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 September 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 (check one).

 

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

  

                                                                 (do not check if a smaller

                                                                     reporting company)

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

Yes      No  ü

On October 31, 2009, there were 8,650,759,836 shares of Bank of America Corporation Common Stock outstanding.

 

 

 

1


Table of Contents

Bank of America Corporation

 

September 30, 2009 Form 10-Q

 

INDEX

 

                        Page     
Part I.
Financial
Information
     

Item 1.

   Financial Statements:      
          

Consolidated Statement of Income for the Three and Nine

Months Ended September 30, 2009 and 2008

   3   
          

Consolidated Balance Sheet at September 30, 2009 and

December 31, 2008

   4   
          

Consolidated Statement of Changes in Shareholders’

Equity for the Nine Months Ended September 30, 2009 and

2008

   5   
          

Consolidated Statement of Cash Flows for the Nine

Months Ended September 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

   93   
          

Discussion and Analysis

   94   
     

Item 3.

  

Quantitative and Qualitative Disclosures about Market

Risk

   216   
     

Item 4.

  

Controls and Procedures

   216   
                              
Part II.
Other Information
     

Item 1.

  

Legal Proceedings

   216   
     

Item 1A.

  

Risk Factors

   216   
     

Item 2.

  

Unregistered Sales of Equity Securities

and Use of Proceeds

   218   
     

Item 6.

  

Exhibits

   219   
     

Signature

   220   
     

Index to Exhibits

   221   

 

2


Table of Contents

Part 1. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

  Bank of America Corporation and Subsidiaries

  Consolidated Statement of Income

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

  Interest income

        

  Interest and fees on loans and leases

   $ 11,620      $ 14,261      $ 37,298      $ 41,797       

  Interest on debt securities

     2,975        3,621        10,088        9,295       

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

     722        912        2,567        2,920       

  Trading account assets

     1,843        2,344        6,223        6,937       

  Other interest income

     1,363        1,058        4,095        3,133       

  Total interest income

     18,523        22,196        60,271        64,082       

  Interest expense

        

  Deposits

     1,710        3,846        6,335        11,954          

  Short-term borrowings

     1,237        3,223        4,854        10,452       

  Trading account liabilities

     455        661        1,484        2,250       

  Long-term debt

     3,698        2,824        12,048        7,172       

  Total interest expense

     7,100        10,554        24,721        31,828       

  Net interest income

     11,423        11,642        35,550        32,254       

  Noninterest income

        

  Card income

     1,557        3,122        6,571        10,212       

  Service charges

     3,020        2,722        8,282        7,757       

  Investment and brokerage services

     2,948        1,238        8,905        3,900       

  Investment banking income

     1,254        474        3,955        1,645       

  Equity investment income (loss)

     843        (316     7,988        1,330       

  Trading account profits (losses)

     3,395        (384     10,760        (1,810)      

  Mortgage banking income

     1,298        1,674        7,139        2,564       

  Insurance income

     707        678        2,057        1,092       

  Gains on sales of debt securities

     1,554        10        3,684        362       

  Other income (loss)

     (1,167     (317     1,870        (206)      

  Other-than-temporary impairment losses on AFS debt securities:

        

  Total other-than-temporary impairment losses

     (847     (922     (2,671     (1,998)      

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

     50        -        477        -        

  Net impairment losses recognized in earnings on AFS debt securities

     (797     (922     (2,194     (1,998)      

  Total noninterest income

     14,612        7,979        59,017        24,848       

  Total revenue, net of interest expense

     26,035        19,621        94,567        57,102       

  Provision for credit losses

     11,705        6,450        38,460        18,290       

  Noninterest expense

        

  Personnel

     7,613        5,198        24,171        14,344       

  Occupancy

     1,220        926        3,567        2,623       

  Equipment

     617        440        1,855        1,208       

  Marketing

     470        605        1,490        1,813       

  Professional fees

     562        424        1,511        1,071       

  Amortization of intangibles

     510        464        1,546        1,357       

  Data processing

     592        755        1,861        1,905       

  Telecommunications

     361        288        1,033        814       

  Other general operating

     3,767        2,313        11,106        4,818       

  Merger and restructuring charges

     594        247        2,188        629       

  Total noninterest expense

     16,306        11,660        50,328        30,582       

  Income (loss) before income taxes

     (1,976     1,511        5,779        8,230       

  Income tax expense (benefit)

     (975     334        (691     2,433       

  Net income (loss)

   $ (1,001   $ 1,177      $ 6,470      $ 5,797       

  Preferred stock dividends

     1,240        473        3,478        849       

  Net income (loss) applicable to common shareholders

   $ (2,241   $ 704      $ 2,992      $ 4,948       

  Per common share information

        

  Earnings (loss)

   $ (0.26   $ 0.15      $ 0.39      $ 1.09       

  Diluted earnings (loss)

     (0.26     0.15        0.39        1.09       

  Dividends paid

     0.01        0.64        0.03        1.92       

  Average common shares issued and outstanding (in thousands)

     8,633,834        4,543,963        7,423,341        4,469,517       

  Average diluted common shares issued and outstanding (in thousands)

     8,633,834        4,547,578        7,449,911        4,477,994       

  See accompanying Notes to Consolidated Financial Statements.

 

3


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

 

September 30
2009

   

 

December 31
2008

 

  Assets

    

  Cash and cash equivalents

   $ 152,412      $ 32,857        

  Time deposits placed and other short-term investments

     22,992        9,570   

  Federal funds sold and securities borrowed or purchased under agreements to resell (includes $66,218 and $2,330 measured at fair value and $187,634 and $82,099 pledged as collateral)

     187,761        82,478   

  Trading account assets (includes $55,151 and $69,348 pledged as collateral)

     204,838        134,315   

  Derivative assets

     94,855        62,252   

  Debt securities:

    

  Available-for-sale (includes $99,615 and $158,939 pledged as collateral)

     247,200        276,904   

  Held-to-maturity, at cost (fair value - $7,879 and $685)

     9,545        685   

  Total debt securities

     256,745        277,589   

  Loans and leases (includes $6,197 and $5,413 measured at fair value and $117,523 and $166,891 pledged as collateral)

     914,266        931,446   

  Allowance for loan and lease losses

     (35,832     (23,071

  Loans and leases, net of allowance

     878,434        908,375   

  Premises and equipment, net

     15,373        13,161   

  Mortgage servicing rights (includes $17,539 and $12,733 measured at fair value)

