Form 10-Q
Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2009

or

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

EXCHANGE ACT OF 1934

For the transition period from        to       

Commission file number:

1-6523

Exact Name of Registrant as Specified in its Charter:

Bank of America Corporation

State or Other Jurisdiction of Incorporation or Organization:

Delaware

IRS Employer Identification Number:

56-0906609

Address of Principal Executive Offices:

Bank of America Corporate Center

100 N. Tryon Street

Charlotte, North Carolina 28255

Registrant’s telephone number, including area code:

(704) 386-5681

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

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

Yes  ü    No

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

Yes  ü    No

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

 

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

(do not check if a smaller                

reporting company)                

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

Yes        No  ü

On July 31, 2009, there were 8,651,594,786 shares of Bank of America Corporation Common Stock outstanding.

 

 

 

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Table of Contents

 

Bank of America Corporation

 

June 30, 2009 Form 10-Q

INDEX

 

              Page   
Part I.
Financial
Information
      Item 1.    Financial Statements:      
           Consolidated Statement of Income for the Three and Six Months Ended June 30, 2009 and 2008    3   
           Consolidated Balance Sheet at June 30, 2009 and December 31, 2008    4   
           Consolidated Statement of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2009 and 2008    5   
           Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2009 and 2008    6   
           Notes to Consolidated Financial Statements    7   
      Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      
           Table of Contents    90   
           Discussion and Analysis    91   
      Item 3.    Quantitative and Qualitative Disclosures about Market Risk    209   
      Item 4.    Controls and Procedures    209   
                          
Part II.
Other Information
              
      Item 1.    Legal Proceedings    209   
      Item 1A.    Risk Factors    209   
      Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    210   
      Item 4.    Submission of Matters to a Vote of Security Holders    211   
      Item 6.    Exhibits    213   
      Signature    214   
      Index to Exhibits    215   

 

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Table of Contents

Part 1. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

  Bank of America Corporation and Subsidiaries

  Consolidated Statement of Income

     Three Months Ended June 30     Six Months Ended June 30
      
  (Dollars in millions, except per share information)    2009     2008     2009    2008
 

  Interest income

         

Interest and fees on loans and leases

   $ 12,329      $ 13,121      $ 25,678    $ 27,536   

Interest on debt securities

     3,283        2,900        7,113      5,674   

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

     690        800        1,845      2,008   

Trading account assets

     1,952        2,229        4,380      4,593   

Other interest income

     1,338        977        2,732      2,075   
 

Total interest income

     19,592        20,027        41,748      41,886   
 

  Interest expense

         

Deposits

     2,082        3,520        4,625      8,108   

Short-term borrowings

     1,396        3,087        3,617      7,229   

Trading account liabilities

     450        749        1,029      1,589   

Long-term debt

     4,034        2,050        8,350      4,348   
 

Total interest expense

     7,962        9,406        17,621      21,274   
 

Net interest income

     11,630        10,621        24,127      20,612   

  Noninterest income

         

Card income

     2,149        3,451        5,014      7,090   

Service charges

     2,729        2,638        5,262      5,035   

Investment and brokerage services

     2,994        1,322        5,957      2,662   

Investment banking income

     1,646        695        2,701      1,171   

Equity investment income

     5,943        592        7,145      1,646   

Trading account profits (losses)

     2,164        357        7,365      (1,426)  

Mortgage banking income

     2,527        439        5,841      890   

Insurance income

     662        217        1,350      414   

Gains on sales of debt securities

     632        127        2,130      352   

Other income (loss) (includes $1,026 and $1,397 of debt other-than-temporary-impairment losses for 2009)

     (302     (49     1,640      (965)  
 

Total noninterest income

     21,144        9,789        44,405      16,869   
 

Total revenue, net of interest expense

     32,774        20,410        68,532      37,481   

  Provision for credit losses

     13,375        5,830        26,755      11,840   

  Noninterest expense

         

Personnel

     7,790        4,420        16,558      9,146   

Occupancy

     1,219        848        2,347      1,697   

Equipment

     616        372        1,238      768   

Marketing

     499        571        1,020      1,208   

Professional fees

     544        362        949      647   

Amortization of intangibles

     516        447        1,036      893   

Data processing

     621        587        1,269      1,150   

Telecommunications

     345        266        672      526   

Other general operating

     4,041        1,574        7,339      2,505   

Merger and restructuring charges

     829        212        1,594      382   
 

Total noninterest expense

     17,020        9,659        34,022      18,922   
 

Income before income taxes

     2,379        4,921        7,755      6,719   

  Income tax expense (benefit)

     (845     1,511        284      2,099   
 

Net income

   $ 3,224      $ 3,410      $ 7,471    $ 4,620   
 

  Preferred stock dividends

     805        186        2,238      376   
 

Net income available to common shareholders

   $ 2,419      $ 3,224      $ 5,233    $ 4,244   
 

  Per common share information

         

Earnings

   $ 0.33      $ 0.72      $ 0.75    $ 0.95   

Diluted earnings

     0.33        0.72        0.75      0.95   

Dividends paid

     0.01        0.64        0.02      1.28   
 

  Average common shares issued and outstanding (in thousands)

     7,241,515        4,435,719        6,808,262      4,431,870   
 

  Average diluted common shares issued and outstanding (in thousands)

     7,269,518        4,444,098        6,836,972      4,445,428   
 

  See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents
  Bank of America Corporation and Subsidiaries   
  Consolidated Balance Sheet   
  (Dollars in millions)   

 

June 30

2009

   

 

December 31
2008

 

  Assets

    

  Cash and cash equivalents

   $ 140,366      $ 32,857   

  Time deposits placed and other short-term investments

     25,710        9,570   

  Federal funds sold and securities borrowed or purchased under agreements to resell (includes $69,826 and $2,330 measured at fair value and $184,595 and $82,099 pledged as collateral)

     184,685        82,478   

  Trading account assets (includes $58,875 and $69,348 pledged as collateral)

     199,471        159,522   

  Derivative assets

     101,707        62,252   

  Debt securities:

    

  Available-for-sale (includes $121,309 and $158,939 pledged as collateral)

     257,519        276,904   

  Held-to-maturity, at cost (fair value - $7,844 and $685)

     9,719        685   

  Total debt securities

     267,238        277,589   

  Loans and leases (includes $6,962 and $5,413 measured at fair value and $140,265 and $166,891 pledged as collateral)

     942,248        931,446   

  Allowance for loan and lease losses

     (33,785     (23,071

  Loans and leases, net of allowance

     908,463        908,375   

  Premises and equipment, net

     15,667        13,161   

  Mortgage servicing rights (includes $18,535 and $12,733 measured at fair value)

     18,857        13,056   

  Goodwill

     86,246        81,934   

  Intangible assets

     13,245        8,535   

  Loans held-for-sale (includes $38,302 and $18,964 measured at fair value)

     50,994        31,454   

  Other assets (includes $30,714 and $29,906 measured at fair value)

     241,745        137,160   

  Total assets

   $ 2,254,394      $ 1,817,943   

  Liabilities

    

  Deposits in domestic offices:

    

  Noninterest-bearing

   $ 248,757      $ 213,994   

  Interest-bearing (includes $1,658 and $1,717 measured at fair value)

     650,725        576,938   

  Deposits in foreign offices:

    

  Noninterest-bearing

     4,560        4,004   

  Interest-bearing

     66,700        88,061   

  Total deposits

     970,742        882,997   

  Federal funds purchased and securities loaned or sold under agreements to repurchase (includes $48,601 measured at fair value at June 30, 2009)

     263,639        206,598   

  Trading account liabilities

     53,384        57,287   

  Derivative liabilities

     51,300        30,709   

  Commercial paper and other short-term borrowings (includes $1,387 measured at fair value at June 30, 2009)

     96,236        158,056   

  Accrued expenses and other liabilities (includes $13,475 and $1,978 measured at fair value and $1,992 and $421 of reserve for unfunded lending commitments)

     116,754        36,952   

  Long-term debt (includes $41,010 measured at fair value at June 30, 2009)

     447,187        268,292   

  Total liabilities

     1,999,242        1,640,891   

  Commitments and contingencies

    

  Shareholders’ equity

    

  Preferred stock, $0.01 par value; authorized - 100,000,000 shares; issued and outstanding – 5,760,731 and 8,202,042 shares

     58,660        37,701   

  Common stock and additional paid-in capital, $0.01 par value; authorized – 10,000,000,000 shares; issued and outstanding – 8,651,459,122 and 5,017,435,592 shares

     128,717        76,766   

  Retained earnings

     79,210        73,823   

  Accumulated other comprehensive income (loss)

     (11,227     (10,825

  Other

     (208     (413

  Total shareholders’ equity

     255,152        177,052   

  Total liabilities and shareholders’ equity

   $ 2,254,394      $ 1,817,943   

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

  Bank of America Corporation and Subsidiaries

  Consolidated Statement of Changes in Shareholders’ Equity

  (Dollars in millions, shares in thousands)    Preferred
Stock
    Common Stock and
Additional Paid-in
Capital
   Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss) (1)
    Other     Total
Shareholders’
Equity
    Comprehensive
Income
 
     Shares    Amount           

  Balance, December 31, 2007

   $ 4,409      4,437,885    $ 60,328    $ 81,393      $ 1,129      $ (456   $ 146,803           

  Net income

             4,620            4,620      $ 4,620   

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

               (3,102       (3,102     (3,102

  Net changes in foreign currency translation adjustments

               62          62        62   

  Net changes in derivatives

               24          24        24   

  Employee benefit plan adjustments

               23          23        23   

  Dividends paid:

                  

Common

             (5,717         (5,717  

Preferred

             (376         (376  

  Issuance of preferred stock

     19,742                    19,742     

  Common stock issued under employee plans and related tax effects

           15,062      781                      (169     612           

 

Balance, June 30, 2008

   $ 24,151      4,452,947    $ 61,109    $ 79,920      $ (1,864   $ (625   $ 162,691      $ 1,627   

 

  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 (2)

             71        (71       -     

  Net income

             7,471            7,471      $ 7,471   

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

               (993       (993     (993

  Net changes in foreign currency translation adjustments

               (101       (101     (101

  Net changes in derivatives

               487          487        487   

  Employee benefit plan adjustments

               276          276        276   

  Dividends paid:

                  

Common

             (150         (150  

Preferred (3)

             (2,235         (2,235  

  Issuance of preferred stock and stock warrants (4)

     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

     8,612      558          205        763     

  Other

     351                    (346                     5           

 

Balance, June 30, 2009

   $ 58,660      8,651,459    $ 128,717    $ 79,210      $ (11,227   $ (208   $ 255,152      $ 7,140   

 

(1) 

Amounts shown are net-of-tax. For additional information on accumulated OCI, see Note 13 – Shareholders’ Equity and Earnings Per Common Share to the Consolidated Financial Statements.

 

(2) 

Effective January 1, 2009, the Corporation early adopted FSP No. FAS 115-2, FAS 124-2 and EITF 99-20-2. Amounts shown are net-of-tax. For additional information on the adoption of this accounting pronouncement, see Note 1 – Summary of Significant Accounting Principles and Note 5 – Securities to the Consolidated Financial Statements.

 

(3) 

Excludes $233 million of second quarter 2009 cumulative preferred dividends not declared as of June 30, 2009 and $346 million of accretion of discounts on preferred stock.

 

(4) 

Proceeds from the issuance of Series Q and Series R Preferred Stock were allocated to the preferred stock and warrants on a relative fair value basis. For more information, see Note 13 – Shareholders’ Equity and Earnings Per Common Share to the Consolidated Financial Statements.

