Table of Contents

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 March 31, 2006

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number:

1-6523

 


Exact name of registrant as specified in its charter:

Bank of America Corporation

 


State of incorporation:

Delaware

IRS Employer Identification Number:

56-0906609

Address of principal executive offices:

Bank of America Corporate Center

100 N. Tryon Street

Charlotte, North Carolina 28255

Registrant’s telephone number, including area code:

(704) 386-5681

 


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.

Large accelerated filer    x                Accelerated filer    ¨                Non-accelerated filer    ¨

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

On April 30, 2006, there were 4,563,502,347 shares of Bank of America Corporation Common Stock outstanding.

 


 


Table of Contents

Bank of America Corporation

March 31, 2006 Form 10-Q

INDEX

 

               Page
Part I.    Item 1.    Financial Statements:   
Financial Information      

Consolidated Statement of Income for the Three Months Ended March 31, 2006 and 2005

   2
     

Consolidated Balance Sheet at March 31, 2006 and December 31, 2005

   3
     

Consolidated Statement of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2006 and 2005

   4
     

Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2006 and 2005

   5
     

Notes to Consolidated Financial Statements

   6
   Item 2.    Management’s Discussion and Analysis of Results of Operations and Financial Condition    30
   Item 3.    Quantitative and Qualitative Disclosures about Market Risk    88
   Item 4.    Controls and Procedures    88
Part II.         
Other Information    Item 1.    Legal Proceedings    88
   Item 2.    Unregistered Sales of Equity Securities and the Use of Proceeds    88
   Item 6.    Exhibits    89
   Signature    90
   Index to Exhibits    91

 

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Bank of America Corporation and Subsidiaries

Consolidated Statement of Income

 

     Three Months Ended
March 31

(Dollars in millions, except per share information)

   2006    2005

Interest income

     

Interest and fees on loans and leases

   $ 11,127    $ 8,080

Interest and dividends on securities

     3,014      2,533

Federal funds sold and securities purchased under agreements to resell

     1,709      904

Trading account assets

     1,548      1,182

Other interest income

     727      437
             

Total interest income

     18,125      13,136
             

Interest expense

     

Deposits

     3,007      2,182

Short-term borrowings

     4,309      1,988

Trading account liabilities

     517      427

Long-term debt

     1,516      1,033
             

Total interest expense

     9,349      5,630
             

Net interest income

     8,776      7,506

Noninterest income

     

Service charges

     1,901      1,777

Investment and brokerage services

     1,103      1,013

Mortgage banking income

     137      221

Investment banking income

     501      366

Equity investment gains

     660      399

Card income

     3,436      1,289

Trading account profits

     1,074      685

Other income

     89      282
             

Total noninterest income

     8,901      6,032
             

Total revenue

     17,677      13,538

Provision for credit losses

     1,270      580

Gains on sales of debt securities

     14      659

Noninterest expense

     

Personnel

     4,813      3,701

Occupancy

     701      636

Equipment

     344      297

Marketing

     575      337

Professional fees

     218      177

Amortization of intangibles

     440      208

Data processing

     410      364

Telecommunications

     220      206

Other general operating

     1,105      1,019

Merger and restructuring charges

     98      112
             

Total noninterest expense

     8,924      7,057
             

Income before income taxes

     7,497      6,560

Income tax expense

     2,511      2,167
             

Net income

   $ 4,986    $ 4,393
             

Net income available to common shareholders

   $ 4,981    $ 4,388
             

Per common share information

     

Earnings

   $ 1.08    $ 1.09
             

Diluted earnings

   $ 1.07    $ 1.07
             

Dividends paid

   $ 0.50    $ 0.45
             

Average common shares issued and outstanding (in thousands)

     4,609,481      4,032,550
             

Average diluted common shares issued and outstanding (in thousands)

     4,666,405      4,099,062
             

See accompanying Notes to Consolidated Financial Statements.

 

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Bank of America Corporation and Subsidiaries

Consolidated Balance Sheet

 

(Dollars in millions)

   March 31
2006
    December 31
2005
 

Assets

    

Cash and cash equivalents

   $ 32,575     $ 36,999  

Time deposits placed and other short-term investments

     11,157       12,800  

Federal funds sold and securities purchased under agreements to resell (includes $137,066 and $148,299 pledged as collateral)

     137,081       149,785  

Trading account assets (includes $85,925 and $68,223 pledged as collateral)

     117,181       131,707  

Derivative assets

     23,291       23,712  

Securities:

    

Available-for-sale (includes $90,403 and $116,659 pledged as collateral)

     237,987       221,556  

Held-to-maturity, at cost (market value - $86 and $47)

     86       47  
                

Total securities

     238,073       221,603  
                

Loans and leases

     619,525       573,791  

Allowance for loan and lease losses

     (9,067 )     (8,045 )
                

Loans and leases, net of allowance

     610,458       565,746  
                

Premises and equipment, net

     9,267       7,786  

Mortgage servicing rights (includes $2,925 measured at fair value at March 31, 2006)

     3,070       2,806  

Goodwill

     66,271       45,354  

Core deposit intangibles and other intangibles

     10,681       3,194  

Other assets

     115,975       90,311  
                

Total assets

   $ 1,375,080     $ 1,291,803  
                

Liabilities

    

Deposits in domestic offices:

    

Noninterest-bearing

   $ 179,358     $ 179,571  

Interest-bearing

     415,769       384,155  

Deposits in foreign offices:

    

Noninterest-bearing

     6,874       7,165  

Interest-bearing

     80,448       63,779  
                

Total deposits

     682,449       634,670  
                

Federal funds purchased and securities sold under agreements to repurchase

     236,919       240,655  

Trading account liabilities

     51,100       50,890  

Derivative liabilities

     15,541       15,000  

Commercial paper and other short-term borrowings

     99,389       116,269  

Accrued expenses and other liabilities (includes $395 and $395 of reserve for unfunded lending commitments)

     37,078       31,938  

Long-term debt

     123,178       100,848  
                

Total liabilities

     1,245,654       1,190,270  
                

Commitments and contingencies (Notes 8 and 10)

    

Shareholders’ equity

    

Preferred stock, $0.01 par value; authorized - 100,000,000 shares; issued and outstanding - 1,090,189 shares

     271       271  

Common stock and additional paid-in capital, $0.01 par value; authorized - 7,500,000,000 shares; issued and outstanding - 4,581,317,964 and 3,999,688,491 shares

     68,705       41,693  

Retained earnings

     70,204       67,552  

Accumulated other comprehensive income (loss)

     (8,981 )     (7,556 )

Other

     (773 )     (427 )
                

Total shareholders’ equity

     129,426       101,533  
                

Total liabilities and shareholders’ equity

   $ 1,375,080     $ 1,291,803  
                

See accompanying Notes to Consolidated Financial Statements.

 

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Bank of America Corporation and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity

 

                            

Accumulated

Other

Comprehensive

Income (Loss) (1)

   

Other

   

Total

Shareholders’

Equity

   

Comprehensive

Income

 
    

Preferred

Stock

  

Common Stock and
Additional

Paid-in Capital

   

Retained

Earnings

         
                 

(Dollars in millions, shares in thousands)

      Shares     Amount            

Balance, December 31, 2004

   $ 271    4,046,546     $ 44,236     $ 58,773     $ (2,764 )   $ (281 )   $ 100,235    

Net income

            4,393           4,393     $ 4,393  

Net unrealized losses on available-for-sale debt and marketable equity securities

              (1,541 )       (1,541 )     (1,541 )

Net unrealized losses on foreign currency translation adjustments

              (5 )       (5 )     (5 )

Net losses on derivatives

              (1,306 )       (1,306 )     (1,306 )

Cash dividends paid:

                 

Common

            (1,830 )         (1,830 )  

Preferred

            (5 )         (5 )  

Common stock issued under employee plans and related tax benefits

      31,987       1,343           (344 )     999    

Common stock repurchased

      (43,214 )     (1,990 )           (1,990 )  

Other

            (22 )     (1 )       (23 )     (1 )
                                                             

Balance, March 31, 2005

   $ 271    4,035,319     $ 43,589     $ 61,309     $ (5,617 )   $ (625 )   $ 98,927     $ 1,540  
                                                             

Balance, December 31, 2005

   $ 271    3,999,688     $ 41,693     $ 67,552     $ (7,556 )   $ (427 )   $ 101,533    

Net income

            4,986           4,986     $ 4,986  

Net unrealized losses on available-for-sale debt and marketable equity securities

              (2,019 )       (2,019 )     (2,019 )

Net unrealized gains on foreign currency translation adjustments

              42         42       42  

Net gains on derivatives

              552         552       552  

Cash dividends paid:

                 

Common

            (2,329 )         (2,329 )  

Preferred

            (5 )         (5 )  

Common stock issued under employee plans and related tax benefits

      38,935       1,704           (346 )     1,358    

Stock issued in acquisition (2)

      631,145       29,377             29,377    

Common stock repurchased

      (88,450 )     (4,069 )           (4,069 )  
                                                             

Balance, March 31, 2006

   $ 271    4,581,318     $ 68,705     $ 70,204     $ (8,981 )   $ (773 )   $ 129,426     $ 3,561  
                                                             

(1) At March 31, 2006 and December 31, 2005, Accumulated Other Comprehensive Income (Loss) includes Net Unrealized Gains (Losses) on Available-for-sale (AFS) Debt and Marketable Equity Securities of $(4,997) million and $(2,978) million; Net Unrealized Gains (Losses) on Foreign Currency Translation Adjustments of $(80) million and $(122) million; Net Gains (Losses) on Derivatives of $(3,786) million and $(4,338) million; and Other of $(118) million and $(118) million. Amounts shown are net of tax. For additional information on Accumulated OCI, see Note 11 of the Consolidated Financial Statements.
(2) Includes adjustment for the fair value of outstanding MBNA Corporation (MBNA) stock options of $435 million.

See accompanying Notes to Consolidated Financial Statements

 

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Bank of America Corporation and Subsidiaries

Consolidated Statement of Cash Flows

 

     Three Months Ended
March 31
 

(Dollars in millions)

   2006     2005  

Operating activities

    

Net income

   $ 4,986     $ 4,393  

Reconciliation of net income to net cash provided by (used in) operating activities:

    

Provision for credit losses

     1,270       580  

Gains on sales of debt securities

     (14 )     (659 )

Depreciation and premises improvements amortization

     278       240  

Amortization of intangibles

     440       208  

Deferred income tax expense (benefit)

     326       (267 )

Net (increase) decrease in trading and derivative instruments

     18,388       (12,697 )

Net (increase) decrease in other assets

     (15,790 )     4,283  

Net increase (decrease) in accrued expenses and other liabilities

     487       (4,489 )

Stock-based compensation expense

     479       193  

Other operating activities, net

     (2,352 )     (3,669 )
                

Net cash provided by (used in) operating activities

     8,498       (11,884 )
                

Investing activities

    

Net decrease in time deposits placed and other short-term investments

     2,671       1,138  

Net (increase) decrease in federal funds sold and securities purchased under agreements to resell

     12,704       (48,036 )

Proceeds from sales of available-for-sale securities

     7,032       38,451  

Proceeds from maturities of available-for-sale securities

     5,357       10,181  

Purchases of available-for-sale securities

     (26,548 )     (74,552 )

Proceeds from maturities of held-to-maturity securities

     —         55  

Proceeds from sales of loans and leases

     6,819       1,113  

Other changes in loans and leases, net

     (16,442 )     (9,574 )

Additions to mortgage servicing rights, net

     (149 )     (168 )

Net (purchases) dispositions of premises and equipment

     140       (254 )

Proceeds from sales of foreclosed properties

     32       26  

Net cash paid for business acquisitions

     (3,519 )     —    

Other investing activities, net

     (231 )     (72 )
                

Net cash used in investing activities

     (12,134 )     (81,692 )
                

Financing activities

    

Net increase in deposits

     19,021       11,417  

Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase

     (4,521 )     67,911  

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

     (18,828 )     14,842  

Proceeds from issuance of long-term debt

     10,197       4,768  

Retirement of long-term debt

     (1,330 )     (2,702 )

Proceeds from issuance of common stock

     948       987  

Common stock repurchased

     (4,069 )     (1,990 )

Cash dividends paid

     (2,334 )     (1,835 )

Excess tax benefits of share-based payments

     75       —    

Other financing activities, net

     50       (37 )
                

Net cash provided by (used in) financing activities

     (791 )     93,361  
                

Effect of exchange rate changes on cash and cash equivalents

     3       (23 )
                

Net decrease in cash and cash equivalents

     (4,424 )     (238 )

Cash and cash equivalents at January 1

     36,999       28,936  
                

Cash and cash equivalents at March 31

   $ 32,575     $ 28,698  
                

There were no net transfers of Loans and Leases from the loan portfolio to loans held-for-sale (included in Other Assets) during the three months ended March 31, 2006. There were $114 million related transfers during the three months ended March 31, 2005.

The fair values of noncash assets acquired and liabilities assumed in the merger with MBNA were $83.6 billion and $50.7 billion.

Approximately 631 million shares of common stock, valued at approximately $28.9 billion were issued in connection with the merger with MBNA.

See accompanying Notes to Consolidated Financial Statements.

 

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Bank of America Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Bank of America Corporation and its subsidiaries (the Corporation) through its banking and nonbanking subsidiaries, provide a diverse range of financial services and products throughout the U.S. and in selected international markets. At March 31, 2006, the Corporation operated its banking activities primarily under three charters: Bank of America, National Association (Bank of America, N.A.), Bank of America, N.A. (USA), and MBNA America Bank, N.A.

