UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ü] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2007
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
Registrants 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 ü 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 ü | 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 ü
On April 30, 2007, there were 4,437,771,404 shares of Bank of America Corporation Common Stock outstanding.
Bank of America Corporation March 31, 2007 Form 10-Q |
Page | |||||
INDEX |
||||||
Part I. |
Item 1. |
Financial Statements: |
||||
Financial |
Consolidated Statement of Income for the Three Months Ended March 31, 2007 and 2006 |
3 | ||||
Consolidated Balance Sheet at March 31, 2007 and December 31, 2006 |
4 | |||||
5 | ||||||
Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2007 and 2006 |
6 | |||||
7 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 31 | ||||
31 | ||||||
32 | ||||||
Item 3. |
91 | |||||
Item 4. |
92 | |||||
Part II. Other Information |
Item 1. |
92 | ||||
Item 1A. |
92 | |||||
Item 2. |
Unregistered Sales of Equity Securities and the Use of Proceeds |
92 | ||||
Item 5. |
92 | |||||
Item 6. |
93 | |||||
94 | ||||||
95 |
2
Bank of America Corporation and Subsidiaries |
Three Months Ended March 31 | ||||||
(Dollars in millions, except per share information) | 2007 | 2006 | ||||
Interest income |
||||||
Interest and fees on loans and leases |
$ | 12,884 | $ | 11,127 | ||
Interest on debt securities |
2,380 | 3,014 | ||||
Federal funds sold and securities purchased under agreements to resell |
1,979 | 1,709 | ||||
Trading account assets |
2,273 | 1,548 | ||||
Other interest income |
1,044 | 727 | ||||
Total interest income |
20,560 | 18,125 | ||||
Interest expense |
||||||
Deposits |
4,034 | 3,007 | ||||
Short-term borrowings |
5,318 | 4,309 | ||||
Trading account liabilities |
892 | 517 | ||||
Long-term debt |
2,048 | 1,516 | ||||
Total interest expense |
12,292 | 9,349 | ||||
Net interest income |
8,268 | 8,776 | ||||
Noninterest income |
||||||
Card income |
3,333 | 3,434 | ||||
Service charges |
2,072 | 1,901 | ||||
Investment and brokerage services |
1,149 | 1,103 | ||||
Investment banking income |
638 | 501 | ||||
Equity investment gains |
1,014 | 718 | ||||
Trading account profits |
872 | 1,060 | ||||
Mortgage banking income |
213 | 137 | ||||
Other income |
534 | 47 | ||||
Total noninterest income |
9,825 | 8,901 | ||||
Total revenue |
18,093 | 17,677 | ||||
Provision for credit losses |
1,235 | 1,270 | ||||
Gains on sales of debt securities |
62 | 14 | ||||
Noninterest expense |
||||||
Personnel |
5,025 | 4,813 | ||||
Occupancy |
713 | 701 | ||||
Equipment |
350 | 344 | ||||
Marketing |
555 | 575 | ||||
Professional fees |
229 | 218 | ||||
Amortization of intangibles |
389 | 440 | ||||
Data processing |
437 | 410 | ||||
Telecommunications |
251 | 220 | ||||
Other general operating |
1,037 | 1,105 | ||||
Merger and restructuring charges |
111 | 98 | ||||
Total noninterest expense |
9,097 | 8,924 | ||||
Income before income taxes |
7,823 | 7,497 | ||||
Income tax expense |
2,568 | 2,511 | ||||
Net income |
$ | 5,255 | $ | 4,986 | ||
Net income available to common shareholders |
$ | 5,209 | $ | 4,981 | ||
Per common share information |
||||||
Earnings |
$ | 1.18 | $ | 1.08 | ||
Diluted earnings |
$ | 1.16 | $ | 1.07 | ||
Dividends paid |
$ | 0.56 | $ | 0.50 | ||
Average common shares issued and outstanding (in thousands) |
4,432,664 | 4,609,481 | ||||
Average diluted common shares issued and outstanding (in thousands) |
4,497,028 | 4,666,405 |
See accompanying Notes to Consolidated Financial Statements.
3
Bank of America Corporation and Subsidiaries |
(Dollars in millions) | March 31 2007 |
December 31 2006 |
||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 31,549 | $ | 36,429 | ||||
Time deposits placed and other short-term investments |
12,037 | 13,952 | ||||||
Federal funds sold and securities purchased under agreements to resell (includes $1,490 measured at fair value at March 31, 2007 and $138,639 and $135,409 pledged as collateral) |
138,646 | 135,478 | ||||||
Trading account assets (includes $70,501 and $92,274 pledged as collateral) |
174,218 | 153,052 | ||||||
Derivative assets |
25,279 | 23,439 | ||||||
Debt securities: |
||||||||
Available-for-sale (includes $127,143 and $83,785 pledged as collateral) |
180,961 | 192,806 | ||||||
Held-to-maturity, at cost (market value$925 and $40) |
925 | 40 | ||||||
Total debt securities |
181,886 | 192,846 | ||||||
Loans and leases (includes $3,859 measured at fair value at March 31, 2007 and $42,306 and $14,290 pledged as collateral) |
723,633 | 706,490 | ||||||
Allowance for loan and lease losses |
(8,732 | ) | (9,016 | ) | ||||
Loans and leases, net of allowance |
714,901 | 697,474 | ||||||
Premises and equipment, net |
9,271 | 9,255 | ||||||
Mortgage servicing rights (includes $2,963 and $2,869 measured at fair value) |
3,141 | 3,045 | ||||||
Goodwill |
65,696 | 65,662 | ||||||
Intangible assets |
9,217 | 9,422 | ||||||
Other assets (includes $27,565 measured at fair value at March 31, 2007) |
136,316 | 119,683 | ||||||
Total assets |
$ | 1,502,157 | $ | 1,459,737 | ||||
Liabilities |
||||||||
Deposits in domestic offices: |
||||||||
Noninterest-bearing |
$ | 174,082 | $ | 180,231 | ||||
Interest-bearing (includes $554 measured at fair value at March 31, 2007) |
425,197 | 418,100 | ||||||
Deposits in foreign offices: |
||||||||
Noninterest-bearing |
3,346 | 4,577 | ||||||
Interest-bearing |
90,176 | 90,589 | ||||||
Total deposits |
692,801 | 693,497 | ||||||
Federal funds purchased and securities sold under agreements to repurchase |
234,413 | 217,527 | ||||||
Trading account liabilities |
77,289 | 67,670 | ||||||
Derivative liabilities |
17,946 | 16,339 | ||||||
Commercial paper and other short-term borrowings |
156,844 | 141,300 | ||||||
Accrued expenses and other liabilities (includes $377 measured at fair value at March 31, 2007 and $374 and $397 of reserve for unfunded lending commitments) |
35,446 | 42,132 | ||||||
Long-term debt |
152,562 | 146,000 | ||||||
Total liabilities |
1,367,301 | 1,324,465 | ||||||
Commitments and contingencies (Notes 8 and 10) |
||||||||
Shareholders equity |
||||||||
Preferred stock, $0.01 par value; authorized100,000,000 shares; issued and outstanding121,739 shares |
2,851 | 2,851 | ||||||
Common stock and additional paid-in capital, $0.01 par value; authorized7,500,000,000 shares; issued and outstanding4,439,069,837 and 4,458,151,391 shares |
60,536 | 61,574 | ||||||
Retained earnings |
79,996 | 79,024 | ||||||
Accumulated other comprehensive income (loss) |
(7,660 | ) | (7,711 | ) | ||||
Other |
(867 | ) | (466 | ) | ||||
Total shareholders equity |
134,856 | 135,272 | ||||||
Total liabilities and shareholders equity |
$ | 1,502,157 | $ | 1,459,737 |
See accompanying Notes to Consolidated Financial Statements.
4
Bank of America Corporation and Subsidiaries |
(Dollars in millions, shares in thousands) | Preferred Stock |
Common Stock and Additional Paid-in Capital |
Retained Earnings |
Accumulated (Loss) (1) |
Other | Total Shareholders Equity |
Comprehensive Income |
|||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||||
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 changes in unrealized losses on available-for-sale debt and marketable equity securities |
(2,019 | ) | (2,019 | ) | (2,019 | ) | ||||||||||||||||||||||||
Net changes in unrealized gains on foreign currency translation adjustments |
42 | 42 | 42 | |||||||||||||||||||||||||||
Net changes in 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 | |||||||||||||
Balance, December 31, 2006 |
$ | 2,851 | 4,458,151 | $ | 61,574 | $ | 79,024 | $ | (7,711 | ) | $ | (466 | ) | $ | 135,272 | |||||||||||||||
Cumulative adjustment for accounting changes (3): |
||||||||||||||||||||||||||||||
Leveraged leases |
(1,381 | ) | (1,381 | ) | ||||||||||||||||||||||||||
Fair value option and measurement |
(208 | ) | (208 | ) | ||||||||||||||||||||||||||
Income tax uncertainties |
(146 | ) | (146 | ) | ||||||||||||||||||||||||||
Net income |
5,255 | 5,255 | $ | 5,255 | ||||||||||||||||||||||||||
Net changes in unrealized losses on available-for-sale debt and marketable equity securities |
(108 | ) | (108 | ) | (108 | ) | ||||||||||||||||||||||||
Net changes in unrealized losses on foreign currency translation adjustments |
(12 | ) | (12 | ) | (12 | ) | ||||||||||||||||||||||||
Net changes in derivatives |
140 | 140 | 140 | |||||||||||||||||||||||||||
Amortization of costs included in net periodic benefit costs |
31 | 31 | 31 | |||||||||||||||||||||||||||
Cash dividends paid: |
||||||||||||||||||||||||||||||
Common |
(2,502 | ) | (2,502 | ) | ||||||||||||||||||||||||||
Preferred |
(46 | ) | (46 | ) | ||||||||||||||||||||||||||
Common stock issued under employee plans and related tax benefits |
28,919 | 1,468 | (401 | ) | 1,067 | |||||||||||||||||||||||||
Common stock repurchased |
(48,000 | ) | (2,506 | ) | (2,506 | ) | ||||||||||||||||||||||||
Balance, March 31, 2007 |
$ | 2,851 | 4,439,070 | $ | 60,536 | $ | 79,996 | $ | (7,660 | ) | $ | (867 | ) | $ | 134,856 | $ | 5,306 |
(1) |
At March 31, 2007 and December 31, 2006, accumulated other comprehensive income (loss) (OCI) includes net gains (losses) on derivatives of $(3,557) million and $(3,697) million; net unrealized gains (losses) on available-for-sale (AFS) debt and marketable equity securities of $(2,841) million and $(2,733) million; unamortized net periodic benefit costs of $(1,397) million and $(1,428) million, and net unrealized gains (losses) on foreign currency translation adjustments of $135 million and $147 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. |
(3) |
Effective January 1, 2007, the Corporation adopted FSP 13-2, SFAS 157, SFAS 159 and FIN 48. For additional information on the adoption of these accounting pronouncements, see Note 1 of the Consolidated Financial Statements. |
See accompanying Notes to Consolidated Financial Statements.
5
Bank of America Corporation and Subsidiaries |
Three Months Ended March 31 | ||||||||
(Dollars in millions) | 2007 | 2006 | ||||||
Operating activities |
||||||||
Net income |
$ | 5,255 | $ | 4,986 | ||||
Reconciliation of net income to net cash provided by (used in) operating activities: |
||||||||
Provision for credit losses |
1,235 | 1,270 | ||||||
Gains on sales of debt securities |
(62 | ) | (14 | ) | ||||
Depreciation and premises improvements amortization |
275 | 278 | ||||||
Amortization of intangibles |
389 | 440 | ||||||
Deferred income tax expense |
244 | 326 | ||||||
Net (increase) decrease in trading and derivative instruments |
(8,356 | ) | 18,388 | |||||
Net increase in other assets |
(12,126 | ) | (15,790 | ) | ||||
Net increase (decrease) in accrued expenses and other liabilities |
(6,740 | ) | 487 | |||||
Other operating activities, net |
255 | (1,873 | ) | |||||
Net cash provided by (used in) operating activities |
(19,631 | ) | 8,498 | |||||
Investing activities |
||||||||
Net decrease in time deposits placed and other short-term investments |
1,927 | 2,671 | ||||||
Net (increase) decrease in federal funds sold and securities purchased under agreements to resell |
(3,348 | ) | 12,704 | |||||
Proceeds from sales of available-for-sale debt securities |
4,173 | 7,032 | ||||||
Proceeds from paydowns and maturities of available-for-sale debt securities |
5,157 | 5,357 | ||||||
Purchases of available-for-sale debt securities |
(2,934 | ) | (26,548 | ) | ||||
Proceeds from maturities of held-to-maturity debt securities |
24 | | ||||||
Proceeds from sales of loans and leases |
17,527 | 6,819 | ||||||
Other changes in loans and leases, net |
(44,304 | ) | (16,442 | ) | ||||
Net (purchases) dispositions of premises and equipment |
(358 | ) | 140 | |||||
Proceeds from sales of foreclosed properties |
38 | 32 | ||||||
(Acquisition) divestiture of business activities, net |
(460 | ) | (3,519 | ) | ||||
Other investing activities, net |
(2,040 | ) | (380 | ) | ||||
Net cash used in investing activities |
(24,598 | ) | (12,134 | ) | ||||
Financing activities |
||||||||
Net increase in deposits |
4,471 | 19,021 | ||||||
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase |
16,985 | (4,521 | ) | |||||
Net increase (decrease) in commercial paper and other short-term borrowings |
15,617 | (18,828 | ) | |||||
Proceeds from issuance of long-term debt |
16,927 | 10,197 | ||||||
Retirement of long-term debt |
(10,050 | ) | (1,330 | ) | ||||
Proceeds from issuance of common stock |
323 | 948 | ||||||
Common stock repurchased |
(2,506 | ) | (4,069 | ) | ||||
Cash dividends paid |
(2,548 | ) | (2,334 | ) | ||||
Excess tax benefits of share-based payments |
148 | 75 | ||||||
Other financing activities, net |
(10 | ) | 50 | |||||
Net cash provided by (used in) financing activities |
39,357 | (791 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents |
(8 | ) | 3 | |||||
Net decrease in cash and cash equivalents |
(4,880 | ) | (4,424 | ) | ||||
Cash and cash equivalents at January 1 |
36,429 | 36,999 | ||||||
Cash and cash equivalents at March 31 |
$ | 31,549 | $ | 32,575 |
During the three months ended March 31, 2007, the Corporation sold its operations in Chile and Uruguay for equity in Banco Itaú Holding Financeira S.A. and its assets in BankBoston Argentina for the assumption of its liabilities. The total assets and liabilities in these divestitures were $6.1 billion and $5.6 billion.
