10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[ü] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2010

or

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from          to         

Commission file number:

1-6523

Exact Name of Registrant as Specified in its Charter:

Bank of America Corporation

State or Other Jurisdiction of Incorporation or Organization:

Delaware

IRS Employer Identification Number:

56-0906609

Address of Principal Executive Offices:

Bank of America Corporate Center

100 N. Tryon Street

Charlotte, North Carolina 28255

Registrant’s telephone number, including area code:

(704) 386-5681

Former name, former address and former fiscal year, if changed since last report:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ü    No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  ü    No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one).

 

Large accelerated filer  ü    Accelerated filer           Non-accelerated filer        Smaller reporting company
 

(do not check if a smaller

    reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

Yes        No  ü

On April 30, 2010, there were 10,032,945,667 shares of Bank of America Corporation Common Stock outstanding.

 

 

 

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Table of Contents

Bank of America Corporation

 

March 31, 2010 Form 10-Q

INDEX

 

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

Consolidated Statement of Income for the Three Months
Ended March 31, 2010 and 2009

   3  
     

Consolidated Balance Sheet at March 31, 2010 and
December 31, 2009

   4  
     

Consolidated Statement of Changes in Shareholders’
Equity for the Three Months Ended March 31, 2010 and
2009

   6  
     

Consolidated Statement of Cash Flows for the Three
Months Ended March 31, 2010 and 2009

   7  
     

Notes to Consolidated Financial Statements

   8  
   Item 2.    Management’s Discussion and Analysis of Financial
Condition and Results of Operations
    
     

Table of Contents

   78  
     

Discussion and Analysis

   79  
   Item 3.

 

   Quantitative and Qualitative Disclosures about Market
Risk
   181  
   Item 4.    Controls and Procedures    181  
                    
          
Part II.
Other Information
          
   Item 1.

 

  

Legal Proceedings

 

   181

 

 
   Item 1A.

 

  

Risk Factors

 

   181

 

 
   Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    182  
   Item 5.    Other Information    182  
   Item 6.    Exhibits    183  
   Signature    184  
   Index to Exhibits    185  

 

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Table of Contents

Part 1. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

  Bank of America Corporation and Subsidiaries

  Consolidated Statement of Income

 
     Three Months Ended March 31
      
  (Dollars in millions, except per share information)         2010     2009
 

  Interest income

    

Interest and fees on loans and leases

   $ 13,475      $ 13,349   

Interest on debt securities

     3,116        3,830   

Federal funds sold and securities borrowed or purchased under agreements to resell

     448        1,155   

Trading account assets

     1,743        2,428   

Other interest income

     1,097        1,394   
 

Total interest income

     19,879        22,156   
 

  Interest expense

    

Deposits

     1,122        2,543   

Short-term borrowings

     818        2,221   

Trading account liabilities

     660        579   

Long-term debt

     3,530        4,316   
 

Total interest expense

     6,130        9,659   
 

Net interest income

     13,749        12,497   

  Noninterest income

    

Card income

     1,976        2,865   

Service charges

     2,566        2,533   

Investment and brokerage services

     3,025        2,963   

Investment banking income

     1,240        1,055   

Equity investment income

     625        1,202   

Trading account profits

     5,236        5,201   

Mortgage banking income

     1,500        3,314   

Insurance income

     715        688   

Gains on sales of debt securities

     734        1,498   

Other income

     1,204        2,313   

Other-than-temporary impairment losses on available-for-sale debt securities:

    

Total other-than-temporary impairment losses

     (1,819     (714)  

Less: Portion of other-than-temporary impairment losses recognized in other comprehensive income

     1,218        343   
 

Net impairment losses recognized in earnings on available-for-sale debt securities

     (601     (371)  
 

Total noninterest income

     18,220        23,261   
 

Total revenue, net of interest expense

     31,969        35,758   

  Provision for credit losses

     9,805        13,380   

  Noninterest expense

    

Personnel

     9,158        8,768   

Occupancy

     1,172        1,128   

Equipment

     613        622   

Marketing

     487        521   

Professional fees

     517        405   

Amortization of intangibles

     446        520   

Data processing

     648        648   

Telecommunications

     330        327   

Other general operating

     3,883        3,298   

Merger and restructuring charges

     521        765   
 

Total noninterest expense

     17,775        17,002   
 

Income before income taxes

     4,389        5,376   

  Income tax expense

     1,207        1,129   
 

Net income

   $ 3,182      $ 4,247   
 

  Preferred stock dividends

     348        1,433   
 

Net income applicable to common shareholders

   $ 2,834      $ 2,814   
 

  Per common share information

    

Earnings

   $ 0.28      $ 0.44   

Diluted earnings

     0.28        0.44   

Dividends paid

     0.01        0.01   
 

  Average common shares issued and outstanding (in thousands)

     9,177,468        6,370,815   
 

  Average diluted common shares issued and outstanding (in thousands)

     10,005,254        6,393,407   
 

  See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

  Bank of America Corporation and Subsidiaries

  Consolidated Balance Sheet

     March 31    December 31
  (Dollars in millions)    2010    2009
 

  Assets

     

  Cash and cash equivalents

   $ 144,794       $ 121,339   

  Time deposits placed and other short-term investments

     20,256         24,202   

  Federal funds sold and securities borrowed or purchased under agreements to resell (includes $71,300 and $57,775 measured at fair value and $191,346 and $189,844 pledged as collateral)

     197,038         189,933   

  Trading account assets (includes $39,131 and $30,921 pledged as collateral)

     206,018         182,206   

  Derivative assets

     77,577         80,689   

  Debt securities:

     

Available-for-sale (includes $141,111 and $122,708 pledged as collateral)

     316,020         301,601   

Held-to-maturity, at cost (fair value – $340 and $9,684)

     340         9,840   
 

Total debt securities

     316,360         311,441   
 

  Loans and leases (includes $4,087 and $4,936 measured at fair value and $106,464 and $118,113 pledged as collateral)

     976,042         900,128   

  Allowance for loan and lease losses

     (46,835)        (37,200)  
 

Loans and leases, net of allowance

     929,207         862,928   
 

  Premises and equipment, net

     15,147         15,500   

  Mortgage servicing rights (includes $18,842 and $19,465 measured at fair value)

     19,146         19,774   

  Goodwill

     86,305         86,314   

  Intangible assets

     11,548         12,026   

  Loans held-for-sale (includes $25,387 and $32,795 measured at fair value)

     35,386         43,874   

  Customer and other receivables

     83,636         81,996   

  Other assets (includes $63,070 and $55,909 measured at fair value)

     196,282         191,077   
 

Total assets

   $ 2,338,700       $ 2,223,299   
 
 

  Assets of consolidated VIEs included in total assets above (substantially all pledged as collateral)

     
 

  Trading account assets

   $ 11,826      
 

  Derivative assets

     4,194      
 

  Available-for-sale debt securities

     12,074      
 

  Loans and leases

     129,432      
 

  Allowance for loan and lease losses

     (11,140)     
      
 

Loans and leases, net of allowance

     118,292      
      
 

  Loans held-for-sale

     5,471      
 

  All other assets

     9,637      
      
 

Total assets of consolidated VIEs

   $ 161,494      
      
 

 

  See accompanying Notes to Consolidated Financial Statements.

     

 

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Table of Contents

  Bank of America Corporation and Subsidiaries

  Consolidated Balance Sheet (continued)

     March 31    December 31
  (Dollars in millions)    2010    2009
 

  Liabilities

     

  Deposits in domestic offices:

     

Noninterest-bearing

   $ 255,470       $ 269,615   

Interest-bearing (includes $1,717 and $1,663 measured at fair value)

     643,943         640,789   

  Deposits in foreign offices:

     

Noninterest-bearing

     5,614         5,489   

Interest-bearing

     71,075         75,718   
 

Total deposits

     976,102         991,611   
 

  Federal funds purchased and securities loaned or sold under agreements to repurchase (includes $46,479 and $37,325 measured at fair value)

     270,601         255,185   

  Trading account liabilities

     82,532         65,432   

  Derivative liabilities

     46,927         43,728   

  Commercial paper and other short-term borrowings (includes $7,021 and $813 measured at fair value)

     85,406         69,524   

  Accrued expenses and other liabilities (includes $25,991 and $19,015 measured at fair value and $1,521 and $1,487 of reserve for unfunded lending commitments)

     135,656         127,854   

  Long-term debt (includes $48,401 and $45,451 measured at fair value)

     511,653         438,521   
 

Total liabilities

     2,108,877         1,991,855   
 

  Commitments and contingencies (Note 8 – Securitizations and Other Variable Interest Entities and Note 11 – Commitments and Contingencies)

     

  Shareholders’ equity

     

  Preferred stock, $0.01 par value; authorized – 100,000,000 shares; issued and outstanding – 3,960,660 and 5,246,660 shares

     17,964         37,208   

  Common stock and additional paid-in capital, $0.01 par value; authorized – 11,300,000,000 and 10,000,000,000 shares; issued and outstanding – 10,032,001,150 and 8,650,243,926 shares

     149,048         128,734   

  Retained earnings

     67,811         71,233   

  Accumulated other comprehensive income (loss)

     (4,929)        (5,619)  

  Other

     (71)        (112)  
 

Total shareholders’ equity

     229,823         231,444   
 

Total liabilities and shareholders’ equity

   $ 2,338,700       $ 2,223,299   
 
 

  Liabilities of consolidated VIEs included in total liabilities above

     
 

  Commercial paper and other short-term borrowings (includes $14,490 of non-recourse liabilities)

   $ 21,631      
 

  Long-term debt (includes $86,023 of non-recourse debt)

     90,329      
 

  All other liabilities (includes $2,561 of non-recourse liabilities)

     5,135      
      
 

Total liabilities of consolidated VIEs

   $ 117,095      
      
 

 

  See accompanying Notes to Consolidated Financial Statements.

     

 

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Table of Contents

  Bank of America Corporation and Subsidiaries

  Consolidated Statement of Changes in Shareholders’ Equity

  (Dollars in millions, shares in thousands)    Preferred    

Common Stock and
Additional Paid-in

Capital

   Retained     Accumulated
Other
Comprehensive
    Other     Total
Shareholders’
Equity
   

Comprehensive
Income

(Loss)

   Stock     Shares    Amount    Earnings     Income (Loss)        

  Balance, December 31, 2008

   $ 37,701      5,017,436    $ 76,766    $ 73,823      $ (10,825   $ (413   $ 177,052         

  Cumulative adjustment for accounting change – Other-than-temporary impairments on debt securities

             71        (71       -     

  Net income

             4,247            4,247      $ 4,247   

  Net change in available-for-sale debt and marketable equity securities

               (811       (811     (811)  

  Net change in foreign currency translation adjustments

               66          66        66   

  Net change in derivatives

               412          412        412   

  Employee benefit plan adjustments

               65          65        65   

  Dividends paid:

                  

Common

             (64         (64  

Preferred

             (1,033         (1,033  

  Issuance of preferred stock and stock warrants

     26,800           3,200            30,000     

  Stock issued in acquisition

     8,605      1,375,476      20,504            29,109     

  Common stock issued under employee plans and related tax effects

     8,038      394          108        502     

  Other

     171                    (167                     4         

  Balance, March 31, 2009

   $ 73,277      6,400,950    $ 100,864    $ 76,877      $ (11,164   $ (305   $ 239,549      $ 3,979   

  Balance, December 31, 2009

   $ 37,208      8,650,244    $ 128,734    $ 71,233      $ (5,619   $ (112   $ 231,444     

 

  Cumulative adjustment for accounting change – Consolidation of certain variable interest entities

             (6,154     (116       (6,270   $ (116)  

  Net income

             3,182            3,182        3,182   

  Net change in available-for-sale debt and marketable equity securities

               944          944        944   

  Net change in foreign currency translation adjustments

               (43       (43     (43)  

  Net change in derivatives

               (161       (161     (161)  

  Employee benefit plan adjustments

               66          66        66   

  Dividends paid:

                  

Common

             (102         (102  

Preferred

             (348         (348  

  Common stock issued under employee plans and related tax effects

     95,757      1,070          36        1,106     

  Common Equivalent Securities conversion

     (19,244   1,286,000      19,244            -     

  Other

                                         5        5         

  Balance, March 31, 2010

   $ 17,964      10,032,001    $ 149,048    $ 67,811      $ (4,929   $ (71   $ 229,823      $ 3,872   

  See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

 Bank of America Corporation and Subsidiaries

 Consolidated Statement of Cash Flows

     Three Months Ended March 31
 (Dollars in millions)    2010     2009

 Operating activities

    

 Net income

   $ 3,182      $ 4,247   

 Reconciliation of net income to net cash provided by operating activities:

    

Provision for credit losses

     9,805        13,380   

Gains on sales of debt securities

     (734     (1,498)  

Depreciation and premises improvements amortization

     566        578   

Amortization of intangibles

     446        520   

Deferred income tax expense

     736        486   

Net decrease in trading and derivative instruments

     6,770        27,049   

Net decrease in other assets

     5,723        28,304   

Net increase (decrease) in accrued expenses and other liabilities

     6,115        (10,870)  

Other operating activities, net

     (8,733     (7,399)  

Net cash provided by operating activities

     23,876        54,797   

 Investing activities

    

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

     4,023        19,336   

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

     (7,105     68,072   

 Proceeds from sales of available-for-sale debt securities

     35,022        53,309   

 Proceeds from paydowns and maturities of available-for-sale debt securities

     18,690        13,871   

 Purchases of available-for-sale debt securities

     (64,899     (6,576)  

 Proceeds from maturities of held-to-maturity debt securities

     -        280   

 Proceeds from sales of loans and leases

     857        565   

 Other changes in loans and leases, net

     12,990        (6,636)  

 Net purchases of premises and equipment

     (213     (531)  

 Proceeds from sales of foreclosed properties

     751        417   

 Cash received upon acquisition, net

     -        31,804   

 Cash received due to impact of adoption of new consolidation guidance

     2,807        -   

 Other investing activities, net

     2,884        2,700   

Net cash provided by investing activities

     5,807        176,611   

 Financing activities

    

 Net decrease in deposits

     (15,509     (27,596)  

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

     15,416        (71,444)  

 Net decrease in commercial paper and other short-term borrowings

     (6,255     (10,135)  

 Proceeds from issuance of long-term debt

     23,280        24,246   

 Retirement of long-term debt

     (22,750     (34,711)  

 Proceeds from issuance of preferred stock

     -        30,000   

 Cash dividends paid

     (450     (1,097)  

 Excess tax benefits of share-based payments

     45        -   

 Other financing activities, net

     (11     11   

Net cash used in financing activities

     (6,234     (90,726)  

 Effect of exchange rate changes on cash and cash equivalents

     6        (79)  

Net increase in cash and cash equivalents

     23,455        140,603   

 Cash and cash equivalents at January 1

     121,339        32,857   

Cash and cash equivalents at March 31

   $ 144,794        $173,460   

 During the three months ended March 31, 2009, the Corporation transferred credit card loans of $8.5 billion and the related allowance for loan and lease losses of $750 million in exchange for a $7.8 billion held-to-maturity debt security that was issued by the Corporation’s U.S. credit card securitization trust and retained by the Corporation.