  See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

 Bank of America Corporation and Subsidiaries

 Consolidated Statement of Cash Flows

     Six Months Ended June 30
 (Dollars in millions)    2009     2008
 

 Operating activities

    

 Net income

   $ 7,471      $ 4,620   

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

    

Provision for credit losses

     26,755        11,840   

Gains on sales of debt securities

     (2,130     (352)  

Depreciation and premises improvements amortization

     1,169        676   

Amortization of intangibles

     1,036        893   

Deferred income tax expense (benefit)

     247        (769)  

Net decrease (increase) in trading and derivative instruments

     41,190        (20,866)  

Net decrease in other assets

     14,107        8,261   

Net (decrease) increase in accrued expenses and other liabilities

     (18,629     3,400   

Other operating activities, net

     (5,605     3,495   
 

Net cash provided by operating activities

     65,611        11,198   
 

 Investing activities

    

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

     17,573        4,124   

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

     36,617        22,482   

 Proceeds from sales of available-for-sale debt securities

     77,402        48,991   

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

     31,900        12,710   

 Purchases of available-for-sale debt securities

     (43,670     (82,343)  

 Proceeds from maturities of held-to-maturity debt securities

     795        63   

 Purchases of held-to-maturity debt securities

     (1,819     (745)  

 Proceeds from sales of loans and leases

     5,846        36,523   

 Other changes in loans and leases, net

     8,646        (58,559)  

 Net purchases of premises and equipment

     (1,240     (1,109)  

 Proceeds from sales of foreclosed properties

     851        138   

 Cash received upon acquisition, net

     31,804        -   

 Other investing activities, net

     18,369        (198)  
 

Net cash provided by (used in) investing activities

     183,074        (17,923)  
 

 Financing activities

    

 Net decrease in deposits

     (10,362     (20,413)  

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

     (54,539     16,688   

 Net decrease in commercial paper and other short-term borrowings

     (99,715     (13,336)  

 Proceeds from issuance of long-term debt

     42,635        20,489   

 Retirement of long-term debt

     (60,228     (13,750)  

 Proceeds from issuance of preferred stock

     30,000        19,742   

 Proceeds from issuance of common stock

     13,468        28   

 Cash dividends paid

     (2,385     (6,093)  

 Excess tax benefits of share-based payments

     -        26   

 Other financing activities, net

     (18     (18)  
 

Net cash (used in) provided by financing activities

     (141,144     3,363   
 

 Effect of exchange rate changes on cash and cash equivalents

     (32     (42)  
 

Net increase (decrease) in cash and cash equivalents

     107,509        (3,404)  

Cash and cash equivalents at January 1

     32,857        42,531   
 

Cash and cash equivalents at June 30

   $ 140,366      $ 39,127   
 

During the six months ended June 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 six months ended June 30, 2009 the Corporation transferred credit card loans of $8.5 billion and the related allowance for loan and lease losses of $750 million in exchange for a $7.8 billion held-to-maturity debt security that was issued by the Corporation’s U.S. credit card securitization trust.

During the six months ended June 30, 2009 the Corporation transferred $1.7 billion of ARS from trading account assets to AFS debt securities.

The fair values of noncash assets acquired and liabilities assumed in the 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.

 

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Bank of America Corporation and Subsidiaries

Notes to Consolidated Financial Statements

On January 1, 2009, Bank of America Corporation and its subsidiaries (the Corporation) acquired all of the outstanding shares of Merrill Lynch & Co., Inc. (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. On July 1, 2008, the Corporation acquired all of the outstanding shares of Countrywide Financial Corporation (Countrywide) through its merger with a subsidiary of the Corporation in exchange for common stock with a value of $4.2 billion. Consequently, Merrill Lynch’s and Countrywide’s results of operations were included in the Corporation’s results from their dates of acquisition. For more information related to the Merrill Lynch and Countrywide acquisitions, see Note 2 – Merger and Restructuring Activity.

The Corporation, through its banking and nonbanking subsidiaries, provides a diverse range of financial services and products throughout the U.S. and in selected international markets. At June 30, 2009, the Corporation operated its banking activities primarily under two charters: Bank of America, National Association (Bank of America, N.A.) and FIA Card Services, N.A. In addition with the acquisition of Merrill Lynch we acquired Merrill Lynch Bank USA and Merrill Lynch Bank & Trust Co., FSB. Effective April 27, 2009, Countrywide Bank, FSB merged into Bank of America, N.A. In addition, effective July 1, 2009, Merrill Lynch Bank USA merged into Bank of America, N.A. These mergers had no impact on the Consolidated Financial Statements of the Corporation.

 

NOTE 1 – Summary of Significant Accounting Principles

 

 

Principles of Consolidation and Basis of Presentation

 

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

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

These unaudited Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements filed as Exhibit 99.2 to the Corporation’s Current Report on Form 8-K filed on May 28, 2009. The nature of the Corporation’s business is such that the results of any interim period are not necessarily indicative of results for a full year. In the opinion of management, normal recurring adjustments necessary for a fair statement of the interim period results have been made. The Corporation evaluates subsequent events through the date of filing. Certain prior period amounts have been reclassified to conform to current period presentation.

 

 

Recently Proposed and Issued Accounting Pronouncements

 

On July 1, 2009, the Financial Accounting Standards Board (FASB) issued FASB Statement of Financial Accounting Standards (SFAS) No. 168, “FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (SFAS 168). SFAS 168 approved the FASB Accounting Standards Codification as the single source of authoritative nongovernmental GAAP. The FASB Accounting Standards Codification is effective for interim or annual periods ending after September 15, 2009. All existing accounting standards have been superseded and all other accounting literature not included in the FASB Accounting Standards Codification will be considered nonauthoritative. The adoption of SFAS 168 will not impact the Corporation’s financial condition and results of operations.

 

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On June 12, 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140” (SFAS 166), and SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (SFAS 167). The amendments will be effective January 1, 2010. SFAS 166 revises SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (SFAS 140), which establishes sale accounting criteria for transfers of financial assets. As described more fully in Note 8 – Securitizations, the Corporation routinely transfers mortgage loans, credit card receivables, and other financial instruments to special purpose entities (SPEs) that meet the definition of a qualifying special purpose entity (QSPE) which are not currently subject to consolidation by the transferor. Among other things, SFAS 166 amends SFAS 140 to eliminate the concept of a QSPE. As a result, existing QSPEs will be subject to consolidation in accordance with the guidance provided in SFAS 167.

SFAS 167 amends FIN 46(R) “Consolidation of Variable Interest Entities” (FIN 46R) by significantly changing the criteria by which an enterprise determines whether it must consolidate a variable interest entity (VIE). A VIE is an entity, typically an SPE, which has insufficient equity at risk or which is not controlled through voting rights held by equity investors. FIN 46R currently requires that a VIE be consolidated by the enterprise that will absorb a majority of the expected losses or expected residual returns created by the assets of the VIE. SFAS 167 amends FIN 46R to require that a VIE be consolidated by the enterprise that has both the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. SFAS 167 also requires that an enterprise continually reassess, based on current facts and circumstances, whether it should consolidate the VIEs with which it is involved.

The adoption of the amendments on January 1, 2010 will result in the consolidation of certain QSPEs and VIEs that are not currently recorded on the Corporation’s Consolidated Balance Sheet. These consolidations will result in an increase in net loans and leases, securities, short-term borrowings and long-term debt. These consolidations will also result in an increase in the provision for credit losses, along with other changes in classification to the Corporation’s Consolidated Statement of Income. The Corporation expects to consolidate certain credit card securitization trusts, commercial paper conduits and revolving home equity securitization trusts which hold aggregate assets of approximately $150 billion as of June 30, 2009, of which approximately $115 billion is related to credit card securitizations and commercial paper conduits that are currently considered in the Corporation’s risk-weighted calculation for regulatory capital purposes. Total assets held by these entities as of January 1, 2010 are expected to be lower than these amounts due to anticipated paydowns of receivables held in the entities and scheduled maturities of securities issued by the entities. The Corporation is also evaluating other VIEs with which it is involved to determine the ultimate impact of adoption.

On May 28, 2009, the FASB issued SFAS No. 165, “Subsequent Events” (SFAS 165). SFAS 165 provides general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In addition, SFAS 165 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The adoption of SFAS 165, effective June 30, 2009, did not impact the Corporation’s financial condition and results of operations.

On April 9, 2009, the FASB issued FASB Staff Position (FSP) No. FAS 157-4 “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (FSP FAS 157-4). FSP FAS 157-4 provides guidance for determining whether a market is inactive and a transaction is distressed in order to apply the existing fair value measurement guidance in SFAS No. 157, “Fair Value Measurements” (SFAS 157). In addition, FSP FAS 157-4 requires enhanced disclosures regarding financial assets and liabilities that are recorded at fair value. The Corporation elected to early adopt FSP FAS 157-4 effective January 1, 2009 and the adoption did not have a material impact on the Corporation’s financial condition and results of operations. The enhanced disclosures related to FSP FAS 157-4 are included in Note 16 – Fair Value Disclosures.

On April 9, 2009, the FASB issued FSP No. FAS 115-2, FAS 124-2 and EITF 99-20-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (FSP FAS 115-2). This FSP requires an entity to recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the noncredit component in other comprehensive income (OCI) when the entity does not intend to sell the security and it is more likely than not that the entity will not be required to sell the security prior to recovery. FSP FAS 115-2 also requires expanded disclosures. The Corporation elected to early adopt FSP FAS 115-2 effective January 1, 2009 and recorded a cumulative-effect adjustment to reclassify $71 million, net-of-tax, from retained earnings to accumulated OCI as of January 1, 2009. FSP FAS 115-2 does not change the recognition of other-than-temporary impairment for equity securities. The expanded disclosures related to FSP FAS 115-2 are included in Note 5 – Securities.

On April 9, 2009, the FASB issued FSP No. FAS 107-1 and APB Opinion 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (FSP FAS 107-1). FSP FAS 107-1 requires expanded disclosures for all financial instruments as defined by FAS 107 such as loans that are not measured at fair value through earnings. The expanded disclosure requirements for FSP FAS 107-1 are effective for the Corporation’s quarterly financial statements for the period ended June

 

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30, 2009. The adoption of FSP FAS 107-1 will not impact the Corporation’s financial condition and results of operations. The disclosures related to FSP FAS 107-1 are included in Note 17 – Fair Value of Financial Instruments (SFAS 107 Disclosure).

On April 1, 2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (FSP FAS 141R-1) whereby assets acquired and liabilities assumed in a business combination that arise from contingencies should be recognized at fair value on the acquisition date if fair value can be determined during the measurement period. If fair value cannot be determined, companies should typically account for the acquired contingencies using existing accounting guidance. FSP FAS 141R-1 is effective for new acquisitions consummated on or after January 1, 2009. The Corporation applied FSP FAS 141R-1 to its January 1, 2009 acquisition of Merrill Lynch. See Note 2 – Merger and Restructuring Activity for more information on FSP FAS 141R-1.

On January 1, 2009, the Corporation adopted FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (FSP EITF 03-6-1). FSP EITF 03-6-1 defines unvested share-based payment awards that contain nonforfeitable rights to dividends as participating securities that should be included in computing earnings per share (EPS) using the two-class method under SFAS No. 128, “Earnings Per Share.” Additionally, all prior-period EPS data was adjusted retrospectively. The adoption did not have a material impact on the Corporation’s financial condition and results of operations.

On January 1, 2009, the Corporation adopted SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS 161) which requires expanded qualitative, quantitative and credit-risk disclosures about derivatives and hedging activities and their effects on the Corporation’s financial position, financial performance and cash flows. The adoption of SFAS 161 did not impact the Corporation’s financial condition and results of operations. The expanded disclosures related to SFAS 161 are included in Note 4 – Derivatives.

On January 1, 2009, the Corporation adopted FSP No. FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions” (FSP 140-3). FSP 140-3 requires that an initial transfer of a financial asset and a repurchase financing that was entered into contemporaneously with, or in contemplation of, the initial transfer be evaluated together as a linked transaction under SFAS 140, unless certain criteria are met. The adoption of FSP 140-3 did not have a material impact on the Corporation’s financial condition and results of operations.

