BANK OF AMERICA CORP /DE/
10-Ks and 10-Qs
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[
ü
] QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2011
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2011
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
Bank of America Corporation
State or Other Jurisdiction of Incorporation or Organization:
Delaware
Delaware
IRS Employer Identification Number:
56-0906609
56-0906609
Address of Principal Executive Offices:
Bank of America Corporate Center
100 N. Tryon Street
Charlotte, North Carolina 28255
Bank of America Corporate Center
100 N. Tryon Street
Charlotte, North Carolina 28255
Registrant’s telephone number, including area code:
(704) 386-5681
(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
(do not check if a smaller reporting company) |
Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in
Exchange Act Rule
12b-2).
Yes No
ü
On
July 31, 2011, there were 10,134,295,342 shares of Bank of America Corporation Common Stock
outstanding.
1
Table of Contents
Bank of America Corporation
June 30, 2011 Form 10-Q
June 30, 2011 Form 10-Q
INDEX
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Part I.
Financial Information |
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| Item 2. | 4 | |||||||||
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2
Table of Contents
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| Item 3. | 127 | |||||||||
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| Item 4. | 127 | |||||||||
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Part II.
Other Information |
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219 | ||||||||
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| Item 1. | 219 | |||||||||
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| Item 1A. | 219 | |||||||||
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| Item 2. | 223 | |||||||||
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| Item 5(a). | 223 | |||||||||
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| Item 6. | 224 | |||||||||
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| Signature | 225 | |||||||||
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| Index to Exhibits | 226 |
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| EX-4.A | ||||||||||
| EX-10.A | ||||||||||
| EX-12 | ||||||||||
| EX-31.A | ||||||||||
| EX-31.B | ||||||||||
| EX-32.A | ||||||||||
| EX-32.B | ||||||||||
| EX-101 INSTANCE DOCUMENT | ||||||||||
| EX-101 SCHEMA DOCUMENT | ||||||||||
| EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||||
| EX-101 LABELS LINKBASE DOCUMENT | ||||||||||
| EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||||
| EX-101 DEFINITION LINKBASE DOCUMENT | ||||||||||
3
Table of Contents
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report on
Form 10-Q
, the documents that it incorporates by reference 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,”
“may,” “might,” “should,” “would” and “could.” The forward-looking statements made represent the
current expectations, plans or forecasts of the Corporation regarding the Corporation’s future
results and revenues, and future business and economic conditions more generally, including
statements concerning: 2011 expense levels; higher revenue and expense reductions in 2012;
improving performance in retail businesses; home price assumptions and Home Price Index (HPI)
estimates; the impact of the agreement with Assured Guaranty Ltd. and its subsidiaries (Assured
Guaranty) and its cost, including the expected value
of the
loss-sharing reinsurance arrangement;
the adequacy of the liability for the remaining representations and warranties exposure to
government-sponsored enterprises, Fannie Mae (FNMA) and Freddie Mac (FHLMC) (collectively, the
GSEs) and the future impact to earnings, including the impact on such estimated liability arising
from the recent announcement by FNMA regarding mortgage rescissions, cancellations and claim
denials and the Corporation’s ability to resolve such rescissions, cancellations or claim denials within the
appeal period allowed by FNMA; the expected repurchase claims on the 2004-2008 loan vintages; the
Corporation’s belief that with the provision recorded in connection with the agreement to resolve
nearly all of the legacy Countrywide-issued first-lien non-GSE residential mortgage-backed
securitization repurchase exposures (the BNY Mellon Settlement), and the additional
representations and warranties provisions recorded in the six months ended June 30, 2011, the
Corporation will provide for a substantial portion of its non-GSE representations and warranties
exposure; in connection with the BNY Mellon Settlement, the Corporation’s obligations to pay, and
estimates of, attorneys’ fees and costs of the group of 22 institutional investors supporting the
BNY Mellon Settlement (the Investor Group) and the fees and expenses incurred by the trustee; the
impact of the BNY Mellon Settlement on costs related to mortgage servicing obligations; the
potential assertion and impact of additional claims not addressed by the BNY Mellon Settlement or
any of the prior agreements entered into between the Corporation and the GSEs, monoline insurers
and other investors; the resolution of certain related claims being litigated by investors in the
event that final court approval of the BNY Mellon Settlement is obtained; the Corporation’s belief
that private letter rulings from the U.S. Internal Revenue Service (IRS) and other tax rulings and
opinions will be obtained during the period prior to final court approval of the BNY Mellon
Settlement; representations and warranties liabilities (also commonly referred to as reserves),
and the estimated range of possible loss, expenses and repurchase claims and resolution of those
claims, and any related servicing, securities, fraud, indemnity or other claims; the Corporation’s
intention to vigorously contest any requests for repurchase for which it concludes that a valid
basis does not exist; future impact of complying with the terms of the recent consent orders with
federal bank regulators regarding the foreclosure process and potential civil monetary penalties
that may be levied in connection therewith; the impact of delays in connection with the Corporation’s temporary
halt of foreclosure proceedings in late 2010; the progress toward achieving a resolution in
negotiations with law enforcement authorities and federal agencies, including the U.S. Department
of Justice (DOJ) and the U.S. Department of Housing and Urban Development (HUD), involving
mortgage servicing practices; the impact on economic conditions and on the Corporation arising
from any changes to the credit rating or perceived creditworthiness of instruments issued, insured or guaranteed by the U.S. government, or of
institutions, agencies or instrumentalities directly linked to the U.S. government; charges to income tax
expense resulting from reductions in the United Kingdom (U.K.) corporate income tax rate; future
payment protection insurance (PPI) claims in the U.K.; future risk-weighted assets and any
mitigation efforts to reduce risk-weighted assets; net interest income; credit trends and
conditions, including credit losses, credit reserves, charge-offs, delinquency, collection and
bankruptcy trends, and nonperforming asset levels; consumer and commercial service charges,
including the impact of changes in the Corporation’s overdraft policy and the Corporation’s
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 with the requirements
of
various
regulatory agencies, including our ability to comply with any
Basel capital requirements endorsed by U.S. regulators without raising additional capital and
within any applicable regulatory timelines; the revenue impact of the Credit Card Accountability
Responsibility and Disclosure Act of 2009 (the CARD Act); the revenue impact and the impact on the
value of our assets and liabilities resulting from, and any mitigation actions taken in response
to, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Financial Reform Act),
including the impact of the Durbin Amendment, the Volcker Rule, the Consumer Financial Protection
Bureau (the CFPB); the risk retention rules and derivatives regulations; mortgage production
levels; long-term debt levels; short-term debt levels, including the expected reduction of certain
short-term unsecured borrowings, including commercial paper, in the
4
Table of Contents
third quarter of 2011; run-off
of loan portfolios; that it is the Corporation’s objective to
maintain high-quality credit ratings; the estimated range of
possible loss and the impact of various legal proceedings discussed in “Litigation and
Regulatory 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; the amount and timing of any clawback or earn-out payments relating to the sale
of certain assets and liabilities of Balboa Insurance Company (Balboa); and other matters relating
to the Corporation and the securities that it 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 Corporation’s control. Actual
outcomes and results may differ materially from those expressed in, or implied by, the
Corporation’s 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, under Item 1A. “Risk Factors” of the Corporation’s 2010 Annual Report on
Form 10-K, and in any of the Corporation’s subsequent Securities and Exchange Commission (SEC)
filings: the Corporation’s timing and determinations regarding any potential revised comprehensive
capital plan submission and the Federal Reserve’s response; the Corporation’s intent to build
capital through retaining earnings, reducing legacy asset portfolios
and implementing other non-dilutive capital related
initiatives; the accuracy and variability of estimates and assumptions in determining the expected
total cost of the BNY Mellon Settlement to the Corporation; the accuracy and variability of
estimates and assumptions in determining the estimated liability and/or estimated range of
possible loss for representations and warranties exposures to the GSEs, monolines and private-label
and other investors; the accuracy and the variability of estimates and assumptions in determining
the portion of the Corporation’s repurchase obligations for residential mortgage obligations sold
by the Corporation and its affiliates to investors that has been paid or reserved after giving
effect to the BNY Mellon Settlement and the charges in the quarter ended June 30, 2011; the
possibility that a substantial number of objections to the approval of the BNY Mellon Settlement
will be made and that these objections will delay or prevent receipt of final court approval;
whether the conditions to the BNY Mellon Settlement will be satisfied, including the receipt of
final court approval and private letter rulings from the IRS and other tax rulings and opinions;
whether conditions in the BNY Mellon Settlement that would permit the Corporation and legacy
Countrywide to withdraw from the settlement will occur and whether the Corporation and legacy
Countrywide will determine to withdraw from the settlement pursuant to the terms of the BNY Mellon
Settlement; the impact of performance and enforcement of obligations under, and provisions
contained in, the BNY Mellon Settlement and the agreement with the Investor Group, including
performance of obligations under the BNY Mellon Settlement by the Corporation and the trustee and
the performance of obligations under the agreement with the Investor Group by the Corporation and
the Investor Group; the Corporation and certain of its affiliates’ ability to comply with the
servicing and documentation obligations under the BNY Mellon Settlement; the potential assertion
and impact of additional claims not addressed by the BNY Mellon Settlement or any of the prior
agreements entered into between the Corporation and the GSEs, monoline insurers and other
investors; the accuracy and variability of estimates and assumptions in determining the expected
value of the loss-sharing reinsurance arrangement relating to the agreement with Assured Guaranty
and the total cost of the agreement to the Corporation; the
Corporation’s resolution
of certain
representations and warranties obligations with the GSEs and our ability to resolve its remaining
claims; the Corporation’s ability to resolve its representations and warranties obligations, and
any related servicing, securities, fraud, indemnity or other claims with monolines, and
private-label investors and other investors, including those monolines and investors from whom we
have not yet received claims or with whom we have not yet reached any resolutions; failure to
satisfy our obligations as servicer in the residential mortgage securitization process; the
adequacy of the liability and/or the estimated range of possible loss for the representations and
warranties exposures to the GSEs, monolines and private-label and other investors; the foreclosure
review and assessment process, the effectiveness of the Corporation’s response and any
governmental findings or penalties or private third-party claims asserted in connection with these
foreclosure matters; the ability to achieve resolution in negotiations with law enforcement
authorities and federal agencies, including the DOJ and HUD, involving mortgage servicing
practices, including the timing and any settlement terms; the adequacy of the reserve for future
PPI claims in the U.K.; and the risk of a credit rating downgrade of the U.S. government; negative
economic conditions generally including continued weakness in the U.S. housing market, high
unemployment in the U.S., as well as economic challenges in many non-U.S. countries in which we
operate and sovereign debt challenges; the Corporation’s mortgage 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, including the Corporation as well as its
business partners; the Corporation’s credit ratings and the credit ratings of its securitizations;
the impact resulting from international and domestic sovereign credit uncertainties; the timing
and amount of any potential dividend increase; estimates of the fair value of certain of the
Corporation’s assets and liabilities; legislative and regulatory actions in the U.S. (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
5
Table of Contents
negative impact of the Financial Reform Act; the impact of litigation
and regulatory investigations, including costs,
expenses, settlements and judgments as well as any collateral effects on our ability to do
business and access the capital markets; various monetary, tax and fiscal policies and regulations
of the U.S. and non-U.S. governments; changes in accounting standards, rules and interpretations,
inaccurate estimates or assumptions in the application of accounting policies, including in
determining reserves, applicable guidance regarding goodwill accounting and the impact on the
Corporation’s financial statements; increased globalization of the financial services industry and
competition with other U.S. and international financial institutions; adequacy of the
Corporation’s risk management framework; the Corporation’s ability to attract new employees and
retain and motivate existing employees; technology changes instituted by the Corporation, its
counterparties or competitors; mergers and acquisitions and their integration into the
Corporation, including the Corporation’s ability to realize the benefits and cost savings from the
Merrill Lynch & Co., Inc. (Merrill Lynch) and Countrywide Financial Corporation (Countrywide)
acquisitions; the Corporation’s reputation, including the effects of continuing intense public and
regulatory scrutiny of the Corporation and the financial services industry; the effects of any
unauthorized disclosures of our or our customers’ private or confidential information and any
negative publicity directed toward the Corporation; 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 Management’s 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. Throughout the MD&A, we use certain acronyms and abbreviations which are defined in
the Glossary.
Executive Summary
Business Overview
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 Corporation’s 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, Consumer Real Estate Services (CRES), Global Commercial Banking, Global Banking &
Markets (GBAM)
and
Global Wealth & Investment Management (GWIM),
with the remaining operations
recorded in
All Other
. At June 30, 2011, the Corporation had $2.3 trillion in assets and
approximately 288,000 full-time equivalent employees.
As of June 30, 2011, we operated in all 50 states, the District of Columbia and more than 40
non-U.S. countries. Our retail banking footprint covers approximately 80 percent of the U.S.
population and in the U.S., we serve approximately 58 million consumer and small business
relationships with approximately 5,700 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 market share for deposits in seven of those
states. We offer industry-leading support to approximately four million small business owners. 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.
6
Table of Contents
Table 1 provides selected consolidated financial data for the three and six months ended
June 30, 2011 and 2010 and at June 30, 2011 and December 31, 2010.
| Table 1 | ||||||||||||||||
| Selected Financial Data | ||||||||||||||||
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
| (Dollars in millions, except per share information) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Income statement
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Revenue, net of interest expense (FTE basis)
(1)
|
$ | 13,483 | $ | 29,450 | $ | 40,578 | $ | 61,740 | ||||||||
|
Net income (loss)
|
(8,826 | ) | 3,123 | (6,777 | ) | 6,305 | ||||||||||
|
Net income (loss), excluding goodwill impairment charge
(2)
|
(6,223 | ) | 3,123 | (4,174 | ) | 6,305 | ||||||||||
|
Diluted earnings (loss) per common share
|
(0.90 | ) | 0.27 | (0.73 | ) | 0.55 | ||||||||||
|
Diluted earnings (loss) per common share, excluding goodwill impairment charge
(2)
|
(0.65 | ) | 0.27 | (0.48 | ) | 0.55 | ||||||||||
|
Dividends paid per common share
|
$ | 0.01 | $ | 0.01 | $ | 0.02 | $ | 0.02 | ||||||||
|
Performance ratios
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Return on average assets
|
n/m | 0.50 | % | n/m | 0.51 | % | ||||||||||
|
Return on average assets, excluding goodwill impairment charge
(2)
|
n/m | 0.50 | n/m | 0.51 | ||||||||||||
|
Return on average tangible shareholders’ equity
(1)
|
n/m | 8.98 | n/m | 9.26 | ||||||||||||
|
Return on average tangible shareholders’ equity, excluding goodwill impairment charge
(1, 2)
|
n/m | 8.98 | n/m | 9.26 | ||||||||||||
|
Efficiency ratio (FTE basis)
(1)
|
n/m | 58.58 | n/m | 56.73 | ||||||||||||
|
Efficiency ratio (FTE basis), excluding goodwill impairment charge
(1, 2)
|
n/m | 58.58 | n/m | 56.73 | ||||||||||||
|
Asset quality
|
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Allowance for loan and lease losses at period end
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$ | 37,312 | $ | 45,255 | ||||||||||||
|
Allowance for loan and lease losses as a percentage of total loans and leases outstanding at period end
(3)
|
4.00 | % | 4.75 | % | ||||||||||||
|
Nonperforming loans, leases and foreclosed properties at period end
(3)
|
$ | 30,058 | $ | 35,598 | ||||||||||||
|
Net charge-offs
|
$ | 5,665 | $ | 9,557 | 11,693 | 20,354 | ||||||||||
|
Annualized net charge-offs as a percentage of average loans and leases outstanding
(3)
|
2.44 | % | 3.98 | % | 2.53 | % | 4.21 | % | ||||||||
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Annualized net charge-offs as a percentage of average loans and leases outstanding excluding purchased
credit-impaired loans
(3)
|
2.54 | 4.11 | 2.63 | 4.36 | ||||||||||||
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Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs
(3)
|
1.64 | 1.18 | 1.58 | 1.10 | ||||||||||||
|
Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs excluding
purchased credit-impaired loans
(3)
|
1.28 | 1.05 | 1.23 | 0.98 | ||||||||||||
| June 30 | December 31 | |||||||
| 2011 | 2010 | |||||||
|
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Total loans and leases
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$ | 941,257 | $ | 940,440 | ||||
|
Total assets
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2,261,319 | 2,264,909 | ||||||
|
Total deposits
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1,038,408 | 1,010,430 | ||||||
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Total common shareholders’ equity
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205,614 | 211,686 | ||||||
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Total shareholders’ equity
|
222,176 | 228,248 | ||||||
|
Capital ratios
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Tier 1 common equity
|
8.23 | % | 8.60 | % | ||||
|
Tier 1 capital
|
11.00 | 11.24 | ||||||
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Total capital
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15.65 | 15.77 | ||||||
|
Tier 1 leverage
|
6.86 | 7.21 | ||||||
| (1) |
FTE basis, return on average tangible shareholders’
equity 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 for a corresponding
reconciliation to GAAP financial measures, see
Supplemental Financial Data on page 19.
|
|
| (2) |
Net income (loss), diluted earnings (loss) per common
share, return on average assets, return on average
tangible shareholders’ equity and the efficiency ratio
have been calculated excluding the impact of the
goodwill impairment charge of $2.6 billion in the
second quarter of 2011 and accordingly, these are
non-GAAP measures. For additional information on these
measures and ratios, and for a corresponding
reconciliation to GAAP financial measures, see
Supplemental Financial Data on page 19.
|
|
| (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 on page 90 and
corresponding Table 42, and Nonperforming Commercial
Loans, Leases and Foreclosed Properties Activity on page 98 and corresponding Table 51.
|
|
| n/m | = not meaningful |
Second Quarter 2011 Economic and Business Environment
The banking environment and markets in which we conduct our businesses, particularly in
Europe, have continued to be strongly influenced by developments in the U.S. and global economies,
as well as the continued implementation and rulemaking from recent financial reforms. The U.S.
economic momentum slowed in the first quarter of 2011, and remained weak in the second quarter.
The sharp rise in prices of gasoline and food pushed up inflation and slowed consumer spending for
a wide array of goods and services, while supply chain effects following the Japanese natural
disaster aggravated the slowdown, especially in the motor vehicle sector. In response, businesses
trimmed production and scaled back growth in investment spending on equipment and software. In
addition, job layoffs rose and hiring moderated, contributing to a renewed upward drift in the
unemployment rate to 9.2 percent in June, from 8.9 percent in March. Economic and financial
performance ended the second quarter 2011 on a fairly weak note, with soft growth and concerns
about Europe’s financial crisis and the recent political situation in Washington, D.C. regarding the U.S. Federal debt ceiling.
These concerns heightened uncertainty and dampened confidence.
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The housing market remained depressed, with weak sales and continued modest declines in home
prices as measured by the HPI. Declines in home prices added uncertainty about future home prices,
dampening home sales. The magnitude of distressed mortgages remained very high, and there were
ongoing delays in foreclosure processes. Loans to businesses rose modestly, while loans to
households remained weak. Credit quality of bank loans to businesses and households continued to
improve.
While the global economy showed signs of moderating, the impact of Japan’s disaster is
expected to be temporary and the focus has once more shifted to Europe’s financial crisis. Core
European economies, led by Germany’s strength, were healthy, but peripheral European Union nations
were mired in recession-type conditions and Greece teetered toward a debt service liquidity
crisis. As the second quarter of 2011 ended, a coordinated European financial support package for
Greece temporarily eased financial market concerns.
Key emerging nations, particularly China, experienced further inflation pressures during the
second quarter of 2011, and their central banks tightened monetary policy and credit in efforts to
constrain excess demand. Although there was some concern that these restrictive policies would
generate sharper-than-desired economic slowdowns that would adversely impact global economic
performance, economic growth in those countries remained healthy. For more information on our
exposure in Europe, Asia, Latin America and Japan, see Non-U.S. Portfolio on page 103.
Recent Events
Private-label Securitization Settlement with the Bank of New York Mellon
As previously announced, on June 28, 2011, the Corporation, BAC Home Loans Servicing, LP (BAC
HLS, which subsequently merged with and into Bank of America, N.A. (BANA) in July 2011), and
certain Countrywide affiliates entered into a settlement agreement with The Bank of New York
Mellon (BNY Mellon), as trustee (Trustee), to resolve all outstanding and potential claims related
to alleged representations and warranties breaches (including repurchase claims), substantially
all historical loan servicing claims and certain other historical claims with respect to 525
legacy Countrywide first-lien and five second-lien non-GSE residential mortgage-backed
securitization trusts (the Covered Trusts) with loans principally originated between 2004 and 2008
and for which BNY Mellon acts as trustee or indenture trustee (the BNY Mellon Settlement). The
Covered Trusts had an original principal balance of approximately $424 billion, of which $409
billion was originated between 2004 and 2008, and a total current unpaid principal balance
(calculated as outstanding principal plus the unpaid principal balance of defaulted loans) of
approximately $220 billion, of which $217 billion was originated between 2004 and 2008, as of June
28, 2011. The BNY Mellon Settlement is supported by a group of 22 institutional investors (the
Investor Group) and is subject to final court approval and certain other conditions. The BNY
Mellon Settlement provides for a cash payment of $8.5 billion (the Settlement Payment) to the
Trustee for distribution to the Covered Trusts after final court approval of the settlement and an
estimated $100 million in additional expenses and fees to the Investor Group’s counsel and the
Trustee. We are also obligated to pay certain other fees and expenses of the Trustee
and the Investor Group. The BNY Mellon Settlement also includes provisions related to specific
mortgage servicing standards and other servicing matters.
The Trustee has determined that the BNY Mellon Settlement is in the best interests of the
Covered Trusts and is seeking the necessary court approval of the BNY Mellon Settlement. Under an
order entered by the court, certificateholders and noteholders in the Covered Trusts have the
opportunity to file objections until August 30, 2011 and responses to those objections and
statements in support of the settlement until October 31, 2011. In connection with the BNY Mellon
Settlement, we entered into an agreement with the Investor Group, which provides that, among other
things, the Investor Group will use reasonable best efforts and cooperate in good faith to
effectuate the settlement, including obtaining final court approval. The Investor Group has filed,
and the court has granted, a petition to intervene as a party to the proceeding so that it may
support of the BNY Mellon Settlement. Several alleged investors outside the Investor Group have
filed, and the court has granted, petitions to intervene as parties in the pending court
proceeding. Certain of these intervenors have stated that they intend to object to the BNY Mellon
Settlement, while others have said that they need more information in order to determine whether
to object, and indicated that they, therefore, intend to seek discovery. In addition, it is possible that a
substantial number of additional investors outside the Investor Group will also seek to intervene
as parties, and some intervenors and other investors may object to the BNY Mellon Settlement. The
resolutions of the objections of intervenors and/or other investors who object may delay or
ultimately prevent receipt of final court approval. There can be no assurance that final court
approval of the BNY Mellon Settlement will be obtained, that all conditions will be satisfied or,
if certain conditions to the BNY Mellon Settlement permitting withdrawal are met, that we and
legacy Countrywide will not determine to withdraw from the BNY Mellon Settlement. The court is
scheduled to hold a hearing on the Trustee’s request for entry of an order approving the BNY
Mellon Settlement on November 17, 2011.
8
Table of Contents
For additional information about the BNY Mellon Settlement, see
Off-Balance Sheet Arrangements and
Contractual Obligations – Representations and Warranties on page 51 and Other
Mortgage-related Matters on page 60. For more information about the risks associated with the BNY
Mellon Settlement, see Item 1A. Risk Factors on page 219.
U.S. Debt Ceiling and the Risk of U.S. Downgrade; EU Sovereign Risks
The U.S. government recently increased its borrowing capacity under the federal debt ceiling.
However, there continues to be a perceived risk of a sovereign credit ratings downgrade of the
U.S. government, including the ratings of U.S. Treasury securities.
In July 2011, Moody’s Investors Service, Inc. (Moody’s) placed the U.S. government under review for a possible credit
rating downgrade, and on August 2, 2011 it confirmed the U.S. government’s existing
sovereign rating, but stated that the
U.S. government’s rating outlook is negative. Also in July 2011
Standard & Poor’s Financial
Services LLC (S&P) placed
its sovereign credit ratings of the U.S. government on CreditWatch with negative implications. On August 2, 2011 Fitch,
Inc. (Fitch) affirmed its existing sovereign rating of the U.S. government, but stated that the rating is under review.
A downgrade of U.S. sovereign credit
ratings could correspondingly impact the credit ratings of instruments issued, insured or
guaranteed by institutions, agencies or instrumentalities directly linked to the U.S. government.
We cannot predict if, when or how any changes to the credit ratings of these organizations will
affect economic conditions or the resulting impact on the Corporation. Such ratings actions could
result in a significant adverse impact to the Corporation. For additional information about the
risks associated with the statutory debt limit and any resulting downgrade of the U.S. government,
see Item 1A. Risk Factors on page 219.
In addition, certain European nations continue to experience varying degrees of financial
stress, and yields on government-issued bonds in Greece, Ireland, Italy, Portugal and Spain have
risen and remain volatile. Despite assistance packages to Greece, Ireland and Portugal, the
creation of a joint EU-IMF European Financial Stability Facility in May 2010, and a recently
announced plan to expand financial assistance to Greece, uncertainty over the outcome of the EU
governments’ financial support programs and worries about sovereign finances persist. Market
concerns over the direct and indirect exposure of European banks and insurers to these EU
peripheral nations has resulted in a widening of credit spreads and increased costs of funding for
some European financial institutions. For additional information about the risks associated with
the financial stability of certain EU sovereigns, see Item 1A. Risk Factors on page 219.
Department of Justice / Attorney General Matters
Law
enforcement authorities in all 50 states and the DOJ and other federal agencies continue to investigate alleged irregularities in the foreclosure practices
of residential mortgage servicers, including the Corporation. Authorities have publicly stated
that the scope of the investigations extends beyond foreclosure documentation practices to
mortgage loan modification and loss mitigation practices, including
compliance with the HUD requirements related to Federal Housing
Administration (FHA)-insured loans. We
continue to cooperate with these investigations and are dedicating significant resources to
address these issues. We and the other largest mortgage servicers continue to engage in ongoing
negotiations regarding these matters with law enforcement authorities and federal agencies. The
negotiations continue to focus on the amount of any settlement payment and settlement terms,
including principal forgiveness, servicing standards, enforcement mechanisms and releases.
Although we cannot be certain as to the ultimate outcome that may result from these negotiations
or the timing of such outcome, the parties continue to make progress
toward achieving a resolution of these matters. For additional information, see Off-Balance Sheet
Arrangement and Contractual Obligations – Other Mortgage-related Matters on page 60.
9
Table of Contents
Performance Overview
Net income (loss) was $(8.8) billion and $(6.8) billion for the three and six months
ended June 30, 2011 compared to $3.1 billion and $6.3 billion for the same periods in 2010. The
principal contributors to the net loss for the three and six months ended June 30, 2011 were the
following: $14.0 billion of representations and warranties provision
in the second quarter largely related to the BNY Mellon Settlement as well as other mortgage-related costs, including a
$2.6 billion non-cash, non-tax deductible goodwill impairment charge,
higher mortgage-related
litigation expense and increased mortgage assessments and waivers costs. The three- and
six-month periods were positively affected by lower credit costs which decreased by $4.9 billion
and $10.8 billion compared to the same periods in 2010, or approximately a 60 percent decrease for
both periods.
| Table 2 | ||||||||||||||||
| Summary Income Statement | ||||||||||||||||
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Net interest income
(1)
|
$ | 11,493 | $ | 13,197 | $ | 23,890 | $ | 27,267 | ||||||||
|
Noninterest income
|
1,990 | 16,253 | 16,688 | 34,473 | ||||||||||||
|
Total revenue, net of interest expense
(1)
|
13,483 | 29,450 | 40,578 | 61,740 | ||||||||||||
|
Provision for credit losses
|
3,255 | 8,105 | 7,069 | 17,910 | ||||||||||||
|
Goodwill impairment
|
2,603 | - | 2,603 | - | ||||||||||||
|
All other noninterest expense
|
20,253 | 17,253 | 40,536 | 35,028 | ||||||||||||
|
Income (loss) before income taxes
|
(12,628 | ) | 4,092 | (9,630 | ) | 8,802 | ||||||||||
|
Income tax expense (benefit)
(1)
|
(3,802 | ) | 969 | (2,853 | ) | 2,497 | ||||||||||
|
Net income (loss)
|
(8,826 | ) | 3,123 | (6,777 | ) | 6,305 | ||||||||||
|
Preferred stock dividends
|
301 | 340 | 611 | 688 | ||||||||||||
|
Net income (loss) applicable to common shareholders
|
$ | (9,127 | ) | $ | 2,783 | $ | (7,388 | ) | $ | 5,617 | ||||||
|
|
||||||||||||||||
|
Per common share information
|
||||||||||||||||
|
Earnings (loss)
|
$ | (0.90 | ) | $ | 0.28 | $ | (0.73 | ) | $ | 0.56 | ||||||
|
Diluted earnings (loss)
|
(0.90 | ) | 0.27 | (0.73 | ) | 0.55 | ||||||||||
| (1) |
FTE basis is a non-GAAP measure. Other companies may
define or calculate this measure differently. For
additional information on this measure and for a
corresponding reconciliation to GAAP financial
measures, see Supplemental Financial Data on page 19.
|
Net interest income on a fully taxable-equivalent (FTE) basis decreased $1.7 billion and
$3.4 billion for the three and six months ended June 30, 2011 compared to the same periods in
2010. The decrease was mainly due to lower consumer loan balances and yields, partially offset by
the benefits of reductions in long-term debt and lower rates paid on deposits. The net interest
yield on a FTE basis was 2.50 percent and 2.58 percent for the three and six months ended June 30,
2011.
Noninterest
income decreased by $14.3 billion and $17.8 billion for the
three and six months ended June 30, 2011
compared to the same periods in 2010 as a result of the aforementioned increase in representations
and warranties provision. For additional information about representations and warranties, see
Off-Balance Sheet Arrangements and Contractual Obligations –
Representations and Warranties on page 51. Other components of the period-over-period change in
noninterest income included a decrease in service charges due to the impact of overdraft policy
changes in conjunction with the implementation of Regulation E, a decrease in equity investment
income as gains on sales of certain investments in the prior-year period outpaced those in 2011
and an increase in trading account profits for the three-month period due to a strong second
quarter in 2011, and a decrease for the six month period due to very
strong first quarter 2010 results.
The provision for credit losses was lower than net charge-offs for the three and six months
ended June 30, 2011 resulting in reserve reductions reflecting improving portfolio trends across most of the consumer and commercial businesses,
particularly the U.S. credit card portfolio. The improvement was offset in part by additions to
purchased credit-impaired (PCI) loan portfolio reserves, largely in the consumer portfolios.
Noninterest expense increased $5.6 billion and $8.1 billion for the three and six months
ended June 30, 2010 compared to the same periods in 2010. The increases were driven by the
goodwill impairment charge and by increases in other general operating expense which includes
mortgage-related assessments and waivers costs and litigation expense both of which increased
significantly compared to the same periods in 2010. Additionally, an increase in personnel costs
for the six months ended June 30, 2011 contributed to the increase as we continue the build-out of
several businesses and increase default-related staffing levels in the mortgage servicing
business.
10
Table of Contents
Segment Results
| Table 3 | ||||||||||||||||||||||||||||||||
| Business Segment Results | ||||||||||||||||||||||||||||||||
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||||||||||
| Total Revenue (1) | Net Income (Loss) | Total Revenue (1) | Net Income (Loss) | |||||||||||||||||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||||||||
|
Deposits
|
$ | 3,301 | $ | 3,695 | $ | 430 | $ | 674 | $ | 6,490 | $ | 7,413 | $ | 785 | $ | 1,372 | ||||||||||||||||
|
Global Card Services
|
5,536 | 6,948 | 2,035 | 826 | 11,223 | 13,838 | 3,770 | 1,794 | ||||||||||||||||||||||||
|
Consumer Real Estate Services
|
(11,315 | ) | 2,704 | (14,520 | ) | (1,542 | ) | (9,252 | ) | 6,237 | (16,935 | ) | (3,619 | ) | ||||||||||||||||||
|
Global Commercial Banking
|
2,810 | 2,883 | 1,381 | 815 | 5,461 | 5,975 | 2,304 | 1,520 | ||||||||||||||||||||||||
|
Global Banking & Markets
|
6,796 | 5,904 | 1,558 | 898 | 14,682 | 15,597 | 3,692 | 4,137 | ||||||||||||||||||||||||
|
Global Wealth & Investment Management
|
4,490 | 4,189 | 506 | 329 | 8,982 | 8,230 | 1,039 | 768 | ||||||||||||||||||||||||
|
All Other
|
1,865 | 3,127 | (216 | ) | 1,123 | 2,992 | 4,450 | (1,432 | ) | 333 | ||||||||||||||||||||||
|
Total FTE basis
|
13,483 | 29,450 | (8,826 | ) | 3,123 | 40,578 | 61,740 | (6,777 | ) | 6,305 | ||||||||||||||||||||||
|
FTE adjustment
|
(247 | ) | (297 | ) | - | - | (465 | ) | (618 | ) | - | - | ||||||||||||||||||||
|
Total Consolidated
|
$ | 13,236 | $ | 29,153 | $ | (8,826 | ) | $ | 3,123 | $ | 40,113 | $ | 61,122 | $ | (6,777 | ) | $ | 6,305 | ||||||||||||||
| (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 for a corresponding
reconciliation to a GAAP financial measure, see
Supplemental Financial Data on page 19.
|
Deposits
net income decreased for the three and six months ended June 30, 2011 compared
to the same periods in the prior year due to a decline in revenue driven by lower noninterest
income, partially offset by higher net interest income. Noninterest income decreased due to the
impact of overdraft policy changes in conjunction with Regulation E, which became effective in the
third quarter of 2010. Net interest income was up slightly due to a customer shift to more liquid
products and continued pricing discipline.
Global Card Services
net income increased for the three and six months ended June 30, 2011
compared
to the same periods in the prior year due primarily to a decrease in the provision for credit losses. Revenue decreased as a result of a
decline in net interest income from lower average loans and yields as well as lower noninterest
income. Provision for credit losses decreased reflecting improving economic conditions and
continued expectations of improving delinquency, collection and bankruptcy trends.
CRES
net loss increased for the three and six months ended June 30, 2011
compared
to the same periods in the prior year
due to a decline in
revenue and increased noninterest expense. This was partially offset by a decline in provision for
credit losses. The decline in revenue was driven primarily by an increase in representations and
warranties provision, higher expected servicing costs and lower core
production income. Noninterest expense increased due to a non-cash goodwill impairment charge,
higher litigation expenses and mortgage-related assessments and waivers costs.
Global Commercial Banking
net income increased for the three and six months ended June 30,
2011 compared to the same periods in the prior year largely due to a decrease in the provision for
credit losses from improved asset quality, particularly in the commercial real estate portfolio.
Revenue decreased primarily due to lower loan balances partially offset by earnings on higher
deposits. Noninterest income increased largely due to a gain on the termination of a purchase
contract.
GBAM
net income increased for the three months ended June 30, 2011 compared to the same
period in the prior year reflecting higher investment banking fees and increased sales and trading
revenue. Net income decreased for the six months ended June 30, 2011 compared to the same period
in the prior year due to a less favorable trading environment compared to the first quarter of
2010 and higher noninterest expense driven by investments in infrastructure. This was partially
offset by higher investment banking fees as noted above for the three
months ended June 30, 2011.
GWIM
net income increased for the three and six months ended June 30, 2011 compared to the
same periods in the prior year driven by higher revenue as well as lower credit costs, partially
offset by higher noninterest expense. Net income for the three months ended June 30, 2010
included the gain and the tax-related charge from the sale of the Columbia Management long-term asset
management business. Revenue increased driven by asset management fees as well as higher net
interest income due to strong deposit balance growth. The provision for credit losses decreased
driven by improving portfolio trends. Noninterest expense increased due to higher revenue-related
expenses and personnel costs associated with the continued build-out of the business.
11
Table of Contents
All Other
reported a net loss for the three and six months ended June 30, 2011 compared to
net income for the same periods in the prior year due to lower revenue and higher provision for
credit losses. Revenue decreased due primarily to a decline in equity investment income, including
an impairment write-down on our merchant services joint venture during the three months ended June
30, 2011, and lower fair value adjustments on structured liabilities. These items were partially
offset by an increase in gains on sales of debt securities. The increase in the provision for
credit losses was primarily attributable to reserve additions in the Countrywide PCI discontinued
real estate and residential mortgage loan portfolios due to the impact of further declines in home
prices. Also, merger and restructuring charges decreased as integration efforts with the Merrill
Lynch acquisition continue to progress as planned.
Financial Highlights
Net Interest Income
Net interest income on a FTE basis decreased $1.7 billion to $11.5 billion and $3.4
billion to $23.9 billion for the three and six months ended June 30, 2011 compared to the same
periods in 2010. The decrease was primarily due to lower consumer loan balances, a decrease in
consumer loan and asset and liability management (ALM) portfolio yields, a drop in long-term
interest rates negatively impacting hedge results and lower trading-related revenues. Partially
offsetting these items were benefits associated with ongoing reductions in long-term debt and
lower rates paid on deposits. The net interest yield on a FTE basis decreased 27 basis points
(bps) to 2.50 percent and 27 bps to 2.58 percent for the three and six months ended June 30, 2011
compared to the same periods in 2010 due to these same factors.
Noninterest Income
| Table 4 | ||||||||||||||||
| Noninterest Income | ||||||||||||||||
|
Three Months Ended
June 30 |
Six Months Ended
June 30 |
|||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Card income
|
$ | 1,967 | $ | 2,023 | $ | 3,795 | $ | 3,999 | ||||||||
|
Service charges
|
2,012 | 2,576 | 4,044 | 5,142 | ||||||||||||
|
Investment and brokerage services
|
3,009 | 2,994 | 6,110 | 6,019 | ||||||||||||
|
Investment banking income
|
1,684 | 1,319 | 3,262 | 2,559 | ||||||||||||
|
Equity investment income
|
1,212 | 2,766 | 2,687 | 3,391 | ||||||||||||
|
Trading account profits
|
2,091 | 1,227 | 4,813 | 6,463 | ||||||||||||
|
Mortgage banking income (loss)
|
(13,196 | ) | 898 | (12,566 | ) | 2,398 | ||||||||||
|
Insurance income
|
400 | 678 | 1,013 | 1,393 | ||||||||||||
|
Gains on sales of debt securities
|
899 | 37 | 1,445 | 771 | ||||||||||||
|
Other income
|
1,957 | 1,861 | 2,218 | 3,065 | ||||||||||||
|
Net impairment losses recognized in earnings on AFS debt securities
|
(45 | ) | (126 | ) | (133 | ) | (727 | ) | ||||||||
|
Total noninterest income
|
$ | 1,990 | $ | 16,253 | $ | 16,688 | $ | 34,473 | ||||||||
Noninterest income decreased $14.3 billion to $2.0 billion and $17.8 billion to $16.7
billion for the three and six months ended June 30, 2011 compared to the same periods in 2010. The
following highlights the significant changes.
| • |
Service charges decreased $564 million and $1.1 billion for the three and six months
ended June 30, 2011 largely due to the impact of overdraft policy changes in conjunction
with Regulation E, which became effective in the third quarter of 2010.
|
||
| • |
Investment banking income increased $365 million and $703 million for the three and
six months ended June 30, 2011 reflecting strong performance in
advisory services and debt
and equity issuances.
|
||
| • |
Equity investment income decreased $1.6 billion and $704 million for the three and six
months ended June 30, 2011. The three months ended June 30, 2011 included an $837 million
China Construction Bank (CCB) dividend, a $377 million pre-tax gain on the sale of our
investment in BlackRock, Inc. (BlackRock) and a $500 million impairment write-down on our
merchant services joint venture. The three months ended June 30, 2010 included net gains
of $751 million on sales of certain strategic investments and a $535 million dividend on
CCB. The six months ended June 30, 2011 included a $1.1 billion pre-tax gain related to
an initial public offering (IPO) of an equity investment which occurred in the first
quarter of 2011.
|
12
Table of Contents
| • |
Trading account profits increased $864 million for the three months ended June 30,
2011 and decreased $1.7 billion for the six-month period. The six-month decline reflects
a less favorable trading environment in the first quarter compared to record results in
the first quarter of 2010.
|
||
| • |
Mortgage banking income decreased $14.1 billion and $15.0 billion for the three and
six months ended June 30, 2011 due to a $12.8 billion and $13.3 billion increase in the
representations and warranties provision and less favorable mortgage
servicing rights (MSR) results, net of hedges,
of $885 million and $1.1 billion as a result of higher servicing costs.
|
||
| • |
Other income increased $96 million and decreased $847 million for the three and six
months ended June 30, 2011. For the six months ended June 30, 2011, the decrease was
primarily due to negative fair value adjustments on structured liabilities of $372
million compared to positive adjustments of $1.4 billion for the same period in 2010,
partially offset by the gain of $771 million on the sale of the lender-placed insurance
business of Balboa in the three months ended June 30, 2011.
|
Provision for Credit Losses
The provision for credit losses decreased $4.9 billion to $3.3 billion and $10.8 billion
to $7.1 billion for the three and six months ended June 30, 2011 compared to the same periods in
2010. The provision for credit losses was $2.4 billion and $4.6 billion lower than net charge-offs
for the three and six months ended June 30, 2011 which is after an addition to reserves for the
PCI loan portfolio of $412 million and $2.0 billion. The reduction in the allowance
for credit losses in the three and six months ended June 30, 2011 was driven primarily by
improving delinquencies, collections and bankruptcies across the
Global Card Services
portfolios.
The provision for credit losses related to our consumer portfolio decreased $3.4 billion to
$3.8 billion and $7.7 billion to $7.7 billion for the three and six months ended June 30, 2011
compared to the same periods in 2010. The provision for credit losses related to our commercial
portfolio including the provision for unfunded lending commitments decreased $1.5 billion to a
benefit of $523 million and $3.1 billion to a benefit of $636 million for the three and six months
ended June 30, 2011 compared to the same periods in 2010.
Net charge-offs totaled $5.7 billion, or 2.44 percent and $11.7 billion, or 2.53 percent of
average loans and leases for the three and six months ended June 30, 2011 compared with $9.6
billion, or 3.98 percent and $20.4 billion, or 4.21 percent for the three and six months ended
June 30, 2010. The decrease in net charge-offs was primarily driven by improvements in general
economic conditions that resulted in fewer delinquencies, improved collection rates and lower
bankruptcy filings across the
Global Card Services
U.S. loan portfolio. For more information on
the provision for credit losses, see Provision for Credit Losses on page 107.
13
Table of Contents
Noninterest Expense
| Table 5 | ||||||||||||||||
| Noninterest Expense | ||||||||||||||||
|
Three Months Ended
June 30 |
Six Months Ended
June 30 |
|||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Personnel
|
$ | 9,171 | $ | 8,789 | $ | 19,339 | $ | 17,947 | ||||||||
|
Occupancy
|
1,245 | 1,182 | 2,434 | 2,354 | ||||||||||||
|
Equipment
|
593 | 613 | 1,199 | 1,226 | ||||||||||||
|
Marketing
|
560 | 495 | 1,124 | 982 | ||||||||||||
|
Professional fees
|
766 | 644 | 1,412 | 1,161 | ||||||||||||
|
Amortization of intangibles
|
382 | 439 | 767 | 885 | ||||||||||||
|
Data processing
|
643 | 632 | 1,338 | 1,280 | ||||||||||||
|
Telecommunications
|
391 | 359 | 762 | 689 | ||||||||||||
|
Other general operating
|
6,343 | 3,592 | 11,800 | 7,475 | ||||||||||||
|
Goodwill impairment
|
2,603 | - | 2,603 | - | ||||||||||||
|
Merger and restructuring charges
|
159 | 508 | 361 | 1,029 | ||||||||||||
|
Total noninterest expense
|
$ | 22,856 | $ | 17,253 | $ | 43,139 | $ | 35,028 | ||||||||
Noninterest expense increased $5.6 billion to $22.9 billion and $8.1 billion to $43.1
billion for the three and six months ended June 30, 2011 compared to the same periods in 2010. The
increases were driven by a $2.6 billion goodwill impairment charge in our mortgage business in the
three months ended June 30, 2011 and by increases in general operating expense of $2.8 billion and
$4.3 billion for the three and six months ended June 30, 2011 compared to the same periods in the
prior year. Other general operating expense includes mortgage-related assessments and waivers
costs of $716 million and $1.6 billion for the three and six months ended June 30, 2011.
Litigation expenses within other general operating expense increased to $2.3 billion and $3.2
billion for the three and six months ended June 30, 2011, of which $2.0 billion and $2.8 billion
were in our mortgage business. Additionally, an increase of $1.4 billion in personnel costs for
the year-to-date period contributed to the increase in noninterest expense as we continue to add
client-facing professionals in
GWIM
, expand our international capabilities in
GBAM
and increase
default-related staffing levels in the mortgage business.
Income Tax Expense
The
income tax benefit was $4.0 billion on a pre-tax loss of $12.9 billion for the three
months ended June 30, 2011 compared to an income tax expense of $672 million on pre-tax income of
$3.8 billion for the same period in 2010 and resulted in an
effective tax rate of a 31.4 percent benefit
on the loss compared to an effective tax rate of 17.7 percent in the prior year. The effective
tax rates for the three and six months ended June 30, 2011 excluding the $2.6 billion goodwill
impairment charge from pre-tax income were 39.4 percent and
44.3 percent benefit rates. The income tax benefit was
$3.3 billion on the pre-tax loss of $10.1 billion for the six months ended June 30, 2011 compared to
an income tax expense of $1.9 billion on pre-tax income of $8.2 billion for the same period in
2010 and resulted in an effective tax rate of a 32.9 percent
benefit on the loss compared to an
effective tax rate of 23.0 percent in the prior year.
The
effective tax benefit rates for the three and six months ended June 30, 2011 were higher than the
tax rates for the same periods in 2010 because the benefits for net tax preference items increased
the income tax benefit recorded on the pre-tax loss while the impact of such benefits was a
decrease in tax expense recorded on pre-tax income for the same periods in 2010.
On July 19, 2011, the U.K. 2011 Finance Bill was enacted which reduced the corporate income
tax rate to 26 percent beginning on April 1, 2011, and then to 25 percent effective April 1, 2012.
These rate reductions will favorably affect income tax expense on future U.K. earnings but also
will require us to remeasure our U.K. net deferred tax assets using the lower tax rates. We will
record a charge to income tax expense of approximately $800 million for this revaluation in the
three months ending September 30, 2011. If corporate income tax rates were to be reduced to 23
percent by 2014 as suggested in U.K. Treasury announcements and assuming no change in the deferred
tax asset balance, a charge to income tax expense of approximately $400 million for each one
percent reduction in the rate would result in each period of enactment.
In addition, it is possible that valuation allowance releases may affect the effective
income tax rate later this year.
14
Table of Contents
Balance Sheet Overview
| Table 6 | ||||||||||||||||||||||||
| Selected Balance Sheet Data | ||||||||||||||||||||||||
| Average Balance | ||||||||||||||||||||||||
| June 30 | December 31 | Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Federal funds sold and securities borrowed or
purchased under agreements to resell
|
$ | 235,181 | $ | 209,616 | $ | 259,069 | $ | 263,564 | $ | 243,311 | $ | 264,810 | ||||||||||||
|
Trading account assets
(1)
|
196,939 | 194,671 | 186,760 | 213,927 | 203,806 | 214,233 | ||||||||||||||||||
|
Debt securities
|
331,052 | 338,054 | 335,269 | 314,299 | 335,556 | 312,727 | ||||||||||||||||||
|
Loans and leases
|
941,257 | 940,440 | 938,513 | 967,054 | 938,738 | 979,267 | ||||||||||||||||||
|
Allowance for loan and lease losses
|
(37,312 | ) | (41,885 | ) | (38,755 | ) | (46,740 | ) | (39,752 | ) | (47,413 | ) | ||||||||||||
|
All other assets
(1)
|
594,202 | 624,013 | 658,254 | 782,328 | 657,167 | 781,835 | ||||||||||||||||||
|
Total assets
|
$ | 2,261,319 | $ | 2,264,909 | $ | 2,339,110 | $ | 2,494,432 | $ | 2,338,826 | $ | 2,505,459 | ||||||||||||
|
Liabilities
|
||||||||||||||||||||||||
|
Deposits
|
$ | 1,038,408 | $ | 1,010,430 | $ | 1,035,944 | $ | 991,615 | $ | 1,029,578 | $ | 986,344 | ||||||||||||
|
Federal funds purchased and securities loaned
or sold under agreements to repurchase
|
239,521 | 245,359 | 276,673 | 383,558 | 291,461 | 399,729 | ||||||||||||||||||
|
Trading account liabilities
|
74,989 | 71,985 | 96,108 | 100,021 | 90,044 | 95,105 | ||||||||||||||||||
|
Commercial paper and other short-term borrowings
|
50,632 | 59,962 | 62,019 | 70,493 | 63,581 | 81,313 | ||||||||||||||||||
|
Long-term debt
|
426,659 | 448,431 | 435,144 | 497,469 | 437,812 | 505,507 | ||||||||||||||||||
|
All other liabilities
|
208,934 | 200,494 | 198,155 | 217,815 | 193,420 | 205,766 | ||||||||||||||||||
|
Total liabilities
|
2,039,143 | 2,036,661 | 2,104,043 | 2,260,971 | 2,105,896 | 2,273,764 | ||||||||||||||||||
|
Shareholders’ equity
|
222,176 | 228,248 | 235,067 | 233,461 | 232,930 | 231,695 | ||||||||||||||||||
|
Total liabilities and shareholders’ equity
|
$ | 2,261,319 | $ | 2,264,909 | $ | 2,339,110 | $ | 2,494,432 | $ | 2,338,826 | $ | 2,505,459 | ||||||||||||
| (1) |
For the three and six months ended June 30, 2011,
for average balance and yield calculation purposes, $40.4
billion and $20.3 billion of noninterest-earning equity trading securities were reclassified from trading
account assets to all other assets. Prior period
amounts are immaterial and have not been restated.
|
Period-end balance sheet amounts may vary from average balance sheet amounts due to
liquidity and balance sheet management activities, 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 our customers, and to position the balance
sheet in accordance with the Corporation’s risk appetite. The execution of these activities
requires the use of balance sheet and capital-related limits including spot, average and
risk-weighted asset limits, particularly in our trading businesses. One of our key metrics, Tier 1
leverage ratio, is calculated based on adjusted quarterly average total assets. Risk mitigation
activities that contributed to the decrease in average assets during the three and six months
ended June 30, 2011 included reduction of exposure within various types of low quality and
alternative investments, significant loan run-off and the exit of proprietary trading.
Assets
At June 30, 2011, total assets were $2.3 trillion, a decrease of $3.6 billion, or less
than one percent, from December 31, 2010.
Average total assets decreased $155.3 billion and $166.6 billion for the three and six months
ended June 30, 2011 compared to the same periods in 2010. Almost all line items decreased with the
most significant decrease in all other assets largely due to the sale of certain strategic
investments, reductions in MSR hedging activity and our goodwill balance as a result of impairment
charges recorded in 2010.
In the first half of 2011, we have taken certain actions to reduce risk-weighted assets,
including reducing certain capital markets risk exposures, selling assets, reducing our loan
run-off portfolio and exiting proprietary trading activities. For more information, see Capital
Management – Regulatory Capital on page 64.
Liabilities and Shareholders’ Equity
At June 30, 2011, total liabilities were $2.0 trillion, an increase of $2.5 billion, or
less than one percent, from December 31, 2010.
Average total liabilities decreased $156.9 billion and $167.9 billion for the three and six
months ended June 30, 2011 compared to the same periods in 2010. The decreases were primarily
driven by reduced short-term borrowings and long-term debt, and the sale of First Republic Bank in
2010. These decreases were partially offset by deposit growth.
15
Table of Contents
Shareholders’ equity decreased $6.1 billion to $222.2 billion at June 30, 2011 compared to
December 31, 2010. The decrease was driven primarily by the second quarter net loss.
Average shareholders’ equity increased $1.6 billion and $1.2 billion for the three and six
months ended June 30, 2011 compared to the same periods in 2010. The increases were due to an
increase in accumulated other comprehensive income (OCI) due in large part to net
unrealized gains on available-for-sale (AFS) securities. The charges that drove the net loss for
the three and six months ended June 30, 2011 were recorded at period end and accordingly had
minimal impact on average shareholders’ equity.
16
Table of Contents
| Table 7 | ||||||||||||||||||||
| Selected Quarterly Financial Data | ||||||||||||||||||||
| 2011 Quarters | 2010 Quarters | |||||||||||||||||||
| (In millions, except per share information) | Second | First | Fourth | Third | Second | |||||||||||||||
|
Income statement
|
||||||||||||||||||||
|
Net interest income
|
$ | 11,246 | $ | 12,179 | $ | 12,439 | $ | 12,435 | $ | 12,900 | ||||||||||
|
Noninterest income
|
1,990 | 14,698 | 9,959 | 14,265 | 16,253 | |||||||||||||||
|
Total revenue, net of interest expense
|
13,236 | 26,877 | 22,398 | 26,700 | 29,153 | |||||||||||||||
|
Provision for credit losses
|
3,255 | 3,814 | 5,129 | 5,396 | 8,105 | |||||||||||||||
|
Goodwill impairment
|
2,603 | - | 2,000 | 10,400 | - | |||||||||||||||
|
Merger and restructuring charges
|
159 | 202 | 370 | 421 | 508 | |||||||||||||||
|
All other noninterest expense
(1)
|
20,094 | 20,081 | 18,494 | 16,395 | 16,745 | |||||||||||||||
|
Income (loss) before income taxes
|
(12,875 | ) | 2,780 | (3,595 | ) | (5,912 | ) | 3,795 | ||||||||||||
|
Income tax expense (benefit)
|
(4,049 | ) | 731 | (2,351 | ) | 1,387 | 672 | |||||||||||||
|
Net income (loss)
|
(8,826 | ) | 2,049 | (1,244 | ) | (7,299 | ) | 3,123 | ||||||||||||
|
Net income (loss) applicable to common shareholders
|
(9,127 | ) | 1,739 | (1,565 | ) | (7,647 | ) | 2,783 | ||||||||||||
|
Average common shares issued and outstanding
|
10,095 | 10,076 | 10,037 | 9,976 | 9,957 | |||||||||||||||
|
Average diluted common shares issued and outstanding
|
10,095 | 10,181 | 10,037 | 9,976 | 10,030 | |||||||||||||||
|
Performance ratios
|
||||||||||||||||||||
|
Return on average assets
|
n/m | 0.36 | % | n/m | n/m | 0.50 | % | |||||||||||||
|
Four quarter trailing return on average assets
(2)
|
n/m | n/m | n/m | n/m | 0.20 | |||||||||||||||
|
Return on average common shareholders’ equity
|
n/m | 3.29 | n/m | n/m | 5.18 | |||||||||||||||
|
Return on average tangible common shareholders’ equity
(3)
|
n/m | 5.28 | n/m | n/m | 9.19 | |||||||||||||||
|
Return on average tangible shareholders’ equity
(3)
|
n/m | 5.54 | n/m | n/m | 8.98 | |||||||||||||||
|
Total ending equity to total ending assets
|
9.83 | % | 10.15 | 10.08 | % | 9.85 | % | 9.85 | ||||||||||||
|
Total average equity to total average assets
|
10.05 | 9.87 | 9.94 | 9.83 | 9.36 | |||||||||||||||
|
Dividend payout
|
n/m | 6.06 | n/m | n/m | 3.63 | |||||||||||||||
|
Per common share data
|
||||||||||||||||||||
|
Earnings (loss)
|
$ | (0.90 | ) | $ | 0.17 | $ | (0.16 | ) | $ | (0.77 | ) | $ | 0.28 | |||||||
|
Diluted earnings (loss)
|
(0.90 | ) | 0.17 | (0.16 | ) | (0.77 | ) | 0.27 | ||||||||||||
|
Dividends paid
|
0.01 | 0.01 | 0.01 | 0.01 | 0.01 | |||||||||||||||
|
Book value
|
20.29 | 21.15 | 20.99 | 21.17 | 21.45 | |||||||||||||||
|
Tangible book value
(3)
|
12.65 | 13.21 | 12.98 | 12.91 | 12.14 | |||||||||||||||
|
Market price per share of common stock
|
||||||||||||||||||||
|
Closing
|
$ | 10.96 | $ | 13.33 | $ | 13.34 | $ | 13.10 | $ | 14.37 | ||||||||||
|
High closing
|
13.72 | 15.25 | 13.56 | 15.67 | 19.48 | |||||||||||||||
|
Low closing
|
10.50 | 13.33 | 10.95 | 12.32 | 14.37 | |||||||||||||||
|
Market capitalization
|
$ | 111,060 | $ | 135,057 | $ | 134,536 | $ | 131,442 | $ | 144,174 | ||||||||||
|
Average balance sheet
|
||||||||||||||||||||
|
Total loans and leases
|
$ | 938,513 | $ | 938,966 | $ | 940,614 | $ | 934,860 | $ | 967,054 | ||||||||||
|
Total assets
|
2,339,110 | 2,338,538 | 2,370,258 | 2,379,397 | 2,494,432 | |||||||||||||||
|
Total deposits
|
1,035,944 | 1,023,140 | 1,007,738 | 973,846 | 991,615 | |||||||||||||||
|
Long-term debt
|
435,144 | 440,511 | 465,875 | 485,588 | 497,469 | |||||||||||||||
|
Common shareholders’ equity
|
218,505 | 214,206 | 218,728 | 215,911 | 215,468 | |||||||||||||||
|
Total shareholders’ equity
|
235,067 | 230,769 | 235,525 | 233,978 | 233,461 | |||||||||||||||
|
Asset quality
(4)
|
||||||||||||||||||||
|
Allowance for credit losses
(5)
|
$ | 38,209 | $ | 40,804 | $ | 43,073 | $ | 44,875 | $ | 46,668 | ||||||||||
|
Nonperforming loans, leases and foreclosed properties
(6)
|
30,058 | 31,643 | 32,664 | 34,556 | 35,598 | |||||||||||||||
|
Allowance for loan and lease losses as a percentage of total loans and leases outstanding
(6)
|
4.00 | % | 4.29 | % | 4.47 | % | 4.69 | % | 4.75 | % | ||||||||||
|
Allowance for loan and lease losses as a percentage of total nonperforming
loans and leases
(6)
|
135 | 135 | 136 | 135 | 137 | |||||||||||||||
|
Allowance for loan and lease losses as a percentage of total nonperforming loans
and leases excluding the PCI loan portfolio
(6)
|
105 | 108 | 116 | 118 | 121 | |||||||||||||||
|
Amounts included in allowance that are excluded from nonperforming loans
(7)
|
$ | 19,935 | $ | 22,110 | $ | 22,908 | $ | 23,661 | $ | 24,338 | ||||||||||
|
Allowance as a percentage of total nonperforming loans and leases excluding the
amounts included in the allowance that are excluded from nonperforming loans
(7)
|
63 | % | 60 | % | 62 | % | 62 | % | 63 | % | ||||||||||
|
Net charge-offs
|
$ | 5,665 | $ | 6,028 | $ | 6,783 | $ | 7,197 | $ | 9,557 | ||||||||||
|
Annualized net charge-offs as a percentage of average loans and leases outstanding
(6)
|
2.44 | % | 2.61 | % | 2.87 | % | 3.07 | % | 3.98 | % | ||||||||||
|
Nonperforming loans and leases as a percentage of total loans and leases outstanding
(6)
|
2.96 | 3.19 | 3.27 | 3.47 | 3.48 | |||||||||||||||
|
Nonperforming loans, leases and foreclosed properties as a percentage of
total loans, leases and foreclosed properties
(6)
|
3.22 | 3.40 | 3.48 | 3.71 | 3.73 | |||||||||||||||
|
Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs
|
1.64 | 1.63 | 1.56 | 1.53 | 1.18 | |||||||||||||||
|
Capital ratios (period end)
|
||||||||||||||||||||
|
Risk-based capital:
|
||||||||||||||||||||
|
Tier 1 common
|
8.23 | % | 8.64 | % | 8.60 | % | 8.45 | % | 8.01 | % | ||||||||||
|
Tier 1
|
11.00 | 11.32 | 11.24 | 11.16 | 10.67 | |||||||||||||||
|
Total
|
15.65 | 15.98 | 15.77 | 15.65 | 14.77 | |||||||||||||||
|
Tier 1 leverage
|
6.86 | 7.25 | 7.21 | 7.21 | 6.68 | |||||||||||||||
|
Tangible equity
(3)
|
6.63 | 6.85 | 6.75 | 6.54 | 6.14 | |||||||||||||||
|
Tangible common equity
(3)
|
5.87 | 6.10 | 5.99 | 5.74 | 5.35 | |||||||||||||||
| (1) |
Excludes merger and restructuring charges and goodwill impairment charges.
|
|
| (2) |
Calculated as total net income for four consecutive quarters divided by average assets for the period.
|
|
| (3) |
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 on page 19 and Table 9 on pages 20 and 21.
|
|
| (4) |
For more information on the impact of the PCI loan portfolio on asset quality, see Consumer Portfolio Credit Risk Management on page 76 and Commercial Portfolio Credit Risk
Management on page 93.
|
|
| (5) |
Includes the allowance for loan and lease losses and the reserve for unfunded lending commitments.
|
|
| (6) |
Balances and ratios do not include loans accounted for under the fair value option. For additional exclusions from nonperforming loans, leases and foreclosed properties, see
Nonperforming Consumer Loans and Foreclosed Properties Activity on page 90 and corresponding Table 42, and Nonperforming Commercial Loans, Leases and Foreclosed Properties
Activity on page 98 and corresponding Table 51.
|
|
| (7) |
Amounts included in allowance that are excluded from nonperforming loans primarily includes amounts allocated to Global Card Services portfolio and purchased credit-impaired loans.
|
|
|
n/m = not meaningful
|
||
17
Table of Contents
| Table 8 | ||||||||
| Selected Year-to-Date Financial Data | ||||||||
| Six Months Ended June 30 | ||||||||
| (In millions, except per share information) | 2011 | 2010 | ||||||
|
Income statement
|
||||||||
|
Net interest income
|
$ | 23,425 | $ | 26,649 | ||||
|
Noninterest income
|
16,688 | 34,473 | ||||||
|
Total revenue, net of interest expense
|
40,113 | 61,122 | ||||||
|
Provision for credit losses
|
7,069 | 17,910 | ||||||
|
Goodwill impairment
|
2,603 | - | ||||||
|
Merger and restructuring charges
|
361 | 1,029 | ||||||
|
All other noninterest expense
(1)
|
40,175 | 33,999 | ||||||
|
Income (loss) before income taxes
|
(10,095 | ) | 8,184 | |||||
|
Income tax expense (benefit)
|
(3,318 | ) | 1,879 | |||||
|
Net income (loss)
|
(6,777 | ) | 6,305 | |||||
|
Net income (loss) available to common shareholders
|
(7,388 | ) | 5,617 | |||||
|
Average common shares issued and outstanding
|
10,085 | 9,570 | ||||||
|
Average diluted common shares issued and outstanding
|
10,085 | 10,021 | ||||||
|
Performance ratios
|
||||||||
|
Return on average assets
|
n/m | 0.51 | % | |||||
|
Return on average common shareholders’ equity
|
n/m | 5.45 | ||||||
|
Return on average tangible common shareholders’ equity
(2)
|
n/m | 9.48 | ||||||
|
Return on average tangible shareholders’ equity
(2)
|
n/m | 9.26 | ||||||
|
Total ending equity to total ending assets
|
9.83 | % | 9.85 | |||||
|
Total average equity to total average assets
|
9.96 | 9.25 | ||||||
|
Dividend payout
|
n/m | 3.60 | ||||||
|
Per common share data
|
||||||||
|
Earnings (loss)
|
$ | (0.73 | ) | $ | 0.56 | |||
|
Diluted earnings (loss)
|
(0.73 | ) | 0.55 | |||||
|
Dividends paid
|
0.02 | 0.02 | ||||||
|
Book value
|
20.29 | 21.45 | ||||||
|
Tangible book value
(2)
|
12.65 | 12.14 | ||||||
|
Market price per share of common stock
|
||||||||
|
Closing
|
$ | 10.96 | $ | 14.37 | ||||
|
High closing
|
15.25 | 19.48 | ||||||
|
Low closing
|
10.50 | 14.37 | ||||||
|
Market capitalization
|
$ | 111,060 | $ | 144,174 | ||||
|
Average balance sheet
|
||||||||
|
Total loans and leases
|
$ | 938,738 | $ | 979,267 | ||||
|
Total assets
|
2,338,826 | 2,505,459 | ||||||
|
Total deposits
|
1,029,578 | 986,344 | ||||||
|
Long-term debt
|
437,812 | 505,507 | ||||||
|
Common shareholders’ equity
|
216,367 | 207,975 | ||||||
|
Total shareholders’ equity
|
232,930 | 231,695 | ||||||
|
Asset quality
(3)
|
||||||||
|
Allowance for credit losses
(4)
|
$ | 38,209 | $ | 46,668 | ||||
|
Nonperforming loans, leases and foreclosed properties
(5)
|
30,058 | 35,598 | ||||||
|
Allowance for loan and lease losses as a percentage of total loans and leases outstanding
(5)
|
4.00 | % | 4.75 | % | ||||
|
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases
(5)
|
135 | 137 | ||||||
|
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases excluding the
PCI loan portfolio
(5)
|
105 | 121 | ||||||
|
Amounts included in allowance that are excluded from nonperforming loans
(6)
|
19,935 | 24,338 | ||||||
|
Allowance as a percentage of total nonperforming loans and leases excluding the
amounts included in the allowance that are excluded from nonperforming loans
(6)
|
63 | % | 63 | % | ||||
|
Net charge-offs
|
$ | 11,693 | $ | 20,354 | ||||
|
Annualized net charge-offs as a percentage of average loans and leases outstanding
(5)
|
2.53 | % | 4.21 | % | ||||
|
Nonperforming loans and leases as a percentage of total loans and leases outstanding
(5)
|
2.96 | 3.48 | ||||||
|
Nonperforming loans, leases and foreclosed properties as a percentage of total loans, leases and foreclosed properties
(5)
|
3.22 | 3.73 | ||||||
|
Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs
|
1.58 | 1.10 | ||||||
| (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 on page 19 and Table 10 on page 22.
|
|
| (3) |
For more information on the impact of the PCI loan portfolio on asset quality, see Consumer
Portfolio Credit Risk Management on page 76 and Commercial Portfolio Credit Risk Management on
page 93.
|
|
| (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 on page 90 and corresponding Table 42 and
Nonperforming Commercial Loans, Leases and Foreclosed Properties
Activity on page 98 and corresponding Table
51.
|
|
| (6) |
Amounts included in allowance that are excluded from nonperforming loans primarily includes
amounts allocated to Global Card Services portfolio and purchased credit-impaired loans.
|
|
|
n/m = not meaningful
|
||
18
Table of Contents
Supplemental Financial Data
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 the bps we earn 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 provides 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. Return on average tangible shareholders’ equity (ROTE) measures our earnings
contribution as a percentage of average shareholders’ equity less 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.
19
Table of Contents
The aforementioned supplemental data and performance measures are presented in Tables 7 and
8. In addition, in Tables 9 and 10 we excluded the impact of goodwill impairment charges of $2.6
billion recorded in the second quarter of 2011, and $10.4 billion and $2.0 billion recorded in the
third and fourth quarters of 2010 when presenting earnings (loss) and diluted earnings (loss) per
common share, the efficiency ratio, return on average assets, four quarter trailing return on
average assets, return on average common shareholders’ equity, return on average tangible common
shareholders’ equity and ROTE. Accordingly, these are non-GAAP measures. Tables 9 and 10 provide
reconciliations of these non-GAAP measures with financial measures defined by GAAP. We believe the
use of these non-GAAP measures provides additional clarity in assessing the results of the
Corporation. Other companies may define or calculate these measures and ratios differently.
| Table 9 | ||||||||||||||||||||
| Quarterly Supplemental Financial Data and Reconciliations to GAAP Financial Measures | ||||||||||||||||||||
| 2011 Quarters | 2010 Quarters | |||||||||||||||||||
| (Dollars in millions, except per share information) | Second | First | Fourth | Third | Second | |||||||||||||||
|
Fully taxable-equivalent basis data
|
||||||||||||||||||||
|
Net interest income
|
$ | 11,493 | $ | 12,397 | $ | 12,709 | $ | 12,717 | $ | 13,197 | ||||||||||
|
Total revenue, net of interest expense
|
13,483 | 27,095 | 22,668 | 26,982 | 29,450 | |||||||||||||||
|
Net interest yield
|
2.50 | % | 2.67 | % | 2.69 | % | 2.72 | % | 2.77 | % | ||||||||||
|
Efficiency ratio
|
n/m | 74.86 | 92.04 | 100.87 | 58.58 | |||||||||||||||
|
Performance ratios, excluding goodwill impairment charges
(1)
|
||||||||||||||||||||
|
Per common share information
|
||||||||||||||||||||
|
Earnings (loss)
|
$ | (0.65 | ) | $ | 0.04 | $ | 0.27 | |||||||||||||
|
Diluted earnings (loss)
|
(0.65 | ) | 0.04 | 0.27 | ||||||||||||||||
|
Efficiency ratio
|
n/m | 83.22 | % | 62.33 | % | |||||||||||||||
|
Return on average assets
|
n/m | 0.13 | 0.52 | |||||||||||||||||
|
Four quarter trailing return on average assets
(2)
|
n/m | 0.43 | 0.39 | |||||||||||||||||
|
Return on average common shareholders’ equity
|
n/m | 0.79 | 5.06 | |||||||||||||||||
|
Return on average tangible common shareholders’ equity
|
n/m | 1.27 | 8.67 | |||||||||||||||||
|
Return on average tangible shareholders’ equity
|
n/m | 1.96 | 8.54 | |||||||||||||||||
| (1) |
Performance ratios have been calculated excluding the impact of the goodwill impairment charges of
$2.6 billion recorded during the second quarter of 2011, and $2.0 billion and $10.4 billion recorded
during the fourth and third quarters of 2010, respectively.
|
|
| (2) |
Calculated as total net income for four consecutive quarters divided by average assets for the period.
|
|
|
n/m = not meaningful
|
||
20
Table of Contents
| Table 9 | ||||||||||||||||||||
| Quarterly Supplemental Financial Data and Reconciliations to GAAP Financial Measures (continued) | ||||||||||||||||||||
| 2011 Quarters | 2010 Quarters | |||||||||||||||||||
| (Dollars in millions) | Second | First | Fourth | Third | Second | |||||||||||||||
|
Reconciliation of net interest income to net interest income on a fully taxable-equivalent basis
|
||||||||||||||||||||
|
Net interest income
|
$ | 11,246 | $ | 12,179 | $ | 12,439 | $ | 12,435 | $ | 12,900 | ||||||||||
|
FTE adjustment
|
247 | 218 | 270 | 282 | 297 | |||||||||||||||
|
Net interest income on a fully taxable-equivalent basis
|
$ | 11,493 | $ | 12,397 | $ | 12,709 | $ | 12,717 | $ | 13,197 | ||||||||||
|
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
|
$ | 13,236 | $ | 26,877 | $ | 22,398 | $ | 26,700 | $ | 29,153 | ||||||||||
|
FTE adjustment
|
247 | 218 | 270 | 282 | 297 | |||||||||||||||
|
Total revenue, net of interest expense on a fully taxable-equivalent basis
|
$ | 13,483 | $ | 27,095 | $ | 22,668 | $ | 26,982 | $ | 29,450 | ||||||||||
|
Reconciliation of total noninterest expense to total noninterest expense, excluding
goodwill impairment charges
|
||||||||||||||||||||
|
Total noninterest expense
|
$ | 22,856 | $ | 20,283 | $ | 20,864 | $ | 27,216 | $ | 17,253 | ||||||||||
|
Goodwill impairment charges
|
(2,603 | ) | - | (2,000 | ) | (10,400 | ) | - | ||||||||||||
|
Total noninterest expense, excluding goodwill impairment charges
|
$ | 20,253 | $ | 20,283 | $ | 18,864 | $ | 16,816 | $ | 17,253 | ||||||||||
|
Reconciliation of income tax expense (benefit) to income tax expense (benefit) on a fully
taxable-equivalent basis
|
||||||||||||||||||||
|
Income tax expense (benefit)
|
$ | (4,049 | ) | $ | 731 | $ | (2,351 | ) | $ | 1,387 | $ | 672 | ||||||||
|
FTE adjustment
|
247 | 218 | 270 | 282 | 297 | |||||||||||||||
|
Income tax expense (benefit) on a fully taxable-equivalent basis
|
$ | (3,802 | ) | $ | 949 | $ | (2,081 | ) | $ | 1,669 | $ | 969 | ||||||||
|
Reconciliation of net income (loss) to net income (loss), excluding goodwill
impairment charges
|
||||||||||||||||||||
|
Net income (loss)
|
$ | (8,826 | ) | $ | 2,049 | $ | (1,244 | ) | $ | (7,299 | ) | $ | 3,123 | |||||||
|
Goodwill impairment charges
|
2,603 | - | 2,000 | 10,400 | - | |||||||||||||||
|
Net income (loss), excluding goodwill impairment charges
|
$ | (6,223 | ) | $ | 2,049 | $ | 756 | $ | 3,101 | $ | 3,123 | |||||||||
|
Reconciliation of net income (loss) applicable to common shareholders to net income (loss)
applicable to common shareholders, excluding goodwill impairment charges
|
||||||||||||||||||||
|
Net income (loss) applicable to common shareholders
|
$ | (9,127 | ) | $ | 1,739 | $ | (1,565 | ) | $ | (7,647 | ) | $ | 2,783 | |||||||
|
Goodwill impairment charges
|
2,603 | - | 2,000 | 10,400 | - | |||||||||||||||
|
Net income (loss) applicable to common shareholders, excluding goodwill
impairment charges
|
$ | (6,524 | ) | $ | 1,739 | $ | 435 | $ | 2,753 | $ | 2,783 | |||||||||
|
Reconciliation of average common shareholders’ equity to average tangible common
shareholders’ equity
|
||||||||||||||||||||
|
Common shareholders’ equity
|
$ | 218,505 | $ | 214,206 | $ | 218,728 | $ | 215,911 | $ | 215,468 | ||||||||||
|
Goodwill
|
(73,748 | ) | (73,922 | ) | (75,584 | ) | (82,484 | ) | (86,099 | ) | ||||||||||
|
Intangible assets (excluding MSRs)
|
(9,394 | ) | (9,769 | ) | (10,211 | ) | (10,629 | ) | (11,216 | ) | ||||||||||
|
Related deferred tax liabilities
|
2,932 | 3,035 | 3,121 | 3,214 | 3,395 | |||||||||||||||
|
Tangible common shareholders’ equity
|
$ | 138,295 | $ | 133,550 | $ | 136,054 | $ | 126,012 | $ | 121,548 | ||||||||||
|
Reconciliation of average shareholders’ equity to average tangible shareholders’ equity
|
||||||||||||||||||||
|
Shareholders’ equity
|
$ | 235,067 | $ | 230,769 | $ | 235,525 | $ | 233,978 | $ | 233,461 | ||||||||||
|
Goodwill
|
(73,748 | ) | (73,922 | ) | (75,584 | ) | (82,484 | ) | (86,099 | ) | ||||||||||
|
Intangible assets (excluding MSRs)
|
(9,394 | ) | (9,769 | ) | (10,211 | ) | (10,629 | ) | (11,216 | ) | ||||||||||
|
Related deferred tax liabilities
|
2,932 | 3,035 | 3,121 | 3,214 | 3,395 | |||||||||||||||
|
Tangible shareholders’ equity
|
$ | 154,857 | $ | 150,113 | $ | 152,851 | $ | 144,079 | $ | 139,541 | ||||||||||
|
Reconciliation of period end common shareholders’ equity to period end tangible
common shareholders’ equity
|
||||||||||||||||||||
|
Common shareholders’ equity
|
$ | 205,614 | $ | 214,314 | $ | 211,686 | $ | 212,391 | $ | 215,181 | ||||||||||
|
Goodwill
|
(71,074 | ) | (73,869 | ) | (73,861 | ) | (75,602 | ) | (85,801 | ) | ||||||||||
|
Intangible assets (excluding MSRs)
|
(9,176 | ) | (9,560 | ) | (9,923 | ) | (10,402 | ) | (10,796 | ) | ||||||||||
|
Related deferred tax liabilities
|
2,853 | 2,933 | 3,036 | 3,123 | 3,215 | |||||||||||||||
|
Tangible common shareholders’ equity
|
$ | 128,217 | $ | 133,818 | $ | 130,938 | $ | 129,510 | $ | 121,799 | ||||||||||
|
Reconciliation of period end shareholders’ equity to period end tangible shareholders’ equity
|
||||||||||||||||||||
|
Shareholders’ equity
|
$ | 222,176 | $ | 230,876 | $ | 228,248 | $ | 230,495 | $ | 233,174 | ||||||||||
|
Goodwill
|
(71,074 | ) | (73,869 | ) | (73,861 | ) | (75,602 | ) | (85,801 | ) | ||||||||||
|
Intangible assets (excluding MSRs)
|
(9,176 | ) | (9,560 | ) | (9,923 | ) | (10,402 | ) | (10,796 | ) | ||||||||||
|
Related deferred tax liabilities
|
2,853 | 2,933 | 3,036 | 3,123 | 3,215 | |||||||||||||||
|
Tangible shareholders’ equity
|
$ | 144,779 | $ | 150,380 | $ | 147,500 | $ | 147,614 | $ | 139,792 | ||||||||||
|
Reconciliation of period end assets to period end tangible assets
|
||||||||||||||||||||
|
Assets
|
$ | 2,261,319 | $ | 2,274,532 | $ | 2,264,909 | $ | 2,339,660 | $ | 2,368,384 | ||||||||||
|
Goodwill
|
(71,074 | ) | (73,869 | ) | (73,861 | ) | (75,602 | ) | (85,801 | ) | ||||||||||
|
Intangible assets (excluding MSRs)
|
(9,176 | ) | (9,560 | ) | (9,923 | ) | (10,402 | ) | (10,796 | ) | ||||||||||
|
Related deferred tax liabilities
|
2,853 | 2,933 | 3,036 | 3,123 | 3,215 | |||||||||||||||
|
Tangible assets
|
$ | 2,183,922 | $ | 2,194,036 | $ | 2,184,161 | $ | 2,256,779 | $ | 2,275,002 | ||||||||||
21
Table of Contents
| Table 10 | ||||||||
| Year-to-Date Supplemental Financial Data and Reconciliations to GAAP Financial Measures | ||||||||
| Six Months Ended June 30 | ||||||||
| (Dollars in millions) | 2011 | 2010 | ||||||
|
Fully taxable-equivalent basis data
|
||||||||
|
Net interest income
|
$ | 23,890 | $ | 27,267 | ||||
|
Total revenue, net of interest expense
|
40,578 | 61,740 | ||||||
|
Net interest yield
|
2.58 | % | 2.85 | % | ||||
|
Efficiency ratio
|
n/m | 56.73 | ||||||
|
Performance ratios, excluding goodwill impairment charge
(1)
|
||||||||
|
Per common share information
|
||||||||
|
Loss
|
$ | (0.48 | ) | |||||
|
Diluted loss
|
(0.48 | ) | ||||||
|
Efficiency ratio
|
n/m | |||||||
|
Return on average assets
|
n/m | |||||||
|
Return on average common shareholders’ equity
|
n/m | |||||||
|
Return on average tangible common shareholders’ equity
|
n/m | |||||||
|
Return on average tangible shareholders’ equity
|
n/m | |||||||
|
Reconciliation of net interest income to net interest income on a fully taxable-equivalent basis
|
||||||||
|
Net interest income
|
$ | 23,425 | $ | 26,649 | ||||
|
FTE adjustment
|
465 | 618 | ||||||
|
Net interest income on a fully taxable-equivalent basis
|
$ | 23,890 | $ | 27,267 | ||||
|
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
|
$ | 40,113 | $ | 61,122 | ||||
|
FTE adjustment
|
465 | 618 | ||||||
|
Total revenue, net of interest expense on a fully taxable-equivalent basis
|
$ | 40,578 | $ | 61,740 | ||||
|
Reconciliation of total noninterest expense to total noninterest expense, excluding
goodwill impairment charge
|
||||||||
|
Total noninterest expense
|
$ | 43,139 | $ | 35,028 | ||||
|
Goodwill impairment charge
|
(2,603 | ) | - | |||||
|
Total noninterest expense, excluding goodwill impairment charge
|
$ | 40,536 | $ | 35,028 | ||||
|
Reconciliation of income tax expense (benefit) to income tax expense (benefit) on a fully
taxable-equivalent basis
|
||||||||
|
Income tax expense (benefit)
|
$ | (3,318 | ) | $ | 1,879 | |||
|
FTE adjustment
|
465 | 618 | ||||||
|
Income tax expense (benefit) on a fully taxable-equivalent basis
|
$ | (2,853 | ) | $ | 2,497 | |||
|
Reconciliation of net income (loss) to net income (loss), excluding goodwill impairment charge
|
||||||||
|
Net income (loss)
|
$ | (6,777 | ) | $ | 6,305 | |||
|
Goodwill impairment charge
|
2,603 | - | ||||||
|
Net income (loss), excluding goodwill impairment charge
|
$ | (4,174 | ) | $ | 6,305 | |||
|
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
|
$ | (7,388 | ) | $ | 5,617 | |||
|
Goodwill impairment charge
|
2,603 | - | ||||||
|
Net income (loss) applicable to common shareholders, excluding goodwill impairment charge
|
$ | (4,785 | ) | $ | 5,617 | |||
|
Reconciliation of average common shareholders’ equity to average tangible common
shareholders’ equity
|
||||||||
|
Common shareholders’ equity
|
$ | 216,367 | $ | 207,975 | ||||
|
Common Equivalent Securities
|
- | 5,848 | ||||||
|
Goodwill
|
(73,834 | ) | (86,225 | ) | ||||
|
Intangible assets (excluding MSRs)
|
(9,580 | ) | (11,559 | ) | ||||
|
Related deferred tax liabilities
|
2,983 | 3,446 | ||||||
|
Tangible common shareholders’ equity
|
$ | 135,936 | $ | 119,485 | ||||
|
Reconciliation of average shareholders’ equity to average tangible shareholders’ equity
|
||||||||
|
Shareholders’ equity
|
$ | 232,930 | $ | 231,695 | ||||
|
Goodwill
|
(73,834 | ) | (86,225 | ) | ||||
|
Intangible assets (excluding MSRs)
|
(9,580 | ) | (11,559 | ) | ||||
|
Related deferred tax liabilities
|
2,983 | 3,446 | ||||||
|
Tangible shareholders’ equity
|
$ | 152,499 | $ | 137,357 | ||||
| (1) |
Performance ratios have been calculated excluding the impact of the goodwill impairment charge of $2.6 billion recorded during the second quarter of 2011.
|
|
|
n/m = not meaningful
|
||
22
Table of Contents
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 on page 42, 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.
An analysis of
core net interest income, core average earning assets and core net interest yield on earning
assets, all of which adjust for the impact of market-based activities 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 11 | ||||||||||||||||
| Core Net Interest Income | ||||||||||||||||
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Net interest income
(1)
|
||||||||||||||||
|
As reported
|
$ | 11,493 | $ | 13,197 | $ | 23,890 | $ | 27,267 | ||||||||
|
Impact of market-based net interest income
(2)
|
(914 | ) | (1,049 | ) | (1,965 | ) | (2,235 | ) | ||||||||
|
Core net interest income
|
$ | 10,579 | $ | 12,148 | $ | 21,925 | $ | 25,032 | ||||||||
|
Average earning assets
(3)
|
||||||||||||||||
|
As reported
|
$ | 1,844,525 | $ | 1,910,790 | $ | 1,857,124 | $ | 1,921,864 | ||||||||
|
Impact of market-based earning assets
(2)
|
(461,775 | ) | (530,785 | ) | (465,617 | ) | (533,180 | ) | ||||||||
|
Core average earning assets
|
$ | 1,382,750 | $ | 1,380,005 | $ | 1,391,507 | $ | 1,388,684 | ||||||||
|
Net interest yield contribution
(1, 4)
|
||||||||||||||||
|
As reported
(3)
|
2.50 | % | 2.77 | % | 2.58 | % | 2.85 | % | ||||||||
|
Impact of market-based activities
(2)
|
0.56 | 0.76 | 0.58 | 0.77 | ||||||||||||
|
Core net interest yield on earning assets
|
3.06 | % | 3.53 | % | 3.16 | % | 3.62 | % | ||||||||
| (1) |
FTE basis
|
|
| (2) |
Represents the impact of market-based amounts included in
GBAM
.
|
|
| (3) |
For the three and six months
ended June 30, 2011, for average balance and yield calculation
purposes, $40.4
billion and $20.3 billion of noninterest-earning equity trading securities were reclassified from trading account assets to
other non-earning assets. Prior period amounts are immaterial
and have not been restated.
|
|
| (4) |
Calculated on an annualized basis.
|
For the three and six months ended June 30, 2011, core net interest income decreased
$1.6 billion to $10.6 billion and $3.1 billion to $21.9 billion compared to the same periods in
2010. The decrease was primarily due to lower consumer and commercial loan balances and yields,
partially offset by lower rates paid on deposits.
For the three and six months ended June 30, 2011, core net interest yield decreased 47 bps to
3.06 percent and 46 bps to 3.16 percent compared to the same periods in 2010 due to the factors
noted above.
23
Table of Contents
| Table 12 | ||||||||||||||||||||||||
| Quarterly Average Balances and Interest Rates – Fully Taxable-equivalent Basis | ||||||||||||||||||||||||
| Second Quarter 2011 | First Quarter 2011 | |||||||||||||||||||||||
| 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)
|
$ | 27,298 | $ | 106 | 1.56 | % | $ | 31,294 | $ | 88 | 1.14 | % | ||||||||||||
|
Federal funds sold and securities borrowed or purchased
under agreements to resell
|
259,069 | 597 | 0.92 | 227,379 | 517 | 0.92 | ||||||||||||||||||
|
Trading account assets
(2)
|
186,760 | 1,576 | 3.38 | 221,041 | 1,669 | 3.05 | ||||||||||||||||||
|
Debt securities
(3)
|
335,269 | 2,696 | 3.22 | 335,847 | 2,917 | 3.49 | ||||||||||||||||||
|
Loans and leases
(4)
:
|
||||||||||||||||||||||||
|
Residential mortgage
(5)
|
265,420 | 2,763 | 4.16 | 262,049 | 2,881 | 4.40 | ||||||||||||||||||
|
Home equity
|
131,786 | 1,261 | 3.83 | 136,089 | 1,335 | 3.96 | ||||||||||||||||||
|
Discontinued real estate
|
15,997 | 129 | 3.22 | 12,899 | 110 | 3.42 | ||||||||||||||||||
|
U.S. credit card
|
106,164 | 2,718 | 10.27 | 109,941 | 2,837 | 10.47 | ||||||||||||||||||
|
Non-U.S. credit card
|
27,259 | 760 | 11.18 | 27,633 | 779 | 11.43 | ||||||||||||||||||
|
Direct/Indirect consumer
(6)
|
89,403 | 945 | 4.24 | 90,097 | 993 | 4.47 | ||||||||||||||||||
|
Other consumer
(7)
|
2,745 | 47 | 6.87 | 2,753 | 45 | 6.58 | ||||||||||||||||||
|
Total consumer
|
638,774 | 8,623 | 5.41 | 641,461 | 8,980 | 5.65 | ||||||||||||||||||
|
U.S. commercial
|
190,479 | 1,827 | 3.85 | 191,353 | 1,926 | 4.08 | ||||||||||||||||||
|
Commercial real estate
(8)
|
45,762 | 382 | 3.35 | 48,359 | 437 | 3.66 | ||||||||||||||||||
|
Commercial lease financing
|
21,284 | 235 | 4.41 | 21,634 | 322 | 5.95 | ||||||||||||||||||
|
Non-U.S. commercial
|
42,214 | 339 | 3.22 | 36,159 | 299 | 3.35 | ||||||||||||||||||
|
Total commercial
|
299,739 | 2,783 | 3.72 | 297,505 | 2,984 | 4.06 | ||||||||||||||||||
|
Total loans and leases
|
938,513 | 11,406 | 4.87 | 938,966 | 11,964 | 5.14 | ||||||||||||||||||
|
Other earning assets
|
97,616 | 866 | 3.56 | 115,336 | 922 | 3.24 | ||||||||||||||||||
|
Total earning assets
|
1,844,525 | 17,247 | 3.75 | 1,869,863 | 18,077 | 3.92 | ||||||||||||||||||
|
Cash and cash equivalents
(1)
|
115,956 | 49 | 138,241 | 63 | ||||||||||||||||||||
|
Other assets, less allowance for loan and lease losses
(2)
|
378,629 | 330,434 | ||||||||||||||||||||||
|
Total assets
|
$ | 2,339,110 | $ | 2,338,538 | ||||||||||||||||||||
| (1) |
For this presentation, fees earned on overnight deposits placed with the Federal Reserve are included in the cash and cash equivalents line, consistent with the
Corporation’s Consolidated Balance Sheet presentation of these deposits. Net interest income and net interest yield are calculated excluding these fees.
|
|
| (2) |
For the second quarter of
2011, $40.4 billion of noninterest-earning equity trading securities were reclassified from trading account assets to other assets. Prior period
amounts are immaterial and have not been restated.
|
|
| (3) |
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.
|
|
| (4) |
Nonperforming loans are included in the respective average loan balances. Income on these nonperforming loans is recognized on a cash basis. PCI loans were recorded at
fair value upon acquisition and accrete interest income over the remaining life of the loan.
|
|
| (5) |
Includes non-U.S. residential mortgage loans of $94 million and $92 million in the second and first quarters of 2011, and $96 million, $502 million and $506 million in
the fourth, third and second quarters of 2010, respectively.
|
|
| (6) |
Includes non-U.S. consumer loans of $8.7 billion and $8.2 billion in the second and first quarters of 2011, and $7.9 billion, $7.7 billion and $7.7 billion in the
fourth, third and second quarters of 2010, respectively.
|
|
| (7) |
Includes consumer finance loans of $1.8 billion and $1.9 billion in the second and first quarters of 2011, and $2.0 billion, $2.0 billion and $2.1 billion in the
fourth, third and second quarters of 2010, respectively; other non-U.S. consumer loans of $840 million and $777 million in the second and first quarters of 2011, and
$791 million, $788 million and $679 million in the fourth, third and second quarters of 2010, respectively; and consumer overdrafts of $79 million and $76 million in
the second and first quarters of 2011, and $34 million, $123 million and $155 million in the fourth, third and second quarters of 2010, respectively.
|
|
| (8) |
Includes U.S. commercial real estate loans of $43.4 billion and $45.7 billion in the second and first quarters of 2011, and $49.0 billion, $53.1 billion and $61.6
billion in the fourth, third and second quarters of 2010, respectively; and non-U.S. commercial real estate loans of $2.4 billion and $2.7 billion in the second and
first quarters of 2011, and $2.6 billion, $2.5 billion and $2.6 billion in the fourth, third and second quarters of 2010, respectively.
|
24
Table of Contents
| Quarterly Average Balances and Interest Rates – Fully Taxable-equivalent Basis (continued) | ||||||||||||||||||||||||||||||||||||
| Fourth Quarter 2010 | Third Quarter 2010 | Second Quarter 2010 | ||||||||||||||||||||||||||||||||||
| 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)
|
$ | 28,141 | $ | 75 | 1.07 | % | $ | 23,233 | $ | 86 | 1.45 | % | $ | 30,741 | $ | 70 | 0.93 | % | ||||||||||||||||||
|
Federal funds sold and securities borrowed
or purchased under agreements to resell
|
243,589 | 486 | 0.79 | 254,820 | 441 | 0.69 | 263,564 | 457 | 0.70 | |||||||||||||||||||||||||||
|
Trading account assets
|
216,003 | 1,710 | 3.15 | 210,529 | 1,692 | 3.20 | 213,927 | 1,853 | 3.47 | |||||||||||||||||||||||||||
|
Debt securities
(3)
|
341,867 | 3,065 | 3.58 | 328,097 | 2,646 | 3.22 | 314,299 | 2,966 | 3.78 | |||||||||||||||||||||||||||
|
Loans and leases
(4)
|
||||||||||||||||||||||||||||||||||||
|
Residential mortgage
(5)
|
254,051 | 2,857 | 4.50 | 237,292 | 2,797 | 4.71 | 247,715 | 2,982 | 4.82 | |||||||||||||||||||||||||||
|
Home equity
|
139,772 | 1,410 | 4.01 | 143,083 | 1,457 | 4.05 | 148,219 | 1,537 | 4.15 | |||||||||||||||||||||||||||
|
Discontinued real estate
|
13,297 | 118 | 3.57 | 13,632 | 122 | 3.56 | 13,972 | 134 | 3.84 | |||||||||||||||||||||||||||
|
U.S. credit card
|
112,673 | 3,040 | 10.70 | 115,251 | 3,113 | 10.72 | 118,738 | 3,121 | 10.54 | |||||||||||||||||||||||||||
|
Non-U.S. credit card
|
27,457 | 815 | 11.77 | 27,047 | 875 | 12.84 | 27,706 | 854 | 12.37 | |||||||||||||||||||||||||||
|
Direct/Indirect consumer
(6)
|
91,549 | 1,088 | 4.72 | 95,692 | 1,130 | 4.68 | 98,549 | 1,233 | 5.02 | |||||||||||||||||||||||||||
|
Other consumer
(7)
|
2,796 | 45 | 6.32 | 2,955 | 47 | 6.35 | 2,958 | 46 | 6.32 | |||||||||||||||||||||||||||
|
Total consumer
|
641,595 | 9,373 | 5.81 | 634,952 | 9,541 | 5.98 | 657,857 | 9,907 | 6.03 | |||||||||||||||||||||||||||
|
U.S. commercial
|
193,608 | 1,894 | 3.88 | 192,306 | 2,040 | 4.21 | 195,144 | 2,005 | 4.12 | |||||||||||||||||||||||||||
|
Commercial real estate
(8)
|
51,617 | 432 | 3.32 | 55,660 | 452 | 3.22 | 64,218 | 541 | 3.38 | |||||||||||||||||||||||||||
|
Commercial lease financing
|
21,363 | 250 | 4.69 | 21,402 | 255 | 4.78 | 21,271 | 261 | 4.90 | |||||||||||||||||||||||||||
|
Non-U.S. commercial
|
32,431 | 289 | 3.53 | 30,540 | 282 | 3.67 | 28,564 | 256 | 3.59 | |||||||||||||||||||||||||||
|
Total commercial
|
299,019 | 2,865 | 3.81 | 299,908 | 3,029 | 4.01 | 309,197 | 3,063 | 3.97 | |||||||||||||||||||||||||||
|
Total loans and leases
|
940,614 | 12,238 | 5.18 | 934,860 | 12,570 | 5.35 | 967,054 | 12,970 | 5.38 | |||||||||||||||||||||||||||
|
Other earning assets
|
113,325 | 923 | 3.23 | 112,280 | 949 | 3.36 | 121,205 | 994 | 3.29 | |||||||||||||||||||||||||||
|
Total earning assets
|
1,883,539 | 18,497 | 3.90 | 1,863,819 | 18,384 | 3.93 | 1,910,790 | 19,310 | 4.05 | |||||||||||||||||||||||||||
|
Cash and cash equivalents
(1)
|
136,967 | 63 | 155,784 | 107 | 209,686 | 106 | ||||||||||||||||||||||||||||||
|
Other assets, less allowance for loan and
lease losses
|
349,752 | 359,794 | 373,956 | |||||||||||||||||||||||||||||||||
|
Total assets
|
$ | 2,370,258 | $ | 2,379,397 | $ | 2,494,432 | ||||||||||||||||||||||||||||||
For footnotes see page 24.
25
Table of Contents
| Quarterly Average Balances and Interest Rates – Fully Taxable-equivalent Basis (continued) | ||||||||||||||||||||||||
| Second Quarter 2011 | First Quarter 2011 | |||||||||||||||||||||||
| Interest | Interest | |||||||||||||||||||||||
| Average | Income/ | Yield/ | Average | Income/ | Yield/ | |||||||||||||||||||
| (Dollars in millions) | Balance | Expense | Rate | Balance | Expense | Rate | ||||||||||||||||||
|
Interest-bearing liabilities
|
||||||||||||||||||||||||
|
U.S. interest-bearing deposits:
|
||||||||||||||||||||||||
|
Savings
|
$ | 41,668 | $ | 31 | 0.30 | % | $ | 38,905 | $ | 32 | 0.34 | % | ||||||||||||
|
NOW and money market deposit accounts
|
478,690 | 304 | 0.25 | 475,954 | 316 | 0.27 | ||||||||||||||||||
|
Consumer CDs and IRAs
|
113,728 | 281 | 0.99 | 118,306 | 300 | 1.03 | ||||||||||||||||||
|
Negotiable CDs, public funds and other time deposits
|
13,842 | 42 | 1.22 | 13,995 | 39 | 1.11 | ||||||||||||||||||
|
Total U.S. interest-bearing deposits
|
647,928 | 658 | 0.41 | 647,160 | 687 | 0.43 | ||||||||||||||||||
|
Non-U.S. interest-bearing deposits:
|
||||||||||||||||||||||||
|
Banks located in non-U.S. countries
|
19,234 | 37 | 0.77 | 21,534 | 38 | 0.72 | ||||||||||||||||||
|
Governments and official institutions
|
2,131 | 2 | 0.38 | 2,307 | 2 | 0.35 | ||||||||||||||||||
|
Time, savings and other
|
64,889 | 146 | 0.90 | 60,432 | 112 | 0.76 | ||||||||||||||||||
|
Total non-U.S. interest-bearing deposits
|
86,254 | 185 | 0.86 | 84,273 | 152 | 0.73 | ||||||||||||||||||
|
Total interest-bearing deposits
|
734,182 | 843 | 0.46 | 731,433 | 839 | 0.46 | ||||||||||||||||||
|
Federal funds purchased, securities loaned or sold under
agreements to repurchase and other short-term borrowings
|
338,692 | 1,342 | 1.59 | 371,573 | 1,184 | 1.29 | ||||||||||||||||||
|
Trading account liabilities
|
96,108 | 627 | 2.62 | 83,914 | 627 | 3.03 | ||||||||||||||||||
|
Long-term debt
|
435,144 | 2,991 | 2.75 | 440,511 | 3,093 | 2.84 | ||||||||||||||||||
|
Total interest-bearing liabilities
|
1,604,126 | 5,803 | 1.45 | 1,627,431 | 5,743 | 1.43 | ||||||||||||||||||
|
Noninterest-bearing sources:
|
||||||||||||||||||||||||
|
Noninterest-bearing deposits
|
301,762 | 291,707 | ||||||||||||||||||||||
|
Other liabilities
|
198,155 | 188,631 | ||||||||||||||||||||||
|
Shareholders’ equity
|
235,067 | 230,769 | ||||||||||||||||||||||
|
Total liabilities and shareholders’ equity
|
$ | 2,339,110 | $ | 2,338,538 | ||||||||||||||||||||
|
Net interest spread
|
2.30 | % | 2.49 | % | ||||||||||||||||||||
|
Impact of noninterest-bearing sources
|
0.19 | 0.17 | ||||||||||||||||||||||
|
Net interest income/yield on earning assets
(1)
|
$ | 11,444 | 2.49 | % | $ | 12,334 | 2.66 | % | ||||||||||||||||
For footnotes see page 24.
26
Table of Contents
|
Quarterly Average Balances and Interest Rates
|
– Fully Taxable-equivalent Basis (continued) | ||||||||||||||||||||||||||||||||||||
| Fourth Quarter 2010 | Third Quarter 2010 | Second Quarter 2010 | |||||||||||||||||||||||||||||||||||
| 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
|
|||||||||||||||||||||||||||||||||||||
|
U.S. interest-bearing deposits:
|
|||||||||||||||||||||||||||||||||||||
|
Savings
|
$ | 37,145 | $ | 35 | 0.36 | % | $ | 37,008 | $ | 36 | 0.39 | % | $ | 37,290 | $ | 43 | 0.46 | % | |||||||||||||||||||
|
NOW and money market deposit accounts
|
464,531 | 333 | 0.28 | 442,906 | 359 | 0.32 | 442,262 | 372 | 0.34 | ||||||||||||||||||||||||||||
|
Consumer CDs and IRAs
|
124,855 | 338 | 1.07 | 132,687 | 377 | 1.13 | 147,425 | 441 | 1.20 | ||||||||||||||||||||||||||||
|
Negotiable CDs, public funds and other time deposits
|
16,334 | 47 | 1.16 | 17,326 | 57 | 1.30 | 17,355 | 59 | 1.36 | ||||||||||||||||||||||||||||
|
Total U.S. interest-bearing deposits
|
642,865 | 753 | 0.46 | 629,927 | 829 | 0.52 | 644,332 | 915 | 0.57 | ||||||||||||||||||||||||||||
|
Non-U.S. interest-bearing deposits:
|
|||||||||||||||||||||||||||||||||||||
|
Banks located in non-U.S. countries
|
16,827 | 38 | 0.91 | 17,431 | 38 | 0.86 | 19,751 | 36 | 0.72 | ||||||||||||||||||||||||||||
|
Governments and official institutions
|
1,560 | 2 | 0.42 | 2,055 | 2 | 0.36 | 4,214 | 3 | 0.28 | ||||||||||||||||||||||||||||
|
Time, savings and other
|
58,746 | 101 | 0.69 | 54,373 | 81 | 0.59 | 52,195 | 77 | 0.60 | ||||||||||||||||||||||||||||
|
Total non-U.S. interest-bearing deposits
|
77,133 | 141 | 0.73 | 73,859 | 121 | 0.65 | 76,160 | 116 | 0.61 | ||||||||||||||||||||||||||||
|
Total interest-bearing deposits
|
719,998 | 894 | 0.49 | 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
|
369,738 | 1,142 | 1.23 | 391,148 | 848 | 0.86 | 454,051 | 891 | 0.79 | ||||||||||||||||||||||||||||
|
Trading account liabilities
|
81,313 | 561 | 2.74 | 95,265 | 635 | 2.65 | 100,021 | 715 | 2.87 | ||||||||||||||||||||||||||||
|
Long-term debt
|
465,875 | 3,254 | 2.78 | 485,588 | 3,341 | 2.74 | 497,469 | 3,582 | 2.88 | ||||||||||||||||||||||||||||
|
Total interest-bearing liabilities
|
1,636,924 | 5,851 | 1.42 | 1,675,787 | 5,774 | 1.37 | 1,772,033 | 6,219 | 1.41 | ||||||||||||||||||||||||||||
|
Noninterest-bearing sources:
|
|||||||||||||||||||||||||||||||||||||
|
Noninterest-bearing deposits
|
287,740 | 270,060 | 271,123 | ||||||||||||||||||||||||||||||||||
|
Other liabilities
|
210,069 | 199,572 | 217,815 | ||||||||||||||||||||||||||||||||||
|
Shareholders’ equity
|
235,525 | 233,978 | 233,461 | ||||||||||||||||||||||||||||||||||
|
Total liabilities and shareholders’ equity
|
$ | 2,370,258 | $ | 2,379,397 | $ | 2,494,432 | |||||||||||||||||||||||||||||||
|
Net interest spread
|
2.48 | % | 2.56 | % | 2.64 | % | |||||||||||||||||||||||||||||||
|
Impact of noninterest-bearing sources
|
0.18 | 0.13 | 0.10 | ||||||||||||||||||||||||||||||||||
|
Net interest income/yield on earning assets
(1)
|
$ | 12,646 | 2.66 | % | $ | 12,610 | 2.69 | % | $ | 13,091 | 2.74 | % | |||||||||||||||||||||||||
For footnotes see page 24.
