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Bank of America 10-Q 2010
Form 10-Q
Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2010

or

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

EXCHANGE ACT OF 1934

For the transition period from          to         

Commission file number:

1-6523

Exact Name of Registrant as Specified in its Charter:

Bank of America Corporation

State or Other Jurisdiction of Incorporation or Organization:

Delaware

IRS Employer Identification Number:

56-0906609

Address of Principal Executive Offices:

Bank of America Corporate Center

100 N. Tryon Street

Charlotte, North Carolina 28255

Registrant’s telephone number, including area code:

(704) 386-5681

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

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

Yes  ü    No

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

Yes  ü    No

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

 

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

(do not check if a smaller

    reporting company)

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

Yes        No  ü

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

 

 

 

1


Table of Contents

Bank of America Corporation

 

March 31, 2010 Form 10-Q

INDEX

 

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

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

   3  
     

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

   4  
     

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

   6  
     

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

   7  
     

Notes to Consolidated Financial Statements

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

Table of Contents

   78  
     

Discussion and Analysis

   79  
   Item 3.

 

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

 

  

Legal Proceedings

 

   181

 

 
   Item 1A.

 

  

Risk Factors

 

   181

 

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

 

2


Table of Contents

Part 1. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

  Bank of America Corporation and Subsidiaries

  Consolidated Statement of Income

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

  Interest income

    

Interest and fees on loans and leases

   $ 13,475      $ 13,349   

Interest on debt securities

     3,116        3,830   

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

     448        1,155   

Trading account assets

     1,743        2,428   

Other interest income

     1,097        1,394   
 

Total interest income

     19,879        22,156   
 

  Interest expense

    

Deposits

     1,122        2,543   

Short-term borrowings

     818        2,221   

Trading account liabilities

     660        579   

Long-term debt

     3,530        4,316   
 

Total interest expense

     6,130        9,659   
 

Net interest income

     13,749        12,497   

  Noninterest income

    

Card income

     1,976        2,865   

Service charges

     2,566        2,533   

Investment and brokerage services

     3,025        2,963   

Investment banking income

     1,240        1,055   

Equity investment income

     625        1,202   

Trading account profits

     5,236        5,201   

Mortgage banking income

     1,500        3,314   

Insurance income

     715        688   

Gains on sales of debt securities

     734        1,498   

Other income

     1,204        2,313   

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

    

Total other-than-temporary impairment losses

     (1,819     (714)  

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

     1,218        343   
 

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

     (601     (371)  
 

Total noninterest income

     18,220        23,261   
 

Total revenue, net of interest expense

     31,969        35,758   

  Provision for credit losses

     9,805        13,380   

  Noninterest expense

    

Personnel

     9,158        8,768   

Occupancy

     1,172        1,128   

Equipment

     613        622   

Marketing

     487        521   

Professional fees

     517        405   

Amortization of intangibles

     446        520   

Data processing

     648        648   

Telecommunications

     330        327   

Other general operating

     3,883        3,298   

Merger and restructuring charges

     521        765   
 

Total noninterest expense

     17,775        17,002   
 

Income before income taxes

     4,389        5,376   

  Income tax expense

     1,207        1,129   
 

Net income

   $ 3,182      $ 4,247   
 

  Preferred stock dividends

     348        1,433   
 

Net income applicable to common shareholders

   $ 2,834      $ 2,814   
 

  Per common share information

    

Earnings

   $ 0.28      $ 0.44   

Diluted earnings

     0.28        0.44   

Dividends paid

     0.01        0.01   
 

  Average common shares issued and outstanding (in thousands)

     9,177,468        6,370,815   
 

  Average diluted common shares issued and outstanding (in thousands)

     10,005,254        6,393,407   
 

  See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

  Bank of America Corporation and Subsidiaries

  Consolidated Balance Sheet

     March 31    December 31
  (Dollars in millions)    2010    2009
 

  Assets

     