On January 1, 2009, the Corporation adopted SFAS No. 141 (revised 2007), “Business Combinations” (SFAS 141R). SFAS 141R modifies the accounting for business combinations and requires, with limited exceptions, the acquirer in a business combination to recognize 100 percent of the assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition-date fair value. In addition, SFAS 141R requires the expensing of acquisition-related transaction and restructuring costs, and certain contingent acquired assets and liabilities, as well as contingent consideration, to be recognized at fair value. SFAS 141R also modifies the accounting for certain acquired income tax assets and liabilities. The Corporation applied SFAS 141R to its January 1, 2009 acquisition of Merrill Lynch. See Note 2 – Merger and Restructuring Activity for more information on SFAS 141R.

On January 1, 2009, the Corporation adopted SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (SFAS 160). SFAS 160 requires all entities to report noncontrolling (i.e., minority) interests in subsidiaries as equity in the Consolidated Financial Statements and to account for transactions between an entity and noncontrolling owners as equity transactions if the parent retains its controlling financial interest in the subsidiary. SFAS 160 also requires expanded disclosure that distinguishes between the interests of the controlling owners and the interests of the noncontrolling owners of a subsidiary. The adoption of SFAS 160 did not have a material impact on the Corporation’s financial condition and results of operations.

 

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, creating a financial services franchise with significantly enhanced wealth management, investment banking and international capabilities. 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 similar terms. Merrill

 

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Lynch convertible preferred stock remains outstanding and is convertible into Bank of America common stock at an equivalent exchange ratio. With the acquisition, the Corporation has one of the largest wealth management businesses in the world with approximately 15,000 financial advisors and more than $1.8 trillion in client assets. Global investment management capabilities include an economic ownership of approximately 50 percent in BlackRock, Inc. (BlackRock), a publicly traded investment management company. In addition, the acquisition adds strengths in debt and equity underwriting, sales and trading, and merger and acquisition advice, creating significant opportunities to deepen relationships with corporate and institutional clients around the globe. Merrill Lynch’s results of operations were included in the Corporation’s results beginning January 1, 2009.

The Merrill Lynch merger is being accounted for under the acquisition method of accounting in accordance with SFAS 141R. Accordingly, the purchase price was preliminarily allocated to the acquired assets and liabilities based on their estimated fair values at the Merrill Lynch acquisition date as summarized in the following table. Preliminary goodwill of $5.0 billion is calculated as the purchase premium after adjusting for the fair value of net assets acquired and represents the value expected from the synergies created from combining the Merrill Lynch wealth management and corporate and investment banking businesses with the Corporation’s capabilities in consumer and commercial banking as well as the economies of scale expected from combining the operations of the two companies.

  Merrill Lynch Preliminary Purchase Price Allocation

 

 

  (Dollars in billions, except per share amounts)     

  Purchase price

  

Merrill Lynch common shares exchanged (in millions)

     1,600   

Exchange ratio

     0.8595   

The Corporation’s common shares issued (in millions)

     1,375   

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

   $ 14.08   

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

   $ 19.4   

Merrill Lynch preferred stock (2)

     8.6   

Fair value of outstanding employee stock awards

     1.1   

Total purchase price

     29.1   

  Preliminary 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

     (1.2)  

Loans

     (6.1)  

Intangible assets (3)

     5.7   

Other assets

     (1.5)  

Long-term debt

     15.4   

Pre-tax total adjustments

     12.3   

Deferred income taxes

     (5.5)  

After-tax total adjustments

     6.8   

Fair value of net assets acquired

     24.1   

Preliminary goodwill resulting from the Merrill Lynch merger (4)

   $ 5.0   

 

  (1)  

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

 

  (2)  

Represents Merrill Lynch’s preferred stock exchanged for Bank of America preferred stock having substantially similar terms and also includes $1.5 billion of convertible preferred stock.

 

  (3)  

Consists of trade name of $1.2 billion and customer relationship and core deposit intangibles of $4.5 billion. The amortization life is 10 years for the customer relationship and core deposit intangibles which will be primarily amortized on a straight-line basis.

 

  (4)  

No goodwill is expected to be deductible for federal income tax purposes. The goodwill was allocated to Global Wealth & Investment Management (GWIM) and Global Markets.

 

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Preliminary Condensed Statement of Net Assets Acquired

The following condensed statement of net assets acquired reflects the preliminary values assigned to Merrill Lynch’s net assets as of the acquisition date.

 

  (Dollars in billions)    January 1, 2009      

  Assets

  

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

   $ 138.8  

Trading account assets

     87.9  

Derivative assets

     97.1  

Investment securities

     70.5  

Loans and leases

     55.9  

Intangible assets

     5.7  

Other assets

     195.0  

Total assets

   $ 650.9  

  Liabilities

  

Deposits

   $ 98.1  

Federal funds purchased and securities loaned or sold under agreements to repurchase

     111.6  

Trading account liabilities

     18.1  

Derivative liabilities

     72.0  

Commercial paper and other short-term borrowings

     37.9  

Accrued expenses and other liabilities

     99.6  

Long-term debt

     189.5  

Total liabilities

     626.8  

  Fair value of net assets acquired (1)

   $ 24.1  

 

  (1)  

The fair value of net assets acquired excludes preliminary goodwill resulting from the Merrill Lynch merger of $5.0 billion.

The fair value of net assets acquired includes preliminary fair value adjustments to certain receivables that were not considered impaired as of the acquisition date. These fair value adjustments were determined using incremental spread impacts for credit and liquidity risk which are part of the rate used to discount contractual cash flows. However, the Corporation believes that all contractual cash flows related to these financial instruments will be collected. As such, these receivables were not considered impaired at the acquisition date and were not subject to the requirements of SOP 03-3. Receivables acquired that were not subject to the requirements of SOP 03-3 include non-impaired loans and customer receivables with a preliminary fair value and gross contractual amounts receivable of $152.8 billion and $159.8 billion at the time of acquisition. For more information on the SOP 03-3 portfolio, see Note 6 – Outstanding Loans and Leases.

Contingencies

The fair value of net assets acquired includes certain contingent liabilities that were recorded as of the acquisition date. Merrill Lynch has been named as a defendant in various pending legal actions and proceedings arising in connection with its activities as a global diversified financial services institution. Some of these legal actions and proceedings include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. Merrill Lynch is also involved in investigations and/or proceedings by governmental and self-regulatory agencies. Due to the number of variables and assumptions involved in assessing the possible outcome of these legal actions, sufficient information does not exist to reasonably estimate the fair value of these contingent liabilities. As such, these contingencies have been measured in accordance with SFAS No. 5, “Accounting for Contingencies”. For further information, see Note 12Commitments and Contingencies.

In connection with the Merrill Lynch acquisition, on January 1, 2009, the Corporation recorded certain guarantees, primarily standby liquidity facilities and letters of credit, with a fair value of approximately $1.0 billion. At the time of acquisition, the maximum amount that could be drawn from these guarantees was approximately $20.0 billion.

 

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Countrywide

 

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

 

 

LaSalle

 

On October 1, 2007, the Corporation acquired all the outstanding shares of ABN AMRO North America Holding Company, parent of LaSalle Bank Corporation (LaSalle), for $21.0 billion in cash. As part of the acquisition, ABN AMRO Bank N.V. (the seller) capitalized approximately $6.3 billion as equity of intercompany debt prior to the date of acquisition. With this acquisition, the Corporation significantly expanded its presence in metropolitan Chicago, Illinois and Michigan by adding LaSalle’s commercial banking clients, retail customers and banking centers. LaSalle’s results of operations were included in the Corporation’s results beginning October 1, 2007.

 

 

U.S. Trust Corporation

 

On July 1, 2007, the Corporation acquired all the outstanding shares of U.S. Trust Corporation for $3.3 billion in cash. U.S. Trust Corporation’s results of operations were included in the Corporation’s results beginning July 1, 2007. The acquisition significantly increased the size and capabilities of the Corporation’s wealth management business and positions it as one of the largest financial services companies managing private wealth in the U.S.

 

 

Unaudited Pro Forma Condensed Combined Financial Information

 

If the Merrill Lynch and Countrywide mergers had been completed on January 1, 2008, total revenue, net of interest expense would have been $19.5 billion and $42.3 billion, net loss from continuing operations would have been $3.4 billion and $4.8 billion, and basic and diluted loss per common share would have been $0.72 and $1.06 for the three and six months ended June 30, 2008. These results include the impact of amortizing certain purchase accounting adjustments such as intangible assets as well as fair value adjustments to loans, securities and issued debt. The pro forma financial information does not indicate the impact of possible business model changes nor does it consider any potential impacts of current market conditions or revenues, expense efficiencies, asset dispositions, share repurchases, or other factors. For the three and six months ended June 30, 2009, Merrill Lynch contributed $2.4 billion and $12.4 billion in revenue, net of interest expense, and $(1.8) billion and $1.8 billion in net income (loss). These amounts are before the consideration of certain merger-related costs, revenue opportunities and certain consolidating tax benefits that were recognized in legacy Bank of America legal entities.

 

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Merger and Restructuring Charges

 

Merger and restructuring charges are recorded in the Consolidated Statement of Income and include incremental costs to integrate the operations of the Corporation, Merrill Lynch, Countrywide, LaSalle and U.S. Trust Corporation. These charges represent costs associated with these one-time activities and do not represent ongoing costs of the fully integrated combined organization. The following table presents severance and employee-related charges, systems integrations and related charges, and other merger-related charges.

 

       Three Months Ended June 30        Six Months Ended June 30  
  (Dollars in millions)    2009    2008    2009    2008      

  Severance and employee-related charges

   $ 491    $ 30    $ 982    $ 75  

  Systems integrations and related charges

     292      155      484      245  

  Other

     46      27      128      62  

Total merger and restructuring charges (1)

   $ 829    $ 212    $ 1,594    $ 382  

 

  (1)  

Included for the three and six months ended June 30, 2009, are merger-related charges of $580 million and approximately $1.1 billion related to the Merrill Lynch acquisition, $227 million and $420 million related to the Countrywide acquisition, and $22 million and $81 million related to the LaSalle acquisition. Included for the three and six months ended June 30, 2008, are merger-related charges of $174 million and $303 million related to the LaSalle acquisition and $38 million and $79 million related to the U.S. Trust Corporation acquisition.

During the three and six months ended June 30, 2009, the $580 million and approximately $1.1 billion merger-related charges for the Merrill Lynch acquisition included $448 million and $880 million for severance and other employee-related costs, $103 million and $141 million of system integration costs, and $29 million and $72 million in other merger-related costs.

 

 

Merger-related Exit Cost and Restructuring Reserves

 

The following table presents the changes in exit cost and restructuring reserves for the three and six months ended June 30, 2009 and 2008.

 

          Exit Cost Reserves (1)            Restructuring Reserves (2)    
  (Dollars in millions)    2009    2008    2009            2008

  Balance, January 1

   $ 523    $ 377    $ 86    $ 108   

  Exit costs and restructuring charges:

           

Merrill Lynch

     n/a      n/a      382      n/a   

Countrywide

     -      n/a      60      n/a   

LaSalle

     -      87      (1)      31   

U.S. Trust Corporation

     -      -      -      13   

  Cash payments

     (192)      (59)      (135)      (55)  

Balance, March 31

     331      405      392      97   

  Exit costs and restructuring charges:

           

Merrill Lynch

     n/a      n/a      350      n/a   

Countrywide

     -      n/a      48      n/a   

LaSalle

     -      -      (4)      15   

U.S. Trust Corporation

     -      -      (1)      13   

MBNA

     -      (2)      -      -   

  Cash payments

     (113)      (53)      (355)      (12)  

Balance, June 30

   $ 218    $ 350    $ 430    $ 113   

 

  (1)  

Exit cost reserves were established in purchase accounting resulting in an increase in goodwill.