27
Table of Contents
|
Table 13
|
||||||||||||||||||||||||
|
Year-to-Date Average Balances and Interest Rates – Fully Taxable-equivalent Basis
|
||||||||||||||||||||||||
| Six Months Ended June 30 | ||||||||||||||||||||||||
| 2011 | 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)
|
$ | 29,285 | $ | 194 | 1.34 | % | $ | 29,179 | $ | 130 | 0.90 | % | ||||||||||||
|
Federal funds sold and securities borrowed or purchased under
agreements to resell
|
243,311 | 1,114 | 0.92 | 264,810 | 905 | 0.69 | ||||||||||||||||||
|
Trading account assets
(2)
|
203,806 | 3,245 | 3.21 | 214,233 | 3,648 | 3.42 | ||||||||||||||||||
|
Debt securities
(3)
|
335,556 | 5,613 | 3.35 | 312,727 | 6,139 | 3.93 | ||||||||||||||||||
|
Loans and leases
(4)
:
|
||||||||||||||||||||||||
|
Residential mortgage
(5)
|
263,744 | 5,644 | 4.28 | 245,785 | 6,082 | 4.95 | ||||||||||||||||||
|
Home equity
|
133,926 | 2,596 | 3.90 | 150,365 | 3,123 | 4.18 | ||||||||||||||||||
|
Discontinued real estate
|
14,457 | 239 | 3.31 | 14,201 | 287 | 4.05 | ||||||||||||||||||
|
U.S. Credit card
|
108,042 | 5,555 | 10.37 | 122,027 | 6,491 | 10.73 | ||||||||||||||||||
|
Non-U.S. credit card
|
27,445 | 1,539 | 11.31 | 28,783 | 1,760 | 12.33 | ||||||||||||||||||
|
Direct/Indirect consumer
(6)
|
89,748 | 1,938 | 4.36 | 99,728 | 2,535 | 5.13 | ||||||||||||||||||
|
Other consumer
(7)
|
2,748 | 92 | 6.75 | 2,981 | 94 | 6.34 | ||||||||||||||||||
|
Total consumer
|
640,110 | 17,603 | 5.53 | 663,870 | 20,372 | 6.17 | ||||||||||||||||||
|
U.S. commercial
|
190,914 | 3,753 | 3.96 | 198,882 | 3,975 | 4.03 | ||||||||||||||||||
|
Commercial real estate
(8)
|
47,053 | 819 | 3.51 | 66,361 | 1,116 | 3.39 | ||||||||||||||||||
|
Commercial lease financing
|
21,458 | 557 | 5.18 | 21,472 | 565 | 5.26 | ||||||||||||||||||
|
Non-U.S. commercial
|
39,203 | 638 | 3.28 | 28,682 | 520 | 3.65 | ||||||||||||||||||
|
Total commercial
|
298,628 | 5,767 | 3.89 | 315,397 | 6,176 | 3.94 | ||||||||||||||||||
|
Total loans and leases
|
938,738 | 23,370 | 5.01 | 979,267 | 26,548 | 5.45 | ||||||||||||||||||
|
Other earning assets
|
106,428 | 1,788 | 3.39 | 121,648 | 2,047 | 3.39 | ||||||||||||||||||
|
Total earning assets
|
1,857,124 | 35,324 | 3.84 | 1,921,864 | 39,417 | 4.14 | ||||||||||||||||||
|
Cash and cash equivalents
(1)
|
127,037 | 112 | 203,334 | 198 | ||||||||||||||||||||
|
Other assets, less allowance for loan and lease losses
(2)
|
354,665 | 380,261 | ||||||||||||||||||||||
|
Total assets
|
$ | 2,338,826 | $ | 2,505,459 | ||||||||||||||||||||
| (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) |
For the six months ended June 30, 2011,
$20.3 billion of noninterest-earning equity trading securities were reclassified from trading account assets to other assets. Prior
period amounts are immaterial and have not been restated.
|
|
| (3) |
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.
|
|
| (4) |
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 recorded at fair value upon acquisition and accrete interest income over the remaining life of the loan.
|
|
| (5) |
Includes non-U.S. residential mortgages of $93 million and $522 million for the six months ended June 30, 2011 and 2010.
|
|
| (6) |
Includes non-U.S. consumer loans of $8.4 billion and $7.9 billion for the six months ended June 30, 2011 and 2010.
|
|
| (7) |
Includes consumer finance loans of $1.9 billion and $2.2 billion, and other non-U.S. consumer loans of $809 million and $671 million, and consumer overdrafts of $78
million and $144 million for the six months ended June 30, 2011 and 2010.
|
|
| (8) |
Includes U.S. commercial real estate loans of $44.5 billion and $63.6 billion, and non-U.S. commercial real estate loans of $2.5 billion and $2.8 billion for the six
months ended June 30, 2011 and 2010.
|
28
Table of Contents
|
Year-to-Date Average Balances and Interest Rates – Fully Taxable-equivalent Basis (continued)
|
||||||||||||||||||||||||
| Six Months Ended June 30 | ||||||||||||||||||||||||
| 2011 | 2010 | |||||||||||||||||||||||
| Interest | Interest | |||||||||||||||||||||||
| Average | Income/ | Yield/ | Average | Income/ | Yield/ | |||||||||||||||||||
|
(Dollars in millions)
|
Balance | Expense | Rate | Balance | Expense | Rate | ||||||||||||||||||
|
Interest-bearing liabilities
|
||||||||||||||||||||||||
|
U.S. interest-bearing deposits:
|
||||||||||||||||||||||||
|
Savings
|
$ | 40,294 | $ | 63 | 0.32 | % | $ | 36,214 | $ | 86 | 0.48 | % | ||||||||||||
|
NOW and money market deposit accounts
|
477,330 | 620 | 0.26 | 429,258 | 713 | 0.33 | ||||||||||||||||||
|
Consumer CDs and IRAs
|
116,004 | 581 | 1.01 | 156,755 | 1,008 | 1.30 | ||||||||||||||||||
|
Negotiable CDs, public funds and other time deposits
|
13,918 | 81 | 1.17 | 18,552 | 122 | 1.33 | ||||||||||||||||||
|
Total U.S. interest-bearing deposits
|
647,546 | 1,345 | 0.42 | 640,779 | 1,929 | 0.61 | ||||||||||||||||||
|
Non-U.S. interest-bearing deposits:
|
||||||||||||||||||||||||
|
Banks located in non-U.S. countries
|
20,378 | 75 | 0.74 | 19,091 | 68 | 0.72 | ||||||||||||||||||
|
Governments and official institutions
|
2,219 | 4 | 0.36 | 4,916 | 6 | 0.25 | ||||||||||||||||||
|
Time, savings and other
|
62,673 | 258 | 0.83 | 53,534 | 150 | 0.57 | ||||||||||||||||||
|
Total non-U.S. interest-bearing deposits
|
85,270 | 337 | 0.80 | 77,541 | 224 | 0.58 | ||||||||||||||||||
|
Total interest-bearing deposits
|
732,816 | 1,682 | 0.46 | 718,320 | 2,153 | 0.60 | ||||||||||||||||||
|
Federal funds purchased and securities loaned or sold under
agreements to repurchase and other short-term borrowings
|
355,042 | 2,526 | 1.43 | 481,041 | 1,709 | 0.72 | ||||||||||||||||||
|
Trading account liabilities
|
90,044 | 1,254 | 2.81 | 95,105 | 1,374 | 2.91 | ||||||||||||||||||
|
Long-term debt
|
437,812 | 6,084 | 2.80 | 505,507 | 7,112 | 2.82 | ||||||||||||||||||
|
Total interest-bearing liabilities
|
1,615,714 | 11,546 | 1.44 | 1,799,973 | 12,348 | 1.38 | ||||||||||||||||||
|
Noninterest-bearing sources:
|
||||||||||||||||||||||||
|
Noninterest-bearing deposits
|
296,762 | 268,024 | ||||||||||||||||||||||
|
Other liabilities
|
193,420 | 205,767 | ||||||||||||||||||||||
|
Shareholders’ equity
|
232,930 | 231,695 | ||||||||||||||||||||||
|
Total liabilities and shareholders’ equity
|
$ | 2,338,826 | $ | 2,505,459 | ||||||||||||||||||||
|
Net interest spread
|
2.40 | % | 2.76 | % | ||||||||||||||||||||
|
Impact of noninterest-bearing sources
|
0.17 | 0.06 | ||||||||||||||||||||||
|
Net interest income/yield on earning assets
(1)
|
$ | 23,778 | 2.57 | % | $ | 27,069 | 2.82 | % | ||||||||||||||||
| For footnotes see page 28. | ||
29
Table of Contents
Business Segment Operations
Segment Description and Basis of Presentation
We report the results of our operations through six business segments:
Deposits, Global
Card Services, CRES, Global Commercial Banking, GBAM
and
GWIM
, with the remaining operations
recorded in
All Other
. 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 on page 19.
In addition, return on average economic capital for the segments is calculated as net
income, excluding cost of funds and earnings credit on intangibles, divided by average economic
capital. Economic capital represents allocated equity less goodwill and a percentage of intangible
assets. We begin by evaluating the operating results of the segments which by definition exclude
merger and restructuring charges.
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.
Total revenue, net of interest expense, includes net interest income on a 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. For presentation
purposes, in segments where the total of liabilities and equity exceeds assets, which are
generally deposit-taking segments, we allocate assets to match liabilities. Net interest income of
the business segments also includes an allocation of net interest income generated by our ALM
activities.
Our ALM activities include 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. Our goal is to manage interest rate sensitivity so that movements in
interest rates do not significantly adversely affect net interest income. Our 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 our
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.
Equity is allocated to business segments and related businesses using a risk-adjusted
methodology incorporating each segment’s credit, market, interest rate, strategic and operational
risk components. The nature of these risks is discussed further on page 64. We benefit 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. The
risk-adjusted methodology is periodically refined and such refinements are reflected as changes to
allocated equity in each segment.
For more information on selected financial information for the business segments and
reconciliations to consolidated total revenue, net income (loss) and period-end total assets, see
Note 20 – Business Segment Information
to the Consolidated Financial Statements.
30
Table of Contents
Deposits
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||
|
(Dollars in millions)
|
2011 | 2010 | % Change | 2011 | 2010 | % Change | ||||||||||||||||||
|
Net interest income
(1)
|
$ | 2,281 | $ | 2,144 | 6 | % | $ | 4,486 | $ | 4,319 | 4 | % | ||||||||||||
|
Noninterest income:
|
||||||||||||||||||||||||
|
Service charges
|
965 | 1,494 | (35 | ) | 1,888 | 2,973 | (36 | ) | ||||||||||||||||
|
All other income
|
55 | 57 | (4 | ) | 116 | 121 | (4 | ) | ||||||||||||||||
|
Total noninterest income
|
1,020 | 1,551 | (34 | ) | 2,004 | 3,094 | (35 | ) | ||||||||||||||||
|
Total revenue, net of interest expense
|
3,301 | 3,695 | (11 | ) | 6,490 | 7,413 | (12 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Provision for credit losses
|
31 | 61 | (49 | ) | 64 | 98 | (35 | ) | ||||||||||||||||
|
Noninterest expense
|
2,599 | 2,572 | 1 | 5,191 | 5,139 | 1 | ||||||||||||||||||
|
Income before income taxes
|
671 | 1,062 | (37 | ) | 1,235 | 2,176 | (43 | ) | ||||||||||||||||
|
Income tax expense
(1)
|
241 | 388 | (38 | ) | 450 | 804 | (44 | ) | ||||||||||||||||
|
Net income
|
$ | 430 | $ | 674 | (36 | ) | $ | 785 | $ | 1,372 | (43 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Net interest yield
(1)
|
2.15 | % | 2.06 | % | 2.15 | % | 2.09 | % | ||||||||||||||||
|
Return on average equity
|
7.30 | 11.16 | 6.70 | 11.45 | ||||||||||||||||||||
|
Return on average economic capital
(2, 3)
|
30.41 | 43.52 | 27.93 | 44.82 | ||||||||||||||||||||
|
Efficiency ratio
(1)
|
78.75 | 69.59 | 79.99 | 69.32 | ||||||||||||||||||||
|
Cost per dollar deposit
(4)
|
2.44 | 2.46 | 2.52 | 2.48 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance Sheet
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Average
|
||||||||||||||||||||||||
|
Total earning assets
|
$ | 425,363 | $ | 417,132 | 2 | $ | 421,313 | $ | 416,185 | 1 | ||||||||||||||
|
Total assets
|
451,554 | 443,520 | 2 | 447,530 | 442,691 | 1 | ||||||||||||||||||
|
Total deposits
|
426,684 | 418,480 | 2 | 422,514 | 417,665 | 1 | ||||||||||||||||||
|
Allocated equity
|
23,612 | 24,226 | (3 | ) | 23,627 | 24,179 | (2 | ) | ||||||||||||||||
|
Economic capital
(5)
|
5,662 | 6,239 | (9 | ) | 5,672 | 6,202 | (9 | ) | ||||||||||||||||
| June 30 | December 31 | |||||||||||||||||||||||
|
Period
end
|
2011 | 2010 | ||||||||||||||||||||||
|
Total earning assets
|
$ | 422,646 | $ | 414,215 | 2 | |||||||||||||||||||
|
Total assets
|
449,123 | 440,954 | 2 | |||||||||||||||||||||
|
Total deposits
|
424,579 | 415,189 | 2 | |||||||||||||||||||||
|
Client brokerage assets
|
69,000 | 63,597 | 8 | |||||||||||||||||||||
| (1) | FTE basis | |
| (2) |
Decreases in the ratios resulted from lower net income partially offset by a slight decrease in economic capital. Economic capital
decreased due to improvements in interest rate risk related to changes in portfolio composition.
|
|
| (3) |
Return on average economic capital is calculated as net income, excluding cost of funds and earnings credit on intangibles,
divided by average economic capital.
|
|
| (4) |
Cost per dollar deposit represents annualized noninterest expense, excluding certain expenses, as a percentage of average deposits.
|
|
| (5) | Economic capital represents allocated equity less goodwill and a percentage of intangible assets. |
Deposits
includes the results of consumer deposit activities which consist of a
comprehensive range of products provided to consumers and small businesses. 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 for the Corporation. 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, as well as investment and brokerage fees from Merrill Edge
accounts. Merrill Edge is an integrated investing and banking service targeted at clients with
less than $250,000 in total assets. Merrill Edge provides team-based investment advice and
guidance, brokerage services, a self-directed online investing platform and key banking
capabilities including access to the Corporation’s network of banking centers and ATMs.
Deposits
includes the net impact of migrating customers and their related deposit balances between
Deposits
and other client-managed businesses.
31
Table of Contents
Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010
Net income decreased $244 million, or 36 percent, to $430 million due to a decline in revenue
driven by lower noninterest income, partially offset by higher net interest income. Noninterest
income decreased $531 million, or 34 percent, to $1.0 billion due to the impact of overdraft
policy changes in conjunction with Regulation E, which became effective in the third quarter of
2010. For more information on Regulation E, see Regulatory Matters of the Corporation’s 2010
Annual Report on Form 10-K on page 56. Net interest income increased $137 million, or six percent,
to $2.3 billion driven by a shift to more liquid products and continued pricing discipline in the
low-rate environment resulting in a 16 bps decrease in the rate paid on deposits from a year ago.
Average deposits increased $8.2 billion from a year ago driven by organic growth in liquid
products, including Merrill Edge, partially offset by the impact of transfers with other
client-managed businesses.
Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010
Net income decreased $587 million, or 43 percent, to $785 million due to a decrease in
noninterest income of $1.1 billion, or 35 percent, to $2.0 billion. Net interest income increased
$167 million, or four percent, to $4.5 billion. These period over period changes were driven by
the same factors as described in the three-month discussion above.
Average deposits increased $4.8 billion from a year ago driven by the same factors as
described in the three-month discussion above.
32
Table of Contents
Global Card Services
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||
|
(Dollars in millions)
|
2011 | 2010 | % Change | 2011 | 2010 | % Change | ||||||||||||||||||
|
Net interest income
(1)
|
$ | 3,611 | $ | 4,442 | (19 | )% | $ | 7,358 | $ | 9,262 | (21 | )% | ||||||||||||
|
Noninterest income:
|
||||||||||||||||||||||||
|
Card income
|
1,833 | 1,901 | (4 | ) | 3,562 | 3,784 | (6 | ) | ||||||||||||||||
|
All other income
|
92 | 605 | (85 | ) | 303 | 792 | (62 | ) | ||||||||||||||||
|
Total noninterest income
|
1,925 | 2,506 | (23 | ) | 3,865 | 4,576 | (16 | ) | ||||||||||||||||
|
Total revenue, net of interest expense
|
5,536 | 6,948 | (20 | ) | 11,223 | 13,838 | (19 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Provision for credit losses
|
481 | 3,796 | (87 | ) | 1,442 | 7,331 | (80 | ) | ||||||||||||||||
|
Noninterest expense
|
1,882 | 1,852 | 2 | 3,851 | 3,664 | 5 | ||||||||||||||||||
|
Income before income taxes
|
3,173 | 1,300 | 144 | 5,930 | 2,843 | 109 | ||||||||||||||||||
|
Income tax expense
(1)
|
1,138 | 474 | 140 | 2,160 | 1,049 | 106 | ||||||||||||||||||
|
Net income
|
$ | 2,035 | $ | 826 | 146 | $ | 3,770 | $ | 1,794 | 110 | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Net interest yield
(1)
|
9.12 | % | 9.97 | % | 9.19 | % | 10.13 | % | ||||||||||||||||
|
Return on average equity
|
32.66 | 8.14 | 29.73 | 8.61 | ||||||||||||||||||||
|
Return on average economic
capital
(2, 3)
|
66.26 | 19.40 | 59.01 | 19.74 | ||||||||||||||||||||
|
Efficiency ratio
(1)
|
33.99 | 26.68 | 34.31 | 26.49 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance Sheet
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Average
|
||||||||||||||||||||||||
|
Total loans and leases
|
$ | 156,788 | $ | 177,076 | (11 | ) | $ | 159,591 | $ | 182,909 | (13 | ) | ||||||||||||
|
Total earning assets
|
158,861 | 178,646 | (11 | ) | 161,462 | 184,326 | (12 | ) | ||||||||||||||||
|
Total assets
|
161,776 | 187,138 | (14 | ) | 163,761 | 191,913 | (15 | ) | ||||||||||||||||
|
Allocated equity
|
24,982 | 40,677 | (39 | ) | 25,573 | 41,994 | (39 | ) | ||||||||||||||||
|
Economic capital
(4)
|
12,341 | 17,501 | (29 | ) | 12,915 | 18,767 | (31 | ) | ||||||||||||||||
| June 30 | December 31 | |||||||||||||||||||||||
|
Period end
|
2011 | 2010 | ||||||||||||||||||||||
|
Total loans and leases
|
$ | 153,280 | $ | 166,899 | (8 | ) | ||||||||||||||||||
|
Total earning assets
|
156,058 | 168,706 | (7 | ) | ||||||||||||||||||||
|
Total assets
|
161,756 | 170,311 | (5 | ) | ||||||||||||||||||||
| (1) | FTE basis | |
| (2) |
Increases in the ratios resulted from higher net income and a decrease in economic capital.
Economic capital decreased due to lower levels of credit risk as loan balances declined.
Allocated equity decreased as a result of the $10.4 billion goodwill impairment charge recorded
during the third quarter of 2010.
|
|
| (3) |
Return on average economic capital is calculated as net income, excluding cost of funds and
earnings credit on intangibles, divided by average economic capital.
|
|
| (4) |
Economic capital represents allocated equity less goodwill and a percentage of intangible assets.
|
Global Card Services
provides a broad offering of products including U.S. consumer and
business credit card, consumer lending, and international credit card and debit card to consumers
and small businesses. We provide credit card products to customers in the U.S., U.K., Canada
and Ireland. 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. For an update on the PPI claims matter, see
Note 11 — Commitments and Contingencies
to
the Consolidated Financial Statements.
The majority of the provisions of the CARD Act became effective on February 22, 2010, while
certain provisions became effective in the third quarter of 2010. The CARD Act has negatively
impacted net interest income due to restrictions on our ability to reprice credit cards based on
risk and card income due to restrictions imposed on certain fees. For more information on the CARD
Act, see Regulatory Matters of the Corporation’s 2010 Annual Report on Form 10-K on page 56.
On June 29, 2011, the Federal Reserve adopted a final rule, effective October 1, 2011, that
established the maximum allowable interchange fees a bank can receive for a debit transaction,
proposed fraud standards and established network routing requirements, effective April 1, 2012.
For more information on the final interchange rules, see Regulatory
Matters on page 62. The new
interchange fee will result in a reduction of debit card revenue in the fourth quarter of 2011 of
approximately $475 million.
33
Table of Contents
Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010
Net income increased $1.2 billion to $2.0 billion due to a $3.3 billion decrease in the
provision for credit losses as a result of continued improvements in credit quality. This was
partially offset by a decrease in revenue of $1.4 billion, or 20 percent, to $5.5 billion,
primarily due to a decline in net interest income from lower average loans and yields.
Net interest income decreased $831 million, or 19 percent, to $3.6 billion driven by lower
average loans and yields. Net interest yield decreased 85 bps to 9.12 percent due to net
charge-offs and paydowns of higher interest rate products.
Noninterest income decreased $581 million, or 23 percent, to $1.9 billion compared to $2.5
billion primarily due to the absence of a $440 million pre-tax gain on the sale of our MasterCard
position in the second quarter of 2010.
The provision for credit losses improved by $3.3 billion, to $481 million compared to $3.8
billion reflecting improving economic conditions and continued expectations of improving
delinquency, collection and bankruptcy trends. For more information on the improvement in the
provision for credit losses, see Provision for Credit Losses on page 107.
Average loans decreased $20.3 billion driven by higher payments, charge-offs and continued
non-core portfolio run-off. In addition,
Global Card Services
exited $2.1 billion of loans at the
end of the quarter with minimal income statement impact.
Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010
Net income increased $2.0 billion to $3.8 billion as the provision for credit losses improved
$5.9 billion to $1.4 billion, partially offset by a $2.6 billion decline in revenue to $11.2
billion. Net interest income of $7.4 billion decreased $1.9 billion, noninterest income declined
$711 million, including approximately $300 million related to
the CARD Act, to $3.9 billion and noninterest expense increased $187 million to $3.9 billion. These
period over period changes were driven by the same factors described in the three-month discussion
above.
34
Table of Contents
Consumer Real Estate Services
| Three Months Ended June 30, 2011 | ||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||
| Legacy Asset | Real Estate | Three Months Ended | ||||||||||||||||||||||
|
(Dollars in millions)
|
Home Loans | Servicing | Other | Services | June 30, 2010 | % Change | ||||||||||||||||||
|
Net interest income
(1)
|
$ | 481 | $ | 129 | $ | (31 | ) | $ | 579 | $ | 992 | (42 | )% | |||||||||||
|
Noninterest income:
|
||||||||||||||||||||||||
|
Mortgage banking income (loss)
|
938 | (13,083 | ) | (873 | ) | (13,018 | ) | 1,020 | n/m | |||||||||||||||
|
Insurance income
|
299 | - | - | 299 | 513 | (42 | ) | |||||||||||||||||
|
All other income
|
795 | 30 | - | 825 | 179 | n/m | ||||||||||||||||||
|
Total noninterest income (loss)
|
2,032 | (13,053 | ) | (873 | ) | (11,894 | ) | 1,712 | n/m | |||||||||||||||
|
Total revenue, net of interest expense
|
2,513 | (12,924 | ) | (904 | ) | (11,315 | ) | 2,704 | n/m | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Provision for credit losses
|
121 | 1,386 | - | 1,507 | 2,390 | (37 | ) | |||||||||||||||||
|
Goodwill impairment
|
- | - | 2,603 | 2,603 | - | n/m | ||||||||||||||||||
|
Noninterest expense
|
1,553 | 4,491 | - | 6,044 | 2,738 | 121 | ||||||||||||||||||
|
Income (loss) before income taxes
|
839 | (18,801 | ) | (3,507 | ) | (21,469 | ) | (2,424 | ) | n/m | ||||||||||||||
|
Income tax expense (benefit)
(1)
|
308 | (6,924 | ) | (333 | ) | (6,949 | ) | (882 | ) | n/m | ||||||||||||||
|
Net income (loss)
|
$ | 531 | $ | (11,877 | ) | $ | (3,174 | ) | $ | (14,520 | ) | $ | (1,542 | ) | n/m | |||||||||
|
|
||||||||||||||||||||||||
|
Net interest yield
(1)
|
2.68 | % | 0.76 | % | n/m | 1.46 | % | 2.13 | % | |||||||||||||||
|
Efficiency ratio
(1)
|
61.80 | n/m | n/m | n/m | 101.27 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance Sheet
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Average
|
||||||||||||||||||||||||
|
Total loans and leases
|
$ | 55,267 | $ | 66,416 | $ | - | $ | 121,683 | $ | 130,662 | (7 | ) | ||||||||||||
|
Total earning assets
|
71,876 | 68,444 | 18,354 | 158,674 | 186,873 | (15 | ) | |||||||||||||||||
|
Total assets
|
73,377 | 84,616 | 40,037 | 198,030 | 227,595 | (13 | ) | |||||||||||||||||
|
Allocated equity
|
n/a | n/a | n/a | 17,139 | 26,174 | (35 | ) | |||||||||||||||||
|
Economic capital
(2, 3)
|
n/a | n/a | n/a | 14,437 | 21,371 | (32 | ) | |||||||||||||||||
| Six Months Ended June 30, 2011 | ||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||
| Legacy Asset | Real Estate | Six Months Ended | ||||||||||||||||||||||
| Home Loans | Servicing | Other | Services | June 30, 2010 | % Change | |||||||||||||||||||
|
Net interest income
(1)
|
$ | 1,056 | $ | 460 | $ | (41 | ) | $ | 1,475 | $ | 2,199 | (33 | )% | |||||||||||
|
Noninterest income:
|
||||||||||||||||||||||||
|
Mortgage banking income (loss)
|
1,696 | (13,149 | ) | (870 | ) | (12,323 | ) | 2,661 | n/m | |||||||||||||||
|
Insurance income
|
730 | - | - | 730 | 1,051 | (31 | ) | |||||||||||||||||
|
All other income
|
822 | 44 | - | 866 | 326 | 166 | ||||||||||||||||||
|
Total noninterest income (loss)
|
3,248 | (13,105 | ) | (870 | ) | (10,727 | ) | 4,038 | n/m | |||||||||||||||
|
Total revenue, net of interest expense
|
4,304 | (12,645 | ) | (911 | ) | (9,252 | ) | 6,237 | n/m | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Provision for credit losses
|
121 | 2,484 | - | 2,605 | 5,990 | (57 | ) | |||||||||||||||||
|
Goodwill impairment
|
- | - | 2,603 | 2,603 | - | n/m | ||||||||||||||||||
|
Noninterest expense
|
3,221 | 7,624 | - | 10,845 | 5,985 | 81 | ||||||||||||||||||
|
Income (loss) before income taxes
|
962 | (22,753 | ) | (3,514 | ) | (25,305 | ) | (5,738 | ) | n/m | ||||||||||||||
|
Income tax expense (benefit)
(1)
|
354 | (8,388 | ) | (336 | ) | (8,370 | ) | (2,119 | ) | n/m | ||||||||||||||
|
Net income (loss)
|
$ | 608 | $ | (14,365 | ) | $ | (3,178 | ) | $ | (16,935 | ) | $ | (3,619 | ) | n/m | |||||||||
|
|
||||||||||||||||||||||||
|
Net interest yield
(1)
|
2.81 | % | 1.37 | % | (0.37 | )% | 1.80 | % | 2.36 | % | ||||||||||||||
|
Efficiency ratio
(1)
|
74.84 | n/m | n/m | n/m | 95.96 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance Sheet
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Average
|
||||||||||||||||||||||||
|
Total loans and leases
|
$ | 55,632 | $ | 65,493 | $ | - | $ | 121,125 | $ | 132,195 | (8 | ) | ||||||||||||
|
Total earning assets
|
75,695 | 67,565 | 22,209 | 165,469 | 188,222 | (12 | ) | |||||||||||||||||
|
Total assets
|
77,052 | 83,531 | 43,065 | 203,648 | 230,076 | (11 | ) | |||||||||||||||||
|
Allocated equity
|
n/a | n/a | n/a | 17,933 | 26,641 | (33 | ) | |||||||||||||||||
|
Economic capital
(2, 3)
|
n/a | n/a | n/a | 15,211 | 21,837 | (30 | ) | |||||||||||||||||
|
Period end
|
June 30, 2011 | December 31, 2010 | ||||||||||||||||||||||
|
Total loans and leases
|
$ | 55,454 | $ | 66,099 | $ | - | $ | 121,553 | $ | 122,933 | (1 | ) | ||||||||||||
|
Total earning assets
|
69,822 | 68,114 | 11,972 | 149,908 | 172,082 | (13 | ) | |||||||||||||||||
|
Total assets
|
71,723 | 83,411 | 30,264 | 185,398 | 212,413 | (13 | ) | |||||||||||||||||
| (1) | FTE basis | |
| (2) |
Economic capital decreased due to improvements in credit risk
as loan balances declined and due to a lower MSR balance. Allocated
equity decreased due to the $2.0 billion goodwill impairment charge recorded during the fourth quarter of 2010 and
was minimally impacted by the $2.6 billion goodwill impairment charge recorded late in the second quarter of
2011.
|
|
| (3) |
Economic capital represents allocated equity less goodwill and a percentage of intangible assets (excluding MSRs).
|
|
| n/m | = not meaningful | |
| n/a | = not applicable |
35
Table of Contents
CRES
was realigned effective January 1, 2011 and its activities
are now referred to as
Home Loans, which includes ongoing loan production and servicing activities, Legacy Asset
Servicing, which includes a separately managed legacy mortgage portfolio, and Other, which
includes the results of certain MSR activities and other unallocated assets (e.g., goodwill). This
realignment allows
CRES
management to lead the ongoing home loan business while also providing
greater focus and transparency on legacy mortgage issues.
CRES
includes the impact of transferring customers and their related loan balances between
GWIM
and
CRES
based on client segmentation thresholds. For more information on the migration of
customer balances, see
GWIM
on page 46.
CRES
generates revenue by providing an extensive line of consumer real estate products and
services to customers nationwide.
CRES
products are available to our customers through our retail
network of approximately 5,700 banking centers, mortgage loan officers in approximately 750
locations and a sales force offering our customers direct telephone and online access to our
products. These products are also offered through our correspondent loan acquisition channels.
CRES
products include fixed and adjustable-rate first-lien mortgage loans for home purchase
and refinancing needs, home equity lines of credit and home equity loans. First mortgage products
are either sold into the secondary mortgage market to investors, while we retain MSRs and the Bank
of America customer relationships, or are held on our balance sheet in
All Other
for ALM purposes.
Home equity lines of credit and home equity loans are retained on the
CRES
balance sheet.
CRES
services mortgage loans, including those loans it owns, loans owned by other business segments and
All Other
, and loans owned by outside investors. On February 4, 2011, we announced that we were
exiting the reverse mortgage origination business. In October 2010, we exited the first mortgage
wholesale acquisition channel. These strategic changes were made to allow greater focus on our
retail channels. The financial results of the on-balance sheet loans are reported in the business
segment that owns the loans or
All Other
.
CRES
is not impacted by the Corporation’s first mortgage
production retention decisions as
CRES
is compensated for loans held for ALM purposes on a
management accounting basis, with a corresponding offset recorded in
All Other,
and for servicing
loans owned by other business segments and
All Other
.
Home Loans includes the ongoing loan production activities, certain servicing activities that
are discussed below, and the
CRES
home equity portfolio not selected for inclusion in the Legacy
Asset Servicing portfolio
.
Home Loans also included insurance operations through June 30, 2011,
when the ongoing insurance business was transferred to
Global Card Services
following the sale of
Balboa’s lender-placed insurance business. Due to the realignment of
CRES
, the composition of the
Home Loans loan portfolio does not currently reflect a normalized level of credit losses and
noninterest expense which we expect will develop over time.
Legacy Asset Servicing is responsible for servicing and managing the exposures related to
selected residential mortgage, home equity and discontinued real estate loan portfolios. In
addition, it is responsible for servicing all delinquent mortgage loans. These selected loan
portfolios include owned loans and loans serviced for others, including loans held in other
business segments and
All Other
(collectively, the Legacy Asset Servicing portfolio). The Legacy
Asset Servicing portfolio includes residential mortgage loans, home equity loans and discontinued
real estate loans that would not have been originated under our underwriting standards at December
31, 2010. Countrywide loans that were impaired at the time of acquisition (the Countrywide PCI
portfolio) as well as certain loans that met a pre-defined delinquency status or probability of
default threshold as of January 1, 2011 are also included in the Legacy Asset Servicing portfolio.
Since determining the pool of loans that would be included in Legacy Asset Servicing portfolio as
of January 1, 2011, the criteria have not changed for this portfolio. However, the criteria for
inclusion of certain assets and liabilities in the Legacy Asset Servicing portfolio will continue
to be evaluated over time.
The total owned loans in the Legacy Asset Servicing portfolio were $169.5 billion at June 30,
2011, of which $66.1 billion are reflected on the balance sheet of Legacy Asset Servicing within
CRES
. The remainder is held on the balance sheets of
Global Commercial Banking
,
GWIM
and
All
Other
. For more information on the Legacy Asset Servicing portfolio criteria, see Consumer Credit
Portfolio on page 76.
Legacy Asset Servicing results reflect the net cost of legacy exposures that is included in
the results of
CRES
, including representations and warranties provision, litigation costs and
financial results of the
CRES
home equity portfolio selected as part of the Legacy Asset Servicing
portfolio. In addition, certain revenue and expenses on loans serviced for others, including loans
serviced for other business segments and
All Other
, are included in Legacy Asset Servicing
results. The results of the Legacy Asset Servicing residential mortgage and discontinued real
estate portfolios are recorded primarily in
All Other
.
The Other component within
CRES
includes the results of certain MSR activities, including net
hedge results, together with any related assets or liabilities used as economic hedges. The change
in the value of the MSRs reflects the change in
36
Table of Contents
discount rates and prepayment speed assumptions,
largely due to changes in interest rates, as well as the effect of changes in other assumptions,
including the cost to service. These amounts are not allocated between Home Loans and Legacy Asset
Servicing since the MSRs are managed as a single asset. Goodwill assigned to
CRES
is also included
in Other; however, the remaining balance of $2.6 billion of goodwill was written off in its
entirety during the three months ended June 30, 2011. For additional information on goodwill, see
Note 10 – Goodwill and Intangible Assets
to the Consolidated Financial Statements.
Servicing activities include collecting cash for principal, interest and escrow payments from
borrowers, and disbursing customer draws for lines of credit and accounting for and remitting
principal and interest payments to investors and escrow
payments to third parties along with responding to non-default related customer inquiries. These
activities are performed by Home Loans. Our home retention efforts are also part of our servicing
activities, along with supervising foreclosures and property dispositions. These default-related
activities are performed by Legacy Asset Servicing. In an effort to help our customers avoid
foreclosure, Legacy Asset Servicing evaluates various workout options prior to foreclosure sale
which, combined with our temporary halt of foreclosures announced in October 2010, has resulted in
elongated default timelines. We have resumed foreclosure sales in all non-judicial states;
however, while we have recently resumed foreclosure proceedings in nearly all judicial states, our
progress on foreclosure sales in judicial states has been significantly slower than in
non-judicial states. We have also not yet resumed foreclosure sales for certain types of
customers, including those in bankruptcy and those with FHA-insured loans, although we have
resumed foreclosure proceedings with respect to these types of customers. For additional
information on our servicing activities, see Off-Balance Sheet Arrangements and Contractual
Obligations – Other Mortgage-related Matters on page 60.
The sale of lender-placed and voluntary property and casualty insurance assets and
liabilities of Balboa closed on June 1, 2011. In connection
with the sale,
CRES
recognized a
pre-tax gain of $752 million net of an inter-segment advisory fee and an allocation of $193
million of goodwill. The sale agreement included the fair value of certain earn-outs and clawback
provisions which were reflected in the determination of the pre-tax gain. Under the earn-out provisions, the buyer will
make payments to the Corporation if certain future revenue or profitability targets are met
whereas under the clawback provision, the Corporation may be required to pay the buyer if certain
loss projections or gross written premiums vary from targets established in the sale agreement
after certain triggering events occur, including regulatory actions. The amount, if any, and
timing of any clawback or earn-out payments could vary based upon these future performance
metrics.
Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010
The
CRES
net loss increased $13.0 billion to $14.5 billion. Revenue declined $14.0 billion to a loss
of $11.3 billion due to $14.0 billion in representations and warranties provision which is
included in mortgage banking income compared to a provision of $1.2 billion in 2010. The
representations and warranties provision included $8.6 billion related to the BNY Mellon
Settlement and $5.4 billion related to other non-GSE exposures, and to a lesser extent, GSE
exposures. Other factors resulting in the revenue decline were the decreases in MSR results, net
of hedges, of $885 million as a result of higher expected servicing costs, and core production
income of $604 million due to a decline in new loan originations caused mainly by lower overall
market demand and a drop in market share in both the retail and correspondent sales channels
partially driven by pricing actions as well as the Corporation’s exit from wholesale lending.
These declines were partially offset by a pre-tax gain on the sale of Balboa’s lender-placed
insurance business of $752 million, net of an inter-segment advisory fee. For additional
information on representations and warranties, see
Note 9 – Representations and Warranties
Obligations and Corporate Guarantees
to the Consolidated
Financial Statements and Off-Balance Sheet Arrangements and
Contractual Obligations – Representations
and Warranties on page 51.
Provision for credit losses decreased $883 million to $1.5 billion reflecting improved
portfolio trends, including the Countrywide PCI home equity portfolio.
Noninterest expense increased $5.9 billion to $8.6 billion, primarily due to a non-cash,
non-tax deductible goodwill impairment charge of $2.6 billion and $2.0 billion in litigation
expense. Additionally, as a result of elongated default timelines,
our servicing costs have increased
driven by $716 million of mortgage-related assessments and waivers costs, which included $485
million for compensatory fees that we expect to be assessed by the GSEs as a result of foreclosure
delays as our agreements and first mortgage seller/servicer guides with the GSEs provide timelines
to complete the liquidation of delinquent loans. In instances where we fail to meet these
timelines, our agreements provide the GSEs with the option to assess
compensatory fees. The remainder of the $716 million of
mortgage-related assessments and waivers costs are out-of-pocket
costs that we do not expect to recover. We expect such
costs will continue as additional loans are delayed in the foreclosure process and as the GSEs
assert more aggressive criteria. Higher default-related and other loss mitigation expenses also
contributed to increased expenses. Production expense was lower due to lower origination volumes
and lower insurance expenses resulting from the sale of Balboa’s lender-placed insurance business.
37
Table of Contents
Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010
The
CRES
net loss increased $13.3 billion to $16.9 billion. Revenue declined $15.5 billion to a loss
of $9.3 billion due in large part to a decrease in mortgage banking income driven by an increase
in representations and warranties provision of $13.3 billion, a decline in core production income
of $1.2 billion and the decrease in MSR results, net of hedges, of $1.1 billion as a result of
servicing costs. The decline in core production income was primarily due to
lower production volume driven by the same factors noted in the three-month discussion. Net
interest income also contributed to the decline in revenue driven primarily by lower average
balances of loans held-for-sale (LHFS).
Provision for credit losses decreased $3.4 billion to $2.6 billion and noninterest expense
increased $7.5 billion to $13.4 billion due to the same factors noted in the three-month
discussion.
Mortgage Banking Income
CRES
mortgage banking income is categorized into production and servicing income. Core
production income is comprised of revenue from the fair value gains and losses recognized on our
interest rate lock commitments (IRLCs) and 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
offset in
All Other,
for transfers of mortgage loans from
CRES
to the ALM portfolio related to the
Corporation’s mortgage production retention decisions. Ongoing costs related to representations
and warranties and other obligations that were incurred in the sales of mortgage loans in prior
periods are also included in production income.
Servicing income includes income earned in connection with servicing activities and MSR
valuation adjustments, net of economic hedge activities. The costs associated with our servicing
activities are included in noninterest expense.
The table below summarizes the components of mortgage banking income.
|
Mortgage Banking Income
|
||||||||||||||||
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
|
(Dollars in millions)
|
2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Production income (loss):
|
||||||||||||||||
|
Core production revenue
|
$ | 824 | $ | 1,428 | $ | 1,492 | $ | 2,711 | ||||||||
|
Representations and warranties provision
|
(14,037 | ) | (1,248 | ) | (15,050 | ) | (1,774 | ) | ||||||||
|
Total production income (loss)
|
(13,213 | ) | 180 | (13,558 | ) | 937 | ||||||||||
|
Servicing income:
|
||||||||||||||||
|
Servicing fees
|
1,556 | 1,649 | 3,162 | 3,218 | ||||||||||||
|
Impact of customer payments
(1)
|
(639 | ) | (981 | ) | (1,345 | ) | (2,037 | ) | ||||||||
|
Fair value changes of MSRs, net of economic hedge results
(2)
|
(873 | ) | 12 | (870 | ) | 209 | ||||||||||
|
Other servicing-related revenue
|
151 | 160 | 288 | 334 | ||||||||||||
|
Total net servicing income
|
195 | 840 | 1,235 | 1,724 | ||||||||||||
|
Total
CRES
mortgage banking income (loss)
|
(13,018 | ) | 1,020 | (12,323 | ) | 2,661 | ||||||||||
|
Eliminations
(3)
|
(178 | ) | (122 | ) | (243 | ) | (263 | ) | ||||||||
|
Total consolidated mortgage banking income (loss)
|
$ | (13,196 | ) | $ | 898 | $ | (12,566 | ) | $ | 2,398 | ||||||
| (1) | Represents the change in the market value of the MSR asset due to the impact of customer payments received during the period. | |
| (2) | Includes sale of MSRs. | |
| (3) | Includes the effect of transfers of mortgage loans from CRES to the ALM portfolio in All Other . |
Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010
Core production revenue of $824 million represented a decrease of $604 million, due to lower
volumes partially offset by an increase in margins. Representations and warranties provision
increased $12.8 billion to $14.0 billion. For additional information on representations and
warranties, see
Note 9 – Representations and Warranties Obligations and Corporate Guarantees
to
the Consolidated Financial Statements and Off-Balance Sheet Arrangements and
Contractual Obligations – Representations and
Warranties on page 51.
Net servicing income decreased $645 million as the lower impact of customer payments was more
than offset by less favorable MSR results, net of hedges. MSRs results, net of hedges, were a loss
of $873 million, driven primarily by a decline in the value of the MSRs of $1.5 billion resulting
from the expectation of higher servicing costs. The increased servicing costs were primarily a result of higher costs
in view of all the changes in servicing delinquent loans, costs associated with additional
servicing obligations under the BNY Mellon Settlement and extending default workout timelines in
judicial states. For additional information on MSRs and the related hedge instruments, see
Mortgage Banking Risk Management on page 119.
38
Table of Contents
Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010
Core production revenue of $1.5 billion represented a decrease of $1.2 billion due to a
decline in new loan originations caused mainly by lower overall market demand and a decline in
market share. Representations and warranties provision increased $13.3 billion to $15.1 billion.
Net servicing income decreased $489 million as the lower impact of customer payments was more
than offset by less favorable MSR results, net of hedges. MSR results, net of hedges, were a loss
of $870 million, driven by a decline in the value of the MSRs of $2.0 billion resulting from revised
expectations of cash flows, primarily related to higher servicing costs.
|
Key Statistics
|
||||||||||||||||
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
|
(Dollars in millions, except as noted)
|
2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Loan production
|
||||||||||||||||
|
CRES:
|
||||||||||||||||
|
First mortgage
|
$ | 38,320 | $ | 69,141 | $ | 90,839 | $ | 136,106 | ||||||||
|
Home equity
|
879 | 1,831 | 2,454 | 3,602 | ||||||||||||
|
Total Corporation
(1)
:
|
||||||||||||||||
|
First mortgage
|
$ | 40,370 | $ | 71,938 | $ | 97,104 | $ | 141,440 | ||||||||
|
Home equity
|
1,054 | 2,137 | 2,782 | 4,164 | ||||||||||||
| June 30 | December 31 | |||||||||||||||
|
Period end
|
2011 | 2010 | ||||||||||||||
|
Mortgage servicing portfolio (in billions)
(2, 3)
|
$ | 1,992 | $ | 2,057 | ||||||||||||
|
Mortgage loans serviced for investors (in billions)
(3)
|
1,578 | 1,628 | ||||||||||||||
|
Mortgage servicing rights:
|
||||||||||||||||
|
Balance
|
12,372 | 14,900 | ||||||||||||||
|
Capitalized mortgage servicing
rights (% of loans serviced for
investors)
|
78 | bps | 92 | bps | ||||||||||||
| (1) |
In addition to loan production in
CRES
, 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.
|
|
| (3) |
The total Corporation mortgage servicing portfolio consists of $1,079 billion in Home Loans and $913 billion in Legacy Asset
Servicing at June 30, 2011. The total Corporation mortgage loans serviced for investors
consisted of $870 billion in Home Loans and
$708 billion in Legacy Asset Servicing at June 30, 2011.
|
First mortgage production was $40.4 billion and $97.1 billion for the three and six
months ended June 30, 2011 compared to $71.9 billion and $141.4 billion for the same periods in
2010. The decrease of $31.5 billion and $44.3 billion was primarily due to a decline in market
share caused primarily by our exit from the wholesale origination channel in the fall of 2010 and
a reduction in market share in both the retail and correspondent sales channels partially driven
by pricing actions.
Home equity production was $1.1 billion and $2.8 billion for the three and six months ended
June 30, 2011 compared to $2.1 billion and $4.2 billion for the same periods in 2010 primarily due
to a decline in reverse mortgage originations based on our decision to exit this business in
February 2011.
At June 30, 2011, the consumer MSR balance was $12.4 billion, which represented 78 bps of the
related unpaid principal balance compared to $14.9 billion, or 92 bps of the related unpaid
principal balance at December 31, 2010. The decline in the consumer MSR balance was primarily
driven by the impact of elevated expected costs to service delinquent loans, which reduced
expected cash flows and the value of the MSRs, the impact of lower mortgage rates and the decline
in value due to customer payments. These declines were partially offset by the addition of new
MSRs recorded in connection with sales of loans. For additional information on our servicing
activities, see Off-Balance Sheet Arrangements and Contractual
Obligations – Other
Mortgage-related Matters on page 60.
39
Table of Contents
|
Global Commercial Banking
|
||||||||||||||||||||||||
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||
|
(Dollars in millions)
|
2011 | 2010 | % Change | 2011 | 2010 | % Change | ||||||||||||||||||
|
Net interest income
(1)
|
$ | 1,827 | $ | 2,097 | (13 | )% | $ | 3,677 | $ | 4,290 | (14 | )% | ||||||||||||
|
Noninterest income:
|
||||||||||||||||||||||||
|
Service charges
|
576 | 589 | (2 | ) | 1,182 | 1,188 | (1 | ) | ||||||||||||||||
|
All other income
|
407 | 197 | 107 | 602 | 497 | 21 | ||||||||||||||||||
|
Total noninterest income
|
983 | 786 | 25 | 1,784 | 1,685 | 6 | ||||||||||||||||||
|
Total revenue, net of interest expense
|
2,810 | 2,883 | (3 | ) | 5,461 | 5,975 | (9 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Provision for credit losses
|
(417 | ) | 623 | n/m | (338 | ) | 1,559 | n/m | ||||||||||||||||
|
Noninterest expense
|
1,068 | 974 | 10 | 2,174 | 2,005 | 8 | ||||||||||||||||||
|
Income before income taxes
|
2,159 | 1,286 | 68 | 3,625 | 2,411 | 50 | ||||||||||||||||||
|
Income tax expense
(1)
|
778 | 471 | 65 | 1,321 | 891 | 48 | ||||||||||||||||||
|
Net income
|
$ | 1,381 | $ | 815 | 69 | $ | 2,304 | $ | 1,520 | 52 | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Net interest yield
(1)
|
2.60 | % | 3.13 | % | 2.66 | % | 3.26 | % | ||||||||||||||||
|
Return on average equity
|
13.67 | 7.46 | 11.33 | 6.93 | ||||||||||||||||||||
|
Return on average economic capital
(2, 3)
|
27.92 | 14.14 | 22.85 | 13.04 | ||||||||||||||||||||
|
Efficiency ratio
(1)
|
38.01 | 33.80 | 39.81 | 33.56 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance Sheet
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Average
|
||||||||||||||||||||||||
|
Total loans and leases
|
$ | 189,346 | $ | 206,603 | (8 | ) | $ | 190,883 | $ | 210,450 | (9 | ) | ||||||||||||
|
Total earning assets
|
281,844 | 268,552 | 5 | 278,272 | 265,125 | 5 | ||||||||||||||||||
|
Total assets
|
320,428 | 305,788 | 5 | 316,521 | 301,925 | 5 | ||||||||||||||||||
|
Total deposits
|
166,481 | 145,499 | 14 | 163,366 | 144,572 | 13 | ||||||||||||||||||
|
Allocated equity
|
40,515 | 43,869 | (8 | ) | 41,008 | 44,222 | (7 | ) | ||||||||||||||||
|
Economic capital
(4)
|
19,817 | 23,159 | (14 | ) | 20,309 | 23,558 | (14 | ) | ||||||||||||||||
| June 30 | December 31 | |||||||||||||||||||||||
|
Period end
|
2011 | 2010 | ||||||||||||||||||||||
|
Total loans and leases
|
$ | 189,434 | $ | 194,038 | (2 | ) | ||||||||||||||||||
|
Total earning assets
|
242,272 | 274,637 | (12 | ) | ||||||||||||||||||||
|
Total assets
|
280,289 | 312,802 | (10 | ) | ||||||||||||||||||||
|
Total deposits
|
170,156 | 161,279 | 6 | |||||||||||||||||||||
| (1) | FTE basis | |
| (2) |
Increases in the ratios resulted from higher net income and lower economic capital. Economic
capital decreased due to improved credit quality, declining loan balances and improvements in
counterparty credit exposure.
|
|
| (3) |
Return on average economic capital is calculated as net income, excluding cost of funds and
earnings credit on intangibles, divided by average economic capital.
|
|
| (4) |
Economic capital represents allocated equity less goodwill and a percentage of intangible assets.
|
|
| 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 annual 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.
Effective in the first quarter of 2011, management responsibility for the merchant processing
joint venture, Banc of America Merchant Services, LLC, was moved from
GBAM
to
Global Commercial
Banking
where it more closely aligns with the business model. Prior periods have been restated to
reflect this change. In the three months ended June 30, 2011, we recorded a $500 million
impairment write-down on our investment in the joint venture. Because of the recent transfer of
the joint venture to
Global Commercial Banking
, the impairment write-down was recorded in
All
Other
for management accounting purposes. For additional
information, see
Note 5 – Securities
to
the Consolidated Financial Statements.
40
Table of Contents
Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010
Net
income increased $566 million, or 69 percent, to $1.4 billion driven by lower credit costs from improved
asset quality. Revenue decreased $73 million, primarily due to lower loan balances partially
offset by earnings on higher deposit balances and a gain on the termination of a purchase
contract.
Net interest income decreased $270 million due to the decline in average loans and a lower
net interest allocation related to ALM activities. Offsetting this decrease was an increase in
average deposits of $21.0 billion, as clients continue to maintain high levels of liquidity.
Noninterest income increased $197 million, or 25 percent, largely due to a gain on the termination
of a purchase contract.
The provision for credit losses decreased $1.0 billion to a benefit of $417 million driven by
improved overall economic conditions and an accelerated rate of loan resolutions in the commercial
real estate portfolio.
Noninterest expense increased $94 million due to an increase in Federal Deposit Insurance
Corporation (FDIC) expense driven by growth in deposit balances, higher foreclosed property
expense driven by lower gains on real estate owned sales, and higher other support costs.
Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010
Net
income increased $784 million, or 52 percent, to $2.3 billion due to an improvement of $1.9 billion in
the provision for credit losses partially offset by lower revenue. The decrease in net interest
income of $613 million was due to a lower net interest allocation related to ALM activities and
lower loan balances. The decrease in provision for credit losses and the increase in noninterest
expense were driven by the same factors described in the three-month discussion above.
Global Commercial Banking Revenue
Global Commercial Banking
revenue can also be categorized into treasury services revenue
primarily from capital and treasury management, and business lending
revenue derived from credit-related products and services.
Treasury services revenue for the three and six months ended June 30, 2011 was $1.2 billion
and $2.4 billion, essentially flat compared to the same periods in 2010. Net interest income
increased from $727 million to $746 million for the three months ended June 30, 2011 compared to
the same period in 2010 driven by the impact of an increase of $21.0 billion in average deposits.
Noninterest income decreased from $521 million to $499 million for the three months ended June 30,
2011 compared to the same period in 2010 as the use of certain treasury services declined and
clients continued to convert from paper to electronic services. These actions, combined with our
clients leveraging compensating balances to offset fees, have negatively impacted treasury
services revenue.
Business lending revenue for the three and six months ended June 30, 2011 was $1.6 billion
and $3.0 billion, a decrease of $71 million and $448 million compared to the same periods in 2010.
Net interest income declined from $1.4 billion to $1.1 billion for the three months ended June 30,
2011 and from $2.8 billion to $2.2 billion for the six months ended June 30, 2011 driven by a
lower net interest allocation related to ALM activities and lower
loan balances compared to the same periods in 2010. Noninterest
income increased from $265 million to $483 million for the three months ended June 30, 2011 and
from $688 million to $825 million for the six months ended June 30, 2011 compared to the same
periods in 2010. This increase was due in part to a gain on the termination of a purchase
contract. Average loan and lease balances decreased $17.3 billion and $19.6 billion, or eight
percent and nine percent, for the three and six months ended June 30, 2011 compared to the same
periods in 2010 due to client deleveraging.
41
Table of Contents
Global Banking & Markets
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||
|
(Dollars in millions)
|
2011 | 2010 | % Change | 2011 | 2010 | % Change | ||||||||||||||||||
|
Net interest income
(1)
|
$ | 1,791 | $ | 2,002 | (11 | )% | $ | 3,828 | $ | 4,172 | (8 | )% | ||||||||||||
|
Noninterest income:
|
||||||||||||||||||||||||
|
Service charges
|
442 | 468 | (6 | ) | 917 | 931 | (2 | ) | ||||||||||||||||
|
Investment and brokerage services
|
587 | 676 | (13 | ) | 1,264 | 1,299 | (3 | ) | ||||||||||||||||
|
Investment banking fees
|
1,637 | 1,301 | 26 | 3,148 | 2,517 | 25 | ||||||||||||||||||
|
Trading account profits
|
2,071 | 1,202 | 72 | 4,691 | 6,273 | (25 | ) | |||||||||||||||||
|
All other income
|
268 | 255 | 5 | 834 | 405 | 106 | ||||||||||||||||||
|
Total noninterest income
|
5,005 | 3,902 | 28 | 10,854 | 11,425 | (5 | ) | |||||||||||||||||
|
Total revenue, net of interest expense
|
6,796 | 5,904 | 15 | 14,682 | 15,597 | (6 | ) | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Provision for credit losses
|
(82 | ) | (133 | ) | 38 | (284 | ) | 103 | n/m | |||||||||||||||
|
Noninterest expense
|
4,713 | 4,735 | - | 9,435 | 9,024 | 5 | ||||||||||||||||||
|
Income before income taxes
|
2,165 | 1,302 | 66 | 5,531 | 6,470 | (15 | ) | |||||||||||||||||
|
Income tax expense
(1)
|
607 | 404 | 50 | 1,839 | 2,333 | (21 | ) | |||||||||||||||||
|
Net income
|
$ | 1,558 | $ | 898 | 73 | $ | 3,692 | $ | 4,137 | (11 | ) | |||||||||||||
|
|
||||||||||||||||||||||||
|
Return on average equity
|
16.44 | % | 7.03 | % | 18.61 | % | 15.99 | % | ||||||||||||||||
|
Return on average economic capital
(2, 3)
|
23.40 | 9.06 | 25.86 | 20.28 | ||||||||||||||||||||
|
Efficiency ratio
(1)
|
69.35 | 80.19 | 64.26 | 57.86 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance Sheet
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Average
|
||||||||||||||||||||||||
|
Total
trading-related assets
(4, 5)
|
$ | 460,153 | $ | 522,304 | (12 | ) | $ | 459,278 | $ | 519,767 | (12 | ) | ||||||||||||
|
Total loans and leases
|
109,473 | 95,839 | 14 | 106,604 | 97,427 | 9 | ||||||||||||||||||
|
Total
earning assets
(4, 5)
|
569,517 | 622,820 | (9 | ) | 572,701 | 628,193 | (9 | ) | ||||||||||||||||
|
Total assets
(4, 5)
|
750,908 | 779,060 | (4 | ) | 730,907 | 781,949 | (7 | ) | ||||||||||||||||
|
Total deposits
|
118,133 | 112,565 | 5 | 115,097 | 108,124 | 6 | ||||||||||||||||||
|
Allocated equity
|
38,001 | 51,245 | (26 | ) | 40,004 | 52,182 | (23 | ) | ||||||||||||||||
|
Economic capital
(6)
|
27,078 | 40,705 | (33 | ) | 29,126 | 41,582 | (30 | ) | ||||||||||||||||
| June 30 | December 31 | |||||||||||||||||||||||
|
Period
end
|
2011 | 2010 | ||||||||||||||||||||||
|
Total
trading-related assets
(4, 5)
|
$ | 445,220 | $ | 417,714 | 7 | |||||||||||||||||||
|
Total loans and leases
|
114,165 | 99,964 | 14 | |||||||||||||||||||||
|
Total
earning assets
(4, 5)
|
557,327 | 514,462 | 8 | |||||||||||||||||||||
|
Total assets
(4, 5)
|
691,249 | 655,778 | 5 | |||||||||||||||||||||
|
Total deposits
|
123,618 | 110,971 | 11 | |||||||||||||||||||||
| (1) | FTE basis | |
| (2) |
Increases in the ratios resulted from higher net income for the three-month period and a decrease in
economic capital for both the three- and six-month periods. Economic capital decreased due to lower
credit risk and improvements in counterparty credit exposure.
|
|
| (3) |
Return on average economic capital is calculated as net income, excluding cost of funds and earnings
credit on intangibles, divided by average economic capital.
|
|
| (4) | Includes assets which are not considered earning assets (i.e., derivative assets). | |
| (5) |
Total earning assets and total assets include asset allocations to match liabilities (i.e., deposits).
|
|
| (6) |
Economic capital represents allocated equity less goodwill and a percentage of intangible assets.
|
|
| n/m | = not meaningful |
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. As a result
of our market-making activities in these products, we may be required to manage positions in
government securities, equity and equity-linked securities, high-grade and high-yield corporate
debt securities, commercial paper, mortgage-backed securities (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 annual sales greater than $2
billion.
42
Table of Contents
Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010
Net income increased $660 million to $1.6 billion driven by higher investment banking fees
and increased sales and trading revenue, while noninterest expense remained relatively flat.
Noninterest expense in the current-year period included
higher revenue-related compensation and costs related to investments in infrastructure while the
prior-year period included the U.K. employer bonus tax of $395 million. Provision benefit
decreased $51 million due to lower reserve releases versus prior year.
Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010
Net income decreased $445 million to $3.7 billion due to a less favorable trading environment
in the first quarter of 2011 compared to last year’s record first quarter and higher noninterest
expense driven by increased costs related to investments in
infrastructure. The provision for credit losses decreased $387 million to a provision benefit
of $284 million driven by stabilization in borrower credit profiles and a legal settlement
recovery.
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),
residential mortgage-backed securities (RMBS), swaps and collateralized debt obligations (CDOs);
currencies including interest rate and foreign exchange contracts; commodities including primarily
futures, forwards and options; and equity income from equity-linked derivatives and cash equity
activity. For additional information on sales and trading revenue, see
Note 4 — Derivatives
to
the Consolidated Financial Statements.
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
|
(Dollars in millions)
|
2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Sales and trading revenue
(1)
|
||||||||||||||||
|
Fixed income, currencies and commodities
|
$ | 2,697 | $ | 2,230 | $ | 6,343 | $ | 7,717 | ||||||||
|
Equity income
|
1,081 | 882 | 2,330 | 2,396 | ||||||||||||
|
Total sales and trading revenue
|
$ | 3,778 | $ | 3,112 | $ | 8,673 | $ | 10,113 | ||||||||
| (1) | Includes $43 million and $98 million of net interest income on a FTE basis for the three and six months ended June 30, 2011 as compared to $76 million and $148 million for the same periods in 2010. |
Sales and trading revenue increased $666 million, or 21 percent, to $3.8 billion for the
three months ended June 30, 2011 compared to the same period in
2010. Fixed income, currencies and
commodities (FICC) revenue increased $467 million to $2.7 billion for the three months ended June
30, 2011 compared to the same period in 2010 driven by credit and commodities. Equity income was
$1.1 billion for the three months ended June 30, 2011 compared to $882 million for the same period
in 2010 with the increase due to favorable market conditions, primarily in the equity derivatives business. Sales
and trading revenue includes total commissions and brokerage fee revenue of $583 million ($547
million from equities and $36 million from FICC) for the three months ended June 30, 2011 compared
to $657 million ($600 million from equities and $57 million from FICC) for the same period in
2010. We recorded DVA gains during the three months ended June 30, 2011 of $121 million compared
to gains of $77 million in the same period in 2010.
Sales and trading revenue decreased $1.4 billion, or 14 percent, to $8.7 billion for the six
months ended June 30, 2011 compared to the same period in 2010 due to a less favorable trading
environment in the first quarter of 2011. FICC revenue decreased $1.4 billion to $6.3 billion for
the six months ended June 30, 2011 compared to the same period in 2010 primarily due to our rates
and currencies business and the wind down of our proprietary trading business. Equity income was
$2.3 billion for the six months ended June 30, 2011 compared to $2.4 billion for the same period
in the prior year with the decrease driven primarily by lower equity derivative trading volumes
partially offset by an increase in commission revenue. Sales and trading revenue includes total
commissions and brokerage fee revenue of $1.3 billion ($1.2 billion from equities and $75 million
from FICC) for the six months ended June 30, 2011 compared to $1.3 billion ($1.2 billion from
equities, and $101 million from FICC) for the same period in 2010. We recorded DVA losses during
the six months ended June 30, 2011 of $236 million compared to gains of
$246 million in the
same period in 2010.
43
Table of Contents
In conjunction with regulatory reform measures and our initiative to optimize our balance
sheet, we have exited our proprietary trading business as of June 30, 2011, which involved trading
activities in a variety of products, including stocks,
bonds, currencies and commodities.
Proprietary trading revenue was $231 million and $434 million for the three and six months
ended June 30, 2011 compared to $432 million and $888 million in the same periods in 2010.
For additional information, see
Financial Reform Act – Limitations on Certain Activities on page
62.
Investment Banking Fees
Product specialists within
GBAM
provide advisory services, and underwrite and distribute debt
and equity issuances and certain other loan products. The table below presents total investment
banking fees for
GBAM
which represents 97 percent of the Corporation’s total investment banking
income for both the three and six months ended June 30, 2011 and 99 percent and 98 percent for the
same periods in 2010, with the remainder comprised of investment banking income reported in
GWIM
and
Global Commercial Banking.
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
|
(Dollars in millions)
|
2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Investment banking fees
|
||||||||||||||||
|
Advisory
(1)
|
$ | 381 | $ | 242 | $ | 700 | $ | 409 | ||||||||
|
Debt issuance
|
880 | 773 | 1,679 | 1,509 | ||||||||||||
|
Equity issuance
|
376 | 286 | 769 | 599 | ||||||||||||
|
Total investment banking fees
|
$ | 1,637 | $ | 1,301 | $ | 3,148 | $ | 2,517 | ||||||||
| (1) | Advisory includes fees on debt and equity advisory services and mergers and acquisitions. |
Investment banking fees increased $336 million for the three months ended June 30, 2011
compared to the same period in the prior year reflecting strong performance across all categories,
particularly advisory, equity issuance, leveraged finance and investment-grade. Investment banking
fees increased $631 million for the six months ended June 30, 2011 compared to the prior-year
period reflecting strong performance across advisory services and debt and equity issuances.
Global Corporate Banking
Client relationship teams along with product partners work with our customers to provide a
wide range of lending-related products and services, integrated working capital management and
treasury solutions through the Corporation’s global network of offices. Global Corporate Banking
revenues of $1.4 billion and $2.9 billion for the three and six months ended June 30, 2011
remained in line with the same periods in the prior year. Global treasury services revenues of
$624 million and $1.2 billion for the three and six months ended June 30, 2011 were consistent
with the same periods in the prior year as growth in deposit volumes across all the regions was
offset by a challenging rate environment. Global Corporate Banking average deposits increased six
percent and eight percent to $110.6 billion and
$108.0 billion for the three and six months ended June 30, 2011
compared to the same periods in the prior year resulting
from clients continuing to hold excess liquidity due to restrained spending. Global Corporate
Banking lending activities continued to show strength as average loan balances increased 17
percent and 12 percent to $92.8 billion and $90.2 billion for the three and six months ended June
30, 2011 compared to the same periods in prior year, primarily from increases in non-U.S.
commercial loan and trade finance portfolios.
Collateralized Debt Obligation Exposure
CDO vehicles hold diversified pools of fixed-income securities and issue multiple
tranches of debt securities including commercial paper, and mezzanine and equity securities. Our
CDO-related exposure can be divided into funded and unfunded super senior liquidity commitment
exposure and other super senior exposure (i.e., cash positions and derivative contracts). For more
information on our CDO positions, see
Note 8 – Securitizations and Other Variable Interest
Entities
to the Consolidated Financial Statements. Super senior exposure represents the most
senior class of notes that are issued by the CDO vehicles. These financial instruments benefit
from the subordination of all other securities issued by the CDO vehicles. In the three and six
months ended June 30, 2011, we recorded $3 million of gains and $2 million of losses from our
CDO-related exposure compared to $313 million and $605 million of losses for the same periods in
2010.
44
Table of Contents
At June 30, 2011, our super senior CDO exposure before consideration of insurance, net of
write-downs, was $1.1 billion, comprised of $805 million in trading account assets and $283
million in AFS debt securities, compared to $2.0 billion, comprised of $1.3 billion in trading
account assets and $675 million in AFS debt securities at December 31, 2010. Of our super senior
CDO exposure at June 30, 2011, $569 million was hedged and $518 million was unhedged compared to
$772 million hedged and $1.2 billion unhedged at December 31, 2010. Unrealized losses recorded in
accumulated OCI on super senior cash positions and retained positions from liquidated CDOs in
aggregate decreased $14 million and $365 million during the three and six months ended June 30,
2011 to $101 million primarily due to tightening of RMBS and CMBS spreads and the sale of two ABS
CDOs.
The table below presents our original total notional, mark-to-market receivable and credit
valuation adjustment for credit default swaps and other positions with monolines. The receivable
for super senior CDOs reflects hedge gains recorded from inception of the contracts in connection
with write-downs on super senior CDOs.
|
Credit Default Swaps with Monoline Financial Guarantors
|
||||||||||||||||||||||||
| June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
| Other | Other | |||||||||||||||||||||||
| Super | Guaranteed | Super | Guaranteed | |||||||||||||||||||||
|
(Dollars in millions)
|
Senior CDOs | Positions | Total | Senior CDOs | Positions | Total | ||||||||||||||||||
|
Notional
|
$ | 2,968 | $ | 32,656 | $ | 35,624 | $ | 3,241 | $ | 35,183 | $ | 38,424 | ||||||||||||
|
Mark-to-market or guarantor
receivable
|
$ | 2,578 | $ | 6,150 | $ | 8,728 | $ | 2,834 | $ | 6,367 | $ | 9,201 | ||||||||||||
|
Credit valuation adjustment
|
(2,363 | ) | (3,314 | ) | (5,677 | ) | (2,168 | ) | (3,107 | ) | (5,275 | ) | ||||||||||||
|
Total
|
$ | 215 | $ | 2,836 | $ | 3,051 | $ | 666 | $ | 3,260 | $ | 3,926 | ||||||||||||
|
Credit valuation adjustment %
|
92 | % | 54 | % | 65 | % | 77 | % | 49 | % | 57 | % | ||||||||||||
|
(Write-downs) gains
|
$ | (314 | ) | $ | (354 | ) | $ | (668 | ) | $ | (386 | ) | $ | 362 | $ | (24 | ) | |||||||
Total monoline exposure, net of credit valuation adjustments decreased $875 million
driven by terminated monoline contracts when compared to December 31, 2010. The increase in the
credit valuation adjustment as a percent of total super senior CDO exposure was driven by
reductions in recovery expectations for a monoline counterparty. Total write-downs for the six
months ended June 30, 2011 were $668 million which included changes in credit valuation
adjustments as well as hedge losses due to breakdowns in correlations.
With the Merrill Lynch acquisition, we acquired a loan with a carrying value of $3.8 billion
as of June 30, 2011 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 is recorded in
All Other
and all scheduled payments on the loan
have been received to date. 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. The loan matures in September 2023.
45
Table of Contents
Global Wealth & Investment Management
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||
|
(Dollars in millions)
|
2011 | 2010 | % Change | 2011 | 2010 | % Change | ||||||||||||||||||
|
Net interest income
(1)
|
$ | 1,571 | $ | 1,443 | 9 | % | $ | 3,140 | $ | 2,907 | 8 | % | ||||||||||||
|
Noninterest income:
|
||||||||||||||||||||||||
|
Investment and brokerage services
|
2,378 | 2,195 | 8 | 4,756 | 4,303 | 11 | ||||||||||||||||||
|
All other income
|
541 | 551 | (2 | ) | 1,086 | 1,020 | 6 | |||||||||||||||||
|
Total noninterest income
|
2,919 | 2,746 | 6 | 5,842 | 5,323 | 10 | ||||||||||||||||||
|
Total revenue, net of interest expense
|
4,490 | 4,189 | 7 | 8,982 | 8,230 | 9 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Provision for credit losses
|
72 | 122 | (41 | ) | 118 | 363 | (67 | ) | ||||||||||||||||
|
Noninterest expense
|
3,631 | 3,269 | 11 | 7,230 | 6,368 | 14 | ||||||||||||||||||
|
Income before income taxes
|
787 | 798 | (1 | ) | 1,634 | 1,499 | 9 | |||||||||||||||||
|
Income tax expense
(1)
|
281 | 469 | (40 | ) | 595 | 731 | (19 | ) | ||||||||||||||||
|
Net income
|
$ | 506 | $ | 329 | 54 | $ | 1,039 | $ | 768 | 35 | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Net interest yield
(1)
|
2.34 | % | 2.42 | % | 2.32 | % | 2.49 | % | ||||||||||||||||
|
Return on average equity
|
11.54 | 7.27 | 11.80 | 8.61 | ||||||||||||||||||||
|
Return on average economic capital
(2, 3)
|
29.97 | 19.10 | 30.21 | 22.76 | ||||||||||||||||||||
|
Efficiency ratio
(1)
|
80.88 | 78.05 | 80.50 | 77.37 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance Sheet
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Average
|
||||||||||||||||||||||||
|
Total loans and leases
|
$ | 102,200 | $ | 98,811 | 3 | $ | 101,529 | $ | 98,826 | 3 | ||||||||||||||
|
Total earning assets
|
268,968 | 239,186 | 12 | 272,958 | 235,284 | 16 | ||||||||||||||||||
|
Total assets
|
289,050 | 259,801 | 11 | 293,170 | 256,510 | 14 | ||||||||||||||||||
|
Total deposits
|
255,219 | 226,276 | 13 | 256,859 | 223,956 | 15 | ||||||||||||||||||
|
Allocated equity
|
17,574 | 18,179 | (3 | ) | 17,755 | 18,002 | (1 | ) | ||||||||||||||||
|
Economic capital
(4)
|
6,868 | 7,380 | (7 | ) | 7,038 | 7,209 | (2 | ) | ||||||||||||||||
| June 30 | December 31 | |||||||||||||||||||||||
|
Period
end
|
2011 | 2010 | ||||||||||||||||||||||
|
Total loans and leases
|
$ | 102,878 | $ | 100,724 | 2 | |||||||||||||||||||
|
Total earning assets
|
263,867 | 275,260 | (4 | ) | ||||||||||||||||||||
|
Total assets
|
284,294 | 296,251 | (4 | ) | ||||||||||||||||||||
|
Total deposits
|
255,580 | 257,982 | (1 | ) | ||||||||||||||||||||
| (1) | FTE basis | |
| (2) |
Increases in ratios resulted from higher net income and a decrease in economic capital. Economic
capital decreased modestly due to improvements in interest rate risk due to changes in portfolio
composition.
|
|
| (3) |
Return on average economic capital is calculated as net income, excluding cost of funds and
earnings credit on intangibles, divided by average economic capital.
|
|
| (4) |
Economic capital represents allocated equity less goodwill and a percentage of intangible assets.
|
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
Services
.
MLGWM’s
advisory business provides a high-touch client experience through a network of more
than 16,000 financial advisors focused on clients with over $250,000 in total investable assets.
MLGWM
provides tailored solutions to meet our clients’ needs through a full set of brokerage,
banking and retirement products in both domestic and international locations.
U.S. Trust
, together with
MLGWM’s
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.
Retirement Services
partners with 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
. Retirement Services
also provides comprehensive investment advisory services to
individuals, small to large corporations and pension plans.
46
Table of Contents
GWIM
results also include the BofA Global Capital Management (BACM) business, which is
comprised primarily of the cash and liquidity asset management business that was retained
following the sale of Columbia Management long-term asset management business in May 2010.
For the three and six months ended June 30, 2011, revenue from
MLGWM
was $3.5 billion and
$7.0 billion, up 11 percent and 15 percent compared to the same periods in 2010 driven by higher
net interest income and higher asset management fees due to market and long-term assets under
management (AUM) flows. Revenue from
U.S. Trust
was $711 million and $1.4 billion, up four percent
and six percent compared to the same periods in the prior year driven by higher net interest
income and higher asset management fees. Revenue from
Retirement Services
was $273 million and
$545 million, up 12 percent and 13 percent compared to the same periods in the prior year
primarily driven by higher investment and brokerage services due to higher market valuations and
long-term flows.
GWIM
results include the impact of migrating clients and their related deposit and loan
balances to or from
Deposits
,
CRES
and the ALM portfolio, as presented in the table below. Current
year’s migration includes the additional movement of balances to Merrill Edge, which is in
Deposits
. Subsequent to the date of the 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 June 30 | Six Months Ended June 30 | |||||||||||||||
|
(Dollars in millions)
|
2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Average
|
||||||||||||||||
|
Total deposits —
GWIM
from / (to)
Deposits
|
$ | (2,087 | ) | $ | 2,016 | $ | (1,704 | ) | $ | 1,472 | ||||||
|
Total loans —
GWIM
to
CRES
and the ALM portfolio
|
(184 | ) | (1,437 | ) | (93 | ) | (1,254 | ) | ||||||||
|
|
||||||||||||||||
|
Period end
|
||||||||||||||||
|
Total deposits —
GWIM
from / (to)
Deposits
|
$ | 1,310 | $ | (652 | ) | $ | (2,053 | ) | $ | 2,031 | ||||||
|
Total loans —
GWIM
to
CRES
and the ALM portfolio
|
(189 | ) | (75 | ) | (189 | ) | (1,430 | ) | ||||||||
Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010
Net income increased $177 million, or 54 percent, to $506 million driven by higher net
interest income and noninterest income as well as lower credit costs, partially offset by higher
noninterest expense. The prior-year period net income included a tax-related charge from the sale
of the Columbia Management long-term asset management business. Net interest income increased $128
million, or nine percent, to $1.6 billion driven by a $28.9 billion increase in average deposits
and the related effect on interest expense. Noninterest income increased $173 million, or six
percent, to $2.9 billion primarily due to higher asset management fees from improved equity market
levels and flows into long-term AUM. Brokerage revenue was essentially flat due to slow market
activity. Provision for credit losses decreased $50 million to $72 million driven by improving
portfolio trends within the home equity portfolio, partially offset by the impact of declines in
home prices on the residential mortgage portfolio. Noninterest expense increased $362 million, or
11 percent, to $3.6 billion driven by higher revenue-related expenses, support costs and personnel
costs associated with the continued build-out of the business.
Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010
Net income increased $271 million, or 35 percent, to $1.0 billion driven by the same factors
discussed above. Net interest income increased $233 million, or eight percent, to $3.1 billion
driven by the $32.9 billion increase in average deposits partially offset by a lower allocation of
income related to ALM activities. Noninterest income increased $519 million, or 10 percent, to
$5.8 billion due to higher asset management fees from improved equity market levels and flows into
long-term AUM as well as higher brokerage income. The provision for credit losses decreased $245
million to $118 million driven by improving portfolio trends in the home equity and commercial
portfolios. The increase in noninterest expense of $862 million was driven by the same factors as
described in the three-month discussion above.
47
Table of Contents
Client Balances
The table below presents client balances which consist of AUM, client brokerage assets,
assets in custody, client deposits, and loans and leases. The increase in client balances was
driven by inflows into long-term AUM and fee-based brokerage assets
as well as higher market levels offset by liquidity outflows from
BACM and declines in other brokerage assets.
|
Client Balances by Type
|
||||||||
| June 30 | December 31 | |||||||
|
(Dollars in millions)
|
2011 | 2010 | ||||||
|
Assets under management
|
$ | 660,928 | $ | 630,498 | ||||
|
Brokerage assets
|
1,066,078 | 1,077,049 | ||||||
|
Assets in custody
|
116,499 | 115,033 | ||||||
|
Deposits
|
255,580 | 257,982 | ||||||
|
Loans and leases
|
102,878 | 100,724 | ||||||
|
Total client balances
|
$ | 2,201,963 | $ | 2,181,286 | ||||
48
Table of Contents
All Other
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||
|
(Dollars in millions)
|
2011 | 2010 | % Change | 2011 | 2010 | % Change | ||||||||||||||||||
|
Net interest income
(1)
|
$ | (167 | ) | $ | 77 | n/m | $ | (74 | ) | $ | 118 | n/m | ||||||||||||
|
Noninterest income:
|
||||||||||||||||||||||||
|
Equity investment income
|
1,139 | 2,253 | (49 | )% | 2,547 | 2,765 | (8 | )% | ||||||||||||||||
|
Gains on sales of debt securities
|
831 | 14 | n/m | 1,299 | 662 | 96 | ||||||||||||||||||
|
All other income (loss)
|
62 | 783 | (92 | ) | (780 | ) | 905 | n/m | ||||||||||||||||
|
Total noninterest income
|
2,032 | 3,050 | (33 | ) | 3,066 | 4,332 | (29 | ) | ||||||||||||||||
|
Total revenue, net of interest expense
|
1,865 | 3,127 | (40 | ) | 2,992 | 4,450 | (33 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Provision for credit losses
|
1,663 | 1,246 | 33 | 3,462 | 2,466 | 40 | ||||||||||||||||||
|
Merger and restructuring charges
|
159 | 508 | (69 | ) | 361 | 1,029 | (65 | ) | ||||||||||||||||
|
All other noninterest expense
|
157 | 605 | (74 | ) | 1,449 | 1,814 | (20 | ) | ||||||||||||||||
|
Income (loss) before income taxes
|
(114 | ) | 768 | n/m | (2,280 | ) | (859 | ) | (165 | ) | ||||||||||||||
|
Income tax expense (benefit)
(1)
|
102 | (355 | ) | n/m | (848 | ) | (1,192 | ) | 29 | |||||||||||||||
|
Net income (loss)
|
$ | (216 | ) | $ | 1,123 | n/m | $ | (1,432 | ) | $ | 333 | n/m | ||||||||||||
|
|
||||||||||||||||||||||||
|
Balance Sheet
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Average
|
||||||||||||||||||||||||
|
Total loans and leases
|
$ | 258,397 | $ | 257,322 | - | $ | 258,374 | $ | 256,742 | 1 | ||||||||||||||
|
Total assets
(2)
|
167,364 | 291,530 | (43 | ) | 183,289 | 300,395 | (39 | ) | ||||||||||||||||
|
Total deposits
|
46,684 | 64,709 | (28 | ) | 47,642 | 67,770 | (30 | ) | ||||||||||||||||
|
Allocated equity
(3)
|
73,244 | 29,091 | 152 | 67,030 | 24,475 | 174 | ||||||||||||||||||
| June 30 | December 31 | |||||||||||||||||||||||
|
Period
end
|
2011 | 2010 | ||||||||||||||||||||||
|
Total loans and leases
|
$ | 259,285 | $ | 254,516 | 2 | |||||||||||||||||||
|
Total assets
(2)
|
209,210 | 243,099 | (14 | ) | ||||||||||||||||||||
|
Total deposits
|
42,355 | 57,424 | (26 | ) | ||||||||||||||||||||
| (1) | FTE basis | |
| (2) |
Includes elimination of segments’ excess asset
allocations to match liabilities (i.e., deposits) of
$676.7 billion and $672.3 billion for the three and six
months ended June 30, 2011 compared to $611.2 billion
and $600.1 billion for the same periods in 2010, and
$629.6 billion and $647.3 billion at June 30, 2011 and
December 31, 2010.
|
|
| (3) |
Represents the risk-based capital assigned to
All Other
as well as the remaining portion of equity not
specifically allocated to the segments. Allocated
equity increased due to excess capital not being
assigned to the business segments.
|
All Other
consists of two broad groupings,
Equity Investments
and
Other
.
Equity
Investments
includes Global Principal Investments (GPI), Strategic and other investments, and
Corporate Investments. In the second quarter of 2011, we sold our investment in BlackRock,
previously included in Strategic and other investments. During 2010, we sold the equity
investments in Corporate Investments.
Other
includes liquidating businesses, merger and
restructuring charges, ALM functions (i.e., residential mortgage portfolio and investment
securities) and related activities (i.e., economic hedges and fair value option on structured
liabilities), the impact of certain allocation methodologies and any accounting
hedge ineffectiveness.
Other
includes certain residential mortgage and discontinued real
estate loans that are managed by Legacy Asset Servicing within
CRES
. For additional information on
the other activities included in
All Other
, see
Note 26
– Business Segment Information
to the
Consolidated Financial Statements of the Corporation’s 2010 Annual Report on Form 10-K.
Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010
All Other
reported a net loss of $216 million compared to net income of $1.1 billion due to
lower revenue and higher provision for credit losses. The decrease in revenue was driven by a $1.1
billion decrease in equity investment income (see Equity Investment
Activity on page 50) and lower
positive fair value adjustments of $214 million on structured liabilities compared to $1.2
billion. Additionally, a $500 million impairment write-down on our merchant services joint venture
during the three months ended June 30, 2011 contributed to the decrease in revenue. These were
partially offset by an $817 million increase in gains on sales of debt securities. Also, merger
and restructuring charges decreased $349 million as integration efforts with the Merrill Lynch
acquisition continue to progress as planned.
Provision for credit losses increased $417 million to $1.7 billion driven primarily by
reserve additions to the Countrywide PCI discontinued real estate and residential mortgage
portfolios due to the impact of further declines in the home price outlook and higher credit costs
related to the non-PCI residential mortgage portfolio driven by the impact of refreshed valuations
of underlying collateral.
49
Table of Contents
Income tax expense was $102 million compared to a benefit of $355 million for the same period
in 2010. The current-period expense reflects the residual tax expense after allocation of tax
benefits to the segments.
Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010
All Other
reported a net loss of $1.4 billion compared to net income of $333 million due to
lower revenue and higher provision for credit losses. The decrease in revenue was driven by
negative fair value adjustments of $372 million on structured liabilities compared to positive
fair value adjustments of $1.4 billion, and a $218 million decrease in equity investment income
(see Equity Investment Activity below). These were partially offset by a $637 million increase in
gains on sales of debt securities. Also, merger and restructuring charges decreased $668 million.
Provision for credit losses increased $996 million to $3.5 billion driven by reserve
additions to the Countrywide PCI discontinued real estate and residential mortgage portfolios.
These increases were partially offset by lower provision for credit losses related to the non-PCI
residential mortgage portfolio due to improving delinquencies in early 2011.
The income tax benefit was $848 million compared to $1.2 billion for the same period
in 2010 driven by the factors described above.
Equity Investment Activity
The tables below present the components of the equity investments in
All Other
at June
30, 2011 and December 31, 2010, and also a reconciliation to the total consolidated equity
investment income for the three and six months ended June 30, 2011 and 2010.
|
Equity Investments
|
||||||||
| June 30 | December 31 | |||||||
|
(Dollars in millions)
|
2011 | 2010 | ||||||
|
Global Principal Investments
|
$ | 10,805 | $ | 11,656 | ||||
|
Strategic and other investments
|
20,190 | 22,545 | ||||||
|
Total equity investments included in
All Other
|
$ | 30,995 | $ | 34,201 | ||||
|
Equity Investment Income
|
||||||||||||||||
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
|
(Dollars in millions)
|
2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Global Principal Investments
|
$ | 399 | $ | 814 | $ | 1,764 | $ | 1,391 | ||||||||
|
Strategic and other investments
|
740 | 1,433 | 783 | 1,679 | ||||||||||||
|
Corporate Investments
|
– | 6 | – | (305 | ) | |||||||||||
|
Total equity investment income included in
All Other
|
1,139 | 2,253 | 2,547 | 2,765 | ||||||||||||
|
Total equity investment income included in the
business segments
|
73 | 513 | 140 | 626 | ||||||||||||
|
Total consolidated equity investment income
|
$ | 1,212 | $ | 2,766 | $ | 2,687 | $ | 3,391 | ||||||||
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. GPI had unfunded
equity commitments of $1.1 billion and $1.4 billion at June 30, 2011 and December 31, 2010 related
to certain of these investments. During the six months ended June 30, 2011, we recorded a $1.1
billion gain related to an IPO of an equity investment, which occurred in the first quarter of
2011.
Strategic and other investments is primarily comprised of our investment in CCB of $19.6
billion, which decreased by $176 million from December 31, 2010 due to a decline in the CCB share
price. At June 30, 2011, we owned approximately 10 percent, or 25.6 billion common shares of CCB.
In the three months ended June 30, 2011, we recorded an $837 million dividend on our investment in
CCB compared to a $535 million dividend in the same period in 2010. Also in the three months ended
June 30, 2011, we sold our investment in BlackRock, resulting in a $377 million gain and recorded
an impairment write-down of $500 million on our merchant services joint venture, Banc of America
Merchant Services, LLC. After the recent transfer of the merchant services joint venture to
Global
Commercial Banking
during the first quarter of 2011, the write-down was taken in
All Other
for
management accounting purposes. In the three months ended March 31, 2010, the $2.7 billion
Corporate Investments equity securities portfolio, which consisted of highly liquid
publicly-traded equity securities, was sold resulting in a loss of $331 million. In the three
months ended June 30, 2010, we sold certain strategic investments, resulting in a net gain of $751
million. For additional information on certain Corporate and
Strategic Investments, see
Note 5 –
Securities
to the Consolidated Financial Statements.
50
Table of Contents
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. For
additional information on our obligations and commitments, see
Note 11 – Commitments and
Contingencies
to the Consolidated Financial Statements, page 51 of the MD&A of the Corporation’s
2010 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 Corporation’s 2010 Annual Report
on Form 10-K.
Representations and Warranties
We securitize first-lien residential mortgage loans generally in the form of MBS
guaranteed by the GSEs or by Government National Mortgage Association (GNMA) in the case of the
FHA-insured and U.S. Department of Veterans Affairs-guaranteed mortgage loans. In addition, in prior years, legacy companies and
certain subsidiaries sold pools of first-lien residential mortgage loans and home equity loans as
private-label securitizations (in certain of these securitizations, monolines or financial
guarantee providers insured all or some of the securities), or in the form of whole loans. In
connection with these transactions, we or our subsidiaries or legacy companies make or have made
various representations and warranties. Breaches of these representations and warranties may
result in the requirement to repurchase mortgage loans or to otherwise make whole or provide other
remedies to the GSEs, GNMA, whole-loan buyers, securitization trusts, monoline insurers or other
financial guarantors (collectively, repurchases). In such cases, we would be exposed to any credit
loss on the repurchased mortgage loans.
Subject to the requirements and limitations of the applicable sales and securitization
agreements, these representations and warranties can be enforced by the GSEs, GNMA, the whole-loan
buyer, the securitization trustee, or others as governed by the applicable agreement or, in
certain first-lien and home equity securitizations where monoline insurers or other financial
guarantee providers have insured all or some of the securities issued, by the monoline insurer or
other financial guarantor at any time. In the case of loans sold to parties other than the GSEs or
GNMA, the contractual liability to repurchase typically arises only if there is a breach of the
representations and warranties that materially and adversely affects the interest of the investor,
or investors, in the loan, or of the monoline insurer or other financial guarantor (as
applicable). Contracts with the GSEs and GNMA do not contain an equivalent requirement.
For additional information about accounting for representations and warranties and our
representations and warranties claims and exposures, see Recent
Events – Private-label
Securitization Settlement with the Bank of New York Mellon, Complex
Accounting Estimates –
Representations and Warranties,
Note 9 – Representations and Warranties Obligations and Corporate
Guarantees
and
Note 11 – Commitments and Contingencies
to the Consolidated Financial Statements,
Item 1A. Risk Factors on page 219 and Item 1A. Risk Factors of the
Corporation’s 2010 Annual Report on Form 10-K.
Representations and Warranties Bulk Settlement Actions
Beginning in the fourth quarter of 2010, we have settled, or entered into agreements to
settle, certain bulk representations and warranties claims, and in certain settlements bulk
servicing claims, with a trustee, a monoline insurer and with the GSEs. We have contested, and
will continue to vigorously contest any request for repurchase when we conclude that a valid basis
for repurchase does not exist. However, in an effort to resolve these legacy mortgage-related
issues, we have reached bulk settlements, or agreements for bulk settlements, including settlement
amounts which have been material, with certain of the above referenced counterparties in lieu of a
loan-by-loan review process. We may reach other settlements in the future if opportunities arise
on terms determined to be advantageous to us. The following discussion is a summary of the
significant settlement actions we have taken beginning in the fourth quarter of 2010 and the
related impact on the representations and warranties provision and liability.
Settlement with the Bank of New York Mellon, as Trustee
On June 28, 2011, we, BAC HLS and certain legacy Countrywide affiliates entered into the BNY
Mellon Settlement. The Covered Trusts referenced in the BNY Mellon Settlement had an original
principal balance of approximately $424 billion, of which $409 billion was originated between 2004
and 2008, and a total current unpaid principal balance of approximately $220 billion at June 28,
2011, of which $217 billion was originated between 2004 and 2008.
The BNY Mellon Settlement is supported by the Investor Group. As previously disclosed, in
October 2010, BAC HLS received a letter from a law firm on behalf of certain members of the
Investor Group alleging a servicer event of
default and asserting breaches of certain loan servicing obligations, including an alleged failure
to provide notice to the
51
Table of Contents
Trustee and other parties to the pooling and servicing agreements of
breaches of representations and warranties with respect to the mortgage loans included in certain
of the Covered Trusts. In connection with the BNY Mellon Settlement, we entered into an agreement
with the Investor Group, which provides that, among other things, the Investor Group will use
reasonable best efforts and cooperate in good faith to effectuate the BNY Mellon Settlement,
including obtaining final court approval.
The BNY Mellon Settlement provides for the Settlement Payment of $8.5 billion to the Trustee
for distribution to the Covered Trusts after final court approval of the BNY Mellon Settlement. In
addition to the Settlement Payment, we are obligated to pay attorneys’ fees and costs to the
Investor Group’s counsel as well as all fees and expenses incurred by the Trustee in connection
with the BNY Mellon Settlement, which are currently estimated at $100 million. We are also
obligated to pay the Investor Group’s counsel and the Trustees’ fees and expenses related to
obtaining final court approval of the BNY Mellon Settlement and certain tax rulings.
The BNY Mellon Settlement also includes provisions related to specific mortgage servicing
standards and other servicing matters, including the transfer of servicing related to certain
high-risk loans to qualified subservicers and the benchmarking of loan servicing against defined
industry standards regarding default-servicing timelines. For additional information about the
servicing matters, see Off-Balance Sheet Arrangements and Contractual
Obligations – Other
Mortgage-related Matters on page 60.
The BNY Mellon Settlement does not cover a small number of legacy Countrywide-issued
first-lien non-GSE RMBS transactions with loans originated principally between 2004 and 2008,
including for example, six legacy Countrywide-issued first-lien non-GSE RMBS transactions in which
BNY Mellon is not the trustee. The BNY Mellon Settlement also does not cover legacy
Countrywide-issued second-lien securitization transactions in which a monoline insurer or other
financial guarantor provides financial guaranty insurance. In addition, because the BNY Mellon
Settlement is with the Trustee on behalf of the Covered Trusts and releases rights under the
governing agreements for the Covered Trusts, the BNY Mellon Settlement does not release investors’
securities law or fraud claims based upon disclosures made in connection with their decision to
purchase, sell, or hold securities issued by the Covered Trusts. To date, various investors,
including certain members of the Investor Group, are pursuing securities law or fraud claims
related to one or more of the Covered Trusts. We are not able to determine whether any additional
securities law or fraud claims will be made by investors in the Covered Trusts. For those Covered
Trusts where a monoline insurer or other financial guarantor has an independent right to assert
repurchase claims directly, the BNY Mellon Settlement does not release such insurer’s or
guarantor’s repurchase claims.
The BNY Mellon Settlement is subject to final court approval and other conditions. The
Trustee has determined that the BNY Mellon Settlement is in the best interests of the Covered
Trusts and is seeking the necessary court approval of the BNY Mellon Settlement by commencing a
judicial proceeding in New York State court requesting that the court approve the BNY Mellon
Settlement as to all the Covered Trusts (the Article 77 Proceeding). The court has signed an order
providing that notice of the settlement terms be provided to certificateholders and noteholders in
the Covered Trusts. Under the court’s order, certificateholders and noteholders in the Covered
Trusts have the opportunity to file objections until August 30, 2011 and responses to those
objections and statements in support of the BNY Mellon Settlement until October 31, 2011. The
Investor Group has filed, and the court has granted, a petition to intervene as a party in the
Article 77 Proceeding so that it may support the BNY Mellon Settlement. The court is scheduled to
hold a hearing on the Trustee’s request for entry of an order approving the BNY Mellon Settlement
on November 17, 2011.
Given the number of Covered Trusts, the number of investors in those Covered Trusts and the
complexity of the BNY Mellon Settlement, it is not possible to predict how many investors will
seek to intervene in the court proceeding, how many of those and other investors may ultimately
object to the BNY Mellon Settlement, or the timing or ultimate outcome of the court approval
process, which can include appeals and could take a substantial period of time. Several alleged
investors outside the Investor Group have filed, and the court has granted, petitions to intervene
as parties in the pending court proceeding. Certain of these intervenors have stated that they
intend to object to the BNY Mellon Settlement, while others have said that they need more
information in order to determine whether to object, and indicated that they therefore intend to
seek discovery. In addition, it is possible that a substantial number of additional investors
outside the Investor Group will also seek to intervene as parties, and some intervenors and other
investors may object to the BNY Mellon Settlement. The resolutions of the objections of
intervenors and/or other investors who object may delay or ultimately prevent receipt of final
court approval. If final court approval is not obtained by December 31, 2015, we and legacy
Countrywide may withdraw from the BNY Mellon Settlement, if the Trustee consents. The BNY Mellon
Settlement also provides that if Covered Trusts representing unpaid principal balance exceeding a
specified amount are excluded from the final BNY Mellon Settlement, based on investor objections
or otherwise, we and legacy Countrywide have the option to withdraw from the BNY Mellon Settlement
pursuant to the terms of the BNY Mellon Settlement agreement.
52
Table of Contents
In addition to final court approval, the BNY Mellon Settlement is conditioned on receipt of
private letter rulings from the IRS as well as receipt of legal opinions under California and New
York state tax laws and regulations. While there can be no assurance that such rulings or opinions
will be obtained, we currently anticipate that the process related to these conditions will be
completed during the period prior to final court approval.
There can be no assurance that final court approval of the BNY Mellon Settlement will be
obtained, that all conditions will be satisfied or, if certain conditions to the BNY Mellon
Settlement permitting withdrawal are met, that we and legacy Countrywide will not determine to
withdraw from the settlement. If final court approval is not obtained or if we and legacy
Countrywide determine to withdraw from the BNY Mellon Settlement in accordance with its terms, our
future representations and warranties losses could be substantially different than existing
accruals and the estimated range of possible loss over existing accruals described under
Experience with Investors Other than Government-sponsored Enterprises
on page 57. For more
information about the risks associated with the BNY Mellon Settlement, see Item 1A. Risk Factors
on page 219.
Settlement with Assured Guaranty
On April 14, 2011, we, including certain legacy Countrywide affiliates, entered into an
agreement with Assured Guaranty, to resolve all of this monoline insurer’s outstanding and
potential repurchase claims related to alleged representations and warranties breaches involving
29 first- and second-lien RMBS trusts where Assured Guaranty provided financial guarantee
insurance (the Assured Guaranty Settlement). The agreement also resolves historical loan servicing
issues and other potential liabilities with respect to these trusts. The agreement covers 21
first-lien RMBS trusts and eight second-lien RMBS trusts, which had an original principal balance
of approximately $35.8 billion and total unpaid principal balance of approximately $20.2 billion
as of April 14, 2011. The agreement includes cash payments totaling approximately $1.1 billion to
Assured Guaranty, as well as a loss-sharing reinsurance arrangement that has an expected value of
approximately $470 million, and other terms, including termination of certain derivative
contracts. The cash payments consist of $850 million paid on April 14, 2011, $57 million paid on
June 30, 2011 and the remainder payable in three equal installments at the end of each quarter
through March 31, 2012. The total cost recognized for the Assured Guaranty Settlement as of June
30, 2011 was approximately $1.6 billion. As a result of this
agreement, we consolidated $5.2 billion in consumer loans and the related trust debt on our
Consolidated Balance Sheet as of June 30, 2011 due to the establishment of reinsurance contracts
at the time of the Assured Guaranty Settlement. For additional information, see
Consumer Credit Risk –
Consumer Loans Accounted for Under the Fair Value Option on page 90.
Government-sponsored Enterprises Agreements
On December 31, 2010, we reached separate agreements with each of the GSEs under which we
paid $2.8 billion to resolve repurchase claims involving certain first-lien residential mortgage
loans sold to the GSEs by entities related to legacy Countrywide (the GSE Agreements). The
agreement with FHLMC extinguished all outstanding and potential mortgage repurchase and make-whole
claims arising out of any alleged breaches of selling representations and warranties related to
loans sold directly by legacy Countrywide to FHLMC through 2008, subject to certain exceptions.
The agreement with FNMA substantially resolved the existing pipeline of repurchase and make-whole
claims outstanding as of September 20, 2010 arising out of alleged breaches of selling
representations and warranties related to loans sold directly by legacy Countrywide to FNMA. For
additional information about these agreements, see
Note 9 – Representations and Warranties
Obligations and Corporate Guarantees
and
Note 11 – Commitments and Contingencies
to the
Consolidated Financial Statements, and Item 1A. Risk Factors of the Corporation’s 2010 Annual
Report on Form 10-K.
Unresolved Claims Status
At June 30, 2011, our total unresolved repurchase claims were approximately $11.6
billion compared to $10.7 billion at December 31, 2010. These repurchase claims include $1.7
billion in demands from investors in the Covered Trusts received in the third quarter of 2010 but
otherwise do not include any repurchase claims related to the Covered Trusts. The increase in
unresolved claims is primarily attributable to an increase in new claims submitted by the GSEs for
both legacy Countrywide originations not covered by the GSE Agreements and legacy Bank of America
originations, in addition to an increase in the volume of claims appealed by us and awaiting
review and response from one GSE. This increase in unresolved claims was partially offset by
resolution of certain monoline claims through the Assured Guaranty Settlement discussed above.
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Representations and Warranties Liability
The liability for representations and warranties and corporate guarantees is included in
accrued expenses and other liabilities on the Consolidated Balance Sheet and the related provision
is included in mortgage banking income (loss). 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, estimated home prices, other economic
conditions, estimated probability that a repurchase claim will be received, consideration of
whether presentation thresholds will be met, number of payments made by the borrower prior to
default and estimated probability that a loan will be required to be repurchased as well as other
relevant facts and circumstances, such as bulk settlements and identity of the counterparty or
type of counterparty, as we believe appropriate. The estimate of the liability for representations
and warranties is based on currently available information, significant judgment and a number of
factors, including those set forth above, that are subject to change. Changes to any one of these
factors could significantly impact the estimate of the liability and could have a material adverse
impact on our results of operations for any particular period.
At June 30, 2011 and December 31, 2010, the liability was $17.8 billion and $5.4 billion. For
the three and six months ended June 30, 2011, the provision for representations and warranties and
corporate guarantees was $14.0 billion and $15.1 billion compared to $1.2 billion and $1.8 billion
for the same periods in 2010. Of the $14.0 billion provision recorded in the three months ended
June 30, 2011, $8.6 billion was attributable to the BNY Mellon Settlement and $5.4 billion was
attributable to other non-GSE exposures, and to a lesser extent, GSE exposures. The BNY Mellon
Settlement led to the determination that we now have sufficient experience to record a liability
related to our exposure on certain other private-label securitizations. This determination,
combined with changes in our experience with the behavior of certain counterparties, including the
GSEs, in the first six months of 2011, was the driver of this additional provision. A significant
factor in the estimate of the liability for losses is the repurchase rate, which increased in both
the three and six months ended June 30, 2011.
Our liability at June 30, 2011 for obligations under representations and warranties given to
the GSEs considers, among other things, higher estimated repurchase rates based on recent higher
than expected claims, including claims on loans that defaulted more
than 18 months ago and
on loans where the borrower has made a significant number of payments (e.g., at least 25
payments), in each case in numbers that were not expected based on historical claims during the
three and six months ended June 30, 2011. It also considers the GSE Agreements and their expected
impact on the repurchase rates on future repurchase claims we might receive on loans that have
defaulted or that we estimate will default.
Estimated
Range of Possible Loss
Government-sponsored Enterprises
Our estimated liability for obligations under representations and warranties with respect to
the GSEs is necessarily dependent on, and limited by, our historical claims experience with the
GSEs and may materially change in the future based on factors outside our control. We believe our
predictive repurchase models, utilizing our historical repurchase experience with the GSEs while
considering current developments, including the GSE Agreements and recent GSE behavior,
projections of future defaults as well as certain other assumptions regarding economic conditions,
home prices and other matters, allow us to reasonably estimate the liability for obligations under
representations and warranties on loans sold to the GSEs and our estimate of the liability for
these obligations has been accounted for in the recorded liability for representations and
warranties for these loans. However, future provisions associated with obligations under
representations and warranties made to the GSEs may be materially impacted if actual results are
different from our assumptions regarding economic conditions, home prices and other matters,
including the repurchase behavior of the GSEs and the estimated repurchase rates. While we have an
established history of working with the GSEs on repurchase claims, our experience with them
continues to evolve and impact our estimated repurchase rates and liability. In addition, the
recent FNMA announcement regarding mortgage insurance rescissions, cancellations and claim denials
could result in increased repurchase requests from FNMA that exceed the repurchase requests
contemplated by our estimated liability.
We are not able to anticipate changes in the behavior of the GSEs from our past experiences.
Therefore, it is not possible to reasonably estimate a possible loss or range of possible loss
with respect to any such potential impact in excess of current accruals on future GSE provisions
if the behavior of the GSEs changes from past experience. See Complex
Accounting Estimates –
Representations and Warranties on page 123 for information related to the
sensitivity of the assumptions used to estimate our liability for obligations under
representations and warranties.
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Non-Government-sponsored Enterprises
As
discussed on page 51, the population of private-label securitizations included in the BNY
Mellon Settlement encompasses almost all legacy Countrywide first-lien private-label
securitizations including loans originated principally in the 2004 through 2008 vintage. For the
remainder of the population of private-label securitizations, although we believe it is probable
that other claimants may come forward with claims that meet the requirements of the terms of the
securitizations, we have experienced limited activity that has met the standards required. We
believe that the provisions recorded in connection with the BNY Mellon Settlement and the
additional non-GSE representations and warranties provisions recorded in the three and six months
ended June 30, 2011, have provided for a substantial portion of our non-GSE repurchase claims.
However, it is reasonably possible that future representations and warranties losses may occur in
excess of the amounts recorded for these exposures. In addition, as discussed below, we have not
recorded any representations and warranties liability for certain potential monoline exposures and
certain potential whole loan and other private-label securitization exposures. We
currently estimate that the range of possible loss related to non-GSE representations and
warranties exposure as of June 30, 2011 could be up to $5 billion over existing accruals. This
estimate of the range of possible loss for non-GSE representations and warranties does not represent a
probable loss, is based on currently available information, significant judgment, and a number of
assumptions, including the assumption that the conditions to the BNY
Mellon Settlement are satisfied and those set forth below, that are subject to change.
The methodology used to estimate the non-GSE representations and warranties liability and the
corresponding range of possible loss considers a variety of factors including
our experience related to actual defaults, estimated future defaults and historical loss
experience. Among the factors that impact the non-GSE representations and warranties liability and
the corresponding estimated range of possible loss are: (1) contractual loss causation requirements, (2) the
representations and warranties provided, and (3) the requirement to meet certain presentation
thresholds. The first factor is based on our belief that a non-GSE contractual liability to repurchase a
loan generally arises only if the counterparties prove there is a breach of representations and
warranties that materially and adversely affects the interest of the investor or all investors, or
the monoline insurer (as applicable), in a securitization trust and, accordingly, we believe that
the repurchase claimants must prove that the alleged representations and warranties breach was the
cause of the loss. The second factor is related to the fact that
non-GSE securitizations include
different types of representations and warranties than those provided
to the GSEs. We believe the
non-GSE securitizations’ representations and warranties are less rigorous and actionable than the
comparable agreements with the GSEs. The third factor is related to the fact that certain
presentation thresholds need to be met in order for any repurchase claim to be asserted under the
non-GSE agreements. A securitization trustee may investigate or demand repurchase on its own
action, and most agreements contain a threshold, for example 25 percent of the voting rights per
trust, that allows investors to declare a servicing event of default under certain circumstances
or to request certain action, such as requesting loan files, that the trustee may choose to accept
and follow, exempt from liability, provided the trustee is acting in good faith. If there is an
uncured servicing event of default, and the trustee fails to bring suit during a 60-day period,
then, under most agreements, investors may file suit. In addition to this, most agreements also
allow investors to direct the securitization trustee to investigate loan files or demand the
repurchase of loans, if security holders hold a specified percentage, for example, 25 percent, of
the voting rights of each tranche of the outstanding securities.
The
methodology used to estimate the non-GSE representations and
warranties liability and the corresponding range of possible loss was updated in the second quarter of 2011 to consider the implied repurchase
experience based on the BNY Mellon Settlement and assumes that the conditions to the BNY Mellon
Settlement are satisfied. It also considers our assumptions regarding economic conditions,
including estimated second quarter 2011 home prices. Since the non-GSE transactions that were
included in the BNY Mellon Settlement differ from those that were not included in the BNY Mellon
Settlement, we adjusted the experience implied in the settlement in order to determine the
estimated non-GSE representations and warranties liability and the
corresponding range of possible loss. The
judgmental adjustments made include consideration of the differences in the mix of products in the
securitizations, loan originator, likelihood of claims differences, the differences in the number
of payments that the borrower has made prior to default, and the sponsor of the securitization.
Although we continue to believe that presentation thresholds, as described above, are a factor in
the determination of probable loss, given the BNY Mellon Settlement,
the upper end of the estimated range of
possible loss assumes that the presentation threshold can be met for all of the non-GSE
securitization transactions.
Future provisions and/or ranges of possible loss for non-GSE representations and warranties
may be significantly impacted if actual results are different from our assumptions in our
predictive models, including, without limitation, those regarding ultimate resolution of the BNY
Mellon Settlement, estimated repurchase rates, economic conditions, home prices, consumer and
counterparty behavior, and a variety of judgmental factors. Adverse developments with respect to
one or more of the assumptions underlying the liability for representations and warranties
and the corresponding estimated range of possible loss could
result in significant increases to future provisions and this
estimated range of possible loss. For example, if courts were to disagree with our interpretation that the underlying
agreements require a claimant to prove that the representations and warranties breach was the
cause of the loss, it could
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significantly impact this estimated range of possible loss. Additionally, if recent court rulings
related to monoline litigation, including one related to us, that have allowed sampling of loan
files instead of a loan-by-loan review to determine if a representations and warranties breach has
occurred are followed generally by the courts, private-label securitization investors may view
litigation as a more attractive alternative as compared to a loan-by-loan review. Finally,
although we believe that the representations and warranties typically given in non-GSE
transactions are less rigorous and actionable than those given in GSE transactions, we do not have
significant loan-level experience to measure the impact of these differences on the probability
that a loan will be required to be repurchased.
The liability for obligations under representations and warranties with respect to GSE and
non-GSE exposures and the corresponding estimated range of possible loss for non-GSE representations and
warranties exposures do not include any losses related to litigation matters disclosed in
Note 11 – Commitments and Contingencies
to the Consolidated Financial Statements, nor do they
include any separate foreclosure costs and related costs and assessments or any possible losses
related to potential claims for breaches of performance of servicing obligations, potential
securities law or fraud claims or potential indemnity or other claims against us. We are not able
to reasonably estimate the amount of any possible loss with respect to any such servicing,
securities law (except to the extent reflected in the aggregate range of possible loss for
litigation and regulatory matters disclosed in
Note 11 – Commitments and Contingencies
to the
Consolidated Financial Statements), fraud or other claims against us; however, such loss could be
material.
