General

Bank of America Corporation (together, with its consolidated subsidiaries, Bank of America, the Corporation, our company, we or us) is a Delaware corporation, a bank holding company and a financial holding company under the Gramm-Leach-Bliley Act. When used in this report, “the Corporation” may refer to the Corporation individually, the Corporation and its subsidiaries, or certain of the Corporation’s subsidiaries or affiliates. Our principal executive offices are located in the Bank of America Corporate Center, 100 North Tryon Street, Charlotte, North Carolina 28255.

Bank of America is one of the world’s largest financial institutions, serving individual consumers, small- and middle-market businesses, large corporations and governments with a full range of banking, investing, asset management and other financial and risk management products and services. Through our banking subsidiaries (the Banks) and various nonbanking subsidiaries throughout the United States and in certain international markets, we provide a diversified range of banking and nonbanking financial services and products through six business segments: Deposits, Global Card Services, Home Loans & Insurance, Global Commercial Banking, Global Banking & Markets (GBAM) and Global Wealth & Investment Management (GWIM), with the remaining operations recorded in All Other. Effective January 1, 2010, we realigned the Global Corporate and Investment Banking portion of the former Global Banking business segment with the former Global Markets business segment to form GBAM and to reflect Global Commercial Banking as a standalone segment.

We are a global franchise, serving customers and clients around the world with operations in all 50 U.S. states, the District of Columbia and more than 40 non-U.S. countries. As of December 31, 2010, our U.S. retail banking footprint includes approximately 80 percent of the U.S. population, and we serve approximately 57 million consumer and small business relationships with approximately 5,900 retail banking offices, approximately 18,000 ATMs, nationwide call centers, and the leading online and mobile banking platforms. We have banking centers in 13 of the 15 fastest growing states and have leadership positions in market share for deposits in seven of those states. We offer industry-leading support to approximately four million small business owners. We have the No. 1 market share in U.S. retail deposits and are the No. 1 issuer of debit cards in the United States. We have the No. 2 market share in credit card products in the United States and we are the No. 1 credit card lender in Europe. We have approximately 5,300 mortgage loan officers

and are the No. 1 mortgage servicer and No. 2 mortgage originator in the United States.

In addition, as of December 31, 2010, our commercial and corporate clients include 98 percent of the U.S. Fortune 1,000 and 85 percent of the Global Fortune 500 and we serve more than 11,000 issuer clients and 3,500 institutional investors. We are the No. 1 treasury services provider in the United States and a leading provider globally. We are a leading provider globally in corporate and investment banking and trading across a broad range of asset classes serving corporations, governments, institutions and individuals around the world. We have one of the largest wealth management businesses in the world with nearly 17,000 financial and wealth advisors and 3,000 other client-facing professionals and more than $2.2 trillion in net client balances, and we are a leading wealth manager for high-net-worth and ultra-high-net-worth clients. Additional information relating to our businesses and our subsidiaries is included in the information set forth in pages 38 through 51 of Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and Note 26 – Business Segment Information to the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data (Consolidated Financial Statements).

Bank of America’s website is www.bankofamerica.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available on our website at http://investor.bankofamerica.com under the heading SEC Filings as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). In addition, we make available on http://investor.bankofamerica.com under the heading Corporate Governance: (i) our Code of Ethics (including our insider trading policy); (ii) our Corporate Governance Guidelines; and (iii) the charter of each committee of our Board of Directors (the Board) (accessible by clicking on the committee names under the Committee Composition link), and we also intend to disclose any amendments to our Code of Ethics, or waivers of our Code of Ethics on behalf of our Chief Executive Officer, Chief Financial Officer or Chief Accounting Officer, on our website. All of these corporate governance materials are also available free of charge in print to stockholders who request them in writing to: Bank of America Corporation, Attention: Shareholder Relations, Hearst Tower, 214 North Tryon Street, NC1-027-20-05, Charlotte, North Carolina 28202.

 

Competition

We operate in a highly competitive environment. Our competitors include banks, thrifts, credit unions, investment banking firms, investment advisory firms, brokerage firms, investment companies, insurance companies, mortgage banking companies, credit card issuers, mutual fund companies and e-commerce and other internet-based companies in addition to those competitors discussed more specifically below. We compete with some of these competitors globally and with others on a regional or product basis. Competition is based on a number of factors including, among others, customer service, quality and range of products and services offered, price, reputation, interest rates on loans and deposits, lending limits and customer convenience. Our ability to continue to compete effectively also depends in large part on our ability to attract new employees and retain and motivate our existing employees, while managing compensation and other costs.

More specifically, our Deposits business segment competes with banks, thrifts, credit unions, finance companies and other nonbank organizations offering financial services. Our Global Commercial Banking business segment competes with local, regional and international banks and nonbank financial organizations. Our GBAM and GWIM business segments compete with U.S. and international commercial banking and investment banking firms, investment advisory firms, brokerage firms, investment companies, mutual funds, hedge funds, private equity funds, trust banks, multi-family offices, advice boutiques and other organizations offering similar services and other investment alternatives available to investors. Our Home Loans & Insurance business segment competes with banks, thrifts, mortgage brokers, Fannie Mae (FNMA) and Freddie Mac (FHLMC) (collectively, the government sponsored enterprises (GSEs)), and other nonbank organizations offering mortgage banking, mortgage and insurance related services. Our Global Card Services business segment competes in the United States and internationally with banks, consumer finance companies and retail stores with private label credit and debit cards.

We also compete actively for funds. A primary source of funds for the Banks is deposits, and competition for deposits includes other deposit-taking organizations, such as banks, thrifts and credit unions, as well as money market mutual funds. Investment banks and other entities that became bank holding companies and financial holding companies as a result of the recent financial crisis are also competitors for deposits. In addition, we compete for funding in the domestic and international short-term and long-term debt securities capital markets.

Over time, certain sectors of the financial services industry have become more concentrated, as institutions involved in a broad range of financial services have been acquired by or merged into other firms or have declared bankruptcy. As a result, this consolidation within the financial services industry has significantly increased the capital base and geographic reach of some of our competitors and also hastened the globalization of the securities markets. These developments could result in our remaining competitors gaining greater capital and other resources or having stronger local presences and longer operating histories outside the United States.

Our ability to expand certain of our banking operations in additional U.S. states remains subject to various federal and state laws. See Government Supervision and Regulation – General below for a more detailed discussion of interstate banking and branching legislation and certain state legislation.

 

Employees

As of December 31, 2010, there were approximately 288,000 full-time equivalent employees with Bank of America. Of these employees, approximately 80,700 were employed within Deposits, approximately 15,000 were employed within Global Card Services, approximately 58,200 were employed within Home Loans & Insurance, approximately 7,100 were employed within Global Commercial Banking, approximately 34,300 were employed within GBAM and approximately 40,300 were employed within GWIM. The remainder were employed elsewhere within our company including various staff and support functions.

None of our domestic employees is subject to a collective bargaining agreement. Management considers our employee relations to be good.

 

Acquisition and Disposition Activity

As part of our operations, we regularly evaluate the potential acquisition of, and hold discussions with, various financial institutions and other businesses of a type eligible for financial holding company ownership or control. In addition, we regularly analyze the values of, and submit bids for, the acquisition of customer-based funds and other liabilities and assets of such financial institutions and other businesses. We also regularly consider the potential disposition of certain of our assets, branches, subsidiaries or lines of businesses. As a general rule, we publicly announce any material acquisitions or dispositions when a material definitive agreement has been reached.

On January 1, 2009, we completed the acquisition of Merrill Lynch. Additional information on our acquisitions is included in Note 2 – Merger and Restructuring Activity to the Consolidated Financial Statements which is incorporated herein by reference.

 

Government Supervision and Regulation

The following discussion describes, among other things, elements of an extensive regulatory framework applicable to bank holding companies, financial holding companies and banks, including specific information about Bank of America. U.S. federal regulation of banks, bank holding companies and financial holding companies is intended primarily for the protection of depositors and the Deposit Insurance Fund (DIF) rather than for the protection of stockholders and creditors. For additional information about recent regulatory programs, initiatives and legislation that impact us, see Regulatory Matters in the MD&A beginning on page 56.

 

General

As a registered financial holding company and bank holding company, Bank of America Corporation is subject to the supervision of, and regular inspection by, the Board of Governors of the Federal Reserve System (Federal Reserve Board). The Banks are organized as national banking associations, which are subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (Comptroller or OCC), the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board and other federal and state regulatory agencies.

A U.S. financial holding company, and the companies under its control, are permitted to engage in activities considered “financial in nature” as defined by the Gramm-Leach-Bliley Act and related Federal Reserve Board interpretations (including, without limitation, insurance and securities activities), and therefore may engage in a broader range of activities than permitted for bank holding companies and their subsidiaries, which are only permitted to engage in activities that are closely related to the business of banking. Unless otherwise limited by the Federal Reserve Board, a financial holding company may engage directly or indirectly in activities considered financial in nature, either de novo or by acquisition, provided the financial holding company gives the Federal Reserve Board after-the-fact notice of the new activities. The Gramm-Leach-Bliley Act also permits national banks, such as the Banks, to engage in activities considered financial in nature through a financial subsidiary, subject to certain conditions and limitations and with the approval of the OCC. If the Federal Reserve Board finds that any of the Banks is not well-capitalized or well-managed, we would be required to enter into an agreement with the Federal Reserve Board to comply with all applicable capital and management requirements, which may contain additional limitations or conditions relating to our activities.

U.S. bank holding companies (including bank holding companies that also are financial holding companies) are also required to obtain the prior approval of the Federal Reserve Board before acquiring more than five percent of any class of voting stock of any non-affiliated bank. Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate Banking and Branching Act), a bank holding company may acquire banks located in states other than its home state without regard to the permissibility of such acquisitions under state law, but subject to any state requirement that the

bank has been organized and operating for a minimum period of time, not to exceed five years, and the federal requirement that the bank holding company, after and as a result of the proposed acquisition, controls no more than 10 percent of the total amount of deposits of insured depository institutions in the United States and no more than 30 percent or such lesser or greater amount set by state law of such deposits in that state. Subject to certain restrictions, the Interstate Banking and Branching Act also authorizes banks to merge across state lines to create interstate banks. At December 31, 2010, we controlled approximately 12 percent of the total amount of deposits of insured depository institutions in the United States.

In addition to banking laws, regulations and regulatory agencies, we are subject to various other laws and regulations, as well as supervision and examination by other regulatory agencies, all of which directly or indirectly affect our operations and management and our ability to make distributions to stockholders. For example, our U.S. broker dealer subsidiaries are subject to regulation by and supervision of the Securities and Exchange Commission (SEC), the New York Stock Exchange and the Financial Industry Regulatory Authority (FINRA); our commodities businesses in the United States are subject to regulation by and supervision of the Commodities Futures Trading Commission (CFTC); and our insurance activities are subject to licensing and regulation by state insurance regulatory agencies.

Our non-U.S. businesses are also subject to extensive regulation by various non-U.S. regulators, including governments, securities exchanges, central banks and other regulatory bodies, in the jurisdictions in which those businesses operate. Our financial services operations in the United Kingdom (U.K.) are subject to regulation by and supervision of the Financial Services Authority (FSA). In July of 2010, the U.K. proposed abolishing the FSA and replacing it with the Financial Policy Committee within the Bank of England (FPC) and two new Regulators, the Prudential Regulatory Authority (PRA) and the Consumer Protection and Markets Authority (CPMA). Our U.K. regulated entities will be subject to the supervision of the FPC within the Bank of England for prudential matters and the CPMA for conduct of business matters. The new financial regulatory structure is intended to be in place by the end of 2012. We continue to monitor the development and potential impact of this regulatory restructuring.

 

Changes in Legislation and Regulations

Proposals to change the laws and regulations governing the banking and financial services industries are frequently introduced in Congress, in state legislatures and before the various bank regulatory or financial regulatory agencies as well as by lawmakers and regulators in jurisdictions outside the United States where we operate. Congress and the federal government have continued to evaluate and develop legislation, programs and initiatives designed to, among other things, stabilize the financial and housing markets, stimulate the economy, including the federal government’s foreclosure prevention program, and prevent future financial crises by further regulating the financial services industry. As a result of the recent financial crisis and the ongoing challenging economic environment, we anticipate additional legislative and regulatory proposals and initiatives as well as continued legislative and regulatory scrutiny of the financial services industry. However, at this time we cannot determine the final form of any proposed programs or initiatives or related legislation, the likelihood and timing of any other future proposals or legislation, and the impact they might have on us.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Financial Reform Act) was signed into law. The Financial Reform Act provides for sweeping financial regulatory reform and will alter the way in which we conduct certain businesses.

The Financial Reform Act contains a broad range of significant provisions that could affect our businesses, including, without limitation, the following:

The Financial Reform Act has had, and will continue to have, a significant and negative impact on our earnings through fee reductions, higher costs and new restrictions, by reducing available capital. The Financial Reform Act also has had and may continue to have a material adverse impact on the value of certain assets and liabilities held on our balance sheet. As previously announced on July 16, 2010, as a result of the Financial Reform Act and its related rules and subject to final rulemaking over the next year, we believe that our debit card revenue will be adversely impacted beginning in the third quarter of 2011. In 2010, our estimate of revenue loss due to the Financial

Reform Act was approximately $2.0 billion annually. As a result, we recorded a non-tax deductible goodwill impairment charge for Global Card Services of $10.4 billion in 2010. The goodwill impairment analysis includes limited mitigation actions within Global Card Services to recapture the lost revenue. We have identified other potential mitigation actions, but they are in the early stages of development and some of them may impact other segments. For additional information, refer to Complex Accounting Estimates – Goodwill and Intangible Assets – Global Card Services Impairment, in the MD&A beginning on page 110 and Note 10 – Goodwill and Intangible Assets to the Consolidated Financial Statements.

We anticipate that the final regulations associated with the Financial Reform Act will include limitations on certain activities, including limitations on the use of a bank’s own capital for proprietary trading and sponsorship or investment in hedge funds and private equity funds (Volcker Rule). Regulations implementing the Volcker Rule are required to be in place by October 21, 2011, and the Volcker Rule becomes effective 12 months after such rules are final or on July 21, 2012, whichever is earlier. The Volcker Rule then gives banking entities two years from the effective date (with opportunities for additional extensions) to bring activities and investments into conformance. In anticipation of the adoption of the final regulations, we have begun winding down our proprietary trading line of business. The ultimate impact of the Volcker Rule or the winding down of this business, and the time it will take to comply or complete, continues to remain uncertain. The final regulations issued may impose additional operational and compliance costs on us.

Additionally, the Financial Reform Act includes measures to broaden the scope of derivative instruments subject to regulation by requiring clearing and exchange trading of certain derivatives, imposing new capital and margin requirements for certain market participants and imposing position limits on certain over-the-counter derivatives. The Financial Reform Act grants the U.S. Commodity Futures Trading Commission (CFTC) and the SEC substantial new authority and requires numerous rulemakings by these agencies. Generally, the CFTC and SEC have until July 16, 2011 to promulgate the rulemakings necessary to implement these regulations. The ultimate impact of these derivatives regulations, and the time it will take to comply, continues to remain uncertain. The final regulations will impose additional operational and compliance costs on us and may require us to restructure certain businesses and negatively impact our revenues and results of operations.

Although the ratings agencies have indicated that our credit ratings currently reflect their expectation that, if necessary, we would receive significant support from the U.S. government, all three major ratings agencies have indicated they will reevaluate, and could reduce the uplift they include in our ratings for government support for reasons arising from financial services regulatory reform proposals or legislation. In the event of certain credit ratings downgrades, our access to credit markets, liquidity and our related funding costs would be materially adversely affected. For additional information about our credit ratings, see Capital Management and Liquidity Risk in the MD&A beginning on pages 63 and 67, respectively.

Most provisions of the Financial Reform Act require various federal banking and securities regulators to issue regulations to clarify and implement its provisions or to conduct studies on significant issues. These proposed regulations and studies are generally subject to a public notice and comment period. The timing of issuance of final regulations, their effective dates and their potential impacts to our businesses will be determined over the coming months and years. As a result, the ultimate impact of the Financial Reform Act’s final rules on our businesses and results of operations will depend on regulatory interpretation and rulemaking, as well as the success of any of our actions to mitigate the negative earnings impact of certain provisions.

 

Capital and Operational Requirements

The Federal Reserve Board, the OCC and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to U.S. banking organizations. In addition, these regulatory agencies may from time to time require that a banking organization maintain capital above the minimum prescribed levels, whether because of its financial condition or actual or anticipated growth. The Federal Reserve Board’s risk-based guidelines define a three-tier capital framework. Tier 1 capital includes common shareholders’ equity, common equivalent securities (CES), trust preferred securities and noncontrolling interests in limited amounts and qualifying preferred stock, less goodwill and other adjustments. The Financial Reform Act includes a provision under which our previously issued and outstanding trust preferred securities in the aggregate amount of $19.9 billion (approximately 137 basis points (bps) of Tier 1 capital) at December 31, 2010, will no longer qualify as Tier 1 capital effective January 1, 2013. Tier 2 capital consists of preferred stock not qualifying as Tier 1 capital, mandatorily convertible debt, limited amounts of subordinated debt, other qualifying term debt, the allowance for credit losses up to 1.25 percent of risk-weighted assets and other adjustments. Tier 3 capital includes subordinated debt that (i) is unsecured, (ii) is fully paid, (iii) has an original maturity of at least two years, (iv) is not redeemable before maturity without prior approval by the Federal Reserve Board and (v) includes a lock-in clause precluding payment of either interest or principal if the payment would cause the issuing bank’s risk-based capital ratio to fall or remain below the required minimum. The sum of Tier 1 and Tier 2 capital less investments in unconsolidated subsidiaries represents qualifying total capital. Risk-based capital ratios are calculated by dividing Tier 1 and total capital by risk-weighted assets, which is calculated by assigning assets and off-balance sheet exposures to one of four categories of risk-weights, based primarily on relative credit risk. The minimum Tier 1 capital ratio is four percent and the minimum total capital ratio is eight percent. A “well-capitalized” institution must generally maintain capital ratios 200 bps higher than the minimum guidelines.

Our Tier 1 and total risk-based capital ratios under these guidelines at December 31, 2010 were 11.24 percent and 15.77 percent. At December 31, 2010, we had no subordinated debt that qualified as Tier 3 capital. While not an explicit requirement of law or regulation, bank regulatory agencies have stated that they expect shares of common stock to be the primary component of a financial holding company’s Tier 1 capital and that financial holding companies should maintain a Tier 1 common capital ratio of at least four percent. The Tier 1 common capital ratio is determined by dividing Tier 1 common capital by risk-weighted assets. We calculate Tier 1 common capital as Tier 1 capital, which includes CES, less preferred stock, trust preferred securities, hybrid securities and noncontrolling interest. As of December 31, 2010, our Tier 1 common capital ratio was 8.60 percent.