 

  (2)  

Restructuring reserves were established by a charge to merger and restructuring charges.

  n/a = not applicable

 

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As of December 31, 2008, there were $523 million of exit cost reserves related to the Countrywide, LaSalle and U.S. Trust Corporation acquisitions, including $347 million for severance, relocation and other employee-related costs and $176 million for contract terminations. During the three and six months ended June 30, 2009, there were no increases to the exit cost reserves. Cash payments of $113 million during the three months ended June 30, 2009 consisted of $101 million in severance, relocation and other employee-related costs and $12 million in contract terminations. Cash payments of $305 million during the six months ended June 30, 2009 consisted of $223 million in severance, relocation and other employee-related costs and $82 million in contract terminations. Exit costs were not recorded in purchase accounting for the Merrill Lynch acquisition in accordance with SFAS 141R.

As of December 31, 2008, there were $86 million of restructuring reserves related to the Countrywide, LaSalle and U.S. Trust Corporation acquisitions related to severance and other employee-related costs. During the three and six months ended June 30, 2009, $393 million and $834 million were added to the restructuring reserves related to severance and other employee-related costs primarily associated with the Merrill Lynch acquisition. Cash payments of $355 million and $490 million during the three and six months ended June 30, 2009 were all related to severance and other employee-related costs.

Payments under exit cost and restructuring reserves associated with the U.S. Trust Corporation acquisition will be substantially completed in 2009 while payments associated with the LaSalle, Countrywide and Merrill Lynch acquisitions will continue into 2010.

 

NOTE 3 – Trading Account Assets and Liabilities

The following table presents the fair values of the components of trading account assets and liabilities at June 30, 2009 and December 31, 2008.

 

  (Dollars in millions)   

June 30

2009

  

December 31

2008

 

  Trading account assets

     

 

  U.S. government and agency securities (1)

   $ 71,324          $ 84,660      

 

  Corporate securities, trading loans and other

     58,685            34,056      

 

  Equity securities

     29,681            20,258      

 

  Foreign sovereign debt

     21,683            13,614      

 

  Mortgage trading loans and asset-backed securities

     18,098            6,934      

 

 Total trading account assets

   $ 199,471          $ 159,522      

 

  Trading account liabilities

     

 

  U.S. government and agency securities

   $ 16,053          $ 32,850      

 

  Equity securities

     18,849            12,128      

 

  Foreign sovereign debt

     11,647            7,252      

 

  Corporate securities and other

     6,835            5,057      

 

 Total trading account liabilities

   $ 53,384          $ 57,287      

 

  (1) 

Includes $42.7 billion and $52.6 billion at June 30, 2009 and December 31, 2008 of government-sponsored enterprise obligations.

 

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NOTE 4 – Derivatives

The Corporation designates derivatives as trading derivatives, economic hedges, or as derivatives used for SFAS 133 hedge accounting purposes. For additional information on the Corporation’s derivatives and hedging activities, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements filed as Exhibit 99.2 to the Corporation’s Current Report on Form 8-K filed on May 28, 2009.

 

 

Derivative Balances

 

The Corporation enters into derivatives to facilitate client transactions, for proprietary trading purposes and to manage risk exposures. The following table identifies derivative instruments included on the Consolidated Balance Sheet in derivative assets and liabilities at June 30, 2009 and December 31, 2008. Balances are provided on a gross basis, prior to the application of the impact 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.

 

     June 30, 2009  
          Gross Derivative Assets          Gross Derivative Liabilities  
  (Dollars in billions)    Contract/
Notional (1)
   Derivatives
Used in
Trading
Activities
and as
Economic
Hedges
   Derivatives
Designated as
SFAS 133
Hedging
Instruments (2)
   Total            Derivatives
Used in
Trading
Activities
and as
Economic
Hedges
   Derivatives
Designated as
SFAS 133
Hedging
Instruments (2)
   Total  

  Interest rate contracts

                      

  Swaps

   $ 49,577.5          $ 1,288.6        $ 4.9        $ 1,293.5         $ 1,260.4        $ 0.6        $ 1,261.0   

  Futures and forwards

     9,130.4            8.4          -          8.4           7.1          -          7.1   

  Written options

     2,696.1            0.1          -          0.1           90.3          -          90.3   

  Purchased options

     2,550.3            90.9          -          90.9           0.8          -          0.8   

  Foreign exchange contracts

                      

  Swaps

     652.1            25.3          4.0          29.3           29.2          0.7          29.9   

  Spot, futures and forwards

     1,840.6            34.1          -          34.1           34.6          0.1          34.7   

  Written options

     486.3            -          -          -           16.3          -          16.3   

  Purchased options

     478.0            17.2          -          17.2           -          -          -   

  Equity contracts

                      

  Swaps

     57.5            1.9          -          1.9           1.9          -          1.9   

  Futures and forwards

     97.8            4.2          -          4.2           3.7          -          3.7   

  Written options

     249.0            5.0          -          5.0           31.0          -          31.0   

  Purchased options

     257.9            28.4          -          28.4           2.3          0.1          2.4   

  Commodity contracts

                      

  Swaps

     90.3            12.3          -          12.3           11.3          -          11.3   

  Futures and forwards

     1,906.5            5.8          -          5.8           3.8          -          3.8   

  Written options

     68.2            -          -          -           6.7          -          6.7   

  Purchased options

     64.8            6.5          -          6.5           -          -          -   

  Credit derivatives

                      

  Purchased protection:

                      

 Credit default swaps

     2,634.7            195.7          -          195.7           23.0          -          23.0   

 Total return swaps/other

     15.9            2.1          -          2.1           0.4          -          0.4   

  Written protection:

                      

 Credit default swaps

     2,620.2            21.9          -          21.9           193.3          -          193.3   

 Total return swaps/other

     27.3            2.5          -          2.5             4.5          -          4.5   

  Gross derivative assets/liabilities

      $ 1,750.9        $ 8.9          1,759.8         $ 1,720.6        $ 1.5          1,722.1   

  Less: Legally enforceable master netting agreements

              (1,594.8              (1,594.8

  Less: Cash collateral applied

                          (63.3                        (76.0 )     

 Total derivative assets/liabilities

                        $ 101.7                         $ 51.3   

 

  (1) 

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

 

  (2) 

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

 

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Table of Contents
     December 31, 2008  
          Gross Derivative Assets          Gross Derivative Liabilities  
  (Dollars in billions)    Contract/
Notional (1)
   Derivatives
Used in
Trading
Activities and
as Economic
Hedges
   Derivatives
Designated as
SFAS 133
Hedging
Instruments (2)
   Total            Derivatives
Used in
Trading
Activities and
as Economic
Hedges
   Derivatives
Designated as
SFAS 133
Hedging
Instruments (2)
   Total  

  Interest rate contracts

                      

  Swaps

   $ 26,577.4        $ 1,213.2        $ 2.2        $ 1,215.4         $ 1,186.0        $ -        $ 1,186.0   

  Futures and forwards

     4,432.1          5.1          -          5.1           7.9          -          7.9   

  Written options

     1,731.1          0.1          -          0.1           61.9          -          61.9   

  Purchased options

     1,656.6          60.2          -          60.2           0.8          -          0.8   

  Foreign exchange contracts

                      

  Swaps

     438.9          17.5          3.6          21.1           20.5          1.3          21.8   

  Spot, futures and forwards

     1,376.5          52.3          -          52.3           51.3          -          51.3   

  Written options

     199.8          -          -          -           7.5          -          7.5   

  Purchased options

     175.7          8.0          -          8.0           -          -          -   

  Equity contracts

                      

  Swaps

     34.7          1.8          -          1.8           1.0          -          1.0   

  Futures and forwards

     14.1          0.3          -          0.3           0.1          -          0.1   

  Written options

     214.1          5.2          -          5.2           28.7          -          28.7   

  Purchased options

     217.5          27.4          -          27.4           2.9          0.1          3.0   

  Commodity contracts

                      

  Swaps

     2.1          2.4          -          2.4           2.1          -          2.1   

  Futures and forwards

     9.6          1.2          -          1.2           1.0          -          1.0   

  Written options

     17.6          -          -          -           3.8          -          3.8   

  Purchased options

     15.6          3.7          -          3.7           -          -          -   

  Credit derivatives

                      

  Purchased protection:

                      

 Credit default swaps

     1,025.9          125.7          -          125.7           3.4          -          3.4   

 Total return swaps

     6.6          1.8          -          1.8           0.2          -          0.2   

  Written protection:

                      

 Credit default swaps

     1,000.0          3.4          -          3.4           118.8          -          118.8   

 Total return swaps

     6.2          0.4          -          0.4             0.1          -          0.1   

  Gross derivative assets/liabilities

      $ 1,529.7        $ 5.8          1,535.5         $ 1,498.0        $ 1.4          1,499.4   

  Less: Legally enforceable master netting agreements

              (1,438.4              (1,438.4

  Less: Cash collateral applied

                          (34.8                        (30.3 )     

 Total derivative assets/liabilities

                        $ 62.3                         $ 30.7   

 

  (1)  

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

 

  (2)  

Excludes $2.0 billion of long-term debt designated as a hedge of foreign currency risk.

 

 

ALM and Risk Management Derivatives

 

The Corporation’s asset and liability management (ALM) and risk management activities include the use of derivatives to mitigate risk to the Corporation including both derivatives that are designated as SFAS 133 accounting hedges and economic hedges. Interest rate, commodity, credit and foreign exchange contracts are utilized in the Corporation’s ALM and risk management activities.

The Corporation maintains an overall interest rate risk management strategy that incorporates the use of interest rate contracts to minimize significant fluctuations in earnings that are caused by interest rate volatility. The Corporation’s goal is to manage interest rate sensitivity so that movements in interest rates do not significantly adversely affect net interest income. As a result of interest rate fluctuations hedged fixed-rate assets and liabilities appreciate or depreciate in market value. Gains or losses on the derivative instruments that are linked to the hedged fixed-rate assets and liabilities are expected to substantially offset this unrealized appreciation or depreciation.

 

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Table of Contents

Interest rate contracts, which are generally non-leveraged generic interest rate and basis swaps, options and futures, allow the Corporation to manage its interest rate risk position. Non-leveraged generic interest rate swaps involve the exchange of fixed-rate and variable-rate interest payments based on the contractual underlying notional amount. Basis swaps involve the exchange of interest payments based on the contractual underlying notional amounts, where both the pay rate and the receive rate are floating rates based on different indices. Option products primarily consist of caps, floors and swaptions. Futures contracts used for the Corporation’s ALM activities are primarily index futures providing for cash payments based upon the movements of an underlying rate index.

Interest rate and market risk can be substantial in the mortgage business. 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 18 – Mortgage Servicing Rights.

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

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

 

17


Table of Contents

 

Derivatives Designated as SFAS 133 Hedging Instruments

 

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 to protect against changes in the cash flows of its assets and liabilities, and other forecasted transactions (cash flow hedges). The Corporation hedges its net investment in consolidated foreign operations determined to have functional currencies other than the U.S. dollar using forward exchange contracts that typically settle in 90 days, cross-currency basis swaps, and by issuing foreign-denominated debt.

The following table summarizes certain information related to the Corporation’s fair value derivative hedges accounted for under SFAS 133 for the three and six months ended June 30, 2009 and 2008.

 

     Amounts Recognized in Income for the Three Months Ended  
     June 30, 2009          June 30, 2008  
  (Dollars in millions)    Derivative     Hedged
Item
    Hedge
Ineffectiveness
          Derivative     Hedged
Item
    Hedge
Ineffectiveness
 

  SFAS 133 fair value hedges

               

  Interest rate risk on long-term borrowings (1)

   $ (3,851   $ 3,529      $ (322      $ (1,415   $ 1,367      $ (48

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

     1,014        (987     27           (1,084     1,073        (11

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

     207        (231     (24        4        (4     -   

  Commodity price risk on commodity inventory (3)

     4        1        5             n/a        n/a        n/a   

  Total

   $ (2,626   $ 2,312      $ (314        $ (2,495   $ 2,436      $ (59
     Amounts Recognized in Income for the Six Months Ended  
     June 30, 2009          June 30, 2008  
      Derivative     Hedged
Item
    Hedge
Ineffectiveness
          Derivative     Hedged
Item
    Hedge
Ineffectiveness
 

  SFAS 133 fair value hedges

               

  Interest rate risk on long-term borrowings (1)

   $ (4,617   $ 4,165      $ (452      $ (58   $ 63      $ 5   

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

     63        22        85           1,169        (1,170     (1

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

     260        (312     (52        7        (9     (2 )   

  Commodity price risk on commodity inventory (3)

     60        (57     3             n/a        n/a        n/a   

  Total

   $ (4,234   $ 3,818      $ (416        $ 1,118      $ (1,116   $ 2   

 

  (1)  

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

 

  (2)  

Amounts are recorded in interest income on AFS securities.