Government-sponsored Enterprises Experience
Our current repurchase claims experience with the GSEs is predominantly concentrated in the
2004 through 2008 origination vintages where we believe that our exposure to representations and
warranties liability is most significant. 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 related to loans originated after
2008. The cumulative repurchase claims for 2007 originations exceed all other vintages as the
volume of loans originated in 2007 was significantly higher than any other vintage which, together
with the high delinquency level in this vintage, contributes to the high level of repurchase
claims compared to the other vintages.
Bank of America and legacy Countrywide sold approximately $1.1 trillion of loans originated
from 2004 through 2008 to the GSEs. As of June 30, 2011, 11 percent of the loans in these vintages
have defaulted or are 180 days or more past due (severely delinquent). At least 25 payments have
been made on approximately 61 percent of severely delinquent or defaulted loans. Through June 30,
2011, we have received $27.7 billion in repurchase claims associated with these vintages,
representing approximately two percent of the loans sold to the GSEs in these vintages. Including
the agreement reached with FNMA on December 31, 2010, we have resolved $22.0 billion of these
claims with a net loss experience of approximately 30 percent. The claims resolved and the loss
rate do not include $839 million in claims extinguished as a result of the agreement with FHLMC
due to the global nature of the agreement and, specifically, the absence of a formal apportionment
of the agreement amount between current and future claims. Our collateral loss severity rate on
approved repurchases has averaged approximately 45 to 55 percent.
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Table 14 highlights our experience with the GSEs related to loans originated from 2004
through 2008.
Table 14
|
Overview of GSE Balances – 2004-2008 Originations
|
||||||||||||||||
| Legacy Originator | ||||||||||||||||
| Percent of | ||||||||||||||||
|
(Dollars in billions)
|
Countrywide | Other | Total | total | ||||||||||||
|
Original funded balance
|
$ | 846 | $ | 272 | $ | 1,118 | ||||||||||
|
Principal payments
|
(431 | ) | (144 | ) | (575 | ) | ||||||||||
|
Defaults
|
(43 | ) | (6 | ) | (49 | ) | ||||||||||
|
Total outstanding balance at June 30, 2011
|
$ | 372 | $ | 122 | $ | 494 | ||||||||||
|
Outstanding principal balance 180 days or more past due (severely delinquent)
|
$ | 58 | $ | 13 | $ | 71 | ||||||||||
|
Defaults plus severely delinquent
|
101 | 19 | 120 | |||||||||||||
|
Payments made by borrower:
|
||||||||||||||||
|
Less than 13
|
$ | 15 | 13 | % | ||||||||||||
|
13-24
|
31 | 26 | ||||||||||||||
|
25-36
|
35 | 29 | ||||||||||||||
|
More than 36
|
39 | 32 | ||||||||||||||
|
Total payments made by borrower
|
$ | 120 | 100 | % | ||||||||||||
|
Outstanding GSE pipeline of representations and warranties claims (all vintages)
|
||||||||||||||||
|
As of December 31, 2010
|
$ | 2.8 | ||||||||||||||
|
As of June 30, 2011
|
5.1 | |||||||||||||||
|
Cumulative GSE representations and warranties losses (2004-2008 vintages)
|
$ | 7.8 | ||||||||||||||
We have an established history of working with the GSEs on repurchase claims. However,
the behavior of the GSEs continues to evolve. Notably in recent periods, we have been experiencing
elevated levels of new claims, including claims on default vintages and loans in which borrowers
have made a significant number of payments (e.g., at least 25 payments), in each case, in numbers
that were not expected based on historical experience. Additionally, the criteria by which the
GSEs are ultimately willing to resolve claims have become more rigid over time.
FNMA recently issued an announcement requiring servicers to report, effective October 1,
2011, all mortgage insurance rescissions, cancellations and claim denials with respect to loans
sold to FNMA. The announcement also confirmed FNMA’s position that a mortgage insurance company’s
issuance of a rescission, cancellation notice or claim denial constitutes a breach of the lender’s
representations and warranties and permits FNMA to require the lender to repurchase the mortgage
loan or promptly remit a make-whole payment covering FNMA’s loss even if the lender is contesting
the mortgage insurer’s rescission cancellation or claim denial. Through June 30, 2012, lenders
have 90 days to appeal FNMA’s repurchase request and 30 days (or such other time frame specified
by FNMA) to appeal after that date. To be successful in its appeal, a lender must provide
documentation confirming reinstatement or continuation of coverage according to the FNMA
announcement. This announcement could result in more repurchase requests from FNMA
than the assumptions in our estimated liability contemplate. We also expect that in many cases
(particularly in the context of litigation), we will not be able to resolve rescissions,
cancellations or claim denials with the mortgage insurance companies before the expiration of the
appeal period allowed by FNMA and, as a result, our representations and warranties liability may
increase.
Experience with Investors Other than Government-sponsored Enterprises
In prior years, legacy companies and certain subsidiaries have sold pools of first-lien
mortgage loans and home equity loans as private-label securitizations or in the form of whole
loans. As detailed in Table 15, legacy companies and certain subsidiaries sold loans originated
from 2004 through 2008 with an original principal balance of $963 billion to investors other than
GSEs, of which approximately $495 billion in principal has been paid and $229 billion has
defaulted or are severely delinquent at June 30, 2011.
As it relates to private-label securitizations, a contractual liability to repurchase
mortgage loans generally arises only if counterparties prove there is a breach of the
representations and warranties that materially and adversely affects the interest of the investor
or all investors in a securitization trust or of the monoline insurer or other financial guarantor
(as applicable). We believe that the longer a loan performs, the less likely it is that an alleged
representations and warranties breach had a material impact on the loan’s performance
or that a breach even exists. Because the majority of the borrowers in this population would have
made a significant number of payments if they are not yet 180 days or more past due, we believe
that the principal balance at the greatest risk for repurchase claims in this population of
private-label securitization investors is a combination of loans that have already defaulted and
those that are currently severely delinquent. Additionally, the obligation to repurchase loans
also requires that counterparties have the contractual right to demand repurchase of the loans
(presentation thresholds). While we believe the agreements for private-label securitizations
generally contain less rigorous representations and warranties and place higher burdens on
investors seeking repurchases than the comparable agreements with the GSEs and GNMA, the
agreements generally include a representation that underwriting practices were prudent and
customary.
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Any amounts paid related to repurchase claims from a monoline insurer are paid to the
securitization trust and are applied in accordance with the terms of the governing securitization
documents, which may include use 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 it will be required to advance funds to the
securitization trust, the likelihood of receiving a repurchase claim from a monoline may be
reduced as the monoline would receive limited or no benefit from the payment of repurchase claims.
Moreover, some monolines are not currently performing their obligations under the financial
guaranty policies they issued which may, in certain circumstances, impact their ability to present
repurchase claims.
Table 15 details the population of loans originated between 2004 and 2008 and the population
of loans sold as whole loans or in non-agency securitizations by entity and product together with
the defaulted and severely delinquent loans stratified by the number of payments the borrower made
prior to default or becoming severely delinquent at June 30, 2011. As shown in Table 15, at least
25 payments have been made on approximately 61 percent of the defaulted and severely delinquent
loans. 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 negative economic trends, diminishing the likelihood that any loan
defect (assuming one exists at all) was the cause of a loan’s default. As of June 30, 2011,
approximately 24 percent of the loans sold to non-GSEs that were originated between 2004 and 2008
have defaulted or are severely delinquent. Of the original principal balance for Countrywide, $409
billion is included in the BNY Mellon Settlement.
|
Table 15
|
||||||||||||||||||||||||||||||||||||
|
Overview of Non-Agency Securitization and Whole Loan Balances
|
||||||||||||||||||||||||||||||||||||
|
(Dollars in billions)
|
Principal Balance | Defaulted or Severely Delinquent | ||||||||||||||||||||||||||||||||||
| Outstanding | ||||||||||||||||||||||||||||||||||||
| Outstanding | Principal | Defaulted | Borrower Made | Borrower Made | Borrower Made | Borrower Made | ||||||||||||||||||||||||||||||
| Original | Principal Balance | Balance 180 Days | Defaulted | or Severely | less than 13 | 13 to 24 | 25 to 36 | more than 36 | ||||||||||||||||||||||||||||
|
By Entity
|
Principal Balance | June 30, 2011 | or More Past Due | Principal Balance | Delinquent | Payments | Payments | Payments | Payments | |||||||||||||||||||||||||||
|
Bank of America
|
$ | 100 | $ | 31 | $ | 5 | $ | 3 | $ | 8 | $ | 1 | $ | 2 | $ | 2 | $ | 3 | ||||||||||||||||||
|
Countrywide
(1)
|
716 | 271 | 87 | 90 | 177 | 24 | 45 | 47 | 61 | |||||||||||||||||||||||||||
|
Merrill Lynch
|
65 | 20 | 6 | 11 | 17 | 3 | 4 | 3 | 7 | |||||||||||||||||||||||||||
|
First Franklin
|
82 | 22 | 7 | 20 | 27 | 4 | 6 | 5 | 12 | |||||||||||||||||||||||||||
|
Total
(2, 3, 4)
|
$ | 963 | $ | 344 | $ | 105 | $ | 124 | $ | 229 | $ | 32 | $ | 57 | $ | 57 | $ | 83 | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
By Product
|
||||||||||||||||||||||||||||||||||||
|
Prime
|
$ | 302 | $ | 111 | $ | 17 | $ | 13 | $ | 30 | $ | 2 | $ | 6 | $ | 8 | $ | 14 | ||||||||||||||||||
|
Alt-A
|
172 | 76 | 21 | 25 | 46 | 7 | 12 | 12 | 15 | |||||||||||||||||||||||||||
|
Pay option
|
150 | 61 | 30 | 24 | 54 | 5 | 14 | 16 | 19 | |||||||||||||||||||||||||||
|
Subprime
|
245 | 78 | 36 | 46 | 82 | 16 | 19 | 17 | 30 | |||||||||||||||||||||||||||
|
Home equity
|
88 | 16 | - | 16 | 16 | 2 | 5 | 4 | 5 | |||||||||||||||||||||||||||
|
Other
|
6 | 2 | 1 | - | 1 | - | 1 | - | - | |||||||||||||||||||||||||||
|
Total
|
$ | 963 | $ | 344 | $ | 105 | $ | 124 | $ | 229 | $ | 32 | $ | 57 | $ | 57 | $ | 83 | ||||||||||||||||||
| (1) | $409 billion of original principal balance is included in the BNY Mellon Settlement. | |
| (2) | Includes $185 billion of original principal balance related to transactions with monoline participation. | |
| (3) | Excludes transactions sponsored by Bank of America and Merrill Lynch where no representation or warranties were made. | |
| (4) | Includes exposures on third-party sponsored transactions related to legacy entity originations. |
Monoline Insurers
Legacy companies have sold $184.5 billion of loans originated between 2004 and 2008 into
monoline-insured securitizations, which are included in Table 15, including $103.9 billion of
first-lien mortgages and $80.6 billion of second-lien mortgages. Of these balances, $46.0 billion
of the first-lien mortgages and $49.5 billion of the second-lien mortgages have been paid in full
and $33.2 billion of the first-lien mortgages and $16.2 billion of the second-lien mortgages have
defaulted or are severely delinquent at June 30, 2011. At least 25 payments have been made on
approximately 57 percent of the defaulted and severely delinquent loans. Of the first-lien
mortgages sold, $39.1 billion, or 38 percent, 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 June 30,
2011, we have received $6.5 billion of representations and warranties claims related to the
monoline-insured transactions. Of these repurchase claims, $2.0 billion were resolved through the
Assured Guaranty Settlement, $829 million were resolved through repurchase or indemnification with
losses of $727 million and $125 million were rescinded by the investor or paid in full. The
majority of these resolved claims related to second-lien mortgages.
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Unresolved Monoline Repurchase Claims
At June 30, 2011, for loans originated between 2004 and 2008,
the unpaid principal balance of
loans related to unresolved monoline repurchase claims was $3.5 billion, including $3.0 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 $547 million that are in the process of review. At June 30,
2011, the unpaid principal balance of loans for which the monolines had requested loan files for
review but for which no repurchase claim had been received was $6.1 billion, excluding loans that
had been paid in full and file requests for loans included in the trusts settled with Assured
Guaranty. There will likely be additional requests for loan files in the future leading to
repurchase claims.
We have had limited experience with the monoline insurers, other than Assured Guaranty, in
the repurchase process as each of these monoline insurers has instituted litigation against legacy
Countrywide and/or Bank of America, which limits our ability to enter into constructive dialogue
with these monolines to resolve the open claims. It is not possible at this time to reasonably
estimate probable future repurchase obligations with respect to those monolines with whom we have
limited repurchase experience and, therefore, no representations and warranties liability has been
recorded in connection with these monolines, other than a liability for repurchase claims where we
have determined that there are valid loan defects. Our estimated range of possible loss related to
non-GSE representations and warranties exposure as of June 30, 2011 includes possible losses
related to these monoline insurers.
Whole Loans and Private-label Securitizations
Legacy entities, and to
a lesser extent Bank of America, sold whole loans to investors, and the majority of the sales were executed through
private-label securitizations, including third-party sponsored transactions. The loans sold with total principal
balance of $778.2 billion, included in Table 15, were originated between 2004 and 2008, of which $399.2 billion have
been paid in full and $179.7 billion are defaulted or severely delinquent at June 30, 2011. In connection with these
transactions, we provided representations and warranties, and the whole-loan investors may retain those rights even when
the whole loans were aggregated with other collateral into private-label securitizations sponsored by the whole-loan
investors. At least 25 payments have been made on approximately 62 percent of the defaulted and severely delinquent
loans. We have received approximately $8.4 billion of representations
and warranties claims from whole-loan investors
and private-label securitization investors related to these vintages, including $5.9 billion from whole-loan investors,
$819 million from one private-label securitization counterparty which were submitted prior to 2008 and $1.7 billion in
claims from private-label securitization investors in the Covered Trusts received in the third quarter of 2010.
We
have resolved $5.6 billion of the claims received from whole-loan investors and private-label
securitization investors with losses of $1.2 billion. Approximately $2.4 billion of these claims
were resolved through repurchase or indemnification and $3.2 billion were rescinded by the
investor. Claims outstanding related to these vintages totaled $2.8 billion at June 30, 2011,
substantially all of which we have reviewed and declined to repurchase based on an assessment
of whether a material breach exists.
The
majority of the claims that we have received outside of the GSEs and
monolines are from third-party whole-loan
investors. Certain whole-loan investors 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. The BNY Mellon Settlement led to the determination that we have
sufficient experience to record a liability related to our exposure on certain other
private-label securitizations as of June 30, 2011. However, the BNY Mellon Settlement did not
provide sufficient experience related to certain private-label securitizations sponsored by third-party
whole-loan investors. As it relates to certain private-label securitizations sponsored by third parties
whole-loan investors and certain other whole loan sales, it is not possible to determine whether
a loss has occurred or is probable and, therefore, no representations and warranties liability
has been recorded in connection with these transactions. Our estimated range of possible loss
related to non-GSE representations and warranties exposure as of June 30, 2011 includes possible
losses related to these whole loan sales and private-label securitizations sponsored by
third-party whole-loan investors.
Private-label securitization investors generally do not have the contractual right to demand
repurchase of loans directly or the right to access loan files. The inclusion of the $1.7 billion
in outstanding claims does not mean that we believe these claims have satisfied the contractual
thresholds required for these investors to direct the securitization trustee to take action or
that these claims are otherwise procedurally or substantively valid. One of these claimants has
filed litigation against us relating to certain of these claims; the claims in this litigation
would be extinguished if there is final court approval of the BNY Mellon Settlement. Additionally,
certain private-label securitizations are insured by the monoline insurers, which are not
reflected in these amounts regarding whole loan sales and private-label securitizations.
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Table of Contents
Other Mortgage-related Matters
Servicing Matters and Foreclosure Processes
We service a large portion of the loans we or our subsidiaries have securitized and also
service loans on behalf of third-party securitization vehicles and other investors. Servicing
agreements with the GSEs generally provide the GSEs with broader rights relative to the servicer
than are found in servicing agreements with private investors. For example, each GSE typically has
the right to demand that the servicer repurchase loans that breach the seller’s representations
and warranties made in connection with the initial sale of the loans even if the servicer was not
the seller. The GSEs also reserve the contractual right to demand indemnification or loan
repurchase for certain servicing breaches. In addition, our agreements with the GSEs and their
first mortgage seller/servicer guides provide for timelines to resolve delinquent loans through
workout efforts or liquidation, if necessary. In addition, many non-agency RMBS and whole-loan
servicing agreements require the servicer to indemnify the trustee or other investor for or
against failures by the servicer to perform its servicing obligations or acts or omissions that
involve willful malfeasance, bad faith or gross negligence in the performance of, or reckless
disregard of, the servicer’s duties.
In October 2010, we voluntarily stopped taking residential mortgage foreclosure proceedings
to judgment in states where foreclosure requires a court order following a legal proceeding
(judicial states) and stopped foreclosure sales in all states in order to complete an assessment
of related business processes. We have resumed foreclosure sales in all non-judicial states;
however, while we have recently resumed foreclosure proceedings in nearly all judicial states, our
progress on foreclosure sales in judicial states has been significantly slower than in
non-judicial states. We have also not yet resumed foreclosure sales for certain types of
customers, including those in bankruptcy and those with FHA-insured loans, although we have
resumed foreclosure proceedings with respect to these types of customers. The implementation of
changes in procedures and controls, including loss mitigation procedures related to our ability to
recover on FHA insurance-related claims, as well as governmental, regulatory and judicial actions,
may result in continuing delays in foreclosure proceedings and foreclosure sales, as well as
creating obstacles to the collection of certain fees and expenses, in both judicial and
non-judicial foreclosures.
On April 13, 2011, we entered into a consent order with the Federal Reserve and BANA entered
into a consent order with the Office of the Comptroller of the Currency (OCC) to address the
regulators’ concerns about residential mortgage servicing practices and foreclosure processes.
Also, on this date, the other 13 largest mortgage servicers in the U.S. separately entered into
consent orders with their respective federal bank regulators related to residential mortgage
servicing practices and foreclosure processes. The orders resulted from an interagency horizontal
review conducted by federal bank regulators of major residential mortgage servicers. While federal
bank regulators found that loans foreclosed upon had been generally considered for other
alternatives (such as loan modifications), were seriously delinquent, and that servicers could
support their standing to foreclose, several areas for process improvement requiring timely and
comprehensive remediation across the industry were also identified. We identified most of these
areas for process improvement after our own review in late 2010 and continue to make significant
progress in these areas. The federal bank regulator consent orders with the mortgage servicers do
not assess civil monetary penalties. However, the consent orders do not preclude the assertion of
civil monetary penalties and a federal bank regulator has stated publicly that it believes
monetary penalties are appropriate.
The consent order with the OCC requires servicers to make several enhancements to their
servicing operations, including implementation of a single point of contact model for borrowers
throughout the loss mitigation and foreclosure processes, adoption of measures designed to ensure
that foreclosure activity is halted once a borrower has been approved for a modification unless
the borrower fails to make payments under the modified loan and implementation of enhanced
controls over third-party vendors that provide default servicing support services. In addition,
the consent order required that servicers retain an independent consultant, approved by the OCC,
in order to conduct a review of all foreclosure actions pending, or foreclosure sales that
occurred, between January 1, 2009 and December 31, 2010 and submit a plan to the OCC to remediate
all financial injury to borrowers caused by any deficiencies identified through the review. The
OCC accepted the independent consultant that we retained to conduct the foreclosure review.
Additionally, we have submitted an action plan to the OCC which will undergo a period of review by
the OCC. The OCC may require changes to the action plan, and may consider the ongoing negotiations
with the DOJ and other federal and state authorities regarding foreclosure and servicing practices
discussed below in its review of our action plan.
In addition, law enforcement authorities in all 50 states and the DOJ and other federal
agencies continue to investigate alleged irregularities in the foreclosure practices of
residential mortgage servicers, including us. Authorities have publicly stated that the scope of
the investigations extends beyond foreclosure documentation practices to mortgage loan
modification and loss mitigation practices, including compliance with HUD requirements related to
FHA-insured loans. We continue to cooperate with these investigations and are dedicating
significant resources to address these issues. We and the
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other largest mortgage servicers continue to engage in ongoing negotiations regarding these
matters with law enforcement authorities and federal agencies. The negotiations continue to focus
on the amount of any settlement payment and settlement terms, including principal forgiveness,
servicing standards, enforcement mechanisms and releases. Although we cannot be certain as to the
ultimate outcome that may result from these negotiations or the timing of such outcome, the
parties continue to make progress toward achieving a resolution of these matters.
We continue to be subject to additional borrower and non-borrower litigation and governmental
and regulatory scrutiny related to our past and current servicing and 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. The current
environment of heightened regulatory scrutiny has the potential to subject us to inquiries or
investigations that could significantly adversely affect our reputation. Such investigations by
state and federal authorities, as well as any other governmental or regulatory scrutiny of our
foreclosure processes, could result in material fines, penalties, equitable remedies, additional
default servicing requirements and process changes, or other enforcement actions, and could result
in significant legal costs in responding to governmental investigations and additional litigation.
In the three and six months ended June 30, 2011, we incurred $716 million and $1.6 billion of
mortgage-related assessments and waivers costs which included $485 million and $1.0 billion for
compensatory fees that we expect to be assessed by the GSEs as a result of foreclosure delays with
the remainder being out-of-pocket costs that we do not expect to recover because of foreclosure
delays. We incurred $230 million in the fourth quarter of 2010. We expect that these costs will
remain elevated as additional loans are delayed in the foreclosure process and as the GSEs assert
more aggressive criteria. We also expect that additional costs related to resources necessary to
perform the foreclosure process assessment, to revise affidavit filings and to implement other
operational changes will continue for at least the remainder of 2011. This will likely result in
continued higher noninterest expense, including higher default servicing costs and legal expenses,
in
CRES
and has impacted and may continue to impact the value of our MSRs related to these
serviced loans. It is also possible that the delays in foreclosure sales may result in additional
costs and expenses, including costs associated with the maintenance of properties or possible home
price declines while foreclosures are delayed. In addition, required process changes, including
those required under the consent orders with federal bank regulators, are likely to result in
further increases in our default servicing costs over the longer term. Finally, the time to
complete foreclosure sales may continue to be protracted, which may result in a greater number of
nonperforming loans and increased servicing advances and may impact the collectability of such
advances and the value of our MSR asset, MBS and real estate owned properties.
An increase in the time to complete foreclosure sales also may increase the number of
severely delinquent loans in our mortgage servicing portfolio, result in increasing levels of
consumer nonperforming loans and could have a dampening effect on net interest margin as
nonperforming assets increase. Accordingly, delays in foreclosure sales, including any delays
beyond those currently anticipated, our continued process enhancements, including those required
under the OCC and federal bank regulator consent orders and any issues that may arise out of
alleged irregularities in our foreclosure process could significantly increase the costs
associated with our mortgage operations.
Private-label
Securitization Settlement – Servicing Matters
In connection with the BNY Mellon Settlement, BAC HLS has agreed to implement certain
servicing changes. On a schedule that began with the signing of the BNY Mellon Settlement, BAC HLS
agreed to transfer the servicing related to certain high-risk loans to qualified subservicers. In
addition, upon final court approval of the BNY Mellon Settlement, BAC HLS has agreed to the
benchmarking of loans not in subservicing arrangements against defined industry standards
regarding default-servicing timelines. The transfer of loans to subservicers will reduce the
servicing fees payable to BAC HLS in the future. Upon final court approval, failure to meet the
established benchmarking standards for loans not in subservicing arrangements can trigger the
payment of agreed-upon fees. BAC HLS’s obligations with respect to these servicing changes will
terminate if final court approval is not obtained.
The Trustee and BAC HLS have also agreed to clarify and conform certain servicing standards
related to loss mitigation. In particular, the BNY Mellon Settlement would clarify that it is
permissible to apply the same loss-mitigation strategies to the Covered Trusts as are applied to
BAC HLS affiliates’ held-for-investment (HFI) portfolios. This provision of the agreement is
effective immediately and is not conditioned on final court approval.
We and legacy Countrywide also have agreed to work to resolve with the Trustee certain note
and mortgage documentation issues related to the enforceability of mortgages in foreclosure (e.g.,
title policy and mortgage recordation issues). If certain documentation issues remain outstanding
when a loan reaches foreclosure, we and/or legacy Countrywide is obligated to reimburse the
related Covered Trust for any loss if BAC HLS is unable to foreclose on the mortgage and the
Covered Trust is not made whole by a title policy because of documentation exceptions. This
agreement will terminate if
final court approval of the BNY Mellon Settlement is not obtained, although we could still have
exposure under the pooling and servicing agreements related to the mortgages in the Covered
Trusts for such documentation issues.
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Certain servicing and documentation obligations began upon signing of the BNY Mellon
Settlement agreement, while others, including potential payment of servicing-related fees, are
conditioned on final court approval of the BNY Mellon Settlement. We estimate that the costs
associated with additional servicing obligations under the BNY Mellon Settlement contributed $400
million to the second quarter 2011 valuation charge related to the MSR asset. The additional
servicing actions are consistent with the consent orders with the OCC and the Federal Reserve.
Regulatory Matters
For additional information regarding significant regulatory matters including Regulation
E and the CARD Act, refer to Item 1A. Risk Factors, as well as Regulatory Matters on page 56 of
the MD&A of the Corporation’s 2010 Annual Report on Form 10-K.
Financial Reform Act
The Financial Reform Act, which was signed into law on July 21, 2010, enacts sweeping
financial regulatory reform and has altered and will continue to alter the way in which we conduct
certain businesses, increase our costs and reduce our revenues. Many aspects of the Financial
Reform Act remain subject to final rulemaking and will take effect over several years, making it
difficult to anticipate the precise impact on the Corporation, our customers or the financial
services industry.
Debit Interchange Fees
On June 29, 2011, the Federal Reserve adopted a final rule with respect to the Durbin
Amendment effective on October 1, 2011 which, among other things, establishes a regulatory cap for
many types of debit interchange transactions to equal no more than 21 cents plus five bps of the
value of the transaction. Furthermore, the Federal Reserve adopted an interim rule to allow a
debit card issuer to recover an additional one cent per transaction for fraud prevention purposes
if the issuer complies with certain fraud-related requirements promulgated by the Federal Reserve,
with which we intend to comply. The Federal Reserve also approved rules governing routing and
exclusivity, requiring issuers to offer two unaffiliated networks for routing debit transactions
on each debit or prepaid product, which are effective April 1,
2012. For additional information, see
Global Card Services
on page 33.
Limitations on Certain Activities
We anticipate that the final regulations associated with the Financial Reform Act will
include limitations on proprietary trading as well as the sponsorship or investment in hedge funds
and private equity funds (the Volcker Rule), as will be defined by various regulators. The
implementing regulations for the Volcker Rule will include clarifications to the definition of
proprietary trading and distinctions between permitted and prohibited activities which have not
yet been finalized. The final regulations are required to be in place by October 21, 2011, and the
Volcker Rule becomes effective twelve months after such rules are final or on July 21, 2012,
whichever is earlier. The Volcker Rule then gives certain financial institutions two years from
the effective date, with opportunities for additional extensions, to bring activities and
investments into conformance. In response to these developments,
GBAM
has exited its proprietary
trading business as of June 30, 2011.
The ultimate impact of the Volcker Rule’s prohibition on proprietary trading and the
sponsorship or investment in hedge funds and private equity funds continues to remain uncertain,
including any additional significant operational and compliance costs we may incur. For additional
information about our proprietary trading business, see
GBAM
on page 42.
Derivatives
The Financial Reform Act includes measures to broaden the scope of derivative instruments
subject to regulation by requiring clearing and exchange trading of certain derivatives; imposing
new capital margins, reporting, registration and business conduct requirements for certain market
participants; and imposing position limits on certain over-the-counter (OTC) derivatives. Although
the Financial Reform Act required regulators to promulgate the rulemakings necessary to implement
these regulations by July 16, 2011, the regulators have indicated that the rulemaking process will
continue through at least the end of 2011. Further, the regulators have granted temporary relief
from certain requirements that would have taken effect on July 16, 2011 absent any rulemaking.
This temporary relief is effective until final rules relevant to each requirement become
effective, or in the case of the Commodity Futures Trading Commission (CFTC), until the earlier of
the effective date of relevant final rules or December 31, 2011. The ultimate impact of these
derivatives regulations and the
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time it will take to comply continues to remain uncertain. The final regulations will impose
additional operational and compliance costs on us and may require us to restructure certain
businesses, thereby negatively impacting our revenues and results of operations.
FDIC Deposit Insurance Assessments
On February 7, 2011, the FDIC issued a new regulation implementing revisions to the
assessment system mandated by the Financial Reform Act, which became effective on April 1, 2011.
The new regulation was reflected in the June 30, 2011 FDIC fund balance and will be reflected in
the invoices for payments due September 30, 2011. Among other things, the final rule changed the
assessment base for insured depository institutions from adjusted domestic deposits to average
consolidated total assets during an assessment period, less average tangible equity capital during
that assessment period. Additionally, the FDIC has broad discretionary authority to increase
assessments on large and highly complex institutions on a case by case basis. Any future increases
in required deposit insurance premiums or other bank industry fees could have an adverse impact on
our financial condition and results of operations.
Credit Risk Retention
On March 29, 2011, numerous federal regulators jointly issued a proposed rule regarding
credit risk retention that would, among other things, require retention by sponsors of at least
five percent of the credit risk of the assets underlying certain ABS and MBS securitizations and
would limit the ability to transfer or hedge that credit risk. The proposed rule as currently
written would likely have an adverse impact on our ability to engage in many types of the MBS and
ABS securitizations conducted in
CRES
,
GBAM
and other business segments, impose additional
operational and compliance costs on us, and negatively influence the value, liquidity and
transferability of ABS or MBS, loans and other assets. However, it remains unclear what
requirements will be included in the final rule and what the ultimate impact of the final rule
will be on our
CRES
,
GBAM
and other business segments or on our consolidated results of
operations.
The Consumer Financial Protection Bureau
The activities of the Corporation, as a consumer lender, are subject to regulation under
various U.S. federal laws, including the Truth-in-Lending, Equal Credit Opportunity, Fair Credit
Reporting, Fair Debt Collection Practice, Electronic Funds Transfer and CARD acts, as well as
various state laws. These statutes impose requirements on consumer loan origination and collection
practices. The Financial Reform Act created the CFPB to supervise, enforce and write all federal
consumer financial protection rules. On July 21, 2011, the CFPB assumed its authorities to
supervise and enforce existing consumer financial protection rules. Once a Director of the CFPB
assumes that position, the full authority to write new consumer financial protection rules will be
vested in the CFPB.
Certain Other Provisions
The Financial Reform Act also provides for a new resolution process administered by the FDIC
to unwind large systemically important financial companies; expands the role of state regulators
in enforcing consumer protection requirements over banks; includes new minimum leverage and
risk-based capital requirements for large financial institutions; and disqualifies trust preferred
securities and other hybrid capital securities from Tier 1 capital. Many of the provisions under
the Financial Reform Act have begun to be phased in 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 continue to have a significant and negative impact on our
earnings through fee reductions, higher costs and new restrictions, as well as reductions to
available capital. The Financial Reform Act may also continue to have a material adverse impact on
the value of certain assets and liabilities held on our balance sheet. The ultimate impact of the
Financial Reform Act 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. For information on the impact of the Financial
Reform Act on our credit ratings, see Liquidity Risk on page 69.
U.K. Bank Levy
The U.K. government bank levy legislation was enacted on July 19, 2011. The rate on banks
operating in the U.K. has been set at 7.5 bps for short-term liabilities and 3.75 bps for
long-term liabilities for 2011 and will increase to 7.8 bps for short-term liabilities and 3.9 bps
for long-term liabilities beginning in 2012. Based on current estimates, the cost of the bank levy
is expected to be approximately $95 million annually beginning this year, and is non-deductible
for U.K. tax purposes.
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Managing Risk
Overview
Risk is inherent in every activity that we undertake. Our business exposes us to
strategic, credit, market, liquidity, compliance, operational and reputational risk. We must
manage these risks to maximize our long-term results by ensuring the integrity of our assets and
the quality of our earnings. Our risk management infrastructure is continually evolving to meet
the heightened challenges posed by the increased complexity of the financial services industry and
markets, by our increased size and global footprint, and by the 2008 financial crisis. We have a
defined risk framework and risk appetite which is approved annually by the Corporation’s Board of
Directors (the Board).
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 as well as managing risk across the enterprise and within
individual business units, products, services and transactions, and across all geographic
locations. 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 59 through 107 of the MD&A of the Corporation’s 2010 Annual Report on Form 10-K.
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/or
other inherent risks of the business including reputational and operational risk. In the financial
services industry, strategic risk is elevated due to changing customer, competitive and regulatory
environments. Our appetite for strategic risk is assessed within the context of the strategic
plan, with strategic risks selectively and carefully considered in the context of 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 pages 62 and 63 of
the MD&A of the Corporation’s 2010 Annual Report on Form 10-K.
Capital Management
Bank of America manages its capital position to maintain a strong and flexible financial
condition in order to perform through changing economic cycles, take advantage of organic growth
opportunities, maintain ready access to financial markets, remain a source of financial strength
for our subsidiaries, and return capital to our shareholders as appropriate.
To determine the appropriate level of capital, we assess the results of our Internal Capital
Adequacy Assessment Process (ICAAP), the current economic and market environment, and feedback
from investors, ratings agencies and regulators. For additional information regarding the ICAAP,
see page 63 of the MD&A of the Corporation’s 2010 Annual Report on Form 10-K.
Capital management is integrated into the risk and governance processes, as capital is a key
consideration in development of the strategic plan, risk appetite and risk limits. Economic
capital is allocated to each business unit and used to perform risk-adjusted return analysis at
the business unit, client relationship and transaction level.
Regulatory Capital
As a financial services holding company, we are subject to the risk-based capital
guidelines (Basel I) issued by the banking agencies. At June 30, 2011, we operated banking
activities primarily under two charters: BANA and FIA Card Services, N.A. Under these guidelines,
the Corporation and its affiliated banking entities measure capital adequacy based on Tier 1
common capital, Tier 1 capital and Total capital (Tier 1 plus Tier 2 capital). Capital ratios are
calculated by
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dividing each capital amount by risk-weighted assets. Additionally, Tier 1 capital is divided by
adjusted quarterly average total assets to derive the Tier 1 leverage ratio.
Certain corporate-sponsored trust companies which issue trust preferred capital debt
securities (Trust Securities) are not consolidated. In accordance with Federal Reserve guidance,
Trust Securities continue to qualify as Tier 1 capital with revised quantitative limits. As a
result, the Corporation includes Trust Securities in Tier 1 capital. The Financial Reform Act
includes a provision under which the Corporation’s previously issued and outstanding Trust
Securities in the aggregate amount of $20.0 billion (approximately 143 bps of Tier 1 capital) at
June 30, 2011 will no longer qualify as Tier 1 capital effective January 1, 2013. This amount
excludes $1.6 billion of hybrid Trust Securities that are expected to be converted to preferred
stock prior to the date of implementation. The exclusion of Trust Securities from Tier 1 capital
will be phased in incrementally over a three-year phase-in period. The treatment of Trust
Securities during the phase-in period remains unclear and is subject to future rulemaking.
For additional information on these and other regulatory requirements, see
Note 18 –
Regulatory Requirements and Restrictions
to the Consolidated Financial Statements of the
Corporation’s 2010 Annual Report on Form 10-K.
Capital Composition and Ratios
Tier 1 common capital decreased $10.5 billion to $114.7 billion at June 30, 2011 compared to
December 31, 2010. The decrease was driven by the second quarter losses and an increase in
deferred tax assets disallowed for regulatory capital reporting purposes. The $7.9 billion
increase in the deferred tax asset disallowance was due to the expiration of the longer
look-forward period granted by the regulators at the time of the Merrill Lynch acquisition and the
second quarter pre-tax loss. Tier 1 capital and Total capital decreased by $10.5 billion and $11.6
billion at June 30, 2011 compared to December 31, 2010.
Risk-weighted assets declined by $63.2 billion to $1,393 billion at June 30, 2011. The
risk-weighted asset reduction is consistent with our continued efforts to reduce non-core assets
and legacy loan portfolios. The Tier 1 common capital ratio decreased 37 bps to 8.23 percent, the
Tier 1 capital ratio decreased 24 bps to 11.00 percent and the Total capital ratio decreased 12
bps to 15.65 percent driven by the same factors noted above. The Tier 1 leverage ratio decreased
35 bps to 6.86 percent reflecting the decrease in Tier 1 capital and the lower risk-weighted
assets mentioned above.
Table 16 presents the Corporation’s capital ratios and related information at June 30, 2011
and December 31, 2010.
|
Table 16
|
||||||||||||||||||||||||
|
Regulatory Capital
|
||||||||||||||||||||||||
| June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
| Actual | Minimum | Actual | Minimum | |||||||||||||||||||||
|
(Dollars in millions)
|
Ratio | Amount | Required (1) | Ratio | Amount | Required (1) | ||||||||||||||||||
|
Tier 1 common equity ratio
|
8.23 | % | $ | 114,684 | n/a | 8.60 | % | $ | 125,139 | n/a | ||||||||||||||
|
Tier 1 capital ratio
|
11.00 | 153,134 | $ | 55,710 | 11.24 | 163,626 | $ | 58,238 | ||||||||||||||||
|
Total capital ratio
|
15.65 | 217,986 | 111,420 | 15.77 | 229,594 | 116,476 | ||||||||||||||||||
|
Tier 1 leverage ratio
|
6.86 | 153,134 | 89,337 | 7.21 | 163,626 | 90,811 | ||||||||||||||||||
| June 30 | December 31 | |||||||
| 2011 | 2010 | |||||||
|
Risk-weighted assets (in billions)
|
$ | 1,393 | $ | 1,456 | ||||
|
Adjusted quarterly average total assets (in billions)
(2)
|
2,233 | 2,270 | ||||||
| (1) | Dollar amount required to meet guidelines for adequately capitalized institutions. | |
| (2) | Reflects adjusted average total assets for the three months ended June 30, 2011 and December 31, 2010. | |
| n/a | = not applicable |
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Table 17 presents the capital composition at June 30, 2011 and December 31, 2010.
|
Table 17
|
||||||||
|
Capital Composition
|
||||||||
| June 30 | December 31 | |||||||
|
(Dollars in millions)
|
2011 | 2010 | ||||||
|
Total common shareholders’ equity
|
$ | 205,614 | $ | 211,686 | ||||
|
Goodwill
|
(71,074 | ) | (73,861 | ) | ||||
|
Nonqualifying intangible assets (includes core deposit intangibles, affinity relationships,
customer relationships and other intangibles)
|
(6,369 | ) | (6,846 | ) | ||||
|
Net unrealized gains on AFS debt and marketable equity securities and net losses on
derivatives recorded in accumulated OCI, net-of-tax
|
(4,825 | ) | (4,137 | ) | ||||
|
Unamortized net periodic benefit costs recorded in accumulated OCI, net-of-tax
|
3,809 | 3,947 | ||||||
|
Exclusion of fair value adjustment related to structured notes
(1)
|
3,219 | 2,984 | ||||||
|
Disallowed deferred tax asset
|
(16,572 | ) | (8,663 | ) | ||||
|
Other
|
882 | 29 | ||||||
|
Total Tier 1 common capital
|
114,684 | 125,139 | ||||||
|
Preferred stock
|
16,562 | 16,562 | ||||||
|
Trust preferred securities
|
21,513 | 21,451 | ||||||
|
Noncontrolling interest
|
375 | 474 | ||||||
|
Total Tier 1 capital
|
153,134 | 163,626 | ||||||
|
Long-term debt qualifying as Tier 2 capital
|
41,077 | 41,270 | ||||||
|
Allowance for loan and lease losses
|
37,312 | 41,885 | ||||||
|
Reserve for unfunded lending commitments
|
897 | 1,188 | ||||||
|
Allowance for loan and lease losses exceeding 1.25 percent of risk-weighted assets
|
(20,565 | ) | (24,690 | ) | ||||
|
45 percent of the pre-tax net unrealized gains on AFS marketable equity securities
|
4,692 | 4,777 | ||||||
|
Other
|
1,439 | 1,538 | ||||||
|
Total capital
|
$ | 217,986 | $ | 229,594 | ||||
| (1) | Represents loss on structured notes, net-of-tax, that is excluded from Tier 1 common capital, Tier 1 capital and Total capital for regulatory capital purposes. |
Regulatory Capital Changes
The regulatory capital rules as written by the Basel Committee on Banking Supervision (the
Basel Committee) continue to evolve. We manage regulatory capital to adhere to regulatory
standards of capital adequacy based on our current understanding of the rules and the application
of such rules to our business as currently conducted.
U.S. banking regulators published a final Basel II rule (Basel II rules) in December 2007,
which requires us to implement Basel II at the holding company level as well as at certain U.S.
bank subsidiaries. We are currently in the Basel II qualification period and expect to be in
compliance with all relevant Basel II requirements within the regulatory timelines.
On December 16, 2010, U.S. regulators issued a Notice of Proposed Rulemaking on the
Risk-based Capital Guidelines for Market Risk (the Market Risk Rules) reflecting partial adoption
of the Basel Committee’s July 2009 consultative document on the topic. We anticipate that these
rules will become effective in early 2012 and expect to be in full compliance with these standards
within the regulatory timelines.
In addition to the Basel II rules, the Basel Committee issued “Basel III: A global regulatory
framework for more resilient banks and banking systems,” together with the liquidity standards
discussed below (Basel III) in December 2010. We expect to be in full compliance with the Basel
III capital standards within the regulatory timelines, including when fully effective on January
1, 2019. We will continue to monitor our capital position in conjunction with our understanding of
the rules as they evolve.
If implemented by U.S. regulators as proposed, Basel III could significantly increase our
capital requirements. Basel III and the Financial Reform Act propose the disqualification of Trust
Securities from Tier 1 capital, with the Financial Reform Act proposing that the disqualification
be phased in from 2013 to 2015. Basel III also proposes the deduction of certain assets from
capital (deferred tax assets, MSRs, investments in financial firms and pension assets, among
others, within prescribed limitations), the inclusion of accumulated OCI in capital, increased
capital for counterparty credit risk,
66
Table of Contents
and new minimum capital and buffer requirements. The phase-in period for the capital
deductions is proposed to occur in 20 percent increments from 2014 through 2018 with full
implementation by December 31, 2018. An increase in capital requirements for counterparty credit
is proposed to be effective January 2013. The phase-in period for the new minimum capital
requirements and related buffers is proposed to occur between 2013 and 2019. U.S. regulators have
indicated a goal to adopt final rules by year-end 2011 or early 2012. We have made the
implementation and migration of the new capital rules our primary capital related priority. We
intend to continue to build capital through retaining earnings,
actively reducing legacy asset
portfolios and implementing other non-dilutive capital related initiatives including focusing on the reduction of higher
risk-weighted assets. As the new rules come into effect, we currently anticipate that we will be
in excess of the minimum required ratios without needing to raise new equity capital. For
additional information on MSRs, refer to
Note 19 – Mortgage Servicing Rights
to the Consolidated
Financial Statements and for additional information on deferred tax assets, refer to
Note 21 –
Income Taxes
to the Consolidated Financial Statements of the Corporation’s 2010 Annual Report on
Form 10-K.
On July 19, 2011, the Basel Committee published the consultative document “Globally systemic
important banks: Assessment methodology and the additional loss absorbency requirement” which sets
out measures for global, systemically important financial institutions including the methodology
for measuring systemic importance, the additional capital required (the SIFI buffer), and the
arrangements by which they will be phased in. As proposed, the SIFI buffer would be met with
additional Tier 1 common equity ranging from one percent to 3.5 percent and will be phased in from
2016 through 2018. U.S. banking regulators have not yet provided similar rules or guidance for
U.S. implementation of a SIFI buffer.
We also note that there remains significant uncertainty regarding the final Basel III
requirements as the U.S. has only issued final rules for Basel II at this time. Impacts may change
as the U.S. finalizes rules under Basel III and the regulatory agencies interpret the final rules
during the implementation process. For additional information regarding Basel II, Basel III,
Market Risk Rules and other proposed regulatory capital changes, see Regulatory Capital on page 63
of the MD&A of the Corporation’s 2010 Annual Report on Form 10-K.
Bank of America, N.A. and FIA Card Services, N.A. Regulatory Capital
Table 18 presents regulatory capital information for BANA and FIA Card Services, N.A. at June
30, 2011 and December 31, 2010. The goodwill impairment charges recognized in 2011 and 2010 did
not impact the regulatory capital ratios.
| Table 18 | |||||||||||||||||||||||||
| Bank of America, N.A. and FIA Card Services, N.A. Regulatory Capital | |||||||||||||||||||||||||
| June 30, 2011 | December 31, 2010 | ||||||||||||||||||||||||
| Actual | Minimum | Actual | Minimum | ||||||||||||||||||||||
| (Dollars in millions) | Ratio | Amount | Required (1) | Ratio | Amount | Required (1) | |||||||||||||||||||
|
Tier 1
|
|||||||||||||||||||||||||
|
Bank of America, N.A.
|
11.24 | % | $ | 118,886 | $ | 42,307 | 10.78 | % | $ | 114,345 | $ | 42,416 | |||||||||||||
|
FIA Card Services, N.A.
|
19.17 | 29,224 | 6,097 | 15.30 | 25,589 | 6,691 | |||||||||||||||||||
|
Total
|
|||||||||||||||||||||||||
|
Bank of America, N.A.
|
14.65 | 154,987 | 84,614 | 14.26 | 151,255 | 84,831 | |||||||||||||||||||
|
FIA Card Services, N.A.
|
20.70 | 31,545 | 12,193 | 16.94 | 28,343 | 13,383 | |||||||||||||||||||
|
Tier 1 leverage
|
|||||||||||||||||||||||||
|
Bank of America, N.A.
|
8.46 | 118,886 | 56,208 | 7.83 | 114,345 | 58,391 | |||||||||||||||||||
|
FIA Card Services, N.A.
|
15.56 | 29,224 | 7,511 | 13.21 | 25,589 | 7,748 | |||||||||||||||||||
| (1) |
Dollar amount required to meet guidelines for adequately capitalized institutions.
|
The BANA Tier 1 and Total capital ratios increased 46 bps to 11.24 percent and 39 bps to
14.65 percent at June 30, 2011 compared to December 31, 2010. The increase in the ratios was
driven by $1.5 billion and $4.0 billion in earnings generated during the three and six months
ended June 30, 2011. The Tier 1 leverage ratio increased 63 bps to 8.46 percent, benefiting from
the improvement in Tier 1 capital combined with a $54.6 billion decrease in adjusted quarterly
average total assets resulting from our continued efforts to reduce non-core assets and legacy
loan portfolios.
The FIA Card Services, N.A. Tier 1 capital ratio increased 387 bps to 19.17 percent and
the Total capital ratio increased 376 bps to 20.70 percent at June 30, 2011 compared to December
31, 2010. The Tier 1 leverage ratio increased 235 bps to 15.56 percent at June 30, 2011 compared
to December 31, 2010. The increase in ratios was driven by $1.9 billion and $3.5 billion in
earnings generated during the three and six months ended June 30, 2011.
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Table of Contents
Broker/Dealer Regulatory Capital
Bank of America’s principal U.S. broker/dealer subsidiaries are Merrill Lynch, Pierce, Fenner
& Smith (MLPF&S) and Merrill Lynch Professional Clearing Corp (MLPCC). MLPCC is a fully-guaranteed
subsidiary of MLPF&S and provides clearing and settlement services. Both entities are subject to
the net capital requirements of SEC Rule 15c3-1. Both entities are also registered as futures
commission merchants and are subject to the CFTC Regulation 1.17.
MLPF&S has elected to compute the minimum capital requirement in accordance with the
Alternative Net Capital Requirement as permitted by SEC Rule 15c3-1. At June 30, 2011, MLPF&S’s
regulatory net capital as defined by Rule 15c3-1 was $10.1 billion and exceeded the minimum
requirement of $807 million by $9.3 billion. MLPCC’s net capital of $1.9 billion exceeded the
minimum requirement of $252 million by approximately $1.7 billion.
In accordance with the Alternative Net Capital Requirements, MLPF&S is required to maintain
tentative net capital in excess of $1 billion, net capital in excess of $500 million and notify
the SEC in the event its tentative net capital is less than $5 billion. At June 30, 2011, MLPF&S
had tentative net capital and net capital in excess of the minimum and notification requirements.
Economic Capital
Our economic capital measurement process provides a risk-based measurement of the
capital required for unexpected credit, market and operational losses over a one-year time horizon
at a 99.97 percent confidence level, consistent with a “AA” credit rating. Economic capital is
allocated to each business unit based upon its risk positions and contribution to enterprise risk,
and is used for capital adequacy, performance measurement and risk management purposes. The
strategic planning process utilizes economic capital with the goal of allocating risk
appropriately and measuring returns consistently across all businesses and activities. Economic
capital allocation plans are incorporated into the Corporation’s operating plan which is approved
by the Board on an annual basis. For additional information regarding economic capital, credit
risk capital, market risk capital and operational risk capital, see page 66 of the MD&A of the
Corporation’s 2010 Annual Report on Form 10-K.
Common Stock Dividends
Table 19 is a summary of our declared quarterly cash dividends on common stock for 2011
as of August 4, 2011.
| Table 19 | ||||||||
| Common Stock Cash Dividend Summary | ||||||||
| Declaration Date | Record Date | Payment Date | Dividend Per Share | |||||
|
May 11, 2011
|
June 3, 2011 | June 24, 2011 | $ | 0.01 | ||||
|
January 26, 2011
|
March 4, 2011 | March 25, 2011 | 0.01 | |||||
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Table of Contents
Preferred Stock Dividends
Table 20 is a summary of our most recent cash dividend declarations on preferred stock
as of August 4, 2011. For additional information on preferred stock, see
Note 15 – Shareholders’
Equity
to the Consolidated Financial Statements of the Corporation’s 2010 Annual Report on Form
10-K.
| Table 20 | ||||||||||||||||||||||||
| 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 | May 11, 2011 | July 11, 2011 | July 25, 2011 | 7.00 | % | $ | 1.75 | |||||||||||||||
|
Series D
(2)
|
$ | 661 | July 5, 2011 | August 31, 2011 | September 14, 2011 | 6.204 | % | $ | 0.38775 | |||||||||||||||
|
Series E
(2)
|
$ | 487 | July 5, 2011 | July 29, 2011 | August 15, 2011 | Floating | $ | 0.25556 | ||||||||||||||||
|
Series H
(2)
|
$ | 2,862 | July 5, 2011 | July 15, 2011 | August 1, 2011 | 8.20 | % | $ | 0.51250 | |||||||||||||||
|
Series I
(2)
|
$ | 365 | July 5, 2011 | September 15, 2011 | October 3, 2011 | 6.625 | % | $ | 0.41406 | |||||||||||||||
|
Series J
(2)
|
$ | 978 | July 5, 2011 | July 15, 2011 | August 1, 2011 | 7.25 | % | $ | 0.45313 | |||||||||||||||
|
Series K
(3, 4)
|
$ | 1,668 | July 5, 2011 | July 15, 2011 | August 1, 2011 | Fixed-to-floating | $ | 40.00 | ||||||||||||||||
|
Series L
|
$ | 3,349 | June 17, 2011 | July 1, 2011 | August 1, 2011 | 7.25 | % | $ | 18.125 | |||||||||||||||
|
Series M
(3, 4)
|
$ | 1,434 | April 4, 2011 | April 30, 2011 | May 16, 2011 | Fixed-to-floating | $ | 40.625 | ||||||||||||||||
|
Series 1
(5)
|
$ | 146 | July 5, 2011 | August 15, 2011 | August 30, 2011 | Floating | $ | 0.19167 | ||||||||||||||||
|
Series 2
(5)
|
$ | 526 | July 5, 2011 | August 15, 2011 | August 30, 2011 | Floating | $ | 0.19167 | ||||||||||||||||
|
Series 3
(5)
|
$ | 670 | July 5, 2011 | August 15, 2011 | August 29, 2011 | 6.375 | % | $ | 0.39843 | |||||||||||||||
|
Series 4
(5)
|
$ | 389 | July 5, 2011 | August 15, 2011 | August 30, 2011 | Floating | $ | 0.25556 | ||||||||||||||||
|
Series 5
(5)
|
$ | 606 | July 5, 2011 | August 1, 2011 | August 22, 2011 | Floating | $ | 0.25556 | ||||||||||||||||
|
Series 6
(6)
|
$ | 65 | July 5, 2011 | September 15, 2011 | September 30, 2011 | 6.70 | % | $ | 0.41875 | |||||||||||||||
|
Series 7
(6)
|
$ | 17 | July 5, 2011 | September 15, 2011 | September 30, 2011 | 6.25 | % | $ | 0.39062 | |||||||||||||||
|
Series 8
(5)
|
$ | 2,673 | July 5, 2011 | August 15, 2011 | August 29, 2011 | 8.625 | % | $ | 0.53906 | |||||||||||||||
| (1) |
Dividends are cumulative.
|
|
| (2) |
Dividends per depositary share, each representing a 1/1,000
th
interest in a share of preferred stock.
|
|
| (3) |
Initially pays dividends semi-annually.
|
|
| (4) |
Dividends per depositary share, each representing a 1/25
th
interest in a share of preferred stock.
|
|
| (5) |
Dividends per depositary share, each representing a 1/1,200
th
interest in a share of preferred stock.
|
|
| (6) |
Dividends per depositary share, each representing a 1/40
th
interest in a share of preferred stock.
|
Enterprise-wide Stress Testing
As a part of our core risk management practices, we conduct enterprise-wide stress
tests on a periodic basis to better understand earnings, capital and liquidity sensitivities to
certain economic and business scenarios, including economic and market conditions that are more
severe than anticipated. These enterprise-wide stress tests provide an understanding of the
potential impacts from our risk profile on earnings, capital and liquidity, and serve as a key
component of our capital management practices. 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, Asset Liability Market Risk Committee (ALMRC) and the Board’s Enterprise Risk
Committee, and serves to inform and be incorporated, along with other core business processes,
into decision making by management and the Board. We have made substantial investments to
establish stress testing capabilities as a core business process.
Liquidity Risk
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
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Table of Contents
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 global funding and liquidity risk management, see Funding and Liquidity Risk Management
on page 67 of the MD&A of the Corporation’s 2010 Annual Report on Form 10-K.
Global Excess Liquidity Sources and Other Unencumbered Assets
We maintain excess liquidity available to the parent company and selected subsidiaries in the
form of cash and high-quality, liquid, unencumbered securities. These assets, which we call our
Global Excess Liquidity Sources, serve as our primary means of liquidity risk mitigation. Our cash
is primarily on deposit with central banks, such as the Federal Reserve. 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 our
Global Excess Liquidity Sources 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 $66 billion to $402 billion at June 30, 2011
compared to December 31, 2010 and were maintained as presented in Table 21. This increase was due
primarily to liquidity generated by our bank subsidiaries through deposit growth, reductions in
LHFS and other factors.
| Table 21 | ||||||||||||
| Global Excess Liquidity Sources | ||||||||||||
| Average for | ||||||||||||
| Three Months Ended | ||||||||||||
| June 30 | December 31 | June 30 | ||||||||||
| (Dollars in billions) | 2011 | 2010 | 2011 | |||||||||
|
Parent company
|
$ | 119 | $ | 121 | $ | 121 | ||||||
|
Bank subsidiaries
|
243 | 180 | 236 | |||||||||
|
Broker/dealers
|
40 | 35 | 45 | |||||||||
|
Total Global Excess Liquidity Sources
|
$ | 402 | $ | 336 | $ | 402 | ||||||
As noted in Table 21, the Global Excess Liquidity Sources available to the parent
company totaled $119 billion and $121 billion at June 30, 2011 and December 31, 2010. Typically,
parent company cash is deposited overnight with BANA.
Table 22 presents the composition of Global Excess Liquidity Sources at June 30, 2011 and
December 31, 2010.
| Table 22 | ||||||||
| Global Excess Liquidity Sources Composition | ||||||||
| June 30 | December 31 | |||||||
| (Dollars in billions) | 2011 | 2010 | ||||||
|
Cash on deposit
|
$ | 85 | $ | 80 | ||||
|
U.S. treasuries
|
63 | 65 | ||||||
|
U.S. agency securities and mortgage-backed securities
|
231 | 174 | ||||||
|
Non-U.S. government securities
|
23 | 17 | ||||||
|
Total Global Excess Liquidity Sources
|
$ | 402 | $ | 336 | ||||
Global Excess Liquidity Sources available to our bank subsidiaries at June 30, 2011 and
December 31, 2010 totaled $243 billion and $180 billion. These amounts are distinct from the cash
deposited by the parent company, as described in Table 22. In addition to their Global Excess
Liquidity Sources, our bank subsidiaries hold significant amounts of other unencumbered securities
that we believe could also be used to generate liquidity, primarily investment-grade MBS. Our bank
subsidiaries can also generate incremental liquidity by pledging a range of other unencumbered
loans and securities to certain FHLBs and the Federal Reserve Discount Window. The cash we could
have obtained by borrowing against this pool of specifically-identified eligible assets was
approximately $197 billion and $170 billion at June 30, 2011 and December 31, 2010. 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 can only be used to fund obligations
within the bank subsidiaries and cannot be transferred to the parent company or nonbank
subsidiaries.
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Table of Contents
Our broker/dealer subsidiaries’ excess liquidity sources at June 30, 2011 and December 31,
2010 consisted of $40 billion and $35 billion in cash and high-quality, liquid, unencumbered
securities. Our broker/dealers also held significant amounts of other unencumbered securities we
believe could also be used to generate additional liquidity, including investment-grade corporate
securities and equities. Liquidity held in a broker/dealer subsidiary is only available to meet
the obligations of that entity and cannot be transferred to the parent company or to any other
subsidiary due to regulatory restrictions and minimum requirements.
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. One 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.
These include certain unsecured debt instruments, primarily structured notes, which we may be
required to settle for cash prior to maturity and issuances under the FDIC’s Temporary Liquidity
Guarantee Program (TLGP), all of which will mature by June 30, 2012. The ALMRC has established a
target for Time to Required Funding of 21 months. Our Time to Required Funding at June 30, 2011
was 22 months. For purposes of calculating Time to Required Funding for June 30, 2011, we have
also included in the amount of unsecured contractual obligations the $8.6 billion liability,
including estimated costs, related to the BNY Mellon Settlement. This settlement is subject to
final court approval and certain other conditions, and the timing of the payment is not certain.
We 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.
These risk sensitive models have become increasingly important in analyzing our potential
contractual and contingent cash outflows beyond those outflows considered in the Time to Required
Funding analysis. For additional information on Time to Required Funding and liquidity stress
modeling, see page 68 of the MD&A of the Corporation’s 2010 Annual Report on Form 10-K.
Basel III Liquidity Standards
In December 2010, the Basel Committee issued “International framework for liquidity risk
measurement, standards and monitoring,” which includes two proposed measures of liquidity risk.
These two minimum liquidity measures were initially introduced in guidance in December 2009 and
are considered part of Basel III.
The first proposed liquidity measure is the Liquidity Coverage Ratio (LCR), which is
calculated as the amount of a financial institution’s unencumbered, high-quality, liquid assets
relative to the net cash outflows the institution could encounter under an acute 30-day stress
scenario. The second proposed liquidity measure is the Net Stable Funding Ratio (NSFR), which
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. The Basel Committee expects the LCR requirement to be implemented in January 2015 and the
NSFR requirement to be implemented in January 2018, following an observation period that began in
2011. We continue to monitor the development and the potential impact of these evolving proposals
and expect to meet the final requirements within the regulatory timelines.
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 groups.
We fund a substantial portion of our lending activities through our deposit base, which was
$1,038 billion and $1,010 billion at June 30, 2011 and December 31, 2010. Deposits are primarily
generated by our
Deposits, Global Commercial Banking, GWIM
and
GBAM
segments. These deposits are
diversified by clients, product type and geography. Certain of our U.S. 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
71
Table of Contents
volatility or changes in our credit ratings than wholesale funding
sources. Our lending activities may also be financed through secured borrowings, including
securitizations and FHLB loans.
Our trading activities in broker/dealer subsidiaries are primarily funded on a secured basis
through securities lending and repurchase agreements and 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 overnight. Disruptions in
secured financing markets for financial institutions have occurred in prior market cycles which
resulted in adverse changes in terms or significant 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 and 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 objectives. We continue to reduce our use of commercial paper for short-term
borrowing purposes and expect that commercial paper levels will decrease further in the third
quarter of 2011.
Our mortgage business accesses a liquid market for the sale of newly originated mortgages through contracts with the GSEs and FHA. Contracts with the GSEs are subject to the Seller/Servicer guides issued by those GSEs.
Table 23 presents information on short-term borrowings.
| Table 23 | ||||||||||||||||||||||||||||||||
| Short-term Borrowings | ||||||||||||||||||||||||||||||||
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||||||||||
| Amount | Rate | Amount | Rate | |||||||||||||||||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||||||||
|
Average during period
|
||||||||||||||||||||||||||||||||
|
Federal funds purchased
|
$ | 1,798 | $ | 6,585 | 0.06 | % | 0.14 | % | $ | 2,365 | $ | 5,508 | 0.09 | % | 0.12 | % | ||||||||||||||||
|
Securities loaned or sold under agreements to repurchase
|
274,875 | 376,973 | 1.52 | 0.66 | 289,096 | 394,221 | 1.34 | 0.61 | ||||||||||||||||||||||||
|
Commercial paper
|
14,166 | 26,641 | 0.76 | 0.58 | 16,305 | 30,351 | 0.74 | 0.50 | ||||||||||||||||||||||||
|
Other short-term borrowings
|
47,853 | 43,852 | 2.30 | 2.09 | 47,276 | 50,961 | 2.34 | 1.75 | ||||||||||||||||||||||||
|
Total
|
$ | 338,692 | $ | 454,051 | 1.59 | 0.79 | $ | 355,042 | $ | 481,041 | 1.43 | 0.72 | ||||||||||||||||||||
|
Maximum month-end balance during period
|
||||||||||||||||||||||||||||||||
|
Federal funds purchased
|
$ | 1,622 | $ | 7,636 | $ | 4,133 | $ | 8,320 | ||||||||||||||||||||||||
|
Securities loaned or sold under agreements to repurchase
|
284,944 | 433,135 | 293,519 | 458,532 | ||||||||||||||||||||||||||||
|
Commercial paper
|
17,423 | 28,052 | 21,212 | 36,236 | ||||||||||||||||||||||||||||
|
Other short-term borrowings
|
47,087 | 56,742 | 47,087 | 63,081 | ||||||||||||||||||||||||||||
| June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||||
| Amount | Rate | Amount | Rate | |||||||||||||||||||||||||||||
|
Period-end balance
|
||||||||||||||||||||||||||||||||
|
Federal funds purchased
|
$ | 1,414 | 0.05 | % | $ | 1,458 | 0.14 | % | ||||||||||||||||||||||||
|
Securities loaned or sold under agreements to repurchase
|
238,107 | 1.33 | 243,901 | 1.15 | ||||||||||||||||||||||||||||
|
Commercial paper
|
6,177 | 1.73 | 15,093 | 0.65 | ||||||||||||||||||||||||||||
|
Other short-term borrowings
|
44,455 | 2.53 | 44,869 | 2.02 | ||||||||||||||||||||||||||||
|
Total
|
$ | 290,153 | 1.68 | $ | 305,321 | 1.27 | ||||||||||||||||||||||||||
For average and period-end balance discussions, see Balance Sheet Overview on page 15.
For more information, see
Note 12
–
Federal Funds Sold, Securities Borrowed or Purchased Under
Agreements to Resell and Short-term Borrowings
to the Consolidated Financial Statements of the
Corporation’s 2010 Annual Report on Form 10-K.
We issue the majority of our long-term unsecured debt at the parent company. During the three
and six months ended June 30, 2011, the parent company issued $5.3 billion and $11.5 billion of
long-term unsecured debt. We may also issue long-term unsecured debt at BANA, although there were
no new issuances during the three or six months ended June 30, 2011.
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.
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Table of Contents
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 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 on
page 114.
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 investments 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 settle certain structured note obligations for cash or
other securities immediately 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 $63.4 billion and $61.1 billion at June 30, 2011 and December 31, 2010.
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.
Prior to 2010, we participated in the TLGP, which allowed us to issue senior unsecured debt
that the FDIC guaranteed in return for a fee based on the amount and maturity of the debt. At June
30, 2011, we had $27.5 billion outstanding under the program. We no longer issue debt under this
program and all of our debt issued under TLGP will mature by June 30, 2012. TLGP issuances are
included in the unsecured contractual obligations for the Time to Required Funding metric, and all
of the outstanding debt issued under the program will mature within 22 months at June 30, 2011.
Under this program, our debt received the highest long-term ratings from the major credit ratings
agencies which resulted in a lower total cost of issuance than if we had issued non-FDIC
guaranteed long-term debt.
Table 24 represents the book value for aggregate annual maturities of long-term debt at June
30, 2011.
| Table 24 | ||||||||||||||||||||||||||||
| Long-term Debt By Maturity | ||||||||||||||||||||||||||||
| (Dollars in millions) | 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | |||||||||||||||||||||
|
Bank of America Corporation
|
$ | 8,519 | $ | 43,760 | $ | 9,538 | $ | 19,668 | $ | 13,814 | $ | 96,020 | $ | 191,319 | ||||||||||||||
|
Merrill Lynch & Co., Inc. and subsidiaries
|
17,514 | 21,484 | 18,502 | 19,251 | 4,804 | 43,331 | 124,886 | |||||||||||||||||||||
|
Bank of America, N.A. and other subsidiaries
|
26 | 4,777 | - | 35 | 690 | 8,556 | 14,084 | |||||||||||||||||||||
|
Other debt
|
8,271 | 13,960 | 4,967 | 1,754 | 422 | 2,251 | 31,625 | |||||||||||||||||||||
|
Total long-term debt excluding consolidated VIEs
|
34,330 | 83,981 | 33,007 | 40,708 | 19,730 | 150,158 | 361,914 | |||||||||||||||||||||
|
Long-term debt of consolidated VIEs
|
8,812 | 11,377 | 16,524 | 10,476 | 1,219 | 16,337 | 64,745 | |||||||||||||||||||||
|
Total long-term debt
|
$ | 43,142 | $ | 95,358 | $ | 49,531 | $ | 51,184 | $ | 20,949 | $ | 166,495 | $ | 426,659 | ||||||||||||||
Table 25 presents our long-term debt in the following currencies at June 30, 2011 and
December 31, 2010.
| Table 25 | ||||||||
| Long-term Debt By Major Currency | ||||||||
| June 30 | December 31 | |||||||
| (Dollars in millions) | 2011 | 2010 | ||||||
|
U.S. Dollar
|
$ | 283,594 | $ | 302,487 | ||||
|
Euros
|
86,252 | 87,482 | ||||||
|
Japanese Yen
|
19,807 | 19,901 | ||||||
|
British Pound
|
15,312 | 16,505 | ||||||
|
Canadian Dollar
|
6,647 | 6,628 | ||||||
|
Australian Dollar
|
5,617 | 6,924 | ||||||
|
Swiss Franc
|
4,363 | 3,069 | ||||||
|
Other
|
5,067 | 5,435 | ||||||
|
Total long-term debt
|
$ | 426,659 | $ | 448,431 | ||||
73
Table of Contents
For additional information on long-term debt funding, see
Note 13 – Long-term Debt
to
the Consolidated Financial Statements of the Corporation’s 2010 Annual Report on Form 10-K. For
additional information regarding funding and liquidity risk management, refer to pages 67 through
70 of the MD&A of the Corporation’s 2010 Annual Report on Form 10-K.
Contingency Planning
We maintain contingency funding plans that outline our potential responses to liquidity
stress events at various levels of severity. These policies and plans are based on stress
scenarios and include potential funding strategies and communication and notification procedures
that we would implement in the event we experienced stressed liquidity conditions. We periodically
review and test the contingency funding plans to validate efficacy and assess readiness.
Our U.S. bank subsidiaries can access contingency funding through the Federal Reserve
Discount Window. Certain non-U.S. subsidiaries have access to central bank facilities in the
jurisdictions in which they operate. While we do not rely on these sources in our liquidity
modeling, we maintain the policies, procedures and governance processes that would enable us to
access these sources if necessary.
A
downgrade of the sovereign credit ratings of the U.S. government or
the credit ratings of instruments issued, insured or guaranteed by related institutions, agencies
or instrumentalities could impact our ability to obtain funding that is collateralized by affected instruments, as well as
affecting the pricing of that funding when it is available. Such a downgrade may also affect the market value of such
instruments.
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 OTC derivatives.
Thus, it is our objective to maintain high-quality credit ratings.
Credit ratings and outlooks are opinions on our creditworthiness and that of our obligations
or securities, including long-term debt, short-term borrowings, preferred stock and other
securities, including asset securitizations. Our credit ratings are subject to ongoing review by
the ratings agencies and thus may change from time to time based on a number of factors, including
our own financial strength, performance, prospects and operations as well as factors not under our
control. In light of the recent difficulties in the financial services industry and financial
markets, there can be no assurance that we will maintain our current ratings.
During 2010, the three major ratings agencies made negative adjustments to the outlooks for
our long-term credit ratings. For a description of these rating adjustments, refer to Credit
Ratings on page 70 of the MD&A of the Corporation’s 2010 Annual Report on Form 10-K. Currently,
Bank of America Corporation’s long-term senior debt ratings and outlooks expressed by the ratings
agencies are as follows: A2 (review for possible downgrade) by Moody’s; A (negative) by S&P; and
A+ (Rating Watch Negative) by Fitch. BANA’s long-term senior debt ratings and
outlooks currently are as follows: Aa3 (review for possible downgrade) by Moody’s; A+ (negative)
by S&P; and A+ (Rating Watch Negative) by Fitch. MLPF&S’s long-term senior debt ratings and
outlooks are A+ (negative) by S&P and A+ (Rating Watch Negative) by Fitch. Merrill Lynch
International’s long-term senior debt rating is A+ (negative) by S&P. The credit ratings of
Merrill Lynch 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 Lynch’s credit ratings are Bank of America Corporation’s credit ratings.
These ratings agencies have indicated that, as a systemically important financial
institution, our credit ratings currently reflect their expectation that, if necessary, we would
receive significant support from the U.S. government. All three ratings agencies, however, 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. On June 2, 2011, Moody’s placed our ratings on review for possible downgrade from
negative outlook due to its view that the current level of U.S. government support incorporated
into our ratings may no longer be appropriate.
Other factors that influence our credit ratings include changes to the ratings agencies’
methodologies for our industry or certain security types, the ratings agencies’ assessment of the
general operating environment for financial services companies, our relative positions in the
markets in which we compete, reputation, liquidity position, diversity of funding sources, 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.
74
Table of Contents
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. Under the terms of certain
OTC derivative contracts and other trading agreements, in the event of a credit ratings downgrade,
the counterparties to those agreements may require us to provide additional collateral or to
terminate these contracts or agreements. Such collateral calls or terminations could cause us to
sustain losses, impair our liquidity, or both, by requiring us to provide the counterparties with
additional collateral in the form of cash or highly liquid securities. If the short-term credit
ratings of our parent company, bank or broker-dealer subsidiaries were downgraded by one or more
levels, the potential loss of short-term funding sources such as commercial paper or repo
financing, and the effect on our incremental cost of funds 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, Item 1A. Risk Factors on page 219 and Item 1A.
Risk Factors of the Corporation’s 2010 Annual Report on Form 10-K.
Credit Risk Management
Credit quality continued to show improvement during the first six months of 2011.
Continued economic stability and our proactive credit risk management initiatives positively
impacted the credit portfolio as charge-offs and delinquencies continued to improve across most
portfolios along with risk rating improvements in the commercial portfolios. However, global and
national economic uncertainty, home price declines, regulatory initiatives and reform continued to
weigh on the credit portfolios through June 30, 2011. For more information, see Second Quarter
2011 Economic and Business Environment on page 7.
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.
Since January 2008, and through the second quarter of 2011, Bank of America and Countrywide
have completed more than 900,000 loan modifications with customers. During the second quarter of
2011, we completed over 69,000 customer loan modifications with a total unpaid principal balance
of approximately $15.5 billion, including approximately 39,000 permanent modifications under the
government’s Making Home Affordable Program. Of the loan modifications completed in the three
months ended June 30, 2011, 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 include a combination of
rate reduction and capitalization of past due amounts which represent 59 percent of the volume of
modifications completed during the three months ended June 30, 2011, while principal forbearance
represented 20 percent and capitalization of past due amounts represented six 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 on page 90 and
Note 6 – Outstanding Loans and Leases
to the Consolidated
Financial Statements.
Certain European countries, including Greece, Ireland, Italy, Portugal and Spain, continue to
experience varying degrees of financial stress. Contagion fears expanded to Spain and Italy, and
credit spreads widened further in European peripheral countries and European banks.
The recently concluded U.S. debt ceiling negotiations, as well as events in the Middle
East/North Africa and Japan add uncertainty to the global economic outlook. Risks and
ongoing concerns about U.S. government debt levels, the debt crisis in Europe, rising
oil and commodity prices and impacts to global supply chains could result in a disruption
of financial and commodity markets and trade which could have a detrimental impact on the
global economic recovery, including the impact of sovereign and non-sovereign debt in these
and other countries. In the U.S., there is a perceived increase in the risk of a U.S.
sovereign credit rating downgrade or a downgrade in the credit
ratings of instruments issued, insured or guaranteed by institutions,
agencies or instrumentalities linked to the U.S. government, as well as the risk of other economic dislocations. Such a
downgrade could have a significant adverse effect on the financial markets and economic
conditions both in the U.S. and abroad. For more information on our direct sovereign and non-sovereign exposures in non-U.S. countries, see Non-U.S. Portfolio on page 103.
For additional information on our direct
sovereign and non-sovereign exposures and the risks associated with a downgrade of the U.S., see Item 1A. Risk Factors on page 219.
75
Table of Contents
Consumer Portfolio Credit Risk Management
Credit risk management for the consumer portfolio begins with initial underwriting and
continues throughout a borrower’s credit cycle. Statistical techniques in conjunction with
experiential judgment are used in all aspects of portfolio management including underwriting,
product pricing, risk appetite, setting credit limits, and establishing operating processes and
metrics to quantify and balance risks and returns. Statistical models are built using detailed
behavioral information from external sources such as credit bureaus and/or internal historical
experience. These models are a component of our consumer credit risk management process and are
used in part to help determine both new and existing credit decisions, portfolio management
strategies including authorizations and line management, collection practices and strategies,
determination of the allowance for loan and lease losses, and economic capital allocations for
credit risk.
For information on 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 Corporation’s 2010 Annual Report on
Form 10-K.
Consumer Credit Portfolio
Improvement in the U.S. economy and labor markets throughout most of 2010 and into the
first six months of 2011 resulted in lower credit losses in most consumer portfolios compared
to the first six months of 2010. However, continued stress in the housing market, including
declining home prices, continued to adversely impact the home loans portfolio.
76
Table of Contents
Table 26 presents our outstanding consumer loans and the Countrywide PCI loan portfolio.
Loans that were acquired from Countrywide and considered credit-impaired were recorded at fair
value upon acquisition. In addition to being included in the “Outstandings” columns in Table 26,
these loans are also shown separately, net of purchase accounting adjustments, in the “Countrywide
Purchased Credit-impaired Loan Portfolio” column. Loans that were acquired from Merrill Lynch were
recorded at fair value including those that were considered credit-impaired upon acquisition. The
Merrill Lynch consumer PCI loan portfolio did not materially alter the reported credit quality
statistics of the consumer portfolios and is therefore excluded from the “Countrywide Purchased
Credit-impaired Loan Portfolio” column and related discussion on page 86. For additional
information, see
Note 6 – Outstanding Loans and Leases
to the Consolidated Financial Statements.
The impact of the Countrywide PCI loan portfolio on certain credit statistics is reported where
appropriate. See Countrywide Purchased Credit-impaired Loan Portfolio on page 86 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 in Table 26. Table 26 also includes consumer loans accounted for under the fair
value option that were consolidated in connection with the Assured Guaranty Settlement in the
second quarter of 2011. For more information on the Assured Guaranty Settlement, see
Off-Balance Sheet Arrangements and Contractual Obligations – Representations and Warranties on page 51.
| Table 26 | ||||||||||||||||
| Consumer Loans | ||||||||||||||||
| Countrywide Purchased | ||||||||||||||||
| Credit-impaired Loan | ||||||||||||||||
| Outstandings | Portfolio | |||||||||||||||
| June 30 | December 31 | June 30 | December 31 | |||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Residential mortgage
(1)
|
$ | 266,333 | $ | 257,973 | $ | 10,224 | $ | 10,592 | ||||||||
|
Home equity
|
130,654 | 137,981 | 12,315 | 12,590 | ||||||||||||
|
Discontinued real estate
(2)
|
12,003 | 13,108 | 10,877 | 11,652 | ||||||||||||
|
U.S. credit card
|
104,659 | 113,785 | n/a | n/a | ||||||||||||
|
Non-U.S. credit card
|
26,037 | 27,465 | n/a | n/a | ||||||||||||
|
Direct/Indirect consumer
(3)
|
90,258 | 90,308 | n/a | n/a | ||||||||||||
|
Other consumer
(4)
|
2,762 | 2,830 | n/a | n/a | ||||||||||||
|
Consumer loans excluding loans accounted for under the fair value option
|
632,706 | 643,450 | 33,416 | 34,834 | ||||||||||||
|
Loans accounted for under the fair value option
(5)
|
5,194 | n/a | n/a | n/a | ||||||||||||
|
Total consumer loans
|
$ | 637,900 | $ | 643,450 | $ | 33,416 | $ | 34,834 | ||||||||
| (1) |
Outstandings include non-U.S. residential mortgages of $90 million at both June 30, 2011 and December 31, 2010.
|
|
| (2) |
Outstandings include $10.7 billion and $11.8 billion of pay option loans at June 30, 2011 and December 31, 2010, and $1.3 billion of subprime loans at both June 30, 2011 and December 31, 2010. We no longer originate these products.
|
|
| (3) |
Outstandings include dealer financial services loans of $42.1 billion and $43.3 billion, consumer lending loans of $9.9 billion and $12.4 billion, U.S. securities-based lending margin loans of $21.3 billion and $16.6 billion, student loans of $6.3 billion and $6.8 billion, non-U.S. consumer loans of $8.7 billion and $8.0 billion and other consumer loans of $2.0 billion and $3.2 billion at June 30, 2011
and December 31, 2010, respectively.
|
|
| (4) |
Outstandings include consumer finance loans of $1.8 billion and $1.9 billion at June 30, 2011 and December 31, 2010. Outstandings also include other non-U.S. consumer loans of $866 million and $803 million and consumer overdrafts of $104 million and $88 million at June 30, 2011 and December 31, 2010.
|
|
| (5) |
Consumer loans accounted for under the fair value option
include residential mortgage loans of $1.2 billion and discontinued real estate loans of $4.0 billion at
June 30, 2011. There were no consumer loans accounted for under the fair value option at December 31, 2010.
See Consumer Loans Accounted for Under the Fair Value Option on page 90 and
Note 17 – Fair Value Option
to
the Consolidated Financial Statements for additional information on the fair value option.
|
|
|
n/a = not applicable
|
||
77
Table of Contents
Table 27 presents accruing consumer loans past due 90 days or more and consumer
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, which include loans insured by the FHA and individually
insured long-term credit protection agreements with FNMA and FHLMC (fully-insured loan portfolio),
are reported as accruing as opposed to nonperforming since the principal repayment is insured.
Fully-insured loans accruing past due 90 days or more are primarily related to our purchases of
delinquent loans pursuant to our servicing agreements with GNMA. Additionally, nonperforming loans
and accruing balances past due 90 days or more do not include the Countrywide PCI loan portfolio
or loans accounted for under the fair value option even though the customer may be contractually
past due.
| Table 27 | ||||||||||||||||
| Consumer Credit Quality | ||||||||||||||||
| Accruing Past Due 90 Days or More | Nonperforming | |||||||||||||||
| June 30 | December 31 | June 30 | December 31 | |||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Residential mortgage
(1, 2)
|
$ | 20,047 | $ | 16,768 | $ | 16,726 | $ | 17,691 | ||||||||
|
Home equity
(1)
|
- | - | 2,345 | 2,694 | ||||||||||||
|
Discontinued real estate
(1)
|
- | - | 324 | 331 | ||||||||||||
|
U.S. credit card
|
2,413 | 3,320 | n/a | n/a | ||||||||||||
|
Non-U.S. credit card
|
607 | 599 | n/a | n/a | ||||||||||||
|
Direct/Indirect consumer
|
810 | 1,058 | 58 | 90 | ||||||||||||
|
Other consumer
|
3 | 2 | 25 | 48 | ||||||||||||
|
Total
(3)
|
$ | 23,880 | $ | 21,747 | $ | 19,478 | $ | 20,854 | ||||||||
|
Consumer loans as a percentage of outstanding consumer loans
(4)
|
3.77 | % | 3.38 | % | 3.08 | % | 3.24 | % | ||||||||
|
Consumer loans excluding Countrywide PCI and fully-insured loan portfolios as a
percentage of outstanding loans
(4)
|
0.75 | 0.92 | 3.80 | 3.85 | ||||||||||||
| (1) |
Our policy is to classify consumer real estate-secured loans as nonperforming at 90 days past due, except the Countrywide PCI and fully-insured loan portfolios and loans accounted for under the fair value option as referenced in footnote 2.
|
|
| (2) |
Balances accruing past due 90 days or more are fully-insured loans. These balances include $15.7 billion and $8.3 billion of loans on which interest has been curtailed by the FHA, and therefore are no longer accruing interest, although principal is still insured and $4.3 billion and $8.5 billion of loans on which interest is still accruing at June 30, 2011 and December 31, 2010.
|
|
| (3) |
Balances exclude consumer
loans accounted for under the fair value option at June 30, 2011. At June 30, 2011, there were no loans accounted for under fair value option accruing past due 90 days or more and approximately $2.3 billion that were nonperforming. There were no consumer loans accounted for under the fair value option at December 31, 2010.
|
|
| (4) |
Outstanding consumer loans exclude loans accounted for under the fair value option.
|
|
|
n/a = not applicable
|
||
Table 28 presents net charge-offs and related ratios for consumer loans and leases for
the three and six months ended June 30, 2011 and 2010.
| Table 28 | ||||||||||||||||||||||||||||||||
| Consumer Net Charge-offs and Related Ratios | ||||||||||||||||||||||||||||||||
| Net Charge-offs | Net Charge-off Ratios (1) | |||||||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
| June 30 | June 30 | June 30 | June 30 | |||||||||||||||||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||||||||
|
Residential mortgage
|
$ | 1,104 | $ | 971 | $ | 2,009 | $ | 2,040 | 1.67 | % | 1.57 | % | 1.54 | % | 1.67 | % | ||||||||||||||||
|
Home equity
|
1,263 | 1,741 | 2,442 | 4,138 | 3.84 | 4.71 | 3.68 | 5.55 | ||||||||||||||||||||||||
|
Discontinued real estate
|
26 | 19 | 46 | 40 | 0.84 | 0.54 | 0.73 | 0.57 | ||||||||||||||||||||||||
|
U.S. credit card
|
1,931 | 3,517 | 4,205 | 7,480 | 7.29 | 11.88 | 7.85 | 12.36 | ||||||||||||||||||||||||
|
Non-U.S. credit card
|
429 | 942 | 831 | 1,573 | 6.31 | 13.64 | 6.11 | 11.02 | ||||||||||||||||||||||||
|
Direct/Indirect consumer
|
366 | 879 | 891 | 1,988 | 1.64 | 3.58 | 2.00 | 4.02 | ||||||||||||||||||||||||
|
Other consumer
|
43 | 73 | 83 | 131 | 6.44 | 10.01 | 6.19 | 8.90 | ||||||||||||||||||||||||
|
Total
|
$ | 5,162 | $ | 8,142 | $ | 10,507 | $ | 17,390 | 3.27 | 4.96 | 3.32 | 5.28 | ||||||||||||||||||||
| (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.
|
Net charge-off ratios excluding the Countrywide PCI and fully-insured loan portfolios
were 2.58 percent and 2.33 percent for residential mortgage, 4.24 percent and 4.05 percent for
home equity, 8.09 percent and 6.78 percent for discontinued real estate and 4.00 percent and 4.04
percent for the total consumer portfolio for the three and six months ended June 30, 2011,
respectively. Net charge-off ratios excluding the Countrywide PCI and fully-insured loan
portfolios were 1.90 percent and 1.98 percent for residential mortgage, 5.17 percent and 6.08
percent for home equity, 4.90 percent and 4.66 percent for discontinued real estate and 5.54
percent and 5.84 percent for the total consumer portfolio for the three and six months ended June
30, 2010, respectively. These are the only product classifications materially impacted by the
Countrywide PCI and fully-insured loan portfolios for the three and six months ended June 30, 2011
and 2010. For all loan and lease categories, the net charge-offs were largely unchanged.
78
Table of Contents
During the first quarter of 2011, we announced a plan to manage the exposures we have to
certain residential mortgage, home equity and discontinued real estate products through the
creation of Legacy Asset Servicing within
CRES
which will manage both our owned loans as well as
loans serviced for others that meet certain criteria. The criteria generally represent home
lending standards which we do not consider as part our continuing core business. The Legacy Asset
Servicing portfolio includes the following:
| • |
Discontinued real estate loans (e.g., subprime and pay option)
|
||
| • |
Residential mortgage loans and home equity loans for products we no longer originate
(e.g., reduced document loans and interest-only loans not underwritten to fully amortizing
payment)
|
||
| • |
Loans that would not have been originated under our underwriting standards at December
31, 2010 (e.g., conventional loans with an original loan-to-value (LTV) greater than 95
percent and government-insured loans for which the borrower has a FICO score less than
620)
|
||
| • |
Countrywide PCI loan portfolios
|
||
| • |
Certain loans that met a pre-defined delinquency and probability of default threshold
as of January 1, 2011
|
The Legacy Asset Servicing portfolio was established as of January 1, 2011. Since making the
determination of the pool of loans to be included in the Legacy Asset Servicing portfolio, the
criteria have not changed for this portfolio; however, the criteria continue to be evaluated over
time. Information presented relating to periods prior to December 31, 2010 was not restated to
conform to the realignment between the core portfolio and Legacy Asset Servicing portfolio. For
more information on Legacy Asset Servicing within
CRES
, see page 35.
| Table 29 | ||||||||||||||||||||||||
| Home Loans Portfolio | ||||||||||||||||||||||||
| Outstandings | Nonperforming | Net Charge-offs | ||||||||||||||||||||||
| June 30, 2011 | ||||||||||||||||||||||||
| June 30 | December 31 | June 30 | December 31 | Three Months | Six Months | |||||||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | Ended | Ended | ||||||||||||||||||
|
Core portfolio
|
||||||||||||||||||||||||
|
Residential mortgage
|
$ | 175,552 | $ | 166,927 | $ | 1,670 | $ | 1,510 | $ | 34 | $ | 57 | ||||||||||||
|
Home equity
|
69,171 | 71,519 | 261 | 107 | 100 | 148 | ||||||||||||||||||
|
Legacy Asset Servicing owned portfolio
|
||||||||||||||||||||||||
|
Residential mortgage
(1)
|
90,781 | 91,046 | 15,056 | 16,181 | 1,070 | 1,952 | ||||||||||||||||||
|
Home equity
|
61,483 | 66,462 | 2,084 | 2,587 | 1,163 | 2,294 | ||||||||||||||||||
|
Discontinued real estate
(1)
|
12,003 | 13,108 | 324 | 331 | 26 | 46 | ||||||||||||||||||
|
Home loans portfolio
|
||||||||||||||||||||||||
|
Residential mortgage
|
266,333 | 257,973 | 16,726 | 17,691 | 1,104 | 2,009 | ||||||||||||||||||
|
Home equity
|
130,654 | 137,981 | 2,345 | 2,694 | 1,263 | 2,442 | ||||||||||||||||||
|
Discontinued real estate
|
12,003 | 13,108 | 324 | 331 | 26 | 46 | ||||||||||||||||||
|
Total home loans portfolio
|
$ | 408,990 | $ | 409,062 | $ | 19,395 | $ | 20,716 | $ | 2,393 | $ | 4,497 | ||||||||||||
| (1) |
Balances exclude consumer loans accounted for under the fair value option of residential mortgage loans of $1.2 billion
and discontinued real estate loans of $4.0 billion at June 30, 2011. There were no consumer loans accounted for under
the fair value option at December 31, 2010. See
Note 17 — Fair Value Option
to the Consolidated Financial Statements
for additional information on the fair value option.
|
We believe that the presentation of information adjusted to exclude the impact of the
Countrywide PCI loan portfolio, the fully-insured loan portfolio and loans accounted for under the
fair value option 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 excludes the impact of the
Countrywide PCI loan portfolio, the fully-insured loan portfolio and loans accounted for under the
fair value option in certain credit quality statistics. We separately disclose information on the
Countrywide PCI loan portfolios on page 86.
Residential Mortgage
The residential mortgage portfolio, which excludes the discontinued real estate portfolio
acquired from Countrywide, makes up the largest percentage of our consumer loan portfolio at 42
percent of consumer loans at June 30, 2011. Approximately 14 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 wealth management clients. The remaining portion of the
portfolio is mostly in
All Other
and is comprised of both originated loans as well as purchased
loans used in our overall ALM activities.
79
Table of Contents
Outstanding balances in the residential mortgage portfolio, excluding $1.2 billion of loans
accounted for under the fair value option, increased $8.4 billion at June 30, 2011 compared to
December 31, 2010 as new origination volume, which is primarily fully-insured, was partially
offset by paydowns, charge-offs and transfers to foreclosed properties. In addition, repurchases
of FHA delinquent loans pursuant to our servicing agreements with GNMA also increased the
residential mortgage portfolio during the six months ended June 30, 2011. At June 30, 2011 and
December 31, 2010, the residential mortgage portfolio included $86.2 billion and $67.2 billion of
outstanding fully-insured loans. On this portion of the residential mortgage portfolio, we are
protected against principal loss as a result of FHA insurance and long-term credit protection
agreements with FNMA and FHLMC.
We have mitigated a portion of our credit risk on the residential mortgage portfolio through
the use of synthetic securitization vehicles and long-term credit protection agreements with FNMA
and FHLMC as described in
Note 6 – Outstanding Loans and Leases
to the Consolidated Financial
Statements.
At June 30, 2011 and December 31, 2010, the synthetic securitization vehicles referenced
$37.6 billion and $53.9 billion of residential mortgage loans and provided loss protection up to
$936 million and $1.1 billion. At June 30, 2011 and December 31, 2010, the Corporation had a
receivable of $445 million and $722 million from these vehicles for reimbursement of losses. The
Corporation records an allowance for credit losses on loans referenced by the synthetic
securitization vehicles. The reported net charge-offs for the residential mortgage portfolio do
not include the benefit of amounts reimbursable from these vehicles. Adjusting for the benefit of
the credit protection from the synthetic securitizations, the residential mortgage net charge-off
ratio, excluding the Countrywide PCI and fully-insured loan portfolios, for both the three and six
months ended June 30, 2011 would have been reduced by 16 bps at each period compared to 13 bps and
nine bps for the same periods in 2010.
At June 30, 2011 and December 31, 2010, $17.2 billion and $12.9 billion in loans were
protected by long-term credit protection agreements. All of these loans are individually insured
and therefore the Corporation does not record an allowance for credit losses.
Synthetic securitizations and the long-term credit protection agreements with FNMA and FHLMC
together reduce our regulatory risk-weighted assets due to the transfer of a portion of our credit
risk to unaffiliated parties. At June 30, 2011 and December 31, 2010, these vehicles had the
cumulative effect of reducing our risk-weighted assets by $6.5 billion and $8.2 billion, and
increased our Tier 1 capital ratio by five bps and six bps and our Tier 1 common capital ratio by
four bps and five bps.
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Table of Contents
Table 30 presents certain residential mortgage key credit statistics on both a reported
basis and excluding the Countrywide PCI loan portfolio, the fully-insured loan portfolio and loans
accounted for under the fair value option. We believe the presentation of information adjusted to
exclude these loan portfolios is more representative of the credit risk in the residential
mortgage loan portfolio. As such, the following discussion presents the residential mortgage
portfolio excluding the Countrywide PCI loan portfolio, the fully-insured loan portfolio and loans
accounted for under the fair value option. For more information on the Countrywide PCI loan
portfolio, see page 86.
Table 30
Residential Mortgage – Key Credit Statistics
Residential Mortgage – Key Credit Statistics
| Excluding Countrywide | ||||||||||||||||
| Purchased Credit-impaired | ||||||||||||||||
| Reported Basis (1) | and Fully-insured Loans | |||||||||||||||
| June 30 | December 31 | June 30 | December 31 | |||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Outstandings
|
$ | 266,333 | $ | 257,973 | $ | 169,865 | $ | 180,136 | ||||||||
|
Accruing past due 30 days or more
|
28,091 | 24,267 | 4,289 | 5,117 | ||||||||||||
|
Accruing past due 90 days or more
|
20,047 | 16,768 | n/a | n/a | ||||||||||||
|
Nonperforming loans
|
16,726 | 17,691 | 16,726 | 17,691 | ||||||||||||
|
Percent of portfolio
|
||||||||||||||||
|
Refreshed LTV greater than 90 but less than 100
|
14 | % | 15 | % | 11 | % | 11 | % | ||||||||
|
Refreshed LTV greater than 100
|
37 | 32 | 27 | 24 | ||||||||||||
|
Refreshed FICO below 620
|
22 | 20 | 15 | 15 | ||||||||||||
|
2006 and 2007 vintages
(2)
|
29 | 32 | 38 | 40 | ||||||||||||
| Excluding Countrywide Purchased Credit-impaired and | ||||||||||||||||||||||||||||||||
| Reported Basis | Fully-insured Loans | |||||||||||||||||||||||||||||||
|
Three Months Ended
June 30 |
Six Months Ended
June 30 |
Three Months Ended
June 30 |
Six Months Ended
June 30 |
|||||||||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||
|
Net charge-off
ratio
(3)
|
1.67 | % | 1.57 | % | 1.54 | % | 1.67 | % | 2.58 | % | 1.90 | % | 2.33 | % | 1.98 | % | ||||||||||||||||
| (1) |
Outstandings, accruing past due, nonperforming loans and percentages of
portfolio exclude loans accounted for under the fair value option at June 30, 2011. There were no
residential mortgage loans accounted for under the fair value option at December 31, 2010. See
Note 17 – Fair Value Option
to the Consolidated Financial Statements for additional information
on the fair value option.
|
|
| (2) |
These vintages of loans account for 65 percent and 67 percent of nonperforming
residential mortgage loans at June 30, 2011 and December 31, 2010. These vintages of loans
accounted for 73 percent and 74 percent of residential mortgage net charge-offs during the three
and six months ended June 30, 2011 and 80 percent for both the three and six months ended June 30,
2010.
|
|
| (3) |
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.
|
|
| n/a = not applicable | ||
Nonperforming residential mortgage loans decreased $965 million compared to December 31,
2010 as charge-offs, nonperforming loans returning to performing status, and paydowns and payoffs
outpaced new inflows, which continued to slow in the six months ended June 30, 2011 due to
favorable delinquency trends. Accruing loans past due 30 days or more (i.e., those loans that are
30 to 89 days past due but still accruing interest) decreased $828 million to $4.3 billion at June
30, 2011. At June 30, 2011, $12.1 billion, or 72 percent, of the nonperforming residential
mortgage loans were 180 days or more past due and had been written down to the estimated fair
value of the collateral less estimated costs to sell. Net charge-offs increased $133 million to
$1.1 billion for the three months ended June 30, 2011, or 2.58 percent of total average
residential mortgage loans compared to 1.90 percent for the same period in 2010 as increased
losses due primarily to further deterioration in home prices were partially offset by favorable
delinquency trends. Net charge-offs remained relatively flat at $2.0 billion for the six months
ended June 30, 2011, or 2.33 percent of total average residential mortgage loans compared to 1.98
percent for the same period in 2010. In addition to the factors noted
in the three-month
discussion above, the six months ended June 30, 2010 included $175 million of net charge-offs
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 paydowns and
charge-offs outpacing new originations.
Loans in the residential mortgage portfolio with certain characteristics have greater risk of
loss than others. These characteristics include loans with a high refreshed LTV, loans originated
at the peak of home prices in 2006 and 2007, interest-only loans and loans to borrowers located in
California and Florida where we have concentrations and where significant declines in home prices
have been experienced. Although the following 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 of the
residential mortgage portfolio at both June 30, 2011 and December 31, 2010. Loans with all of
these risk characteristics accounted for 22 percent and 23 percent of the residential mortgage net
charge-offs during the three and six months ended June 30, 2011 compared to 25 percent and 27
percent for the same periods in 2010.
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 June 30, 2011 and
December 31, 2010. Loans with a refreshed LTV greater than 100 percent represented 27 percent of
the residential mortgage loan portfolio at June 30, 2011 and 24 percent at December 31, 2010. Of
the loans with a refreshed LTV greater than 100 percent, 90 percent and 88 percent were performing
at June 30, 2011 and December 31, 2010. Loans with a refreshed LTV greater than 100 percent
reflect loans
81
Table of Contents
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 over the past several years. Loans to borrowers
with refreshed FICO scores below 620 represented 15 percent of the residential mortgage portfolio
at both June 30, 2011 and December 31, 2010.
Of the residential mortgage loans, $60.6 billion, or 36 percent, and $62.2 billion, or 35
percent, at June 30, 2011 and December 31, 2010 are interest-only loans of which 88 percent and 87
percent were performing. Nonperforming balances on interest-only residential mortgage loans were
$7.2 billion, or 43 percent, and $8.0 billion, or 45 percent, of total nonperforming residential
mortgages at June 30, 2011 and December 31, 2010. Additionally, net charge-offs on the
interest-only portion of the portfolio represented 57 percent and 56 percent of the total
residential mortgage net charge-offs for the three and six months ended June 30, 2011 compared to
50 percent and 49 percent for the same periods in 2010.
Table 31 presents outstandings, nonperforming loans and net charge-offs by certain state
concentrations for the residential mortgage portfolio. The Los Angeles-Long Beach-Santa Ana
Metropolitan Statistical Area (MSA) within California represented 12 percent and 13 percent of
outstandings at June 30, 2011 and December 31, 2010. Loans within this MSA comprised only seven
percent and six percent of net charge-offs for both the three and six months ended June 30, 2011
and 2010.
Table 31
Residential Mortgage State Concentrations
Residential Mortgage State Concentrations
| Outstandings (1) | Nonperforming (1) | Net Charge-offs | ||||||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
| June 30 | December 31 | June 30 | December 31 | June 30 | June 30 | |||||||||||||||||||||||||||
|
(Dollars in millions)
|
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||||||||
|
California
|
$ | 58,638 | $ | 63,677 | $ | 6,004 | $ | 6,389 | $ | 365 | $ | 407 | $ | 673 | $ | 887 | ||||||||||||||||
|
Florida
|
12,983 | 13,298 | 1,999 | 2,054 | 186 | 135 | 342 | 295 | ||||||||||||||||||||||||
|
New York
|
11,850 | 12,198 | 759 | 772 | 37 | 23 | 56 | 21 | ||||||||||||||||||||||||
|
Texas
|
8,155 | 8,466 | 465 | 492 | 14 | 11 | 26 | 20 | ||||||||||||||||||||||||
|
Virginia
|
6,145 | 6,441 | 419 | 450 | 23 | 17 | 37 | 41 | ||||||||||||||||||||||||
|
Other U.S./Non-U.S.
|
72,094 | 76,056 | 7,080 | 7,534 | 479 | 378 | 875 | 776 | ||||||||||||||||||||||||
|
Residential mortgage loans
(2)
|
$ | 169,865 | $ | 180,136 | $ | 16,726 | $ | 17,691 | $ | 1,104 | $ | 971 | $ | 2,009 | $ | 2,040 | ||||||||||||||||
|
Fully-insured loan portfolio
|
86,244 | 67,245 | ||||||||||||||||||||||||||||||
|
Countrywide purchased credit-impaired
residential mortgage loan portfolio
|
10,224 | 10,592 | ||||||||||||||||||||||||||||||
|
Total residential mortgage loan
portfolio
|
$ | 266,333 | $ | 257,973 | ||||||||||||||||||||||||||||
| (1) |
Outstandings and nonperforming amounts exclude loans accounted for under the
fair value option at June 30, 2011. There were no residential mortgage loans accounted for under
the fair value option at December 31, 2010. See
Note 17 – Fair Value Option
to the Consolidated
Financial Statements for additional information on the fair value option.
|
|
| (2) |
Amount excludes the Countrywide PCI residential mortgage and fully-insured loan
portfolios.
|
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 June 30, 2011 and December 31, 2010, our CRA portfolio was $13.4 billion and $13.8
billion, or eight percent of the residential mortgage loan balances for both periods. The CRA
portfolio included $2.7 billion and $3.0 billion of nonperforming loans at June 30, 2011 and
December 31, 2010 representing 16 percent and 17 percent of total nonperforming residential
mortgage loans. Net charge-offs related to the CRA portfolio were $204 million and $220 million
for the three months ended June 30, 2011 and 2010, or 19 percent and 23 percent of total net
charge-offs for the residential mortgage portfolio. Net charge-offs related to this portfolio were
$412 million and $500 million for the six months ended June 30, 2011 and 2010, or 21 percent and
25 percent of total net charge-offs for the residential mortgage portfolio.
For information on representations and warranties related to our residential mortgage
portfolio, see Off-Balance Sheet Arrangements and Contractual Obligations – Representations and Warranties on page 51 and
Note
9 – Representations and
Warranties Obligations and Corporate Guarantees
to the Consolidated Financial Statements.
Home Equity
The home equity portfolio makes up 20 percent of the consumer portfolio and is comprised of
home equity lines of credit, home equity loans and reverse mortgages. As of June 30, 2011, our
home equity line of credit (HELOC) portfolio had an outstanding balance of $107.6 billion. HELOCs
generally have an initial draw period of 10 years with approximately 15 percent of the portfolio
having a draw period of five years with a five-year renewal option. During the initial draw
period, the borrowers are only required to pay the interest due on the loans on a monthly basis.
After the initial draw period ends, the loans generally convert to 15-year amortizing loans. As of
June 30, 2011, our home equity loan portfolio had an outstanding balance of $22.0 billion. Home
equity loans are almost all fixed-rate loans with amortizing payment terms of 10 to 30 years and
approximately 80 percent of these loans have 25 to 30-year terms. As of June 30, 2011, our reverse
mortgage portfolio had an outstanding balance of $1.1 billion. In the first quarter of 2011, we
announced that we were exiting the reverse mortgage origination business.
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Table of Contents
At June 30, 2011, approximately 87 percent of the home equity portfolio was included in
CRES
while the remainder of the portfolio was primarily in
GWIM
. Outstanding balances in the home
equity portfolio decreased $7.3 billion at June 30, 2011 compared to December 31, 2010 primarily
due to paydowns and charge-offs outpacing new originations. Of the total home equity portfolio at
June 30, 2011 and December 31, 2010, $25.1 billion, or 19 percent, and $24.8 billion, or 18
percent, were in first-lien positions (21 percent and 20 percent excluding the Countrywide PCI
home equity portfolio). For more information on the Countrywide PCI home equity portfolio, see
page 86. As of June 30, 2011, outstanding balances in the home equity portfolio that were in a
second-lien or more junior-lien position and where we also held the first-lien loan totaled $41.7
billion, or 35 percent, of our home equity portfolio excluding the Countrywide PCI loan portfolio.
Unused HELOCs totaled $72.1 billion at June 30, 2011 compared to $80.1 billion at December
31, 2010. This decrease was due primarily to customers choosing to close accounts as well as line
management initiatives on deteriorating accounts, which more than offset new production. The HELOC
utilization rate was 60 percent at June 30, 2011 compared to 59 percent at December 31, 2010.
Table 32 presents certain home equity portfolio key credit statistics on both a reported
basis as well as excluding the Countrywide PCI loan portfolio. We believe the presentation of
information adjusted to exclude the impact of the Countrywide PCI loan portfolio is more
representative of the credit risk in this portfolio.
Table 32
Home Equity – Key Credit Statistics
Home Equity – Key Credit Statistics
| Excluding Countrywide Purchased | ||||||||||||||||
| Reported Basis | Credit-impaired Loans | |||||||||||||||
| June 30 | December 31 | June 30 | December 31 | |||||||||||||
|
(Dollars
in millions)
|
2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Outstandings
|
$ | 130,654 | $ | 137,981 | $ | 118,339 | $ | 125,391 | ||||||||
|
Accruing past due 30 days or more
(1)
|
1,681 | 1,929 | 1,681 | 1,929 | ||||||||||||
|
Nonperforming loans
(1)
|
2,345 | 2,694 | 2,345 | 2,694 | ||||||||||||
|
Percent of portfolio
|
||||||||||||||||
|
Refreshed combined loan-to-value greater than 90 but less than 100
|
11 | % | 11 | % | 11 | % | 11 | % | ||||||||
|
Refreshed combined loan-to-value greater than 100
|
39 | 34 | 36 | 30 | ||||||||||||
|
Refreshed FICO below 620
|
13 | 14 | 12 | 12 | ||||||||||||
|
2006 and 2007 vintages
(2)
|
50 | 50 | 47 | 47 | ||||||||||||
| Reported Basis | Excluding Countrywide Purchased Credit-impaired Loans | |||||||||||||||||||||||||||||||
|
Three Months Ended
June 30 |
Six Months Ended
June 30 |
Three Months Ended
June 30 |
Six Months Ended
June 30 |
|||||||||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||
|
Net charge-off
ratio
(3)
|
3.84 | % | 4.71 | % | 3.68 | % | 5.55 | % | 4.24 | % | 5.17 | % | 4.05 | % | 6.08 | % | ||||||||||||||||
| (1) |
Accruing past due 30 days or more include $698 million and $662 million and
nonperforming loans include $715 million and $480 million of loans where we service the underlying
first-lien at June 30, 2011 and December 31, 2010.
|
|
| (2) |
These vintages of loans have higher refreshed consumer LTV ratios and accounted for
55 percent and 57 percent of nonperforming home equity loans at June 30, 2011 and December 31,
2010. These vintages of loans accounted for 65 percent and 66 percent of net charge-offs for the
three and six months ended June 30, 2011 and 65 percent for both the three and six months ended
June 30, 2010.
|
|
| (3) |
Net charge-off ratios are calculated as annualized net charge-offs divided by
average outstanding loans.
|
The following discussion presents the home equity portfolio excluding the Countrywide
PCI loan portfolio.