 The fair values of noncash assets acquired and liabilities assumed in the Merrill Lynch acquisition were $619.0 billion and $626.7 billion as of March 31, 2009.

 Approximately 1.4 billion shares of common stock valued at approximately $20.5 billion and 376 thousand shares of preferred stock valued at approximately $8.6 billion were issued in connection with the Merrill Lynch acquisition.

 See accompanying Notes to Consolidated Financial Statements.

 

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Bank of America Corporation and Subsidiaries

Notes to Consolidated Financial Statements

 

NOTE 1 – Summary of Significant Accounting Principles

Bank of America Corporation and its subsidiaries (the Corporation), a financial holding company, provides a diverse range of financial services and products throughout the U.S. and in certain international markets. When used in this report, the meaning of the words “the Corporation” may refer to the Corporation individually, the Corporation and its subsidiaries, or certain of the Corporation’s subsidiaries or affiliates. The Corporation conducts these activities through its banking and nonbanking subsidiaries. At March 31, 2010, the Corporation operated its banking activities primarily under two charters: Bank of America, National Association (Bank of America, N.A.) and FIA Card Services, N.A. In connection with certain acquisitions including Merrill Lynch & Co. Inc. (Merrill Lynch) and Countrywide Financial Corporation (Countrywide), the Corporation acquired banking subsidiaries that have been merged into Bank of America, N.A. with no impact on the Consolidated Financial Statements of the Corporation. On January 1, 2009, the Corporation acquired Merrill Lynch through its merger with a subsidiary of the Corporation in exchange for common and preferred stock with a value of $29.1 billion.

 

 

Principles of Consolidation and Basis of Presentation

 

The Consolidated Financial Statements include the accounts of the Corporation and its majority-owned subsidiaries, and those variable interest entities (VIEs) where the Corporation is the primary beneficiary. Intercompany accounts and transactions have been eliminated. Results of operations, assets and liabilities of acquired companies are included from the dates of acquisition. Results of operations, assets and liabilities of VIEs are included from the date that the Corporation became the primary beneficiary. Assets held in an agency or fiduciary capacity are not included in the Consolidated Financial Statements. The Corporation accounts for investments in companies for which it owns a voting interest of 20 percent to 50 percent and for which it has the ability to exercise significant influence over operating and financing decisions using the equity method of accounting. These investments are included in other assets and are subject to impairment testing. The Corporation’s proportionate share of income or loss is included in equity investment income.

The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect reported amounts and disclosures. Realized results could differ from those estimates and assumptions.

These unaudited Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements included in the Corporation’s 2009 Annual Report on Form 10-K. The nature of the Corporation’s business is such that the results of any interim period are not necessarily indicative of results for a full year. In the opinion of management, normal recurring adjustments necessary for a fair statement of the interim period results have been made. Certain prior period amounts have been reclassified to conform to current period presentation.

 

 

New Accounting Pronouncements

 

On January 1, 2010, the Corporation adopted new Financial Accounting Standards Board (FASB) accounting guidance on transfers of financial assets and consolidation of VIEs. This new accounting guidance revises sale accounting criteria for transfers of financial assets, including elimination of the concept of and accounting for qualifying special purpose entities (QSPEs), and significantly changes the criteria for consolidation of a VIE. The adoption of this new accounting guidance resulted in the consolidation of certain VIEs that previously were QSPEs and VIEs that were not recorded on the Corporation’s Consolidated Balance Sheet prior to January 1, 2010. The adoption of this new accounting guidance resulted in a net incremental increase in assets of $100.4 billion and a net increase in liabilities of $106.7 billion. 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 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 accounting guidance, which resulted principally from the increase in the allowance for loan and lease losses, and a $116 million charge to accumulated other comprehensive income (OCI). Initial recording of these assets, related allowance and liabilities on the Corporation’s Consolidated Balance Sheet had no impact at the date of adoption on consolidated results of operations.

 

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Application of the new consolidation guidance has been deferred indefinitely for certain investment funds managed on behalf of third parties if the Corporation does not have an obligation to fund losses that could potentially be significant to these funds. Application of the new consolidation guidance has also been deferred if the funds must comply with guidelines similar to those included in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. These funds, which include the cash funds managed within Global Wealth & Investment Management (GWIM), will continue to be evaluated for consolidation in accordance with the prior guidance.

On January 1, 2010, the Corporation elected to early adopt, on a prospective basis new FASB accounting guidance stating that troubled debt restructuring (TDR) accounting cannot be applied to individual loans within purchased credit-impaired loan pools. The adoption of this guidance did not have a material impact on the Corporation’s financial condition or results of operations.

On January 1, 2010, the Corporation adopted new FASB accounting guidance that requires disclosure of gross transfers into and out of Level 3 of the fair value hierarchy and adds a requirement to disclose significant transfers between Level 1 and Level 2 of the fair value hierarchy. The new accounting guidance also clarifies existing disclosure requirements regarding the level of disaggregation of fair value measurements and inputs, and valuation techniques. The enhanced disclosures required under this new guidance are included in Note 14 – Fair Value Measurements.

In March 2010, the FASB issued new accounting guidance on embedded credit derivatives. This new accounting guidance clarifies the scope exception for embedded credit derivatives and defines which embedded credit derivatives should be evaluated for bifurcation and separate accounting. The adoption of this new accounting guidance in the third quarter of 2010 is not expected to have a material impact on the Corporation’s financial position or results of operations.

 

 

Significant Accounting Policies

 

Securities Financing Agreements

Securities borrowed or purchased under agreements to resell and securities loaned or sold under agreements to repurchase (securities financing agreements) are treated as collateralized financing transactions. These agreements are recorded at the amounts at which the securities were acquired or sold plus accrued interest, except for certain securities financing agreements that the Corporation accounts for under the fair value option. Changes in the value of securities financing agreements that are accounted for under the fair value option are recorded in other income. For more information on securities financing agreements that the Corporation accounts for under the fair value option, see Note 14 – Fair Value Measurements.

The Corporation’s policy is to obtain possession of collateral with a market value equal to or in excess of the principal amount loaned under resale agreements. To ensure that the market value of the underlying collateral remains sufficient, collateral is generally valued daily and the Corporation may require counterparties to deposit additional collateral or may return collateral pledged when appropriate.

Substantially all securities financing agreements are transacted under master repurchase agreements which give the Corporation, in the event of default, the right to liquidate securities held and to offset receivables and payables with the same counterparty. The Corporation offsets securities financing agreements with the same counterparty on the Consolidated Balance Sheet where it has such a master agreement. In transactions where the Corporation acts as the lender in a securities lending agreement and receives securities that can be pledged or sold as collateral, it recognizes an asset on the Consolidated Balance Sheet at fair value, representing the securities received, and a liability for the same amount, representing the obligation to return those securities.

 

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At the end of certain quarterly periods during the three years ended December 31, 2009, the Corporation had recorded certain sales of agency mortgage-backed securities (MBS) which, based on a more recent internal review and interpretation, should have been recorded as secured borrowings. These periods and amounts were as follows: March 31, 2009 – $573 million; September 30, 2008 – $10.7 billion; December 31, 2007 – $1.8 billion; and March 31, 2007 – $4.5 billion. As the transferred securities were recorded at fair value in trading account assets, the change would have had no impact on consolidated results of operations. Had the sales been recorded as secured borrowings, trading account assets and federal funds purchased and securities loaned or sold under agreements to repurchase would have increased by the amount of the transactions, however, the increase in all cases was less than 0.7 percent of total assets or total liabilities. Accordingly, the Corporation believes that these transactions did not have a material impact on the Corporation’s Consolidated Balance Sheet.

In repurchase transactions, typically, the termination date for a repurchase agreement is before the maturity date of the underlying security. However, in certain situations, the Corporation may enter into repurchase agreements where the termination date of the repurchase transaction is the same as the maturity date of the underlying security and these transactions are referred to as “repo-to-maturity” (RTM) transactions. The Corporation enters into RTM transactions only for high quality, very liquid securities such as U.S. Treasury securities or securities issued by government-sponsored entities. The Corporation accounts for RTM transactions as sales in accordance with GAAP, and accordingly, de-recognizes the securities from the balance sheet and recognizes a gain or loss in the Consolidated Statement of Income. At March 31, 2010 and December 31, 2009, the Corporation had outstanding RTM transactions of $3.0 billion and $6.5 billion that had been accounted for as sales.

Variable Interest Entities

The entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and consolidates the VIE. Prior to 2010, the primary beneficiary was the entity that would absorb a majority of the economic risks and rewards of the VIE based on an analysis of projected probability-weighted cash flows. In accordance with the new accounting guidance on consolidation of VIEs and transfers of financial assets (new consolidation guidance) effective January 1, 2010, the Corporation is deemed to have a controlling financial interest and is the primary beneficiary of a VIE if it has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. On a quarterly basis, the Corporation reassesses whether it has a controlling financial interest in and is the primary beneficiary of a VIE. The quarterly reassessment process considers whether the Corporation has acquired or divested the power to direct the activities of the VIE through changes in governing documents or other circumstances. The reassessment also considers whether the Corporation has acquired or disposed of a financial interest that could be significant to the VIE, or whether an interest in the VIE has become significant or is no longer significant. The consolidation status of the VIEs with which the Corporation is involved may change as a result of such reassessments.

Retained interests in securitized assets are initially recorded at fair value. Prior to 2010, retained interests were initially recorded at an allocated cost basis in proportion to the relative fair values of the assets sold and interests retained. In addition, the Corporation may invest in debt securities issued by unconsolidated VIEs. Quoted market prices are primarily used to obtain fair values of these debt securities, which are recorded in available-for-sale (AFS) debt securities or trading account assets. Generally, quoted market prices for retained residual interests are not available, therefore, the Corporation estimates fair values based on the present value of the associated expected future cash flows. This may require management to estimate credit losses, prepayment speeds, forward interest yield curves, discount rates and other factors that impact the value of retained interests. Retained residual interests in unconsolidated securitization trusts are recorded in trading account assets or other assets with changes in fair value recorded in income. The Corporation may also purchase credit protection from unconsolidated VIEs in the form of credit default swaps or other derivatives, which are carried at fair value with changes in fair value recorded in income.

 

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NOTE 2 – Merger and Restructuring Activity

 

 

Merrill Lynch

 

On January 1, 2009, the Corporation acquired Merrill Lynch through its merger with a subsidiary of the Corporation in exchange for common and preferred stock with a value of $29.1 billion. Under the terms of the merger agreement, Merrill Lynch common shareholders received 0.8595 of a share of Bank of America Corporation common stock in exchange for each share of Merrill Lynch common stock. In addition, Merrill Lynch non-convertible preferred shareholders received Bank of America Corporation preferred stock having substantially identical terms. Merrill Lynch convertible preferred stock remains outstanding and is convertible into Bank of America Corporation common stock at an equivalent exchange ratio.

The purchase price was allocated to the acquired assets and liabilities based on their estimated fair values at the Merrill Lynch acquisition date as summarized in the following table. Goodwill of $5.1 billion was calculated as the purchase premium after adjusting for the fair value of net assets acquired and represents the value expected from the synergies created from combining the Merrill Lynch wealth management and corporate and investment banking businesses with the Corporation’s capabilities in consumer and commercial banking as well as the economies of scale expected from combining the operations of the two companies. No goodwill is deductible for federal income tax purposes. The goodwill was allocated principally to the GWIM and Global Banking & Markets (GBAM) business segments.