 

  (3)  

Amounts are recorded in trading account profits (losses).

  n/a = not applicable

 

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Table of Contents

The following table summarizes certain information related to the Corporation’s cash flow and net investment hedges accounted for under SFAS 133 for the three and six months ended June 30, 2009 and 2008. During the next 12 months, net losses in accumulated OCI of approximately $460 million ($290 million after-tax) on derivative instruments that qualified as cash flow hedges under SFAS 133 are expected to be reclassified into earnings. These net losses reclassified into earnings are expected to reduce net interest income related to the respective hedged items.

 

     Three Months Ended June 30  
     2009          2008  
  (Dollars in millions)   

Amounts

Recognized in

OCI on

Derivatives (1)

   

Amounts

Reclassified

from OCI into

Income (1)

   

Hedge

Ineffectiveness

and Amount

Excluded from

Effectiveness

Testing (1,2)

         

Amounts

Recognized in

OCI on

Derivatives (1)

   

Amounts

Reclassified

from OCI into

Income (1)

   

Hedge
Ineffectiveness

and Amount

Excluded from

Effectiveness

Testing (1,2)

 

  SFAS 133 cash flow hedges

               

  Interest rate risk on variable rate portfolios (3,4,5,6)

   $ (187   $ (376   $ 35         $ 285      $ (352   $ (5

  Commodity price risk on forecasted purchases and sales (7)

     15        2        -           n/a        n/a        n/a   

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

     (10     -        -             (79     -        -   

  Total

   $ (182   $ (374   $ 35           $ 206      $ (352   $ (5

  Net investment hedges

               

  Foreign exchange risk (8)

   $ (3,015   $ -      $ (27        $ (46   $ -      $ (53

 

     Six Months Ended June 30  
     2009          2008  
  (Dollars in millions)    Amounts
Recognized
in OCI on
Derivatives
(1)
    Amounts
Reclassified
from OCI
into
Income (1)
   

Hedge
Ineffectiveness

and Amount

Excluded
from
Effectiveness
Testing (1,2)

          Amounts
Recognized
in OCI on
Derivatives
(1)
    Amounts
Reclassified
from OCI
into Income
(1)
    Hedge
Ineffectiveness
and Amount
Excluded from
Effectiveness
Testing (1,2)
 

  SFAS 133 cash flow hedges

               

  Interest rate risk on variable rate portfolios (3,4,5,6)

   $ (35   $ (786   $ 38         $ (445   $ (608   $ (8

  Commodity price risk on forecasted purchases and sales (7)

     63        5        -           n/a        n/a        n/a   

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

     (54     -        -             (147     -        -   

  Total

   $ (26   $ (781   $ 38           $ (592   $ (608   $ (8

  Net investment hedges

               

  Foreign exchange risk (8)

   $ (1,999   $ -      $ (107        $ 8      $ -      $ (79 )   

 

 (1)  

Amounts are on a pre-tax basis.

 

 (2)  

Amounts related to SFAS 133 cash flow hedges represent hedge ineffectiveness and amounts related to net investment hedges represent amounts excluded from effectiveness testing.

 

 (3)  

Losses reclassified from OCI reduced interest income on assets by $64 million and $104 million and increased interest expense $312 million and $248 million during the three months ended June 30, 2009 and 2008. Losses reclassified from OCI reduced interest income on assets by $107 million and $205 million and increased interest expense $679 million and $403 million during the six months ended June 30, 2009 and 2008.

 

 (4)  

Hedge ineffectiveness of $35 million and $38 million were recorded in interest income during the three and six months ended June 30, 2009. Hedge ineffectiveness of $(5) million and $(8) million were recorded in interest expense during the three and six months ended June 30, 2008.

 

 (5)  

Amounts recognized in OCI on derivatives exclude amounts related to terminated hedges of available-for-sale securities of $(6) million and $65 million for the three and six months ended June 30, 2009 compared to $(22) million and $18 million for the same periods in 2008.

 

 (6)  

Amounts reclassified from OCI exclude amounts related to derivative interest accruals which increased interest income by $53 million and $56 million for the three and six months ended June 30, 2009 compared to amounts which increased interest expense by $47 million and $69 million for the same periods in 2008.

 

 (7)  

Gains reclassified from OCI into income were recorded in trading account profits (losses).

 

 (8)  

Amounts recognized in OCI on derivatives exclude losses of $472 million and $439 million related to long-term debt designated as a net investment hedge for the three and six months ended June 30, 2009.

 n/a = not applicable

 

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Table of Contents

 

Economic Hedges

 

Derivatives designated as economic hedges are used by the Corporation to reduce certain risk exposure but are not accounted for as qualifying SFAS 133 hedges. The following table presents gains (losses) on these derivatives for the three and six months ended June 30, 2009 and 2008. These gains (losses) are partially offset by the income or expense that is recorded on the economic hedged item.

 

      Three Months Ended June 30     Six Months Ended June 30  
  (Dollars in millions)    2009     2008     2009     2008  

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

   $ 2,437      $ 100      $ 4,692      $ 144   

  Interest rate risk on mortgage banking servicing income (1)

     (3,386     (558     (3,176     (292 )  

  Credit risk on loans and leases (3)

     (342     (59     (272     279   

  Interest rate and foreign currency risk on long-term borrowings and other foreign exchange transactions (3)

     28        112        (518     2,320   

  Other (3)

     (31     (27     (18     35   

Total

   $ (1,294   $ (432   $ 708      $ 2,486   

 

  (1)  

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

 

  (2)  

Includes gain on interest rate lock commitments related to the origination of mortgage loans that will be held for sale, which are considered derivative instruments, of $1.2 billion and $3.7 billion for the three and six months ended June 30, 2009 compared to $12 million and $69 million for the same periods in 2008.

 

  (3)  

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

 

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Table of Contents

 

Sales and Trading Revenue

 

The Corporation enters into trading derivatives to facilitate client transactions, for proprietary trading purposes, and to manage risk exposures arising from trading assets and liabilities. It is the Corporation’s policy to include these derivative instruments in its trading activities which includes derivative and non-derivative cash instruments. The resulting risk from these derivatives is managed on a portfolio basis as part of the Corporation’s Global Markets business segment. The related sales and trading revenue generated within Global Markets is recorded on different income statement line items including trading account profits (losses) and net interest income as well as other revenue categories. The vast majority of income related to derivative instruments is recorded in trading account profits (losses). The following table identifies the amounts in the income statement line items attributable to the Corporation’s sales and trading revenue categorized by primary risk for the three and six months ended June 30, 2009 and 2008.

 

     Three Months Ended June 30  
     2009          2008  
  (Dollars in millions)   

Trading 
Account 
Profits 

(Losses) 

    Other  
Revenues  
    Net 
Interest 
Income 
    Total            Trading 
Account 
Profits 
(Losses) 
    Other  
Revenues  
    Net 
Interest 
Income 
    Total   

  Interest rate risk

   $ (343   $ 5      $ 277      $ (61      $ 460      $ 2      $ 23      $ 485   

  Foreign exchange risk

     305        4        6        315           271        3        2        276   

  Equity risk

     359        792        14        1,165           40        187        43        270   

  Credit risk

     1,704        (386     1,175        2,493           (686     (635     1,048        (273

  Other risk

     (10     (16     (120     (146          98        23        (8     113   

Total sales and trading revenue

     2,015        399        1,352        3,766           183        (420     1,108        871   

  Non-sales and trading-related revenue 

     149        n/a        n/a        149             174        n/a        n/a        174   

Total

   $ 2,164      $ 399      $ 1,352      $ 3,915           $ 357      $ (420   $ 1,108      $ 1,045   
      Six Months Ended June 30  
     2009          2008  
  (Dollars in millions)    Trading 
Account 
Profits 
    Other  
Revenues  
    Net 
Interest 
Income 
    Total            Trading 
Account 
Profits 
(Losses) 
    Other  
Revenues  
    Net 
Interest 
Income 
    Total   

  Interest rate risk

   $ 2,547      $ 20      $ 601      $ 3,168         $ 799      $ 13      $ 29      $ 841   

  Foreign exchange risk

     652        5        13        670           611        3        7        621   

  Equity risk

     1,145        1,391        78        2,614           42        393        133        568   

  Credit risk

     1,908        (1,474     2,674        3,108           (2,967     (1,870     1,981        (2,856

  Other risk

     683        (36     (273     374             96        44        (8     132   

Total sales and trading revenue

     6,935        (94     3,093        9,934           (1,419     (1,417     2,142        (694

  Non-sales and trading-related revenue 

     430        n/a        n/a        430             (7     n/a        n/a        (7

Total

   $ 7,365      $ (94   $ 3,093      $ 10,364           $ (1,426   $ (1,417   $ 2,142      $ (701

  n/a = not applicable

 

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Table of Contents

 

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.

Credit derivative instruments in which the Corporation is the seller of credit protection and their expiration at June 30, 2009 and December 31, 2008 are summarized as follows. These instruments have been classified as investment and non-investment grade based on the credit quality of the underlying reference obligation.

 

     June 30, 2009
     Carrying Value
  (Dollars in millions)    Less than One  
Year 
   One to Three  
Years 
   Three to Five Years      Over Five  
Years 
   Total  

 Credit default swaps:

              

 Investment grade (1)

   $ 2,542    $ 12,488    $ 23,641    $ 37,987    $ 76,658  

 Non-investment grade (2)

     4,081      26,457      39,363      46,711      116,612  

Total

     6,623      38,945      63,004      84,698      193,270  

 Total return swaps/other:

              

 Investment grade (1)

     121      133      76      1,227      1,557  

 Non-investment grade (2)

     26      192      519      2,234      2,971  

Total

     147      325      595      3,461      4,528  

Total credit derivatives

   $ 6,770    $ 39,270    $ 63,599    $ 88,159    $ 197,798  
    

 

Maximum Payout/Notional

 Credit default swaps:

              

 Investment grade (1)

   $ 133,573    $ 314,538    $ 657,512    $ 386,927    $ 1,492,550  

 Non-investment grade (2)

     137,306      286,543      358,020      345,777      1,127,646  

Total

     270,879      601,081      1,015,532      732,704      2,620,196  

 Total return swaps/other:

              

 Investment grade (1)

     369      290      2,537      9,397      12,593  

 Non-investment grade (2)

     559      639      882      12,631      14,711  

Total

     928      929      3,419      22,028      27,304  

Total credit derivatives

   $ 271,807    $ 602,010    $ 1,018,951    $ 754,732    $ 2,647,500  

 

    

 

December 31, 2008

     Carrying Value
  (Dollars in millions)    Less
than
One  
Year 
   One to
Three  
Years 
   Three to
Five
Years  
   Over Five Years      Total  

 Credit default swaps:

              

 Investment grade (1)

   $ 1,039    $ 13,062    $ 32,594    $ 29,153    $ 75,848  

 Non-investment grade (2)

     1,483      9,222      19,243      13,012      42,960  

Total

     2,522      22,284      51,837      42,165      118,808  

 Total return swaps/other:

              

 Non-investment grade (2)

     36      8      -      13      57  

Total credit derivatives

   $ 2,558    $ 22,292    $ 51,837    $ 42,178    $ 118,865  
    

 

Maximum Payout/Notional

 Credit default swaps:

              

 Investment grade (1)

   $ 49,535    $ 169,508    $ 395,768    $ 187,075    $ 801,886  

 Non-investment grade (2)

     17,217      48,829      89,650      42,452      198,148  

Total

     66,752      218,337      485,418      229,527      1,000,034  

 Total return swaps/other:

              

 Non-investment grade (2)

     1,178      628      37      4,360      6,203  

Total credit derivatives

   $ 67,930    $ 218,965    $ 485,455    $ 233,887    $ 1,006,237  

 

 (1) 

The Corporation considers ratings of BBB- or higher as meeting the definition of investment grade.