During the three months ended March 31, 2007, there were $3.7 billion of AFS debt securities that were transferred to trading account assets following the adoption of SFAS 159.
The fair values of noncash assets acquired and liabilities assumed in the MBNA merger were $83.3 billion and $50.4 billion at January 1, 2006.
Approximately 631 million shares of common stock, valued at approximately $28.9 billion were issued in connection with the MBNA merger at January 1, 2006.
See accompanying Notes to Consolidated Financial Statements.
6
Bank of America Corporation and Subsidiaries |
Bank of America Corporation and its subsidiaries (the Corporation), through its banking and nonbanking subsidiaries, provides a diverse range of financial services and products throughout the U.S. and in selected international markets. At March 31, 2007, the Corporation operated its banking activities primarily under two charters: Bank of America, National Association (Bank of America, N.A.) and FIA Card Services, N.A.
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.
Effective January 1, 2007, the Corporation changed its basis of presentation for its business segments. For additional information see Note 16 of the Consolidated Financial Statements.
Prior period amounts have been reclassified to conform to current period presentation.
Recently Adopted Accounting Pronouncements |
Effective January 1, 2007, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS 157) and SFAS No. 159 The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 157 defines fair value, establishes a framework for measuring fair value under accounting principles generally accepted in the United States (GAAP) and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The impact of adopting both SFAS 157 and SFAS 159 reduced the beginning balance of retained earnings as of January 1, 2007 by $208 million, net of tax. Subsequent changes in fair value of these financial assets and liabilities are recognized in earnings when they occur. For additional information on the fair value of certain financial assets and liabilities, see Note 14 of the Consolidated Financial Statements.
Effective January 1, 2007, the Corporation adopted FASB Staff Position (FSP) No. FAS 13-2, Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction (FSP 13-2). The principal provision of FSP 13-2 is the requirement that a lessor recalculate the recognition of lease income when there is a change in the estimated timing of the cash flows relating to income taxes generated by such leveraged lease. The adoption of FSP 13-2 reduced the beginning balance of retained earnings as of January 1, 2007 by $1,381 million, net of tax, with a corresponding offset decreasing the net investment in leveraged leases recorded as part of loans and leases. Following the adoption, if during the remainder of the lease term the timing of the income tax cash flows generated by the leveraged leases are revised as a result of final determination by the Internal Revenue Service of certain leveraged leases or management changes its assumption about the timing of the tax cash flows, the rate of return shall be recalculated from the inception of the lease using the revised assumption and the change in the net investment shall be recognized as a gain or loss in the year in which the assumption is changed.
Effective January 1, 2007, the Corporation adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting and reporting for income taxes where interpretation of the tax law may be uncertain. FIN 48 prescribes a
7
comprehensive model for the financial statement recognition, measurement, presentation and disclosure of income tax uncertainties with respect to positions taken or expected to be taken in income tax returns. The adoption of FIN 48 reduced the beginning balance of retained earnings as of January 1, 2007 by $146 million and increased goodwill by $52 million. For additional information on income taxes, 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 Corporations 2006 Annual Report on Form 10-K.
NOTE 2 MBNA Merger and Restructuring Activity
|
On January 1, 2006, the Corporation acquired 100 percent of the outstanding stock of MBNA through a tax-free merger. MBNAs results of operations were included in the Corporations results beginning January 1, 2006.
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.
Three Months Ended March 31 | ||||||
(Dollars in millions) | 2007 | 2006 | ||||
Severance and employee-related charges |
$ | 12 | $ | 20 | ||
Systems integrations and related charges |
79 | 48 | ||||
Other |
20 | 30 | ||||
Total merger and restructuring charges |
$ | 111 | $ | 98 |
Exit Cost and Restructuring Reserves
|
As of December 31, 2006, there were $125 million of exit cost reserves, including $121 million for severance, relocation and other employee-related expenses and $4 million for contract terminations. Cash payments of $26 million during the three months ended March 31, 2007 consisted of $24 million of severance, relocation and other employee-related costs and $2 million of contract terminations. The impact of these items reduced the balance in the liability to $99 million at March 31, 2007.
As of December 31, 2006, there were $67 million of restructuring reserves remaining, including $58 million related to severance and other employee-related expenses and $9 million related to contract terminations. During the three months ended March 31, 2007, $11 million was recorded to the restructuring reserves. During the three months ended March 31, 2007, cash payments of $28 million for severance and other employee-related costs and $5 million of contract terminations have reduced this liability. The net impact of these items resulted in a balance of $45 million at March 31, 2007.
Payments under exit cost and restructuring reserves associated with the MBNA merger are expected to be substantially completed in 2007. The following table presents the changes in exit cost and restructuring reserves for the three months ended March 31, 2007 and 2006.
Three Months Ended March 31 | |||||||||||||||
Exit Cost Reserves (1) |
Restructuring Reserves (2) | ||||||||||||||
(Dollars in millions) | 2007 | 2006 | 2007 | 2006 | |||||||||||
Balance, January 1, |
$ | 125 | $ | | $ | 67 | $ | | |||||||
MBNA exit costs |
| 269 | | | |||||||||||
Restructuring charges |
| | 11 | 34 | |||||||||||
Cash payments |
(26 | ) | (22 | ) | (33 | ) | | ||||||||
Balance, March 31 |
$ | 99 | $ | 247 | $ | 45 | $ | 34 |
(1) |
Exit cost reserves were established in purchase accounting resulting in an increase in goodwill. |
(2) |
Restructuring reserves were established by a charge to merger and restructuring charges. |
8
NOTE 3 Trading Account Assets and Liabilities |
The following table presents the fair values of the components of trading account assets and liabilities at March 31, 2007 and December 31, 2006.
March 31 | December 31 | |||||
(Dollars in millions) | 2007 | 2006 | ||||
Trading account assets |
||||||
Corporate securities, trading loans and other |
$ | 63,705 | $ | 53,923 | ||
U.S. government and agency securities (1) |
43,629 | 36,656 | ||||
Equity securities |
31,362 | 27,103 | ||||
Mortgage trading loans and asset-backed securities |
16,111 | 15,449 | ||||
Foreign sovereign debt |
19,411 | 19,921 | ||||
Total trading account assets |
$ | 174,218 | $ | 153,052 | ||
Trading account liabilities |
||||||
U.S. government and agency securities |
$ | 32,713 | $ | 26,760 | ||
Equity securities |
26,540 | 23,908 | ||||
Foreign sovereign debt |
10,133 | 9,261 | ||||
Corporate securities and other |
7,903 | 7,741 | ||||
Total trading account liabilities |
$ | 77,289 | $ | 67,670 |
(1) |
Includes $23.0 billion and $22.7 billion at March 31, 2007 and December 31, 2006 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. The Corporation designates at inception whether the derivative contract is considered hedging or non-hedging for SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133) accounting purposes. Derivatives held for trading purposes are included in derivative assets or derivative liabilities with changes in fair value reflected in trading account profits. Other derivatives that are used as 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. A detailed discussion of derivative trading activities and asset and liability management (ALM) activities are presented in Notes 1 and 4 of the Consolidated Financial Statements of the Corporations 2006 Annual Report on Form 10-K.
9
The following table presents the contract/notional amounts and credit risk amounts at March 31, 2007 and December 31, 2006 of all the Corporations 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 March 31, 2007 and December 31, 2006, the cash collateral applied against derivative assets on the Consolidated Balance Sheet was $8.7 billion and $7.3 billion. In addition, at March 31, 2007 and December 31, 2006, the cash collateral placed against derivative liabilities was $6.0 billion and $6.5 billion.
March 31, 2007 | December 31, 2006 | |||||||||||
(Dollars in millions) |
Contract/ Notional |
Credit Risk |
Contract/ Notional |
Credit Risk | ||||||||
Interest rate contracts |
||||||||||||
Swaps |
$ | 19,305,549 | $ | 9,834 | $ | 18,185,655 | $ | 9,601 | ||||
Futures and forwards |
2,690,359 | 56 | 2,283,579 | 103 | ||||||||
Written options |
1,264,115 | | 1,043,933 | | ||||||||
Purchased options |
1,645,827 | 1,808 | 1,308,888 | 2,212 | ||||||||
Foreign exchange contracts |
||||||||||||
Swaps |
492,428 | 4,292 | 451,462 | 4,241 | ||||||||
Spot, futures and forwards |
1,378,049 | 2,296 | 1,234,009 | 2,995 | ||||||||
Written options |
421,185 | | 464,420 | | ||||||||
Purchased options |
494,530 | 1,079 | 414,004 | 1,391 | ||||||||
Equity contracts |
||||||||||||
Swaps |
47,308 | 1,225 | 32,247 | 577 | ||||||||
Futures and forwards |
22,511 | 31 | 19,947 | 24 | ||||||||
Written options |
197,572 | | 102,902 | | ||||||||
Purchased options |
233,146 | 10,759 | 104,958 | 7,513 | ||||||||
Commodity contracts |
||||||||||||
Swaps |
6,565 | 948 | 4,868 | 1,129 | ||||||||
Futures and forwards |
18,481 | 6 | 13,513 | 2 | ||||||||
Written options |
12,484 | | 9,947 | | ||||||||
Purchased options |
10,663 | 199 | 6,796 | 184 | ||||||||
Credit derivatives |
2,025,200 | 1,482 | 1,497,869 | 756 | ||||||||
Credit risk before cash collateral |
34,015 | 30,728 | ||||||||||
Less: Cash collateral applied |
8,736 | 7,289 | ||||||||||
Total derivative assets |
$ | 25,279 | $ | 23,439 |
The average fair value of derivative assets, less cash collateral, for the three months ended March 31, 2007 and December 31, 2006 was $25.1 billion and $24.3 billion. The average fair value of derivative liabilities for the three months ended March 31, 2007 and December 31, 2006 was $17.7 billion and $17.1 billion.
Fair Value and Cash Flow Hedges |
The Corporation uses various types of interest rate and foreign exchange 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 other comprehensive income (OCI) of approximately $1.0 billion ($653 million after-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.
10
The following table summarizes certain information related to the Corporations derivative hedges accounted for under SFAS 133 for the three months ended March 31, 2007 and 2006.
Three Months Ended March 31 | ||||||||
(Dollars in millions) | 2007 | 2006 | ||||||
Fair value hedges |
||||||||
Hedge ineffectiveness recognized in earnings (1) |
$ | 2 | $ | (19 | ) | |||
Cash flow hedges | ||||||||
Hedge ineffectiveness recognized in earnings (1) |
| (1 | ) | |||||
Net investment hedges | ||||||||
Gains (losses) included in foreign currency translation adjustments within accumulated OCI |
(35 | ) | 10 |
(1) |
Hedge ineffectiveness was recognized within net interest income in the Consolidated Statement of Income for the three months ended March 31, 2007 and 2006. |
NOTE 5 Securities |
The amortized cost, gross unrealized gains and losses, and fair value of available-for-sale (AFS) debt and marketable equity securities, and held-to-maturity debt securities at March 31, 2007 and December 31, 2006 were:
(Dollars in millions) | Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||
Available-for-sale debt securities, March 31, 2007 |
|||||||||||||
U.S. Treasury securities and agency debentures |
$ | 692 | $ | | $ | (6 | ) | $ | 686 | ||||
Mortgage-backed securities |
157,148 | 3 | (4,490 | ) | 152,661 | ||||||||
Foreign securities |
7,935 | 2 | (44 | ) | 7,893 | ||||||||
Corporate/Agency bonds |
4,151 | | (73 | ) | 4,078 | ||||||||
Other taxable securities (1) |
9,814 | 9 | (48 | ) | 9,775 | ||||||||
Total taxable securities |
179,740 | 14 | (4,661 | ) | 175,093 | ||||||||
Tax-exempt securities |
5,887 | 12 | (31 | ) | 5,868 | ||||||||
Total available-for-sale debt securities |
$ | 185,627 | $ | 26 | $ | (4,692 | ) | $ | 180,961 | ||||
Available-for-sale marketable equity securities (2) |
$ | 2,648 | $ | 184 | $ | (73 | ) | $ | 2,759 | ||||
Available-for-sale debt securities, December 31, 2006 |
|||||||||||||
U.S. Treasury securities and agency debentures |
$ | 697 | $ | | $ | (9 | ) | $ | 688 | ||||
Mortgage-backed securities |
161,693 | 4 | (4,804 | ) | 156,893 | ||||||||
Foreign securities |
12,126 | 2 | (78 | ) | 12,050 | ||||||||
Corporate/Agency bonds |
4,699 | | (96 | ) | 4,603 | ||||||||
Other taxable securities (1) |
12,077 | 10 | (38 | ) | 12,049 | ||||||||
Total taxable securities |
191,292 | 16 | (5,025 | ) | 186,283 | ||||||||
Tax-exempt securities |
6,493 | 64 | (34 | ) | 6,523 | ||||||||
Total available-for-sale debt securities |
$ | 197,785 | $ | 80 | $ | (5,059 | ) | $ | 192,806 | ||||
Available-for-sale marketable equity securities (2) |
$ | 2,799 | $ | 408 | $ | (10 | ) | $ | 3,197 | ||||
Held-to-maturity debt securities, March 31, 2007 |
|||||||||||||
Taxable securities |
$ | 909 | $ | | $ | | $ | 909 | |||||
Tax-exempt securities |
16 | | | 16 | |||||||||
Total held-to-maturity debt securities |
$ | 925 | $ | | $ | | $ | 925 | |||||
Held-to-maturity debt securities, December 31, 2006 |
|||||||||||||
Taxable securities |
$ | 1 | $ | | $ | | $ | 1 | |||||
Tax-exempt securities |
39 | | | 39 | |||||||||
Total held-to-maturity debt securities |
$ | 40 | $ | | $ | | $ | 40 |
(1) |
Includes asset-backed securities. |
(2) |
Represents those AFS marketable equity securities that are recorded in other assets on the Consolidated Balance Sheet. |
11
At March 31, 2007 and December 31, 2006, accumulated net unrealized losses on AFS debt and marketable equity securities included in accumulated OCI were $2.8 billion and $2.9 billion, net of the related income tax benefit of $1.8 billion and $1.7 billion, respectively. Effective January 1, 2007, the Corporation redesignated $909 million of securities at amortized cost from AFS to held-to-maturity.
For all AFS debt and marketable equity securities that are in an unrealized loss position, we have the intent and ability to hold these securities to recovery.