On January 1, 2006, the Corporation acquired 100 percent of the outstanding stock of MBNA Corporation (MBNA) (the MBNA Merger). The MBNA Merger was accounted for under the purchase method of accounting. Consequently, MBNA’s results of operations were included in the Corporation’s results beginning as of January 1, 2006.

Note 1 - Summary of Significant Accounting Principles

Principles of Consolidation and Basis of Presentation

The Consolidated Financial Statements include the accounts of the Corporation and its majority-owned subsidiaries, and those variable interest entities (VIEs) where the Corporation is the primary beneficiary. All significant intercompany accounts and transactions have been eliminated.

The information contained in the Consolidated Financial Statements is unaudited. In the opinion of management, normal recurring adjustments necessary for a fair statement of the interim period results have been made. Results of operations of companies purchased are included from the dates of acquisition.

As indicated in the Corporation’s 2005 Annual Report on Form 10-K, certain historical financial statements and other selected financial data were restated to comply with the accounting treatment for certain derivative transactions under the Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities, as amended” (SFAS 133). For additional information on this restatement, see Note 1 of the Consolidated Financial Statements of the Corporation’s 2005 Annual Report on Form 10-K.

As part of its credit portfolio management, the Corporation purchases credit protection through credit derivatives. Effective January 1, 2006, the Corporation classifies the impact of these credit derivatives that economically hedge the portfolio in Other Income. Prior to January 1, 2006, the impact was classified in Trading Account Profits. Prior period amounts have been reclassified to conform to current period presentation.

Recently Issued or Proposed Accounting Pronouncements

On March 31, 2006, the Financial Accounting Standards Board (FASB) issued an exposure draft, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R).” The exposure draft requires the recognition of a plan’s over-funded or under-funded status as an asset or liability and an adjustment to accumulated other comprehensive income. Additionally, the exposure draft requires determination of the fair values of a plan’s assets at a company’s year-end and recognition of actuarial gains and losses, and prior service costs and credits, as a component of other comprehensive income. The exposure draft is expected to be effective December 31, 2006. If the provisions in this exposure draft had been applied as of December 31, 2005, Shareholders’ Equity would have been reduced by approximately $2.9 billion before tax and approximately $1.9 billion after tax. For additional information on the Corporation’s pension and postretirement plans, see Note 16 of the Consolidated Financial Statements of the Corporation’s 2005 Annual Report on Form 10-K.

On March 17, 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140” (SFAS 156), which permits, but does not require, an entity to account for one or more classes of servicing rights (i.e., mortgage servicing rights, or MSRs) at fair value, with the changes in fair value recorded in the Consolidated Statement of Income. The Corporation elected to early adopt the standard and to account for consumer MSRs using the fair value measurement method on January 1, 2006. Commercial related MSRs continue to be accounted for using the amortization method (i.e. lower of cost or market). The adoption of this standard did not have a material impact on the Corporation’s results of operations or financial condition. For additional information on MSRs, see Note 7 of the Consolidated Financial Statements.

 

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On February 16, 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Instruments” (SFAS 155), which permits, but does not require, fair value accounting for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurcation in accordance with SFAS 133. The statement also subjects beneficial interests issued by securitization vehicles to the requirements of SFAS 133. The statement is effective as of January 1, 2007, with earlier adoption permitted. The adoption of SFAS No. 155 will not have a material impact on the Corporation’s results of operations and financial condition.

Effective January 1, 2006, the Corporation adopted SFAS No. 123 (revised 2004) “Share-based Payment” (SFAS 123R). Previously, the Corporation accounted for stock-based employee compensation under the fair value-based method of accounting. For additional information on stock-based employee compensation, see Note 13 of the Consolidated Financial Statements.

For additional information on recently issued accounting pronouncements and other significant accounting principles, see Note 1 of the Consolidated Financial Statements of the Corporation’s 2005 Annual Report on Form 10-K.

Note 2 – MBNA Merger and Restructuring Activity

The Corporation acquired 100 percent of the outstanding stock of MBNA on January 1, 2006 under the terms of the MBNA Merger. As a result, 1,260 million shares of MBNA common stock were exchanged for 631 million shares of the Corporation’s common stock. Prior to the MBNA Merger, this represented approximately 16 percent of the Corporation’s outstanding common stock. MBNA shareholders also received cash of $5.2 billion. The MBNA Merger was a tax-free merger for the Corporation. The acquisition expands the Corporation’s customer base and its opportunity to deepen customer relationships across the full breadth of the Corporation by delivering innovative deposit, lending and investment products and services to MBNA’s customer base. Additionally, the acquisition allows the Corporation to significantly increase its affinity relationships through MBNA’s credit card operations and sell these credit cards through its delivery channels (including the retail branch network). MBNA’s results of operations were included in the Corporation’s results beginning January 1, 2006.

 

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The MBNA Merger was accounted for under the purchase method of accounting in accordance with SFAS No. 141, “Business Combinations”. The purchase price has been allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the MBNA Merger date as summarized below. This allocation is based on management’s current estimation and could change as the fair value calculations are finalized and more information becomes available.

 

(In millions, except per share amounts)

           

Purchase price

     

Purchase price per share of the Corporation’s common stock (1)

   $ 45.856   

Exchange ratio

     0.5009   
         

Purchase price per share of the Corporation’s common stock exchanged

   $ 22.969   

Cash portion of the MBNA Merger consideration

     4.125   
         

Implied value of one share of MBNA common stock

     27.094   

MBNA common stock exchanged

     1,260   
         

Total value of the Corporation’s common stock and cash exchanged

      $ 34,139  

Fair value of outstanding stock options and direct acquisition costs

        467  
           

Total purchase price

      $ 34,606  
           

Allocation of the purchase price

     

MBNA stockholders’ equity

      $ 13,410  

MBNA goodwill and other intangible assets

        (3,564 )

Adjustments to reflect assets acquired and liabilities assumed at fair value:

     

Loans and leases

        (270 )

Premises and equipment

        (549 )

Identified intangibles (2)

        7,886  

Other assets

        (901 )

Deposits

        (97 )

Exit and termination liabilities

        (468 )

Other personnel-related liabilities

        (685 )

Other liabilities and deferred income taxes

        (603 )

Long-term debt

        (409 )
           

Estimated fair value of net assets acquired

        13,750  
           

Estimated goodwill resulting from the MBNA Merger (3)

      $ 20,856  
           

(1) The value of the shares of common stock exchanged with MBNA shareholders was based upon the average of the closing prices of the Corporation’s common stock for the period commencing two trading days before, and ending two trading days after, June 30, 2005, the date of the MBNA Merger Agreement.
(2) Includes purchased credit card relationships of $5,698 million, affinity relationships of $1,642 million, core deposit intangibles of $214 million, and other intangibles of $332 million. The amortization life for core deposit intangibles is 10 years, and purchased credit card relationships and affinity relationships are 15 years.
(3) No Goodwill is expected to be deductible for tax purposes. Substantially all Goodwill was allocated to Global Consumer and Small Business Banking.

As a result of the MBNA Merger, the Corporation acquired certain loans for which there was, at the time of the merger, evidence of deterioration of credit quality since origination and for which it was probable that all contractually required payments would not be collected. These loans were accounted for in accordance with Statement of Position No. 03-3 “Accounting for Certain Loans or Debt Securities Acquired in a Transfer”, which requires that purchased impaired loans be recorded at fair value at the time of acquisition. The purchase accounting adjustment to reduce impaired loans to fair value results in an increase in Goodwill. In addition, an adjustment was made to the allowance for loan and lease losses for those impaired loans resulting in a decrease in Goodwill. The outstanding balance and fair value of such loans was approximately $1.3 billion and $940 million as of the merger date. At March 31, 2006 the outstanding balance of such loans was approximately $465 million.

 

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Unaudited Pro Forma Condensed Combined Financial Information

The following unaudited pro forma condensed combined financial information presents the results of operations of the Corporation had the Merger taken place at January 1, 2005. For more information on the unaudited pro forma condensed combined financial information, refer to the Corporation’s Current Report on Form 8-K filed on April 10, 2006.

 

(Dollars in millions)

  

Pro Forma
Three Months

Ended March 31,
2005

Net interest income

   $ 8,341

Noninterest income

     7,775

Provision for credit losses

     882

Gains on sales of debt securities

     659

Merger and restructuring charges

     880

Other noninterest expense

     8,399

Income before income taxes

     6,614

Net income

     4,437

Merger and Restructuring Charges in the above table includes a nonrecurring restructuring charge related to legacy MBNA of $768 million. Pro forma Earnings Per Common Share and Diluted Earnings Per Common Share were $0.95 and $0.94 for the three months ended March 31, 2005.

Merger and Restructuring Charges

Merger and Restructuring Charges are recorded in the Consolidated Statement of Income, and include incremental costs to integrate the operations of the Corporation and MBNA. These charges represent costs associated with these one-time activities and do not represent ongoing costs of the fully integrated combined organization. The following table presents severance and employee-related charges, systems integrations and related charges, and other merger related charges. For a discussion of the prior year Merger and Restructuring Charges related to FleetBoston, see Note 2 of the Consolidated Financial Statements of the Corporation’s 2005 Annual Report on Form 10-K.

 

(Dollars in millions)

  

Three Months

Ended March 31,
2006

Severance and employee-related charges

   $ 20

Systems integrations and related charges

     48

Other

     30
      

Total merger and restructuring charges

   $ 98
      

Exit Costs and Restructuring Reserves

On January 1, 2006, liabilities of $468 million for MBNA’s exit and termination costs were recorded as purchase accounting adjustments resulting in an increase in Goodwill. Included in the $468 million were $409 million for severance, relocation and other employee-related expenses and $59 million for contract terminations. Cash payments of $22 million were charged against this liability during the first quarter, including $2 million of severance, relocation and other employee-related costs, and $20 million of contract terminations reducing the balance in the liability to $446 million at March 31, 2006.

Restructuring reserves were established for legacy Bank of America associate severance, other employee-related expenses, and contract terminations. During the quarter, $13 million was recorded to the restructuring reserves related to associate severance and other employee-related expenses, and another $21 million for contract terminations.

 

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Payments under exit costs and restructuring reserves associated with the MBNA Merger are expected to be substantially complete by the end of 2007.

Exit Costs and Restructuring Reserves

 

    

Three Months Ended

March 31, 2006

(Dollars in millions)

   Exit Costs
Reserves (1)
    Restructuring
Reserves (2)

Balance, December 31, 2005

   $ —       $ —  

MBNA exit costs

     468       —  

Restructuring charges

     —         34

Cash payments

     (22 )     —  
              

Balance, March 31, 2006

   $ 446     $ 34
              

 


(1) Exit costs reserves were established in purchase accounting resulting in an increase in Goodwill.
(2) Restructuring reserves were established by a charge to income.

Note 3 - Trading Account Assets and Liabilities

The Corporation engages in a variety of trading-related activities that are either for clients or its own account.

The following table presents the fair values of the components of Trading Account Assets and Liabilities at March 31, 2006 and December 31, 2005.

 

(Dollars in millions)

   March 31
2006
   December 31
2005

Trading account assets

     

Corporate securities, trading loans and other

   $ 39,719    $ 46,554

U.S. government and agency securities (1)

     29,104      31,091

Equity securities

     23,723      31,029

Mortgage trading loans and asset-backed securities

     11,820      12,290

Foreign sovereign debt

     12,815      10,743
             

Total

   $ 117,181    $ 131,707
             

Trading account liabilities

     

U.S. government and agency securities (2)

   $ 18,452    $ 23,179

Equity securities

     13,310      11,371

Foreign sovereign debt

     9,040      8,915

Corporate securities and other

     10,285      7,407

Mortgage trading loans and asset-backed securities

     13      18
             

Total

   $ 51,100    $ 50,890
             

(1) Includes $20.8 billion at March 31, 2006 and $22.1 billion at December 31, 2005 of government-sponsored enterprise obligations that are not backed by the full faith and credit of the U.S. government.
(2) Includes $1.1 billion at March 31, 2006 and $1.4 billion at December 31, 2005 of government-sponsored enterprise obligations that are not backed by the full faith and credit of the U.S. government.

Note 4 - Derivatives

All derivatives are recognized on the Consolidated Balance Sheet at fair value, taking into consideration the effects of legally enforceable master netting agreements that allow the Corporation to settle positive and negative positions and offset cash collateral held with the same counterparty on a net basis. For exchange-traded contracts, fair value is based on quoted market prices. For non-exchange traded contracts, fair value is based on dealer quotes, pricing models or quoted prices for instruments with similar characteristics.

 

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The Corporation designates at inception whether the derivative contract is considered hedging or non-hedging for Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities, as amended” (SFAS 133) accounting purposes. Non-hedging derivatives held for trading purposes are included in Derivative Assets or Derivative Liabilities with changes in fair value reflected in Trading Account Profits. Other non-hedging derivatives that are considered economic hedges, but not designated in a hedging relationship for accounting purposes, are also included in Derivative Assets or Derivative Liabilities with changes in fair value recorded in Mortgage Banking Income or Other Income on the Consolidated Statement of Income. A detailed discussion of derivative trading activities and Asset and Liability Management (ALM) activities are presented in Note 5 of the Consolidated Financial Statements of the Corporation’s 2005 Annual Report on Form 10-K.

The following table presents the contract/notional amounts and credit risk amounts at March 31, 2006 and December 31, 2005 of all the Corporation’s derivative positions. These derivative positions are primarily executed in the over-the-counter market. Credit risk associated with derivatives is measured as the net replacement cost in the event the counterparties with contracts in a gain position to the Corporation completely fail to perform under the terms of those contracts. The credit risk amounts take into consideration the effects of legally enforceable master netting agreements, and on an aggregate basis have been reduced by the cash collateral applied against Derivative Assets. At both March 31, 2006 and December 31, 2005, the cash collateral applied against Derivative Assets on the Consolidated Balance Sheet was $9.3 billion. In addition, at March 31, 2006 and December 31, 2005, the cash collateral placed against Derivative Liabilities was $6.9 billion and $7.6 billion.