  Cash and cash equivalents

   $ 144,794       $ 121,339   

  Time deposits placed and other short-term investments

     20,256         24,202   

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

     197,038         189,933   

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

     206,018         182,206   

  Derivative assets

     77,577         80,689   

  Debt securities:

     

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

     316,020         301,601   

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

     340         9,840   
 

Total debt securities

     316,360         311,441   
 

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

     976,042         900,128   

  Allowance for loan and lease losses

     (46,835)        (37,200)  
 

Loans and leases, net of allowance

     929,207         862,928   
 

  Premises and equipment, net

     15,147         15,500   

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

     19,146         19,774   

  Goodwill

     86,305         86,314   

  Intangible assets

     11,548         12,026   

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

     35,386         43,874   

  Customer and other receivables

     83,636         81,996   

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

     196,282         191,077   
 

Total assets

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

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

     
 

  Trading account assets

   $ 11,826      
 

  Derivative assets

     4,194      
 

  Available-for-sale debt securities

     12,074      
 

  Loans and leases

     129,432      
 

  Allowance for loan and lease losses

     (11,140)     
      
 

Loans and leases, net of allowance

     118,292      
      
 

  Loans held-for-sale

     5,471      
 

  All other assets

     9,637      
      
 

Total assets of consolidated VIEs

   $ 161,494      
      
 

 

  See accompanying Notes to Consolidated Financial Statements.

     

 

4


Table of Contents

  Bank of America Corporation and Subsidiaries

  Consolidated Balance Sheet (continued)

     March 31    December 31
  (Dollars in millions)    2010    2009
 

  Liabilities

     

  Deposits in domestic offices:

     

Noninterest-bearing

   $ 255,470       $ 269,615   

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

     643,943         640,789   

  Deposits in foreign offices:

     

Noninterest-bearing

     5,614         5,489   

Interest-bearing

     71,075         75,718   
 

Total deposits

     976,102         991,611   
 

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

     270,601         255,185   

  Trading account liabilities

     82,532         65,432   

  Derivative liabilities

     46,927         43,728   

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

     85,406         69,524   

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

     135,656         127,854   

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

     511,653         438,521   
 

Total liabilities

     2,108,877         1,991,855   
 

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

     

  Shareholders’ equity

     

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

     17,964         37,208   

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

     149,048         128,734   

  Retained earnings

     67,811         71,233   

  Accumulated other comprehensive income (loss)

     (4,929)        (5,619)  

  Other

     (71)        (112)  
 

Total shareholders’ equity

     229,823         231,444   
 

Total liabilities and shareholders’ equity

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

  Liabilities of consolidated VIEs included in total liabilities above

     
 

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

   $ 21,631      
 

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

     90,329      
 

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

     5,135      
      
 

Total liabilities of consolidated VIEs

   $ 117,095      
      
 

 

  See accompanying Notes to Consolidated Financial Statements.

     

 

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Table of Contents

  Bank of America Corporation and Subsidiaries

  Consolidated Statement of Changes in Shareholders’ Equity

  (Dollars in millions, shares in thousands)    Preferred    

Common Stock and
Additional Paid-in

Capital

   Retained     Accumulated
Other
Comprehensive
    Other     Total
Shareholders’
Equity
   

Comprehensive
Income

(Loss)

   Stock     Shares    Amount    Earnings     Income (Loss)        

  Balance, December 31, 2008

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

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

             71        (71       -     

  Net income

             4,247            4,247      $ 4,247   

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

               (811       (811     (811)  

  Net change in foreign currency translation adjustments

               66          66        66   

  Net change in derivatives

               412          412        412   

  Employee benefit plan adjustments

               65          65        65   

  Dividends paid:

                  

Common

             (64         (64  

Preferred

             (1,033         (1,033  

  Issuance of preferred stock and stock warrants

     26,800           3,200            30,000     

  Stock issued in acquisition

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

  Common stock issued under employee plans and related tax effects

     8,038      394          108        502     

  Other

     171                    (167                     4         

  Balance, March 31, 2009

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

  Balance, December 31, 2009

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

 