 

  Merrill Lynch Purchase Price Allocation  
  (Dollars in billions, except per share amounts)       

  Purchase price

  

  Merrill Lynch common shares exchanged (in millions)

     1,600   

  Exchange ratio

     0.8595   

The Corporation’s common shares issued (in millions)

     1,375   

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

   $ 14.08   

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

   $ 19.4   

  Merrill Lynch preferred stock

     8.6   

  Fair value of outstanding employee stock awards

     1.1   

Total purchase price

   $ 29.1   

  Allocation of the purchase price

  

  Merrill Lynch stockholders’ equity

     19.9   

  Merrill Lynch goodwill and intangible assets

     (2.6

  Pre-tax adjustments to reflect acquired assets and liabilities at fair value:

  

Derivatives and securities

     (1.9

Loans

     (6.1

Intangible assets (2)

     5.4   

Other assets/liabilities

     (0.8

Long-term debt

     16.0   

Pre-tax total adjustments

     12.6   

  Deferred income taxes

     (5.9

After-tax total adjustments

     6.7   

Fair value of net assets acquired

     24.0   

Goodwill resulting from the Merrill Lynch acquisition

   $ 5.1   

 

(1)

The value of the shares of common stock exchanged with Merrill Lynch shareholders was based upon the closing price of the Corporation’s common stock at December 31, 2008, the last trading day prior to the date of acquisition.

 

(2)

Consists of trade name of $1.5 billion and customer relationship and core deposit intangibles of $3.9 billion. The amortization life is 10 years for the customer relationship and core deposit intangibles which are primarily amortized on a straight-line basis.

 

 

Countrywide

 

On July 1, 2008, the Corporation acquired Countrywide through its merger with a subsidiary of the Corporation. Under the terms of the merger agreement, Countrywide shareholders received 0.1822 of a share of Bank of America Corporation common stock in exchange for each share of Countrywide common stock. The acquisition of Countrywide significantly expanded the Corporation’s mortgage originating and servicing capabilities, making it a leading mortgage originator and servicer. As provided by the merger agreement, 583 million shares of Countrywide common stock were exchanged for 107 million shares of the Corporation’s common stock. Countrywide’s results of operations were included in the Corporation’s results beginning July 1, 2008.

 

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Merger and Restructuring Charges and Reserves

 

Merger and restructuring charges are recorded in the Consolidated Statement of Income and include incremental costs to integrate the operations of the Corporation and its recent acquisitions. These charges represent costs associated with these one-time activities and do not represent ongoing costs of the fully integrated combined organization. On January 1, 2009, the Corporation adopted new accounting guidance on business combinations, on a prospective basis, that requires that acquisition-related transaction and restructuring costs be charged to expense as incurred. Previously, these expenses were recorded as an adjustment to goodwill.

The following table presents severance and employee-related charges, systems integrations and related charges, and other merger-related charges.

 

     Three Months Ended
March 31
  (Dollars in millions)    2010      2009    

  Severance and employee-related charges

   $ 151      $ 491    

  Systems integrations and related charges

     310        192    

  Other

     60        82    

Total merger and restructuring charges

   $ 521      $ 765    

For the three months ended March 31, 2010, merger and restructuring charges consisted of $408 million related to the Merrill Lynch acquisition and $113 million related to the Countrywide acquisition. For the three months ended March 31, 2009, merger and restructuring charges consisted primarily of $513 million related to the Merrill Lynch acquisition and $193 million related to the Countrywide acquisition.

For the three months ended March 31, 2010, $408 million of merger-related charges for the Merrill Lynch acquisition included $121 million for severance and other employee-related costs, $238 million of system integration costs, and $49 million of other merger-related costs.

The following table presents the changes in exit cost and restructuring reserves for the three months ended March 31, 2010 and 2009. Exit cost reserves were established in purchase accounting resulting in an increase in goodwill. Restructuring reserves are established by a charge to merger and restructuring charges, and the restructuring charges are included in the total merger and restructuring charges in the table above. Exit costs were not recorded in purchase accounting for the Merrill Lynch acquisition in accordance with new accounting guidance on business combinations which was effective January 1, 2009.

 

     Exit Cost Reserves     Restructuring Reserves
  (Dollars in millions)    2010     2009     2010     2009

  Balance, January 1

   $ 112      $ 523      $ 403      $ 86    

  Exit costs and restructuring charges:

        

Merrill Lynch

     n/a        n/a        106        382    

Countrywide

     -        -        30        60    

  Cash payments

     (22     (192     (294     (136)   

Balance, March 31

   $ 90      $ 331      $ 245      $ 392    

  n/a = not applicable

        

At December 31, 2009, there were $112 million of exit cost reserves related principally to the Countrywide acquisition, including $70 million for severance, relocation and other employee-related costs and $42 million for contract terminations. Cash payments of $22 million during the three months ended March 31, 2010 consisted of $7 million in severance, relocation and other employee-related costs, and $15 million in contract terminations. At March 31, 2010, exit cost reserves of $90 million related principally to Countrywide.

At December 31, 2009, there were $403 million of restructuring reserves related to the Merrill Lynch and Countrywide acquisitions for severance and other employee-related costs. For the three months ended March 31, 2010, $136 million was added to the restructuring reserves related to severance and other employee-related costs primarily associated with the Merrill Lynch acquisition. Cash payments of $294 million during the three months ended March 31, 2010 were all related to severance and other employee-related costs. Payments associated with the Countrywide and Merrill Lynch acquisitions will continue into 2011. At March 31, 2010, restructuring reserves of $245 million consisted of $169 million for Merrill Lynch and $76 million for Countrywide.

 

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NOTE 3 – Trading Account Assets and Liabilities

The following table presents the components of trading account assets and liabilities at March 31, 2010 and December 31, 2009.

 

  (Dollars in millions)    March 31
2010
   December 31
2009

  Trading account assets

     

U.S. government and agency securities (1)

   $ 56,603        $ 44,585    

Corporate securities, trading loans and other

     61,384          57,009    

Equity securities

     32,014          33,562    

Foreign sovereign debt

     35,817          28,143    

Mortgage trading loans and asset-backed securities

     20,200          18,907    

Total trading account assets

   $ 206,018        $ 182,206    

  Trading account liabilities

     

U.S. government and agency securities

   $ 30,068        $ 26,519    

Equity securities

     20,419          18,407    

Foreign sovereign debt

     21,619          12,897    

Corporate securities and other

     10,426          7,609    

Total trading account liabilities

   $ 82,532        $ 65,432    

 

(1)

Includes $28.2 billion and $23.5 billion at March 31, 2010 and December 31, 2009 of government-sponsored enterprise (GSE) obligations.

 

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NOTE 4 – Derivatives

 

 

Derivative Balances

 

Derivatives are held for trading, as economic hedges, or as qualifying accounting hedges. The Corporation enters into derivatives to facilitate client transactions, for proprietary trading purposes and to manage risk exposures. For additional information on the Corporation’s derivatives and hedging activities, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements of the Corporation’s 2009 Annual Report on Form 10-K. The following table identifies derivative instruments included on the Corporation’s Consolidated Balance Sheet in derivative assets and liabilities at March 31, 2010 and December 31, 2009. Balances are provided on a gross basis, prior to the application of counterparty and collateral netting. Total derivative assets and liabilities are adjusted on an aggregate basis to take into consideration the effects of legally enforceable master netting agreements and have been reduced by the cash collateral applied.

 

     March 31, 2010
          Gross Derivative Assets    Gross Derivative Liabilities
  (Dollars in billions)    Contract/
Notional  (1)
   Trading
Derivatives
and
Economic
Hedges
   Qualifying
Accounting
Hedges (2)
   Total    Trading
Derivatives
and
Economic
Hedges
   Qualifying
Accounting
Hedges  (2)
   Total

  Interest rate contracts

                    

  Swaps

   $ 43,320.7        $ 1,128.4        $ 6.2        $ 1,134.6        $ 1,107.0        $ 1.2        $ 1,108.2    

  Futures and forwards

     12,096.0          5.9          0.1          6.0          6.4          -          6.4    

  Written options

     2,791.0          -          -          -          77.4          -          77.4    

  Purchased options

     2,732.7          78.1          -          78.1          -          -          -    

  Foreign exchange contracts

                    

  Swaps

     646.7          21.6          5.8          27.4          26.0          1.7          27.7    

  Spot, futures and forwards

     2,207.9          25.7          -          25.7          27.1          -          27.1    

  Written options

     391.3          -          -          -          10.9          -          10.9    

  Purchased options

     392.4          10.5          -          10.5          -          -          -    

  Equity contracts

                    

  Swaps

     72.3          7.6          -          7.6          7.5          -          7.5    

  Futures and forwards

     95.7          3.1          -          3.1          2.3          -          2.3    

  Written options

     430.9          -          -          -          23.3          0.4          23.7    

  Purchased options

     391.4          24.5          -          24.5          -          -          -    

  Commodity contracts

                    

  Swaps

     101.4          8.8          0.2          9.0          8.4          -          8.4    

  Futures and forwards

     435.0          10.2          -          10.2          9.4          -          9.4    

  Written options

     65.1          -          -          -          4.8          -          4.8    

  Purchased options

     60.0          4.5          -          4.5          -          -          -    

  Credit derivatives

                    

  Purchased credit derivatives:

                    

  Credit default swaps

     2,525.8          88.1          -          88.1          38.7          -          38.7    

  Total return swaps/other

     25.9          1.3          -          1.3          0.8          -          0.8    

  Written credit derivatives:

                    

  Credit default swaps

     2,534.1          37.7          -          37.7          82.4          -          82.4    

  Total return swaps/other

     36.0          1.4          -          1.4          0.6          -          0.6    

  Gross derivative assets/liabilities

      $ 1,457.4        $ 12.3          1,469.7        $ 1,433.0        $ 3.3          1,436.3    

  Less: Legally enforceable master netting agreements

              (1,334.0)               (1,334.0)   

  Less: Cash collateral applied

                          (58.1)                       (55.4)   

    Total derivative assets/liabilities

                        $ 77.6                      $ 46.9    

 

(1)

Represents the total contract/notional amount of the derivatives outstanding and includes both written and purchased credit derivatives.

 

(2)

Excludes $4.1 billion of long-term debt designated as a hedge of foreign currency risk.

 

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     December 31, 2009
          Gross Derivative Assets     Gross Derivative Liabilities
                 
  (Dollars in billions)    Contract/
Notional (1)
  

Trading
Derivatives
and

Economic
Hedges

   Qualifying
Accounting
Hedges (2)
   Total    

Trading
Derivatives

and

Economic
Hedges

   Qualifying
Accounting
Hedges (2)
   Total
 

  Interest rate contracts

                   

Swaps

   $ 45,261.5    $ 1,121.3    $ 5.6    $ 1,126.9      $ 1,105.0    $ 0.8    $ 1,105.8   

Futures and forwards

     11,842.1      7.1      -      7.1        6.1      -      6.1   

Written options

     2,865.5      -      -      -        84.1      -      84.1   

Purchased options

     2,626.7      84.1      -      84.1        -      -      -   

  Foreign exchange contracts

                   

Swaps

     661.9      23.7      4.6      28.3        27.3      0.5      27.8   

Spot, futures and forwards

     1,750.8      24.6      0.3      24.9        25.6      0.1      25.7   

Written options

     383.6      -      -      -        13.0      -      13.0   

Purchased options

     355.3      12.7      -      12.7        -      -      -   

  Equity contracts

                   

Swaps

     58.5      2.0      -      2.0        2.0      -      2.0   

Futures and forwards

     79.0      3.0      -      3.0        2.2      -      2.2   

Written options

     283.4      -      -      -        25.1      0.4      25.5   

Purchased options

     273.7      27.3      -      27.3        -      -      -   

  Commodity contracts

                   

Swaps

     65.3      6.9      0.1      7.0        6.8      -      6.8   

Futures and forwards

     387.8      10.4      -      10.4        9.6      -      9.6   

Written options

     54.9      -      -      -        7.9      -      7.9   

Purchased options

     50.9      7.6      -      7.6        -      -      -   

  Credit derivatives

                   

Purchased credit derivatives:

                   

Credit default swaps

     2,800.5      105.5      -      105.5        45.2      -      45.2   

Total return swaps/other

     21.7      1.5      -      1.5        0.4      -      0.4   

Written credit derivatives:

                   

Credit default swaps

     2,788.8      44.1      -      44.1        98.4      -      98.4   

Total return swaps/other

     33.1      1.8      -      1.8        1.1      -      1.1   
 

Gross derivative assets/liabilities

      $ 1,483.6    $ 10.6      1,494.2      $ 1,459.8    $ 1.8      1,461.6   

  Less: Legally enforceable master netting agreements

              (1,355.1           (1,355.1)  

  Less: Cash collateral applied

              (58.4           (62.8)  
 

Total derivative assets/liabilities

            $ 80.7            $ 43.7   
 

 

(1)

Represents the total contract/notional amount of the derivatives outstanding and includes both written and purchased credit derivatives.

 

(2)

Excludes $4.4 billion of long-term debt designated as a hedge of foreign currency risk.

 

 

ALM and Risk Management Derivatives

 

The Corporation’s asset and liability management (ALM) and risk management activities include the use of derivatives to mitigate risk to the Corporation including both derivatives that are designated as hedging instruments and economic hedges. Interest rate, commodity, credit and foreign exchange contracts are utilized in the Corporation’s ALM and risk management activities.

