
|
|
2006 | |
|
2005 | |
| |
Assets in GPC accounts
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$ |
1,370 |
|
|
$ |
1,234 |
|
|
Non-U.S.
|
|
|
124 |
|
|
|
115 |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,494 |
|
|
$ |
1,349 |
|
|
|
|
|
|
|
|
|
Transactional and origination revenues
Transactional and origination revenues include certain
commission revenues, such as those that arise from agency
transactions in listed and OTC equity securities, mutual funds,
and insurance products. Also included are principal transactions
revenues which primarily represent bid-offer revenues on
government bonds and municipal securities, as well as new issue
revenues which include selling concessions on newly issued debt
and equity securities, including shares of closed-end funds.
Transactional and origination revenues were $902 million in
the second quarter of 2006, 15% higher than the year-ago
quarter. This increase is due principally to higher origination
revenues driven by a few particularly large transactions in
addition to a moderate increase in transactional revenues.
Year-to-date
transactional and origination revenues were $1.8 billion,
up 10% from the year-ago period.
Net interest profit and related hedges
Net interest profit (interest revenues less interest expenses)
and related hedges includes GPCs allocation of the
interest spread earned in Merrill Lynchs banks for
deposits, as well as interest earned on margin, small- and
middle-market business and other loans, corporate funding
allocations, and the interest component of non-qualifying
derivatives.
GPCs net interest profit and related hedges were
$554 million in the second quarter of 2006, up 32% from the
2005 second quarter. This increase primarily reflects higher
margins on deposits resulting from rising short-term interest
rates. On a
year-to-date basis,
GPCs net interest profit was $1.1 billion, 32% higher
than the year-ago period.
52
Other revenues
GPCs other revenues were $56 million in the second
quarter of 2006, down 26% from $76 million in the year-ago
period, due largely to lower mortgage-related revenues. For the
first six months of 2006, other revenues were also down 26%,
totaling $111 million.
For additional information on GPCs segment results, refer
to Note 2 to the Condensed Consolidated Financial
Statements.
Merrill Lynch Investment Managers
MLIMs Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) | |
| |
|
|
For the Three | |
|
|
|
For the Six | |
|
|
|
|
Months Ended | |
|
|
|
Months Ended | |
|
|
|
|
| |
|
|
|
| |
|
|
|
|
June 30, | |
|
July 1, | |
|
% Inc. | |
|
June 30, | |
|
July 1, | |
|
% Inc. | |
|
|
2006 | |
|
2005 | |
|
(Dec.) | |
|
2006 | |
|
2005 | |
|
(Dec.) | |
| |
Asset management fees
|
|
$ |
522 |
|
|
$ |
367 |
|
|
|
42 |
% |
|
$ |
1,014 |
|
|
$ |
737 |
|
|
|
38 |
% |
Commissions
|
|
|
29 |
|
|
|
25 |
|
|
|
16 |
|
|
|
61 |
|
|
|
53 |
|
|
|
15 |
|
Other revenues
|
|
|
79 |
|
|
|
13 |
|
|
|
508 |
|
|
|
125 |
|
|
|
28 |
|
|
|
346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
630 |
|
|
|
405 |
|
|
|
56 |
|
|
|
1,200 |
|
|
|
818 |
|
|
|
47 |
|
Non-interest expenses before one-time compensation expenses
|
|
|
390 |
|
|
|
284 |
|
|
|
37 |
|
|
|
738 |
|
|
|
570 |
|
|
|
29 |
|
One-time compensation expenses
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
109 |
|
|
|
- |
|
|
|
N/M |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings
|
|
$ |
240 |
|
|
$ |
121 |
|
|
|
98 |
|
|
$ |
353 |
|
|
$ |
248 |
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax profit margin
|
|
|
38.1 |
% |
|
|
29.9 |
% |
|
|
|
|
|
|
29.4 |
% |
|
|
30.3 |
% |
|
|
|
|
|
N/ M = Not Meaningful
MLIMs second quarter 2006 net revenues were
$630 million, up 56% from the 2005 second quarter. This
increase was driven principally by net inflows and higher
average long-term asset values. MLIMs pre-tax earnings for
the 2006 second quarter were $240 million, up 98% from the
2005 second quarter, and the pre-tax margin was 38.1%, compared
with 29.9% in the prior-year period. The increase in pre-tax
earnings and pre-tax margin can be attributed to strong
operating leverage which was enhanced by net benefits related to
the pending merger with BlackRock. These net benefits pertain to
certain projects which have been curtailed and employee
attrition not replaced in advance of the BlackRock transaction.
For the first six months of 2006, MLIMs net revenues were
up 47% over the first half of 2005, to $1.2 billion.
Pre-tax earnings of $353 million and the pre-tax profit
margin of 29.4% included $109 million in one-time
compensation expenses recognized during the first quarter of
2006. Excluding the one-time compensation expenses, the pre-tax
earnings for the first half of 2006 were $462 million, up
86% from the year-ago period, and the pre-tax margin was 38.5%,
up from 30.3% due primarily to strong operating leverage. Refer
to Note 1 to the Condensed Consolidated Financial
Statements and Exhibit 99.1 for further detail on the
one-time compensation expenses.
On February 15, 2006, Merrill Lynch announced that it had
signed a definitive agreement under which it would combine its
MLIM investment management business with BlackRock in exchange
for a 49.8% interest in the combined firm, including a 45%
voting interest. Merrill Lynch expects to recognize a gain upon
the closing of this transaction which, based upon the price at
the time of the announcement, is estimated to be over
$1 billion. This transaction is expected to close around
the end of the third quarter of 2006, subject to regulatory and
shareholder approvals. The actual gain will be
53
contingent upon BlackRocks share price at closing, as well
as closing adjustments. Merrill Lynch plans to account for its
investment in BlackRock under the equity method of accounting.
A detailed discussion of MLIMs revenues follows:
Asset management fees
Asset management fees primarily consist of fees earned from the
management and administration of retail mutual funds and
separately managed accounts for retail investors, as well as
institutional funds such as pension assets. Asset management
fees also include performance fees, which are generated in some
cases by separately managed accounts and institutional money
management arrangements.
Asset management fees were $522 million, up 42% from the
second quarter of 2005 due to higher average equity market
values and an improvement in the fee profile of assets under
management and new money inflows.
Year-to-date asset
management fees were $1.0 billion, up 38% from the year-ago
period. At the end of the second quarter of 2006, firmwide
assets under management totaled $589 billion, with
$583 billion managed by MLIM and $6 billion managed by
GPC. Compared with the 2005 second quarter, assets under
management increased 23%, due principally to positive market
movement and net new money inflows. Net inflows for the quarter
were $8 billion, primarily driven by the EMEA-Pacific
retail business.
An analysis of changes in firmwide assets under management from
July 1, 2005 to June 30, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in billions) | |
| |
|
|
Net Changes Due To | |
|
|
|
|
| |
|
|
|
|
July 1, | |
|
New | |
|
Asset | |
|
|
|
June 30, | |
|
|
2005(1) | |
|
Money | |
|
Appreciation | |
|
Other(2) | |
|
2006(1) | |
| |
Assets under management
|
|
$ |
478 |
|
|
$ |
46 |
|
|
$ |
34 |
|
|
$ |
31 |
|
|
$ |
589 |
|
|
|
|
(1) |
Includes $5 billion and $6 billion of assets
managed by GPC as of July 1, 2005 and June 30, 2006,
respectively. |
(2) |
Includes $18 billion of new assets from the acquisition
of the pension business of Royal Philips Electronics, the impact
of foreign exchange movements, reinvested dividends and other
changes. |
Commissions
Commissions for MLIM principally consist of distribution fees
and contingent deferred sales charges (CDSC) related
to mutual funds. The distribution fees represent revenues earned
for promoting and distributing mutual funds, and the CDSC
represents fees earned when a shareholder redeems shares prior
to the specified holding period. Commissions revenues were
$29 million in the second quarter of 2006, up 16% from the
year-ago quarter on increased activity levels.
Year-to-date
commissions were $61 million, up 15% from the prior-year
period.
Other revenues
Other revenues primarily include net interest profit, investment
gains and losses and revenues from consolidated investments.
Other revenues, totaled $79 million for the second quarter
of 2006, up from $13 million a year ago reflecting
increased investment gains from consolidated investments. Other
revenues for the first six months of 2006 were
$125 million, compared to $28 million for the first
six months of 2005.
For additional information on MLIMs segment results, refer
to Note 2 to the Condensed Consolidated Financial
Statements.