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

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

  Net income

             3,182            3,182        3,182   

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

               944          944        944   

  Net change in foreign currency translation adjustments

               (43       (43     (43)  

  Net change in derivatives

               (161       (161     (161)  

  Employee benefit plan adjustments

               66          66        66   

  Dividends paid:

                  

Common

             (102         (102  

Preferred

             (348         (348  

  Common stock issued under employee plans and related tax effects

     95,757      1,070          36        1,106     

  Common Equivalent Securities conversion

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

  Other

                                         5        5         

  Balance, March 31, 2010

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

  See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

 Bank of America Corporation and Subsidiaries

 Consolidated Statement of Cash Flows

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

 Operating activities

    

 Net income

   $ 3,182      $ 4,247   

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

    

Provision for credit losses

     9,805        13,380   

Gains on sales of debt securities

     (734     (1,498)  

Depreciation and premises improvements amortization

     566        578   

Amortization of intangibles

     446        520   

Deferred income tax expense

     736        486   

Net decrease in trading and derivative instruments

     6,770        27,049   

Net decrease in other assets

     5,723        28,304   

Net increase (decrease) in accrued expenses and other liabilities

     6,115        (10,870)  

Other operating activities, net

     (8,733     (7,399)  

Net cash provided by operating activities

     23,876        54,797   

 Investing activities

    

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

     4,023        19,336   

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

     (7,105     68,072   

 Proceeds from sales of available-for-sale debt securities

     35,022        53,309   

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

     18,690        13,871   

 Purchases of available-for-sale debt securities

     (64,899     (6,576)  

 Proceeds from maturities of held-to-maturity debt securities

     -        280   

 Proceeds from sales of loans and leases

     857        565   

 Other changes in loans and leases, net

     12,990        (6,636)  

 Net purchases of premises and equipment

     (213     (531)  

 Proceeds from sales of foreclosed properties

     751        417   

 Cash received upon acquisition, net

     -        31,804   

 Cash received due to impact of adoption of new consolidation guidance

     2,807        -   

 Other investing activities, net

     2,884        2,700   

Net cash provided by investing activities

     5,807        176,611   

 Financing activities

    

 Net decrease in deposits

     (15,509     (27,596)  

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

     15,416        (71,444)  

 Net decrease in commercial paper and other short-term borrowings

     (6,255     (10,135)  

 Proceeds from issuance of long-term debt

     23,280        24,246   

 Retirement of long-term debt

     (22,750     (34,711)  

 Proceeds from issuance of preferred stock

     -        30,000   

 Cash dividends paid

     (450     (1,097)  

 Excess tax benefits of share-based payments

     45        -   

 Other financing activities, net

     (11     11   

Net cash used in financing activities

     (6,234     (90,726)  

 Effect of exchange rate changes on cash and cash equivalents

     6        (79)  

Net increase in cash and cash equivalents

     23,455        140,603   

 Cash and cash equivalents at January 1

     121,339        32,857   

Cash and cash equivalents at March 31

   $ 144,794        $173,460   

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

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

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

 See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

Bank of America Corporation and Subsidiaries

Notes to Consolidated Financial Statements

 

NOTE 1 – Summary of Significant Accounting Principles

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

 

 

Principles of Consolidation and Basis of Presentation

 

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

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

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

 

 

New Accounting Pronouncements

 

