e10vq
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 September 30, 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
Registrants 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).
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Large accelerated filer ü |
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Accelerated filer |
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Non-accelerated filer
(do not check if a smaller
reporting company) |
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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
October 31, 2010, there were 10,085,147,198 shares of Bank of America Corporation Common Stock
outstanding.
1
Bank of America Corporation
September 30, 2010 Form 10-Q
INDEX
2
Part 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Bank of America Corporation and Subsidiaries
Consolidated Statement of Income
|
|
|
|
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|
|
|
|
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|
|
|
|
|
|
|
Three Months Ended September 30 |
|
|
Nine Months Ended September 30 |
|
(Dollars in millions, except per share information) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans and leases |
|
$ |
12,485 |
|
|
$ |
11,620 |
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|
$ |
38,847 |
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|
$ |
37,298 |
|
Interest on debt securities |
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|
2,605 |
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|
|
2,975 |
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|
|
8,638 |
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|
|
10,088 |
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Federal funds sold and securities borrowed or purchased under agreements to resell |
|
|
441 |
|
|
|
722 |
|
|
|
1,346 |
|
|
|
2,567 |
|
Trading account assets |
|
|
1,641 |
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|
|
1,843 |
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|
|
5,180 |
|
|
|
6,223 |
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Other interest income |
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|
1,037 |
|
|
|
1,363 |
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|
|
3,196 |
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|
|
4,095 |
|
|
Total interest income |
|
|
18,209 |
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|
|
18,523 |
|
|
|
57,207 |
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|
|
60,271 |
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|
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|
|
|
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Interest expense |
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Deposits |
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|
950 |
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|
|
1,710 |
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|
|
3,103 |
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|
|
6,335 |
|
Short-term borrowings |
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|
848 |
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|
1,237 |
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|
|
2,557 |
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|
|
4,854 |
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Trading account liabilities |
|
|
635 |
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|
|
455 |
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|
|
2,010 |
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|
|
1,484 |
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Long-term debt |
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|
3,341 |
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|
3,698 |
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|
10,453 |
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|
12,048 |
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Total interest expense |
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|
5,774 |
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|
|
7,100 |
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|
18,123 |
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|
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24,721 |
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Net interest income |
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12,435 |
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|
|
11,423 |
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|
|
39,084 |
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|
|
35,550 |
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|
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|
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|
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Noninterest income |
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Card income |
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1,982 |
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|
|
1,557 |
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|
|
5,981 |
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|
|
6,571 |
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Service charges |
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2,212 |
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|
3,020 |
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|
7,354 |
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|
8,282 |
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Investment and brokerage services |
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|
2,724 |
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2,948 |
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|
8,743 |
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|
8,905 |
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Investment banking income |
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|
1,371 |
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|
|
1,254 |
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|
|
3,930 |
|
|
|
3,955 |
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Equity investment income |
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|
357 |
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|
|
843 |
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|
|
3,748 |
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|
|
7,988 |
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Trading account profits |
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|
2,596 |
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|
|
3,395 |
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|
|
9,059 |
|
|
|
10,760 |
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Mortgage banking income |
|
|
1,755 |
|
|
|
1,298 |
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|
|
4,153 |
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|
|
7,139 |
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Insurance income |
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|
75 |
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|
|
707 |
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|
|
1,468 |
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|
|
2,057 |
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Gains on sales of debt securities |
|
|
883 |
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1,554 |
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1,654 |
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|
|
3,684 |
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Other income (loss) |
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|
433 |
|
|
|
(1,167 |
) |
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|
3,498 |
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|
1,870 |
|
Other-than-temporary impairment losses on available-for-sale debt securities: |
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Total other-than-temporary impairment losses |
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|
(156 |
) |
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|
(847 |
) |
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|
(1,616 |
) |
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|
(2,671 |
) |
Less: Portion of other-than-temporary impairment losses recognized in other
comprehensive income |
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33 |
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|
50 |
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|
766 |
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|
477 |
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Net impairment losses recognized in earnings on available-for-sale debt securities |
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|
(123 |
) |
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|
(797 |
) |
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|
(850 |
) |
|
|
(2,194 |
) |
|
Total noninterest income |
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|
14,265 |
|
|
|
14,612 |
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|
|
48,738 |
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|
59,017 |
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Total revenue, net of interest expense |
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26,700 |
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|
26,035 |
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|
87,822 |
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94,567 |
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|
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|
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Provision for credit losses |
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|
5,396 |
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|
11,705 |
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|
23,306 |
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|
38,460 |
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Noninterest expense |
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Personnel |
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8,402 |
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|
7,613 |
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|
26,349 |
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|
24,171 |
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Occupancy |
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1,150 |
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1,220 |
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3,504 |
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|
3,567 |
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Equipment |
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|
619 |
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|
617 |
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|
1,845 |
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|
1,855 |
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Marketing |
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|
497 |
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|
470 |
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|
|
1,479 |
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|
1,490 |
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Professional fees |
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|
651 |
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|
562 |
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|
1,812 |
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|
1,511 |
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Amortization of intangibles |
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|
426 |
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|
510 |
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|
1,311 |
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|
1,546 |
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Data processing |
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|
602 |
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|
592 |
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|
1,882 |
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|
|
1,861 |
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Telecommunications |
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|
361 |
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|
361 |
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|
1,050 |
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|
1,033 |
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Other general operating |
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|
3,687 |
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|
|
3,767 |
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|
|
11,162 |
|
|
|
11,106 |
|
Goodwill impairment |
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|
10,400 |
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|
|
- |
|
|
|
10,400 |
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|
- |
|
Merger and restructuring charges |
|
|
421 |
|
|
|
594 |
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|
|
1,450 |
|
|
|
2,188 |
|
|
Total noninterest expense |
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|
27,216 |
|
|
|
16,306 |
|
|
|
62,244 |
|
|
|
50,328 |
|
|
Income (loss) before income taxes |
|
|
(5,912 |
) |
|
|
(1,976 |
) |
|
|
2,272 |
|
|
|
5,779 |
|
Income tax expense (benefit) |
|
|
1,387 |
|
|
|
(975 |
) |
|
|
3,266 |
|
|
|
(691 |
) |
|
Net income (loss) |
|
$ |
(7,299 |
) |
|
$ |
(1,001 |
) |
|
$ |
(994 |
) |
|
$ |
6,470 |
|
|
Preferred stock dividends |
|
|
348 |
|
|
|
1,240 |
|
|
|
1,036 |
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|
|
3,478 |
|
|
Net income (loss) applicable to common shareholders |
|
$ |
(7,647 |
) |
|
$ |
(2,241 |
) |
|
$ |
(2,030 |
) |
|
$ |
2,992 |
|
|
|
|
|
|
|
|
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|
|
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Per common share information |
|
|
|
|
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|
|
|
Earnings (loss) |
|
$ |
(0.77 |
) |
|
$ |
(0.26 |
) |
|
$ |
(0.21 |
) |
|
$ |
0.39 |
|
Diluted earnings (loss) |
|
|
(0.77 |
) |
|
|
(0.26 |
) |
|
|
(0.21 |
) |
|
|
0.39 |
|
Dividends paid |
|
|
0.01 |
|
|
|
0.01 |
|
|
|
0.03 |
|
|
|
0.03 |
|
|
Average common shares issued and outstanding (in thousands) |
|
|
9,976,351 |
|
|
|
8,633,834 |
|
|
|
9,706,951 |
|
|
|
7,423,341 |
|
|
Average diluted common shares issued and outstanding (in thousands) |
|
|
9,976,351 |
|
|
|
8,633,834 |
|
|
|
9,706,951 |
|
|
|
7,449,911 |
|
|
See accompanying Notes to Consolidated Financial Statements.
3
Bank of America Corporation and Subsidiaries
Consolidated Balance Sheet
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|
September 30 |
|
December 31 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
131,116 |
|
|
$ |
121,339 |
|
Time deposits placed and other short-term investments |
|
|
18,946 |
|
|
|
24,202 |
|
Federal funds sold and securities borrowed or purchased under agreements to resell (includes $81,480 and
$57,775 measured at fair value and $271,593 and $189,844 pledged as collateral) |
|
|
271,818 |
|
|
|
189,933 |
|
Trading account assets (includes $15,995 and $30,921 pledged as collateral) |
|
|
207,695 |
|
|
|
182,206 |
|
Derivative assets |
|
|
84,684 |
|
|
|
87,622 |
|
Debt securities: |
|
|
|
|
|
|
|
|
Available-for-sale (includes $115,506 and $122,708 pledged as collateral) |
|
|
322,424 |
|
|
|
301,601 |
|
Held-to-maturity, at cost (fair value - $438 and $9,684) |
|
|
438 |
|
|
|
9,840 |
|
|
Total debt securities |
|
|
322,862 |
|
|
|
311,441 |
|
|
Loans and leases (includes $3,684 and $4,936 measured at fair value and $84,036
and $118,113 pledged as collateral) |
|
|
933,910 |
|
|
|
900,128 |
|
Allowance for loan and lease losses |
|
|
(43,581 |
) |
|
|
(37,200 |
) |
|
Loans and leases, net of allowance |
|
|
890,329 |
|
|
|
862,928 |
|
|
Premises and equipment, net |
|
|
14,320 |
|
|
|
15,500 |
|
Mortgage servicing rights (includes $12,251 and $19,465 measured at fair value) |
|
|
12,540 |
|
|
|
19,774 |
|
Goodwill |
|
|
75,602 |
|
|
|
86,314 |
|
Intangible assets |
|
|
10,402 |
|
|
|
12,026 |
|
Loans held-for-sale (includes $22,337 and $32,795 measured at fair value) |
|
|
33,276 |
|
|
|
43,874 |
|
Customer and other receivables |
|
|
78,599 |
|
|
|
81,996 |
|
Other assets (includes $72,635 and $55,909 measured at fair value) |
|
|
187,471 |
|
|
|
191,077 |
|
|
Total assets |
|
$ |
2,339,660 |
|
|
$ |
2,230,232 |
|
|
|
|
|
|
|
Assets of consolidated VIEs included in total assets above (substantially all pledged as collateral) |
|
|
|
|
Trading account assets |
|
$ |
11,186 |
|
Derivative assets |
|
|
2,838 |
|
Available-for-sale debt securities |
|
|
7,684 |
|
Loans and leases |
|
|
132,106 |
|
Allowance for loan and lease losses |
|
|
(9,831 |
) |
|
Loans and leases, net of allowance |
|
|
122,275 |
|
|
Loans held-for-sale |
|
|
3,301 |
|
All other assets |
|
|
7,910 |
|
|
Total assets of consolidated VIEs |
|
$ |
155,194 |
|
|
See accompanying Notes to Consolidated Financial Statements.
4
Bank of America Corporation and Subsidiaries
Consolidated Balance Sheet
(continued)
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
December 31 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
Liabilities |
|
|
|
|
|
|
|
|
Deposits in domestic offices: |
|
|
|
|
|
|
|
|
Noninterest-bearing |
|
$ |
265,672 |
|
|
$ |
269,615 |
|
Interest-bearing (includes $2,745 and $1,663 measured at fair value) |
|
|
634,784 |
|
|
|
640,789 |
|
Deposits in foreign offices: |
|
|
|
|
|
|
|
|
Noninterest-bearing |
|
|
6,297 |
|
|
|
5,489 |
|
Interest-bearing |
|
|
70,569 |
|
|
|
75,718 |
|
|
Total deposits |
|
|
977,322 |
|
|
|
991,611 |
|
|
Federal funds purchased and securities loaned or sold under agreements to repurchase
(includes $48,509 and $37,325 measured at fair value) |
|
|
296,605 |
|
|
|
255,185 |
|
Trading account liabilities |
|
|
90,010 |
|
|
|
65,432 |
|
Derivative liabilities |
|
|
61,656 |
|
|
|
50,661 |
|
Commercial paper and other short-term borrowings (includes $4,924 and $813 measured at fair value) |
|
|
64,818 |
|
|
|
69,524 |
|
Accrued expenses and other liabilities (includes $23,855 and $19,015 measured at fair value
and $1,294 and $1,487 of reserve for unfunded lending commitments) |
|
|
139,896 |
|
|
|
127,854 |
|
Long-term debt (includes $49,452 and $45,451 measured at fair value) |
|
|
478,858 |
|
|
|
438,521 |
|
|
Total liabilities |
|
|
2,109,165 |
|
|
|
1,998,788 |
|
|
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 |
|
|
18,104 |
|
|
|
37,208 |
|
Common stock and additional paid-in capital, $0.01 par value; authorized 12,800,000,000 and
10,000,000,000 shares; issued and outstanding 10,033,705,046 and 8,650,243,926 shares |
|
|
149,563 |
|
|
|
128,734 |
|
Retained earnings |
|
|
62,515 |
|
|
|
71,233 |
|
Accumulated other comprehensive income (loss) |
|
|
336 |
|
|
|
(5,619 |
) |
Other |
|
|
(23 |
) |
|
|
(112 |
) |
|
Total shareholders equity |
|
|
230,495 |
|
|
|
231,444 |
|
|
Total liabilities and shareholders equity |
|
$ |
2,339,660 |
|
|
$ |
2,230,232 |
|
|
|
|
|
|
|
Liabilities of consolidated VIEs included in total liabilities above |
|
|
|
|
Commercial paper and other short-term borrowings (includes $7,136 of non-recourse liabilities) |
|
$ |
13,222 |
|
Long-term debt (includes $75,137 of non-recourse debt) |
|
|
79,228 |
|
All other liabilities (includes $1,160 of non-recourse liabilities) |
|
|
1,954 |
|
|
Total liabilities of consolidated VIEs |
|
$ |
94,404 |
|
|
See accompanying Notes to Consolidated Financial Statements.
5
Bank of America Corporation and Subsidaries
Consolidated Statement of Changes in Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock and |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-in |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Total |
|
|
Comprehensive |
|
|
|
Preferred |
|
|
Capital |
|
|
Retained |
|
|
Comprehensive |
|
|
|
|
|
|
Shareholders |
|
|
Income |
|
(Dollars in millions, shares in thousands) |
|
Stock |
|
|
Shares |
|
|
Amount |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Other |
|
|
Equity |
|
|
(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 |
) |
|
|
|
|
|
|
- |
|
|
$ |
(71 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,470 |
|
|
|
|
|
|
|
|
|
|
|
6,470 |
|
|
|
6,470 |
|
Net change in available-for-sale debt and marketable
equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,110 |
|
|
|
|
|
|
|
3,110 |
|
|
|
3,110 |
|
Net change in foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
26 |
|
|
|
26 |
|
Net change in derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
721 |
|
|
|
|
|
|
|
721 |
|
|
|
721 |
|
Employee benefit plan adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
334 |
|
|
|
|
|
|
|
334 |
|
|
|
334 |
|
Dividends paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(238 |
) |
|
|
|
|
|
|
|
|
|
|
(238 |
) |
|
|
|
|
Preferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,295 |
) |
|
|
|
|
|
|
|
|
|
|
(3,295 |
) |
|
|
|
|
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 |
|
|
|
|
|
Issuance of common stock |
|
|
|
|
|
|
1,250,000 |
|
|
|
13,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,468 |
|
|
|
|
|
Exchange of preferred stock |
|
|
(14,797 |
) |
|
|
999,935 |
|
|
|
14,221 |
|
|
|
576 |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
Common stock issued under employee plans and
related tax effects |
|
|
|
|
|
|
7,467 |
|
|
|
664 |
|
|
|
|
|
|
|
|
|
|
|
257 |
|
|
|
921 |
|
|
|
|
|
Other |
|
|
531 |
|
|
|
|
|
|
|
|
|
|
|
(526 |
) |
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
Balance, September 30, 2009 |
|
$ |
58,840 |
|
|
|
8,650,314 |
|
|
$ |
128,823 |
|
|
$ |
76,881 |
|
|
$ |
(6,705 |
) |
|
$ |
(156 |
) |
|
$ |
257,683 |
|
|
$ |
10,590 |
|
|
Balance, December 31, 2009 |
|
$ |
37,208 |
|
|
|
8,650,244 |
|
|
$ |
128,734 |
|
|
$ |
71,233 |
|
|
$ |
(5,619 |
) |
|
$ |
(112 |
) |
|
$ |
231,444 |
|
|
|
|
|
Cumulative adjustments for accounting changes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation of certain variable interest entities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,154 |
) |
|
|
(116 |
) |
|
|
|
|
|
|
(6,270 |
) |
|
$ |
(116 |
) |
Credit-related notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(229 |
) |
|
|
229 |
|
|
|
|
|
|
|
- |
|
|
|
229 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(994 |
) |
|
|
|
|
|
|
|
|
|
|
(994 |
) |
|
|
(994 |
) |
Net change in available-for-sale debt and marketable
equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,855 |
|
|
|
|
|
|
|
6,855 |
|
|
|
6,855 |
|
Net change in foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
238 |
|
|
|
|
|
|
|
238 |
|
|
|
238 |
|
Net change in derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,439 |
) |
|
|
|
|
|
|
(1,439 |
) |
|
|
(1,439 |
) |
Employee benefit plan adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
188 |
|
|
|
|
|
|
|
188 |
|
|
|
188 |
|
Dividends paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(303 |
) |
|
|
|
|
|
|
|
|
|
|
(303 |
) |
|
|
|
|
Preferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,036 |
) |
|
|
|
|
|
|
|
|
|
|
(1,036 |
) |
|
|
|
|
Common stock issued under employee plans and
related tax effects |
|
|
|
|
|
|
97,461 |
|
|
|
1,585 |
|
|
|
|
|
|
|
|
|
|
|
82 |
|
|
|
1,667 |
|
|
|
|
|
Common Equivalent Securities conversion |
|
|
(19,244 |
) |
|
|
1,286,000 |
|
|
|
19,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
Other |
|
|
140 |
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
7 |
|
|
|
145 |
|
|
|
|
|
|
Balance, September 30, 2010 |
|
$ |
18,104 |
|
|
|
10,033,705 |
|
|
$ |
149,563 |
|
|
$ |
62,515 |
|
|
$ |
336 |
|
|
$ |
(23 |
) |
|
$ |
230,495 |
|
|
$ |
4,961 |
|
|
See accompanying Notes to Consolidated Financial Statements.
6
Bank of America Corporation and Subsidiaries
Consolidated Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30 |
|
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
Operating activities |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(994 |
) |
|
$ |
6,470 |
|
Reconciliation of net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
23,306 |
|
|
|
38,460 |
|
Gains on sales of debt securities |
|
|
(1,654 |
) |
|
|
(3,684 |
) |
Depreciation
and premises improvements amortization |
|
|
1,651 |
|
|
|
1,755 |
|
Amortization of intangibles |
|
|
1,311 |
|
|
|
1,546 |
|
Deferred income tax expense |
|
|
3,094 |
|
|
|
3,560 |
|
Net decrease in trading and derivative instruments |
|
|
18,113 |
|
|
|
42,827 |
|
Net decrease in other assets |
|
|
29,187 |
|
|
|
21,970 |
|
Net increase (decrease) in accrued expenses and other liabilities |
|
|
6,726 |
|
|
|
(20,945 |
) |
Other operating activities, net |
|
|
(3,357 |
) |
|
|
5,718 |
|
|
Net cash provided by operating activities |
|
|
77,383 |
|
|
|
97,677 |
|
|
Investing activities |
|
|
|
|
|
|
|
|
Net decrease in time deposits placed and other short-term investments |
|
|
5,333 |
|
|
|
20,291 |
|
Net (increase) decrease in federal funds sold and securities borrowed or purchased
under agreements to resell |
|
|
(81,885 |
) |
|
|
33,541 |
|
Proceeds from sales of available-for-sale debt securities |
|
|
79,813 |
|
|
|
122,756 |
|
Proceeds from pay downs and maturities of available-for-sale debt securities |
|
|
52,832 |
|
|
|
47,238 |
|
Purchases of available-for-sale debt securities |
|
|
(138,238 |
) |
|
|
(82,377 |
) |
Proceeds from maturities of held-to-maturity debt securities |
|
|
3 |
|
|
|
1,831 |
|
Purchases of held-to-maturity debt securities |
|
|
(100 |
) |
|
|
(2,677 |
) |
Proceeds from sales of loans and leases |
|
|
7,629 |
|
|
|
6,565 |
|
Other changes in loans and leases, net |
|
|
12,296 |
|
|
|
19,221 |
|
Net purchases of premises and equipment |
|
|
(471 |
) |
|
|
(1,532 |
) |
Proceeds from sales of foreclosed properties |
|
|
2,224 |
|
|
|
1,352 |
|
Cash received upon acquisition, net |
|
|
- |
|
|
|
31,804 |
|
Cash received due to impact of adoption of new consolidation guidance |
|
|
2,807 |
|
|
|
- |
|
Other investing activities, net |
|
|
802 |
|
|
|
9,812 |
|
|
Net cash provided by (used in) investing activities |
|
|
(56,955 |
) |
|
|
207,825 |
|
|
Financing activities |
|
|
|
|
|
|
|
|
Net increase
(decrease) in deposits |
|
|
3,490 |
|
|
|
(6,205 |
) |
Net increase (decrease) in federal funds purchased and securities loaned or sold under agreements to repurchase |
|
|
41,420 |
|
|
|
(68,600 |
) |
Net decrease in commercial paper and other short-term borrowings |
|
|
(26,842 |
) |
|
|
(133,672 |
) |
Proceeds from issuance of long-term debt |
|
|
51,524 |
|
|
|
62,809 |
|
Retirement of long-term debt |
|
|
(79,048 |
) |
|
|
(80,302 |
) |
Proceeds from issuance of preferred stock |
|
|
- |
|
|
|
30,000 |
|
Proceeds from issuance of common stock |
|
|
- |
|
|
|
13,468 |
|
Cash dividends paid |
|
|
(1,339 |
) |
|
|
(3,533 |
) |
Excess tax benefits on share-based payments |
|
|
53 |
|
|
|
- |
|
Other financing activities, net |
|
|
(49 |
) |
|
|
(37 |
) |
|
Net cash used in financing activities |
|
|
(10,791 |
) |
|
|
(186,072 |
) |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
140 |
|
|
|
125 |
|
|
Net increase in cash and cash equivalents |
|
|
9,777 |
|
|
|
119,555 |
|
Cash and cash equivalents at January 1 |
|
|
121,339 |
|
|
|
32,857 |
|
|
Cash and cash equivalents at September 30 |
|
$ |
131,116 |
|
|
$ |
152,412 |
|
|
During
the nine months ended September 30, 2010, the Corporation sold First
Republic Bank in a non-cash transaction that reduced assets and
liabilities by $19.5 billion and $18.1 billion.
During
the nine months ended September 30, 2010, the Corporation recorded a
non-cash goodwill impairment charge of $10.4 billion.
During the nine months ended September 30, 2009, the Corporation exchanged $14.8 billion of
preferred stock by issuing approximately 1.0 billion shares of common stock valued at $11.5
billion.
During the nine months ended September 30, 2009, the Corporation transferred $1.7 billion of
auction rate securities (ARS) from trading account assets to available-for-sale (AFS) debt
securities.
During the nine months ended September 30, 2009, the Corporation exchanged credit card loans of
$8.5 billion and the related allowance for loan and lease losses of $750 million for a $7.8 billion
held-to-maturity debt security that was issued by the Corporations U.S. credit card securitization
trust and retained by the Corporation.
The
acquisition-date fair values of non-cash assets acquired and liabilities assumed in the Merrill
Lynch & Co., Inc. (Merrill Lynch) acquisition were $619.1 billion and $626.8 billion.
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.
7
Bank of America Corporation and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 1 - Summary of Significant Accounting Principles
Bank of America Corporation (collectively, with 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. The Corporation conducts these activities through
its banking and nonbanking subsidiaries. On January 1, 2009, the Corporation acquired Merrill
Lynch & Co., Inc. (Merrill Lynch) in exchange for common and preferred stock with a value of $29.1
billion. On July 1, 2008, the Corporation acquired Countrywide Financial Corporation (Countrywide)
in exchange for common stock with a value of $4.2 billion. The Corporation operates 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
and 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.
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 Corporations 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 Corporations 2009 Annual Report on Form
10-K. The nature of the Corporations 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, all
adjustments, which consist of 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
In March 2010, the Financial Accounting Standards Board (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 are
required to be evaluated for bifurcation and separate accounting. This new accounting guidance was
effective on July 1, 2010. Upon adoption, companies may elect the fair value option for any
beneficial interests, including those that would otherwise require bifurcation under the new
guidance. In connection with the adoption of the guidance on July 1, 2010, the Corporation elected
the fair value option for $629 million of AFS debt securities, principally collateralized
debt obligations (CDOs), that otherwise may be subject to bifurcation under the new guidance. In
connection with this election the Corporation recorded a $229 million charge to retained earnings
on July 1, 2010 as an after tax adjustment to reclassify the net unrealized loss on these AFS debt
securities from accumulated other comprehensive income (OCI) to retained earnings. These AFS debt
securities have been reclassified to trading account assets. The Corporation did not bifurcate any
securities as a result of adopting the new accounting guidance.
On January 1, 2010, the Corporation adopted new 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,
8
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 Corporations 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 net of 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 OCI. Initial recording of these assets, related allowance and liabilities on
the Corporations Consolidated Balance Sheet had no impact at the date of adoption on the
consolidated results of operations.
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 Corporations consolidated 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. These
enhanced disclosures required under this new guidance are included in Note 14 Fair Value
Measurements. Beginning in 2011, this new accounting guidance also requires separate presentation
of purchases, issuances and settlements in the Level 3 reconciliation table.
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 fair 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 Corporations 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 by the counterparty, 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.
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
an ongoing 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 $2.1 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
9
Corporation believes that these transactions did not have a material impact on the Corporations
Consolidated Financial Statements.
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 enterprises (GSE). The Corporation accounts for RTM transactions as
sales in accordance with GAAP, and accordingly, removes the securities from the Consolidated
Balance Sheet and recognizes a gain or loss in the Consolidated Statement of Income. At September
30, 2010, the Corporation had no outstanding RTM transactions, compared to $6.5 billion at
December 31, 2009, 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 January 1, 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 VIEs 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 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
classified 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.
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.
10
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 table below.
Goodwill of $5.1 billion was calculated as the purchase premium after adjusting for the fair value
of net assets acquired. No goodwill is deductible for federal income tax purposes. The goodwill
was allocated principally to the Global Wealth & Investment
Management (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 Corporations common shares issued (in millions) |
|
|
1,375 |
|
Purchase price per share of the Corporations common stock (1) |
|
$ |
14.08 |
|
|
Total value of the Corporations 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 Corporations
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. |
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 table below presents severance and employee-related charges, systems integrations and
related charges, and other merger-related charges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30 |
|
September 30 |
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Severance
and employee-related charges |
|
$ |
88 |
|
|
$ |
225 |
|
|
$ |
362 |
|
|
$ |
1,207 |
|
Systems integrations and related charges |
|
|
260 |
|
|
|
329 |
|
|
|
898 |
|
|
|
813 |
|
Other |
|
|
73 |
|
|
|
40 |
|
|
|
190 |
|
|
|
168 |
|
|
Total merger and restructuring charges |
|
$ |
421 |
|
|
$ |
594 |
|
|
$ |
1,450 |
|
|
$ |
2,188 |
|
|
11
For the three and nine months ended September 30, 2010, merger and restructuring charges
consisted of $420 million and $1.3 billion related to the Merrill Lynch acquisition and $1 million
and $197 million related to the Countrywide acquisition. For the three and nine months ended
September 30, 2009, merger and restructuring charges consisted primarily of $371 million and $1.5
billion related to the Merrill Lynch acquisition, $212 million and $632 million related to the
Countrywide acquisition, and $11 million and $92 million related to previous acquisitions.
For the three and nine months ended September 30, 2010, $420 million and $1.3 billion of
merger-related charges for the Merrill Lynch acquisition included $100 million and $333 million of
severance and other employee-related costs, $249 million and $745 million of systems integration
costs, and $71 million and $175 million of other merger-related costs. For the three and nine
months ended September 30, 2009, $371 million and $1.5 billion of merger-related charges for the
Merrill Lynch acquisition included $196 million and $1.1 billion of severance and other
employee-related costs, $153 million and $294 million of systems integration costs, and $22
million and $94 million of other merger-related costs.
The table below presents the changes in exit cost and restructuring reserves for the three
and nine months ended September 30, 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 |
|
|
|
199 |
|
|
|
732 |
|
Countrywide |
|
|
(18 |
) |
|
|
- |
|
|
|
53 |
|
|
|
108 |
|
Cash payments and other |
|
|
(57 |
) |
|
|
(305 |
) |
|
|
(395 |
) |
|
|
(496 |
) |
|
Balance, June 30 |
|
$ |
37 |
|
|
$ |
218 |
|
|
$ |
260 |
|
|
$ |
430 |
|
Exit costs and restructuring charges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merrill Lynch |
|
|
n/a |
|
|
|
n/a |
|
|
|
87 |
|
|
|
132 |
|
Countrywide |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
37 |
|
Cash payments and other |
|
|
(16 |
) |
|
|
(64 |
) |
|
|
(74 |
) |
|
|
(228 |
) |
|
Balance, September 30 |
|
$ |
21 |
|
|
$ |
154 |
|
|
$ |
273 |
|
|
$ |
371 |
|
|
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 of severance, relocation and other
employee-related costs and $42 million for contract terminations. Cash payments and other of $73
million during the nine months ended September 30, 2010 related to the Countrywide acquisition
consisted of $36 million in severance, relocation and other employee-related costs, and $37
million in contract terminations. At September 30, 2010, exit cost reserves of $21 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 and nine months ended September 30, 2010, $87 million and $339 million were added to the
restructuring reserves related to severance and other employee-related costs primarily associated
with the Merrill Lynch acquisition. Cash payments and other of $74 million and $469 million during
the three and nine months ended September 30, 2010 were all related to severance and other
employee-related costs primarily associated with the Merrill Lynch acquisition. Payments
associated with the Countrywide and Merrill Lynch acquisitions are expected to continue into 2012.
At September 30, 2010, restructuring reserves of $273 million consisted of $254 million for
Merrill Lynch and $19 million for Countrywide.