     17,850        13,056   

  Goodwill

     86,009        81,934   

  Intangible assets

     12,715        8,535   

  Loans held-for-sale (includes $28,803 and $18,964 measured at fair value)

     40,124        31,454   

  Other assets (includes $63,666 and $55,113 measured at fair value)

     280,935        162,367   

  Total assets

   $ 2,251,043      $ 1,817,943   

  Liabilities

    

  Deposits in domestic offices:

    

  Noninterest-bearing

   $ 246,729      $ 213,994   

  Interest-bearing (includes $1,652 and $1,717 measured at fair value)

     652,730        576,938   

  Deposits in foreign offices:

    

  Noninterest-bearing

     4,889        4,004   

  Interest-bearing

     70,551        88,061   

  Total deposits

     974,899        882,997   

  Federal funds purchased and securities loaned or sold under agreements to repurchase (includes $51,804 measured at fair value at September 30, 2009)

     249,578        206,598   

  Trading account liabilities

     71,672        51,723   

  Derivative liabilities

     52,624        30,709   

  Commercial paper and other short-term borrowings (includes $568 measured at fair value at September 30, 2009)

     62,280        158,056   

  Accrued expenses and other liabilities (includes $17,489 and $7,542 measured at fair value and $1,567 and $421 of reserve for unfunded lending commitments)

     126,019        42,516   

  Long-term debt (includes $43,967 measured at fair value at September 30, 2009)

     456,288        268,292   

  Total liabilities

     1,993,360        1,640,891   
  Commitments and contingencies (Note 9 – Variable Interest Entities and Note 12 –
  Commitments and
Contingencies)
    

  Shareholders’ equity

    

  Preferred stock, $0.01 par value; authorized - 100,000,000 shares; issued and outstanding – 5,760,660 and 8,202,042 shares

     58,840        37,701   

  Common stock and additional paid-in capital, $0.01 par value; authorized – 10,000,000,000 shares; issued and outstanding – 8,650,314,133 and 5,017,435,592 shares

     128,823        76,766   

  Retained earnings

     76,881        73,823   

  Accumulated other comprehensive income (loss)

     (6,705     (10,825

  Other

     (156     (413

  Total shareholders’ equity

     257,683        177,052   

  Total liabilities and shareholders’ equity

   $ 2,251,043      $ 1,817,943   

  See accompanying Notes to Consolidated Financial Statements.

    

 

4


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     Accumulated
Other
Comprehensive
          Total
Shareholders’
    Comprehensive  
     Shares    Amount    Earnings     Income (Loss) (1)     Other     Equity     Income  

  Balance, December 31, 2007

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

  Net income

             5,797            5,797      $ 5,797   

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

               (7,054       (7,054     (7,054 )     

  Net changes in foreign currency translation adjustments

               (242       (242     (242

  Net changes in derivatives

               485          485        485   

  Employee benefit plan adjustments

               35          35        35   

  Dividends paid:

                  

      Common

             (8,646         (8,646  

      Preferred

             (849         (849  

  Issuance of preferred stock

     19,742                    19,742     

  Stock issued in acquisition (2)

     106,776      4,201            4,201     

  Common stock issued under employee plans and related tax effects

           17,394      832                      (65     767           

 

Balance, September 30, 2008

   $ 24,151      4,562,055    $ 65,361    $ 77,695      $ (5,647   $ (521   $ 161,039      $ (979

 

  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 (3)

             71        (71       -     

  Net income

             6,470            6,470      $ 6,470   

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

               3,110          3,110        3,110   

  Net changes in foreign currency translation adjustments

               26          26        26   

  Net changes in derivatives

               721          721        721   

  Employee benefit plan adjustments

               334          334        334   

  Dividends paid:

                  

      Common

             (238         (238  

      Preferred (4)

             (3,295         (3,295  

  Issuance of preferred stock and stock warrants (5)

     26,800           3,200            30,000     

  Stock issued in acquisition

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

  Issuance of common stock

     1,250,000      13,468            13,468     

  Exchange of preferred stock

     (14,797   999,935      14,221      576            -     

  Common stock issued under employee plans and related tax effects

     7,467      664          257        921     

  Other

     531                    (526                     5           

 

Balance, September 30, 2009

   $ 58,840      8,650,314    $ 128,823    $ 76,881      $ (6,705   $ (156   $ 257,683      $ 10,661   

 

(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) 

Includes adjustments for the fair value of certain Countrywide stock-based compensation awards of 507 thousand shares and $86 million.

 

(3) 

Effective January 1, 2009, the Corporation adopted new accounting guidance related to the recognition of other-than-temporary impairment charges on debt securities. 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. Amounts shown are net-of-tax.

 

(4) 

Excludes $233 million of third quarter 2009 cumulative preferred dividends not declared as of September 30, 2009 and $526 million of accretion of discounts on preferred stock.

 

(5) 

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.

 

5


Table of Contents

 Bank of America Corporation and Subsidiaries

 Consolidated Statement of Cash Flows

     Nine Months Ended September 30
 (Dollars in millions)    2009     2008

 Operating activities

    

 Net income

   $ 6,470      $ 5,797   

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

    

  Provision for credit losses

     38,460        18,290   

  Gains on sales of debt securities

     (3,684     (362)  

  Depreciation and premises improvements amortization

     1,755        1,074   

  Amortization of intangibles

     1,546        1,357   

  Deferred income tax expense (benefit)

     3,560        (1,429)  

  Net decrease (increase) in trading and derivative instruments

     42,827        (17,963)  

  Net decrease in other assets

     21,970        6,422   

  Net (decrease) increase in accrued expenses and other liabilities

     (20,945     17,987   

  Other operating activities, net

     5,718        103   
 

   Net cash provided by operating activities

     97,677        31,276   
 

 Investing activities

    

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

     20,291        64   

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

     33,541        49,163   

 Proceeds from sales of available-for-sale debt securities

     122,756        69,218   

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

     47,238        18,825   

 Purchases of available-for-sale debt securities

     (82,377     (109,219)  

 Proceeds from maturities of held-to-maturity debt securities

     1,831        176   

 Purchases of held-to-maturity debt securities

     (2,677     (840)  

 Proceeds from sales of loans and leases

     6,565        42,209   

 Other changes in loans and leases, net

     19,221        (62,464)  

 Net purchases of premises and equipment

     (1,532     (1,526)  

 Proceeds from sales of foreclosed properties

     1,352        506   

 Cash received upon acquisition, net

     31,804        6,650   

 Other investing activities, net

     9,812        (214)  
 

   Net cash provided by investing activities

     207,825        12,548   
 

 Financing activities

    

