Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2007

or

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

EXCHANGE ACT OF 1934

Commission file number:

1-6523

Exact name of registrant as specified in its charter:

Bank of America Corporation

State of incorporation:

Delaware

IRS Employer Identification Number:

56-0906609

Address of principal executive offices:

Bank of America Corporate Center

100 N. Tryon Street

Charlotte, North Carolina 28255

Registrant’s telephone number, including area code:

(704) 386-5681

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 is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ü      Accelerated filer      Non-accelerated filer     

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, 2007, there were 4,437,353,406 shares of Bank of America Corporation Common Stock outstanding.

 


 

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Table of Contents

Bank of America Corporation

 

June 30, 2007 Form 10-Q

INDEX

 

       Page
Part I. Financial  Information     

Item 1.      Financial Statements:

Consolidated Statement of Income for the Three and Six Months Ended June 30, 2007 and 2006

  3
    

Consolidated Balance Sheet at June 30, 2007 and December 31, 2006

  4
    

Consolidated Statement of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2007 and 2006

  5
    

Consolidated Statement of Cash Flows for the Six Months Ended
June 30, 2007 and 2006

  6
    

Notes to Consolidated Financial Statements

  7
    

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

 
    

Table of Contents

  39
    

Discussion and Analysis

  40
    

Item 3.      Quantitative and Qualitative Disclosures about Market Risk

  118
    

Item 4.      Controls and Procedures

 

  118
     

Part II.

Other 

Information

    

Item 1.      Legal Proceedings

  119
    

Item 1A.  Risk Factors

  119
    

Item 2.      Unregistered Sales of Equity Securities and the Use of Proceeds

  119
    

Item 4.      Submission of Matters to a Vote of Security Holders

  120
    

Item 6.      Exhibits

  121
    

Signature

  122
    

Index to Exhibits

  123

 

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Table of Contents

Bank of America Corporation and Subsidiaries

Consolidated Statement of Income

     Three Months Ended June 30        Six Months Ended June 30
(Dollars in millions, except per share information)        2007              2006                2007              2006    

Interest income

                 

Interest and fees on loans and leases

   $13,323      $11,804        $26,207      $22,931

Interest on debt securities

   2,332      3,121        4,712      6,135

Federal funds sold and securities purchased under agreements to resell

   2,156      1,900        4,135      3,609

Trading account assets

   2,267      1,627        4,540      3,175

Other interest income

   1,154      845        2,198      1,572

Total interest income

   21,232      19,297        41,792      37,422

Interest expense

                 

Deposits

   4,261      3,508        8,295      6,515

Short-term borrowings

   5,537      4,842        10,855      9,151

Trading account liabilities

   821      596        1,713      1,113

Long-term debt

   2,227      1,721        4,275      3,237

Total interest expense

   12,846      10,667        25,138      20,016

Net interest income

   8,386      8,630        16,654      17,406

Noninterest income

                 

Card income

   3,558      3,664        6,891      7,098

Service charges

   2,200      2,077        4,272      3,978

Investment and brokerage services

   1,193      1,146        2,342      2,249

Investment banking income

   774      612        1,412      1,113

Equity investment income

   1,829      699        2,843      1,417

Trading account profits

   890      915        1,762      1,975

Mortgage banking income

   148      89        361      226

Gains (losses) on sales of debt securities

   2      (9 )      64      5

Other income

   583      396        1,117      443

Total noninterest income

   11,177      9,589        21,064      18,504

Total revenue, net of interest expense

   19,563      18,219        37,718      35,910

Provision for credit losses

   1,810      1,005        3,045      2,275

Noninterest expense

                 

Personnel

   4,737      4,480        9,762      9,293

Occupancy

   744      703        1,457      1,404

Equipment

   332      316        682      660

Marketing

   537      551        1,092      1,126

Professional fees

   283      233        512      451

Amortization of intangibles

   391      441        780      881

Data processing

   472      409        909      819

Telecommunications

   244      228        495      448

Other general operating

   1,278      1,162        2,315      2,267

Merger and restructuring charges

   75      194        186      292

Total noninterest expense

   9,093      8,717        18,190      17,641

Income before income taxes

   8,660      8,497        16,483      15,994

Income tax expense

   2,899      3,022        5,467      5,533

Net income

   $5,761      $5,475        $11,016      $10,461

Preferred stock dividends

   40      4        86      9

Net income available to common shareholders

   $5,721      $5,471        $10,930      $10,452

Per common share information

                 

Earnings

   $1.29      $1.21        $2.47      $2.29

Diluted earnings

   1.28      1.19        2.44      2.25

Dividends paid

   0.56      0.50        1.12      1.00

Average common shares issued and outstanding
(in thousands)

   4,419,246      4,534,627        4,426,046      4,572,013

Average diluted common shares issued and outstanding
(in thousands)

   4,476,799      4,601,169        4,487,224      4,636,959

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

Bank of America Corporation and Subsidiaries

Consolidated Balance Sheet

(Dollars in millions)

  

June 30

2007

   December 31
2006

Assets

     

Cash and cash equivalents

   $35,499    $36,429

Time deposits placed and other short-term investments

   13,151    13,952

Federal funds sold and securities purchased under agreements to resell (includes $1,970 measured at fair value at June 30, 2007 and $131,149 and $135,409 pledged as collateral)

   131,658    135,478

Trading account assets (includes $65,768 and $92,274 pledged as collateral)

   182,404    153,052

Derivative assets

   29,810    23,439

Debt securities:

     

Available-for-sale (includes $116,020 and $83,785 pledged as collateral)

   172,332    192,806

Held-to-maturity, at cost (market value – $995 and $40)

   995    40

Total debt securities

               173,327                192,846

Loans and leases (includes $3,606 measured at fair value at June 30, 2007 and $55,097 and $14,290 pledged as collateral)

   758,635    706,490

Allowance for loan and lease losses

   (9,060)    (9,016)

Loans and leases, net of allowance

   749,575    697,474

Premises and equipment, net

   9,482    9,255

Mortgage servicing rights (includes $3,269 and $2,869 measured at fair value)

   3,508    3,045

Goodwill

   65,845    65,662

Intangible assets

   8,720    9,422

Other assets (includes $30,591 measured at fair value at June 30, 2007)

   131,380    119,683

Total assets

   $1,534,359    $1,459,737

Liabilities

     

Deposits in domestic offices:

     

Noninterest-bearing

   $172,573    $180,231

Interest-bearing (includes $521 measured at fair value at June 30, 2007)