Derivatives (1)

 

     March 31, 2006    December 31, 2005

(Dollars in millions)

   Contract/
Notional
   Credit
Risk
   Contract/
Notional
   Credit
Risk

Interest rate contracts

           

Swaps

   $ 15,792,608    $ 11,751    $ 14,401,577    $ 11,085

Futures and forwards

     2,559,817      105      2,113,717      —  

Written options

     1,021,106      —        900,036      —  

Purchased options

     966,694      3,266      869,471      3,345

Foreign exchange contracts

           

Swaps

     353,358      3,383      333,487      3,735

Spot, futures and forwards

     1,067,210      1,974      944,321      2,481

Written options

     308,482      —        214,668      —  

Purchased options

     320,435      1,335      229,049      1,214

Equity contracts

           

Swaps

     29,827      524      28,287      548

Futures and forwards

     8,171      44      6,479      44

Written options

     77,160      —        69,048      —  

Purchased options

     71,349      7,368      57,693      6,729

Commodity contracts

           

Swaps

     4,586      1,790      8,809      2,475

Futures and forwards

     6,679      —        5,533      —  

Written options

     6,550      —        7,854      —  

Purchased options

     2,849      445      3,673      546

Credit derivatives (2) 

     813,327      651      722,190      766
                           

Credit risk before cash collateral

        32,636         32,968

Less: Cash collateral applied

        9,345         9,256
                   

Total derivative assets

      $ 23,291       $ 23,712
                   

(1) Includes long and short derivative positions.
(2) The December 31, 2005 notional amount has been restated to conform with new regulatory guidance, which defined the notional as the contractual loss protection for structured basket transactions.

 

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Table of Contents

The average fair value of Derivative Assets for the three months ended March 31, 2006 and December 31, 2005 was $22.6 billion and $25.2 billion. The average fair value of Derivative Liabilities for the three months ended March 31, 2006 and December 31, 2005 was $15.2 billion and $16.9 billion.

Fair Value and Cash Flow Hedges

The Corporation uses various types of interest rate and foreign currency exchange rate derivative contracts to protect against changes in the fair value of its assets and liabilities due to fluctuations in interest rates and exchange rates (fair value hedges). The Corporation also uses these types of contracts to protect against changes in the cash flows of its assets and liabilities, and other forecasted transactions (cash flow hedges). During the next 12 months, net losses on derivative instruments included in Accumulated OCI of approximately $486 million (pre-tax) are expected to be reclassified into earnings. These net losses reclassified into earnings are expected to decrease income or increase expense on the respective hedged items.

The following table summarizes certain information related to the Corporation’s derivative hedges accounted for under SFAS 133 for the three months ended March 31, 2006 and 2005:

 

     Three Months Ended
March 31
 

(Dollars in millions)

   2006     2005  

Fair value hedges

    

Hedge ineffectiveness recognized in earnings (1)

   $ (19 )   $ 5  

Net gain excluded from assessment of effectiveness (2)

     —         6  

Cash flow hedges

    

Hedge ineffectiveness recognized in earnings (3)

     (1 )     (2 )

Net investment hedges

    

Gains included in foreign currency translation adjustments within Accumulated OCI

     10       47  

(1) Included $(19) million recorded in Net Interest Income in the Consolidated Statement of Income for the three months ended March 31, 2006. Included $5 million recorded in Mortgage Banking Income for the three months ended March 31, 2005.
(2) Included $6 million recorded in Mortgage Banking Income in the Consolidated Statement of Income for the three months ended March 31, 2005.
(3) Included $(1) million and $4 million recorded in Net Interest Income and $0 and $(6) million recorded in Mortgage Banking Income in the Consolidated Statement of Income for the three months ended March 31, 2006 and 2005.

 

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Note 5 - Outstanding Loans and Leases

Outstanding loans and leases at March 31, 2006 and December 31, 2005 were:

 

(Dollars in millions)

   March 31
2006
   December 31
2005

Consumer

     

Residential mortgage

   $ 188,261    $ 182,596

Credit card - domestic

     64,490      58,548

Credit card - foreign

     7,789      —  

Home equity lines

     65,516      62,098

Direct/Indirect consumer

     55,127      45,490

Other consumer (1)

     10,528      6,725
             

Total consumer

     391,711      355,457
             

Commercial

     

Commercial - domestic

     146,737      140,533

Commercial real estate (2)

     36,337      35,766

Commercial lease financing

     20,813      20,705

Commercial - foreign

     23,927      21,330
             

Total commercial

     227,814      218,334
             

Total

   $ 619,525    $ 573,791
             

(1) Includes consumer finance of $3.0 billion and $2.8 billion; foreign consumer of $7.6 billion and $3.8 billion; and consumer lease financing of $18 million and $35 million at March 31, 2006 and December 31, 2005.
(2) Includes domestic commercial real estate loans of $35.7 billion and $35.2 billion; and foreign commercial real estate loans of $671 million and $585 million at March 31, 2006 and December 31, 2005.

The following table presents the recorded loan amounts, without consideration for the specific component of the Allowance for Loan and Lease Losses, that were considered individually impaired in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” (SFAS 114) at March 31, 2006 and December 31, 2005. SFAS 114 impairment includes performing troubled debt restructurings and excludes all commercial leases.

 

(Dollars in millions)

   March 31
2006
   December 31
2005

Commercial - domestic

   $ 668    $ 613

Commercial real estate

     72      49

Commercial - foreign

     43      34
             

Total impaired loans

   $ 783    $ 696
             

At March 31, 2006 and December 31, 2005, nonperforming loans and leases, including impaired loans and nonaccrual consumer loans, totaled $1.6 billion and $1.5 billion. In addition, included in Other Assets were nonperforming loans held-for-sale of $62 million and $50 million at March 31, 2006 and December 31, 2005.

 

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Note 6 - Allowance for Credit Losses

The following table summarizes the changes in the allowance for credit losses for the three months ended March 31, 2006 and 2005:

 

     Three Months Ended
March 31
 

(Dollars in millions)

   2006     2005  

Allowance for loan and lease losses, January 1

   $ 8,045     $ 8,626  

MBNA balance, January 1, 2006

     577       —    

Loans and leases charged off

     (1,117 )     (1,158 )

Recoveries of loans and leases previously charged off

     295       269  
                

Net charge-offs

     (822 )     (889 )
                

Provision for loan and lease losses

     1,270       588  

Other

     (3 )     (12 )
                

Allowance for loan and lease losses, March 31

     9,067       8,313  
                

Reserve for unfunded lending commitments, January 1

     395       402  

Provision for unfunded lending commitments

     —         (8 )
                

Reserve for unfunded lending commitments, March 31

     395       394  
                

Total allowance for credit losses

   $ 9,462     $ 8,707  
                

Note 7 – Mortgage Servicing Rights

Effective January 1, 2006, the Corporation accounts for consumer MSRs at fair value with changes in fair value recorded in the Consolidated Statement of Income. Prior to January 1, 2006, MSRs were accounted for on a lower of cost or market basis and hedged with derivatives that qualified for SFAS 133 hedge accounting.

The following table presents activity for consumer-related MSRs for the three months ended March 31, 2006 and 2005.

 

     Three Months Ended
March 31
 

(Dollars in millions)

   2006     2005  

Balance, January 1

   $ 2,673     $ 2,358  

Additions

     143       165  

Loss in market value from customer payments

     (171 )     —    

Amortization

     —         (144 )

Other changes in MSR market value (1)

     280       —    

Valuation adjustment of MSRs (2)

     —         168  
                

Balance, March 31 (3)

   $ 2,925     $ 2,547  
                

(1) Reflects changes in discount rates and prepayment speed assumptions, mostly due to changes in interest rates.
(2) For the three months ended March 31, 2005, includes $150 million related to change in value attributed to SFAS 133 hedged MSRs and $18 million of net recoveries.
(3) Net of impairment allowance of $236 million at March 31, 2005.

The key economic assumptions used in valuations of MSRs included modeled prepayment rates and resultant weighted average lives of the MSRs and the option adjusted spread levels. Commercial MSRs are accounted for using the amortization method (i.e. lower of cost or market). Commercial MSRs were $145 million and $148 million at March 31, 2006 and December 31, 2005 and are not included in the table above.

 

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Table of Contents

Note 8 - Securitizations

The Corporation securitizes assets and may continue to hold a portion or all of the securities, subordinated tranches, interest-only strips and, in some cases, a cash reserve account, all of which are considered interests that continue to be held by a transferor in the securitized assets. Those assets may be serviced by the Corporation or by third parties. The Corporation also uses other special purpose financing entities to access the commercial paper market and for other lending, leasing and real estate activities.

As a result of the MBNA Merger, the Corporation acquired interests in credit card, consumer, and commercial loan securitization vehicles. Their aggregate debt securities outstanding as of January 1, 2006 was $81.6 billion in credit card, $5.6 billion in consumer, and $1.5 billion in commercial. These interests include interest-only strips, subordinated tranches, cash reserve accounts, and subordinated accrued interest receivable. Changes in the fair value of the interest-only strips are recorded in earnings.

Key economic assumptions used in measuring the fair value of certain interests that continue to be held by the Corporation (included in Other Assets) in credit card securitizations and the sensitivity of the current fair value of residual cash flows to changes in those assumptions are as follows:

Credit Card Data

 

(Dollars in millions)

   March 31
2006
    December 31
2005
 

Carrying amount of residual interests (at fair value) (1)

   $ 2,451     $ 203  

Balance of unamortized securitized loans

     87,154       2,237  

Weighted average life to call or maturity (in years)

     0.3       0.5  

Revolving structures - payment rate

     12.2-20.0  %     12.1  %

Impact on fair value of 100 bps favorable change

   $ 22     $ 2  

Impact on fair value of 200 bps favorable change

     46       3  

Impact on fair value of 100 bps adverse change

     (18 )     (2 )

Impact on fair value of 200 bps adverse change

     (35 )     (3 )

Expected credit losses (annual rate)

     3.6-5.1  %     4.0-4.3  %

Impact on fair value of 10% favorable change

   $ 92     $ 3  

Impact on fair value of 25% favorable change

     228       8  

Impact on fair value of 10% adverse change

     (84 )     (3 )

Impact on fair value of 25% adverse change

     (198 )     (8 )

Residual cash flows discount rate (annual rate)

     12.0  %     12.0  %

Impact on fair value of 100 bps favorable change

   $ 8     $ —    

Impact on fair value of 200 bps favorable change

     11       —    

Impact on fair value of 100 bps adverse change

     (12 )     —    

Impact on fair value of 200 bps adverse change

     (23 )     —    

(1) Residual interests include interest-only strips, one or more subordinated tranches, accrued interest receivable, and in some cases, a cash reserve account.

 

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Table of Contents

The sensitivities in the preceding table are hypothetical and should be used with caution. As the amounts indicate, changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of an interest that continues to be held by the Corporation is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. Additionally, the Corporation has the ability to hedge interest rate risk associated with retained residual positions. The above sensitivities do not reflect any hedge strategies that may be undertaken to mitigate such risk. The other consumer and commercial loan securitization vehicles acquired with MBNA were not material to the Corporation.

Proceeds from collections reinvested in revolving credit card securitizations were $38.8 billion and $0.5 billion for the three months ended March 31, 2006 and 2005. Credit card servicing fee income totaled $440 million and $34 million for the three months ended March 31, 2006 and 2005. Other cash flows received on interests that continued to be held by the Corporation were $1.8 billion and $75 million for the three months ended March 31, 2006 and 2005, for credit card securitizations.

The Corporation reviews its loans and leases portfolio on a managed basis. Managed loans and leases are defined as on-balance sheet Loans and Leases as well as those loans in revolving securitizations and other securitizations where servicing is retained that are undertaken for liquidity or other corporate purposes, which include credit card, home equity lines, commercial loans, auto and certain mortgage securitizations. Managed loans and leases excludes originate-to-distribute loans and other loans in securitizations where the Corporation has not retained servicing. New advances on accounts for which previous loan balances were sold to the securitization trusts will be recorded on the Corporation’s Consolidated Balance Sheet after the revolving period of the securitization, which has the effect of increasing Loans and Leases on the Corporation’s Consolidated Balance Sheet and increasing Net Interest Income and charge-offs, with a corresponding reduction in Noninterest Income. Portfolio balances, delinquency and historical loss amounts of the managed loans and leases portfolio as of March 31, 2006, and December 31, 2005, and for the three months ended March 31, 2006 and 2005 were as follows:

 

     March 31, 2006    December 31, 2005 (1)

(Dollars in millions)

  

Total

Loans and
Leases

   

Accruing

Loans and

Leases Past Due
90 Days

or More

  

Nonperforming
Loans and

Leases

   Total
Loans and
Leases
   

Accruing

Loans and

Leases Past Due
90 Days

or More

  

Nonperforming
Loans and

Leases

Residential mortgage

   $ 193,730     $ —      $ 538    $ 188,502     $ —      $ 570

Credit card - domestic

     136,785       2,810      —        60,785       1,217      —  

Credit card - foreign

     22,648       484      —        —         —        —  

Home equity lines

     65,930       3      124      62,553       3      117

Direct/Indirect consumer

     64,699       326      34      49,486       75      37

Other consumer

     10,528       36      92      6,725       15      61
                                           

Total consumer

     494,320       3,659      788      368,051       1,310      785
                                           

Commercial - domestic

     150,181       159      631      142,437       117      581

Commercial real estate

     36,337       11      72      35,766       4      49

Commercial lease financing

     20,813       12      53      20,705       15      62

Commercial - foreign

     23,927       1      43      21,330       32      34
                                           

Total commercial

     231,258       183      799      220,238       168      726
                                           

Total managed loans and leases

     725,578     $ 3,842    $ 1,587      588,289     $ 1,478    $ 1,511
                                           

Managed loans in securitizations

     (106,053 )           (14,498 )     
                           

Total held loans and leases

   $ 619,525           $ 573,791       
                           

(1) The amounts for December 31, 2005 have been restated to include certain mortgage and auto securitizations as these are now included in the Corporation’s definition of managed loans.