 Net (decrease) increase in deposits

     (6,205     5,884   

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

     (68,600     (15,398)  

 Net decrease in commercial paper and other short-term borrowings

     (133,672     (45,277)  

 Proceeds from issuance of long-term debt

     62,809        24,038   

 Retirement of long-term debt

     (80,302     (26,559)  

 Proceeds from issuance of preferred stock

     30,000        19,742   

 Proceeds from issuance of common stock

     13,468        229   

 Cash dividends paid

     (3,533     (9,495)  

 Excess tax benefits of share-based payments

            34   

 Other financing activities, net

     (37     (85)  
 

   Net cash used in financing activities

     (186,072     (46,887)  
 

 Effect of exchange rate changes on cash and cash equivalents

     125        (127)  
 

   Net increase (decrease) in cash and cash equivalents

     119,555        (3,190)  

Cash and cash equivalents at January 1

     32,857        42,531   
 

  Cash and cash equivalents at September 30

   $ 152,412      $ 39,341   
 
 

 

   The Corporation securitized $11.6 billion of residential mortgage loans into mortgage-backed securities which were retained by the Corporation during the nine months ended September 30, 2009.

 

   During the nine months ended September 30, 2009, the Corporation exchanged $14.8 billion of preferred stock by issuing 1.0 billion shares of common stock valued at $11.5 billion.

 

   During the nine months ended September 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 nine months ended September 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 $618.9 billion and $626.4 billion.

 

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

 

   During the nine months ended September 30, 2008, the Corporation reclassified $12.6 billion of AFS debt securities to trading account assets in connection with the Countrywide acquisition.

 

   The Corporation securitized $23.4 billion of residential mortgage loans into mortgage-backed securities and $4.9 billion of automobile loans into asset-backed securities which were retained by the Corporation during the nine months ended September 30, 2008.

 

   The fair values of noncash assets acquired and liabilities assumed in the Countrywide acquisition were $157.4 billion and $157.8 billion.

 

   Approximately 107 million shares of common stock, valued at approximately $4.2 billion were issued in connection with the Countrywide acquisition.

See accompanying Notes to Consolidated Financial Statements.

 

6


Table of Contents

Bank of America Corporation and Subsidiaries

Notes to Consolidated Financial Statements

 

NOTE 1 – Summary of Significant Accounting Principles

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 September 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, the Corporation 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. Effective July 1, 2009, Merrill Lynch Bank USA merged into Bank of America, N.A. In addition, effective November 2, 2009, Merrill Lynch Bank & Trust Co., FSB merged into Bank of America, N.A. These mergers had no impact on the Consolidated Financial Statements of the Corporation.

 

 

Principles of Consolidation and Basis of Presentation

 

The Consolidated Financial Statements include the accounts of the Corporation and its majority-owned subsidiaries, and those variable interest entities (VIEs) where the Corporation is the primary beneficiary. 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 with the SEC. 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

 

7


Table of Contents

Accounting Principles,” which is included in FASB Accounting Standards Codification (ASC) 105 “Generally Accepted Accounting Principles.” This new guidance approved the FASB ASC as the single source of authoritative nongovernmental GAAP. The FASB ASC 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 ASC will be considered nonauthoritative. The ASC is a restructuring of GAAP designed to simplify access to all authoritative literature by providing a topically organized structure. The adoption of FASB ASC did not impact the Corporation’s financial condition or results of operations. Technical references to GAAP included in these Notes to the Consolidated Financial Statements are provided under the new FASB ASC structure.

On June 12, 2009, the FASB issued two new accounting standards: 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), which will amend FASB ASC 860-10, “Transfers and Servicing,” and FASB ASC 810-10, “Consolidation of Variable Interest Entities.” These statements are effective on January 1, 2010. SFAS 166 revises existing 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 eliminates the concept of a QSPE. As a result, existing QSPEs generally will be subject to consolidation in accordance with the guidance provided in SFAS 167.

SFAS 167 significantly changes the criteria by which an enterprise determines whether it must consolidate a 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. Currently, a VIE is 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 requires 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 SFAS 166 and 167 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, which will result in an increase in net loans and leases, securities, short-term borrowings and long-term debt. Consolidation of currently unconsolidated VIEs may also result in an increase in the allowance for credit losses for newly consolidated loans, along with changes in classification in the Corporation’s Consolidated Statement of Income. The Corporation expects to consolidate on January 1, 2010 certain vehicles including credit card securitization trusts, commercial paper conduits and revolving home equity securitization trusts with a net incremental impact on total assets of approximately $121 billion (based on estimates at September 30, 2009) of which approximately $80 billion is related to credit card securitizations and commercial paper conduits that are currently included at the appropriate risk weighting in the Corporation’s risk-weighted asset calculation for regulatory capital purposes, based on current guidance. The Corporation is also evaluating other VIEs with which it is involved to determine the impact of adoption.

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,” which amends FASB ASC 820-10, “Fair Value Measurements and Disclosures.” This amendment provides guidance for determining whether a market is inactive and a transaction is distressed in order to apply the existing fair value measurement guidance, and acknowledges that in these circumstances quoted prices may not be determinative of fair value. Additionally, this amendment requires enhanced disclosures regarding financial assets and liabilities that are recorded at fair value. The Corporation elected to early adopt this new guidance effective January 1, 2009 and the adoption did not have a material impact on the Corporation’s financial condition or results of operations. The enhanced disclosures 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,” which amends FASB ASC 320-10, “Investments – Debt and Equity Securities.” This new guidance 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. The new guidance also requires expanded disclosures. The Corporation elected to early adopt this new guidance 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. The new guidance does not change the recognition of other-than-temporary

 

8


Table of Contents

impairment for equity securities. The expanded disclosures are included in Note 5 – Securities and on the Corporation’s Consolidated Statement of Income.

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,” which amends FASB ASC 825-10, “Financial Instruments.” This new guidance requires that disclosures for financial instruments such as loans that are not measured at fair value through earnings be provided on a quarterly basis, whereas previously these disclosures were required to be provided only annually. The expanded disclosure requirements were effective for the Corporation’s quarterly financial statements for the period ended June 30, 2009. The adoption of this new guidance did not impact the Corporation’s financial condition or results of operations. These disclosures are included in Note 17 – Fair Value of Financial Instruments.

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,” which amends FASB ASC 805, “Business Combinations,” and requires that assets acquired and liabilities assumed in a business combination that arise from contingencies 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. This new guidance is effective for acquisitions consummated on or after January 1, 2009. The Corporation applied this new guidance to its January 1, 2009 acquisition of Merrill Lynch. See Note 2 – Merger and Restructuring Activity.