The Corporation maintains an overall interest rate risk management strategy that incorporates the use of interest rate contracts, which are generally non-leveraged generic interest rate and basis swaps, options, futures and forwards, to minimize significant fluctuations in earnings that are caused by interest rate volatility. Interest rate contracts are used by the Corporation in the management of its interest rate risk position. The Corporation’s goal is to manage interest rate sensitivity so that movements in interest rates do not significantly adversely affect earnings. As a result of interest rate fluctuations, hedged fixed-rate assets and liabilities appreciate or depreciate in fair value. Gains or losses on the derivative instruments that are linked to the hedged fixed-rate assets and liabilities are expected to substantially offset this unrealized appreciation or depreciation.

 

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Table of Contents

Interest rate and market risk can be substantial in the mortgage business. Market risk is the risk that values of mortgage assets or revenues will be adversely affected by changes in market conditions such as interest rate movements. To hedge interest rate risk in mortgage banking production income, the Corporation utilizes forward loan sale commitments and other derivative instruments including purchased options. The Corporation also utilizes derivatives such as interest rate options, interest rate swaps, forward settlement contracts and euro-dollar futures as economic hedges of the fair value of mortgage servicing rights (MSRs). For additional information on MSRs, see Note 16 – Mortgage Servicing Rights.

The Corporation uses foreign currency contracts to manage the foreign exchange risk associated with certain foreign currency-denominated assets and liabilities, as well as the Corporation’s investments in foreign subsidiaries. Foreign exchange contracts, which include spot and forward contracts, represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date. Exposure to loss on these contracts will increase or decrease over their respective lives as currency exchange and interest rates fluctuate.

The Corporation enters into derivative commodity contracts such as futures, swaps, options and forwards as well as non-derivative commodity contracts to provide price risk management services to customers or to manage price risk associated with its physical and financial commodity positions. The non-derivative commodity contracts and physical inventories of commodities expose the Corporation to earnings volatility. Cash flow and fair value accounting hedges provide a method to mitigate a portion of this earnings volatility.

The Corporation purchases credit derivatives to manage credit risk related to certain funded and unfunded credit exposures. Credit derivatives include credit default swaps, total return swaps and swaptions. These derivatives are accounted for as economic hedges and changes in fair value are recorded in other income.

 

 

Derivatives Designated as Accounting Hedges

 

The Corporation uses various types of interest rate, commodity and foreign exchange derivative contracts to protect against changes in the fair value of its assets and liabilities due to fluctuations in interest rates, exchange rates and commodity prices (fair value hedges). The Corporation also uses these types of contracts and equity derivatives to protect against changes in the cash flows of its assets and liabilities, and other forecasted transactions (cash flow hedges). The Corporation hedges its net investment in consolidated foreign operations determined to have functional currencies other than the U.S. dollar using forward exchange contracts that typically settle in 90 days, cross-currency basis swaps, and by issuing foreign currency-denominated debt.

The following table summarizes certain information related to the Corporation’s derivatives designated as fair value hedges for the three months ended March 31, 2010 and 2009.

 

     Amounts Recognized in Income for the Three Months Ended
     March 31, 2010     March 31, 2009
  (Dollars in millions)        Derivative         Hedged
Item
    Hedge
Ineffectiveness
    Derivative     Hedged
Item
    Hedge
    Ineffectiveness    

  Derivatives designated as fair value hedges

            

  Interest rate risk on long-term debt (1)

   $ 885      $ (1,013   $ (128   $ (765   $ 636      $ (129)  

  Interest rate and foreign currency risk on long-term debt (1)

     (1,375     1,251        (124     (951     1,009        58   

  Interest rate risk on available-for-sale securities (2, 3)

     (30     19        (11     53        (81     (28)  

  Commodity price risk on commodity inventory (4)

     57        (61     (4     56        (58     (2)  

Total

   $ (463   $ 196      $ (267   $ (1,607   $ 1,506      $ (101)  

 

(1)

Amounts are recorded in interest expense on long-term debt.

 

(2)

Amounts are recorded in interest income on AFS securities.

 

(3)

Measurement of ineffectiveness in the three months ended March 31, 2010 and 2009 includes $4 million and $28 million of interest costs on short forward contracts. The Corporation considers this as part of the cost of hedging, and it is offset by the fixed coupon receipt on the AFS security that is recognized in interest income on securities.

 

(4)

Amounts are recorded in trading account profits.

 

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Table of Contents

The following table summarizes certain information related to the Corporation’s derivatives designated as cash flow hedges and net investment hedges for the three months ended March 31, 2010 and 2009. During the next 12 months, net losses in accumulated OCI of approximately $1.2 billion ($739 million after-tax) on derivative instruments that qualify as cash flow hedges are expected to be reclassified into earnings. These net losses reclassified into earnings are expected to reduce net interest income related to the respective hedged items.

 

     Three Months Ended March 31
     2010     2009
(Dollars in millions, amounts pre-tax)    Amounts
Recognized
in OCI on
Derivatives
    Amounts
Reclassified
from OCI
into Income
    Hedge
Ineffectiveness
and Amount
Excluded from
Effectiveness
Testing (1)
   

Amounts
Recognized

in OCI on
Derivatives

   

Amounts
Reclassified
from OCI

into Income

    Hedge
Ineffectiveness
and Amount
Excluded from
Effectiveness
Testing (1)

  Derivatives designated as cash flow hedges

            

  Interest rate risk on variable rate portfolios (2 ,3 ,4)

   $ (502   $ (81   $ (13   $ 154      $ (484   $ 4   

  Commodity price risk on forecasted purchases and sales

     32        3        -        48        -        -   

  Price risk on restricted stock awards (5)

     144        11        -        n/a        n/a        n/a   

  Price risk on equity investments included in available-for-sale securities

     6        -        -        (44     -        -   

Total

   $ (320   $ (67   $ (13   $ 158      $ (484   $ 4   

  Net investment hedges

            

  Foreign exchange risk (6)

   $ 978      $ -      $ (65   $ 1,016      $ -      $ (80)  

 

(1)

Amounts related to derivatives designated as cash flow hedges represent hedge ineffectiveness and amounts related to net investment hedges represent amounts excluded from effectiveness testing.

 

(2)

Amounts reclassified from OCI increased interest income on assets by $47 million and reduced interest income on assets by $44 million, and increased interest expense on liabilities by $128 million and $440 million during the three months ended March 31, 2010 and 2009.

 

(3)

Hedge ineffectiveness of $(1) million and $4 million was recorded in interest income and $(12) million and $0 was recorded in interest expense during the three months ended March 31, 2010 and 2009.

 

(4)

Amounts reclassified from OCI exclude amounts related to derivative interest accruals which increased interest income by $62 million and $3 million for the three months ended March 31, 2010 and 2009.

 

(5)

Gains reclassified from OCI are recorded in personnel expense.

 

(6)

Amounts recognized in OCI on derivatives exclude gains of $262 million and $33 million related to long-term debt designated as a net investment hedge for the three months ended March 31, 2010 and 2009.

n/a = not applicable

The Corporation entered into total return swaps to hedge a portion of cash-settled restricted stock units (RSUs) granted to certain employees in the three months ended March 31, 2010 as part of their 2009 compensation. These cash-settled RSUs are accrued as liabilities over the vesting period and adjusted to fair value based on changes in the share price of the Corporation’s common stock. The Corporation entered into the derivatives to minimize the change in the expense to the Corporation driven by fluctuations in the share price of the Corporation’s common stock during the vesting period of the restricted stock units. Certain of these derivatives are designated as cash flow hedges of unrecognized non-vested awards with the changes in fair value of the hedge recorded in OCI and reclassified into income in the same period as the RSUs affect earnings. The remaining derivatives are accounted for as economic hedges and changes in fair value are recorded in personnel expense. For more information on restricted stock units, see Note 13 – Pension, Postretirement and Other Employee Plans.

 

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Economic Hedges

 

Derivatives designated as economic hedges are used by the Corporation to reduce certain risk exposures but are not accounted for as accounting hedges. The following table presents gains (losses) on these derivatives for the three months ended March 31, 2010 and 2009. These gains (losses) are largely offset by the income or expense that is recorded on the economically hedged item.

 

     Three Months Ended March 31
  (Dollars in millions)    2010     2009

  Price risk on mortgage banking production income (1, 2)

   $ 1,356      $ 2,157   

  Interest rate risk on mortgage banking servicing income (1)

     798        150   

  Credit risk on loans (3)

     (56     75   

  Interest rate and foreign currency risk on long-term debt and other foreign exchange transactions (4)

     (3,988     (546)  

  Other (4)

     96        15   

Total

   $ (1,794   $ 1,851   

 

(1)

Gains (losses) on these derivatives are recorded in mortgage banking income.

 

(2)

Includes gains on interest rate lock commitments related to the origination of mortgage loans that are held for sale, which are considered derivative instruments, of $1.9 billion and $2.5 billion for the three months ended March 31, 2010 and 2009.

 

(3)

Gains (losses) on these derivatives and bonds are recorded in other income, trading account profits and net interest income.

 

(4)

Gains (losses) on these derivatives are recorded in other income, trading account profits and personnel expense.

 

 

Sales and Trading Revenue

 

The Corporation enters into trading derivatives to facilitate client transactions, for proprietary trading purposes, and to manage risk exposures arising from trading assets and liabilities. It is the Corporation’s policy to include these derivative instruments in its trading activities which include derivatives and non-derivative cash instruments. The resulting risk from these derivatives is managed on a portfolio basis as part of the Corporation’s GBAM business segment. The related sales and trading revenue generated within GBAM is recorded on various income statement line items including trading account profits and net interest income as well as other revenue categories. However, the vast majority of income related to derivative instruments is recorded in trading account profits. The following table identifies the amounts in the income statement line items attributable to the Corporation’s sales and trading revenue categorized by primary risk for the three months ended March 31, 2010 and 2009.

 

     Three Months Ended March 31
      
     2010    2009
             
  (Dollars in millions)    Trading
Account
Profits
   Other
Revenues (1)
   Net
Interest
Income
    Total    Trading
Account
Profits
   Other
Revenues (1)
    Net
Interest
Income
    Total
 

  Interest rate risk

   $ 1,057    $ 41    $ 183      $ 1,281    $ 2,963    $ 15      $ 334      $ 3,312   

  Foreign exchange risk

     281      -      -        281      274      1        7        282   

  Equity risk

     874      610      46        1,530      786      622        81        1,489   

  Credit risk

     2,619      129      950        3,698      197      (1,104     1,507        600   

  Other risk

     224      8      (50     182      683      (39     (191     453   
 

Total sales and trading revenue

   $ 5,055    $ 788    $ 1,129      $ 6,972    $ 4,903    $ (505   $ 1,738      $ 6,136   
 

 

(1)

Represents investment and brokerage services and other income recorded in GBAM that the Corporation includes in its definition of sales and trading revenue.

 

 

Credit Derivatives

 

The Corporation enters into credit derivatives primarily to facilitate client transactions and to manage credit risk exposures. Credit derivatives derive value based on an underlying third party-referenced obligation or a portfolio of referenced obligations and generally require the Corporation as the seller of credit protection to make payments to a buyer upon the occurrence of a predefined credit event. Such credit events generally include bankruptcy of the referenced credit

 

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entity and failure to pay under the obligation, as well as acceleration of indebtedness and payment repudiation or moratorium. For credit derivatives based on a portfolio of referenced credits or credit indices, the Corporation may not be required to make payment until a specified amount of loss has occurred and/or may only be required to make payment up to a specified amount.

Credit derivative instruments in which the Corporation is the seller of credit protection and their expiration at March 31, 2010 and December 31, 2009 are summarized below. These instruments are classified as investment and non-investment grade based on the credit quality of the underlying reference obligation. The Corporation considers ratings of BBB- or higher as investment grade. Non-investment grade includes non-rated credit derivative instruments.