Strategic Investments |
The Corporation owns approximately nine percent, or 19.1 billion shares, of the stock of China Construction Bank (CCB) which is recorded in other assets. These shares are accounted for at cost as they are non-transferable until October 2008. The Corporation also holds an option to increase its ownership interest in CCB to 19.9 percent. This option expires in February 2011.
Additionally, the Corporation owns $2.6 billion in preferred stock of Banco Itaú Holding Financeira S.A. (Banco Itaú), which is recorded in other assets. These shares are accounted for at cost as they are non-transferable until May 2009.
The shares of CCB and Banco Itaú are currently carried at cost but, as required by GAAP, will be accounted for as AFS marketable equity securities and carried at fair value with an offset to accumulated OCI beginning in the fourth quarter of 2007 and second quarter of 2008, respectively. The fair values of the CCB shares and Banco Itaú shares were approximately $10.9 billion and $3.1 billion at March 31, 2007.
For additional information on securities, see Notes 1 and 5 of the Consolidated Financial Statements of the Corporations 2006 Annual Report on Form 10-K.
NOTE 6 Outstanding Loans and Leases |
Outstanding loans and leases at March 31, 2007 and December 31, 2006 were:
(Dollars in millions) | March 31 2007 |
December 31 2006 | ||||
Consumer |
||||||
Residential mortgage |
$ | 254,845 | $ | 241,181 | ||
Credit carddomestic |
54,490 | 61,195 | ||||
Credit cardforeign |
11,430 | 10,999 | ||||
Home equity (1) |
91,725 | 87,896 | ||||
Direct/Indirect consumer (1) |
62,124 | 55,501 | ||||
Other consumer (1, 2) |
8,189 | 8,933 | ||||
Total consumer |
482,803 | 465,705 | ||||
Commercial |
||||||
Commercialdomestic |
160,190 | 161,982 | ||||
Commercial real estate (3) |
36,022 | 36,258 | ||||
Commercial lease financing |
19,988 | 21,864 | ||||
Commercialforeign |
20,771 | 20,681 | ||||
Total commercial loans measured at historical cost |
236,971 | 240,785 | ||||
Commercial loans measured at fair value (4) |
3,859 | n/a | ||||
Total commercial |
240,830 | 240,785 | ||||
Total loans and leases |
$ | 723,633 | $ | 706,490 |
(1) |
Home equity loans of $13.0 billion at December 31, 2006 have been reclassified to home equity from direct/indirect consumer and other consumer to conform to the current period presentation. |
(2) |
Includes foreign consumer loans of $4.7 billion and $6.2 billion, and consumer finance loans of $3.5 billion and $2.8 billion at March 31, 2007 and December 31, 2006. |
(3) |
Includes domestic commercial real estate loans of $35.4 billion and $35.7 billion, and foreign commercial real estate loans of $606 million and $578 million at March 31, 2007 and December 31, 2006. |
(4) |
Certain commercial loans are measured at fair value in accordance with SFAS 159 and include commercial domestic loans of $2.75 billion, commercial foreign loans of $932 million and commercial real estate loans of $179 million at March 31, 2007. See Note 14 of the Consolidated Financial Statements for additional discussion of fair value for certain financial instruments. |
n/a | = not applicable |
12
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, 2007 and December 31, 2006. SFAS 114 impairment includes performing troubled debt restructurings and excludes all commercial leases.
(Dollars in millions) | March 31 2007 |
December 31 2006 | ||||
Commercialdomestic |
$ | 513 | $ | 586 | ||
Commercial real estate |
189 | 118 | ||||
Commercialforeign |
29 | 13 | ||||
Total impaired loans |
$ | 731 | $ | 717 |
At March 31, 2007 and December 31, 2006, nonperforming loans and leases, including impaired and nonaccrual consumer loans, totaled $2.0 billion and $1.8 billion. In addition, included in other assets were consumer and commercial nonperforming loans held-for-sale of $94 million and $80 million at March 31, 2007 and December 31, 2006.
NOTE 7 Allowance for Credit Losses |
The following table summarizes the changes in the allowance for credit losses for the three months ended March 31, 2007 and 2006.
Three Months Ended March 31 |
||||||||
(Dollars in millions) | 2007 | 2006 | ||||||
Allowance for loan and lease losses, January 1 |
$ | 9,016 | $ | 8,045 | ||||
Transition adjustment due to the adoption of SFAS 159 |
(32 | ) | | |||||
MBNA balance, January 1, 2006 |
| 577 | ||||||
Loans and leases charged off |
(1,743 | ) | (1,117 | ) | ||||
Recoveries of loans and leases previously charged off |
316 | 295 | ||||||
Net charge-offs |
(1,427 | ) | (822 | ) | ||||
Provision for loan and lease losses |
1,228 | 1,270 | ||||||
Other |
(53 | ) | (3 | ) | ||||
Allowance for loan and lease losses, March 31 |
8,732 | 9,067 | ||||||
Reserve for unfunded lending commitments, January 1 |
397 | 395 | ||||||
Transition adjustment due to the adoption of SFAS 159 |
(28 | ) | | |||||
Provision for unfunded lending commitments |
7 | | ||||||
Other |
(2 | ) | | |||||
Reserve for unfunded lending commitments, March 31 |
374 | 395 | ||||||
Total allowance for credit losses |
$ | 9,106 | $ | 9,462 |
NOTE 8 Securitizations |
The Corporation securitizes credit card, other consumer and commercial loans. With each securitization the Corporation may retain all or a portion of the securities, subordinated tranches, interest-only strips, subordinated interests in accrued interest and fees on the securitized receivables, and, in some cases, cash reserve accounts, all of which are known as retained interests. These retained interests are carried at fair value or amounts that approximate fair value. Changes in the fair value of the credit card interest-only strips are recorded in card income. For all other retained interests the changes in fair value are recorded in accumulated OCI. The securitized loans may be serviced by the Corporation or by third parties.
13
The Corporation also uses other special purpose financing entities to access the commercial paper market for other lending, leasing and real estate activities.
As of March 31, 2007 and December 31, 2006 the aggregate debt securities outstanding for the Corporations credit card securitization trusts were $97.9 billion and $96.8 billion. Key assumptions used in measuring the fair value of certain interests that continue to be held by the Corporation (included in other assets) from credit card securitizations and the sensitivity of the current fair value of residual cash flows to changes in those assumptions are as follows:
(Dollars in millions) | March 31 2007 |
December 31 2006 |
||||||||
Carrying amount of residual interests (at fair value) (1) | $ | 2,935 | $ | 2,929 | ||||||
Balance of unamortized securitized loans | 99,507 | 98,295 | ||||||||
Weighted average life to call or maturity (in years) | 0.3 | 0.3 | ||||||||
Monthly payment rate | 11.0-16.7 | % | 11.2-19.8 | % | ||||||
Impact on fair value of 10% favorable change | $ | 56 | $ | 43 | ||||||
Impact on fair value of 25% favorable change | 162 | 133 | ||||||||
Impact on fair value of 10% adverse change | (41 | ) | (38 | ) | ||||||
Impact on fair value of 25% adverse change | (92 | ) | (82 | ) | ||||||
Expected credit losses (annual rate) | 3.3-6.0 | % | 3.8-5.8 | % | ||||||
Impact on fair value of 10% favorable change | $ | 107 | $ | 86 | ||||||
Impact on fair value of 25% favorable change | 268 | 218 | ||||||||
Impact on fair value of 10% adverse change | (107 | ) | (85 | ) | ||||||
Impact on fair value of 25% adverse change | (268 | ) | (211 | ) | ||||||
Residual cash flows discount rate (annual rate) | 12.0 | % | 12.5 | % | ||||||
Impact on fair value of 100 bps favorable change | $ | 14 | $ | 12 | ||||||
Impact on fair value of 200 bps favorable change | 21 | 17 | ||||||||
Impact on fair value of 100 bps adverse change | (16 | ) | (14 | ) | ||||||
Impact on fair value of 200 bps adverse change | (32 | ) | (27 | ) |
(1) |
Residual interests include interest-only strips, subordinated tranches, subordinated interests in accrued interest and fees on the securitized receivables and cash reserve accounts which are carried at fair value or amounts that approximate fair value. |
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.
Principal proceeds from collections reinvested in revolving credit card securitizations were $44.7 billion and $39.1 billion for the three months ended March 31, 2007 and 2006. Contractual credit card servicing fee income totaled $509 million and $440 million for the three months ended March 31, 2007 and 2006. Other cash flows received on credit card securitization interests that continued to be held by the Corporation were $1.7 billion and $1.8 billion for the three months ended March 31, 2007 and 2006.
Variable Interest Entities
|
At March 31, 2007 and December 31, 2006, the assets and liabilities of the Corporations 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 AFS and held-to-maturity debt securities, other assets, and commercial paper and other short-term borrowings. As of March 31, 2007 and December 31, 2006, the Corporation held $10.6 billion and $10.5 billion of assets in these entities, and in the unlikely event that all of the assets in the VIEs become worthless, the Corporations maximum loss exposure associated with these entities including unfunded lending commitments would be approximately $13.2 billion and $12.9 billion. In addition, the Corporation had net investments in leveraged lease trusts totaling $6.5 billion and $8.6 billion at March 31, 2007 and
14
December 31, 2006. These amounts, which were reflected in loans and leases, represent the Corporations maximum loss exposure to these entities in the unlikely event that the leveraged lease investments become worthless. Debt issued by the leveraged lease trusts is nonrecourse to the Corporation. 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, 2007 and December 31, 2006, the amount of assets of these entities was $3.2 billion and $3.3 billion, and in the unlikely event that all of the assets in the VIEs become worthless, the Corporations maximum possible loss exposure would be $1.5 billion and $1.6 billion.
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 Corporations 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 or invests in other special purpose vehicles that engage in lending, investing, or real estate activities. Total assets of these entities at March 31, 2007 and December 31, 2006 were approximately $54.1 billion and $51.9 billion. Revenues associated with administration, liquidity, letters of credit and other services were approximately $33 million and $29 million for the three months ended March 31, 2007 and 2006. At March 31, 2007 and December 31, 2006, in the unlikely event that all of the assets in the VIEs become worthless, the Corporations maximum loss exposure associated with these VIEs would be approximately $51.7 billion and $46.0 billion, which is net of amounts syndicated.
Management does not believe losses resulting from the Corporations involvement with the entities discussed above will be material. See Notes 1 and 9 of the Consolidated Financial Statements of the Corporations 2006 Annual Report on Form 10-K for additional discussion of special purpose financing entities.
NOTE 9 Goodwill and Intangibles |
The following table presents allocated goodwill at March 31, 2007 and December 31, 2006 for each business segment and All Other.
(Dollars in millions) | March 31 2007 |
December 31 2006 | ||||
Global Consumer and Small Business Banking |
$ | 38,813 | $ | 38,760 | ||
Global Corporate and Investment Banking |
21,425 | 21,420 | ||||
Global Wealth and Investment Management |
5,243 | 5,243 | ||||
All Other |
215 | 239 | ||||
Total goodwill |
$ | 65,696 | $ | 65,662 |
The gross carrying values and accumulated amortization related to intangible assets at March 31, 2007 and December 31, 2006 are presented below:
March 31, 2007 | December 31, 2006 | |||||||||||
(Dollars in millions) | Gross Carrying Value |
Accumulated Amortization |
Gross Carrying Value |
Accumulated Amortization | ||||||||
Purchased credit card relationships |
$ | 6,791 | $ | 1,360 | $ | 6,790 | $ | 1,159 | ||||
Core deposit intangibles |
3,847 | 2,503 | 3,850 | 2,396 | ||||||||
Affinity relationships |
1,675 | 259 | 1,650 | 205 | ||||||||
Other intangibles |
1,686 | 660 | 1,525 | 633 | ||||||||
Total intangible assets |
$ | 13,999 | $ | 4,782 | $ | 13,815 | $ | 4,393 |
Amortization of intangibles expense was $389 million and $440 million for the three months ended March 31, 2007 and 2006. The Corporation estimates that aggregate amortization expense is expected to be approximately $370 million, $360 million, and $350 million for the second, third and fourth quarters of 2007. In addition, the Corporation estimates the aggregate amortization expense will be approximately $1.3 billion, $1.2 billion, $1.0 billion, $900 million and $800 million for 2008 through 2012, respectively.
15
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 Corporations 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 Corporations 2006 Annual Report on Form 10-K. The outstanding unfunded lending commitments shown in the following table have been reduced by amounts participated to other financial institutions of $36.4 billion and $30.5 billion at March 31, 2007 and December 31, 2006. The carrying amount for these commitments, which represents the liability recorded related to these instruments, at March 31, 2007 and December 31, 2006 was $782 million and $444 million. At March 31, 2007, the carrying amount included deferred revenue of $31 million, a reserve for unfunded lending commitments of $374 million and the fair value of certain unfunded commitments of $377 million that are recorded in accrued expenses and other liabilities. See Note 14 of the Consolidated Financial Statements for additional information on the adoption of SFAS 159. At March 31, 2007, the notional amount of total legally binding commitments measured at fair value in accordance with SFAS 159 was $21.5 billion. The table below only reflects the commitments notional value and excludes the fair value adjustments of $377 million. At December 31, 2006, the carrying amount included deferred revenue of $47 million and a reserve for unfunded lending commitments of $397 million.
(Dollars in millions) | March 31 2007 |
December 31 2006 | ||||
Loan commitments (1) |
$ | 346,384 | $ | 338,205 | ||
Home equity lines of credit |
102,726 | 98,200 | ||||
Standby letters of credit and financial guarantees |
53,235 | 53,006 | ||||
Commercial letters of credit |
4,308 | 4,482 | ||||
Legally binding commitments |
506,653 | 493,893 | ||||
Credit card lines |
869,826 | 853,592 | ||||
Total credit extension commitments |
$ | 1,376,479 | $ | 1,347,485 |
(1) |
Included at March 31, 2007 and December 31, 2006, were equity commitments of $1.7 billion and $2.8 billion, related to obligations to further fund equity investments. |
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, 2007 and December 31, 2006, charge cards (nonrevolving card lines) to individuals and government entities, both of which are guaranteed by the U.S. government, in the amount of $9.6 billion were not included in credit card line commitments in the previous table. The outstanding balances related to these charge cards were $212 million and $193 million at March 31, 2007 and December 31, 2006.
At March 31, 2007, the Corporation had whole mortgage loan purchase commitments of $4.4 billion and whole loan sale commitments of $415 million, all of which will settle in the second quarter of 2007. At December 31, 2006, the Corporation had whole mortgage loan purchase commitments of $8.5 billion, all of which settled in the first quarter of 2007.