Nonperforming outstanding balances in the home equity portfolio decreased $349 million
compared to December 31, 2010 driven primarily by charge-offs and nonperforming loans returning to
performing status which together outpaced delinquency inflows, which continued to slow during the
six months ended June 30, 2011 due to favorable early stage delinquency trends. Accruing
outstanding balances past due 30 days or more decreased $248 million at June 30, 2011. At June 30,
2011, $912 million, or 39 percent, of the nonperforming home equity portfolio were 180 days or more
past due and had been written down to their fair values.
In some cases, the junior-lien home equity outstanding balance that we hold is current, but
the underlying first-lien is not. For outstanding balances in the home equity portfolio in which
we service the first-lien loan, we are able to track whether the first-lien loan is in default.
For loans in which the first-lien is serviced by a third party, we utilize credit bureau data to
estimate the delinquency status of the first-lien. Given that the credit bureau database we use
does not include a property address for the mortgages, we are unable to identify with certainty
whether a reported delinquent first mortgage pertains to the same property for which we hold a
second- or more junior-lien loan. As of June 30, 2011, we estimate that $5.1 billion of current
second-lien or more junior-lien loans were behind a delinquent first-lien loan. We service the
first-lien loans on $1.5 billion of that amount, with the remaining $3.6 billion serviced by third
parties. Of the $5.1 billion current second-lien loans, we estimate that approximately $2.6
billion had first-lien loans that were 120 days or more past due, of which approximately $2.1
billion had first-lien loans serviced by third parties and we have therefore assumed the worst
delinquency status of all outstanding mortgages for the borrower as discussed above.
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Table of Contents
Net
charge-offs decreased $478 million to $1.3 billion, or 4.24 percent of the total average
home equity portfolio, for the three months ended June 30, 2011 compared to $1.7 billion, or 5.17
percent, for the same period in the prior year primarily driven by favorable portfolio trends due
in part to improvement in the U.S. economy. Also, the prior-year period included $128 million of
net charge-offs related to certain modified loans that were written down to the underlying
collateral value. Net charge-offs decreased $1.7 billion to $2.4 billion, or 4.05 percent of the
total average home equity portfolio, for the six months ended June 30, 2011 compared to $4.1
billion, or 6.08 percent, for the same period in the prior year. The decrease was driven by the
same factors noted in the three-month discussion above with the impact of implementing regulatory
guidance on collateral dependent modified loans resulting in $771 million in net charge-offs for
the six months ended June 30, 2010. Net charge-off ratios were further impacted by lower
outstanding balances primarily as a result of charge-offs and paydowns outpacing new originations.
Outstanding
balances in the home equity portfolio with a high refreshed combined
loan-to-value (CLTV), that were originated at the peak of home prices
in 2006 and 2007 or that are secured by
homes in geographic areas have experienced the most significant declines in home prices. Home
price declines coupled with the fact that most home equity outstandings 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 outstanding balances with these
characteristics, which has contributed to a disproportionate share of losses in the portfolio.
Outstanding balances in the home equity portfolio with all of these higher risk characteristics
comprised 11 percent and 10 percent of the total home equity portfolio at June 30, 2011 and
December 31, 2010, but have accounted for 29 percent and 28 percent of the home equity net
charge-offs during the three and six months ended June 30, 2011 compared to 30 percent for both of
the same periods in 2010.
Outstanding balances in the home equity portfolio with greater than 90 percent but less than
100 percent refreshed CLTVs comprised 11 percent of the home equity portfolio at both June 30,
2011 and December 31, 2010. Outstanding balances with refreshed CLTVs greater than 100 percent
comprised 36 percent and 30 percent of the home equity portfolio at June 30, 2011 and December 31,
2010. Of those outstanding balances with a refreshed CLTV greater than 100 percent, 98 percent
were performing at June 30, 2011 while 97 percent were performing at December 31, 2010.
Outstanding balances in the home equity portfolio with a refreshed CLTV greater than 100 percent
reflect loans where the carrying value 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 value of the property, there may be collateral in excess of the first-lien that is available
to reduce the severity of loss on the second-lien. Home price deterioration over the past several
years has contributed to an increase in CLTV ratios. Outstanding balances in the home equity
portfolio to borrowers with a refreshed FICO score below 620 represented 12 percent of the home
equity portfolio at both June 30, 2011 and December 31, 2010.
Of the $118.3 billion in total home equity portfolio outstandings, 77 percent and 75 percent
at June 30, 2011 and December 31, 2010 were interest-only loans almost all of which were HELOCs.
The outstanding balance of HELOCs that have entered the amortization period was $1.4 billion, or
one percent of total HELOCs, at June 30, 2011. The HELOCs that have entered the amortization period
have experienced a higher percentage of early stage delinquencies and nonperforming status when
compared to the HELOC portfolio as a whole. As of June 30, 2011, $47 million, or three percent of
outstanding HELOCs that had entered the amortization period, were accruing loans past due 30 days
or more. In addition, $59 million, or four percent, were nonperforming compared to $1.4 billion,
or one percent of the entire HELOC portfolio, that were accruing loans past due 30 days or more and
$1.9 billion, or two percent, that were nonperforming.
Although we do not actively track how many of our home equity customers only pay the minimum
amount due on their home equity loans and lines, we can infer some of this information through a
review of our HELOC portfolio that we service and that is still in its revolving period (i.e.,
customers may draw on and repay their line of credit, but are generally only required to pay
interest on a monthly basis). During the three months ended June 30, 2011, approximately 59
percent of these customers did not pay down any principal on their HELOCs.
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Table 33 presents outstandings, nonperforming balances and net charge-offs by certain state
concentrations for the home equity portfolio. In the New York area, the New York-Northern New
Jersey-Long Island MSA made up 11 percent of the outstanding home equity portfolio at both June
30, 2011 and December 31, 2010. This MSA comprised only seven percent of net charge-offs for both
the three and six months ended June 30, 2011 and seven percent and six percent for the same
periods in 2010. The Los Angeles-Long Beach-Santa Ana MSA within California made up 11 percent of
the outstanding home equity portfolio at both June 30, 2011 and December 31, 2010. This MSA
comprised 11 percent and 10 percent of net charge-offs for the three and six months ended June 30,
2011 and 12 percent for both of the same periods in 2010.
For information on representations and warranties related to our home equity portfolio, see
Off-Balance Sheet Arrangements and Contractual Obligations – Representations and Warranties on page 51 and
Note 9 – Representations and Warranties Obligations
and Corporate Guarantees
to the Consolidated Financial Statements.
Table 33
Home Equity State Concentrations
Home Equity State Concentrations
| Outstandings | Nonperforming | Net Charge-offs | ||||||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
| June 30 | December 31 | June 30 | December 31 | June 30 | June 30 | |||||||||||||||||||||||||||
|
(Dollars in millions)
|
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||||||||
|
California
|
$ | 33,861 | $ | 35,426 | $ | 623 | $ | 708 | $ | 409 | $ | 601 | $ | 777 | $ | 1,472 | ||||||||||||||||
|
Florida
|
14,175 | 15,028 | 389 | 482 | 247 | 371 | 486 | 885 | ||||||||||||||||||||||||
|
New Jersey
|
7,763 | 8,153 | 159 | 169 | 48 | 60 | 90 | 130 | ||||||||||||||||||||||||
|
New York
|
7,693 | 8,061 | 224 | 246 | 57 | 80 | 110 | 165 | ||||||||||||||||||||||||
|
Massachusetts
|
5,142 | 5,657 | 63 | 71 | 22 | 25 | 42 | 61 | ||||||||||||||||||||||||
|
Other U.S./Non-U.S.
|
49,705 | 53,066 | 887 | 1,018 | 480 | 604 | 937 | 1,425 | ||||||||||||||||||||||||
|
Home equity loans
(1)
|
$ | 118,339 | $ | 125,391 | $ | 2,345 | $ | 2,694 | $ | 1,263 | $ | 1,741 | $ | 2,442 | $ | 4,138 | ||||||||||||||||
|
Countrywide purchased
credit-impaired home
equity portfolio
|
12,315 | 12,590 | ||||||||||||||||||||||||||||||
|
Total home equity loan
portfolio
|
$ | 130,654 | $ | 137,981 | ||||||||||||||||||||||||||||
| (1) | Amount excludes the Countrywide PCI home equity portfolio. |
Discontinued Real Estate
The discontinued real estate portfolio, excluding $4.0 billion of loans accounted for under
the fair value option, totaled $12.0 billion at June 30, 2011 and consists 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 June 30, 2011, the Countrywide PCI loan portfolio was $10.9 billion, or 91 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 on page 86
for more information on the discontinued real estate portfolio.
At June 30, 2011, the purchased discontinued real estate portfolio that was not
credit-impaired was $1.1 billion. Loans with greater than 90 percent refreshed LTVs and CLTVs
comprised 32 percent of the portfolio and those with refreshed FICO scores below 620 represented
47 percent of the portfolio. The Los Angeles-Long Beach-Santa Ana MSA within California made up 16
percent of outstanding discontinued real estate loans at June 30, 2011.
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 loan’s 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.
The difference between the frequency of changes in a loan’s 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 is 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.
85
Table of Contents
At June 30, 2011, the unpaid principal balance of pay option loans was $13.4 billion, with a
carrying amount of $10.7 billion, including $10.2 billion of loans that were credit-impaired upon
acquisition. The total unpaid principal balance of pay option loans with accumulated negative
amortization was $11.2 billion including $785 million of negative amortization. The percentage of
borrowers electing to make only the minimum payment on option ARMs was 71 percent at June 30, 2011
compared to 69 percent at December 31, 2010. We continue to evaluate our exposure to payment
resets on the acquired negative-amortizing loans including the Countrywide PCI pay option loan
portfolio and have taken into consideration several assumptions regarding this evaluation (e.g.,
prepayment rates). Based on our expectations, four percent and three percent of the pay option
loan portfolio are expected to reset in the remainder of 2011 and 2012. Approximately five percent
are expected to reset thereafter and approximately 88 percent are expected to default or 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 PCI loans, which addresses accounting for
differences between contractual and expected cash flows to be collected from the purchaser’s
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. PCI loans are
recorded at fair value upon acquisition and the applicable accounting guidance prohibits carrying
over or recording a valuation allowance in the initial accounting.
The Merrill Lynch consumer PCI
loan portfolio did not materially alter the reported credit quality statistics of the consumer
portfolios. As such, the Merrill Lynch consumer PCI loans are excluded from the following
discussion and credit statistics.
Acquired loans from Countrywide that were considered credit-impaired were
recorded at to
fair value at the acquisition date. Table 34 presents the unpaid principal balance, carrying
value, related valuation allowance and the net carrying value as a percentage of the unpaid
principal balance for the Countrywide PCI loan portfolio at June 30, 2011 and December 31, 2010.
Table 34
Countrywide Purchased Credit-impaired Loan Portfolio (1)
Countrywide Purchased Credit-impaired Loan Portfolio (1)
| June 30, 2011 | ||||||||||||||||||||
| Carrying | ||||||||||||||||||||
| Unpaid | Related | Value Net of | % of Unpaid | |||||||||||||||||
| Principal | Carrying | Valuation | Valuation | Principal | ||||||||||||||||
|
(Dollars in millions)
|
Balance | Value | Allowance | Allowance | Balance | |||||||||||||||
|
Residential mortgage
|
$ | 10,911 | $ | 10,224 | $ | 1,245 | $ | 8,979 | 82.29 | % | ||||||||||
|
Home equity
|
13,940 | 12,315 | 5,075 | 7,240 | 51.94 | |||||||||||||||
|
Discontinued real estate
|
13,637 | 10,877 | 1,919 | 8,958 | 65.69 | |||||||||||||||
|
Total
Countrywide
purchased
credit-impaired
loan portfolio
|
$ | 38,488 | $ | 33,416 | $ | 8,239 | $ | 25,177 | 65.42 | % | ||||||||||
| December 31, 2010 | ||||||||||||||||||||
|
Residential mortgage
|
$ | 11,481 | $ | 10,592 | $ | 663 | $ | 9,929 | 86.48 | % | ||||||||||
|
Home equity
|
15,072 | 12,590 | 4,467 | 8,123 | 53.89 | |||||||||||||||
|
Discontinued real estate
|
14,893 | 11,652 | 1,204 | 10,448 | 70.15 | |||||||||||||||
|
Total
Countrywide
purchased
credit-impaired
loan portfolio
|
$ | 41,446 | $ | 34,834 | $ | 6,334 | $ | 28,500 | 68.76 | % | ||||||||||
| (1) |
Certain PCI loans that were originally classified as discontinued real estate
loans upon acquisition have been subsequently modified and are now included in the residential
mortgage outstandings along with the related valuation allowance.
|
Of the unpaid principal balance at June 30, 2011, $14.6 billion was 180 days or more
past due, including $10.2 billion of first-lien and $4.4 billion of home equity. Of the $23.9
billion that is less than 180 days past due, $20.4 billion, or 85 percent of the total unpaid
principal balance was current based on the contractual terms while $1.9 billion, or eight percent,
was in early stage delinquency. During the three months ended June 30, 2011, we recorded $394
million of provision for credit losses on Countrywide PCI loans including $182 million for
discontinued real estate, $130 million for home equity and $82 million for residential mortgage
loans. This compared to a total provision for Countrywide PCI loans of $328 million during the
three months ended June 30, 2010. For the six months ended June 30, 2011, we recorded $1.9 billion
of provision for credit losses for PCI loans including $997 million for discontinued real estate,
$605 million for home equity loans and $303 million for residential mortgage. This compared to a
total provision of $1.2 billion during the six months ended June 30, 2010. Provision expense for the three and six months ended June 30, 2011 was driven
primarily by recent deterioration in home prices resulting in a refreshed outlook reflecting
further declines in home prices over 2011 and slower appreciation in subsequent years versus
previous expectations. For further information on the PCI loan
portfolio, see
Note 6 –
Outstanding Loans and Leases
to the Consolidated Financial Statements.
86
Table of Contents
Additional information is provided below on the Countrywide PCI residential mortgage, home
equity and discontinued real estate loan portfolios.
Purchased Credit-impaired Residential Mortgage Loan Portfolio
The Countrywide PCI residential mortgage loan portfolio comprised 31 percent of the total
Countrywide PCI loan portfolio. Those loans to borrowers with a refreshed FICO score below 620
represented 38 percent of the Countrywide PCI residential mortgage loan portfolio at June 30,
2011. Refreshed LTVs greater than 90 percent represented 64 percent of the Countrywide PCI
residential mortgage loan portfolio after consideration of purchase accounting adjustments and the
related valuation allowance, and 87 percent based on the unpaid principal balance at June 30,
2011. Those loans that were originally classified as Countrywide PCI discontinued real estate
loans upon acquisition and have been subsequently modified are now included in the Countrywide PCI
residential mortgage outstandings. Table 35 presents outstandings net of purchase accounting
adjustments and before the related valuation allowance, by certain state concentrations.
Table 35
Outstanding Countrywide Purchased Credit-impaired Loan Portfolio – Residential Mortgage State Concentrations
Outstanding Countrywide Purchased Credit-impaired Loan Portfolio – Residential Mortgage State Concentrations
| June 30 | December 31 | |||||||
|
(Dollars in millions)
|
2011 | 2010 | ||||||
|
California
|
$ | 5,689 | $ | 5,882 | ||||
|
Florida
|
741 | 779 | ||||||
|
Virginia
|
555 | 579 | ||||||
|
Maryland
|
264 | 271 | ||||||
|
Texas
|
154 | 164 | ||||||
|
Other U.S./Non-U.S.
|
2,821 | 2,917 | ||||||
|
Total Countrywide purchased credit-impaired residential mortgage loan portfolio
|
$ | 10,224 | $ | 10,592 | ||||
Purchased Credit-impaired Home Equity Portfolio
The Countrywide PCI home equity portfolio comprised 37 percent of the total Countrywide PCI
loan portfolio. Those loans with a refreshed FICO score below 620 represented 26 percent of the
Countrywide PCI home equity portfolio at June 30, 2011. Refreshed CLTVs greater than 90 percent
represented 82 percent of the Countrywide PCI home equity portfolio after consideration of
purchase accounting adjustments and the related valuation allowance, and 86 percent based on the
unpaid principal balance at June 30, 2011. Table 36 presents outstandings net of purchase
accounting adjustments and before the related valuation allowance, by certain state
concentrations.
Table 36
Outstanding Countrywide Purchased Credit-impaired Loan Portfolio – Home Equity State Concentrations
Outstanding Countrywide Purchased Credit-impaired Loan Portfolio – Home Equity State Concentrations
| June 30 | December 31 | |||||||
|
(Dollars in millions)
|
2011 | 2010 | ||||||
|
California
|
$ | 4,063 | $ | 4,178 | ||||
|
Florida
|
743 | 750 | ||||||
|
Virginia
|
515 | 532 | ||||||
|
Arizona
|
510 | 520 | ||||||
|
Colorado
|
361 | 375 | ||||||
|
Other U.S./Non-U.S.
|
6,123 | 6,235 | ||||||
|
Total Countrywide purchased credit-impaired home equity portfolio
|
$ | 12,315 | $ | 12,590 | ||||
Purchased Credit-impaired Discontinued Real Estate Loan Portfolio
The Countrywide PCI discontinued real estate loan portfolio comprised 32 percent of the total
Countrywide PCI loan portfolio. Those loans to borrowers with a refreshed FICO score below 620
represented 62 percent of the Countrywide PCI discontinued real estate loan portfolio at June 30,
2011. Refreshed LTVs, or CLTVs in the case of second-liens, greater than 90 percent represented 39
percent of the Countrywide PCI discontinued real estate loan portfolio after consideration of
purchase accounting adjustments and the related valuation allowance, and 85 percent based on the
unpaid principal balance at June 30, 2011. Those loans that were originally classified as
discontinued real estate loans upon acquisition and have been subsequently modified are now
excluded from this portfolio and included in the Countrywide PCI residential mortgage loan
portfolio, but remain in the PCI loan pool.
87
Table of Contents
Table 37 presents outstandings net of purchase accounting adjustments and before the related
valuation adjustment, by certain state concentrations.
Table 37
Outstanding Countrywide Purchased Credit-impaired Loan Portfolio – Discontinued Real Estate State Concentrations
Outstanding Countrywide Purchased Credit-impaired Loan Portfolio – Discontinued Real Estate State Concentrations
| June 30 | December 31 | |||||||
|
(Dollars in millions)
|
2011 | 2010 | ||||||
|
California
|
$ | 5,866 | $ | 6,322 | ||||
|
Florida
|
1,043 | 1,121 | ||||||
|
Washington
|
350 | 368 | ||||||
|
Virginia
|
314 | 344 | ||||||
|
Arizona
|
297 | 339 | ||||||
|
Other U.S./Non-U.S.
|
3,007 | 3,158 | ||||||
|
Total Countrywide purchased credit-impaired discontinued real estate loan portfolio
|
$ | 10,877 | $ | 11,652 | ||||
U.S. Credit Card
Table 38 presents certain key credit statistics for the consumer U.S. credit card portfolio.
Table 38
U.S. Credit Card – Key Credit Statistics
U.S. Credit Card – Key Credit Statistics
| June 30 | December 31 | |||||||
|
(Dollars in millions)
|
2011 | 2010 | ||||||
|
Outstandings
|
$ | 104,659 | $ | 113,785 | ||||
|
Accruing past due 30 days
or more
|
4,263 | 5,913 | ||||||
|
Accruing past due 90 days
or more
|
2,413 | 3,320 | ||||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30 | June 30 | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Net charge-offs
|
||||||||||||||||
|
Amount
|
$ | 1,931 | $ | 3,517 | $ | 4,205 | $ | 7,480 | ||||||||
|
Ratios
(1)
|
7.29 | % | 11.88 | % | 7.85 | % | 12.36 | % | ||||||||
| (1) | Net charge-off ratios are calculated as annualized net charge-offs divided by average outstanding loans and leases. |
The consumer U.S. credit card portfolio is managed in
Global Card Services
. Outstandings
in the U.S. credit card loan portfolio decreased $9.1 billion compared to December 31, 2010 due to
a seasonal decline in retail transaction volume, higher payment rates, charge-offs and portfolio
divestitures. Compared to the three and six months ended June 30, 2010, net charge-offs decreased
$1.6 billion to $1.9 billion and $3.3 billion to $4.2 billion due to improvements in
delinquencies, collections and bankruptcies as a result of an improved economic environment and
the impact of higher credit quality originations. U.S. credit card loans 30 days or more past due
and still accruing interest decreased $1.7 billion while loans 90 days or more past due and still
accruing interest decreased $907 million compared to December 31, 2010 due to improvement in the
U.S. economy.
Table 39 presents certain state concentrations for the U.S. credit card portfolio.
Table 39
U.S. Credit Card State Concentrations
U.S. Credit Card State Concentrations
| Accruing Past Due | ||||||||||||||||||||||||||||||||
| Outstandings | 90 Days or More | Net Charge-offs | ||||||||||||||||||||||||||||||
| June 30 | December 31 | June 30 | December 31 | Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||||||
|
(Dollars in millions)
|
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||||||||
|
California
|
$ | 15,507 | $ | 17,028 | $ | 426 | $ | 612 | $ | 372 | $ | 740 | $ | 822 | $ | 1,583 | ||||||||||||||||
|
Florida
|
8,196 | 9,121 | 257 | 376 | 225 | 442 | 496 | 956 | ||||||||||||||||||||||||
|
Texas
|
7,007 | 7,581 | 146 | 207 | 113 | 213 | 249 | 456 | ||||||||||||||||||||||||
|
New York
|
6,318 | 6,862 | 141 | 192 | 107 | 184 | 231 | 387 | ||||||||||||||||||||||||
|
New Jersey
|
4,233 | 4,579 | 100 | 132 | 72 | 119 | 157 | 252 | ||||||||||||||||||||||||
|
Other U.S.
|
63,398 | 68,614 | 1,343 | 1,801 | 1,042 | 1,819 | 2,250 | 3,846 | ||||||||||||||||||||||||
|
Total U.S. credit card
portfolio
|
$ | 104,659 | $ | 113,785 | $ | 2,413 | $ | 3,320 | $ | 1,931 | $ | 3,517 | $ | 4,205 | $ | 7,480 | ||||||||||||||||
Unused lines of credit for U.S. credit card totaled $393.5 billion at June 30, 2011
compared to $399.7 billion at December 31, 2010. The $6.2 billion decrease was driven by the
closure of inactive accounts, portfolio divestitures and account management initiatives on higher
risk accounts.
88
Table of Contents
Non-U.S. Credit Card
Table 40 presents certain key credit statistics for the non-U.S. credit card portfolio.
Table 40
Non-U.S. Credit Card – Key Credit Statistics
Non-U.S. Credit Card – Key Credit Statistics
| June 30 | December 31 | |||||||
|
(Dollars in millions)
|
2011 | 2010 | ||||||
|
Outstandings
|
$ | 26,037 | $ | 27,465 | ||||
|
Accruing past due 30 days
or more
|
1,215 | 1,354 | ||||||
|
Accruing past due 90 days
or more
|
607 | 599 | ||||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30 | June 30 | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Net charge-offs
|
||||||||||||||||
|
Amount
|
$ | 429 | $ | 942 | $ | 831 | $ | 1,573 | ||||||||
|
Ratio
(1)
|
6.31 | % | 13.64 | % | 6.11 | % | 11.02 | % | ||||||||
| (1) | Net charge-off ratios are calculated as annualized net charge-offs divided by average outstanding loans and leases. |
The consumer non-U.S. credit card portfolio is managed in
Global Card Services
.
Outstandings in the non-U.S. credit card portfolio decreased $1.4 billion compared to December 31,
2010 due to lower origination volume, charge-offs and the transfer of certain loans to
held-for-sale, partially offset by strengthening of certain foreign currencies against the U.S.
dollar. Compared to the three and six months ended June 30, 2010, net charge-offs decreased $513
million to $429 million and $742 million to $831 million due primarily to the impact of aligning charge-off policies across
Global Card Services
on certain types of renegotiated loans, which accelerated charge-offs in the second quarter of
2010 and resulted in lower charge-offs in subsequent periods.
Unused lines of credit for non-U.S. credit card totaled $60.8 billion at June 30, 2011
compared to $60.3 billion at December 31, 2010. The $517 million increase was driven by
strengthening of certain foreign currencies against the U.S. dollar.
Direct/Indirect Consumer
At June 30, 2011, approximately 47 percent of the direct/indirect portfolio was included in
Global Commercial Banking
(dealer financial services - automotive, marine, aircraft and
recreational vehicle loans), 34 percent was included in
GWIM
(principally other non-real
estate-secured, unsecured personal loans and securities-based lending margin loans), 11 percent
was included in
Global Card Services
(consumer personal loans) and the remainder was in
All Other
(student loans).
Outstanding loans and leases were flat at $90.3 billion at June 30, 2011 compared to December
31, 2010 as lower outstandings in the
Global Card Services
unsecured consumer lending portfolio
and the dealer financial services portfolio were offset by securities-based lending growth and
product transfers from U.S. commercial. For the three and six months ended June 30, 2011, net
charge-offs decreased $513 million and $1.1 billion to $366 million and $891 million, or 1.64
percent and 2.00 percent of total average direct/indirect loans compared to 3.58 percent and 4.02
percent for the same periods in the prior year. This decrease was primarily driven by improvements
in delinquencies, collections and bankruptcies in the unsecured consumer lending portfolio as a
result of an improved economic environment as well as reduced outstandings. An additional driver
was 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 three and six months ended June 30, 2011, net charge-offs in the unsecured consumer
lending portfolio decreased $450 million and $933 million
to $294 million and $691 million, or
11.27 percent and 12.55 percent of total average unsecured consumer lending loans compared to
18.28 percent and 18.92 percent for the same periods in the prior year. For the three and six
months ended June 30, 2011, net charge-offs in the dealer financial services portfolio decreased
$40 million and $110 million to $44 million and $147 million, or 0.43 percent and 0.71 percent of
total average dealer financial services loans compared to 0.73 percent and 1.12 percent for the
same periods in the prior year. Direct/indirect loans that were past due 30 days or more and still accruing interest declined $698 million
compared to $1.9 billion at December 31, 2010 due to
improvements in both the unsecured consumer
lending and dealer financial services portfolios.
89
Table of Contents
Table 41 presents certain state concentrations for the direct/indirect consumer loan
portfolio.
Table 41
Direct/Indirect State Concentrations
Direct/Indirect State Concentrations
| Outstandings |
Accruing Past Due 90
Days or More |
Net Charge-offs | ||||||||||||||||||||||||||||||
| June 30 | December 31 | June 30 | December 31 | Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||||||
|
(Dollars in millions)
|
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||||||||
|
California
|
$ | 11,149 | $ | 10,558 | $ | 96 | $ | 132 | $ | 54 | $ | 154 | $ | 136 | $ | 361 | ||||||||||||||||
|
Texas
|
7,876 | 7,885 | 57 | 78 | 25 | 67 | 70 | 155 | ||||||||||||||||||||||||
|
Florida
|
7,045 | 6,725 | 58 | 80 | 30 | 90 | 84 | 208 | ||||||||||||||||||||||||
|
New York
|
5,148 | 4,770 | 44 | 56 | 22 | 49 | 49 | 106 | ||||||||||||||||||||||||
|
Georgia
|
2,802 | 2,814 | 39 | 44 | 14 | 33 | 35 | 75 | ||||||||||||||||||||||||
|
Other U.S./Non-U.S.
|
56,238 | 57,556 | 516 | 668 | 221 | 486 | 517 | 1,083 | ||||||||||||||||||||||||
|
Total
direct/indirect
loan portfolio
|
$ | 90,258 | $ | 90,308 | $ | 810 | $ | 1,058 | $ | 366 | $ | 879 | $ | 891 | $ | 1,988 | ||||||||||||||||
Other Consumer
At June 30, 2011, approximately 65 percent of the $2.8 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 non-U.S. consumer loan portfolio, most of
which we previously exited and is largely in
Global Card Services
and deposit overdrafts in
Deposits
.
Consumer Loans Accounted for Under the Fair Value Option
Outstanding consumer loans accounted for under the fair value option were $5.2 billion at
June 30, 2011 and represent $4.0 billion of discontinued real estate loans and $1.2 billion of
residential mortgage loans consolidated in connection with the Assured Guaranty Settlement in the
second quarter of 2011. For more information on the Assured Guaranty Settlement, see Off-Balance Sheet Arrangements and Contractual Obligations –
Representations and Warranties on page 51. This portfolio is managed as part of our Legacy Asset
Servicing portfolio and is included in
CRES
. We recorded net losses of $100 million resulting from
changes in the fair value of the loan portfolio during the three months ended June 30, 2011. These
amounts were primarily attributable to changes in instrument-specific credit risk and were
recorded in other income and offset by gains recorded on the related debt.
Nonperforming Consumer Loans and Foreclosed Properties Activity
Table 42 presents nonperforming consumer loans and foreclosed properties activity for the
three and six months ended June 30, 2011 and 2010. 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 loan becomes 180 days past due. The fully-insured loan portfolio
is not reported as nonperforming as principal repayment is insured. Additionally, nonperforming
loans do not include the Countrywide PCI loan portfolio or loans which we account for under the
fair value option. For further information on nonperforming loans,
see
Note 1 – Summary of
Significant Accounting Principles
to the Consolidated Financial Statements of the Corporation’s
2010 Annual Report on Form 10-K. Nonperforming loans declined $978 million and $1.4 billion during
the three and six months ended June 30, 2011. Delinquency inflows to nonaccrual loans, which
slowed due to favorable portfolio trends, were more than offset by charge-offs, nonperforming
loans returning to performing status, and paydowns and payoffs.
The outstanding balance of a real estate-secured loan that is in excess of the estimated
property value, after reducing the estimated property value for estimated costs to sell, is
charged off no later than the end of the month in which the loan becomes 180 days past due unless
repayment of the loan is fully insured. At June 30, 2011, $15.1 billion, or 71 percent, of the
nonperforming consumer real estate loans and foreclosed properties had been written down to their
estimated property value less estimated costs to sell, including $13.3 billion of nonperforming
loans 180 days or more past due and $1.8 billion of foreclosed properties.
Foreclosed properties increased $466 million and $548 million during the three and six months
ended June 30, 2011 due in part to $158 million of foreclosed properties consolidated in
connection with the Assured Guaranty Settlement in the second quarter of 2011. For more
information on the Assured Guaranty Settlement, see Off-Balance Sheet Arrangements and Contractual Obligations – Representations and Warranties on page 51. PCI
loans are excluded from nonperforming loans as these loans were written down to fair value at the
acquisition date. However, once the underlying real estate is acquired by the Corporation upon
foreclosure of the delinquent PCI loan, it is included in foreclosed properties. Net changes to
foreclosed properties related to PCI loans were an increase of $159 million and $250 million for
the three and six months ended June 30, 2011 compared to $272 million and $355 million for
90
Table of Contents
the same periods in 2010. Not included in foreclosed properties at June 30, 2011 was $1.4 billion
of real estate that we acquired 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. Foreclosures were
temporarily halted in October 2010 as we began a review of our foreclosure processes. We have
resumed foreclosure sales in all non-judicial states; however, while we have recently resumed
foreclosure proceedings in nearly all judicial states, our progress on foreclosure sales in
judicial states has been significantly slower than in non-judicial states. We have also not yet
resumed foreclosure sales for certain types of customers, including those in bankruptcy and those
with FHA-insured loans, although we have resumed foreclosure proceedings with respect to these
types of customers.
The implementation of changes in procedures and controls, including loss mitigation
procedures related to our ability to recover on FHA insurance-related claims, as well
as governmental, regulatory and judicial actions, may result in continuing delays in
foreclosure proceedings and foreclosure sales, as well as creating obstacles to the
collection of certain fees and expenses, in both judicial and non-judicial foreclosures.
For more information on the review of our foreclosure processes, see
Off-Balance Sheet Arrangements and Contractual Obligations – Other Mortgage-related Matters on
page 60.
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 Corporation’s 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 borrower’s sustained repayment performance under
revised payment terms for a reasonable period, generally six months. Nonperforming TDRs, excluding
those modified loans in the Countrywide PCI loan portfolio, are included in Table 42.
As a result of accounting guidance on PCI loans, beginning January 1, 2010, modifications of
loans in the PCI loan portfolio do not result in removal of the loan from the PCI loan pool. TDRs
in the consumer real estate portfolio that were removed from the PCI loan portfolio prior to the
adoption of this accounting guidance were $2.0 billion and $2.1 billion at June 30, 2011 and
December 31, 2010, of which $465 million and $426 million were nonperforming. These nonperforming
loans are excluded from Table 42.
91
Table of Contents
Nonperforming consumer real estate TDRs, included in Table 42, as a percentage of total
nonperforming consumer loans and foreclosed properties, increased to 20 percent at June 30, 2011
from 16 percent at December 31, 2010.
Table 42
Nonperforming Consumer Loans and Foreclosed Properties Activity (1)
Nonperforming Consumer Loans and Foreclosed Properties Activity (1)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30 | June 30 | |||||||||||||||
|
(Dollars in millions)
|
2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Nonperforming loans
|
||||||||||||||||
|
Balance, beginning of period
|
$ | 20,456 | $ | 21,557 | $ | 20,854 | $ | 20,839 | ||||||||
|
Additions to nonperforming loans:
|
||||||||||||||||
|
New nonaccrual loans
(2)
|
4,044 | 5,409 | 8,171 | 12,465 | ||||||||||||
|
Reductions in nonperforming loans:
|
||||||||||||||||
|
Paydowns and payoffs
|
(1,003 | ) | (528 | ) | (1,782 | ) | (1,153 | ) | ||||||||
|
Returns to performing status
(3)
|
(1,311 | ) | (1,816 | ) | (2,651 | ) | (4,337 | ) | ||||||||
|
Charge-offs
(4)
|
(2,300 | ) | (2,607 | ) | (4,320 | ) | (5,524 | ) | ||||||||
|
Transfers to foreclosed properties
|
(408 | ) | (331 | ) | (794 | ) | (606 | ) | ||||||||
|
Total net additions (reductions) to nonperforming loans
|
(978 | ) | 127 | (1,376 | ) | 845 | ||||||||||
|
Total nonperforming loans, end of period
(5)
|
19,478 | 21,684 | 19,478 | 21,684 | ||||||||||||
|
Foreclosed properties
|
||||||||||||||||
|
Balance, beginning of period
|
1,331 | 1,388 | 1,249 | 1,428 | ||||||||||||
|
Additions to foreclosed properties:
|
||||||||||||||||
|
New foreclosed properties
(6)
|
930 | 847 | 1,536 | 1,396 | ||||||||||||
|
Reductions in foreclosed properties:
|
||||||||||||||||
|
Sales
|
(416 | ) | (453 | ) | (875 | ) | (996 | ) | ||||||||
|
Write-downs
|
(48 | ) | (38 | ) | (113 | ) | (84 | ) | ||||||||
|
Total net additions to foreclosed properties
|
466 | 356 | 548 | 316 | ||||||||||||
|
Total foreclosed properties, end of period
|
1,797 | 1,744 | 1,797 | 1,744 | ||||||||||||
|
Nonperforming consumer loans and foreclosed properties,
end of period
|
$ | 21,275 | $ | 23,428 | $ | 21,275 | $ | 23,428 | ||||||||
|
Nonperforming consumer loans as a percentage of outstanding consumer loans
(7)
|
3.08 | % | 3.34 | % | ||||||||||||
|
Nonperforming consumer loans and foreclosed properties as a percentage of outstanding
consumer loans and foreclosed properties
(7)
|
3.35 | 3.60 | ||||||||||||||
| (1) |
Balances do not include nonperforming LHFS of $835 million and $1.3 billion at June
30, 2011 and 2010.
|
|
| (2) |
The six months ended June 30, 2010 includes $448 million of nonperforming loans as
a result of the consolidation of variable interest entities.
|
|
| (3) |
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 borrower’s sustained repayment performance for a reasonable period,
generally six months.
|
|
| (4) |
Our policy 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.
|
|
| (5) |
At June 30, 2011, 68 percent of nonperforming loans 180 days or more past due and
were written down through charge-offs to 67 percent of the unpaid principal balance.
|
|
| (6) |
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 gains and losses in value are recorded in
noninterest expense. New foreclosed properties in the table above are net of $99 million and $187
million of charge-offs for the three months ended June 30, 2011 and 2010, recorded during the
first 90 days after transfer. For the six months ended June 30, 2011 and 2010, new foreclosed
properties in the table above are net of $160 million and $396 million of charge-offs, recorded
during the first 90 days after transfer.
|
|
| (7) |
Outstanding consumer loans exclude loans accounted for under the fair value option.
|
Table 43 presents TDRs for the home loans portfolio. Performing TDR balances are
excluded from nonperforming loans in Table 42.
Table 43
Home Loans Troubled Debt Restructurings
Home Loans Troubled Debt Restructurings
| June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
|
(Dollars in millions)
|
Total | Nonperforming | Performing | Total | Nonperforming | Performing | ||||||||||||||||||
|
Residential mortgage
(1, 2)
|
$ | 15,771 | $ | 3,949 | $ | 11,822 | $ | 11,788 | $ | 3,297 | $ | 8,491 | ||||||||||||
|
Home equity
(3)
|
1,815 | 473 | 1,342 | 1,721 | 541 | 1,180 | ||||||||||||||||||
|
Discontinued real estate
(4)
|
397 | 206 | 191 | 395 | 206 | 189 | ||||||||||||||||||
|
Total home loans
troubled debt
restructurings
|
$ | 17,983 | $ | 4,628 | $ | 13,355 | $ | 13,904 | $ | 4,044 | $ | 9,860 | ||||||||||||
| (1) |
Residential mortgage TDRs deemed collateral dependent totaled $3.9 billion and
$3.2 billion, and included $1.3 billion and $921 million of loans classified as nonperforming and
$2.6 billion and $2.3 billion of loans classified as performing at June 30, 2011 and December 31,
2010.
|
|
| (2) |
Residential mortgage performing TDRs included $5.1 billion and $2.5 billion of
loans that were fully-insured at June 30, 2011 and December 31, 2010.
|
|
| (3) |
Home equity TDRs deemed collateral dependent totaled $787 million and $796 million,
and included $216 million and $245 million of loans classified as nonperforming and $571 million
and $551 million of loans classified as performing at
June 30, 2011 and December 31, 2010.
|
|
| (4) |
Discontinued real estate TDRs deemed collateral dependent totaled $227 million and
$213 million, and included $110 million and $97 million of loans classified as nonperforming and
$117 million and $116 million as performing at
June 30, 2011 and December 31, 2010.
|
92
Table of Contents
We also work with customers that are experiencing financial difficulty by renegotiating
credit card, consumer lending and small business loans (the renegotiated TDR portfolio), while
complying with Federal Financial Institutions Examination Council (FFIEC) guidelines. Substantially
all renegotiated portfolio modifications are considered to be TDRs. The renegotiated TDR 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 TDR portfolio is excluded from Table 42 as we do not
generally classify consumer non-real estate loans as nonperforming. At June 30, 2011, our
renegotiated TDR portfolio was $9.8 billion, of which $7.6 billion was current or less than 30 days
past due under the modified terms compared to $12.1 billion at December 31, 2010, of which $9.2
billion was current or less than 30 days past due under the modified terms. The decline in the
renegotiated TDR portfolio was primarily driven by lower new program enrollments as well as
attrition throughout the first half of 2011. For more information on the renegotiated TDR
portfolio, see
Note 6 – Outstanding Loans and Leases
to the Consolidated Financial Statements
.
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 48, 53, 57 and 58 summarize our concentrations. We also utilize
syndications 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, see Commercial Portfolio Credit Risk
Management on page 83 in the MD&A of the Corporation’s 2010
Annual Report on Form 10-K and
Note 1 – Summary of Significant Accounting Principles
to the Consolidated Financial Statements of
the Corporation’s 2010 Annual Report on Form 10-K.
Commercial Credit Portfolio
During the three and six months ended June 30, 2011, commercial loans continued to show
stabilization relative to prior periods. Regional economic conditions, client demand and
enterprise-wide initiatives drove non-U.S. commercial loan growth in both loans and trade finance.
Commercial real estate loans declined in the second quarter of 2011 compared to December 31, 2010
as net paydowns outpaced new originations and renewals, as well as charge-offs, particularly in
higher risk portfolios. U.S. commercial loans, excluding loans accounted for under the fair value
option, increased $1.1 billion for the six months ended June 30, 2011 compared to December 31,
2010 due to continued growth across the portfolio, net of securities-based lending loans that were
transferred to the consumer portfolio in the first quarter of 2011.
Reservable criticized balances, net charge-offs and nonperforming loans, leases and
foreclosed property balances in the commercial credit portfolio declined during the second quarter
of 2011 compared to December 31, 2010. Commercial real estate continued to show signs of
stabilization during the six months ended June 30, 2011 compared to December 31, 2010 in both the
homebuilder and non-homebuilder portfolios. However, levels of stressed commercial real estate
loans remain elevated. The reductions in reservable criticized and non-performing loans, leases
and foreclosed property were primarily in the commercial real estate and U.S. commercial
portfolios. The reduction in U.S. commercial was driven by broad-based improvements in terms of
clients, industries and lines of business. Most other credit indicators across the remaining
commercial portfolios have also improved.
93
Table of Contents
Table 44 presents our commercial loans and leases, and related credit quality information at
June 30, 2011 and December 31, 2010.
Table 44
Commercial Loans and Leases
Commercial Loans and Leases
| Accruing Past Due 90 | ||||||||||||||||||||||||
| Outstandings | Nonperforming | Days or More | ||||||||||||||||||||||
| June 30 | December 31 | June 30 | December 31 | June 30 | December 31 | |||||||||||||||||||
|
(Dollars in millions)
|
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
|
U.S. commercial
|
$ | 176,677 | $ | 175,586 | $ | 2,767 | $ | 3,453 | $ | 83 | $ | 236 | ||||||||||||
|
Commercial real estate
(1)
|
44,028 | 49,393 | 5,051 | 5,829 | 45 | 47 | ||||||||||||||||||
|
Commercial lease financing
|
21,391 | 21,942 | 23 | 117 | 22 | 18 | ||||||||||||||||||
|
Non-U.S. commercial
|
42,929 | 32,029 | 108 | 233 | 3 | 6 | ||||||||||||||||||
|
|
285,025 | 278,950 | 7,949 | 9,632 | 153 | 307 | ||||||||||||||||||
|
U.S. small business commercial
(2)
|
13,929 | 14,719 | 156 | 204 | 257 | 325 | ||||||||||||||||||
|
Commercial loans excluding loans accounted
for under the fair value option
|
298,954 | 293,669 | 8,105 | 9,836 | 410 | 632 | ||||||||||||||||||
|
Loans accounted for under the fair value option
(3)
|
4,403 | 3,321 | 126 | 30 | - | - | ||||||||||||||||||
|
Total commercial loans and leases
|
$ | 303,357 | $ | 296,990 | $ | 8,231 | $ | 9,866 | $ | 410 | $ | 632 | ||||||||||||
| (1) |
Includes U.S. commercial real estate loans of $41.7 billion and $46.9 billion
and non-U.S. commercial real estate loans of $2.3 billion and $2.5 billion at June 30, 2011 and
December 31, 2010.
|
|
| (2) |
Includes card-related products.
|
|
| (3) |
Commercial loans accounted for under the fair value option include U.S. commercial
loans of $1.6 billion at both June 30, 2011 and December 31, 2010, non-U.S. commercial loans of
$2.8 billion and $1.7 billion and commercial real estate loans of $11 million and $79 million at
June 30, 2011 and December 31, 2010. See
Note 17 – Fair Value Option
to the Consolidated
Financial Statements for additional information on the fair value option.
|
Nonperforming commercial loans and leases as a percentage of outstanding commercial
loans and leases were 2.71 percent and 3.32 percent (2.71 percent and 3.35 percent excluding loans
accounted for under the fair value option) at June 30, 2011 and December 31, 2010. Accruing
commercial loans and leases past due 90 days or more as a percentage of outstanding commercial
loans and leases were 0.14 percent and 0.21 percent (0.14 percent and 0.22 percent excluding loans
accounted for under the fair value option) at June 30, 2011 and December 31, 2010.
Table 45 presents net charge-offs and related ratios for our commercial loans and leases for
the three and six months ended June 30, 2011 and 2010. Commercial real estate net charge-offs
during the three and six months ended June 30, 2011 declined in both the homebuilder and
non-homebuilder portfolios.
Table 45
Commercial Net Charge-offs and Related Ratios
Commercial Net Charge-offs and Related Ratios
| Net Charge-offs | Net Charge-off Ratios (1) | |||||||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
| June 30 | June 30 | June 30 | June 30 | |||||||||||||||||||||||||||||
|
(Dollars in millions)
|
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||||||||
|
U.S. commercial
|
$ | 60 | $ | 179 | $ | 39 | $ | 465 | 0.14 | % | 0.41 | % | 0.05 | % | 0.52 | % | ||||||||||||||||
|
Commercial real estate
|
163 | 645 | 451 | 1,260 | 1.43 | 4.03 | 1.93 | 3.83 | ||||||||||||||||||||||||
|
Commercial lease financing
|
(8 | ) | (3 | ) | (7 | ) | 18 | (0.15 | ) | (0.06 | ) | (0.06 | ) | 0.17 | ||||||||||||||||||
|
Non-U.S. commercial
|
13 | 66 | 116 | 91 | 0.13 | 0.98 | 0.64 | 0.68 | ||||||||||||||||||||||||
|
|
228 | 887 | 599 | 1,834 | 0.32 | 1.23 | 0.43 | 1.26 | ||||||||||||||||||||||||
|
U.S. small business commercial
|
275 | 528 | 587 | 1,130 | 7.78 | 12.94 | 8.24 | 13.59 | ||||||||||||||||||||||||
|
Total commercial
|
$ | 503 | $ | 1,415 | $ | 1,186 | $ | 2,964 | 0.68 | 1.86 | 0.81 | 1.92 | ||||||||||||||||||||
| (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.
|
Table 46 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 $10.3 billion at June
30, 2011 compared to December 31, 2010 driven primarily by reductions in derivative assets, LHFS,
debt securities and SBLCs, partially offset by an increase in loans and leases.
Total commercial utilized credit exposure decreased $13.7 billion at June 30, 2011 compared
to December 31, 2010. Utilized loans and leases increased as growth in our international franchise
was partially offset by run-off in the commercial real estate portfolio and the transfer of
securities-based lending exposures from our U.S. commercial portfolio to the consumer portfolio in
the first quarter of 2011. The utilization rate for loans and leases, letters of credit and
financial guarantees, and bankers’ acceptances was 57 percent at both June 30, 2011 and December
31, 2010.
94
Table of Contents
Table 46
Commercial Credit Exposure by Type
Commercial Credit Exposure by Type
| Commercial Utilized (1) | Commercial Unfunded (2, 3) | Total Commercial Committed | ||||||||||||||||||||||
| June 30 | December 31 | June 30 | December 31 | June 30 | December 31 | |||||||||||||||||||
|
(Dollars in millions)
|
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
|
Loans and leases
|
$ | 303,357 | $ | 296,990 | $ | 273,554 | $ | 272,172 | $ | 576,911 | $ | 569,162 | ||||||||||||
|
Derivative assets
(4)
|
66,598 | 73,000 | - | - | 66,598 | 73,000 | ||||||||||||||||||
|
Standby letters of credit and
financial guarantees
(5)
|
58,951 | 62,745 | 2,624 | 1,511 | 61,575 | 64,256 | ||||||||||||||||||
|
Debt securities and other investments
(6)
|
6,619 | 10,216 | 5,053 | 4,546 | 11,672 | 14,762 | ||||||||||||||||||
|
Loans held-for-sale
|
6,186 | 10,380 | 94 | 242 | 6,280 | 10,622 | ||||||||||||||||||
|
Commercial letters of credit
|
2,820 | 2,654 | 1,693 | 1,179 | 4,513 | 3,833 | ||||||||||||||||||
|
Bankers’ acceptances
|
1,481 | 3,706 | 31 | 23 | 1,512 | 3,729 | ||||||||||||||||||
|
Foreclosed properties and other
|
709 | 731 | - | - | 709 | 731 | ||||||||||||||||||
|
Total commercial credit exposure
|
$ | 446,721 | $ | 460,422 | $ | 283,049 | $ | 279,673 | $ | 729,770 | $ | 740,095 | ||||||||||||
| (1) |
Total commercial utilized exposure at June 30, 2011 and December 31, 2010
includes loans and issued letters of credit accounted for under the fair value option including
loans outstanding of $4.4 billion and $3.3 billion and letters of credit with a notional value of
$1.2 billion and $1.4 billion.
|
|
| (2) |
Total commercial unfunded exposure at June 30, 2011 and December 31, 2010 includes
loan commitments accounted for under the fair value option with a notional value of $26.8 billion
and $25.9 billion.
|
|
| (3) |
Excludes unused business card lines which are not legally binding.
|
|
| (4) |
Derivative assets are accounted for under the fair value option, reflect the
effects of legally enforceable master netting agreements and have been reduced by cash collateral
of $58.8 billion and $58.3 billion at June 30, 2011 and December 31, 2010. Not reflected in
utilized and committed exposure is additional derivative collateral held of $15.7 billion and
$17.7 billion which consists primarily of other marketable securities.
|
|
| (5) |
Excludes $362 million of Other Letters of Credit at June 30, 2011.
|
|
| (6) |
Total commercial committed exposure consists of $11.7 billion and $14.2 billion of
debt securities and $0 and $590 million of other investments at June 30, 2011 and December 31,
2010.
|
Table 47 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. Total commercial utilized reservable
criticized exposure decreased $7.5 billion, or 18 percent, at June 30, 2011 compared to December
31, 2010, due to decreases across all portfolios, primarily commercial real estate and U.S.
commercial driven largely by continued paydowns and payoffs, charge-offs and ratings upgrades
outpacing downgrades. Despite the improvements, utilized reservable criticized levels remain
elevated, particularly in commercial real estate and U.S. small business commercial. At June 30,
2011, approximately 87 percent of commercial utilized reservable criticized exposure was secured
compared to 88 percent at December 31, 2010.
Table 47
Commercial Utilized Reservable Criticized Exposure
Commercial Utilized Reservable Criticized Exposure
| June 30, 2011 | December 31, 2010 | |||||||||||||||
|
(Dollars in millions)
|
Amount | Percent (1) | Amount | Percent (1) | ||||||||||||
|
U.S. commercial
|
$ | 13,895 | 6.08 | % | $ | 17,195 | 7.44 | % | ||||||||
|
Commercial real estate
|
16,781 | 35.58 | 20,518 | 38.88 | ||||||||||||
|
Commercial lease financing
|
1,001 | 4.68 | 1,188 | 5.41 | ||||||||||||
|
Non-U.S. commercial
|
1,934 | 3.87 | 2,043 | 5.01 | ||||||||||||
|
|
33,611 | 9.69 | 40,944 | 11.81 | ||||||||||||
|
U.S. small business commercial
|
1,499 | 10.75 | 1,677 | 11.37 | ||||||||||||
|
Total commercial utilized
reservable criticized
exposure
|
$ | 35,110 | 9.73 | $ | 42,621 | 11.80 | ||||||||||
| (1) |
Percentages are calculated as commercial utilized reservable criticized
exposure divided by total commercial utilized reservable exposure for each exposure category.
|
U.S. Commercial
At June 30, 2011, 57 percent of the U.S. commercial loan portfolio, excluding small business,
was managed in
Global Commercial Banking
and 26 percent in
GBAM
. The remaining 17 percent was
mostly in
GWIM
(business-purpose loans for wealthy clients). U.S. commercial loans, excluding
loans accounted for under the fair value option, increased $1.1 billion due to continued growth
across the portfolio compared to December 31, 2010, net of securities-based lending loans that
were transferred to the consumer portfolio in the first quarter of 2011. Compared to December 31,
2010, reservable criticized balances and nonperforming loans and leases declined $3.3 billion and
$686 million. The declines were broad-based in terms of clients and industries and were driven by
improved client credit profiles and liquidity. Net charge-offs decreased $119 million and $426
million for the three and six months ended June 30, 2011 compared to the same periods in 2010.
95
Table of Contents
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 decreased $5.4 billion at June 30, 2011 compared to December
31, 2010 due to paydowns, which outpaced new originations and renewals. The portfolio remains
diversified across property types and geographic regions. California represents the largest state
concentration at 19 percent of commercial real estate loans and leases at both June 30, 2011 and
December 31, 2010. For more information on geographic and property concentrations, refer to Table
48.
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. Nonperforming commercial real estate loans and
foreclosed properties decreased 13 percent compared to December 31, 2010, split evenly across the
homebuilder and non-homebuilder portfolios. The decline in nonperforming loans and foreclosed
properties in the non-homebuilder portfolio was driven by decreases in the land and land
development and office property types. Reservable criticized balances declined by $3.7 billion
primarily due to declines in the shopping centers/retail, office and multi-family rental segments
in the non-homebuilder portfolio and stabilization in the homebuilder portfolio. For the three and
six months ended June 30, 2011, net charge-offs decreased $482 million and $809 million compared
to the same periods in 2010 due to improvement in both the homebuilder and non-homebuilder
portfolio.
Table 48 presents outstanding commercial real estate loans by geographic region which is
based on the geographic location of the collateral and property type. Commercial real estate
primarily includes commercial loans and leases secured by non-owner-occupied real estate which is
dependent on the sale or lease of the real estate as the primary source of repayment.
Table 48
Outstanding Commercial Real Estate Loans
Outstanding Commercial Real Estate Loans
| June 30 | December 31 | |||||||
|
(Dollars in millions)
|
2011 | 2010 | ||||||
|
By Geographic Region
|
||||||||
|
California
|
$ | 8,287 | $ | 9,012 | ||||
|
Northeast
|
6,714 | 7,639 | ||||||
|
Southwest
|
5,520 | 6,169 | ||||||
|
Southeast
|
5,343 | 5,806 | ||||||
|
Midwest
|
4,745 | 5,301 | ||||||
|
Florida
|
3,085 | 3,649 | ||||||
|
Midsouth
|
2,283 | 2,627 | ||||||
|
Illinois
|
2,272 | 2,811 | ||||||
|
Northwest
|
2,004 | 2,243 | ||||||
|
Non-U.S.
|
2,326 | 2,515 | ||||||
|
Other
(1)
|
1,460 | 1,701 | ||||||
|
Total outstanding commercial real
estate loans
(2)
|
$ | 44,039 | $ | 49,473 | ||||
|
By Property Type
|
||||||||
|
Office
|
$ | 8,550 | $ | 9,688 | ||||
|
Multi-family rental
|
6,695 | 7,721 | ||||||
|
Shopping centers/retail
|
6,495 | 7,484 | ||||||
|
Industrial/warehouse
|
4,597 | 5,039 | ||||||
|
Multi-use
|
3,913 | 4,266 | ||||||
|
Homebuilder
(3)
|
3,202 | 4,299 | ||||||
|
Hotels/motels
|
2,620 | 2,650 | ||||||
|
Land and land development
|
2,052 | 2,376 | ||||||
|
Other
(4)
|
5,915 | 5,950 | ||||||
|
Total outstanding commercial real
estate loans
(2)
|
$ | 44,039 | $ | 49,473 | ||||
| (1) |
Includes unsecured outstandings to real estate investment trusts and national
home builders whose portfolios of properties span multiple geographic regions and properties
in the states of Colorado, Utah, Hawaii, Wyoming and Montana.
|
|
| (2) |
Includes commercial real estate loans accounted for under the fair value option of
$11 million and $79 million at June 30, 2011 and December 31, 2010.
|
|
| (3) |
Homebuilder includes condominiums and residential land.
|
|
| (4) |
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.
|
For the three and six months ended June 30, 2011, we continued to see stabilization in
the homebuilder portfolio. Certain portions of the non-homebuilder portfolio remain 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 including refinement of our credit standards,
additional transfers
of deteriorating exposures to management by independent special asset officers and the pursuit of
alternative resolution methods to achieve best results for our customers and the Corporation.
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Table of Contents
Tables 49 and 50 present commercial real estate credit quality data by non-homebuilder and
homebuilder property types. The homebuilder portfolio includes condominiums and other residential
real estate. Other property types represent loans to borrowers whose primary business is
commercial real estate, but the exposure is secured by another property or is unsecured.
Table 49
Commercial Real Estate Credit Quality Data
Commercial Real Estate Credit Quality Data
| Nonperforming Loans and | Utilized Reservable | |||||||||||||||
| Foreclosed Properties (1) | Criticized Exposure (2) | |||||||||||||||
| June 30 | December 31 | June 30 | December 31 | |||||||||||||
|
(Dollars in millions)
|
2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Commercial real estate –
non-homebuilder
|
||||||||||||||||
|
Office
|
$ | 957 | $ | 1,061 | $ | 3,350 | $ | 3,956 | ||||||||
|
Multi-family rental
|
505 | 500 | 2,360 | 2,940 | ||||||||||||
|
Shopping centers/retail
|
919 | 1,000 | 2,111 | 2,837 | ||||||||||||
|
Industrial/warehouse
|
461 | 420 | 1,885 | 1,878 | ||||||||||||
|
Multi-use
|
431 | 483 | 1,185 | 1,316 | ||||||||||||
|
Hotels/motels
|
168 | 139 | 1,189 | 1,191 | ||||||||||||
|
Land and land development
|
590 | 820 | 1,060 | 1,420 | ||||||||||||
|
Other
|
179 | 168 | 1,386 | 1,604 | ||||||||||||
|
Total non-homebuilder
|
4,210 | 4,591 | 14,526 | 17,142 | ||||||||||||
|
Commercial real estate – homebuilder
|
1,520 | 1,963 | 2,255 | 3,376 | ||||||||||||
|
Total commercial real estate
|
$ | 5,730 | $ | 6,554 | $ | 16,781 | $ | 20,518 | ||||||||
| (1) |
Includes commercial foreclosed properties of $678 million and $725 million at
June 30, 2011 and December 31, 2010.
|
|
| (2) |
Includes loans, excluding those accounted for under the fair value option, SBLCs and
bankers’ acceptances.
|
Table 50
Commercial Real Estate Net Charge-offs and Related Ratios
Commercial Real Estate Net Charge-offs and Related Ratios
| Net Charge-offs | Net Charge-off Ratios (1) | |||||||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
| June 30 | June 30 | June 30 | June 30 | |||||||||||||||||||||||||||||
|
(Dollars in millions)
|
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||||||||
|
Commercial real estate
–
non-homebuilder
|
||||||||||||||||||||||||||||||||
|
Office
|
$ | (10 | ) | $ | 130 | $ | 24 | $ | 193 | (0.46 | )% | 4.53 | % | 0.54 | % | 3.28 | % | |||||||||||||||
|
Multi-family rental
|
20 | 52 | 29 | 87 | 1.14 | 1.92 | 0.80 | 1.60 | ||||||||||||||||||||||||
|
Shopping centers/retail
|
22 | 78 | 110 | 165 | 1.25 | 3.30 | 3.09 | 3.46 | ||||||||||||||||||||||||
|
Industrial/warehouse
|
6 | 16 | 26 | 40 | 0.49 | 1.08 | 1.10 | 1.39 | ||||||||||||||||||||||||
|
Multi-use
|
13 | 51 | 22 | 88 | 1.29 | 3.93 | 1.10 | 3.27 | ||||||||||||||||||||||||
|
Hotels/motels
|
3 | 11 | 11 | 24 | 0.48 | 1.03 | 0.86 | 0.84 | ||||||||||||||||||||||||
|
Land and land development
|
42 | 70 | 92 | 173 | 7.85 | 9.27 | 8.35 | 11.24 | ||||||||||||||||||||||||
|
Other
|
(4 | ) | 59 | (2 | ) | 151 | (0.23 | ) | 3.02 | (0.11 | ) | 4.12 | ||||||||||||||||||||
|
Total non-homebuilder
|
92 | 467 | 312 | 921 | 0.87 | 3.23 | 1.45 | 3.10 | ||||||||||||||||||||||||
|
Commercial real estate – homebuilder
|
71 | 178 | 139 | 339 | 8.30 | 11.78 | 7.57 | 10.60 | ||||||||||||||||||||||||
|
Total commercial real estate
|
$ | 163 | $ | 645 | $ | 451 | $ | 1,260 | 1.43 | 4.03 | 1.93 | 3.83 | ||||||||||||||||||||
| (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.
|
At June 30, 2011, total committed non-homebuilder exposure was $58.5 billion compared to
$64.2 billion at December 31, 2010, with the decrease due to exposure reductions in almost all
non-homebuilder property types. Non-homebuilder nonperforming loans and foreclosed properties were
$4.2 billion and $4.6 billion at June 30, 2011 and December 31, 2010, which represented 10.20
percent and 10.08 percent of total non-homebuilder loans and foreclosed properties.
Non-homebuilder utilized reservable criticized exposure decreased to $14.5 billion, or 33.20
percent, at June 30, 2011 compared to $17.1 billion, or 35.55 percent, at December 31, 2010. The
decrease in reservable criticized exposure was driven primarily by shopping centers/retail, office
and multi-family rental properties. For the non-homebuilder portfolio, net charge-offs decreased
$375 million and $609 million for the three and six months ended June 30, 2011 compared to the
same periods in 2010, due in part to net recoveries of $10 million and $4 million in the office
and other properties.
At June 30, 2011, we had committed homebuilder exposure of $4.6 billion compared to $6.0
billion at December 31, 2010, of which $3.2 billion and $4.3 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 June 30, 2011, homebuilder
nonperforming loans and foreclosed properties declined $443 million compared to December 31, 2010
due to repayments, a decline in the volume of loans being downgraded to nonaccrual status and net
charge-offs. Homebuilder utilized reservable criticized exposure decreased by $1.1 billion to $2.3
billion due to repayments and net charge-offs. The nonperforming loans, leases and foreclosed
properties and the utilized reservable criticized ratios for the
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Table of Contents
homebuilder portfolio were 44.15 percent and 66.13 percent at June 30, 2011 compared to 42.80
percent and 74.27 percent at December 31, 2010. Net charge-offs for the homebuilder portfolio
decreased $107 million and $200 million for the three and six months ended June 30, 2011 compared
to the same periods in 2010.
At June 30, 2011 and December 31, 2010, the commercial real estate loan portfolio included
$15.2 billion and $19.1 billion of funded construction and land development loans that were
originated to fund the construction and/or rehabilitation of commercial properties. This portfolio
is mostly secured and diversified across property types and geographic regions but faces
continuing challenges in the housing and rental markets. Weak rental demand and cash flows along
with depressed 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 $8.2 billion and $10.5 billion, and nonperforming
construction and land development loans and foreclosed properties totaled $3.2 billion and $4.0
billion at June 30, 2011 and December 31, 2010. During a property’s 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 payments from operating cash flows begin. 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.
Non-U.S. Commercial
The non-U.S. commercial loan portfolio is managed primarily in
GBAM
. Outstanding loans,
excluding loans accounted for under the fair value option, increased $10.9 billion from December
31, 2010 primarily due to regional economic conditions and client demand driving growth in both
loans and trade finance, with the growth centered in Asia and Europe, the Middle East and Africa
(EMEA). Net charge-offs decreased $53 million and increased $25 million for the three and six
months ended June 30, 2011 compared to the same periods in 2010 due primarily to certain credits
related to Merrill Lynch. For additional information on the non-U.S. commercial portfolio, refer
to Non-U.S. Portfolio on page 103.
U.S. Small Business Commercial
The U.S. small business commercial loan portfolio is comprised of business card and small
business loans managed in
Global Card Services
and
Global Commercial Banking
. U.S. small business
commercial net charge-offs decreased $253 million and $543 million for the three and six months
ended June 30, 2011 compared to the same periods in 2010 driven by improvements in delinquency,
collections, and bankruptcies resulting from an improved economic environment as well as the
reduction of higher risk vintages and the impact of higher credit quality originations. Of the
U.S. small business commercial net charge-offs for the three and six months ended June 30, 2011,
73 percent and 74 percent were credit card-related products compared to 79 percent for both of the
same periods in 2010.
Commercial Loans Accounted for Under the Fair Value Option
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
increased $1.1 billion to an aggregate fair value of $4.4 billion at June 30, 2011 compared to
December 31, 2010 due primarily to increased corporate borrowings under bank credit facilities. We
recorded net gains of $50 million and $222 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 six
months ended June 30, 2011 compared to net losses of $256 million and $140 million for the same
periods in 2010. These amounts were primarily attributable to changes in instrument-specific
credit risk and were recorded in other income.
In addition, unfunded lending commitments and letters of credit had an aggregate fair value
of $773 million and $866 million at June 30, 2011 and December 31, 2010 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 $28.0
billion and $27.3 billion at June 30, 2011 and December 31, 2010. Net gains (losses) resulting
from new originations, terminations and changes in the fair value of commitments and letters of
credit of $(151) million and $0 were recorded during the three and six months ended June 30, 2011
compared to net gains (losses) of $(11) million and $60 million for the same periods in 2010.
These amounts were primarily attributable to changes in instrument-specific credit risk and were
recorded in other income.
Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity
Table 51 presents the nonperforming commercial loans, leases and foreclosed properties
activity during the three and six months ended June 30, 2011 and 2010. Nonperforming loans and
leases decreased $1.0 billion and $1.7 billion during the three and six months ended June 30, 2011
to $8.1 billion compared to $9.8 billion at December 31, 2010 driven by
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Table of Contents
paydowns, payoffs and charge-offs. Approximately 96 percent of commercial nonperforming loans,
leases and foreclosed properties are secured and approximately 51 percent are contractually
current. In addition, commercial nonperforming loans are carried at approximately 72 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 property value less estimated
costs to sell.
Table 51
Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity (1, 2)
Nonperforming Commercial Loans, Leases and Foreclosed Properties Activity (1, 2)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30 | June 30 | |||||||||||||||
|
(Dollars in millions)
|
2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Nonperforming loans and leases, beginning of period
|
$ | 9,131 | $ | 12,060 | $ | 9,836 | $ | 12,703 | ||||||||
|
Additions to nonperforming loans and leases:
|
||||||||||||||||
|
New nonaccrual loans and leases
|
1,042 | 2,256 | 2,341 | 4,137 | ||||||||||||
|
Advances
|
52 | 62 | 119 | 145 | ||||||||||||
|
Reductions in nonperforming loans and leases:
|
||||||||||||||||
|
Paydowns and payoffs
|
(1,023 | ) | (1,148 | ) | (1,787 | ) | (1,919 | ) | ||||||||
|
Sales
|
(141 | ) | (256 | ) | (388 | ) | (426 | ) | ||||||||
|
Returns to performing status
(3)
|
(362 | ) | (404 | ) | (682 | ) | (727 | ) | ||||||||
|
Charge-offs
(4)
|
(290 | ) | (870 | ) | (778 | ) | (1,826 | ) | ||||||||
|
Transfers to foreclosed properties
|
(241 | ) | (205 | ) | (441 | ) | (524 | ) | ||||||||
|
Transfers to loans held-for-sale
|
(63 | ) | (82 | ) | (115 | ) | (150 | ) | ||||||||
|
Total net reductions to nonperforming loans and leases
|
(1,026 | ) | (647 | ) | (1,731 | ) | (1,290 | ) | ||||||||
|
Total nonperforming loans and leases, June 30
|
8,105 | 11,413 | 8,105 | 11,413 | ||||||||||||
|
Foreclosed properties, beginning of period
|
725 | 920 | 725 | 777 | ||||||||||||
|
Additions to foreclosed properties:
|
||||||||||||||||
|
New foreclosed properties
|
130 | 119 | 261 | 379 | ||||||||||||
|
Reductions in foreclosed properties:
|
||||||||||||||||
|
Sales
|
(151 | ) | (253 | ) | (271 | ) | (346 | ) | ||||||||
|
Write-downs
|
(26 | ) | (29 | ) | (37 | ) | (53 | ) | ||||||||
|
Total net additions to foreclosed properties
|
(47 | ) | (163 | ) | (47 | ) | (20 | ) | ||||||||
|
Total foreclosed properties, June 30
|
678 | 757 | 678 | 757 | ||||||||||||
|
Nonperforming commercial loans, leases and foreclosed properties, June 30
|
$ | 8,783 | $ | 12,170 | $ | 8,783 | $ | 12,170 | ||||||||
|
Nonperforming commercial loans and leases as a percentage of outstanding
commercial loans and leases
(5)
|
2.71 | % | 3.77 | % | ||||||||||||
|
Nonperforming commercial loans, leases and foreclosed properties as a percentage
of outstanding commercial loans, leases and foreclosed properties
(5)
|
2.93 | 4.01 | ||||||||||||||
| (1) |
Balances do not include nonperforming LHFS of $1.3 billion and $2.7
billion at June 30, 2011 and 2010.
|
|
| (2) |
Includes U.S. small business commercial activity.
|
|
| (3) |
Commercial loans and leases 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. 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 and accordingly are excluded from this
table.
|
|
| (5) |
Outstanding commercial loans and leases exclude loans accounted for under the fair
value option.
|
Table 52 presents commercial TDRs by product type and status.
U.S. small business commercial TDRs are comprised of renegotiated business card loans and
are not classified as nonperforming as they are charged off no later than the end of the month in
which the loan becomes 180 days past due.
Table 52
Commercial Troubled Debt Restructurings
Commercial Troubled Debt Restructurings
| June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
|
(Dollars in millions)
|
Total | Nonperforming | Performing | Total | Nonperforming | Performing | ||||||||||||||||||
|
U.S. commercial
|
$ | 532 | $ | 348 | $ | 184 | $ | 356 | $ | 175 | $ | 181 | ||||||||||||
|
Commercial real estate
|
1,027 | 868 | 159 | 815 | 770 | 45 | ||||||||||||||||||
|
Non-U.S. commercial
|
88 | 40 | 48 | 19 | 7 | 12 | ||||||||||||||||||
|
U.S. small business commercial
|
521 | - | 521 | 688 | - | 688 | ||||||||||||||||||
|
Total commercial troubled
debt restructurings
|
$ | 2,168 | $ | 1,256 | $ | 912 | $ | 1,878 | $ | 952 | $ | 926 | ||||||||||||
Industry Concentrations
Table 53 on page 101 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 $10.3 billion from December
31, 2010 to June 30, 2011, was broad-based across most industries.
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Table of Contents
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. Management’s Credit Risk Committee (CRC) oversees industry limit governance.
Diversified financials, our largest industry concentration, experienced a decrease in
committed exposure of $4.2 billion, or five percent, at June 30, 2011 compared to December 31,
2010. This decrease was driven primarily by reduced exposures in consumer finance along with asset
managers, regulated funds and broker/dealers.
Real estate, our second largest industry concentration, experienced a decrease in committed
exposure of $4.9 billion, or seven percent, at June 30, 2011 compared to December 31, 2010 due
primarily to net paydowns which outpaced new originations and renewals, as well as charge-offs.
Real estate construction and land development exposure represented 24 percent of the total real
estate industry committed exposure at June 30, 2011, down from 27 percent at December 31, 2010.
For more information on the commercial real estate and related portfolios, refer to Commercial
Real Estate on page 96.
Committed exposure in the banking industry increased $5.8 billion, or 20 percent, at June 30,
2011 compared to December 31, 2010 which was primarily due to increases in international loan
exposure as a result of momentum from regional economies and growth initiatives in foreign
markets. The increase in committed exposure in the energy industry of $3.5 billion, or 13 percent,
at June 30, 2011 compared to December 31, 2010 was primarily due to growth in foreign loan
exposure. Other committed exposure decreased $9.9 billion, or 58 percent, at June 30, 2011
compared to December 31, 2010 due to reductions primarily in traded products exposure.
The Corporation’s committed state and municipal exposure of $46.3 billion at June 30, 2011
consisted of $33.8 billion of commercial utilized exposure (including $18.8 billion of funded
loans, $12.6 billion of SBLCs and $2.4 billion of derivative assets), and unutilized commercial
exposure of $12.5 billion (primarily unfunded loan commitments and letters of credit) and is
reported in the government and public education industry presented in Table 53. Economic
conditions continue to impact debt issued by state and local municipalities and certain exposures
to these municipalities. While historically default rates were low, stress on the municipalities’
financials due to the economic downturn has increased the potential for defaults in the near term.
As part of our overall and ongoing risk management processes, we continually monitor these
exposures through a rigorous review process. Additionally, internal communications surrounding
certain at-risk counterparties and/or sectors are regularly circulated ensuring exposure levels
are in compliance with established concentration guidelines.
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 at both June 30, 2011 and December 31, 2010.
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.
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 we are required to indemnify or provide recourse for a
guarantor’s loss. For additional information regarding our exposure to representations and
warranties, see Off-Balance Sheet Arrangements and Contractual Obligations – Representations and
Warranties on page 51, and
Note 9 – Representations and Warranties Obligations and Corporate
Guarantees
to the Consolidated Financial Statements.
Monoline derivative credit exposure at June 30, 2011 had a notional value of $35.6 billion
compared to $38.4 billion at December 31, 2010. Mark-to-market monoline derivative credit exposure
was $8.7 billion at June 30, 2011 compared to $9.2 billion at December 31, 2010 with the decrease
driven by positive valuation adjustments on legacy assets and terminated monoline contracts. The
counterparty credit valuation adjustment related to monoline derivative exposure was $5.7 billion
at June 30, 2011 compared to $5.3 billion December 31, 2010. This adjustment reduced our net
mark-to-market exposure to $3.1 billion at June 30, 2011 compared to $3.9 billion at December 31,
2010 and covered 65 percent of the mark-to-market exposure at June 30, 2011, up from 57 percent at
December 31, 2010. At June 30, 2011, approximately
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Table of Contents
52 percent of this exposure was related to one monoline compared to approximately 62 percent at
December 31, 2010. We do not hold collateral against these derivative exposures. For more
information on our monoline exposure, see
GBAM
on page 42.
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 the
purchased insurance for recovery. Investments in securities issued by municipalities and
corporations with purchased wraps at June 30, 2011 had a notional value of $1.6 billion compared
to $2.4 billion at December 31, 2010. Mark-to-market investment exposure was $1.4 billion at June
30, 2011 compared to $2.2 billion at December 31, 2010.
Table 53
Commercial Credit Exposure by Industry (1)
Commercial Credit Exposure by Industry (1)
|
Commercial
Utilized |
Total Commercial
Committed |
|||||||||||||||
| June 30 | December 31 | June 30 | December 31 | |||||||||||||
|
(Dollars in millions)
|
2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Diversified financials
|
$ | 51,889 | $ | 55,196 | $ | 79,056 | $ | 83,248 | ||||||||
|
Real estate
(2)
|
53,597 | 58,531 | 67,093 | 72,004 | ||||||||||||
|
Government and public education
|
42,153 | 44,131 | 58,027 | 59,594 | ||||||||||||
|
Capital goods
|
23,880 | 21,940 | 46,822 | 46,087 | ||||||||||||
|
Healthcare equipment and services
|
28,757 | 30,420 | 45,608 | 47,569 | ||||||||||||
|
Retailing
|
25,530 | 24,660 | 45,604 | 43,950 | ||||||||||||
|
Consumer services
|
23,195 | 24,759 | 37,735 | 39,694 | ||||||||||||
|
Materials
|
17,696 | 15,873 | 35,831 | 33,046 | ||||||||||||
|
Banks
|
32,005 | 26,831 | 35,461 | 29,667 | ||||||||||||
|
Commercial services and supplies
|
20,740 | 20,056 | 31,344 | 30,517 | ||||||||||||
|
Energy
|
12,661 | 9,765 | 29,817 | 26,328 | ||||||||||||
|
Food, beverage and tobacco
|
14,697 | 14,777 | 28,920 | 28,126 | ||||||||||||
|
Utilities
|
6,407 | 6,990 | 24,697 | 24,207 | ||||||||||||
|
Insurance, including monolines
|
16,306 | 17,263 | 23,059 | 24,417 | ||||||||||||
|
Individuals and trusts
|
16,249 | 18,278 | 20,498 | 22,899 | ||||||||||||
|
Media
|
10,730 | 11,611 | 20,461 | 20,619 | ||||||||||||
|
Transportation
|
11,778 | 12,070 | 18,129 | 18,436 | ||||||||||||
|
Pharmaceuticals and biotechnology
|
4,998 | 3,859 | 12,152 | 11,009 | ||||||||||||
|
Technology hardware and equipment
|
4,557 | 4,373 | 11,005 | 10,932 | ||||||||||||
|
Religious and social organizations
|
8,087 | 8,409 | 10,319 | 10,823 | ||||||||||||
|
Telecommunication services
|
3,890 | 3,823 | 10,096 | 9,321 | ||||||||||||
|
Software and services
|
3,480 | 3,837 | 8,995 | 9,531 | ||||||||||||
|
Consumer durables and apparel
|
4,329 | 4,297 | 8,938 | 8,836 | ||||||||||||
|
Food and staples retailing
|
3,123 | 3,222 | 6,521 | 6,161 | ||||||||||||
|
Automobiles and components
|
2,466 | 2,090 | 6,391 | 5,941 | ||||||||||||
|
Other
|
3,521 | 13,361 | 7,191 | 17,133 | ||||||||||||
|
Total commercial credit exposure by industry
|
$ | 446,721 | $ | 460,422 | $ | 729,770 | $ | 740,095 | ||||||||
|
Net credit default protection purchased on total
commitments
(3)
|
$ | (19,861 | ) | $ | (20,118 | ) | ||||||||||
| (1) |
Includes U.S. small business commercial 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 June 30, 2011 and December 31, 2010, 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, was $19.9 billion and $20.1
billion. The mark-to-market effects, including the cost of net credit default protection hedging
our credit exposure, resulted in net losses of $12 million and $209 million during the three and
six months ended June 30, 2011 compared to net gains (losses) of $181 million and $(23) million
for the same periods in 2010.
101
Table of Contents
The average Value-at-Risk (VaR) for these credit derivative hedges was $47 million and $52
million during the three and six months ended June 30, 2011 compared to $57 million and $58
million for the same periods in 2010. The average VaR for the related credit exposure was $57
million and $55 million during the three and six months ended June 30, 2011 compared to $59
million and $61 million for the same periods in 2010. 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 $31 million and $35 million during for the three and six months
ended June 30, 2011 compared to $42 million and $44 million for the same periods in 2010. Refer to
Trading Risk Management on page 112 for a description of our VaR calculation for the market-based
trading portfolio.
Tables 54 and 55 present the maturity profiles and the credit exposure debt ratings of the
net credit default protection portfolio at June 30, 2011 and December 31, 2010. The distribution
of debt ratings for net notional credit default protection purchased is shown as a negative
amount.
Table 54
Net Credit Default Protection by Maturity Profile
Net Credit Default Protection by Maturity Profile
| June 30 | December 31 | |||||||
| 2011 | 2010 | |||||||
|
Less than or equal to one year
|
14 | % | 14 | % | ||||
|
Greater than one year and less than or equal
to five years
|
80 | 80 | ||||||
|
Greater than five years
|
6 | 6 | ||||||
|
Total net credit default protection
|
100 | % | 100 | % | ||||
Table 55
Net Credit Default Protection by Credit Exposure Debt Rating (1)
Net Credit Default Protection by Credit Exposure Debt Rating (1)
| (Dollars in millions) | June 30, 2011 | December 31, 2010 | ||||||||||||||
| Net | Percent of | Net | Percent of | |||||||||||||
| Ratings (2) | Notional | Total | Notional | Total | ||||||||||||
|
AA
|
$ | (313 | ) | 1.6 | % | $ | (188 | ) | 0.9 | % | ||||||
|
A
|
(7,016 | ) | 35.3 | (6,485 | ) | 32.2 | ||||||||||
|
BBB
|
(7,542 | ) | 38.0 | (7,731 | ) | 38.4 | ||||||||||
|
BB
|
(1,659 | ) | 8.4 | (2,106 | ) | 10.5 | ||||||||||
|
B
|
(1,381 | ) | 7.0 | (1,260 | ) | 6.3 | ||||||||||
|
CCC and below
|
(756 | ) | 3.8 | (762 | ) | 3.8 | ||||||||||
|
NR
(3)
|
(1,194 | ) | 5.9 | (1,586 | ) | 7.9 | ||||||||||
|
Total net credit default protection
|
$ | (19,861 | ) | 100.0 | % | $ | (20,118 | ) | 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 that have not been rated, “NR” includes $(1.1) billion and
$(1.5) billion in net credit default swaps index positions at June 30, 2011 and December 31,
2010. 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.
Table 56 presents notional amounts that 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.
102
Table of Contents
The credit risk amounts discussed on page 102 and noted in Table 56 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 Corporation’s overall exposure.
Table 56
Credit Derivatives
Credit Derivatives
| June 30, 2011 | December 31, 2010 | |||||||||||||||
|
(Dollars in millions)
|
Contract/Notional | Credit Risk | Contract/Notional | Credit Risk | ||||||||||||
|
Purchased credit derivatives:
|
||||||||||||||||
|
Credit default swaps
|
$ | 2,065,664 | $ | 15,029 | $ | 2,184,703 | $ | 18,150 | ||||||||
|
Total return swaps/other
|
41,401 | 601 | 26,038 | 1,013 | ||||||||||||
|
Total purchased credit derivatives
|
2,107,065 | 15,630 | 2,210,741 | 19,163 | ||||||||||||
|
Written credit derivatives:
|
||||||||||||||||
|
Credit default swaps
|
1,990,530 | n/a | 2,133,488 | n/a | ||||||||||||
|
Total return swaps/other
|
40,788 | n/a | 22,474 | n/a | ||||||||||||
|
Total written credit derivatives
|
2,031,318 | n/a | 2,155,962 | n/a | ||||||||||||
|
Total credit derivatives
|
$ | 4,138,383 | $ | 15,630 | $ | 4,366,703 | $ | 19,163 | ||||||||
|
n/a = not applicable
|
||
Counterparty Credit Risk Valuation Adjustments
We record a counterparty credit risk valuation adjustment on certain derivative assets,
including our credit default protection purchased, in order to properly reflect the credit quality
of the counterparty. These adjustments are necessary as the market quotes on derivatives do not
fully reflect the credit risk of the counterparties to the derivative assets. 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 subsequently adjusted due to
changes in the value of the derivative contract, collateral and creditworthiness of the
counterparty.
During the three and six months ended June 30, 2011, credit valuation losses of $(592)
million and $(450) million ($(151) million and $(624) million, net of hedges) compared to $(752)
million and $(426) million ($(302) million and $(370) million, net of hedges) for the same periods
in 2010 were recognized in trading account profits for counterparty credit risk related to
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 Collateralized Debt
Obligation Exposure on page 44 and Monoline and Related Exposure on page 100.
Non-U.S. Portfolio
Our non-U.S. 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 non-U.S. risk and exposures. Management oversight of
country risk, including cross-border risk, is provided by the Regional Risk Committee, a
subcommittee of the CRC.
Non-U.S. exposure includes credit exposure net of local liabilities, securities and other
investments issued by or domiciled in countries other than the U.S. Total non-U.S. 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.
At June 30, 2011, the total cross-border exposure to the U.K., China and Japan was $30.9
billion, $25.4 billion and $22.7 billion, respectively. The U.K., China and Japan were the only
countries where cross-border exposure exceeded one percent of our total assets, representing 1.37
percent, 1.13 percent and 1.01 percent of total assets. At June 30, 2011, the total cross-border
exposure to France and Canada was $20.1 billion and $19.0 billion, representing 0.89 percent and
0.84 percent of total assets. France and Canada were the only other countries that had total
cross-border exposure that exceeded 0.75 percent of our total assets at June 30, 2011.
103
Table of Contents
As presented in Table 57, non-U.S. exposure to borrowers or counterparties in emerging
markets increased $9.6 billion to $74.7 billion at June 30, 2011 compared to $65.1 billion at
December 31, 2010. The increase was primarily due to an increase in the Asia Pacific region.
Non-U.S. exposure to borrowers or counterparties in emerging markets represented 28 percent and 25
percent of total non-U.S. exposure at June 30, 2011 and December 31, 2010.
Table 57
Selected Emerging Markets (1)
Selected Emerging Markets (1)
| Total | ||||||||||||||||||||||||||||||||
| Emerging | Increase | |||||||||||||||||||||||||||||||
| Loans and | Local Country | Market | (Decrease) | |||||||||||||||||||||||||||||
| Leases, and | Securities/ | Total Cross- | Exposure Net | Exposure at | From | |||||||||||||||||||||||||||
| Loan | Other | Derivative | Other | border | of Local | June 30, | December 31, | |||||||||||||||||||||||||
|
(Dollars in millions)
|
Commitments | Financing (2) | Assets (3) | Investments (4) | Exposure (5) | Liabilities (6) | 2011 | 2010 | ||||||||||||||||||||||||
|
Region/Country
|
||||||||||||||||||||||||||||||||
|
Asia Pacific
|
||||||||||||||||||||||||||||||||
|
China
|
$ | 2,534 | $ | 425 | $ | 990 | $ | 21,494 | $ | 25,443 | $ | 99 | $ | 25,542 | $ | 1,614 | ||||||||||||||||
|
India
|
4,154 | 1,485 | 551 | 2,381 | 8,571 | 516 | 9,087 | 819 | ||||||||||||||||||||||||
|
South Korea
|
873 | 1,255 | 401 | 2,105 | 4,634 | 1,774 | 6,408 | 1,129 | ||||||||||||||||||||||||
|
Taiwan
|
472 | 78 | 74 | 603 | 1,227 | 1,519 | 2,746 | 891 | ||||||||||||||||||||||||
|
Singapore
|
616 | 43 | 428 | 1,488 | 2,575 | - | 2,575 | 29 | ||||||||||||||||||||||||
|
Hong Kong
|
518 | 396 | 178 | 1,056 | 2,148 | 287 | 2,435 | 393 | ||||||||||||||||||||||||
|
Thailand
|
20 | 15 | 32 | 878 | 945 | - | 945 | 276 | ||||||||||||||||||||||||
|
Malaysia
|
85 | 10 | 132 | 476 | 703 | 2 | 705 | 471 | ||||||||||||||||||||||||
|
Indonesia
|
148 | 15 | 5 | 519 | 687 | 7 | 694 | 545 | ||||||||||||||||||||||||
|
Other Asia Pacific
(7)
|
226 | 92 | 53 | 381 | 752 | - | 752 | 421 | ||||||||||||||||||||||||
|
Total Asia Pacific
|
9,646 | 3,814 | 2,844 | 31,381 | 47,685 | 4,204 | 51,889 | 6,588 | ||||||||||||||||||||||||
|
Latin America
|
||||||||||||||||||||||||||||||||
|
Brazil
|
1,254 | 375 | 407 | 3,213 | 5,249 | 1,848 | 7,097 | 1,291 | ||||||||||||||||||||||||
|
Mexico
|
2,029 | 475 | 257 | 3,032 | 5,793 | - | 5,793 | 1,408 | ||||||||||||||||||||||||
|
Chile
|
1,069 | 58 | 336 | 27 | 1,490 | 41 | 1,531 | 5 | ||||||||||||||||||||||||
|
Peru
|
373 | 114 | 20 | 92 | 599 | - | 599 | 81 | ||||||||||||||||||||||||
|
Other Latin America
(7)
|
263 | 346 | 39 | 334 | 982 | 152 | 1,134 | (403 | ) | |||||||||||||||||||||||
|
Total Latin America
|
4,988 | 1,368 | 1,059 | 6,698 | 14,113 | 2,041 | 16,154 | 2,382 | ||||||||||||||||||||||||
|
Middle East and Africa
|
||||||||||||||||||||||||||||||||
|
United Arab Emirates
|
1,088 | 30 | 126 | 85 | 1,329 | - | 1,329 | 153 | ||||||||||||||||||||||||
|
Bahrain
|
79 | 1 | 4 | 1,001 | 1,085 | 2 | 1,087 | (73 | ) | |||||||||||||||||||||||
|
South Africa
|
361 | 22 | 88 | 48 | 519 | - | 519 | (52 | ) | |||||||||||||||||||||||
|
Other Middle East and Africa
(7)
|
513 | 103 | 93 | 209 | 918 | 28 | 946 | 165 | ||||||||||||||||||||||||
|
Total Middle East and Africa
|
2,041 | 156 | 311 | 1,343 | 3,851 | 30 | 3,881 | 193 | ||||||||||||||||||||||||
|
Central and Eastern Europe
|
||||||||||||||||||||||||||||||||
|
Russian Federation
|
819 | 117 | 12 | 187 | 1,135 | 11 | 1,146 | 610 | ||||||||||||||||||||||||
|
Turkey
|
321 | 45 | 6 | 217 | 589 | 96 | 685 | 185 | ||||||||||||||||||||||||
|
Other Central and Eastern Europe
(7)
|
116 | 84 | 221 | 492 | 913 | - | 913 | (340 | ) | |||||||||||||||||||||||
|
Total Central and Eastern
Europe
|
1,256 | 246 | 239 | 896 | 2,637 | 107 | 2,744 | 455 | ||||||||||||||||||||||||
|
Total emerging markets
exposure
|
$ | 17,931 | $ | 5,584 | $ | 4,453 | $ | 40,318 | $ | 68,286 | $ | 6,382 | $ | 74,668 | $ | 9,618 | ||||||||||||||||
| (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. At June 30, 2011 and
December 31, 2010, there was $526 million and $460 million in emerging markets exposure
accounted for under the fair value option.
|
|
| (2) |
Includes acceptances, due froms, SBLCs, commercial letters of credit and formal
guarantees.
|
|
| (3) |
Derivative assets are accounted for under the fair value option and have been
reduced by the amount of cash collateral applied of $1.1 billion and $1.2 billion at June 30,
2011 and December 31, 2010. At June 30, 2011 and December 31, 2010, there were $226 million
and $408 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 was $21.4 billion and $15.7 billion at June 30, 2011 and
December 31, 2010. Local liabilities at June 30, 2011 in Asia Pacific, Latin America, and
Middle East and Africa were $19.2 billion, $1.6 billion and $579 million, respectively, of
which $8.8 billion was in Singapore, $2.6 billion in Hong Kong, $2.4 billion in China, $2.1
billion in India, $1.5 billion in Mexico, $1.0 billion in Korea, $949 million in Indonesia and
$579 million in South Africa. 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 non-U.S. exposure of
more than $500 million.
|
104
Table of Contents
At June 30, 2011 and December 31, 2010, 69 percent and 70 percent of the emerging
markets exposure was in Asia Pacific. Emerging markets exposure in Asia Pacific increased by $6.6
billion primarily driven by an increase in loans and loan commitments in China and India and an
increase in local country exposure in South Korea and Taiwan. The securities exposure in China
includes our equity investment in CCB. For more information on our CCB investment, see the
All Other
discussion on page 49.
At June 30, 2011 and December 31, 2010, 22 percent and 21 percent of the emerging markets
exposure was in Latin America. Latin America emerging markets exposure increased $2.4 billion
driven by an increase in securities in Brazil and Mexico related to liquidity and risk
diversification management initiatives.
At June 30, 2011 and December 31, 2010, five percent and six percent of the emerging markets
exposure was in the Middle East and Africa. At June 30, 2011 and December 31, 2010, four percent
and three percent of the emerging markets exposure was in Central and Eastern Europe.
105
Table of Contents
Certain European countries, including Greece, Ireland, Italy, Portugal and Spain, are
currently experiencing varying degrees of financial stress. Risks from the debt crisis in Europe
could result in a disruption of the financial markets which could have a detrimental impact on
global economic conditions and sovereign and non-sovereign debt in these countries. Contagion
fears expanded to Spain and Italy, and credit spreads widened further in European peripheral
countries and European banks. There remains considerable uncertainty as to future developments in
the European debt crisis and the impact on financial markets. On July 29, 2011, Moody’s placed
Spain’s Aa2 sovereign credit rating on review for possible downgrade. Table 58 shows our direct
sovereign and non-sovereign exposures, excluding consumer credit card exposure, in these countries
at June 30, 2011. The total exposure to these countries was $16.7 billion at June 30, 2011
compared to $15.8 billion at December 31, 2010, of which $1.6 billion and $1.9 billion was total
sovereign exposure. The total sovereign exposure amounts do not reflect net notional credit
default protection purchased of $1.5 billion and $1.2 billion at June 30, 2011 and December 31,
2010. In addition to our direct sovereign and non-sovereign exposures set forth above, a
significant deterioration of the European debt crisis could result in material reductions in the
value of sovereign debt and other asset classes, disruptions in capital markets, widening of
credit spreads, loss of investor confidence in the financial services industry, a slowdown in
global economic activity, and other adverse developments. For additional information on the debt
crisis in Europe, refer to Item 1A. Risk Factors.
Our non-sovereign exposures are comprised of exposure to corporations and financial institutions, or those entities that
are non-governmental or are not owned or controlled by the government. Loans, derivatives and other financing exposures
are not reduced by hedges, whereas securities and other investments are reduced by correlated hedges to the extent that
there is an equal or greater amount of exposure on a single name basis. Derivative assets as presented in Table 58 are not
offset by corresponding derivative liabilities but are offset only by cash collateral applied.
Table 58
Selected European Countries
Selected European Countries
| Total | ||||||||||||||||||||||||||||||||
| Loans and | Local Country | Non-U.S. | ||||||||||||||||||||||||||||||
| Leases, and | Securities/ | Total Cross- | Exposure Net | Exposure at | ||||||||||||||||||||||||||||
| Loan | Other | Derivative | Other | border | of Local | June 30, | Credit Default | |||||||||||||||||||||||||
| (Dollars in millions) | Commitments | Financing (1) | Assets (2) | Investments (3) | Exposure (4) | Liabilities (5) | 2011 | Protection (6) | ||||||||||||||||||||||||
|
Greece
|
||||||||||||||||||||||||||||||||
|
Sovereign
|
$ | - | $ | - | $ | - | $ | 17 | $ | 17 | $ | - | $ | 17 | $ | (7 | ) | |||||||||||||||
|
Non-sovereign
|
399 | 5 | 52 | 47 | 503 | - | 503 | - | ||||||||||||||||||||||||
|
Total Greece
|
$ | 399 | $ | 5 | $ | 52 | $ | 64 | $ | 520 | $ | - | $ | 520 | $ | (7 | ) | |||||||||||||||
|
Ireland
|
||||||||||||||||||||||||||||||||
|
Sovereign
|
$ | 1 | $ | - | $ | 10 | $ | 25 | $ | 36 | $ | - | $ | 36 | $ | - | ||||||||||||||||
|
Non-sovereign
|
1,625 | 570 | 304 | 298 | 2,797 | - | 2,797 | (41 | ) | |||||||||||||||||||||||
|
Total Ireland
|
$ | 1,626 | $ | 570 | $ | 314 | $ | 323 | $ | 2,833 | $ | - | $ | 2,833 | $ | (41 | ) | |||||||||||||||
|
Italy
|
||||||||||||||||||||||||||||||||
|
Sovereign
|
$ | 28 | $ | - | $ | 1,320 | $ | 16 | $ | 1,364 | $ | 9 | $ | 1,373 | $ | (1,361 | ) | |||||||||||||||
|
Non-sovereign
|
1,165 | 18 | 655 | 1,233 | 3,071 | 2,450 | 5,521 | (252 | ) | |||||||||||||||||||||||
|
Total Italy
|
$ | 1,193 | $ | 18 | $ | 1,975 | $ | 1,249 | $ | 4,435 | $ | 2,459 | $ | 6,894 | $ | (1,613 | ) | |||||||||||||||
|
Portugal
|
||||||||||||||||||||||||||||||||
|
Sovereign
|
$ | - | $ | - | $ | 32 | $ | - | $ | 32 | $ | - | $ | 32 | $ | (30 | ) | |||||||||||||||
|
Non-sovereign
|
280 | 22 | 6 | 80 | 388 | - | 388 | - | ||||||||||||||||||||||||
|
Total Portugal
|
$ | 280 | $ | 22 | $ | 38 | $ | 80 | $ | 420 | $ | - | $ | 420 | $ | (30 | ) | |||||||||||||||
|
Spain
|
||||||||||||||||||||||||||||||||
|
Sovereign
|
$ | 27 | $ | - | $ | 39 | $ | 5 | $ | 71 | $ | 52 | $ | 123 | $ | (64 | ) | |||||||||||||||
|
Non-sovereign
|
911 | 102 | 241 | 2,199 | 3,453 | 2,490 | 5,943 | (14 | ) | |||||||||||||||||||||||
|
Total Spain
|
$ | 938 | $ | 102 | $ | 280 | $ | 2,204 | $ | 3,524 | $ | 2,542 | $ | 6,066 | $ | (78 | ) | |||||||||||||||
|
Total
|
||||||||||||||||||||||||||||||||
|
Sovereign
|
$ | 56 | $ | - | $ | 1,401 | $ | 63 | $ | 1,520 | $ | 61 | $ | 1,581 | $ | (1,462 | ) | |||||||||||||||
|
Non-sovereign
|
4,380 | 717 | 1,258 | 3,857 | 10,212 | 4,940 | 15,152 | (307 | ) | |||||||||||||||||||||||
|
Total selected European exposure
|
$ | 4,436 | $ | 717 | $ | 2,659 | $ | 3,920 | $ | 11,732 | $ | 5,001 | $ | 16,733 | $ | (1,769 | ) | |||||||||||||||
| (1) |
Includes acceptances, due froms, SBLCs, commercial letters of credit and formal guarantees.
|
|
| (2) |
Derivative assets are accounted for under the fair value option and have been reduced by
the amount of cash collateral applied of $3.1 billion at June 30, 2011. At June 30, 2011,
there was $77 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 of $957 million are subtracted from
local exposures consistent with FFIEC reporting requirements. Of the $957 million applied
for exposure reduction, $389 million was in Italy, $362 million in Ireland, $158 million
in Spain and $48 million in Greece.
|
|
| (6) |
Represents net notional credit default protection purchased to hedge counterparty risk.
|
106
Table of Contents
Provision for Credit Losses
The provision for credit losses decreased $4.9 billion to $3.3 billion, and $10.8
billion to $7.1 billion for the three and six months ended June 30, 2011 compared to the same
periods in 2010. The provision for credit losses for the consumer portfolio decreased $3.4 billion
to $3.8 billion, and $7.7 billion to $7.7 billion for the three and six months ended June 30, 2011
compared to the same periods in 2010 reflecting improving economic conditions and continued
expectations of improving delinquency, collection and bankruptcy trends in the U.S. consumer
credit card and unsecured consumer lending portfolios. Also contributing to the improvement were
lower credit costs in the non-PCI consumer real estate loan portfolio due to improving portfolio
trends. Partially offsetting these improvements was an increase in reserves of $412 million and
$2.0 billion in the consumer PCI loan portfolios during the three and six months ended June 30,
2011 compared to $271 million and $1.1 billion in the same periods in 2010 reflecting further
reductions in expected principal cash flows due primarily to our updated home price outlook based
on further deterioration of HPI.
The provision for credit losses for the commercial portfolio, including the provision for
unfunded lending commitments, decreased $1.5 billion to a benefit of $523 million, and $3.1
billion to a benefit of $636 million for the three and six months ended June 30, 2011 compared to
the same periods in 2010 due to continued economic improvement and its impact on property values
in the commercial real estate portfolio, continued expectations of improving delinquency and
bankruptcy trends in the small business portfolio, and improved borrower credit profiles across
the remainder of the portfolio.
Allowance for Credit Losses
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is comprised of two components as described
below. 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 LHFS and loans accounted
for under the fair value option as the fair value adjustments include a credit risk component.
The first component of the allowance for loan and lease losses covers nonperforming
commercial loans and performing commercial loans that have been modified in a TDR, 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 based on the present value
of expected future cash flows discounted at the loan’s original effective interest rate, or in
certain circumstances, impairment may also be based upon the collateral value or the loan’s
observable market price if available. Impairment measurement for the renegotiated credit card,
unsecured consumer and small business TDR portfolio is based on the present value of projected
cash flows discounted using the average portfolio contractual interest rate, excluding
promotionally priced loans, in effect prior to restructuring and prior to any risk-based or
penalty-based increase in rate on the restructured loans. 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 loans that will default based on individual
loan attributes, the most significant of which are refreshed LTV or CLTV, and borrower credit
score as well as 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. Included within this second component of the allowance for loan and
lease losses and determined separately from the procedures outlined above are reserves which are
maintained to cover uncertainties that affect our estimate of probable losses including domestic
and global economic uncertainty, large single name defaults, significant events which could
disrupt financial markets and model imprecision. As of June 30, 2011, the loss forecast process
resulted in reductions in the allowance for most consumer portfolios, particularly the credit card
and other consumer portfolio segment.
107
Table of Contents
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 and obligor
concentrations within each portfolio segment,
and any other pertinent information. The statistical models for commercial loans are generally
updated annually and utilize the Corporation’s historical database of actual defaults and other
data. The loan risk ratings and composition 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 and the loss given default
(LGD) based on the Corporation’s historical experience of defaults and credit losses. Factors
considered when assessing the internal risk rating include the value of the underlying collateral,
if applicable; the industry in which the obligor operates; the obligor’s liquidity and other
financial indicators; and other quantitative and qualitative factors relevant to the obligor’s
credit risk. When estimating the allowance for loan and lease losses, management relies not only
on models derived from historical experience but also on its judgment in considering the effect on
probable losses inherent in the portfolios due to the current macroeconomic environment and
trends, inherent uncertainty in models and other qualitative factors. As of June 30, 2011, the
loan risk ratings and portfolio composition resulted in reductions in the allowance for all
commercial portfolios.
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 generally are
recorded through charges or credits to 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 60
was $31.9 billion at June 30, 2011, a decrease of $2.8 billion from December 31, 2010. This
decrease was primarily due to improving credit quality in the
Global Card Services
consumer
portfolios. For the consumer PCI loan portfolios, updates to our expected principal cash flows
resulted in an increase in reserves of $412 million and $2.0 billion for the three and six months
ended June 30, 2011 in the discontinued real estate, home equity and residential mortgage
portfolios.
The allowance for loan and lease losses for the commercial portfolio was $5.4 billion at June
30, 2011, a $1.7 billion decrease from December 31, 2010. The decrease was driven by stabilization
in the economy and its impact on property values in the commercial real estate portfolio,
continued expectations of improving delinquencies in the U.S. small business commercial portfolio,
primarily within
Global Card Services
, and stronger borrower credit profiles in the U.S.
commercial portfolios as a result of improving economic conditions, primarily in
Global Commercial
Banking
and
GBAM
.
The allowance for loan and lease losses as a percentage of total loans and leases outstanding
was 4.00 percent at June 30, 2011 compared to 4.47 percent at December 31, 2010. The decrease in
the ratio was mostly due to improved credit quality and economic conditions which led to the
reserve reductions discussed above. The June 30, 2011 and December 31, 2010 ratios above include
the PCI loan portfolio. Excluding the PCI loan portfolio, the allowance for loan and lease losses
as a percentage of total loans and leases outstanding was 3.24 percent at June 30, 2011 compared
to 3.94 percent at December 31, 2010.
108
Table of Contents
Table 59 presents a rollforward of the allowance for credit losses for the three and six
months ended June 30, 2011 and 2010.