54
CONSOLIDATED BALANCE SHEETS
Management continually monitors and evaluates the size and
composition of the Consolidated Balance Sheet. The following
table summarizes the June 30, 2006 and December 30,
2005 period-end, and first six months of 2006 and full-year 2005
average balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in billions) | |
| |
|
|
2006 | |
|
|
|
2005 | |
|
|
June 30, | |
|
Six Month | |
|
Dec. 30, | |
|
Full Year | |
|
|
2006 | |
|
Average(1) | |
|
2005 | |
|
Average(1) | |
| |
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading-Related
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities financing assets
|
|
$ |
342.6 |
|
|
$ |
336.9 |
|
|
$ |
272.3 |
|
|
$ |
268.3 |
|
Trading assets
|
|
|
166.9 |
|
|
|
187.1 |
|
|
|
148.7 |
|
|
|
182.9 |
|
Other trading-related receivables
|
|
|
61.1 |
|
|
|
60.9 |
|
|
|
54.3 |
|
|
|
60.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
570.6 |
|
|
|
584.9 |
|
|
|
475.3 |
|
|
|
512.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Trading-Related
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
40.8 |
|
|
|
35.7 |
|
|
|
26.5 |
|
|
|
38.7 |
|
Investment securities
|
|
|
66.6 |
|
|
|
68.2 |
|
|
|
69.3 |
|
|
|
71.2 |
|
Loans, notes, and mortgages, net
|
|
|
70.4 |
|
|
|
68.7 |
|
|
|
66.0 |
|
|
|
60.6 |
|
Other non-trading assets
|
|
|
50.8 |
|
|
|
45.0 |
|
|
|
43.9 |
|
|
|
47.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
228.6 |
|
|
|
217.6 |
|
|
|
205.7 |
|
|
|
218.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
799.2 |
|
|
$ |
802.5 |
|
|
$ |
681.0 |
|
|
$ |
730.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading-Related
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities financing liabilities
|
|
$ |
298.0 |
|
|
$ |
315.4 |
|
|
$ |
234.3 |
|
|
$ |
272.7 |
|
Trading liabilities
|
|
|
99.7 |
|
|
|
117.1 |
|
|
|
88.9 |
|
|
|
105.7 |
|
Other trading-related payables
|
|
|
75.5 |
|
|
|
71.0 |
|
|
|
56.9 |
|
|
|
63.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
473.2 |
|
|
|
503.5 |
|
|
|
380.1 |
|
|
|
442.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Trading-Related
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper and other short-term borrowings
|
|
|
13.4 |
|
|
|
9.3 |
|
|
|
3.9 |
|
|
|
6.5 |
|
Deposits
|
|
|
79.4 |
|
|
|
81.3 |
|
|
|
80.0 |
|
|
|
79.2 |
|
Long-term borrowings
|
|
|
140.0 |
|
|
|
130.0 |
|
|
|
132.4 |
|
|
|
122.4 |
|
Long-term debt issued to
TOPrSSM
partnerships
|
|
|
3.1 |
|
|
|
3.1 |
|
|
|
3.1 |
|
|
|
3.1 |
|
Other non-trading liabilities
|
|
|
53.6 |
|
|
|
38.4 |
|
|
|
45.9 |
|
|
|
43.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
289.5 |
|
|
|
262.1 |
|
|
|
265.3 |
|
|
|
255.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
762.7 |
|
|
|
765.6 |
|
|
|
645.4 |
|
|
|
697.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
36.5 |
|
|
|
36.9 |
|
|
|
35.6 |
|
|
|
33.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
799.2 |
|
|
$ |
802.5 |
|
|
$ |
681.0 |
|
|
$ |
730.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Averages represent managements daily balance sheet
estimates, which may not fully reflect netting and other
adjustments included in period-end balances. Balances for
certain assets and liabilities are not revised on a daily
basis. |
55
Off Balance Sheet
Arrangements
As a part of its normal operations, Merrill Lynch enters into
various off balance sheet arrangements that may require future
payments. The table below outlines the significant off balance
sheet arrangements, as well as the future expiration as of
June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) | |
| |
|
|
Expiration | |
|
|
| |
|
|
|
|
Less | |
|
|
|
|
|
|
than | |
|
1 - 3 | |
|
3+- 5 | |
|
Over | |
|
|
Total | |
|
1 Year | |
|
Years | |
|
Years | |
|
5 Years | |
| |
Liquidity facilities with
SPEs(1)
|
|
$ |
29,094 |
|
|
$ |
28,651 |
|
|
$ |
333 |
|
|
$ |
110 |
|
|
$ |
- |
|
Liquidity and default facilities with
SPEs(2)
|
|
|
10,359 |
|
|
|
9,013 |
|
|
|
1,100 |
|
|
|
- |
|
|
|
246 |
|
Residual value
guarantees(3)
|
|
|
1,069 |
|
|
|
66 |
|
|
|
169 |
|
|
|
330 |
|
|
|
504 |
|
Standby letters of credit and other guarantees
(4)(5)(6)
|
|
|
3,918 |
|
|
|
1,547 |
|
|
|
584 |
|
|
|
1,475 |
|
|
|
312 |
|
|
|
(1) |
Amounts relate primarily to facilities provided to municipal
bond securitization SPEs and an asset-backed commercial paper
conduit sponsored by Merrill Lynch. |
(2) |
Amounts relate to liquidity facilities and credit default
protection provided to municipal bond securitization SPEs and
asset-backed commercial paper conduits sponsored by Merrill
Lynch. |
(3) |
Includes residual value guarantees associated with the
Hopewell campus and aircraft leases of $322 million. |
(4) |
Includes $173 million of reimbursement agreements with
the
Mortgage 100 sm
program. |
(5) |
Includes guarantees related to principal-protected mutual
funds. |
(6) |
Includes certain indemnifications related to foreign tax
planning strategies. |
Refer to Note 10 to the Condensed Consolidated Financial
Statements for additional information.
Contractual Obligations
and Commitments
Contractual Obligations
In the normal course of business, Merrill Lynch enters into
various contractual obligations that may require future cash
payments. The accompanying table summarizes Merrill Lynchs
contractual obligations by remaining maturity at June 30,
2006. Excluded from this table are obligations recorded on the
Condensed Consolidated Balance Sheets that are:
(i) generally short-term in nature, including securities
financing transactions, trading liabilities, commercial paper
and other short-term borrowings and other payables;
(ii) deposits; (iii) obligations that are related to
Merrill Lynchs insurance subsidiaries, including
liabilities of insurance subsidiaries, which are subject to
significant variability; and (iv) separate accounts
liabilities, which fund separate accounts assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) | |
| |
|
|
Expiration | |
|
|
| |
|
|
|
|
Less | |
|
|
|
|
|
|
than | |
|
1 - 3 | |
|
3+- 5 | |
|
Over | |
|
|
Total | |
|
1 Year | |
|
Years | |
|
Years | |
|
5 Years | |
| |
Long-term
borrowings(1)
|
|
$ |
143,082 |
|
|
$ |
24,628 |
|
|
$ |
45,343 |
|
|
$ |
35,824 |
|
|
$ |
37,287 |
|
Purchasing and other commitments
|
|
|
7,748 |
|
|
|
5,548 |
|
|
|
675 |
|
|
|
576 |
|
|
|
949 |
|
Operating lease commitments
|
|
|
3,243 |
|
|
|
561 |
|
|
|
1,016 |
|
|
|
815 |
|
|
|
851 |
|
|
|
(1) |
Includes long-term debt issued to
TOPrS sm
partnerships. |
56
Commitments
At June 30, 2006, Merrill Lynch commitments had the
following expirations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) | |
| |
|
|
Expiration | |
|
|
| |
|
|
|
|
Less than | |
|
1 - 3 | |
|
3+ - 5 | |
|
Over 5 | |
|
|
Total | |
|
1 Year | |
|
Years | |
|
Years | |
|
Years | |
| |
Commitments to extend credit
|
|
$ |
77,463 |
|
|
$ |
39,141 |
|
|
$ |
11,036 |
|
|
$ |
19,423 |
|
|
$ |
7,863 |
|
Commitments to enter into resale agreements
|
|
|
12,169 |
|
|
|
12,169 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Capital and
Funding
The primary objectives of Merrill Lynchs capital structure
and funding policies are to support the successful execution of
Merrill Lynchs business strategies while ensuring:
|
|
|
|
|
sufficient equity capital to support existing businesses and
future growth plans and |
|
|
|
liquidity across market cycles and through periods of financial
stress. |
These objectives and Merrill Lynchs capital and funding
policies are discussed more fully in the 2005 Annual Report.
Capital
At June 30, 2006, equity capital, as defined by Merrill
Lynch, was comprised of $33.4 billion of common equity,
$3.1 billion of preferred stock, and $2.5 billion of
long-term debt issued to
TOPrSsm
partnerships (net of related investments). Equity capital is
Merrill Lynchs view of capital available to support its
businesses and differs from stockholders equity as defined
by U.S. generally accepted accounting principles, which
does not include long-term debt issued to
TOPrSsm
partnerships, net of related investments.
Merrill Lynch regularly reviews overall equity capital needs to
ensure that its equity capital base can support the estimated
risks and needs of its businesses, the regulatory and legal
capital requirements of its subsidiaries, and standards pursuant
to the Consolidated Supervised Entity rules. Merrill Lynch
determines the appropriateness of its equity capital
composition, taking into account that its preferred stock and
TOPrSsm
are perpetual. In the event that capital is generated beyond
estimated needs, Merrill Lynch returns capital to
shareholders through share repurchases and dividends.
Merrill Lynch continued to grow its equity capital base in the
first half of 2006 primarily through net earnings, additional
preferred stock issuances, and the net effect of employee stock
transactions, including the adoption of SFAS No. 123R,
partially offset by common stock repurchases and dividends.
Equity capital of $39.1 billion at June 30, 2006 was
2% higher than at December 30, 2005.
On February 28, 2006, Merrill Lynch issued
$360 million face value of floating rate, non-cumulative,
perpetual preferred stock.
The Board of Directors authorized the repurchase of an
additional $6 billion of Merrill Lynchs outstanding
common shares under a program announced on February 26,
2006. During the second quarter of 2006, Merrill Lynch
repurchased 41.4 million common shares at an average
repurchase price of $73.26 per share.
57
On January 18, 2006, the Board of Directors declared an
additional 25% increase in the regular quarterly dividend to 25
cents per common share.