At March 31, 2007 the Corporation had home equity loan purchase commitments of $1.3 billion, all of which will settle in the second quarter of 2007. At December 31, 2006 the Corporation had home equity loan purchase commitments of $362 million, all of which settled in the first quarter of 2007.
The Corporation is a party to operating leases for certain of its premises and equipment. Commitments under these leases approximate $1.2 billion, $1.2 billion, $1.1 billion, $970 million, and $840 million for 2007 through 2011, respectively, and $6.2 billion for all years thereafter.
16
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 2006, the Corporation purchased $7.5 billion of such loans. Under the agreement, the Corporation is committed to purchase up to $5.0 billion of such loans for the period July 1, 2006 through June 30, 2007, of which $2.5 billion is still outstanding at March 31, 2007, and up to $10.0 billion in each of the agreements following three fiscal years. As of March 31, 2007, the remaining commitment amount was $32.5 billion.
Other Guarantees |
The Corporation provides credit and debit card processing services to various merchants by 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 cardholders 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 six 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, 2007 and 2006, the Corporation processed $82.8 billion and $88.3 billion of transactions and recorded losses as a result of these chargebacks of $4 million each.
At March 31, 2007 and December 31, 2006, the Corporation held as collateral approximately $26 million and $32 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 six months, which represents the claim period for the cardholder, plus any outstanding delayed-delivery transactions. As of March 31, 2007 and December 31, 2006, the maximum potential exposure totaled approximately $162.3 billion and $176.0 billion.
For additional information on other guarantees, see Note 13 of the Consolidated Financial Statements on the Corporations 2006 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 Corporations 2006 Annual Report on Form 10-K.
Litigation and Regulatory Matters |
The following supplements the disclosure in Note 13 of the Consolidated Financial Statements of the Corporations 2006 Annual Report on Form 10-K.
In re Initial Public Offering Securities Litigation
In In re Initial Public Offering Securities Litigation, on April 6, 2007, the U.S. Court of Appeals for the Second Circuit (Second Circuit) panel that vacated the district courts class certification order denied the plaintiffs motion to reconsider its ruling. The plaintiffs petition for rehearing by the full Second Circuit is pending.
Miller
In Paul J. Miller v. Bank of America, N.A., on March 21, 2007, the California Supreme Court granted plaintiffs petition to review the California Court Appeals decision reversing the trial courts judgment.
Parmalat Finanziaria S.p.A.
In Food Holdings Ltd., et al. v. Bank of America Corp., et al., on February 28, 2007, the U.S. District Court for the Southern District of New York granted in part and denied in part the Corporations motion to dismiss by dismissing three of the eight counts of the complaint consisting of the claims for (1) aiding and abetting breach of fiduciary duty,
17
(2) civil conspiracy, and (3) a request for declaratory judgment regarding the enforcement of the Corporations claims in the insolvency proceedings of such entities. In Parmalat Capital Finance Limited v. Bank of America Corp. et al., on February 28, 2007, the court granted the Corporations motion to dismiss claims based on allegations of fraud, but allowed the other claims to remain.
Refco
On April 30, 2007, the district court dismissed the claims against BAS relating to Refcos senior subordinated notes offering in August 2004.
NOTE 11 Shareholders Equity and Earnings Per Common Share
|
Common Stock |
The following table presents share repurchase activity for the three months ended March 31, 2007 and 2006, including total common shares repurchased under announced programs, weighted average per share price and the remaining buyback authority under announced programs.
Common Shares Repurchased (1) |
Weighted Per Share |
Remaining Buyback Authority (2) | ||||||||||
(Dollars in millions, except per share information; shares in thousands) | Amounts | Shares | ||||||||||
January 1-31, 2007 |
11,800 | $ | 53.17 | $ | 18,246 | 251,288 | ||||||
February 1-28, 2007 |
17,750 | 53.04 | 17,304 | 233,538 | ||||||||
March 1-31, 2007 |
18,450 | 50.86 | 16,366 | 215,088 | ||||||||
Three months ended March 31, 2007 |
48,000 | 52.23 | ||||||||||
Common Shares Repurchased (3) |
Weighted Average Per Share Price |
Remaining Buyback Authority (2) | ||||||||||
(Dollars in millions, except per share information; shares in thousands) | 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 |
(1) |
Reduced shareholders equity by $2.5 billion and increased diluted earnings per common share by less than $0.01 for the three months ended March 31, 2007. These repurchases were partially offset by the issuance of approximately 28.9 million shares of common stock under employee plans, which increased shareholders equity by $1.1 billion, net of $401 million of deferred compensation related to restricted stock awards, and decreased diluted earnings per common share by $0.01 for the three months ended March 31, 2007. |
(2) |
On January 24, 2007, the Board of Directors (the Board) authorized a stock repurchase program of up to 200 million shares of the Corporations common stock at an aggregate cost not to exceed $14.0 billion and is limited to a period of 12 to 18 months. On April 26, 2006, the Board authorized a stock repurchase program of up to 200 million shares of the Corporations common stock at an aggregate cost not to exceed $12.0 billion and to be completed within a period of 12 to 18 months. On March 22, 2005, the Board authorized a stock repurchase program of up to 200 million shares of the Corporations common stock at an aggregate cost not to exceed $12.0 billion and to be completed within a period of 18 months. This repurchase plan was completed during the second quarter of 2006. |
(3) |
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 $346 million 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. |
The Corporation may repurchase shares, from time to time, in the open market or in private transactions through the Corporations approved repurchase program. The Corporation expects to continue to repurchase a number of shares of common stock at least equal to any shares issued under the Corporations employee stock plans.
In January 2007, the Board declared a regular quarterly cash dividend on common stock of $0.56 per share, payable on March 23, 2007 to common shareholders of record on March 2, 2007.
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Accumulated OCI |
The following table presents the changes in accumulated OCI for the three months ended March 31, 2007 and 2006, net of tax:
(Dollars in millions) | Securities (1, 2) | Derivatives (3) | Employee Benefit Plans |
Foreign Currency |
Total | |||||||||||||||
Balance, December 31, 2006 |
$ | (2,733 | ) | $ | (3,697 | ) | $ | (1,428 | ) | $ | 147 | $ | (7,711 | ) | ||||||
Net change in fair value recorded in accumulated OCI |
98 | 31 | | (25 | ) | 104 | ||||||||||||||
Net realized (gains) losses reclassified into earnings (4) |
(206 | ) | 109 | 31 | 13 | (53 | ) | |||||||||||||
Balance, March 31, 2007 |
$ | (2,841 | ) | $ | (3,557 | ) | $ | (1,397 | ) | $ | 135 | $ | (7,660 | ) | ||||||
Balance, December 31, 2005 |
$ | (2,978 | ) | $ | (4,338 | ) | $ | (118 | ) | $ | (122 | ) | $ | (7,556 | ) | |||||
Net change in fair value recorded in accumulated OCI |
(1,893 | ) | 489 | | 42 | (1,362 | ) | |||||||||||||
Net realized (gains) losses reclassified into earnings (4) |
(126 | ) | 63 | | | (63 | ) | |||||||||||||
Balance, March 31, 2006 |
$ | (4,997 | ) | $ | (3,786 | ) | $ | (118 | ) | $ | (80 | ) | $ | (8,981 | ) |
(1) |
For the three months ended March 31, 2007 and 2006, the Corporation reclassified net realized gains into earnings on the sale of AFS debt securities of $39 million and $9 million net of tax, and gains on the sales of AFS marketable equity securities of $167 million and $117 million net of tax. |
(2) |
Accumulated OCI includes fair value loss of $29 million and a fair value gain of $170 million net of tax on certain retained interests in the Corporations securitization transactions at March 31, 2007 and 2006. |
(3) |
The amount included in accumulated OCI for terminated derivative contracts were losses of $3.4 billion and $2.5 billion, net of tax, at March 31, 2007 and 2006. |
(4) |
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 AFS debt and marketable equity securities. These amounts are reclassified into earnings upon sale of the related security. |
Earnings per Common Share |
The calculation of earnings per common share and diluted earnings per common share for the three months ended March 31, 2007 and 2006 is presented below:
Three Months Ended March 31 | ||||||||
(Dollars in millions, except per share information; shares in thousands) | 2007 | 2006 | ||||||
Earnings per common share |
||||||||
Net income |
$ | 5,255 | $ | 4,986 | ||||
Preferred stock dividends |
(46 | ) | (5 | ) | ||||
Net income available to common shareholders |
$ | 5,209 | $ | 4,981 | ||||
Average common shares issued and outstanding |
4,432,664 | 4,609,481 | ||||||
Earnings per common share |
$ | 1.18 | $ | 1.08 | ||||
Diluted earnings per common share |
||||||||
Net income available to common shareholders |
$ | 5,209 | $ | 4,981 | ||||
Average common shares issued and outstanding |
4,432,664 | 4,609,481 | ||||||
Dilutive potential common shares (1, 2) |
64,364 | 56,924 | ||||||
Total diluted average common shares issued and outstanding |
4,497,028 | 4,666,405 | ||||||
Diluted earnings per common share |
$ | 1.16 | $ | 1.07 |
(1) |
For the three months ended March 31, 2007 and 2006, average options to purchase 17 million and 60 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. |
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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 presented in Note 16 of the Consolidated Financial Statements of the Corporations 2006 Annual Report on Form 10-K.
Net periodic benefit cost (income) for the three months ended March 31, 2007 and 2006 included the following components:
Three Months Ended March 31 | ||||||||||||||||||||||||
Qualified Pension Plans |
Nonqualified Pension Plans |
Postretirement Health and Life Plans |
||||||||||||||||||||||
(Dollars in millions) | 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | ||||||||||||||||||
Components of net periodic benefit cost (income) |
||||||||||||||||||||||||
Service cost |
$ | 86 | $ | 82 | $ | 3 | $ | 3 | $ | 3 | $ | 4 | ||||||||||||
Interest cost |
180 | 168 | 18 | 22 | 22 | 22 | ||||||||||||||||||
Expected return on plan assets |
(316 | ) | (260 | ) | | | (2 | ) | (2 | ) | ||||||||||||||
Amortization of transition obligation |
| | | | 8 | 8 | ||||||||||||||||||
Amortization of prior service cost (credits) |
12 | 10 | (2 | ) | (2 | ) | | | ||||||||||||||||
Recognized net actuarial loss (gain) |
33 | 53 | 5 | 5 | (6 | ) | 13 | |||||||||||||||||
Net periodic benefit cost (income) |
$ | (5 | ) | $ | 53 | $ | 24 | $ | 28 | $ | 25 | $ | 45 |
During 2007, the Corporation expects to contribute $97 million and $95 million to its Nonqualified Pension Plans and Postretirement Health and Life Plans. At March 31, 2007, the Corporation had contributed $57 million and $24 million to these plans.
NOTE 13 Income Taxes |
Under FIN 48, income tax benefits are recognized and measured based upon a two-step model: 1) a tax position must be more-likely-than-not to be sustained based solely on its technical merits in order to be recognized and 2) the benefit is measured as the largest dollar amount of that position that is more-likely-than-not to be sustained upon settlement. The difference between the benefit recognized for a position in accordance with this FIN 48 model and the tax benefit claimed on a tax return is referred to as an unrecognized tax benefit (UTB). As of January 1, 2007, the balance of the Corporations UTBs, excluding any related accrual for interest, was $2.7 billion, of which $1.5 billion would, if recognized, affect the Corporations effective tax rate. Included in the $2.7 billion UTB balance are some items the recognition of which would not affect the effective tax rate, such as the tax effect of certain temporary differences, and the portion of gross state UTBs that would be offset by the tax benefit of the associated federal deduction.
As of January 1, 2007, the Corporations accrual for interest and penalties that relate to income taxes, net of taxes and payments on deposit to taxing authorities, was $769 million, including applicable interest on leveraged lease positions. Under FIN 48 the Corporation continues its policy of accruing income-tax-related interest and penalties (if applicable) within income tax expense.
The Internal Revenue Service is currently examining the Corporations federal income tax returns for the years 2000 through 2004. It is anticipated that the examination phase related to the years 2000 through 2002 will be completed during 2007, but management does not believe that this event will cause a significant change in the UTB balance. However, final determination will decrease the UTB balance, since resolved items would be removed whether their resolution resulted in payment or recognition. In addition, the federal income tax returns of FleetBoston Financial Corporation are currently under examination for the years 1997 through March 31, 2004. We do not expect the exam and related discussions with the IRS to be completed within the next 12 months. In addition, the federal income tax returns of MBNA for the tax years 2001 through 2004 are under examination. Management expects these examinations to be completed during 2007. As a result, it is probable that a change to the UTB balance relating to the MBNA examinations will occur, but it will not significantly affect the Corporations effective tax rate. All tax years subsequent to the above years remain open to examination.
20
NOTE 14 Fair Value Disclosures |
Effective January 1, 2007, the Corporation adopted SFAS 157, which provides a framework for measuring fair value under GAAP. As described more fully below, SFAS 157 also eliminated the deferral of gains and losses at inception of certain derivative contracts whose fair value was not evidenced by market-observable data. SFAS 157 requires that the impact of this change in accounting for derivative contracts be recorded as an adjustment to beginning retained earnings in the period of adoption.
The Corporation also adopted SFAS 159 on January 1, 2007. SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Corporation elected to adopt the fair value option for certain financial instruments on the adoption date. SFAS 159 requires that the difference between the carrying value before election of the fair value option and the fair value of these instruments be recorded as an adjustment to beginning retained earnings in the period of adoption.
The following table summarizes the impact of the change in accounting for derivative contracts described above and the impact of adopting the fair value option for certain financial instruments on January 1, 2007. Amounts shown represent the carrying value of the affected instruments before and after the changes in accounting resulting from the adoption of SFAS 157 and SFAS 159.