   422,201    418,100

Deposits in foreign offices:

     

Noninterest-bearing

   3,006    4,577

Interest-bearing

   101,629    90,589

Total deposits

   699,409    693,497

Federal funds purchased and securities sold under agreements to repurchase

   221,064    217,527

Trading account liabilities

   75,070    67,670

Derivative liabilities

   25,141    16,339

Commercial paper and other short-term borrowings

   159,542    141,300

Accrued expenses and other liabilities (includes $391 measured at fair value at June 30, 2007 and $376 and $397 of reserve for unfunded lending commitments)

   49,065    42,132

Long-term debt

   169,317    146,000

Total liabilities

   1,398,608    1,324,465

Commitments and contingencies (Note 8 – Securitizations and Note 10 – Commitments and Contingencies)

     

Shareholders’ equity

     

Preferred stock, $0.01 par value; authorized – 100,000,000 shares; issued and outstanding –
121,739 shares

   2,851    2,851

Common stock and additional paid-in capital, $0.01 par value; authorized – 7,500,000,000 shares; issued and outstanding – 4,436,935,963 and 4,458,151,391 shares

   60,349    61,574

Retained earnings

   83,223    79,024

Accumulated other comprehensive income (loss)

   (9,957)    (7,711)

Other

   (715)    (466)

Total shareholders’ equity

   135,751    135,272

Total liabilities and shareholders’ equity

   $1,534,359    $1,459,737

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

Bank of America Corporation and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity

       

Common Stock and  

Additional Paid-in Capital  

      Accumulated Other
Comprehensive
Income (Loss) (1)
     

Total    

Shareholders’    

Equity    

   
   

Preferred    

Stock    

    Retained  
Earnings  
    Other        

Comprehensive  

Income  

(Dollars in millions,

shares in thousands)

    Shares           Amount                  

Balance, December 31, 2005

  $271   3,999,688   $41,693   $67,552   $(7,556)   $(427)   $101,533  

Net income

        10,461       10,461   $10,461

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

          (4,373)     (4,373)   (4,373)

Net changes in foreign currency translation adjustments

          90     90   90

Net changes in derivatives

          866     866   866

Cash dividends paid:

               

Common

        (4,611)       (4,611)  

Preferred

        (9)       (9)  

Common stock issued under employee plans and related tax benefits

    68,608   2,818       (245)   2,573  

Stock issued in acquisition (2)

    631,145   29,377         29,377  

Common stock repurchased

      (171,500)   (8,066)               (8,066)    

Balance, June 30, 2006

  $271   4,527,941   $65,822   $73,393   $(10,973)   $(672)   $127,841   $7,044

Balance, December 31, 2006

  $2,851   4,458,151   $61,574   $79,024   $(7,711)   $(466)   $135,272  

Cumulative adjustment for accounting changes (3):

               

Leveraged leases

        (1,381)       (1,381)  

Fair value option and measurement

        (208)       (208)  

Income tax uncertainties

        (146)       (146)  

Net income

        11,016       11,016   $11,016

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

          (2,823)     (2,823)   (2,823)

Net changes in foreign currency translation adjustments

          103     103   103

Net changes in derivatives

          416     416   416

Amortization of costs included in net periodic benefit costs

          58     58   58

Cash dividends paid:

               

Common

        (4,996)       (4,996)  

Preferred

        (86)       (86)  

Common stock issued under employee plans and related tax benefits

    40,235   1,965       (249)   1,716  

Common stock repurchased

      (61,450)   (3,190)               (3,190)    

Balance, June 30, 2007

  $2,851   4,436,936   $60,349   $83,223   $(9,957)   $(715)   $135,751   $8,770

 

 

(1)

Amounts shown are net of tax. For additional information on accumulated OCI, see Note 11 – Shareholders’ Equity and Earnings Per Common Share to the Consolidated Financial Statements.

 

 

(2)

Includes adjustment for the fair value of outstanding MBNA Corporation (MBNA) stock options of $435 million.

 

 

(3)

Effective January 1, 2007, the Corporation adopted FSP 13-2, SFAS 157, SFAS 159 and FIN 48. For additional information on the adoption of these accounting pronouncements, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements.

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

Bank of America Corporation and Subsidiaries

Consolidated Statement of Cash Flows

       Six Months Ended June 30            

(Dollars in millions)

     2007                  2006            

Operating activities

         

Net income

     $11,016      $10,461

Reconciliation of net income to net cash provided by (used in) operating activities:

         

Provision for credit losses

     3,045      2,275

Gains on sales of debt securities

     (64)      (5)

Depreciation and premises improvements amortization

     555      557

Amortization of intangibles

     780      881

Deferred income tax expense

     210      503

Net (increase) decrease in trading and derivative instruments

     (16,029)      9,670

Net increase in other assets

    

(10,172)

     (14,912)

Net increase in accrued expenses and other liabilities

    

8,346

     4,320

Other operating activities, net

     (408)      (3,720)

Net cash provided by (used in) operating activities

    

(2,721)

     10,030

Investing activities

         

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

     813      (824)

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

     3,640      13,140

Proceeds from sales of available-for-sale debt securities

     6,078      7,341

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

     10,713      11,616

Purchases of available-for-sale debt securities

     (5,874)      (34,795)

Proceeds from maturities of held-to-maturity debt securities

     24     

Purchases of held-to-maturity debt securities

     (70)     

Proceeds from sales of loans and leases

     29,309      12,111

Other changes in loans and leases, net

     (91,018)      (71,238)

Net purchases of premises and equipment

     (849)      (206)

Proceeds from sales of foreclosed properties

     52      71

(Acquisition) divestiture of business activities, net

     (685)      (3,519)

Other investing activities, net

     (631)      (516)

Net cash used in investing activities

     (48,498)      (66,819)

Financing activities

         

Net increase in deposits

     11,079      13,437

Net increase in federal funds purchased and securities sold under agreements to repurchase

     3,636      17,668

Net increase in commercial paper and other short-term borrowings

     18,315      18,669

Proceeds from issuance of long-term debt

     41,374      21,886

Retirement of long-term debt

     (16,728)      (6,744)

Proceeds from issuance of common stock

     682      1,734

Common stock repurchased

     (3,190)      (8,066)

Cash dividends paid

     (5,082)      (4,620)

Excess tax benefits related to share-based payments

     190      203

Other financing activities, net

     (36)      111

Net cash provided by financing activities

     50,240      54,278

Effect of exchange rate changes on cash and cash equivalents

     49      57

Net decrease in cash and cash equivalents

     (930)      (2,454)

Cash and cash equivalents at January 1

     36,429      36,999

Cash and cash equivalents at June 30

     $35,499      $34,545

During the six months ended June 30, 2007, the Corporation sold its operations in Chile and Uruguay for approximately $750 million in equity in Banco Itaú Holding Financeira S.A., and its assets in BankBoston Argentina for the assumption of its liabilities. The total assets and liabilities in these divestitures were $6.1 billion and $5.6 billion.