12
NOTE 3 Trading Account Assets and Liabilities
The table below presents the components of trading account assets and liabilities at
September 30, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
December 31 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
Trading account assets |
|
|
|
|
|
|
|
|
U.S. government and agency securities (1) |
|
$ |
65,861 |
|
|
$ |
44,585 |
|
Corporate securities, trading loans and other |
|
|
52,861 |
|
|
|
57,009 |
|
Equity securities |
|
|
28,143 |
|
|
|
33,562 |
|
Foreign sovereign debt |
|
|
41,447 |
|
|
|
28,143 |
|
Mortgage trading loans and asset-backed securities |
|
|
19,383 |
|
|
|
18,907 |
|
|
Total trading account assets |
|
$ |
207,695 |
|
|
$ |
182,206 |
|
|
Trading account liabilities |
|
|
|
|
|
|
|
|
U.S. government and agency securities |
|
$ |
33,988 |
|
|
$ |
26,519 |
|
Equity securities |
|
|
18,460 |
|
|
|
18,407 |
|
Foreign sovereign debt |
|
|
25,954 |
|
|
|
12,897 |
|
Corporate securities and other |
|
|
11,608 |
|
|
|
7,609 |
|
|
Total trading account liabilities |
|
$ |
90,010 |
|
|
$ |
65,432 |
|
|
|
|
(1) |
Includes $30.4 billion and $23.5 billion at September 30, 2010 and December 31, 2009 of GSE obligations. |
13
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 principal
trading purposes and to manage risk exposures. For additional information on the Corporations
derivatives and hedging activities, see Note 1 Summary of Significant Accounting Principles to
the Consolidated Financial Statements of the Corporations 2009 Annual Report on Form 10-K. The
table below identifies derivative instruments included on the Corporations Consolidated Balance
Sheet in derivative assets and liabilities at September 30, 2010 and December 31, 2009. Balances
are presented 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
|
|
|
|
|
Gross Derivative Assets |
|
|
Gross Derivative Liabilities |
|
|
|
|
|
|
|
Trading |
|
|
|
|
|
|
|
|
|
|
Trading |
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
and |
|
|
Qualifying |
|
|
|
|
|
|
and |
|
|
Qualifying |
|
|
|
|
|
|
Contract/ |
|
|
Economic |
|
|
Accounting |
|
|
|
|
|
|
Economic |
|
|
Accounting |
|
|
|
|
(Dollars in billions) |
|
Notional (1) |
|
|
Hedges |
|
|
Hedges
(2) |
|
|
Total |
|
|
Hedges |
|
|
Hedges (2) |
|
|
Total |
|
|
Interest rate contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps |
|
$ |
43,665.7 |
|
|
$ |
1,694.2 |
|
|
$ |
13.2 |
|
|
$ |
1,707.4 |
|
|
$ |
1,679.0 |
|
|
$ |
6.4 |
|
|
$ |
1,685.4 |
|
Futures and forwards |
|
|
12,592.5 |
|
|
|
7.0 |
|
|
|
- |
|
|
|
7.0 |
|
|
|
8.3 |
|
|
|
- |
|
|
|
8.3 |
|
Written options |
|
|
2,837.3 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
109.8 |
|
|
|
- |
|
|
|
109.8 |
|
Purchased options |
|
|
2,932.2 |
|
|
|
116.0 |
|
|
|
- |
|
|
|
116.0 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Foreign exchange contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps |
|
|
644.5 |
|
|
|
28.3 |
|
|
|
3.8 |
|
|
|
32.1 |
|
|
|
30.5 |
|
|
|
1.6 |
|
|
|
32.1 |
|
Spot, futures and forwards |
|
|
2,721.2 |
|
|
|
49.3 |
|
|
|
- |
|
|
|
49.3 |
|
|
|
50.9 |
|
|
|
- |
|
|
|
50.9 |
|
Written options |
|
|
545.8 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
12.8 |
|
|
|
- |
|
|
|
12.8 |
|
Purchased options |
|
|
535.3 |
|
|
|
12.6 |
|
|
|
- |
|
|
|
12.6 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Equity contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps |
|
|
39.9 |
|
|
|
1.2 |
|
|
|
- |
|
|
|
1.2 |
|
|
|
1.8 |
|
|
|
- |
|
|
|
1.8 |
|
Futures and forwards |
|
|
106.9 |
|
|
|
3.7 |
|
|
|
- |
|
|
|
3.7 |
|
|
|
2.7 |
|
|
|
- |
|
|
|
2.7 |
|
Written options |
|
|
281.0 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
24.4 |
|
|
|
- |
|
|
|
24.4 |
|
Purchased options |
|
|
244.6 |
|
|
|
25.0 |
|
|
|
- |
|
|
|
25.0 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commodity contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps |
|
|
106.8 |
|
|
|
8.4 |
|
|
|
0.3 |
|
|
|
8.7 |
|
|
|
9.5 |
|
|
|
- |
|
|
|
9.5 |
|
Futures and forwards |
|
|
452.3 |
|
|
|
5.7 |
|
|
|
- |
|
|
|
5.7 |
|
|
|
3.7 |
|
|
|
- |
|
|
|
3.7 |
|
Written options |
|
|
86.5 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5.6 |
|
|
|
- |
|
|
|
5.6 |
|
Purchased options |
|
|
83.7 |
|
|
|
5.4 |
|
|
|
- |
|
|
|
5.4 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Credit derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased credit derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit default swaps |
|
|
2,363.8 |
|
|
|
87.1 |
|
|
|
- |
|
|
|
87.1 |
|
|
|
31.3 |
|
|
|
- |
|
|
|
31.3 |
|
Total return swaps/other |
|
|
29.7 |
|
|
|
1.0 |
|
|
|
- |
|
|
|
1.0 |
|
|
|
0.2 |
|
|
|
- |
|
|
|
0.2 |
|
Written credit derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit default swaps |
|
|
2,320.7 |
|
|
|
30.3 |
|
|
|
- |
|
|
|
30.3 |
|
|
|
80.2 |
|
|
|
- |
|
|
|
80.2 |
|
Total return swaps/other |
|
|
18.9 |
|
|
|
0.8 |
|
|
|
- |
|
|
|
0.8 |
|
|
|
0.3 |
|
|
|
- |
|
|
|
0.3 |
|
|
Gross derivative assets/liabilities |
|
|
|
|
|
$ |
2,076.0 |
|
|
$ |
17.3 |
|
|
$ |
2,093.3 |
|
|
$ |
2,051.0 |
|
|
$ |
8.0 |
|
|
$ |
2,059.0 |
|
Less: Legally enforceable master
netting agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,940.5 |
) |
|
|
|
|
|
|
|
|
|
|
(1,940.5 |
) |
Less: Cash collateral applied |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68.1 |
) |
|
|
|
|
|
|
|
|
|
|
(56.8 |
) |
|
Total derivative assets/liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
84.7 |
|
|
|
|
|
|
|
|
|
|
$ |
61.7 |
|
|
|
|
(1) |
Represents the total contract/notional amount of the derivatives outstanding and
includes both written and purchased credit derivatives. |
|
(2) |
Excludes $4.3 billion of long-term debt designated as a hedge of foreign currency
risk. |
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
Gross Derivative Assets |
|
Gross Derivative Liabilities |
|
|
|
|
|
|
Trading |
|
|
|
|
|
|
|
|
|
Trading |
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
|
|
|
|
|
|
|
|
Derivatives |
|
|
|
|
|
|
|
|
|
|
and |
|
Qualifying |
|
|
|
|
|
and |
|
Qualifying |
|
|
|
|
Contract/ |
|
Economic |
|
Accounting |
|
|
|
|
|
Economic |
|
Accounting |
|
|
(Dollars in billions) |
|
Notional (1) |
|
Hedges |
|
Hedges (2) |
|
Total |
|
Hedges |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51.5 |
) |
|
|
|
|
|
|
|
|
|
|
(55.8 |
) |
|
Total derivative assets/liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
87.6 |
|
|
|
|
|
|
|
|
|
|
$ |
50.7 |
|
|
|
|
(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 Corporations 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 Corporations 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 Corporations 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
15
that are linked to the hedged fixed-rate assets and liabilities are expected to substantially
offset this unrealized appreciation or depreciation.
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
Corporations 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.
16
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, cross-currency basis swaps, and by issuing foreign currency-denominated debt (net
investment hedges).
Fair Value Hedges
The table below summarizes certain information related to the Corporations derivatives
designated as fair value hedges for the three and nine months ended September 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recognized in Income for the Three Months Ended September 30 |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
Hedged |
|
|
Hedge |
|
|
|
|
|
|
Hedged |
|
|
Hedge |
|
(Dollars in millions) |
|
Derivative |
|
|
Item |
|
|
Ineffectiveness |
|
|
Derivative |
|
|
Item |
|
|
Ineffectiveness |
|
|
Derivatives designated as fair value hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate risk on long-term debt (1) |
|
$ |
2,128 |
|
|
$ |
(2,268 |
) |
|
$ |
(140 |
) |
|
$ |
1,591 |
|
|
$ |
(1,778 |
) |
|
$ |
(187 |
) |
Interest rate and foreign currency risk on long-term debt (1) |
|
|
3,913 |
|
|
|
(3,867 |
) |
|
|
46 |
|
|
|
1,561 |
|
|
|
(1,568 |
) |
|
|
(7 |
) |
Interest rate risk on available-for-sale securities (2, 3) |
|
|
(3,073 |
) |
|
|
2,842 |
|
|
|
(231 |
) |
|
|
(603 |
) |
|
|
433 |
|
|
|
(170 |
) |
Commodity price risk on commodity inventory (4) |
|
|
25 |
|
|
|
(23 |
) |
|
|
2 |
|
|
|
3 |
|
|
|
(2 |
) |
|
|
1 |
|
|
Total |
|
$ |
2,993 |
|
|
$ |
(3,316 |
) |
|
$ |
(323 |
) |
|
$ |
2,552 |
|
|
$ |
(2,915 |
) |
|
$ |
(363 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recognized in Income for the Nine Months Ended September 30 |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
Hedged |
|
|
Hedge |
|
|
|
|
|
|
Hedged |
|
|
Hedge |
|
(Dollars in millions) |
|
Derivative |
|
|
Item |
|
|
Ineffectiveness |
|
|
Derivative |
|
|
Item |
|
|
Ineffectiveness |
|
|
Derivatives designated as fair value hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate risk on long-term debt (1) |
|
$ |
6,214 |
|
|
$ |
(6,598 |
) |
|
$ |
(384 |
) |
|
$ |
(3,025 |
) |
|
$ |
2,387 |
|
|
$ |
(638 |
) |
Interest rate and foreign currency risk on long-term debt (1) |
|
|
630 |
|
|
|
(911 |
) |
|
|
(281 |
) |
|
|
1,624 |
|
|
|
(1,546 |
) |
|
|
78 |
|
Interest rate risk on available-for-sale securities (2, 3) |
|
|
(8,342 |
) |
|
|
8,024 |
|
|
|
(318 |
) |
|
|
(343 |
) |
|
|
121 |
|
|
|
(222 |
) |
Commodity price risk on commodity inventory (4) |
|
|
66 |
|
|
|
(69 |
) |
|
|
(3 |
) |
|
|
63 |
|
|
|
(59 |
) |
|
|
4 |
|
|
Total |
|
$ |
(1,432 |
) |
|
$ |
446 |
|
|
$ |
(986 |
) |
|
$ |
(1,681 |
) |
|
$ |
903 |
|
|
$ |
(778 |
) |
|
|
|
(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 and nine months ended September 30, 2010
includes $(1) million and $(5) million compared to $(145) million and $(186) million for the same
periods of 2009 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. |
Cash Flow Hedges
The table on page 18 summarizes certain information related to the Corporations derivatives
designated as cash flow hedges and net investment hedges for the three and nine months ended
September 30, 2010 and 2009. During the next 12 months, net losses in accumulated OCI of
approximately $1.7 billion ($1.1 billion 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 primarily reduce net interest income related to the respective hedged items.
Amounts related to interest rate risk on variable rate portfolios reclassified from
accumulated OCI increased interest income on assets by $29 million and $7 million and increased
interest expense by $145 million and $252 million during the three months ended September 30, 2010
and 2009, respectively. Amounts reclassified from accumulated OCI increased interest income on
assets by $109 million and reduced interest income by $101 million and increased interest expense
by $411 million and $1.0 billion during the nine months ended September 30, 2010 and 2009. Hedge
ineffectiveness of $3 million and $(16) million was recorded in interest income during the three
and nine months ended September 30, 2010 compared to $36 million and $74 million for the same
periods in 2009. Hedge ineffectiveness of $(12) million and $(13) million was recorded in interest
expense during the three and nine months ended September 30, 2010 compared to $(17)
17
million for both periods in 2009. Amounts reclassified from accumulated OCI
exclude amounts related to derivative interest accruals which increased interest income by $58
million and $41 million and increased interest expense by $47 million and decreased interest
expense by $7 million for the three months ended September 30, 2010 and 2009, respectively.
Amounts reclassified from accumulated OCI exclude amounts related to derivative interest accruals
which increased interest income by $189 million and $97 million and increased interest expense by
$47 million and decreased interest expense by $7 million for the nine months ended September 30,
2010 and 2009, respectively.
Amounts related to commodity price risk reclassified from accumulated OCI are recorded in
trading account profits with the underlying hedged item. Amounts related to price risk on
restricted stock awards reclassified from accumulated OCI are recorded in personnel expense.
Amounts related to price risk on equity investments included in AFS securities reclassified from
accumulated OCI are recorded in equity investment income with the underlying hedged item.
Amounts related to foreign exchange risk recognized in accumulated OCI on derivatives exclude
losses of $241 million and gains of $135 million related to long-term debt designated as a net
investment hedge for the three and nine months ended September 30, 2010 compared to gains of $74
million and losses of $365 million for the same periods in 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
Amounts |
|
|
Hedge |
|
|
|
|
|
|
Amounts |
|
|
Hedge |
|
|
|
Amounts |
|
|
Reclassified |
|
|
Ineffectiveness |
|
|
Amounts |
|
|
Reclassified |
|
|
Ineffectiveness |
|
|
|
Recognized in |
|
|
from |
|
|
and Amount |
|
|
Recognized in |
|
|
from |
|
|
and Amount |
|
|
|
Accumulated |
|
|
Accumulated |
|
|
Excluded from |
|
|
Accumulated |
|
|
Accumulated |
|
|
Excluded from |
|
|
|
OCI on |
|
|
OCI into |
|
|
Effectiveness |
|
|
OCI on |
|
|
OCI into |
|
|
Effectiveness |
|
(Dollars in millions, amounts pre-tax) |
|
Derivatives |
|
|
Income |
|
|
Testing (1) |
|
|
Derivatives |
|
|
Income |
|
|
Testing (1) |
|
|
Derivatives designated as cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate risk on variable rate portfolios |
|
$ |
(1,577 |
) |
|
$ |
(116 |
) |
|
$ |
(9 |
) |
|
$ |
183 |
|
|
$ |
(245 |
) |
|
$ |
19 |
|
Commodity price risk on forecasted purchases
and sales |
|
|
20 |
|
|
|
3 |
|
|
|
4 |
|
|
|
102 |
|
|
|
56 |
|
|
|
(1 |
) |
Price risk on restricted stock awards |
|
|
(58 |
) |
|
|
(21 |
) |
|
|
- |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
Price risk on equity investments included in
available-for-sale securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(101 |
) |
|
|
- |
|
|
|
- |
|
|
Total |
|
$ |
(1,615 |
) |
|
$ |
(134 |
) |
|
$ |
(5 |
) |
|
$ |
184 |
|
|
$ |
(189 |
) |
|
$ |
18 |
|
|
Net investment hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange risk |
|
$ |
(2,162 |
) |
|
$ |
- |
|
|
$ |
(63 |
) |
|
$ |
(737 |
) |
|
$ |
- |
|
|
$ |
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30 |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
Amounts |
|
|
Hedge |
|
|
|
|
|
|
Amounts |
|
|
Hedge |
|
|
|
Amounts |
|
|
Reclassified |
|
|
Ineffectiveness |
|
|
Amounts |
|
|
Reclassified |
|
|
Ineffectiveness |
|
|
|
Recognized in |
|
|
from |
|
|
and Amount |
|
|
Recognized in |
|
|
from |
|
|
and Amount |
|
|
|
Accumulated |
|
|
Accumulated |
|
|
Excluded from |
|
|
Accumulated |
|
|
Accumulated |
|
|
Excluded from |
|
|
|
OCI on |
|
|
OCI into |
|
|
Effectiveness |
|
|
OCI on |
|
|
OCI into |
|
|
Effectiveness |
|
(Dollars in millions, amounts pre-tax) |
|
Derivatives |
|
|
Income |
|
|
Testing (1) |
|
|
Derivatives |
|
|
Income |
|
|
Testing (1) |
|
|
Derivatives designated as cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate risk on variable rate portfolios |
|
$ |
(2,935 |
) |
|
$ |
(302 |
) |
|
$ |
(29 |
) |
|
$ |
141 |
|
|
$ |
(1,106 |
) |
|
$ |
57 |
|
Commodity price risk on forecasted purchases
and sales |
|
|
47 |
|
|
|
16 |
|
|
|
6 |
|
|
|
115 |
|
|
|
62 |
|
|
|
(1 |
) |
Price risk on restricted stock awards |
|
|
(96 |
) |
|
|
(4 |
) |
|
|
- |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
Price risk on equity investments included in
available-for-sale securities |
|
|
186 |
|
|
|
(226 |
) |
|
|
- |
|
|
|
(155 |
) |
|
|
- |
|
|
|
- |
|
|
Total |
|
$ |
(2,798 |
) |
|
$ |
(516 |
) |
|
$ |
(23 |
) |
|
$ |
101 |
|
|
$ |
(1,044 |
) |
|
$ |
56 |
|
|
Net investment hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange risk |
|
$ |
(278 |
) |
|
$ |
- |
|
|
$ |
(196 |
) |
|
$ |
(2,736 |
) |
|
$ |
- |
|
|
$ |
(88 |
) |
|
|
|
(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. |
|
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 Corporations common
stock. The Corporation entered into the derivatives to minimize the change in the expense to the
18
Corporation driven by fluctuations in the share price of the Corporations common stock during the
vesting period of the RSUs. 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 accumulated
OCI and reclassified into earnings 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 and related hedges, see Note
12 Shareholders Equity and Earnings Per Common Share.
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 table below presents gains
(losses) on these derivatives for the three and nine months ended September 30, 2010 and 2009.
These gains (losses) are largely offset by the income or expense that is recorded on the
economically hedged item. Gains (losses) on derivatives related to price risk on mortgage banking
production income and interest rate risk on mortgage banking servicing income are recorded in
mortgage banking income. Gains (losses) on derivatives and bonds related to credit risk on loans
are recorded in other income, trading account profits and net interest income. Gains (losses) on
derivatives related to interest rate and foreign currency risk on long-term debt and other foreign
currency exchange transactions are recorded in other income and trading account profits. Gains
(losses) on other economic hedge transactions are recorded in other income, trading account
profits and personnel expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Price risk on mortgage banking production income (1) |
|
$ |
3,577 |
|
|
$ |
1,209 |
|
|
$ |
6,974 |
|
|
$ |
5,701 |
|
Interest rate risk on mortgage banking servicing income |
|
|
1,736 |
|
|
|
906 |
|
|
|
5,048 |
|
|
|
(2,417 |
) |
Credit risk on loans |
|
|
(46 |
) |
|
|
(320 |
) |
|
|
(70 |
) |
|
|
(604 |
) |
Interest rate and foreign currency risk on long-term debt
and other foreign exchange transactions
(2) |
|
|
7,613 |
|
|
|
3,437 |
|
|
|
(1,596 |
) |
|
|
2,919 |
|
Other |
|
|
(35 |
) |
|
|
18 |
|
|
|
(134 |
) |
|
|
1 |
|
|
Total |
|
$ |
12,845 |
|
|
$ |
5,250 |
|
|
$ |
10,222 |
|
|
$ |
5,600 |
|
|
|
|
(1) |
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 $2.9 billion
and $7.6 billion for the three and nine months ended September 30, 2010 compared to $2.6 billion
and $6.3 billion for the same periods in 2009. |
|
(2) |
The majority of the balance is related to the revaluation of economic hedges on
foreign currency-denominated debt. The revaluation of the foreign currency-denominated debt and the
related economic hedges are recorded in other income. |
19
Sales and Trading Revenue
The Corporation enters into trading derivatives to facilitate client transactions, for
principal trading purposes, and to manage risk exposures arising from trading account assets and
liabilities. It is the Corporations 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 Corporations 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 table below identifies the amounts in the income
statement line items attributable to the Corporations sales and trading revenue categorized by
primary risk for the three and nine months ended September 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
|
|
2010 |
|
|
2009 |
|
|
|
Trading |
|
|
|
|
|
|
Net |
|
|
|
|
|
|
Trading |
|
|
|
|
|
|
Net |
|
|
|
|
|
|
Account |
|
|
Other |
|
|
Interest |
|
|
|
|
|
|
Account |
|
|
Other |
|
|
Interest |
|
|
|
|
(Dollars in millions) |
|
Profits |
|
|
Revenues (1) |
|
|
Income |
|
|
Total |
|
|
Profits |
|
|
Revenues (1) |
|
|
Income |
|
|
Total |
|
|
Interest rate risk |
|
$ |
474 |
|
|
$ |
20 |
|
|
$ |
122 |
|
|
$ |
616 |
|
|
$ |
258 |
|
|
$ |
(1 |
) |
|
$ |
236 |
|
|
$ |
493 |
|
Foreign exchange risk |
|
|
207 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
207 |
|
|
|
219 |
|
|
|
1 |
|
|
|
14 |
|
|
|
234 |
|
Equity risk |
|
|
418 |
|
|
|
569 |
|
|
|
(13 |
) |
|
|
974 |
|
|
|
617 |
|
|
|
585 |
|
|
|
63 |
|
|
|
1,265 |
|
Credit risk |
|
|
1,189 |
|
|
|
438 |
|
|
|
899 |
|
|
|
2,526 |
|
|
|
2,198 |
|
|
|
(87 |
) |
|
|
998 |
|
|
|
3,109 |
|
Other risk |
|
|
139 |
|
|
|
10 |
|
|
|
(33 |
) |
|
|
116 |
|
|
|
105 |
|
|
|
34 |
|
|
|
(57 |
) |
|
|
82 |
|
|
Total sales and trading revenue |
|
$ |
2,427 |
|
|
$ |
1,038 |
|
|
$ |
974 |
|
|
$ |
4,439 |
|
|
$ |
3,397 |
|
|
$ |
532 |
|
|
$ |
1,254 |
|
|
$ |
5,183 |
|
|
|
|
|
Nine Months Ended September 30 |
|
|
|
2010 |
|
|
2009 |
|
|
|
Trading |
|
|
|
|
|
|
Net |
|
|
|
|
|
|
Trading |
|
|
|
|
|
|
Net |
|
|
|
|
|
|
Account |
|
|
Other |
|
|
Interest |
|
|
|
|
|
|
Account |
|
|
Other |
|
|
Interest |
|
|
|
|
(Dollars in millions) |
|
Profits |
|
|
Revenues (1) |
|
|
Income |
|
|
Total |
|
|
Profits |
|
|
Revenues (1) |
|
|
Income |
|
|
Total |
|
|
Interest rate risk |
|
$ |
1,965 |
|
|
$ |
94 |
|
|
$ |
438 |
|
|
$ |
2,497 |
|
|
$ |
2,923 |
|
|
$ |
19 |
|
|
$ |
846 |
|
|
$ |
3,788 |
|
Foreign exchange risk |
|
|
722 |
|
|
|
2 |
|
|
|
- |
|
|
|
724 |
|
|
|
753 |
|
|
|
6 |
|
|
|
27 |
|
|
|
786 |
|
Equity risk |
|
|
1,468 |
|
|
|
1,928 |
|
|
|
(14 |
) |
|
|
3,382 |
|
|
|
1,761 |
|
|
|
2,025 |
|
|
|
165 |
|
|
|
3,951 |
|
Credit risk |
|
|
4,294 |
|
|
|
710 |
|
|
|
2,770 |
|
|
|
7,774 |
|
|
|
4,093 |
|
|
|
(1,579 |
) |
|
|
3,676 |
|
|
|
6,190 |
|
Other risk |
|
|
221 |
|
|
|
26 |
|
|
|
(122 |
) |
|
|
125 |
|
|
|
779 |
|
|
|
(41 |
) |
|
|
(369 |
) |
|
|
369 |
|
|
Total sales and trading revenue |
|
$ |
8,670 |
|
|
$ |
2,760 |
|
|
$ |
3,072 |
|
|
$ |
14,502 |
|
|
$ |
10,309 |
|
|
$ |
430 |
|
|
$ |
4,345 |
|
|
$ |
15,084 |
|
|
|
|
(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 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.
20
Credit derivative instruments in which the Corporation is the seller of credit protection and
their expiration at September 30, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
|
Carrying Value |
|
|
|
Less than |
|
|
|
|
|
Three to |
|
|
Over |
|
|
|
|
(Dollars in millions) |
|
One Year |
|
|
Three Years |
|
|
Five Years |
|
|
Five Years |
|
|
Total |
|
|
Credit default swaps: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade |
|
$ |
262 |
|
|
$ |
2,852 |
|
|
$ |
6,052 |
|
|
$ |
14,569 |
|
|
$ |
23,735 |
|
Non-investment grade |
|
|
898 |
|
|
|
11,115 |
|
|
|
13,983 |
|
|
|
30,478 |
|
|
|
56,474 |
|
|
Total |
|
|
1,160 |
|
|
|
13,967 |
|
|
|
20,035 |
|
|
|
45,047 |
|
|
|
80,209 |
|
|
Total return swaps/other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade |
|
|
- |
|
|
|
- |
|
|
|
24 |
|
|
|
24 |
|
|
|
48 |
|
Non-investment grade |
|
|
1 |
|
|
|
3 |
|
|
|
5 |
|
|
|
246 |
|
|
|
255 |
|
|
Total |
|
|
1 |
|
|
|
3 |
|
|
|
29 |
|
|
|
270 |
|
|
|
303 |
|
|
Total credit derivatives |
|
$ |
1,161 |
|
|
$ |
13,970 |
|
|
$ |
20,064 |
|
|
$ |
45,317 |
|
|
$ |
80,512 |
|
|
Credit-related notes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade |
|
|
4 |
|
|
|
138 |
|
|
|
91 |
|
|
|
1,237 |
|
|
|
1,470 |
|
Non-investment grade |
|
|
4 |
|
|
|
37 |
|
|
|
117 |
|
|
|
2,049 |
|
|
|
2,207 |
|
|
Total credit-related notes |
|
$ |
8 |
|
|
$ |
175 |
|
|
$ |
208 |
|
|
$ |
3,286 |
|
|
$ |
3,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Payout/Notional |
|
Credit default swaps: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade |
|
$ |
123,089 |
|
|
$ |
390,947 |
|
|
$ |
483,132 |
|
|
$ |
257,902 |
|
|
$ |
1,255,070 |
|
Non-investment grade |
|
|
97,180 |
|
|
|
385,026 |
|
|
|
296,720 |
|
|
|
286,733 |
|
|
|
1,065,659 |
|
|
Total |
|
|
220,269 |
|
|
|
775,973 |
|
|
|
779,852 |
|
|
|
544,635 |
|
|
|
2,320,729 |
|
|
Total return swaps/other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade |
|
|
24 |
|
|
|
- |
|
|
|
13,278 |
|
|
|
3,545 |
|
|
|
16,847 |
|
Non-investment grade |
|
|
40 |
|
|
|
66 |
|
|
|
605 |
|
|
|
1,358 |
|
|
|
2,069 |
|
|
Total |
|
|
64 |
|
|
|
66 |
|
|
|
13,883 |
|
|
|
4,903 |
|
|
|
18,916 |
|
|
Total credit derivatives |
|
$ |
220,333 |
|
|
$ |
776,039 |
|
|
$ |
793,735 |
|
|
$ |
549,538 |
|
|
$ |
2,339,645 |
|
|
Credit-related notes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade |
|
|
4 |
|
|
|
138 |
|
|
|
91 |
|
|
|
1,237 |
|
|
|
1,470 |
|
Non-investment grade |
|
|
4 |
|
|
|
37 |
|
|
|
117 |
|
|
|
2,049 |
|
|
|
2,207 |
|
|
Total credit-related notes |
|
$ |
8 |
|
|
$ |
175 |
|
|
$ |
208 |
|
|
$ |
3,286 |
|
|
$ |
3,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Carrying Value |
|
|
|
Less than |
|
|
One to |
|
|
Three to |
|
|
Over |
|
|
|
|
(Dollars in millions) |
|
One Year |
|
|
Three Years |
|
|
Five Years |
|
|
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 |
|
|
21
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 indicator of the
Corporations 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 and terms at September 30, 2010 was $56.2 billion and $1.6 trillion compared to
$79.4 billion and $2.3 trillion at December 31, 2009.
Credit-related notes in the table on page 21 include investments in securities issued by
CDOs, collateralized loan obligations (CLOs) and credit-linked note vehicles. These instruments
are classified as trading securities. The carrying value of these instruments equals the
Corporations maximum exposure to loss. The Corporation is not obligated to make any payments to
the entities under the terms of the securities owned. The Corporation discloses internal
categorizations (i.e., investment grade, non-investment grade) consistent with how risk is managed
for these instruments.
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
ratings 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 previously described on page 14, 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 Corporations 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 Corporations creditworthiness. At
September 30, 2010 and December 31, 2009, the Corporation received cash and securities collateral
of $87.5 billion and $67.7 billion, and posted cash and securities collateral of $76.9 billion and
$62.2 billion in the normal course of business under derivative agreements.
In connection with certain over-the-counter derivative 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 September 30, 2010 and December 31, 2009, the amount of additional collateral and
termination payments that would have been required for such derivatives and trading agreements was
approximately $1.2 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 September 30, 2010 and December 31, 2009, a second incremental one level downgrade by
the ratings agencies would have required approximately $1.1 billion and $1.2 billion in additional
collateral and termination payments.
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 and nine months ended September 30, 2010, credit valuation
gains (losses) of $400 million and $(33) million ($183 million and $(194) million, net of hedges)
compared to gains of $1.4 billion and $2.8 billion ($1.1 billion and $1.6 billion, net of hedges)
for the same periods in 2009 for counterparty credit risk related to
22
derivative assets were recognized in trading account profits. At September 30, 2010 and December
31, 2009, the cumulative counterparty credit risk valuation adjustment reduced the derivative
assets balance by $7.5 billion and $7.8 billion.