Transition Impact
(Dollars in millions) | Ending Balance |
Adoption Net Gain/(Loss) |
Opening Balance |
|||||||||
Impact of adopting SFAS 157 |
||||||||||||
Net derivative assets and liabilities (1) |
$ | 7,100 | $ | 22 | $ | 7,122 | ||||||
Impact of electing the fair value option under SFAS 159 |
||||||||||||
Loans and leases (2) |
3,968 | (21 | ) | 3,947 | ||||||||
Accrued expenses and other liabilities (3) |
(28 | ) | (321 | ) | (349 | ) | ||||||
Other assets (4) |
8,778 | | 8,778 | |||||||||
Available-for-sale debt securities (5) |
3,692 | | 3,692 | |||||||||
Federal funds sold and securities purchased under agreements to resell (6) |
1,401 | (1 | ) | 1,400 | ||||||||
Interest-bearing deposits liability in domestic offices (7) |
(548 | ) | 1 | (547 | ) | |||||||
Cumulative-effect adjustment (pre-tax) |
(320 | ) | ||||||||||
Tax impact |
112 | |||||||||||
Cumulative-effect adjustment (net of tax), decrease to retained earnings |
$ | (208 | ) |
(1) |
The transition adjustment reflects the impact of recognizing previously deferred gains and losses as a result of the rescission of certain requirements of Emerging Issues Task Force (EITF) Issue No. 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities (EITF 02-3) in accordance with SFAS 157. |
(2) |
Includes loans to certain large corporate clients. The ending balance at December 31, 2006 and the transition adjustment is net of a $32 million reduction in the allowance for loan and lease losses. |
(3) |
The January 1, 2007 balance after adoption represents the fair value of certain unfunded commercial loan commitments. The December 31, 2006 balance prior to adoption represents the reserve for unfunded lending commitments associated with these commitments. |
(4) |
Other assets include loans held-for-sale. No transition adjustment was recorded for the loans held-for-sale because they were already recorded at fair value pursuant to lower of cost or market accounting. |
(5) |
Changes in fair value of these AFS debt securities resulting from foreign currency exposure, which is the primary driver of fair value for these securities, had previously been hedged by derivatives that qualified for fair value hedge accounting in accordance with SFAS 133. As a result, there was no transition adjustment. Following the election of the fair value option, these AFS debt securities have been transferred to trading account assets. |
(6) |
Includes structured reverse repurchase agreements that are economically hedged with derivatives. |
(7) |
Includes long-term fixed rate deposits that are economically hedged with derivatives. |
Fair Value Option |
Corporate Loans and Loan Commitments
The Corporation elected to account for certain large corporate loans and loan commitments which exceeded the Corporations single name credit risk concentration guidelines at fair value in accordance with SFAS 159. Lending commitments, both funded and unfunded, are actively managed and monitored, and, as appropriate, credit risk for these
21
lending relationships may be mitigated through the use of credit derivatives, with our credit view and market perspectives determining the size and timing of the hedging activity. These credit derivatives do not meet the requirements for hedge accounting under SFAS 133 and are therefore carried at fair value with changes in fair value recorded in other income. Electing the fair value option allows the Corporation to account for these loans and loan commitments at fair value, which is more consistent with managements view of the underlying economics and the manner in which they are managed. In addition, accounting for these loans and loan commitments at fair value reduces the accounting asymmetry that would otherwise result from carrying the loans at historical cost and the credit derivatives at fair value.
Fair values for the loans and loan commitments are based on market prices, where available, or discounted cash flows using market-based credit spreads of comparable debt instruments or credit derivatives of the specific borrower or comparable borrowers. Results of discounted cash flow calculations may be adjusted, as appropriate, to reflect other market conditions or the perceived credit risk of the borrower.
At March 31, 2007, funded loans which the Corporation has elected to fair value had an aggregate fair value of $3.86 billion recorded in loans and leases and an aggregate outstanding principal balance of $3.93 billion. Unfunded loan commitments that the Corporation has elected to fair value had an aggregate fair value of $377 million recorded in accrued expenses and other liabilities and an aggregate committed exposure of $21.5 billion. At March 31, 2007, none of these loans were 90 days or more past due and still accruing interest or had been placed on nonaccrual status. Net losses recorded in other income resulting from changes in fair value of these loans and loan commitments totaled $27 million during the three months ended March 31, 2007 of which $14 million related to commitments originated subsequent to January 1, 2007. These losses were significantly attributable to changes in instrument-specific credit risk. Following adoption of SFAS 159, an immaterial amount of direct loan origination fees and costs related to items for which the fair value option was elected were recognized in earnings. Previously, these items would have been capitalized and amortized to earnings over the life of the loans.
Loans Held-for-Sale
The Corporation also elected to account for certain loans held-for-sale at fair value. Electing to fair value allows a better offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting under SFAS 133. The Corporation has not elected to fair value other loans held-for-sale primarily because these loans are floating rate loans that are not economically hedged using derivative instruments. Fair values for loans held-for-sale are based on quoted market prices, where available, or are determined by discounting estimated cash flows using interest rates approximating the Corporations current origination rates for similar loans and adjusted to reflect the inherent credit risk. At March 31, 2007, residential mortgage loans, commercial mortgage loans, and other loans held-for-sale for which the fair value option was elected had an aggregate fair value of $16.43 billion and an aggregate outstanding principal balance of $16.47 billion and were recorded in other assets. Interest income on these loans is recorded in interest and fees on loans and leases. Net gains resulting from changes in fair value of these loans, including realized gains and losses on sale, of $56 million were recorded in mortgage banking income during the three months ended March 31, 2007. An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk. Following adoption of SFAS 159, direct loan origination fees of $13 million and costs of $29 million related to loans held-for-sale for which the fair value option was elected were recognized in earnings. Previously, these items would have been capitalized as part of the carrying amount of the loans and recognized in earnings upon the sale of such loans.
Debt Securities
The Corporation elected to fair value $3.7 billion of AFS debt securities. Changes in fair value resulting from foreign currency exposure, which is the primary driver of fair value for these securities, had previously been hedged by derivatives that qualified for fair value hedge accounting in accordance with SFAS 133. Electing the fair value option allows the Corporation to eliminate the burden of complying with the requirements for hedge accounting under SFAS 133 without introducing accounting volatility. Following election of the fair value option, these securities were reclassified to trading account assets. The Corporation did not elect the fair value option for other AFS securities because they are not hedged by derivatives that qualified for hedge accounting in accordance with SFAS 133.
22
Structured Reverse Repurchase Agreements and Certain Long-term Deposits
The Corporation elected to fair value certain other financial instruments which are economically hedged with derivatives. At March 31, 2007, these instruments included structured reverse repurchase agreements with an aggregate fair value and principal balance of $1.5 billion recorded in federal funds sold and securities purchased under agreements to resell; and certain long-term fixed rate deposits with an aggregate fair value of $554 million and principal balance of $558 million recorded in interest-bearing deposits. Interest earned on the structured reverse repurchase agreements and interest paid on the long-term deposits continue to be recorded in interest income and interest expense, respectively. Election of the fair value option will allow the Corporation to reduce the accounting volatility that would otherwise result from the accounting asymmetry created by accounting for the financial instruments at historical cost and the economic hedges at fair value. The Corporation did not elect to fair value other financial instruments within the same balance sheet categories because they are not economically hedged.
The overall effect of electing the fair value option on operating results for the three months ended March 31, 2007 was an $11 million decrease in pre-tax profits. This amount includes a net loss of $27 million due to changes in fair value of loans and loan commitments, offset by a net gain of $27 million due to changes in fair value of mortgage loans held-for-sale. It also reflects a net reduction in profits of $16 million resulting from the change in accounting for direct loan origination fees and costs related to mortgage loans held-for-sale. The impact of electing the fair value option for other items was immaterial.
Fair Value Measurement |
SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 |
Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain U.S. Treasury, other U.S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter markets. | |
Level 2 |
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. Government and agency mortgage-backed debt securities, corporate debt securities, derivative contracts and residential mortgage loans held-for-sale. | |
Level 3 |
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly structured or long-term derivative contracts. |
Prior to the adoption of SFAS 157, EITF 02-3 prohibited the recognition of gains and losses at inception of a derivative contract unless the fair value of the contract was evidenced by a quoted price in an active market, an observable price or other market transaction, or other observable data. SFAS 157 rescinded this requirement, resulting in the recognition of previously deferred gains and losses as an increase to the beginning balance of retained earnings of $22 million (pre-tax).
23
Assets and liabilities measured at fair value on a recurring basis, including financial instruments for which the Corporation has elected the fair value option, are summarized below:
March 31, 2007 | ||||||||||||||||
Fair Value Measurements Using | ||||||||||||||||
(Dollars in millions) | Level 1 | Level 2 | Level 3 | Netting Adjustments (1) |
Assets/ Liabilities at Fair Value | |||||||||||
Assets |
||||||||||||||||
Federal funds sold and securities purchased under agreements to resell (2) |
$ | | $ | 1,490 | $ | | $ | | $ | 1,490 | ||||||
Trading account assets |
54,789 | 119,160 | 269 | | 174,218 | |||||||||||
Derivative assets |
3,891 | 230,341 | 7,012 | (215,965 | ) | 25,279 | ||||||||||
Available-for-sale debt securities |
164,928 | 16,033 | | | 180,961 | |||||||||||
Loans and leases (2) |
| | 3,859 | | 3,859 | |||||||||||
Mortgage servicing rights |
| | 2,963 | | 2,963 | |||||||||||
Other assets (3) |
2,897 | 18,801 | 5,867 | | 27,565 | |||||||||||
Total assets |
$ | 226,505 | $ | 385,825 | $ | 19,970 | $ | (215,965 | ) | $ | 416,335 | |||||
Liabilities |
||||||||||||||||
Interest-bearing deposits in domestic offices (2) |
$ | | $ | 554 | $ | | $ | | $ | 554 | ||||||
Trading account liabilities |
56,413 | 20,876 | | | 77,289 | |||||||||||
Derivative liabilities |
4,530 | 220,001 | 6,671 | (213,256 | ) | 17,946 | ||||||||||
Accrued expenses and other liabilities (2) |
| | 377 | | 377 | |||||||||||
Total liabilities |
$ | 60,943 | $ | 241,431 | $ | 7,048 | $ | (213,256 | ) | $ | 96,166 |
(1) |
Amounts represent the impact of legally enforceable master netting agreements that allow the Corporation to settle positive and negative positions and also cash collateral held or placed with the same counterparties. |
(2) |
Amounts represent items for which the Corporation has elected the fair value option under SFAS 159. |
(3) |
Other assets include equity investments held by Principal Investing, AFS equity investments and certain retained interests in securitization vehicles, including interest-only strips, all of which were carried at fair value prior to the adoption of SFAS 159; and loans held-for-sale of $16.4 billion for which the Corporation has elected the fair value option under SFAS 159. |
Loans and leases at March 31, 2007 included $20.0 billion of leases that were not eligible for the fair value option as they were specifically excluded from fair value option election in accordance with SFAS 159.
The table below presents a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the period from January 1, 2007 to March 31, 2007. Level 3 loans and loan commitments are carried at fair value due to adoption of the fair value option, as described on page 23. Other Level 3 instruments presented in the table, including derivatives, trading account assets, mortgage servicing rights (MSRs), certain equity investments and retained interests in securitizations, were carried at fair value prior to the adoption of SFAS 159.
Total Fair Value Measurements | ||||||||||||||||||||||||
Level 3 Instruments Only (Dollars in millions) |
Net Derivatives (1) |
Trading |
Loans and Leases (3) |
Mortgage Servicing Rights (2) |
Other Assets (4) |
Accrued Expenses and Other Liabilities (3) |
||||||||||||||||||
Balance, December 31, 2006 |
$ | 711 | $ | 303 | $ | 3,968 | $ | 2,869 | $ | 6,605 | $ | (28 | ) | |||||||||||
Impact of SFAS 157 and SFAS 159 adoption |
22 | | (21 | ) | | | (321 | ) | ||||||||||||||||
Balance, January 1, 2007 |
$ | 733 | $ | 303 | $ | 3,947 | $ | 2,869 | $ | 6,605 | $ | (349 | ) | |||||||||||
Total gains or losses (realized/unrealized): |
||||||||||||||||||||||||
Included in earnings |
(64 | ) | (30 | ) | 1 | 121 | 730 | (28 | ) | |||||||||||||||
Included in other comprehensive income |
| | | | (51 | ) | | |||||||||||||||||
Purchases, issuances, and settlements |
(320 | ) | (4 | ) | (89 | ) | (27 | ) | (1,403 | ) | | |||||||||||||
Transfers in and/or out of Level 3 |
(8 | ) | | | | (14 | ) | | ||||||||||||||||
Balance, March 31, 2007 |
$ | 341 | $ | 269 | $ | 3,859 | $ | 2,963 | $ | 5,867 | $ | (377 | ) |
(1) |
Net derivatives at March 31, 2007 included derivative assets of $7,012 million and derivative liabilities of $6,671 million, all of which were carried at fair value prior to the adoption of SFAS 159. |
(2) |
Amounts represented items which were carried at fair value prior to the adoption of SFAS 159. |
(3) |
Amounts represented items for which the Corporation had elected the fair value option under SFAS 159 including commercial loan commitments recorded in accrued expenses and other liabilities. |
(4) |
Other assets included equity investments held by Principal Investing and certain retained interests in securitization vehicles, including interest-only strips, all of which were carried at fair value prior to the adoption of SFAS 159. |
24
The table below summarizes gains and losses due to changes in fair value, including both realized and unrealized gains and losses, recorded in earnings for Level 3 assets and liabilities for the period from January 1, 2007 to March 31, 2007. These amounts include gains and losses generated by loans and loan commitments for which the fair value option was elected and by other instruments, including certain derivative contracts, trading account assets, MSRs, equity investments and retained interests in securitizations, which were carried at fair value prior to the adoption of SFAS 159.
Total Gains and Losses | |||||||||||||||||||||
Level 3 Instruments Only (Dollars in millions) |
Net Derivatives (1) |
Trading |
Loans and Leases (2) |
Mortgage Servicing Rights (1) |
Other Assets (1) |
Accrued Expenses and Other Liabilities (2) |
|||||||||||||||
Classification of gains and losses (realized/unrealized) included in earnings for the period: |
|||||||||||||||||||||
Card income |
$ | | $ | | $ | | $ | | $ | 181 | $ | | |||||||||
Equity investment gains |
| | | | 508 | | |||||||||||||||
Trading account profits |
(69 | ) | (30 | ) | | | | | |||||||||||||
Mortgage banking income |
5 | | | 121 | | | |||||||||||||||
Other income |
| | 1 | | 41 | (28 | ) | ||||||||||||||
Total |
$ | (64 | ) | $ | (30 | ) | $ | 1 | $ | 121 | $ | 730 | $ | (28 | ) |
(1) |
Amounts represented items which were carried at fair value prior to the adoption of SFAS 159. |
(2) |
Amounts represented items for which the Corporation had elected the fair value option under SFAS 159. |
The table below summarizes changes in unrealized gains or losses recorded in earnings for the period from January 1, 2007 to March 31, 2007 for Level 3 assets and liabilities that are still held at March 31, 2007. These amounts include changes in fair value of loans and loan commitments for which the fair value option was elected and changes in fair value for other instruments, including certain derivative contracts, trading account assets, MSRs, equity investments and retained interests in securitizations, which were carried at fair value prior to the adoption of SFAS 159.