The leverage ratio is determined by dividing Tier 1 capital by adjusted quarterly average total assets, after certain adjustments. “Well-capitalized” bank holding companies must have a minimum Tier 1 leverage ratio of four percent and not be subject to a Federal Reserve Board directive to maintain higher capital levels. “Well-Capitalized” national banks must maintain a Tier 1 leverage ratio of at least five percent and not be subject to a Federal Reserve Board directive to maintain higher capital levels. Our leverage ratio at December 31, 2010 was 7.21 percent, which exceeded our leverage ratio requirement. For additional information about our calculation of regulatory capital and capital composition, see Capital Management – Regulatory Capital in the MD&A beginning on page 63, and Note 18 – Regulatory Requirements and Restrictions to the Consolidated Financial Statements.

The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), among other things, identifies five capital categories for insured

depository institutions (well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) and requires the respective federal regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital-raising requirements. An “undercapitalized” bank must develop a capital restoration plan and its parent holding company must guarantee that bank’s compliance with the plan. The liability of the parent holding company under any such guarantee is limited to the lesser of five percent of the bank’s assets at the time it became “undercapitalized” or the amount needed to comply with the plan. Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent’s general unsecured creditors. In addition, FDICIA requires the various regulatory agencies to prescribe certain non-capital standards for safety and soundness relating generally to operations and management, asset quality and executive compensation, and permits regulatory action against a financial institution that does not meet such standards.

The various regulatory agencies have adopted substantially similar regulations that define the five capital categories identified by FDICIA, using the total risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the relevant capital measures. Such regulations establish various degrees of corrective action to be taken when an institution is considered undercapitalized. Under the regulations, a “well-capitalized” institution must have a Tier 1 risk-based capital ratio of at least six percent, a total risk-based capital ratio of at least ten percent and a leverage ratio of at least five percent and not be subject to a capital directive order. Under these guidelines, each of the Banks was considered well capitalized as of December 31, 2010.

Pursuant to FDICIA, regulators also must take into consideration: (a) concentrations of credit risk; (b) interest rate risk; and (c) risks from non-traditional banking activities, such as derivatives, securities and insurance activities, as well as an institution’s ability to manage those risks, when determining the adequacy of an institution’s capital. This evaluation is made as a part of the institution’s regular safety and soundness examination. In addition, Bank of America Corporation, and any Bank with significant trading activity, must incorporate a measure for market risk in their regulatory capital calculations.

In June 2004, the Basel Committee on Banking Supervision (the Basel Committee) published the Basel II Accord with the intent of more closely aligning regulatory capital requirements with underlying risks, similar to economic capital. While economic capital is measured to cover unexpected losses, the Corporation also manages regulatory capital to adhere to regulatory standards of capital adequacy. The Basel Committee, which consists of central banks and bank supervisors from 13 countries including the United States, does not possess any formal supervisory or legal authority over institutions in its member countries. Instead, the Basel Committee formulates supervisory guidelines that it recommends to its member countries with the expectation that these guidelines will be implemented in a manner best suited to each country’s own national system.

The Basel II Final Rule (Basel II) was published in December 2007 and established requirements for U.S. implementation of the Basel II Rules and provided detailed requirements for a new regulatory capital framework. This regulatory capital framework includes requirements related to credit and operational risk (Pillar 1), supervisory requirements (Pillar 2) and disclosure requirements (Pillar 3). The Corporation began Basel II parallel implementation on April 1, 2010.

 

Designated U.S. financial institutions are required to complete a minimum parallel qualification period under Basel II of four consecutive successful quarters before receiving regulatory approval to report regulatory capital using the Basel II methodology and exiting the parallel period. During the parallel period, the resulting capital calculations under both the current risk-based capital rules (Basel I) and Basel II will be reported to the financial institutions’ regulatory supervisors. Once the parallel period is successfully completed and we have received approval to exit parallel, we will transition to Basel II as the methodology for calculating regulatory capital. Basel II provides for a three-year transitional floor subsequent to exiting parallel, after which Basel I may be discontinued. The Collins Amendment within the Financial Reform Act and the U.S. banking regulators’ subsequent Notice of Proposed Rulemaking published by the Federal Reserve Board on December 14, 2010 propose however that the current three-year transitional floors under Basel II be replaced with a permanent risk based capital floor as defined under Basel I.

On December 16, 2010, U.S. regulators issued a Notice of Proposed Rulemaking on the Risk-Based Capital Guidelines for Market Risk (Market Risk Rules), reflecting partial adoption of the Basel Committee’s July 2009 consultative document on the topic. We anticipate U.S. regulators will adopt the Market Risk Rules in mid-2011. This change is expected to significantly increase the capital requirements for our trading assets and liabilities, including derivatives exposures which meet the definition established by the regulatory agencies. We continue to evaluate the capital impact of the proposed rules and currently anticipate being fully compliant with any final rules by the projected implementation date of year-end 2011.

On December 16, 2010, the Basel Committee issued “Basel III: A global regulatory framework for more resilient banks and banking systems” (Basel III), proposing a January 2013 implementation date for Basel III. If implemented by U.S. regulators as proposed, Basel III could significantly increase our capital requirements. Basel III and the Financial Reform Act propose the disqualification of trust preferred securities from Tier 1 capital, with the Financial Reform Act proposing that the disqualification be phased in from 2013 to 2015. Basel III also proposes the deduction of certain assets from capital (deferred tax assets, mortgage servicing rights (MSRs), investments in financial firms and pension assets, among others, within prescribed limitations), the inclusion of other comprehensive income in capital, increased capital for counterparty credit risk, and new minimum capital and buffer requirements. The phase-in period for the capital deductions is proposed to occur in 20 percent increments from 2014 through 2018 with full implementation by December 31, 2018. The increase in capital requirements for counterparty credit risk is proposed to be effective January 2013. The phase-in period for the new minimum capital requirements and related buffers is proposed to occur between 2013 and 2019. U.S. regulators are expected to begin the final rulemaking processes for Basel III in early 2011 and have indicated a goal to adopt final rules by year-end 2011 or early 2012. For additional information on our MSRs, refer to Note 25 – Mortgage Servicing Rights to the Consolidated Financial Statements. For additional information on deferred tax assets, refer to Note 21 – Income Taxes to the Consolidated Financial Statements.

If Basel III is implemented in the U.S. consistent with Basel Committee rules, beginning in January 2013, we would be required to maintain minimum capital ratio requirements of 6.0 percent for Tier 1 capital and 8.0 percent for Total capital. The proposed minimum requirement for common equity Tier 1 capital is 3.5 percent in 2013 and would increase to 4.5 percent in 2015. Basel III also includes three capital buffers which would be phased in over time and impact all three capital ratios. These buffers include a capital conservation buffer that would start at 0.63 percent in 2016 and increase to 2.5 percent in 2019. Thus, the minimum capital ratio requirements including the capital conservation buffer in 2019 would be 7.0 percent for common equity Tier 1 capital, 8.5 percent for Tier 1 capital and 10.5 percent

for Total capital. If ratios fall below the minimum requirement plus the capital conservation buffer, such as 10.5 percent for Total capital, an institution would be required to restrict dividends, share repurchases and discretionary bonuses. Additionally, Basel III also includes a countercyclical buffer of up to 2.5 percent that regulators could require in periods of excess credit growth. The countercyclical buffer is to be comprised of loss-absorbing capital, such as common equity, and is meant to retain additional capital during periods of strong credit expansion, providing incremental protection in the event of a material market downturn. The ratios presented above do not include the third buffer requirement for systemically important financial institutions, which the Basel Committee continues to assess and has not yet quantified. The countercyclical and systemic buffers are scheduled to be phased in from 2013 through 2019. U.S. regulators are expected to begin the rulemaking processes for Basel III in early 2011 and have indicated a goal to adopt final rules by end of 2011 or early 2012.

These regulatory changes also require approval by the regulatory agencies of analytical models used as part of our capital measurement and assessment, especially in the case of more complex models. If these more complex models are not approved, it could require financial institutions to hold additional capital, which in some cases could be significant.

We expect to maintain a Tier 1 common capital ratio in excess of 8 percent as the regulatory rule changes are implemented without needing to raise new equity capital. We have made the implementation and mitigation of these regulatory changes a strategic priority. We also note there remains significant uncertainty on the final impacts as the U.S. has issued only final rules for Basel II and a Notice of Proposed Rulemaking for the Market Risk Rules at this time. Impacts may change as the U.S. finalizes rules for Basel III and the regulatory agencies interpret the final rules during the implementation process.

In addition to the capital proposals, in December 2010 the Basel Committee proposed two measures of liquidity risk. The Liquidity Coverage Ratio identifies the amount of unencumbered, high quality liquid assets a financial institution holds that can be used to offset the net cash outflows the institution would encounter under an acute 30-day stress scenario. The Net Stable Funding Ratio measures the amount of longer-term, stable sources of funding employed by a financial institution relative to the liquidity profiles of the assets funded and the potential for contingent calls on funding liquidity arising from off-balance sheet commitments and obligations, over a one-year period. These two minimum liquidity standards are also considered part of Basel III. The Basel Committee expects the Liquidity Coverage Ratio to be implemented in January 2015 and the Net Stable Funding Ratio to be implemented in January 2018, following observation periods beginning in 2012. We continue to monitor the development and potential impact of these capital proposals.

 

Distributions

Our funds for cash distributions to our stockholders are derived from a variety of sources, including cash and temporary investments. The primary source of such funds, and funds used to pay principal and interest on our indebtedness, is dividends received from the Banks. Each of the Banks is subject to various regulatory policies and requirements relating to the payment of dividends, including requirements to maintain capital above regulatory minimums. The appropriate federal regulatory authority is authorized to determine, under certain circumstances relating to the financial condition of a bank or bank holding company, that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. For additional information regarding the restrictions on our ability to receive dividends or other distributions from the Banks, see Item 1A. Risk Factors.

 

In addition, the ability of Bank of America Corporation and the Banks to pay dividends may be affected by the various minimum capital requirements and the capital and non-capital standards established under FDICIA, as described above. The right of Bank of America Corporation, our stockholders and our creditors to participate in any distribution of the assets or earnings of our subsidiaries is further subject to the prior claims of creditors of the respective subsidiaries.

For additional information regarding the requirements relating to the payment of dividends, including the minimum capital requirements, see Note 15 – Shareholders’ Equity and Note 18 – Regulatory Requirements and Restrictions to the Consolidated Financial Statements.

 

Source of Strength

According to the Financial Reform Act and Federal Reserve Board policy, bank holding companies are expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each such subsidiary. This support may be required at times when a bank holding company may not be able to provide such support. Similarly, under the cross-guarantee provisions of the FDICIA, in the event of a loss suffered or anticipated by the FDIC – either as a result of default of a banking subsidiary or related to FDIC assistance provided to such a subsidiary in danger of default – the affiliate banks of such a subsidiary may be assessed for the FDIC’s loss, subject to certain exceptions.

 

Deposit Insurance

Deposits placed at the U.S. Banks are insured by the FDIC, subject to limits and conditions of applicable law and the FDIC’s regulations. Pursuant to the Financial Reform Act, FDIC insurance coverage limits were permanently increased to $250,000 per customer. The Financial Reform Act also provides for unlimited FDIC insurance coverage for non-interest bearing demand deposit accounts for a two-year period beginning on December 31, 2010 and ending on January 1, 2013. The FDIC administers the DIF, and all insured depository institutions are required to pay assessments to the FDIC that fund the DIF. The Financial Reform Act changed the methodology for calculating deposit insurance assessments from the amount of an insured depository institution’s domestic deposits to its total assets minus tangible capital. On February 7, 2011 the FDIC issued a new regulation implementing revisions to the assessment system mandated by the Financial Reform Act. The new regulation will be effective April 1, 2011 and will be reflected in the June 30, 2011 FDIC fund balance and the invoices for assessments due September 30, 2011. As a result of the new regulations, we expect to incur higher annual deposit insurance assessments. We have identified potential mitigation actions, but they are in the early stages of development and we are not able to directly control the basis or the amount of premiums that we are required to pay for FDIC insurance or for other fees or assessment obligations imposed on financial institutions. Any future increases in required deposit insurance premiums or other bank industry fees could have a significant adverse impact on our financial condition and results of operations.

The FDIC is required to maintain at least a designated minimum ratio of the DIF to insured deposits in the United States. The Financial Reform Act requires the FDIC to assess insured depository institutions to achieve a DIF ratio of at least 1.35 percent by September 30, 2020. The FDIC has recently adopted new regulations that establish a long-term target DIF ratio of greater than two percent. As a result of the ongoing instability in the economy and the failure of other U.S. depository institutions, the DIF ratio is currently below the required targets and the FDIC has adopted a restoration plan that will result in

substantially higher deposit insurance assessments for all depository institutions over the coming years. Deposit insurance assessment rates are subject to change by the FDIC and will be impacted by the overall economy and the stability of the banking industry as a whole.

 

Transactions with Affiliates

The U.S. Banks are subject to restrictions under federal law that limit certain types of transactions between the Banks and their non-bank affiliates. In general, the U.S. Banks are subject to quantitative and qualitative limits on extensions of credit, purchases of assets and certain other transactions involving Bank of America and its non-bank affiliates. Transactions between the U.S. Banks and their non-bank affiliates are required to be on arm’s length terms.

 

Privacy and Information Security

We are subject to many U.S., state and international laws and regulations governing requirements for maintaining policies and procedures to protect the non-public confidential information of our customers. The Gramm-Leach-Bliley Act requires the Banks to periodically disclose Bank of America’s privacy policies and practices relating to sharing such information and enables retail customers to opt out of our ability to market to affiliates and non-affiliates under certain circumstances.

 

Additional Information

See also the following additional information which is incorporated herein by reference: Net Interest Income (under the captions Financial Highlights – Net Interest Income and Supplemental Financial Data in the MD&A and Tables I, II and XIII of the Statistical Tables); Securities (under the caption Balance Sheet Analysis – Assets – Debt Securities and Market Risk Management – Interest Rate Risk Management for Nontrading Activities – Securities in the MD&A and Note 1 – Summary of Significant Accounting Principles and Note 5 – Securities to the Consolidated Financial Statements); Outstanding Loans and Leases (under the caption Balance Sheet Overview – Assets – Loans and Leases and Credit Risk Management in the MD&A, Table IV of the Statistical Tables, and Note 1 – Summary of Significant Accounting Principles and Note 6 – Outstanding Loans and Leases to the Consolidated Financial Statements); Deposits (under the caption Balance Sheet Overview – Liabilities – Deposits and Liquidity Risk – Funding and Liquidity Risk Management in the MD&A and Note 11 – Deposits to the Consolidated Financial Statements); Short-term Borrowings (under the caption Balance Sheet Overview – Liabilities – Commercial Paper and Other Short-term Borrowings and Liquidity Risk – Funding and Liquidity Risk Management in the MD&A, and Note 12 – Federal Funds Sold, Securities Borrowed or Purchased Under Agreements to Resell and Short-term Borrowings and Note 13 – Long-term Debt to the Consolidated Financial Statements); Trading Account Assets and Liabilities (under the caption Balance Sheet Overview – Assets – Trading Accounts Assets and Market Risk Management – Trading Risk Management in the MD&A and Note 3 – Trading Account Assets and Liabilities to the Consolidated Financial Statements); Market Risk Management (under the caption Market Risk Management in the MD&A); Liquidity Risk Management (under the caption Liquidity Risk in the MD&A); Compliance Risk Management (under the caption Compliance Risk Management in the MD&A) and Operational Risk Management (under the caption Operational Risk Management in the MD&A); and Performance by Geographic Area (under Note 28 – Performance by Geographical Area to the Consolidated Financial Statements).

 

In the course of conducting our business operations, we are exposed to a variety of risks, some of which are inherent in the financial services industry and others of which are more specific to our own businesses. The following discussion addresses some of the key risks that could affect our businesses, operations, and financial condition. Other factors that could affect our financial condition and operations are discussed in Forward-looking Statements in the MD&A. However, other factors besides those discussed below or elsewhere in this report could also adversely affect our businesses, operations, and financial condition. Therefore, the risk factors below should not be considered a complete list of potential risks that we may face.

Our businesses and results of operations have been, and may continue to be, materially and adversely affected by the U.S. and international financial markets and economic conditions generally.

Our businesses and results of operations are materially affected by the financial markets and general economic conditions in the United States and abroad, including factors such as the level and volatility of short-term and long-term interest rates, inflation, home prices, unemployment and under-employment levels, bankruptcies, household income, consumer spending, fluctuations in both debt and equity capital markets, liquidity of the global financial markets, the availability and cost of capital and credit, investor sentiment and confidence in the financial markets, and the strength of the U.S. economy and the non-U.S. economies in which we operate. The deterioration of any of these conditions can adversely affect our consumer and commercial businesses and securities portfolios, our level of charge-offs and provision for credit losses, our capital levels and liquidity and our results of operations.

U.S. financial markets have improved from the severe financial crisis that dominated the domestic economy in the second half of 2008 and early 2009, but mortgage markets remain fragile. The financial crisis that gripped the European Union beginning in spring 2010 directly affected U.S. financial market behavior and the financial services industry. Any intensification of Europe’s financial crisis or the inability to address the sources of future financial turmoil in Europe may adversely affect the U.S. and international financial markets and the financial services industry. Such adverse effect may involve declines in liquidity, loss of investor confidence in the financial services industry, disruptions in credit markets, declines in the values of many asset classes, reductions in home prices and increased unemployment.

Although the U.S. economy has continued to recover throughout 2010 and growth of real Gross Domestic Product strengthened in the second half of 2010, the elevated levels of unemployment and household debt, along with continued stress in the consumer and commercial real estate markets, pose challenges for domestic economic performance and the banking environment. Consumer spending, exports and business investment in equipment and software rose during 2010, and showed accelerated momentum in the second half of 2010, but labor markets and housing markets remain weak and pose risks. The sustained high unemployment rate and the lengthy duration of unemployment have directly impaired consumer finances and pose risks to the financial services sector. The housing market remains weak and the elevated levels of distressed and delinquent mortgages add a significant degree of risk to the mortgage market, in addition to risks inherent to the business of banking. The risks related to the distressed mortgage market may be accentuated by attempts to forestall foreclosure proceedings, as well as state and federal investigations into foreclosure practices throughout the financial services industry. These factors may adversely affect credit quality, bank lending and the general financial services sector.

These conditions, as well as any further challenges stemming from the continuing global economic recovery and recent financial reform initiatives, such as the Financial Reform Act, could have a material adverse effect on our businesses and results of operations in the future.

For additional information about economic conditions and challenges discussed above, see Executive Summary – 2010 Economic and Business Environment in the MD&A beginning on page 25.

 

Liquidity Risk

Liquidity Risk is the Potential Inability to Meet Our Contractual and Contingent Financial Obligations, on- or Off-Balance Sheet, as they Become Due.

Adverse changes to our credit ratings from the major credit ratings agencies could have a material adverse effect on our liquidity, cash flows, competitive position, financial condition and results of operations by significantly limiting our access to the funding or capital markets, increasing our borrowing costs, or triggering additional collateral or funding requirements under certain bilateral provisions of our trading and collateralized financing contracts.

Our borrowing costs and ability to raise funds are directly impacted by our credit ratings. In addition, credit ratings may be important to customers or counterparties when we compete in certain markets and when we seek to engage in certain transactions including OTC derivatives. Credit ratings and outlooks are opinions on our creditworthiness and that of our obligations or securities, including long-term debt, short-term borrowings, preferred stock and other securities, including asset securitizations. Our credit ratings are subject to ongoing review by the ratings agencies and thus may change from time to time based on a number of factors, including our own financial strength and operations as well as factors not under our control, such as rating-agency-specific criteria or frameworks for our industry or certain security types, which are subject to revision from time to time, and conditions affecting the financial services industry generally.