On January 1, 2007, the Corporation transferred $3.7 billion of AFS debt securities to trading account assets following the adoption of SFAS 159.

The fair values of noncash assets acquired and liabilities assumed in the MBNA merger were $83.3 billion and $50.4 billion at January 1, 2006.

Approximately 631 million shares of common stock, valued at approximately $28.9 billion were issued in connection with the MBNA merger at January 1, 2006.

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

Bank of America Corporation and Subsidiaries

Notes to Consolidated Financial Statements


Bank of America Corporation and its subsidiaries (the Corporation), through its banking and nonbanking subsidiaries, provides a diverse range of financial services and products throughout the U.S. and in selected international markets. At June 30, 2007, the Corporation operated its banking activities primarily under two charters: Bank of America, National Association (Bank of America, N.A.) and FIA Card Services, N.A.

 

NOTE 1 – Summary of Significant Accounting Principles

 

Principles of Consolidation and Basis of Presentation

The Consolidated Financial Statements include the accounts of the Corporation and its majority-owned subsidiaries, and those variable interest entities (VIEs) where the Corporation is the primary beneficiary. All significant intercompany accounts and transactions have been eliminated.

The information contained in the Consolidated Financial Statements is unaudited. In the opinion of management, normal recurring adjustments necessary for a fair statement of the interim period results have been made. Results of operations of companies purchased are included from the dates of acquisition.

Effective January 1, 2007, the Corporation changed its basis of presentation for its business segments. For additional information, see Note 16 – Business Segment Information to the Consolidated Financial Statements.

Effective April 1, 2007, the Corporation changed the current and historical presentation of its Consolidated Statement of Income to present gains (losses) on sales of debt securities as a component of noninterest income.

Prior period amounts have been reclassified to conform to current period presentation.

 

Recently Issued Accounting Pronouncements

On June 27, 2007, the Financial Accounting Standards Board (FASB) ratified the Emerging Issues Task Force (EITF) consensus on Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (EITF 06-11). EITF 06-11 requires that the tax benefit related to dividend equivalents paid on restricted stock and restricted stock units which are expected to vest be recorded as an increase to additional paid-in capital. The Corporation currently accounts for this tax benefit as a reduction to income tax expense. EITF 06-11 is to be applied prospectively for tax benefits on dividends declared by the Corporation on or after January 1, 2008. The Corporation expects to adopt the provisions of EITF 06-11 on January 1, 2008. The adoption of EITF 06-11 will not have a material impact on the Corporation’s financial condition and results of operations.

On June 11, 2007, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) No. 07-1, “Clarification of the Scope of the Audit and Accounting Guide ‘Audits of Investment Companies’ and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies” (SOP 07-1). SOP 07-1 clarifies when an entity may apply the provisions of the Audit and Accounting Guide for Investment Companies. SOP 07-1 is effective for the Corporation on January 1, 2008. The adoption of SOP 07-1 is not expected to have a material impact on the Corporation’s financial condition and results of operations.

Effective January 1, 2007, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” (SFAS 157) and SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). SFAS 157 defines fair value, establishes a framework for measuring fair value under accounting principles generally accepted in the United States (GAAP) and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 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. SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The impact of adopting both SFAS

 

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Table of Contents

157 and SFAS 159 reduced the beginning balance of retained earnings as of January 1, 2007 by $208 million, net of tax. Subsequent changes in fair value of these financial assets and liabilities are recognized in earnings when they occur. For additional information on the fair value of certain financial assets and liabilities, see Note 14 – Fair Value Disclosures to the Consolidated Financial Statements.

Effective January 1, 2007, the Corporation adopted FASB Staff Position (FSP) No. FAS 13-2, “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction” (FSP 13-2). The principal provision of FSP 13-2 is the requirement that a lessor recalculate the recognition of lease income when there is a change in the estimated timing of the cash flows relating to income taxes generated by such leveraged lease. The adoption of FSP 13-2 reduced the beginning balance of retained earnings as of January 1, 2007 by $1,381 million, net of tax, with a corresponding offset decreasing the net investment in leveraged leases recorded as part of loans and leases. Following the adoption, if during the remainder of the lease term the timing of the income tax cash flows generated by the leveraged leases are revised as a result of final determination by the Internal Revenue Service on certain leveraged leases or management changes its assumption about the timing of the tax cash flows, the rate of return shall be recalculated from the inception of the lease using the revised assumption and the change in the net investment shall be recognized as a gain or loss in the year in which the assumption is changed.

Effective January 1, 2007, the Corporation adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 clarifies the accounting and reporting for income taxes where interpretation of the tax law may be uncertain. FIN 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of income tax uncertainties with respect to positions taken or expected to be taken in income tax returns. The adoption of FIN 48 reduced the beginning balance of retained earnings as of January 1, 2007 by $146 million and increased goodwill by $52 million. For additional information on income taxes, see Note 13 – Income Taxes to the Consolidated Financial Statements.

For additional information on recently issued accounting pronouncements and other significant accounting principles, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements filed as Exhibit 99.2 to the Corporation’s Current Report on Form 8-K filed on May 23, 2007.

 

NOTE 2 – Merger and Restructuring Activity

In April 2007, the Corporation announced an agreement to purchase ABN AMRO North America Holding Company, parent company of LaSalle Bank Corporation (LaSalle), from ABN AMRO Bank N.V. for $21 billion in cash. The transaction has been approved by both companies’ boards of directors. The transaction will be subject to obtaining all necessary regulatory approvals and is expected to close in the fourth quarter of 2007.

In July 2007, the Corporation completed the acquisition of U.S. Trust Corporation (U.S. Trust) for $3.3 billion in cash. U.S. Trust focuses exclusively on managing wealth for high net-worth and ultra high net-worth individuals and families. The acquisition increases the size and capabilities of the Corporation’s wealth management business.

On January 1, 2006, the Corporation acquired 100 percent of the outstanding stock of MBNA through a merger that was tax-free to the Corporation. MBNA’s results of operations were included in the Corporation’s results beginning January 1, 2006.