Table 59
Allowance for Credit Losses
Allowance for Credit Losses
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30 | June 30 | |||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Allowance for loan and lease losses, beginning of period
|
$ | 39,843 | $ | 46,835 | $ | 41,885 | $ | 47,988 | ||||||||
|
Loans and leases charged off
|
||||||||||||||||
|
Residential mortgage
|
(1,244 | ) | (986 | ) | (2,226 | ) | (2,062 | ) | ||||||||
|
Home equity
|
(1,332 | ) | (1,813 | ) | (2,614 | ) | (4,280 | ) | ||||||||
|
Discontinued real estate
|
(27 | ) | (20 | ) | (52 | ) | (47 | ) | ||||||||
|
U.S. credit card
|
(2,139 | ) | (3,709 | ) | (4,624 | ) | (7,850 | ) | ||||||||
|
Non-U.S. credit card
|
(498 | ) | (989 | ) | (949 | ) | (1,663 | ) | ||||||||
|
Direct/Indirect consumer
|
(552 | ) | (1,130 | ) | (1,292 | ) | (2,502 | ) | ||||||||
|
Other consumer
|
(56 | ) | (88 | ) | (111 | ) | (164 | ) | ||||||||
|
Total consumer charge-offs
|
(5,848 | ) | (8,735 | ) | (11,868 | ) | (18,568 | ) | ||||||||
|
U.S. commercial
(1)
|
(440 | ) | (811 | ) | (893 | ) | (1,783 | ) | ||||||||
|
Commercial real estate
|
(299 | ) | (659 | ) | (641 | ) | (1,289 | ) | ||||||||
|
Commercial lease financing
|
(6 | ) | (17 | ) | (17 | ) | (43 | ) | ||||||||
|
Non-U.S. commercial
|
(14 | ) | (84 | ) | (114 | ) | (124 | ) | ||||||||
|
Total commercial charge-offs
|
(759 | ) | (1,571 | ) | (1,665 | ) | (3,239 | ) | ||||||||
|
Total loans and leases charged off
|
(6,607 | ) | (10,306 | ) | (13,533 | ) | (21,807 | ) | ||||||||
|
Recoveries of loans and leases previously charged off
|
||||||||||||||||
|
Residential mortgage
|
140 | 15 | 217 | 22 | ||||||||||||
|
Home equity
|
69 | 72 | 172 | 142 | ||||||||||||
|
Discontinued real estate
|
1 | 1 | 6 | 7 | ||||||||||||
|
U.S. credit card
|
208 | 192 | 419 | 370 | ||||||||||||
|
Non-U.S. credit card
|
69 | 47 | 118 | 90 | ||||||||||||
|
Direct/Indirect consumer
|
186 | 251 | 401 | 514 | ||||||||||||
|
Other consumer
|
13 | 15 | 28 | 33 | ||||||||||||
|
Total consumer recoveries
|
686 | 593 | 1,361 | 1,178 | ||||||||||||
|
U.S. commercial
(2)
|
105 | 104 | 267 | 188 | ||||||||||||
|
Commercial real estate
|
136 | 14 | 190 | 29 | ||||||||||||
|
Commercial lease financing
|
14 | 20 | 24 | 25 | ||||||||||||
|
Non-U.S. commercial
|
1 | 18 | (2 | ) | 33 | |||||||||||
|
Total commercial recoveries
|
256 | 156 | 479 | 275 | ||||||||||||
|
Total recoveries of loans and leases previously charged off
|
942 | 749 | 1,840 | 1,453 | ||||||||||||
|
Net charge-offs
|
(5,665 | ) | (9,557 | ) | (11,693 | ) | (20,354 | ) | ||||||||
|
Provision for loan and lease losses
|
3,260 | 8,105 | 7,176 | 17,704 | ||||||||||||
|
Other
|
(126 | ) | (128 | ) | (56 | ) | (83 | ) | ||||||||
|
Allowance for loan and lease losses, June 30
|
37,312 | 45,255 | 37,312 | 45,255 | ||||||||||||
|
Reserve for unfunded lending commitments, beginning of period
|
961 | 1,521 | 1,188 | 1,487 | ||||||||||||
|
Provision for unfunded lending commitments
|
(5 | ) | - | (107 | ) | 206 | ||||||||||
|
Other
|
(59 | ) | (108 | ) | (184 | ) | (280 | ) | ||||||||
|
Reserve for unfunded lending commitments, June 30
|
897 | 1,413 | 897 | 1,413 | ||||||||||||
|
Allowance for credit losses, June 30
|
$ | 38,209 | $ | 46,668 | $ | 38,209 | $ | 46,668 | ||||||||
| (1) |
Includes U.S. small business commercial charge-offs of
$304 million and $640 million for the three and six
months ended June 30, 2011 compared to $554 million and
$1.2 billion for the same periods in 2010.
|
|
| (2) |
Includes U.S. small business commercial recoveries of
$29 million and $53 million for the three and six
months ended June 30, 2011 compared to $26 million and
$49 million for the same periods in 2010.
|
109
Table of Contents
Table 59
Allowance for Credit Losses (continued)
Allowance for Credit Losses (continued)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30 | June 30 | |||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Loans and leases outstanding at June 30
(3)
|
$ | 931,660 | $ | 952,279 | $ | 931,660 | $ | 952,279 | ||||||||
|
Allowance for loan and lease losses as a percentage of
total loans and leases and
outstanding at June 30
(3)
|
4.00 | % | 4.75 | % | 4.00 | % | 4.75 | % | ||||||||
|
Consumer allowance for loan and lease losses as a
percentage of total consumer loans
outstanding at June 30
|
5.04 | 5.62 | 5.04 | 5.62 | ||||||||||||
|
Commercial allowance for loan and lease losses as a
percentage of total commercial loans and leases
outstanding
at June 30
(3)
|
1.82 | 2.89 | 1.82 | 2.89 | ||||||||||||
|
Average loans and leases outstanding
(3)
|
$ | 929,408 | $ | 962,850 | $ | 932,352 | $ | 974,847 | ||||||||
|
Annualized net charge-offs as a percentage of average
loans and leases outstanding
(3)
|
2.44 | % | 3.98 | % | 2.53 | % | 4.21 | % | ||||||||
|
Allowance for loan and lease losses as a percentage of
total nonperforming loans and
leases at June 30
(3, 5)
|
135 | 137 | 135 | 137 | ||||||||||||
|
Ratio of the allowance for loan and lease losses at June
30 to annualized net
charge-offs
|
1.64 | 1.18 | 1.58 | 1.10 | ||||||||||||
|
Amounts included in allowance that are excluded from
nonperforming loans
(4)
|
$ | 19,935 | $ | 24,338 | $ | 19,935 | $ | 24,338 | ||||||||
|
Allowance as a percentage of total nonperforming loans
and leases excluding the
amounts included in the allowance that are excluded
from nonperforming loans
(4)
|
63.00 | % | 63.20 | % | 63.00 | % | 63.20 | % | ||||||||
|
Excluding purchased credit-impaired loans:
(6)
|
||||||||||||||||
|
Allowance for loan and lease losses as a percentage of
total loans and leases
outstanding at June 30
(3)
|
3.24 | % | 4.37 | % | 3.24 | % | 4.37 | % | ||||||||
|
Consumer allowance for loan and lease losses as a
percentage of total consumer loans outstanding
at June 30
|
3.95 | 5.09 | 3.95 | 5.09 | ||||||||||||
|
Commercial allowance for loan and lease losses as a
percentage of total commercial loans and leases
outstanding
at June 30
(3)
|
1.82 | 2.88 | 1.82 | 2.88 | ||||||||||||
|
Annualized net charge-offs as a percentage of average
loans and leases outstanding
(3)
|
2.54 | 4.11 | 2.63 | 4.36 | ||||||||||||
|
Allowance for loan and lease losses as a percentage of
total nonperforming loans and
leases at June 30
(3, 5)
|
105 | 121 | 105 | 121 | ||||||||||||
|
Ratio of the allowance for loan and lease losses at June
30 to annualized net
charge-offs
|
1.28 | 1.05 | 1.23 | 0.98 | ||||||||||||
| (3) |
Outstanding loan and lease balances and ratios do not include loans accounted for under the fair value option. Loans accounted for under the fair value
option were $9.6 billion and $3.9 billion at June 30, 2011 and 2010. Average loans accounted for under the fair value option were $9.1 billion and $6.4
billion for the three and six months ended June 30, 2011 compared to $4.2 billion and $4.4 billion for the same periods in 2010.
|
|
| (4) |
Amounts included in allowance that are excluded from nonperforming loans primarily includes amounts allocated to
Global Card Services
portfolios and PCI.
|
|
| (5) |
For more information on our definition of nonperforming loans, see pages 90 and 98.
|
|
| (6) |
Metrics exclude the impact of Countrywide consumer PCI loans and Merrill Lynch commercial PCI loans.
|
110
Table of Contents
For reporting purposes, we allocate the allowance for credit losses across products.
However, the allowance is available to absorb any credit losses without restriction. Table 60
presents our allocation by product type.
Table 60
Allocation of the Allowance for Credit Losses by Product Type
Allocation of the Allowance for Credit Losses by Product Type
| June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
| Percent of | Percent of | |||||||||||||||||||||||
| Loans and | Loans and | |||||||||||||||||||||||
| Percent of | Leases | Percent of | Leases | |||||||||||||||||||||
| (Dollars in millions) | Amount | Total | Outstanding (1) | Amount | Total | Outstanding (1) | ||||||||||||||||||
|
Allowance for loan and lease losses
|
||||||||||||||||||||||||
|
Residential mortgage
|
$ | 5,845 | 15.66 | % | 2.19 | % | $ | 5,082 | 12.14 | % | 1.97 | % | ||||||||||||
|
Home equity
|
13,111 | 35.14 | 10.03 | 12,887 | 30.77 | 9.34 | ||||||||||||||||||
|
Discontinued real estate
|
1,997 | 5.35 | 16.64 | 1,283 | 3.06 | 9.79 | ||||||||||||||||||
|
U.S. credit card
|
7,540 | 20.21 | 7.20 | 10,876 | 25.97 | 9.56 | ||||||||||||||||||
|
Non-U.S. credit card
|
1,771 | 4.75 | 6.80 | 2,045 | 4.88 | 7.45 | ||||||||||||||||||
|
Direct/Indirect consumer
|
1,475 | 3.95 | 1.63 | 2,381 | 5.68 | 2.64 | ||||||||||||||||||
|
Other consumer
|
145 | 0.39 | 5.25 | 161 | 0.38 | 5.67 | ||||||||||||||||||
|
Total consumer
|
31,884 | 85.45 | 5.04 | 34,715 | 82.88 | 5.40 | ||||||||||||||||||
|
U.S. commercial
(2)
|
2,792 | 7.48 | 1.46 | 3,576 | 8.54 | 1.88 | ||||||||||||||||||
|
Commercial real estate
|
2,314 | 6.20 | 5.26 | 3,137 | 7.49 | 6.35 | ||||||||||||||||||
|
Commercial lease financing
|
99 | 0.27 | 0.46 | 126 | 0.30 | 0.57 | ||||||||||||||||||
|
Non-U.S. commercial
|
223 | 0.60 | 0.52 | 331 | 0.79 | 1.03 | ||||||||||||||||||
|
Total commercial
(3)
|
5,428 | 14.55 | 1.82 | 7,170 | 17.12 | 2.44 | ||||||||||||||||||
|
Allowance for loan and lease losses
|
37,312 | 100.00 | % | 4.00 | 41,885 | 100.00 | % | 4.47 | ||||||||||||||||
|
Reserve for unfunded lending commitments
|
897 | 1,188 | ||||||||||||||||||||||
|
Allowance for credit losses
(4)
|
$ | 38,209 | $ | 43,073 | ||||||||||||||||||||
| (1) |
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. Consumer loans accounted for under the fair
value option include residential mortgage loans of $1.2 billion and discontinued real estate of $4.0 billion at June 30, 2011. There were no consumer loans accounted for under the fair value option at December 31, 2010. Commercial loans accounted
for under the fair value option include U.S. commercial loans of $1.6 billion and $1.6 billion, non-U.S. commercial loans of $2.8 billion and $1.7 billion, and commercial real estate loans of $11 million and $79 million at June 30, 2011 and
December 31, 2010.
|
|
| (2) |
Includes allowance for U.S. small business commercial loans of $1.0 billion and $1.5 billion at June 30, 2011 and December 31, 2010.
|
|
| (3) |
Includes allowance for loan and lease losses for impaired commercial loans of $778 million and $1.1 billion at June 30, 2011 and December 31, 2010.
|
|
| (4) |
Includes $8.4 billion and $6.4 billion of valuation reserve presented with the allowance for credit losses related to PCI loans at June 30, 2011 and December 31, 2010.
|
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,
unfunded bankers’ acceptances 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 probability of default 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 Corporation’s 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 probability of default, the LGD and the EAD, adjusted
for any qualitative factors including economic uncertainty and inherent imprecision in models.
The reserve for unfunded lending commitments at June 30, 2011 was $897 million, $291 million
lower than December 31, 2010 primarily driven by accretion of purchase accounting adjustments on
acquired Merrill Lynch unfunded positions and a decline in unfunded commitment and letter of
credit balances primarily due to higher utilization.
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 100 through 106 of the MD&A of the Corporation’s 2010 Annual Report
on Form 10-K.
111
Table of Contents
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 16 – 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. Also, 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 GRC’s 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.
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 June 30, 2011 compared with the three
months ended March 31, 2011. During the three months ended June 30, 2011, positive trading-related
revenue was recorded for 95 percent (60 days) of the trading days of which 78 percent (49 days)
were daily trading gains of over $25 million, three percent (two days) of the trading days had
losses greater than $25 million and the largest loss was $77 million. These results can be
compared to the three months ended March 31, 2011, where positive trading-related revenue was
recorded for 100 percent of the trading days of which 98 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.
112
Table of Contents
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. In order for the VaR model to reflect 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.
We continually review, evaluate and enhance our VaR model so that it reflects the material
risks in our trading portfolio. Nevertheless, due to the limitations previously discussed, 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 varying 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 June
30, 2011. Actual losses did not exceed daily trading VaR in the twelve months ended June 30, 2011
and 2010. 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. The three years of historical market data through June 30, 2011
includes the stressed fourth quarter of 2008. Recent market volatility has not approached the
volatility in fourth quarter of 2008 and actual losses have therefore not exceeded VaR.
Trading Risk and Return
Daily Trading-related Revenue VaR
Daily Trading-related Revenue VaR
113
Table of Contents
Table 61 presents average, high and low daily trading VaR for the three months ended
June 30, 2011, March 31, 2011 and June 30, 2010, as well as average daily trading VaR for the six
months ended June 30, 2011 and 2010.
Table 61
Trading Activities Market Risk VaR
Trading Activities Market Risk VaR
| Three Months Ended | Three Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||||||
| June 30, 2011 | March 31, 2011 | June 30, 2010 | June 30 | |||||||||||||||||||||||||||||||||||||||||
| 2011 | 2010 | |||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Average | High (1) | Low (1) | Average | High (1) | Low (1) | Average | High (1) | Low (1) | Average | Average | |||||||||||||||||||||||||||||||||
|
Foreign exchange
|
$ | 14.3 | $ | 34.6 | $ | 6.0 | $ | 28.7 | $ | 48.6 | $ | 13.2 | $ | 21.5 | $ | 63.0 | $ | 6.6 | $ | 21.4 | $ | 34.5 | ||||||||||||||||||||||
|
Interest rate
|
63.6 | 76.6 | 49.5 | 48.7 | 73.1 | 33.2 | 56.4 | 89.7 | 38.4 | 56.2 | 60.0 | |||||||||||||||||||||||||||||||||
|
Credit
|
133.6 | 155.3 | 97.3 | 138.3 | 154.4 | 120.7 | 175.8 | 216.2 | 146.8 | 135.9 | 191.8 | |||||||||||||||||||||||||||||||||
|
Real estate/mortgage
|
100.2 | 138.9 | 72.5 | 93.7 | 139.5 | 73.9 | 71.0 | 80.2 | 63.5 | 97.0 | 67.4 | |||||||||||||||||||||||||||||||||
|
Equities
|
55.2 | 79.5 | 32.1 | 50.1 | 82.8 | 25.1 | 36.6 | 68.1 | 20.9 | 52.7 | 49.7 | |||||||||||||||||||||||||||||||||
|
Commodities
|
23.7 | 33.8 | 15.9 | 23.9 | 29.5 | 17.9 | 23.2 | 31.7 | 14.0 | 23.8 | 22.7 | |||||||||||||||||||||||||||||||||
|
Portfolio diversification
|
(161.4 | ) | - | - | (199.5 | ) | - | - | (195.5 | ) | - | - | (180.3 | ) | (194.4 | ) | ||||||||||||||||||||||||||||
|
Total market-based trading
portfolio |
$ | 229.2 | $ | 318.6 | $ | 140.9 | $ | 183.9 | $ | 260.5 | $ | 140.3 | $ | 189.0 | $ | 296.3 | $ | 123.0 | $ | 206.7 | $ | 231.7 | ||||||||||||||||||||||
| (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 increase in average VaR for the three months ended June 30, 2011 compared to March
31, 2011 was primarily due to a reduction in portfolio diversification and increases in the
exposure in our equities and interest rate categories.
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 pre-defined 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 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 and incorporated into the limits framework. A
process has been established to promote 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 69.
Interest Rate Risk Management for Nontrading Activities
Interest rate risk represents the most significant market risk exposure to our
nontrading balance sheet. 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.
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 baseline forecast in order to assess
interest rate sensitivity under varied conditions. The core net interest income forecast is
frequently updated for changing assumptions and differing outlooks based on economic trends,
market conditions and business strategies. Thus, we continually monitor our balance sheet position
in an effort to maintain an acceptable level of exposure to interest rate changes.
The interest rate scenarios that we analyze incorporate balance sheet assumptions such as
loan and deposit growth and pricing, changes in funding mix, product repricing and maturity
characteristics, but do not include the impact of hedge ineffectiveness. Our overall goal is to
manage interest rate risk so that movements in interest rates do not adversely affect core net
interest income.
114
Table of Contents
Periodically, we evaluate the scenarios presented to ensure that they provide a comprehensive
view of the Corporation’s interest rate risk exposure and are meaningful in the context of the
current rate environment. Given the low level of short-end rates, we have determined that gradual
downward shifts of 50 bps applied to the short-end of the market-based forward curve provide a
more realistic view of potential exposure resulting from changes in interest rates. This replaced
the 100 bps downward shift scenarios applied to the short-end of the market-based forward curve
previously presented. In addition, a long-end flattener of (50) bps was added for comparability
purposes.
The spot and 12-month forward monthly rates used in our baseline forecasts at June 30, 2011
and December 31, 2010 are presented in
Table 62.
Table 62
Forward Rates
Forward Rates
| June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
| Three-month | Three-month | |||||||||||||||||||||||
| Federal Funds | LIBOR | 10-Year Swap | Federal Funds | LIBOR | 10-Year Swap | |||||||||||||||||||
|
Spot rates
|
0.25 | % | 0.25 | % | 3.28 | % | 0.25 | % | 0.30 | % | 3.39 | % | ||||||||||||
|
12-month forward rates
|
0.25 | 0.61 | 3.73 | 0.25 | 0.72 | 3.86 | ||||||||||||||||||
Table 63 shows the pre-tax dollar impact to forecasted core net interest income over
the next twelve months from June 30, 2011 and December 31, 2010, resulting from gradual parallel
and non-parallel shocks to the market-based forward curve. For further discussion of core net
interest income, see page 23.
Table 63
Estimated Core Net Interest Income
Estimated Core Net Interest Income
| (Dollars in millions) | June 30 | December 31 | ||||||||||||||
| Curve Change | Short Rate (bps) | Long Rate (bps) | 2011 | 2010 | ||||||||||||
|
+100 bps Parallel shift
|
+100 | +100 | $ | 597 | $ | 601 | ||||||||||
|
-50 bps Parallel shift
|
-50 | -50 | (720 | ) | (499 | ) | ||||||||||
|
Flatteners
|
||||||||||||||||
|
Short end
|
+100 | - | 60 | 136 | ||||||||||||
|
Long end
|
- | -50 | (400 | ) | (280 | ) | ||||||||||
|
Long end
|
- | -100 | (901 | ) | (637 | ) | ||||||||||
|
Steepeners
|
||||||||||||||||
|
Short end
|
-50 | - | (319 | ) | (209 | ) | ||||||||||
|
Long end
|
- | +100 | 542 | 493 | ||||||||||||
The sensitivity analysis in Table 63 assumes that we take no action in response to
these rate shifts over the indicated periods. Our core net interest income was asset sensitive to
a parallel move in interest rates at both June 30, 2011 and December 31, 2010. As part of our ALM
activities, we use securities, residential mortgages, and interest rate and foreign exchange
derivatives in managing interest rate sensitivity.
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 U.S. Treasury, corporate,
municipal and other debt securities. At June 30, 2011 and December 31, 2010, we held AFS debt
securities of $330.9 billion and $337.6 billion with a weighted-average duration of 4.5 years and
4.9 years, and primarily relates to our MBS and U.S. Treasury portfolio. During the three months
ended June 30, 2011 and 2010, we purchased AFS debt securities of $36.4 billion and $34.8 billion,
sold $29.1 billion and $28.3 billion, and had maturities and received paydowns of $11.0 billion
and $17.8 billion. We realized $899 million and $37 million in net gains on sales of debt
securities during the three months ended June 30, 2011 and 2010. There were no residential
mortgage loans securitized into MBS for the three months ended June 30, 2011 compared to $436
million during the same period in 2010, which we retained within the HFI portfolio.
During the six months ended June 30, 2011 and 2010, we purchased AFS debt securities of $59.8
billion and $99.7 billion, sold $40.0 billion and $62.6 billion, and had maturities and received
paydowns of $28.7 billion and $36.5 billion. We realized $1.4 billion and $771 million in net
gains on sales of debt securities during the six months ended June 30, 2011
and 2010. There were no residential mortgage loans securitized into MBS for the six months ended
June 30, 2011 compared to $2.1 billion during the same period in 2010, which we retained within
the HFI portfolio.
Accumulated OCI includes after-tax net unrealized gains of $8.1 billion and $2.9 billion at
June 30, 2011 and 2010, comprised primarily of after-tax net unrealized gains of nearly $1.6
billion and $2.9 billion related to AFS debt securities
115
Table of Contents
and after-tax net unrealized gains of $6.5
billion and after-tax net unrealized losses of $1 million related to AFS equity securities. The
amount of pre-tax accumulated OCI related to AFS debt securities increased by $2.4 billion and
$1.4 billion during the three and six months ended June 30, 2011 to $2.5 billion primarily due to
lower interest rates.
We recognized $45 million and $133 million of other-than-temporary impairment (OTTI) losses
through earnings on AFS debt securities in the three and six months ended June 30, 2011 compared
to $126 million and $727 million for the same periods in 2010. There were no recognized OTTI
losses on AFS marketable equity securities during the six months ended June 30, 2011 compared to
$3 million for the same period in 2010.
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 amortized cost, the financial condition of the issuer of the security including credit
ratings and the specific events affecting the operations of the issuer, 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 not more-likely-than-not that we will 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 June 30, 2011 are
other-than-temporarily impaired.
Residential Mortgage Portfolio
At June 30, 2011 and December 31, 2010, our residential mortgage portfolio was $267.5
billion (which includes $1.2 billion in residential mortgage loans accounted for under the fair
value option) and $258.0 billion. For more information on consumer fair value option loans, refer
to Consumer Credit Portfolio on page 76. During the three months ended June 30, 2011 and 2010, we
retained $13.0 billion and $8.8 billion in first mortgages originated by
CRES
and
GWIM
.
Outstanding residential mortgage loans increased $9.5 billion at June 30, 2011 compared to
December 31, 2010 as new origination volume, which is primarily fully-insured, was partially
offset by paydowns, charge-offs and transfers to foreclosed properties. In addition, the $7.5
billion repurchases of FHA delinquent loans pursuant to our servicing agreements with GNMA also
increased the residential mortgage portfolio during the six months ended June 30, 2011. There were
no loans securitized during the three months ended June 30, 2011 compared to $436 million of
residential mortgage loans securitized into MBS which we retained for the same period in 2010. We
recognized gains of $23 million on securitizations completed during the three months ended June
30, 2010. For more information on these securitizations, see
Note 8 – Securitizations and Other
Variable Interest Entities
to the Consolidated Financial Statements. There were no purchases of
residential mortgages related to ALM activities during the three months ended June 30, 2011 and
2010. We sold $50 million of residential mortgages during the three months ended June 30, 2011,
all of which consisted of originated residential mortgages. This compares to sales of $41 million
of residential mortgages during the three months ended June 30, 2010, all of which were originated
residential mortgages. Net gains on these transactions were minimal. We received paydowns of $8.5
billion and $8.2 billion in the three months ended June 2011 and 2010.
We retained $23.8 billion and $19.7 billion in first mortgages originated by
CRES
and
GWIM
during the six months ended June 30, 2011 and 2010. There were no loans securitized during the six
months ended June 30, 2011 compared to $2.1 billion of residential mortgage loans securitized into
MBS which we retained during the six months ended June 30, 2010. We recognized gains of $61
million on the securitizations completed during the six months ended June 30, 2010. There were no
purchases of residential mortgages related to ALM activities during the six months ended June 30,
2011 and 2010. We sold $73 million of residential mortgages during the six months ended June 30,
2011, all of which consisted of originated residential mortgages. We sold $283 million of
residential mortgages during both the six months ended June 30, 2011 and 2010, of which $272 million were
originated residential mortgages and $11 million were previously purchased from third parties. Net
gains on these transactions were minimal. We received paydowns of $20.3 billion and $16.5 billion
in the six months ended June 30, 2011 and 2010.
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.
116
Table of Contents
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, foreign currency forward contracts and
options to mitigate the foreign exchange risk associated with foreign currency-denominated assets
and liabilities.
Changes to the composition of our derivatives portfolio during the three months ended June
30, 2011 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 and foreign currency environments,
balance sheet composition and trends, and the relative mix of our cash and derivative positions.
117
Table of Contents
Table 64 includes derivatives utilized in our ALM activities including those designated as
accounting and economic hedging instruments and shows the notional amount, fair value,
weighted-average receive-fixed and pay-fixed rates, expected maturity and estimated duration of
our open ALM derivatives at June 30, 2011 and December 31, 2010. These amounts do not include
derivative hedges on our MSRs.
Table 64
Asset and Liability Management Interest Rate and Foreign Exchange Contracts
Asset and Liability Management Interest Rate and Foreign Exchange Contracts
| June 30, 2011 | ||||||||||||||||||||||||||||||||||||
| Expected Maturity | ||||||||||||||||||||||||||||||||||||
| Average | ||||||||||||||||||||||||||||||||||||
| (Dollars in millions, average | Fair | Estimated | ||||||||||||||||||||||||||||||||||
| estimated duration in years) | Value | Total | 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Duration | |||||||||||||||||||||||||||
|
Receive-fixed interest rate swaps
(1,
2)
|
$ | 7,499 | 5.12 | |||||||||||||||||||||||||||||||||
|
Notional amount
|
$ | 100,235 | $ | - | $ | 23,422 | $ | 7,769 | $ | 7,713 | $ | 10,788 | $ | 50,543 | ||||||||||||||||||||||
|
Weighted-average fixed-rate
|
4.18 | % | - | % | 2.60 | % | 3.85 | % | 3.88 | % | 4.01 | % | 5.04 | % | ||||||||||||||||||||||
|
Pay-fixed interest rate swaps
(1, 2)
|
(4,076 | ) | 11.12 | |||||||||||||||||||||||||||||||||
|
Notional amount
|
$ | 98,435 | $ | - | $ | 2,550 | $ | 1,435 | $ | 3,077 | $ | 17,436 | $ | 73,937 | ||||||||||||||||||||||
|
Weighted-average fixed-rate
|
3.40 | % | - | % | 1.48 | % | 2.50 | % | 2.17 | % | 2.52 | % | 3.74 | % | ||||||||||||||||||||||
|
Same-currency basis swaps
(3)
|
5 | |||||||||||||||||||||||||||||||||||
|
Notional amount
|
$ | 171,907 | $ | 9,422 | $ | 49,766 | $ | 45,383 | $ | 24,357 | $ | 14,854 | $ | 28,125 | ||||||||||||||||||||||
|
Foreign exchange basis swaps
(2, 4,
5)
|
7,189 | |||||||||||||||||||||||||||||||||||
|
Notional amount
|
269,034 | 15,724 | 46,746 | 45,615 | 56,387 | 25,884 | 78,678 | |||||||||||||||||||||||||||||
|
Option products
(6)
|
(133 | ) | ||||||||||||||||||||||||||||||||||
|
Notional amount
(8)
|
10,944 | 3,100 | 1,500 | 2,252 | 600 | 300 | 3,192 | |||||||||||||||||||||||||||||
|
Foreign exchange contracts
(2, 5, 7)
|
2,735 | |||||||||||||||||||||||||||||||||||
|
Notional amount
(8)
|
35,608 | (11,410 | ) | 5,792 | 7,966 | 11,156 | 2,212 | 19,892 | ||||||||||||||||||||||||||||
|
Futures and forward rate contracts
|
24 | |||||||||||||||||||||||||||||||||||
|
Notional amount
(8)
|
2,086 | 2,086 | - | - | - | - | - | |||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Net ALM contracts
|
$ | 13,243 | ||||||||||||||||||||||||||||||||||
| December 31, 2010 | ||||||||||||||||||||||||||||||||||||
| Expected Maturity | ||||||||||||||||||||||||||||||||||||
|
|
Average | |||||||||||||||||||||||||||||||||||
|
(Dollars in millions, average
|
Fair | Estimated | ||||||||||||||||||||||||||||||||||
|
estimated duration in years)
|
Value | Total | 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Duration | |||||||||||||||||||||||||||
|
Receive-fixed interest rate swaps
(1,
2)
|
$ | 7,364 | 4.45 | |||||||||||||||||||||||||||||||||
|
Notional amount
|
$ | 104,949 | $ | 8 | $ | 36,201 | $ | 7,909 | $ | 7,270 | $ | 8,094 | $ | 45,467 | ||||||||||||||||||||||
|
Weighted-average fixed-rate
|
3.94 | % | 1.00 | % | 2.49 | % | 3.90 | % | 3.66 | % | 3.71 | % | 5.19 | % | ||||||||||||||||||||||
|
Pay-fixed interest rate swaps
(1, 2)
|
(3,827 | ) | 6.03 | |||||||||||||||||||||||||||||||||
|
Notional amount
|
$ | 156,067 | $ | 50,810 | $ | 16,205 | $ | 1,207 | $ | 4,712 | $ | 10,933 | $ | 72,200 | ||||||||||||||||||||||
|
Weighted-average fixed-rate
|
3.02 | % | 2.37 | % | 2.15 | % | 2.88 | % | 2.40 | % | 2.75 | % | 3.76 | % | ||||||||||||||||||||||
|
Same-currency basis swaps
(3)
|
103 | |||||||||||||||||||||||||||||||||||
|
Notional amount
|
$ | 152,849 | $ | 13,449 | $ | 49,509 | $ | 31,503 | $ | 21,085 | $ | 11,431 | $ | 25,872 | ||||||||||||||||||||||
|
Foreign exchange basis swaps
(2, 4,
5)
|
4,830 | |||||||||||||||||||||||||||||||||||
|
Notional amount
|
235,164 | 21,936 | 39,365 | 46,380 | 41,003 | 23,430 | 63,050 | |||||||||||||||||||||||||||||
|
Option products
(6)
|
(120 | ) | ||||||||||||||||||||||||||||||||||
|
Notional amount
(8)
|
6,572 | (1,180 | ) | 2,092 | 2,390 | 603 | 311 | 2,356 | ||||||||||||||||||||||||||||
|
Foreign exchange contracts
(2, 5, 7)
|
4,272 | |||||||||||||||||||||||||||||||||||
|
Notional amount
(8)
|
109,544 | 59,508 | 5,427 | 10,048 | 13,035 | 2,372 | 19,154 | |||||||||||||||||||||||||||||
|
Futures and forward rate contracts
|
(21 | ) | ||||||||||||||||||||||||||||||||||
|
Notional amount
(8)
|
(280 | ) | (280 | ) | - | - | - | - | - | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Net ALM contracts
|
$ | 12,601 | ||||||||||||||||||||||||||||||||||
| (1) |
At June 30, 2011 and December 31, 2010, the receive-fixed interest rate swap notional amounts that represented forward starting swaps and which will not be effective until
their respective contractual start dates were $1.7 billion. The forward starting pay-fixed swap positions at June 30, 2011 and December 31, 2010 were $25.1 billion and
$34.5 billion.
|
|
| (2) |
Does not include basis adjustments on either fixed-rate debt issued by the Corporation or AFS debt securities which are hedged using derivatives designated as fair value
hedging instruments that substantially offset the fair values of these derivatives.
|
|
| (3) |
At June 30, 2011 and December 31, 2010, same-currency basis swaps consisted of $171.9 billion and $152.8 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 consisted 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 non-U.S. debt issued by the Corporation that substantially offset the fair values of these derivatives.
|
|
| (6) |
Option products of $10.9 billion at June 30, 2011 were comprised of $43 million in purchased caps/floors, $8.0 billion in swaptions and $2.9 billion of foreign exchange
options. Option products of $6.6 billion at December 31, 2010 were comprised of $160 million in purchased caps/floors, $8.2 billion in swaptions and $(1.8) billion in
foreign exchange options.
|
|
| (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 $47.0 billion in foreign currency-denominated and cross-currency receive-fixed swaps and ($11.4) billion in net foreign currency
forward rate contracts at June 30, 2011, and $57.6 billion in foreign currency-denominated and cross-currency receive-fixed swaps and $52.0 billion in foreign currency
forward rate contracts at December 31, 2010.
|
|
| (8) |
Reflects the net of long and short positions.
|
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We use interest rate derivative instruments to hedge the variability in the cash flows
of our assets and liabilities 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 $3.3 billion and $3.2 billion at June 30, 2011 and December 31,
2010. 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
in prices or interest rates beyond what is implied in forward yield curves at June 30, 2011, the
pre-tax net losses are expected to be reclassified into earnings as follows: $1.7 billion, or 33
percent, within the next year, 81 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.
We hedge our net investment in non-U.S. 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 losses on derivatives and foreign
currency-denominated debt in accumulated OCI associated with net investment hedges which were
offset by gains on our net investments in consolidated non-U.S. entities at June 30, 2011.
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 HFI 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 June 30, 2011 and December 31, 2010, the notional amount
of derivatives economically hedging the IRLCs and residential first mortgage LHFS was $66.8
billion and $129.0 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 rate agreements, Eurodollar and U.S. Treasury 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
were $2.3 trillion and $52.5 billion at June 30, 2011 and $1.6 trillion and $60.3 billion at
December 31, 2010. For the three and six months ended June 30, 2011, we recorded gains in mortgage
banking income of $1.5 billion and $1.3 billion related to the change in fair value of these
economic hedges compared to gains of $4.0 billion and $4.9 billion for the same periods in 2010.
For additional information on MSRs, see
Note 19 – Mortgage Servicing Rights
to the Consolidated
Financial Statements and for more information on mortgage banking income, see
Consumer Real Estate
Services
on page 35.
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.
We approach compliance risk management on an enterprise and line of business level. The
Operational and Compliance Risk Committee, which is a sub-committee of the Operational Risk
Committee (ORC), provides oversight of significant compliance risk issues. Global Compliance Risk
Management develops and implements the strategies, policies and practices for assessing and
managing compliance risks across the organization. The lines of business are responsible for all
the risks within the business line, including compliance risk. For more information on our
Compliance Risk Management activities, refer to page 106 of the MD&A of the Corporation’s 2010
Annual Report on Form 10-K.
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Table of Contents
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. Operational risk includes legal 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. Global banking guidelines and
country-specific requirements for managing operational risk were established in Basel II which
requires that banks have internal operational risk management processes to assess and measure
operational risk exposure and to set aside appropriate capital to address those exposures.
We approach operational risk management from two perspectives to best manage operational risk
within the structure of the Corporation: (1) at the enterprise level to provide independent,
integrated management of operational risk across the organization, and (2) at the line of business
and enterprise control function levels to address operational risk in revenue producing and
non-revenue producing units. A sound internal governance structure ensures the effectiveness of
the Corporation’s Operational Risk Management Program and is accomplished at the enterprise level
through formal oversight by the Board, the Chief Risk Officer and a variety of management
committees and risk oversight groups aligned to the Corporation’s overall risk governance
framework and practices. Of these, the ORC oversees and approves the Corporation’s policies and
processes to assure sound operational and compliance risk management. The ORC also serves as an
escalation point for critical operational risk and compliance matters within the Corporation. The
ORC reports operational risk activities to the Enterprise Risk Committee of the Board.
Within the Global Risk Management organization, the Corporate Operational Risk team develops
and guides the strategies, policies, practices, controls and monitoring tools for assessing and
managing operational risks across the organization and reports results to the lines of business,
enterprise control functions, senior management, governance committees and the Board.
Each line of business and enterprise control function is responsible for all risks within
their respective line of business, including operational risks. In addition to enterprise risk
management tools such as loss reporting, scenario analysis and risk and control self-assessments,
independent operational risk executives, working in conjunction with senior line of business
executives, have developed key tools to proactively identify, measure, mitigate and monitor risk
specific to each line of business and enterprise control function.
Independent review and challenge to the Corporation’s overall operational risk management
framework is performed by the Corporate Operational Risk Validation Team, Compliance and Internal
Audit.
For more information on our operational risk management activities, refer to pages 106
through 107 of the MD&A of the Corporation’s 2010 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 Corporation’s 2010 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.
We have identified and described the development of the variables most important in the
estimation processes that 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 our operating results. Separate from the possible
future impact to our operating results 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.
For additional information, see Complex Accounting Estimates on page 107 of the MD&A of the
Corporation’s 2010 Annual Report on Form 10-K.
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Table of Contents
Level 3 Assets and Liabilities
Financial assets and liabilities whose values are based on 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 consumer MSRs, highly
structured, complex or long-dated derivative contracts, ABS, structured notes, certain CDOs and
private equity investments 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 six months ended June 30, 2011,
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.
Table 65
Level 3 Asset and Liability Summary
Level 3 Asset and Liability Summary
| June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
| As a % | As a % | |||||||||||||||||||||||
| of Total | As a % | of Total | As a % | |||||||||||||||||||||
| Level 3 | Level 3 | of Total | Level 3 | Level 3 | of Total | |||||||||||||||||||
| (Dollars in millions) | Fair Value | Assets | Assets | Fair Value | Assets | Assets | ||||||||||||||||||
|
Trading account assets
|
$ | 14,024 | 19.16 | % | 0.62 | % | $ | 15,525 | 19.56 | % | 0.69 | % | ||||||||||||
|
Derivative assets
|
15,214 | 20.79 | 0.67 | 18,773 | 23.65 | 0.83 | ||||||||||||||||||
|
AFS debt securities
|
13,462 | 18.40 | 0.60 | 15,873 | 19.99 | 0.70 | ||||||||||||||||||
|
All other Level 3 assets at fair value
|
30,476 | 41.65 | 1.35 | 29,217 | 36.80 | 1.29 | ||||||||||||||||||
|
Total Level 3 assets at fair value
(1)
|
$ | 73,176 | 100.00 | % | 3.24 | % | $ | 79,388 | 100.00 | % | 3.51 | % | ||||||||||||
| As a % | As a % | |||||||||||||||||||||||
| of Total | As a % | of Total | As a % | |||||||||||||||||||||
| Level 3 | Level 3 | of Total | Level 3 | Level 3 | of Total | |||||||||||||||||||
| Fair Value | Liabilities | Liabilities | Fair Value | Liabilities | Liabilities | |||||||||||||||||||
|
Derivative liabilities
|
$ | 9,796 | 66.62 | % | 0.48 | % | $ | 11,028 | 70.90 | % | 0.54 | % | ||||||||||||
|
Long-term debt
|
3,324 | 22.61 | 0.16 | 2,986 | 19.20 | 0.15 | ||||||||||||||||||
|
All other Level 3 liabilities at fair value
|
1,584 | 10.77 | 0.08 | 1,541 | 9.90 | 0.07 | ||||||||||||||||||
|
Total Level 3 liabilities at fair value
(1)
|
$ | 14,704 | 100.00 | % | 0.72 | % | $ | 15,555 | 100.00 | % | 0.76 | % | ||||||||||||
| (1) |
Level 3 total assets and liabilities are shown before the impact of counterparty
netting related to our derivative positions.
|
During the three and six months ended June 30, 2011, we recognized net losses of $158
million and net gains of $2.1 billion on Level 3 assets and liabilities. The net losses during the
three months ended June 30, 2011 were primarily related to MSRs due to valuation charges during
the quarter. These losses were partially offset by gains on trading account assets combined with
gains on net derivatives. The net gains during the six months ended June 30, 2011 were primarily
related to strong trading account asset gains in the first quarter of 2011 combined with gains on
net derivatives driven by income earned on IRLCs. These gains were partially offset by losses on
MSRs. We also recorded pre-tax net unrealized losses of $42 million and $0 in accumulated OCI on
Level 3 assets and liabilities during the three and six months ended June 30, 2011, primarily
related to other taxable and tax-exempt securities.
Level 3 financial instruments, such as our consumer MSRs, may be economically hedged with
derivatives classified as Level 1 or 2; 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 Level 3 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 considered to be effective as of the
beginning of the quarter in which they occur.
During the three months ended June 30, 2011, there were no significant transfers into or out
of Level 3.
During the six months ended June 30, 2011, the more significant transfers into Level 3
included $939 million of trading account assets and $1.0 billion of long-term debt accounted for
under the fair value option. Transfers into Level 3 for trading account assets were primarily
driven by certain collateralized loan obligations which were transferred into Level 3 due
to a lack of pricing transparency. Transfers into Level 3 for long-term debt were the result of an
increase in unobservable inputs used in the pricing of certain equity-linked structured notes.
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Table of Contents
During the six months ended June 30, 2011, the more significant transfers out of Level 3
included $749 million of trading account assets and $1.6 billion of other assets. Transfers out of
Level 3 for trading account assets were primarily driven by increased price observability on
certain RMBS and consumer ABS portfolios. Transfers out of Level 3 for other assets were the
result of an IPO of an equity investment which occurred in the first quarter of 2011.
Goodwill and Intangible Assets
Background
The
nature of and accounting for goodwill and intangible assets are discussed in
Note 1 —
Summary of Significant Accounting Principles
and
Note 10 – Goodwill and Intangible Assets
to the
Consolidated Financial Statements of the Corporation’s 2010 Annual Report on Form 10-K as well as
Complex Accounting Estimates on page 107 of the MD&A of the Corporation’s 2010 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, and in interim periods if events or
circumstances indicate a potential impairment. A reporting unit is an operating 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.
We use the reporting units’ allocated equity as a proxy for the carrying amount of equity for
each reporting unit in our goodwill impairment tests as we do not maintain a record of equity as
defined under GAAP at the reporting unit level. Allocated equity includes economic capital,
goodwill and a percentage of intangible assets allocated to the reporting units. The allocation of
economic capital to the reporting units utilized for goodwill impairment testing has the same basis
as the allocation of economic capital to our operating segments. Economic capital allocation plans
are incorporated into the Corporation’s operating plan which is approved by the Board on an annual
basis. Allocated equity is updated on a quarterly basis.
We are in the process of completing our annual impairment test for all reporting units as of
June 30, 2011. We performed an impairment test for
CRES
and
Global Card Services
during the three
months ended June 30, 2011 as discussed below.
2010 Goodwill Impairment Testing
Due
to continued stress on
Global Card Services
and the uncertain debit card interchange provisions
under the Financial Reform Act, we concluded that an additional impairment analysis should be
performed for this reporting unit during the third quarter of 2010. Based on the results of this
goodwill impairment test for
Global Card Services
, we determined that goodwill was impaired for
this reporting unit and recorded a non-cash, non-tax deductible goodwill impairment charge of
$10.4 billion during the three months ended September 30, 2010.
During the fourth quarter of 2010, we performed an impairment test for the
CRES
reporting unit
as it was likely that there was a decline in its fair value as a result of increased uncertainties
and risks in the mortgage business. Based on the results of the fourth quarter 2010 goodwill
impairment test for
CRES,
we determined that goodwill was impaired for this reporting unit and
recorded a non-cash, non-tax deductible goodwill impairment charge of $2.0 billion as of December
31, 2010.
Second Quarter 2011 Goodwill Impairment Test
During the three months ended June 30, 2011, we performed an impairment test for the
CRES
reporting unit as a consequence of the BNY Mellon Settlement we entered into on June 28, 2011, the
adverse impact of the incremental mortgage-related charges recorded during the three months ended
June 30, 2011 and the continued economic slowdown in the mortgage business. Based on the results
of this test, we concluded that the remaining goodwill balance of
$2.6 billion was impaired.
Accordingly, we recorded a non-cash, non-tax deductible goodwill
impairment charge of $2.6 billion during the three months ended June 30, 2011
to reduce the carrying value of the goodwill in
CRES
to zero.
On June 29, 2011, the Federal Reserve issued a final rule which will be effective October 1,
2011 that establishes debit card interchange fees in connection with the Durbin Amendment of the
Financial Reform Act. The rate expected to be earned is higher than our original estimate used in
our previous goodwill impairment tests. While we expected that the increased interchange fees
allowed under the final rule would increase the estimated fair value of
Global Card Services
, we
performed an impairment analysis for this reporting unit during the three months ended June 30,
2011.
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In step one of the goodwill impairment test, the fair value of
Global Card Services
was
estimated using the income approach. The significant assumptions under the income approach
included the discount rate, terminal value, cash flow estimates and expected new account growth.
The step one fair value estimate also included the impact of the Federal Reserve’s final rule on
debit card interchange fees. At June 30, 2011, the carrying amount, fair value and goodwill for
the
Global Card Services
reporting unit were $24.8 billion, $37.3 billion and $11.9 billion,
respectively. The estimated fair value as a percent of the carrying amount was 150 percent.
Although the fair value exceeded the carrying amount in step one of the
Global Card Services
goodwill impairment test, to further substantiate the value of goodwill, we also performed step
two for this reporting unit. Under step two of the goodwill impairment test, significant
assumptions in measuring the fair value of the assets and liabilities of the reporting unit
including discount rates, loss rates and interest rates were updated to reflect the current
economic conditions. The results of step two of the goodwill impairment test indicated that the
remaining balance of goodwill of $11.9 billion was not impaired as of June 30, 2011. Given the
recent Federal Reserve rulemaking and improved economic environment, the uncertainty concerning
the recoverability of
Global Card Services
goodwill has been significantly reduced.
Representations and Warranties
The methodology used to estimate the liability for obligations under representations
and warranties related to transfers of residential mortgage loans is a function of the
representations and warranties given and considers a variety of factors. Depending upon the
counterparty, these factors include actual defaults, estimated future defaults, historical loss
experience, estimated home prices, other economic conditions, estimated probability that we will
receive a repurchase request, including consideration of whether presentation thresholds will be
met, number of payments made by the borrower prior to default, estimated probability that we will
be required to repurchase a loan and the experience with and the behavior of the counterparty. It
also considers bulk settlements, as appropriate. The estimate of the liability for obligations
under representations and warranties is based upon currently available information, significant
judgment, and a number of factors, including those set forth above, that are subject to change.
Changes to any one of these factors could significantly impact the estimate of our liability.
The provision for representations and warranties 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. The estimated range of possible loss related to non-GSE
representations and warranties exposure has been disclosed. However, we are not currently able to
reasonably estimate the possible loss or range of possible loss with respect to any such potential
impact in excess of current reserves on future GSE provisions if the behavior of the GSEs changes
from past experience. For the GSE claims where we have established a representations and
warranties liability as discussed in
Note 9 – Representations and Warranties Obligations and
Corporate Guarantees
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 of approximately $829 million or decrease of approximately $710
million in the representations and warranties liability as of June 30, 2011. Viewed from the
perspective of home prices, for each one percent change in home prices, the liability for
representations and warranties on unsettled GSE originations is estimated to be impacted by $125
million based on projected collateral losses and defect rates. 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 51, as well as
Note 9 – Representations and Warranties Obligations and Corporate Guarantees
and
Note 11 –
Commitments and Contingencies
to the Consolidated Financial Statements.
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Table of Contents
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 clients. 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.
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.
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 FTE 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 on February 22,
2010, while certain provisions became effective in the third quarter of 2010.
Credit Default Swap
– 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.
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 issuer’s 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 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.
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.
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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, PCI loans and LHFS 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, which
include loans insured by the FHA and individually insured long-term credit protection agreements
with FNMA and FHLMC (fully-insured loan portfolio), are not placed on nonaccrual status and are,
therefore, not reported as nonperforming loans and leases.
Purchased Credit-impaired (PCI) 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 recorded at fair value upon
acquisition.
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, 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.
Tier 1 Common Capital
– Tier 1 capital including any CES, less preferred stock, qualifying trust
preferred securities, hybrid securities and qualifying noncontrolling interest in subsidiaries.
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 generally
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
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. A VaR model is an effective tool in estimating ranges of
potential gains and losses on our trading portfolios and is a key statistic used to measure and
manage market risk.
125
Table of Contents
Acronyms
|
ABS
|
Asset-backed securities | |
|
AFS
|
Available-for-sale | |
|
ALM
|
Asset and liability management | |
|
ALMRC
|
Asset Liability Market Risk Committee | |
|
ARM
|
Adjustable-rate mortgage | |
|
CDO
|
Collateralized debt obligation | |
|
CES
|
Common Equivalent Securities | |
|
CMBS
|
Commercial mortgage-backed securities | |
|
CRA
|
Community Reinvestment Act | |
|
CRC
|
Credit Risk Committee | |
|
DVA
|
Debit valuation adjustment | |
|
EAD
|
Exposure at default | |
|
FDIC
|
Federal Deposit Insurance Corporation | |
|
FFIEC
|
Federal Financial Institutions Examination Council | |
|
FHA
|
Federal Housing Administration | |
|
FHLMC
|
Freddie Mac | |
|
FICC
|
Fixed income, currencies and commodities | |
|
FICO
|
Fair Isaac Corporation (credit score) | |
|
FNMA
|
Fannie Mae | |
|
FTE
|
Fully taxable-equivalent | |
|
GAAP
|
Accounting principles generally accepted in the United States of America | |
|
GNMA
|
Government National Mortgage Association | |
|
GRC
|
Global Markets Risk Committee | |
|
GSE
|
Government-sponsored enterprise | |
|
HFI
|
Held-for-investment | |
|
HPI
|
Home Price Index | |
|
HUD
|
U.S. Department of Housing and Urban Development | |
|
IPO
|
Initial public offering | |
|
LCR
|
Liquidity Coverage Ratio | |
|
LGD
|
Loss given default | |
|
LHFS
|
Loans held-for-sale | |
|
LIBOR
|
London InterBank Offered Rate | |
|
MBS
|
Mortgage-backed securities | |
|
MD&A
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
|
MSA
|
Metropolitan Statistical Area | |
|
NSFR
|
Net Stable Funding Ratio | |
|
OCC
|
Office of the Comptroller of the Currency | |
|
OCI
|
Other comprehensive income | |
|
ORC
|
Operational Risk Committee | |
|
OTC
|
Over-the-counter | |
|
OTTI
|
Other-than-temporary impairment | |
|
RMBS
|
Residential mortgage-backed securities | |
|
ROTE
|
Return on average tangible shareholders’ equity | |
|
SBLCs
|
Standby letters of credit | |
|
SEC
|
Securities and Exchange Commission | |
|
TLGP
|
Temporary Liquidity Guarantee Program |
126
Table of Contents
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See
Market Risk Management on page 111 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 Corporation’s management, including the
Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness
and design of the Corporation’s disclosure controls and procedures (as that term is defined in
Rule 13a-15(e) of the Exchange Act). Based upon that evaluation, the Corporation’s Chief Executive
Officer and Chief Financial Officer concluded that the Corporation’s 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 Commission’s rules and forms.
Changes in internal controls
There have been no changes in the Corporation’s internal control over financial
reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended June 30,
2011 that have materially affected or are reasonably likely to materially affect the Corporation’s
internal control over financial reporting.
127
Table of Contents
Bank of America Corporation and Subsidiaries
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
| (Dollars in millions, except per share information) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Interest income
|
||||||||||||||||
|
Loans and leases
|
$ | 11,320 | $ | 12,887 | $ | 23,249 | $ | 26,362 | ||||||||
|
Debt securities
|
2,675 | 2,917 | 5,557 | 6,033 | ||||||||||||
|
Federal funds sold and securities borrowed or purchased under agreements to resell
|
597 | 457 | 1,114 | 905 | ||||||||||||
|
Trading account assets
|
1,538 | 1,796 | 3,164 | 3,539 | ||||||||||||
|
Other interest income
|
918 | 1,062 | 1,886 | 2,159 | ||||||||||||
|
Total interest income
|
17,048 | 19,119 | 34,970 | 38,998 | ||||||||||||
|
|
||||||||||||||||
|
Interest expense
|
||||||||||||||||
|
Deposits
|
843 | 1,031 | 1,682 | 2,153 | ||||||||||||
|
Short-term borrowings
|
1,341 | 891 | 2,525 | 1,709 | ||||||||||||
|
Trading account liabilities
|
627 | 715 | 1,254 | 1,375 | ||||||||||||
|
Long-term debt
|
2,991 | 3,582 | 6,084 | 7,112 | ||||||||||||
|
Total interest expense
|
5,802 | 6,219 | 11,545 | 12,349 | ||||||||||||
|
Net interest income
|
11,246 | 12,900 | 23,425 | 26,649 | ||||||||||||
|
|
||||||||||||||||
|
Noninterest income
|
||||||||||||||||
|
Card income
|
1,967 | 2,023 | 3,795 | 3,999 | ||||||||||||
|
Service charges
|
2,012 | 2,576 | 4,044 | 5,142 | ||||||||||||
|
Investment and brokerage services
|
3,009 | 2,994 | 6,110 | 6,019 | ||||||||||||
|
Investment banking income
|
1,684 | 1,319 | 3,262 | 2,559 | ||||||||||||
|
Equity investment income
|
1,212 | 2,766 | 2,687 | 3,391 | ||||||||||||
|
Trading account profits
|
2,091 | 1,227 | 4,813 | 6,463 | ||||||||||||
|
Mortgage banking income (loss)
|
(13,196 | ) | 898 | (12,566 | ) | 2,398 | ||||||||||
|
Insurance income
|
400 | 678 | 1,013 | 1,393 | ||||||||||||
|
Gains on sales of debt securities
|
899 | 37 | 1,445 | 771 | ||||||||||||
|
Other income
|
1,957 | 1,861 | 2,218 | 3,065 | ||||||||||||
|
Other-than-temporary impairment losses on available-for-sale debt securities:
|
||||||||||||||||
|
Total other-than-temporary impairment losses
|
(63 | ) | (462 | ) | (157 | ) | (1,783 | ) | ||||||||
|
Less: Portion of other-than-temporary impairment losses recognized in other
comprehensive income
|
18 | 336 | 24 | 1,056 | ||||||||||||
|
Net impairment losses recognized in earnings on available-for-sale debt securities
|
(45 | ) | (126 | ) | (133 | ) | (727 | ) | ||||||||
|
Total noninterest income
|
1,990 | 16,253 | 16,688 | 34,473 | ||||||||||||
|
Total revenue, net of interest expense
|
13,236 | 29,153 | 40,113 | 61,122 | ||||||||||||
|
|
||||||||||||||||
|
Provision for credit losses
|
3,255 | 8,105 | 7,069 | 17,910 | ||||||||||||
|
|
||||||||||||||||
|
Noninterest expense
|
||||||||||||||||
|
Personnel
|
9,171 | 8,789 | 19,339 | 17,947 | ||||||||||||
|
Occupancy
|
1,245 | 1,182 | 2,434 | 2,354 | ||||||||||||
|
Equipment
|
593 | 613 | 1,199 | 1,226 | ||||||||||||
|
Marketing
|
560 | 495 | 1,124 | 982 | ||||||||||||
|
Professional fees
|
766 | 644 | 1,412 | 1,161 | ||||||||||||
|
Amortization of intangibles
|
382 | 439 | 767 | 885 | ||||||||||||
|
Data processing
|
643 | 632 | 1,338 | 1,280 | ||||||||||||
|
Telecommunications
|
391 | 359 | 762 | 689 | ||||||||||||
|
Other general operating
|
6,343 | 3,592 | 11,800 | 7,475 | ||||||||||||
|
Goodwill impairment
|
2,603 | - | 2,603 | - | ||||||||||||
|
Merger and restructuring charges
|
159 | 508 | 361 | 1,029 | ||||||||||||
|
Total noninterest expense
|
22,856 | 17,253 | 43,139 | 35,028 | ||||||||||||
|
Income (loss) before income taxes
|
(12,875 | ) | 3,795 | (10,095 | ) | 8,184 | ||||||||||
|
Income tax expense (benefit)
|
(4,049 | ) | 672 | (3,318 | ) | 1,879 | ||||||||||
|
Net income (loss)
|
$ | (8,826 | ) | $ | 3,123 | $ | (6,777 | ) | $ | 6,305 | ||||||
|
Preferred stock dividends
|
301 | 340 | 611 | 688 | ||||||||||||
|
Net income (loss) applicable to common shareholders
|
$ | (9,127 | ) | $ | 2,783 | $ | (7,388 | ) | $ | 5,617 | ||||||
|
|
||||||||||||||||
|
Per common share information
|
||||||||||||||||
|
Earnings (loss)
|
$ | (0.90 | ) | $ | 0.28 | $ | (0.73 | ) | $ | 0.56 | ||||||
|
Diluted earnings (loss)
|
(0.90 | ) | 0.27 | (0.73 | ) | 0.55 | ||||||||||
|
Dividends paid
|
0.01 | 0.01 | 0.02 | 0.02 | ||||||||||||
|
Average common shares issued and outstanding (in thousands)
|
10,094,928 | 9,956,773 | 10,085,479 | 9,570,166 | ||||||||||||
|
Average diluted common shares issued and outstanding (in thousands)
|
10,094,928 | 10,029,776 | 10,085,479 | 10,020,926 | ||||||||||||
See accompanying Notes to Consolidated Financial Statements.
128
Table of Contents
Bank of America Corporation and Subsidiaries
Consolidated Balance Sheet
| June 30 | December 31 | |||||||
| (Dollars in millions) | 2011 | 2010 | ||||||
|
Assets
|
||||||||
|
Cash and cash equivalents
|
$ | 119,527 | $ | 108,427 | ||||
|
Time deposits placed and other short-term investments
|
20,291 | 26,433 | ||||||
|
Federal funds sold and securities borrowed or purchased under agreements to resell (includes
$95,115
and
$78,599 measured at fair value and
$233,257
and $209,249 pledged as collateral)
|
235,181 | 209,616 | ||||||
|
Trading account assets (includes
$16,928
and $42,221 pledged as collateral)
|
196,939 | 194,671 | ||||||
|
Derivative assets
|
66,598 | 73,000 | ||||||
|
Debt securities:
|
||||||||
|
Available-for-sale (includes
$80,262
and $99,925 pledged as collateral)
|
330,871 | 337,627 | ||||||
|
Held-to-maturity, at cost (fair value -
$181
and $427)
|
181 | 427 | ||||||
|
Total debt securities
|
331,052 | 338,054 | ||||||
|
Loans and leases (includes
$9,597
and $3,321 measured at fair value and
$65,923
and $91,730 pledged as collateral)
|
941,257 | 940,440 | ||||||
|
Allowance for loan and lease losses
|
(37,312 | ) | (41,885 | ) | ||||
|
Loans and leases, net of allowance
|
903,945 | 898,555 | ||||||
|
Premises and equipment, net
|
13,793 | 14,306 | ||||||
|
Mortgage servicing rights (includes
$12,372
and $14,900 measured at fair value)
|
12,642 | 15,177 | ||||||
|
Goodwill
|
71,074 | 73,861 | ||||||
|
Intangible assets
|
9,176 | 9,923 | ||||||
|
Loans held-for-sale (includes
$15,143
and $25,942 measured at fair value)
|
20,092 | 35,058 | ||||||
|
Customer and other receivables
|
86,550 | 85,704 | ||||||
|
Other assets (includes
$66,153
and $70,531 measured at fair value)
|
174,459 | 182,124 | ||||||
|
Total assets
|
$ | 2,261,319 | $ | 2,264,909 | ||||
|
|
||||||||
|
|
||||||||
|
|
||||||||
|
|
||||||||
|
Assets of consolidated VIEs included in total assets above (substantially all pledged as collateral)
|
||||||||
|
Trading account assets
|
$ | 10,746 | $ | 19,627 | ||||
|
Derivative assets
|
2,293 | 2,027 | ||||||
|
Available-for-sale debt securities
|
251 | 2,601 | ||||||
|
Loans and leases
|
151,928 | 145,469 | ||||||
|
Allowance for loan and lease losses
|
(6,367 | ) | (8,935 | ) | ||||
|
Loans and leases, net of allowance
|
145,561 | 136,534 | ||||||
|
Loans held-for-sale
|
1,561 | 1,953 | ||||||
|
All other assets
|
7,115 | 7,086 | ||||||
|
Total assets of consolidated VIEs
|
$ | 167,527 | $ | 169,828 | ||||
See accompanying Notes to Consolidated Financial Statements.
129
Table of Contents
Bank of America Corporation and Subsidiaries
Consolidated Balance Sheet
(continued)
| June 30 | December 31 | |||||||
| (Dollars in millions) | 2011 | 2010 | ||||||
|
Liabilities
|
||||||||
|
Deposits in U.S. offices:
|
||||||||
|
Noninterest-bearing
|
$ | 301,558 | $ | 285,200 | ||||
|
Interest-bearing (includes
$3,334
and $2,732 measured at fair value)
|
647,480 | 645,713 | ||||||
|
Deposits in non-U.S. offices:
|
||||||||
|
Noninterest-bearing
|
6,555 | 6,101 | ||||||
|
Interest-bearing
|
82,815 | 73,416 | ||||||
|
Total deposits
|
1,038,408 | 1,010,430 | ||||||
|
Federal funds purchased and securities loaned or sold under agreements to repurchase
(includes
$42,453
and $37,424 measured at fair value)
|
239,521 | 245,359 | ||||||
|
Trading account liabilities
|
74,989 | 71,985 | ||||||
|
Derivative liabilities
|
54,414 | 55,914 | ||||||
|
Commercial paper and other short-term borrowings (includes
$4,865
and $7,178 measured at fair
value)
|
50,632 | 59,962 | ||||||
|
Accrued expenses and other liabilities (includes
$25,398
and $33,229 measured at fair value
and
$897
and $1,188 of reserve for unfunded lending commitments)
|
154,520 | 144,580 | ||||||
|
Long-term debt (includes
$60,737
and $50,984 measured at fair value)
|
426,659 | 448,431 | ||||||
|
Total liabilities
|
2,039,143 | 2,036,661 | ||||||
|
Commitments and contingencies (
Note 8 – Securitizations and Other Variable Interest Entities,
Note 9 – Representations and Warranties Obligations and Corporate Guarantees
and
Note 11 – Commitments and Contingencies)
|
||||||||
|
|
||||||||
|
Shareholders’ equity
|
||||||||
|
Preferred stock, $0.01 par value; authorized —
100,000,000
shares; issued and outstanding
—
3,943,660
and 3,943,660 shares
|
16,562 | 16,562 | ||||||
|
Common stock and additional paid-in capital, $0.01 par value; authorized —
12,800,000,000
shares;
issued and outstanding —
10,133,189,501
and 10,085,154,806 shares
|
151,567 | 150,905 | ||||||
|
Retained earnings
|
53,254 | 60,849 | ||||||
|
Accumulated other comprehensive income (loss)
|
793 | (66 | ) | |||||
|
Other
|
- | (2 | ) | |||||
|
Total shareholders’ equity
|
222,176 | 228,248 | ||||||
|
Total liabilities and shareholders’ equity
|
$ | 2,261,319 | $ | 2,264,909 | ||||
|
|
||||||||
|
|
||||||||
|
Liabilities of consolidated VIEs included in total liabilities above
|
||||||||
|
Commercial paper and other short-term borrowings (includes
$974
and $706 of non-recourse
liabilities)
|
$ | 5,421 | $ | 6,742 | ||||
|
Long-term debt (includes
$59,177
and $66,309 of non-recourse debt)
|
64,745 | 71,013 | ||||||
|
All other liabilities (includes
$251
and $382 of non-recourse liabilities)
|
1,127 | 9,141 | ||||||
|
Total liabilities of consolidated VIEs
|
$ | 71,293 | $ | 86,896 | ||||
See accompanying Notes to Consolidated Financial Statements.
130
Table of Contents
Bank of America Corporation and Subsidiaries
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, 2009
|
$ | 37,208 | 8,650,244 | $ | 128,734 | $ | 71,233 | $ | (5,619 | ) | $ | (112 | ) | $ | 231,444 | |||||||||||||||||
|
Cumulative adjustment for accounting change - Consolidation
of certain VIEs
|
(6,154 | ) | (116 | ) | (6,270 | ) | $ | (116 | ) | |||||||||||||||||||||||
|
Net income
|
6,305 | 6,305 | 6,305 | |||||||||||||||||||||||||||||
|
Net change in available-for-sale debt and marketable
equity securities
|
1,520 | 1,520 | 1,520 | |||||||||||||||||||||||||||||
|
Net change in derivatives
|
(505 | ) | (505 | ) | (505 | ) | ||||||||||||||||||||||||||
|
Employee benefit plan adjustments
|
127 | 127 | 127 | |||||||||||||||||||||||||||||
|
Net change in foreign currency translation adjustments
|
146 | 146 | 146 | |||||||||||||||||||||||||||||
|
Dividends paid:
|
||||||||||||||||||||||||||||||||
|
Common
|
(202 | ) | (202 | ) | ||||||||||||||||||||||||||||
|
Preferred
|
(688 | ) | (688 | ) | ||||||||||||||||||||||||||||
|
Common stock issued under employee plans and
related tax effects
|
96,773 | 1,197 | 61 | 1,258 | ||||||||||||||||||||||||||||
|
Common Equivalent Securities conversion
|
(19,244 | ) | 1,286,000 | 19,244 | - | |||||||||||||||||||||||||||
|
Other
|
29 | 3 | 7 | 39 | ||||||||||||||||||||||||||||
|
Balance, June 30, 2010
|
$ | 17,993 | 10,033,017 | $ | 149,175 | $ | 70,497 | $ | (4,447 | ) | $ | (44 | ) | $ | 233,174 | $ | 7,477 | |||||||||||||||
|
Balance, December 31, 2010
|
$ | 16,562 | 10,085,155 | $ | 150,905 | $ | 60,849 | $ | (66 | ) | $ | (2 | ) | $ | 228,248 | |||||||||||||||||
|
Net loss
|
(6,777 | ) | (6,777 | ) | $ | (6,777 | ) | |||||||||||||||||||||||||
|
Net change in available-for-sale debt and marketable
equity securities
|
754 | 754 | 754 | |||||||||||||||||||||||||||||
|
Net change in derivatives
|
(66 | ) | (66 | ) | (66 | ) | ||||||||||||||||||||||||||
|
Employee benefit plan adjustments
|
138 | 138 | 138 | |||||||||||||||||||||||||||||
|
Net change in foreign currency translation adjustments
|
33 | 33 | 33 | |||||||||||||||||||||||||||||
|
Dividends paid:
|
||||||||||||||||||||||||||||||||
|
Common
|
(207 | ) | (207 | ) | ||||||||||||||||||||||||||||
|
Preferred
|
(611 | ) | (611 | ) | ||||||||||||||||||||||||||||
|
Common stock issued under employee plans and
related tax effects
|
48,035 | 662 | 1 | 663 | ||||||||||||||||||||||||||||
|
Other
|
- | 1 | 1 | |||||||||||||||||||||||||||||
|
Balance, June 30, 2011
|
$ | 16,562 | 10,133,190 | $ | 151,567 | $ | 53,254 | $ | 793 | $ | - | $ | 222,176 | $ | (5,918 | ) | ||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
131
Table of Contents
Bank of America Corporation and Subsidiaries
|
Six Months Ended
June 30 |
||||||||
| (Dollars in millions) | 2011 | 2010 | ||||||
|
Operating activities
|
||||||||
|
Net income (loss)
|
$ | (6,777 | ) | $ | 6,305 | |||
|
Reconciliation of net income (loss) to net cash provided by operating activities:
|
||||||||
|
Provision for credit losses
|
7,069 | 17,910 | ||||||
|
Goodwill impairment
|
2,603 | - | ||||||
|
Gains on sales of debt securities
|
(1,445 | ) | (771 | ) | ||||
|
Depreciation and premises improvements amortization
|
1,002 | 1,113 | ||||||
|
Amortization of intangibles
|
767 | 885 | ||||||
|
Deferred income taxes
|
(3,418 | ) | 1,264 | |||||
|
Net decrease in trading and derivative instruments
|
4,716 | 32,108 | ||||||
|
Net decrease in other assets
|
19,340 | 3,205 | ||||||
|
Net increase in accrued expenses and other liabilities
|
9,556 | 2,518 | ||||||
|
Other operating activities, net
|
17,790 | (25,186 | ) | |||||
|
Net cash provided by operating activities
|
51,203 | 39,351 | ||||||
|
Investing activities
|
||||||||
|
Net decrease in time deposits placed and other short-term investments
|
6,142 | 3,561 | ||||||
|
Net increase in federal funds sold and securities borrowed or purchased under agreements to resell
|
(25,565 | ) | (57,734 | ) | ||||
|
Proceeds from sales of available-for-sale debt securities
|
41,422 | 63,356 | ||||||
|
Proceeds
from paydowns and maturities of available-for-sale debt securities
|
28,729 | 36,458 | ||||||
|
Purchases of available-for-sale debt securities
|
(59,846 | ) | (99,704 | ) | ||||
|
Proceeds from maturities of held-to-maturity debt securities
|
- | 3 | ||||||
|
Purchases of held-to-maturity debt securities
|
- | (100 | ) | |||||
|
Proceeds from sales of loans and leases
|
1,517 | 3,525 | ||||||
|
Other changes in loans and leases, net
|
(8,147 | ) | 19,657 | |||||
|
Net purchases of premises and equipment
|
(489 | ) | (149 | ) | ||||
|
Proceeds from sales of foreclosed properties
|
1,146 | 1,342 | ||||||
|
Cash received due to impact of adoption of new consolidation guidance
|
- | 2,807 | ||||||
|
Other investing activities, net
|
(313 | ) | 6,905 | |||||
|
Net cash used in investing activities
|
(15,404 | ) | (20,073 | ) | ||||
|
Financing activities
|
||||||||
|
Net increase (decrease) in deposits
|
27,978 | (17,144 | ) | |||||
|
Net increase (decrease) in federal funds purchased and securities loaned or sold under agreements
to repurchase
|
(5,838 | ) | 52,026 | |||||
|
Net decrease in commercial paper and other short-term borrowings
|
(9,330 | ) | (18,303 | ) | ||||
|
Proceeds from issuance of long-term debt
|
16,959 | 38,920 | ||||||
|
Retirement of long-term debt
|
(53,929 | ) | (44,157 | ) | ||||
|
Cash dividends paid
|
(818 | ) | (890 | ) | ||||
|
Excess tax benefits on share-based payments
|
39 | 47 | ||||||
|
Other financing activities, net
|
- | (34 | ) | |||||
|
Net cash provided by (used in) financing activities
|
(24,939 | ) | 10,465 | |||||
|
Effect of exchange rate changes on cash and cash equivalents
|
240 | (48 | ) | |||||
|
Net increase in cash and cash equivalents
|
11,100 | 29,695 | ||||||
|
Cash and cash equivalents at January 1
|
108,427 | 121,339 | ||||||
|
Cash and cash equivalents at June 30
|
$ | 119,527 | $ | 151,034 | ||||
During the six months ended June 30, 2011, the Corporation entered into an agreement with
Assured Guaranty Ltd. and subsidiaries which resulted in non-cash increases to loans of $5.3
billion, other assets of $504 million and long-term debt of $5.8 billion.
See accompanying Notes to Consolidated Financial Statements.
132
Table of Contents
Bank of America Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
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 term “the Corporation” as used herein may refer
to the Corporation individually, the Corporation and its subsidiaries, or certain of the
Corporation’s subsidiaries or affiliates.
The Corporation conducts its activities through banking and nonbanking subsidiaries. The
Corporation operates its banking activities primarily under two charters: Bank of America,
National Association (Bank of America, N.A. or BANA) and FIA Card Services, National Association
(FIA Card Services, N.A.).
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 of acquired companies are included from the dates of acquisition and for VIEs, from the
dates that the Corporation became the primary beneficiary. Assets held in an agency or fiduciary
capacity are not included in the Consolidated Financial Statements. The Corporation accounts for
investments in companies for which it owns a voting interest and for which it has the ability to
exercise significant influence over operating and financing decisions using the equity method of
accounting or at fair value under the fair value option. These investments are included in other
assets. Equity method investments are subject to impairment testing and 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 of the Corporation’s 2010 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, all adjustments,
which consist of normal recurring adjustments necessary for a fair statement of the interim period
results have been made. The Corporation evaluates subsequent events through the date of filing
with the Securities and Exchange Commission (SEC). Certain prior period amounts have been
reclassified to conform to current period presentation.
Effective January 1, 2011, the Corporation changed the name of the segment formerly known as
Home Loans & Insurance
to
Consumer Real Estate Services (CRES).
For additional information, see
Note 6 – Outstanding Loans and Leases
.
New Accounting Pronouncements
In April 2011, the Financial Accounting Standards Board (FASB) issued new accounting guidance
on troubled debt restructurings (TDRs), including how to determine whether a loan modification
represents a concession and whether the debtor is experiencing financial difficulties. This new
accounting guidance will be effective for the Corporation’s interim period ending September 30,
2011 with retrospective application back to January 1, 2011. The adoption of this guidance is not
expected to have a material impact on the Corporation’s consolidated financial position or results
of operations.
In April 2011, the FASB issued new accounting guidance that addresses effective control in
repurchase agreements and eliminates the requirement for entities to consider whether the
transferor (i.e., seller) has the ability to repurchase the financial assets in a repurchase
agreement. This new accounting guidance will be effective, on a prospective basis to new
transactions or modifications to existing transactions, on January 1, 2012. The adoption of this
guidance is not expected to have a material impact on the Corporation’s consolidated financial
position or results of operations.
133
Table of Contents
In May 2011, the FASB issued amendments to the fair value accounting guidance. The amendments
clarify the application of the highest and best use and valuation premise concepts, preclude the
application of blockage factors in the valuation of all financial instruments and include criteria
for applying the fair value measurement principles to portfolios of financial instruments. The
amendments additionally prescribe enhanced financial statement disclosures for Level 3 fair value
measurements. The new amendments will be effective on January 1, 2012. The Corporation is
currently assessing the impact of this guidance on the consolidated financial position and results
of operations.
In June 2011, the FASB issued new accounting guidance on the presentation of comprehensive
income in financial statements. The new guidance removes current presentation options and requires
entities to report components of comprehensive income in either a continuous statement of
comprehensive income or two separate but consecutive statements. This new accounting guidance will
be effective for the Corporation for the three months ended March 31, 2012. The adoption of this
guidance, which involves disclosures only, will not impact the Corporation’s consolidated
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 fair value of securities
financing agreements that are accounted for under the fair value option are recorded in other
income.
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. Securities financing agreements give rise to negligible
credit risk as a result of these collateral provisions, and accordingly, no allowance for loan
losses is considered necessary.
Substantially all repurchase and resale activities are transacted under legally enforceable
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 repurchase and resale transactions with the same
counterparty on the Consolidated Balance Sheet where it has such a legally enforceable master
agreement and the transactions have the same maturity date.
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 financings.
The Corporation is currently conducting a detailed review to determine whether there are
additional sales of agency MBS which should have been recorded as secured financings. Upon
completion of this detailed review, additional transactions will be identified. These transactions
are not expected to have an impact on the Corporation’s current period consolidated financial
position or results of operations. For additional information, see
Note 1 – Summary of Significant
Accounting Principles
to the Consolidated Financial Statements of the Corporation’s 2010 Annual
Report on Form 10-K.
134
Table of Contents
Loans and Leases
Under applicable accounting guidance, a portfolio segment is defined as the level at which an
entity develops and documents a systematic methodology to determine the allowance for credit
losses, and a class of financing receivables is defined as the level of disaggregation of
portfolio segments based on the initial measurement attribute, risk characteristics and methods
for assessing risk. The Corporation’s portfolio segments are home loans, credit card and other
consumer, and commercial. The classes within the home loans portfolio segment are core portfolio
residential mortgage, Legacy Asset Servicing residential mortgage, Countrywide Financial
Corporation (Countrywide) residential mortgage purchased credit-impaired (PCI), core portfolio
home equity, Legacy Asset Servicing home equity, Countrywide home equity PCI, Legacy Asset
Servicing discontinued real estate and Countrywide discontinued real estate PCI
.
The classes
within the credit card and other consumer portfolio segment are U.S. credit card, non-U.S. credit
card, direct/indirect consumer and other consumer. The classes within the commercial portfolio
segment are U.S. commercial, commercial real estate, commercial lease financing, non-U.S.
commercial and U.S. small business commercial.
Revenue Recognition
The following summarizes the Corporation’s revenue recognition policies as they relate to
certain noninterest income line items in the Consolidated Statement of Income.
Card income is derived from fees such as interchange, cash advance, annual, late, over-limit
and other miscellaneous fees, which are recorded as revenue when earned, primarily on an accrual
basis. Uncollected fees are included in the customer card receivable balances with an amount
recorded in the allowance for loan and lease losses for estimated uncollectible card income
receivables. Uncollected fees are written off when a card receivable
reaches 180 days past due.
Service charges include fees for insufficient funds, overdrafts and other banking services
and are recorded as revenue when earned. Uncollected fees are included in outstanding loan
balances with an amount recorded for estimated uncollectible service
fee receivables. Uncollected fees are written off when a fee
receivable reaches 60 days past due.
Investment and brokerage services revenue consists primarily of asset management fees and
brokerage income that is recognized over the period in which the services are provided or when
commissions are earned. Asset management fees consist primarily of fees for investment management
and trust services and are generally based on the dollar amount of the assets being managed.
Brokerage income is generally derived from commissions and fees earned on the sale of various
financial products.
Investment banking income consists primarily of advisory and underwriting fees, which are
recognized in income as the services are provided and no contingencies exist. Revenues are
generally recognized net of any direct expenses. Non-reimbursed expenses are recorded as
noninterest expense.
135
Table of Contents
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 most recent
acquisitions. These charges represent costs associated with these one-time activities and do not
represent ongoing costs of the fully integrated combined organization. The table below presents
the components of merger and restructuring charges.
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30 | June 30 | |||||||||||||||
|
(Dollars in millions)
|
2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Severance and employee-related charges
|
$ | 65 | $ | 123 | $ | 133 | $ | 274 | ||||||||
|
Systems integrations and related charges
|
79 | 329 | 185 | 639 | ||||||||||||
|
Other
|
15 | 56 | 43 | 116 | ||||||||||||
|
Total merger and restructuring charges
|
$ | 159 | $ | 508 | $ | 361 | $ | 1,029 | ||||||||
For the three and six months ended June 30, 2011, all merger-related charges related to the
Merrill Lynch & Co., Inc. (Merrill Lynch) acquisition. For the three and six months ended June 30,
2010, $424 million and $832 million of merger-related charges related to the Merrill Lynch
acquisition and $84 million and $197 million related to earlier acquisitions.
The table below presents the changes in restructuring reserves for the three and six months
ended June 30, 2011 and 2010. 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. Substantially all of the amounts in the table below
relate to the Merrill Lynch acquisition.
| Restructuring Reserves | ||||||||
|
(Dollars in millions)
|
2011 | 2010 | ||||||
|
Balance, January 1
|
$ | 336 | $ | 403 | ||||
|
Exit costs and restructuring charges:
|
||||||||
|
Merrill Lynch
|
65 | 106 | ||||||
|
Other
|
- | 30 | ||||||
|
Cash payments and other
|
(237 | ) | (294 | ) | ||||
|
Balance, March 31
|
$ | 164 | $ | 245 | ||||
|
Exit costs and restructuring charges:
|
||||||||
|
Merrill Lynch
|
62 | 93 | ||||||
|
Other
|
- | 23 | ||||||
|
Cash payments and other
|
(57 | ) | (101 | ) | ||||
|
Balance, June 30
|
$ | 169 | $ | 260 | ||||
The table below presents the components of trading account assets and liabilities at June 30,
2011 and December 31, 2010.
| June 30 | December 31 | |||||||
|
(Dollars in millions)
|
2011 | 2010 | ||||||
|
Trading account assets
|
||||||||
|
U.S. government and agency securities
(1)
|
$ | 45,968 | $ | 60,811 | ||||
|
Corporate securities, trading loans and other
|
49,309 | 49,352 | ||||||
|
Non-U.S. sovereign debt
|
46,723 | 33,523 | ||||||
|
Equity securities
|
37,801 | 32,129 | ||||||
|
Mortgage trading loans and asset-backed securities
|
17,138 | 18,856 | ||||||
|
Total trading account assets
|
$ | 196,939 | $ | 194,671 | ||||
|
Trading account liabilities
|
||||||||
|
U.S. government and agency securities
|
$ | 25,552 | $ | 29,340 | ||||
|
Non-U.S. sovereign debt
|
22,062 | 15,813 | ||||||
|
Equity securities
|
16,424 | 15,482 | ||||||
|
Corporate securities and other
|
10,951 | 11,350 | ||||||
|
Total trading account liabilities
|
$ | 74,989 | $ | 71,985 | ||||
| (1) |
Includes $24.1 billion and $29.7 billion of government-sponsored enterprise
obligations at June 30, 2011 and December 31, 2010.
|
136
Table of Contents
Derivative Balances
Derivatives are entered into on behalf of customers, 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 Corporation’s derivatives and hedging activities, see
Note 1 – Summary of
Significant Accounting Principles
to the Consolidated Financial Statements of the Corporation’s
2010 Annual Report on Form 10-K. The tables below identify derivative instruments included on the
Corporation’s Consolidated Balance Sheet in derivative assets and liabilities at June 30, 2011 and
December 31, 2010. 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.
| June 30, 2011 | ||||||||||||||||||||||||||||
| 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 | Total | Hedges | Hedges (2) | Total | |||||||||||||||||||||
|
Interest rate contracts
|
||||||||||||||||||||||||||||
|
Swaps
|
$ | 45,518.3 | $ | 1,114.0 | $ | 9.8 | $ | 1,123.8 | $ | 1,106.3 | $ | 3.8 | $ | 1,110.1 | ||||||||||||||
|
Futures and forwards
|
12,471.9 | 3.5 | - | 3.5 | 4.1 | - | 4.1 | |||||||||||||||||||||
|
Written options
|
3,089.1 | - | - | - | 78.4 | - | 78.4 | |||||||||||||||||||||
|
Purchased options
|
3,132.4 | 84.0 | - | 84.0 | - | - | - | |||||||||||||||||||||
|
Foreign exchange contracts
|
||||||||||||||||||||||||||||
|
Swaps
|
880.8 | 32.6 | 3.6 | 36.2 | 32.4 | 0.7 | 33.1 | |||||||||||||||||||||
|
Spot, futures and forwards
|
3,109.3 | 36.7 | 0.5 | 37.2 | 37.3 | 0.9 | 38.2 | |||||||||||||||||||||
|
Written options
|
545.7 | - | - | - | 12.4 | - | 12.4 | |||||||||||||||||||||
|
Purchased options
|
542.2 | 11.1 | - | 11.1 | - | - | - | |||||||||||||||||||||
|
Equity contracts
|
||||||||||||||||||||||||||||
|
Swaps
|
43.4 | 1.2 | - | 1.2 | 1.5 | - | 1.5 | |||||||||||||||||||||
|
Futures and forwards
|
105.9 | 2.5 | - | 2.5 | 2.4 | - | 2.4 | |||||||||||||||||||||
|
Written options
|
530.7 | - | - | - | 20.7 | - | 20.7 | |||||||||||||||||||||
|
Purchased options
|
254.1 | 22.6 | - | 22.6 | - | - | - | |||||||||||||||||||||
|
Commodity contracts
|
||||||||||||||||||||||||||||
|
Swaps
|
87.4 | 5.9 | 0.1 | 6.0 | 6.5 | - | 6.5 | |||||||||||||||||||||
|
Futures and forwards
|
534.5 | 4.2 | - | 4.2 | 3.0 | - | 3.0 | |||||||||||||||||||||
|
Written options
|
120.3 | - | - | - | 8.0 | - | 8.0 | |||||||||||||||||||||
|
Purchased options
|
120.0 | 7.7 | - | 7.7 | - | - | - | |||||||||||||||||||||
|
Credit derivatives
|
||||||||||||||||||||||||||||
|
Purchased credit derivatives:
|
||||||||||||||||||||||||||||
|
Credit default swaps
|
2,065.7 | 59.8 | - | 59.8 | 29.2 | - | 29.2 | |||||||||||||||||||||
|
Total return swaps/other
|
41.4 | 0.4 | - | 0.4 | 0.3 | - | 0.3 | |||||||||||||||||||||
|
Written credit derivatives:
|
||||||||||||||||||||||||||||
|
Credit default swaps
|
1,990.5 | 28.5 | - | 28.5 | 51.9 | - | 51.9 | |||||||||||||||||||||
|
Total return swaps/other
|
40.8 | 0.5 | - | 0.5 | 0.6 | - | 0.6 | |||||||||||||||||||||
|
Gross derivative assets/liabilities
|
$ | 1,415.2 | $ | 14.0 | $ | 1,429.2 | $ | 1,395.0 | $ | 5.4 | $ | 1,400.4 | ||||||||||||||||
|
Less: Legally enforceable master
netting agreements
|
(1,303.8 | ) | (1,303.8 | ) | ||||||||||||||||||||||||
|
Less: Cash collateral applied
|
(58.8 | ) | (42.2 | ) | ||||||||||||||||||||||||
|
Total derivative assets/liabilities
|
$ | 66.6 | $ | 54.4 | ||||||||||||||||||||||||
| (1) |
Represents the total contract/notional amount of derivative assets and liabilities
outstanding.
|
|
| (2) |
Excludes $3.3 billion of long-term debt designated as a hedge of foreign currency
risk.
|
137
Table of Contents
| December 31, 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 | Total | Hedges | Hedges (2) | Total | |||||||||||||||||||||
|
Interest rate contracts
|
||||||||||||||||||||||||||||
|
Swaps
|
$ | 42,719.2 | $ | 1,193.9 | $ | 14.9 | $ | 1,208.8 | $ | 1,187.9 | $ | 2.2 | $ | 1,190.1 | ||||||||||||||
|
Futures and forwards
|
9,939.2 | 6.0 | - | 6.0 | 4.7 | - | 4.7 | |||||||||||||||||||||
|
Written options
|
2,887.7 | - | - | - | 82.8 | - | 82.8 | |||||||||||||||||||||
|
Purchased options
|
3,026.2 | 88.0 | - | 88.0 | - | - | - | |||||||||||||||||||||
|
Foreign exchange contracts
|
||||||||||||||||||||||||||||
|
Swaps
|
630.1 | 26.5 | 3.7 | 30.2 | 28.5 | 2.1 | 30.6 | |||||||||||||||||||||
|
Spot, futures and forwards
|
2,652.9 | 41.3 | - | 41.3 | 44.2 | - | 44.2 | |||||||||||||||||||||
|
Written options
|
439.6 | - | - | - | 13.2 | - | 13.2 | |||||||||||||||||||||
|
Purchased options
|
417.1 | 13.0 | - | 13.0 | - | - | - | |||||||||||||||||||||
|
Equity contracts
|
||||||||||||||||||||||||||||
|
Swaps
|
42.4 | 1.7 | - | 1.7 | 2.0 | - | 2.0 | |||||||||||||||||||||
|
Futures and forwards
|
78.8 | 2.9 | - | 2.9 | 2.1 | - | 2.1 | |||||||||||||||||||||
|
Written options
|
242.7 | - | - | - | 19.4 | - | 19.4 | |||||||||||||||||||||
|
Purchased options
|
193.5 | 21.5 | - | 21.5 | - | - | - | |||||||||||||||||||||
|
Commodity contracts
|
||||||||||||||||||||||||||||
|
Swaps
|
90.2 | 8.8 | 0.2 | 9.0 | 9.3 | - | 9.3 | |||||||||||||||||||||
|
Futures and forwards
|
413.7 | 4.1 | - | 4.1 | 2.8 | - | 2.8 | |||||||||||||||||||||
|
Written options
|
86.3 | - | - | - | 6.7 | - | 6.7 | |||||||||||||||||||||
|
Purchased options
|
84.6 | 6.6 | - | 6.6 | - | - | - | |||||||||||||||||||||
|
Credit derivatives
|
||||||||||||||||||||||||||||
|
Purchased credit derivatives:
|
||||||||||||||||||||||||||||
|
Credit default swaps
|
2,184.7 | 69.8 | - | 69.8 | 34.0 | - | 34.0 | |||||||||||||||||||||
|
Total return swaps/other
|
26.0 | 0.9 | - | 0.9 | 0.2 | - | 0.2 | |||||||||||||||||||||
|
Written credit derivatives:
|
||||||||||||||||||||||||||||
|
Credit default swaps
|
2,133.5 | 33.3 | - | 33.3 | 63.2 | - | 63.2 | |||||||||||||||||||||
|
Total return swaps/other
|
22.5 | 0.5 | - | 0.5 | 0.5 | - | 0.5 | |||||||||||||||||||||
|
Gross derivative assets/liabilities
|
$ | 1,518.8 | $ | 18.8 | $ | 1,537.6 | $ | 1,501.5 | $ | 4.3 | $ | 1,505.8 | ||||||||||||||||
|
Less: Legally enforceable master
netting agreements
|
(1,406.3 | ) | (1,406.3 | ) | ||||||||||||||||||||||||
|
Less: Cash collateral applied
|
(58.3 | ) | (43.6 | ) | ||||||||||||||||||||||||
|
Total derivative assets/liabilities
|
$ | 73.0 | $ | 55.9 | ||||||||||||||||||||||||
| (1) |
Represents the total contract/notional amount of derivative assets and liabilities
outstanding.
|
|
| (2) |
Excludes $4.1 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 qualifying accounting hedges and economic hedges. Interest rate, commodity, credit
and foreign exchange contracts are utilized in the Corporation’s ALM and risk management
activities.
The Corporation maintains an overall interest rate risk management strategy that incorporates
the use of interest rate contracts, 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. The Corporation’s goal is to manage interest rate
sensitivity and volatility so that movements in interest rates do not significantly adversely
affect earnings or capital. 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.
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,
138
Table of Contents
interest rate swaps, forward settlement contracts and Eurodollar futures as economic hedges of the
fair value of mortgage servicing rights (MSRs). For additional information on MSRs, see
Note 19 –
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 non-U.S. 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 non-U.S. 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 amounts recognized in revenue related to the Corporation’s
derivatives designated as fair value hedges for the three and six months ended June 30, 2011 and
2010.
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||
| 2011 | 2011 | |||||||||||||||||||||||
| 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)
|
$ | 1,373 | $ | (1,494 | ) | $ | (121 | ) | $ | 439 | $ | (705 | ) | $ | (266 | ) | ||||||||
|
Interest rate and foreign currency risk on long-term debt
(1)
|
1,438 | (1,487 | ) | (49 | ) | 2,188 | (2,293 | ) | (105 | ) | ||||||||||||||
|
Interest rate risk on AFS securities
(2)
|
(1,873 | ) | 1,630 | (243 | ) | (721 | ) | 546 | (175 | ) | ||||||||||||||
|
Price risk on commodity inventory
(3)
|
20 | (20 | ) | - | 16 | (16 | ) | - | ||||||||||||||||
|
Total
|
$ | 958 | $ | (1,371 | ) | $ | (413 | ) | $ | 1,922 | $ | (2,468 | ) | $ | (546 | ) | ||||||||
| 2010 | 2010 | |||||||||||||||||||||||
|
Derivatives designated as fair value hedges
|
||||||||||||||||||||||||
|
Interest rate risk on long-term debt
(1)
|
$ | 3,202 | $ | (3,318 | ) | $ | (116 | ) | $ | 4,086 | $ | (4,330 | ) | $ | (244 | ) | ||||||||
|
Interest rate and foreign currency risk on long-term debt
(1)
|
(1,907 | ) | 1,704 | (203 | ) | (3,282 | ) | 2,955 | (327 | ) | ||||||||||||||
|
Interest rate risk on AFS securities
(2)
|
(5,240 | ) | 5,165 | (75 | ) | (5,270 | ) | 5,184 | (86 | ) | ||||||||||||||
|
Price risk on commodity inventory
(3)
|
(16 | ) | 15 | (1 | ) | 42 | (46 | ) | (4 | ) | ||||||||||||||
|
Total
|
$ | (3,961 | ) | $ | 3,566 | $ | (395 | ) | $ | (4,424 | ) | $ | 3,763 | $ | (661 | ) | ||||||||
| (1) |
Amounts are recorded in interest expense on long-term debt.
|
|
| (2) |
Amounts are recorded in interest income on AFS securities.
|
|
| (3) |
Amounts relating to commodity inventory are recorded in trading account profits.
|
139
Table of Contents
Cash Flow Hedges
The table below summarizes certain information related to the Corporation’s derivatives
designated as cash flow hedges and net investment hedges for the three and six months ended June
30, 2011 and 2010. During the next 12 months, net losses in accumulated other comprehensive income
(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 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 available-for-sale (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 $17 million and $179 million related to long-term debt designated as a net investment
hedge for the three and six months ended June 30, 2011 compared to gains of $114 million and $376
million for the same periods in 2010.
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||
| 2011 | 2011 | |||||||||||||||||||||||
| Hedge | Hedge | |||||||||||||||||||||||
| Gains (Losses) | Gains (Losses) | Ineffectiveness and | Gains (Losses) | Gains (Losses) | Ineffectiveness and | |||||||||||||||||||
| Recognized in | in Income | Amounts Excluded | Recognized in | in Income | Amounts Excluded | |||||||||||||||||||
| Accumulated OCI | Reclassified from | from Effectiveness | Accumulated OCI | Reclassified from | from Effectiveness | |||||||||||||||||||
| (Dollars in millions, amounts pre-tax) | on Derivatives | Accumulated OCI | Testing (1) | on Derivatives | Accumulated OCI | Testing (1) | ||||||||||||||||||
|
Derivatives designated as cash flow hedges
|
||||||||||||||||||||||||
|
Interest rate risk on variable rate portfolios
|
$ | (878 | ) | $ | (444 | ) | $ | (30 | ) | $ | (722 | ) | $ | (748 | ) | $ | (34 | ) | ||||||
|
Commodity price risk on forecasted purchases and sales
|
(1 | ) | 1 | - | (9 | ) | 3 | (2 | ) | |||||||||||||||
|
Price risk on restricted stock awards
|
(136 | ) | (44 | ) | - | (191 | ) | (70 | ) | - | ||||||||||||||
|
Total
|
$ | (1,015 | ) | $ | (487 | ) | $ | (30 | ) | $ | (922 | ) | $ | (815 | ) | $ | (36 | ) | ||||||
|
Net investment hedges
|
||||||||||||||||||||||||
|
Foreign exchange risk
|
$ | (653 | ) | $ | - | $ | (139 | ) | $ | (1,615 | ) | $ | 423 | $ | (250 | ) | ||||||||
| 2010 | 2010 | |||||||||||||||||||||||
|
Derivatives designated as cash flow hedges
|
||||||||||||||||||||||||
|
Interest rate risk on variable rate portfolios
|
$ | (856 | ) | $ | (105 | ) | $ | (6 | ) | $ | (1,358 | ) | $ | (186 | ) | $ | (20 | ) | ||||||
|
Commodity price risk on forecasted purchases and sales
|
(5 | ) | 10 | 1 | 27 | 13 | 2 | |||||||||||||||||
|
Price risk on restricted stock awards
|
(181 | ) | 6 | - | (37 | ) | 17 | - | ||||||||||||||||
|
Price risk on equity investments included in AFS
securities
|
180 | (226 | ) | - | 186 | (226 | ) | - | ||||||||||||||||
|
Total
|
$ | (862 | ) | $ | (315 | ) | $ | (5 | ) | $ | (1,182 | ) | $ | (382 | ) | $ | (18 | ) | ||||||
|
Net investment hedges
|
||||||||||||||||||||||||
|
Foreign exchange risk
|
$ | 906 | $ | - | $ | (68 | ) | $ | 1,885 | $ | - | $ | (132 | ) | ||||||||||
| (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.
|
The Corporation enters into equity total return swaps to hedge a portion of restricted stock
units (RSUs) granted to certain employees as part of their compensation in prior periods. Certain
awards contain clawback provisions which permit the Corporation to cancel all or a portion of the
award under specified circumstances, and certain awards may be settled in cash. These 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. From time to time, the Corporation may enter into
equity 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 any RSUs that
may be granted from time to time, if any, subject to similar or other terms and conditions.
Certain of these derivatives are designated as cash flow hedges of unrecognized unvested 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 RSUs and related hedges, see
Note 12 – Shareholders’ Equity
.
140
Table of Contents
Economic Hedges
Derivatives accounted for as economic hedges, because either they did not qualify for or were
not designated as accounting hedges, are used by the Corporation to reduce certain risk exposures.
The table below presents gains (losses) on these derivatives for the three and six months ended
June 30, 2011 and 2010. These gains (losses) are largely offset by the income or expense that is
recorded on the economically hedged item.
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
|
(Dollars in millions)
|
2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Price risk on mortgage banking production income
(1, 2)
|
$ | 1,221 | $ | 2,041 | $ | 1,166 | $ | 3,397 | ||||||||
|
Interest rate risk on mortgage banking servicing income
(1)
|
530 | 2,700 | 385 | 3,312 | ||||||||||||
|
Credit risk on loans
(3)
|
- | 31 | (30 | ) | (27 | ) | ||||||||||
|
Interest rate and foreign currency risk on long-term debt and other
foreign exchange transactions
(4)
|
1,826 | (5,221 | ) | 5,220 | (9,209 | ) | ||||||||||
|
Other
(5)
|
(166 | ) | (194 | ) | (176 | ) | (98 | ) | ||||||||
|
Total
|
$ | 3,411 | $ | (643 | ) | $ | 6,565 | $ | (2,625 | ) | ||||||
| (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 $1.2 billion
and $2.2 billion for the three and six months ended June 30, 2011 compared to $2.8 billion and $4.6
billion for the same periods in 2010.
|
|
| (3) |
Gains (losses) on these derivatives are recorded in other income.
|
|
| (4) |
The majority of the balance is related to the revaluation of economic hedges of
foreign currency-denominated debt which is offset with the revaluation of the debt in other income.
|
|
| (5) |
Gains (losses) on these derivatives are recorded in other income or in personnel
expense for hedges of certain RSUs.
|
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 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
Global Banking &
Markets
(
GBAM)
business segment. The related sales and trading revenue generated within
GBAM
is
recorded in 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.
Sales and trading revenue includes changes in the fair value and realized gains and losses on
the sales of trading and other assets, net interest income and fees primarily from commissions on
equity securities. Revenue is generated by the difference in the client price for an instrument
and the price at which the trading desk can execute the trade in the dealer market. For equity
securities, commissions related to purchases and sales are recorded in other income on the
Consolidated Statement of Income. Changes in the fair value of these securities are included in
trading account profits. For debt securities, revenue, with the exception of interest associated
with the debt securities, is typically included in trading account profits. Unlike commissions for
equity securities, the initial revenue related to broker/dealer services for debt securities is
included in the pricing of the instrument rather than being charged through separate fee
arrangements. Therefore, this revenue is recorded in trading account profits as part of the initial mark to fair value. For derivatives,
all revenue is included in trading account profits. In transactions where the Corporation acts as
agent, which includes exchange-traded futures and options, fees are recorded in other income.
Certain instruments, primarily loans, held in the
GBAM
segment are not considered trading
instruments. Gains/losses on sales and changes in fair value of these instruments, where
applicable (e.g., where the fair value option has been elected) are reflected in other income.
Interest revenue for debt securities and loans is included in net interest income.
141
Table of Contents
The table below, which includes both derivatives and non-derivative cash instruments,
identifies the amounts in the respective income statement line items attributable to the
Corporation’s sales and trading revenue in
GBAM
, categorized by primary risk for the three and six
months ended June 30, 2011 and 2010. The difference between total trading account profits in the
table below and in the Consolidated Statement of Income relates to trading activities in business
segments other than
GBAM
.
| Three Months Ended June 30 | ||||||||||||||||||||||||||||||||
| 2011 | 2010 | |||||||||||||||||||||||||||||||
| Trading | Trading | |||||||||||||||||||||||||||||||
| Account | Other | Net Interest | Account | Other | Net Interest | |||||||||||||||||||||||||||
|
(Dollars in millions)
|
Profits | Income (1, 2) | Income (3) | Total | Profits | Income (1, 2) | Income (3) | Total | ||||||||||||||||||||||||
|
Interest rate risk
|
$ | 488 | $ | 16 | $ | 199 | $ | 703 | $ | 434 | $ | 21 | $ | 138 | $ | 593 | ||||||||||||||||
|
Foreign exchange risk
|
261 | (16 | ) | 4 | 249 | 234 | (11 | ) | 1 | 224 | ||||||||||||||||||||||
|
Equity risk
|
539 | 564 | (22 | ) | 1,081 | 202 | 727 | (47 | ) | 882 | ||||||||||||||||||||||
|
Credit risk
|
579 | 218 | 760 | 1,557 | 447 | 73 | 959 | 1,479 | ||||||||||||||||||||||||
|
Other risk
|
164 | 12 | (31 | ) | 145 | (129 | ) | 30 | (43 | ) | (142 | ) | ||||||||||||||||||||
|
Total sales and trading revenue
|
$ | 2,031 | $ | 794 | $ | 910 | $ | 3,735 | $ | 1,188 | $ | 840 | $ | 1,008 | $ | 3,036 | ||||||||||||||||
| Six Months Ended June 30 | ||||||||||||||||||||||||||||||||
| 2011 | 2010 | |||||||||||||||||||||||||||||||
|
Interest rate risk
|
$ | 791 | $ | (7 | ) | $ | 415 | $ | 1,199 | $ | 1,493 | $ | 48 | $ | 327 | $ | 1,868 | |||||||||||||||
|
Foreign exchange risk
|
493 | (31 | ) | 7 | 469 | 515 | (18 | ) | 1 | 498 | ||||||||||||||||||||||
|
Equity risk
|
1,059 | 1,241 | 30 | 2,330 | 1,077 | 1,322 | (3 | ) | 2,396 | |||||||||||||||||||||||
|
Credit risk
|
1,983 | 769 | 1,552 | 4,304 | 3,109 | 121 | 1,953 | 5,183 | ||||||||||||||||||||||||
|
Other risk
|
293 | 45 | (65 | ) | 273 | 50 | 68 | (98 | ) | 20 | ||||||||||||||||||||||
|
Total sales and trading revenue
|
$ | 4,619 | $ | 2,017 | $ | 1,939 | $ | 8,575 | $ | 6,244 | $ | 1,541 | $ | 2,180 | $ | 9,965 | ||||||||||||||||
| (1) |
Represents investment and brokerage services and other income recorded in
GBAM
that
the Corporation includes in its definition of sales and trading revenue.
|
|
| (2) |
Other income includes commissions and brokerage fee revenue of $583 million and
$1.3 billion for the three and six months ended June 30, 2011 and $657 million and $1.3 billion for
the same periods in 2010.
|
|
| (3) |
Net interest income excludes FTE adjustments of $43 million and $98 million for the
three and six months ended June 30, 2011 compared to $75 million and $148 million for the same
periods in 2010.
|
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 pre-defined 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.
142
Table of Contents
Credit derivative instruments where the Corporation is the seller of credit protection and
their expiration at June 30, 2011 and December 31, 2010 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.
| June 30, 2011 | ||||||||||||||||||||
| Carrying Value | ||||||||||||||||||||
| Less than | One to Three | Three to | Over Five | |||||||||||||||||
|
(Dollars in millions)
|
One Year | Years | Five Years | Years | Total | |||||||||||||||
|
Credit default swaps:
|
||||||||||||||||||||
|
Investment grade
|
$ | 113 | $ | 1,393 | $ | 5,263 | $ | 5,788 | $ | 12,557 | ||||||||||
|
Non-investment grade
|
758 | 5,380 | 8,334 | 24,864 | 39,336 | |||||||||||||||
|
Total
|
871 | 6,773 | 13,597 | 30,652 | 51,893 | |||||||||||||||
|
Total return swaps/other:
|
||||||||||||||||||||
|
Investment grade
|
- | 35 | 79 | 255 | 369 | |||||||||||||||
|
Non-investment grade
|
2 | 8 | 32 | 209 | 251 | |||||||||||||||
|
Total
|
2 | 43 | 111 | 464 | 620 | |||||||||||||||
|
Total credit derivatives
|
$ | 873 | $ | 6,816 | $ | 13,708 | $ | 31,116 | $ | 52,513 | ||||||||||
|
Credit-related notes:
(1)
|
||||||||||||||||||||
|
Investment grade
|
1 | 17 | 415 | 2,952 | 3,385 | |||||||||||||||
|
Non-investment grade
|
9 | 26 | 208 | 1,722 | 1,965 | |||||||||||||||
|
Total credit-related notes
|
$ | 10 | $ | 43 | $ | 623 | $ | 4,674 | $ | 5,350 | ||||||||||
| Maximum Payout/Notional | ||||||||||||||||||||
|
Credit default swaps:
|
||||||||||||||||||||
|
Investment grade
|
$ | 133,694 | $ | 434,130 | $ | 456,682 | $ | 195,869 | $ | 1,220,375 | ||||||||||
|
Non-investment grade
|
97,824 | 273,164 | 201,725 | 197,442 | 770,155 | |||||||||||||||
|
Total
|
231,518 | 707,294 | 658,407 | 393,311 | 1,990,530 | |||||||||||||||
|
Total return swaps/other:
|
||||||||||||||||||||
|
Investment grade
|
110 | 2,493 | 29,026 | 4,953 | 36,582 | |||||||||||||||
|
Non-investment grade
|
83 | 942 | 2,272 | 909 | 4,206 | |||||||||||||||
|
Total
|
193 | 3,435 | 31,298 | 5,862 | 40,788 | |||||||||||||||
|
Total credit derivatives
|
$ | 231,711 | $ | 710,729 | $ | 689,705 | $ | 399,173 | $ | 2,031,318 | ||||||||||
| December 31, 2010 | ||||||||||||||||||||
| Carrying Value | ||||||||||||||||||||
| Less than | One to Three | Three to | Over Five | |||||||||||||||||
|
(Dollars in millions)
|
One Year | Years | Five Years | Years | Total | |||||||||||||||
|
Credit default swaps:
|
||||||||||||||||||||
|
Investment grade
|
$ | 158 | $ | 2,607 | $ | 7,331 | $ | 14,880 | $ | 24,976 | ||||||||||
|
Non-investment grade
|
598 | 6,630 | 7,854 | 23,106 | 38,188 | |||||||||||||||
|
Total
|
756 | 9,237 | 15,185 | 37,986 | 63,164 | |||||||||||||||
|
Total return swaps/other:
|
||||||||||||||||||||
|
Investment grade
|
- | - | 38 | 60 | 98 | |||||||||||||||
|
Non-investment grade
|
1 | 2 | 2 | 415 | 420 | |||||||||||||||
|
Total
|
1 | 2 | 40 | 475 | 518 | |||||||||||||||
|
Total credit derivatives
|
$ | 757 | $ | 9,239 | $ | 15,225 | $ | 38,461 | $ | 63,682 | ||||||||||
|
Credit-related notes:
(1, 2)
|
||||||||||||||||||||
|
Investment grade
|
- | 136 | - | 3,525 | 3,661 | |||||||||||||||
|
Non-investment grade
|
9 | 33 | 174 | 2,423 | 2,639 | |||||||||||||||
|
Total credit-related notes
|
$ | 9 | $ | 169 | $ | 174 | $ | 5,948 | $ | 6,300 | ||||||||||
| Maximum Payout/Notional | ||||||||||||||||||||
|
Credit default swaps:
|
||||||||||||||||||||
|
Investment grade
|
$ | 133,691 | $ | 466,565 | $ | 475,715 | $ | 275,434 | $ | 1,351,405 | ||||||||||
|
Non-investment grade
|
84,851 | 314,422 | 178,880 | 203,930 | 782,083 | |||||||||||||||
|
Total
|
218,542 | 780,987 | 654,595 | 479,364 | 2,133,488 | |||||||||||||||
|
Total return swaps/other:
|
||||||||||||||||||||
|
Investment grade
|
- | 10 | 15,413 | 4,012 | 19,435 | |||||||||||||||
|
Non-investment grade
|
113 | 78 | 951 | 1,897 | 3,039 | |||||||||||||||
|
Total
|
113 | 88 | 16,364 | 5,909 | 22,474 | |||||||||||||||
|
Total credit derivatives
|
$ | 218,655 | $ | 781,075 | $ | 670,959 | $ | 485,273 | $ | 2,155,962 | ||||||||||
| (1) |
For credit-related notes, maximum payout/notional is the same.
|
|
| (2) |
For December 31, 2010, total credit-related note amounts have been revised from
$3.6 billion (as previously reported) to $6.3 billion to reflect collateralized debt obligations
and collateralized loan obligations held by certain consolidated VIEs.
|
143
Table of Contents
The notional amount represents the maximum amount payable by the Corporation for most credit
derivatives. However, the Corporation does not solely monitor its exposure to credit derivatives
based on notional amount because this measure does not take into consideration the probability of
occurrence. As such, the notional amount is not a reliable indicator of the Corporation’s exposure
to these contracts. Instead, a risk framework is used to define risk tolerances and establish
limits to help ensure that certain credit risk-related losses occur within acceptable, pre-defined
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 amount and notional amount of written credit
derivatives for which the Corporation held purchased credit derivatives with identical underlying
referenced names and terms at June 30, 2011 was $31.4 billion and $1.1 trillion compared to $43.7
billion and $1.4 trillion at December 31, 2010.
Credit-related notes in the table on page 143 include investments in securities issued by
collateralized debt obligations (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 Corporation’s 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
(OTC) 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 discussed on page 137, the Corporation enters into legally
enforceable master netting agreements which reduce risk by permitting the closeout and netting of
transactions with the same counterparty upon the occurrence of certain events.