There can be no assurance that we will maintain our current ratings. A reduction in certain of our credit ratings or the ratings of certain asset-backed securitizations would likely have a material adverse effect on our liquidity, access to credit markets, the related cost of funds, our businesses and on certain trading revenues, particularly in those businesses where counterparty creditworthiness is critical. In connection with certain over-the-counter (OTC) derivatives contracts and other trading agreements, counterparties may require us to provide additional collateral or to terminate these contracts and agreements and collateral financing arrangements in the event of a credit ratings downgrade. Termination of these contracts and agreements could cause us to sustain losses and impair our liquidity by requiring us to make significant cash payments or securities movements. If Bank of America Corporation’s or Bank of America, N.A.’s commercial paper or short-term credit ratings (which currently have the following ratings: P-1 by Moody’s, A-1 by S&P and F1+ by Fitch) were downgraded by one or more levels, the potential loss of short-term funding sources such as commercial paper or repurchase agreement financing and the effect on our incremental cost of funds would be material.

The ratings agencies have indicated that, as a systemically important financial institution, our credit ratings currently reflect their expectation that, if necessary, we would receive significant support from the U.S. government. All three major ratings agencies, however, have indicated they will reevaluate and could reduce the uplift they include in our ratings for government support for reasons arising from financial services regulatory reform proposals or legislation. In February 2010, S&P affirmed our current credit ratings but revised the outlook to negative from stable based on its belief that it is less certain whether the U.S. government would be willing to provide extraordinary support. On July 27, 2010, Moody’s affirmed our current ratings but revised the outlook to negative from stable due to its expectation for lower levels of government support over time as a result of the passage of the Financial Reform Act. Also, on October 22, 2010, Fitch placed our credit ratings on Rating Watch Negative from stable outlook due to proposed rulemaking that could negatively impact its assessment of future systemic government

support. Any expectation that government support may be diminished or withheld in the future would likely have a negative impact on the company’s credit ratings. The timing of the agencies’ assessment of potential government support, as well as its impact on our ratings, is currently uncertain.

For additional information about the company’s credit ratings, see Liquidity Risk – Credit Ratings in the MD&A beginning on page 70.

Our liquidity, cash flows, financial condition and results of operations, and competitive position may be significantly adversely affected if we are unable to access capital markets, continue to raise deposits, sell assets on favorable terms, or if there is an increase in our borrowing costs.

Liquidity is essential to our businesses. We fund our assets primarily with globally sourced deposits in our bank entities, as well as secured and unsecured liabilities transacted in the capital markets. We rely on certain unsecured and secured funding sources, such as the commercial paper and repo markets, which are typically short-term and credit-sensitive in nature. We also engage in asset securitization transactions to fund consumer lending activities. Our liquidity could be significantly adversely affected by an inability to access the capital markets; illiquidity or volatility in the capital markets; unforeseen outflows of cash, including customer deposits, funding for commitments and contingencies; inability to sell assets on favorable terms; or negative perceptions about our short- or long-term business prospects, including changes in our credit ratings. Several of these factors may arise due to circumstances beyond our control, such as a general market disruption, negative views about the financial services industry generally, changes in the regulatory environment, actions by credit ratings agencies or an operational problem that affects third parties or us. For example, during the recent financial crisis our ability to raise funding was at times adversely affected in the U.S. and international markets.

Our cost of obtaining funding is directly related to prevailing market interest rates and to our credit spreads. Credit spreads are the amount in excess of the interest rate of U.S. Treasury securities, or other benchmark securities, of the same maturity that we need to pay to our funding providers. Increases in interest rates and our credit spreads can significantly increase the cost of our funding. Changes in our credit spreads are market-driven, and may be influenced by market perceptions of our creditworthiness. Changes to interest rates and our credit spreads occur continuously and may be unpredictable and highly volatile.

For additional information about our liquidity position and other liquidity matters, including credit ratings and outlooks and the policies and procedures we use to manage our liquidity risks, see Capital Management and Liquidity Risk in the MD&A beginning on pages 63 and 67, respectively.

Bank of America Corporation is a holding company and as such we are dependent upon our subsidiaries for liquidity, including our ability to pay dividends to stockholders.

Bank of America Corporation is a separate and distinct legal entity from our banking and nonbanking subsidiaries. We evaluate and manage liquidity on a legal entity basis. Legal entity liquidity is an important consideration as there are legal and other limitations on our ability to utilize liquidity from one legal entity to satisfy the liquidity requirements of another, including Bank of America Corporation. For instance, Bank of America Corporation depends on dividends, distributions and other payments from our banking and nonbanking subsidiaries to fund dividend payments on our common stock and preferred stock and to fund all payments on our other obligations, including debt obligations. Many of our subsidiaries, including our bank and broker-dealer subsidiaries, are subject to laws that restrict dividend payments or authorize regulatory bodies to block or reduce the flow of funds from those subsidiaries to Bank of America Corporation. In addition, our bank and broker-dealer subsidiaries are subject to restrictions on their ability to lend or transact with affiliates and to minimum regulatory capital requirements, as well as restrictions on their ability to use funds deposited with them in bank or brokerage accounts to fund their businesses. Additional restrictions on

related-party transactions, increased capital requirements and additional limitations on the use of funds on deposit in bank or brokerage accounts, as well as lower earnings, can reduce the amount of funds available to meet the obligations of Bank of America Corporation and even require Bank of America Corporation to provide additional funding to such subsidiaries. Regulatory action of that kind could impede access to funds we need to make payments on our obligations or dividend payments. In addition, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. For a further discussion regarding our ability to pay dividends, see Note 15 – Shareholders’ Equity and Note 18 – Regulatory Requirements and Restrictions to the Consolidated Financial Statements.

 

Mortgage and Housing Market-Related Risk

We have been, and expect to continue to be, required to repurchase loans and/or reimburse the GSEs and monoline bond insurance companies (monolines) for losses due to claims related to representations and warranties made in connection with mortgage-backed securities and other loans, and have received similar claims, and may receive additional claims, from whole loan purchasers and private-label securitization investors. The resolution of these claims could have a material adverse effect on our cash flows, financial condition, and results of operations.

We have securitized and continue to securitize first-lien mortgage loans generally in the form of mortgage-backed securities (MBS) guaranteed by the GSEs or, in the case of Federal Housing Administration insured and U.S. Department of Veterans Affairs guaranteed mortgage loans, by the Government National Mortgage Association. We and our legacy companies and certain subsidiaries have also sold pools of first-lien mortgages and home equity loans as private-label securitizations or in the form of whole loans. In certain cases, all or a portion of the private-label MBS were insured by monolines or other non-GSE counterparties. In connection with these securitizations and other transactions, we or our subsidiaries or legacy companies made various representations and warranties. Breaches of these representations and warranties may result in a requirement that we repurchase mortgage loans, or indemnify or provide other remedies to counterparties.

On December 31, 2010, we reached agreements with Freddie Mac (FHLMC) and Fannie Mae (FNMA), collectively the GSEs, where the Corporation paid $2.8 billion to resolve repurchase claims involving first-lien residential mortgage loans sold directly to the GSEs by entities related to legacy Countrywide (Countrywide). The agreement with FHLMC extinguishes all outstanding and potential mortgage repurchase and make-whole claims arising out of any alleged breaches of selling representations and warranties related to loans sold directly by legacy Countrywide to FHLMC through 2008, subject to certain exceptions we do not believe will be material. The agreement with FNMA substantially resolves the existing pipeline of repurchase and make-whole claims outstanding as of September 20, 2010 arising out of alleged breaches of selling representations and warranties related to loans sold directly by legacy Countrywide to FNMA. These agreements with the GSEs do not cover outstanding and potential mortgage repurchase and make-whole claims arising out of any alleged breaches of selling representations and warranties to legacy Bank of America first-lien residential mortgage loans sold directly to the GSEs, loans sold to the GSEs other than described above, loan servicing obligations, other contractual obligations or loans contained in private-label securitizations. In addition, we have other unresolved representation and warranty claims from the GSEs and certain monolines, and other non-GSE counterparties, and certain monolines have instituted litigation against us with respect to representations and warranties claims.

We have experienced increasing repurchase and similar requests from non-GSE counterparties, including monolines, private-label MBS securitization investors and whole loan purchasers. We expect additional activity in this

area going forward and the volume of repurchase requests from monolines, whole loan purchasers and investors in private-label MBS could increase in the future. It is reasonably possible that future losses may occur and our estimate is that the upper range of loss related to non-GSE sales could be $7.0 billion to $10.0 billion over existing accruals. This estimate does not represent a probable loss, is based on currently available information, significant judgment, and a number of assumptions that are subject to change. A significant portion of this estimate relates to loans originated through legacy Countrywide, and the repurchase liability is generally limited to the original seller of the loan. Future provisions and possible loss or range of loss may be impacted if actual results are different from our assumptions regarding economic conditions, home prices and other matters and may vary by counterparty. We expect that the resolution of the repurchase claims process with the non-GSE counterparties will likely be a protracted process, and we will vigorously contest any request for repurchase if we conclude that a valid basis for the repurchase claim does not exist.

The resolution of claims related to alleged breaches of these representations and warranties and repurchase claims could have a material adverse effect on our financial condition, cash flows and results of operations, and could exceed existing estimates and accruals. In addition, any accruals or estimates we have made are based on assumptions which are subject to change.

For additional information about our representations and warranties exposure and past activities, see Recent Events – Representations and Warrants Liability, in the MD&A on page 33, Recent Events – Private-label Residential Mortgage-backed Securities Matters, in the MD&A on page 35, Off-Balance Sheet Arrangements and Contractual Obligations – Representations and Warranties, in the MD&A beginning on page 52, and Note 9 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements and Representations.

Continued, or increasing, declines in the domestic and international housing markets, including home prices, may adversely affect the company’s consumer and commercial portfolios and have a significant adverse effect on our financial condition and results of operations.

Economic deterioration throughout 2009 and weakness in the economic recovery in 2010 was accompanied by continued stress in the U.S. and international housing markets, including declines in home prices. These declines in the housing market, with falling home prices and increasing foreclosures, have negatively impacted the demand for many of our products and the credit performance of our consumer and commercial portfolios. Additionally, our mortgage loan production volume is generally influenced by the rate of growth in residential mortgage debt outstanding and the size of the residential mortgage market, which has declined due to reduced activity in the housing market. Continued high unemployment rates in the U.S. have added another element to the financial challenges facing U.S. consumers and further compounded these stresses in the U.S. housing market as employment conditions may be compelling some consumers to delay new home purchases or miss payments on existing mortgages.

Conditions in the housing market have also resulted in significant write-downs of asset values in several asset classes, notably mortgage-backed securities and exposure to monolines. These conditions may negatively affect the value of real estate which could negatively affect our exposure to representations and warranties. While there were continued indications throughout the past year that the U.S. economy is stabilizing, the performance of our overall consumer and commercial portfolios may not significantly improve in the near future. A protracted continuation or worsening of these difficult housing market conditions would likely exacerbate the adverse effects outlined above and have a significant adverse effect on our financial condition and results of operations.

We temporarily suspended our foreclosure sales nationally in the fourth quarter of 2010 to conduct an assessment of our foreclosure processes. Subsequently, numerous state and federal investigations of foreclosure

processes across our industry have been initiated. Those investigations and any irregularities that might be found in our foreclosure processes, along with any remedial steps taken in response to governmental investigations or to our own internal assessment, could have a material adverse effect on our financial condition and results of operations.

On October 1, 2010, we voluntarily stopped taking residential mortgage foreclosure proceedings to judgment in states where foreclosure requires a court order following a legal proceeding (judicial states). On October 8, 2010, we stopped foreclosure sales in all states in order to complete an assessment of the related business processes. These actions generally did not affect the initiation and processing of foreclosures prior to judgment or sale of vacant real estate owned properties. We took these precautionary steps in order to ensure our processes for handling foreclosures include the appropriate controls and quality assurance. Our review has involved an assessment of the foreclosure process, including a review of completed foreclosure affidavits in pending proceedings.

As a result of that review, we identified and implemented process and control enhancements, and we intend to monitor ongoing quality results of each process. After these enhancements were put in place, we resumed foreclosure sales in most states where foreclosures are handled without judicial supervision (non-judicial states) during the fourth quarter of 2010, and expect sales to resume in the remaining non-judicial states in the first quarter of 2011. We also commenced a rolling process of preparing, as necessary, affidavits of indebtedness in pending foreclosure proceedings in order to resume the process of taking these foreclosure proceedings to judgment in judicial states, beginning with properties believed to be vacant, and with properties for which the mortgage was originated on a non-owner-occupied basis. The process of preparing affidavits in pending proceedings is expected to continue in the first quarter of 2011, and could result in prolonged adversary proceedings that delay certain foreclosure sales.

Law enforcement authorities in all 50 states and the U.S. Department of Justice and other federal agencies, including certain bank supervisory authorities, continue to investigate alleged irregularities in the foreclosure practices of residential mortgage servicers. Authorities have publicly stated that the scope of the investigations extends beyond foreclosure documentation practices to include mortgage loan modification and loss mitigation practices. The Corporation is cooperating with these investigations and is dedicating significant resources to address these issues. The current environment of heightened regulatory scrutiny has the potential to subject the Corporation to inquiries or investigations that could significantly adversely affect its reputation. Such investigations by state and federal authorities, as well as any other governmental or regulatory scrutiny of our foreclosure processes, could result in material fines, penalties, equitable remedies (including requiring default servicing or other process changes), or other enforcement actions, and result in significant legal costs in responding to governmental investigations and additional litigation.

While we cannot predict the ultimate impact of the temporary delay in foreclosure sales, or any issues that may arise as a result of alleged irregularities with respect to previously completed foreclosure activities, we may be subject to additional borrower and non-borrower litigation and governmental and regulatory scrutiny related to our past and current foreclosure activities. This scrutiny may extend beyond our pending foreclosure matters to issues arising out of alleged irregularities with respect to previously completed foreclosure activities. Our costs increased in the fourth quarter of 2010 and we expect that additional costs incurred in connection with our foreclosure process assessment will continue into 2011 due to the additional resources necessary to perform the foreclosure process assessment, to revise affidavit filings and to implement other operational changes. This will likely result in higher noninterest expense, including higher servicing costs and legal expenses, in Home Loans & Insurance. It is also possible that the temporary suspension of foreclosure sales may result in additional costs and

expenses, including costs associated with the maintenance of properties or possible home price declines, while foreclosures are delayed. In addition, required process changes could increase our default servicing costs over the longer term. Finally, the time to complete foreclosure sales may increase temporarily, which may result in an increase in non-performing loans and servicing advances and may impact the collectability of such advances and the value of our MSRs, MBS and real estate owned properties. An increase in the time to complete foreclosure sales also may inflate the amount of highly delinquent loans in the Corporation’s mortgage statistics, result in increasing levels of consumer nonperforming loans, and could have a dampening effect on net interest margin as non-performing assets rise. Accordingly, delays in foreclosure sales, including any delays beyond those currently anticipated, and our continued process enhancements and any issues that may arise out of alleged irregularities in our foreclosure process could increase the costs associated with our mortgage operations.

Loan sales have not been materially impacted by the temporary delay in foreclosure sales or the review of our foreclosure process. However, delays in foreclosure sales could negatively affect the valuation of our real estate owned properties and MBS that are serviced by us. With respect to GSE MBS, while there would be no credit impairment to security holders due to the guarantee provided by the agencies, the valuation of certain MBS could be negatively affected under certain scenarios due to changes in the timing of cash flows. The impact on GSE MBS depends on, among other factors, how long the underlying loans are affected by foreclosure delays and would vary among securities. With respect to non-GSE MBS, under certain scenarios the timing and amount of cash flows could be negatively affected. The ultimate impact on non-GSE MBS depends on the same factors that impact GSE MBS, as well as the level of credit enhancement, including subordination. In addition, as a result of our foreclosure process assessment and related control enhancements that we have implemented, there may continue to be delays in foreclosure sales, including a continued backlog of foreclosure proceedings, and evictions from real estate owned properties.

Failure to satisfy our obligations as servicer in the residential mortgage securitization process, including obligations related to residential mortgage foreclosure actions, along with other losses we could incur in our capacity as servicer, could have a material adverse effect on our financial condition and results of operations.

Bank of America and its legacy companies have securitized, and continue to securitize, a significant portion of the residential mortgage loans that they have originated or acquired. The Corporation services a large portion of the loans it or its subsidiaries have securitized and also services loans on behalf of third-party securitization vehicles. In addition to identifying specific servicing criteria, pooling and servicing arrangements entered into in connection with a securitization or whole loan sale typically impose standards of care on the servicer, with respect to its activities, that may include the obligation to adhere to the accepted servicing practices of prudent mortgage lenders and/or to exercise the degree of care and skill that the servicer employs when servicing loans for its own account. Many non-GSE residential mortgage-backed securitizations and whole loan servicing agreements also require the servicer to indemnify the trustee or other investor for or against failures by the servicer to perform its servicing obligations or acts or omissions that involve willful malfeasance, bad faith, or gross negligence in the performance of, or reckless disregard of, the servicer’s duties.

Servicing agreements with the GSEs generally provide the GSEs with broader rights relative to the servicer than are found in servicing agreements with private investors. For example, each GSE typically has the right to demand

that the servicer repurchase loans that breach the seller’s representations and warranties made in connection with the initial sale of the loans, even if the servicer was not the seller. The GSEs also reserve the contractual right to demand indemnification or loan repurchase for certain servicing breaches. In addition, our agreements with the GSEs and their first mortgage seller/servicer guides provide for timelines to resolve delinquent loans through workout efforts or liquidation, if necessary.

With regard to alleged irregularities in foreclosure process-related activities referred to above, a servicer may incur costs or losses if the servicer elects or is required to re-execute or re-file documents or take other action in its capacity as a servicer in connection with pending or completed foreclosures. The servicer also may incur costs or losses if the validity of a foreclosure action is challenged by a borrower. If a court were to overturn a foreclosure because of errors or deficiencies in the foreclosure process, the servicer may have liability to a title insurer of the property sold in foreclosure. These costs and liabilities may not be reimbursable to the servicer. A servicer may also incur costs or losses associated with private-label securitizations or other loan investors relating to delays or alleged deficiencies in processing documents necessary to comply with state law governing foreclosures.

The servicer may be subject to deductions by insurers for mortgage insurance or guarantee benefits relating to delays or alleged deficiencies. Additionally, if the servicer commits a material breach of its servicing obligations that is not cured within specified timeframes, including those related to default servicing and foreclosure, it could be terminated as servicer under servicing agreements under certain circumstances. Any of these actions may harm the servicer’s reputation, increase its servicing costs or otherwise adversely affect its financial condition and results of operations.