 

     March 31, 2010
     Carrying Value
      (Dollars in millions)   

Less than

One Year

  

One to

Three Years

  

Three to

Five Years

  

Over

Five Years

   Total      

Credit default swaps:

              

Investment grade

   $ 353    $ 5,887    $ 8,295    $ 25,256    $ 39,791      

Non-investment grade

     1,141      8,056      9,883      23,552      42,632      

Total

     1,494      13,943      18,178      48,808      82,423      

Total return swaps/other:

              

Investment grade

     -      26      33      32      91      

Non-investment grade

     1      192      38      253      484      

Total

     1      218      71      285      575      

Total credit derivatives

   $ 1,495    $ 14,161    $ 18,249    $ 49,093    $ 82,998      
    

 

Maximum Payout/Notional

Credit default swaps:

              

Investment grade

   $ 162,417    $ 453,420    $ 575,291    $ 390,296    $ 1,581,424      

Non-investment grade

     95,012      296,057      295,898      265,668      952,635      

Total

     257,429      749,477      871,189      655,964      2,534,059      

Total return swaps/other:

              

Investment grade

     4      91      12,563      10,478      23,136      

Non-investment grade

     403      1,712      923      9,818      12,856      

Total

     407      1,803      13,486      20,296      35,992      

Total credit derivatives

   $ 257,836    $ 751,280    $ 884,675    $ 676,260    $ 2,570,051      
    

 

December 31, 2009

     Carrying Value
      (Dollars in millions)   

Less than

One Year

  

One to

Three Years

  

Three to

Five Years

  

Over

Five Years

   Total      

Credit default swaps:

              

Investment grade

   $ 454    $ 5,795    $ 5,831    $ 24,586    $ 36,666      

Non-investment grade

     1,342      14,012      16,081      30,274      61,709      

Total

     1,796      19,807      21,912      54,860      98,375      

Total return swaps/other:

              

Investment grade

     1      20      5      540      566      

Non-investment grade

     -      194      3      291      488      

Total

     1      214      8      831      1,054      

Total credit derivatives

   $ 1,797    $ 20,021    $ 21,920    $ 55,691    $ 99,429      
    

 

Maximum Payout/Notional

Credit default swaps:

              

Investment grade

   $ 147,501    $ 411,258    $ 596,103    $ 335,526    $ 1,490,388      

Non-investment grade

     123,907      417,834      399,896      356,735      1,298,372      

Total

     271,408      829,092      995,999      692,261      2,788,760      

Total return swaps/other:

              

Investment grade

     31      60      1,081      8,087      9,259      

Non-investment grade

     2,035      1,280      2,183      18,352      23,850      

Total

     2,066      1,340      3,264      26,439      33,109      

Total credit derivatives

   $ 273,474    $ 830,432    $ 999,263    $ 718,700    $ 2,821,869      

The notional amount represents the maximum amount payable by the Corporation for most credit derivatives. However, the Corporation does not solely monitor its exposure to credit derivatives based on notional amount because this measure does not take into consideration the probability of occurrence. As such, the notional amount is not a reliable

 

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indicator of the Corporation’s exposure to these contracts. Instead, a risk framework is used to define risk tolerances and establish limits to help ensure that certain credit risk-related losses occur within acceptable, predefined limits.

The Corporation economically hedges its market risk exposure to credit derivatives by entering into a variety of offsetting derivative contracts and security positions. For example, in certain instances, the Corporation may purchase credit protection with identical underlying referenced names to offset its exposure. The carrying value and notional amount of written credit derivatives for which the Corporation held purchased credit derivatives with identical underlying referenced names at March 31, 2010 was $58.9 billion and $1.8 trillion compared to $79.4 billion and $2.3 trillion at December 31, 2009.

 

 

Credit Risk Management of Derivatives and Credit-related Contingent Features

 

The Corporation executes the majority of its derivative contracts in the over-the-counter market with large, international financial institutions, including broker/dealers and, to a lesser degree, with a variety of non-financial companies. Substantially all of the derivative transactions are executed on a daily margin basis. Therefore, events such as a credit downgrade (depending on the ultimate rating level) or a breach of credit covenants would typically require an increase in the amount of collateral required of the counterparty, where applicable, and/or allow the Corporation to take additional protective measures such as early termination of all trades. Further, as discussed above, the Corporation enters into legally enforceable master netting agreements which reduce risk by permitting the closeout and netting of transactions with the same counterparty upon the occurrence of certain events.

Substantially all of the Corporation’s derivative contracts contain credit risk-related contingent features, primarily in the form of International Swaps and Derivatives Association, Inc. (ISDA) master agreements that enhance the creditworthiness of these instruments as compared to other obligations of the respective counterparty with whom the Corporation has transacted (e.g., other debt or equity). These contingent features may be for the benefit of the Corporation, as well as its counterparties with respect to changes in the Corporation’s creditworthiness. At March 31, 2010 and December 31, 2009, the Corporation received cash and securities collateral of $74.1 billion and $74.6 billion, and posted cash and securities collateral of $62.6 billion and $69.1 billion in the normal course of business under derivative agreements.

In connection with certain over-the-counter derivatives contracts and other trading agreements, the Corporation could be required to provide additional collateral or to terminate transactions with certain counterparties in the event of a downgrade of the senior debt ratings of Bank of America Corporation and its subsidiaries. The amount of additional collateral required depends on the contract and is usually a fixed incremental amount and/or the market value of the exposure. At March 31, 2010 and December 31, 2009, the amount of additional collateral and termination payments that would be required for such derivatives and trading agreements was approximately $1.8 billion and $2.1 billion if the long-term credit rating of Bank of America Corporation and its subsidiaries was incrementally downgraded by one level by all ratings agencies. At both March 31, 2010 and December 31, 2009, a second incremental one level downgrade by the ratings agencies would require approximately $1.2 billion in additional collateral.

The Corporation records counterparty credit risk valuation adjustments on derivative assets in order to properly reflect the credit quality of the counterparty. These adjustments are necessary as the market quotes on derivatives do not fully reflect the credit risk of the counterparties to the derivative assets. The Corporation considers collateral and legally enforceable master netting agreements that mitigate its credit exposure to each counterparty in determining the counterparty credit risk valuation adjustment. All or a portion of these counterparty credit risk valuation adjustments can be reversed or otherwise adjusted in future periods due to changes in the value of the derivative contract, collateral and creditworthiness of the counterparty. During the three months ended March 31, 2010 and 2009, credit valuation gains (losses) of $326 million and $70 million ($(69) million and $(41) million, net of hedges) for counterparty credit risk related to derivative assets were recognized in trading account profits. At March 31, 2010 and December 31, 2009, the cumulative counterparty credit risk valuation adjustment that was included in the derivative assets balance was $7.4 billion and $7.6 billion.

In addition, the fair value of the Corporation’s or its subsidiaries’ derivative liabilities is adjusted to reflect the impact of the Corporation’s credit quality. During the three months ended March 31, 2010 and 2009, credit valuation gains of $171 million and $1.7 billion were recognized in trading account profits for changes in the Corporation’s or its subsidiaries’ credit risk. At March 31, 2010 and December 31, 2009, the Corporation’s cumulative credit risk valuation adjustment that was included in the derivative liabilities balance was $950 million and $608 million.

 

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NOTE 5 – Securities

The following table presents the amortized cost, gross unrealized gains and losses in accumulated OCI, and fair value of AFS debt and marketable equity securities at March 31, 2010 and December 31, 2009.

 

  (Dollars in millions)   

Amortized

Cost

        

Gross

Unrealized

Gains

        

Gross

Unrealized

Losses

         

Fair    

Value    

 

  Available-for-sale debt securities, March 31, 2010

                   

U.S. Treasury and agency securities

   $ 40,664       $ 291       $ (212      $ 40,743    

Mortgage-backed securities:

                   

Agency

     150,356         2,791         (578        152,569    

Agency collateralized mortgage obligations

     43,403         320         (250        43,473    

Non-agency residential (1)

     35,008         655         (2,685        32,978    

Non-agency commercial

     6,971         947         (48        7,870    

Foreign securities

     3,826         41         (744        3,123    

Corporate bonds

     6,780         162         (85        6,857    

Other taxable securities (2)

     19,914           84           (539          19,459    

Total taxable securities

     306,922         5,291         (5,141        307,072    

Tax-exempt securities

     9,041           74           (167          8,948    

Total available-for-sale debt securities

   $ 315,963         $ 5,365         $ (5,308        $ 316,020    

  Available-for-sale marketable equity securities (3)

   $ 2,937         $ 3,679         $ (42        $ 6,574    

 

  Available-for-sale debt securities, December 31, 2009

                   

U.S. Treasury and agency securities

   $ 22,648       $ 414       $ (37      $ 23,025    

Mortgage-backed securities:

                   

Agency

     164,677         2,415         (846        166,246    

Agency collateralized mortgage obligations

     25,330         464         (13        25,781    

Non-agency residential (1)

     37,940         1,191         (4,028        35,103    

Non-agency commercial

     6,354         671         (116        6,909    

Foreign securities

     4,732         61         (896        3,897    

Corporate bonds

     6,136         182         (126        6,192    

Other taxable securities (2)

     25,469           260           (478          25,251    

Total taxable securities

     293,286         5,658         (6,540        292,404    

Tax-exempt securities

     9,340           100           (243          9,197    

Total available-for-sale debt securities

   $ 302,626         $ 5,758         $ (6,783        $ 301,601    

  Available-for-sale marketable equity securities (3)

   $ 6,020         $ 3,895         $ (507        $ 9,408    

 

   (1) 

At both March 31, 2010 and December 31, 2009, includes approximately 85 percent of prime bonds, 10 percent of Alt-A bonds, and five percent of subprime bonds.

 

   (2) 

Substantially all asset-backed securities (ABS).

 

   (3) 

Recorded in other assets on the Corporation’s Consolidated Balance Sheet.

At March 31, 2010, the accumulated net unrealized gains on AFS debt and marketable equity securities included in accumulated OCI were $36 million and $2.3 billion, net of the related income tax expense of $21 million and $1.3 billion. At March 31, 2010 and December 31, 2009, the Corporation had nonperforming AFS debt securities of $550 million and $467 million.

At March 31, 2010, both the amortized cost and fair value of held-to-maturity (HTM) debt securities were $340 million. At December 31, 2009, the amortized cost and fair value of HTM debt securities were $9.8 billion and $9.7 billion, which included ABS that were issued by the Corporation’s credit card securitization trust and retained by the Corporation with an amortized cost of $6.6 billion and a fair value of $6.4 billion. Additionally, $2.9 billion of HTM debt securities held in consolidated commercial paper conduits were reclassified to AFS as a result of changes in regulatory capital requirements. Also, as a result of the adoption of new consolidation guidance, the Corporation consolidated the credit card securitization trusts on January 1, 2010 and the ABS were eliminated in consolidation and the related consumer credit card loans are included in loans and leases on the Corporation’s Consolidated Balance Sheet.

 

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During the three months ended March 31, 2010 and 2009, the Corporation recorded other-than-temporary impairment losses on AFS debt securities as presented in the table below.

 

     Three Months Ended March 31, 2010
      
  (Dollars in millions)      Non-agency
  Residential
  MBS
   Non-agency
Commercial
MBS
   Foreign
Securities
   Corporate
Bonds
   Other
Taxable
Securities
   Total  
 

  Total other-than-temporary impairment losses (unrealized and realized)

   $ (720)    $ (29)    $ (716)    $ (22)    $ (332)    $ (1,819)  

  Unrealized other-than-temporary impairment losses recognized in OCI (1)

     445       23       539       18       193       1,218   
 

Net impairment losses recognized in earnings (2)

   $ (275)    $ (6)    $ (177)    $ (4)    $ (139)    $ (601)  
 
    

 

Three Months Ended March 31, 2009

      
  (Dollars in millions)      Non-agency
  Residential
  MBS
   Non-agency
Commercial
MBS
   Foreign
Securities
   Corporate
Bonds
  

Other

Taxable

Securities

   Total  
 

  Total other-than-temporary impairment losses (unrealized and realized)

   $ (432)    $    $ (133)    $ (17)    $ (132)    $ (714)  

  Unrealized other-than-temporary impairment losses recognized in OCI (1)

     343                           343   
 

Net impairment losses recognized in earnings (2)

   $ (89)    $    $ (133)    $ (17)    $ (132)    $ (371)  
 

 

  (1)  

Represents the non-credit component of other-than-temporary impairment losses on AFS debt securities. For the three months ended March 31, 2010, for certain securities, the Corporation recognized credit losses in excess of unrealized losses in OCI. In these instances, a portion of the credit losses recognized in earnings has been offset by an unrealized gain. Balances above exclude $93 million of gross gains recorded in OCI related to these securities for the three months ended March 31, 2010. No gross gains were recorded in OCI related to these securities for the three months ended March 31, 2009.

 

  (2)  

Represents the credit component of other-than-temporary impairment losses on AFS debt securities.

The following table presents activity for the three months ended March 31, 2010 and 2009 related to the credit component recognized in earnings on debt securities held by the Corporation for which a portion of the other-than-temporary impairment loss remains in OCI.

 

         Three Months Ended    
    March 31    
      
  (Dollars in millions)        2010    2009    
 

  Balance, January 1

   $ 442    $ -    

  Credit component of other-than-temporary impairment not reclassified to OCI in connection with the cumulative effect transition adjustment (1)

     -      22    

  Additions for the credit component on debt securities on which other-than-temporary impairment losses were not previously recognized (2)

     131      18    

  Additions for the credit component on debt securities on which other-than-temporary impairment losses were previously recognized

     302      -    
 

Balance, March 31

   $ 875    $ 40    
 

 

  (1) 

At January 1, 2009, the Corporation had securities with $134 million of other-than-temporary impairment previously recognized in earnings of which $22 million represented the credit component and $112 million represented the non-credit component which was reclassified to OCI through a cumulative effect transition adjustment.

 

  (2) 

During the three months ended March 31, 2010 and 2009, the Corporation recognized $168 million and $331 million of other-than-temporary impairment losses on debt securities on which no portion of other-than-temporary impairment loss remained in OCI. Other-than-temporary impairment losses related to these securities are excluded from these amounts.

As of March 31, 2010, those debt securities with other-than-temporary impairment for which a portion of the other-than-temporary impairment loss remains in OCI primarily consisted of non-agency residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs). The Corporation estimates the portion of loss attributable to credit using a discounted cash flow model. The Corporation estimates the expected cash flows of the underlying collateral using internal credit risk, interest rate and prepayment risk models that incorporate management’s best estimate of current key assumptions such as default rates, loss severity and prepayment rates. Assumptions used can vary widely from loan to loan and are influenced by such factors as loan interest rate, geographical location of the borrower, borrower characteristics and collateral type. The Corporation then uses a third party vendor to determine how the underlying collateral cash flows will be distributed to each security issued from the structure. Expected principal and interest cash flows on an impaired debt security are discounted using the book yield of each individual impaired debt security.