Substantially all of the Corporation’s derivative contracts contain credit risk related
contingent features, primarily in the form of International Swaps and Derivatives Association,
Inc. (ISDA) master netting agreements that enhance the creditworthiness of these instruments
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 Corporation’s
creditworthiness. At June 30, 2011 and December 31, 2010, the Corporation held cash and securities
collateral of $74.4 billion and $76.0 billion, and posted cash and securities collateral of $58.5
billion and $61.2 billion in the normal course of business under derivative agreements.
In connection with certain OTC 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 the 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. If the long-term
credit rating of the Corporation was incrementally downgraded by one level by all ratings
agencies, the amount of additional collateral and termination payments required for such
derivatives and trading agreements would have been approximately $1.5 billion at June 30, 2011 and
$1.2 billion at December 31, 2010. A second incremental one-level downgrade by the ratings
agencies would have required approximately $1.8 billion and $1.1 billion in additional collateral
and termination payments at June 30, 2011 and December 31, 2010. Excluded from these amounts are
potential additional collateral requirements due to contingent triggers applicable in certain
derivative contracts primarily with structured VIEs. The Corporation is in the process of
evaluating these requirements in the contracts.
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 valuation adjustments are subsequently adjusted due to changes in the value of
the derivative contract, collateral and creditworthiness of the counterparty. During
144
Table of Contents
the three and six months ended June 30, 2011, credit valuation losses of $(592) million and $(450)
million ($(151) million and $(624) million, net of hedges) compared to $(752) million and $(426)
million ($(302) million and $(370) million, net of hedges) for the same periods in 2010 for
counterparty credit risk related to derivative assets were recognized in trading account profits.
These credit valuation adjustments were primarily related to the Corporation’s monoline exposure.
At June 30, 2011 and December 31, 2010, the cumulative counterparty credit risk valuation
adjustment reduced the derivative assets balance by $7.1 billion and $6.8 billion.
In addition, the fair value of the Corporation’s or its subsidiaries’ derivative liabilities
is adjusted to reflect the impact of the Corporation’s credit quality. During the three and six
months ended June 30, 2011, the Corporation recorded DVA gains (losses) of $205 million and $(103)
million ($121 million and $(236) million, net of hedges) compared to $206 million and $368 million
($77 million and $246 million, net of hedges) for the same periods in 2010 in trading account
profits for changes in the Corporation’s or its subsidiaries’ credit risk. At June 30, 2011 and
December 31, 2010, the Corporation’s cumulative DVA reduced the derivative liabilities balance by
$983 million and $1.1 billion.
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 June 30, 2011 and December 31,
2010.
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | ||||||||||||||
|
(Dollars in millions)
|
Cost | Gains | Losses | Fair Value | ||||||||||||
|
Available-for-sale debt securities, June 30, 2011
|
||||||||||||||||
|
U.S. Treasury and agency securities
|
$ | 49,874 | $ | 684 | $ | (1,289 | ) | $ | 49,269 | |||||||
|
Mortgage-backed securities:
|
||||||||||||||||
|
Agency
|
180,151 | 3,128 | (1,663 | ) | 181,616 | |||||||||||
|
Agency collateralized mortgage obligations
|
48,212 | 930 | (31 | ) | 49,111 | |||||||||||
|
Non-agency residential
(1)
|
19,564 | 568 | (557 | ) | 19,575 | |||||||||||
|
Non-agency commercial
|
6,018 | 702 | (2 | ) | 6,718 | |||||||||||
|
Non-U.S. securities
|
4,314 | 62 | (16 | ) | 4,360 | |||||||||||
|
Corporate bonds
|
4,388 | 154 | (4 | ) | 4,538 | |||||||||||
|
Other
taxable securities, substantially all asset-backed securities
|
12,010 | 79 | (66 | ) | 12,023 | |||||||||||
|
Total taxable securities
|
324,531 | 6,307 | (3,628 | ) | 327,210 | |||||||||||
|
Tax-exempt securities
|
3,808 | 18 | (165 | ) | 3,661 | |||||||||||
|
Total available-for-sale debt securities
|
$ | 328,339 | $ | 6,325 | $ | (3,793 | ) | $ | 330,871 | |||||||
|
Available-for-sale marketable equity securities, June 30, 2011
(2)
|
$ | 8,536 | $ | 10,445 | $ | (19 | ) | $ | 18,962 | |||||||
|
|
||||||||||||||||
|
Available-for-sale debt securities, December 31, 2010
|
||||||||||||||||
|
U.S. Treasury and agency securities
|
$ | 49,413 | $ | 604 | $ | (912 | ) | $ | 49,105 | |||||||
|
Mortgage-backed securities:
|
||||||||||||||||
|
Agency
|
190,409 | 3,048 | (2,240 | ) | 191,217 | |||||||||||
|
Agency collateralized mortgage obligations
|
36,639 | 401 | (23 | ) | 37,017 | |||||||||||
|
Non-agency residential
(1)
|
23,458 | 588 | (929 | ) | 23,117 | |||||||||||
|
Non-agency commercial
|
6,167 | 686 | (1 | ) | 6,852 | |||||||||||
|
Non-U.S. securities
|
4,054 | 92 | (7 | ) | 4,139 | |||||||||||
|
Corporate bonds
|
5,157 | 144 | (10 | ) | 5,291 | |||||||||||
|
Other
taxable securities, substantially all asset-backed securities
|
15,514 | 39 | (161 | ) | 15,392 | |||||||||||
|
Total taxable securities
|
330,811 | 5,602 | (4,283 | ) | 332,130 | |||||||||||
|
Tax-exempt securities
|
5,687 | 32 | (222 | ) | 5,497 | |||||||||||
|
Total available-for-sale debt securities
|
$ | 336,498 | $ | 5,634 | $ | (4,505 | ) | $ | 337,627 | |||||||
|
Available-for-sale marketable equity securities, December 31, 2010
(2)
|
$ | 8,650 | $ | 10,628 | $ | (13 | ) | $ | 19,265 | |||||||
| (1) |
At June 30, 2011, includes approximately 90 percent prime bonds, nine percent Alt-A bonds and one percent subprime bonds. At December 31, 2010, includes approximately 90 percent prime bonds, eight percent Alt-A bonds and two percent subprime bonds.
|
|
| (2) |
Classified in other assets on the Corporation’s Consolidated Balance Sheet.
|
At June 30, 2011, the accumulated net unrealized gains on AFS debt securities included in
accumulated OCI were $1.6 billion, net of the related income tax expense of $944 million. At June
30, 2011 and December 31, 2010, both the amortized cost and fair value of held-to-maturity debt
securities were $181 million and $427 million. At June 30, 2011 and December 31, 2010, the
Corporation had nonperforming AFS debt securities with a fair value of $17 million and $44
million.
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Table of Contents
The Corporation recorded other-than-temporary impairment (OTTI) losses on AFS debt securities
for the three and six months ended June 30, 2011 and 2010 as presented in the table below. If the
fair value of an AFS debt security is less than its amortized cost, a security is determined to be
impaired and an OTTI loss is recorded. For AFS debt securities that the Corporation does not
intend or will not more-likely-than-not be required to sell, the OTTI loss is separated into an
amount representing a credit loss and an amount representing other factors (e.g., interest rate).
The credit loss portion of the OTTI loss is recorded in earnings and the remaining portion is
recorded in accumulated OCI. Subsequently, the debt securities continue to be evaluated for
additional credit losses until the fair value of the debt security increases to an amount greater
than its amortized cost which has been adjusted for any previously recognized credit losses. If
the Corporation intends or will more-likely-than-not be required to sell the AFS debt securities
prior to recovery, the entire OTTI loss is recorded in earnings. For certain securities, the
credit loss portion of the OTTI exceeded the total OTTI loss. In these instances, the portion of
the credit losses that exceeded the OTTI loss represented an unrealized gain related to other
factors and was recorded in accumulated OCI as an unrealized gain. Balances in the table exclude
$3 million and $10 million of unrealized gains recorded in accumulated OCI related to these
securities for the three and six months ended June 30, 2011 and $16 million and $49 million for
the same periods in 2010.
| Three Months Ended June 30, 2011 | ||||||||||||||||||||||||
| Non-agency | Non-agency | Other | ||||||||||||||||||||||
| Residential | Commercial | Non-U.S. | Corporate | Taxable | ||||||||||||||||||||
|
(Dollars in millions)
|
MBS | MBS | Securities | Bonds | Securities | Total | ||||||||||||||||||
|
Total OTTI losses
|
$ | (48 | ) | $ | - | $ | (12 | ) | $ | - | $ | (3 | ) | $ | (63 | ) | ||||||||
|
OTTI losses recognized in accumulated OCI
|
17 | - | - | - | 1 | 18 | ||||||||||||||||||
|
Net impairment losses recognized in earnings
|
$ | (31 | ) | $ | - | $ | (12 | ) | $ | - | $ | (2 | ) | $ | (45 | ) | ||||||||
| Three Months Ended June 30, 2010 | ||||||||||||||||||||||||
|
Total OTTI losses
|
$ | (145 | ) | $ | (1 | ) | $ | (285 | ) | $ | - | $ | (31 | ) | $ | (462 | ) | |||||||
|
OTTI losses recognized in accumulated OCI
|
74 | - | 261 | - | 1 | 336 | ||||||||||||||||||
|
Net impairment losses recognized in earnings
|
$ | (71 | ) | $ | (1 | ) | $ | (24 | ) | $ | - | $ | (30 | ) | $ | (126 | ) | |||||||
| Six months Ended June 30, 2011 | ||||||||||||||||||||||||
|
Total OTTI losses
|
$ | (142 | ) | $ | - | $ | (12 | ) | $ | - | $ | (3 | ) | $ | (157 | ) | ||||||||
|
OTTI losses recognized in accumulated OCI
|
23 | - | - | - | 1 | 24 | ||||||||||||||||||
|
Net impairment losses recognized in earnings
|
$ | (119 | ) | $ | - | $ | (12 | ) | $ | - | $ | (2 | ) | $ | (133 | ) | ||||||||
| Six months Ended June 30, 2010 | ||||||||||||||||||||||||
|
Total OTTI losses
|
$ | (463 | ) | $ | (1 | ) | $ | (975 | ) | $ | (2 | ) | $ | (342 | ) | $ | (1,783 | ) | ||||||
|
OTTI losses recognized in accumulated OCI
|
119 | - | 780 | - | 157 | 1,056 | ||||||||||||||||||
|
Net impairment losses recognized in earnings
|
$ | (344 | ) | $ | (1 | ) | $ | (195 | ) | $ | (2 | ) | $ | (185 | ) | $ | (727 | ) | ||||||
The table below presents a rollforward of the credit loss portion of OTTI losses recognized
in earnings on debt securities in which a portion of the OTTI loss remains in accumulated OCI for
the three and six months ended June 30, 2011 and 2010.
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
|
(Dollars in millions)
|
2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Balance, beginning of period
|
$ | 378 | $ | 1,084 | $ | 326 | $ | 706 | ||||||||
|
Additions for the credit component on debt securities on which OTTI
losses were not previously recognized
|
14 | 47 | 47 | 271 | ||||||||||||
|
Additions for the credit component on debt securities on which OTTI
losses were previously recognized
|
31 | 79 | 86 | 456 | ||||||||||||
|
Reductions for debt securities sold on which OTTI losses were
previously recognized
|
(5 | ) | (510 | ) | (41 | ) | (733 | ) | ||||||||
|
Balance, June 30
|
$ | 418 | $ | 700 | $ | 418 | $ | 700 | ||||||||
146
Table of Contents
The Corporation estimates the portion of loss attributable to credit using a discounted cash
flow model and estimates the expected cash flows of the underlying collateral using internal
credit, interest rate and prepayment risk models that incorporate management’s best estimate of
current key assumptions such as default rates, loss severity and prepayment rates. Assumptions
used can vary widely from loan to loan and are influenced by such factors as loan interest rate,
geographical location of the borrower, borrower characteristics and collateral type. The
Corporation then uses a third-party vendor to determine how the underlying collateral cash flows
will be distributed to each security issued from the structure. Expected principal and interest
cash flows on an impaired debt security are discounted using the book yield of each individual
impaired debt security. Significant assumptions used in the valuation of non-agency residential
mortgage-backed securities (RMBS) were as follows at June 30, 2011.
| Range (1) | ||||||||||||
| 10 th | 90 th | |||||||||||
| Weighted- average | Percentile (2) | Percentile (2) | ||||||||||
|
Prepayment speed
|
8.2 | % | 3.0 | % | 16.0 | % | ||||||
|
Loss severity
|
49.6 | 17.3 | 62.1 | |||||||||
|
Life default rate
|
51.8 | 2.2 | 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.
|
Additionally, 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 44
percent for prime bonds, 51 percent for Alt-A bonds and 59 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 39 percent for prime bonds, 66 percent for Alt-A bonds and 69 percent for
subprime bonds.
147
Table of Contents
The table below presents the fair value and the associated gross unrealized losses on
investments in securities with gross unrealized losses at June 30, 2011 and 2010, 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
June 30, 2011
|
||||||||||||||||||||||||
|
U.S. Treasury and agency securities
|
$ | - | $ | - | $ | 29,514 | $ | (1,289 | ) | $ | 29,514 | $ | (1,289 | ) | ||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||||||
|
Agency
|
75,586 | (1,622 | ) | 1,378 | (41 | ) | 76,964 | (1,663 | ) | |||||||||||||||
|
Agency collateralized mortgage obligations
|
2,042 | (7 | ) | 1,072 | (24 | ) | 3,114 | (31 | ) | |||||||||||||||
|
Non-agency residential
|
4,165 | (204 | ) | 2,354 | (235 | ) | 6,519 | (439 | ) | |||||||||||||||
|
Non-agency commercial
|
57 | (1 | ) | 8 | (1 | ) | 65 | (2 | ) | |||||||||||||||
|
Non-U.S. securities
|
- | - | 61 | (16 | ) | 61 | (16 | ) | ||||||||||||||||
|
Corporate bonds
|
- | - | 100 | (4 | ) | 100 | (4 | ) | ||||||||||||||||
|
Other taxable securities
|
- | - | 3,962 | (50 | ) | 3,962 | (50 | ) | ||||||||||||||||
|
Total taxable securities
|
81,850 | (1,834 | ) | 38,449 | (1,660 | ) | 120,299 | (3,494 | ) | |||||||||||||||
|
Tax-exempt securities
|
1,612 | (78 | ) | 1,487 | (86 | ) | 3,099 | (164 | ) | |||||||||||||||
|
Total temporarily-impaired available-for-sale debt securities
|
83,462 | (1,912 | ) | 39,936 | (1,746 | ) | 123,398 | (3,658 | ) | |||||||||||||||
|
Temporarily-impaired available-for-sale marketable equity
securities
|
12 | (7 | ) | 22 | (12 | ) | 34 | (19 | ) | |||||||||||||||
|
Total temporarily-impaired available-for-sale securities
|
83,474 | (1,919 | ) | 39,958 | (1,758 | ) | 123,432 | (3,677 | ) | |||||||||||||||
|
Other-than-temporarily impaired available-for-sale debt
securities
(1)
|
||||||||||||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||||||
|
Non-agency residential
|
175 | (16 | ) | 598 | (102 | ) | 773 | (118 | ) | |||||||||||||||
|
Other taxable securities
|
- | - | 124 | (16 | ) | 124 | (16 | ) | ||||||||||||||||
|
Tax-exempt securities
|
- | - | 7 | (1 | ) | 7 | (1 | ) | ||||||||||||||||
|
Total temporarily-impaired and other-than-temporarily
impaired available-for-sale securities
(2)
|
$ | 83,649 | $ | (1,935 | ) | $ | 40,687 | $ | (1,877 | ) | $ | 124,336 | $ | (3,812 | ) | |||||||||
|
|
||||||||||||||||||||||||
|
Temporarily-impaired available-for-sale debt securities
at December 31, 2010
|
||||||||||||||||||||||||
|
U.S. Treasury and agency securities
|
$ | 27,384 | $ | (763 | ) | $ | 2,382 | $ | (149 | ) | $ | 29,766 | $ | (912 | ) | |||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||||||
|
Agency
|
85,517 | (2,240 | ) | - | - | 85,517 | (2,240 | ) | ||||||||||||||||
|
Agency collateralized mortgage obligations
|
3,220 | (23 | ) | - | - | 3,220 | (23 | ) | ||||||||||||||||
|
Non-agency residential
|
6,385 | (205 | ) | 2,245 | (274 | ) | 8,630 | (479 | ) | |||||||||||||||
|
Non-agency commercial
|
47 | (1 | ) | - | - | 47 | (1 | ) | ||||||||||||||||
|
Non-U.S. securities
|
- | - | 70 | (7 | ) | 70 | (7 | ) | ||||||||||||||||
|
Corporate bonds
|
465 | (9 | ) | 22 | (1 | ) | 487 | (10 | ) | |||||||||||||||
|
Other taxable securities
|
3,414 | (38 | ) | 46 | (7 | ) | 3,460 | (45 | ) | |||||||||||||||
|
Total taxable securities
|
126,432 | (3,279 | ) | 4,765 | (438 | ) | 131,197 | (3,717 | ) | |||||||||||||||
|
Tax-exempt securities
|
2,325 | (95 | ) | 568 | (119 | ) | 2,893 | (214 | ) | |||||||||||||||
|
Total temporarily-impaired available-for-sale debt securities
|
128,757 | (3,374 | ) | 5,333 | (557 | ) | 134,090 | (3,931 | ) | |||||||||||||||
|
Temporarily-impaired available-for-sale marketable equity
securities
|
7 | (2 | ) | 19 | (11 | ) | 26 | (13 | ) | |||||||||||||||
|
Total temporarily-impaired available-for-sale securities
|
128,764 | (3,376 | ) | 5,352 | (568 | ) | 134,116 | (3,944 | ) | |||||||||||||||
|
Other-than-temporarily impaired available-for-sale debt
securities
(1)
|
||||||||||||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||||||
|
Non-agency residential
|
128 | (11 | ) | 530 | (439 | ) | 658 | (450 | ) | |||||||||||||||
|
Other taxable securities
|
- | - | 223 | (116 | ) | 223 | (116 | ) | ||||||||||||||||
|
Tax-exempt securities
|
68 | (8 | ) | - | - | 68 | (8 | ) | ||||||||||||||||
|
Total temporarily-impaired and other-than-temporarily
impaired available-for-sale securities
(2)
|
$ | 128,960 | $ | (3,395 | ) | $ | 6,105 | $ | (1,123 | ) | $ | 135,065 | $ | (4,518 | ) | |||||||||
| (1) |
Includes AFS debt securities on which OTTI losses were recognized and a portion of the OTTI loss was recorded as a credit loss in earnings and a portion
as an unrealized loss in OCI.
|
|
| (2) |
At June 30, 2011, the amortized cost of approximately 5,300 AFS securities exceeded their fair value by $3.8 billion. At December 31, 2010, the amortized
cost of approximately 8,500 AFS securities exceeded their fair value by $4.5 billion.
|
148
Table of Contents
The amortized cost and fair value of the Corporation’s investment in AFS debt
securities from Fannie Mae (FNMA), the Government National Mortgage Association (GNMA) and Freddie
Mac (FHLMC), and U.S. Treasury securities where the investment exceeded 10 percent of consolidated
shareholders’ equity at June 30, 2011 and December 31, 2010 are presented in the table below.
| June 30, 2011 | December 31, 2010 | |||||||||||||||
| Amortized | Fair | Amortized | Fair | |||||||||||||
| (Dollars in millions) | Cost | Value | Cost | Value | ||||||||||||
|
Fannie Mae
|
$ | 133,053 | $ | 132,917 | $ | 123,662 | $ | 123,107 | ||||||||
|
Government National Mortgage Association
|
27,833 | 27,894 | 72,863 | 74,305 | ||||||||||||
|
Freddie Mac
|
67,477 | 69,916 | 30,523 | 30,822 | ||||||||||||
|
U.S Treasury Securities
|
46,961 | 46,174 | 46,576 | 46,081 | ||||||||||||
The expected maturity distribution of the Corporation’s MBS and the contractual
maturity distribution of the Corporation’s other AFS debt securities, and the yields on the
Corporation’s AFS debt securities portfolio at June 30, 2011 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.
| June 30, 2011 | ||||||||||||||||||||||||||||||||||||||||
| 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) | ||||||||||||||||||||||||||||||
|
Amortized cost of AFS debt securities
|
||||||||||||||||||||||||||||||||||||||||
|
U.S. Treasury and agency securities
|
$ | 492 | 4.80 | % | $ | 1,633 | 2.00 | % | $ | 12,290 | 3.30 | % | $ | 35,459 | 4.10 | % | $ | 49,874 | 3.90 | % | ||||||||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||||||||||||||||||||||
|
Agency
|
25 | 4.40 | 67,665 | 4.00 | 43,235 | 4.00 | 69,226 | 3.70 | 180,151 | 3.90 | ||||||||||||||||||||||||||||||
|
Agency-collateralized mortgage
obligations
|
62 | 0.60 | 17,650 | 3.00 | 13,115 | 4.20 | 17,385 | 3.50 | 48,212 | 3.50 | ||||||||||||||||||||||||||||||
|
Non-agency residential
|
188 | 7.00 | 3,205 | 5.90 | 1,236 | 5.90 | 14,935 | 4.20 | 19,564 | 4.60 | ||||||||||||||||||||||||||||||
|
Non-agency commercial
|
486 | 4.40 | 5,135 | 6.60 | 131 | 6.80 | 266 | 6.80 | 6,018 | 6.50 | ||||||||||||||||||||||||||||||
|
Non-U.S. securities
|
2,058 | 0.60 | 2,087 | 4.90 | 169 | 3.70 | - | - | 4,314 | 4.90 | ||||||||||||||||||||||||||||||
|
Corporate bonds
|
241 | 3.60 | 2,859 | 2.10 | 1,127 | 3.50 | 161 | 0.80 | 4,388 | 2.40 | ||||||||||||||||||||||||||||||
|
Other taxable securities
|
1,344 | 1.40 | 5,329 | 1.40 | 1,136 | 1.90 | 4,201 | 0.50 | 12,010 | 1.10 | ||||||||||||||||||||||||||||||
|
Total taxable securities
|
4,896 | 2.03 | 105,563 | 3.82 | 72,439 | 3.91 | 141,633 | 3.74 | 324,531 | 3.82 | ||||||||||||||||||||||||||||||
|
Tax-exempt securities
|
89 | 4.30 | 746 | 4.40 | 856 | 4.50 | 2,117 | 4.60 | 3,808 | 4.50 | ||||||||||||||||||||||||||||||
|
Total amortized cost of AFS debt
securities
|
$ | 4,985 | 2.07 | $ | 106,309 | 3.83 | $ | 73,295 | 3.92 | $ | 143,750 | 3.75 | $ | 328,339 | 3.83 | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Fair value of AFS debt securities
|
||||||||||||||||||||||||||||||||||||||||
|
U.S. Treasury and agency securities
|
$ | 493 | $ | 1,676 | $ | 12,694 | $ | 34,406 | $ | 49,269 | ||||||||||||||||||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||||||||||||||||||||||
|
Agency
|
27 | 69,599 | 43,866 | 68,124 | 181,616 | |||||||||||||||||||||||||||||||||||
|
Agency-collateralized mortgage
obligations
|
62 | 17,959 | 13,614 | 17,476 | 49,111 | |||||||||||||||||||||||||||||||||||
|
Non-agency residential
|
152 | 3,188 | 1,263 | 14,972 | 19,575 | |||||||||||||||||||||||||||||||||||
|
Non-agency commercial
|
490 | 5,782 | 147 | 299 | 6,718 | |||||||||||||||||||||||||||||||||||
|
Non-U.S. securities
|
2,055 | 2,132 | 173 | - | 4,360 | |||||||||||||||||||||||||||||||||||
|
Corporate bonds
|
245 | 2,951 | 1,181 | 161 | 4,538 | |||||||||||||||||||||||||||||||||||
|
Other taxable securities
|
1,346 | 5,374 | 1,153 | 4,150 | 12,023 | |||||||||||||||||||||||||||||||||||
|
Total taxable securities
|
4,870 | 108,661 | 74,091 | 139,588 | 327,210 | |||||||||||||||||||||||||||||||||||
|
Tax-exempt securities
|
90 | 739 | 828 | 2,004 | 3,661 | |||||||||||||||||||||||||||||||||||
|
Total fair value of AFS debt
securities
|
$ | 4,960 | $ | 109,400 | $ | 74,919 | $ | 141,592 | $ | 330,871 | ||||||||||||||||||||||||||||||
| (1) |
Yields are calculated based on the amortized cost of the securities and exclude the impact of hedging activities.
|
The gross realized gains and losses on sales of debt securities for the three and six
months ended June 30, 2011 and 2010 are presented in the table below.
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Gross gains
|
$ | 901 | $ | 942 | $ | 1,455 | $ | 1,848 | ||||||||
|
Gross losses
|
(2 | ) | (905 | ) | (10 | ) | (1,077 | ) | ||||||||
|
Net gains on sales of debt securities
|
$ | 899 | $ | 37 | $ | 1,445 | $ | 771 | ||||||||
|
Income tax expense attributable to realized net gains on sales
of debt securities
|
$ | 333 | $ | 14 | $ | 535 | $ | 285 | ||||||||
149
Table of Contents
Certain Corporate and Strategic Investments
At both June 30, 2011 and December 31, 2010, the Corporation owned 25.6 billion shares
representing approximately 10 percent of China Construction Bank (CCB). Of the Corporation’s
investment in CCB, 23.6 billion shares are classified as AFS. Sales restrictions on the remaining
two billion CCB shares continue until August 2013 and accordingly these shares continue to be
carried at cost. At June 30, 2011, the cost basis of the Corporation’s total investment in CCB was
$9.2 billion, the carrying value was $19.6 billion and the fair value was $20.5 billion. At
December 31, 2010, the cost basis was $9.2 billion, the carrying value was $19.7 billion and the
fair value was $20.8 billion. This investment is recorded in other assets. Dividend income on this
investment is recorded in equity investment income and during the six months ended June 30, 2011
and 2010, the Corporation recorded dividends of $837 million and $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.
In June 2011, the Corporation sold its remaining ownership interest of approximately 13.6
million preferred shares, or seven percent of BlackRock, Inc. The investment was recorded in other
assets at cost. In connection with the sale, the Corporation recorded a pre-tax gain of $377
million.
A joint venture was formed in 2009 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. The Corporation‘s 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. In the three months ended
June 30, 2011, the Corporation recorded a $500 million impairment write-down on the joint venture.
The joint venture had a carrying value at June 30, 2011 and December 31, 2010 of $4.1 billion and
$4.7 billion with the reduction in carrying value primarily the result of the impairment mentioned
above.
150
Table of Contents
The tables below present total outstanding loans and leases and an aging analysis at
June 30, 2011 and December 31, 2010.
The Legacy Asset Servicing portfolio, as shown in the table below, is a separately managed
legacy mortgage portfolio. Legacy Asset Servicing, which was created on January 1, 2011 in
connection with the re-alignment of
CRES
, is responsible for servicing loans on its balance sheet
and for others including loans held in other business segments and
All Other
. This includes
servicing and managing the runoff and exposures related to selected residential mortgages and home
equity loans, including discontinued real estate products, Countrywide PCI loans and certain loans
that met a pre-defined delinquency status or probability of default threshold as of January 1,
2011. Since making the determination of the pool of loans to be included in the Legacy Asset
Servicing portfolio, the criteria have not changed for this
portfolio; however, the criteria will
continue to be evaluated over time.
| June 30, 2011 | ||||||||||||||||||||||||||||||||
| Loans | ||||||||||||||||||||||||||||||||
| Total Past | Total Current | Purchased | Accounted for | |||||||||||||||||||||||||||||
| 30-59 Days | 60-89 Days | 90 Days or | Due 30 Days | or Less Than 30 | Credit - | Under the Fair | Total | |||||||||||||||||||||||||
| (Dollars in millions) | Past Due (1) | Past Due (1) | More Past Due (2) | or More | Days Past Due (3) | impaired (4) | Value Option | Outstandings | ||||||||||||||||||||||||
|
Home loans
|
||||||||||||||||||||||||||||||||
|
Core portfolio
|
||||||||||||||||||||||||||||||||
|
Residential mortgage
(5)
|
$ | 1,777 | $ | 594 | $ | 1,842 | $ | 4,213 | $ | 171,339 | $ | - | $ | 175,552 | ||||||||||||||||||
|
Home equity
|
236 | 148 | 250 | 634 | 68,537 | - | 69,171 | |||||||||||||||||||||||||
|
Legacy Asset Servicing portfolio
|
||||||||||||||||||||||||||||||||
|
Residential mortgage
|
3,864 | 2,523 | 33,277 | 39,664 | 40,893 | 10,224 | 90,781 | |||||||||||||||||||||||||
|
Home equity
|
882 | 541 | 1,764 | 3,187 | 45,981 | 12,315 | 61,483 | |||||||||||||||||||||||||
|
Discontinued real estate
(6)
|
59 | 31 | 403 | 493 | 633 | 10,877 | 12,003 | |||||||||||||||||||||||||
|
Credit card and other consumer
|
||||||||||||||||||||||||||||||||
|
U.S. credit card
|
1,032 | 818 | 2,413 | 4,263 | 100,396 | - | 104,659 | |||||||||||||||||||||||||
|
Non-U.S. credit card
|
363 | 245 | 607 | 1,215 | 24,822 | - | 26,037 | |||||||||||||||||||||||||
|
Direct/Indirect consumer
(7)
|
782 | 343 | 855 | 1,980 | 88,278 | - | 90,258 | |||||||||||||||||||||||||
|
Other consumer
(8)
|
53 | 22 | 28 | 103 | 2,659 | - | 2,762 | |||||||||||||||||||||||||
|
Total consumer loans
|
9,048 | 5,265 | 41,439 | 55,752 | 543,538 | 33,416 | 632,706 | |||||||||||||||||||||||||
|
Consumer loans accounted for
under the fair value option
(9)
|
$ | 5,194 | 5,194 | |||||||||||||||||||||||||||||
|
Total consumer
|
9,048 | 5,265 | 41,439 | 55,752 | 543,538 | 33,416 | 5,194 | 637,900 | ||||||||||||||||||||||||
|
Commercial
|
||||||||||||||||||||||||||||||||
|
U.S. commercial
|
568 | 199 | 1,046 | 1,813 | 174,863 | 1 | 176,677 | |||||||||||||||||||||||||
|
Commercial real estate
(10)
|
230 | 210 | 2,904 | 3,344 | 40,530 | 154 | 44,028 | |||||||||||||||||||||||||
|
Commercial lease financing
|
29 | 30 | 28 | 87 | 21,304 | - | 21,391 | |||||||||||||||||||||||||
|
Non-U.S. commercial
|
1 | - | 3 | 4 | 42,899 | 26 | 42,929 | |||||||||||||||||||||||||
|
U.S. small business commercial
|
143 | 117 | 332 | 592 | 13,337 | - | 13,929 | |||||||||||||||||||||||||
|
Total commercial loans
|
971 | 556 | 4,313 | 5,840 | 292,933 | 181 | 298,954 | |||||||||||||||||||||||||
|
Commercial loans accounted for
under the fair value option
(9)
|
4,403 | 4,403 | ||||||||||||||||||||||||||||||
|
Total commercial
|
971 | 556 | 4,313 | 5,840 | 292,933 | 181 | 4,403 | 303,357 | ||||||||||||||||||||||||
|
Total loans and leases
|
$ | 10,019 | $ | 5,821 | $ | 45,752 | $ | 61,592 | $ | 836,471 | $ | 33,597 | $ | 9,597 | $ | 941,257 | ||||||||||||||||
|
Percentage of outstandings
|
1.06 | % | 0.62 | % | 4.86 | % | 6.54 | % | 88.87 | % | 3.57 | % | 1.02 | % | ||||||||||||||||||
| (1) |
Home loans includes $3.8 billion of fully-insured loans, $745 million of nonperforming loans and $129 million of TDRs that were removed from the Countrywide PCI loan portfolio prior to the
adoption of accounting guidance on PCI loans effective January 1, 2010.
|
|
| (2) |
Home loans includes $20.0 billion of fully-insured loans and $385 million of TDRs that were removed from the Countrywide PCI loan portfolio prior to the adoption of accounting guidance on PCI
loans effective January 1, 2010.
|
|
| (3) |
Home loans includes $1.5 billion of nonperforming loans as all principal and interest are not current or are TDRs that have not demonstrated sustained repayment performance.
|
|
| (4) |
PCI loan amounts are shown gross of the valuation allowance and exclude $1.5 billion of PCI home loans from the Merrill Lynch acquisition which are included in their appropriate aging categories.
|
|
| (5) |
Total outstandings include non-U.S. residential mortgages of $90 million at June 30, 2011.
|
|
| (6) |
Total outstandings include $10.7 billion of pay option loans and $1.3 billion of subprime loans at June 30, 2011. The Corporation no longer originates these products.
|
|
| (7) |
Total outstandings include dealer financial services loans of $42.1 billion, consumer lending of $9.9 billion, U.S. securities-based lending margin loans of $21.3 billion, student loans of $6.3
billion, non-U.S. consumer loans of $8.7 billion and other consumer loans of $2.0 billion at June 30, 2011.
|
|
| (8) |
Total outstandings include consumer finance loans of $1.8 billion, other non-U.S. consumer loans of $866 million and consumer overdrafts of $104 million at June 30, 2011.
|
|
| (9) |
Certain consumer loans are accounted for under the fair value option and include residential mortgage loans of $1.2 billion and discontinued real estate loans of $4.0 billion at June 30, 2011.
Certain commercial loans are accounted for under the fair value option and include U.S. commercial loans of $1.6 billion, non-U.S. commercial loans of $2.8 billion and commercial real estate
loans of $11 million at June 30, 2011. See
Note 16
– Fair Value Measurements
and
Note 17 – Fair Value Option
for additional information.
|
|
| (10) |
Total outstandings include U.S. commercial real estate loans of $41.7 billion and non-U.S. commercial real estate loans of $2.3 billion at June 30, 2011.
|
151
Table of Contents
| December 31, 2010 | ||||||||||||||||||||||||||||||||
| Loans | ||||||||||||||||||||||||||||||||
| Total Past | Total Current | Purchased | Accounted for | |||||||||||||||||||||||||||||
| 30-59 Days | 60-89 Days | 90 Days or | Due 30 Days | or Less Than 30 | Credit - | Under the Fair | Total | |||||||||||||||||||||||||
| (Dollars in millions) | Past Due (1) | Past Due (1) | More Past Due (2) | or More | Days Past Due (3) | impaired (4) | Value Option | Outstandings | ||||||||||||||||||||||||
|
Home loans
|
||||||||||||||||||||||||||||||||
|
Core portfolio
|
||||||||||||||||||||||||||||||||
|
Residential mortgage
(5)
|
$ | 1,160 | $ | 236 | $ | 1,255 | $ | 2,651 | $ | 164,276 | $ | - | $ | 166,927 | ||||||||||||||||||
|
Home equity
|
186 | 12 | 105 | 303 | 71,216 | - | 71,519 | |||||||||||||||||||||||||
|
Legacy Asset Servicing portfolio
|
||||||||||||||||||||||||||||||||
|
Residential mortgage
|
3,999 | 2,879 | 31,985 | 38,863 | 41,591 | 10,592 | 91,046 | |||||||||||||||||||||||||
|
Home equity
|
1,096 | 792 | 2,186 | 4,074 | 49,798 | 12,590 | 66,462 | |||||||||||||||||||||||||
|
Discontinued real estate
(6)
|
68 | 39 | 419 | 526 | 930 | 11,652 | 13,108 | |||||||||||||||||||||||||
|
Credit card and other consumer
|
||||||||||||||||||||||||||||||||
|
U.S. credit card
|
1,398 | 1,195 | 3,320 | 5,913 | 107,872 | - | 113,785 | |||||||||||||||||||||||||
|
Non-U.S. credit card
|
439 | 316 | 599 | 1,354 | 26,111 | - | 27,465 | |||||||||||||||||||||||||
|
Direct/Indirect consumer
(7)
|
1,086 | 522 | 1,104 | 2,712 | 87,596 | - | 90,308 | |||||||||||||||||||||||||
|
Other consumer
(8)
|
65 | 25 | 50 | 140 | 2,690 | - | 2,830 | |||||||||||||||||||||||||
|
Total consumer
|
9,497 | 6,016 | 41,023 | 56,536 | 552,080 | 34,834 | 643,450 | |||||||||||||||||||||||||
|
Commercial
|
||||||||||||||||||||||||||||||||
|
U.S. commercial
|
605 | 341 | 1,453 | 2,399 | 173,185 | 2 | 175,586 | |||||||||||||||||||||||||
|
Commercial real estate
(9)
|
535 | 186 | 3,554 | 4,275 | 44,957 | 161 | 49,393 | |||||||||||||||||||||||||
|
Commercial lease financing
|
95 | 23 | 31 | 149 | 21,793 | - | 21,942 | |||||||||||||||||||||||||
|
Non-U.S. commercial
|
25 | 2 | 6 | 33 | 31,955 | 41 | 32,029 | |||||||||||||||||||||||||
|
U.S. small business commercial
|
195 | 165 | 438 | 798 | 13,921 | - | 14,719 | |||||||||||||||||||||||||
|
Total commercial loans
|
1,455 | 717 | 5,482 | 7,654 | 285,811 | 204 | 293,669 | |||||||||||||||||||||||||
|
Commercial loans accounted for
under the fair value option
(10)
|
- | - | - | - | - | - | $ | 3,321 | 3,321 | |||||||||||||||||||||||
|
Total commercial
|
1,455 | 717 | 5,482 | 7,654 | 285,811 | 204 | 3,321 | 296,990 | ||||||||||||||||||||||||
|
Total loans and leases
|
$ | 10,952 | $ | 6,733 | $ | 46,505 | $ | 64,190 | $ | 837,891 | $ | 35,038 | $ | 3,321 | $ | 940,440 | ||||||||||||||||
|
Percentage of outstandings
|
1.16 | % | 0.72 | % | 4.95 | % | 6.83 | % | 89.10 | % | 3.72 | % | 0.35 | % | ||||||||||||||||||
| (1) |
Home loans includes $2.4 billion of fully-insured loans, $818 million of nonperforming loans and $156 million of TDRs that were removed from the Countrywide PCI loan portfolio prior to the adoption of accounting guidance on PCI loans effective January 1, 2010.
|
|
| (2) |
Home loans includes $16.8 billion of fully-insured loans and $372 million of TDRs that were removed from the Countrywide PCI loan portfolio prior to the adoption of accounting guidance on PCI loans effective January 1, 2010.
|
|
| (3) |
Home loans includes $1.1 billion of nonperforming loans as all principal and interest are not current or are TDRs that have not demonstrated sustained repayment performance.
|
|
| (4) |
PCI loan amounts are shown gross of the valuation allowance and exclude $1.6 billion of PCI home loans from the Merrill Lynch acquisition which are included in their appropriate aging categories.
|
|
| (5) |
Total outstandings include non-U.S. residential mortgages of $90 million at December 31, 2010.
|
|
| (6) |
Total outstandings include $11.8 billion of pay option loans and $1.3 billion of subprime loans at December 31, 2010. The Corporation no longer originates these products.
|
|
| (7) |
Total outstandings include dealer financial services loans of $43.3 billion, consumer lending of $12.4 billion, U.S. securities-based lending margin loans of $16.6 billion, student loans of $6.8 billion, non-U.S. consumer loans of $8.0 billion and other consumer loans of $3.2 billion at December 31, 2010.
|
|
| (8) |
Total outstandings include consumer finance loans of $1.9 billion, other non-U.S. consumer loans of $803 million and consumer overdrafts of $88 million at December 31, 2010.
|
|
| (9) |
Total outstandings include U.S. commercial real estate loans of $46.9 billion and non-U.S. commercial real estate loans of $2.5 billion at December 31, 2010.
|
|
| (10) |
Certain commercial loans are
accounted for under the fair value option and include U.S. commercial
loans of $1.6 billion, non-U.S. commercial loans of $1.7 billion and commercial real estate loans of $79 million at December 31, 2010. See
Note 16 – Fair Value Measurements
and
Note 17 – Fair Value Option
for additional information.
|
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 remaining amount of purchased loss protection of $936 million and $1.1
billion at June 30, 2011 and December 31, 2010. The vehicles are VIEs from which the Corporation
purchases credit protection and in which the Corporation does not have a variable interest; and
accordingly, these vehicles are not consolidated by the Corporation. Amounts due from the vehicles
are recorded in other income (loss) 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 June 30, 2011 and December 31, 2010, the Corporation had a
receivable of $445 million and $722 million from these vehicles for reimbursement of losses. At
June 30, 2011 and December 31, 2010, $37.6 billion and $53.9 billion of residential mortgage loans
were referenced under these agreements. 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.
In addition, the Corporation has entered into long-term credit protection agreements with
FNMA and FHLMC on loans totaling $17.2 billion and $12.9 billion at June 30, 2011 and December 31,
2010, providing full protection on residential mortgage loans that become severely delinquent. All
of these loans are individually insured and therefore the Corporation does not record an allowance
for credit losses related to these loans.
152
Table of Contents
Nonperforming Loans and Leases
The table below presents the Corporation’s nonperforming loans and leases, including
nonperforming TDRs and loans accruing past due 90 days or more at June 30, 2011 and December 31,
2010. Nonperforming loans and leases exclude 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, PCI 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
below. See
Note 1 – Summary
of Significant Accounting Principles
to the Consolidated Financial Statements of the Corporation’s
2010 Annual Report on Form 10-K for further information on the criteria to determine if a loan is
classified as nonperforming. Real estate-secured past due consumer fully-insured loans are
reported as performing since the principal repayment is insured.
| Nonperforming Loans and Leases | Accruing Past Due 90 Days or More | |||||||||||||||
| June 30 | December 31 | June 30 | December 31 | |||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Home loans
|
||||||||||||||||
|
Core portfolio
|
||||||||||||||||
|
Residential mortgage
(1)
|
$ | 1,670 | $ | 1,510 | $ | 431 | $ | 16 | ||||||||
|
Home equity
|
261 | 107 | - | - | ||||||||||||
|
Legacy Asset Servicing portfolio
|
||||||||||||||||
|
Residential mortgage
(1)
|
15,056 | 16,181 | 19,616 | 16,752 | ||||||||||||
|
Home equity
|
2,084 | 2,587 | - | - | ||||||||||||
|
Discontinued real estate
|
324 | 331 | - | - | ||||||||||||
|
Credit card and other consumer
|
||||||||||||||||
|
U.S. credit card
|
n/a | n/a | 2,413 | 3,320 | ||||||||||||
|
Non-U.S. credit card
|
n/a | n/a | 607 | 599 | ||||||||||||
|
Direct/Indirect consumer
|
58 | 90 | 810 | 1,058 | ||||||||||||
|
Other consumer
|
25 | 48 | 3 | 2 | ||||||||||||
|
Total consumer
|
19,478 | 20,854 | 23,880 | 21,747 | ||||||||||||
|
Commercial
|
||||||||||||||||
|
U.S. commercial
|
2,767 | 3,453 | 83 | 236 | ||||||||||||
|
Commercial real estate
|
5,051 | 5,829 | 45 | 47 | ||||||||||||
|
Commercial lease financing
|
23 | 117 | 22 | 18 | ||||||||||||
|
Non-U.S. commercial
|
108 | 233 | 3 | 6 | ||||||||||||
|
U.S. small business commercial
|
156 | 204 | 257 | 325 | ||||||||||||
|
Total commercial
|
8,105 | 9,836 | 410 | 632 | ||||||||||||
|
Total consumer and commercial
|
$ | 27,583 | $ | 30,690 | $ | 24,290 | $ | 22,379 | ||||||||
| (1) |
Residential mortgage loans accruing past due 90 days or more are fully-insured
loans. At June 30, 2011 and December 31, 2010, residential mortgage includes $15.7 billion and $8.3
billion of loans on which interest has been curtailed by the Federal Housing Administration, and
therefore are no longer accruing interest, although principal is still insured and $4.3 billion and
$8.5 billion of loans on which interest is still accruing.
|
|
| n/a |
= not applicable
|
Included in certain loan categories in nonperforming loans and leases in the table above are
TDRs that are classified as nonperforming. At June 30, 2011 and December 31, 2010, the Corporation
had $3.6 billion and $3.0 billion of residential mortgages, $468 million and $535 million of home
equity, $76 million and $75 million of discontinued real estate, $348 million and $175 million of
U.S. commercial, $868 million and $770 million of commercial real estate and $40 million and $7
million of non-U.S. commercial loans that were TDRs and classified as nonperforming.
153
Table of Contents
Credit Quality Indicators
The Corporation monitors credit quality within its three portfolio segments based on primary
credit quality indicators. Within the home loans portfolio segment, the primary credit quality
indicators are refreshed LTV and refreshed FICO score. Refreshed LTV measures the carrying value
of the loan as a percentage of the value of property securing the loan, refreshed quarterly. Home
equity loans are evaluated using combined LTV which measures the carrying value of the combined
loans that have liens against the property and the available line of credit as a percentage of the
appraised value of the property securing the loan, refreshed quarterly. Refreshed FICO score
measures the creditworthiness of the borrower based on the financial obligations of the borrower
and the borrower’s credit history. At a minimum, FICO scores are refreshed quarterly, and in many
cases, more frequently. Refreshed FICO score is also a primary credit quality indicator for the
credit card and other consumer portfolio segment and the business card portfolio within U.S. small
business commercial. The Corporation’s commercial loans are evaluated using pass rated or
reservable criticized as the primary credit quality indicators. The term reservable criticized
refers to those commercial loans that are internally classified or listed by the Corporation as
special mention, substandard or doubtful, which are asset categories defined by regulatory
authorities. These assets have an elevated level of risk and may have a high probability of
default or total loss. Pass rated refers to all loans not considered criticized. In addition to
these primary credit quality indicators, the Corporation uses other credit quality indicators for
certain types of loans.
154
Table of Contents
The tables below present certain credit quality indicators for the Corporation’s home loans,
credit card and other consumer loans, and commercial loan portfolio segments at June 30, 2011 and
December 31, 2010.
| Home Loans (1) | ||||||||||||||||||||||||||||||||
| June 30, 2011 | ||||||||||||||||||||||||||||||||
| Legacy Asset | Legacy Asset | Countrywide | ||||||||||||||||||||||||||||||
| Core Portfolio | Servicing | Countrywide | Core Portfolio | Legacy Asset | Countrywide | Servicing | Discontinued | |||||||||||||||||||||||||
| Residential | Residential | Residential | Home | Servicing Home | Home Equity | Discontinued | Real Estate | |||||||||||||||||||||||||
| (Dollars in millions) | Mortgage (2) | Mortgage (2) | Mortgage PCI | Equity (2) | Equity (2) | PCI | Real Estate (2) | PCI | ||||||||||||||||||||||||
|
Refreshed LTV
(3)
|
||||||||||||||||||||||||||||||||
|
Less than 90 percent
|
$ | 85,776 | $ | 20,459 | $ | 3,707 | $ | 46,086 | $ | 17,193 | $ | 2,236 | $ | 767 | $ | 6,678 | ||||||||||||||||
|
Greater than 90 percent but less
than 100 percent
|
12,094 | 6,322 | 1,589 | 7,787 | 5,137 | 1,033 | 125 | 1,275 | ||||||||||||||||||||||||
|
Greater than 100 percent
|
18,325 | 26,889 | 4,928 | 15,298 | 26,838 | 9,046 | 234 | 2,924 | ||||||||||||||||||||||||
|
Fully-insured loans
(4)
|
59,357 | 26,887 | - | - | - | - | - | - | ||||||||||||||||||||||||
|
Total home loans
|
$ | 175,552 | $ | 80,557 | $ | 10,224 | $ | 69,171 | $ | 49,168 | $ | 12,315 | $ | 1,126 | $ | 10,877 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Refreshed FICO score
|
||||||||||||||||||||||||||||||||
|
Less than 620
|
$ | 5,518 | $ | 20,367 | $ | 3,920 | $ | 4,111 | $ | 10,068 | $ | 3,248 | $ | 523 | $ | 6,731 | ||||||||||||||||
|
Greater than or equal to 620
|
110,677 | 33,303 | 6,304 | 65,060 | 39,100 | 9,067 | 603 | 4,146 | ||||||||||||||||||||||||
|
Fully-insured loans
(4)
|
59,357 | 26,887 | - | - | - | - | - | - | ||||||||||||||||||||||||
|
Total home loans
|
$ | 175,552 | $ | 80,557 | $ | 10,224 | $ | 69,171 | $ | 49,168 | $ | 12,315 | $ | 1,126 | $ | 10,877 | ||||||||||||||||
| (1) |
Excludes $5.2 billion of loans accounted for under the fair value option.
|
|
| (2) |
Excludes Countrywide PCI loans.
|
|
| (3) |
Refreshed LTV percentages for PCI loans were calculated using the carrying value net
of the related valuation allowance.
|
|
| (4) |
Credit quality indicators are not reported for fully-insured loans as principal
repayment is insured.
|
| Credit Card and Other Consumer | ||||||||||||||||
| June 30, 2011 | ||||||||||||||||
| U.S. Credit | Non-U.S. | Direct/Indirect | Other | |||||||||||||
| (Dollars in millions) | Card | Credit Card | Consumer | Consumer (1) | ||||||||||||
|
Refreshed FICO score
|
||||||||||||||||
|
Less than 620
|
$ | 10,809 | $ | 512 | $ | 4,935 | $ | 880 | ||||||||
|
Greater than or equal to 620
|
93,850 | 7,517 | 46,344 | 913 | ||||||||||||
|
Other internal credit metrics
(2, 3, 4)
|
- | 18,008 | 38,979 | 969 | ||||||||||||
|
Total credit card and other consumer
|
$ | 104,659 | $ | 26,037 | $ | 90,258 | $ | 2,762 | ||||||||
| (1) |
96 percent of the other consumer portfolio was associated with portfolios from
certain consumer finance businesses that the Corporation previously exited.
|
|
| (2) |
Other internal credit metrics may include delinquency status, geography or other
factors.
|
|
| (3) |
Direct/indirect consumer includes $29.6 billion of securities-based lending which is
overcollateralized and therefore has minimal credit risk and $6.6 billion of loans the Corporation
no longer originates.
|
|
| (4) |
Non-U.S. credit card
represents the select European countries’ credit card portfolios
and a portion of the Canadian credit card portfolio which is evaluated using internal credit
metrics, including delinquency status. At June 30, 2011, 95 percent of this portfolio was current
or less than 30 days past due, two percent was 30-89 days past due and three percent was 90 days
past due or more.
|
| Commercial (1) | ||||||||||||||||||||
| June 30, 2011 | ||||||||||||||||||||
| Commercial | U.S. Small | |||||||||||||||||||
| U.S. | Commercial | Lease | Non-U.S. | Business | ||||||||||||||||
| (Dollars in millions) | Commercial | Real Estate | Financing | Commercial | Commercial | |||||||||||||||
|
Risk Ratings
|
||||||||||||||||||||
|
Pass rated
|
$ | 164,199 | $ | 28,026 | $ | 20,390 | $ | 41,105 | $ | 2,724 | ||||||||||
|
Reservable criticized
|
12,478 | 16,002 | 1,001 | 1,824 | 939 | |||||||||||||||
|
|
||||||||||||||||||||
|
Refreshed FICO score
|
||||||||||||||||||||
|
Less than 620
|
n/a | n/a | n/a | n/a | 682 | |||||||||||||||
|
Greater than or equal to 620
|
n/a | n/a | n/a | n/a | 4,952 | |||||||||||||||
|
Other internal credit metrics
(2, 3)
|
n/a | n/a | n/a | n/a | 4,632 | |||||||||||||||
|
Total commercial credit
|
$ | 176,677 | $ | 44,028 | $ | 21,391 | $ | 42,929 | $ | 13,929 | ||||||||||
| (1) |
Includes $181 million of PCI loans in the commercial portfolio segment and excludes
$4.4 billion of loans accounted for under the fair value option.
|
|
| (2) |
Other internal credit metrics may include delinquency status, application scores,
geography or other factors.
|
|
| (3) |
U.S. small business commercial includes business card and small business loans which
are evaluated using internal credit metrics, including delinquency status. At June 30, 2011, 97
percent was current or less than 30 days past due.
|
|
| n/a |
= not applicable
|
155
Table of Contents
| Home Loans | ||||||||||||||||||||||||||||||||
| December 31, 2010 | ||||||||||||||||||||||||||||||||
| Legacy Asset | Legacy Asset | Countrywide | ||||||||||||||||||||||||||||||
| Core Portfolio | Servicing | Countrywide | Core Portfolio | Legacy Asset | Countrywide | Servicing | Discontinued | |||||||||||||||||||||||||
| Residential | Residential | Residential | Home | Servicing Home | Home Equity | Discontinued | Real Estate | |||||||||||||||||||||||||
| (Dollars in millions) | Mortgage (1) | Mortgage (1) | Mortgage PCI | Equity (1) | Equity (1) | PCI | Real Estate (1) | PCI (2) | ||||||||||||||||||||||||
|
Refreshed LTV
(2)
|
||||||||||||||||||||||||||||||||
|
Less than 90 percent
|
$ | 95,874 | $ | 21,357 | $ | 3,710 | $ | 51,555 | $ | 22,125 | $ | 2,313 | $ | 1,033 | $ | 6,713 | ||||||||||||||||
|
Greater than 90 percent but less
than 100 percent
|
11,581 | 8,234 | 1,664 | 7,534 | 6,504 | 1,215 | 155 | 1,319 | ||||||||||||||||||||||||
|
Greater than 100 percent
|
14,047 | 29,043 | 5,218 | 12,430 | 25,243 | 9,062 | 268 | 3,620 | ||||||||||||||||||||||||
|
Fully-insured loans
(3)
|
45,425 | 21,820 | - | - | - | - | - | - | ||||||||||||||||||||||||
|
Total home loans
|
$ | 166,927 | $ | 80,454 | $ | 10,592 | $ | 71,519 | $ | 53,872 | $ | 12,590 | $ | 1,456 | $ | 11,652 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Refreshed FICO score
|
||||||||||||||||||||||||||||||||
|
Less than 620
|
$ | 5,193 | $ | 22,126 | $ | 4,016 | $ | 3,932 | $ | 11,562 | $ | 3,206 | $ | 663 | $ | 7,168 | ||||||||||||||||
|
Greater than or equal to 620
|
116,309 | 36,508 | 6,576 | 67,587 | 42,310 | 9,384 | 793 | 4,484 | ||||||||||||||||||||||||
|
Fully-insured loans
(3)
|
45,425 | 21,820 | - | - | - | - | - | - | ||||||||||||||||||||||||
|
Total home loans
|
$ | 166,927 | $ | 80,454 | $ | 10,592 | $ | 71,519 | $ | 53,872 | $ | 12,590 | $ | 1,456 | $ | 11,652 | ||||||||||||||||
| (1) |
Excludes Countrywide PCI loans.
|
|
| (2) |
Refreshed LTV percentages for PCI loans were calculated using the carrying value net
of the related valuation allowance.
|
|
| (3) |
Credit quality indicators are not reported for fully-insured loans as principal
repayment is insured.
|
| Credit Card and Other Consumer | |||||||||||||||||
| December 31, 2010 | |||||||||||||||||
| U.S. Credit | Non-U.S. | Direct/Indirect | Other | ||||||||||||||
| (Dollars in millions) | Card | Credit Card | Consumer | Consumer (1) | |||||||||||||
|
Refreshed FICO score
|
|||||||||||||||||
|
Less than 620
|
$ | 14,159 | $ | 631 | $ | 6,748 | $ | 979 | |||||||||
|
Greater than or equal to 620
|
99,626 | 7,528 | 48,209 | 961 | |||||||||||||
|
Other internal credit metrics
(2, 3, 4)
|
- | 19,306 | 35,351 | 890 | |||||||||||||
|
Total credit card and other consumer
|
$ | 113,785 | $ | 27,465 | $ | 90,308 | $ | 2,830 | |||||||||
| (1) |
96 percent of the other consumer portfolio was associated with portfolios from
certain consumer finance businesses that the Corporation previously exited.
|
|
| (2) |
Other internal credit metrics may include delinquency status, geography or other
factors.
|
|
| (3) |
Direct/indirect consumer includes $24.0 billion of securities-based lending which is
overcollateralized and therefore has minimal credit risk and $7.4 billion of loans the Corporation
no longer originates.
|
|
| (4) |
Non-U.S. credit card represents the select European countries’ credit card
portfolios and a portion of the Canadian credit card portfolio which is evaluated using internal
credit metrics, including delinquency status. At December 31, 2010, 95 percent of this portfolio
was current or less than 30 days past due, three percent was 30-89 days past due and two percent
was 90 days past due or more.
|
| Commercial (1) | ||||||||||||||||||||
| December 31, 2010 | ||||||||||||||||||||
| Commercial | U.S. Small | |||||||||||||||||||
| U.S. | Commercial | Lease | Non-U.S. | Business | ||||||||||||||||
| (Dollars in millions) | Commercial | Real Estate | Financing | Commercial | Commercial | |||||||||||||||
|
Risk Ratings
|
||||||||||||||||||||
|
Pass rated
|
$ | 160,154 | $ | 29,757 | $ | 20,754 | $ | 30,180 | $ | 3,139 | ||||||||||
|
Reservable criticized
|
15,432 | 19,636 | 1,188 | 1,849 | 988 | |||||||||||||||
|
|
||||||||||||||||||||
|
Refreshed FICO score
|
||||||||||||||||||||
|
Less than 620
|
n/a | n/a | n/a | n/a | 888 | |||||||||||||||
|
Greater than or equal to 620
|
n/a | n/a | n/a | n/a | 5,083 | |||||||||||||||
|
Other internal credit metrics
(2, 3)
|
n/a | n/a | n/a | n/a | 4,621 | |||||||||||||||
|
Total commercial credit
|
$ | 175,586 | $ | 49,393 | $ | 21,942 | $ | 32,029 | $ | 14,719 | ||||||||||
| (1) |
Includes $204 million of PCI loans in the commercial portfolio segment and excludes
$3.3 billion of loans accounted for under the fair value option.
|
|
| (2) |
Other internal credit metrics may include delinquency status, application scores,
geography or other factors.
|
|
| (3) |
U.S. small business commercial includes business card and small business loans which
are evaluated using internal credit metrics, including delinquency status. At December 31, 2010, 95
percent was current or less than 30 days past due.
|
|
| n/a |
= not applicable
|
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, all
TDRs, including both commercial and consumer TDRs, and the renegotiated credit card, consumer
lending and small business loan portfolios (collectively, the renegotiated portfolio). Impaired
loans exclude nonperforming consumer loans unless they are classified as TDRs, all commercial
leases and all loans accounted for under the fair value option. PCI loans are reported separately
on page 160.
156
Table of Contents
The following tables present impaired loans in the Corporation’s home loans and commercial
loan portfolio segments at June 30, 2011 and December 31, 2010. The impaired home loans table
below consists primarily of loans managed by Legacy Asset Servicing. Certain impaired home loans
and commercial loans do not have a related allowance as the valuation of these impaired loans
exceeded the carrying value.
| Impaired Loans - Home Loans | ||||||||||||||||||||||||||||
| Three Months Ended June 30 | ||||||||||||||||||||||||||||
| June 30, 2011 | 2011 | 2010 | ||||||||||||||||||||||||||
| Unpaid | Average | Interest | Average | Interest | ||||||||||||||||||||||||
| Principal | Carrying | Related | Carrying | Income | Carrying | Income | ||||||||||||||||||||||
| (Dollars in millions) | Balance | Value | Allowance | Value | Recognized (1) | Value | Recognized (1) | |||||||||||||||||||||
|
With no recorded allowance
|
||||||||||||||||||||||||||||
|
Residential mortgage
|
$ | 6,955 | $ | 5,400 | n/a | $ | 5,427 | $ | 62 | $ | 4,125 | $ | 43 | |||||||||||||||
|
Home equity
|
1,381 | 395 | n/a | 419 | 5 | 483 | 5 | |||||||||||||||||||||
|
Discontinued real estate
|
324 | 193 | n/a | 216 | 2 | 220 | 2 | |||||||||||||||||||||
|
With an allowance recorded
|
||||||||||||||||||||||||||||
|
Residential mortgage
|
$ | 11,914 | $ | 10,371 | $ | 1,320 | $ | 9,828 | $ | 77 | $ | 5,058 | $ | 46 | ||||||||||||||
|
Home equity
|
1,764 | 1,420 | 723 | 1,439 | 8 | 1,525 | 7 | |||||||||||||||||||||
|
Discontinued real estate
|
303 | 204 | 51 | 181 | 2 | 168 | 2 | |||||||||||||||||||||
|
Total
|
||||||||||||||||||||||||||||
|
Residential mortgage
|
$ | 18,869 | $ | 15,771 | $ | 1,320 | $ | 15,255 | $ | 139 | $ | 9,183 | $ | 89 | ||||||||||||||
|
Home equity
|
3,145 | 1,815 | 723 | 1,858 | 13 | 2,008 | 12 | |||||||||||||||||||||
|
Discontinued real estate
|
627 | 397 | 51 | 397 | 4 | 388 | 4 | |||||||||||||||||||||
| Six Months Ended June 30 | ||||||||||||||||||||||||||||
| 2011 | 2010 | |||||||||||||||||||||||||||
|
With no recorded allowance
|
||||||||||||||||||||||||||||
|
Residential mortgage
|
$ | 5,527 | $ | 116 | $ | 3,563 | $ | 79 | ||||||||||||||||||||
|
Home equity
|
452 | 10 | 455 | 9 | ||||||||||||||||||||||||
|
Discontinued real estate
|
222 | 4 | 223 | 4 | ||||||||||||||||||||||||
|
With an allowance recorded
|
||||||||||||||||||||||||||||
|
Residential mortgage
|
$ | 8,790 | $ | 147 | $ | 5,035 | $ | 101 | ||||||||||||||||||||
|
Home equity
|
1,370 | 15 | 1,706 | 12 | ||||||||||||||||||||||||
|
Discontinued real estate
|
175 | 3 | 160 | 3 | ||||||||||||||||||||||||
|
Total
|
||||||||||||||||||||||||||||
|
Residential mortgage
|
$ | 14,317 | $ | 263 | $ | 8,598 | $ | 180 | ||||||||||||||||||||
|
Home equity
|
1,822 | 25 | 2,161 | 21 | ||||||||||||||||||||||||
|
Discontinued real estate
|
397 | 7 | 383 | 7 | ||||||||||||||||||||||||
| Year Ended | ||||||||||||||||||||||||||||
| December 31, 2010 | December 31, 2010 | |||||||||||||||||||||||||||
|
With no recorded allowance
|
||||||||||||||||||||||||||||
|
Residential mortgage
|
$ | 5,493 | $ | 4,382 | n/a | $ | 4,429 | $ | 184 | |||||||||||||||||||
|
Home equity
|
1,411 | 437 | n/a | 493 | 21 | |||||||||||||||||||||||
|
Discontinued real estate
|
361 | 218 | n/a | 219 | 8 | |||||||||||||||||||||||
|
With an allowance recorded
|
||||||||||||||||||||||||||||
|
Residential mortgage
|
$ | 8,593 | $ | 7,406 | $ | 1,154 | $ | 5,226 | $ | 196 | ||||||||||||||||||
|
Home equity
|
1,521 | 1,284 | 676 | 1,509 | 23 | |||||||||||||||||||||||
|
Discontinued real estate
|
247 | 177 | 41 | 170 | 7 | |||||||||||||||||||||||
|
Total
|
||||||||||||||||||||||||||||
|
Residential mortgage
|
$ | 14,086 | $ | 11,788 | $ | 1,154 | $ | 9,655 | $ | 380 | ||||||||||||||||||
|
Home equity
|
2,932 | 1,721 | 676 | 2,002 | 44 | |||||||||||||||||||||||
|
Discontinued real estate
|
608 | 395 | 41 | 389 | 15 | |||||||||||||||||||||||
| (1) |
Interest income recognized includes interest accrued and collected on the
outstanding balances of accruing impaired loans as well as interest cash collections on nonaccruing
impaired loans for which the ultimate collectability of principal is not uncertain.
|
|
| n/a |
= not applicable
|
157
Table of Contents
| Impaired Loans - Commercial | ||||||||||||||||||||||||||||
| Three Months Ended June 30 | ||||||||||||||||||||||||||||
| June 30, 2011 | 2011 | 2010 | ||||||||||||||||||||||||||
| Unpaid | Average | Interest | Average | Interest | ||||||||||||||||||||||||
| Principal | Carrying | Related | Carrying | Income | Carrying | Income | ||||||||||||||||||||||
| (Dollars in millions) | Balance | Value | Allowance | Value | Recognized (1) | Value | Recognized (1) | |||||||||||||||||||||
|
With no recorded allowance
|
||||||||||||||||||||||||||||
|
U.S. commercial
|
$ | 984 | $ | 696 | n/a | $ | 534 | $ | 1 | $ | 473 | $ | - | |||||||||||||||
|
Commercial real estate
|
2,723 | 1,990 | n/a | 1,895 | 1 | 1,703 | 2 | |||||||||||||||||||||
|
Non-U.S. commercial
|
161 | 72 | n/a | 92 | - | - | - | |||||||||||||||||||||
|
U.S. small business commercial
(2)
|
- | - | n/a | - | - | - | - | |||||||||||||||||||||
|
With an allowance recorded
|
||||||||||||||||||||||||||||
|
U.S. commercial
|
$ | 3,067 | $ | 2,255 | $ | 340 | $ | 2,463 | $ | 2 | $ | 3,882 | $ | 9 | ||||||||||||||
|
Commercial real estate
|
4,330 | 3,219 | 165 | 3,491 | 2 | 5,263 | 7 | |||||||||||||||||||||
|
Non-U.S. commercial
|
335 | 85 | 5 | 66 | - | 221 | - | |||||||||||||||||||||
|
U.S. small business commercial
(2)
|
705 | 677 | 268 | 707 | 6 | 1,080 | 9 | |||||||||||||||||||||
|
Total
|
||||||||||||||||||||||||||||
|
U.S. commercial
|
$ | 4,051 | $ | 2,951 | $ | 340 | $ | 2,997 | $ | 3 | $ | 4,355 | $ | 9 | ||||||||||||||
|
Commercial real estate
|
7,053 | 5,209 | 165 | 5,386 | 3 | 6,966 | 9 | |||||||||||||||||||||
|
Non-U.S. commercial
|
496 | 157 | 5 | 158 | - | 221 | - | |||||||||||||||||||||
|
U.S. small business commercial
(2)
|
705 | 677 | 268 | 707 | 6 | 1,080 | 9 | |||||||||||||||||||||
| Six Months Ended June 30 | ||||||||||||||||||||||||||||
| 2011 | 2010 | |||||||||||||||||||||||||||
|
With no recorded allowance
|
||||||||||||||||||||||||||||
|
U.S. commercial
|
$ | 503 | $ | 1 | $ | 474 | $ | 1 | ||||||||||||||||||||
|
Commercial real estate
|
1,854 | 2 | 1,572 | 2 | ||||||||||||||||||||||||
|
Non-U.S. commercial
|
71 | - | - | - | ||||||||||||||||||||||||
|
U.S. small business commercial
(2)
|
- | - | - | - | ||||||||||||||||||||||||
|
With an allowance recorded
|
||||||||||||||||||||||||||||
|
U.S. commercial
|
$ | 2,692 | $ | 3 | $ | 4,006 | $ | 12 | ||||||||||||||||||||
|
Commercial real estate
|
3,709 | 4 | 5,481 | 10 | ||||||||||||||||||||||||
|
Non-U.S. commercial
|
122 | - | 184 | - | ||||||||||||||||||||||||
|
U.S. small business commercial
(2)
|
762 | 13 | 1,079 | 18 | ||||||||||||||||||||||||
|
Total
|
||||||||||||||||||||||||||||
|
U.S. commercial
|
$ | 3,195 | $ | 4 | $ | 4,480 | $ | 13 | ||||||||||||||||||||
|
Commercial real estate
|
5,563 | 6 | 7,053 | 12 | ||||||||||||||||||||||||
|
Non-U.S. commercial
|
193 | - | 184 | - | ||||||||||||||||||||||||
|
U.S. small business commercial
(2)
|
762 | 13 | 1,079 | 18 | ||||||||||||||||||||||||
| Year Ended | ||||||||||||||||||||||||||||
| December 31, 2010 | December 31, 2010 | |||||||||||||||||||||||||||
|
With no recorded allowance
|
||||||||||||||||||||||||||||
|
U.S. commercial
|
$ | 968 | $ | 441 | n/a | $ | 547 | $ | 3 | |||||||||||||||||||
|
Commercial real estate
|
2,655 | 1,771 | n/a | 1,736 | 8 | |||||||||||||||||||||||
|
Non-U.S. commercial
|
46 | 28 | n/a | 9 | - | |||||||||||||||||||||||
|
U.S. small business commercial
(2)
|
- | - | n/a | - | - | |||||||||||||||||||||||
|
With an allowance recorded
|
||||||||||||||||||||||||||||
|
U.S. commercial
|
$ | 3,891 | $ | 3,193 | $ | 336 | $ | 3,389 | $ | 36 | ||||||||||||||||||
|
Commercial real estate
|
5,682 | 4,103 | 208 | 4,813 | 29 | |||||||||||||||||||||||
|
Non-U.S. commercial
|
572 | 217 | 91 | 190 | - | |||||||||||||||||||||||
|
U.S. small business commercial
(2)
|
935 | 892 | 445 | 1,028 | 34 | |||||||||||||||||||||||
|
Total
|
||||||||||||||||||||||||||||
|
U.S. commercial
|
$ | 4,859 | $ | 3,634 | $ | 336 | $ | 3,936 | $ | 39 | ||||||||||||||||||
|
Commercial real estate
|
8,337 | 5,874 | 208 | 6,549 | 37 | |||||||||||||||||||||||
|
Non-U.S. commercial
|
618 | 245 | 91 | 199 | - | |||||||||||||||||||||||
|
U.S. small business commercial
(2)
|
935 | 892 | 445 | 1,028 | 34 | |||||||||||||||||||||||
| (1) |
Interest income recognized includes interest accrued and collected on the
outstanding balances of accruing impaired loans as well as interest cash collections on nonaccruing
impaired loans for which the ultimate collectability of principal is not uncertain.
|
|
| (2) |
Includes U.S. small business commercial renegotiated TDR loans and related
allowance. See additional information on the U.S. small business card renegotiated TDR portfolio on
page 159.
|
|
| n/a |
= not applicable
|
At June 30, 2011 and December 31, 2010, remaining commitments to lend additional funds to
debtors whose terms have been modified in a TDR were immaterial.
The Corporation seeks to assist customers that are experiencing financial difficulty by
renegotiating loans within the renegotiated portfolio while ensuring compliance with Federal
Financial Institutions Examination Council guidelines. Substantially all modifications in the
renegotiated portfolio are considered to be both TDRs and impaired loans. The renegotiated
portfolio may include modifications, both short- and long-term, of interest rates or payment
amounts or a
158
Table of Contents
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 customer’s charging
privileges are revoked.
The tables below provide information on the Corporation’s primary modification programs for
the renegotiated portfolio. At June 30, 2011 and December 31, 2010, all renegotiated credit card
and other consumer loans were considered impaired and have a related allowance as shown in the
table below. The allowance for credit card loans is based on the present value of projected cash
flows discounted using the average portfolio contractual interest rate, excluding promotionally
priced loans, in effect prior to restructuring and prior to any risk-based or penalty-based
increase in rate on the restructured loan.
| Impaired Loans - Credit Card and Other Consumer | ||||||||||||||||||||||||||||
| Three Months Ended June 30 | ||||||||||||||||||||||||||||
| June 30, 2011 | 2011 | 2010 | ||||||||||||||||||||||||||
| Unpaid | Average | Interest | Average | Interest | ||||||||||||||||||||||||
| Principal | Carrying | Related | Carrying | Income | Carrying | Income | ||||||||||||||||||||||
| (Dollars in millions) | Balance | Value (1) | Allowance | Value | Recognized (2) | Value | Recognized (2) | |||||||||||||||||||||
|
With an allowance recorded
|
||||||||||||||||||||||||||||
|
U.S. credit card
|
$ | 6,867 | $ | 6,919 | $ | 2,279 | $ | 7,637 | $ | 115 | $ | 11,030 | $ | 158 | ||||||||||||||
|
Non-U.S. credit card
|
789 | 808 | 507 | 808 | 1 | 1,034 | 4 | |||||||||||||||||||||
|
Direct/Indirect consumer
|
1,542 | 1,552 | 586 | 1,686 | 23 | 2,199 | 29 | |||||||||||||||||||||
| Six Months Ended June 30 | ||||||||||||||||||||||||||||
| 2011 | 2010 | |||||||||||||||||||||||||||
|
With an allowance recorded
|
||||||||||||||||||||||||||||
|
U.S. credit card
|
$ | 8,100 | $ | 242 | $ | 11,170 | $ | 329 | ||||||||||||||||||||
|
Non-U.S. credit card
|
803 | 3 | 1,154 | 9 | ||||||||||||||||||||||||
|
Direct/Indirect consumer
|
1,763 | 47 | 2,202 | 57 | ||||||||||||||||||||||||
| Year Ended | ||||||||||||||||||||||||||||
| December 31, 2010 | December 31, 2010 | |||||||||||||||||||||||||||
|
With an allowance recorded
|
||||||||||||||||||||||||||||
|
U.S. credit card
|
$ | 8,680 | $ | 8,766 | $ | 3,458 | $ | 10,549 | $ | 621 | ||||||||||||||||||
|
Non-U.S. credit card
|
778 | 797 | 506 | 973 | 21 | |||||||||||||||||||||||
|
Direct/Indirect consumer
|
1,846 | 1,858 | 822 | 2,126 | 111 | |||||||||||||||||||||||
| (1) |
Includes accrued interest and fees.
|
|
| (2) |
Interest income recognized includes interest accrued and collected on the
outstanding balances of accruing impaired loans as well as interest cash collections on nonaccruing
impaired loans for which the ultimate collectability of principal is not uncertain.
|
| Renegotiated TDR Portfolio | ||||||||||||||||||||||||||||||||||||||||
| Percent of Balances Current or | ||||||||||||||||||||||||||||||||||||||||
| Internal Programs | External Programs | Other | Total | Less Than 30 Days Past Due | ||||||||||||||||||||||||||||||||||||
| June 30 | December 31 | June 30 | December 31 | June 30 | December 31 | June 30 | December 31 | June 30 | December 31 | |||||||||||||||||||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||||||||||||||
|
Credit card and other consumer
|
||||||||||||||||||||||||||||||||||||||||
|
U.S. credit card
|
$ | 5,073 | $ | 6,592 | $ | 1,707 | $ | 1,927 | $ | 139 | $ | 247 | $ | 6,919 | $ | 8,766 | 79.59 | % | 77.66 | % | ||||||||||||||||||||
|
Non-U.S. credit card
|
279 | 282 | 164 | 176 | 365 | 339 | 808 | 797 | 54.80 | 58.86 | ||||||||||||||||||||||||||||||
|
Direct/Indirect consumer
|
1,005 | 1,222 | 473 | 531 | 74 | 105 | 1,552 | 1,858 | 80.76 | 78.81 | ||||||||||||||||||||||||||||||
|
Total consumer
|
6,357 | 8,096 | 2,344 | 2,634 | 578 | 691 | 9,279 | 11,421 | 77.62 | 76.51 | ||||||||||||||||||||||||||||||
|
Commercial
|
||||||||||||||||||||||||||||||||||||||||
|
U.S. small business commercial
|
468 | 624 | 52 | 58 | 1 | 6 | 521 | 688 | 67.70 | % | 65.37 | % | ||||||||||||||||||||||||||||
|
Total commercial
|
468 | 624 | 52 | 58 | 1 | 6 | 521 | 688 | 67.70 | 65.37 | ||||||||||||||||||||||||||||||
|
Total renegotiated TDR loans
|
$ | 6,825 | $ | 8,720 | $ | 2,396 | $ | 2,692 | $ | 579 | $ | 697 | $ | 9,800 | $ | 12,109 | 77.09 | 75.90 | ||||||||||||||||||||||
At June 30, 2011 and December 31, 2010, the Corporation had a renegotiated TDR portfolio of
$9.8 billion and $12.1 billion of which $7.6 billion was current or less than 30 days past due
under the modified terms at June 30, 2011. The renegotiated TDR 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 charged off no later than the end of the month in
which the loan becomes 180 days past due.
159
Table of Contents
Purchased Credit-impaired Loans
PCI 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. PCI loans are pooled based on similar characteristics and
evaluated for impairment on a pool basis. The Corporation estimates impairment on its PCI loan
portfolio in accordance with applicable accounting guidance on contingencies which involves
estimating the expected cash flows of each pool using internal credit risk, interest rate and
prepayment risk models. The key assumptions used in the models include the Corporation’s estimate
of default rates, loss severity and payment speeds.
The table below presents the remaining unpaid principal balance and carrying amount,
excluding the valuation allowance, for PCI loans at June 30, 2011, March 31, 2011 and December 31,
2010. The valuation allowance for PCI loans is presented together with the allowance for loan and
lease losses. See
Note 7 – Allowance for Credit Losses
for additional information.
| June 30 | March 31 | December 31 | ||||||||||
| (Dollars in millions) | 2011 | 2011 | 2010 | |||||||||
|
Consumer
|
||||||||||||
|
Countrywide
|
||||||||||||
|
Unpaid principal balance
|
$ | 38,488 | $ | 40,040 | $ | 41,446 | ||||||
|
Carrying value excluding valuation allowance
|
33,416 | 34,132 | 34,834 | |||||||||
|
Allowance for loan and lease losses
|
8,239 | 7,845 | 6,334 | |||||||||
|
Merrill Lynch
|
||||||||||||
|
Unpaid principal balance
|
1,582 | 1,629 | 1,698 | |||||||||
|
Carrying value excluding valuation allowance
|
1,474 | 1,508 | 1,559 | |||||||||
|
Allowance for loan and lease losses
|
154 | 136 | 83 | |||||||||
|
Commercial
|
||||||||||||
|
Merrill Lynch
|
||||||||||||
|
Unpaid principal balance
|
$ | 842 | $ | 859 | $ | 870 | ||||||
|
Carrying value excluding valuation allowance
|
181 | 192 | 204 | |||||||||
|
Allowance for loan and lease losses
|
1 | 1 | 12 | |||||||||
The table below shows activity for the accretable yield on PCI loans. The $118 million
reclassification to nonaccretable difference for the three months ended June 30, 2011 reflects a
decrease in estimated interest cash flows. The $873 million reclassification from nonaccretable
difference for the six months ended June 30, 2011 reflects an increase in estimated interest cash
flows resulting from lower prepayment speeds.
| Three Months Ended | Six Months Ended | |||||||
| (Dollars in millions) | June 30, 2011 | June 30, 2011 | ||||||
|
Accretable yield, beginning of period
|
$ | 6,317 | $ | 5,722 | ||||
|
Accretion
|
(341 | ) | (708 | ) | ||||
|
Disposals/transfers
|
(35 | ) | (64 | ) | ||||
|
Reclassifications (to)/from nonaccretable difference
|
(118 | ) | 873 | |||||
|
Accretable yield, June 30, 2011
|
$ | 5,823 | $ | 5,823 | ||||
Loans Held-for-Sale
The Corporation had LHFS of $20.1 billion and $35.1 billion at June 30, 2011 and December 31,
2010. Proceeds from sales, securitizations and paydowns of LHFS were $99.0 billion and $150.4
billion for the six months ended June 30, 2011 and 2010. Proceeds used for originations and
purchases of LHFS were $80.4 billion and $137.5 billion for the six months ended June 30, 2011 and
2010.
160
Table of Contents
The tables below summarize the changes in the allowance for credit losses by portfolio
segment for the three and six months ended June 30, 2011 and 2010.
| Three Months Ended June 30, 2011 | ||||||||||||||||
| Credit Card | ||||||||||||||||
| and Other | Total | |||||||||||||||
| (Dollars in millions) | Home Loans | Consumer | Commercial | Allowance | ||||||||||||
|
Allowance for loan and lease losses, April 1
|
$ | 20,097 | $ | 13,271 | $ | 6,475 | $ | 39,843 | ||||||||
|
Loans and leases charged off
|
(2,603 | ) | (3,245 | ) | (759 | ) | (6,607 | ) | ||||||||
|
Recoveries of loans and leases previously charged off
|
210 | 476 | 256 | 942 | ||||||||||||
|
Net charge-offs
|
(2,393 | ) | (2,769 | ) | (503 | ) | (5,665 | ) | ||||||||
|
Provision for loan and lease losses
|
3,249 | 529 | (518 | ) | 3,260 | |||||||||||
|
Other
|
- | (100 | ) | (26 | ) | (126 | ) | |||||||||
|
Allowance for loan and lease losses, June 30
|
20,953 | 10,931 | 5,428 | 37,312 | ||||||||||||
|
Reserve for unfunded lending commitments, April 1
|
- | - | 961 | 961 | ||||||||||||
|
Provision for unfunded lending commitments
|
- | - | (5 | ) | (5 | ) | ||||||||||
|
Other
(1)
|
- | - | (59 | ) | (59 | ) | ||||||||||
|
Reserve for unfunded lending commitments, June 30
|
- | - | 897 | 897 | ||||||||||||
|
Allowance for credit losses, June 30
|
$ | 20,953 | $ | 10,931 | $ | 6,325 | $ | 38,209 | ||||||||
| Six Months Ended June 30, 2011 | ||||||||||||||||
|
Allowance for loan and lease losses, January 1
|
$ | 19,252 | $ | 15,463 | $ | 7,170 | $ | 41,885 | ||||||||
|
Loans and leases charged off
|
(4,892 | ) | (6,976 | ) | (1,665 | ) | (13,533 | ) | ||||||||
|
Recoveries of loans and leases previously charged off
|
395 | 966 | 479 | 1,840 | ||||||||||||
|
Net charge-offs
|
(4,497 | ) | (6,010 | ) | (1,186 | ) | (11,693 | ) | ||||||||
|
Provision for loan and lease losses
|
6,197 | 1,508 | (529 | ) | 7,176 | |||||||||||
|
Other
|
1 | (30 | ) | (27 | ) | (56 | ) | |||||||||
|
Allowance for loan and lease losses, June 30
|
20,953 | 10,931 | 5,428 | 37,312 | ||||||||||||
|
Reserve for unfunded lending commitments, January 1
|
- | - | 1,188 | 1,188 | ||||||||||||
|
Provision for unfunded lending commitments
|
- | - | (107 | ) | (107 | ) | ||||||||||
|
Other
(1)
|
- | - | (184 | ) | (184 | ) | ||||||||||
|
Reserve for unfunded lending commitments, June 30
|
- | - | 897 | 897 | ||||||||||||
|
Allowance for credit losses, June 30
|
$ | 20,953 | $ | 10,931 | $ | 6,325 | $ | 38,209 | ||||||||
| Three Months Ended June 30, 2010 | ||||||||||||||||
|
Allowance for loan and lease losses, April 1
|
$ | 17,971 | $ | 19,683 | $ | 9,181 | $ | 46,835 | ||||||||
|
Loans and leases charged off
|
(2,819 | ) | (5,916 | ) | (1,571 | ) | (10,306 | ) | ||||||||
|
Recoveries of loans and leases previously charged off
|
88 | 505 | 156 | 749 | ||||||||||||
|
Net charge-offs
|
(2,731 | ) | (5,411 | ) | (1,415 | ) | (9,557 | ) | ||||||||
|
Provision for loan and lease losses
|
3,659 | 3,489 | 957 | 8,105 | ||||||||||||
|
Other
|
(61 | ) | (69 | ) | 2 | (128 | ) | |||||||||
|
Allowance for loan and lease losses, June 30
|
18,838 | 17,692 | 8,725 | 45,255 | ||||||||||||
|
Reserve for unfunded lending commitments, April 1
|
- | - | 1,521 | 1,521 | ||||||||||||
|
Other
(1)
|
- | - | (108 | ) | (108 | ) | ||||||||||
|
Reserve for unfunded lending commitments, June 30
|
- | - | 1,413 | 1,413 | ||||||||||||
|
Allowance for credit losses, June 30
|
$ | 18,838 | $ | 17,692 | $ | 10,138 | $ | 46,668 | ||||||||
| Six Months Ended June 30, 2010 | ||||||||||||||||
|
Allowance for loan and lease losses, January 1
|
$ | 16,329 | $ | 22,243 | $ | 9,416 | $ | 47,988 | ||||||||
|
Loans and leases charged off
|
(6,389 | ) | (12,179 | ) | (3,239 | ) | (21,807 | ) | ||||||||
|
Recoveries of loans and leases previously charged off
|
171 | 1,007 | 275 | 1,453 | ||||||||||||
|
Net charge-offs
|
(6,218 | ) | (11,172 | ) | (2,964 | ) | (20,354 | ) | ||||||||
|
Provision for loan and lease losses
|
8,632 | 6,799 | 2,273 | 17,704 | ||||||||||||
|
Other
|
95 | (178 | ) | - | (83 | ) | ||||||||||
|
Allowance for loan and lease losses, June 30
|
18,838 | 17,692 | 8,725 | 45,255 | ||||||||||||
|
Reserve for unfunded lending commitments, January 1
|
- | - | 1,487 | 1,487 | ||||||||||||
|
Provision for unfunded lending commitments
|
- | - | 206 | 206 | ||||||||||||
|
Other
(1)
|
- | - | (280 | ) | (280 | ) | ||||||||||
|
Reserve for unfunded lending commitments, June 30
|
- | - | 1,413 | 1,413 | ||||||||||||
|
Allowance for credit losses, June 30
|
$ | 18,838 | $ | 17,692 | $ | 10,138 | $ | 46,668 | ||||||||
| (1) |
Represents primarily accretion of the Merrill Lynch purchase accounting adjustment
and the impact of funding previously unfunded positions.
|
161
Table of Contents
During the three and six months ended June 30, 2011, the Corporation recorded $412 million
and $2.0 billion in provision for credit losses with a corresponding increase in the valuation
reserve presented with the allowance for loan and lease losses specifically for the PCI loan
portfolio. This compared to $256 million and $1.1 billion for the same periods in 2010. The amount
of the allowance for loan and lease losses associated with the PCI loan portfolio was $8.4
billion, $8.0 billion and $6.4 billion at June 30, 2011, March 31, 2011 and December 31, 2010.
The table below presents the allowance and the carrying value of outstanding loans and leases
by portfolio segment at June 30, 2011 and December 31, 2010.
| June 30, 2011 | ||||||||||||||||
| Credit Card | ||||||||||||||||
| and Other | ||||||||||||||||
| (Dollars in millions) | Home Loans | Consumer | Commercial | Total | ||||||||||||
|
Impaired loans and troubled debt restructurings
(1)
|
||||||||||||||||
|
Allowance for loan and lease losses
(2)
|
$ | 2,094 | $ | 3,372 | $ | 778 | $ | 6,244 | ||||||||
|
Carrying value
|
17,983 | 9,279 | 8,994 | 36,256 | ||||||||||||
|
Allowance as a percentage of carrying value
|
11.64 | % | 36.34 | % | 8.66 | % | 17.22 | % | ||||||||
|
Collectively evaluated for impairment
|
||||||||||||||||
|
Allowance for loan and lease losses
|
$ | 10,466 | $ | 7,559 | $ | 4,649 | $ | 22,674 | ||||||||
|
Carrying value
(3)
|
356,117 | 214,437 | 289,779 | 860,333 | ||||||||||||
|
Allowance as a percentage of carrying value
(3)
|
2.94 | % | 3.53 | % | 1.60 | % | 2.64 | % | ||||||||
|
Purchased credit-impaired loans
|
||||||||||||||||
|
Allowance for loan and lease losses
|
$ | 8,393 | n/a | $ | 1 | $ | 8,394 | |||||||||
|
Carrying value excluding valuation allowance
|
34,890 | n/a | 181 | 35,071 | ||||||||||||
|
Allowance as a percentage of carrying value
|
24.06 | % | n/a | 0.39 | % | 23.94 | % | |||||||||
|
Total
|
||||||||||||||||
|
Allowance for loan and lease losses
|
$ | 20,953 | $ | 10,931 | $ | 5,428 | $ | 37,312 | ||||||||
|
Carrying value
(3)
|
408,990 | 223,716 | 298,954 | 931,660 | ||||||||||||
|
Allowance as a percentage of carrying value
(3)
|
5.12 | % | 4.89 | % | 1.82 | % | 4.00 | % | ||||||||
| December 31, 2010 | ||||||||||||||||
|
Impaired loans and troubled debt restructurings
(1)
|
||||||||||||||||
|
Allowance for loan and lease losses
(2)
|
$ | 1,871 | $ | 4,786 | $ | 1,080 | $ | 7,737 | ||||||||
|
Carrying value
|
13,904 | 11,421 | 10,645 | 35,970 | ||||||||||||
|
Allowance as a percentage of carrying value
|
13.46 | % | 41.91 | % | 10.15 | % | 21.51 | % | ||||||||
|
Collectively evaluated for impairment
|
||||||||||||||||
|
Allowance for loan and lease losses
|
$ | 10,964 | $ | 10,677 | $ | 6,078 | $ | 27,719 | ||||||||
|
Carrying value
(3)
|
358,765 | 222,967 | 282,820 | 864,552 | ||||||||||||
|
Allowance as a percentage of carrying value
(3)
|
3.06 | % | 4.79 | % | 2.15 | % | 3.21 | % | ||||||||
|
Purchased credit-impaired loans
|
||||||||||||||||
|
Allowance for loan and lease losses
|
$ | 6,417 | n/a | $ | 12 | $ | 6,429 | |||||||||
|
Carrying value excluding valuation allowance
|
36,393 | n/a | 204 | 36,597 | ||||||||||||
|
Allowance as a percentage of carrying value
|
17.63 | % | n/a | 5.76 | % | 17.57 | % | |||||||||
|
Total
|
||||||||||||||||
|
Allowance for loan and lease losses
|
$ | 19,252 | $ | 15,463 | $ | 7,170 | $ | 41,885 | ||||||||
|
Carrying value
(3)
|
409,062 | 234,388 | 293,669 | 937,119 | ||||||||||||
|
Allowance as a percentage of carrying value
(3)
|
4.71 | % | 6.60 | % | 2.44 | % | 4.47 | % | ||||||||
| (1) |
Impaired loans include nonperforming commercial loans and all commercial and
consumer TDRs. Impaired loans exclude nonperforming consumer loans unless they are classified as
TDRs, and all loans and leases that are accounted for under the fair value option.
|
|
| (2) |
Commercial impaired allowance for loan and lease losses includes $268 million and
$445 million at June 30, 2011 and December 31, 2010 related to U.S. small business commercial
renegotiated TDR loans.
|
|
| (3) |
Outstanding loan and lease balances and ratios do not include loans accounted for
under the fair value option. Total loans accounted for under the fair value option were $9.6
billion and $3.3 billion at June 30, 2011 and December 31, 2010.
|
|
| n/a |
= not applicable
|
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 CDOs, investment vehicles and other
entities. For additional information on the Corporation’s
utilization of VIEs, see
Note 1 –
Summary
of Significant
Accounting Principles
to the Consolidated Financial Statements of the
Corporation’s 2010 Annual Report on Form 10-K.
The following tables present the assets and liabilities of consolidated and unconsolidated
VIEs at June 30, 2011 and December 31, 2010, in situations where the Corporation has continuing
involvement with transferred assets or where the Corporation otherwise has a variable interest in
the VIE. The tables also present the Corporation’s maximum exposure to
162
Table of Contents
loss at June 30, 2011 and
December 31, 2010 resulting from its involvement with consolidated VIEs and unconsolidated VIEs in
which the Corporation holds a variable interest. The Corporation’s 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 Corporation’s Consolidated
Balance Sheet but also potential losses associated with off-balance sheet commitments such as
unfunded liquidity commitments and other contractual arrangements. The Corporation’s maximum
exposure to loss does not include losses previously recognized, for example, through write-downs
of assets on the Corporation’s Consolidated Balance Sheet.
The Corporation invests in asset-backed securities (ABS) 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. For
additional information, see
Note 13 – Long-term Debt
to the Consolidated Financial Statements of
the Corporation’s 2010 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
uses VIEs, such as cash funds managed within
Global Wealth & Investment Management (GWIM)
, to
provide investment opportunities for clients. These VIEs, which are not consolidated by the
Corporation, are not included in the tables within this Note.
Except as described below and in
Note 8 – Securitizations and Other Variable Interest
Entities
to the Consolidated Financial Statements of the Corporation’s 2010 Annual Report on Form
10-K, the Corporation did not provide financial support to consolidated or unconsolidated VIEs
during the three and six months ended June 30, 2011 or the year ended December 31, 2010 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 government sponsored enterprises (GSEs), or GNMA in the case of
Federal Housing Administration (FHA)-insured and U.S. Department of Veterans Affairs
(VA)-guaranteed mortgage loans. Securitization usually 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 typically
services the loans it securitizes. Further, the Corporation may retain beneficial interests in the
securitization trusts including senior and subordinate securities and residual tranches issued by
the trusts. Except as described below and in
Note 9 – Representations and Warranties Obligations
and Corporate Guarantees
, the Corporation does not provide guarantees or recourse to the
securitization trusts other than standard representations and warranties.
163
Table of Contents
The table below summarizes select information related to first-lien mortgage
securitizations for the three and six months ended June 30, 2011 and 2010.
| Residential Mortgage | ||||||||||||||||||||||||||||||||||||||||
| Non-Agency | ||||||||||||||||||||||||||||||||||||||||
| Agency | Prime | Subprime | Alt-A | Commercial Mortgage | ||||||||||||||||||||||||||||||||||||
| Three Months Ended June 30 | ||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||||||||||||||
|
Cash proceeds from new securitizations
(1)
|
$ | 36,222 | $ | 61,301 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 1,802 | $ | 1,362 | ||||||||||||||||||||
|
Gain (loss) on securitizations, net of hedges
(2)
|
(227 | ) | (402 | ) | - | - | - | - | - | - | - | 2 | ||||||||||||||||||||||||||||
|
Cash flows received on residual interests
|
- | - | 1 | 4 | 10 | 14 | - | 1 | 4 | - | ||||||||||||||||||||||||||||||
| Six Months Ended June 30, 2011 | ||||||||||||||||||||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||||
|
Cash proceeds from new securitizations
(1)
|
$ | 96,976 | $ | 131,209 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 3 | $ | 1,802 | $ | 2,383 | ||||||||||||||||||||
|
Gain (loss) on securitizations, net of hedges
(2)
|
(55 | ) | (451 | ) | - | - | - | - | - | - | - | 20 | ||||||||||||||||||||||||||||
|
Cash flows received on residual interests
|
- | - | 2 | 9 | 22 | 33 | 1 | 2 | 7 | 1 | ||||||||||||||||||||||||||||||
| (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) |
Substantially all of the first-lien residential mortgage loans 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 six months ended June 30, 2011, the Corporation recognized $765 million and $1.8 billion of gains on these LHFS compared to $1.2 billion and $2.5 billion
for the same periods in 2010, net of hedges.
|
In addition to cash proceeds reported in the table above, the Corporation received securities
with an initial fair value of $428 million in connection with agency first-lien residential
mortgage securitizations for the three and six months ended June 30, 2011, and $436 million and
$18.5 billion for the same periods in 2010. The Corporation also received securities with an
initial fair value of $27 million in connection with commercial mortgage securitizations for the
three and six months ended June 30, 2011 and none for the same periods in 2010. All of these
securities were initially classified as Level 2 assets within the fair value hierarchy. During the
three and six months ended June 30, 2011 and 2010, there were no changes to the initial
classification.
The Corporation recognizes consumer MSRs from the sale or securitization of first-lien
mortgage loans. Servicing fee and ancillary fee income on consumer mortgage loans serviced,
including securitizations where the Corporation has continuing involvement, were $1.5 billion and
$3.1 billion during the three and six months ended June 30, 2011 compared to $1.6 billion and $3.2
billion for the same periods in 2010. Servicing advances on consumer mortgage loans, including
securitizations where the Corporation has continuing involvement, were $25.0 billion and $24.3
billion at June 30, 2011 and December 31, 2010. The Corporation may have 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 six months ended June 30, 2011, $1.8 billion and $7.6
billion of loans were repurchased from first-lien securitization trusts as a result of loan
delinquencies or in order to perform modifications compared to $4.3 billion and $8.4 billion for
the same periods in 2010. The majority of these loans repurchased were FHA-insured mortgages
collateralizing 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 a loss of $1 million and income of $2 million during the three and six months
ended June 30, 2011 compared to a loss of $2 million and income of $2 million for the same periods
in 2010. Servicing advances on commercial mortgage loans, including securitizations where the
Corporation has continuing involvement, were $160 million and $156 million at June 30, 2011 and
December 31, 2010.
164
Table of Contents
The table below summarizes select information related to first-lien mortgage securitization
trusts in which the Corporation held a variable interest at June 30, 2011 and December 31, 2010.
| Residential Mortgage | ||||||||||||||||||||||||||||||||||||||||
| Non-Agency | ||||||||||||||||||||||||||||||||||||||||
| Agency | Prime | Subprime | Alt-A | Commercial Mortgage | ||||||||||||||||||||||||||||||||||||
| June 30 | December 31 | June 30 | December 31 | June 30 | December 31 | June 30 | December 31 | June 30 | December 31 | |||||||||||||||||||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||||||||||||||
|
Unconsolidated VIEs
|
||||||||||||||||||||||||||||||||||||||||
|
Maximum loss exposure
(1)
|
$ | 42,139 | $ | 46,093 | $ | 2,477 | $ | 2,794 | $ | 439 | $ | 416 | $ | 593 | $ | 651 | $ | 1,258 | $ | 1,199 | ||||||||||||||||||||
|
On-balance sheet assets
|
||||||||||||||||||||||||||||||||||||||||
|
Senior securities held
(2)
:
|
||||||||||||||||||||||||||||||||||||||||
|
Trading account assets
|
$ | 8,536 | $ | 10,693 | $ | 118 | $ | 147 | $ | 73 | $ | 126 | $ | 399 | $ | 645 | $ | 93 | $ | 146 | ||||||||||||||||||||
|
AFS debt securities
|
33,596 | 35,400 | 2,265 | 2,593 | 204 | 234 | 190 | - | 976 | 984 | ||||||||||||||||||||||||||||||
|
Subordinate securities held
(2)
:
|
||||||||||||||||||||||||||||||||||||||||
|
Trading account assets
|
- | - | - | - | 6 | 12 | - | - | 11 | 8 | ||||||||||||||||||||||||||||||
|
AFS debt securities
|
- | - | 35 | 39 | 33 | 35 | 4 | 6 | - | - | ||||||||||||||||||||||||||||||
|
Residual interests held
|
7 | - | 6 | 6 | 8 | 9 | - | - | 123 | 61 | ||||||||||||||||||||||||||||||
|
All other assets
|
- | - | - | 9 | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
|
Total retained positions
|
$ | 42,139 | $ | 46,093 | $ | 2,424 | $ | 2,794 | $ | 324 | $ | 416 | $ | 593 | $ | 651 | $ | 1,203 | $ | 1,199 | ||||||||||||||||||||
|
Principal balance outstanding
(3)
|
$ | 1,311,478 | $ | 1,297,159 | $ | 67,316 | $ | 75,762 | $ | 82,730 | $ | 92,710 | $ | 108,697 | $ | 116,233 | $ | 72,765 | $ | 73,597 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Consolidated VIEs
|
||||||||||||||||||||||||||||||||||||||||
|
Maximum loss exposure
(1)
|
$ | 46,446 | $ | 32,746 | $ | 901 | $ | 46 | $ | 310 | $ | 42 | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||
|
On-balance sheet assets
|
||||||||||||||||||||||||||||||||||||||||
|
Loans and leases
|
$ | 46,232 | $ | 32,563 | $ | 4,172 | $ | - | $ | 1,022 | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||
|
Allowance for loan and lease losses
|
(38 | ) | (37 | ) | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
|
Loans held-for-sale
|
- | - | - | - | 749 | 732 | - | - | - | - | ||||||||||||||||||||||||||||||
|
All other assets
|
252 | 220 | 224 | 46 | 40 | 16 | - | - | - | - | ||||||||||||||||||||||||||||||
|
Total assets
|
$ | 46,446 | $ | 32,746 | $ | 4,396 | $ | 46 | $ | 1,811 | $ | 748 | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||
|
On-balance sheet liabilities
|
||||||||||||||||||||||||||||||||||||||||
|
Long-term debt
|
$ | - | $ | - | $ | 4,364 | $ | - | $ | 1,033 | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||
|
All other liabilities
|
3 | 3 | - | 9 | 811 | 768 | - | - | - | - | ||||||||||||||||||||||||||||||
|
Total liabilities
|
$ | 3 | $ | 3 | $ | 4,364 | $ | 9 | $ | 1,844 | $ | 768 | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||
| (1) |
Maximum loss exposure
excludes the liability for representations and warranties obligations and corporate guarantees and also excludes servicing advances. For more information, see
Note 9 – Representations and Warranties Obligations and Corporate Guarantees.
|
|
| (2) |
As a holder of these securities, the Corporation receives scheduled principal and interest payments. During the three and six months ended June 30, 2011 and 2010, there were no 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.
|
As a result of a settlement agreement with Assured Guaranty Ltd. and its subsidiaries
(Assured Guaranty), the Corporation has entered into a loss-sharing reinsurance arrangement
involving 21 first-lien RMBS trusts. This obligation is a variable interest that could potentially
be significant to the trusts. To the extent that the Corporation services all or a majority of the
loans in any of the 21 trusts, the Corporation is the primary beneficiary. At June 30, 2011, 19 of
these trusts were consolidated. Assets and liabilities of the consolidated trusts and the
Corporation’s maximum loss exposure to consolidated and unconsolidated trusts are included in the
table above as non-agency prime and subprime trusts. For additional information, see
Note 9 –
Representations and Warranties Obligations and Corporate Guarantees.
Home Equity Loans
The Corporation maintains interests in home equity securitization trusts to which it
transferred home equity loans. These retained interests include senior and subordinate securities
and residual interests. In addition, the Corporation may be obligated to provide subordinate
funding to the trusts during a rapid amortization event. The Corporation also services the loans
in the trusts. Except as described below and in
Note 9 – Representations and Warranties
Obligations and Corporate Guarantees
, the Corporation does not provide guarantees or recourse to
the securitization trusts other than standard representations and warranties. There were no
securitizations of home equity loans during the three and six months ended June 30, 2011 and 2010.
Cash flows received on residual interests were $2 million and $3 million and, as all of the home
equity trusts have entered the amortization phase, there were no collections reinvested in
revolving period securitizations for the three and six months ended June 30, 2011. Cash flows
received on residual interests were $4 million and $7 million, and collections reinvested in
revolving period securitizations were $9 million and $16 million for the three and six months
ended June 30, 2010.
165
Table of Contents
The table below summarizes select information related to home equity loan securitization
trusts in which the Corporation held a variable interest at June 30, 2011 and December 31, 2010.
| June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
| Retained | Retained | |||||||||||||||||||||||
| Interests in | Interests in | |||||||||||||||||||||||
| Consolidated | Unconsolidated | Consolidated | Unconsolidated | |||||||||||||||||||||
| (Dollars in millions) | VIEs | VIEs | Total | VIEs | VIEs | Total | ||||||||||||||||||
|
Maximum loss exposure
(1)
|
$ | 2,927 | $ | 8,278 | $ | 11,205 | $ | 3,192 | $ | 9,132 | $ | 12,324 | ||||||||||||
|
On-balance sheet assets
|
||||||||||||||||||||||||
|
Trading account assets
(2, 3)
|
$ | - | $ | 141 | $ | 141 | $ | - | $ | 209 | $ | 209 | ||||||||||||
|
AFS debt securities
(3, 4)
|
- | 13 | 13 | - | 35 | 35 | ||||||||||||||||||
|
Loans and leases
|
3,219 | - | 3,219 | 3,529 | - | 3,529 | ||||||||||||||||||
|
Allowance for loan and lease losses
|
(292 | ) | - | (292 | ) | (337 | ) | - | (337 | ) | ||||||||||||||
|
Total
|
$ | 2,927 | $ | 154 | $ | 3,081 | $ | 3,192 | $ | 244 | $ | 3,436 | ||||||||||||
|
On-balance sheet liabilities
|
||||||||||||||||||||||||
|
Long-term debt
|
$ | 3,311 | $ | - | $ | 3,311 | $ | 3,635 | $ | - | $ | 3,635 | ||||||||||||
|
All other liabilities
|
42 | - | 42 | 23 | - | 23 | ||||||||||||||||||
|
Total
|
$ | 3,353 | $ | - | $ | 3,353 | $ | 3,658 | $ | - | $ | 3,658 | ||||||||||||
|
Principal balance outstanding
|
$ | 3,219 | $ | 17,905 | $ | 21,124 | $ | 3,529 | $ | 20,095 | $ | 23,624 | ||||||||||||
| (1) |
For unconsolidated VIEs, the maximum loss exposure includes 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 June 30, 2011, $116 million of the debt securities classified as trading account assets were senior securities and $25 million were subordinate securities. At December 31, 2010, $204 million of the debt securities classified as trading account assets were senior securities and $5 million were subordinate securities.
|
|
| (3) |
As a holder of these securities, the Corporation receives scheduled principal and interest payments. During the three and six months ended June 30, 2011 and 2010, there were no OTTI losses recorded on those securities classified as AFS debt securities.
|
|
| (4) |
At June 30, 2011 and December 31, 2010, $13 million and $35 million represented subordinate debt securities held.
|
Included in the table above are consolidated and unconsolidated home equity loan
securitizations that have entered a rapid amortization period and for which the Corporation is
obligated to provide subordinated funding. During this period, cash payments from borrowers are
accumulated to repay outstanding debt securities and the Corporation continues to make advances to
borrowers when they draw on their lines of credit. The Corporation then transfers the newly
generated receivables into the securitization vehicles and is reimbursed only after other parties
in the securitization have received all of the cash flows to which they are entitled. If loan
losses requiring draws on monoline insurers’ policies, which protect the bondholders in the
securitization, exceed a certain level, 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 each of these securitizations for potential losses due to non-recoverable advances by
estimating the amount and timing of future losses on the underlying loans, the excess spread
available to cover such losses and potential cash flow shortfalls during rapid amortization. This
evaluation, which includes the number of loans still in revolving status, the amount of available
credit and when those loans will lose revolving status, is also used to determine whether the
Corporation has a variable interest that is more than insignificant and must consolidate the
trust. 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 June 30, 2011 and
December 31, 2010, home equity loan securitization transactions in rapid amortization for which
the Corporation has a subordinate funding obligation, including both consolidated and
unconsolidated trusts, had $11.5 billion and $12.5 billion of trust certificates outstanding. This
amount is significantly greater than the amount the Corporation expects to fund. The charges that
will ultimately be recorded as a result of the rapid amortization events depend on the undrawn
available credit on the home equity lines, which totaled $564 million and $639 million at June 30,
2011 and December 31, 2010, as well as performance of the loans, the amount of subsequent draws
and the timing of related cash flows. At June 30, 2011 and December 31, 2010, the reserve for
losses on expected future draw obligations on the home equity loan securitizations in rapid
amortization for which the Corporation has a subordinated funding obligation was $107 million and
$131 million.