 

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Merger and Restructuring Charges

Merger and restructuring charges are recorded in the Consolidated Statement of Income and include incremental costs to integrate the operations of the Corporation and those of acquired entities. These charges represent costs associated with these one-time activities and do not represent ongoing costs of the fully integrated combined organization. The following table presents severance and employee-related charges, systems integrations and related charges, and other merger-related charges for the three and six months ended June 30, 2007 and 2006.

 

     Three Months Ended June 30                 Six Months Ended June 30        

(Dollars in millions)

   2007                2006                      2007                2006            

Severance and employee-related charges

   $5    $20       $17    $33

Systems integrations and related charges

   58    132       137    180

Other

   12    42         32    79

Total merger and restructuring charges (1)

   $75    $194         $186    $292

 

(1)

Included for the three and six months ended June 30, 2007, are merger-related charges of $60 million and $171 million related to the MBNA acquisition and $15 million for both periods related to the U.S. Trust acquisition. The Corporation has not incurred any merger-related charges related to the LaSalle transaction.

 

Exit Cost and Restructuring Reserves

As of December 31, 2006, there were $125 million of exit cost reserves, including $121 million for severance, relocation and other employee-related expenses and $4 million for contract terminations. Cash payments of $19 million and $45 million during the three and six months ended June 30, 2007, consisted of $19 million and $43 million of severance, relocation and other employee-related costs. In addition, cash payments of $2 million for contract terminations were recorded during the six months ended June 30, 2007.

As of December 31, 2006, there were $67 million of restructuring reserves remaining, including $58 million related to severance and other employee-related expenses and $9 million related to contract terminations. During the three and six months ended June 30, 2007, $5 million and $16 million were recorded to the restructuring reserves. During the three and six months ended June 30, 2007, cash payments of $14 million and $42 million for severance and other employee-related costs were recorded. In addition, cash payments of $5 million for contract terminations have reduced this liability during the six months ended June 30, 2007.

Payments under exit cost and restructuring reserves associated with the MBNA merger are expected to be substantially completed in 2007. The following table presents the changes in exit cost and restructuring reserves for the three and six months ended June 30, 2007 and 2006.

 

     Exit Cost Reserves (1, 2)        Restructuring Reserves (2, 3)

(Dollars in millions)

   2007                          2006                     2007                      2006            

Balance, January 1

   $125      $–      $67      $–

MBNA exit costs

        269          

Restructuring charges

             11      34

Cash payments

   (26)      (22)        (33)     

Balance, March 31

   99      247      45      34

MBNA exit costs

        99          

Restructuring charges

             5      40

Cash payments

   (19)      (45)        (14)      (4)

Balance, June 30

   $80      $301        $36      $70

 

 

(1)

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

 

 

(2)

At June 30, 2007, there were no exit cost and restructuring reserves related to the U.S. Trust and LaSalle transactions.

 

 

(3)

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

 

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NOTE 3 – Trading Account Assets and Liabilities

The following table presents the fair values of the components of trading account assets and liabilities at June 30, 2007 and December 31, 2006.

 

(Dollars in millions)

   June 30
2007
     December 31
2006

Trading account assets

       

Corporate securities, trading loans and other

   $66,006      $53,923

U.S. Government and agency securities (1)

   47,509      36,656

Equity securities

   29,756      27,103

Mortgage trading loans and asset-backed securities

   20,598      15,449

Foreign sovereign debt

   18,535      19,921

Total trading account assets

   $182,404      $153,052

Trading account liabilities

       

U.S. Government and agency securities

   $26,805      $26,760

Equity securities

   31,016      23,908

Foreign sovereign debt

   9,292      9,261

Corporate securities and other

   7,957      7,741

Total trading account liabilities

   $75,070      $67,670

 

 

(1)

Includes $21.9 billion and $22.7 billion at June 30, 2007 and December 31, 2006 of government-sponsored enterprise obligations that are not backed by the full faith and credit of the U.S. government.

 

NOTE 4 – Derivatives

All derivatives are recognized on the Consolidated Balance Sheet at fair value, taking into consideration the effects of legally enforceable master netting agreements that allow the Corporation to settle positive and negative positions and offset cash collateral held with the same counterparty on a net basis. For exchange-traded contracts, fair value is based on quoted market prices. For non-exchange traded contracts, fair value is based on dealer quotes, pricing models or quoted prices for instruments with similar characteristics. The Corporation designates at inception whether the derivative contract is considered hedging or non-hedging for SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133) accounting purposes. Derivatives held for trading purposes are included in derivative assets or derivative liabilities with changes in fair value reflected in trading account profits. Other derivatives that are used as economic hedges, but not designated in a hedging relationship for accounting purposes, are also included in derivative assets or derivative liabilities with changes in fair value recorded in mortgage banking income or other income. A detailed discussion of derivative trading activities and asset and liability management (ALM) activities are presented in Note 1 – Summary of Significant Accounting Principles and Note 4 – Derivatives to the Consolidated Financial Statements filed as Exhibit 99.2 to the Corporation’s Current Report on Form 8-K filed on May 23, 2007.

 

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The following table presents the contract/notional amounts and credit risk amounts at June 30, 2007 and December 31, 2006 of all the Corporation’s derivative positions. These derivative positions are primarily executed in the over-the-counter market. Credit risk associated with derivatives is measured as the net replacement cost in the event the counterparties with contracts in a gain position to the Corporation completely fail to perform under the terms of those contracts. The credit risk amounts take into consideration the effects of legally enforceable master netting agreements, and on an aggregate basis have been reduced by the cash collateral applied against derivative assets. At June 30, 2007 and December 31, 2006, the cash collateral applied against derivative assets on the Consolidated Balance Sheet was $7.3 billion. In addition, at June 30, 2007 and December 31, 2006, the cash collateral placed against derivative liabilities was $7.0 billion and $6.5 billion.