Major components of the changes in equity capital for the first
six months of 2006 are as follows:
|
|
|
|
|
|
(dollars in millions) |
| |
Balance at December 30, 2005
|
|
$ |
38,144 |
|
|
Net earnings
|
|
|
2,108 |
|
|
Issuance of preferred stock
|
|
|
360 |
|
|
Common and preferred stock dividends
|
|
|
(549 |
) |
|
Common stock repurchases
|
|
|
(5,008 |
) |
|
Net effect of employee stock transactions and
other(1)
|
|
|
4,030 |
|
|
|
|
|
Balance at June 30, 2006
|
|
$ |
39,085 |
|
|
|
(1) |
Includes effect of Accumulated other comprehensive loss, the
reclassification of FACAAP liabilities to equity associated with
the adoption of SFAS No. 123R, and other items. |
Balance Sheet Leverage
Asset-to-equity
leverage ratios are commonly used to assess a companys
capital adequacy. When assessing its capital adequacy, Merrill
Lynch considers the risk profiles of the assets, the impact of
hedging, off-balance sheet exposures, operational risk and other
considerations. As leverage ratios are not risk sensitive,
Merrill Lynch does not rely on them as a measure of capital
adequacy.
Merrill Lynch believes that a leverage ratio adjusted to exclude
certain assets considered to have low risk profiles and assets
in customer accounts financed primarily by customer liabilities
provides a more meaningful measure of balance sheet leverage in
the securities industry than an unadjusted ratio. Adjusted
assets are calculated by reducing total assets by
(1) securities financing transactions and securities
received as collateral less trading liabilities net of
contractual agreements and (2) segregated cash and
securities and separate account assets.
58
The following table provides calculations of Merrill
Lynchs leverage ratios at June 30, 2006 and
December 30, 2005:
|
|
|
|
|
|
|
|
|
|
(dollars in millions) | |
| |
|
|
June 30, 2006 | |
|
Dec. 30, 2005 | |
| |
Total assets
|
|
$ |
799,188 |
|
|
$ |
681,015 |
|
Less:
|
|
|
|
|
|
|
|
|
|
Receivables under resale agreements
|
|
|
210,268 |
|
|
|
163,021 |
|
|
Receivables under securities borrowed transactions
|
|
|
111,580 |
|
|
|
92,484 |
|
|
Securities received as collateral
|
|
|
20,721 |
|
|
|
16,808 |
|
Add:
|
|
|
|
|
|
|
|
|
|
Trading liabilities, at fair value, excluding contractual
agreements
|
|
|
66,554 |
|
|
|
60,178 |
|
|
|
|
|
|
|
|
Sub-total
|
|
|
523,173 |
|
|
|
468,880 |
|
Less:
|
|
|
|
|
|
|
|
|
|
Segregated cash and securities balances
|
|
|
18,307 |
|
|
|
11,949 |
|
|
Separate account assets
|
|
|
15,876 |
|
|
|
16,185 |
|
|
|
|
|
|
|
|
Adjusted assets
|
|
|
488,990 |
|
|
|
440,746 |
|
Less:
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangible assets
|
|
|
6,936 |
|
|
|
6,035 |
|
|
|
|
|
|
|
|
Tangible adjusted assets
|
|
$ |
482,054 |
|
|
$ |
434,711 |
|
Stockholders equity
|
|
$ |
36,541 |
|
|
$ |
35,600 |
|
Add:
|
|
|
|
|
|
|
|
|
|
Long-term debt issued to
TOPrSSM
partnerships, net of related
investments(1)
|
|
|
2,544 |
|
|
|
2,544 |
|
|
|
|
|
|
|
|
Equity capital
|
|
$ |
39,085 |
|
|
$ |
38,144 |
|
Tangible equity
capital(2)
|
|
$ |
32,149 |
|
|
$ |
32,109 |
|
Leverage
ratio(3)
|
|
|
20.4 |
x |
|
|
17.9 |
x |
Adjusted leverage
ratio(4)
|
|
|
12.5 |
x |
|
|
11.6 |
x |
Tangible adjusted leverage
ratio(5)
|
|
|
15.0 |
x |
|
|
13.5 |
x |
|
|
|
(1) |
Due to the perpetual nature of
TOPrSSM
and other considerations, Merrill Lynch views the long-term debt
issued to
TOPrSSM
partnerships (net of related investments) as a component of
equity capital. However, the Long-term debt issued to
TOPrSSM
partnerships is reported as a liability for accounting purposes.
TOPrSSM
related investments were $548 million at June 30, 2006
and December 30, 2005. |
(2) |
Equity capital less goodwill and other intangible assets. |
(3) |
Total assets divided by equity capital. |
(4) |
Adjusted assets divided by equity capital. |
(5) |
Tangible adjusted assets divided by tangible equity
capital. |
Funding
Liquidity Risk Management
Merrill Lynch seeks to assure liquidity across market cycles and
through periods of financial stress. Merrill Lynchs
primary liquidity objective is to ensure that all unsecured debt
obligations maturing within one year can be repaid without
issuing new unsecured debt or requiring liquidation of business
assets. Toward this goal, Merrill Lynch has established a set of
liquidity practices that are outlined below. In addition,
Merrill Lynch maintains a contingency funding plan that outlines
actions that would be taken in the event of a funding disruption.
Maintain sufficient long-term capital: Merrill Lynch
regularly reviews its mix of assets, liabilities and commitments
to ensure the maintenance of adequate long-term capital sources
to meet long-term capital requirements. Merrill Lynchs
long-term capital sources include equity capital, long-term debt
59
obligations and certain deposit liabilities in banking
subsidiaries which are considered by management to be long-term
or stable in nature.
At June 30, 2006 and December 30, 2005, total
long-term capital was as follows:
|
|
|
|
|
|
|
|
|
|
(dollars in billions) | |
| |
|
|
June 30, | |
|
Dec. 30, | |
|
|
2006 | |
|
2005 | |
| |
Equity capital
|
|
$ |
39.1 |
|
|
$ |
38.1 |
|
Long-term debt
obligations(1)
|
|
|
104.1 |
|
|
|
99.3 |
|
Deposit
liabilities(2)
|
|
|
66.6 |
|
|
|
69.9 |
|
|
|
|
|
|
|
|
|
Total long-term capital
|
|
$ |
209.8 |
|
|
$ |
207.3 |
|
|
|
|
(1) |
Total long-term borrowings (excluding long term debt issued
to
TOPrS sm
partnerships) less (1) the current portion and
(2) other subsidiary financing non-recourse.
Borrowings that mature in more than one year, but contain
provisions whereby the holder has the option to redeem the
obligations within one year, are reflected as current portion of
long-term borrowings and are not included in long-term capital.
Management believes, however, that a portion of such borrowings
will remain outstanding beyond their earliest redemption
date. |
(2) |
Includes $56.0 billion and $10.6 billion of
deposits in U.S. and
non-U.S. banking
subsidiaries, respectively, at June 30, 2006, and
$60.2 billion and $9.7 billion of deposits,
respectively, at December 30, 2005 that are considered by
management to be long-term. |
The following items are generally financed with long-term
capital:
|
|
|
|
|
The portion of assets that cannot be self-funded in the secured
financing markets, considering stressed market conditions,
including long-term, illiquid assets such as certain loans,
goodwill and other intangible assets and fixed assets; |
|
|
|
Subsidiaries regulatory capital; |
|
|
|
Collateral on derivative contracts that may be required in the
event of changes in Merrill Lynchs ratings or
movements in underlying instruments; and |
|
|
|
Portions of commitments to extend credit based on
managements estimate of the probability of drawdown. |
At June 30, 2006, Merrill Lynchs long-term capital
sources of $209.8 billion exceeded
Merrill Lynchs estimated long-term capital
requirements.
In assessing the appropriateness of its long-term capital,
Merrill Lynch seeks to: (1) ensure sufficient matching of
its assets based on factors such as holding period, contractual
maturity and regulatory restrictions and (2) limit the
amount of liabilities maturing in any particular period. Merrill
Lynch also considers circumstances that might cause contingent
funding obligations, including early repayment of debt.
On May 16, 2006, ML & Co. issued $2.0 billion
of subordinated debt. ML & Co. pays interest on this
subordinated debt at an annual rate of 6.05%. The subordinated
debt matures on May 16, 2016 and is junior in right of
payment to all of ML & Co.s senior indebtedness.
60
The following chart presents Merrill Lynchs long-term
borrowings maturity profile as of June 30, 2006 (quarterly
for two years and annually thereafter):
Note: Extendibles are debt instruments with an extendible
maturity date. Unless debt holders instruct Merrill Lynch to
redeem their debt with at least a one-year notification period,
the maturity date of these instruments is automatically
extended. Extendibles are included in long-term borrowings if
the earliest maturity date is at least one year away. Based on
past experience, the majority of Merrill Lynchs
extendibles are expected to remain outstanding beyond their
earliest maturity date.
Major components of the change in long-term borrowings,
including long-term debt issued to
TOPrSsm
partnerships, during the first six months of 2006 are as follows:
|
|
|
|
|
(dollars in billions) |
|
|
| |
Balance at December 30, 2005
|
|
$ |
135.5 |
|
Issuance and resale
|
|
|
29.4 |
|
Settlement and repurchase
|
|
|
(22.5 |
) |
Other(1)
|
|
|
0.7 |
|
|
|
|
|
Balance at June 30,
2006(2)
|
|
$ |
143.1 |
|
|
|
|
(1) |
Relates to foreign exchange and other movements. |
(2) |
See Note 7 to the Condensed Consolidated Financial
Statements for the long-term borrowings maturity schedule. |
Maintain sufficient funding to repay short-term
obligations: The main alternative funding sources to
unsecured borrowings are repurchase agreements, securities
loaned, other secured borrowings, which require pledging
unencumbered securities held for trading or investment purposes,
or collateral and proceeds from maturing loans and other assets.
Nonetheless, a key funding assumption is accessibility to a
repurchase market for highly rated government, agency and
certain other securities.
61
Merrill Lynch maintains a liquidity portfolio of
U.S. Government and agency obligations and other
instruments of high credit quality, funded predominantly with
long term capital sources. The carrying value of this portfolio,
net of related hedges, was $15.0 billion and
$18.0 billion at June 30, 2006 and December 30,
2005, respectively. ML & Co. also maintained cash and
cash equivalents, investments in short-term money market mutual
funds, and certain highly liquid unencumbered securities of
$7.1 billion and $7.4 billion at June 30, 2006
and December 30, 2005, respectively.