Changes in Unrealized Gains or Losses | ||||||||||||||||||||||
Level 3 Instruments Only (Dollars in millions) |
Net Derivatives (1) |
Trading Account Assets (1) |
Loans and Leases (2) |
Mortgage Servicing Rights (1) |
Other Assets (1) |
Accrued Expenses and Other Liabilities (2) |
||||||||||||||||
Changes in unrealized gains or losses relating to assets still held at reporting date |
||||||||||||||||||||||
Card income |
$ | | $ | | $ | | $ | | $ | 28 | $ | | ||||||||||
Equity investment gains |
| | | | 118 | | ||||||||||||||||
Trading account profits |
(158 | ) | (30 | ) | | | | | ||||||||||||||
Mortgage banking income |
4 | | | 60 | | | ||||||||||||||||
Other income |
| | (1 | ) | | | (31 | ) | ||||||||||||||
Total |
$ | (154 | ) | $ | (30 | ) | $ | (1 | ) | $ | 60 | $ | 146 | $ | (31 | ) |
(1) |
Amounts represented items which were carried at fair value prior to the adoption of SFAS 159. |
(2) |
Amounts represented items for which the Corporation had elected the fair value option under SFAS 159. |
Certain assets are measured at fair value on a non-recurring basis. As of March 31, 2007, loans held-for-sale for which the Corporation had not elected the fair value option and lease residuals, both of which were carried at the lower of cost or fair value, with an aggregate cost of $9.29 billion had been written down to fair value of $9.24 billion, resulting in a charge of $45 million, of which $41 million was recorded in other income and $4 million was recorded in mortgage banking income.
25
NOTE 15 Mortgage Servicing Rights |
The Corporation accounts for consumer MSRs at fair value with changes in fair value recorded in the Consolidated Statement of Income in mortgage banking income. The Corporation economically hedges these MSRs with certain derivatives such as options and interest rate swaps.
The following table presents activity for consumer MSRs for the three months ended March 31, 2007 and 2006.
Three Months Ended March 31 | ||||||||
(Dollars in millions) | 2007 | 2006 | ||||||
Balance, January 1 |
$ | 2,869 | $ | 2,658 | ||||
MBNA balance, January 1, 2006 |
| 9 | ||||||
Additions |
171 | 149 | ||||||
Impact of customer payments |
(183 | ) | (171 | ) | ||||
Other changes in MSR market value (1) |
106 | 280 | ||||||
Balance, March 31 |
$ | 2,963 | $ | 2,925 |
(1) |
Reflects changes in discount rates and prepayment speed assumptions, mostly due to changes in interest rates. |
Other changes in MSR market value of $106 million reflect changes in discount rates and prepayment speed assumptions, mostly due to changes in interest rates. This amount does not include $15 million resulting from the reconciliation of actual cash received versus expected prepayments. The total of these amounts of $121 million is included in the line Mortgage banking income in the table Total Gains and Losses in Note 14 of the Consolidated Financial Statements.
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 $178 million and $176 million at March 31, 2007 and December 31, 2006 and are not included in the table above.
NOTE 16 - Business Segment Information |
The Corporation reports the results of its operations through three business segments: Global Consumer and Small Business Banking (GCSBB), Global Corporate and Investment Banking (GCIB), and Global Wealth and Investment Management (GWIM). Effective January 1, 2007, the Corporation changed its basis of presentation for its business segments as discussed below.
Global Consumer and Small Business Banking |
GCSBB provides a diversified range of products and services to individuals and small businesses. Effective January 1, 2007, the Corporation began reporting its GCSBB results, specifically credit card, business card and certain unsecured lending portfolios, on a managed basis. This basis of presentation excludes the Corporations securitized mortgage and home equity portfolios for which the Corporation retains servicing. The change to a managed basis is consistent with the way that management as well as analysts evaluate the results of GCSBB. Managed basis assumes that loans that have been securitized were not sold and presents earnings on these loans in a manner similar to the way loans that have not been sold (i.e., held loans) are presented. Loan securitization is an alternative funding process that is used by the Corporation to diversify funding sources. Loan securitization removes loans from the Consolidated Balance Sheet through the sale of loans to an off-balance sheet qualified special purpose entity which is excluded from the Corporations Consolidated Financial Statements in accordance with GAAP.
The performance of the managed portfolio is important in understanding GCSBBs results as it demonstrates the results of the entire portfolio serviced by the business. Securitized loans continue to be serviced by the business and are subject to the
26
same underwriting standards and ongoing monitoring as held loans. In addition, retained excess servicing income is exposed to similar credit risk and repricing of interest rates as held loans. GCSBBs managed income statement line items differ from its held basis reported in the prior period as follows:
| Managed net interest income includes GCSBBs net interest income on held loans and interest income on the securitized loans less the internal funds transfer pricing allocation related to securitized loans. |
| Managed noninterest income includes GCSBBs noninterest income on a held basis less the reclassification of certain components of card income (e.g., excess servicing income) to record managed net interest income and managed credit impact. Noninterest income, both on a held and managed basis, also includes the impact of adjustments to the interest-only strip that are recorded in card income as management continues to manage this impact within GCSBB. |
| The managed credit impact represents the provision for credit losses on held loans combined with realized credit losses associated with the securitized loan portfolio. |
Prior period amounts have been adjusted to reflect these changes.
Global Corporate and Investment Banking |
GCIB serves domestic and international issuer and investor clients, providing financial services, specialized industry expertise and local delivery. Prior to January 1, 2007, GCIB also included the results of our Latin America and Hong Kong based retail and commercial banking businesses, parts of which were sold in 2006. Effective January 1, 2007, the results of the Latin American operations in Argentina, Brazil, Chile, and Uruguay, as well as our Hong Kong based retail and commercial banking business, that are expected to be or have been sold have been transferred to All Other as liquidating businesses as the Corporation has made a decision to exit these businesses in these regions. Also, effective January 1, 2007, the results of Banc of America Specialist have been transferred to GCIB from GWIM to more closely align businesses with similar operations and clients. Prior period amounts have been adjusted to reflect these changes.
Global Wealth and Investment Management |
GWIM offers investment and brokerage 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. GWIM also includes the impact of migrated qualifying affluent customers, including their related deposit balances and associated net interest income from GCSBB. Prior to January 1, 2007, GWIM also included the results of Banc of America Specialist and International Wealth Management (IWM). Effective January 1, 2007, the results of Banc of America Specialist have been transferred to GCIB to more closely align businesses with similar operations and clients and the results of IWM that are expected to be sold or liquidated have been transferred to All Other as a liquidating business. Prior period amounts have been adjusted to reflect these changes.
All Other |
Prior to January 1, 2007, All Other consisted of equity investment activities including Principal Investing, Corporate Investments and Strategic Investments, the residual impacts 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 were being liquidated. All Other also included amounts associated with the 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 did not qualify for SFAS 133 hedge accounting treatment, certain gains or losses on sales of whole mortgage loans, and gains (losses) on sales of debt securities. Effective January 1, 2007, All Other now also includes the offsetting securitization impact to present GCSBB on a managed basis which assumes that GCSBBs securitized loans have not been sold. This offsetting adjustment is made to report the consolidated results of the Corporation on a GAAP basis. All Other also includes the addition of the liquidating businesses that were transferred from GCIB and GWIM. Prior period amounts have been adjusted to reflect these changes.
27
Basis of Presentation |
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 net interest income of the businesses includes 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 Corporations 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 costs of certain centralized or shared functions are allocated based on methodologies which reflect utilization.
The Corporations business segments and All Other have also been revised to reflect the impact of certain management accounting methodologies and related allocation refinements that have occurred subsequent to December 31, 2006. These changes did not have an impact on the previously reported consolidated results of the Corporation.
The following table presents total revenue on a FTE basis and net income for the three months ended March 31, 2007 and 2006, and total assets at March 31, 2007 and 2006 for each business segment, as well as All Other.
Business Segments
For the Three Months Ended March 31 | Total Corporation | Global Consumer
and Banking (1, 2, 3) |
Global Corporate and Investment Banking (1) | |||||||||||||||||
(Dollars in millions) | 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | ||||||||||||||
Net interest income (4) |
$ | 8,597 | $ | 9,040 | $ | 7,028 | $ | 7,092 | $ | 2,412 | $ | 2,489 | ||||||||
Noninterest income |
9,825 | 8,901 | 4,394 | 3,750 | 2,909 | 2,779 | ||||||||||||||
Total revenue (4) |
18,422 | 17,941 | 11,422 | 10,842 | 5,321 | 5,268 | ||||||||||||||
Provision for credit losses/Managed credit impact |
1,235 | 1,270 | 2,411 | 1,901 | 115 | 25 | ||||||||||||||
Gains (losses) on sales of debt securities |
62 | 14 | (1 | ) | (1 | ) | 2 | 14 | ||||||||||||
Amortization of intangibles |
389 | 440 | 337 | 378 | 34 | 40 | ||||||||||||||
Other noninterest expense |
8,708 | 8,484 | 4,391 | 4,234 | 2,866 | 2,792 | ||||||||||||||
Income before income taxes (4) |
8,152 | 7,761 | 4,282 | 4,328 | 2,308 | 2,425 | ||||||||||||||
Income tax expense (4) |
2,897 | 2,775 | 1,586 | 1,604 | 861 | 901 | ||||||||||||||
Net income |
$ | 5,255 | $ | 4,986 | $ | 2,696 | $ | 2,724 | $ | 1,447 | $ | 1,524 | ||||||||
Period-end total assets |
$ | 1,502,157 | $ | 1,375,080 | $ | 407,654 | $ | 406,032 | $ | 713,868 | $ | 611,208 |
Global Wealth and Investment Management (1, 2) |
All Other (3) | |||||||||||||
(Dollars in millions) | 2007 | 2006 | 2007 | 2006 | ||||||||||
Net interest income (4) |
$ | 926 | $ | 939 | $ | (1,769 | ) | $ | (1,480 | ) | ||||
Noninterest income |
962 | 890 | 1,560 | 1,482 | ||||||||||
Total revenue (4) |
1,888 | 1,829 | (209 | ) | 2 | |||||||||
Provision for credit losses/Reported credit impact |
23 | | (1,314 | ) | (656 | ) | ||||||||
Gains on sales of debt securities |
| | 61 | 1 | ||||||||||
Amortization of intangibles |
16 | 18 | 2 | 4 | ||||||||||
Other noninterest expense |
1,001 | 949 | 450 | 509 | ||||||||||
Income before income taxes (4) |
848 | 862 | 714 | 146 | ||||||||||
Income tax expense (benefit) (4) |
317 | 320 | 133 | (50 | ) | |||||||||
Net income |
$ | 531 | $ | 542 | $ | 581 | $ | 196 | ||||||
Period-end total assets |
$ | 128,547 | $ | 112,399 | $ | 252,088 | $ | 245,441 |
(1) |
There were no material intersegment revenues among the segments. |
(2) |
Total assets include asset allocations to match liabilities (i.e., deposits). |
(3) |
GCSBB is presented on a managed basis with a corresponding offset recorded in All Other. |
(4) |
FTE basis |
28
The following table presents reconciliations of GCSBB and the associated offsetting securitization impact in All Other from a managed to held basis.