Mortgage notes, assignments or other documents are often required to be maintained and are often necessary to enforce mortgages loans. There has been significant public commentary regarding the common industry practice of recording mortgages in the name of Mortgage Electronic Registration Systems, Inc. (MERS), as nominee on behalf of the note holder, and whether securitization trusts own the loans purported to be conveyed to them and have valid liens securing those loans. We currently use the MERS system for a substantial portion of the residential mortgage loans that we originate, including loans that have been sold to investors or securitization trusts. Additionally, certain legal challenges have been made to the process for transferring mortgage loans to securitization trusts, asserting that having a mortgagee of record that is different than the holder of the mortgage note could “break the chain of title” and cloud the ownership of the loan. In order to foreclose on a mortgage loan, in certain cases it may be necessary or prudent for an assignment of the mortgage to be made to the holder of the note, which in the case of a mortgage held in the name of MERS as nominee would need to be completed by MERS. As such, our practice is to obtain assignments of mortgages from MERS prior to instituting foreclosure. If certain required documents are missing or defective, or if the use of MERS is found not to be effective, we could be obligated to cure certain defects or in some circumstances be subject to additional costs and expenses, which could have a material adverse effect on our cash flows, financial condition and results of operations.

We may also face negative reputational costs from these servicing risks, which could reduce our future business opportunities in this area or cause that business to be on less favorable terms to us.

For additional information concerning our servicing risks, see Recent Events – Certain Servicing-related Issues, in the MD&A beginning on page 34.

Credit Risk

Credit Risk is the Risk of Loss Arising from a Borrower, Obligor or Counterparty Default when a Borrower, Obligor or Counterparty does not Meet its Obligations.

Increased credit risk, due to economic or market disruptions, insufficient credit loss reserves or concentration of credit risk, may necessitate increased provisions for credit losses and could have an adverse effect on our financial condition and results of operations.

When we loan money, commit to loan money or enter into a letter of credit or other contract with a counterparty, we incur credit risk, or the risk of losses if our borrowers do not repay their loans or our counterparties fail to perform according to the terms of their agreements. A number of our products expose us to credit risk, including loans, leases and lending commitments, derivatives, trading account assets and assets held-for-sale. As one of the nation’s largest lenders, the credit quality of our consumer and commercial portfolios has a significant impact on our earnings.

Although credit quality generally continued to show improvement throughout 2010, net charge-offs, nonperforming loans, leases and foreclosed properties remained elevated. Global and national economic conditions continue to weigh on our credit portfolios. Economic or market disruptions are likely to increase our credit exposure to customers, obligors or other counterparties due to the increased risk that they may default on their obligations to us. These potential increases in delinquencies and default rates could adversely affect our consumer credit card, home equity, consumer real estate and purchased credit-impaired portfolios, through increased charge-offs and provisions for credit losses. In addition, this increased credit risk could also adversely affect our commercial loan portfolios where we have experienced continued losses, particularly in our commercial real estate portfolios, reflecting broad-based stress across industries, property types and borrowers.

We estimate and establish an allowance for credit risks and credit losses inherent in our lending activities (including unfunded lending commitments), excluding those measured at fair value, through a charge to earnings. The amount of allowance is determined based on our evaluation of the potential credit losses included within our loan portfolio. The process for determining the amount of the allowance, which is critical to our operating results and financial condition, requires difficult, subjective and complex judgments, including forecasts of economic conditions and how our borrowers will react to those conditions. Our ability to assess future economic conditions or the creditworthiness of our customers, obligors or other counterparties is imperfect. The ability of our borrowers to repay their loans will likely be impacted by changes in economic conditions, which in turn could impact the accuracy of our forecasts. As with any such assessments, there is also the chance that we will fail to identify the proper factors or that we will fail to accurately estimate the impacts of factors that we identify. In addition, we may underestimate the credit losses in our loan portfolios and suffer unexpected losses if the models and approaches we use to establish reserves and make judgments in extending credit to our borrowers and other counterparties become less predictive of future behaviors, valuations, assumptions or estimates. Although we believe that our allowance for credit losses was in compliance with applicable standards at December 31, 2010, there is no guarantee that it will be sufficient to address future credit losses, particularly if economic conditions worsen. In such an event we may need to increase the

size of our allowance in 2011, which would adversely affect our financial condition and results of operations.

In the ordinary course of our business, we also may be subject to a concentration of credit risk to a particular industry, country, counterparty, borrower or issuer. A deterioration in the financial condition or prospects of a particular industry or a failure or downgrade of, or default by, any particular entity or group of entities could have a material adverse impact on our businesses, and the processes by which we set limits and monitor the level of our credit exposure to individual entities, industries and countries may not function as we have anticipated. While our activities expose us to many different industries and counterparties, we routinely execute a high volume of transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment funds and insurers. This has resulted in significant credit concentration with respect to this industry.

In the ordinary course of business, we also enter into transactions with sovereign nations, U.S. states and U.S. municipalities. Unfavorable economic or political conditions, disruptions to capital markets, currency fluctuations, social instability and changes in government policies could impact the operating budgets or credit ratings of sovereign nations, U.S. states and U.S. municipalities and expose us to credit risk.

We also have a concentration of credit risk with respect to our consumer real estate, consumer credit card and commercial real estate portfolios, which represent a large percentage of our overall credit portfolio. The economic downturn has adversely affected these portfolios and further exposed us to this concentration of risk. Continued economic weakness or deterioration in real estate values or household incomes could result in materially higher credit losses.

For additional information about our credit risk and credit risk management policies and procedures, see Credit Risk Management in the MD&A beginning on page 71 and Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.

We could suffer losses as a result of the actions of or deterioration in the commercial soundness of our counterparties and other financial services institutions.

Our ability to engage in routine trading and funding transactions could be adversely affected by the actions and commercial soundness of other market participants. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds and other institutional clients. Financial services institutions and other counterparties are inter-related because of trading, funding, clearing or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to significant future liquidity problems, including losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of a counterparty or client. In addition, our credit risk may be impacted when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivatives exposure due us. Any such losses could materially adversely affect our financial condition and results of operations.

 

Our derivatives businesses may expose us to unexpected risks and potential losses.

We are party to a large number of derivatives transactions, including credit derivatives. Our derivatives businesses may expose us to unexpected market, credit and operational risks that could cause us to suffer unexpected losses and have an adverse effect on our financial condition and results of operations. Severe declines in asset values, unanticipated credit events or unforeseen circumstances that may cause previously uncorrelated factors to become correlated (and vice versa) may create losses resulting from risks not appropriately taken into account in the development, structuring or pricing of a derivative instrument.

Many derivative instruments are individually negotiated and non-standardized, which can make exiting, transferring or settling some positions difficult. Many derivatives require that we deliver to the counterparty the underlying security, loan or other obligation in order to receive payment. In a number of cases, we do not hold, and may not be able to obtain, the underlying security, loan or other obligation. This could cause us to forfeit the payments due to us under these contracts or result in settlement delays with the attendant credit and operational risk, as well as increased costs to us.

Derivatives contracts and other transactions entered into with third parties are not always confirmed by the counterparties or settled on a timely basis. While a transaction remains unconfirmed or during any delay in settlement, we are subject to heightened credit and operational risk and in the event of default may find it more difficult to enforce the contract. In addition, as new and more complex derivatives products have been created, covering a wider array of underlying credit and other instruments, disputes about the terms of the underlying contracts may arise, which could impair our ability to effectively manage our risk exposures from these products and subject us to increased costs.

For a further discussion of our derivatives exposure, see Note 4 – Derivatives to the Consolidated Financial Statements.

 

Market Risk

Market Risk is the Risk that Values of Assets and Liabilities or Revenues will be Adversely Affected by Changes in Market Conditions Such as Market Volatility. Market Risk is Inherent in the Financial Instruments Associated with our Operations and Activities, Including Loans, Deposits, Securities, Short-Term Borrowings, Long-Term Debt, Trading Account Assets and Liabilities, and Derivatives.

Our businesses and results of operations have been, and may continue to be, significantly adversely affected by changes in the levels of market volatility and by other financial or capital market conditions.

Our businesses and results of operations may be adversely affected by market risk factors such as changes in interest and currency exchange rates, equity and futures prices, the implied volatility of interest rates, credit spreads and other economic and business factors. These market risks may adversely affect, for example, (i) the value of our on- and off-balance sheet securities, trading assets, other financial instruments, and MSRs, (ii) the cost of debt capital and our access to credit markets, (iii) the value of assets under management, which could reduce our fee income relating to those assets, (iv) customer allocation of capital among investment alternatives, (v) the volume of client activity in our trading operations, and (vi) the general profitability and risk level of the transactions in which we engage. Any of these developments could have a significant adverse impact on our financial condition and results of operations.

We use various models and strategies to assess and control our market risk exposures but those are subject to inherent limitations. For example, our models, which rely on historical trends and assumptions, may not be sufficiently predictive of future results due to limited historical patterns, extreme or unanticipated market movements and illiquidity, especially during severe market downturns or stress events. The models that we use to assess and control our market risk exposures also reflect assumptions about the degree of correlation or lack thereof among prices of various asset classes or other market indicators. In times of market stress or other unforeseen circumstances, such as the market conditions experienced in 2008 and 2009, previously uncorrelated indicators may become correlated, or previously correlated indicators may move in different directions. These types of market movements have at times limited the effectiveness of our hedging strategies and have caused us to incur significant losses, and they may do so in the future. These changes in correlation can be exacerbated where other market participants are using risk or trading models with assumptions or algorithms that are similar to ours. In these and other cases, it may be difficult to reduce our risk positions due to the activity of other market participants or widespread market dislocations, including circumstances where asset values are declining significantly or no market exists for certain assets. To the extent that we make investments directly in securities that do not have an established liquid trading market or are otherwise subject to restrictions on sale or hedging, we may not be able to reduce our positions and therefore reduce our risk associated with such positions.

For additional information about market risk and our market risk management policies and procedures, see Market Risk Management in the MD&A beginning on page 100.

Declines in the value of certain of our assets could have an adverse effect on our results of operations.

We have a large portfolio of financial instruments that we measure at fair value including, among others, certain corporate loans and loan commitments, loans held-for-sale, repurchase agreements and long-term deposits. We also have trading account assets and liabilities, derivatives assets and liabilities, available-for-sale debt and marketable equity securities, consumer-related MSRs and certain other assets that are valued at fair value. We determine the fair values of these instruments based on the fair value hierarchy under applicable accounting guidance. The fair values of these financial instruments include adjustments for market liquidity, credit quality and other transaction specific factors, where appropriate.

Gains or losses on these instruments can have a direct and significant impact on our results of operations, unless we have effectively “hedged” our exposures. For example, changes in interest rates, among other things, can impact the value of our MSRs and can result in substantially higher or lower mortgage banking income and earnings, depending upon our ability to fully hedge the performance of our MSRs. Fair values may be impacted by declining values of the underlying assets or the prices at which observable market transactions occur and the continued availability of these transactions. The financial strength of counterparties, such as monolines, with whom we have economically hedged some of our exposure to these assets, also will affect the fair value of these assets. Sudden declines and significant volatility in the prices of assets may substantially curtail or eliminate the trading activity for these assets, which may make it very difficult to sell, hedge or value such assets. The inability to sell or effectively hedge assets reduces our ability to limit losses in such positions and the difficulty in valuing assets may increase our risk-weighted assets, which requires us to maintain additional capital and increases our funding costs.

 

Asset values also directly impact revenues in our asset management businesses. We receive asset-based management fees based on the value of our clients’ portfolios or investments in funds managed by us and, in some cases, we also receive incentive fees based on increases in the value of such investments. Declines in asset values can reduce the value of our clients’ portfolios or fund assets, which in turn can result in lower fees earned for managing such assets.

For additional information about fair value measurements, see Note 22 – Fair Value Measurements to the Consolidated Financial Statements. For additional information about our asset management businesses, see Business Segment Operations – Global Wealth & Investment Management in the MD&A beginning on page 48.

Our commodities activities, particularly our physical commodities business, subject us to performance, environmental and other risks that may result in significant cost and liabilities.

As part of our commodities business, we enter into exchange-traded contracts, financially settled OTC derivatives, contracts for physical delivery and contracts providing for the transportation, transmission and/or storage rights on or in vessels, barges, pipelines, transmission lines or storage facilities. Commodity, related storage, transportation or other contracts expose us to the risk that the price of the underlying commodity or the cost of storing or transporting commodities may rise or fall. In addition, contracts relating to physical ownership and/or delivery can expose us to numerous other risks, including performance and environmental risks. For example, our counterparties may not be able to pass changes in the price of commodities to their customers and therefore may not be able to meet their performance obligations. Our actions to mitigate the aforementioned risks may not prove adequate to address every contingency. In addition, insurance covering some of these risks may not be available, and the proceeds, if any, from insurance recovery may not be adequate to cover liabilities with respect to particular incidents. As a result, our financial condition and results of operations may be adversely affected by such events.

 

Regulatory and Legal Risk

Bank regulatory agencies may require us to hold higher levels of regulatory capital, increase our regulatory capital ratios, or increase liquidity which could result in the need to issue additional securities that qualify as regulatory capital or to liquidate company assets.

We are subject to the risk-based capital guidelines issued by the Federal Reserve Board. These guidelines establish regulatory capital requirements for banking institutions to meet minimal requirements as well as to qualify as a “well-capitalized” institution. (A “well-capitalized” institution must generally maintain capital ratios 200 bps higher than the minimum guidelines.) The risk-based capital rules have been further supplemented by required leverage ratios, defined as so-called Tier 1 (the highest grade) capital divided by quarterly average total assets, after certain adjustments. If any of our insured depository institutions fails to maintain its status as “well- capitalized” under the capital rules of their primary federal regulator, the Federal Reserve Board will require us to enter into an agreement to bring the insured depository institution or institutions back into a “well-capitalized” status. For the duration of such an agreement, the Federal Reserve Board may impose restrictions on the activities in which we may engage. If we were to fail to enter into such an agreement, or fail to comply with the terms of such agreement, the Federal Reserve Board may impose more severe restrictions on the activities in which we may engage, including requiring us to cease and desist in activities permitted under the Gramm-Leach-Bliley Act.

It is possible that in the future increases in regulatory capital requirements, changes in how regulatory capital is calculated or increases to liquidity requirements, may cause the loss of our “well-capitalized” status unless we increase our capital levels by issuing additional common stock, thus diluting

our existing shareholders, or by selling assets. For example, the Financial Reform Act includes a provision under which our previously issued and outstanding trust preferred securities will no longer qualify as Tier 1 capital effective January 1, 2013. The exclusion of trust preferred securities from Tier 1 capital will be phased in incrementally over a three-year phase-in period. The treatment of trust preferred securities during the phase-in period remains unclear and is subject to future rulemaking.

On December 16, 2010, the Basel Committee issued Basel III, proposing a January 2013 implementation date for Basel III. If implemented by U.S. regulators as proposed, Basel III could significantly increase our capital requirements. Basel III and the Financial Reform Act propose the disqualification of trust preferred securities from Tier 1 capital, with the Financial Reform Act proposing that the disqualification be phased in from 2013 to 2015. Basel III also proposes the deduction of certain assets from capital (deferred tax assets, mortgage servicing rights (MSRs), investments in financial firms and pension assets, among others, within prescribed limitations), the inclusion of other comprehensive income in capital, increased capital for counterparty credit risk, and new minimum capital and buffer requirements. U.S. regulators are expected to begin the final rulemaking processes for Basel III in early 2011 and have indicated a goal to adopt final rules by year-end 2011 or early 2012. In addition to the capital proposals, in December 2010 the Basel Committee proposed two measures of liquidity risk. The Liquidity Coverage Ratio identifies the amount of unencumbered, high quality liquid assets a financial institution holds that can be used to offset the net cash outflows the institution would encounter under an acute 30-day stress scenario. The Net Stable Funding Ratio measures the amount of longer-term, stable sources of funding employed by a financial institution relative to the liquidity profiles of the assets funded and the potential for contingent calls on funding liquidity arising from off-balance sheet commitments and obligations, over a one-year period. The Basel Committee expects the Liquidity Coverage Ratio to be implemented in January 2015 and the Net Stable Funding Ratio to be implemented in January 2018, following observation periods beginning in 2012.

Any requirement that we increase our regulatory capital, regulatory capital ratios or liquidity could have a material adverse effect on our financial condition and results of operations, as we may need to liquidate certain assets, perhaps on terms unfavorable to us and contrary to our business plans. Such a requirement could also compel us to issue additional securities, which could dilute our current common stockholders.For additional information about the proposals described above and their potential effect on our required levels of regulatory capital, see Item 1. Business – Capital and Operational Requirements on page 5 and Capital Management – Regulatory Capital in the MD&A beginning on page 63.

Government measures to regulate the financial industry, including the Financial Reform Act, either individually, in combination or in the aggregate, could require us to change certain of our business practices, impose significant additional costs on us, limit the products that we offer, limit our ability to pursue business opportunities in an efficient manner, require us to increase our regulatory capital, impact the value of assets that we hold, significantly reduce our revenues or otherwise materially and adversely affect our businesses, financial condition or results of operations.

As a financial institution, we are heavily regulated at the state, federal and international levels. As a result of the financial crisis and related global economic downturn that began in 2007, we have faced and expect to continue to face increased public and legislative scrutiny as well as stricter and more comprehensive regulation of our financial services practices. These regulatory and legislative measures, either individually, in combination or in the aggregate, could require us to change certain of our business practices, impose significant additional costs on us, limit the products that we offer, limit our ability to pursue business opportunities in an efficient manner, require us to increase our regulatory capital, impact the value of assets that we hold,

significantly reduce our revenues or otherwise materially and adversely affect our businesses, financial condition, or results of operations.

Throughout 2009 and 2010, several major regulatory and legislative initiatives were adopted that will have significant future impacts on our businesses and financial results. For example, in November 2009, the Federal Reserve Board issued amendments to Regulation E, which implements the Electronic Fund Transfer Act. The rules became effective on July 1, 2010 for new customers and August 16, 2010 for existing customers. These amendments limit the way we and other banks charge an overdraft fee for non-recurring debit card transactions that overdraw a consumer’s account unless the consumer affirmatively consents to the bank’s payment of overdrafts for those transactions. In addition, in May 2009, the Credit Card Accountability Responsibility and Disclosure (“CARD”) Act of 2009 was signed into law. The majority of the CARD Act provisions became effective in February 2010. The CARD Act legislation contains comprehensive credit card reform related to credit card industry practices, including significantly restricting banks’ ability to change interest rates and assess fees to reflect individual consumer risk, changing the way payments are applied and requiring changes to consumer credit card disclosures. Complying with the Regulation E amendments and the CARD Act has required us to invest significant management attention and resources to make the necessary disclosure and systems changes and has adversely affected, and will likely continue to adversely affect, our earnings.

In July 2010, the Financial Reform Act was signed into law. The Financial Reform Act, among other reforms, (i) mandates that the Federal Reserve Board limit debit card interchange fees; (ii) bans banking organizations from engaging in proprietary trading and restricts their sponsorship of, or investing in, hedge funds and private equity funds, subject to limited exceptions; (iii) increases regulation of the over-the-counter derivative markets through measures that broaden the derivative instruments subject to regulation, requiring clearing and exchange trading and imposing additional capital and margin requirements for derivative market participants; (iv) changes the assessment base used in calculating FDIC deposit insurance fees from assessable deposits to total assets less tangible capital; (v) provides for heightened capital, liquidity, and prudential regulation and supervision over systemically important financial institutions; (vi) provides for resolution authority to establish a process to unwind large systemically important financial companies; (vii) creates a new regulatory body to set requirements around the terms and conditions of consumer financial products and expands the role of state regulators in enforcing consumer protection requirements over banks; (viii) disqualifies trust preferred securities and other hybrid capital securities from Tier 1 capital; (ix) includes a variety of corporate governance and executive compensation provisions and requirements; and (x) requires securitizers to retain a portion of the risk that would otherwise be transferred into certain securitization transactions.