 

     June 30, 2007      December 31, 2006

(Dollars in millions)

   Contract/
Notional (1)
    

Credit        

Risk        

     Contract/
Notional (1)
    

Credit        

Risk        

Interest rate contracts

                 

Swaps

   $ 19,872,341        $8,536      $ 18,185,655      $9,601

Futures and forwards

     2,498,237        131        2,283,579      103

Written options

     1,482,254               1,043,933     

Purchased options

     1,795,174        1,866        1,308,888      2,212

Foreign exchange contracts

                 

Swaps

     521,926        4,546        451,462      4,241

Spot, futures and forwards

     1,619,591        2,484        1,234,009      2,995

Written options

     406,368               464,420     

Purchased options

     492,154        1,306        414,004      1,391

Equity contracts

                 

Swaps

     50,991        1,697        32,247      577

Futures and forwards

     17,880        8        19,947      24

Written options

     246,441               102,902     

Purchased options

     275,791        13,326        104,958      7,513

Commodity contracts

                 

Swaps

     11,077        812        4,868      1,129

Futures and forwards

     18,259        6        13,513      2

Written options

     15,017               9,947     

Purchased options

     12,902        212        6,796      184

Credit derivatives

     2,384,391        2,219        1,497,869      756
                       

Credit risk before cash collateral

          37,149           30,728

Less: Cash collateral applied

              7,339               7,289

Total derivative assets

            $ 29,810               $23,439

(1) Represents

the total contract/notional amount of the derivatives outstanding and includes both short and long positions.

The average fair value of derivative assets, less cash collateral, for the three months ended June 30, 2007 and December 31, 2006 was $28.9 billion and $24.3 billion. The average fair value of derivative liabilities for the three months ended June 30, 2007 and December 31, 2006 was $22.6 billion and $17.1 billion.

 

Fair Value and Cash Flow Hedges

The Corporation uses various types of interest rate and foreign exchange derivative contracts to protect against changes in the fair value of its assets and liabilities due to fluctuations in interest rates and exchange rates (fair value hedges). The Corporation also uses these types of contracts to protect against changes in the cash flows of its assets and liabilities, and other forecasted transactions (cash flow hedges). During the next 12 months, net losses on derivative instruments included in accumulated other comprehensive income (OCI) of approximately $1.0 billion ($630 million after-tax) are expected to be reclassified into earnings. These net losses reclassified into earnings are expected to decrease income or increase expense on the respective hedged items.

 

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The following table summarizes certain information related to the Corporation’s derivative hedges accounted for under SFAS 133 for the three and six months ended June 30, 2007 and 2006.

 

         Three Months Ended June 30              Six Months Ended June 30    

(Dollars in millions)

   2007      2006      2007      2006

Fair value hedges

                 

Hedge ineffectiveness recognized in net interest income

   $(38)      $18      $(36)      $(1)

Cash flow hedges

                 

Hedge ineffectiveness recognized in net interest income

   7      4      7      3

Net losses on transactions which are probable of not occurring recognized in other income

   (14)           (14)     

The Corporation hedges its net investment in foreign operations determined to have functional currencies other than the U.S. dollar using forward foreign exchange contracts that typically settle in 90 days. The Corporation recorded net derivative losses in accumulated OCI associated with net investment hedges of $267 million and $302 million for the three and six months ended June 30, 2007 as compared to losses of $212 million and $202 million for the same periods in the prior year.

 

NOTE 5 – Securities

The amortized cost, gross unrealized gains and losses, and fair value of available-for-sale (AFS) debt and marketable equity securities at June 30, 2007 and December 31, 2006 were:

 

(Dollars in millions)

  

Amortized    

Cost    

    

Gross    

Unrealized    

Gains    

    

Gross    

Unrealized    

Losses    

    

Fair        

Value        

Available-for-sale debt securities, June 30, 2007

                 

U.S. Treasury securities and agency debentures

   $698      $–      $(11)      $687

Mortgage-backed securities

   152,495      1      (8,530)      143,966

Foreign securities

   7,752      8      (130)      7,630

Corporate/Agency bonds

   3,858      1      (128)      3,731

Other taxable securities (1)

   10,054      5      (51)      10,008

Total taxable securities

   174,857      15      (8,850)      166,022

Tax-exempt securities

   6,446      3      (139)      6,310

Total available-for-sale debt securities

   $181,303      $18      $(8,989)      $172,332

Available-for-sale marketable equity securities (2)

   $2,530      $236      $(69)      $2,697

Available-for-sale debt securities, December 31, 2006

                 

U.S. Treasury securities and agency debentures

   $697      $–      $(9)      $688

Mortgage-backed securities

   161,693      4      (4,804)      156,893

Foreign securities

   12,126      2      (78)      12,050

Corporate/Agency bonds

   4,699           (96)      4,603

Other taxable securities (1)

   12,077      10      (38)      12,049

Total taxable securities

   191,292      16      (5,025)      186,283

Tax-exempt securities

   6,493      64      (34)      6,523

Total available-for-sale debt securities

   $197,785      $80      $(5,059)      $192,806

Available-for-sale marketable equity securities (2)

   $2,799      $408      $(10)      $3,197

 

 

(1)

Includes asset-backed securities.

 

 

(2)

Represents those AFS marketable equity securities that are recorded in other assets on the Consolidated Balance Sheet.

At June 30, 2007, the amortized cost and fair value of both taxable and tax-exempt held-to-maturity securities were $995 million. At December 31, 2006, the amortized cost and fair value of both taxable and tax-exempt held-to-maturity securities were $40 million. Effective January 1, 2007, the Corporation redesignated $909 million of securities at amortized cost from AFS to held-to-maturity.

 

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At June 30, 2007 and December 31, 2006, accumulated net unrealized losses on AFS debt and marketable equity securities included in accumulated OCI were $5.6 billion and $2.9 billion, net of the related income tax benefit of $3.2 billion and $1.7 billion, respectively.

For all AFS debt and marketable equity securities that are in an unrealized loss position, we have the intent and ability to hold these securities to recovery.

 

Strategic Investments

The Corporation owns approximately nine percent, or 19.1 billion shares, of the stock of China Construction Bank (CCB) which is recorded in other assets. These shares are accounted for at cost as they are non-transferable until October 2008. The Corporation also holds an option to increase its ownership interest in CCB to 19.9 percent. This option expires in February 2011.

Additionally, the Corporation owns approximately 68.5 million and 20.5 million of preferred and common shares, respectively, of Banco Itaú Holding Financeira S.A. (Banco Itaú) at June 30, 2007 which are recorded in other assets. These shares are accounted for at cost as they are non-transferable until May 2009.

The shares of CCB and Banco Itaú are currently carried at cost but, in accordance with GAAP, will be accounted for as AFS marketable equity securities and carried at fair value with an offset to accumulated OCI beginning in the fourth quarter of 2007 and second quarter of 2008, respectively. Dividend income on these investments is accounted for as part of equity investment income. The fair values of the CCB shares and Banco Itaú shares were approximately $13.2 billion and $4.0 billion at June 30, 2007.