In addition, the fair value of the Corporations or its subsidiaries derivative liabilities
is adjusted to reflect the impact of the Corporations credit quality. During the three and nine
months ended September 30, 2010, credit valuation gains (losses) of $(43) million and $334 million
($(21) million and $238 million, net of hedges) compared to $(718) million and $(633) million for
the same periods in 2009 were recognized in trading account profits for changes in the
Corporations or its subsidiaries credit risk. At September 30, 2010 and December 31, 2009, the
Corporations cumulative credit risk valuation adjustment reduced the derivative liabilities
balance by $1.1 billion and $664 million.
NOTE 5 Securities
The table below presents the amortized cost, gross unrealized gains and losses in
accumulated OCI, and fair value of AFS debt and marketable equity securities at September 30, 2010
and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
(Dollars in millions) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Available-for-sale debt securities, September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agency securities |
|
$ |
53,153 |
|
|
$ |
499 |
|
|
$ |
(1,602 |
) |
|
$ |
52,050 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
|
162,143 |
|
|
|
3,785 |
|
|
|
(103 |
) |
|
|
165,825 |
|
Agency collateralized mortgage obligations |
|
|
38,856 |
|
|
|
478 |
|
|
|
(73 |
) |
|
|
39,261 |
|
Non-agency residential (1) |
|
|
25,716 |
|
|
|
738 |
|
|
|
(669 |
) |
|
|
25,785 |
|
Non-agency commercial |
|
|
6,632 |
|
|
|
943 |
|
|
|
(22 |
) |
|
|
7,553 |
|
Foreign securities |
|
|
3,960 |
|
|
|
95 |
|
|
|
(468 |
) |
|
|
3,587 |
|
Corporate bonds |
|
|
5,888 |
|
|
|
256 |
|
|
|
(20 |
) |
|
|
6,124 |
|
Other taxable securities (2) |
|
|
16,534 |
|
|
|
57 |
|
|
|
(322 |
) |
|
|
16,269 |
|
|
Total taxable securities |
|
|
312,882 |
|
|
|
6,851 |
|
|
|
(3,279 |
) |
|
|
316,454 |
|
Tax-exempt securities |
|
|
5,882 |
|
|
|
159 |
|
|
|
(71 |
) |
|
|
5,970 |
|
|
Total available-for-sale debt securities |
|
$ |
318,764 |
|
|
$ |
7,010 |
|
|
$ |
(3,350 |
) |
|
$ |
322,424 |
|
|
Available-for-sale marketable equity securities (3) |
|
$ |
8,598 |
|
|
$ |
9,868 |
|
|
$ |
(28 |
) |
|
$ |
18,438 |
|
|
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 September 30, 2010, includes approximately 89 percent prime bonds, nine
percent Alt-A bonds, and two percent subprime bonds. At December 31, 2009, includes approximately
85 percent prime bonds, 10 percent Alt-A bonds, and five percent subprime bonds. |
|
(2) |
Substantially all asset-backed securities (ABS). |
|
(3) |
Classified in other assets on the Corporations Consolidated Balance Sheet. |
At September 30, 2010, the accumulated net unrealized gains on AFS debt securities included
in accumulated OCI were $2.3 billion, net of the related income tax expense of $1.4 billion. At
September 30, 2010 and December 31, 2009, the Corporation had nonperforming AFS debt securities of
$213 million and $467 million.
At September 30, 2010, both the amortized cost and fair value of held-to-maturity (HTM) debt
securities were $438 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
Corporations credit card securitization trust and retained by the Corporation
23
with an amortized cost of $6.6 billion and a fair value of $6.4 billion. 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 were included in loans and leases on the Corporations
Consolidated Balance Sheet. Additionally, during the three months
ended June 30, 2010, $2.9 billion of debt securities held in consolidated
commercial paper conduits was reclassified from HTM to AFS as a result of new regulatory capital
requirements related to asset-backed commercial paper conduits.
During the three and nine months ended September 30, 2010 and 2009, the Corporation recorded
other-than-temporary impairment (OTTI) losses on AFS debt securities as presented in the table
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2010 |
|
|
|
Non-agency |
|
|
Non-agency |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Residential |
|
|
Commercial |
|
|
Foreign |
|
|
Corporate |
|
|
Taxable |
|
|
|
|
(Dollars in millions) |
|
MBS |
|
|
MBS |
|
|
Securities |
|
|
Bonds |
|
|
Securities |
|
|
Total |
|
|
Total other-than-temporary impairment losses (unrealized and realized) (1) |
|
$ |
(154 |
) |
|
$ |
- |
|
|
$ |
(2 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(156 |
) |
Unrealized other-than-temporary impairment losses recognized in OCI (2) |
|
|
33 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
33 |
|
|
Net impairment losses recognized in earnings (3) |
|
$ |
(121 |
) |
|
$ |
- |
|
|
$ |
(2 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(123 |
) |
|
|
|
|
Three Months Ended September 30, 2009 |
|
|
|
Non-agency |
|
|
Non-agency |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Residential |
|
|
Commercial |
|
|
Foreign |
|
|
Corporate |
|
|
Taxable |
|
|
|
|
(Dollars in millions) |
|
MBS |
|
|
MBS |
|
|
Securities |
|
|
Bonds |
|
|
Securities |
|
|
Total |
|
|
Total other-than-temporary impairment losses (unrealized and realized) (1) |
|
$ |
(538 |
) |
|
$ |
- |
|
|
$ |
(107 |
) |
|
$ |
(19 |
) |
|
$ |
(183 |
) |
|
$ |
(847 |
) |
Unrealized other-than-temporary impairment losses recognized in OCI (2) |
|
|
50 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
50 |
|
|
Net impairment losses recognized in earnings (3) |
|
$ |
(488 |
) |
|
$ |
- |
|
|
$ |
(107 |
) |
|
$ |
(19 |
) |
|
$ |
(183 |
) |
|
$ |
(797 |
) |
|
|
|
|
Nine Months Ended September 30, 2010 |
|
|
|
Non-agency |
|
|
Non-agency |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Residential |
|
|
Commercial |
|
|
Foreign |
|
|
Corporate |
|
|
Taxable |
|
|
|
|
(Dollars in millions) |
|
MBS |
|
|
MBS |
|
|
Securities |
|
|
Bonds |
|
|
Securities |
|
|
Total |
|
|
Total other-than-temporary impairment losses (unrealized and realized) (1) |
|
$ |
(925 |
) |
|
$ |
(1 |
) |
|
$ |
(213 |
) |
|
$ |
(2 |
) |
|
$ |
(475 |
) |
|
$ |
(1,616 |
) |
Unrealized other-than-temporary impairment losses recognized in OCI (2) |
|
|
460 |
|
|
|
- |
|
|
|
16 |
|
|
|
- |
|
|
|
290 |
|
|
|
766 |
|
|
Net impairment losses recognized in earnings (3) |
|
$ |
(465 |
) |
|
$ |
(1 |
) |
|
$ |
(197 |
) |
|
$ |
(2 |
) |
|
$ |
(185 |
) |
|
$ |
(850 |
) |
|
|
|
|
Nine Months Ended September 30, 2009 |
|
|
|
Non-agency |
|
|
Non-agency |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Residential |
|
|
Commercial |
|
|
Foreign |
|
|
Corporate |
|
|
Taxable |
|
|
|
|
(Dollars in millions) |
|
MBS |
|
|
MBS |
|
|
Securities |
|
|
Bonds |
|
|
Securities |
|
|
Total |
|
|
Total other-than-temporary impairment losses (unrealized and realized) (1) |
|
$ |
(1,801 |
) |
|
$ |
- |
|
|
$ |
(342 |
) |
|
$ |
(87 |
) |
|
$ |
(441 |
) |
|
$ |
(2,671 |
) |
Unrealized other-than-temporary impairment losses recognized in OCI (2) |
|
|
477 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
477 |
|
|
Net impairment losses recognized in earnings (3) |
|
$ |
(1,324 |
) |
|
$ |
- |
|
|
$ |
(342 |
) |
|
$ |
(87 |
) |
|
$ |
(441 |
) |
|
$ |
(2,194 |
) |
|
|
|
(1) |
For initial impairment on a security, represents the excess of the amortized
cost over the fair value. For subsequent impairments of the same security, represents additional
declines in fair value subsequent to the previously recorded OTTI loss(es), if applicable. |
|
(2) |
Represents the non-credit component of OTTI losses on AFS debt securities. For the
three and nine months ended September 30, 2010, for certain securities, the Corporation recognized
credit losses in excess of unrealized losses in accumulated OCI. In these instances, a portion of
the credit losses recognized in earnings has been offset by an unrealized gain. Balances above
exclude $18 million and $82 million of gross gains recorded in accumulated OCI related to these
securities for the three and nine months ended September 30, 2010 and $149 million and $430 million
for the same periods in 2009. |
|
(3) |
Represents the credit component of OTTI losses on AFS debt securities. |
24
The table below presents activity for the three and nine months ended September 30, 2010 and
2009 related to the credit component recognized in earnings on debt securities held by the
Corporation for which a portion of the OTTI loss remains in accumulated OCI.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
September 30 |
|
|
September 30 |
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Balance, beginning of period |
|
$ |
940 |
|
|
$ |
296 |
|
|
$ |
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) |
|
|
13 |
|
|
|
36 |
|
|
|
190 |
|
|
|
310 |
|
Additions for the credit component on debt securities on which other-than-temporary
impairment losses were previously recognized |
|
|
11 |
|
|
|
9 |
|
|
|
332 |
|
|
|
9 |
|
|
Balance, September 30 |
|
$ |
964 |
|
|
$ |
341 |
|
|
$ |
964 |
|
|
$ |
341 |
|
|
|
|
(1) |
At January 1, 2009, the Corporation had securities with $134 million of OTTI
previously recognized in earnings of which $22 million represented the credit component and $112
million represented the non-credit component which was reclassified to accumulated OCI through a
cumulative effect transition adjustment. |
|
(2) |
During the three and nine months ended September 30, 2010, the Corporation
recognized $99 million and $328 million of OTTI losses on debt securities on which no portion of
OTTI loss remained in accumulated OCI and $752 million and $1.9 billion for the same periods in
2009. OTTI losses related to these securities are excluded from these amounts. |
As of September 30, 2010, those debt securities with OTTI for which a portion of the OTTI
loss remains in accumulated OCI primarily consisted of non-agency residential mortgage-backed
securities (RMBS) and 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, interest rate and prepayment risk models that
incorporate managements 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range (1) |
|
|
Weighted- |
|
10th |
|
90th |
|
|
average |
|
Percentile (2) |
|
Percentile (2) |
|
Prepayment speed |
|
|
13.2 |
% |
|
|
3.1 |
% |
|
|
27.5 |
% |
Loss severity |
|
|
43.8 |
|
|
|
20.1 |
|
|
|
53.4 |
|
Life default rate |
|
|
50.4 |
|
|
|
2.6 |
|
|
|
99.1 |
|
|
|
|
(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. |
Based on the expected cash flows derived from the applicable 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 are in the table above. Annual constant prepayment speed
and loss severity rates are projected considering collateral characteristics such as loan-to-value
(LTV), creditworthiness of borrowers (FICO) and geographic concentrations. The weighted-average
severity by collateral type was 38 percent for prime bonds, 45 percent for Alt-A bonds and 52
percent for subprime bonds. Additionally, 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 37 percent for prime bonds, 59 percent
for Alt-A bonds and 66 percent for subprime bonds.
25
The table below presents the current fair value and the associated gross unrealized losses on
investments in securities with gross unrealized losses at September 30, 2010 and December 31,
2009, and 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 |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
(Dollars in millions) |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Temporarily-impaired available-for-sale debt securities at
September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agency securities |
|
$ |
32,578 |
|
|
$ |
(1,558 |
) |
|
$ |
783 |
|
|
$ |
(44 |
) |
|
$ |
33,361 |
|
|
$ |
(1,602 |
) |
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
|
8,288 |
|
|
|
(103 |
) |
|
|
- |
|
|
|
- |
|
|
|
8,288 |
|
|
|
(103 |
) |
Agency collateralized mortgage obligations |
|
|
2,931 |
|
|
|
(73 |
) |
|
|
- |
|
|
|
- |
|
|
|
2,931 |
|
|
|
(73 |
) |
Non-agency residential |
|
|
5,049 |
|
|
|
(353 |
) |
|
|
- |
|
|
|
- |
|
|
|
5,049 |
|
|
|
(353 |
) |
Non-agency commercial |
|
|
15 |
|
|
|
(1 |
) |
|
|
58 |
|
|
|
(4 |
) |
|
|
73 |
|
|
|
(5 |
) |
Foreign securities |
|
|
- |
|
|
|
- |
|
|
|
80 |
|
|
|
(11 |
) |
|
|
80 |
|
|
|
(11 |
) |
Corporate bonds |
|
|
224 |
|
|
|
(3 |
) |
|
|
41 |
|
|
|
(17 |
) |
|
|
265 |
|
|
|
(20 |
) |
Other taxable securities |
|
|
9,148 |
|
|
|
(165 |
) |
|
|
77 |
|
|
|
(54 |
) |
|
|
9,225 |
|
|
|
(219 |
) |
|
Total taxable securities |
|
|
58,233 |
|
|
|
(2,256 |
) |
|
|
1,039 |
|
|
|
(130 |
) |
|
|
59,272 |
|
|
|
(2,386 |
) |
Tax-exempt securities |
|
|
9,988 |
|
|
|
(24 |
) |
|
|
690 |
|
|
|
(47 |
) |
|
|
10,678 |
|
|
|
(71 |
) |
|
Total temporarily-impaired available-for-sale debt securities |
|
|
68,221 |
|
|
|
(2,280 |
) |
|
|
1,729 |
|
|
|
(177 |
) |
|
|
69,950 |
|
|
|
(2,457 |
) |
Temporarily-impaired available-for-sale marketable equity
securities |
|
|
53 |
|
|
|
(13 |
) |
|
|
30 |
|
|
|
(15 |
) |
|
|
83 |
|
|
|
(28 |
) |
|
Total temporarily-impaired available-for-sale securities |
|
|
68,274 |
|
|
|
(2,293 |
) |
|
|
1,759 |
|
|
|
(192 |
) |
|
|
70,033 |
|
|
|
(2,485 |
) |
|
Other-than-temporarily impaired available-for-sale-debt
securities (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency residential |
|
|
114 |
|
|
|
(12 |
) |
|
|
1,002 |
|
|
|
(304 |
) |
|
|
1,116 |
|
|
|
(316 |
) |
Non-agency commercial |
|
|
10 |
|
|
|
(1 |
) |
|
|
132 |
|
|
|
(16 |
) |
|
|
142 |
|
|
|
(17 |
) |
Foreign securities |
|
|
- |
|
|
|
- |
|
|
|
494 |
|
|
|
(457 |
) |
|
|
494 |
|
|
|
(457 |
) |
Other taxable securities |
|
|
46 |
|
|
|
(2 |
) |
|
|
948 |
|
|
|
(101 |
) |
|
|
994 |
|
|
|
(103 |
) |
|
Total temporarily-impaired and other-than-temporarily
impaired available-for-sale securities(2) |
|
$ |
68,444 |
|
|
$ |
(2,308 |
) |
|
$ |
4,335 |
|
|
$ |
(1,070 |
) |
|
$ |
72,779 |
|
|
$ |
(3,378 |
) |
|
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(2) |
|
$ |
77,979 |
|
|
$ |
(1,847 |
) |
|
$ |
26,011 |
|
|
$ |
(5,443 |
) |
|
$ |
103,990 |
|
|
$ |
(7,290 |
) |
|
|
|
(1) |
Includes other-than-temporarily impaired AFS debt securities on which a portion
of the OTTI loss remains in OCI. |
|
(2) |
At September 30, 2010, the amortized cost of approximately 7,000 AFS securities
exceeded their fair value by $3.4 billion. At December 31, 2009, the amortized cost of
approximately 12,000 AFS securities exceeded their fair value by $7.3 billion. |
26
The Corporation considers the length of time and extent to which the fair value of AFS debt
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, 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 Corporations 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 September 30, 2010 and December 31, 2009 are presented in the
table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
December 31, 2009 |
|
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
(Dollars in millions) |
|
Cost |
|
Value |
|
Cost |
|
Value |
|
Federal National Mortgage Association |
|
$ |
97,272 |
|
|
$ |
98,828 |
|
|
$ |
100,321 |
|
|
$ |
101,096 |
|
Government National Mortgage Association |
|
|
76,480 |
|
|
|
78,296 |
|
|
|
60,610 |
|
|
|
61,121 |
|
Federal Home Loan Mortgage Corporation |
|
|
27,247 |
|
|
|
27,962 |
|
|
|
29,076 |
|
|
|
29,810 |
|
|
The expected maturity distribution of the Corporations MBS and the contractual maturity
distribution of the Corporations other AFS debt securities, and the yields on the Corporations
AFS debt securities portfolio at September 30, 2010 are summarized in the table below. Actual
maturities may differ from the contractual or expected maturities since borrowers may have the
right to prepay obligations with or without prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
Due after One |
|
|
Due after Five |
|
|
|
|
|
|
|
|
|
Due in One |
|
|
Year through |
|
|
Years through |
|
|
Due after |
|
|
|
|
|
|
Year or Less |
|
|
Five Years |
|
|
Ten Years |
|
|
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 |
|
$ |
637 |
|
|
|
3.90 |
% |
|
$ |
1,693 |
|
|
|
1.97 |
% |
|
$ |
13,218 |
|
|
|
2.78 |
% |
|
$ |
36,502 |
|
|
|
3.43 |
% |
|
$ |
52,050 |
|
|
|
3.22 |
% |
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
|
19 |
|
|
|
4.81 |
|
|
|
91,376 |
|
|
|
4.46 |
|
|
|
37,924 |
|
|
|
4.30 |
|
|
|
36,506 |
|
|
|
3.96 |
|
|
|
165,825 |
|
|
|
4.31 |
|
Agency-collateralized mortgage obligations |
|
|
138 |
|
|
|
2.45 |
|
|
|
14,885 |
|
|
|
2.80 |
|
|
|
14,179 |
|
|
|
4.10 |
|
|
|
10,059 |
|
|
|
2.33 |
|
|
|
39,261 |
|
|
|
3.15 |
|
Non-agency residential |
|
|
411 |
|
|
|
11.48 |
|
|
|
4,470 |
|
|
|
8.13 |
|
|
|
2,076 |
|
|
|
6.18 |
|
|
|
18,828 |
|
|
|
4.22 |
|
|
|
25,785 |
|
|
|
5.17 |
|
Non-agency commercial |
|
|
250 |
|
|
|
5.60 |
|
|
|
5,604 |
|
|
|
6.13 |
|
|
|
1,243 |
|
|
|
11.55 |
|
|
|
456 |
|
|
|
6.64 |
|
|
|
7,553 |
|
|
|
7.04 |
|
Foreign securities |
|
|
872 |
|
|
|
0.50 |
|
|
|
2,540 |
|
|
|
5.42 |
|
|
|
156 |
|
|
|
2.72 |
|
|
|
19 |
|
|
|
3.40 |
|
|
|
3,587 |
|
|
|
4.10 |
|
Corporate bonds |
|
|
169 |
|
|
|
4.55 |
|
|
|
4,337 |
|
|
|
2.14 |
|
|
|
1,320 |
|
|
|
3.04 |
|
|
|
298 |
|
|
|
3.04 |
|
|
|
6,124 |
|
|
|
2.44 |
|
Other taxable securities |
|
|
2,528 |
|
|
|
1.10 |
|
|
|
6,179 |
|
|
|
1.20 |
|
|
|
424 |
|
|
|
0.90 |
|
|
|
7,138 |
|
|
|
6.50 |
|
|
|
16,269 |
|
|
|
3.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total taxable securities |
|
|
5,024 |
|
|
|
2.59 |
|
|
|
131,084 |
|
|
|
4.22 |
|
|
|
70,540 |
|
|
|
4.11 |
|
|
|
109,806 |
|
|
|
3.85 |
|
|
|
316,454 |
|
|
|
4.04 |
|
Tax-exempt securities |
|
|
215 |
|
|
|
4.42 |
|
|
|
1,603 |
|
|
|
4.35 |
|
|
|
2,430 |
|
|
|
4.09 |
|
|
|
1,722 |
|
|
|
4.51 |
|
|
|
5,970 |
|
|
|
4.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale debt securities |
|
$ |
5,239 |
|
|
|
2.67 |
|
|
$ |
132,687 |
|
|
|
4.23 |
|
|
$ |
72,970 |
|
|
|
4.11 |
|
|
$ |
111,528 |
|
|
|
3.86 |
|
|
$ |
322,424 |
|
|
|
4.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost of available-for-sale debt securities |
|
$ |
5,585 |
|
|
|
|
|
|
$ |
130,211 |
|
|
|
|
|
|
$ |
70,445 |
|
|
|
|
|
|
$ |
112,523 |
|
|
|
|
|
|
$ |
318,764 |
|
|
|
|
|
|
|
|
|
(1) |
|
Yields are calculated based on the amortized cost of the securities. |
The components of realized gains and losses on sales of debt securities for the three
and nine months ended September 30, 2010 and 2009 are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
|
Nine Months Ended September 30 |
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Gross gains |
|
$ |
990 |
|
|
$ |
1,639 |
|
|
$ |
2,838 |
|
|
$ |
3,920 |
|
Gross losses |
|
|
(107 |
) |
|
|
(85 |
) |
|
|
(1,184 |
) |
|
|
(236 |
) |
|
Net gains on sales of debt securities |
|
$ |
883 |
|
|
$ |
1,554 |
|
|
$ |
1,654 |
|
|
$ |
3,684 |
|
|
Income tax expense attributable to realized net gains on sales
on debt securities |
|
$ |
327 |
|
|
$ |
575 |
|
|
$ |
612 |
|
|
$ |
1,363 |
|
|
During the three months ended June 30, 2010, the Corporation entered into a series of
transactions in its AFS debt securities portfolio that involved securitizations as well as sales
of non-agency RMBS. The Corporation made the decision to enter into these transactions in late May
2010 following a review of corporate risk objectives in light of proposed Basel regulatory capital
changes and liquidity targets. The carrying value of the non-agency RMBS portfolio was reduced
$5.2 billion during the quarter primarily as a result of the aforementioned sales and
securitizations as well as paydowns. The
27
Corporation
recognized net losses of $711 million on the series of
transactions in the AFS debt securities portfolio, and improved
the overall credit quality of the remaining portfolio such that the percentage of the non-agency
RMBS portfolio that is below investment grade was reduced significantly.
Certain Corporate and Strategic Investments
At both September 30, 2010 and December 31, 2009, the Corporation owned approximately 11
percent, or 25.6 billion common shares of China Construction Bank (CCB). During the nine months
ended September 30, 2009, the Corporation sold its initial investment of 19.1 billion common
shares in CCB for a pre-tax gain of $7.3 billion. In the three months ended September 30, 2010,
the Corporation recorded in accumulated OCI a $6.2 billion after-tax unrealized gain on 23.6
billion shares of the Corporations investment in CCB, which previously had been carried at cost.
These shares were reclassified to AFS in the three months ended September 30, 2010 because the
sales restrictions on 23.6 billion of these shares expire within one year (August 2011), and
therefore, in accordance with applicable accounting guidance, the Corporation recorded the
unrealized gain in accumulated OCI, net of an 11.5 percent restriction discount. Sales
restrictions on the remaining two billion CCB shares continue until August 2013, and these shares
continue to be carried at cost basis. At September 30, 2010, the cost basis of all remaining CCB
shares was $9.2 billion, the carrying value was $19.0 billion and the fair value was $20.0
billion. At December 31, 2009, both the cost basis and the carrying value were $9.2 billion and
the fair value was $22.0 billion. Dividend income on this investment is recorded in equity
investment income and during the nine months ended September 30, 2010, the Corporation recorded
dividend income of $535 million from CCB. 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.
In June 2010, the Corporation sold its investment of 188.4 million preferred shares and 56.5
million common shares in Itaú Unibanco Holding S.A. (Itaú Unibanco) at a price of $3.9 billion.
The Itaú Unibanco investment was 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. The
cost basis of this investment was $2.6 billion and, after transaction costs, the pre-tax gain was
$1.2 billion.
In September 2010, the Corporation sold its 24.9 percent ownership interest in Grupo
Financiero Santander, S.A.B. de C.V. to an affiliate of its parent company, Banco Santander, S.A.,
the majority interest holder. The investment was recorded in other assets and was accounted for
under the equity method of accounting. Because the sale was expected to result in a loss upon
closing, the Corporation recorded an impairment write-down in the three months ended June 30, 2010
equal to the estimated pre-tax loss on sale of $428 million. The
sale closed during the three months ended September 30,
2010.
In June 2010, the Corporation sold all of its Class B units in MasterCard, which were
acquired primarily upon MasterCards initial public offering. In connection with the transaction,
the Corporation recorded a pre-tax gain of $440 million.
During the third quarter, the Corporation sold its exposure of $1.7 billion in certain
private equity funds, comprised of $859 million in capital and $794 million in unfunded
commitments, resulting in no gain or loss in the three months ended
September 30, 2010.
At both September 30, 2010 and December 31, 2009, the Corporation had an economic ownership
of approximately 34 percent in BlackRock, Inc. (BlackRock), a publicly traded investment company.
The carrying value of this investment at September 30, 2010 and December 31, 2009 was $10.2
billion and $10.0 billion and the fair value was $11.0 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 the
three months ended June 30, 2009, the Corporation recorded in other income a pre-tax gain of $3.8
billion related to this transaction. In addition to the Corporation and First Data Corporation,
the remaining stake was initially held by a third party. In June 2010, the third party sold its
interest to the joint venture, resulting in an ownership increase in this joint venture to
approximately 49 percent for the Corporation and 51 percent for First Data Corporation. 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 September 30, 2010 and December 31, 2009 was $4.7 billion.
28
NOTE 6 Outstanding Loans and Leases
The table below presents outstanding loans and leases at September 30, 2010 and December
31, 2009.
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
December 31 |
(Dollars in millions) |
|
2010(1) |
|
2009 |
|
Consumer |
|
|
|
|
|
|
|
|
Residential mortgage (2) |
|
$ |
243,141 |
|
|
$ |
242,129 |
|
Home equity |
|
|
141,558 |
|
|
|
149,126 |
|
Discontinued real estate (3) |
|
|
13,442 |
|
|
|
14,854 |
|
Credit card domestic |
|
|
113,609 |
|
|
|
49,453 |
|
Credit card foreign |
|
|
27,262 |
|
|
|
21,656 |
|
Direct/Indirect consumer (4) |
|
|
92,479 |
|
|
|
97,236 |
|
Other consumer (5) |
|
|
2,924 |
|
|
|
3,110 |
|
|
Total consumer |
|
|
634,415 |
|
|
|
577,564 |
|
|
Commercial |
|
|
|
|
|
|
|
|
Commercial domestic (6) |
|
|
191,096 |
|
|
|
198,903 |
|
Commercial real estate (7) |
|
|
52,819 |
|
|
|
69,447 |
|
Commercial lease financing |
|
|
21,321 |
|
|
|
22,199 |
|
Commercial foreign |
|
|
30,575 |
|
|
|
27,079 |
|
|
Total commercial loans |
|
|
295,811 |
|
|
|
317,628 |
|
Commercial loans measured at fair value (8) |
|
|
3,684 |
|
|
|
4,936 |
|
|
Total commercial |
|
|
299,495 |
|
|
|
322,564 |
|
|
Total loans and leases |
|
$ |
933,910 |
|
|
$ |
900,128 |
|
|
|
|
|
(1) |
|
Periods subsequent to January 1, 2010 are presented in accordance with new
consolidation guidance. |
|
(2) |
|
Includes foreign residential mortgages of $98 million and $552 million at September
30, 2010 and December 31, 2009. |
|
(3) |
|
Includes $12.1 billion and $13.4 billion of pay option loans and $1.4 billion and
$1.5 billion of subprime loans at September 30, 2010 and December 31, 2009. The Corporation no
longer originates these products. |
|
(4) |
|
Includes dealer financial services loans of $44.5 billion and $41.6 billion,
consumer lending of $14.3 billion and $19.7 billion, domestic securities-based lending margin loans
of $15.7 billion and $12.9 billion, student loans of $7.0 billion and $10.8 billion, foreign
consumer loans of $7.7 billion and $8.0 billion and other consumer loans of $3.3 billion and $4.2
billion at September 30, 2010 and December 31, 2009. |
|
(5) |
|
Includes consumer finance loans of $2.0 billion and $2.3 billion, other foreign
consumer loans of $846 million and $709 million and consumer overdrafts of $66 million and $144
million at September 30, 2010 and December 31, 2009. |
|
(6) |
|
Includes small business commercial domestic loans, including card related
products, of $15.2 billion and $17.5 billion at September 30, 2010 and December 31, 2009. |
|
(7) |
|
Includes domestic commercial real estate loans of $50.1 billion and $66.5 billion
and foreign commercial real estate loans of $2.7 billion and $3.0 billion at September 30, 2010 and
December 31, 2009. |
|
(8) |
|
Certain commercial loans are accounted for under the fair value option and include
commercial domestic loans of $1.8 billion and $3.0 billion, commercial foreign loans of $1.8
billion and $1.9 billion and commercial real estate loans of $54 million and $90 million at
September 30, 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 on the residential mortgage
portfolio through the use of synthetic securitization vehicles. These vehicles issue long-term
notes to investors, the proceeds of which are held as cash collateral. The Corporation pays a
premium to the vehicles to purchase mezzanine loss protection on a portfolio of residential
mortgages owned by the Corporation. Cash held in the vehicles is used to reimburse the Corporation
in the event that losses on the mortgage portfolio exceed 10 basis points (bps) of the original
pool balance, up to the maximum amount of purchased loss protection of $2.1 billion and $2.5
billion at September 30, 2010 and December 31, 2009. The vehicles are variable interest entities
from which the Corporation purchases credit protection and in which the Corporation does not have
a variable interest; accordingly, these vehicles are not consolidated by the Corporation. Amounts
due from the vehicles are recorded in other income when the Corporation recognizes a reimbursable
loss, as described above. Amounts are collected when reimbursable losses are realized through the
sale of the underlying collateral. At September 30, 2010 and December 31, 2009, the Corporation
had a receivable of $834 million and $1.0 billion from these vehicles for reimbursement of losses.
As of September 30, 2010 and December 31, 2009, $59.0 billion and $70.7 billion of residential
mortgage loans were held in the portfolio for which these vehicles provide protection. The
decrease in these pools was due to $9.6 billion in principal payments and $2.1 billion of loan
sales. The Corporation records an allowance for credit losses on these loans without regard to the
existence of the purchased loss protection as the protection does not represent a guarantee of
individual loans.