Many of these provisions have begun to be or will be phased in over the next several months or years and will be subject both to further rulemaking and the discretion of applicable regulatory bodies. The ultimate impact of the final rules on our businesses and results of operations will depend on regulatory interpretation and rulemaking, as well as the success of any of our actions to mitigate the negative earnings impact of certain provisions. For instance, in December 2010, the Federal Reserve Board requested comment on a proposed rule that would establish debit card interchange fee standards and prohibit network exclusivity arrangements and routing restrictions. The proposed rule would establish standards for determining whether a debit card interchange fee received by a card issuer is reasonable and proportional to the cost incurred by the issuer for the transaction. Depending upon which cap is ultimately adopted, the final rule could have a significant adverse effect on our financial condition and results of operations and could result in additional goodwill impairment charges within our Global Card Services business segment.

We also anticipate that the final regulations associated with the Financial Reform Act will include limitations on certain activities, including limitations on

the use of a bank’s own capital for proprietary trading and sponsorship or investment in hedge funds and private equity funds (Volcker Rule). Regulations implementing the Volcker Rule are required to be in place by October 21, 2011, and the Volcker Rule becomes effective 12 months after such rules are final or on July 21, 2012, whichever is earlier. The Volcker Rule then gives banking entities two years from the effective date (with opportunities for additional extensions) to bring activities and investments into conformance. In anticipation of the adoption of the final regulations, we have begun winding down our proprietary trading line of business. The ultimate impact of the Volcker Rule or the winding down of this business, and the time it will take to comply or complete, continues to remain uncertain. The final regulations issued may impose additional operational and compliance costs on us.

Additionally, the Financial Reform Act includes measures to broaden the scope of derivative instruments subject to regulation by requiring clearing and exchange trading of certain derivatives, imposing new capital and margin requirements for certain market participants and imposing position limits on certain over-the-counter derivatives. The Financial Reform Act grants the U.S. Commodity Futures Trading Commission (CFTC) and the SEC substantial new authority and requires numerous rulemakings by these agencies. Generally, the CFTC and SEC have until July 16, 2011 to promulgate the rulemakings necessary to implement these regulations. The ultimate impact of these derivatives regulations, and the time it will take to comply, continues to remain uncertain. The final regulations will impose additional operational and compliance costs on us and may require us to restructure certain businesses and negatively impact our revenues and results of operations.

The Financial Reform Act provided for a new resolution authority to establish a process to unwind large systemically important financial institutions. As part of that process we will be required to develop and implement a recovery and resolution plan which will be subject to review by the FDIC and the Federal Reserve Board to determine whether our plan is credible and viable. As a result of FDIC and Federal Reserve Board review, we could be required to take certain actions over the next several years which could impose operational costs and could potentially result in the divestiture or restructuring of certain businesses and subsidiaries.

Although we cannot predict the full effect of the Financial Reform Act on our operations, it, as well as the future rules implementing its reforms, could result in a significant loss of revenue, impose additional costs on us, require us to increase our regulatory capital or otherwise materially adversely affect our businesses, financial condition and results of operations.

In addition, Congress and the Administration have signaled growing interest in reforming the U.S. corporate income tax. While the timing of consideration of such legislative reform is unclear, possible approaches include lowering the 35% corporate tax rate, modifying the taxation of income earned outside of the U.S. and limiting or eliminating various other deductions, tax credits and/or other tax preferences. It is not possible at this time to quantify either the one-time impact from remeasuring deferred tax assets and liabilities that might result upon enactment of tax reform or the ongoing impact reform might have on income tax expense, but it is possible either of these impacts could adversely affect our financial condition and results of operations.

Other countries have also proposed and, in some cases, adopted certain regulatory changes targeted at financial institutions or that otherwise affect us. For example, the European Union has adopted increased capital requirements and the U.K. has (i) increased liquidity requirements for local financial institutions, including regulated U.K. subsidiaries of non-U.K. bank holding companies and other financial institutions as well as branches of non-U.K. banks located in the U.K; (ii) adopted a Bank Tax Levy which will apply to the aggregate balance sheet of branches and subsidiaries of non-U.K. banks and banking groups operating in the U.K.; (iii) proposed the creation and production of recovery and resolution plans (commonly referred to as living wills) by U.K. regulated entities; and (iv) announced the expectation of corporate

income tax rate reductions of one percent to be enacted during each of 2011, 2012 and 2013 that would favorably impact income tax expense on future earnings but which would result in adjustments to the carrying value of deferred tax assets and related one-time charges to income tax expenses of nearly $400 million for each one percent reduction (however, it is possible that the full three percent rate reductions could be enacted in 2011, which would result in a 2011 charge of approximately $1.1 billion). We are also monitoring other international legislative proposals that could materially impact us, such as changes to income tax laws. Currently, in the U.K., net operating loss carry forwards (NOLs) have an indefinite life. Were the U.K. taxing authorities to introduce limitations on the future utilization of NOLs and the Corporation was unable to document its continued ability to fully utilize its NOLs, it would be required to establish a valuation allowance by a charge to income tax expense. Depending upon the nature of the limitations, such a change could be material in the period of enactment. In addition, in 2010 the FSA issued a policy statement regarding payment protection insurance (PPI) that requires companies to review their sales practices and to proactively remediate certain problems, if discovered. As a result of this review, we may be required to record additional liabilities.

For additional information about the regulatory initiatives discussed above, see Regulatory Matters in the MD&A beginning on page 56. For additional information about PPI, see Note 14 – Commitments and Contingencies – Payment Protection Insurance Claims Matter to the Consolidated Financial Statements.

During the last ten years, the Corporation and its subsidiaries and legacy companies have sold over $2.0 trillion of loans to the GSEs. Each GSE is currently in a conservatorship, with its primary regulator, the Federal Housing Finance Agency, acting as conservator. We cannot predict if, when or how the conservatorships will end, or any associated changes to the GSEs’ business structure that could result. We also cannot predict whether the conservatorships will end in receivership. There are several proposed approaches to reform the GSEs which, if enacted, could change the structure of the GSEs and the relationship among the GSEs, the government, and the private markets. We expect dialogue concerning GSE reform to continue and additional proposals to be advanced. We cannot predict the prospects for the enactment, timing or content of legislative or rulemaking proposals regarding the future status of the GSEs. Accordingly, there continues to be uncertainty regarding the future of the GSEs, including whether they will continue to exist in their current form. GSE reform, if enacted, could result in a significant change to the business operations of Home Loans & Insurance.

Finally, since the financial crisis began several years ago, an increasing number of bank failures has imposed significant costs on the FDIC in resolving those failures, and the regulator’s deposit insurance fund has been depleted. In order to maintain a strong funding position and restore reserve ratios of the deposit insurance fund, the FDIC has increased, and may increase in the future, assessment rates of insured institutions, including Bank of America.

Deposits placed at the U.S. Banks are insured by the FDIC, subject to limits and conditions of applicable law and the FDIC’s regulations. Pursuant to the Financial Reform Act, FDIC insurance coverage limits were permanently increased to $250,000 per customer. The Financial Reform Act also provides for unlimited FDIC insurance coverage for non-interest bearing demand deposit accounts for a two-year period beginning on December 31, 2010 and ending on January 1, 2013. The FDIC administers the DIF, and all insured depository institutions are required to pay assessments to the FDIC that fund the DIF. The Financial Reform Act changed the methodology for calculating deposit insurance assessments from the amount of an insured depository institution’s domestic deposits to its total assets minus tangible capital. On February 7, 2011 the FDIC issued a new regulation implementing revisions to the assessment system mandated by the Financial Reform Act. The new regulation will be effective April 1, 2011 and will be reflected in the June 30, 2011 FDIC fund balance and the invoices for assessments due

September 30, 2011. As a result of the new regulations, we expect to incur higher annual deposit insurance assessments. We have identified potential mitigation actions, but they are in the early stages of development and we are not able to directly control the basis or the amount of premiums that we are required to pay for FDIC insurance or for other fees or assessment obligations imposed on financial institutions. Any future increases in required deposit insurance premiums or other bank industry fees could have a significant adverse impact on our financial condition and results of operations.

We face substantial potential legal liability and significant regulatory action, which could have material adverse effects on our cash flows, financial condition and results of operations, or cause significant reputational harm to us.

We face significant legal risks in our businesses, and the volume of claims and amount of damages and penalties claimed in litigation and regulatory proceedings against us and other financial institutions remain high and are increasing. Increased litigation costs, substantial legal liability or significant regulatory action against us could have material adverse effects on our financial condition and results of operations or cause significant reputational harm to us, which in turn could adversely impact our business prospects. In addition, we continue to face increased litigation risk and regulatory scrutiny as a result of the Countrywide and Merrill Lynch acquisitions. As a result of ongoing challenging economic conditions and the increased level of defaults over recent years, we have continued to experience increased litigation and other disputes with counterparties regarding relative rights and responsibilities. These litigation and regulatory matters and any related settlements could have a material adverse effect on our cash flows, financial condition and results of operations. They could also negatively impact our reputation and lead to volatility of our stock price. For a further discussion of litigation risks, see Note 14 – Commitments and Contingencies to the Consolidated Financial Statements.

Changes in governmental fiscal and monetary policy could adversely affect our financial condition and results of operations.

Our businesses and earnings are affected by domestic and international fiscal and monetary policy. For example, the Federal Reserve Board regulates the supply of money and credit in the United States and its policies determine in large part our cost of funds for lending, investing and capital raising activities and the return we earn on those loans and investments, both of which affect our net interest margin. The actions of the Federal Reserve Board also can materially affect the value of financial instruments we hold, such as debt securities and MSRs, and its policies also can affect our borrowers, potentially increasing the risk that they may fail to repay their loans. Our businesses and earnings are also affected by the fiscal or other policies that are adopted by various U.S. regulatory authorities, non-U.S. governments and international agencies. Changes in domestic and international fiscal and monetary policies are beyond our control and difficult to predict but could have an adverse impact on our capital requirements and the costs of running our businesses, in turn adversely impacting our financial condition and results of operations.

 

Risk of the Competitive Environment in which We Operate

We face significant and increasing competition in the financial services industry.

We operate in a highly competitive environment.  Over time, there has been substantial consolidation among companies in the financial services industry, and this trend accelerated in recent years as the credit crisis led to numerous mergers and asset acquisitions among industry participants and in certain cases reorganization, restructuring, or even bankruptcy. This trend has also hastened the globalization of the securities and financial services markets. We will continue to experience intensified competition as further

consolidation in the financial services industry in connection with current market conditions may produce larger, better-capitalized and more geographically diverse companies that are capable of offering a wider array of financial products and services at more competitive prices. To the extent we expand into new business areas and new geographic regions, we may face competitors with more experience and more established relationships with clients, regulators and industry participants in the relevant market, which could adversely affect our ability to compete. In addition, technological advances and the growth of e-commerce have made it possible for non-depository institutions to offer products and services that traditionally were banking products, and for financial institutions to compete with technology companies in providing electronic and internet-based financial solutions. Increased competition may negatively affect our results of operations by creating pressure to lower prices on our products and services and reducing market share.

Damage to our reputation could significantly harm our businesses, including our competitive position and business prospects.

Our ability to attract and retain investors, customers, clients and employees could be adversely affected to the extent our reputation is damaged. Significant harm to our reputation can arise from many sources, including employee misconduct, litigation or regulatory outcomes, failing to deliver minimum standards of service and quality, compliance failures, unethical behavior, unintended disclosure of confidential information, and the activities of our clients, customers and counterparties. Actions by the financial services industry generally or by certain members or individuals in the industry also can significantly adversely affect our reputation.

Our actual or perceived failure to address various issues also could give rise to reputational risk that could cause significant harm to us and our business prospects, including failure to properly address operational risks. These issues include legal and regulatory requirements, privacy, properly maintaining customer and associate personal information, record keeping, protecting against money-laundering, sales and trading practices, ethical issues, and the proper identification of the legal, reputational, credit, liquidity and market risks inherent in our products.

We could suffer significant reputational harm if we fail to properly identify and manage potential conflicts of interest. Management of potential conflicts of interests has become increasingly complex as we expand our business activities through more numerous transactions, obligations and interests with and among our clients. The failure to adequately address, or the perceived failure to adequately address, conflicts of interest could affect the willingness of clients to deal with us, or give rise to litigation or enforcement actions, which could adversely affect our businesses.

We continue to face increased public and regulatory scrutiny resulting from the financial crisis, including our foreclosure practices, modifications of mortgages, volume of lending, compensation practices, our acquisitions of Countrywide and Merrill Lynch, and the suitability of certain trading and investment businesses. Failure to appropriately address any of these issues could also give rise to additional regulatory restrictions, legal risks and reputational harm, which could, among other consequences, increase the size and number of litigation claims and damages asserted or subject us to enforcement actions, fines and penalties and cause us to incur related costs and expenses.

Our ability to attract and retain qualified employees is critical to the success of our businesses and failure to do so could adversely affect our business prospects, including our competitive position and results of operations.

Our performance is heavily dependent on the talents and efforts of highly skilled individuals. Competition for qualified personnel within the financial services industry and from businesses outside the financial services industry has been, and is expected to continue to be, intense even during difficult economic times. Our competitors include non-U.S.-based institutions and institutions otherwise not subject to compensation and hiring regulations imposed on U.S. institutions and financial institutions in particular. The difficulty we face in competing for key personnel is exacerbated in emerging markets, where we

are often competing for qualified employees with entities that may have a significantly greater presence or more extensive experience in the region.

In order to attract and retain qualified personnel, we must provide market-level compensation. As a large financial and banking institution, we may be subject to limitations on compensation practices (which may or may not affect our competitors) by the Federal Reserve Board, the FDIC or other regulators around the world. Any future limitations on executive compensation imposed by legislators and regulators could adversely affect our ability to attract and maintain qualified employees. Furthermore, a substantial portion of our annual bonus compensation paid to our senior employees has in recent years taken the form of long-term equity awards. The value of long-term equity awards to senior employees generally has been negatively affected by the significant decline in the market price of our common stock. If we are unable to continue to attract and retain qualified individuals, our business prospects, including our competitive position and results of operations, could be adversely affected.

Our inability to adapt our products and services to evolving industry standards and consumer preferences could harm our businesses.

Our business model is based on a diversified mix of businesses that provide a broad range of financial products and services, delivered through multiple distribution channels. Our success depends, in part, on our ability to adapt our products and services to evolving industry standards. There is increasing pressure by competitors to provide products and services at lower prices. This can reduce our net interest margin and revenues from our fee-based products and services. In addition, the widespread adoption of new technologies, including internet services, could require us to incur substantial expenditures to modify or adapt our existing products and services. We might not be successful in developing or introducing new products and services, responding or adapting to changes in consumer spending and saving habits, achieving market acceptance of our products and services, or sufficiently developing and maintaining loyal customers.

 

Risks Related to Risk Management

Our risk management framework may not be effective in mitigating risk and reducing the potential for significant losses.

Our risk management framework is designed to minimize risk and loss to us. We seek to identify, measure, monitor, report and control our exposure to the types of risk to which we are subject, including strategic, credit, market, liquidity, compliance, fiduciary, operational and reputational risks, among others. While we employ a broad and diversified set of risk monitoring and mitigation techniques, those techniques are inherently limited because they cannot anticipate the existence or future development of currently unanticipated or unknown risks. For example, recent economic conditions, heightened legislative and regulatory scrutiny of the financial services industry and increases in the overall complexity of our operations, among other developments, have resulted in the creation of a variety of previously unanticipated or unknown risks, highlighting the intrinsic limitations of our risk monitoring and mitigation techniques. As such, we may incur future losses due to the development of such previously unanticipated or unknown risks.

For additional information about our risk management policies and procedures, see Managing Risk in the MD&A beginning on page 59.

A failure in or breach of our operational or security systems or infrastructure, or those of third parties, could disrupt our businesses, result in the disclosure of confidential information or damage our reputation. Any such failure also could have a significant adverse effect on our reputation, cash flows, financial condition, and results of operations.

Our businesses are highly dependent on our ability to process and monitor, on a continuous basis, a large number of transactions, many of which are highly complex, across numerous and diverse markets in many currencies. The potential for operational risk exposure exists throughout our organization, including losses resulting from unauthorized trades by any employees.

Integral to our performance is the continued efficacy of our internal processes, systems, relationships with third parties and the vast array of employees and key executives in our day-to-day and ongoing operations. Our financial, accounting, data processing or other operating systems and facilities may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control and adversely affect our ability to process these transactions or provide these services. We must continuously update these systems to support our operations and growth. This updating entails significant costs and creates risks associated with implementing new systems and integrating them with existing ones.

In addition, we also face the risk of operational failure, termination or capacity constraints of any of the clearing agents, exchanges, clearing houses or other financial intermediaries we use to facilitate our securities transactions. In recent years, there has been significant consolidation among clearing agents, exchanges and clearing houses, which has increased our exposure to operational failure, termination or capacity constraints of the particular financial intermediaries that we use and could affect our ability to find adequate and cost-effective alternatives in the event of any such failure, termination or constraint. Industry consolidation, whether among market participants or financial intermediaries, increases the risk of operational failure as disparate complex systems need to be integrated, often on an accelerated basis.

Furthermore, the interconnectivity of multiple financial institutions with central agents, exchanges and clearing houses, and the increased centrality of these entities under proposed and potential regulation, increases the risk that an operational failure at one institution or entity may cause an industry-wide operational failure that could adversely impact our own business operations. Any such failure, termination or constraint could adversely affect our ability to effect transactions, service our clients, manage our exposure to risk or expand our businesses and could have a significant adverse impact on our liquidity, financial condition, and results of operations.

Our operations rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer systems, software and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses or other malicious code and other events that could have a security impact. Additionally, breaches of security may occur through intentional or unintentional acts by those having authorized or unauthorized access to our or our clients’ or counterparties’ confidential or other information. If one or more of such events occur, this potentially could jeopardize our or our clients’ or counterparties’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our, our clients’, our counterparties’ or third parties’ operations, which could result in significant losses or reputational damage to us. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures arising from operational and security risks, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us.

We routinely transmit and receive personal, confidential and proprietary information by e-mail and other electronic means. We have discussed and worked with clients, vendors, service providers, counterparties and other third parties to develop secure transmission capabilities, but we do not have, and may be unable to put in place, secure capabilities with all of our clients, vendors, service providers, counterparties and other third parties, and we may not be able to ensure that these third parties have appropriate controls in place to protect the confidentiality of the information. Any interception, misuse or mishandling of personal, confidential or proprietary information being sent to or received from a client, vendor, service provider, counterparty or other third party could result in legal liability, regulatory action and

reputational harm for us and could have a significant adverse effect on our competitive position, financial condition and results of operations.