 

 

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 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 $1.9 trillion in client assets. Global investment management capabilities include an economic ownership of approximately 48 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.

 

9


Table of Contents

The Merrill Lynch merger is being accounted for under the acquisition method of accounting. 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 $4.8 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 (4)

     15.8   

 Pre-tax total adjustments

     12.7   

 Deferred income taxes

     (5.7)  

 After-tax total adjustments

     7.0   

 Fair value of net assets acquired

     24.3   

 Preliminary goodwill resulting from the Merrill Lynch merger (5)

   $ 4.8   

 

(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 are primarily amortized on a straight-line basis.

 

(4)

The change in the estimated fair value of long-term debt of approximately $400 million had an immaterial impact on net income for the first and second quarters of 2009.

 

(5)

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.

 

10


Table of Contents

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

     194.8  

Total assets

   $ 650.7  

  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

     189.1  

Total liabilities

   $ 626.4  

  Fair value of net assets acquired (1)

   $ 24.3  

 

  (1) 

The fair value of net assets acquired excludes preliminary goodwill resulting from the Merrill Lynch merger of $4.8 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 spreads 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 are collectible. These receivables 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 date of acquisition. For more information on the purchased impaired loan 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 accounting guidance on contingencies which states that a loss is recognized when it is probable of occurring and the loss amount can be reasonably estimated. 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 billion. At the time of acquisition, the maximum amount that could be drawn under these guarantees was approximately $20 billion.

 

11


Table of Contents

 

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 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 $20.4 billion and $62.9 billion, net loss from continuing operations would have been $3.8 billion and $8.5 billion, and basic and diluted loss per common share would have been $1.16 and $2.24 for the three and nine months ended September 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 include 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 nine months ended September 30, 2009, Merrill Lynch contributed $5.1 billion and $16.8 billion in revenue, net of interest expense, and $690 million and $2.2 billion in net income. 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.

 

12


Table of Contents

 

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 September 30        Nine Months Ended September 30  
  (Dollars in millions)    2009    2008    2009    2008      

  Severance and employee-related charges

   $ 225    $ 15    $ 1,207    $ 90  

  Systems integrations and related charges

     329      186      813      431  

  Other

     40      46      168      108  

Total merger and restructuring charges

   $ 594    $ 247    $ 2,188    $ 629  

Included for the three and nine months ended September 30, 2009 are merger-related charges of $371 million and $1.5 billion related to the Merrill Lynch acquisition, $212 million and $632 million related to the Countrywide acquisition, and $11 million and $92 million related to the LaSalle acquisition. Included for the three and nine months ended September 30, 2008 are merger-related charges of $72 million for both periods related to the Countrywide acquisition, $159 million and $462 million related to the LaSalle acquisition and $16 million and $95 million related to the U.S. Trust Corporation acquisition.

During the three and nine months ended September 30, 2009, the $371 million and $1.5 billion of merger-related charges for the Merrill Lynch acquisition included $196 million and $1.1 billion for severance and other employee-related costs, $153 million and $294 million of system integration costs, and $22 million and $94 million in other merger-related costs.

 

13


Table of Contents

 

Merger-related Exit Cost and Restructuring Reserves

 

The following table presents the changes in exit cost and restructuring reserves for the three and nine months ended September 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       732       n/a    

  Countrywide

          n/a       108       n/a    

  LaSalle

          87       (5)      46    

  U.S. Trust Corporation

               (1)      26    

  MBNA

          (2)             

  Cash payments

     (305)      (112)      (490)      (67)   

  Balance, June 30

     218       350       430       113    

  Exit costs and restructuring charges:

           

  Merrill Lynch

     n/a       n/a       132       n/a    

  Countrywide

          588       37       32    

  LaSalle

     (6)      (56)      (2)      (22)   

  U.S. Trust Corporation

                      

  MBNA

          (4)           (3)   

  Cash payments

     (58)      (203)      (226)      (50)      

  Balance, September 30

   $ 154     $ 675     $ 371     $ 75    

 

  (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

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. Cash payments of $58 million during the three months ended September 30, 2009 consisted of $38 million in severance, relocation and other employee-related costs and $20 million in contract terminations. Cash payments of $363 million during the nine months ended September 30, 2009 consisted of $261 million in severance, relocation and other employee-related costs and $102 million in contract terminations. Exit costs were not recorded in purchase accounting for the Merrill Lynch acquisition in accordance with amendments to the accounting guidance for business combinations which were effective on January 1, 2009.

As of December 31, 2008, there were $86 million of restructuring reserves related to the Countrywide, LaSalle and U.S. Trust Corporation acquisitions for severance and other employee-related costs. During the three and nine months ended September 30, 2009, $167 million and $1.0 billion were added to the restructuring reserves related to severance and other employee-related costs primarily associated with the Merrill Lynch acquisition. Cash payments of $226 million and $716 million during the three and nine months ended September 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.

 

14


Table of Contents
NOTE 3 – Trading Account Assets and Liabilities

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

 

  (Dollars in millions)    September 30
2009
     December 31
2008

  Trading account assets

       

  U.S. government and agency securities (1)

   $ 63,982      $ 60,038

  Corporate securities, trading loans and other

     59,046        34,056

  Equity securities

     33,500        20,258

  Foreign sovereign debt

     29,879        13,614

  Mortgage trading loans and asset-backed securities

     18,431        6,349

  Total trading account assets

   $ 204,838      $ 134,315

  Trading account liabilities

       

  U.S. government and agency securities

   $ 25,287      $ 27,286

  Equity securities

     18,560        12,128

  Foreign sovereign debt

     20,072        7,252

  Corporate securities and other

     7,753        5,057

  Total trading account liabilities

   $ 71,672      $ 51,723

 

 (1)  

Includes $29.8 billion and $52.6 billion at September 30, 2009 and December 31, 2008 of government-sponsored enterprise obligations.

 

15


Table of Contents
NOTE 4 – Derivatives

The Corporation designates derivatives as trading derivatives, economic hedges, or as derivatives designated as hedging instruments under applicable GAAP. 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 Corporation’s Consolidated Balance Sheet in derivative assets and liabilities at September 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.

 

     September 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
Hedging
Instruments (2)
   Total            Derivatives
Used in
Trading
Activities
and as
Economic
Hedges
   Derivatives
Designated as
Hedging
Instruments (2)
    Total  

  Interest rate contracts

                     

  Swaps

   $ 48,676.6          $ 1,385.8        $ 5.8        $ 1,391.6         $ 1,349.5        $ 0.7         $ 1,350.2   

  Futures and forwards

     8,890.7            6.4          -          6.4           7.4          0.1        7.5   

  Written options

     2,831.4            -          -          -           93.4          -        93.4   

  Purchased options

     2,591.5            92.7          -          92.7           -          -        -   

  Foreign exchange contracts

                     

  Swaps

     669.2            28.1          5.9          34.0           32.4          0.6        33.0   

  Spot, futures and forwards

     1,979.4            32.8          -          32.8           32.6          0.1        32.7   

  Written options

     416.7            -          -          -           15.3          -        15.3   

  Purchased options

     398.9            15.8          -          15.8           -          -        -   

  Equity contracts

                     

  Swaps

     54.1            2.0          -          2.0           2.4          -        2.4   

  Futures and forwards

     103.0            4.5          -          4.5           3.6          -        3.6   

  Written options

     382.8            -          -          -           34.0          0.2        34.2   

  Purchased options

     342.1            36.1          -          36.1           -          -        -   

  Commodity contracts

                     

  Swaps

     78.1            9.5          0.1          9.6           9.0          -        9.0   

  Futures and forwards

     2,092.1            14.8          -          14.8           13.6          -        13.6   

  Written options

     98.4            -          -          -           8.1          -        8.1   

  Purchased options

     95.8            7.7          -          7.7           -          -        -   

  Credit derivatives

                     

  Purchased protection:

                     

Credit default swaps

     2,739.4            130.4          -          130.4           38.7          -        38.7   

Total return swaps/other

     14.0            1.7          -          1.7           0.7          -        0.7   

  Written protection:

                     

Credit default swaps

     2,811.8            37.7          -          37.7           129.1          -        129.1   

Total return swaps/other

     24.9            2.1          -          2.1             4.6          -        4.6   

  Gross derivative assets/liabilities

      $ 1,808.1        $ 11.8          1,819.9         $ 1,774.4        $ 1.7        1,776.1   

  Less: Legally enforceable master netting agreements

              (1,653.1             (1,653.1 )       

  Less: Cash collateral applied

                          (71.9                         (70.4

  Total derivative assets/liabilities

                        $ 94.9                          $ 52.6   

 

 (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.

 

16


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
Hedging
Instruments (2)
    Total            Derivatives
Used in
Trading
Activities and
as Economic
Hedges
   Derivatives
Designated as
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            -          -        -           62.7          -          62.7   

  Purchased options

     1,656.6            60.3          -        60.3           -          -          -   

  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            -          -        -           31.6          0.1          31.7   

  Purchased options

     217.5            32.6          -        32.6           -          -          -   

  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 hedging instruments and economic hedges. Interest rate, commodity, credit and foreign exchange contracts are utilized in the Corporation’s ALM and risk management activities.

     The Corporation maintains an overall interest rate risk management strategy that incorporates the use of interest rate contracts 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.

 

17


Table of Contents

Interest rate contracts, which are generally non-leveraged generic interest rate and basis swaps, options, futures and forwards, assist the Corporation in the management of 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.

 

18


Table of Contents

 

Derivatives Designated as 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 derivatives designated as fair value hedge relationships for the three and nine months ended September 30, 2009 and 2008.

 

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

  Derivatives designated as fair value hedge relationships

               

  Interest rate risk on long-term debt (1)

   $ 1,591      $ (1,778   $ (187      $ 599      $ (529   $ 70   

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

     1,561        (1,568     (7        (1,771     1,694        (77

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

     (603     433        (170        68        (70     (2

  Commodity price risk on commodity inventory (3)

     3        (2     1             n/a        n/a        n/a   

  Total

   $ 2,552      $ (2,915   $ (363        $ (1,104   $ 1,095      $ (9
     Amounts Recognized in Income for the Nine Months Ended  
     September 30, 2009          September 30, 2008  
  (Dollars in millions)    Derivative     Hedged
Item
    Hedge
Ineffectiveness
          Derivative     Hedged
Item
    Hedge
Ineffectiveness
 

  Derivatives designated as fair value hedge relationships

               

  Interest rate risk on long-term debt (1)

   $ (3,025   $ 2,387      $ (638      $ 541      $ (466   $ 75   

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

     1,624        (1,546     78           (602     524        (78

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

     (343     121        (222        75        (79     (4 )   

  Commodity price risk on commodity inventory (3)

     63        (59     4             n/a        n/a        n/a   

  Total

   $ (1,681   $ 903      $ (778        $ 14      $ (21   $ (7

 

 (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

 

19


Table of Contents

The following table summarizes certain information related to the Corporation’s derivatives designated as cash flow hedge relationships and net investment hedges for the three and nine months ended September 30, 2009 and 2008. During the next 12 months, net losses in accumulated OCI of approximately $577 million ($364 million after-tax) on derivative instruments that qualify as cash flow hedge relationships are expected to be reclassified in earnings. These net losses reclassified into earnings are expected to reduce net interest income related to the respective hedged items.

 

     Three Months Ended September 30  
     2009          2008  
  (Dollars in millions, amounts pre-tax)    Amounts
Recognized in
OCI on
Derivatives
    Amounts
Reclassified
from OCI into
Income
   

Hedge
Ineffectiveness

and Amount

Excluded from
Effectiveness
Testing (1)

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

  Derivatives designated as cash flow hedge relationships

               

  Interest rate risk on variable rate portfolios (2,3,4,5)

   $ 246      $ (247   $ 19         $ 166      $ (313   $ 1   

  Commodity price risk on forecasted purchases and sales (6)

     (4     53        (1        n/a        n/a        n/a   

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

     (101     -        -             272        -        -   

  Total

   $ 141      $ (194   $ 18           $ 438      $ (313   $ 1   

  Net investment hedges

               

  Foreign exchange risk (7)

   $ (737   $ -      $ 19           $ 1,402      $ -      $ (57
     Nine Months Ended September 30  
     2009          2008  
  (Dollars in millions, amounts pre-tax)    Amounts
Recognized in
OCI on
Derivatives
    Amounts
Reclassified
from OCI into
Income
   

Hedge
Ineffectiveness

and Amount

Excluded from
Effectiveness
Testing (1)

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

  Derivatives designated as cash flow hedge relationships

               

  Interest rate risk on variable rate portfolios (2,3,4,5)

   $ 211      $ (1,033   $ 58         $ (279   $ (921   $ (7

  Commodity price risk on forecasted purchases and sales(6)

     64        59        (1        n/a        n/a        n/a   

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

     (155     -        -             125        -        -   

  Total

   $ 120      $ (974   $ 57           $ (154   $ (921   $ (7

  Net investment hedges

               

  Foreign exchange risk (7)

   $ (2,736   $ -      $ (88        $ 1,410      $ -      $ (136 )   

 

 (1)  

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

 

 (2)  

Amounts reclassified from OCI increased (decreased) interest income on assets by $5 million and $(7) million and increased interest expense $252 million and $306 million during the three months ended September 30, 2009 and 2008. Amounts reclassified from OCI reduced interest income on assets by $103 million and $134 million and increased interest expense $930 million and $787 million during the nine months ended September 30, 2009 and 2008.

 

 (3)  

Hedge ineffectiveness of $36 million and $3 million was recorded in interest income and $17 million and $2 million was recorded in interest expense during the three months ended September 30, 2009 and 2008. Hedge ineffectiveness of $75 million and $7 million was recorded in interest income and $17 million and $14 million was recorded in interest expense during the nine months ended September 30, 2009 and 2008.

 

 (4)  

Amounts recognized in OCI on derivatives exclude amounts related to terminated hedges of AFS securities of $23 million and $88 million for the three and nine months ended September 30, 2009 compared to $31 million and $49 million for the same periods in 2008.

 

 (5)  

Amounts reclassified from OCI exclude amounts related to derivative interest accruals which increased interest income by $49 million and $104 million for the three and nine months ended September 30, 2009 compared to amounts which increased interest expense by $4 million and $73 million for the same periods in 2008.

 

 (6)  

Gains reclassified from OCI into income were recorded in trading account profits (losses). Included in the gains reclassified into trading account profits (losses) during the three and nine months ended September 30, 2009 were $44 million related to the discontinuance of cash flow hedging because it was probable that the original forecasted transaction would not occur.

 

 (7)  

Amounts recognized in OCI on derivatives exclude gains of $74 million and losses of $365 million related to long-term debt designated as a net investment hedge for the three and nine months ended September 30, 2009.

n/a = not applicable

 

20


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 derivatives designated as hedging instruments. The following table presents gains (losses) on these derivatives for the three and nine months ended September 30, 2009 and 2008. These gains (losses) are largely offset by the income or expense that is recorded on the economic hedged item.

 

     Three Months Ended September 30     Nine Months Ended September 30
  (Dollars in millions)    2009     2008     2009     2008

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

   $ 1,209      $ 275      $ 5,734      $ 419   

  Interest rate risk on mortgage banking servicing income (1)

     1,309        831        (1,867     539   

  Credit risk on loans and leases (3)

     (330     24        (603     88   

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

     3,437        (2,889     2,919        (569)  

  Other (3)

     18        (25     -        10   
 

Total

   $ 5,643      $ (1,784   $ 6,183      $ 487   
 

 

(1)

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

 

(2)

Includes gains on interest rate lock commitments related to the origination of mortgage loans that will be held for sale, which are considered derivative instruments, of $2.6 billion and $6.3 billion for the three and nine months ended September 30, 2009 compared to $485 million and $554 million for the same periods in 2008.

 

(3)

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

 

21


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 include 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. However, 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 nine months ended September 30, 2009 and 2008.

 

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

Trading

Account

Profits

  

Other

Revenues (1)

   

Net

Interest

Income

    Total   

Trading

Account

Profits

(Losses)

   

Other

Revenues (1)

   

Net

Interest

Income

    Total
 

  Interest rate risk

   $ 258    $ (1   $ 237      $ 494    $ 556      $ (16   $ 93      $ 633   

  Foreign exchange risk

     219      1        14        234      341        2        7        350   

  Equity risk

     617      585        63        1,265      (51     182        39        170   

  Credit risk

     2,177      (95     1,051        3,133      (1,330     (1,416     1,053        (1,693)  

  Other risk

     109      40        (51     98      (15     16        (1     -   
 

Total sales and trading revenue

   $ 3,380    $ 530      $ 1,314      $ 5,224    $ (499   $ (1,232   $ 1,191      $ (540)  
 
     Nine Months Ended September 30
     2009    2008
  (Dollars in millions)   

Trading

Account

Profits

  

Other

Revenues (1)

   

Net

Interest

Income

    Total   

Trading

Account

Profits

(Losses)

   

Other

Revenues (1)

   

Net

Interest

Income

    Total
 

  Interest rate risk

   $ 2,923    $ 19      $ 847      $ 3,789    $ 1,480      $ (4   $ 124      $ 1,600   

  Foreign exchange risk

     753      6        27        786      827        6        12        845   

  Equity risk

     1,762      2,024        165        3,951      (8     575        172        739   

  Credit risk

     4,073      (1,565     3,724        6,232      (4,300     (3,286     3,030        (4,556)  

  Other risk

     803      (1     (348     454      83        60        (8     135   
 

Total sales and trading revenue

   $ 10,314    $ 483      $ 4,415      $ 15,212    $ (1,918   $ (2,649   $ 3,330      $ (1,237)  
 

 

(1)

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

 

 

Credit Derivatives

 

The Corporation enters into credit derivatives primarily to facilitate client transactions and to manage credit risk exposures. Credit derivatives derive value based on an underlying third party-referenced obligation or a portfolio of referenced obligations and generally require the Corporation as the seller of credit protection to make payments to a buyer upon the occurrence of a predefined credit event. Such credit events generally include bankruptcy of the referenced credit entity and failure to pay under the obligation, as well as acceleration of indebtedness and payment repudiation or moratorium. For credit derivatives based on a portfolio of referenced credits or credit indices, the Corporation may not be required to make payment until a specified amount of loss has occurred and/or may only be required to make payment up to a specified amount.

 

22


Table of Contents

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

 

     September 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)

   $ 940         $ 7,117       $ 10,763       $ 27,199       $ 46,019

  Non-investment grade (2)

     1,657        14,817        24,877        41,777        83,128
 

  Total

     2,597        21,934        35,640        68,976        129,147
 

  Total return swaps/other:

          

  Investment grade (1)

     123        4        436        1,540        2,103

  Non-investment grade (2)

     -        190        491        1,802        2,483
 

  Total

     123        194        927        3,342        4,586
 

  Total credit derivatives

   $ 2,720      $ 22,128      $ 36,567      $ 72,318      $ 133,733
 
     Maximum Payout/Notional

  Credit default swaps:

          

  Investment grade (1)

   $ 125,714      $ 329,927      $ 631,153      $ 354,000      $ 1,440,794

  Non-investment grade (2)

     105,360        311,464        466,507        487,693        1,371,024
 

  Total

     231,074        641,391        1,097,660        841,693        2,811,818
 

  Total return swaps/other:

          

  Investment grade (1)

     169        68        3,144        7,780        11,161

  Non-investment grade (2)

     167        963        1,052        11,530        13,712
 

  Total

     336        1,031        4,196        19,310        24,873
 

  Total credit derivatives

   $ 231,410      $ 642,422      $ 1,101,856      $ 861,003      $ 2,836,691
 
     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.

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

The Corporation economically hedges its market risk exposure to credit derivatives by entering into a variety of offsetting

derivative contracts and security positions. For example, in certain instances, the Corporation may purchase credit protection with identical underlying referenced names to offset its exposure. The carrying value and notional amount of written credit protection for which the Corporation held purchased protection with identical underlying referenced names

 

23


Table of Contents

at September 30, 2009 was $110.2 billion and $2.5 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 September 30, 2009, the Corporation received cash and securities collateral of $86.6 billion and posted cash and securities collateral of $78.9 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 September 30, 2009, the amount of additional collateral and termination payments that would be required for such derivative transactions and trading agreements was approximately $2.1 billion if the long-term credit rating of Bank of America Corporation and its subsidiaries was incrementally downgraded by one level by all rating agencies. A second incremental one level downgrade by the rating agencies would have required approximately $1.0 billion in additional collateral.

The Corporation records counterparty credit risk valuation adjustments on derivative assets, including its 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 nine months ended September 30, 2009, credit valuation gains for counterparty credit risk related to derivative assets of $1.0 billion and $1.5 billion compared to losses of $467 million and $1.4 billion during the same periods in 2008 were recognized as trading account profits (losses). At September 30, 2009, the cumulative counterparty credit risk valuation adjustment that was netted against the derivative asset balance was $7.8 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 nine months ended September 30, 2009, credit valuation losses of $714 million and $631 million compared to gains of $106 million and $346 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 September 30, 2009, the Corporation’s cumulative credit risk valuation adjustment that was netted against the derivative liabilities balance was $774 million.

 

24


Table of Contents
NOTE 5 – Securities

The amortized cost, gross unrealized gains and losses, and fair value of AFS debt and marketable equity securities at September 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, September 30, 2009

          

  U.S. Treasury securities and agency debentures

   $ 26,562    $ 439    $ (32   $ 26,969

  Mortgage-backed securities:

          

  Agency MBSs

     120,653      3,007      (165     123,495

  Agency collateralized mortgage obligations

     16,012      243      (135     16,120

  Non-agency MBSs

     44,343      1,864      (5,253     40,954

  Foreign securities

     5,017      40      (897     4,160

  Corporate/Agency bonds

     5,853      156      (122     5,887

  Other taxable securities (1)

     18,844      300      (505     18,639
 

  Total taxable securities

     237,284      6,049      (7,109     236,224

  Tax-exempt securities

     10,939      209      (172     10,976
 

  Total available-for-sale debt securities

   $ 248,223    $ 6,258    $ (7,281   $ 247,200
 

  Available-for-sale marketable equity securities (2)

   $ 6,189    $ 3,172    $ (612   $ 8,749
 

  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 Corporation’s Consolidated Balance Sheet.

At September 30, 2009, the amortized cost and fair value of held-to-maturity debt securities were $9.5 billion and $7.9 billion, which include asset-backed securities that were issued by the Corporation’s credit card securitization trust and retained by the Corporation with an amortized cost of $6.9 billion and a fair value of $5.3 billion. At December 31, 2008, both the amortized cost and fair value of held-to-maturity debt securities were $685 million. The accumulated net unrealized gains (losses) on AFS debt and marketable equity securities included in accumulated OCI were $(596) million and $1.6 billion, net of the related income tax expense (benefit) of $(427) million and $947 million at September 30, 2009. For more information on accumulated OCI see Note 13 – Shareholders’ Equity and Earnings Per Common Share. At September 30, 2009 and December 31, 2008, the Corporation had nonperforming AFS debt securities of $779 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 new accounting guidance related to the recognition of other-than-temporary impairment charges on debt securities as of January 1, 2009. As prescribed by the new guidance, for the three and nine months ended September 30, 2009, the Corporation recognized the credit component of an other-than-temporary impairment of its debt securities in earnings and the non-credit component in OCI for those securities which the Corporation does not intend to sell 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. For additional information on the adoption of this accounting pronouncement see Note 1 – Summary of Significant Accounting Principles.

 

25


Table of Contents

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

 

    Three Months Ended September 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)

  $ (538   $ (107   $ (19   $ (183   $ (847 )     

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

    50        -        -        -        50   

 

Net impairment losses recognized in earnings (2)

 

 

$

 

(488

 

 

 

$

 

(107

 

  $ (19  

 

$

 

(183

 

 

 

$

 

(797

 

)     

   

 

Nine Months Ended September 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)

  $ (1,801   $ (342   $ (87   $ (441   $ (2,671

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

    477        -        -        -        477   

 

Net impairment losses recognized in earnings (2)

 

 

$

 

(1,324

 

 

 

$

 

(342

 

 

 

$

 

(87

 

 

 

$

 

(441

 

 

 

$

 

(2,194

 

)     

 

  (1)  

Represents the non-credit component of the other-than-temporary impairment on AFS debt securities. For securities where the credit loss exceeds the total unrealized loss, the non-credit component is recognized as an unrealized gain in OCI. Balances above exclude $149 million and $430 million of gross unrealized gains recorded in OCI related to these securities for the three and nine months ended September 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 nine months ended September 30, 2009 is as follows:

 

  (Dollars in millions)    Three Months Ended
September 30, 2009
   Nine Months Ended
September 30, 2009

 

  Balance, beginning of period

  

 

$

 

296      

  

 

$

 

-      

  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)

     36            310      

  Additions for the credit component on debt securities in which other-than-temporary impairment was previously recognized (2)

     9            9      

 

Balance, September 30, 2009

  

 

$

 

341      

  

 

$

 

341      

 

  (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 non-credit component which was reclassified back to OCI through a cumulative-effect transition adjustment.

 

  (2)  

During the three and nine months ended September 30, 2009, the Corporation recognized $752 million and $1.9 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.

 

26


Table of Contents

As of September 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 mortgage-backed securities. 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 a structure. Expected principal and interest cash flows on an 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. 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 modeling of the credit component of the non-agency mortgage-backed securities with other-than-temporary impairments were as follows as of September 30, 2009.

 

                           Range
     Weighted-
average
                10th
Percentile
                90th    
Percentile    
   

  Prepayment speed (1)

   11.8     %      3.0     %      32.7       %

  Loss severity (2)

   56.3          27.8          67.4      

  Life default rate (3)

   57.0                3.2                98.7        

 

  (1)  

Annual constant prepayment speed.

 

  (2)  

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 52 percent for prime bonds, 57 percent for Alt-A bonds, and 58 percent for subprime bonds.

 

  (3)  

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 40 percent for prime bonds, 62 percent for Alt-A bonds, and 61 percent for subprime bonds.

During the nine months ended September 30, 2009, the Corporation recognized $326 million of other-than-temporary impairment losses on AFS marketable equity securities compared to $388 million during the same period in 2008. During the three months ended September 30, 2008, the Corporation recognized $374 million of other-than-temporary impairment losses on AFS marketable equity securities. No such losses were recognized for the three months ended September 30, 2009.

 

27


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 September 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 September 30, 2009

               

 

  U.S. Treasury securities and agency debentures

   $ 3,875    $ (32   $ -    $ -      $ 3,875    $ (32

 

  Mortgage-backed securities:

               

 

Agency MBSs

     10,011      (162     172      (3     10,183      (165

 

Agency collateralized mortgage obligations

     4,236      (135     -      -        4,236      (135

 

Non-agency MBSs

     9,673      (1,581     12,028      (3,567     21,701      (5,148

 

  Foreign securities

     180      (54     3,669      (843     3,849      (897

 

  Corporate/Agency bonds

     456      (91     373      (31     829      (122

 

  Other taxable securities

     311      (25     3,491      (480     3,802      (505

 

Total taxable securities

     28,742      (2,080     19,733      (4,924     48,475      (7,004

 

  Tax-exempt securities

     157      (5     1,881      (167     2,038      (172

Total temporarily-impaired available-for-sale debt securities

     28,899      (2,085     21,614      (5,091     50,513      (7,176

  Temporarily-impaired available-for-sale marketable equity securities

     49      (1     2,089      (611     2,138      (612

Total temporarily-impaired available-for-sale securities

     28,948      (2,086     23,703      (5,702     52,651      (7,788

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

               

 

  Mortgage-backed securities:

               

 

Non-agency MBSs

     171      (33     555      (72     726      (105

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

   $ 29,119    $ (2,119   $ 24,258    $ (5,774   $ 53,377    $ (7,893

  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.

 

28


Table of Contents

At September 30, 2009, the amortized cost of approximately 10,000 AFS securities, including securities with other-than-temporary impairment in which a portion of the impairment remains in OCI, exceeded their fair value by $7.9 billion. Included in the $7.9 billion of gross unrealized losses on these AFS securities at September 30, 2009, was $2.1 billion of gross unrealized losses that have existed for less than twelve months and $5.8 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 longer, $3.6 billion, or 62 percent, of the gross unrealized loss is related to approximately 400 mortgage-backed securities 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, $611 million, or 11 percent, of the gross unrealized loss is related to approximately 400 AFS marketable equity securities primarily due to the decline in the market. 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 September 30, 2009. These investments had market values of $76.6 billion, $32.8 billion and $30.2 billion at September 30, 2009 and total amortized cost of $75.3 billion, $31.8 billion and $29.6 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 cost 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 $99.6 billion and $158.9 billion at September 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 September 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.

 

     September 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

   $ 171      2.24   %    $ 14,719      1.60   %    $ 2,910      4.65   %    $ 9,169      4.17   %    $ 26,969      2.80   %

  Mortgage-backed securities:

                                       

  Agency MBSs

     42      5.01        64,500      5.03        37,758      4.95        21,195      4.57        123,495      4.92  

  Agency collateralized mortgage obligations

     425      1.03        7,777      1.73        7,914      1.43        4      5.22        16,120      1.56  

  Non-agency MBSs

     821      7.95        21,991      8.84        9,984      9.17        8,158      5.29        40,954      8.17  

  Foreign securities

     544      1.43        2,210      6.19        88      4.03        1,318      4.12        4,160      4.68  

  Corporate/Agency bonds

     875      0.85        1,881      4.29        2,613      9.47        518      4.36        5,887      6.01  

  Other taxable securities

     10,468      1.07        6,110      3.76        415      9.99        1,646      4.13        18,639      2.43  
                                                       

  Total taxable securities

     13,346      1.65        119,188      5.11        61,682      5.41        42,008      4.60        236,224      4.89  

  Tax-exempt securities (2)

     1,283      1.49        1,858      6.85        4,513      6.97        3,322      4.19        10,976      5.43  
                                                       

  Total available-for-sale debt securities

   $ 14,629      1.63      $ 121,046      5.13      $ 66,195      5.51      $ 45,330      4.57      $ 247,200      4.91  
                                                       

  Amortized cost of available-for-sale debt securities

   $ 15,157               $ 121,308               $ 65,059               $ 46,699               $ 248,223           

 

  (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.

 

29


Table of Contents

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

 

         Three Months Ended September 30                    Nine Months Ended September 30        
  (Dollars in millions)    2009     2008             2009     2008    

  Gross gains

   $ 1,639      $ 58           $ 3,920      $ 477     

  Gross losses

     (85     (48)              (236     (115)    

  Net gains on sales of debt securities

   $ 1,554      $ 10             $ 3,684      $ 362     

The income tax expense attributable to realized net gains on debt securities sales was $575 million and $1.4 billion for the three and nine months ended September 30, 2009 compared to $3 million and $134 million for the same periods in 2008.

 

 

Certain Corporate and Strategic Investments

 

At September 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 its 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 its 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 September 30, 2009 and December 31, 2008, the cost of the CCB investment was $9.2 billion and $12.0 billion. At September 30, 2009 and December 31, 2008, the carrying value was $9.2 billion and $19.7 billion and the fair value was $20.4 billion and $24.5 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 188.4 million and 171.3 million of preferred shares and 56.5 million and 51.3 million of common shares of Itaú Unibanco Holding S.A. (Itaú Unibanco) at September 30, 2009 and December 31, 2008. During the third quarter of 2009, the Corporation received a stock dividend resulting in an increase of preferred shares of 17.1 million and common shares of 5.2 million. The Itaú Unibanco investment is accounted for at fair value and recorded as AFS marketable equity securities in other assets with an off