 

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Table of Contents
     Three Months Ended March 31, 2006     Three Months Ended March 31, 2005 (1)  

(Dollars in millions)

   Average
Loans and
Leases
Outstanding
    Loans and
Leases Net
Losses
    Net Loss
Ratio (2)
    Average
Loans and
Leases
Outstanding
    Loans and
Leases Net
Losses
    Net Loss
Ratio (2)
 

Residential mortgage

   $ 190,317     $ 10     0.02 %   $ 181,538     $ 4     0.01 %

Credit card - domestic

     139,355       1,073     3.12       58,145       884     6.17  

Credit card - foreign

     22,783       173     3.08       —         —       —    

Home equity lines

     64,628       9     0.06       52,073       6     0.05  

Direct/Indirect consumer

     64,587       134     0.85       43,115       66     0.61  

Other consumer

     10,357       42     1.67       7,305       56     3.12  
                                    

Total consumer

     492,027       1,441     1.19       342,176       1,016     1.20  
                                    

Commercial - domestic

     148,142       63     0.17       127,154       26     0.08  

Commercial real estate

     36,676       (1 )   (0.01 )     33,016       —       —    

Commercial lease financing

     20,512       (23 )   (0.45 )     20,745       25     0.48  

Commercial - foreign

     23,139       1     0.01       17,570       (29 )   (0.66 )
                                    

Total commercial

     228,469       40     0.07       198,485       22     0.04  
                                    

Total managed loans and leases

     720,496     $ 1,481     0.84 %     540,661     $ 1,038     0.78 %
                                    

Managed loans in securitizations

     (104,528 )         (15,740 )    
                        

Total held loans and leases

   $ 615,968         $ 524,921      
                        

(1) The amounts for the three months ended March 31, 2005 have been restated to include certain mortgage and auto securitizations as these are now included in the Corporation’s definition of managed loans.
(2) The net loss ratio is calculated by dividing annualized managed loans and leases net losses by average managed loans and leases outstanding for each loan and lease category.

Variable Interest Entities

At March 31, 2006 and December 31, 2005, the assets and liabilities of the Corporation’s multi-seller asset-backed commercial paper conduits that have been consolidated in accordance with FASB Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” were reflected in Available-for-sale Securities, Other Assets, and Commercial Paper and Other Short-term Borrowings in Global Corporate and Investment Banking. As of March 31, 2006 and December 31, 2005, the Corporation held $8.4 billion and $6.6 billion of assets in these entities, and in the unlikely event that all of the assets in the VIEs become worthless, the Corporation’s maximum loss exposure associated with these entities including unfunded lending commitments would be approximately $10.6 billion and $8.3 billion. The Corporation also had contractual relationships with other consolidated VIEs that engage in leasing or lending activities or real estate joint ventures. As of March 31, 2006 and December 31, 2005, the amount of assets of these entities was $693 million and $750 million, and in the unlikely event that all of the assets in the VIEs become worthless, the Corporation’s maximum possible loss exposure would be $258 million and $212 million.

Additionally, the Corporation had significant variable interests in other VIEs that it did not consolidate because it was not deemed to be the primary beneficiary. In such cases, the Corporation does not absorb the majority of the entities’ expected losses nor does it receive a majority of the entities’ expected residual returns. These entities typically support the financing needs of the Corporation’s customers by facilitating their access to the commercial paper markets. The Corporation functions as administrator and provides either liquidity and letters of credit, or derivatives to the VIE. The Corporation also provides asset management and related services to other special purpose vehicles that engage in lending, investing, or real estate activities. Total assets of these entities at March 31, 2006 and December 31, 2005 were approximately $33.0 billion and $32.5 billion. Revenues associated with administration, liquidity, letters of credit and other services were approximately $29 million and $75 million for the three months ended March 31, 2006 and 2005. At March 31, 2006 and December 31, 2005, in the unlikely event that all of the assets in the VIEs become worthless, the Corporation’s maximum loss exposure associated with these VIEs would be approximately $27.7 billion and $26.7 billion, which is net of amounts syndicated.

 

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Management does not believe losses resulting from its involvement with the entities discussed above will be material. See Notes 1 and 9 of the Consolidated Financial Statements of the Corporation’s 2005 Annual Report on Form 10-K for additional discussion of securitizations and special purpose financing entities.

Note 9- Goodwill and Other Intangibles

The following table presents allocated Goodwill at March 31, 2006 and December 31, 2005 for each business segment and All Other.

 

(Dollars in millions)

   March 31
2006
   December 31
2005

Global Consumer and Small Business Banking

   $ 39,355    $ 18,491

Global Corporate and Investment Banking

     21,304      21,292

Global Wealth and Investment Management

     5,333      5,333

All Other

     279      238
             

Total

   $ 66,271    $ 45,354
             

The gross carrying value and accumulated amortization related to core deposit intangibles and other intangibles at March 31, 2006 and December 31, 2005 are presented below:

 

     March 31, 2006    December 31, 2005

(Dollars in millions)

   Gross Carrying
Value
   Accumulated
Amortization
   Gross Carrying
Value
   Accumulated
Amortization

Purchase credit card relationships

   $ 6,384    $ 411    $ 660    $ 217

Core deposit intangibles

     3,865      2,004      3,661      1,881

Affinity relationships

     1,642      50      —        —  

Other intangibles

     2,050      795      1,693      722
                           

Total

   $ 13,941    $ 3,260    $ 6,014    $ 2,820
                           

For additional information on the impact of the MBNA Merger, see Note 2 of the Consolidated Financial Statements.

Amortization expense on core deposit intangibles and other intangibles was $440 million and $208 million for the three months ended March 31, 2006 and 2005. The Corporation estimates that aggregate amortization expense will be approximately $434 million, $433 million and $430 million for the second, third and fourth quarters of 2006, respectively. In addition the Corporation estimates the aggregate amortization expense will be approximately $1.5 billion, $1.3 billion, $1.2 billion, $1.0 billion, and $900 million for 2007, 2008, 2009, 2010 and 2011, respectively.

Note 10 - Commitments and Contingencies

In the normal course of business, the Corporation enters into a number of off-balance sheet commitments. These commitments expose the Corporation to varying degrees of credit and market risk and are subject to the same credit and market risk limitation reviews as those instruments recorded on the Corporation’s Consolidated Balance Sheet.

Credit Extension Commitments

The Corporation enters into commitments to extend credit such as loan commitments, standby letters of credit and commercial letters of credit to meet the financing needs of its customers. For additional information on commitments to extend credit, see Note 13 of the Consolidated Financial Statements of the Corporation’s 2005 Annual Report on Form 10-K.

 

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The outstanding unfunded lending commitments shown in the following table have been reduced by amounts participated to other financial institutions of $30.6 billion and $30.4 billion at March 31, 2006 and December 31, 2005. The carrying amount for these commitments, which represents the liability recorded related to these instruments, at March 31, 2006 and December 31, 2005 was $455 million and $458 million. At March 31, 2006, the carrying amount included deferred revenue of $60 million and a reserve for unfunded lending commitments of $395 million. At December 31, 2005, the carrying amount included deferred revenue of $63 million and a reserve for unfunded lending commitments of $395 million.

 

(Dollars in millions)

   March 31
2006
   December 31
2005

Loan commitments(1)

   $ 312,823    $ 277,757

Home equity lines of credit

     84,174      78,626

Standby letters of credit and financial guarantees

     43,147      43,095

Commercial letters of credit

     4,992      5,154
             

Legally binding commitments

     445,136      404,632

Credit card lines(2)

     802,517      192,968
             

Total

   $ 1,247,653    $ 597,600
             

(1) At March 31, 2006 and December 31, 2005, there were equity commitments of $1.3 billion and $1.4 billion, related to obligations to further fund Principal Investing equity investments.
(2) As part of the MBNA Merger, on January 1, 2006, the Corporation acquired $588.4 billion of unused credit lines.

Legally binding commitments to extend credit generally have specified rates and maturities. Certain of these commitments have adverse change clauses that help to protect the Corporation against deterioration in the borrowers’ ability to pay.

Other Commitments

At March 31, 2006 and December 31, 2005, charge cards (nonrevolving card lines) to individuals and government entities guaranteed by the U.S. government in the amount of $9.3 billion and $9.4 billion were not included in credit card line commitments in the previous table. The outstanding balances related to these charge cards were $227 million and $171 million at March 31, 2006 and December 31, 2005.

At March 31, 2006, the Corporation had whole mortgage loan purchase commitments of $445 million, all of which will settle in the second quarter of 2006. At December 31, 2005, the Corporation had whole mortgage loan purchase commitments of $4.0 billion, all of which settled in the first quarter of 2006.

The Corporation has entered into operating leases for certain of its premises and equipment. Commitments under these leases approximate $1.3 billion in 2006, $1.2 billion in 2007, $1.2 billion in 2008, $900 million in 2009, $750 million in 2010 and $5.0 billion for all years thereafter.

In 2005, the Corporation entered into an agreement for the committed purchase of retail automotive loans over a five-year period, ending June 30, 2010. In 2005, the Corporation purchased $5.0 billion of such loans and at March 31, 2006, the remaining commitment amount was $44.5 billion. For the three months ended March 31, 2006 the Corporation purchased $2.5 billion of such loans. Under the agreement, the Corporation is committed to purchase up to $4.5 billion of such loans for the period April 1, 2006 through June 30, 2006 and up to $10.0 billion in each of the agreement’s next four fiscal years.

Other Guarantees

The Corporation provides credit and debit card processing services to various merchants, processing credit and debit card transactions on their behalf. In connection with these services, a liability may arise in the event of a billing dispute between the merchant and a cardholder that is ultimately resolved in the cardholder’s favor and the merchant defaults upon its obligation to reimburse the cardholder. A cardholder, through its issuing bank, generally has until the later of up to four months after the date a transaction is processed or the delivery of the product or service to present a chargeback to the Corporation as the merchant processor. If the Corporation is unable to collect this amount from the merchant, it bears the loss for the amount paid to the cardholder. For the three months ended March 31, 2006 and 2005, the Corporation processed $88.3 billion and $75.8 billion of transactions and recorded losses as a result of these chargebacks of $4 million for both periods.

 

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At March 31, 2006 and December 31, 2005, the Corporation held as collateral approximately $404 million and $248 million of merchant escrow deposits which the Corporation has the right to offset against amounts due from the individual merchants. The Corporation also has the right to offset any payments with cash flows otherwise due to the merchant. Accordingly, the Corporation believes that the maximum potential exposure is not representative of the actual potential loss exposure. The Corporation believes the maximum potential exposure for chargebacks would not exceed the total amount of merchant transactions processed through Visa and MasterCard for the last four months, which represents the claim period for the cardholder, plus any outstanding delayed-delivery transactions. As of March 31, 2006 and December 31, 2005, the maximum potential exposure totaled approximately $116.3 billion and $118.2 billion.

For additional information on other guarantees, see Note 13 of the Consolidated Financial Statements of the Corporation’s 2005 Annual Report on Form 10-K. For additional information on recourse obligations related to residential mortgage loans sold and other guarantees related to securitizations, see Note 9 of the Consolidated Financial Statements of the Corporation’s 2005 Annual Report on Form 10-K.

Litigation and Regulatory Matters

The following disclosure supplements the disclosure in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

Interchange Anti-Trust Litigation

In the In re Payment Card Interchange Fee and Merchant Discount Anti-Trust Litigation case, on April 24, 2006, plaintiffs filed a first consolidated and amended putative class action complaint realleging the claims in the original complaint and alleging, among other additional claims, that defendants violated federal and California antitrust laws by combining to impose certain fees and to adopt rules and practices of Visa and MasterCard that are alleged to constitute restraints of trade.

Pension Plan Matters

In the Donna C. Richards v. FleetBoston Financial Corp. and the FleetBoston Financial Pension Plan case, on March 31, 2006, the court granted defendants’ motion to dismiss in part and denied it in part. The court certified a class with respect to plaintiffs’ claims that (i) the cash balance benefit formula reduces the rate of benefit accrual on account of age, (ii) the participants did not receive proper notice of the alleged reduction of future benefit accrual, and (iii) the summary plan description was not adequate. On April 17, 2006, plaintiff filed an amended complaint again alleging the three claims as to which a class was certified and amending two claims the court had dismissed, which alleged violation of ERISA’s “anti-backloading” rule and breach of fiduciary duty.

 

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Note 11 - Shareholders’ Equity and Earnings Per Common Share

The following table presents share repurchase activity for the three months ended March 31, 2006 and 2005, including total common shares repurchased under announced programs, weighted average per share price and the remaining buyback authority under announced programs.