Global Consumer and Small Business Banking Reconciliation
For the Three Months Ended March 31, 2007 |
For the Three Months Ended March 31, 2006 |
|||||||||||||||||||||||
(Dollars in millions) | Managed Basis |
Securitizations Impact (1) |
Held Basis |
Managed Basis |
Securitizations Impact (1) |
Held Basis |
||||||||||||||||||
Net interest income (2) |
$ | 7,028 | $ | (1,890 | ) | $ | 5,138 | $ | 7,092 | $ | (1,946 | ) | $ | 5,146 | ||||||||||
Noninterest income |
||||||||||||||||||||||||
Card income |
2,451 | 839 | 3,290 | 2,107 | 1,402 | 3,509 | ||||||||||||||||||
Service charges |
1,377 | | 1,377 | 1,190 | | 1,190 | ||||||||||||||||||
Mortgage banking income |
302 | | 302 | 205 | | 205 | ||||||||||||||||||
All other income |
264 | (77 | ) | 187 | 248 | (110 | ) | 138 | ||||||||||||||||
Total noninterest income |
4,394 | 762 | 5,156 | 3,750 | 1,292 | 5,042 | ||||||||||||||||||
Total revenue (2) |
11,422 | (1,128 | ) | 10,294 | 10,842 | (654 | ) | 10,188 | ||||||||||||||||
Provision for credit losses |
2,411 | (1,128 | ) | 1,283 | 1,901 | (654 | ) | 1,247 | ||||||||||||||||
Gains (losses) on sales of debt securities |
(1 | ) | | (1 | ) | (1 | ) | | (1 | ) | ||||||||||||||
Noninterest expense |
4,728 | | 4,728 | 4,612 | | 4,612 | ||||||||||||||||||
Income before income taxes (2) |
4,282 | | 4,282 | 4,328 | | 4,328 | ||||||||||||||||||
Income tax expense (2) |
1,586 | | 1,586 | 1,604 | | 1,604 | ||||||||||||||||||
Net income |
$ | 2,696 | $ | | $ | 2,696 | $ | 2,724 | $ | | $ | 2,724 |
All Other Reconciliation
For the Three Months Ended March 31, 2007 |
For the Three Months Ended March 31, 2006 |
|||||||||||||||||||||||
(Dollars in millions) | Reported Basis |
Securitizations Impact (1) |
As Adjusted |
Reported Basis |
Securitizations Impact (1) |
As Adjusted |
||||||||||||||||||
Net interest income (2) |
$ | (1,769 | ) | $ | 1,890 | $ | 121 | $ | (1,480 | ) | $ | 1,946 | $ | 466 | ||||||||||
Noninterest income |
||||||||||||||||||||||||
Card income |
722 | (839 | ) | (117 | ) | 1,168 | (1,402 | ) | (234 | ) | ||||||||||||||
Equity investment gains |
896 | | 896 | 571 | | 571 | ||||||||||||||||||
All other income |
(58 | ) | 77 | 19 | (257 | ) | 110 | (147 | ) | |||||||||||||||
Total noninterest income |
1,560 | (762 | ) | 798 | 1,482 | (1,292 | ) | 190 | ||||||||||||||||
Total revenue (2) |
(209 | ) | 1,128 | 919 | 2 | 654 | 656 | |||||||||||||||||
Provision for credit losses |
(1,314 | ) | 1,128 | (186 | ) | (656 | ) | 654 | (2 | ) | ||||||||||||||
Gains on sales of debt securities |
61 | | 61 | 1 | | 1 | ||||||||||||||||||
Merger and restructuring charges |
111 | | 111 | 98 | | 98 | ||||||||||||||||||
All other noninterest expense |
341 | | 341 | 415 | | 415 | ||||||||||||||||||
Income before income taxes (2) |
714 | | 714 | 146 | | 146 | ||||||||||||||||||
Income tax expense (benefit) (2) |
133 | | 133 | (50 | ) | | (50 | ) | ||||||||||||||||
Net income |
$ | 581 | $ | | $ | 581 | $ | 196 | $ | | $ | 196 |
(1) |
The securitizations impact on net interest income is based on a funds transfer pricing methodology consistent with the way we allocate funding costs to the Corporations businesses. |
(2) |
FTE basis |
29
The following table presents reconciliations of the three business segments (GCSBB, GCIB and GWIM) total revenue on a FTE basis and net income to the Consolidated Statement of Income. 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) | 2007 | 2006 | ||||||
Segments total revenue (1) |
$ | 18,631 | $ | 17,939 | ||||
Adjustments: |
||||||||
ALM activities |
38 | (151 | ) | |||||
Equity investment gains |
896 | 571 | ||||||
Liquidating businesses |
318 | 536 | ||||||
FTE basis adjustment |
(329 | ) | (264 | ) | ||||
Managed securitizations impact to total revenue |
(1,128 | ) | (654 | ) | ||||
Other |
(333 | ) | (300 | ) | ||||
Consolidated revenue |
$ | 18,093 | $ | 17,677 | ||||
Segments net income |
$ | 4,674 | $ | 4,790 | ||||
Adjustments, net of taxes: |
||||||||
ALM activities (2) |
(4 | ) | (145 | ) | ||||
Equity investment gains |
564 | 360 | ||||||
Liquidating businesses |
263 | 163 | ||||||
Merger and restructuring charges |
(70 | ) | (61 | ) | ||||
Other |
(172 | ) | (121 | ) | ||||
Consolidated net income |
$ | 5,255 | $ | 4,986 |
(1) |
FTE basis |
(2) |
Includes pre-tax gains (losses) on sales of debt securities of $58 million and $(8) million for the three months ended March 31, 2007 and 2006. |
NOTE 17 Subsequent Event |
In April 2007, the Corporation announced an agreement to purchase ABN AMRO North America Holding Company, parent company of LaSalle Bank Corporation, from ABN AMRO Bank N.V. (collectively, ABN AMRO) for $21 billion in cash. The transaction has been approved by both companys boards of directors. A copy of the agreement is filed as an exhibit to the Corporations Current Report on Form 8-K filed April 26, 2007. On May 3, 2007, a court in the Netherlands ruled that ABN AMRO is enjoined from consummating the transaction until ABN AMROs public shareholders vote on the proposed transaction. The Corporation believes it has a valid and binding agreement, and has filed a lawsuit against ABN AMRO in a federal district court located in New York to enforce its legal rights.
30
31
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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 Corporations 2006 Annual Report on Form 10-K. 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 Corporations 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 court, 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, the Office of the Comptroller of Currency, the Federal Deposit Insurance Corporation, state regulators and the Financial Services Authority; 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 managements ability to manage these and other risks.
The Corporation, headquartered in Charlotte, North Carolina, operates in 30 states, the District of Columbia and 45 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 (GCSBB), Global Corporate and Investment Banking (GCIB), and Global Wealth and Investment Management (GWIM).
At March 31, 2007, the Corporation had $1.5 trillion in assets and approximately 199,000 full-time equivalent employees. Notes to Consolidated Financial Statements referred to in Managements Discussion and Analysis of Financial Condition and Results of Operations are incorporated by reference into Managements Discussion and Analysis of Financial Condition and Results of Operations. Throughout Managements Discussion and Analysis of Financial Condition and Results of Operations, we use certain acronyms and abbreviations which are defined in the Glossary beginning on page 89. Certain prior period amounts have been reclassified to conform to current period presentation.
Recent Events |
In April 2007, the Corporation announced an agreement to purchase ABN AMRO North America Holding Company, parent company of LaSalle Bank Corporation, from ABN AMRO Bank N.V. (collectively, ABN AMRO) for $21 billion in cash. The transaction has been approved by both companys boards of directors. A copy of the agreement is filed as an exhibit to the Corporations Current Report on Form 8-K filed April 26, 2007. On May 3, 2007, a court in the Netherlands ruled that ABN AMRO is enjoined from consummating the transaction until ABN AMROs public shareholders vote on the proposed transaction. The Corporation believes it has a valid and binding agreement, and has filed a lawsuit against ABN AMRO in a federal district court located in New York to enforce its legal rights.
32
In April 2007, the Corporation announced an agreement to purchase 24.9 percent of SLM Corporation (Sallie Mae), the U.S. leader in originating and servicing student loans, for $2.2 billion. The Corporation is part of a consortium led by J.C. Flowers & Co. and private-equity firm Friedman Fleischer & Lowe, LLC which will invest $4.4 billion and own 50.2 percent of Sallie Mae, and JP Morgan Chase & Co, which will invest $2.2 billion and own the remaining 24.9 percent of Sallie Mae. The agreement also includes a five year forward purchase commitment for the Corporation to purchase $100 billion of loans from Sallie Mae. The transaction will require approval by Sallie Maes stockholders and will be subject to obtaining all necessary regulatory approvals. Closing of the transaction is expected to occur late in 2007.
In April 2007, the Board of Directors (the Board) declared a regular quarterly cash dividend on common stock of $0.56 per share, payable on June 22, 2007 to common shareholders of record on June 1, 2007.
In February and March 2007, the Corporation completed the sale of its operations in Chile and Uruguay for approximately $750 million in equity of Banco Itaú Holding Financeira S.A. (Banco Itaú), Brazils second largest nongovernment-owned banking company. In addition, in March 2007, the Corporation completed the sale of its BankBoston Argentina assets to a consortium led by Johannesburg-based Standard Bank Group Ltd in exchange for the assumption of BankBoston Argentina liabilities of approximately $2.0 billion. These sales resulted in a $46 million gain (pre-tax) that was recorded in other income and a decrease of $132 million in provision for credit losses from a reduction of reserves related to the sale of our Argentina portfolio.
In January 2007, the Board authorized a stock repurchase program of up to 200 million shares of the Corporations common stock at an aggregate cost not to exceed $14.0 billion and is limited to a period of 12 to 18 months.
In January 2007, the Board declared a regular quarterly cash dividend on common stock of $0.56 per share, payable on March 23, 2007 to common shareholders of record on March 2, 2007.
Performance Overview |
Net income totaled $5.3 billion, or $1.16 per diluted common share, for the three months ended March 31, 2007, increases of five percent and eight percent from $5.0 billion, or $1.07 per diluted common share, for the three months ended March 31, 2006.
Table 1
Business Segment Total Revenue and Net Income
Three Months Ended March 31 | ||||||||||||||
Total Revenue | Net Income | |||||||||||||
(Dollars in millions) | 2007 | 2006 | 2007 | 2006 | ||||||||||
Global Consumer and Small Business Banking (1) |
$ | 11,422 | $ | 10,842 | $ | 2,696 | $ | 2,724 | ||||||
Global Corporate and Investment Banking |
5,321 | 5,268 | 1,447 | 1,524 | ||||||||||
Global Wealth and Investment Management |
1,888 | 1,829 | 531 | 542 | ||||||||||
All Other (1) |
(209 | ) | 2 | 581 | 196 | |||||||||
Total FTE basis (2) |
18,422 | 17,941 | 5,255 | 4,986 | ||||||||||
FTE adjustment (2) |
(329 | ) | (264 | ) | | | ||||||||
Total Consolidated |
$ | 18,093 | $ | 17,677 | $ | 5,255 | $ | 4,986 |
(1) |
GCSBB is presented on a managed basis with a corresponding offset recorded in All Other. |
(2) |
Total revenue for the business segments and All Other is on a FTE basis. For more information on a FTE basis, see Supplemental Financial Data beginning on page 38. |
Global Consumer and Small Business Banking |
Net income remained essentially flat at $2.7 billion for the three months ended March 31, 2007 compared to the same period in 2006. Managed total revenue grew $580 million, or five percent, to $11.4 billion, as higher card income, service charges and mortgage banking income were partially offset by spread compression on our Card Services products, which
33
negatively impacted net interest income. The growth in managed total revenue was offset by the higher managed credit impact of $510 million driven by portfolio seasoning and a trend toward more normalized loss levels post bankruptcy reform, and higher noninterest expense. For more information on GCSBB, see page 44.
Global Corporate and Investment Banking |
Net income decreased $77 million, or five percent, to $1.4 billion for the three months ended March 31, 2007 compared to the same period in 2006. Total revenue remained essentially flat at $5.3 billion as higher noninterest income, primarily due to increases in investment banking income and all other income, was offset by lower net interest income from spread compression in the loan portfolio. The decrease in net income primarily resulted from an increase in the provision for credit losses and higher personnel expenses. For more information on GCIB, see page 49.
Global Wealth and Investment Management |
Net income remained essentially flat at $531 million for the three months ended March 31, 2007 compared to the same period in 2006. Total revenue increased $59 million, or three percent, as higher noninterest income, primarily due to increases in investment and brokerage services, more than offset the decrease in net interest income as a result of a decline in ALM activities and spread compression. Offsetting the increase in total revenue was higher provision for credit losses as well as increased noninterest expense resulting from higher personnel expenses.
Total AUM were $547.4 billion at March 31, 2007, an increase of $4.5 billion since December 31, 2006 and $53.5 billion since March 31, 2006. For more information on GWIM, see page 53.
All Other |
Net income increased $385 million to $581 million for the three months ended March 31, 2007 compared to the same period in 2006. Excluding our securitization reclassifications, total revenue increased $263 million as higher noninterest income, primarily due to higher equity investment gains and all other income, was partially offset by a decrease in net interest income. The increase in net income was also driven by a decrease in provision for credit losses. For more information on All Other, see page 56.
Financial Highlights |
Net Interest Income |
Net interest income on a FTE basis decreased $443 million to $8.6 billion for the three months ended March 31, 2007 compared to the same period in 2006. The primary drivers of the decrease were the impact of divestitures of certain foreign operations in 2006, reduced benefits from purchase accounting adjustments from 2006, the impact of hedging activities and the higher cost of deposits. Net interest income also decreased as a result of the adoption of FSP 13-2. These decreases were partially offset by higher levels of consumer (primarily unsecured lines of credit and home equity) and commercial loans, higher ALM portfolio balances and a higher contribution from market-based activity. The net interest yield on a FTE basis decreased 37 basis points (bps) to 2.61 percent for the three months ended March 31, 2007 compared to the same period in 2006.
For more information on net interest income on a FTE basis, see Table 7 on page 41.
34
Noninterest Income |
Table 2
Noninterest Income
Three Months Ended March 31 | ||||||
(Dollars in millions) | 2007 | 2006 | ||||
Card income |
$ | 3,333 | $ | 3,434 | ||
Service charges |
2,072 | 1,901 | ||||
Investment and brokerage services |
1,149 | 1,103 | ||||
Investment banking income |
638 | 501 | ||||
Equity investment gains |
1,014 | 718 | ||||
Trading account profits |
872 | 1,060 | ||||
Mortgage banking income |
213 | 137 | ||||
Other income |
534 | 47 | ||||
Total noninterest income |
$ | 9,825 | $ | 8,901 |
Noninterest income increased $924 million to $9.8 billion for the three months ended March 31, 2007 compared to the same period in 2006, due primarily to the following:
| Card income on a held basis decreased $101 million primarily due to lower excess servicing income and lower merchant discount fees partially offset by the favorable change in value of the interest-only strip, increased cash advance fees and higher debit card income. |
| Service charges grew $171 million due to increased non-sufficient funds fees and overdraft charges resulting from new account growth and increased usage in deposit products. |
| Investment banking income increased $137 million due to continued strength in debt underwriting. |
| Equity investment gains increased $296 million driven by increased liquidity in the capital markets. |
| Trading account profits decreased $188 million compared to record results in 2006. |
| Mortgage banking income increased $76 million due to the net favorable performance of the MSRs and the impact related to the adoption of SFAS 159. For more information on the impact of SFAS 159 on mortgage banking income, see Mortgage Banking Risk Management on page 87. |
| Other income increased $487 million primarily related to mark-to-market losses realized in 2006 on certain economic hedges that did not qualify for SFAS 133 hedge accounting, improved credit mitigation results, and the gain on the sales of our Argentina, Chile and Uruguay operations. |
Provision for Credit Losses |
The provision for credit losses decreased $35 million to $1.2 billion for the three months ended March 31, 2007 compared to the same period in 2006. The decrease was primarily driven by reductions in reserves from consumer credit card securitization activities and the sale of the Argentina portfolio. These decreases were partially offset by higher net charge-offs primarily reflecting seasoning and the trend toward more normalized loss levels post bankruptcy reform. For more information on credit quality, see Credit Risk Management beginning on page 62.
35
Noninterest Expense |
Table 3
Noninterest Expense
Three Months Ended March 31 | ||||||
(Dollars in millions) | 2007 | 2006 | ||||
Personnel |
$ | 5,025 | $ | 4,813 | ||
Occupancy |
713 | 701 | ||||
Equipment |
350 | 344 | ||||
Marketing |
555 | 575 | ||||
Professional fees |
229 | 218 | ||||
Amortization of intangibles |
389 | 440 | ||||
Data processing |
437 | 410 | ||||
Telecommunications |
251 | 220 | ||||
Other general operating |
1,037 | 1,105 | ||||
Merger and restructuring charges |
111 | 98 | ||||
Total noninterest expense |
$ | 9,097 | $ | 8,924 |
Noninterest expense increased $173 million to $9.1 billion for the three months ended March 31, 2007 compared to the same period in 2006. Growth in personnel expense of $212 million was primarily driven by higher revenue-related incentive compensation expense as well as stock-based compensation granted to retirement-eligible employees of $397 million compared to $320 million for the same period in 2006.