The Corporation has a 24.9 percent, or $2.7 billion, investment in Grupo Financiero Santander Serfin (Santander) which is recorded in other assets. This investment is accounted for under the equity method of accounting and income is recorded in equity investment income.

For additional information on securities, see Note 1 – Summary of Significant Accounting Principles and Note 5 – Securities to the Consolidated Financial Statements filed as Exhibit 99.2 to the Corporation’s Current Report on Form 8-K filed on May 23, 2007.

 

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Table of Contents
NOTE 6 – Outstanding Loans and Leases

Outstanding loans and leases at June 30, 2007 and December 31, 2006 were:

 

(Dollars in millions)

   June 30
2007
     December 31
2006

Consumer

       

Residential mortgage

   $269,721      $241,181

Credit card – domestic

   57,036      61,195

Credit card – foreign

   12,205      10,999

Home equity (1)

   96,467      87,893

Direct/Indirect consumer (1)

   66,181      55,504

Other consumer (1, 2)

   8,041      8,933

Total consumer

   509,651      465,705

Commercial

       

Commercial – domestic (3)

   164,620      161,982

Commercial real estate (4)

   36,950      36,258

Commercial lease financing

   20,053      21,864

Commercial – foreign

   23,755      20,681

Total commercial loans measured at historical cost

   245,378      240,785

Commercial loans measured at fair value (5)

   3,606      n/a

Total commercial

   248,984      240,785

Total loans and leases

   $758,635      $706,490

 

 

(1)

Home equity loans of $13.0 billion at December 31, 2006 have been reclassified to home equity from direct/indirect consumer and other consumer to conform to the current period presentation.

 

 

(2)

Includes foreign consumer loans of $4.7 billion and $6.2 billion, and consumer finance loans of $3.3 billion and $2.8 billion at June 30, 2007 and December 31, 2006.

 

 

(3)

Includes small business commercial – domestic loans of $15.5 billion and $13.7 billion at June 30, 2007 and December 31, 2006.

 

 

(4)

Includes domestic commercial real estate loans of $36.2 billion and $35.7 billion, and foreign commercial real estate loans of $674 million and $578 million at June 30, 2007 and December 31, 2006.

 

 

(5)

Certain commercial loans are measured at fair value in accordance with SFAS 159 and include commercial – domestic loans of $2.61 billion, commercial – foreign loans of $795 million and commercial real estate loans of $198 million at June 30, 2007. See Note 14 – Fair Value Disclosures to the Consolidated Financial Statements for additional discussion of fair value for certain financial instruments.

 

  n/a

= not applicable

The following table presents the recorded loan amounts, without consideration for the specific component of the allowance for loan and lease losses, that were considered individually impaired in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” (SFAS 114) at June 30, 2007 and December 31, 2006. SFAS 114 impairment includes performing troubled debt restructurings and excludes all commercial leases.

 

(Dollars in millions)

   June 30
2007
     December 31
2006

Commercial – domestic (1)

   $ 514      $ 586

Commercial real estate

     280        118

Commercial – foreign

     17        13

Total impaired loans

   $ 811      $ 717

 

 

(1)

Includes small business commercial - domestic loans of $101 million and $79 million at June 30, 2007 and December 31, 2006.

At June 30, 2007 and December 31, 2006, nonperforming loans and leases, including impaired and nonaccrual consumer loans, totaled $2.3 billion and $1.8 billion. In addition, included in other assets were consumer and commercial nonperforming loans held-for-sale of $73 million and $80 million at June 30, 2007 and December 31, 2006.

 

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Table of Contents
NOTE 7 – Allowance for Credit Losses

The following table summarizes the changes in the allowance for credit losses for the three and six months ended June 30, 2007 and 2006.

 

     Three Months Ended June 30              Six Months Ended June 30      

(Dollars in millions)

   2007      2006          2007      2006

Allowance for loan and lease losses, beginning of period

   $8,732      $9,067    $9,016      $8,045

Transition adjustment due to the adoption of SFAS 159

           (32)     

MBNA balance, January 1, 2006

                577

Loans and leases charged off

   (1,805)      (1,407)    (3,548)      (2,524)

Recoveries of loans and leases previously charged off

   310      384    626      679

Net charge-offs

   (1,495)      (1,023)    (2,922)      (1,845)

Provision for loan and lease losses

   1,808      1,005    3,036      2,275

Other

   15      31    (38)      28

Allowance for loan and lease losses, June 30

   9,060      9,080    9,060      9,080

Reserve for unfunded lending commitments, beginning of period

   374      395    397      395

Transition adjustment due to the adoption of SFAS 159

           (28)     

Provision for unfunded lending commitments

   2         9     

Other

           (2)     

Reserve for unfunded lending commitments, June 30

   376      395    376      395

Allowance for credit losses, June 30

   $9,436      $9,475    $9,436      $9,475

 

NOTE 8 – Securitizations

The Corporation securitizes loans which may be serviced by the Corporation or by third parties. With each securitization the Corporation may retain all or a portion of the securities, subordinated tranches, interest-only strips, subordinated interests in accrued interest and fees on the securitized receivables, and, in some cases, cash reserve accounts, all of which are known as retained interests. These retained interests are carried at fair value or amounts that approximate fair value. Changes in the fair value are accounted for in accumulated OCI, except for credit card related interest-only strips that are recorded in card income.

 

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Table of Contents

As of June 30, 2007 and December 31, 2006 the aggregate debt securities outstanding for the Corporation’s credit card securitization trusts were $98.9 billion and $96.8 billion. Key assumptions used in measuring the fair value of certain interests that continue to be held by the Corporation (included in other assets) from credit card securitizations and the sensitivity of the current fair value of residual cash flows to changes in those assumptions are as follows:

 

(Dollars in millions)

   June 30  
2007  
       December 31
2006
 

Carrying amount of residual interests (at fair value) (1)

   $3,134        $2,929  

Balance of unamortized securitized loans

   100,611        98,295  

Weighted average life to call or maturity (in years)

   0.3        0.3  

Monthly payment rate

   10.9-17.0         %      11.2-19.8         %

Impact on fair value of 10% favorable change

   $56        $43  

Impact on fair value of 25% favorable change

   156        133  

Impact on fair value of 10% adverse change

   (43)        (38)  

Impact on fair value of 25% adverse change

   (98)        (82)  

Expected credit losses (annual rate)

   3.4-5.9         %      3.8-5.8         %

Impact on fair value of 10% favorable change

   $106        $86  

Impact on fair value of 25% favorable change

   265        218  

Impact on fair value of 10% adverse change

   (105)        (85)  

Impact on fair value of 25% adverse change

   (265)        (211)  

Residual cash flows discount rate (annual rate)

   12.0         %      12.5         %

Impact on fair value of 100 bps favorable change

   $14        $12  

Impact on fair value of 200 bps favorable change

   20        17  

Impact on fair value of 100 bps adverse change

   (17)        (14)  

Impact on fair value of 200 bps adverse change

   (32)        (27)  

 

 

(1)

Residual interests include interest-only strips, subordinated tranches, subordinated interests in accrued interest and fees on the securitized receivables and cash reserve accounts which are carried at fair value or amounts that approximate fair value.