 

(Dollars in millions, except per share information; shares in thousands)

   Number of Common
Shares Repurchased
under Announced
Programs (1)
   Weighted
Average
Per Share
Price (1)
   Remaining Buyback Authority
under Announced Programs (2)
         Amounts    Shares

January 1-31, 2006

   4,500    $ 44.61    $ 9,717    149,688

February 1-28, 2006

   5,000      45.29      9,491    144,688

March 1-31, 2006

   78,950      46.15      5,847    65,738
             

Three months ended March 31, 2006

   88,450      46.02      
             

(Dollars in millions, except per share information; shares in thousands)

   Number of Common
Shares Repurchased
under Announced
Programs (3)
   Weighted
Average
Per Share
Price (3)
   Remaining Buyback Authority
under Announced Programs (2)
         Amounts    Shares

January 1-31, 2005

   9,637    $ 46.20    $ 4,233    70,988

February 1-28, 2005

   9,375      46.18      3,800    61,613

March 1-31, 2005

   24,202      45.94      14,688    237,411
             

Three months ended March 31, 2005

   43,214      46.05      
             

(1) Reduced Shareholders’ Equity by $4.1 billion and increased diluted earnings per common share by $0.01 for the three months ended March 31, 2006. These repurchases were partially offset by the issuance of approximately 38.9 million shares of common stock under employee plans, which increased Shareholders’ Equity by $1.4 billion, net of $0.3 billion of deferred compensation related to restricted stock awards, and had no effect on diluted earnings per common share for the three months ended March 31, 2006.
(2) On January 28, 2004, our Board of Directors (the Board) authorized a stock repurchase program of up to 180 million shares of the Corporation’s common stock at an aggregate cost not to exceed $9.0 billion. At March 31, 2005 there was 37.4 million shares of remaining buyback authority related to the January 2004 plan. This repurchase plan was completed during the third quarter of 2005. On March 22, 2005, the Board authorized an additional stock repurchase program of up to 200 million shares of the Corporation’s common stock at an aggregate cost not to exceed $12.0 billion and to be completed within a period of 18 months.
(3) Reduced Shareholders’ Equity by $2.0 billion and had no effect on diluted earnings per common share for the three months ended March 31, 2005. These repurchases were partially offset by the issuance of approximately 32 million shares of common stock under employee plans, which increased Shareholders’ Equity by $1.0 billion, net of $0.3 billion of deferred compensation related to restricted stock awards, and had no effect on diluted earnings per common share for the three months ended March 31, 2005.

The Corporation will continue to repurchase shares, from time to time, in the open market or in private transactions through the Corporation’s approved repurchase programs. The Corporation expects to continue to repurchase a number of shares of common stock at least equal to any shares issued under the Corporation’s employee stock plans.

On April 26, 2006, the Board authorized a stock repurchase program of up to 200 million shares of the Corporation’s common stock at an aggregate cost not to exceed $12.0 billion to be completed within a period of 18 months.

Also on April 26, 2006, the Board declared a regular quarterly cash dividend on common stock of $0.50 per share, payable on June 23, 2006 to common shareholders of record on June 2, 2006. In January 2006, the Board declared a quarterly cash dividend of $0.50 per common share which was paid on March 24, 2006 to common shareholders of record on March 3, 2006.

 

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The following table presents the changes in Accumulated OCI for the three months ended March 31, 2006 and 2005.

 

(Dollars in millions)(1)

   Securities     Derivatives(2)     Other     Total  

Balance, December 31, 2004

   $ (197 )   $ (2,279 )   $ (288 )   $ (2,764 )

Net change in fair value recorded in Accumulated OCI

     (1,095 )     (1,383 )     (6 )     (2,484 )

Less: Net realized gains (losses) reclassified into earnings(3)

     446       (77 )     —         369  
                                

Balance, March 31, 2005

   $ (1,738 )   $ (3,585 )   $ (294 )   $ (5,617 )
                                

Balance, December 31, 2005

   $ (2,978 )   $ (4,338 )   $ (240 )   $ (7,556 )

Net change in fair value recorded in Accumulated OCI

     (1,893 )     489       42       (1,362 )

Less: Net realized gains (losses) reclassified into earnings(3)

     126       (63 )     —         63  
                                

Balance, March 31, 2006

   $ (4,997 )   $ (3,786 )   $ (198 )   $ (8,981 )
                                

(1) Amounts shown are net-of-tax.
(2) The amount included in Accumulated OCI for terminated derivative contracts were losses of $2.5 billion and $1.2 billion, net-of-tax at March 31, 2006 and 2005.
(3) Included in this line item are amounts related to derivatives used in cash flow hedge relationships. These amounts are reclassified into earnings in the same period or periods during which the hedged forecasted transactions affect earnings. This line item also includes gains (losses) on available-for-sale securities. These amounts are reclassified into earnings upon sale of the related security.

The calculation of earnings per common share and diluted earnings per common share for the three months ended March 31, 2006 and 2005 is presented below:

 

     Three Months Ended
March 31
 

(Dollars in millions, except per share information; shares in thousands)

   2006     2005  

Earnings per common share

    

Net income

   $ 4,986     $ 4,393  

Preferred stock dividends

     (5 )     (5 )
                

Net income available to common shareholders

   $ 4,981     $ 4,388  
                

Average common shares issued and outstanding

     4,609,481       4,032,550  
                

Earnings per common share

   $ 1.08     $ 1.09  
                

Diluted earnings per common share

    

Net income available to common shareholders

   $ 4,981     $ 4,388  
                

Average common shares issued and outstanding

     4,609,481       4,032,550  

Dilutive potential common shares (1, 2)

     56,924       66,512  
                

Total diluted average common shares issued and outstanding

     4,666,405       4,099,062  
                

Diluted earnings per common share

   $ 1.07     $ 1.07  
                

(1) For the three months ended March 31, 2006 and 2005, average options to purchase 60 million and 27 million shares were outstanding but not included in the computation of earnings per common share because they were antidilutive.
(2) Includes incremental shares from restricted stock units, restricted stock shares and stock options.

Note 12 – Pension and Postretirement Plans

The Corporation sponsors noncontributory trusteed qualified pension plans that cover substantially all officers and employees, a number of noncontributory nonqualified pension plans, and postretirement health and life plans. The Bank of America Pension Plan (the Pension Plan) allows participants to select from various earnings measures, which are based on the returns of certain funds or common stock of the Corporation. The participant-selected earnings measures determine the earnings rate on the individual participant account balances in the Pension Plan. A detailed discussion of these plans is provided in Note 16 of the Consolidated Financial Statements of the Corporation’s 2005 Annual Report on Form 10-K.

 

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As a result of the MBNA Merger, the Corporation assumed the obligations related to the plans of former MBNA. The MBNA Pension Plan retirement benefits are based on the number of years of benefit service and a percentage of the participant’s average annual compensation during the five highest paid consecutive years of their last 10 years of employment. The MBNA Supplemental Executive Retirement Plan (SERP) provides certain officers with supplemental retirement benefits in excess of limits imposed on qualified plans by federal tax law. The MBNA Postretirement Health and Life Plan provides certain health care and life insurance benefits for a closed group upon early retirement.

Net periodic benefit cost of the Corporation’s plans including the MBNA plans, for the three months ended March 31, 2006 and 2005 included the following components:

 

     Three Months Ended March 31  
     Pension Plan     Nonqualified
Pension Plans
    Postretirement
Health and Life Plans
 

(Dollars in millions)

   2006 (1)     2005     2006 (1)     2005     2006 (1)     2005  

Components of net periodic benefit cost

            

Service cost

   $ 82     $ 77     $ 3     $ 3     $ 4     $ 3  

Interest cost

     168       165       22       16       22       19  

Expected return on plan assets

     (260 )     (248 )     —         —         (2 )     (4 )

Amortization of transition obligation

     —         —         —         —         8       8  

Amortization of prior service cost

     10       12       (2 )     (2 )     —         —    

Recognized net actuarial loss

     53       38       5       5       13       17  

Recognized loss due to settlements and curtailments

     —         —         —         9       —         —    
                                                

Net periodic benefit cost

   $ 53     $ 44     $ 28     $ 31     $ 45     $ 43  
                                                

(1) Includes the results of former MBNA. The net periodic benefit cost of the former MBNA Pension Plan, SERP, and Postretirement Health and Life Plan were $13 million, $7 million and $4 million, respectively, for the three months ended March 31, 2006.

During 2006, the Corporation expects to contribute $85 million, $242 million and $20 million to the former MBNA Pension Plan, SERP, and Postretirement Health and Life Plan, respectively. At March 31, 2006, the Corporation had contributed $0 million, $116 million, and $9 million, respectively, to these plans.

Note 13 – Stock-based Compensation Plans

Prior to January 1, 2006, the Corporation accounted for its stock-based compensation plans under SFAS 123. On January 1, 2006, the Corporation adopted SFAS 123R under the modified-prospective application. Under the modified-prospective-application, SFAS 123R applies to new awards and to awards modified, repurchased, or cancelled after adoption.

The compensation cost recognized in income for the plans described below was $479 million and $193 million for the three months ended March 31, 2006 and 2005. The related income tax benefit recognized in income was $178 million and $68 million for the three months ended March 31, 2006 and 2005.

Prior to the adoption of SFAS 123R, awards granted to retirement eligible employees were expensed over the stated vesting period. SFAS 123R requires that the Corporation recognize stock compensation cost immediately for any awards granted to retirement eligible employees, or over the vesting period or the period from the grant date to the date retirement eligibility is achieved, which ever is shorter. For the three months ended March 31, 2006, the Corporation recognized $320 million in equity based compensation due to awards being granted to retirement eligible employees.

 

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Prior to the adoption of SFAS 123R, the Corporation presented tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Consolidated Statement of Cash Flows. SFAS 123R requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. The Corporation recognized $75 million in excess tax benefits that were classified as a financing cash inflow for the three months ended March 31, 2006.

Prior to January 1, 2006, the Corporation estimated the fair value of stock options granted on the date of grant using the Black-Scholes option-pricing model. On January 1, 2006, the Corporation began using a lattice option-pricing model to estimate the grant date fair value of stock options granted. The table below presents the assumptions used to estimate the fair value of stock options granted on the date of grant using the lattice option-pricing model for the three months ended March 31, 2006. Lattice option-pricing models incorporate ranges of assumptions for inputs and those ranges are disclosed in the table below. The risk-free rate for periods within the contractual life of the stock option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatilities are based on implied volatilities from traded stock options on the Corporation’s common stock, historical volatility of the Corporation’s common stock, and other factors. The Corporation uses historical data to estimate stock option exercise and employee termination within the model. The expected term of stock options granted is derived from the output of the model and represents the period of time that stock options granted are expected to be outstanding. The table below also includes the assumptions used to estimate the fair value of stock options granted on the date of grant using the Black-Scholes option-pricing model for the three months ended March 31, 2005. The estimates of fair value from these models are theoretical values for stock options and changes in the assumptions used in the models could result in materially different fair value estimates. The actual value of the stock options will depend on the market value of the Corporation’s common stock when the stock options are exercised.

 

     Shareholder Approved Plans  
     Three Months Ended
March 31
 
     2006     2005  

Risk-free interest rate

   4.59 - 4.70 %   3.94 %

Dividend yield

   4.50 %   4.60 %

Expected volatility

   17.00 - 27.00 %   20.53 %

Weighted-average volatility

   20.30 %   n/a  

Expected lives (years)

   6.5     6  

The Corporation has certain equity compensation plans that were approved by its shareholders. These plans are the Key Employee Stock Plan and the Key Associate Stock Plan. Descriptions of the material features of these plans follow.

Key Employee Stock Plan

The Key Employee Stock Plan, as amended and restated, provided for different types of awards. These include stock options, restricted stock shares and restricted stock units. Under the plan, ten-year options to purchase approximately 260 million shares of common stock were granted through December 31, 2002, to certain employees at the closing market price on the respective grant dates. Options granted under the plan generally vest in three or four equal annual installments. At March 31, 2006, approximately 86 million options were outstanding under this plan. No further awards may be granted.

Key Associate Stock Plan

On April 24, 2002, the shareholders approved the Key Associate Stock Plan to be effective January 1, 2003. This approval authorized and reserved 200 million shares for grant in addition to the remaining amount under the Key Employee Stock Plan as of December 31, 2002, which was approximately 34 million shares plus any shares covered by awards under the Key Employee Stock Plan that terminate, expire, lapse or are cancelled after December 31, 2002. Upon the FleetBoston Merger, the shareholders authorized an additional 102 million shares for grant under the Key Associate Stock Plan.

 

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At March 31, 2006, approximately 155 million options were outstanding under this plan. Approximately 18 million shares of restricted stock and restricted stock units were granted during the three months ended March 31, 2006. These shares of restricted stock generally vest in three equal annual installments beginning one year from the grant date. The Corporation incurred restricted stock expense of $391 million and $114 million during the three months ended March 31, 2006 and 2005.

The following table presents information on equity compensation plans at March 31, 2006:

 

     Number of Shares
to be Issued (1,3)
   Weighted Average
Exercise Price of
Outstanding
Options (2)
   Number of Shares Remaining
for Future Issuance Under
Equity Compensation Plans

Plans approved by shareholders

   255,771,100    $ 37.08    123,542,897

Plans not approved by shareholders

   18,005,585      30.68    —  
            

Total

   273,776,685      36.63    123,542,897
            

(1) Includes 14,755,019 unvested restricted stock units.
(2) Does not take into account unvested restricted stock units.
(3) In addition to the securities presented in the table above, there were outstanding options to purchase 70,402,399 shares of the Corporation’s common stock and 618,372 unvested restricted stock units granted to employees of predecessor companies assumed in mergers. The weighted average option price of the assumed options was $33.87 at March 31, 2006.