Merrill Lynch monitors the extent to which other unencumbered
assets are available to ML & Co. as a source of funds,
considering that some subsidiaries are restricted in their
ability to upstream unencumbered assets to ML & Co. As
of June 30, 2006 unencumbered assets, including amounts
that may be restricted, were in excess of $150.1 billion,
including the carrying value of the liquidity portfolio and cash
balances. Of this amount, $40.1 billion, including the
liquidity portfolio and cash, was available to ML & Co.
at June 30, 2006, free of regulatory restrictions.
For liquidity planning purposes, Merrill Lynch considers as
short-term debt obligations: (i) commercial paper and other
short-term borrowings and (ii) the current portion of
long-term borrowings. At June 30, 2006 and
December 30, 2005, these short-term debt obligations are as
follows:
|
|
|
|
|
|
|
|
|
|
(dollars in billions) | |
| |
|
|
June 30, | |
|
Dec. 30, | |
|
|
2006 | |
|
2005 | |
| |
Commercial paper and other short-term borrowings
|
|
$ |
13.4 |
|
|
$ |
3.9 |
|
Current portion of long-term borrowings
|
|
|
24.6 |
|
|
|
22.8 |
|
|
|
|
|
|
|
|
|
Total short-term obligations
|
|
$ |
38.0 |
|
|
$ |
26.7 |
|
At June 30, 2006, Merrill Lynchs liquidity portfolio,
cash balances, maturing short-term assets and other unencumbered
assets, some of which may be held in regulated entities but
which management believes may be reasonably upstreamed to
ML & Co., free of regulatory restrictions, were more
than the amount that would be required to repay Merrill
Lynchs short-term obligations and other contingent cash
outflows.
In addition to the sources of funding available to meet
short-term obligations described above, Merrill Lynch maintains
credit facilities that are available to cover immediate funding
needs. Merrill Lynch maintains a committed, multi-currency,
unsecured bank credit facility that totaled $4.5 billion at
June 30, 2006 and $4.0 billion at December 30,
2005. This 364-day
facility permits borrowings by ML & Co. and select
subsidiaries and expires in June 2007. The facility includes a
one year term-out feature that allows ML & Co., at its
option, to extend borrowings under the facility for a further
year beyond the expiration date in June 2007. At June 30,
2006 and December 30, 2005, there were no borrowings
outstanding under this credit facility, although Merrill Lynch
borrows regularly from this facility.
Merrill Lynch also maintains two committed, secured credit
facilities which totaled $7.0 billion at June 30, 2006
and $5.5 billion at December 30, 2005. The facilities
expire in December 2006 and May 2007 respectively. Both
facilities include a one year term-out option that allows
ML & Co. to extend borrowings under the facilities for
a further year beyond their respective expiration dates. The
secured facilities permit borrowings by ML & Co. and
select subsidiaries, secured by a broad range of collateral. At
June 30, 2006 and December 30, 2005 there were no
borrowings outstanding under either facility.
In addition, Merrill Lynch maintains a committed, secured credit
facility with a financial institution that totaled
$6.25 billion at June 30, 2006 and December 30,
2005. The secured facility may be
62
collateralized by government obligations eligible for pledging.
The facility expires in 2014, but may be terminated with at
least nine months notice by either party. At June 30, 2006
and December 30, 2005, there were no borrowings outstanding
under this facility.
Concentrate unsecured financing at ML & Co.:
ML & Co. is the primary issuer of all unsecured,
non-deposit financing instruments that are used primarily to
fund assets in subsidiaries, some of which are regulated. The
benefits of this strategy are greater control, reduced financing
costs, wider name recognition by creditors, and greater
flexibility to meet variable funding requirements of
subsidiaries. Where regulations, time zone differences, or other
business considerations make this impractical, some subsidiaries
enter into their own financing arrangements.
Diversify unsecured funding sources: Merrill Lynch
strives to continually expand and globally diversify its funding
programs, its markets, and its investor and creditor base to
minimize reliance on any one investor base or region. Merrill
Lynch diversifies its borrowings by maintaining various limits,
including a limit on the amount of commercial paper held by a
single investor. Merrill Lynch benefits by distributing a
significant portion of its debt issuances through its own sales
force to a large, diversified global client base. Merrill Lynch
also makes markets buying and selling its debt instruments.
Total borrowings outstanding at June 30, 2006 were issued
in the following currencies:
|
|
|
|
|
|
|
|
|
(USD equivalent in millions) |
|
|
|
|
| |
USD
|
|
$ |
96,685 |
|
|
|
62 |
% |
EUR
|
|
|
31,204 |
|
|
|
20 |
|
JPY
|
|
|
10,602 |
|
|
|
7 |
|
GBP
|
|
|
8,990 |
|
|
|
5 |
|
AUD
|
|
|
3,192 |
|
|
|
2 |
|
CAD
|
|
|
2,752 |
|
|
|
2 |
|
Other
|
|
|
3,059 |
|
|
|
2 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
156,484 |
|
|
|
100 |
% |
|
Adhere to prudent governance processes: In order to
ensure that both daily and strategic funding activities are
appropriate and subject to senior management review and control,
liquidity management is reviewed in Asset/Liability Committee
meetings with Treasury management and is presented to Merrill
Lynchs Risk Oversight Committee (ROC),
ML & Co. executive management and the Finance Committee
of the Board of Directors. Merrill Lynch also manages the growth
and composition of its assets and sets limits on the level of
unsecured funding at any time.
Credit Ratings
The cost and availability of unsecured funding are also impacted
by credit ratings. In addition, credit ratings are important
when competing in certain markets and when seeking to engage in
long-term transactions including OTC derivatives. Factors that
influence Merrill Lynchs credit ratings include the credit
rating agencies assessment of the general operating
environment, relative positions in the markets in which Merrill
Lynch competes, reputation, level and volatility of earnings,
corporate governance, risk management policies, liquidity and
capital management.
The senior debt and preferred stock ratings of ML & Co.
and the ratings of preferred securities issued by subsidiaries
on August 2, 2006 were as follows. Rating agencies express
outlooks from time to time on these ratings. Each of these
agencies describes its current outlook as stable, except for
63
Standard & Poors whose outlook on ML &
Co. was raised to positive from stable on January 23, 2006.
|
|
|
|
|
|
|
|
|
| |
|
|
Preferred | |
Rating Agency |
|
Senior Debt Ratings | |
|
Stock Ratings | |
| |
Dominion Bond Rating Service Ltd.
|
|
|
AA (low) |
|
|
|
Not Rated |
|
Fitch Ratings
|
|
|
AA- |
|
|
|
A+ |
|
Moodys Investors Service, Inc.
|
|
|
Aa3 |
|
|
|
A2 |
|
Rating & Investment Information, Inc. (Japan)
|
|
|
AA |
|
|
|
A+ |
|
Standard & Poors Ratings Services
|
|
|
A+ |
|
|
|
A- |
|
|
In connection with certain OTC derivatives transactions and
other trading agreements, Merrill Lynch could be required to
provide additional collateral to certain counterparties in the
event of a downgrade of the senior debt ratings of ML &
Co. At June 30, 2006, the amount of additional collateral
that would be required for such derivatives transactions and
trading agreements was approximately $456 million in the
event of a one-notch downgrade and approximately
$1,024 million in the event of a two-notch downgrade of
ML & Co.s long term senior debt credit rating.
Merrill Lynch considers additional collateral on derivative
contracts that may be required in the event of changes in
ML & Co.s ratings as part of its liquidity
management practices.
Risk
Management
Risk-taking is integral to many of the core businesses in which
Merrill Lynch operates. In the course of conducting its business
operations, Merrill Lynch is exposed to a variety of risks
including market, credit, liquidity, operational and other risks
that are material and require comprehensive controls and ongoing
oversight. Senior managers of Merrill Lynchs core
businesses are responsible and accountable for management of the
risks associated with their business activities. In addition,
there are independent control groups that manage market risk,
credit risk, liquidity risk and operational risk, among other
functions, which fall under the management responsibility of the
Chief Financial Officer. Along with other control units these
disciplines work to ensure risks are properly identified,
measured, monitored, and managed throughout Merrill Lynch. For a
full discussion of Merrill Lynchs risk management
framework, see the 2005 Annual Report.
Market Risk
Market risk is defined as the potential change in value of
financial instruments caused by fluctuations in interest rates,
exchange rates, equity and commodity prices, credit spread,
and/or other risks. The Market Risk Framework defines and
communicates Merrill Lynchs market risk tolerance and
broad overall limits across the firm by defining and
constraining exposure to specific asset classes, market risk
factors and Value at Risk (VaR). VaR is a
statistical measure of the potential loss in the fair value of a
portfolio due to adverse movements in underlying risk factors.
The Market Risk Management Group is responsible for approving
the products and markets in which Merrill Lynchs major
business units and functions will transact and take risk.
Moreover, it is responsible for identifying the risks to which
these business units will be exposed in these approved products
and markets. Market Risk Management uses a variety of
quantitative methods to assess the risk of Merrill Lynchs
positions and portfolios. In particular, Market Risk Management
quantifies the sensitivities of Merrill Lynchs current
portfolios to changes in market variables. These sensitivities
are then utilized in the context of historical data to estimate
earnings and loss distributions that Merrill Lynchs
current portfolios would have incurred throughout the historical
period. From these distributions, Market Risk Management derives
a number of useful risk statistics, including VaR.