29
In addition, the Corporation has entered into credit protection agreements with FNMA and
FHLMC totaling $7.5 billion and $6.6 billion as of September 30, 2010 and December 31, 2009,
providing full protection on conforming residential mortgage loans that become severely
delinquent. The Corporation does not record an allowance for credit losses on these loans as the
loans are individually guaranteed.
Nonperforming Loans and Leases
The table below presents the Corporations nonperforming loans and leases, including
nonperforming TDRs, at September 30, 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 either fair value or the lower of cost or fair value. In addition, purchased
credit-impaired loans, consumer credit card, business card loans and in general, consumer loans
not secured by real estate, including renegotiated 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 Corporations servicing agreements with GNMA, are not reported as
nonperforming as principal repayments are insured by the FHA.
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
December 31 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
Consumer |
|
|
|
|
|
|
|
|
Residential mortgage |
|
$ |
18,291 |
|
|
$ |
16,596 |
|
Home equity |
|
|
2,702 |
|
|
|
3,804 |
|
Discontinued real estate |
|
|
297 |
|
|
|
249 |
|
Direct/Indirect consumer |
|
|
83 |
|
|
|
86 |
|
Other consumer |
|
|
56 |
|
|
|
104 |
|
|
Total consumer |
|
|
21,429 |
|
|
|
20,839 |
|
|
Commercial |
|
|
|
|
|
|
|
|
Commercial domestic (1) |
|
|
4,096 |
|
|
|
5,125 |
|
Commercial real estate |
|
|
6,376 |
|
|
|
7,286 |
|
Commercial lease financing |
|
|
123 |
|
|
|
115 |
|
Commercial foreign |
|
|
272 |
|
|
|
177 |
|
|
Total commercial |
|
|
10,867 |
|
|
|
12,703 |
|
|
Total nonperforming loans and leases (2) |
|
$ |
32,296 |
|
|
$ |
33,542 |
|
|
|
|
|
(1) |
|
Includes small business commercial domestic loans of $202 million and $200
million at September 30, 2010 and December 31, 2009. |
|
(2) |
|
Balances exclude nonaccruing TDRs in the consumer real estate portfolio of $378
million and $395 million at September 30, 2010 and December 31, 2009 that were removed from the
purchased credit-impaired loan portfolio prior to the adoption of new accounting guidance effective
January 1, 2010. |
Included in certain loan categories in the nonperforming table above are TDRs that were
classified as nonperforming. At September 30, 2010 and December 31, 2009, the Corporation had $3.5
billion and $2.9 billion of residential mortgages, $698 million and $1.7 billion of home equity,
$751 million and $486 million of commercial loans and $78 million and $43 million of discontinued
real estate loans that were TDRs and classified as nonperforming. In addition to these amounts, at
September 30, 2010 and December 31, 2009, the Corporation had performing TDRs that were on accrual
status of $5.2 billion and $2.3 billion of residential mortgages, $1.1 billion and $639 million of
home equity, $192 million and $91 million of commercial loans and $41 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, performing commercial TDRs and both performing and nonperforming consumer real estate TDRs.
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
separately and discussed beginning on page 32.
30
The Corporation seeks to assist customers that are experiencing financial difficulty by
renegotiating credit card, consumer lending and small business loans (the renegotiated portfolio)
while ensuring compliance with Federal Financial Institutions Examination Council (FFIEC)
guidelines. Substantially all renegotiated portfolio modifications are considered to be TDRs. The
renegotiated portfolio may include modifications, both short- and long-term, of interest rates or
payment amounts or a combination thereof. The Corporation makes loan modifications, primarily
utilizing internal renegotiation programs via direct customer contact, that manage customers debt
exposures held only by the Corporation. Additionally, the Corporation makes loan modifications
with consumers who have elected to work with external renegotiation agencies and these
modifications provide solutions to customers entire unsecured debt structures. Under both
internal and external programs, customers receive reduced annual percentage rates with fixed
payments that amortize loan balances over a 60-month period. Under both programs, for credit card
loans, a customers charging privileges are revoked.
The table below provides detailed information on the Corporations primary modification
programs for the renegotiated portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renegotiated Portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Balances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current or Less Than 30 |
|
|
Internal Programs |
|
External Programs |
|
Other |
|
Total |
|
Days Past Due |
|
|
September 30 |
|
December 31 |
|
September 30 |
|
December 31 |
|
September 30 |
|
December 31 |
|
September 30 |
|
December 31 |
|
September 30 |
|
December 31 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card domestic |
|
$ |
7,363 |
|
|
$ |
3,159 |
|
|
$ |
2,011 |
|
|
$ |
758 |
|
|
$ |
302 |
|
|
$ |
283 |
|
|
$ |
9,676 |
|
|
$ |
4,200 |
|
|
|
77.82 |
% |
|
|
75.43 |
% |
Credit card foreign |
|
|
288 |
|
|
|
252 |
|
|
|
180 |
|
|
|
168 |
|
|
|
243 |
|
|
|
435 |
|
|
|
711 |
|
|
|
855 |
|
|
|
68.44 |
|
|
|
53.02 |
|
Direct/Indirect consumer |
|
|
1,324 |
|
|
|
1,414 |
|
|
|
542 |
|
|
|
539 |
|
|
|
76 |
|
|
|
89 |
|
|
|
1,942 |
|
|
|
2,042 |
|
|
|
78.93 |
|
|
|
75.44 |
|
Other consumer |
|
|
3 |
|
|
|
54 |
|
|
|
4 |
|
|
|
69 |
|
|
|
- |
|
|
|
17 |
|
|
|
7 |
|
|
|
140 |
|
|
|
80.99 |
|
|
|
68.94 |
|
|
Total consumer |
|
|
8,978 |
|
|
|
4,879 |
|
|
|
2,737 |
|
|
|
1,534 |
|
|
|
621 |
|
|
|
824 |
|
|
|
12,336 |
|
|
|
7,237 |
|
|
|
77.45 |
|
|
|
72.66 |
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Small business commercial
domestic |
|
|
706 |
|
|
|
776 |
|
|
|
60 |
|
|
|
57 |
|
|
|
4 |
|
|
|
11 |
|
|
|
770 |
|
|
|
844 |
|
|
|
66.25 |
|
|
|
64.90 |
|
|
Total commercial |
|
|
706 |
|
|
|
776 |
|
|
|
60 |
|
|
|
57 |
|
|
|
4 |
|
|
|
11 |
|
|
|
770 |
|
|
|
844 |
|
|
|
66.25 |
|
|
|
64.90 |
|
|
Total renegotiated loans |
|
$ |
9,684 |
|
|
$ |
5,655 |
|
|
$ |
2,797 |
|
|
$ |
1,591 |
|
|
$ |
625 |
|
|
$ |
835 |
|
|
$ |
13,106 |
|
|
$ |
8,081 |
|
|
|
76.80 |
% |
|
|
72.96 |
% |
|
At September 30, 2010 and December 31, 2009, the Corporation had a renegotiated
portfolio of $13.1 billion and $8.1 billion of which $10.1 billion was current or less than 30
days past due under the modified terms at September 30, 2010. The related allowance was $5.9
billion at September 30, 2010. Current period amounts include the impact of new consolidation
guidance which resulted in the consolidation of credit card and other securitization trusts. The
average recorded investment in the renegotiated portfolio for the nine months ended September 30,
2010 and 2009 was $14.8 billion and $6.2 billion. Interest income is accrued on outstanding
balances with cash receipts first applied to interest and fees, then to reduce outstanding
principal balances. For the three and nine months ended September 30, 2010, interest income on the
renegotiated portfolio totaled $195 million and $607 million compared to $90 million and $221
million for the same periods in 2009. 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.
At September 30, 2010 and December 31, 2009, the Corporation had $10.9 billion and $12.7
billion of impaired commercial loans and $10.6 billion and $7.7 billion of impaired consumer real
estate loans. The average recorded investment in impaired commercial and consumer real estate
loans for the nine months ended September 30, 2010 and 2009 was $21.3 billion and $13.5 billion.
At September 30, 2010 and December 31, 2009, the recorded investment in impaired loans requiring
an allowance for loan and lease losses was $17.2 billion and $18.6 billion, and the related
allowance for loan and lease losses was $2.3 billion and $3.0 billion. For the three and nine
months ended September 30, 2010, interest income on these impaired loans totaled $130 million and
$364 million, compared to $89 million and $164 million for the same periods in 2009. At September
30, 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.
31
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 were residential mortgage, home equity and discontinued real estate loans. In connection
with the Merrill Lynch acquisition in 2009, the Corporation acquired purchased credit-impaired
loans, substantially all of which were commercial and residential mortgage loans.
The table below presents the remaining unpaid principal balance and carrying amount,
excluding the valuation reserve, for purchased credit-impaired loans at September 30, 2010, June
30, 2010 and December 31, 2009. See Note 7 Allowance for Credit Losses for additional
information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
June 30 |
|
December 31 |
(Dollars in millions) |
|
2010 |
|
2010 |
|
2009 |
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
Countrywide |
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid principal balance |
|
$ |
42,877 |
|
|
$ |
44,921 |
|
|
$ |
47,701 |
|
Carrying value excluding valuation reserve |
|
|
35,433 |
|
|
|
36,207 |
|
|
|
37,541 |
|
Merrill Lynch |
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid principal balance |
|
|
1,768 |
|
|
|
2,102 |
|
|
|
2,388 |
|
Carrying value excluding valuation reserve |
|
|
1,608 |
|
|
|
1,901 |
|
|
|
2,112 |
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
Merrill Lynch |
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid principal balance |
|
$ |
1,052 |
|
|
$ |
1,581 |
|
|
$ |
1,971 |
|
Carrying value excluding valuation reserve |
|
|
228 |
|
|
|
439 |
|
|
|
692 |
|
|
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 less 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 $2.1 billion. As of
September 30, 2010, $1.7 billion of those classified as TDRs were on accrual status. The carrying
value of these modified loans, net of allowance, was approximately 66 percent of the unpaid
principal balance.
The table below shows activity for the accretable yield on purchased credit-impaired loans.
For the three months ended September 30, 2010, there was an $89 million reclassification to
accretable yield from nonaccretable difference primarily related to an increase in estimated
interest cash flows. The $78 million reclassification to nonaccretable difference for the nine
months ended September 30, 2010 was primarily due to the reduction in estimated interest cash
flows during the second quarter.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
(Dollars in millions) |
|
September 30, 2010 |
|
September 30, 2010 |
|
Accretable yield, beginning of period |
|
$ |
6,467 |
|
|
$ |
7,715 |
|
Accretion |
|
|
(405 |
) |
|
|
(1,365 |
) |
Disposals/transfers |
|
|
(91 |
) |
|
|
(212 |
) |
Reclassifications from (to) nonaccretable difference |
|
|
89 |
|
|
|
(78 |
) |
|
Accretable yield, September 30, 2010 |
|
$ |
6,060 |
|
|
$ |
6,060 |
|
|
Loans Held-for-Sale
The Corporation had LHFS of $33.3 billion and $43.9 billion at September 30, 2010 and
December 31, 2009. Proceeds from sales, securitizations and paydowns of LHFS were $221.4 billion
and $278.5 billion for the nine months ended September 30, 2010 and 2009. Proceeds used for
originations and purchases of LHFS were $200.4 billion and $281.3 billion for the nine months
ended September 30, 2010 and 2009.
32
NOTE 7 Allowance for Credit Losses
The table below summarizes the changes in the allowance for credit losses for the three
and nine months ended September 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
|
Nine Months Ended September 30 |
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Allowance for loan and lease losses, beginning of period, before effect
of the January 1 adoption of new consolidation guidance |
|
$ |
45,255 |
|
|
$ |
33,785 |
|
|
$ |
37,200 |
|
|
$ |
23,071 |
|
Allowance related to adoption of new consolidation guidance |
|
|
n/a |
|
|
|
n/a |
|
|
|
10,788 |
|
|
|
n/a |
|
|
Allowance for loan and lease losses, beginning of period |
|
|
45,255 |
|
|
|
33,785 |
|
|
|
47,988 |
|
|
|
23,071 |
|
Loans and leases charged off |
|
|
(7,924 |
) |
|
|
(10,059 |
) |
|
|
(29,731 |
) |
|
|
(26,541 |
) |
Recoveries of loans and leases previously charged off |
|
|
727 |
|
|
|
435 |
|
|
|
2,180 |
|
|
|
1,274 |
|
|
Net charge-offs |
|
|
(7,197 |
) |
|
|
(9,624 |
) |
|
|
(27,551 |
) |
|
|
(25,267 |
) |
|
Provision for loan and lease losses |
|
|
5,395 |
|
|
|
11,658 |
|
|
|
23,099 |
|
|
|
38,357 |
|
Other |
|
|
128 |
|
|
|
13 |
|
|
|
45 |
|
|
|
(329 |
) |
|
Allowance for loan and lease losses, September 30 |
|
|
43,581 |
|
|
|
35,832 |
|
|
|
43,581 |
|
|
|
35,832 |
|
|
Reserve for unfunded lending commitments, beginning of period |
|
|
1,413 |
|
|
|
1,992 |
|
|
|
1,487 |
|
|
|
421 |
|
Provision for unfunded lending commitments |
|
|
1 |
|
|
|
47 |
|
|
|
207 |
|
|
|
103 |
|
Other |
|
|
(120 |
) |
|
|
(472 |
) |
|
|
(400 |
) |
|
|
1,043 |
|
|
Reserve for unfunded lending commitments, September 30 |
|
|
1,294 |
|
|
|
1,567 |
|
|
|
1,294 |
|
|
|
1,567 |
|
|
Allowance for credit losses, September 30 |
|
$ |
44,875 |
|
|
$ |
37,399 |
|
|
$ |
44,875 |
|
|
$ |
37,399 |
|
|
n/a = not applicable
During the three and nine months ended September 30, 2010 the Corporation recorded $281
million and $1.4 billion 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 loan portfolio. This compared to $1.3 billion and $3.0 billion for the
same periods in 2009. The amount of the allowance for loan and lease losses associated with the
purchased credit-impaired loan portfolio was $5.6 billion, $5.3 billion and $3.9 billion at
September 30, 2010, June 30, 2010 and December 31, 2009.
The other amount under the reserve for unfunded lending commitments for the nine months
ended September 30, 2009 includes the remaining balance of the acquired Merrill Lynch liability excluding
those commitments accounted for under the fair value option, net of accretion, and the impact of
funding previously unfunded positions. This amount in all other periods represents primarily
accretion of the Merrill Lynch purchase accounting adjustment and the impact of funding previously unfunded
positions.
33
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.
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 VIEs 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 Corporations Consolidated Balance Sheet is set forth in the table below. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance Sheet |
|
|
Net Increase |
|
|
Beginning Balance Sheet |
(Dollars in millions) |
|
December 31, 2009 |
|
|
(Decrease) |
|
|
January 1, 2010 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
121,339 |
|
|
$ |
2,807 |
|
|
$ |
124,146 |
|
Trading account assets |
|
|
182,206 |
|
|
|
6,937 |
|
|
|
189,143 |
|
Derivative assets |
|
|
87,622 |
|
|
|
556 |
|
|
|
88,178 |
|
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 loan and lease 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 |
|
$ |
2,230,232 |
|
|
$ |
100,439 |
|
|
$ |
2,330,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
1,490,743 |
|
|
|
217 |
|
|
|
1,490,960 |
|
|
Total liabilities |
|
|
1,998,788 |
|
|
|
106,709 |
|
|
|
2,105,497 |
|
|
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 |
|
$ |
2,230,232 |
|
|
$ |
100,439 |
|
|
$ |
2,330,671 |
|
|
The following tables present the assets and liabilities of consolidated and
unconsolidated VIEs at September 30, 2010 and December 31, 2009, if the Corporation has continuing
involvement with transferred assets or if the Corporation otherwise has a variable interest in the
VIE. The tables also present the Corporations maximum exposure to loss at September 30, 2010 and
December 31, 2009 resulting from its involvement with consolidated VIEs and unconsolidated VIEs
in which the Corporation holds a variable interest. The Corporations 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 Corporations Consolidated
Balance Sheet but also potential losses associated with off-balance sheet commitments such as
unfunded liquidity commitments and other contractual arrangements. The Corporations maximum
34
exposure to loss does not include losses previously recognized through write-downs of assets on
the Corporations 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 Corporations 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 Corporation has also provided support to certain cash
funds managed within GWIM as described in Note 14 Commitments and Contingencies to the
Consolidated Financial Statements of the Corporations 2009 Annual Report on Form 10-K. These
VIEs, which are not consolidated by the Corporation, are not included in the tables below.
Except as described below and in Note 14 Commitments and Contingencies to the Consolidated
Financial Statements of the Corporations 2009 Annual Report on Form 10-K, as of September 30,
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.
Mortgage-related Securitizations
First-Lien Mortgages
As part of its mortgage banking activities, the Corporation securitizes a portion of the
first-lien residential mortgage loans it originates or purchases from third parties, generally in
the form of MBS guaranteed by GSEs. Securitization occurs in conjunction with or shortly after
loan closing or purchase. In addition, the Corporation may, from time to time, securitize
commercial mortgages it originates or purchases from other entities. The Corporation also
typically services loans it securitizes. 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 table below summarizes select information related to first-lien mortgage securitizations
for the three and nine months ended September 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Mortgage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Agency |
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
|
Prime |
|
|
Subprime |
|
|
Alt-A |
|
|
Commercial Mortgage |
|
|
|
Three Months Ended September 30 |
|
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Cash proceeds from new securitizations (1) |
|
$ |
61,727 |
|
|
$ |
99,029 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
934 |
|
|
$ |
313 |
|
Gain (loss) on securitizations (2, 3) |
|
|
(336 |
) |
|
|
16 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(22 |
) |
|
|
- |
|
Cash flows received on residual interests |
|
|
- |
|
|
|
- |
|
|
|
4 |
|
|
|
4 |
|
|
|
13 |
|
|
|
21 |
|
|
|
- |
|
|
|
1 |
|
|
|
5 |
|
|
|
6 |
|
Initial fair value of assets acquired (4) |
|
|
- |
|
|
|
n/a |
|
|
|
- |
|
|
|
n/a |
|
|
|
- |
|
|
|
n/a |
|
|
|
- |
|
|
|
n/a |
|
|
|
- |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30 |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Cash proceeds from new securitizations (1) |
|
$ |
192,936 |
|
|
$ |
270,314 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
3 |
|
|
$ |
- |
|
|
$ |
3,317 |
|
|
$ |
313 |
|
Gain (loss) on securitizations (2, 3) |
|
|
(787 |
) |
|
|
37 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Cash flows received on residual interests |
|
|
- |
|
|
|
- |
|
|
|
15 |
|
|
|
18 |
|
|
|
45 |
|
|
|
52 |
|
|
|
2 |
|
|
|
4 |
|
|
|
15 |
|
|
|
17 |
|
Initial fair value of assets acquired (4) |
|
|
23,402 |
|
|
|
n/a |
|
|
|
- |
|
|
|
n/a |
|
|
|
- |
|
|
|
n/a |
|
|
|
- |
|
|
|
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 and nine months ended September 30, 2010, the Corporation
recognized $1.3 billion and $3.8 billion of gains on these LHFS compared to $1.7 billion and $4.2
billion for the same periods in 2009. The gains 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 and nine
months ended September 30, 2010, there were no changes to the initial classification within the
fair value hierarchy. |
|
n/a = not applicable |
35
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 $4.8
billion during the three and nine months ended September 30, 2010 compared to $1.6 billion and
$4.6 billion for the same periods in 2009. Servicing advances on consumer mortgage loans,
including securitizations where the Corporation has continuing involvement, were $21.8 billion and
$19.3 billion at September 30, 2010 and December 31, 2009. The Corporation has the option to
repurchase delinquent loans out of securitization trusts, which reduces the amount of servicing
advances it is required to make. During the three and nine months ended September 30, 2010, $3.8
billion and $12.2 billion of loans were repurchased from first-lien securitization trusts as a
result of loan delinquencies or in order to perform modifications, compared to $2.3 billion and
$3.2 billion for the same periods in 2009. The majority of these loans repurchased were FHA
insured mortgages from GNMA securities. 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 $14 million and $16 million during the three and nine months ended
September 30, 2010 compared to $13 million and $37 million for the same periods in 2009. Servicing
advances on commercial mortgage loans, including securitizations where the Corporation has
continuing involvement, were $144 million and $109 million at September 30, 2010 and December 31,
2009. For more information on MSRs, see Note 16 Mortgage Servicing Rights.
The table below summarizes select information related to first-lien mortgage securitization
trusts in which the Corporation held a variable interest at September 30, 2010 and December 31,
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Mortgage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Agency |
|
|
|
|
|
|
Agency |
|
|
Prime |
|
|
Subprime |
|
|
Alt-A |
|
|
Commercial Mortgage |
|
|
|
September 30 |
|
|
December 31 |
|
|
September 30 |
|
|
December 31 |
|
|
September 30 |
|
|
December 31 |
|
|
September 30 |
|
|
December 31 |
|
|
September 30 |
|
|
December 31 |
|
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Unconsolidated VIEs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum loss exposure (1) |
|
$ |
47,997 |
|
|
$ |
14,398 |
|
|
$ |
3,000 |
|
|
$ |
4,068 |
|
|
$ |
326 |
|
|
$ |
224 |
|
|
$ |
635 |
|
|
$ |
996 |
|
|
$ |
1,739 |
|
|
$ |
1,877 |
|
|
On-balance sheet assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior securities held (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading account assets |
|
$ |
10,125 |
|
|
$ |
2,295 |
|
|
$ |
145 |
|
|
$ |
201 |
|
|
$ |
29 |
|
|
$ |
12 |
|
|
$ |
379 |
|
|
$ |
431 |
|
|
$ |
285 |
|
|
$ |
469 |
|
AFS debt securities |
|
|
37,872 |
|
|
|
12,103 |
|
|
|
2,793 |
|
|
|
3,845 |
|
|
|
244 |
|
|
|
188 |
|
|
|
255 |
|
|
|
561 |
|
|
|
918 |
|
|
|
1,215 |
|
Subordinate securities held (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading account assets |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
17 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
58 |
|
|
|
122 |
|
AFS debt securities |
|
|
- |
|
|
|
- |
|
|
|
44 |
|
|
|
13 |
|
|
|
34 |
|
|
|
22 |
|
|
|
1 |
|
|
|
4 |
|
|
|
156 |
|
|
|
23 |
|
Residual interests held |
|
|
- |
|
|
|
- |
|
|
|
18 |
|
|
|
9 |
|
|
|
2 |
|
|
|
2 |
|
|
|
- |
|
|
|
- |
|
|
|
322 |
|
|
|
48 |
|
|
Total retained positions |
|
$ |
47,997 |
|
|
$ |
14,398 |
|
|
$ |
3,000 |
|
|
$ |
4,068 |
|
|
$ |
326 |
|
|
$ |
224 |
|
|
$ |
635 |
|
|
$ |
996 |
|
|
$ |
1,739 |
|
|
$ |
1,877 |
|
|
Principal balance outstanding (3) |
|
$ |
1,280,903 |
|
|
$ |
1,255,650 |
|
|
$ |
68,459 |
|
|
$ |
81,012 |
|
|
$ |
74,543 |
|
|
$ |
83,065 |
|
|
$ |
116,324 |
|
|
$ |
147,072 |
|
|
$ |
122,371 |
|
|
$ |
65,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated VIEs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum loss exposure (1) |
|
$ |
16,065 |
|
|
$ |
1,683 |
|
|
$ |
50 |
|
|
$ |
472 |
|
|
$ |
677 |
|
|
$ |
1,261 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
On-balance sheet assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases |
|
$ |
16,049 |
|
|
$ |
1,689 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
450 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Allowance for loan and lease losses |
|
|
(34 |
) |
|
|
(6 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Loans held-for-sale |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
436 |
|
|
|
2,201 |
|
|
|
2,030 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other assets |
|
|
50 |
|
|
|
- |
|
|
|
50 |
|
|
|
86 |
|
|
|
171 |
|
|
|
271 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total assets |
|
$ |
16,065 |
|
|
$ |
1,683 |
|
|
$ |
50 |
|
|
$ |
522 |
|
|
$ |
2,372 |
|
|
$ |
2,751 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
48 |
|
|
$ |
1,024 |
|
|
$ |
1,737 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Other liabilities |
|
|
- |
|
|
|
- |
|
|
|
8 |
|
|
|
3 |
|
|
|
784 |
|
|
|
3 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total liabilities |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
8 |
|
|
$ |
51 |
|
|
$ |
1,808 |
|
|
$ |
1,740 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
(1) |
|
Maximum loss exposure excludes liability for representations and warranties, and
corporate guarantees and also excludes servicing advances. |
|
(2) |
|
As a holder of these securities, the Corporation receives scheduled principal and
interest payments. During the three and nine months ended September 30, 2010 and 2009, there were
no significant OTTI losses recorded on those securities classified as AFS debt securities. |
|
(3) |
|
Principal balance outstanding includes loans the Corporation transferred with which the
Corporation has continuing involvement, which may include servicing the loans. |
On January 1, 2010, the Corporation consolidated $2.5 billion of commercial mortgage
securitization trusts in which it had a controlling financial interest. These trusts were
subsequently deconsolidated as the Corporation determined that it no longer had a controlling
financial interest. When the Corporation is the servicer of the loans or holds certain subordinate
investments in a non-agency mortgage trust, the Corporation has control over the activities of the
trust. If the Corporation also holds a financial interest that could potentially be significant to
the trust, the Corporation is the primary beneficiary of and consolidates the trust. The
Corporation does not have a controlling financial interest in and therefore does not consolidate
agency trusts unless the Corporation holds substantially all of the issued securities and has the
unilateral right to liquidate the trust. Prior to 2010, substantially all of the securitization
trusts met the definition of a QSPE and as such were not subject to consolidation.
36
Home Equity Mortgages
The Corporation maintains interests in home equity securitization trusts to which the
Corporation transferred home equity loans. These retained interests include senior and subordinate
securities and residual interests. The Corporation also services the loans in the trusts. There
were no securitizations of home equity loans during the three and nine months ended September 30,
2010 and 2009. Collections reinvested in revolving period securitizations were $4 million and $20
million during the three and nine months ended September 30, 2010 compared to $34 million and $157
million for the same periods in 2009. Cash flows received on residual interests were $3 million
and $11 million for the three and nine months ended September 30, 2010 compared to $4 million and
$27 million for the same periods in 2009.
On January 1, 2010, the Corporation consolidated home equity loan securitization trusts of
$4.5 billion, which held loans with principal balances outstandings of $5.1 billion net of an
allowance of $573 million, in which it had a controlling financial interest. In the Corporations
role as a servicer, the Corporation has the power to manage the loans held in the trusts. In
addition, the Corporation may have a financial interest that could potentially be significant to
the trusts through its retained interests in senior or subordinate securities or the trusts
residual interest, through providing a guarantee to the trusts, or through providing subordinate
funding to the trusts during a rapid amortization event. In these cases, the Corporation is the
primary beneficiary of and consolidates these trusts. If the Corporation is not the servicer or
does not hold a financial interest that could potentially be significant to the trust, the
Corporation does not have a controlling financial interest and does not consolidate the trust.
Prior to 2010, the trusts met the definition of a QSPE and as such were not subject to
consolidation.
The table below summarizes select information related to home equity loan securitization
trusts in which the Corporation held a variable interest at September 30, 2010 and December 31,
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
Retained |
|
|
|
|
|
|
Retained |
|
|
|
|
|
|
|
Interests in |
|
|
|
|
|
|
Interests in |
|
|
|
Consolidated |
|
|
Unconsolidated |
|
|
|
|
|
|
Unconsolidated |
|
(Dollars in millions) |
|
VIEs |
|
|
VIEs |
|
|
Total |
|
|
VIEs |
|
|
Maximum loss exposure (1) |
|
$ |
3,339 |
|
|
$ |
9,473 |
|
|
$ |
12,812 |
|
|
$ |
13,947 |
|
|
On-balance sheet assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading account assets (2, 3) |
|
$ |
- |
|
|
$ |
144 |
|
|
$ |
144 |
|
|
$ |
16 |
|
Available-for-sale debt securities (3, 4) |
|
|
- |
|
|
|
34 |
|
|
|
34 |
|
|
|
147 |
|
Loans and leases |
|
|
3,688 |
|
|
|
- |
|
|
|
3,688 |
|
|
|
- |
|
Allowance for loan and lease losses |
|
|
(349 |
) |
|
|
- |
|
|
|
(349 |
) |
|
|
- |
|
|
Total |
|
$ |
3,339 |
|
|
$ |
178 |
|
|
$ |
3,517 |
|
|
$ |
163 |
|
|
On-balance sheet liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
3,782 |
|
|
$ |
- |
|
|
$ |
3,782 |
|
|
$ |
- |
|
All other liabilities |
|
|
39 |
|
|
|
- |
|
|
|
39 |
|
|
|
- |
|
|
Total |
|
$ |
3,821 |
|
|
$ |
- |
|
|
$ |
3,821 |
|
|
$ |
- |
|
|
Principal balance outstanding |
|
$ |
3,688 |
|
|
$ |
30,432 |
|
|
$ |
34,120 |
|
|
$ |
31,869 |
|
|
|
|
|
(1) |
|
For unconsolidated VIEs, the maximum loss exposure represents outstanding trust
certificates issued by trusts in rapid amortization, net of recorded reserves and excludes the
liability for representations and warranties, and corporate guarantees. |
|
(2) |
|
At September 30, 2010 and December 31, 2009, $127 million and $15 million of the debt
securities classified as trading account assets were senior securities and $17 million and $1
million were subordinate securities. |
|
(3) |
|
As a holder of these securities, the Corporation receives scheduled principal and
interest payments. During the nine months ended September 30, 2010 and year ended December 31,
2009, there were no OTTI losses recorded on those securities classified as AFS debt securities. |
|
(4) |
|
At September 30, 2010 and December 31, 2009, $34 million and $47 million represents
subordinate debt securities held. At December 31, 2009, $100 million are residual interests
classified as AFS debt securities. |
Under the terms of the Corporations home equity loan securitizations, advances are made
to borrowers when they draw on their lines of credit and the Corporation is reimbursed for those
advances from the cash flows in the securitization. During the revolving period of the
securitization, this reimbursement normally occurs within a short period after the advance.