The following table presents the status of all option plans at March 31, 2006, and changes during the three months ended March 31, 2006:

 

     March 31, 2006

Employee stock options

   Shares     Weighted
Average
Exercise
Price

Outstanding at January 1, 2006

   298,132,802     $ 35.13

Options assumed through acquisition

   31,506,268       32.70

Granted

   30,999,249       44.37

Exercised

   (29,786,640 )     31.89

Forfeited

   (1,427,614 )     37.97
        

Outstanding at March 31, 2006 (1)

   329,424,065       36.04
        

Options exercisable at March 31, 2006

   257,074,593       33.77
        

Options vested and expected to vest at March 31, 2006 (2)

   326,438,576       35.96
        

(1) Included in outstanding options are 13.9 million options that were immediately expensed as they were granted to retirement eligible employees.
(2) Includes vested shares and outstanding, nonvested shares after a forfeiture rate is applied.

The weighted average remaining contractual term and aggregate intrinsic value of options outstanding was 5.7 years and $3.1 billion, options exercisable was 4.8 years and $3.0 billion, and options vested and expected to vest was 5.7 years and $3.1 billion at March 31, 2006.

The weighted average grant-date fair value of options granted during the three months ended March 31, 2006 and 2005 was $6.90 and $6.48. The total intrinsic value of options exercised during the three months ended March 31, 2006 was $409 million.

 

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The following table presents the status of the nonvested shares at March 31, 2006, and changes during the three months ended March 31, 2006:

 

     March 31, 2006

Restricted stock/unit awards

   Shares     Weighted
Average
Grant Date
Fair Value

Outstanding at January 1, 2006

   27,278,106     $ 42.79

Share obligations assumed through acquisition

   754,740       30.40

Granted

   17,569,652       44.37

Vested

   (9,894,384 )     41.11

Canceled

   (575,006 )     43.57
        

Outstanding March 31, 2006 (1)

   35,133,108       43.78
        

(1) Included in outstanding restricted stock/unit awards are 5.2 million shares that were immediately expensed as they were granted to retirement eligible employees.

At March 31, 2006, there was $1.5 billion of total unrecognized compensation cost related to share-based compensation arrangements for all awards, that is expected to be recognized over a weighted average period of 1.16 years. The total fair value of restricted stock vested during the three months ended March 31, 2006 was $437 million.

Note 14 - Business Segment Information

The Corporation reports the results of its operations through three business segments: Global Consumer and Small Business Banking, Global Corporate and Investment Banking, and Global Wealth and Investment Management. Effective January 1, 2006, the Corporation combined Global Business and Financial Services and Global Capital Markets and Investment Banking creating a new business segment called Global Corporate and Investment Banking. This new segment enables us to more effectively leverage the full breadth of the Corporation to better service our business clients. The Corporation may periodically reclassify business segment results based on modifications to its management reporting methodologies and changes in organizational alignment.

Global Consumer and Small Business Banking provides a diversified range of products and services to individuals and small businesses through its primary businesses: Deposits, Card Services, Mortgage and Home Equity. Global Corporate and Investment Banking serves domestic and international issuer and investor clients, providing financial services, specialized industry expertise and local delivery through its primary businesses: Business Lending, Capital Markets and Advisory Services, and Treasury Services. These businesses provide traditional bank deposit and loan products to large corporations and institutional clients, capital-raising solutions, advisory services, derivatives capabilities, equity and debt sales and trading for clients, as well as treasury management and payment services. Global Wealth and Investment Management offers investment services, estate management, financial planning services, fiduciary management, credit and banking expertise, and diversified asset management products to institutional clients, as well as affluent and high-net-worth individuals through its primary businesses: Private Bank, Columbia Management and Premier Banking and Investments.

All Other consists of equity investment activities including Principal Investing and corporate investments, the residual impact of the allowance for credit losses and the cost allocation processes, Merger and Restructuring Charges, intersegment eliminations, and the results of certain consumer finance and commercial lending businesses that are being liquidated. All Other also includes certain amounts associated with ALM activities, including the residual impact of funds transfer pricing allocation methodologies, amounts associated with the change in the value of derivatives used as economic hedges of interest rate and foreign exchange rate fluctuations that do not qualify for SFAS 133 hedge accounting treatment, gains or losses on sales of whole mortgage loans, and Gains on Sales of Debt Securities.

 

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Total Revenue includes Net Interest Income on a fully taxable-equivalent (FTE) basis and Noninterest Income. The adjustment of Net Interest Income to a FTE basis results in a corresponding increase in Income Tax Expense. The adjustment is included in Net Interest Income of each of the businesses and offset in All Other. The Net Interest Income of the businesses include the results of a funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics. Net Interest Income of the business segments also includes an allocation of Net Interest Income generated by the Corporation’s ALM activities.

Certain expenses not directly attributable to a specific business segment are allocated to the segments based on pre-determined means. The most significant of these expenses include data processing costs, item processing costs and certain centralized or shared functions. Data processing costs are allocated to the segments based on equipment usage. Item processing costs are allocated to the segments based on the volume of items processed for each segment. The cost of certain centralized or shared functions are allocated based on methodologies which reflect utilization.

 

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The following table presents Total Revenue on a FTE basis and Net Income for the three months ended March 31, 2006 and 2005, and Total Assets at March 31, 2006 and 2005 for each business segment, as well as All Other.

Business Segments

 

For the Three Months Ended March 31    Total Corporation    Global Consumer and
Small Business Banking (1)
    Global Corporate and
Investment Banking (1)
 

(Dollars in millions)

   2006    2005    2006     2005     2006    2005  

Net interest income (FTE basis)

   $ 9,040    $ 7,706    $ 5,400     $ 4,215     $ 2,714    $ 2,856  

Noninterest income

     8,901      6,032      4,801       2,638       2,846      2,591  
                                             

Total revenue (FTE basis)

     17,941      13,738      10,201       6,853       5,560      5,447  

Provision for credit losses

     1,270      580      1,257       710       39      (151 )

Gains (losses) on sales of debt securities

     14      659      (1 )     (1 )     23      30  

Amortization of intangibles

     440      208      378       142       41      45  

Other noninterest expense

     8,484      6,849      4,315       3,096       2,985      2,660  
                                             

Income before income taxes

     7,761      6,760      4,250       2,904       2,518      2,923  

Income tax expense

     2,775      2,367      1,575       1,026       932      1,072  
                                             

Net income

   $ 4,986    $ 4,393    $ 2,675     $ 1,878     $ 1,586    $ 1,851  
                                             

Period-end total assets

   $ 1,375,080    $ 1,212,229    $ 359,131     $ 331,769     $ 630,956    $ 593,525  
                                             
     Global Wealth and
Investment Management (1)
     All Other  

(Dollars in millions)

   2006      2005      2006      2005  

Net interest income (FTE basis)

   $ 981      $ 955      $ (55 )    $ (320 )

Noninterest income

     987        858        267        (55 )
                                   

Total revenue (FTE basis)

     1,968        1,813        212        (375 )

Provision for credit losses

     (1 )      2        (25 )      19  

Gains (losses) on sales of debt securities

     —          —          (8 )      630  

Amortization of intangibles

     19        20        2        1  

Other noninterest expense

     973        889        211        204  
                                   

Income before income taxes

     977        902        16        31  

Income tax expense (benefit)

     363        318        (95 )      (49 )
                                   

Net income

   $ 614      $ 584      $ 111      $ 80  
                                   

Period-end total assets

   $    125,819      $    129,970      $ 259,174      $ 156,965  
                                   

(1) There were no material intersegment revenues among the segments.

 

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The following table presents reconciliations of the three business segments’ Total Revenue on a FTE basis and Net Income to the Consolidated Statement of Income totals. The adjustments presented in the table below include consolidated income and expense amounts not specifically allocated to individual business segments.

 

     Three Months Ended
March 31
 

(Dollars in millions)

   2006     2005  

Segments’ total revenue (FTE basis)

   $ 17,729     $ 14,113  

Adjustments:

    

ALM activities

     (149 )     (508 )

Equity investment gains

     513       264  

Liquidating businesses

     75       57  

FTE basis adjustment

     (264 )     (200 )

Other

     (227 )     (188 )
                

Consolidated revenue

   $ 17,677     $ 13,538  
                

Segments’ net income

   $ 4,875     $ 4,313  

Adjustments, net of taxes:

    

ALM activities (1)

     (144 )     41  

Equity investment gains

     323       169  

Liquidating businesses

     41       20  

Merger and restructuring charges

     (61 )     (75 )

Other

     (48 )     (75 )
                

Consolidated net income

   $ 4,986     $ 4,393  
                

(1) Includes pre-tax Gains (Losses) on Sales of Debt Securities of $(6) million and $627 million for the three months ended March 31, 2006 and 2005.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

This report on Form 10-Q contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from those expressed in, or implied by, our forward-looking statements. Words such as “expects,” “anticipates,” “believes,” “estimates” and other similar expressions or future or conditional verbs such as “will,” “should,” “would” and “could” are intended to identify such forward-looking statements. Readers of the Form 10-Q of Bank of America Corporation and its subsidiaries (the Corporation) should not rely solely on the forward-looking statements and should consider all uncertainties and risks throughout this report as well as those discussed under Item 1A. “Risk Factors “ of the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005. The statements are representative only as of the date they are made, and the Corporation undertakes no obligation to update any forward-looking statement.

Possible events or factors that could cause results or performance to differ materially from those expressed in our forward-looking statements include the following: changes in general economic conditions and economic conditions in the geographic regions and industries in which the Corporation operates which may affect, among other things, the level of nonperforming assets, charge-offs and provision expense; changes in the interest rate environment which may reduce interest margins and impact funding sources; changes in foreign exchange rates; adverse movements and volatility in debt and equity capital markets; changes in market rates and prices which may adversely impact the value of financial products including securities, loans, deposits, debt and derivative financial instruments, and other similar financial instruments; political conditions and related actions by the United States abroad which may adversely affect the Corporation’s businesses and economic conditions as a whole; liabilities resulting from litigation and regulatory investigations, including costs, expenses, settlements and judgments; changes in domestic or foreign tax laws, rules and regulations as well as Internal Revenue Service or other governmental agencies’ interpretations thereof; various monetary and fiscal policies and regulations, including those determined by the Board of Governors of the Federal Reserve System (FRB), the Office of the Comptroller of Currency, the Federal Deposit Insurance Corporation and state regulators; changes in accounting standards, rules and interpretations; competition with other local, regional and international banks, thrifts, credit unions and other nonbank financial institutions; ability to grow core businesses; ability to develop and introduce new banking-related products, services and enhancements, and gain market acceptance of such products; mergers and acquisitions and their integration into the Corporation; decisions to downsize, sell or close units or otherwise change the business mix of the Corporation; and management’s ability to manage these and other risks.

 

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The Corporation, headquartered in Charlotte, North Carolina, operates in 30 states, the District of Columbia and 44 foreign countries. The Corporation provides a diversified range of banking and nonbanking financial services and products domestically and internationally through three business segments: Global Consumer and Small Business Banking, Global Corporate and Investment Banking, and Global Wealth and Investment Management.

At March 31, 2006, we had $1.4 trillion in assets and approximately 202,500 full-time equivalent employees. Notes to Consolidated Financial Statements referred to in Management’s Discussion and Analysis of Results of Operations and Financial Condition are incorporated by reference into Management’s Discussion and Analysis of Results of Operations and Financial Condition. Certain prior period amounts have been reclassified to conform to current period presentation.

Recent Events

On April 26, 2006, our Board of Directors (the Board) authorized a stock repurchase program of up to 200 million shares of the Corporation’s common stock at an aggregate cost not to exceed $12.0 billion to be completed within a period of 18 months.

Also on April 26, 2006, the Board declared a regular quarterly cash dividend on common stock of $0.50 per share, payable on June 23, 2006 to common shareholders of record on June 2, 2006. In January 2006, the Board declared a quarterly cash dividend of $0.50 per common share which was paid on March 24, 2006 to common shareholders of record on March 3, 2006.

On May 2, 2006, we announced an agreement to exchange our BankBoston operations in Brazil for approximately $2.2 billion in equity of Banco Itau, Brazil’s second largest nongovernment-owned banking company. We further agreed to negotiate exclusively with Banco Itau to sell BankBoston’s assets in Chile, Uruguay and certain other operations and accounts related to Latin America. Closing of the transaction for the exchange of BankBoston’s operations in Brazil will be subject to obtaining all necessary regulatory approvals.

MBNA Merger Overview

The Corporation acquired 100 percent of the outstanding stock of MBNA Corporation (MBNA) (the MBNA Merger) on January 1, 2006, for $34.6 billion. In connection therewith 1,260 million shares of MBNA common stock were exchanged for 631 million shares of the Corporation’s common stock. Prior to the MBNA Merger, this represented approximately 16 percent of the Corporation’s outstanding common stock. MBNA shareholders also received cash of $5.2 billion. The MBNA Merger was a tax-free merger for the Corporation. The acquisition expands the Corporation’s customer base and its opportunity to deepen customer relationships across the full breadth of the Corporation by delivering innovative deposit, lending and investment products and services to MBNA’s customer base. Additionally, the acquisition allows the Corporation to significantly increase its affinity relationships through MBNA’s credit card operations and sell these credit cards through our delivery channels (including the retail branch network). MBNA’s results of operations were included in the Corporation’s results beginning January 1, 2006. The transaction was accounted for under the purchase method of accounting. The purchase price has been allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the MBNA Merger date. For more information related to the MBNA Merger, see Note 2 of the Corporation’s Consolidated Financial Statements.

 

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Performance Overview

Net Income totaled $5.0 billion for the three months ended March 31, 2006, an increase of 13 percent from $4.4 billion for the three months ended March 31, 2005. For both periods, diluted earnings per common share were $1.07.