64
The VaR disclosed in the accompanying table is an estimate of
the amount that Merrill Lynchs current trading portfolios
could lose with a specified degree of confidence, over a given
time interval. The VaR for Merrill Lynchs overall
portfolios is less than the sum of the VaRs for individual risk
categories because movements in different risk categories occur
at different times and, historically, extreme movements have not
occurred in all risk categories simultaneously. The difference
between the sum of the VaRs for individual risk categories and
the VaR calculated for all risk categories is shown in the
following table and may be viewed as a measure of the
diversification within Merrill Lynchs portfolios. Market
Risk Management believes that the tabulated risk measures
provide broad guidance as to the amount Merrill Lynch could lose
in future periods, and Market Risk Management works continually
to improve its measurement and the methodology of the
firms VaR. However, the calculation of VaR requires
numerous assumptions and thus VaR should not be viewed as a
precise measure of risk. In addition, VaR is not intended to
capture worst case scenario losses.
To complement VaR and in recognition of its inherent
limitations, Merrill Lynch uses a number of additional risk
measurement methods and tools as part of its overall market risk
management process. These include stress testing and event risk
analysis, which examine portfolio behavior under significant
adverse market conditions, including scenarios that would result
in material losses for the firm.
To calculate VaR, Market Risk Management aggregates
sensitivities to market risk factors and combines them with a
database of historical market factor movements to simulate a
series of profits and losses. The level of loss that is exceeded
in that series 5% of the time is used as the estimate for
the 95% confidence level VaR. The overall total VaR amounts are
presented across major risk categories, which include exposure
to volatility risk found in certain products, such as options.
The table that follows presents Merrill Lynchs average and
ending VaR for trading instruments for the first and second
quarters of 2006 and the full-year 2005. Additionally, high and
low VaR for the second quarter of 2006 is presented
independently for each risk category and overall. Because high
and low VaR numbers for these risk categories may have occurred
on different days, high and low numbers for diversification
benefit would not be meaningful. In the second quarter of 2006,
Merrill Lynch made a refinement to the modeling of leveraged
loans in the trading account, which lowered the trading VaR.
Prior periods have been restated to reflect this refinement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Daily | |
|
Daily | |
|
Daily | |
|
|
June 30, | |
|
March 31, | |
|
Dec. 30, | |
|
High | |
|
Low | |
|
Average | |
|
Average | |
|
Average | |
|
|
2006 | |
|
2006 | |
|
2005 | |
|
2Q06 | |
|
2Q06 | |
|
2Q06 | |
|
1Q06 | |
|
2005 | |
| |
Trading
Value-at-Risk(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate and credit spread
|
|
$ |
56 |
|
|
$ |
35 |
|
|
$ |
37 |
|
|
$ |
56 |
|
|
$ |
33 |
|
|
$ |
44 |
|
|
$ |
42 |
|
|
$ |
37 |
|
|
Equity
|
|
|
19 |
|
|
|
21 |
|
|
|
16 |
|
|
|
39 |
|
|
|
11 |
|
|
|
25 |
|
|
|
11 |
|
|
|
12 |
|
|
Commodity
|
|
|
11 |
|
|
|
5 |
|
|
|
6 |
|
|
|
13 |
|
|
|
6 |
|
|
|
9 |
|
|
|
6 |
|
|
|
8 |
|
|
Currency
|
|
|
4 |
|
|
|
4 |
|
|
|
2 |
|
|
|
9 |
|
|
|
2 |
|
|
|
4 |
|
|
|
4 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90 |
|
|
|
65 |
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
82 |
|
|
|
63 |
|
|
|
60 |
|
Diversification benefit
|
|
|
(37 |
) |
|
|
(25 |
) |
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
(34 |
) |
|
|
(23 |
) |
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall(2)
|
|
$ |
53 |
|
|
$ |
40 |
|
|
$ |
38 |
|
|
$ |
65 |
|
|
$ |
37 |
|
|
$ |
48 |
|
|
$ |
40 |
|
|
$ |
35 |
|
|
|
|
(1) |
Based on a 95% confidence level and a one-day holding
period. |
(2) |
Overall VaR using a 95% confidence level and a one-week
holding period was $92 million at June 30, 2006,
$76 million at March 31, 2006 and $63 million at
December 30, 2005. |
65
At June 30, 2006, trading VaR was higher than the first
quarter of 2006 due to increases in credit spread exposures,
and, to a lesser extent, higher commodity exposures. If market
conditions are favorable, Merrill Lynch may increase its risk
taking in a number of its businesses, including certain
proprietary trading activities and principal investments. These
activities provide revenue opportunities while also increasing
the loss potential under certain market conditions. Risk levels
are monitored on a daily basis to ensure they remain within
corporate risk guidelines and tolerance levels.
Non-Trading Market Risk
Non-trading market risk includes the risks associated with
certain non-trading activities, including investment securities,
securities financing transactions and equity investments. Also
included are the risks related to treasury funding activities.
Risks related to lending activities are covered in the Credit
Risk section.
The primary market risk of non-trading investment securities,
and non-trading repurchase and reverse repurchase agreements is
expressed as sensitivity to changes in the general level of
credit spreads which are defined as the differences in the
yields on debt instruments from relevant LIBOR/ Swap rates.
Non-trading investment securities include securities
available-for-sale and
held-to-maturity as
well as investments of insurance subsidiaries. At the end of the
second quarter of 2006, the total credit spread sensitivity of
these instruments is a pre-tax loss of $22 million in fair
market value for an increase of one basis point, which is one
one-hundredth of a percent, in credit spreads, compared to a
pre-tax loss of $20 million at the end of the first quarter
of 2006 and $19 million at year-end 2005. This change in
fair market value is a measurement of economic risk which may
differ significantly in magnitude and timing from the actual
profit or loss that would be realized under generally accepted
accounting principles.
The interest rate risk associated with the foregoing non-trading
positions, together with treasury funding activities is
expressed as sensitivity to changes in the general level of
interest rates. Treasury funding activities include
LYONs®,
TOPrSsm
and other long-term debt together with interest rate hedges. At
the end of the second quarter of 2006, the net interest rate
sensitivity of these positions is a pre-tax loss in fair market
value of $2 million for a parallel one basis point increase
in interest rates across all yield curves, unchanged from the
end of the first quarter of 2006, and compared to
$1 million at year-end 2005. This change in fair market
value is a measurement of economic risk which may differ
significantly in magnitude and timing from the actual profit or
loss that would be realized under generally accepted accounting
principles.
Other non-trading equity investments include direct private
equity interests, private equity fund investments, hedge fund
interests, and certain direct and indirect real estate
investments. These investments are broadly sensitive to general
price levels in the equity or commercial real estate markets as
well as to specific business, financial and credit factors which
influence the performance and valuation of each investment
uniquely. Refer to Note 5 of the 2005 Annual Report for
additional information on these investments.
Credit Risk
Commercial Lending
Commercial lending conducted by Merrill Lynch consists primarily
of corporate and institutional lending, asset-based finance,
commercial finance, and commercial real estate related
activities. In evaluating certain potential commercial lending
transactions, Merrill Lynch utilizes a risk adjusted return on
capital model in addition to other methodologies.
66
The following table presents a distribution of commercial loans
and closed commitments for June 30, 2006, gross of
allowances for loan losses and reserves, without considering the
impact of purchased credit protection. Closed commitments
represent the unfunded portion of existing commitments available
for draw down and do not include contingent commitments extended
but not yet closed. As of June 30, 2006, Merrill
Lynchs largest commercial lending industry concentration
was to financial institutions including banks, insurance
companies, finance companies, investment managers and other
diversified financial institutions. Commercial borrowers were
predominantly domiciled in the United States or had principal
operations tied to the United States or its economy. The
majority of all outstanding commercial loan balances had a
remaining maturity of less than three years. Additional detail
on Merrill Lynchs commercial lending related activities
can be found in Note 6 to the Condensed Consolidated
Financial Statements. The following table depicts Merrill
Lynchs commercial lending balances by credit quality,
industry and country at June 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