 

 (2) 

Includes non-rated credit derivative instruments.

 

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The notional value 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 value because this measure does not take into consideration the probability of occurrence. As such, the notional value is not a reliable indicator of the Corporation’s exposure to these contracts. Instead, a risk framework is used to define risk tolerances and establish limits to help ensure that certain credit risk-related losses occur within acceptable, predefined limits.

The Corporation economically hedges its market risk exposure to credit derivatives by entering into a variety of offsetting derivative contracts and security positions. For example, in certain instances, the Corporation may purchase credit protection with identical underlying referenced names to offset its exposure. The carrying value and notional value of written credit protection for which the Corporation held purchased protection with identical underlying referenced names at June 30, 2009 was $166.1 billion and $2.3 trillion compared to $92.4 billion and $819.4 billion at December 31, 2008.

 

 

Credit Risk Management of Derivatives and Credit-related Contingent Features

 

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

Substantially all of the Corporation’s derivative contracts contain credit risk-related contingent features, primarily in the form of International Swaps and Derivatives Association, Inc. (ISDA) master agreements that aid in enhancing 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 in respect to changes in the Corporation’s creditworthiness. At June 30, 2009, the Corporation received cash and securities collateral of $74.8 billion and posted cash and securities collateral of $85.0 billion in the normal course of business under derivative agreements.

In connection with certain over-the-counter derivatives transactions 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 June 30, 2009, the amount of additional collateral and termination payments that would be required for such derivatives transactions and trading agreements was approximately $1.8 billion if the long-term credit rating of Bank of America Corporation and its subsidiaries was incrementally downgraded by one level by all rating agencies. A second incremental one level downgrade by the rating agencies would have required approximately $1.1 billion in additional collateral.

The Corporation records counterparty credit risk valuation adjustments on derivative assets, including our credit default protection purchased, 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 six months ended June 30, 2009, credit valuation adjustments for counterparty credit risk related to derivative assets of $697 million and $491 million compared to $44 million and $(718) million during the same periods in 2008 were recognized as trading account profits (losses). At June 30, 2009, the cumulative counterparty credit risk valuation adjustment that was netted against the derivative asset balance was $11.6 billion.

In addition, the fair value of the Corporation or its subsidiaries’ derivative liabilities is adjusted to reflect the impact of the Corporation’s credit quality. During the three and six months ended June 30, 2009, credit valuation adjustments of $(1.6) billion and $83 million compared to $88 million and $241 million for the same periods in 2008 were recognized in trading account profits (losses) for changes in the Corporation or its subsidiaries’ credit risk. At June 30, 2009, the Corporation’s cumulative credit risk valuation adjustment that was netted against the derivative liabilities balance was $1.6 billion.

 

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NOTE 5 – Securities

The amortized cost, gross unrealized gains and losses, and fair value of AFS debt and marketable equity securities at June 30, 2009 and December 31, 2008 were:

 

  (Dollars in millions)    Amortized
Cost
         Gross
Unrealized
Gains
         Gross
Unrealized
Losses
          Fair Value    

 

  Available-for-sale debt securities, June 30, 2009

                   

U.S. Treasury securities and agency debentures

   $ 14,545       $ 383       $ (12      $ 14,916    

Mortgage-backed securities:

                   

Agency MBSs

     135,348         2,330         (210        137,468    

Agency collateralized mortgage obligations

     17,573         401         (112        17,862    

Non-agency MBSs

     48,222         2,179         (7,945        42,456    

Foreign securities

     5,405         24         (1,204        4,225    

Corporate/Agency bonds

     5,794         101         (412        5,483    

Other taxable securities (1)

     23,198           150           (749          22,599    

Total taxable securities

     250,085         5,568         (10,644        245,009    

Tax-exempt securities

     13,032           85           (607          12,510    

Total available-for-sale debt securities

   $ 263,117         $ 5,653         $ (11,251        $ 257,519    

  Available-for-sale marketable equity securities (2)

   $ 6,427         $ 1,495         $ (947        $ 6,975    

  Available-for-sale debt securities, December 31, 2008

                   

U.S. Treasury securities and agency debentures

   $ 4,540       $ 121       $ (14      $ 4,647    

Mortgage-backed securities:

                   

Agency MBSs

     191,913         3,064         (146        194,831    

Non-agency MBSs

     43,224         860         (9,337        34,747    

Foreign securities

     5,675         6         (678        5,003    

Corporate/Agency bonds

     5,560         31         (1,022        4,569    

Other taxable securities (1)

     24,832           11           (1,300          23,543    

Total taxable securities

     275,744         4,093         (12,497        267,340    

Tax-exempt securities

     10,501           44           (981          9,564    

Total available-for-sale debt securities

   $ 286,245         $ 4,137         $ (13,478        $ 276,904    

  Available-for-sale marketable equity securities (2)

   $ 18,892         $ 7,717         $ (1,537        $ 25,072    

 

    (1)  

Includes ABS.

 

    (2)  

Represents those AFS marketable equity securities that are recorded in other assets on the Consolidated Balance Sheet. At December 31, 2008, approximately $19.7 billion of the fair value balance, including $7.7 billion of unrealized gain on the unrestricted shares, represents China Construction Bank (CCB) shares.

At June 30, 2009, the amortized cost and fair value of held-to-maturity debt securities was $9.7 billion and $7.8 billion, which includes asset-backed securities that were issued by the Corporation’s credit card securitization trust and retained by the Corporation with an amortized cost of $7.4 billion and a fair value of $5.5 billion. At December 31, 2008, both the amortized cost and fair value of held-to-maturity debt securities was $685 million. The accumulated net unrealized gains (losses) on AFS debt and marketable equity securities included in accumulated OCI were $(3.4) billion and $345 million, net of the related income tax expense (benefit) of $(2.2) billion and $203 million at June 30, 2009. At June 30, 2009 and December 31, 2008, the Corporation had nonperforming AFS debt securities of $177 million and $291 million.

The Corporation obtained certain securities as part of the Merrill Lynch acquisition with evidence of deterioration and for which it was probable that all contractually required payments would not be collected. The securities’ par value was approximately $6.6 billion and fair value was approximately $1.8 billion as of the acquisition date.

The Corporation adopted the provisions of FSP FAS 115-2 as of January 1, 2009. As prescribed by FSP FAS 115-2, for the three and six months ended June 30, 2009, the Corporation recognized the credit component of an other-than-temporary impairment of its debt securities in earnings and the noncredit component in OCI for those securities in which the Corporation does not intend to sell the security and it is more likely than not that the Corporation will not be required to sell the security prior to recovery. Upon adoption, $71 million, net-of-tax, of other-than-temporary impairment charges previously recorded through earnings were reclassified to OCI with an offset to retained earnings as a cumulative-effect adjustment.

 

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During the three and six months ended June 30, 2009, the Corporation recorded other-than-temporary impairment losses on AFS debt securities as follows:

 

    Three Months Ended June 30, 2009  
  (Dollars in millions)  

 

Non-agency
MBSs

   

 

Foreign
Securities

   

 

Corporate /
Agency Bonds

   

 

Other Taxable
Securities

   

 

    Total

 

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

  $ (832   $ (103   $ (51   $ (124   $ (1,110 )     

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

    84        -        -        -        84   

 

Net impairment losses recognized in earnings (2)

  $ (748   $ (103   $ (51   $ (124   $ (1,026 )     
   

 

Six Months Ended June 30, 2009

 
  (Dollars in millions)  

 

Non-agency
MBSs

   

 

Foreign
Securities

   

 

Corporate /
Agency Bonds

   

 

Other Taxable
Securities

   

 

Total    

 

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

  $ (1,263   $ (235   $ (68   $ (258   $ (1,824 )     

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

    427        -        -        -        427   

 

Net impairment losses recognized in earnings (2)

  $ (836   $ (235   $ (68   $ (258   $ (1,397 )     

 

  (1)  

Represents the noncredit component impact of the other-than-temporary impairment on AFS debt securities. During the three and six months ended June 30, 2009, for certain securities, the Corporation recognized credit losses in excess of unrealized losses in OCI. In these instances, a portion of the credit losses recognized in earnings has been offset by an unrealized gain. Balances above exclude $281 million of gross gains recorded in OCI related to these securities for the three and six months ended June 30, 2009.

 

  (2)  

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

Activity related to the credit component recognized in earnings on debt securities held by the Corporation for which a portion of the other-than-temporary impairment loss remains in OCI for the three and six months ended June 30, 2009 is as follows:

 

  (Dollars in millions)    Three Months Ended
June 30, 2009
   Six Months Ended    
June 30, 2009

 

  Balance, beginning of period

   $ 40          $ -      

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

     -            22      

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

     256            274      

 

Balance, June 30, 2009

   $ 296          $ 296      

 

  (1)  

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

 

  (2)  

During the three and six months ended June 30, 2009, the Corporation recognized $770 million and $1.1 billion of other-than-temporary impairments on debt securities in which no portion of other-than-temporary impairment loss remained in OCI. Other-than-temporary impairments related to these securities are excluded from these amounts.

As of June 30, 2009, those debt securities with other-than-temporary impairment for which a portion of the other-than-temporary impairment loss remains in OCI consisted entirely of non-agency MBSs. The Corporation estimates the portion of loss attributable to credit using a discounted cash flow model. The Corporation estimates the expected cash flows of the underlying collateral using internal credit risk, interest rate and prepayment risk models that incorporate management’s best estimate of current key assumptions, such as default rates, loss severity and prepayment rates. Assumptions used can vary widely from loan to loan, and are influenced by such factors as loan interest rate, geographical location of the borrower, borrower characteristics and collateral type. The Corporation then uses a third party vendor to determine how the underlying collateral cash flows will be distributed to each security issued from the structure. Expected principal and interest cash flows on the impaired debt security are discounted using an observable discount rate for similar instruments with adjustments that management believes a market participant would consider in determining fair value for the specific security.

 

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Table of Contents

Based on the expected cash flows derived from the model, the Corporation expects to recover the remaining unrealized losses on non-agency mortgage-backed securities. Significant assumptions used in the valuation of non-agency mortgage-backed securities were as follows as of June 30, 2009.

 

                            Range (1)
    

 

Weighted-

average

                

 

10th
Percentile

                

 

90th
Percentile

     

  Prepayment speed (2)

   11.4      %      3.0      %      29.5        %

  Loss severity (3)

   54.3           29.4           82.7       

  Life default rate (4)

   50.8                 3.0                 98.7         

 

  (1)  

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

 

  (2)  

Annual constant prepayment speed.

 

  (3)  

Loss severity rates are projected considering collateral characteristics, such as loan-to-value (LTV), creditworthiness of borrowers (FICO score) and geographic concentration. Weighted average severity by collateral type was 45 percent for prime bonds, 52 percent for Alt-A bonds, and 65 percent for subprime bonds.

 

  (4)  

Default rates are projected by considering collateral characteristics including, but not limited to, LTV, FICO, and geographic concentration. Weighted average default rate by collateral type was 30 percent for prime bonds, 60 percent for Alt-A bonds, and 74 percent for subprime bonds.

During the six months ended June 30, 2009 the Corporation recognized $326 million of other-than-temporary impairment losses on AFS marketable equity securities compared to $14 million during the same period in 2008. No such losses were recognized for the three months ended June 30, 2009 and 2008.

 

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Table of Contents

The following table presents the current fair value and the associated gross unrealized losses on investments in securities with gross unrealized losses at June 30, 2009 and December 31, 2008 including debt securities for which a portion of other-than-temporary impairment has been recognized in OCI. The table also discloses whether these securities have had gross unrealized losses for less than twelve months, or for twelve months or longer.