On January 1, 2010, the Corporation adopted new Financial Accounting Standards Board (FASB) accounting guidance on transfers of financial assets and consolidation of VIEs. This new accounting guidance revises sale accounting criteria for transfers of financial assets, including elimination of the concept of and accounting for qualifying special purpose entities (QSPEs), and significantly changes the criteria for consolidation of a VIE. The adoption of this new accounting guidance resulted in the consolidation of certain VIEs that previously were QSPEs and VIEs that were not recorded on the Corporation’s Consolidated Balance Sheet prior to January 1, 2010. The adoption of this new accounting guidance resulted in a net incremental increase in assets of $100.4 billion and a net increase in liabilities of $106.7 billion. These amounts are net of retained interests in securitizations held on the Consolidated Balance Sheet at December 31, 2009 and a $10.8 billion increase in the allowance for loan and lease losses. The Corporation recorded a $6.2 billion charge, net of tax, to retained earnings on January 1, 2010 for the cumulative effect of the adoption of this new accounting guidance, which resulted principally from the increase in the allowance for loan and lease losses, and a $116 million charge to accumulated other comprehensive income (OCI). Initial recording of these assets, related allowance and liabilities on the Corporation’s Consolidated Balance Sheet had no impact at the date of adoption on consolidated results of operations.

 

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Table of Contents

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

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

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

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

 

 

Significant Accounting Policies

 

Securities Financing Agreements

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

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

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

 

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

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

Variable Interest Entities

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

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

 

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NOTE 2 – Merger and Restructuring Activity

 

 

Merrill Lynch

 

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

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

 

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

  Purchase price

  

  Merrill Lynch common shares exchanged (in millions)

     1,600   

  Exchange ratio

     0.8595   

The Corporation’s common shares issued (in millions)

     1,375   

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

   $ 14.08   

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

   $ 19.4   

  Merrill Lynch preferred stock

     8.6   

  Fair value of outstanding employee stock awards

     1.1   

Total purchase price

   $ 29.1   

  Allocation of the purchase price

  

  Merrill Lynch stockholders’ equity

     19.9   

  Merrill Lynch goodwill and intangible assets

     (2.6

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

  

Derivatives and securities

     (1.9

Loans

     (6.1

Intangible assets (2)

     5.4   

Other assets/liabilities

     (0.8

Long-term debt

     16.0   

Pre-tax total adjustments

     12.6   

  Deferred income taxes

     (5.9

After-tax total adjustments

     6.7   

Fair value of net assets acquired

     24.0   

Goodwill resulting from the Merrill Lynch acquisition

   $ 5.1   

 

(1)

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

 

(2)

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

 

 

Countrywide

 

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

 

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Table of Contents

 

Merger and Restructuring Charges and Reserves

 

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

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

 

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

  Severance and employee-related charges

   $ 151      $ 491    

  Systems integrations and related charges

     310        192    

  Other

     60        82    

Total merger and restructuring charges

   $ 521      $ 765    

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

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

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

 

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

  Balance, January 1

   $ 112      $ 523      $ 403      $ 86    

  Exit costs and restructuring charges:

        

Merrill Lynch

     n/a        n/a        106        382    

Countrywide

     -        -        30        60    

  Cash payments

     (22     (192     (294     (136)   

Balance, March 31

   $ 90      $ 331      $ 245      $ 392    

  n/a = not applicable

        

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

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

 

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NOTE 3 – Trading Account Assets and Liabilities

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

 

  (Dollars in millions)    March 31
2010
   December 31
2009

  Trading account assets

     

U.S. government and agency securities (1)

   $ 56,603        $ 44,585    

Corporate securities, trading loans and other

     61,384          57,009    

Equity securities

     32,014          33,562    

Foreign sovereign debt

     35,817          28,143    

Mortgage trading loans and asset-backed securities

     20,200          18,907    

Total trading account assets

   $ 206,018        $ 182,206    

  Trading account liabilities

     

U.S. government and agency securities

   $ 30,068        $ 26,519    

Equity securities

     20,419          18,407    

Foreign sovereign debt

     21,619          12,897    

Corporate securities and other

     10,426          7,609    

Total trading account liabilities

   $ 82,532        $ 65,432    

 

(1)

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

 

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NOTE 4 – Derivatives

 

 

Derivative Balances

 

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

 

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

  Interest rate contracts

                    

  Swaps

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

  Futures and forwards

     12,096.0          5.9          0.1          6.0          6.4          -          6.4    