|
|
|
|
| |
|
|
Loans | |
|
Closed Commitments | |
|
|
| |
|
| |
By Credit Quality(1) |
|
Secured | |
|
Unsecured | |
|
Secured | |
|
Unsecured | |
| |
Investment grade
|
|
$ |
18,163 |
|
|
$ |
4,481 |
|
|
$ |
16,748 |
|
|
$ |
21,539 |
|
Non-investment grade
|
|
|
22,904 |
|
|
|
1,497 |
|
|
|
9,707 |
|
|
|
1,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
41,067 |
|
|
$ |
5,978 |
|
|
$ |
26,455 |
|
|
$ |
22,905 |
|
|
|
|
(1) |
Based on credit rating agency equivalent of internal credit
ratings. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Loans | |
|
Closed Commitments | |
|
|
| |
|
| |
By Industry |
|
Secured | |
|
Unsecured | |
|
Secured | |
|
Unsecured | |
| |
Financial Institutions
|
|
|
38 |
% |
|
|
12 |
% |
|
|
41 |
% |
|
|
30 |
% |
Consumer Goods and Services
|
|
|
27 |
|
|
|
49 |
|
|
|
27 |
|
|
|
15 |
|
Real Estate
|
|
|
13 |
|
|
|
8 |
|
|
|
5 |
|
|
|
4 |
|
Technology/ Media/ Telecommunications
|
|
|
4 |
|
|
|
11 |
|
|
|
3 |
|
|
|
18 |
|
Energy/ Utilities
|
|
|
2 |
|
|
|
7 |
|
|
|
5 |
|
|
|
17 |
|
Industrial/ Manufacturing Goods and Services
|
|
|
5 |
|
|
|
5 |
|
|
|
4 |
|
|
|
10 |
|
All Other
|
|
|
11 |
|
|
|
8 |
|
|
|
15 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Loans | |
|
Closed Commitments | |
|
|
| |
|
| |
By Country |
|
Secured | |
|
Unsecured | |
|
Secured | |
|
Unsecured | |
| |
United States
|
|
|
61 |
% |
|
|
70 |
% |
|
|
80 |
% |
|
|
76 |
% |
United Kingdom
|
|
|
14 |
|
|
|
4 |
|
|
|
10 |
|
|
|
5 |
|
Germany
|
|
|
2 |
|
|
|
- |
|
|
|
1 |
|
|
|
8 |
|
Japan
|
|
|
4 |
|
|
|
5 |
|
|
|
- |
|
|
|
- |
|
Canada
|
|
|
3 |
|
|
|
1 |
|
|
|
2 |
|
|
|
3 |
|
All Other
|
|
|
16 |
|
|
|
20 |
|
|
|
7 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
Residential Mortgage Lending
Merrill Lynch originates and purchases residential mortgage
loans, certain of which include features that may result in
additional credit risk when compared to more traditional types
of mortgages. The potential additional credit risk arising from
these mortgages is addressed through adherence to underwriting
guidelines. Credit risk is closely monitored in order to ensure
that reserves are sufficient and valuations are appropriate. For
additional information on residential mortgage lending, see the
2005 Annual Report.
67
Derivatives
Merrill Lynch enters into International Swaps and Derivatives
Association, Inc. master agreements or their equivalent
(master netting agreements) with substantially all
of its derivative counterparties as soon as possible. Agreements
are negotiated bilaterally and can require complex terms. While
every effort is taken to execute such agreements, it is possible
that a counterparty may be unwilling to sign such an agreement
and, as a result, would subject Merrill Lynch to additional
credit risk. Master netting agreements provide protection in
bankruptcy in certain circumstances and, in some cases, enable
receivables and payables with the same counterparty to be offset
for risk management purposes. However, the enforceability of
master netting agreements under bankruptcy laws in certain
countries or in certain industries is not free from doubt, and
receivables and payables with counterparties in these countries
or industries are accordingly recorded on a gross basis.
In addition, to reduce the risk of loss, Merrill Lynch requires
collateral, principally cash and U.S. Government and agency
securities, on certain derivative transactions. From an economic
standpoint, Merrill Lynch evaluates risk exposures net of
related collateral. The following is a summary of counterparty
credit ratings for the replacement cost (net of
$14.4 billion of collateral, of which $7.1 billion
represented cash collateral) of OTC trading derivatives in a
gain position by maturity at June 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Years to Maturity | |
|
Cross- | |
|
|
|
|
| |
|
Maturity | |
|
|
Credit Rating(1) |
|
0-3 | |
|
3+- 5 | |
|
5+- 7 | |
|
Over 7 | |
|
Netting(2) | |
|
Total | |
| |
AAA
|
|
$ |
1,434 |
|
|
$ |
423 |
|
|
$ |
190 |
|
|
$ |
1,290 |
|
|
$ |
(185 |
) |
|
$ |
3,152 |
|
AA
|
|
|
3,420 |
|
|
|
929 |
|
|
|
960 |
|
|
|
3,346 |
|
|
|
(2,646 |
) |
|
|
6,009 |
|
A
|
|
|
2,991 |
|
|
|
1,139 |
|
|
|
1,146 |
|
|
|
2,953 |
|
|
|
(4,797 |
) |
|
|
3,432 |
|
BBB
|
|
|
1,743 |
|
|
|
452 |
|
|
|
466 |
|
|
|
1,662 |
|
|
|
(519 |
) |
|
|
3,804 |
|
Other
|
|
|
2,120 |
|
|
|
531 |
|
|
|
268 |
|
|
|
405 |
|
|
|
(187 |
) |
|
|
3,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
11,708 |
|
|
$ |
3,474 |
|
|
$ |
3,030 |
|
|
$ |
9,656 |
|
|
$ |
(8,334 |
) |
|
$ |
19,534 |
|
|
|
|
(1) |
Represents credit rating agency equivalent of internal credit
ratings. |
(2) |
Represents netting of payable balances with receivable
balances for the same counterparty across maturity band
categories. Receivable and payable balances with the same
counterparty in the same maturity category, however, are net
within the maturity category. |
In addition to obtaining collateral, Merrill Lynch attempts to
mitigate its default risk on derivatives whenever possible by
entering into transactions with provisions that enable Merrill
Lynch to terminate or reset the terms of its derivative
contracts.
Non-Investment Grade
Holdings and Highly Leveraged Transactions
Non-investment grade holdings and highly leveraged transactions
involve risks related to the creditworthiness of the issuers or
counterparties and the liquidity of the market for such
investments. Merrill Lynch recognizes these risks and, whenever
possible, employs strategies to mitigate exposures. The specific
components and overall level of non-investment grade and highly
leveraged positions may vary significantly from period to period
as a result of inventory turnover, investment sales, and asset
redeployment.
In the normal course of business, Merrill Lynch underwrites,
trades, and holds non-investment grade cash instruments in
connection with its investment banking, market-making, and
derivative structuring
68
activities. Non-investment grade holdings are defined as debt
and preferred equity securities rated lower than BBB or
equivalent ratings by recognized credit rating agencies,
sovereign debt in emerging markets, amounts due under derivative
contracts from non-investment grade counterparties, and other
instruments that, in the opinion of management, are
non-investment grade.
In addition to the amounts included in the following table,
derivatives may also expose Merrill Lynch to credit risk related
to the underlying security where a derivative contract can
either replicate ownership of the underlying security (e.g.,
long total return swaps) or potentially force ownership of the
underlying security (e.g., short put options). Derivatives may
also subject Merrill Lynch to credit spread or issuer default
risk, in that changes in credit spreads or in the credit quality
of the underlying securities may adversely affect the
derivatives fair values. Merrill Lynch seeks to manage
these risks by engaging in various hedging strategies to reduce
its exposure associated with non-investment grade positions,
such as purchasing an option to sell the related security or
entering into other offsetting derivative contracts.
Merrill Lynch provides financing and advisory services to, and
invests in, companies entering into leveraged transactions,
which may include leveraged buyouts, recapitalizations, and
mergers and acquisitions. On a selected basis, Merrill Lynch
provides extensions of credit to leveraged companies, in the
form of senior and subordinated debt, as well as bridge
financing. In addition, Merrill Lynch syndicates loans for
non-investment grade companies or in connection with highly
leveraged transactions and may retain a portion of these loans.
Merrill Lynch holds direct equity investments in leveraged
companies and interests in partnerships that invest in leveraged
transactions. Merrill Lynch has also committed to participate in
limited partnerships that invest in leveraged transactions.
Future commitments to participate in limited partnerships and
other direct equity investments will continue to be made on a
selective basis.
Trading Exposures
The following table summarizes Merrill Lynchs trading
exposure to non-investment grade or highly leveraged issuers or
counterparties:
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
| |
|
|
June 30, | |
|
Dec. 30, | |
|
|
2006 | |
|
2005 | |
| |
Trading assets:
|
|
|
|
|
|
|
|
|
|
Cash instruments
|
|
$ |
20,397 |
|
|
$ |
15,578 |
|
|
Derivatives
|
|
|
5,838 |
|
|
|
6,750 |
|
Trading liabilities cash instruments
|
|
|
(3,304 |
) |
|
|
(3,400 |
) |
Collateral on derivative assets
|
|
|
(2,701 |
) |
|
|
(3,123 |
) |
|
|
|
|
|
|
|
Net trading asset exposure
|
|
$ |
20,230 |
|
|
$ |
15,805 |
|
|
Included in the preceding table are debt and equity securities
and bank loans of companies in various stages of bankruptcy
proceedings or in default. At June 30, 2006, the carrying
value of such debt and equity securities totaled
$694 million, of which 48% resulted from Merrill
Lynchs market-making activities in such securities. This
compared with $900 million at December 30, 2005, of
which 61% related to market-making activities. Also included are
distressed bank loans totaling $297 million and
$290 million at June 30, 2006 and December 30,
2005, respectively.
69
Non-Trading Exposures
The following table summarizes Merrill Lynchs non-trading
exposures to non-investment grade or highly leveraged corporate
issuers or counterparties:
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
| |
|
|
June 30, | |
|
Dec. 30, | |
|
|
2006 | |
|
2005 | |
| |
Investment securities
|
|
$ |
500 |
|
|
$ |
554 |
|
Other
investments(1):
|
|
|
|
|
|
|
|
|
|
Partnership interests
|
|
|
3,245 |
|
|
|
2,371 |
|
|
Other equity
investments(2)
|
|
|
2,646 |
|
|
|
2,086 |
|
Other assets
|
|
|
- |
|
|
|
76 |
|
|
|
|
(1) |
Includes a total of $665 million and $556 million
in investments held by employee partnerships at June 30,
2006 and December 30, 2005, respectively, for which a
portion of the market risk of the investments rests with the
participating employees. |
(2) |
Includes investments in 169 and 167 enterprises at
June 30, 2006 and December 30, 2005, respectively. |
In addition, Merrill Lynch had commitments to non-investment
grade or highly leveraged corporate issuers or counterparties of
$1.7 billion and $1.2 billion at June 30, 2006
and December 30, 2005, respectively, which primarily relate
to commitments to invest in partnerships.
Recent
Developments
New Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an Interpretation
of FASB Statement No. 109 (FIN 48).
FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in a companys financial statements and
prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The
Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 will be
effective for Merrill Lynch beginning in the first quarter
of 2007. Merrill Lynch is currently evaluating the impact of
adopting the Interpretation.
In April 2006, the FASB issued a FASB Staff Position
FIN 46(R)-6, Determining the Variability to be
Considered in Applying FIN 46R ( the FSP).