The Corporation has consumer MSRs from the sale or securitization of home equity loans. The
Corporation recorded $16 million and $33 million of servicing fee income related to home equity
loan securitizations during the three and six months ended June 30, 2011 compared to $15 million
and $41 million for the same periods in 2010. The Corporation repurchased $4 million and $5
million of loans from home equity securitization trusts in order to perform modifications during
the three and six months ended June 30, 2011 compared to $5 million and $11 million for the same
periods in 2010.
Credit Card Securitizations
The Corporation securitizes originated and purchased credit card loans. The Corporation’s
continuing involvement with the securitization trusts includes servicing the receivables,
retaining an undivided interest (seller’s interest) in the receivables, and holding certain
retained interests including senior and subordinate securities, discount receivables,
166
Table of Contents
subordinate
interests in accrued interest and fees on the securitized receivables, and cash reserve accounts.
The seller’s interest in the trusts, which is pari passu to the investors’ interest, and the
discount receivables are classified in loans and leases.
The table below summarizes select information related to credit card securitization trusts in
which the Corporation held a variable interest at June 30, 2011 and December 31, 2010.
| June 30 | December 31 | |||||||
| (Dollars in millions) | 2011 | 2010 | ||||||
|
Consolidated VIEs
|
||||||||
|
Maximum loss exposure
|
$ | 39,440 | $ | 36,596 | ||||
|
On-balance sheet assets
|
||||||||
|
Derivative assets
|
$ | 1,445 | $ | 1,778 | ||||
|
Loans and leases
(1)
|
82,839 | 92,104 | ||||||
|
Allowance for loan and lease losses
|
(6,004 | ) | (8,505 | ) | ||||
|
All other assets
(2)
|
3,957 | 4,259 | ||||||
|
Total
|
$ | 82,237 | $ | 89,636 | ||||
|
On-balance sheet liabilities
|
||||||||
|
Long-term debt
|
$ | 42,600 | $ | 52,781 | ||||
|
All other liabilities
|
197 | 259 | ||||||
|
Total
|
$ | 42,797 | $ | 53,040 | ||||
|
Trust loans
|
$ | 82,839 | $ | 92,104 | ||||
| (1) |
At June 30, 2011 and December 31, 2010, loans and leases included $24.9 billion and $20.4 billion of seller’s interest and $2.7 billion and $3.8 billion of discount receivables.
|
|
| (2) |
At June 30, 2011 and December 31, 2010, all other assets included restricted cash accounts and unbilled accrued interest and fees.
|
For the three and six months ended June 30, 2010, $2.9 billion of new senior debt securities
were issued to external investors from the credit card securitization trusts and none for the same
periods in 2011.
During the three and six months ended June, 30 2010, subordinate securities with a notional
principal amount of $1.9 billion and $11.5 billion with a stated interest rate of zero percent
were issued by certain credit card securitization trusts to the Corporation and none for the same
periods in 2011. In addition, the Corporation has elected to designate a specified percentage of
new receivables transferred to the trusts as “discount receivables” such that principal
collections thereon are added to finance charges which increases the yield in the trust. Through
the designation of newly transferred receivables as discount receivables, the Corporation has
subordinated a portion of its seller’s interest to the investors’ interest. These actions, which
were specifically permitted by the terms of the trust documents, were taken in an effort to
address the decline in the excess spread of the U.S. and United Kingdom (U.K.) Credit Card
Securitization Trusts. The issuance of subordinate securities and the discount receivables
election had no impact on the Corporation’s consolidated results of operations for the three and
six months ended June 30, 2011 and 2010.
167
Table of Contents
Other Asset-backed Securitizations
Other asset-backed securitizations include resecuritization trusts, municipal bond trusts,
and automobile and other securitization trusts. The table below summarizes select information
related to other asset-backed securitizations in which the Corporation held a variable interest at
June 30, 2011 and December 31, 2010.
| Automobile and Other | ||||||||||||||||||||||||
| Resecuritization Trusts | Municipal Bond Trusts | Securitization Trusts | ||||||||||||||||||||||
| June 30 | December 31 | June 30 | December 31 | June 30 | December 31 | |||||||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
|
Unconsolidated VIEs
|
||||||||||||||||||||||||
|
Maximum loss exposure
|
$ | 30,821 | $ | 20,320 | $ | 3,736 | $ | 4,261 | $ | 113 | $ | 141 | ||||||||||||
|
On-balance sheet assets
|
||||||||||||||||||||||||
|
Senior securities held
(1, 2)
:
|
||||||||||||||||||||||||
|
Trading account assets
|
$ | 644 | $ | 1,219 | $ | 182 | $ | 255 | $ | - | $ | - | ||||||||||||
|
AFS debt securities
|
29,099 | 17,989 | - | - | 84 | 109 | ||||||||||||||||||
|
Subordinate securities held
(1, 2)
:
|
||||||||||||||||||||||||
|
Trading account assets
|
1 | 2 | - | - | - | - | ||||||||||||||||||
|
AFS debt securities
|
973 | 1,036 | - | - | - | - | ||||||||||||||||||
|
Residual interests held
(3)
|
104 | 74 | - | - | - | - | ||||||||||||||||||
|
All other assets
|
- | - | - | - | 14 | 17 | ||||||||||||||||||
|
Total retained positions
|
$ | 30,821 | $ | 20,320 | $ | 182 | $ | 255 | $ | 98 | $ | 126 | ||||||||||||
|
Total assets of VIEs
|
$ | 53,796 | $ | 39,830 | $ | 5,516 | $ | 6,108 | $ | 718 | $ | 774 | ||||||||||||
|
|
||||||||||||||||||||||||
|
Consolidated VIEs
|
||||||||||||||||||||||||
|
Maximum loss exposure
|
$ | 25 | $ | - | $ | 4,493 | $ | 4,716 | $ | 1,665 | $ | 2,061 | ||||||||||||
|
On-balance sheet assets
|
||||||||||||||||||||||||
|
Trading account assets
|
$ | 39 | $ | 68 | $ | 4,493 | $ | 4,716 | $ | - | $ | - | ||||||||||||
|
Loans and leases
|
- | - | - | - | 7,187 | 9,583 | ||||||||||||||||||
|
Allowance for loan and lease losses
|
- | - | - | - | (10 | ) | (29 | ) | ||||||||||||||||
|
All other assets
|
- | - | - | - | 195 | 196 | ||||||||||||||||||
|
Total assets
|
$ | 39 | $ | 68 | $ | 4,493 | $ | 4,716 | $ | 7,372 | $ | 9,750 | ||||||||||||
|
On-balance sheet liabilities
|
||||||||||||||||||||||||
|
Commercial paper and other short-term borrowings
|
$ | - | $ | - | $ | 4,445 | $ | 4,921 | $ | - | $ | - | ||||||||||||
|
Long-term debt
|
14 | 68 | - | - | 5,701 | 7,681 | ||||||||||||||||||
|
All other liabilities
|
- | - | - | - | 119 | 101 | ||||||||||||||||||
|
Total liabilities
|
$ | 14 | $ | 68 | $ | 4,445 | $ | 4,921 | $ | 5,820 | $ | 7,782 | ||||||||||||
| (1) |
As a holder of these securities, the Corporation receives scheduled principal and interest payments. During the three and six months ended June 30, 2011 and 2010, there were no significant OTTI losses recorded on those securities classified as AFS debt securities.
|
|
| (2) |
The retained senior and subordinate securities were valued using quoted market prices or observable market inputs (Level 2 of the fair value hierarchy).
|
|
| (3) |
The retained residual interests are carried at fair value which was derived using model valuations (Level 2 of the fair value hierarchy).
|
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 portfolio for purposes of
improving liquidity and capital, and managing credit or interest rate risk. Generally, there are
no significant ongoing activities performed in a resecuritization trust and no single investor has
the unilateral ability to liquidate the trust.
The Corporation resecuritized $21.6 billion and $23.6 billion of securities during the three
and six months ended June 30, 2011 compared to $27.9 billion and $68.7 billion for the same
periods in 2010. Net gains on sales totaled $732 million and $735 million for the three and six
months ended June 30, 2011 compared to net losses of $53 million and $86 million for the same
periods in 2010. 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 share
responsibility for the design of the trust and purchase a significant portion of subordinate
securities, the Corporation does not consolidate the trust.
Municipal Bond Trusts
The Corporation administers municipal bond trusts that hold highly-rated, long-term,
fixed-rate municipal bonds. A majority of the bonds are rated AAA or AA and some benefit from
insurance provided by third parties. The trusts obtain
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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 unless the bond’s credit
rating has declined below investment-grade or there has been an event of default or bankruptcy of
the issuer and insurer.
The Corporation also provides credit enhancement to investors in certain municipal bond
trusts whereby the Corporation guarantees the payment of interest and principal on floating-rate
certificates issued by these trusts in the event of default by the issuer of the underlying
municipal bond. If a customer holds the residual interest in a trust, 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 customer’s residual interest, effectively preventing the
Corporation from absorbing losses incurred on assets held within that trust. The weighted-average
remaining life of bonds held in the trusts at June 30, 2011 was 14.6 years. There were no material
write-downs or downgrades of assets or issuers during the three and six months ended June 30,
2011.
During the three and six months ended June 30, 2011, the Corporation was the transferor of
assets into unconsolidated municipal bond trusts and received cash proceeds from new
securitizations of $348 million and $415 million compared to $369 million and $782 million for the
same periods in 2010. At June 30, 2011 and December 31, 2010, the principal balance outstanding
for unconsolidated municipal bond securitization trusts for which the Corporation was transferor
was $2.0 billion and $2.2 billion.
The Corporation’s liquidity commitments to unconsolidated municipal bond trusts, including
those for which the Corporation was transferor, totaled $3.6 billion and $4.0 billion at June 30,
2011 and December 31, 2010.
Automobile and Other Securitization Trusts
The Corporation transfers automobile and other loans into securitization trusts, typically to
improve liquidity or manage credit risk. At June 30, 2011, the Corporation serviced assets or
otherwise had continuing involvement with automobile and other securitization trusts with
outstanding balances of $8.1 billion, including trusts collateralized by automobile loans of $6.1
billion, student loans of $1.2 billion, and other loans and receivables of $718 million. At
December 31, 2010, the Corporation serviced assets or otherwise had continuing involvement with
automobile and other securitization trusts with outstanding balances of $10.5 billion, including
trusts collateralized by automobile loans of $8.4 billion, student loans of $1.3 billion, and
other loans and receivables of $774 million.
Collateralized Debt Obligation Vehicles
CDO vehicles hold diversified pools of fixed-income securities, typically corporate debt or
ABS, which they fund by issuing multiple tranches of debt and equity securities. Synthetic CDOs
enter into a portfolio of credit 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 absorbs 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.
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The table below summarizes select information related to CDO vehicles in which the
Corporation held a variable interest at June 30, 2011 and December 31, 2010.
| June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
| (Dollars in millions) | Consolidated | Unconsolidated | Total | Consolidated | Unconsolidated | Total | ||||||||||||||||||
|
Maximum loss exposure
|
$ | 2,714 | $ | 2,678 | $ | 5,392 | $ | 2,971 | $ | 3,828 | $ | 6,799 | ||||||||||||
|
On-balance sheet assets
|
||||||||||||||||||||||||
|
Trading account assets
|
$ | 2,178 | $ | 554 | $ | 2,732 | $ | 2,485 | $ | 884 | $ | 3,369 | ||||||||||||
|
Derivative assets
|
469 | 744 | 1,213 | 207 | 890 | 1,097 | ||||||||||||||||||
|
AFS debt securities
|
251 | - | 251 | 769 | 338 | 1,107 | ||||||||||||||||||
|
All other assets
|
74 | 146 | 220 | 24 | 123 | 147 | ||||||||||||||||||
|
Total
|
$ | 2,972 | $ | 1,444 | $ | 4,416 | $ | 3,485 | $ | 2,235 | $ | 5,720 | ||||||||||||
|
On-balance sheet liabilities
|
||||||||||||||||||||||||
|
Derivative liabilities
|
$ | - | $ | 17 | $ | 17 | $ | - | $ | 58 | $ | 58 | ||||||||||||
|
Long-term debt
|
3,169 | 2 | 3,171 | 3,162 | - | 3,162 | ||||||||||||||||||
|
Total
|
$ | 3,169 | $ | 19 | $ | 3,188 | $ | 3,162 | $ | 58 | $ | 3,220 | ||||||||||||
|
Total assets of VIEs
|
$ | 2,972 | $ | 36,427 | $ | 39,399 | $ | 3,485 | $ | 43,476 | $ | 46,961 | ||||||||||||
The Corporation’s maximum loss exposure of $5.4 billion at June 30, 2011 includes $1.0
billion of super senior CDO exposure, $2.3 billion of exposure to CDO financing facilities and
$2.1 billion of other non-super senior exposure. This exposure is calculated on a gross basis and
does not reflect any benefit from insurance purchased from third parties. Net of this insurance
but including securities retained from liquidations of CDOs, the Corporation’s net exposure to
super senior CDO-related positions was $518 million at June 30, 2011. 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 Corporation’s Consolidated Balance Sheet.
The CDO financing facilities’ long-term debt at June 30, 2011 totaled $2.9 billion, all of which
has recourse to the general credit of the Corporation. The Corporation’s maximum exposure to loss
is significantly less than the total assets of the CDO vehicles in the table above because the
Corporation typically has exposure to only a portion of the total assets.
At June 30, 2011, the Corporation had $948 million notional amount of super senior CDO
liquidity exposure, including derivatives and other exposures with third parties that hold super
senior cash positions on the Corporation’s behalf and to
certain synthetic CDOs through which the Corporation is obligated to purchase 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 $2.1 billion notional
amount of derivative contracts with unconsolidated special purpose entities (SPEs), principally
CDO vehicles, which hold non-super senior CDO debt securities or other debt securities on the
Corporation’s behalf. These derivatives comprise substantially all of the $2.1 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 Corporation’s $3.0 billion of
aggregate liquidity exposure to CDOs at June 30, 2011 is included in the table above to the extent
that the Corporation sponsored the CDO vehicle or the liquidity exposure is more than
insignificant compared to total assets of the CDO vehicle. Liquidity exposure included in the
table is reported net of previously recorded losses.
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.
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The table below summarizes select information related to customer vehicles in which the
Corporation held a variable interest at June 30, 2011 and December 31, 2010.
| June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
| (Dollars in millions) | Consolidated | Unconsolidated | Total | Consolidated | Unconsolidated | Total | ||||||||||||||||||
|
Maximum loss exposure
|
$ | 4,634 | $ | 2,112 | $ | 6,746 | $ | 4,449 | $ | 2,735 | $ | 7,184 | ||||||||||||
|
On-balance sheet assets
|
||||||||||||||||||||||||
|
Trading account assets
|
$ | 3,932 | $ | 225 | $ | 4,157 | $ | 3,458 | $ | 876 | $ | 4,334 | ||||||||||||
|
Derivative assets
|
- | 747 | 747 | 1 | 722 | 723 | ||||||||||||||||||
|
Loans held-for-sale
|
672 | - | 672 | 959 | - | 959 | ||||||||||||||||||
|
All other assets
|
1,980 | - | 1,980 | 1,429 | - | 1,429 | ||||||||||||||||||
|
Total
|
$ | 6,584 | $ | 972 | $ | 7,556 | $ | 5,847 | $ | 1,598 | $ | 7,445 | ||||||||||||
|
On-balance sheet liabilities
|
||||||||||||||||||||||||
|
Derivative liabilities
|
$ | 1 | $ | 59 | $ | 60 | $ | 1 | $ | 23 | $ | 24 | ||||||||||||
|
Commercial paper and other short-term borrowings
|
232 | - | 232 | - | - | - | ||||||||||||||||||
|
Long-term debt
|
4,379 | - | 4,379 | 3,457 | - | 3,457 | ||||||||||||||||||
|
All other liabilities
|
1 | 477 | 478 | - | 140 | 140 | ||||||||||||||||||
|
Total
|
$ | 4,613 | $ | 536 | $ | 5,149 | $ | 3,458 | $ | 163 | $ | 3,621 | ||||||||||||
|
Total assets of VIEs
|
$ | 6,584 | $ | 5,878 | $ | 12,462 | $ | 5,847 | $ | 6,090 | $ | 11,937 | ||||||||||||
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 $859 million of other liquidity commitments, including written put options
and collateral value guarantees, with unconsolidated credit-linked and equity-linked note vehicles
at June 30, 2011.
Repackaging vehicles issue notes that are designed to incorporate risk characteristics
desired by customers. The vehicles hold debt instruments such as corporate bonds, convertible
bonds or ABS with the desired credit risk profile. The Corporation enters into derivatives with
the vehicles to change the interest rate or foreign currency profile of the debt instruments. If a
vehicle holds convertible bonds and the Corporation retains the conversion option, the Corporation
is deemed to have a controlling financial interest and consolidates the vehicle.
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
Corporation’s 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.
The Corporation’s maximum exposure to loss from customer vehicles includes the notional
amount of the credit or equity derivatives to which the Corporation is a counterparty, net of
losses previously recorded, and the Corporation’s investment, if any, in securities issued by the
vehicles. It has not been reduced to reflect the benefit of offsetting swaps with the customers or
collateral arrangements.
Other Variable Interest Entities
Other consolidated VIEs primarily include investment vehicles, a collective investment fund,
leveraged lease trusts and asset acquisition conduits. Other unconsolidated VIEs primarily include
investment vehicles and real estate vehicles.
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The table below summarizes select information related to other VIEs in which the Corporation
held a variable interest at June 30, 2011 and December 31, 2010.
| June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
| (Dollars in millions) | Consolidated | Unconsolidated | Total | Consolidated | Unconsolidated | Total | ||||||||||||||||||
|
Maximum loss exposure
|
$ | 8,026 | $ | 7,268 | $ | 15,294 | $ | 19,248 | $ | 8,796 | $ | 28,044 | ||||||||||||
|
On-balance sheet assets
|
||||||||||||||||||||||||
|
Trading account assets
|
$ | 104 | $ | - | $ | 104 | $ | 8,900 | $ | - | $ | 8,900 | ||||||||||||
|
Derivative assets
|
353 | 197 | 550 | - | 228 | 228 | ||||||||||||||||||
|
AFS debt securities
|
- | 61 | 61 | 1,832 | 73 | 1,905 | ||||||||||||||||||
|
Loans and leases
|
7,257 | 557 | 7,814 | 7,690 | 1,122 | 8,812 | ||||||||||||||||||
|
Allowance for loan and lease losses
|
(23 | ) | (7 | ) | (30 | ) | (27 | ) | (22 | ) | (49 | ) | ||||||||||||
|
Loans held-for-sale
|
144 | 870 | 1,014 | 262 | 949 | 1,211 | ||||||||||||||||||
|
All other assets
|
415 | 5,585 | 6,000 | 937 | 6,440 | 7,377 | ||||||||||||||||||
|
Total
|
$ | 8,250 | $ | 7,263 | $ | 15,513 | $ | 19,594 | $ | 8,790 | $ | 28,384 | ||||||||||||
|
On-balance sheet liabilities
|
||||||||||||||||||||||||
|
Commercial paper and other short-term borrowings
|
$ | - | $ | - | $ | - | $ | 1,115 | $ | - | $ | 1,115 | ||||||||||||
|
Long-term debt
|
174 | - | 174 | 229 | - | 229 | ||||||||||||||||||
|
All other liabilities
|
697 | 1,451 | 2,148 | 8,683 | 1,666 | 10,349 | ||||||||||||||||||
|
Total
|
$ | 871 | $ | 1,451 | $ | 2,322 | $ | 10,027 | $ | 1,666 | $ | 11,693 | ||||||||||||
|
Total assets of VIEs
|
$ | 8,250 | $ | 11,594 | $ | 19,844 | $ | 19,594 | $ | 13,416 | $ | 33,010 | ||||||||||||
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 June 30, 2011 and December 31,
2010, the Corporation’s consolidated investment vehicles had total assets of $3.3 billion and $5.6
billion. The Corporation also held investments in unconsolidated vehicles with total assets of
$6.3 billion and $7.9 billion at June 30, 2011 and December 31, 2010. The Corporation’s maximum
exposure to loss associated with both consolidated and unconsolidated investment vehicles totaled
$5.2 billion and $8.7 billion at June 30, 2011 and December 31, 2010 comprised primarily of
on-balance sheet assets less non-recourse liabilities.
Collective Investment Funds
The Corporation is trustee for certain common and collective investment funds that provide
investment opportunities for eligible clients of
GWIM
. These funds, which had total assets of
$12.8 billion at June 30, 2011, hold a variety of cash, debt and equity investments. At June 30,
2011, the Corporation does not have a variable interest in these funds. The Corporation
consolidated a stable value collective investment fund with total assets of $8.1 billion at
December 31, 2010, for which the Corporation had the unilateral ability to replace the fund’s
asset manager. The fund was liquidated during the three months ended March 31, 2011.
Leveraged Lease Trusts
The Corporation’s net investment in consolidated leveraged lease trusts totaled $4.9 billion
and $5.2 billion at June 30, 2011 and December 31, 2010. The trusts hold long-lived equipment such
as rail cars, power generation and distribution equipment, and commercial aircraft. The
Corporation structures the trusts and holds a significant residual interest. The net investment
represents the Corporation’s 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
non-recourse to the Corporation. The Corporation has no liquidity exposure to these leveraged
lease trusts.
Asset Acquisition Conduits
The Corporation administered two asset acquisition conduits which acquire assets on behalf of
the Corporation or its customers. These conduits had total assets of $640 million at December 31,
2010. The conduits were liquidated during the three months ended June 30, 2011. Liquidation of the
conduits did not impact the Corporation’s consolidated results of operations. For more information
on the asset acquisition conduits, see
Note 8 — Securitizations and Other Variable Interest
Entities
to the Consolidated Financial Statements of the Corporation’s 2010 Annual Report on Form
10-K.
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Table of Contents
Real Estate Vehicles
The Corporation held investments in unconsolidated real estate vehicles of $5.2 billion and
$5.4 billion at June 30, 2011 and December 31, 2010, which consisted of investments in
unconsolidated limited partnerships that finance the construction and rehabilitation of affordable
rental housing. An unrelated third party is typically the general partner and has control over the
significant activities of the partnership. The Corporation earns a return primarily through the
receipt of tax credits allocated to the affordable housing projects. The Corporation’s 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.
Other Asset-backed Financing Arrangements
Prior to 2011, 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 June 30, 2011 and December 31, 2010, the Corporation’s
maximum loss exposure under these financing arrangements was $6.0 billion and $6.5 billion,
substantially all of which was classified as loans on the Corporation’s 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 table on page 172 because the
purchasers are not VIEs.
Background
The Corporation securitizes first-lien residential mortgage loans, generally in the form of
MBS guaranteed by the GSEs or by GNMA in the case of FHA-insured and VA-guaranteed mortgage loans.
In addition, in prior years, legacy companies and certain subsidiaries sold pools of first-lien
residential mortgage loans, home equity loans and other second-lien loans as private-label
securitizations (in certain of these securitizations, monolines or financial guarantee providers
insured all or some of the securities), or in the form of whole loans. In connection with these
transactions, 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 loan’s compliance
with any applicable loan criteria, including underwriting standards, and the loan’s compliance
with applicable federal, state and local laws. Breaches of these representations and warranties
may result in the requirement to repurchase mortgage loans or to otherwise make whole or provide
other remedies to the GSEs, GNMA, whole-loan buyers, securitization trusts, monoline insurers or
other financial guarantors (collectively, repurchases). In such cases, the Corporation would be
exposed to any credit loss on the repurchased mortgage loans.
Subject to the requirements and limitations of the applicable sales and securitization
agreements, these representations and warranties can be enforced by the GSEs, GNMA, the whole-loan
buyer, the securitization trustee or others as governed by the applicable agreement or, in certain
first-lien and home equity securitizations where monoline insurers or other financial guarantee
providers have insured all or some of the securities issued, by the monoline insurer or other
financial guarantor at any time. In the case of loans sold to parties other than the GSEs or GNMA,
the contractual liability to repurchase typically arises only if there is a breach of the
representations and warranties that materially and adversely affects the interest of the investor
or investors in the loan or of the monoline insurer or other financial guarantor (as applicable).
Contracts with the GSEs and GNMA do not contain an equivalent requirement. 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 loan’s
performance. Historically, most demands for repurchase have occurred within the first several
years after origination, generally after a loan has defaulted. However, the time horizon has
lengthened due to increased repurchase claim activity across all vintages with a significant
increase in claims related to loans that had defaulted more than 18 months ago in the three
and six months ended June 30, 2011.
The Corporation’s credit loss would be reduced by any recourse it may have to organizations
(e.g., correspondents) that, in turn, had sold such loans to the Corporation based upon its
agreements with these organizations. When a loan is originated by a correspondent or other third
party, the Corporation typically has the right to seek a recovery of related repurchase losses
from that originator. Many of the correspondent originators of loans in 2004 through 2008 are no
longer in business and the Corporation is unable to recover valid claims. In the event a loan is
originated and underwritten by a
173
Table of Contents
correspondent who obtains FHA insurance, even if they are no
longer in business, any breach of FHA guidelines is the direct obligation of the correspondent,
not the Corporation. At June 30, 2011, approximately 27 percent of the outstanding repurchase
claims relate to loans purchased from correspondents or other parties compared to approximately 25
percent at December 31, 2010. During the three and six months ended June 30, 2011, the Corporation
experienced a decline in recoveries from correspondents and other parties; however, the actual
recovery rate may vary from period to period based upon the underlying mix of correspondents and
other parties (e.g., active, inactive, out-of-business originators) from which recoveries are
sought.
The Corporation structures its operations to limit the risk of repurchase and accompanying
credit exposure by seeking to ensure consistent production of mortgages in accordance with its
underwriting procedures and by servicing those mortgages consistent with its contractual
obligations. In addition, certain securitizations include guarantees written to protect certain
purchasers of the loans from credit losses up to a specified amount. The fair value of the
obligations to be absorbed under the representations and warranties and guarantees provided is
recorded as an accrued liability when the loans are sold. This liability for probable losses is
updated by accruing a representations and warranties provision in mortgage banking income. This is
done 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, estimated home prices, other economic conditions, estimated probability that a
repurchase claim will be received, including consideration of whether presentation thresholds will
be met, number of payments made by the borrower prior to default and estimated probability that a
loan will be required to be repurchased. The Corporation also considers bulk settlements when determining its estimated liability for
representations and warranties. The estimate of the liability for representations and warranties
is based upon currently available information, significant judgment, and a number of factors,
including those set forth above, that are subject to change. Changes to any one of these factors
could significantly impact the estimate of the liability and could have a material adverse impact
on the Corporation’s results of operations for any particular period. Given that these factors vary by
counterparty, the Corporation analyzes representations and warranties obligations based on the
specific counterparty, or type of counterparty, with whom the sale was made. Generally the volume
of unresolved repurchase claims from the FHA and VA for loans in GNMA-guaranteed securities is not
significant because the requests are limited in number and are typically resolved quickly.
Settlement Actions
The Corporation has vigorously contested any request for repurchase when it concludes that a
valid basis for repurchase claim did not exist and will continue to do so in the future. However,
in an effort to resolve these legacy mortgage-related issues, the Corporation has reached bulk
settlements, or agreements for bulk settlements, including settlement amounts which have been
material, with counterparties in lieu of a loan-by-loan review process. The Corporation may reach
other settlements in the future if opportunities arise on terms determined to be advantageous to
the Corporation. The following provides a summary of the larger bulk
settlement actions beginning in the
fourth quarter of 2010 followed by details of the Corporation’s representations and warranties
liability, including claims status.
Settlement with the Bank of New York Mellon, as Trustee
On June 28, 2011, the Corporation, BAC Home Loans Servicing, LP (BAC HLS, which was
subsequently merged with and into BANA in July 2011), and its legacy Countrywide affiliates
entered into a settlement agreement with the Bank of New York Mellon (BNY Mellon), as trustee (the
Trustee), to resolve all outstanding and potential claims related to alleged representations and
warranties breaches (including repurchase claims), substantially all historical loan servicing
claims and certain other historical claims with respect to 525 legacy Countrywide first-lien and
five second-lien non-GSE residential mortgage-backed securitization trusts (the Covered Trusts)
containing loans principally originated between 2004 and 2008 for which BNY Mellon acts as trustee
or indenture trustee (the BNY Mellon Settlement). The Covered Trusts had an original principal
balance of approximately $424 billion, of which $409 billion was originated between 2004 and 2008,
and total current outstanding principal and unpaid principal balance of loans that had defaulted
(collectively unpaid principal balance) of approximately $220 billion, of which $217 billion was
originated between 2004 and 2008.
The BNY Mellon Settlement is supported by a group of 22 institutional investors (the Investor
Group). As previously disclosed in October 2010, BAC HLS
received a letter from a law firm
on behalf of certain members of the Investor Group alleging a servicer event of default and
asserting breaches of certain loan servicing obligations, including an
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alleged failure to provide
notice to the Trustee and other parties to the pooling and servicing agreements of breaches of
representations and warranties with respect to the mortgage loans included in certain of the
Covered Trusts. In connection with the BNY Mellon Settlement, the Corporation, BAC HLS and certain
legacy Countrywide affiliates entered into an agreement with the Investor Group, which provides
that, among other things, the Investor Group will use reasonable best efforts and cooperate in
good faith to effectuate the BNY Mellon Settlement, including obtaining final court approval.
The BNY Mellon Settlement provides for a cash payment of $8.5 billion (the Settlement
Payment) to the Trustee for distribution to the Covered Trusts after final court approval of the
BNY Mellon Settlement. In addition to the Settlement Payment, the Corporation is obligated to pay
attorneys’ fees and costs to the Investor Group’s counsel as well as all fees and expenses
incurred by the Trustee in connection with the BNY Mellon Settlement, which are currently
estimated at $100 million. The Corporation is also obligated to pay the Investor Group’s counsel
and the Trustee’s fees and expenses related to obtaining final court approval of the BNY Mellon
Settlement and certain tax rulings.
The BNY Mellon Settlement does not cover a small number of legacy Countrywide-issued
first-lien non-GSE RMBS transactions with loans originated principally between 2004 and 2008 for
various reasons, including for example, six legacy Countrywide-issued first-lien non-GSE RMBS
transactions in which BNY Mellon is not the trustee. The BNY Mellon Settlement also does not cover
legacy Countrywide-issued second-lien securitization transactions in which a monoline insurer or
other financial guarantor provides financial guaranty insurance. In addition, because the
settlement is with the Trustee on behalf of the Covered Trusts and releases rights under the
governing agreements for the Covered Trusts, the settlement does not release investors’ securities
law or fraud claims based upon disclosures made in connection with
their decision to purchase, sell, or hold securities issued by the Covered Trusts. To date, various
investors, including certain members of the Investor Group, are pursuing securities law or fraud
claims related to one or more of the Covered Trusts. The Corporation is not able to determine
whether any additional securities law or fraud claims will be made by investors in the Covered
Trusts. For information about mortgage-related securities law or fraud claims, see Countrywide
Equity and Debt Securities Matters and Mortgage-backed Securities Litigation under Litigation and
Regulatory Matters in
Note 14 — Commitments and Contingencies
to the Consolidated Financial
Statements of the Corporation’s 2010 Annual Report on Form 10-K and in
Note 11 — Commitments and
Contingencies
. For those Covered Trusts where a monoline insurer or other financial guarantor has
an independent right to assert repurchase claims directly, the BNY Mellon Settlement does not
release such insurer’s or guarantor’s repurchase claims.
The BNY Mellon Settlement is subject to final court approval and other conditions. The
Trustee has determined that the settlement is in the best interests of the Covered Trusts and is
seeking the necessary court approval of the BNY Mellon Settlement by commencing a judicial
proceeding in New York State court requesting that the court approve the BNY Mellon Settlement as
to all the Covered Trusts (the Article 77 Proceeding). The court has signed an order providing
that notice of the BNY Mellon Settlement terms be provided to certificateholders and noteholders
in the Covered Trusts. Under the court’s order, certificateholders and noteholders in the Covered
Trusts have the opportunity to file objections until August 30, 2011 and responses to those
objections and statements in support of the settlement until October 31, 2011. The Investor Group
has filed, and the court has granted, a petition to intervene as a party to the proceeding so that
it may support the BNY Mellon Settlement. The court is scheduled to hold a hearing on the
Trustee’s request for entry of an order approving the settlement on November 17, 2011.
Given the number of Covered Trusts, the number of investors in those Covered Trusts and the
complexity of the BNY Mellon Settlement, it is not possible to predict how many investors will
seek to intervene in the court proceeding, how many of those and
other investors may ultimately object to the BNY Mellon Settlement or the timing or ultimate outcome of the court approval
process, which can include appeals and could take a substantial period of time. Several alleged
investors outside the Investor Group have filed, and the court has
granted, petitions to intervene as parties
in the pending court proceeding. Certain of these intervenors have stated that they intend to
object to the BNY Mellon Settlement, while others have said that they need more information in
order to determine whether to object, and indicated that they therefore intend to seek discovery.
In addition, it is possible that a substantial number of additional investors outside the Investor
Group will also seek to intervene as parties, and some intervenors and other investors may object
to the BNY Mellon Settlement. The resolutions of the objections of intervenors and/or other
investors who object may delay or ultimately prevent receipt of final court approval. If final
court approval is not obtained by December 31, 2015, the Corporation and legacy Countrywide may
withdraw from the BNY Mellon Settlement, if the Trustee consents. The BNY Mellon Settlement also
provides that if Covered Trusts representing unpaid principal balance exceeding a specified amount
are excluded from the final BNY Mellon Settlement, based on investor objections or otherwise, the
Corporation and legacy Countrywide have the option to withdraw from the BNY Mellon Settlement
pursuant to the terms of the BNY Mellon Settlement agreement.
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In addition to final court approval, the settlement is conditioned on receipt of private
letter rulings from the IRS as well as receipt of legal opinions under California and New York
state tax laws and regulations. While there can be no assurance that such rulings or opinions will
be obtained, the Corporation currently anticipates that the process related to these conditions
will be completed during the period prior to final court approval.
There can be no assurance that final court approval of the settlement will be obtained, that
all conditions will be satisfied or, if certain conditions to the BNY Mellon Settlement permitting
withdrawal are met, that the Corporation and legacy Countrywide will not determine to withdraw
from the settlement. If final court approval is not obtained or if the Corporation and legacy
Countrywide determine to withdraw from the BNY Mellon Settlement in accordance with its terms, the
Corporation’s future representations and warranties losses could be substantially different than
existing accruals and the estimated range of possible loss over existing accruals described below under
Whole Loan Sales and Private-label Securitization Experience on page
183.
In connection with the BNY Mellon Settlement, BAC HLS has agreed to implement certain
servicing changes, on a schedule that began with the signing of the BNY Mellon Settlement
agreement, including the transfer of servicing related to certain high-risk loans to qualified
subservicers and the benchmarking of loan servicing against defined industry standards regarding
default-servicing timelines. The transfer of loans to subservicers will reduce the servicing fees
payable to BAC HLS in the future. Failure to meet the established benchmarking standards can
trigger the payment of agreed-upon fees. BAC HLS’s obligations with respect to these servicing
changes will terminate if final court approval is not obtained.
The Trustee and BAC HLS have also agreed to clarify certain servicing standards related to
loss mitigation. In particular, the BNY Mellon Settlement would clarify that it is permissible to
apply the same loss-mitigation strategies to the Covered Trusts as are applied to BAC HLS
affiliates’ held-for-investment portfolios. This agreement, which is effective immediately,
is not conditioned on final court approval of the BNY Mellon
Settlement. If final court approval is
never obtained, BAC HLS’s actions taken in accordance with this agreement could be subject to
challenge if counterparties argue that they are inconsistent with the Covered Trusts’ current
governing documents.
The Corporation and legacy Countrywide also have agreed to work to resolve with the Trustee
certain note and mortgage documentation issues related to the enforceability of mortgages in
foreclosure (e.g., title policy and mortgage recordation issues). If certain documentation issues
remain outstanding when certain specified loans reach foreclosure, the Corporation and/or legacy
Countrywide is obligated to reimburse the related Covered Trust for any loss if BAC HLS is unable
to foreclose on the mortgage and the Covered Trust is not made whole by a title policy because of
documentation exceptions. This agreement will terminate if final
court approval of the BNY Mellon Settlement is not obtained.
Certain servicing and documentation obligations begin upon signing of the BNY Mellon
Settlement agreement, while others, including potential payment of servicing-related fees, are
conditioned on final court approval of the BNY Mellon Settlement. The Corporation estimates that
the costs associated with additional servicing obligations under the BNY Mellon Settlement
contributed $400 million to the second quarter 2011 valuation charge related to the MSR asset. The
additional servicing actions are consistent with the consent orders with the Office of the
Comptroller of the Currency (OCC) and the Federal Reserve issued in April 2011.
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Settlement with Assured Guaranty
On April 14, 2011, the Corporation, including its legacy Countrywide affiliates, entered into
an agreement with Assured Guaranty Ltd. and subsidiaries (Assured
Guaranty), to resolve all of the monoline insurer’s outstanding and
potential repurchase claims related to alleged representations and warranties breaches involving
29 first- and second-lien RMBS trusts where Assured Guaranty provided financial guarantee
insurance (the Assured Guaranty Settlement). The agreement also resolves historical loan servicing
issues and other potential liabilities with respect to these trusts. The agreement covers 21
first-lien RMBS trusts and eight second-lien RMBS trusts, which had an original principal balance
of approximately $35.8 billion and total unpaid principal balance of approximately $20.2 billion
as of April 14, 2011. The agreement includes cash payments totaling approximately $1.1 billion to
Assured Guaranty, as well as a loss-sharing reinsurance arrangement that has an expected value of
approximately $470 million, and other terms, including termination of certain derivative
contracts. The cash payments consist of $850 million paid on April 14, 2011, $57 million paid on
June 30, 2011 and the remainder payable in three equal installments at the end of each quarter
through March 31, 2012. The total cost recognized for the Assured Guaranty Settlement as of June
30, 2011 was approximately $1.6 billion. As a result of this
agreement, the Corporation consolidated $5.2 billion in consumer loans and the related trust debt
on its Consolidated Balance Sheet as of June 30, 2011, due to the establishment of reinsurance
contracts at the time of the Assured Guaranty Settlement.
Government-sponsored Enterprise Agreements
On December 31, 2010, the Corporation reached agreements with the GSEs, under which the
Corporation paid $2.8 billion to resolve repurchase claims involving first-lien residential
mortgage loans sold directly to the GSEs by entities related to legacy Countrywide (the GSE
Agreements). The agreement with FHLMC extinguished all outstanding and potential mortgage
repurchase and make-whole claims arising out of any alleged breaches of selling representations
and warranties related to loans sold directly by legacy Countrywide to FHLMC through 2008, subject
to certain exceptions. The agreement with FNMA substantially resolved the existing pipeline of
repurchase claims outstanding as of September 20, 2010 arising out of alleged breaches of selling
representations and warranties related to loans sold directly by legacy Countrywide to FNMA. These
agreements with the GSEs did not cover outstanding and potential mortgage repurchase claims
arising out of any alleged breaches of selling representations and warranties to legacy Bank of
America first-lien residential mortgage loans sold directly to the GSEs or other loans sold
directly to the GSEs other than described above, loan servicing obligations, other contractual
obligations or loans contained in private-label securitizations.
Outstanding Claims
The table below presents outstanding representations and warranties claims by counterparty
and product type at June 30, 2011 and December 31, 2010. For additional information refer to Whole
Loan Sales and Private-label Securitizations on
page 183 of this Note and
Note 11 — Commitments and Contingencies.
These repurchase claims
include $1.7 billion in demands from investors in the Covered Trusts received in the third quarter
of 2010, but otherwise do not include any repurchase claims related to the Covered Trusts.
| Outstanding Claims by Counterparty and Product Type | ||||||||
| June 30 | December 31 | |||||||
| (Dollars in millions) | 2011 | 2010 | ||||||
|
By counterparty
|
||||||||
|
GSEs
|
$ | 5,081 | $ | 2,821 | ||||
|
Monolines
|
3,533 | 4,799 | ||||||
|
Whole loan and private-label securitization investors and other
(1)
|
2,966 | 3,067 | ||||||
|
Total outstanding claims by counterparty
|
$ | 11,580 | $ | 10,687 | ||||
|
By product type
|
||||||||
|
Prime loans
|
$ | 3,421 | $ | 2,040 | ||||
|
Alt-A
|
1,938 | 1,190 | ||||||
|
Home equity
|
2,853 | 3,658 | ||||||
|
Pay option
|
2,478 | 2,889 | ||||||
|
Subprime
|
663 | 734 | ||||||
|
Other
|
227 | 176 | ||||||
|
Total outstanding claims by product type
|
$ | 11,580 | $ | 10,687 | ||||
| (1) |
Amounts for June 30, 2011 and December 31, 2010 include
$1.7 billion in demands contained in correspondence from
private-label securitizations investors in the Covered
Trusts that do not have the right to demand repurchase of
loans directly or the right to access loan files. For
additional information, see Settlement with Bank of New
York Mellon, as Trustee on page 174.
|
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The number of repurchase claims as a percentage of the number of loans purchased arising from
loans sourced from brokers or purchased from third-party sellers is relatively consistent with the
number of repurchase claims as a percentage of the number of loans originated by the Corporation
or its subsidiaries or legacy companies.
Cash Payments
As presented in the table below, during the three and six months ended June 30, 2011, the
Corporation paid $1.6 billion and $2.1 billion to resolve $1.9 billion and $2.6 billion of
repurchase claims through repurchase or reimbursement to the investor or securitization trust for
losses they incurred, resulting in a loss on the related loans at the time of repurchase or
reimbursement of $1.0 billion and $1.4 billion. During the three and six months ended June 30,
2010, the Corporation paid $857 million and $1.9 billion to resolve $926 million and $2.1 billion
of repurchase claims through repurchase or reimbursement to the investor or securitization trust
for losses they incurred, resulting in a loss on the related loans at the time of repurchase or
reimbursement of $487 million and $1.2 billion. Cash paid for loan repurchases includes the unpaid
principal balance of the loan plus past due interest. The amount of loss for loan repurchases is
reduced by the fair value of the underlying loan collateral. The repurchase of loans and
indemnification payments related to first-lien and home equity repurchase claims generally
resulted from 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 and warranties 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. Transactions to repurchase or
indemnification payments related to first-lien residential mortgages primarily involved the GSEs
while transactions to repurchase or indemnification payments for home equity loans primarily
involved the monoline insurers. In addition to the amounts discussed above, the Corporation paid
$907 million in the three months ended June 30, 2011 to Assured Guaranty as part of the Assured
Guaranty Settlement.
The table below presents first-lien and home equity loan repurchases and indemnification
payments for the three and six months ended June 30, 2011 and 2010.
| Loan Repurchases and Indemnification Payments | ||||||||||||||||||||||||
| Three Months Ended June 30 | ||||||||||||||||||||||||
| 2011 | 2010 | |||||||||||||||||||||||
| Unpaid | Cash Paid | Unpaid | Cash Paid | |||||||||||||||||||||
| Principal | for | Principal | for | |||||||||||||||||||||
| (Dollars in millions) | Balance | Repurchases | Loss | Balance | Repurchases | Loss | ||||||||||||||||||
|
First-lien
|
||||||||||||||||||||||||
|
Repurchases
|
$ | 860 | $ | 970 | $ | 419 | $ | 573 | $ | 627 | $ | 267 | ||||||||||||
|
Indemnification payments
|
958 | 539 | 539 | 291 | 166 | 165 | ||||||||||||||||||
|
Total first-lien
|
1,818 | 1,509 | 958 | 864 | 793 | 432 | ||||||||||||||||||
|
Home equity
|
||||||||||||||||||||||||
|
Repurchases
|
3 | 3 | - | 24 | 28 | 19 | ||||||||||||||||||
|
Indemnification payments
|
45 | 48 | 48 | 38 | 36 | 36 | ||||||||||||||||||
|
Total home equity
|
48 | 51 | 48 | 62 | 64 | 55 | ||||||||||||||||||
|
Total first-lien and home equity
|
$ | 1,866 | $ | 1,560 | $ | 1,006 | $ | 926 | $ | 857 | $ | 487 | ||||||||||||
| Six Months Ended June 30 | ||||||||||||||||||||||||
| 2011 | 2010 | |||||||||||||||||||||||
|
First-lien
|
||||||||||||||||||||||||
|
Repurchases
|
$ | 1,194 | $ | 1,333 | $ | 552 | $ | 1,209 | $ | 1,325 | $ | 627 | ||||||||||||
|
Indemnification payments
|
1,292 | 699 | 699 | 801 | 462 | 462 | ||||||||||||||||||
|
Total first-lien
|
2,486 | 2,032 | 1,251 | 2,010 | 1,787 | 1,089 | ||||||||||||||||||
|
Home equity
|
||||||||||||||||||||||||
|
Repurchases
|
18 | 18 | 14 | 42 | 48 | 29 | ||||||||||||||||||
|
Indemnification payments
|
85 | 87 | 87 | 79 | 76 | 76 | ||||||||||||||||||
|
Total home equity
|
103 | 105 | 101 | 121 | 124 | 105 | ||||||||||||||||||
|
Total first-lien and home equity
|
$ | 2,589 | $ | 2,137 | $ | 1,352 | $ | 2,131 | $ | 1,911 | $ | 1,194 | ||||||||||||
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Liability for Representations and Warranties and Corporate Guarantees
The liability for representations and warranties and corporate guarantees is included in
accrued expenses and other liabilities and the related provision is included in mortgage banking
income. The table below presents a rollforward of the liability for representations and warranties
and corporate guarantees and includes the provision and related payments made for recent
settlements.
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Liability for representations and warranties and corporate guarantees, beginning of period
|
$ | 6,220 | $ | 3,325 | $ | 5,438 | $ | 3,507 | ||||||||
|
Additions for new sales
|
3 | 8 | 10 | 16 | ||||||||||||
|
Charge-offs
|
(2,480 | ) | (642 | ) | (2,718 | ) | (1,360 | ) | ||||||||
|
Provision
|
14,037 | 1,248 | 15,050 | 1,774 | ||||||||||||
|
Other
|
- | - | - | 2 | ||||||||||||
|
Liability for representations and warranties and corporate guarantees, June 30
|
$ | 17,780 | $ | 3,939 | $ | 17,780 | $ | 3,939 | ||||||||
The liability for representations and warranties is established when those obligations are
both probable and reasonably estimable. For the three and six months ended June 30, 2011, the
provision for representations and warranties and corporate guarantees was $14.0 billion and $15.1
billion compared to $1.2 billion and $1.8 billion for the same periods in 2010. Of the $14.0
billion provision recorded in the three months ended June 30, 2011, $8.6 billion was attributable
to the BNY Mellon Settlement. In addition, the BNY Mellon Settlement led to the determination that
the Corporation has sufficient experience to record a liability related to its exposure on certain
other private-label securitizations. This determination combined with higher estimated GSE
repurchase rates in the three and six months ended June 30, 2011, was the driver of the balance of
the provision. GSE repurchase rates increased driven by higher than expected claims during the
three and six months ended June 30, 2011, including claims on loans that defaulted more than
18 months ago and on loans where the borrower has made a significant number of payments
(e.g., at least 25), in each case in numbers that were not expected based on historical claims.
Estimated
Range of Possible Loss
Government-sponsored Enterprises
The Corporation’s estimated liability for obligations under representations and warranties
given to the GSEs considers, among other things, higher estimated repurchase rates based on higher
than expected claims from the GSEs during the three and six months ended June 30, 2011. It also
considers the GSE Agreements and their expected impact on the repurchase rates on future
repurchase claims the Corporation might receive on loans that have defaulted or that it estimates
will default. The Corporation’s provision with respect to the GSEs is necessarily dependent on,
and limited by, its historical claims experience with the GSEs and may materially change in the
future based on factors beyond its control. The Corporation believes its predictive repurchase
models, utilizing its historical repurchase experience with the GSEs while considering current
developments, including the GSE Agreements and recent GSE behavior, projections of future
defaults, as well as certain other assumptions regarding economic conditions, home prices and
other matters, allow it to reasonably estimate the liability for obligations under representations
and warranties on loans sold to the GSEs, and its estimate of the liability for these obligations
has been accounted for in the recorded liability for representations and warranties for these
loans. However, future provisions associated with obligations under representations and warranties
made to the GSEs may be materially impacted if actual results are different from the Corporation’s
assumptions regarding economic conditions, home prices and other matters, including the repurchase
request behavior of the GSEs and the estimated repurchase rates. While the Corporation has an
established history of working with the GSEs on repurchase claims, its experience with them
continues to evolve and impact the Corporation’s estimated repurchase rates and liability. In
addition, the recent FNMA announcement regarding mortgage insurance rescissions, cancellations and
claim denials could result in increased repurchase requests from FNMA
that exceed the repurchase
requests contemplated by the estimated liability.
The Corporation is not able to anticipate changes in the behavior of the GSEs from the
Corporation’s past experiences. Therefore, it is not possible to reasonably estimate a possible
loss or range of possible loss with respect to any such potential impact in excess of current
accruals on future GSE provisions if the behavior of the GSEs changes from past experience.
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Table of Contents
Counterparties other than Government-sponsored Enterprises
The population of private-label securitizations included in the BNY Mellon Settlement
encompasses almost all legacy Countrywide first-lien private-label securitizations including loans
originated principally in the 2004 through 2008 vintage. For the remainder of the population of
private-label securitizations, although the Corporation believes it is probable that other
claimants may come forward with claims that meet the requirements of the terms of the
securitizations, the Corporation has experienced limited activity that has met the standards
required. The Corporation believes that the provisions recorded in connection with the BNY Mellon
Settlement and the additional non-GSE representations and warranties provisions recorded in the
three and six months ended June 30, 2011, have provided for a substantial portion of the
Corporation’s non-GSE representations and warranties exposures. However, it is reasonably possible
that future representations and warranties losses may occur in excess of the amounts recorded for
these exposures. In addition, as discussed below, the Corporation has not recorded any
representations and warranties liability for certain potential monoline exposures and certain
potential whole loan and other private-label securitization exposures. The
Corporation currently estimates that the range of possible loss related to non-GSE representations
and warranties exposure as of June 30, 2011, could be up to $5 billion over existing accruals.
This estimated range of possible loss for non-GSE representations and warranties does not
represent a probable loss, is based on currently available information, significant judgment, and
a number of assumptions, including those set forth below, that are subject to change.
The methodology used to estimate the non-GSE representations and warranties liability and the
corresponding range of possible loss considers a variety of factors including
the Corporation’s experience related to actual defaults, estimated future defaults and historical
loss experience. Among the factors that impact the non-GSE representations and warranties
liability and the corresponding estimated range of possible loss are: (1) contractual loss causation requirements, (2) the
representations and warranties provided, and (3) the requirement to meet certain presentation
thresholds. The first factor is based on the Corporation’s
belief that a non-GSE contractual liability to
repurchase a loan generally arises only if the counterparties prove there is a breach of
representations and warranties that materially and adversely affects the interest of the investor
or all investors, or the monoline insurer (as applicable), in a securitization trust and,
accordingly, the Corporation believes that the repurchase claimants must prove that the alleged
representations and warranties breach was the cause of the loss. The second factor is related to
the fact that non-GSE securitizations include different types of representations and warranties
than those provided to the GSEs. The Corporation believes the non-GSE securitizations’ representations
and warranties are less rigorous and actionable than the comparable agreements with the GSEs. The
third factor is related to the fact that certain presentation thresholds need to be met in order
for any repurchase claim to be asserted under the non-GSE agreements. A securitization trustee may
investigate or demand repurchase on its own action, and most agreements contain a threshold, for
example 25 percent of the voting rights per trust, that allows investors to declare a servicing
event of default under certain circumstances or to request certain action, such as requesting loan
files, that the trustee may choose to accept and follow, exempt from liability, provided the
trustee is acting in good faith. If there is an uncured servicing event of default, and the
trustee fails to bring suit during a 60-day period, then, under most agreements, investors may
file suit. In addition to this, most agreements also allow investors to direct the securitization
trustee to investigate loan files or demand the repurchase of loans, if security holders hold a
specified percentage, for example, 25 percent, of the voting rights of each tranche of the
outstanding securities.
The
methodology used to estimate the non-GSE representations and
warranties liability and the corresponding range of possible loss was updated in the second quarter of 2011 to consider the implied repurchase
experience based on the BNY Mellon Settlement and assumes that the conditions to the BNY Mellon
Settlement are satisfied. It also considers the Corporation’s assumptions regarding economic
conditions, including estimated second quarter 2011 home prices. Since the non-GSE transactions
that were included in the BNY Mellon Settlement differ from those that were not included in the
BNY Mellon Settlement, the Corporation adjusted the experience implied in the settlement in order
to determine the estimated non-GSE representations and warranties
liability and the corresponding range of
possible loss. The judgmental adjustments made include consideration of the differences in the mix
of products in the securitizations, loan originator, likelihood of claims differences, the
differences in the number of payments that the borrower has made prior to default, and the sponsor
of the securitization. Although the Corporation continues to believe that presentation thresholds,
as described above, are a factor in the determination of probable loss, given the BNY Mellon
Settlement, the upper end of the estimated range of possible loss
assumes that the presentation threshold can be met for all of the non-GSE securitization transactions.
Future provisions and/or ranges of possible loss for non-GSE representations and warranties
may be significantly impacted if actual results are different from the Corporation’s assumptions
in its predictive models, including, without limitation, those regarding the ultimate resolution
of the BNY Mellon Settlement, estimated repurchase rates, economic conditions, home prices,
consumer and counterparty behavior, and a variety of judgmental factors. Adverse developments with
respect to one or more of the assumptions underlying the
liability for representations and warranties and the corresponding estimated range of possible loss could result
in significant increases to future provisions
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Table of Contents
and/or
the estimated range of loss. For example, if courts were to disagree with the Corporation’s
interpretation that the underlying agreements require a claimant to prove that the representations
and warranties breach was the cause of the loss, it could significantly impact this estimated
range of possible loss. Additionally, if recent court rulings related to monoline litigation,
including one related to the Corporation, that have allowed sampling of loan files instead of a
loan-by-loan review to determine if a representations and warranties breach has occurred are
followed generally by the courts, private-label securitization investors may view litigation as a
more attractive alternative as compared to a loan-by-loan review. Finally, although the
Corporation believes that the representations and warranties typically given in non-GSE
transactions are less rigorous and actionable than those given in GSE transactions, the
Corporation does not have significant loan-level experience to measure the impact of these
differences on the probability that a loan will be repurchased.
The liability for obligations under representations and warranties with respect to GSE and
non-GSE exposures and the corresponding estimated range of possible loss for non-GSE representations and
warranties exposures do not include any losses related to litigation matters disclosed in
Note 11
– Commitments and Contingencies
, nor do they include any separate foreclosure costs and related
costs and assessments or any possible losses related to potential claims for breaches of
performance of servicing obligations, potential securities law or fraud claims or potential
indemnity or other claims against the Corporation. The Corporation is not able to reasonably
estimate the amount of any possible loss with respect to any such servicing, securities law
(except to the extent reflected in the aggregate range of possible loss for litigation and
regulatory matters disclosed in
Note 11 – Commitments and Contingencies
), fraud or other claims
against the Corporation; however, such loss could be material.
Government-sponsored Enterprises Experience
The Corporation and its subsidiaries have an established history of working with the
GSEs on repurchase claims. However, the behavior of the GSEs continues to evolve. Notably in
recent periods, the Corporation has been experiencing elevated levels of new claims, including
claims on default vintages and loans in which borrowers have made a significant number of payments
(e.g., at least 25 payments), in each case, in numbers that were not expected based on historical
experience. Additionally, the criteria by which the GSEs are ultimately willing to resolve claims
have become more rigid over time. Generally, the Corporation first becomes aware that a GSE is
evaluating a particular loan for repurchase when the Corporation receives a request from a GSE to
review the underlying loan file (file request). Upon completing its review, the GSE may submit a
repurchase claim to the Corporation. As soon as practicable after receiving a repurchase claim
from either of the GSEs, the Corporation evaluates the claim and takes appropriate action. Claim
disputes are generally handled through loan-level negotiations with the GSEs and the Corporation
seeks to resolve the repurchase claim within 90 to 120 days of the receipt of the claim although
tolerances exist for claims that remain open beyond this timeframe. Experience with the GSEs
continues to evolve and any disputes are generally related to areas including reasonableness of
stated income, occupancy, undisclosed liabilities and the validity of mortgage insurance claim
rescissions or denials in the vintages with the highest default rates. During the three and six
months ended June 30, 2011, outstanding GSE claims increased substantially, primarily attributable
to an increase in new claims submitted on both legacy Countrywide originations not covered by the
GSE Agreements and Bank of America originations, combined with an increase in the volume of claims
appealed by the Corporation and awaiting review and response from one of the GSEs.
Monoline Insurers Experience
Unlike the repurchase protocols and experience established with GSEs, experience with
most of the monoline insurers has been varied and the protocols and experience with these
counterparties has not been as predictable as with the GSEs. The timetable for the loan file
request, the repurchase claim, if any, response and resolution vary by monoline. 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.
Properly presented repurchase claims for the monolines are generally reviewed on a
loan-by-loan basis. As part of an ongoing claims process, if the Corporation does not believe a
claim is valid, it will deny the claim and generally indicate the reason for the denial to
facilitate meaningful dialogue with the counterparty although it is not contractually obligated to
do so. When there is disagreement as to the resolution of a claim, meaningful dialogue and
negotiation is generally necessary between the parties to reach conclusion on an individual claim.
Although the Assured Guaranty Settlement does not cover all securitizations where Assured Guaranty
and subsidiaries provided insurance, it covers the transactions that
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resulted in repurchase requests from this monoline. As a result, the on-going claims process with
counterparties with a more consistent repurchase experience is substantially complete.
The remaining monolines have instituted litigation against legacy Countrywide and Bank of
America. When claims from these counterparties are denied, the Corporation does not indicate its
reason for denial as it is not contractually obligated to do so. In the Corporation’s experience,
the monolines have been generally unwilling to withdraw repurchase claims, regardless of whether
and what evidence was offered to refute a claim.
The pipeline of unresolved monoline claims where the Corporation believes a valid defect has
not been identified which would constitute an actionable breach of representations and warranties
decreased during the three and six months ended June 30, 2011 as a result of the Assured Guaranty
Settlement. Through June 30, 2011, approximately 30 percent of monoline claims that the
Corporation initially denied have subsequently been resolved through the Assured Guaranty
Settlement, nine percent through repurchase or make-whole payments and one percent have been
resolved through rescission. When a claim has been denied and there has not been communication
with the counterparty for six months, the Corporation views these claims as inactive; however,
they remain in the outstanding claims balance until resolution.
A liability for representations and warranties has been established for repurchase claims
based on valid identified loan defects and for repurchase claims that are in the process of review
based on historical repurchase experience with specific monoline insurers to the extent such
experience provides a reasonable basis on which to estimate incurred losses from repurchase
activity. In prior periods, a liability was established for Assured Guaranty related to repurchase
claims subject to negotiation and unasserted claims to repurchase current and future defaulted
loans. The Assured Guaranty Settlement resolved this representations and warranties liability with
the liability for the related loss sharing reinsurance arrangement being recorded in other accrued
liabilities. With respect to the other monoline insurers, the Corporation has had limited
experience in the repurchase process as these monoline insurers have instituted litigation against
legacy Countrywide and Bank of America, which limits the Corporation’s ability to enter into
constructive dialogue with these monolines to resolve the open claims. For these monolines, in
view of the inherent difficulty of predicting the outcome of those repurchase claims where a valid
defect has not been identified or in predicting future claim requests and the related outcome in
the case of unasserted claims 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 through the repurchase process. In addition, the timing of the
ultimate resolution or the eventual loss through the repurchase process, if any, related to those
repurchase claims cannot be reasonably estimated. Thus, with respect to these monolines, a
liability for representations and warranties has not been established related to repurchase claims
where a valid defect has not been identified, or in the case of any unasserted claims to
repurchase loans from the securitization trusts in which such monolines have insured all or some
of the related bonds. For additional information related to the monolines, see
Note 11 –
Commitments and Contingencies.
Monoline Outstanding Claims
At June 30, 2011, for loans originated between 2004 and 2008, the unpaid principal balance of
loans related to unresolved repurchase claims previously received from monolines was $3.5 billion,
including $3.0 billion in repurchase claims 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 $547 million in repurchase claims that are in the process of review. As noted
above, a portion of the repurchase claims that are initially denied are ultimately resolved
through bulk settlement, repurchase or make-whole payments, after additional dialogue and
negotiation with the monoline insurer. At June 30, 2011, the unpaid principal balance of loans in
these vintages for which the monolines had requested loan files for review but for which no
repurchase claim had been received was $6.1 billion, excluding loans that had been paid in full
and file requests for loans included in the trusts settled with Assured Guaranty. There will
likely be additional requests for loan files in the future leading to repurchase claims. Such
claims 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 claim will be received for every loan in a
securitization or every file requested or that a valid defect exists for every loan repurchase
claim. In addition, amounts paid on repurchase claims 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 it will be required to advance funds to the
securitization trust, the likelihood of receiving a repurchase claim from a monoline may be
reduced as the monoline would receive limited or no benefit from the payment of repurchase claims.
Moreover, some monolines are not currently performing their obligations under the financial
guaranty policies they issued which may, in certain circumstances, impact their ability to present
repurchase claims.
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Whole Loan Sales and Private-label Securitizations Experience
The majority
of the repurchase claims that the Corporation has received
outside of the GSEs and monolines are from third-party whole-loan
investors. In connection with these transactions, the Corporation
provided representations and warranties and the whole-loan investors may retain those rights even when the loans were aggregated with other collateral into
private-label securitizations sponsored by the whole-loan investors. Properly presented repurchase
claims for these whole loans are reviewed on a loan-by-loan basis. If, after the Corporation’s
review, it does not believe a claim is valid, it will deny the claim and generally indicate a
reason for the denial. When the counterparty agrees with the Corporation’s denial of the claim,
the counterparty may rescind the claim. When there is disagreement as to the resolution of the
claim, meaningful dialogue and negotiation between the parties is generally necessary to reach
conclusion on an individual claim. Generally, a whole loan sale claimant is engaged in the
repurchase process and the Corporation and the claimant reach resolution, either through
loan-by-loan negotiation or at times, through a bulk settlement. Through June 30, 2011, 16 percent
of the whole-loan claims that the Corporation initially denied have subsequently been resolved
through repurchase or make-whole payments and 50 percent have been resolved through rescission or
repayment in full by the borrower. Although the timeline for resolution varies, once an actionable
breach is identified on a given loan, settlement is generally reached as to that loan within 60 to
90 days. When a claim has been denied and the Corporation does not have communication with the
counterparty for six months, the Corporation views these claims as inactive; however, they remain
in the outstanding claims balance until resolution.
The Corporation and its subsidiaries have limited experience with loan-level private-label
securitization repurchases as the number of valid repurchase claims received has been limited as
shown in the outstanding claims table on page 177. In private-label securitizations certain
presentation thresholds need to be met in order for any repurchase claim to be asserted by
investors. The representations and warranties, as governed by the private-label securitization
agreements, generally 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. While the
Corporation believes the agreements for private-label securitizations generally contain less
rigorous representations and warranties and place higher burdens on investors seeking repurchases
than the comparable agreements with the GSEs and GNMA, the agreements generally include a
representation that underwriting practices were prudent and customary.
During the third quarter of 2010, the Corporation received claim demands totaling $1.7
billion from private-label securitization investors in the Covered Trusts. Non-GSE investors
generally do not have the contractual right to demand repurchase of the loans directly or the
right to access loan files. The inclusion of the $1.7 billion in outstanding claims, as reflected
in the table on page 177, does not mean that the Corporation believes these claims have satisfied
the contractual thresholds required for the private-label securitization investors to direct the
securitization trustee to take action or that these claims are otherwise procedurally or
substantively valid. One of these claimants has filed litigation against the Corporation relating
to certain of these demands; the claims in this litigation would be extinguished if there is final
court approval of the BNY Mellon Settlement.
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Goodwill
The table below presents goodwill balances by business segment at June 30, 2011 and
December 31, 2010. The reporting units utilized for goodwill impairment tests are the operating
segments or one level below. The Corporation performs its annual goodwill impairment test during
the three months ending September 30, based on June 30 information.
| June 30 | December 31 | |||||||
|
(Dollars in millions)
|
2011 | 2010 | ||||||
|
Deposits
|
$ | 17,875 | $ | 17,875 | ||||
|
Global Card Services
|
11,896 | 11,889 | ||||||
|
Consumer Real Estate Services
|
- | 2,796 | ||||||
|
Global Commercial Banking
|
20,668 | 20,656 | ||||||
|
Global Banking & Markets
|
10,673 | 10,671 | ||||||
|
Global Wealth & Investment Management
|
9,928 | 9,928 | ||||||
|
All Other
|
34 | 46 | ||||||
|
Total goodwill
|
$ | 71,074 | $ | 73,861 | ||||
In connection with the sale of Balboa Insurance Company’s lender-placed insurance
business that closed on June 1, 2011, the Corporation allocated $193 million of
CRES
goodwill to
the business in determining the gain on sale based upon the relative fair value of the business
sold.
During the three months ended June 30, 2011, as a consequence of the BNY Mellon Settlement
entered into by the Corporation on June 28, 2011, the adverse impact of the incremental
mortgage-related charges recorded during the three months ended June 30, 2011, and the continued
economic slowdown in the mortgage business, the Corporation performed an impairment test for the
CRES
reporting unit on the remaining goodwill balance of $2.6 billion. Based on the results of
step one of the impairment test, the Corporation determined that a step two analysis was
necessary. In step two, the Corporation compared the implied fair value of the reporting unit’s
goodwill with the carrying amount of that goodwill and concluded that the remaining balance of
goodwill of $2.6 billion was impaired as of June 30, 2011. Accordingly, the Corporation recorded a
non-cash, non-tax deductible goodwill impairment charge of $2.6 billion to reduce the carrying
value of the goodwill in
CRES
to zero during the three months ended June 30, 2011.
On June 29, 2011, the Federal Reserve issued a final rule which will be effective October 1,
2011 that establishes debit card interchange fees in connection with the Durbin Amendment of the
Dodd-Frank Wall Street Reform and Consumer Protection Act. In light of the issuance of the final
rules, the Corporation performed an updated impairment analysis for the
Global Card Services
reporting unit during the three months ended June 30, 2011.
In step one of the goodwill impairment test, the fair value of
Global Card Services
was
estimated using the income approach. The significant assumptions under the income approach
included the discount rate, terminal value, cash flow estimates and expected new account growth.
The step one fair value estimate also included the impact of the Federal Reserve’s final rule on
debit card interchange fees. At June 30, 2011, the carrying amount, fair value and goodwill for
the
Global Card Services
reporting unit were $24.8 billion, $37.3 billion and $11.9 billion,
respectively. The estimated fair value as a percent of the carrying amount was 150 percent.
Although, the fair value exceeded the carrying amount in step one of the
Global Card Services
goodwill impairment test indicating no impairment, to further substantiate the value of goodwill,
the Corporation also performed step two for this reporting unit. Under step two of the goodwill
impairment test, significant assumptions in measuring the fair value of the assets and liabilities
of the reporting unit, including discount rates, loss rates and interest rates were updated to
reflect the current economic conditions. The results of step two of the goodwill impairment test
indicated that the remaining balance of goodwill of $11.9 billion was not impaired as of June 30,
2011. Given the recent Federal Reserve rulemaking and improved economic environment, the
uncertainty concerning the recoverability of
Global Card Services
goodwill has been significantly
reduced.
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Intangible Assets
The table below presents the gross carrying amounts and accumulated amortization related
to intangible assets at June 30, 2011 and December 31, 2010.
| June 30, 2011 | December 31, 2010 | |||||||||||||||
| Gross | Accumulated | Gross | Accumulated | |||||||||||||
| (Dollars in millions) | Carrying Value | Amortization | Carrying Value | Amortization | ||||||||||||
|
Purchased credit card relationships
|
$ | 7,179 | $ | 4,372 | $ | 7,162 | $ | 4,085 | ||||||||
|
Core deposit intangibles
|
5,394 | 4,253 | 5,394 | 4,094 | ||||||||||||
|
Customer relationships
|
4,229 | 1,440 | 4,232 | 1,222 | ||||||||||||
|
Affinity relationships
|
1,649 | 969 | 1,647 | 902 | ||||||||||||
|
Other intangibles
|
3,091 | 1,332 | 3,087 | 1,296 | ||||||||||||
|
Total intangible assets
|
$ | 21,542 | $ | 12,366 | $ | 21,522 | $ | 11,599 | ||||||||
None of the intangible assets were impaired at June 30, 2011 or December 31, 2010.
Amortization of intangibles expense was $382 million and $767 million for the three and six
months ended June 30, 2011 compared to $439 million and $885 million for the same periods in 2010.
The Corporation estimates aggregate amortization expense will be approximately $370 million for
each of the remaining quarters of 2011, and $1.3 billion, $1.2 billion, $1.0 billion, $890 million
and $785 million for 2012 through 2016, respectively.
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 Corporation’s Consolidated Balance Sheet. For additional information
on commitments and contingencies, see
Note 14 — Commitments and Contingencies
to the Consolidated
Financial Statements of the Corporation’s 2010 Annual Report on Form 10-K.
Credit Extension Commitments
The Corporation enters into commitments to extend credit such as loan commitments,
standby letters of credit (SBLCs) and commercial letters of credit to meet the financing needs of
its customers. The table on page 186 shows the notional amount of unfunded legally binding lending
commitments net of amounts distributed (e.g., syndicated) to other financial institutions of $20.4
billion and $23.3 billion at June 30, 2011 and December 31, 2010. At June 30, 2011, the carrying
amount of these commitments, excluding commitments accounted for under the fair value option, was
$925 million, including deferred revenue of $28 million and a reserve for unfunded lending
commitments of $897 million. At December 31, 2010, the comparable amounts were $1.2 billion, $29
million and $1.2 billion, respectively. The carrying amount of these commitments is classified in
accrued expenses and other liabilities on the Consolidated Balance Sheet.
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The table below also includes the notional amount of commitments of $28.0 billion and $27.3
billion at June 30, 2011 and December 31, 2010 that are accounted for under the fair value option.
However, the table below excludes fair value adjustments of $773 million and $866 million on these
commitments, which are classified in accrued expenses and other liabilities. For information
regarding the Corporation’s loan commitments accounted for under the fair value option, see
Note
17 — Fair Value Option.
| June 30, 2011 | ||||||||||||||||||||
| Expire after 1 | Expire after 3 | |||||||||||||||||||
| Expire in 1 | Year through | Years through | Expire after 5 | |||||||||||||||||
| (Dollars in millions) | Year or Less | 3 Years | 5 Years | Years | Total | |||||||||||||||
|
Notional amount of credit extension commitments
|
||||||||||||||||||||
|
Loan commitments
|
$ | 116,408 | $ | 113,690 | $ | 78,377 | $ | 19,966 | $ | 328,441 | ||||||||||
|
Home equity lines of credit
|
1,523 | 5,387 | 19,973 | 45,260 | 72,143 | |||||||||||||||
|
Standby letters of credit and financial guarantees
(1)
|
34,382 | 18,419 | 6,710 | 3,220 | 62,731 | |||||||||||||||
|
Letters of credit
(2)
|
4,350 | 103 | 3 | 166 | 4,622 | |||||||||||||||
|
Legally binding commitments
|
156,663 | 137,599 | 105,063 | 68,612 | 467,937 | |||||||||||||||
|
Credit card lines
(3)
|
488,460 | - | - | - | 488,460 | |||||||||||||||
|
Total credit extension commitments
|
$ | 645,123 | $ | 137,599 | $ | 105,063 | $ | 68,612 | $ | 956,397 | ||||||||||
|
|
||||||||||||||||||||
|
|
December 31, 2010 | |||||||||||||||||||
|
Notional amount of credit extension commitments
|
||||||||||||||||||||
|
Loan commitments
|
$ | 152,926 | $ | 144,461 | $ | 43,465 | $ | 16,172 | $ | 357,024 | ||||||||||
|
Home equity lines of credit
|
1,722 | 4,290 | 18,207 | 55,886 | 80,105 | |||||||||||||||
|
Standby letters of credit and financial guarantees
(1)
|
35,275 | 18,940 | 4,144 | 5,897 | 64,256 | |||||||||||||||
|
Letters of credit
(2)
|
3,698 | 110 | - | 874 | 4,682 | |||||||||||||||
|
Legally binding commitments
|
193,621 | 167,801 | 65,816 | 78,829 | 506,067 | |||||||||||||||
|
Credit card lines
(3)
|
497,068 | - | - | - | 497,068 | |||||||||||||||
|
Total credit extension commitments
|
$ | 690,689 | $ | 167,801 | $ | 65,816 | $ | 78,829 | $ | 1,003,135 | ||||||||||
| (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 $40.5 billion and $21.0 billion at June 30, 2011 and $41.1 billion
and $22.4 billion at December 31, 2010. Amount includes consumer letters of credit of $794 million
and other letters of credit of $362 million at June 30, 2011.
|
|
| (2) |
Amount includes $109 million and $849 million of consumer letters of credit and $4.5
billion and $3.8 billion of commercial letters of credit at June 30, 2011 and December 31, 2010,
respectively.
|
|
| (3) |
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 borrower’s ability to pay.
Other Commitments
Global Principal Investments and Other Equity Investments
At June 30, 2011 and December 31, 2010, the Corporation had unfunded equity investment
commitments of approximately $1.2 billion and $1.5 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. For more
information on these Basel regulatory capital changes, see
Note 18 – Regulatory Requirements and
Restrictions
to the Consolidated Financial Statements of the Corporation’s 2010 Annual Report on
Form 10-K. In 2010, the Corporation completed the sale of its exposure to certain private equity
funds. For more information on these transactions, see
Note 5 – Securities
to the Consolidated
Financial Statements of the Corporation’s 2010 Annual Report on Form 10-K.
Other Commitments
At June 30, 2011 and December 31, 2010, the Corporation had commitments to purchase loans
(e.g., residential mortgage and commercial real estate) of $3.5 billion and $2.6 billion, which
upon settlement will be included in loans or LHFS.
At June 30, 2011 and December 31, 2010, the Corporation had commitments to enter into
forward-dated resale and securities borrowing agreements of $86.1 billion and $39.4 billion. In
addition, the Corporation had commitments to enter into forward-dated repurchase and securities
lending agreements of $72.9 billion and $33.5 billion. All of these commitments expire within the
next 12 months.
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Table of Contents
The Corporation is a party to operating leases for certain of its premises and equipment.
Commitments under these leases are approximately $1.6 billion, $2.9 billion, $2.4 billion, $1.8
billion and $1.5 billion for the remainder of 2011 through 2015, respectively, and $7.1 billion in
the aggregate for all years thereafter.
The Corporation has entered into agreements with providers of market data, communications,
systems consulting and other office-related services. At June 30, 2011 and December 31, 2010, the
minimum fee commitments over the remaining terms of these agreements totaled $2.0 billion and $2.1
billion.
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 June 30, 2011 and December 31, 2010, the notional amount of these guarantees
totaled $15.9 billion and $15.8 billion and the Corporation’s maximum exposure related to these
guarantees totaled $5.1 billion and $5.0 billion with estimated maturity dates between 2030 and
2040.
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 June 30, 2011 and December 31,
2010, the notional amount of these guarantees totaled $31.8 billion and $33.8 billion with
estimated maturity dates up to 2014 if the exit option is exercised on all deals.
Merchant Services
During 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 three months
ended June 30, 2010, the joint venture purchased the interest held by one of the three initial
investors bringing the Corporation’s ownership interest up to 49 percent. For additional
information on the joint venture agreement, see
Note 5 – Securities
.
In accordance with credit and debit card association rules, the Corporation sponsors merchant
processing servicers that process credit and debit card transactions on behalf of various
merchants. 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 cardholder’s
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 merchant processor. The
sponsored entities are primarily liable for any losses on
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covered transactions. However, if the sponsored entities fail to meet their obligation to reimburse the
cardholder for disputed transactions, then the Corporation, as the sponsor, could be held liable
for the disputed amount. For the three and six months ended June 30, 2011, the sponsored entities
processed and settled $109.9 billion and $194.8 billion of sponsored transactions and recorded
losses of $3 million and $5 million. For the three and six months ended June 30, 2010, the
sponsored entities processed and settled $82.8 billion and $161.9 billion of sponsored
transactions and recorded losses of $5 million and $8 million. At June 30, 2011 and December 31,
2010, the Corporation held as collateral $29 million and $25 million of merchant escrow deposits
which may be used to offset amounts due from the individual merchants.
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,
MasterCard and Discover for the last six months, which represents the claim period for the
cardholder, plus any outstanding delayed-delivery transactions. As of June 30, 2011 and December
31, 2010, the maximum potential exposure for sponsored transactions totaled approximately $158.6
billion and $139.5 billion. The Corporation does not expect to make material payments in
connection with these guarantees.
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 Corporation’s Consolidated Balance Sheet. At June 30, 2011 and December 31,
2010, the total notional amount of these derivative contracts was approximately $5.1 billion and
$4.3 billion with commercial banks and $2.1 billion and $1.7 billion with SPEs. The underlying
securities are senior securities and substantially all of the Corporation’s exposures are insured.
Accordingly, the Corporation’s 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 June 30, 2011 and December 31, 2010, the notional amount of
these guarantees totaled $374 million and $666 million. These guarantees have various maturities
ranging from two to five years. As of June 30, 2011 and December 31, 2010, 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 and commitments, including
lease-end obligation agreements, partial credit guarantees on certain leases, real estate joint
venture guarantees, sold risk participation swaps, divested business commitments and sold put
options that require gross settlement. The maximum potential future payment under these agreements
was approximately $3.2 billion and $3.4 billion at June 30, 2011 and December 31, 2010. The
estimated maturity dates of these obligations extend up to 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 $2.4 billion and $2.1 billion at June 30, 2011 and
December 31, 2010. In the normal course of business, the Corporation periodically guarantees the
obligations of its affiliates in a variety of transactions including ISDA-related transactions and
non ISDA-related transactions such as commodities trading, repurchase agreements, prime brokerage
agreements and other transactions.
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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 consumer’s 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) 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 (the FSA Policy Statement) on the assessment and
remediation of PPI claims that is applicable to the Corporation’s U.K. consumer businesses and is
intended to address concerns among consumers and regulators regarding the handling of PPI
complaints across the industry. The FSA 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 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.
In October 2010, the British Bankers’ Association (BBA), on behalf of its members, including
the Corporation, challenged the provisions of the FSA Policy Statement and their retroactive
application to sales of PPI to U.K. consumers through a judicial review process against the FSA
and the U.K. Financial Ombudsman Service. On April 20, 2011, the U.K. court issued a judgment
upholding the FSA Policy Statement as promulgated and dismissing the BBA’s challenge. The BBA will
not appeal the decision. Following the conclusion of the judicial review and the subsequent
completion of the detailed root cause analysis as required by the FSA Policy Statement, the
Corporation re-assessed its reserve for PPI claims resulting in an increase in the reserve of $77
million bringing the total accrued liability as of June 30, 2011 to $769 million.
Litigation and Regulatory Matters
The following supplements the disclosure in
Note 14 – Commitments and Contingencies
to
the Consolidated Financial Statements of the Corporation’s 2010 Annual Report on Form 10-K and in
Note 11 – Commitments and Contingencies
to the Consolidated Financial Statements of the
Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 (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 SEC, the Financial Industry Regulatory Authority (FINRA), the New
York Stock Exchange, the FSA 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
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would make such loss contingency both probable and estimable. Once the loss contingency related to
a litigation or regulatory matter is deemed to be both probable and estimable, the Corporation
will establish an accrued liability with respect to such loss contingency and record a
corresponding amount of litigation-related expense. The Corporation continues 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 expense was $2.3 billion and $3.2 billion during the three and six months ended
June 30, 2011 compared to $102 million and $690 million for the same periods in 2010.
For a limited number of the matters disclosed in this Note, and in the prior commitments and
contingencies disclosure, 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. In determining whether it is possible to
provide an estimate of loss or range of possible loss, the Corporation reviews and evaluates its
material litigation and regulatory matters on an ongoing basis, in conjunction with any outside
counsel handling the matter, in light of potentially relevant factual and legal developments.
These may include information learned through the discovery process, rulings on dispositive
motions, settlement discussions, and other rulings by courts, arbitrators or others. In cases in
which the Corporation possesses sufficient appropriate information to develop an estimate of loss
or range of possible loss, that estimate is aggregated and disclosed below. There may be other
disclosed matters for which a loss is probable or reasonably possible but such an estimate may not
be possible. For those matters where an estimate is possible, management currently estimates the
aggregate range of possible loss is $0 to $2.3 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 and is subject to significant judgment and a variety of assumptions, and known and
unknown uncertainties. 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 represents what the Corporation believes to be an estimate of possible loss
only for certain matters meeting these criteria. It does not represent the Corporation’s maximum
loss exposure. Information is provided below, or in the prior commitments and contingencies
disclosure, 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 the prior commitments and contingencies disclosure, 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, some of which are beyond the
Corporation’s control, 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 Corporation’s
results of operations or cash flows for any particular reporting period.
Checking Account Overdraft Litigation
On May 24, 2011, the Multi-District Litigation transferee court entered an order
preliminarily approving the settlement.
Countrywide Bond Insurance Litigation
MBIA
On June 30, 2011, the appellate court issued a decision on the parties’ cross-appeals in
MBIA
Insurance Corporation, Inc. v. Countrywide Home Loans, et al.
The appellate court dismissed MBIA
Insurance Corporation’s breach of implied covenant of good faith and fair dealing claim, which
reversed the trial court ruling on that claim, and otherwise affirmed the trial court’s decisions.
Syncora
The trial is set to commence during or after the second quarter of 2012.
FGIC
The trial is set to commence during or after the fourth quarter of 2012.
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Fontainebleau Las Vegas Litigation
On June 9, 2009, Fontainebleau Las Vegas, LLC, then a Chapter 11 debtor-in-possession (FBLV),
commenced an adversary proceeding, entitled
Fontainebleau Las Vegas, LLC v. Bank of America, N.A.,
Merrill Lynch Capital Corporation, et al
. (FBLV action), against a group of lenders, including
BANA and Merrill Lynch Capital Corporation (MLCC). The action was originally filed in the United
States Bankruptcy Court, Southern District of Florida but is now before the U.S. District Court
for the Southern District of Florida. On April 12, 2010, FBLV’s Chapter 11 case was converted to a
Chapter 7 case and a Trustee was appointed. On July 15, 2010, the district court entered an order
substituting the Trustee as plaintiff in this action. The complaint alleges, among other things,
that defendants breached an agreement to lend their respective committed amounts under an $800
million revolving loan facility, of which BANA and MLCC had each committed $100 million, in
connection with the construction of a resort and casino development in Las Vegas. The complaint
seeks damages in excess of $3 billion and a “turnover” order under Section 542 of the Bankruptcy
Code requiring the lenders to fund their respective commitments. On September 21, 2010, the court
entered an order dismissing the breach of contract and turnover claims in order to allow the
plaintiff to pursue an immediate appeal of the court’s August 2009 decision denying partial
summary judgment of certain of FBLV’s claims. The Trustee filed a notice of appeal on October 18,
2010. That appeal is currently pending before the U.S. Court of Appeals for the Eleventh Circuit.
On June 9, 2009, a related lawsuit,
Avenue CLO Fund Ltd., et al. v. Bank of America, N.A.,
Merrill Lynch Capital Corporation, et al
. (the Avenue action), was filed in the U.S. District
Court for the District of Nevada by certain project lenders. On September 21, 2009, another
related lawsuit,
ACP Master, Ltd., et al. v. Bank of America, N.A., Merrill Lynch Capital
Corporation, et al
. (the ACP action), was filed in the U.S. District Court for the Southern
District of New York by the purported successors-in-interest to certain project lenders. These two
actions were subsequently transferred by the Judicial Panel on Multidistrict Litigation to the
U.S. District Court for the Southern District of Florida for coordinated pretrial proceedings with
the FBLV action. Plaintiffs in the Avenue and ACP actions (the Term Lenders) allege that BANA,
MLCC and the other defendants breached their revolving loan facility commitments to FBLV. In
addition, they allege that BANA breached its duties as disbursement agent under a separate
agreement governing the disbursement of loaned funds to FBLV. The Term Lenders seek unspecified
money damages on their claims. On May 28, 2010, the district court granted defendants’ motion to
dismiss the revolving loan facility commitment claims, but denied BANA’s motion to dismiss the
disbursement agent claims. On January 13, 2011, the district court granted the Term Lenders’
motion for entry of a partial final judgment on their revolving loan facility commitment claims.
The Term Lenders filed a notice of appeal with respect to those claims on January 19, 2011.
On April 19, 2011, the district court dismissed the disbursement agent claims against BANA in
the ACP action after the Avenue action plaintiffs represented that they had acquired the claims
belonging to the ACP action plaintiffs and would be pursuing those claims in the Avenue action.
Interchange and Related Litigation
On May 16, 2011, a proceeding parallel to
Watson v. Bank of America Corporation
, containing
substantially the same allegations was commenced in Ontario Superior Court under the caption
Bancroft-Snell v. Visa Canada Corp. et. al
.
Lehman Brothers Holdings, Inc. Litigation
On June 4, 2010, defendants filed a motion to dismiss the class action complaint, and on July
27, 2011, the court granted in part and denied in part the motion. Certain of the allegations in
the complaint that purported to support the Section 11 claim against the underwriter defendants
were dismissed; others were not dismissed relating to alleged misstatements regarding Lehman
Brothers Holdings, Inc.’s leverage and financial condition, risk management and risk
concentrations.
Lehman Setoff Litigation
On May 20, 2011, the Bankruptcy Court entered final judgment in the matter. BANA noticed its
appeal on May 23, 2011.
MBIA Insurance Corporation CDO Litigation
On July 11, 2011, the parties reached an agreement to settle the litigation, which did not
require any payment by Merrill Lynch.
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Merrill Lynch Acquisition-related Matters
Securities Actions
On July 29, 2011,
the court in the securities class actions in
In re Banc of America
Securities, Derivative and Employment Retirement Income Security Act (ERISA) Litigation
granted in
part and denied in part the Corporation’s and its co-defendants’ motion to dismiss the second
amended complaint. Among other rulings, the court: (i) dismissed plaintiffs’ claim under Section
10(b) of the Securities Exchange Act of 1934 alleging that the Corporation and individual
defendants committed securities fraud in connection with the failure to disclose the Corporation’s
discussions with government officials in December 2008 regarding the possibility of obtaining
government assistance in completing the Merrill Lynch acquisition; (ii) dismissed the claims of
certain holders of the Corporation’s preferred shares, purchasers of the Corporation’s bonds, and
owners of call options on the ground that such securities holders lacked standing to pursue a claim
against the Corporation and the individual defendants; and (iii) sustained plaintiffs’ Section
10(b) claim alleging the Corporation failed to disclose the financial condition and 2008
fourth-quarter losses experienced by Merrill Lynch. On August 2,
2011, the court dismissed plaintiffs’ Section 10(b) claim
alleging that the Corporation failed to make an interim disclosure of
its 2008 fourth-quarter losses.
Mortgage-backed Securities Litigation
The Corporation and its affiliates, Countrywide entities and their affiliates, and Merrill
Lynch entities and their affiliates have been named as defendants in several cases relating to
their various roles as issuer, originator, seller, depositor, sponsor, underwriter and/or
controlling entity in MBS offerings, pursuant to which the MBS investors were entitled to a
portion of the cash flow from the underlying pools of mortgages. These cases generally include
purported class action suits and actions by individual MBS purchasers. Although the allegations
vary by lawsuit, these cases generally allege that the registration statements, prospectuses and
prospectus supplements for securities issued by securitization trusts contained material
misrepresentations and omissions, in violation of Sections 11, 12 and 15 of the Securities Act of
1933, Sections 10(b) and 20 of the Securities Exchange Act of 1934 and/or state securities laws
and other state statutory and common laws.
These cases generally involve allegations of false and misleading statements regarding: (i)
the process by which the properties that served as collateral for the mortgage loans underlying
the MBS were appraised; (ii) the percentage of equity that mortgage borrowers had in their homes;
(iii) the borrowers’ ability to repay their mortgage loans; and (iv) the underwriting practices by
which those mortgage loans were originated (collectively MBS Claims). In addition, several of the
cases discussed below assert claims related to the ratings given to the different tranches of MBS
by rating agencies. Plaintiffs in these cases generally seek unspecified compensatory damages,
unspecified costs and legal fees and, in some instances, seek rescission.
On May 24, 2011, Countrywide filed with the Judicial Panel on Multi-District Litigation a
motion to centralize federal court cases involving Countrywide MBS Claims in the U.S. District
Court for the Central District of California, which is pending.
Luther Litigation and Related Actions
On May 6, 2011, the court held, in
Maine State Retirement System vs. Countrywide Financial
Corporation, et al.
(Maine State), that the plaintiffs only have standing to sue over the specific
MBS tranches that they purchased, and that the applicable statute of limitations could be tolled
by the filing of the
Luther v. Countrywide Financial Corporation, et al.
(Luther) action only with
respect to the specific tranches of MBS that the Luther plaintiffs purchased. On June 6, 2011, the
Maine State plaintiffs filed a third amended complaint that asserts claims in connection with nine
MBS tranches and moved for certification of the case as a class action. On June 15, 2011, the
court denied the Maine State plaintiffs’ motion to permit immediate interlocutory appeal of the
court’s orders on standing, tolling of the statute of limitations, and successor liability.
On May 18, 2011, in Luther, the California Court of Appeal reversed the Superior Court’s
dismissal on jurisdictional grounds. Countrywide filed a petition for further review by the
California Supreme Court.
IndyMac Litigation
On June 21, 2011, the court denied plaintiffs’ motion to amend to add MLPF&S and Countrywide
Securities Corporation as defendants.
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Merrill Lynch MBS Litigation
On June 15, 2011, the court granted plaintiffs’ motion for class certification.
Federal Home Loan Bank Litigation
In
Federal Home Loan Bank of Chicago v. Banc of America Funding Corp., et al.
, plaintiff
filed an amended complaint that adds Merrill Lynch Mortgage Investors, BANA, and CFC as defendants
and adds additional claims for alleged successor liability against the Corporation. Defendants
filed a motion to dismiss the amended complaint on May 27, 2011.
The Federal Home Loan Bank of Indianapolis filed a complaint against the Corporation, BAS,
Banc of America Mortgage Securities Inc, CFC and CWMBS Inc., in the Superior Court of Indiana,
Marion County, entitled
Federal Home Loan Bank of Indianapolis v.
Banc
of America
Mortgage
Securities, Inc., et al.
Plaintiffs allege that they purchased
MBS issued by or underwritten by certain of the defendants from
February 2005 to June 2007.
On June 23, 2011 and July 18, 2011, the court denied defendants’ motions to dismiss in the
Federal Home Loan Bank of Seattle v. UBS Securities LLC, et al
.;
Federal Home Loan Bank of Seattle
v. Countrywide Securities Corp., et al
.;
Federal Home Loan
Bank of Seattle v. Banc
of
America
Securities LLC, et al
. and
Federal Home Loan Bank of Seattle v. Merrill Lynch, Pierce, Fenner &
Smith, Inc., et al
. actions.
Allstate Litigation
On June 14, 2011, the court granted CFC’s motion and transferred the case to the U.S.
District Court for the Central District of California, where it has been assigned to the same
judge before whom the Maine State action is pending.
Dexia Litigation
Dexia Holdings, Inc. and others filed an action on January 24, 2011 against CFC, the
Corporation and several of their affiliates, among others, in the New York Supreme Court, entitled
Dexia Holdings, Inc., et al., v. Countrywide Financial Corporation, et al.
Plaintiffs allege that
they purchased MBS issued by CFC-related entities in 142 public offerings and six private
placements between April 2004 and August 2007. Defendants filed a motion to remove and transfer
the case to the U.S. District Court for the Central District of California and a motion to
dismiss.
Western & Southern Litigation
The Western and Southern Life Insurance Company and others filed an action on April 27, 2011
against CFC, the Corporation, several of their subsidiaries and several individuals in the U.S.
District Court for the Southern District of Ohio, entitled
The Western and Southern Life Insurance
Company, et al., v. Countrywide Financial Corporation, et al
. Plaintiffs allege that they
purchased MBS issued by CFC-related entities in 32 public offerings between March 2005 and July
2007.
Regulatory Investigations
The Corporation has received a number of subpoenas and other requests for information from
regulators and governmental authorities regarding MBS and other mortgage-related matters,
including inquiries and investigations related to a number of transactions involving the
Corporation’s underwriting and issuance of MBS and its participation in certain CDO offerings.
These inquiries and investigations include, among others: an investigation by the SEC related to
Merrill Lynch’s risk control, valuation, structuring, marketing and purchase of CDOs. The
Corporation has provided documents and testimony and continues to cooperate fully with these
inquiries and investigations.
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Mortgage Servicing Investigations and Litigation
On April 13, 2011, the Corporation entered into a consent order with the Federal Reserve and
BANA entered into a consent order with the OCC to address the regulators’ concerns about
residential mortgage servicing practices and foreclosure processes. Also on this date, the other
13 largest mortgage servicers separately entered into consent orders with their respective federal
bank regulators related to residential mortgage servicing practices and foreclosure processes. The
orders resulted from an interagency horizontal review conducted by federal bank regulators of
major residential mortgage servicers. While federal bank regulators found that loans foreclosed
upon had been generally considered for other alternatives (such as loan modifications) and were
seriously delinquent, and that servicers could support their standing to foreclose, several areas
for process improvement requiring timely and comprehensive remediation across the industry were
also identified. The Corporation identified most of these areas for process improvement after its
own review in late 2010 and continues to make significant progress in these areas. The federal
bank regulator consent orders with the mortgage servicers do not assess civil monetary penalties.
However, the consent orders do not preclude the assertion of civil monetary penalties and a
federal bank regulator has stated publicly that it believes monetary penalties are appropriate.
The consent order with the OCC requires servicers to make several enhancements to their
servicing operations, including implementation of a single point of contact model for borrowers
throughout the loss mitigation and foreclosure processes; adoption of measures designed to ensure
that foreclosure activity is halted once a borrower has been approved for a modification unless
the borrower fails to make payments under the modified loan; and implementation of enhanced
controls over third-party vendors that provide default servicing support services. In addition,
the consent order required that servicers retain an independent consultant, approved by the OCC,
in order to conduct a review of all foreclosure actions pending, or foreclosure sales that
occurred between January 1, 2009 and December 31, 2010 and submit a plan to the OCC to remediate
all financial injury to borrowers caused by any deficiencies identified through the review. The
OCC accepted the independent consultant that the Corporation retained to conduct the foreclosure
review. Additionally, the Corporation has submitted an action plan to the OCC which will undergo a
period of review by the OCC. The OCC may require changes to the action plan, and may consider the
ongoing negotiations with the U.S. Department of Justice (DOJ) and other federal and state
authorities regarding foreclosure and servicing practices discussed below in its review of the
plan.
In addition, law enforcement authorities in all 50 states and the DOJ and other federal
agencies continue to investigate alleged irregularities in the foreclosure practices of
residential mortgage servicers, including the Corporation. Authorities have publicly stated that
the scope of the investigations extends beyond foreclosure documentation practices to mortgage
loan modification and loss mitigation practices, including compliance with the U.S. Department of
Housing and Urban Development requirements related to FHA-insured loans. The Corporation continues
to cooperate with these investigations and is dedicating significant resources to address these
issues. The Corporation and the other largest mortgage servicers continue to engage in ongoing
negotiations regarding these matters with law enforcement authorities and federal agencies. The
negotiations continue to focus on the amount of any settlement payment and settlement terms,
including principal forgiveness, servicing standards, enforcement mechanisms and releases.
Although the Corporation cannot be certain as to the ultimate outcome that may result from these
negotiations or the timing of such outcome, the parties continue to make progress toward achieving
a resolution of these matters.
The Corporation continues to be subject to additional borrower and non-borrower litigation
and governmental and regulatory scrutiny related to the Corporation’s past and current foreclosure
activities. This scrutiny may extend beyond its pending foreclosure matters to issues arising out
of alleged irregularities with respect to previously completed foreclosure activities.
The current environment of heightened regulatory scrutiny has the potential to subject the
Corporation to inquiries or investigations that could significantly adversely affect its
reputation. Such investigations by state and federal authorities, as well as any other
governmental or regulatory scrutiny of the Corporation’s foreclosure processes, could result in
material fines, penalties, equitable remedies, additional default servicing requirements and
process changes, or other enforcement actions, and could result in significant legal costs in
responding to governmental investigations and additional litigation.
Ocala Litigation
On April 4, 2011, BANA filed a first amended complaint in the October 1, 2010 action against
the Federal Deposit Insurance Corporation to include, among other things, certain additional facts
disclosed during the course of federal criminal proceedings brought against the management of
Taylor Bean & Whitaker Mortgage Corporation and Colonial Bank.
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On June 22, 2011, BANA filed third-party complaints in
BNP Paribas Mortgage Corporation v.
Bank of America, N.A.
and
Deutsche Bank AG v. Bank of America, N.A
. seeking contribution from
affiliates of the plaintiffs which were the note dealers and placement agents for the Ocala notes.
BANA alleges that, if plaintiffs suffered any losses as a result of the nonpayment of the Ocala
notes, these losses were due in whole or in part to actions by the third-party defendants.
Parmalat
On May 27, 2011, the U.S. Court of Appeals for the Second Circuit upheld the district court’s
dismissal of the
Food Holdings Ltd., et al. v. Bank of America Corp, et al.
action. On June 9,
2011, plaintiffs filed a petition for rehearing, which was denied on July 19, 2011.
Common Stock
In May 2011, the Corporation’s Board of Directors (the Board) declared a second quarter
cash dividend of $0.01 per common share which was paid on June 24, 2011 to common shareholders of
record on June 3, 2011. In January 2011, the Board declared a first quarter cash dividend of $0.01
per common share which was paid on March 25, 2011 to common shareholders of record on March 4,
2011.
There is no existing Board authorized share repurchase program. In connection with employee
stock plans, the Corporation issued approximately 48 million shares and repurchased approximately
28 million shares to satisfy tax withholding obligations during the six months ended June 30,
2011. At June 30, 2011, the Corporation had reserved 1.5 billion unissued shares of common stock
for future issuances under employee stock plans, common stock warrants, convertible notes and
preferred stock.
During the six months ended June 30, 2011, the Corporation issued approximately 196 million
RSUs to certain employees under the Key Associate Stock Plan and the Merrill Lynch Employee Stock
Compensation Plan. The majority of these awards generally vest in three equal annual installments
beginning one year from the grant date; however, certain awards are earned based on the
achievement of specified performance criteria. Vested RSUs may be settled in cash or in shares of
common stock depending on the terms of the applicable award. In early 2011, approximately 129
million of these RSUs were authorized to be settled in shares of common stock. 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 Corporation’s common stock. The compensation cost for the
remaining awards is fixed and based on the share price of the Corporation’s 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 certain
unvested awards using a combination of economic and cash flow hedges as described in
Note 4 –
Derivatives
.
Preferred Stock
During the three months ended March 31, 2011 and June 30, 2011, the dividends declared
on preferred stock were $310 million and $301 million or a total of $611 million for the six
months ended June 30, 2011.
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The table below presents the changes in accumulated OCI for the six months ended June
30, 2011 and 2010, net-of-tax.
| Available-for- | Available-for- | |||||||||||||||||||||||
| sale Debt | sale Marketable | Employee | Foreign | |||||||||||||||||||||
|
(Dollars in millions)
|
Securities | Equity Securities | Derivatives | Benefit Plans | Currency (1) | Total | ||||||||||||||||||
|
Balance, December 31, 2009
|
$ | (628 | ) | $ | 2,129 | $ | (2,535 | ) | $ | (4,092 | ) | $ | (493 | ) | $ | (5,619 | ) | |||||||
|
Cumulative adjustment for new consolidation guidance
|
(116 | ) | - | - | - | - | (116 | ) | ||||||||||||||||
|
Net change in fair value recorded in accumulated OCI
|
3,678 | (1,294 | ) | (746 | ) | - | (112 | ) | 1,526 | |||||||||||||||
|
Net realized (gains) losses reclassified into earnings
|
(28 | ) | (836 | ) | 241 | 127 | 258 | (238 | ) | |||||||||||||||
|
Balance, June 30, 2010
|
$ | 2,906 | $ | (1 | ) | $ | (3,040 | ) | $ | (3,965 | ) | $ | (347 | ) | $ | (4,447 | ) | |||||||
|
Balance, December 31, 2010
|
$ | 714 | $ | 6,659 | $ | (3,236 | ) | $ | (3,947 | ) | $ | (256 | ) | $ | (66 | ) | ||||||||
|
Net change in fair value recorded in accumulated OCI
|
1,701 | (101 | ) | (580 | ) | - | 28 | 1,048 | ||||||||||||||||
|
Net realized (gains) losses reclassified into earnings
|
(827 | ) | (19 | ) | 514 | 138 | 5 | (189 | ) | |||||||||||||||
|
Balance, June 30, 2011
|
$ | 1,588 | $ | 6,539 | $ | (3,302 | ) | $ | (3,809 | ) | $ | (223 | ) | $ | 793 | |||||||||
| (1) |
Net change in fair value represents only the impact of changes in spot foreign
exchange rates on the Corporation’s net investment in non-U.S. operations and related hedges.
|
The calculation of earnings per common share (EPS) and diluted EPS for the three and six
months ended June 30, 2011 and 2010 is presented below. See
Note 1 – Summary of Significant
Accounting Principles
to the Consolidated Financial Statements of the Corporation’s 2010 Annual
Report on Form 10-K for additional information on the calculation of EPS.
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
| (Dollars in millions, except per share information; shares in thousands) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Earnings (loss) per common share
|
||||||||||||||||
|
Net income (loss)
|
$ | (8,826 | ) | $ | 3,123 | $ | (6,777 | ) | $ | 6,305 | ||||||
|
Preferred stock dividends
|
(301 | ) | (340 | ) | (611 | ) | (688 | ) | ||||||||
|
Net income (loss) applicable to common shareholders
|
$ | (9,127 | ) | $ | 2,783 | $ | (7,388 | ) | $ | 5,617 | ||||||
|
Dividends and undistributed earnings allocated to participating securities
|
- | (42 | ) | (1 | ) | (286 | ) | |||||||||
|
Net income (loss) allocated to
common shareholders
|
$ | (9,127 | ) | $ | 2,741 | $ | (7,389 | ) | $ | 5,331 | ||||||
|
Average common shares issued and outstanding
|
10,094,928 | 9,956,773 | 10,085,479 | 9,570,166 | ||||||||||||
|
Earnings (loss) per common share
|
$ | (0.90 | ) | $ | 0.28 | $ | (0.73 | ) | $ | 0.56 | ||||||
|
|
||||||||||||||||
|
Diluted earnings (loss) per common share
|
||||||||||||||||
|
Net income (loss) applicable to common shareholders
|
$ | (9,127 | ) | $ | 2,783 | $ | (7,388 | ) | $ | 5,617 | ||||||
|
Dividends and undistributed earnings allocated to participating securities
|
- | (42 | ) | (1 | ) | (79 | ) | |||||||||
|
Net income (loss) allocated to
common shareholders
|
$ | (9,127 | ) | $ | 2,741 | $ | (7,389 | ) | $ | 5,538 | ||||||
|
Average common shares issued and outstanding
|
10,094,928 | 9,956,773 | 10,085,479 | 9,570,166 | ||||||||||||
|
Dilutive potential common shares
(1)
|
- | 73,003 | - | 450,760 | ||||||||||||
|
Total diluted average common shares issued and outstanding
|
10,094,928 | 10,029,776 | 10,085,479 | 10,020,926 | ||||||||||||
|
Diluted earnings (loss) per common share
|
$ | (0.90 | ) | $ | 0.27 | $ | (0.73 | ) | $ | 0.55 | ||||||
| (1) |
Includes incremental shares from RSUs, restricted stock shares, stock options
and warrants.
|
Due to the net loss for the three and six months ended June 30, 2011, no dilutive
potential common shares were included in the calculations of diluted EPS because they would have
been antidilutive.
For the three and six months ended June 30, 2011, average options to purchase 215 million and
223 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 269 million and 277
million for the same periods in 2010. For both the three and six months ended June 30, 2011,
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 122 million for the same periods in 2010. For both the three and six months ended June 30,
2011, 67 million average dilutive potential common shares associated with the 7.25% Non-cumulative
Perpetual Convertible Preferred Stock, Series L (Series L Preferred Stock) were excluded from the
diluted share count because the result would have been antidilutive under the “if-converted”
method. For both the three and six months ended June 30, 2010, 117 million average dilutive
potential common shares associated with the Series L Preferred Stock 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. For
purposes of computing basic EPS, Common Equivalent Securities were considered to be participating
securities prior to February 24, 2010.
196
Table of Contents
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
19 – Employee Benefit Plans
to the Consolidated Financial Statements of the Corporation’s 2010
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 made no contributions
for the six months ended June 30, 2011 and 2010, under this agreement. Contributions may be
required in the future under this agreement.