With regard to the physical infrastructure that supports our operations, we have taken measures to implement backup systems and other safeguards, but our ability to conduct business may be adversely affected by any disruption to that infrastructure. Such disruptions could involve electrical, communications, internet, transportation or other services used by us or third parties with whom we conduct business. These disruptions may occur as a result of events that affect only our facilities or those of our clients or other business partners but they could also be the result of events with a broader impact globally, regionally or in the cities where those facilities are located. The costs associated with such disruptions, including any loss of business, could have a significant adverse effect on our results of operations or financial condition.

Any of these operational and security risks could lead to significant and negative consequences, including reputational harm as well as loss of customers and business opportunities, which in turn could have a significant adverse effect on our businesses, financial condition and results of operations. For a further discussion of operational risks and our operational risk management, see Operational Risk Management in the MD&A beginning on page 106.

 

Risk Related to Past Acquisitions

Any failure to successfully integrate or otherwise realize the expected benefits from our recent acquisitions could adversely affect our results of operations.

There are significant risks and uncertainties associated with mergers and acquisitions. We have made several significant acquisitions in the last several years, including Merrill Lynch and Countrywide, and the success of these acquisitions faces numerous challenges. In particular, the success of our acquisition of Merrill Lynch in 2009 will continue to depend, in part, on our ability to realize the anticipated benefits and cost savings from combining the businesses of Bank of America and Merrill Lynch. If we are not able to successfully integrate these businesses, the anticipated benefits and cost savings of the acquisition may not be realized fully or may take longer to realize than expected. For example, we may fail to realize the growth opportunities and cost savings anticipated to be derived from the acquisition. With regard to any of our acquisitions, a significant decline in asset valuations or cash flows may also cause us not to realize expected benefits. These failures could in turn negatively affect our financial condition, including adversely impacting the carrying value of the acquisition premium or goodwill. Our ability to achieve these objectives has also been made more difficult as a result of the substantial challenges that we are facing in our businesses because of the current economic environment.

In addition, it is possible that the integration process could result in disruption of our and Merrill Lynch’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain sufficiently strong relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the acquisition. Integration efforts may also divert management attention and resources. These integration matters could have an adverse effect on us for an undetermined period. We will be subject to similar risks and difficulties in connection with any future acquisitions or decisions to downsize, sell or close units or otherwise change the business mix of the Corporation.

 

Risk of Being an International Business

We are subject to numerous political, economic, market, reputational, operational, legal, regulatory and other risks in the non-U.S. jurisdictions in which we operate which could adversely impact our businesses.

We do business throughout the world, including in developing regions of the world commonly known as emerging markets. Our businesses and revenues derived from non-U.S. jurisdictions are subject to risk of loss from currency fluctuations, social or judicial instability, changes in governmental

policies or policies of central banks, expropriation, nationalization and/or confiscation of assets, price controls, capital controls, exchange controls, other restrictive actions, unfavorable political and diplomatic developments and changes in legislation. These risks are especially acute in emerging markets. As in the United States, many non-U.S. jurisdictions in which we do business have been negatively impacted by recessionary conditions. While a number of these jurisdictions are showing signs of recovery, others continue to experience increasing levels of stress. In addition, the risk of default on sovereign debt in some non-U.S. jurisdictions is increasing and could expose us to substantial losses. Any such unfavorable conditions or developments could have an adverse impact on our businesses and results of operations.

Our non-U.S. businesses are also subject to extensive regulation by various non-U.S. regulators, including governments, securities exchanges, central banks and other regulatory bodies, in the jurisdictions in which those businesses operate. In many countries, the laws and regulations applicable to the financial services and securities industries are uncertain and evolving, and it may be difficult for us to determine the exact requirements of local laws in every market or manage our relationships with multiple regulators in various jurisdictions. Our inability to remain in compliance with local laws in a particular market and manage our relationships with regulators could have a significant and adverse effect not only on our businesses in that market but also on our reputation generally.

We also invest or trade in the securities of corporations and governments located in non-U.S. jurisdictions, including emerging markets. Revenues from the trading of non-U.S. securities may be subject to negative fluctuations as a result of the above factors. Furthermore, the impact of these fluctuations could be magnified, because non-U.S. trading markets, particularly in emerging market countries, are generally smaller, less liquid and more volatile than U.S. trading markets.

We are subject to geopolitical risks, including acts or threats of terrorism, and actions taken by the U.S. or other governments in response and/or military conflicts, that could adversely affect business and economic conditions abroad as well as in the United States.

For a further discussion of our non-U.S. credit and trading portfolio, see Credit Risk Management — Non-U.S. Portfolio in the MD&A beginning on page 94.

 

Risk from Accounting Changes

Changes in accounting standards or inaccurate estimates or assumptions in the application of accounting policies could adversely affect our financial condition and results of operations.

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Some of these policies require use of estimates and assumptions that may affect the reported value of our assets or liabilities and results of operations and are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain. If those assumptions, estimate or judgments were incorrectly made, we could be required to correct and restate prior period financial statements.

Accounting standard-setters and those who interpret the accounting standards (such as the Financial Accounting Standards Board (FASB), the SEC, banking regulators and our independent registered public accounting firm) may also amend or even reverse their previous interpretations or positions on how various standards should be applied. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the Corporation needing to revise and republish prior period financial statements. For a further discussion of some of our critical accounting policies and standards and recent accounting changes, see Complex Accounting Estimates in the MD&A beginning on page 107 and Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.

 

There are no unresolved written comments that were received from the SEC Staff 180 days or more before the end of our 2010 fiscal year relating to our periodic or current reports filed under the Securities Exchange Act of 1934.

We own or lease approximately 120 million square feet in 26,910 locations globally, including approximately 112 million square feet in the United States (all 50 U.S. states, the District of Columbia, the U.S. Virgin Islands and Puerto Rico) and approximately eight million square feet in 44 non-U.S. countries.

We believe our owned and leased properties are adequate for our business needs and are well maintained. We continue to evaluate our current and

projected space requirements and may determine from time to time that certain of our premises and facilities are no longer necessary for our operations. There is no assurance that we will be able to dispose of any such excess premises, and we may incur costs in connection with such disposition, including costs that could be material to our results of operations in any given period.

 

See Litigation and Regulatory Matters in Note 14 – Commitments and Contingencies to the Consolidated Financial Statements for Bank of America’s litigation disclosure which is incorporated herein by reference.

 

 

Executive Officers of The Registrant

The name, age and position of each of our current executive officers are listed below along with such officer’s business experience. Unless otherwise indicated, executive officers are appointed by the Board to hold office until their successors are elected and qualified or until their earlier resignation or removal.

David C. Darnell (58) President, Global Commercial Banking since July 2005. Mr. Darnell joined the Corporation in 1979 and served in a number of senior leadership roles before becoming the President of Global Commercial Banking.

Barbara J. Desoer (58) President, Bank of America Home Loans and Insurance since July 2008; Chief Technology and Operations Officer from August 2004 to July 2008. Ms. Desoer joined a predecessor of the Corporation in 1977 and served in a number of senior leadership roles before becoming Chief Technology and Operations Officer.

Sallie L. Krawcheck (46) President, Global Wealth and Investment Management since August 2009; Chairman of Global Wealth Management of Citigroup, Inc. from January 2007 until December 2008; Chief Executive Officer of Global Wealth Management of Citigroup, Inc. from January 2007 to September 2008; Chief Financial Officer and Head of Strategy of Citigroup, Inc. from November 2004 to January 2007.

Terrence P. Laughlin (56) Legacy Asset Servicing Executive since February 2011; Credit Loss Mitigation Strategies & Secondary Markets Executive from August 2010 to February 2011; Chief Executive Officer and President of OneWest Bank, FSB from March 2009 to July 2010; Chairman of Merrill Lynch Bank & Trust Co., FSB from February 2005 to May 2008.

Thomas K. Montag (54) President, Global Banking and Markets since August 2009; President, Global Markets from January 2009 to August 2009; Executive Vice President and Head of Global Sales and Trading of Merrill Lynch & Co., Inc. from August 2008 to December 2008; Co-head, Global

Securities of The Goldman Sachs Group, Inc. from 2006 to 2008; Co-president, Japanese Operations of The Goldman Sachs Group, Inc. from 2002 to 2007; Member, Management Committee of The Goldman Sachs Group, Inc. from 2002 to 2008; Member, Fixed Income, Currency and Commodities & Equities Executive Committee of The Goldman Sachs Group, Inc. from 2000 to 2008.

Brian T. Moynihan (51) President and Chief Executive Officer since January 2010; President, Consumer and Small Business Banking from August 2009 to December 2009; President, Global Banking and Wealth Management from January 2009 to August 2009; General Counsel from December 2008 to January 2009; President, Global Corporate and Investment Banking from October 2007 to December 2008; President, Global Wealth and Investment Management from April 2004 to October 2007.

Charles H. Noski (58) Executive Vice President and Chief Financial Officer since May 2010. Mr. Noski has served as a director of Microsoft Corporation since November 2003; director of Air Products and Chemicals, Inc. from October 2000 to January 2004 and from May 2005 to May 2010; director of Morgan Stanley from September 2005 to April 2010; director of Automatic Data Processing, Inc. from April 2008 to May 2010.

Edward P. O’Keefe (55) General Counsel since January 2009; Deputy General Counsel and Head of Litigation from December 2008 to January 2009; Global Compliance and Operational Risk Executive and Senior Privacy Executive from September 2008 to December 2008; Deputy General Counsel for Staff Support from January 2005 to September 2008.

Joe L. Price (50) President, Consumer and Small Business Banking since February 2010; Chief Financial Officer from January 2007 to January 2010; Global Corporate and Investment Banking Risk Management Executive from June 2003 to December 2006.

Bruce R. Thompson (46) Chief Risk Officer since January 2010; Head of Global Capital Markets from July 2008 to January 2010; Co-head of Capital Markets (now Global Capital Markets) from October 2007 to July 2008; Co-head of Global Credit Products from June 2007 to October 2007; Co-head of Global Leveraged Finance from March 2007 to June 2007; Head of U.S. Leveraged Finance Capital Markets from May 2006 to March 2007; Managing Director of Banc of America Securities LLC, a subsidiary of the Corporation, from 1996 to May 2006.

 

The principal market on which our common stock is traded is the New York Stock Exchange. Our common stock is also listed on the London Stock Exchange, and certain shares are listed on the Tokyo Stock Exchange. The following table sets forth the high and low closing sales prices of the common stock on the New York Stock Exchange for the periods indicated:

 

 

As of February 15, 2011, there were 247,064 registered shareholders of common stock. During 2009 and 2010, we paid dividends on the common stock on a quarterly basis.

The following table sets forth dividends paid per share of our common stock for the periods indicated:

 

For additional information regarding our ability to pay dividends, see Note 15 – Shareholders’ Equity and Note 18 – Regulatory Requirements and Restrictions to the Consolidated Financial Statements, which are incorporated herein by reference.

For information on our equity compensation plans, see Item 12 beginning on page 244 of this report and Note 20 – Stock-Based Compensation Plans to the Consolidated Financial Statements both of which are incorporated herein by reference.

 

 

We did not have any unregistered sales of our equity securities in 2010.

See Table 6 in the MD&A on page 32 and Table XII of the Statistical Tables on page 125 which are incorporated herein by reference.

 

This report on Form 10-K, the documents that it incorporates by reference and the documents into which it may be incorporated by reference may contain, and from time to time Bank of America Corporation (collectively with its subsidiaries, the Corporation) and its management may make, certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often use words such as “expects,” “anticipates,” “believes,” “estimates,” “targets,” “intends,” “plans,” “goal” and other similar expressions or future or conditional verbs such as “will,” “may,” “might,” “should,” “would” and “could.” The forward-looking statements made represent the current expectations, plans or forecasts of the Corporation regarding the Corporation’s future results and revenues, and future business and economic conditions more generally, including statements concerning: the adequacy of the liability for the remaining representations and warranties exposure to the government-sponsored enterprises (GSEs) and the future impact to earnings; the potential assertion and impact of additional claims not addressed by the GSE agreements; the expected repurchase claims on the 2004-2008 loan vintages; representations and warranties liabilities (also commonly referred to as reserves), and range of possible loss estimates, expenses and repurchase claims and resolution of those claims; the proposal to modestly increase dividends in the second half of 2011; the charge to income tax expense resulting from a reduction in the United Kingdom (U.K.) corporate income tax rate; future payment protection insurance claims in the U.K.; future risk-weighted assets and any mitigation efforts to reduce risk-weighted assets; net interest income; credit trends and conditions, including credit losses, credit reserves, charge-offs, delinquency trends and nonperforming asset levels; consumer and commercial service charges, including the impact of changes in the Corporation’s overdraft policy as well as from the Electronic Fund Transfer Act and the Corporation’s ability to mitigate a decline in revenues; liquidity; capital levels determined by or established in accordance with accounting principles generally accepted in the United States of America (GAAP) and with the requirements of various regulatory agencies, including our ability to comply with any Basel capital requirements endorsed by U.S. regulators without raising additional capital; the revenue impact of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the CARD Act); the revenue impact resulting from, and any mitigation actions taken in response to, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Financial Reform Act) including the impact of the Volcker Rule and derivatives regulations; mortgage production levels; long-term debt levels; run-off of loan portfolios; the impact of various legal proceedings discussed in “Litigation and Regulatory Matters” in Note 14 – Commitments and Contingencies to the Consolidated Financial Statements; the number of delayed foreclosure sales and the resulting financial impact and other similar matters; and other matters relating to the Corporation and the securities that we may offer from time to time. The foregoing is not an exclusive list of all forward-looking statements the Corporation makes. These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumptions that are difficult to predict and often are beyond the Corporation’s control. Actual outcomes and results may differ materially from those expressed in, or implied by, the Corporation’s forward-looking statements.

You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties more fully discussed elsewhere in this report, including Item 1A. “Risk Factors,” and in any of the Corporation’s subsequent Securities and Exchange Commission (SEC) filings: the Corporation’s resolution of certain

representations and warranties obligations with the GSEs and our ability to resolve any remaining claims; the Corporation’s ability to resolve any representations and warranties obligations with monolines and private investors; failure to satisfy our obligations as servicer in the residential mortgage securitization process; the adequacy of the liability and/or range of possible loss estimates for the representations and warranties exposures to the GSEs, monolines and private-label and other investors; the potential assertion and impact of additional claims not addressed by the GSE agreements; the foreclosure review and assessment process, the effectiveness of the Corporation’s response and any governmental or private third-party claims asserted in connection with these foreclosure matters; the adequacy of the reserve for future payment protection insurance claims in the U.K.; negative economic conditions generally including continued weakness in the U.S. housing market, high unemployment in the U.S., as well as economic challenges in many non-U.S. countries in which we operate and sovereign debt challenges; the Corporation’s mortgage modification policies and related results; the level and volatility of the capital markets, interest rates, currency values and other market indices; changes in consumer, investor and counterparty confidence in, and the related impact on, financial markets and institutions, including the Corporation as well as its business partners; the Corporation’s credit ratings and the credit ratings of its securitizations; estimates of the fair value of certain of the Corporation’s assets and liabilities; legislative and regulatory actions in the U.S. (including the impact of the Financial Reform Act, the Electronic Fund Transfer Act, the CARD Act and related regulations and interpretations) and internationally; the identification and effectiveness of any initiatives to mitigate the negative impact of the Financial Reform Act; the impact of litigation and regulatory investigations, including costs, expenses, settlements and judgments as well as any collateral effects on our ability to do business and access the capital markets; various monetary, tax and fiscal policies and regulations of the U.S. and non-U.S. governments; changes in accounting standards, rules and interpretations (including new consolidation guidance), inaccurate estimates or assumptions in the application of accounting policies, including in determining reserves, applicable guidance regarding goodwill accounting and the impact on the Corporation’s financial statements; increased globalization of the financial services industry and competition with other U.S. and international financial institutions; adequacy of the Corporation’s risk management framework; the Corporation’s ability to attract new employees and retain and motivate existing employees; technology changes instituted by the Corporation, its counterparties or competitors; mergers and acquisitions and their integration into the Corporation, including the Corporation’s ability to realize the benefits and cost savings from and limit any unexpected liabilities acquired as a result of the Merrill Lynch and Countrywide acquisitions; the Corporation’s reputation, including the effects of continuing intense public and regulatory scrutiny of the Corporation and the financial services industry; the effects of any unauthorized disclosures of our or our customers’ private or confidential information and any negative publicity directed toward the Corporation; and decisions to downsize, sell or close units or otherwise change the business mix of the Corporation.

Forward-looking statements speak only as of the date they are made, and the Corporation undertakes no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.

Notes to the Consolidated Financial Statements referred to in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) are incorporated by reference into the MD&A. Certain prior period amounts have been reclassified to conform to current period presentation.

 

 

Business Overview

The Corporation is a Delaware corporation, a bank holding company and a financial holding company. When used in this report, “the Corporation” may refer to the Corporation individually, the Corporation and its subsidiaries, or certain of the Corporation’s subsidiaries or affiliates. Our principal executive offices are located in the Bank of America Corporate Center in Charlotte, North Carolina. Through our banking and various nonbanking subsidiaries throughout the United States and in certain international markets, we provide a diversified range of banking and nonbanking financial services and products through six business segments: Deposits, Global Card Services, Home Loans & Insurance, Global Commercial Banking, Global Banking & Markets (GBAM) and Global Wealth & Investment Management (GWIM), with the remaining operations recorded in All Other. Effective January 1, 2010, we realigned the Global Corporate and Investment Banking portion of the former Global Banking business segment with the former Global Markets business segment to form GBAM and to reflect Global Commercial Banking as a standalone segment. At December 31, 2010, the Corporation had $2.3 trillion in assets and approximately 288,000 full-time equivalent employees.

On January 1, 2009, we acquired Merrill Lynch & Co., Inc. (Merrill Lynch) and, as a result, we now have one of the largest wealth management businesses in the world with nearly 17,000 wealth advisors, an additional 3,000 client-facing professionals and more than $2.2 trillion in client assets. Additionally, we are a global leader in corporate and investment banking and trading across a broad range of asset classes serving corporations, governments, institutions and individuals around the world.

As of December 31, 2010, we operate in all 50 states, the District of Columbia and more than 40 non-U.S. countries. Our retail banking footprint covers approximately 80 percent of the U.S. population and in the U.S., we serve approximately 57 million consumer and small business relationships with 5,900 banking centers, 18,000 ATMs, nationwide call centers, and leading online and mobile banking platforms. We have banking centers in 13 of the 15 fastest growing states and have leadership positions in market share for deposits in seven of those states. We offer industry-leading support to approximately four million small business owners.

For information on recent and proposed legislative and regulatory initiatives that may affect our business, see Regulatory Matters beginning on page 56.

The table below provides selected consolidated financial data for 2010 and 2009.

 

2010 Economic and Business Environment

The banking environment and markets in which we conduct our businesses will continue to be strongly influenced by developments in the U.S. and global economies, as well as the continued implementation and rulemaking from recent financial reforms. The global economy continued to recover in 2010, but growth was very uneven across countries and regions. Emerging nations, led by China, India and Brazil, expanded rapidly, while the U.S., U.K., Europe and Japan continued to grow modestly.