However, when the securitization transaction has begun a rapid amortization period, reimbursement
of the Corporations advance occurs only after other parties in the securitization have received
all of the cash flows to which they are entitled. This has the effect of extending the time period
for which the Corporations advances are outstanding. In particular, if loan losses requiring
draws on monoline insurers policies, which protect the bondholders in the securitization,
37
exceed
a specified threshold or duration, the Corporation may not receive reimbursement for all of the
funds advanced to borrowers, as the senior bondholders and the monoline insurers have priority for
repayment.
The Corporation evaluates all of its home equity loan securitizations for their potential to
experience a rapid amortization event by estimating the amount and timing of future losses on the
underlying loans, the excess spread available to cover such losses and by evaluating any estimated
shortfalls in relation to contractually defined triggers. A maximum funding obligation
attributable to rapid amortization cannot be calculated as a home equity borrower has the ability
to pay down and re-draw balances. At September 30, 2010 and December 31, 2009, home equity loan
securitization transactions in rapid amortization, including both consolidated and unconsolidated
trusts, had $13.0 billion and $14.1 billion of trust certificates outstanding. This amount is
significantly greater than the amount the Corporation expects to fund. At September 30, 2010, an
additional $94 million of trust certificates outstanding related to home equity loan
securitization transactions that are expected to enter rapid amortization during the next 12
months. The charges that will ultimately be recorded as a result of the rapid amortization events
depend on the performance of the loans, the amount of subsequent draws and the timing of related
cash flows. At September 30, 2010 and December 31, 2009, the reserve for losses on expected future
draw obligations on the home equity loan securitizations in or expected to be in rapid
amortization was $137 million and $178 million.
The Corporation has consumer MSRs from the sale or securitization of home equity loans. The
Corporation recorded $19 million and $60 million of servicing fee income related to home equity
securitizations during the three and nine months ended September 30, 2010 compared to $31 million
and $100 million for the same periods in 2009. The Corporation repurchased $4 million and $15
million of loans from home equity securitization trusts in order to perform modifications or clean
up calls compared to $3 million and $26 million for the same periods in 2009. For more information
on MSRs, see Note 16 Mortgage Servicing Rights.
Representations and Warranties Obligations and Corporate Guarantees
The Corporation securitizes first-lien mortgage loans, generally in the form of MBS
guaranteed by GSEs. In addition, in prior years, legacy companies and certain subsidiaries have
sold pools of first-lien mortgage loans, home equity loans and other second-lien loans as private-label MBS or in the form
of whole loans. In connection with these securitizations and whole loan sales, the Corporation or
certain subsidiaries or legacy companies made various representations and warranties. These representations and warranties, as governed by the
agreements, related to, among
other things, the ownership of the loan, the validity of the lien securing the loan, the absence
of delinquent taxes or liens against the property securing the loan, the process used to select
the loan for inclusion in a transaction, the loans compliance with any applicable loan criteria,
including underwriting standards, and the loans compliance with applicable federal, state and
local laws. Violation of these representations and warranties may result in a requirement to
repurchase mortgage loans, indemnify or provide other remedy to an investor or
securitization trust. In such cases, the repurchaser would be exposed to any subsequent credit
loss on the mortgage loans. The repurchasers credit loss would be reduced by any recourse to
sellers of loans for representations and warranties previously
provided. Subject to the requirements and limitations of the applicable agreements, these
representations and
warranties can be enforced by the trustee or the investor as governed by the
agreements or, in certain first-lien and home equity
securitizations where monolines have insured all or some of the related bonds issued, by the
insurer at any time over the life of the loan. Importantly, the contractual liability to
repurchase arises if there is a breach of the representations and warranties that materially
and adversely affects the interest of all investors in the case of non-GSE loans, or if there is a
breach of other standards established by the terms of the related sale agreement. The Corporation
believes that the longer a loan performs prior to default the less
likely it is that an alleged underwriting
breach of representations and warranties had a material impact on the loans performance.
Historically, most demands for repurchase have occurred within the first few years after
origination, generally after a loan has defaulted. However, in recent periods the time horizon has
lengthened due to increased repurchase request activity across all vintages.
The Corporations current operations are structured to limit the risk of repurchase and
accompanying credit exposure by seeking to ensure consistent production of mortgages in accordance with our underwriting procedures and by
servicing those mortgages consistent with secondary mortgage market standards. In addition,
certain securitizations include guarantees written to protect purchasers of the loans from credit
losses up to a specified amount. The probable losses to be absorbed under the representations and
warranties obligations and the guarantees are recorded as a liability when the loans are sold and
are updated by accruing a representations and warranties expense in mortgage banking income
throughout the life of the loan as necessary when additional relevant information becomes
available. The methodology used to estimate the liability for representations and warranties is a
function of the representations and warranties given and considers a variety of factors, which
include depending on the counterparty, actual defaults, estimated future defaults, historical loss
experience, probability that a repurchase request will be received,
number of payments made by the borrower prior
to default and probability that a loan will be required to be repurchased.
38
During the three and nine months ended September 30, 2010, $1.0 billion and $3.0 billion of
first-lien repurchase claims were resolved, primarily with the GSEs, through repurchase or
reimbursement to the investor or securitization trust for losses they incurred compared to $721
million and $1.7 billion for the same periods in 2009. The amount of the loss on the related loans
at the time of repurchase or reimbursement was $487 million and $1.6 billion during the three and
nine months ended September 30, 2010 compared to $379 million and $775 million for the same
periods in 2009. Of the amounts resolved during the three and nine months ended September 30,
2010, $567 million and $1.8 billion of loans were repurchased from first-lien investors and
securitization trusts, including those in which the monolines insured some or all of the related
bonds, under representations and warranties and corporate guarantees compared to $340 million and
$921 million for the same periods in 2009. In addition, during the three and nine months ended
September 30, 2010, the amount paid to indemnify first-lien investors and securitization trusts,
including those in which the monolines insured some or all of the related bonds, was $257 million
and $720 million compared to $221 million and $405 million for the same
periods in 2009, to resolve loans with unpaid principal balances of $448 million and $1.2 billion
for the three and nine months ended September 30, 2010 and $381 million and $740 million for the
three and nine months ended September 30, 2009.
During the three and nine months ended September 30, 2010, $42 million and $163 million of
home equity repurchase claims were resolved, primarily through repurchase or reimbursement to the
securitization trusts in which the monolines insured some or all of the related bonds for losses
they incurred compared to $105 million and $196 million for the same periods in 2009. The amount
of the loss on the related loans at the time of repurchase or reimbursement was $37 million and
$143 million for the three and nine months ended September 30, 2010 compared to $92 million and
$194 million for the same periods in 2009. Of the amounts resolved during the three and nine
months ended September 30, 2010, $13 million and $55 million of loans were repurchased from home
equity securitization trusts, including those in which the monolines insured some or all of the
related bonds, under representations and warranties and corporate guarantees compared to $47
million and $87 million for the same periods in 2009. In addition, during the three and nine
months ended September 30, 2010, $28 million and $104 million were paid to indemnify investors or
securitization trusts, including those in which the monolines insured some or all of the related
bonds, compared to $57 million and $109 million for the same periods in 2009.
The repurchase of loans and indemnification payments related to first-lien and home equity
repurchase claims were primarily as a result of material breaches of representations and warranties related to
the loans material compliance with the applicable underwriting standards, including borrower
misrepresentation, credit exceptions without sufficient compensating factors and non-compliance
with underwriting procedures, although the actual representations made in a sales transaction and
the resulting repurchase and indemnification activity can vary by transaction or investor. A
direct relationship between the type of defect that causes the breach of representations and
warranties and the severity of the realized loss has not been observed. Generally the agreements for private-label MBS contain less rigorous representations and warranties and higher burdens
on investors seeking repurchases than the comparable agreements with
the GSEs.
The table below presents outstanding claims by counterparty and product type at September 30,
2010 and December 31, 2009.
Outstanding Claims by Counterparty and Product
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
|
December 31 |
|
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
By Counterparty |
|
|
|
|
|
|
|
|
GSEs |
|
$ |
6,842 |
|
|
$ |
3,300 |
|
Monolines |
|
|
4,217 |
|
|
|
2,936 |
|
Whole loan
and private-label securitization investors and other |
|
|
1,816 |
|
|
|
1,430 |
|
|
Total outstanding claims by counterparty |
|
$ |
12,875 |
|
|
$ |
7,666 |
|
|
By Product Type |
|
|
|
|
|
|
|
|
Prime loans |
|
$ |
3,627 |
|
|
$ |
1,451 |
|
Alt-A |
|
|
3,453 |
|
|
|
1,984 |
|
Home equity |
|
|
3,415 |
|
|
|
2,279 |
|
Pay option |
|
|
1,434 |
|
|
|
1,157 |
|
Subprime |
|
|
579 |
|
|
|
577 |
|
Other |
|
|
367 |
|
|
|
218 |
|
|
Total outstanding claims by product type |
|
$ |
12,875 |
|
|
$ |
7,666 |
|
|
Although the timing and volume has varied, repurchase and similar requests have
increased from buyers and insurers including monolines. A loan by loan review of all repurchase
requests is performed and demands have been and will continue to be contested to the extent not
considered valid. Overall, repurchase requests and disputes have increased with buyers and
insurers regarding representations and warranties, which has resulted in an increase in unresolved
repurchase requests. The volume of repurchase claims as a percentage of the volume of loans
purchased arising from loans sourced
39
from brokers or purchased from third party sellers is
relatively consistent with the volume of repurchase claims as a percentage of the volume of loans
originated by the Corporation or its subsidiaries or legacy companies.
The
table below presents a rollforward of the liability for
representations and warranties, and corporate guarantees for the three and nine months ended September 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
|
Nine Months Ended September 30 |
|
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Liability for representations and warranties, and corporate
guarantees,
beginning of period |
|
$ |
3,939 |
|
|
$ |
3,442 |
|
|
$ |
3,507 |
|
|
$ |
2,271 |
|
Merrill Lynch acquisition |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
580 |
|
Additions for new sales |
|
|
6 |
|
|
|
12 |
|
|
|
22 |
|
|
|
29 |
|
Charge-offs |
|
|
(415 |
) |
|
|
(359 |
) |
|
|
(1,774 |
) |
|
|
(721 |
) |
Provision (1) |
|
|
872 |
|
|
|
455 |
|
|
|
2,647 |
|
|
|
1,336 |
|
Other |
|
|
- |
|
|
|
20 |
|
|
|
- |
|
|
|
75 |
|
|
Liability for representations and warranties, and corporate
guarantees, September 30 |
|
$ |
4,402 |
|
|
$ |
3,570 |
|
|
$ |
4,402 |
|
|
$ |
3,570 |
|
|
|
|
|
(1) |
|
Recorded as representation and warranty expense in mortgage banking income. |
The liability for representations and warranties, and corporate guarantees is included
in accrued expenses and other liabilities and the related expense is included in mortgage banking
income.
The Corporation and its subsidiaries have an established history of working with the GSEs
on repurchase requests. Experience with the GSEs continues to evolve and any disputes are
generally related to areas including reasonableness of stated income, occupancy and
undisclosed liabilities in the vintages with the highest default rates. While the environment around the
repurchase process continues to be challenging, the Corporation and its subsidiaries strive to
maintain a constructive relationship with the GSEs. As soon as practicable after receiving a repurchase request from
either of the GSEs, the Corporation evaluates the request and takes appropriate action. Claim
disputes are generally handled through loan-level negotiations with the GSEs and the Corporation
seeks to resolve the repurchase request within 90 to 120 days of the receipt of the request
although tolerances exist for claims that remain open beyond this timeframe. However, unlike the
repurchase protocols and experience established with GSEs, experience with the monolines and other
third party investors has been varied and the protocols and experience with these counterparties has not
been as predictable as with the GSEs. For the monolines and other third party investors the
timetable for the loan file request, the repurchase request (if any), response and resolution
varies by contract. Where a breach of representations and warranties
given by the Corporation or subsidiaries or legacy companies is
confirmed on a given loan, settlement is generally reached as to that loan within 60 to 90 days.
The
Corporation and its subsidiaries have limited experience
with private-label MBS repurchases as the number of recent repurchase requests received has been
limited. The representations and warranties, as governed by the private-label
securitizations, require that counterparties have the ability to both assert a claim and actually
prove that a loan has an actionable defect under the applicable contracts. Although it is reasonably possible that a loss may have occurred, until the Corporation and its legacy companies
have meaningful repurchase experience with these counterparties, it is not possible to estimate
future repurchase rates and any related loss or range of loss.
A liability for representations and warranties has been established for monoline repurchase requests based
upon valid identified loan defects and for repurchase requests that are in the process of review based on
historical repurchase experience with a specific monoline to the extent such experience provides a reasonable basis on
which to estimate incurred losses from repurchase activity. A liability
has also been established related to repurchase requests subject to negotiation and unasserted
requests to repurchase current and future defaulted loans where it is believed a more consistent
repurchase experience with certain monolines has been established. For other monolines, in view of
the inherent difficulty of predicting the outcome of those repurchase requests where a valid
defect has not been identified or the inherent difficulty in predicting future claim requests and
the related outcome in the case of unasserted requests to repurchase loans from the securitization
trusts in which these monolines have insured all or some of the related bonds, the Corporation
cannot reasonably estimate the eventual outcome. In addition, the timing of the ultimate
resolution or the eventual loss, if any, related to those repurchase requests cannot be reasonably
estimated. For the monolines, where sufficient, consistent repurchase experience has not been
established, it is not possible to estimate the possible loss or a range of loss. Thus, a
liability has not been established related to repurchase requests
40
where a valid defect has not
been identified, or in the case of any unasserted requests to repurchase loans from the
securitization trusts in which such monolines have insured all or some of the related bonds.
At September 30, 2010, the unpaid principal balance of loans related to unresolved repurchase
requests previously received from monolines was $4.2 billion, including $2.7 billion that have
been reviewed where it is believed a valid defect has not been identified which would constitute
an actionable breach of representations and warranties and
$1.5 billion that is in the process of
review. At September 30, 2010, the unpaid principal balance of loans for which the monolines had
requested loan files for review but for which no repurchase request has been received was $9.9
billion, excluding loans that had been paid in full. There will likely be additional requests for
loan files in the future leading to repurchase requests. Such requests may relate to loans that
are currently in securitization trusts or loans that have defaulted and are no longer included
in the unpaid principal balance of the loans in the trusts. However, it is unlikely that a
repurchase request will be received for every loan in a securitization or every file requested or
that a valid defect exists for every loan repurchase request. In addition, any claims paid related
to repurchase requests from a monoline are paid to the securitization trust and may be used by the
securitization trust to repay any outstanding monoline advances or reduce future advances from the
monolines. To the extent that a monoline has not advanced funds or does not anticipate that they
will be required to advance funds to the securitization trust, the likelihood of receiving a
repurchase request from a monoline may be reduced as the monoline would receive limited to no benefit from
the payment of repurchase claims. Repurchase requests from the monolines will continue to be
evaluated and reviewed and, to the extent not considered valid, contested. The exposure to loss
from monoline repurchase requests will be determined by the number and amount of loans ultimately
repurchased offset by the applicable underlying collateral value in the real estate securing these
loans. In the unlikely event that repurchase would be required for the entire amount of all loans
in all securitizations, regardless of whether the loans were current, and without considering
whether a repurchase demand might be asserted or whether such demand actually showed a valid
defect in any loans from the securitization trusts in which monolines have insured all or some of
the related bonds, assuming the underlying collateral has no value, the maximum amount of
potential loss would be no greater than the unpaid principal balance of the loans repurchased plus
accrued interest.
Credit Card Securitizations
The Corporation securitizes originated and purchased credit card loans. The
Corporations continuing involvement with the securitization trusts includes servicing the
receivables, retaining an undivided interest (sellers interest) in the receivables, and holding
certain retained interests including senior and subordinate securities, discount receivables,
subordinate interests in accrued interest and fees on the securitized receivables, and cash
reserve accounts. The securitization trusts legal documents require the Corporation to maintain a
minimum sellers interest of four to five percent and at September 30, 2010, the Corporation was
in compliance with this requirement. The sellers interest in the trusts represents the
Corporations undivided interest in the receivables transferred to the trust and is pari passu to
the investors interest. At December 31, 2009, prior to the consolidation of the trusts, the
Corporation had $10.8 billion of sellers interest which was carried at historical cost and
classified in loans.
The Corporation consolidated all credit card securitization trusts as of January 1, 2010. In
its role as administrator and servicer, the Corporation has the power to manage defaulted
receivables, add and remove accounts within certain defined parameters, and manage the trusts
liabilities. Through its retained residual and other interests, the Corporation has an obligation
to absorb losses or the right to receive benefits that could potentially be significant to the
trusts. Accordingly, the Corporation is the primary beneficiary of the trusts and therefore the
trusts are subject to consolidation. Prior to 2010, the trusts met the definition of a QSPE and as
such were not subject to consolidation.
41
The table below summarizes select information related to credit card securitization trusts in
which the Corporation held a variable interest at September 30, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
September 30 2010 |
|
December 31 2009 |
|
|
Consolidated |
|
|
Retained Interests in |
(Dollars in millions) |
|
VIEs |
|
|
Unconsolidated VIEs |
|
Maximum loss exposure (1) |
|
$ |
28,943 |
|
|
$ |
32,167 |
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet assets |
|
|
|
|
|
|
|
|
Trading account assets |
|
$ |
- |
|
|
$ |
80 |
|
Available-for-sale debt securities (2) |
|
|
- |
|
|
|
8,501 |
|
Held-to-maturity securities (2) |
|
|
- |
|
|
|
6,573 |
|
Loans and leases (3) |
|
|
92,553 |
|
|
|
10,798 |
|
Allowance for loan and lease losses |
|
|
(9,386 |
) |
|
|
(1,268 |
) |
Derivative assets |
|
|
2,302 |
|
|
|
- |
|
All other assets (4) |
|
|
2,887 |
|
|
|
5,195 |
|
|
Total |
|
$ |
88,356 |
|
|
$ |
29,879 |
|
|
On-balance sheet liabilities |
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
59,137 |
|
|
$ |
- |
|
All other liabilities |
|
|
276 |
|
|
|
- |
|
|
Total |
|
$ |
59,413 |
|
|
$ |
- |
|
|
Trust loans (5) |
|
$ |
92,553 |
|
|
$ |
103,309 |
|
|
|
|
|
(1) |
|
At December 31, 2009, maximum loss exposure represents the total retained interests
held by the Corporation and also includes $2.3 billion related to a liquidity support commitment
the Corporation provided to one of the U.S. Credit Card Securitization Trusts commercial paper
program. |
|
(2) |
|
As a holder of these securities, the Corporation receives scheduled principal and
interest payments. During the year ended December 31, 2009, there were no OTTI losses recorded on
those securities classified as AFS or HTM debt securities. |
|
(3) |
|
At December 31, 2009, amount represents sellers interest which was classified as loans
and leases on the Corporations Consolidated Balance Sheet. |
|
(4) |
|
At December 31, 2009, All other assets includes discount receivables, subordinate
interests in accrued interest and fees on the securitized receivables, cash reserve accounts and
interest-only strips which are carried at fair value. |
|
(5) |
|
At December 31, 2009, Trust loans represents the principal balance of credit card
receivables that have been legally isolated from the Corporation including those loans represented
by the sellers interest that were held on the Corporations Consolidated Balance Sheet. At
September 30, 2010, Trust loans includes accrued interest receivables of $1.2 billion. Prior to
consolidation, subordinate accrued interest receivables were included in All other assets. These
credit card receivables are legally assets of the Trust and not of the Corporation and can only be
used to settle obligations of the Trust. |
For the nine months ended September 30, 2010, $2.9 billion of new senior debt securities
were issued to external investors from the credit card securitization trusts. There were no new
debt securities issued to external investors from the credit card securitization trusts for the
nine months ended September 30, 2009. Collections reinvested in revolving period securitizations
were $32.6 billion and $101.7 billion and cash flows received on residual interests were $1.2
billion and $3.7 billion for the three and nine months ended September 30, 2009.
At December 31, 2009, there were no recognized servicing assets or liabilities associated
with any of the credit card securitization transactions. The Corporation recorded $500 million and
$1.5 billion in servicing fees related to credit card securitizations for the three and nine
months ended September 30, 2009.
During the nine months ended September 30, 2010, subordinate securities of $10.0 billion with
a stated interest rate of zero percent were issued by the U.S. Credit Card Securitization Trusts
to the Corporation. In addition, the Corporation extended its election of designating a specified
percentage of new receivables transferred to the Trusts as discount
receivables through December 31, 2010. As the U.S. Credit Card Securitization Trusts were
consolidated on January 1, 2010, the additional subordinate securities issued and the extension of
the discount receivables election had no impact on the Corporations consolidated results for the
three and nine months ended September 30, 2010. For additional information on these transactions,
see Note 8 Securitizations to the Consolidated Financial Statements of the Corporations 2009
Annual Report on Form 10-K.
During the nine months ended September 30, 2010, similar actions were also taken with the
U.K. Credit Card Securitization Trusts. Additional subordinate securities of $1.5 billion with a
stated interest rate of zero percent were issued by the U.K. Credit Card Securitization Trusts to
the Corporation and the Corporation extended its election of designating a specified percentage of
new receivables transferred to the Trusts as discount receivables through April 30, 2011. Both
42
actions were taken in an effort to address the decline in the excess spread of the U.K. Credit
Card Securitization Trusts. As the U.K. Credit Card Securitization Trusts were consolidated on
January 1, 2010, the additional subordinate securities issued and the designation of discount
receivables had no impact on the Corporations results for the three and nine months ended
September 30, 2010.
As of March 31, 2010, the Corporation had terminated the U.S. Credit Card Securitization
Trusts commercial paper program and all outstanding notes were paid in full. Accordingly, there
is no commercial paper outstanding and the associated liquidity support agreement between the
Corporation and the U.S. Credit Card Securitization Trust was terminated as of March 31, 2010. For
additional information on the Corporations U.S. Credit Card Securitization Trusts commercial
paper program, see Note 8 Securitizations to the Consolidated Financial Statements of the
Corporations 2009 Annual Report on Form 10-K.
Multi-seller Conduits
The Corporation currently administers three multi-seller conduits which provide a
low-cost funding alternative to their customers by facilitating access to the commercial paper
market. These customers sell or otherwise transfer assets to the conduits, which in turn issue
short-term commercial paper that is rated high-grade and is collateralized by the underlying
assets. The Corporation receives fees for providing combinations of liquidity and standby letters
of credit (SBLCs) to the conduits for the benefit of third party investors. The Corporation also
receives fees for serving as commercial paper placement agent and for providing administrative
services to the conduits. The Corporations liquidity commitments, which had an aggregate notional
amount outstanding of $8.3 billion and $34.5 billion at September 30, 2010 and December 31, 2009,
are collateralized by various classes of assets and incorporate features such as
overcollateralization and cash reserves that are designed to provide credit support to the
conduits at a level equivalent to investment grade as determined in accordance with internal risk
rating guidelines. The Corporation liquidated a fourth conduit during the three months ended
September 30, 2010.
The table below summarizes select information related to multi-seller conduits in which the
Corporation held a variable interest at September 30, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
(Dollars in millions) |
|
Consolidated |
|
|
Consolidated |
|
|
Unconsolidated |
|
|
Total |
|
|
Maximum loss exposure |
|
$ |
8,327 |
|
|
$ |
9,388 |
|
|
$ |
25,135 |
|
|
$ |
34,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities |
|
$ |
4,998 |
|
|
$ |
3,492 |
|
|
$ |
- |
|
|
$ |
3,492 |
|
Held-to-maturity debt securities |
|
|
- |
|
|
|
2,899 |
|
|
|
- |
|
|
|
2,899 |
|
Loans and leases |
|
|
1,085 |
|
|
|
318 |
|
|
|
318 |
|
|
|
636 |
|
Allowance for loan and lease losses |
|
|
(3 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
All other assets |
|
|
410 |
|
|
|
4 |
|
|
|
60 |
|
|
|
64 |
|
|
Total |
|
$ |
6,490 |
|
|
$ |
6,713 |
|
|
$ |
378 |
|
|
$ |
7,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper and other short-term borrowings |
|
$ |
6,424 |
|
|
$ |
6,748 |
|
|
$ |
- |
|
|
$ |
6,748 |
|
|
Total |
|
$ |
6,424 |
|
|
$ |
6,748 |
|
|
$ |
- |
|
|
$ |
6,748 |
|
|
Total assets of VIEs |
|
$ |
6,490 |
|
|
$ |
6,713 |
|
|
$ |
13,893 |
|
|
$ |
20,606 |
|
|
The Corporation consolidated all previously unconsolidated multi-seller conduits on
January 1, 2010. In its role as administrator, the Corporation has the power to determine which
assets will be held in the conduits and it has an obligation to monitor these assets for
compliance with agreed-upon lending terms. In addition, the Corporation manages the issuance of
commercial paper. Through the liquidity facilities and loss protection commitments with the
conduits, the Corporation has an obligation to absorb losses that could potentially be significant
to the VIE. Accordingly, the Corporation is the primary beneficiary of and therefore consolidates
the conduits.
Prior to 2010, the Corporation determined whether it must consolidate a multi-seller conduit
based on an analysis of projected cash flows using Monte Carlo simulations. The Corporation did
not consolidate three of the four conduits as it did not expect to absorb a majority of the
variability created by the credit risk of the assets held in the conduits. On a combined basis,
these three conduits had issued approximately $147 million of capital notes and equity interests
to third parties, $142
43
million of which were outstanding at December 31, 2009, which absorbed
credit risk on a first loss basis. All of these capital notes and equity interests were redeemed
as of March 31, 2010. The Corporation consolidated the fourth conduit which had not issued capital
notes to third parties.
The assets of the conduits typically carry a risk rating of AAA to BBB based on the
Corporations current internal risk rating equivalent which reflects structural enhancements of
the assets including third party insurance. Approximately 73 percent of commitments in the
conduits are supported by senior exposures. At September 30, 2010, the assets of the consolidated
conduits and the conduits unfunded liquidity commitments were mainly collateralized by $2.5
billion in student loans (30 percent), $1.3 billion in equipment loans (15 percent), $1.0 billion
in auto loans (12 percent) and $655 million in trade receivables (eight percent). In addition,
$2.3 billion (28 percent) of the conduits assets and unfunded commitments were collateralized by
projected cash flows from long-term contracts (e.g., television broadcast contracts, stadium
revenues and royalty payments) which, as mentioned above, incorporate features that provide credit
support. Amounts advanced under these arrangements will be repaid when cash flows due under the long-term
contracts are received. Substantially all of this exposure is insured. In addition, $443 million
(five percent) of the conduits assets and unfunded commitments were collateralized by the
conduits short-term lending arrangements with investment funds, primarily real estate funds,
which, as mentioned above, incorporate features that provide credit support. Amounts advanced
under these arrangements are secured by commitments from a diverse group of high quality equity
investors. Outstanding advances under these facilities will be repaid when the investment funds
issue capital calls.
One of the previously unconsolidated conduits held CDO investments with aggregate funded
amounts and unfunded commitments totaling $543 million at December 31, 2009. The conduit had
transferred the investments to a subsidiary of the Corporation in accordance with existing
contractual requirements and the transfers were initially accounted for as financing transactions.
After the capital notes issued by the conduit were redeemed in 2010, the conduit no longer had any
continuing exposure to credit losses of the investments and the transfers were recharacterized by
the conduit as sales to the subsidiary of the Corporation. At September 30, 2010, these CDO
exposures were recorded on the Corporations Consolidated Balance Sheet in trading account assets
and derivative liabilities and are included in the Corporations disclosure of variable interests
in CDO vehicles beginning on page 45.
Assets of the Corporation are not available to pay creditors of the conduits except to the
extent the Corporation may be obligated to perform under the liquidity commitments and SBLCs.
Assets of the conduits are not available to pay creditors of the Corporation. At September 30,
2010 and December 31, 2009, the Corporation did not hold any commercial paper issued by the
conduits other than incidentally and in its role as a commercial paper dealer.
The Corporations liquidity and SBLC commitments obligate it to purchase assets from the
conduits at the conduits cost. If a conduit is unable to re-issue commercial paper due to
illiquidity in the commercial paper markets or deterioration in the asset portfolio, the
Corporation is obligated to provide funding. Beginning in the third quarter of 2010, the
Corporations obligation to purchase assets under the liquidity agreements is no longer limited to
the amount of non-defaulted assets. However, the Corporation is not obligated to fund under the
liquidity commitments if the conduit is the subject of a voluntary or involuntary bankruptcy
proceeding.
The SBLCs, which are typically set at eight to 10 percent of total outstanding commercial
paper, are unconditional.
Municipal Bond Trusts
The Corporation administers municipal bond trusts that hold highly rated, long-term,
fixed-rate municipal bonds, some of which are callable prior to maturity. The vast majority of the
bonds are rated AAA or AA and some of the bonds benefit from insurance provided by monolines. The
trusts obtain financing by issuing floating-rate trust certificates that reprice on a weekly or
other basis to third party investors. The Corporation may serve as remarketing agent and/or
liquidity provider for the trusts. The floating-rate investors have the right to tender the
certificates at specified dates, often with as little as seven days notice. Should the
Corporation be unable to remarket the tendered certificates, it is generally obligated to purchase
them at par under standby liquidity facilities. The Corporation is typically not obligated to
purchase the certificates under the standby liquidity facilities if a bonds credit rating
declines below investment grade or in the event of certain defaults or bankruptcy of the issuer
and insurer.
In addition to standby liquidity facilities, the Corporation also provides default protection
or credit enhancement to investors on securities issued by certain municipal bond trusts. Interest
and principal payments on floating-rate certificates issued by these trusts are secured by
guarantees issued by the Corporation. In the event that the issuer of the underlying municipal
bond defaults on any payment of principal and/or interest when due, the Corporation will make any
payments
44
required under the guarantees to the holders of the floating-rate certificates. The
Corporation or a customer of the Corporation may hold the residual interest in the trust. If a
customer holds the residual interest, that customer typically has the unilateral ability to
liquidate the trust at any time, while the Corporation typically has the ability to trigger the
liquidation of that trust if the market value of the bonds held in the trust declines below a
specified threshold. This arrangement is designed to limit market losses to an amount that is less
than the customers residual interest, effectively preventing the Corporation from absorbing
losses incurred on assets held within the trust when a customer holds the residual interest. The
weighted average remaining life of bonds held in the trusts at September 30, 2010 was 13.0 years.
There were no material write-downs or downgrades of assets or issuers during the three and nine
months ended September 30, 2010.