The FSP requires that the variability to be included when
applying FIN 46R be based on a by-design
approach and consider what risks the variable interest entity
was designed to create. The FSP is effective beginning in the
third quarter of 2006 for all new entities with which Merrill
Lynch becomes involved, and to all entities previously required
to be analyzed under FIN 46R when a reconsideration event
occurs as defined under paragraph 7 of the Interpretation.
Merrill Lynch does not expect the adoption of the FSP to have a
material impact on the Condensed Consolidated Financial
Statements.
In March 2006, the FASB issued Statement No. 156,
Accounting for Servicing of Financial Assets
(SFAS No. 156). SFAS No. 156
amends Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities, to require all separately recognized servicing
assets and servicing liabilities to be initially measured at
fair value, if practicable. SFAS No. 156 also permits
servicers to subsequently measure each separate class of
servicing assets
70
and liabilities at fair value rather than at the lower of cost
or market. For those companies that elect to measure their
servicing assets and liabilities at fair value,
SFAS No. 156 requires the difference between the
carrying value and fair value at the date of adoption to be
recognized as a cumulative-effect adjustment to retained
earnings as of the beginning of the fiscal year in which the
election is made. Merrill Lynch will adopt
SFAS No. 156 beginning in the first quarter of 2007.
Merrill Lynch is currently assessing the impact of adopting
SFAS No. 156 but does not expect the standard to have
a material impact on the Condensed Consolidated Financial
Statements.
In February 2006, the FASB issued Statement No. 155,
Accounting for Certain Hybrid Financial Instruments an
amendment of FASB Statements No. 133 and
140(SFAS No. 155).
SFAS No. 155 clarifies the bifurcation requirements
for certain financial instruments and permits interests in
hybrid financial instruments that contain an embedded derivative
that would otherwise require bifurcation to be accounted for as
a single financial instrument at fair value with changes in fair
value recognized in earnings. This election is permitted on an
instrument-by-instrument basis for all hybrid financial
instruments held, obtained, or issued as of the adoption date.
Merrill Lynch will adopt SFAS No. 155 beginning in the
first quarter of 2007. At adoption, any difference between the
total carrying amount of the individual components of the
existing bifurcated hybrid financial instruments and the fair
value of the combined hybrid financial instruments will be
recognized as a cumulative-effect adjustment to beginning
retained earnings. Merrill Lynch is currently assessing the
impact of adopting SFAS No. 155.
During the first quarter of 2006, Merrill Lynch adopted the
provisions of Statement No. 123 (revised 2004),
Share-Based Payment, a revision of
SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123R). Under
SFAS No. 123R, compensation expenses for share-based
awards that do not require future service are recorded
immediately, and share-based awards that require future service
continue to be amortized into expense over the relevant service
period. Merrill Lynch adopted SFAS No. 123R under the
modified prospective method whereby the provisions of
SFAS No. 123R are generally applied only to
share-based awards granted or modified subsequent to adoption.
Thus, for Merrill Lynch, SFAS No. 123R required
the immediate expensing of share-based awards granted or
modified in 2006 to retirement-eligible employees, including
awards that are subject to non-compete provisions.
Prior to the adoption of SFAS No. 123R, Merrill Lynch
had recognized expense for share-based compensation over the
vesting period stipulated in the grant for all employees. This
included those who had satisfied retirement eligibility criteria
but were subject to a non-compete agreement that applied from
the date of retirement through each applicable vesting period.
Previously, Merrill Lynch had accelerated any unrecognized
compensation cost for such awards if a retirement-eligible
employee left Merrill Lynch. However, because
SFAS No. 123R applies only to awards granted or
modified in 2006, expenses for share-based awards granted prior
to 2006 to employees who were retirement-eligible with respect
to those awards must continue to be amortized over the stated
vesting period.
In addition, beginning with performance year 2006, for which
Merrill Lynch expects to grant stock awards in early 2007,
Merrill Lynch will accrue the expense for future awards granted
to retirement-eligible employees over the award performance year
instead of recognizing the entire expense related to the award
on the grant date. Compensation expense for all future stock
awards granted to employees not eligible for retirement with
respect to those awards will be recognized over the applicable
vesting period.
SFAS No. 123R also requires expected forfeitures of
share-based compensation awards for non-retirement-eligible
employees to be included in determining compensation expense.
Prior to the adoption of SFAS No. 123R, any benefits
of employee forfeitures of such awards were recorded as a
reduction of compensation expense when the employee left Merrill
Lynch and forfeited the award. In
71
the first quarter of 2006, Merrill Lynch recorded a benefit
based on expected forfeitures which was not material to the
results of operations for the quarter.
The adoption of SFAS No. 123R resulted in a first
quarter charge to compensation expense of approximately
$550 million on a pre-tax basis and $370 million on an
after-tax basis.
The adoption of SFAS No. 123R, combined with other
business and competitive considerations, prompted Merrill Lynch
to undertake a comprehensive review of the companys
stock-based incentive compensation awards, including vesting
schedules and retirement eligibility requirements, examining
their impact to both Merrill Lynch and its employees. Upon the
completion of this review, the Management Development and
Compensation Committee of Merrill Lynchs Board of
Directors determined that to fulfill the objective of retaining
high quality personnel, future stock grants should contain more
stringent retirement provisions. These provisions include a
combination of increased age and length of service requirements.
While the stock awards of employees who retire continue to vest,
retired employees are subject to continued compliance with the
strict non-compete provisions of those awards. To facilitate
transition to the more stringent future requirements, the terms
of most outstanding stock awards previously granted to
employees, including certain executive officers, were modified,
effective March 31, 2006, to permit employees to be
immediately eligible for retirement with respect to those
earlier awards. While Merrill Lynch modified the
retirement-related provisions of the previous stock awards, the
vesting and non-compete provisions for those awards remain in
force.
Since the provisions of SFAS No. 123R apply to awards
modified in 2006, these modifications required Merrill Lynch to
record additional one-time compensation expense in the first
quarter of 2006 for the remaining unamortized amount of all
awards to employees who had not previously been
retirement-eligible under the original provisions of those
awards.
The one-time, non-cash charge associated with the adoption of
SFAS No. 123R, and the policy modifications to
previous awards resulted in a net charge to compensation expense
in the first quarter of 2006 of approximately $1.8 billion
pre-tax, and $1.2 billion after-tax, or a net impact of
$1.34 and $1.21 on basic and diluted earnings per share,
respectively. Policy modifications to previously granted awards
amounted to $1.2 billion of the pre-tax charge and impacted
approximately 6,300 employees.
Prior to the adoption of SFAS No. 123R, Merrill Lynch
presented the cash flows related to income tax deductions in
excess of the compensation expense recognized on share-based
compensation as operating cash flows in the Condensed
Consolidated Statements of Cash Flows. SFAS No. 123R
requires cash flows resulting from tax deductions in excess of
the grant-date fair value of share-based awards to be included
in cash flows from financing activities. The excess tax benefits
of $283 million related to total share-based compensation
included in cash flows from financing activities in the first
quarter of 2006 would have been included in cash flows from
operating activities if Merrill Lynch had not adopted
SFAS No. 123R.
As a result of adopting SFAS No. 123R, approximately
$600 million of liabilities associated with the Financial
Advisor Capital Accumulation Award Plan (FACAAP)
were reclassified to stockholders equity. In addition, as
a result of adopting SFAS No. 123R, the unamortized
portion of employee stock grants, which was previously reported
as a separate component of stockholders equity on the
Condensed Consolidated Balance Sheets, has been reclassified to
Paid-in Capital. Refer to Note 12 to the Condensed
Consolidated Financial Statements for additional information.
72
In June 2005, the FASB ratified the consensus reached by the
Emerging Issues Task Force on
Issue 04-5,
Determining Whether a General Partner, or the General
Partners as a Group, Controls a Limited Partnership or Similar
Entity When the Limited Partners Have Certain Rights
(EITF 04-5).
EITF 04-5 presumes
that a general partner controls a limited partnership, and
should therefore consolidate a limited partnership, unless the
limited partners have the substantive ability to remove the
general partner without cause based on a simple majority vote or
can otherwise dissolve the limited partnership, or unless the
limited partners have substantive participating rights over
decision making. The guidance in
EITF 04-5 was
effective beginning in the third quarter of 2005 for all new
limited partnership agreements and any limited partnership
agreements that were modified. For those partnership agreements
that existed at the date
EITF 04-5 was
issued, the guidance became effective in the first quarter of
2006. The adoption of this guidance did not have a material
impact on the Condensed Consolidated Financial Statements.