 

     Less than twelve months     Twelve months or longer     Total  
  (Dollars in millions)    Fair
Value
   Gross
Unrealized
Losses
    Fair
Value
   Gross
Unrealized
Losses
    Fair
Value
   Gross
Unrealized
Losses
 

  Temporarily-impaired available-for-sale debt securities as of June 30, 2009

               

 

U.S. Treasury securities and agency debentures

   $ 1,276    $ (12   $ -    $ -      $ 1,276    $ (12 )   

 

Mortgage-backed securities:

               

 

Agency MBSs

     10,633      (205     271      (5     10,904      (210 )   

 

Agency collateralized mortgage obligations

     2,596      (112     -      -        2,596      (112 )   

 

Non-agency MBSs

     13,491      (3,101     13,816      (4,719     27,307      (7,820 )   

 

Foreign securities

     2,573      (1,057     1,811      (147     4,384      (1,204 )   

 

Corporate/Agency bonds

     2,366      (331     707      (81     3,073      (412 )   

 

Other taxable securities

     3,490      (710     1,372      (39     4,862      (749 )   

 

Total taxable securities

     36,425      (5,528     17,977      (4,991     54,402      (10,519 )   

 

Tax-exempt securities

     4,002      (155     5,768      (452     9,770      (607 )   

Total temporarily-impaired available-for-sale debt securities

     40,427      (5,683     23,745      (5,443     64,172      (11,126 )   

  Temporarily-impaired available-for-sale marketable equity securities

     463      (140     1,772      (807     2,235      (947 )   

Total temporarily-impaired available-for-sale securities

   $ 40,890    $ (5,823   $ 25,517    $ (6,250   $ 66,407    $ (12,073 )   

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

               

 

Mortgage-backed securities:

               

 

Non-agency MBSs

     456      (22     716      (103     1,172      (125 )   

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

   $ 41,346    $ (5,845   $ 26,233    $ (6,353   $ 67,579    $ (12,198 )   

  Temporarily-impaired available-for-sale debt securities as of December 31, 2008

               

 

U.S. Treasury securities and agency debentures

   $ 306    $ (14   $ -    $ -      $ 306    $ (14 )   

 

Mortgage-backed securities:

               

 

Agency MBSs

     2,282      (12     7,508      (134     9,790      (146 )   

 

Non-agency MBSs

     20,068      (6,776     4,141      (2,561     24,209      (9,337 )   

 

Foreign securities

     3,491      (562     1,126      (116     4,617      (678 )   

 

Corporate/Agency bonds

     2,573      (934     666      (88     3,239      (1,022 )   

 

Other taxable securities

     12,870      (1,077     501      (223     13,371      (1,300 )   

 

Total taxable securities

     41,590      (9,375     13,942      (3,122     55,532      (12,497 )   

 

Tax-exempt securities

     6,386      (682     1,540      (299     7,926      (981 )   

Total temporarily-impaired available-for-sale debt securities

     47,976      (10,057     15,482      (3,421     63,458      (13,478 )   

  Temporarily-impaired available-for-sale marketable equity securities

     3,431      (499     1,555      (1,038     4,986      (1,537 )   

 

Total temporarily-impaired available-for-sale securities

   $ 51,407    $ (10,556   $ 17,037    $ (4,459   $ 68,444    $ (15,015 )   

 

  (1)    

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

 

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At June 30, 2009, the amortized cost of approximately 18,500 AFS securities, including securities with other-than-temporary impairment in which a portion of the impairment remains in OCI, exceeded their fair value by $12.2 billion. Included in the $12.2 billion of gross unrealized losses on these AFS securities at June 30, 2009, was $5.8 billion of gross unrealized losses that have existed for less than twelve months and $6.4 billion of gross unrealized losses that have existed for a period of twelve months or longer. Of the gross unrealized losses existing for twelve months or more, $4.8 billion, or 76 percent, of the gross unrealized loss is related to approximately 500 mortgage-backed securities primarily due to continued deterioration in non-agency MBS values driven by a lack of market liquidity. The Corporation does not intend to sell these securities and it is more likely than not that the Corporation will not be required to sell these securities before recovery of its amortized cost basis. In addition, $807 million, or 13 percent, of the gross unrealized loss is related to approximately 400 AFS marketable equity securities primarily due to the overall decline in the market during the six months ended June 30, 2009 as well as the full year of 2008. The Corporation has the ability and intent to hold these securities for a period of time sufficient to recover all gross unrealized losses.

The Corporation had investments in AFS mortgage-backed securities from Fannie Mae, Freddie Mac and Ginnie Mae that exceeded 10 percent of consolidated shareholders’ equity as of June 30, 2009. These investments had market values of $87.6 billion, $33.1 billion and $34.6 billion at June 30, 2009 and total amortized costs of $86.5 billion, $32.5 billion and $33.9 billion, respectively. The Corporation had investments in AFS debt securities from Fannie Mae, Freddie Mac and Ginnie Mae that exceeded 10 percent of consolidated shareholders’ equity as of December 31, 2008. These investments had market values of $104.1 billion, $46.9 billion and $44.6 billion at December 31, 2008 and total amortized costs of $102.9 billion, $46.1 billion and $43.7 billion, respectively.

Securities are pledged or assigned to secure borrowed funds, government and trust deposits and for other purposes. The carrying value of pledged securities was $121.3 billion and $158.9 billion at June 30, 2009 and December 31, 2008.

The expected maturity distribution of the Corporation’s mortgage-backed securities and the contractual maturity distribution of the Corporation’s other debt securities, and the yields of the Corporation’s AFS debt securities portfolio at June 30, 2009 are summarized in the following table. Actual maturities may differ from the contractual or expected maturities since borrowers may have the right to prepay obligations with or without prepayment penalties.

 

     June 30, 2009
     Due in one year or less   

 

Due after one year
through five years

  

Due after five years

through ten years

   Due after ten years         Total
  (Dollars in millions)    Amount      Yield (1)         Amount      Yield (1)         Amount      Yield (1)         Amount      Yield (1)         Amount      Yield (1)     

  Fair value of available-for-sale debt securities

                                       

  U.S. Treasury securities and agency debentures

   $ 113      2.65   %    $ 7,422      1.97   %    $ 3,820      4.66   %    $ 3,561      4.78   %    $ 14,916      3.31   %

  Mortgage-backed securities:

                                       

  Agency MBSs

     241      4.78        41,060      5.28        70,584      5.06        25,583      4.89        137,468      5.09  

  Agency collateralized mortgage obligations

     126      1.28        8,588      1.91        9,136      2.33        12      4.83        17,862      2.13  

  Non-agency MBSs

     837      9.67        21,838      11.11        11,869      9.95        7,912      5.63        42,456      9.72  

  Foreign securities

     1,154      4.54        2,780      6.35        45      9.12        246      4.01        4,225      5.46  

  Corporate/Agency bonds

     354      2.57        1,890      4.55        2,669      10.66        570      4.57        5,483      7.46  

  Other taxable securities

     12,386      2.51        8,103      5.51        396      8.87        1,714      3.94        22,599      3.82  
                                                       

  Total taxable securities

     15,211      3.21        91,681      6.31        98,519      5.62        39,598      4.97        245,009      5.62  

  Tax-exempt securities (2)

     1,247      0.86        1,572      6.09        3,132      6.19        6,559      5.48        12,510      5.27  
                                                       

  Total available-for-sale debt securities

   $ 16,458      3.03      $ 93,253      6.31      $ 101,651      5.64      $ 46,157      5.04      $ 257,519      5.60  
                                                       

  Amortized cost of available-for-sale debt securities

   $ 17,034               $ 95,530               $ 101,713               $ 48,840               $ 263,117           

 

  (1)  

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

 

  (2)  

Yields of tax-exempt securities are calculated on a fully taxable-equivalent (FTE) basis.

 

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The components of realized gains and losses on sales of debt securities for the three and six months ended June 30, 2009 and 2008 were:

 

         Three Months Ended June 30                    Six Months Ended June 30        
  (Dollars in millions)    2009     2008             2009     2008    

  Gross gains

   $ 744      $ 173           $ 2,281      $ 419     

  Gross losses

     (112     (46)              (151     (67)    

  Net gains on sales of debt securities

   $ 632      $ 127             $ 2,130      $ 352     

The income tax expense attributable to realized net gains on debt securities sales was $234 million and $788 million for the three and six months ended June 30, 2009 compared to $47 million and $130 million for the same periods in 2008.

 

 

Certain Corporate and Strategic Investments

 

At June 30, 2009 and December 31, 2008, the Corporation owned approximately 11 percent, or 25.6 billion common shares and 19 percent, or 44.7 billion common shares of CCB. During the first quarter of 2009, the Corporation sold 5.6 billion common shares of our initial investment of 19.1 billion common shares in CCB for a pre-tax gain of approximately $1.9 billion. During the second quarter of 2009, the Corporation sold its remaining 13.5 billion common shares of our initial investment in CCB for a pre-tax gain of approximately $5.3 billion. These shares were accounted for at fair value and recorded as AFS marketable equity securities in other assets with an offset, net-of-tax, to accumulated OCI. The remaining investment of 25.6 billion common shares is accounted for at cost, is recorded in other assets and is non-transferable until August 2011. At June 30, 2009 and December 31, 2008, the cost of the CCB investment was $9.2 billion and $12.0 billion. At June 30, 2009 and December 31, 2008, the carrying value was $9.2 billion and $19.7 billion. Dividend income on this investment is recorded in equity investment income. The Corporation remains a significant shareholder in CCB and intends to continue the important long-term strategic alliance with CCB originally entered into in 2005. As part of this alliance, the Corporation expects to continue to provide advice and assistance to CCB.

Additionally, the Corporation owned approximately 171.3 million of preferred shares and 51.3 million of common shares of Banco Itaú Holding Financeira S.A. (Banco Itaú) at June 30, 2009 and December 31, 2008. The Banco Itaú investment is accounted for at fair value and recorded as AFS marketable equity securities in other assets with an offset, net-of-tax, to accumulated OCI. Dividend income on this investment is recorded in equity investment income. At June 30, 2009 and December 31, 2008, the cost of this investment was $2.6 billion and the fair value was $3.5 billion and $2.5 billion.

At June 30, 2009 and December 31, 2008, the Corporation had a 24.9 percent, or $2.4 billion and $2.1 billion, investment in Grupo Financiero Santander, S.A., the subsidiary of Grupo Santander, S.A. This investment is recorded in other assets and is accounted for under the equity method of accounting with income being recorded in equity investment income.

As part of the acquisition of Merrill Lynch, the Corporation acquired an economic ownership in BlackRock, a publicly traded investment company. At June 30, 2009, the Corporation had an approximate 50 percent, or $8.6 billion, economic ownership in BlackRock. This economic ownership is recorded in other assets and is accounted for under the equity method of accounting with income being recorded in equity investment income.

On June 26, 2009, the Corporation entered into a joint venture agreement with First Data Corporation creating Banc of America Merchant Services, LLC. Approximately 46.5 percent of this joint venture is owned by the Corporation and 48.5 percent is owned by First Data Corporation, with the remaining stake held by a third party investor. The Corporation recorded in other income a pre-tax gain of $3.8 billion related to the contribution of our merchant processing business to the joint venture. The investment in the joint venture, which was initially recorded at a fair value of $4.7 billion, is recorded in other assets and is accounted for under the equity method of accounting with income being recorded in equity investment income.

For additional information on securities, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements filed as Exhibit 99.2 to the Corporation’s Current Report on Form 8-K filed on May 28, 2009.