Table 1

Business Segment Total Revenue and Net Income

 

     Total Revenue     Net Income
     Three Months Ended March 31

(Dollars in millions)

   2006     2005     2006    2005

Global Consumer and Small Business Banking

   $ 10,201     $ 6,853     $ 2,675    $ 1,878

Global Corporate and Investment Banking

     5,560       5,447       1,586      1,851

Global Wealth and Investment Management

     1,968       1,813       614      584

All Other

     212       (375 )     111      80
                             

Total FTE basis (1)

     17,941       13,738       4,986      4,393

FTE adjustment (1)

     (264 )     (200 )     —        —  
                             

Total Consolidated

   $ 17,677     $ 13,538     $ 4,986    $ 4,393
                             

(1) Total revenue for the segments and All Other is on a fully taxable-equivalent (FTE) basis. For more information on a FTE basis, see Supplemental Financial Data beginning on page 36.

Global Consumer and Small Business Banking

Net Income increased $797 million, or 42 percent, to $2.7 billion for the three months ended March 31, 2006. Driving the increase was the impact of MBNA, which contributed to increases in Card Income and Net Interest Income. Also impacting the increase in Net Income were higher Service Charges due to new accounts. Partially offsetting these increases were higher Noninterest Expense and Provision for Credit Losses primarily driven by the addition of MBNA. For more information on Global Consumer and Small Business Banking, see page 42.

Global Corporate and Investment Banking

Net Income decreased $265 million, or 14 percent, to $1.6 billion for the three months ended March 31, 2006. Revenues increased by two percent driven mainly by market-based activity in Capital Markets and Advisory Services. Offsetting this revenue growth were higher risk mitigation costs, lower Asset Liability Management (ALM) allocation, higher Noninterest Expense and an increase in Provision for Credit Losses. For more information on Global Corporate and Investment Banking, see page 49.

Global Wealth and Investment Management

Net Income increased $30 million, or five percent, to $614 million for the three months ended March 31, 2006. The increase was due to an increase in asset management fees and gains on the sales of assets. Also impacting the increase in Net Income was higher Net Interest Income as a result of increases in deposit spreads offset by a decline in income from ALM activity. Partially offsetting these increases was higher Personnel Expense. Total assets under management increased $11.5 billion to $493.9 billion at March 31, 2006 compared to December 31, 2005. For more information on Global Wealth and Investment Management, see page 53.

All Other

Net Income increased $31 million, or 39 percent, to $111 million for the three months ended March 31, 2006. This increase was primarily a result of increases in Net Interest Income and Equity Investment Gains offset by a decrease in Gains on Sales of Debt Securities. For more information on All Other, see page 57.

 

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Financial Highlights

Net Interest Income

Net Interest Income on a FTE basis increased $1.3 billion to $9.0 billion for the three months ended March 31, 2006 compared to the same period in 2005. The primary drivers of the increase were the MBNA Merger, organic growth in consumer (primarily credit card and home equity) and commercial loans, and increases driven by deposit pricing strategies and a larger securities portfolio. Partially offsetting these increases were lower market-based Net Interest Income and domestic deposit funding levels (excluding the impact of the MBNA Merger). The net interest yield on a FTE basis increased two basis points (bps) to 2.98 percent primarily due to the impact of the MBNA Merger, partially offset by the adverse impact of an increase in lower-yielding, market-based Net Interest Income balances. For more information on Net Interest Income on a FTE basis, see Table 7 on pages 39 and 40.

Noninterest Income

Table 2

Noninterest Income

 

     Three Months Ended
March 31

(Dollars in millions)

   2006    2005

Service charges

   $ 1,901    $ 1,777

Investment and brokerage services

     1,103      1,013

Mortgage banking income

     137      221

Investment banking income

     501      366

Equity investment gains

     660      399

Card income

     3,436      1,289

Trading account profits

     1,074      685

Other income

     89      282
             

Total noninterest income

   $ 8,901    $ 6,032
             

Noninterest Income increased $2.9 billion to $8.9 billion for the three months ended March 31, 2006 compared to the same period in 2005, due primarily to the following:

 

    Service Charges grew $124 million due to higher levels of customer accounts.

 

    Investment and Brokerage Services increased $90 million due to higher asset management fees driven by increased levels of assets under management and higher brokerage sales.

 

    Equity Investment Gains increased $261 million due to favorable market conditions, and significant liquidity and exit opportunities in the capital markets.

 

    Card Income increased $2.1 billion as a result of increased fee income driven by higher purchase volumes for credit cards and increases in average managed credit card outstandings, all of which were primarily the result of the MBNA Merger. Card Income also benefited from the increase in debit card income.

 

    Trading Account Profits increased $389 million due to improved market conditions and increased client activity.

 

    Other Income decreased $193 million primarily related to credit risk mitigation activity in Business Lending within Global Corporate and Investment Banking.

 

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Provision for Credit Losses

The Provision for Credit Losses increased $690 million to $1.3 billion for the three months ended March 31, 2006 compared to the same period in 2005. Consumer provision increased due to the addition of MBNA and from an increase in reserves to cover the anticipated return to a more normal level of bankruptcy-related charge-offs. Commercial provision also increased primarily due to the first quarter of 2005 including a provision benefit from actions to reduce certain Latin American portfolio exposures, as well as higher costs driven by a slower rate of improvement in commercial credit quality in the first quarter of 2006 compared to the same period of 2005.

For more information on credit quality, see Credit Risk Management beginning on page 62.

Gains on Sales of Debt Securities

Gains on Sales of Debt Securities for the three months ended March 31, 2006 were $14 million compared to $659 million for the same period in 2005. For more information on Gains on Sales of Debt Securities, see Market Risk Management beginning on page 80.

Noninterest Expense

Table 3

Noninterest Expense

 

     Three Months Ended
March 31

(Dollars in millions)

   2006    2005

Personnel

   $ 4,813    $ 3,701

Occupancy

     701      636

Equipment

     344      297

Marketing

     575      337

Professional fees

     218      177

Amortization of intangibles

     440      208

Data processing

     410      364

Telecommunications

     220      206

Other general operating

     1,105      1,019

Merger and restructuring charges

     98      112
             

Total noninterest expense

   $ 8,924    $ 7,057
             

Noninterest Expense increased $1.9 billion to $8.9 billion for the three months ended March 31, 2006 compared to the same period in 2005, due primarily to the following:

 

    Personnel expense increased $1.1 billion due to the MBNA Merger and higher performance-based incentive compensation.

 

    Marketing expense increased $238 million primarily due to the MBNA Merger.

 

    Amortization expense increased $232 million due to the addition of purchased credit card relationships, affinity relationships, core deposit intangibles and other intangibles as a result of the MBNA Merger.

Income Tax Expense

Income Tax Expense was $2.5 billion, reflecting an effective tax rate of 33.5 percent, for the three months ended March 31, 2006 compared to $2.2 billion and 33.0 percent for the three months ended March 31, 2005. The increase in the effective tax rate was primarily due to the addition of MBNA.

 

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Table 4

Selected Quarterly Financial Data

 

     2006 Quarter     2005 Quarters  

(Dollars in millions, except per share information)

   First     Fourth     Third     Second     First  

Income statement

          

Net interest income

   $ 8,776     $ 7,859     $ 7,735     $ 7,637     $ 7,506  

Noninterest income

     8,901       5,951       6,416       6,955       6,032  

Total revenue

     17,677       13,810       14,151       14,592       13,538  

Provision for credit losses

     1,270       1,400       1,159       875       580  

Gains on sales of debt securities

     14       71       29       325       659  

Noninterest expense

     8,924       7,320       7,285       7,019       7,057  

Income before income taxes

     7,497       5,161       5,736       7,023       6,560  

Income tax expense

     2,511       1,587       1,895       2,366       2,167  

Net income

     4,986       3,574       3,841       4,657       4,393  

Average common shares issued and outstanding (in thousands)

     4,609,481       3,996,024       4,000,573       4,005,356       4,032,550  

Average diluted common shares issued and outstanding (in thousands)

     4,666,405       4,053,859       4,054,659       4,065,355       4,099,062  

Performance ratios

          

Return on average assets

     1.43 %     1.09 %     1.18 %     1.46 %     1.49 %

Return on average common shareholders’ equity

     15.44       14.21       15.09       18.93       17.97  

Total ending equity to total ending assets

     9.41       7.86       8.12       8.13       8.16  

Total average equity to total average assets

     9.26       7.66       7.82       7.74       8.28  

Dividend payout

     46.75       56.24       52.60       38.90       41.71  

Per common share data

          

Earnings

   $ 1.08     $ 0.89     $ 0.96     $ 1.16     $ 1.09  

Diluted earnings

     1.07       0.88       0.95       1.14       1.07  

Dividends paid

     0.50       0.50       0.50       0.45       0.45  

Book value

     28.19       25.32       25.28       25.16       24.45  

Average balance sheet

          

Total loans and leases

   $ 615,968     $ 563,589     $ 539,497     $ 520,415     $ 524,921  

Total assets

     1,416,373       1,305,057       1,294,754       1,277,478       1,200,859  

Total deposits

     659,821       628,922       632,771       640,593       627,420  

Long-term debt

     117,018       99,601       98,326       96,697       96,167  

Common shareholders’ equity

     130,881       99,677       100,974       98,558       99,130  

Total shareholders’ equity

     131,153       99,948       101,246       98,829       99,401  

Capital ratios (period end)

          

Risk-based capital:

          

Tier 1

     8.45 %     8.25 %     8.27 %     8.16 %     8.26 %

Total

     11.33       11.08       11.19       11.23       11.52  

Tier 1 Leverage

     6.18       5.91       5.90       5.66       5.86  

Market price per share of common stock

          

Closing

   $ 45.54     $ 46.15     $ 42.10     $ 45.61     $ 44.10  

High closing

     47.08       46.99       45.98       47.08       47.08  

Low closing

     43.09       41.57       41.60       44.01       43.66  

Assets

At March 31, 2006, Total Assets were $1.4 trillion, an increase of $83.3 billion, or six percent, from December 31, 2005. Average Total Assets for the three months ended March 31, 2006 increased $215.5 billion, or 18 percent, compared to the same period in 2005. Growth in period end and average Total Assets was attributable to increases in Loans and Leases, and Other Assets which increased primarily due to the acquisition of MBNA and organic growth. Period end increases in Total Assets were partially offset by decreases in Trading Account Assets and Federal Funds Sold and Securities Purchased under Agreements to Resell.

Liabilities and Shareholders’ Equity

At March 31, 2006, Total Liabilities were $1.2 trillion, an increase of $55.4 billion, or five percent, from December 31, 2005. Average Total Liabilities for the three months ended March 31, 2006 increased $183.8 billion, or 17 percent, compared to the same period in 2005. Growth in period end and average Total Liabilities was attributable to increases in Deposits and Long-term Debt. Period end and average Total Liabilities were impacted by the assumption of liabilities in connection with the MBNA Merger and organic growth.

 

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Period end and average Shareholders’ Equity increased primarily from the issuance of stock related to the MBNA Merger.

Supplemental Financial Data

Table 5 provides a reconciliation of the supplemental financial data mentioned below with financial measures defined by accounting principles generally accepted in the United States (GAAP). Other companies may define or calculate supplemental financial data differently.

Operating Basis Presentation

In managing our business, we may at times look at performance excluding certain non-recurring items. For example, as an alternative to Net Income, we view results on an operating basis, which represents Net Income excluding Merger and Restructuring Charges. The operating basis of presentation is not defined by GAAP. We believe that the exclusion of Merger and Restructuring Charges, which represent events outside our normal operations, provides a meaningful year-to-year comparison and is more reflective of normalized operations.

Net Interest Income - FTE Basis

In addition, we view Net Interest Income and related ratios and analysis (i.e. efficiency ratio, net interest yield and operating leverage) on a FTE basis. Although this is a non-GAAP measure, we believe managing the business with Net Interest Income on a FTE basis provides a more accurate picture of the interest margin for comparative purposes. To derive the FTE basis, Net Interest Income is adjusted to reflect tax-exempt income on an equivalent before-tax basis with a corresponding increase in Income Tax Expense. For purposes of this calculation, we use the federal statutory tax rate of 35 percent. This measure ensures comparability of Net Interest Income arising from taxable and tax-exempt sources.

Performance Measures

As mentioned above, certain performance measures including the efficiency ratio, net interest yield and operating leverage utilize Net Interest Income (and thus Total Revenue) on a FTE basis. The efficiency ratio measures the costs expended to generate a dollar of revenue, and net interest yield evaluates how many basis points we are earning over the cost of funds. Operating leverage measures the total percentage revenue growth minus the total percentage expense growth for the corresponding period. During our annual integrated planning process, we set operating leverage and efficiency targets for the Corporation and each line of business. Targets vary by year and by business, and are based on a variety of factors including: maturity of the business, investment appetite, competitive environment, market factors, and other items (e.g. risk appetite). The aforementioned performance measures and ratios, earnings per common share (EPS), return on average assets, and dividend payout ratio, as well as those measures discussed more fully below, are presented in Table 5.

Return on Average Common Shareholders’ Equity and Shareholder Value Added

We also evaluate our business based upon return on average common shareholders’ equity (ROE) and shareholder value added (SVA) measures. ROE and SVA utilize non-GAAP allocation methodologies. ROE measures the earnings contribution of a unit as a percentage of the Shareholders’ Equity allocated to that unit. SVA is defined as cash basis earnings on an operating basis less a charge for the use of capital. These measures are used to evaluate our use of equity (i.e. capital) at the individual unit level and are integral components in the analytics for resource allocation. Using SVA as a performance measure places specific focus on whether incremental investments generate returns in excess of the costs of capital associated with those investments. Investments and initiatives are analyzed using SVA during the annual planning process for maximizing allocation of corporate resources. In addition, profitability, relationship, and investment models all use ROE and SVA as key measures to support our overall growth goal.