197
Table of Contents
Net periodic benefit cost of the Corporation’s plans for the three and six months ended June
30, 2011 and 2010 included the following components.
| Three Months Ended June 30, 2011 | ||||||||||||||||
| Nonqualified and | Postretirement | |||||||||||||||
| Qualified Pension | Non-U.S. Pension | Other Pension | Health and Life | |||||||||||||
|
(Dollars in millions)
|
Plans | Plans | Plans (1) | Plans | ||||||||||||
|
Components of net periodic benefit cost
|
||||||||||||||||
|
Service cost
|
$ | 104 | $ | 10 | $ | 1 | $ | 3 | ||||||||
|
Interest cost
|
185 | 23 | 37 | 19 | ||||||||||||
|
Expected return on plan assets
|
(324 | ) | (27 | ) | (35 | ) | (2 | ) | ||||||||
|
Amortization of transition obligation
|
- | - | - | 8 | ||||||||||||
|
Amortization of prior service cost (credits)
|
4 | - | (2 | ) | - | |||||||||||
|
Amortization of net actuarial loss (gain)
|
93 | - | 3 | (10 | ) | |||||||||||
|
Recognized termination and settlement benefit cost
|
- | - | 3 | - | ||||||||||||
|
Net periodic benefit cost
|
$ | 62 | $ | 6 | $ | 7 | $ | 18 | ||||||||
|
|
||||||||||||||||
| Six Months Ended June 30, 2011 | ||||||||||||||||
|
Components of net periodic benefit cost
|
||||||||||||||||
|
Service cost
|
$ | 212 | $ | 21 | $ | 1 | $ | 7 | ||||||||
|
Interest cost
|
373 | 48 | 76 | 40 | ||||||||||||
|
Expected return on plan assets
|
(649 | ) | (56 | ) | (70 | ) | (4 | ) | ||||||||
|
Amortization of transition obligation
|
- | - | - | 16 | ||||||||||||
|
Amortization of prior service cost (credits)
|
10 | - | (4 | ) | 2 | |||||||||||
|
Amortization of net actuarial loss (gain)
|
194 | - | 8 | (9 | ) | |||||||||||
|
Recognized termination and settlement benefit cost
|
- | - | 3 | - | ||||||||||||
|
Net periodic benefit cost
|
$ | 140 | $ | 13 | $ | 14 | $ | 52 | ||||||||
|
|
||||||||||||||||
| Three Months Ended June 30, 2010 | ||||||||||||||||
|
Components of net periodic benefit cost
|
||||||||||||||||
|
Service cost
|
$ | 95 | $ | 7 | $ | 1 | $ | 3 | ||||||||
|
Interest cost
|
187 | 20 | 44 | 23 | ||||||||||||
|
Expected return on plan assets
|
(315 | ) | (23 | ) | (34 | ) | (3 | ) | ||||||||
|
Amortization of transition obligation
|
- | - | - | 8 | ||||||||||||
|
Amortization of prior service cost (credits)
|
7 | - | (2 | ) | 3 | |||||||||||
|
Amortization of net actuarial loss (gain)
|
92 | - | 3 | (17 | ) | |||||||||||
|
Recognized termination and settlement benefit cost
|
- | - | 3 | - | ||||||||||||
|
Net periodic benefit cost
|
$ | 66 | $ | 4 | $ | 15 | $ | 17 | ||||||||
|
|
||||||||||||||||
| Six Months Ended June 30, 2010 | ||||||||||||||||
|
Components of net periodic benefit cost
|
||||||||||||||||
|
Service cost
|
$ | 198 | $ | 14 | $ | 2 | $ | 7 | ||||||||
|
Interest cost
|
374 | 40 | 85 | 45 | ||||||||||||
|
Expected return on plan assets
|
(631 | ) | (45 | ) | (69 | ) | (5 | ) | ||||||||
|
Amortization of transition obligation
|
- | - | - | 16 | ||||||||||||
|
Amortization of prior service cost (credits)
|
14 | - | (4 | ) | 3 | |||||||||||
|
Amortization of net actuarial loss (gain)
|
181 | - | 3 | (25 | ) | |||||||||||
|
Recognized termination and settlement benefit cost
|
- | - | 13 | - | ||||||||||||
|
Net periodic benefit cost
|
$ | 136 | $ | 9 | $ | 30 | $ | 41 | ||||||||
| (1) |
Includes nonqualified
pension plans and the terminated Merrill Lynch U.S. pension plan.
|
In 2011, the Corporation expects to contribute approximately $101 million to its
non-U.S. pension plans, $103 million to its nonqualified and other pension plans and $121 million
to its postretirement health and life plans. For the six months ended June 30, 2011, the
Corporation contributed $79 million, $66 million and $61 million, respectively, to these plans.
The Corporation does not expect to be required to contribute to its qualified pension plans during
2011.
198
Table of Contents
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
and
Note 22 – Fair
Value Measurements
to the Consolidated Financial Statements of the Corporation’s 2010 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. For more information, see
Note 17 – Fair Value Option
.
199
Table of Contents
Recurring Fair Value
Assets and liabilities carried at fair value on a recurring basis at June 30, 2011 and
December 31, 2010, including financial instruments which the Corporation accounts for under the
fair value option, are summarized in the following tables.
| June 30, 2011 | ||||||||||||||||||||
| Fair Value Measurements | ||||||||||||||||||||
| Netting | Assets/Liabilities | |||||||||||||||||||
| (Dollars in millions) | Level 1 (1) | Level 2 (1) | Level 3 | Adjustments (2) | at Fair Value | |||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Federal funds sold and securities borrowed or
purchased under agreements to resell
|
$ | - | $ | 95,115 | $ | - | $ | - | $ | 95,115 | ||||||||||
|
Trading account assets:
|
||||||||||||||||||||
|
U.S. government and agency securities
|
26,141 | 19,827 | - | - | 45,968 | |||||||||||||||
|
Corporate securities, trading loans and other
|
1,165 | 40,692 | 7,452 | - | 49,309 | |||||||||||||||
|
Equity securities
|
28,057 | 9,082 | 662 | - | 37,801 | |||||||||||||||
|
Non-U.S. sovereign debt
|
35,309 | 11,023 | 391 | - | 46,723 | |||||||||||||||
|
Mortgage trading loans and ABS
|
- | 11,619 | 5,519 | - | 17,138 | |||||||||||||||
|
Total trading account assets
|
90,672 | 92,243 | 14,024 | - | 196,939 | |||||||||||||||
|
Derivative assets
(3)
|
3,262 | 1,410,699 | 15,214 | (1,362,577 | ) | 66,598 | ||||||||||||||
|
AFS debt securities:
|
||||||||||||||||||||
|
U.S. Treasury securities and agency securities
|
46,402 | 2,867 | - | - | 49,269 | |||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||
|
Agency
|
- | 181,616 | - | - | 181,616 | |||||||||||||||
|
Agency-collateralized mortgage obligations
|
- | 49,056 | 55 | - | 49,111 | |||||||||||||||
|
Non-agency residential
|
- | 18,481 | 1,094 | - | 19,575 | |||||||||||||||
|
Non-agency commercial
|
- | 6,700 | 18 | - | 6,718 | |||||||||||||||
|
Non-U.S. securities
|
2,114 | 2,158 | 88 | - | 4,360 | |||||||||||||||
|
Corporate/Agency bonds
|
- | 4,314 | 224 | - | 4,538 | |||||||||||||||
|
Other taxable securities
|
20 | 1,629 | 10,374 | - | 12,023 | |||||||||||||||
|
Tax-exempt securities
|
- | 2,052 | 1,609 | - | 3,661 | |||||||||||||||
|
Total AFS debt securities
|
48,536 | 268,873 | 13,462 | - | 330,871 | |||||||||||||||
|
Loans and leases
|
- | - | 9,597 | - | 9,597 | |||||||||||||||
|
Mortgage servicing rights
|
- | - | 12,372 | - | 12,372 | |||||||||||||||
|
Loans held-for-sale
|
- | 11,131 | 4,012 | - | 15,143 | |||||||||||||||
|
Other assets
|
29,988 | 31,670 | 4,495 | - | 66,153 | |||||||||||||||
|
Total assets
|
$ | 172,458 | $ | 1,909,731 | $ | 73,176 | $ | (1,362,577 | ) | $ | 792,788 | |||||||||
|
Liabilities
|
||||||||||||||||||||
|
Interest-bearing deposits in U.S. offices
|
$ | - | $ | 3,334 | $ | - | $ | - | $ | 3,334 | ||||||||||
|
Federal funds purchased and securities loaned or
sold under agreements to repurchase
|
- | 42,453 | - | - | 42,453 | |||||||||||||||
|
Trading account liabilities:
|
||||||||||||||||||||
|
U.S. government and agency securities
|
22,164 | 3,388 | - | - | 25,552 | |||||||||||||||
|
Equity securities
|
12,993 | 3,431 | - | - | 16,424 | |||||||||||||||
|
Non-U.S. sovereign debt
|
19,659 | 2,403 | - | - | 22,062 | |||||||||||||||
|
Corporate securities and other
|
277 | 10,611 | 63 | - | 10,951 | |||||||||||||||
|
Total trading account liabilities
|
55,093 | 19,833 | 63 | - | 74,989 | |||||||||||||||
|
Derivative liabilities
(3)
|
2,445 | 1,388,183 | 9,796 | (1,346,010 | ) | 54,414 | ||||||||||||||
|
Commercial paper and other short-term borrowings
|
- | 4,121 | 744 | - | 4,865 | |||||||||||||||
|
Accrued expenses and other liabilities
|
23,157 | 1,464 | 777 | - | 25,398 | |||||||||||||||
|
Long-term debt
|
- | 57,413 | 3,324 | - | 60,737 | |||||||||||||||
|
Total liabilities
|
$ | 80,695 | $ | 1,516,801 | $ | 14,704 | $ | (1,346,010 | ) | $ | 266,190 | |||||||||
| (1) |
Gross transfers between Level 1 and Level 2 were approximately $400 million during the six months ended June 30, 2011.
|
|
| (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.
|
200
Table of Contents
| December 31, 2010 | ||||||||||||||||||||
| Fair Value Measurements | ||||||||||||||||||||
| Netting | Assets/Liabilities | |||||||||||||||||||
| (Dollars in millions) | Level 1 (1) | Level 2 (1) | Level 3 | Adjustments (2) | at Fair Value | |||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Federal funds sold and securities borrowed or
purchased under agreements to resell
|
$ | - | $ | 78,599 | $ | - | $ | - | $ | 78,599 | ||||||||||
|
Trading account assets:
|
||||||||||||||||||||
|
U.S. government and agency securities
(3)
|
28,237 | 32,574 | - | - | 60,811 | |||||||||||||||
|
Corporate securities, trading loans and other
|
732 | 40,869 | 7,751 | - | 49,352 | |||||||||||||||
|
Equity securities
|
23,249 | 8,257 | 623 | - | 32,129 | |||||||||||||||
|
Non-U.S. sovereign debt
|
24,934 | 8,346 | 243 | - | 33,523 | |||||||||||||||
|
Mortgage trading loans and ABS
|
- | 11,948 | 6,908 | - | 18,856 | |||||||||||||||
|
Total trading account assets
|
77,152 | 101,994 | 15,525 | - | 194,671 | |||||||||||||||
|
Derivative assets
(4)
|
2,627 | 1,516,244 | 18,773 | (1,464,644 | ) | 73,000 | ||||||||||||||
|
AFS debt securities:
|
||||||||||||||||||||
|
U.S. Treasury securities and agency securities
|
46,003 | 3,102 | - | - | 49,105 | |||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||
|
Agency
|
- | 191,213 | 4 | - | 191,217 | |||||||||||||||
|
Agency-collateralized mortgage obligations
|
- | 37,017 | - | - | 37,017 | |||||||||||||||
|
Non-agency residential
|
- | 21,649 | 1,468 | - | 23,117 | |||||||||||||||
|
Non-agency commercial
|
- | 6,833 | 19 | - | 6,852 | |||||||||||||||
|
Non-U.S. securities
|
1,440 | 2,696 | 3 | - | 4,139 | |||||||||||||||
|
Corporate/Agency bonds
|
- | 5,154 | 137 | - | 5,291 | |||||||||||||||
|
Other taxable securities
|
20 | 2,354 | 13,018 | - | 15,392 | |||||||||||||||
|
Tax-exempt securities
|
- | 4,273 | 1,224 | - | 5,497 | |||||||||||||||
|
Total AFS debt securities
|
47,463 | 274,291 | 15,873 | - | 337,627 | |||||||||||||||
|
Loans and leases
|
- | - | 3,321 | - | 3,321 | |||||||||||||||
|
Mortgage servicing rights
|
- | - | 14,900 | - | 14,900 | |||||||||||||||
|
Loans held-for-sale
|
- | 21,802 | 4,140 | - | 25,942 | |||||||||||||||
|
Other assets
|
32,624 | 31,051 | 6,856 | - | 70,531 | |||||||||||||||
|
Total assets
|
$ | 159,866 | $ | 2,023,981 | $ | 79,388 | $ | (1,464,644 | ) | $ | 798,591 | |||||||||
|
Liabilities
|
||||||||||||||||||||
|
Interest-bearing deposits in U.S. offices
|
$ | - | $ | 2,732 | $ | - | $ | - | $ | 2,732 | ||||||||||
|
Federal funds purchased and securities loaned or
sold under agreements to repurchase
|
- | 37,424 | - | - | 37,424 | |||||||||||||||
|
Trading account liabilities:
|
||||||||||||||||||||
|
U.S. government and agency securities
|
23,357 | 5,983 | - | - | 29,340 | |||||||||||||||
|
Equity securities
|
14,568 | 914 | - | - | 15,482 | |||||||||||||||
|
Non-U.S. sovereign debt
|
14,748 | 1,065 | - | - | 15,813 | |||||||||||||||
|
Corporate securities and other
|
224 | 11,119 | 7 | - | 11,350 | |||||||||||||||
|
Total trading account liabilities
|
52,897 | 19,081 | 7 | - | 71,985 | |||||||||||||||
|
Derivative liabilities
(4)
|
1,799 | 1,492,963 | 11,028 | (1,449,876 | ) | 55,914 | ||||||||||||||
|
Commercial paper and other short-term borrowings
|
- | 6,472 | 706 | - | 7,178 | |||||||||||||||
|
Accrued expenses and other liabilities
|
31,470 | 931 | 828 | - | 33,229 | |||||||||||||||
|
Long-term debt
|
- | 47,998 | 2,986 | - | 50,984 | |||||||||||||||
|
Total liabilities
|
$ | 86,166 | $ | 1,607,601 | $ | 15,555 | $ | (1,449,876 | ) | $ | 259,446 | |||||||||
| (1) |
Gross transfers between Level 1 and Level 2 were approximately $1.3 billion during the year ended December 31, 2010.
|
|
| (2) |
Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties.
|
|
| (3) |
Certain prior period amounts have been reclassified to conform to current period presentation.
|
|
| (4) |
For further disaggregation of derivative assets and liabilities, see
Note 4 – Derivatives.
|
201
Table of Contents
The following tables present a reconciliation of all assets and liabilities measured at
fair value on a recurring basis using significant unobservable inputs (Level 3) during the three
and six months ended June 30, 2011 and 2010, including net realized and unrealized gains (losses)
included in earnings and accumulated OCI.
| Level 3 – Fair Value Measurements | ||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended June 30, 2011 | ||||||||||||||||||||||||||||||||||||||||||||
| Gains | Gains | Gross | Gross | |||||||||||||||||||||||||||||||||||||||||
| Balance | (Losses) | (Losses) | Transfers | Transfers | Balance | |||||||||||||||||||||||||||||||||||||||
| April 1 | Consolidation | Included in | Included in | Gross | into | out of | June 30 | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2011 (1) | of VIEs | Earnings | OCI | Purchases | Sales | Issuances | Settlements | Level 3 (1) | Level 3 (1) | 2011 (1) | |||||||||||||||||||||||||||||||||
|
Trading account assets:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Corporate securities, trading loans and other
|
$ | 7,578 | $ | - | $ | 181 | $ | - | $ | 2,030 | $ | (2,187 | ) | $ | - | $ | (338 | ) | $ | 246 | $ | (58 | ) | $ | 7,452 | |||||||||||||||||||
|
Equity securities
|
734 | - | 24 | - | 75 | (136 | ) | - | (115 | ) | 81 | (1 | ) | 662 | ||||||||||||||||||||||||||||||
|
Non-U.S. sovereign debt
|
252 | - | 80 | - | 74 | (11 | ) | - | (3 | ) | 3 | (4 | ) | 391 | ||||||||||||||||||||||||||||||
|
Mortgage trading loans and ABS
|
6,697 | - | 80 | - | 1,066 | (2,160 | ) | - | (164 | ) | - | - | 5,519 | |||||||||||||||||||||||||||||||
|
Total trading account assets
|
15,261 | - | 365 | - | 3,245 | (4,494 | ) | - | (620 | ) | 330 | (63 | ) | 14,024 | ||||||||||||||||||||||||||||||
|
Net derivative assets
(2)
|
6,419 | - | 1,807 | - | 384 | (512 | ) | - | (2,390 | ) | 33 | (323 | ) | 5,418 | ||||||||||||||||||||||||||||||
|
AFS debt securities:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Agency-collateralized mortgage obligations
|
56 | - | - | - | - | - | - | (1 | ) | - | - | 55 | ||||||||||||||||||||||||||||||||
|
Non-agency residential
|
1,203 | - | (29 | ) | (6 | ) | 2 | (53 | ) | - | (27 | ) | 4 | - | 1,094 | |||||||||||||||||||||||||||||
|
Non-agency commercial
|
19 | - | - | - | - | - | - | (1 | ) | - | - | 18 | ||||||||||||||||||||||||||||||||
|
Non-U.S. securities
|
- | - | - | - | - | - | - | - | 88 | - | 88 | |||||||||||||||||||||||||||||||||
|
Corporate/Agency bonds
|
133 | - | - | (2 | ) | 86 | - | - | - | 7 | - | 224 | ||||||||||||||||||||||||||||||||
|
Other taxable securities
|
11,024 | - | 23 | 5 | 898 | (1 | ) | - | (1,573 | ) | - | (2 | ) | 10,374 | ||||||||||||||||||||||||||||||
|
Tax-exempt securities
|
1,146 | - | 9 | (39 | ) | 683 | (23 | ) | - | (205 | ) | 38 | - | 1,609 | ||||||||||||||||||||||||||||||
|
Total AFS debt securities
|
13,581 | - | 3 | (42 | ) | 1,669 | (77 | ) | - | (1,807 | ) | 137 | (2 | ) | 13,462 | |||||||||||||||||||||||||||||
|
Loans and leases
(3, 4)
|
3,619 | 5,194 | 37 | - | 21 | (267 | ) | 1,821 | (828 | ) | - | - | 9,597 | |||||||||||||||||||||||||||||||
|
Mortgage servicing rights
(4)
|
15,282 | - | (2,447 | ) | - | - | (234 | ) | 410 | (639 | ) | - | - | 12,372 | ||||||||||||||||||||||||||||||
|
Loans held-for-sale
(3)
|
4,259 | - | 7 | - | 92 | (70 | ) | - | (469 | ) | 219 | (26 | ) | 4,012 | ||||||||||||||||||||||||||||||
|
Other assets
(5)
|
4,193 | - | 180 | - | 95 | (243 | ) | - | (105 | ) | 375 | - | 4,495 | |||||||||||||||||||||||||||||||
|
Trading account liabilities – Corporate securities and other
|
(102 | ) | - | - | - | 69 | (30 | ) | - | - | - | - | (63 | ) | ||||||||||||||||||||||||||||||
|
Commercial paper and other short-term borrowings
(3)
|
(726 | ) | - | (36 | ) | - | - | - | - | 18 | - | - | (744 | ) | ||||||||||||||||||||||||||||||
|
Accrued expenses and other liabilities
(3)
|
(689 | ) | - | (79 | ) | - | - | - | (9 | ) | - | - | - | (777 | ) | |||||||||||||||||||||||||||||
|
Long-term debt
(3)
|
(3,138 | ) | - | 5 | - | 131 | (55 | ) | (206 | ) | 149 | (393 | ) | 183 | (3,324 | ) | ||||||||||||||||||||||||||||
| (1) |
Assets (liabilities). For assets, increase / (decrease) to Level 3 and for liabilities, (increase) / decrease to Level 3.
|
|
| (2) |
Net derivatives at June 30, 2011 include derivative assets of $15.2 billion and derivative liabilities of $9.8 billion.
|
|
| (3) |
Amounts represent items which are accounted for under the fair value option.
|
|
| (4) |
Issuances represent loan originations and mortgage servicing rights retained following securitizations or whole loan sales.
|
|
| (5) |
Other assets is primarily comprised of AFS marketable equity securities.
|
During the three months ended June 30, 2011, there were no significant transfers into
or out of Level 3.
202
Table of Contents
| Level 3 – Fair Value Measurements | ||||||||||||||||||||||||||||
| Three Months Ended June 30, 2010 | ||||||||||||||||||||||||||||
| Gains | Gains | Purchases, | Gross | Gross | ||||||||||||||||||||||||
| Balance | (Losses) | (Losses) | Sales, | Transfers | Transfers | Balance | ||||||||||||||||||||||
| April 1 | Included in | Included in | Issuances and | into | out of | June 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
|
$ | 10,646 | $ | (52 | ) | $ | - | $ | (854 | ) | $ | 715 | $ | (582 | ) | $ | 9,873 | |||||||||||
|
Equity securities
|
721 | (39 | ) | - | 4 | 41 | (1 | ) | 726 | |||||||||||||||||||
|
Non-U.S. sovereign debt
|
1,064 | (73 | ) | - | (52 | ) | 16 | (3 | ) | 952 | ||||||||||||||||||
|
Mortgage trading loans and ABS
|
7,832 | 182 | - | (640 | ) | 367 | (233 | ) | 7,508 | |||||||||||||||||||
|
Total trading account assets
|
20,263 | 18 | - | (1,542 | ) | 1,139 | (819 | ) | 19,059 | |||||||||||||||||||
|
Net derivative assets
(2)
|
8,597 | 3,588 | - | (2,555 | ) | (520 | ) | 292 | 9,402 | |||||||||||||||||||
|
AFS debt securities:
|
||||||||||||||||||||||||||||
|
Non-agency MBS:
|
||||||||||||||||||||||||||||
|
Residential
|
5,376 | (282 | ) | 65 | (3,594 | ) | 599 | (188 | ) | 1,976 | ||||||||||||||||||
|
Commercial
|
138 | - | - | - | - | (88 | ) | 50 | ||||||||||||||||||||
|
Non-U.S. securities
|
284 | (3 | ) | (79 | ) | (25 | ) | 56 | - | 233 | ||||||||||||||||||
|
Corporate/Agency bonds
|
639 | - | 14 | (341 | ) | 11 | (19 | ) | 304 | |||||||||||||||||||
|
Other taxable securities
|
16,192 | 28 | (56 | ) | (2,702 | ) | 439 | (1 | ) | 13,900 | ||||||||||||||||||
|
Tax-exempt securities
|
1,430 | (48 | ) | (17 | ) | (69 | ) | - | (59 | ) | 1,237 | |||||||||||||||||
|
Total AFS debt securities
|
24,059 | (305 | ) | (73 | ) | (6,731 | ) | 1,105 | (355 | ) | 17,700 | |||||||||||||||||
|
Loans and leases
(3)
|
4,007 | (256 | ) | - | 147 | - | - | 3,898 | ||||||||||||||||||||
|
Mortgage servicing rights
|
18,842 | (3,998 | ) | - | (99 | ) | - | - | 14,745 | |||||||||||||||||||
|
Loans held-for-sale
(3)
|
5,984 | 131 | - | (371 | ) | 237 | - | 5,981 | ||||||||||||||||||||
|
Other assets
(4)
|
7,774 | 998 | - | (1,050 | ) | - | (20 | ) | 7,702 | |||||||||||||||||||
|
Trading account liabilities:
|
||||||||||||||||||||||||||||
|
Non-U.S. sovereign debt
|
(369 | ) | 2 | - | (9 | ) | - | 369 | (7 | ) | ||||||||||||||||||
|
Corporate securities and other
|
(30 | ) | (5 | ) | - | 8 | (46 | ) | - | (73 | ) | |||||||||||||||||
|
Total trading account liabilities
|
(399 | ) | (3 | ) | - | (1 | ) | (46 | ) | 369 | (80 | ) | ||||||||||||||||
|
Commercial paper and other short-term borrowings
(3)
|
(696 | ) | (30 | ) | - | 26 | - | - | (700 | ) | ||||||||||||||||||
|
Accrued expenses and other liabilities
(3)
|
(694 | ) | (23 | ) | - | (201 | ) | - | - | (918 | ) | |||||||||||||||||
|
Long-term debt
(3)
|
(4,560 | ) | 586 | - | 188 | (560 | ) | 256 | (4,090 | ) | ||||||||||||||||||
| (1) |
Assets (liabilities). For assets, increase / (decrease) to Level 3 and for liabilities, (increase) / decrease to Level 3.
|
|
| (2) |
Net derivatives at June 30, 2010 include derivative assets of $22.7 billion and derivative liabilities of $13.3 billion.
|
|
| (3) |
Amounts represent instruments 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 June 30, 2010, the more significant transfers into Level
3 included $1.1 billion of trading account assets, $1.1 billion of AFS debt securities and $520
million of net derivative contracts. 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
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 primarily related to a lack of price observability for certain
credit default and total return swaps.
During the three months ended June 30, 2010, the more significant transfers out of Level 3
were $819 million of trading account assets, driven by increased price verification of certain
mortgage-backed and corporate debt securities and increased price observability of index floaters
based on the Bond Market Association (BMA) curve held in corporate securities, trading loans and
other.
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Table of Contents
| Level 3 – Fair Value Measurements | ||||||||||||||||||||||||||||||||||||||||||||
| Six Months Ended June 30, 2011 | ||||||||||||||||||||||||||||||||||||||||||||
| Gains | Gains | Gross | Gross | |||||||||||||||||||||||||||||||||||||||||
| Balance | (Losses) | (Losses) | Transfers | Transfers | Balance | |||||||||||||||||||||||||||||||||||||||
| January 1 | Consolidation | Included in | Included in | Gross | into | out of | June 30 | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2011 (1) | of VIEs | Earnings | OCI | Purchases | Sales | Issuances | Settlements | Level 3 (1) | Level 3 (1) | 2011 (1) | |||||||||||||||||||||||||||||||||
|
Trading account assets:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Corporate securities, trading loans and other
|
$ | 7,751 | $ | - | $ | 675 | $ | - | $ | 3,580 | $ | (4,537 | ) | $ | - | $ | (519 | ) | $ | 815 | $ | (313 | ) | $ | 7,452 | |||||||||||||||||||
|
Equity securities
|
623 | - | 67 | - | 175 | (206 | ) | - | (115 | ) | 120 | (2 | ) | 662 | ||||||||||||||||||||||||||||||
|
Non-U.S. sovereign debt
|
243 | - | 85 | - | 122 | (15 | ) | - | (3 | ) | 3 | (44 | ) | 391 | ||||||||||||||||||||||||||||||
|
Mortgage trading loans and ABS
|
6,908 | - | 642 | - | 1,832 | (3,246 | ) | - | (228 | ) | 1 | (390 | ) | 5,519 | ||||||||||||||||||||||||||||||
|
Total trading account assets
|
15,525 | - | 1,469 | - | 5,709 | (8,004 | ) | - | (865 | ) | 939 | (749 | ) | 14,024 | ||||||||||||||||||||||||||||||
|
Net derivative assets
(2)
|
7,745 | - | 2,245 | - | 886 | (1,260 | ) | - | (4,060 | ) | 340 | (478 | ) | 5,418 | ||||||||||||||||||||||||||||||
|
AFS debt securities:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Agency
|
4 | - | - | - | - | - | - | - | - | (4 | ) | - | ||||||||||||||||||||||||||||||||
|
Agency-collateralized mortgage obligations
|
- | - | - | - | 56 | - | - | (1 | ) | - | - | 55 | ||||||||||||||||||||||||||||||||
|
Non-agency residential
|
1,468 | - | (45 | ) | (28 | ) | 2 | (290 | ) | - | (289 | ) | 276 | - | 1,094 | |||||||||||||||||||||||||||||
|
Non-agency commercial
|
19 | - | - | - | - | - | - | (1 | ) | - | - | 18 | ||||||||||||||||||||||||||||||||
|
Non-U.S. securities
|
3 | - | - | - | - | - | - | - | 88 | (3 | ) | 88 | ||||||||||||||||||||||||||||||||
|
Corporate/Agency bonds
|
137 | - | 2 | (1 | ) | 86 | (7 | ) | - | - | 7 | - | 224 | |||||||||||||||||||||||||||||||
|
Other taxable securities
|
13,018 | - | 52 | 62 | 1,450 | (53 | ) | - | (4,155 | ) | 2 | (2 | ) | 10,374 | ||||||||||||||||||||||||||||||
|
Tax-exempt securities
|
1,224 | - | 6 | (33 | ) | 683 | (72 | ) | - | (237 | ) | 38 | - | 1,609 | ||||||||||||||||||||||||||||||
|
Total AFS debt securities
|
15,873 | - | 15 | - | 2,277 | (422 | ) | - | (4,683 | ) | 411 | (9 | ) | 13,462 | ||||||||||||||||||||||||||||||
|
Loans and leases
(3, 4)
|
3,321 | 5,194 | 209 | - | 21 | (376 | ) | 2,667 | (1,444 | ) | 5 | - | 9,597 | |||||||||||||||||||||||||||||||
|
Mortgage servicing rights
(4)
|
14,900 | - | (2,200 | ) | - | - | (234 | ) | 1,251 | (1,345 | ) | - | - | 12,372 | ||||||||||||||||||||||||||||||
|
Loans held-for-sale
(3)
|
4,140 | - | 185 | - | 123 | (243 | ) | - | (592 | ) | 441 | (42 | ) | 4,012 | ||||||||||||||||||||||||||||||
|
Other assets
(5)
|
6,856 | - | 302 | - | 172 | (1,184 | ) | - | (393 | ) | 375 | (1,633 | ) | 4,495 | ||||||||||||||||||||||||||||||
|
Trading account liabilities – Corporate securities and other
|
(7 | ) | - | - | - | 76 | (132 | ) | - | - | - | - | (63 | ) | ||||||||||||||||||||||||||||||
|
Commercial paper and other short-term borrowings
(3)
|
(706 | ) | - | (82 | ) | - | - | - | - | 44 | - | - | (744 | ) | ||||||||||||||||||||||||||||||
|
Accrued expenses and other liabilities
(3)
|
(828 | ) | - | 64 | - | - | (4 | ) | (9 | ) | - | - | - | (777 | ) | |||||||||||||||||||||||||||||
|
Long-term debt
(3)
|
(2,986 | ) | - | (143 | ) | - | 215 | (55 | ) | (249 | ) | 388 | (1,030 | ) | 536 | (3,324 | ) | |||||||||||||||||||||||||||
| (1) |
Assets (liabilities). For assets, increase / (decrease) to Level 3 and for liabilities, (increase) / decrease to Level 3.
|
|
| (2) |
Net derivatives at June 30, 2011 include derivative assets of $15.2 billion and derivative liabilities of $9.8 billion.
|
|
| (3) |
Amounts represent items which are accounted for under the fair value option.
|
|
| (4) |
Issuances represent loan originations and mortgage servicing rights retained following securitizations or whole loan sales.
|
|
| (5) |
Other assets is primarily comprised of AFS marketable equity securities.
|
During the six months ended June 30, 2011, the more significant transfers into Level 3 included $939 million of trading account assets and $1.0 billion of long-term debt accounted for
under the fair value option. Transfers into Level 3 for trading account assets were primarily driven by certain CLOs which were transferred into Level 3 due to a lack of pricing
transparency. Transfers into Level 3 for long-term debt were the result of an increase in unobservable inputs used in the pricing of certain equity-linked structured notes.
During the six months ended June 30, 2011, the more significant transfers out of Level 3 included $749 million of trading account assets and $1.6 billion of other
assets. Transfers out of Level 3 for trading account assets were primarily driven by increased price observability on certain RMBS and consumer ABS portfolios.
Transfers out of Level 3 for other assets were the result of an initial public offering of an equity investment which occurred in the first quarter of 2011.
204
Table of Contents
| Level 3 – Fair Value Measurements | ||||||||||||||||||||||||||||||||
| Six Months Ended June 30, 2010 | ||||||||||||||||||||||||||||||||
| Gains | Gains | Purchases, | Gross | Gross | ||||||||||||||||||||||||||||
| Balance | (Losses) | (Losses) | Sales, | Transfers | Transfers | Balance | ||||||||||||||||||||||||||
| January 1 | Consolidation | Included in | Included in | Issuances and | into | out of | June 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 | $ | 354 | $ | - | $ | (2,798 | ) | $ | 2,189 | $ | (1,069 | ) | $ | 9,873 | ||||||||||||||
|
Equity securities
|
1,084 | - | (33 | ) | - | (326 | ) | 75 | (74 | ) | 726 | |||||||||||||||||||||
|
Non-U.S. sovereign debt
|
1,143 | - | (155 | ) | - | (80 | ) | 103 | (59 | ) | 952 | |||||||||||||||||||||
|
Mortgage trading loans and ABS
|
7,770 | 175 | 157 | - | (586 | ) | 389 | (397 | ) | 7,508 | ||||||||||||||||||||||
|
Total trading account assets
|
21,077 | 292 | 323 | - | (3,790 | ) | 2,756 | (1,599 | ) | 19,059 | ||||||||||||||||||||||
|
Net derivative assets
(2)
|
7,863 | - | 4,991 | - | (4,451 | ) | 768 | 231 | 9,402 | |||||||||||||||||||||||
|
AFS debt securities:
|
||||||||||||||||||||||||||||||||
|
Non-agency MBS:
|
||||||||||||||||||||||||||||||||
|
Residential
|
7,216 | (96 | ) | (515 | ) | (310 | ) | (5,829 | ) | 1,698 | (188 | ) | 1,976 | |||||||||||||||||||
|
Commercial
|
258 | - | (13 | ) | (31 | ) | (128 | ) | 52 | (88 | ) | 50 | ||||||||||||||||||||
|
Non-U.S. securities
|
468 | - | (124 | ) | (89 | ) | (78 | ) | 56 | - | 233 | |||||||||||||||||||||
|
Corporate/Agency bonds
|
927 | - | (3 | ) | 35 | (666 | ) | 30 | (19 | ) | 304 | |||||||||||||||||||||
|
Other taxable securities
|
9,854 | 5,812 | 19 | (119 | ) | (2,742 | ) | 1,119 | (43 | ) | 13,900 | |||||||||||||||||||||
|
Tax-exempt securities
|
1,623 | - | (25 | ) | (9 | ) | (561 | ) | 316 | (107 | ) | 1,237 | ||||||||||||||||||||
|
Total AFS debt securities
|
20,346 | 5,716 | (661 | ) | (523 | ) | (10,004 | ) | 3,271 | (445 | ) | 17,700 | ||||||||||||||||||||
|
Loans and leases
(3)
|
4,936 | - | (140 | ) | - | (898 | ) | - | - | 3,898 | ||||||||||||||||||||||
|
Mortgage servicing rights
|
19,465 | - | (4,696 | ) | - | (24 | ) | - | - | 14,745 | ||||||||||||||||||||||
|
Loans held-for-sale
(3)
|
6,942 | - | 67 | - | (1,427 | ) | 399 | - | 5,981 | |||||||||||||||||||||||
|
Other assets
(4)
|
7,821 | - | 1,537 | - | (1,421 | ) | - | (235 | ) | 7,702 | ||||||||||||||||||||||
|
Trading account liabilities:
|
||||||||||||||||||||||||||||||||
|
Non-U.S. sovereign debt
|
(386 | ) | - | 23 | - | (24 | ) | - | 380 | (7 | ) | |||||||||||||||||||||
|
Corporate securities and other
|
(10 | ) | - | (5 | ) | - | (9 | ) | (52 | ) | 3 | (73 | ) | |||||||||||||||||||
|
Total trading account liabilities
|
(396 | ) | - | 18 | - | (33 | ) | (52 | ) | 383 | (80 | ) | ||||||||||||||||||||
|
Commercial paper and other short-term borrowings
(3)
|
(707 | ) | - | (41 | ) | - | 48 | - | - | (700 | ) | |||||||||||||||||||||
|
Accrued expenses and other liabilities
(3)
|
(891 | ) | - | 50 | - | (77 | ) | - | - | (918 | ) | |||||||||||||||||||||
|
Long-term debt
(3)
|
(4,660 | ) | - | 788 | - | (264 | ) | (897 | ) | 943 | (4,090 | ) | ||||||||||||||||||||
| (1) |
Assets (liabilities). For assets, increase / (decrease) to Level 3 and for liabilities, (increase) / decrease to Level 3.
|
|
| (2) |
Net derivatives at June 30, 2010 include derivative assets of $22.7 billion and derivative liabilities of $13.3 billion.
|
|
| (3) |
Amounts represent instruments which are accounted for under the fair value option.
|
|
| (4) |
Other assets is primarily comprised of AFS marketable equity securities.
|
During the six months ended June 30, 2010, the more significant transfers into Level 3
included $2.8 billion of trading account assets, $3.3 billion of AFS debt securities and $768
million of net derivative contracts. 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
primarily related to a lack of price observability for certain credit default and total return
swaps.
During the six months ended June 30, 2010, the more significant transfers out of Level 3 were
$1.6 billion of trading account assets, driven by increased price verification of certain
mortgage-backed and corporate debt securities and increased price observability of index floaters
based on the BMA curve held in corporate securities, trading loans and other.
205
Table of Contents
The following tables summarize gains (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 and six months ended June 30, 2011 and 2010. 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 June 30, 2011 | ||||||||||||||||||||
| 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
|
$ | - | $ | 181 | $ | - | $ | - | $ | 181 | ||||||||||
|
Equity securities
|
- | 24 | - | - | 24 | |||||||||||||||
|
Non-U.S. sovereign debt
|
- | 80 | - | - | 80 | |||||||||||||||
|
Mortgage trading loans and ABS
|
- | 80 | - | - | 80 | |||||||||||||||
|
Total trading account assets
|
- | 365 | - | - | 365 | |||||||||||||||
|
Net derivative assets
|
- | 556 | 1,251 | - | 1,807 | |||||||||||||||
|
AFS debt securities:
|
||||||||||||||||||||
|
Non-agency residential MBS
|
- | - | - | (29 | ) | (29 | ) | |||||||||||||
|
Other taxable securities
|
- | - | - | 23 | 23 | |||||||||||||||
|
Tax-exempt securities
|
- | - | - | 9 | 9 | |||||||||||||||
|
Total AFS debt securities
|
- | - | - | 3 | 3 | |||||||||||||||
|
Loans and leases
(2)
|
- | - | (13 | ) | 50 | 37 | ||||||||||||||
|
Mortgage servicing rights
|
- | - | (2,447 | ) | - | (2,447 | ) | |||||||||||||
|
Loans held-for-sale
(2)
|
- | - | (13 | ) | 20 | 7 | ||||||||||||||
|
Other assets
|
192 | - | (12 | ) | - | 180 | ||||||||||||||
|
Commercial paper and other short-term borrowings
(2)
|
- | - | (36 | ) | - | (36 | ) | |||||||||||||
|
Accrued expenses and other liabilities
(2)
|
- | (2 | ) | 74 | (151 | ) | (79 | ) | ||||||||||||
|
Long-term debt
(2)
|
- | (10 | ) | - | 15 | 5 | ||||||||||||||
|
Total
|
$ | 192 | $ | 909 | $ | (1,196 | ) | $ | (63 | ) | $ | (158 | ) | |||||||
| Three Months Ended June 30, 2010 | ||||||||||||||||||||
|
Trading account assets:
|
||||||||||||||||||||
|
Corporate securities, trading loans and other
|
$ | - | $ | (52 | ) | $ | - | $ | - | $ | (52 | ) | ||||||||
|
Equity securities
|
- | (39 | ) | - | - | (39 | ) | |||||||||||||
|
Non-U.S. sovereign debt
|
- | (73 | ) | - | - | (73 | ) | |||||||||||||
|
Mortgage trading loans and ABS
|
- | 182 | - | - | 182 | |||||||||||||||
|
Total trading account assets
|
- | 18 | - | - | 18 | |||||||||||||||
|
Net derivative assets
|
- | 193 | 3,395 | - | 3,588 | |||||||||||||||
|
AFS debt securities:
|
||||||||||||||||||||
|
Non-agency residential MBS
|
- | - | - | (282 | ) | (282 | ) | |||||||||||||
|
Non-U.S. securities
|
- | - | - | (3 | ) | (3 | ) | |||||||||||||
|
Other taxable securities
|
- | - | - | 28 | 28 | |||||||||||||||
|
Tax-exempt securities
|
- | - | - | (48 | ) | (48 | ) | |||||||||||||
|
Total AFS debt securities
|
- | - | - | (305 | ) | (305 | ) | |||||||||||||
|
Loans and leases
(2)
|
- | - | - | (256 | ) | (256 | ) | |||||||||||||
|
Mortgage servicing rights
|
- | - | (3,998 | ) | - | (3,998 | ) | |||||||||||||
|
Loans held-for-sale
(2)
|
- | - | 44 | 87 | 131 | |||||||||||||||
|
Other assets
|
1,033 | - | (35 | ) | - | 998 | ||||||||||||||
|
Trading account liabilities:
|
||||||||||||||||||||
|
Non-U.S. sovereign debt
|
- | 2 | - | - | 2 | |||||||||||||||
|
Corporate securities and other
|
- | (5 | ) | - | - | (5 | ) | |||||||||||||
|
Total trading account liabilities
|
- | (3 | ) | - | - | (3 | ) | |||||||||||||
|
Commercial paper and other short-term borrowings
(2)
|
- | - | (30 | ) | - | (30 | ) | |||||||||||||
|
Accrued expenses and other liabilities
(2)
|
- | (12 | ) | - | (11 | ) | (23 | ) | ||||||||||||
|
Long-term debt
(2)
|
- | 472 | - | 114 | 586 | |||||||||||||||
|
Total
|
$ | 1,033 | $ | 668 | $ | (624 | ) | $ | (371 | ) | $ | 706 | ||||||||
| (1) |
Mortgage banking income does not reflect the impact of Level 1 and Level 2 hedges on MSRs.
|
|
| (2) |
Amounts represent instruments which are accounted for under the fair value option.
|
206
Table of Contents
| Level 3– Total Realized and Unrealized Gains (Losses) Included in Earnings | ||||||||||||||||||||
| Six Months Ended June 30, 2011 | ||||||||||||||||||||
| 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
|
$ | - | $ | 675 | $ | - | $ | - | $ | 675 | ||||||||||
|
Equity securities
|
- | 67 | - | - | 67 | |||||||||||||||
|
Non-U.S. sovereign debt
|
- | 85 | - | - | 85 | |||||||||||||||
|
Mortgage trading loans and ABS
|
- | 642 | - | - | 642 | |||||||||||||||
|
Total trading account assets
|
- | 1,469 | - | - | 1,469 | |||||||||||||||
|
Net derivative assets
|
- | 97 | 2,148 | - | 2,245 | |||||||||||||||
|
AFS debt securities:
|
||||||||||||||||||||
|
Non-agency residential MBS
|
- | - | - | (45 | ) | (45 | ) | |||||||||||||
|
Corporate/Agency bonds
|
- | - | - | 2 | 2 | |||||||||||||||
|
Other taxable securities
|
- | 12 | - | 40 | 52 | |||||||||||||||
|
Tax-exempt securities
|
- | (3 | ) | - | 9 | 6 | ||||||||||||||
|
Total AFS debt securities
|
- | 9 | - | 6 | 15 | |||||||||||||||
|
Loans and leases
(2)
|
- | - | (13 | ) | 222 | 209 | ||||||||||||||
|
Mortgage servicing rights
|
- | - | (2,200 | ) | - | (2,200 | ) | |||||||||||||
|
Loans held-for-sale
(2)
|
- | - | (11 | ) | 196 | 185 | ||||||||||||||
|
Other assets
|
314 | - | (12 | ) | - | 302 | ||||||||||||||
|
Commercial paper and other short-term borrowings
(2)
|
- | - | (82 | ) | - | (82 | ) | |||||||||||||
|
Accrued expenses and other liabilities
(2)
|
- | (10 | ) | 74 | - | 64 | ||||||||||||||
|
Long-term debt
(2)
|
- | (102 | ) | - | (41 | ) | (143 | ) | ||||||||||||
|
Total
|
$ | 314 | $ | 1,463 | $ | (96 | ) | $ | 383 | $ | 2,064 | |||||||||
|
|
||||||||||||||||||||
| Six Months Ended June 30, 2010 | ||||||||||||||||||||
|
Trading account assets:
|
||||||||||||||||||||
|
Corporate securities, trading loans and other
|
$ | - | $ | 354 | $ | - | $ | - | $ | 354 | ||||||||||
|
Equity securities
|
- | (33 | ) | - | - | (33 | ) | |||||||||||||
|
Non-U.S. sovereign debt
|
- | (155 | ) | - | - | (155 | ) | |||||||||||||
|
Mortgage trading loans and ABS
|
- | 157 | - | - | 157 | |||||||||||||||
|
Total trading account assets
|
- | 323 | - | - | 323 | |||||||||||||||
|
Net derivative assets
|
- | (334 | ) | 5,325 | - | 4,991 | ||||||||||||||
|
AFS debt securities:
|
||||||||||||||||||||
|
Non-agency MBS:
|
||||||||||||||||||||
|
Residential
|
- | - | (13 | ) | (502 | ) | (515 | ) | ||||||||||||
|
Commercial
|
- | - | - | (13 | ) | (13 | ) | |||||||||||||
|
Non-U.S. securities
|
- | - | - | (124 | ) | (124 | ) | |||||||||||||
|
Corporate/Agency bonds
|
- | - | - | (3 | ) | (3 | ) | |||||||||||||
|
Other taxable securities
|
- | - | - | 19 | 19 | |||||||||||||||
|
Tax-exempt securities
|
- | 23 | - | (48 | ) | (25 | ) | |||||||||||||
|
Total AFS debt securities
|
- | 23 | (13 | ) | (671 | ) | (661 | ) | ||||||||||||
|
Loans and leases
(2)
|
- | - | - | (140 | ) | (140 | ) | |||||||||||||
|
Mortgage servicing rights
|
- | - | (4,696 | ) | - | (4,696 | ) | |||||||||||||
|
Loans held-for-sale
(2)
|
- | - | 59 | 8 | 67 | |||||||||||||||
|
Other assets
|
1,569 | - | (32 | ) | - | 1,537 | ||||||||||||||
|
Trading account liabilities:
|
||||||||||||||||||||
|
Non-U.S. sovereign debt
|
- | 23 | - | - | 23 | |||||||||||||||
|
Corporate securities and other
|
- | (5 | ) | - | - | (5 | ) | |||||||||||||
|
Total trading account liabilities
|
- | 18 | - | - | 18 | |||||||||||||||
|
Commercial paper and other short-term borrowings
(2)
|
- | - | (41 | ) | - | (41 | ) | |||||||||||||
|
Accrued expenses and other liabilities
(2)
|
- | (10 | ) | - | 60 | 50 | ||||||||||||||
|
Long-term debt
(2)
|
- | 595 | - | 193 | 788 | |||||||||||||||
|
Total
|
$ | 1,569 | $ | 615 | $ | 602 | $ | (550 | ) | $ | 2,236 | |||||||||
| (1) |
Mortgage banking income does not reflect the impact of Level 1 and Level 2 hedges on MSRs.
|
|
| (2) |
Amounts represent instruments which are accounted for under the fair value option.
|
207
Table of Contents
The following tables summarize changes in unrealized gains (losses) recorded in earnings
during the three and six months ended June 30, 2011 and 2010 for Level 3 assets and liabilities
that were still held at June 30, 2011 and 2010. 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 June 30, 2011 | |||||||||||||||||||||
| 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
|
$ | - | $ | (20 | ) | $ | - | $ | - | $ | (20 | ) | |||||||||
|
Equity securities
|
- | (40 | ) | - | - | (40 | ) | ||||||||||||||
|
Non-U.S. sovereign debt
|
- | 67 | - | - | 67 | ||||||||||||||||
|
Mortgage trading loans and ABS
|
- | (40 | ) | - | - | (40 | ) | ||||||||||||||
|
Total trading account assets
|
- | (33 | ) | - | - | (33 | ) | ||||||||||||||
|
Net derivative assets
|
- | 460 | 166 | - | 626 | ||||||||||||||||
|
AFS debt securities:
|
|||||||||||||||||||||
|
Non-agency residential MBS
|
- | - | - | (29 | ) | (29 | ) | ||||||||||||||
|
Total AFS debt securities
|
- | - | - | (29 | ) | (29 | ) | ||||||||||||||
|
Mortgage servicing rights
|
- | - | (2,869 | ) | - | (2,869 | ) | ||||||||||||||
|
Loans held-for-sale
(2)
|
- | - | (36 | ) | 3 | (33 | ) | ||||||||||||||
|
Other assets
|
150 | - | (12 | ) | - | 138 | |||||||||||||||
|
Commercial paper and other short-term borrowings
(2)
|
- | - | (28 | ) | - | (28 | ) | ||||||||||||||
|
Accrued expenses and other liabilities
(2)
|
- | - | - | (174 | ) | (174 | ) | ||||||||||||||
|
Long-term debt
(2)
|
- | (10 | ) | - | 3 | (7 | ) | ||||||||||||||
|
Total
|
$ | 150 | $ | 417 | $ | (2,779 | ) | $ | (197 | ) | $ | (2,409 | ) | ||||||||
| Three Months Ended June 30, 2010 | |||||||||||||||||||||
|
Trading account assets:
|
|||||||||||||||||||||
|
Corporate securities, trading loans and other
|
$ | - | $ | (136 | ) | $ | - | $ | - | $ | (136 | ) | |||||||||
|
Equity securities
|
- | (33 | ) | - | - | (33 | ) | ||||||||||||||
|
Non-U.S. sovereign debt
|
- | (73 | ) | - | - | (73 | ) | ||||||||||||||
|
Mortgage trading loans and ABS
|
- | 173 | - | - | 173 | ||||||||||||||||
|
Total trading account assets
|
- | (69 | ) | - | - | (69 | ) | ||||||||||||||
|
Net derivative assets
|
- | 453 | 2,187 | - | 2,640 | ||||||||||||||||
|
AFS debt securities:
|
|||||||||||||||||||||
|
Non-agency residential MBS
|
- | - | - | (44 | ) | (44 | ) | ||||||||||||||
|
Other taxable securities
|
- | - | - | (20 | ) | (20 | ) | ||||||||||||||
|
Total AFS debt securities
|
- | - | - | (64 | ) | (64 | ) | ||||||||||||||
|
Loans and leases
(2)
|
- | - | - | (95 | ) | (95 | ) | ||||||||||||||
|
Mortgage servicing rights
|
- | - | (4,477 | ) | - | (4,477 | ) | ||||||||||||||
|
Loans held-for-sale
(2)
|
- | - | 16 | (17 | ) | (1 | ) | ||||||||||||||
|
Other assets
|
716 | - | (11 | ) | - | 705 | |||||||||||||||
|
Trading
account liabilities – Non-U.S. sovereign debt
|
- | 2 | - | - | 2 | ||||||||||||||||
|
Commercial paper and other short-term borrowings
(2)
|
- | - | (16 | ) | - | (16 | ) | ||||||||||||||
|
Accrued expenses and other liabilities
(2)
|
- | - | - | (271 | ) | (271 | ) | ||||||||||||||
|
Long-term debt
(2)
|
- | 384 | - | 113 | 497 | ||||||||||||||||
|
Total
|
$ | 716 | $ | 770 | $ | (2,301 | ) | $ | (334 | ) | $ | (1,149 | ) | ||||||||
| (1) |
Mortgage banking income does not reflect the impact of Level 1 and Level 2 hedges on MSRs.
|
|
| (2) |
Amounts represent instruments which are accounted for under the fair value option.
|
208
Table of Contents
| Level 3 – Changes in Unrealized Gains (Losses) Relating to Assets and Liabilities Still Held at Reporting Date | ||||||||||||||||||||
| Six Months Ended June 30, 2011 | ||||||||||||||||||||
| 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
|
$ | - | $ | 286 | $ | - | $ | - | $ | 286 | ||||||||||
|
Equity securities
|
- | (21 | ) | - | - | (21 | ) | |||||||||||||
|
Non-U.S. sovereign debt
|
- | 70 | - | - | 70 | |||||||||||||||
|
Mortgage trading loans and ABS
|
- | 278 | - | - | 278 | |||||||||||||||
|
Total trading account assets
|
- | 613 | - | - | 613 | |||||||||||||||
|
Net derivative assets
|
- | 247 | 192 | - | 439 | |||||||||||||||
|
AFS debt securities:
|
||||||||||||||||||||
|
Non-agency residential MBS
|
- | - | - | (99 | ) | (99 | ) | |||||||||||||
|
Total AFS debt securities
|
- | - | - | (99 | ) | (99 | ) | |||||||||||||
|
Loans and leases
(2)
|
- | - | - | 127 | 127 | |||||||||||||||
|
Mortgage servicing rights
|
- | - | (2,933 | ) | - | (2,933 | ) | |||||||||||||
|
Loans held-for-sale
(2)
|
- | - | (48 | ) | 91 | 43 | ||||||||||||||
|
Other assets
|
137 | - | (11 | ) | - | 126 | ||||||||||||||
|
Commercial paper and other short-term borrowings
(2)
|
- | - | (61 | ) | - | (61 | ) | |||||||||||||
|
Accrued expenses and other liabilities
(2)
|
- | - | - | (90 | ) | (90 | ) | |||||||||||||
|
Long-term debt
(2)
|
- | (102 | ) | - | (53 | ) | (155 | ) | ||||||||||||
|
Total
|
$ | 137 | $ | 758 | $ | (2,861 | ) | $ | (24 | ) | $ | (1,990 | ) | |||||||
|
|
||||||||||||||||||||
| Six Months Ended June 30, 2010 | ||||||||||||||||||||
|
Trading account assets:
|
||||||||||||||||||||
|
Corporate securities, trading loans and other
|
$ | - | $ | 705 | $ | - | $ | - | $ | 705 | ||||||||||
|
Equity securities
|
- | (49 | ) | - | - | (49 | ) | |||||||||||||
|
Non-U.S. sovereign debt
|
- | (156 | ) | - | - | (156 | ) | |||||||||||||
|
Mortgage trading loans and ABS
|
- | 106 | - | - | 106 | |||||||||||||||
|
Total trading account assets
|
- | 606 | - | - | 606 | |||||||||||||||
|
Net derivative assets
|
- | 377 | 3,013 | - | 3,390 | |||||||||||||||
|
AFS debt securities:
|
||||||||||||||||||||
|
Non-agency MBS:
|
||||||||||||||||||||
|
Residential
|
- | - | - | (139 | ) | (139 | ) | |||||||||||||
|
Commercial
|
- | - | - | (30 | ) | (30 | ) | |||||||||||||
|
Non-U.S. securities
|
- | - | - | (121 | ) | (121 | ) | |||||||||||||
|
Other taxable securities
|
- | - | - | (14 | ) | (14 | ) | |||||||||||||
|
Total AFS debt securities
|
- | - | - | (304 | ) | (304 | ) | |||||||||||||
|
Loans and leases
(2)
|
- | - | - | 45 | 45 | |||||||||||||||
|
Mortgage servicing rights
|
- | - | (5,708 | ) | - | (5,708 | ) | |||||||||||||
|
Loans held-for-sale
(2)
|
- | - | 6 | (102 | ) | (96 | ) | |||||||||||||
|
Other assets
|
635 | - | (13 | ) | - | 622 | ||||||||||||||
|
Trading account liabilities:
|
||||||||||||||||||||
|
Non-U.S. sovereign debt
|
- | 23 | - | - | 23 | |||||||||||||||
|
Corporate securities and other
|
- | (38 | ) | - | - | (38 | ) | |||||||||||||
|
Total trading account liabilities
|
- | (15 | ) | - | - | (15 | ) | |||||||||||||
|
Commercial paper and other short-term borrowings
(2)
|
- | - | (16 | ) | - | (16 | ) | |||||||||||||
|
Accrued expenses and other liabilities
(2)
|
- | - | - | (201 | ) | (201 | ) | |||||||||||||
|
Long-term debt
(2)
|
- | 494 | - | 191 | 685 | |||||||||||||||
|
Total
|
$ | 635 | $ | 1,462 | $ | (2,718 | ) | $ | (371 | ) | $ | (992 | ) | |||||||
| (1) |
Mortgage banking income does not reflect the impact of Level 1 and Level 2 hedges on MSRs.
|
|
| (2) |
Amounts represent instruments which are accounted for under the fair value option.
|
209
Table of Contents
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 and foreclosed properties. The amounts below represent
only balances measured at fair value during the three and six months ended June 30, 2011 and 2010,
and still held as of the reporting date.
| Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis | ||||||||||||||||||||
| June 30, 2011 | Gains (Losses) | |||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||
| (Dollars in millions) | Level 2 | Level 3 | June 30, 2011 | June 30, 2011 | ||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Loans held-for-sale
|
$ | 1,049 | $ | 1,779 | $ | (12 | ) | $ | 52 | |||||||||||
|
Loans and leases
(1)
|
17 | 9,437 | (1,679 | ) | (3,097 | ) | ||||||||||||||
|
Foreclosed properties
(2)
|
- | 2,405 | (75 | ) | (147 | ) | ||||||||||||||
|
Other assets
|
- | 96 | (19 | ) | (23 | ) | ||||||||||||||
| June 30, 2010 | Gains (Losses) | |||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| (Dollars in millions) | Level 2 | Level 3 | June 30, 2010 | June 30, 2010 | ||||||||||||
|
Assets
|
||||||||||||||||
|
Loans held-for-sale
|
$ | 1,501 | $ | 8,070 | $ | 307 | $ | 123 | ||||||||
|
Loans and leases
(1)
|
45 | 10,817 | (1,736 | ) | (3,921 | ) | ||||||||||
|
Foreclosed properties
(2)
|
10 | 1,251 | (59 | ) | (113 | ) | ||||||||||
|
Other assets
|
4 | 16 | (3 | ) | (3 | ) | ||||||||||
| (1) |
Gains
(losses) represent charge-offs on real estate-secured loans.
|
|
| (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.
|
The Corporation elected to account for certain financial instruments under the fair value
option. For additional information on the primary financial instruments for which the fair value
option elections have been made, see
Note 23 – Fair Value Option
to the Consolidated Financial
Statements of the Corporation’s 2010 Annual Report on Form 10-K.
The table below provides information about the fair value carrying amount and the contractual
principal outstanding of assets or liabilities accounted for under the fair value option at June
30, 2011 and December 31, 2010.
| Fair Value Option Elections | ||||||||||||||||||||||||
| June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
| Fair Value | Fair Value | |||||||||||||||||||||||
| Carrying | Carrying | |||||||||||||||||||||||
| Fair Value | Contractual | Amount | Fair Value | Contractual | Amount | |||||||||||||||||||
| Carrying | Principal | Less Unpaid | Carrying | Principal | Less Unpaid | |||||||||||||||||||
| (Dollars in millions) | Amount | Outstanding | Principal | Amount | Outstanding | Principal | ||||||||||||||||||
|
Corporate loans
|
$ | 9,597 | $ | 14,039 | $ | (4,442 | ) | $ | 3,269 | $ | 3,638 | $ | (369 | ) | ||||||||||
|
Loans held-for-sale
|
15,143 | 17,262 | (2,119 | ) | 25,942 | 28,370 | (2,428 | ) | ||||||||||||||||
|
Securities financing agreements
|
137,568 | 137,196 | 372 | 116,023 | 115,053 | 970 | ||||||||||||||||||
|
Other assets
|
237 | n/a | n/a | 310 | n/a | n/a | ||||||||||||||||||
|
Long-term deposits
|
3,334 | 3,187 | 147 | 2,732 | 2,692 | 40 | ||||||||||||||||||
|
Asset-backed secured financings
|
744 | 1,313 | (569 | ) | 706 | 1,356 | (650 | ) | ||||||||||||||||
|
Unfunded loan commitments
|
773 | n/a | n/a | 866 | n/a | n/a | ||||||||||||||||||
|
Commercial paper and other
short-term borrowings
|
4,121 | 4,121 | - | 6,472 | 6,472 | - | ||||||||||||||||||
|
Long-term debt
|
60,737 | 67,119 | (6,382 | ) | 50,984 | 54,656 | (3,672 | ) | ||||||||||||||||
n/a = not applicable
210
Table of Contents
The tables below provide 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 six months ended June 30, 2011 and 2010.
| Gains (Losses) Relating to Assets and Liabilities Accounted for Under the Fair Value Option | ||||||||||||||||
| Three Months Ended June 30, 2011 | ||||||||||||||||
| Trading | Mortgage | |||||||||||||||
| Account | Banking | Other | ||||||||||||||
| Profits | Income | Income | ||||||||||||||
| (Dollars in millions) | (Losses) | (Loss) | (Loss) | Total | ||||||||||||
|
Corporate loans
|
$ | - | $ | - | $ | 33 | $ | 33 | ||||||||
|
Loans held-for-sale
|
2 | 1,511 | 31 | 1,544 | ||||||||||||
|
Securities financing agreements
|
- | - | 98 | 98 | ||||||||||||
|
Other assets
|
- | - | 1 | 1 | ||||||||||||
|
Long-term deposits
|
- | - | (40 | ) | (40 | ) | ||||||||||
|
Asset-backed secured financings
|
- | (36 | ) | - | (36 | ) | ||||||||||
|
Unfunded loan commitments
|
- | - | (76 | ) | (76 | ) | ||||||||||
|
Commercial paper and other short-term borrowings
|
37 | - | - | 37 | ||||||||||||
|
Long-term debt
|
(178 | ) | - | 214 | 36 | |||||||||||
|
Total
|
$ | (139 | ) | $ | 1,475 | $ | 261 | $ | 1,597 | |||||||
|
|
||||||||||||||||
| Three Months Ended June 30, 2010 | ||||||||||||||||
|
Corporate loans
|
$ | - | $ | - | $ | (44 | ) | $ | (44 | ) | ||||||
|
Loans held-for-sale
|
- | 3,198 | 96 | 3,294 | ||||||||||||
|
Securities financing agreements
|
- | - | 56 | 56 | ||||||||||||
|
Other assets
|
- | - | 49 | 49 | ||||||||||||
|
Long-term deposits
|
- | - | (54 | ) | (54 | ) | ||||||||||
|
Asset-backed secured financings
|
- | (30 | ) | - | (30 | ) | ||||||||||
|
Unfunded loan commitments
|
- | - | (254 | ) | (254 | ) | ||||||||||
|
Commercial paper and other short-term borrowings
|
(151 | ) | - | - | (151 | ) | ||||||||||
|
Long-term debt
|
1,797 | - | 1,175 | 2,972 | ||||||||||||
|
Total
|
$ | 1,646 | $ | 3,168 | $ | 1,024 | $ | 5,838 | ||||||||
211
Table of Contents
| Gains (Losses) Relating to Assets and Liabilities Accounted for Under the Fair Value Option | ||||||||||||||||
| Six Months Ended June 30, 2011 | ||||||||||||||||
| Trading | Mortgage | |||||||||||||||
| Account | Banking | Other | ||||||||||||||
| Profits | Income | Income | ||||||||||||||
| (Dollars in millions) | (Losses) | (Loss) | (Loss) | Total | ||||||||||||
|
Corporate loans
|
$ | - | $ | - | $ | 128 | $ | 128 | ||||||||
|
Loans held-for-sale
|
2 | 2,383 | 252 | 2,637 | ||||||||||||
|
Securities financing
agreements
|
- | - | (13 | ) | (13 | ) | ||||||||||
|
Other assets
|
- | - | 30 | 30 | ||||||||||||
|
Long-term deposits
|
- | - | (35 | ) | (35 | ) | ||||||||||
|
Asset-backed secured
financings
|
- | (82 | ) | - | (82 | ) | ||||||||||
|
Unfunded loan commitments
|
- | - | 56 | 56 | ||||||||||||
|
Commercial paper and other
short-term borrowings
|
93 | - | - | 93 | ||||||||||||
|
Long-term debt
|
(113 | ) | - | (372 | ) | (485 | ) | |||||||||
|
Total
|
$ | (18 | ) | $ | 2,301 | $ | 46 | $ | 2,329 | |||||||
| Six Months Ended June 30, 2010 | ||||||||||||||||
|
Corporate loans
|
$ | 2 | $ | - | $ | 46 | $ | 48 | ||||||||
|
Loans held-for-sale
|
- | 5,127 | 252 | 5,379 | ||||||||||||
|
Securities financing agreements
|
- | - | 98 | 98 | ||||||||||||
|
Other assets
|
- | - | 46 | 46 | ||||||||||||
|
Long-term deposits
|
- | - | (112 | ) | (112 | ) | ||||||||||
|
Asset-backed secured financings
|
- | (41 | ) | - | (41 | ) | ||||||||||
|
Unfunded loan commitments
|
- | - | (67 | ) | (67 | ) | ||||||||||
|
Commercial paper and other
short-term borrowings
|
(195 | ) | - | - | (195 | ) | ||||||||||
|
Long-term debt
|
876 | - | 1,401 | 2,277 | ||||||||||||
|
Total
|
$ | 683 | $ | 5,086 | $ | 1,664 | $ | 7,433 | ||||||||
The fair values of financial instruments have been derived using methodologies described
in
Note 22 — Fair Value Measurements
to the Consolidated Financial Statements of the
Corporation’s 2010 Annual Report on Form 10-K. The following disclosures include financial
instruments where only a portion of the ending balances at June 30, 2011 and December 31, 2010 is
carried at fair value on the Corporation’s 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.
212
Table of Contents
Loans
Fair values for loans 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 Corporation’s 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 the applicable allowance for loan and
lease losses and excludes leases. The Corporation elected to account for certain large corporate
loans which exceeded the Corporation’s single name credit risk concentration guidelines 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 non-U.S. time deposits approximates fair value. For deposits with no stated
maturities, the carrying value was considered to approximate fair value and does not take into
account the significant value of the cost advantage and stability of the Corporation’s 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.
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 terms and maturities. The
Corporation accounts for certain structured notes under the fair value option.
Fair Value of Financial Instruments
The carrying values and fair values of certain financial instruments that are not carried at
fair value at June 30, 2011 and December 31, 2010 are presented in the table below.
| June 30, 2011 | December 31, 2010 | |||||||||||||||
| Carrying | Fair | Carrying | Fair | |||||||||||||
| (Dollars in millions) | Value | Value | Value | Value | ||||||||||||
|
Financial assets
|
||||||||||||||||
|
Loans
|
$ | 882,653 | $ | 862,646 | $ | 876,739 | $ | 861,695 | ||||||||
|
Financial liabilities
|
||||||||||||||||
|
Deposits
|
1,038,408 | 1,038,436 | 1,010,430 | 1,010,460 | ||||||||||||
|
Long-term debt
|
426,659 | 426,645 | 448,431 | 441,672 | ||||||||||||
213
Table of Contents
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-lien MSRs for the three and six
months ended June 30, 2011 and 2010. Commercial and residential reverse MSRs, which are carried at
the lower of cost or market value and accounted for using the amortization method, totaled $270
million and $278 million at June 30, 2011 and December 31, 2010, and are not included in the
tables in this Note.
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30 | June 30 | |||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Balance, beginning of period
|
$ | 15,282 | $ | 18,842 | $ | 14,900 | $ | 19,465 | ||||||||
|
Net additions
|
176 | 882 | 1,017 | 2,013 | ||||||||||||
|
Impact of customer payments
(1)
|
(639 | ) | (981 | ) | (1,345 | ) | (2,037 | ) | ||||||||
|
Impact of changes in interest rates and other market factors
(2)
|
(1,094 | ) | (3,817 | ) | (385 | ) | (4,000 | ) | ||||||||
|
Model and other cash flow assumption changes:
(3)
|
||||||||||||||||
|
Projected cash flows, primarily due to increases in cost to service
loans
|
(1,501 | ) | (524 | ) | (2,029 | ) | (1,076 | ) | ||||||||
|
Impact of changes in the Home Price Index
|
212 | (34 | ) | 434 | (34 | ) | ||||||||||
|
Impact of changes to the prepayment model
|
303 | 385 | 126 | 427 | ||||||||||||
|
Other model changes
|
(367 | ) | (8 | ) | (346 | ) | (13 | ) | ||||||||
|
Balance, June 30
|
$ | 12,372 | $ | 14,745 | $ | 12,372 | $ | 14,745 | ||||||||
|
Mortgage loans serviced for investors (in billions)
|
$ | 1,578 | $ | 1,706 | $ | 1,578 | $ | 1,706 | ||||||||
| (1) |
Represents the change in the market value of the MSR asset due to the impact of customer payments received during the period.
|
|
| (2) |
These amounts reflect the changes in modeled MSR market value largely due to observed changes in interest rates, volatility,
spreads and the shape of the forward swap curve.
|
|
| (3) |
These amounts reflect periodic adjustments to the valuation model, as well as changes in certain cash flow assumptions, such
as costs to service and ancillary income per loan.
|
The Corporation uses an option-adjusted spread (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 June 30, 2011 and December 31, 2010 are presented below.
| June 30, 2011 | December 31, 2010 | |||||||||||||||
| (Dollars in millions) | Fixed | Adjustable | Fixed | Adjustable | ||||||||||||
|
Weighted-average OAS
|
2.28 | % | 2.21 | % | 2.21 | % | 3.25 | % | ||||||||
|
Weighted-average life, in years
|
4.86 | 2.47 | 4.85 | 2.29 | ||||||||||||
214
Table of Contents
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 MSRs that continue 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.
| June 30, 2011 | |||||||||||||
| Change in | |||||||||||||
| Weighted-average Lives | |||||||||||||
| Change in | |||||||||||||
| (Dollars in millions) | Fixed | Adjustable | Fair Value | ||||||||||
|
Prepayment rates
|
|||||||||||||
|
Impact of 10% decrease
|
0.30 | years | 0.17 | years | $ | 800 | |||||||
|
Impact of 20% decrease
|
0.65 | 0.37 | 1,696 | ||||||||||
|
|
|||||||||||||
|
Impact of 10% increase
|
(0.27 | ) | (0.15 | ) | (719 | ) | |||||||
|
Impact of 20% increase
|
(0.52 | ) | (0.28 | ) | (1,370 | ) | |||||||
|
OAS level
|
|||||||||||||
|
Impact of 100 bps decrease
|
n/a | n/a | $ | 740 | |||||||||
|
Impact of 200 bps decrease
|
n/a | n/a | 1,551 | ||||||||||
|
|
|||||||||||||
|
Impact of 100 bps increase
|
n/a | n/a | (677 | ) | |||||||||
|
Impact of 200 bps increase
|
n/a | n/a | (1,298 | ) | |||||||||
|
n/a = not applicable
|
The Corporation reports the results of its operations through six business segments:
Deposits, Global Card Services, Consumer Real Estate Services
,
Global Commercial Banking,
Global Banking & Markets
and
Global Wealth & Investment Management
, with the
remaining operations recorded in
All Other
. For more information on each business segment, see
Note 26 — Business Segment Information
to the Consolidated Financial Statements of the
Corporation’s 2010 Annual Report on Form 10-K.
Basis of Presentation
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.
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. For presentation purposes, in segments where the total of liabilities and equity
exceeds assets, which are generally deposit-taking segments, the Corporation allocates assets to
match liabilities. Net interest income of the business segments also includes an allocation of net
interest income generated by the Corporation’s ALM activities.
The Corporation’s ALM activities include 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 Corporation’s goal is to manage interest rate sensitivity
so that movements in interest rates do not significantly adversely affect net interest income. The
Corporation’s 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 Corporation’s internal funds transfer pricing process and the net
effects of other ALM activities.
215
Table of Contents
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.
The following tables present total revenue, net of interest expense, on a FTE basis and net
income (loss) for the three and six months ended June 30, 2011 and 2010, and total assets at June
30, 2011 and 2010 for each business segment, as well as
All Other
.
| Business Segments | ||||||||||||||||||||||||
| Three Months Ended June 30 | ||||||||||||||||||||||||
| Total Corporation (1) | Deposits | Global Card Services | ||||||||||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
|
Net interest income
(2)
|
$ | 11,493 | $ | 13,197 | $ | 2,281 | $ | 2,144 | $ | 3,611 | $ | 4,442 | ||||||||||||
|
Noninterest income
|
1,990 | 16,253 | 1,020 | 1,551 | 1,925 | 2,506 | ||||||||||||||||||
|
Total revenue, net of interest expense
|
13,483 | 29,450 | 3,301 | 3,695 | 5,536 | 6,948 | ||||||||||||||||||
|
Provision for credit losses
|
3,255 | 8,105 | 31 | 61 | 481 | 3,796 | ||||||||||||||||||
|
Amortization of intangibles
|
382 | 439 | 39 | 49 | 183 | 203 | ||||||||||||||||||
|
Other noninterest expense
|
22,474 | 16,814 | 2,560 | 2,523 | 1,699 | 1,649 | ||||||||||||||||||
|
Income (loss) before income taxes
|
(12,628 | ) | 4,092 | 671 | 1,062 | 3,173 | 1,300 | |||||||||||||||||
|
Income tax expense (benefit)
(2)
|
(3,802 | ) | 969 | 241 | 388 | 1,138 | 474 | |||||||||||||||||
|
Net income (loss)
|
$ | (8,826 | ) | $ | 3,123 | $ | 430 | $ | 674 | $ | 2,035 | $ | 826 | |||||||||||
|
Period-end total assets
|
$ | 2,261,319 | $ | 2,368,384 | $ | 449,123 | $ | 439,770 | $ | 161,756 | $ | 184,213 | ||||||||||||
| Consumer Real | Global Commercial | Global Banking & | ||||||||||||||||||||||
| Estate Services | Banking | Markets | ||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||
|
Net interest income
(2)
|
$ | 579 | $ | 992 | $ | 1,827 | $ | 2,097 | $ | 1,791 | $ | 2,002 | ||||||||||||
|
Noninterest income (loss)
|
(11,894 | ) | 1,712 | 983 | 786 | 5,005 | 3,902 | |||||||||||||||||
|
Total revenue, net of interest expense
|
(11,315 | ) | 2,704 | 2,810 | 2,883 | 6,796 | 5,904 | |||||||||||||||||
|
Provision for credit losses
|
1,507 | 2,390 | (417 | ) | 623 | (82 | ) | (133 | ) | |||||||||||||||
|
Amortization of intangibles
|
4 | 13 | 15 | 18 | 29 | 37 | ||||||||||||||||||
|
Other noninterest expense
|
8,643 | 2,725 | 1,053 | 956 | 4,684 | 4,698 | ||||||||||||||||||
|
Income (loss) before income taxes
|
(21,469 | ) | (2,424 | ) | 2,159 | 1,286 | 2,165 | 1,302 | ||||||||||||||||
|
Income tax expense (benefit)
(2)
|
(6,949 | ) | (882 | ) | 778 | 471 | 607 | 404 | ||||||||||||||||
|
Net income (loss)
|
$ | (14,520 | ) | $ | (1,542 | ) | $ | 1,381 | $ | 815 | $ | 1,558 | $ | 898 | ||||||||||
|
Period-end total assets
|
$ | 185,398 | $ | 223,998 | $ | 280,289 | $ | 306,234 | $ | 691,249 | $ | 718,563 | ||||||||||||
| Global Wealth & | ||||||||||||||||||||||||
| Investment Management | All Other | |||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||
|
Net interest income
(2)
|
$ | 1,571 | $ | 1,443 | $ | (167 | ) | $ | 77 | |||||||||||||||
|
Noninterest income
|
2,919 | 2,746 | 2,032 | 3,050 | ||||||||||||||||||||
|
Total revenue, net of interest expense
|
4,490 | 4,189 | 1,865 | 3,127 | ||||||||||||||||||||
|
Provision for credit losses
|
72 | 122 | 1,663 | 1,246 | ||||||||||||||||||||
|
Amortization of intangibles
|
112 | 117 | - | 2 | ||||||||||||||||||||
|
Other noninterest expense
|
3,519 | 3,152 | 316 | 1,111 | ||||||||||||||||||||
|
Income (loss) before income taxes
|
787 | 798 | (114 | ) | 768 | |||||||||||||||||||
|
Income tax expense (benefit)
(2)
|
281 | 469 | 102 | (355 | ) | |||||||||||||||||||
|
Net income (loss)
|
$ | 506 | $ | 329 | $ | (216 | ) | $ | 1,123 | |||||||||||||||
|
Period-end total assets
|
$ | 284,294 | $ | 252,507 | $ | 209,210 | $ | 243,099 | ||||||||||||||||
| (1) |
There were no material intersegment revenues.
|
|
| (2) |
FTE basis
|
216
Table of Contents
| Business Segments | ||||||||||||||||||||||||
| Six Months Ended June 30 | ||||||||||||||||||||||||
| Total Corporation (1) | Deposits | Global Card Services | ||||||||||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
|
Net interest income
(2)
|
$ | 23,890 | $ | 27,267 | $ | 4,486 | $ | 4,319 | $ | 7,358 | $ | 9,262 | ||||||||||||
|
Noninterest income
|
16,688 | 34,473 | 2,004 | 3,094 | 3,865 | 4,576 | ||||||||||||||||||
|
Total revenue, net of interest expense
|
40,578 | 61,740 | 6,490 | 7,413 | 11,223 | 13,838 | ||||||||||||||||||
|
Provision for credit losses
|
7,069 | 17,910 | 64 | 98 | 1,442 | 7,331 | ||||||||||||||||||
|
Amortization of intangibles
|
767 | 885 | 78 | 98 | 367 | 407 | ||||||||||||||||||
|
Other noninterest expense
|
42,372 | 34,143 | 5,113 | 5,041 | 3,484 | 3,257 | ||||||||||||||||||
|
Income (loss) before income taxes
|
(9,630 | ) | 8,802 | 1,235 | 2,176 | 5,930 | 2,843 | |||||||||||||||||
|
Income tax expense (benefit)
(2)
|
(2,853 | ) | 2,497 | 450 | 804 | 2,160 | 1,049 | |||||||||||||||||
|
Net income (loss)
|
$ | (6,777 | ) | $ | 6,305 | $ | 785 | $ | 1,372 | $ | 3,770 | $ | 1,794 | |||||||||||
|
Period-end total assets
|
$ | 2,261,319 | $ | 2,368,384 | $ | 449,123 | $ | 439,770 | $ | 161,756 | $ | 184,213 | ||||||||||||
| Consumer Real | Global Commercial | Global Banking & | ||||||||||||||||||||||
| Estate Services | Banking | Markets | ||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||
|
Net interest income
(2)
|
$ | 1,475 | $ | 2,199 | $ | 3,677 | $ | 4,290 | $ | 3,828 | $ | 4,172 | ||||||||||||
|
Noninterest income (loss)
|
(10,727 | ) | 4,038 | 1,784 | 1,685 | 10,854 | 11,425 | |||||||||||||||||
|
Total revenue, net of interest expense
|
(9,252 | ) | 6,237 | 5,461 | 5,975 | 14,682 | 15,597 | |||||||||||||||||
|
Provision for credit losses
|
2,605 | 5,990 | (338 | ) | 1,559 | (284 | ) | 103 | ||||||||||||||||
|
Amortization of intangibles
|
11 | 25 | 29 | 37 | 59 | 73 | ||||||||||||||||||
|
Other noninterest expense
|
13,437 | 5,960 | 2,145 | 1,968 | 9,376 | 8,951 | ||||||||||||||||||
|
Income (loss) before income taxes
|
(25,305 | ) | (5,738 | ) | 3,625 | 2,411 | 5,531 | 6,470 | ||||||||||||||||
|
Income tax expense (benefit)
(2)
|
(8,370 | ) | (2,119 | ) | 1,321 | 891 | 1,839 | 2,333 | ||||||||||||||||
|
Net income (loss)
|
$ | (16,935 | ) | $ | (3,619 | ) | $ | 2,304 | $ | 1,520 | $ | 3,692 | $ | 4,137 | ||||||||||
|
Period-end total assets
|
$ | 185,398 | $ | 223,998 | $ | 280,289 | $ | 306,234 | $ | 691,249 | $ | 718,563 | ||||||||||||
| Global Wealth & | ||||||||||||||||||||||||
| Investment Management | All Other | |||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||
|
Net interest income
(2)
|
$ | 3,140 | $ | 2,907 | $ | (74 | ) | $ | 118 | |||||||||||||||
|
Noninterest income
|
5,842 | 5,323 | 3,066 | 4,332 | ||||||||||||||||||||
|
Total revenue, net of interest expense
|
8,982 | 8,230 | 2,992 | 4,450 | ||||||||||||||||||||
|
Provision for credit losses
|
118 | 363 | 3,462 | 2,466 | ||||||||||||||||||||
|
Amortization of intangibles
|
223 | 233 | - | 12 | ||||||||||||||||||||
|
Other noninterest expense
|
7,007 | 6,135 | 1,810 | 2,831 | ||||||||||||||||||||
|
Income (loss) before income taxes
|
1,634 | 1,499 | (2,280 | ) | (859 | ) | ||||||||||||||||||
|
Income tax expense (benefit)
(2)
|
595 | 731 | (848 | ) | (1,192 | ) | ||||||||||||||||||
|
Net income (loss)
|
$ | 1,039 | $ | 768 | $ | (1,432 | ) | $ | 333 | |||||||||||||||
|
Period-end total assets
|
$ | 284,294 | $ | 252,507 | $ | 209,210 | $ | 243,099 | ||||||||||||||||
| (1) |
There were no material intersegment revenues.
|
|
| (2) |
FTE basis
|
217
Table of Contents
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 June 30 | Six Months Ended June 30 | |||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Segments’ total revenue, net of interest expense
(1)
|
$ | 11,618 | $ | 26,323 | $ | 37,586 | $ | 57,290 | ||||||||
|
Adjustments:
|
||||||||||||||||
|
ALM activities
|
1,145 | 976 | 910 | 1,726 | ||||||||||||
|
Equity investment income
|
1,139 | 2,253 | 2,547 | 2,765 | ||||||||||||
|
Liquidating businesses
|
62 | 444 | 112 | 1,048 | ||||||||||||
|
FTE basis adjustment
|
(247 | ) | (297 | ) | (465 | ) | (618 | ) | ||||||||
|
Other
|
(481 | ) | (546 | ) | (577 | ) | (1,089 | ) | ||||||||
|
Consolidated revenue, net of interest expense
|
$ | 13,236 | $ | 29,153 | $ | 40,113 | $ | 61,122 | ||||||||
|
Segments’ net income (loss)
|
$ | (8,610 | ) | $ | 2,000 | $ | (5,345 | ) | $ | 5,972 | ||||||
|
Adjustments, net-of-tax:
|
||||||||||||||||
|
ALM activities
|
(535 | ) | (452 | ) | (1,945 | ) | (479 | ) | ||||||||
|
Equity investment income
|
718 | 1,419 | 1,605 | 1,742 | ||||||||||||
|
Liquidating businesses
|
(9 | ) | 103 | (44 | ) | 272 | ||||||||||
|
Merger and restructuring charges
|
101 | 320 | 228 | 648 | ||||||||||||
|
Other
|
(491 | ) | (267 | ) | (1,276 | ) | (1,850 | ) | ||||||||
|
Consolidated net income (loss)
|
$ | (8,826 | ) | $ | 3,123 | $ | (6,777 | ) | $ | 6,305 | ||||||
| (1) |
FTE basis
|
| June 30 | ||||||||
| (Dollars in millions) | 2011 | 2010 | ||||||
|
Segments’ total assets
|
$ | 2,052,109 | $ | 2,125,285 | ||||
|
Adjustments:
|
||||||||
|
ALM activities, including securities portfolio
|
639,220 | 586,609 | ||||||
|
Equity investments
|
30,995 | 35,450 | ||||||
|
Liquidating businesses
|
10,078 | 33,026 | ||||||
|
Elimination of segment excess asset allocations to match liabilities
|
(629,621 | ) | (603,543 | ) | ||||
|
Other
|
158,538 | 191,557 | ||||||
|
Consolidated total assets
|
$ | 2,261,319 | $ | 2,368,384 | ||||
218
Table of Contents
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 Corporation’s 2010 Annual Report on
Form 10-K and in
Note 11 – Commitments and Contingencies
to the Consolidated Financial Statements
of the Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011.
There are no material changes from the risk factors set forth under Part 1, Item 1A.
Risk Factors in the Corporation’s 2010 Annual Report on Form 10-K, other than the addition of the
following risk factors.
Mortgage and Housing Related Risk
We have been, and expect to continue to be, required to repurchase mortgage loans and/or
reimburse the GSEs and monolines for losses due to claims related to representations and
warranties made in connection with sales of RMBS and mortgage loans, and have received similar
claims, and may receive additional claims, from whole loan purchasers, private-label
securitization investors and private-label securitization trustees, monolines and others. We have
recorded provisions for certain of these exposures and have settled others on a bulk basis.
However, the ultimate resolution of these exposures could have a material adverse effect on our
cash flows, financial condition and results of operations.
In connection with loans sold to GSEs and investors other than GSEs, we or our
subsidiaries or legacy companies made various representations and warranties. Breaches of these
representations and warranties may result in a requirement that we repurchase mortgage loans, or
indemnify or provide other remedies to counterparties. Bank of America and legacy Countrywide sold
approximately $1.1 trillion of loans originated from 2004 through 2008 to the GSEs. In addition,
legacy companies and certain subsidiaries sold loans originated from 2004 through 2008 with an
original principal balance of $963 billion to investors other than GSEs.
The amount of our total unresolved repurchase claims from all sources totaled approximately $11.6 billion at June 30,
2011. These repurchase claims include $1.7 billion in demands from investors (none of whom are in the Investor Group) in the Covered Trusts received in the third
quarter of 2010, but otherwise do not include any repurchase claims related to the Covered Trusts. The total amount of our
recorded liability related to representations and warranties repurchase exposure was $17.8 billion at June 30, 2011. We
recorded a provision of $14.0 billion in the three months ended June 30, 2011, of which $8.6 billion was for the BNY
Mellon Settlement and $5.4 billion was for non-GSE and to a lesser extent GSE exposures.
It is reasonably possible that future representations and warranties losses may occur in
excess of the amounts recorded for non-GSE exposures. Our estimated liability and range of
possible loss with respect to non-GSE transactions is necessarily dependent on, and limited by,
our historical claims experience with non-GSE investors and may materially change in the future
based on factors beyond our control. Future provisions and/or estimated ranges of possible loss
associated with representations and warranties made in non-GSE transactions may be materially
impacted if actual results are different from our assumptions in our predictive models, including, without limitation, those regarding ultimate resolution of the BNY Mellon Settlement, estimated repurchase rates, economic conditions, home prices, consumer and counterparty behavior, and a variety of
judgmental factors. In addition, we have not recorded any representations and warranties
liability for certain potential monoline exposures and certain potential whole loan and other
private-label exposures. After giving effect to the BNY Mellon Settlement and the
additional representations and warranties provisions recorded in the three months ended June 30,
2011, we currently estimate that the range of possible loss related to non-GSE representations and
warranties exposure could be up to $5 billion over existing accruals at June 30, 2011. This
estimated range of possible loss for non-GSE representations and warranties does not
represent a probable loss, is based on currently available information, significant judgment and a
number of other assumptions that are subject to change, including the assumption that the
conditions to the BNY Mellon Settlement are satisfied. Adverse developments with respect to one or
more of the assumptions underlying the liability for non-GSE
representations and warranties and the corresponding estimated range of
possible loss could result in significant increases to
future provisions and/or this range of possible loss estimate. For example, if courts were to
disagree with our interpretation that the underlying agreements require a claimant to prove that
the representations and warranties breach was the cause of the loss, it could significantly impact
this estimated range of possible loss. Additionally, if recent court rulings
219
Table of Contents
related to monoline litigation, including one related to us, that have allowed sampling of loan
files instead of a loan-by-loan review to determine if a representations and warranties breach has
occurred are followed generally by the courts, private-label securitization investors may view litigation as
a more attractive alternative as compared to a loan-by-loan review. If these or other developments
cause our actual future experience to differ materially from the assumptions underlying this
estimated range of possible loss, the resolution of our non-GSE representations and warranties
exposure could have a material adverse effect on our cash flows, financial condition and results
of operations.
Our estimated liability with respect to the GSEs is necessarily dependent on, and limited by,
our historical claims experience with the GSEs and may materially change in the future based on
factors beyond our control. Future provisions associated with representations and warranties made
to the GSEs may be materially impacted if actual results are different from the Corporation’s
assumptions regarding economic conditions, home prices and other matters, including the repurchase
behavior of the GSEs and our estimated repurchase rates (including changes related to the
announcement in the second quarter of 2011 by Fannie Mae regarding mortgage insurance rescissions,
cancellations and claim denials with respect to loans sold to it). We are not able to anticipate
changes in the behavior of the GSEs from our past experiences. Therefore, it is not possible to
reasonably estimate a possible loss or range of possible loss with respect to any such potential impact in
excess of current accruals on future GSE provisions if the behavior of the GSEs changes from past
experience; however, any such loss could have a material adverse effect on our cash flows,
financial condition and results of operations.
The liability for obligations under representations and warranties with respect to GSE and non-GSE exposures and the
corresponding estimated range of possible loss related to non-GSE representations and warranties
exposures do not include any losses related to litigation
matters disclosed in
Note 11 –
Commitments and Contingencies
to the Consolidated Financial Statements, nor do they include any
separate foreclosure costs and related costs and assessments or any possible losses related to
potential claims for breaches of performance of servicing obligations, potential securities law or
fraud claims or potential indemnity or other claims against us. We are not able to reasonably
estimate the amount of any possible loss with respect to any such servicing, securities law
(except to the extent reflected in the aggregate range of possible loss for litigation and
regulatory matters disclosed in
Note 11 – Commitments and Contingencies
to the Consolidated
Financial Statements), fraud or other claims against us; however, such loss could have a material
adverse effect on our cash flows, financial condition and results of operations.
For additional information about our representations and warranties exposure, see Recent
Events – Private-label Securitization Settlement with the Bank of New York Mellon in the MD&A on
page 8, Off-Balance Sheet Arrangements and Contractual Obligations
– Representations and
Warranties in the MD&A on page 51 and
Note 9 – Representations and Warranties Obligations and
Corporate Guarantees
to the Consolidated Financial Statements.
If final court approval is not obtained with respect to the BNY Mellon Settlement to resolve
nearly all of the legacy Countrywide-issued first-lien non-GSE RMBS repurchase exposures of the
2004-2008 vintages, or if the Corporation and legacy Countrywide determine to withdraw from the
BNY Mellon Settlement in accordance with its terms, the Corporation’s future representations and
warranties losses could be substantially different than existing accruals and the estimated range
of possible loss over existing accruals, and consequently could have a material adverse effect on
our cash flows, financial condition and results of operations.
Given the number of Covered Trusts under the BNY Mellon Settlement, the number of investors
in those Covered Trusts and the complexity of the settlement with a trustee for multiple trusts,
it is not possible to predict how many investors will seek to intervene in the court proceeding,
how many of those and other investors may ultimately object to the BNY Mellon Settlement or the
timing or ultimate outcome of the court approval process. Several alleged investors outside the
Investor Group have filed, and the court has granted, petitions to intervene as parties in the
pending court proceeding. Certain of these intervenors have stated that they intend to object to
the BNY Mellon Settlement, while others have said that they need more information in order to
determine whether to object and indicated that they therefore intend to seek discovery. In
addition, it is possible that a substantial number of additional investors outside the Investor
Group will also seek to intervene as parties, and some intervenors and other investors may object
to the BNY Mellon Settlement. The resolutions of the objections of intervenors and/or other
investors who object may materially delay or prevent receipt of final court approval. There can be
no assurance that final court approval of the settlement will be obtained, that all conditions
will be satisfied (including the receipt of private letter rulings from the IRS and other tax
rulings and opinions) or that, if certain conditions in the BNY Mellon Settlement permitting
withdrawal are met, the Corporation and legacy Countrywide will not determine to withdraw from the
BNY Mellon Settlement agreement.
If final court approval is not obtained with respect to the BNY Mellon Settlement or if the
Corporation and legacy Countrywide determine to withdraw from the BNY Mellon Settlement agreement
in accordance with its terms, the
220
Table of Contents
provision recorded in connection with the BNY Mellon Settlement, and the additional
representations and warranties provisions recorded in the three months ended June 30, 2011, could
be insufficient to provide for a substantial portion of the Corporation’s non-GSE representations
and warranties exposures. In those circumstances, the Corporation’s future representations and
warranties losses with respect to non-GSEs could substantially exceed our non-GSE reserve,
together with estimated reasonably possible loss related to non-GSE representations and warranties
exposure of up to $5 billion over existing accruals at June 30, 2011. Developments with respect to
one or more of the assumptions underlying the estimated range of possible loss for non-GSE
representations and warranties (including the timing and ultimate outcome of the court approval
process relating to the BNY Mellon Settlement) could result in significant increases in our
non-GSE reserve and/or to this estimated range of possible loss, and such increases could
have a material adverse effect on our cash flows, financial condition and results of operations.
Credit Risk and Market Risk
A
downgrade in the U.S. government’s sovereign credit rating, or in the credit ratings of instruments issued, insured or guaranteed by related
institutions, agencies or instrumentalities, could result in risks to the Corporation and general economic conditions that we are not able to predict. In addition, uncertainty about the financial stability of several countries in the
European Union (EU), the increasing risk that those countries may default on their sovereign debt
and related stresses on financial markets could have a significant adverse effect on our
business, results of operations and financial condition, which in turn could adversely affect
our stock price.
On July 13, 2011, Moody’s placed the U.S. government under review for a possible credit
ratings downgrade, and on August 2, 2011, Moody’s confirmed the U.S. government’s existing sovereign
rating, but stated that the rating outlook is negative. On July 14, 2011, S&P placed its sovereign
credit ratings of the U.S. government on CreditWatch with negative implications. On August
2, 2011, Fitch affirmed its existing sovereign rating of the U.S. government, but stated
that the rating is under review. There continues to be
the perceived risk of a sovereign credit ratings downgrade of the U.S. government, including the
rating of U.S. Treasury securities. It is foreseeable that the ratings and perceived creditworthiness of instruments issued, insured or guaranteed by institutions,
agencies or instrumentalities directly linked to the U.S. government could also be
correspondingly affected by any such downgrade. Instruments of this nature are key assets on the
balance sheets of financial institutions, including the Corporation, and are widely used as
collateral by financial institutions to meet their day-to-day cash flows in the short-term debt
market. A downgrade of the sovereign credit ratings of the U.S. government and perceived
creditworthiness of U.S. government-related obligations could impact our ability to obtain funding
that is collateralized by affected instruments, as well as affecting the pricing of that funding
when it is available. A downgrade may also adversely affect the market value of such instruments.
We cannot predict if, when or how any changes to the credit ratings or perceived creditworthiness
of these organizations will affect economic conditions. Such ratings actions could result in a
significant adverse impact to the Corporation. In addition, the Corporation presently delivers a
material portion of the residential mortgage loans it originates into the government-sponsored
institutions, agencies or instrumentalities (or instruments insured or guaranteed thereby).
We cannot predict if, when or how any changes to the credit
ratings of these organizations will affect their ability to finance residential mortgage loans.
Such ratings actions, if any, could result in a significant change to the business operations of
CRES
.
A
downgrade of the sovereign credit ratings of the U.S. government or the credit ratings of
related institutions, agencies or instrumentalities would significantly exacerbate the other
risks to which the Corporation is subject and any related adverse effects on our business, financial
condition and results of operations, including those described under Risk Factors – Credit
Risk – “We could suffer losses as a result of the actions of or deterioration in the commercial
soundness of our counterparties and other financial services institutions,” Risk Factors – Market
Risk – “Our businesses and results of operations have been, and may continue to be, significantly
adversely affected by changes in the levels of market volatility and by other financial or
capital market conditions” and Risk Factors – Liquidity Risk – “Our liquidity, cash flows,
financial condition and results of operations, and competitive position may be significantly
adversely affected if we are unable to access capital markets, continue to raise deposits,
sell assets on favorable terms, or if there is an increase in our borrowing costs” in the
Corporation’s 2010 Annual Report on Form 10-K.
In
2010, a financial crisis emerged in Europe, triggered by high budget deficits and rising
direct and contingent sovereign debt in Greece, Ireland, Italy, Portugal and Spain, which
created concerns about the ability of these EU “peripheral nations” to continue to service
their sovereign debt obligations. These conditions impacted financial markets and resulted
in high and volatile bond yields on the sovereign debt of many EU nations. Certain European
nations continue to experience varying degrees of financial stress, and yields on
government-issued bonds in Greece, Ireland, Italy, Portugal and Spain have risen and remain
volatile. Despite assistance packages to Greece, Ireland and Portugal, the creation of a
joint EU-IMF European Financial Stability Facility in May 2010, and a recently announced
plan to expand financial
assistance to Greece,
uncertainty over the outcome of the EU governments’ financial support programs and worries
about sovereign finances persist. Market concerns over the direct and indirect exposure
of European banks and insurers to the EU peripheral nations has resulted in a widening
of credit spreads and increased costs of funding for some European financial institutions.
221
Table of Contents
Risks
and ongoing concerns about the debt crisis in Europe could have a detrimental impact on the
global economic recovery, sovereign and non-sovereign debt in these countries and the financial
condition of European financial institutions. Market and economic disruptions have affected,
and may continue to affect, consumer confidence levels and spending, personal bankruptcy rates,
levels of incurrence and default on consumer debt and home prices, among other factors. There
can be no assurance that the market disruptions in Europe, including the increased cost of
funding for certain governments and financial institutions, will not spread, nor can there
be any assurance that future assistance packages will be available or, even if provided,
will be sufficient to stabilize the affected countries and markets in Europe or elsewhere.
To the extent uncertainty regarding the economic recovery continues to negatively impact
consumer confidence and consumer credit factors, our business and results of operations
could be significantly and adversely affected. For example, global economic uncertainty,
regulatory initiatives and reform have impacted, and will likely continue to impact,
non-U.S. credit and trading portfolios. Our regional Risk Committee, a subcommittee of
our Credit Risk Committee, will continue to monitor and manage this risk but there can be
no assurance our efforts in this respect will be sufficient or successful. For a further
discussion of our direct sovereign and non-sovereign exposures in Europe, see Second Quarter
2011 Economic and Business Environment on page 7 of the MD&A and Non-U.S. Portfolio on
page 103 of the MD&A.
Liquidity Risk
Adverse changes to our credit ratings from the major credit ratings agencies could have a
material adverse effect on our liquidity, cash flows, competitive position, financial condition and
results of operations by significantly limiting our access to the funding or capital markets,
increasing our borrowing costs, or triggering additional collateral
or funding requirements.
Our borrowing costs and ability to obtain funding 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 OTC derivatives. Credit ratings and outlooks are opinions on our creditworthiness and that of
our obligations or securities, including long-term debt, short-term borrowings, preferred stock and other securities,
including asset-backed and mortgage-backed securities. Our credit ratings are subject to ongoing review by the rating
agencies and thus may change from time to time 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 for our industry or
certain security types, which are subject to revision from time to time, and conditions affecting the financial services
industry generally. There can be no assurance that we will maintain our current credit ratings.
On June 2, 2011, Moody’s placed our ratings on review for possible downgrade from
negative outlook due to its view that the current level of U.S. government support incorporated
into our ratings may no longer be appropriate. The ratings agencies have indicated that, as a
systemically important financial institution, our credit ratings currently reflect their
expectation that, if necessary, we would receive significant support from the U.S. government. 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.
Currently, our long-term senior debt ratings and outlooks expressed by the ratings agencies
are as follows: A2 (review for possible downgrade) by Moody’s; A (negative) by S&P; and A+ (Rating
Watch Negative) by Fitch. A reduction in certain of our credit ratings 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 our short-term credit ratings, or those of our bank or
broker-dealer subsidiaries, were downgraded by one or more levels, the potential loss of
short-term funding sources such as commercial paper or repo financing, and the effect on our
incremental cost of funds would be material. While certain potential impacts of a downgrade are contractual and quantifiable, the full scope of consequences to a credit rating downgrade is inherently uncertain, as it depends upon numerous dynamic,
complex and inter-related factors and assumptions, including whether any downgrade of our long-term credit ratings
precipitates downgrades to our short-term credit ratings, and assumptions about the behavior of various customers,
investors and counterparties, whose responses to a downgrade are unknown and not reasonably knowable in advance.
For additional information about our credit ratings and their potential effects to our
liquidity, see Liquidity Risk – Credit Ratings in the MD&A
on page 74 and
Note 4 – Derivatives
to the Consolidated Financial Statements.
222
Table of Contents
The table below presents share repurchase activity for the three months ended June 30,
2011. 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 Corporation’s preferred
stock outstanding has preference over the Corporation’s common stock with respect to the payment
of dividends.
| Shares Purchased as | ||||||||||||||||||||
|
(Dollars in millions, except per
|
Common Shares | Weighted-average | Part of Publicly | Remaining Buyback Authority | ||||||||||||||||
|
share information; shares in thousands)
|
Repurchased (1) | Per Share Price | Announced Programs | Amounts | Shares | |||||||||||||||
|
April 1-30, 2011
|
101,310 | $ | 13.79 | - | $ | - | - | |||||||||||||
|
May 1-31, 2011
|
99,935 | 13.88 | - | - | - | |||||||||||||||
|
June 1-30, 2011
|
9,925 | 12.35 | - | - | - | |||||||||||||||
|
Three months ended June 30, 2011
|
211,170 | 13.76 | ||||||||||||||||||
| (1) |
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 June 30, 2011.
In light of the previously announced voting results for the Corporation’s advisory vote
on the frequency of future advisory stockholder votes on executive compensation held at its 2011
Annual Meeting of Stockholders, and consistent with the recommendation of the Corporation’s Board
of Directors on that proposal, the Corporation has decided that it will hold future advisory votes
on executive compensation each year until the next advisory vote on frequency occurs. The
Corporation is required to hold an advisory vote on frequency at least every six years.
223
Table of Contents
|
Exhibit 3(a)
|
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 Corporation’s Quarterly Report on Form 10-Q (File No.
1-6523) for the quarter ended June 30, 2010
|
|
|
|
||
|
Exhibit 3(b)
|
Amended and Restated Bylaws of the Corporation, as in effect on the date hereof incorporated herein by
reference to Exhibit 3(b) of the Corporation’s 2010 Annual Report on Form 10-K (File No. 1-6523) filed on
February 25, 2011
|
|
|
|
||
|
Exhibit 4(a)
|
Supplemental Agreement to the Amended and Restated Agency Agreement dated as of July 22, 2011 among the Bank
of America Corporation, Bank of America, N.A. (operating through its London branch), as Principal Agent, and
Merrill Lynch International Bank Limited, as Registrar and Transfer
Agent
(1)
|
|
|
|
||
|
Exhibit 10(a)
|
Form of Directors’ Stock Plan Conditional Restricted Stock Award Agreement for Non-U.S. Director
(1)
|
|
|
|
||
|
Exhibit 10(b)
|
Settlement Agreement dated as of June 28, 2011, among The Bank of New York Mellon, Bank of America
Corporation, BAC Home Loans Servicing, LP, Countrywide Financial Corporation, and Countrywide Home Loans,
Inc., incorporated by reference to Exhibit 99.2 of the Corporation’s Current Report on Form 8-K (File no.
1-6523) filed on June 29, 2011
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Exhibit 10(c)
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Institutional Investor Agreement dated as of June 28, 2011, among The Bank of New York Mellon, Bank of
America Corporation, BAC Home Loans Servicing, LP, Countrywide Financial Corporation, Countrywide Home Loans,
Inc. and the other parties thereto, incorporated by reference to Exhibit 99.3 of the Corporation’s Current
Report on Form 8-K (File no. 1-6523) filed on June 29, 2011
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Exhibit 11
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Earnings Per
Share Computation – included in
Note 14 – 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.
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224
Table of Contents
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
Registrant |
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| Date: August 4, 2011 | /s/ Neil A. Cotty | |||
| Neil A. Cotty | ||||
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Chief Accounting Officer
(Duly Authorized Officer) |
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225
Table of Contents
Bank of America Corporation
Form 10-Q
Form 10-Q
Index to Exhibits
| Exhibit | Description | |
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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 Corporation’s Quarterly Report on Form 10-Q (File No. 1-6523) for the
quarter ended June 30, 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(b) of the Corporation’s 2010 Annual Report on Form 10-K (File No. 1-6523) filed on February 25, 2011
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Exhibit 4(a)
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Supplemental Agreement to the Amended and Restated Agency Agreement dated as of July 22, 2011 among the Bank of
America Corporation, Bank of America, N.A. (operating through its London branch), as Principal Agent, and Merrill
Lynch International Bank Limited, as Registrar and Transfer Agent
(1)
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Exhibit 10(a)
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Form of Directors’ Stock Plan Conditional Restricted Stock Award Agreement for Non-U.S. Director
(1)
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Exhibit 10(b)
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Settlement Agreement dated as of June 28, 2011, among The Bank of New York Mellon, Bank of America Corporation, BAC
Home Loans Servicing, LP, Countrywide Financial Corporation, and Countrywide Home Loans, Inc., incorporated by
reference to Exhibit 99.2 of the Corporation’s Current
Report on Form 8-K (File no. 1-6523) filed on June 29, 2011
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Exhibit 10(c)
|
Institutional Investor Agreement dated as of June 28, 2011, among The Bank of New York Mellon, Bank of America
Corporation, BAC Home Loans Servicing, LP, Countrywide Financial Corporation, Countrywide Home Loans, Inc. and the
other parties thereto, incorporated by reference to Exhibit 99.3 of the Corporation’s Current Report on Form 8-K
(File no. 1-6523) filed on June 29, 2011
|
|
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Exhibit 11
|
Earnings
Per Share Computation – included in
Note 14 – Earnings Per Common Share
to the Consolidated Financial
Statements
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Exhibit 12
|
Ratio of Earnings to Fixed Charges
(1)
Ratio of Earnings to Fixed Charges and Preferred Dividends (1) |
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Exhibit 31(a)
|
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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|
||
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Exhibit 32(a)
|
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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|
||
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Exhibit 32(b)
|
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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||
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Exhibit 101.INS
|
XBRL Instance Document
(1, 2)
|
|
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|
||
|
Exhibit 101.SCH
|
XBRL Taxonomy Extension Schema Document
(1, 2)
|
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||
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Exhibit 101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document
(1, 2)
|
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Exhibit 101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document
(1, 2)
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Exhibit 101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document
(1, 2)
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Exhibit 101.DEF
|
XBRL Taxonomy Extension Definitions Linkbase Document
(1, 2)
|
| (1) |
Included herewith
|
|
| (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.
|
226
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial Statements Bank Of America Corporation and SubsidiariesItem 1. Financial StatementsNote 1 Summary Of Significant Accounting PrinciplesNote 2 Merger and Restructuring ActivityNote 3 Trading Account Assets and LiabilitiesNote 4 DerivativesNote 5 SecuritiesNote 6 Outstanding Loans and LeasesNote 7 Allowance For Credit LossesNote 8 Securitizations and Other Variable Interest EntitiesNote 9 Representations and Warranties Obligations and Corporate GuaranteesNote 10 Goodwill and Intangible AssetsNote 11 Commitments and ContingenciesNote 12 Shareholders EquityNote 13 Accumulated Other Comprehensive Income (loss)Note 14 Earnings Per Common ShareNote 15 Pension and Postretirement PlansNote 16 Fair Value MeasurementsNote 17 Fair Value OptionNote 18 Fair Value Of Financial InstrumentsNote 19 Mortgage Servicing RightsNote 20 Business Segment InformationPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 5. (a). OtherItem 6. Exhibits