The sensitivities in the preceding table 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 an interest that continues to be held by the Corporation is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. Additionally, the Corporation has the ability to hedge interest rate risk associated with retained residual positions. The above sensitivities do not reflect any hedge strategies that may be undertaken to mitigate such risk.

Principal proceeds from collections reinvested in revolving credit card securitizations were $44.6 billion and $89.3 billion for the three and six months ended June 30, 2007, and $40.2 billion and $79.3 billion for the three and six months ended June 30, 2006. Contractual credit card servicing fee income totaled $514 million and $1.0 billion for the three and six months ended June 30, 2007, and $448 million and $888 million for the three and six months ended June 30, 2006. Other cash flows received on credit card securitization interests that continued to be held by the Corporation were $1.5 billion and $3.2 billion for the three and six months ended June 30, 2007, and $1.6 billion and $3.4 billion for the three and six months ended June 30, 2006.

 

Variable Interest Entities

The Corporation consolidates variable interest entities (VIEs) for which it is the primary beneficiary in accordance with FASB Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51”. As of June 30, 2007 and December 31, 2006, the Corporation had consolidated certain multi-seller commercial paper conduits and certain securitization vehicles with assets totaling $17.6 billion and $10.5 billion. The assets and liabilities of these entities are recorded in trading account assets and liabilities, AFS and held-to-maturity debt securities, other assets, commercial paper and other short-term borrowings or accrued expenses and other liabilities. In the unlikely event that all of the assets in the VIEs become worthless, the Corporation’s maximum loss exposure associated with these

 

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entities including unfunded lending commitments would be approximately $19.9 billion and $12.9 billion at June 30, 2007 and December 31, 2006 if all commitments become fully drawn. In addition, the Corporation had net investments in leveraged lease trusts totaling $6.4 billion and $8.6 billion at June 30, 2007 and December 31, 2006. These amounts, which were reflected in loans and leases, represent the Corporation’s maximum loss exposure to these entities in the unlikely event that the leveraged lease investments become worthless. Debt issued by the leveraged lease trusts is nonrecourse to the Corporation. The Corporation also had contractual relationships with other consolidated VIEs that engage in leasing or lending activities or real estate joint ventures. As of June 30, 2007 and December 31, 2006, the amount of assets of these entities was $3.4 billion and $3.3 billion, and in the unlikely event that all of the assets in the VIEs become worthless, the Corporation’s maximum possible loss exposure would be $2.7 billion and $1.6 billion.

Additionally, the Corporation had significant variable interests in other VIEs that it did not consolidate because it was not deemed to be the primary beneficiary. In such cases, the Corporation does not absorb the majority of the entities’ expected losses nor does it receive a majority of the entities’ expected residual returns. These entities typically support the financing needs of the Corporation’s customers by facilitating their access to the commercial paper markets. The Corporation functions as administrator and provides either liquidity and letters of credit, or derivatives to the VIE. The Corporation also provides asset management and related services to or invests in other special purpose vehicles that engage in lending, investing, or real estate activities. Total assets of these entities at June 30, 2007 and December 31, 2006 were approximately $61.8 billion and $51.9 billion. Revenues associated with administration, liquidity, letters of credit and other services were approximately $53 million and $86 million for the three and six months ended June 30, 2007, and $37 million and $66 million for the three and six months ended June 30, 2006. At June 30, 2007 and December 31, 2006, in the unlikely event that all of the assets in the VIEs become worthless, the Corporation’s maximum loss exposure associated with these VIEs would be approximately $61.9 billion and $46.0 billion, which is net of amounts syndicated.

Management does not believe losses resulting from the Corporation’s involvement with the entities discussed above will be material.

See Note 1 – Summary of Significant Accounting Principles and Note 9 – Securitizations to the Consolidated Financial Statements filed as Exhibit 99.2 to the Corporation’s Current Report on Form 8-K filed on May 23, 2007 for additional discussion of securitizations and special purpose financing entities.

 

NOTE 9 – Goodwill and Intangible Assets

The following table presents allocated goodwill at June 30, 2007 and December 31, 2006 for each business segment and All Other.

 

(Dollars in millions)

  

June 30

2007

    

December 31    

2006    

Global Consumer and Small Business Banking

   $38,955      $38,760

Global Corporate and Investment Banking

   21,438      21,420

Global Wealth and Investment Management

   5,243      5,243

All Other

   209      239

Total goodwill

   $65,845      $65,662

The gross carrying values and accumulated amortization related to intangible assets at June 30, 2007 and December 31, 2006 are presented below:

 

     June 30, 2007      December 31, 2006

(Dollars in millions)

  

Gross Carrying  

Value  

  

Accumulated    

Amortization    

    

Gross Carrying  

Value  

  

Accumulated    

Amortization    

Purchased credit card relationships

   $6,861    $1,561      $6,790    $1,159

Core deposit intangibles

   3,822    2,596      3,850    2,396

Affinity relationships

   1,680    307      1,650    205

Other intangibles

   1,517    696      1,525    633

Total intangible assets

   $13,880    $5,160      $13,815    $4,393

 

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Amortization of intangibles expense was $391 million and $441 million for the three months ended June 30, 2007 and 2006, and $780 million and $881 million for the six months ended June 30, 2007 and 2006. The Corporation estimates that aggregate amortization expense will be approximately $360 million and $350 million for the third and fourth quarters of 2007. In addition, the Corporation estimates that aggregate amortization expense will be approximately $1.3 billion, $1.2 billion, $1.0 billion, $900 million and $800 million for 2008 through 2012, respectively. These estimates exclude the potential impacts of the LaSalle and U.S. Trust transactions.

 

NOTE 10 – Commitments and Contingencies

In the normal course of business, the Corporation enters into a number of off-balance sheet commitments. These commitments expose the Corporation to varying degrees of credit and market risk and are subject to the same credit and market risk limitation reviews as those instruments recorded on the Corporation’s Consolidated Balance Sheet.