 

United States

In the U.S., the economy began to recover early in 2010, fueled by moderate growth in consumption and inventory rebuilding, but slowed in late spring, coincident with the intensification of Europe’s financial crisis. A slowdown in consumption and domestic demand growth contributed to weak employment gains and an unemployment rate that drifted close to 10 percent. Year-over-year inflation measures receded below one percent and stock market indices declined. Concerns about high unemployment and fears that the U.S. might incur deflation led the Federal Reserve to adopt a second round of quantitative easing that involved purchases of $600 billion of U.S. Treasury securities scheduled to occur through June 2011. The announcement of this policy led to lower interest rates. Bond yields rebounded in the second half of 2010 as the U.S. economy reaccelerated, driven by stronger consumer spending, rapid growth of exports and business investment in equipment and software. The strong holiday retail season provided healthy economic momentum toward year end. Despite only moderate economic growth in 2010, corporate profits rose sharply, benefiting from strong productivity gains and constraints on hiring and operating costs. Cautious business financial practices resulted in a record-breaking $1.5 trillion in free cash flows at non-financial businesses.

The housing market remained weak throughout 2010. Home sales were soft, despite lower home prices and low interest rates. There were delays in the foreclosure process on the large number of distressed mortgages and the supply of unsold homes remained high. Based on available Home Price Index (HPI) information, the mild improvement in home prices that occurred in the second half of 2009 continued into early 2010. However, housing prices renewed a downward trend in the second half of 2010, due in part to the expiration of tax incentives for home buyers.

Credit quality of bank loans to businesses and households improved significantly in 2010 and the continued economic recovery improved the environment for bank lending. Bank commercial and industrial loans to businesses increased in the last few months of 2010, following their steep recession-related declines, reflecting increasing loan demand relating to stronger production, inventory building and capital spending. Rising disposable personal income, household deleveraging and improving household finances contributed to improving consumer credit quality.

 

Europe

In Europe, a financial crisis emerged in mid-2010, triggered by high budget deficits and rising direct and contingent sovereign debt in Greece, Ireland, Italy, Portugal and Spain that created concerns about the ability of these European Union (EU) “peripheral nations” to continue to service their debt obligations. These conditions impacted financial markets and resulted in high and volatile bond yields on the sovereign debt of many EU nations. The financial crisis and efforts by the European Commission, European Central Bank (ECB) and International Monetary Fund (IMF) to negotiate a financial support package to financially challenged EU nations unsettled global financial markets and contributed to Euro exchange rate and interest rate volatility. Economic performance of certain EU “core nations,” led by Germany, remained healthy throughout 2010, while the economies of Greece, Ireland, Italy, Portugal and Spain experienced recessionary conditions and slowing

growth in response to the financial crisis and the implementation of fiscal austerity programs. Additionally, Spain and Ireland’s economies declined as a result of material deterioration in their housing sectors. Uncertainty over the outcome of the EU governments’ financial support programs and worries about sovereign finances continued through year end. For information on our exposure in Europe, see Non-U.S. Portfolio beginning on page 94 and Note 28 – Performance by Geographical Area to the Consolidated Financial Statements.

 

Asia

Asia, excluding Japan, continued to outperform all other regions in 2010 with strong growth across most countries. China and India continued to lead the region in terms of growth and China became the second largest economy in the world after the U.S., eclipsing Japan. Growth across the region became broader based with consumer demand, investment activity and exports all performing well. Asia remained well positioned to withstand global shocks because of record international reserves, current account surpluses and reduced external leverage. Many Asian nations, including China, Taiwan, South Korea, Thailand and Malaysia, are net external creditors, with China and Japan among the largest holders of U.S. Treasury bonds. Bank balance sheets have improved across most of the region and asset quality issues have remained manageable. Among the key challenges faced by the region were large capital inflows that placed appreciation pressures on most currencies against the U.S. Dollar (USD), complicating monetary policy and adding to excess liquidity pressures. Most countries in the region, including China, India, South Korea, Thailand and Indonesia, began to withdraw fiscal stimulus and tighten monetary policy with hikes in interest rates as growth gathered momentum and as food and broader price inflation pressures began to increase. Japan performed well early in the year, but the economy weakened at the end of the year due to weakening consumer demand, and appreciation of the yen that hurt export competitiveness. For information on our exposure in Asia, see Non-U.S. Portfolio beginning on page 94 and Note 28 – Performance by Geographical Area to the Consolidated Financial Statements.

 

Emerging Nations

In the emerging nations, inflation pressures began to mount and their central banks raised interest rates or took steps to tighten monetary policy and slow bank lending. Strong growth in emerging nations and their favorable economic outlooks attracted capital from the industrialized nations. The excess global liquidity generated by the accommodative monetary policies of the Federal Reserve, Bank of Japan and other central banks also flowed into emerging nations. These capital inflows put upward pressure on many emerging nation currencies. As a result, some emerging nations, such as Brazil, experienced strong currency appreciation. However, in other nations, that peg their currencies to the U.S. dollar, currency appreciation was muted causing inflationary pressures and rapid real estate price appreciation. Global economic momentum, along with the generally weak U.S. dollar and easing monetary policies in several industrialized nations, contributed to rising prices for industrial commodities in these emerging nations. Through year end, inflation pressures in key emerging nations continued to mount. For more information on our emerging nations exposure, see Table 48 on page 95.

 

Performance Overview

In 2010, we reported a net loss of $2.2 billion compared to net income of $6.3 billion in 2009. After preferred stock dividends and accretion of $1.4 billion in 2010 compared with $8.5 billion in 2009, net loss applicable to common shareholders was $3.6 billion, or $0.37 per diluted common share, compared to $2.2 billion, or $0.29 per diluted common share in 2009. Our 2010 results reflected, among other things, $12.4 billion in goodwill impairment charges, including non-cash, non-tax deductible goodwill impairment charges of

$10.4 billion in Global Card Services and $2.0 billion in Home Loans & Insurance. For more information about the goodwill impairment charges in 2010, see Complex Accounting Estimates beginning on page 107 and Note 10 – Goodwill and Intangible Assets to the Consolidated Financial Statements.

Excluding the $12.4 billion of goodwill impairment charges, net income was $10.2 billion for 2010. After preferred stock dividends and accretion, net income applicable to common shareholders, excluding the goodwill impairment charges was $8.8 billion, or $0.86 per diluted common share, for 2010. Revenue, net of interest expense on a FTE basis decreased $9.6 billion or eight percent to $111.4 billion in 2010.

Net interest income on a FTE basis increased $4.3 billion to $52.7 billion for 2010 compared to 2009. The increase was due to the impact of deposit pricing and the adoption of new consolidation guidance. The increase was partially offset by lower commercial and consumer loan levels and lower rates on the core assets and trading assets and liabilities.

Noninterest income decreased $13.8 billion to $58.7 billion in 2010 compared to $72.5 billion in 2009. Contributing to the decline was lower mortgage banking income, down $6.1 billion, largely due to $6.8 billion in representations and warranties provision, and decreases in equity investment income of $4.8 billion, gains on sales of debt securities of $2.2 billion, trading account profits of $2.2 billion, service charges of $1.6 billion and insurance income of $694 million, compared to 2009. These declines were partially offset by an increase in other income of $2.4 billion and a decrease in impairment losses of $1.9 billion.

Representations and warranties expense increased $4.9 billion to $6.8 billion in 2010 compared to $1.9 billion in 2009. The increase was primarily driven by a $4.1 billion provision for representations and warranties in the fourth quarter of 2010. The fourth quarter provision includes $3.0 billion related to the impact of the agreements reached with the GSEs on December 31, 2010, pursuant to which we paid $2.8 billion to resolve repurchase claims involving certain residential mortgage loans sold directly to the GSEs by entities related to legacy Countrywide Financial Corporation (Countrywide) as well as adjustments made to the representations and warranties liability for other loans sold

directly to the GSEs and not covered by these agreements. For more information about the GSE agreements, see Recent Events beginning on page 33 and Note 9 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements.

The provision for credit losses decreased $20.1 billion to $28.4 billion in 2010 compared to 2009. The provision for credit losses was $5.9 billion lower than net charge-offs in 2010, resulting in a reduction in reserves, compared with the 2009 provision for credit losses that was $14.9 billion higher than net charge-offs, reflecting reserve additions throughout the year. The reserve reduction in 2010 was due to improving portfolio trends across most of the consumer and commercial businesses, particularly the U.S. credit card, consumer lending and small business products, as well as core commercial loan portfolios.

Noninterest expense increased $16.4 billion to $83.1 billion in 2010 compared to 2009. The increase was driven by the $12.4 billion of goodwill impairment charges recognized in 2010. Excluding the goodwill impairment charges, noninterest expense increased $4.0 billion in 2010 compared to 2009, driven by a $3.6 billion increase in personnel costs reflecting the build-out of several businesses and a $1.6 billion increase in litigation expense, partially offset by lower merger and restructuring charges.

FTE basis, net income excluding the goodwill impairment charges, noninterest expense excluding goodwill impairment charges and net income applicable to common shareholders excluding the goodwill impairment charges are non-GAAP measures. For corresponding reconciliations to GAAP financial measures, see Table XIII.

 

Segment Results

Effective January 1, 2010, management realigned the former Global Banking and Global Markets business segments into Global Commercial Banking and GBAM. Prior year amounts have been reclassified to conform to the current period presentation. These changes did not have an impact on the previously reported consolidated results of the Corporation. For additional information related to the business segments, see Note 26 – Business Segment Information to the Consolidated Financial Statements.

Deposits net income decreased from the prior year due to a decline in revenue and higher noninterest expense. Net interest income increased as a result of a customer shift to more liquid products and continued pricing discipline, partially offset by a lower net interest income allocation related to asset and liability management (ALM) activities. The noninterest income decline was driven by the impact of Regulation E, which was effective in the third quarter of 2010 and our overdraft policy changes implemented in late 2009. Noninterest expense increased as a higher proportion of banking center sales and service

costs was aligned to Deposits from the other segments, and increased litigation expenses. The increase was partially offset by the absence of a special Federal Deposit Insurance Corporation (FDIC) assessment in 2009.

Global Card Services net loss increased compared to the prior year due primarily to a $10.4 billion goodwill impairment charge. Revenue decreased compared to the prior year driven by lower average loans, reduced interest and fee income primarily resulting from the implementation of the CARD Act and the impact of recording a reserve related to future payment protection

insurance claims in the U.K. that have not yet been asserted. Provision for credit losses improved due to lower delinquencies and bankruptcies as a result of the improved economic environment, which resulted in reserve reductions in 2010 compared to reserve increases in the prior year. Noninterest expense increased primarily due to the goodwill impairment charge.

Home Loans & Insurance net loss increased in 2010 compared to the prior year primarily due to an increase in representations and warranties provision and a $2.0 billion goodwill impairment charge, partially offset by a decline in provision for credit losses driven by improving portfolio trends. Mortgage banking income declined driven by increased representations and warranties provision and lower production volume reflecting a drop in the overall size of the mortgage market. Noninterest expense increased primarily due to the goodwill impairment charge, higher litigation expense and an increase in default-related servicing expense, partially offset by lower production expense and insurance losses.

Global Commercial Banking net income increased due to lower credit costs. Revenue was negatively impacted by additional costs related to our agreement to purchase certain retail automotive loans. Net interest income increased due to a growth in average deposits, partially offset by a lower net interest income allocation related to ALM activities. Credit pricing discipline offset the impact of the decline in average loan balances. The provision for credit losses decreased driven by improvements from stabilizing values in the commercial real estate portfolio.

GBAM net income decreased driven by the absence of the gain in the prior year related to the contribution of our merchant processing business to a joint venture. Additionally, the decrease was driven by lower sales and trading revenue due to more favorable market conditions in the prior year, partially

offset by credit valuation gains on derivative liabilities and gains on legacy assets compared to losses in the prior year. Provision for credit losses declined driven by lower net charge-offs and reserve levels, as well as a reduction in reservable criticized balances. Noninterest expense increased driven by higher compensation costs as a result of the recognition of expense on a proportionately larger amount of prior year incentive deferrals and investments in infrastructure and personnel associated with further development of the business. Income tax expense was adversely affected by a charge related to the U.K. tax rate reduction impacting the carrying value of deferred tax assets.

GWIM net income decreased driven by higher noninterest expense and the tax-related effect of the sale of the Columbia Management long-term asset management business partially offset by higher noninterest income and lower credit costs. Revenue increased driven by higher asset management fees and transactional revenue. Provision for credit losses decreased driven by stabilization of the portfolios and the recognition of a single large commercial charge-off in 2009. Noninterest expense increased due primarily to higher revenue-related expenses, support costs and personnel costs associated with further investment in the business.

All Other net income decreased compared to the prior year driven primarily by decreases in net interest income and noninterest income, partially offset by a lower provision for credit losses. Revenue decreased due primarily to lower equity investment gains as the prior year included a gain resulting from the sale of a portion of our investment in China Construction Bank (CCB) combined with reduced gains on the sale of debt securities. The decrease in the provision for credit losses was due to improving portfolio trends in the residential mortgage portfolio.

 

Net Interest Income

Net interest income on a FTE basis increased $4.3 billion to $52.7 billion for 2010 compared to 2009. The increase was due to the impact of deposit pricing and the adoption of new consolidation guidance which contributed $10.5 billion to net interest income in 2010. The increase was partially offset by lower commercial and consumer loan levels, the sale of First Republic in 2010 and lower rates on the core assets and trading assets and liabilities, including derivatives exposure. The net interest yield on a FTE basis increased 13 basis points (bps) to 2.78 percent for 2010 compared to 2009 due to these same factors.

 

Noninterest Income

 

Table 3 Noninterest Income

 

 

Noninterest income decreased $13.8 billion to $58.7 billion for 2010 compared to 2009. The following items highlight the significant changes.

 

Provision for Credit Losses

The provision for credit losses decreased $20.1 billion to $28.4 billion in 2010 compared to 2009. The provision for credit losses was $5.9 billion lower than net charge-offs for 2010, resulting in a reduction in reserves primarily due to improving portfolio trends throughout the year across the consumer and commercial businesses.

The provision for credit losses related to our consumer portfolio decreased $11.4 billion to $25.4 billion for 2010 compared to 2009. The provision for credit losses related to our commercial portfolio including the provision for unfunded lending commitments decreased $8.7 billion to $3.0 billion for 2010 compared to 2009.

Net charge-offs totaled $34.3 billion, or 3.60 percent of average loans and leases for 2010 compared with $33.7 billion, or 3.58 percent for 2009. For more information on the provision for credit losses, see Provision for Credit Losses on page 96.

 

Noninterest Expense

 

Table 4 Noninterest Expense

 

 

Excluding the goodwill impairment charges of $12.4 billion, noninterest expense increased $4.0 billion for 2010 compared to 2009. The increase was driven by a $3.6 billion increase in personnel costs reflecting the build out of several businesses, the recognition of expense on proportionally larger prior year incentive deferrals and the U.K. payroll tax on certain year-end incentive payments, as well as a $1.6 billion increase in litigation costs. These increases were partially offset by a $901 million decline in pre-tax merger and restructuring charges compared to the prior year. The prior year included a special FDIC assessment of $724 million.

 

Income Tax Expense

Income tax expense was $915 million for 2010 compared to a benefit of $1.9 billion for 2009. The effective tax rate for 2010 was not meaningful due to the impact of non-deductible goodwill impairment charges of $12.4 billion.

The effective tax rate for 2010 excluding goodwill impairment charges from pre-tax income was 8.3 percent compared to (44.0) percent for 2009, primarily driven by an increase in pre-tax income excluding the non-deductible goodwill impairment charges. Also impacting the 2010 effective tax rate was a

$392 million charge from a U.K. law change referred to below and a $1.7 billion tax benefit from the release of a portion of the deferred tax asset valuation allowance related to acquired capital loss carryforward tax benefits compared to $650 million in 2009. For more information, see Note 21 — Income Taxes to the Consolidated Financial Statements.

During 2010, the U.K. government enacted a tax law change reducing the corporate income tax rate by one percent effective for the 2011 U.K. tax financial year beginning on April 1, 2011. This reduction favorably affects

income tax expense on future U.K. earnings, but also required us to re-measure our U.K. net deferred tax assets using the lower tax rate. The U.K. corporate tax rate reduction resulted in an income tax charge of $392 million in 2010. If future rate reductions were to be enacted as suggested in U.K. Treasury announcements and assuming no change in the deferred tax asset balance, a similar charge to income tax expense for each one percent reduction in the rate would result during each period of enactment. For more information, see Regulatory Matters beginning on page 56.

At December 31, 2010, total assets were $2.3 trillion, an increase of $34.7 billion, or two percent, from December 31, 2009. Average total assets in 2010 decreased $3.5 billion from 2009. At December 31, 2010, total liabilities were $2.0 trillion, an increase of $37.9 billion, or two percent, from December 31, 2009. Average total liabilities for 2010 increased $7.9 billion from 2009.

Period-end balance sheet amounts may vary from average balance sheet amounts due to liquidity and balance sheet management functions, primarily involving our portfolios of highly liquid assets, that are designed to ensure the adequacy of capital while enhancing our ability to manage liquidity requirements for the Corporation and for our customers, and to position the balance sheet in accordance with the Corporation’s risk appetite. The execution of these functions requires the use of balance sheet and capital-related limits including spot, average and risk-weighted asset limits, particularly in our trading businesses. One of our key metrics, Tier 1 leverage ratio, is calculated based on adjusted quarterly average total assets.

Impact of Adopting New Consolidation Guidance

On January 1, 2010, the Corporation adopted new consolidation guidance resulting in the consolidation of certain former qualifying special purpose entities and VIEs that were not recorded on the Corporation’s Consolidated Balance Sheet prior to that date. The adoption of this new consolidation guidance resulted in a net incremental increase in assets of $100.4 billion, including $69.7 billion resulting from consolidation of credit card trusts and $30.7 billion from consolidation of other special purpose entities including multi-seller conduits, and a net increase of $106.7 billion in total liabilities, including $84.4 billion of long-term debt. These amounts are net of retained interests in securitizations held on the Consolidated Balance Sheet at December 31, 2009 and a $10.8 billion increase in the allowance for loan and lease losses, the majority of which relates to credit card receivables. The Corporation recorded a $6.2 billion charge, net-of-tax, to retained earnings on January 1, 2010 for the cumulative effect of the adoption of this new consolidation guidance due primarily to the increase in the allowance for loan and lease losses, and a $116 million charge to accumulated other comprehensive income (OCI). The initial recording of these assets, related allowance for loan and lease losses and liabilities on the Corporation’s Consolidated Balance Sheet had no impact at the date of adoption on consolidated results of operations. For additional detail on the impact of adopting this new consolidation guidance, refer to Note 8 – Securitizations and Other Variable Interest Entities to the Consolidated Financial Statements.

Assets

 

Federal Funds Sold and Securities Borrowed or Purchased Under Agreements to Resell

Federal funds transactions involve lending reserve balances on a short-term basis. Securities borrowed and securities purchased under agreements to resell are utilized to accommodate customer transactions, earn interest rate spreads and obtain securities for settlement. Year-end federal funds sold and securities borrowed or purchased under agreements to resell increased $19.7 billion and average amounts increased $21.2 billion in 2010 compared to 2009, attributable primarily to a favorable rate environment and increased customer activity.