  Written options

     2,791.0          -          -          -          77.4          -          77.4    

  Purchased options

     2,732.7          78.1          -          78.1          -          -          -    

  Foreign exchange contracts

                    

  Swaps

     646.7          21.6          5.8          27.4          26.0          1.7          27.7    

  Spot, futures and forwards

     2,207.9          25.7          -          25.7          27.1          -          27.1    

  Written options

     391.3          -          -          -          10.9          -          10.9    

  Purchased options

     392.4          10.5          -          10.5          -          -          -    

  Equity contracts

                    

  Swaps

     72.3          7.6          -          7.6          7.5          -          7.5    

  Futures and forwards

     95.7          3.1          -          3.1          2.3          -          2.3    

  Written options

     430.9          -          -          -          23.3          0.4          23.7    

  Purchased options

     391.4          24.5          -          24.5          -          -          -    

  Commodity contracts

                    

  Swaps

     101.4          8.8          0.2          9.0          8.4          -          8.4    

  Futures and forwards

     435.0          10.2          -          10.2          9.4          -          9.4    

  Written options

     65.1          -          -          -          4.8          -          4.8    

  Purchased options

     60.0          4.5          -          4.5          -          -          -    

  Credit derivatives

                    

  Purchased credit derivatives:

                    

  Credit default swaps

     2,525.8          88.1          -          88.1          38.7          -          38.7    

  Total return swaps/other

     25.9          1.3          -          1.3          0.8          -          0.8    

  Written credit derivatives:

                    

  Credit default swaps

     2,534.1          37.7          -          37.7          82.4          -          82.4    

  Total return swaps/other

     36.0          1.4          -          1.4          0.6          -          0.6    

  Gross derivative assets/liabilities

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

  Less: Legally enforceable master netting agreements

              (1,334.0)               (1,334.0)   

  Less: Cash collateral applied

                          (58.1)                       (55.4)   

    Total derivative assets/liabilities

                        $ 77.6                      $ 46.9    

 

(1)

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

 

(2)

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

 

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

Trading
Derivatives
and

Economic
Hedges

   Qualifying
Accounting
Hedges (2)
   Total    

Trading
Derivatives

and

Economic
Hedges

   Qualifying
Accounting
Hedges (2)
   Total
 

  Interest rate contracts

                   

Swaps

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

Futures and forwards

     11,842.1      7.1      -      7.1        6.1      -      6.1   

Written options

     2,865.5      -      -      -        84.1      -      84.1   

Purchased options

     2,626.7      84.1      -      84.1        -      -      -   

  Foreign exchange contracts

                   

Swaps

     661.9      23.7      4.6      28.3        27.3      0.5      27.8   

Spot, futures and forwards

     1,750.8      24.6      0.3      24.9        25.6      0.1      25.7   

Written options

     383.6      -      -      -        13.0      -      13.0   

Purchased options

     355.3      12.7      -      12.7        -      -      -   

  Equity contracts

                   

Swaps

     58.5      2.0      -      2.0        2.0      -      2.0   

Futures and forwards

     79.0      3.0      -      3.0        2.2      -      2.2   

Written options

     283.4      -      -      -        25.1      0.4      25.5   

Purchased options

     273.7      27.3      -      27.3        -      -      -   

  Commodity contracts

                   

Swaps

     65.3      6.9      0.1      7.0        6.8      -      6.8   

Futures and forwards

     387.8      10.4      -      10.4        9.6      -      9.6   

Written options

     54.9      -      -      -        7.9      -      7.9   

Purchased options

     50.9      7.6      -      7.6        -      -      -   

  Credit derivatives

                   

Purchased credit derivatives:

                   

Credit default swaps

     2,800.5      105.5      -      105.5        45.2      -      45.2   

Total return swaps/other

     21.7      1.5      -      1.5        0.4      -      0.4   

Written credit derivatives:

                   