The table below summarizes select information related to municipal bond trusts in which the
Corporation held a variable interest at September 30, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
(Dollars in millions) |
|
Consolidated |
|
|
Unconsolidated |
|
|
Total |
|
|
Consolidated |
|
|
Unconsolidated |
|
|
Total |
|
|
Maximum loss exposure |
|
$ |
4,630 |
|
|
$ |
4,260 |
|
|
$ |
8,890 |
|
|
$ |
241 |
|
|
$ |
10,143 |
|
|
$ |
10,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading account assets |
|
$ |
4,630 |
|
|
$ |
140 |
|
|
$ |
4,770 |
|
|
$ |
241 |
|
|
$ |
191 |
|
|
$ |
432 |
|
Derivative assets |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
167 |
|
|
|
167 |
|
|
Total |
|
$ |
4,630 |
|
|
$ |
140 |
|
|
$ |
4,770 |
|
|
$ |
241 |
|
|
$ |
358 |
|
|
$ |
599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper and other short-term borrowings |
|
$ |
4,774 |
|
|
$ |
- |
|
|
$ |
4,774 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
All other liabilities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
287 |
|
|
|
289 |
|
|
Total |
|
$ |
4,774 |
|
|
$ |
- |
|
|
$ |
4,774 |
|
|
$ |
2 |
|
|
$ |
287 |
|
|
$ |
289 |
|
|
Total assets of VIEs |
|
$ |
4,630 |
|
|
$ |
6,476 |
|
|
$ |
11,106 |
|
|
$ |
241 |
|
|
$ |
12,247 |
|
|
$ |
12,488 |
|
|
On January 1, 2010, the Corporation consolidated $5.1 billion of municipal bond trusts
in which it has a controlling financial interest. As transferor of assets into a trust, the
Corporation has the power to determine which assets will be held in the trust and to structure the
liquidity facilities, default protection and credit enhancement, if applicable. In some instances,
the Corporation retains a residual interest in such trusts and has loss exposure that could
potentially be significant to the trust through the residual interest, liquidity facilities and
other arrangements. The Corporation is also the remarketing agent through which it has the power
to direct the activities that most significantly impact economic performance.
Accordingly, the Corporation is the primary beneficiary and consolidates these trusts. In other
instances, one or more third party investors hold the residual interest and through that interest
have the right to liquidate the trust. The Corporation does not consolidate these trusts.
Prior to 2010, some of the municipal bond trusts were QSPEs and as such were not subject to
consolidation by the Corporation. The Corporation consolidated those trusts that were not QSPEs if
it held the residual interests or otherwise expected to absorb a majority of the variability
created by changes in fair value of assets in the trusts and changes in market rates of interest.
The Corporation did not consolidate a trust if the customer held the residual interest and the
Corporation was protected from loss in connection with its liquidity obligations.
During the three and nine months ended September 30, 2010, the Corporation was the transferor
of assets into unconsolidated municipal bond trusts and received cash proceeds from new
securitizations of $226 million and $1.0 billion as compared to $247 million and $422 million
during the same periods in 2009. At September 30, 2010 and December 31, 2009, the principal
balance outstanding for unconsolidated municipal bond securitization trusts for which the
Corporation was transferor was $2.1 billion and $6.9 billion.
The Corporations liquidity commitments to unconsolidated municipal bond trusts totaled $4.1
billion and $9.8 billion at September 30, 2010 and December 31, 2009. At September 30, 2010 and
December 31, 2009, the Corporation held $140 million and $155 million of floating-rate
certificates issued by unconsolidated municipal bond trusts in trading account assets. At December
31, 2009, the Corporation also held residual interests of $203 million.
Collateralized Debt Obligation Vehicles
CDO vehicles hold diversified pools of fixed-income securities, typically corporate debt
or asset-backed securities, which they fund by issuing multiple tranches of debt and equity
securities. Synthetic CDOs enter into a portfolio of credit
45
default swaps to synthetically create
exposure to fixed-income securities. CLOs are a subset of CDOs which hold pools of loans,
typically corporate loans or commercial mortgages. CDOs are typically managed by third party
portfolio managers. The Corporation transfers assets to these CDOs, holds securities issued by the
CDOs and may be a derivative counterparty to the CDOs, including a credit default swap
counterparty for synthetic CDOs. The Corporation has also entered into total return swaps with
certain CDOs whereby the Corporation will absorb the economic returns generated by specified
assets held by the CDO. The Corporation receives fees for structuring CDOs and providing liquidity
support for super senior tranches of securities issued by certain CDOs. No third parties provide a
significant amount of similar commitments to these CDOs.
The table below summarizes select information related to CDO vehicles in which the
Corporation held a variable interest at September 30, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
(Dollars in millions) |
|
Consolidated |
|
|
Unconsolidated |
|
|
Total |
|
|
Consolidated |
|
|
Unconsolidated |
|
|
Total |
|
|
Maximum loss exposure (1) |
|
$ |
3,191 |
|
|
$ |
4,037 |
|
|
$ |
7,228 |
|
|
$ |
3,863 |
|
|
$ |
6,987 |
|
|
$ |
10,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading account assets |
|
$ |
2,812 |
|
|
$ |
967 |
|
|
$ |
3,779 |
|
|
$ |
2,785 |
|
|
$ |
1,253 |
|
|
$ |
4,038 |
|
Derivative assets |
|
|
- |
|
|
|
989 |
|
|
|
989 |
|
|
|
- |
|
|
|
2,085 |
|
|
|
2,085 |
|
Available-for-sale debt securities |
|
|
876 |
|
|
|
217 |
|
|
|
1,093 |
|
|
|
1,414 |
|
|
|
368 |
|
|
|
1,782 |
|
All other assets |
|
|
19 |
|
|
|
135 |
|
|
|
154 |
|
|
|
- |
|
|
|
166 |
|
|
|
166 |
|
|
Total |
|
$ |
3,707 |
|
|
$ |
2,308 |
|
|
$ |
6,015 |
|
|
$ |
4,199 |
|
|
$ |
3,872 |
|
|
$ |
8,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
15 |
|
|
$ |
41 |
|
|
$ |
56 |
|
|
$ |
- |
|
|
$ |
781 |
|
|
$ |
781 |
|
Long-term debt |
|
|
3,174 |
|
|
|
- |
|
|
|
3,174 |
|
|
|
2,753 |
|
|
|
- |
|
|
|
2,753 |
|
|
Total |
|
$ |
3,189 |
|
|
$ |
41 |
|
|
$ |
3,230 |
|
|
$ |
2,753 |
|
|
$ |
781 |
|
|
$ |
3,534 |
|
|
Total assets of VIEs |
|
$ |
3,707 |
|
|
$ |
46,399 |
|
|
$ |
50,106 |
|
|
$ |
4,199 |
|
|
$ |
56,590 |
|
|
$ |
60,789 |
|
|
|
|
|
(1) |
|
Maximum loss exposure has not been reduced to reflect the benefit of purchased insurance. |
The Corporations maximum loss exposure of $7.2 billion at September 30, 2010, includes
$1.9 billion of super senior CDO exposure, $2.2 billion of exposure to CDO financing facilities
and $3.1 billion of other non-super senior exposure. This exposure is calculated on a gross basis
and does not reflect any benefit from purchased insurance. Net of purchased insurance but
including securities retained from liquidations of CDOs, the Corporations net exposure to super
senior CDO-related positions was $1.3 billion at September 30, 2010. The CDO financing facilities,
which are consolidated, obtain funding from third parties for CDO positions which are principally
classified in trading account assets on the Corporations Consolidated Balance Sheet. The CDO
financing facilities long-term debt at September 30, 2010 totaled $2.7 billion, all of which has
recourse to the general credit of the Corporation.
The Corporation consolidated $220 million of CDOs on January 1, 2010. The Corporation does
not routinely serve as collateral manager for CDOs and, therefore, does not typically have the
power to direct the activities that most significantly impact the economic performance of a CDO.
However, following an event of default, if the Corporation is a majority holder of senior
securities issued by a CDO and acquires the power to manage the assets of the CDO, the Corporation
consolidates the CDO. Generally, the creditors of the consolidated CDOs have no recourse to the
general credit of the Corporation. Prior to 2010, the Corporation evaluated whether it must
consolidate a CDO based principally on a determination as to which party was expected to absorb a
majority of the credit risk created by the assets of the CDO.
At September 30, 2010, the Corporation had $1.4 billion notional amount of super senior
liquidity exposure to CDO vehicles, which is comprised of two components. The first component is
$567 million notional amount of liquidity exposure to third parties that are not special purpose entities (SPE) that hold
super senior cash positions on the Corporations behalf. The remainder is comprised of $850
million notional amount of liquidity support provided to certain synthetic CDOs, including $323
million to a consolidated CDO, in the form of lending commitments related to super senior
securities issued by the CDOs. These unfunded commitments obligate the Corporation to purchase the
super senior CDO securities at par value if the CDOs need cash to make payments due under credit
default swaps written by the CDO vehicles.
Liquidity-related commitments also include $1.3 billion notional amount of derivative
contracts with unconsolidated SPEs, principally CDO vehicles, which hold non-super senior CDO debt
securities or other debt securities on the Corporations behalf. These derivatives are typically
in the form of total return swaps which obligate the Corporation to purchase the securities at the
SPEs cost to acquire the securities, generally as a result of credit
ratings downgrades. The underlying securities are senior securities and substantially all of the
Corporations exposures are
46
insured. Accordingly, the Corporations exposure to loss consists
principally of counterparty risk to the insurers. These derivatives comprise substantially all of
the $1.3 billion notional amount of derivative contracts through which the Corporation obtains
funding from third party SPEs, as described in Note 11 Commitments and Contingencies.
The Corporations $2.7 billion of aggregate liquidity exposure to CDOs at September 30, 2010
is included in the table on page 46 to the extent that the Corporation sponsored the CDO vehicle
or the liquidity exposure to the CDO vehicle is more than insignificant as compared to total
assets of the CDO vehicle. Liquidity exposure included in the table is reported net of previously
recorded losses.
The Corporations maximum exposure to loss is significantly less than the total assets of the
CDO vehicles in the table on page 46 because the Corporation typically has exposure to only a
portion of the total assets. The Corporation has also purchased credit protection from some of the
same CDO vehicles in which it invested, thus reducing net exposure to future loss.
Customer Vehicles
Customer vehicles include credit-linked and equity-linked note vehicles, repackaging
vehicles and asset acquisition vehicles, which are typically created on behalf of customers who
wish to obtain market or credit exposure to a specific company or financial instrument.
The table below summarizes select information related to customer vehicles in which the
Corporation held a variable interest at September 30, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
(Dollars in millions) |
|
Consolidated |
|
|
Unconsolidated |
|
|
Total |
|
|
Consolidated |
|
|
Unconsolidated |
|
|
Total |
|
|
Maximum loss exposure |
|
$ |
3,971 |
|
|
$ |
2,541 |
|
|
$ |
6,512 |
|
|
$ |
277 |
|
|
$ |
10,229 |
|
|
$ |
10,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading account assets |
|
$ |
2,557 |
|
|
$ |
522 |
|
|
$ |
3,079 |
|
|
$ |
183 |
|
|
$ |
1,334 |
|
|
$ |
1,517 |
|
Derivative assets |
|
|
93 |
|
|
|
905 |
|
|
|
998 |
|
|
|
78 |
|
|
|
4,815 |
|
|
|
4,893 |
|
Loans and leases |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
65 |
|
|
|
65 |
|
Loans held-for-sale |
|
|
788 |
|
|
|
- |
|
|
|
788 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
All other assets |
|
|
1,785 |
|
|
|
16 |
|
|
|
1,801 |
|
|
|
16 |
|
|
|
- |
|
|
|
16 |
|
|
Total |
|
$ |
5,223 |
|
|
$ |
1,443 |
|
|
$ |
6,666 |
|
|
$ |
277 |
|
|
$ |
6,214 |
|
|
$ |
6,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
- |
|
|
$ |
36 |
|
|
$ |
36 |
|
|
$ |
- |
|
|
$ |
267 |
|
|
$ |
267 |
|
Commercial paper and other short-term borrowings |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
22 |
|
|
|
- |
|
|
|
22 |
|
Long-term debt |
|
|
2,684 |
|
|
|
- |
|
|
|
2,684 |
|
|
|
50 |
|
|
|
74 |
|
|
|
124 |
|
All other liabilities |
|
|
- |
|
|
|
151 |
|
|
|
151 |
|
|
|
- |
|
|
|
1,357 |
|
|
|
1,357 |
|
|
Total |
|
$ |
2,684 |
|
|
$ |
187 |
|
|
$ |
2,871 |
|
|
$ |
72 |
|
|
$ |
1,698 |
|
|
$ |
1,770 |
|
|
Total assets of VIEs |
|
$ |
5,223 |
|
|
$ |
5,335 |
|
|
$ |
10,558 |
|
|
$ |
277 |
|
|
$ |
16,487 |
|
|
$ |
16,764 |
|
|
On January 1, 2010, the Corporation consolidated $5.9 billion of customer vehicles in
which it has a controlling financial interest.
Credit-linked and equity-linked note vehicles issue notes which pay a return that is linked
to the credit or equity risk of a specified company or debt instrument. The vehicles purchase
high-grade assets as collateral and enter into credit default swaps or equity derivatives to
synthetically create the credit or equity risk to pay the specified return on the notes. The
Corporation is typically the counterparty for some or all of the credit and equity derivatives
and, to a lesser extent, it may invest in securities issued by the vehicles. The Corporation may
also enter into interest rate or foreign currency derivatives with the vehicles. The Corporation
also had approximately $460 million of other liquidity commitments, including written put options
and collateral value guarantees, with unconsolidated credit-linked and equity-linked note vehicles
at September 30, 2010.
The Corporation consolidates these vehicles when it has control over the initial design of
the vehicle and also absorbs potentially significant gains or losses through derivative contracts
or the collateral assets. The Corporation does not
47
consolidate a vehicle if a single investor
controlled the initial design of the vehicle or if the Corporation does not have a variable
interest that could potentially be significant to the vehicle. Credit-linked and equity-linked
note vehicles were not consolidated prior to 2010 because the Corporation did not absorb a
majority of the economic risks and rewards of the vehicles.
Asset acquisition vehicles acquire financial instruments, typically loans, at the direction
of a single customer and obtain funding through the issuance of structured notes to the
Corporation. At the time the vehicle acquires an asset, the Corporation enters into total return
swaps with the customer such that the economic returns of the asset are passed through to the
customer. The Corporation is exposed to counterparty credit risk if the asset declines in value
and the customer defaults on its obligation to the Corporation under the total return swaps. The
Corporations risk may be mitigated by collateral or other arrangements. The Corporation
consolidates these vehicles because it has the power to manage the assets in the vehicles and owns
all of the structured notes issued by the vehicles. These vehicles were not consolidated prior to
2010 because the variability created by the assets in the vehicles was considered to be absorbed
by the Corporations customers through the total return swaps.
Other VIEs
Other consolidated VIEs primarily include investment vehicles, leveraged lease trusts,
automobile and other securitization trusts, and asset acquisition conduits. Other unconsolidated
VIEs primarily include investment vehicles, real estate vehicles and resecuritization trusts.
The table below summarizes select information related to other VIEs in which the Corporation
held a variable interest at September 30, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
(Dollars in millions) |
|
Consolidated |
|
|
Unconsolidated |
|
|
Total |
|
|
Consolidated |
|
|
Unconsolidated |
|
|
Total |
|
|
Maximum loss exposure |
|
$ |
15,150 |
|
|
$ |
33,488 |
|
|
$ |
48,638 |
|
|
$ |
13,111 |
|
|
$ |
14,373 |
|
|
$ |
27,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading account assets |
|
$ |
1,187 |
|
|
$ |
1,719 |
|
|
$ |
2,906 |
|
|
$ |
269 |
|
|
$ |
543 |
|
|
$ |
812 |
|
Derivative assets |
|
|
259 |
|
|
|
317 |
|
|
|
576 |
|
|
|
1,096 |
|
|
|
86 |
|
|
|
1,182 |
|
Available-for-sale debt securities |
|
|
1,810 |
|
|
|
20,811 |
|
|
|
22,621 |
|
|
|
1,822 |
|
|
|
2,439 |
|
|
|
4,261 |
|
Loans and leases |
|
|
18,731 |
|
|
|
1,569 |
|
|
|
20,300 |
|
|
|
16,112 |
|
|
|
1,200 |
|
|
|
17,312 |
|
Allowance for loan and lease losses |
|
|
(59 |
) |
|
|
(15 |
) |
|
|
(74 |
) |
|
|
(130 |
) |
|
|
(10 |
) |
|
|
(140 |
) |
Loans held-for-sale |
|
|
312 |
|
|
|
865 |
|
|
|
1,177 |
|
|
|
197 |
|
|
|
- |
|
|
|
197 |
|
All other assets |
|
|
2,722 |
|
|
|
8,381 |
|
|
|
11,103 |
|
|
|
1,310 |
|
|
|
8,875 |
|
|
|
10,185 |
|
|
Total |
|
$ |
24,962 |
|
|
$ |
33,647 |
|
|
$ |
58,609 |
|
|
$ |
20,676 |
|
|
$ |
13,133 |
|
|
$ |
33,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
- |
|
|
$ |
11 |
|
|
$ |
11 |
|
|
$ |
- |
|
|
$ |
80 |
|
|
$ |
80 |
|
Commercial paper and other short-term borrowings |
|
|
1,312 |
|
|
|
- |
|
|
|
1,312 |
|
|
|
965 |
|
|
|
- |
|
|
|
965 |
|
Long-term debt |
|
|
9,427 |
|
|
|
74 |
|
|
|
9,501 |
|
|
|
7,341 |
|
|
|
- |
|
|
|
7,341 |
|
All other liabilities |
|
|
1,544 |
|
|
|
1,447 |
|
|
|
2,991 |
|
|
|
3,123 |
|
|
|
1,626 |
|
|
|
4,749 |
|
|
Total |
|
$ |
12,283 |
|
|
$ |
1,532 |
|
|
$ |
13,815 |
|
|
$ |
11,429 |
|
|
$ |
1,706 |
|
|
$ |
13,135 |
|
|
Total assets of VIEs |
|
$ |
24,962 |
|
|
$ |
70,824 |
|
|
$ |
95,786 |
|
|
$ |
20,676 |
|
|
$ |
25,914 |
|
|
$ |
46,590 |
|
|
Investment Vehicles
The Corporation sponsors, invests in or provides financing to a variety of investment
vehicles that hold loans, real estate, debt securities or other financial instruments and are
designed to provide the desired investment profile to investors. At September 30, 2010 and
December 31, 2009, the Corporations consolidated investment vehicles had total assets of $7.8
billion and $5.7 billion. The Corporation also held investments in unconsolidated vehicles with
total assets of $10.4 billion and $8.8 billion at September 30, 2010 and December 31, 2009. The
Corporations maximum exposure to loss associated with consolidated and unconsolidated investment
vehicles totaled $12.0 billion and $10.7 billion at September 30, 2010 and December 31, 2009.
On January 1, 2010, the Corporation consolidated $2.5 billion of investment vehicles. This
amount included a real estate investment fund with $1.5 billion of assets which is designed to
provide returns to clients through limited partnership
48
holdings. Affiliates of the Corporation are
the general partner and also have a limited partnership interest in the fund. The Corporation
anticipates that it will provide support to the entity and therefore considers the entity to be a
VIE. The Corporation consolidates an investment vehicle that meets the definition of a VIE if it
manages the assets or otherwise controls the activities of the vehicle and also holds a variable
interest that could potentially be significant to the vehicle. Prior to 2010, the Corporation
consolidated an investment vehicle that met the definition of a VIE if the Corporations
investment or guarantee was expected to absorb a majority of the variability created by the assets
of the funds.
Leveraged Lease Trusts
The Corporations net investment in consolidated leveraged lease trusts totaled $5.3 billion
and $5.6 billion at September 30, 2010 and December 31, 2009. The trusts hold long-lived equipment
such as rail cars, power generation and distribution equipment, and commercial aircraft. The
Corporation consolidates these trusts because it structured the trusts, giving the Corporation
power over the limited activities of the trusts, and holds a significant residual interest. Prior
to 2010, the Corporation consolidated these trusts because the residual interest was expected to
absorb a majority of the variability driven by credit risk of the lessee and, in some cases, by
the residual risk of the leased property. The net investment represents the Corporations maximum
loss exposure to the trusts in the unlikely event that the leveraged lease investments become
worthless. Debt issued by the leveraged lease trusts is nonrecourse to the Corporation. The
Corporation has no liquidity exposure to these leveraged lease trusts.
Automobile and Other Securitization Trusts
On January 1, 2010, the Corporation consolidated one automobile securitization trust with
$2.6 billion of assets in which it had a controlling financial interest. Prior to 2010, this trust
met the definition of a QSPE and was therefore not subject to consolidation. The Corporation held
$2.1 billion of senior securities, $195 million of subordinate securities and $83 million of
residual interests issued by this trust at December 31, 2009. The remaining automobile trusts,
which were not QSPEs, were previously consolidated. The automobile and student loan trusts are
consolidated under the new consolidation guidance because the Corporation services the underlying
loans and also holds a significant amount of
beneficial interests issued by the trusts. The other trusts are not consolidated because the
Corporation does not service the underlying assets or does not hold more than an insignificant
amount of beneficial interests issued by the trusts. The loans and receivables held as collateral
in the asset-backed securitization trusts are legally assets of the trusts and not the Corporation
and can only be used to settle obligations of the trusts. The creditors of these trusts have no
recourse to the Corporation.
At September 30, 2010, the Corporation serviced assets held in auto and other securitization
trusts with outstanding balances of $11.7 billion, including trusts collateralized by automobile
loans of $9.7 billion, student loans of $1.3 billion and other loans and receivables of $711
million. At December 31, 2009, the Corporation serviced assets held in auto and other
securitization trusts with outstanding balances of $11.9 billion, including trusts collateralized
by automobile loans of $11.0 billion and other loans of $905 million. The Corporations maximum
exposure to loss associated with these consolidated and unconsolidated trusts totaled $3.0 billion
and $3.5 billion at September 30, 2010 and December 31, 2009. The Corporation transferred $3.0
billion of automobile loans, $1.3 billion of student loans and $303 million of other receivables
to the trusts in the nine months ended September 30, 2010; $1.3 billion of student loans and $303
million of other receivables in the three months ended September 30, 2010; and $9.0 billion of
automobile loans during the year ended December 31, 2009.
Asset Acquisition Conduits
The Corporation administers three asset acquisition conduits which acquire assets on behalf
of the Corporation or its customers. These conduits had total assets of $816 million and $965
million at September 30, 2010 and December 31, 2009. Two of the conduits, which were
unconsolidated prior to 2010, acquire assets at the request of customers who wish to benefit from
the economic returns of the specified assets on a leveraged basis, which consist principally of
liquid exchange-traded equity securities. The third conduit holds subordinate debt securities for
the Corporations benefit. The conduits obtain funding by issuing commercial paper and subordinate
certificates to third party investors. Repayment of the commercial paper and certificates is
assured by total return swaps between the Corporation and the conduits. When a conduit acquires
assets for the benefit of the Corporations customers, the Corporation enters into back-to-back
total return swaps with the conduit and the customer such that the economic returns of the assets
are passed through to the customer. The Corporations exposure to the counterparty credit risk of
its customers is mitigated by the ability to liquidate an asset held in the conduit if the
customer defaults on its obligation. The Corporation receives fees for serving as commercial paper
placement agent and for providing administrative services to the conduits. At September 30, 2010
and December 31, 2009, the Corporation did not hold any commercial paper issued by the asset
acquisition conduits other than incidentally and in its role as a commercial paper dealer.
49
On January 1, 2010, the Corporation consolidated the two previously unconsolidated asset
acquisition conduits with total assets of $1.4 billion. In its role as administrator, the
Corporation has the power to determine which assets will be held in the conduits and to manage the
issuance of commercial paper. Through the total return swaps with the conduits, the Corporation
initially absorbs gains and losses incurred due to changes in the market value of assets held in
the conduits. Although the Corporation then transfers gains and losses to customers through the
back-to-back total return swaps, its financial interest could potentially be significant to the
VIE. Accordingly, the Corporation is the primary beneficiary of and consolidates all of the asset
acquisition conduits.
Prior to 2010, the Corporation determined whether it must consolidate an asset acquisition
conduit based on the design of the conduit and whether the third party investors are exposed to
the Corporations credit risk or the market risk of the assets. Interest rate risk was not
included in the cash flow analysis because the conduits are not designed to absorb and pass along
interest rate risk to investors who receive current rates of interest that are appropriate for the
tenor and relative risk of their investments. When a conduit acquired assets for the benefit of
the Corporations customers, the Corporation entered into back-to-back total return swaps with the
conduit and the customers such that the economic returns of the assets are passed through to the
customers, none of whom have a variable interest in the conduit as a whole. The third party
investors are exposed primarily to the credit risk of the Corporation. Accordingly, the
Corporation did not consolidate the conduit. When a conduit acquires assets on the Corporations
behalf and the Corporation absorbs the market risk of the assets, it consolidates the conduit.
Real Estate Vehicles
The Corporation held investments in unconsolidated real estate vehicles of $5.2 billion and
$4.8 billion at September 30, 2010 and December 31, 2009, which consisted of limited partnership
investments in unconsolidated limited partnerships that finance the construction and
rehabilitation of affordable rental housing. The Corporation earns a return primarily through the
receipt of tax credits allocated to the affordable housing projects. The Corporations risk of
loss is mitigated by policies requiring that the project qualify for the expected tax credits
prior to making its investment. The
Corporation may from time to time be asked to invest additional amounts to support a troubled
project. Such additional investments have not been and are not expected to be significant.
Beginning January 1, 2010, the Corporation determines whether it must consolidate these
limited partnerships principally based on an identification of the party that has power over the
activities of the partnership. Typically, an unrelated third party is the general partner and the
Corporation does not consolidate the partnership.
Prior to 2010, the Corporation determined whether it must consolidate these limited
partnerships based on a determination as to which party is expected to absorb a majority of the
risk created by the real estate held in the vehicle, which may include construction, market and
operating risk. Typically, the general partner in a limited partnership will absorb a majority of
this risk due to the legal nature of the limited partnership structure and, accordingly, would
consolidate the vehicle.
Resecuritization Trusts
The Corporation transfers existing securities, typically MBS, into resecuritization vehicles
at the request of customers seeking securities with specific characteristics. The Corporation may
also enter into resecuritizations of securities within its investment portfolios for purposes of
improving liquidity and capital, and managing credit or interest rate risk.
During the three and nine months ended September 30, 2010, the Corporation resecuritized
$11.5 billion and $83.3 billion of MBS, including $11.4 billion and $58.4 billion of securities
purchased from third parties, compared to $11.7 billion and $27.7 billion for the same periods in
2009. Net losses upon sale totaled $16 million and $144 million for the three and nine months
ended September 30, 2010 compared to net gains of $94 million and $156 million for the same
periods in 2009. At September 30, 2010, the Corporation held $19.5 billion and $1.4 billion of
senior securities classified in AFS debt securities and trading account assets, and $1.1 billion
and $325 million of subordinate securities classified in AFS debt securities and trading account
assets which were issued by unconsolidated resecuritization trusts which had total assets of $54.0
billion. At December 31, 2009, the Corporation held $543 million of senior securities classified
in trading account assets which were issued by unconsolidated resecuritization trusts which had
total assets of $7.4 billion. All of the retained interests were valued using quoted market prices
or observable market inputs (Level 2 of the fair value hierarchy). The Corporation consolidates a
resecuritization trust if it has sole discretion over the design of the trust, including the
identification of securities to be transferred in and the structure of securities to be issued and
also retains a variable interest that could potentially be significant to the trust. If one or a
limited number of third party investors purchases a significant portion of subordinate securities
and shares responsibility for the design of the trust, the Corporation does not consolidate
50
the trust. Prior to 2010, these resecuritization trusts were typically QSPEs and as such were
not subject to consolidation by the Corporation.
Other Transactions
Prior to 2010, the Corporation transferred pools of securities to certain independent third
parties and provided financing for approximately 75 percent of the purchase price under
asset-backed financing arrangements. At September 30, 2010 and December 31, 2009, the
Corporations maximum loss exposure under these financing arrangements was $6.4 billion and $6.8
billion, substantially all of which was classified as loans on the Corporations Consolidated
Balance Sheet. All principal and interest payments have been received when due in accordance with
their contractual terms. These arrangements are not included in the Other VIEs table on page 48
because the purchasers are not VIEs.
NOTE 9 Goodwill and Intangible Assets
Goodwill
The table below presents goodwill
balances by business segment at September 30, 2010 and December 31, 2009. As
discussed in more detail in Note 17 Business Segment Information, on January 1, 2010, the
Corporation realigned the former Global Banking and Global Markets business segments. There was no
impact on the reporting units used in goodwill impairment testing. The reporting units utilized
for goodwill impairment tests are the business segments or one level below the business segments.
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
December 31 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
Deposits |
|
$ |
17,875 |
|
|
$ |
17,875 |
|
Global Card Services |
|
|
11,889 |
|
|
|
22,292 |
|
Home Loans & Insurance |
|
|
4,797 |
|
|
|
4,797 |
|
Global Commercial Banking |
|
|
20,656 |
|
|
|
20,656 |
|
Global Banking & Markets |
|
|
10,423 |
|
|
|
10,252 |
|
Global Wealth & Investment Management |
|
|
9,928 |
|
|
|
10,411 |
|
All Other |
|
|
34 |
|
|
|
31 |
|
|
Total Goodwill |
|
$ |
75,602 |
|
|
$ |
86,314 |
|
|
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
Financial Reform Act) was signed into law. Under the Financial Reform Act and its amendment to the
Electronic Fund Transfer Act, the Federal Reserve must adopt rules within nine months of enactment
of the Financial Reform Act regarding the interchange fees that may be charged with respect to
electronic debit transactions. Those rules will take effect one year after enactment of the
Financial Reform Act. The Financial Reform Act and the applicable rules are expected to materially
reduce the future revenues generated by the debit card business of the Corporation. However, the
Corporation expects to implement a number of actions that will mitigate a good portion of the impact when
the laws and regulations become effective.