 

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NOTE 6 – Outstanding Loans and Leases

 

Outstanding loans and leases at June 30, 2009 and December 31, 2008 were:

 

  (Dollars in millions)    June 30
2009
   December 31       
2008       

 

  Consumer

     

 

  Residential mortgage (1)

   $ 245,967    $ 248,063        

 

  Home equity

     155,058      152,483        

 

  Discontinued real estate (2)

     17,490      19,981        

 

  Credit card – domestic

     48,948      64,128        

 

  Credit card – foreign

     20,429      17,146        

 

  Direct/Indirect consumer (3)

     99,154      83,436        

 

  Other consumer (4)

     3,390      3,442        

 

  Total consumer

     590,436      588,679        

 

  Commercial

     

 

  Commercial – domestic (5)

     217,571      219,233        

 

  Commercial real estate (6)

     75,081      64,701        

 

  Commercial lease financing

     22,387      22,400        

 

  Commercial – foreign

     29,811      31,020        

 

  Total commercial loans

     344,850      337,354        

 

  Commercial loans measured at fair value (7)

     6,962      5,413        

 

  Total commercial

     351,812      342,767        

 

  Total loans and leases

   $ 942,248    $ 931,446        

 

  (1)  

Includes foreign residential mortgages of $710 million at June 30, 2009.

 

  (2)  

Includes $15.9 billion and $18.2 billion of pay option loans and $1.6 billion and $1.8 billion of subprime loans at June 30, 2009 and December 31, 2008 obtained as part of the acquisition of Countrywide. The Corporation no longer originates these products.

 

  (3)  

Includes dealer financial services of $40.9 billion and $40.1 billion, consumer lending of $24.2 billion and $28.2 billion, securities based lending margin loans of $11.0 billion and $0 and foreign consumer loans of $7.7 billion and $1.8 billion at June 30, 2009 and December 31, 2008.

 

  (4)  

Includes consumer finance loans of $2.4 billion and $2.6 billion, and other foreign consumer loans of $721 million and $618 million at June 30, 2009 and December 31, 2008.

 

  (5)  

Includes small business commercial – domestic loans, primarily card related, of $18.1 billion and $19.1 billion at June 30, 2009 and December 31, 2008.

 

  (6)  

Includes domestic commercial real estate loans of $71.6 billion and $63.7 billion, and foreign commercial real estate loans of $3.5 billion and $979 million at June 30, 2009 and December 31, 2008.

 

  (7)  

Certain commercial loans are measured at fair value in accordance with SFAS 159 and include commercial – domestic loans of $4.4 billion and $3.5 billion, commercial – foreign loans of $2.5 billion and $1.7 billion, and commercial real estate loans of $123 million and $203 million at June 30, 2009 and December 31, 2008. See Note 16 – Fair Value Disclosures for additional discussion of fair value for certain financial instruments.

 

The Corporation mitigates a portion of its credit risk in the residential mortgage portfolio through cash collateralized synthetic securitizations which provide mezzanine risk protection and are designed to reimburse the Corporation in the event that losses exceed 10 bps of the original pool balance. As of June 30, 2009 and December 31, 2008, $93.2 billion and $109.3 billion of mortgage loans were protected by these agreements. During the three and six months ended June 30, 2009, $248 million and $636 million was recognized in other income for amounts that will be reimbursed under these structures. As of June 30, 2009, the Corporation had a receivable of $1.1 billion from these structures for reimbursement of losses. In addition, the Corporation has entered into credit protection agreements with government-sponsored enterprises on $3.9 billion and $9.6 billion as of June 30, 2009 and December 31, 2008, providing full protection on conforming residential mortgage loans that become severely delinquent. Combined these structures provided risk mitigation for approximately 39 percent and 48 percent of the residential mortgage portfolio at June 30, 2009 and December 31, 2008.

 

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Nonperforming Loans and Leases

 

The following table presents the Corporation’s nonperforming loans and leases at June 30, 2009 and December 31, 2008. This table excludes loans that are accounted for under SOP 03-3. See the discussion that follows on the SOP 03-3 loan portfolio.

Nonperforming Loans and Leases (1)

 

  (Dollars in millions)    June 30
2009
   December 31
2008

 

  Consumer (2)

     

 

  Residential mortgage

   $ 13,615    $ 7,057    

 

  Home equity

     3,826      2,637    

 

  Discontinued real estate

     181      77    

 

  Direct/Indirect consumer

     57      26    

 

  Other consumer

     93      91    

 

  Total consumer

     17,772      9,888    

 

  Commercial

     

 

  Commercial – domestic (3)

     4,404      2,245    

 

  Commercial real estate

     6,651      3,906    

 

  Commercial lease financing

     104      56    

 

  Commercial – foreign

     250      290    

 

  Total commercial

     11,409      6,497    

 

  Total nonperforming loans and leases

   $ 29,181    $ 16,385    

 

  (1)  

Only real estate secured accounts are generally placed into nonaccrual status and classified as nonperforming at 90 days past due. These loans may be restored to performing status when all principal and interest is current and full repayment of the remaining contractual principal and interest is expected, or when the loan otherwise becomes well-secured and is in the process of collection. Troubled debt restructurings are generally reclassified as performing after six consecutive, on-time payments.

 

  (2)  

The definition of nonperforming does not include consumer credit card and consumer non-real estate loans and leases. These loans are charged off no later than the end of the month in which the account becomes 180 days past due.

 

  (3)  

Includes small business commercial – domestic loans of $200 million and $205 million at June 30, 2009 and December 31, 2008.

 

 

SFAS 114 and Troubled Debt Restructurings

 

SFAS No. 114, “Accounting by Creditors for Impairment of a Loan” (SFAS 114) defines a loan as 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 but also include loans modified in troubled debt restructurings (TDRs) where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. These amounts exclude all commercial leases and purchased loans that are accounted for under SOP 03-3. See the discussion that follows on the SOP 03-3 loan portfolio.

Included in certain loan categories in the nonperforming table above are TDRs that were classified as nonperforming. At June 30, 2009 and December 31, 2008, the Corporation had $2.1 billion and $209 million of residential mortgages, $1.4 billion and $302 million of home equity, $232 million and $44 million of commercial domestic loans, and $31 million and $5 million of discontinued real estate loans that were modified in TDRs and nonperforming. In addition to these amounts the Corporation had TDRs that were performing in accordance with their modified terms of $1.1 billion and $320 million of residential mortgage, $307 million and $1 million of home equity, $80 million and $66 million of discontinued real estate, and $10 million and $13 million of commercial domestic loans at June 30, 2009 and December 31, 2008.

At June 30, 2009 and December 31, 2008, the recorded investment in impaired loans as defined by SFAS 114 (commercial nonperforming loans, commercial accruing TDRs and consumer accruing and non-accruing TDRs) requiring

 

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an allowance for loan and lease losses was $15.3 billion and $6.9 billion, and the related allowance for loan and lease losses was $2.4 billion and $720 million.

The Corporation seeks to assist customers that are experiencing financial difficulty through renegotiating credit card and consumer lending loans, while ensuring compliance with Federal Financial Institutions Examination Council (FFIEC) guidelines. At June 30, 2009 and December 31, 2008, the Corporation had renegotiated consumer credit card – domestic held loans of $3.2 billion and $2.3 billion of which $2.4 billion and $1.7 billion were current or less than 30 days past due under the modified terms. In addition at June 30, 2009 and December 31, 2008 the Corporation had renegotiated consumer credit card – foreign held loans of $839 million and $517 million of which $443 million and $287 million were current or less than 30 days past due under the modified terms, and consumer lending loans of $1.7 billion and $1.3 billion of which $1.3 billion and $854 million were current or less than 30 days past due under the modified terms. These renegotiated loans are not considered nonperforming.

 

 

SOP 03-3

 

Loans acquired with evidence of credit quality deterioration since origination and for which it is probable at purchase that the Corporation will be unable to collect all contractually required payments are accounted for under SOP 03-3. For additional information on the accounting in accordance with SOP 03-3 see the Loans and Leases section of Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements filed as Exhibit 99.2 to the Corporation’s Current Report on Form 8-K filed on May 28, 2009.

As of January 1, 2009, the Merrill Lynch acquired consumer and commercial loans within the scope of SOP 03-3 had an unpaid principal balance of $2.7 billion and $2.9 billion and a fair value of $2.3 billion and $1.9 billion. At June 30, 2009, the unpaid principal balance on consumer and commercial loans was $2.6 billion and $2.7 billion and the carrying value on these loans was $2.1 billion and $1.4 billion, net of allowance for the loan and lease losses. The following table provides details on loans obtained in connection with the Merrill Lynch acquisition within the scope of SOP 03-3.

Acquired Loan Information for Merrill Lynch, as of January 1, 2009

 

 

  (Dollars in millions)    Merrill Lynch      

 

  Contractually required payments including interest

   $ 6,205     

 

  Less: Nonaccretable difference

 

     (1,357)    

  Cash flows expected to be collected (1)

 

     4,848     

  Less: Accretable yield

     (627)    

 

  Fair value of loans acquired

   $ 4,221     

 

  (1)  

Represents undiscounted expected principal and interest cash flows at acquisition.

Under SOP 03-3, the excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loans. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. Changes in the expected cash flows from the date of acquisition will either impact the accretable yield or result in a charge to the provision for credit losses. Subsequent decreases to expected principal cash flows will result in a charge to provision for credit losses and a corresponding increase to allowance for loan and lease losses. Subsequent increases in expected principal cash flows will result in recovery of any previously recorded allowance for loan and lease losses, to the extent applicable, and an increase from expected cash flows to accretable yield for any remaining increase. All changes in expected interest cash flows will result in an increase or decrease of accretable yield.

Loans in the SOP 03-3 population that are modified subsequent to acquisition are reviewed to compare modified contractual cash flows to the SOP 03-3 carrying value. If modified cash flows are lower than the carrying value, the loan is removed from the SOP 03-3 pool at its carrying value, as well as the related allowance for loan and lease losses, and classified as a TDR. SOP 03-3 TDRs totaled $1.7 billion at June 30, 2009, of which $1.4 billion were on accrual status. The carrying basis of these modified loans, net of allowance, was approximately 71 percent of the unpaid principal balance.

The Corporation recorded approximately $855 million and $1.7 billion of charges to the provision for credit losses related to the SOP 03-3 portfolio during the three and six months ended June 30, 2009, due to a decrease in expected principal cash flows. The amount of the allowance for loan and lease losses associated with the SOP 03-3 portfolio was $2.5 billion at June 30, 2009 of which $2.2 billion related to Countrywide and $233 million related to Merrill Lynch.

 

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The following table provides activity for the accretable yield of loans acquired from Countrywide and Merrill Lynch within the scope of SOP 03-3 for the three and six months ended June 30, 2009. The increase in expected cash flows during the three and six months ended June 30, 2009 of $1.5 billion and $3.6 billion is primarily attributable to an increase in interest rates and slower prepayments resulting in an increase in expected interest cash flows.

Accretable Yield Activity

 

  (Dollars in millions)    Three Months Ended
June 30, 2009
    Six Months Ended June
30, 2009
 

 

  Accretable yield, beginning of period

   $ 14,072      $ 12,860   

 

  Merrill Lynch balance, January 1, 2009

 

     -        627   

  Accretions

     (767     (1,678

 

  Disposals/Transfers (1)

     (493     (1,055

 

  Increase in expected cash flows (2)

     1,514        3,572   

 

  Accretable yield, June 30, 2009

   $ 14,326      $ 14,326   

 

  (1)  

Includes $420 million and $907 million in accretable yield related to loans restructured in TDRs in which the modified cash flows were lower than the carrying value for the three and six months ended June 30, 2009. These TDRs have been removed from the SOP 03-3 pool.

 

  (2)  

Represents reclassifications to/from nonaccretable difference, increases/decreases in interest cash flows due to prepayments and/or changes in interest rates.

 

NOTE 7 – Allowance for Credit Losses

 

The following table summarizes the changes in the allowance for the three and six months ended June 30, 2009 and 2008. The Corporation recorded $855 million and $1.7 billion of charges to the provision for credit losses during the three and six months ended June 30, 2009, specifically for loans associated with the SOP 03-3 portfolio. The amount of the allowance for loan and lease losses associated with the SOP 03-3 portfolio was $2.5 billion at June 30, 2009.

 

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