73
Statistical
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2nd Qtr. | |
|
3rd Qtr. | |
|
4th Qtr. | |
|
1st Qtr. | |
|
2nd Qtr. | |
|
|
2005 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
2006 | |
| |
Client Assets (dollars in billions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Client:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$ |
1,234 |
|
|
$ |
1,271 |
|
|
$ |
1,341 |
|
|
$ |
1,381 |
|
|
$ |
1,370 |
|
|
|
Non-U.S.
|
|
|
115 |
|
|
|
113 |
|
|
|
117 |
|
|
|
121 |
|
|
|
124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Client Assets
|
|
|
1,349 |
|
|
|
1,384 |
|
|
|
1,458 |
|
|
|
1,502 |
|
|
|
1,494 |
|
MLIM direct
sales(1)
|
|
|
236 |
|
|
|
272 |
|
|
|
291 |
|
|
|
316 |
|
|
|
326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Client Assets
|
|
$ |
1,585 |
|
|
$ |
1,656 |
|
|
$ |
1,749 |
|
|
$ |
1,818 |
|
|
$ |
1,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Under
Management(2)
|
|
$ |
478 |
|
|
$ |
524 |
|
|
$ |
544 |
|
|
$ |
581 |
|
|
$ |
589 |
|
Retail
|
|
|
218 |
|
|
|
231 |
|
|
|
245 |
|
|
|
272 |
|
|
|
275 |
|
Institutional
|
|
|
215 |
|
|
|
246 |
|
|
|
250 |
|
|
|
259 |
|
|
|
266 |
|
Retail Separate Accounts
|
|
|
45 |
|
|
|
47 |
|
|
|
49 |
|
|
|
50 |
|
|
|
48 |
|
U.S.
|
|
|
311 |
|
|
|
322 |
|
|
|
333 |
|
|
|
347 |
|
|
|
346 |
|
Non-U.S.
|
|
|
167 |
|
|
|
202 |
|
|
|
211 |
|
|
|
234 |
|
|
|
243 |
|
Equity
|
|
|
249 |
|
|
|
285 |
|
|
|
299 |
|
|
|
330 |
|
|
|
333 |
|
Retail Money Market
|
|
|
46 |
|
|
|
45 |
|
|
|
45 |
|
|
|
48 |
|
|
|
46 |
|
Institutional Liquidity Funds
|
|
|
68 |
|
|
|
74 |
|
|
|
77 |
|
|
|
78 |
|
|
|
83 |
|
Fixed Income
|
|
|
115 |
|
|
|
120 |
|
|
|
123 |
|
|
|
125 |
|
|
|
127 |
|
|
Net New Money (dollars in billions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Private Client
Accounts(3)
|
|
$ |
7 |
|
|
$ |
11 |
|
|
$ |
17 |
|
|
$ |
18 |
|
|
$ |
7 |
|
Annuitized-Revenue
Products(3)(4)
|
|
$ |
8 |
|
|
$ |
10 |
|
|
$ |
10 |
|
|
$ |
13 |
|
|
$ |
10 |
|
Assets Under Management
|
|
$ |
(2 |
) |
|
$ |
12 |
|
|
$ |
11 |
|
|
$ |
15 |
|
|
$ |
8 |
|
|
Full-Time
Employees:(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
40,900 |
|
|
|
41,900 |
|
|
|
43,200 |
|
|
|
43,400 |
|
|
|
43,600 |
|
|
|
Non-U.S.
|
|
|
10,900 |
|
|
|
11,200 |
|
|
|
11,400 |
|
|
|
12,100 |
|
|
|
12,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
51,800 |
|
|
|
53,100 |
|
|
|
54,600 |
|
|
|
55,500 |
|
|
|
56,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Client Financial
Advisors:(6)
|
|
|
14,420 |
|
|
|
14,690 |
|
|
|
15,160 |
|
|
|
15,350 |
|
|
|
15,520 |
|
|
Balance Sheet (dollars in millions, except per share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
626,140 |
|
|
$ |
670,593 |
|
|
$ |
681,015 |
|
|
$ |
732,240 |
|
|
$ |
799,188 |
|
Total stockholders equity
|
|
$ |
33,041 |
|
|
$ |
33,630 |
|
|
$ |
35,600 |
|
|
$ |
37,825 |
|
|
$ |
36,541 |
|
Book value per common share
|
|
$ |
33.63 |
|
|
$ |
34.66 |
|
|
$ |
35.82 |
|
|
$ |
37.19 |
|
|
$ |
37.18 |
|
Share Information (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
897,524 |
|
|
|
881,409 |
|
|
|
876,230 |
|
|
|
883,737 |
|
|
|
885,373 |
|
|
Diluted
|
|
|
978,504 |
|
|
|
968,493 |
|
|
|
970,673 |
|
|
|
981,085 |
|
|
|
973,324 |
|
Common shares outstanding at period end
|
|
|
930,867 |
|
|
|
921,699 |
|
|
|
919,201 |
|
|
|
933,443 |
|
|
|
898,124 |
|
|
|
|
Note: |
Certain prior period amounts have been reclassified to
conform to the current period presentation. |
(1) Reflects funds managed by MLIM not sold through
Private Client channels.
|
|
(2) |
Includes $5 billion of accounts managed by GPC at the
end of 2Q05, 3Q05, 4Q05 and 1Q06, and $6 billion at the end
of 2Q06. |
(3) |
GPC net new money excludes flows associated with the
Institutional Advisory Division which serves certain small- and
middle-market companies, as well as net outflows in the Amvescap
retirement business and the Advest acquisition prior to its
system conversion in early March. |
(4) |
Includes both net new client assets into annuitized-revenue
products, as well as existing client assets transferred into
annuitized-revenue products. |
(5) |
Excludes 100 full-time employees on salary continuation
severance at the end of 2Q05, 3Q05, and 200 at the end of 4Q05,
1Q06; and 300 at the end of 2Q06. |
(6) |
Includes 140 Financial Advisors associated with the
Mitsubishi UFJ joint venture at the end of 2Q06. |
74
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
The information under the caption Item 2.
Managements Discussion and Analysis of Financial
Condition and Results of Operations Risk
Management above in this Report is incorporated herein by
reference.
Item 4. Controls and Procedures
ML & Co.s Disclosure Committee assists with the
monitoring and evaluation of our disclosure controls and
procedures. ML & Co.s Chief Executive Officer,
Chief Financial Officer and Disclosure Committee have evaluated
the effectiveness of ML & Co.s disclosure
controls and procedures (as defined in
Rule 13a-15(e)
under the Securities Exchange Act of 1934) as of the end of the
period covered by this Report. Based on that evaluation,
ML & Co.s Chief Executive Officer and Chief
Financial Officer have concluded that ML & Co.s
disclosure controls and procedures are effective.
In addition, no change in ML & Co.s internal
control over financial reporting (as defined in
Rule 13a-15(f)
under the Securities Exchange Act of 1934) occurred during the
second fiscal quarter of 2006 that has materially affected, or
is reasonably likely to materially affect, ML &
Co.s internal control over financial reporting.
75
PART II OTHER INFORMATION
|
|
Item 1. |
Legal Proceedings |
The following information supplements the discussions in
Part I, Item 3 Legal Proceedings in
ML & Co.s Annual Report on
Form 10-K for the
fiscal year ended December 30, 2005 and ML &
Cos Quarterly Report on
Form 10-Q for the
quarter ended March 31, 2006:
Enron Litigation
United States v. Brown, et al.: On August 1, 2006,
the United States Court of Appeals for the Fifth Circuit vacated
the conviction of four former Merrill Lynch employees for
conspiracy and wire fraud related to Enrons alleged
misrepresentations of its financial condition. The court
affirmed the conviction of one of those former employees for
perjury and obstruction of a Grand Jury investigation.
Newby v. Enron Corp. et al.: On July 5, 2006, the
district court issued an order certifying the case as a class
action. On July 19, 2006, Merrill Lynch and other
defendants appealed that order to the United States Court of
Appeals for the Fifth Circuit. Merrill Lynchs appeal,
which plaintiff opposes, challenges the district courts
rulings on 1) the standards for determining whether conduct
amounts to a primary violation of the federal securities laws
(which is actionable) or aiding and abetting (which is not
actionable), 2) defendants potential liability for
the conduct of others who allegedly caused losses to
Enrons investors, and 3) whether the so-called
fraud-on-the-market
theory, which is important to class certification, applies to
the allegations against Merrill Lynch. On July 31, 2006,
the district court denied plaintiffs August 3, 2005
motion for partial summary judgment against Merrill Lynch. On
August 2, 2006, plaintiff and certain defendants, including
Merrill Lynch, requested that the start of the trial be
postponed from October 16, 2006 to April 9, 2007.
Research
In re Merrill Lynch & Co., Inc. Shareholders
Litigation: In July 2006, this matter was settled for an
amount that did not have a material impact on ML &
Co.s financial condition or results of operations. The
settlement is subject to documentation and court approval.
IPO Allocation Litigation
In re Initial Public Offering Antitrust Litigation: On
June 19, 2006, the Supreme Court requested the government
to submit its views on whether the defendants petition for
certiorari should be granted. The petition seeks review of an
appellate court decision reversing the district courts
dismissal of the action. The government has not yet submitted
its views to the Supreme Court, and the Supreme Court has not
yet decided whether to grant the petition for certiorari.
IPO Underwriting Fee Litigation
In re Public Offering Fee Antitrust Litigation and In re
Issuer Plaintiff Initial Public Offering Fee Antitrust
Litigation: On May 1, 2006, plaintiff filed an appeal
of the district courts decision declining to certify a
class with the United States Court of Appeals for the Second
Circuit. On August 1, 2006, the court of appeals agreed to
hear the appeal.
76
Short Sales
Electronic Trading Group, LLC v. Banc of America
Securities LLC, et al: Plaintiffs have advised the
defendants that they intend to file an amended complaint on or
before September 5, 2006. The defendants, including Merrill
Lynch, will then have until November 8, 2006, to move to
dismiss the amended complaint.
Avenius v. Banc of America Securities LLC,
et al: On June 22, 2006, 37 purchasers of
securities of Nova Star Financial filed an action against eleven
financial services firms, including Merrill Lynch, in the
California Superior Court in San Francisco. The case
alleges that the defendants improperly depressed the price of
Nova Star Financial shares by facilitating short sales that did
not comply with regulatory requirements. The case was removed to
federal court on July 21. Merrill Lynch intends to vigorously
defend itself against these charges.
SwissAir
On July 24, 2006, Merrill Lynch Capital Markets Bank AG
(MLCMB AG) filed its defense to the claims of the
Liquidator of SAirGroup (SwissAir) in the commercial
court of Zurich. The first hearing that considers the merits of
the claims is likely to take place in late 2006 or early 2007.
Other
Merrill Lynch has been named as a defendant in various other
legal actions, including arbitrations, class actions, and other
litigation arising in connection with its activities as a global
diversified financial services institution. The general decline
of equity securities prices between 2000 and 2003 resulted in
increased legal actions against many firms, including Merrill
Lynch.
Some of the legal actions include claims for substantial
compensatory and/or pun