Income Tax Expense |
Income tax expense was $2.6 billion for the three months ended March 31, 2007 compared to $2.5 billion for the three months ended March 31, 2006, resulting in effective tax rates of 32.8 percent and 33.5 percent, respectively. Income tax expense for the three months ended March 31, 2007 reflects a one-time reduction to expense of approximately $50 million resulting from the remeasurement of certain accrued tax liabilities due to the evaluation of new guidance from taxing authorities.
Assets |
At March 31, 2007, total assets were $1.5 trillion, an increase of $42.4 billion, or three percent, from December 31, 2006. Average total assets for the three months ended March 31, 2007 increased $105.0 billion, or seven percent, compared to the same period in 2006. Growth in period end and average total assets was due to growth in trading account assets driven by higher trading activity, an increase in loans and leases attributable to organic growth and bulk purchases of primarily residential mortgages and auto loans, and an increase in loans held-for-sale. Offsetting this growth was a decrease in AFS debt securities due to the third quarter 2006 strategic shift in balance sheet composition from mortgage-backed securities to residential mortgage loans.
Liabilities and Shareholders Equity |
At March 31, 2007, total liabilities were $1.4 trillion, an increase of $42.8 billion, or three percent, from December 31, 2006. Average total liabilities for the three months ended March 31, 2007 increased $102.6 billion, or eight percent, compared to the same period in 2006. Growth in period end and average total liabilities was attributable to increases in trading account liabilities, federal funds purchased and securities sold under agreements to repurchase, and commercial paper and other short-term borrowings resulting from funding requirements to support the growth in overall assets. Other increases in average long-term debt and deposits were due to the net issuances of long-term debt and organic growth.
Period end shareholders equity was $134.9 billion at March 31, 2007, a decrease of $416 million from December 31, 2006, primarily due to dividend payments, share repurchases and the adoption of certain new accounting standards partially offset by net income and common stock issued in connection with employee benefit plans.
36
Average shareholders equity for the three months ended March 31, 2007, compared to the same period in 2006, increased $2.4 billion to $133.6 billion primarily due to net income and the issuances of preferred stock partially offset by net share repurchases and the adoption of certain new accounting standards.
Table 4
Selected Quarterly Financial Data
2007 Quarter | 2006 Quarters | |||||||||||||||||||
(Dollars in millions, per share information in thousands) | First | Fourth | Third | Second | First | |||||||||||||||
Income statement |
||||||||||||||||||||
Net interest income |
$ | 8,268 | $ | 8,599 | $ | 8,586 | $ | 8,630 | $ | 8,776 | ||||||||||
Noninterest income |
9,825 | 9,866 | 10,067 | 9,598 | 8,901 | |||||||||||||||
Total revenue |
18,093 | 18,465 | 18,653 | 18,228 | 17,677 | |||||||||||||||
Provision for credit losses |
1,235 | 1,570 | 1,165 | 1,005 | 1,270 | |||||||||||||||
Gains (losses) on sales of debt securities |
62 | 21 | (469 | ) | (9 | ) | 14 | |||||||||||||
Noninterest expense |
9,097 | 9,093 | 8,863 | 8,717 | 8,924 | |||||||||||||||
Income before income taxes |
7,823 | 7,823 | 8,156 | 8,497 | 7,497 | |||||||||||||||
Income tax expense |
2,568 | 2,567 | 2,740 | 3,022 | 2,511 | |||||||||||||||
Net income |
5,255 | 5,256 | 5,416 | 5,475 | 4,986 | |||||||||||||||
Average common shares issued and outstanding |
4,432,664 | 4,464,110 | 4,499,704 | 4,534,627 | 4,609,481 | |||||||||||||||
Average diluted common shares issued and outstanding |
4,497,028 | 4,536,696 | 4,570,558 | 4,601,169 | 4,666,405 | |||||||||||||||
Performance ratios |
||||||||||||||||||||
Return on average assets |
1.40 | % | 1.39 | % | 1.43 | % | 1.51 | % | 1.43 | % | ||||||||||
Return on average common shareholders equity |
16.16 | 15.76 | 16.64 | 17.26 | 15.44 | |||||||||||||||
Total ending equity to total ending assets |
8.98 | 9.27 | 9.22 | 8.85 | 9.41 | |||||||||||||||
Total average equity to total average assets |
8.78 | 8.97 | 8.63 | 8.75 | 9.26 | |||||||||||||||
Dividend payout |
48.02 | 47.49 | 46.82 | 41.76 | 46.75 | |||||||||||||||
Per common share data |
||||||||||||||||||||
Earnings |
$ | 1.18 | $ | 1.17 | $ | 1.20 | $ | 1.21 | $ | 1.08 | ||||||||||
Diluted earnings |
1.16 | 1.16 | 1.18 | 1.19 | 1.07 | |||||||||||||||
Dividends paid |
0.56 | 0.56 | 0.56 | 0.50 | 0.50 | |||||||||||||||
Book value |
29.74 | 29.70 | 29.52 | 28.17 | 28.19 | |||||||||||||||
Average balance sheet |
||||||||||||||||||||
Total loans and leases |
$ | 714,042 | $ | 683,598 | $ | 673,477 | $ | 635,649 | $ | 615,968 | ||||||||||
Total assets |
1,521,418 | 1,495,150 | 1,497,987 | 1,456,004 | 1,416,373 | |||||||||||||||
Total deposits |
686,704 | 680,245 | 676,851 | 674,796 | 659,821 | |||||||||||||||
Long-term debt |
148,627 | 140,756 | 136,769 | 125,620 | 117,018 | |||||||||||||||
Common shareholders equity |
130,737 | 132,004 | 129,098 | 127,102 | 130,881 | |||||||||||||||
Total shareholders equity |
133,588 | 134,047 | 129,262 | 127,373 | 131,153 | |||||||||||||||
Asset Quality |
||||||||||||||||||||
Allowance for credit losses |
$ | 9,106 | $ | 9,413 | $ | 9,260 | $ | 9,475 | $ | 9,462 | ||||||||||
Nonperforming assets measured at historical cost |
2,059 | 1,856 | 1,656 | 1,641 | 1,680 | |||||||||||||||
Allowance for loan and lease losses as a percentage of total loans and leases outstanding measured at historical cost (1) |
1.21 | % | 1.28 | % | 1.33 | % | 1.36 | % | 1.46 | % | ||||||||||
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases measured at historical cost |
443 | 505 | 562 | 579 | 572 | |||||||||||||||
Net charge-offs |
$ | 1,427 | $ | 1,417 | $ | 1,277 | $ | 1,023 | $ | 822 | ||||||||||
Annualized net charge-offs as a percentage of average loans and leases outstanding measured at historical cost (1) |
0.81 | % | 0.82 | % | 0.75 | % | 0.65 | % | 0.54 | % | ||||||||||
Nonperforming loans and leases as a percentage of total loans and leases outstanding measured at historical cost (1) |
0.27 | 0.25 | 0.24 | 0.23 | 0.26 | |||||||||||||||
Nonperforming assets as a percentage of total loans, leases, and foreclosed properties (1) |
0.29 | 0.26 | 0.25 | 0.25 | 0.27 | |||||||||||||||
Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs |
1.51 | 1.60 | 1.75 | 2.21 | 2.72 | |||||||||||||||
Capital ratios (period end) |
||||||||||||||||||||
Risk-based capital: |
||||||||||||||||||||
Tier 1 |
8.57 | % | 8.64 | % | 8.48 | % | 8.33 | % | 8.45 | % | ||||||||||
Total |
11.94 | 11.88 | 11.46 | 11.25 | 11.32 | |||||||||||||||
Tier 1 leverage |
6.25 | 6.36 | 6.16 | 6.13 | 6.18 | |||||||||||||||
Market capitalization |
$ | 226,481 | $ | 238,021 | $ | 240,966 | $ | 217,794 | $ | 208,633 | ||||||||||
Market price per share of common stock |
||||||||||||||||||||
Closing |
$ | 51.02 | $ | 53.39 | $ | 53.57 | $ | 48.10 | $ | 45.54 | ||||||||||
High closing |
54.05 | 54.90 | 53.57 | 50.47 | 47.08 | |||||||||||||||
Low closing |
49.46 | 51.66 | 47.98 | 45.48 | 43.09 |
(1) |
Ratios do not include loans measured at fair value in accordance with SFAS 159 at and for the period ended March 31, 2007. Loans measured at fair value were $3.86 billion at March 31, 2007. |
37
Supplemental Financial Data |
Table 5 provides a reconciliation of the supplemental financial data mentioned below with financial measures defined by 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 nonrecurring 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 period-to-period comparison and is more reflective of normalized operations.
Net Interest IncomeFTE 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. We believe the use of these non-GAAP measures provides additional clarity in assessing the results of the Corporation. 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, EPS, diluted 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, Return on Average Tangible Shareholders Equity and Shareholder Value Added |
We also evaluate our business based upon ROE, ROTE and SVA measures. ROE, ROTE 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. ROTE measures the earnings contribution of the Corporation as a percentage of shareholders equity reduced by goodwill. 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. We believe 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. In addition, profitability, relationship, and investment models all use ROE and SVA as key measures to support our overall growth goal.
38
Table 5
Supplemental Financial Data and Reconciliations to GAAP Financial Measures
Three Months Ended March 31 | ||||||||
(Dollars in millions, except per share information) | 2007 | 2006 | ||||||
Operating basis |
||||||||
Operating earnings |
$ | 5,325 | $ | 5,047 | ||||
Operating earnings per common share |
1.19 | 1.09 | ||||||
Diluted operating earnings per common share |
1.17 | 1.08 | ||||||
Shareholder value added |
2,168 | 1,937 | ||||||
Return on average assets |
1.42 | % | 1.45 | % | ||||
Return on average common shareholders equity |
16.38 | 15.63 | ||||||
Return on average tangible shareholders equity |
31.81 | 31.46 | ||||||
Operating efficiency ratio (FTE basis) |
48.78 | 49.19 | ||||||
Dividend payout ratio |
47.39 | 46.18 | ||||||
Operating leverage |
0.86 | 3.51 | ||||||
FTE basis data |
||||||||
Net interest income |
$ | 8,597 | $ | 9,040 | ||||
Total revenue |
18,422 | 17,941 | ||||||
Net interest yield |
2.61 | % | 2.98 | % | ||||
Efficiency ratio |
49.38 | 49.74 | ||||||
Reconciliation of net income to operating earnings |
||||||||
Net income |
$ | 5,255 | $ | 4,986 | ||||
Merger and restructuring charges |
111 | 98 | ||||||
Related income tax benefit |
(41 | ) | (37 | ) | ||||
Operating earnings |
$ | 5,325 | $ | 5,047 | ||||
Reconciliation of average shareholders equity to average tangible shareholders equity |
||||||||
Average shareholders equity |
$ | 133,588 | $ | 131,153 | ||||
Average goodwill |
(65,703 | ) | (66,094 | ) | ||||
Average tangible shareholders equity |
$ | 67,885 | $ | 65,059 | ||||
Reconciliation of EPS to operating EPS |
||||||||
Earnings per common share |
$ | 1.18 | $ | 1.08 | ||||
Effect of merger and restructuring charges, net of tax benefit |
0.01 | 0.01 | ||||||
Operating earnings per common share |
$ | 1.19 | $ | 1.09 | ||||
Reconciliation of diluted EPS to diluted operating EPS |
||||||||
Diluted earnings per common share |
$ | 1.16 | $ | 1.07 | ||||
Effect of merger and restructuring charges, net of tax benefit |
0.01 | 0.01 | ||||||
Diluted operating earnings per common share |
$ | 1.17 | $ | 1.08 | ||||
Reconciliation of net income to shareholder value added |
||||||||
Net income |
$ | 5,255 | $ | 4,986 | ||||
Amortization of intangibles |
389 | 440 | ||||||
Merger and restructuring charges, net of tax benefit |
70 | 61 | ||||||
Cash basis earnings on an operating basis |
5,714 | 5,487 | ||||||
Capital charge |
(3,546 | ) | (3,550 | ) | ||||
Shareholder value added |
$ | 2,168 | $ | 1,937 | ||||
Reconciliation of return on average assets to operating return on average assets |
||||||||
Return on average assets |
1.40 | % | 1.43 | % | ||||
Effect of merger and restructuring charges, net of tax benefit |
0.02 | 0.02 | ||||||
Operating return on average assets |
1.42 | % | 1.45 | % | ||||
Reconciliation of return on average common shareholders equity to operating return on average common shareholders equity |
||||||||
Return on average common shareholders equity |
16.16 | % | 15.44 | % | ||||
Effect of merger and restructuring charges, net of tax benefit |
0.22 | 0.19 | ||||||
Operating return on average common shareholders equity |
16.38 | % | 15.63 | % | ||||
Reconciliation of return on average tangible shareholders equity to operating return on average tangible shareholders equity |
||||||||
Return on average tangible shareholders equity |
31.39 | % | 31.08 | % | ||||
Effect of merger and restructuring charges, net of tax benefit |
0.42 | 0.38 | ||||||
Operating return on average tangible shareholders equity |
31.81 | % | 31.46 | % | ||||
Reconciliation of efficiency ratio to operating efficiency ratio (FTE basis) |
||||||||
Efficiency ratio |
49.38 | % | 49.74 | % | ||||
Effect of merger and restructuring charges |
(0.60 | ) | (0.55 | ) | ||||
Operating efficiency ratio |
48.78 | % | 49.19 | % | ||||
Reconciliation of dividend payout ratio to operating dividend payout ratio |
||||||||
Dividend payout ratio |
48.02 | % | 46.75 | % | ||||
Effect of merger and restructuring charges, net of tax benefit |
(0.63 | ) | (0.57 | ) | ||||
Operating dividend payout ratio |
47.39 | % | 46.18 | % | ||||
Reconciliation of operating leverage to operating basis operating leverage |
||||||||
Operating leverage |
0.74 | % | 4.14 | % | ||||
Effect of merger and restructuring charges |
0.12 | (0.63 | ) | |||||
Operating leverage |
0.86 | % | 3.51 | % |
39
Core Net Interest Income Managed Basis |
In managing our business, we review core net interest income managed basis, which adjusts reported net interest income on a FTE basis for the impact of market-based activities and certain securitizations, net of retained securities. As discussed in the GCIB business segment section beginning on page 49, we evaluate our market-based results and strategies on a total market-based revenue approach 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. These securitizations include off-balance sheet loans and leases, specifically those loans in revolving securitizations and other securitizations where servicing is retained by the Corporation (e.g., credit card and home equity lines). 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. We believe the use of this non-GAAP presentation provides additional clarity in assessing the results of the Corporation. 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) |