 

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Table 5

Supplemental Financial Data and Reconciliations to GAAP Financial Measures

 

     Three Months Ended
March 31
 

(Dollars in millions, except per share information)

   2006     2005  

Operating basis (1)

    

Operating earnings

   $ 5,047     $ 4,468  

Operating earnings per common share

     1.09       1.11  

Diluted operating earnings per common share

     1.08       1.09  

Shareholder value added

     1,937       1,987  

Return on average assets

     1.45 %     1.51 %

Return on average common shareholders’ equity

     15.63       18.26  

Operating efficiency ratio (FTE basis)

     49.19       50.55  

Dividend payout ratio

     46.18       41.01  

Operating leverage

     3.51       14.50  
                

FTE basis data

    

Net interest income

   $ 9,040     $ 7,706  

Total revenue

     17,941       13,738  

Net interest yield

     2.98 %     2.96 %

Efficiency ratio

     49.74       51.37  
                

Reconciliation of net income to operating earnings

    

Net income

   $ 4,986     $ 4,393  

Merger and restructuring charges

     98       112  

Related income tax benefit

     (37 )     (37 )
                

Operating earnings

   $ 5,047     $ 4,468  
                

Reconciliation of EPS to operating EPS

    

Earnings per common share

   $ 1.08     $ 1.09  

Effect of merger and restructuring charges, net of tax benefit

     0.01       0.02  
                

Operating earnings per common share

   $ 1.09     $ 1.11  
                

Reconciliation of diluted EPS to diluted operating EPS

    

Diluted earnings per common share

   $ 1.07     $ 1.07  

Effect of merger and restructuring charges, net of tax benefit

     0.01       0.02  
                

Diluted operating earnings per common share

   $ 1.08     $ 1.09  
                

Reconciliation of net income to shareholder value added

    

Net income

   $ 4,986     $ 4,393  

Amortization of intangibles

     440       208  

Merger and restructuring charges, net of tax benefit

     61       75  
                

Cash basis earnings on an operating basis

     5,487       4,676  

Capital charge

     (3,550 )     (2,689 )
                

Shareholder value added

   $ 1,937     $ 1,987  
                

Reconciliation of return on average assets to operating return on average assets

    

Return on average assets

     1.43 %     1.49 %

Effect of merger and restructuring charges, net of tax benefit

     0.02       0.02  
                

Operating return on average assets

     1.45 %     1.51 %
                

Reconciliation of return on average common shareholders’ equity to operating return on average common shareholders’ equity

    

Return on average common shareholders’ equity

     15.44 %     17.97 %

Effect of merger and restructuring charges, net of tax benefit

     0.19       0.29  
                

Operating return on average common shareholders’ equity

     15.63 %     18.26 %
                

Reconciliation of efficiency ratio to operating efficiency ratio (FTE basis)

    

Efficiency ratio

     49.74 %     51.37 %

Effect of merger and restructuring charges, net of tax benefit

     (0.55 )     (0.82 )
                

Operating efficiency ratio

     49.19 %     50.55 %
                

Reconciliation of dividend payout ratio to operating dividend payout ratio

    

Dividend payout ratio

     46.75 %     41.71 %

Effect of merger and restructuring charges, net of tax benefit

     (0.57 )     (0.70 )
                

Operating dividend payout ratio

     46.18 %     41.01 %
                

Reconciliation of operating leverage to operating basis operating leverage

    

Operating leverage

     4.14 %     12.45 %

Effect of merger and restructuring charges

     (0.63 )     2.05  
                

Operating basis operating leverage

     3.51 %     14.50 %
                

(1) Operating basis excludes Merger and Restructuring Charges. Merger and Restructuring Charges were $98 million and $112 million for the three months ended March 31, 2006 and 2005.

 

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In managing our business, we review core net interest income on a managed basis, which adjusts reported Net Interest Income on a FTE basis for the impact of market-based activities and certain securitizations. As discussed in the Global Corporate and Investment Banking business segment section beginning on page 49, we evaluate our trading results and strategies based on total market-based revenue by combining net interest income and noninterest income for the Capital Markets and Advisory Services business. We also adjust for loans that we originated and sold into certain securitizations. Noninterest Income, rather than Net Interest Income and Provision for Credit Losses, is recorded for assets that have been securitized as we are compensated for servicing the securitized assets and record servicing income and gains or losses on securitizations, where appropriate. An analysis of core net interest income – managed basis, core average earning assets – managed basis and core net interest yield on earning assets – managed basis, which adjusts for the impact of these two non-core items from reported Net Interest Income on a FTE basis, is shown below.

Table 6

Core Net Interest Income - Managed Basis

 

    

Three Months Ended

March 31

 

(Dollars in millions)

   2006     2005  

Net interest income

    

As reported (FTE basis)

   $ 9,040     $ 7,706  

Impact of market-based net interest income (1)

     (410 )     (546 )
                

Core net interest income

     8,630       7,160  

Impact of securitizations

     1,725       155  
                

Core net interest income - managed basis

   $ 10,355     $ 7,315  
                

Average earning assets

    

As reported

   $ 1,219,611     $ 1,044,891  

Impact of market-based earning assets

     (336,496 )     (285,414 )
                

Core average earning assets

     883,115       759,477  

Impact of securitizations

     96,268       11,151  
                

Core average earning assets - managed basis

   $ 979,383     $ 770,628  
                

Net interest yield contribution

    

As reported (FTE basis)

     2.98 %     2.96 %

Impact of market-based activities

     0.95       0.82  
                

Core net interest yield on earning assets

     3.93       3.78  

Impact of securitizations

     0.32       0.03  
                

Core net interest yield on earning assets - managed basis

     4.25 %     3.81 %
                

(1) Market-based Net Interest Income represents Net Interest Income from the Capital Markets and Advisory Services business within Global Corporate and Investment Banking.

Core net interest income on a managed basis increased $3.0 billion for the three months ended March 31, 2006 from the comparable period in 2005. This increase was primarily driven by the impact of the MBNA Merger, organic growth in consumer (primarily credit card and home equity) and commercial loans, and increases driven by deposit pricing strategies and a larger securities portfolio. Partially offsetting these increases was lower domestic deposit funding levels (excluding the impact of the MBNA Merger).

Core average earning assets on a managed basis increased $208.8 billion primarily due to higher ALM levels (primarily securities) and higher levels of consumer loans (primarily home equity and credit card). The increases in these assets were due to organic growth as well as the impact of the MBNA Merger.

The core net interest yield on a managed basis increased 44 bps as a result of the impact of the MBNA Merger and increases in ALM activity, primarily due to the impact of interest rates.

 

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Table 7

Quarterly Average Balances and Interest Rates - FTE Basis

 

     First Quarter 2006     Fourth Quarter 2005  

(Dollars in millions)

   Average
Balance
   Interest
Income/
Expense
   Yield/
Rate
    Average
Balance
   Interest
Income/
Expense
   Yield/
Rate
 

Earning assets

                

Time deposits placed and other short-term investments

   $ 14,347    $ 139    3.92 %   $ 14,619    $ 132    3.59 %

Federal funds sold and securities purchased under agreements to resell

     174,711      1,709    3.94       165,908      1,477    3.55  

Trading account assets

     133,361      1,623    4.89       139,441      1,648    4.72  

Securities

     234,606      3,043    5.19       221,411      2,842    5.13  

Loans and leases (1):

                

Residential mortgage

     184,796      2,524    5.48       178,764      2,424    5.42  

Credit card - domestic

     68,169      2,180    12.94       56,858      1,747    12.19  

Credit card - foreign

     8,403      287    13.86       —        —      —    

Home equity lines

     64,198      1,112    7.02       60,571      1,012    6.63  

Direct/Indirect consumer

     55,025      986    7.24       47,181      703    5.91  

Other consumer (2)

     10,357      272    10.59       6,653      184    11.01  
                                

Total consumer

     390,948      7,361    7.60       350,027      6,070    6.90  
                                

Commercial - domestic

     144,693      2,490    6.97       137,224      2,280    6.59  

Commercial real estate

     36,676      632    6.99       36,017      597    6.58  

Commercial lease financing

     20,512      247    4.82       20,178      241    4.79  

Commercial - foreign

     23,139      427    7.48       20,143      378    7.45  
                                

Total commercial

     225,020      3,796    6.83       213,562      3,496    6.50  
                                

Total loans and leases

     615,968      11,157    7.32       563,589      9,566    6.75  
                                

Other earning assets

     46,618      718    6.22       40,582      596    5.83  
                                

Total earning assets (3)

     1,219,611      18,389    6.08       1,145,550      16,261    5.65  
                                        

Cash and cash equivalents

     34,857           33,693      

Other assets, less allowance for loan and lease losses

     161,905           125,814      
                        

Total assets

   $ 1,416,373         $ 1,305,057      
                        

Interest-bearing liabilities

                

Domestic interest-bearing deposits:

                

Savings

   $ 35,550    $ 76    0.87 %   $ 35,535    $ 68    0.76 %

NOW and money market deposit accounts

     227,606      908    1.62       224,122      721    1.28  

Consumer CDs and IRAs

     135,068      1,177    3.53       120,321      1,029    3.39  

Negotiable CDs, public funds and other time deposits

     8,551      70    3.30       5,085      27    2.13  
                                

Total domestic interest-bearing deposits

     406,775      2,231    2.22       385,063      1,845    1.90  
                                

Foreign interest-bearing deposits (4):

                

Banks located in foreign countries

     30,116      424    5.71       24,451      355    5.77  

Governments and official institutions

     10,200      107    4.25       7,579      73    3.84  

Time, savings and other

     35,136      245    2.83       32,624      203    2.46  
                                

Total foreign interest-bearing deposits

     75,452      776    4.17       64,654      631    3.87  
                                

Total interest-bearing deposits

     482,227      3,007    2.53       449,717      2,476    2.18  
                                

Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings

     399,896      4,309    4.37       364,140      3,855    4.20  
                

Trading account liabilities

     52,466      517    3.99       56,880      619    4.32  

Long-term debt

     117,018      1,516    5.18       99,601      1,209    4.85  
                                

Total interest-bearing liabilities (3)

     1,051,607      9,349    3.60       970,338      8,159    3.34  
                                    

Noninterest-bearing sources:

                

Noninterest-bearing deposits

     177,594           179,205      

Other liabilities

     56,019           55,566      

Shareholders’ equity

     131,153           99,948      
                        

Total liabilities and shareholders’ equity

   $ 1,416,373         $ 1,305,057      
                        

Net interest spread

         2.48           2.31  

Impact of noninterest-bearing sources

         0.50           0.51  
                                

Net interest income/yield on earning assets

      $ 9,040    2.98 %      $ 8,102    2.82 %
                                

 

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Third Quarter 2005

   

Second Quarter 2005

   

First Quarter 2005

 

(Dollars in millions)

   Average
Balance
   Interest
Income/
Expense
   Yield/
Rate
    Average
Balance
   Interest
Income/
Expense
   Yield/
Rate
    Average
Balance
   Interest
Income/
Expense
   Yield/
Rate
 

Earning assets

                        

Time deposits placed and other short-term investments

   $ 14,498    $ 125    3.43 %   $ 13,696    $ 113    3.31 %   $ 14,327    $ 101    2.87 %

Federal funds sold and securities purchased under agreements to resell

     176,650      1,382    3.12       185,835      1,249    2.69       147,855      904    2.46  

Trading account assets

     142,287      1,578    4.42       134,196      1,454    4.34       117,748      1,203    4.10  

Securities

     225,952      2,820    4.99       227,182      2,825    4.98       204,574      2,559    5.01  

Loans and leases (1):

                        

Residential mortgage

     171,012      2,298    5.37       167,263      2,285    5.47       178,075      2,415    5.44  

Credit card - domestic

     55,271      1,651    11.85       52,474      1,481    11.32       51,310      1,373    10.85  

Credit card - foreign

     —        —      —         —        —      —         —        —      —    

Home equity lines

     58,046      910    6.22       54,941      799    5.83       51,477      692    5.45  

Direct/Indirect consumer

     47,900      702    5.81       43,132      612    5.69       41,620      573    5.58  

Other consumer (2)

     6,715      170    10.05       6,968      155    8.96       7,305      158    8.75  
                                                

Total consumer

     338,944      5,731    6.73       324,778      5,332    6.58       329,787      5,211    6.38  
                                                

Commercial - domestic

     127,044      2,095    6.54       123,927      1,938    6.27       123,803      1,954    6.40  

Commercial real estate

     34,663      542    6.20       33,484      477    5.72       33,016      430    5.29  

Commercial lease financing

     20,402      239    4.69       20,446      252    4.93       20,745      260    5.01  

Commercial - foreign

     18,444      349    7.51       17,780      306    6.90       17,570      259    5.97  
                                                

Total commercial

     200,553      3,225    6.38       195,637      2,973    6.09       195,134      2,903    6.03  
                                                

Total loans and leases

     539,497      8,956    6.60       520,415      8,305    6.40       524,921      8,114    6.25  
                                                

Other earning assets

     38,745      542    5.57       37,194      512    5.52       35,466      455    5.19  
                                                

Total earning assets (3)

     1,137,629      15,403    5.39       1,118,518      14,458    5.18       1,044,891      13,336    5.14  
                                                            

Cash and cash equivalents

     32,969           34,731           31,382      

Other assets, less allowance for loan and lease losses

     124,156           124,229           124,586      
                                    

Total assets

   $ 1,294,754         $ 1,277,478         $ 1,200,859      
                                    

Interest-bearing liabilities

                        

Domestic interest-bearing deposits: