e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ü] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2010
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number:
1-6523
Exact Name of Registrant as Specified in its Charter:
Bank of America Corporation
State or Other Jurisdiction of Incorporation or Organization:
Delaware
IRS Employer Identification Number:
56-0906609
Address of Principal Executive Offices:
Bank of America Corporate Center
100 N. Tryon Street
Charlotte, North Carolina 28255
Registrants telephone number, including area code:
(704) 386-5681
Former name, former address and former fiscal year, if changed since last report:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes ü No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes ü No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act
(check one).
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Large accelerated filer ü |
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Accelerated filer |
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Non-accelerated filer
(do not check if a smaller
reporting company) |
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Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule
12b-2).
Yes No ü
On
October 31, 2010, there were 10,085,147,198 shares of Bank of America Corporation Common Stock
outstanding.
1
Bank of America Corporation
September 30, 2010 Form 10-Q
INDEX
2
Part 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Bank of America Corporation and Subsidiaries
Consolidated Statement of Income
|
|
|
|
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|
|
|
|
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|
|
|
|
|
|
|
Three Months Ended September 30 |
|
|
Nine Months Ended September 30 |
|
(Dollars in millions, except per share information) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans and leases |
|
$ |
12,485 |
|
|
$ |
11,620 |
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|
$ |
38,847 |
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|
$ |
37,298 |
|
Interest on debt securities |
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|
2,605 |
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|
|
2,975 |
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|
|
8,638 |
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|
|
10,088 |
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Federal funds sold and securities borrowed or purchased under agreements to resell |
|
|
441 |
|
|
|
722 |
|
|
|
1,346 |
|
|
|
2,567 |
|
Trading account assets |
|
|
1,641 |
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|
|
1,843 |
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|
|
5,180 |
|
|
|
6,223 |
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Other interest income |
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|
1,037 |
|
|
|
1,363 |
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|
|
3,196 |
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|
|
4,095 |
|
|
Total interest income |
|
|
18,209 |
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|
|
18,523 |
|
|
|
57,207 |
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|
|
60,271 |
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|
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|
|
|
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Interest expense |
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Deposits |
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|
950 |
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|
|
1,710 |
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|
|
3,103 |
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|
|
6,335 |
|
Short-term borrowings |
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|
848 |
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|
1,237 |
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|
|
2,557 |
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|
|
4,854 |
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Trading account liabilities |
|
|
635 |
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|
|
455 |
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|
|
2,010 |
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|
|
1,484 |
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Long-term debt |
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|
3,341 |
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|
3,698 |
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|
10,453 |
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|
12,048 |
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Total interest expense |
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|
5,774 |
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|
|
7,100 |
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|
18,123 |
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|
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24,721 |
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Net interest income |
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12,435 |
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|
|
11,423 |
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|
|
39,084 |
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|
|
35,550 |
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|
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|
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|
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Noninterest income |
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Card income |
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1,982 |
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|
|
1,557 |
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|
|
5,981 |
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|
|
6,571 |
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Service charges |
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2,212 |
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|
3,020 |
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|
7,354 |
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|
8,282 |
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Investment and brokerage services |
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|
2,724 |
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2,948 |
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|
8,743 |
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|
8,905 |
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Investment banking income |
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|
1,371 |
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|
|
1,254 |
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|
|
3,930 |
|
|
|
3,955 |
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Equity investment income |
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|
357 |
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|
|
843 |
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|
|
3,748 |
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|
|
7,988 |
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Trading account profits |
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|
2,596 |
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|
|
3,395 |
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|
|
9,059 |
|
|
|
10,760 |
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Mortgage banking income |
|
|
1,755 |
|
|
|
1,298 |
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|
|
4,153 |
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|
|
7,139 |
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Insurance income |
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|
75 |
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|
|
707 |
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|
|
1,468 |
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|
|
2,057 |
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Gains on sales of debt securities |
|
|
883 |
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1,554 |
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1,654 |
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|
|
3,684 |
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Other income (loss) |
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|
433 |
|
|
|
(1,167 |
) |
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|
3,498 |
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|
1,870 |
|
Other-than-temporary impairment losses on available-for-sale debt securities: |
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Total other-than-temporary impairment losses |
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|
(156 |
) |
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|
(847 |
) |
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|
(1,616 |
) |
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|
(2,671 |
) |
Less: Portion of other-than-temporary impairment losses recognized in other
comprehensive income |
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33 |
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|
50 |
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|
766 |
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|
477 |
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Net impairment losses recognized in earnings on available-for-sale debt securities |
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|
(123 |
) |
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|
(797 |
) |
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|
(850 |
) |
|
|
(2,194 |
) |
|
Total noninterest income |
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|
14,265 |
|
|
|
14,612 |
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|
|
48,738 |
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|
59,017 |
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Total revenue, net of interest expense |
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26,700 |
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|
26,035 |
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|
87,822 |
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94,567 |
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|
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|
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Provision for credit losses |
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|
5,396 |
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|
11,705 |
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|
23,306 |
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|
38,460 |
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Noninterest expense |
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Personnel |
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8,402 |
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|
7,613 |
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|
26,349 |
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|
24,171 |
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Occupancy |
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1,150 |
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1,220 |
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3,504 |
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|
3,567 |
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Equipment |
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|
619 |
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|
617 |
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|
1,845 |
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|
1,855 |
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Marketing |
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|
497 |
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|
470 |
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|
|
1,479 |
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|
1,490 |
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Professional fees |
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|
651 |
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|
562 |
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|
1,812 |
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|
1,511 |
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Amortization of intangibles |
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|
426 |
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|
510 |
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|
1,311 |
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|
1,546 |
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Data processing |
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|
602 |
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|
592 |
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|
1,882 |
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|
|
1,861 |
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Telecommunications |
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|
361 |
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|
361 |
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|
1,050 |
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|
1,033 |
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Other general operating |
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|
3,687 |
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|
|
3,767 |
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|
|
11,162 |
|
|
|
11,106 |
|
Goodwill impairment |
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|
10,400 |
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|
|
- |
|
|
|
10,400 |
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|
- |
|
Merger and restructuring charges |
|
|
421 |
|
|
|
594 |
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|
|
1,450 |
|
|
|
2,188 |
|
|
Total noninterest expense |
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|
27,216 |
|
|
|
16,306 |
|
|
|
62,244 |
|
|
|
50,328 |
|
|
Income (loss) before income taxes |
|
|
(5,912 |
) |
|
|
(1,976 |
) |
|
|
2,272 |
|
|
|
5,779 |
|
Income tax expense (benefit) |
|
|
1,387 |
|
|
|
(975 |
) |
|
|
3,266 |
|
|
|
(691 |
) |
|
Net income (loss) |
|
$ |
(7,299 |
) |
|
$ |
(1,001 |
) |
|
$ |
(994 |
) |
|
$ |
6,470 |
|
|
Preferred stock dividends |
|
|
348 |
|
|
|
1,240 |
|
|
|
1,036 |
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|
|
3,478 |
|
|
Net income (loss) applicable to common shareholders |
|
$ |
(7,647 |
) |
|
$ |
(2,241 |
) |
|
$ |
(2,030 |
) |
|
$ |
2,992 |
|
|
|
|
|
|
|
|
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|
|
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Per common share information |
|
|
|
|
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|
|
|
Earnings (loss) |
|
$ |
(0.77 |
) |
|
$ |
(0.26 |
) |
|
$ |
(0.21 |
) |
|
$ |
0.39 |
|
Diluted earnings (loss) |
|
|
(0.77 |
) |
|
|
(0.26 |
) |
|
|
(0.21 |
) |
|
|
0.39 |
|
Dividends paid |
|
|
0.01 |
|
|
|
0.01 |
|
|
|
0.03 |
|
|
|
0.03 |
|
|
Average common shares issued and outstanding (in thousands) |
|
|
9,976,351 |
|
|
|
8,633,834 |
|
|
|
9,706,951 |
|
|
|
7,423,341 |
|
|
Average diluted common shares issued and outstanding (in thousands) |
|
|
9,976,351 |
|
|
|
8,633,834 |
|
|
|
9,706,951 |
|
|
|
7,449,911 |
|
|
See accompanying Notes to Consolidated Financial Statements.
3
Bank of America Corporation and Subsidiaries
Consolidated Balance Sheet
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|
September 30 |
|
December 31 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
131,116 |
|
|
$ |
121,339 |
|
Time deposits placed and other short-term investments |
|
|
18,946 |
|
|
|
24,202 |
|
Federal funds sold and securities borrowed or purchased under agreements to resell (includes $81,480 and
$57,775 measured at fair value and $271,593 and $189,844 pledged as collateral) |
|
|
271,818 |
|
|
|
189,933 |
|
Trading account assets (includes $15,995 and $30,921 pledged as collateral) |
|
|
207,695 |
|
|
|
182,206 |
|
Derivative assets |
|
|
84,684 |
|
|
|
87,622 |
|
Debt securities: |
|
|
|
|
|
|
|
|
Available-for-sale (includes $115,506 and $122,708 pledged as collateral) |
|
|
322,424 |
|
|
|
301,601 |
|
Held-to-maturity, at cost (fair value - $438 and $9,684) |
|
|
438 |
|
|
|
9,840 |
|
|
Total debt securities |
|
|
322,862 |
|
|
|
311,441 |
|
|
Loans and leases (includes $3,684 and $4,936 measured at fair value and $84,036
and $118,113 pledged as collateral) |
|
|
933,910 |
|
|
|
900,128 |
|
Allowance for loan and lease losses |
|
|
(43,581 |
) |
|
|
(37,200 |
) |
|
Loans and leases, net of allowance |
|
|
890,329 |
|
|
|
862,928 |
|
|
Premises and equipment, net |
|
|
14,320 |
|
|
|
15,500 |
|
Mortgage servicing rights (includes $12,251 and $19,465 measured at fair value) |
|
|
12,540 |
|
|
|
19,774 |
|
Goodwill |
|
|
75,602 |
|
|
|
86,314 |
|
Intangible assets |
|
|
10,402 |
|
|
|
12,026 |
|
Loans held-for-sale (includes $22,337 and $32,795 measured at fair value) |
|
|
33,276 |
|
|
|
43,874 |
|
Customer and other receivables |
|
|
78,599 |
|
|
|
81,996 |
|
Other assets (includes $72,635 and $55,909 measured at fair value) |
|
|
187,471 |
|
|
|
191,077 |
|
|
Total assets |
|
$ |
2,339,660 |
|
|
$ |
2,230,232 |
|
|
|
|
|
|
|
Assets of consolidated VIEs included in total assets above (substantially all pledged as collateral) |
|
|
|
|
Trading account assets |
|
$ |
11,186 |
|
Derivative assets |
|
|
2,838 |
|
Available-for-sale debt securities |
|
|
7,684 |
|
Loans and leases |
|
|
132,106 |
|
Allowance for loan and lease losses |
|
|
(9,831 |
) |
|
Loans and leases, net of allowance |
|
|
122,275 |
|
|
Loans held-for-sale |
|
|
3,301 |
|
All other assets |
|
|
7,910 |
|
|
Total assets of consolidated VIEs |
|
$ |
155,194 |
|
|
See accompanying Notes to Consolidated Financial Statements.
4
Bank of America Corporation and Subsidiaries
Consolidated Balance Sheet
(continued)
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
December 31 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
Liabilities |
|
|
|
|
|
|
|
|
Deposits in domestic offices: |
|
|
|
|
|
|
|
|
Noninterest-bearing |
|
$ |
265,672 |
|
|
$ |
269,615 |
|
Interest-bearing (includes $2,745 and $1,663 measured at fair value) |
|
|
634,784 |
|
|
|
640,789 |
|
Deposits in foreign offices: |
|
|
|
|
|
|
|
|
Noninterest-bearing |
|
|
6,297 |
|
|
|
5,489 |
|
Interest-bearing |
|
|
70,569 |
|
|
|
75,718 |
|
|
Total deposits |
|
|
977,322 |
|
|
|
991,611 |
|
|
Federal funds purchased and securities loaned or sold under agreements to repurchase
(includes $48,509 and $37,325 measured at fair value) |
|
|
296,605 |
|
|
|
255,185 |
|
Trading account liabilities |
|
|
90,010 |
|
|
|
65,432 |
|
Derivative liabilities |
|
|
61,656 |
|
|
|
50,661 |
|
Commercial paper and other short-term borrowings (includes $4,924 and $813 measured at fair value) |
|
|
64,818 |
|
|
|
69,524 |
|
Accrued expenses and other liabilities (includes $23,855 and $19,015 measured at fair value
and $1,294 and $1,487 of reserve for unfunded lending commitments) |
|
|
139,896 |
|
|
|
127,854 |
|
Long-term debt (includes $49,452 and $45,451 measured at fair value) |
|
|
478,858 |
|
|
|
438,521 |
|
|
Total liabilities |
|
|
2,109,165 |
|
|
|
1,998,788 |
|
|
Commitments
and contingencies (Note 8 Securitizations and Other
Variable Interest Entities and Note 11 Commitments and Contingencies) |
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; authorized 100,000,000 shares; issued and outstanding
3,960,660 and 5,246,660 shares |
|
|
18,104 |
|
|
|
37,208 |
|
Common stock and additional paid-in capital, $0.01 par value; authorized 12,800,000,000 and
10,000,000,000 shares; issued and outstanding 10,033,705,046 and 8,650,243,926 shares |
|
|
149,563 |
|
|
|
128,734 |
|
Retained earnings |
|
|
62,515 |
|
|
|
71,233 |
|
Accumulated other comprehensive income (loss) |
|
|
336 |
|
|
|
(5,619 |
) |
Other |
|
|
(23 |
) |
|
|
(112 |
) |
|
Total shareholders equity |
|
|
230,495 |
|
|
|
231,444 |
|
|
Total liabilities and shareholders equity |
|
$ |
2,339,660 |
|
|
$ |
2,230,232 |
|
|
|
|
|
|
|
Liabilities of consolidated VIEs included in total liabilities above |
|
|
|
|
Commercial paper and other short-term borrowings (includes $7,136 of non-recourse liabilities) |
|
$ |
13,222 |
|
Long-term debt (includes $75,137 of non-recourse debt) |
|
|
79,228 |
|
All other liabilities (includes $1,160 of non-recourse liabilities) |
|
|
1,954 |
|
|
Total liabilities of consolidated VIEs |
|
$ |
94,404 |
|
|
See accompanying Notes to Consolidated Financial Statements.
5
Bank of America Corporation and Subsidaries
Consolidated Statement of Changes in Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock and |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-in |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Total |
|
|
Comprehensive |
|
|
|
Preferred |
|
|
Capital |
|
|
Retained |
|
|
Comprehensive |
|
|
|
|
|
|
Shareholders |
|
|
Income |
|
(Dollars in millions, shares in thousands) |
|
Stock |
|
|
Shares |
|
|
Amount |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Other |
|
|
Equity |
|
|
(Loss) |
|
|
Balance, December 31, 2008 |
|
$ |
37,701 |
|
|
|
5,017,436 |
|
|
$ |
76,766 |
|
|
$ |
73,823 |
|
|
$ |
(10,825 |
) |
|
$ |
(413 |
) |
|
$ |
177,052 |
|
|
|
|
|
Cumulative
adjustment for accounting change - Other-than-temporary impairments on debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71 |
|
|
|
(71 |
) |
|
|
|
|
|
|
- |
|
|
$ |
(71 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,470 |
|
|
|
|
|
|
|
|
|
|
|
6,470 |
|
|
|
6,470 |
|
Net change in available-for-sale debt and marketable
equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,110 |
|
|
|
|
|
|
|
3,110 |
|
|
|
3,110 |
|
Net change in foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
26 |
|
|
|
26 |
|
Net change in derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
721 |
|
|
|
|
|
|
|
721 |
|
|
|
721 |
|
Employee benefit plan adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
334 |
|
|
|
|
|
|
|
334 |
|
|
|
334 |
|
Dividends paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(238 |
) |
|
|
|
|
|
|
|
|
|
|
(238 |
) |
|
|
|
|
Preferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,295 |
) |
|
|
|
|
|
|
|
|
|
|
(3,295 |
) |
|
|
|
|
Issuance of preferred stock and stock warrants |
|
|
26,800 |
|
|
|
|
|
|
|
3,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,000 |
|
|
|
|
|
Stock issued in acquisition |
|
|
8,605 |
|
|
|
1,375,476 |
|
|
|
20,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,109 |
|
|
|
|
|
Issuance of common stock |
|
|
|
|
|
|
1,250,000 |
|
|
|
13,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,468 |
|
|
|
|
|
Exchange of preferred stock |
|
|
(14,797 |
) |
|
|
999,935 |
|
|
|
14,221 |
|
|
|
576 |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
Common stock issued under employee plans and
related tax effects |
|
|
|
|
|
|
7,467 |
|
|
|
664 |
|
|
|
|
|
|
|
|
|
|
|
257 |
|
|
|
921 |
|
|
|
|
|
Other |
|
|
531 |
|
|
|
|
|
|
|
|
|
|
|
(526 |
) |
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
Balance, September 30, 2009 |
|
$ |
58,840 |
|
|
|
8,650,314 |
|
|
$ |
128,823 |
|
|
$ |
76,881 |
|
|
$ |
(6,705 |
) |
|
$ |
(156 |
) |
|
$ |
257,683 |
|
|
$ |
10,590 |
|
|
Balance, December 31, 2009 |
|
$ |
37,208 |
|
|
|
8,650,244 |
|
|
$ |
128,734 |
|
|
$ |
71,233 |
|
|
$ |
(5,619 |
) |
|
$ |
(112 |
) |
|
$ |
231,444 |
|
|
|
|
|
Cumulative adjustments for accounting changes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation of certain variable interest entities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,154 |
) |
|
|
(116 |
) |
|
|
|
|
|
|
(6,270 |
) |
|
$ |
(116 |
) |
Credit-related notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(229 |
) |
|
|
229 |
|
|
|
|
|
|
|
- |
|
|
|
229 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(994 |
) |
|
|
|
|
|
|
|
|
|
|
(994 |
) |
|
|
(994 |
) |
Net change in available-for-sale debt and marketable
equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,855 |
|
|
|
|
|
|
|
6,855 |
|
|
|
6,855 |
|
Net change in foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
238 |
|
|
|
|
|
|
|
238 |
|
|
|
238 |
|
Net change in derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,439 |
) |
|
|
|
|
|
|
(1,439 |
) |
|
|
(1,439 |
) |
Employee benefit plan adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
188 |
|
|
|
|
|
|
|
188 |
|
|
|
188 |
|
Dividends paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(303 |
) |
|
|
|
|
|
|
|
|
|
|
(303 |
) |
|
|
|
|
Preferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,036 |
) |
|
|
|
|
|
|
|
|
|
|
(1,036 |
) |
|
|
|
|
Common stock issued under employee plans and
related tax effects |
|
|
|
|
|
|
97,461 |
|
|
|
1,585 |
|
|
|
|
|
|
|
|
|
|
|
82 |
|
|
|
1,667 |
|
|
|
|
|
Common Equivalent Securities conversion |
|
|
(19,244 |
) |
|
|
1,286,000 |
|
|
|
19,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
Other |
|
|
140 |
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
7 |
|
|
|
145 |
|
|
|
|
|
|
Balance, September 30, 2010 |
|
$ |
18,104 |
|
|
|
10,033,705 |
|
|
$ |
149,563 |
|
|
$ |
62,515 |
|
|
$ |
336 |
|
|
$ |
(23 |
) |
|
$ |
230,495 |
|
|
$ |
4,961 |
|
|
See accompanying Notes to Consolidated Financial Statements.
6
Bank of America Corporation and Subsidiaries
Consolidated Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30 |
|
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
Operating activities |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(994 |
) |
|
$ |
6,470 |
|
Reconciliation of net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
23,306 |
|
|
|
38,460 |
|
Gains on sales of debt securities |
|
|
(1,654 |
) |
|
|
(3,684 |
) |
Depreciation
and premises improvements amortization |
|
|
1,651 |
|
|
|
1,755 |
|
Amortization of intangibles |
|
|
1,311 |
|
|
|
1,546 |
|
Deferred income tax expense |
|
|
3,094 |
|
|
|
3,560 |
|
Net decrease in trading and derivative instruments |
|
|
18,113 |
|
|
|
42,827 |
|
Net decrease in other assets |
|
|
29,187 |
|
|
|
21,970 |
|
Net increase (decrease) in accrued expenses and other liabilities |
|
|
6,726 |
|
|
|
(20,945 |
) |
Other operating activities, net |
|
|
(3,357 |
) |
|
|
5,718 |
|
|
Net cash provided by operating activities |
|
|
77,383 |
|
|
|
97,677 |
|
|
Investing activities |
|
|
|
|
|
|
|
|
Net decrease in time deposits placed and other short-term investments |
|
|
5,333 |
|
|
|
20,291 |
|
Net (increase) decrease in federal funds sold and securities borrowed or purchased
under agreements to resell |
|
|
(81,885 |
) |
|
|
33,541 |
|
Proceeds from sales of available-for-sale debt securities |
|
|
79,813 |
|
|
|
122,756 |
|
Proceeds from pay downs and maturities of available-for-sale debt securities |
|
|
52,832 |
|
|
|
47,238 |
|
Purchases of available-for-sale debt securities |
|
|
(138,238 |
) |
|
|
(82,377 |
) |
Proceeds from maturities of held-to-maturity debt securities |
|
|
3 |
|
|
|
1,831 |
|
Purchases of held-to-maturity debt securities |
|
|
(100 |
) |
|
|
(2,677 |
) |
Proceeds from sales of loans and leases |
|
|
7,629 |
|
|
|
6,565 |
|
Other changes in loans and leases, net |
|
|
12,296 |
|
|
|
19,221 |
|
Net purchases of premises and equipment |
|
|
(471 |
) |
|
|
(1,532 |
) |
Proceeds from sales of foreclosed properties |
|
|
2,224 |
|
|
|
1,352 |
|
Cash received upon acquisition, net |
|
|
- |
|
|
|
31,804 |
|
Cash received due to impact of adoption of new consolidation guidance |
|
|
2,807 |
|
|
|
- |
|
Other investing activities, net |
|
|
802 |
|
|
|
9,812 |
|
|
Net cash provided by (used in) investing activities |
|
|
(56,955 |
) |
|
|
207,825 |
|
|
Financing activities |
|
|
|
|
|
|
|
|
Net increase
(decrease) in deposits |
|
|
3,490 |
|
|
|
(6,205 |
) |
Net increase (decrease) in federal funds purchased and securities loaned or sold under agreements to repurchase |
|
|
41,420 |
|
|
|
(68,600 |
) |
Net decrease in commercial paper and other short-term borrowings |
|
|
(26,842 |
) |
|
|
(133,672 |
) |
Proceeds from issuance of long-term debt |
|
|
51,524 |
|
|
|
62,809 |
|
Retirement of long-term debt |
|
|
(79,048 |
) |
|
|
(80,302 |
) |
Proceeds from issuance of preferred stock |
|
|
- |
|
|
|
30,000 |
|
Proceeds from issuance of common stock |
|
|
- |
|
|
|
13,468 |
|
Cash dividends paid |
|
|
(1,339 |
) |
|
|
(3,533 |
) |
Excess tax benefits on share-based payments |
|
|
53 |
|
|
|
- |
|
Other financing activities, net |
|
|
(49 |
) |
|
|
(37 |
) |
|
Net cash used in financing activities |
|
|
(10,791 |
) |
|
|
(186,072 |
) |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
140 |
|
|
|
125 |
|
|
Net increase in cash and cash equivalents |
|
|
9,777 |
|
|
|
119,555 |
|
Cash and cash equivalents at January 1 |
|
|
121,339 |
|
|
|
32,857 |
|
|
Cash and cash equivalents at September 30 |
|
$ |
131,116 |
|
|
$ |
152,412 |
|
|
During
the nine months ended September 30, 2010, the Corporation sold First
Republic Bank in a non-cash transaction that reduced assets and
liabilities by $19.5 billion and $18.1 billion.
During
the nine months ended September 30, 2010, the Corporation recorded a
non-cash goodwill impairment charge of $10.4 billion.
During the nine months ended September 30, 2009, the Corporation exchanged $14.8 billion of
preferred stock by issuing approximately 1.0 billion shares of common stock valued at $11.5
billion.
During the nine months ended September 30, 2009, the Corporation transferred $1.7 billion of
auction rate securities (ARS) from trading account assets to available-for-sale (AFS) debt
securities.
During the nine months ended September 30, 2009, the Corporation exchanged credit card loans of
$8.5 billion and the related allowance for loan and lease losses of $750 million for a $7.8 billion
held-to-maturity debt security that was issued by the Corporations U.S. credit card securitization
trust and retained by the Corporation.
The
acquisition-date fair values of non-cash assets acquired and liabilities assumed in the Merrill
Lynch & Co., Inc. (Merrill Lynch) acquisition were $619.1 billion and $626.8 billion.
Approximately 1.4 billion shares of common stock valued at approximately $20.5 billion and 376
thousand shares of preferred stock valued at approximately $8.6 billion were issued in connection
with the Merrill Lynch acquisition.
See accompanying Notes to Consolidated Financial Statements.
7
Bank of America Corporation and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 1 - Summary of Significant Accounting Principles
Bank of America Corporation (collectively, with its subsidiaries, the Corporation), a
financial holding company, provides a diverse range of financial services and products throughout
the U.S. and in certain international markets. The Corporation conducts these activities through
its banking and nonbanking subsidiaries. On January 1, 2009, the Corporation acquired Merrill
Lynch & Co., Inc. (Merrill Lynch) in exchange for common and preferred stock with a value of $29.1
billion. On July 1, 2008, the Corporation acquired Countrywide Financial Corporation (Countrywide)
in exchange for common stock with a value of $4.2 billion. The Corporation operates its banking
activities primarily under two charters: Bank of America, National Association (Bank of America,
N.A.) and FIA Card Services, N.A. In connection with certain acquisitions including Merrill Lynch
and Countrywide, the Corporation acquired banking subsidiaries that have been merged into Bank of
America, N.A. with no impact on the Consolidated Financial Statements of the Corporation.
Principles of Consolidation and Basis of Presentation
The Consolidated Financial Statements include the accounts of the Corporation and its
majority-owned subsidiaries, and those variable interest entities (VIEs) where the Corporation is
the primary beneficiary. Intercompany accounts and transactions have been eliminated. Results of
operations, assets and liabilities of acquired companies are included from the dates of
acquisition. Results of operations, assets and liabilities of VIEs are included from the date that
the Corporation became the primary beneficiary. Assets held in an agency or fiduciary capacity are
not included in the Consolidated Financial Statements. The Corporation accounts for investments in
companies for which it owns a voting interest of 20 percent to 50 percent and for which it has the
ability to exercise significant influence over operating and financing decisions using the equity
method of accounting. These investments are included in other assets and are subject to impairment
testing. The Corporations proportionate share of income or loss is included in equity investment
income.
The preparation of the Consolidated Financial Statements in conformity with accounting
principles generally accepted in the United States of America (GAAP) requires management to make
estimates and assumptions that affect reported amounts and disclosures. Realized results could
differ from those estimates and assumptions.
These unaudited Consolidated Financial Statements should be read in conjunction with the
audited Consolidated Financial Statements included in the Corporations 2009 Annual Report on Form
10-K. The nature of the Corporations business is such that the results of any interim period are
not necessarily indicative of results for a full year. In the opinion of management, all
adjustments, which consist of normal recurring adjustments necessary for a fair statement of the
interim period results have been made. Certain prior period amounts have been reclassified to
conform to current period presentation.
New Accounting Pronouncements
In March 2010, the Financial Accounting Standards Board (FASB) issued new accounting
guidance on embedded credit derivatives. This new accounting guidance clarifies the scope
exception for embedded credit derivatives and defines which embedded credit derivatives are
required to be evaluated for bifurcation and separate accounting. This new accounting guidance was
effective on July 1, 2010. Upon adoption, companies may elect the fair value option for any
beneficial interests, including those that would otherwise require bifurcation under the new
guidance. In connection with the adoption of the guidance on July 1, 2010, the Corporation elected
the fair value option for $629 million of AFS debt securities, principally collateralized
debt obligations (CDOs), that otherwise may be subject to bifurcation under the new guidance. In
connection with this election the Corporation recorded a $229 million charge to retained earnings
on July 1, 2010 as an after tax adjustment to reclassify the net unrealized loss on these AFS debt
securities from accumulated other comprehensive income (OCI) to retained earnings. These AFS debt
securities have been reclassified to trading account assets. The Corporation did not bifurcate any
securities as a result of adopting the new accounting guidance.
On January 1, 2010, the Corporation adopted new FASB accounting guidance on transfers of
financial assets and consolidation of VIEs. This new accounting guidance revises sale accounting
criteria for transfers of financial assets,
8
including elimination of the concept of and accounting for qualifying special purpose entities
(QSPEs), and significantly changes the criteria for consolidation of a VIE. The adoption of this
new accounting guidance resulted in the consolidation of certain VIEs that previously were QSPEs
and VIEs that were not recorded on the Corporations Consolidated Balance Sheet prior to January
1, 2010. The adoption of this new accounting guidance resulted in a net incremental increase in
assets of $100.4 billion and a net increase in liabilities of $106.7 billion. These amounts are
net of retained interests in securitizations held on the Consolidated Balance Sheet at December
31, 2009 and net of a $10.8 billion increase in the allowance for loan and lease losses. The
Corporation recorded a $6.2 billion charge, net of tax, to retained earnings on January 1, 2010
for the cumulative effect of the adoption of this new accounting guidance, which resulted
principally from the increase in the allowance for loan and lease losses, and a $116 million
charge to accumulated OCI. Initial recording of these assets, related allowance and liabilities on
the Corporations Consolidated Balance Sheet had no impact at the date of adoption on the
consolidated results of operations.
On January 1, 2010, the Corporation elected to early adopt, on a prospective basis, new FASB
accounting guidance stating that troubled debt restructuring (TDR) accounting cannot be applied to
individual loans within purchased credit-impaired loan pools. The adoption of this guidance did
not have a material impact on the Corporations consolidated financial condition or results of
operations.
On January 1, 2010, the Corporation adopted new FASB accounting guidance that requires
disclosure of gross transfers into and out of Level 3 of the fair value hierarchy and adds a
requirement to disclose significant transfers between Level 1 and Level 2 of the fair value
hierarchy. The new accounting guidance also clarifies existing disclosure requirements regarding
the level of disaggregation of fair value measurements and inputs, and valuation techniques. These
enhanced disclosures required under this new guidance are included in Note 14 Fair Value
Measurements. Beginning in 2011, this new accounting guidance also requires separate presentation
of purchases, issuances and settlements in the Level 3 reconciliation table.
Significant Accounting Policies
Securities Financing Agreements
Securities borrowed or purchased under agreements to resell and securities loaned or sold
under agreements to repurchase (securities financing agreements) are treated as collateralized
financing transactions. These agreements are recorded at the amounts at which the securities were
acquired or sold plus accrued interest, except for certain securities financing agreements that
the Corporation accounts for under the fair value option. Changes in the fair value of securities
financing agreements that are accounted for under the fair value option are recorded in other
income. For more information on securities financing agreements that the Corporation accounts for
under the fair value option, see Note 14 Fair Value Measurements.
The Corporations policy is to obtain possession of collateral with a market value equal to
or in excess of the principal amount loaned under resale agreements. To ensure that the market
value of the underlying collateral remains sufficient, collateral is generally valued daily and
the Corporation may require counterparties to deposit additional collateral or may return
collateral pledged when appropriate.
Substantially all securities financing agreements are transacted under master repurchase
agreements which give the Corporation, in the event of default by the counterparty, the right to
liquidate securities held and to offset receivables and payables with the same counterparty. The
Corporation offsets securities financing agreements with the same counterparty on the Consolidated
Balance Sheet where it has such a master agreement. In transactions where the Corporation acts as
the lender in a securities lending agreement and receives securities that can be pledged or sold
as collateral, it recognizes an asset on the Consolidated Balance Sheet at fair value,
representing the securities received, and a liability for the same amount, representing the
obligation to return those securities.
At the end of certain quarterly periods during the three years ended December 31, 2009, the
Corporation had recorded certain sales of agency mortgage-backed securities (MBS) which, based on
an ongoing internal review and interpretation, should have been recorded as secured borrowings.
These periods and amounts were as follows: March 31, 2009 $573 million; September 30, 2008
$10.7 billion; December 31, 2007 $2.1 billion; and March 31, 2007 $4.5 billion. As the
transferred securities were recorded at fair value in trading account assets, the change would
have had no impact on consolidated results of operations. Had the sales been recorded as secured
borrowings, trading account assets and federal funds purchased and securities loaned or sold under
agreements to repurchase would have increased by the amount of the transactions, however, the
increase in all cases was less than 0.7 percent of total assets or total liabilities. Accordingly, the
9
Corporation believes that these transactions did not have a material impact on the Corporations
Consolidated Financial Statements.
In repurchase transactions, typically, the termination date for a repurchase agreement is
before the maturity date of the underlying security. However, in certain situations, the
Corporation may enter into repurchase agreements where the termination date of the repurchase
transaction is the same as the maturity date of the underlying security and these transactions are
referred to as repo-to-maturity (RTM) transactions. The Corporation enters into RTM transactions
only for high quality, very liquid securities such as U.S. Treasury securities or securities
issued by government-sponsored enterprises (GSE). The Corporation accounts for RTM transactions as
sales in accordance with GAAP, and accordingly, removes the securities from the Consolidated
Balance Sheet and recognizes a gain or loss in the Consolidated Statement of Income. At September
30, 2010, the Corporation had no outstanding RTM transactions, compared to $6.5 billion at
December 31, 2009, that had been accounted for as sales.
Variable Interest Entities
The entity that has a controlling financial interest in a VIE is referred to as the primary
beneficiary and consolidates the VIE. Prior to January 1, 2010, the primary beneficiary was the
entity that would absorb a majority of the economic risks and rewards of the VIE based on an
analysis of projected probability-weighted cash flows. In accordance with the new accounting
guidance on consolidation of VIEs and transfers of financial assets (new consolidation guidance)
effective January 1, 2010, the Corporation is deemed to have a controlling financial interest and
is the primary beneficiary of a VIE if it has both the power to direct the activities of the VIE
that most significantly impact the VIEs economic performance and an obligation to absorb losses
or the right to receive benefits that could potentially be significant to the VIE. On a quarterly
basis, the Corporation reassesses whether it has a controlling financial interest in and is the
primary beneficiary of a VIE. The quarterly reassessment process considers whether the Corporation
has acquired or divested the power to direct the activities of the VIE through changes in
governing documents or other circumstances. The reassessment also considers whether the
Corporation has acquired or disposed of a financial interest that could be significant to the VIE,
or whether an interest in the VIE has become significant or is no longer significant. The
consolidation status of the VIEs with which the Corporation is involved may change as a result of
such reassessments.
Retained interests in securitized assets are initially recorded at fair value. Prior to 2010,
retained interests were initially recorded at an allocated cost basis in proportion to the
relative fair values of the assets sold and interests retained. In addition, the Corporation may
invest in debt securities issued by unconsolidated VIEs. Quoted market prices are primarily used
to obtain fair values of these debt securities, which are AFS debt securities or trading account
assets. Generally, quoted market prices for retained residual interests are not available,
therefore, the Corporation estimates fair values based on the present value of the associated
expected future cash flows. This may require management to estimate credit losses, prepayment
speeds, forward interest yield curves, discount rates and other factors that impact the value of
retained interests. Retained residual interests in unconsolidated securitization trusts are
classified in trading account assets or other assets with changes in fair value recorded in
income. The Corporation may also purchase credit protection from unconsolidated VIEs in the form
of credit default swaps or other derivatives, which are carried at fair value with changes in fair
value recorded in income.
NOTE 2 Merger and Restructuring Activity
Merrill Lynch
On January 1, 2009, the Corporation acquired Merrill Lynch through its merger with a
subsidiary of the Corporation in exchange for common and preferred stock with a value of $29.1
billion. Under the terms of the merger agreement, Merrill Lynch common shareholders received
0.8595 of a share of Bank of America Corporation common stock in exchange for each share of
Merrill Lynch common stock. In addition, Merrill Lynch non-convertible preferred shareholders
received Bank of America Corporation preferred stock having substantially identical terms. Merrill
Lynch convertible preferred stock remains outstanding and is convertible into Bank of America
Corporation common stock at an equivalent exchange ratio.
10
The purchase price was allocated to the acquired assets and liabilities based on their
estimated fair values at the Merrill Lynch acquisition date as summarized in the table below.
Goodwill of $5.1 billion was calculated as the purchase premium after adjusting for the fair value
of net assets acquired. No goodwill is deductible for federal income tax purposes. The goodwill
was allocated principally to the Global Wealth & Investment
Management (GWIM) and Global Banking & Markets (GBAM) business segments.
|
|
|
|
|
Merrill Lynch Purchase Price Allocation |
(Dollars in billions, except per share amounts) |
|
|
|
|
Purchase price |
|
|
|
|
Merrill Lynch common shares exchanged (in millions) |
|
|
1,600 |
|
Exchange ratio |
|
|
0.8595 |
|
|
The Corporations common shares issued (in millions) |
|
|
1,375 |
|
Purchase price per share of the Corporations common stock (1) |
|
$ |
14.08 |
|
|
Total value of the Corporations common stock and cash exchanged for fractional shares |
|
$ |
19.4 |
|
Merrill Lynch preferred stock |
|
|
8.6 |
|
Fair value of outstanding employee stock awards |
|
|
1.1 |
|
|
Total purchase price |
|
$ |
29.1 |
|
Allocation of the purchase price |
|
|
|
|
Merrill Lynch stockholders equity |
|
|
19.9 |
|
Merrill Lynch goodwill and intangible assets |
|
|
(2.6 |
) |
Pre-tax adjustments to reflect acquired assets and liabilities at fair value: |
|
|
|
|
Derivatives and securities |
|
|
(1.9 |
) |
Loans |
|
|
(6.1 |
) |
Intangible assets (2) |
|
|
5.4 |
|
Other assets/liabilities |
|
|
(0.8 |
) |
Long-term debt |
|
|
16.0 |
|
|
Pre-tax total adjustments |
|
|
12.6 |
|
Deferred income taxes |
|
|
(5.9 |
) |
|
After-tax total adjustments |
|
|
6.7 |
|
|
Fair value of net assets acquired |
|
|
24.0 |
|
|
Goodwill resulting from the Merrill Lynch acquisition |
|
$ |
5.1 |
|
|
|
|
(1) |
The value of the shares of common stock exchanged with Merrill
Lynch shareholders was based upon the closing price of the Corporations
common stock at December 31, 2008, the last trading day prior to the date of acquisition. |
|
(2) |
Consists of trade name of $1.5 billion and customer relationship
and core deposit intangibles of $3.9 billion. The amortization life
is 10 years for the customer relationship and core deposit intangibles
which are primarily amortized on a straight-line basis. |
Merger and Restructuring Charges and Reserves
Merger and restructuring charges are recorded in the Consolidated Statement of Income
and include incremental costs to integrate the operations of the Corporation and its recent
acquisitions. These charges represent costs associated with these one-time activities and do not
represent ongoing costs of the fully integrated combined organization. On January 1, 2009, the
Corporation adopted new accounting guidance on business combinations, on a prospective basis, that
requires that acquisition-related transaction and restructuring costs be charged to expense as
incurred. Previously, these expenses were recorded as an adjustment to goodwill.
The table below presents severance and employee-related charges, systems integrations and
related charges, and other merger-related charges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30 |
|
September 30 |
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Severance
and employee-related charges |
|
$ |
88 |
|
|
$ |
225 |
|
|
$ |
362 |
|
|
$ |
1,207 |
|
Systems integrations and related charges |
|
|
260 |
|
|
|
329 |
|
|
|
898 |
|
|
|
813 |
|
Other |
|
|
73 |
|
|
|
40 |
|
|
|
190 |
|
|
|
168 |
|
|
Total merger and restructuring charges |
|
$ |
421 |
|
|
$ |
594 |
|
|
$ |
1,450 |
|
|
$ |
2,188 |
|
|
11
For the three and nine months ended September 30, 2010, merger and restructuring charges
consisted of $420 million and $1.3 billion related to the Merrill Lynch acquisition and $1 million
and $197 million related to the Countrywide acquisition. For the three and nine months ended
September 30, 2009, merger and restructuring charges consisted primarily of $371 million and $1.5
billion related to the Merrill Lynch acquisition, $212 million and $632 million related to the
Countrywide acquisition, and $11 million and $92 million related to previous acquisitions.
For the three and nine months ended September 30, 2010, $420 million and $1.3 billion of
merger-related charges for the Merrill Lynch acquisition included $100 million and $333 million of
severance and other employee-related costs, $249 million and $745 million of systems integration
costs, and $71 million and $175 million of other merger-related costs. For the three and nine
months ended September 30, 2009, $371 million and $1.5 billion of merger-related charges for the
Merrill Lynch acquisition included $196 million and $1.1 billion of severance and other
employee-related costs, $153 million and $294 million of systems integration costs, and $22
million and $94 million of other merger-related costs.
The table below presents the changes in exit cost and restructuring reserves for the three
and nine months ended September 30, 2010 and 2009. Exit cost reserves were established in purchase
accounting resulting in an increase in goodwill. Restructuring reserves are established by a
charge to merger and restructuring charges, and the restructuring charges are included in the
total merger and restructuring charges in the table above. Exit costs were not recorded in
purchase accounting for the Merrill Lynch acquisition in accordance with new accounting guidance
on business combinations which was effective January 1, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exit Cost Reserves |
|
Restructuring Reserves |
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Balance, January 1 |
|
$ |
112 |
|
|
$ |
523 |
|
|
$ |
403 |
|
|
$ |
86 |
|
Exit costs and restructuring charges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merrill Lynch |
|
|
n/a |
|
|
|
n/a |
|
|
|
199 |
|
|
|
732 |
|
Countrywide |
|
|
(18 |
) |
|
|
- |
|
|
|
53 |
|
|
|
108 |
|
Cash payments and other |
|
|
(57 |
) |
|
|
(305 |
) |
|
|
(395 |
) |
|
|
(496 |
) |
|
Balance, June 30 |
|
$ |
37 |
|
|
$ |
218 |
|
|
$ |
260 |
|
|
$ |
430 |
|
Exit costs and restructuring charges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merrill Lynch |
|
|
n/a |
|
|
|
n/a |
|
|
|
87 |
|
|
|
132 |
|
Countrywide |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
37 |
|
Cash payments and other |
|
|
(16 |
) |
|
|
(64 |
) |
|
|
(74 |
) |
|
|
(228 |
) |
|
Balance, September 30 |
|
$ |
21 |
|
|
$ |
154 |
|
|
$ |
273 |
|
|
$ |
371 |
|
|
n/a = not applicable
At December 31, 2009, there were $112 million of exit cost reserves related principally
to the Countrywide acquisition, including $70 million of severance, relocation and other
employee-related costs and $42 million for contract terminations. Cash payments and other of $73
million during the nine months ended September 30, 2010 related to the Countrywide acquisition
consisted of $36 million in severance, relocation and other employee-related costs, and $37
million in contract terminations. At September 30, 2010, exit cost reserves of $21 million related
principally to Countrywide.
At December 31, 2009, there were $403 million of restructuring reserves related to the
Merrill Lynch and Countrywide acquisitions for severance and other employee-related costs. For the
three and nine months ended September 30, 2010, $87 million and $339 million were added to the
restructuring reserves related to severance and other employee-related costs primarily associated
with the Merrill Lynch acquisition. Cash payments and other of $74 million and $469 million during
the three and nine months ended September 30, 2010 were all related to severance and other
employee-related costs primarily associated with the Merrill Lynch acquisition. Payments
associated with the Countrywide and Merrill Lynch acquisitions are expected to continue into 2012.
At September 30, 2010, restructuring reserves of $273 million consisted of $254 million for
Merrill Lynch and $19 million for Countrywide.
12
NOTE 3 Trading Account Assets and Liabilities
The table below presents the components of trading account assets and liabilities at
September 30, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
December 31 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
Trading account assets |
|
|
|
|
|
|
|
|
U.S. government and agency securities (1) |
|
$ |
65,861 |
|
|
$ |
44,585 |
|
Corporate securities, trading loans and other |
|
|
52,861 |
|
|
|
57,009 |
|
Equity securities |
|
|
28,143 |
|
|
|
33,562 |
|
Foreign sovereign debt |
|
|
41,447 |
|
|
|
28,143 |
|
Mortgage trading loans and asset-backed securities |
|
|
19,383 |
|
|
|
18,907 |
|
|
Total trading account assets |
|
$ |
207,695 |
|
|
$ |
182,206 |
|
|
Trading account liabilities |
|
|
|
|
|
|
|
|
U.S. government and agency securities |
|
$ |
33,988 |
|
|
$ |
26,519 |
|
Equity securities |
|
|
18,460 |
|
|
|
18,407 |
|
Foreign sovereign debt |
|
|
25,954 |
|
|
|
12,897 |
|
Corporate securities and other |
|
|
11,608 |
|
|
|
7,609 |
|
|
Total trading account liabilities |
|
$ |
90,010 |
|
|
$ |
65,432 |
|
|
|
|
(1) |
Includes $30.4 billion and $23.5 billion at September 30, 2010 and December 31, 2009 of GSE obligations. |
13
NOTE 4 Derivatives
Derivative Balances
Derivatives are held for trading, as economic hedges, or as qualifying accounting
hedges. The Corporation enters into derivatives to facilitate client transactions, for principal
trading purposes and to manage risk exposures. For additional information on the Corporations
derivatives and hedging activities, see Note 1 Summary of Significant Accounting Principles to
the Consolidated Financial Statements of the Corporations 2009 Annual Report on Form 10-K. The
table below identifies derivative instruments included on the Corporations Consolidated Balance
Sheet in derivative assets and liabilities at September 30, 2010 and December 31, 2009. Balances
are presented on a gross basis, prior to the application of counterparty and collateral netting.
Total derivative assets and liabilities are adjusted on an aggregate basis to take into
consideration the effects of legally enforceable master netting agreements and have been reduced
by the cash collateral applied.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
|
|
|
|
|
Gross Derivative Assets |
|
|
Gross Derivative Liabilities |
|
|
|
|
|
|
|
Trading |
|
|
|
|
|
|
|
|
|
|
Trading |
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
and |
|
|
Qualifying |
|
|
|
|
|
|
and |
|
|
Qualifying |
|
|
|
|
|
|
Contract/ |
|
|
Economic |
|
|
Accounting |
|
|
|
|
|
|
Economic |
|
|
Accounting |
|
|
|
|
(Dollars in billions) |
|
Notional (1) |
|
|
Hedges |
|
|
Hedges
(2) |
|
|
Total |
|
|
Hedges |
|
|
Hedges (2) |
|
|
Total |
|
|
Interest rate contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps |
|
$ |
43,665.7 |
|
|
$ |
1,694.2 |
|
|
$ |
13.2 |
|
|
$ |
1,707.4 |
|
|
$ |
1,679.0 |
|
|
$ |
6.4 |
|
|
$ |
1,685.4 |
|
Futures and forwards |
|
|
12,592.5 |
|
|
|
7.0 |
|
|
|
- |
|
|
|
7.0 |
|
|
|
8.3 |
|
|
|
- |
|
|
|
8.3 |
|
Written options |
|
|
2,837.3 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
109.8 |
|
|
|
- |
|
|
|
109.8 |
|
Purchased options |
|
|
2,932.2 |
|
|
|
116.0 |
|
|
|
- |
|
|
|
116.0 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Foreign exchange contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps |
|
|
644.5 |
|
|
|
28.3 |
|
|
|
3.8 |
|
|
|
32.1 |
|
|
|
30.5 |
|
|
|
1.6 |
|
|
|
32.1 |
|
Spot, futures and forwards |
|
|
2,721.2 |
|
|
|
49.3 |
|
|
|
- |
|
|
|
49.3 |
|
|
|
50.9 |
|
|
|
- |
|
|
|
50.9 |
|
Written options |
|
|
545.8 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
12.8 |
|
|
|
- |
|
|
|
12.8 |
|
Purchased options |
|
|
535.3 |
|
|
|
12.6 |
|
|
|
- |
|
|
|
12.6 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Equity contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps |
|
|
39.9 |
|
|
|
1.2 |
|
|
|
- |
|
|
|
1.2 |
|
|
|
1.8 |
|
|
|
- |
|
|
|
1.8 |
|
Futures and forwards |
|
|
106.9 |
|
|
|
3.7 |
|
|
|
- |
|
|
|
3.7 |
|
|
|
2.7 |
|
|
|
- |
|
|
|
2.7 |
|
Written options |
|
|
281.0 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
24.4 |
|
|
|
- |
|
|
|
24.4 |
|
Purchased options |
|
|
244.6 |
|
|
|
25.0 |
|
|
|
- |
|
|
|
25.0 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commodity contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps |
|
|
106.8 |
|
|
|
8.4 |
|
|
|
0.3 |
|
|
|
8.7 |
|
|
|
9.5 |
|
|
|
- |
|
|
|
9.5 |
|
Futures and forwards |
|
|
452.3 |
|
|
|
5.7 |
|
|
|
- |
|
|
|
5.7 |
|
|
|
3.7 |
|
|
|
- |
|
|
|
3.7 |
|
Written options |
|
|
86.5 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5.6 |
|
|
|
- |
|
|
|
5.6 |
|
Purchased options |
|
|
83.7 |
|
|
|
5.4 |
|
|
|
- |
|
|
|
5.4 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Credit derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased credit derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit default swaps |
|
|
2,363.8 |
|
|
|
87.1 |
|
|
|
- |
|
|
|
87.1 |
|
|
|
31.3 |
|
|
|
- |
|
|
|
31.3 |
|
Total return swaps/other |
|
|
29.7 |
|
|
|
1.0 |
|
|
|
- |
|
|
|
1.0 |
|
|
|
0.2 |
|
|
|
- |
|
|
|
0.2 |
|
Written credit derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit default swaps |
|
|
2,320.7 |
|
|
|
30.3 |
|
|
|
- |
|
|
|
30.3 |
|
|
|
80.2 |
|
|
|
- |
|
|
|
80.2 |
|
Total return swaps/other |
|
|
18.9 |
|
|
|
0.8 |
|
|
|
- |
|
|
|
0.8 |
|
|
|
0.3 |
|
|
|
- |
|
|
|
0.3 |
|
|
Gross derivative assets/liabilities |
|
|
|
|
|
$ |
2,076.0 |
|
|
$ |
17.3 |
|
|
$ |
2,093.3 |
|
|
$ |
2,051.0 |
|
|
$ |
8.0 |
|
|
$ |
2,059.0 |
|
Less: Legally enforceable master
netting agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,940.5 |
) |
|
|
|
|
|
|
|
|
|
|
(1,940.5 |
) |
Less: Cash collateral applied |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68.1 |
) |
|
|
|
|
|
|
|
|
|
|
(56.8 |
) |
|
Total derivative assets/liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
84.7 |
|
|
|
|
|
|
|
|
|
|
$ |
61.7 |
|
|
|
|
(1) |
Represents the total contract/notional amount of the derivatives outstanding and
includes both written and purchased credit derivatives. |
|
(2) |
Excludes $4.3 billion of long-term debt designated as a hedge of foreign currency
risk. |
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
Gross Derivative Assets |
|
Gross Derivative Liabilities |
|
|
|
|
|
|
Trading |
|
|
|
|
|
|
|
|
|
Trading |
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
|
|
|
|
|
|
|
|
Derivatives |
|
|
|
|
|
|
|
|
|
|
and |
|
Qualifying |
|
|
|
|
|
and |
|
Qualifying |
|
|
|
|
Contract/ |
|
Economic |
|
Accounting |
|
|
|
|
|
Economic |
|
Accounting |
|
|
(Dollars in billions) |
|
Notional (1) |
|
Hedges |
|
Hedges (2) |
|
Total |
|
Hedges |
|
Hedges (2) |
|
Total |
|
Interest rate contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps |
|
$ |
45,261.5 |
|
|
$ |
1,121.3 |
|
|
$ |
5.6 |
|
|
$ |
1,126.9 |
|
|
$ |
1,105.0 |
|
|
$ |
0.8 |
|
|
$ |
1,105.8 |
|
Futures and forwards |
|
|
11,842.1 |
|
|
|
7.1 |
|
|
|
- |
|
|
|
7.1 |
|
|
|
6.1 |
|
|
|
- |
|
|
|
6.1 |
|
Written options |
|
|
2,865.5 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
84.1 |
|
|
|
- |
|
|
|
84.1 |
|
Purchased options |
|
|
2,626.7 |
|
|
|
84.1 |
|
|
|
- |
|
|
|
84.1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Foreign exchange contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps |
|
|
661.9 |
|
|
|
23.7 |
|
|
|
4.6 |
|
|
|
28.3 |
|
|
|
27.3 |
|
|
|
0.5 |
|
|
|
27.8 |
|
Spot, futures and forwards |
|
|
1,750.8 |
|
|
|
24.6 |
|
|
|
0.3 |
|
|
|
24.9 |
|
|
|
25.6 |
|
|
|
0.1 |
|
|
|
25.7 |
|
Written options |
|
|
383.6 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
13.0 |
|
|
|
- |
|
|
|
13.0 |
|
Purchased options |
|
|
355.3 |
|
|
|
12.7 |
|
|
|
- |
|
|
|
12.7 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Equity contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps |
|
|
58.5 |
|
|
|
2.0 |
|
|
|
- |
|
|
|
2.0 |
|
|
|
2.0 |
|
|
|
- |
|
|
|
2.0 |
|
Futures and forwards |
|
|
79.0 |
|
|
|
3.0 |
|
|
|
- |
|
|
|
3.0 |
|
|
|
2.2 |
|
|
|
- |
|
|
|
2.2 |
|
Written options |
|
|
283.4 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
25.1 |
|
|
|
0.4 |
|
|
|
25.5 |
|
Purchased options |
|
|
273.7 |
|
|
|
27.3 |
|
|
|
- |
|
|
|
27.3 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commodity contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps |
|
|
65.3 |
|
|
|
6.9 |
|
|
|
0.1 |
|
|
|
7.0 |
|
|
|
6.8 |
|
|
|
- |
|
|
|
6.8 |
|
Futures and forwards |
|
|
387.8 |
|
|
|
10.4 |
|
|
|
- |
|
|
|
10.4 |
|
|
|
9.6 |
|
|
|
- |
|
|
|
9.6 |
|
Written options |
|
|
54.9 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7.9 |
|
|
|
- |
|
|
|
7.9 |
|
Purchased options |
|
|
50.9 |
|
|
|
7.6 |
|
|
|
- |
|
|
|
7.6 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Credit derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased credit derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit default swaps |
|
|
2,800.5 |
|
|
|
105.5 |
|
|
|
- |
|
|
|
105.5 |
|
|
|
45.2 |
|
|
|
- |
|
|
|
45.2 |
|
Total return swaps/other |
|
|
21.7 |
|
|
|
1.5 |
|
|
|
- |
|
|
|
1.5 |
|
|
|
0.4 |
|
|
|
- |
|
|
|
0.4 |
|
Written credit derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit default swaps |
|
|
2,788.8 |
|
|
|
44.1 |
|
|
|
- |
|
|
|
44.1 |
|
|
|
98.4 |
|
|
|
- |
|
|
|
98.4 |
|
Total return swaps/other |
|
|
33.1 |
|
|
|
1.8 |
|
|
|
- |
|
|
|
1.8 |
|
|
|
1.1 |
|
|
|
- |
|
|
|
1.1 |
|
|
Gross derivative assets/liabilities |
|
|
|
|
|
$ |
1,483.6 |
|
|
$ |
10.6 |
|
|
$ |
1,494.2 |
|
|
$ |
1,459.8 |
|
|
$ |
1.8 |
|
|
$ |
1,461.6 |
|
Less: Legally enforceable master
netting agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,355.1 |
) |
|
|
|
|
|
|
|
|
|
|
(1,355.1 |
) |
Less: Cash collateral applied |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51.5 |
) |
|
|
|
|
|
|
|
|
|
|
(55.8 |
) |
|
Total derivative assets/liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
87.6 |
|
|
|
|
|
|
|
|
|
|
$ |
50.7 |
|
|
|
|
(1) |
Represents the total contract/notional amount of the derivatives
outstanding and includes both written and purchased credit derivatives. |
|
(2) |
Excludes $4.4 billion of long-term debt designated as a hedge of foreign currency risk. |
ALM and Risk Management Derivatives
The Corporations asset and liability management (ALM) and risk management activities
include the use of derivatives to mitigate risk to the Corporation including both derivatives that
are designated as hedging instruments and economic hedges. Interest rate, commodity, credit and
foreign exchange contracts are utilized in the Corporations ALM and risk management activities.
The Corporation maintains an overall interest rate risk management strategy that incorporates
the use of interest rate contracts, which are generally non-leveraged generic interest rate and
basis swaps, options, futures and forwards, to minimize significant fluctuations in earnings that
are caused by interest rate volatility. Interest rate contracts are used by the Corporation in the
management of its interest rate risk position. The Corporations goal is to manage interest rate
sensitivity so that movements in interest rates do not significantly adversely affect earnings. As
a result of interest rate fluctuations, hedged fixed-rate assets and liabilities appreciate or
depreciate in fair value. Gains or losses on the derivative instruments
15
that are linked to the hedged fixed-rate assets and liabilities are expected to substantially
offset this unrealized appreciation or depreciation.
Interest rate and market risk can be substantial in the mortgage business. Market risk is the
risk that values of mortgage assets or revenues will be adversely affected by changes in market
conditions such as interest rate movements. To hedge interest rate risk in mortgage banking
production income, the Corporation utilizes forward loan sale commitments and other derivative
instruments including purchased options. The Corporation also utilizes derivatives such as
interest rate options, interest rate swaps, forward settlement contracts and euro-dollar futures
as economic hedges of the fair value of mortgage servicing rights (MSRs). For additional
information on MSRs, see Note 16 Mortgage Servicing Rights.
The Corporation uses foreign currency contracts to manage the foreign exchange risk
associated with certain foreign currency-denominated assets and liabilities, as well as the
Corporations investments in foreign subsidiaries. Foreign exchange contracts, which include spot
and forward contracts, represent agreements to exchange the currency of one country for the
currency of another country at an agreed-upon price on an agreed-upon settlement date. Exposure to
loss on these contracts will increase or decrease over their respective lives as currency exchange
and interest rates fluctuate.
The Corporation enters into derivative commodity contracts such as futures, swaps, options
and forwards as well as non-derivative commodity contracts to provide price risk management
services to customers or to manage price risk associated with its physical and financial commodity
positions. The non-derivative commodity contracts and physical inventories of commodities expose
the Corporation to earnings volatility. Cash flow and fair value accounting hedges provide a
method to mitigate a portion of this earnings volatility.
The Corporation purchases credit derivatives to manage credit risk related to certain funded
and unfunded credit exposures. Credit derivatives include credit default swaps, total return swaps
and swaptions. These derivatives are accounted for as economic hedges and changes in fair value
are recorded in other income.
16
Derivatives Designated as Accounting Hedges
The Corporation uses various types of interest rate, commodity and foreign exchange
derivative contracts to protect against changes in the fair value of its assets and liabilities
due to fluctuations in interest rates, exchange rates and commodity prices (fair value hedges).
The Corporation also uses these types of contracts and equity derivatives to protect against
changes in the cash flows of its assets and liabilities, and other forecasted transactions (cash
flow hedges). The Corporation hedges its net investment in consolidated foreign operations
determined to have functional currencies other than the U.S. dollar using forward exchange
contracts, cross-currency basis swaps, and by issuing foreign currency-denominated debt (net
investment hedges).
Fair Value Hedges
The table below summarizes certain information related to the Corporations derivatives
designated as fair value hedges for the three and nine months ended September 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recognized in Income for the Three Months Ended September 30 |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
Hedged |
|
|
Hedge |
|
|
|
|
|
|
Hedged |
|
|
Hedge |
|
(Dollars in millions) |
|
Derivative |
|
|
Item |
|
|
Ineffectiveness |
|
|
Derivative |
|
|
Item |
|
|
Ineffectiveness |
|
|
Derivatives designated as fair value hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate risk on long-term debt (1) |
|
$ |
2,128 |
|
|
$ |
(2,268 |
) |
|
$ |
(140 |
) |
|
$ |
1,591 |
|
|
$ |
(1,778 |
) |
|
$ |
(187 |
) |
Interest rate and foreign currency risk on long-term debt (1) |
|
|
3,913 |
|
|
|
(3,867 |
) |
|
|
46 |
|
|
|
1,561 |
|
|
|
(1,568 |
) |
|
|
(7 |
) |
Interest rate risk on available-for-sale securities (2, 3) |
|
|
(3,073 |
) |
|
|
2,842 |
|
|
|
(231 |
) |
|
|
(603 |
) |
|
|
433 |
|
|
|
(170 |
) |
Commodity price risk on commodity inventory (4) |
|
|
25 |
|
|
|
(23 |
) |
|
|
2 |
|
|
|
3 |
|
|
|
(2 |
) |
|
|
1 |
|
|
Total |
|
$ |
2,993 |
|
|
$ |
(3,316 |
) |
|
$ |
(323 |
) |
|
$ |
2,552 |
|
|
$ |
(2,915 |
) |
|
$ |
(363 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recognized in Income for the Nine Months Ended September 30 |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
Hedged |
|
|
Hedge |
|
|
|
|
|
|
Hedged |
|
|
Hedge |
|
(Dollars in millions) |
|
Derivative |
|
|
Item |
|
|
Ineffectiveness |
|
|
Derivative |
|
|
Item |
|
|
Ineffectiveness |
|
|
Derivatives designated as fair value hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate risk on long-term debt (1) |
|
$ |
6,214 |
|
|
$ |
(6,598 |
) |
|
$ |
(384 |
) |
|
$ |
(3,025 |
) |
|
$ |
2,387 |
|
|
$ |
(638 |
) |
Interest rate and foreign currency risk on long-term debt (1) |
|
|
630 |
|
|
|
(911 |
) |
|
|
(281 |
) |
|
|
1,624 |
|
|
|
(1,546 |
) |
|
|
78 |
|
Interest rate risk on available-for-sale securities (2, 3) |
|
|
(8,342 |
) |
|
|
8,024 |
|
|
|
(318 |
) |
|
|
(343 |
) |
|
|
121 |
|
|
|
(222 |
) |
Commodity price risk on commodity inventory (4) |
|
|
66 |
|
|
|
(69 |
) |
|
|
(3 |
) |
|
|
63 |
|
|
|
(59 |
) |
|
|
4 |
|
|
Total |
|
$ |
(1,432 |
) |
|
$ |
446 |
|
|
$ |
(986 |
) |
|
$ |
(1,681 |
) |
|
$ |
903 |
|
|
$ |
(778 |
) |
|
|
|
(1) |
Amounts are recorded in interest expense on long-term debt. |
|
(2) |
Amounts are recorded in interest income on AFS securities. |
|
(3) |
Measurement of ineffectiveness in the three and nine months ended September 30, 2010
includes $(1) million and $(5) million compared to $(145) million and $(186) million for the same
periods of 2009 of interest costs on short forward contracts. The Corporation considers this as
part of the cost of hedging, and it is offset by the fixed coupon receipt on the AFS security that
is recognized in interest income on securities. |
|
(4) |
Amounts are recorded in trading account profits. |
Cash Flow Hedges
The table on page 18 summarizes certain information related to the Corporations derivatives
designated as cash flow hedges and net investment hedges for the three and nine months ended
September 30, 2010 and 2009. During the next 12 months, net losses in accumulated OCI of
approximately $1.7 billion ($1.1 billion after-tax) on derivative instruments that qualify as cash
flow hedges are expected to be reclassified into earnings. These net losses reclassified into
earnings are expected to primarily reduce net interest income related to the respective hedged items.
Amounts related to interest rate risk on variable rate portfolios reclassified from
accumulated OCI increased interest income on assets by $29 million and $7 million and increased
interest expense by $145 million and $252 million during the three months ended September 30, 2010
and 2009, respectively. Amounts reclassified from accumulated OCI increased interest income on
assets by $109 million and reduced interest income by $101 million and increased interest expense
by $411 million and $1.0 billion during the nine months ended September 30, 2010 and 2009. Hedge
ineffectiveness of $3 million and $(16) million was recorded in interest income during the three
and nine months ended September 30, 2010 compared to $36 million and $74 million for the same
periods in 2009. Hedge ineffectiveness of $(12) million and $(13) million was recorded in interest
expense during the three and nine months ended September 30, 2010 compared to $(17)
17
million for both periods in 2009. Amounts reclassified from accumulated OCI
exclude amounts related to derivative interest accruals which increased interest income by $58
million and $41 million and increased interest expense by $47 million and decreased interest
expense by $7 million for the three months ended September 30, 2010 and 2009, respectively.
Amounts reclassified from accumulated OCI exclude amounts related to derivative interest accruals
which increased interest income by $189 million and $97 million and increased interest expense by
$47 million and decreased interest expense by $7 million for the nine months ended September 30,
2010 and 2009, respectively.
Amounts related to commodity price risk reclassified from accumulated OCI are recorded in
trading account profits with the underlying hedged item. Amounts related to price risk on
restricted stock awards reclassified from accumulated OCI are recorded in personnel expense.
Amounts related to price risk on equity investments included in AFS securities reclassified from
accumulated OCI are recorded in equity investment income with the underlying hedged item.
Amounts related to foreign exchange risk recognized in accumulated OCI on derivatives exclude
losses of $241 million and gains of $135 million related to long-term debt designated as a net
investment hedge for the three and nine months ended September 30, 2010 compared to gains of $74
million and losses of $365 million for the same periods in 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
Amounts |
|
|
Hedge |
|
|
|
|
|
|
Amounts |
|
|
Hedge |
|
|
|
Amounts |
|
|
Reclassified |
|
|
Ineffectiveness |
|
|
Amounts |
|
|
Reclassified |
|
|
Ineffectiveness |
|
|
|
Recognized in |
|
|
from |
|
|
and Amount |
|
|
Recognized in |
|
|
from |
|
|
and Amount |
|
|
|
Accumulated |
|
|
Accumulated |
|
|
Excluded from |
|
|
Accumulated |
|
|
Accumulated |
|
|
Excluded from |
|
|
|
OCI on |
|
|
OCI into |
|
|
Effectiveness |
|
|
OCI on |
|
|
OCI into |
|
|
Effectiveness |
|
(Dollars in millions, amounts pre-tax) |
|
Derivatives |
|
|
Income |
|
|
Testing (1) |
|
|
Derivatives |
|
|
Income |
|
|
Testing (1) |
|
|
Derivatives designated as cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate risk on variable rate portfolios |
|
$ |
(1,577 |
) |
|
$ |
(116 |
) |
|
$ |
(9 |
) |
|
$ |
183 |
|
|
$ |
(245 |
) |
|
$ |
19 |
|
Commodity price risk on forecasted purchases
and sales |
|
|
20 |
|
|
|
3 |
|
|
|
4 |
|
|
|
102 |
|
|
|
56 |
|
|
|
(1 |
) |
Price risk on restricted stock awards |
|
|
(58 |
) |
|
|
(21 |
) |
|
|
- |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
Price risk on equity investments included in
available-for-sale securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(101 |
) |
|
|
- |
|
|
|
- |
|
|
Total |
|
$ |
(1,615 |
) |
|
$ |
(134 |
) |
|
$ |
(5 |
) |
|
$ |
184 |
|
|
$ |
(189 |
) |
|
$ |
18 |
|
|
Net investment hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange risk |
|
$ |
(2,162 |
) |
|
$ |
- |
|
|
$ |
(63 |
) |
|
$ |
(737 |
) |
|
$ |
- |
|
|
$ |
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30 |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
Amounts |
|
|
Hedge |
|
|
|
|
|
|
Amounts |
|
|
Hedge |
|
|
|
Amounts |
|
|
Reclassified |
|
|
Ineffectiveness |
|
|
Amounts |
|
|
Reclassified |
|
|
Ineffectiveness |
|
|
|
Recognized in |
|
|
from |
|
|
and Amount |
|
|
Recognized in |
|
|
from |
|
|
and Amount |
|
|
|
Accumulated |
|
|
Accumulated |
|
|
Excluded from |
|
|
Accumulated |
|
|
Accumulated |
|
|
Excluded from |
|
|
|
OCI on |
|
|
OCI into |
|
|
Effectiveness |
|
|
OCI on |
|
|
OCI into |
|
|
Effectiveness |
|
(Dollars in millions, amounts pre-tax) |
|
Derivatives |
|
|
Income |
|
|
Testing (1) |
|
|
Derivatives |
|
|
Income |
|
|
Testing (1) |
|
|
Derivatives designated as cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate risk on variable rate portfolios |
|
$ |
(2,935 |
) |
|
$ |
(302 |
) |
|
$ |
(29 |
) |
|
$ |
141 |
|
|
$ |
(1,106 |
) |
|
$ |
57 |
|
Commodity price risk on forecasted purchases
and sales |
|
|
47 |
|
|
|
16 |
|
|
|
6 |
|
|
|
115 |
|
|
|
62 |
|
|
|
(1 |
) |
Price risk on restricted stock awards |
|
|
(96 |
) |
|
|
(4 |
) |
|
|
- |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
Price risk on equity investments included in
available-for-sale securities |
|
|
186 |
|
|
|
(226 |
) |
|
|
- |
|
|
|
(155 |
) |
|
|
- |
|
|
|
- |
|
|
Total |
|
$ |
(2,798 |
) |
|
$ |
(516 |
) |
|
$ |
(23 |
) |
|
$ |
101 |
|
|
$ |
(1,044 |
) |
|
$ |
56 |
|
|
Net investment hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange risk |
|
$ |
(278 |
) |
|
$ |
- |
|
|
$ |
(196 |
) |
|
$ |
(2,736 |
) |
|
$ |
- |
|
|
$ |
(88 |
) |
|
|
|
(1) |
Amounts related to derivatives designated as cash flow hedges represent hedge
ineffectiveness and amounts related to net investment hedges represent amounts excluded from
effectiveness testing. |
|
n/a = not applicable |
The Corporation entered into total return swaps to hedge a portion of cash-settled restricted
stock units (RSUs) granted to certain employees in the three months ended March 31, 2010 as part
of their 2009 compensation. These cash-settled RSUs are accrued as liabilities over the vesting
period and adjusted to fair value based on changes in the share price of the Corporations common
stock. The Corporation entered into the derivatives to minimize the change in the expense to the
18
Corporation driven by fluctuations in the share price of the Corporations common stock during the
vesting period of the RSUs. Certain of these derivatives are designated as cash flow hedges of
unrecognized non-vested awards with the changes in fair value of the hedge recorded in accumulated
OCI and reclassified into earnings in the same period as the RSUs affect earnings. The
remaining derivatives are accounted for as economic hedges and changes in fair value are recorded
in personnel expense. For more information on restricted stock units and related hedges, see Note
12 Shareholders Equity and Earnings Per Common Share.
Economic Hedges
Derivatives designated as economic hedges are used by the Corporation to reduce certain
risk exposures but are not accounted for as accounting hedges. The table below presents gains
(losses) on these derivatives for the three and nine months ended September 30, 2010 and 2009.
These gains (losses) are largely offset by the income or expense that is recorded on the
economically hedged item. Gains (losses) on derivatives related to price risk on mortgage banking
production income and interest rate risk on mortgage banking servicing income are recorded in
mortgage banking income. Gains (losses) on derivatives and bonds related to credit risk on loans
are recorded in other income, trading account profits and net interest income. Gains (losses) on
derivatives related to interest rate and foreign currency risk on long-term debt and other foreign
currency exchange transactions are recorded in other income and trading account profits. Gains
(losses) on other economic hedge transactions are recorded in other income, trading account
profits and personnel expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Price risk on mortgage banking production income (1) |
|
$ |
3,577 |
|
|
$ |
1,209 |
|
|
$ |
6,974 |
|
|
$ |
5,701 |
|
Interest rate risk on mortgage banking servicing income |
|
|
1,736 |
|
|
|
906 |
|
|
|
5,048 |
|
|
|
(2,417 |
) |
Credit risk on loans |
|
|
(46 |
) |
|
|
(320 |
) |
|
|
(70 |
) |
|
|
(604 |
) |
Interest rate and foreign currency risk on long-term debt
and other foreign exchange transactions
(2) |
|
|
7,613 |
|
|
|
3,437 |
|
|
|
(1,596 |
) |
|
|
2,919 |
|
Other |
|
|
(35 |
) |
|
|
18 |
|
|
|
(134 |
) |
|
|
1 |
|
|
Total |
|
$ |
12,845 |
|
|
$ |
5,250 |
|
|
$ |
10,222 |
|
|
$ |
5,600 |
|
|
|
|
(1) |
Includes gains on interest rate lock commitments related to the origination of
mortgage loans that are held-for-sale, which are considered derivative instruments, of $2.9 billion
and $7.6 billion for the three and nine months ended September 30, 2010 compared to $2.6 billion
and $6.3 billion for the same periods in 2009. |
|
(2) |
The majority of the balance is related to the revaluation of economic hedges on
foreign currency-denominated debt. The revaluation of the foreign currency-denominated debt and the
related economic hedges are recorded in other income. |
19
Sales and Trading Revenue
The Corporation enters into trading derivatives to facilitate client transactions, for
principal trading purposes, and to manage risk exposures arising from trading account assets and
liabilities. It is the Corporations policy to include these derivative instruments in its trading
activities which include derivatives and non-derivative cash instruments. The resulting risk from
these derivatives is managed on a portfolio basis as part of the Corporations GBAM business
segment. The related sales and trading revenue generated within GBAM is recorded on various income
statement line items including trading account profits and net interest income as well as other
revenue categories. However, the vast majority of income related to derivative instruments is
recorded in trading account profits. The table below identifies the amounts in the income
statement line items attributable to the Corporations sales and trading revenue categorized by
primary risk for the three and nine months ended September 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
|
|
2010 |
|
|
2009 |
|
|
|
Trading |
|
|
|
|
|
|
Net |
|
|
|
|
|
|
Trading |
|
|
|
|
|
|
Net |
|
|
|
|
|
|
Account |
|
|
Other |
|
|
Interest |
|
|
|
|
|
|
Account |
|
|
Other |
|
|
Interest |
|
|
|
|
(Dollars in millions) |
|
Profits |
|
|
Revenues (1) |
|
|
Income |
|
|
Total |
|
|
Profits |
|
|
Revenues (1) |
|
|
Income |
|
|
Total |
|
|
Interest rate risk |
|
$ |
474 |
|
|
$ |
20 |
|
|
$ |
122 |
|
|
$ |
616 |
|
|
$ |
258 |
|
|
$ |
(1 |
) |
|
$ |
236 |
|
|
$ |
493 |
|
Foreign exchange risk |
|
|
207 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
207 |
|
|
|
219 |
|
|
|
1 |
|
|
|
14 |
|
|
|
234 |
|
Equity risk |
|
|
418 |
|
|
|
569 |
|
|
|
(13 |
) |
|
|
974 |
|
|
|
617 |
|
|
|
585 |
|
|
|
63 |
|
|
|
1,265 |
|
Credit risk |
|
|
1,189 |
|
|
|
438 |
|
|
|
899 |
|
|
|
2,526 |
|
|
|
2,198 |
|
|
|
(87 |
) |
|
|
998 |
|
|
|
3,109 |
|
Other risk |
|
|
139 |
|
|
|
10 |
|
|
|
(33 |
) |
|
|
116 |
|
|
|
105 |
|
|
|
34 |
|
|
|
(57 |
) |
|
|
82 |
|
|
Total sales and trading revenue |
|
$ |
2,427 |
|
|
$ |
1,038 |
|
|
$ |
974 |
|
|
$ |
4,439 |
|
|
$ |
3,397 |
|
|
$ |
532 |
|
|
$ |
1,254 |
|
|
$ |
5,183 |
|
|
|
|
|
Nine Months Ended September 30 |
|
|
|
2010 |
|
|
2009 |
|
|
|
Trading |
|
|
|
|
|
|
Net |
|
|
|
|
|
|
Trading |
|
|
|
|
|
|
Net |
|
|
|
|
|
|
Account |
|
|
Other |
|
|
Interest |
|
|
|
|
|
|
Account |
|
|
Other |
|
|
Interest |
|
|
|
|
(Dollars in millions) |
|
Profits |
|
|
Revenues (1) |
|
|
Income |
|
|
Total |
|
|
Profits |
|
|
Revenues (1) |
|
|
Income |
|
|
Total |
|
|
Interest rate risk |
|
$ |
1,965 |
|
|
$ |
94 |
|
|
$ |
438 |
|
|
$ |
2,497 |
|
|
$ |
2,923 |
|
|
$ |
19 |
|
|
$ |
846 |
|
|
$ |
3,788 |
|
Foreign exchange risk |
|
|
722 |
|
|
|
2 |
|
|
|
- |
|
|
|
724 |
|
|
|
753 |
|
|
|
6 |
|
|
|
27 |
|
|
|
786 |
|
Equity risk |
|
|
1,468 |
|
|
|
1,928 |
|
|
|
(14 |
) |
|
|
3,382 |
|
|
|
1,761 |
|
|
|
2,025 |
|
|
|
165 |
|
|
|
3,951 |
|
Credit risk |
|
|
4,294 |
|
|
|
710 |
|
|
|
2,770 |
|
|
|
7,774 |
|
|
|
4,093 |
|
|
|
(1,579 |
) |
|
|
3,676 |
|
|
|
6,190 |
|
Other risk |
|
|
221 |
|
|
|
26 |
|
|
|
(122 |
) |
|
|
125 |
|
|
|
779 |
|
|
|
(41 |
) |
|
|
(369 |
) |
|
|
369 |
|
|
Total sales and trading revenue |
|
$ |
8,670 |
|
|
$ |
2,760 |
|
|
$ |
3,072 |
|
|
$ |
14,502 |
|
|
$ |
10,309 |
|
|
$ |
430 |
|
|
$ |
4,345 |
|
|
$ |
15,084 |
|
|
|
|
(1) |
Represents investment and brokerage services and other income recorded in GBAM
that the Corporation includes in its definition of sales and trading revenue. |
Credit Derivatives
The Corporation enters into credit derivatives primarily to facilitate client
transactions and to manage credit risk exposures. Credit derivatives derive value based on an
underlying third party-referenced obligation or a portfolio of referenced obligations and
generally require the Corporation as the seller of credit protection to make payments to a buyer
upon the occurrence of a predefined credit event. Such credit events generally include bankruptcy
of the referenced credit entity and failure to pay under the obligation, as well as acceleration
of indebtedness and payment repudiation or moratorium. For credit derivatives based on a portfolio
of referenced credits or credit indices, the Corporation may not be required to make payment until
a specified amount of loss has occurred and/or may only be required to make payment up to a
specified amount.
20
Credit derivative instruments in which the Corporation is the seller of credit protection and
their expiration at September 30, 2010 and December 31, 2009 are summarized below. These
instruments are classified as investment and non-investment grade based on the credit quality of
the underlying reference obligation. The Corporation considers ratings of BBB- or higher as
investment grade. Non-investment grade includes non-rated credit derivative instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
|
Carrying Value |
|
|
|
Less than |
|
|
|
|
|
Three to |
|
|
Over |
|
|
|
|
(Dollars in millions) |
|
One Year |
|
|
Three Years |
|
|
Five Years |
|
|
Five Years |
|
|
Total |
|
|
Credit default swaps: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade |
|
$ |
262 |
|
|
$ |
2,852 |
|
|
$ |
6,052 |
|
|
$ |
14,569 |
|
|
$ |
23,735 |
|
Non-investment grade |
|
|
898 |
|
|
|
11,115 |
|
|
|
13,983 |
|
|
|
30,478 |
|
|
|
56,474 |
|
|
Total |
|
|
1,160 |
|
|
|
13,967 |
|
|
|
20,035 |
|
|
|
45,047 |
|
|
|
80,209 |
|
|
Total return swaps/other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade |
|
|
- |
|
|
|
- |
|
|
|
24 |
|
|
|
24 |
|
|
|
48 |
|
Non-investment grade |
|
|
1 |
|
|
|
3 |
|
|
|
5 |
|
|
|
246 |
|
|
|
255 |
|
|
Total |
|
|
1 |
|
|
|
3 |
|
|
|
29 |
|
|
|
270 |
|
|
|
303 |
|
|
Total credit derivatives |
|
$ |
1,161 |
|
|
$ |
13,970 |
|
|
$ |
20,064 |
|
|
$ |
45,317 |
|
|
$ |
80,512 |
|
|
Credit-related notes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade |
|
|
4 |
|
|
|
138 |
|
|
|
91 |
|
|
|
1,237 |
|
|
|
1,470 |
|
Non-investment grade |
|
|
4 |
|
|
|
37 |
|
|
|
117 |
|
|
|
2,049 |
|
|
|
2,207 |
|
|
Total credit-related notes |
|
$ |
8 |
|
|
$ |
175 |
|
|
$ |
208 |
|
|
$ |
3,286 |
|
|
$ |
3,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Payout/Notional |
|
Credit default swaps: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade |
|
$ |
123,089 |
|
|
$ |
390,947 |
|
|
$ |
483,132 |
|
|
$ |
257,902 |
|
|
$ |
1,255,070 |
|
Non-investment grade |
|
|
97,180 |
|
|
|
385,026 |
|
|
|
296,720 |
|
|
|
286,733 |
|
|
|
1,065,659 |
|
|
Total |
|
|
220,269 |
|
|
|
775,973 |
|
|
|
779,852 |
|
|
|
544,635 |
|
|
|
2,320,729 |
|
|
Total return swaps/other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade |
|
|
24 |
|
|
|
- |
|
|
|
13,278 |
|
|
|
3,545 |
|
|
|
16,847 |
|
Non-investment grade |
|
|
40 |
|
|
|
66 |
|
|
|
605 |
|
|
|
1,358 |
|
|
|
2,069 |
|
|
Total |
|
|
64 |
|
|
|
66 |
|
|
|
13,883 |
|
|
|
4,903 |
|
|
|
18,916 |
|
|
Total credit derivatives |
|
$ |
220,333 |
|
|
$ |
776,039 |
|
|
$ |
793,735 |
|
|
$ |
549,538 |
|
|
$ |
2,339,645 |
|
|
Credit-related notes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade |
|
|
4 |
|
|
|
138 |
|
|
|
91 |
|
|
|
1,237 |
|
|
|
1,470 |
|
Non-investment grade |
|
|
4 |
|
|
|
37 |
|
|
|
117 |
|
|
|
2,049 |
|
|
|
2,207 |
|
|
Total credit-related notes |
|
$ |
8 |
|
|
$ |
175 |
|
|
$ |
208 |
|
|
$ |
3,286 |
|
|
$ |
3,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Carrying Value |
|
|
|
Less than |
|
|
One to |
|
|
Three to |
|
|
Over |
|
|
|
|
(Dollars in millions) |
|
One Year |
|
|
Three Years |
|
|
Five Years |
|
|
Five Years |
|
|
Total |
|
|
Credit default swaps: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade |
|
$ |
454 |
|
|
$ |
5,795 |
|
|
$ |
5,831 |
|
|
$ |
24,586 |
|
|
$ |
36,666 |
|
Non-investment grade |
|
|
1,342 |
|
|
|
14,012 |
|
|
|
16,081 |
|
|
|
30,274 |
|
|
|
61,709 |
|
|
Total |
|
|
1,796 |
|
|
|
19,807 |
|
|
|
21,912 |
|
|
|
54,860 |
|
|
|
98,375 |
|
|
Total return swaps/other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade |
|
|
1 |
|
|
|
20 |
|
|
|
5 |
|
|
|
540 |
|
|
|
566 |
|
Non-investment grade |
|
|
- |
|
|
|
194 |
|
|
|
3 |
|
|
|
291 |
|
|
|
488 |
|
|
Total |
|
|
1 |
|
|
|
214 |
|
|
|
8 |
|
|
|
831 |
|
|
|
1,054 |
|
|
Total credit derivatives |
|
$ |
1,797 |
|
|
$ |
20,021 |
|
|
$ |
21,920 |
|
|
$ |
55,691 |
|
|
$ |
99,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Payout/Notional |
|
Credit default swaps: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade |
|
$ |
147,501 |
|
|
$ |
411,258 |
|
|
$ |
596,103 |
|
|
$ |
335,526 |
|
|
$ |
1,490,388 |
|
Non-investment grade |
|
|
123,907 |
|
|
|
417,834 |
|
|
|
399,896 |
|
|
|
356,735 |
|
|
|
1,298,372 |
|
|
Total |
|
|
271,408 |
|
|
|
829,092 |
|
|
|
995,999 |
|
|
|
692,261 |
|
|
|
2,788,760 |
|
|
Total return swaps/other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade |
|
|
31 |
|
|
|
60 |
|
|
|
1,081 |
|
|
|
8,087 |
|
|
|
9,259 |
|
Non-investment grade |
|
|
2,035 |
|
|
|
1,280 |
|
|
|
2,183 |
|
|
|
18,352 |
|
|
|
23,850 |
|
|
Total |
|
|
2,066 |
|
|
|
1,340 |
|
|
|
3,264 |
|
|
|
26,439 |
|
|
|
33,109 |
|
|
Total credit derivatives |
|
$ |
273,474 |
|
|
$ |
830,432 |
|
|
$ |
999,263 |
|
|
$ |
718,700 |
|
|
$ |
2,821,869 |
|
|
21
The notional amount represents the maximum amount payable by the Corporation for most
credit derivatives. However, the Corporation does not solely monitor its exposure to credit
derivatives based on notional amount because this measure does not take into consideration the
probability of occurrence. As such, the notional amount is not a reliable indicator of the
Corporations exposure to these contracts. Instead, a risk framework is used to define risk
tolerances and establish limits to help ensure that certain credit risk-related losses occur
within acceptable, predefined limits.
The Corporation economically hedges its market risk exposure to credit derivatives by
entering into a variety of offsetting derivative contracts and security positions. For example, in
certain instances, the Corporation may purchase credit protection with identical underlying
referenced names to offset its exposure. The carrying value and notional amount of written credit
derivatives for which the Corporation held purchased credit derivatives with identical underlying
referenced names and terms at September 30, 2010 was $56.2 billion and $1.6 trillion compared to
$79.4 billion and $2.3 trillion at December 31, 2009.
Credit-related notes in the table on page 21 include investments in securities issued by
CDOs, collateralized loan obligations (CLOs) and credit-linked note vehicles. These instruments
are classified as trading securities. The carrying value of these instruments equals the
Corporations maximum exposure to loss. The Corporation is not obligated to make any payments to
the entities under the terms of the securities owned. The Corporation discloses internal
categorizations (i.e., investment grade, non-investment grade) consistent with how risk is managed
for these instruments.
Credit Risk Management of Derivatives and Credit-related Contingent Features
The Corporation executes the majority of its derivative contracts in the
over-the-counter market with large, international financial institutions, including broker/dealers
and, to a lesser degree, with a variety of non-financial companies. Substantially all of the
derivative transactions are executed on a daily margin basis. Therefore, events such as a credit
ratings downgrade (depending on the ultimate rating level) or a breach of credit covenants would
typically require an increase in the amount of collateral required of the counterparty, where
applicable, and/or allow the Corporation to take additional protective measures such as early
termination of all trades. Further, as previously described on page 14, the Corporation enters
into legally enforceable master netting agreements which reduce risk by permitting the closeout
and netting of transactions with the same counterparty upon the occurrence of certain events.
Substantially all of the Corporations derivative contracts contain credit risk-related
contingent features, primarily in the form of International Swaps and Derivatives Association,
Inc. (ISDA) master agreements that enhance the creditworthiness of these instruments as compared
to other obligations of the respective counterparty with whom the Corporation has transacted
(e.g., other debt or equity). These contingent features may be for the benefit of the Corporation,
as well as its counterparties with respect to changes in the Corporations creditworthiness. At
September 30, 2010 and December 31, 2009, the Corporation received cash and securities collateral
of $87.5 billion and $67.7 billion, and posted cash and securities collateral of $76.9 billion and
$62.2 billion in the normal course of business under derivative agreements.
In connection with certain over-the-counter derivative contracts and other trading
agreements, the Corporation could be required to provide additional collateral or to terminate
transactions with certain counterparties in the event of a downgrade of the senior debt ratings of
Bank of America Corporation and its subsidiaries. The amount of additional collateral required
depends on the contract and is usually a fixed incremental amount and/or the market value of the
exposure. At September 30, 2010 and December 31, 2009, the amount of additional collateral and
termination payments that would have been required for such derivatives and trading agreements was
approximately $1.2 billion and $2.1 billion if the long-term credit rating of Bank of America
Corporation and its subsidiaries was incrementally downgraded by one level by all ratings
agencies. At September 30, 2010 and December 31, 2009, a second incremental one level downgrade by
the ratings agencies would have required approximately $1.1 billion and $1.2 billion in additional
collateral and termination payments.
The Corporation records counterparty credit risk valuation adjustments on derivative assets
in order to properly reflect the credit quality of the counterparty. These adjustments are
necessary as the market quotes on derivatives do not fully reflect the credit risk of the
counterparties to the derivative assets. The Corporation considers collateral and legally
enforceable master netting agreements that mitigate its credit exposure to each counterparty in
determining the counterparty credit risk valuation adjustment. All or a portion of these
counterparty credit risk valuation adjustments can be reversed or otherwise adjusted in future
periods due to changes in the value of the derivative contract, collateral and creditworthiness of
the counterparty. During the three and nine months ended September 30, 2010, credit valuation
gains (losses) of $400 million and $(33) million ($183 million and $(194) million, net of hedges)
compared to gains of $1.4 billion and $2.8 billion ($1.1 billion and $1.6 billion, net of hedges)
for the same periods in 2009 for counterparty credit risk related to
22
derivative assets were recognized in trading account profits. At September 30, 2010 and December
31, 2009, the cumulative counterparty credit risk valuation adjustment reduced the derivative
assets balance by $7.5 billion and $7.8 billion.
In addition, the fair value of the Corporations or its subsidiaries derivative liabilities
is adjusted to reflect the impact of the Corporations credit quality. During the three and nine
months ended September 30, 2010, credit valuation gains (losses) of $(43) million and $334 million
($(21) million and $238 million, net of hedges) compared to $(718) million and $(633) million for
the same periods in 2009 were recognized in trading account profits for changes in the
Corporations or its subsidiaries credit risk. At September 30, 2010 and December 31, 2009, the
Corporations cumulative credit risk valuation adjustment reduced the derivative liabilities
balance by $1.1 billion and $664 million.
NOTE 5 Securities
The table below presents the amortized cost, gross unrealized gains and losses in
accumulated OCI, and fair value of AFS debt and marketable equity securities at September 30, 2010
and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
(Dollars in millions) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Available-for-sale debt securities, September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agency securities |
|
$ |
53,153 |
|
|
$ |
499 |
|
|
$ |
(1,602 |
) |
|
$ |
52,050 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
|
162,143 |
|
|
|
3,785 |
|
|
|
(103 |
) |
|
|
165,825 |
|
Agency collateralized mortgage obligations |
|
|
38,856 |
|
|
|
478 |
|
|
|
(73 |
) |
|
|
39,261 |
|
Non-agency residential (1) |
|
|
25,716 |
|
|
|
738 |
|
|
|
(669 |
) |
|
|
25,785 |
|
Non-agency commercial |
|
|
6,632 |
|
|
|
943 |
|
|
|
(22 |
) |
|
|
7,553 |
|
Foreign securities |
|
|
3,960 |
|
|
|
95 |
|
|
|
(468 |
) |
|
|
3,587 |
|
Corporate bonds |
|
|
5,888 |
|
|
|
256 |
|
|
|
(20 |
) |
|
|
6,124 |
|
Other taxable securities (2) |
|
|
16,534 |
|
|
|
57 |
|
|
|
(322 |
) |
|
|
16,269 |
|
|
Total taxable securities |
|
|
312,882 |
|
|
|
6,851 |
|
|
|
(3,279 |
) |
|
|
316,454 |
|
Tax-exempt securities |
|
|
5,882 |
|
|
|
159 |
|
|
|
(71 |
) |
|
|
5,970 |
|
|
Total available-for-sale debt securities |
|
$ |
318,764 |
|
|
$ |
7,010 |
|
|
$ |
(3,350 |
) |
|
$ |
322,424 |
|
|
Available-for-sale marketable equity securities (3) |
|
$ |
8,598 |
|
|
$ |
9,868 |
|
|
$ |
(28 |
) |
|
$ |
18,438 |
|
|
Available-for-sale debt securities, December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agency securities |
|
$ |
22,648 |
|
|
$ |
414 |
|
|
$ |
(37 |
) |
|
$ |
23,025 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
|
164,677 |
|
|
|
2,415 |
|
|
|
(846 |
) |
|
|
166,246 |
|
Agency collateralized mortgage obligations |
|
|
25,330 |
|
|
|
464 |
|
|
|
(13 |
) |
|
|
25,781 |
|
Non-agency residential (1) |
|
|
37,940 |
|
|
|
1,191 |
|
|
|
(4,028 |
) |
|
|
35,103 |
|
Non-agency commercial |
|
|
6,354 |
|
|
|
671 |
|
|
|
(116 |
) |
|
|
6,909 |
|
Foreign securities |
|
|
4,732 |
|
|
|
61 |
|
|
|
(896 |
) |
|
|
3,897 |
|
Corporate bonds |
|
|
6,136 |
|
|
|
182 |
|
|
|
(126 |
) |
|
|
6,192 |
|
Other taxable securities (2) |
|
|
25,469 |
|
|
|
260 |
|
|
|
(478 |
) |
|
|
25,251 |
|
|
Total taxable securities |
|
|
293,286 |
|
|
|
5,658 |
|
|
|
(6,540 |
) |
|
|
292,404 |
|
Tax-exempt securities |
|
|
9,340 |
|
|
|
100 |
|
|
|
(243 |
) |
|
|
9,197 |
|
|
Total available-for-sale debt securities |
|
$ |
302,626 |
|
|
$ |
5,758 |
|
|
$ |
(6,783 |
) |
|
$ |
301,601 |
|
|
Available-for-sale marketable equity securities (3) |
|
$ |
6,020 |
|
|
$ |
3,895 |
|
|
$ |
(507 |
) |
|
$ |
9,408 |
|
|
|
|
(1) |
At September 30, 2010, includes approximately 89 percent prime bonds, nine
percent Alt-A bonds, and two percent subprime bonds. At December 31, 2009, includes approximately
85 percent prime bonds, 10 percent Alt-A bonds, and five percent subprime bonds. |
|
(2) |
Substantially all asset-backed securities (ABS). |
|
(3) |
Classified in other assets on the Corporations Consolidated Balance Sheet. |
At September 30, 2010, the accumulated net unrealized gains on AFS debt securities included
in accumulated OCI were $2.3 billion, net of the related income tax expense of $1.4 billion. At
September 30, 2010 and December 31, 2009, the Corporation had nonperforming AFS debt securities of
$213 million and $467 million.
At September 30, 2010, both the amortized cost and fair value of held-to-maturity (HTM) debt
securities were $438 million. At December 31, 2009, the amortized cost and fair value of HTM debt
securities were $9.8 billion and $9.7 billion, which included ABS that were issued by the
Corporations credit card securitization trust and retained by the Corporation
23
with an amortized cost of $6.6 billion and a fair value of $6.4 billion. As a result of the
adoption of new consolidation guidance, the Corporation consolidated the credit card
securitization trusts on January 1, 2010 and the ABS were eliminated in consolidation and the
related consumer credit card loans were included in loans and leases on the Corporations
Consolidated Balance Sheet. Additionally, during the three months
ended June 30, 2010, $2.9 billion of debt securities held in consolidated
commercial paper conduits was reclassified from HTM to AFS as a result of new regulatory capital
requirements related to asset-backed commercial paper conduits.
During the three and nine months ended September 30, 2010 and 2009, the Corporation recorded
other-than-temporary impairment (OTTI) losses on AFS debt securities as presented in the table
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2010 |
|
|
|
Non-agency |
|
|
Non-agency |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Residential |
|
|
Commercial |
|
|
Foreign |
|
|
Corporate |
|
|
Taxable |
|
|
|
|
(Dollars in millions) |
|
MBS |
|
|
MBS |
|
|
Securities |
|
|
Bonds |
|
|
Securities |
|
|
Total |
|
|
Total other-than-temporary impairment losses (unrealized and realized) (1) |
|
$ |
(154 |
) |
|
$ |
- |
|
|
$ |
(2 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(156 |
) |
Unrealized other-than-temporary impairment losses recognized in OCI (2) |
|
|
33 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
33 |
|
|
Net impairment losses recognized in earnings (3) |
|
$ |
(121 |
) |
|
$ |
- |
|
|
$ |
(2 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(123 |
) |
|
|
|
|
Three Months Ended September 30, 2009 |
|
|
|
Non-agency |
|
|
Non-agency |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Residential |
|
|
Commercial |
|
|
Foreign |
|
|
Corporate |
|
|
Taxable |
|
|
|
|
(Dollars in millions) |
|
MBS |
|
|
MBS |
|
|
Securities |
|
|
Bonds |
|
|
Securities |
|
|
Total |
|
|
Total other-than-temporary impairment losses (unrealized and realized) (1) |
|
$ |
(538 |
) |
|
$ |
- |
|
|
$ |
(107 |
) |
|
$ |
(19 |
) |
|
$ |
(183 |
) |
|
$ |
(847 |
) |
Unrealized other-than-temporary impairment losses recognized in OCI (2) |
|
|
50 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
50 |
|
|
Net impairment losses recognized in earnings (3) |
|
$ |
(488 |
) |
|
$ |
- |
|
|
$ |
(107 |
) |
|
$ |
(19 |
) |
|
$ |
(183 |
) |
|
$ |
(797 |
) |
|
|
|
|
Nine Months Ended September 30, 2010 |
|
|
|
Non-agency |
|
|
Non-agency |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Residential |
|
|
Commercial |
|
|
Foreign |
|
|
Corporate |
|
|
Taxable |
|
|
|
|
(Dollars in millions) |
|
MBS |
|
|
MBS |
|
|
Securities |
|
|
Bonds |
|
|
Securities |
|
|
Total |
|
|
Total other-than-temporary impairment losses (unrealized and realized) (1) |
|
$ |
(925 |
) |
|
$ |
(1 |
) |
|
$ |
(213 |
) |
|
$ |
(2 |
) |
|
$ |
(475 |
) |
|
$ |
(1,616 |
) |
Unrealized other-than-temporary impairment losses recognized in OCI (2) |
|
|
460 |
|
|
|
- |
|
|
|
16 |
|
|
|
- |
|
|
|
290 |
|
|
|
766 |
|
|
Net impairment losses recognized in earnings (3) |
|
$ |
(465 |
) |
|
$ |
(1 |
) |
|
$ |
(197 |
) |
|
$ |
(2 |
) |
|
$ |
(185 |
) |
|
$ |
(850 |
) |
|
|
|
|
Nine Months Ended September 30, 2009 |
|
|
|
Non-agency |
|
|
Non-agency |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Residential |
|
|
Commercial |
|
|
Foreign |
|
|
Corporate |
|
|
Taxable |
|
|
|
|
(Dollars in millions) |
|
MBS |
|
|
MBS |
|
|
Securities |
|
|
Bonds |
|
|
Securities |
|
|
Total |
|
|
Total other-than-temporary impairment losses (unrealized and realized) (1) |
|
$ |
(1,801 |
) |
|
$ |
- |
|
|
$ |
(342 |
) |
|
$ |
(87 |
) |
|
$ |
(441 |
) |
|
$ |
(2,671 |
) |
Unrealized other-than-temporary impairment losses recognized in OCI (2) |
|
|
477 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
477 |
|
|
Net impairment losses recognized in earnings (3) |
|
$ |
(1,324 |
) |
|
$ |
- |
|
|
$ |
(342 |
) |
|
$ |
(87 |
) |
|
$ |
(441 |
) |
|
$ |
(2,194 |
) |
|
|
|
(1) |
For initial impairment on a security, represents the excess of the amortized
cost over the fair value. For subsequent impairments of the same security, represents additional
declines in fair value subsequent to the previously recorded OTTI loss(es), if applicable. |
|
(2) |
Represents the non-credit component of OTTI losses on AFS debt securities. For the
three and nine months ended September 30, 2010, for certain securities, the Corporation recognized
credit losses in excess of unrealized losses in accumulated OCI. In these instances, a portion of
the credit losses recognized in earnings has been offset by an unrealized gain. Balances above
exclude $18 million and $82 million of gross gains recorded in accumulated OCI related to these
securities for the three and nine months ended September 30, 2010 and $149 million and $430 million
for the same periods in 2009. |
|
(3) |
Represents the credit component of OTTI losses on AFS debt securities. |
24
The table below presents activity for the three and nine months ended September 30, 2010 and
2009 related to the credit component recognized in earnings on debt securities held by the
Corporation for which a portion of the OTTI loss remains in accumulated OCI.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
September 30 |
|
|
September 30 |
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Balance, beginning of period |
|
$ |
940 |
|
|
$ |
296 |
|
|
$ |
442 |
|
|
$ |
- |
|
Credit component of other-than-temporary impairment not reclassified to
OCI in connection with the cumulative effect transition adjustment (1) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
22 |
|
Additions for the credit component on debt securities on which other-than-temporary
impairment losses were not previously recognized (2) |
|
|
13 |
|
|
|
36 |
|
|
|
190 |
|
|
|
310 |
|
Additions for the credit component on debt securities on which other-than-temporary
impairment losses were previously recognized |
|
|
11 |
|
|
|
9 |
|
|
|
332 |
|
|
|
9 |
|
|
Balance, September 30 |
|
$ |
964 |
|
|
$ |
341 |
|
|
$ |
964 |
|
|
$ |
341 |
|
|
|
|
(1) |
At January 1, 2009, the Corporation had securities with $134 million of OTTI
previously recognized in earnings of which $22 million represented the credit component and $112
million represented the non-credit component which was reclassified to accumulated OCI through a
cumulative effect transition adjustment. |
|
(2) |
During the three and nine months ended September 30, 2010, the Corporation
recognized $99 million and $328 million of OTTI losses on debt securities on which no portion of
OTTI loss remained in accumulated OCI and $752 million and $1.9 billion for the same periods in
2009. OTTI losses related to these securities are excluded from these amounts. |
As of September 30, 2010, those debt securities with OTTI for which a portion of the OTTI
loss remains in accumulated OCI primarily consisted of non-agency residential mortgage-backed
securities (RMBS) and CDOs. The Corporation estimates the portion of loss attributable to credit
using a discounted cash flow model. The Corporation estimates the expected cash flows of the
underlying collateral using internal credit, interest rate and prepayment risk models that
incorporate managements best estimate of current key assumptions such as default rates, loss
severity and prepayment rates. Assumptions used can vary widely from loan to loan and are
influenced by such factors as loan interest rate, geographical location of the borrower, borrower
characteristics and collateral type. The Corporation then uses a third party vendor to determine
how the underlying collateral cash flows will be distributed to each security issued from the
structure. Expected principal and interest cash flows on an impaired debt security are discounted
using the book yield of each individual impaired debt security.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range (1) |
|
|
Weighted- |
|
10th |
|
90th |
|
|
average |
|
Percentile (2) |
|
Percentile (2) |
|
Prepayment speed |
|
|
13.2 |
% |
|
|
3.1 |
% |
|
|
27.5 |
% |
Loss severity |
|
|
43.8 |
|
|
|
20.1 |
|
|
|
53.4 |
|
Life default rate |
|
|
50.4 |
|
|
|
2.6 |
|
|
|
99.1 |
|
|
|
|
(1) |
Represents the range of inputs/assumptions based upon
the underlying collateral. |
|
(2) |
The value of a variable below which the indicated
percentile of observations will fall. |
Based on the expected cash flows derived from the applicable model, the Corporation expects
to recover the unrealized losses in accumulated OCI on non-agency RMBS. Significant assumptions
used in the valuation of non-agency RMBS are in the table above. Annual constant prepayment speed
and loss severity rates are projected considering collateral characteristics such as loan-to-value
(LTV), creditworthiness of borrowers (FICO) and geographic concentrations. The weighted-average
severity by collateral type was 38 percent for prime bonds, 45 percent for Alt-A bonds and 52
percent for subprime bonds. Additionally, default rates are projected by considering collateral
characteristics including, but not limited to LTV, FICO and geographic concentration.
Weighted-average life default rates by collateral type were 37 percent for prime bonds, 59 percent
for Alt-A bonds and 66 percent for subprime bonds.
25
The table below presents the current fair value and the associated gross unrealized losses on
investments in securities with gross unrealized losses at September 30, 2010 and December 31,
2009, and whether these securities have had gross unrealized losses for less than twelve months or
for twelve months or longer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
Twelve Months |
|
|
|
|
|
|
Twelve Months |
|
|
or Longer |
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
(Dollars in millions) |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Temporarily-impaired available-for-sale debt securities at
September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agency securities |
|
$ |
32,578 |
|
|
$ |
(1,558 |
) |
|
$ |
783 |
|
|
$ |
(44 |
) |
|
$ |
33,361 |
|
|
$ |
(1,602 |
) |
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
|
8,288 |
|
|
|
(103 |
) |
|
|
- |
|
|
|
- |
|
|
|
8,288 |
|
|
|
(103 |
) |
Agency collateralized mortgage obligations |
|
|
2,931 |
|
|
|
(73 |
) |
|
|
- |
|
|
|
- |
|
|
|
2,931 |
|
|
|
(73 |
) |
Non-agency residential |
|
|
5,049 |
|
|
|
(353 |
) |
|
|
- |
|
|
|
- |
|
|
|
5,049 |
|
|
|
(353 |
) |
Non-agency commercial |
|
|
15 |
|
|
|
(1 |
) |
|
|
58 |
|
|
|
(4 |
) |
|
|
73 |
|
|
|
(5 |
) |
Foreign securities |
|
|
- |
|
|
|
- |
|
|
|
80 |
|
|
|
(11 |
) |
|
|
80 |
|
|
|
(11 |
) |
Corporate bonds |
|
|
224 |
|
|
|
(3 |
) |
|
|
41 |
|
|
|
(17 |
) |
|
|
265 |
|
|
|
(20 |
) |
Other taxable securities |
|
|
9,148 |
|
|
|
(165 |
) |
|
|
77 |
|
|
|
(54 |
) |
|
|
9,225 |
|
|
|
(219 |
) |
|
Total taxable securities |
|
|
58,233 |
|
|
|
(2,256 |
) |
|
|
1,039 |
|
|
|
(130 |
) |
|
|
59,272 |
|
|
|
(2,386 |
) |
Tax-exempt securities |
|
|
9,988 |
|
|
|
(24 |
) |
|
|
690 |
|
|
|
(47 |
) |
|
|
10,678 |
|
|
|
(71 |
) |
|
Total temporarily-impaired available-for-sale debt securities |
|
|
68,221 |
|
|
|
(2,280 |
) |
|
|
1,729 |
|
|
|
(177 |
) |
|
|
69,950 |
|
|
|
(2,457 |
) |
Temporarily-impaired available-for-sale marketable equity
securities |
|
|
53 |
|
|
|
(13 |
) |
|
|
30 |
|
|
|
(15 |
) |
|
|
83 |
|
|
|
(28 |
) |
|
Total temporarily-impaired available-for-sale securities |
|
|
68,274 |
|
|
|
(2,293 |
) |
|
|
1,759 |
|
|
|
(192 |
) |
|
|
70,033 |
|
|
|
(2,485 |
) |
|
Other-than-temporarily impaired available-for-sale-debt
securities (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency residential |
|
|
114 |
|
|
|
(12 |
) |
|
|
1,002 |
|
|
|
(304 |
) |
|
|
1,116 |
|
|
|
(316 |
) |
Non-agency commercial |
|
|
10 |
|
|
|
(1 |
) |
|
|
132 |
|
|
|
(16 |
) |
|
|
142 |
|
|
|
(17 |
) |
Foreign securities |
|
|
- |
|
|
|
- |
|
|
|
494 |
|
|
|
(457 |
) |
|
|
494 |
|
|
|
(457 |
) |
Other taxable securities |
|
|
46 |
|
|
|
(2 |
) |
|
|
948 |
|
|
|
(101 |
) |
|
|
994 |
|
|
|
(103 |
) |
|
Total temporarily-impaired and other-than-temporarily
impaired available-for-sale securities(2) |
|
$ |
68,444 |
|
|
$ |
(2,308 |
) |
|
$ |
4,335 |
|
|
$ |
(1,070 |
) |
|
$ |
72,779 |
|
|
$ |
(3,378 |
) |
|
Temporarily-impaired available-for-sale debt securities
at December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agency securities |
|
$ |
4,655 |
|
|
$ |
(37 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
4,655 |
|
|
$ |
(37 |
) |
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
|
53,979 |
|
|
|
(817 |
) |
|
|
740 |
|
|
|
(29 |
) |
|
|
54,719 |
|
|
|
(846 |
) |
Agency collateralized mortgage obligations |
|
|
965 |
|
|
|
(10 |
) |
|
|
747 |
|
|
|
(3 |
) |
|
|
1,712 |
|
|
|
(13 |
) |
Non-agency residential |
|
|
6,907 |
|
|
|
(557 |
) |
|
|
13,613 |
|
|
|
(3,370 |
) |
|
|
20,520 |
|
|
|
(3,927 |
) |
Non-agency commercial |
|
|
1,263 |
|
|
|
(35 |
) |
|
|
1,711 |
|
|
|
(81 |
) |
|
|
2,974 |
|
|
|
(116 |
) |
Foreign securities |
|
|
169 |
|
|
|
(27 |
) |
|
|
3,355 |
|
|
|
(869 |
) |
|
|
3,524 |
|
|
|
(896 |
) |
Corporate bonds |
|
|
1,157 |
|
|
|
(71 |
) |
|
|
294 |
|
|
|
(55 |
) |
|
|
1,451 |
|
|
|
(126 |
) |
Other taxable securities |
|
|
3,779 |
|
|
|
(70 |
) |
|
|
932 |
|
|
|
(408 |
) |
|
|
4,711 |
|
|
|
(478 |
) |
|
Total taxable securities |
|
|
72,874 |
|
|
|
(1,624 |
) |
|
|
21,392 |
|
|
|
(4,815 |
) |
|
|
94,266 |
|
|
|
(6,439 |
) |
Tax-exempt securities |
|
|
4,716 |
|
|
|
(93 |
) |
|
|
1,989 |
|
|
|
(150 |
) |
|
|
6,705 |
|
|
|
(243 |
) |
|
Total temporarily-impaired available-for-sale debt securities |
|
|
77,590 |
|
|
|
(1,717 |
) |
|
|
23,381 |
|
|
|
(4,965 |
) |
|
|
100,971 |
|
|
|
(6,682 |
) |
Temporarily-impaired available-for-sale marketable equity
securities |
|
|
338 |
|
|
|
(113 |
) |
|
|
1,554 |
|
|
|
(394 |
) |
|
|
1,892 |
|
|
|
(507 |
) |
|
Total temporarily-impaired available-for-sale securities |
|
|
77,928 |
|
|
|
(1,830 |
) |
|
|
24,935 |
|
|
|
(5,359 |
) |
|
|
102,863 |
|
|
|
(7,189 |
) |
|
Other-than-temporarily impaired available-for-sale-debt
securities (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency residential |
|
|
51 |
|
|
|
(17 |
) |
|
|
1,076 |
|
|
|
(84 |
) |
|
|
1,127 |
|
|
|
(101 |
) |
|
Total temporarily-impaired and other-than-temporarily
impaired available-for-sale securities(2) |
|
$ |
77,979 |
|
|
$ |
(1,847 |
) |
|
$ |
26,011 |
|
|
$ |
(5,443 |
) |
|
$ |
103,990 |
|
|
$ |
(7,290 |
) |
|
|
|
(1) |
Includes other-than-temporarily impaired AFS debt securities on which a portion
of the OTTI loss remains in OCI. |
|
(2) |
At September 30, 2010, the amortized cost of approximately 7,000 AFS securities
exceeded their fair value by $3.4 billion. At December 31, 2009, the amortized cost of
approximately 12,000 AFS securities exceeded their fair value by $7.3 billion. |
26
The Corporation considers the length of time and extent to which the fair value of AFS debt
securities have been less than cost to conclude that such securities were not
other-than-temporarily impaired. The Corporation also considers other factors such as the
financial condition of the issuer including credit ratings and specific events affecting the
operations of the issuer, underlying assets that collateralize the
debt security, and other industry and macroeconomic conditions. As the Corporation has no intent
to sell securities with unrealized losses and it is not more-likely-than-not that the Corporation
will be required to sell these securities before recovery of amortized cost, the Corporation has
concluded that the securities are not impaired on an other-than-temporary basis.
The amortized cost and fair value of the Corporations investment in AFS debt securities from
the Federal National Mortgage Association (FNMA), Government National Mortgage Association (GNMA)
and the Federal Home Loan Mortgage Corporation (FHLMC) where the investment exceeded 10 percent of
consolidated shareholders equity at September 30, 2010 and December 31, 2009 are presented in the
table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
December 31, 2009 |
|
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
(Dollars in millions) |
|
Cost |
|
Value |
|
Cost |
|
Value |
|
Federal National Mortgage Association |
|
$ |
97,272 |
|
|
$ |
98,828 |
|
|
$ |
100,321 |
|
|
$ |
101,096 |
|
Government National Mortgage Association |
|
|
76,480 |
|
|
|
78,296 |
|
|
|
60,610 |
|
|
|
61,121 |
|
Federal Home Loan Mortgage Corporation |
|
|
27,247 |
|
|
|
27,962 |
|
|
|
29,076 |
|
|
|
29,810 |
|
|
The expected maturity distribution of the Corporations MBS and the contractual maturity
distribution of the Corporations other AFS debt securities, and the yields on the Corporations
AFS debt securities portfolio at September 30, 2010 are summarized in the table below. Actual
maturities may differ from the contractual or expected maturities since borrowers may have the
right to prepay obligations with or without prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
Due after One |
|
|
Due after Five |
|
|
|
|
|
|
|
|
|
Due in One |
|
|
Year through |
|
|
Years through |
|
|
Due after |
|
|
|
|
|
|
Year or Less |
|
|
Five Years |
|
|
Ten Years |
|
|
Ten Years |
|
|
Total |
|
(Dollars in millions) |
|
Amount |
|
|
Yield (1) |
|
|
Amount |
|
|
Yield (1) |
|
|
Amount |
|
|
Yield (1) |
|
|
Amount |
|
|
Yield (1) |
|
|
Amount |
|
|
Yield (1) |
|
|
Fair value of available-for-sale debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agency securities |
|
$ |
637 |
|
|
|
3.90 |
% |
|
$ |
1,693 |
|
|
|
1.97 |
% |
|
$ |
13,218 |
|
|
|
2.78 |
% |
|
$ |
36,502 |
|
|
|
3.43 |
% |
|
$ |
52,050 |
|
|
|
3.22 |
% |
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
|
19 |
|
|
|
4.81 |
|
|
|
91,376 |
|
|
|
4.46 |
|
|
|
37,924 |
|
|
|
4.30 |
|
|
|
36,506 |
|
|
|
3.96 |
|
|
|
165,825 |
|
|
|
4.31 |
|
Agency-collateralized mortgage obligations |
|
|
138 |
|
|
|
2.45 |
|
|
|
14,885 |
|
|
|
2.80 |
|
|
|
14,179 |
|
|
|
4.10 |
|
|
|
10,059 |
|
|
|
2.33 |
|
|
|
39,261 |
|
|
|
3.15 |
|
Non-agency residential |
|
|
411 |
|
|
|
11.48 |
|
|
|
4,470 |
|
|
|
8.13 |
|
|
|
2,076 |
|
|
|
6.18 |
|
|
|
18,828 |
|
|
|
4.22 |
|
|
|
25,785 |
|
|
|
5.17 |
|
Non-agency commercial |
|
|
250 |
|
|
|
5.60 |
|
|
|
5,604 |
|
|
|
6.13 |
|
|
|
1,243 |
|
|
|
11.55 |
|
|
|
456 |
|
|
|
6.64 |
|
|
|
7,553 |
|
|
|
7.04 |
|
Foreign securities |
|
|
872 |
|
|
|
0.50 |
|
|
|
2,540 |
|
|
|
5.42 |
|
|
|
156 |
|
|
|
2.72 |
|
|
|
19 |
|
|
|
3.40 |
|
|
|
3,587 |
|
|
|
4.10 |
|
Corporate bonds |
|
|
169 |
|
|
|
4.55 |
|
|
|
4,337 |
|
|
|
2.14 |
|
|
|
1,320 |
|
|
|
3.04 |
|
|
|
298 |
|
|
|
3.04 |
|
|
|
6,124 |
|
|
|
2.44 |
|
Other taxable securities |
|
|
2,528 |
|
|
|
1.10 |
|
|
|
6,179 |
|
|
|
1.20 |
|
|
|
424 |
|
|
|
0.90 |
|
|
|
7,138 |
|
|
|
6.50 |
|
|
|
16,269 |
|
|
|
3.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total taxable securities |
|
|
5,024 |
|
|
|
2.59 |
|
|
|
131,084 |
|
|
|
4.22 |
|
|
|
70,540 |
|
|
|
4.11 |
|
|
|
109,806 |
|
|
|
3.85 |
|
|
|
316,454 |
|
|
|
4.04 |
|
Tax-exempt securities |
|
|
215 |
|
|
|
4.42 |
|
|
|
1,603 |
|
|
|
4.35 |
|
|
|
2,430 |
|
|
|
4.09 |
|
|
|
1,722 |
|
|
|
4.51 |
|
|
|
5,970 |
|
|
|
4.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale debt securities |
|
$ |
5,239 |
|
|
|
2.67 |
|
|
$ |
132,687 |
|
|
|
4.23 |
|
|
$ |
72,970 |
|
|
|
4.11 |
|
|
$ |
111,528 |
|
|
|
3.86 |
|
|
$ |
322,424 |
|
|
|
4.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost of available-for-sale debt securities |
|
$ |
5,585 |
|
|
|
|
|
|
$ |
130,211 |
|
|
|
|
|
|
$ |
70,445 |
|
|
|
|
|
|
$ |
112,523 |
|
|
|
|
|
|
$ |
318,764 |
|
|
|
|
|
|
|
|
|
(1) |
|
Yields are calculated based on the amortized cost of the securities. |
The components of realized gains and losses on sales of debt securities for the three
and nine months ended September 30, 2010 and 2009 are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
|
Nine Months Ended September 30 |
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Gross gains |
|
$ |
990 |
|
|
$ |
1,639 |
|
|
$ |
2,838 |
|
|
$ |
3,920 |
|
Gross losses |
|
|
(107 |
) |
|
|
(85 |
) |
|
|
(1,184 |
) |
|
|
(236 |
) |
|
Net gains on sales of debt securities |
|
$ |
883 |
|
|
$ |
1,554 |
|
|
$ |
1,654 |
|
|
$ |
3,684 |
|
|
Income tax expense attributable to realized net gains on sales
on debt securities |
|
$ |
327 |
|
|
$ |
575 |
|
|
$ |
612 |
|
|
$ |
1,363 |
|
|
During the three months ended June 30, 2010, the Corporation entered into a series of
transactions in its AFS debt securities portfolio that involved securitizations as well as sales
of non-agency RMBS. The Corporation made the decision to enter into these transactions in late May
2010 following a review of corporate risk objectives in light of proposed Basel regulatory capital
changes and liquidity targets. The carrying value of the non-agency RMBS portfolio was reduced
$5.2 billion during the quarter primarily as a result of the aforementioned sales and
securitizations as well as paydowns. The
27
Corporation
recognized net losses of $711 million on the series of
transactions in the AFS debt securities portfolio, and improved
the overall credit quality of the remaining portfolio such that the percentage of the non-agency
RMBS portfolio that is below investment grade was reduced significantly.
Certain Corporate and Strategic Investments
At both September 30, 2010 and December 31, 2009, the Corporation owned approximately 11
percent, or 25.6 billion common shares of China Construction Bank (CCB). During the nine months
ended September 30, 2009, the Corporation sold its initial investment of 19.1 billion common
shares in CCB for a pre-tax gain of $7.3 billion. In the three months ended September 30, 2010,
the Corporation recorded in accumulated OCI a $6.2 billion after-tax unrealized gain on 23.6
billion shares of the Corporations investment in CCB, which previously had been carried at cost.
These shares were reclassified to AFS in the three months ended September 30, 2010 because the
sales restrictions on 23.6 billion of these shares expire within one year (August 2011), and
therefore, in accordance with applicable accounting guidance, the Corporation recorded the
unrealized gain in accumulated OCI, net of an 11.5 percent restriction discount. Sales
restrictions on the remaining two billion CCB shares continue until August 2013, and these shares
continue to be carried at cost basis. At September 30, 2010, the cost basis of all remaining CCB
shares was $9.2 billion, the carrying value was $19.0 billion and the fair value was $20.0
billion. At December 31, 2009, both the cost basis and the carrying value were $9.2 billion and
the fair value was $22.0 billion. Dividend income on this investment is recorded in equity
investment income and during the nine months ended September 30, 2010, the Corporation recorded
dividend income of $535 million from CCB. The Corporation remains a significant shareholder in CCB
and intends to continue the important long-term strategic alliance with CCB originally entered
into in 2005. As part of this alliance, the Corporation expects to continue to provide advice and
assistance to CCB.
In June 2010, the Corporation sold its investment of 188.4 million preferred shares and 56.5
million common shares in Itaú Unibanco Holding S.A. (Itaú Unibanco) at a price of $3.9 billion.
The Itaú Unibanco investment was accounted for at fair value and recorded as AFS marketable equity
securities in other assets with unrealized gains recorded, net-of-tax, in accumulated OCI. The
cost basis of this investment was $2.6 billion and, after transaction costs, the pre-tax gain was
$1.2 billion.
In September 2010, the Corporation sold its 24.9 percent ownership interest in Grupo
Financiero Santander, S.A.B. de C.V. to an affiliate of its parent company, Banco Santander, S.A.,
the majority interest holder. The investment was recorded in other assets and was accounted for
under the equity method of accounting. Because the sale was expected to result in a loss upon
closing, the Corporation recorded an impairment write-down in the three months ended June 30, 2010
equal to the estimated pre-tax loss on sale of $428 million. The
sale closed during the three months ended September 30,
2010.
In June 2010, the Corporation sold all of its Class B units in MasterCard, which were
acquired primarily upon MasterCards initial public offering. In connection with the transaction,
the Corporation recorded a pre-tax gain of $440 million.
During the third quarter, the Corporation sold its exposure of $1.7 billion in certain
private equity funds, comprised of $859 million in capital and $794 million in unfunded
commitments, resulting in no gain or loss in the three months ended
September 30, 2010.
At both September 30, 2010 and December 31, 2009, the Corporation had an economic ownership
of approximately 34 percent in BlackRock, Inc. (BlackRock), a publicly traded investment company.
The carrying value of this investment at September 30, 2010 and December 31, 2009 was $10.2
billion and $10.0 billion and the fair value was $11.0 billion and $15.0 billion. This investment
is recorded in other assets and is accounted for under the equity method of accounting with income
recorded in equity investment income.
On June 26, 2009, the Corporation entered into a joint venture agreement with First Data
Corporation (First Data) creating Banc of America Merchant Services, LLC. Under the terms of the
agreement, the Corporation contributed its merchant processing business to the joint venture and
First Data contributed certain merchant processing contracts and personnel resources. During the
three months ended June 30, 2009, the Corporation recorded in other income a pre-tax gain of $3.8
billion related to this transaction. In addition to the Corporation and First Data Corporation,
the remaining stake was initially held by a third party. In June 2010, the third party sold its
interest to the joint venture, resulting in an ownership increase in this joint venture to
approximately 49 percent for the Corporation and 51 percent for First Data Corporation. The
investment in the joint venture, which was initially recorded at a fair value of $4.7 billion, is
accounted for under the equity method of accounting with income recorded in equity investment
income. The carrying value at both September 30, 2010 and December 31, 2009 was $4.7 billion.
28
NOTE 6 Outstanding Loans and Leases
The table below presents outstanding loans and leases at September 30, 2010 and December
31, 2009.
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
December 31 |
(Dollars in millions) |
|
2010(1) |
|
2009 |
|
Consumer |
|
|
|
|
|
|
|
|
Residential mortgage (2) |
|
$ |
243,141 |
|
|
$ |
242,129 |
|
Home equity |
|
|
141,558 |
|
|
|
149,126 |
|
Discontinued real estate (3) |
|
|
13,442 |
|
|
|
14,854 |
|
Credit card domestic |
|
|
113,609 |
|
|
|
49,453 |
|
Credit card foreign |
|
|
27,262 |
|
|
|
21,656 |
|
Direct/Indirect consumer (4) |
|
|
92,479 |
|
|
|
97,236 |
|
Other consumer (5) |
|
|
2,924 |
|
|
|
3,110 |
|
|
Total consumer |
|
|
634,415 |
|
|
|
577,564 |
|
|
Commercial |
|
|
|
|
|
|
|
|
Commercial domestic (6) |
|
|
191,096 |
|
|
|
198,903 |
|
Commercial real estate (7) |
|
|
52,819 |
|
|
|
69,447 |
|
Commercial lease financing |
|
|
21,321 |
|
|
|
22,199 |
|
Commercial foreign |
|
|
30,575 |
|
|
|
27,079 |
|
|
Total commercial loans |
|
|
295,811 |
|
|
|
317,628 |
|
Commercial loans measured at fair value (8) |
|
|
3,684 |
|
|
|
4,936 |
|
|
Total commercial |
|
|
299,495 |
|
|
|
322,564 |
|
|
Total loans and leases |
|
$ |
933,910 |
|
|
$ |
900,128 |
|
|
|
|
|
(1) |
|
Periods subsequent to January 1, 2010 are presented in accordance with new
consolidation guidance. |
|
(2) |
|
Includes foreign residential mortgages of $98 million and $552 million at September
30, 2010 and December 31, 2009. |
|
(3) |
|
Includes $12.1 billion and $13.4 billion of pay option loans and $1.4 billion and
$1.5 billion of subprime loans at September 30, 2010 and December 31, 2009. The Corporation no
longer originates these products. |
|
(4) |
|
Includes dealer financial services loans of $44.5 billion and $41.6 billion,
consumer lending of $14.3 billion and $19.7 billion, domestic securities-based lending margin loans
of $15.7 billion and $12.9 billion, student loans of $7.0 billion and $10.8 billion, foreign
consumer loans of $7.7 billion and $8.0 billion and other consumer loans of $3.3 billion and $4.2
billion at September 30, 2010 and December 31, 2009. |
|
(5) |
|
Includes consumer finance loans of $2.0 billion and $2.3 billion, other foreign
consumer loans of $846 million and $709 million and consumer overdrafts of $66 million and $144
million at September 30, 2010 and December 31, 2009. |
|
(6) |
|
Includes small business commercial domestic loans, including card related
products, of $15.2 billion and $17.5 billion at September 30, 2010 and December 31, 2009. |
|
(7) |
|
Includes domestic commercial real estate loans of $50.1 billion and $66.5 billion
and foreign commercial real estate loans of $2.7 billion and $3.0 billion at September 30, 2010 and
December 31, 2009. |
|
(8) |
|
Certain commercial loans are accounted for under the fair value option and include
commercial domestic loans of $1.8 billion and $3.0 billion, commercial foreign loans of $1.8
billion and $1.9 billion and commercial real estate loans of $54 million and $90 million at
September 30, 2010 and December 31, 2009. See Note 14 Fair Value Measurements for additional
information on the fair value option. |
The Corporation mitigates a portion of its credit risk on the residential mortgage
portfolio through the use of synthetic securitization vehicles. These vehicles issue long-term
notes to investors, the proceeds of which are held as cash collateral. The Corporation pays a
premium to the vehicles to purchase mezzanine loss protection on a portfolio of residential
mortgages owned by the Corporation. Cash held in the vehicles is used to reimburse the Corporation
in the event that losses on the mortgage portfolio exceed 10 basis points (bps) of the original
pool balance, up to the maximum amount of purchased loss protection of $2.1 billion and $2.5
billion at September 30, 2010 and December 31, 2009. The vehicles are variable interest entities
from which the Corporation purchases credit protection and in which the Corporation does not have
a variable interest; accordingly, these vehicles are not consolidated by the Corporation. Amounts
due from the vehicles are recorded in other income when the Corporation recognizes a reimbursable
loss, as described above. Amounts are collected when reimbursable losses are realized through the
sale of the underlying collateral. At September 30, 2010 and December 31, 2009, the Corporation
had a receivable of $834 million and $1.0 billion from these vehicles for reimbursement of losses.
As of September 30, 2010 and December 31, 2009, $59.0 billion and $70.7 billion of residential
mortgage loans were held in the portfolio for which these vehicles provide protection. The
decrease in these pools was due to $9.6 billion in principal payments and $2.1 billion of loan
sales. The Corporation records an allowance for credit losses on these loans without regard to the
existence of the purchased loss protection as the protection does not represent a guarantee of
individual loans.
29
In addition, the Corporation has entered into credit protection agreements with FNMA and
FHLMC totaling $7.5 billion and $6.6 billion as of September 30, 2010 and December 31, 2009,
providing full protection on conforming residential mortgage loans that become severely
delinquent. The Corporation does not record an allowance for credit losses on these loans as the
loans are individually guaranteed.
Nonperforming Loans and Leases
The table below presents the Corporations nonperforming loans and leases, including
nonperforming TDRs, at September 30, 2010 and December 31, 2009.
This table excludes performing TDRs and loans accounted for under the fair value option.
Nonperforming loans held-for-sale (LHFS) are excluded from nonperforming loans and leases as they
are recorded at either fair value or the lower of cost or fair value. In addition, purchased
credit-impaired loans, consumer credit card, business card loans and in general, consumer loans
not secured by real estate, including renegotiated loans, are not considered nonperforming and are
therefore excluded from nonperforming loans and leases in the table. Real estate-secured, past due
consumer loans that are insured by the Federal Housing Administration (FHA), including repurchased
loans pursuant to the Corporations servicing agreements with GNMA, are not reported as
nonperforming as principal repayments are insured by the FHA.
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
December 31 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
Consumer |
|
|
|
|
|
|
|
|
Residential mortgage |
|
$ |
18,291 |
|
|
$ |
16,596 |
|
Home equity |
|
|
2,702 |
|
|
|
3,804 |
|
Discontinued real estate |
|
|
297 |
|
|
|
249 |
|
Direct/Indirect consumer |
|
|
83 |
|
|
|
86 |
|
Other consumer |
|
|
56 |
|
|
|
104 |
|
|
Total consumer |
|
|
21,429 |
|
|
|
20,839 |
|
|
Commercial |
|
|
|
|
|
|
|
|
Commercial domestic (1) |
|
|
4,096 |
|
|
|
5,125 |
|
Commercial real estate |
|
|
6,376 |
|
|
|
7,286 |
|
Commercial lease financing |
|
|
123 |
|
|
|
115 |
|
Commercial foreign |
|
|
272 |
|
|
|
177 |
|
|
Total commercial |
|
|
10,867 |
|
|
|
12,703 |
|
|
Total nonperforming loans and leases (2) |
|
$ |
32,296 |
|
|
$ |
33,542 |
|
|
|
|
|
(1) |
|
Includes small business commercial domestic loans of $202 million and $200
million at September 30, 2010 and December 31, 2009. |
|
(2) |
|
Balances exclude nonaccruing TDRs in the consumer real estate portfolio of $378
million and $395 million at September 30, 2010 and December 31, 2009 that were removed from the
purchased credit-impaired loan portfolio prior to the adoption of new accounting guidance effective
January 1, 2010. |
Included in certain loan categories in the nonperforming table above are TDRs that were
classified as nonperforming. At September 30, 2010 and December 31, 2009, the Corporation had $3.5
billion and $2.9 billion of residential mortgages, $698 million and $1.7 billion of home equity,
$751 million and $486 million of commercial loans and $78 million and $43 million of discontinued
real estate loans that were TDRs and classified as nonperforming. In addition to these amounts, at
September 30, 2010 and December 31, 2009, the Corporation had performing TDRs that were on accrual
status of $5.2 billion and $2.3 billion of residential mortgages, $1.1 billion and $639 million of
home equity, $192 million and $91 million of commercial loans and $41 million and $35 million of
discontinued real estate.
Impaired Loans and Troubled Debt Restructurings
A loan is considered impaired when, based on current information and events, it is
probable that the Corporation will be unable to collect all amounts due from the borrower in
accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial
loans, performing commercial TDRs and both performing and nonperforming consumer real estate TDRs.
As defined in applicable accounting guidance, impaired loans exclude smaller balance homogeneous
loans that are collectively evaluated for impairment, all commercial leases and those commercial
loans accounted for under the fair value option. Purchased credit-impaired loans are reported
separately and discussed beginning on page 32.
30
The Corporation seeks to assist customers that are experiencing financial difficulty by
renegotiating credit card, consumer lending and small business loans (the renegotiated portfolio)
while ensuring compliance with Federal Financial Institutions Examination Council (FFIEC)
guidelines. Substantially all renegotiated portfolio modifications are considered to be TDRs. The
renegotiated portfolio may include modifications, both short- and long-term, of interest rates or
payment amounts or a combination thereof. The Corporation makes loan modifications, primarily
utilizing internal renegotiation programs via direct customer contact, that manage customers debt
exposures held only by the Corporation. Additionally, the Corporation makes loan modifications
with consumers who have elected to work with external renegotiation agencies and these
modifications provide solutions to customers entire unsecured debt structures. Under both
internal and external programs, customers receive reduced annual percentage rates with fixed
payments that amortize loan balances over a 60-month period. Under both programs, for credit card
loans, a customers charging privileges are revoked.
The table below provides detailed information on the Corporations primary modification
programs for the renegotiated portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renegotiated Portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Balances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current or Less Than 30 |
|
|
Internal Programs |
|
External Programs |
|
Other |
|
Total |
|
Days Past Due |
|
|
September 30 |
|
December 31 |
|
September 30 |
|
December 31 |
|
September 30 |
|
December 31 |
|
September 30 |
|
December 31 |
|
September 30 |
|
December 31 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card domestic |
|
$ |
7,363 |
|
|
$ |
3,159 |
|
|
$ |
2,011 |
|
|
$ |
758 |
|
|
$ |
302 |
|
|
$ |
283 |
|
|
$ |
9,676 |
|
|
$ |
4,200 |
|
|
|
77.82 |
% |
|
|
75.43 |
% |
Credit card foreign |
|
|
288 |
|
|
|
252 |
|
|
|
180 |
|
|
|
168 |
|
|
|
243 |
|
|
|
435 |
|
|
|
711 |
|
|
|
855 |
|
|
|
68.44 |
|
|
|
53.02 |
|
Direct/Indirect consumer |
|
|
1,324 |
|
|
|
1,414 |
|
|
|
542 |
|
|
|
539 |
|
|
|
76 |
|
|
|
89 |
|
|
|
1,942 |
|
|
|
2,042 |
|
|
|
78.93 |
|
|
|
75.44 |
|
Other consumer |
|
|
3 |
|
|
|
54 |
|
|
|
4 |
|
|
|
69 |
|
|
|
- |
|
|
|
17 |
|
|
|
7 |
|
|
|
140 |
|
|
|
80.99 |
|
|
|
68.94 |
|
|
Total consumer |
|
|
8,978 |
|
|
|
4,879 |
|
|
|
2,737 |
|
|
|
1,534 |
|
|
|
621 |
|
|
|
824 |
|
|
|
12,336 |
|
|
|
7,237 |
|
|
|
77.45 |
|
|
|
72.66 |
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Small business commercial
domestic |
|
|
706 |
|
|
|
776 |
|
|
|
60 |
|
|
|
57 |
|
|
|
4 |
|
|
|
11 |
|
|
|
770 |
|
|
|
844 |
|
|
|
66.25 |
|
|
|
64.90 |
|
|
Total commercial |
|
|
706 |
|
|
|
776 |
|
|
|
60 |
|
|
|
57 |
|
|
|
4 |
|
|
|
11 |
|
|
|
770 |
|
|
|
844 |
|
|
|
66.25 |
|
|
|
64.90 |
|
|
Total renegotiated loans |
|
$ |
9,684 |
|
|
$ |
5,655 |
|
|
$ |
2,797 |
|
|
$ |
1,591 |
|
|
$ |
625 |
|
|
$ |
835 |
|
|
$ |
13,106 |
|
|
$ |
8,081 |
|
|
|
76.80 |
% |
|
|
72.96 |
% |
|
At September 30, 2010 and December 31, 2009, the Corporation had a renegotiated
portfolio of $13.1 billion and $8.1 billion of which $10.1 billion was current or less than 30
days past due under the modified terms at September 30, 2010. The related allowance was $5.9
billion at September 30, 2010. Current period amounts include the impact of new consolidation
guidance which resulted in the consolidation of credit card and other securitization trusts. The
average recorded investment in the renegotiated portfolio for the nine months ended September 30,
2010 and 2009 was $14.8 billion and $6.2 billion. Interest income is accrued on outstanding
balances with cash receipts first applied to interest and fees, then to reduce outstanding
principal balances. For the three and nine months ended September 30, 2010, interest income on the
renegotiated portfolio totaled $195 million and $607 million compared to $90 million and $221
million for the same periods in 2009. The renegotiated portfolio is excluded from nonperforming
loans as the Corporation generally does not classify consumer loans not secured by real estate as
nonperforming as these loans are generally charged off no later than the end of the month in which
the loan becomes 180 days past due.
At September 30, 2010 and December 31, 2009, the Corporation had $10.9 billion and $12.7
billion of impaired commercial loans and $10.6 billion and $7.7 billion of impaired consumer real
estate loans. The average recorded investment in impaired commercial and consumer real estate
loans for the nine months ended September 30, 2010 and 2009 was $21.3 billion and $13.5 billion.
At September 30, 2010 and December 31, 2009, the recorded investment in impaired loans requiring
an allowance for loan and lease losses was $17.2 billion and $18.6 billion, and the related
allowance for loan and lease losses was $2.3 billion and $3.0 billion. For the three and nine
months ended September 30, 2010, interest income on these impaired loans totaled $130 million and
$364 million, compared to $89 million and $164 million for the same periods in 2009. At September
30, 2010 and December 31, 2009, remaining commitments to lend additional funds to debtors whose
terms have been modified in a commercial or consumer TDR were immaterial.
31
Purchased Credit-impaired Loans
Purchased credit-impaired loans are acquired loans with evidence of credit quality
deterioration since origination for which it is probable at purchase date that the Corporation
will be unable to collect all contractually required payments. In connection with the Countrywide
acquisition in 2008, the Corporation acquired purchased credit-impaired loans, substantially all
of which were residential mortgage, home equity and discontinued real estate loans. In connection
with the Merrill Lynch acquisition in 2009, the Corporation acquired purchased credit-impaired
loans, substantially all of which were commercial and residential mortgage loans.
The table below presents the remaining unpaid principal balance and carrying amount,
excluding the valuation reserve, for purchased credit-impaired loans at September 30, 2010, June
30, 2010 and December 31, 2009. See Note 7 Allowance for Credit Losses for additional
information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
June 30 |
|
December 31 |
(Dollars in millions) |
|
2010 |
|
2010 |
|
2009 |
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
Countrywide |
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid principal balance |
|
$ |
42,877 |
|
|
$ |
44,921 |
|
|
$ |
47,701 |
|
Carrying value excluding valuation reserve |
|
|
35,433 |
|
|
|
36,207 |
|
|
|
37,541 |
|
Merrill Lynch |
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid principal balance |
|
|
1,768 |
|
|
|
2,102 |
|
|
|
2,388 |
|
Carrying value excluding valuation reserve |
|
|
1,608 |
|
|
|
1,901 |
|
|
|
2,112 |
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
Merrill Lynch |
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid principal balance |
|
$ |
1,052 |
|
|
$ |
1,581 |
|
|
$ |
1,971 |
|
Carrying value excluding valuation reserve |
|
|
228 |
|
|
|
439 |
|
|
|
692 |
|
|
As a result of the adoption of new accounting guidance on purchased credit-impaired
loans, beginning January 1, 2010, pooled loans that are modified subsequent to acquisition are not
removed from the purchased credit-impaired loan pools. Prior to January 1, 2010, pooled loans that
were modified subsequent to acquisition were reviewed to compare modified contractual cash flows
to the purchased credit-impaired carrying value. If the present value of the modified cash flows
was less than the carrying value, the loan was removed from the purchased credit-impaired loan
pool at its carrying value, as well as any related allowance for loan and lease losses, and was
classified as a TDR. The carrying value of purchased credit-impaired loan TDRs that were removed
from the purchased credit-impaired pool prior to January 1, 2010 totaled $2.1 billion. As of
September 30, 2010, $1.7 billion of those classified as TDRs were on accrual status. The carrying
value of these modified loans, net of allowance, was approximately 66 percent of the unpaid
principal balance.
The table below shows activity for the accretable yield on purchased credit-impaired loans.
For the three months ended September 30, 2010, there was an $89 million reclassification to
accretable yield from nonaccretable difference primarily related to an increase in estimated
interest cash flows. The $78 million reclassification to nonaccretable difference for the nine
months ended September 30, 2010 was primarily due to the reduction in estimated interest cash
flows during the second quarter.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
(Dollars in millions) |
|
September 30, 2010 |
|
September 30, 2010 |
|
Accretable yield, beginning of period |
|
$ |
6,467 |
|
|
$ |
7,715 |
|
Accretion |
|
|
(405 |
) |
|
|
(1,365 |
) |
Disposals/transfers |
|
|
(91 |
) |
|
|
(212 |
) |
Reclassifications from (to) nonaccretable difference |
|
|
89 |
|
|
|
(78 |
) |
|
Accretable yield, September 30, 2010 |
|
$ |
6,060 |
|
|
$ |
6,060 |
|
|
Loans Held-for-Sale
The Corporation had LHFS of $33.3 billion and $43.9 billion at September 30, 2010 and
December 31, 2009. Proceeds from sales, securitizations and paydowns of LHFS were $221.4 billion
and $278.5 billion for the nine months ended September 30, 2010 and 2009. Proceeds used for
originations and purchases of LHFS were $200.4 billion and $281.3 billion for the nine months
ended September 30, 2010 and 2009.
32
NOTE 7 Allowance for Credit Losses
The table below summarizes the changes in the allowance for credit losses for the three
and nine months ended September 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
|
Nine Months Ended September 30 |
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Allowance for loan and lease losses, beginning of period, before effect
of the January 1 adoption of new consolidation guidance |
|
$ |
45,255 |
|
|
$ |
33,785 |
|
|
$ |
37,200 |
|
|
$ |
23,071 |
|
Allowance related to adoption of new consolidation guidance |
|
|
n/a |
|
|
|
n/a |
|
|
|
10,788 |
|
|
|
n/a |
|
|
Allowance for loan and lease losses, beginning of period |
|
|
45,255 |
|
|
|
33,785 |
|
|
|
47,988 |
|
|
|
23,071 |
|
Loans and leases charged off |
|
|
(7,924 |
) |
|
|
(10,059 |
) |
|
|
(29,731 |
) |
|
|
(26,541 |
) |
Recoveries of loans and leases previously charged off |
|
|
727 |
|
|
|
435 |
|
|
|
2,180 |
|
|
|
1,274 |
|
|
Net charge-offs |
|
|
(7,197 |
) |
|
|
(9,624 |
) |
|
|
(27,551 |
) |
|
|
(25,267 |
) |
|
Provision for loan and lease losses |
|
|
5,395 |
|
|
|
11,658 |
|
|
|
23,099 |
|
|
|
38,357 |
|
Other |
|
|
128 |
|
|
|
13 |
|
|
|
45 |
|
|
|
(329 |
) |
|
Allowance for loan and lease losses, September 30 |
|
|
43,581 |
|
|
|
35,832 |
|
|
|
43,581 |
|
|
|
35,832 |
|
|
Reserve for unfunded lending commitments, beginning of period |
|
|
1,413 |
|
|
|
1,992 |
|
|
|
1,487 |
|
|
|
421 |
|
Provision for unfunded lending commitments |
|
|
1 |
|
|
|
47 |
|
|
|
207 |
|
|
|
103 |
|
Other |
|
|
(120 |
) |
|
|
(472 |
) |
|
|
(400 |
) |
|
|
1,043 |
|
|
Reserve for unfunded lending commitments, September 30 |
|
|
1,294 |
|
|
|
1,567 |
|
|
|
1,294 |
|
|
|
1,567 |
|
|
Allowance for credit losses, September 30 |
|
$ |
44,875 |
|
|
$ |
37,399 |
|
|
$ |
44,875 |
|
|
$ |
37,399 |
|
|
n/a = not applicable
During the three and nine months ended September 30, 2010 the Corporation recorded $281
million and $1.4 billion in provision for credit losses with a corresponding increase in the
valuation reserve included as part of the allowance for loan and lease losses specifically for the
purchased credit-impaired loan portfolio. This compared to $1.3 billion and $3.0 billion for the
same periods in 2009. The amount of the allowance for loan and lease losses associated with the
purchased credit-impaired loan portfolio was $5.6 billion, $5.3 billion and $3.9 billion at
September 30, 2010, June 30, 2010 and December 31, 2009.
The other amount under the reserve for unfunded lending commitments for the nine months
ended September 30, 2009 includes the remaining balance of the acquired Merrill Lynch liability excluding
those commitments accounted for under the fair value option, net of accretion, and the impact of
funding previously unfunded positions. This amount in all other periods represents primarily
accretion of the Merrill Lynch purchase accounting adjustment and the impact of funding previously unfunded
positions.
33
NOTE 8 Securitizations and Other Variable Interest Entities
The Corporation utilizes VIEs in the ordinary course of business to support its own and
its customers financing and investing needs. The Corporation routinely securitizes loans and debt
securities using VIEs as a source of funding for the Corporation and as a means of transferring
the economic risk of the loans or debt securities to third parties. The Corporation also
administers, structures or invests in other VIEs including multi-seller conduits, municipal bond
trusts, CDOs and other entities, as described in more detail below.
The entity that has a controlling financial interest in a VIE is referred to as the primary
beneficiary and consolidates the VIE. In accordance with the new consolidation guidance effective
January 1, 2010, the Corporation is deemed to have a controlling financial interest and is the
primary beneficiary of a VIE if it has both the power to direct the activities of the VIE that
most significantly impact the VIEs economic performance and an obligation to absorb losses or the
right to receive benefits that could potentially be significant to the VIE. As a result of this
change in accounting, the Corporation consolidated certain VIEs and former QSPEs that were
unconsolidated prior to January 1, 2010. The net incremental impact of this accounting change on
the Corporations Consolidated Balance Sheet is set forth in the table below. The net effect of
the accounting change on January 1, 2010 shareholders equity was a $6.2 billion charge to
retained earnings, net-of-tax, primarily from the increase in the allowance for loan and lease
losses, as well as a $116 million charge to accumulated OCI, net-of-tax, for the net unrealized
losses on AFS debt securities on newly consolidated VIEs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance Sheet |
|
|
Net Increase |
|
|
Beginning Balance Sheet |
(Dollars in millions) |
|
December 31, 2009 |
|
|
(Decrease) |
|
|
January 1, 2010 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
121,339 |
|
|
$ |
2,807 |
|
|
$ |
124,146 |
|
Trading account assets |
|
|
182,206 |
|
|
|
6,937 |
|
|
|
189,143 |
|
Derivative assets |
|
|
87,622 |
|
|
|
556 |
|
|
|
88,178 |
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
301,601 |
|
|
|
(2,320 |
) |
|
|
299,281 |
|
Held-to-maturity |
|
|
9,840 |
|
|
|
(6,572 |
) |
|
|
3,268 |
|
|
Total debt securities |
|
|
311,441 |
|
|
|
(8,892 |
) |
|
|
302,549 |
|
|
Loans and leases |
|
|
900,128 |
|
|
|
102,595 |
|
|
|
1,002,723 |
|
Allowance for loan and lease losses |
|
|
(37,200 |
) |
|
|
(10,788 |
) |
|
|
(47,988 |
) |
|
Loans and leases, net of allowance |
|
|
862,928 |
|
|
|
91,807 |
|
|
|
954,735 |
|
|
Loans held-for-sale |
|
|
43,874 |
|
|
|
3,025 |
|
|
|
46,899 |
|
Deferred tax asset |
|
|
27,279 |
|
|
|
3,498 |
|
|
|
30,777 |
|
All other assets |
|
|
593,543 |
|
|
|
701 |
|
|
|
594,244 |
|
|
Total assets |
|
$ |
2,230,232 |
|
|
$ |
100,439 |
|
|
$ |
2,330,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper and other short-term borrowings |
|
$ |
69,524 |
|
|
$ |
22,136 |
|
|
$ |
91,660 |
|
Long-term debt |
|
|
438,521 |
|
|
|
84,356 |
|
|
|
522,877 |
|
All other liabilities |
|
|
1,490,743 |
|
|
|
217 |
|
|
|
1,490,960 |
|
|
Total liabilities |
|
|
1,998,788 |
|
|
|
106,709 |
|
|
|
2,105,497 |
|
|
Shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
71,233 |
|
|
|
(6,154 |
) |
|
|
65,079 |
|
Accumulated other comprehensive income (loss) |
|
|
(5,619 |
) |
|
|
(116 |
) |
|
|
(5,735 |
) |
All other shareholders equity |
|
|
165,830 |
|
|
|
- |
|
|
|
165,830 |
|
|
Total shareholders equity |
|
|
231,444 |
|
|
|
(6,270 |
) |
|
|
225,174 |
|
|
Total liabilities and shareholders equity |
|
$ |
2,230,232 |
|
|
$ |
100,439 |
|
|
$ |
2,330,671 |
|
|
The following tables present the assets and liabilities of consolidated and
unconsolidated VIEs at September 30, 2010 and December 31, 2009, if the Corporation has continuing
involvement with transferred assets or if the Corporation otherwise has a variable interest in the
VIE. The tables also present the Corporations maximum exposure to loss at September 30, 2010 and
December 31, 2009 resulting from its involvement with consolidated VIEs and unconsolidated VIEs
in which the Corporation holds a variable interest. The Corporations maximum exposure to loss is
based on the unlikely event that all of the assets in the VIEs become worthless and incorporates
not only potential losses associated with assets recorded on the Corporations Consolidated
Balance Sheet but also potential losses associated with off-balance sheet commitments such as
unfunded liquidity commitments and other contractual arrangements. The Corporations maximum
34
exposure to loss does not include losses previously recognized through write-downs of assets on
the Corporations Consolidated Balance Sheet.
The Corporation invests in asset-backed securities issued by third party VIEs with which it
has no other form of involvement. These securities are included in Note 3 Trading Account Assets
and Liabilities and Note 5 Securities. In addition, the Corporation uses VIEs such as trust
preferred securities trusts in connection with its funding activities as described in Note 13
Long-term Debt to the Consolidated Financial Statements of the Corporations 2009 Annual Report on
Form 10-K. The Corporation also uses VIEs in the form of synthetic securitization vehicles to
mitigate a portion of the credit risk on its residential mortgage loan portfolio, as described in
Note 6 Outstanding Loans and Leases. The Corporation has also provided support to certain cash
funds managed within GWIM as described in Note 14 Commitments and Contingencies to the
Consolidated Financial Statements of the Corporations 2009 Annual Report on Form 10-K. These
VIEs, which are not consolidated by the Corporation, are not included in the tables below.
Except as described below and in Note 14 Commitments and Contingencies to the Consolidated
Financial Statements of the Corporations 2009 Annual Report on Form 10-K, as of September 30,
2010, the Corporation has not provided financial support to consolidated or unconsolidated VIEs
that it was not previously contractually required to provide, nor does it intend to do so.
Mortgage-related Securitizations
First-Lien Mortgages
As part of its mortgage banking activities, the Corporation securitizes a portion of the
first-lien residential mortgage loans it originates or purchases from third parties, generally in
the form of MBS guaranteed by GSEs. Securitization occurs in conjunction with or shortly after
loan closing or purchase. In addition, the Corporation may, from time to time, securitize
commercial mortgages it originates or purchases from other entities. The Corporation also
typically services loans it securitizes. Further, the Corporation may retain beneficial interests
in the securitization vehicles including senior and
subordinate securities and the equity tranche. Except as described below, the Corporation does not
provide guarantees or recourse to the securitization vehicles other than standard representations
and warranties.
The table below summarizes select information related to first-lien mortgage securitizations
for the three and nine months ended September 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Mortgage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Agency |
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
|
Prime |
|
|
Subprime |
|
|
Alt-A |
|
|
Commercial Mortgage |
|
|
|
Three Months Ended September 30 |
|
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Cash proceeds from new securitizations (1) |
|
$ |
61,727 |
|
|
$ |
99,029 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
934 |
|
|
$ |
313 |
|
Gain (loss) on securitizations (2, 3) |
|
|
(336 |
) |
|
|
16 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(22 |
) |
|
|
- |
|
Cash flows received on residual interests |
|
|
- |
|
|
|
- |
|
|
|
4 |
|
|
|
4 |
|
|
|
13 |
|
|
|
21 |
|
|
|
- |
|
|
|
1 |
|
|
|
5 |
|
|
|
6 |
|
Initial fair value of assets acquired (4) |
|
|
- |
|
|
|
n/a |
|
|
|
- |
|
|
|
n/a |
|
|
|
- |
|
|
|
n/a |
|
|
|
- |
|
|
|
n/a |
|
|
|
- |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30 |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Cash proceeds from new securitizations (1) |
|
$ |
192,936 |
|
|
$ |
270,314 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
3 |
|
|
$ |
- |
|
|
$ |
3,317 |
|
|
$ |
313 |
|
Gain (loss) on securitizations (2, 3) |
|
|
(787 |
) |
|
|
37 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Cash flows received on residual interests |
|
|
- |
|
|
|
- |
|
|
|
15 |
|
|
|
18 |
|
|
|
45 |
|
|
|
52 |
|
|
|
2 |
|
|
|
4 |
|
|
|
15 |
|
|
|
17 |
|
Initial fair value of assets acquired (4) |
|
|
23,402 |
|
|
|
n/a |
|
|
|
- |
|
|
|
n/a |
|
|
|
- |
|
|
|
n/a |
|
|
|
- |
|
|
|
n/a |
|
|
|
- |
|
|
|
n/a |
|
|
|
|
|
(1) |
|
The Corporation sells residential mortgage loans to GSEs in the normal course of
business and receives MBS in exchange which may then be sold into the market to third party
investors for cash proceeds. |
|
(2) |
|
Net of hedges |
|
(3) |
|
Substantially all of the residential mortgages securitized are initially classified
as LHFS and accounted for under the fair value option. As such, gains are recognized on these LHFS
prior to securitization. During the three and nine months ended September 30, 2010, the Corporation
recognized $1.3 billion and $3.8 billion of gains on these LHFS compared to $1.7 billion and $4.2
billion for the same periods in 2009. The gains were substantially offset by hedges. |
|
(4) |
|
All of the securities and other retained interests acquired from securitizations are
initially classified as Level 2 assets within the fair value hierarchy. During the three and nine
months ended September 30, 2010, there were no changes to the initial classification within the
fair value hierarchy. |
|
n/a = not applicable |
35
The Corporation recognizes consumer MSRs from the sale or securitization of mortgage
loans. Servicing fee and ancillary fee income on consumer mortgage loans serviced, including
securitizations where the Corporation has continuing involvement, were $1.6 billion and $4.8
billion during the three and nine months ended September 30, 2010 compared to $1.6 billion and
$4.6 billion for the same periods in 2009. Servicing advances on consumer mortgage loans,
including securitizations where the Corporation has continuing involvement, were $21.8 billion and
$19.3 billion at September 30, 2010 and December 31, 2009. The Corporation has the option to
repurchase delinquent loans out of securitization trusts, which reduces the amount of servicing
advances it is required to make. During the three and nine months ended September 30, 2010, $3.8
billion and $12.2 billion of loans were repurchased from first-lien securitization trusts as a
result of loan delinquencies or in order to perform modifications, compared to $2.3 billion and
$3.2 billion for the same periods in 2009. The majority of these loans repurchased were FHA
insured mortgages from GNMA securities. In addition, the Corporation has retained commercial MSRs
from the sale or securitization of commercial mortgage loans. Servicing fee and ancillary fee
income on commercial mortgage loans serviced, including securitizations where the Corporation has
continuing involvement, were $14 million and $16 million during the three and nine months ended
September 30, 2010 compared to $13 million and $37 million for the same periods in 2009. Servicing
advances on commercial mortgage loans, including securitizations where the Corporation has
continuing involvement, were $144 million and $109 million at September 30, 2010 and December 31,
2009. For more information on MSRs, see Note 16 Mortgage Servicing Rights.
The table below summarizes select information related to first-lien mortgage securitization
trusts in which the Corporation held a variable interest at September 30, 2010 and December 31,
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Mortgage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Agency |
|
|
|
|
|
|
Agency |
|
|
Prime |
|
|
Subprime |
|
|
Alt-A |
|
|
Commercial Mortgage |
|
|
|
September 30 |
|
|
December 31 |
|
|
September 30 |
|
|
December 31 |
|
|
September 30 |
|
|
December 31 |
|
|
September 30 |
|
|
December 31 |
|
|
September 30 |
|
|
December 31 |
|
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Unconsolidated VIEs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum loss exposure (1) |
|
$ |
47,997 |
|
|
$ |
14,398 |
|
|
$ |
3,000 |
|
|
$ |
4,068 |
|
|
$ |
326 |
|
|
$ |
224 |
|
|
$ |
635 |
|
|
$ |
996 |
|
|
$ |
1,739 |
|
|
$ |
1,877 |
|
|
On-balance sheet assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior securities held (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading account assets |
|
$ |
10,125 |
|
|
$ |
2,295 |
|
|
$ |
145 |
|
|
$ |
201 |
|
|
$ |
29 |
|
|
$ |
12 |
|
|
$ |
379 |
|
|
$ |
431 |
|
|
$ |
285 |
|
|
$ |
469 |
|
AFS debt securities |
|
|
37,872 |
|
|
|
12,103 |
|
|
|
2,793 |
|
|
|
3,845 |
|
|
|
244 |
|
|
|
188 |
|
|
|
255 |
|
|
|
561 |
|
|
|
918 |
|
|
|
1,215 |
|
Subordinate securities held (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading account assets |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
17 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
58 |
|
|
|
122 |
|
AFS debt securities |
|
|
- |
|
|
|
- |
|
|
|
44 |
|
|
|
13 |
|
|
|
34 |
|
|
|
22 |
|
|
|
1 |
|
|
|
4 |
|
|
|
156 |
|
|
|
23 |
|
Residual interests held |
|
|
- |
|
|
|
- |
|
|
|
18 |
|
|
|
9 |
|
|
|
2 |
|
|
|
2 |
|
|
|
- |
|
|
|
- |
|
|
|
322 |
|
|
|
48 |
|
|
Total retained positions |
|
$ |
47,997 |
|
|
$ |
14,398 |
|
|
$ |
3,000 |
|
|
$ |
4,068 |
|
|
$ |
326 |
|
|
$ |
224 |
|
|
$ |
635 |
|
|
$ |
996 |
|
|
$ |
1,739 |
|
|
$ |
1,877 |
|
|
Principal balance outstanding (3) |
|
$ |
1,280,903 |
|
|
$ |
1,255,650 |
|
|
$ |
68,459 |
|
|
$ |
81,012 |
|
|
$ |
74,543 |
|
|
$ |
83,065 |
|
|
$ |
116,324 |
|
|
$ |
147,072 |
|
|
$ |
122,371 |
|
|
$ |
65,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated VIEs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum loss exposure (1) |
|
$ |
16,065 |
|
|
$ |
1,683 |
|
|
$ |
50 |
|
|
$ |
472 |
|
|
$ |
677 |
|
|
$ |
1,261 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
On-balance sheet assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases |
|
$ |
16,049 |
|
|
$ |
1,689 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
450 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Allowance for loan and lease losses |
|
|
(34 |
) |
|
|
(6 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Loans held-for-sale |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
436 |
|
|
|
2,201 |
|
|
|
2,030 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other assets |
|
|
50 |
|
|
|
- |
|
|
|
50 |
|
|
|
86 |
|
|
|
171 |
|
|
|
271 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total assets |
|
$ |
16,065 |
|
|
$ |
1,683 |
|
|
$ |
50 |
|
|
$ |
522 |
|
|
$ |
2,372 |
|
|
$ |
2,751 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
48 |
|
|
$ |
1,024 |
|
|
$ |
1,737 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Other liabilities |
|
|
- |
|
|
|
- |
|
|
|
8 |
|
|
|
3 |
|
|
|
784 |
|
|
|
3 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total liabilities |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
8 |
|
|
$ |
51 |
|
|
$ |
1,808 |
|
|
$ |
1,740 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
(1) |
|
Maximum loss exposure excludes liability for representations and warranties, and
corporate guarantees and also excludes servicing advances. |
|
(2) |
|
As a holder of these securities, the Corporation receives scheduled principal and
interest payments. During the three and nine months ended September 30, 2010 and 2009, there were
no significant OTTI losses recorded on those securities classified as AFS debt securities. |
|
(3) |
|
Principal balance outstanding includes loans the Corporation transferred with which the
Corporation has continuing involvement, which may include servicing the loans. |
On January 1, 2010, the Corporation consolidated $2.5 billion of commercial mortgage
securitization trusts in which it had a controlling financial interest. These trusts were
subsequently deconsolidated as the Corporation determined that it no longer had a controlling
financial interest. When the Corporation is the servicer of the loans or holds certain subordinate
investments in a non-agency mortgage trust, the Corporation has control over the activities of the
trust. If the Corporation also holds a financial interest that could potentially be significant to
the trust, the Corporation is the primary beneficiary of and consolidates the trust. The
Corporation does not have a controlling financial interest in and therefore does not consolidate
agency trusts unless the Corporation holds substantially all of the issued securities and has the
unilateral right to liquidate the trust. Prior to 2010, substantially all of the securitization
trusts met the definition of a QSPE and as such were not subject to consolidation.
36
Home Equity Mortgages
The Corporation maintains interests in home equity securitization trusts to which the
Corporation transferred home equity loans. These retained interests include senior and subordinate
securities and residual interests. The Corporation also services the loans in the trusts. There
were no securitizations of home equity loans during the three and nine months ended September 30,
2010 and 2009. Collections reinvested in revolving period securitizations were $4 million and $20
million during the three and nine months ended September 30, 2010 compared to $34 million and $157
million for the same periods in 2009. Cash flows received on residual interests were $3 million
and $11 million for the three and nine months ended September 30, 2010 compared to $4 million and
$27 million for the same periods in 2009.
On January 1, 2010, the Corporation consolidated home equity loan securitization trusts of
$4.5 billion, which held loans with principal balances outstandings of $5.1 billion net of an
allowance of $573 million, in which it had a controlling financial interest. In the Corporations
role as a servicer, the Corporation has the power to manage the loans held in the trusts. In
addition, the Corporation may have a financial interest that could potentially be significant to
the trusts through its retained interests in senior or subordinate securities or the trusts
residual interest, through providing a guarantee to the trusts, or through providing subordinate
funding to the trusts during a rapid amortization event. In these cases, the Corporation is the
primary beneficiary of and consolidates these trusts. If the Corporation is not the servicer or
does not hold a financial interest that could potentially be significant to the trust, the
Corporation does not have a controlling financial interest and does not consolidate the trust.
Prior to 2010, the trusts met the definition of a QSPE and as such were not subject to
consolidation.
The table below summarizes select information related to home equity loan securitization
trusts in which the Corporation held a variable interest at September 30, 2010 and December 31,
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
Retained |
|
|
|
|
|
|
Retained |
|
|
|
|
|
|
|
Interests in |
|
|
|
|
|
|
Interests in |
|
|
|
Consolidated |
|
|
Unconsolidated |
|
|
|
|
|
|
Unconsolidated |
|
(Dollars in millions) |
|
VIEs |
|
|
VIEs |
|
|
Total |
|
|
VIEs |
|
|
Maximum loss exposure (1) |
|
$ |
3,339 |
|
|
$ |
9,473 |
|
|
$ |
12,812 |
|
|
$ |
13,947 |
|
|
On-balance sheet assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading account assets (2, 3) |
|
$ |
- |
|
|
$ |
144 |
|
|
$ |
144 |
|
|
$ |
16 |
|
Available-for-sale debt securities (3, 4) |
|
|
- |
|
|
|
34 |
|
|
|
34 |
|
|
|
147 |
|
Loans and leases |
|
|
3,688 |
|
|
|
- |
|
|
|
3,688 |
|
|
|
- |
|
Allowance for loan and lease losses |
|
|
(349 |
) |
|
|
- |
|
|
|
(349 |
) |
|
|
- |
|
|
Total |
|
$ |
3,339 |
|
|
$ |
178 |
|
|
$ |
3,517 |
|
|
$ |
163 |
|
|
On-balance sheet liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
3,782 |
|
|
$ |
- |
|
|
$ |
3,782 |
|
|
$ |
- |
|
All other liabilities |
|
|
39 |
|
|
|
- |
|
|
|
39 |
|
|
|
- |
|
|
Total |
|
$ |
3,821 |
|
|
$ |
- |
|
|
$ |
3,821 |
|
|
$ |
- |
|
|
Principal balance outstanding |
|
$ |
3,688 |
|
|
$ |
30,432 |
|
|
$ |
34,120 |
|
|
$ |
31,869 |
|
|
|
|
|
(1) |
|
For unconsolidated VIEs, the maximum loss exposure represents outstanding trust
certificates issued by trusts in rapid amortization, net of recorded reserves and excludes the
liability for representations and warranties, and corporate guarantees. |
|
(2) |
|
At September 30, 2010 and December 31, 2009, $127 million and $15 million of the debt
securities classified as trading account assets were senior securities and $17 million and $1
million were subordinate securities. |
|
(3) |
|
As a holder of these securities, the Corporation receives scheduled principal and
interest payments. During the nine months ended September 30, 2010 and year ended December 31,
2009, there were no OTTI losses recorded on those securities classified as AFS debt securities. |
|
(4) |
|
At September 30, 2010 and December 31, 2009, $34 million and $47 million represents
subordinate debt securities held. At December 31, 2009, $100 million are residual interests
classified as AFS debt securities. |
Under the terms of the Corporations home equity loan securitizations, advances are made
to borrowers when they draw on their lines of credit and the Corporation is reimbursed for those
advances from the cash flows in the securitization. During the revolving period of the
securitization, this reimbursement normally occurs within a short period after the advance.
However, when the securitization transaction has begun a rapid amortization period, reimbursement
of the Corporations advance occurs only after other parties in the securitization have received
all of the cash flows to which they are entitled. This has the effect of extending the time period
for which the Corporations advances are outstanding. In particular, if loan losses requiring
draws on monoline insurers policies, which protect the bondholders in the securitization,
37
exceed
a specified threshold or duration, the Corporation may not receive reimbursement for all of the
funds advanced to borrowers, as the senior bondholders and the monoline insurers have priority for
repayment.
The Corporation evaluates all of its home equity loan securitizations for their potential to
experience a rapid amortization event by estimating the amount and timing of future losses on the
underlying loans, the excess spread available to cover such losses and by evaluating any estimated
shortfalls in relation to contractually defined triggers. A maximum funding obligation
attributable to rapid amortization cannot be calculated as a home equity borrower has the ability
to pay down and re-draw balances. At September 30, 2010 and December 31, 2009, home equity loan
securitization transactions in rapid amortization, including both consolidated and unconsolidated
trusts, had $13.0 billion and $14.1 billion of trust certificates outstanding. This amount is
significantly greater than the amount the Corporation expects to fund. At September 30, 2010, an
additional $94 million of trust certificates outstanding related to home equity loan
securitization transactions that are expected to enter rapid amortization during the next 12
months. The charges that will ultimately be recorded as a result of the rapid amortization events
depend on the performance of the loans, the amount of subsequent draws and the timing of related
cash flows. At September 30, 2010 and December 31, 2009, the reserve for losses on expected future
draw obligations on the home equity loan securitizations in or expected to be in rapid
amortization was $137 million and $178 million.
The Corporation has consumer MSRs from the sale or securitization of home equity loans. The
Corporation recorded $19 million and $60 million of servicing fee income related to home equity
securitizations during the three and nine months ended September 30, 2010 compared to $31 million
and $100 million for the same periods in 2009. The Corporation repurchased $4 million and $15
million of loans from home equity securitization trusts in order to perform modifications or clean
up calls compared to $3 million and $26 million for the same periods in 2009. For more information
on MSRs, see Note 16 Mortgage Servicing Rights.
Representations and Warranties Obligations and Corporate Guarantees
The Corporation securitizes first-lien mortgage loans, generally in the form of MBS
guaranteed by GSEs. In addition, in prior years, legacy companies and certain subsidiaries have
sold pools of first-lien mortgage loans, home equity loans and other second-lien loans as private-label MBS or in the form
of whole loans. In connection with these securitizations and whole loan sales, the Corporation or
certain subsidiaries or legacy companies made various representations and warranties. These representations and warranties, as governed by the
agreements, related to, among
other things, the ownership of the loan, the validity of the lien securing the loan, the absence
of delinquent taxes or liens against the property securing the loan, the process used to select
the loan for inclusion in a transaction, the loans compliance with any applicable loan criteria,
including underwriting standards, and the loans compliance with applicable federal, state and
local laws. Violation of these representations and warranties may result in a requirement to
repurchase mortgage loans, indemnify or provide other remedy to an investor or
securitization trust. In such cases, the repurchaser would be exposed to any subsequent credit
loss on the mortgage loans. The repurchasers credit loss would be reduced by any recourse to
sellers of loans for representations and warranties previously
provided. Subject to the requirements and limitations of the applicable agreements, these
representations and
warranties can be enforced by the trustee or the investor as governed by the
agreements or, in certain first-lien and home equity
securitizations where monolines have insured all or some of the related bonds issued, by the
insurer at any time over the life of the loan. Importantly, the contractual liability to
repurchase arises if there is a breach of the representations and warranties that materially
and adversely affects the interest of all investors in the case of non-GSE loans, or if there is a
breach of other standards established by the terms of the related sale agreement. The Corporation
believes that the longer a loan performs prior to default the less
likely it is that an alleged underwriting
breach of representations and warranties had a material impact on the loans performance.
Historically, most demands for repurchase have occurred within the first few years after
origination, generally after a loan has defaulted. However, in recent periods the time horizon has
lengthened due to increased repurchase request activity across all vintages.
The Corporations current operations are structured to limit the risk of repurchase and
accompanying credit exposure by seeking to ensure consistent production of mortgages in accordance with our underwriting procedures and by
servicing those mortgages consistent with secondary mortgage market standards. In addition,
certain securitizations include guarantees written to protect purchasers of the loans from credit
losses up to a specified amount. The probable losses to be absorbed under the representations and
warranties obligations and the guarantees are recorded as a liability when the loans are sold and
are updated by accruing a representations and warranties expense in mortgage banking income
throughout the life of the loan as necessary when additional relevant information becomes
available. The methodology used to estimate the liability for representations and warranties is a
function of the representations and warranties given and considers a variety of factors, which
include depending on the counterparty, actual defaults, estimated future defaults, historical loss
experience, probability that a repurchase request will be received,
number of payments made by the borrower prior
to default and probability that a loan will be required to be repurchased.
38
During the three and nine months ended September 30, 2010, $1.0 billion and $3.0 billion of
first-lien repurchase claims were resolved, primarily with the GSEs, through repurchase or
reimbursement to the investor or securitization trust for losses they incurred compared to $721
million and $1.7 billion for the same periods in 2009. The amount of the loss on the related loans
at the time of repurchase or reimbursement was $487 million and $1.6 billion during the three and
nine months ended September 30, 2010 compared to $379 million and $775 million for the same
periods in 2009. Of the amounts resolved during the three and nine months ended September 30,
2010, $567 million and $1.8 billion of loans were repurchased from first-lien investors and
securitization trusts, including those in which the monolines insured some or all of the related
bonds, under representations and warranties and corporate guarantees compared to $340 million and
$921 million for the same periods in 2009. In addition, during the three and nine months ended
September 30, 2010, the amount paid to indemnify first-lien investors and securitization trusts,
including those in which the monolines insured some or all of the related bonds, was $257 million
and $720 million compared to $221 million and $405 million for the same
periods in 2009, to resolve loans with unpaid principal balances of $448 million and $1.2 billion
for the three and nine months ended September 30, 2010 and $381 million and $740 million for the
three and nine months ended September 30, 2009.
During the three and nine months ended September 30, 2010, $42 million and $163 million of
home equity repurchase claims were resolved, primarily through repurchase or reimbursement to the
securitization trusts in which the monolines insured some or all of the related bonds for losses
they incurred compared to $105 million and $196 million for the same periods in 2009. The amount
of the loss on the related loans at the time of repurchase or reimbursement was $37 million and
$143 million for the three and nine months ended September 30, 2010 compared to $92 million and
$194 million for the same periods in 2009. Of the amounts resolved during the three and nine
months ended September 30, 2010, $13 million and $55 million of loans were repurchased from home
equity securitization trusts, including those in which the monolines insured some or all of the
related bonds, under representations and warranties and corporate guarantees compared to $47
million and $87 million for the same periods in 2009. In addition, during the three and nine
months ended September 30, 2010, $28 million and $104 million were paid to indemnify investors or
securitization trusts, including those in which the monolines insured some or all of the related
bonds, compared to $57 million and $109 million for the same periods in 2009.
The repurchase of loans and indemnification payments related to first-lien and home equity
repurchase claims were primarily as a result of material breaches of representations and warranties related to
the loans material compliance with the applicable underwriting standards, including borrower
misrepresentation, credit exceptions without sufficient compensating factors and non-compliance
with underwriting procedures, although the actual representations made in a sales transaction and
the resulting repurchase and indemnification activity can vary by transaction or investor. A
direct relationship between the type of defect that causes the breach of representations and
warranties and the severity of the realized loss has not been observed. Generally the agreements for private-label MBS contain less rigorous representations and warranties and higher burdens
on investors seeking repurchases than the comparable agreements with
the GSEs.
The table below presents outstanding claims by counterparty and product type at September 30,
2010 and December 31, 2009.
Outstanding Claims by Counterparty and Product
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
|
December 31 |
|
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
By Counterparty |
|
|
|
|
|
|
|
|
GSEs |
|
$ |
6,842 |
|
|
$ |
3,300 |
|
Monolines |
|
|
4,217 |
|
|
|
2,936 |
|
Whole loan
and private-label securitization investors and other |
|
|
1,816 |
|
|
|
1,430 |
|
|
Total outstanding claims by counterparty |
|
$ |
12,875 |
|
|
$ |
7,666 |
|
|
By Product Type |
|
|
|
|
|
|
|
|
Prime loans |
|
$ |
3,627 |
|
|
$ |
1,451 |
|
Alt-A |
|
|
3,453 |
|
|
|
1,984 |
|
Home equity |
|
|
3,415 |
|
|
|
2,279 |
|
Pay option |
|
|
1,434 |
|
|
|
1,157 |
|
Subprime |
|
|
579 |
|
|
|
577 |
|
Other |
|
|
367 |
|
|
|
218 |
|
|
Total outstanding claims by product type |
|
$ |
12,875 |
|
|
$ |
7,666 |
|
|
Although the timing and volume has varied, repurchase and similar requests have
increased from buyers and insurers including monolines. A loan by loan review of all repurchase
requests is performed and demands have been and will continue to be contested to the extent not
considered valid. Overall, repurchase requests and disputes have increased with buyers and
insurers regarding representations and warranties, which has resulted in an increase in unresolved
repurchase requests. The volume of repurchase claims as a percentage of the volume of loans
purchased arising from loans sourced
39
from brokers or purchased from third party sellers is
relatively consistent with the volume of repurchase claims as a percentage of the volume of loans
originated by the Corporation or its subsidiaries or legacy companies.
The
table below presents a rollforward of the liability for
representations and warranties, and corporate guarantees for the three and nine months ended September 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
|
Nine Months Ended September 30 |
|
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Liability for representations and warranties, and corporate
guarantees,
beginning of period |
|
$ |
3,939 |
|
|
$ |
3,442 |
|
|
$ |
3,507 |
|
|
$ |
2,271 |
|
Merrill Lynch acquisition |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
580 |
|
Additions for new sales |
|
|
6 |
|
|
|
12 |
|
|
|
22 |
|
|
|
29 |
|
Charge-offs |
|
|
(415 |
) |
|
|
(359 |
) |
|
|
(1,774 |
) |
|
|
(721 |
) |
Provision (1) |
|
|
872 |
|
|
|
455 |
|
|
|
2,647 |
|
|
|
1,336 |
|
Other |
|
|
- |
|
|
|
20 |
|
|
|
- |
|
|
|
75 |
|
|
Liability for representations and warranties, and corporate
guarantees, September 30 |
|
$ |
4,402 |
|
|
$ |
3,570 |
|
|
$ |
4,402 |
|
|
$ |
3,570 |
|
|
|
|
|
(1) |
|
Recorded as representation and warranty expense in mortgage banking income. |
The liability for representations and warranties, and corporate guarantees is included
in accrued expenses and other liabilities and the related expense is included in mortgage banking
income.
The Corporation and its subsidiaries have an established history of working with the GSEs
on repurchase requests. Experience with the GSEs continues to evolve and any disputes are
generally related to areas including reasonableness of stated income, occupancy and
undisclosed liabilities in the vintages with the highest default rates. While the environment around the
repurchase process continues to be challenging, the Corporation and its subsidiaries strive to
maintain a constructive relationship with the GSEs. As soon as practicable after receiving a repurchase request from
either of the GSEs, the Corporation evaluates the request and takes appropriate action. Claim
disputes are generally handled through loan-level negotiations with the GSEs and the Corporation
seeks to resolve the repurchase request within 90 to 120 days of the receipt of the request
although tolerances exist for claims that remain open beyond this timeframe. However, unlike the
repurchase protocols and experience established with GSEs, experience with the monolines and other
third party investors has been varied and the protocols and experience with these counterparties has not
been as predictable as with the GSEs. For the monolines and other third party investors the
timetable for the loan file request, the repurchase request (if any), response and resolution
varies by contract. Where a breach of representations and warranties
given by the Corporation or subsidiaries or legacy companies is
confirmed on a given loan, settlement is generally reached as to that loan within 60 to 90 days.
The
Corporation and its subsidiaries have limited experience
with private-label MBS repurchases as the number of recent repurchase requests received has been
limited. The representations and warranties, as governed by the private-label
securitizations, require that counterparties have the ability to both assert a claim and actually
prove that a loan has an actionable defect under the applicable contracts. Although it is reasonably possible that a loss may have occurred, until the Corporation and its legacy companies
have meaningful repurchase experience with these counterparties, it is not possible to estimate
future repurchase rates and any related loss or range of loss.
A liability for representations and warranties has been established for monoline repurchase requests based
upon valid identified loan defects and for repurchase requests that are in the process of review based on
historical repurchase experience with a specific monoline to the extent such experience provides a reasonable basis on
which to estimate incurred losses from repurchase activity. A liability
has also been established related to repurchase requests subject to negotiation and unasserted
requests to repurchase current and future defaulted loans where it is believed a more consistent
repurchase experience with certain monolines has been established. For other monolines, in view of
the inherent difficulty of predicting the outcome of those repurchase requests where a valid
defect has not been identified or the inherent difficulty in predicting future claim requests and
the related outcome in the case of unasserted requests to repurchase loans from the securitization
trusts in which these monolines have insured all or some of the related bonds, the Corporation
cannot reasonably estimate the eventual outcome. In addition, the timing of the ultimate
resolution or the eventual loss, if any, related to those repurchase requests cannot be reasonably
estimated. For the monolines, where sufficient, consistent repurchase experience has not been
established, it is not possible to estimate the possible loss or a range of loss. Thus, a
liability has not been established related to repurchase requests
40
where a valid defect has not
been identified, or in the case of any unasserted requests to repurchase loans from the
securitization trusts in which such monolines have insured all or some of the related bonds.
At September 30, 2010, the unpaid principal balance of loans related to unresolved repurchase
requests previously received from monolines was $4.2 billion, including $2.7 billion that have
been reviewed where it is believed a valid defect has not been identified which would constitute
an actionable breach of representations and warranties and
$1.5 billion that is in the process of
review. At September 30, 2010, the unpaid principal balance of loans for which the monolines had
requested loan files for review but for which no repurchase request has been received was $9.9
billion, excluding loans that had been paid in full. There will likely be additional requests for
loan files in the future leading to repurchase requests. Such requests may relate to loans that
are currently in securitization trusts or loans that have defaulted and are no longer included
in the unpaid principal balance of the loans in the trusts. However, it is unlikely that a
repurchase request will be received for every loan in a securitization or every file requested or
that a valid defect exists for every loan repurchase request. In addition, any claims paid related
to repurchase requests from a monoline are paid to the securitization trust and may be used by the
securitization trust to repay any outstanding monoline advances or reduce future advances from the
monolines. To the extent that a monoline has not advanced funds or does not anticipate that they
will be required to advance funds to the securitization trust, the likelihood of receiving a
repurchase request from a monoline may be reduced as the monoline would receive limited to no benefit from
the payment of repurchase claims. Repurchase requests from the monolines will continue to be
evaluated and reviewed and, to the extent not considered valid, contested. The exposure to loss
from monoline repurchase requests will be determined by the number and amount of loans ultimately
repurchased offset by the applicable underlying collateral value in the real estate securing these
loans. In the unlikely event that repurchase would be required for the entire amount of all loans
in all securitizations, regardless of whether the loans were current, and without considering
whether a repurchase demand might be asserted or whether such demand actually showed a valid
defect in any loans from the securitization trusts in which monolines have insured all or some of
the related bonds, assuming the underlying collateral has no value, the maximum amount of
potential loss would be no greater than the unpaid principal balance of the loans repurchased plus
accrued interest.
Credit Card Securitizations
The Corporation securitizes originated and purchased credit card loans. The
Corporations continuing involvement with the securitization trusts includes servicing the
receivables, retaining an undivided interest (sellers interest) in the receivables, and holding
certain retained interests including senior and subordinate securities, discount receivables,
subordinate interests in accrued interest and fees on the securitized receivables, and cash
reserve accounts. The securitization trusts legal documents require the Corporation to maintain a
minimum sellers interest of four to five percent and at September 30, 2010, the Corporation was
in compliance with this requirement. The sellers interest in the trusts represents the
Corporations undivided interest in the receivables transferred to the trust and is pari passu to
the investors interest. At December 31, 2009, prior to the consolidation of the trusts, the
Corporation had $10.8 billion of sellers interest which was carried at historical cost and
classified in loans.
The Corporation consolidated all credit card securitization trusts as of January 1, 2010. In
its role as administrator and servicer, the Corporation has the power to manage defaulted
receivables, add and remove accounts within certain defined parameters, and manage the trusts
liabilities. Through its retained residual and other interests, the Corporation has an obligation
to absorb losses or the right to receive benefits that could potentially be significant to the
trusts. Accordingly, the Corporation is the primary beneficiary of the trusts and therefore the
trusts are subject to consolidation. Prior to 2010, the trusts met the definition of a QSPE and as
such were not subject to consolidation.
41
The table below summarizes select information related to credit card securitization trusts in
which the Corporation held a variable interest at September 30, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
September 30 2010 |
|
December 31 2009 |
|
|
Consolidated |
|
|
Retained Interests in |
(Dollars in millions) |
|
VIEs |
|
|
Unconsolidated VIEs |
|
Maximum loss exposure (1) |
|
$ |
28,943 |
|
|
$ |
32,167 |
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet assets |
|
|
|
|
|
|
|
|
Trading account assets |
|
$ |
- |
|
|
$ |
80 |
|
Available-for-sale debt securities (2) |
|
|
- |
|
|
|
8,501 |
|
Held-to-maturity securities (2) |
|
|
- |
|
|
|
6,573 |
|
Loans and leases (3) |
|
|
92,553 |
|
|
|
10,798 |
|
Allowance for loan and lease losses |
|
|
(9,386 |
) |
|
|
(1,268 |
) |
Derivative assets |
|
|
2,302 |
|
|
|
- |
|
All other assets (4) |
|
|
2,887 |
|
|
|
5,195 |
|
|
Total |
|
$ |
88,356 |
|
|
$ |
29,879 |
|
|
On-balance sheet liabilities |
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
59,137 |
|
|
$ |
- |
|
All other liabilities |
|
|
276 |
|
|
|
- |
|
|
Total |
|
$ |
59,413 |
|
|
$ |
- |
|
|
Trust loans (5) |
|
$ |
92,553 |
|
|
$ |
103,309 |
|
|
|
|
|
(1) |
|
At December 31, 2009, maximum loss exposure represents the total retained interests
held by the Corporation and also includes $2.3 billion related to a liquidity support commitment
the Corporation provided to one of the U.S. Credit Card Securitization Trusts commercial paper
program. |
|
(2) |
|
As a holder of these securities, the Corporation receives scheduled principal and
interest payments. During the year ended December 31, 2009, there were no OTTI losses recorded on
those securities classified as AFS or HTM debt securities. |
|
(3) |
|
At December 31, 2009, amount represents sellers interest which was classified as loans
and leases on the Corporations Consolidated Balance Sheet. |
|
(4) |
|
At December 31, 2009, All other assets includes discount receivables, subordinate
interests in accrued interest and fees on the securitized receivables, cash reserve accounts and
interest-only strips which are carried at fair value. |
|
(5) |
|
At December 31, 2009, Trust loans represents the principal balance of credit card
receivables that have been legally isolated from the Corporation including those loans represented
by the sellers interest that were held on the Corporations Consolidated Balance Sheet. At
September 30, 2010, Trust loans includes accrued interest receivables of $1.2 billion. Prior to
consolidation, subordinate accrued interest receivables were included in All other assets. These
credit card receivables are legally assets of the Trust and not of the Corporation and can only be
used to settle obligations of the Trust. |
For the nine months ended September 30, 2010, $2.9 billion of new senior debt securities
were issued to external investors from the credit card securitization trusts. There were no new
debt securities issued to external investors from the credit card securitization trusts for the
nine months ended September 30, 2009. Collections reinvested in revolving period securitizations
were $32.6 billion and $101.7 billion and cash flows received on residual interests were $1.2
billion and $3.7 billion for the three and nine months ended September 30, 2009.
At December 31, 2009, there were no recognized servicing assets or liabilities associated
with any of the credit card securitization transactions. The Corporation recorded $500 million and
$1.5 billion in servicing fees related to credit card securitizations for the three and nine
months ended September 30, 2009.
During the nine months ended September 30, 2010, subordinate securities of $10.0 billion with
a stated interest rate of zero percent were issued by the U.S. Credit Card Securitization Trusts
to the Corporation. In addition, the Corporation extended its election of designating a specified
percentage of new receivables transferred to the Trusts as discount
receivables through December 31, 2010. As the U.S. Credit Card Securitization Trusts were
consolidated on January 1, 2010, the additional subordinate securities issued and the extension of
the discount receivables election had no impact on the Corporations consolidated results for the
three and nine months ended September 30, 2010. For additional information on these transactions,
see Note 8 Securitizations to the Consolidated Financial Statements of the Corporations 2009
Annual Report on Form 10-K.
During the nine months ended September 30, 2010, similar actions were also taken with the
U.K. Credit Card Securitization Trusts. Additional subordinate securities of $1.5 billion with a
stated interest rate of zero percent were issued by the U.K. Credit Card Securitization Trusts to
the Corporation and the Corporation extended its election of designating a specified percentage of
new receivables transferred to the Trusts as discount receivables through April 30, 2011. Both
42
actions were taken in an effort to address the decline in the excess spread of the U.K. Credit
Card Securitization Trusts. As the U.K. Credit Card Securitization Trusts were consolidated on
January 1, 2010, the additional subordinate securities issued and the designation of discount
receivables had no impact on the Corporations results for the three and nine months ended
September 30, 2010.
As of March 31, 2010, the Corporation had terminated the U.S. Credit Card Securitization
Trusts commercial paper program and all outstanding notes were paid in full. Accordingly, there
is no commercial paper outstanding and the associated liquidity support agreement between the
Corporation and the U.S. Credit Card Securitization Trust was terminated as of March 31, 2010. For
additional information on the Corporations U.S. Credit Card Securitization Trusts commercial
paper program, see Note 8 Securitizations to the Consolidated Financial Statements of the
Corporations 2009 Annual Report on Form 10-K.
Multi-seller Conduits
The Corporation currently administers three multi-seller conduits which provide a
low-cost funding alternative to their customers by facilitating access to the commercial paper
market. These customers sell or otherwise transfer assets to the conduits, which in turn issue
short-term commercial paper that is rated high-grade and is collateralized by the underlying
assets. The Corporation receives fees for providing combinations of liquidity and standby letters
of credit (SBLCs) to the conduits for the benefit of third party investors. The Corporation also
receives fees for serving as commercial paper placement agent and for providing administrative
services to the conduits. The Corporations liquidity commitments, which had an aggregate notional
amount outstanding of $8.3 billion and $34.5 billion at September 30, 2010 and December 31, 2009,
are collateralized by various classes of assets and incorporate features such as
overcollateralization and cash reserves that are designed to provide credit support to the
conduits at a level equivalent to investment grade as determined in accordance with internal risk
rating guidelines. The Corporation liquidated a fourth conduit during the three months ended
September 30, 2010.
The table below summarizes select information related to multi-seller conduits in which the
Corporation held a variable interest at September 30, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
(Dollars in millions) |
|
Consolidated |
|
|
Consolidated |
|
|
Unconsolidated |
|
|
Total |
|
|
Maximum loss exposure |
|
$ |
8,327 |
|
|
$ |
9,388 |
|
|
$ |
25,135 |
|
|
$ |
34,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities |
|
$ |
4,998 |
|
|
$ |
3,492 |
|
|
$ |
- |
|
|
$ |
3,492 |
|
Held-to-maturity debt securities |
|
|
- |
|
|
|
2,899 |
|
|
|
- |
|
|
|
2,899 |
|
Loans and leases |
|
|
1,085 |
|
|
|
318 |
|
|
|
318 |
|
|
|
636 |
|
Allowance for loan and lease losses |
|
|
(3 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
All other assets |
|
|
410 |
|
|
|
4 |
|
|
|
60 |
|
|
|
64 |
|
|
Total |
|
$ |
6,490 |
|
|
$ |
6,713 |
|
|
$ |
378 |
|
|
$ |
7,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper and other short-term borrowings |
|
$ |
6,424 |
|
|
$ |
6,748 |
|
|
$ |
- |
|
|
$ |
6,748 |
|
|
Total |
|
$ |
6,424 |
|
|
$ |
6,748 |
|
|
$ |
- |
|
|
$ |
6,748 |
|
|
Total assets of VIEs |
|
$ |
6,490 |
|
|
$ |
6,713 |
|
|
$ |
13,893 |
|
|
$ |
20,606 |
|
|
The Corporation consolidated all previously unconsolidated multi-seller conduits on
January 1, 2010. In its role as administrator, the Corporation has the power to determine which
assets will be held in the conduits and it has an obligation to monitor these assets for
compliance with agreed-upon lending terms. In addition, the Corporation manages the issuance of
commercial paper. Through the liquidity facilities and loss protection commitments with the
conduits, the Corporation has an obligation to absorb losses that could potentially be significant
to the VIE. Accordingly, the Corporation is the primary beneficiary of and therefore consolidates
the conduits.
Prior to 2010, the Corporation determined whether it must consolidate a multi-seller conduit
based on an analysis of projected cash flows using Monte Carlo simulations. The Corporation did
not consolidate three of the four conduits as it did not expect to absorb a majority of the
variability created by the credit risk of the assets held in the conduits. On a combined basis,
these three conduits had issued approximately $147 million of capital notes and equity interests
to third parties, $142
43
million of which were outstanding at December 31, 2009, which absorbed
credit risk on a first loss basis. All of these capital notes and equity interests were redeemed
as of March 31, 2010. The Corporation consolidated the fourth conduit which had not issued capital
notes to third parties.
The assets of the conduits typically carry a risk rating of AAA to BBB based on the
Corporations current internal risk rating equivalent which reflects structural enhancements of
the assets including third party insurance. Approximately 73 percent of commitments in the
conduits are supported by senior exposures. At September 30, 2010, the assets of the consolidated
conduits and the conduits unfunded liquidity commitments were mainly collateralized by $2.5
billion in student loans (30 percent), $1.3 billion in equipment loans (15 percent), $1.0 billion
in auto loans (12 percent) and $655 million in trade receivables (eight percent). In addition,
$2.3 billion (28 percent) of the conduits assets and unfunded commitments were collateralized by
projected cash flows from long-term contracts (e.g., television broadcast contracts, stadium
revenues and royalty payments) which, as mentioned above, incorporate features that provide credit
support. Amounts advanced under these arrangements will be repaid when cash flows due under the long-term
contracts are received. Substantially all of this exposure is insured. In addition, $443 million
(five percent) of the conduits assets and unfunded commitments were collateralized by the
conduits short-term lending arrangements with investment funds, primarily real estate funds,
which, as mentioned above, incorporate features that provide credit support. Amounts advanced
under these arrangements are secured by commitments from a diverse group of high quality equity
investors. Outstanding advances under these facilities will be repaid when the investment funds
issue capital calls.
One of the previously unconsolidated conduits held CDO investments with aggregate funded
amounts and unfunded commitments totaling $543 million at December 31, 2009. The conduit had
transferred the investments to a subsidiary of the Corporation in accordance with existing
contractual requirements and the transfers were initially accounted for as financing transactions.
After the capital notes issued by the conduit were redeemed in 2010, the conduit no longer had any
continuing exposure to credit losses of the investments and the transfers were recharacterized by
the conduit as sales to the subsidiary of the Corporation. At September 30, 2010, these CDO
exposures were recorded on the Corporations Consolidated Balance Sheet in trading account assets
and derivative liabilities and are included in the Corporations disclosure of variable interests
in CDO vehicles beginning on page 45.
Assets of the Corporation are not available to pay creditors of the conduits except to the
extent the Corporation may be obligated to perform under the liquidity commitments and SBLCs.
Assets of the conduits are not available to pay creditors of the Corporation. At September 30,
2010 and December 31, 2009, the Corporation did not hold any commercial paper issued by the
conduits other than incidentally and in its role as a commercial paper dealer.
The Corporations liquidity and SBLC commitments obligate it to purchase assets from the
conduits at the conduits cost. If a conduit is unable to re-issue commercial paper due to
illiquidity in the commercial paper markets or deterioration in the asset portfolio, the
Corporation is obligated to provide funding. Beginning in the third quarter of 2010, the
Corporations obligation to purchase assets under the liquidity agreements is no longer limited to
the amount of non-defaulted assets. However, the Corporation is not obligated to fund under the
liquidity commitments if the conduit is the subject of a voluntary or involuntary bankruptcy
proceeding.
The SBLCs, which are typically set at eight to 10 percent of total outstanding commercial
paper, are unconditional.
Municipal Bond Trusts
The Corporation administers municipal bond trusts that hold highly rated, long-term,
fixed-rate municipal bonds, some of which are callable prior to maturity. The vast majority of the
bonds are rated AAA or AA and some of the bonds benefit from insurance provided by monolines. The
trusts obtain financing by issuing floating-rate trust certificates that reprice on a weekly or
other basis to third party investors. The Corporation may serve as remarketing agent and/or
liquidity provider for the trusts. The floating-rate investors have the right to tender the
certificates at specified dates, often with as little as seven days notice. Should the
Corporation be unable to remarket the tendered certificates, it is generally obligated to purchase
them at par under standby liquidity facilities. The Corporation is typically not obligated to
purchase the certificates under the standby liquidity facilities if a bonds credit rating
declines below investment grade or in the event of certain defaults or bankruptcy of the issuer
and insurer.
In addition to standby liquidity facilities, the Corporation also provides default protection
or credit enhancement to investors on securities issued by certain municipal bond trusts. Interest
and principal payments on floating-rate certificates issued by these trusts are secured by
guarantees issued by the Corporation. In the event that the issuer of the underlying municipal
bond defaults on any payment of principal and/or interest when due, the Corporation will make any
payments
44
required under the guarantees to the holders of the floating-rate certificates. The
Corporation or a customer of the Corporation may hold the residual interest in the trust. If a
customer holds the residual interest, that customer typically has the unilateral ability to
liquidate the trust at any time, while the Corporation typically has the ability to trigger the
liquidation of that trust if the market value of the bonds held in the trust declines below a
specified threshold. This arrangement is designed to limit market losses to an amount that is less
than the customers residual interest, effectively preventing the Corporation from absorbing
losses incurred on assets held within the trust when a customer holds the residual interest. The
weighted average remaining life of bonds held in the trusts at September 30, 2010 was 13.0 years.
There were no material write-downs or downgrades of assets or issuers during the three and nine
months ended September 30, 2010.
The table below summarizes select information related to municipal bond trusts in which the
Corporation held a variable interest at September 30, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
(Dollars in millions) |
|
Consolidated |
|
|
Unconsolidated |
|
|
Total |
|
|
Consolidated |
|
|
Unconsolidated |
|
|
Total |
|
|
Maximum loss exposure |
|
$ |
4,630 |
|
|
$ |
4,260 |
|
|
$ |
8,890 |
|
|
$ |
241 |
|
|
$ |
10,143 |
|
|
$ |
10,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading account assets |
|
$ |
4,630 |
|
|
$ |
140 |
|
|
$ |
4,770 |
|
|
$ |
241 |
|
|
$ |
191 |
|
|
$ |
432 |
|
Derivative assets |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
167 |
|
|
|
167 |
|
|
Total |
|
$ |
4,630 |
|
|
$ |
140 |
|
|
$ |
4,770 |
|
|
$ |
241 |
|
|
$ |
358 |
|
|
$ |
599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper and other short-term borrowings |
|
$ |
4,774 |
|
|
$ |
- |
|
|
$ |
4,774 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
All other liabilities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
287 |
|
|
|
289 |
|
|
Total |
|
$ |
4,774 |
|
|
$ |
- |
|
|
$ |
4,774 |
|
|
$ |
2 |
|
|
$ |
287 |
|
|
$ |
289 |
|
|
Total assets of VIEs |
|
$ |
4,630 |
|
|
$ |
6,476 |
|
|
$ |
11,106 |
|
|
$ |
241 |
|
|
$ |
12,247 |
|
|
$ |
12,488 |
|
|
On January 1, 2010, the Corporation consolidated $5.1 billion of municipal bond trusts
in which it has a controlling financial interest. As transferor of assets into a trust, the
Corporation has the power to determine which assets will be held in the trust and to structure the
liquidity facilities, default protection and credit enhancement, if applicable. In some instances,
the Corporation retains a residual interest in such trusts and has loss exposure that could
potentially be significant to the trust through the residual interest, liquidity facilities and
other arrangements. The Corporation is also the remarketing agent through which it has the power
to direct the activities that most significantly impact economic performance.
Accordingly, the Corporation is the primary beneficiary and consolidates these trusts. In other
instances, one or more third party investors hold the residual interest and through that interest
have the right to liquidate the trust. The Corporation does not consolidate these trusts.
Prior to 2010, some of the municipal bond trusts were QSPEs and as such were not subject to
consolidation by the Corporation. The Corporation consolidated those trusts that were not QSPEs if
it held the residual interests or otherwise expected to absorb a majority of the variability
created by changes in fair value of assets in the trusts and changes in market rates of interest.
The Corporation did not consolidate a trust if the customer held the residual interest and the
Corporation was protected from loss in connection with its liquidity obligations.
During the three and nine months ended September 30, 2010, the Corporation was the transferor
of assets into unconsolidated municipal bond trusts and received cash proceeds from new
securitizations of $226 million and $1.0 billion as compared to $247 million and $422 million
during the same periods in 2009. At September 30, 2010 and December 31, 2009, the principal
balance outstanding for unconsolidated municipal bond securitization trusts for which the
Corporation was transferor was $2.1 billion and $6.9 billion.
The Corporations liquidity commitments to unconsolidated municipal bond trusts totaled $4.1
billion and $9.8 billion at September 30, 2010 and December 31, 2009. At September 30, 2010 and
December 31, 2009, the Corporation held $140 million and $155 million of floating-rate
certificates issued by unconsolidated municipal bond trusts in trading account assets. At December
31, 2009, the Corporation also held residual interests of $203 million.
Collateralized Debt Obligation Vehicles
CDO vehicles hold diversified pools of fixed-income securities, typically corporate debt
or asset-backed securities, which they fund by issuing multiple tranches of debt and equity
securities. Synthetic CDOs enter into a portfolio of credit
45
default swaps to synthetically create
exposure to fixed-income securities. CLOs are a subset of CDOs which hold pools of loans,
typically corporate loans or commercial mortgages. CDOs are typically managed by third party
portfolio managers. The Corporation transfers assets to these CDOs, holds securities issued by the
CDOs and may be a derivative counterparty to the CDOs, including a credit default swap
counterparty for synthetic CDOs. The Corporation has also entered into total return swaps with
certain CDOs whereby the Corporation will absorb the economic returns generated by specified
assets held by the CDO. The Corporation receives fees for structuring CDOs and providing liquidity
support for super senior tranches of securities issued by certain CDOs. No third parties provide a
significant amount of similar commitments to these CDOs.
The table below summarizes select information related to CDO vehicles in which the
Corporation held a variable interest at September 30, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
(Dollars in millions) |
|
Consolidated |
|
|
Unconsolidated |
|
|
Total |
|
|
Consolidated |
|
|
Unconsolidated |
|
|
Total |
|
|
Maximum loss exposure (1) |
|
$ |
3,191 |
|
|
$ |
4,037 |
|
|
$ |
7,228 |
|
|
$ |
3,863 |
|
|
$ |
6,987 |
|
|
$ |
10,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading account assets |
|
$ |
2,812 |
|
|
$ |
967 |
|
|
$ |
3,779 |
|
|
$ |
2,785 |
|
|
$ |
1,253 |
|
|
$ |
4,038 |
|
Derivative assets |
|
|
- |
|
|
|
989 |
|
|
|
989 |
|
|
|
- |
|
|
|
2,085 |
|
|
|
2,085 |
|
Available-for-sale debt securities |
|
|
876 |
|
|
|
217 |
|
|
|
1,093 |
|
|
|
1,414 |
|
|
|
368 |
|
|
|
1,782 |
|
All other assets |
|
|
19 |
|
|
|
135 |
|
|
|
154 |
|
|
|
- |
|
|
|
166 |
|
|
|
166 |
|
|
Total |
|
$ |
3,707 |
|
|
$ |
2,308 |
|
|
$ |
6,015 |
|
|
$ |
4,199 |
|
|
$ |
3,872 |
|
|
$ |
8,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
15 |
|
|
$ |
41 |
|
|
$ |
56 |
|
|
$ |
- |
|
|
$ |
781 |
|
|
$ |
781 |
|
Long-term debt |
|
|
3,174 |
|
|
|
- |
|
|
|
3,174 |
|
|
|
2,753 |
|
|
|
- |
|
|
|
2,753 |
|
|
Total |
|
$ |
3,189 |
|
|
$ |
41 |
|
|
$ |
3,230 |
|
|
$ |
2,753 |
|
|
$ |
781 |
|
|
$ |
3,534 |
|
|
Total assets of VIEs |
|
$ |
3,707 |
|
|
$ |
46,399 |
|
|
$ |
50,106 |
|
|
$ |
4,199 |
|
|
$ |
56,590 |
|
|
$ |
60,789 |
|
|
|
|
|
(1) |
|
Maximum loss exposure has not been reduced to reflect the benefit of purchased insurance. |
The Corporations maximum loss exposure of $7.2 billion at September 30, 2010, includes
$1.9 billion of super senior CDO exposure, $2.2 billion of exposure to CDO financing facilities
and $3.1 billion of other non-super senior exposure. This exposure is calculated on a gross basis
and does not reflect any benefit from purchased insurance. Net of purchased insurance but
including securities retained from liquidations of CDOs, the Corporations net exposure to super
senior CDO-related positions was $1.3 billion at September 30, 2010. The CDO financing facilities,
which are consolidated, obtain funding from third parties for CDO positions which are principally
classified in trading account assets on the Corporations Consolidated Balance Sheet. The CDO
financing facilities long-term debt at September 30, 2010 totaled $2.7 billion, all of which has
recourse to the general credit of the Corporation.
The Corporation consolidated $220 million of CDOs on January 1, 2010. The Corporation does
not routinely serve as collateral manager for CDOs and, therefore, does not typically have the
power to direct the activities that most significantly impact the economic performance of a CDO.
However, following an event of default, if the Corporation is a majority holder of senior
securities issued by a CDO and acquires the power to manage the assets of the CDO, the Corporation
consolidates the CDO. Generally, the creditors of the consolidated CDOs have no recourse to the
general credit of the Corporation. Prior to 2010, the Corporation evaluated whether it must
consolidate a CDO based principally on a determination as to which party was expected to absorb a
majority of the credit risk created by the assets of the CDO.
At September 30, 2010, the Corporation had $1.4 billion notional amount of super senior
liquidity exposure to CDO vehicles, which is comprised of two components. The first component is
$567 million notional amount of liquidity exposure to third parties that are not special purpose entities (SPE) that hold
super senior cash positions on the Corporations behalf. The remainder is comprised of $850
million notional amount of liquidity support provided to certain synthetic CDOs, including $323
million to a consolidated CDO, in the form of lending commitments related to super senior
securities issued by the CDOs. These unfunded commitments obligate the Corporation to purchase the
super senior CDO securities at par value if the CDOs need cash to make payments due under credit
default swaps written by the CDO vehicles.
Liquidity-related commitments also include $1.3 billion notional amount of derivative
contracts with unconsolidated SPEs, principally CDO vehicles, which hold non-super senior CDO debt
securities or other debt securities on the Corporations behalf. These derivatives are typically
in the form of total return swaps which obligate the Corporation to purchase the securities at the
SPEs cost to acquire the securities, generally as a result of credit
ratings downgrades. The underlying securities are senior securities and substantially all of the
Corporations exposures are
46
insured. Accordingly, the Corporations exposure to loss consists
principally of counterparty risk to the insurers. These derivatives comprise substantially all of
the $1.3 billion notional amount of derivative contracts through which the Corporation obtains
funding from third party SPEs, as described in Note 11 Commitments and Contingencies.
The Corporations $2.7 billion of aggregate liquidity exposure to CDOs at September 30, 2010
is included in the table on page 46 to the extent that the Corporation sponsored the CDO vehicle
or the liquidity exposure to the CDO vehicle is more than insignificant as compared to total
assets of the CDO vehicle. Liquidity exposure included in the table is reported net of previously
recorded losses.
The Corporations maximum exposure to loss is significantly less than the total assets of the
CDO vehicles in the table on page 46 because the Corporation typically has exposure to only a
portion of the total assets. The Corporation has also purchased credit protection from some of the
same CDO vehicles in which it invested, thus reducing net exposure to future loss.
Customer Vehicles
Customer vehicles include credit-linked and equity-linked note vehicles, repackaging
vehicles and asset acquisition vehicles, which are typically created on behalf of customers who
wish to obtain market or credit exposure to a specific company or financial instrument.
The table below summarizes select information related to customer vehicles in which the
Corporation held a variable interest at September 30, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
(Dollars in millions) |
|
Consolidated |
|
|
Unconsolidated |
|
|
Total |
|
|
Consolidated |
|
|
Unconsolidated |
|
|
Total |
|
|
Maximum loss exposure |
|
$ |
3,971 |
|
|
$ |
2,541 |
|
|
$ |
6,512 |
|
|
$ |
277 |
|
|
$ |
10,229 |
|
|
$ |
10,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading account assets |
|
$ |
2,557 |
|
|
$ |
522 |
|
|
$ |
3,079 |
|
|
$ |
183 |
|
|
$ |
1,334 |
|
|
$ |
1,517 |
|
Derivative assets |
|
|
93 |
|
|
|
905 |
|
|
|
998 |
|
|
|
78 |
|
|
|
4,815 |
|
|
|
4,893 |
|
Loans and leases |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
65 |
|
|
|
65 |
|
Loans held-for-sale |
|
|
788 |
|
|
|
- |
|
|
|
788 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
All other assets |
|
|
1,785 |
|
|
|
16 |
|
|
|
1,801 |
|
|
|
16 |
|
|
|
- |
|
|
|
16 |
|
|
Total |
|
$ |
5,223 |
|
|
$ |
1,443 |
|
|
$ |
6,666 |
|
|
$ |
277 |
|
|
$ |
6,214 |
|
|
$ |
6,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
- |
|
|
$ |
36 |
|
|
$ |
36 |
|
|
$ |
- |
|
|
$ |
267 |
|
|
$ |
267 |
|
Commercial paper and other short-term borrowings |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
22 |
|
|
|
- |
|
|
|
22 |
|
Long-term debt |
|
|
2,684 |
|
|
|
- |
|
|
|
2,684 |
|
|
|
50 |
|
|
|
74 |
|
|
|
124 |
|
All other liabilities |
|
|
- |
|
|
|
151 |
|
|
|
151 |
|
|
|
- |
|
|
|
1,357 |
|
|
|
1,357 |
|
|
Total |
|
$ |
2,684 |
|
|
$ |
187 |
|
|
$ |
2,871 |
|
|
$ |
72 |
|
|
$ |
1,698 |
|
|
$ |
1,770 |
|
|
Total assets of VIEs |
|
$ |
5,223 |
|
|
$ |
5,335 |
|
|
$ |
10,558 |
|
|
$ |
277 |
|
|
$ |
16,487 |
|
|
$ |
16,764 |
|
|
On January 1, 2010, the Corporation consolidated $5.9 billion of customer vehicles in
which it has a controlling financial interest.
Credit-linked and equity-linked note vehicles issue notes which pay a return that is linked
to the credit or equity risk of a specified company or debt instrument. The vehicles purchase
high-grade assets as collateral and enter into credit default swaps or equity derivatives to
synthetically create the credit or equity risk to pay the specified return on the notes. The
Corporation is typically the counterparty for some or all of the credit and equity derivatives
and, to a lesser extent, it may invest in securities issued by the vehicles. The Corporation may
also enter into interest rate or foreign currency derivatives with the vehicles. The Corporation
also had approximately $460 million of other liquidity commitments, including written put options
and collateral value guarantees, with unconsolidated credit-linked and equity-linked note vehicles
at September 30, 2010.
The Corporation consolidates these vehicles when it has control over the initial design of
the vehicle and also absorbs potentially significant gains or losses through derivative contracts
or the collateral assets. The Corporation does not
47
consolidate a vehicle if a single investor
controlled the initial design of the vehicle or if the Corporation does not have a variable
interest that could potentially be significant to the vehicle. Credit-linked and equity-linked
note vehicles were not consolidated prior to 2010 because the Corporation did not absorb a
majority of the economic risks and rewards of the vehicles.
Asset acquisition vehicles acquire financial instruments, typically loans, at the direction
of a single customer and obtain funding through the issuance of structured notes to the
Corporation. At the time the vehicle acquires an asset, the Corporation enters into total return
swaps with the customer such that the economic returns of the asset are passed through to the
customer. The Corporation is exposed to counterparty credit risk if the asset declines in value
and the customer defaults on its obligation to the Corporation under the total return swaps. The
Corporations risk may be mitigated by collateral or other arrangements. The Corporation
consolidates these vehicles because it has the power to manage the assets in the vehicles and owns
all of the structured notes issued by the vehicles. These vehicles were not consolidated prior to
2010 because the variability created by the assets in the vehicles was considered to be absorbed
by the Corporations customers through the total return swaps.
Other VIEs
Other consolidated VIEs primarily include investment vehicles, leveraged lease trusts,
automobile and other securitization trusts, and asset acquisition conduits. Other unconsolidated
VIEs primarily include investment vehicles, real estate vehicles and resecuritization trusts.
The table below summarizes select information related to other VIEs in which the Corporation
held a variable interest at September 30, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
(Dollars in millions) |
|
Consolidated |
|
|
Unconsolidated |
|
|
Total |
|
|
Consolidated |
|
|
Unconsolidated |
|
|
Total |
|
|
Maximum loss exposure |
|
$ |
15,150 |
|
|
$ |
33,488 |
|
|
$ |
48,638 |
|
|
$ |
13,111 |
|
|
$ |
14,373 |
|
|
$ |
27,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading account assets |
|
$ |
1,187 |
|
|
$ |
1,719 |
|
|
$ |
2,906 |
|
|
$ |
269 |
|
|
$ |
543 |
|
|
$ |
812 |
|
Derivative assets |
|
|
259 |
|
|
|
317 |
|
|
|
576 |
|
|
|
1,096 |
|
|
|
86 |
|
|
|
1,182 |
|
Available-for-sale debt securities |
|
|
1,810 |
|
|
|
20,811 |
|
|
|
22,621 |
|
|
|
1,822 |
|
|
|
2,439 |
|
|
|
4,261 |
|
Loans and leases |
|
|
18,731 |
|
|
|
1,569 |
|
|
|
20,300 |
|
|
|
16,112 |
|
|
|
1,200 |
|
|
|
17,312 |
|
Allowance for loan and lease losses |
|
|
(59 |
) |
|
|
(15 |
) |
|
|
(74 |
) |
|
|
(130 |
) |
|
|
(10 |
) |
|
|
(140 |
) |
Loans held-for-sale |
|
|
312 |
|
|
|
865 |
|
|
|
1,177 |
|
|
|
197 |
|
|
|
- |
|
|
|
197 |
|
All other assets |
|
|
2,722 |
|
|
|
8,381 |
|
|
|
11,103 |
|
|
|
1,310 |
|
|
|
8,875 |
|
|
|
10,185 |
|
|
Total |
|
$ |
24,962 |
|
|
$ |
33,647 |
|
|
$ |
58,609 |
|
|
$ |
20,676 |
|
|
$ |
13,133 |
|
|
$ |
33,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
- |
|
|
$ |
11 |
|
|
$ |
11 |
|
|
$ |
- |
|
|
$ |
80 |
|
|
$ |
80 |
|
Commercial paper and other short-term borrowings |
|
|
1,312 |
|
|
|
- |
|
|
|
1,312 |
|
|
|
965 |
|
|
|
- |
|
|
|
965 |
|
Long-term debt |
|
|
9,427 |
|
|
|
74 |
|
|
|
9,501 |
|
|
|
7,341 |
|
|
|
- |
|
|
|
7,341 |
|
All other liabilities |
|
|
1,544 |
|
|
|
1,447 |
|
|
|
2,991 |
|
|
|
3,123 |
|
|
|
1,626 |
|
|
|
4,749 |
|
|
Total |
|
$ |
12,283 |
|
|
$ |
1,532 |
|
|
$ |
13,815 |
|
|
$ |
11,429 |
|
|
$ |
1,706 |
|
|
$ |
13,135 |
|
|
Total assets of VIEs |
|
$ |
24,962 |
|
|
$ |
70,824 |
|
|
$ |
95,786 |
|
|
$ |
20,676 |
|
|
$ |
25,914 |
|
|
$ |
46,590 |
|
|
Investment Vehicles
The Corporation sponsors, invests in or provides financing to a variety of investment
vehicles that hold loans, real estate, debt securities or other financial instruments and are
designed to provide the desired investment profile to investors. At September 30, 2010 and
December 31, 2009, the Corporations consolidated investment vehicles had total assets of $7.8
billion and $5.7 billion. The Corporation also held investments in unconsolidated vehicles with
total assets of $10.4 billion and $8.8 billion at September 30, 2010 and December 31, 2009. The
Corporations maximum exposure to loss associated with consolidated and unconsolidated investment
vehicles totaled $12.0 billion and $10.7 billion at September 30, 2010 and December 31, 2009.
On January 1, 2010, the Corporation consolidated $2.5 billion of investment vehicles. This
amount included a real estate investment fund with $1.5 billion of assets which is designed to
provide returns to clients through limited partnership
48
holdings. Affiliates of the Corporation are
the general partner and also have a limited partnership interest in the fund. The Corporation
anticipates that it will provide support to the entity and therefore considers the entity to be a
VIE. The Corporation consolidates an investment vehicle that meets the definition of a VIE if it
manages the assets or otherwise controls the activities of the vehicle and also holds a variable
interest that could potentially be significant to the vehicle. Prior to 2010, the Corporation
consolidated an investment vehicle that met the definition of a VIE if the Corporations
investment or guarantee was expected to absorb a majority of the variability created by the assets
of the funds.
Leveraged Lease Trusts
The Corporations net investment in consolidated leveraged lease trusts totaled $5.3 billion
and $5.6 billion at September 30, 2010 and December 31, 2009. The trusts hold long-lived equipment
such as rail cars, power generation and distribution equipment, and commercial aircraft. The
Corporation consolidates these trusts because it structured the trusts, giving the Corporation
power over the limited activities of the trusts, and holds a significant residual interest. Prior
to 2010, the Corporation consolidated these trusts because the residual interest was expected to
absorb a majority of the variability driven by credit risk of the lessee and, in some cases, by
the residual risk of the leased property. The net investment represents the Corporations maximum
loss exposure to the trusts in the unlikely event that the leveraged lease investments become
worthless. Debt issued by the leveraged lease trusts is nonrecourse to the Corporation. The
Corporation has no liquidity exposure to these leveraged lease trusts.
Automobile and Other Securitization Trusts
On January 1, 2010, the Corporation consolidated one automobile securitization trust with
$2.6 billion of assets in which it had a controlling financial interest. Prior to 2010, this trust
met the definition of a QSPE and was therefore not subject to consolidation. The Corporation held
$2.1 billion of senior securities, $195 million of subordinate securities and $83 million of
residual interests issued by this trust at December 31, 2009. The remaining automobile trusts,
which were not QSPEs, were previously consolidated. The automobile and student loan trusts are
consolidated under the new consolidation guidance because the Corporation services the underlying
loans and also holds a significant amount of
beneficial interests issued by the trusts. The other trusts are not consolidated because the
Corporation does not service the underlying assets or does not hold more than an insignificant
amount of beneficial interests issued by the trusts. The loans and receivables held as collateral
in the asset-backed securitization trusts are legally assets of the trusts and not the Corporation
and can only be used to settle obligations of the trusts. The creditors of these trusts have no
recourse to the Corporation.
At September 30, 2010, the Corporation serviced assets held in auto and other securitization
trusts with outstanding balances of $11.7 billion, including trusts collateralized by automobile
loans of $9.7 billion, student loans of $1.3 billion and other loans and receivables of $711
million. At December 31, 2009, the Corporation serviced assets held in auto and other
securitization trusts with outstanding balances of $11.9 billion, including trusts collateralized
by automobile loans of $11.0 billion and other loans of $905 million. The Corporations maximum
exposure to loss associated with these consolidated and unconsolidated trusts totaled $3.0 billion
and $3.5 billion at September 30, 2010 and December 31, 2009. The Corporation transferred $3.0
billion of automobile loans, $1.3 billion of student loans and $303 million of other receivables
to the trusts in the nine months ended September 30, 2010; $1.3 billion of student loans and $303
million of other receivables in the three months ended September 30, 2010; and $9.0 billion of
automobile loans during the year ended December 31, 2009.
Asset Acquisition Conduits
The Corporation administers three asset acquisition conduits which acquire assets on behalf
of the Corporation or its customers. These conduits had total assets of $816 million and $965
million at September 30, 2010 and December 31, 2009. Two of the conduits, which were
unconsolidated prior to 2010, acquire assets at the request of customers who wish to benefit from
the economic returns of the specified assets on a leveraged basis, which consist principally of
liquid exchange-traded equity securities. The third conduit holds subordinate debt securities for
the Corporations benefit. The conduits obtain funding by issuing commercial paper and subordinate
certificates to third party investors. Repayment of the commercial paper and certificates is
assured by total return swaps between the Corporation and the conduits. When a conduit acquires
assets for the benefit of the Corporations customers, the Corporation enters into back-to-back
total return swaps with the conduit and the customer such that the economic returns of the assets
are passed through to the customer. The Corporations exposure to the counterparty credit risk of
its customers is mitigated by the ability to liquidate an asset held in the conduit if the
customer defaults on its obligation. The Corporation receives fees for serving as commercial paper
placement agent and for providing administrative services to the conduits. At September 30, 2010
and December 31, 2009, the Corporation did not hold any commercial paper issued by the asset
acquisition conduits other than incidentally and in its role as a commercial paper dealer.
49
On January 1, 2010, the Corporation consolidated the two previously unconsolidated asset
acquisition conduits with total assets of $1.4 billion. In its role as administrator, the
Corporation has the power to determine which assets will be held in the conduits and to manage the
issuance of commercial paper. Through the total return swaps with the conduits, the Corporation
initially absorbs gains and losses incurred due to changes in the market value of assets held in
the conduits. Although the Corporation then transfers gains and losses to customers through the
back-to-back total return swaps, its financial interest could potentially be significant to the
VIE. Accordingly, the Corporation is the primary beneficiary of and consolidates all of the asset
acquisition conduits.
Prior to 2010, the Corporation determined whether it must consolidate an asset acquisition
conduit based on the design of the conduit and whether the third party investors are exposed to
the Corporations credit risk or the market risk of the assets. Interest rate risk was not
included in the cash flow analysis because the conduits are not designed to absorb and pass along
interest rate risk to investors who receive current rates of interest that are appropriate for the
tenor and relative risk of their investments. When a conduit acquired assets for the benefit of
the Corporations customers, the Corporation entered into back-to-back total return swaps with the
conduit and the customers such that the economic returns of the assets are passed through to the
customers, none of whom have a variable interest in the conduit as a whole. The third party
investors are exposed primarily to the credit risk of the Corporation. Accordingly, the
Corporation did not consolidate the conduit. When a conduit acquires assets on the Corporations
behalf and the Corporation absorbs the market risk of the assets, it consolidates the conduit.
Real Estate Vehicles
The Corporation held investments in unconsolidated real estate vehicles of $5.2 billion and
$4.8 billion at September 30, 2010 and December 31, 2009, which consisted of limited partnership
investments in unconsolidated limited partnerships that finance the construction and
rehabilitation of affordable rental housing. The Corporation earns a return primarily through the
receipt of tax credits allocated to the affordable housing projects. The Corporations risk of
loss is mitigated by policies requiring that the project qualify for the expected tax credits
prior to making its investment. The
Corporation may from time to time be asked to invest additional amounts to support a troubled
project. Such additional investments have not been and are not expected to be significant.
Beginning January 1, 2010, the Corporation determines whether it must consolidate these
limited partnerships principally based on an identification of the party that has power over the
activities of the partnership. Typically, an unrelated third party is the general partner and the
Corporation does not consolidate the partnership.
Prior to 2010, the Corporation determined whether it must consolidate these limited
partnerships based on a determination as to which party is expected to absorb a majority of the
risk created by the real estate held in the vehicle, which may include construction, market and
operating risk. Typically, the general partner in a limited partnership will absorb a majority of
this risk due to the legal nature of the limited partnership structure and, accordingly, would
consolidate the vehicle.
Resecuritization Trusts
The Corporation transfers existing securities, typically MBS, into resecuritization vehicles
at the request of customers seeking securities with specific characteristics. The Corporation may
also enter into resecuritizations of securities within its investment portfolios for purposes of
improving liquidity and capital, and managing credit or interest rate risk.
During the three and nine months ended September 30, 2010, the Corporation resecuritized
$11.5 billion and $83.3 billion of MBS, including $11.4 billion and $58.4 billion of securities
purchased from third parties, compared to $11.7 billion and $27.7 billion for the same periods in
2009. Net losses upon sale totaled $16 million and $144 million for the three and nine months
ended September 30, 2010 compared to net gains of $94 million and $156 million for the same
periods in 2009. At September 30, 2010, the Corporation held $19.5 billion and $1.4 billion of
senior securities classified in AFS debt securities and trading account assets, and $1.1 billion
and $325 million of subordinate securities classified in AFS debt securities and trading account
assets which were issued by unconsolidated resecuritization trusts which had total assets of $54.0
billion. At December 31, 2009, the Corporation held $543 million of senior securities classified
in trading account assets which were issued by unconsolidated resecuritization trusts which had
total assets of $7.4 billion. All of the retained interests were valued using quoted market prices
or observable market inputs (Level 2 of the fair value hierarchy). The Corporation consolidates a
resecuritization trust if it has sole discretion over the design of the trust, including the
identification of securities to be transferred in and the structure of securities to be issued and
also retains a variable interest that could potentially be significant to the trust. If one or a
limited number of third party investors purchases a significant portion of subordinate securities
and shares responsibility for the design of the trust, the Corporation does not consolidate
50
the trust. Prior to 2010, these resecuritization trusts were typically QSPEs and as such were
not subject to consolidation by the Corporation.
Other Transactions
Prior to 2010, the Corporation transferred pools of securities to certain independent third
parties and provided financing for approximately 75 percent of the purchase price under
asset-backed financing arrangements. At September 30, 2010 and December 31, 2009, the
Corporations maximum loss exposure under these financing arrangements was $6.4 billion and $6.8
billion, substantially all of which was classified as loans on the Corporations Consolidated
Balance Sheet. All principal and interest payments have been received when due in accordance with
their contractual terms. These arrangements are not included in the Other VIEs table on page 48
because the purchasers are not VIEs.
NOTE 9 Goodwill and Intangible Assets
Goodwill
The table below presents goodwill
balances by business segment at September 30, 2010 and December 31, 2009. As
discussed in more detail in Note 17 Business Segment Information, on January 1, 2010, the
Corporation realigned the former Global Banking and Global Markets business segments. There was no
impact on the reporting units used in goodwill impairment testing. The reporting units utilized
for goodwill impairment tests are the business segments or one level below the business segments.
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
December 31 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
Deposits |
|
$ |
17,875 |
|
|
$ |
17,875 |
|
Global Card Services |
|
|
11,889 |
|
|
|
22,292 |
|
Home Loans & Insurance |
|
|
4,797 |
|
|
|
4,797 |
|
Global Commercial Banking |
|
|
20,656 |
|
|
|
20,656 |
|
Global Banking & Markets |
|
|
10,423 |
|
|
|
10,252 |
|
Global Wealth & Investment Management |
|
|
9,928 |
|
|
|
10,411 |
|
All Other |
|
|
34 |
|
|
|
31 |
|
|
Total Goodwill |
|
$ |
75,602 |
|
|
$ |
86,314 |
|
|
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
Financial Reform Act) was signed into law. Under the Financial Reform Act and its amendment to the
Electronic Fund Transfer Act, the Federal Reserve must adopt rules within nine months of enactment
of the Financial Reform Act regarding the interchange fees that may be charged with respect to
electronic debit transactions. Those rules will take effect one year after enactment of the
Financial Reform Act. The Financial Reform Act and the applicable rules are expected to materially
reduce the future revenues generated by the debit card business of the Corporation. However, the
Corporation expects to implement a number of actions that will mitigate a good portion of the impact when
the laws and regulations become effective.
The Corporations consumer and small business card products, including the debit card
business, are part of an integrated platform within Global Card Services. The Corporations
current estimate of revenue loss due to the Financial Reform Act is expected to be approximately $2.0 billion annually based on current volumes. Accordingly, the Corporation performed an impairment test for Global Card
Services during the three months ended September 30, 2010. In step one of the impairment test, the fair value of Global
Card Services was estimated under the income approach where the significant assumptions included
the discount rate, terminal value, expected loss rates and expected new account growth. The
Corporation also updated the estimated cash flows to reflect the current strategic plan
and other portfolio assumptions. Based on the results of step one of the impairment test, the
Corporation determined that the carrying amount of Global Card Services, including goodwill,
exceeded its fair value. The carrying amount of the reporting unit, fair value of the reporting
unit and goodwill were $39.2 billion, $25.9 billion and $22.3 billion,
respectively. Accordingly, the Corporation performed step two of the goodwill impairment test for
this reporting unit. In step two, the Corporation compared the implied fair value of the reporting
units goodwill with the carrying amount of that goodwill. Under step two of the impairment test,
significant assumptions in measuring the fair value of the assets and liabilities including
discount rates, loss rates and interest rates were updated to reflect the current economic
conditions. Based on the results of this third quarter goodwill impairment test for Global
Card Services, the carrying value of the goodwill assigned to the reporting unit exceeded the
implied fair value by $10.4 billion. Accordingly, the Corporation recorded a non-cash, non-tax
deductible goodwill
51
impairment charge of $10.4 billion to reduce the carrying amount of goodwill
in Global Card Services from $22.3 billion to $11.9 billion during the three months ended September 30, 2010. The goodwill impairment analysis includes limited
mitigation actions to recapture lost revenue within Global Card Services. Although the
Corporation has identified other potential mitigation actions, the impact of these actions
did not reduce the goodwill impairment charge because these actions are in the early
stages of development and some of them may impact segments other than Global
Card Services (e.g., Deposits).
During the three months ended September 30, 2010, the Corporation completed its annual
goodwill impairment test as of June 30, 2010 for all reporting units. In performing the first step
of the annual impairment analysis, the Corporation compared the fair value of each reporting unit
to its current carrying amount, including goodwill. As part of the June 30, 2010 annual test, the
fair value of Global Card Services was estimated under the income approach and did not include the
impact of any potential future changes which may result from the Financial Reform Act which was
signed into law in the third quarter.
Based on the results of step one of the annual impairment test, the Corporation determined
that the carrying amount of the Home Loans & Insurance and Global Card Services reporting units,
including goodwill, exceeded their fair value. The carrying amount of the reporting unit, fair
value of the reporting unit and goodwill for Home Loans & Insurance was $27.1 billion, $22.5
billion and $4.8 billion, respectively, and for Global Card Services was $40.1 billion, $40.1
billion and $22.3 billion, respectively. Because the carrying amount exceeded the fair value, the
Corporation performed step two of the goodwill impairment test for these reporting units as of
June 30, 2010. For all other reporting units, step two was not required as their fair value
exceeded their carrying amount indicating there was no impairment.
In step two for both reporting units, the Corporation compared the implied fair value of each
reporting units goodwill with the carrying amount of that goodwill. The Corporation determined
the implied fair value of goodwill for the reporting unit by assigning the fair value of the
reporting unit to all of the assets and liabilities of that unit, including any unrecognized
intangible assets, as if the reporting unit had been acquired in a business combination. The
excess of the fair value of the reporting unit over the amounts assigned to its assets and
liabilities is the implied fair value of goodwill. Based on the results of step two of the
impairment test as of June 30, 2010, the Corporation determined that goodwill was not impaired in
either Home Loans & Insurance or Global Card Services.
Given the results of the Corporations annual impairment test and due to continued stress for
Home Loans & Insurance as a result of current market conditions, the Corporation concluded,
consistent with previous quarters, that an additional impairment analysis should be performed for
this reporting unit as of September 30, 2010. Consistent with the June 30, 2010 annual impairment
test, the results of step one for Home Loans & Insurance indicated that the carrying amount
exceeded the fair value. The carrying amount of the reporting unit, fair value of the reporting
unit and goodwill for Home Loans & Insurance were $25.6 billion, $25.5 billion and $4.8 billion,
respectively. The estimated fair value as a percent of the carrying amount at September 30, 2010
was 99.8 percent. Under step two of the goodwill impairment analysis for the reporting unit, significant
assumptions in measuring the fair value of the assets and liabilities of the reporting unit
included discount rates, loss rates and interest rates. Based on the results of step two of the
impairment test, the Corporation determined that goodwill was not impaired in Home Loans &
Insurance.
The decrease in the goodwill balance in GWIM was related to
the sale of Columbia Managements long-term asset management business (Columbia) in the second quarter of 2010.
Intangible Assets
The table below presents the gross carrying amounts and accumulated amortization related to
intangible assets at September 30, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Gross Carrying |
|
|
Accumulated |
|
(Dollars in millions) |
|
Value |
|
|
Amortization |
|
|
Value |
|
|
Amortization |
|
|
Purchased credit card relationships |
|
$ |
7,164 |
|
|
$ |
3,927 |
|
|
$ |
7,179 |
|
|
$ |
3,452 |
|
Core deposit intangibles |
|
|
5,394 |
|
|
|
4,004 |
|
|
|
5,394 |
|
|
|
3,722 |
|
Customer relationships |
|
|
4,232 |
|
|
|
1,111 |
|
|
|
4,232 |
|
|
|
760 |
|
Affinity relationships |
|
|
1,648 |
|
|
|
864 |
|
|
|
1,651 |
|
|
|
751 |
|
Other intangibles |
|
|
3,143 |
|
|
|
1,273 |
|
|
|
3,438 |
|
|
|
1,183 |
|
|
Total intangible assets |
|
$ |
21,581 |
|
|
$ |
11,179 |
|
|
$ |
21,894 |
|
|
$ |
9,868 |
|
|
52
None of the intangible assets were impaired at either September 30, 2010 or December 31,
2009.
Amortization of intangibles expense was $426 million and $1.3 billion for the three and nine
months ended September 30, 2010, compared to $510 million and $1.5 billion for the same periods in
2009. The Corporation estimates aggregate amortization expense will be approximately $420 million
for the fourth quarter of 2010. In addition, the Corporation estimates aggregate amortization
expense will be approximately $1.5 billion, $1.3 billion, $1.2 billion, $1.0 billion and $900
million for 2011 through 2015, respectively.
The table below presents the Corporations long-term debt at September 30, 2010 and
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
December 31 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
Long-term debt of Bank of America Corporation and subsidiaries |
|
$ |
268,598 |
|
|
$ |
283,570 |
|
Long-term debt of Merrill Lynch & Co., Inc. and subsidiaries |
|
|
131,032 |
|
|
|
154,951 |
|
Long-term debt of consolidated VIEs under new consolidation guidance |
|
|
79,228 |
|
|
|
n/a |
|
|
Total long-term debt |
|
$ |
478,858 |
|
|
$ |
438,521 |
|
|
n/a = not applicable
At September 30, 2010, long-term debt of consolidated VIEs including credit card,
automobile, home equity, first-lien mortgage-related securitization trusts and other VIEs
totaled $59.1 billion, $7.5 billion, $3.8 billion, $1.0 billion and $7.8 billion, respectively.
Long-term debt of VIEs is collateralized by the assets of the VIEs.
As of September 30, 2010, the Corporation had not assumed or guaranteed $126.5 billion of
long-term debt that was issued or guaranteed by Merrill Lynch & Co., Inc. or its subsidiaries
prior to the acquisition of Merrill Lynch by the Corporation. Beginning late in the third quarter
of 2009, in connection with the update or renewal of certain Merrill Lynch international
securities offering programs, the Corporation agreed to guarantee debt securities, warrants and/or
certificates issued by certain subsidiaries of Merrill Lynch & Co., Inc. on a going forward basis.
All existing Merrill Lynch & Co., Inc. guarantees of securities issued by those same Merrill Lynch
subsidiaries under various international securities offering programs will remain in full force
and effect as long as those securities are outstanding and the Corporation has not assumed any of
those prior Merrill Lynch & Co., Inc. guarantees or otherwise guaranteed such securities.
Certain structured notes issued by Merrill Lynch are accounted for under the fair value
option. For more information on these structured notes, see Note 14 Fair Value Measurements.
Aggregate annual maturities of long-term debt obligations at September 30, 2010 are
summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions) |
|
2010 |
|
2011 |
|
2012 |
|
2013 |
|
2014 |
|
Thereafter |
|
Total |
|
Bank of America Corporation |
|
$ |
7,666 |
|
|
$ |
17,157 |
|
|
$ |
42,729 |
|
|
$ |
8,975 |
|
|
$ |
15,970 |
|
|
$ |
99,087 |
|
|
$ |
191,584 |
|
Merrill Lynch & Co., Inc. and subsidiaries |
|
|
5,522 |
|
|
|
20,237 |
|
|
|
18,981 |
|
|
|
19,073 |
|
|
|
17,404 |
|
|
|
49,815 |
|
|
|
131,032 |
|
Bank of America, N.A. and other subsidiaries |
|
|
4,551 |
|
|
|
4,195 |
|
|
|
4,890 |
|
|
|
- |
|
|
|
64 |
|
|
|
9,750 |
|
|
|
23,450 |
|
Other |
|
|
6,846 |
|
|
|
23,277 |
|
|
|
13,768 |
|
|
|
5,163 |
|
|
|
1,774 |
|
|
|
2,736 |
|
|
|
53,564 |
|
|
Total long-term debt excluding consolidated VIEs |
|
|
24,585 |
|
|
|
64,866 |
|
|
|
80,368 |
|
|
|
33,211 |
|
|
|
35,212 |
|
|
|
161,388 |
|
|
|
399,630 |
|
Long-term debt of consolidated VIEs |
|
|
6,433 |
|
|
|
19,090 |
|
|
|
12,307 |
|
|
|
17,716 |
|
|
|
9,212 |
|
|
|
14,470 |
|
|
|
79,228 |
|
|
Total long-term debt |
|
$ |
31,018 |
|
|
$ |
83,956 |
|
|
$ |
92,675 |
|
|
$ |
50,927 |
|
|
$ |
44,424 |
|
|
$ |
175,858 |
|
|
$ |
478,858 |
|
|
Included in the above table are certain structured notes that contain provisions whereby
the borrowings are redeemable at the option of the holder (put options) at specified dates prior
to maturity. Other structured notes have coupon or repayment terms linked to the performance of
debt or equity securities, indices, currencies or commodities and the maturity may be accelerated
based on the value of a referenced index or security. In both cases, the Corporation or a
subsidiary may be required to settle the obligation for cash or other securities prior to the
contractual maturity date. These borrowings are reflected in the above table as maturing at their
earliest put or redemption date.
53
NOTE 11 Commitments and Contingencies
In the normal course of business, the Corporation enters into a number of off-balance
sheet commitments. These commitments expose the Corporation to varying degrees of credit and
market risk and are subject to the same credit and market risk limitation reviews as those
instruments recorded on the Corporations Consolidated Balance Sheet. For additional information
on commitments and contingencies, see Note 14 Commitments and Contingencies to the Consolidated
Financial Statements of the Corporations 2009 Annual Report on Form 10-K.
Credit Extension Commitments
The Corporation enters into commitments to extend credit such as loan commitments, SBLCs
and commercial letters of credit to meet the financing needs of its customers. The unfunded
legally binding lending commitments shown in the table below are net of amounts distributed
(e.g., syndicated) to other financial institutions of $32.1 billion and $30.9 billion at September
30, 2010 and December 31, 2009. At September 30, 2010, the carrying amount of these commitments,
excluding commitments accounted for under the fair value option, was $1.3 billion, including
deferred revenue of $33 million and a reserve for unfunded lending commitments of $1.3 billion. At
December 31, 2009, the comparable amounts were $1.5 billion, $34 million and $1.5 billion,
respectively. The carrying amount of these commitments is classified in accrued expenses and other
liabilities.
The table below also includes the notional amount of commitments of $28.5 billion and $27.0
billion at September 30, 2010 and December 31, 2009, that are accounted for under the fair value
option. However, the table below excludes fair value adjustments of $809 million and $950 million
on these commitments, which are classified in accrued expenses and other liabilities. For
information regarding the Corporations loan commitments accounted for under the fair value
option, see Note 14 Fair Value Measurements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expires after 1 |
|
Expires after 3 |
|
|
|
|
|
|
Expires in 1 |
|
Year through |
|
Years through |
|
Expires after 5 |
|
|
(Dollars in millions) |
|
Year or Less |
|
3 Years |
|
5 Years |
|
Years |
|
Total |
|
Credit extension commitments,
September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan commitments |
|
$ |
172,127 |
|
|
$ |
152,449 |
|
|
$ |
29,505 |
|
|
$ |
21,165 |
|
|
$ |
375,246 |
|
Home equity lines of credit |
|
|
1,976 |
|
|
|
3,770 |
|
|
|
16,350 |
|
|
|
60,568 |
|
|
|
82,664 |
|
Standby letters of credit and financial
guarantees (1) |
|
|
36,257 |
|
|
|
19,636 |
|
|
|
3,082 |
|
|
|
6,708 |
|
|
|
65,683 |
|
Commercial letters of credit |
|
|
2,440 |
|
|
|
38 |
|
|
|
- |
|
|
|
1,952 |
|
|
|
4,430 |
|
|
Legally binding commitments |
|
|
212,800 |
|
|
|
175,893 |
|
|
|
48,937 |
|
|
|
90,393 |
|
|
|
528,023 |
|
Credit card lines (2) |
|
|
502,961 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
502,961 |
|
|
Total credit extension commitments |
|
$ |
715,761 |
|
|
$ |
175,893 |
|
|
$ |
48,937 |
|
|
$ |
90,393 |
|
|
$ |
1,030,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit extension commitments, December
31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan commitments |
|
$ |
149,248 |
|
|
$ |
187,585 |
|
|
$ |
30,897 |
|
|
$ |
28,489 |
|
|
$ |
396,219 |
|
Home equity lines of credit |
|
|
1,810 |
|
|
|
3,272 |
|
|
|
10,667 |
|
|
|
76,924 |
|
|
|
92,673 |
|
Standby letters of credit and financial
guarantees (1) |
|
|
29,794 |
|
|
|
21,285 |
|
|
|
4,923 |
|
|
|
13,740 |
|
|
|
69,742 |
|
Commercial letters of credit |
|
|
2,020 |
|
|
|
40 |
|
|
|
- |
|
|
|
1,465 |
|
|
|
3,525 |
|
|
Legally binding commitments |
|
|
182,872 |
|
|
|
212,182 |
|
|
|
46,487 |
|
|
|
120,618 |
|
|
|
562,159 |
|
Credit card lines (2) |
|
|
541,919 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
541,919 |
|
|
Total credit extension commitments |
|
$ |
724,791 |
|
|
$ |
212,182 |
|
|
$ |
46,487 |
|
|
$ |
120,618 |
|
|
$ |
1,104,078 |
|
|
|
|
|
(1) |
|
The notional amounts of SBLCs and financial
guarantees classified as investment grade and
non-investment grade based on the credit
quality of the underlying reference name
within the instrument were $40.3 billion and
$25.4 billion at September 30, 2010 and $39.7
billion and $30.0 billion at December 31,
2009. |
|
(2) |
|
Includes business card unused lines of credit. |
Legally binding commitments to extend credit generally have specified rates and
maturities. Certain of these commitments have adverse change clauses that help to protect the
Corporation against deterioration in the borrowers ability to pay.
54
Other Commitments
Global Principal Investments and Other Equity Investments
At September 30, 2010 and December 31, 2009, the Corporation had unfunded equity investment
commitments of approximately $1.6 billion and $2.8 billion. In light of proposed Basel regulatory
capital changes related to unfunded commitments, the Corporation has actively reduced these
commitments in a series of transactions involving its private equity fund investments. During the
three months ended September 30, 2010, the Corporation completed the sale of its exposure to
certain private equity funds. For more information on these transactions, see Note 5 Securities.
These commitments generally relate to the Corporations Global Principal Investments business
which is comprised of a diversified portfolio of investments in private equity, real estate and
other alternative investments. These investments are made either directly in a company or held
through a fund.
Where the Corporation has a binding equity bridge commitment and there is a market disruption
or other unexpected event, there is higher potential for loss, unless an orderly disposition of
the exposure can be made. At September 30, 2010, the Corporation did not have any unfunded bridge
equity commitments. The Corporation had funded equity bridges of $1.2 billion that were committed
prior to the market disruption. These equity bridges were considered held for investment and
classified in other assets. During the fourth quarter of 2009, these equity bridges were written
down to a zero balance. In the three and nine months ended September 30, 2009, the Corporation
recorded a total of $193 million and $456 million in losses in equity investment income related to
these investments.
Loan Purchases
In 2005, the Corporation entered into an agreement for the committed purchase of retail
automotive loans over a five-year period that ended on June 22, 2010. Under this agreement, the
Corporation purchased $6.6 billion of such loans during the six months ended June 30, 2010 and
also the year ended December 31, 2009. All loans purchased under this agreement were subject to a
comprehensive set of credit criteria. This agreement was accounted for as a derivative liability
with a fair value of $189 million at December 31, 2009. As of September 30, 2010, the Corporation
was no longer committed for any additional purchases. As part of this agreement, the
Corporation recorded a liability which may increase or decrease based on credit performance of
the purchased loans over a period extending through 2016.
At September 30, 2010 and December 31, 2009, the Corporation had commitments to purchase
loans (e.g., residential mortgage and commercial real estate) of $3.6 billion and $2.2 billion,
which upon settlement will be included in loans or LHFS.
Operating Leases
The Corporation is a party to operating leases for certain of its premises and equipment.
Commitments under these leases are approximately $780 million, $2.9 billion, $2.5 billion, $2.0
billion and $1.5 billion for the remainder of 2010 through 2014, respectively, and $7.8 billion in
the aggregate for all years thereafter.
Other Commitments
At September 30, 2010 and December 31, 2009, the Corporation had commitments to enter into
forward-dated resale and securities borrowing agreements of $59.5 billion and $51.8 billion. In
addition, the Corporation had commitments to enter into forward-dated repurchase and securities
lending agreements of $54.1 billion and $58.3 billion. All of these commitments expire within the
next 12 months.
The Corporation has entered into agreements with providers of market data, communications,
systems consulting and other office-related services. At September 30, 2010 and December 31, 2009,
the minimum fee commitments over the remaining terms of these agreements totaled $2.2 billion and
$2.3 billion.
55
Other Guarantees
Bank-owned Life Insurance Book Value Protection
The Corporation sells products that offer book value protection to insurance carriers who
offer group life insurance policies to corporations, primarily banks. The book value protection is
provided on portfolios of intermediate investment-grade fixed-income securities and is intended to
cover any shortfall in the event that policyholders surrender their policies and market value is
below book value. To manage its exposure, the Corporation imposes significant restrictions on
surrenders and the manner in which the portfolio is liquidated and the funds are accessed. In
addition, investment parameters of the underlying portfolio are restricted. These constraints,
combined with structural protections, including a cap on the amount of risk assumed on each
policy, are designed to provide adequate buffers and guard against payments even under extreme
stress scenarios. These guarantees are recorded as derivatives and carried at fair value in the
trading portfolio. At September 30, 2010 and December 31, 2009, the notional amount of these
guarantees totaled $15.7 billion and $15.6 billion and the Corporations maximum exposure related
to these guarantees totaled $5.0 billion and $4.9 billion with estimated maturity
dates between 2030 and 2040. As of September 30, 2010, the Corporation has not made a payment
under these products. The probability of surrender has increased due to the deteriorating
financial health of policyholders, but remains a small percentage of total notional.
Employee Retirement Protection
The Corporation sells products that offer book value protection primarily to plan sponsors of
Employee Retirement Income Security Act of 1974 (ERISA) governed pension plans, such as 401(k)
plans and 457 plans. The book value protection is provided on portfolios of
intermediate/short-term investment-grade fixed-income securities and is intended to cover any
shortfall in the event that plan participants continue to withdraw funds after all securities have
been liquidated and there is remaining book value. The Corporation retains the option to exit the
contract at any time. If the Corporation exercises its option, the purchaser can require the
Corporation to purchase high quality fixed-income securities, typically government or
government-backed agency securities, with the proceeds of the liquidated assets to assure the
return of principal. To manage its exposure, the Corporation imposes significant restrictions and
constraints on the timing of the withdrawals, the manner in which the portfolio is liquidated and
the funds are accessed, and the investment parameters of the underlying portfolio. These
constraints, combined with structural protections, are designed to provide adequate buffers and
guard against payments even under extreme stress scenarios. These guarantees are recorded as
derivatives and carried at fair value in the trading portfolio. At September 30, 2010 and December
31, 2009, the notional amount of these guarantees totaled $36.1 billion and $36.8 billion with
estimated maturity dates between 2010 and 2014 if the exit option is exercised on all deals. As of
September 30, 2010, the Corporation has not made a payment under these products and has assessed
the probability of payments under these guarantees as remote.
Merchant Services
On June 26, 2009, the Corporation contributed its merchant processing business to a joint
venture in exchange for a 46.5 percent ownership interest in the joint venture. During the second
quarter of 2010, the joint venture purchased the interest held by one of the three initial
investors bringing the Corporations ownership interest up to 49 percent. For additional
information on the joint venture agreement, see Note 5 Securities.
The Corporation, on behalf of the joint venture, provides credit and debit card processing
services to various merchants by processing credit and debit card transactions on the merchants
behalf. In connection with these services, a liability may arise in the event of a billing dispute
between the merchant and a cardholder that is ultimately resolved in the cardholders favor and
the merchant defaults on its obligation to reimburse the cardholder. A cardholder, through its
issuing bank, generally has until the later of up to six months after the date a transaction is
processed or the delivery of the product or service to present a chargeback to the joint venture
as the merchant processor. If the joint venture is unable to collect this amount from the
merchant, it bears the loss for the amount paid to the cardholder. The joint venture is primarily
liable for any losses on transactions from the contributed portfolio that occur after June 26,
2009. However, if the joint venture fails to meet its obligation to reimburse the cardholder for
disputed transactions, then the Corporation could be held liable for the disputed amount. For the
three and nine months ended September 30, 2010, the Corporation processed and settled $66.1
billion and $192.1 billion of transactions and recorded losses of $5 million and $13 million. For
the three and nine months ended September 30, 2009, the Corporation processed and settled $63.1
billion and $182.1 billion of transactions and recorded losses of $7 million and $21 million.
At September 30, 2010 and December 31, 2009, the Corporation, on behalf of the joint venture,
held as collateral $25 million and $26 million of merchant escrow deposits which may be used to
offset amounts due from the individual
56
merchants. The joint venture also has the right to offset any payments with cash flows otherwise
due to the merchant. Accordingly, the Corporation believes that the maximum potential exposure is
not representative of the actual potential loss exposure. The Corporation believes the maximum
potential exposure for chargebacks would not exceed the total amount of merchant transactions
processed through Visa and MasterCard for the last six months, which represents the claim period
for the cardholder, plus any outstanding delayed-delivery transactions. As of September 30, 2010
and December 31, 2009, the maximum potential exposure totaled approximately $130.8 billion and
$131.0 billion. The Corporation does not expect to make material payments in connection with these
guarantees. The maximum potential exposure disclosed above does not include volumes processed by
First Data contributed portfolios.
Other Derivative Contracts
The Corporation funds selected assets, including securities issued by CDOs and CLOs, through
derivative contracts, typically total return swaps, with third parties and SPEs that are not
consolidated on the Corporations Consolidated Balance Sheet. At September 30, 2010 and December
31, 2009, the total notional amount of these derivative contracts was approximately $4.0 billion
and $4.9 billion with commercial banks and $1.3 billion and $2.8 billion with SPEs. The underlying
securities are senior securities and substantially all of the Corporations exposures are insured.
Accordingly, the Corporations exposure to loss consists principally of counterparty risk to the
insurers. In certain circumstances, generally as a result of ratings downgrades, the Corporation
may be required to purchase the underlying assets, which would not result in additional gain or
loss to the Corporation as such exposure is already reflected in the fair value of the derivative
contracts.
Other Guarantees
The Corporation sells products that guarantee the return of principal to investors at a
preset future date. These guarantees cover a broad range of underlying asset classes and are
designed to cover the shortfall between the market value of the underlying portfolio and the
principal amount on the preset future date. To manage its exposure, the Corporation requires that
these guarantees be backed by structural and investment constraints and certain pre-defined
triggers that would require the underlying assets or portfolio to be liquidated and invested in
zero-coupon bonds that mature at the preset future date. The Corporation is required to fund any
shortfall between the proceeds of the liquidated assets and the purchase price of the zero-coupon
bonds at the preset future date. These guarantees are recorded as derivatives and carried at fair
value in the trading portfolio. At September 30, 2010 and December 31, 2009, the notional amount
of these guarantees totaled $668 million and $2.1 billion. These guarantees have various
maturities ranging from two to five years. As of September 30, 2010 and December 31, 2009, the
Corporation had not made a payment under these products and has assessed the probability of
payments under these guarantees as remote.
The Corporation has entered into additional guarantee agreements, including lease-end
obligation agreements, partial credit guarantees on certain leases, real estate joint venture
guarantees, sold risk participation swaps and sold put options that require gross settlement. The
maximum potential future payment under these agreements was approximately $3.2 billion and $3.6
billion at September 30, 2010 and December 31, 2009. The estimated maturity dates of these
obligations are between 2010 and 2033. The Corporation has made no material payments under these
guarantees.
In addition, the Corporation has guaranteed the payment obligations of certain subsidiaries
of Merrill Lynch on certain derivative transactions. The aggregate notional amount of such
derivative liabilities was approximately $2.6 billion and $2.5 billion at September 30, 2010 and
December 31, 2009.
57
Payment Protection Insurance Claims Matter
In the U.K. the Corporation sells payment protection insurance (PPI) through its Global
Card Services business to credit card customers and has previously sold this insurance to consumer
loan customers. PPI covers a consumers loan or debt repayment if certain events occur such as
loss of job or illness. In response to an elevated level of customer complaints of misleading
sales tactics across the industry, heightened media coverage and pressure from consumer advocacy
groups, the U.K. Financial Services Authority (FSA) has investigated and raised concerns about the
way some companies have handled complaints relating to the sale of these insurance policies. In
August 2010, the FSA issued a policy statement on the assessment and remediation of PPI claims
which is applicable to the Corporations U.K. consumer businesses and is intended to address
concerns among consumers and regulators regarding the handling of PPI complaints across the
industry. The policy statement sets standards for the sale of PPI that apply to current and prior
sales, and in the event a company does not or did not comply with the standards, it is alleged that the insurance was incorrectly sold, giving the customer rights to remedies. The
FSA has given companies until December 1, 2010 to comply with the new regulations. Given the new
regulatory guidance, as of September 30, 2010, the Corporation recorded a liability of $592
million based on its current claims history and an estimate of future claims which have yet to be
asserted against the Corporation. The liability is included in accrued expenses and other
liabilities and the related expense is included in insurance income. The policy statement also
requires companies to review their sales practices and to proactively remediate non-complaining
customers if evidence of a systematic breach of the newly articulated sales standards is
discovered, which could include refunding premiums paid. Subject to the outcome of the
Corporations review and the new regulatory guidance, it is possible that an additional liability may be required. As the review
will not be completed until the first quarter of 2011, the Corporation is unable to reasonably
estimate the total amount of additional possible loss or a range of loss as of September 30, 2010.
Litigation and Regulatory Matters
The following supplements the disclosure in Note 14 Commitments and Contingencies to
the Consolidated Financial Statements of the Corporations 2009 Annual Report on Form 10-K and in
Note 11 Commitments and Contingencies to the Consolidated Financial Statements of the
Corporations Quarterly Reports on Form 10-Q for the quarters ended March 31, 2010 and June 30,
2010 (collectively, the prior commitments and contingencies disclosures).
In the ordinary course of business, the Corporation and its subsidiaries are routinely
defendants in or parties to many pending and threatened legal actions and proceedings, including
actions brought on behalf of various classes of claimants. These actions and proceedings are
generally based on alleged violations of consumer protection, securities, environmental, banking,
employment and other laws. In some of these actions and proceedings, claims for substantial
monetary damages are asserted against the Corporation and its subsidiaries.
In the ordinary course of business, the Corporation and its subsidiaries are also subject to
regulatory examinations, information gathering requests, inquiries and investigations. Certain
subsidiaries of the Corporation are registered broker/dealers or investment advisors and are
subject to regulation by the Securities and Exchange Commission, the Financial Industry Regulatory
Authority (FINRA), the New York Stock Exchange, the Financial Services Authority and other
domestic, international and state securities regulators. In connection with formal and informal
inquiries by those agencies, such subsidiaries receive numerous requests, subpoenas and orders for
documents, testimony and information in connection with various aspects of their regulated
activities.
In view of the inherent difficulty of predicting the outcome of such litigation and
regulatory matters, particularly where the claimants seek very large or indeterminate damages or
where the matters present novel legal theories or involve a large number of parties, the
Corporation generally cannot predict what the eventual outcome of the pending matters will be,
what the timing of the ultimate resolution of these matters will be, or what the eventual loss,
fines or penalties related to each pending matter may be.
In accordance with applicable accounting guidance, the Corporation establishes an accrued
liability for litigation and regulatory matters when those matters present loss contingencies that
are both probable and estimable. In such cases, there may be an exposure to loss in excess of any
amounts accrued. When a loss contingency is not both probable and estimable, the Corporation does
not establish an accrued liability. As a litigation or regulatory matter develops, the
Corporation, in conjunction with any outside counsel handling the matter, evaluates on an ongoing
basis whether such matter presents a loss contingency that is probable and estimable. If, at the
time of evaluation, the loss contingency related to a litigation or regulatory matter is not both
probable and estimable, the matter will continue to be monitored for further developments that
would make such loss contingency both probable and estimable. Once the loss contingency related to
a litigation or
58
regulatory matter is deemed to be both probable and estimable, the Corporation will establish an
accrued liability with respect to such loss contingency and continue to monitor the matter for
further developments that could affect the amount of the accrued liability that has been
previously established. Excluding fees paid to external legal service providers,
litigation-related costs of $482 million and $1.2 billion were recognized for the three and nine
months ended September 30, 2010 as compared to $107 million and $477 million for the same periods
in 2009.
For
a limited number of the matters disclosed in this Note 11, and in the prior commitments
and contingencies disclosures, for which a loss is probable or reasonably possible in future
periods, whether in excess of a
related accrued liability or where there is no accrued liability, the Corporation is able to estimate a range of
possible loss. For other disclosed matters for which a loss is probable or reasonably possible,
such an estimate is not possible. For those matters where an estimate is possible, management
currently estimates the aggregate range of possible loss is
$400 million to $1.9 billion in excess
of the accrued liability (if any) related to those matters. This estimated range of possible loss
is based upon currently available information. The matters underlying the estimated range will
change from time to time, and actual results may vary significantly from the current estimate.
Those matters for which an estimate is not possible are not included within this estimated range.
Therefore, this estimated range of possible loss does not represent the Corporations maximum loss
exposure. Information is provided below, or in the prior commitments and contingencies
disclosures, regarding the nature of all of these contingencies and, where specified, the amount
of the claim associated with these loss contingencies. Based on current knowledge, management does
not believe that loss contingencies arising from pending matters, including the matters described
herein and in prior commitments and contingencies disclosures, will have a material adverse effect
on the consolidated financial position or liquidity of the Corporation. However, in light of the
inherent uncertainties involved in these matters, and the very large or indeterminate damages
sought in some of these matters, an adverse outcome in one or more of these matters could be
material to the Corporations results of operations or cash flows for any particular reporting
period.
Adelphia Litigation
On September 22, 2010, the court was advised that an agreement had been reached to resolve
all of the claims in the Adelphia Bankruptcy litigation. The settlement is subject to finalization
of documentation and filing with the court on November 18, 2010. The settlement will resolve all
claims pending against Bank of America, N.A. (BANA), Merrill Lynch
and Co., Inc., Merrill
Lynch Capital Corp., Fleet National Bank and Fleet Securities, Inc. and other affiliated
entities that are pending before the U. S. District Courts for the Southern and Western Districts
of New York and the U. S. Second Circuit Court of Appeals, with the exception of one remaining
securities litigation pending in the U.S. District Court for the Southern District of New York.
The settlement is not material to the Corporations Consolidated Financial Statements.
Checking Account Overdraft Litigation
BANA is currently a defendant in three consumer suits discussed below challenging certain
deposit account related business practices. All three suits are presently part of a multi-district
litigation proceeding involving dozens of financial institution-defendants assigned by the
Judicial Panel on Multidistrict Litigation (MDL) to the U.S. District Court for the Southern
District of Florida.
Tornes v. Bank of America, N.A., which was commenced on December 1, 2008 in the U.S. District
Court for the Southern District of Florida, is brought on behalf of a putative nationwide class of
customers who, within the applicable statutes of limitations, incurred overdraft fees due to
BANAs posting of transactions to deposit accounts in high-to-low order.
Yourke, et al. v. Bank of America, N.A., et al., which was commenced on April 9, 2009 in the
Superior Court of the State of California, County of San Francisco, is brought on behalf of a
similar putative class as Tornes but is limited to California customers of BANA and to
transactions occurring within four years of the filing of the complaint. Tornes and Yourke each
assert claims for breach of the implied covenant of good faith and fair dealing, conversion,
unjust enrichment, and violation of the unfair and deceptive practices statutes of various states.
Plaintiffs seek restitution of all overdraft fees paid to BANA as a result of BANAs allegedly
wrongful business practices, as well as actual damages, disgorgement, exemplary damages,
injunctive relief, pre-judgment interest and attorneys fees.
Knighten v. Bank of America, N.A., which was commenced on May 3, 2010 in the U.S. District
Court for the Central District of California, is brought on behalf of a putative nationwide class
of customers of BANA who, within the applicable limitations periods, incurred overdraft fees due
to BANAs posting of transactions to deposit accounts in high-to-low order or as a result of
reliance upon the accuracy of published account balance information. Knighten also asserts claims
for violations of California state law. Knighten seeks restitution, disgorgement, punitive
damages, and injunctive relief.
59
Omnibus motions to dismiss the complaints in many of the suits included in the MDL, including
in Tornes and Yourke, were denied on March 12, 2010. Trial is currently scheduled for October
2011.
Countrywide Bond Insurance Litigation
On September 7, 2010, in MBIA Insurance Corporation, Inc. v. Countrywide Home Loans, the
Countrywide defendants filed a memorandum in support of their consolidated appeal from the courts
order granting in part and denying in part the motions to dismiss.
On July 2, 2010, in the Syncora Guarantee action, the Corporation and the Countrywide
defendants filed an answer to the amended complaint. Various legacy Countrywide entities also
filed a counterclaim for breach of contract and declaratory judgment on that date. Syncora moved
to dismiss the counterclaim on August 19, 2010.
On August 6, 2010, in the Financial Guaranty Insurance Co. action, Countrywide Home Loans,
Inc. (CHL) filed a notice of appeal from the courts order granting in part and denying in part
its motion to dismiss the initial complaint.
On July 21, 2010, in the MBIA Insurance Corporation, Inc. v. Bank of America action, the
Corporation and various defendants filed demurrers to the second amended complaint.
On October 20, 2010, the
court entered an order staying the case until August 1, 2011.
On September 28, 2010, Ambac Assurance Corporation (Ambac) filed an action in New York
Supreme Court, New York County, entitled Ambac Assurance Corporation and The Segregated Account of
Ambac Assurance Corporation v. Countrywide Home Loans, Inc., et al., against the Corporation, CHL,
Countrywide Securities Corporation (CSC) and Countrywide Financial Corporation (CFC). The action
relates to 12 bond insurance policies provided by Ambac between 2004 and 2006 with regard to
certain securitized pools of home equity lines of credit and fixed-rate second-lien mortgage
loans. The complaint alleges fraudulent inducement and breach of contract, among other claims, and
seeks unspecified actual and punitive damages and equitable relief. The complaint alleges that the
Corporation is jointly and severally liable as the successor to the Countrywide defendants.
Data Treasury Litigation
On October 14, 2010, the Corporation and BANA reached an agreement in principle with Data
Treasury Corporation to settle all pending claims against them in the Data Treasury Corporation v.
Wells Fargo, et al. action for an amount that is not material to the Corporations Consolidated
Financial Statements.
Heilig Meyers Litigation
On July 20, 2010, the court denied the appeal of BAS. A petition for reconsideration was
filed on August 3, 2010, which the court denied on October 14, 2010.
MBIA Insurance Corporation CDO Litigation
Plaintiffs have filed a notice of appeal concerning the April 9, 2010 order of the court
dismissing certain claims in the matter.
Mortgage-Backed Securities Litigation
The Corporation and affiliates, legacy Countrywide entities and affiliates, and legacy
Merrill Lynch entities and affiliates have been named as defendants in a number of cases relating
to various roles they played in MBS offerings. These cases are generally purported class action
suits or actions by individual purchasers of securities. Although the allegations vary by lawsuit,
these cases generally allege that the offering documents for more than $375 billion of securities
issued by hundreds of securitization trusts contained material misrepresentations and omissions,
including statements regarding the underwriting standards pursuant to which the underlying
mortgage loans were issued, the ratings given to the tranches by rating agencies, and the
appraisal standards that were used in violation of Section 11 and 12 of the Securities Act of 1933
and/or state securities laws. The cases generally allege unspecified compensatory damages and in
some instances, seek rescission. The Corporation has previously disclosed some of these matters
under other headings, in its 2009 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q
for the quarters ended March 31, 2010 and June 30, 2010, including Countrywide Mortgage-Backed
Securities Litigation; IndyMac Litigation; Merrill Lynch Subprime-related Matters; and Federal
Home Loan Bank of Seattle Litigation.
60
BAS, Asset Backed Funding Corporation, Banc of America Mortgage Securities, Inc., CSC, CWABS,
Inc., CWALT, Inc., Merrill Lynch Pierce, Fenner and Smith, Inc.
(MLPF&S), and Merrill Lynch Mortgage Investors, Inc. are among the defendants in
an individual action, entitled Cambridge Place Investment Management Inc. v. Morgan Stanley & Co.,
Inc., et al., filed by Cambridge Place Investment Management Inc. in Massachusetts Superior Court,
Middlesex County on July 9, 2010. Plaintiff asserts claims under the Massachusetts securities laws
and seeks unspecified damages and rescission, among other relief. On August 13, 2010, certain
defendants removed the case to federal court. On September 13, 2010, plaintiff moved to remand the
matter to state court.
BAS, Bank of America Mortgage Securities, Inc., Bank of America Funding Corporation, CFC and
CWALT, Inc., MLPF&S, and Merrill Lynch Mortgage Investors, Inc. are among the defendants named in
an individual action filed by The Charles Schwab Corporation in Superior Court
California, County of San Francisco. The case was filed on July 15, 2010 and is entitled The
Charles Schwab Corporation v. BNP Paribas Securities Corp. and the amended complaint alleges
violations of the Securities Act of 1933, the California Corporate Securities Act, the California
Civil Code, and common law in connection with various offerings of MBS and
seeks unspecified damages and rescission, among other relief.
On October 15, 2010, the Federal Home Loan Bank of Chicago (FHLB Chicago) filed a complaint
entitled Federal Home Loan Bank of Chicago v. Banc of America Funding Corporation et al., in the
Circuit Court of Cook County, Illinois County Department, Chancery Division against the
Corporation, Banc of America Funding Corporation, BAS, CSC and MLPF&S, among other defendants,
asserting claims for violations of the Illinois Securities Law, as well as negligent
misrepresentation under Illinois common law in connection with various offerings of MBS. FHLB
Chicago filed a second complaint on October 15, 2010 entitled Federal Home Loan Bank of Chicago v.
Banc of America Securities LLC et al., in the Superior Court of the State of California County of
Los Angeles, Northwest District against BAS, CSC, CFC, CWABS, Inc., CWALT, Inc., CWMBS, Inc.,
among other defendants, asserting claims for violations of the California Civil Code, California
Corporation Code, Illinois Securities Law, Sections 11, 12 and 15 of the Securities Act of 1933,
as well as negligent misrepresentation and rescission of contract in connection with various
offerings of MBS. The complaints filed by FHLB Chicago make allegations similar to those in the
Federal Home Loan Bank of Pittsburgh and Federal Home Loan
Bank of Seattle actions and seek unspecified damages and rescission, among other
relief.
Merrill Lynch Subprime-related Matters
Connecticut Carpenters Pension Fund, et al. v. Merrill Lynch & Co., Inc., et al.; Iron Workers
Local No. 25 Pension Fund v. Credit-Based Asset Servicing and Securitization LLC, et al.; Public
Employees Ret. System of Mississippi v. Merrill Lynch & Co. Inc. et al.; Wyoming State Treasurer
v. Merrill Lynch & Co., Inc.
On August 6, 2010, defendants moved to dismiss the consolidated amended complaint.
Merrill Lynch Acquisition-related Matters
In Re Bank of America Securities, Derivative & ERISA Litigation
On August 27, 2010, the court entered two orders in In re Bank of America Securities,
Derivative and Employment Retirement Income Security Act
(ERISA) Litigation. One order dismissed
the complaint brought by plaintiffs in the consolidated ERISA action in its entirety. The second
order granted in part and denied in part defendants motions to dismiss the consolidated
securities and derivative actions. All of the securities plaintiffs claims brought under the
Securities and Exchange Act of 1934 were dismissed other than Section 14(a) claims concerning
Merrill Lynchs 2008 bonus payments and fourth quarter losses; Section 10(b) claims based on
Merrill Lynchs 2008 bonus payments; and Section 20(a) claims for control person liability. All of
the securities plaintiffs claims brought under the Securities Act of 1933 were dismissed with the
exception of the Section 11, 12(a)(2), and 15 claims based on Merrill Lynchs 2008 bonus payments.
All of derivative plaintiffs claims have been dismissed other than their Section 14(a) claims
related to Merrill Lynchs 2008 bonus payments and fourth quarter losses and certain state law
breach of fiduciary duty claims. The securities plaintiffs have been granted leave to amend their
complaint, and the derivative plaintiffs have reserved their right to seek leave to amend. On
September 10, 2010, the Corporation moved for certification, or in the alternative, for
reconsideration of three issues in the courts August 27, 2010 order concerning the securities
plaintiffs complaint: (i) that the defendants had a duty under Section 14(a) to disclose Merrill
Lynchs 2008 fourth quarter losses, (ii) that the securities plaintiffs adequately pleaded
transaction causation for their Section 14(a) claim, and (iii) that covenants in a private merger
agreement filed with the Securities and Exchange Commission can be the basis for a
misrepresentation claim under the Securities Act of 1933.
61
On September 23, 2010, plaintiffs in the consolidated ERISA action filed a notice that they
will appeal the dismissal of their complaint to the U.S. Court of Appeals for the Second Circuit.
On October 8, 2010, the court denied the Corporations motion for certification, or in the
alternative, for reconsideration. On October 15, 2010, the securities plaintiffs served an amended
complaint. In addition to adding claims under Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934
on behalf of holders of
certain debt, preferred and option securities, the amendment attempts to re-plead allegations that
had been dismissed under the Courts August 27 order concerning Merrill Lynchs 2008 fourth
quarter losses.
Ocala Litigation
On August 30, 2010, each plaintiff filed a new lawsuit against BANA in the U.S. District
Court for the Southern District of Florida, Miami Division (Deutsche Bank AG v. Bank of America,
N.A., and BNP Paribas Mortgage Corporation v. Bank of America, N.A.). These lawsuits assert an
alternative theory for recovering from BANA a portion of the plaintiffs alleged losses related to
the Ocala facility. Plaintiffs allege that BANAs commercial division purchased mortgage loans
from Taylor, Bean & Whitaker Mortgage Corp., which loans had already been pledged to BANA, as
Ocala Trustee, as collateral for the notes issued by the Ocala facility and purchased by
plaintiffs. Plaintiffs seek a ruling that BANAs commercial divisions rights to these loans is
subordinate to BANAs alleged security interest as Trustee, and that BANAs commercial division is
therefore wrongfully retaining the loans or the proceeds of any resales. Plaintiffs seek
compensatory and other damages, interest, and attorneys fees in amounts that are unspecified but
which plaintiffs allege exceed approximately $665 million.
On October 1, 2010, BANA, on behalf of the Ocala facility, filed suit in the U.S. District
Court for the District of Columbia against the Federal Deposit Insurance Corporation (FDIC) as
receiver of Colonial Bank and Platinum Community Bank entitled Bank of America, National
Association as indenture trustee, custodian and collateral agent
for Ocala Funding, LLC v. Federal
Deposit Insurance Corporation, in its capacity as receiver of Colonial Bank, and in its capacity
as receiver of Platinum Community Bank. The suit seeks judicial review of the FDICs denial of
BANAs administrative claims on behalf of the Ocala facility in the Colonial and Platinum
receiverships. These claims allege that losses to the Ocala facility were in whole or in part the
result of the fraud and other wrongful conduct of Colonial and Platinum.
Parmalat Finanziaria S.p.A. Matters
Proceedings in the United States
As a result of an agreement among the parties to settle the matter in an amount that is not
material to the Corporations Consolidated Financial Statements, on August 25, 2010, the U.S.
District Court for the Southern District of New York so ordered a stipulation of voluntary
dismissal in Allstate Life Insurance Company v. Bank of America Corporation, et al.
Pender Litigation
On August 25, 2010, the U.S. District Court for the Western District of North Carolina held
that The Bank of America Pension Plans definition of normal retirement age was valid and
dismissed plaintiffs claims for unlawful lump sum benefit calculation and violation of ERISAs
anti-backloading rule, and denied defendants motion to dismiss pertaining to plaintiffs claims
regarding the voluntary transfers of assets from The Bank of America 401(k) Plan to The Bank of
America Pension Plan. The court granted plaintiffs motion for class certification. On September
10, 2010, plaintiffs filed a motion to reconsider the dismissal of the claim for violation of
ERISAs anti-backloading rule.
62
NOTE 12 Shareholders Equity and Earnings Per Common Share
Common Stock
In October 2010, the Board declared a fourth quarter cash dividend of $0.01 per common
share payable on December 24, 2010 to common shareholders of record on December 3, 2010. In July
2010, April 2010 and January 2010, the Board declared the third quarter, second quarter and first
quarter cash dividends of $0.01 per common share, which were paid on September 24, 2010, June 25,
2010 and March 26, 2010 to common shareholders of record on September 3, 2010, June 4, 2010 and
March 5, 2010, respectively.
On April 28, 2010, at the Corporations 2010 Annual Meeting of Stockholders, the Corporation
obtained shareholder approval of an amendment to the Corporations amended and restated
certificate of incorporation to increase the number of authorized shares of common stock from 11.3
billion to 12.8 billion.
In December 2009, the Corporation repurchased the non-voting perpetual preferred stock
previously issued to the U.S. Treasury (TARP Preferred Stock) through the use of $25.7 billion in
excess liquidity and $19.3 billion in proceeds from the sale of 1.3 billion Common Equivalent
Securities (CES) valued at $15.00 per unit. The CES consisted of depositary shares representing
interests in shares of Common Equivalent Junior Preferred Stock, Series S (Common Equivalent
Stock) and contingent warrants to purchase an aggregate of 60 million shares of the Corporations
common stock. On February 23, 2010, the Corporation held a special meeting of stockholders at
which it obtained shareholder approval of an amendment to the Corporations amended and restated
certificate of incorporation to increase the number of authorized shares of common stock, and
accordingly, the Common Equivalent Stock automatically converted in full into 1.286 billion shares
of common stock on February 24, 2010 following the filing of the amendment with the Delaware
Secretary of State on February 23, 2010. In addition, as a result, the contingent warrants expired
without having become exercisable and the CES ceased to exist. For additional information on
preferred stock, see Note 15 Shareholders Equity and Earnings Per Common Share to the
Consolidated Financial Statements of the Corporations 2009 Annual Report on Form 10-K.
Through a 2008 authorized share repurchase program, the Corporation had the ability to
repurchase shares of its common stock, subject to certain restrictions, from time to time, in the
open market or in private transactions. The 2008 authorized repurchase program expired on January
23, 2010. In the nine months ended September 30, 2010, the Corporation did not repurchase any
shares of common stock and issued approximately 97.5 million shares under employee stock plans. At
September 30, 2010, the Corporation had reserved 1.6 billion unissued shares of common stock for
future issuances under employee stock plans, common stock warrants, convertible notes and
preferred stock.
During the three months ended March 31, 2010, the Corporation issued approximately 191
million RSUs to certain employees under the Key Associate Stock Plan. These awards generally vest
in three equal annual installments beginning one year from the grant date. Vested RSUs will be
settled in cash unless the Corporation authorizes settlement in common shares. Certain awards
contain clawback provisions which permit the Corporation to cancel all or a portion of the award
under specified circumstances. The compensation cost for cash-settled awards and awards subject to
certain clawback provisions is accrued over the vesting period and adjusted to fair value based
upon changes in the share price of the Corporations common stock. The compensation cost for the
remaining awards is fixed and based on the share price of the common stock on the date of grant,
or the date upon which settlement in common stock has been authorized. The Corporation hedges a
portion of its exposure to variability in the expected cash flows for unvested awards using a
combination of economic and cash flow hedges as described in Note 4 Derivatives. In early 2010,
approximately 58 million of these RSUs were authorized to be settled in common shares. During the
three months ended September 30, 2010, the Corporation authorized approximately 42 million
additional RSUs to be settled in common shares and terminated a portion of the corresponding
economic and cash flow hedges. As a result, these share-settled RSUs are no longer adjusted to
fair value based upon changes in the share price of the Corporations common stock.
Preferred Stock
During the first, second and third quarters of 2010, the aggregate dividends declared on
preferred stock were $348 million, $340 million and $348 million, respectively, or a total of $1.0
billion for the nine months ended September 30, 2010.
63
Accumulated OCI
The table below presents the changes in accumulated OCI for the nine months ended
September 30, 2010 and 2009, net-of-tax.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for- |
|
|
Available-for- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale Debt |
|
|
Sale Marketable |
|
|
|
|
|
|
Employee |
|
|
Foreign |
|
|
|
|
(Dollars in millions) |
|
Securities |
|
|
Equity Securities |
|
|
Derivatives |
|
|
Benefit Plans (1) |
|
|
Currency (2) |
|
|
Total |
|
|
Balance, December 31, 2009 |
|
$ |
(628 |
) |
|
$ |
2,129 |
|
|
$ |
(2,535 |
) |
|
$ |
(4,092 |
) |
|
$ |
(493 |
) |
|
$ |
(5,619 |
) |
Cumulative adjustments for accounting changes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation of certain variable interest entities |
|
|
(116 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(116 |
) |
Credit-related notes |
|
|
229 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
229 |
|
Net change in fair value recorded in accumulated OCI |
|
|
3,308 |
|
|
|
4,910 |
|
|
|
(1,765 |
) |
|
|
- |
|
|
|
(20 |
) |
|
|
6,433 |
|
Net realized (gains) losses reclassified into earnings |
|
|
(506 |
) |
|
|
(857 |
) |
|
|
326 |
|
|
|
188 |
|
|
|
258 |
|
|
|
(591 |
) |
|
Balance, September 30, 2010 |
|
$ |
2,287 |
|
|
$ |
6,182 |
|
|
$ |
(3,974 |
) |
|
$ |
(3,904 |
) |
|
$ |
(255 |
) |
|
$ |
336 |
|
|
Balance, December 31, 2008 |
|
$ |
(5,956 |
) |
|
$ |
3,935 |
|
|
$ |
(3,458 |
) |
|
$ |
(4,642 |
) |
|
$ |
(704 |
) |
|
$ |
(10,825 |
) |
Cumulative adjustment for accounting change OTTI (3) |
|
|
(71 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(71 |
) |
Net change in fair value recorded in accumulated OCI |
|
|
6,146 |
|
|
|
2,112 |
|
|
|
63 |
|
|
|
161 |
|
|
|
26 |
|
|
|
8,508 |
|
Net realized (gains) losses reclassified into earnings |
|
|
(715 |
) |
|
|
(4,433 |
) |
|
|
658 |
|
|
|
173 |
|
|
|
- |
|
|
|
(4,317 |
) |
|
Balance, September 30, 2009 |
|
$ |
(596 |
) |
|
$ |
1,614 |
|
|
$ |
(2,737 |
) |
|
$ |
(4,308 |
) |
|
$ |
(678 |
) |
|
$ |
(6,705 |
) |
|
|
|
|
(1) |
|
Net change in fair value represents after-tax adjustments based on the final year-end
actuarial valuations. |
|
(2) |
|
Net change in fair value represents only the impact of changes in foreign exchange
rates on the Corporations net investment in foreign operations. |
|
(3) |
|
Effective January 1, 2009, the Corporation adopted new accounting guidance on the
recognition of OTTI losses on debt securities. For additional
information on the adoption of this accounting guidance, see Note 1 Summary of Significant
Accounting Principles to the Consolidated Financial Statements of the Corporations 2009 Annual
Report on Form 10-K and Note 5 Securities. |
Earnings Per Common Share
Due to the net loss for the three and nine months ended September 30, 2010, no dilutive
potential common shares were included in the calculations of diluted earnings per common share
(EPS) because they would have been antidilutive.
For the three and nine months ended September 30, 2010, average options to purchase 265
million and 273 million shares of common stock were outstanding but not included in the
computation of EPS because they were antidilutive under the treasury stock method compared to 311
million and 318 million for the same periods in 2009. For both the three and nine months ended
September 30, 2010, average warrants to purchase 272 million shares of common stock were
outstanding but not included in the computation of EPS because they were antidilutive under the
treasury stock method compared to 272 million and 262 million for the same periods in 2009. For
both the three and nine months ended September 30, 2010, 117 million average dilutive potential
common shares associated with the 7.25% Non-cumulative Perpetual Convertible Preferred Stock,
Series L and the Merrill Lynch & Co., Inc. Mandatory Convertible Preferred Stock Series 2 and
Series 3 were excluded from the diluted share count because the result would have been
antidilutive under the if-converted method compared to 117 million and 157 million for the same
periods in 2009. For purposes of computing basic EPS, CES were considered to be participating
securities prior to February 24, 2010, however, due to a net loss for the nine months ended
September 30, 2010, CES were not allocated earnings. The two-class method prohibits the allocation
of an undistributed loss to participating securities. For purposes of computing diluted EPS, there
was no dilutive effect of the CES, which were outstanding prior to February 24, 2010, due to a net
loss for the nine months ended September 30, 2010. In the nine months ended September 30, 2009,
the Corporation recorded an increase to retained earnings and net income available to common
shareholders of $576 million related to the Corporations preferred stock exchange for common
stock.
64
The calculation of EPS and diluted EPS for the three and nine months ended September 30, 2010
and 2009 is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
|
Nine Months Ended September 30 |
|
(Dollars in millions, except per share information; shares in thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Earnings (loss) per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(7,299 |
) |
|
$ |
(1,001 |
) |
|
$ |
(994 |
) |
|
$ |
6,470 |
|
Preferred stock dividends |
|
|
(348 |
) |
|
|
(1,240 |
) |
|
|
(1,036 |
) |
|
|
(3,478 |
) |
|
Net income (loss) applicable to common shareholders |
|
|
(7,647 |
) |
|
|
(2,241 |
) |
|
|
(2,030 |
) |
|
|
2,992 |
|
Income allocated to participating securities |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(3 |
) |
|
|
(60 |
) |
|
Net income (loss) allocated to common shareholders |
|
$ |
(7,648 |
) |
|
$ |
(2,242 |
) |
|
$ |
(2,033 |
) |
|
$ |
2,932 |
|
|
Average common shares issued and outstanding |
|
|
9,976,351 |
|
|
|
8,633,834 |
|
|
|
9,706,951 |
|
|
|
7,423,341 |
|
|
Earnings (loss) per common share |
|
$ |
(0.77 |
) |
|
$ |
(0.26 |
) |
|
$ |
(0.21 |
) |
|
$ |
0.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shareholders |
|
$ |
(7,647 |
) |
|
$ |
(2,241 |
) |
|
$ |
(2,030 |
) |
|
$ |
2,992 |
|
Income allocated to participating securities |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(3 |
) |
|
|
(60 |
) |
|
Net income (loss) allocated to common shareholders |
|
$ |
(7,648 |
) |
|
$ |
(2,242 |
) |
|
$ |
(2,033 |
) |
|
$ |
2,932 |
|
|
Average common shares issued and outstanding |
|
|
9,976,351 |
|
|
|
8,633,834 |
|
|
|
9,706,951 |
|
|
|
7,423,341 |
|
Dilutive potential common shares (1) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
26,570 |
|
|
Total diluted average common shares issued and outstanding |
|
|
9,976,351 |
|
|
|
8,633,834 |
|
|
|
9,706,951 |
|
|
|
7,449,911 |
|
|
Diluted earnings (loss) per common share |
|
$ |
(0.77 |
) |
|
$ |
(0.26 |
) |
|
$ |
(0.21 |
) |
|
$ |
0.39 |
|
|
|
|
(1) |
Includes incremental shares from RSUs, restricted stock shares, stock options and
warrants. |
NOTE 13 Pension and Postretirement Plans
The Corporation sponsors noncontributory trusteed pension plans that cover substantially
all officers and employees, a number of noncontributory nonqualified pension plans, and
postretirement health and life plans. Additional information on these plans is presented in Note
17 Employee Benefit Plans to the Consolidated Financial Statements of the Corporations 2009
Annual Report on Form 10-K.
As a result of the Merrill Lynch acquisition, the Corporation assumed the obligations related
to the plans of Merrill Lynch. These plans include a terminated U.S. pension plan, non-U.S.
pension plans, nonqualified pension plans and postretirement plans. The non-U.S. pension plans
vary based on the country and local practices. In 1988, Merrill Lynch purchased a group annuity
contract that guarantees the payment of benefits vested under the terminated U.S. pension plan.
The Corporation, under a supplemental agreement, may be responsible for, or benefit from actual
experience and investment performance of the annuity assets. The Corporation contributed $0 and
$120 million for the nine months ended September 30, 2010 and 2009, under this agreement.
Additional contributions may be required in the future under this agreement.
65
Net periodic benefit cost of the Corporations plans for the three and nine months ended
September 30, 2010 and 2009 included the following components.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
|
|
|
|
|
|
|
|
|
Nonqualified and |
|
Postretirement |
|
|
Qualified Pension |
|
Other Pension |
|
Health and Life |
|
|
Plans |
|
Plans (1) |
|
Plans |
(Dollars in millions) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Components of net periodic benefit cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
99 |
|
|
$ |
97 |
|
|
$ |
8 |
|
|
$ |
7 |
|
|
$ |
4 |
|
|
$ |
4 |
|
Interest cost |
|
|
187 |
|
|
|
185 |
|
|
|
62 |
|
|
|
59 |
|
|
|
23 |
|
|
|
23 |
|
Expected return on plan assets |
|
|
(316 |
) |
|
|
(308 |
) |
|
|
(57 |
) |
|
|
(54 |
) |
|
|
(2 |
) |
|
|
(2 |
) |
Amortization of transition obligation |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8 |
|
|
|
8 |
|
Amortization of prior service cost (credits) |
|
|
7 |
|
|
|
10 |
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
2 |
|
|
|
- |
|
Recognized net actuarial loss (gain) |
|
|
91 |
|
|
|
94 |
|
|
|
2 |
|
|
|
1 |
|
|
|
(13 |
) |
|
|
(19 |
) |
Recognized termination benefit cost |
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Net periodic benefit cost |
|
$ |
68 |
|
|
$ |
78 |
|
|
$ |
14 |
|
|
$ |
11 |
|
|
$ |
22 |
|
|
$ |
14 |
|
|
|
(1) Includes nonqualified pension plans, the terminated U.S. pension plan and
non-U.S. pension plans as described above. |
|
|
|
Nine Months Ended September 30 |
|
|
|
|
|
|
|
|
|
|
Nonqualified and |
|
Postretirement |
|
|
Qualified Pension |
|
Other Pension |
|
Health and Life |
|
|
Plans |
|
Plans (1) |
|
Plans |
(Dollars in millions) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Components of net periodic benefit cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
298 |
|
|
$ |
291 |
|
|
$ |
24 |
|
|
$ |
21 |
|
|
$ |
11 |
|
|
$ |
12 |
|
Interest cost |
|
|
561 |
|
|
|
556 |
|
|
|
187 |
|
|
|
178 |
|
|
|
68 |
|
|
|
68 |
|
Expected return on plan assets |
|
|
(947 |
) |
|
|
(924 |
) |
|
|
(172 |
) |
|
|
(162 |
) |
|
|
(7 |
) |
|
|
(6 |
) |
Amortization of transition obligation |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
24 |
|
|
|
24 |
|
Amortization of prior service cost (credits) |
|
|
21 |
|
|
|
30 |
|
|
|
(6 |
) |
|
|
(6 |
) |
|
|
5 |
|
|
|
- |
|
Recognized net actuarial loss (gain) |
|
|
272 |
|
|
|
282 |
|
|
|
5 |
|
|
|
3 |
|
|
|
(38 |
) |
|
|
(58 |
) |
Recognized termination benefit cost |
|
|
- |
|
|
|
8 |
|
|
|
15 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Net periodic benefit cost |
|
$ |
205 |
|
|
$ |
243 |
|
|
$ |
53 |
|
|
$ |
34 |
|
|
$ |
63 |
|
|
$ |
40 |
|
|
|
|
(1) |
Includes nonqualified pension plans, the terminated U.S. pension plan and
non-U.S. pension plans as described above. |
In
2010, the Corporation expects to contribute approximately $275 million to its
nonqualified and other pension plans and $116 million to its postretirement health and life plans.
For the nine months ended September 30, 2010, the Corporation
contributed $223 million and $87
million to these plans. The Corporation does not expect to be required to contribute to its
qualified pension plans in 2010.
NOTE 14 Fair Value Measurements
Under applicable accounting guidance, fair value is defined as the exchange price that
would be received for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. The Corporation determines the fair values of its financial
instruments based on the fair value hierarchy established under applicable accounting guidance
which requires an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. There are three levels of inputs that may be used
to measure fair value. For more information regarding the fair value hierarchy and how the
Corporation measures fair value, see Note 1 Summary of Significant Accounting Principles to the
Consolidated Financial Statements of the Corporations 2009 Annual Report on Form 10-K. The
Corporation accounts for certain corporate loans and loan commitments, LHFS, structured reverse
repurchase agreements, long-term deposits and long-term debt under the fair value option.
Level 1, 2 and 3 Valuation Techniques
Financial instruments are considered Level 1 when the valuation is based on quoted prices in
active markets for identical assets or liabilities. Level 2 financial instruments are valued using
quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or
models using inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities. Financial instruments are considered
Level 3 when their values are determined using pricing models, discounted cash flow methodologies
or similar techniques, and at least
66
one significant model assumption or input is unobservable and
when determination of the fair value requires significant management judgment or estimation.
The Corporation uses market indices for direct inputs to certain models where the cash
settlement is directly linked to appreciation or depreciation of that particular index (primarily
in the context of structured credit products). In those cases, no material adjustments are made to
the index-based values. In other cases, the use of market indices is inherently limited because
the fair value of an individual position being valued may not move in tandem with changes in fair
value of a specific market index. Accordingly, market indices are used as inputs to the valuation,
but are adjusted for trade specific factors such as rating, credit quality, vintage and other
factors.
Trading Account Assets and Liabilities and Available-for-Sale Debt Securities
The fair values of trading account assets and liabilities are primarily based on actively
traded markets where prices are based on either direct market quotes or observed transactions. The
fair values of AFS debt securities are generally based on quoted market prices or market prices
for similar assets. Liquidity is a significant factor in the determination of the fair values of
trading account assets and liabilities and AFS debt securities. Market price quotes may not be
readily available for some positions, or positions within a market sector where trading activity
has slowed significantly or ceased. Some of these instruments are valued using a discounted cash
flow model, which estimates the fair value of the securities using internal credit risk, interest
rate and prepayment risk models that incorporate managements best estimate of current key
assumptions such as default rates, loss severity and prepayment rates. Principal and interest cash
flows 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. Others are valued using a net asset value approach which considers the value of
the underlying securities. Underlying assets are valued using external pricing services, where
available, or matrix pricing based on the vintages and ratings. Situations of illiquidity
generally are triggered by the markets perception of credit uncertainty regarding a single
company or a specific market sector. In these instances, fair value is determined based on limited
available market information and other factors, principally from reviewing the issuers financial
statements and changes in credit ratings made by one or more ratings agencies.
Derivative Assets and Liabilities
The fair values of derivative assets and liabilities traded in the over-the-counter (OTC)
market are determined using quantitative models that utilize multiple market inputs including
interest rates, prices and indices to generate continuous yield or pricing curves and volatility
factors to value the position. The majority of market inputs are actively quoted and can be
validated through external sources, including brokers, market transactions and third party pricing
services. Estimation risk is greater for derivative asset and liability positions that are either
option-based or have longer maturity dates where observable market inputs are less readily
available or are unobservable, in which case, quantitative-based extrapolations of rate, price or
index scenarios are used in determining fair values. The fair values of derivative assets and
liabilities include adjustments for market liquidity, counterparty credit quality and other deal
specific factors, where appropriate. The Corporation incorporates within its fair value
measurements of OTC derivatives the net credit differential between the counterparty credit risk
and the Corporations own credit risk. An estimate of severity of loss is also used in the
determination of fair value, primarily based on market data.
Corporate Loans and Loan Commitments
The fair values of loans and loan commitments are based on market prices, where available, or
discounted cash flow analyses using market-based credit spreads of comparable debt instruments or
credit derivatives of the specific borrower or comparable borrowers. Results of discounted cash
flow calculations may be adjusted, as appropriate, to reflect other market conditions or the
perceived credit risk of the borrower.
Mortgage Servicing Rights
The fair values of MSRs are determined using models that rely on estimates of prepayment
rates, the resultant weighted-average lives of the MSRs and the option adjusted spread (OAS)
levels. For more information on MSRs, see Note 16 Mortgage Servicing Rights.
67
Loans Held-for-Sale
The fair values of LHFS are based on quoted market prices, where available, or are determined
by discounting estimated cash flows using interest rates approximating the Corporations current
origination rates for similar loans adjusted to reflect the inherent credit risk.
Other Assets
The fair values of AFS marketable equity securities are generally based on quoted market
prices or market prices for similar assets. However, non-public investments are initially valued
at the transaction price and subsequently adjusted when evidence is available to support such
adjustments.
Securities Financing Agreements
The fair values of certain reverse repurchase agreements, repurchase agreements and
securities borrowed transactions are determined using quantitative models, including discounted
cash flow models that require the use of multiple market inputs including interest rates and
spreads to generate continuous yield or pricing curves, and volatility factors. The majority of
market inputs are actively quoted and can be validated through external sources, including
brokers, market transactions and third party pricing services.
Deposits, Commercial Paper and Other Short-term Borrowings
The fair values of deposits, commercial paper and other short-term borrowings are determined
using quantitative models, including discounted cash flow models that require the use of multiple
market inputs including interest rates and spreads to generate continuous yield or pricing curves,
and volatility factors. The majority of market inputs are actively quoted and can be validated
through external sources, including brokers, market transactions and third party pricing services.
The Corporation considers the impact of its own credit spreads in the valuation of these
liabilities. The credit risk is determined by reference to observable credit spreads in the
secondary cash market.
Long-term Borrowings
The Corporation issues structured notes that have coupons or repayment terms linked to the
performance of debt or equity securities, indices, currencies or commodities. The fair value of
structured notes is estimated using valuation models for the combined derivative and debt portions
of the notes accounted for under the fair value option. These models incorporate observable and,
in some instances, unobservable inputs including security prices, interest rate yield curves,
option volatility, currency, commodity or equity rates and correlations between these inputs. The
impact of the Corporations own credit spreads is also included based on the Corporations
observed secondary bond market spreads.
Asset-backed Secured Financings
The fair values of asset-backed secured financings are based on external broker bids, where
available, or are determined by discounting estimated cash flows using interest rates
approximating the Corporations current origination rates for similar loans adjusted to reflect
the inherent credit risk.
68
Recurring Fair Value
Assets and liabilities carried at fair value on a recurring basis at September 30, 2010,
including financial instruments which the Corporation accounts for under the fair value option,
are summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
Fair Value Measurements Using |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Netting |
|
Assets/Liabilities at |
(Dollars in millions) |
|
Level 1 (1) |
|
Level 2 (1) |
|
Level 3 |
|
Adjustments (2) |
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and securities borrowed or
purchased under agreements to resell |
|
$ |
- |
|
|
$ |
81,480 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
81,480 |
|
Trading account assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities |
|
|
33,048 |
|
|
|
32,813 |
|
|
|
- |
|
|
|
- |
|
|
|
65,861 |
|
Corporate securities, trading loans and other |
|
|
1,060 |
|
|
|
43,064 |
|
|
|
8,737 |
|
|
|
- |
|
|
|
52,861 |
|
Equity securities |
|
|
18,037 |
|
|
|
9,389 |
|
|
|
717 |
|
|
|
- |
|
|
|
28,143 |
|
Foreign sovereign debt |
|
|
25,648 |
|
|
|
15,541 |
|
|
|
258 |
|
|
|
- |
|
|
|
41,447 |
|
Mortgage trading loans and asset-backed
securities |
|
|
- |
|
|
|
11,540 |
|
|
|
7,843 |
|
|
|
- |
|
|
|
19,383 |
|
|
Total trading account assets |
|
|
77,793 |
|
|
|
112,347 |
|
|
|
17,555 |
|
|
|
- |
|
|
|
207,695 |
|
Derivative assets (3) |
|
|
2,577 |
|
|
|
2,070,303 |
|
|
|
20,410 |
|
|
|
(2,008,606 |
) |
|
|
84,684 |
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and agency debentures |
|
|
48,837 |
|
|
|
3,213 |
|
|
|
- |
|
|
|
- |
|
|
|
52,050 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
|
- |
|
|
|
165,825 |
|
|
|
- |
|
|
|
- |
|
|
|
165,825 |
|
Agency-collateralized mortgage obligations |
|
|
- |
|
|
|
39,261 |
|
|
|
- |
|
|
|
- |
|
|
|
39,261 |
|
Non-agency residential |
|
|
- |
|
|
|
24,243 |
|
|
|
1,542 |
|
|
|
- |
|
|
|
25,785 |
|
Non-agency commercial |
|
|
- |
|
|
|
7,488 |
|
|
|
65 |
|
|
|
- |
|
|
|
7,553 |
|
Foreign securities |
|
|
214 |
|
|
|
3,350 |
|
|
|
23 |
|
|
|
- |
|
|
|
3,587 |
|
Corporate/Agency bonds |
|
|
- |
|
|
|
5,852 |
|
|
|
272 |
|
|
|
- |
|
|
|
6,124 |
|
Other taxable securities |
|
|
20 |
|
|
|
2,513 |
|
|
|
13,736 |
|
|
|
- |
|
|
|
16,269 |
|
Tax-exempt securities |
|
|
- |
|
|
|
4,740 |
|
|
|
1,230 |
|
|
|
- |
|
|
|
5,970 |
|
|
Total available-for-sale debt securities |
|
|
49,071 |
|
|
|
256,485 |
|
|
|
16,868 |
|
|
|
- |
|
|
|
322,424 |
|
Loans and leases |
|
|
- |
|
|
|
- |
|
|
|
3,684 |
|
|
|
- |
|
|
|
3,684 |
|
Mortgage servicing rights |
|
|
- |
|
|
|
- |
|
|
|
12,251 |
|
|
|
- |
|
|
|
12,251 |
|
Loans held-for-sale |
|
|
- |
|
|
|
16,316 |
|
|
|
6,021 |
|
|
|
- |
|
|
|
22,337 |
|
Other assets |
|
|
33,532 |
|
|
|
31,837 |
|
|
|
7,266 |
|
|
|
- |
|
|
|
72,635 |
|
|
Total assets |
|
$ |
162,973 |
|
|
$ |
2,568,768 |
|
|
$ |
84,055 |
|
|
$ |
(2,008,606 |
) |
|
$ |
807,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits in domestic offices |
|
$ |
- |
|
|
$ |
2,745 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,745 |
|
Federal funds purchased and securities loaned or
sold under agreements to repurchase |
|
|
- |
|
|
|
48,509 |
|
|
|
- |
|
|
|
|
|
|
|
48,509 |
|
Trading account liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities |
|
|
30,854 |
|
|
|
3,134 |
|
|
|
- |
|
|
|
- |
|
|
|
33,988 |
|
Equity securities |
|
|
17,240 |
|
|
|
1,220 |
|
|
|
- |
|
|
|
- |
|
|
|
18,460 |
|
Foreign sovereign debt |
|
|
22,335 |
|
|
|
3,619 |
|
|
|
- |
|
|
|
- |
|
|
|
25,954 |
|
Corporate securities and other |
|
|
342 |
|
|
|
11,228 |
|
|
|
38 |
|
|
|
- |
|
|
|
11,608 |
|
|
Total trading account liabilities |
|
|
70,771 |
|
|
|
19,201 |
|
|
|
38 |
|
|
|
- |
|
|
|
90,010 |
|
Derivative liabilities (3) |
|
|
3,659 |
|
|
|
2,044,411 |
|
|
|
10,866 |
|
|
|
(1,997,280 |
) |
|
|
61,656 |
|
Commercial paper and other short-term borrowings |
|
|
- |
|
|
|
4,924 |
|
|
|
- |
|
|
|
- |
|
|
|
4,924 |
|
Accrued expenses and other liabilities |
|
|
21,723 |
|
|
|
618 |
|
|
|
1,514 |
|
|
|
- |
|
|
|
23,855 |
|
Long-term debt |
|
|
- |
|
|
|
45,344 |
|
|
|
4,108 |
|
|
|
- |
|
|
|
49,452 |
|
|
Total liabilities |
|
$ |
96,153 |
|
|
$ |
2,165,752 |
|
|
$ |
16,526 |
|
|
$ |
(1,997,280 |
) |
|
$ |
281,151 |
|
|
|
|
|
(1) |
|
Gross transfers between Level 1 and Level 2 were approximately $888 million during
the nine months ended September 30, 2010. |
|
(2) |
|
Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties. |
|
(3) |
|
For further disaggregation
of derivative assets and liabilities, see Note 4 Derivatives. |
69
Assets and liabilities carried at fair value on a recurring basis at December 31, 2009,
including financial instruments which the Corporation accounts for under the fair value option,
are summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
Fair Value Measurements Using |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Netting |
|
Assets/Liabilities at |
(Dollars in millions) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Adjustments (1) |
|
Fair Value |
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and securities borrowed or purchased under agreements to resell |
|
$ |
- |
|
|
$ |
57,775 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
57,775 |
|
Trading account assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities |
|
|
17,140 |
|
|
|
27,445 |
|
|
|
- |
|
|
|
- |
|
|
|
44,585 |
|
Corporate securities, trading loans and other |
|
|
4,772 |
|
|
|
41,157 |
|
|
|
11,080 |
|
|
|
- |
|
|
|
57,009 |
|
Equity securities |
|
|
25,274 |
|
|
|
7,204 |
|
|
|
1,084 |
|
|
|
- |
|
|
|
33,562 |
|
Foreign sovereign debt |
|
|
18,353 |
|
|
|
8,647 |
|
|
|
1,143 |
|
|
|
- |
|
|
|
28,143 |
|
Mortgage trading loans and asset-backed securities |
|
|
- |
|
|
|
11,137 |
|
|
|
7,770 |
|
|
|
- |
|
|
|
18,907 |
|
|
Total trading account assets |
|
|
65,539 |
|
|
|
95,590 |
|
|
|
21,077 |
|
|
|
- |
|
|
|
182,206 |
|
Derivative assets |
|
|
3,326 |
|
|
|
1,467,855 |
|
|
|
23,048 |
|
|
|
(1,406,607 |
) |
|
|
87,622 |
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and agency debentures |
|
|
19,571 |
|
|
|
3,454 |
|
|
|
- |
|
|
|
- |
|
|
|
23,025 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
|
- |
|
|
|
166,246 |
|
|
|
- |
|
|
|
- |
|
|
|
166,246 |
|
Agency-collateralized mortgage obligations |
|
|
- |
|
|
|
25,781 |
|
|
|
- |
|
|
|
- |
|
|
|
25,781 |
|
Non-agency residential |
|
|
- |
|
|
|
27,887 |
|
|
|
7,216 |
|
|
|
- |
|
|
|
35,103 |
|
Non-agency commercial |
|
|
- |
|
|
|
6,651 |
|
|
|
258 |
|
|
|
- |
|
|
|
6,909 |
|
Foreign securities |
|
|
158 |
|
|
|
3,271 |
|
|
|
468 |
|
|
|
- |
|
|
|
3,897 |
|
Corporate/Agency bonds |
|
|
- |
|
|
|
5,265 |
|
|
|
927 |
|
|
|
- |
|
|
|
6,192 |
|
Other taxable securities |
|
|
676 |
|
|
|
14,721 |
|
|
|
9,854 |
|
|
|
- |
|
|
|
25,251 |
|
Tax-exempt securities |
|
|
- |
|
|
|
7,574 |
|
|
|
1,623 |
|
|
|
- |
|
|
|
9,197 |
|
|
Total available-for-sale debt securities |
|
|
20,405 |
|
|
|
260,850 |
|
|
|
20,346 |
|
|
|
- |
|
|
|
301,601 |
|
Loans and leases |
|
|
- |
|
|
|
- |
|
|
|
4,936 |
|
|
|
- |
|
|
|
4,936 |
|
Mortgage servicing rights |
|
|
- |
|
|
|
- |
|
|
|
19,465 |
|
|
|
- |
|
|
|
19,465 |
|
Loans held-for-sale |
|
|
- |
|
|
|
25,853 |
|
|
|
6,942 |
|
|
|
- |
|
|
|
32,795 |
|
Other assets |
|
|
35,411 |
|
|
|
12,677 |
|
|
|
7,821 |
|
|
|
- |
|
|
|
55,909 |
|
|
Total assets |
|
$ |
124,681 |
|
|
$ |
1,920,600 |
|
|
$ |
103,635 |
|
|
$ |
(1,406,607 |
) |
|
$ |
742,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits in domestic offices |
|
$ |
- |
|
|
$ |
1,663 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,663 |
|
Federal funds purchased and securities loaned or
sold under agreements to repurchase |
|
|
- |
|
|
|
37,325 |
|
|
|
- |
|
|
|
- |
|
|
|
37,325 |
|
Trading account liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities |
|
|
22,339 |
|
|
|
4,180 |
|
|
|
- |
|
|
|
- |
|
|
|
26,519 |
|
Equity securities |
|
|
17,300 |
|
|
|
1,107 |
|
|
|
- |
|
|
|
- |
|
|
|
18,407 |
|
Foreign sovereign debt |
|
|
12,028 |
|
|
|
483 |
|
|
|
386 |
|
|
|
- |
|
|
|
12,897 |
|
Corporate securities and other |
|
|
282 |
|
|
|
7,317 |
|
|
|
10 |
|
|
|
- |
|
|
|
7,609 |
|
|
Total trading account liabilities |
|
|
51,949 |
|
|
|
13,087 |
|
|
|
396 |
|
|
|
- |
|
|
|
65,432 |
|
Derivative liabilities |
|
|
2,925 |
|
|
|
1,443,494 |
|
|
|
15,185 |
|
|
|
(1,410,943 |
) |
|
|
50,661 |
|
Commercial paper and other short-term borrowings |
|
|
- |
|
|
|
813 |
|
|
|
- |
|
|
|
- |
|
|
|
813 |
|
Accrued expenses and other liabilities |
|
|
16,797 |
|
|
|
620 |
|
|
|
1,598 |
|
|
|
- |
|
|
|
19,015 |
|
Long-term debt |
|
|
- |
|
|
|
40,791 |
|
|
|
4,660 |
|
|
|
- |
|
|
|
45,451 |
|
|
Total liabilities |
|
$ |
71,671 |
|
|
$ |
1,537,793 |
|
|
$ |
21,839 |
|
|
$ |
(1,410,943 |
) |
|
$ |
220,360 |
|
|
|
|
|
(1) |
|
Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties. |
70
The table below presents a reconciliation of all assets and liabilities measured at fair
value on a recurring basis using significant unobservable inputs (Level 3) during the three months
ended September 30, 2010, including net realized and unrealized gains (losses) included in
earnings and accumulated OCI.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Fair Value Measurements |
|
|
Three Months Ended September 30, 2010 |
|
|
|
|
|
|
Gains |
|
|
Gains |
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Balance |
|
|
(Losses) |
|
|
(Losses) |
|
|
Purchases, |
|
|
Transfers |
|
|
Transfers |
|
|
Balance |
|
|
|
July 1 |
|
|
Included in |
|
|
Included in |
|
|
Inssuances and |
|
|
into |
|
|
out of |
|
|
September 30 |
|
(Dollars in millions) |
|
2010 (1) |
|
|
Earnings |
|
|
OCI |
|
|
Settlements |
|
|
Level 3 (1) |
|
|
Level 3 (1) |
|
|
2010 (1) |
|
|
Trading account assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities, trading loans and other |
|
$ |
9,873 |
|
|
$ |
257 |
|
|
$ |
- |
|
|
$ |
(802 |
) |
|
$ |
252 |
|
|
$ |
(843 |
) |
|
$ |
8,737 |
|
Equity securities |
|
|
726 |
|
|
|
(17 |
) |
|
|
- |
|
|
|
18 |
|
|
|
- |
|
|
|
(10 |
) |
|
|
717 |
|
Foreign sovereign debt |
|
|
952 |
|
|
|
23 |
|
|
|
- |
|
|
|
(75 |
) |
|
|
11 |
|
|
|
(653 |
) |
|
|
258 |
|
Mortgage trading loans and asset-backed securities |
|
|
7,508 |
|
|
|
183 |
|
|
|
- |
|
|
|
175 |
|
|
|
7 |
|
|
|
(30 |
) |
|
|
7,843 |
|
|
Total trading account assets |
|
|
19,059 |
|
|
|
446 |
|
|
|
- |
|
|
|
(684 |
) |
|
|
270 |
|
|
|
(1,536 |
) |
|
|
17,555 |
|
Net derivative assets (2) |
|
|
9,402 |
|
|
|
2,684 |
|
|
|
- |
|
|
|
(2,246 |
) |
|
|
307 |
|
|
|
(603 |
) |
|
|
9,544 |
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency MBS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
1,976 |
|
|
|
(86 |
) |
|
|
108 |
|
|
|
(567 |
) |
|
|
111 |
|
|
|
- |
|
|
|
1,542 |
|
Commercial |
|
|
50 |
|
|
|
- |
|
|
|
(3 |
) |
|
|
18 |
|
|
|
- |
|
|
|
- |
|
|
|
65 |
|
Foreign securities |
|
|
233 |
|
|
|
(2 |
) |
|
|
14 |
|
|
|
(222 |
) |
|
|
- |
|
|
|
- |
|
|
|
23 |
|
Corporate/Agency bonds |
|
|
304 |
|
|
|
- |
|
|
|
11 |
|
|
|
(43 |
) |
|
|
- |
|
|
|
- |
|
|
|
272 |
|
Other taxable securities |
|
|
13,900 |
|
|
|
2 |
|
|
|
92 |
|
|
|
(258 |
) |
|
|
- |
|
|
|
- |
|
|
|
13,736 |
|
Tax-exempt securities |
|
|
1,237 |
|
|
|
- |
|
|
|
- |
|
|
|
(7 |
) |
|
|
- |
|
|
|
- |
|
|
|
1,230 |
|
|
Total available-for-sale debt securities |
|
|
17,700 |
|
|
|
(86 |
) |
|
|
222 |
|
|
|
(1,079 |
) |
|
|
111 |
|
|
|
- |
|
|
|
16,868 |
|
Loans and leases (3) |
|
|
3,898 |
|
|
|
86 |
|
|
|
- |
|
|
|
(300 |
) |
|
|
- |
|
|
|
- |
|
|
|
3,684 |
|
Mortgage servicing rights |
|
|
14,745 |
|
|
|
(2,315 |
) |
|
|
- |
|
|
|
(179 |
) |
|
|
- |
|
|
|
- |
|
|
|
12,251 |
|
Loans held-for-sale (3) |
|
|
5,981 |
|
|
|
386 |
|
|
|
- |
|
|
|
(397 |
) |
|
|
118 |
|
|
|
(67 |
) |
|
|
6,021 |
|
Other assets (4) |
|
|
7,702 |
|
|
|
(201 |
) |
|
|
- |
|
|
|
(235 |
) |
|
|
- |
|
|
|
- |
|
|
|
7,266 |
|
Trading account liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign sovereign debt |
|
|
(7 |
) |
|
|
- |
|
|
|
- |
|
|
|
7 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Corporate securities and other |
|
|
(73 |
) |
|
|
- |
|
|
|
- |
|
|
|
(11 |
) |
|
|
- |
|
|
|
46 |
|
|
|
(38 |
) |
|
Total trading account liabilities |
|
|
(80 |
) |
|
|
- |
|
|
|
- |
|
|
|
(4 |
) |
|
|
- |
|
|
|
46 |
|
|
|
(38 |
) |
Accrued expenses and other liabilities (3) |
|
|
(1,618 |
) |
|
|
81 |
|
|
|
- |
|
|
|
23 |
|
|
|
- |
|
|
|
- |
|
|
|
(1,514 |
) |
Long-term debt (3) |
|
|
(4,090 |
) |
|
|
(190 |
) |
|
|
- |
|
|
|
174 |
|
|
|
(477 |
) |
|
|
475 |
|
|
|
(4,108 |
) |
|
|
|
|
(1) |
|
Assets (liabilities). For assets, increase / (decrease) to Level 3 and for liabilities, (increase) / decrease to Level 3. |
|
(2) |
|
Net derivatives at September 30, 2010 include derivative assets of $20.4 billion and derivative liabilities of $10.9 billion. |
|
(3) |
|
Amounts represent items which are accounted for under the fair value option. |
|
(4) |
|
Other assets is primarily comprised of AFS marketable equity securities. |
71
The table below presents a reconciliation of all assets and liabilities measured at fair
value on a recurring basis using significant unobservable inputs (Level 3) during the three months
ended September 30, 2009, including net realized and unrealized gains (losses) included in
earnings and accumulated OCI.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Fair Value Measurements |
|
|
Three Months Ended September 30, 2009 |
|
|
|
|
|
|
Gains |
|
|
Gains |
|
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
|
(Losses) |
|
|
(Losses) |
|
|
Purchases, |
|
|
Transfers |
|
|
Balance |
|
|
|
July 1 |
|
|
Included in |
|
|
Included in |
|
|
Issuances and |
|
|
into/(out of) |
|
|
September 30 |
|
|
|
2009 (1) |
|
|
Earnings |
|
|
OCI |
|
|
Settlements |
|
|
Level 3 (1) |
|
|
2009 (1) |
|
|
Trading account assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
securities, trading loans and other |
|
$ |
8,578 |
|
|
$ |
505 |
|
|
$ |
- |
|
|
$ |
3,411 |
|
|
$ |
524 |
|
|
$ |
13,018 |
|
Equity securities |
|
|
7,433 |
|
|
|
(1 |
) |
|
|
- |
|
|
|
(545 |
) |
|
|
(309 |
) |
|
|
6,578 |
|
Foreign sovereign debt |
|
|
865 |
|
|
|
60 |
|
|
|
- |
|
|
|
- |
|
|
|
94 |
|
|
|
1,019 |
|
Mortgage trading loans and asset-backed securities |
|
|
8,743 |
|
|
|
12 |
|
|
|
- |
|
|
|
(3,319 |
) |
|
|
1,138 |
|
|
|
6,574 |
|
|
Total trading account assets |
|
|
25,619 |
|
|
|
576 |
|
|
|
- |
|
|
|
(453 |
) |
|
|
1,447 |
|
|
|
27,189 |
|
Net derivative assets (2) |
|
|
9,401 |
|
|
|
787 |
|
|
|
- |
|
|
|
(3,280 |
) |
|
|
1,622 |
|
|
|
8,530 |
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency MBS |
|
|
8,897 |
|
|
|
(446 |
) |
|
|
2 |
|
|
|
(1,936 |
) |
|
|
499 |
|
|
|
7,016 |
|
Foreign securities |
|
|
1,061 |
|
|
|
- |
|
|
|
51 |
|
|
|
(94 |
) |
|
|
(381 |
) |
|
|
637 |
|
Corporate/Agency bonds |
|
|
1,942 |
|
|
|
- |
|
|
|
23 |
|
|
|
559 |
|
|
|
(1,468 |
) |
|
|
1,056 |
|
Other taxable securities |
|
|
7,776 |
|
|
|
(16 |
) |
|
|
88 |
|
|
|
(2,169 |
) |
|
|
(347 |
) |
|
|
5,332 |
|
Tax-exempt securities |
|
|
2,106 |
|
|
|
- |
|
|
|
7 |
|
|
|
(569 |
) |
|
|
613 |
|
|
|
2,157 |
|
|
Total available-for-sale debt securities |
|
|
21,782 |
|
|
|
(462 |
) |
|
|
171 |
|
|
|
(4,209 |
) |
|
|
(1,084 |
) |
|
|
16,198 |
|
Loans and leases (3) |
|
|
6,962 |
|
|
|
429 |
|
|
|
- |
|
|
|
(1,194 |
) |
|
|
- |
|
|
|
6,197 |
|
Mortgage servicing rights |
|
|
18,535 |
|
|
|
(1,621 |
) |
|
|
- |
|
|
|
625 |
|
|
|
- |
|
|
|
17,539 |
|
Loans held-for-sale (3) |
|
|
7,313 |
|
|
|
141 |
|
|
|
- |
|
|
|
(691 |
) |
|
|
380 |
|
|
|
7,143 |
|
Other assets (4) |
|
|
6,792 |
|
|
|
635 |
|
|
|
- |
|
|
|
(163 |
) |
|
|
43 |
|
|
|
7,307 |
|
Trading account liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign sovereign debt |
|
|
(352 |
) |
|
|
(39 |
) |
|
|
- |
|
|
|
- |
|
|
|
(4 |
) |
|
|
(395 |
) |
Corporate securities and other |
|
|
(7 |
) |
|
|
- |
|
|
|
- |
|
|
|
8 |
|
|
|
(17 |
) |
|
|
(16 |
) |
|
Total trading account liabilities |
|
|
(359 |
) |
|
|
(39 |
) |
|
|
- |
|
|
|
8 |
|
|
|
(21 |
) |
|
|
(411 |
) |
Accrued expenses and other liabilities (3) |
|
|
(2,063 |
) |
|
|
258 |
|
|
|
- |
|
|
|
63 |
|
|
|
- |
|
|
|
(1,742 |
) |
Long-term debt (3) |
|
|
(5,289 |
) |
|
|
(561 |
) |
|
|
- |
|
|
|
365 |
|
|
|
401 |
|
|
|
(5,084 |
) |
|
|
|
|
(1) |
|
Assets (liabilities). For assets, increase / (decrease) to Level 3 and for liabilities, (increase) / decrease to Level 3. |
|
(2) |
|
Net derivatives at September 30, 2009 include derivative assets of $28.7
billion and derivative liabilities of $20.1 billion. |
|
(3) |
|
Amounts represent items which are accounted for under the fair value option. |
|
(4) |
|
Other assets is primarily comprised of AFS marketable equity securities. |
72
The table below presents a reconciliation of all assets and liabilities measured at fair
value on a recurring basis using significant unobservable inputs (Level 3) during the nine months
ended September 30, 2010, including net realized and unrealized gains (losses) included in
earnings and accumulated OCI.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Fair Value Measurements |
|
|
|
Nine Months Ended September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
Gains |
|
|
Gains |
|
|
Purchases, |
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Balance |
|
|
|
|
|
|
(Losses) |
|
|
(Losses) |
|
|
Issuances |
|
|
Transfers |
|
|
Transfers |
|
|
Balance |
|
|
|
January 1 |
|
|
Consolidation |
|
|
Included in |
|
|
Included in |
|
|
and |
|
|
into |
|
|
out of |
|
|
September 30 |
|
(Dollars in millions) |
|
2010 (1) |
|
|
of VIEs |
|
|
Earnings |
|
|
OCI |
|
|
Settlements |
|
|
Level 3 (1) |
|
|
Level 3 (1) |
|
|
2010 (1) |
|
|
Trading account assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities, trading loans and other |
|
$ |
11,080 |
|
|
$ |
117 |
|
|
$ |
611 |
|
|
$ |
- |
|
|
$ |
(3,600 |
) |
|
$ |
2,441 |
|
|
$ |
(1,912 |
) |
|
$ |
8,737 |
|
Equity securities |
|
|
1,084 |
|
|
|
- |
|
|
|
(50 |
) |
|
|
- |
|
|
|
(308 |
) |
|
|
75 |
|
|
|
(84 |
) |
|
|
717 |
|
Foreign sovereign debt |
|
|
1,143 |
|
|
|
- |
|
|
|
(132 |
) |
|
|
- |
|
|
|
(155 |
) |
|
|
114 |
|
|
|
(712 |
) |
|
|
258 |
|
Mortgage trading loans and asset-backed securities |
|
|
7,770 |
|
|
|
175 |
|
|
|
340 |
|
|
|
- |
|
|
|
(411 |
) |
|
|
396 |
|
|
|
(427 |
) |
|
|
7,843 |
|
|
Total trading account assets |
|
|
21,077 |
|
|
|
292 |
|
|
|
769 |
|
|
|
- |
|
|
|
(4,474 |
) |
|
|
3,026 |
|
|
|
(3,135 |
) |
|
|
17,555 |
|
Net derivative assets (2) |
|
|
7,863 |
|
|
|
- |
|
|
|
7,675 |
|
|
|
- |
|
|
|
(6,697 |
) |
|
|
1,075 |
|
|
|
(372 |
) |
|
|
9,544 |
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency MBS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
7,216 |
|
|
|
(96 |
) |
|
|
(601 |
) |
|
|
(202 |
) |
|
|
(6,396 |
) |
|
|
1,809 |
|
|
|
(188 |
) |
|
|
1,542 |
|
Commercial |
|
|
258 |
|
|
|
- |
|
|
|
(13 |
) |
|
|
(34 |
) |
|
|
(110 |
) |
|
|
52 |
|
|
|
(88 |
) |
|
|
65 |
|
Foreign securities |
|
|
468 |
|
|
|
- |
|
|
|
(126 |
) |
|
|
(75 |
) |
|
|
(300 |
) |
|
|
56 |
|
|
|
- |
|
|
|
23 |
|
Corporate/Agency bonds |
|
|
927 |
|
|
|
- |
|
|
|
(3 |
) |
|
|
46 |
|
|
|
(709 |
) |
|
|
30 |
|
|
|
(19 |
) |
|
|
272 |
|
Other taxable securities |
|
|
9,854 |
|
|
|
5,812 |
|
|
|
21 |
|
|
|
(27 |
) |
|
|
(3,000 |
) |
|
|
1,119 |
|
|
|
(43 |
) |
|
|
13,736 |
|
Tax-exempt securities |
|
|
1,623 |
|
|
|
- |
|
|
|
(25 |
) |
|
|
(9 |
) |
|
|
(568 |
) |
|
|
316 |
|
|
|
(107 |
) |
|
|
1,230 |
|
|
Total available-for-sale debt securities |
|
|
20,346 |
|
|
|
5,716 |
|
|
|
(747 |
) |
|
|
(301 |
) |
|
|
(11,083 |
) |
|
|
3,382 |
|
|
|
(445 |
) |
|
|
16,868 |
|
Loans and leases (3) |
|
|
4,936 |
|
|
|
- |
|
|
|
(54 |
) |
|
|
- |
|
|
|
(1,198 |
) |
|
|
- |
|
|
|
- |
|
|
|
3,684 |
|
Mortgage servicing rights |
|
|
19,465 |
|
|
|
- |
|
|
|
(7,011 |
) |
|
|
- |
|
|
|
(203 |
) |
|
|
- |
|
|
|
- |
|
|
|
12,251 |
|
Loans held-for-sale (3) |
|
|
6,942 |
|
|
|
- |
|
|
|
453 |
|
|
|
- |
|
|
|
(1,824 |
) |
|
|
517 |
|
|
|
(67 |
) |
|
|
6,021 |
|
Other assets (4) |
|
|
7,821 |
|
|
|
- |
|
|
|
1,336 |
|
|
|
- |
|
|
|
(1,656 |
) |
|
|
- |
|
|
|
(235 |
) |
|
|
7,266 |
|
Trading account liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign sovereign debt |
|
|
(386 |
) |
|
|
- |
|
|
|
23 |
|
|
|
- |
|
|
|
(17 |
) |
|
|
- |
|
|
|
380 |
|
|
|
- |
|
Corporate securities and other |
|
|
(10 |
) |
|
|
- |
|
|
|
(5 |
) |
|
|
- |
|
|
|
(20 |
) |
|
|
(52 |
) |
|
|
49 |
|
|
|
(38 |
) |
|
Total trading account liabilities |
|
|
(396 |
) |
|
|
- |
|
|
|
18 |
|
|
|
- |
|
|
|
(37 |
) |
|
|
(52 |
) |
|
|
429 |
|
|
|
(38 |
) |
Accrued expenses and other liabilities (3) |
|
|
(1,598 |
) |
|
|
- |
|
|
|
90 |
|
|
|
- |
|
|
|
(6 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1,514 |
) |
Long-term debt (3) |
|
|
(4,660 |
) |
|
|
- |
|
|
|
598 |
|
|
|
- |
|
|
|
(90 |
) |
|
|
(1,374 |
) |
|
|
1,418 |
|
|
|
(4,108 |
) |
|
|
|
|
(1) |
|
Assets (liabilities). For assets, increase / (decrease) to Level 3 and for liabilities, (increase) / decrease to Level 3. |
|
(2) |
|
Net derivatives at September 30, 2010 include derivative assets of $20.4 billion and derivative liabilities of $10.9 billion. |
|
(3) |
|
Amounts represent items which are accounted for under the fair value option. |
|
(4) |
|
Other assets is primarily comprised of AFS marketable equity securities. |
During the three months ended September 30, 2010, the more significant transfers out of
Level 3 included $1.5 billion of trading account assets driven by increased price verification of
corporate debt securities and non-U.S. government and agency securities.
During the nine months ended September 30, 2010, the more significant transfers into Level 3
included $3.0 billion of trading account assets, $3.4 billion of AFS debt securities, $1.1 billion
of net derivative contracts and $1.4 billion of long-term debt. Transfers into Level 3 for trading
account assets were driven by reduced price transparency as a result of lower levels of trading
activity for certain municipal auction rate securities and corporate debt securities as well as a
change in valuation methodology for certain ABS to a discounted cash flow model. Transfers into
Level 3 for AFS debt securities were due to an increase in the number of non-agency RMBS and other
taxable securities priced using a discounted cash flow model. Transfers into Level 3 for net
derivative contracts were primarily related to a lack of price observability for certain credit
default and total return swaps. Transfers into Level 3 for long-term debt were attributable to
increases in the impact of unobservable inputs on the value of certain
equity-linked structured
notes.
During the nine months ended September 30, 2010, the more significant transfers out of Level
3 were $3.1 billion of trading account assets and $1.4 billion of long-term debt. Transfers out of
Level 3 for trading account assets were driven by increased price verification of certain
mortgage-backed securities, corporate debt and non-U.S. government and agency securities and
increased price observability of index floaters based on the BMA curve held in corporate
securities, trading loans and other. Transfers out of Level 3 for
long-term debt are the result of
a decrease in the significance of unobservable pricing inputs for certain equity-linked structured
notes.
73
The table below presents a reconciliation of all assets and liabilities measured at fair
value on a recurring basis using significant unobservable inputs (Level 3) during the nine months
ended September 30, 2009, including net realized and unrealized gains (losses) included in
earnings and accumulated OCI.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Fair Value Measurements |
|
|
Nine Months Ended September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
Gains |
|
|
Gains |
|
|
Purchases, |
|
|
|
|
|
|
|
|
|
Balance |
|
|
Merrill |
|
|
(Losses) |
|
|
(Losses) |
|
|
Issuances |
|
|
Transfers |
|
|
Balance |
|
|
|
January 1 |
|
|
Lynch |
|
|
Included in |
|
|
Included in |
|
|
and |
|
|
into/(out of) |
|
|
September 30 |
|
|
|
2009 (1) |
|
|
Acquisition |
|
|
Earnings |
|
|
OCI |
|
|
Settlements |
|
|
Level 3 (1) |
|
|
2009 (1) |
|
|
Trading account assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities, trading loans and other |
|
$ |
4,540 |
|
|
$ |
7,012 |
|
|
$ |
233 |
|
|
$ |
- |
|
|
$ |
(34 |
) |
|
$ |
1,267 |
|
|
$ |
13,018 |
|
Equity securities |
|
|
546 |
|
|
|
3,848 |
|
|
|
(279 |
) |
|
|
- |
|
|
|
2,998 |
|
|
|
(535 |
) |
|
|
6,578 |
|
Foreign sovereign debt |
|
|
- |
|
|
|
30 |
|
|
|
124 |
|
|
|
- |
|
|
|
10 |
|
|
|
855 |
|
|
|
1,019 |
|
Mortgage trading loans and asset-backed securities |
|
|
1,647 |
|
|
|
7,294 |
|
|
|
(277 |
) |
|
|
- |
|
|
|
(1,576 |
) |
|
|
(514 |
) |
|
|
6,574 |
|
|
Total trading account assets |
|
|
6,733 |
|
|
|
18,184 |
|
|
|
(199 |
) |
|
|
- |
|
|
|
1,398 |
|
|
|
1,073 |
|
|
|
27,189 |
|
Net derivative assets (2) |
|
|
2,270 |
|
|
|
2,307 |
|
|
|
5,061 |
|
|
|
- |
|
|
|
(7,271 |
) |
|
|
6,163 |
|
|
|
8,530 |
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency MBS |
|
|
6,096 |
|
|
|
2,509 |
|
|
|
(1,186 |
) |
|
|
2,111 |
|
|
|
(3,614 |
) |
|
|
1,100 |
|
|
|
7,016 |
|
Foreign securities |
|
|
1,247 |
|
|
|
- |
|
|
|
(79 |
) |
|
|
(48 |
) |
|
|
(102 |
) |
|
|
(381 |
) |
|
|
637 |
|
Corporate/Agency bonds |
|
|
1,598 |
|
|
|
- |
|
|
|
(49 |
) |
|
|
118 |
|
|
|
510 |
|
|
|
(1,121 |
) |
|
|
1,056 |
|
Other taxable securities |
|
|
9,599 |
|
|
|
- |
|
|
|
(36 |
) |
|
|
575 |
|
|
|
(3,316 |
) |
|
|
(1,490 |
) |
|
|
5,332 |
|
Tax-exempt securities |
|
|
162 |
|
|
|
- |
|
|
|
- |
|
|
|
32 |
|
|
|
723 |
|
|
|
1,240 |
|
|
|
2,157 |
|
|
Total available-for-sale debt securities |
|
|
18,702 |
|
|
|
2,509 |
|
|
|
(1,350 |
) |
|
|
2,788 |
|
|
|
(5,799 |
) |
|
|
(652 |
) |
|
|
16,198 |
|
Loans and leases (3) |
|
|
5,413 |
|
|
|
2,452 |
|
|
|
585 |
|
|
|
- |
|
|
|
(2,253 |
) |
|
|
- |
|
|
|
6,197 |
|
Mortgage servicing rights |
|
|
12,733 |
|
|
|
209 |
|
|
|
3,306 |
|
|
|
- |
|
|
|
1,291 |
|
|
|
- |
|
|
|
17,539 |
|
Loans held-for-sale (3) |
|
|
3,382 |
|
|
|
3,872 |
|
|
|
274 |
|
|
|
- |
|
|
|
(645 |
) |
|
|
260 |
|
|
|
7,143 |
|
Other assets (4) |
|
|
4,157 |
|
|
|
2,696 |
|
|
|
643 |
|
|
|
- |
|
|
|
(242 |
) |
|
|
53 |
|
|
|
7,307 |
|
Trading account liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign sovereign debt |
|
|
- |
|
|
|
- |
|
|
|
(65 |
) |
|
|
- |
|
|
|
18 |
|
|
|
(348 |
) |
|
|
(395 |
) |
Corporate securities and other |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
(17 |
) |
|
|
(16 |
) |
|
Total trading account liabilities |
|
|
- |
|
|
|
- |
|
|
|
(65 |
) |
|
|
- |
|
|
|
19 |
|
|
|
(365 |
) |
|
|
(411 |
) |
Accrued expenses and other liabilities (3) |
|
|
(1,940 |
) |
|
|
(1,337 |
) |
|
|
1,379 |
|
|
|
- |
|
|
|
117 |
|
|
|
39 |
|
|
|
(1,742 |
) |
Long-term debt (3) |
|
|
- |
|
|
|
(7,481 |
) |
|
|
(2,165 |
) |
|
|
- |
|
|
|
314 |
|
|
|
4,248 |
|
|
|
(5,084 |
) |
|
|
|
|
(1) |
|
Assets (liabilities). For assets, increase / (decrease) to Level 3 and for liabilities, (increase) / decrease to Level 3. |
|
(2) |
|
Net derivatives at September 30, 2009 include derivative assets of $28.7 billion and derivative liabilities of $20.1 billion. |
|
(3) |
|
Amounts represent items which are accounted for under the fair value option. |
|
(4) |
|
Other assets is primarily comprised of AFS marketable equity securities. |
74
The table below summarizes gains and losses due to changes in fair value, including both
realized and unrealized gains (losses), recorded in earnings for Level 3 assets and liabilities
during the three months ended September 30, 2010 and 2009. These amounts include gains (losses) on
loans, LHFS, loan commitments and structured notes which are accounted for under the fair value
option.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Total Realized and Unrealized Gains (Losses) Included in Earnings |
|
|
Three Months Ended September 30, 2010 |
|
|
Equity |
|
|
Trading |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
Investment |
|
|
Account |
|
|
Banking |
|
|
Other |
|
|
|
|
|
|
Income |
|
|
Profits |
|
|
Income |
|
|
Income |
|
|
|
|
(Dollars in millions) |
|
(Loss) |
|
|
(Losses) |
|
|
(Loss) (1) |
|
|
(Loss) |
|
|
Total |
|
|
Trading account assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities, trading loans and other |
|
$ |
- |
|
|
$ |
257 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
257 |
|
Equity securities |
|
|
- |
|
|
|
(17 |
) |
|
|
- |
|
|
|
- |
|
|
|
(17 |
) |
Foreign sovereign debt |
|
|
- |
|
|
|
23 |
|
|
|
- |
|
|
|
- |
|
|
|
23 |
|
Mortgage trading loans and asset-backed securities |
|
|
- |
|
|
|
183 |
|
|
|
- |
|
|
|
- |
|
|
|
183 |
|
|
Total trading account assets |
|
|
- |
|
|
|
446 |
|
|
|
- |
|
|
|
- |
|
|
|
446 |
|
Net derivative assets |
|
|
- |
|
|
|
(466 |
) |
|
|
3,150 |
|
|
|
- |
|
|
|
2,684 |
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency MBS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
- |
|
|
|
- |
|
|
|
(3 |
) |
|
|
(83 |
) |
|
|
(86 |
) |
Commercial |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Foreign securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2 |
) |
|
|
(2 |
) |
Corporate/Agency bonds |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other taxable securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
2 |
|
Tax-exempt securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total available-for-sale debt securities |
|
|
- |
|
|
|
- |
|
|
|
(3 |
) |
|
|
(83 |
) |
|
|
(86 |
) |
Loans and leases (2) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
86 |
|
|
|
86 |
|
Mortgage servicing rights |
|
|
- |
|
|
|
- |
|
|
|
(2,315 |
) |
|
|
- |
|
|
|
(2,315 |
) |
Loans held-for-sale (2) |
|
|
- |
|
|
|
- |
|
|
|
39 |
|
|
|
347 |
|
|
|
386 |
|
Other assets |
|
|
(186 |
) |
|
|
- |
|
|
|
(15 |
) |
|
|
- |
|
|
|
(201 |
) |
Trading
account liabilities Foreign sovereign debt |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Accrued expenses and other liabilities (2) |
|
|
- |
|
|
|
(15 |
) |
|
|
(35 |
) |
|
|
131 |
|
|
|
81 |
|
Long-term debt (2) |
|
|
- |
|
|
|
(119 |
) |
|
|
- |
|
|
|
(71 |
) |
|
|
(190 |
) |
|
Total |
|
$ |
(186 |
) |
|
$ |
(154 |
) |
|
$ |
821 |
|
|
$ |
410 |
|
|
$ |
891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2009 |
|
|
Equity |
|
|
Trading |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
Investment |
|
|
Account |
|
|
Banking |
|
|
Other |
|
|
|
|
|
|
Income |
|
|
Profits |
|
|
Income |
|
|
Income |
|
|
|
|
(Dollars in millions) |
|
(Loss) |
|
|
(Losses) |
|
|
(Loss) (1) |
|
|
(Loss) |
|
|
Total |
|
|
Trading account assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities, trading loans and other |
|
$ |
- |
|
|
$ |
505 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
505 |
|
Equity securities |
|
|
- |
|
|
|
(1 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1 |
) |
Foreign sovereign debt |
|
|
- |
|
|
|
60 |
|
|
|
- |
|
|
|
- |
|
|
|
60 |
|
Mortgage trading loans and asset-backed securities |
|
|
- |
|
|
|
12 |
|
|
|
- |
|
|
|
- |
|
|
|
12 |
|
|
Total trading account assets |
|
|
- |
|
|
|
576 |
|
|
|
- |
|
|
|
- |
|
|
|
576 |
|
Net derivative assets |
|
|
- |
|
|
|
(1,905 |
) |
|
|
2,692 |
|
|
|
- |
|
|
|
787 |
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency MBS |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(446 |
) |
|
|
(446 |
) |
Other taxable securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(16 |
) |
|
|
(16 |
) |
|
Total available-for-sale debt securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(462 |
) |
|
|
(462 |
) |
Loans and leases (2) |
|
|
- |
|
|
|
(4 |
) |
|
|
- |
|
|
|
433 |
|
|
|
429 |
|
Mortgage servicing rights |
|
|
- |
|
|
|
- |
|
|
|
(1,621 |
) |
|
|
- |
|
|
|
(1,621 |
) |
Loans held-for-sale (2) |
|
|
- |
|
|
|
(10 |
) |
|
|
173 |
|
|
|
(22 |
) |
|
|
141 |
|
Other assets |
|
|
570 |
|
|
|
- |
|
|
|
65 |
|
|
|
- |
|
|
|
635 |
|
Trading
account liabilities Foreign sovereign debt |
|
|
- |
|
|
|
(39 |
) |
|
|
- |
|
|
|
- |
|
|
|
(39 |
) |
Accrued expenses and other liabilities (2) |
|
|
- |
|
|
|
(1 |
) |
|
|
(106 |
) |
|
|
365 |
|
|
|
258 |
|
Long-term debt (2) |
|
|
- |
|
|
|
(468 |
) |
|
|
- |
|
|
|
(93 |
) |
|
|
(561 |
) |
|
Total |
|
$ |
570 |
|
|
$ |
(1,851 |
) |
|
$ |
1,203 |
|
|
$ |
221 |
|
|
$ |
143 |
|
|
|
|
|
(1) |
|
Mortgage banking income does not reflect the impact of Level 1 and Level 2 hedges on MSRs. |
|
(2) |
|
Amounts represent items which are accounted for under the fair value option. |
75
The table below summarizes gains and losses due to changes in fair value, including both
realized and unrealized gains (losses), recorded in earnings for Level 3 assets and liabilities
during the nine months ended September 30, 2010 and 2009. These amounts include gains (losses) on
loans, LHFS, loan commitments and structured notes which are accounted for under the fair value
option.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Total Realized and Unrealized Gains (Losses) Included in Earnings |
|
|
Nine Months Ended September 30, 2010 |
|
|
Equity |
|
|
Trading |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
Investment |
|
|
Account |
|
|
Banking |
|
|
Other |
|
|
|
|
|
|
Income |
|
|
Profits |
|
|
Income |
|
|
Income |
|
|
|
|
(Dollars in millions) |
|
(Loss) |
|
|
(Losses) |
|
|
(Loss) (1) |
|
|
(Loss) |
|
|
Total |
|
|
Trading account assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities, trading loans and other |
|
$ |
- |
|
|
$ |
611 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
611 |
|
Equity securities |
|
|
- |
|
|
|
(50 |
) |
|
|
- |
|
|
|
- |
|
|
|
(50 |
) |
Foreign sovereign debt |
|
|
- |
|
|
|
(132 |
) |
|
|
- |
|
|
|
- |
|
|
|
(132 |
) |
Mortgage trading loans and asset-backed securities |
|
|
- |
|
|
|
340 |
|
|
|
- |
|
|
|
- |
|
|
|
340 |
|
|
Total trading account assets |
|
|
- |
|
|
|
769 |
|
|
|
- |
|
|
|
- |
|
|
|
769 |
|
Net derivative assets |
|
|
- |
|
|
|
(800 |
) |
|
|
8,475 |
|
|
|
- |
|
|
|
7,675 |
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency MBS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
- |
|
|
|
- |
|
|
|
(16 |
) |
|
|
(585 |
) |
|
|
(601 |
) |
Commercial |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(13 |
) |
|
|
(13 |
) |
Foreign securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(126 |
) |
|
|
(126 |
) |
Corporate/Agency bonds |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3 |
) |
|
|
(3 |
) |
Other taxable securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
21 |
|
|
|
21 |
|
Tax-exempt securities |
|
|
- |
|
|
|
23 |
|
|
|
- |
|
|
|
(48 |
) |
|
|
(25 |
) |
|
Total available-for-sale debt securities |
|
|
- |
|
|
|
23 |
|
|
|
(16 |
) |
|
|
(754 |
) |
|
|
(747 |
) |
Loans and leases (2) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(54 |
) |
|
|
(54 |
) |
Mortgage servicing rights |
|
|
- |
|
|
|
- |
|
|
|
(7,011 |
) |
|
|
- |
|
|
|
(7,011 |
) |
Loans held-for-sale (2) |
|
|
- |
|
|
|
- |
|
|
|
98 |
|
|
|
355 |
|
|
|
453 |
|
Other assets |
|
|
1,383 |
|
|
|
- |
|
|
|
(47 |
) |
|
|
- |
|
|
|
1,336 |
|
Trading
account liabilities Foreign sovereign debt |
|
|
- |
|
|
|
18 |
|
|
|
- |
|
|
|
- |
|
|
|
18 |
|
Accrued expenses and other liabilities (2) |
|
|
- |
|
|
|
(25 |
) |
|
|
(76 |
) |
|
|
191 |
|
|
|
90 |
|
Long-term debt (2) |
|
|
- |
|
|
|
476 |
|
|
|
- |
|
|
|
122 |
|
|
|
598 |
|
|
Total |
|
$ |
1,383 |
|
|
$ |
461 |
|
|
$ |
1,423 |
|
|
$ |
(140 |
) |
|
$ |
3,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2009 |
|
|
Equity |
|
|
Trading |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
Investment |
|
|
Account |
|
|
Banking |
|
|
Other |
|
|
|
|
|
|
Income |
|
|
Profits |
|
|
Income |
|
|
Income |
|
|
|
|
(Dollars in millions) |
|
(Loss) |
|
|
(Losses) |
|
|
(Loss) (1) |
|
|
(Loss) |
|
|
Total |
|
|
Trading account assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities, trading loans and other |
|
$ |
- |
|
|
$ |
233 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
233 |
|
Equity securities |
|
|
- |
|
|
|
(279 |
) |
|
|
- |
|
|
|
- |
|
|
|
(279 |
) |
Foreign sovereign debt |
|
|
- |
|
|
|
124 |
|
|
|
- |
|
|
|
- |
|
|
|
124 |
|
Mortgage trading loans and asset-backed securities |
|
|
- |
|
|
|
(277 |
) |
|
|
- |
|
|
|
- |
|
|
|
(277 |
) |
|
Total trading account assets |
|
|
- |
|
|
|
(199 |
) |
|
|
- |
|
|
|
- |
|
|
|
(199 |
) |
Net derivative assets |
|
|
- |
|
|
|
(1,195 |
) |
|
|
6,256 |
|
|
|
- |
|
|
|
5,061 |
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency MBS |
|
|
- |
|
|
|
- |
|
|
|
(12 |
) |
|
|
(1,174 |
) |
|
|
(1,186 |
) |
Foreign securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(79 |
) |
|
|
(79 |
) |
Corporate/Agency bonds |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(49 |
) |
|
|
(49 |
) |
Other taxable securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(36 |
) |
|
|
(36 |
) |
|
Total available-for-sale debt securities |
|
|
- |
|
|
|
- |
|
|
|
(12 |
) |
|
|
(1,338 |
) |
|
|
(1,350 |
) |
Loans and leases (2) |
|
|
- |
|
|
|
(11 |
) |
|
|
- |
|
|
|
596 |
|
|
|
585 |
|
Mortgage servicing rights |
|
|
- |
|
|
|
- |
|
|
|
3,306 |
|
|
|
- |
|
|
|
3,306 |
|
Loans held-for-sale (2) |
|
|
- |
|
|
|
(219 |
) |
|
|
85 |
|
|
|
408 |
|
|
|
274 |
|
Other assets |
|
|
641 |
|
|
|
(3 |
) |
|
|
190 |
|
|
|
(185 |
) |
|
|
643 |
|
Trading
account liabilities Foreign sovereign debt |
|
|
- |
|
|
|
(65 |
) |
|
|
- |
|
|
|
- |
|
|
|
(65 |
) |
Accrued expenses and other liabilities (2) |
|
|
- |
|
|
|
(2 |
) |
|
|
27 |
|
|
|
1,354 |
|
|
|
1,379 |
|
Long-term debt (2) |
|
|
- |
|
|
|
(1,813 |
) |
|
|
- |
|
|
|
(352 |
) |
|
|
(2,165 |
) |
|
Total |
|
$ |
641 |
|
|
$ |
(3,507 |
) |
|
$ |
9,852 |
|
|
$ |
483 |
|
|
$ |
7,469 |
|
|
|
|
|
(1) |
|
Mortgage banking income does not reflect the impact of Level 1 and Level 2 hedges on MSRs. |
|
(2) |
|
Amounts represent items which are accounted for under the fair value option. |
76
The table below summarizes changes in unrealized gains (losses) recorded in earnings
during the three months ended September 30, 2010 and 2009 for Level 3 assets and liabilities that
were still held at September 30, 2010 and 2009. These amounts include changes in fair value on
loans, LHFS, loan commitments and structured notes which are accounted for under the fair value
option.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Changes in Unrealized Gains (Losses) Relating to Assets and Liabilities Still Held at Reporting Date |
|
|
Three Months Ended September 30, 2010 |
|
|
Equity |
|
|
Trading |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
Investment |
|
|
Account |
|
|
Banking |
|
|
Other |
|
|
|
|
|
|
Income |
|
|
Profits |
|
|
Income |
|
|
Income |
|
|
|
|
(Dollars in millions) |
|
(Loss) |
|
|
(Losses) |
|
|
(Loss) (1) |
|
|
(Loss) |
|
|
Total |
|
|
Trading account assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities, trading loans and other |
|
$ |
- |
|
|
$ |
119 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
119 |
|
Equity securities |
|
|
- |
|
|
|
(4 |
) |
|
|
- |
|
|
|
- |
|
|
|
(4 |
) |
Foreign sovereign debt |
|
|
- |
|
|
|
18 |
|
|
|
- |
|
|
|
- |
|
|
|
18 |
|
Mortgage trading loans and asset-backed securities |
|
|
- |
|
|
|
147 |
|
|
|
- |
|
|
|
- |
|
|
|
147 |
|
|
Total trading account assets |
|
|
- |
|
|
|
280 |
|
|
|
- |
|
|
|
- |
|
|
|
280 |
|
Net derivative assets |
|
|
- |
|
|
|
(318 |
) |
|
|
1,814 |
|
|
|
- |
|
|
|
1,496 |
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency MBS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(60 |
) |
|
|
(60 |
) |
Commercial |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Foreign securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other taxable securities |
|
|
- |
|
|
|
(18 |
) |
|
|
- |
|
|
|
14 |
|
|
|
(4 |
) |
|
Total available-for-sale debt securities |
|
|
- |
|
|
|
(18 |
) |
|
|
- |
|
|
|
(46 |
) |
|
|
(64 |
) |
Loans and leases (2) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
123 |
|
|
|
123 |
|
Mortgage servicing rights |
|
|
- |
|
|
|
- |
|
|
|
(2,627 |
) |
|
|
- |
|
|
|
(2,627 |
) |
Loans held-for-sale (2) |
|
|
- |
|
|
|
- |
|
|
|
20 |
|
|
|
252 |
|
|
|
272 |
|
Other assets |
|
|
(251 |
) |
|
|
- |
|
|
|
(14 |
) |
|
|
- |
|
|
|
(265 |
) |
Trading
account liabilities Foreign sovereign debt |
|
|
- |
|
|
|
29 |
|
|
|
- |
|
|
|
- |
|
|
|
29 |
|
Accrued expenses and other liabilities (2) |
|
|
- |
|
|
|
- |
|
|
|
(24 |
) |
|
|
57 |
|
|
|
33 |
|
Long-term debt (2) |
|
|
- |
|
|
|
(111 |
) |
|
|
- |
|
|
|
(87 |
) |
|
|
(198 |
) |
|
Total |
|
$ |
(251 |
) |
|
$ |
(138 |
) |
|
$ |
(831 |
) |
|
$ |
299 |
|
|
$ |
(921 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2009 |
|
|
Equity |
|
|
Trading |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
Investment |
|
|
Account |
|
|
Banking |
|
|
Other |
|
|
|
|
|
|
Income |
|
|
Profits |
|
|
Income |
|
|
Income |
|
|
|
|
(Dollars in millions) |
|
(Loss) |
|
|
(Losses) |
|
|
(Loss) (1) |
|
|
(Loss) |
|
|
Total |
|
|
Trading account assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities, trading loans and other |
|
$ |
- |
|
|
$ |
340 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
340 |
|
Equity securities |
|
|
- |
|
|
|
5 |
|
|
|
- |
|
|
|
- |
|
|
|
5 |
|
Foreign sovereign debt |
|
|
- |
|
|
|
61 |
|
|
|
- |
|
|
|
- |
|
|
|
61 |
|
Mortgage trading loans and asset-backed securities |
|
|
- |
|
|
|
113 |
|
|
|
- |
|
|
|
- |
|
|
|
113 |
|
|
Total trading account assets |
|
|
- |
|
|
|
519 |
|
|
|
- |
|
|
|
- |
|
|
|
519 |
|
Net derivative assets |
|
|
- |
|
|
|
(665 |
) |
|
|
2,706 |
|
|
|
- |
|
|
|
2,041 |
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency MBS |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(477 |
) |
|
|
(477 |
) |
Other taxable securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(8 |
) |
|
|
(8 |
) |
|
Total available-for-sale debt securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(485 |
) |
|
|
(485 |
) |
Loans and leases (2) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
509 |
|
|
|
509 |
|
Mortgage servicing rights |
|
|
- |
|
|
|
- |
|
|
|
(1,922 |
) |
|
|
- |
|
|
|
(1,922 |
) |
Loans held-for-sale (2) |
|
|
- |
|
|
|
- |
|
|
|
154 |
|
|
|
164 |
|
|
|
318 |
|
Other assets |
|
|
515 |
|
|
|
- |
|
|
|
11 |
|
|
|
- |
|
|
|
526 |
|
Trading
account liabilities Foreign sovereign debt |
|
|
- |
|
|
|
(39 |
) |
|
|
- |
|
|
|
- |
|
|
|
(39 |
) |
Accrued expenses and other liabilities (2) |
|
|
- |
|
|
|
- |
|
|
|
(106 |
) |
|
|
14 |
|
|
|
(92 |
) |
Long-term debt (2) |
|
|
- |
|
|
|
(484 |
) |
|
|
- |
|
|
|
(93 |
) |
|
|
(577 |
) |
|
Total |
|
$ |
515 |
|
|
$ |
(669 |
) |
|
$ |
843 |
|
|
$ |
109 |
|
|
$ |
798 |
|
|
|
|
|
(1) |
|
Mortgage banking income does not reflect impact of Level 1 and Level 2 hedges on MSRs. |
|
(2) |
|
Amounts represent items which are accounted for under the fair value option. |
77
The table below summarizes changes in unrealized gains (losses) recorded in earnings
during the nine months ended September 30, 2010 and 2009 for Level 3 assets and liabilities that
were still held at September 30, 2010 and 2009. These amounts include changes in fair value on
loans, LHFS, loan commitments and structured notes which are accounted for under the fair value
option.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Changes in Unrealized Gains (Losses) Relating to Assets and Liabilities Still Held at Reporting Date |
|
|
Nine Months Ended September 30, 2010 |
|
|
Equity |
|
|
Trading |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
Investment |
|
|
Account |
|
|
Banking |
|
|
Other |
|
|
|
|
|
|
Income |
|
|
Profits |
|
|
Income |
|
|
Income |
|
|
|
|
(Dollars in millions) |
|
(Loss) |
|
|
(Losses) |
|
|
(Loss) (1) |
|
|
(Loss) |
|
|
Total |
|
|
Trading account assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities, trading loans and other |
|
$ |
- |
|
|
$ |
109 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
109 |
|
Equity securities |
|
|
- |
|
|
|
(40 |
) |
|
|
- |
|
|
|
- |
|
|
|
(40 |
) |
Foreign sovereign debt |
|
|
- |
|
|
|
(144 |
) |
|
|
- |
|
|
|
- |
|
|
|
(144 |
) |
Mortgage trading loans and asset-backed securities |
|
|
- |
|
|
|
110 |
|
|
|
- |
|
|
|
- |
|
|
|
110 |
|
|
Total trading account assets |
|
|
- |
|
|
|
35 |
|
|
|
- |
|
|
|
- |
|
|
|
35 |
|
Net derivative assets |
|
|
- |
|
|
|
(953 |
) |
|
|
4,654 |
|
|
|
- |
|
|
|
3,701 |
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency MBS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(104 |
) |
|
|
(104 |
) |
Commercial |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Foreign securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other taxable securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(25 |
) |
|
|
(25 |
) |
|
Total available-for-sale debt securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(129 |
) |
|
|
(129 |
) |
Loans and leases (2) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(26 |
) |
|
|
(26 |
) |
Mortgage servicing rights |
|
|
- |
|
|
|
- |
|
|
|
(8,339 |
) |
|
|
- |
|
|
|
(8,339 |
) |
Loans held-for-sale (2) |
|
|
- |
|
|
|
- |
|
|
|
28 |
|
|
|
256 |
|
|
|
284 |
|
Other assets |
|
|
375 |
|
|
|
- |
|
|
|
(22 |
) |
|
|
- |
|
|
|
353 |
|
Trading
account liabilities Foreign sovereign debt |
|
|
- |
|
|
|
23 |
|
|
|
- |
|
|
|
- |
|
|
|
23 |
|
Accrued expenses and other liabilities (2) |
|
|
- |
|
|
|
- |
|
|
|
(40 |
) |
|
|
(87 |
) |
|
|
(127 |
) |
Long-term debt (2) |
|
|
- |
|
|
|
80 |
|
|
|
- |
|
|
|
(87 |
) |
|
|
(7 |
) |
|
Total |
|
$ |
375 |
|
|
$ |
(815 |
) |
|
$ |
(3,719 |
) |
|
$ |
(73 |
) |
|
$ |
(4,232 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2009 |
|
|
Equity |
|
|
Trading |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
Investment |
|
|
Account |
|
|
Banking |
|
|
Other |
|
|
|
|
|
|
Income |
|
|
Profits |
|
|
Income |
|
|
Income |
|
|
|
|
(Dollars in millions) |
|
(Loss) |
|
|
(Losses) |
|
|
(Loss) (1) |
|
|
(Loss) |
|
|
Total |
|
|
Trading account assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities, trading loans and other |
|
$ |
- |
|
|
$ |
(111 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(111 |
) |
Equity securities |
|
|
- |
|
|
|
(269 |
) |
|
|
- |
|
|
|
- |
|
|
|
(269 |
) |
Foreign sovereign debt |
|
|
- |
|
|
|
125 |
|
|
|
- |
|
|
|
- |
|
|
|
125 |
|
Mortgage trading loans and asset-backed securities |
|
|
- |
|
|
|
(324 |
) |
|
|
- |
|
|
|
- |
|
|
|
(324 |
) |
|
Total trading account assets |
|
|
- |
|
|
|
(579 |
) |
|
|
- |
|
|
|
- |
|
|
|
(579 |
) |
Net derivative assets |
|
|
- |
|
|
|
(1,526 |
) |
|
|
6,402 |
|
|
|
- |
|
|
|
4,876 |
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency MBS |
|
|
- |
|
|
|
- |
|
|
|
(12 |
) |
|
|
(860 |
) |
|
|
(872 |
) |
Foreign securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(89 |
) |
|
|
(89 |
) |
Other taxable securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(14 |
) |
|
|
(14 |
) |
Tax-exempt securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(78 |
) |
|
|
(78 |
) |
|
Total available-for-sale debt securities |
|
|
- |
|
|
|
- |
|
|
|
(12 |
) |
|
|
(1,041 |
) |
|
|
(1,053 |
) |
Loans and leases (2) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
165 |
|
|
|
165 |
|
Mortgage servicing rights |
|
|
- |
|
|
|
- |
|
|
|
2,470 |
|
|
|
- |
|
|
|
2,470 |
|
Loans held-for-sale (2) |
|
|
- |
|
|
|
(208 |
) |
|
|
60 |
|
|
|
457 |
|
|
|
309 |
|
Other assets |
|
|
302 |
|
|
|
- |
|
|
|
77 |
|
|
|
45 |
|
|
|
424 |
|
Trading
account liabilities Foreign sovereign debt |
|
|
- |
|
|
|
(43 |
) |
|
|
- |
|
|
|
- |
|
|
|
(43 |
) |
Accrued expenses and other liabilities (2) |
|
|
- |
|
|
|
- |
|
|
|
27 |
|
|
|
1,123 |
|
|
|
1,150 |
|
Long-term debt (2) |
|
|
- |
|
|
|
(2,266 |
) |
|
|
- |
|
|
|
(135 |
) |
|
|
(2,401 |
) |
|
Total |
|
$ |
302 |
|
|
$ |
(4,622 |
) |
|
$ |
9,024 |
|
|
$ |
614 |
|
|
$ |
5,318 |
|
|
|
|
|
(1) |
|
Mortgage banking income does not reflect impact of Level 1 and Level 2 hedges on MSRs. |
|
(2) |
|
Amounts represent items which are accounted for under the fair value option. |
78
Nonrecurring Fair Value
Certain assets and liabilities are measured at fair value on a nonrecurring basis and are not
included in the previous tables in this Note. These assets and liabilities primarily include LHFS,
unfunded loan commitments held-for-sale, goodwill and foreclosed properties. The amounts below
represent only balances measured at fair value during the three and nine months ended September
30, 2010 and 2009, and still held as of the reporting date.
The Corporation recorded a $10.4 billion goodwill impairment charge in the Global Card
Services business segment related to the passage of the Financial Reform Act which is expected to
reduce future revenues within the Corporations debit card
business. See Note 9 Goodwill and
Intangible Assets for additional information on the goodwill impairment charge.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis |
|
|
|
September 30, 2010 |
|
|
Gains (Losses) |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
(Dollars in millions) |
|
Level 2 |
|
|
Level 3 |
|
|
September 30, 2010 |
|
|
September 30, 2010 |
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held-for-sale |
|
$ |
1,155 |
|
|
$ |
7,981 |
|
|
$ |
104 |
|
|
$ |
403 |
|
Loans and leases (1) |
|
|
58 |
|
|
|
10,893 |
|
|
|
(1,319 |
) |
|
|
(5,125 |
) |
Goodwill |
|
|
- |
|
|
|
11,889 |
|
|
|
(10,400 |
) |
|
|
(10,400 |
) |
Foreclosed properties (2) |
|
|
10 |
|
|
|
1,712 |
|
|
|
(88 |
) |
|
|
(191 |
) |
Other assets |
|
|
4 |
|
|
|
92 |
|
|
|
(7 |
) |
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
Gains (Losses) |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
(Dollars in millions) |
|
Level 2 |
|
|
Level 3 |
|
|
September 30, 2009 |
|
|
September 30, 2009 |
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held-for-sale |
|
$ |
1,524 |
|
|
$ |
8,258 |
|
|
$ |
(164 |
) |
|
$ |
(855 |
) |
Loans and leases (1) |
|
|
- |
|
|
|
8,927 |
|
|
|
(1,928 |
) |
|
|
(4,430 |
) |
Foreclosed properties (2) |
|
|
- |
|
|
|
60 |
|
|
|
(31 |
) |
|
|
(91 |
) |
Other assets |
|
|
- |
|
|
|
631 |
|
|
|
(116 |
) |
|
|
(323 |
) |
|
|
|
|
(1) |
|
Gains (losses) represent charge-offs associated with real estate-secured loans that
exceed 180 days past due. |
|
(2) |
|
Amounts are included in other assets on the Consolidated Balance Sheet and represent
fair value and related losses on foreclosed properties that were written down subsequent to their
initial classification as foreclosed properties. |
Fair Value Option Elections
Corporate Loans and Loan Commitments
The Corporation elected to account for certain large corporate loans and loan commitments
which exceeded the Corporations single name credit risk concentration guidelines under the fair
value option. Lending commitments, both funded and unfunded, are actively managed and monitored
and, as appropriate, credit risk for these lending relationships may be mitigated through the use
of credit derivatives, with the Corporations public side credit view and market perspectives
determining the size and timing of the hedging activity. These credit derivatives do not meet the
requirements for derivatives designated as accounting hedges and therefore are carried at fair
value with changes in fair value recorded in other income. Electing the fair value option allows
the Corporation to carry these loans and loan commitments at fair value, which is more consistent
with managements view of the underlying economics and the manner in which they are managed. In
addition, accounting for these loans and loan commitments at fair value reduces the accounting
asymmetry that would otherwise result from carrying the loans at historical cost and the credit
derivatives at fair value.
At September 30, 2010 and December 31, 2009, funded loans that the Corporation elected to
carry at fair value had an aggregate fair value of $3.7 billion and $4.9 billion recorded in loans
and leases and an aggregate outstanding principal balance of $4.0 billion and $5.4 billion. At
September 30, 2010 and December 31, 2009, unfunded loan commitments that the Corporation elected
to carry at fair value had an aggregate fair value of $809 million and $950 million recorded in
accrued expenses and other liabilities and an aggregate committed exposure of $28.5 billion and
$27.0 billion. Interest income on these loans is recorded in interest and fees on loans and
leases.
79
Loans Held-for-Sale
The Corporation elected to account for certain LHFS at fair value. Electing the fair value
option allows a better offset of the changes in fair values of the loans and the derivative
instruments used to economically hedge them. The Corporation has not elected to account for other
LHFS under the fair value option primarily because these loans are floating rate loans that are
not economically hedged using derivative instruments. At September 30, 2010 and December 31, 2009,
residential mortgage LHFS, commercial mortgage LHFS, and other LHFS accounted for under the fair
value option had an aggregate
fair value of $22.3 billion and $32.8 billion and an aggregate outstanding principal balance of
$25.8 billion and $36.5 billion. Interest income on these LHFS is recorded in other interest
income. The changes in fair value are largely offset by hedging activities.
Other Assets
The Corporation elected to account for certain other assets under the fair value option
including non-marketable convertible preferred shares where the Corporation has economically
hedged a majority of the position with derivatives. At September 30, 2010, these assets had a fair
value of $250 million.
Securities Financing Agreements
The Corporation elected to account for certain securities financing agreements under the fair
value option based on the tenor of the agreements, which reflects the magnitude of the interest
rate risk. The majority of securities financing agreements collateralized by U.S. government
securities were excluded from the fair value option election as these contracts are generally
short-dated and therefore the interest rate risk is not significant. At September 30, 2010,
securities financing agreements which the Corporation elected to carry at fair value had an
aggregate fair value of $130.0 billion and a principal balance of $129.4 billion.
Long-term Deposits
The Corporation elected to account for certain long-term fixed-rate and rate-linked deposits,
which are economically hedged with derivatives, under the fair value option. At September 30, 2010
and December 31, 2009, these instruments, which are classified in interest-bearing deposits, had
an aggregate fair value of $2.7 billion and $1.7 billion and a principal balance of $2.6 billion
and $1.6 billion. Interest paid on these instruments is recorded in interest expense. Election of
the fair value option allows the Corporation to reduce the accounting volatility that would
otherwise result from the accounting asymmetry created by accounting for the financial instruments
at historical cost and the economic hedges at fair value. The Corporation did not elect to carry
other long-term deposits at fair value because they were not economically hedged using
derivatives.
Commercial Paper and Other Short-term Borrowings
The Corporation elected to account for certain commercial paper and other short-term
borrowings under the fair value option. This debt is risk-managed on a fair value basis. At
September 30, 2010, this debt, which is classified in commercial paper and short-term borrowings,
had an aggregate fair value and principal balance of $4.9 billion.
Long-term Debt
The Corporation elected to account for certain long-term debt, primarily structured notes
that were acquired as part of the Merrill Lynch acquisition, under the fair value option. This
long-term debt is risk-managed on a fair value basis. Election of the fair value option allows the
Corporation to reduce the accounting volatility that would otherwise result from the accounting
asymmetry created by accounting for these financial instruments at historical cost and the related
economic hedges at fair value. At September 30, 2010, this long-term debt had an aggregate fair
value of $49.5 billion and a principal balance of $55.9 billion. The Corporation did not elect to
carry other long-term debt at fair value because it is not economically hedged using derivatives.
Asset-backed Secured Financings
The Corporation elected to account for certain asset-backed secured financings that were
acquired as part of the Countrywide acquisition under the fair value option. At September 30,
2010, these secured financings, which are classified in accrued expenses and other liabilities,
had an aggregate fair value of $712 million and a principal balance of $1.4 billion. Election of
the fair value option allows the Corporation to reduce the accounting volatility that would
otherwise result from
80
the accounting asymmetry created by accounting for the asset-backed secured
financings at historical cost and the corresponding mortgage LHFS securing these financings at
fair value.
The table below provides information about where changes in the fair value of assets or
liabilities accounted for under the fair value option are included in the Consolidated Statement
of Income for the three and nine months ended September 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) Relating to Assets and Liabilities Accounted for Under the Fair Value Option |
|
|
Three Months Ended September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset- |
|
|
Paper and |
|
|
|
|
|
|
|
|
|
Loans and |
|
|
Loans |
|
|
Securities |
|
|
|
|
|
|
|
|
|
|
backed |
|
|
Other Short- |
|
|
|
|
|
|
|
|
|
Loan |
|
|
Held-for- |
|
|
Financing |
|
|
Other |
|
|
Long-term |
|
|
Secured |
|
|
term |
|
|
Long-term |
|
|
|
|
(Dollars in millions) |
|
Commitments |
|
|
Sale |
|
|
Agreements |
|
|
Assets |
|
|
Deposits |
|
|
Financings |
|
|
Borrowings |
|
|
Debt |
|
|
Total |
|
|
Trading account profits
(losses) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
5 |
|
|
$ |
(1,443 |
) |
|
$ |
(1,438 |
) |
Mortgage banking income |
|
|
- |
|
|
|
3,077 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(35 |
) |
|
|
- |
|
|
|
- |
|
|
|
3,042 |
|
Equity investment
income (loss) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other income (loss) |
|
|
210 |
|
|
|
295 |
|
|
|
117 |
|
|
|
16 |
|
|
|
4 |
|
|
|
- |
|
|
|
- |
|
|
|
(190 |
) |
|
|
452 |
|
|
Total |
|
$ |
210 |
|
|
$ |
3,372 |
|
|
$ |
117 |
|
|
$ |
16 |
|
|
$ |
4 |
|
|
$ |
(35 |
) |
|
$ |
5 |
|
|
$ |
(1,633 |
) |
|
$ |
2,056 |
|
|
|
|
Three Months Ended September 30, 2009 |
Trading account profits
(losses) |
|
$ |
(5 |
) |
|
$ |
(10 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
20 |
|
|
$ |
(1,362 |
) |
|
$ |
(1,357 |
) |
Mortgage banking income |
|
|
- |
|
|
|
3,068 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(106 |
) |
|
|
- |
|
|
|
- |
|
|
|
2,962 |
|
Equity investment income
(loss) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(13 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(13 |
) |
Other income (loss) |
|
|
799 |
|
|
|
(60 |
) |
|
|
19 |
|
|
|
- |
|
|
|
(96 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1,842 |
) |
|
|
(1,180 |
) |
|
Total |
|
|
$794 |
|
|
$ |
2,998 |
|
|
$ |
19 |
|
|
$ |
(13 |
) |
|
$ |
(96 |
) |
|
$ |
(106 |
) |
|
$ |
20 |
|
|
$ |
(3,204 |
) |
|
$ |
412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset- |
|
|
Paper and |
|
|
|
|
|
|
|
|
|
Loans and |
|
|
Loans |
|
|
Securities |
|
|
|
|
|
|
|
|
|
|
backed |
|
|
Other Short- |
|
|
|
|
|
|
|
|
|
Loan |
|
|
Held-for- |
|
|
Financing |
|
|
Other |
|
|
Long-term |
|
|
Secured |
|
|
term |
|
|
Long-term |
|
|
|
|
(Dollars in millions) |
|
Commitments |
|
|
Sale |
|
|
Agreements |
|
|
Assets |
|
|
Deposits |
|
|
Financings |
|
|
Borrowings |
|
|
Debt |
|
|
Total |
|
|
Trading account profits
(losses) |
|
$ |
2 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(190 |
) |
|
$ |
(567 |
) |
|
$ |
(755 |
) |
Mortgage banking
income |
|
|
- |
|
|
|
8,204 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(76 |
) |
|
|
- |
|
|
|
- |
|
|
|
8,128 |
|
Equity investment
income
(loss) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other income (loss) |
|
|
189 |
|
|
|
547 |
|
|
|
215 |
|
|
|
62 |
|
|
|
(108 |
) |
|
|
- |
|
|
|
- |
|
|
|
1,211 |
|
|
|
2,116 |
|
|
Total |
|
|
$191 |
|
|
$ |
8,751 |
|
|
$ |
215 |
|
|
$ |
62 |
|
|
$ |
(108 |
) |
|
$ |
(76 |
) |
|
$ |
(190 |
) |
|
$ |
644 |
|
|
$ |
9,489 |
|
|
|
|
Nine Months Ended September 30, 2009 |
Trading account profits
(losses) |
|
$ |
(13 |
) |
|
$ |
(258 |
) |
|
$ |
- |
|
|
$ |
379 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(220 |
) |
|
$ |
(3,365 |
) |
|
$ |
(3,477 |
) |
Mortgage banking income |
|
|
- |
|
|
|
5,628 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
27 |
|
|
|
- |
|
|
|
- |
|
|
|
5,655 |
|
Equity investment income
(loss) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(148 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(148 |
) |
Other income (loss) |
|
|
2,140 |
|
|
|
487 |
|
|
|
(124 |
) |
|
|
- |
|
|
|
(16 |
) |
|
|
- |
|
|
|
- |
|
|
|
(3,255 |
) |
|
|
(768 |
) |
|
Total |
|
$ |
2,127 |
|
|
$ |
5,857 |
|
|
$ |
(124 |
) |
|
$ |
231 |
|
|
$ |
(16 |
) |
|
$ |
27 |
|
|
$ |
(220 |
) |
|
$ |
(6,620 |
) |
|
$ |
1,262 |
|
|
81
NOTE 15 Fair Value of Financial Instruments
The fair values of financial instruments have been derived using the methodologies
described in Note 14 Fair Value Measurements. The following disclosures include financial
instruments where only a portion of the ending balances at September 30, 2010 and December 31,
2009 is carried at fair value on the Corporations Consolidated Balance Sheet.
Short-term Financial Instruments
The carrying value of short-term financial instruments, including cash and cash equivalents,
time deposits placed, federal funds sold and purchased, resale and certain repurchase agreements,
commercial paper and other short-term investments and borrowings approximates the fair value of
these instruments. These financial instruments generally expose the Corporation to limited credit
risk and have no stated maturities or have short-term maturities and carry interest rates that
approximate market. The Corporation elected to account for certain structured reverse repurchase
agreements under the fair value option. See Note 14 Fair Value Measurements for additional
information on these structured reverse repurchase agreements.
Loans
Fair values were generally determined by discounting both principal and interest cash flows
expected to be collected using an observable discount rate for similar instruments with
adjustments that the Corporation believes a market participant would consider in determining fair
value. The Corporation estimates the cash flows expected to be collected using internal credit
risk, interest rate and prepayment risk models that incorporate the Corporations best estimate of
current key assumptions, such as default rates, loss severity and prepayment speeds for the life
of the loan. The carrying value of loans is presented net of allowance for loan and lease losses
and excludes leases. The Corporation elected to account for certain large corporate loans which
exceeded the Corporations single name credit risk concentration guidelines under the fair value
option. See Note 14 Fair Value Measurements for additional information on loans accounted for
under the fair value option.
Deposits
The fair value for certain deposits with stated maturities was determined by discounting
contractual cash flows using current market rates for instruments with similar maturities. The
carrying value of foreign time deposits approximates fair value. For deposits with no stated
maturities, the carrying amount was considered to approximate fair value and does not take into
account the significant value of the cost advantage and stability of the Corporations long-term
relationships with depositors. The Corporation accounts for certain long-term fixed-rate deposits
which are economically hedged with derivatives under the fair value option. See Note 14 Fair
Value Measurements for additional information on these long-term fixed-rate deposits.
Long-term Debt
The Corporation uses quoted market prices, when available, to estimate fair value for its
long-term debt. When quoted market prices are not available, fair value is estimated based on
current market interest rates and credit spreads for debt with similar maturities. The Corporation
accounts for certain structured notes under the fair value option. See Note 14 Fair Value
Measurements for additional information on these structured notes.
The carrying values and fair values of certain financial instruments at September 30, 2010
and December 31, 2009 were as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
(Dollars in millions) |
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
|
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
869,159 |
|
|
$ |
861,898 |
|
|
$ |
841,020 |
|
|
$ |
813,596 |
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
977,322 |
|
|
|
977,943 |
|
|
|
991,611 |
|
|
|
991,768 |
|
Long-term debt |
|
|
478,858 |
|
|
|
470,838 |
|
|
|
438,521 |
|
|
|
440,246 |
|
|
82
NOTE 16 Mortgage Servicing Rights
The Corporation accounts for consumer MSRs at fair value with changes in fair value
recorded in the Consolidated Statement of Income in mortgage banking income. The Corporation
economically hedges these MSRs with certain derivatives and securities including MBS and U.S.
Treasuries. The securities that economically hedge the MSRs are classified in other assets with
changes in the fair value of the securities and the related interest income recorded in mortgage
banking income.
The table below presents activity for residential first mortgage MSRs for the three and nine
months ended September 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
|
Nine Months Ended September 30 |
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Balance, beginning of period |
|
$ |
14,745 |
|
|
$ |
18,535 |
|
|
$ |
19,465 |
|
|
$ |
12,733 |
|
Merrill Lynch balance, January 1, 2009 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
209 |
|
Net additions |
|
|
745 |
|
|
|
1,738 |
|
|
|
2,758 |
|
|
|
4,693 |
|
Impact of customer payments |
|
|
(924 |
) |
|
|
(1,111 |
) |
|
|
(2,961 |
) |
|
|
(3,402 |
) |
Other changes in MSR fair value |
|
|
(2,315 |
) |
|
|
(1,623 |
) |
|
|
(7,011 |
) |
|
|
3,306 |
|
|
Balance, September 30 |
|
$ |
12,251 |
|
|
$ |
17,539 |
|
|
$ |
12,251 |
|
|
$ |
17,539 |
|
|
Mortgage loans serviced for investors (in billions) |
|
$ |
1,669 |
|
|
$ |
1,726 |
|
|
$ |
1,669 |
|
|
$ |
1,726 |
|
|
The Corporation uses an OAS valuation approach to determine the fair value of MSRs which
factors in prepayment risk. This approach consists of projecting servicing cash flows under
multiple interest rate scenarios and discounting these cash flows using risk-adjusted discount
rates. The key economic assumptions used in determining the fair value of MSRs at September 30,
2010 and December 31, 2009 are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
December 31, 2009 |
(Dollars in millions) |
|
Fixed |
|
Adjustable |
|
Fixed |
|
Adjustable |
|
Weighted-average option adjusted spread |
|
|
2.37 |
% |
|
|
4.28 |
% |
|
|
1.67 |
% |
|
|
4.64 |
% |
Weighted-average life, in years |
|
|
3.84 |
|
|
|
2.04 |
|
|
|
5.62 |
|
|
|
3.26 |
|
|
The table below presents the sensitivity of the weighted-average lives and fair value of
MSRs to changes in modeled assumptions. These sensitivities are hypothetical and should be used
with caution. As the amounts indicate, changes in fair value based on variations in assumptions
generally cannot be extrapolated because the relationship of the change in assumption to the
change in fair value may not be linear. Also, the effect of a variation in a particular assumption
on the fair value of a MSR that continues to be held by the Corporation is calculated without
changing any other assumption. In reality, changes in one factor may result in changes in another,
which might magnify or counteract the sensitivities. The below sensitivities do not reflect any
hedge strategies that may be undertaken to mitigate such risk.
83
Commercial and residential reverse mortgage MSRs, which are carried at the lower of cost or
market value and accounted for using the amortization method, totaled $289 million and $309
million at September 30, 2010 and December 31, 2009, and are not included in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
Change in |
|
|
|
|
Weighted-average Lives |
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
(Dollars in millions) |
|
Fixed |
|
Adjustable |
|
Fair Value |
|
Prepayment rates |
|
|
|
|
|
|
|
|
|
|
|
|
Impact of 10% decrease |
|
0.30 |
years |
|
0.14 |
years |
|
$ |
881 |
|
Impact of 20% decrease |
|
|
0.65 |
|
|
|
0.30 |
|
|
|
1,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of 10% increase |
|
|
(0.26) |
|
|
|
(0.12) |
|
|
|
(772) |
|
Impact of 20% increase |
|
|
(0.49) |
|
|
|
(0.22) |
|
|
|
(1,455) |
|
|
OAS level |
|
|
|
|
|
|
|
|
|
|
|
|
Impact of 100 bps decrease |
|
|
n/a |
|
|
|
n/a |
|
|
$ |
554 |
|
Impact of 200 bps decrease |
|
|
n/a |
|
|
|
n/a |
|
|
|
1,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of 100 bps increase |
|
|
n/a |
|
|
|
n/a |
|
|
|
(510) |
|
Impact of 200 bps increase |
|
|
n/a |
|
|
|
n/a |
|
|
|
(980) |
|
|
n/a = not applicable
NOTE
17 Business Segment Information
The Corporation reports the results of its operations through six business segments:
Deposits, Global Card Services, Home Loans & Insurance, Global Commercial Banking, Global Banking
& Markets (GBAM) and Global Wealth & Investment Management (GWIM), with the remaining operations
recorded in All Other. Effective January 1, 2010, the Corporation realigned the Global Corporate
and Investment Banking portion of the former Global Banking business segment with the former
Global Markets business segment to form GBAM and to reflect Global Commercial Banking as a
standalone segment. In addition, the Corporation may periodically reclassify business segment
results based on modifications to its management reporting methodologies and changes in
organizational alignment. Prior period amounts have been reclassified to conform to current period
presentation.
Deposits
Deposits includes the results of consumer deposits activities which consist of a
comprehensive range of products provided to consumers and small businesses. In addition, Deposits
includes an allocation of ALM activities. Deposit products include traditional savings accounts,
money market savings accounts, CDs and IRAs, and noninterest- and interest-bearing checking
accounts. These products provide a relatively stable source of funding and liquidity. The
Corporation earns net interest spread revenue from investing this liquidity in earning assets
through client-facing lending and ALM activities. The revenue is allocated to the deposit products
using a funds transfer pricing process which takes into account the interest rates and maturity
characteristics of the deposits. Deposits also generates fees such as account service fees,
non-sufficient funds fees, overdraft charges and ATM fees. In addition, Deposits includes the net
impact of migrating customers and their related deposit balances between GWIM and Deposits.
Subsequent to the date of migration, the associated net interest income, service charges and
noninterest expense are recorded in the business to which deposits were transferred.
Global Card Services
Global Card Services provides a broad offering of products including U.S. consumer and
business card, consumer lending, international card and debit card to consumers and small
businesses. The Corporation reports its Global Card Services current period results in accordance
with new consolidation guidance that was effective on January 1, 2010. Under
84
this new consolidation guidance, the Corporation consolidated all credit card trusts. Accordingly,
current year results are comparable to prior year results that were presented on a managed basis,
which was consistent with the way that management evaluated the results of the business. Managed
basis assumed that securitized loans were not sold and presented earnings on these loans in a
manner similar to the way loans that have not been sold (i.e., held loans) were presented. Loan
securitization is an alternative funding process that is used by the Corporation to diversify
funding sources. Prior to the adoption of the new consolidation guidance, loan securitization
removed loans from the Corporations Consolidated Balance Sheet through the sale of loans to an
off-balance sheet QSPE. For more information on managed basis, see
Note 23 Business Segment
Information to the Consolidated Financial Statements of the Corporations 2009 Annual Report on
Form 10-K.
Home Loans & Insurance
Home Loans & Insurance provides an extensive line of consumer real estate products and
services to customers nationwide. Home Loans & Insurance products include fixed and adjustable
rate first-lien mortgage loans for home purchase and refinancing needs, reverse mortgages, home
equity lines of credit and home equity loans. First mortgage products are either sold into the
secondary mortgage market to investors, while retaining MSRs and the Bank of America customer
relationships, or are held on the Corporations Consolidated Balance Sheet for ALM purposes and
reported in All Other. Home Loans & Insurance is not impacted by the Corporations first mortgage
production retention decisions as Home Loans & Insurance is compensated for the decision on a
management accounting basis with a corresponding offset recorded in All Other. Funded home equity
lines of credit and home equity loans are held on the Corporations Consolidated Balance Sheet. In
addition, Home Loans & Insurance offers property, casualty, life, disability and credit insurance.
Home Loans & Insurance also includes the impact of migrating customers and their related loan
balances between GWIM and Home Loans & Insurance based on client segmentation thresholds.
Subsequent to the date of migration, the associated net interest income and noninterest expense
are recorded in the business segment to which loans were transferred.
Global Commercial Banking
Global Commercial Banking provides a wide range of lending-related products and
services, integrated working capital management and treasury solutions to clients through the
Corporations network of offices and client relationship teams along with various product
partners. Clients include business banking and middle-market companies, commercial real estate
firms and governments, and are generally defined as companies with sales up to $2 billion.
Lending products and services include commercial loans and commitment facilities, real estate
lending, asset-based lending and indirect consumer loans. Capital management and treasury
solutions include treasury management, foreign exchange and short-term investing options.
Global Banking & Markets
GBAM provides financial products, advisory services, financing, securities clearing,
settlement and custody services globally to institutional investor clients in support of their
investing and trading activities. GBAM also works with commercial and corporate clients to provide
debt and equity underwriting and distribution capabilities, merger-related and other advisory
services, and risk management products using interest rate, equity, credit, currency and commodity
derivatives, foreign exchange, fixed-income and mortgage-related products. The business may take
positions in these products and participate in market-making activities dealing in government
securities, equity and equity-linked securities, high-grade and high-yield corporate debt
securities, commercial paper, MBS and ABS. Corporate banking services provide a wide range of
lending-related products and services, integrated working capital management and treasury
solutions to clients through the Corporations network of offices and client relationship teams
along with various product partners. Corporate clients are generally defined as
companies with sales greater than
$2 billion. In addition, GBAM also includes the results related to the merchant services joint
venture.
85
Global Wealth & Investment Management
GWIM provides comprehensive wealth management capabilities to a broad base of clients
from emerging affluent to the ultra-high-net-worth. These services include investment and
brokerage services, estate and financial planning, fiduciary portfolio management, cash and
liability management and specialty asset management. GWIM also provides retirement and benefit
plan services, philanthropic management and asset management to individuals and institutions. In
addition, GWIM includes the results of BofA Capital Management, the cash and liquidity asset
management business that the Corporation retained following the sale of the Columbia long-term
asset management business, the Corporations approximately 34 percent economic ownership of
BlackRock, Inc., and other miscellaneous items. GWIM also reflects the impact of migrating clients
and their related deposit and loan balances between GWIM and Deposits, and GWIM and Home Loans &
Insurance and the Corporations ALM activities. Subsequent to the date of migration, the
associated net interest income, noninterest income and noninterest expense are recorded in the
business to which the deposits and loans were transferred.
All Other
All Other consists of equity investment activities including Global Principal
Investments, Corporate Investments and Strategic Investments, the residential mortgage portfolio
associated with ALM activities, the residual impact of the cost allocation processes, merger and
restructuring charges, intersegment eliminations, and the results of certain businesses that are expected to be or have been sold
or are in the process of being liquidated. All Other also includes certain amounts associated with
ALM activities, amounts associated with the change in the value of derivatives used as economic
hedges of interest rate and foreign exchange rate fluctuations, the impact of foreign exchange
rate fluctuations related to revaluation of foreign currency-denominated debt,
fair value adjustments related to certain structured notes, certain
gains (losses) on sales of whole mortgage loans, gains (losses) on sales of debt securities, OTTI
write-downs on certain AFS securities and for periods prior to January 1, 2010, a securitization
offset which removed the securitization impact of sold loans in Global Card Services in order to
present the consolidated results of the Corporation on a GAAP basis (i.e., held basis).
Basis of Presentation
Total revenue, net of interest expense, includes net interest income on a fully
taxable-equivalent (FTE) basis and noninterest income. The adjustment of net interest income to a
FTE basis results in a corresponding increase in income tax expense. The segment results also
reflect certain revenue and expense methodologies that are utilized to determine net income. The
net interest income of the businesses includes the results of a funds transfer pricing process
that matches assets and liabilities with similar interest rate sensitivity and maturity
characteristics. Net interest income of the business segments also includes an allocation of net
interest income generated by the Corporations ALM activities.
The management accounting and reporting process derives segment and business results by
utilizing allocation methodologies for revenue and expense. The net income derived for the
businesses is dependent upon revenue and cost allocations using an activity-based costing model,
funds transfer pricing, and other methodologies and assumptions management believes are
appropriate to reflect the results of the business.
The Corporations ALM activities maintain an overall interest rate risk management strategy
that incorporates the use of interest rate contracts to manage fluctuations in earnings that are
caused by interest rate volatility. The Corporations goal is to manage interest rate sensitivity
so that movements in interest rates do not significantly adversely affect net interest income. The
Corporations ALM activities are allocated to the business segments and fluctuate based on
performance. ALM activities include external product pricing decisions, including deposit pricing
strategies, the effects of the Corporations internal funds transfer pricing process and the net
effects of other ALM activities.
Certain expenses not directly attributable to a specific business segment are allocated to
the segments. The most significant of these expenses include data and item processing costs and
certain centralized or shared functions. Data processing costs are allocated to the segments based
on equipment usage. Item processing costs are allocated to the segments based on the volume of
items processed for each segment. The costs of certain centralized or shared functions are
allocated based on methodologies that reflect utilization.
86
The following tables present total revenue, net of interest expense, on a FTE basis and net
income (loss) for the three and nine months ended September 30, 2010 and 2009, and total assets at
September 30, 2010 and 2009 for each business segment as well as All Other.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Segments |
Three Months Ended September 30 |
|
|
|
|
|
|
|
|
|
|
|
Total Corporation (1) |
|
Deposits (2) |
|
Global Card Services (3) |
(Dollars in millions) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Net interest income (4) |
|
$ |
12,717 |
|
|
$ |
11,753 |
|
|
$ |
1,922 |
|
|
$ |
1,726 |
|
|
$ |
4,361 |
|
|
$ |
4,920 |
|
Noninterest income |
|
|
14,265 |
|
|
|
14,612 |
|
|
|
1,138 |
|
|
|
1,906 |
|
|
|
1,350 |
|
|
|
2,330 |
|
|
Total revenue, net of interest expense |
|
|
26,982 |
|
|
|
26,365 |
|
|
|
3,060 |
|
|
|
3,632 |
|
|
|
5,711 |
|
|
|
7,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
5,396 |
|
|
|
11,705 |
|
|
|
62 |
|
|
|
93 |
|
|
|
3,177 |
|
|
|
6,823 |
|
Amortization of intangibles |
|
|
426 |
|
|
|
510 |
|
|
|
49 |
|
|
|
59 |
|
|
|
203 |
|
|
|
237 |
|
Goodwill impairment |
|
|
10,400 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10,400 |
|
|
|
- |
|
Other noninterest expense |
|
|
16,390 |
|
|
|
15,796 |
|
|
|
2,644 |
|
|
|
2,227 |
|
|
|
1,496 |
|
|
|
1,678 |
|
|
Income (loss) before income taxes |
|
|
(5,630 |
) |
|
|
(1,646 |
) |
|
|
305 |
|
|
|
1,253 |
|
|
|
(9,565 |
) |
|
|
(1,488 |
) |
Income tax expense (benefit) (4) |
|
|
1,669 |
|
|
|
(645 |
) |
|
|
110 |
|
|
|
439 |
|
|
|
306 |
|
|
|
(533 |
) |
|
Net income (loss) |
|
$ |
(7,299 |
) |
|
$ |
(1,001 |
) |
|
$ |
195 |
|
|
$ |
814 |
|
|
$ |
(9,871 |
) |
|
$ |
(955 |
) |
|
Period-end total assets |
|
$ |
2,339,660 |
|
|
$ |
2,259,891 |
|
|
$ |
431,604 |
|
|
$ |
441,585 |
|
|
$ |
169,813 |
|
|
$ |
219,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home Loans |
|
Global Commercial |
|
Global Banking |
|
|
& Insurance |
|
Banking (2) |
|
& Markets (2) |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Net interest income (4) |
|
$ |
1,346 |
|
|
$ |
1,309 |
|
|
$ |
1,874 |
|
|
$ |
2,012 |
|
|
$ |
1,874 |
|
|
$ |
2,255 |
|
Noninterest income |
|
|
2,398 |
|
|
|
2,104 |
|
|
|
685 |
|
|
|
760 |
|
|
|
5,302 |
|
|
|
5,419 |
|
|
Total revenue, net of interest expense |
|
|
3,744 |
|
|
|
3,413 |
|
|
|
2,559 |
|
|
|
2,772 |
|
|
|
7,176 |
|
|
|
7,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
1,302 |
|
|
|
2,897 |
|
|
|
554 |
|
|
|
2,057 |
|
|
|
(157 |
) |
|
|
538 |
|
Amortization of intangibles |
|
|
6 |
|
|
|
13 |
|
|
|
18 |
|
|
|
22 |
|
|
|
37 |
|
|
|
53 |
|
Goodwill impairment |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other noninterest expense |
|
|
2,973 |
|
|
|
3,036 |
|
|
|
982 |
|
|
|
937 |
|
|
|
4,409 |
|
|
|
3,600 |
|
|
Income (loss) before income taxes |
|
|
(537 |
) |
|
|
(2,533 |
) |
|
|
1,005 |
|
|
|
(244 |
) |
|
|
2,887 |
|
|
|
3,483 |
|
Income tax expense (benefit) (4) |
|
|
(193 |
) |
|
|
(898 |
) |
|
|
368 |
|
|
|
(84 |
) |
|
|
1,439 |
|
|
|
1,241 |
|
|
Net income (loss) |
|
$ |
(344 |
) |
|
$ |
(1,635 |
) |
|
$ |
637 |
|
|
$ |
(160 |
) |
|
$ |
1,448 |
|
|
$ |
2,242 |
|
|
Period-end total assets |
|
$ |
215,592 |
|
|
$ |
234,725 |
|
|
$ |
302,684 |
|
|
$ |
284,869 |
|
|
$ |
759,767 |
|
|
$ |
703,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Wealth & |
|
|
|
|
Investment Management (2) |
|
All
Other (2, 3) |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Net interest income (4) |
|
$ |
1,292 |
|
|
$ |
1,329 |
|
|
$ |
48 |
|
|
$ |
(1,798 |
) |
Noninterest income (loss) |
|
|
2,780 |
|
|
|
2,543 |
|
|
|
612 |
|
|
|
(450 |
) |
|
Total revenue, net of interest expense |
|
|
4,072 |
|
|
|
3,872 |
|
|
|
660 |
|
|
|
(2,248 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
128 |
|
|
|
515 |
|
|
|
330 |
|
|
|
(1,218 |
) |
Amortization of intangibles |
|
|
113 |
|
|
|
119 |
|
|
|
- |
|
|
|
7 |
|
Goodwill impairment |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other noninterest expense |
|
|
3,336 |
|
|
|
2,886 |
|
|
|
550 |
|
|
|
1,432 |
|
|
Income (loss) before income taxes |
|
|
495 |
|
|
|
352 |
|
|
|
(220 |
) |
|
|
(2,469 |
) |
Income tax expense (benefit) (4) |
|
|
182 |
|
|
|
118 |
|
|
|
(543 |
) |
|
|
(928 |
) |
|
Net income (loss) |
|
$ |
313 |
|
|
$ |
234 |
|
|
$ |
323 |
|
|
$ |
(1,541 |
) |
|
Period-end total assets |
|
$ |
272,272 |
|
|
$ |
248,472 |
|
|
$ |
187,928 |
|
|
$ |
127,323 |
|
|
|
|
|
(1) |
|
There were no material intersegment revenues. |
|
(2) |
|
Total assets include asset allocations to match liabilities (i.e., deposits). |
|
(3) |
|
Current period is presented in accordance with new consolidation guidance effective
January 1, 2010. Prior period Global Card Services results are presented on a managed basis with a corresponding offset recorded in All Other . |
|
(4) |
|
FTE basis |
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Segments |
Nine Months Ended September 30 |
|
|
|
|
|
|
|
|
|
|
|
Total Corporation (1) |
|
Deposits (2) |
|
Global Card Services (3) |
(Dollars in millions) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Net interest income (4) |
|
$ |
39,984 |
|
|
$ |
36,514 |
|
|
$ |
6,183 |
|
|
$ |
5,324 |
|
|
$ |
13,618 |
|
|
$ |
15,094 |
|
Noninterest income |
|
|
48,738 |
|
|
|
59,017 |
|
|
|
4,114 |
|
|
|
5,156 |
|
|
|
5,757 |
|
|
|
6,865 |
|
|
Total revenue, net of interest expense |
|
|
88,722 |
|
|
|
95,531 |
|
|
|
10,297 |
|
|
|
10,480 |
|
|
|
19,375 |
|
|
|
21,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
23,306 |
|
|
|
38,460 |
|
|
|
160 |
|
|
|
268 |
|
|
|
10,507 |
|
|
|
22,699 |
|
Amortization of intangibles |
|
|
1,311 |
|
|
|
1,546 |
|
|
|
148 |
|
|
|
181 |
|
|
|
610 |
|
|
|
687 |
|
Goodwill impairment |
|
|
10,400 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10,400 |
|
|
|
- |
|
Other noninterest expense |
|
|
50,533 |
|
|
|
48,782 |
|
|
|
7,530 |
|
|
|
6,992 |
|
|
|
4,597 |
|
|
|
5,161 |
|
|
Income (loss) before income taxes |
|
|
3,172 |
|
|
|
6,743 |
|
|
|
2,459 |
|
|
|
3,039 |
|
|
|
(6,739 |
) |
|
|
(6,588 |
) |
Income tax expense (benefit) (4) |
|
|
4,166 |
|
|
|
273 |
|
|
|
906 |
|
|
|
1,073 |
|
|
|
1,349 |
|
|
|
(2,321 |
) |
|
Net income (loss) |
|
$ |
(994 |
) |
|
$ |
6,470 |
|
|
$ |
1,553 |
|
|
$ |
1,966 |
|
|
$ |
(8,088 |
) |
|
$ |
(4,267 |
) |
|
Period-end total assets |
|
$ |
2,339,660 |
|
|
$ |
2,259,891 |
|
|
$ |
431,604 |
|
|
$ |
441,585 |
|
|
$ |
169,813 |
|
|
$ |
219,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home Loans |
|
Global Commercial |
|
Global Banking |
|
|
& Insurance |
|
Banking (2) |
|
& Markets (2) |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Net interest income (4) |
|
$ |
3,559 |
|
|
$ |
3,700 |
|
|
$ |
6,205 |
|
|
$ |
5,972 |
|
|
$ |
5,997 |
|
|
$ |
7,403 |
|
Noninterest income |
|
|
6,604 |
|
|
|
9,412 |
|
|
|
2,162 |
|
|
|
2,352 |
|
|
|
16,934 |
|
|
|
19,622 |
|
|
Total revenue, net of interest expense |
|
|
10,163 |
|
|
|
13,112 |
|
|
|
8,367 |
|
|
|
8,324 |
|
|
|
22,931 |
|
|
|
27,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
7,292 |
|
|
|
8,995 |
|
|
|
2,103 |
|
|
|
5,925 |
|
|
|
(43 |
) |
|
|
1,451 |
|
Amortization of intangibles |
|
|
32 |
|
|
|
50 |
|
|
|
55 |
|
|
|
67 |
|
|
|
110 |
|
|
|
171 |
|
Goodwill impairment |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other noninterest expense |
|
|
9,093 |
|
|
|
8,490 |
|
|
|
2,821 |
|
|
|
2,835 |
|
|
|
13,492 |
|
|
|
12,157 |
|
|
Income (loss) before income taxes |
|
|
(6,254 |
) |
|
|
(4,423 |
) |
|
|
3,388 |
|
|
|
(503 |
) |
|
|
9,372 |
|
|
|
13,246 |
|
Income tax expense (benefit) (4) |
|
|
(2,304 |
) |
|
|
(1,567 |
) |
|
|
1,248 |
|
|
|
(244 |
) |
|
|
3,777 |
|
|
|
4,623 |
|
|
Net income (loss) |
|
$ |
(3,950 |
) |
|
$ |
(2,856 |
) |
|
$ |
2,140 |
|
|
$ |
(259 |
) |
|
$ |
5,595 |
|
|
$ |
8,623 |
|
|
Period-end total assets |
|
$ |
215,592 |
|
|
$ |
234,725 |
|
|
$ |
302,684 |
|
|
$ |
284,869 |
|
|
$ |
759,767 |
|
|
$ |
703,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Wealth & |
|
|
|
|
Investment Management (2) |
|
All Other (2, 3) |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Net interest income (4) |
|
$ |
4,068 |
|
|
$ |
4,271 |
|
|
$ |
354 |
|
|
$ |
(5,250 |
) |
Noninterest income |
|
|
8,504 |
|
|
|
7,725 |
|
|
|
4,663 |
|
|
|
7,885 |
|
|
Total revenue, net of interest expense |
|
|
12,572 |
|
|
|
11,996 |
|
|
|
5,017 |
|
|
|
2,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
491 |
|
|
|
1,007 |
|
|
|
2,796 |
|
|
|
(1,885 |
) |
Amortization of intangibles |
|
|
346 |
|
|
|
365 |
|
|
|
10 |
|
|
|
25 |
|
Goodwill impairment |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other noninterest expense |
|
|
9,665 |
|
|
|
8,898 |
|
|
|
3,335 |
|
|
|
4,249 |
|
|
Income (loss) before income taxes |
|
|
2,070 |
|
|
|
1,726 |
|
|
|
(1,124 |
) |
|
|
246 |
|
Income tax expense (benefit) (4) |
|
|
941 |
|
|
|
603 |
|
|
|
(1,751 |
) |
|
|
(1,894 |
) |
|
Net income |
|
$ |
1,129 |
|
|
$ |
1,123 |
|
|
$ |
627 |
|
|
$ |
2,140 |
|
|
Period-end total assets |
|
$ |
272,272 |
|
|
$ |
248,472 |
|
|
$ |
187,928 |
|
|
$ |
127,323 |
|
|
|
|
|
(1) |
|
There were no material intersegment revenues. |
|
(2) |
|
Total assets include asset allocations to match liabilities (i.e., deposits). |
|
(3) |
|
Current period is presented in accordance with new consolidation guidance effective
January 1, 2010. Prior period Global Card Services results are presented on a managed basis with a
corresponding offset recorded in All Other . |
|
(4) |
|
FTE basis |
88
The table below reconciles Global Card Services and All Other for the three and nine
months ended September 30, 2009 to a held basis by reclassifying net interest income, all other
income and realized credit losses associated with the securitized loans to card income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Card Services Reconciliation |
|
|
Three Months Ended September 30, 2009 |
|
Nine Months Ended September 30, 2009 |
|
|
Managed |
|
Securitization |
|
Held |
|
Managed |
|
Securitization |
|
Held |
(Dollars in millions) |
|
Basis (1) |
|
Impact (2) |
|
Basis |
|
Basis (1) |
|
Impact (2) |
|
Basis |
|
Net interest income (3) |
|
$ |
4,920 |
|
|
$ |
(2,275 |
) |
|
$ |
2,645 |
|
|
$ |
15,094 |
|
|
$ |
(7,024 |
) |
|
$ |
8,070 |
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Card income |
|
|
2,183 |
|
|
|
(1,007 |
) |
|
|
1,176 |
|
|
|
6,460 |
|
|
|
(1,355 |
) |
|
|
5,105 |
|
All other income |
|
|
147 |
|
|
|
(26 |
) |
|
|
121 |
|
|
|
405 |
|
|
|
(94 |
) |
|
|
311 |
|
|
Total noninterest income |
|
|
2,330 |
|
|
|
(1,033 |
) |
|
|
1,297 |
|
|
|
6,865 |
|
|
|
(1,449 |
) |
|
|
5,416 |
|
|
Total revenue, net of interest expense |
|
|
7,250 |
|
|
|
(3,308 |
) |
|
|
3,942 |
|
|
|
21,959 |
|
|
|
(8,473 |
) |
|
|
13,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
6,823 |
|
|
|
(3,308 |
) |
|
|
3,515 |
|
|
|
22,699 |
|
|
|
(8,473 |
) |
|
|
14,226 |
|
Noninterest expense |
|
|
1,915 |
|
|
|
- |
|
|
|
1,915 |
|
|
|
5,848 |
|
|
|
- |
|
|
|
5,848 |
|
|
Loss before income taxes |
|
|
(1,488 |
) |
|
|
- |
|
|
|
(1,488 |
) |
|
|
(6,588 |
) |
|
|
- |
|
|
|
(6,588 |
) |
Income tax benefit (3) |
|
|
(533 |
) |
|
|
- |
|
|
|
(533 |
) |
|
|
(2,321 |
) |
|
|
- |
|
|
|
(2,321 |
) |
|
Net loss |
|
$ |
(955 |
) |
|
$ |
- |
|
|
$ |
(955 |
) |
|
$ |
(4,267 |
) |
|
$ |
- |
|
|
$ |
(4,267 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other Reconciliation |
|
|
Three Months Ended September 30, 2009 |
|
Nine Months Ended September 30, 2009 |
|
|
Reported |
|
Securitization |
|
As |
|
Reported |
|
Securitization |
|
As |
(Dollars in millions) |
|
Basis (1) |
|
Offset (2) |
|
Adjusted |
|
Basis (1) |
|
Offset (2) |
|
Adjusted |
|
Net interest income (3) |
|
$ |
(1,798 |
) |
|
$ |
2,275 |
|
|
$ |
477 |
|
|
$ |
(5,250 |
) |
|
$ |
7,024 |
|
|
$ |
1,774 |
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Card income (loss) |
|
|
(721 |
) |
|
|
1,007 |
|
|
|
286 |
|
|
|
(464 |
) |
|
|
1,355 |
|
|
|
891 |
|
Equity investment income |
|
|
882 |
|
|
|
- |
|
|
|
882 |
|
|
|
8,184 |
|
|
|
- |
|
|
|
8,184 |
|
Gains on sales of debt securities |
|
|
1,442 |
|
|
|
- |
|
|
|
1,442 |
|
|
|
3,585 |
|
|
|
- |
|
|
|
3,585 |
|
All other (loss) |
|
|
(2,053 |
) |
|
|
26 |
|
|
|
(2,027 |
) |
|
|
(3,420 |
) |
|
|
94 |
|
|
|
(3,326 |
) |
|
Total noninterest income (loss) |
|
|
(450 |
) |
|
|
1,033 |
|
|
|
583 |
|
|
|
7,885 |
|
|
|
1,449 |
|
|
|
9,334 |
|
|
Total revenue, net of interest expense |
|
|
(2,248 |
) |
|
|
3,308 |
|
|
|
1,060 |
|
|
|
2,635 |
|
|
|
8,473 |
|
|
|
11,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
(1,218 |
) |
|
|
3,308 |
|
|
|
2,090 |
|
|
|
(1,885 |
) |
|
|
8,473 |
|
|
|
6,588 |
|
Merger and restructuring charges |
|
|
594 |
|
|
|
- |
|
|
|
594 |
|
|
|
2,188 |
|
|
|
- |
|
|
|
2,188 |
|
All other noninterest expense |
|
|
845 |
|
|
|
- |
|
|
|
845 |
|
|
|
2,086 |
|
|
|
- |
|
|
|
2,086 |
|
|
Income (loss) before income taxes |
|
|
(2,469 |
) |
|
|
- |
|
|
|
(2,469 |
) |
|
|
246 |
|
|
|
- |
|
|
|
246 |
|
Income tax benefit (3) |
|
|
(928 |
) |
|
|
- |
|
|
|
(928 |
) |
|
|
(1,894 |
) |
|
|
- |
|
|
|
(1,894 |
) |
|
Net income (loss) |
|
$ |
(1,541 |
) |
|
$ |
- |
|
|
$ |
(1,541 |
) |
|
$ |
2,140 |
|
|
$ |
- |
|
|
$ |
2,140 |
|
|
|
|
|
(1) |
|
Provision for credit losses in Global Card Services is presented on a managed basis
with the securitization offset in All Other . |
|
(2) |
|
The securitization impact/offset to net interest income is on a funds transfer pricing
methodology consistent with the way funding costs are allocated to the businesses. |
|
(3) |
|
FTE basis |
89
The tables below present a reconciliation of the six business segments total
revenue, net of interest expense, on a FTE basis, and net income to the Consolidated Statement of
Income, and total assets to the Consolidated Balance Sheet. The adjustments presented in the
tables below include consolidated income, expense and asset amounts not specifically allocated to
individual business segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Segments total revenue, net of interest expense (1) |
|
$ |
26,322 |
|
|
$ |
28,613 |
|
|
$ |
83,705 |
|
|
$ |
92,896 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALM activities |
|
|
692 |
|
|
|
(642 |
) |
|
|
2,418 |
|
|
|
610 |
|
Equity investment income |
|
|
94 |
|
|
|
882 |
|
|
|
2,575 |
|
|
|
8,184 |
|
Liquidating businesses |
|
|
193 |
|
|
|
601 |
|
|
|
1,245 |
|
|
|
1,642 |
|
FTE basis adjustment |
|
|
(282 |
) |
|
|
(330 |
) |
|
|
(900 |
) |
|
|
(964 |
) |
Managed securitization impact to total revenue, net of interest expense |
|
|
n/a |
|
|
|
(3,308 |
) |
|
|
n/a |
|
|
|
(8,473 |
) |
Other |
|
|
(319 |
) |
|
|
219 |
|
|
|
(1,221 |
) |
|
|
672 |
|
|
Consolidated revenue, net of interest expense |
|
$ |
26,700 |
|
|
$ |
26,035 |
|
|
$ |
87,822 |
|
|
$ |
94,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segments net income (loss) |
|
$ |
(7,622 |
) |
|
$ |
540 |
|
|
$ |
(1,621 |
) |
|
$ |
4,330 |
|
Adjustments, net of taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALM activities |
|
|
590 |
|
|
|
(2,347 |
) |
|
|
(359 |
) |
|
|
(4,738 |
) |
Equity investment income |
|
|
59 |
|
|
|
556 |
|
|
|
1,622 |
|
|
|
5,156 |
|
Liquidating businesses |
|
|
52 |
|
|
|
149 |
|
|
|
325 |
|
|
|
357 |
|
Merger and restructuring charges |
|
|
(265 |
) |
|
|
(374 |
) |
|
|
(914 |
) |
|
|
(1,379 |
) |
Other |
|
|
(113 |
) |
|
|
475 |
|
|
|
(47 |
) |
|
|
2,744 |
|
|
Consolidated net income (loss) |
|
$ |
(7,299 |
) |
|
$ |
(1,001 |
) |
|
$ |
(994 |
) |
|
$ |
6,470 |
|
|
n/a = not applicable
|
|
|
|
|
|
|
|
|
|
|
September 30 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
Segment total assets |
|
$ |
2,151,732 |
|
|
$ |
2,132,568 |
|
Adjustments: |
|
|
|
|
|
|
|
|
ALM activities, including securities portfolio |
|
|
588,884 |
|
|
|
527,614 |
|
Equity investments |
|
|
31,834 |
|
|
|
33,513 |
|
Liquidating businesses |
|
|
11,468 |
|
|
|
35,042 |
|
Elimination of segment excess asset allocations to match liabilities |
|
|
(627,007 |
) |
|
|
(553,881 |
) |
Elimination of managed securitized loans (1) |
|
|
n/a |
|
|
|
(94,328 |
) |
Other |
|
|
182,749 |
|
|
|
179,363 |
|
|
Consolidated total assets |
|
$ |
2,339,660 |
|
|
$ |
2,259,891 |
|
|
|
|
|
(1) |
|
Represents Global Card Services securitized loans. Current period is presented in accordance with new consolidation guidance effective January 1, 2010. Prior period is presented on a managed basis. |
n/a = not applicable
90
|
|
|
|
|
Bank of America Corporation and Subsidiaries |
|
|
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
|
|
|
Table of Contents |
|
Page |
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93 |
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100 |
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103 |
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107 |
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118 |
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119 |
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|
121 |
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123 |
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|
127 |
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|
129 |
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|
134 |
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|
137 |
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|
139 |
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|
143 |
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145 |
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146 |
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146 |
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155 |
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156 |
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173 |
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186 |
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188 |
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189 |
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192 |
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192 |
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195 |
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200 |
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201 |
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201 |
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|
206 |
|
Throughout the MD&A, we use certain acronyms and
abbreviations which are defined in the Glossary beginning on page 206.
91
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report on Form 10-Q and the documents into which it may be incorporated by
reference may contain, and from time to time Bank of America Corporation (collectively with its
subsidiaries, the Corporation) and its management may make, certain statements that constitute
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements can be identified by the fact that they do not relate strictly to
historical or current facts. Forward looking statements often use words such as expects,
anticipates, believes, estimates, targets, intends, plans, goal and other similar
expressions or future or conditional verbs such as will, should, would and could. The
forward looking statements made represent the current expectations, plans or forecasts of the
Corporation regarding the Corporations future results and revenues, including future risk
weighted assets and any mitigation efforts to reduce risk weighted assets; representations and
warranties liabilities, expenses and repurchase activity; net interest income; credit trends and
conditions, including credit losses, credit reserves, charge-offs, delinquency trends and
nonperforming asset levels; consumer and commercial service charges, including the impact of
changes in the Corporations overdraft policy as well as from the Electronic Fund Transfer Act and
the Corporations ability to mitigate a decline in revenues; liquidity;
capital levels determined by or established in accordance with accounting principles
generally accepted in the United States of America (GAAP) and regulatory agencies, including
complying with any Basel capital requirements without raising additional capital; the revenue
impact of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the CARD Act);
the revenue impact resulting from, and any mitigation actions taken in response to, the Dodd-Frank
Wall Street Reform and Consumer Protection Act (the Financial Reform Act); mortgage production
levels; long-term debt levels; runoff of loan portfolios; the impact of various legal proceedings
discussed in Litigation Matters in Note 11 Commitments and Contingencies to the Consolidated
Financial Statements; the number of delayed foreclosure sales and the resulting financial impact
and other similar matters; and other matters relating to the Corporation and the securities that
we may offer from time to time. The foregoing is not an exclusive list of all forward-looking
statements the Corporation makes. These statements are not guarantees of future results or
performance and involve certain risks, uncertainties and assumptions that are difficult to predict
and often are beyond the Corporations control. Actual outcomes and results may differ materially
from those expressed in, or implied by, the Corporations forward-looking statements.
You should not place undue reliance on any forward-looking statement and should consider the
following uncertainties and risks, as well as the risks and uncertainties more fully discussed
elsewhere in this report, including Part II, Item 1A. Risk Factors, under Item 1A. Risk Factors of the Corporations 2009 Annual Report on
Form 10-K, and Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 and in any of the
Corporations other subsequent Securities and Exchange Commission (SEC) filings: the foreclosure
review and assessment process, the effectiveness of the Corporations response and any
governmental or private third party
claims asserted in connection with these foreclosure matters; negative economic conditions; the
Corporations modification policies and related results; the level and volatility of the capital
markets, interest rates, currency values and other market indices; changes in consumer, investor
and counterparty confidence in, and the related impact on, financial markets and institutions; the
Corporations credit ratings and the credit ratings of its securitizations; estimates of fair
value of certain of the Corporations assets and liabilities; legislative and regulatory actions
in the United States (including the impact of the Financial Reform Act, the Electronic Fund
Transfer Act, the CARD Act and related regulations and interpretations) and internationally; the
identification and effectiveness of any initiatives to mitigate the negative impact of the
Financial Reform Act; the impact of litigation and regulatory investigations, including costs,
expenses, settlements and judgments; various monetary and fiscal policies and regulations of the
U.S. and non-U.S. governments; changes in accounting standards, rules and interpretations
(including new consolidation guidance), inaccurate estimates or assumptions in the application of
accounting policies, including in determining reserves, applicable guidance regarding goodwill
accounting and the impact on the Corporations financial statements; increased globalization of
the financial services industry and competition with other U.S. and international financial
institutions; the Corporations ability to attract new employees and retain and motivate existing
employees; mergers and acquisitions and their integration into the Corporation, including the
Corporations ability to realize the benefits and cost savings from and limit any unexpected
liabilities acquired as a result of the Merrill Lynch acquisition; the Corporations reputation;
and decisions to downsize, sell or close units or otherwise change the business mix of the
Corporation.
Forward-looking statements speak only as of the date they are made, and the Corporation
undertakes no obligation to update any forward-looking statement to reflect the impact of
circumstances or events that arise after the date the forward-looking statement was made.
Notes to the Consolidated Financial Statements referred to in the Managements Discussion and
Analysis of Financial Condition and Results of Operations (MD&A) are incorporated by reference
into the MD&A. Certain prior period amounts have been reclassified to conform to current period
presentation.
92
Executive Summary
Business Overview
Bank of America Corporation (collectively with its subsidiaries, the Corporation) is a
Delaware corporation, a bank holding company and a financial holding company. When used in this
report, the Corporation may refer to the Corporation individually, the Corporation and its
subsidiaries, or certain of the Corporations subsidiaries or affiliates. Our principal executive
offices are located in the Bank of America Corporate Center in Charlotte, North Carolina. Through
our banking and various nonbanking subsidiaries throughout the United States and in certain
international markets, we provide a diversified range of banking and nonbanking financial services
and products through six business segments: Deposits, Global Card Services, Home Loans &
Insurance, Global Commercial Banking, Global Banking & Markets (GBAM) and Global Wealth &
Investment Management (GWIM), with the remaining operations recorded in All Other. Effective
January 1, 2010, we realigned the Global Corporate and Investment Banking portion of the former
Global Banking business segment with the former Global Markets business segment to form GBAM and
to reflect Global Commercial Banking as a standalone segment. At September 30, 2010, the
Corporation had $2.3 trillion in assets and approximately 284,000 full-time equivalent employees.
On January 1, 2009, we acquired Merrill Lynch & Co., Inc. (Merrill Lynch) and, as a result, we
have one of the largest wealth management businesses in the world with over 16,700 financial and
wealth advisors, an additional 3,000 client-facing professionals and more than $2.1 trillion in
net client assets. Additionally, we are a global leader in corporate and investment banking and
trading across a broad range of asset classes serving corporations, governments, institutions and
individuals around the world.
As of September 30, 2010, we operate in all 50 states, the District of Columbia and more than
40 foreign countries. Our retail banking footprint covers approximately 80 percent of the U.S.
population and in the U.S., we serve approximately 57 million consumer and small business
relationships with 5,900 banking centers, 18,000 ATMs, nationwide call centers,
and leading online and mobile banking platforms. We have banking centers in 13 of the 15 fastest
growing states and have leadership positions in seven of those states. We offer industry-leading
support to approximately four million small business owners.
|
|
For information on recent and proposed legislative and regulatory initiatives involving us,
see Regulatory Matters on page 143. |
93
The table below provides selected consolidated financial data for the three and nine months
ended September 30, 2010 and 2009 and period end September 30, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 1 |
Selected Financial Data |
|
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
(Dollars in millions, except per share information) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Income statement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue, net of interest expense (FTE basis) (1) |
|
$ |
26,982 |
|
|
$ |
26,365 |
|
|
$ |
88,722 |
|
|
$ |
95,531 |
|
Net income (loss) |
|
|
(7,299 |
) |
|
|
(1,001 |
) |
|
|
(994 |
) |
|
|
6,470 |
|
Net income (loss), excluding goodwill impairment charge (2) |
|
|
3,101 |
|
|
|
(1,001 |
) |
|
|
9,406 |
|
|
|
6,470 |
|
Diluted earnings (loss) per common share |
|
|
(0.77 |
) |
|
|
(0.26 |
) |
|
|
(0.21 |
) |
|
|
0.39 |
|
Diluted earnings (loss) per common share, excluding
goodwill impairment charge (2) |
|
|
0.27 |
|
|
|
(0.26 |
) |
|
|
0.82 |
|
|
|
0.39 |
|
Dividends paid per common share |
|
|
0.01 |
|
|
|
0.01 |
|
|
|
0.03 |
|
|
|
0.03 |
|
|
Performance ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
n/m |
|
|
|
n/m |
|
|
|
n/m |
|
|
|
0.35 |
% |
Return on average assets, excluding goodwill impairment charge (2) |
|
|
0.52 |
% |
|
|
n/m |
|
|
|
0.51 |
% |
|
|
0.35 |
|
Return on average tangible shareholders equity (1) |
|
|
n/m |
|
|
|
n/m |
|
|
|
n/m |
|
|
|
5.83 |
|
Return on average tangible shareholders equity, excluding goodwill
impairment charge (1, 2) |
|
|
8.54 |
|
|
|
n/m |
|
|
|
9.03 |
|
|
|
5.83 |
|
Efficiency ratio (FTE basis) (1) |
|
|
100.87 |
|
|
|
61.84 |
% |
|
|
70.16 |
|
|
|
52.68 |
|
Efficiency ratio (FTE basis), excluding goodwill impairment charge (1, 2) |
|
|
62.33 |
|
|
|
61.84 |
|
|
|
58.43 |
|
|
|
52.68 |
|
|
Asset quality |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses |
|
|
|
|
|
|
|
|
|
$ |
43,581 |
|
|
$ |
35,832 |
|
Allowance for loan and lease losses as a percentage of total loans
and leases outstanding (3) |
|
|
|
|
|
|
|
|
|
|
4.69 |
% |
|
|
3.95 |
% |
Nonperforming
loans, leases and foreclosed
properties
(3) |
|
|
|
|
|
|
|
|
|
$ |
34,556 |
|
|
$ |
33,825 |
|
Net charge-offs |
|
$ |
7,197 |
|
|
$ |
9,624 |
|
|
|
27,551 |
|
|
|
25,267 |
|
Annualized net charge-offs as a percentage of average loans and
leases outstanding (3, 4) |
|
|
3.07 |
% |
|
|
4.13 |
% |
|
|
3.84 |
% |
|
|
3.53 |
% |
Ratio of the allowance for loan and lease losses to annualized
net charge-offs (3, 5) |
|
|
1.53 |
|
|
|
0.94 |
|
|
|
1.18 |
|
|
|
1.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
December 31 |
|
|
2010 |
|
2009 |
Balance sheet |
|
|
|
|
|
|
|
|
Total loans and leases |
|
$ |
933,910 |
|
|
$ |
900,128 |
|
Total assets |
|
|
2,339,660 |
|
|
|
2,230,232 |
|
Total deposits |
|
|
977,322 |
|
|
|
991,611 |
|
Total common shareholders equity |
|
|
212,391 |
|
|
|
194,236 |
|
Total shareholders equity |
|
|
230,495 |
|
|
|
231,444 |
|
|
Capital ratios |
|
|
|
|
|
|
|
|
Tier 1 common equity |
|
|
8.45 |
% |
|
|
7.81 |
% |
Tier 1 capital |
|
|
11.16 |
|
|
|
10.40 |
|
Total capital |
|
|
15.65 |
|
|
|
14.66 |
|
Tier 1 leverage |
|
|
7.21 |
|
|
|
6.88 |
|
|
|
|
|
(1) |
|
Fully taxable-equivalent (FTE) basis, return on average tangible shareholders
equity (ROTE) and the efficiency ratio are non-GAAP measures. Other companies may define or
calculate these measures differently. For additional information on these measures and ratios, and
a corresponding reconciliation to GAAP financial measures, see Supplemental Financial Data
beginning on page 107. |
|
(2) |
|
Net income (loss), diluted earnings (loss) per common share, return on average
assets, ROTE, and the efficiency ratio have been calculated excluding the impact of the goodwill
impairment charge of $10.4 billion recorded in the third quarter of 2010 which are non-GAAP measures. For additional
information on these measures and ratios, and a corresponding reconciliation to GAAP financial
measures, see Supplemental Financial Data beginning on page 107. |
|
(3) |
|
Balances and ratios do not include loans accounted for
under the fair value option. For additional exclusions on nonperforming loans, leases and foreclosed properties,
see Nonperforming Consumer Loans and
Foreclosed Properties Activity beginning on page 170 and corresponding Table 34 and Nonperforming
Commercial Loans, Leases and Foreclosed Properties Activity and
corresponding Table 42 on page 181.
|
|
(4) |
|
Annualized net charge-offs as a percentage of
average loans and leases outstanding excluding purchased credit-impaired loans were 3.18 percent
and 3.98 percent for the three and nine months ended September 30, 2010 compared to 4.27 percent
and 3.68 percent for the same periods in 2009. |
|
(5) |
|
Ratio of the allowance for loan and lease losses to annualized net charge-offs
excluding purchased credit-impaired loans were 1.34 percent and 1.04 percent for the three and nine
months ended September 30, 2010 compared to 0.86 percent and 0.96 percent for the same periods in
2009. |
|
n/m = not meaningful |
94
Economic and Business Environment
The national and global economic environment remains challenging. Most prominently,
unemployment levels remain high along with household debt levels, businesses remain reticent to
hire and the consumer and commercial real estate markets remain stressed. Nevertheless, during the third quarter of 2010,
the U.S. economy continued its recovery, with modest increases in consumer spending and real Gross
Domestic Product. Employment rose modestly, but the unemployment rate remained high. Consumer
spending on retail sales, motor vehicles and services rose moderately, and businesses increased
production to meet demand but did not add materially to inventories. Business investment in
equipment and software continued to rise rapidly, but investment in structures continued to
decline. Households are saving more and continue to pay down debt, while businesses
remain very cautious and hold record levels of cash. This will result in additional pressure on
our loan levels which negatively affects net interest income. In this current economic
environment, credit quality has improved over the past several quarters as losses and criticized
loan levels have declined and
our nonperforming loans are stabilizing. To the extent there is continued de-leveraging and
businesses utilize operating cash, these factors will negatively impact our ability to grow loan
balances.
Looking forward, the banking environment and many of the markets in which we conduct business
will be influenced by the uneven and fragile global economic recovery and recent financial reforms
including the Financial Reform Act. Market expectations that the Federal Reserve will resort to
more quantitative easing has flattened the yield curve and depressed the U.S. dollar exchange
rate. The European Union financial crisis may spread or worsen and adversely affect global and
U.S. capital markets and undermine the confidence of U.S. consumers and businesses. In this
uncertain economic environment, imposition of new U.S. and global financial regulations,
especially significantly higher capital and liquidity standards and additional fees, will directly
affect the banking industry, and may adversely affect our earnings.
Recent Events
Review of Foreclosure Processes
On October 1, 2010, we voluntarily stopped taking foreclosure proceedings to judgment in
states where foreclosure requires a court order following a legal
proceeding. On October 8, 2010,
we stopped foreclosure sales in all states in order to complete an assessment of the related
business processes. These actions did not affect the initiation and processing of foreclosures
prior to judgment or sale of real estate owned properties. We took these precautionary steps in
order to ensure our processes for handling foreclosures include the appropriate controls and
quality assurance. Our review involves an assessment of the foreclosure process, including a
review of completed foreclosure affidavits in pending proceedings.
We recently announced that we had completed our assessment of our foreclosure affidavit
process in the 23 states where foreclosure requires a court order following a legal proceeding. As
a result of that review, we have identified and are implementing process and control enhancements
to ensure that affidavits are prepared in compliance with state law and have begun a rolling
process of preparing and resubmitting, as necessary, affidavits of indebtedness in pending
foreclosure proceedings in order to resume the process of taking these foreclosure proceedings to
judgment in these states. We estimate this process of resubmitting affidavits will take at least
several weeks and could involve as many as 102,000 foreclosure proceedings that were pending as of
October 1, 2010. Once these affidavits are resubmitted, there may be prolonged adversary
proceedings that delay certain foreclosure sales. We continue to assess our processes in the other
27 states and intend to implement enhancements as appropriate.
Subsequent to our announcements that we were temporarily suspending foreclosure sales, law
enforcement authorities in all 50 states and the United States Department of Justice and other
federal agencies have stated they are investigating whether mortgage servicers have had
irregularities in their foreclosure practices. Those investigations, as well as any other
governmental or regulatory scrutiny of our foreclosure processes, could result in fines, penalties
or other equitable remedies and result in significant legal costs in responding to governmental
investigations and possible litigation.
While we cannot predict the ultimate impact of the temporary delay in foreclosure sales, or
any issues that may arise as a result of alleged irregularities with respect to previously
completed foreclosure activities, we may be subject to additional borrower and non-borrower
litigation and governmental and regulatory scrutiny related to our past and current foreclosure
activities. This scrutiny may extend beyond our pending foreclosure matters to issues arising out
of alleged irregularities with respect to previously completed foreclosure activities. We expect
that our costs will increase in the fourth quarter of 2010 and will
continue into 2011 as a result of
the additional resources necessary to perform the foreclosure process assessment, revise affidavit
filings and make any other operational changes, which will likely result in higher noninterest
expense, including higher servicing costs and legal expenses, in the Home Loans & Insurance
business segment. In addition, process changes required as a result of our assessment could
increase our default servicing costs over the longer term. Finally, the time to complete
foreclosure sales may increase temporarily, which may result in an increase in nonperforming loans
and servicing advances and may impact the collectability of such advances and the value of our
mortgage servicing rights asset. Accordingly, delays in foreclosure sales, including any delays
beyond those currently anticipated, our process enhancements and any issues that may arise out of
alleged irregularities in our foreclosure processes could increase the costs associated with our
mortgage operations.
95
Private label Residential Mortgage-Backed Securities Claims
Recently, Countrywide Home Loans Servicing LP (which changed its name to BAC Home Loans
Servicing, LP), which is a wholly-owned subsidiary of the Corporation, received a letter, as
master servicer under certain pooling and servicing agreements, for 115 private label residential
mortgage-backed securities (RMBS) transactions, from eight investors purportedly owning interests
in RMBS issued in the transactions. The RMBS issued in the transactions have an original and
current principal balance of approximately $104 billion and $46 billion, respectively. The letter
asserts breaches of certain servicing obligations, including an alleged failure to provide notice
to the trustee and the other parties to the pooling and servicing agreements of breaches of
representations and warranties with respect to mortgage loans included in the transactions, and
states that a failure to remedy the alleged servicing breaches will constitute an event of default
if not remedied within 60 days of the date of the letter.
There are a number of questions about the validity of the assertions set forth in the letter,
including whether these purported investors have standing to bring these claims. The master
servicer intends to challenge the assertions in the letter and fully enforce its rights under the
pooling and servicing agreements.
For additional information about representations and warranties claims, see Note 8
Securitizations and Other Variable Interest Entities to the Consolidated Financial Statements and
Representations and Warranties, beginning on page 139, and Item 1A. Risk Factors beginning on page
210.
U.K. Bank Levy
On June 22, 2010, the U.K. government announced that it intended to introduce an annual bank
levy, commencing in 2011, payable on the consolidated liabilities, subject to certain exclusions
and offsets, on U.K. group companies and U.K. branches of banking groups as of the end of each
accounting period. On October 21, 2010, a first draft of potential legislation was released for
comment with the intention that a final substantive draft of the legislation, along with the final
rates, will be published later in the year.
At this time it is not possible to quantify the impact of the revised proposals since the final basis and rate of the bank
levy remain uncertain.
Investment in BlackRock, Inc.
On November 3, 2010, BlackRock, Inc. (BlackRock) filed a prospectus supplement with the SEC
pursuant to which we are offering for sale through an underwritten offering up to 34.5 million shares of
common stock (including shares of common stock issuable upon the automatic conversion of shares of
Series B Convertible Participating Preferred Stock). The underwriters of the offering may also
purchase, pursuant to a 30-day option, up to an additional 6.3 million shares of BlackRock common
stock issuable upon the conversion of Series B Preferred Stock to cover any over-allotments. Such
offering is consistent with the Corporations stated strategy to
reduce its investment in non-core
businesses to focus on its core businesses and strengthen capital ratios.
Troubled Asset Relief Program Related Asset Sales
As previously disclosed, in connection with the approval we received to repurchase the
Troubled Asset Relief Program (TARP) preferred stock on December 9, 2009, the Corporation agreed
to increase equity by $3.0 billion through net asset sales
to be approved by the Federal Reserve.
The Corporation has been active in selling
assets generating approximately $10 billion in gross proceeds and approximately $1.9 billion in
after-tax GAAP accounting gains toward the $3.0 billion target. To the extent the asset sales are
not completed by December 31, 2010, the Corporation must raise a commensurate amount of common
equity. We continue to pursue several potential asset sales that may reduce the remaining amount
of additional capital required. In the event that there is a shortfall, it would be met by issuing
equity awards of fully vested common stock to certain associates in lieu of a
portion of their 2010 year-end cash incentive awards, which would be transferable by associates as
soon as administratively practicable.
96
Performance Overview
Net income (loss) was ($7.3) billion and ($994) million for the three and nine months
ended September 30, 2010, compared to ($1.0) billion and $6.5 billion for the same periods in
2009. After preferred stock dividends and accretion, net income (loss) applicable to common
shareholders was ($7.6) billion, or ($0.77) per diluted common share, and ($2.0) billion, or
($0.21) per diluted common share, for the three and nine months ended September 30, 2010 compared
to ($2.2) billion, or ($0.26) per diluted common share, and $3.0 billion, or $0.39 per diluted
common share, for the same periods in 2009. Excluding the $10.4 billion goodwill impairment
charge, net income was $3.1 billion and $9.4 billion for the three and nine months ended September
30, 2010. After preferred stock dividends and accretion, net income applicable to common
shareholders, excluding the goodwill impairment charge, was $2.8 billion, or $0.27 per diluted
common share, and $8.4 billion, or $0.82 per diluted common share, for the three and nine months
ended September 30, 2010. Revenue, net of interest expense on a FTE basis increased (decreased)
$617 million to $27.0 billion and ($6.8) billion to $88.7 billion for the three and nine months
ended September 30, 2010, representing a two percent increase and a seven percent decrease from
the same periods in 2009. FTE basis, net income excluding the goodwill impairment charge, and net
income applicable to common shareholders excluding the goodwill impairment charge are non-GAAP
measures. For corresponding reconciliations to GAAP financial measures, see Supplemental Financial
Data beginning on page 107.
Net interest income on a FTE basis increased $964 million to $12.7 billion and $3.5 billion
to $40.0 billion for the three and nine months ended September 30, 2010 compared to the same
periods in 2009. The increases were driven by the impact of adoption of the new consolidation
guidance and improved deposit pricing, partially offset by lower commercial and consumer loan
levels and lower rates on the core assets and trading book. Net interest yield on a FTE basis
increased 11 basis points (bps) to 2.72 percent and 16 bps to 2.81 percent for the three and nine
months ended September 30, 2010 compared to the same periods in 2009, due to the factors noted
above.
Noninterest income decreased $347 million to $14.3 billion and $10.3 billion to $48.7 billion
for the three and nine months ended September 30, 2010 compared to the same periods in 2009. Lower
equity investment income, gains on sales of debt securities, trading account profits, and service
charges partially offset by an increase in other income and a decrease in net impairment losses
recognized in earnings on available-for-sale debt securities, drove the decline in the three and
nine months ended September 30, 2010 compared to the same periods in the prior year.
The provision for credit losses decreased $6.3 billion to $5.4 billion and $15.2 billion to
$23.3 billion for the three and nine months ended September 30, 2010 compared to the same periods
in 2009. The provision for credit losses was $1.8 billion and $4.2 billion lower than net
charge-offs for the three and nine months ended September 30, 2010, resulting from a reduction in
the allowance for loan and lease losses. The reserve reductions in both periods were primarily due
to improved delinquencies and collections, lower bankruptcies in the domestic credit card,
consumer lending and small business portfolios and improved credit profiles in the commercial
portfolios. In addition, the reserve reduction for the three months ended September 30, 2010 was
also due to improvement in portfolio trends within the consumer real estate portfolios. The
reserve reduction for the nine months ended September 30, 2010 was partially offset by reserve
additions in the consumer real estate portfolios during the first half of the year amid continued
stress in the housing market, which included reserve additions for purchased credit-impaired
consumer portfolios obtained through acquisitions.
Noninterest expense increased $10.9 billion to $27.2 billion and $11.9 billion to $62.2
billion for the three and nine months ended September 30, 2010 compared to the same periods in
2009. The increases for the three and nine months ended September 30, 2010 were driven by the
$10.4 billion goodwill impairment charge. Excluding the goodwill impairment charge, noninterest
expense increased $510 million and $1.5 billion for the three and nine months ended September 30,
2010 compared to the same periods in 2009. The increase for the three months ended September 30,
2010 was driven by higher personnel costs and professional fees compared to the same period in the
prior year. The increase was partially offset by declines in pre-tax merger and restructuring
charges compared to the prior year. The increase for the nine months ended September 30, 2010 was
driven by higher personnel costs due in part to the U.K. payroll tax on certain year-end incentive
payments and the same reasons as described above, partially offset by higher Federal Deposit
Insurance Corporation (FDIC) expense, including a special
assessment of $724 million, in 2009.
97
Segment Results
Effective January 1, 2010, management realigned the former Global Banking and Global
Markets business segments into Global Commercial Banking and GBAM. Prior period amounts have been
reclassified to conform to the current period presentation. These changes did not have an impact
on the previously reported consolidated results of the Corporation. For additional information
related to the business segments, see Note 17 Business Segment Information to the Consolidated
Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 2 |
Business Segment Results |
|
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
|
|
Total Revenue (1) |
|
Net Income (Loss) |
|
Total Revenue (1) |
|
Net Income (Loss) |
(Dollars in millions) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Deposits |
|
$ |
3,060 |
|
|
$ |
3,632 |
|
|
$ |
195 |
|
|
$ |
814 |
|
|
$ |
10,297 |
|
|
$ |
10,480 |
|
|
$ |
1,553 |
|
|
$ |
1,966 |
|
Global Card Services (2) |
|
|
5,711 |
|
|
|
7,250 |
|
|
|
(9,871 |
) |
|
|
(955 |
) |
|
|
19,375 |
|
|
|
21,959 |
|
|
|
(8,088 |
) |
|
|
(4,267 |
) |
Home Loans & Insurance |
|
|
3,744 |
|
|
|
3,413 |
|
|
|
(344 |
) |
|
|
(1,635 |
) |
|
|
10,163 |
|
|
|
13,112 |
|
|
|
(3,950 |
) |
|
|
(2,856 |
) |
Global Commercial Banking |
|
|
2,559 |
|
|
|
2,772 |
|
|
|
637 |
|
|
|
(160 |
) |
|
|
8,367 |
|
|
|
8,324 |
|
|
|
2,140 |
|
|
|
(259 |
) |
Global Banking & Markets |
|
|
7,176 |
|
|
|
7,674 |
|
|
|
1,448 |
|
|
|
2,242 |
|
|
|
22,931 |
|
|
|
27,025 |
|
|
|
5,595 |
|
|
|
8,623 |
|
Global Wealth & Investment Management |
|
|
4,072 |
|
|
|
3,872 |
|
|
|
313 |
|
|
|
234 |
|
|
|
12,572 |
|
|
|
11,996 |
|
|
|
1,129 |
|
|
|
1,123 |
|
All Other (2) |
|
|
660 |
|
|
|
(2,248 |
) |
|
|
323 |
|
|
|
(1,541 |
) |
|
|
5,017 |
|
|
|
2,635 |
|
|
|
627 |
|
|
|
2,140 |
|
|
Total FTE basis |
|
|
26,982 |
|
|
|
26,365 |
|
|
|
(7,299 |
) |
|
|
(1,001 |
) |
|
|
88,722 |
|
|
|
95,531 |
|
|
|
(994 |
) |
|
|
6,470 |
|
FTE adjustment |
|
|
(282 |
) |
|
|
(330 |
) |
|
|
- |
|
|
|
- |
|
|
|
(900 |
) |
|
|
(964 |
) |
|
|
- |
|
|
|
- |
|
|
Total Consolidated |
|
$ |
26,700 |
|
|
$ |
26,035 |
|
|
$ |
(7,299 |
) |
|
$ |
(1,001 |
) |
|
$ |
87,822 |
|
|
$ |
94,567 |
|
|
$ |
(994 |
) |
|
$ |
6,470 |
|
|
|
|
|
(1) |
|
Total revenue is net of interest expense and is on a FTE basis which is a non-GAAP
measure. For more information on this measure and a corresponding reconciliation to a GAAP
financial measure, see Supplemental Financial Data on page 107. |
(2) |
|
For the three and nine months ended September 30, 2009, Global Card Services is
presented on a managed basis with a corresponding offset recorded in All Other. For the three and
nine months ended September 30, 2010, Global Card Services and All Other are presented in
accordance with new consolidation guidance. Accordingly, current period Global Card Services
results are comparable to prior period results that are presented on a managed basis. For more
information on the new consolidation guidance, see Note 8 Securitizations and Other Variable
Interest Entities to the Consolidated Financial Statements. For more information on the
reconciliation of Global Card Services and All Other, see Note 17 Business Segment Information
to the Consolidated Financial Statements. |
Deposits net income decreased from comparable periods in the prior year due to
decreases in revenue and higher noninterest expense. The revenue decline was driven by the impact
of Regulation E and related overdraft policy changes. Net interest income increased as a result of
disciplined pricing and a customer shift to more liquid products, partially offset by a lower
residual net interest income allocation related to asset and liability management (ALM)
activities. Noninterest expense increased as a higher proportion of banking center sales and
service costs were aligned to Deposits from the other consumer businesses.
Global Card Services net loss for the three and nine months ended September 30, 2010
increased compared to the same periods in the prior year due primarily to the $10.4 billion
goodwill impairment charge. Revenue decreased for the three months ended September 30, 2010,
compared to the same period in the prior year driven by lower average loans, reduced interest and
fee income primarily resulting from the implementation of the CARD Act and the impact of recording
a $592 million reserve related to future payment protection insurance claims in the U.K. Provision
for credit losses decreased for the three months ended September 30, 2010, from the same period in
the prior year driven by lower charge-offs and reserve reductions due to lower delinquencies and
decreasing bankruptcies as a result of an improved economic environment. Revenue and provision for
credit losses decreased for the nine months ended September 30, 2010 compared to the same period
in the prior year for the same reasons discussed above; however, the revenue decrease was
partially offset by the gain on sale of our MasterCard equity holdings during the three months
ended June 30, 2010. Excluding the goodwill impairment charge, noninterest expense decreased for
the three and nine months ended September 30, 2010, compared to the same periods in the prior year
as a higher proportion of banking center sales and service costs were
aligned to Deposits from Global Card Services.
Home Loans & Insurance net loss for the three months ended September 30, 2010 decreased
compared to the same period in the prior year as the provision for credit losses decreased due to
lower net charge-offs and reserve reductions driven by improving
portfolio trends. In addition, revenue increased as a result of higher mortgage
banking income driven by improved mortgage servicing rights (MSRs) results, net of hedges, and
higher production income due mainly to higher production margins. These increases were partially
offset by higher representations and warranties expense. Noninterest expense was flat as lower
production and insurance expenses were offset by higher costs related to the increase in default
management staff and other loss mitigation activities. The net loss for the nine months ended
September 30, 2010 increased compared to the year ago period as revenue decreased as a result
98
of lower mortgage banking income driven by higher representations and warranties expense combined
with lower loan production volume resulting from declines in market demand for refinances and less
favorable MSR results, net of hedges. The provision for credit losses decreased driven by lower
reserve additions for the reasons discussed above. Noninterest expense increased for the reasons
discussed above combined with higher litigation costs.
Global Commercial Banking net income increased from comparable periods in the prior year due
to lower credit costs. Revenue was negatively impacted by a lower residual net interest income
allocation related to ALM activities and, to a lesser extent, declines in net interest income from
lower average loan balances. These were partially offset by improved loan spreads on new, renewed
and amended facilities. In addition, revenue was positively impacted by strong deposit growth as
clients remained very liquid. The provision for credit losses decreased driven by reserve
reductions reflecting the stabilization of appraised values primarily in the homebuilder portfolio
and lower net charge-offs in the commercial real estate portfolio.
GBAM net income decreased from comparable periods in the prior year due to decreased sales
and trading revenue, partially offset by credit valuation gains on derivative liabilities compared
to losses in the prior year and gains on legacy assets compared to losses in the prior year.
Revenue was negatively impacted by lower spreads on trading-related assets and lower average loans
and leases. Noninterest expense increased driven by the recognition
of expense on a proportionately larger amount of prior year incentive deferrals. Provision for credit losses declined driven by
lower charge-offs and reserve reductions. Net income decreased for the nine months ended September
30, 2010 compared to the same period in 2009 due to the prior year pre-tax gain related to the
contribution of the merchant processing business to the joint venture.
GWIM net income increased from comparable periods in the prior year driven by lower credit
costs and higher noninterest income, partially offset by higher noninterest expense. Revenue
increased compared to the prior year driven by higher asset management fees and the absence of
support for certain cash funds, partially offset by lower brokerage income. The provision for
credit losses decreased compared to the prior year driven by improvement in the commercial
domestic portfolio due to improved borrower credit profiles and improvement in the consumer real
estate portfolio. Noninterest expense increased from comparable periods in the prior year due primarily to higher revenue
related expenses, personnel costs and support costs.
All Other reported net income for the three months ended September 30, 2010 compared to a net
loss for the same period in the prior year driven primarily by a significantly lower provision for
credit losses and also lower noninterest expense. The decrease in the provision for credit losses
was mainly due to reserve reductions in the residential mortgage portfolio due to improving
portfolio trends as compared to reserve additions in the same period in the prior year. In
addition, the provision benefited from a lower reserve addition in the Countrywide purchased
credit-impaired discontinued real estate portfolio compared to reserve additions due to credit
deterioration in the same period in 2009. Net income decreased for
the nine months ended September 30, 2010 compared to the same period
in 2009 due to the pre-tax gain resulting from sales of shares in
China Construction Bank (CCB).
99
Financial Highlights
Net Interest Income
Net interest income on a FTE basis increased $964 million to $12.7 billion and $3.5
billion to $40.0 billion for the three and nine months ended September 30, 2010 compared to the
same periods in 2009. The increase was due to the impact of adoption of new consolidation guidance
which contributed $2.6 billion and $8.1 billion to the three and nine months ended September 30,
2010 and due to deposit pricing. The increase was partially offset by lower commercial and
consumer loan levels, the sale of First Republic Bank (First Republic) and lower rates on the core
assets and trading book. The net interest yield on a FTE basis increased 11 bps to 2.72 percent
and 16 bps to 2.81 percent for the three and nine months ended September 30, 2010 compared to the
same periods in 2009 due to the factors stated above.
Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 3 |
Noninterest Income |
|
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Card income |
|
$ |
1,982 |
|
|
$ |
1,557 |
|
|
$ |
5,981 |
|
|
$ |
6,571 |
|
Service charges |
|
|
2,212 |
|
|
|
3,020 |
|
|
|
7,354 |
|
|
|
8,282 |
|
Investment and brokerage services |
|
|
2,724 |
|
|
|
2,948 |
|
|
|
8,743 |
|
|
|
8,905 |
|
Investment banking income |
|
|
1,371 |
|
|
|
1,254 |
|
|
|
3,930 |
|
|
|
3,955 |
|
Equity investment income |
|
|
357 |
|
|
|
843 |
|
|
|
3,748 |
|
|
|
7,988 |
|
Trading account profits |
|
|
2,596 |
|
|
|
3,395 |
|
|
|
9,059 |
|
|
|
10,760 |
|
Mortgage banking income |
|
|
1,755 |
|
|
|
1,298 |
|
|
|
4,153 |
|
|
|
7,139 |
|
Insurance income |
|
|
75 |
|
|
|
707 |
|
|
|
1,468 |
|
|
|
2,057 |
|
Gains on sales of debt securities |
|
|
883 |
|
|
|
1,554 |
|
|
|
1,654 |
|
|
|
3,684 |
|
Other income (loss) |
|
|
433 |
|
|
|
(1,167 |
) |
|
|
3,498 |
|
|
|
1,870 |
|
Net impairment losses recognized in earnings on available-for-sale
debt securities |
|
|
(123 |
) |
|
|
(797 |
) |
|
|
(850 |
) |
|
|
(2,194 |
) |
|
Total noninterest income |
|
$ |
14,265 |
|
|
$ |
14,612 |
|
|
$ |
48,738 |
|
|
$ |
59,017 |
|
|
Noninterest income decreased $347 million to $14.3 billion and $10.3 billion to $48.7
billion for the three and nine months ended September 30, 2010 compared to the same periods in
2009. The following items highlight the significant changes.
|
|
|
Card income increased $425 million for the three months ended September 30, 2010 driven
by the impact of the new consolidation guidance and higher interchange income from
increased consumer spending partially offset by the implementation of the CARD Act. Card
income decreased $590 million for the nine months ended September 30, 2010 due to the
provisions of the CARD Act and the absence of certain fee income resulting from the sale of
our merchant processing business to a joint venture in 2009, partially offset by the
impact of the new consolidation guidance and higher interchange income. |
|
|
|
|
Service charges decreased $808 million and $928 million for the three and nine months
ended September 30, 2010 largely due to the impact of Regulation E, which became effective
in the third quarter of 2010 and the impact of our overdraft policy changes announced in 2009. |
|
|
|
|
Equity investment income decreased $486 million for the three months ended September 30,
2010 driven by a decrease in Global Principal Investments revenue. Equity investment income
decreased by $4.2 billion for the nine months ended September 30, 2010, as the benefits of
the $1.2 billion pre-tax gain on the sale of our investment in Itaú Unibanco and valuation adjustments of $1.4
billion in Global Principal Investments revenue
were less than the $7.3 billion pre-tax gain related
to the sale of CCB shares
during the same period in 2009. |
|
|
|
|
Trading account profits decreased $799 million and $1.7 billion for the three and nine
months ended September 30, 2010 due to more favorable market
conditions in the prior year and a lack of liquidity in 2010
as sovereign debt fears and regulatory uncertainty |
100
|
|
|
fueled investor concerns. We recorded
net credit valuation gains on derivatives of $162 million and $44 million for the three and
nine months ended September 30, 2010 compared to $382 million and $967 million for the same
periods in the prior year. |
|
|
|
|
Mortgage banking income increased $457 million for the three months ended September 30,
2010 due to higher production margins and more favorable MSR results, net of hedges,
partially offset by an increase in representations and warranties expense. Mortgage banking
income decreased $3.0 billion for the nine months ended September 30, 2010 due to an
increase in representations and warranties expense and lower production income, volume and
margins. The decline in servicing income for the nine months ended September 30, 2010
compared to the same period in the prior year was also due to less favorable MSR results,
net of hedges. |
|
|
|
|
Insurance income decreased $632 million and $589 million for the three and nine months
ended September 30, 2010 due to a liability recorded related to payment protection
insurance sold in the U.K. |
|
|
|
|
Gains on sales of debt securities decreased $671 million and $2.0 billion for the three
and nine months ended September 30, 2010 driven by lower volumes of sales of debt
securities. The decrease for the nine months ended September 30, 2010 also included the
impact of losses in the second quarter of 2010 related to portfolio restructuring
activities. |
|
|
|
|
Other income increased by $1.6 billion for both the three and nine months ended
September 30, 2010 due to increased credit valuation adjustments recorded on our structured
liabilities compared to the same periods in the prior year. |
|
|
|
|
Impairment losses recognized in earnings on available-for-sale (AFS) debt securities
decreased $674 million and $1.3 billion for the three and nine months ended September 30,
2010 reflecting lower impairment write-downs on non-agency RMBS and collateralized debt
obligations (CDOs). |
Provision for Credit Losses
The provision for credit losses decreased $6.3 billion to $5.4 billion and $15.2
billion to $23.3 billion for the three and nine months ended September 30, 2010 compared to the
same periods in 2009. The provision for credit losses was $1.8 billion and $4.2 billion lower than
net charge-offs for the three and nine months ended September 30, 2009, resulting in a reduction
in the allowance for loan and lease losses. The decreases in the provision for credit losses for
both the three and nine month periods were driven by lower net charge-offs and reserve reductions
due to lower bankruptcies and delinquencies in both the consumer and commercial portfolios.
The provision for credit losses related to our consumer portfolio decreased $3.7 billion to
$4.8 billion and $9.2 billion to $20.2 billion for the three and nine months ended September 30,
2010, compared to the same periods in 2009. The provision for credit losses related to our
commercial portfolio including the provision for unfunded lending commitments decreased $2.6
billion to $594 million and $6.0 billion to $3.1 billion for the three and nine months ended
September 30, 2010 compared to the same periods in 2009.
Net charge-offs totaled $7.2 billion, or 3.07 percent and $27.6 billion, or 3.84 percent of
average loans and leases for the three and nine months ended September 30, 2010 compared with $9.6
billion, or 4.13 percent and $25.3 billion, or 3.53 percent for the three and nine months ended
September 30, 2009. For more information on the provision for credit losses, refer to Provision
for Credit Losses on page 188.
101
Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 4 |
Noninterest Expense |
|
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Personnel |
|
$ |
8,402 |
|
|
$ |
7,613 |
|
|
$ |
26,349 |
|
|
$ |
24,171 |
|
Occupancy |
|
|
1,150 |
|
|
|
1,220 |
|
|
|
3,504 |
|
|
|
3,567 |
|
Equipment |
|
|
619 |
|
|
|
617 |
|
|
|
1,845 |
|
|
|
1,855 |
|
Marketing |
|
|
497 |
|
|
|
470 |
|
|
|
1,479 |
|
|
|
1,490 |
|
Professional fees |
|
|
651 |
|
|
|
562 |
|
|
|
1,812 |
|
|
|
1,511 |
|
Amortization of intangibles |
|
|
426 |
|
|
|
510 |
|
|
|
1,311 |
|
|
|
1,546 |
|
Data processing |
|
|
602 |
|
|
|
592 |
|
|
|
1,882 |
|
|
|
1,861 |
|
Telecommunications |
|
|
361 |
|
|
|
361 |
|
|
|
1,050 |
|
|
|
1,033 |
|
Other general operating |
|
|
3,687 |
|
|
|
3,767 |
|
|
|
11,162 |
|
|
|
11,106 |
|
Goodwill impairment |
|
|
10,400 |
|
|
|
- |
|
|
|
10,400 |
|
|
|
- |
|
Merger and restructuring charges |
|
|
421 |
|
|
|
594 |
|
|
|
1,450 |
|
|
|
2,188 |
|
|
Total noninterest expense |
|
$ |
27,216 |
|
|
$ |
16,306 |
|
|
$ |
62,244 |
|
|
$ |
50,328 |
|
|
Noninterest expense increased $10.9 billion to $27.2 billion and $11.9 billion to $62.2
billion for the three and nine months ended September 30, 2010 compared to the same periods in
2009. The increases were driven by the $10.4 goodwill impairment charge. Excluding the goodwill
impairment charge, noninterest expense increased $510 million and $1.5 billion for the three and
nine months ended September 30, 2010 compared to the same periods in 2009. The increases for the
three months ended September 30, 2010 were driven by higher personnel costs, higher professional
and litigation costs, compared to the same period in the prior year. These increases were
partially offset by declines in pre-tax merger and restructuring charges compared to the prior
year. The increases for the nine months ended September 30, 2010 were driven by higher personnel
costs due in part to the U.K. payroll tax on certain year-end incentive payments and the same
reasons as described above, partially offset by higher FDIC expense including a special assessment
of $724 million in 2009.
Income Tax Expense
Income tax expense was $1.4 billion for the three months ended September 30, 2010
compared to a benefit of $975 million for the same period in 2009. Income tax expense was $3.3
billion for the nine months ended September 30, 2010 compared to a benefit of $691 million for the
same period in 2009.
The effective tax rates for the three and
nine months ended September 30, 2010 are not meaningful due to the
impact of the non-deductible $10.4 billion goodwill impairment charge.
The effective tax rates for the three and nine months ended September 30, 2010 excluding the
goodwill impairment charge from pre-tax income were 30.9 percent
and 25.8 percent. The increase in the effective tax
rate for the nine months ended September 30, 2010, as compared
to (12.0) percent for the comparable 2009 period was driven by the change in the U.K. corporate
tax rate, as described below, as well as permanent tax preferences (e.g., tax-exempt income and
tax credits) and the release of $473 million of a valuation allowance provided for acquired
capital loss carryforward tax benefits which together offset a lower percentage of pre-tax income
than similar items offset during the comparative 2009 period. The effective tax rate for the three
months ended September 30, 2009 was calculated on a pre-tax loss.
On July 27, 2010, the U.K. government enacted a law change reducing the corporate income tax
rate by one percent effective for the 2011 U.K. tax financial year beginning on April 1, 2011.
This reduction favorably affects income tax expense on future U.K.
earnings, but also required us
to revalue our U.K. net deferred tax assets using the lower tax rate. The U.K. corporate tax rate reduction
resulted in an income tax charge of $388 million during the three months ended September 30, 2010.
If future rate reductions were to be enacted as suggested in U.K. Treasury announcements and assuming no change in the deferred tax asset balance, a
similar charge to income tax expense for each one percent reduction in the rate would result in
each period of enactment.
102
Balance Sheet Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 5 |
|
Selected Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
Average Balance |
|
|
|
September 30 |
|
December 31 |
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and securities borrowed or
purchased under agreements to resell |
|
$ |
271,818 |
|
|
$ |
189,933 |
|
|
$ |
254,820 |
|
|
$ |
223,039 |
|
|
$ |
261,444 |
|
|
$ |
232,680 |
|
Trading account assets |
|
|
207,695 |
|
|
|
182,206 |
|
|
|
210,529 |
|
|
|
212,488 |
|
|
|
212,985 |
|
|
|
216,462 |
|
Debt securities |
|
|
322,862 |
|
|
|
311,441 |
|
|
|
328,097 |
|
|
|
263,712 |
|
|
|
317,906 |
|
|
|
268,291 |
|
Loans and leases |
|
|
933,910 |
|
|
|
900,128 |
|
|
|
934,860 |
|
|
|
930,255 |
|
|
|
964,302 |
|
|
|
963,260 |
|
All other assets (1) |
|
|
603,375 |
|
|
|
646,524 |
|
|
|
651,091 |
|
|
|
768,707 |
|
|
|
706,333 |
|
|
|
766,434 |
|
|
Total assets |
|
$ |
2,339,660 |
|
|
$ |
2,230,232 |
|
|
$ |
2,379,397 |
|
|
$ |
2,398,201 |
|
|
$ |
2,462,970 |
|
|
$ |
2,447,127 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
977,322 |
|
|
$ |
991,611 |
|
|
$ |
973,846 |
|
|
$ |
989,295 |
|
|
$ |
982,132 |
|
|
$ |
976,182 |
|
Federal funds purchased and securities loaned
or sold under agreements to repurchase |
|
|
296,605 |
|
|
|
255,185 |
|
|
|
318,368 |
|
|
|
352,083 |
|
|
|
372,311 |
|
|
|
370,389 |
|
Trading account liabilities |
|
|
90,010 |
|
|
|
65,432 |
|
|
|
95,265 |
|
|
|
73,290 |
|
|
|
95,159 |
|
|
|
68,530 |
|
Commercial paper and other short-term
borrowings |
|
|
64,818 |
|
|
|
69,524 |
|
|
|
72,780 |
|
|
|
58,980 |
|
|
|
78,437 |
|
|
|
131,096 |
|
Long-term debt |
|
|
478,858 |
|
|
|
438,521 |
|
|
|
485,588 |
|
|
|
449,974 |
|
|
|
498,794 |
|
|
|
447,038 |
|
All other liabilities |
|
|
201,552 |
|
|
|
178,515 |
|
|
|
199,572 |
|
|
|
218,596 |
|
|
|
203,679 |
|
|
|
211,254 |
|
|
Total liabilities |
|
|
2,109,165 |
|
|
|
1,998,788 |
|
|
|
2,145,419 |
|
|
|
2,142,218 |
|
|
|
2,230,512 |
|
|
|
2,204,489 |
|
Shareholders equity |
|
|
230,495 |
|
|
|
231,444 |
|
|
|
233,978 |
|
|
|
255,983 |
|
|
|
232,458 |
|
|
|
242,638 |
|
|
Total liabilities and shareholders equity |
|
$ |
2,339,660 |
|
|
$ |
2,230,232 |
|
|
$ |
2,379,397 |
|
|
$ |
2,398,201 |
|
|
$ |
2,462,970 |
|
|
$ |
2,447,127 |
|
|
|
|
|
(1) |
|
All other assets is presented net of allowance for loan and lease losses for the
period-end and average balances. |
Impact of Adopting New Consolidation Guidance
On January 1, 2010, the Corporation adopted new consolidation guidance resulting in the
consolidation of certain former qualifying special purpose entities and VIEs that were not
recorded on the Corporations Consolidated Balance Sheet prior to that date. The adoption of this
new consolidation guidance resulted in a net incremental increase in assets of $100.4 billion,
including $69.7 billion resulting from consolidation of credit card trusts and $30.7 billion from
consolidation of other special purpose entities including multi-seller conduits, and a net
increase of $106.7 billion in total liabilities, including $84.4 billion of long-term debt. These
amounts are net of retained interests in securitizations held on the Consolidated Balance Sheet at
December 31, 2009 and a $10.8 billion increase in the allowance for loan and lease losses, the
majority of which relates to credit card receivables. The Corporation recorded a $6.2 billion
charge, net of tax, to retained earnings on January 1, 2010 for the cumulative effect of the
adoption of this new consolidation guidance due primarily to the increase in the allowance for
loan and lease losses, and a $116 million charge to accumulated other comprehensive income (OCI).
The initial recording of these assets, related allowance for loan and lease losses and liabilities
on the Corporations Consolidated Balance Sheet had no impact at the date of adoption on
consolidated results of operations. For additional detail on the impact of adopting this new
consolidation guidance, refer to Note 8 Securitizations and Other Variable Interest Entities to
the Consolidated Financial Statements.
Assets
At September 30, 2010, total assets were $2.3 trillion, an increase of $109.4 billion
from December 31, 2009. Changes from year end were attributable to the impact of adopting new
consolidation guidance which increased loan balances, primarily in the credit card, commercial
domestic and home equity portfolios, partially offset by an increase in the allowance for loan and
lease losses. In addition, changes were driven by an increase in federal funds sold and securities
borrowed or purchased under agreements to resell driven by a favorable rate environment. Trading
account assets increased as a result of the new consolidation
guidance. The increase in total assets was partially
offset by lower loan balances due to the sale of First Republic and due to other assets impacted
by the sale of strategic investments, and the impairment of goodwill.
Average total assets decreased $18.8 billion for the three months ended September 30, 2010
compared to the same period in 2009. The decrease was due to a decline in cash and cash
equivalents, other assets and commercial loans and was partially offset by adopting new
consolidation guidance, increases in debt securities driven by prior year reductions in the ALM
portfolio, and increases in federal funds sold, securities borrowed or purchased under agreements
to resell.
103
Average total assets increased $15.8 billion for the nine months ended September 30, 2010
compared to the same period in 2009. The increase was due to adopting new consolidation guidance,
increases in debt securities and in federal funds
sold, securities borrowed and purchased under agreements to resell and was partially offset by
lower commercial loans and other assets.
Liabilities and Shareholders Equity
Total liabilities increased $110.4 billion to $2.1 trillion at September 30, 2010
compared to December 31, 2009. The increase in total liabilities was attributable to the impact of
adopting new consolidation guidance which increased long-term debt and short-term borrowings. In
addition, liabilities increased due to higher federal funds purchased and securities loaned or
sold under agreements to repurchase due to a favorable rate environment. Changes in trading
account liabilities reflected trading activity in fixed-income securities. All other liabilities
increased due in part to foreign currency exchange rates.
Average total liabilities increased $3.2 billion and $26.0 billion for the three and nine months ended September 30,
2010 compared to the same periods in 2009. The increases were due to adopting new consolidation
guidance which impacted long-term debt, and increases in trading account liabilities and
noninterest-bearing deposits. The increases were partially offset by a decrease in federal funds
purchased and securities sold under agreements to repurchase and other liabilities.
Shareholders equity
decreased $949 million to $230.5 billion at September 30, 2010 compared
to December 31, 2009. The decrease was driven primarily by the goodwill impairment charge of $10.4 billion and
the impact of adopting new consolidation guidance as we recorded a $6.2 billion charge to retained
earnings due primarily to the increase in the allowance for loan and
lease losses for newly consolidated loans.
Average shareholders equity decreased $22.0 billion and $10.2 billion for the three and nine
months ended September 30, 2010, compared to the same periods in 2009 driven by the TARP
repayment, the goodwill impairment charge, and the impact of adopting new consolidation guidance,
partially offset by an increase in accumulated OCI due to the
addition this quarter of the unrealized gain on our investment in CCB.
Period-end balance sheet amounts may vary from average balance sheet amounts due to liquidity
and balance sheet management functions, primarily involving our portfolios of highly liquid
assets, that are designed to ensure the adequacy of capital while enhancing our ability to manage
liquidity requirements for the Corporation and for our customers, and to position the balance
sheet in accordance with the Corporations risk appetite. The execution of these functions
requires the use of balance sheet and capital-related limits including spot, average and
risk-weighted asset limits, particularly in our trading businesses. The Tier 1 leverage ratio is
calculated based on adjusted quarterly average total assets.
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 6 |
Selected Quarterly Financial Data |
|
|
2010 Quarters |
|
2009 Quarters |
(Dollars in millions, except per share information) |
|
Third |
|
Second |
|
First |
|
Fourth |
|
Third |
|
Income statement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
12,435 |
|
|
$ |
12,900 |
|
|
$ |
13,749 |
|
|
$ |
11,559 |
|
|
$ |
11,423 |
|
Noninterest income |
|
|
14,265 |
|
|
|
16,253 |
|
|
|
18,220 |
|
|
|
13,517 |
|
|
|
14,612 |
|
Total revenue, net of interest expense |
|
|
26,700 |
|
|
|
29,153 |
|
|
|
31,969 |
|
|
|
25,076 |
|
|
|
26,035 |
|
Provision for credit losses |
|
|
5,396 |
|
|
|
8,105 |
|
|
|
9,805 |
|
|
|
10,110 |
|
|
|
11,705 |
|
Goodwill impairment |
|
|
10,400 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Merger and restructuring charges |
|
|
421 |
|
|
|
508 |
|
|
|
521 |
|
|
|
533 |
|
|
|
594 |
|
All other
noninterest expense
(1) |
|
|
16,395 |
|
|
|
16,745 |
|
|
|
17,254 |
|
|
|
15,852 |
|
|
|
15,712 |
|
Income (loss) before income taxes |
|
|
(5,912 |
) |
|
|
3,795 |
|
|
|
4,389 |
|
|
|
(1,419 |
) |
|
|
(1,976 |
) |
Income tax expense (benefit) |
|
|
1,387 |
|
|
|
672 |
|
|
|
1,207 |
|
|
|
(1,225 |
) |
|
|
(975 |
) |
Net income (loss) |
|
|
(7,299 |
) |
|
|
3,123 |
|
|
|
3,182 |
|
|
|
(194 |
) |
|
|
(1,001 |
) |
Net income (loss) applicable to common shareholders |
|
|
(7,647 |
) |
|
|
2,783 |
|
|
|
2,834 |
|
|
|
(5,196 |
) |
|
|
(2,241 |
) |
Average common shares issued and outstanding (in thousands) |
|
|
9,976,351 |
|
|
|
9,956,773 |
|
|
|
9,177,468 |
|
|
|
8,634,565 |
|
|
|
8,633,834 |
|
Average diluted common shares issued and outstanding (in thousands) |
|
|
9,976,351 |
|
|
|
10,029,776 |
|
|
|
10,005,254 |
|
|
|
8,634,565 |
|
|
|
8,633,834 |
|
|
Performance ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
n/m |
|
|
|
0.50 |
% |
|
|
0.51 |
% |
|
|
n/m |
|
|
|
n/m |
|
Return on average common shareholders equity |
|
|
n/m |
|
|
|
5.18 |
|
|
|
5.73 |
|
|
|
n/m |
|
|
|
n/m |
|
Return on average tangible common shareholders equity (2) |
|
|
n/m |
|
|
|
9.19 |
|
|
|
9.79 |
|
|
|
n/m |
|
|
|
n/m |
|
Return on average tangible shareholders equity (2) |
|
|
n/m |
|
|
|
8.98 |
|
|
|
9.55 |
|
|
|
n/m |
|
|
|
n/m |
|
Total ending equity to total ending assets |
|
|
9.85 |
% |
|
|
9.85 |
|
|
|
9.80 |
|
|
|
10.38 |
% |
|
|
11.40 |
% |
Total average equity to total average assets |
|
|
9.83 |
|
|
|
9.36 |
|
|
|
9.14 |
|
|
|
10.31 |
|
|
|
10.67 |
|
Dividend payout |
|
|
n/m |
|
|
|
3.63 |
|
|
|
3.57 |
|
|
|
n/m |
|
|
|
n/m |
|
|
Per common share data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) |
|
$ |
(0.77 |
) |
|
$ |
0.28 |
|
|
$ |
0.28 |
|
|
$ |
(0.60 |
) |
|
$ |
(0.26 |
) |
Diluted earnings (loss) |
|
|
(0.77 |
) |
|
|
0.27 |
|
|
|
0.28 |
|
|
|
(0.60 |
) |
|
|
(0.26 |
) |
Dividends paid |
|
|
0.01 |
|
|
|
0.01 |
|
|
|
0.01 |
|
|
|
0.01 |
|
|
|
0.01 |
|
Book value |
|
|
21.17 |
|
|
|
21.45 |
|
|
|
21.12 |
|
|
|
21.48 |
|
|
|
22.99 |
|
Tangible book value (2) |
|
|
12.91 |
|
|
|
12.14 |
|
|
|
11.70 |
|
|
|
11.94 |
|
|
|
12.00 |
|
|
Market price per share of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing |
|
$ |
13.10 |
|
|
$ |
14.37 |
|
|
$ |
17.85 |
|
|
$ |
15.06 |
|
|
$ |
16.92 |
|
High closing |
|
|
15.67 |
|
|
|
19.48 |
|
|
|
18.04 |
|
|
|
18.59 |
|
|
|
17.98 |
|
Low closing |
|
|
12.32 |
|
|
|
14.37 |
|
|
|
14.45 |
|
|
|
14.58 |
|
|
|
11.84 |
|
|
Market capitalization |
|
$ |
131,442 |
|
|
$ |
144,174 |
|
|
$ |
179,071 |
|
|
$ |
130,273 |
|
|
$ |
146,363 |
|
|
Average balance sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
$ |
934,860 |
|
|
$ |
967,054 |
|
|
$ |
991,615 |
|
|
$ |
905,913 |
|
|
$ |
930,255 |
|
Total assets |
|
|
2,379,397 |
|
|
|
2,494,432 |
|
|
|
2,516,590 |
|
|
|
2,431,024 |
|
|
|
2,398,201 |
|
Total deposits |
|
|
973,846 |
|
|
|
991,615 |
|
|
|
981,015 |
|
|
|
995,160 |
|
|
|
989,295 |
|
Long-term debt |
|
|
485,588 |
|
|
|
497,469 |
|
|
|
513,634 |
|
|
|
445,440 |
|
|
|
449,974 |
|
Common shareholders equity |
|
|
215,911 |
|
|
|
215,468 |
|
|
|
200,380 |
|
|
|
197,123 |
|
|
|
197,230 |
|
Total shareholders equity |
|
|
233,978 |
|
|
|
233,461 |
|
|
|
229,891 |
|
|
|
250,599 |
|
|
|
255,983 |
|
|
Asset
quality
(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses (4) |
|
$ |
44,875 |
|
|
$ |
46,668 |
|
|
$ |
48,356 |
|
|
$ |
38,687 |
|
|
$ |
37,399 |
|
Nonperforming loans, leases and foreclosed properties (5) |
|
|
34,556 |
|
|
|
35,598 |
|
|
|
35,925 |
|
|
|
35,747 |
|
|
|
33,825 |
|
Allowance for loan and lease losses as a percentage of total loans and leases outstanding (5) |
|
|
4.69 |
% |
|
|
4.75 |
% |
|
|
4.82 |
% |
|
|
4.16 |
% |
|
|
3.95 |
% |
Allowance for loan and lease losses as a percentage of total
nonperforming loans and
leases (5, 6) |
|
|
135 |
|
|
|
137 |
|
|
|
139 |
|
|
|
111 |
|
|
|
112 |
|
Allowance for loan and lease losses as a percentage of total nonperforming loans
and leases excluding the purchased credit-impaired loan portfolio (5, 6) |
|
|
118 |
|
|
|
121 |
|
|
|
124 |
|
|
|
99 |
|
|
|
101 |
|
Net charge-offs |
|
$ |
7,197 |
|
|
$ |
9,557 |
|
|
$ |
10,797 |
|
|
$ |
8,421 |
|
|
$ |
9,624 |
|
Annualized net charge-offs as a percentage of average loans and leases
outstanding (5) |
|
|
3.07 |
% |
|
|
3.98 |
% |
|
|
4.44 |
% |
|
|
3.71 |
% |
|
|
4.13 |
% |
Nonperforming loans and leases as a percentage of total loans and leases
outstanding (5) |
|
|
3.47 |
|
|
|
3.48 |
|
|
|
3.46 |
|
|
|
3.75 |
|
|
|
3.51 |
|
Nonperforming loans, leases and foreclosed properties as a percentage of
total loans, leases and
foreclosed properties (5) |
|
|
3.71 |
|
|
|
3.73 |
|
|
|
3.69 |
|
|
|
3.98 |
|
|
|
3.72 |
|
Ratio of the allowance for loan and lease losses at period end to
annualized net charge-offs |
|
|
1.53 |
|
|
|
1.18 |
|
|
|
1.07 |
|
|
|
1.11 |
|
|
|
0.94 |
|
|
Capital ratios (period end) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-based capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 common |
|
|
8.45 |
% |
|
|
8.01 |
% |
|
|
7.60 |
% |
|
|
7.81 |
% |
|
|
7.25 |
% |
Tier 1 |
|
|
11.16 |
|
|
|
10.67 |
|
|
|
10.23 |
|
|
|
10.40 |
|
|
|
12.46 |
|
Total |
|
|
15.65 |
|
|
|
14.77 |
|
|
|
14.47 |
|
|
|
14.66 |
|
|
|
16.69 |
|
Tier 1 leverage |
|
|
7.21 |
|
|
|
6.68 |
|
|
|
6.44 |
|
|
|
6.88 |
|
|
|
8.36 |
|
Tangible equity (1) |
|
|
6.54 |
|
|
|
6.14 |
|
|
|
6.02 |
|
|
|
6.40 |
|
|
|
7.51 |
|
Tangible common equity (1) |
|
|
5.74 |
|
|
|
5.35 |
|
|
|
5.22 |
|
|
|
5.56 |
|
|
|
4.80 |
|
|
|
|
|
(1) |
|
Excludes merger and
restructuring charges and goodwill impairment charge. |
|
(2) |
|
Tangible equity ratios and tangible book value per share of common stock are
non-GAAP measures. Other companies may define or calculate these measures differently. For
additional information on these ratios and corresponding reconciliations to GAAP financial
measures, see Supplemental Financial Data beginning on page 107. |
|
(3) |
|
For more information on the impact of the purchased credit-impaired loan portfolio
on asset quality, see Consumer Portfolio Credit Risk Management beginning on page 156 and
Commercial Portfolio Credit Risk Management beginning on page 173. |
|
(4) |
|
Includes the allowance for loan and lease losses and the reserve for unfunded
lending commitments. |
|
(5) |
|
Balances and ratios do not include loans accounted for under the fair value option.
For additional exclusions on nonperforming loans, leases and foreclosed properties, see Nonperforming Consumer Loans and Foreclosed Properties Activity
beginning on page 170 and corresponding Table 34 and Nonperforming Commercial Loans, Leases and
Foreclosed Properties Activity and corresponding Table 42 on page 181. |
|
(6) |
|
Allowance for loan and lease losses includes $23.7 billion, $24.3 billion, $26.2
billion, $17.7 billion, and $17.2 billion allocated to products that are excluded from
nonperforming loans, leases and foreclosed properties at September 30, 2010, June 30, 2010, March
31, 2010, December 31, 2009, and September 30, 2009, respectively. |
|
n/m = not meaningful |
105
|
|
|
|
|
|
|
|
|
Table 7 |
Selected Year-to-Date Financial Data |
|
|
Nine Months Ended September 30 |
(Dollars in millions, except per share information) |
|
2010 |
|
2009 |
|
Income statement |
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
39,084 |
|
|
$ |
35,550 |
|
Noninterest income |
|
|
48,738 |
|
|
|
59,017 |
|
Total revenue, net of interest expense |
|
|
87,822 |
|
|
|
94,567 |
|
Provision for credit losses |
|
|
23,306 |
|
|
|
38,460 |
|
Goodwill impairment |
|
|
10,400 |
|
|
|
- |
|
Merger and restructuring charges |
|
|
1,450 |
|
|
|
2,188 |
|
All other
noninterest expense
(1) |
|
|
50,394 |
|
|
|
48,140 |
|
Income before income taxes |
|
|
2,272 |
|
|
|
5,779 |
|
Income tax expense (benefit) |
|
|
3,266 |
|
|
|
(691 |
) |
Net income (loss) |
|
|
(994 |
) |
|
|
6,470 |
|
Net income (loss) available to common shareholders |
|
|
(2,030 |
) |
|
|
2,992 |
|
Average common shares issued and outstanding (in thousands) |
|
|
9,706,951 |
|
|
|
7,423,341 |
|
Average diluted common shares issued and outstanding (in thousands) |
|
|
9,706,951 |
|
|
|
7,449,911 |
|
|
Performance ratios |
|
|
|
|
|
|
|
|
Return on average assets |
|
|
n/m |
|
|
|
0.35 |
% |
Return on average common shareholders equity |
|
|
n/m |
|
|
|
2.26 |
|
Return on average tangible common shareholders equity (2) |
|
|
n/m |
|
|
|
4.82 |
|
Return on average tangible shareholders equity (2) |
|
|
n/m |
|
|
|
5.83 |
|
Total ending equity to total ending assets |
|
|
9.85 |
% |
|
|
11.40 |
|
Total average equity to total average assets |
|
|
9.44 |
|
|
|
9.92 |
|
Dividend payout |
|
|
n/m |
|
|
|
7.96 |
|
|
Per common share data |
|
|
|
|
|
|
|
|
Earnings (loss) |
|
$ |
(0.21 |
) |
|
$ |
0.39 |
|
Diluted earnings (loss) |
|
|
(0.21 |
) |
|
|
0.39 |
|
Dividends paid |
|
|
0.03 |
|
|
|
0.03 |
|
Book value |
|
|
21.17 |
|
|
|
22.99 |
|
Tangible book value (2) |
|
|
12.91 |
|
|
|
12.00 |
|
|
Market price per share of common stock |
|
|
|
|
|
|
|
|
Closing |
|
$ |
13.10 |
|
|
$ |
16.92 |
|
High closing |
|
|
19.48 |
|
|
|
17.98 |
|
Low closing |
|
|
12.32 |
|
|
|
3.14 |
|
|
Market capitalization |
|
$ |
131,442 |
|
|
$ |
146,363 |
|
|
Average balance sheet |
|
|
|
|
|
|
|
|
Total loans and leases |
|
$ |
964,302 |
|
|
$ |
963,260 |
|
Total assets |
|
|
2,462,970 |
|
|
|
2,447,127 |
|
Total deposits |
|
|
982,132 |
|
|
|
976,182 |
|
Long-term debt |
|
|
498,794 |
|
|
|
447,038 |
|
Common shareholders equity |
|
|
210,643 |
|
|
|
177,289 |
|
Total shareholders equity |
|
|
232,458 |
|
|
|
242,638 |
|
|
Asset quality (3) |
|
|
|
|
|
|
|
|
Allowance for credit losses (4) |
|
$ |
44,875 |
|
|
$ |
37,399 |
|
Nonperforming loans, leases and foreclosed properties (5) |
|
|
34,556 |
|
|
|
33,825 |
|
Allowance for loan and lease losses as a percentage of total loans and leases outstanding (5) |
|
|
4.69 |
% |
|
|
3.95 |
% |
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases (5, 6) |
|
|
135 |
|
|
|
112 |
|
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases excluding the
purchased credit-impaired loan portfolio (5, 6) |
|
|
118 |
|
|
|
101 |
|
Net charge-offs |
|
$ |
27,551 |
|
|
$ |
25,267 |
|
Annualized net charge-offs as a percentage of average loans and leases outstanding (5) |
|
|
3.84 |
% |
|
|
3.53 |
% |
Nonperforming loans and leases as a percentage of total loans and leases outstanding (5) |
|
|
3.47 |
|
|
|
3.51 |
|
Nonperforming loans, leases and foreclosed properties as a percentage of total loans, leases and
foreclosed properties (5) |
|
|
3.71 |
|
|
|
3.72 |
|
Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs |
|
|
1.18 |
|
|
|
1.06 |
|
|
|
|
|
(1) |
|
Excludes merger and
restructuring charges and goodwill impairment charge. |
|
(2) |
|
Tangible equity ratios and tangible book value per share of common stock are non-GAAP
measures. Other companies may define or calculate these measures differently. For additional
information on these ratios and corresponding reconciliations to GAAP financial measures, see
Supplemental Financial Data beginning on page 107. |
|
(3) |
|
For more information on the impact of the purchased credit-impaired loan portfolio on
asset quality, see Consumer Portfolio Credit Risk Management beginning on page 156 and Commercial
Portfolio Credit Risk Management beginning on page 173. |
|
(4) |
|
Includes the allowance for loan and lease losses and the reserve for unfunded lending
commitments. |
|
(5) |
|
Balances and ratios do not include loans accounted for under the fair value option.
For additional exclusions on nonperforming loans, leases and foreclosed properties, see Nonperforming Consumer Loans and Foreclosed Properties Activity
beginning on page 170 and corresponding Table 34 and Nonperforming Commercial Loans, Leases and
Foreclosed Properties Activity and corresponding Table 42 on page 181. |
|
(6) |
|
Allowance for loan and lease losses includes $23.7 billion and $17.2 billion
allocated to products that are excluded from nonperforming loans, leases, and foreclosed properties
at September 30, 2010 and 2009. |
|
n/m = not meaningful |
106
Supplemental Financial Data
Tables 8 and 9 provide a reconciliation of the supplemental financial data mentioned
below with financial measures defined by GAAP. Other companies may define or calculate
supplemental financial data differently.
We view net interest income and related ratios and analyses (i.e., efficiency ratio and net
interest yield) on a FTE basis. Although these are non-GAAP measures, we believe managing the
business with net interest income on a FTE basis provides a more accurate picture of the interest
margin for comparative purposes. To derive the FTE basis, net interest income is adjusted to
reflect tax-exempt income on an equivalent before-tax basis with a corresponding increase in
income tax expense. For purposes of this calculation, we use the federal statutory tax rate of 35
percent. This measure ensures comparability of net interest income arising from taxable and
tax-exempt sources.
As mentioned above, certain performance measures including the efficiency ratio and net
interest yield utilize net interest income (and thus total revenue) on a FTE basis. The efficiency
ratio measures the costs expended to generate a dollar of revenue, and net interest yield
evaluates how many bps we are earning over the cost of funds. During our annual planning process,
we set efficiency targets for the Corporation and each line of business. We believe the use of
these non-GAAP measures provide additional clarity in assessing our results. Targets vary by year
and by business and are based on a variety of factors including maturity of the business,
competitive environment, market factors, and other items including our risk appetite.
We also evaluate our business based on the following ratios that utilize tangible equity, a
non-GAAP measure. Return on average tangible common shareholders equity measures our earnings
contribution as a percentage of common shareholders equity plus any Common Equivalent Securities
(CES) less goodwill and intangible assets (excluding MSRs), net of related deferred tax
liabilities. ROTE measures our earnings contribution as a percentage of average shareholders
equity reduced by goodwill and intangible assets (excluding MSRs), net of related deferred tax
liabilities. The tangible common equity ratio represents common shareholders equity plus any CES less
goodwill and intangible assets (excluding MSRs), net of related deferred tax liabilities divided
by total assets less goodwill and intangible assets (excluding MSRs), net of related deferred tax
liabilities. The tangible equity ratio represents total shareholders equity less goodwill and
intangible assets (excluding MSRs), net of related deferred tax liabilities divided by total
assets less goodwill and intangible assets (excluding MSRs), net of related deferred tax
liabilities. Tangible book value per common share represents ending common shareholders equity
less goodwill and intangible assets (excluding MSRs), net of related deferred tax liabilities
divided by ending common shares outstanding. These measures are used to evaluate our use of equity
(i.e., capital). In addition, profitability, relationship and investment models all use ROTE as
key measures to support our overall growth goals. Also, earnings and diluted earnings per
common share, the efficiency ratio, return on average assets, return on average common
shareholders equity, return on average tangible common shareholders equity and ROTE have been
calculated excluding the impact of the goodwill impairment charge of $10.4 billion recorded during
the third quarter of 2010. We believe the use of these non-GAAP measures provides additional
clarity in assessing the results of the Corporation.
The aforementioned performance
measures and ratios are presented in Tables 6 and 7 and performance measures and ratios excluding the impact of the
goodwill impairment charge are presented in Tables 8 and 9.
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 8 |
Quarterly Supplemental Financial Data and Reconciliations to GAAP Financial Measures |
|
|
2010 Quarters |
|
2009 Quarters |
(Dollars in millions, except per share information) |
|
Third |
|
Second |
|
First |
|
Fourth |
|
Third |
|
Fully taxable-equivalent basis data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
12,717 |
|
|
$ |
13,197 |
|
|
$ |
14,070 |
|
|
$ |
11,896 |
|
|
$ |
11,753 |
|
Total revenue, net of interest expense |
|
|
26,982 |
|
|
|
29,450 |
|
|
|
32,290 |
|
|
|
25,413 |
|
|
|
26,365 |
|
Net interest yield (1) |
|
|
2.72 |
% |
|
|
2.77 |
% |
|
|
2.93 |
% |
|
|
2.62 |
% |
|
|
2.61 |
% |
Efficiency ratio |
|
|
100.87 |
|
|
|
58.58 |
|
|
|
55.05 |
|
|
|
64.47 |
|
|
|
61.84 |
|
|
Performance ratios, excluding goodwill impairment charge (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings |
|
$ |
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings |
|
|
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency ratio |
|
|
62.33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
0.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average common shareholders equity |
|
|
5.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average tangible common shareholders equity |
|
|
9.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average tangible shareholders equity |
|
|
8.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of net interest income to net interest income on a fully taxable-equivalent basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
12,435 |
|
|
$ |
12,900 |
|
|
$ |
13,749 |
|
|
$ |
11,559 |
|
|
$ |
11,423 |
|
Fully taxable-equivalent adjustment |
|
|
282 |
|
|
|
297 |
|
|
|
321 |
|
|
|
337 |
|
|
|
330 |
|
|
Net
interest income on a fully taxable-equivalent basis |
|
$ |
12,717 |
|
|
$ |
13,197 |
|
|
$ |
14,070 |
|
|
$ |
11,896 |
|
|
$ |
11,753 |
|
|
Reconciliation of total revenue, net of interest expense to total revenue, net of interest
expense on a fully taxable-equivalent basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue, net of interest expense |
|
$ |
26,700 |
|
|
$ |
29,153 |
|
|
$ |
31,969 |
|
|
$ |
25,076 |
|
|
$ |
26,035 |
|
Fully taxable-equivalent adjustment |
|
|
282 |
|
|
|
297 |
|
|
|
321 |
|
|
|
337 |
|
|
|
330 |
|
|
Total revenue, net of interest expense on a fully taxable-equivalent basis |
|
$ |
26,982 |
|
|
$ |
29,450 |
|
|
$ |
32,290 |
|
|
$ |
25,413 |
|
|
$ |
26,365 |
|
|
Reconciliation of total noninterest expense to total noninterest expense, excluding
goodwill impairment charge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
27,216 |
|
|
$ |
17,253 |
|
|
$ |
17,775 |
|
|
$ |
16,385 |
|
|
$ |
16,306 |
|
Goodwill impairment |
|
|
(10,400 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total noninterest expense, excluding goodwill impairment charge |
|
$ |
16,816 |
|
|
$ |
17,253 |
|
|
$ |
17,775 |
|
|
$ |
16,385 |
|
|
$ |
16,306 |
|
|
Reconciliation of income tax expense (benefit) to income tax expense (benefit)
on a fully
taxable-equivalent basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
$ |
1,387 |
|
|
$ |
672 |
|
|
$ |
1,207 |
|
|
$ |
(1,225 |
) |
|
$ |
(975 |
) |
Fully taxable-equivalent adjustment |
|
|
282 |
|
|
|
297 |
|
|
|
321 |
|
|
|
337 |
|
|
|
330 |
|
|
Income
tax expense (benefit) on a fully taxable-equivalent basis |
|
$ |
1,669 |
|
|
$ |
969 |
|
|
$ |
1,528 |
|
|
$ |
(888 |
) |
|
$ |
(645 |
) |
|
Reconciliation of net income (loss) to net income (loss), excluding goodwill
impairment charge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(7,299 |
) |
|
$ |
3,123 |
|
|
$ |
3,182 |
|
|
$ |
(194 |
) |
|
$ |
(1,001 |
) |
Goodwill impairment |
|
|
10,400 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Net income (loss), excluding goodwill impairment charge |
|
$ |
3,101 |
|
|
$ |
3,123 |
|
|
$ |
3,182 |
|
|
$ |
(194 |
) |
|
$ |
(1,001 |
) |
|
Reconciliation of net income (loss) applicable to common shareholders to net income (loss)
applicable to common shareholders, excluding goodwill impairment charge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shareholders |
|
$ |
(7,647 |
) |
|
$ |
2,783 |
|
|
$ |
2,834 |
|
|
$ |
(5,196 |
) |
|
$ |
(2,241 |
) |
Goodwill impairment |
|
|
10,400 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Net income (loss) applicable to common shareholders, excluding goodwill
impairment charge |
|
$ |
2,753 |
|
|
$ |
2,783 |
|
|
$ |
2,834 |
|
|
$ |
(5,196 |
) |
|
$ |
(2,241 |
) |
|
|
|
|
(1) |
|
Calculation includes fees earned on overnight deposits placed with the Federal
Reserve of $107 million, $106 million and $92 million for the third, second and first quarters of
2010, and $130 million and $107 million for the fourth and third quarters of 2009, respectively. |
|
(2) |
|
Performance ratios have been calculated excluding the impact of the goodwill
impairment charge of $10.4 billion recorded during the third quarter of 2010. |
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 8 |
Quarterly Supplemental Financial Data and Reconciliations to GAAP Financial Measures (Continued) |
|
|
2010 Quarters |
|
2009 Quarters |
(Dollars in millions, shares in thousands) |
|
Third |
|
Second |
|
First |
|
Fourth |
|
Third |
|
Reconciliation of average common shareholders equity to average tangible common
shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shareholders equity |
|
$ |
215,911 |
|
|
$ |
215,468 |
|
|
$ |
200,380 |
|
|
$ |
197,123 |
|
|
$ |
197,230 |
|
Common Equivalent Securities |
|
|
- |
|
|
|
- |
|
|
|
11,760 |
|
|
|
4,811 |
|
|
|
- |
|
Goodwill |
|
|
(82,484 |
) |
|
|
(86,099 |
) |
|
|
(86,334 |
) |
|
|
(86,053 |
) |
|
|
(86,170 |
) |
Intangible assets (excluding MSRs) |
|
|
(10,629 |
) |
|
|
(11,216 |
) |
|
|
(11,906 |
) |
|
|
(12,556 |
) |
|
|
(13,223 |
) |
Related deferred tax liabilities |
|
|
3,214 |
|
|
|
3,395 |
|
|
|
3,497 |
|
|
|
3,712 |
|
|
|
3,725 |
|
|
Tangible common shareholders equity |
|
$ |
126,012 |
|
|
$ |
121,548 |
|
|
$ |
117,397 |
|
|
$ |
107,037 |
|
|
$ |
101,562 |
|
|
Reconciliation of average shareholders equity to average tangible shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
$ |
233,978 |
|
|
$ |
233,461 |
|
|
$ |
229,891 |
|
|
$ |
250,599 |
|
|
$ |
255,983 |
|
Goodwill |
|
|
(82,484 |
) |
|
|
(86,099 |
) |
|
|
(86,334 |
) |
|
|
(86,053 |
) |
|
|
(86,170 |
) |
Intangible assets (excluding MSRs) |
|
|
(10,629 |
) |
|
|
(11,216 |
) |
|
|
(11,906 |
) |
|
|
(12,556 |
) |
|
|
(13,223 |
) |
Related deferred tax liabilities |
|
|
3,214 |
|
|
|
3,395 |
|
|
|
3,497 |
|
|
|
3,712 |
|
|
|
3,725 |
|
|
Tangible shareholders equity |
|
$ |
144,079 |
|
|
$ |
139,541 |
|
|
$ |
135,148 |
|
|
$ |
155,702 |
|
|
$ |
160,315 |
|
|
Reconciliation of period end common shareholders equity to period end tangible
common shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shareholders equity |
|
$ |
212,391 |
|
|
$ |
215,181 |
|
|
$ |
211,859 |
|
|
$ |
194,236 |
|
|
$ |
198,843 |
|
Common Equivalent Securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
19,244 |
|
|
|
- |
|
Goodwill |
|
|
(75,602 |
) |
|
|
(85,801 |
) |
|
|
(86,305 |
) |
|
|
(86,314 |
) |
|
|
(86,009 |
) |
Intangible assets (excluding MSRs) |
|
|
(10,402 |
) |
|
|
(10,796 |
) |
|
|
(11,548 |
) |
|
|
(12,026 |
) |
|
|
(12,715 |
) |
Related deferred tax liabilities |
|
|
3,123 |
|
|
|
3,215 |
|
|
|
3,396 |
|
|
|
3,498 |
|
|
|
3,714 |
|
|
Tangible common shareholders equity |
|
$ |
129,510 |
|
|
$ |
121,799 |
|
|
$ |
117,402 |
|
|
$ |
118,638 |
|
|
$ |
103,833 |
|
|
Reconciliation of period end shareholders equity to period end tangible shareholders
equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
$ |
230,495 |
|
|
$ |
233,174 |
|
|
$ |
229,823 |
|
|
$ |
231,444 |
|
|
$ |
257,683 |
|
Goodwill |
|
|
(75,602 |
) |
|
|
(85,801 |
) |
|
|
(86,305 |
) |
|
|
(86,314 |
) |
|
|
(86,009 |
) |
Intangible assets (excluding MSRs) |
|
|
(10,402 |
) |
|
|
(10,796 |
) |
|
|
(11,548 |
) |
|
|
(12,026 |
) |
|
|
(12,715 |
) |
Related deferred tax liabilities |
|
|
3,123 |
|
|
|
3,215 |
|
|
|
3,396 |
|
|
|
3,498 |
|
|
|
3,714 |
|
|
Tangible shareholders equity |
|
$ |
147,614 |
|
|
$ |
139,792 |
|
|
$ |
135,366 |
|
|
$ |
136,602 |
|
|
$ |
162,673 |
|
|
Reconciliation of period end assets to period end tangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
2,339,660 |
|
|
$ |
2,368,384 |
|
|
$ |
2,344,634 |
|
|
$ |
2,230,232 |
|
|
$ |
2,259,891 |
|
Goodwill |
|
|
(75,602 |
) |
|
|
(85,801 |
) |
|
|
(86,305 |
) |
|
|
(86,314 |
) |
|
|
(86,009 |
) |
Intangible assets (excluding MSRs) |
|
|
(10,402 |
) |
|
|
(10,796 |
) |
|
|
(11,548 |
) |
|
|
(12,026 |
) |
|
|
(12,715 |
) |
Related deferred tax liabilities |
|
|
3,123 |
|
|
|
3,215 |
|
|
|
3,396 |
|
|
|
3,498 |
|
|
|
3,714 |
|
|
Tangible assets |
|
$ |
2,256,779 |
|
|
$ |
2,275,002 |
|
|
$ |
2,250,177 |
|
|
$ |
2,135,390 |
|
|
$ |
2,164,881 |
|
|
Reconciliation of ending common shares outstanding to ending tangible common shares
outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding |
|
|
10,033,705 |
|
|
|
10,033,017 |
|
|
|
10,032,001 |
|
|
|
8,650,244 |
|
|
|
8,650,314 |
|
Assumed conversion of common equivalent shares (1) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,286,000 |
|
|
|
- |
|
|
Tangible common shares outstanding |
|
|
10,033,705 |
|
|
|
10,033,017 |
|
|
|
10,032,001 |
|
|
|
9,936,244 |
|
|
|
8,650,314 |
|
|
|
|
|
(1) |
|
On February 24, 2010, the common equivalent shares converted into common shares. |
109
|
|
|
|
|
|
|
|
|
Table 9 |
Year-to-Date Supplemental Financial Data and Reconciliations to GAAP Financial Measures |
|
|
Nine Months Ended September 30 |
(Dollars in millions, except per share information) |
|
2010 |
|
2009 |
|
Fully taxable-equivalent basis data |
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
39,984 |
|
|
$ |
36,514 |
|
Total revenue, net of interest expense |
|
|
88,722 |
|
|
|
95,531 |
|
Net interest yield (1) |
|
|
2.81 |
% |
|
|
2.65 |
% |
Efficiency ratio |
|
|
70.16 |
|
|
|
52.68 |
|
|
Performance ratios, excluding goodwill impairment charge (2) |
|
|
|
|
|
|
|
|
Per common share information |
|
|
|
|
|
|
|
|
Earnings |
|
$ |
0.83 |
|
|
|
|
|
Diluted earnings |
|
|
0.82 |
|
|
|
|
|
Efficiency ratio |
|
|
58.43 |
% |
|
|
|
|
Return on average assets |
|
|
0.51 |
|
|
|
|
|
Return on average common shareholders equity |
|
|
5.23 |
|
|
|
|
|
Return on average tangible common shareholders equity |
|
|
10.36 |
|
|
|
|
|
Return on average tangible shareholders equity |
|
|
9.03 |
|
|
|
|
|
|
Reconciliation of net interest income to net interest income on a fully taxable-equivalent basis |
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
39,084 |
|
|
$ |
35,550 |
|
Fully taxable-equivalent adjustment |
|
|
900 |
|
|
|
964 |
|
|
Net interest income on a fully taxable-equivalent basis |
|
$ |
39,984 |
|
|
$ |
36,514 |
|
|
Reconciliation of total revenue, net of interest expense to total revenue, net of interest expense
on a fully taxable-equivalent basis |
|
|
|
|
|
|
|
|
Total revenue, net of interest expense |
|
$ |
87,822 |
|
|
$ |
94,567 |
|
Fully taxable-equivalent adjustment |
|
|
900 |
|
|
|
964 |
|
|
Total revenue, net of interest expense on a fully taxable-equivalent basis |
|
$ |
88,722 |
|
|
$ |
95,531 |
|
|
Reconciliation of total noninterest expense to total noninterest expense, excluding
goodwill impairment charge |
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
62,244 |
|
|
$ |
50,328 |
|
Goodwill impairment |
|
|
(10,400 |
) |
|
|
- |
|
|
Total noninterest expense, excluding goodwill impairment charge |
|
$ |
51,844 |
|
|
$ |
50,328 |
|
|
Reconciliation of income tax expense (benefit) to income tax expense on a fully taxable-equivalent basis |
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
$ |
3,266 |
|
|
$ |
(691 |
) |
Fully taxable-equivalent adjustment |
|
|
900 |
|
|
|
964 |
|
|
Income tax expense on a fully taxable-equivalent basis |
|
$ |
4,166 |
|
|
$ |
273 |
|
|
Reconciliation of net income (loss) to net income, excluding goodwill impairment charge |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(994 |
) |
|
$ |
6,470 |
|
Goodwill impairment |
|
|
10,400 |
|
|
|
- |
|
|
Net income, excluding goodwill impairment charge |
|
$ |
9,406 |
|
|
$ |
6,470 |
|
|
Reconciliation of net income (loss) applicable to common shareholders to net income applicable
to common shareholders, excluding goodwill impairment charge |
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shareholders |
|
$ |
(2,030 |
) |
|
$ |
2,992 |
|
Goodwill impairment |
|
|
10,400 |
|
|
|
- |
|
|
Net income applicable to common shareholders, excluding goodwill impairment charge |
|
$ |
8,370 |
|
|
$ |
2,992 |
|
|
Reconciliation of average common shareholders equity to average tangible common
shareholders equity |
|
|
|
|
|
|
|
|
Common shareholders equity |
|
$ |
210,643 |
|
|
$ |
177,289 |
|
Common Equivalent Securities |
|
|
3,877 |
|
|
|
- |
|
Goodwill |
|
|
(84,959 |
) |
|
|
(86,028 |
) |
Intangible assets (excluding MSRs) |
|
|
(11,246 |
) |
|
|
(12,107 |
) |
Related deferred tax liabilities |
|
|
3,368 |
|
|
|
3,873 |
|
|
Tangible common shareholders equity |
|
$ |
121,683 |
|
|
$ |
83,027 |
|
|
Reconciliation of average shareholders equity to average tangible shareholders equity |
|
|
|
|
|
|
|
|
Shareholders equity |
|
$ |
232,458 |
|
|
$ |
242,638 |
|
Goodwill |
|
|
(84,959 |
) |
|
|
(86,028 |
) |
Intangible assets (excluding MSRs) |
|
|
(11,246 |
) |
|
|
(12,107 |
) |
Related deferred tax liabilities |
|
|
3,368 |
|
|
|
3,873 |
|
|
Tangible shareholders equity |
|
$ |
139,621 |
|
|
$ |
148,376 |
|
|
|
|
|
(1) |
|
Calculation includes fees earned on overnight deposits placed with the Federal
Reserve of $305 million and $249 million for the nine months ended September 30, 2010 and 2009. |
|
(2) |
|
Performance ratios have been calculated excluding the impact of the goodwill
impairment charge of $10.4 billion recorded during the third quarter of 2010. |
110
Core Net Interest Income
We manage core net interest income which is reported net interest income on a FTE basis
adjusted for the impact of market-based activities. As discussed in the GBAM business segment
section beginning on page 129, we evaluate our market-based results and
strategies on a total market-based revenue approach by combining net interest income and
noninterest income for GBAM. In addition, the 2009 periods are presented on a managed basis which
adjusted for loans that we originated and subsequently sold into credit card securitizations.
Noninterest income, rather than net interest income and provision for credit losses, was recorded
for securitized assets as we are compensated for servicing the securitized assets and recorded
servicing income and gains or losses on securitizations, where appropriate. The 2010 periods are
presented in accordance with new consolidation guidance. An analysis of core net interest income,
core average earning assets and core net interest yield on earning assets, which adjusts for the
impact of these two non-core items from reported net interest income on a FTE basis, is shown
below. We believe the use of this non-GAAP presentation provides additional clarity in assessing
our results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 10 |
Core Net Interest Income |
|
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Net interest income (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported (2) |
|
$ |
12,717 |
|
|
$ |
11,753 |
|
|
$ |
39,984 |
|
|
$ |
36,514 |
|
Impact of market-based net interest income (3) |
|
|
(1,045 |
) |
|
|
(1,394 |
) |
|
|
(3,280 |
) |
|
|
(4,810 |
) |
|
Core net interest income |
|
|
11,672 |
|
|
|
10,359 |
|
|
|
36,704 |
|
|
|
31,704 |
|
Impact of securitizations (4) |
|
|
n/a |
|
|
|
2,567 |
|
|
|
n/a |
|
|
|
8,050 |
|
|
Core net interest income (5) |
|
$ |
11,672 |
|
|
$ |
12,926 |
|
|
$ |
36,704 |
|
|
$ |
39,754 |
|
|
Average earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported (2) |
|
$ |
1,863,819 |
|
|
$ |
1,790,000 |
|
|
$ |
1,902,303 |
|
|
$ |
1,837,706 |
|
Impact of market-based earning assets (5) |
|
|
(494,777 |
) |
|
|
(468,844 |
) |
|
|
(514,249 |
) |
|
|
(478,288 |
) |
|
Core average earning assets |
|
|
1,369,042 |
|
|
|
1,321,156 |
|
|
|
1,388,054 |
|
|
|
1,359,418 |
|
Impact of securitizations (6) |
|
|
n/a |
|
|
|
81,703 |
|
|
|
n/a |
|
|
|
86,438 |
|
|
Core average earning assets (7) |
|
$ |
1,369,042 |
|
|
$ |
1,402,859 |
|
|
$ |
1,388,054 |
|
|
$ |
1,445,856 |
|
|
Net interest yield contribution (1, 7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
|
2.72 |
% |
|
|
2.61 |
% |
|
|
2.81 |
% |
|
|
2.65 |
% |
Impact of market-based activities (3) |
|
|
0.67 |
|
|
|
0.52 |
|
|
|
0.72 |
|
|
|
0.46 |
|
|
Core net interest yield on earning assets |
|
|
3.39 |
|
|
|
3.13 |
|
|
|
3.53 |
|
|
|
3.11 |
|
Impact of securitizations |
|
|
n/a |
|
|
|
0.54 |
|
|
|
n/a |
|
|
|
0.56 |
|
|
Core net interest yield on earning assets (5) |
|
|
3.39 |
% |
|
|
3.67 |
% |
|
|
3.53 |
% |
|
|
3.67 |
% |
|
|
|
|
(1) |
|
FTE basis |
|
(2) |
|
Balance and calculation includes fees earned on overnight deposits placed with the
Federal Reserve of $107 million for both the three months ended September 30, 2010 and 2009 and
$305 million and $249 million for the nine months ended September 30, 2010 and 2009. |
|
(3) |
|
Represents the impact of market-based amounts included in GBAM . |
|
(4) |
|
Represents the impact of securitizations utilizing actual bond costs which is
different from the business segment view which utilizes funds transfer pricing methodologies. |
|
(5) |
|
Periods subsequent to January 1, 2010 are presented in accordance with new
consolidation guidance. Prior periods are presented on a managed basis. |
|
(6) |
|
Represents
average securitized loans less accrued interest receivable and certain securitized bonds retained. |
|
(7) |
|
Calculated on an annualized basis. |
|
n/a = not applicable |
For the three and nine months ended September 30, 2010, core net interest income
decreased $1.3 billion to $11.7 billion and $3.1 billion to $36.7 billion compared to core net
interest income on a managed basis of $12.9 billion and $39.8 billion for the same periods in
2009. The decrease was driven by lower loan levels compared to managed loan levels for the same
periods in 2009, and lower yields for the discretionary and credit card portfolios. These impacts
were partially offset by lower rates on deposits.
For the three and nine months ended September 30, 2010, core average earning assets decreased
$33.8 billion to $1.4 trillion and $57.8 billion to $1.4 trillion compared to core average earning
assets on a managed basis of $1.4 trillion for both of the same periods in 2009. The decrease was
primarily due to lower commercial loan levels and lower consumer loan levels compared to managed
consumer loan levels. The impact was partially offset by increased investment securities levels
for the same periods in 2009.
For the three and nine months ended September 30, 2010, core net interest yield decreased 28
bps to 3.39 percent and 14 bps to 3.53 percent compared to core net interest yield on a managed
basis of 3.67 percent for both of the same periods in 2009 due to the factors noted above.
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 11 |
Quarterly Average Balances and Interest Rates FTE Basis |
|
|
Third Quarter 2010 |
|
Second Quarter 2010 |
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
Average |
|
Income/ |
|
Yield/ |
|
Average |
|
Income/ |
|
Yield/ |
(Dollars in millions) |
|
Balance |
|
Expense |
|
Rate |
|
Balance |
|
Expense |
|
Rate |
|
Earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits placed and other short-term investments (1) |
|
$ |
23,233 |
|
|
$ |
86 |
|
|
|
1.45 |
% |
|
$ |
30,741 |
|
|
$ |
70 |
|
|
|
0.93 |
% |
Federal funds sold and securities borrowed or purchased under agreements to resell |
|
|
254,820 |
|
|
|
441 |
|
|
|
0.69 |
|
|
|
263,564 |
|
|
|
457 |
|
|
|
0.70 |
|
Trading account assets |
|
|
210,529 |
|
|
|
1,692 |
|
|
|
3.20 |
|
|
|
213,927 |
|
|
|
1,853 |
|
|
|
3.47 |
|
Debt securities (2) |
|
|
328,097 |
|
|
|
2,646 |
|
|
|
3.22 |
|
|
|
314,299 |
|
|
|
2,966 |
|
|
|
3.78 |
|
Loans and leases (3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage (4) |
|
|
237,292 |
|
|
|
2,797 |
|
|
|
4.71 |
|
|
|
247,715 |
|
|
|
2,982 |
|
|
|
4.82 |
|
Home equity |
|
|
143,083 |
|
|
|
1,457 |
|
|
|
4.05 |
|
|
|
148,219 |
|
|
|
1,537 |
|
|
|
4.15 |
|
Discontinued real estate |
|
|
13,632 |
|
|
|
122 |
|
|
|
3.56 |
|
|
|
13,972 |
|
|
|
134 |
|
|
|
3.84 |
|
Credit card domestic |
|
|
115,251 |
|
|
|
3,113 |
|
|
|
10.72 |
|
|
|
118,738 |
|
|
|
3,121 |
|
|
|
10.54 |
|
Credit card foreign |
|
|
27,047 |
|
|
|
875 |
|
|
|
12.84 |
|
|
|
27,706 |
|
|
|
854 |
|
|
|
12.37 |
|
Direct/Indirect consumer (5) |
|
|
95,692 |
|
|
|
1,130 |
|
|
|
4.68 |
|
|
|
98,549 |
|
|
|
1,233 |
|
|
|
5.02 |
|
Other consumer (6) |
|
|
2,955 |
|
|
|
47 |
|
|
|
6.35 |
|
|
|
2,958 |
|
|
|
46 |
|
|
|
6.32 |
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
634,952 |
|
|
|
9,541 |
|
|
|
5.98 |
|
|
|
657,857 |
|
|
|
9,907 |
|
|
|
6.03 |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial domestic |
|
|
192,306 |
|
|
|
2,040 |
|
|
|
4.21 |
|
|
|
195,144 |
|
|
|
2,005 |
|
|
|
4.12 |
|
Commercial real estate (7) |
|
|
55,660 |
|
|
|
452 |
|
|
|
3.22 |
|
|
|
64,218 |
|
|
|
541 |
|
|
|
3.38 |
|
Commercial lease financing |
|
|
21,402 |
|
|
|
255 |
|
|
|
4.78 |
|
|
|
21,271 |
|
|
|
261 |
|
|
|
4.90 |
|
Commercial foreign |
|
|
30,540 |
|
|
|
282 |
|
|
|
3.67 |
|
|
|
28,564 |
|
|
|
256 |
|
|
|
3.59 |
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
299,908 |
|
|
|
3,029 |
|
|
|
4.01 |
|
|
|
309,197 |
|
|
|
3,063 |
|
|
|
3.97 |
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
|
934,860 |
|
|
|
12,570 |
|
|
|
5.35 |
|
|
|
967,054 |
|
|
|
12,970 |
|
|
|
5.38 |
|
|
|
|
|
|
|
|
|
|
|
|
Other earning assets |
|
|
112,280 |
|
|
|
949 |
|
|
|
3.36 |
|
|
|
121,205 |
|
|
|
994 |
|
|
|
3.29 |
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets (8) |
|
|
1,863,819 |
|
|
|
18,384 |
|
|
|
3.93 |
|
|
|
1,910,790 |
|
|
|
19,310 |
|
|
|
4.05 |
|
|
|
|
|
Cash and cash equivalents (1) |
|
|
155,784 |
|
|
|
107 |
|
|
|
|
|
|
|
209,686 |
|
|
|
106 |
|
|
|
|
|
Other assets, less allowance for loan and lease losses |
|
|
359,794 |
|
|
|
|
|
|
|
|
|
|
|
373,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,379,397 |
|
|
|
|
|
|
|
|
|
|
$ |
2,494,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Fees earned on overnight deposits placed with the Federal Reserve, which were
included in the time deposits placed and other short-term investments line in prior periods, have
been reclassified to cash and cash equivalents, consistent with the balance sheet presentation of
these deposits. Net interest income and net interest yield in the table are calculated excluding
these fees. |
|
(2) |
|
Yields on AFS debt securities are calculated based on fair value rather than the
cost basis. The use of fair value does not have a material impact on net interest yield. |
|
(3) |
|
Nonperforming loans are included in the respective average loan balances. Income on
these nonperforming loans is recognized on a cash basis. Purchased credit-impaired loans were
written down to fair value upon acquisition and accrete interest income over the remaining life of
the loan. |
|
(4) |
|
Includes foreign residential mortgage loans of $502 million, $506 million and $538
million in the third, second and first quarters of 2010, and $550 million and $662 million in the
fourth and third quarters of 2009, respectively. |
|
(5) |
|
Includes foreign consumer loans of $7.7 billion, $7.7 billion and $8.1 billion in
the third, second and first quarters of 2010, and $8.6 billion and $8.4 billion in the fourth and
third quarters of 2009, respectively. |
|
(6) |
|
Includes consumer finance loans of $2.0 billion, $2.1 billion and $2.2 billion in
the third, second and first quarters of 2010, and $2.3 billion and $2.4 billion in the fourth and
third quarters of 2009, respectively; other foreign consumer loans of $788 million, $679 million
and $664 million in the third, second and first quarters of 2010, and $689 million and $700 million
in the fourth and third quarters of 2009, respectively; and consumer overdrafts of $123 million,
$155 million and $132 million in the third, second and first quarters of 2010, and $192 million and
$243 million in the fourth and third quarters of 2009, respectively. |
|
(7) |
|
Includes domestic commercial real estate loans of $53.1 billion, $61.6 billion and
$65.6 billion in the third, second and first quarters of 2010, and $68.2 billion and $70.7 billion
in the fourth and third quarters of 2009, respectively; and foreign commercial real estate loans of
$2.5 billion, $2.6 billion and $3.0 billion in the third, second and first quarters of 2010, and
$3.1 billion and $3.6 billion in the fourth and third quarters of 2009, respectively. |
|
(8) |
|
Interest income includes the impact of interest rate risk management contracts,
which decreased interest income on the underlying assets by $643 million, $479 million and $272 million in the
third, second and first quarters of 2010, and $248 million and $136 million in the fourth and third
quarters of 2009, respectively. Interest expense includes the impact of interest rate risk
management contracts, which decreased interest expense on the underlying liabilities by $1.0 billion, $829 million
and $970 million in the third, second and first quarters of 2010, and $1.1 billion and $873 million
in the fourth and third quarters of 2009, respectively. For further information on interest rate
contracts, see Interest Rate Risk Management for Nontrading
Activities beginning on page 195. |
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Average Balances and Interest Rates FTE Basis (continued) |
|
|
First Quarter 2010 |
|
Fourth Quarter 2009 |
|
Third Quarter 2009 |
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
Average |
|
Income/ |
|
Yield/ |
|
Average |
|
Income/ |
|
Yield/ |
|
Average |
|
Income/ |
|
Yield/ |
(Dollars in millions) |
|
Balance |
|
Expense |
|
Rate |
|
Balance |
|
Expense |
|
Rate |
|
Balance |
|
Expense |
|
Rate |
|
Earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits placed and other short-term investments (1) |
|
$ |
27,600 |
|
|
$ |
61 |
|
|
|
0.89 |
|
% |
$ |
28,566 |
|
|
$ |
90 |
|
|
|
1.25 |
|
% |
$ |
29,485 |
|
|
$ |
26 |
|
|
|
0.35 |
% |
Federal
funds sold and securities borrowed or purchased
under agreements to resell |
|
|
266,070 |
|
|
|
448 |
|
|
|
0.68 |
|
|
|
244,914 |
|
|
|
327 |
|
|
|
0.53 |
|
|
|
223,039 |
|
|
|
722 |
|
|
|
1.28 |
|
Trading account assets |
|
|
214,542 |
|
|
|
1,795 |
|
|
|
3.37 |
|
|
|
218,787 |
|
|
|
1,800 |
|
|
|
3.28 |
|
|
|
212,488 |
|
|
|
1,909 |
|
|
|
3.58 |
|
Debt securities (2) |
|
|
311,136 |
|
|
|
3,173 |
|
|
|
4.09 |
|
|
|
279,231 |
|
|
|
2,921 |
|
|
|
4.18 |
|
|
|
263,712 |
|
|
|
3,048 |
|
|
|
4.62 |
|
Loans and leases (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage (4) |
|
|
243,833 |
|
|
|
3,100 |
|
|
|
5.09 |
|
|
|
236,883 |
|
|
|
3,108 |
|
|
|
5.24 |
|
|
|
241,924 |
|
|
|
3,258 |
|
|
|
5.38 |
|
Home equity |
|
|
152,536 |
|
|
|
1,586 |
|
|
|
4.20 |
|
|
|
150,704 |
|
|
|
1,613 |
|
|
|
4.26 |
|
|
|
153,269 |
|
|
|
1,614 |
|
|
|
4.19 |
|
Discontinued real estate |
|
|
14,433 |
|
|
|
153 |
|
|
|
4.24 |
|
|
|
15,152 |
|
|
|
174 |
|
|
|
4.58 |
|
|
|
16,570 |
|
|
|
219 |
|
|
|
5.30 |
|
Credit card domestic |
|
|
125,353 |
|
|
|
3,370 |
|
|
|
10.90 |
|
|
|
49,213 |
|
|
|
1,336 |
|
|
|
10.77 |
|
|
|
49,751 |
|
|
|
1,349 |
|
|
|
10.76 |
|
Credit card foreign |
|
|
29,872 |
|
|
|
906 |
|
|
|
12.30 |
|
|
|
21,680 |
|
|
|
605 |
|
|
|
11.08 |
|
|
|
21,189 |
|
|
|
562 |
|
|
|
10.52 |
|
Direct/Indirect consumer (5) |
|
|
100,920 |
|
|
|
1,302 |
|
|
|
5.23 |
|
|
|
98,938 |
|
|
|
1,361 |
|
|
|
5.46 |
|
|
|
100,012 |
|
|
|
1,439 |
|
|
|
5.71 |
|
Other consumer (6) |
|
|
3,002 |
|
|
|
48 |
|
|
|
6.35 |
|
|
|
3,177 |
|
|
|
50 |
|
|
|
6.33 |
|
|
|
3,331 |
|
|
|
60 |
|
|
|
7.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
669,949 |
|
|
|
10,465 |
|
|
|
6.30 |
|
|
|
575,747 |
|
|
|
8,247 |
|
|
|
5.70 |
|
|
|
586,046 |
|
|
|
8,501 |
|
|
|
5.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial domestic |
|
|
202,662 |
|
|
|
1,970 |
|
|
|
3.94 |
|
|
|
207,050 |
|
|
|
2,090 |
|
|
|
4.01 |
|
|
|
216,332 |
|
|
|
2,132 |
|
|
|
3.91 |
|
Commercial real estate (7) |
|
|
68,526 |
|
|
|
575 |
|
|
|
3.40 |
|
|
|
71,352 |
|
|
|
595 |
|
|
|
3.31 |
|
|
|
74,276 |
|
|
|
600 |
|
|
|
3.20 |
|
Commercial lease financing |
|
|
21,675 |
|
|
|
304 |
|
|
|
5.60 |
|
|
|
21,769 |
|
|
|
273 |
|
|
|
5.04 |
|
|
|
22,068 |
|
|
|
178 |
|
|
|
3.22 |
|
Commercial foreign |
|
|
28,803 |
|
|
|
264 |
|
|
|
3.72 |
|
|
|
29,995 |
|
|
|
287 |
|
|
|
3.78 |
|
|
|
31,533 |
|
|
|
297 |
|
|
|
3.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
321,666 |
|
|
|
3,113 |
|
|
|
3.92 |
|
|
|
330,166 |
|
|
|
3,245 |
|
|
|
3.90 |
|
|
|
344,209 |
|
|
|
3,207 |
|
|
|
3.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
|
991,615 |
|
|
|
13,578 |
|
|
|
5.53 |
|
|
|
905,913 |
|
|
|
11,492 |
|
|
|
5.05 |
|
|
|
930,255 |
|
|
|
11,708 |
|
|
|
5.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other earning assets |
|
|
122,097 |
|
|
|
1,053 |
|
|
|
3.50 |
|
|
|
130,487 |
|
|
|
1,222 |
|
|
|
3.72 |
|
|
|
131,021 |
|
|
|
1,333 |
|
|
|
4.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets (8) |
|
|
1,933,060 |
|
|
|
20,108 |
|
|
|
4.19 |
|
|
|
1,807,898 |
|
|
|
17,852 |
|
|
|
3.93 |
|
|
|
1,790,000 |
|
|
|
18,746 |
|
|
|
4.17 |
|
|
|
|
|
|
|
|
Cash and cash equivalents (1) |
|
|
196,911 |
|
|
|
92 |
|
|
|
|
|
|
|
230,618 |
|
|
|
130 |
|
|
|
|
|
|
|
196,116 |
|
|
|
107 |
|
|
|
|
|
Other assets, less allowance for loan and lease losses |
|
|
386,619 |
|
|
|
|
|
|
|
|
|
|
|
392,508 |
|
|
|
|
|
|
|
|
|
|
|
412,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,516,590 |
|
|
|
|
|
|
|
|
|
|
$ |
2,431,024 |
|
|
|
|
|
|
|
|
|
|
$ |
2,398,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
For footnotes see page 112. |
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Average Balances and Interest Rates FTE Basis (continued) |
|
|
Third Quarter 2010 |
|
Second Quarter 2010 |
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
Average |
|
Income/ |
|
Yield/ |
|
Average |
|
Income/ |
|
Yield/ |
(Dollars in millions) |
|
Balance |
|
Expense |
|
Rate |
|
Balance |
|
Expense |
|
Rate |
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic interest-bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings |
|
$ |
37,008 |
|
|
$ |
36 |
|
|
|
0.39 |
% |
|
$ |
37,290 |
|
|
$ |
43 |
|
|
|
0.46 |
% |
NOW and money market deposit accounts |
|
|
442,906 |
|
|
|
359 |
|
|
|
0.32 |
|
|
|
442,262 |
|
|
|
372 |
|
|
|
0.34 |
|
Consumer CDs and IRAs |
|
|
132,687 |
|
|
|
377 |
|
|
|
1.13 |
|
|
|
147,425 |
|
|
|
441 |
|
|
|
1.20 |
|
Negotiable CDs, public funds and other time deposits |
|
|
17,326 |
|
|
|
57 |
|
|
|
1.30 |
|
|
|
17,355 |
|
|
|
59 |
|
|
|
1.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total domestic interest-bearing deposits |
|
|
629,927 |
|
|
|
829 |
|
|
|
0.52 |
|
|
|
644,332 |
|
|
|
915 |
|
|
|
0.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign interest-bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks located in foreign countries |
|
|
18,557 |
|
|
|
38 |
|
|
|
0.81 |
|
|
|
19,994 |
|
|
|
34 |
|
|
|
0.70 |
|
Governments and official institutions |
|
|
2,992 |
|
|
|
3 |
|
|
|
0.28 |
|
|
|
4,990 |
|
|
|
3 |
|
|
|
0.26 |
|
Time, savings and other |
|
|
52,310 |
|
|
|
80 |
|
|
|
0.61 |
|
|
|
51,176 |
|
|
|
79 |
|
|
|
0.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total foreign interest-bearing deposits |
|
|
73,859 |
|
|
|
121 |
|
|
|
0.65 |
|
|
|
76,160 |
|
|
|
116 |
|
|
|
0.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
703,786 |
|
|
|
950 |
|
|
|
0.54 |
|
|
|
720,492 |
|
|
|
1,031 |
|
|
|
0.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased, securities loaned or sold under
agreements to repurchase and other short-term borrowings |
|
|
391,148 |
|
|
|
848 |
|
|
|
0.86 |
|
|
|
454,051 |
|
|
|
891 |
|
|
|
0.79 |
|
Trading account liabilities |
|
|
95,265 |
|
|
|
635 |
|
|
|
2.65 |
|
|
|
100,021 |
|
|
|
715 |
|
|
|
2.87 |
|
Long-term debt |
|
|
485,588 |
|
|
|
3,341 |
|
|
|
2.74 |
|
|
|
497,469 |
|
|
|
3,582 |
|
|
|
2.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities (8) |
|
|
1,675,787 |
|
|
|
5,774 |
|
|
|
1.37 |
|
|
|
1,772,033 |
|
|
|
6,219 |
|
|
|
1.41 |
|
|
|
|
|
|
|
|
Noninterest-bearing sources: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
|
270,060 |
|
|
|
|
|
|
|
|
|
|
|
271,123 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
199,572 |
|
|
|
|
|
|
|
|
|
|
|
217,815 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
233,978 |
|
|
|
|
|
|
|
|
|
|
|
233,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
2,379,397 |
|
|
|
|
|
|
|
|
|
|
$ |
2,494,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread |
|
|
|
|
|
|
|
|
|
|
2.56 |
% |
|
|
|
|
|
|
|
|
|
|
2.64 |
% |
Impact of noninterest-bearing sources |
|
|
|
|
|
|
|
|
|
|
0.13 |
|
|
|
|
|
|
|
|
|
|
|
0.10 |
|
|
|
|
|
|
|
|
Net interest income/yield on earning assets (1) |
|
|
|
|
|
$ |
12,610 |
|
|
|
2.69 |
% |
|
|
|
|
|
$ |
13,091 |
|
|
|
2.74 |
% |
|
For footnotes see page 112.
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Average Balances and Interest Rates |
FTE Basis (continued) |
|
|
|
First Quarter 2010 |
|
|
Fourth Quarter 2009 |
|
|
Third Quarter 2009 |
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
Average |
|
|
Income/ |
|
|
Yield/ |
|
|
Average |
|
|
Income/ |
|
|
Yield/ |
|
|
Average |
|
|
Income/ |
|
|
Yield/ |
|
(Dollars in millions) |
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic interest-bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings |
|
$ |
35,126 |
|
|
$ |
43 |
|
|
|
0.50 |
% |
|
$ |
33,749 |
|
|
$ |
54 |
|
|
|
0.63 |
% |
|
$ |
34,170 |
|
|
$ |
49 |
|
|
|
0.57 |
% |
NOW and money market deposit accounts |
|
|
416,110 |
|
|
|
341 |
|
|
|
0.33 |
|
|
|
392,212 |
|
|
|
388 |
|
|
|
0.39 |
|
|
|
356,873 |
|
|
|
353 |
|
|
|
0.39 |
|
Consumer CDs and IRAs |
|
|
166,189 |
|
|
|
567 |
|
|
|
1.38 |
|
|
|
192,779 |
|
|
|
835 |
|
|
|
1.72 |
|
|
|
214,284 |
|
|
|
1,100 |
|
|
|
2.04 |
|
Negotiable CDs, public funds and other time deposits |
|
|
19,763 |
|
|
|
63 |
|
|
|
1.31 |
|
|
|
31,758 |
|
|
|
82 |
|
|
|
1.04 |
|
|
|
48,905 |
|
|
|
118 |
|
|
|
0.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total domestic interest-bearing deposits |
|
|
637,188 |
|
|
|
1,014 |
|
|
|
0.65 |
|
|
|
650,498 |
|
|
|
1,359 |
|
|
|
0.83 |
|
|
|
654,232 |
|
|
|
1,620 |
|
|
|
0.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign interest-bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks located in foreign countries |
|
|
18,338 |
|
|
|
32 |
|
|
|
0.70 |
|
|
|
16,477 |
|
|
|
30 |
|
|
|
0.73 |
|
|
|
15,941 |
|
|
|
29 |
|
|
|
0.73 |
|
Governments and official institutions |
|
|
6,493 |
|
|
|
3 |
|
|
|
0.21 |
|
|
|
6,650 |
|
|
|
4 |
|
|
|
0.23 |
|
|
|
6,488 |
|
|
|
4 |
|
|
|
0.23 |
|
Time, savings and other |
|
|
54,104 |
|
|
|
73 |
|
|
|
0.55 |
|
|
|
54,469 |
|
|
|
79 |
|
|
|
0.57 |
|
|
|
53,013 |
|
|
|
57 |
|
|
|
0.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total foreign interest-bearing deposits |
|
|
78,935 |
|
|
|
108 |
|
|
|
0.55 |
|
|
|
77,596 |
|
|
|
113 |
|
|
|
0.58 |
|
|
|
75,442 |
|
|
|
90 |
|
|
|
0.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
716,123 |
|
|
|
1,122 |
|
|
|
0.64 |
|
|
|
728,094 |
|
|
|
1,472 |
|
|
|
0.80 |
|
|
|
729,674 |
|
|
|
1,710 |
|
|
|
0.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds purchased, securities loaned or sold under agreements to
repurchase and other short-term borrowings |
|
|
508,332 |
|
|
|
818 |
|
|
|
0.65 |
|
|
|
450,538 |
|
|
|
658 |
|
|
|
0.58 |
|
|
|
411,063 |
|
|
|
1,237 |
|
|
|
1.19 |
|
Trading account liabilities |
|
|
90,134 |
|
|
|
660 |
|
|
|
2.97 |
|
|
|
83,118 |
|
|
|
591 |
|
|
|
2.82 |
|
|
|
73,290 |
|
|
|
455 |
|
|
|
2.46 |
|
Long-term debt |
|
|
513,634 |
|
|
|
3,530 |
|
|
|
2.77 |
|
|
|
445,440 |
|
|
|
3,365 |
|
|
|
3.01 |
|
|
|
449,974 |
|
|
|
3,698 |
|
|
|
3.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
(8) |
|
|
1,828,223 |
|
|
|
6,130 |
|
|
|
1.35 |
|
|
|
1,707,190 |
|
|
|
6,086 |
|
|
|
1.42 |
|
|
|
1,664,001 |
|
|
|
7,100 |
|
|
|
1.70 |
|
|
|
|
|
|
Noninterest-bearing sources: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
|
264,892 |
|
|
|
|
|
|
|
|
|
|
|
267,066 |
|
|
|
|
|
|
|
|
|
|
|
259,621 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
193,584 |
|
|
|
|
|
|
|
|
|
|
|
206,169 |
|
|
|
|
|
|
|
|
|
|
|
218,596 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
229,891 |
|
|
|
|
|
|
|
|
|
|
|
250,599 |
|
|
|
|
|
|
|
|
|
|
|
255,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
2,516,590 |
|
|
|
|
|
|
|
|
|
|
$ |
2,431,024 |
|
|
|
|
|
|
|
|
|
|
$ |
2,398,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread |
|
|
|
|
|
|
|
|
|
|
2.84 |
% |
|
|
|
|
|
|
|
|
|
|
2.51 |
% |
|
|
|
|
|
|
|
|
|
|
2.47 |
% |
Impact of noninterest-bearing sources |
|
|
|
|
|
|
|
|
|
|
0.08 |
|
|
|
|
|
|
|
|
|
|
|
0.08 |
|
|
|
|
|
|
|
|
|
|
|
0.12 |
|
|
|
|
|
|
Net interest income/yield on earning assets
(1) |
|
|
|
|
|
$ |
13,978 |
|
|
|
2.92 |
% |
|
|
|
|
|
$ |
11,766 |
|
|
|
2.59 |
% |
|
|
|
|
|
$ |
11,646 |
|
|
|
2.59 |
% |
|
For footnotes see page 112.
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 12 |
Year-to-Date Average Balances and Interest Rates -Fully Taxable-equivalent Basis |
|
|
Nine Months Ended September 30 |
|
|
2010 |
|
2009 |
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
Average |
|
Income/ |
|
Yield/ |
|
Average |
|
Income/ |
|
Yield/ |
(Dollars in millions) |
|
Balance |
|
Expense |
|
Rate |
|
Balance |
|
Expense |
|
Rate |
|
Earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits placed and other short-term investments (1) |
|
$ |
27,175 |
|
|
$ |
217 |
|
|
|
1.06 |
% |
|
$ |
27,094 |
|
|
$ |
244 |
|
|
|
1.20 |
% |
Federal funds sold and securities borrowed or purchased under
agreements to resell |
|
|
261,444 |
|
|
|
1,346 |
|
|
|
0.69 |
|
|
|
232,680 |
|
|
|
2,567 |
|
|
|
1.47 |
|
Trading account assets |
|
|
212,985 |
|
|
|
5,340 |
|
|
|
3.35 |
|
|
|
216,462 |
|
|
|
6,436 |
|
|
|
3.97 |
|
Debt securities (2) |
|
|
317,906 |
|
|
|
8,785 |
|
|
|
3.69 |
|
|
|
268,291 |
|
|
|
10,303 |
|
|
|
5.12 |
|
Loans and leases (3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage (4) |
|
|
242,922 |
|
|
|
8,879 |
|
|
|
4.87 |
|
|
|
253,531 |
|
|
|
10,427 |
|
|
|
5.49 |
|
Home equity |
|
|
147,911 |
|
|
|
4,580 |
|
|
|
4.14 |
|
|
|
156,128 |
|
|
|
5,123 |
|
|
|
4.38 |
|
Discontinued real estate |
|
|
14,009 |
|
|
|
409 |
|
|
|
3.89 |
|
|
|
18,078 |
|
|
|
908 |
|
|
|
6.70 |
|
Credit card domestic |
|
|
119,744 |
|
|
|
9,604 |
|
|
|
10.72 |
|
|
|
53,444 |
|
|
|
4,330 |
|
|
|
10.83 |
|
Credit card foreign |
|
|
28,198 |
|
|
|
2,635 |
|
|
|
12.50 |
|
|
|
18,973 |
|
|
|
1,517 |
|
|
|
10.69 |
|
Direct/Indirect consumer (5) |
|
|
98,368 |
|
|
|
3,665 |
|
|
|
4.98 |
|
|
|
100,349 |
|
|
|
4,655 |
|
|
|
6.20 |
|
Other consumer (6) |
|
|
2,973 |
|
|
|
141 |
|
|
|
6.34 |
|
|
|
3,346 |
|
|
|
187 |
|
|
|
7.43 |
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
654,125 |
|
|
|
29,913 |
|
|
|
6.11 |
|
|
|
603,849 |
|
|
|
27,147 |
|
|
|
6.00 |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial domestic |
|
|
196,665 |
|
|
|
6,015 |
|
|
|
4.09 |
|
|
|
229,462 |
|
|
|
6,793 |
|
|
|
3.96 |
|
Commercial real estate (7) |
|
|
62,755 |
|
|
|
1,568 |
|
|
|
3.34 |
|
|
|
74,021 |
|
|
|
1,777 |
|
|
|
3.21 |
|
Commercial lease financing |
|
|
21,448 |
|
|
|
820 |
|
|
|
5.10 |
|
|
|
22,050 |
|
|
|
717 |
|
|
|
4.33 |
|
Commercial foreign |
|
|
29,309 |
|
|
|
802 |
|
|
|
3.66 |
|
|
|
33,878 |
|
|
|
1,119 |
|
|
|
4.42 |
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
310,177 |
|
|
|
9,205 |
|
|
|
3.97 |
|
|
|
359,411 |
|
|
|
10,406 |
|
|
|
3.87 |
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
|
964,302 |
|
|
|
39,118 |
|
|
|
5.42 |
|
|
|
963,260 |
|
|
|
37,553 |
|
|
|
5.21 |
|
|
|
|
|
|
|
|
|
|
|
|
Other earning assets |
|
|
118,491 |
|
|
|
2,996 |
|
|
|
3.38 |
|
|
|
129,919 |
|
|
|
3,883 |
|
|
|
4.00 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
earning assets (8) |
|
|
1,902,303 |
|
|
|
57,802 |
|
|
|
4.06 |
|
|
|
1,837,706 |
|
|
|
60,986 |
|
|
|
4.43 |
|
|
|
|
|
Cash and cash equivalents (1) |
|
|
187,310 |
|
|
|
305 |
|
|
|
|
|
|
|
184,650 |
|
|
|
249 |
|
|
|
|
|
Other assets, less allowance for loan and lease losses |
|
|
373,357 |
|
|
|
|
|
|
|
|
|
|
|
424,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,462,970 |
|
|
|
|
|
|
|
|
|
|
$ |
2,447,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Fees earned on overnight deposits placed with the Federal Reserve, which were included
in the time deposits placed and other short-term investments line in prior periods, have been
reclassified in this table to cash and cash equivalents, consistent with the balance sheet
presentation of these deposits. Net interest income and net interest yield are calculated excluding
these fees. |
|
(2) |
|
Yields on AFS debt securities are calculated based on fair value rather than the cost
basis. The use of fair value does not have a material impact on net interest yield. |
|
(3) |
|
Nonperforming loans are included in the respective average loan balances. Income on
these nonperforming loans is recognized on a cash basis. Purchased credit-impaired loans were
written down to fair value upon acquisition and accrete interest income over the remaining life of
the loan. |
|
(4) |
|
Includes foreign residential mortgages of $515 million and $647 million for the nine
months ended September 30, 2010 and 2009. |
|
(5) |
|
Includes foreign consumer loans of $7.9
billion and $7.8 billion for the nine months ended September 30, 2010 and 2009. |
|
(6) |
|
Includes consumer finance loans of $2.1 billion and $2.5 billion, and other foreign
consumer loans of $711 million and $646 million, and consumer overdrafts of $137 million and $226
million for the nine months ended September 30, 2010 and 2009. |
|
(7) |
|
Includes domestic commercial real estate loans of $60.1 billion and $71.5 billion, and
foreign commercial real estate loans of $2.7 billion and $2.5 billion for the nine months ended
September 30, 2010 and 2009. |
|
(8) |
|
Interest income includes the impact of interest rate risk management contracts, which
decreased interest income on the underlying assets $1.4 billion and $208 million for the nine
months ended September 30, 2010 and 2009. Interest expense includes the impact of interest rate
risk management contracts, which decreased interest expense on the underlying liabilities $2.8
billion and $1.9 billion for the nine months ended September 30, 2010 and 2009.
For further information on interest rate contracts, see Interest Rate Risk Management for Nontrading Activities beginning on page 195.
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-Date Average Balances and Interest Rates - Fully Taxable-equivalent Basis (continued) |
|
|
Nine Months Ended September 30 |
|
|
2010 |
|
2009 |
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
Average |
|
Income/ |
|
Yield/ |
|
Average |
|
Income/ |
|
Yield/ |
(Dollars in millions) |
|
Balance |
|
Expense |
|
Rate |
|
Balance |
|
Expense |
|
Rate |
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic interest-bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings |
|
$ |
36,482 |
|
|
$ |
122 |
|
|
|
0.45 |
% |
|
$ |
33,645 |
|
|
$ |
161 |
|
|
|
0.64 |
% |
NOW and money market deposit accounts |
|
|
433,858 |
|
|
|
1,072 |
|
|
|
0.33 |
|
|
|
347,423 |
|
|
|
1,169 |
|
|
|
0.45 |
|
Consumer CDs and IRAs |
|
|
148,644 |
|
|
|
1,385 |
|
|
|
1.25 |
|
|
|
226,555 |
|
|
|
4,219 |
|
|
|
2.49 |
|
Negotiable CDs, public funds and other time deposits |
|
|
18,138 |
|
|
|
179 |
|
|
|
1.32 |
|
|
|
39,829 |
|
|
|
391 |
|
|
|
1.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total domestic interest-bearing deposits |
|
|
637,122 |
|
|
|
2,758 |
|
|
|
0.58 |
|
|
|
647,452 |
|
|
|
5,940 |
|
|
|
1.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign interest-bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks located in foreign countries |
|
|
18,964 |
|
|
|
104 |
|
|
|
0.73 |
|
|
|
20,381 |
|
|
|
114 |
|
|
|
0.75 |
|
Governments and official institutions |
|
|
4,812 |
|
|
|
9 |
|
|
|
0.24 |
|
|
|
7,893 |
|
|
|
14 |
|
|
|
0.23 |
|
Time, savings and other |
|
|
52,524 |
|
|
|
232 |
|
|
|
0.59 |
|
|
|
55,214 |
|
|
|
267 |
|
|
|
0.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total foreign interest-bearing deposits |
|
|
76,300 |
|
|
|
345 |
|
|
|
0.60 |
|
|
|
83,488 |
|
|
|
395 |
|
|
|
0.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
713,422 |
|
|
|
3,103 |
|
|
|
0.58 |
|
|
|
730,940 |
|
|
|
6,335 |
|
|
|
1.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and securities loaned or sold under
agreements to repurchase and other short-term borrowings |
|
|
450,748 |
|
|
|
2,557 |
|
|
|
0.76 |
|
|
|
501,485 |
|
|
|
4,854 |
|
|
|
1.29 |
|
Trading account liabilities |
|
|
95,159 |
|
|
|
2,010 |
|
|
|
2.82 |
|
|
|
68,530 |
|
|
|
1,484 |
|
|
|
2.90 |
|
Long-term debt |
|
|
498,794 |
|
|
|
10,453 |
|
|
|
2.80 |
|
|
|
447,038 |
|
|
|
12,048 |
|
|
|
3.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities (8) |
|
|
1,758,123 |
|
|
|
18,123 |
|
|
|
1.38 |
|
|
|
1,747,993 |
|
|
|
24,721 |
|
|
|
1.89 |
|
|
|
|
|
|
|
|
Noninterest-bearing sources: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
|
268,710 |
|
|
|
|
|
|
|
|
|
|
|
245,242 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
203,679 |
|
|
|
|
|
|
|
|
|
|
|
211,254 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
232,458 |
|
|
|
|
|
|
|
|
|
|
|
242,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
2,462,970 |
|
|
|
|
|
|
|
|
|
|
$ |
2,447,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread |
|
|
|
|
|
|
|
|
|
|
2.68 |
% |
|
|
|
|
|
|
|
|
|
|
2.54 |
% |
Impact of noninterest-bearing sources |
|
|
|
|
|
|
|
|
|
|
0.11 |
|
|
|
|
|
|
|
|
|
|
|
0.09 |
|
|
|
|
|
|
|
|
Net interest income/yield on earning assets (1) |
|
|
|
|
|
$ |
39,679 |
|
|
|
2.79 |
% |
|
|
|
|
|
$ |
36,265 |
|
|
|
2.63 |
% |
|
For footnotes see page 116.
117
Business Segment Operations
Segment Description and Basis of Presentation
We report the results of our operations through six business segments: Deposits, Global
Card Services, Home Loans & Insurance, Global Commercial Banking, GBAM and GWIM, with the
remaining operations recorded in All Other. Effective January 1, 2010, we realigned the Global
Corporate and Investment Banking portion of the former Global Banking segment with the former
Global Markets business segment to form GBAM and to reflect Global Commercial Banking as a
standalone segment. Prior period amounts have been reclassified to conform to current period
presentation.
We prepare and evaluate segment results using certain non-GAAP methodologies and performance
measures, many of which are discussed in Supplemental Financial Data beginning on page 107. We begin
by evaluating the operating results of the segments which by definition exclude merger and
restructuring charges. The segment results also reflect certain revenue and expense methodologies
which are utilized to determine net income. The net interest income of the business segments
includes the results of a funds transfer pricing process that matches assets and liabilities with
similar interest rate sensitivity and maturity characteristics.
Equity is allocated to business segments and related businesses using a risk-adjusted
methodology incorporating each segments credit, market, interest rate, strategic and operational
risk components. The nature of these risks is discussed further beginning on page 145. The Corporation benefits from the diversification of risk across these components
which is reflected as a reduction to allocated equity for each segment. The total amount of
average equity reflects both risk-based capital and the portion of goodwill and intangibles
specifically assigned to the business segments.
For more information on our basis of presentation, selected financial information for the
business segments and reconciliations to consolidated total revenue, net income and period-end
total assets, see Note 17 Business Segment Information to the Consolidated Financial Statements.
118
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Net interest income (1) |
|
$ |
1,922 |
|
|
$ |
1,726 |
|
|
$ |
6,183 |
|
|
$ |
5,324 |
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges |
|
|
1,138 |
|
|
|
1,904 |
|
|
|
4,112 |
|
|
|
5,152 |
|
All other income |
|
|
- |
|
|
|
2 |
|
|
|
2 |
|
|
|
4 |
|
|
Total noninterest income |
|
|
1,138 |
|
|
|
1,906 |
|
|
|
4,114 |
|
|
|
5,156 |
|
|
Total revenue, net of interest expense |
|
|
3,060 |
|
|
|
3,632 |
|
|
|
10,297 |
|
|
|
10,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
62 |
|
|
|
93 |
|
|
|
160 |
|
|
|
268 |
|
Noninterest expense |
|
|
2,693 |
|
|
|
2,286 |
|
|
|
7,678 |
|
|
|
7,173 |
|
|
Income before income taxes |
|
|
305 |
|
|
|
1,253 |
|
|
|
2,459 |
|
|
|
3,039 |
|
Income tax expense (1) |
|
|
110 |
|
|
|
439 |
|
|
|
906 |
|
|
|
1,073 |
|
|
Net income |
|
$ |
195 |
|
|
$ |
814 |
|
|
$ |
1,553 |
|
|
$ |
1,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest yield (1) |
|
|
1.87 |
% |
|
|
1.64 |
% |
|
|
2.01 |
% |
|
|
1.77 |
% |
Return on average equity |
|
|
3.17 |
|
|
|
13.63 |
|
|
|
8.57 |
|
|
|
11.19 |
|
Efficiency ratio (1) |
|
|
88.03 |
|
|
|
62.93 |
|
|
|
74.57 |
|
|
|
68.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets (2) |
|
$ |
407,025 |
|
|
$ |
416,570 |
|
|
$ |
411,178 |
|
|
$ |
401,837 |
|
Total assets (2) |
|
|
433,203 |
|
|
|
443,204 |
|
|
|
437,612 |
|
|
|
428,223 |
|
Total deposits |
|
|
408,009 |
|
|
|
418,449 |
|
|
|
412,593 |
|
|
|
403,551 |
|
Allocated equity |
|
|
24,382 |
|
|
|
23,688 |
|
|
|
24,238 |
|
|
|
23,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
December 31 |
Period end |
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
Total earning assets (2) |
|
|
|
|
|
|
|
|
|
$ |
405,552 |
|
|
$ |
417,713 |
|
Total assets (2) |
|
|
|
|
|
|
|
|
|
|
431,604 |
|
|
|
444,612 |
|
Total deposits |
|
|
|
|
|
|
|
|
|
|
406,340 |
|
|
|
419,583 |
|
|
|
|
|
(1) |
|
FTE basis |
|
(2) |
|
Total earning assets and total assets include asset allocations to match liabilities (i.e., deposits). |
Deposits includes the results of consumer deposit activities which consist of a comprehensive
range of products provided to consumers and small businesses. In addition, Deposits includes an
allocation of ALM activities. In the U.S., we serve approximately 57 million consumer and small
business relationships through a franchise that stretches coast to coast through 32 states and the
District of Columbia utilizing our network of 5,900 banking centers, 18,000
ATMs, nationwide call centers and leading online and mobile banking platforms.
Our deposit products include traditional savings accounts, money market savings accounts, CDs
and IRAs, and noninterest- and interest-bearing checking accounts. Deposit products provide a
relatively stable source of funding and liquidity. We earn net interest spread revenue from
investing this liquidity in earning assets through client-facing lending and ALM activities. The
revenue is allocated to the deposit products using our funds transfer pricing process which takes
into account the interest rates and maturity characteristics of the deposits. Deposits also
generates fees such as account service fees, non-sufficient funds fees, overdraft charges and ATM
fees.
In the fourth quarter of 2009, we implemented changes in our overdraft fee policies which
have negatively impacted revenue. These changes were intended to help customers limit overdraft
fees. In addition, amendments to Regulation E became effective July 1, 2010 for new customers and August 16, 2010 for existing customers. These
rules partially impacted the third quarter of 2010 and will have a full impact beginning in the
fourth quarter of 2010. For more information on Regulation E, see Regulatory Matters beginning on
page 143.
119
At September 30, 2010, our active online banking customer base was 29.3 million subscribers,
an increase of approximately 100 thousand from the same period in 2009 and our active bill pay
users paid $227.5 billion of bills online during the nine months ended September 30, 2010, which
is in line with the year-ago period.
Deposits includes the net impact of migrating customers
and their related deposit balances between GWIM and Deposits.
For more information on the migration of customer balances, see GWIM beginning on page 134.
Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
Net income fell $619 million, or 76 percent, to $195 million from lower revenue and higher
noninterest expense. The revenue decline was driven by the impact of Regulation E and related
overdraft fee policy changes. Net interest income increased $196 million, or 11 percent, to $1.9
billion as a result of disciplined pricing and a customer shift to more liquid products, partially
offset by a lower residual net interest income allocation related to ALM activities. Average
deposits declined $10.4 billion from a year ago as organic growth was more than offset by the
decline in higher-yielding Countrywide deposits and the transfer of certain deposits to other
client-managed businesses.
Noninterest income fell $768 million, or 40 percent, to $1.1 billion. The decline in service
charges is primarily due to the implementation of Regulation E and the impact of overdraft fee
policy changes. The impact of Regulation E in the third quarter was a reduction in service charges
of approximately $375 million pre-tax. The 2010 full-year decrease in revenue related to the
implementation of Regulation E and the impact of overdraft policy changes is expected to be
approximately $1.0 billion after-tax.
Noninterest expense increased $407 million, or 18 percent, to $2.7 billion as a result of an
increase in distribution costs as a higher proportion of banking center sales and service efforts
were aligned to Deposits from the other consumer businesses.
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
Net income fell $413 million, or 21 percent, to $1.6 billion as revenue declined and
noninterest expense increased. Net interest income increased $859 million, or 16 percent, to $6.2
billion, while noninterest income decreased $1.0 billion, or 20 percent, to $4.1 billion. In
addition, noninterest expense increased $505 million, or seven percent, to $7.7 billion. These
period-over-period changes were driven by the same factors as described in the three-month
discussion above. In addition, average deposits grew $9.0 billion as organic growth and the
transfer of certain deposits from other client-managed businesses were offset by the expected
decline in higher yielding Countrywide deposits. Noninterest expense includes FDIC charges of $675
million as compared to $997 million during the same period in 2009 which included a special FDIC
assessment.
120
Global Card Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
(Dollars in millions) |
|
2010 |
|
2009 (1) |
|
2010 |
|
2009 (1) |
|
Net interest income (2) |
|
$ |
4,361 |
|
|
$ |
4,920 |
|
|
$ |
13,618 |
|
|
$ |
15,094 |
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Card income |
|
|
1,877 |
|
|
|
2,183 |
|
|
|
5,658 |
|
|
|
6,460 |
|
All other income (loss) |
|
|
(527 |
) |
|
|
147 |
|
|
|
99 |
|
|
|
405 |
|
|
Total noninterest income |
|
|
1,350 |
|
|
|
2,330 |
|
|
|
5,757 |
|
|
|
6,865 |
|
|
Total revenue, net of interest expense |
|
|
5,711 |
|
|
|
7,250 |
|
|
|
19,375 |
|
|
|
21,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
3,177 |
|
|
|
6,823 |
|
|
|
10,507 |
|
|
|
22,699 |
|
Goodwill impairment |
|
|
10,400 |
|
|
|
- |
|
|
|
10,400 |
|
|
|
- |
|
All other noninterest expense |
|
|
1,699 |
|
|
|
1,915 |
|
|
|
5,207 |
|
|
|
5,848 |
|
|
Loss before income taxes |
|
|
(9,565 |
) |
|
|
(1,488 |
) |
|
|
(6,739 |
) |
|
|
(6,588 |
) |
Income tax expense (benefit) (2) |
|
|
306 |
|
|
|
(533 |
) |
|
|
1,349 |
|
|
|
(2,321 |
) |
|
Net loss |
|
$ |
(9,871 |
) |
|
$ |
(955 |
) |
|
$ |
(8,088 |
) |
|
$ |
(4,267 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest yield (2) |
|
|
10.09 |
% |
|
|
9.37 |
% |
|
|
10.14 |
% |
|
|
9.35 |
% |
Return on average equity |
|
|
n/m |
|
|
|
n/m |
|
|
|
n/m |
|
|
|
n/m |
|
Efficiency ratio (2) |
|
|
n/m |
|
|
|
26.40 |
|
|
|
80.55 |
|
|
|
26.64 |
|
Efficiency ratio, excluding goodwill impairment charge (2, 3) |
|
|
29.75 |
|
|
|
26.40 |
|
|
|
26.87 |
|
|
|
26.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
$ |
171,191 |
|
|
$ |
208,650 |
|
|
$ |
179,290 |
|
|
$ |
216,101 |
|
Total earning assets |
|
|
171,456 |
|
|
|
208,287 |
|
|
|
179,494 |
|
|
|
215,901 |
|
Total assets |
|
|
177,634 |
|
|
|
224,165 |
|
|
|
186,491 |
|
|
|
232,816 |
|
Allocated equity |
|
|
35,270 |
|
|
|
40,652 |
|
|
|
39,623 |
|
|
|
40,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
December 31 |
Period end |
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
|
|
|
|
|
|
|
|
$ |
168,845 |
|
|
$ |
196,289 |
|
Total earning assets |
|
|
|
|
|
|
|
|
|
|
169,615 |
|
|
|
196,046 |
|
Total assets |
|
|
|
|
|
|
|
|
|
|
169,813 |
|
|
|
212,668 |
|
|
|
|
|
(1) |
|
Prior year amounts are presented on a managed basis. For information on managed
basis, refer to Note 23 Business Segment Information to the Consolidated Financial Statements of
the Corporations 2009 Annual Report on Form 10-K. |
|
(2) |
|
FTE basis |
|
(3) |
|
Excludes goodwill impairment of $10.4 billion during the three and nine months ended
September 30, 2010. |
|
n/m = not meaningful |
Global Card Services provides a broad offering of products including U.S. consumer and
business card, consumer lending, international card and debit card to consumers and small
businesses. We provide credit card products to customers in the U.S., Canada, Ireland, Spain and
the U.K. We offer a variety of co-branded and affinity credit and debit card products and are one
of the leading issuers of credit cards through endorsed marketing in the U.S. and Europe. On
February 22, 2010, the majority of the provisions in the CARD Act went into effect and negatively
affected net interest income during the three and nine months ended September 30, 2010 due to the
restrictions on our ability to reprice credit cards based on risk and on card income due to
restrictions imposed on certain fees. The 2010 full-year decrease in revenue is expected to be
approximately $1.0 billion after-tax. For more information on the CARD Act, see Regulatory Matters
beginning on page 143.
The Corporation reports its Global Card Services 2010 results in accordance with new
consolidation guidance. Under this new consolidation guidance, we consolidated all credit card
trusts. Accordingly, current year results are comparable to prior year results that were presented
on a managed basis. For more information on managed basis, refer to Note 23 Business Segment
Information to the Consolidated Financial Statements of the Corporations 2009 Annual Report on
Form 10-K and for more information on new consolidation guidance, refer to Impact of Adopting New
Consolidation Guidance on page 103 and Note 8 Securitizations and Other
Variable Interest Entities to the Consolidated Financial Statements.
121
On July 21, 2010, the Financial Reform Act was signed into law. As a result of the this
legislation and final rulemaking over the next year, we estimate that debit card revenue in Global
Card Services will be reduced by approximately $2.0 billion
annually based on current volumes starting in the third quarter
of 2011, assuming limited mitigation in this segment. This current estimate of revenue loss
resulted in a $10.4 billion goodwill impairment charge in Global Card Services. The goodwill
impairment analysis includes limited mitigation actions to recapture the lost revenue. We have
identified other potential mitigation actions, but they are in the early stages of development and
some of them may impact other segments. For additional information, refer to Note 9 Goodwill
and Intangible Assets to the Consolidated Financial Statements and Complex Accounting Estimates on
page 201.
Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
Global Card Services recorded a net loss of $9.9 billion primarily due to the $10.4 billion
goodwill impairment charge. Excluding this charge, Global Card Services would have reported net
income of $529 million, compared to a net loss of $955 million in the prior year. Revenue
decreased $1.5 billion, or 21 percent, to $5.7 billion, driven by lower average loans, reduced
interest and fee income primarily resulting from the implementation of the CARD Act and the impact
of recording a $592 million reserve for payment protection insurance claims in the U.K. For more
information on payment protection insurance, refer to Note 11 Commitments and Contingencies to
the Consolidated Financial Statements.
Net interest income decreased $559 million, or 11 percent, to $4.4 billion as average loans
decreased $37.5 billion partially offset by lower funding costs.
Noninterest income decreased $980 million, or 42 percent, to $1.4 billion driven by the
reserve related to payment protection insurance claims and lower card income of $306 million
primarily due to the implementation of the CARD Act.
Provision for credit losses improved $3.6 billion driven by $3.2 billion lower net
charge-offs and reserve reductions in the consumer card, consumer lending and small business
portfolios. The prior year included a reserve addition due to maturing securitizations which had
an unfavorable impact on the 2009 provision expense.
Noninterest expense increased $10.2 billion primarily due to the goodwill impairment charge.
Excluding the impairment charge, noninterest expense decreased $216 million as a higher proportion
of costs associated with banking center sales and service efforts were aligned to Deposits from
Global Card Services.
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
Global Card Services recorded a net loss of $8.1 billion compared to a net loss of $4.3
billion as a decline in provision for credit losses was more than offset by higher noninterest
expense and lower revenue. Excluding the goodwill impairment charge, Global Card Services would
have reported net income of $2.3 billion compared to a net loss of $4.3 billion a year ago. Net
interest income decreased $1.5 billion to $13.6 billion and noninterest income declined $1.1
billion to $5.8 billion. Provision for credit losses decreased $12.2 billion to $10.5 billion.
Noninterest expense increased $9.8 billion to $15.6 billion due to the goodwill impairment charge
of $10.4 billion. These period-over-period changes were driven by the same factors as described in
the three-month discussion above. In addition, the decline in noninterest income was partially
offset by the gain on the sale of our MasterCard equity holdings
during the second quarter of 2010.
122
Home Loans & Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Net interest income (1) |
|
$ |
1,346 |
|
|
$ |
1,309 |
|
|
$ |
3,559 |
|
|
$ |
3,700 |
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking income |
|
|
1,756 |
|
|
|
1,424 |
|
|
|
4,417 |
|
|
|
7,505 |
|
Insurance income |
|
|
574 |
|
|
|
594 |
|
|
|
1,725 |
|
|
|
1,728 |
|
All other income |
|
|
68 |
|
|
|
86 |
|
|
|
462 |
|
|
|
179 |
|
|
Total noninterest income |
|
|
2,398 |
|
|
|
2,104 |
|
|
|
6,604 |
|
|
|
9,412 |
|
|
Total revenue, net of interest expense |
|
|
3,744 |
|
|
|
3,413 |
|
|
|
10,163 |
|
|
|
13,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
1,302 |
|
|
|
2,897 |
|
|
|
7,292 |
|
|
|
8,995 |
|
Noninterest expense |
|
|
2,979 |
|
|
|
3,049 |
|
|
|
9,125 |
|
|
|
8,540 |
|
|
Loss before income taxes |
|
|
(537 |
) |
|
|
(2,533 |
) |
|
|
(6,254 |
) |
|
|
(4,423 |
) |
Income tax benefit (1) |
|
|
(193 |
) |
|
|
(898 |
) |
|
|
(2,304 |
) |
|
|
(1,567 |
) |
|
Net loss |
|
$ |
(344 |
) |
|
$ |
(1,635 |
) |
|
$ |
(3,950 |
) |
|
$ |
(2,856 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest yield (1) |
|
|
2.87 |
% |
|
|
2.59 |
% |
|
|
2.53 |
% |
|
|
2.55 |
% |
Efficiency ratio (1) |
|
|
79.57 |
|
|
|
89.33 |
|
|
|
89.78 |
|
|
|
65.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
$ |
127,713 |
|
|
$ |
132,599 |
|
|
$ |
130,685 |
|
|
$ |
129,910 |
|
Total earning assets |
|
|
186,022 |
|
|
|
200,426 |
|
|
|
188,307 |
|
|
|
193,694 |
|
Total assets |
|
|
223,133 |
|
|
|
236,086 |
|
|
|
228,765 |
|
|
|
229,212 |
|
Allocated equity |
|
|
26,628 |
|
|
|
24,737 |
|
|
|
26,749 |
|
|
|
18,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
December 31 |
Period end |
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
|
|
|
|
|
|
|
|
$ |
127,701 |
|
|
$ |
131,302 |
|
Total earning assets |
|
|
|
|
|
|
|
|
|
|
178,970 |
|
|
|
188,349 |
|
Total assets |
|
|
|
|
|
|
|
|
|
|
215,592 |
|
|
|
232,588 |
|
|
Home Loans & Insurance generates revenue by providing an extensive line of consumer real
estate products and services to customers nationwide. Home Loans & Insurance products are
available to our customers through a retail network of approximately 5,900 banking centers, mortgage loan
officers in 700 locations and a sales force offering our customers direct telephone
and online access to our products. These products are also offered through our correspondent and
wholesale loan acquisition channels. On October 5, 2010, we announced that we are exiting from the
first mortgage wholesale acquisition channel to allow greater focus on our retail and
correspondent channels.
Home Loans & Insurance products include fixed and adjustable rate first-lien mortgage loans
for home purchase and refinancing needs, reverse mortgages, home equity lines of credit and home
equity loans. First mortgage products are either sold into the secondary mortgage market to
investors, while retaining MSRs and the Bank of America customer relationships, or are held on our
balance sheet in All Other for ALM purposes. Home Loans & Insurance is not impacted by the
Corporations first mortgage production retention decisions as Home Loans & Insurance is
compensated for the decision on a management accounting basis with a corresponding offset recorded
in All Other. Funded home equity lines of credit and home equity loans are held on our balance
sheet. In addition, Home Loans & Insurance offers property, casualty, life, disability and credit
insurance. In July 2010, we announced our intention to sell Balboa Insurance Group, a wholly-owned
subsidiary and part of Home Loans & Insurance, which provides primarily lender-placed insurance to
financial institutions and their customers, as well as homeowners, renters and life insurance to
consumers.
Home Loans & Insurance includes the impact of transferring customers and their related loan
balances between GWIM and Home Loans & Insurance based on client segmentation thresholds. For more
information on the migration of customer balances, see GWIM beginning on page 134.
123
Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
Home Loans & Insurance recorded a net loss of $344 million compared to a net loss of $1.6
billion mainly as a result of lower provisions for credit losses and improved mortgage banking
income.
Net interest income increased $37 million, or three percent, to $1.3 billion. Noninterest
income increased $294 million, or 14 percent, to $2.4 billion due to an increase in mortgage
banking income of $332 million. The increase in mortgage banking income was driven by higher
servicing revenues due to favorable MSR results, net of hedges, and higher core production revenue
driven by wider production margins. These improvements were partially offset by an increase of
$417 million in representations and warranties expense. For additional information on
representations and warranties, see Note 8 Securitizations and Other Variable Interest Entities
to the Consolidated Financial Statements and Representations and Warranties beginning on page
139.
Provision for credit losses decreased $1.6 billion to $1.3 billion driven primarily by
improving portfolio trends which led to lower net charge-offs and reserve reductions in 2010
compared to reserve increases in the prior year. In addition, provision for credit losses
benefited from a lower reserve addition in the Countrywide purchased credit-impaired home equity
portfolio.
Noninterest expense was essentially flat from a year ago as lower production and insurance
expenses were offset by higher costs related to the increase in default management staff and other
loss mitigation activities.
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
Home Loans & Insurance recorded a net loss of $4.0 billion compared to a net loss of $2.9
billion due to a decline in mortgage banking income of $3.1 billion and an increase in noninterest
expense of $585 million, offset by a $1.7 billion decline in the provision for credit losses.
Mortgage banking income declined as a result of lower production income driven by increased
representations and warranties expense, and lower production volume driven by declines in the
market demand for refinances. Also contributing to the decrease in mortgage banking income was
lower servicing income due to less favorable MSR results, net of hedges. In addition, higher
litigation costs impacted noninterest expense in 2010.
Provision for credit losses decreased $1.7 billion to $7.3 billion driven by lower reserve
additions due to the factors noted above. In addition, provision for credit losses was adversely
impacted by certain modified loans that were written-down to the underlying collateral value and
additional provision expense associated with home equity VIEs that were consolidated on January 1,
2010 under new consolidation guidance.
Mortgage Banking Income
We categorize Home Loans & Insurance mortgage banking income into production and servicing
income. Production income is comprised of revenue from the fair value gains and losses recognized
on our interest rate lock commitments (IRLCs) and loans held for sale (LHFS), the related
secondary market execution, and costs related to representations and warranties in the sales
transactions along with other obligations incurred in the sales of mortgage loans. In addition,
production income includes revenue, which is eliminated in All Other, for transfers of mortgage
loans from Home Loans & Insurance to the ALM portfolio related to the Corporations mortgage
production retention decisions.
Servicing income includes income earned in connection with these activities such as late fees
and MSR valuation adjustments, net of economic hedge activities. The costs associated with our
servicing activities are included in noninterest expense.
On October 18, 2010, Countrywide Home Loans Servicer LP, in its capacity as servicer on 115
private-label mortgage-backed securities (MBS) securitizations, received a letter that asserts breaches of certain servicing
obligations. For additional information, see Executive Summary Recent Events beginning on page
95.
Servicing activities include collecting cash for principal, interest and escrow payments from
borrowers, disbursing customer draws for lines of credit and accounting for and remitting
principal and interest payments to investors and escrow payments to third parties. Our home
retention efforts are also part of our servicing activities, along with responding to customer
inquiries and supervising foreclosures and property dispositions. In an effort to avoid
foreclosure, Bank of America evaluates all workout options prior to foreclosure sale which,
together with new requirements, has resulted in elongated default timelines. Our servicing
agreements with certain loan investors require us to comply with usual and customary standards in
the liquidation of delinquent mortgage loans. Our agreements with the government-sponsored
enterprises (GSEs) provide for timelines to complete the liquidation of delinquent loans. In
instances where we fail to meet these timelines, our agreements provide the GSEs the option to
assess compensatory fees. Given the uncertainty of such an
124
assessment and the factors that exist which may be deemed as uncontrollable causes of at least a
portion of such delays, we have not determined that a loss is probable and cannot reasonably
estimate the amount of a possible loss or range of loss. Additionally, we may face demands and
claims from private-label RMBS investors concerning alleged breaches of customary servicing
standards.
See
Complex Accounting Estimates Goodwill and Intangible Assets
beginning on page 202 for a discussion of the goodwill impairment
tests on Home Loans & Insurance.
The table below summarizes the components of mortgage banking income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Banking Income |
|
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Production income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core production revenue |
|
$ |
1,849 |
|
|
$ |
1,573 |
|
|
$ |
4,560 |
|
|
$ |
5,776 |
|
Representations and warranties |
|
|
(872 |
) |
|
|
(455 |
) |
|
|
(2,646 |
) |
|
|
(1,335 |
) |
|
Total production income |
|
|
977 |
|
|
|
1,118 |
|
|
|
1,914 |
|
|
|
4,441 |
|
|
Servicing income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fees |
|
|
1,623 |
|
|
|
1,590 |
|
|
|
4,841 |
|
|
|
4,618 |
|
Impact of customer payments |
|
|
(924 |
) |
|
|
(1,111 |
) |
|
|
(2,961 |
) |
|
|
(3,402 |
) |
Fair value changes of MSRs, net of economic hedge results (1) |
|
|
(90 |
) |
|
|
(313 |
) |
|
|
119 |
|
|
|
1,444 |
|
Other servicing-related revenue |
|
|
170 |
|
|
|
140 |
|
|
|
504 |
|
|
|
404 |
|
|
Total net servicing income |
|
|
779 |
|
|
|
306 |
|
|
|
2,503 |
|
|
|
3,064 |
|
|
Total Home Loans & Insurance mortgage banking income |
|
|
1,756 |
|
|
|
1,424 |
|
|
|
4,417 |
|
|
|
7,505 |
|
Other business segments mortgage banking income (loss) (2) |
|
|
(1 |
) |
|
|
(126 |
) |
|
|
(264 |
) |
|
|
(366 |
) |
|
Total consolidated mortgage banking income |
|
$ |
1,755 |
|
|
$ |
1,298 |
|
|
$ |
4,153 |
|
|
$ |
7,139 |
|
|
|
|
|
(1) |
|
Includes sale of mortgage servicing rights. |
|
(2) |
|
Includes the effect of transfers of mortgage loans from Home Loans & Insurance to
the ALM portfolio in All Other. |
Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
Production income of $977 million represented a decrease of $141 million as representations
and warranties expense increased, partially offset by higher core production revenue. Core
production revenue increased $276 million due to an increase in production margins, partially
offset by a decline in production volume due mainly to a decline in market share. Representations
and warranties expense increased to $872 million from $455 million due to increased estimates of
defaults combined with a higher rate of repurchase or similar requests and an increase in the
probability that the resolution of such requests will be a repurchase or indemnification of the
investor for loss. For additional information on representations and warranties, see Note 8
Securitizations and Other Variable Interest Entities to the Consolidated Financial Statements and
Representations and Warranties beginning on page 139.
Net servicing income increased $473 million largely due to improved MSR results, net of
hedges. For additional information on MSRs and the related hedge instruments, see Mortgage Banking
Risk Management on page 200.
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
Production income of $1.9 billion represented a decrease of $2.5 billion with $1.2 billion of
the decrease due to a decline in production volume resulting from weaker market demand for
refinance transactions. In addition, representations and warranties expense increased
$1.3 billion compared to a year ago due to the same reasons described above as well
as our continued evaluation of exposure to repurchases and similar claims, including repurchase
demands from monoline insurers. For additional information on representations and warranties, see
Note 8 Securitizations and Other Variable Interest Entities to the Consolidated Financial
Statements and Representations and Warranties beginning on page 139.
125
Net servicing income decreased $561 million largely due to lower MSR results, net of hedges.
For additional information on MSRs and the related hedge instruments, see Mortgage Banking Risk
Management on page 200.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home Loans & Insurance Key Statistics |
|
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
(Dollars in millions, except as noted) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Loan production |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home Loans & Insurance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage |
|
$ |
69,875 |
|
|
$ |
89,484 |
|
|
$ |
205,981 |
|
|
$ |
271,003 |
|
Home equity |
|
|
2,000 |
|
|
|
2,225 |
|
|
|
5,602 |
|
|
|
8,068 |
|
Total Corporation (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage |
|
$ |
71,925 |
|
|
$ |
95,654 |
|
|
$ |
213,365 |
|
|
$ |
291,517 |
|
Home equity |
|
|
2,136 |
|
|
|
2,739 |
|
|
|
6,300 |
|
|
|
10,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
December 31 |
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing portfolio (in billions) (2) |
|
|
|
|
|
|
|
|
|
$ |
2,080 |
|
|
$ |
2,151 |
|
Mortgage loans serviced for investors (in billions) |
|
|
|
|
|
|
|
|
|
|
1,669 |
|
|
|
1,716 |
|
Mortgage servicing rights: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
|
|
|
|
|
|
|
|
|
12,251 |
|
|
|
19,465 |
|
Capitalized mortgage servicing rights (% of loans serviced for investors) |
|
|
|
|
|
|
|
|
73 |
bps |
|
|
113 |
bps |
|
|
|
|
(1) |
|
In addition to loan production in Home Loans & Insurance, the remaining first
mortgage and home equity loan production is primarily in GWIM. |
|
(2) |
|
Servicing of residential mortgage loans, home equity lines of credit, home
equity loans and discontinued real estate mortgage loans. |
First mortgage production in Home Loans & Insurance was $69.9 billion and $206.0 billion for
the three and nine months ended September 30, 2010 compared to $89.5 billion and $271.0 billion in
the same periods of 2009. The decrease of $19.6 billion compared to the three-month period a year
ago was driven primarily by a decline in market share. The decrease of $65.0 billion compared to
the nine-month period a year ago was driven by weaker market demand for refinance transactions.
Home equity production was $2.0 billion and $5.6 billion for the three and nine months ended
September 30, 2010 compared to $2.2 billion and $8.1 billion in the same periods of 2009. The
decreases of $225 million and $2.5 billion were primarily due to more stringent underwriting
guidelines for home equity lines of credit and loans as well as lower consumer demand.
At September 30, 2010, the consumer MSR balance was $12.3 billion, which represented 73 bps
of the related unpaid principal balance as compared to $19.5 billion, or 113 bps of the related
unpaid principal balance at December 31, 2009. The decrease in the consumer MSR balance was driven
by the impact of declining mortgage rates during the third quarter, and the impact of elevated
servicing costs partially offset by the addition of new MSRs recorded in connection with sales of
loans. In addition, elevated servicing costs reduced expected cash flows. These factors combined
resulted in the 40 bps decrease in capitalized MSRs as a percentage of loans serviced.
126
Global Commercial Banking
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Net interest income (1) |
|
$ |
1,874 |
|
|
$ |
2,012 |
|
|
$ |
6,205 |
|
|
$ |
5,972 |
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges |
|
|
528 |
|
|
|
533 |
|
|
|
1,599 |
|
|
|
1,556 |
|
All other income |
|
|
157 |
|
|
|
227 |
|
|
|
563 |
|
|
|
796 |
|
|
Total noninterest income |
|
|
685 |
|
|
|
760 |
|
|
|
2,162 |
|
|
|
2,352 |
|
|
Total revenue, net of interest expense |
|
|
2,559 |
|
|
|
2,772 |
|
|
|
8,367 |
|
|
|
8,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
554 |
|
|
|
2,057 |
|
|
|
2,103 |
|
|
|
5,925 |
|
Noninterest expense |
|
|
1,000 |
|
|
|
959 |
|
|
|
2,876 |
|
|
|
2,902 |
|
|
Income (loss) before income taxes |
|
|
1,005 |
|
|
|
(244 |
) |
|
|
3,388 |
|
|
|
(503 |
) |
Income tax
expense (benefit) (1) |
|
|
368 |
|
|
|
(84 |
) |
|
|
1,248 |
|
|
|
(244 |
) |
|
Net
income (loss) |
|
$ |
637 |
|
|
$ |
(160 |
) |
|
$ |
2,140 |
|
|
$ |
(259 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest yield (1) |
|
|
2.61 |
% |
|
|
3.05 |
% |
|
|
3.03 |
% |
|
|
3.25 |
% |
Return on average equity |
|
|
6.14 |
|
|
|
n/m |
|
|
|
6.82 |
|
|
|
n/m |
|
Efficiency ratio (1) |
|
|
39.06 |
|
|
|
34.61 |
|
|
|
34.37 |
|
|
|
34.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
$ |
198,839 |
|
|
$ |
225,994 |
|
|
$ |
206,209 |
|
|
$ |
232,426 |
|
Total earning assets (2) |
|
|
284,941 |
|
|
|
261,876 |
|
|
|
273,760 |
|
|
|
245,891 |
|
Total assets (2) |
|
|
315,632 |
|
|
|
292,878 |
|
|
|
304,581 |
|
|
|
277,894 |
|
Total deposits |
|
|
148,534 |
|
|
|
131,548 |
|
|
|
145,857 |
|
|
|
125,333 |
|
Allocated equity |
|
|
41,172 |
|
|
|
42,193 |
|
|
|
41,924 |
|
|
|
41,805 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
|
December 31 |
|
Period end |
|
2010 |
|
|
2009 |
|
|
|
Total loans and leases |
|
$ |
195,858 |
|
|
$ |
215,237 |
|
Total earning assets (2) |
|
|
271,410 |
|
|
|
264,855 |
|
Total assets (2) |
|
|
302,684 |
|
|
|
295,947 |
|
Total deposits |
|
|
150,981 |
|
|
|
147,023 |
|
|
|
|
|
(1) |
|
FTE basis |
|
(2) |
|
Total earning assets and total assets include
asset allocations to match liabilities (i.e., deposits). |
|
n/m = not meaningful |
Global Commercial Banking provides a wide range of lending-related products and
services, integrated working capital management and treasury solutions to clients through our
network of offices and client relationship teams along with various product partners. Our clients
include business banking and middle-market companies, commercial real estate firms and
governments, and are generally defined as companies with sales up to $2 billion. Our lending
products and services include commercial loans and commitment facilities, real estate lending,
asset-based lending and indirect consumer loans. Our capital management and treasury solutions
include treasury management, foreign exchange and short-term investing options.
Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
Global Commercial Banking recorded net income of $637 million compared to a net loss of $160
million, with the improvement primarily driven by lower credit costs.
Net interest income decreased $138 million, or seven percent, primarily due to a lower
residual net interest income allocation related to ALM activities. Client deleveraging, which we
believe has stabilized, coupled with higher levels of liquidity is reflected in Global Commercial Bankings balance sheet
and earnings. Net interest income was impacted by the $27.2 billion, or 12
127
percent, decline in
average loan balances, partially offset by improved loan spreads on new, renewed and amended
facilities. In addition, net interest income also benefited from the growth in average deposits of
$17.0 billion, or 13 percent.
Noninterest income decreased $75 million, or 10 percent, to $685 million due to a decrease in
all other income of $70 million, or 31 percent, driven by the absence of a valuation adjustment
recorded in the prior-year period and additional costs related to our agreement to purchase
certain retail automotive loans. As clients manage through current economic conditions, we have
seen usage of certain treasury services decline and increased conversion of paper to electronic
services offset by lower credit utilization. The net effect of this dynamic has kept service
charges flat.
The provision for credit losses was $554 million compared to $2.1 billion in the prior-year
period. The decrease was primarily driven by reserve reductions and lower net charge-offs in the
commercial real estate portfolio, reflecting stabilization of appraised values primarily in the
homebuilder portfolio and fewer single name charge-offs, combined with lower net charge-offs in
the commercial domestic portfolio reflecting improved borrower credit profiles.
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
Net income increased $2.4 billion driven by an increase in net interest income of $233
million and a decrease in provision for credit losses of $3.8 billion. The increase in net
interest income was driven by improved loan spreads on new, renewed and amended facilities offset
by the impact of a decline in average loan balances. Noninterest income was impacted by a decrease
of $190 million due to additional costs related to our agreement to purchase certain retail
automotive loans. The period-over-period changes in provision were driven by the same factors as
described in the three-month discussion above.
Global Commercial Banking Revenue
Global Commercial Banking revenues can also be categorized as business lending revenue
derived from credit-related products and services and treasury services revenue primarily from
capital and treasury management. Business lending revenue of $1.6 billion and $5.1 billion for the
three and nine months ended September 30, 2010 decreased $172 million and $52 million compared to
the same periods in 2009 due to the decline in average loan balances partially offset by improved
loan spreads on new, renewed and amended facilities. Treasury services revenue of $1.0 billion and
$3.3 billion decreased $41 million and increased $95 million for the three and nine months ended
September 30, 2010 compared to the same periods in 2009. The decrease for the three months ended
September 30, 2010 compared to the same period in 2009 is primarily due to the growth in average
deposits offset by lower treasury service charges and a lower residual net interest income
allocation related to ALM activities. The increase for the nine months ended September 30, 2010 is
due to the growth in average deposits partially offset by the same factors as described in the
three-month discussion.
128
Global Banking & Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Net interest income (1) |
|
$ |
1,874 |
|
|
$ |
2,255 |
|
|
$ |
5,997 |
|
|
$ |
7,403 |
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges |
|
|
520 |
|
|
|
555 |
|
|
|
1,568 |
|
|
|
1,478 |
|
Investment and brokerage services |
|
|
581 |
|
|
|
590 |
|
|
|
1,880 |
|
|
|
2,066 |
|
Investment banking income |
|
|
1,306 |
|
|
|
1,232 |
|
|
|
3,824 |
|
|
|
3,957 |
|
Trading account profits |
|
|
2,453 |
|
|
|
3,411 |
|
|
|
8,727 |
|
|
|
10,426 |
|
All other income (loss) |
|
|
442 |
|
|
|
(369 |
) |
|
|
935 |
|
|
|
1,695 |
|
|
Total noninterest income |
|
|
5,302 |
|
|
|
5,419 |
|
|
|
16,934 |
|
|
|
19,622 |
|
|
Total revenue, net of interest expense |
|
|
7,176 |
|
|
|
7,674 |
|
|
|
22,931 |
|
|
|
27,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
(157 |
) |
|
|
538 |
|
|
|
(43 |
) |
|
|
1,451 |
|
Noninterest expense |
|
|
4,446 |
|
|
|
3,653 |
|
|
|
13,602 |
|
|
|
12,328 |
|
|
Income before income taxes |
|
|
2,887 |
|
|
|
3,483 |
|
|
|
9,372 |
|
|
|
13,246 |
|
Income tax expense (1) |
|
|
1,439 |
|
|
|
1,241 |
|
|
|
3,777 |
|
|
|
4,623 |
|
|
Net income |
|
$ |
1,448 |
|
|
$ |
2,242 |
|
|
$ |
5,595 |
|
|
$ |
8,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average equity |
|
|
10.94 |
% |
|
|
17.49 |
% |
|
|
13.97 |
% |
|
|
23.61 |
% |
Efficiency ratio (1) |
|
|
61.96 |
|
|
|
47.60 |
|
|
|
59.32 |
|
|
|
45.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading-related assets (2) |
|
$ |
497,954 |
|
|
$ |
496,278 |
|
|
$ |
506,461 |
|
|
$ |
513,037 |
|
Total loans and leases |
|
|
98,847 |
|
|
|
105,995 |
|
|
|
97,925 |
|
|
|
114,578 |
|
Total market-based earning assets |
|
|
494,777 |
|
|
|
468,844 |
|
|
|
514,249 |
|
|
|
478,288 |
|
Total earning assets |
|
|
593,176 |
|
|
|
570,599 |
|
|
|
610,965 |
|
|
|
589,216 |
|
Total assets |
|
|
753,287 |
|
|
|
754,295 |
|
|
|
771,483 |
|
|
|
789,860 |
|
Total deposits |
|
|
106,865 |
|
|
|
104,228 |
|
|
|
107,927 |
|
|
|
103,630 |
|
Allocated equity |
|
|
52,519 |
|
|
|
50,844 |
|
|
|
53,561 |
|
|
|
48,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
|
December 31 |
|
Period end |
|
2010 |
|
|
2009 |
|
|
|
Total trading-related assets (2) |
|
$ |
508,611 |
|
|
$ |
410,755 |
|
Total loans and leases |
|
|
99,476 |
|
|
|
95,930 |
|
Total market-based earning assets |
|
|
500,664 |
|
|
|
404,315 |
|
Total earning assets |
|
|
605,761 |
|
|
|
505,698 |
|
Total assets |
|
|
759,767 |
|
|
|
656,809 |
|
Total deposits |
|
|
109,956 |
|
|
|
102,093 |
|
|
|
|
|
(1) |
|
FTE basis |
|
(2) |
|
Includes assets which are not considered earning assets (i.e., derivative
assets). |
GBAM provides financial products, advisory services, financing, securities clearing,
settlement and custody services globally to our institutional investor clients in support of their
investing and trading activities. We also work with our commercial and corporate clients to
provide debt and equity underwriting and distribution capabilities, merger-related and other
advisory services, and risk management products using interest rate, equity, credit, currency and
commodity derivatives, foreign exchange, fixed-income and mortgage-related products. The business
may take positions in these products and participate in market-making activities dealing in
government securities, equity and equity-linked securities, high-grade and high-yield corporate
debt securities, commercial paper, MBS and asset-backed securities (ABS). Underwriting debt and
equity issuances, securities research and certain market-based activities are executed through our global
broker/dealer affiliates which are our primary dealers in several countries. GBAM is a leader in
the global distribution of fixed income, currency and energy commodity products and derivatives.
GBAM also has one of the largest equity trading operations in the world and is a leader in the
origination and distribution of equity and equity-related products. Our corporate banking services
provide a wide range of lending-related products and services, integrated working capital
management and treasury solutions to clients through our network of offices and client
relationship teams along with various product partners. Our corporate clients are generally
defined as companies with sales greater than $2 billion. GBAM also includes the results of our
merchant processing joint venture, Banc of America Merchant Services, LLC.
129
During the second quarter of 2009, we entered into a joint venture agreement with First Data
Corporation (First Data) to form Banc of America Merchant Services, LLC. The joint venture
provides payment solutions, including credit, debit and prepaid cards, and check and e-commerce
payments to merchants ranging from small businesses to corporate and commercial clients worldwide.
In addition to Bank of America and First Data, the remaining stake was initially held by a third
party. During the second quarter of 2010, the third party sold its interest to the joint venture,
thus increasing the Corporations ownership interest in the joint venture to 49 percent. For
additional information on the joint venture agreement, see Note 5 Securities to the Consolidated Financial Statements.
Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
Net income decreased $794 million to $1.4 billion driven by reduced revenues, increased
noninterest expense, and higher income taxes related to the impact of the U.K. tax rate reduction
on deferred tax assets, partially offset by lower provision expense.
Net interest income decreased $381 million to $1.9 billion due to lower spreads on
trading-related assets and lower average loans and leases, which decreased $7.1 billion, or 7
percent, driven primarily by reduced demand. Net interest income is both market-based, which is
related to sales and trading, and core, which is related to credit and treasury services.
Noninterest income decreased $117 million due to decreased sales and trading revenue. Noninterest expense
increased $793 million due in part to the recognition of expense on proportionately larger
prior-year incentive deferrals. Provision for credit losses decreased $695 million driven by lower
net charge-offs and reserve reductions reflecting improvement in borrower credit profiles and
reduction in reservable criticized levels.
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
Net income decreased $3.0 billion to $5.6 billion due to the prior year pre-tax gain of $3.8
billion related to the contribution of the merchant processing business to the joint venture.
Components of Global Banking & Markets
Sales and Trading Revenue
Sales and trading revenue is segregated into fixed-income including investment and
non-investment grade corporate debt obligations, commercial mortgage-backed securities (CMBS),
RMBS and CDO; currencies including interest rate and foreign exchange contracts; commodities
including primarily futures, forwards, swaps and options; and equity income from equity-linked
derivatives and cash equity activity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Sales and trading revenue (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income, currencies and commodities (FICC) |
|
$ |
3,527 |
|
|
$ |
4,004 |
|
|
$ |
11,358 |
|
|
$ |
11,454 |
|
Equity income |
|
|
974 |
|
|
|
1,265 |
|
|
|
3,356 |
|
|
|
3,951 |
|
|
Total sales and trading revenue |
|
$ |
4,501 |
|
|
$ |
5,269 |
|
|
$ |
14,714 |
|
|
$ |
15,405 |
|
|
|
|
|
(1) |
|
Includes $62 million and $212 million of net interest income on a FTE basis for
the three and nine months ended September 30, 2010 compared to $86 million and $321 million for the
same periods in 2009. |
Sales and trading revenue
decreased $768 million to $4.5 billion for the three months ended September 30, 2010 compared to the same period in 2009
due to more favorable market conditions in the prior-year period, and a lack of liquidity this quarter as sovereign debt
fears and regulatory uncertainty fueled investor concerns. FICC revenue decreased $477 million to $3.5 billion primarily
due to lower results in credit products, which benefited a year earlier from spread tightening. Equities revenue decreased $291 million to $974 million due to
lower volumes and a decline in trading revenue. Additionally, we recorded net credit spread losses on derivative liabilities
in the third quarter of 2010 of $34 million compared to losses of $714 million due to more significant spread tightening during the prior year
quarter. Gains on legacy assets were $264 million for the three months ended September 30, 2010 and $218 million for the same
period in 2009.
130
Sales and trading revenue decreased $691 million
to $14.7 billion for the nine months ended
September 30, 2010 compared to the same period in 2009. FICC revenue decreased $96 million to
$11.4 billion due to lower revenue in our rates and currencies and credit products offset by
improved results in our mortgage-backed products. We recorded net credit spread gains on derivative
liabilities during the nine months ended September 30, 2010 of $212 million compared to losses of
$631 million in 2009. Gains on legacy assets
were $51 million for the nine months ended September 30, 2010 compared to write-downs of $2.8 billion for the same period
in 2009. Losses in the prior year were primarily driven by our CDO exposure, as well as monoline
and CMBS exposure.
Equity income was $3.4 billion for the nine months ended September 30, 2010 compared to $4.0
billion for the same period in 2009 driven by lower domestic volumes and market conditions in the
derivatives business.
Investment Banking Income
Product specialists within GBAM underwrite and distribute debt and equity securities, and
certain other loan products, and provide advisory services. To provide a complete discussion of
our consolidated investment banking income, the table below presents total investment banking
income for the Corporation, substantially all of which is recorded in GBAM with the remainder
in GWIM and Global Commercial Banking.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Investment banking income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisory (1) |
|
$ |
273 |
|
|
$ |
207 |
|
|
$ |
682 |
|
|
$ |
828 |
|
Debt issuance |
|
|
798 |
|
|
|
724 |
|
|
|
2,398 |
|
|
|
2,323 |
|
Equity issuance |
|
|
341 |
|
|
|
403 |
|
|
|
1,003 |
|
|
|
1,067 |
|
|
|
|
|
1,412 |
|
|
|
1,334 |
|
|
|
4,083 |
|
|
|
4,218 |
|
Offset for intercompany fees (2) |
|
|
(41 |
) |
|
|
(80 |
) |
|
|
(153 |
) |
|
|
(263 |
) |
|
Total investment banking income |
|
$ |
1,371 |
|
|
$ |
1,254 |
|
|
$ |
3,930 |
|
|
$ |
3,955 |
|
|
|
|
|
(1) |
|
Advisory includes fees on debt and equity
advisory and mergers and acquisitions. |
|
(2) |
|
Represents the offset to fees paid on the
Corporations transactions. |
Investment banking income increased $117 million to $1.4 billion and decreased $25
million to $3.9 billion for the three and nine months ended September 30, 2010 compared to the
same periods in 2009. Equity issuance fees decreased $62 million and $64 million for the three and
nine months ended September 30, 2010 primarily reflecting lower levels of industry-wide activity.
Debt issuance fees increased $74 million and $75 million for the three and nine months ended
September 30, 2010 mainly driven by investment grade debt issuances and strong results in
leveraged finance in the third quarter and first nine months of the year. Advisory fees increased
$66 million and decreased $146 million for the three and nine months ended September 30, 2010.
Global Corporate Banking
Client relationship teams along
with product partners work with our customers and provide them with a wide range of
lending-related products and services, integrated working capital management and treasury solutions through the
Corporations global network of offices. Global Corporate Banking lending revenues of $821 million and $2.6 billion for
the three and nine months ended September 30, 2010 increased $217 million and $543 million compared to same periods in
2009. The increase for the three and nine months ended September 30, 2010 is primarily due to higher fees and the negative
impact of hedge results in 2009. Treasury services revenue of $645 million and $2.0 billion for the three and nine months
ended September 30, 2010 decreased $104 million and $3.9 billion primarily due to a $3.8 billion pre-tax gain in the prior year related to the
contribution of the merchant processing business to a joint venture. Equity investment income from the joint venture was
$36 million and $97 million for the three and nine months ended September 30, 2010.
131
Collateralized Debt Obligation Exposure
CDO vehicles hold diversified pools of fixed-income securities and issue multiple
tranches of debt securities including commercial paper, mezzanine and equity securities. Our CDO
exposure can be divided into funded and unfunded super senior liquidity commitment exposure, other
super senior exposure (i.e., cash positions and derivative contracts), warehouse, and sales and
trading positions. For more information on our CDO liquidity commitments, see Note 8
Securitizations and Other Variable Interest Entities to the Consolidated Financial Statements.
Super senior exposure represents the most senior class of commercial paper or notes that are
issued by the CDO vehicles. These financial instruments benefit from the subordination of all
other securities issued by the CDO vehicles.
For the three and nine months ended September 30, 2010, we incurred $64 million and $669
million of losses resulting from our CDO exposure. This compares to $287 million and $2.0 billion
in CDO-related losses for the same periods in 2009. Included in these losses in 2010 were $59
million and $377 million related to counterparty risk on our CDO-related exposure, as compared to
$149 million and $777 million in 2009. Also included in these losses were other-than-temporary
impairment (OTTI) losses of $2 million and $251 million compared to $258 million and $856 million
in the same periods in 2009 related to CDOs and retained positions classified as AFS debt
securities.
As presented in the table below at September 30, 2010, our hedged and unhedged super senior
CDO exposure before consideration of insurance, net of write-downs, was $2.2 billion. For
additional information on our CDO positions, including the super senior CDO exposure in the table
below and our maximum exposure to loss, see Note 8 Securitizations and Other Variable Interest
Entities to the Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Super Senior Collateralized Debt Obligation Exposure |
|
|
September 30, 2010 |
|
|
|
|
|
|
Retained |
|
Total |
|
Non- |
|
|
(Dollars in millions) |
|
Subprime (1) |
|
Positions |
|
Subprime |
|
Subprime (2) |
|
Total |
|
Unhedged |
|
$ |
729 |
|
|
$ |
327 |
|
|
$ |
1,056 |
|
|
$ |
301 |
|
|
$ |
1,357 |
|
Hedged (3) |
|
|
604 |
|
|
|
|
|
|
|
604 |
|
|
|
236 |
|
|
|
840 |
|
|
Total |
|
$ |
1,333 |
|
|
$ |
327 |
|
|
$ |
1,660 |
|
|
$ |
537 |
|
|
$ |
2,197 |
|
|
|
|
|
(1) |
|
Classified as subprime when subprime consumer real estate loans make up at
least 35 percent of the original net exposure value of the underlying collateral. |
|
(2) |
|
Includes highly-rated collateralized loan
obligations and CMBS super senior exposure. |
|
(3) |
|
Hedged amounts are presented at carrying value
before consideration of the insurance. |
We value our CDO structures using market-standard models to model the specific
collateral composition and cash flow structure of each deal. Key inputs to the model are
prepayment rates, default rates and severities for each collateral type, and other relevant
contractual features. Unrealized losses recorded in accumulated OCI on super senior cash positions
and retained positions from liquidated CDOs in aggregate decreased $340 million and $222 million
for the three and nine months to $628 million at September 30, 2010.
At September 30, 2010, total super senior exposure of $2.2 billion was marked at 18 percent,
including $327 million of retained positions from liquidated CDOs marked at 43 percent, $537
million of non-subprime exposure marked at 32 percent, and the remaining $1.3 billion exposure
marked at 14 percent of the original net exposure amounts. The percentages marked are based on
original exposure balances.
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Default Swaps with Monoline Financial Guarantors |
|
|
September 30, 2010 |
|
|
|
|
|
|
Other |
|
|
|
|
Super |
|
Guaranteed |
|
|
(Dollars in millions) |
|
Senior CDO s |
|
Positions |
|
Total |
|
Notional |
|
$ |
3,276 |
|
|
$ |
35,556 |
|
|
$ |
38,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark-to-market or guarantor receivable |
|
$ |
2,860 |
|
|
$ |
6,880 |
|
|
$ |
9,740 |
|
Credit valuation adjustment |
|
|
(2,188 |
) |
|
|
(3,444 |
) |
|
|
(5,632 |
) |
|
Total |
|
$ |
672 |
|
|
$ |
3,436 |
|
|
$ |
4,108 |
|
|
Credit valuation adjustment % |
|
|
77 |
% |
|
|
50 |
% |
|
|
58 |
% |
(Write-downs) gains during the three months ended September 30, 2010 |
|
$ |
(59 |
) |
|
$ |
146 |
|
|
$ |
87 |
|
(Write-downs) gains during the nine months ending September 30, 2010 |
|
|
(392 |
) |
|
|
300 |
|
|
|
(92 |
) |
|
132
Monoline wrap protection on our super senior CDOs had a notional value of $3.3 billion
at September 30, 2010, with a receivable of $2.9 billion and a counterparty credit valuation
adjustment of $2.2 billion, or 77 percent. For the three and nine months ended September 30, 2010,
we recorded $59 million and $392 million of counterparty credit risk-related write-downs on these
positions. At December 31, 2009, the monoline wrap on our super senior CDOs had a notional value
of $3.8 billion, with a receivable of $2.8 billion and a counterparty credit valuation adjustment
of $1.9 billion, or 66 percent. In addition, we held collateral in the form of cash and marketable
securities of $1.4 billion and $1.1 billion at September 30, 2010 and December 31, 2009 related to
our non-monoline purchased insurance.
In addition to the monoline exposure related to super senior CDOs, at September 30, 2010 and
December 31, 2009, we had $35.6 billion and $38.8 billion of notional exposure to monolines that
predominantly hedge corporate collateralized loan obligation and CDO exposures as well as CMBS,
RMBS and other ABS cash and synthetic exposures. Mark-to-market monoline derivative credit
exposure was $6.9 billion at September 30, 2010 compared to $8.3 billion at December 31, 2009.
This decrease was driven by positive valuation adjustments on legacy assets and terminated
monoline contracts.
At September 30, 2010, the counterparty credit valuation adjustment related to non-super
senior CDO monoline derivative exposure was $3.4 billion which reduced our net mark-to-market
exposure to $3.4 billion. We do not hold collateral against these derivative exposures. Also,
during the three and nine months ended September 30, 2010, we recognized gains of $146 million and
$300 million for counterparty credit risk related to these positions.
With the Merrill Lynch acquisition, we acquired a loan with a carrying value of $4.3 billion
as of September 30, 2010 that is collateralized by U.S. super senior ABS CDOs. Merrill Lynch
originally provided financing to the borrower for an amount equal to approximately 75 percent of
the fair value of the collateral. The loan has full recourse to the borrower and all scheduled
payments on the loan have been received. Events of default under the loan are customary events of
default, including failure to pay interest when due and failure to pay principal at maturity.
Collateral for the loan is excluded from our CDO exposure discussions and the applicable tables.
133
Global Wealth & Investment Management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Net interest income (1) |
|
$ |
1,292 |
|
|
$ |
1,329 |
|
|
$ |
4,068 |
|
|
$ |
4,271 |
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment and brokerage services |
|
|
2,134 |
|
|
|
2,104 |
|
|
|
6,525 |
|
|
|
6,262 |
|
All other income |
|
|
646 |
|
|
|
439 |
|
|
|
1,979 |
|
|
|
1,463 |
|
|
Total noninterest income |
|
|
2,780 |
|
|
|
2,543 |
|
|
|
8,504 |
|
|
|
7,725 |
|
|
Total revenue, net of interest expense |
|
|
4,072 |
|
|
|
3,872 |
|
|
|
12,572 |
|
|
|
11,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
128 |
|
|
|
515 |
|
|
|
491 |
|
|
|
1,007 |
|
Noninterest expense |
|
|
3,449 |
|
|
|
3,005 |
|
|
|
10,011 |
|
|
|
9,263 |
|
|
Income before income taxes |
|
|
495 |
|
|
|
352 |
|
|
|
2,070 |
|
|
|
1,726 |
|
Income tax expense (1) |
|
|
182 |
|
|
|
118 |
|
|
|
941 |
|
|
|
603 |
|
|
Net income |
|
$ |
313 |
|
|
$ |
234 |
|
|
$ |
1,129 |
|
|
$ |
1,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest yield (1) |
|
|
2.13 |
% |
|
|
2.53 |
% |
|
|
2.33 |
% |
|
|
2.60 |
% |
Return on average equity |
|
|
5.19 |
|
|
|
4.94 |
|
|
|
6.53 |
|
|
|
8.41 |
|
Efficiency ratio (1) |
|
|
84.70 |
|
|
|
77.64 |
|
|
|
79.63 |
|
|
|
77.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
$ |
99,318 |
|
|
$ |
101,155 |
|
|
$ |
99,122 |
|
|
$ |
104,444 |
|
Total earning assets (2) |
|
|
240,796 |
|
|
|
208,699 |
|
|
|
233,528 |
|
|
|
219,548 |
|
Total assets (2) |
|
|
271,304 |
|
|
|
239,352 |
|
|
|
264,554 |
|
|
|
251,719 |
|
Total deposits |
|
|
237,878 |
|
|
|
214,992 |
|
|
|
230,604 |
|
|
|
226,964 |
|
Allocated equity |
|
|
23,896 |
|
|
|
18,802 |
|
|
|
23,137 |
|
|
|
17,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
|
December 31 |
|
Period end |
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
|
|
|
|
|
|
|
|
$ |
99,772 |
|
|
$ |
99,571 |
|
Total earning assets (2) |
|
|
|
|
|
|
|
|
|
|
240,831 |
|
|
|
221,115 |
|
Total assets (2) |
|
|
|
|
|
|
|
|
|
|
272,272 |
|
|
|
254,473 |
|
Total deposits |
|
|
|
|
|
|
|
|
|
|
243,586 |
|
|
|
224,839 |
|
|
|
|
|
(1) |
|
FTE basis |
|
(2) |
|
Total earning assets and total assets include asset allocations to match liabilities
(i.e., deposits). |
GWIM consists of three primary businesses: Merrill Lynch Global Wealth Management
(MLGWM), U.S. Trust, Bank of America Private Wealth Management (U.S. Trust); and Retirement &
Philanthropic Services (RPS).
MLGWMs advisory business provides a high-touch client experience through a network of
approximately 15,400 financial advisors focused on clients with more than $250,000 in total
investable assets. MLGWM also includes Merrill Edge, a new
integrated investing and banking service, which is targeted at clients with less
than $250,000 in total assets, and provides team-based investment advice and guidance, brokerage
services, a self-directed online investing platform and key banking capabilities, including access
to the Corporations branch network and approximately 18,000 ATMs. In addition, MLGWM includes the
Private Banking & Investments Group.
U.S. Trust, together with MLGWMs Private Banking & Investments Group, provides comprehensive
wealth management solutions targeted at wealthy and ultra-wealthy clients with investable assets
of more than $5 million, as well as customized solutions to meet clients wealth structuring,
investment management, trust and banking needs, including specialty asset management services.
RPS partners with GWIM financial advisors to provide institutional and personal retirement
solutions (including investment management administration, recordkeeping and custodial services for 401(k),
pension, profit-sharing, equity award and non-qualified deferred compensation plans), and
comprehensive investment advisory and philanthropic services to individuals, small to large
corporations, pension plans, endowments and foundations.
134
GWIM results also include the BofA Global Capital Management (BACM) business, which is the
cash and liquidity asset management business that Bank of America retained following the sale of
the Columbia long-term asset management business, the Corporations approximate 34 percent
economic ownership interest in BlackRock and other miscellaneous items. The
historical results of Columbias long-term asset management business have been transferred to All
Other.
Revenue from MLGWM was $3.1 billion and $9.5 billion for the three and nine months ended
September 30, 2010, which was relatively flat compared to the same periods in the prior year. Revenue
from U.S. Trust was $611 million and $1.9 billion, up two percent for both periods compared to the
same periods in the prior year. Revenue from RPS was $269 million and $810 million, up eight percent
and seven percent compared to the same periods in the prior year.
GWIM results include the impact of migrating clients and their related deposit and loan
balances to or from Deposits, Home Loans & Insurance and the ALM portfolio as presented in the
table below. The directional shift of total deposits migrated was mainly due to client
segmentation threshold changes. Subsequent to the
date of migration, the associated net interest income, noninterest income and noninterest expense
are recorded in the business to which the clients migrated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Migration Summary |
|
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Total
deposits GWIM from (to) Deposits |
|
$ |
2,807 |
|
|
$ |
(3,176 |
) |
|
$ |
4,838 |
|
|
$ |
(42,588 |
) |
Total
loans GWIM to Home Loans & Insurance and the ALM portfolio |
|
|
(113 |
) |
|
|
(2,538 |
) |
|
|
(1,543 |
) |
|
|
(16,403 |
) |
|
Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
Net income increased $79 million, or 34 percent, to $313 million driven in part by lower
credit costs and higher revenue, partially offset by higher noninterest expense. Net interest
income decreased $37 million, or three percent, to $1.3 billion as higher deposit levels were more
than offset by lower corporate ALM activity. Noninterest income increased $237 million, or nine
percent, to $2.8 billion primarily due to higher asset management fees driven by higher market
levels, continued long-term assets under management flows and lower levels of support to certain cash funds
partially offset by lower brokerage income. Provision for credit losses decreased
$387 million, or 75 percent, to $128 million driven by lower reserve additions and net charge-offs
in the consumer real estate and commercial portfolios, along with the absence of a single large
commercial charge-off in the prior year. Noninterest expense increased $444 million, or 15
percent, to $3.4 billion driven by increases in revenue-related expenses, higher personnel costs
associated with increased staffing levels, higher litigation and support costs.
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
Net income remained relatively flat at $1.1 billion as an increase of $779 million in
noninterest income and a decrease of $516 million in provision for credit losses were offset by
higher noninterest expense of $748 million and a decline of $203 million in net interest income.
The period over period changes in net interest income, noninterest income and provision for credit
losses were driven by the same factors as described in the three-month discussion above.
Additionally, the decrease in net interest income was driven by the impact of net migration of
client relationships to Deposits, Home Loans & Insurance and the ALM portfolio in the prior year,
and the increase in noninterest income was driven by higher equity investment income related to
our investment in BlackRock. The increase in noninterest expense was driven by increases in
revenue-related expenses, higher personnel costs associated with increased staffing levels and
higher support costs.
135
Client Balances
The table below presents client balances which consist of assets under management, client
brokerage assets, assets in custody, client deposits, and loans and leases.
|
|
|
|
|
|
|
|
|
Client
Balances by Type |
|
|
September 30 |
|
December 31 |
(Dollars
in millions) |
|
2010 |
|
2009 |
|
Assets under management
|
|
$ |
624,158 |
|
|
$ |
749,852 |
|
Client brokerage assets (1)
|
|
|
1,436,098 |
|
|
|
1,401,063 |
|
Assets in custody
|
|
|
125,784 |
|
|
|
143,870 |
|
Client deposits
|
|
|
243,586 |
|
|
|
224,839 |
|
Loans and leases
|
|
|
99,772 |
|
|
|
99,571 |
|
Less: Client brokerage assets and assets in custody included in assets under management
|
|
|
(360,267 |
) |
|
|
(346,681 |
) |
|
Total client balances (2)
|
|
$ |
2,169,131 |
|
|
$ |
2,272,514 |
|
|
|
|
|
(1) |
|
Client brokerage assets include non-discretionary brokerage and fee-based assets. |
|
(2) |
|
Includes the Columbia Management long-term asset management business through the date
of sale on May 1, 2010. At December 31, 2009, it represented $96.7 billion, net of eliminations. |
The decrease in client balances was due to the sale of the Columbia long-term asset
management business, outflows in MLGWMs non-fee based brokerage assets and outflows in BACMs
money market assets due to the continued low rate environment partially offset by higher market
levels.
136
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
(Dollars in millions) |
|
2010 (1) |
|
|
2009 |
|
|
2010 (1) |
|
|
2009 |
|
|
Net interest income (2) |
|
$ |
48 |
|
|
$ |
477 |
|
|
$ |
354 |
|
|
$ |
1,774 |
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Card income |
|
|
- |
|
|
|
286 |
|
|
|
- |
|
|
|
891 |
|
Equity investment income |
|
|
94 |
|
|
|
882 |
|
|
|
2,575 |
|
|
|
8,184 |
|
Gains on sales of debt securities |
|
|
794 |
|
|
|
1,442 |
|
|
|
1,456 |
|
|
|
3,585 |
|
All other income (loss) |
|
|
(276 |
) |
|
|
(2,027 |
) |
|
|
632 |
|
|
|
(3,326 |
) |
|
Total noninterest income |
|
|
612 |
|
|
|
583 |
|
|
|
4,663 |
|
|
|
9,334 |
|
|
Total revenue, net of interest expense |
|
|
660 |
|
|
|
1,060 |
|
|
|
5,017 |
|
|
|
11,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
330 |
|
|
|
2,090 |
|
|
|
2,796 |
|
|
|
6,588 |
|
Merger and restructuring charges (3) |
|
|
421 |
|
|
|
594 |
|
|
|
1,450 |
|
|
|
2,188 |
|
All other noninterest expense |
|
|
129 |
|
|
|
845 |
|
|
|
1,895 |
|
|
|
2,086 |
|
|
Income (loss) before income taxes |
|
|
(220 |
) |
|
|
(2,469 |
) |
|
|
(1,124 |
) |
|
|
246 |
|
Income tax benefit (2) |
|
|
(543 |
) |
|
|
(928 |
) |
|
|
(1,751 |
) |
|
|
(1,894 |
) |
|
Net income (loss) |
|
$ |
323 |
|
|
$ |
(1,541 |
) |
|
$ |
627 |
|
|
$ |
2,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases (4) |
|
$ |
238,457 |
|
|
$ |
155,184 |
|
|
$ |
250,553 |
|
|
$ |
165,086 |
|
Total assets (4, 5) |
|
|
205,204 |
|
|
|
208,221 |
|
|
|
269,484 |
|
|
|
237,403 |
|
Total deposits |
|
|
44,586 |
|
|
|
95,131 |
|
|
|
59,640 |
|
|
|
92,139 |
|
Allocated equity |
|
|
30,112 |
|
|
|
55,065 |
|
|
|
23,227 |
|
|
|
51,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
|
December 31 |
|
Period end |
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases (4) |
|
|
|
|
|
|
|
|
|
$ |
241,837 |
|
|
$ |
161,128 |
|
Total assets (4, 5) |
|
|
|
|
|
|
|
|
|
|
187,928 |
|
|
|
133,135 |
|
Total deposits |
|
|
|
|
|
|
|
|
|
|
37,130 |
|
|
|
65,433 |
|
|
(1) |
|
Current periods are
presented in accordance with new consolidation guidance.
|
|
(2) |
|
FTE basis |
|
(3) |
|
For more information on merger and restructuring charges, see Note 2 Merger and
Restructuring Activity to the Consolidated Financial Statements. |
|
(4) |
|
Loan amounts are
net of the securitization offset of $97.5 billion and $100.7 billion for the three and nine months
ended September 30, 2009 and $89.7 billion at December 31, 2009. |
|
(5) |
|
Includes elimination of segments excess asset allocations to match liabilities
(i.e., deposits) of $635.9 billion and $547.6 billion for the three months ended September 30, 2010
and 2009, $611.2 billion and $514.5 billion for the nine months ended September 30, 2010 and 2009,
and $627.0 billion and $586.3 billion at September 30, 2010 and December 31, 2009. |
All Other includes our Equity Investments businesses and Other. For periods prior to 2010,
Global Card Services was reported on a managed basis which included a securitization impact
adjustment. All Others results included a corresponding securitization offset which removed the
impact of these securitized loans in order to present the consolidated results on a GAAP basis
(i.e., held basis). The current periods are presented in accordance with new consolidation
guidance, which we adopted on January 1, 2010. For more information on managed basis, refer to
Note 23 Business Segment Information to the Consolidated Financial Statements of the
Corporations 2009 Annual Report on Form 10-K.
Equity Investments includes Global Principal Investments, Corporate Investments and Strategic
Investments. During the first quarter of 2010, the $2.7 billion Corporate Investment equity
portfolio was sold as a result of a change in our investment portfolio objectives shifting more to
core interest income and reducing our exposure to equity market risk, resulting in a loss of $331
million.
Global Principal Investments (GPI) is comprised of a diversified portfolio of investments in
private equity, real estate and other alternative investments. These investments are made either
directly in a company or held through a fund with related income recorded in equity investment
income. Global Principal Investments had unfunded equity commitments of $1.5 billion at September
30, 2010, related to certain of these investments. For more information on these commitments, see
Note 11 Commitments and Contingencies to the Consolidated Financial Statements. Affiliates of
the Corporation
137
may, from time to time, act as general partner, fund manager and/or investment advisor to certain
Corporation-sponsored real estate private equity funds. In such capacities, these affiliates
manage and/or provide investment advisory services to such real estate private equity funds
primarily for the benefit of third-party institutional and private clients. Such activities
inherently involve risk to us and to the fund investors, and in certain situations may result in
loss.
In the third quarter, we recorded a loss of $165 million related to a consolidated real estate private equity fund for which we are the
general partner and investment advisor.
During the quarter, we sold our exposure of $1.7 billion in certain private equity funds,
comprised of $859 million in capital and $794 million in unfunded commitments, resulting in no
gain or loss in the three months ended September 30, 2010.
The
Strategic Investments business includes our investment in CCB. At September 30, 2010, we
owned approximately 11 percent, or 25.6 billion common shares of CCB. In the third quarter of
2010, we recorded in accumulated OCI a $6.2 billion after-tax unrealized gain on 23.6 billion
shares of our investment in CCB, which previously had been carried at cost. These shares were
reclassified to available-for-sale in the three months ended September 30, 2010 because the sales
restrictions on 23.6 billion of these shares expire within one year, and therefore, we recorded
the unrealized gain in accumulated OCI, net of an 11.5 percent restriction discount. Sales
restrictions on the remaining two billion CCB shares continue until August 2013, and these shares
continue to be carried at cost. At September 30, 2010, for all CCB shares, the cost basis was $9.2 billion, the carrying value was $19.0 billion and the fair value was $20.0
billion.
The
table below presents the components of All Others equity investment income and
reconciliation to the total consolidated equity investment income for the three and nine months
ended September 30, 2010 and 2009 and also All Others equity investments at September 30, 2010
and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Investment Income |
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Global Principal Investments |
|
$ |
46 |
|
|
$ |
713 |
|
|
$ |
1,437 |
|
|
$ |
551 |
|
Corporate Investments |
|
|
5 |
|
|
|
109 |
|
|
|
(300 |
) |
|
|
(153 |
) |
Strategic and other investments |
|
|
43 |
|
|
|
60 |
|
|
|
1,438 |
|
|
|
7,786 |
|
|
Total equity
investment income included in All Other |
|
|
94 |
|
|
|
882 |
|
|
|
2,575 |
|
|
|
8,184 |
|
Total equity investment income (loss) included in the business segments |
|
|
263 |
|
|
|
(39 |
) |
|
|
1,173 |
|
|
|
(196 |
) |
|
Total consolidated equity investment income |
|
$ |
357 |
|
|
$ |
843 |
|
|
$ |
3,748 |
|
|
$ |
7,988 |
|
|
|
|
|
|
|
|
|
|
|
Equity Investments |
|
|
September 30 |
|
|
December 31 |
|
|
|
2010 |
|
|
2009 |
|
|
Global Principal Investments |
|
$ |
12,171 |
|
|
$ |
14,071 |
|
Corporate Investments |
|
|
- |
|
|
|
2,731 |
|
Strategic and other investments |
|
|
19,663 |
|
|
|
17,860 |
|
|
Total equity investments included in All Other |
|
$ |
31,834 |
|
|
$ |
34,662 |
|
|
|
Other includes the residential mortgage portfolio associated with ALM activities, the
residual impact of the cost allocation processes, merger and restructuring charges, intersegment
eliminations and the results of certain businesses that are expected to be or have been sold or
are in the process of being liquidated. Other also includes certain amounts associated with ALM
activities, amounts associated with the change in the value of derivatives used as economic hedges
of interest rate and foreign exchange rate fluctuations, the impact of foreign exchange rate
fluctuations related to revaluation of foreign currency-denominated debt, fair value adjustments
on certain structured notes, certain gains (losses) on sales of whole mortgage loans, gains
(losses) on sales of certain debt securities and other-than-temporary impairment write-downs on
certain AFS securities. In addition, Other includes adjustments to net interest income and income
tax expense to remove the FTE effect of items (primarily low-income housing tax credits) that are
reported on a FTE basis in the business segments. Other also includes a trust services business
which is a client-focused business providing trustee services and fund administration to various
financial services companies.
On July 1, 2010, we completed the sale of First Republic at book value and as a result, we
removed $17.4 billion of loans and $17.8 billion of deposits from our consolidated balance sheet.
Three Months Ended September 30, 2010 compared to Three Months Ended September 30, 2009
All Other reported net income of $323 million compared to a net loss of $1.5 billion driven
primarily by a significantly lower provision for credit losses and also lower noninterest expense.
Net interest income decreased $429 million to $48
138
million as the prior year included net interest income driven by capital raises occurring
throughout 2009 that were not allocated to the businesses. Noninterest income was
relatively flat and included a decrease in equity investment income of $788 million as the prior year
included positive valuation adjustments on public and private investments within GPI, and
gains on sales of debt securities declined $648 million to $794 million, largely offset by lower losses on structured
liabilities of $190 million compared to losses of $1.8 billion in the prior year.
Provision for credit losses decreased $1.8 billion to $330 million mainly due to reserve
reductions in the residential mortgage portfolio due to improving portfolio trends as compared to
reserve additions in the prior year. The provision benefited from a lower reserve
addition in the Countrywide purchased credit-impaired discontinued real-estate portfolio.
The income tax benefit for the current-year period included the release of a valuation
allowance established for acquired capital loss carryforward amounts.
Nine Months Ended September 30, 2010 compared to Nine Months Ended September 30, 2009
Net income decreased $1.5 billion to $627 million as decreases in net interest income of $1.4
billion and noninterest income of $4.7 billion were partially
offset by a decrease in the provision of
$3.8 billion and lower merger and restructuring charges of $738 million. These period-over-period
changes were driven by the same factors as described in the three-month discussion above. In
addition, the prior-year period included a $7.3 billion pre-tax gain resulting from sales of
shares in CCB in addition to gains on the sale of agency mortgage-backed securities of $2.1
billion. These prior period gains combined with the lower losses on structured liabilities were
somewhat offset by the same factors described above. Income tax benefit was $1.8 billion compared
to $1.9 billion, reflecting higher tax benefits on the decrease in pre-tax income, offset by lower
benefit on the release of a valuation allowance.
Off-Balance Sheet Arrangements and Contractual Obligations
We have contractual obligations to make future payments on debt and lease agreements.
Additionally, in the normal course of business, we enter into a number of off-balance sheet
commitments including commitments to extend credit such as loan commitments, standby letters of
credit (SBLCs) and commercial letters of credit to meet the financing needs of our customers.
Beginning on January 1, 2010, the accounting and reporting for these commitments were subject to
new consolidation guidance which is more fully discussed in Note 8 Securitizations and Other
Variable Interest Entities to the Consolidated Financial Statements. For additional information on
our obligations and commitments, see Note 10 Long-term Debt and Note 11 Commitments and
Contingencies to the Consolidated Financial Statements, pages 42 through 43 of the MD&A of the
Corporations 2009 Annual Report on Form 10-K, as well as Note 13 Long-term Debt and Note 14
Commitments and Contingencies to the Consolidated Financial Statements of the Corporations 2009
Annual Report on Form 10-K.
Representations and Warranties
We securitize first-lien mortgage loans generally in the form of MBS guaranteed by GSEs.
In addition, in prior years, legacy companies and certain subsidiaries have sold pools of
first-lien mortgage loans and home equity loans as private-label MBS or in the form of whole
loans. In connection with these securitizations and whole loan sales, we or our subsidiaries or legacy companies
made various representations and warranties. Breaches of these representations and warranties may result in
the requirement to repurchase mortgage loans, indemnify or provide other remedy to an investor
or securitization trust. In such cases, the repurchaser bears any subsequent credit loss on the
mortgage loans. The repurchasers credit loss may be reduced by any recourse to sellers of loans
for representations and warranties previously provided when such loans were purchased. Subject to the requirements
and limitations of the applicable agreements, representations and warranties can be enforced by the trustee, investor or, in certain first-lien and home
equity securitizations where monolines have insured all or some of the related bonds issued, by
the insurer at any time over the life of the loan.
Importantly, the contractual liability to repurchase arises if there is a breach of the
representations and warranties that materially and adversely affects
the interest of all investors in the case of non-GSE loans,
or if there is a breach of other standards established by the terms of
the related sale agreement. We believe many of the defaults observed in these loans have been, and
continue to be, driven by external factors like the substantial depreciation in home prices,
persistently high unemployment and other economic trends, diminishing the likelihood that any loan
defect (assuming one exists at all) was the cause of the loans default. The length of time a loan
performs prior to default is an important consideration. We believe that the longer a loan
performs, the less likely it is that an alleged underwriting representation breach would have had a
139
material impact on the loans performance or that a breach even exists. Historically, most demands
for repurchase have occurred within the first few years after origination, generally after a loan
has defaulted. However, in recent periods the time horizon has lengthened due to increased
repurchase demands across all vintages. Our current operations are structured to attempt to limit
the risk of repurchase and accompanying credit exposure by seeking to
ensure consistent production of mortgages in accordance with our
underwriting procedures and by servicing those mortgages consistent with secondary mortgage market
standards.
The representations and warranties given in the sales of loans related to, among other
things, the ownership of the loan and the validity of the lien securing the loan. Recently, there
has been significant public commentary regarding mortgage securitization processes, the use of the
electronic records system operated by the Mortgage Electronic Registration Systems, Inc. (MERS),
and whether securitization trusts own the loans purported to be conveyed to them and have valid
liens securing those loans. The process for mortgage loan transfers into securitization trusts is
based on a well-established body of law that establishes the ownership of mortgage loans by the
securitization trusts and we believe we have substantially executed this process. We currently use
the MERS system for a substantial portion of the residential mortgage loans that we originate,
including loans that have been sold to investors or securitization
trusts. Although the GSEs do not require the use of MERS, the GSEs
permit standard forms of mortgages and deeds of trust that use MERS
and loans that employ these forms are considered to be properly
documented for the GSEs purposes. We believe that the use of MERS is widespread in the
industry.
The probable losses to be absorbed under the representations and warranties obligations and
the guarantees are recorded as a liability when the loans are sold and are updated by accruing a
representations and warranties expense in mortgage banking income throughout the life of the loan
as necessary when additional relevant information becomes available. The methodology used to
estimate the liability for representations and warranties is a function of the representations and
warranties given and considers a variety of factors, which include, depending on the counterparty,
actual defaults, estimated future defaults, historical loss experience, probability that a
repurchase request will be received, number of payments made by the borrower prior to default and probability that
a loan will be required to be repurchased. Given that these factors vary by counterparty, we
analyze our representations and warranties obligations based on the specific party with whom the
sale was made. Although the timing and volume has varied, we have experienced increasing
repurchase and similar requests from buyers and insurers, including monolines. To date we
have received a limited number of repurchase requests related to
private-label MBS transactions, but we expect efforts to attempt
to assert repurchase requests by private-label MBS investors may
increase in the future. See Executive
Summary Recent Events on
page 95 for additional information.
We perform a loan by loan review of all repurchase requests and have and will continue to contest
such demands that we do not believe are valid. Overall, disputes have increased with buyers and
insurers regarding representations and warranties.
The liability for representations and warranties, and corporate guarantees, is included in
accrued expenses and other liabilities and the related expense is included in mortgage banking
income. At September 30, 2010, and December 31, 2009, the liability was $4.4 billion and $3.5
billion. For the three and nine months ended September 30, 2010, the representations and
warranties, and corporate guarantees expense was $872 million and $2.6 billion, compared to $455
million and $1.9 billion for the same periods in 2009. Representations and warranties expense may
vary significantly each period as the methodology used to estimate the expense continues to be
refined based on the level and type of repurchase requests presented, defects identified, the
latest experience gained on repurchase requests and other relevant facts and circumstances, which
could have a material adverse impact on our earnings for the period.
140
Government-sponsored Enterprises
During
the last ten years Bank of America and our subsidiaries have sold over $2.0
trillion of loans to the GSEs and we have an established history of working with them on
repurchase requests. Our experience with them continues to evolve and any disputes are generally
related to such areas as the reasonableness of stated income, occupancy and undisclosed
liabilities, and are typically focused on the 2004 through 2008 vintages. While the environment
around the repurchase process continues to be challenging we strive to maintain a constructive
relationship with the GSEs. We believe that our exposure to representations and warranties is most
significant for loans sold between 2004 through 2008. Our repurchase claims experience related to
loans originated prior to 2004 has not been significant and we believe that the changes made to
our operations and underwriting policies have reduced our exposure after 2008. The graph below
shows cumulative repurchase claims by vintage.
Cumulative GSE Repurchase Requests by Vintage
|
|
1 |
Exposure at default (EAD) represents the unpaid principal balance at the time of
default, or the unpaid principal balance as of September 30, 2010. |
From 2004 through 2008 Bank of America and Countrywide sold approximately
$1.2 trillion of loans to the GSEs. Through September 30, 2010, we have received approximately
$18.0 billion in repurchase claims associated with these vintages, representing approximately 1.5
percent of the loans sold to the GSEs in these vintages. We have successfully resolved $11.4 billion
of these claims with a net loss experience of approximately 22 percent. The level of repurchase
claims from the GSEs has been elevated for the last few quarters driving the total number of
outstanding repurchase claims due to the time that it takes to work loans through the claims
process. The volume of loans in 2007 is significantly higher than any other vintage, which
together with the high delinquency level in this vintage helps to explain the high level of
repurchase claims compared to the other vintages. Our liability for obligations under
representations and warranties given to the GSEs considers the existing pipeline of claims and
future claims we might receive on loans that have defaulted or that we estimate will default. We
also take into account our experience with the GSEs in working through repurchase claims. Although our experience with the GSEs could change in the
future, we believe our predictive repurchase models, utilizing our historical repurchase
experience with the GSEs while considering current developments, projections of future defaults
and a continued loan by loan review, allows us to reasonably estimate the liability for
obligations under representations and warranties on loans sold to the GSEs.
141
Monoline Insurers
In the past, legacy companies and certain subsidiaries have sold pools of first-lien mortgage
loans and home equity loans as private-label MBS where monolines have insured all or some of the
related bonds issued. The contractual representations and warranties provided to the private-label securitizations insured by the monolines are less rigorous than those given to the GSEs as fraud and property valuation representations and warranties were generally
not given in private-label securitizations. Additionally, the applicable agreements generally impose higher burdens for those seeking repurchase than the comparable agreements with the GSEs.
Through September 30, 2010, legacy companies have sold
approximately $180
billion of loans into these monoline-wrapped securitizations,
including $75 billion of first-lien
mortgages and $105 billion of second-lien mortgages. Of these balances, approximately one-third of
the first-lien mortgages and 60 percent of the second-lien mortgages have paid off as of September
30, 2010. Of the first-lien mortgages sold, we estimate $38 billion were sold as whole loans to
other institutions which subsequently included these loans with those of other originators in
private-label securitization transactions in which the monolines typically insured one or more
securities. Through September 30, 2010, we have received $4.8 billion of representations and
warranties claims related to the monoline insured deals and approximately $550 million of such
claims were resolved through repurchase or indemnification of the trust for the loss. At September
30, 2010, the unpaid principal balance of loans related to unresolved monoline repurchase requests
was approximately $4.2 billion, including $2.7 billion that have been reviewed where it is
believed a valid defect has not been identified which would constitute an actionable breach of
representations and warranties and $1.5 billion that is in the process of review. We have had
limited experience with most of the monoline insurers in the repurchase process, which has
constrained our ability to resolve the open claims. Also, certain monoline insurers have
instituted litigation against Countrywide and Bank of America, which limits our relationship and
ability to enter into constructive dialogue to resolve the open
claims. It is not possible at this time to reasonably estimate
future repurchase obligations with respect to these claims and, therefore, no liability has been
recorded in connection with these
counterparties, other than a liability for repurchase requests that
are in the process of review. However, certain
monoline insurers have engaged with us in a consistent repurchase process and we have used that
experience to record a liability related to existing and future claims from such counterparties.
Whole Loan Sales and Private-label Securitizations
In the
past legacy companies and certain subsidiaries have also sold pools of first-lien
mortgage loans and home equity loans as private-label MBS or in the form of whole loans in which
we believe there is no participation by the monoline insurers. The loans sold include prime loans,
including loans with a loan balance in excess of the conforming loan limit, Alt-A, pay-option,
home equity and subprime loans. Many of the loans sold in the form of whole loans were
subsequently pooled with other mortgages into private-label
securitizations issued by the third-party buyer of
the loans. Our repurchase claims experience with this category of counterparties prior to 2004 is
limited and the amount of the claims asserted is not significant.
From 2004 through 2008 legacy Countrywide and to a
lesser extent Bank of America, sold loans with a total principal
balance of approximately $750 billion of which approximately forty percent
has been paid off. Through September 30, 2010, we have received approximately $3.9 billion of
representations and warranties claims related to such loans and have resolved
almost $2.9 billion of those claims to date. Approximately $1.0
billion of these claims were resolved through repurchase or
indemnification and $1.9 billion were rescinded by the investor. We have reviewed approximately half of the remaining
$1.0 billion claims still outstanding and have declined to repurchase based on our assessment of
whether a material breach exists. The majority of the claims that we have received so far are from
whole loan investors. As it relates to private-label securitizations, the ultimate representations
and warranties exposure requires that counterparties have the ability to both assert a claim and
actually prove there is a breach of the representations and warranties that materially and
adversely affects the interest of all investors in the case of
non-GSE loans, or if there is a breach of
other standards established by the terms of the related sale agreement. As previously noted, we
believe many of the defaults observed in these securitizations have been, and continue to be,
driven by external factors like the substantial depreciation in home prices, persistently high
unemployment and other economic trends, diminishing the likelihood that any loan defect (assuming
one exists at all) was the cause of the loans default. Bondholders and other market participants
assumed the market and disclosed credit risks of the mortgage securities they purchased, including
the loans backing those securities. The expansion of underwriting
standards and increase in credit risk over time, including
higher loan-to-value ratios, lower FICOs, less loan documentation and the fact that exceptions
were made to underwriting guidelines was disclosed to market
participants. In addition, the contractual representations and
warranties are
less rigorous than those given to the GSEs, for
example, as fraud and property valuation
representations and warranties were generally not given in
private-label securitizations and the applicable agreements generally
impose higher burdens on investors seeking repurchase than the
comparable agreements with the GSEs, we believe these factors make it difficult to extrapolate the experience with
the GSEs over the private-label securitizations population. Accordingly, until we have meaningful
repurchase experiences with these counterparties, it is not possible to determine whether a loss
has occurred and, although it is reasonably possible that a loss may occur, it is not possible at
this time to estimate future repurchase experience and any related loss or range of loss.
From 2004
to 2007 legacy Merrill Lynch, including First Franklin Financial
Corporation, sold loans in this category
with a total principal balance in the amount of approximately $110 billion, including certain
loans made to high net worth borrowers. In addition, certain of these loans have paid off.
During the nine months ended September 30, 2010, $50 million of
repurchase claims were resolved through repurchase or reimbursement to the investor or
securitization trust for losses they incurred compared to $13 million for the same
period in 2009. At September 30, 2010, the unpaid principal balance of loans related to
unresolved repurchase requests for this portfolio was approximately
$815 million. We have reviewed $626 million of the claims
outstanding and have declined to repurchase based on our assessment
of whether a material breach exists.
On
October 18, 2010, in its capacity as servicer on 115 private
label MBS securitizations, one of our subsidiaries
received a letter that asserts breaches of certain servicing obligations, including an alleged
failure to provide notice of breaches of representations and warranties with respect to mortgage
loans included in the transactions. See Executive Summary Recent Events on page 95 for
additional information.
142
See Complex Accounting Estimates Representations and Warranties on page 205 for information
related to our estimated liability for representations and warranties and corporate guarantees
related to mortgage-related securitizations. For additional information regarding representations
and warranties and disputes involving monolines, see Note 8 Securitizations and Other Variable
Interest Entities to the Consolidated Financial Statements, Note 11 Commitments and
Contingencies to the Consolidated Financial Statements and Note 14 Commitments and Contingencies
to the Consolidated Financial Statements of the Corporations 2009 Annual Report on Form 10-K.
Regulatory Matters
Refer to Item 1A. Risk Factors of the Corporations 2009 Annual Report on Form 10-K and
Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 for additional information on
recent or proposed legislative and regulatory initiatives as well as other risks to which the
Corporation is exposed, including among others enhanced regulatory scrutiny or potential legal
liability as a result of the recent financial crisis.
On July 21, 2010, the Financial Reform Act was signed into law. The Financial Reform Act
provides for sweeping financial regulatory reform and will alter the way in which we conduct
certain businesses, restrict our ability to compete, increase our costs and reduce our revenues.
The Financial Reform Act mandates that the Federal Reserve Board (Federal Reserve) limit
debit card interchange fees. Provisions in the legislation also ban banking organizations from
engaging in proprietary trading and restrict their sponsorship of, or investing in, hedge funds
and private equity funds, subject to limited exceptions. The Financial Reform Act increases
regulation of the derivative markets through measures that broaden the derivative instruments
subject to regulation and will require clearing and exchange trading as well as imposing
additional capital and margin requirements for derivative market participants. The Financial
Reform Act changes the assessment base used in calculating FDIC deposit insurance fees from
assessable deposits to total assets less tangible capital; provides for resolution authority to
establish a process to unwind large systemically important financial companies; establishes a
consumer financial protection bureau; includes new minimum leverage and risk-based capital
requirements for large financial institutions; and proposes disqualification of trust preferred
securities and other hybrid capital securities from Tier 1 capital. Many of these provisions have
begun to be or will be phased-in over the next several months or years and will be subject both to
further rulemaking and the discretion of applicable regulatory bodies.
The Financial Reform Act will have a significant and negative impact on our earnings through
fee reductions, higher costs and new restrictions, as well as reduce available capital and have a
material adverse impact on the value of certain assets and liabilities held on our balance sheet.
The ultimate impact of the final rules on our businesses and results of operations will depend on
regulatory interpretation and rulemaking, as well as the success of any of our actions to mitigate
the negative earnings impact of certain provisions. Two of the major credit ratings agencies have
indicated that enactment of the Financial Reform Act, including regulators interpretation or
rulemaking thereunder, may at some point result in a downgrade of our credit ratings. One of these
ratings agencies placed our and certain other banks credit ratings on negative outlook based on
an earlier version of financial reform legislation, and the other ratings agency placed our and
other banks credit ratings on negative outlook shortly after the Financial Reform Act was signed
into law. It remains unclear what other actions the ratings agencies may take as a result of
enactment of the Financial Reform Act. However, in the event of certain credit ratings downgrades,
our access to credit markets, liquidity and our related funding costs would be materially
adversely affected. For additional information about our credit ratings, see Liquidity Risk and
Capital Management on page 146.
The limits to be placed on debit interchange fees will significantly reduce our debit card
interchange revenues. Interchange fees, or swipe fees, are charges that merchants pay to us and
other credit card companies and card-issuing banks for processing electronic payment transactions.
The legislation, which provides the Federal Reserve with authority over interchange fees received
or charged by a card issuer, requires that fees must be reasonable and proportional to the costs
of processing such transactions. The Federal Reserve has nine months from the date of enactment of
the Financial Reform Act to provide clarification on the rules, which are to become effective one
year from the enactment of the Financial Reform Act. In issuing regulations, the Federal Reserve
must consider the functional similarity between debit card transactions and traditional checking
transactions and the incremental costs incurred by a card issuer in processing a particular debit
card transaction. In addition, the legislation prohibits card issuers and networks from entering
into exclusive arrangements requiring that debit card transactions be processed on a single
network or only two affiliated networks, and allows merchants to determine transaction routing.
As
previously announced on July 16, 2010, as a result of the Financial Reform Act
and its related rules and subject to final rulemaking over the next
year, we believe that our debit card revenue will be adversely
impacted beginning in the third quarter of
143
2011. Our consumer and small business card products, including the debit card business, are part
of an integrated platform within the Global Card Services business segment. Based on our current
estimates of the revenue impact to this business segment, we recorded a non-tax deductible
goodwill impairment charge for Global Card Services in the three months ended September 30, 2010
of $10.4 billion. The impairment charge, which is a non-cash item, had no impact on our reported
Tier 1 and tangible equity ratios. For more information on goodwill and the impairment charge,
refer to Note 9 Goodwill and Intangible Assets to the Consolidated Financial Statements and
Complex Accounting Estimates on page 201.
On May 22, 2009, the CARD Act was signed into law. The majority of the CARD Act provisions
became effective in February 2010. The CARD Act legislation contains comprehensive credit card
reform related to credit card industry practices including significantly restricting banks
ability to change interest rates and assess fees to reflect individual consumer risk, changing the
way payments are applied and requiring changes to consumer credit card disclosures. The provisions
of the CARD Act negatively impacted net interest income and card income during the nine months
ended September 30, 2010 and are expected to negatively impact future net interest income due to
the restrictions on our ability to reprice credit cards based on risk, and card income due to
restrictions imposed on certain fees. The 2010 full-year decrease in revenue is expected to be
approximately $1 billion after-tax.
On November 12, 2009, the Federal Reserve issued amendments to Regulation E which implements
the Electronic Fund Transfer Act. The rules became effective on July 1, 2010 for new customers and
August 16, 2010 for existing customers. These amendments limit the way we and other banks charge
an overdraft fee for non-recurring debit card transactions that overdraw a consumers account
unless the consumer affirmatively consents to the banks payment of overdrafts for those
transactions. Under previously announced plans, we do not offer customers the opportunity to
opt-in to overdraft services related to non-recurring debit card transactions. However, customers
are able to opt-in on a withdrawal-by-withdrawal basis to access cash through the Bank of America
ATM network where the bank is able to alert customers that the transaction may overdraw their
account and result in a fee if they choose to proceed. The impact of Regulation E in the third
quarter was a reduction in service charges of approximately $375 million pre-tax. The 2010
full-year decrease in revenue related to the implementation of Regulation E and the impact of
overdraft policy changes is expected to be approximately $1 billion after-tax.
For information on certain Basel Committee on Banking Supervision consultative documents
and proposed capital requirements, see Basel Regulatory Capital Requirements on page 153.
On January 21, 2010, the Federal Reserve, Office of the Comptroller of the Currency, FDIC and
Office of Thrift Supervision (collectively, joint agencies) issued a final rule regarding
risk-based capital requirements related to the impact of the adoption of new consolidation
guidance. The impact on the Corporation on January 1, 2010, due to the new consolidation guidance
and the final rule was an increase in risk-weighted assets of $21.3 billion and a reduction in
capital of $9.7 billion. The overall effect of the new consolidation guidance and the final rule
was a decrease in Tier 1 capital and Tier 1 common ratios of 76 bps and 73 bps. For more
information, see the Impact of Adopting New Consolidation Guidance section on page 103 and
Liquidity Risk and Capital Management beginning on page 146.
On July 27, 2010, the U.K. government enacted a law change reducing the corporate income tax
rate by one percent effective for the 2011 U.K. tax financial year beginning on April 1, 2011. For
additional information, see Financial Highlights Income Tax Expense on page 102.
In the U.K., the Corporation sells payment protection insurance (PPI) through its Global Card
Services business to credit card customers and has previously sold this insurance to consumer loan
customers. In response to an elevated level of customer complaints of misleading sales tactics
across the industry, heightened media coverage and pressure from consumer advocacy groups, the
U.K. Financial Services Authority (FSA) has investigated and raised concerns about the way some
companies have handled complaints relating to the sale of these insurance policies. For additional
information on PPI, see Note 11 Commitments and Contingencies to the Consolidated Financial
Statements Payment Protection Insurance Claim Matter on page 58.
The U.K. has adopted increased capital and liquidity requirements for local financial
institutions, including regulated U.K. subsidiaries of foreign bank holding companies and other
financial institutions as well as branches of foreign banks located in the U.K. In addition, the
U.K. has proposed the creation and production of recovery and resolution plans (commonly referred
to as living wills) by such entities. We are currently monitoring the impact of these initiatives.
On February 23, 2010, regulators issued clarifying guidance, effective in the first quarter
of 2010, on modified consumer real estate loans that specifies criteria required to demonstrate a
borrowers capacity to repay the modified loan. In connection with this guidance, we reviewed our
modified consumer real estate loans and determined that a portion of these loans did not meet the
criteria and, therefore, were deemed collateral dependent. The guidance requires that modified
loans deemed to be collateral dependent be written down to their estimated collateral value which
resulted in $59 million of
144
net charge-offs during the three months ended September 30, 2010, of which $38 million were home
equity and $21 million were residential mortgage. In addition, the guidance resulted in $1.0
billion of net charge-offs during the nine months ended September 30, 2010 of which $809 million
were home equity, $196 million were residential mortgage and $9 million were discontinued real
estate.
On March 4, 2009, the U.S. Treasury provided details related to the $75 billion Making Home
Affordable program (MHA) which is focused on reducing the number of foreclosures and making it
easier for customers to refinance loans. The MHA consists of the Home Affordable Modification
Program (HAMP) which provides guidelines on first-lien loan modifications, and the Home Affordable
Refinance Program (HARP) which provides guidelines for loan refinancing. For additional
information, refer to page 44, Regulatory Initiatives section in the MD&A of the Corporations
2009 Annual Report and the paragraphs below.
As part of the MHA program, on April 28, 2009, the U.S. government announced intentions to
create the second lien modification program (2MP) that is designed to reduce the monthly payments
on qualifying home equity loans and lines of credit under certain conditions, including completion
of a HAMP modification on the first mortgage on the property. This program provides incentives to
lenders to modify all eligible loans that fall under the guidelines of this program. Additional
clarification on government guidelines for the program was announced in the first quarter of 2010.
On April 8, 2010, we began early implementation of the 2MP with the mailing of trial modification
offers to eligible home equity customers. We will modify eligible second liens under this
initiative regardless of whether the MHA modified first lien is serviced by Bank of America or
another participating servicer.
On April 5, 2010, we implemented the Home Affordable Foreclosure Alternatives (HAFA) program,
which is another addition to the HAMP, that assists borrowers with non-retention options instead
of foreclosure. The HAFA program provides incentives to lenders to assist all eligible borrowers
that fall under the guidelines of this program. Our first goal is to work with the borrower to
determine if a loan modification or other homeownership retention solution is available before
pursuing non-retention options such as short sales. Short sales are an important option for
homeowners who are facing financial difficulty and do not have a viable option to remain in the
home. HAFAs short sale guidelines are designed to streamline and standardize the process and will
be compatible with Bank of Americas new cooperative short sale program.
During the nine months ended September 30, 2010, 209,000 loan modifications were completed
with a total unpaid principal balance of $48.1 billion, including 84,000 customers who were
converted from trial-period to permanent modifications under the HAMP. In addition, on March 26,
2010, the U.S. government announced new changes to the MHA program guidelines that will include
principal forgiveness options to the HAMP for a sub-segment of qualified HAMP borrowers. The
details around eligibility, forgiveness arrangements, and the incentive structures are still being
finalized and are not available at the time of this filing; however, the implementation of these
changes is anticipated for the fourth quarter of 2010.
In addition to the programs described above, we have implemented several programs designed to
help our customers. For information on these programs, refer to Credit Risk Management beginning
on page 155. We will continue to help our customers address financial challenges through these
government programs and our own home retention programs.
Managing Risk
Given our wide range of business activities as well as the competitive dynamics, the
regulatory environment and the geographic span of such activities, risk taking is an inherent
activity for the Corporation. Our business exposes us to strategic, credit, market, liquidity,
compliance, operational and reputational risks. The Corporations risk management infrastructure
is continually evolving to meet the challenges posed by the increased complexity of the financial
services industry and markets, by our increased size and global footprint, and by the recent
financial crisis. We have redefined our risk framework and articulated a risk appetite approved by
the Corporations Board of Directors (the Board). While many of these processes, and roles and
responsibilities continue to evolve and mature, we continue to enhance our risk management process
with a focus on clarity of roles and accountabilities, escalation of issues, aggregation of risk
and data across the enterprise, and effective governance characterized by clarity and
transparency.
We take a comprehensive approach to risk management. Risk management planning is fully
integrated with strategic, financial and customer/client planning so that goals and
responsibilities are aligned across the organization. Risk is managed in a systematic manner by
focusing on the Corporation as a whole and managing risk across the enterprise and within
individual business units, products, services and transactions. We maintain a governance structure
that delineates the responsibilities for risk management activities, as well as governance and
oversight of those activities, by executive management and the Board. For a more detailed
discussion of our risk management activities, see pages 44 through 87 of the MD&A of the
Corporations 2009 Annual Report on Form 10-K.
145
Strategic Risk Management
Strategic risk is embedded in every line of business and is one of the major risk
categories along with credit, market, liquidity, compliance and operational risks. It is the risk
that results from adverse business decisions, ineffective or inappropriate business plans, or
failure to respond to changes in the competitive environment, business cycles, customer
preferences, product obsolescence, regulatory environment, business strategy execution and
resulting reputation risk. In the financial services industry, strategic risk is high due to
changing customer, competitive and regulatory environments. The Corporations appetite for
strategic risk is assessed within the context of the strategic plan, with strategic risks
selectively and carefully taken to maintain relevance in the evolving marketplace. Strategic risk
is managed in the context of our overall financial condition and assessed, managed and acted on by
the Chief Executive Officer and executive management team. Significant strategic actions, such as
material acquisitions or capital actions are reviewed and approved by the Board.
For more information on our Strategic Risk Management activities, refer to page 47 of the
MD&A of the Corporations 2009 Annual Report on Form 10-K.
Liquidity Risk and Capital Management
Funding and Liquidity Risk Management
We define liquidity risk as the potential inability to meet our contractual and
contingent financial obligations, on- or off-balance sheet, as they come due. Our primary
liquidity objective is to ensure adequate funding for our businesses throughout market cycles,
including periods of financial stress. To achieve that objective, we analyze and monitor our
liquidity risk, maintain excess liquidity and access diverse funding sources including our stable
deposit base. We define excess liquidity as readily available assets, limited to cash and
high-quality, liquid, unencumbered securities that we can use to meet our funding requirements as
those obligations arise.
Global funding and liquidity risk management activities are centralized within Corporate
Treasury. We believe that a centralized approach to funding and liquidity risk management enhances
our ability to monitor liquidity requirements, maximizes access to funding sources, minimizes
borrowing costs and facilitates timely responses to liquidity events. For additional information
regarding Funding and Liquidity Risk Management, see the discussion that follows and refer to page
47 of the MD&A of the Corporations 2009 Annual Report on Form 10-K.
Global Excess Liquidity Sources and Other Unencumbered Assets
We maintain excess liquidity available to the parent company, Bank of America Corporation,
and selected subsidiaries in the form of cash and high-quality, liquid, unencumbered securities
that together serve as our primary means of liquidity risk mitigation. We call these assets our
Global Excess Liquidity Sources, and we limit the composition of high-quality, liquid,
unencumbered securities to U.S. government securities, U.S. agency securities, U.S. agency MBS and
a select group of non-U.S. government securities. We believe we can quickly obtain cash for these
securities, even in stressed market conditions, through repurchase agreements or outright sales.
We hold these assets in entities that allow us to meet the liquidity requirements of our global
businesses and we consider the impact of potential regulatory, tax, legal and other restrictions
that could limit the transferability of funds among entities.
Our global excess liquidity sources increased $110 billion to $324 billion at September 30,
2010 compared to $214 billion at December 31, 2009 and were maintained as presented in the table
below. This increase was due primarily to liquidity generated by our bank subsidiaries through
loan repayments combined with lower loan demand and other factors.
|
|
|
|
|
|
|
|
|
Table 13 |
|
|
|
|
|
|
|
|
Global Excess Liquidity Sources |
|
|
September 30 |
|
|
December 31 |
|
(Dollars in billions) |
|
2010 |
|
|
2009 |
|
|
Parent company |
|
$ |
119 |
|
|
$ |
99 |
|
Bank subsidiaries |
|
|
176 |
|
|
|
89 |
|
Broker/dealers |
|
|
29 |
|
|
|
26 |
|
|
Total global excess liquidity sources |
|
$ |
324 |
|
|
$ |
214 |
|
|
146
As noted above, the excess liquidity available to the parent company is held in cash and
high-quality, liquid, unencumbered securities and totaled $119 billion and $99 billion at
September 30, 2010 and December 31, 2009. Typically, parent company cash is deposited overnight
with Bank of America, N.A.
Our bank subsidiaries excess liquidity sources at September 30, 2010 and December 31, 2009
consisted of $176 billion and $89 billion in cash on deposit at the Federal Reserve and
high-quality, liquid, unencumbered securities. These amounts are distinct from the cash deposited
by the parent company, as described above. In addition to their excess liquidity sources, our bank
subsidiaries hold significant amounts of other unencumbered securities that we believe could also
be used to generate liquidity, such as investment grade ABS and municipal bonds. Another way our
bank subsidiaries can generate incremental liquidity is by pledging a range of other unencumbered
loans and securities to certain Federal Home Loan Banks and the Federal Reserve Discount Window.
The cash we could have obtained by borrowing against this pool of specifically identified eligible
assets was approximately $193 billion and $187 billion at September 30, 2010 and December 31,
2009. We have established operational procedures to enable us to borrow against these assets,
including regularly monitoring our total pool of eligible loans and securities collateral. Due to
regulatory restrictions, liquidity generated by the bank subsidiaries may only be used to fund
obligations within the bank subsidiaries and may not be transferred to the parent company or other
nonbank subsidiaries.
Our broker/dealer subsidiaries excess liquidity sources at September 30, 2010 and December
31, 2009 consisted of $29 billion and $26 billion in cash and high-quality, liquid, unencumbered
securities. Our broker/dealers also held significant amounts of other unencumbered securities we
believe could be utilized to generate additional liquidity, including investment grade corporate
bonds, ABS and equities. Liquidity held in a broker/dealer subsidiary may only be available to
meet the liquidity requirements of that entity and may not be transferred to the parent company or
other subsidiaries.
Time to Required Funding and Stress Modeling
We use a variety of metrics to determine the appropriate amounts of excess liquidity to
maintain at the parent company and our bank and broker/dealer subsidiaries. The primary metric we
use to evaluate the appropriate level of excess liquidity at the parent company is Time to
Required Funding. This debt coverage measure indicates the number of months that the parent
company can continue to meet its unsecured contractual obligations as they come due using only its
Global Excess Liquidity Sources without issuing any new debt or accessing any additional liquidity
sources. We define unsecured contractual obligations for purposes of this metric as maturities of
senior or subordinated debt issued or guaranteed by Bank of America Corporation or Merrill Lynch &
Co., Inc., including certain unsecured debt instruments, primarily structured notes, which we may
be required to settle for cash prior to maturity. The Asset Liability Market Risk Committee
(ALMRC) has established a minimum target for Time to Required Funding of 21 months. Time to
Required Funding was 23 months at September 30, 2010 compared to 25 months at December 31, 2009.
We also utilize liquidity stress models to assist us in determining the appropriate amounts
of excess liquidity to maintain at the parent company and our bank and broker/dealer subsidiaries.
We use these models to analyze our potential contractual and contingent cash outflows and
liquidity requirements under a range of scenarios with varying levels of severity and time
horizons. These scenarios incorporate market-wide and Corporation-specific events, including
potential credit rating downgrades for the parent company and our subsidiaries. We consider and
utilize scenarios based on historical experience, regulatory guidance, and both expected and
unexpected future events.
Diversified Funding Sources
We fund our assets primarily with a mix of deposits and secured and unsecured liabilities
through a globally coordinated funding strategy. We diversify our funding globally across
products, programs, markets, currencies and investor bases.
We fund a substantial portion of our lending activities through our deposit base which was
$977 billion and $992 billion at September 30, 2010 and December 31, 2009. Deposits are primarily
generated by our Deposits, Global Commercial Banking, GWIM and GBAM segments. These deposits are
diversified by clients, product type and geography. Some of our domestic deposits are insured by
the FDIC. We consider a substantial portion of our deposits to be a stable, low-cost and
consistent source of funding. We believe this deposit funding is generally less sensitive to
interest rate changes, market volatility or changes in our credit ratings than wholesale funding
sources.
Our trading activities are primarily funded on a secured basis through securities lending and
repurchase agreements; these amounts will vary based on customer activity and market conditions.
We believe funding these activities in the secured financing markets is more cost-efficient and
less sensitive to changes in our credit ratings than unsecured financing. Repurchase agreements
are generally short-term and often occur overnight. Disruptions in secured financing markets for
financial institutions have occurred in prior market cycles which resulted in adverse changes in
terms or significant
147
reductions in the availability of such financing. We manage the liquidity risks arising from
secured funding by sourcing funding globally from a diverse group of counterparties, providing a
range of securities collateral and pursuing longer durations, when appropriate.
In addition, our parent company, bank and broker-dealer subsidiaries regularly access
short-term secured and unsecured markets through federal funds purchased, commercial paper and
other short-term borrowings to support customer activities, short-term financing requirements and
cash management.
The table below presents information for short-term borrowings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 14 |
|
|
|
|
Short-term Borrowings |
|
|
|
|
|
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
|
|
Amount |
|
Rate |
|
Amount |
|
Rate |
(Dollars in millions) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Average during period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased |
|
$ |
4,608 |
|
|
$ |
6,444 |
|
|
|
0.20 |
% |
|
|
0.02 |
% |
|
$ |
5,205 |
|
|
$ |
4,196 |
|
|
|
0.14 |
% |
|
|
0.04 |
% |
Securities
loaned or sold under agreements to repurchase |
|
|
313,760 |
|
|
|
345,639 |
|
|
|
0.76 |
|
|
|
1.05 |
|
|
|
367,106 |
|
|
|
366,193 |
|
|
|
0.65 |
|
|
|
1.17 |
|
Commercial paper |
|
|
24,908 |
|
|
|
20,626 |
|
|
|
0.65 |
|
|
|
0.84 |
|
|
|
31,191 |
|
|
|
28,963 |
|
|
|
0.51 |
|
|
|
1.12 |
|
Other short-term borrowings |
|
|
47,872 |
|
|
|
38,354 |
|
|
|
1.69 |
|
|
|
2.91 |
|
|
|
47,246 |
|
|
|
102,133 |
|
|
|
1.81 |
|
|
|
1.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
391,148 |
|
|
$ |
411,063 |
|
|
|
0.86 |
|
|
|
1.19 |
|
|
$ |
450,748 |
|
|
$ |
501,485 |
|
|
|
0.76 |
|
|
|
1.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum month-end balance during period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased |
|
$ |
4,560 |
|
|
$ |
2,407 |
|
|
|
|
|
|
|
|
|
|
$ |
8,320 |
|
|
$ |
3,646 |
|
|
|
|
|
|
|
|
|
Securities loaned or sold under agreements to repurchase |
|
|
312,736 |
|
|
|
368,816 |
|
|
|
|
|
|
|
|
|
|
|
458,532 |
|
|
|
407,967 |
|
|
|
|
|
|
|
|
|
Commercial paper |
|
|
24,834 |
|
|
|
21,921 |
|
|
|
|
|
|
|
|
|
|
|
40,417 |
|
|
|
37,025 |
|
|
|
|
|
|
|
|
|
Other short-term borrowings |
|
|
44,002 |
|
|
|
55,426 |
|
|
|
|
|
|
|
|
|
|
|
59,192 |
|
|
|
169,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
386,132 |
|
|
$ |
448,570 |
|
|
|
|
|
|
|
|
|
|
$ |
566,461 |
|
|
$ |
618,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
|
|
|
|
December 31, 2009 |
|
Period-end
balance |
|
Amount |
|
|
Rate |
|
|
|
|
|
|
Amount |
|
|
Rate |
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased |
|
$ |
2,712 |
|
|
|
0.22 |
% |
|
|
|
|
|
$ |
4,814 |
|
|
|
0.09 |
% |
Securities loaned or sold under agreements to repurchase |
|
|
293,893 |
|
|
|
0.92 |
|
|
|
|
|
|
|
250,371 |
|
|
|
0.39 |
|
Commercial paper |
|
|
21,935 |
|
|
|
0.68 |
|
|
|
|
|
|
|
13,131 |
|
|
|
0.65 |
|
Other short-term borrowings |
|
|
42,883 |
|
|
|
1.29 |
|
|
|
|
|
|
|
56,393 |
|
|
|
1.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
361,423 |
|
|
|
0.94 |
|
|
|
|
|
|
$ |
324,709 |
|
|
|
0.59 |
|
|
At September 30, 2010, commercial paper and other short-term borrowings included $13.2
billion from VIEs that were consolidated in accordance with new consolidation guidance effective
January 1, 2010.
For average and period-end balance discussions, see Balance Sheet
Analysis beginning on page 103.
We issue the majority of our long-term unsecured debt at the parent company and Bank of
America, N.A. During the three and nine months ended September 30, 2010, the parent company issued
$10.1 billion and $23.5 billion of long-term senior unsecured debt. During the nine months ended
September 30, 2010, Bank of America N.A. issued $3.5 billion of long-term senior unsecured debt,
all of which was issued in the first quarter of 2010.
The primary benefits of our centralized funding strategy include greater control, reduced
funding costs, wider name recognition by investors and greater flexibility to meet the variable
funding requirements of subsidiaries. Where regulations, time zone differences or other business
considerations make parent company funding impractical, certain other subsidiaries may issue their
own debt.
We issue long-term unsecured debt in a variety of maturities and currencies to achieve
cost-efficient funding and to maintain an appropriate maturity profile. While the cost and
availability of unsecured funding may be negatively impacted by general market conditions or by
matters specific to the financial services industry or the Corporation, we seek to mitigate
refinancing risk by actively managing the amount of our borrowings that we anticipate will mature
within any month or quarter.
148
At September 30, 2010 and December 31, 2009, our long-term debt was in the currencies
presented in the table below.
|
|
|
|
|
|
|
|
|
Table 15 |
|
|
|
|
|
|
|
|
Long-term Debt By Major Currency |
|
|
September 30 |
|
|
December 31 |
|
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
U.S. Dollar |
|
$ |
322,831 |
|
|
$ |
281,692 |
|
Euros |
|
|
95,000 |
|
|
|
99,917 |
|
Japanese Yen |
|
|
20,027 |
|
|
|
19,903 |
|
British Pound |
|
|
19,205 |
|
|
|
16,460 |
|
Australian Dollar |
|
|
7,307 |
|
|
|
7,973 |
|
Canadian Dollar |
|
|
6,546 |
|
|
|
4,894 |
|
Swiss Franc |
|
|
2,907 |
|
|
|
2,666 |
|
Other |
|
|
5,035 |
|
|
|
5,016 |
|
|
Total long-term debt |
|
$ |
478,858 |
|
|
$ |
438,521 |
|
|
At September 30, 2010, the above table includes $79.2 billion of primarily U.S. Dollar
long-term debt of VIEs that were consolidated in accordance with new consolidation guidance
effective January 1, 2010.
We use derivative transactions to manage the duration, interest rate and currency risks of
our borrowings, considering the characteristics of the assets they are funding. For further
details on our ALM activities, refer to Interest Rate Risk Management for Nontrading Activities
beginning on page 195.
We also diversify our funding sources by issuing various types of debt instruments including
structured notes, which are debt obligations that pay investors with returns linked to other debt
or equity securities, indices, currencies or commodities. We typically hedge the returns we are
obligated to pay on these notes with derivative positions and/or in the underlying instruments so
that from a funding perspective, the cost is similar to our other unsecured long-term debt. We
could be required to immediately settle certain structured note obligations for cash or other
securities under certain circumstances, which we consider for liquidity planning purposes. We
believe, however, that a portion of such borrowings will remain outstanding beyond the earliest
put or redemption date. We had outstanding structured notes of $57 billion at both September 30,
2010 and December 31, 2009.
Substantially all of our senior and subordinated debt obligations contain no provisions that
could trigger a requirement for an early repayment, require additional collateral support, result
in changes to terms, accelerate maturity, or create additional financial obligations upon an
adverse change in our credit ratings, financial ratios, earnings, cash flows or stock price.
For additional information on debt funding, see Note 13 Long-term Debt to the Consolidated
Financial Statements of the Corporations 2009 Annual Report on Form 10-K. For additional
information regarding Funding and Liquidity Risk Management, refer to pages 47 through 49 of the
MD&A of the Corporations 2009 Annual Report on Form 10-K.
Credit Ratings
Our borrowing costs and ability to raise funds are directly impacted by our credit ratings.
In addition, credit ratings may be important to customers or counterparties when we compete in
certain markets and when we seek to engage in certain transactions including over-the-counter
(OTC) derivatives. Thus, it is our objective to maintain high-quality credit ratings.
Credit ratings and outlooks are opinions subject to ongoing review by the ratings agencies
and may change from time to time. The ratings agencies regularly review our performance, prospects
and financial condition, and our securities and reevaluate their ratings of our long-term debt,
short-term borrowings and other securities, including asset securitizations. These evaluations are
based on a number of factors, including our own financial strength and operations as well as
factors not under our control such as rating-agency-specific criteria or frameworks and conditions
affecting the financial services industry generally. In light of the recent difficulties in the
financial services industry and the financial markets, there can be no assurance that we will
maintain our current ratings.
During 2009 and 2010, the ratings agencies have taken numerous actions, many of which were
negative, to adjust our credit ratings and the outlooks for those ratings. Currently, Bank of
America Corporations long-term senior debt and outlook expressed by the ratings agencies are as
follows: A2 (negative) by Moodys Investors Services, Inc. (Moodys), A (negative) by Standard and
Poors Ratings Services, a division of The McGraw-Hill Companies, Inc. (S&P), and A+ (Rating Watch
Negative) by Fitch, Inc. (Fitch). Bank of America, N.A.s long-term debt and outlook currently are
as follows: A+ (negative), Aa3 (negative) and A+ (Rating Watch Negative) by those same three
credit rating agencies,
149
respectively. The ratings agencies have indicated that our credit ratings currently reflect their
expectation that, if necessary, we would receive significant support from the U.S. government but
all three ratings agencies have indicated they will reevaluate, and could reduce the uplift they include
in our ratings for government support for reasons arising from financial services regulatory
reform proposals or legislation. In February 2010, S&P affirmed our current credit ratings but
revised the outlook to negative from stable based on its belief that it is less certain whether
the U.S. government would be willing to provide extraordinary support. Also, on July 27, 2010,
Moodys affirmed our current ratings but revised the outlook to negative from stable due to its
expectation for lower levels of government support over time as a result of the passage of the
Financial Reform Act. Also, on October 22, 2010, Fitch placed our credit ratings on Rating Watch
Negative from stable outlook due to proposed regulation that could negatively impact its
assessment of future systemic government support. Other factors that influence our credit ratings
include changes to the ratings agencies methodologies, the ratings agencies assessment of the
general operating environment, our relative positions in the markets in which we compete,
reputation, liquidity position, the level and volatility of earnings, corporate governance and
risk management policies, capital position, capital management practices and current or future
regulatory and legislative initiatives.
A reduction in certain of our credit ratings or the ratings of certain asset-backed
securitizations would likely have a material adverse effect on our liquidity, access to credit
markets, the related cost of funds, our businesses and on certain trading revenues, particularly
in those businesses where counterparty creditworthiness is critical. If Bank of America
Corporations or Bank of America, N.A.s commercial paper or short-term credit ratings (which
currently have the following ratings: P-1 by Moodys, A-1 by S&P and F1+ by Fitch) were downgraded
by one or more levels, the effect on our incremental cost of funds and potential lost funding
would be material. For information regarding the additional collateral and termination payments
that would be required in connection with certain OTC derivative contracts and other trading
agreements as a result of such a credit ratings downgrade, see Note 4 Derivatives to the
Consolidated Financial Statements and Item 1A. Risk Factors of the Corporations 2009 Annual
Report on Form 10-K.
The credit ratings of Merrill Lynch & Co., Inc. from the three major credit ratings agencies
are the same as those of Bank of America Corporation. The major credit ratings agencies have
indicated that the primary drivers of Merrill Lynchs credit ratings are Bank of America Corporationss credit
ratings.
Regulatory Capital
To meet minimum, adequately capitalized regulatory requirements, an institution must
maintain a Tier 1 capital ratio of four percent and a Total capital ratio of eight percent. A
well-capitalized institution must generally maintain capital ratios 200 bps higher than the
minimum guidelines. The risk-based capital rules have been further supplemented by a Tier 1
leverage ratio, defined as Tier 1 capital divided by quarterly average total assets, after certain
adjustments. Well-capitalized bank holding companies must have a minimum Tier 1 leverage ratio
of four percent. National banks must maintain a Tier 1 leverage ratio of at least five percent to
be classified as well-capitalized. At September 30, 2010, the Corporations Tier 1 capital,
Total capital and Tier 1 leverage ratios were 11.16 percent, 15.65 percent and 7.21 percent,
respectively. This classifies the Corporation as well-capitalized for regulatory purposes, the
highest classification.
Certain corporate-sponsored trust companies which issue trust preferred securities are not
consolidated. In accordance with Federal Reserve guidance, the Federal Reserve currently allows
the trust preferred securities to qualify as Tier 1 capital with revised quantitative limits that
will be effective on March 31, 2011. As a result, we include trust preferred securities in Tier 1
capital. The Financial Reform Act includes a provision under which our previously issued and
outstanding trust preferred securities in the aggregate amount of $19.9 billion (approximately 135
bps of Tier 1 capital) at September 30, 2010, will no longer qualify as Tier 1 capital effective
January 1, 2013. This amount excludes $1.6 billion of hybrid trust preferred securities that are
expected to be converted to preferred stock prior to the date of implementation. The
exclusion of trust preferred securities from Tier 1 capital will be phased in incrementally over
a three-year phase-in period. The treatment of trust preferred securities during the phase-in
period remains unclear and is subject to future rulemaking. Current limits restrict core capital
elements to 15 percent of total core capital elements for internationally active bank holding
companies. In addition, the Federal Reserve revised the qualitative standards for capital
instruments included in regulatory capital. Internationally active bank holding companies are
those that have significant activities in non-U.S. markets with consolidated assets greater than
$250 billion or on-balance sheet foreign exposure greater than $10 billion. At September 30, 2010,
our restricted core capital elements comprised 11.5 percent of total core capital elements. We
expect to remain fully compliant with the revised limits prior to the implementation date of March
31, 2011.
The Corporation calculates Tier 1 common capital as Tier 1 capital including any CES less
preferred stock, qualifying trust preferred securities, hybrid securities and qualifying
noncontrolling interest in subsidiaries. CES was included in Tier 1 common capital based upon
applicable regulatory guidance and our expectation at December 31, 2009 that the underlying
150
Common Equivalent Junior Preferred Stock, Series S would convert into common stock following
shareholder approval of additional authorized shares. Shareholders approved the increase in the
number of authorized shares of common stock at a special meeting of stockholders held on February
23, 2010 and the Common Equivalent Stock converted to common stock on February 24, 2010.
Tier 1 common capital increased $4.4 billion to $124.8 billion at September 30, 2010 compared
to $120.4 billion at December 31, 2009. The Tier 1 common capital ratio increased 64 bps to 8.45
percent. The ratio increase was driven by the $9.4 billion in earnings generated for the first
nine months in 2010 (excluding the goodwill impairment charge of $10.4 billion) partially offset
by the $6.2 billion charge, net-of-tax, for the cumulative effect of the adoption of the new
consolidation guidance primarily related to the increase in the allowance for loan and lease
losses. In addition, risk-weighted assets decreased $65.7 billion primarily due to declines in
loans, available-for-sale securities and letters of credit. The goodwill impairment charge does
not impact regulatory capital ratios.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory Capital |
|
|
September 30, 2010 |
|
December 31, 2009 |
|
|
Actual |
|
Minimum |
|
Actual |
|
Minimum |
(Dollars in millions) |
|
Ratio |
|
Amount |
|
Required (1) |
|
Ratio |
|
Amount |
|
Required (1) |
|
Risk-based capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of America Corporation |
|
|
8.45 |
% |
|
$ |
124,756 |
|
|
|
n/a |
|
|
|
7.81 |
% |
|
$ |
120,394 |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of America Corporation |
|
|
11.16 |
|
|
|
164,763 |
|
|
$ |
59,071 |
|
|
|
10.40 |
|
|
|
160,388 |
|
|
$ |
61,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of America, N.A. |
|
|
11.05 |
|
|
|
115,901 |
|
|
|
41,955 |
|
|
|
10.30 |
|
|
|
111,916 |
|
|
|
43,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIA Card Services, N.A. |
|
|
14.98 |
|
|
|
24,489 |
|
|
|
6,540 |
|
|
|
15.21 |
|
|
|
28,831 |
|
|
|
7,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of America Corporation |
|
|
15.65 |
|
|
|
231,120 |
|
|
|
118,142 |
|
|
|
14.66 |
|
|
|
226,070 |
|
|
|
123,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of America, N.A. |
|
|
14.58 |
|
|
|
152,966 |
|
|
|
83,910 |
|
|
|
13.76 |
|
|
|
149,528 |
|
|
|
86,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIA Card Services, N.A. |
|
|
16.77 |
|
|
|
27,416 |
|
|
|
13,080 |
|
|
|
17.01 |
|
|
|
32,244 |
|
|
|
15,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of America Corporation |
|
|
7.21 |
|
|
|
164,763 |
|
|
|
91,407 |
|
|
|
6.88 |
|
|
|
160,388 |
|
|
|
93,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of America, N.A. |
|
|
8.02 |
|
|
|
115,901 |
|
|
|
57,772 |
|
|
|
7.38 |
|
|
|
111,916 |
|
|
|
60,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIA Card Services, N.A. |
|
|
12.54 |
|
|
|
24,489 |
|
|
|
7,808 |
|
|
|
23.09 |
|
|
|
28,831 |
|
|
|
4,994 |
|
|
|
|
|
(1) |
|
Dollar amount required to meet guidelines for
adequately capitalized institutions. |
n/a = not applicable
151
Table 17 provides a reconciliation of the Corporations total shareholders equity at
September 30, 2010 and December 31, 2009 to Tier 1 common capital, Tier 1 capital and Total
capital as defined by the regulations issued by the joint agencies.
|
|
|
|
|
|
|
|
|
Table 17 |
Reconciliation of Tier 1 Common Capital, Tier 1 Capital and Total Capital |
|
|
September 30 |
|
December 31 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
Total common shareholders equity |
|
$ |
212,391 |
|
|
$ |
194,236 |
|
Goodwill |
|
|
(75,602 |
) |
|
|
(86,314 |
) |
Nonqualifying intangible assets (1) |
|
|
(7,165 |
) |
|
|
(8,299 |
) |
Net unrealized gains or losses on AFS debt and marketable equity securities and net losses on
derivatives recorded in accumulated OCI, net-of-tax |
|
|
(4,495 |
) |
|
|
1,034 |
|
Unamortized net periodic benefit costs recorded in accumulated OCI, net-of-tax |
|
|
3,904 |
|
|
|
4,092 |
|
Exclusion of fair value adjustment related to structured notes (2) |
|
|
2,236 |
|
|
|
2,981 |
|
Common Equivalent Securities |
|
|
- |
|
|
|
19,290 |
|
Disallowed deferred tax asset |
|
|
(7,112 |
) |
|
|
(7,080 |
) |
Other |
|
|
599 |
|
|
|
454 |
|
|
Total Tier 1 common capital |
|
|
124,756 |
|
|
|
120,394 |
|
|
Preferred stock |
|
|
18,104 |
|
|
|
17,964 |
|
Trust preferred securities |
|
|
21,429 |
|
|
|
21,448 |
|
Noncontrolling interest |
|
|
474 |
|
|
|
582 |
|
|
Total Tier 1 capital |
|
|
164,763 |
|
|
|
160,388 |
|
|
Long-term debt qualifying as Tier 2 capital |
|
|
41,730 |
|
|
|
43,284 |
|
Allowance for loan and lease losses |
|
|
43,581 |
|
|
|
37,200 |
|
Reserve for unfunded lending commitments |
|
|
1,294 |
|
|
|
1,487 |
|
Other (3) |
|
|
(20,248 |
) |
|
|
(16,289 |
) |
|
Total capital |
|
$ |
231,120 |
|
|
$ |
226,070 |
|
|
|
|
|
(1) |
|
Nonqualifying intangible assets include core deposit intangibles, affinity
relationships, customer relationships and other intangibles. |
|
(2) |
|
Represents loss on structured notes, net-of-tax, that is excluded from Tier 1 common
capital, Tier 1 capital and Total capital for regulatory purposes. |
|
(3) |
|
Balance includes a reduction of $26.1 billion and $18.6 billion related to allowance
for loan and lease losses exceeding 1.25 percent of risk-weighted assets at September 30, 2010 and
December 31, 2009, partially offset by $4.4 billion and $1.5 billion representing 45 percent of the
pre-tax net unrealized gains on AFS marketable equity securities. |
Enterprise-wide Stress Testing
As a part of our core risk management practices, the Corporation conducts
enterprise-wide stress tests on a periodic basis to better understand earnings, capital and
liquidity sensitivities to certain economic and business scenarios, including economic conditions
that are more severe than anticipated. These enterprise-wide stress tests provide an understanding
of the potential impacts to our risk profile, capital and liquidity. Scenarios are selected by a
group comprised of senior line of business, risk and finance executives. Impacts to each line of
business from each scenario are then determined and analyzed, primarily leveraging the models and
processes utilized in everyday management routines. Impacts are assessed along with potential
mitigating actions that may be taken. Analysis from such stress scenarios is compiled for and
reviewed through our Risk Oversight Committee (ROC), ALMRC and the Enterprise Risk Committee of
the Board and serves to inform and be incorporated, along with other core business processes, into
decision making by management and the Board. The Corporation continues to invest in and improve
stress testing capabilities as a core business process.
Regulatory Capital Impact of Final Rule on Adopting New Consolidation Guidance
On January 21, 2010, the joint agencies issued a final rule regarding risk-based capital
and the impact of new consolidation guidance issued by the Financial Accounting Standards Board
(FASB). The final rule allows for a phase-in period for a maximum of one year for the effect on
risk-weighted assets and the regulatory limit on the inclusion of the allowance for loan and lease
losses in Tier 2 capital related to the assets that are consolidated. The Corporation elected to
forgo the phase-in period and consolidated the amounts for regulatory capital purposes as of
January 1, 2010. The incremental impact to the Corporation on January 1, 2010, was an increase in
assets of $100.4 billion and risk-weighted assets of $21.3 billion and a reduction in capital of
$9.7 billion. The overall effect of the new consolidation guidance and the final rule was a
decrease in Tier 1 capital and Tier 1 common capital ratios of 76 bps and 73 bps. For more
information
152
on the impact of the new consolidation guidance, refer to Note 8 Securitizations and Other
Variable Interest Entities to the Consolidated Financial Statements.
Basel Regulatory Capital and Liquidity Requirements
In June 2004, the Basel II Accord was published with the intent of more closely aligning
regulatory capital requirements with underlying risks, similar to economic capital. While economic
capital is measured to cover unexpected losses, the Corporation also manages regulatory capital to
adhere to regulatory standards of capital adequacy.
The Basel II Final Rule (Basel II Rules), which was published on December 7, 2007,
establishes requirements for the U.S. implementation and provides detailed capital requirements
for credit and operational risk (Pillar 1), supervisory requirements (Pillar 2) and disclosure
requirements (Pillar 3). We began Basel II parallel implementation on April 1, 2010.
Financial institutions are required to successfully complete a minimum parallel qualification
period before receiving regulatory approval to report regulatory capital using the Basel II
methodology. During the parallel period, the resulting capital calculations under both the current
risk-based capital rules and the Basel II Rules will be reported to the financial institutions
regulatory supervisors for at least four consecutive quarterly periods. Once the parallel period
is successfully completed, the financial institutions will utilize Basel II as the methodology for
calculating regulatory capital. A three-year transitional floor period will follow after which use
of Basel I will be discontinued.
In July 2009, the Basel Committee on Banking Supervision (the Committee) released a
consultative document entitled Revisions to the Basel II Market Risk Framework that would
significantly increase the capital requirements for trading book activities if adopted as
proposed. The proposal recommended implementation by December 31, 2010, but regulatory agencies
continue to evaluate the proposed rulemaking and related impacts before establishing final rules.
While the proposal originally recommended implementation by December 31, 2010, implementation is
now targeted by December 31, 2011 but U.S. regulators have not yet issued final regulations. We
continue to evaluate the capital impact of the rules as proposed and currently anticipate being
fully compliant with the revised rules by the fourth quarter of 2011.
In December 2009, the Committee issued a consultative document entitled Strengthening the
Resilience of the Banking Sector, with additional guidance published in July and September 2010
describing pending changes to the December consultative document. This document has become known
as Basel III. The Committee expects to issue final rules by year-end 2010 and is calling for
regulators to implement regulations by year-end 2012. If adopted as proposed, the rules could
significantly increase capital requirements for the Corporation. The consultative document and the
Financial Reform Act propose disqualification of trust preferred securities and other hybrid
capital securities from Tier 1 capital treatment with the Financial Reform Act proposing to be
phased in over the period from 2013 to 2015. The consultative document also proposes the potential
capital deduction of certain assets (deferred tax assets, MSRs and investments in financial firms
within prescribed limitations certain of which may be significant), increased capital for
counterparty credit risk, and new minimum capital and buffer requirements. The phase-in period for
these capital deductions is currently proposed to be in 20 percent increments during 2014 through
2018 with full implementation by December 2018. For additional information on our MSRs, refer to
Note 16 Mortgage Servicing Rights to the Consolidated Financial Statements. For additional
information on deferred tax assets, refer to Note 19 Income Taxes to the Consolidated Financial
Statements of the Corporations 2009 Annual Report on Form 10-K.
The guidance published in July and clarified in September 2010 proposed the inclusion of
three capital buffers to strengthen capital levels which would be phased in over time. These
buffers include a 2.5 percent capital conservation buffer to be comprised of common equity after
certain deductions to be phased in beginning in 2016. Additionally, the proposal includes a
counter-cyclical buffer, with a proposed upper limit of 2.5 percent. This buffer is to be
comprised of loss absorbing capital, such as common equity and is meant to retain additional
capital during periods of strong credit expansion, providing incremental protection in the event
of a material market downturn. The third proposed buffer is a systemic buffer, which currently
does not have prescribed limits. This buffer is specific to systemically important financial
institutions. The counter-cyclical and systemic buffers are scheduled to be phased in over 2013
through 2019. Beginning in January 2013 we would be required to maintain a Tier 1 common equity
minimum capital ratio of 3.5 percent, a Tier 1 capital ratio of 4.5 percent and an 8 percent total
capital ratio. The common equity and Tier 1 capital ratios will also be subject to incremental
increases to be phased in over time. These ratios will increase to 4.5 percent and 6.0 percent by
January 1, 2015. We continue to monitor the development and potential impact of these proposals,
and have determined that given current initiatives and continued focus on these proposals that by
the date of full implementation of these proposals in 2018, we must have a Tier 1 common capital
ratio of seven percent which we anticipate we will meet. We do not expect the need to issue any common
stock to meet the new Basel proposals.
In addition to the capital proposals, in December 2009 the Committee issued a consultative
document entitled International framework for liquidity risk measurement, standards and
monitoring, introducing two new measures of liquidity risk. The Liquidity Coverage Ratio
identifies the amount of unencumbered, high quality liquid assets a financial institution holds
that can be used to offset the net cash outflows the institution
would encounter under an acute 30-day stress scenario. The Net Stable Funding Ratio measures the amount of longer-term, stable
sources of funding employed by a financial institution relative to the liquidity profiles of the
assets funded and the potential for contingent calls on funding liquidity arising from off-balance
sheet commitments and obligations, over a one-year period. These two minimum liquidity standards
are also considered part of Basel III. Following further guidance published in July and
September 2010, the Committee expects the Liquidity Coverage Ratio to be implemented in January
2015 and the Net Stable Funding Ratio in January 2018, following observation periods beginning in
2011 and 2012, respectively. We continue to monitor the development and potential impact of these
proposals.
153
Common Share Issuances and Repurchases
On February 24, 2010, 1.286 billion shares of common stock were issued through the
conversion of Common Equivalent Stock into common stock. For more information regarding this
conversion, see Preferred Stock Conversion below.
There were no common shares repurchased in the nine months ended September 30, 2010 except
for shares acquired under equity incentive plans, as discussed in Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds, on page 212. Currently, there is no existing Board
authorized share repurchase program.
For more information regarding our common share issuances, see Note 12 Shareholders
Equity and Earnings Per Common Share to the Consolidated Financial Statements.
Common Stock Dividends
The table below is a summary of our regular quarterly cash dividends on common stock for
2010 as of November 5, 2010.
|
|
|
|
|
|
|
|
|
Table 18 |
|
Common Stock Cash Dividend Summary |
Declaration Date |
|
Record Date |
|
Payment Date |
|
Dividend Per Share |
|
|
October 25, 2010 |
|
December 3, 2010 |
|
December 24, 2010 |
|
$ |
0.01 |
|
July 28, 2010 |
|
September 3, 2010 |
|
September 24, 2010 |
|
|
0.01 |
|
April 28, 2010 |
|
June 4, 2010 |
|
June 25, 2010 |
|
|
0.01 |
|
January 27, 2010 |
|
March 5, 2010 |
|
March 26, 2010 |
|
|
0.01 |
|
|
Preferred Stock Conversion
On December 2, 2009, we received approval from the U.S. Treasury and Federal Reserve to
repay the U.S. governments $45.0 billion preferred stock investment provided under TARP. In
accordance with the approval, on December 9, 2009, we repurchased all outstanding shares of
Cumulative Perpetual Preferred Stock Series N, Series Q and Series R previously issued to the U.S.
Treasury as part of the TARP. We did not repurchase the related common stock warrants issued to
the U.S. Treasury in connection with its TARP investment. The U.S. Treasury auctioned these
warrants in March 2010.
We repurchased the TARP Preferred Stock through the use of $25.7 billion in excess liquidity
and $19.3 billion in proceeds from the sale of 1.3 billion units of CES valued at $15.00 per unit.
The CES consisted of depositary shares representing interests in shares of Common Equivalent Stock
and contingent warrants to purchase an aggregate 60 million shares of the Corporations common
stock.
The Corporation held a special meeting of stockholders on February 23, 2010 at which we
obtained shareholder approval of an amendment to our amended and restated certificate of
incorporation to increase the number of authorized shares of our common stock, and following
effectiveness of the amendment, on February 24, 2010, the Common Equivalent Stock automatically
converted in full into our common stock, the contingent warrants automatically expired without
becoming exercisable and the CES ceased to exist.
On October 15, 2010, all of the outstanding shares of the mandatory convertible Preferred
Stock, Series 2 and Series 3, of Merrill Lynch automatically converted into an aggregate of
50,354,545 shares of the Corporations Common Stock in accordance with the terms of these
preferred securities.
154
Preferred Stock Dividends
The table below is a summary of our most recent cash dividend declarations on preferred
stock as of November 5, 2010. For additional information on preferred stock, see Note 15
Shareholders Equity and Earnings Per Common Share to the Consolidated Financial Statements of the
Corporations 2009 Annual Report on Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 19 |
|
Preferred Stock Cash Dividend Summary |
|
|
Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Annum |
|
|
Dividend Per |
|
Preferred Stock |
|
(in millions) |
|
|
Declaration Date |
|
|
Record Date |
|
|
Payment Date |
|
|
Dividend Rate |
|
|
Share |
|
|
Series B (1) |
|
$ |
1 |
|
|
October 25, 2010 |
|
January 11, 2011 |
|
January 25, 2011 |
|
|
7.00 |
% |
|
$ |
1.75 |
|
|
Series D (2) |
|
$ |
661 |
|
|
October 4, 2010 |
|
November 30, 2010 |
|
December 14, 2010 |
|
|
6.204 |
% |
|
$ |
0.38775 |
|
|
Series E (2) |
|
$ |
487 |
|
|
October 4, 2010 |
|
October 29, 2010 |
|
November 15, 2010 |
|
Floating |
|
|
$ |
0.25556 |
|
|
Series H (2) |
|
$ |
2,862 |
|
|
October 4, 2010 |
|
October 15, 2010 |
|
November 1, 2010 |
|
|
8.20 |
% |
|
$ |
0.51250 |
|
|
Series I (2) |
|
$ |
365 |
|
|
October 4, 2010 |
|
December 15, 2010 |
|
January 3, 2011 |
|
|
6.625 |
% |
|
$ |
0.41406 |
|
|
Series J (2) |
|
$ |
978 |
|
|
October 4, 2010 |
|
October 15, 2010 |
|
November 1, 2010 |
|
|
7.25 |
% |
|
$ |
0.45312 |
|
|
Series K (3, 4) |
|
$ |
1,668 |
|
|
July 2, 2010 |
|
July 15, 2010 |
|
July 30, 2010 |
|
Fixed-to-Floating |
|
|
$ |
40.00 |
|
|
Series L |
|
$ |
3,349 |
|
|
September 17, 2010 |
|
October 1, 2010 |
|
November 1, 2010 |
|
|
7.25 |
% |
|
$ |
18.125 |
|
|
Series M (3,4) |
|
$ |
1,434 |
|
|
October 4, 2010 |
|
October 31, 2010 |
|
November 15, 2010 |
|
Fixed-to-Floating |
|
|
$ |
40.625 |
|
|
Series 1 (5) |
|
$ |
146 |
|
|
October 4, 2010 |
|
November 15, 2010 |
|
November 29, 2010 |
|
Floating |
|
|
$ |
0.19167 |
|
|
Series 2 (5) |
|
$ |
526 |
|
|
October 4, 2010 |
|
November 15, 2010 |
|
November 29, 2010 |
|
Floating |
|
|
$ |
0.19167 |
|
|
Series 3 (5) |
|
$ |
670 |
|
|
October 4, 2010 |
|
November 15, 2010 |
|
November 29, 2010 |
|
|
6.375 |
% |
|
$ |
0.39843 |
|
|
Series 4 (5) |
|
$ |
389 |
|
|
October 4, 2010 |
|
November 15, 2010 |
|
November 29, 2010 |
|
Floating |
|
|
$ |
0.25556 |
|
|
Series 5 (5) |
|
$ |
606 |
|
|
October 4, 2010 |
|
November 1, 2010 |
|
November 22, 2010 |
|
Floating |
|
|
$ |
0.25556 |
|
|
Series 6 (6) |
|
$ |
65 |
|
|
October 4, 2010 |
|
December 15, 2010 |
|
December 30, 2010 |
|
|
6.70 |
% |
|
$ |
0.41875 |
|
|
Series 7 (6) |
|
$ |
17 |
|
|
October 4, 2010 |
|
December 15, 2010 |
|
December 30, 2010 |
|
|
6.25 |
% |
|
$ |
0.39062 |
|
|
Series 8 (5) |
|
$ |
2,673 |
|
|
October 4, 2010 |
|
November 15, 2010 |
|
November 29, 2010 |
|
|
8.625 |
% |
|
$ |
0.53906 |
|
|
Series 2 (MC) (7) |
|
$ |
1,200 |
|
|
October 4, 2010 |
|
October 5, 2010 |
|
October 15, 2010 |
|
|
9.00 |
% |
|
$ |
1,150.00 |
|
|
Series 3 (MC) (8) |
|
$ |
500 |
|
|
October 4, 2010 |
|
October 5, 2010 |
|
October 15, 2010 |
|
|
9.00 |
% |
|
$ |
1,150.00 |
|
|
|
|
|
(1) |
|
Dividends are cumulative. |
|
(2) |
|
Dividends per depositary share, each representing a 1/1000th interest in a share of preferred stock. |
|
(3) |
|
Initially pays dividends semi-annually. |
|
(4) |
|
Dividends per depositary share, each representing a 1/25th interest in a share of preferred stock. |
|
(5) |
|
Dividends per depositary share, each representing a 1/1200th interest in a share of preferred stock. |
|
(6) |
|
Dividends per depositary share, each representing a 1/40th interest in a share of preferred stock. |
|
(7) |
|
Represents preferred stock of Merrill Lynch & Co., Inc. which converted to 31,254,545 shares of common stock on October 15, 2010. |
|
(8) |
|
Represents preferred stock of Merrill Lynch & Co., Inc. which converted to 19,100,000 shares of common stock on October 15, 2010. |
Credit Risk Management
Credit quality continued to show improvement during the three and nine months ended
September 30, 2010 although net charge-offs, nonperforming loans, leases and foreclosed properties
remained elevated. Signs of economic stability and our proactive credit risk management
initiatives positively impacted the credit portfolio as charge-offs, delinquencies and risk rating downgrades
improved across almost all portfolios. Global and national economic uncertainty, regulatory
initiatives and reform, however, continued to weigh on the credit portfolios through September 30,
2010. For more information, see Economic Environment beginning on page 95. Credit metrics were
also impacted by loans added to the balance sheet on January 1, 2010 in connection with the
adoption of new consolidation guidance.
We proactively refine our underwriting and credit management practices, as well as credit
standards, to meet the changing economic environment. To actively mitigate losses and enhance
customer support in our consumer businesses, we have expanded collections, loan modification and
customer assistance infrastructures. We also have implemented a number of actions to mitigate
losses in the commercial businesses including increasing the frequency and intensity of portfolio
monitoring, hedging activity and our practice of transferring management of deteriorating
commercial exposures to independent Special Asset officers as credits approach criticized levels.
For more information on our loss mitigation activities, see Credit Risk Management on page 54 of
the MD&A of the Corporations 2009 Annual Report on Form 10-K.
155
The following discussion provides an update on our home retention modification activities and
should be read in conjunction with the discussion on page 54 of the MD&A of the Corporations 2009
Annual Report on Form 10-K. Since January 2008, and through the third quarter of 2010, Bank of
America and Countrywide have completed nearly 700,000 loan modifications with customers. This
quarter included completion of nearly 50,000 customer loan modifications with total unpaid
principal balances of approximately $11.6 billion, which included 13,000 customers who converted
from trial period to permanent modifications under the governments MHA program. Of the loan
modifications completed in the third quarter of 2010, in terms of both the volume of modifications
and the unpaid principal balance associated with the underlying loans, most were in the portfolio
serviced for investors and were not on our balance sheet. The most common types of modifications
during the quarter include a combination of rate reduction and capitalization of past due amounts
which represent 73 percent of the volume of modifications completed in the third quarter of 2010,
while principal forbearance represented 10 percent and capitalization of past due amounts
represented eight percent. We also provide rate reductions, rate and payment extensions, principal
forgiveness, and other actions. These modification types are generally considered troubled debt
restructurings (TDRs). For more information on TDRs and portfolio impacts, see Nonperforming
Consumer Loans and Foreclosed Properties Activity beginning on page 170 and Note 6 Outstanding
Loans and Leases to the Consolidated Financial Statements.
In response to growing industry-wide
concerns that foreclosure affidavits have not been authorized properly, on October
1, 2010, the Corporation voluntarily stopped taking foreclosure proceedings to judgment in states where foreclosure requires
a court order following a legal proceeding. On October 8, 2010, the Corporation stopped foreclosure sales in all states in
order to complete an assessment of the related business process. The Corporation recently announced that we have
completed our assessment of our foreclosure affidavit process in the 23 states where foreclosure requires a court order
following a legal proceeding. As a result of that review, the Corporation has identified and are implementing process and
control enhancements to ensure that affidavits are prepared in compliance with state law and have begun a rolling process
of preparing and submitting or resubmitting, as necessary, affidavits of indebtedness in pending foreclosure proceedings in
order to resume the process of taking these foreclosure proceedings to judgment in these states. The Corporation continues
to assess our processes in the other 27 states and intend to implement enhancements as appropriate. For more information,
see Recent Events beginning on page 95.
Certain European countries (including Greece, Ireland, Italy, Portugal, and Spain) continue
to experience varying degrees of financial stress. Risks and ongoing concerns about the debt
crisis in Europe could result in a disruption of the financial markets which could have a
detrimental impact on the global economic recovery, including the impact of non-sovereign debt in
these countries. For more information on our direct sovereign and non-sovereign exposures in these
countries, see Foreign Portfolio beginning on page 186.
Consumer Portfolio Credit Risk Management
For information on our consumer credit risk management practices as well as our
accounting policies regarding delinquencies, nonperforming status, charge-offs and TDRs for the
consumer portfolio, see Note 1 Summary of Significant Accounting Principles to the Consolidated
Financial Statements of the Corporations 2009 Annual Report on Form 10-K as well as Consumer
Portfolio Credit Risk Management beginning on page 54 of the MD&A of the Corporations 2009 Annual
Report on Form 10-K.
Consumer Credit Portfolio
Improvement in the U.S. economy and stabilization in the labor markets during the first
nine months of 2010, although unemployment rates remained at elevated levels, resulted in lower
losses and lower delinquencies in almost all consumer portfolios during the three and nine months
ended September 30, 2010 when compared to the same periods in 2009 on a managed basis. However,
economic deterioration throughout 2009 and weakness in the economic recovery in 2010 drove
continued stress in the housing markets and tighter availability of credit resulting in elevated
net charge-offs in most portfolios. In addition, during the first half of 2010, our consumer real
estate portfolios were impacted by net charge-offs taken on certain modified loans deemed to be
collateral dependent pursuant to clarification of regulatory guidance and our foreign credit card
portfolio was impacted by the acceleration of charge-offs on certain renegotiated loans as
policies were conformed to align with the domestic portfolio. For more information on the
quarterly impacts of complying with regulatory guidance on collateral dependent modified loans,
see Regulatory Matters beginning on page 143.
The 2010 consumer credit card credit quality statistics include the impact of consolidation
of VIEs. Under the new consolidation guidance, we consolidated all previously off-balance sheet
securitized credit card receivables along with certain home equity and auto loans. The following
tables include the December 31, 2009 balances as well as the January 1, 2010 balances to show the
impact of the adoption of the new consolidation guidance. Accordingly, the September 30, 2010
156
credit quality statistics under the new consolidation guidance should be compared to the amounts
presented in the January 1, 2010 column.
The table below presents our outstanding consumer loans and the Countrywide purchased
credit-impaired loan portfolio. Loans that were acquired from Countrywide and considered
credit-impaired were written down to fair value upon acquisition. In addition to being included in
the Outstandings columns in the table below, these loans are also shown separately, net of
purchase accounting adjustments, in the Countrywide Purchased Credit-impaired Loan Portfolio
column. For additional information, see Note 6 Outstanding Loans and Leases to the Consolidated
Financial Statements. The impact of the Countrywide purchased credit-impaired loan portfolio on
certain credit statistics is reported where appropriate. See Countrywide Purchased Credit-impaired
Loan Portfolio beginning on page 165 for more information. Under certain circumstances, loans that
were originally classified as discontinued real estate loans upon acquisition have been
subsequently modified from pay option or subprime loans into loans with more conventional terms
and are now included in the residential mortgage portfolio shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 20 |
|
Consumer Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Countrywide Purchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit-impaired Loan |
|
|
Outstandings |
|
Portfolio (1) |
|
|
September 30 |
|
January 1 |
|
December 31 |
|
September 30 |
|
December 31 |
(Dollars in millions) |
|
2010 (1) |
|
2010 (1) |
|
2009 |
|
2010 (1) |
|
2009 |
|
Residential mortgage (2) |
|
$ |
243,141 |
|
|
$ |
242,129 |
|
|
$ |
242,129 |
|
|
$ |
10,616 |
|
|
$ |
11,077 |
|
Home equity |
|
|
141,558 |
|
|
|
154,202 |
|
|
|
149,126 |
|
|
|
12,847 |
|
|
|
13,214 |
|
Discontinued real estate (3) |
|
|
13,442 |
|
|
|
14,854 |
|
|
|
14,854 |
|
|
|
11,970 |
|
|
|
13,250 |
|
Credit card domestic |
|
|
113,609 |
|
|
|
129,642 |
|
|
|
49,453 |
|
|
|
n/a |
|
|
|
n/a |
|
Credit card foreign |
|
|
27,262 |
|
|
|
31,182 |
|
|
|
21,656 |
|
|
|
n/a |
|
|
|
n/a |
|
Direct/Indirect consumer (4) |
|
|
92,479 |
|
|
|
99,812 |
|
|
|
97,236 |
|
|
|
n/a |
|
|
|
n/a |
|
Other consumer (5) |
|
|
2,924 |
|
|
|
3,110 |
|
|
|
3,110 |
|
|
|
n/a |
|
|
|
n/a |
|
|
Total |
|
$ |
634,415 |
|
|
$ |
674,931 |
|
|
$ |
577,564 |
|
|
$ |
35,433 |
|
|
$ |
37,541 |
|
|
|
|
|
(1) |
|
Balances reflect the impact of new consolidation guidance. Adoption of the new
consolidation guidance did not impact the Countrywide purchased credit-impaired loan portfolio. |
|
(2) |
|
Outstandings include foreign residential mortgages of $98 million and $552 million at
September 30, 2010 and December 31, 2009. |
|
(3) |
|
Outstandings include $12.1 billion and $13.4 billion of pay option loans and $1.4
billion and $1.5 billion of subprime loans at September 30, 2010 and December 31, 2009. We no
longer originate these products. |
|
(4) |
|
Outstandings include dealer financial services loans of $44.5 billion and $41.6
billion, consumer lending loans of $14.3 billion and $19.7 billion, domestic securities-based
lending margin loans of $15.7 billion and $12.9 billion, student loans of $7.0 billion and $10.8
billion, foreign consumer loans of $7.7 billion and $8.0 billion and other consumer loans of $3.3
billion and $4.2 billion at September 30, 2010 and December 31, 2009, respectively. |
|
(5) |
|
Outstandings include consumer finance loans of $2.0 billion and $2.3 billion, other
foreign consumer loans of $846 million and $709 million and consumer overdrafts of $66 million and
$144 million at September 30, 2010 and December 31, 2009. |
n/a = not applicable
157
The table below presents our accruing consumer loans past due 90 days or more and our
nonperforming loans. Nonperforming loans do not include past due consumer credit card loans,
consumer non-real estate-secured loans or unsecured consumer loans as these loans are generally
charged off no later than the end of the month in which the loan becomes 180 days past due. Real
estate-secured past due consumer loans insured by the Federal Housing Administration (FHA) are not
reported as nonperforming as principal repayment is insured by the FHA. Additionally,
nonperforming loans and accruing balances past due 90 days or more do not include the Countrywide
purchased credit-impaired loans even though the customer may be contractually past due.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 21 |
|
Consumer Credit Quality |
|
|
Accruing Past Due 90 Days or More |
|
|
Nonperforming |
|
|
|
September 30 |
|
|
January 1 |
|
|
December 31 |
|
|
September 30 |
|
|
January 1 |
|
|
December 31 |
|
(Dollars in millions) |
|
2010 (1) |
|
|
2010 (1) |
|
|
2009 |
|
|
2010 (1) |
|
|
2010 (1) |
|
|
2009 |
|
|
Residential mortgage (2, 3) |
|
$ |
16,427 |
|
|
$ |
11,680 |
|
|
$ |
11,680 |
|
|
$ |
18,291 |
|
|
$ |
16,596 |
|
|
$ |
16,596 |
|
Home equity (2) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,702 |
|
|
|
4,252 |
|
|
|
3,804 |
|
Discontinued real estate (2) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
297 |
|
|
|
249 |
|
|
|
249 |
|
Credit card domestic |
|
|
3,484 |
|
|
|
5,408 |
|
|
|
2,158 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
Credit card foreign |
|
|
523 |
|
|
|
814 |
|
|
|
515 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
Direct/Indirect consumer |
|
|
1,065 |
|
|
|
1,492 |
|
|
|
1,488 |
|
|
|
83 |
|
|
|
86 |
|
|
|
86 |
|
Other consumer |
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
56 |
|
|
|
104 |
|
|
|
104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
21,502 |
|
|
$ |
19,397 |
|
|
$ |
15,844 |
|
|
$ |
21,429 |
|
|
$ |
21,287 |
|
|
$ |
20,839 |
|
|
|
|
|
(1) |
|
Balances reflect the impact of new consolidation guidance. |
|
(2) |
|
Our policy is to classify consumer real estate secured loans as nonperforming at 90
days past due, except for FHA loans as referenced in footnote (3). |
|
(3) |
|
Residential mortgages accruing past due 90 days or more represent loans insured by
the FHA. At September 30, 2010 and December 31, 2009, balances include $6.1 billion and $2.2
billion of loans that are no longer accruing interest as interest has been curtailed by the FHA
although principal is still insured. See Residential Mortgage beginning on page 159 for more detail. |
n/a = not applicable
Accruing consumer loans and leases past due 90 days or more as a percentage of
outstanding consumer loans and leases were 3.39 percent (0.90 percent excluding the Countrywide
purchased credit-impaired and FHA insured loan portfolios) and 2.74 percent (0.79 percent
excluding the Countrywide purchased credit-impaired and FHA insured loan portfolios) at September
30, 2010 and December 31, 2009. Nonperforming consumer loans as a percentage of outstanding
consumer loans were 3.38 percent (3.82 percent excluding the Countrywide purchased credit-impaired
and FHA insured loan portfolios) and 3.61 percent (3.95 percent excluding the Countrywide
purchased credit-impaired and FHA insured loan portfolios) at September 30, 2010 and December 31,
2009.
158
The table below presents net charge-offs and related ratios for our consumer loans and leases
for the three and nine months ended September 30, 2010 and 2009 (managed basis for 2009). The
reported net charge-off ratios for residential mortgage, home equity and discontinued real estate
include the Countrywide purchased credit-impaired loan portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 22 |
Consumer Net Charge-offs/Net Losses and Related Ratios |
|
|
Net Charge-offs/Losses |
|
Net Charge-off/Loss Ratios (1, 2) |
|
|
Three Months Ended |
|
Nine Months Ended |
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30 |
|
September 30 |
|
September 30 |
|
September 30 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Held basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage |
|
$ |
660 |
|
|
$ |
1,247 |
|
|
$ |
2,700 |
|
|
$ |
3,117 |
|
|
|
1.10 |
% |
|
|
2.05 |
% |
|
|
1.49 |
% |
|
|
1.64 |
% |
Home equity |
|
|
1,372 |
|
|
|
1,970 |
|
|
|
5,510 |
|
|
|
5,490 |
|
|
|
3.80 |
|
|
|
5.10 |
|
|
|
4.98 |
|
|
|
4.70 |
|
Discontinued real estate |
|
|
17 |
|
|
|
37 |
|
|
|
57 |
|
|
|
87 |
|
|
|
0.48 |
|
|
|
0.89 |
|
|
|
0.54 |
|
|
|
0.64 |
|
Credit card domestic |
|
|
2,975 |
|
|
|
1,787 |
|
|
|
10,455 |
|
|
|
5,001 |
|
|
|
10.24 |
|
|
|
14.25 |
|
|
|
11.67 |
|
|
|
12.51 |
|
Credit card foreign |
|
|
295 |
|
|
|
382 |
|
|
|
1,868 |
|
|
|
844 |
|
|
|
4.32 |
|
|
|
7.14 |
|
|
|
8.86 |
|
|
|
5.95 |
|
Direct/Indirect consumer |
|
|
707 |
|
|
|
1,451 |
|
|
|
2,695 |
|
|
|
4,175 |
|
|
|
2.93 |
|
|
|
5.76 |
|
|
|
3.66 |
|
|
|
5.56 |
|
Other consumer |
|
|
80 |
|
|
|
118 |
|
|
|
211 |
|
|
|
314 |
|
|
|
10.68 |
|
|
|
14.00 |
|
|
|
9.50 |
|
|
|
12.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held |
|
$ |
6,106 |
|
|
$ |
6,992 |
|
|
$ |
23,496 |
|
|
$ |
19,028 |
|
|
|
3.81 |
|
|
|
4.73 |
|
|
|
4.80 |
|
|
|
4.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental managed basis data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card domestic |
|
|
n/a |
|
|
$ |
4,816 |
|
|
|
n/a |
|
|
$ |
12,767 |
|
|
|
n/a |
|
|
|
13.92 |
|
|
|
n/a |
|
|
|
11.88 |
|
Credit card foreign |
|
|
n/a |
|
|
|
661 |
|
|
|
n/a |
|
|
|
1,551 |
|
|
|
n/a |
|
|
|
8.41 |
|
|
|
n/a |
|
|
|
7.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit card managed |
|
|
n/a |
|
|
$ |
5,477 |
|
|
|
n/a |
|
|
$ |
14,318 |
|
|
|
n/a |
|
|
|
12.90 |
|
|
|
n/a |
|
|
|
11.06 |
|
|
|
|
|
(1) |
|
Net charge-off/loss ratios are calculated as annualized held net charge-offs or
managed net losses divided by average outstanding held or managed loans and leases. |
|
(2) |
|
Net charge-off ratios excluding the Countrywide purchased credit-impaired and FHA
insured loan portfolio were 1.34 percent and 1.74 percent for residential mortgage, 4.18 percent
and 5.46 percent for home equity, 4.25 percent and 4.53 percent for discontinued real estate and
4.26 percent and 5.30 percent for the total held portfolio for the three and nine months ended
September 30, 2010, respectively. Net charge-off ratios excluding the Countrywide purchased
credit-impaired and FHA insured loan portfolio were 2.14 percent and 1.72 percent for residential
mortgage, 5.60 percent and 5.16 percent for home equity, 7.76 percent and 6.24 percent for
discontinued real estate and 5.08 percent and 4.52 percent for the total held portfolio for the
three and nine months ended September 30, 2009, respectively. These are the only product
classifications materially impacted by the Countrywide purchased credit-impaired loan portfolio for
the three and nine months ended September 30, 2010 and 2009. For all loan and lease categories, the
net charge-offs were unchanged. |
n/a = not applicable
We believe that the presentation of information adjusted to exclude the impact of the
Countrywide purchased credit-impaired loan portfolio is more representative of the ongoing
operations and credit quality of the business. As a result, in the following discussions of the
residential mortgage, home equity and discontinued real estate portfolios, we provide information
that is adjusted to exclude the impact of the Countrywide purchased credit-impaired loan
portfolio. In addition, beginning on page 165, we separately disclose information on the
Countrywide purchased credit-impaired loan portfolio.
Residential Mortgage
The residential mortgage portfolio, which excludes the discontinued real estate portfolio
acquired with Countrywide, makes up the largest percentage of our consumer loan portfolio at 38
percent of consumer loans at September 30, 2010. Approximately 15 percent of the residential
mortgage portfolio is in GWIM and represents residential mortgages that are originated for the
home purchase and refinancing needs of our affluent customers. The remaining portion of the
portfolio is mostly in All Other and is comprised of both purchased loans as well as residential
loans originated for our customers and used in our overall ALM activities.
159
Outstanding balances in the residential mortgage portfolio increased $1.0 billion at
September 30, 2010 compared to December 31, 2009 as new FHA insured origination volume and FHA
repurchases were partially offset by the sale of First Republic, paydowns and charge-offs. At
September 30, 2010 and December 31, 2009, the residential mortgage portfolio included $38.0
billion and $12.9 billion of outstanding loans that were insured by the FHA. On this portion of
the residential mortgage portfolio, we are protected against principal loss as a result of FHA
insurance. The table below presents certain residential mortgage key credit statistics on both a
reported basis and excluding the Countrywide purchased credit-impaired and FHA insured loan
portfolios. We believe the presentation of information adjusted to exclude the impacts of the
Countrywide purchased credit-impaired and FHA insured loan portfolios is more representative of
the credit risk in this portfolio. For more information on the Countrywide purchased
credit-impaired loan portfolio, see the discussion beginning on page 165.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 23 |
|
Residential Mortgage Key Credit Statistics |
|
|
|
|
|
|
|
|
|
|
Excluding Countrywide |
|
|
|
|
|
|
|
|
|
|
|
Purchased Credit-impaired |
|
|
|
Reported Basis |
|
|
and FHA Insured Loans |
|
|
|
September 30 |
|
|
December 31 |
|
|
September 30 |
|
|
December 31 |
|
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Outstandings |
|
$ |
243,141 |
|
|
$ |
242,129 |
|
|
$ |
194,560 |
|
|
$ |
218,147 |
|
Accruing past due 90 days or more |
|
|
16,427 |
|
|
|
11,680 |
|
|
|
n/a |
|
|
|
n/a |
|
Nonperforming loans |
|
|
18,291 |
|
|
|
16,596 |
|
|
|
18,291 |
|
|
|
16,596 |
|
Percent of portfolio with refreshed LTVs greater than
90 but less than 100 |
|
|
16 |
% |
|
|
12 |
% |
|
|
11 |
% |
|
|
11 |
% |
Percent of portfolio with refreshed LTVs greater than 100 |
|
|
27 |
|
|
|
27 |
|
|
|
23 |
|
|
|
23 |
|
Percent of portfolio with refreshed FICOs below 620 |
|
|
22 |
|
|
|
17 |
|
|
|
14 |
|
|
|
12 |
|
Percent of portfolio in the 2006 and 2007 vintages |
|
|
36 |
|
|
|
42 |
|
|
|
40 |
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding Countrywide Purchased Credit-impaired |
|
|
Reported Basis |
|
and FHA Insured Loans |
|
|
Three Months Ended |
|
Nine Months Ended |
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30 |
|
September 30 |
|
September 30 |
|
September 30 |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Net charge-offs (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
$ |
660 |
|
|
$ |
1,247 |
|
|
$ |
2,700 |
|
|
$ |
3,117 |
|
|
$ |
660 |
|
|
$ |
1,247 |
|
|
$ |
2,700 |
|
|
$ |
3,117 |
|
Ratios |
|
|
1.10 |
% |
|
|
2.05 |
% |
|
|
1.49 |
% |
|
|
1.64 |
% |
|
|
1.34 |
% |
|
|
2.14 |
% |
|
|
1.74 |
% |
|
|
1.72 |
% |
|
|
|
|
(1) |
|
Net charge-off dollar amounts remained unchanged after excluding the Countrywide
purchased credit-impaired and FHA insured loan portfolios. |
n/a = not applicable
The following discussion presents the residential mortgage portfolio excluding the
Countrywide purchased credit-impaired and FHA insured loan portfolios.
We have mitigated a portion of our credit risk on the residential mortgage portfolio through
the use of synthetic securitization vehicles. These vehicles are cash collateralized and provided
mezzanine risk protection of $2.1 billion and $2.5 billion at September 30, 2010 and December 31,
2009 which will reimburse us in the event that losses exceed 10 bps of the original pool balance.
As of September 30, 2010 and December 31, 2009, $59.0 billion and $70.7 billion of residential
mortgage loans were referenced under these agreements. At September 30, 2010 and December 31,
2009, we had a receivable of $834 million and $1.0 billion from these synthetic securitizations
for reimbursement of losses. Also, we have entered into credit protection agreements with
the Federal National Mortgage Association (FNMA) and the
Federal Home Loan Mortgage Corporation (FHLMC) totaling $7.5 billion and $6.6 billion as of September 30, 2010 and December 31, 2009,
providing full protection on conforming residential mortgage loans that become severely
delinquent. The reported net charge-offs for residential mortgages do not include the benefits of
amounts reimbursable under cash collateralized synthetic securitizations. Adjusting for the
benefit of the credit protection from the synthetic securitizations, the residential mortgage net
charge-off ratio for the three and nine months ended September 30, 2010 would have been reduced by
seven bps and eight bps as compared to 30 bps for both periods in 2009. Synthetic securitizations
and the protection provided by FNMA and FHLMC together mitigated risk on 34 percent and 35 percent
of our residential mortgage portfolio at September 30, 2010 and December 31, 2009. These credit
protection agreements reduce our regulatory risk-weighted assets due to the transfer of a portion
of our credit risk to unaffiliated parties. At September 30, 2010 and December 31, 2009, these
synthetic securitizations had the cumulative effect of reducing our risk-weighted assets by $7.1
billion and $16.8 billion, and increased our Tier 1 capital ratio by five bps and 11 bps and our
Tier 1 common capital ratio by four bps and eight bps. For further information, see Note 6
Outstanding Loans and Leases to the Consolidated Financial Statements.
Nonperforming residential mortgage loans increased $1.7 billion compared to December 31, 2009
as new inflows, which continue to slow in 2010 due to favorable delinquency trends, continue to
outpace nonperforming TDRs returning to performing status, charge-offs and transfers to foreclosed
properties. At September 30, 2010, $12.3 billion, or 67 percent, of
160
the nonperforming residential mortgage loans were greater than 180 days past due and had been
written down to the fair value of the underlying collateral. Net charge-offs decreased $587
million to $660 million for the third quarter of 2010, or 1.34 percent of total average
residential mortgage loans compared to 2.14 percent for the same period in the prior year. Net
charge-offs decreased $417 million to $2.7 billion for the nine months ended September 30, 2010,
or 1.74 percent of total average residential mortgage loans, compared to 1.72 percent for the same
period in 2009. These decreases in net charge-off dollars for the three and nine month periods
were driven primarily by favorable delinquency trends due in part to improvement in the U.S.
economy. These improvements were partially offset by $175 million of net charge-offs in the first
half of 2010 related to compliance with regulatory guidance on collateral dependent modified loans
that were written down to their underlying collateral value. Net charge-off ratios were further
impacted by lower loan balances primarily due to the sale of First Republic, paydowns and
charge-offs.
Certain risk characteristics of the residential mortgage portfolio continued to contribute to
higher losses. These characteristics include loans with a high refreshed loan-to-value (LTV),
loans originated at the peak of home prices in 2006 and 2007, loans to borrowers located in
California and Florida where we have concentrations and where significant declines in home prices
have been experienced, as well as interest-only loans. Although the disclosures address each of
these risk characteristics separately, there is significant overlap in loans with these
characteristics, which contributed to a disproportionate share of the losses in the portfolio. The
residential mortgage loans with all of these higher risk characteristics comprised six percent and
seven percent of the residential mortgage portfolio at September 30, 2010 and December 31, 2009,
but accounted for 27 percent of the residential mortgage net charge-offs during both the three and
nine months ended September 30, 2010, compared to 33 percent and 31 percent for the same periods
in 2009.
Residential mortgage loans with a greater than 90 percent but less than 100 percent refreshed
LTV represented 11 percent of the residential mortgage portfolio at both September 30, 2010 and
December 31, 2009. Loans with a refreshed LTV greater than 100 percent represented 23 percent of
the residential mortgage loan portfolio at both September 30, 2010 and December 31, 2009. Of the
loans with a refreshed LTV greater than 100 percent, 86 percent and 88 percent were performing at
September 30, 2010 and December 31, 2009. Loans with a refreshed LTV greater than 100 percent
reflect loans where the outstanding carrying value of the loan is greater than the most recent
valuation of the property securing the loan. The majority of these loans have a refreshed LTV
greater than 100 percent due primarily to home price deterioration from the weakened economy.
Loans to borrowers with refreshed FICO scores below 620 represented 14 percent and 12 percent of
the residential mortgage portfolio at September 30, 2010 and December 31, 2009.
The 2006 and 2007 vintage loans, which represented 40 percent and 42 percent of our
residential mortgage portfolio at September 30, 2010 and December 31, 2009, have higher refreshed
LTVs and accounted for 67 percent and 69 percent of nonperforming residential mortgage loans at
September 30, 2010 and December 31, 2009. These vintages of loans accounted for 79
percent of residential mortgage net charge-offs during both the three and nine months ended September
30, 2010 and 83 percent and 82 percent for the three and nine months ended September 30, 2009.
The table below presents
outstandings, nonperforming loans and net charge-offs by certain state concentrations for the
residential mortgage portfolio. California and Florida combined represented 43 percent of outstandings and 47 percent of
nonperforming loans at September 30, 2010. These states accounted for 50 percent and 56 percent of the net charge-offs
during the three and nine months ended September 30, 2010, compared to 59 percent and 60 percent of the net charge-offs
during the same periods in 2009. The Los Angeles-Long Beach-Santa Ana Metropolitan Statistical Area (MSA) within
California represented 13 percent of outstandings at both September 30, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 24 |
|
Residential Mortgage State Concentrations |
|
|
Outstandings |
|
|
Nonperforming |
|
|
Net Charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30 |
|
|
December 31 |
|
|
September 30 |
|
|
December 31 |
|
|
September 30 |
|
|
September 30 |
|
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
California |
|
$ |
69,384 |
|
|
$ |
81,508 |
|
|
$ |
6,546 |
|
|
$ |
5,967 |
|
|
$ |
243 |
|
|
$ |
552 |
|
|
$ |
1,130 |
|
|
$ |
1,346 |
|
Florida |
|
|
13,917 |
|
|
|
15,088 |
|
|
|
2,138 |
|
|
|
1,912 |
|
|
|
89 |
|
|
|
186 |
|
|
|
384 |
|
|
|
514 |
|
New York |
|
|
12,814 |
|
|
|
15,752 |
|
|
|
784 |
|
|
|
632 |
|
|
|
6 |
|
|
|
24 |
|
|
|
27 |
|
|
|
45 |
|
Texas |
|
|
9,141 |
|
|
|
9,865 |
|
|
|
516 |
|
|
|
534 |
|
|
|
9 |
|
|
|
13 |
|
|
|
29 |
|
|
|
41 |
|
Virginia |
|
|
6,969 |
|
|
|
7,496 |
|
|
|
485 |
|
|
|
450 |
|
|
|
15 |
|
|
|
21 |
|
|
|
56 |
|
|
|
68 |
|
Other U.S./Foreign |
|
|
82,335 |
|
|
|
88,438 |
|
|
|
7,822 |
|
|
|
7,101 |
|
|
|
298 |
|
|
|
451 |
|
|
|
1,074 |
|
|
|
1,103 |
|
|
Total residential mortgage loans (1) |
|
$ |
194,560 |
|
|
$ |
218,147 |
|
|
$ |
18,291 |
|
|
$ |
16,596 |
|
|
$ |
660 |
|
|
$ |
1,247 |
|
|
$ |
2,700 |
|
|
$ |
3,117 |
|
|
Total FHA insured loans |
|
|
37,965 |
|
|
|
12,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased credit-impaired residential
mortgage portfolio |
|
|
10,616 |
|
|
|
11,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgage loan portfolio |
|
$ |
243,141 |
|
|
$ |
242,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amount excludes the Countrywide purchased credit-impaired residential mortgage
loan portfolio and FHA insured loans. |
161
Of the residential mortgage loans, $64.3 billion, or 33 percent, at September 30, 2010
are interest-only loans of which 88 percent were performing. Nonperforming balances on
interest-only residential mortgage loans were $7.7 billion, or 42 percent, of total nonperforming
residential mortgages. Additionally, net charge-offs on the interest-only portion of the portfolio
represented 52 percent and 50 percent of the total residential mortgage net charge-offs for the
three and nine months ended September 30, 2010.
The Community Reinvestment Act (CRA) encourages banks to meet the credit needs of their
communities for housing and other purposes, particularly in neighborhoods with low or moderate
incomes. At September 30, 2010, our CRA portfolio was eight percent of the residential mortgage
loan balances but comprised 16 percent of nonperforming residential mortgage loans. This portfolio
also represented 28 percent and 25 percent of residential mortgage net charge-offs during the
three and nine months ended September 30, 2010.
For information on representations and warranties related to our residential mortgage portfolio, see Off-Balance Sheet Arrangements and
Contractual Obligations on page 139 and Note 8 Securitizations and Other Variable Interest
Entities to the Consolidated Financial Statements.
Home Equity
The home equity portfolio makes up 22 percent of the consumer portfolio and is comprised of
home equity lines of credit, home equity loans and reverse mortgages. At September 30, 2010,
approximately 88 percent of the home equity portfolio was included in Home Loans & Insurance,
while the remainder of the portfolio was primarily in GWIM. Outstanding balances in the home
equity portfolio decreased $7.6 billion at September 30, 2010 compared to December 31, 2009 due to
charge-offs, balance paydowns and the sale of First Republic, partially offset by the adoption of
new consolidation guidance, which resulted in the consolidation of $5.1 billion of home equity
loans on January 1, 2010. Of the loans in the home equity portfolio at September 30, 2010 and
December 31, 2009, $25.3 billion and $26.0 billion, or 18 percent for both periods, were in first
lien positions (20 percent and 19 percent excluding the Countrywide purchased credit-impaired home
equity loan portfolio). For more information on the Countrywide purchased credit-impaired home
equity loan portfolio, see the discussion beginning on page 165.
Home equity unused lines of credit totaled $82.7 billion at September 30, 2010 compared to
$92.7 billion at December 31, 2009. This decrease was due primarily to account attrition as well
as line management initiatives on deteriorating accounts and the sale of First Republic which more
than offset new production. The home equity line of credit utilization rate was 59 percent at
September 30, 2010 compared to 57 percent at December 31, 2009.
The table below presents certain home equity key credit statistics on both a reported basis
as well as excluding the Countrywide purchased credit-impaired loan portfolio. We believe the
presentation of information adjusted to exclude the impacts of the Countrywide purchased
credit-impaired loan portfolio is more representative of the credit risk in this portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 25 |
|
Home Equity Key Credit Statistics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding Countrywide Purchased |
|
|
|
Reported Basis |
|
|
Credit-impaired Loans |
|
|
September 30 |
|
|
December 31 |
|
|
September 30 |
|
|
December 31 |
|
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Outstandings |
|
$ |
141,558 |
|
|
$ |
149,126 |
|
|
$ |
128,711 |
|
|
$ |
135,912 |
|
Nonperforming loans |
|
|
2,702 |
|
|
|
3,804 |
|
|
|
2,702 |
|
|
|
3,804 |
|
Percent of portfolio with refreshed CLTVs greater than 90 but less than 100 |
|
|
11 |
% |
|
|
12 |
% |
|
|
11 |
% |
|
|
12 |
% |
Percent of portfolio with refreshed CLTVs greater than 100 |
|
|
34 |
|
|
|
35 |
|
|
|
30 |
|
|
|
31 |
|
Percent of portfolio with refreshed FICOs below 620 |
|
|
14 |
|
|
|
13 |
|
|
|
12 |
|
|
|
13 |
|
Percent of portfolio in the 2006 and 2007 vintages |
|
|
50 |
|
|
|
52 |
|
|
|
47 |
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported Basis |
|
|
Excluding Countrywide Purchased Credit-impaired Loans |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
September 30 |
|
|
September 30 |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Net charge-offs (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
$ |
1,372 |
|
|
$ |
1,970 |
|
|
$ |
5,510 |
|
|
$ |
5,490 |
|
|
$ |
1,372 |
|
|
$ |
1,970 |
|
|
$ |
5,510 |
|
|
$ |
5,490 |
|
Ratios |
|
|
3.80 |
% |
|
|
5.10 |
% |
|
|
4.98 |
% |
|
|
4.70 |
% |
|
|
4.18 |
% |
|
|
5.60 |
% |
|
|
5.46 |
% |
|
|
5.16 |
% |
|
|
|
|
(1) |
|
Net charge-off dollar amounts remained unchanged after excluding the Countrywide
purchased credit-impaired loan portfolio. |
162
The following discussion presents the home equity portfolio excluding the Countrywide
purchased credit-impaired loan portfolio.
Nonperforming home equity loans decreased $1.1 billion to $2.7 billion compared to December
31, 2009 driven primarily by charge-offs, including those recorded in connection with regulatory
guidance clarifying the timing of charge-offs on collateral dependent modified loans, and
nonperforming TDRs returning to performing status which together outpaced delinquency inflows and
the impact of the adoption of new consolidation guidance. For more information on TDRs, refer to
Nonperforming Consumer Loans and Foreclosed Properties Activity on page 170 and Note 6
Outstanding Loans and Leases to the Consolidated Financial Statements. At September 30, 2010, $812
million, or 30 percent, of the nonperforming home equity loans were greater than 180 days past due
and had been written down to their fair values. Net charge-offs decreased $598 million to $1.4
billion, or 4.18 percent, of total average home equity loans for the three months ended September
30, 2010, compared to $2.0 billion, or 5.60 percent, for the same period in the prior year. The
decrease was primarily driven by favorable portfolio trends due in part to improvement in the U.S.
economy and the absence of the prior year loss severity adjustment of $223 million driven by the
protracted nature of collections under certain insurance contracts. These items were partially
offset by $92 million of net charge-offs related to home equity loans that were consolidated on
January 1, 2010 under new consolidation guidance. Net charge-off ratios were further impacted by
lower loan balances partially as a result of paydowns, charge-offs and the sale of First
Republic.
Net charge-offs remained flat at $5.5 billion for the nine months ended September 30, 2010 or
5.46 percent of total average home equity loans compared to 5.16 percent for the same period in
2009. In addition to the factors noted in the three month discussion above, the net charge-off
amounts were impacted by implementing regulatory guidance on collateral dependent modified loans
which resulted in $771 million of net charge-offs in the first half of 2010.
There are certain risk characteristics of the home equity portfolio which have contributed to
higher losses. These characteristics include loans with a high refreshed combined loan-to-value
(CLTV), loans originated at the peak of home prices in 2006 and 2007 and loans in geographic areas
that have experienced the most significant declines in home prices. Home price declines coupled
with the fact that most home equity loans are secured by second lien positions have significantly
reduced, and in some cases, eliminated all collateral value after consideration of the first lien
position. Although the disclosures below address each of these risk characteristics separately,
there is significant overlap in loans with these characteristics, which has contributed to a
disproportionate share of losses in the portfolio. Home equity loans with all of these higher risk
characteristics comprised 10 percent and 11 percent of the total home equity portfolio at
September 30, 2010 and December 31, 2009, but have accounted for 27 percent and 29 percent of the
home equity net charge-offs for the three and nine months ended September 30, 2010, compared to 37
percent and 38 percent for the same periods in 2009.
Home equity loans with greater than 90 percent but less than 100 percent refreshed CLTVs
comprised 11 percent and 12 percent of the home equity portfolio at September 30, 2010 and
December 31, 2009. Loans with refreshed CLTVs greater than 100 percent comprised 30 percent and 31
percent of the home equity portfolio at September 30, 2010 and December 31, 2009. Of those loans
with a refreshed CLTV greater than 100 percent, 97 percent were performing at September 30, 2010
while 95 percent were performing at December 31, 2009. Home equity loans and lines of credit with
a refreshed CLTV greater than 100 percent reflect loans where the balance and available line of
credit of the combined loans are equal to or greater than the most recent valuation of the
property securing the loan. Depending on the LTV of the first lien, there may be collateral in
excess of the first lien that is available to reduce the severity of loss on the second lien. The
majority of these high refreshed CLTV ratios are due to the weakened U.S. economy and home price
declines. In addition, loans to borrowers with a refreshed FICO score below 620 represented 12
percent and 13 percent of the home equity loans at September 30, 2010 and December 31, 2009. Of
the total home equity portfolio, 72 percent at September 30, 2010 and 68 percent at December 31,
2009 were interest-only loans.
The 2006 and 2007 vintage loans, which represent 47 percent and 49 percent of our home equity
portfolio at September 30, 2010 and December 31, 2009, have higher refreshed CLTVs and accounted
for 58 percent of nonperforming home equity loans at September 30, 2010 compared to 62 percent at
December 31, 2009. These vintages of loans accounted for 65 percent of net charge-offs for both
the three and nine months ended September 30, 2010 compared to 72 percent and 73 percent for the
three and nine months ended September 30, 2009.
163
The table below presents outstandings,
nonperforming loans and net charge-offs by certain state concentrations for the
home equity loan portfolio. California and Florida combined represented 40 percent of the total home equity portfolio and
44 percent of nonperforming home equity loans at September 30, 2010. These states accounted for 53 percent and 56
percent of the home equity net charge-offs for the three and nine months ended September 30, 2010, compared to 61
percent of the home equity net charge-offs during the same periods in 2009. In the New York area, the New York-Northern
New Jersey-Long Island MSA made up 11 percent of outstanding home equity loans at September 30, 2010. These states
comprised only six percent of net charge-offs for both the three and nine months ended September 30, 2010, compared to
seven percent and six percent of net charge-offs during the same periods in 2009. The Los Angeles-Long Beach-Santa Ana
MSA within California made up 11 percent of outstanding home equity loans at September 30, 2010. These states
comprised 11 percent and 12 percent of net charge-offs for the three and nine months ended September 30, 2010, compared
to 15 percent and 11 percent of net charge-offs during the same periods in 2009.
For information on representations and warranties
related to our home equity portfolio, see Off-Balance Sheet Arrangements and
Contractual Obligations on page 139 and Note 8 Securitizations and Other Variable Interest
Entities to the Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 26 |
|
Home Equity State Concentrations |
|
|
Outstandings |
|
|
Nonperforming |
|
|
Net Charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
September 30 |
|
|
December 31 |
|
|
September 30 |
|
|
December 31 |
|
|
September 30 |
|
|
September 30 |
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
California |
|
$ |
36,263 |
|
|
$ |
38,573 |
|
|
$ |
717 |
|
|
$ |
1,178 |
|
|
$ |
453 |
|
|
$ |
783 |
|
|
$ |
1,925 |
|
|
$ |
2,105 |
|
Florida |
|
|
15,438 |
|
|
|
16,735 |
|
|
|
484 |
|
|
|
731 |
|
|
|
278 |
|
|
|
414 |
|
|
|
1,163 |
|
|
|
1,239 |
|
New Jersey |
|
|
8,361 |
|
|
|
8,732 |
|
|
|
170 |
|
|
|
192 |
|
|
|
44 |
|
|
|
74 |
|
|
|
174 |
|
|
|
181 |
|
New York |
|
|
8,213 |
|
|
|
8,752 |
|
|
|
244 |
|
|
|
274 |
|
|
|
52 |
|
|
|
85 |
|
|
|
217 |
|
|
|
203 |
|
Massachusetts |
|
|
5,837 |
|
|
|
6,155 |
|
|
|
75 |
|
|
|
90 |
|
|
|
21 |
|
|
|
23 |
|
|
|
82 |
|
|
|
70 |
|
Other U.S./Foreign |
|
|
54,599 |
|
|
|
56,965 |
|
|
|
1,012 |
|
|
|
1,339 |
|
|
|
524 |
|
|
|
591 |
|
|
|
1,949 |
|
|
|
1,692 |
|
|
Total home equity loans (excluding the
Countrywide
purchased credit-impaired home equity loan
portfolio) |
|
$ |
128,711 |
|
|
$ |
135,912 |
|
|
$ |
2,702 |
|
|
$ |
3,804 |
|
|
$ |
1,372 |
|
|
$ |
1,970 |
|
|
$ |
5,510 |
|
|
$ |
5,490 |
|
|
Total Countrywide purchased credit-impaired home
equity loan portfolio |
|
|
12,847 |
|
|
|
13,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total home equity loan portfolio |
|
$ |
141,558 |
|
|
$ |
149,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Real Estate
The discontinued real estate portfolio, totaling $13.4 billion at September 30, 2010,
consisted of pay option and subprime loans acquired in the Countrywide acquisition. Upon
acquisition, the majority of the discontinued real estate portfolio was considered credit-impaired
and written down to fair value. At September 30, 2010, the Countrywide purchased credit-impaired
loan portfolio comprised $12.0 billion, or 89 percent, of the total discontinued real estate
portfolio. This portfolio is included in All Other and is managed as part of our overall ALM
activities. See Countrywide Purchased Credit-impaired Loan Portfolio below for more information on
the discontinued real estate portfolio.
At September 30, 2010, the purchased discontinued real estate portfolio that was not credit
impaired was $1.5 billion. Loans with greater than 90 percent refreshed LTVs and CLTVs comprised
28 percent of the portfolio and those with refreshed FICO scores below 620 represented 44 percent
of the portfolio. California represented 37 percent of the portfolio and 31 percent of the
nonperforming loans while Florida represented nine percent of the portfolio and 14 percent of the
nonperforming loans at September 30, 2010. The Los Angeles-Long Beach-Santa Ana MSA within
California made up 15 percent of outstanding discontinued real estate loans at September 30, 2010.
Pay option adjustable rate mortgages (ARMs), which are included in the discontinued real estate portfolio, have interest
rates that adjust monthly and minimum required payments that adjust annually (subject to resetting
of the loan if minimum payments are made and deferred interest limits are reached). Annual payment
adjustments are subject to a 7.5 percent maximum change. To ensure that contractual loan payments
are adequate to repay a loan, the fully amortizing loan payment amount is re-established after the
initial five or 10-year period and again every five years thereafter. These payment adjustments
are not subject to the 7.5 percent limit and may be substantial due to changes in interest rates
and the addition of unpaid interest to the loan balance. Payment advantage ARMs have interest
rates that are fixed for an initial period of five years. Payments are subject to reset if the
minimum payments are made and deferred interest limits are reached. If interest deferrals cause a
loans
principal balance to reach a certain level within the first 10 years of the life of the loan, the
payment is reset to the interest-only payment; then at the 10-year point, the fully amortizing
payment is required.
164
The difference between the frequency of changes in the loans interest rates and payments
along with a limitation on changes in the minimum monthly payments of 7.5 percent per year can
result in payments that are not sufficient to pay all of the monthly interest charges (i.e.,
negative amortization). Unpaid interest charges are added to the loan balance until the loan
balance increases to a specified limit, which can be no more than 115 percent of the original loan
amount, at which time a new monthly payment amount adequate to repay the loan over its remaining
contractual life is established.
At September 30, 2010, the unpaid principal balance of pay option loans was $15.1 billion,
with a carrying amount of $12.1 billion, including $11.3 billion of loans that were
credit-impaired upon acquisition. The total unpaid principal balance of pay option loans with
accumulated negative amortization was $13.0 billion including $895 million of negative
amortization. The percentage of borrowers electing to make only the minimum payment on option ARMs
was 66 percent at September 30, 2010. We continue to evaluate our exposure to payment resets on
the acquired negatively amortizing loans and have taken into consideration several assumptions
regarding this evaluation (e.g., prepayment rates). We also continue to evaluate the potential for
resets on the Countrywide purchased credit-impaired pay option loan portfolio. Based on our
expectations, six percent, 10 percent and two percent of the pay option loan portfolio is expected
to reset in the remainder of 2010, and in 2011 and 2012, respectively. Approximately four percent
are expected to reset thereafter, and approximately 78 percent are expected to repay prior to
being reset.
Countrywide Purchased Credit-impaired Loan Portfolio
Loans acquired with evidence of credit quality deterioration since origination and for which
it is probable at purchase that we will be unable to collect all contractually required payments
are accounted for under the accounting guidance for purchased credit-impaired loans, which
addresses accounting for differences between contractual and expected cash flows to be collected
from the purchasers initial investment in loans if those differences are attributable, at least
in part, to credit quality. Evidence of credit quality deterioration as of the acquisition date
may include statistics such as past due status, refreshed FICO scores and refreshed LTVs.
Purchased credit-impaired loans are recorded at fair value upon acquisition and the applicable
accounting guidance prohibits carrying over or creation of valuation allowances in the initial
accounting. The Merrill Lynch purchased credit-impaired consumer loan portfolio did not materially
alter the reported credit quality statistics of the consumer portfolios. As such, the Merrill
Lynch consumer purchased credit-impaired loans are excluded from the following discussion and
credit statistics.
Acquired loans from Countrywide that were considered credit-impaired were written down to
fair value at the acquisition date. As of September 30, 2010, the carrying value was $35.4
billion, or $29.9 billion net of the valuation reserve of $5.5 billion, and the unpaid principal
balance was $42.9 billion. Of the unpaid principal balance at September 30, 2010, $15.3 billion
was more than 180 days past due, including $10.6 billion of first lien and $4.7 billion of home
equity. Of the $27.6 billion that is less than 180 days past due, $22.4 billion, or 81 percent of
the total unpaid principal balance, was current based on their contractual terms while $2.6
billion, or nine percent, was in early stage delinquency. During the three months ended September
30, 2010, we recorded $260 million of provision for credit losses which was comprised mainly of
$245 million for home equity loans compared to a total provision for purchased credit-impaired
loans of $1.3 billion during the three months ended September 30, 2009. For the nine months ended
September 30, 2010, we recorded $1.5 billion of provision for credit losses for purchased
credit-impaired loans, including $1.3 billion for home equity loans, compared to $2.8 billion
during the nine months ended September 30, 2009. The additional provision expense for the three
months ended September 30, 2010 was driven primarily by a slower pace of expected recovery in home
prices and a reassessment of modification and short sale benefits as we gain more experience with
troubled borrowers. Further, the additional provision expense for the nine months ended September
30, 2010 was a result of a deteriorating view on defaults on more seasoned loans in the portfolio.
The Countrywide purchased credit-impaired allowance for loan losses increased $1.7 billion from
December 31, 2009 to $5.5 billion at September 30,
2010 as a result of the increase in the provision for credit
losses and the reclassification of the nonaccretable difference of previous write-downs recorded
against the allowance. For further information on the purchased credit-impaired loan portfolio,
see Note 6 Outstanding Loans and Leases to the Consolidated Financial Statements.
Additional information is provided below on the Countrywide purchased credit-impaired
residential mortgage, home equity and discontinued real estate loan portfolios. Since these loans
were written down to fair value upon acquisition, we are reporting this information separately.
165
Purchased Credit-impaired Residential Mortgage Loan Portfolio
The Countrywide purchased credit-impaired residential mortgage loan portfolio outstandings
were $10.6 billion at September 30, 2010 and comprised 30 percent of the total Countrywide
purchased credit-impaired loan portfolio. Those loans to borrowers with a refreshed FICO score
below 620 represented 38 percent of the Countrywide purchased credit-impaired residential mortgage
loan portfolio at September 30, 2010. Refreshed LTVs greater than 90 percent represented 65
percent of the purchased credit-impaired residential mortgage loan portfolio after consideration
of purchase accounting adjustments and 80 percent based on the unpaid principal balance at
September 30, 2010. The table below presents outstandings net of purchase accounting adjustments,
by certain state concentrations. Those loans that were originally classified as discontinued real
estate loans upon acquisition and have been subsequently modified are now included in the
residential mortgage outstandings in the table below.
|
|
|
|
|
|
|
|
|
Table 27 |
|
|
|
|
|
|
|
|
Countrywide Purchased Credit-impaired Loan Portfolio Residential Mortgage State Concentrations |
|
|
Outstandings |
|
|
September 30 |
|
December 31 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
California |
|
$ |
5,889 |
|
|
$ |
6,142 |
|
Florida |
|
|
790 |
|
|
|
843 |
|
Virginia |
|
|
586 |
|
|
|
617 |
|
Maryland |
|
|
274 |
|
|
|
278 |
|
Texas |
|
|
166 |
|
|
|
166 |
|
Other U.S./Foreign |
|
|
2,911 |
|
|
|
3,031 |
|
|
Total Countrywide purchased credit-impaired residential mortgage loan portfolio |
|
$ |
10,616 |
|
|
$ |
11,077 |
|
|
Purchased Credit-impaired Home Equity Loan Portfolio
The Countrywide purchased credit-impaired home equity loan portfolio outstandings were $12.8
billion at September 30, 2010 and comprised 36 percent of the total Countrywide purchased
credit-impaired loan portfolio. Those loans with a refreshed FICO score below 620 represented 26
percent of the Countrywide purchased credit-impaired home equity loan portfolio at September 30,
2010. Refreshed CLTVs greater than 90 percent represented 87 percent of the purchased
credit-impaired home equity loan portfolio after consideration of purchase accounting adjustments
and 82 percent based on the unpaid principal balance at September 30, 2010. The table below
presents outstandings net of purchase accounting adjustments, by certain state concentrations.
|
|
|
|
|
|
|
|
|
Table 28 |
|
|
Countrywide Purchased Credit-impaired Loan Portfolio
Home Equity State Concentrations |
|
|
Outstandings |
|
|
September 30 |
|
December 31 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
California |
|
$ |
4,367 |
|
|
$ |
4,311 |
|
Florida |
|
|
773 |
|
|
|
765 |
|
Arizona |
|
|
543 |
|
|
|
542 |
|
Virginia |
|
|
540 |
|
|
|
550 |
|
Colorado |
|
|
379 |
|
|
|
416 |
|
Other U.S./Foreign |
|
|
6,245 |
|
|
|
6,630 |
|
|
Total Countrywide purchased credit-impaired home equity loan portfolio |
|
$ |
12,847 |
|
|
$ |
13,214 |
|
|
166
Purchased Credit-impaired Discontinued Real Estate Loan Portfolio
The Countrywide purchased credit-impaired discontinued real estate loan portfolio
outstandings were $12.0 billion at September 30, 2010 and comprised 34 percent of the total
Countrywide purchased credit-impaired loan portfolio. Those loans to borrowers with a refreshed
FICO score below 620 represented 58 percent of the Countrywide purchased credit-impaired
discontinued real estate loan portfolio at September 30, 2010. Refreshed LTVs and CLTVs greater
than 90 percent represented 52 percent of the purchased credit-impaired discontinued real estate
loan portfolio after consideration of purchase accounting adjustments and 84 percent based on the
unpaid principal balance at September 30, 2010. The table below presents outstandings net of
purchase accounting adjustments, by certain state concentrations. Those loans that were originally
classified as discontinued real estate loans upon acquisition and have been subsequently modified
are now excluded from amounts shown in the table below and included in the Countrywide purchased
credit-impaired residential mortgage loan portfolio, but remain in the purchased credit-impaired
loan pool.
|
|
|
|
|
|
|
|
|
Table 29 |
|
|
|
|
|
|
Countrywide Purchased Credit-impaired Loan Portfolio Discontinued Real Estate State Concentrations |
|
|
Outstandings |
|
|
September 30 |
|
December 31 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
California |
|
$ |
6,486 |
|
|
$ |
7,148 |
|
Florida |
|
|
1,171 |
|
|
|
1,315 |
|
Washington |
|
|
374 |
|
|
|
421 |
|
Virginia |
|
|
352 |
|
|
|
399 |
|
Arizona |
|
|
342 |
|
|
|
430 |
|
Other U.S./Foreign |
|
|
3,245 |
|
|
|
3,537 |
|
|
Total Countrywide purchased credit-impaired discontinued real estate loan portfolio |
|
$ |
11,970 |
|
|
$ |
13,250 |
|
|
Credit
Card Domestic
Prior to the adoption of new consolidation guidance, the domestic credit card portfolio was
reported on both a held and managed basis. Managed basis assumed that securitized loans were not
sold into credit card securitizations and presented credit quality information as if the loans had
not been sold. Under the new consolidation guidance effective January 1, 2010, we consolidated the
credit card securitization trusts and the new held basis is comparable to the previously reported
managed basis. For more information on the adoption of the new consolidation guidance, see Note 8
Securitizations and Other Variable Interest Entities to the Consolidated Financial Statements.
The
table below presents certain credit card domestic key credit statistics on a held
basis and managed basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Card Domestic Key Credit Statistics |
|
|
September 30 |
|
January 1 |
|
December 31 |
|
September 30 |
(Dollars in millions) |
|
2010 |
|
2010 |
|
2009 |
|
2009 |
|
Outstandings |
|
$ |
113,609 |
|
|
$ |
129,642 |
|
|
$ |
49,453 |
|
|
$ |
49,221 |
|
Accruing past due 30 days or more |
|
|
6,460 |
|
|
|
9,866 |
|
|
|
3,907 |
|
|
|
4,001 |
|
Accruing past due 90 days or more |
|
|
3,484 |
|
|
|
5,408 |
|
|
|
2,158 |
|
|
|
2,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30 |
|
September 30 |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Net charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
$ |
2,975 |
|
|
$ |
1,787 |
|
|
$ |
10,455 |
|
|
$ |
5,001 |
|
Ratios |
|
|
10.24 |
% |
|
|
14.25 |
% |
|
|
11.67 |
% |
|
|
12.51 |
% |
Supplemental managed basis data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
n/a |
|
|
$ |
4,816 |
|
|
|
n/a |
|
|
$ |
12,767 |
|
Ratios |
|
|
n/a |
|
|
|
13.92 |
% |
|
|
n/a |
|
|
|
11.88 |
% |
|
The consumer domestic credit card portfolio is managed in Global Card Services.
Outstandings in the domestic credit card loan portfolio increased $64.2 billion compared to
December 31, 2009 primarily due to the adoption of the new consolidation guidance. Compared to the
three and nine months ended September 30, 2009, net charge-offs increased $1.2 billion to $3.0
billion and $5.5 billion to $10.5 billion also primarily due to the adoption of the new
consolidation guidance compared to the same period in the prior year. Compared to December 31,
2009, domestic credit card loans 30 days or
167
more past due and still accruing interest increased $2.6 billion while loans 90 days or more past due and still accruing
interest increased $1.3 billion due to the adoption of new consolidation guidance.
Compared to December 31, 2009 on a managed basis, outstandings decreased $16.0 billion as a
result of a seasonal decline in transaction volume, lower origination volume and charge-offs.
Compared to the three and nine months ended September 30, 2009 on a managed basis, net losses
decreased $1.8 billion and $2.3 billion due to lower levels of delinquencies and bankruptcies as a
result of improvement in the U.S. economy. The net charge-off ratio was 10.24 percent and 11.67
percent of total average credit card domestic loans in the three and nine months ended
September 30, 2010, compared to 13.92 percent and 11.88 percent for the same periods in the prior
year on a managed basis. Domestic credit card loans 30 days or more past due and still accruing interest on a managed basis
decreased $3.4 billion and loans 90 days or more past due and still accruing interest decreased
$1.9 billion compared to December 31, 2009 on a managed basis. These declines were due to improvement in the U.S. economy including
stabilization in the levels of unemployment.
The table below presents certain state concentrations for the credit card domestic
portfolio. The 2009 periods are presented on a managed basis. Periods subsequent to
January 1, 2010 reflect the adoption of new consolidation guidance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Card Domestic State Concentrations |
|
|
|
|
|
|
|
|
|
|
Accruing Past Due 90 |
|
|
|
|
|
Outstandings |
|
Days or More |
|
Net Charge-offs |
|
|
September 30 |
|
December 31 |
|
September 30 |
|
December 31 |
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
California |
|
$ |
17,211 |
|
|
$ |
20,048 |
|
|
$ |
689 |
|
|
$ |
1,097 |
|
|
$ |
633 |
|
|
$ |
1,034 |
|
|
$ |
2,216 |
|
|
$ |
2,680 |
|
Florida |
|
|
9,179 |
|
|
|
10,858 |
|
|
|
392 |
|
|
|
676 |
|
|
|
353 |
|
|
|
610 |
|
|
|
1,308 |
|
|
|
1,649 |
|
Texas |
|
|
7,588 |
|
|
|
8,653 |
|
|
|
212 |
|
|
|
345 |
|
|
|
177 |
|
|
|
272 |
|
|
|
633 |
|
|
|
713 |
|
New York |
|
|
6,874 |
|
|
|
7,839 |
|
|
|
204 |
|
|
|
295 |
|
|
|
166 |
|
|
|
243 |
|
|
|
553 |
|
|
|
639 |
|
New Jersey |
|
|
4,562 |
|
|
|
5,168 |
|
|
|
135 |
|
|
|
189 |
|
|
|
106 |
|
|
|
159 |
|
|
|
358 |
|
|
|
420 |
|
Other U.S. |
|
|
68,195 |
|
|
|
77,076 |
|
|
|
1,852 |
|
|
|
2,806 |
|
|
|
1,540 |
|
|
|
2,498 |
|
|
|
5,387 |
|
|
|
6,666 |
|
|
Total credit card -
domestic loan
portfolio |
|
$ |
113,609 |
|
|
$ |
129,642 |
|
|
$ |
3,484 |
|
|
$ |
5,408 |
|
|
$ |
2,975 |
|
|
$ |
4,816 |
|
|
$ |
10,455 |
|
|
$ |
12,767 |
|
|
Unused lines of credit for domestic credit card totaled $406.7 billion at September 30,
2010 compared to $438.5 billion on a managed basis at December 31, 2009. The $31.8 billion
decrease was driven by a combination of account management initiatives on higher risk or inactive
accounts and tighter underwriting standards for new originations.
Credit Card Foreign
Prior to the adoption of new consolidation guidance, the foreign credit card portfolio was
reported on both a held and managed basis. Managed basis assumed that securitized loans were not
sold into credit card securitizations and presented credit quality information as if the loans had
not been sold. Under the new consolidation guidance effective January 1, 2010, we consolidated the
credit card securitization trusts and the new held basis is comparable to the previously reported
managed basis. For more information on the adoption of the new consolidation guidance, see Note 8
Securitizations and Other Variable Interest Entities to the Consolidated Financial Statements.
The table below presents certain credit card foreign key credit statistics on a held basis
and managed basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Card Foreign Key Credit Statistics |
|
|
September 30 |
|
January 1 |
|
December 31 |
|
September 30 |
(Dollars in millions) |
|
2010 |
|
2010 |
|
2009 |
|
2009 |
|
Outstandings |
|
$ |
27,262 |
|
|
$ |
31,182 |
|
|
$ |
21,656 |
|
|
$ |
20,985 |
|
Accruing past due 30 days or more |
|
|
1,183 |
|
|
|
1,744 |
|
|
|
1,104 |
|
|
|
1,053 |
|
Accruing past due 90 days or more |
|
|
523 |
|
|
|
814 |
|
|
|
515 |
|
|
|
505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30 |
|
September 30 |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Net charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
$ |
295 |
|
|
$ |
382 |
|
|
$ |
1,868 |
|
|
$ |
844 |
|
Ratios |
|
|
4.32 |
% |
|
|
7.14 |
% |
|
|
8.86 |
% |
|
|
5.95 |
% |
Supplemental managed basis data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
n/a |
|
|
$ |
661 |
|
|
|
n/a |
|
|
$ |
1,551 |
|
Ratios |
|
|
n/a |
|
|
|
8.41 |
% |
|
|
n/a |
|
|
|
7.05 |
% |
|
168
The consumer foreign credit card portfolio is managed in Global Card Services.
Outstandings in the foreign credit card loan portfolio increased $5.6 billion
compared to December 31, 2009
primarily due to the
adoption of the new consolidation guidance. Additionally, net charge-off levels and ratios for the
three and nine months ended September 30, 2010, when compared to the same prior-year periods, were
impacted by the adoption of the new consolidation guidance and economic deterioration experienced
during 2009 in Europe and Canada. Additionally, charge-off levels and ratios were impacted by the
acceleration of losses on certain renegotiated loans to conform with charge-off policies on the
domestic portfolio during the second quarter of 2010. Net charge-offs decreased $87 million and
increased $1.0 billion to $295 million and $1.9 billion for the three and nine months ended
September 30, 2010. The impact of these factors is reflected in
Table 32. The net charge-off ratio
was 4.32 percent and 8.86 percent of total average credit card foreign loans during the three
and nine months ended September 30, 2010.
Compared to December 31, 2009 on a managed basis, outstandings declined $3.9 billion
primarily due to charge-offs, lower origination volume and the strengthening of the U.S. dollar
against certain foreign currencies. Net loss levels and ratios for the three and nine months ended
September 30, 2010 were also impacted by the economic deterioration experienced in 2009 and the
acceleration of losses in the second quarter 2010 to conform charge-off policies on certain
renegotiated loans with the domestic portfolio. Compared to the same periods a year ago on a
managed basis, net losses decreased $366 million and increased $317 million for the three and nine
months ended September 30, 2010. The net loss ratio was 8.41 percent and 7.05 percent for the same
periods in the prior year on a managed basis.
Unused lines of credit for foreign credit card totaled $61.9 billion at September 30, 2010
compared to $69.6 billion on a managed basis at December 31, 2009. The $7.7 billion decrease was
driven by the combination of account management initiatives on inactive accounts, tighter
underwriting standards for new originations and the strengthening of the U.S. dollar against
certain foreign currencies, particularly the British Pound and the Euro.
Direct/Indirect Consumer
At September 30, 2010, approximately 48 percent of the direct/indirect portfolio was included
in Global Commercial Banking (dealer financial services automotive, marine and recreational
vehicle loans), 28 percent was in GWIM (principally other
non-real estate-secured, unsecured
personal loans and securities-based lending margin loans), 16 percent was included in Global Card
Services (consumer personal loans and other non-real estate-secured loans), and the remainder was
in All Other (student loans).
Outstanding loans and leases decreased $4.8 billion to $92.5 billion at September 30, 2010
compared to December 31, 2009 as lower outstandings in the Global Card Services unsecured consumer
lending portfolio and the sale of a portion of the student loans portfolio were partially offset
by the adoption of new consolidation guidance and the purchase of auto receivables within the
dealer financial services portfolio. Direct/indirect loans that were past due 30 days or more and
still accruing interest declined $922 million compared to December 31, 2009, to $2.8 billion due
to a combination of reduced outstandings and improvement in the unsecured consumer lending portfolio. Net charge-offs
decreased $744 million to $707 million for the three months ended September 30, 2010, or 2.93
percent of total average direct/indirect loans, compared to 5.76 percent for the same period in
2009. This decrease was primarily driven by reduced outstandings in the unsecured consumer lending
portfolio from changes in underwriting criteria and lower levels of delinquencies and bankruptcies
as a result of improvement in the U.S. economy including stabilization in the levels of
unemployment. Net charge-offs for the unsecured consumer lending portfolio decreased $612 million
to $575 million and the loss rate decreased to 15.18 percent for the three months ended September
30, 2010, compared to 20.27 percent for the same period in the prior year. For the nine months
ended September 30, 2010, net charge-offs decreased $1.5 billion to $2.7 billion, or 3.66 percent
of total average direct/indirect loans, compared to 5.56 percent for the same period in 2009. The
decline was primarily driven by reduced outstandings and lower levels of delinquencies and
bankruptcies in the consumer lending portfolio and lower net charge-offs in the dealer financial
services portfolio due to the impact of higher credit quality originations and higher resale
values. For the nine months ended September 30, 2010, net charge-offs for the unsecured consumer
lending portfolio decreased $1.1 billion to $2.2 billion, although the loss rate increased to
17.45 percent compared to 17.40 percent for the same period in the prior year.
169
The table below presents certain state concentrations for the direct/indirect consumer loan
portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct/Indirect State Concentrations |
|
|
|
|
|
|
|
|
|
|
|
Accruing Past Due |
|
|
|
|
|
Outstandings |
|
90 Days or More |
|
Net Charge-offs |
|
|
September 30 |
|
December 31 |
|
September 30 |
|
December 31 |
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
California |
|
$ |
11,252 |
|
|
$ |
11,664 |
|
|
$ |
155 |
|
|
$ |
228 |
|
|
$ |
120 |
|
|
$ |
267 |
|
|
$ |
481 |
|
|
$ |
804 |
|
Texas |
|
|
8,473 |
|
|
|
8,743 |
|
|
|
81 |
|
|
|
105 |
|
|
|
55 |
|
|
|
101 |
|
|
|
211 |
|
|
|
279 |
|
Florida |
|
|
7,166 |
|
|
|
7,559 |
|
|
|
85 |
|
|
|
130 |
|
|
|
70 |
|
|
|
143 |
|
|
|
278 |
|
|
|
454 |
|
New York |
|
|
5,101 |
|
|
|
5,111 |
|
|
|
58 |
|
|
|
73 |
|
|
|
41 |
|
|
|
74 |
|
|
|
147 |
|
|
|
203 |
|
Georgia |
|
|
3,059 |
|
|
|
3,165 |
|
|
|
41 |
|
|
|
52 |
|
|
|
28 |
|
|
|
49 |
|
|
|
102 |
|
|
|
153 |
|
Other U.S./Foreign |
|
|
57,428 |
|
|
|
60,994 |
|
|
|
645 |
|
|
|
900 |
|
|
|
393 |
|
|
|
817 |
|
|
|
1,476 |
|
|
|
2,282 |
|
|
Total direct/indirect loans |
|
$ |
92,479 |
|
|
$ |
97,236 |
|
|
$ |
1,065 |
|
|
$ |
1,488 |
|
|
$ |
707 |
|
|
$ |
1,451 |
|
|
$ |
2,695 |
|
|
$ |
4,175 |
|
|
Other Consumer
At September 30, 2010, approximately 69 percent of the $2.9 billion other consumer portfolio
was associated with portfolios from certain consumer finance businesses that we previously exited
and is included in All Other. The remainder consisted of the foreign consumer loan portfolio which
is mostly included in Global Card Services and deposit overdrafts which are recorded in Deposits.
Nonperforming Consumer Loans and Foreclosed Properties Activity
Table 34 presents nonperforming consumer loans and foreclosed properties activity during the
most recent five quarters. Nonperforming LHFS are excluded from nonperforming loans as they are
recorded at either fair value or the lower of cost or fair value. Nonperforming loans do not
include past due consumer credit card loans and in general, past due consumer loans not secured by
real estate as these loans are generally charged off no later than the end of the month in which
the account becomes 180 days past due. Real estate-secured past due consumer loans insured by the
FHA are not reported as nonperforming as principal repayment is insured by the FHA. Additionally,
nonperforming loans do not include the Countrywide purchased credit-impaired loan portfolio. For
further information regarding nonperforming loans, see Note 1 Summary of Significant Accounting
Principles to the Consolidated Financial Statements of the Corporations 2009 Annual Report on
Form 10-K. Total net reductions to nonperforming loans for the three months ended September 30,
2010 were $255 million compared to net additions of $127 million for the three months ended June
30, 2010. The reductions to nonperforming loans for the three months ended September 30, 2010 were
due to the slower pace of delinquency inflows to new nonaccrual loans resulting from favorable
portfolio trends due in part to the improving U.S. economy. In addition, nonperforming loan
balances benefited from a decline in the volume of new TDRs less than 90 days past due moving into
nonperforming status due to lower modification volumes. Nonperforming loans increased $590 million
compared to December 31, 2009 as new inflows, which continue to slow in 2010 due to favorable
delinquency trends, outpaced nonperforming TDRs returning to performing status, charge-offs and
transfers to foreclosed properties. Nonperforming consumer real estate related TDRs as a
percentage of total nonperforming consumer loans and foreclosed properties declined to 19 percent
at September 30, 2010 from 21 percent at December 31, 2009. This was due to nonperforming TDRs
returning to performing status and charge-offs, including those charged off to comply with
regulatory guidance clarifying the timing of charge-offs on collateral dependent modified loans,
both of which outpaced new TDRs.
The outstanding balance of a real estate-secured loan that is in excess of the estimated
property value, after reducing the property value for costs to sell, is charged off no later than
the end of the month in which the account becomes 180 days past due unless repayment of the loan
is insured by the FHA. Property values are refreshed at least quarterly with additional
charge-offs taken as needed. At September 30, 2010, $13.4 billion, or 69 percent of the
nonperforming residential mortgage loans and foreclosed properties, included $12.3 billion of
nonperforming loans greater than 180 days past due and $1.1 billion of foreclosed properties that
had been written down to their fair values. In addition, $878 million, or 32 percent of the
nonperforming home equity loans and foreclosed properties, included $812 million of nonperforming
loans greater than 180 days past due and $66 million of foreclosed properties that had been
written down to their fair values.
Foreclosed properties decreased $259 million and increased $57 million during the three and
nine months ended September 30, 2010. Purchased credit-impaired loans are excluded from our
nonperforming loans as these loans were written down to fair value at the acquisition date and the
accretable yield is recognized in interest income over the remaining life of the loan. However,
once the underlying real estate is acquired by the Corporation upon foreclosure of the
170
delinquent purchased credit-impaired loan, it is included in foreclosed properties. Net changes to
foreclosed properties related to purchased credit-impaired loans were a reduction of $134 million
for the three months ended and an increase of $221 million for the nine months ended
September 30, 2010. Not included in foreclosed properties at September 30, 2010 was
$1.5 billion of real estate that was acquired by the Corporation upon foreclosure of delinquent
FHA insured loans. We hold this real estate on our balance sheet until we convey these properties
to the FHA. We exclude these amounts from our nonperforming loans and foreclosed properties
activity as we will be reimbursed once the property is conveyed to the FHA for principal and up to
certain limits, costs incurred during the foreclosure process and interest incurred during the
holding period.
Restructured Loans
Nonperforming loans also include certain loans that have been modified in TDRs where economic
concessions have been granted to borrowers experiencing financial difficulties. These concessions
typically result from the Corporations loss mitigation activities and could include reductions in
the interest rate, payment extensions, forgiveness of principal, forbearance or other actions.
Certain TDRs are classified as nonperforming at the time of restructuring and may only be returned
to performing status after considering the borrowers sustained repayment performance under
revised payment terms for a reasonable period, generally six months. Nonperforming TDRs, excluding
those modified loans in the purchased credit-impaired loan portfolio, are included in Table 34.
At September 30, 2010, residential mortgage TDRs were $8.7 billion, including $2.4 billion
deemed collateral dependent, an increase of $1.1 billion and $3.4 billion during the three and
nine months ended September 30, 2010. Nonperforming residential mortgage TDRs increased $56
million and $588 million during the three and nine months ended September 30, 2010 to $3.5
billion, including $832 million deemed collateral dependent. Nonperforming residential mortgage
TDRs represented 18 percent and 17 percent of total residential mortgage nonperforming loans and
foreclosed properties at September 30, 2010 and December 31, 2009. Residential mortgage TDRs that
were performing in accordance with their modified terms and excluded from nonperforming loans in
Table 34 were $5.2 billion, including $1.5 billion deemed collateral dependent, an increase of
$1.0 billion and $2.8 billion during the three and nine months ended September 30, 2010 driven by
an increase in TDRs returning to performing status and new additions to TDRs.
At September 30, 2010, home equity TDRs were $1.8 billion, including $860 million deemed
collateral dependent, a decrease of $84 million and $528 million during the three and nine months
ended September 30, 2010. Nonperforming TDRs decreased $158 million and $996 million during the
three and nine months ended September 30, 2010 to $698 million, including $330 million deemed
collateral dependent, due primarily to nonperforming TDRs returning to performing status. In
addition, during the nine months ended September 30, 2010, the decrease was also due to
charge-offs taken to comply with regulatory guidance clarifying the timing of charge-offs on
collateral dependent modified loans. Nonperforming home equity TDRs represented 25 percent and 44
percent of total home equity nonperforming loans and foreclosed properties at September 30, 2010
and December 31, 2009. Home equity TDRs that were performing in accordance with their modified
terms and excluded from nonperforming loans in Table 34 were $1.1 billion, including $530 million
deemed collateral dependent, at September 30, 2010, an increase of $74 million and $469 million
during the three and nine months ended September 30, 2010.
Discontinued real estate TDRs totaled $119 million at September 30, 2010, an increase of $8
million and $41 million during the three and nine months ended September 30, 2010. Of these loans,
$78 million were nonperforming while the remaining $41 million were classified as performing at
September 30, 2010. Discontinued real estate TDRs deemed collateral dependent totaled $46 million
at September 30, 2010 and included $28 million of loans classified as nonperforming and $18
million classified as performing.
We also work with customers that are experiencing financial difficulty by renegotiating
credit card, consumer lending and small business loans (the renegotiated portfolio), while
complying with Federal Financial Institutions Examination Council (FFIEC) guidelines.
Substantially all renegotiated portfolio modifications are considered to be TDRs. The renegotiated
portfolio may include modifications, both short- and long-term, of interest rates or payment
amounts or a combination of interest rates and payment amounts. We make modifications primarily
through internal renegotiation programs utilizing direct customer contact, but may also utilize
external renegotiation programs. The renegotiated portfolio is excluded from Table 34 as we do not
generally classify consumer non-real estate loans as nonperforming. At September 30, 2010, our
renegotiated portfolio was $13.1 billion of which $10.1 billion was current or less than 30 days
past due under the modified terms. At December 31, 2009, our renegotiated portfolio, on a managed
basis, was $15.8 billion of which $11.5 billion was current or less than 30 days past due under
the modified terms. For more information on the renegotiated portfolio, see Note 6 Outstanding
Loans and Leases to the Consolidated Financial Statements.
171
As a result of new accounting guidance on purchased credit-impaired loans, beginning January
1, 2010, modifications of loans in the purchased credit-impaired loan portfolio do not result in
removal of the loan from the purchased credit-impaired loan portfolio pool. The table below does
not include nonaccruing TDRs in the consumer real estate portfolio of $378 million and $395
million at September 30, 2010 and December 31, 2009 that were removed from the purchased
credit-impaired loan portfolio prior to the adoption of new accounting guidance effective January
1, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming Consumer Loans and Foreclosed Properties Activity (1) |
|
|
Third |
|
Second |
|
First |
|
Fourth |
|
Third |
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
(Dollars in millions) |
|
2010 |
|
2010 |
|
2010 |
|
2009 |
|
2009 |
|
Nonperforming loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
21,684 |
|
|
$ |
21,557 |
|
|
$ |
20,839 |
|
|
$ |
19,654 |
|
|
$ |
17,772 |
|
|
Additions to nonperforming loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation of VIEs |
|
|
- |
|
|
|
- |
|
|
|
448 |
|
|
|
- |
|
|
|
- |
|
New nonaccrual loans |
|
|
4,313 |
|
|
|
5,033 |
|
|
|
6,298 |
|
|
|
6,521 |
|
|
|
6,696 |
|
Reductions in nonperforming loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paydowns and payoffs |
|
|
(917 |
) |
|
|
(528 |
) |
|
|
(625 |
) |
|
|
(371 |
) |
|
|
(410 |
) |
Returns to performing status (2) |
|
|
(1,469 |
) |
|
|
(1,816 |
) |
|
|
(2,521 |
) |
|
|
(2,169 |
) |
|
|
(966 |
) |
Charge-offs (3) |
|
|
(1,749 |
) |
|
|
(2,231 |
) |
|
|
(2,607 |
) |
|
|
(2,443 |
) |
|
|
(2,829 |
) |
Transfers to foreclosed properties |
|
|
(433 |
) |
|
|
(331 |
) |
|
|
(275 |
) |
|
|
(353 |
) |
|
|
(609 |
) |
|
Total net additions (reductions) to nonperforming loans |
|
|
(255 |
) |
|
|
127 |
|
|
|
718 |
|
|
|
1,185 |
|
|
|
1,882 |
|
|
Total nonperforming loans, end of period (4) |
|
|
21,429 |
|
|
|
21,684 |
|
|
|
21,557 |
|
|
|
20,839 |
|
|
|
19,654 |
|
|
Foreclosed properties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
1,744 |
|
|
|
1,388 |
|
|
|
1,428 |
|
|
|
1,298 |
|
|
|
1,330 |
|
|
Additions to foreclosed properties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New foreclosed properties (5) |
|
|
541 |
|
|
|
847 |
|
|
|
549 |
|
|
|
701 |
|
|
|
488 |
|
Reductions in foreclosed properties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
(747 |
) |
|
|
(453 |
) |
|
|
(543 |
) |
|
|
(495 |
) |
|
|
(428 |
) |
Write-downs |
|
|
(53 |
) |
|
|
(38 |
) |
|
|
(46 |
) |
|
|
(76 |
) |
|
|
(92 |
) |
|
Total net additions (reductions) to foreclosed
properties |
|
|
(259 |
) |
|
|
356 |
|
|
|
(40 |
) |
|
|
130 |
|
|
|
(32 |
) |
|
Total foreclosed properties, end of period |
|
|
1,485 |
|
|
|
1,744 |
|
|
|
1,388 |
|
|
|
1,428 |
|
|
|
1,298 |
|
|
Nonperforming consumer loans and
foreclosed properties, end of period |
|
$ |
22,914 |
|
|
$ |
23,428 |
|
|
$ |
22,945 |
|
|
$ |
22,267 |
|
|
$ |
20,952 |
|
|
Nonperforming consumer loans as a percentage of
outstanding consumer loans |
|
|
3.38 |
% |
|
|
3.34 |
% |
|
|
3.26 |
% |
|
|
3.61 |
% |
|
|
3.40 |
% |
Nonperforming consumer loans and foreclosed properties
as a percentage of outstanding consumer loans and
foreclosed properties |
|
|
3.60 |
|
|
|
3.60 |
|
|
|
3.46 |
|
|
|
3.85 |
|
|
|
3.62 |
|
|
|
|
|
(1) |
|
Balances do not include nonperforming LHFS of $1.1 billion, $1.3 billion, $1.4 billion,
$1.6 billion and $1.6 billion at September 30, 2010, June 30, 2010, March 31, 2010, December 31,
2009 and September 30, 2009, respectively. For more information on our definition of nonperforming
loans, see the discussion beginning on page 170. |
|
(2) |
|
Consumer loans may be returned to performing status when all principal and interest is
current and full repayment of the remaining contractual principal and interest is expected, or when
the loan otherwise becomes well-secured and is in the process of collection. Certain TDRs are
classified as nonperforming at the time of restructure and may only be returned to performing
status after considering the borrowers sustained repayment performance for a reasonable period,
generally six months. |
|
(3) |
|
Our policy generally is not to classify consumer credit card and consumer loans not
secured by real estate as nonperforming; therefore, the charge-offs on these loans have no impact
on nonperforming activity and accordingly are excluded from this table. |
|
(4) |
|
62 percent of the nonperforming loans at September 30, 2010 are greater than 180 days
past due and have been written down through charge-offs to 71 percent of the unpaid principal
balance. |
|
(5) |
|
Our policy is to record any losses in the value of foreclosed properties as a
reduction in the allowance for loan and lease losses during the first 90 days after transfer of a
loan into foreclosed properties. Thereafter, all losses in value are recorded in noninterest
expense. New foreclosed properties in the table above are net of $158 million, $187 million, $209
million, $161 million and $270 million of charge-offs during the third, second and first quarters
of 2010 and the fourth and third quarters of 2009, respectively, taken during the first 90 days
after transfer. |
172
Commercial Portfolio Credit Risk Management
Commercial credit risk is evaluated and managed with the goal that concentrations of
credit exposure do not result in undesirable levels of risk. We review, measure and manage
concentrations of credit exposure by industry, product, geography, customer relationship and loan
size. We also review, measure and manage commercial real estate loans by geographic location and
property type. In addition, within our international portfolio, we evaluate exposures by region
and by country. Tables 39, 43, 47 and 48 summarize our concentrations. We also utilize syndication
of exposure to third parties, loan sales, hedging and other risk mitigation techniques to manage
the size and risk profile of the commercial credit portfolio.
For information on our accounting policies regarding delinquencies, nonperforming status and
net charge-offs for the commercial portfolio, refer to the Commercial Portfolio Credit Risk
Management section beginning on page 64 in the MD&A of the Corporations 2009 Annual Report on
Form 10-K as well as Note 1 Summary of Significant Accounting Principles to the Consolidated
Financial Statements of the Corporations 2009 Annual Report on Form 10-K.
Commercial Credit Portfolio
U. S.-based loan balances continued to decline on weak loan demand as businesses
aggressively managed their working capital and production capacity by maintaining lean
inventories, staff levels and physical locations. Additionally, borrowers continued to access the
capital markets for financing while reducing their use of bank credit facilities. Risk mitigation
strategies and net charge-offs further contributed to the decline in loan balances. Commercial
foreign loans showed growth due to initiatives in Asia and other emerging markets.
Reservable criticized balances and net charge-offs in the commercial credit portfolio
declined for the fourth consecutive quarter and nonperforming loans, leases and foreclosed
property balances declined for the third consecutive quarter. These reductions were driven
primarily by the commercial domestic and commercial real estate portfolios. Commercial
domestic was driven by broad-based improvements in terms of clients, industries and
lines of business. Commercial real estate also continued to show some signs of stabilization
during the three and nine months ended September 30, 2010; however, levels of stressed commercial
real estate loans remained elevated. Most other credit indicators across the remaining commercial
portfolio have also improved.
173
Table 35 presents our commercial loans and leases, and related credit quality information at
September 30, 2010 and December 31, 2009.
Loans that were acquired from Merrill Lynch that were considered purchased credit-impaired
were written down to fair value upon acquisition and represented $228 million and $692 million of
total commercial loans and leases outstanding at September 30, 2010 and December 31, 2009. These
loans are excluded from the nonperforming loans and accruing balances 90 days or more past due
even though the customer may be contractually past due.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 35 |
|
Commercial Loans and Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing Past Due 90 |
|
|
|
Outstandings |
|
|
Nonperforming(1) |
|
Days or More (2) |
|
|
|
September 30 |
|
|
January 1 |
|
|
December 31 |
|
|
September 30 |
|
|
December 31 |
|
September 30 |
|
December 31 |
(Dollars in millions) |
|
2010(3) |
|
|
2010 (3) |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
2010 |
|
2009 |
|
Commercial loans and leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial domestic (4) |
|
$ |
175,869 |
|
|
$ |
186,675 |
|
|
$ |
181,377 |
|
|
$ |
3,894 |
|
|
$ |
4,925 |
|
|
$ |
138 |
|
|
$ |
213 |
|
Commercial real estate (5) |
|
|
52,819 |
|
|
|
69,377 |
|
|
|
69,447 |
|
|
|
6,376 |
|
|
|
7,286 |
|
|
|
174 |
|
|
|
80 |
|
Commercial lease financing |
|
|
21,321 |
|
|
|
22,199 |
|
|
|
22,199 |
|
|
|
123 |
|
|
|
115 |
|
|
|
24 |
|
|
|
32 |
|
Commercial foreign |
|
|
30,575 |
|
|
|
27,079 |
|
|
|
27,079 |
|
|
|
272 |
|
|
|
177 |
|
|
|
7 |
|
|
|
67 |
|
|
|
|
|
280,584 |
|
|
|
305,330 |
|
|
|
300,102 |
|
|
|
10,665 |
|
|
|
12,503 |
|
|
|
343 |
|
|
|
392 |
|
Small business commercial - domestic (6) |
|
|
15,227 |
|
|
|
17,526 |
|
|
|
17,526 |
|
|
|
202 |
|
|
|
200 |
|
|
|
363 |
|
|
|
624 |
|
|
Total commercial loans excluding
loans measured at fair value |
|
|
295,811 |
|
|
|
322,856 |
|
|
|
317,628 |
|
|
|
10,867 |
|
|
|
12,703 |
|
|
|
706 |
|
|
|
1,016 |
|
Total measured at fair value (7) |
|
|
3,684 |
|
|
|
4,936 |
|
|
|
4,936 |
|
|
|
15 |
|
|
|
138 |
|
|
|
- |
|
|
|
87 |
|
|
Total commercial loans and leases |
|
$ |
299,495 |
|
|
$ |
327,792 |
|
|
$ |
322,564 |
|
|
$ |
10,882 |
|
|
$ |
12,841 |
|
|
$ |
706 |
|
|
$ |
1,103 |
|
|
|
|
|
(1) |
|
Nonperforming commercial loans and leases as a percentage of outstanding commercial
loans and leases excluding loans accounted for under the fair value option were 3.67 percent and
4.00 percent at September 30, 2010 and December 31, 2009. |
|
(2) |
|
Accruing commercial loans and leases past due 90 days or more as a percentage of
outstanding commercial loans and leases excluding loans accounted for under the fair value option
were 0.24 percent and 0.32 percent at September 30, 2010 and December 31, 2009. |
|
(3) |
|
Balance reflects impact of new
consolidation guidance. |
|
(4) |
|
Excludes
small business commercial domestic loans. |
|
(5) |
|
Includes domestic commercial real estate loans of $50.1 billion and $66.5 billion and
foreign commercial real estate loans of $2.7 billion and $3.0 billion at September 30, 2010 and
December 31, 2009. |
|
(6) |
|
Includes card-related products. |
|
(7) |
|
Commercial loans accounted
for under the fair value option include commercial
domestic loans of $1.8 billion and $3.0 billion, commercial
foreign loans of $1.8 billion and
$1.9 billion and commercial real estate loans of $54 million and $90 million at September 30, 2010
and December 31, 2009. See Note 14 Fair Value Measurements to the Consolidated Financial
Statements for additional information on the fair value option. |
174
Table 36 presents net charge-offs and related ratios for our commercial loans and leases for
the three and nine months ended September 30, 2010 and 2009. Commercial real estate net
charge-offs for the three and nine months ended September 30, 2010 were primarily in the
non-homebuilder portfolio while homebuilder net charge-offs declined from comparable periods in
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 36 |
Commercial Net Charge-offs and Related Ratios |
|
|
Net Charge-offs |
|
|
Net Charge-off Ratios (1) |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
September 30 |
|
|
September 30 |
|
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Commercial domestic (2) |
|
$ |
206 |
|
|
$ |
773 |
|
|
$ |
671 |
|
|
$ |
1,553 |
|
|
|
0.47 |
% |
|
|
1.58 |
% |
|
|
0.50 |
% |
|
|
1.01 |
% |
Commercial real estate |
|
|
410 |
|
|
|
873 |
|
|
|
1,670 |
|
|
|
1,957 |
|
|
|
2.93 |
|
|
|
4.67 |
|
|
|
3.56 |
|
|
|
3.54 |
|
Commercial lease financing |
|
|
19 |
|
|
|
41 |
|
|
|
37 |
|
|
|
152 |
|
|
|
0.34 |
|
|
|
0.72 |
|
|
|
0.23 |
|
|
|
0.92 |
|
Commercial foreign |
|
|
12 |
|
|
|
149 |
|
|
|
103 |
|
|
|
375 |
|
|
|
0.17 |
|
|
|
2.05 |
|
|
|
0.50 |
|
|
|
1.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
647 |
|
|
|
1,836 |
|
|
|
2,481 |
|
|
|
4,037 |
|
|
|
0.91 |
|
|
|
2.28 |
|
|
|
1.15 |
|
|
|
1.62 |
|
Small business commercial - domestic |
|
|
444 |
|
|
|
796 |
|
|
|
1,574 |
|
|
|
2,202 |
|
|
|
11.38 |
|
|
|
17.45 |
|
|
|
12.88 |
|
|
|
15.85 |
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
$ |
1,091 |
|
|
$ |
2,632 |
|
|
$ |
4,055 |
|
|
$ |
6,239 |
|
|
|
1.46 |
|
|
|
3.09 |
|
|
|
1.77 |
|
|
|
2.37 |
|
|
|
|
|
(1) |
|
Net charge-off ratios are
calculated as annualized net charge-offs divided by average
outstanding loans and leases excluding loans accounted for under the
fair value option. |
|
(2) |
|
Excludes small business
commercial domestic loans. |
Table 37 presents commercial credit exposure by type for utilized, unfunded and total
binding committed credit exposure. Commercial utilized credit exposure includes SBLCs, financial
guarantees, bankers acceptances and commercial letters of credit for which the Corporation is
legally bound to advance funds under prescribed conditions, during a specified period. Although
funds have not yet been advanced, these exposure types are considered utilized for credit risk
management purposes. Total commercial committed credit exposure decreased $49.7 billion, or six
percent, at September 30, 2010 compared to December 31, 2009. The decrease was driven primarily by
reductions in both funded and unfunded loan and lease exposure.
Total commercial utilized credit exposure decreased $27.6 billion, or five percent, at
September 30, 2010 compared to December 31, 2009. Utilized loans and leases declined as businesses
continued to aggressively manage working capital and production capacity, maintain low inventories
and defer capital expenditures as the economic outlook remained uncertain. Clients also continued
to access the capital markets for their funding needs to reduce reliance on bank credit
facilities. The decline in utilized loans and leases was also due to the sale of First Republic
effective July 1, 2010 and the transfer of certain exposures into LHFS partially offset by the
increase in conduit balances related to the adoption of new consolidation guidance.
175
The utilization rate increased to 58 percent at September 30, 2010 from 57 percent at
December 31, 2009. The utilization rate includes loans and leases, letters of credit and financial
guarantees, and bankers acceptances.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 37 |
|
Commercial Credit Exposure by Type |
|
|
Commercial Utilized (1) |
|
|
Commercial Unfunded (2, 3) |
|
|
Total Commercial Committed |
|
|
|
September 30 |
|
|
December 31 |
|
|
September 30 |
|
|
December 31 |
|
|
September 30 |
|
|
December 31 |
|
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Loans and leases |
|
$ |
299,495 |
|
|
$ |
322,564 |
|
|
$ |
270,629 |
|
|
$ |
298,048 |
|
|
$ |
570,124 |
|
|
$ |
620,612 |
|
Derivative assets (4) |
|
|
84,684 |
|
|
|
87,622 |
|
|
|
- |
|
|
|
- |
|
|
|
84,684 |
|
|
|
87,622 |
|
Standby letters of credit and financial guarantees |
|
|
64,050 |
|
|
|
67,975 |
|
|
|
1,633 |
|
|
|
1,767 |
|
|
|
65,683 |
|
|
|
69,742 |
|
Debt securities and other investments (5) |
|
|
9,872 |
|
|
|
11,754 |
|
|
|
6,457 |
|
|
|
1,508 |
|
|
|
16,329 |
|
|
|
13,262 |
|
Loans held-for-sale |
|
|
11,995 |
|
|
|
8,169 |
|
|
|
693 |
|
|
|
781 |
|
|
|
12,688 |
|
|
|
8,950 |
|
Commercial letters of credit |
|
|
3,348 |
|
|
|
2,958 |
|
|
|
1,082 |
|
|
|
569 |
|
|
|
4,430 |
|
|
|
3,527 |
|
Bankers acceptances |
|
|
3,700 |
|
|
|
3,658 |
|
|
|
19 |
|
|
|
16 |
|
|
|
3,719 |
|
|
|
3,674 |
|
Foreclosed properties and other |
|
|
782 |
|
|
|
797 |
|
|
|
- |
|
|
|
- |
|
|
|
782 |
|
|
|
797 |
|
|
Total commercial credit exposure |
|
$ |
477,926 |
|
|
$ |
505,497 |
|
|
$ |
280,513 |
|
|
$ |
302,689 |
|
|
$ |
758,439 |
|
|
$ |
808,186 |
|
|
|
|
|
(1) |
|
Total commercial utilized exposure at September 30, 2010 and December 31, 2009 includes
loans and issued letters of credit accounted for under the fair value option including loans
outstanding of $3.7 billion and $4.9 billion and letters of credit with a notional value of $1.6
billion and $1.7 billion. |
|
(2) |
|
Total commercial unfunded exposure at September 30, 2010 and December 31, 2009 includes
loan commitments accounted for under the fair value option with a notional value of $26.9 billion
and $25.3 billion. |
|
(3) |
|
Excludes unused business card lines which are not legally binding. |
|
(4) |
|
Derivative assets are carried at fair value, reflect the effects of legally enforceable
master netting agreements and have been reduced by cash collateral of $68.1 billion and $51.5
billion at September 30, 2010 and December 31, 2009. Not reflected in utilized and committed
exposure is additional derivative collateral held of $19.4 billion and $16.2 billion which consists
primarily of other marketable securities. |
|
(5) |
|
Total commercial committed exposure consists of $13.3 billion and $9.8 billion of
debt securities and $3.0 billion and $3.5 billion of other investments at September 30, 2010 and
December 31, 2009. |
Table 38 presents commercial utilized reservable criticized exposure by product type.
Criticized exposure corresponds to the Special Mention, Substandard and Doubtful asset categories
as defined by regulatory authorities. In addition to reservable loans and leases, excluding those
accounted for under the fair value option, exposure includes SBLCs, financial guarantees, bankers
acceptances and commercial letters of credit for which we are legally bound to advance funds under
prescribed conditions, during a specified time period. Although funds have not been advanced,
these exposure types are considered utilized for credit risk management purposes. Total commercial
utilized reservable criticized exposure decreased $11.0 billion at September 30, 2010 compared to
December 31, 2009, due to decreases in commercial domestic and commercial real estate driven
primarily by continued paydowns. Despite the improvements, utilized reservable criticized levels
remain elevated in commercial real estate. At September 30, 2010, 88 percent of the loans within commercial utilized
reservable criticized exposure were secured.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 38 |
|
Commercial Utilized Reservable Criticized Exposure |
|
|
September 30, 2010 |
|
December 31, 2009 |
(Dollars in millions) |
|
Amount |
|
|
Percent (1) |
|
|
Amount |
|
|
Percent (1) |
|
|
Commercial domestic (2) |
|
$ |
20,449 |
|
|
|
8.80 |
% |
|
$ |
28,259 |
|
|
|
11.77 |
% |
Commercial real estate |
|
|
21,974 |
|
|
|
39.00 |
|
|
|
23,804 |
|
|
|
32.13 |
|
Commercial lease financing |
|
|
1,497 |
|
|
|
7.02 |
|
|
|
2,229 |
|
|
|
10.04 |
|
Commercial foreign |
|
|
2,037 |
|
|
|
5.09 |
|
|
|
2,605 |
|
|
|
7.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,957 |
|
|
|
13.13 |
|
|
|
56,897 |
|
|
|
15.26 |
|
Small business commercial domestic |
|
|
1,741 |
|
|
|
11.40 |
|
|
|
1,789 |
|
|
|
10.18 |
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial utilized reservable criticized exposure |
|
$ |
47,698 |
|
|
|
13.06 |
|
|
$ |
58,686 |
|
|
|
15.03 |
|
|
|
|
|
(1) |
|
Percentages are calculated as commercial utilized reservable criticized exposure
divided by total commercial utilized reservable exposure for each exposure category. |
|
(2) |
|
Excludes small business commercial domestic exposure. |
176
Commercial
Domestic
At
September 30, 2010, 55 percent and 25 percent of the commercial domestic loan
portfolio, excluding small business, were included in Global Commercial Banking and GBAM. The
remaining 20 percent was mostly included in GWIM (business-purpose loans for wealthy individuals).
Outstanding commercial domestic loans, excluding loans accounted for under the fair value
option, decreased primarily due to reduced customer demand and continued client utilization of the
capital markets, partially offset by the adoption of new consolidation guidance which increased
loans by $5.3 billion on January 1, 2010. Compared to December 31, 2009, reservable criticized
balances and nonperforming loans and leases declined $7.8 billion and $1.0 billion. The declines
were broad-based in terms of borrowers and industries and driven by improved client credit
profiles and liquidity. Net charge-offs decreased $567 million and $882 million for the three and
nine months ended September 30, 2010 compared to the same periods during 2009.
Commercial Real Estate
The commercial real estate portfolio is predominantly managed in Global Commercial Banking
and consists of loans made primarily to public and private developers, homebuilders and commercial
real estate firms. Outstanding loans and leases decreased $16.6 billion at September 30, 2010
compared to December 31, 2009, primarily due to portfolio attrition, the sale of First Republic, a
transfer of certain assets to LHFS and net charge-offs. The portfolio remains diversified across
property types and geographic regions. California represents the largest state concentration at 18
percent of commercial real estate loans and leases at September 30, 2010. For more information on
geographic and property concentrations, refer to Table 39.
Credit quality for commercial real estate is showing signs of stabilization; however, we
expect that elevated unemployment and ongoing pressure on vacancy and rental rates will continue
to affect primarily the non-homebuilder portfolio. Compared to December 31, 2009, nonperforming
commercial real estate loans and foreclosed properties decreased in the homebuilder and retail
property types, partially offset by an increase in multi-use, office, warehouse, hotel and
multi-family rental property types. Reservable criticized balances declined by $1.8 billion
primarily due to stabilization in the homebuilder portfolio and non-homebuilder retail and
unsecured segments, partially offset by continued deterioration within the office and multi-family
rental property types of the non-homebuilder portfolio. For the three and nine months ended
September 30, 2010, net charge-offs decreased $463 million and $287 million compared to the same
periods in 2009 due to declines in the homebuilder portfolio.
177
The
table below presents outstanding commercial real estate loans by geographic
region and property type. Commercial real estate primarily includes commercial loans and leases
secured by non owner-occupied real estate which are dependent on the sale or lease of the real
estate as the primary source of repayment. The decline in California is due primarily to the sale
of First Republic. The declines in the Northeast and Southwest regions and the hotels/motels
property type were driven primarily by the transfer of $3.8 billion of assets to LHFS.
|
|
|
|
|
|
|
|
|
Table 39 |
|
Outstanding Commercial Real Estate Loans |
|
|
September 30 |
|
|
December 31 |
|
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
By Geographic Region (1) |
|
|
|
|
|
|
|
|
California |
|
$ |
9,573 |
|
|
$ |
14,554 |
|
Northeast |
|
|
7,666 |
|
|
|
12,089 |
|
Southwest |
|
|
6,501 |
|
|
|
8,641 |
|
Southeast |
|
|
6,290 |
|
|
|
7,019 |
|
Midwest |
|
|
5,756 |
|
|
|
6,662 |
|
Florida |
|
|
4,000 |
|
|
|
4,589 |
|
Illinois |
|
|
3,191 |
|
|
|
4,527 |
|
Midsouth |
|
|
2,920 |
|
|
|
3,459 |
|
Non-U.S. |
|
|
2,682 |
|
|
|
2,994 |
|
Northwest |
|
|
2,395 |
|
|
|
3,097 |
|
Geographically diversified (2) |
|
|
341 |
|
|
|
1,362 |
|
Other (3) |
|
|
1,558 |
|
|
|
544 |
|
|
Total outstanding commercial real estate loans (4) |
|
$ |
52,873 |
|
|
$ |
69,537 |
|
|
By Property Type |
|
|
|
|
|
|
|
|
Office |
|
$ |
10,117 |
|
|
$ |
12,511 |
|
Multi-family rental |
|
|
8,354 |
|
|
|
11,169 |
|
Shopping centers/retail |
|
|
8,041 |
|
|
|
9,519 |
|
Industrial/warehouse |
|
|
5,284 |
|
|
|
5,852 |
|
Homebuilder (5) |
|
|
4,939 |
|
|
|
7,250 |
|
Multi-use |
|
|
4,349 |
|
|
|
5,924 |
|
Hotels/motels |
|
|
2,769 |
|
|
|
6,946 |
|
Land and land development |
|
|
2,697 |
|
|
|
3,215 |
|
Other (6) |
|
|
6,323 |
|
|
|
7,151 |
|
|
Total outstanding commercial real estate loans (4) |
|
$ |
52,873 |
|
|
$ |
69,537 |
|
|
|
|
|
(1) |
|
Distribution is based on geographic location of collateral. |
|
(2) |
|
The geographically diversified category is comprised primarily of unsecured
outstandings to real estate investment trusts and national home builders whose portfolios of
properties span multiple geographic regions. |
|
(3) |
|
Primarily includes properties in the states of Colorado, Utah,
Hawaii, Wyoming and Montana. |
|
(4) |
|
Includes commercial real
estate loans accounted for under the fair value option of $54 million
and $90 million at September 30, 2010 and December 31, 2009. |
|
(5) |
|
Homebuilder includes condominiums and
residential land. |
|
(6) |
|
Represents loans to
borrowers whose primary business is commercial real estate, but the
exposure is not secured by the listed property types or is unsecured. |
During the three and nine months ended September 30, 2010, we continued to see
stabilization in the homebuilder portfolio. Certain portions of the non-homebuilder portfolio
remain most at risk as occupancy rates, rental rates and commercial property prices remain under
pressure. We have adopted a number of proactive risk mitigation initiatives to reduce utilized and
potential exposure in the commercial real estate portfolios. For additional information on our
Credit Risk Management activities, see page 54 of the MD&A of the Corporations 2009 Annual Report
on Form 10-K.
178
The tables below present commercial real estate credit quality data by non-homebuilder
and homebuilder property types. The homebuilder portfolio includes condominiums and other
residential real estate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 40 |
|
Commercial Real Estate Credit Quality Data |
|
|
Nonperforming Loans and |
|
|
Utilized Reservable |
|
|
Foreclosed Properties (1) |
|
Criticized Exposure (2) |
|
|
September 30 |
|
December 31 |
|
September 30 |
|
|
December 31 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
2010 |
|
|
2009 |
|
Commercial real estate non-homebuilder |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office |
|
$ |
1,043 |
|
|
$ |
729 |
|
|
$ |
4,103 |
|
|
$ |
3,822 |
|
Multi-family rental |
|
|
627 |
|
|
|
546 |
|
|
|
3,171 |
|
|
|
2,496 |
|
Shopping centers/retail |
|
|
990 |
|
|
|
1,157 |
|
|
|
3,210 |
|
|
|
3,469 |
|
Industrial/warehouse |
|
|
462 |
|
|
|
442 |
|
|
|
1,856 |
|
|
|
1,757 |
|
Multi-use |
|
|
507 |
|
|
|
416 |
|
|
|
1,373 |
|
|
|
1,578 |
|
Hotels/motels |
|
|
186 |
|
|
|
160 |
|
|
|
1,190 |
|
|
|
1,140 |
|
Land and land development |
|
|
888 |
|
|
|
968 |
|
|
|
1,534 |
|
|
|
1,657 |
|
Other (3) |
|
|
217 |
|
|
|
417 |
|
|
|
1,735 |
|
|
|
2,210 |
|
|
Total non-homebuilder |
|
|
4,920 |
|
|
|
4,835 |
|
|
|
18,172 |
|
|
|
18,129 |
|
Commercial real estate homebuilder |
|
|
2,231 |
|
|
|
3,228 |
|
|
|
3,802 |
|
|
|
5,675 |
|
|
Total commercial real estate |
|
$ |
7,151 |
|
|
$ |
8,063 |
|
|
$ |
21,974 |
|
|
$ |
23,804 |
|
|
|
|
|
(1) |
|
Includes commercial foreclosed properties of $775 million and $777 million at
September 30, 2010 and December 31, 2009. |
|
(2) |
|
Utilized reservable criticized exposure corresponds to the Special Mention,
Substandard and Doubtful asset categories defined by regulatory authorities. This includes loans,
excluding those accounted for under the fair value option, SBLCs and bankers acceptances. |
|
(3) |
|
Represents loans to borrowers whose primary business is commercial real estate, but
the exposure is not secured by the listed property types or is unsecured. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 41 |
Commercial Real Estate Net Charge-offs and Related Ratios |
|
|
Net Charge-offs |
|
Net Charge-off Ratios (1) |
|
|
Three Months Ended |
|
Nine Months Ended |
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30 |
|
September 30 |
|
September 30 |
|
September 30 |
(Dollars in millions) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Commercial real estate non-homebuilder |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office |
|
$ |
50 |
|
|
$ |
65 |
|
|
$ |
244 |
|
|
$ |
149 |
|
|
|
1.95 |
% |
|
|
2.02 |
% |
|
|
2.87 |
% |
|
|
1.61 |
% |
Multi-family rental |
|
|
7 |
|
|
|
135 |
|
|
|
94 |
|
|
|
176 |
|
|
|
0.33 |
|
|
|
4.76 |
|
|
|
1.24 |
|
|
|
2.13 |
|
Shopping centers/retail |
|
|
112 |
|
|
|
45 |
|
|
|
277 |
|
|
|
96 |
|
|
|
5.22 |
|
|
|
1.69 |
|
|
|
4.01 |
|
|
|
1.22 |
|
Industrial/warehouse |
|
|
14 |
|
|
|
44 |
|
|
|
54 |
|
|
|
56 |
|
|
|
1.06 |
|
|
|
2.77 |
|
|
|
1.29 |
|
|
|
1.22 |
|
Multi-use |
|
|
17 |
|
|
|
81 |
|
|
|
105 |
|
|
|
84 |
|
|
|
1.55 |
|
|
|
5.31 |
|
|
|
2.77 |
|
|
|
2.03 |
|
Hotels/motels |
|
|
8 |
|
|
|
- |
|
|
|
32 |
|
|
|
3 |
|
|
|
0.87 |
|
|
|
- |
|
|
|
0.85 |
|
|
|
0.05 |
|
Land and land development |
|
|
47 |
|
|
|
103 |
|
|
|
220 |
|
|
|
229 |
|
|
|
6.61 |
|
|
|
11.73 |
|
|
|
9.79 |
|
|
|
8.41 |
|
Other (2) |
|
|
68 |
|
|
|
24 |
|
|
|
218 |
|
|
|
105 |
|
|
|
3.89 |
|
|
|
1.22 |
|
|
|
4.05 |
|
|
|
1.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-homebuilder |
|
|
323 |
|
|
|
497 |
|
|
|
1,244 |
|
|
|
898 |
|
|
|
2.55 |
|
|
|
3.02 |
|
|
|
2.94 |
|
|
|
1.87 |
|
Commercial real estate homebuilder |
|
|
87 |
|
|
|
376 |
|
|
|
426 |
|
|
|
1,059 |
|
|
|
6.65 |
|
|
|
16.83 |
|
|
|
9.46 |
|
|
|
14.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate |
|
$ |
410 |
|
|
$ |
873 |
|
|
$ |
1,670 |
|
|
$ |
1,957 |
|
|
|
2.93 |
|
|
|
4.67 |
|
|
|
3.56 |
|
|
|
3.54 |
|
|
|
|
|
(1) |
|
Net charge-off ratios are calculated as annualized net charge-offs divided by average
outstanding loans excluding loans accounted for under the fair value option. |
|
(2) |
|
Represents loans to borrowers whose primary business is commercial real estate, but
the exposure is not secured by the listed property types or is unsecured. |
At September 30, 2010, we had total committed non-homebuilder exposure of $71.1 billion
compared to $84.4 billion at December 31, 2009, with the decrease due to the sale of First
Republic, repayments and net charge-offs. Non-homebuilder nonperforming loans and foreclosed
properties were $4.9 billion, or 10.18 percent, of total non-homebuilder loans and foreclosed
properties at September 30, 2010, compared to $4.8 billion, or 7.73 percent, at December 31, 2009,
with the increase due to continued deterioration in the office, multi-family rental and multi-use
property types. Non-homebuilder utilized reservable criticized exposure increased to $18.2
billion, or 35.60 percent, at September 30, 2010 compared to $18.1 billion, or 27.27 percent, at
December 31, 2009. The increase in these ratios was driven primarily by multi-family rental and
office property types as well as lower balances, partially offset by a decrease in the retail and
multi-use property type. For the non-homebuilder portfolio, net charge-offs decreased $174 million
for the three months and increased $346 million for the nine months ended September 30, 2010
compared to the same periods in 2009. The changes were
179
concentrated in multi-family, multi-use and
land and land development property types for the three months ended September 30, 2010 and
shopping centers/retail and office property types for the nine months ended September 30, 2010.
At September 30, 2010, we had committed homebuilder exposure of $7.0 billion compared to
$10.4 billion at December 31, 2009 of which $4.9 billion and $7.3 billion were funded secured
loans. The decline in homebuilder committed exposure was due to repayments, net charge-offs,
reductions in new home construction and continued risk mitigation initiatives. At September 30,
2010, homebuilder nonperforming loans and foreclosed properties declined $997 million due to
repayments, net charge-offs, fewer risk rating downgrades and a slowdown in the rate of home price
declines compared to December 31, 2009. Homebuilder utilized reservable criticized exposure
decreased by $1.9 billion to $3.8 billion due to repayments and
net charge-offs. The nonperforming loans, leases and foreclosed properties and the utilized
reservable criticized ratios for the homebuilder portfolio were 42.28 percent and 71.76 percent at
September 30, 2010 compared to 42.16 percent and 74.44 percent at December 31, 2009. Net
charge-offs for the homebuilder portfolio decreased $289 million and $633 million for the three
and nine months ended September 30, 2010 compared to the same periods in 2009.
At September 30, 2010 and December 31, 2009, the commercial real estate loan portfolio
included $21.4 billion and $27.4 billion of funded construction and land development loans that
were originated to fund the construction and/or rehabilitation of commercial properties. The
construction and land development portfolio is mostly secured and diversified across property
types and geographies, but faces significant challenges in the current housing and rental markets.
Weak rental demand and cash flows and declining property valuations have resulted in elevated
levels of reservable criticized exposure, nonperforming loans and foreclosed properties, and net
charge-offs. Reservable criticized construction and land development loans totaled $11.5 billion
and $13.9 billion at September 30, 2010 and December 31, 2009. Nonperforming construction and land
development loans and foreclosed properties totaled $4.4 billion and $5.2 billion at September 30,
2010 and December 31, 2009. During a propertys construction phase, interest income is typically
paid from interest reserves that are established at the inception of the loan. As construction is
completed and the property is put into service, these interest reserves are depleted and interest
begins to be paid from operating cash flows. Loans continue to be classified as construction loans
until they are refinanced. We do not recognize interest income on nonperforming loans regardless
of the existence of an interest reserve.
Commercial Foreign
The commercial foreign loan portfolio is managed primarily in GBAM. Outstanding loans,
excluding loans accounted for under the fair value option, increased due to growth initiatives in
Asia and other emerging markets. Net charge-offs decreased $137 million and $272 million for the
three and nine months ended September 30, 2010 compared to the same periods in 2009 due to
stabilization in the portfolio with the largest decrease in the financial services sector. For
additional information on the commercial foreign portfolio, refer to Foreign Portfolio beginning
on page 186.
Small Business Commercial Domestic
The small business commercial domestic loan portfolio is comprised of business card and
small business loans managed in Global Card Services and Global Commercial Banking. Small business
commercial domestic net charge-offs decreased $352 million and $628 million for the three and
nine months ended September 30, 2010 compared to the same periods in 2009. Although losses remain
elevated, the reduction in net charge-offs was driven by lower levels of delinquencies and
bankruptcies resulting from U.S. economic improvement as well as the runoff of higher risk
vintages and the impact of higher quality originations. Of the small business commercial
domestic net charge-offs for the three and nine months ended September 30, 2010, 78 percent and 79
percent were credit card related products, compared to 78 percent and 77 percent for the same
periods in 2009.
Commercial Loans Carried at Fair Value
The portfolio of commercial loans accounted for under the fair value option is managed
primarily in GBAM. Outstanding commercial loans accounted for under the fair value option
decreased $1.3 billion to an aggregate fair value of $3.7 billion at September 30, 2010 compared
to December 31, 2009 due primarily to reduced corporate borrowings under bank credit facilities.
We recorded net gains (losses) of $86 million and $(54) million resulting from new originations,
loans being paid off at par value and changes in the fair value of the loan portfolio during the
three and nine months ended September 30, 2010, compared to net gains of $429 million and $764
million for the same periods in 2009. These amounts were primarily attributable to changes in
instrument-specific credit risk and were largely offset by gains or losses from hedging
activities.
In addition, unfunded lending commitments and letters of credit had an aggregate fair value
of $809 million and $950 million at September 30, 2010 and December 31, 2009 and were recorded in
accrued expenses and other liabilities. The associated aggregate notional amount of unfunded
lending commitments and letters of credit accounted for under the fair value option were $28.5
billion and $27.0 billion at September 30, 2010 and December 31, 2009. Net gains resulting from
180
new originations, terminations and changes in the fair value of commitments and letters of credit
of $131 million and $191 million were recorded during the three and nine months ended September
30, 2010 compared to net gains of $365 million and $1.4 billion for the same periods in 2009.
These gains were primarily attributable to changes in instrument-specific credit risk.
Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity
The table below presents the additions and reductions to nonperforming loans, leases and
foreclosed properties in the commercial portfolio during the most recent five quarters. The $1.8
billion decrease at September 30, 2010 compared to December 31, 2009 was driven by paydowns,
payoffs and charge-offs in the commercial real estate and commercial
domestic
portfolios. Approximately 93 percent of commercial nonperforming loans, leases and foreclosed
properties are secured and approximately 39 percent are contractually current. In addition,
commercial nonperforming loans are carried at approximately 69 percent of their unpaid principal
balance before consideration of the allowance for loan and lease losses as the carrying value of
these loans has been reduced to the estimated net realizable value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 42 |
Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity (1,2) |
|
|
Third |
|
Second |
|
First |
|
Fourth |
|
Third |
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
(Dollars in millions) |
|
2010 |
|
2010 |
|
2010 |
|
2009 |
|
2009 |
|
Nonperforming loans and leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
11,413 |
|
|
$ |
12,060 |
|
|
$ |
12,703 |
|
|
$ |
12,260 |
|
|
$ |
11,409 |
|
|
Additions to nonperforming loans and leases: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New nonaccrual loans and leases |
|
|
1,852 |
|
|
|
2,256 |
|
|
|
1,881 |
|
|
|
3,662 |
|
|
|
4,235 |
|
Advances |
|
|
83 |
|
|
|
62 |
|
|
|
83 |
|
|
|
130 |
|
|
|
54 |
|
Reductions in nonperforming loans and leases: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paydowns and payoffs |
|
|
(906 |
) |
|
|
(1,148 |
) |
|
|
(771 |
) |
|
|
(1,016 |
) |
|
|
(892 |
) |
Sales |
|
|
(187 |
) |
|
|
(256 |
) |
|
|
(170 |
) |
|
|
(283 |
) |
|
|
(304 |
) |
Returns to performing status (3) |
|
|
(415 |
) |
|
|
(404 |
) |
|
|
(323 |
) |
|
|
(220 |
) |
|
|
(94 |
) |
Charge-offs (4) |
|
|
(628 |
) |
|
|
(870 |
) |
|
|
(956 |
) |
|
|
(1,448 |
) |
|
|
(1,773 |
) |
Transfers to foreclosed properties |
|
|
(217 |
) |
|
|
(205 |
) |
|
|
(319 |
) |
|
|
(376 |
) |
|
|
(305 |
) |
Transfers to loans held-for-sale |
|
|
(128 |
) |
|
|
(82 |
) |
|
|
(68 |
) |
|
|
(6 |
) |
|
|
(70 |
) |
|
Total net additions to (reductions in)
nonperforming loans and leases |
|
|
(546 |
) |
|
|
(647 |
) |
|
|
(643 |
) |
|
|
443 |
|
|
|
851 |
|
|
Total nonperforming loans and leases,
end of period |
|
|
10,867 |
|
|
|
11,413 |
|
|
|
12,060 |
|
|
|
12,703 |
|
|
|
12,260 |
|
|
Foreclosed properties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
757 |
|
|
|
920 |
|
|
|
777 |
|
|
|
613 |
|
|
|
471 |
|
|
Additions to foreclosed properties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New foreclosed properties |
|
|
175 |
|
|
|
119 |
|
|
|
260 |
|
|
|
344 |
|
|
|
253 |
|
Reductions in foreclosed properties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
(135 |
) |
|
|
(253 |
) |
|
|
(93 |
) |
|
|
(150 |
) |
|
|
(73 |
) |
Write-downs |
|
|
(22 |
) |
|
|
(29 |
) |
|
|
(24 |
) |
|
|
(30 |
) |
|
|
(38 |
) |
|
Total net additions to (reductions in) foreclosed properties |
|
|
18 |
|
|
|
(163 |
) |
|
|
143 |
|
|
|
164 |
|
|
|
142 |
|
|
Total foreclosed properties, end of period |
|
|
775 |
|
|
|
757 |
|
|
|
920 |
|
|
|
777 |
|
|
|
613 |
|
|
Nonperforming commercial loans, leases
and foreclosed properties, end of period |
|
$ |
11,642 |
|
|
$ |
12,170 |
|
|
$ |
12,980 |
|
|
$ |
13,480 |
|
|
$ |
12,873 |
|
|
Nonperforming commercial loans and leases as a
percentage of outstanding commercial loans
and leases (5) |
|
|
3.67 |
% |
|
|
3.77 |
% |
|
|
3.88 |
% |
|
|
4.00 |
% |
|
|
3.72 |
% |
Nonperforming commercial loans, leases and
foreclosed properties as a percentage of
outstanding commercial loans, leases and
foreclosed properties (5) |
|
|
3.93 |
|
|
|
4.01 |
|
|
|
4.16 |
|
|
|
4.23 |
|
|
|
3.90 |
|
|
|
|
|
(1) |
|
Balances do not include nonperforming LHFS of $2.5 billion, $2.7 billion, $2.9
billion, $4.5 billion and $2.9 billion at September 30, 2010, June 30, 2010, March 31, 2010,
December 31, 2009 and September 30, 2009, respectively. |
|
(2) |
|
Includes small business commercial domestic activity. |
|
(3) |
|
Commercial loans and leases may be restored to performing status when all principal
and interest is current and full repayment of the remaining contractual principal and interest is
expected, or when the loan otherwise becomes well-secured and is in the process of collection. TDRs
are generally classified as performing after a sustained period of demonstrated payment
performance. |
|
(4) |
|
Business card loans are not classified as nonperforming; therefore, the charge-offs
on these loans have no impact on nonperforming activity. |
|
(5) |
|
Outstanding commercial loans and leases exclude loans accounted for under the fair
value option. |
181
At September 30, 2010, the total commercial TDR balance was $943 million. Nonperforming
TDRs increased $82 million and $265 million while performing TDRs decreased $15 million and
increased $101 million during the three and nine months ended September 30, 2010. Commercial
domestic TDRs were $287 million, a decrease of $45 million and $9 million in the three and nine
months ended September 30, 2010. Nonperforming commercial domestic TDRs decreased $3 million and
$98 million in the three and nine months ended September 30, 2010, while performing TDRs excluded
from nonperforming loans in Table 42 decreased $42 million and increased $89 million during those
same periods.
At September 30, 2010, the commercial real estate TDR balance was $644 million, an increase
of $137 million and $376 million during the three and nine months ended September 30, 2010.
Nonperforming TDRs increased $110 million and $364 million in the three and nine months ended
September 30, 2010, while performing TDRs increased $27 million and $12 million.
At
September 30, 2010, the commercial foreign TDR balance was $12 million, a decrease of $25
million and $1 million in the three and nine months ended September 30, 2010. All commercial
foreign TDRs were nonperforming.
Nonperforming TDRs of $751 million are included in Table 42. As of September 30, 2010, $3.8
billion of LHFS have also undergone troubled debt restructurings. These LHFS are not included in
Table 42.
Industry Concentrations
Table 43 presents commercial committed and utilized credit exposure by industry and the
total net credit default protection purchased to cover the funded and unfunded portions of certain
credit exposures. Our commercial credit exposure is diversified across a broad range of
industries. The decline in commercial committed exposure of $49.7 billion from December 31, 2009
to September 30, 2010 was broad-based across most industries.
Industry limits are used internally to manage industry concentrations and are based on
committed exposures and capital usage that are allocated on an industry-by-industry basis. A risk
management framework is in place to set and approve industry limits, as well as to provide ongoing
monitoring. Managements Credit Risk Committee (CRC) oversees industry limits governance.
Diversified financials, our largest industry concentration, experienced a decrease in
committed exposure of $20.9 billion, or 19 percent, at September 30, 2010 compared to December 31,
2009. This decrease was driven primarily by a reduction in exposure to conduits tied to the
consumer finance industry.
Real estate, our second largest industry concentration, experienced a decrease in committed
exposure of $14.1 billion, or 15 percent, at September 30, 2010 compared to December 31, 2009.
Real estate construction and land development exposure represented 27 percent of the total real
estate industry committed exposure at September 30, 2010. For more information on the commercial
real estate and related portfolios, refer to Commercial Real Estate beginning on page 177.
The $9.4 billion, or 27 percent, decline in individuals and trust committed exposure was
largely due to the unwinding of two derivative transactions. Committed exposure in the banking
industry increased $8.5 billion, or 36 percent, at September 30, 2010 compared to December 31,
2009, primarily due to increases in both traded products and loan exposure as a result of momentum
from growth initiatives as well as higher demand from mortgage warehouse clients, with the latter mostly to accommodate home-owner refinancings. Committed
exposure for the commercial services and supplies industry declined $3.8 billion, or 11 percent,
primarily due to declining line renewals and the sale of First Republic.
Monoline and Related Exposure
Monoline exposure is reported in the insurance industry and managed under insurance portfolio
industry limits. Direct loan exposure to monolines consisted of revolvers in the amount of $51
million and $41 million at September 30, 2010 and December 31, 2009.
We have indirect exposure to monolines primarily in the form of guarantees supporting our
loans, investment portfolios, securitizations and credit-enhanced securities as part of our public
finance business and other selected products. Such indirect exposure exists when we purchase
credit protection from monolines to hedge all or a portion of the credit risk on certain credit
exposures including loans and CDOs. We underwrite our public finance exposure by evaluating the
underlying securities.
182
We also have indirect exposure to monolines, primarily in the form of guarantees supporting
our mortgage and other loan sales. Indirect exposure may exist when credit protection was
purchased from monolines to hedge all or a portion of the credit risk on certain mortgage and
other loan exposures. A loss may occur when we are required to repurchase a loan and the market
value of the loan has declined or are required to indemnify or provide recourse for a guarantors
loss. For additional information regarding our exposure to representations and warranties, see
Note 8 Securitizations and Other Variable Interest Entities to the Consolidated Financial
Statements and Off-Balance Sheet Arrangements and Contractual Obligations Representations and
Warranties beginning on page 139. For additional information regarding disputes involving
monolines, see Note 11 Commitments and Contingencies to the Consolidated Financial Statements
and Note 14 Commitments and Contingencies to the Consolidated Financial Statements of the
Corporations 2009 Annual Report on Form 10-K.
Monoline derivative credit exposure at September 30, 2010 had a notional value of $38.8
billion compared to $42.6 billion at December 31, 2009. Mark-to-market monoline derivative credit
exposure was $9.7 billion at September 30, 2010 compared to $11.1 billion at December 31, 2009
with the decrease driven by positive valuation adjustments on legacy assets and terminated
monoline contracts. At September 30, 2010 the counterparty credit valuation adjustment related to
monoline derivative exposure was $5.6 billion compared to $6.0 billion at December 31, 2009. This
reduced our net mark-to-market exposure to $4.1 billion at September 30, 2010, compared to $5.1
billion at December 31, 2009. At September 30, 2010, approximately 60 percent of this exposure was related to
one monoline, compared to
approximately
54 percent at December 31, 2009. We do not hold collateral against these
derivative exposures. For more information on our monoline exposure, see GBAM beginning on page
129.
183
We also have indirect exposure to monolines as we invest in securities where the issuers have
purchased wraps (i.e., insurance). For example, municipalities and corporations purchase insurance
in order to reduce their cost of borrowing. If the ratings agencies downgrade the monolines, the
credit rating of the bond may fall and may have an adverse impact on the market value of the
security. In the case of default, we first look to the underlying securities and then to recovery
on the purchased insurance. Investments in securities issued by municipalities and corporations
with purchased wraps at September 30, 2010 and December 31, 2009 had a notional value of $2.3
billion and $5.0 billion. Mark-to-market investment exposure was $2.4 billion at September 30,
2010 compared to $4.9 billion at December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 43 |
|
Commercial Credit Exposure by Industry (1) |
|
|
|
Commercial |
|
|
Total Commercial |
|
|
|
Utilized |
|
|
Committed |
|
|
|
September 30 |
|
|
December 31 |
|
|
September 30 |
|
|
December 31 |
|
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Diversified financials |
|
$ |
58,176 |
|
|
$ |
69,259 |
|
|
$ |
88,222 |
|
|
$ |
109,079 |
|
Real estate
(2) |
|
|
64,484 |
|
|
|
75,049 |
|
|
|
79,016 |
|
|
|
93,147 |
|
Government and public education |
|
|
45,280 |
|
|
|
44,151 |
|
|
|
61,111 |
|
|
|
61,998 |
|
Healthcare equipment and services |
|
|
29,980 |
|
|
|
29,584 |
|
|
|
47,373 |
|
|
|
46,870 |
|
Capital goods |
|
|
22,693 |
|
|
|
23,911 |
|
|
|
45,598 |
|
|
|
48,184 |
|
Retailing |
|
|
24,130 |
|
|
|
23,671 |
|
|
|
42,560 |
|
|
|
42,414 |
|
Consumer services |
|
|
26,377 |
|
|
|
28,704 |
|
|
|
41,484 |
|
|
|
44,214 |
|
Materials |
|
|
15,928 |
|
|
|
16,373 |
|
|
|
33,082 |
|
|
|
33,233 |
|
Banks |
|
|
28,702 |
|
|
|
20,299 |
|
|
|
31,918 |
|
|
|
23,384 |
|
Commercial services and supplies |
|
|
20,483 |
|
|
|
23,892 |
|
|
|
30,893 |
|
|
|
34,646 |
|
Food, beverage and tobacco |
|
|
14,075 |
|
|
|
14,812 |
|
|
|
26,861 |
|
|
|
28,079 |
|
Insurance |
|
|
18,742 |
|
|
|
20,613 |
|
|
|
26,028 |
|
|
|
28,033 |
|
Individuals and trusts |
|
|
20,029 |
|
|
|
25,941 |
|
|
|
25,267 |
|
|
|
34,698 |
|
Energy |
|
|
9,451 |
|
|
|
9,605 |
|
|
|
24,942 |
|
|
|
23,619 |
|
Utilities |
|
|
6,687 |
|
|
|
9,217 |
|
|
|
24,515 |
|
|
|
25,316 |
|
Media |
|
|
11,912 |
|
|
|
14,020 |
|
|
|
21,133 |
|
|
|
22,886 |
|
Transportation |
|
|
11,895 |
|
|
|
13,724 |
|
|
|
17,892 |
|
|
|
20,101 |
|
Religious and social organizations |
|
|
8,999 |
|
|
|
8,920 |
|
|
|
11,312 |
|
|
|
11,374 |
|
Technology hardware and equipment |
|
|
4,338 |
|
|
|
3,416 |
|
|
|
10,673 |
|
|
|
10,516 |
|
Telecommunication services |
|
|
4,054 |
|
|
|
3,558 |
|
|
|
9,882 |
|
|
|
9,478 |
|
Pharmaceuticals and biotechnology |
|
|
2,583 |
|
|
|
2,875 |
|
|
|
9,625 |
|
|
|
10,626 |
|
Software and services |
|
|
3,728 |
|
|
|
3,216 |
|
|
|
9,345 |
|
|
|
9,359 |
|
Consumer durables and apparel |
|
|
4,342 |
|
|
|
4,409 |
|
|
|
8,897 |
|
|
|
9,998 |
|
Food and staples retailing |
|
|
3,278 |
|
|
|
3,680 |
|
|
|
6,276 |
|
|
|
6,562 |
|
Automobiles and components |
|
|
2,021 |
|
|
|
2,379 |
|
|
|
5,293 |
|
|
|
6,359 |
|
Other |
|
|
15,559 |
|
|
|
10,219 |
|
|
|
19,241 |
|
|
|
14,013 |
|
|
Total commercial credit exposure by industry |
|
$ |
477,926 |
|
|
$ |
505,497 |
|
|
$ |
758,439 |
|
|
$ |
808,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net credit default protection purchased on total commitments (3) |
|
|
|
|
|
|
|
|
|
$ |
(20,487 |
) |
|
$ |
(19,025 |
) |
|
|
|
|
(1) |
|
Includes small business commercial domestic exposure. |
|
(2) |
|
Industries are viewed from a variety of perspectives to best isolate the perceived risks. For
purposes of this table, the real estate industry is defined based on the borrowers or
counterparties primary business activity using operating cash flows and primary source of
repayment as key factors. |
|
(3) |
|
Represents net notional credit protection purchased. See Risk Mitigation below for
additional information. |
Risk Mitigation
We purchase credit protection to cover the funded portion as well as the unfunded
portion of certain credit exposures. To lower the cost of obtaining our desired credit protection
levels, credit exposure may be added within an industry, borrower or counterparty group by selling
protection.
At September 30, 2010 and December 31, 2009, we had net notional credit default protection
purchased in our credit derivatives portfolio to hedge our funded and unfunded exposures for which
we elected the fair value option as well as certain other credit exposures of $20.5 billion and
$19.0 billion. The mark-to-market effects, including the cost of net credit default protection
hedging our credit exposure, resulted in net losses of $293 million and $316 million during the
three and nine months ended September 30, 2010 compared to net losses of $988 million and $2.5
billion for the same periods in 2009. The average Value-at-Risk (VaR) for these credit derivative
hedges was $53 million and $57 million for the three and
184
nine months ended September 30, 2010, compared to $82 million and $80 million for the same periods
in 2009. The average VaR for the related credit exposure was $74 million and $65 million for the
three and nine months ended September 30, 2010 compared to $123 million and $140 million for the
same periods in 2009. There is a diversification effect between the net credit default protection
hedging our credit exposure and the related credit exposure such that the combined average VaR was
$41 million and $43 million for the three and nine months ended September 30, 2010 compared to $73
million and $100 million for the same periods in 2009. Refer to Trading Risk Management beginning
on page 192 for a description of our VaR calculation for the market-based trading portfolio.
Tables 44 and 45 present the maturity profiles and the credit exposure debt ratings of the
net credit default protection portfolio at September 30, 2010 and December 31, 2009. The
distribution of debt ratings for net notional credit default protection purchased is shown as a
negative and the net notional credit protection sold is shown as a positive amount.
|
|
|
|
|
|
|
|
|
Table 44 |
|
Net Credit Default Protection by Maturity Profile |
|
|
September 30 |
|
|
December 31 |
|
|
|
2010 |
|
|
2009 |
|
|
Less than or equal to one year |
|
|
18 |
% |
|
|
16 |
% |
Greater than one year and less than or equal to five years |
|
|
78 |
|
|
|
81 |
|
Greater than five years |
|
|
4 |
|
|
|
3 |
|
|
Total net credit default protection |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 45 |
|
Net Credit Default Protection by Credit Exposure Debt Rating (1) |
(Dollars in millions) |
|
September 30, 2010 |
|
|
December 31, 2009 |
|
|
Net |
|
|
Percent of |
|
|
Net |
|
|
Percent of |
|
Ratings (2) |
|
Notional |
|
|
Total |
|
|
Notional |
|
|
Total |
|
|
AAA |
|
$ |
- |
|
|
|
- |
% |
|
$ |
15 |
|
|
|
(0.1 |
)% |
AA |
|
|
(189 |
) |
|
|
0.9 |
|
|
|
(344 |
) |
|
|
1.8 |
|
A |
|
|
(6,577 |
) |
|
|
32.0 |
|
|
|
(6,092 |
) |
|
|
32.0 |
|
BBB |
|
|
(8,440 |
) |
|
|
41.2 |
|
|
|
(9,573 |
) |
|
|
50.4 |
|
BB |
|
|
(2,206 |
) |
|
|
10.8 |
|
|
|
(2,725 |
) |
|
|
14.3 |
|
B |
|
|
(1,634 |
) |
|
|
8.0 |
|
|
|
(835 |
) |
|
|
4.4 |
|
CCC and below |
|
|
(853 |
) |
|
|
4.2 |
|
|
|
(1,691 |
) |
|
|
8.9 |
|
NR (3) |
|
|
(588 |
) |
|
|
2.9 |
|
|
|
2,220 |
|
|
|
(11.7 |
) |
|
Total net credit default protection |
|
$ |
(20,487 |
) |
|
|
100.0 |
% |
|
$ |
(19,025 |
) |
|
|
100.0 |
% |
|
|
|
|
(1) |
|
Ratings are refreshed on a quarterly basis. |
|
(2) |
|
The Corporation considers ratings of BBB- or higher to meet the definition of
investment grade. |
|
(3) |
|
In addition to names which have not been rated, NR includes $(467) million and
$2.3 billion in net credit default swaps index positions at September 30, 2010 and December 31,
2009. While index positions are principally investment grade, credit default swaps indices include
names in and across each of the ratings categories. |
In addition to our net notional credit default protection purchased to cover the funded and
unfunded portion of certain credit exposures, credit derivatives are used for market-making
activities for clients and establishing positions intended to profit from directional or relative
value changes. We execute the majority of our credit derivative trades in the OTC market with
large, multinational financial institutions, including broker/dealers and, to a lesser degree,
with a variety of other investors. Because these transactions are executed in the OTC market, we
are subject to settlement risk. We are also subject to credit risk in the event that these
counterparties fail to perform under the terms of these contracts. In most cases, credit
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 us to take additional protective measures such as early termination of all trades.
The notional amounts presented in Table 46 represent the total contract/notional amount of
credit derivatives outstanding and include both purchased and written credit derivatives. The
credit risk amounts are measured as the net replacement cost, in the event the counterparties with
contracts in a gain position to us fail to perform under the terms of those contracts. For
information on the performance risk of our written credit derivatives, see Note 4 Derivatives to
the Consolidated Financial Statements.
185
The credit risk amounts discussed above and noted in the table below take into consideration
the effects of legally enforceable master netting agreements while amounts disclosed in Note 4
Derivatives to the Consolidated Financial Statements are shown on a gross basis. Credit risk
reflects the potential benefit from offsetting exposure to non-credit derivative products with the
same counterparties that may be netted upon the occurrence of certain events, thereby reducing the
Corporations overall exposure.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 46 |
|
Credit Derivatives |
|
September 30, 2010 |
|
December 31, 2009 |
(Dollars in millions) |
|
Contract/Notional |
|
|
Credit Risk |
|
|
Contract/Notional |
|
|
Credit Risk |
|
|
Purchased credit derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit default swaps |
|
$ |
2,363,774 |
|
|
$ |
21,350 |
|
|
$ |
2,800,539 |
|
|
$ |
25,964 |
|
Total return swaps/other |
|
|
29,659 |
|
|
|
1,070 |
|
|
|
21,685 |
|
|
|
1,740 |
|
|
Total purchased credit derivatives |
|
|
2,393,433 |
|
|
|
22,420 |
|
|
|
2,822,224 |
|
|
|
27,704 |
|
|
Written credit derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit default swaps |
|
|
2,320,729 |
|
|
|
- |
|
|
|
2,788,760 |
|
|
|
- |
|
Total return swaps/other |
|
|
18,916 |
|
|
|
- |
|
|
|
33,109 |
|
|
|
- |
|
|
Total written credit derivatives |
|
|
2,339,645 |
|
|
|
- |
|
|
|
2,821,869 |
|
|
|
- |
|
|
Total credit derivatives |
|
$ |
4,733,078 |
|
|
$ |
22,420 |
|
|
$ |
5,644,093 |
|
|
$ |
27,704 |
|
|
Counterparty Credit Risk Valuation Adjustments
We record a counterparty credit risk valuation adjustment on certain derivatives assets,
including our credit default protection purchased, in order to properly reflect the credit quality
of the counterparty. These adjustments are necessary as the market quotes on derivatives do not
fully reflect the credit risk of the counterparties to the derivative assets. We consider
collateral and legally enforceable master netting agreements that mitigate our credit exposure to
each counterparty in determining the counterparty credit risk valuation adjustment. All or a
portion of these counterparty credit risk valuation adjustments are reversed or otherwise adjusted
in future periods due to changes in the value of the derivative contract, collateral and
creditworthiness of the counterparty.
During the three and nine months ended September 30, 2010, credit valuation gains (losses) of
$400 million and $(33) million ($183 million and $(194) million, net of hedges) compared to gains
of $1.4 billion and $2.8 billion ($1.1 billion and $1.6 billion, net of hedges) for the same
periods in 2009 were recognized in trading account profits related to counterparty credit risk on
derivative assets. For additional information on gains or losses related to the counterparty
credit risk on derivative assets, refer to Note 4 Derivatives to the Consolidated Financial
Statements. For information on our monoline counterparty credit risk, see the discussions
beginning on pages 132 and 182, and for information on our CDO-related counterparty credit risk,
see GBAM beginning on page 129.
Foreign Portfolio
Our foreign credit and trading portfolios are subject to country risk. We define country
risk as the risk of loss from unfavorable economic and political conditions, currency
fluctuations, social instability and changes in government policies. A risk management framework
is in place to measure, monitor and manage foreign risk and exposures. Management oversight of
country risk including cross-border risk is provided by the Regional Risk Committee, a
subcommittee of the CRC.
Foreign exposure includes credit exposure net of local liabilities, securities and other
investments issued by or domiciled in countries other than the U.S. Total foreign exposure can be
adjusted for externally guaranteed loans outstanding and certain collateral types. Exposures which
are subject to external guarantees are reported under the country of the guarantor. Exposures with
tangible collateral are reflected in the country where the collateral is held. For securities
received, other than cross-border resale agreements, outstandings are assigned to the domicile of
the issuer of the securities. Resale agreements are generally presented based on the domicile of
the counterparty consistent with FFIEC reporting requirements.
186
As presented in Table 47, foreign exposure to borrowers or counterparties in emerging markets
increased $10.3 billion to $60.9 billion at September 30, 2010, compared to $50.6 billion at
December 31, 2009. The increase was due to an increase in Asia Pacific partially offset by a
decrease in Latin America. Foreign exposure to borrowers or counterparties in emerging markets
represented 22 percent and 20 percent of total foreign exposure at September 30, 2010 and December
31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 47 |
|
Selected Emerging Markets (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local |
|
|
Emerging |
|
|
Increase |
|
|
|
Loans and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Country |
|
|
Market |
|
|
(Decrease) |
|
|
|
Leases, and |
|
|
|
|
|
|
|
|
|
|
Securities/ |
|
|
Cross- |
|
|
Exposure |
|
|
Exposure at |
|
|
From |
|
|
|
Loan |
|
|
Other |
|
|
Derivative |
|
|
Other |
|
|
border |
|
|
Net of Local |
|
|
September 30, |
|
|
December 31, |
|
(Dollars in millions) |
|
Commitments |
|
|
Financing (2) |
|
|
Assets (3) |
|
|
Investments (4) |
|
|
Exposure (5) |
|
|
Liabilities (6) |
|
|
2010 |
|
|
2009 |
|
|
Region/Country |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia Pacific |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China |
|
$ |
751 |
|
|
$ |
898 |
|
|
$ |
896 |
|
|
$ |
21,425 |
|
|
$ |
23,970 |
|
|
$ |
- |
|
|
$ |
23,970 |
|
|
$ |
11,907 |
|
India |
|
|
3,138 |
|
|
|
1,692 |
|
|
|
629 |
|
|
|
2,476 |
|
|
|
7,935 |
|
|
|
119 |
|
|
|
8,054 |
|
|
|
1,894 |
|
South Korea |
|
|
825 |
|
|
|
1,190 |
|
|
|
854 |
|
|
|
2,397 |
|
|
|
5,266 |
|
|
|
293 |
|
|
|
5,559 |
|
|
|
548 |
|
Singapore |
|
|
576 |
|
|
|
29 |
|
|
|
313 |
|
|
|
771 |
|
|
|
1,689 |
|
|
|
- |
|
|
|
1,689 |
|
|
|
821 |
|
Taiwan |
|
|
398 |
|
|
|
34 |
|
|
|
148 |
|
|
|
499 |
|
|
|
1,079 |
|
|
|
573 |
|
|
|
1,652 |
|
|
|
923 |
|
Hong Kong |
|
|
342 |
|
|
|
255 |
|
|
|
213 |
|
|
|
630 |
|
|
|
1,440 |
|
|
|
- |
|
|
|
1,440 |
|
|
|
338 |
|
Thailand |
|
|
17 |
|
|
|
12 |
|
|
|
69 |
|
|
|
404 |
|
|
|
502 |
|
|
|
17 |
|
|
|
519 |
|
|
|
332 |
|
Other Asia Pacific (7) |
|
|
263 |
|
|
|
37 |
|
|
|
114 |
|
|
|
595 |
|
|
|
1,009 |
|
|
|
3 |
|
|
|
1,012 |
|
|
|
168 |
|
|
Total Asia Pacific |
|
|
6,310 |
|
|
|
4,147 |
|
|
|
3,236 |
|
|
|
29,197 |
|
|
|
42,890 |
|
|
|
1,005 |
|
|
|
43,895 |
|
|
|
16,931 |
|
|
Latin America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brazil |
|
|
637 |
|
|
|
372 |
|
|
|
411 |
|
|
|
1,054 |
|
|
|
2,474 |
|
|
|
2,918 |
|
|
|
5,392 |
|
|
|
(4,062 |
) |
Mexico |
|
|
1,332 |
|
|
|
321 |
|
|
|
332 |
|
|
|
427 |
|
|
|
2,412 |
|
|
|
- |
|
|
|
2,412 |
|
|
|
(3,059 |
) |
Chile |
|
|
1,083 |
|
|
|
163 |
|
|
|
396 |
|
|
|
32 |
|
|
|
1,674 |
|
|
|
13 |
|
|
|
1,687 |
|
|
|
526 |
|
Peru |
|
|
250 |
|
|
|
157 |
|
|
|
40 |
|
|
|
82 |
|
|
|
529 |
|
|
|
51 |
|
|
|
580 |
|
|
|
310 |
|
Other Latin America (7) |
|
|
168 |
|
|
|
259 |
|
|
|
17 |
|
|
|
382 |
|
|
|
826 |
|
|
|
174 |
|
|
|
1,000 |
|
|
|
(210 |
) |
|
Total Latin America |
|
|
3,470 |
|
|
|
1,272 |
|
|
|
1,196 |
|
|
|
1,977 |
|
|
|
7,915 |
|
|
|
3,156 |
|
|
|
11,071 |
|
|
|
(6,495 |
) |
|
Middle East and Africa |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bahrain |
|
|
78 |
|
|
|
- |
|
|
|
6 |
|
|
|
1,175 |
|
|
|
1,259 |
|
|
|
- |
|
|
|
1,259 |
|
|
|
126 |
|
United Arab Emirates |
|
|
784 |
|
|
|
5 |
|
|
|
202 |
|
|
|
83 |
|
|
|
1,074 |
|
|
|
- |
|
|
|
1,074 |
|
|
|
354 |
|
South Africa |
|
|
333 |
|
|
|
9 |
|
|
|
46 |
|
|
|
81 |
|
|
|
469 |
|
|
|
- |
|
|
|
469 |
|
|
|
(679 |
) |
Other Middle East and Africa (7) |
|
|
462 |
|
|
|
73 |
|
|
|
129 |
|
|
|
192 |
|
|
|
856 |
|
|
|
1 |
|
|
|
857 |
|
|
|
89 |
|
|
Total Middle East and Africa |
|
|
1,657 |
|
|
|
87 |
|
|
|
383 |
|
|
|
1,531 |
|
|
|
3,658 |
|
|
|
1 |
|
|
|
3,659 |
|
|
|
(110 |
) |
|
Central and Eastern Europe |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turkey |
|
|
197 |
|
|
|
171 |
|
|
|
43 |
|
|
|
238 |
|
|
|
649 |
|
|
|
45 |
|
|
|
694 |
|
|
|
306 |
|
Russian Federation |
|
|
73 |
|
|
|
122 |
|
|
|
55 |
|
|
|
181 |
|
|
|
431 |
|
|
|
2 |
|
|
|
433 |
|
|
|
(236 |
) |
Other Central and Eastern Europe (7) |
|
|
47 |
|
|
|
138 |
|
|
|
305 |
|
|
|
621 |
|
|
|
1,111 |
|
|
|
12 |
|
|
|
1,123 |
|
|
|
(95 |
) |
|
Total
Central and Eastern Europe |
|
|
317 |
|
|
|
431 |
|
|
|
403 |
|
|
|
1,040 |
|
|
|
2,191 |
|
|
|
59 |
|
|
|
2,250 |
|
|
|
(25 |
) |
|
Total emerging market exposure |
|
$ |
11,754 |
|
|
$ |
5,937 |
|
|
$ |
5,218 |
|
|
$ |
33,745 |
|
|
$ |
56,654 |
|
|
$ |
4,221 |
|
|
$ |
60,875 |
|
|
$ |
10,301 |
|
|
|
|
|
(1) |
|
There is no generally accepted definition of emerging markets. The definition
that we use includes all countries in Asia Pacific excluding Japan, Australia and New Zealand; all
countries in Latin America excluding Cayman Islands and Bermuda; all countries in Middle East and
Africa; and all countries in Central and Eastern Europe. There was no emerging market exposure
included in the portfolio accounted for under the fair value option at September 30, 2010 and
December 31, 2009. |
|
(2) |
|
Includes acceptances, due froms, SBLCs, commercial letters of credit and formal
guarantees. |
|
(3) |
|
Derivative assets are carried at fair value and have been reduced by the amount of
cash collateral applied of $1.5 billion and $557 million at September 30, 2010 and December 31,
2009. At September 30, 2010 and December 31, 2009, there were $476 million and $616 million of
other marketable securities collateralizing derivative assets. |
|
(4) |
|
Generally, cross-border resale agreements are presented based on the domicile of the
counterparty, consistent with FFIEC reporting requirements. Cross-border resale agreements where
the underlying securities are U.S. Treasury securities, in which case the domicile is the U.S., are
excluded from this presentation. |
|
(5) |
|
Cross-border exposure includes amounts payable to the Corporation by borrowers or
counterparties with a country of residence other than the one in which the credit is booked,
regardless of the currency in which the claim is denominated, consistent with FFIEC reporting
requirements. |
|
(6) |
|
Local country exposure includes amounts payable to the Corporation by borrowers with
a country of residence in which the credit is booked regardless of the currency in which the claim
is denominated. Local funding or liabilities are subtracted from local exposures consistent with
FFIEC reporting requirements. Total amount of available local liabilities funding local country
exposure at September 30, 2010 was $17.9 billion compared to $17.6 billion at December 31, 2009.
Local liabilities at September 30, 2010 in Asia Pacific, Latin America, and Middle East and Africa
were $16.3 billion, $1.4 billion and $213 million, respectively, of which $8.1 billion was in
Singapore, $2.0 billion in China, $1.8 billion in Hong Kong, $1.6 billion in South Korea, $1.3
billion in both India and Mexico, and $585 million in Taiwan. There were no other countries with
available local liabilities funding local country exposure greater than $500 million. |
|
(7) |
|
No country included in Other Asia Pacific, Other Latin America, Other Middle East
and Africa, and Other Central and Eastern Europe had total foreign exposure of more than $500
million. |
At September 30, 2010 and December 31, 2009, 72 percent and 53 percent of the emerging
markets exposure was in Asia Pacific. Emerging markets exposure in Asia Pacific increased by $16.9
billion primarily driven by our equity investment in CCB, which accounted for 58 percent of the
increase in Asia. The increase in our equity investment in CCB was driven by a required change in
accounting. For more information on our CCB investment, refer to All Other beginning on page
137 and Note 5 Securities to the Consolidated Financial Statements.
At September 30, 2010 and December 31, 2009, 18 percent and 35 percent of the emerging
markets exposure was in Latin America. Latin America emerging markets exposure decreased by $6.5
billion driven by the sale of our equity investments in Itaú Unibanco and Santander, which
accounted for $5.4 billion and $2.5 billion at December 31, 2009. For more information on these
sales, refer to Note 5 Securities to the Consolidated Financial Statements.
187
At September 30, 2010 and December 31, 2009, six percent and seven percent of the
emerging markets exposure was in Middle East and Africa, with a decrease of $110 million primarily
driven by a decrease in securities investments in South Africa, offset by increases in securities
investments in Bahrain and loans in United Arab Emirates. At September 30, 2010 and December 31,
2009, four percent and five percent of the emerging markets exposure was in Central and Eastern
Europe which decreased by $25 million primarily driven by a decrease in derivatives exposure in
the Russian Federation.
Certain European countries including Greece, Ireland, Italy, Portugal and Spain, are
currently experiencing varying degrees of financial stress. These countries have had certain
credit ratings lowered by ratings services during the nine months ended September 30, 2010. Risks
from the debt crisis in Europe could result in a disruption of the financial markets which could
have a detrimental impact on the global economic recovery and non-sovereign debt in these
countries. The table below shows our direct sovereign and non-sovereign exposures (excluding
consumer credit card exposure) in these countries at September 30, 2010. The total exposure to
these countries was $18.2 billion at September 30, 2010 compared to $25.5 billion at December 31,
2009. The $7.3 billion decrease since December 31, 2009 was driven primarily by the sale or
maturity of sovereign and non-sovereign securities in all countries.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 48 |
|
Selected European Countries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local |
|
|
Total |
|
|
|
|
|
|
Loans and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Country |
|
|
Foreign |
|
|
|
|
|
|
Leases, and |
|
|
|
|
|
|
|
|
|
|
Securities/ |
|
|
Total |
|
|
Exposure |
|
|
Exposure |
|
|
|
|
|
|
Loan |
|
|
Other |
|
|
Derivative |
|
|
Other |
|
|
Crossborder |
|
|
Net of Local |
|
|
at September 30, |
|
|
Credit Default |
|
(Dollars in millions) |
|
Commitments |
|
|
Financing (1) |
|
|
Assets (2) |
|
|
Investments (3) |
|
|
Exposure (4) |
|
|
Liabilities (5) |
|
|
2010 |
|
|
Protection (6) |
|
|
Country |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greece |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sovereign |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1 |
|
|
$ |
140 |
|
|
$ |
141 |
|
|
$ |
- |
|
|
$ |
141 |
|
|
$ |
(26 |
) |
Non-sovereign |
|
|
331 |
|
|
|
2 |
|
|
|
32 |
|
|
|
113 |
|
|
|
478 |
|
|
|
- |
|
|
|
478 |
|
|
|
- |
|
|
Total Greece |
|
$ |
331 |
|
|
$ |
2 |
|
|
$ |
33 |
|
|
$ |
253 |
|
|
$ |
619 |
|
|
$ |
- |
|
|
$ |
619 |
|
|
$ |
(26 |
) |
|
Ireland |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sovereign |
|
$ |
8 |
|
|
$ |
17 |
|
|
$ |
17 |
|
|
$ |
- |
|
|
$ |
42 |
|
|
$ |
- |
|
|
$ |
42 |
|
|
$ |
- |
|
Non-sovereign |
|
|
1,925 |
|
|
|
595 |
|
|
|
307 |
|
|
|
262 |
|
|
|
3,089 |
|
|
|
- |
|
|
|
3,089 |
|
|
|
(23 |
) |
|
Total Ireland |
|
$ |
1,933 |
|
|
$ |
612 |
|
|
$ |
324 |
|
|
$ |
262 |
|
|
$ |
3,131 |
|
|
$ |
- |
|
|
$ |
3,131 |
|
|
$ |
(23 |
) |
|
Italy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sovereign |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,701 |
|
|
$ |
20 |
|
|
$ |
1,721 |
|
|
$ |
- |
|
|
$ |
1,721 |
|
|
$ |
(1,311 |
) |
Non-sovereign |
|
|
964 |
|
|
|
53 |
|
|
|
822 |
|
|
|
2,010 |
|
|
|
3,849 |
|
|
|
1,904 |
|
|
|
5,753 |
|
|
|
(59 |
) |
|
Total Italy |
|
$ |
964 |
|
|
$ |
53 |
|
|
$ |
2,523 |
|
|
$ |
2,030 |
|
|
$ |
5,570 |
|
|
$ |
1,904 |
|
|
$ |
7,474 |
|
|
$ |
(1,370 |
) |
|
Portugal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sovereign |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
46 |
|
|
$ |
38 |
|
|
$ |
84 |
|
|
$ |
- |
|
|
$ |
84 |
|
|
$ |
(20 |
) |
Non-sovereign |
|
|
66 |
|
|
|
51 |
|
|
|
66 |
|
|
|
274 |
|
|
|
457 |
|
|
|
- |
|
|
|
457 |
|
|
|
- |
|
|
Total Portugal |
|
$ |
66 |
|
|
$ |
51 |
|
|
$ |
112 |
|
|
$ |
312 |
|
|
$ |
541 |
|
|
$ |
- |
|
|
$ |
541 |
|
|
$ |
(20 |
) |
|
Spain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sovereign |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
60 |
|
|
$ |
3 |
|
|
$ |
63 |
|
|
$ |
63 |
|
|
$ |
126 |
|
|
$ |
(73 |
) |
Non-sovereign |
|
|
982 |
|
|
|
427 |
|
|
|
511 |
|
|
|
2,432 |
|
|
|
4,352 |
|
|
|
1,994 |
|
|
|
6,346 |
|
|
|
(7 |
) |
|
Total Spain |
|
$ |
982 |
|
|
$ |
427 |
|
|
$ |
571 |
|
|
$ |
2,435 |
|
|
$ |
4,415 |
|
|
$ |
2,057 |
|
|
$ |
6,472 |
|
|
$ |
(80 |
) |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sovereign |
|
$ |
8 |
|
|
$ |
17 |
|
|
$ |
1,825 |
|
|
$ |
201 |
|
|
$ |
2,051 |
|
|
$ |
63 |
|
|
$ |
2,114 |
|
|
$ |
(1,430 |
) |
Non-sovereign |
|
|
4,268 |
|
|
|
1,128 |
|
|
|
1,738 |
|
|
|
5,091 |
|
|
|
12,225 |
|
|
|
3,898 |
|
|
|
16,123 |
|
|
|
(89 |
) |
|
Total Selected European exposure |
|
$ |
4,276 |
|
|
$ |
1,145 |
|
|
$ |
3,563 |
|
|
$ |
5,292 |
|
|
$ |
14,276 |
|
|
$ |
3,961 |
|
|
$ |
18,237 |
|
|
$ |
(1,519 |
) |
|
|
|
|
(1) |
|
Includes acceptances, due froms, SBLCs, commercial letters of credit and formal
guarantees. |
|
(2) |
|
Derivative assets are carried at fair value and have been reduced by the amount of
cash collateral applied of $3.6 billion at September 30, 2010. At September 30, 2010, there
was $44 million of other marketable securities collateralizing derivative assets. |
|
(3) |
|
Generally, cross-border resale agreements are presented based on the domicile of
the counterparty, consistent with FFIEC reporting requirements. Cross-border resale agreements
where the underlying securities are U.S. Treasury securities, in which case the domicile is
the U.S., are excluded from this presentation. |
|
(4) |
|
Cross-border exposure includes amounts payable to the Corporation by borrowers or
counterparties with a country of residence other than the one in which the credit is booked,
regardless of the currency in which the claim is denominated, consistent with FFIEC reporting
requirements. |
|
(5) |
|
Local country exposure includes amounts payable to the Corporation by borrowers
with a country of residence in which the credit is booked regardless of the currency in which
the claim is denominated. Local funding or liabilities are subtracted from local exposures
consistent with FFIEC reporting requirements. Of the $784 million applied for exposure
reduction, $344 million was in Italy, $271 million in Ireland, $136 million in Spain and $33
million in Greece. |
|
(6) |
|
Represents net notional credit default protection purchased to hedge counterparty
risk. |
Provision for Credit Losses
The provision for credit losses decreased $6.3 billion to $5.4 billion, and $15.2
billion to $23.3 billion for the three and nine months ended September 30, 2010 compared to the
same periods in 2009.
The provision for credit losses for the consumer portfolio decreased $3.7 billion to $4.8
billion, and $9.2 billion to $20.2 billion for the three and nine months ended September 30, 2010
compared to the same periods in 2009. The decreases for both the three and nine month periods were
due to reserve reductions in 2010 compared to reserve additions in 2009. The
188
reserve reductions
reflected lower delinquencies, decreasing bankruptcies and lower net charge-offs in the
consumer credit card and unsecured consumer lending portfolios resulting from an improving
economic outlook. Additionally, consumer real estate reserves were impacted by improving portfolio
trends as reserves decreased during the three months ended September 30, 2010 compared to reserve increases during the same
period in 2009. Reserve increases during the nine months ended September 30, 2010 were of a smaller magnitude compared to the same period in 2009. Net charge-offs of $6.1 billion for the three months ended September 30, 2010 were $886
million lower than the prior year as all consumer portfolios have benefited from economic
improvement during the year. This improvement was partially offset by higher net charge-offs due
to the impact of the adoption of new consolidation guidance
resulting in the consolidation of certain securitized loan balances in our consumer credit card
and home equity portfolios. The adoption of the new guidance also drove the $4.5 billion increase
in net charge-offs to $23.5 billion for the nine months ended September 30, 2010 compared to the
prior year. The addition to reserves in the consumer purchased credit-impaired loan
portfolios reflected further reductions in expected principal cash flows of $292 million and $1.4
billion during the three and nine months ended September 30, 2010 compared to $1.4 billion and
$3.0 billion a year earlier.
The provision for credit losses for the commercial portfolio, including the provision for
unfunded lending commitments, decreased $2.6 billion to $594 million, and $5.9 billion to $3.1
billion for the three and nine months ended September 30, 2010 compared to the same periods in
2009. In both the three and nine month comparisons, the decreases were driven by lower net
charge-offs and reserve reductions across the commercial portfolio due to improved borrower credit
profiles, slower deterioration of appraisal values in the commercial real estate portfolio and
lower delinquencies and bankruptcies combined with higher credit quality originations in the small
business portfolio.
Allowance for Credit Losses
The allowance for loan and lease losses is allocated based on two components, described
below, depending on whether or not the loan or lease has been individually identified as being
impaired. We evaluate the adequacy of the allowance for loan and lease losses based on the total
of these two components. The allowance for loan and lease losses excludes loans held-for-sale and
loans accounted for under the fair value option, as fair value adjustments related to loans
measured at fair value include a credit risk component.
The first component of the allowance for loan and lease losses covers nonperforming
commercial loans, consumer real estate loans that have been modified in a TDR, renegotiated credit
card, unsecured consumer, and small business loans. These loans are subject to impairment
measurement at the loan level based either on the present value of expected future cash flows
discounted at the loans original effective interest rate, or discounted at the portfolio average
contractual annual percentage rate, excluding renegotiated and promotionally priced loans for the
renegotiated portfolio; the collateral value or the loans observable market price. When the
values are lower than the carrying value of the loan, impairment is recognized. For purposes of
computing this specific loss component of the allowance, larger impaired loans are evaluated
individually and smaller impaired loans are evaluated as a pool using historical loss experience
for the respective product types and risk ratings of the loans.
The second component of the allowance for loan and lease losses covers performing consumer
and commercial loans and leases which have incurred losses that are not yet individually
identifiable. The allowance for consumer and certain homogeneous commercial loan and lease
products is based on aggregated portfolio evaluations, generally by product type. Loss forecast
models are utilized that consider a variety of factors including, but not limited to, historical
loss experience, estimated defaults or foreclosures based on portfolio trends, delinquencies,
economic trends and credit scores. Our consumer real estate loss forecast model estimates the
portion of our homogeneous loans that will default based on individual loan attributes, the most
significant of which are refreshed LTV or CLTV, borrower credit score, vintage and geography all
of which are further broken down into current delinquency status. Incorporating refreshed LTV and
CLTV into our probability of default allows us to factor the impact of changes in home prices into
our allowance for loan and lease losses. These loss forecast models are updated on a quarterly
basis to incorporate information reflecting the current economic environment. As of September 30,
2010, inputs to the loss forecast models resulted in reductions in the allowance for almost all
consumer portfolios.
The allowance for commercial loan and lease losses is established by product type after
analyzing historical loss experience by internal risk rating, current economic conditions,
industry performance trends, geographic or obligor concentrations within each portfolio segment,
and any other pertinent information. The statistical models for commercial loans are generally
updated annually and utilize the Corporations historical database of actual defaults and other
data. The credit characteristics of the commercial portfolios are updated at least quarterly to
incorporate the most recent data reflecting the current economic environment. For risk-rated
commercial loans, we estimate the probability of default (PD) and the loss given default (LGD)
based on the Corporations historical experience of defaults and credit losses. Factors
189
considered
when assessing the internal risk rating include: the value of the underlying collateral, if
applicable; the industry in which the obligor operates; the obligors liquidity and other
financial indicators; and other quantitative and qualitative factors relevant to the obligors
credit risk. As of September 30, 2010, updates to the credit characteristics resulted in
reductions in the allowance for our commercial domestic portfolio. When estimating the allowance
for loan and lease losses, management relies not only on models derived from historical experience
but also on its judgment to consider the effect on probable losses inherent in the portfolios due
to the current macroeconomic environment and trends, inherent uncertainty in models, changes to
underwriting standards and their inputs and other qualitative factors.
We monitor differences between estimated and actual incurred loan and lease losses. This
monitoring process includes periodic assessments by senior management of loan and lease portfolios
and the models used to estimate incurred losses in those portfolios.
Additions to, or reductions of, the allowance for loan and lease losses affect the provision
for credit losses. Credit exposures deemed to be uncollectible are charged against the allowance
for loan and lease losses. Recoveries of previously charged off amounts are credited to the
allowance for loan and lease losses.
The
allowance for loan and lease losses for the consumer portfolio as
presented in Table 50
was $35.4 billion at September 30, 2010, an increase of $7.6 billion from December 31, 2009. This
increase was primarily related to reserves recorded on January 1, 2010 in connection with the
adoption of new consolidation guidance and higher reserve additions in the consumer real estate
portfolios during the first half of 2010 amid continued stress in the housing market. These items
were partially offset by reserve reductions primarily due to improving credit quality in the
Global Card Services consumer portfolios. With respect to the consumer purchased credit-impaired
loan portfolios, updates to our expected principal cash flows resulted in an increase in reserves
through provision of $1.4 billion for the nine months ended September 30, 2010, primarily in the
home equity portfolio.
The allowance for commercial loan and lease losses was $8.2 billion at September 30, 2010, a
$1.2 billion decrease from December 31, 2009. The decrease was primarily due to reserve reductions
in the small business portfolios within Global Card Services and Global Commercial Banking, as
well as in the commercial domestic portfolios primarily in Global Commercial Banking and GBAM.
The allowance for loan and lease losses as a percentage of total loans and leases outstanding
was 4.69 percent at September 30, 2010, compared to 4.16 percent at December 31, 2009. The
increase in the ratio was primarily due to consumer reserve increases for securitized loans
consolidated under the new consolidation guidance, which were primarily credit card loans. The
September 30, 2010 and the December 31, 2009 ratios above include the impact of the purchased
credit-impaired loan portfolio. Excluding the impacts of the purchased credit-impaired loan
portfolio, the allowance for loan and lease losses as a percentage of total loans and leases
outstanding was 4.25 percent at September 30, 2010 compared to 3.88 percent at December 31, 2009.
Reserve for Unfunded Lending Commitments
In addition to the allowance for loan and lease losses, we also estimate probable losses
related to unfunded lending commitments such as letters of credit, financial guarantees and
binding loan commitments (excluding commitments accounted for under the fair value option).
Unfunded lending commitments are subject to the same assessment as funded loans, including
estimates of PD and LGD. Due to the nature of unfunded commitments, the estimate of probable
losses must also consider utilization. To estimate the portion of these undrawn commitments that
is likely to be drawn by a borrower at the time of estimated default, analyses of the
Corporations historical experience are applied to the unfunded commitments to estimate the funded
Exposure at Default (EAD). The expected loss for unfunded lending commitments is the product of
the PD, the LGD and the EAD, adjusted for any qualitative factors including economic uncertainty
and inherent uncertainty in models.
The reserve for unfunded lending commitments at September 30, 2010 was $1.3 billion, $193
million lower than December 31, 2009.
190
The table below presents a rollforward of the allowance for credit losses for the three and nine
months ended September 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Credit Losses |
|
Three Months Ended |
|
Nine Months Ended |
|
September 30 |
|
|
September 30 |
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Allowance for loan and lease losses, beginning of period, before effect of the January 1 adoption of new
consolidation guidance |
|
$ |
45,255 |
|
|
$ |
33,785 |
|
|
$ |
37,200 |
|
|
$ |
23,071 |
|
Allowance related to adoption of new consolidation guidance |
|
|
n/a |
|
|
|
n/a |
|
|
|
10,788 |
|
|
|
n/a |
|
|
Allowance for loan and lease losses, beginning of period |
|
|
45,255 |
|
|
|
33,785 |
|
|
|
47,988 |
|
|
|
23,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases charged off |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage |
|
|
(679 |
) |
|
|
(1,263 |
) |
|
|
(2,741 |
) |
|
|
(3,167 |
) |
Home equity |
|
|
(1,444 |
) |
|
|
(2,006 |
) |
|
|
(5,724 |
) |
|
|
(5,592 |
) |
Discontinued real estate |
|
|
(17 |
) |
|
|
(37 |
) |
|
|
(64 |
) |
|
|
(90 |
) |
Credit card domestic |
|
|
(3,191 |
) |
|
|
(1,836 |
) |
|
|
(11,041 |
) |
|
|
(5,148 |
) |
Credit card foreign |
|
|
(369 |
) |
|
|
(401 |
) |
|
|
(2,032 |
) |
|
|
(902 |
) |
Direct/Indirect consumer |
|
|
(940 |
) |
|
|
(1,685 |
) |
|
|
(3,442 |
) |
|
|
(4,887 |
) |
Other consumer |
|
|
(93 |
) |
|
|
(134 |
) |
|
|
(257 |
) |
|
|
(362 |
) |
|
Total consumer charge-offs |
|
|
(6,733 |
) |
|
|
(7,362 |
) |
|
|
(25,301 |
) |
|
|
(20,148 |
) |
|
Commercial domestic (1) |
|
|
(728 |
) |
|
|
(1,606 |
) |
|
|
(2,511 |
) |
|
|
(3,858 |
) |
Commercial real estate |
|
|
(434 |
) |
|
|
(890 |
) |
|
|
(1,723 |
) |
|
|
(1,981 |
) |
Commercial lease financing |
|
|
(24 |
) |
|
|
(48 |
) |
|
|
(67 |
) |
|
|
(166 |
) |
Commercial foreign |
|
|
(5 |
) |
|
|
(153 |
) |
|
|
(129 |
) |
|
|
(388 |
) |
|
Total commercial charge-offs |
|
|
(1,191 |
) |
|
|
(2,697 |
) |
|
|
(4,430 |
) |
|
|
(6,393 |
) |
|
Total loans and leases charged off |
|
|
(7,924 |
) |
|
|
(10,059 |
) |
|
|
(29,731 |
) |
|
|
(26,541 |
) |
|
Recoveries of loans and leases previously charged off |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage |
|
|
19 |
|
|
|
16 |
|
|
|
41 |
|
|
|
50 |
|
Home equity |
|
|
72 |
|
|
|
36 |
|
|
|
214 |
|
|
|
102 |
|
Discontinued real estate |
|
|
- |
|
|
|
- |
|
|
|
7 |
|
|
|
3 |
|
Credit card domestic |
|
|
216 |
|
|
|
49 |
|
|
|
586 |
|
|
|
147 |
|
Credit card foreign |
|
|
74 |
|
|
|
19 |
|
|
|
164 |
|
|
|
58 |
|
Direct/Indirect consumer |
|
|
233 |
|
|
|
234 |
|
|
|
747 |
|
|
|
712 |
|
Other consumer |
|
|
13 |
|
|
|
16 |
|
|
|
46 |
|
|
|
48 |
|
|
Total consumer recoveries |
|
|
627 |
|
|
|
370 |
|
|
|
1,805 |
|
|
|
1,120 |
|
|
Commercial domestic (2) |
|
|
78 |
|
|
|
37 |
|
|
|
266 |
|
|
|
103 |
|
Commercial real estate |
|
|
24 |
|
|
|
17 |
|
|
|
53 |
|
|
|
24 |
|
Commercial lease financing |
|
|
5 |
|
|
|
7 |
|
|
|
30 |
|
|
|
14 |
|
Commercial foreign |
|
|
(7 |
) |
|
|
4 |
|
|
|
26 |
|
|
|
13 |
|
|
Total commercial recoveries |
|
|
100 |
|
|
|
65 |
|
|
|
375 |
|
|
|
154 |
|
|
Total recoveries of loans and leases previously charged off |
|
|
727 |
|
|
|
435 |
|
|
|
2,180 |
|
|
|
1,274 |
|
|
Net charge-offs |
|
|
(7,197 |
) |
|
|
(9,624 |
) |
|
|
(27,551 |
) |
|
|
(25,267 |
) |
|
Provision for loan and lease losses |
|
|
5,395 |
|
|
|
11,658 |
|
|
|
23,099 |
|
|
|
38,357 |
|
Other (3) |
|
|
128 |
|
|
|
13 |
|
|
|
45 |
|
|
|
(329 |
) |
|
Allowance for loan and lease losses, September 30 |
|
|
43,581 |
|
|
|
35,832 |
|
|
|
43,581 |
|
|
|
35,832 |
|
|
Reserve for unfunded lending commitments, beginning of period |
|
|
1,413 |
|
|
|
1,992 |
|
|
|
1,487 |
|
|
|
421 |
|
Provision for unfunded lending commitments |
|
|
1 |
|
|
|
47 |
|
|
|
207 |
|
|
|
103 |
|
Other (4) |
|
|
(120 |
) |
|
|
(472 |
) |
|
|
(400 |
) |
|
|
1,043 |
|
|
Reserve for unfunded lending commitments, September 30 |
|
|
1,294 |
|
|
|
1,567 |
|
|
|
1,294 |
|
|
|
1,567 |
|
|
Allowance for credit losses, September 30 |
|
$ |
44,875 |
|
|
$ |
37,399 |
|
|
$ |
44,875 |
|
|
$ |
37,399 |
|
|
Loans and leases outstanding at September 30 (5) |
|
$ |
930,226 |
|
|
$ |
908,069 |
|
|
$ |
930,226 |
|
|
$ |
908,069 |
|
Allowance
for loan and lease losses as a percentage of total loans and leases outstanding at September 30 (5) |
|
|
4.69 |
% |
|
|
3.95 |
% |
|
|
4.69 |
% |
|
|
3.95 |
% |
Consumer
allowance for loan and lease losses as a percentage of total consumer
loans and leases outstanding at September 30 |
|
|
5.57 |
|
|
|
4.62 |
|
|
|
5.57 |
|
|
|
4.62 |
|
Commercial allowance for loan and lease losses as a percentage of total commercial loans and leases outstanding
at September 30 (5) |
|
|
2.78 |
|
|
|
2.76 |
|
|
|
2.78 |
|
|
|
2.76 |
|
Average loans and leases outstanding at September 30 (5) |
|
$ |
931,103 |
|
|
$ |
923,446 |
|
|
$ |
960,106 |
|
|
$ |
956,004 |
|
Annualized net charge-offs as a percentage of average loans and leases outstanding (5) |
|
|
3.07 |
% |
|
|
4.13 |
% |
|
|
3.84 |
% |
|
|
3.53 |
% |
Allowance
for loan and lease losses as a percentage of total nonperforming
loans and leases at September 30 (5, 6, 7) |
|
|
135 |
|
|
|
112 |
|
|
|
135 |
|
|
|
112 |
|
Ratio of the allowance for loan and lease losses at September 30 to annualized net charge-offs |
|
|
1.53 |
|
|
|
0.94 |
|
|
|
1.18 |
|
|
|
1.06 |
|
|
Excluding purchased credit-impaired loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan and lease losses as a percentage of total loans and leases outstanding at September 30 (5) |
|
|
4.25 |
% |
|
|
3.71 |
% |
|
|
4.25 |
% |
|
|
3.71 |
% |
Consumer
allowance for loan and lease losses as a percentage of total consumer
loans and leases outstanding
at September 30 |
|
|
4.98 |
|
|
|
4.30 |
|
|
|
4.98 |
|
|
|
4.30 |
|
Commercial allowance for loan and lease losses as a percentage of total commercial loans and leases outstanding
at September 30 (5) |
|
|
2.78 |
|
|
|
2.76 |
|
|
|
2.78 |
|
|
|
2.76 |
|
Annualized
net charge-offs as a percentage of average loans and leases outstanding (5) |
|
|
3.18 |
|
|
|
4.27 |
|
|
|
3.98 |
|
|
|
3.68 |
|
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases at September 30 (5, 6, 7) |
|
|
118 |
|
|
|
101 |
|
|
|
118 |
|
|
|
101 |
|
Ratio of the allowance for loan and lease losses at September 30 to annualized net charge-offs |
|
|
1.34 |
|
|
|
0.86 |
|
|
|
1.04 |
|
|
|
0.96 |
|
|
|
|
|
(1) |
|
Includes small business commercial - domestic charge-offs of $473 million and $1.7 billion
for the three and nine months ended September 30, 2010 compared to $814 million and $2.2
billion for the same periods in 2009. |
|
(2) |
|
Includes small business commercial - domestic recoveries of $29 million and $78 million for
the three and nine months ended September 30, 2010 compared to $18 million and $44 million for
the same periods in 2009. |
|
(3) |
|
For the nine months ended September 30, 2009, amount includes a $750 million reduction in the
allowance for loan and lease losses related to credit card loans of $8.5 billion which were
exchanged for $7.8 billion in held-to-maturity debt securities that were issued by the
Corporations U.S. Credit Card Securitization Trust and retained by the Corporation. |
|
(4) |
|
For the nine months ended September 30, 2010, amount includes the remaining balance of the
acquired Merrill Lynch liability excluding those commitments accounted for under the fair value
option, net of accretion, and the impact of funding previously unfunded positions. All other
amounts represent primarily accretion of the Merrill Lynch purchase accounting adjustment and the impact of funding
previously unfunded positions. |
|
(5) |
|
Outstanding loan and lease balances and ratios do not include loans accounted for under the
fair value option. Loans accounted for under fair value option were $3.7 billion and $6.2
billion at September 30, 2010 and 2009. Average loans accounted for under fair value option
were $3.8 billion and $4.2 billion for the three and nine months ended September 30, 2010
compared to $6.8 billion and $7.3 billion for the same periods in 2009. |
|
(6) |
|
Allowance for loan and lease losses includes $23.7 billion and $17.2 billion allocated to
products that were excluded from nonperforming loans, leases and foreclosed properties at
September 30, 2010 and 2009. |
|
(7) |
|
For more information on our definition of nonperforming
loans, see the discussion beginning on page 170. |
|
n/a = not applicable |
191
For reporting purposes, we allocate the allowance for credit losses across products. However,
the allowance is available to absorb any credit losses without restriction. The table below presents our
allocation by product type.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of the Allowance for Credit Losses by Product Type |
|
|
September 30, 2010 |
|
January 1, 2010 (1) |
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
|
|
|
|
Loans and |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and |
|
|
|
|
|
|
Percent of |
|
Leases |
|
|
|
|
|
|
|
|
|
Percent of |
|
Leases |
(Dollars in millions) |
|
Amount |
|
Total |
|
Outstanding (2) |
|
Amount |
|
Amount |
|
Total |
|
Outstanding (2) |
|
Allowance
for loan and lease losses (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage |
|
$ |
4,320 |
|
|
|
9.91 |
% |
|
|
1.78 |
% |
|
$ |
4,607 |
|
|
$ |
4,607 |
|
|
|
12.38 |
% |
|
|
1.90 |
% |
Home equity |
|
|
12,925 |
|
|
|
29.66 |
|
|
|
9.13 |
|
|
|
10,733 |
|
|
|
10,160 |
|
|
|
27.31 |
|
|
|
6.81 |
|
Discontinued real estate |
|
|
1,191 |
|
|
|
2.73 |
|
|
|
8.86 |
|
|
|
989 |
|
|
|
989 |
|
|
|
2.66 |
|
|
|
6.66 |
|
Credit card domestic |
|
|
11,977 |
|
|
|
27.48 |
|
|
|
10.54 |
|
|
|
15,102 |
|
|
|
6,017 |
|
|
|
16.18 |
|
|
|
12.17 |
|
Credit card foreign |
|
|
2,116 |
|
|
|
4.86 |
|
|
|
7.76 |
|
|
|
2,686 |
|
|
|
1,581 |
|
|
|
4.25 |
|
|
|
7.30 |
|
Direct/Indirect consumer |
|
|
2,661 |
|
|
|
6.11 |
|
|
|
2.88 |
|
|
|
4,251 |
|
|
|
4,227 |
|
|
|
11.36 |
|
|
|
4.35 |
|
Other consumer |
|
|
171 |
|
|
|
0.39 |
|
|
|
5.83 |
|
|
|
204 |
|
|
|
204 |
|
|
|
0.55 |
|
|
|
6.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
35,361 |
|
|
|
81.14 |
|
|
|
5.57 |
|
|
|
38,572 |
|
|
|
27,785 |
|
|
|
74.69 |
|
|
|
4.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial domestic (4) |
|
|
4,089 |
|
|
|
9.38 |
|
|
|
2.14 |
|
|
|
5,153 |
|
|
|
5,152 |
|
|
|
13.85 |
|
|
|
2.59 |
|
Commercial real estate |
|
|
3,573 |
|
|
|
8.20 |
|
|
|
6.77 |
|
|
|
3,567 |
|
|
|
3,567 |
|
|
|
9.59 |
|
|
|
5.14 |
|
Commercial lease financing |
|
|
151 |
|
|
|
0.35 |
|
|
|
0.71 |
|
|
|
291 |
|
|
|
291 |
|
|
|
0.78 |
|
|
|
1.31 |
|
Commercial foreign |
|
|
407 |
|
|
|
0.93 |
|
|
|
1.33 |
|
|
|
405 |
|
|
|
405 |
|
|
|
1.09 |
|
|
|
1.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial (5) |
|
|
8,220 |
|
|
|
18.86 |
|
|
|
2.78 |
|
|
|
9,416 |
|
|
|
9,415 |
|
|
|
25.31 |
|
|
|
2.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses |
|
|
43,581 |
|
|
|
100.00 |
% |
|
|
4.69 |
|
|
|
47,988 |
|
|
|
37,200 |
|
|
|
100.00 |
% |
|
|
4.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
for unfunded lending commitments |
|
|
1,294 |
|
|
|
|
|
|
|
|
|
|
|
1,487 |
|
|
|
1,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for credit losses (6) |
|
$ |
44,875 |
|
|
|
|
|
|
|
|
|
|
$ |
49,475 |
|
|
$ |
38,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Balances reflect impact of new consolidation guidance. |
|
(2) |
|
Ratios are calculated as allowance for loan and lease losses as a percentage of loans and
leases outstanding excluding loans accounted for under the fair value option for each loan and
lease category. Loans accounted for under the fair value option include commercial domestic
loans of $1.8 billion and $3.0 billion, commercial foreign loans of $1.8 billion and $1.9
billion, and commercial real estate loans of $54 million and $90 million at September 30, 2010
and December 31, 2009. |
|
(3) |
|
Current period is presented in accordance with new consolidation guidance. Prior period has
not been restated. |
|
(4) |
|
Includes allowance for small business commercial domestic loans of $1.8 billion and $2.4
billion at September 30, 2010 and December 31, 2009. |
|
(5) |
|
Includes allowance for loan and lease losses for impaired commercial loans of $673
million and $1.2 billion at September 30, 2010 and December 31, 2009. |
|
(6) |
|
Includes $5.6 billion and $3.9 billion of allowance for credit losses related
to purchased credit-impaired loans at September 30, 2010 and December 31, 2009. |
Market Risk Management
Market risk is the risk that values of assets and liabilities or revenues will be
adversely affected by changes in market conditions such as market movements. This risk is inherent
in the financial instruments associated with our operations and/or activities including loans,
deposits, securities, short-term borrowings, long-term debt, trading account assets and
liabilities, and derivatives. Market-sensitive assets and liabilities are generated through loans
and deposits associated with our traditional banking business, customer and other trading
operations, the ALM process, credit risk mitigation activities and mortgage banking activities. In
the event of market volatility, factors such as underlying market movements and liquidity have an
impact on the results of the Corporation. More detailed information on our market risk management
process is included on pages 79 through 86 of the MD&A of the Corporations 2009 Annual Report on
Form 10-K.
Trading Risk Management
Trading-related revenues represent the amount earned from trading positions, including
market-based net interest income, which are taken in a diverse range of financial instruments and
markets. Trading account assets and liabilities and derivative positions are reported at fair
value. For more information on fair value, see Note 14 Fair Value Measurements to the
Consolidated Financial Statements. Trading-related revenues can be volatile and are largely driven
by general market conditions and customer demand. Trading-related revenues are dependent on the
volume and type of transactions, the level of risk assumed, and the volatility of price and rate
movements at any given time within the ever-changing market environment.
The Global Markets Risk Committee (GRC), chaired by the Global Markets Risk Executive, has
been designated by ALMRC as the primary governance authority for Global Markets Risk Management
including trading risk management. The GRCs focus is to take a forward-looking view of the
primary credit and market risks impacting GBAM and prioritize those that need a proactive risk
mitigation strategy. Market risks that impact lines of business outside of GBAM are monitored and
governed by their respective governance authorities.
192
The GRC monitors significant daily revenues and losses by business and the primary drivers of
the revenues or losses. Thresholds are in place for each of our businesses in order to determine
if the revenue or loss is considered to be significant
for that business. If any of the thresholds are exceeded, an explanation of the variance is
provided to the GRC. The thresholds are developed in coordination with the respective risk
managers to highlight those revenues or losses that exceed what is considered to be normal daily
income statement volatility.
The histogram below is a graphic depiction of trading volatility and illustrates the daily
level of trading-related revenue for the three months ended September 30, 2010 as compared with
the three months ended June 30, 2010 and March 31, 2010. During the three months ended September
30, 2010, positive trading-related revenue was recorded for 100 percent of the trading days of
which 89 percent were daily trading gains of over $25 million. This can be compared to the three
months ended June 30, 2010, where positive trading-related revenue was recorded for 81 percent of
the trading days of which 59 percent were daily trading gains of over $25 million, eight percent
of the trading days had losses greater than $25 million and the largest loss was $102 million. For
the three months ended March 31, 2010, positive trading-related revenue was recorded for 100
percent of the trading days of which 95 percent were daily trading gains of over $25 million.
Histogram of Daily Trading-Related Revenue
To evaluate risk in our trading activities, we focus on the actual and potential volatility
of individual positions as well as portfolios. VaR is a key statistic used to measure market risk.
In order to manage day-to-day risks, VaR is subject to trading limits both for our overall trading
portfolio and within individual businesses. All limit excesses are communicated to management for
review.
A VaR model simulates the value of a portfolio under a range of hypothetical scenarios in
order to generate a distribution of potential gains and losses. VaR represents the worst loss the
portfolio is expected to experience based on historical trends with a given level of confidence
and depends on the volatility of the positions in the portfolio and on how strongly their risks
are correlated. Within any VaR model, there are significant and numerous assumptions that will
differ from company to company. In addition, the accuracy of a VaR model depends on the
availability and quality of historical data for each of the positions in the portfolio. A VaR
model may require additional modeling assumptions for new products that do not have extensive
historical price data or for illiquid positions for which accurate daily prices are not
consistently available.
A VaR model is an effective tool in estimating ranges of potential gains and losses on our
trading portfolios. There are however many limitations inherent in a VaR model as it utilizes
historical results over a defined time period to estimate future performance. Historical results
may not always be indicative of future results and changes in market conditions or in the
composition of the underlying portfolio could have a material impact on the accuracy of the VaR
model. To ensure that the VaR model reflects current market conditions, we update the historical
data underlying our VaR model on a bi-weekly basis and regularly review the assumptions underlying
the model.
193
We continually review, evaluate and enhance our VaR model to ensure that it reflects the
material risks in our trading portfolio. Nevertheless, due to the limitations mentioned above, we
have historically used the VaR model as only one of the components in managing our trading risk
and also use other techniques such as stress testing and desk level limits. Periods of extreme
market stress influence the reliability of these techniques to various degrees.
The accuracy of the VaR methodology is reviewed by backtesting (i.e., comparing actual
results against expectations derived from historical data) the VaR results against the daily
profit and loss. Graphic representation of the backtesting results with additional explanation of
backtesting excesses are reported to the GRC. Backtesting excesses occur when trading losses
exceed VaR. Senior management reviews and evaluates the results of these tests. In periods of
market stress, the GRC members communicate daily to discuss losses and VaR limit excesses. As a
result of this process, the lines of business may selectively reduce risk. Where economically
feasible, positions are sold or macroeconomic hedges are executed to reduce the exposure.
The graph below shows daily trading-related revenue and VaR for the twelve months ended
September 30, 2010. Actual losses did not exceed daily trading VaR in the twelve months ended
September 30, 2010 and 2009. Our VaR model uses a historical simulation approach based on three
years of historical data and an expected shortfall methodology equivalent to a 99 percent
confidence level. Statistically, this means that losses will exceed VaR, on average, one out of
100 trading days, or two to three times each year.
Trading Risk and Return
Daily Trading-related Revenue and VaR
194
Table 51 presents average, high and low daily trading VaR for the three months ended
September 30, 2010, June 30, 2010 and September 30, 2009, as well as average daily trading VaR for
the nine months ended September 30, 2010 and September 30, 2009.
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Table 51 |
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Trading Activities Market Risk VAR |
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Three Months Ended |
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Three Months Ended |
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Three Months Ended |
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|
Nine Months Ended |
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|
September 30, 2010 |
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|
June 30, 2010 |
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|
September 30, 2009 |
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September 30 |
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2010 |
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2009 |
|
(Dollars in millions) |
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Average |
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|
High (1) |
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Low (1) |
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Average |
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|
High (1) |
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Low (1) |
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Average |
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High (1) |
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Low (1) |
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Average |
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Average |
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Foreign exchange |
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$ |
8.2 |
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$ |
13.4 |
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$ |
4.9 |
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$ |
21.5 |
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$ |
63.0 |
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$ |
6.6 |
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$ |
17.0 |
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$ |
30.8 |
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$ |
6.1 |
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$ |
25.6 |
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$ |
14.0 |
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Interest rate |
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83.7 |
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128.3 |
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43.7 |
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56.4 |
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89.7 |
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38.4 |
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80.6 |
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136.7 |
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49.1 |
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68.1 |
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70.7 |
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Credit |
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165.7 |
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189.3 |
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139.1 |
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175.8 |
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216.2 |
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146.8 |
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145.9 |
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191.5 |
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123.9 |
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182.9 |
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182.9 |
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Real estate/mortgage |
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108.4 |
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138.5 |
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90.3 |
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71.0 |
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80.2 |
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63.5 |
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47.4 |
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61.6 |
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36.4 |
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81.4 |
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46.9 |
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Equities |
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28.3 |
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37.3 |
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22.8 |
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36.6 |
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68.1 |
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20.9 |
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47.7 |
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74.4 |
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30.8 |
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42.4 |
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39.8 |
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Commodities |
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16.8 |
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20.4 |
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12.8 |
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23.2 |
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31.7 |
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14.0 |
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19.4 |
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26.3 |
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16.7 |
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20.7 |
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20.0 |
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Portfolio diversification |
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(226.1 |
) |
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- |
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- |
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(195.5 |
) |
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- |
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- |
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(198.6 |
) |
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- |
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- |
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(205.3 |
) |
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(184.5 |
) |
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Total market-based trading
portfolio |
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$ |
185.0 |
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$ |
212.0 |
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$ |
152.5 |
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$ |
189.0 |
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$ |
296.3 |
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$ |
123.0 |
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$ |
159.4 |
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$ |
225.1 |
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$ |
117.9 |
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$ |
215.8 |
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$ |
189.8 |
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(1) |
|
The high and low for the total portfolio may not equal the sum of the
individual components as the highs or lows of the individual portfolios may have occurred on
different trading days. |
The decrease in average VaR during the three months ended September 30, 2010 resulted
from reduced exposures in several businesses. In addition, portfolio diversification increased
relative to average VaR, as exposure changes resulted in reduced correlations across businesses.
Counterparty credit risk is an adjustment to the mark-to-market value of our derivative
exposures reflecting the impact of the credit quality of counterparties on our derivative assets.
Since counterparty credit exposure is not included in the VaR component of the regulatory capital
allocation, we do not include it in our trading VaR, and it is therefore not included in the daily
trading-related revenue illustrated in our histogram or used for backtesting.
Trading Portfolio Stress Testing
Because the very nature of a VaR model suggests results can exceed our estimates, we
also stress test our portfolio. Stress testing estimates the value change in our trading
portfolio that may result from abnormal market movements. Various scenarios, categorized as either
historical or hypothetical, are regularly run and reported for the overall trading portfolio and
individual businesses. Historical scenarios simulate the impact of price changes that occurred
during a set of extended historical market events. Generally, a 10-business-day window or longer,
representing the most severe point during a crisis, is selected for each historical scenario.
Hypothetical scenarios provide simulations of anticipated shocks from predefined market stress
events. These stress events include shocks to underlying market risk variables which may be well
beyond the shocks found in the historical data used to calculate the VaR. As with the historical
scenarios, the hypothetical scenarios are designed to represent a short-term market disruption.
Scenarios are reviewed and updated as necessary in light of changing positions and new economic or
political information. In addition to the value afforded by the results themselves, this
information provides senior management with a clear picture of the trend of risk being taken given
the relatively static nature of the shocks applied. Stress testing for the trading portfolio is
also integrated with enterprise-wide stress testing. A process has been established to ensure
consistency between the scenarios used for the trading portfolio and those used for
enterprise-wide stress testing. The scenarios used for enterprise-wide stress testing purposes
differ from the typical trading portfolio scenarios in that they have a longer time horizon and
the results are forecasted over multiple periods for use in consolidated capital and liquidity
planning. For additional information on enterprise-wide stress testing, see page 152.
Interest Rate Risk Management for Nontrading Activities
Interest rate risk represents the most significant market risk exposure to our
nontrading exposures. Our overall goal is to manage interest rate risk so that movements in
interest rates do not adversely affect core net interest income. Interest rate risk is measured as
the potential volatility in our core net interest income caused by changes in market interest
rates. Client-facing activities, primarily lending and deposit-taking, create interest rate
sensitive positions on our balance sheet. Interest rate risk from these activities, as well as the
impact of changing market conditions, is managed through our ALM activities.
Simulations are used to estimate the impact on core net interest income of numerous interest
rate scenarios, balance sheet trends and strategies. These simulations evaluate how changes in
short-term financial instruments, debt securities,
195
loans, deposits, borrowings and derivative
instruments impact core net interest income. In addition, these simulations incorporate
assumptions about balance sheet dynamics such as loan and deposit growth and pricing, changes in
funding mix, and asset and liability repricing and maturity characteristics. These simulations do
not include the impact of hedge ineffectiveness.
Management analyzes core net interest income forecasts utilizing different rate scenarios
with the baseline utilizing market-based forward interest rates. Management frequently updates the
core net interest income forecast for changing assumptions and differing outlooks based on
economic trends and market conditions. Thus, we continually monitor our balance sheet position in
an effort to maintain an acceptable level of exposure to interest rate changes.
We prepare forward-looking forecasts of core net interest income. The baseline forecast takes
into consideration expected future business growth, ALM positioning, and the direction of interest
rate movements as implied by the market-based forward curve. We then measure and evaluate the
impact that alternative interest rate scenarios have on the static baseline forecast in order to
assess interest rate sensitivity under varied conditions. The spot and 12-month forward monthly
rates used in our respective baseline forecast at September 30, 2010 and December 31, 2009 are
presented in the table below.
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Table 52 |
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Forward Rates |
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|
September 30, 2010 |
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December 31, 2009 |
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Three-Month |
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Three-Month |
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Federal Funds |
|
|
LIBOR |
|
|
10-Year Swap |
|
|
Federal Funds |
|
|
LIBOR |
|
|
10-Year Swap |
|
|
Spot rates |
|
|
0.25 |
% |
|
|
0.29 |
% |
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|
2.57 |
% |
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|
0.25 |
% |
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|
0.25 |
% |
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|
3.97 |
% |
12-month forward rates |
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|
0.25 |
|
|
|
0.57 |
|
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|
2.93 |
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|
|
1.14 |
|
|
|
1.53 |
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|
|
4.47 |
|
|
Table 53 shows the pre-tax dollar impact to forecasted core net interest income over the
next twelve months from September 30, 2010 and December 31, 2009, resulting from a 100 bps gradual
parallel increase, a 100 bps gradual parallel decrease, a 100 bps gradual curve flattening
(increase in short-term rates or decrease in long-term rates) and a 100 bps gradual curve
steepening (decrease in short-term rates or increase in long-term rates) from the forward market
curve. For further discussion of core net interest income, see page 111.
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|
Table 53 |
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|
Estimated Core Net Interest
Income (1) |
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
September 30 |
|
|
December 31 |
|
Curve Change |
|
Short Rate (bps) |
|
Long Rate (bps) |
|
2010 |
|
|
2009 |
|
|
+100 bps Parallel shift |
|
|
+100 |
|
|
|
+100 |
|
|
$ |
875 |
|
|
$ |
598 |
|
-100 bps Parallel shift |
|
|
-100 |
|
|
|
-100 |
|
|
|
(1,009 |
) |
|
|
(1,084 |
) |
Flatteners |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short end |
|
|
+100 |
|
|
|
- |
|
|
|
114 |
|
|
|
127 |
|
Long end |
|
|
- |
|
|
|
-100 |
|
|
|
(815 |
) |
|
|
(616 |
) |
Steepeners |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short end |
|
|
-100 |
|
|
|
- |
|
|
|
(235 |
) |
|
|
(444 |
) |
Long end |
|
|
- |
|
|
|
+100 |
|
|
|
726 |
|
|
|
476 |
|
|
|
|
|
(1) |
|
Prior periods are reported on a managed basis. |
The sensitivity analysis above assumes that we take no action in response to these rate
shifts over the indicated periods. At September 30, 2010, the exposure as reported reflects
impacts that may be realized in net interest income. At December 31, 2009, the estimated exposure
as reported reflects impacts that would have been realized primarily in net interest income and
card income.
Our core net interest income was asset sensitive to a parallel move in interest rates at both
September 30, 2010 and December 31, 2009. Beyond what is already implied in the market-based
forward curve, the exposure to declining rates is materially unchanged since December 31, 2009. As
part of our ALM activities, we use securities, residential mortgages, and interest rate and
foreign exchange derivatives in managing interest rate sensitivity.
196
Securities
The securities portfolio is an integral part of our ALM position and is primarily
comprised of debt securities including MBS and to a lesser extent corporate, municipal and other
debt securities. At September 30, 2010 and December 31, 2009, AFS debt securities were $322.4
billion and $301.6 billion. During the three months ended September 30, 2010 and 2009, we
purchased AFS debt securities of $38.5 billion and $38.7 billion, sold $15.6 billion and $43.8
billion, and had maturities and received paydowns of $16.4 billion and $15.5 billion. We realized
$883 million and $1.6 billion in net gains on sales of debt securities during the three months
ended September 30, 2010 and 2009. In addition, we securitized $6.2 billion of residential
mortgage loans into MBS which we retained during the three months ended September 30, 2009. There
were no residential mortgage loans securitized into MBS during the three months ended September
30, 2010.
During the nine months ended September 30, 2010 and 2009, we purchased AFS debt securities of
$138.2 billion and $82.4 billion, sold $78.2 billion and $119.1 billion, and had maturities and
received paydowns of $52.8 billion and $47.2 billion. We realized $1.7 billion and $3.7 billion in
net gains on sales of debt securities during the nine months ended September 30, 2010 and 2009. In
addition, we securitized $2.1 billion and $11.6 billion of residential mortgage loans into MBS
which we retained during the nine months ended September 30, 2010 and 2009.
During the second quarter of 2010, we entered into a series of transactions in our AFS debt
securities portfolio that involved securitizations as well as sales of non-agency RMBS. The
Corporation made the decision to enter into these transactions following a review of corporate
risk objectives in light of proposed Basel regulatory capital changes and liquidity targets. For
more information on the proposed regulatory capital changes, see Basel Regulatory Capital
Requirements on page 153. The carrying value of the non-agency RMBS
portfolio was reduced $5.2 billion during the second quarter of 2010, primarily as a
result of the aforementioned sales and securitizations as well as paydowns. We recognized net
losses of $711 million on the sales and securitization, and improved the overall credit quality of
the remaining portfolio as the non-agency RMBS portfolio below investment grade was reduced
significantly.
Accumulated OCI includes an $8.5 billion and $1.0 billion after-tax net unrealized gain at
September 30, 2010 and 2009, comprised primarily of $2.3 billion of after-tax net unrealized gains
related to AFS debt securities and $6.2 billion of after-tax net unrealized gains related to AFS
equity securities. The gain was primarily due to the $6.2 billion after-tax unrealized gain on our
investment in CCB that was recorded in accumulated OCI during the three months ended September 30,
2010, which previously had been carried at cost. Total market value of the AFS debt securities was
$322.4 billion and $247.2 billion at September 30, 2010 and 2009 with a weighted-average duration
of 4.3 years for both periods, and primarily relates to our MBS portfolio. The amount of pre-tax
accumulated OCI related to AFS debt securities decreased by $1.0 billion during the three months ended September 30, 2010 and improved by $4.7 billion during
the nine months ended September 30, 2010. This compared to the three and nine months
ended September 30, 2009 in which it decreased by $4.6 billion and $8.3 billion.
We recognized $123 million and $850 million of OTTI losses through earnings on AFS debt
securities during the three and nine months ended September 30, 2010 compared to $797 million and
$2.2 billion for the same periods in 2009. OTTI losses on AFS marketable equity securities
decreased $323 million during the nine months ended September 30, 2010 compared to $326 million for
the same period in 2009.
The recognition of impairment losses on AFS debt and marketable equity securities is based on
a variety of factors, including the length of time and extent to which the market value has been
less than cost, the financial condition of the issuer of the security and its ability to recover
market value, underlying assets that collateralize the debt security, other industry and
macroeconomic conditions, and our intent and ability to hold the security to recovery. We do not
intend to sell securities with unrealized losses and it is
more-likely-than-not that we will not be
required to sell those securities before recovery of amortized cost. Based on our evaluation of
the above and other relevant factors, and after consideration of the losses described in the
paragraph above, we do not believe that the AFS debt and marketable equity securities that are in
an unrealized loss position at September 30, 2010 are other-than-temporarily impaired.
Residential Mortgage Portfolio
At September 30, 2010 and December 31, 2009, residential mortgages were $243.1 billion
and $242.1 billion. During the three months ended September 30, 2010 and 2009, we retained $17.1
billion and $8.4 billion in first mortgages originated by Home Loans & Insurance. Outstanding
residential mortgage loans increased $1.0 billion at September 30, 2010 compared to December 31,
2009 primarily due to the repurchase of FHA insured mortgages from Government National Mortgage
Association (GNMA) securities and origination of FHA insured loans during the nine months ended
September 30, 2010. During the three months ended September 30, 2009, we securitized $6.2 billion
of residential
197
mortgage loans into MBS which we retained. There were no residential mortgage loans
securitized into MBS during the three months ended September 30, 2010. For more information on
these securitizations, see Note 8 Securitizations and Other Variable Interest Entities to the
Consolidated Financial Statements. During the three months ended September 30, 2010 and 2009, we
had no purchases of residential mortgages related to ALM activities. We sold $129 million of
residential mortgages during the three months ended September 30, 2010, all of which were
originated residential mortgages. Net gains on these transactions were $13 million. This compares
to sales of $17 million of residential mortgages during the three months ended September 30, 2009
of which $14 million were originated residential mortgages and $3 million were previously
purchased from third parties. Net gains on these transactions were immaterial. We received
paydowns of $9.2 billion and $11.5 billion during the three months ended September 30, 2010 and
2009.
We retained $36.8 billion and $21.2 billion in first mortgages originated by Home Loans &
Insurance during the nine months ended September 30, 2010 and 2009. We securitized $2.1 billion
and $11.6 billion of residential mortgage loans into MBS which we retained during the nine months
ended September 30, 2010 and 2009. We recognized gains of $61 million on the securitizations
completed during the nine months ended September 30, 2010. We had no purchases of residential
mortgages related to ALM activities during the nine months ended September 30, 2010 and 2009. We
sold $412 million of residential mortgages during the nine months ended September 30, 2010 of
which $401 million were originated residential mortgages and $11 million were previously purchased
from third parties. Net gains on these transactions were $19 million. This compares to sales of
$5.8 billion during the nine months ended September 30, 2009, which were comprised of $5.1 billion
in originated residential mortgages and $651 million previously purchased from third parties. Net
gains on these transactions were $46 million. We received paydowns of $25.8 billion and $34.1
billion during the nine months ended September 30, 2010 and 2009.
Interest Rate and Foreign Exchange Derivative Contracts
Interest rate and foreign exchange derivative contracts are utilized in our ALM
activities and serve as an efficient tool to manage our interest rate and foreign exchange risk.
We use derivatives to hedge the variability in cash flows or changes in fair value on our balance
sheet due to interest rate and foreign exchange components. For additional information on our
hedging activities, see Note 4 Derivatives to the Consolidated Financial Statements.
Our interest rate contracts are generally non-leveraged generic interest rate and foreign
exchange basis swaps, options, futures and forwards. In addition, we use foreign exchange
contracts, including cross-currency interest rate swaps and foreign currency forward contracts, to
mitigate the foreign exchange risk associated with foreign currency-denominated assets and
liabilities. Table 54 shows the notional amounts, fair value, weighted-average receive fixed and
pay fixed rates, expected maturity and estimated duration of our open ALM derivatives at September
30, 2010 and December 31, 2009. These amounts do not include derivative hedges on our net
investments in consolidated foreign operations and MSRs.
Changes to the composition of our derivatives portfolio during the nine months ended
September 30, 2010 reflect actions taken for interest rate and foreign exchange rate risk
management. The decisions to reposition our derivatives portfolio are based upon the current
assessment of economic and financial conditions including the interest rate environment, balance
sheet composition and trends, and the relative mix of our cash and derivative positions. The
notional amount of our option positions increased to $7.6 billion at September 30, 2010 from $6.5
billion at December 31, 2009. Our interest rate swap positions, including foreign exchange
contracts, were a net receive fixed position of $390 million at September 30, 2010 compared to a
net receive fixed position of $52.2 billion at December 31, 2009. The decrease in the notional
levels of our interest rate swap position was driven by the net addition of $12.5 billion in pay
fixed swaps and $12.1 billion in foreign currency-denominated receive fixed swaps, offset by a
reduction of $8.5 billion in U.S. dollar-denominated receive fixed swaps. The notional amount of
our foreign exchange basis swaps was $212.8 billion and $122.8 billion at September 30, 2010 and
December 31, 2009. The $90.0 billion notional change was primarily due to new trade activity
during the nine months ended September 30, 2010 to mitigate cross currency basis risk on our
economic hedge portfolio. The increase in pay fixed swaps resulted from hedging newly purchased
U.S. Treasury Bonds with swaps and entering into additional pay fixed swaps to hedge variable rate
short-term liabilities. Our futures and forwards net notional
position, which reflects the net of long and short positions, was a long position of $2.5 billion
at September 30, 2010 compared to a long position of $10.6 billion at December 31, 2009.
198
The table below includes derivatives utilized in our ALM activities including those
designated as accounting and economic hedging instruments. The fair value of net ALM contracts
decreased $1.8 billion to a gain of $10.5 billion at September 30, 2010 from a gain of $12.3
billion at December 31, 2009. The decrease was primarily attributable to a loss from the changes
in the value of pay fixed interest rate swaps of $12.5 billion, option products of $605 million
and foreign exchange basis swaps of $270 million. The decrease was partially offset by changes in
the value of U.S. dollar-denominated receive fixed interest rate swaps of $7.2 billion and foreign
exchange contracts of $4.4 billion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset and Liability Management Interest Rate and Foreign Exchange Contracts |
September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
(Dollars in millions, average estimated |
|
Fair |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
duration in years) |
|
Value |
|
Total |
|
2010 |
|
2011 |
|
2012 |
|
2013 |
|
2014 |
|
Thereafter |
|
Duration |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive fixed interest rate swaps (1, 2) |
|
$ |
11,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.63 |
|
Notional amount |
|
|
|
|
|
$ |
102,095 |
|
|
$ |
1,772 |
|
|
$ |
8 |
|
|
$ |
36,201 |
|
|
$ |
7,663 |
|
|
$ |
7,097 |
|
|
$ |
49,354 |
|
|
|
|
|
Weighted-average fixed-rate |
|
|
|
|
|
|
3.95 |
% |
|
|
3.33 |
% |
|
|
1.00 |
% |
|
|
2.49 |
% |
|
|
3.95 |
% |
|
|
3.71 |
% |
|
|
5.09 |
% |
|
|
|
|
Pay fixed interest rate swaps (1) |
|
|
(11,364 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.84 |
|
Notional amount |
|
|
|
|
|
$ |
159,912 |
|
|
$ |
2,500 |
|
|
$ |
50,810 |
|
|
$ |
16,205 |
|
|
$ |
1,207 |
|
|
$ |
6,742 |
|
|
$ |
82,448 |
|
|
|
|
|
Weighted-average fixed-rate |
|
|
|
|
|
|
2.99 |
% |
|
|
1.82 |
% |
|
|
2.37 |
% |
|
|
2.15 |
% |
|
|
2.88 |
% |
|
|
2.33 |
% |
|
|
3.64 |
% |
|
|
|
|
Same-currency basis swaps (3) |
|
|
113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount |
|
|
|
|
|
$ |
128,067 |
|
|
$ |
154 |
|
|
$ |
10,714 |
|
|
$ |
48,013 |
|
|
$ |
23,870 |
|
|
$ |
21,011 |
|
|
$ |
24,305 |
|
|
|
|
|
Foreign exchange basis swaps (2, 4, 5) |
|
|
4,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount |
|
|
|
|
|
|
212,810 |
|
|
|
5,664 |
|
|
|
21,940 |
|
|
|
31,402 |
|
|
|
37,152 |
|
|
|
39,966 |
|
|
|
76,686 |
|
|
|
|
|
Option products (6) |
|
|
(432 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount |
|
|
|
|
|
|
7,643 |
|
|
|
60 |
|
|
|
631 |
|
|
|
2,092 |
|
|
|
2,091 |
|
|
|
603 |
|
|
|
2,166 |
|
|
|
|
|
Foreign exchange contracts (2, 5, 7) |
|
|
6,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount (8) |
|
|
|
|
|
|
99,024 |
|
|
|
46,957 |
|
|
|
6,236 |
|
|
|
4,897 |
|
|
|
8,086 |
|
|
|
13,026 |
|
|
|
19,822 |
|
|
|
|
|
Futures and forward rate contracts |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount (8) |
|
|
|
|
|
|
2,500 |
|
|
|
2,500 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
Net ALM contracts |
|
$ |
10,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
(Dollars in millions, average estimated |
|
Fair |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
duration in years) |
|
Value |
|
Total |
|
2010 |
|
2011 |
|
2012 |
|
2013 |
|
2014 |
|
Thereafter |
|
Duration |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive fixed interest rate swaps (1, 2) |
|
$ |
4,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.34 |
|
Notional amount |
|
|
|
|
|
$ |
110,597 |
|
|
$ |
15,212 |
|
|
$ |
8 |
|
|
$ |
35,454 |
|
|
$ |
7,333 |
|
|
$ |
8,247 |
|
|
$ |
44,343 |
|
|
|
|
|
Weighted-average fixed-rate |
|
|
|
|
|
|
3.65 |
% |
|
|
1.61 |
% |
|
|
1.00 |
% |
|
|
2.42 |
% |
|
|
4.06 |
% |
|
|
3.48 |
% |
|
|
5.29 |
% |
|
|
|
|
Pay fixed interest rate swaps (1) |
|
|
1,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.18 |
|
Notional amount |
|
|
|
|
|
$ |
104,445 |
|
|
$ |
2,500 |
|
|
$ |
50,810 |
|
|
$ |
14,688 |
|
|
$ |
806 |
|
|
$ |
3,729 |
|
|
$ |
31,912 |
|
|
|
|
|
Weighted-average fixed-rate |
|
|
|
|
|
|
2.83 |
% |
|
|
1.82 |
% |
|
|
2.37 |
% |
|
|
2.24 |
% |
|
|
3.77 |
% |
|
|
2.61 |
% |
|
|
3.92 |
% |
|
|
|
|
Same-currency basis swaps (3) |
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount |
|
|
|
|
|
$ |
42,881 |
|
|
$ |
4,549 |
|
|
$ |
8,593 |
|
|
$ |
11,934 |
|
|
$ |
5,591 |
|
|
$ |
5,546 |
|
|
$ |
6,668 |
|
|
|
|
|
Foreign exchange basis swaps (2, 4, 5) |
|
|
4,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount |
|
|
|
|
|
|
122,807 |
|
|
|
7,958 |
|
|
|
10,968 |
|
|
|
19,862 |
|
|
|
18,322 |
|
|
|
31,853 |
|
|
|
33,844 |
|
|
|
|
|
Option products (6) |
|
|
174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount |
|
|
|
|
|
|
6,540 |
|
|
|
656 |
|
|
|
2,031 |
|
|
|
1,742 |
|
|
|
244 |
|
|
|
603 |
|
|
|
1,264 |
|
|
|
|
|
Foreign exchange contracts (2, 5, 7) |
|
|
2,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount (8) |
|
|
|
|
|
|
103,726 |
|
|
|
63,158 |
|
|
|
3,491 |
|
|
|
3,977 |
|
|
|
6,795 |
|
|
|
10,585 |
|
|
|
15,720 |
|
|
|
|
|
Futures and forward rate contracts |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount (8) |
|
|
|
|
|
|
10,559 |
|
|
|
10,559 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net ALM contracts |
|
$ |
12,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At September 30, 2010 and December 31, 2009, the receive fixed interest rate swap notional
amounts that represented forward starting swaps and will not be effective until their respective
contractual start dates were $623 million and $2.5 billion, and the forward starting pay fixed swap
positions were $54.0 billion and $76.8 billion. |
|
(2) |
|
Does not include basis adjustments on fixed-rate debt issued by the Corporation and hedged
under fair value hedges using derivatives designated as hedging instruments that substantially
offset the fair values of these derivatives. |
|
(3) |
|
At September 30, 2010 and December 31, 2009, same-currency basis swaps consist of $128.1
billion and $42.9 billion in both foreign currency and U.S. dollar-denominated basis swaps in which
both sides of the swap are in the same currency. |
|
(4) |
|
Foreign exchange basis swaps consist of cross-currency variable interest rate swaps used
separately or in conjunction with receive fixed interest rate swaps. |
|
(5) |
|
Does not include foreign currency translation adjustments on certain foreign debt issued by the
Corporation which substantially offset the fair values of these derivatives. |
|
(6) |
|
Option products of $7.6 billion and $6.5 billion at September 30, 2010 and December 31, 2009
were comprised of $159 million and $177 million in purchased caps and $7.5 billion and $6.3 billion
in swaptions. |
|
(7) |
|
Foreign exchange contracts include foreign currency-denominated and cross-currency receive
fixed interest rate swaps as well as foreign currency forward rate contracts. Total notional amount
was comprised of $58.2 billion in foreign currency-denominated and cross-currency receive fixed
swaps and $40.8 billion in foreign currency forward rate contracts at September 30, 2010, and $46.0
billion in foreign currency-denominated and cross-currency receive fixed swaps and $57.7 billion in
foreign currency forward rate contracts at December 31, 2009. |
|
(8) |
|
Reflects the net of long and short positions. |
199
We use interest rate derivative instruments to hedge the variability in the cash flows
of our assets and liabilities, including certain compensation costs and other forecasted
transactions (collectively referred to as cash flow hedges). The net losses on both open and
terminated derivative instruments recorded in accumulated OCI, net-of-tax, were $4.0 billion and
$2.5 billion at September 30, 2010 and December 31, 2009. These net losses are expected to be
reclassified into earnings in the same period as the hedged cash flows affect earnings and will
decrease income or increase expense on the respective hedged cash flows. Assuming no change in
open cash flow derivative hedge positions and no changes to prices or interest rates beyond what
is implied in forward yield curves at September 30, 2010, the pre-tax net losses are expected to
be reclassified into earnings as follows: $1.7 billion, or 28 percent within the next year, 80
percent within five years, and 93 percent within 10 years, with the remaining seven percent
thereafter. For more information on derivatives designated as cash
flow hedges, see Note 4
Derivatives to the Consolidated Financial Statements.
In addition to the derivatives disclosed in Table 54, we hedge our net investment in foreign
operations determined to have functional currencies other than the U.S. dollar using forward
foreign exchange contracts that typically settle in less than 180 days, cross currency basis
swaps, foreign exchange options and foreign currency-denominated debt. We recorded after-tax gains
on derivatives and foreign currency-denominated debt in accumulated OCI associated with net
investment hedges which were offset by losses on our net investments in consolidated foreign
entities at September 30, 2010.
Mortgage Banking Risk Management
We originate, fund and service mortgage loans, which subject us to credit, liquidity and
interest rate risks, among others. We determine whether loans will be held for investment or held
for sale at the time of commitment and manage credit and liquidity risks by selling or
securitizing a portion of the loans we originate.
Interest rate risk and market risk can be substantial in the mortgage business. Fluctuations
in interest rates drive consumer demand for new mortgages and the level of refinancing activity,
which in turn, affects total origination and service fee income. Typically, a decline in mortgage
interest rates will lead to an increase in mortgage originations and fees and a decrease in the
value of the MSRs driven by higher prepayment expectations. Hedging the various sources of
interest rate risk in mortgage banking is a complex process that requires complex modeling and
ongoing monitoring. IRLCs and the related residential first mortgage LHFS are subject to interest
rate risk between the date of the IRLC and the date the loans are sold to the secondary market. To
hedge interest rate risk, we utilize forward loan sale commitments and other derivative
instruments including purchased options. These instruments are used as economic hedges of IRLCs
and residential first mortgage LHFS. At September 30, 2010 and December 31, 2009, the notional
amount of derivatives economically hedging the IRLCs and residential first mortgage LHFS was
$150.5 billion and $161.4 billion.
MSRs are nonfinancial assets created when the underlying mortgage loan is sold to investors
and we retain the right to service the loan. We use certain derivatives such as interest rate
options, interest rate swaps, forward settlement contracts, Eurodollar futures, as well as
mortgage-backed and U.S. Treasury securities as economic hedges of MSRs. The notional amounts of
the derivative contracts and other securities designated as economic hedges of MSRs at September
30, 2010 were $1.4 trillion and $66.9 billion, for a total notional amount of $1.5 trillion. At
December 31, 2009, the notional amounts of the derivative contracts and other securities
designated as economic hedges of MSRs were $1.3 trillion and $67.6 billion, for a total notional
amount of $1.4 trillion. For the three and nine months ended September 30, 2010, we recorded gains
in mortgage banking income of $2.2 billion and $7.1 billion related to the change in fair value of
these economic hedges as compared to gains (losses) of $1.3 billion and $(1.9) billion for the
same periods in 2009. For additional information on MSRs, see Note
16 Mortgage Servicing Rights
to the Consolidated Financial Statements and for more information on mortgage banking income, see
Home Loans & Insurance beginning on page 123.
Compliance Risk Management
Compliance risk is the risk posed by the failure to manage regulatory, legal and ethical
issues that could result in monetary damages, losses or harm to our reputation or image. The Seven
Elements of a Compliance Program® provides the framework for the compliance programs that are
consistently applied across the Corporation to manage compliance risk. This framework includes a
common approach to commitment and accountability, policies and procedures, controls and
supervision, monitoring and testing, regulatory change management, education and awareness, and
reporting. For more information on our Compliance Risk Management activities, refer to page 86 of
the MD&A of the Corporations 2009 Annual Report on Form 10-K.
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Operational Risk Management
The Corporation defines operational risk as the risk of loss resulting from inadequate
or failed internal processes, people and systems or from external events. Operational risk may
occur anywhere in the Corporation, not solely in operations functions, and its effects may extend
beyond financial losses. It includes legal risk but not strategic risk. Successful operational
risk management is particularly important to diversified financial services companies because of
the nature, volume and complexity of the financial services business. Under the Basel II Rules, an
operational loss event is an event that results in a loss and is associated with any of the
following seven operational loss event categories: internal fraud; external fraud; employment
practices and workplace safety; clients, products and business practices; damage to physical
assets; business disruption and system failures; and execution, delivery and process management.
Specific examples of loss events include robberies, internal fraud, processing errors and physical
losses from natural disasters.
We approach operational risk management from two perspectives: the enterprise and line of
business. The Operational Risk Committee, which reports to the Enterprise Risk Committee of the
Board, is responsible for operational risk policies, measurement and management, and control
processes. Within Global Risk Management, Corporate Operational Risk Management develops and
guides the strategies, policies, practices, controls and monitoring tools for assessing and
managing operational risks across the organization. For more information on potential risks
resulting from our foreclosure review processes, see Executive Summary
Recent Events on page 95.
For more information on our Operational Risk Management activities, refer to pages 86 and 87
of the MD&A of the Corporations 2009 Annual Report on Form 10-K.
Complex Accounting Estimates
Our
significant accounting principles, as described in Note 1 Summary of Significant
Accounting Principles to the Consolidated Financial Statements of the Corporations 2009 Annual
Report on Form 10-K are essential in understanding the MD&A. Many of our significant accounting
principles require complex judgments to estimate the values of assets and liabilities. We have
procedures and processes in place to facilitate making these judgments.
The more judgmental estimates are summarized below and in Complex Accounting Estimates
beginning on page 88 of the MD&A of the Corporations 2009 Annual Report on Form 10-K. We have
identified and described the development of the variables most important in the estimation
processes that, with the exception of accrued taxes, involve mathematical models to derive the
estimates. In many cases, there are numerous alternative judgments that could be used in the
process of determining the inputs to the models. Where alternatives exist, we have used the
factors that we believe represent the most reasonable value in developing the inputs. Actual
performance that differs from our estimates of the key variables could impact net income. Separate
from the possible future impact to net income from input and model variables, the value of our
lending portfolio and market sensitive assets and liabilities may change subsequent to the balance
sheet date, often significantly, due to the nature and magnitude of future credit and market
conditions. Such credit and market conditions may change quickly and in unforeseen ways and the
resulting volatility could have a significant, negative effect on future operating results. These
fluctuations would not be indicative of deficiencies in our models or inputs.
Level 3 Assets and Liabilities
Financial assets and liabilities whose values are based on prices or valuation
techniques that require inputs that are both unobservable and are significant to the overall fair
value measurement are classified as Level 3 under the fair value hierarchy established in
applicable accounting guidance. The Level 3 financial assets and liabilities include private
equity investments, consumer MSRs, ABS, highly structured, complex or long-dated derivative
contracts, structured notes and certain CDOs, for which there is not an active market for
identical assets from which to determine fair value or where sufficient, current market
information about similar assets to use as observable, corroborated data for all significant
inputs into a valuation model is not available. In these cases, the fair values of these Level 3
financial assets and liabilities are determined using pricing models, discounted cash flow
methodologies, a net asset value approach for certain structured securities, or similar techniques
for which the determination of fair value requires significant management judgment or estimation.
In the nine months ended September 30, 2010, there were no changes to the quantitative models, or
uses of such models, that resulted in a material adjustment to the Consolidated Statement of
Income.
Level 3 assets, before the impact of counterparty netting related to our derivative
positions, were $84.1 billion and $103.6 billion at September 30, 2010 and December 31, 2009 and
represented approximately 11 percent and 14 percent of assets measured at fair value (or four
percent and five percent of total assets). Level 3 liabilities, before the impact of counterparty
netting related to our derivative positions, were $16.5 billion and $21.8 billion at September 30,
2010 and
201
December 31,
2009 and represented approximately six percent and 10 percent of the
liabilities measured at fair value (or approximately one percent of total liabilities for both
period ends). At September 30, 2010, $17.6 billion, or eight percent, of trading account assets
were classified as Level 3 assets, and $38 million, or less than one percent, of trading account
liabilities, were classified as Level 3 liabilities. At September 30, 2010, $20.4 billion, or 28
percent, of derivative assets were classified as Level 3 assets, and $10.9 billion, or 22 percent,
of derivative liabilities were classified as Level 3 liabilities. See
Note 14 Fair Value
Measurements to the Consolidated Financial Statements for a tabular presentation of the fair
values of Level 1, 2 and 3 assets and liabilities at September 30, 2010 and December 31, 2009 and
detail of Level 3 activity for the three and nine months ended September 30, 2010 and 2009.
During the three months ended September 30, 2010, we recognized net gains of $893 million on
Level 3 assets and liabilities which were primarily gains on net derivatives, driven by income
earned on IRLCs related to the origination of mortgage loans that are held for sale which are
considered derivative instruments. These gains were partially offset by changes in the value of
MSRs as a result of a decline in interest rates. We also recorded pre-tax unrealized gains of $222
million in accumulated OCI on Level 3 assets during the three months ended September 30, 2010,
which were primarily related to non-agency RMBS.
During the nine months ended September 30, 2010, we recognized net gains of $3.1 billion on
Level 3 assets and liabilities which were primarily gains on net derivatives driven by income
earned on IRLCs related to the origination of mortgage loans that are held for sale, which are
considered derivative instruments, and gains recognized on private equity investments which are
included in other assets. These gains were partially offset by changes in the value of MSRs as a
result of a decline in interest rates and other-than-temporary impairment losses on non-agency
RMBS. We also recorded pre-tax unrealized losses of $301 million in accumulated OCI on Level 3
assets and liabilities during the nine months ended September 30, 2010, primarily related to
non-agency RMBS.
Level 3 financial instruments, such as our consumer MSRs, may be economically hedged with
derivatives not classified as Level 3; therefore, gains or losses associated with Level 3
financial instruments may be offset by gains or losses associated with financial instruments
classified in other levels of the fair value hierarchy. The gains and losses recorded in earnings
did not have a significant impact on our liquidity or capital resources.
We conduct a review of our fair value hierarchy classifications on a quarterly basis.
Transfers into or out of Level 3 are made if the significant inputs used in the financial models
measuring the fair values of the assets and liabilities became unobservable or observable,
respectively, in the current marketplace. These transfers are effective as of the beginning of the
quarter.
During the three months ended September 30, 2010, the more significant transfers out of Level
3 included $1.5 billion of trading account assets driven by increased price verification of
corporate debt securities and non-U.S. government and agency securities.
During the nine months ended September 30, 2010, the more significant transfers into Level 3
included $3.0 billion of trading account assets, $3.4 billion of AFS debt securities, $1.1 billion
of net derivative contracts and $1.4 billion of long-term debt. Transfers into Level 3 for trading
account assets were driven by reduced price transparency as a result of lower levels of trading
activity for certain municipal auction rate securities and corporate debt securities as well as a
change in valuation methodology for certain ABS to a discounted cash flow model. Transfers into
Level 3 for AFS debt securities
were due to an increase in the number of non-agency RMBS and other taxable securities priced using
a discounted cash flow model. Transfers into Level 3 for net derivative contracts were primarily
related to a lack of price observability for certain credit default and total return swaps.
Transfers into Level 3 for long-term debt were attributable to increases in the impact of
unobservable inputs on the value of certain equity linked structured notes.
During the nine months ended September 30, 2010, the more significant transfers out of Level
3 were $3.1 billion of trading account assets and $1.4 billion of long-term debt. Transfers out of
Level 3 for trading account assets were driven by increased price verification of certain
mortgage-backed securities, corporate debt and non-U.S. government and agency securities and
increased price observability of index floaters based on the BMA curve held in corporate
securities, trading loans and other. Transfers out of Level 3 for long-term debt are the result of
a decrease in the significance of unobservable pricing inputs for certain equity linked structured
notes.
Goodwill and Intangible Assets
The nature of and accounting for goodwill and intangible assets are discussed in detail
in Note 9 Goodwill and Intangible Assets to the Consolidated Financial Statements and also in
Note 10 Goodwill and Intangible Assets and Note 1
Summary of Significant Accounting
Principles to the Consolidated Financial Statements of the Corporations 2009
202
Annual Report on
Form 10-K as well as Complex Accounting Estimates beginning on page 88 of the MD&A of the
Corporations 2009 Annual Report on Form 10-K. Goodwill is reviewed for potential impairment at
the reporting unit level on an annual basis, which for the Corporation is performed as of June 30,
or in interim periods if events or circumstances indicate a potential impairment. A reporting unit
is a business segment or one level below. As reporting units are determined after an acquisition
or evolve with changes in business strategy, goodwill is assigned to reporting units and it no
longer retains its association with a particular acquisition. All of the revenue streams and
related activities of a reporting unit, whether acquired or organic, are available to support the
value of the goodwill.
The Corporations common stock price, consistent with common stock prices in the financial
services industry, has been more volatile during the past 24 months primarily due to the continued
uncertainty in the financial markets as well as recent financial reforms including the Financial
Reform Act. During this period, our market capitalization remained below our recorded book value.
The fair value of all reporting units in aggregate as of the June 30, 2010 annual impairment test
was estimated to be $264.4 billion and the common stock market capitalization of the Corporation
as of that date was $144.2 billion ($131.4 billion at September 30, 2010). The implied control
premium, the amount a buyer is willing to pay over the current market price of a publicly traded
stock to obtain control, was 63 percent after taking into consideration the outstanding preferred
stock of $18.0 billion as of June 30, 2010. As none of our reporting units are publicly traded,
individual reporting unit fair value determinations are not directly correlated to the
Corporations stock price. Although we believe it is reasonable to conclude that market
capitalization could be an indicator of fair value over time, we do not believe that recent
fluctuations in our market capitalization as a result of the market dislocation are reflective of
actual cash flows and the fair value of our individual reporting units.
Estimating the fair value of reporting units is a subjective process that involves the use of
estimates and judgments, particularly related to cash flows, the appropriate discount rates and an
applicable control premium. The fair values of the reporting units were determined using a
combination of valuation techniques consistent with the market approach and the income approach
and included the use of independent valuation specialists.
The market approach we used estimates the fair value of the individual reporting units by
incorporating any combination of the tangible capital, book capital and earnings multiples from
comparable publicly traded companies in industries similar to that of the reporting unit. The
relative weight assigned to these multiples varies among the reporting units based upon
qualitative and quantitative characteristics, primarily the size and relative profitability of the
respective reporting unit as compared to the comparable publicly traded companies. Since the fair
values determined under the market approach are representative of a noncontrolling interest, a
control premium was added to arrive at the reporting units estimated fair values on a controlling
basis.
For purposes of the income approach, discounted cash flows were calculated by taking the net
present value of estimated cash flows using estimated future cash flows and an appropriate
terminal value. Our discounted cash flow analysis employs a capital asset pricing model in
estimating the discount rate (i.e., cost of equity financing) for each reporting unit. The inputs
to this model include the risk-free rate of return, beta, which is a measure of the level of
non-diversifiable risk associated with comparable companies for each specific reporting unit,
market equity risk premium and in certain cases an unsystematic (company-specific) risk factor.
The unsystematic risk factor is the input that specifically addresses uncertainty related to our
projections of earnings and growth, including the uncertainty related to loss expectations. We
utilized discount rates that we believe adequately reflect the risk and uncertainty in the
financial markets generally and specifically in our internally developed forecasts. Expected rates
of equity returns were estimated based on
historical market returns and risk/return rates for similar industries of the reporting unit. We
use our internal forecasts to estimate future cash flows and actual results may differ from
forecasted results.
During the third quarter, we completed our annual goodwill impairment test as of June 30,
2010 for all of our reporting units. In performing the first step of the annual impairment
analysis, we compared the fair value of each reporting unit to its current carrying amount,
including goodwill. To determine fair value, we utilized a combination of a market approach and an
income approach. Under the market approach, we compared earnings and equity multiples of the
individual reporting units to multiples of public companies comparable to the individual reporting
units. The control premiums used in the June 30, 2010 annual impairment test ranged from 25
percent to 35 percent. Under the income approach, we updated our assumptions to reflect the
current market environment. The discount rates used in the June 30, 2010 annual impairment test
ranged from 11 percent to 15 percent depending on the relative risk of a reporting unit. Growth
rates developed by management for individual revenue and expense items in each reporting unit
ranged from (1.0) percent to 5.9 percent. For certain revenue and expense items that have been
significantly affected by the current economic environment and financial reform, management
developed separate long-term forecasts. As part of the June 30, 2010 annual test, the fair value
of Global Card Services was estimated under the income approach and did not consider the impact of
any potential future changes which may result from the Financial Reform Act which was not signed
into law until the third quarter.
Based on the results of step one of the annual impairment test, we determined that the
carrying amount of the Home Loans & Insurance and Global Card Services reporting units, including
goodwill, exceeded their fair value. The carrying
203
amount of the reporting unit, fair value of the
reporting unit and goodwill for Home Loans & Insurance were $27.1 billion, $22.5 billion and $4.8
billion, respectively, and for Global Card Services were $40.1 billion, $40.1 billion and $22.3
billion, respectively. Therefore, we performed step two of the goodwill impairment test for these
reporting units as of June 30, 2010. For all other reporting units, step two was not required as
their fair value exceeded their carrying value indicating there was no impairment.
In step two for both reporting units, we compared the implied fair value of each reporting
units goodwill with the carrying amount of that goodwill. We determined the implied fair value of
goodwill for a reporting unit by assigning the fair value of the reporting unit to all of the
assets and liabilities of that unit, including any unrecognized intangible assets, as if the
reporting unit had been acquired in a business combination. The excess of the fair value of the
reporting unit over the amounts assigned to its assets and liabilities is the implied fair value
of goodwill. Significant assumptions in measuring the fair value of the assets and liabilities of
both reporting units including discount rates, loss rates and interest rates were updated to
reflect the current economic conditions. Based on the results of step two of the impairment test
as of June 30, 2010, we determined that goodwill was not impaired in either Home Loans & Insurance
or Global Card Services.
The table below shows goodwill assigned to the individual reporting units and the fair
value as a percentage of the carrying value as of our June 30,
2010 annual impairment test.
|
|
|
|
|
|
|
|
|
Table 55 |
|
|
|
|
|
|
|
|
Goodwill by Reporting Unit |
|
|
|
June 30, 2010 |
|
|
|
Estimated Fair Value |
|
|
|
|
as a % of Allocated |
|
|
(Dollars in billions) |
|
Carrying Value |
Goodwill |
|
|
Deposits |
|
|
158.5 |
% |
|
$ |
17.9 |
|
Global Card Services |
|
|
99.9 |
|
|
|
22.3 |
|
Home Loans & Insurance |
|
|
83.0 |
|
|
|
4.8 |
|
Global Commercial Banking |
|
|
116.1 |
|
|
|
20.7 |
|
Global Banking & Markets |
|
|
|
|
|
|
|
|
Global Markets |
|
|
147.2 |
|
|
|
3.3 |
|
Global Corporate & Investment Banking |
|
|
136.9 |
|
|
|
6.9 |
|
Global Wealth & Investment Management |
|
|
|
|
|
|
|
|
U.S. Trust |
|
|
119.0 |
|
|
|
4.4 |
|
Merrill Lynch Global Wealth Management |
|
|
179.7 |
|
|
|
5.2 |
|
Retirement & Philanthropic Services |
|
|
725.1 |
|
|
|
0.3 |
|
|
In estimating the fair value of the reporting units in step one of the goodwill
impairment analysis, the fair values can be sensitive to changes in the projected cash flows and
assumptions. In some instances, minor changes in the assumptions
could impact whether the fair value of a reporting unit is greater than its carrying amount.
Furthermore, a prolonged decrease or increase in a particular assumption would eventually lead to
the fair value of a reporting unit being less than its carrying amount. Also, to the extent step
two of the goodwill analysis is required, changes in the estimated fair values of the individual
assets and liabilities may impact other estimates of fair value for assets or liabilities and
result in a different amount of implied goodwill, and ultimately the amount of goodwill
impairment, if any.
Given the results of our annual impairment test and due to continued stress for Home Loans &
Insurance as a result of current market conditions, we concluded, consistent with previous
quarters, that an additional impairment analysis should be performed
for this reporting unit during the third quarter ended September 30, 2010. In step one of the goodwill impairment analysis, the fair value of Home Loans
& Insurance was estimated with equal weighting assigned to the market approach and the income
approach. Under the market approach valuation, significant assumptions were consistent with the
assumptions used in our annual impairment tests as of June 30, 2010 and included market multiples
and a control premium. The significant assumptions for the valuation of Home Loans & Insurance
under the income approach included cash flow estimates, the discount rate and the terminal value. Consistent with the June 30, 2010 annual impairment test, the results of step
one for Home Loans & Insurance indicated that the carrying amount exceeded the fair value. The
carrying amount of the reporting unit, fair value of the reporting unit and goodwill for Home
Loans & Insurance were $25.6 billion, $25.5 billion and $4.8 billion, respectively. The estimated
fair value as a percent of the carrying amount at September 30, 2010 was 99.8 percent. Under step
two of the goodwill impairment analysis for the reporting unit, significant assumptions in
measuring the fair value of the assets and liabilities of the reporting unit included discount
rates, loss rates and interest rates. Based on the results of step two of the impairment test, we
determined that goodwill was not impaired in Home Loans & Insurance.
In addition, we stressed the fair value of Home Loans & Insurance as determined in step one to consider the uncertainty
associated with the risks related to representations and warranties. The results of the stress test supported the conclusion
that goodwill was not impaired.
In the future, continued
uncertainty or the occurrence of certain unforeseen events relating
to the risks associated to
representations and warranties, mortgage servicing compliance or our foreclosure processes could
result in an adverse change in the estimated
204
fair
value of Home Loans & Insurance. Such an adverse change,
if significant, may result in impairment of goodwill in Home Loans & Insurance.
On July 21, 2010, the Financial Reform Act was signed into law. Under the Financial Reform
Act and its amendment to the Electronic Fund Transfer Act, the Federal Reserve must adopt rules
within nine months of enactment of the Financial Reform Act regarding the interchange fees that
may be charged with respect to electronic debit transactions. Those rules will take effect one
year after enactment of the Financial Reform Act. The Financial Reform Act and the applicable
rules are expected to materially reduce the future revenues generated by the debit card business
of the Corporation. However, we expect to implement a number of
actions that will mitigate a good portion of
the impact when the laws and regulations become effective.
Our consumer and small business card products, including the debit card business, are part of
an integrated platform within Global Card Services. Our current estimate of revenue loss due to
the Financial Reform Act will be approximately $2.0 billion annually based on current volumes. Accordingly, we performed an
impairment test for Global Card Services during the quarter
ended September 30, 2010. In step one of the impairment
test, the fair value of Global Card Services was estimated under the income approach where the
significant assumptions included the discount rate, terminal value, expected loss rates and
expected new account growth. We also updated our estimated cash flows valuation to reflect the
current strategic plan forecast and other portfolio assumptions. Based on the results of step one
of the impairment test, we determined that the carrying amount of Global Card Services, including
goodwill, exceeded the fair value. The carrying amount of the reporting unit, fair value of the
reporting unit and goodwill were $39.2 billion, $25.9 billion and $22.3 billion, respectively.
Accordingly, we performed step two of the goodwill impairment test for this reporting unit. In
step two, we compared the implied fair value of the reporting units goodwill with the carrying
amount of that goodwill. Under step two of the impairment test, significant assumptions in
measuring the fair value of the assets and liabilities including discount rates, loss rates and
interest rates were updated to reflect the current economic conditions. Based on the results of
this third quarter goodwill impairment test for Global Card Services, the carrying value of
the goodwill assigned to the reporting unit exceeded the implied fair value by $10.4 billion.
Accordingly, we recorded a non-cash, non-tax deductible goodwill impairment charge of $10.4
billion to reduce the carrying value of goodwill in Global Card
Services from $22.3 billion to $11.9 billion during the
quarter ended September 30, 2010. The goodwill impairment charge exceeded the previously announced
range due to adjustments in key assumptions and updates to models used in determining the fair
values of the business. The goodwill impairment analysis includes limited mitigation actions to
recapture lost revenue. Although we have identified other potential mitigation actions, the impact
of these actions going forward did not reduce the goodwill impairment charge because these actions
are in the early stages of development and, additionally, certain of them may impact segments
other than Global Card Services (e.g. Deposits). The impairment charge had no impact on the
Corporations reported Tier 1 and tangible equity ratios.
Representations and Warranties
We securitize first-lien mortgage loans generally in the form of MBS guaranteed by GSEs.
In addition, in prior years, legacy companies and certain subsidiaries have sold pools of
first-lien mortgage loans and home equity loans as private-label MBS or in the form of whole
loans. In connection with these securitizations and whole loan sales,
we or our subsidiaries or legacy companies
made various representations and warranties. The methodology used to estimate the liability for
representations and warranties is a function of the representations and warranties given and
considers a variety of factors, which include depending upon the counterparty, actual defaults,
estimated future defaults, historical loss experience, probability that we will receive a
repurchase request, number of payments made by the borrower prior to default and probability that we will be
required to repurchase a loan.
Representations and warranties expense may vary significantly each period as the methodology
used to estimate the expense continues to be refined based on the level and type of repurchase
requests presented, defects identified, the latest experience gained on repurchase requests and
other relevant facts and circumstances. For those claims where we have established a
representations and warranties liability as discussed on page 40
in Note 8 Securitizations and Other Variable Interest
Entities to the Consolidated Financial Statements, an assumed simultaneous increase or decrease of 10
percent in estimated future defaults, loss severity and the net repurchase rate would result in an
increase or decrease of approximately $800 million in the representations and warranties liability as of
September 30, 2010. These sensitivities are hypothetical and are intended to provide an indication
of the impact of a significant change in these key assumptions on the representations and
warranties liability. In reality, changes in one assumption may result in changes in other
assumptions, which may or may not counteract the sensitivity.
For additional information on representations and warranties, see Off-Balance Sheet
Arrangements and Contractual Obligations Representations and Warranties on page 139, Note 8
Securitizations and Other Variable Interest Entities to the Consolidated Financial Statements,
Note 11 Commitments and Contingencies to the Consolidated Financial Statements and Note 14
Commitments and Contingencies to the Consolidated Financial Statements of the Corporations 2009
Annual Report on Form 10-K.
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Glossary
Alt-A Mortgage Alternative-A mortgage, a type of U.S. mortgage that, for various reasons,
is considered riskier than A-paper, or prime, and less risky than subprime, the riskiest
category. Alt-A interest rates, which are determined by credit risk, therefore tend to be between
those of prime and subprime home loans. Typically, Alt-A mortgages are characterized by borrowers
with less than full documentation, lower credit scores and higher LTVs.
Assets in Custody Consist largely of custodial and non-discretionary trust assets excluding
brokerage assets administered for customers. Trust assets encompass a broad range of asset types
including real estate, private company ownership interest, personal property and investments.
Assets Under Management (AUM) The total market value of assets under the investment advisory
and discretion of GWIM which generate asset management fees based on a percentage of the assets
market values. AUM reflects assets that are generally managed for institutional, high net-worth
and retail clients and are distributed through various investment products including mutual funds,
other commingled vehicles and separate accounts.
Bridge Financing A loan or security that is expected to be replaced by permanent financing
(debt or equity securities, loan syndication or asset sales) prior to the maturity date of the
loan. Bridge loans may include an unfunded commitment, as well as funded amounts, and are
generally expected to be retired in one year or less.
Client Brokerage Assets Include client assets which are held in brokerage accounts. This
includes non-discretionary brokerage and fee-based assets which generate brokerage income and
asset management fee revenue.
Client Deposits Includes GWIM client deposit accounts representing both consumer and commercial
demand, regular savings, time, money market, sweep and foreign accounts.
Committed Credit Exposure Includes any funded portion of a facility plus the unfunded portion
of a facility on which the lender is legally bound to advance funds during a specified period
under prescribed conditions.
Core Net Interest Income Net interest income on a fully taxable-equivalent basis excluding the
impact of market-based activities.
Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) Legislation
signed into law on May 22, 2009 to provide changes to credit card industry practices including
significantly restricting credit card issuers ability to change interest rates and assess fees to
reflect individual consumer risk, change the way payments are applied and requiring changes to
consumer credit card disclosures. The majority of the provisions became effective in February
2010.
Credit Default Swap (CDS) A derivative contract that provides protection against the
deterioration of credit quality and allows one party to receive payment in the event of default by
a third party under a borrowing arrangement.
Excess Servicing Income For certain assets that have been securitized, interest income, fee
revenue and recoveries in excess of interest paid to the investors, gross credit losses and other
trust expenses related to the securitized receivables are all classified as excess servicing
income, which is a component of card income. Excess servicing income also includes the changes in
fair value of the Corporations card-related retained interests.
Interest-only Strip A residual interest in a securitization trust representing the right to
receive future net cash flows from securitized assets after payments to third party investors and
net credit losses. These arise when assets are transferred to a SPE as part of an asset
securitization transaction qualifying for sale treatment under GAAP.
Interest Rate Lock Commitment (IRLC) Commitment with a loan applicant in which the loan terms,
including interest rate and price, are guaranteed for a designated period of time subject to
credit approval.
Letter of Credit A document issued on behalf of a customer to a third party promising to pay
the third party upon presentation of specified documents. A letter of credit effectively
substitutes the issuers credit for that of the customer.
Loan-to-value (LTV) A commonly used credit quality metric that is reported in terms of ending
and average LTV. Ending LTV is calculated as the outstanding carrying value of the loan at the end
of the period divided by the estimated value of the property securing the loan. Estimated property
values are primarily determined by utilizing the Case-Schiller
206
Home Index, a widely used index based on data from repeat sales of single family homes.
Case-Schiller indices are updated quarterly and are reported on a three-month or one-quarter lag.
An additional metric related to LTV is combined loan-to-value (CLTV) which is similar to the LTV
metric, yet combines the outstanding balance on the residential mortgage loan and the outstanding
carrying value on the home equity loan or available line of credit, both of which are secured by
the same property, divided by the estimated value of the property. A LTV of 100 percent reflects a
loan that is currently secured by a property valued at an amount exactly equal to the carrying
value or available line of the loan. Under certain circumstances, estimated values can also be
determined by utilizing an automated valuation method (AVM) or Mortgage Risk Assessment
Corporation (MRAC) index. An AVM is a tool that estimates the value of a property by reference to
large volumes of market data including sales of comparable properties and price trends specific to
the MSA in which the property being valued is located. The MRAC index is similar to the
Case-Schiller Home Index in that it is an index that is based on data from repeat sales of single
family homes and is reported on a lag.
Making Home Affordable Program (MHA) A U.S. Treasury program to reduce the number of
foreclosures and make it easier for homeowners to refinance loans. The program is comprised of the
Home Affordable Modification Program (HAMP) which provides guidelines on loan modifications and is
designed to help at-risk homeowners avoid foreclosure by reducing monthly mortgage payments and
provides incentives to lenders to modify all eligible loans that fall under the program guidelines
and the Home Affordable Refinance Program (HARP) which is available to homeowners who have a
proven payment history on an existing mortgage owned by FNMA or FHLMC and is designed to help
eligible homeowners refinance their mortgage loans to take advantage of current lower mortgage
rates or to refinance ARMs into more stable fixed-rate mortgages. In addition, the Second Lien
Program is a part of the MHA. For more information on this program, see the separate definition
for the Second Lien Program.
Mortgage Servicing Right (MSR) The right to service a mortgage loan when the underlying loan is
sold or securitized. Servicing includes collections for principal, interest and escrow payments
from borrowers and accounting for and remitting principal and interest payments to investors.
Net Interest Yield Net interest income divided by average total interest-earning assets.
Nonperforming Loans and Leases Includes loans and leases that have been placed on nonaccrual
status, including nonaccruing loans whose contractual terms have been restructured in a manner
that grants a concession to a borrower experiencing financial difficulties (troubled debt
restructurings or TDRs). Loans accounted for under the fair value option, purchased
credit-impaired loans and loans held-for-sale are not reported as nonperforming loans and leases.
Consumer credit card loans, business card loans, consumer loans not secured by real estate, and
consumer loans secured by real estate where repayments are insured by the Federal Housing
Administration are not placed on nonaccrual status and are, therefore, not reported as
nonperforming loans and leases.
Purchased Credit-impaired Loan A loan purchased as an individual loan, in a portfolio of loans
or in a business combination with evidence of deterioration in credit quality since origination
for which it is probable, upon acquisition, that the investor will be unable to collect all
contractually required payments. These loans are written down to fair value at the acquisition
date.
Second Lien Program (2MP) A MHA program announced on April 28, 2009 by the U.S. Treasury that
focuses on creating a comprehensive affordability solution for homeowners. By focusing on shared
efforts with lenders to reduce second mortgage payments, pay-for-success incentives for servicers,
investors and borrowers, and a payment schedule for extinguishing second mortgages, the 2MP is
designed to help up to 1.5 million homeowners. The program is designed to ensure that first and
second lien holders are treated fairly and consistently with priority of liens, and offers
automatic modification of a second lien when a first lien is modified.
Subprime Loans Although a standard industry definition for subprime loans (including subprime
mortgage loans) does not exist, the Corporation defines subprime loans as specific product
offerings for higher risk borrowers, including individuals with one or a combination of high
credit risk factors, such as low FICO scores (generally less than 620 for secured products and 660
for unsecured products), high debt to income ratios and inferior payment history.
Super Senior CDO Exposure Represents the most senior class of commercial paper or notes that
are issued by CDO vehicles. These financial instruments benefit from the subordination of all
other securities, including AAA-rated securities, issued by CDO vehicles.
Troubled Asset Relief Program (TARP) A program established under the Emergency Economic
Stabilization Act of 2008 by the U.S. Treasury to, among other things, invest in financial
institutions through capital infusions and purchase
207
mortgages, MBS and certain other financial instruments from financial institutions, in an
aggregate amount up to $700 billion, for the purpose of stabilizing and providing liquidity to the
U.S. financial markets.
Troubled
Debt Restructurings (TDRs) Loans whose contractual terms have been restructured in a
manner that grants a concession to a borrower experiencing financial difficulties. Concessions
could include a reduction in the interest rate on the loan, payment extensions, forgiveness of
principal, forbearance or other actions intended to maximize collection. TDRs are reported as
nonperforming loans and leases while on nonaccrual status. TDRs that are on accrual status are
reported as performing TDRs through the end of the calendar year in which the restructuring
occurred or the year in which they are returned to accrual status. In addition, if accruing TDRs
bear less than a market rate of interest at the time of modification, they are reported as
performing TDRs throughout their remaining lives.
Value-at-risk (VaR) A VaR model estimates a range of hypothetical scenarios to calculate a
potential loss which is not expected to be exceeded with a specified confidence level. VaR is a
key statistic used to measure and manage market risk.
208
Acronyms
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ABS
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Asset-backed securities |
AFS
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Available-for-sale |
ALM
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Asset and liability management |
ALMRC
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Asset Liability Market Risk Committee |
ARM
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Adjustable-rate mortgage |
ARS
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Auction rate securities |
BPS
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Basis points |
CDO
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Collateralized debt obligation |
CES
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Common Equivalent Securities |
CMBS
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Commercial mortgage-backed securities |
CRA
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Community Reinvestment Act |
CRC
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Credit Risk Committee |
FASB
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Financial Accounting Standards Board |
FDIC
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Federal Deposit Insurance Corporation |
FFIEC
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Federal Financial Institutions Examination Council |
FHA
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Federal Housing Administration |
FHLMC
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Federal Home Loan Mortgage Corporation |
FICC
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Fixed income, currencies and commodities |
FICO
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Fair Isaac Corporation (credit score) |
FNMA
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Federal National Mortgage Association |
FSA
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Financial Services Authority |
FTE
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Fully taxable-equivalent |
GAAP
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Generally accepted accounting principles in the United States of America |
GNMA
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Government National Mortgage Association |
GRC
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Global Markets Risk Committee |
GSE
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Government-sponsored enterprise |
HAFA
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Home Affordable Foreclosure Alternatives |
IRLC
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Interest rate lock commitments |
LHFS
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Loans held-for-sale |
LIBOR
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London InterBank Offered Rate |
MBS
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Mortgage-backed securities |
MD&A
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
MSA
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Metropolitan statistical area |
OCI
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Other comprehensive income |
OTC
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Over-the-counter |
OTTI
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Other-than-temporary impairment |
PPI
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Payment protection insurance |
QSPE
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Qualifying special purpose entity |
RMBS
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Residential mortgage-backed securities |
ROC
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Risk Oversight Committee |
ROTE
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Return on average tangible shareholders equity |
SBLCs
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Standby letters of credit |
SEC
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Securities and Exchange Commission |
SPE
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Special purpose entity |
VIE
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Variable interest entity |
209
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Market Risk Management beginning on page 192 in the MD&A and the sections referenced
therein for Quantitative and Qualitative Disclosures about Market Risk.
Item 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
As of the end of the period covered by this report and pursuant to Rule 13a-15(b) of the
Securities Exchange Act of 1934 (Exchange Act), the Corporations management, including the Chief
Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness and
design of the Corporations disclosure controls and procedures (as that term is defined in Rule
13a-15(e) of the Exchange Act). Based upon that evaluation, the Corporations Chief Executive
Officer and Chief Financial Officer concluded that the Corporations disclosure controls and
procedures were effective, as of the end of the period covered by this report, in recording,
processing, summarizing and reporting information required to be disclosed by the Corporation in
reports that it files or submits under the Exchange Act, within the time periods specified in the
Securities and Exchange Commissions rules and forms.
Changes in internal controls
There have been no changes in the Corporations internal control over financial
reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended September
30, 2010 that have materially affected or are reasonably likely to materially affect the
Corporations internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
See Litigation and Regulatory Matters in Note 11 Commitments and Contingencies to the
Consolidated Financial Statements, which is incorporated by reference in this Item 1, for
litigation and regulatory disclosure that supplements the disclosure in Note 14 Commitments and
Contingencies to the Consolidated Financial Statements of the Corporations 2009 Annual Report on
Form 10-K and in Note 11 Commitments and Contingencies to the Consolidated Financial Statements
of the Corporations Quarterly Reports on Form 10-Q for the quarters ended March 31, 2010 and June
30, 2010.
Item 1A. Risk Factors
There are no material changes from the risk factors set forth under Part I, Item1A. Risk
Factors, in the Corporations 2009 Annual Report on Form 10-K or under Part II, Item 1A. Risk
Factors, in the Corporations Quarterly Report on Form 10-Q for the quarter ended June 30, 2010,
other than the addition of the following risk factor.
We recently temporarily suspended our foreclosure sales nationally to conduct an assessment
of our foreclosure processes. Subsequently, numerous state and federal investigations of alleged
irregularities in foreclosure processes across our industry have been initiated. We
have incurred liabilities and are facing additional claims
from GSEs and monolines related to representations and warranties and we may face
similar claims from private-label RMBS investors which, if successful, could result in significant
repurchase obligations.
On October 1, 2010, we voluntarily stopped taking foreclosure proceedings to judgment in
states where foreclosure requires a court order following a legal proceeding. On October 8, 2010,
we stopped foreclosure sales in all states in order to complete an assessment of the related
business processes. Our review involves an assessment of the foreclosure process, including a
review of completed foreclosure affidavits in pending proceedings.
We recently announced that we had completed our assessment of our foreclosure affidavit
process in the 23 states where foreclosure requires a court order following a legal proceeding. We
continue to assess our processes in the other 27 states and intend to implement enhancements as
appropriate.
210
Subsequent to our announcements that we were temporarily suspending foreclosure sales,
law enforcement authorities in all 50 states and the United States Department of Justice and other
federal agencies have stated they are investigating whether mortgage servicers have had
irregularities in their foreclosure practices. Those investigations, as well as any other
governmental or regulatory scrutiny of our foreclosure processes, could result in fines, penalties
or other equitable remedies and result in significant legal costs in responding to governmental
investigations and possible litigation.
While we cannot predict the ultimate impact of the temporary delay in foreclosure sales, or
any issues that may arise as a result of alleged irregularities with respect to previously
completed foreclosure activities, we may be subject to additional borrower and non-borrower
litigation and governmental and regulatory scrutiny related to our past and current foreclosure
activities. Accordingly, delays in foreclosure sales, including any delays beyond those currently
anticipated, our process enhancements and any issues that may arise out of alleged irregularities
in our foreclosure processes could increase the costs associated with our mortgage operations.
We may also face negative reputational costs from the foreclosure delays and the public
attention given to alleged foreclosure irregularities which could reduce our future business
opportunities in this area or cause that business to be on less favorable terms to us.
For additional information of our foreclosure assessment, see Recent Events beginning on page
95.
Significant attention has recently been focused on representations and warranties provided by
the Corporation, legacy companies and certain subsidiaries with respect to mortgage loans sold to
or insured by the GSEs, monolines and private-label RMBS. For additional information about our
representations and warranties exposure and past activities, see Note 8 Securitizations and
Other Variable Interest Entities to the Consolidated Financial Statements beginning on page 34 and
Representations and Warranties in the MD&A beginning on page 139.
Recently, Countrywide Home Loans Servicing LP (which changed its name to BAC Home Loans
Servicing, LP), which is a wholly-owned subsidiary of the Corporation, received a letter, as
master servicer under certain pooling and servicing agreements, for 115 private-label RMBS
transactions, from eight investors purportedly owning interests in RMBS issued in the
transactions. The RMBS issued in the transactions have an original and current principal balance
of approximately $104 billion and $46 billion, respectively. The letter asserts breaches of
certain servicing obligations, including an alleged failure
to provide notice to the trustee and the other parties to the pooling and servicing agreements of
breaches of representations and warranties with respect to mortgage loans included in the
transactions, and states that a failure to remedy the alleged servicing breaches will constitute
an event of default if not remedied within 60 days of the date of the letter. The master servicer
intends to challenge these assertions and fully enforce its rights under the pooling and servicing
agreements. We believe these purported investors may, in the future, attempt to obtain loan files
and submit claims for breaches of representations and warranties on private-label RMBS issued in
those transactions. Successful efforts by these and other private-label RMBS investors asserting
similar claims could result in significant repurchase obligations.
One or more of the foregoing matters could have a material adverse effect on our results of
operations and financial condition.
211
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The table below presents share repurchase activity for the three months ended September
30, 2010. The primary source of funds for cash distributions by the Corporation to its
shareholders is dividends received from its banking subsidiaries. Each of the banking subsidiaries
is subject to various regulatory policies and requirements relating to the payment of dividends,
including requirements to maintain capital above regulatory minimums. All of the Corporations
preferred stock outstanding has preference over the Corporations common stock with respect to the
payment of dividends.
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Weighted- |
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Shares Purchased as |
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(Dollars in millions, except per share |
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Common Shares |
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average Per |
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Part of Publicly |
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Remaining Buyback Authority |
information; shares in thousands) |
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Repurchased (1) |
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Share Price |
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Announced Programs |
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Amounts |
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Shares |
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July 1-31, 2010 |
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633 |
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$ |
13.99 |
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- |
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$ |
- |
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- |
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August 1-31, 2010 |
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132 |
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13.71 |
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- |
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- |
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- |
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September 1-30, 2010 |
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39 |
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14.39 |
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- |
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- |
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- |
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Three months ended September 30, 2010 |
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804 |
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13.96 |
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(1) |
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Consists of shares acquired by the Corporation in connection with satisfaction
of tax withholding obligations on vested restricted stock or restricted stock units and certain
forfeitures and terminations of employment related to awards under equity incentive plans. |
The Corporation did not have any unregistered sales of its equity securities during the three
months ended September 30, 2010.
212
Item 6. Exhibits
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Exhibit 3(a)
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Amended and Restated Certificate of Incorporation of the Corporation, as in effect on the date hereof
incorporated herein by reference to Exhibit 3(a) of the Corporations Quarterly Report on Form 10-Q (File No.
1-6523) for the quarter ended March 31, 2010 |
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Exhibit 3(b)
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Amended and Restated Bylaws of the Corporation, as in effect on the date hereof incorporated herein by
reference to Exhibit 3.1 of the Corporations Current Report on Form 8-K (File No. 1-6523) filed on August 3,
2010 |
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Exhibit 4(a)
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Amended and Restated Agency Agreement dated as of July 22, 2010 among the
Corporation, Bank of America, N.A., London Branch, as Principal Agent, and Merrill Lynch
International Bank Limited, as Registrar and Transfer Agent, incorporated by reference to
Exhibit 4.1 of the Corporations Current Report on Form 8-K (File No. 1-6523) filed on July
27, 2010 |
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Exhibit 11
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Earnings Per
Share Computation included in Note 12 Shareholders Equity and Earnings Per Common Share to
the Consolidated Financial Statements |
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Exhibit 12
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Ratio of Earnings to Fixed Charges (1)
Ratio of Earnings to Fixed Charges and Preferred Dividends
(1) |
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Exhibit 31(a)
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Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(1) |
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Exhibit 31(b)
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Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(1) |
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Exhibit 32(a)
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Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(1) |
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Exhibit 32(b)
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|
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(1) |
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Exhibit 101.INS
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XBRL Instance Document (1, 2) |
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Exhibit 101.SCH
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XBRL Taxonomy Extension Schema Document (1, 2) |
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Exhibit 101.CAL
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XBRL Taxonomy Extension Calculation Linkbase Document (1, 2) |
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Exhibit 101.LAB
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XBRL Taxonomy Extension Label Linkbase Document (1, 2) |
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Exhibit 101.PRE
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XBRL Taxonomy Extension Presentation Linkbase Document (1, 2) |
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Exhibit 101.DEF
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XBRL Taxonomy Extension Definitions Linkbase Document (1, 2) |
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(1) |
|
Included herewith |
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(2) |
|
These interactive data files shall not be deemed filed for purposes of Section 11 or
12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of
1934, as amended, or otherwise subject to liability under those sections. |
213
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Bank of America Corporation |
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Registrant |
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Date: November 5, 2010 |
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/s/ Neil A. Cotty
Neil A. Cotty
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Chief Accounting Officer |
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(Duly Authorized Officer) |
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214
Bank of America Corporation
Form 10-Q
Index to Exhibits
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Exhibit |
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Description |
Exhibit 3(a)
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|
Amended and Restated Certificate of Incorporation of the Corporation, as in effect on the date hereof
incorporated herein by reference to Exhibit 3(a) of the Corporations Quarterly Report on Form 10-Q (File No.
1-6523) for the quarter ended March 31, 2010 |
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Exhibit 3(b)
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|
Amended and Restated Bylaws of the Corporation, as in effect on the date hereof incorporated herein by
reference to Exhibit 3.1 of the Corporations Current Report on Form 8-K (File No. 1-6523) filed on August 3,
2010 |
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Exhibit 4(a)
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|
Amended and Restated Agency Agreement dated as of July 22, 2010 among the
Corporation, Bank of America, N.A., London Branch, as Principal Agent, and Merrill Lynch
International Bank Limited, as Registrar and Transfer Agent, incorporated by reference to
Exhibit 4.1 of the Corporations Current Report on Form 8-K (File No. 1-6523) filed on July
27, 2010 |
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Exhibit 11
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Earnings Per Share Computation
included in Note 12 Shareholders Equity and Earnings Per Common Share to
the Consolidated Financial Statements |
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Exhibit 12
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Ratio of Earnings to Fixed Charges (1)
Ratio of Earnings to Fixed Charges and Preferred Dividends (1) |
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Exhibit 31(a)
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|
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(1) |
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Exhibit 31(b)
|
|
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(1) |
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Exhibit 32(a)
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Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (1) |
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Exhibit 32(b)
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Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (1) |
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Exhibit 101.INS
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XBRL Instance Document (1, 2) |
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Exhibit 101.SCH
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XBRL Taxonomy Extension Schema Document (1, 2) |
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Exhibit 101.CAL
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XBRL Taxonomy Extension Calculation Linkbase Document (1, 2) |
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Exhibit 101.LAB
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XBRL Taxonomy Extension Label Linkbase Document (1, 2) |
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Exhibit 101.PRE
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XBRL Taxonomy Extension Presentation Linkbase Document (1, 2) |
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Exhibit 101.DEF
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XBRL Taxonomy Extension Definitions Linkbase Document (1, 2) |
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(1) |
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Included herewith |
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(2) |
|
These interactive data files shall not be deemed filed for purposes of Section 11 or
12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of
1934, as amended, or otherwise subject to liability under those sections. |
215