Credit default swaps

     2,788.8      44.1      -      44.1        98.4      -      98.4   

Total return swaps/other

     33.1      1.8      -      1.8        1.1      -      1.1   
 

Gross derivative assets/liabilities

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

  Less: Legally enforceable master netting agreements

              (1,355.1           (1,355.1)  

  Less: Cash collateral applied

              (58.4           (62.8)  
 

Total derivative assets/liabilities

            $ 80.7            $ 43.7   
 

 

(1)

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

 

(2)

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

 

 

ALM and Risk Management Derivatives

 

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

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

 

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Table of Contents

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

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

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

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

 

 

Derivatives Designated as Accounting Hedges

 

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

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

 

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

  Derivatives designated as fair value hedges

            

  Interest rate risk on long-term debt (1)

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

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

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

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

     (30     19        (11     53        (81     (28)  

  Commodity price risk on commodity inventory (4)

     57        (61     (4     56        (58     (2)  

Total

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

 

(1)

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

 

(2)

Amounts are recorded in interest income on AFS securities.

 

(3)

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

 

(4)

Amounts are recorded in trading account profits.

 

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Table of Contents

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

 

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

Amounts
Recognized

in OCI on
Derivatives

   

Amounts
Reclassified
from OCI

into Income

    Hedge
Ineffectiveness
and Amount
Excluded from
Effectiveness
Testing (1)

  Derivatives designated as cash flow hedges

            

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

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

  Commodity price risk on forecasted purchases and sales

     32        3        -        48        -        -   

  Price risk on restricted stock awards (5)

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

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

     6        -        -        (44     -        -   

Total

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

  Net investment hedges

            

  Foreign exchange risk (6)

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

 

(1)

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

 

(2)

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

 

(3)

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

 

(4)

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

 

(5)

Gains reclassified from OCI are recorded in personnel expense.

 

(6)

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

n/a = not applicable

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

 

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Economic Hedges

 

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

 

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

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

   $ 1,356      $ 2,157   

  Interest rate risk on mortgage banking servicing income (1)

     798        150   

  Credit risk on loans (3)

     (56     75   

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

     (3,988     (546)  

  Other (4)

     96        15   

Total

   $ (1,794   $ 1,851   

 

(1)

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

 

(2)

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

 

(3)

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

 

(4)

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

 

 

Sales and Trading Revenue

 

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

 

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

  Interest rate risk

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

  Foreign exchange risk

     281      -      -        281      274      1        7        282   

  Equity risk

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

  Credit risk

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

  Other risk

     224      8      (50     182      683      (39     (191     453   
 

Total sales and trading revenue

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

 

(1)

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

 

 

Credit Derivatives

 

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

 

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

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

 

     March 31, 2010
     Carrying Value
      (Dollars in millions)   

Less than

One Year

  

One to

Three Years

  

Three to

Five Years

  

Over

Five Years

   Total      

Credit default swaps:

              

Investment grade

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

Non-investment grade

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

Total

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

Total return swaps/other:

              

Investment grade

     -      26      33      32      91      

Non-investment grade

     1      192      38      253      484      

Total

     1      218      71      285      575      

Total credit derivatives

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

 

Maximum Payout/Notional

Credit default swaps:

              

Investment grade

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

Non-investment grade

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

Total

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

Total return swaps/other:

              

Investment grade

     4      91      12,563      10,478      23,136      

Non-investment grade

     403      1,712      923      9,818      12,856      

Total

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

Total credit derivatives

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

 

December 31, 2009

     Carrying Value
      (Dollars in millions)   

Less than

One Year

  

One to

Three Years

  

Three to

Five Years

  

Over

Five Years

   Total      

Credit default swaps:

              

Investment grade

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

Non-investment grade

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

Total

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

Total return swaps/other:

              

Investment grade

     1      20      5      540      566      

Non-investment grade

     -      194      3      291      488      

Total

     1      214      8      831      1,054      

Total credit derivatives