 

Trading Account Assets

Trading account assets consist primarily of fixed-income securities (including government and corporate debt), and equity and convertible instruments. Year-end trading account assets increased $12.5 billion in 2010 compared to 2009 primarily due to the adoption of new consolidation guidance as well as the consolidation of a VIE late in 2010. Average trading account assets decreased slightly in 2010 as compared to 2009.

 

Debt Securities

Debt securities include U.S. Treasury and agency securities, mortgage-backed securities (MBS), principally agency MBS, foreign bonds, corporate bonds and municipal debt. We use the debt securities portfolio primarily to manage interest rate and liquidity risk and to take advantage of market conditions that create more economically attractive returns on these investments. Year-end and average balances of debt securities increased $26.6 billion and $52.9 billion in 2010 compared to 2009 due to agency MBS purchases. For additional information on AFS debt securities, see Market Risk Management – Securities beginning on page 103 and Note 5 – Securities to the Consolidated Financial Statements.

 

Loans and Leases

Year-end and average loans and leases increased $40.3 billion to $940.4 billion and $9.5 billion to $958.3 billion in 2010 compared to 2009. The increase was primarily due to the impact of adopting new consolidation guidance partially offset by continued deleveraging by consumers, tighter underwriting and the elevated levels of liquidity of commercial clients. For a more detailed discussion of the loan portfolio, see Credit Risk Management beginning on page 71 and Note 6 – Outstanding Loans and Leases to the Consolidated Financial Statements.

 

Allowance for Loan and Lease Losses

Year-end and average allowance for loan lease losses increased $4.7 billion and $12.3 billion in 2010 compared to 2009 primarily due to the $10.8 billion of reserves recorded on January 1, 2010 in connection with the adoption of new consolidation guidance and reserve additions in the PCI portfolio throughout 2010. These were partially offset by reserve reductions during 2010 due to the impacts of the improving economy. For a more detailed discussion of the Allowance for Loan and Lease Losses, see Allowance for Loan and Lease Losses beginning on page 97.

 

All Other Assets

Year-end and average other assets decreased $59.7 billion and $71.5 billion in 2010 compared to 2009 driven primarily by the sale of strategic investments and goodwill impairment charges.

Liabilities

 

Deposits

Year-end and average deposits increased $18.8 billion to $1.0 trillion and $7.6 billion to $988.6 billion in 2010 compared to 2009. The increase was attributable to growth in our noninterest-bearing deposits, NOW and money market accounts primarily driven by affluent, and commercial and corporate clients, partially offset by a decrease in time deposits as a result of customer shift to more liquid products.

 

Federal Funds Purchased and Securities Loaned or Sold Under Agreements to Repurchase

Federal funds transactions involve borrowing reserve balances on a short-term basis. Securities loaned and securities sold under agreements to repurchase are collateralized borrowing transactions utilized to accommodate customer transactions, earn interest rate spreads and finance assets on the balance sheet. Year-end and average federal funds purchased and securities loaned or sold under agreements to repurchase decreased $9.8 billion and $16.2 billion in 2010 compared to 2009 primarily due to lower funding requirements.

 

Trading Account Liabilities

Trading account liabilities consist primarily of short positions in fixed-income securities (including government and corporate debt), equity and convertible instruments. Year-end and average trading account liabilities increased $6.5 billion and $19.5 billion in 2010 compared to 2009 due to trading activity in fixed-income securities.

 

Commercial Paper and Other Short-term Borrowings

Commercial paper and other short-term borrowings provide a funding source to supplement deposits in our ALM strategy. Year-end and average commercial paper and other short-term borrowings decreased $9.6 billion to $60.0 billion and decreased $42.1 billion to $76.7 billion in 2010 compared to 2009 as a result of our strengthened liquidity position.

 

Long-term Debt

Year-end and average long-term debt increased by $9.9 billion to $448.4 billion and $43.9 billion to $490.5 billion in 2010 compared to 2009. The increases were attributable to the $84.4 billion impact of new consolidation guidance as discussed on page 29 offset by maturities outpacing new issuances and the Corporation’s strategy to reduce our long-term debt. For additional information on long-term debt, see Note 13 – Long-term Debt to the Consolidated Financial Statements.

 

All Other Liabilities

Year-end all other liabilities increased $22.0 billion in 2010 compared to 2009 driven primarily by adoption of new consolidation guidance.

 

Shareholders’ Equity

Year-end and average shareholders’ equity decreased $3.2 billion and $11.4 billion in 2010 compared to 2009. The decrease was driven primarily by the goodwill impairment charges of $12.4 billion and the impact of adopting new consolidation guidance as we recorded a $6.2 billion charge to retained earnings for newly consolidated loans partially offset by changes in accumulated OCI.

Cash Flows Overview

The Corporation’s operating assets and liabilities support our global markets and lending activities. We believe that cash flows from operations, available cash balances and our ability to generate cash through short- and long-term debt are sufficient to fund our operating liquidity needs. Our investing activities primarily include the AFS securities portfolio and other short-term investments. In addition, our financing activities reflect cash flows related to raising customer deposits and issuing long-term debt as well as preferred and common stock.

Cash and cash equivalents decreased $12.9 billion during 2010 due to repayment and maturities of certain long-term debt and net purchases of AFS securities partially offset by deposit growth. Cash and cash equivalents increased $88.5 billion during 2009 which reflected our strengthened liquidity. The following discussion outlines the significant activities that impacted our cash flows during 2010 and 2009.

During 2010, net cash provided by operating activities was $82.6 billion compared to $129.7 billion in 2009. The more significant adjustments to net

income (loss) to arrive at cash provided by operating activities included the decreases in the provision for credit losses, decreases in trading and derivative assets, and in 2010, the goodwill impairment charges.

During 2010, net cash of $30.3 billion was used in investing activities primarily for net purchases of AFS debt securities. During 2009, net cash provided by investing activities was $157.9 billion, in part, from net sales, pay downs and maturities of AFS securities associated with our management of interest rate risk, and net cash received from the acquisition of Merrill Lynch.

During 2010, the net cash used in financing activities of $65.4 billion primarily reflected the net decreases in long-term debt as maturities outpaced new issuances. During 2009, net cash used in financing activities was $199.6 billion reflecting the declines in commercial paper and other short-term borrowings due, in part to lower Federal Home Loan Bank (FHLB) balances as a result of our strong liquidity position and a decrease in long-term debt as maturities outpaced new issuances.

 

Representations and Warranties Liability

On December 31, 2010, we reached agreements with Freddie Mac (FHLMC) and Fannie Mae (FNMA), collectively the GSEs, where the Corporation paid $2.8 billion to resolve repurchase claims involving first-lien residential mortgage loans sold directly to the GSEs by entities related to legacy Countrywide (Countrywide). The agreement with FHLMC extinguishes all outstanding and potential mortgage repurchase and make-whole claims arising out of any alleged breaches of selling representations and warranties related to loans sold directly by legacy Countrywide to FHLMC through 2008, subject to certain exceptions we do not believe will be material. The agreement with FNMA substantially resolves the existing pipeline of repurchase and make-whole claims outstanding as of September 20, 2010 arising out of alleged breaches of selling representations and warranties related to loans sold directly by legacy Countrywide to FNMA. These agreements with the GSEs do not cover outstanding and potential mortgage repurchase and make-whole claims arising out of any alleged breaches of selling representations and warranties to legacy Bank of America first-lien residential mortgage loans sold directly to the GSEs or other loans sold directly to the GSEs other than described above, loan servicing obligations, other contractual obligations or loans contained in private-label securitizations.

As a result of these agreements and associated adjustments made to the representations and warranties liability for other loans sold directly to the GSEs and not covered by the agreements, the Corporation recorded a provision of $3.0 billion during the fourth quarter of 2010. We believe that our remaining exposure to representations and warranties for first-lien residential mortgage loans sold directly to the GSEs has been accounted for as a result of these agreements and the associated adjustments to our recorded liability for representations and warranties for first-lien residential mortgage for loans sold directly to the GSEs and not covered by the agreements as discussed above. We believe our predictive repurchase models, utilizing our historical repurchase experience with the GSEs while considering current developments, including the recent agreements, projections of future defaults as well as certain assumptions regarding economic conditions, home prices and other matters, allows us to reasonably estimate the liability for obligations under representations and warranties on loans sold to the GSEs. However, future provisions for representations and warranties liability to the GSEs may be affected if actual experience is different from our historical experience with the GSEs or our projections of future defaults, and assumptions regarding economic conditions, home prices and other matters, that are incorporated in the provision calculation.

Although our experience with non-GSE claims remains limited, we expect additional activity in this area going forward and that the volume of repurchase claims from monolines, whole-loan investors and investors in private-label securitizations could increase in the future. It is reasonably possible that future losses may occur, and our estimate is that the upper range of possible loss related to non-GSE sales could be $7 billion to $10 billion over existing accruals. This estimate does not represent a probable loss, is based on currently available information, significant judgment, and a number of assumptions that are subject to change. A significant portion of this estimate relates to loans originated through legacy Countrywide, and the repurchase liability is generally limited to the original seller of the loan. Future provisions and possible loss or range of loss may be impacted if actual results are different from our assumptions regarding economic conditions, home prices and other matters and may vary by counterparty. The resolution of the repurchase claims process with the non-GSE counterparties will likely be a protracted process, and we will vigorously contest any request for repurchase if we conclude that a valid basis for the repurchase claim does not exist. For additional information about representations and warranties, see Note 9 – Representations and Warranties Obligations and Corporate Guarantees to the Consolidated Financial Statements and Representations and Warranties beginning on page 52.

Goodwill

In 2010, we recorded a $10.4 billion goodwill impairment charge in Global Card Services and a $2.0 billion goodwill impairment charge in Home Loans & Insurance. These goodwill impairment charges are non-cash, non-tax deductible and have no impact on our reported Tier 1 and tangible equity ratios. Our consumer and small business card products, including the debit card business, are part of an integrated platform within Global Card Services. Based on the provisions of the Financial Reform Act which limit the interchange fees that may be charged with respect to electronic debit interchange, we estimate a revenue loss, beginning in the third quarter of 2011, of approximately $2.0 billion annually based on current volumes and assuming limited mitigation within this segment. Accordingly, we performed a goodwill impairment analysis during the three months ended September 30, 2010. This analysis indicated that the implied fair value of the goodwill in Global Card Services was less than the carrying value, and accordingly, we recorded a $10.4 billion charge to reduce the carrying value to fair value.

During the three months ended December 31, 2010, we performed a goodwill impairment analysis for Home Loans & Insurance as it was likely that there had been a decline in its fair value as a result of increased uncertainties, including existing and potential litigation exposure and other related risks, higher servicing costs including loss mitigation efforts, foreclosure related issues and the redeployment of centralized sales resources to address servicing needs. This analysis indicated that the implied fair value of the goodwill in Home Loans & Insurance was less than the carrying value, and accordingly, we recorded a $2 billion charge to reduce the carrying value of goodwill in Home Loans & Insurance.

For additional information on the goodwill impairment charges, see Complex Accounting Estimates — Goodwill and Intangible Assets beginning on page 110 and Note 10 — Goodwill and Intangible Assets to the Consolidated Financial Statements.

 

Review of Foreclosure Processes

On October 1, 2010, we voluntarily stopped taking residential mortgage foreclosure proceedings to judgment in states where foreclosure requires a court order following a legal proceeding (judicial states). On October 8, 2010, we stopped foreclosure sales in all states in order to complete an assessment of the related business processes. These actions generally did not affect the initiation and processing of foreclosures prior to judgment, or sale of vacant real estate owned properties. We took these precautionary steps in order to ensure our processes for handling foreclosures include the appropriate controls and quality assurance. Our review has involved an assessment of the foreclosure process, including a review of completed foreclosure affidavits in pending proceedings.

As a result of that review, we identified and implemented process and control enhancements, and we intend to monitor ongoing quality results of each process. The process and control enhancements implemented as a result of our review are intended to strengthen the controls related to preparation, execution and notarization of affidavits in judicial states and strengthen our oversight of lawyers in the attorney network who conduct foreclosure proceedings on our behalf, both in judicial states and in states where foreclosures are handled without judicial supervision (non-judicial states). This oversight includes a periodic review of a sample of foreclosure files maintained by these attorneys, and on-site reviews of law firms in the attorney network. In addition, our process and control enhancements for both judicial and non-judicial states include strengthening the controls related to the preparation and execution of other foreclosure loan documentation, including notices of default and pre-foreclosure loss mitigation affidavits, as well as enhanced associate training. After these enhancements were put in place, we resumed foreclosure sales in most non-judicial states during the fourth quarter of 2010, and expect sales to resume in the remaining non-judicial states in the

first quarter of 2011. We also commenced a rolling process of preparing, as necessary, affidavits of indebtedness in pending foreclosure proceedings in order to resume the process of taking these foreclosure proceedings to judgment in judicial states, beginning with properties believed to be vacant, and with properties for which the mortgage was originated on a non-owner-occupied basis. The process of preparing affidavits in pending proceedings is expected to continue in the first quarter of 2011, and could result in prolonged adversary proceedings that delay certain foreclosure sales.

Law enforcement authorities in all 50 states and the U.S. Department of Justice (DOJ) and other federal agencies, including certain bank supervisory authorities, continue to investigate alleged irregularities in the foreclosure practices of residential mortgage servicers. Authorities have publicly stated that the scope of the investigations extends beyond foreclosure documentation practices to include mortgage loan modification and loss mitigation practices. The Corporation is cooperating with these investigations and is dedicating significant resources to address these issues. The current environment of heightened regulatory scrutiny has the potential to subject the Corporation to inquiries or investigations that could significantly adversely affect its reputation. Such investigations by state and federal authorities, as well as any other governmental or regulatory scrutiny of our foreclosure processes, could result in material fines, penalties, equitable remedies (including requiring default servicing or other process changes), or other enforcement actions, and result in significant legal costs in responding to governmental investigations and additional litigation.

While we cannot predict the ultimate impact of the temporary delay in foreclosure sales, or any issues that may arise as a result of alleged irregularities with respect to previously completed foreclosure activities, we may be subject to additional borrower and non-borrower litigation and governmental and regulatory scrutiny related to our past and current foreclosure activities. This scrutiny may extend beyond our pending foreclosure matters to issues arising out of alleged irregularities with respect to previously completed foreclosure activities. Our costs increased in the fourth quarter of 2010 and we expect that additional costs incurred in connection with our foreclosure process assessment will continue into 2011 due to the additional resources necessary to perform the foreclosure process assessment, to revise affidavit filings and to implement other operational changes. This will likely result in higher noninterest expense, including higher servicing costs and legal expenses, in Home Loans & Insurance. It is also possible that the temporary suspension in foreclosure sales may result in additional costs and expenses, including costs associated with the maintenance of properties or possible home price declines while foreclosures are delayed. In addition, required process changes could increase our default servicing costs over the longer term. Finally, the time to complete foreclosure sales may increase temporarily, which may result in an increase in nonperforming loans and servicing advances and may impact the collectability of such advances and the value of our mortgage servicing rights (MSR) asset, MBS and real estate owned properties. An increase in the time to complete foreclosure sales also may inflate the amount of highly delinquent loans in the Corporation’s mortgage statistics, result in increasing levels of consumer nonperforming loans, and could have a dampening effect on net interest margin as nonperforming assets increase. Accordingly, delays in foreclosure sales, including any delays beyond those currently anticipated, our continued process enhancements and any issues that may arise out of alleged irregularities in our foreclosure process could increase the costs associated with our mortgage operations.

Loan sales have not been materially impacted by the temporary delay in foreclosure sales or the review of our foreclosure process. However, delays in foreclosure sales could negatively impact the valuation of our real estate owned properties and MBS that are serviced by us. With respect to agency MBS, while there would be no credit impairment to security holders due to the guarantee provided by the agencies, the valuation of certain MBS could be negatively affected under certain scenarios due to changes in the timing of cash flows. The impact on agency MBS depends on, among other factors, how

long the underlying loans are affected by foreclosure delays and would vary among securities. With respect to non-agency MBS, under certain scenarios the timing and amount of cash flows could be negatively affected. The ultimate impact on the non-agency MBS depends on the same factors that impact agency MBS, as well as the level of credit enhancement, including subordination. In addition, as a result of our foreclosure process assessment and related control enhancements that we have implemented, there may continue to be delays in foreclosure sales, including a continued backlog of foreclosure proceedings, and evictions from real estate owned properties.

 

Certain Servicing-related Issues

The Corporation and its legacy companies have securitized, and continue to securitize, a significant portion of the residential mortgage loans that we have originated or acquired. The Corporation services a large portion of the loans it or its subsidiaries have securitized and also services loans on behalf of third-party securitization vehicles. In addition to identifying specific servicing criteria, pooling and servicing arrangements entered into in connection with a securitization or whole loan sale typically impose standards of care on the servicer, with respect to its activities, that may include the obligation to adhere to the accepted servicing practices of prudent mortgage lenders and/or to exercise the degree of care and skill that the servicer employs when servicing loans for its own account. Many non-agency residential mortgage-backed securitizations and whole loan servicing agreements also require the servicer to indemnify the trustee or other investor for or against failures by the servicer to perform its servicing obligations or acts or omissions that involve willful malfeasance, bad faith or gross negligence in the performance of, or reckless disregard of, the servicer’s duties.

Servicing agreements with the GSEs generally provide the GSEs with broader rights relative to the servicer than are found in servicing agreements with private investors. For example, each GSE typically has the right to demand that the servicer repurchase loans that breach the seller’s representations and warranties made in connection with the initial sale of the loans even if the servicer was not the seller. The GSEs also reserve the contractual right to demand indemnification or loan repurchase for certain servicing breaches although we believe that repurchase or indemnification demands solely for servicing breaches are rare. In addition, our agreements with the GSEs and their first mortgage seller/servicer guides provide for timelines to resolve delinquent loans through workout efforts or liquidation, if necessary. In the fourth quarter of 2010, we recorded an expense of $230 million for compensatory fees that we expect to be assessed by the GSEs as a result of foreclosure delays.

With regard to alleged irregularities in foreclosure process-related activities, a servicer may incur costs or losses if the servicer elects or is required to re-execute or re-file documents or take other action in its capacity as a servicer in connection with pending or completed foreclosures. The servicer also may incur costs or losses if the validity of a foreclosure action is challenged by a borrower. If a court were to overturn a foreclosure because of errors or deficiencies in the foreclosure process, the servicer may have liability to a title insurer of the property sold in foreclosure. These costs and liabilities may not be reimbursable to the servicer. A servicer may also incur costs or losses associated with private-label securitizations or other loan investors relating to delays or alleged deficiencies in processing documents necessary to comply with state law governing foreclosures.

The servicer may be subject to deductions by insurers for mortgage insurance or guarantee benefits relating to delays or alleged deficiencies. Additionally, if the servicer commits a material breach of its servicing obligations that is not cured within specified timeframes, including those related to default servicing and foreclosure, it could be terminated as servicer under servicing agreements under certain circumstances. Any of these actions may harm the servicer’s reputation, increase its servicing costs or otherwise adversely affect its financial condition and results of operations.