 

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Based on the expected cash flows derived from the model, the Corporation expects to recover the unrealized losses in accumulated OCI on non-agency RMBS. Significant assumptions used in the valuation of non-agency RMBS were as follows at March 31, 2010.

 

          Range (1)
       
     Weighted-
average
   10th
    Percentile  (2)
   90th  
Percentile  (2)  
 

  Prepayment speed (3)

   10.5%    3.0%    23.0%    

  Loss severity (4)

   43.6        17.4        52.3        

  Life default rate (5)

   46.6        2.7        98.9        
 

 

   (1) 

Represents the range of inputs/assumptions based upon the underlying collateral.

 

   (2) 

The value of a variable below which the indicated percentile of observations will fall.

 

   (3) 

Annual constant prepayment speed.

 

   (4) 

Loss severity rates are projected considering collateral characteristics such as LTV, creditworthiness of borrowers (FICO score) and geographic concentration. Weighted-average severity by collateral type was 40 percent for prime bonds, and 45 percent for both Alt-A bonds and subprime bonds.

 

   (5) 

Default rates are projected by considering collateral characteristics including, but not limited to LTV, FICO and geographic concentration. Weighted-average life default rates by collateral type were 39 percent for prime bonds, 53 percent for Alt-A bonds and 45 percent for subprime bonds.

Additionally, based on the expected cash flows derived from the model, the Corporation expects to recover the unrealized losses in accumulated OCI on CDOs. Certain assumptions used in the valuation of CDOs were an annual constant prepayment speed, loss severities and default rates which take into consideration various collateral characteristics including but not limited to asset type, subordination and vintages. For CDOs these assumptions were a maximum prepayment speed of 26 percent, a maximum default rate of 58 percent and a maximum loss severity of 100 percent. Due to the structure and variability of the underlying collateral for the CDOs, the minimum end of the ranges and a weighted-average for each of these assumptions are not meaningful.

 

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The following table presents the current fair value and the associated gross unrealized losses on investments in securities with gross unrealized losses at March 31, 2010 and December 31, 2009. The table also discloses whether these securities have had gross unrealized losses for less than twelve months, or for twelve months or longer.

 

    

Less than

Twelve Months

  

Twelve Months

or Longer

   Total
                    
  (Dollars in millions)   

  Fair

  Value

  

Gross  

Unrealized  

Losses  

  

  Fair

  Value

  

Gross  

Unrealized  

Losses  

  

  Fair

  Value

  

Gross  

Unrealized  

Losses  

 

  Temporarily-impaired available-for-sale debt securities at March 31, 2010

                 

U.S. Treasury and agency securities

   $ 31,888    $ (212)    $ -    $    $ 31,888    $ (212)    

Mortgage-backed securities:

                 

Agency

     29,886      (552)      685      (26)      30,571      (578)    

Agency-collateralized mortgage obligations

     28,950      (250)      -           28,950      (250)    

Non-agency residential

     5,623      (322)      9,601      (1,987)      15,224      (2,309)    

Non-agency commercial

     223      (3)      210      (22)      433      (25)    

Foreign securities

     33      (3)      1,244      (202)      1,277      (205)    

Corporate bonds

     1,264      (15)      7,020      (52)      8,284      (67)    

Other taxable securities

     6,138      (195)      194      (151)      6,332      (346)    
 

Total taxable securities

     104,005      (1,552)      18,954      (2,440)      122,959      (3,992)    

Tax-exempt securities

     1,712      (51)      1,720      (116)      3,432      (167)    
 

Total temporarily-impaired available-for-sale debt securities

     105,717      (1,603)      20,674      (2,556)      126,391      (4,159)    

  Temporarily-impaired available-for-sale marketable equity securities

     31      (14)      60      (28)      91      (42)    
 

Total temporarily-impaired available-for-sale securities

     105,748      (1,617)      20,734      (2,584)      126,482      (4,201)    
 

  Other-than-temporarily impaired available-for-sale debt securities (1)

                 

Mortgage-backed securities:

                 

Non-agency residential

     736      (66)      1,682      (310)      2,418      (376)    

Non-agency commercial

     -           59      (23)      59      (23)    

Foreign securities

     -           835      (539)      835      (539)    

Corporate bonds

     -           81      (18)      81      (18)    

Other taxable securities

     -           831      (193)      831      (193)    
 

Total temporarily-impaired and other-than-temporarily impaired available-for-sale securities

   $ 106,484    $ (1,683)    $ 24,222    $ (3,667)    $ 130,706    $ (5,350)    
 

  Temporarily-impaired available-for-sale debt securities at December 31, 2009

                 

U.S. Treasury and agency securities

   $ 4,655    $ (37)    $ -    $    $ 4,655    $ (37)    

Mortgage-backed securities:

                 

Agency

     53,979      (817)      740      (29)      54,719      (846)    

Agency-collateralized mortgage obligations

     965      (10)      747      (3)      1,712      (13)    

Non-agency residential

     6,907      (557)      13,613      (3,370)      20,520      (3,927)    

Non-agency commercial

     1,263      (35)      1,711      (81)      2,974      (116)    

Foreign securities

     169      (27)      3,355      (869)      3,524      (896)    

Corporate bonds

     1,157      (71)      294      (55)      1,451      (126)    

Other taxable securities

     3,779      (70)      932      (408)      4,711      (478)    
 

Total taxable securities

     72,874      (1,624)      21,392      (4,815)      94,266      (6,439)    

Tax-exempt securities

     4,716      (93)      1,989      (150)      6,705      (243)    
 

Total temporarily-impaired available-for-sale debt securities

     77,590      (1,717)      23,381      (4,965)      100,971      (6,682)    

  Temporarily-impaired available-for-sale marketable equity securities

     338      (113)      1,554      (394)      1,892      (507)    
 

Total temporarily-impaired available-for-sale securities

     77,928      (1,830)      24,935      (5,359)      102,863      (7,189)    
 

  Other-than-temporarily impaired available-for-sale debt securities (1)

                 

Mortgage-backed securities:

                 

Non-agency residential

     51      (17)      1,076      (84)      1,127      (101)    
 

Total temporarily-impaired and other-than-temporarily impaired available-for-sale securities

   $ 77,979    $ (1,847)    $ 26,011    $ (5,443)    $ 103,990    $ (7,290)    
 

 

   (1) 

Includes other-than-temporarily impaired AFS debt securities in which a portion of the other-than-temporary impairment loss remains in OCI.

The impairment of AFS debt and marketable equity securities is based on a variety of factors including the length of time and extent to which the fair value has been less than cost, the financial condition of the issuer of the security, and the Corporation’s intent and ability to hold the security to recovery.

 

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At March 31, 2010, the amortized cost of approximately 9,000 AFS securities exceeded their fair value by $5.4 billion. The gross unrealized losses include $2.7 billion on non-agency RMBS, $1.3 billion on foreign securities and other taxable securities, which are primarily CDOs, and $828 million on agency RMBS. Combined, these securities represented 89 percent of the $5.4 billion in gross unrealized losses. Of the $5.4 billion, $1.7 billion of gross unrealized losses have existed for less than twelve months and $3.7 billion of gross unrealized losses have existed for a period of twelve months or longer. Of the gross unrealized losses existing for twelve months or longer, $2.3 billion related to approximately 400 non-agency RMBS, an additional $1.1 billion related to foreign securities and other taxable securities, and $28 million related to 400 AFS marketable equity securities. Combined, these securities represented 94 percent of the gross unrealized losses that have existed for a period of twelve months or longer. Gross unrealized losses are principally the result of ongoing illiquidity in the markets and lower interest rates.

The Corporation considers the length of time and extent to which the fair value of AFS debt and marketable equity securities have been less than cost to conclude that such securities were not other-than-temporarily impaired. The Corporation also considers other factors such as the financial condition of the issuer including credit ratings and specific events affecting the operations of the issuer, volatility of the security, underlying assets that collateralize the debt security, and other industry and macroeconomic conditions. As the Corporation has no intent to sell securities with unrealized losses and it is not more-likely-than-not that the Corporation will be required to sell these securities before recovery of amortized cost, the Corporation has concluded that the securities are not impaired on an other-than-temporary basis.

The amortized cost and fair value of the Corporation’s investment in AFS debt securities from the Federal National Mortgage Association (FNMA), Government National Mortgage Association (GNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) where the investment exceeded 10 percent of consolidated shareholders’ equity at March 31, 2010 and December 31, 2009 are presented in the following table.

 

         March 31, 2010            December 31, 2009    
             
  (Dollars in millions)        Amortized
    Cost
  

Fair    

Value    

       Amortized
    Cost
  

Fair    

Value    

 

  Federal National Mortgage Association

   $ 93,536    $ 94,684        $ 100,321    $ 101,096    

  Government National Mortgage Association

     71,763      72,103          60,610      61,121    

  Federal Home Loan Mortgage Corporation

     28,460      29,255          29,076      29,810    
 

Securities are pledged or assigned to secure borrowed funds, government and trust deposits and for other purposes. The carrying value of pledged securities was $141.1 billion and $122.7 billion at March 31, 2010 and December 31, 2009.

The expected maturity distribution of the Corporation’s MBS and the contractual maturity distribution of the Corporation’s other debt securities, and the yields on the Corporation’s AFS debt securities portfolio at March 31, 2010 are summarized in the following table. Actual maturities may differ from the contractual or expected maturities since borrowers may have the right to prepay obligations with or without prepayment penalties.

 

    March 31, 2010      
     
   

Due in One

Year or Less

   

Due after One

Year through

Five Years

   

Due after Five

Years through

Ten Years

   

Due after

Ten Years

    Total      
                                         
  (Dollars in millions)   Amount   Yield (1)         Amount   Yield (1)         Amount   Yield (1)         Amount   Yield (1)         Amount   Yield (1)      
 

  Fair value of available-for-sale debt securities

                     

U.S. Treasury and agency securities

  $ 101     3.5       $ 1,728     3.1       $ 8,326     4.0       $ 30,588     4.6       $ 40,743     4.4      

Mortgage-backed securities:

                     

Agency

    27     5.3            98,530     4.6            24,172     4.5            29,840     4.4            152,569     4.5         

Agency-collateralized mortgage obligations

    485     1.3            17,262     2.7            19,602     3.3            6,124     3.3            43,473     3.1         

Non-agency residential

    593     16.6            11,696     5.7            4,055     5.4            16,634     3.8            32,978     4.9         

Non-agency commercial

    250     5.2            4,727     6.8            2,379     12.8            514     5.0            7,870     8.4         

Foreign securities

    38     1.4            2,043     6.0            138     4.4            904     1.4            3,123     4.5         

Corporate bonds

    347     2.2            4,699     2.9            1,487     4.8            324     2.7            6,857     3.2         

Other taxable securities

    5,995     2.3            5,156     5.8            513     6.8            7,795     2.7            19,459     3.4         
                                     

Total taxable securities

    7,836     3.4            145,841     4.5            60,672     4.5            92,723     4.1            307,072     4.4         

Tax-exempt securities

    199     4.3            1,816     4.2            3,805     3.6            3,128     4.1            8,948     3.9         
                                     

Total available-for-sale debt securities

  $ 8,035     3.4          $ 147,657     4.5          $ 64,477     4.4          $ 95,851     4.1          $ 316,020     4.3         
                                     

  Amortized cost of available-for-sale debt securities

  $ 8,298       $ 146,452       $ 63,539       $ 97,674       $ 315,963      
 

 

  (1)   

Yields are calculated based on the amortized cost of the securities.

 

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The components of realized gains and losses on sales of debt securities for the three months ended March 31, 2010 and 2009 are presented in the following table.

 

         Three Months Ended March 31    
  (Dollars in millions)    2010    2009

  Gross gains

   $ 906     $ 1,537     

  Gross losses

     (172)      (39)    

  Net gains on sales of debt securities

   $ 734     $ 1,498     

The income tax expense attributable to realized net gains on sales of debt securities was $272 million and $554 million for the three months ended March 31, 2010 and 2009.

 

 

Certain Corporate and Strategic Investments

 

At both March 31, 2010 and December 31, 2009, the Corporation owned approximately 11 percent, or 25.6 billion common shares of China Construction Bank (CCB). During 2009, the Corporation sold its initial investment of 19.1 billion common shares in CCB for a pre-tax gain of $7.3 billion. The remaining investment of 25.6 billion common shares is accounted for at cost, is recorded in other assets and is non-transferable until August 2011. At March 31, 2010 and December 31, 2009, both the cost and the carrying value of the CCB investment were $9.2 billion, and the fair value was $21.0 billion and $22.0 billion. Dividend income on this investment is recorded in equity investment income. The Corporation remains a significant shareholder in CCB and intends to continue the important long-term strategic alliance with CCB originally entered into in 2005. As part of this alliance, the Corporation expects to continue to provide advice and assistance to CCB.