The Corporations consumer and small business card products, including the debit card
business, are part of an integrated platform within Global Card Services. The Corporations
current estimate of revenue loss due to the Financial Reform Act is expected to be approximately $2.0 billion annually based on current volumes. Accordingly, the Corporation performed an impairment test for Global Card
Services during the three months ended September 30, 2010. In step one of the impairment test, the fair value of Global
Card Services was estimated under the income approach where the significant assumptions included
the discount rate, terminal value, expected loss rates and expected new account growth. The
Corporation also updated the estimated cash flows to reflect the current strategic plan
and other portfolio assumptions. Based on the results of step one of the impairment test, the
Corporation determined that the carrying amount of Global Card Services, including goodwill,
exceeded its fair value. The carrying amount of the reporting unit, fair value of the reporting
unit and goodwill were $39.2 billion, $25.9 billion and $22.3 billion,
respectively. Accordingly, the Corporation performed step two of the goodwill impairment test for
this reporting unit. In step two, the Corporation compared the implied fair value of the reporting
units goodwill with the carrying amount of that goodwill. Under step two of the impairment test,
significant assumptions in measuring the fair value of the assets and liabilities including
discount rates, loss rates and interest rates were updated to reflect the current economic
conditions. Based on the results of this third quarter goodwill impairment test for Global
Card Services, the carrying value of the goodwill assigned to the reporting unit exceeded the
implied fair value by $10.4 billion. Accordingly, the Corporation recorded a non-cash, non-tax
deductible goodwill
51
impairment charge of $10.4 billion to reduce the carrying amount of goodwill
in Global Card Services from $22.3 billion to $11.9 billion during the three months ended September 30, 2010. The goodwill impairment analysis includes limited
mitigation actions to recapture lost revenue within Global Card Services. Although the
Corporation has identified other potential mitigation actions, the impact of these actions
did not reduce the goodwill impairment charge because these actions are in the early
stages of development and some of them may impact segments other than Global
Card Services (e.g., Deposits).
During the three months ended September 30, 2010, the Corporation completed its annual
goodwill impairment test as of June 30, 2010 for all reporting units. In performing the first step
of the annual impairment analysis, the Corporation compared the fair value of each reporting unit
to its current carrying amount, including goodwill. As part of the June 30, 2010 annual test, the
fair value of Global Card Services was estimated under the income approach and did not include the
impact of any potential future changes which may result from the Financial Reform Act which was
signed into law in the third quarter.
Based on the results of step one of the annual impairment test, the Corporation determined
that the carrying amount of the Home Loans & Insurance and Global Card Services reporting units,
including goodwill, exceeded their fair value. The carrying amount of the reporting unit, fair
value of the reporting unit and goodwill for Home Loans & Insurance was $27.1 billion, $22.5
billion and $4.8 billion, respectively, and for Global Card Services was $40.1 billion, $40.1
billion and $22.3 billion, respectively. Because the carrying amount exceeded the fair value, the
Corporation performed step two of the goodwill impairment test for these reporting units as of
June 30, 2010. For all other reporting units, step two was not required as their fair value
exceeded their carrying amount indicating there was no impairment.
In step two for both reporting units, the Corporation compared the implied fair value of each
reporting units goodwill with the carrying amount of that goodwill. The Corporation determined
the implied fair value of goodwill for the reporting unit by assigning the fair value of the
reporting unit to all of the assets and liabilities of that unit, including any unrecognized
intangible assets, as if the reporting unit had been acquired in a business combination. The
excess of the fair value of the reporting unit over the amounts assigned to its assets and
liabilities is the implied fair value of goodwill. Based on the results of step two of the
impairment test as of June 30, 2010, the Corporation determined that goodwill was not impaired in
either Home Loans & Insurance or Global Card Services.
Given the results of the Corporations annual impairment test and due to continued stress for
Home Loans & Insurance as a result of current market conditions, the Corporation concluded,
consistent with previous quarters, that an additional impairment analysis should be performed for
this reporting unit as of September 30, 2010. Consistent with the June 30, 2010 annual impairment
test, the results of step one for Home Loans & Insurance indicated that the carrying amount
exceeded the fair value. The carrying amount of the reporting unit, fair value of the reporting
unit and goodwill for Home Loans & Insurance were $25.6 billion, $25.5 billion and $4.8 billion,
respectively. The estimated fair value as a percent of the carrying amount at September 30, 2010
was 99.8 percent. Under step two of the goodwill impairment analysis for the reporting unit, significant
assumptions in measuring the fair value of the assets and liabilities of the reporting unit
included discount rates, loss rates and interest rates. Based on the results of step two of the
impairment test, the Corporation determined that goodwill was not impaired in Home Loans &
Insurance.
The decrease in the goodwill balance in GWIM was related to
the sale of Columbia Managements long-term asset management business (Columbia) in the second quarter of 2010.
Intangible Assets
The table below presents the gross carrying amounts and accumulated amortization related to
intangible assets at September 30, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Gross Carrying |
|
|
Accumulated |
|
(Dollars in millions) |
|
Value |
|
|
Amortization |
|
|
Value |
|
|
Amortization |
|
|
Purchased credit card relationships |
|
$ |
7,164 |
|
|
$ |
3,927 |
|
|
$ |
7,179 |
|
|
$ |
3,452 |
|
Core deposit intangibles |
|
|
5,394 |
|
|
|
4,004 |
|
|
|
5,394 |
|
|
|
3,722 |
|
Customer relationships |
|
|
4,232 |
|
|
|
1,111 |
|
|
|
4,232 |
|
|
|
760 |
|
Affinity relationships |
|
|
1,648 |
|
|
|
864 |
|
|
|
1,651 |
|
|
|
751 |
|
Other intangibles |
|
|
3,143 |
|
|
|
1,273 |
|
|
|
3,438 |
|
|
|
1,183 |
|
|
Total intangible assets |
|
$ |
21,581 |
|
|
$ |
11,179 |
|
|
$ |
21,894 |
|
|
$ |
9,868 |
|
|
52
None of the intangible assets were impaired at either September 30, 2010 or December 31,
2009.
Amortization of intangibles expense was $426 million and $1.3 billion for the three and nine
months ended September 30, 2010, compared to $510 million and $1.5 billion for the same periods in
2009. The Corporation estimates aggregate amortization expense will be approximately $420 million
for the fourth quarter of 2010. In addition, the Corporation estimates aggregate amortization
expense will be approximately $1.5 billion, $1.3 billion, $1.2 billion, $1.0 billion and $900
million for 2011 through 2015, respectively.
The table below presents the Corporations long-term debt at September 30, 2010 and
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
December 31 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
Long-term debt of Bank of America Corporation and subsidiaries |
|
$ |
268,598 |
|
|
$ |
283,570 |
|
Long-term debt of Merrill Lynch & Co., Inc. and subsidiaries |
|
|
131,032 |
|
|
|
154,951 |
|
Long-term debt of consolidated VIEs under new consolidation guidance |
|
|
79,228 |
|
|
|
n/a |
|
|
Total long-term debt |
|
$ |
478,858 |
|
|
$ |
438,521 |
|
|
n/a = not applicable
At September 30, 2010, long-term debt of consolidated VIEs including credit card,
automobile, home equity, first-lien mortgage-related securitization trusts and other VIEs
totaled $59.1 billion, $7.5 billion, $3.8 billion, $1.0 billion and $7.8 billion, respectively.
Long-term debt of VIEs is collateralized by the assets of the VIEs.
As of September 30, 2010, the Corporation had not assumed or guaranteed $126.5 billion of
long-term debt that was issued or guaranteed by Merrill Lynch & Co., Inc. or its subsidiaries
prior to the acquisition of Merrill Lynch by the Corporation. Beginning late in the third quarter
of 2009, in connection with the update or renewal of certain Merrill Lynch international
securities offering programs, the Corporation agreed to guarantee debt securities, warrants and/or
certificates issued by certain subsidiaries of Merrill Lynch & Co., Inc. on a going forward basis.
All existing Merrill Lynch & Co., Inc. guarantees of securities issued by those same Merrill Lynch
subsidiaries under various international securities offering programs will remain in full force
and effect as long as those securities are outstanding and the Corporation has not assumed any of
those prior Merrill Lynch & Co., Inc. guarantees or otherwise guaranteed such securities.
Certain structured notes issued by Merrill Lynch are accounted for under the fair value
option. For more information on these structured notes, see Note 14 Fair Value Measurements.
Aggregate annual maturities of long-term debt obligations at September 30, 2010 are
summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions) |
|
2010 |
|
2011 |
|
2012 |
|
2013 |
|
2014 |
|
Thereafter |
|
Total |
|
Bank of America Corporation |
|
$ |
7,666 |
|
|
$ |
17,157 |
|
|
$ |
42,729 |
|
|
$ |
8,975 |
|
|
$ |
15,970 |
|
|
$ |
99,087 |
|
|
$ |
191,584 |
|
Merrill Lynch & Co., Inc. and subsidiaries |
|
|
5,522 |
|
|
|
20,237 |
|
|
|
18,981 |
|
|
|
19,073 |
|
|
|
17,404 |
|
|
|
49,815 |
|
|
|
131,032 |
|
Bank of America, N.A. and other subsidiaries |
|
|
4,551 |
|
|
|
4,195 |
|
|
|
4,890 |
|
|
|
- |
|
|
|
64 |
|
|
|
9,750 |
|
|
|
23,450 |
|
Other |
|
|
6,846 |
|
|
|
23,277 |
|
|
|
13,768 |
|
|
|
5,163 |
|
|
|
1,774 |
|
|
|
2,736 |
|
|
|
53,564 |
|
|
Total long-term debt excluding consolidated VIEs |
|
|
24,585 |
|
|
|
64,866 |
|
|
|
80,368 |
|
|
|
33,211 |
|
|
|
35,212 |
|
|
|
161,388 |
|
|
|
399,630 |
|
Long-term debt of consolidated VIEs |
|
|
6,433 |
|
|
|
19,090 |
|
|
|
12,307 |
|
|
|
17,716 |
|
|
|
9,212 |
|
|
|
14,470 |
|
|
|
79,228 |
|
|
Total long-term debt |
|
$ |
31,018 |
|
|
$ |
83,956 |
|
|
$ |
92,675 |
|
|
$ |
50,927 |
|
|
$ |
44,424 |
|
|
$ |
175,858 |
|
|
$ |
478,858 |
|
|
Included in the above table are certain structured notes that contain provisions whereby
the borrowings are redeemable at the option of the holder (put options) at specified dates prior
to maturity. Other structured notes have coupon or repayment terms linked to the performance of
debt or equity securities, indices, currencies or commodities and the maturity may be accelerated
based on the value of a referenced index or security. In both cases, the Corporation or a
subsidiary may be required to settle the obligation for cash or other securities prior to the
contractual maturity date. These borrowings are reflected in the above table as maturing at their
earliest put or redemption date.
53
NOTE 11 Commitments and Contingencies
In the normal course of business, the Corporation enters into a number of off-balance
sheet commitments. These commitments expose the Corporation to varying degrees of credit and
market risk and are subject to the same credit and market risk limitation reviews as those
instruments recorded on the Corporations Consolidated Balance Sheet. For additional information
on commitments and contingencies, see Note 14 Commitments and Contingencies to the Consolidated
Financial Statements of the Corporations 2009 Annual Report on Form 10-K.
Credit Extension Commitments
The Corporation enters into commitments to extend credit such as loan commitments, SBLCs
and commercial letters of credit to meet the financing needs of its customers. The unfunded
legally binding lending commitments shown in the table below are net of amounts distributed
(e.g., syndicated) to other financial institutions of $32.1 billion and $30.9 billion at September
30, 2010 and December 31, 2009. At September 30, 2010, the carrying amount of these commitments,
excluding commitments accounted for under the fair value option, was $1.3 billion, including
deferred revenue of $33 million and a reserve for unfunded lending commitments of $1.3 billion. At
December 31, 2009, the comparable amounts were $1.5 billion, $34 million and $1.5 billion,
respectively. The carrying amount of these commitments is classified in accrued expenses and other
liabilities.
The table below also includes the notional amount of commitments of $28.5 billion and $27.0
billion at September 30, 2010 and December 31, 2009, that are accounted for under the fair value
option. However, the table below excludes fair value adjustments of $809 million and $950 million
on these commitments, which are classified in accrued expenses and other liabilities. For
information regarding the Corporations loan commitments accounted for under the fair value
option, see Note 14 Fair Value Measurements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expires after 1 |
|
Expires after 3 |
|
|
|
|
|
|
Expires in 1 |
|
Year through |
|
Years through |
|
Expires after 5 |
|
|
(Dollars in millions) |
|
Year or Less |
|
3 Years |
|
5 Years |
|
Years |
|
Total |
|
Credit extension commitments,
September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan commitments |
|
$ |
172,127 |
|
|
$ |
152,449 |
|
|
$ |
29,505 |
|
|
$ |
21,165 |
|
|
$ |
375,246 |
|
Home equity lines of credit |
|
|
1,976 |
|
|
|
3,770 |
|
|
|
16,350 |
|
|
|
60,568 |
|
|
|
82,664 |
|
Standby letters of credit and financial
guarantees (1) |
|
|
36,257 |
|
|
|
19,636 |
|
|
|
3,082 |
|
|
|
6,708 |
|
|
|
65,683 |
|
Commercial letters of credit |
|
|
2,440 |
|
|
|
38 |
|
|
|
- |
|
|
|
1,952 |
|
|
|
4,430 |
|
|
Legally binding commitments |
|
|
212,800 |
|
|
|
175,893 |
|
|
|
48,937 |
|
|
|
90,393 |
|
|
|
528,023 |
|
Credit card lines (2) |
|
|
502,961 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
502,961 |
|
|
Total credit extension commitments |
|
$ |
715,761 |
|
|
$ |
175,893 |
|
|
$ |
48,937 |
|
|
$ |
90,393 |
|
|
$ |
1,030,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit extension commitments, December
31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan commitments |
|
$ |
149,248 |
|
|
$ |
187,585 |
|
|
$ |
30,897 |
|
|
$ |
28,489 |
|
|
$ |
396,219 |
|
Home equity lines of credit |
|
|
1,810 |
|
|
|
3,272 |
|
|
|
10,667 |
|
|
|
76,924 |
|
|
|
92,673 |
|
Standby letters of credit and financial
guarantees (1) |
|
|
29,794 |
|
|
|
21,285 |
|
|
|
4,923 |
|
|
|
13,740 |
|
|
|
69,742 |
|
Commercial letters of credit |
|
|
2,020 |
|
|
|
40 |
|
|
|
- |
|
|
|
1,465 |
|
|
|
3,525 |
|
|
Legally binding commitments |
|
|
182,872 |
|
|
|
212,182 |
|
|
|
46,487 |
|
|
|
120,618 |
|
|
|
562,159 |
|
Credit card lines (2) |
|
|
541,919 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
541,919 |
|
|
Total credit extension commitments |
|
$ |
724,791 |
|
|
$ |
212,182 |
|
|
$ |
46,487 |
|
|
$ |
120,618 |
|
|
$ |
1,104,078 |
|
|
|
|
|
(1) |
|
The notional amounts of SBLCs and financial
guarantees classified as investment grade and
non-investment grade based on the credit
quality of the underlying reference name
within the instrument were $40.3 billion and
$25.4 billion at September 30, 2010 and $39.7
billion and $30.0 billion at December 31,
2009. |
|
(2) |
|
Includes business card unused lines of credit. |
Legally binding commitments to extend credit generally have specified rates and
maturities. Certain of these commitments have adverse change clauses that help to protect the
Corporation against deterioration in the borrowers ability to pay.
54
Other Commitments
Global Principal Investments and Other Equity Investments
At September 30, 2010 and December 31, 2009, the Corporation had unfunded equity investment
commitments of approximately $1.6 billion and $2.8 billion. In light of proposed Basel regulatory
capital changes related to unfunded commitments, the Corporation has actively reduced these
commitments in a series of transactions involving its private equity fund investments. During the
three months ended September 30, 2010, the Corporation completed the sale of its exposure to
certain private equity funds. For more information on these transactions, see Note 5 Securities.
These commitments generally relate to the Corporations Global Principal Investments business
which is comprised of a diversified portfolio of investments in private equity, real estate and
other alternative investments. These investments are made either directly in a company or held
through a fund.
Where the Corporation has a binding equity bridge commitment and there is a market disruption
or other unexpected event, there is higher potential for loss, unless an orderly disposition of
the exposure can be made. At September 30, 2010, the Corporation did not have any unfunded bridge
equity commitments. The Corporation had funded equity bridges of $1.2 billion that were committed
prior to the market disruption. These equity bridges were considered held for investment and
classified in other assets. During the fourth quarter of 2009, these equity bridges were written
down to a zero balance. In the three and nine months ended September 30, 2009, the Corporation
recorded a total of $193 million and $456 million in losses in equity investment income related to
these investments.
Loan Purchases
In 2005, the Corporation entered into an agreement for the committed purchase of retail
automotive loans over a five-year period that ended on June 22, 2010. Under this agreement, the
Corporation purchased $6.6 billion of such loans during the six months ended June 30, 2010 and
also the year ended December 31, 2009. All loans purchased under this agreement were subject to a
comprehensive set of credit criteria. This agreement was accounted for as a derivative liability
with a fair value of $189 million at December 31, 2009. As of September 30, 2010, the Corporation
was no longer committed for any additional purchases. As part of this agreement, the
Corporation recorded a liability which may increase or decrease based on credit performance of
the purchased loans over a period extending through 2016.
At September 30, 2010 and December 31, 2009, the Corporation had commitments to purchase
loans (e.g., residential mortgage and commercial real estate) of $3.6 billion and $2.2 billion,
which upon settlement will be included in loans or LHFS.
Operating Leases
The Corporation is a party to operating leases for certain of its premises and equipment.
Commitments under these leases are approximately $780 million, $2.9 billion, $2.5 billion, $2.0
billion and $1.5 billion for the remainder of 2010 through 2014, respectively, and $7.8 billion in
the aggregate for all years thereafter.
Other Commitments
At September 30, 2010 and December 31, 2009, the Corporation had commitments to enter into
forward-dated resale and securities borrowing agreements of $59.5 billion and $51.8 billion. In
addition, the Corporation had commitments to enter into forward-dated repurchase and securities
lending agreements of $54.1 billion and $58.3 billion. All of these commitments expire within the
next 12 months.
The Corporation has entered into agreements with providers of market data, communications,
systems consulting and other office-related services. At September 30, 2010 and December 31, 2009,
the minimum fee commitments over the remaining terms of these agreements totaled $2.2 billion and
$2.3 billion.
55
Other Guarantees
Bank-owned Life Insurance Book Value Protection
The Corporation sells products that offer book value protection to insurance carriers who
offer group life insurance policies to corporations, primarily banks. The book value protection is
provided on portfolios of intermediate investment-grade fixed-income securities and is intended to
cover any shortfall in the event that policyholders surrender their policies and market value is
below book value. To manage its exposure, the Corporation imposes significant restrictions on
surrenders and the manner in which the portfolio is liquidated and the funds are accessed. In
addition, investment parameters of the underlying portfolio are restricted. These constraints,
combined with structural protections, including a cap on the amount of risk assumed on each
policy, are designed to provide adequate buffers and guard against payments even under extreme
stress scenarios. These guarantees are recorded as derivatives and carried at fair value in the
trading portfolio. At September 30, 2010 and December 31, 2009, the notional amount of these
guarantees totaled $15.7 billion and $15.6 billion and the Corporations maximum exposure related
to these guarantees totaled $5.0 billion and $4.9 billion with estimated maturity
dates between 2030 and 2040. As of September 30, 2010, the Corporation has not made a payment
under these products. The probability of surrender has increased due to the deteriorating
financial health of policyholders, but remains a small percentage of total notional.
Employee Retirement Protection
The Corporation sells products that offer book value protection primarily to plan sponsors of
Employee Retirement Income Security Act of 1974 (ERISA) governed pension plans, such as 401(k)
plans and 457 plans. The book value protection is provided on portfolios of
intermediate/short-term investment-grade fixed-income securities and is intended to cover any
shortfall in the event that plan participants continue to withdraw funds after all securities have
been liquidated and there is remaining book value. The Corporation retains the option to exit the
contract at any time. If the Corporation exercises its option, the purchaser can require the
Corporation to purchase high quality fixed-income securities, typically government or
government-backed agency securities, with the proceeds of the liquidated assets to assure the
return of principal. To manage its exposure, the Corporation imposes significant restrictions and
constraints on the timing of the withdrawals, the manner in which the portfolio is liquidated and
the funds are accessed, and the investment parameters of the underlying portfolio. These
constraints, combined with structural protections, are designed to provide adequate buffers and
guard against payments even under extreme stress scenarios. These guarantees are recorded as
derivatives and carried at fair value in the trading portfolio. At September 30, 2010 and December
31, 2009, the notional amount of these guarantees totaled $36.1 billion and $36.8 billion with
estimated maturity dates between 2010 and 2014 if the exit option is exercised on all deals. As of
September 30, 2010, the Corporation has not made a payment under these products and has assessed
the probability of payments under these guarantees as remote.
Merchant Services
On June 26, 2009, the Corporation contributed its merchant processing business to a joint
venture in exchange for a 46.5 percent ownership interest in the joint venture. During the second
quarter of 2010, the joint venture purchased the interest held by one of the three initial
investors bringing the Corporations ownership interest up to 49 percent. For additional
information on the joint venture agreement, see Note 5 Securities.
The Corporation, on behalf of the joint venture, provides credit and debit card processing
services to various merchants by processing credit and debit card transactions on the merchants
behalf. In connection with these services, a liability may arise in the event of a billing dispute
between the merchant and a cardholder that is ultimately resolved in the cardholders favor and
the merchant defaults on its obligation to reimburse the cardholder. A cardholder, through its
issuing bank, generally has until the later of up to six months after the date a transaction is
processed or the delivery of the product or service to present a chargeback to the joint venture
as the merchant processor. If the joint venture is unable to collect this amount from the
merchant, it bears the loss for the amount paid to the cardholder. The joint venture is primarily
liable for any losses on transactions from the contributed portfolio that occur after June 26,
2009. However, if the joint venture fails to meet its obligation to reimburse the cardholder for
disputed transactions, then the Corporation could be held liable for the disputed amount. For the
three and nine months ended September 30, 2010, the Corporation processed and settled $66.1
billion and $192.1 billion of transactions and recorded losses of $5 million and $13 million. For
the three and nine months ended September 30, 2009, the Corporation processed and settled $63.1
billion and $182.1 billion of transactions and recorded losses of $7 million and $21 million.
At September 30, 2010 and December 31, 2009, the Corporation, on behalf of the joint venture,
held as collateral $25 million and $26 million of merchant escrow deposits which may be used to
offset amounts due from the individual
56
merchants. The joint venture also has the right to offset any payments with cash flows otherwise
due to the merchant. Accordingly, the Corporation believes that the maximum potential exposure is
not representative of the actual potential loss exposure. The Corporation believes the maximum
potential exposure for chargebacks would not exceed the total amount of merchant transactions
processed through Visa and MasterCard for the last six months, which represents the claim period
for the cardholder, plus any outstanding delayed-delivery transactions. As of September 30, 2010
and December 31, 2009, the maximum potential exposure totaled approximately $130.8 billion and
$131.0 billion. The Corporation does not expect to make material payments in connection with these
guarantees. The maximum potential exposure disclosed above does not include volumes processed by
First Data contributed portfolios.
Other Derivative Contracts
The Corporation funds selected assets, including securities issued by CDOs and CLOs, through
derivative contracts, typically total return swaps, with third parties and SPEs that are not
consolidated on the Corporations Consolidated Balance Sheet. At September 30, 2010 and December
31, 2009, the total notional amount of these derivative contracts was approximately $4.0 billion
and $4.9 billion with commercial banks and $1.3 billion and $2.8 billion with SPEs. The underlying
securities are senior securities and substantially all of the Corporations exposures are insured.
Accordingly, the Corporations exposure to loss consists principally of counterparty risk to the
insurers. In certain circumstances, generally as a result of ratings downgrades, the Corporation
may be required to purchase the underlying assets, which would not result in additional gain or
loss to the Corporation as such exposure is already reflected in the fair value of the derivative
contracts.
Other Guarantees
The Corporation sells products that guarantee the return of principal to investors at a
preset future date. These guarantees cover a broad range of underlying asset classes and are
designed to cover the shortfall between the market value of the underlying portfolio and the
principal amount on the preset future date. To manage its exposure, the Corporation requires that
these guarantees be backed by structural and investment constraints and certain pre-defined
triggers that would require the underlying assets or portfolio to be liquidated and invested in
zero-coupon bonds that mature at the preset future date. The Corporation is required to fund any
shortfall between the proceeds of the liquidated assets and the purchase price of the zero-coupon
bonds at the preset future date. These guarantees are recorded as derivatives and carried at fair
value in the trading portfolio. At September 30, 2010 and December 31, 2009, the notional amount
of these guarantees totaled $668 million and $2.1 billion. These guarantees have various
maturities ranging from two to five years. As of September 30, 2010 and December 31, 2009, the
Corporation had not made a payment under these products and has assessed the probability of
payments under these guarantees as remote.
The Corporation has entered into additional guarantee agreements, including lease-end
obligation agreements, partial credit guarantees on certain leases, real estate joint venture
guarantees, sold risk participation swaps and sold put options that require gross settlement. The
maximum potential future payment under these agreements was approximately $3.2 billion and $3.6
billion at September 30, 2010 and December 31, 2009. The estimated maturity dates of these
obligations are between 2010 and 2033. The Corporation has made no material payments under these
guarantees.
In addition, the Corporation has guaranteed the payment obligations of certain subsidiaries
of Merrill Lynch on certain derivative transactions. The aggregate notional amount of such
derivative liabilities was approximately $2.6 billion and $2.5 billion at September 30, 2010 and
December 31, 2009.
57
Payment Protection Insurance Claims Matter
In the U.K. the Corporation sells payment protection insurance (PPI) through its Global
Card Services business to credit card customers and has previously sold this insurance to consumer
loan customers. PPI covers a consumers loan or debt repayment if certain events occur such as
loss of job or illness. In response to an elevated level of customer complaints of misleading
sales tactics across the industry, heightened media coverage and pressure from consumer advocacy
groups, the U.K. Financial Services Authority (FSA) has investigated and raised concerns about the
way some companies have handled complaints relating to the sale of these insurance policies. In
August 2010, the FSA issued a policy statement on the assessment and remediation of PPI claims
which is applicable to the Corporations U.K. consumer businesses and is intended to address
concerns among consumers and regulators regarding the handling of PPI complaints across the
industry. The policy statement sets standards for the sale of PPI that apply to current and prior
sales, and in the event a company does not or did not comply with the standards, it is alleged that the insurance was incorrectly sold, giving the customer rights to remedies. The
FSA has given companies until December 1, 2010 to comply with the new regulations. Given the new
regulatory guidance, as of September 30, 2010, the Corporation recorded a liability of $592
million based on its current claims history and an estimate of future claims which have yet to be
asserted against the Corporation. The liability is included in accrued expenses and other
liabilities and the related expense is included in insurance income. The policy statement also
requires companies to review their sales practices and to proactively remediate non-complaining
customers if evidence of a systematic breach of the newly articulated sales standards is
discovered, which could include refunding premiums paid. Subject to the outcome of the
Corporations review and the new regulatory guidance, it is possible that an additional liability may be required. As the review
will not be completed until the first quarter of 2011, the Corporation is unable to reasonably
estimate the total amount of additional possible loss or a range of loss as of September 30, 2010.
Litigation and Regulatory Matters
The following supplements the disclosure in Note 14 Commitments and Contingencies to
the Consolidated Financial Statements of the Corporations 2009 Annual Report on Form 10-K and in
Note 11 Commitments and Contingencies to the Consolidated Financial Statements of the
Corporations Quarterly Reports on Form 10-Q for the quarters ended March 31, 2010 and June 30,
2010 (collectively, the prior commitments and contingencies disclosures).
In the ordinary course of business, the Corporation and its subsidiaries are routinely
defendants in or parties to many pending and threatened legal actions and proceedings, including
actions brought on behalf of various classes of claimants. These actions and proceedings are
generally based on alleged violations of consumer protection, securities, environmental, banking,
employment and other laws. In some of these actions and proceedings, claims for substantial
monetary damages are asserted against the Corporation and its subsidiaries.
In the ordinary course of business, the Corporation and its subsidiaries are also subject to
regulatory examinations, information gathering requests, inquiries and investigations. Certain
subsidiaries of the Corporation are registered broker/dealers or investment advisors and are
subject to regulation by the Securities and Exchange Commission, the Financial Industry Regulatory
Authority (FINRA), the New York Stock Exchange, the Financial Services Authority and other
domestic, international and state securities regulators. In connection with formal and informal
inquiries by those agencies, such subsidiaries receive numerous requests, subpoenas and orders for
documents, testimony and information in connection with various aspects of their regulated
activities.
In view of the inherent difficulty of predicting the outcome of such litigation and
regulatory matters, particularly where the claimants seek very large or indeterminate damages or
where the matters present novel legal theories or involve a large number of parties, the
Corporation generally cannot predict what the eventual outcome of the pending matters will be,
what the timing of the ultimate resolution of these matters will be, or what the eventual loss,
fines or penalties related to each pending matter may be.
In accordance with applicable accounting guidance, the Corporation establishes an accrued
liability for litigation and regulatory matters when those matters present loss contingencies that
are both probable and estimable. In such cases, there may be an exposure to loss in excess of any
amounts accrued. When a loss contingency is not both probable and estimable, the Corporation does
not establish an accrued liability. As a litigation or regulatory matter develops, the
Corporation, in conjunction with any outside counsel handling the matter, evaluates on an ongoing
basis whether such matter presents a loss contingency that is probable and estimable. If, at the
time of evaluation, the loss contingency related to a litigation or regulatory matter is not both
probable and estimable, the matter will continue to be monitored for further developments that
would make such loss contingency both probable and estimable. Once the loss contingency related to
a litigation or
58
regulatory matter is deemed to be both probable and estimable, the Corporation will establish an
accrued liability with respect to such loss contingency and continue to monitor the matter for
further developments that could affect the amount of the accrued liability that has been
previously established. Excluding fees paid to external legal service providers,
litigation-related costs of $482 million and $1.2 billion were recognized for the three and nine
months ended September 30, 2010 as compared to $107 million and $477 million for the same periods
in 2009.
For
a limited number of the matters disclosed in this Note 11, and in the prior commitments
and contingencies disclosures, for which a loss is probable or reasonably possible in future
periods, whether in excess of a
related accrued liability or where there is no accrued liability, the Corporation is able to estimate a range of
possible loss. For other disclosed matters for which a loss is probable or reasonably possible,
such an estimate is not possible. For those matters where an estimate is possible, management
currently estimates the aggregate range of possible loss is
$400 million to $1.9 billion in excess
of the accrued liability (if any) related to those matters. This estimated range of possible loss
is based upon currently available information. The matters underlying the estimated range will
change from time to time, and actual results may vary significantly from the current estimate.