At both March 31, 2010 and December 31, 2009, the Corporation owned approximately 188.4 million preferred shares and 56.5 million common shares of Itaú Unibanco Holding S.A. (Itaú Unibanco). The Itaú Unibanco investment is accounted for at fair value and recorded as AFS marketable equity securities in other assets with unrealized gains recorded, net-of-tax, in accumulated OCI. At both March 31, 2010 and December 31, 2009, the cost of this investment was $2.6 billion and the fair value of this investment was $5.4 billion. Dividend income on this investment is recorded in equity investment income.

At both March 31, 2010 and December 31, 2009, the Corporation had a 24.9 percent investment in Grupo Financiero Santander, S.A., the subsidiary of Grupo Santander, S.A. Both the carrying value and fair value of this investment were $2.7 billion at March 31, 2010 compared to $2.5 billion at December 31, 2009. This investment is recorded in other assets and is accounted for under the equity method of accounting with income recorded in equity investment income.

At both March 31, 2010 and December 31, 2009, the Corporation had an approximate 34 percent economic ownership in BlackRock Inc. (BlackRock), a publicly traded investment company. The carrying value of this investment at both March 31, 2010 and December 31, 2009 was $10.0 billion, and the fair value was $14.1 billion and $15.0 billion. This investment is recorded in other assets and is accounted for under the equity method of accounting with income recorded in equity investment income.

On June 26, 2009, the Corporation entered into a joint venture agreement with First Data Corporation (First Data) creating Banc of America Merchant Services, LLC. Under the terms of the agreement, the Corporation contributed its merchant processing business to the joint venture and First Data contributed certain merchant processing contracts and personnel resources. During 2009, the Corporation recorded in other income a pre-tax gain of $3.8 billion related to this transaction. The Corporation owns approximately 46.5 percent of this joint venture, 48.5 percent is owned by First Data, with the remaining stake held by a third party investor. The third party investor has the right to put their interest to the joint venture which would have the effect of increasing the Corporation’s ownership interest to 49 percent. The investment in the joint venture, which was initially recorded at a fair value of $4.7 billion, is accounted for under the equity method of accounting with income recorded in equity investment income. The carrying value at both March 31, 2010 and December 31, 2009 was $4.7 billion.

 

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NOTE 6 – Outstanding Loans and Leases

The table below presents outstanding loans and leases at March 31, 2010 and December 31, 2009.

 

  (Dollars in millions)    March 31
2010 (1)
     December 31       
2009        

  Consumer

       

  Residential mortgage (2)

   $ 245,007      $ 242,129        

  Home equity

     149,907        149,126        

  Discontinued real estate (3)

     14,211        14,854        

  Credit card – domestic

     120,783        49,453        

  Credit card – foreign

     28,772        21,656        

  Direct/Indirect consumer (4)

     99,372        97,236        

  Other consumer (5)

     3,022        3,110        

  Total consumer

     661,074        577,564        

  Commercial

       

  Commercial – domestic (6)

     195,862        198,903        

  Commercial real estate (7)

     66,649        69,447        

  Commercial lease financing

     21,465        22,199        

  Commercial – foreign

     26,905        27,079        

  Total commercial loans

     310,881        317,628        

  Commercial loans measured at fair value (8)

     4,087        4,936        

  Total commercial

     314,968        322,564        

  Total loans and leases

   $ 976,042      $ 900,128        

 

  (1)  

March 31, 2010 balances are presented in accordance with new consolidation guidance.

 

  (2)  

Includes foreign residential mortgages of $511 million and $552 million at March 31, 2010 and December 31, 2009.

 

  (3)  

Includes $12.8 billion and $13.4 billion of pay option loans, and $1.4 billion and $1.5 billion of subprime loans at March 31, 2010 and December 31, 2009. The Corporation no longer originates these products.

 

  (4)  

Includes dealer financial services loans of $45.3 billion and $41.6 billion, consumer lending of $17.7 billion and $19.7 billion, domestic securities-based lending margin loans of $13.5 billion and $12.9 billion, student loans of $11.1 billion and $10.8 billion, foreign consumer loans of $7.9 billion and $8.0 billion and other loans of $3.9 billion and $4.2 billion at March 31, 2010 and December 31, 2009.

 

  (5)  

Includes consumer finance loans of $2.2 billion and $2.3 billion, other foreign consumer loans of $680 million and $709 million and consumer overdrafts of $173 million and $144 million at March 31, 2010 and December 31, 2009.

 

  (6)  

Includes small business commercial – domestic loans, including card related products, of $16.6 billion and $17.5 billion at March 31, 2010 and December 31, 2009.

 

  (7)  

Includes domestic commercial real estate loans of $63.9 billion and $66.5 billion and foreign commercial real estate loans of $2.7 billion and $3.0 billion at March 31, 2010 and December 31, 2009.

 

  (8)  

Certain commercial loans are accounted for under the fair value option and include commercial – domestic loans of $2.5 billion and $3.0 billion, commercial – foreign loans of $1.5 billion and $1.9 billion and commercial real estate loans of $101 million and $90 million at March 31, 2010 and December 31, 2009. See Note 14 – Fair Value Measurements for additional information on the fair value option.

 

The Corporation mitigates a portion of its credit risk through synthetic securitizations which are cash collateralized and provided mezzanine risk protection on residential mortgages of $2.4 billion and $2.5 billion at March 31, 2010 and December 31, 2009 which will reimburse the Corporation in the event that losses exceed 10 basis points (bps) of the original pool balance. As of March 31, 2010 and December 31, 2009, $65.5 billion and $70.7 billion of mortgage loans were protected under these agreements. The decrease in these credit protected pools was due to approximately $3.4 billion in principal payments and loan sales of $1.8 billion. At both March 31, 2010 and December 31, 2009, the Corporation had a receivable of $1.0 billion from these synthetic securitizations for reimbursement of losses. In addition, the Corporation has entered into credit protection agreements with FNMA and FHLMC totaling $6.9 billion and $6.6 billion as of March 31, 2010 and December 31, 2009, providing full protection on conforming residential mortgage loans that become severely delinquent.

 

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Table of Contents

 

Nonperforming Loans and Leases

 

The following table presents the Corporation’s nonperforming loans and leases, including nonperforming troubled debt restructurings (TDRs), at March 31, 2010 and December 31, 2009. This table excludes performing TDRs and loans accounted for under the fair value option. Nonperforming loans held-for-sale (LHFS) are excluded from nonperforming loans and leases as they are recorded at the lower of cost or fair value. In addition, purchased credit-impaired loans and past due consumer credit card, consumer non-real estate-secured loans, unsecured consumer loans and business card loans are not considered nonperforming and are therefore excluded from nonperforming loans and leases in the table. Real estate-secured, past due consumer loans that are insured by the Federal Housing Administration (FHA), including repurchased loans pursuant to the Corporation’s servicing agreements with GNMA, are not reported as nonperforming as principal repayments are insured by the FHA.

 

  (Dollars in millions)    March 31
2010
     December 31      
2009      

  Consumer

       

  Residential mortgage

   $ 17,763      $ 16,596      

  Home equity

     3,335        3,804      

  Discontinued real estate

     279        249      

  Direct/Indirect consumer

     91        86      

  Other consumer

     89        104      

  Total consumer

     21,557        20,839      

  Commercial

       

  Commercial – domestic (1)

     4,586        5,125      

  Commercial real estate

     7,177        7,286      

  Commercial lease financing

     147        115      

  Commercial – foreign

     150        177      

  Total commercial

     12,060        12,703      

  Total nonperforming loans and leases (2)

   $ 33,617      $ 33,542      

 

  (1)  

Includes small business commercial – domestic loans of $179 million and $200 million at March 31, 2010 and December 31, 2009.

 

  (2)  

Balances exclude nonaccruing TDRs in the consumer real estate portfolio that were removed from the purchased credit-impaired loan portfolio of $301 million and $395 million at March 31, 2010 and December 31, 2009.

Included in certain loan categories in the nonperforming table above are TDRs that were classified as nonperforming. At March 31, 2010 and December 31, 2009, the Corporation had $3.0 billion and $2.9 billion of residential mortgages, $1.1 billion and $1.7 billion of home equity, $516 million and $486 million of commercial – domestic loans and $53 million and $43 million of discontinued real estate loans that were TDRs and classified as nonperforming. In addition to these amounts, at March 31, 2010 and December 31, 2009, the Corporation had performing TDRs that were on accrual status of $3.6 billion and $2.3 billion of residential mortgages, $795 million and $639 million of home equity, $102 million and $91 million of commercial – domestic loans and $36 million and $35 million of discontinued real estate.

 

 

Impaired Loans and Troubled Debt Restructurings

 

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans, commercial performing TDRs and both performing and nonperforming consumer real estate TDRs. Additionally, the Corporation seeks to assist customers that are experiencing financial difficulty through renegotiating credit card, consumer lending and small business loans (the renegotiated portfolio) while ensuring compliance with Federal Financial Institutions Examination Council (FFIEC) guidelines. As defined in applicable accounting guidance, impaired loans exclude smaller balance homogeneous loans that are collectively evaluated for impairment, all commercial leases and those commercial loans accounted for under the fair value option. Purchased credit-impaired loans are reported and discussed separately below.

At March 31, 2010 and December 31, 2009, the Corporation had $12.0 billion and $12.7 billion of commercial impaired loans and $8.6 billion and $7.7 billion of consumer real estate impaired loans. The average recorded investment in commercial and consumer real estate impaired loans for the three months ended March 31, 2010 and 2009 was $20.9 billion and $9.0 billion. At March 31, 2010 and December 31, 2009, the recorded investment in impaired loans requiring an allowance for loan and lease losses was $18.7 billion and $18.6 billion, and the related allowance for loan and lease

 

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losses was $2.4 billion and $3.0 billion. For the three months ended March 31, 2010 and 2009, interest income on these impaired loans totaled $111 million and $15 million. At March 31, 2010 and December 31, 2009, remaining commitments to lend additional funds to debtors whose terms have been modified in a commercial or consumer TDR were immaterial.

At March 31, 2010 and December 31, 2009, the Corporation had a renegotiated portfolio of $15.5 billion and $8.1 billion and the related allowance was $8.0 billion at March 31, 2010. Current period amounts include the impact of new consolidation guidance which resulted in the consolidation of credit card securitization trusts. The average recorded investment in the renegotiated portfolio for the three months ended March 31, 2010 and 2009 was $15.6 billion and $5.0 billion. Interest income is accrued on outstanding balances with cash receipts first applied to interest and fees, then to outstanding principal balances. For the three months ended March 31, 2010 and 2009, interest income on the renegotiated portfolio totaled $210 million and $63 million. The renegotiated portfolio is excluded from nonperforming loans as the Corporation generally does not classify consumer loans not secured by real estate as nonperforming as these loans are generally charged off no later than the end of the month in which the loan becomes 180 days past due.

 

 

Purchased Credit-impaired Loans

 

Purchased credit-impaired loans are acquired loans with evidence of credit quality deterioration since origination for which it is probable at purchase date that the Corporation will be unable to collect all contractually required payments. In connection with the Countrywide acquisition in 2008, the Corporation acquired purchased credit-impaired loans, substantially all of which are residential mortgage, home equity and discontinued real estate loans, with a remaining unpaid principal balance at March 31, 2010 and December 31, 2009 of $46.3 billion and $47.7 billion and a carrying amount of $37.0 billion and $37.5 billion. In connection with the Merrill Lynch acquisition in 2009, the Corporation acquired purchased credit-impaired loans, substantially all of which are commercial and residential mortgage loans. At March 31, 2010, the unpaid principal balance of Merrill Lynch purchased credit-impaired consumer and commercial loans was $2.3 billion and $1.7 billion and the carrying amount of these loans was $2.0 billion and $604 million. At December 31, 2009, the unpaid principal balance of Merrill Lynch purchased credit-impaired consumer and commercial loans was $2.4 billion and $2.0 billion and the carrying amount of these loans was $2.1 billion and $692 million.

As a result of the adoption of new accounting guidance on purchased credit-impaired loans, beginning January 1, 2010, pooled loans that are modified subsequent to acquisition are not removed from the purchased credit-impaired loan pools. Prior to January 1, 2010, pooled loans that were modified subsequent to acquisition were reviewed to compare modified contractual cash flows to the purchased credit-impaired carrying value. If the present value of the modified cash flows was lower than the carrying value, the loan was removed from the purchased credit-impaired loan pool at its carrying value, as well as any related allowance for loan and lease losses, and was classified as a TDR. The carrying value of purchased credit-impaired loan TDRs that were removed from the purchased credit-impaired pool prior to January 1, 2010 totaled $2.2 billion at March 31, 2010 of which $1.9 billion were on accrual status. The carrying value of these modified loans, net of allowance, was approximately 68 percent of the unpaid principal balance.

The following table shows activity for the accretable yield on purchased credit-impaired loans. The increase in expected cash flows during the three months ended March 31, 2010 of $200 million is primarily attributable to slower forecasted prepayments.