Those matters for which an estimate is not possible are not included within this estimated range.
Therefore, this estimated range of possible loss does not represent the Corporations maximum loss
exposure. Information is provided below, or in the prior commitments and contingencies
disclosures, regarding the nature of all of these contingencies and, where specified, the amount
of the claim associated with these loss contingencies. Based on current knowledge, management does
not believe that loss contingencies arising from pending matters, including the matters described
herein and in prior commitments and contingencies disclosures, will have a material adverse effect
on the consolidated financial position or liquidity of the Corporation. However, in light of the
inherent uncertainties involved in these matters, and the very large or indeterminate damages
sought in some of these matters, an adverse outcome in one or more of these matters could be
material to the Corporations results of operations or cash flows for any particular reporting
period.
Adelphia Litigation
On September 22, 2010, the court was advised that an agreement had been reached to resolve
all of the claims in the Adelphia Bankruptcy litigation. The settlement is subject to finalization
of documentation and filing with the court on November 18, 2010. The settlement will resolve all
claims pending against Bank of America, N.A. (BANA), Merrill Lynch
and Co., Inc., Merrill
Lynch Capital Corp., Fleet National Bank and Fleet Securities, Inc. and other affiliated
entities that are pending before the U. S. District Courts for the Southern and Western Districts
of New York and the U. S. Second Circuit Court of Appeals, with the exception of one remaining
securities litigation pending in the U.S. District Court for the Southern District of New York.
The settlement is not material to the Corporations Consolidated Financial Statements.
Checking Account Overdraft Litigation
BANA is currently a defendant in three consumer suits discussed below challenging certain
deposit account related business practices. All three suits are presently part of a multi-district
litigation proceeding involving dozens of financial institution-defendants assigned by the
Judicial Panel on Multidistrict Litigation (MDL) to the U.S. District Court for the Southern
District of Florida.
Tornes v. Bank of America, N.A., which was commenced on December 1, 2008 in the U.S. District
Court for the Southern District of Florida, is brought on behalf of a putative nationwide class of
customers who, within the applicable statutes of limitations, incurred overdraft fees due to
BANAs posting of transactions to deposit accounts in high-to-low order.
Yourke, et al. v. Bank of America, N.A., et al., which was commenced on April 9, 2009 in the
Superior Court of the State of California, County of San Francisco, is brought on behalf of a
similar putative class as Tornes but is limited to California customers of BANA and to
transactions occurring within four years of the filing of the complaint. Tornes and Yourke each
assert claims for breach of the implied covenant of good faith and fair dealing, conversion,
unjust enrichment, and violation of the unfair and deceptive practices statutes of various states.
Plaintiffs seek restitution of all overdraft fees paid to BANA as a result of BANAs allegedly
wrongful business practices, as well as actual damages, disgorgement, exemplary damages,
injunctive relief, pre-judgment interest and attorneys fees.
Knighten v. Bank of America, N.A., which was commenced on May 3, 2010 in the U.S. District
Court for the Central District of California, is brought on behalf of a putative nationwide class
of customers of BANA who, within the applicable limitations periods, incurred overdraft fees due
to BANAs posting of transactions to deposit accounts in high-to-low order or as a result of
reliance upon the accuracy of published account balance information. Knighten also asserts claims
for violations of California state law. Knighten seeks restitution, disgorgement, punitive
damages, and injunctive relief.
59
Omnibus motions to dismiss the complaints in many of the suits included in the MDL, including
in Tornes and Yourke, were denied on March 12, 2010. Trial is currently scheduled for October
2011.
Countrywide Bond Insurance Litigation
On September 7, 2010, in MBIA Insurance Corporation, Inc. v. Countrywide Home Loans, the
Countrywide defendants filed a memorandum in support of their consolidated appeal from the courts
order granting in part and denying in part the motions to dismiss.
On July 2, 2010, in the Syncora Guarantee action, the Corporation and the Countrywide
defendants filed an answer to the amended complaint. Various legacy Countrywide entities also
filed a counterclaim for breach of contract and declaratory judgment on that date. Syncora moved
to dismiss the counterclaim on August 19, 2010.
On August 6, 2010, in the Financial Guaranty Insurance Co. action, Countrywide Home Loans,
Inc. (CHL) filed a notice of appeal from the courts order granting in part and denying in part
its motion to dismiss the initial complaint.
On July 21, 2010, in the MBIA Insurance Corporation, Inc. v. Bank of America action, the
Corporation and various defendants filed demurrers to the second amended complaint.
On October 20, 2010, the
court entered an order staying the case until August 1, 2011.
On September 28, 2010, Ambac Assurance Corporation (Ambac) filed an action in New York
Supreme Court, New York County, entitled Ambac Assurance Corporation and The Segregated Account of
Ambac Assurance Corporation v. Countrywide Home Loans, Inc., et al., against the Corporation, CHL,
Countrywide Securities Corporation (CSC) and Countrywide Financial Corporation (CFC). The action
relates to 12 bond insurance policies provided by Ambac between 2004 and 2006 with regard to
certain securitized pools of home equity lines of credit and fixed-rate second-lien mortgage
loans. The complaint alleges fraudulent inducement and breach of contract, among other claims, and
seeks unspecified actual and punitive damages and equitable relief. The complaint alleges that the
Corporation is jointly and severally liable as the successor to the Countrywide defendants.
Data Treasury Litigation
On October 14, 2010, the Corporation and BANA reached an agreement in principle with Data
Treasury Corporation to settle all pending claims against them in the Data Treasury Corporation v.
Wells Fargo, et al. action for an amount that is not material to the Corporations Consolidated
Financial Statements.
Heilig Meyers Litigation
On July 20, 2010, the court denied the appeal of BAS. A petition for reconsideration was
filed on August 3, 2010, which the court denied on October 14, 2010.
MBIA Insurance Corporation CDO Litigation
Plaintiffs have filed a notice of appeal concerning the April 9, 2010 order of the court
dismissing certain claims in the matter.
Mortgage-Backed Securities Litigation
The Corporation and affiliates, legacy Countrywide entities and affiliates, and legacy
Merrill Lynch entities and affiliates have been named as defendants in a number of cases relating
to various roles they played in MBS offerings. These cases are generally purported class action
suits or actions by individual purchasers of securities. Although the allegations vary by lawsuit,
these cases generally allege that the offering documents for more than $375 billion of securities
issued by hundreds of securitization trusts contained material misrepresentations and omissions,
including statements regarding the underwriting standards pursuant to which the underlying
mortgage loans were issued, the ratings given to the tranches by rating agencies, and the
appraisal standards that were used in violation of Section 11 and 12 of the Securities Act of 1933
and/or state securities laws. The cases generally allege unspecified compensatory damages and in
some instances, seek rescission. The Corporation has previously disclosed some of these matters
under other headings, in its 2009 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q
for the quarters ended March 31, 2010 and June 30, 2010, including Countrywide Mortgage-Backed
Securities Litigation; IndyMac Litigation; Merrill Lynch Subprime-related Matters; and Federal
Home Loan Bank of Seattle Litigation.
60
BAS, Asset Backed Funding Corporation, Banc of America Mortgage Securities, Inc., CSC, CWABS,
Inc., CWALT, Inc., Merrill Lynch Pierce, Fenner and Smith, Inc.
(MLPF&S), and Merrill Lynch Mortgage Investors, Inc. are among the defendants in
an individual action, entitled Cambridge Place Investment Management Inc. v. Morgan Stanley & Co.,
Inc., et al., filed by Cambridge Place Investment Management Inc. in Massachusetts Superior Court,
Middlesex County on July 9, 2010. Plaintiff asserts claims under the Massachusetts securities laws
and seeks unspecified damages and rescission, among other relief. On August 13, 2010, certain
defendants removed the case to federal court. On September 13, 2010, plaintiff moved to remand the
matter to state court.
BAS, Bank of America Mortgage Securities, Inc., Bank of America Funding Corporation, CFC and
CWALT, Inc., MLPF&S, and Merrill Lynch Mortgage Investors, Inc. are among the defendants named in
an individual action filed by The Charles Schwab Corporation in Superior Court
California, County of San Francisco. The case was filed on July 15, 2010 and is entitled The
Charles Schwab Corporation v. BNP Paribas Securities Corp. and the amended complaint alleges
violations of the Securities Act of 1933, the California Corporate Securities Act, the California
Civil Code, and common law in connection with various offerings of MBS and
seeks unspecified damages and rescission, among other relief.
On October 15, 2010, the Federal Home Loan Bank of Chicago (FHLB Chicago) filed a complaint
entitled Federal Home Loan Bank of Chicago v. Banc of America Funding Corporation et al., in the
Circuit Court of Cook County, Illinois County Department, Chancery Division against the
Corporation, Banc of America Funding Corporation, BAS, CSC and MLPF&S, among other defendants,
asserting claims for violations of the Illinois Securities Law, as well as negligent
misrepresentation under Illinois common law in connection with various offerings of MBS. FHLB
Chicago filed a second complaint on October 15, 2010 entitled Federal Home Loan Bank of Chicago v.
Banc of America Securities LLC et al., in the Superior Court of the State of California County of
Los Angeles, Northwest District against BAS, CSC, CFC, CWABS, Inc., CWALT, Inc., CWMBS, Inc.,
among other defendants, asserting claims for violations of the California Civil Code, California
Corporation Code, Illinois Securities Law, Sections 11, 12 and 15 of the Securities Act of 1933,
as well as negligent misrepresentation and rescission of contract in connection with various
offerings of MBS. The complaints filed by FHLB Chicago make allegations similar to those in the
Federal Home Loan Bank of Pittsburgh and Federal Home Loan
Bank of Seattle actions and seek unspecified damages and rescission, among other
relief.
Merrill Lynch Subprime-related Matters
Connecticut Carpenters Pension Fund, et al. v. Merrill Lynch & Co., Inc., et al.; Iron Workers
Local No. 25 Pension Fund v. Credit-Based Asset Servicing and Securitization LLC, et al.; Public
Employees Ret. System of Mississippi v. Merrill Lynch & Co. Inc. et al.; Wyoming State Treasurer
v. Merrill Lynch & Co., Inc.
On August 6, 2010, defendants moved to dismiss the consolidated amended complaint.
Merrill Lynch Acquisition-related Matters
In Re Bank of America Securities, Derivative & ERISA Litigation
On August 27, 2010, the court entered two orders in In re Bank of America Securities,
Derivative and Employment Retirement Income Security Act
(ERISA) Litigation. One order dismissed
the complaint brought by plaintiffs in the consolidated ERISA action in its entirety. The second
order granted in part and denied in part defendants motions to dismiss the consolidated
securities and derivative actions. All of the securities plaintiffs claims brought under the
Securities and Exchange Act of 1934 were dismissed other than Section 14(a) claims concerning
Merrill Lynchs 2008 bonus payments and fourth quarter losses; Section 10(b) claims based on
Merrill Lynchs 2008 bonus payments; and Section 20(a) claims for control person liability. All of
the securities plaintiffs claims brought under the Securities Act of 1933 were dismissed with the
exception of the Section 11, 12(a)(2), and 15 claims based on Merrill Lynchs 2008 bonus payments.
All of derivative plaintiffs claims have been dismissed other than their Section 14(a) claims
related to Merrill Lynchs 2008 bonus payments and fourth quarter losses and certain state law
breach of fiduciary duty claims. The securities plaintiffs have been granted leave to amend their
complaint, and the derivative plaintiffs have reserved their right to seek leave to amend. On
September 10, 2010, the Corporation moved for certification, or in the alternative, for
reconsideration of three issues in the courts August 27, 2010 order concerning the securities
plaintiffs complaint: (i) that the defendants had a duty under Section 14(a) to disclose Merrill
Lynchs 2008 fourth quarter losses, (ii) that the securities plaintiffs adequately pleaded
transaction causation for their Section 14(a) claim, and (iii) that covenants in a private merger
agreement filed with the Securities and Exchange Commission can be the basis for a
misrepresentation claim under the Securities Act of 1933.
61
On September 23, 2010, plaintiffs in the consolidated ERISA action filed a notice that they
will appeal the dismissal of their complaint to the U.S. Court of Appeals for the Second Circuit.
On October 8, 2010, the court denied the Corporations motion for certification, or in the
alternative, for reconsideration. On October 15, 2010, the securities plaintiffs served an amended
complaint. In addition to adding claims under Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934
on behalf of holders of
certain debt, preferred and option securities, the amendment attempts to re-plead allegations that
had been dismissed under the Courts August 27 order concerning Merrill Lynchs 2008 fourth
quarter losses.
Ocala Litigation
On August 30, 2010, each plaintiff filed a new lawsuit against BANA in the U.S. District
Court for the Southern District of Florida, Miami Division (Deutsche Bank AG v. Bank of America,
N.A., and BNP Paribas Mortgage Corporation v. Bank of America, N.A.). These lawsuits assert an
alternative theory for recovering from BANA a portion of the plaintiffs alleged losses related to
the Ocala facility. Plaintiffs allege that BANAs commercial division purchased mortgage loans
from Taylor, Bean & Whitaker Mortgage Corp., which loans had already been pledged to BANA, as
Ocala Trustee, as collateral for the notes issued by the Ocala facility and purchased by
plaintiffs. Plaintiffs seek a ruling that BANAs commercial divisions rights to these loans is
subordinate to BANAs alleged security interest as Trustee, and that BANAs commercial division is
therefore wrongfully retaining the loans or the proceeds of any resales. Plaintiffs seek
compensatory and other damages, interest, and attorneys fees in amounts that are unspecified but
which plaintiffs allege exceed approximately $665 million.
On October 1, 2010, BANA, on behalf of the Ocala facility, filed suit in the U.S. District
Court for the District of Columbia against the Federal Deposit Insurance Corporation (FDIC) as
receiver of Colonial Bank and Platinum Community Bank entitled Bank of America, National
Association as indenture trustee, custodian and collateral agent
for Ocala Funding, LLC v. Federal
Deposit Insurance Corporation, in its capacity as receiver of Colonial Bank, and in its capacity
as receiver of Platinum Community Bank. The suit seeks judicial review of the FDICs denial of
BANAs administrative claims on behalf of the Ocala facility in the Colonial and Platinum
receiverships. These claims allege that losses to the Ocala facility were in whole or in part the
result of the fraud and other wrongful conduct of Colonial and Platinum.
Parmalat Finanziaria S.p.A. Matters
Proceedings in the United States
As a result of an agreement among the parties to settle the matter in an amount that is not
material to the Corporations Consolidated Financial Statements, on August 25, 2010, the U.S.
District Court for the Southern District of New York so ordered a stipulation of voluntary
dismissal in Allstate Life Insurance Company v. Bank of America Corporation, et al.
Pender Litigation
On August 25, 2010, the U.S. District Court for the Western District of North Carolina held
that The Bank of America Pension Plans definition of normal retirement age was valid and
dismissed plaintiffs claims for unlawful lump sum benefit calculation and violation of ERISAs
anti-backloading rule, and denied defendants motion to dismiss pertaining to plaintiffs claims
regarding the voluntary transfers of assets from The Bank of America 401(k) Plan to The Bank of
America Pension Plan. The court granted plaintiffs motion for class certification. On September
10, 2010, plaintiffs filed a motion to reconsider the dismissal of the claim for violation of
ERISAs anti-backloading rule.
62
NOTE 12 Shareholders Equity and Earnings Per Common Share
Common Stock
In October 2010, the Board declared a fourth quarter cash dividend of $0.01 per common
share payable on December 24, 2010 to common shareholders of record on December 3, 2010. In July
2010, April 2010 and January 2010, the Board declared the third quarter, second quarter and first
quarter cash dividends of $0.01 per common share, which were paid on September 24, 2010, June 25,
2010 and March 26, 2010 to common shareholders of record on September 3, 2010, June 4, 2010 and
March 5, 2010, respectively.
On April 28, 2010, at the Corporations 2010 Annual Meeting of Stockholders, the Corporation
obtained shareholder approval of an amendment to the Corporations amended and restated
certificate of incorporation to increase the number of authorized shares of common stock from 11.3
billion to 12.8 billion.
In December 2009, the Corporation repurchased the non-voting perpetual preferred stock
previously issued to the U.S. Treasury (TARP Preferred Stock) through the use of $25.7 billion in
excess liquidity and $19.3 billion in proceeds from the sale of 1.3 billion Common Equivalent
Securities (CES) valued at $15.00 per unit. The CES consisted of depositary shares representing
interests in shares of Common Equivalent Junior Preferred Stock, Series S (Common Equivalent
Stock) and contingent warrants to purchase an aggregate of 60 million shares of the Corporations
common stock. On February 23, 2010, the Corporation held a special meeting of stockholders at
which it obtained shareholder approval of an amendment to the Corporations amended and restated
certificate of incorporation to increase the number of authorized shares of common stock, and
accordingly, the Common Equivalent Stock automatically converted in full into 1.286 billion shares
of common stock on February 24, 2010 following the filing of the amendment with the Delaware
Secretary of State on February 23, 2010. In addition, as a result, the contingent warrants expired
without having become exercisable and the CES ceased to exist. For additional information on
preferred stock, see Note 15 Shareholders Equity and Earnings Per Common Share to the
Consolidated Financial Statements of the Corporations 2009 Annual Report on Form 10-K.
Through a 2008 authorized share repurchase program, the Corporation had the ability to
repurchase shares of its common stock, subject to certain restrictions, from time to time, in the
open market or in private transactions. The 2008 authorized repurchase program expired on January
23, 2010. In the nine months ended September 30, 2010, the Corporation did not repurchase any
shares of common stock and issued approximately 97.5 million shares under employee stock plans. At
September 30, 2010, the Corporation had reserved 1.6 billion unissued shares of common stock for
future issuances under employee stock plans, common stock warrants, convertible notes and
preferred stock.
During the three months ended March 31, 2010, the Corporation issued approximately 191
million RSUs to certain employees under the Key Associate Stock Plan. These awards generally vest
in three equal annual installments beginning one year from the grant date. Vested RSUs will be
settled in cash unless the Corporation authorizes settlement in common shares. Certain awards
contain clawback provisions which permit the Corporation to cancel all or a portion of the award
under specified circumstances. The compensation cost for cash-settled awards and awards subject to
certain clawback provisions is accrued over the vesting period and adjusted to fair value based
upon changes in the share price of the Corporations common stock. The compensation cost for the
remaining awards is fixed and based on the share price of the common stock on the date of grant,
or the date upon which settlement in common stock has been authorized. The Corporation hedges a
portion of its exposure to variability in the expected cash flows for unvested awards using a
combination of economic and cash flow hedges as described in Note 4 Derivatives. In early 2010,
approximately 58 million of these RSUs were authorized to be settled in common shares. During the
three months ended September 30, 2010, the Corporation authorized approximately 42 million
additional RSUs to be settled in common shares and terminated a portion of the corresponding
economic and cash flow hedges. As a result, these share-settled RSUs are no longer adjusted to
fair value based upon changes in the share price of the Corporations common stock.
Preferred Stock
During the first, second and third quarters of 2010, the aggregate dividends declared on
preferred stock were $348 million, $340 million and $348 million, respectively, or a total of $1.0
billion for the nine months ended September 30, 2010.
63
Accumulated OCI
The table below presents the changes in accumulated OCI for the nine months ended
September 30, 2010 and 2009, net-of-tax.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for- |
|
|
Available-for- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale Debt |
|
|
Sale Marketable |
|
|
|
|
|
|
Employee |
|
|
Foreign |
|
|
|
|
(Dollars in millions) |
|
Securities |
|
|
Equity Securities |
|
|
Derivatives |
|
|
Benefit Plans (1) |
|
|
Currency (2) |
|
|
Total |
|
|
Balance, December 31, 2009 |
|
$ |
(628 |
) |
|
$ |
2,129 |
|
|
$ |
(2,535 |
) |
|
$ |
(4,092 |
) |
|
$ |
(493 |
) |
|
$ |
(5,619 |
) |
Cumulative adjustments for accounting changes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation of certain variable interest entities |
|
|
(116 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(116 |
) |
Credit-related notes |
|
|
229 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
229 |
|
Net change in fair value recorded in accumulated OCI |
|
|
3,308 |
|
|
|
4,910 |
|
|
|
(1,765 |
) |
|
|
- |
|
|
|
(20 |
) |
|
|
6,433 |
|
Net realized (gains) losses reclassified into earnings |
|
|
(506 |
) |
|
|
(857 |
) |
|
|
326 |
|
|
|
188 |
|
|
|
258 |
|
|
|
(591 |
) |
|
Balance, September 30, 2010 |
|
$ |
2,287 |
|
|
$ |
6,182 |
|
|
$ |
(3,974 |
) |
|
$ |
(3,904 |
) |
|
$ |
(255 |
) |
|
$ |
336 |
|
|
Balance, December 31, 2008 |
|
$ |
(5,956 |
) |
|
$ |
3,935 |
|
|
$ |
(3,458 |
) |
|
$ |
(4,642 |
) |
|
$ |
(704 |
) |
|
$ |
(10,825 |
) |
Cumulative adjustment for accounting change OTTI (3) |
|
|
(71 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(71 |
) |
Net change in fair value recorded in accumulated OCI |
|
|
6,146 |
|
|
|
2,112 |
|
|
|
63 |
|
|
|
161 |
|
|
|
26 |
|
|
|
8,508 |
|
Net realized (gains) losses reclassified into earnings |
|
|
(715 |
) |
|
|
(4,433 |
) |
|
|
658 |
|
|
|
173 |
|
|
|
- |
|
|
|
(4,317 |
) |
|
Balance, September 30, 2009 |
|
$ |
(596 |
) |
|
$ |
1,614 |
|
|
$ |
(2,737 |
) |
|
$ |
(4,308 |
) |
|
$ |
(678 |
) |
|
$ |
(6,705 |
) |
|
|
|
|
(1) |
|
Net change in fair value represents after-tax adjustments based on the final year-end
actuarial valuations. |
|
(2) |
|
Net change in fair value represents only the impact of changes in foreign exchange
rates on the Corporations net investment in foreign operations. |
|
(3) |
|
Effective January 1, 2009, the Corporation adopted new accounting guidance on the
recognition of OTTI losses on debt securities. For additional
information on the adoption of this accounting guidance, see Note 1 Summary of Significant
Accounting Principles to the Consolidated Financial Statements of the Corporations 2009 Annual
Report on Form 10-K and Note 5 Securities. |
Earnings Per Common Share
Due to the net loss for the three and nine months ended September 30, 2010, no dilutive
potential common shares were included in the calculations of diluted earnings per common share
(EPS) because they would have been antidilutive.
For the three and nine months ended September 30, 2010, average options to purchase 265
million and 273 million shares of common stock were outstanding but not included in the
computation of EPS because they were antidilutive under the treasury stock method compared to 311
million and 318 million for the same periods in 2009. For both the three and nine months ended
September 30, 2010, average warrants to purchase 272 million shares of common stock were
outstanding but not included in the computation of EPS because they were antidilutive under the
treasury stock method compared to 272 million and 262 million for the same periods in 2009. For
both the three and nine months ended September 30, 2010, 117 million average dilutive potential
common shares associated with the 7.25% Non-cumulative Perpetual Convertible Preferred Stock,
Series L and the Merrill Lynch & Co., Inc. Mandatory Convertible Preferred Stock Series 2 and
Series 3 were excluded from the diluted share count because the result would have been
antidilutive under the if-converted method compared to 117 million and 157 million for the same
periods in 2009. For purposes of computing basic EPS, CES were considered to be participating
securities prior to February 24, 2010, however, due to a net loss for the nine months ended
September 30, 2010, CES were not allocated earnings. The two-class method prohibits the allocation
of an undistributed loss to participating securities. For purposes of computing diluted EPS, there
was no dilutive effect of the CES, which were outstanding prior to February 24, 2010, due to a net
loss for the nine months ended September 30, 2010. In the nine months ended September 30, 2009,
the Corporation recorded an increase to retained earnings and net income available to common
shareholders of $576 million related to the Corporations preferred stock exchange for common
stock.
64
The calculation of EPS and diluted EPS for the three and nine months ended September 30, 2010
and 2009 is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
|
Nine Months Ended September 30 |
|
(Dollars in millions, except per share information; shares in thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Earnings (loss) per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(7,299 |
) |
|
$ |
(1,001 |
) |
|
$ |
(994 |
) |
|
$ |
6,470 |
|
Preferred stock dividends |
|
|
(348 |
) |
|
|
(1,240 |
) |
|
|
(1,036 |
) |
|
|
(3,478 |
) |
|
Net income (loss) applicable to common shareholders |
|
|
(7,647 |
) |
|
|
(2,241 |
) |
|
|
(2,030 |
) |
|
|
2,992 |
|
Income allocated to participating securities |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(3 |
) |
|
|
(60 |
) |
|
Net income (loss) allocated to common shareholders |
|
$ |
(7,648 |
) |
|
$ |
(2,242 |
) |
|
$ |
(2,033 |
) |
|
$ |
2,932 |
|
|
Average common shares issued and outstanding |
|
|
9,976,351 |
|
|
|
8,633,834 |
|
|
|
9,706,951 |
|
|
|
7,423,341 |
|
|
Earnings (loss) per common share |
|
$ |
(0.77 |
) |
|
$ |
(0.26 |
) |
|
$ |
(0.21 |
) |
|
$ |
0.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shareholders |
|
$ |
(7,647 |
) |
|
$ |
(2,241 |
) |
|
$ |
(2,030 |
) |
|
$ |
2,992 |
|
Income allocated to participating securities |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(3 |
) |
|
|
(60 |
) |
|
Net income (loss) allocated to common shareholders |
|
$ |
(7,648 |
) |
|
$ |
(2,242 |
) |
|
$ |
(2,033 |
) |
|
$ |
2,932 |
|
|
Average common shares issued and outstanding |
|
|
9,976,351 |
|
|
|
8,633,834 |
|
|
|
9,706,951 |
|
|
|
7,423,341 |
|
Dilutive potential common shares (1) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
26,570 |
|
|
Total diluted average common shares issued and outstanding |
|
|
9,976,351 |
|
|
|
8,633,834 |
|
|
|
9,706,951 |
|
|
|
7,449,911 |
|
|
Diluted earnings (loss) per common share |
|
$ |
(0.77 |
) |
|
$ |
(0.26 |
) |
|
$ |
(0.21 |
) |
|
$ |
0.39 |
|
|
|
|
(1) |
Includes incremental shares from RSUs, restricted stock shares, stock options and
warrants. |
NOTE 13 Pension and Postretirement Plans
The Corporation sponsors noncontributory trusteed pension plans that cover substantially
all officers and employees, a number of noncontributory nonqualified pension plans, and
postretirement health and life plans. Additional information on these plans is presented in Note
17 Employee Benefit Plans to the Consolidated Financial Statements of the Corporations 2009
Annual Report on Form 10-K.
As a result of the Merrill Lynch acquisition, the Corporation assumed the obligations related
to the plans of Merrill Lynch. These plans include a terminated U.S. pension plan, non-U.S.
pension plans, nonqualified pension plans and postretirement plans. The non-U.S. pension plans
vary based on the country and local practices. In 1988, Merrill Lynch purchased a group annuity
contract that guarantees the payment of benefits vested under the terminated U.S. pension plan.
The Corporation, under a supplemental agreement, may be responsible for, or benefit from actual
experience and investment performance of the annuity assets. The Corporation contributed $0 and
$120 million for the nine months ended September 30, 2010 and 2009, under this agreement.
Additional contributions may be required in the future under this agreement.
65
Net periodic benefit cost of the Corporations plans for the three and nine months ended
September 30, 2010 and 2009 included the following components.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
|
|
|
|
|
|
|
|
|
Nonqualified and |
|
Postretirement |
|
|
Qualified Pension |
|
Other Pension |
|
Health and Life |
|
|
Plans |
|
Plans (1) |
|
Plans |
(Dollars in millions) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Components of net periodic benefit cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
99 |
|
|
$ |
97 |
|
|
$ |
8 |
|
|
$ |
7 |
|
|
$ |
4 |
|
|
$ |
4 |
|
Interest cost |
|
|
187 |
|
|
|
185 |
|
|
|
62 |
|
|
|
59 |
|
|
|
23 |
|
|
|
23 |
|
Expected return on plan assets |
|
|
(316 |
) |
|
|
(308 |
) |
|
|
(57 |
) |
|
|
(54 |
) |
|
|
(2 |
) |
|
|
(2 |
) |
Amortization of transition obligation |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8 |
|
|
|
8 |
|
Amortization of prior service cost (credits) |
|
|
7 |
|
|
|
10 |
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
2 |
|
|
|
- |
|
Recognized net actuarial loss (gain) |
|
|
91 |
|
|
|
94 |
|
|
|
2 |
|
|
|
1 |
|
|
|
(13 |
) |
|
|
(19 |
) |
Recognized termination benefit cost |
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Net periodic benefit cost |
|
$ |
68 |
|
|
$ |
78 |
|
|
$ |
14 |
|
|
$ |
11 |
|
|
$ |
22 |
|
|
$ |
14 |
|
|
|
(1) Includes nonqualified pension plans, the terminated U.S. pension plan and
non-U.S. pension plans as described above. |
|
|
|
Nine Months Ended September 30 |
|
|
|
|
|
|
|
|
|
|
Nonqualified and |
|
Postretirement |
|
|
Qualified Pension |
|
Other Pension |
|
Health and Life |
|
|
Plans |
|
Plans (1) |
|
Plans |
(Dollars in millions) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Components of net periodic benefit cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
298 |
|
|
$ |
291 |
|
|
$ |
24 |
|
|
$ |
21 |
|
|
$ |
11 |
|
|
$ |
12 |
|
Interest cost |
|
|
561 |
|
|
|
556 |
|
|
|
187 |
|
|
|
178 |
|
|
|
68 |
|
|
|
68 |
|
Expected return on plan assets |
|
|
(947 |
) |
|
|
(924 |
) |
|
|
(172 |
) |
|
|
(162 |
) |
|
|
(7 |
) |
|
|
(6 |
) |
Amortization of transition obligation |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
24 |
|
|
|
24 |
|
Amortization of prior service cost (credits) |
|
|
21 |
|
|
|
30 |
|
|
|
(6 |
) |
|
|
(6 |
) |
|
|
5 |
|
|
|
- |
|
Recognized net actuarial loss (gain) |
|
|
272 |
|
|
|
282 |
|
|
|
5 |
|
|
|
3 |
|
|
|
(38 |
) |
|
|
(58 |
) |
Recognized termination benefit cost |
|
|
- |
|
|
|
8 |
|
|
|
15 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Net periodic benefit cost |
|
$ |
205 |
|
|
$< |