 

  (Dollars in millions)

 

     

  Accretable yield, January 1, 2009

 

   $ 12,860     

  Merrill Lynch balance

 

     627     

  Accretion

 

     (2,859)    

  Disposals/transfers

 

     (1,482)    

  Reclassifications to nonaccretable difference

 

     (1,431)    

  Accretable yield, December 31, 2009

 

   $ 7,715     

  Accretion

 

     (500)    

  Disposals

 

     (47)    

  Reclassifications from nonaccretable difference

 

     200     

  Accretable yield, March 31, 2010

   $ 7,368     

 

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Table of Contents

 

Loans Held-for-Sale

The Corporation had LHFS of $35.4 billion and $43.9 billion at March 31, 2010 and December 31, 2009. Proceeds from sales, securitizations and paydowns of LHFS were $76.5 billion and $80.4 billion for the three months ended March 31, 2010 and 2009. Proceeds used for originations and purchases of LHFS were $65.1 billion and $83.8 billion for the three months ended March 31, 2010 and 2009.

 

NOTE 7 – Allowance for Credit Losses

 

The following table summarizes the changes in the allowance for credit losses for the three months ended March 31, 2010 and 2009.

 

     Three Months Ended March 31
      

  (Dollars in millions)

 

   2010      2009

  Allowance for loan and lease losses, January 1, before effect of adoption of

    new consolidation guidance

 

   $ 37,200      $ 23,071     

  Allowance related to adoption of new consolidation guidance

 

     10,788        n/a     

  Allowance for loan and lease losses, January 1

 

     47,988        23,071     

  Loans and leases charged off

 

     (11,501)        (7,356)    

  Recoveries of loans and leases previously charged off

 

     704        414     

  Net charge-offs

 

     (10,797)        (6,942)    

  Provision for loan and lease losses

 

     9,599        13,352     

  Other

 

     45        (433)    

  Allowance for loan and lease losses, March 31

 

     46,835        29,048     

  Reserve for unfunded lending commitments, January 1

 

     1,487        421     

  Provision for unfunded lending commitments

 

     206        28     

  Other

 

     (172)        1,653     

  Reserve for unfunded lending commitments, March 31

 

     1,521        2,102     

  Allowance for credit losses, March 31

   $ 48,356      $ 31,150     

n/a = not applicable

During the three months ended March 31, 2010 and 2009, the Corporation recorded $848 million and $853 million in provision for credit losses with a corresponding increase in the valuation reserve included as part of the allowance for loan and lease losses specifically for the purchased credit-impaired portfolio. The amount of the allowance for loan and lease losses associated with the purchased credit-impaired loan portfolio was $5.1 billion and $3.9 billion at March 31, 2010 and December 31, 2009. The increase in the allowance for loan and lease losses was a result of provision for credit losses and the reclassification to the nonaccretable difference of previous write-downs recorded against the allowance.

The “other” amount under the reserve for unfunded lending commitments for the three months ended March 31, 2009 represents the fair value of the acquired Merrill Lynch reserve excluding those commitments accounted for under the fair value option, net of accretion, and the impact of funding previously unfunded portions.

 

NOTE 8 – Securitizations and Other Variable Interest Entities

The Corporation utilizes VIEs in the ordinary course of business to support its own and its customers’ financing and investing needs. The Corporation routinely securitizes loans and debt securities using VIEs as a source of funding for the Corporation and as a means of transferring the economic risk of the loans or debt securities to third parties. The Corporation also administers, structures or invests in other VIEs including multi-seller conduits, municipal bond trusts, CDOs and other entities as described in more detail below.

 

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The entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and consolidates the VIE. In accordance with the new consolidation guidance effective January 1, 2010, the Corporation is deemed to have a controlling financial interest and is the primary beneficiary of a VIE if it has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. As a result of this change in accounting, the Corporation consolidated certain VIEs and former QSPEs that were unconsolidated prior to January 1, 2010. The net incremental impact of this accounting change on the Corporation’s Consolidated Balance Sheet is set forth in the following table. The net effect of the accounting change on January 1, 2010 shareholders’ equity was a $6.2 billion charge to retained earnings, net-of-tax, primarily from the increase in the allowance for loan and lease losses, as well as a $116 million charge to accumulated OCI, net-of-tax, for the net unrealized losses on AFS debt securities on newly consolidated VIEs.

 

  (Dollars in millions)    Ending Balance Sheet
December 31, 2009
   Net Increase
(Decrease)  (1)  
     Beginning Balance Sheet  
January 1, 2010

 

  Assets

 

        

  Cash and cash equivalents

 

   $ 121,339    $ 2,807     $ 124,146         

  Trading assets

 

     182,206      6,937       189,143         

  Derivative assets

 

     80,689      556       81,245         

  Debt securities:

 

        

  Available-for-sale

 

     301,601      (2,320)      299,281         

  Held-to-maturity

 

     9,840      (6,572)      3,268         

  Total debt securities

 

     311,441      (8,892)      302,549         

  Loans and leases

 

     900,128      102,595       1,002,723         

  Allowance for loans and leases losses

 

     (37,200)      (10,788)      (47,988)        

  Loans and leases, net of allowance

 

     862,928      91,807       954,735         

  Loans held-for-sale

 

     43,874      3,025       46,899         

  Deferred tax asset

 

     27,279      3,498       30,777         

  All other assets

 

     593,543      701       594,244         

  Total assets

   $ 2,223,299    $ 100,439     $ 2,323,738         

  Liabilities

        

  Commercial paper and other short-term borrowings

   $ 69,524    $ 22,136     $ 91,660         

  Long-term debt

     438,521      84,356       522,877         

  All other liabilities

     1,483,810      217       1,484,027         

  Total liabilities

     1,991,855      106,709       2,098,564         

  Shareholders’ equity

        

  Retained earnings

     71,233      (6,154)      65,079         

  Accumulated other comprehensive income (loss)

     (5,619)      (116)      (5,735)        

  All other shareholders’ equity

     165,830           165,830         

  Total shareholders’ equity

     231,444      (6,270)      225,174         

  Total liabilities and shareholders’ equity

   $ 2,223,299    $ 100,439     $ 2,323,738         

 

  (1)  

The carrying amount of non-cash assets and liabilities consolidated as a result of the adoption of new consolidation guidance was $97.6 billion and $106.7 billion.

The following tables present the assets and liabilities of consolidated and unconsolidated VIEs if the Corporation has continuing involvement with transferred assets or if the Corporation otherwise has a variable interest in the VIE as of March 31, 2010 and December 31, 2009. The tables also present the Corporation’s maximum exposure to loss resulting from its involvement with consolidated VIEs and unconsolidated VIEs in which the Corporation holds a variable interest as of March 31, 2010 and December 31, 2009. The Corporation’s maximum exposure to loss is based on the unlikely event that all of the assets in the VIEs become worthless and incorporates not only potential losses associated with assets recorded on the Corporation’s Consolidated Balance Sheet but also potential losses associated with off-balance sheet commitments such as unfunded liquidity commitments and other contractual arrangements. The Corporation’s maximum exposure to loss does not include losses previously recognized through write-downs of assets on the Corporation’s Consolidated Balance Sheet.

The Corporation invests in asset-backed securities issued by third party VIEs with which it has no other form of involvement. These securities are included in Note 3 – Trading Account Assets and Liabilities and Note 5 – Securities. In addition, the Corporation uses VIEs such as trust preferred securities trusts in connection with its funding activities, as described in Note 13 – Long-term Debt to the Consolidated Financial Statements of the Corporation’s 2009 Annual Report on Form 10-K. The Corporation also uses VIEs in the form of synthetic securitization vehicles to mitigate a portion of the credit risk on its residential mortgage loan portfolio as described in Note 6 – Outstanding Loans and Leases. The

 

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Corporation has also provided support to certain cash funds managed within GWIM. These VIEs, which are not consolidated by the Corporation, are not included in the tables below. For additional information on these transactions, see Note 3 – Trading Account Assets and Liabilities, Note 5 – Securities, Note 6 – Outstanding Loans and Leases, Note 13 – Long-term Debt and Note 14 – Commitments and Contingencies to the Consolidated Financial Statements of the Corporation’s 2009 Annual Report on Form 10-K.

Except as described below and in Note 11 – Commitments and Contingencies, as of March 31, 2010, the Corporation has not provided financial support to consolidated or unconsolidated VIEs that it was not previously contractually required to provide, nor does it intend to do so.

 

 

First-Lien Mortgage-related Securitizations

 

As part of its mortgage banking activities, the Corporation securitizes a portion of the first-lien residential mortgage loans it originated or purchased from third parties in conjunction with or shortly after loan closing or purchase. In addition, the Corporation may, from time to time, securitize commercial mortgages originated or purchased from other entities. The Corporation also typically has continuing involvement with the securitized loans as servicer of the loans. Further, the Corporation may retain beneficial interests in the securitization vehicles including senior and subordinate securities and the equity tranche. Except as described below, the Corporation does not provide guarantees or recourse to the securitization vehicles other than standard representations and warranties.

The following table summarizes select information related to first-lien mortgage securitizations for the three months ended March 31, 2010 and 2009.

 

     Residential Mortgage          
            
          Non-Agency   

Commercial Mortgage

               
     Agency    Prime    Subprime    Alt-A   
                    
     Three Months Ended March 31
      
 (Dollars in millions)      2010      2009    2010    2009    2010    2009    2010    2009    2010    2009  

  Cash proceeds from new securitizations (1)

   $ 69,909       $ 74,858    $ -    $ -    $ -    $ -    $ -    $ -    $ 1,021    $ 3,557  

  Gain (loss) on securitizations (2, 3)

     (49      -      -      -      -      -      -      -      20      29  

  Cash flows received on residual interests

     -         -      6      6      20      16      1      2      5      6  

  Initial fair value of assets acquired (4)

     25,148         n/a      -      n/a      -      n/a      9      n/a      -      n/a  

 

  (1)  

The Corporation sells residential mortgage loans to GSEs in the normal course of business and receives MBS in exchange which may then be sold into the market to third-party investors for cash proceeds.

 

  (2)  

Net of hedges

 

  (3)  

Substantially all of the residential mortgages securitized are initially classified as LHFS and accounted for under the fair value option. As such, gains are recognized on these LHFS prior to securitization. During the three months ended March 31, 2010 and 2009, the Corporation recognized $1.3 billion and $954 million of gains on these LHFS which were substantially offset by hedges.

 

  (4)  

All of the securities and other retained interests acquired from securitizations are initially classified as Level 2 assets within the fair value hierarchy. During the three months ended March 31, 2010, there were no changes to the initial classification within the fair value hierarchy.

 

  n/a

= not applicable

The Corporation recognizes consumer MSRs from the sale or securitization of mortgage loans. Servicing fee and ancillary fee income on consumer mortgage loans serviced, including securitizations where the Corporation has continuing involvement, were $1.6 billion and $1.5 billion during the three months ended March 31, 2010 and 2009. Servicing advances on consumer mortgage loans, including securitizations where the Corporation has continuing involvement, were $20.6 billion and $19.3 billion at March 31, 2010 and December 31, 2009. In addition, the Corporation has retained commercial MSRs from the sale or securitization of commercial mortgage loans. Servicing fee and ancillary fee income on commercial mortgage loans serviced, including securitizations where the Corporation has continuing involvement, were $4 million and $11 million during the three months ended March 31, 2010 and 2009. Servicing advances on commercial mortgage loans, including securitizations where the Corporation has continuing involvement, were $109 million at both March 31, 2010 and December 31, 2009. For more information on MSRs, see Note 16 – Mortgage Servicing Rights.

 

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The following table summarizes select information related to first-lien mortgage securitization trusts in which the Corporation holds a variable interest as of March 31, 2010 and December 31, 2009.

 

    Residential Mortgage        
            Non-Agency        
    Agency   Prime   Subprime   Alt-A   Commercial Mortgage
                 

  (Dollars in millions)

 

  March 31
2010
  December 31
2009
  March 31
2010
  December 31
2009
  March 31
2010
  December 31
2009
  March 31
2010
  December 31
2009
  March 31
2010
  December 31    
2009    

  Maximum loss exposure (1)

 

  $ 50,928   $ 16,081   $ 3,565   $ 4,068   $ 309   $ 224   $ 791   $ 996   $ 1,941   $ 1,877        

 

  Unconsolidated VIEs

 

                   

  Senior securities held (2)

 

                   

  Trading account assets

 

  $ 9,248   $ 2,295   $ 169   $ 201   $ 3   $ 12   $ 426   $ 431   $ 1   $ 469        

  AFS debt securities

 

    41,680     13,786     3,356     3,845     216     188     346     561     1,346     1,215        

  Subordinate securities held (2)

 

                   

  Trading account assets

 

    -     -     21     -     16     -     13     -     542     122        

  AFS debt securities

 

    -     -     12     13     63     22     2     4     5     23        

  Residual interests held

 

    -     -     7     9     11     2     4     -     47     48        

  Total retained positions

 

  $ 50,928   $ 16,081   $ 3,565   $ 4,068   $ 309   $ 224   $ 791   $ 996   $ 1,941   $ 1,877        

  Principal balance outstanding (3)

 

  $ 1,274,074   $ 1,255,650   $ 75,779   $ 81,012   $ 74,882   $ 83,065   $ 142,947   $ 147,072   $ 101,132   $ 65,397        

 

  Maximum loss exposure (1)

 

  $ 900   $ -   $ 53   $ 472   $ 1,442   $ 1,261   $ -   $ -   $ -   $ -        

  Consolidated VIEs

 

                   

  Loans and leases

 

  $ 900   $ -   $ -   $ -   $ 413   $ 450   $ -   $ -   $ -   $ -        

  Loans held-for-sale

 

    -     -     106     436     2,942     2,030     -     -