 

Credit Extension Commitments

The Corporation enters into commitments to extend credit such as loan commitments, standby letters of credit and commercial letters of credit to meet the financing needs of its customers. For additional information on commitments to extend credit, see Note 13 – Commitments and Contingencies to the Consolidated Financial Statements filed on Exhibit 99.2 to the Corporation’s Current Report on Form 8-K filed on May 23, 2007. The outstanding unfunded lending commitments shown in the following table have been reduced by amounts participated to other financial institutions of $36.6 billion and $30.5 billion at June 30, 2007 and December 31, 2006. The carrying amount for the unfunded lending commitments shown below, which represents the liability recorded related to these instruments, at June 30, 2007 and December 31, 2006 was $797 million and $444 million. At June 30, 2007, the carrying amount included deferred revenue of $30 million, a reserve for unfunded lending commitments of $376 million and the fair value of certain unfunded commitments of $391 million that are recorded in accrued expenses and other liabilities. See Note 14 – Fair Value Disclosures to the Consolidated Financial Statements for additional information on the adoption of SFAS 159. At June 30, 2007, the notional amount of total legally binding commitments measured at fair value in accordance with SFAS 159 was $21.7 billion. The table below only reflects the commitments at notional value and excludes the fair value adjustments of $391 million. At December 31, 2006, the carrying amount included deferred revenue of $47 million and a reserve for unfunded lending commitments of $397 million.

 

(Dollars in millions)

   June 30    
2007    
     December 31    
2006    

Loan commitments

   $371,142      $335,362

Home equity lines of credit

   107,042      98,200

Standby letters of credit and financial guarantees

   53,182      53,006

Commercial letters of credit

   5,463      4,482

Legally binding commitments

   536,829      491,050

Credit card lines

   880,539      853,592

Total credit extension commitments

   $1,417,368      $1,344,642

Legally binding commitments to extend credit generally have specified rates and maturities. Certain of these commitments have adverse change clauses that help to protect the Corporation against deterioration in the borrowers’ ability to pay.

 

Other Commitments

At June 30, 2007 and December 31, 2006, the Corporation had unfunded equity investment commitments of approximately $4.6 billion and $2.8 billion, which include commitments within the Corporation’s Principal Investing and other businesses that will be used to invest directly in privately-held companies or in private equity funds. Also included are unfunded bridge equity commitments, which are used to help facilitate the Corporation’s clients’ investment activities and are often retired prior to or shortly following funding. The Corporation has an agreement to sell $638 million of these unfunded equity investment commitments to Conversus Capital, L.P. in July 2007. The Corporation also has an agreement to purchase 24.9 percent of SLM Corporation (Sallie Mae) for $2.2 billion.

 

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At June 30, 2007 and December 31, 2006, charge cards (nonrevolving card lines) to individuals and government entities guaranteed by the U.S. government in the amount of $9.5 billion and $9.6 billion were not included in credit card line commitments in the previous table. The outstanding balances related to these charge cards were $287 million and $193 million at June 30, 2007 and December 31, 2006.

At June 30, 2007, the Corporation had whole mortgage loan purchase commitments related to our ALM activities of $510 million, all of which will settle in the third quarter of 2007. At December 31, 2006, the Corporation had whole mortgage loan purchase commitments related to our ALM activities of $8.5 billion, all of which settled in the first quarter of 2007.

At June 30, 2007 the Corporation had home equity loan purchase commitments of $292 million, all of which will settle in the third quarter of 2007. At December 31, 2006 the Corporation had home equity loan purchase commitments of $362 million, all of which settled in the first quarter of 2007.

The Corporation is a party to operating leases for certain of its premises and equipment. Commitments under these leases approximate $1.2 billion, $1.2 billion, $1.1 billion, $970 million and $840 million for 2007 through 2011, respectively, and $6.2 billion for all years thereafter.

In 2005, the Corporation entered into an agreement for the committed purchase of retail automotive loans over a five-year period ending June 30, 2010. For the six months ended June 30, 2007, the Corporation purchased $4.5 billion of such loans. In 2006, the Corporation purchased $7.5 billion of such loans. Under the agreement, the Corporation is committed to purchase up to $5.0 billion for the fiscal period July 1, 2007 through June 30, 2008 and $10.0 billion in each of the agreement’s following two fiscal years. As of June 30, 2007, the remaining commitment amount was $25.0 billion.

 

Other Guarantees

The Corporation provides credit and debit card processing services to various merchants by processing credit and debit card transactions on their behalf. In connection with these services, a liability may arise in the event of a billing dispute between the merchant and a cardholder that is ultimately resolved in the cardholder’s favor and the merchant defaults upon 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 Corporation as the merchant processor. If the Corporation is unable to collect this amount from the merchant, it bears the loss for the amount paid to the cardholder. For the three months ended June 30, 2007 and 2006, the Corporation processed $91.5 billion and $97.2 billion of transactions and recorded losses as a result of these chargebacks of $4 million and $5 million. For the six months ended June 30, 2007 and 2006, the Corporation processed $174.3 billion and $185.6 billion of transactions and recorded losses as a result of these chargebacks of $8 million and $9 million.

At June 30, 2007 and December 31, 2006, the Corporation held as collateral approximately $24 million and $32 million of merchant escrow deposits which the Corporation has the right to offset against amounts due from the individual merchants. The Corporation also has the right to offset any payments with cash flows otherwise due to the merchant. Accordingly, the Corporation believes that the maximum potential exposure is not representative of the actual potential loss exposure. The Corporation believes the maximum potential exposure for chargebacks would not exceed the total amount of merchant transactions processed through Visa and MasterCard for the last six months, which represents the claim period for the cardholder, plus any outstanding delayed-delivery transactions. As of June 30, 2007 and December 31, 2006, the maximum potential exposure totaled approximately $152.2 billion and $176.0 billion.

For additional information on other guarantees, see Note 13 – Commitments and Contingencies to the Consolidated Financial Statements filed on Exhibit 99.2 to the Corporation’s Current Report on Form 8-K filed on May 23, 2007. For additional information on recourse obligations related to residential mortgage loans sold and other guarantees related to securitizations, see Note 9 – Securitizations to the Consolidated Financial Statements filed on Exhibit 99.2 to the Corporation’s Current Report on Form 8-K filed on May 23, 2007.

 

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Litigation and Regulatory Matters

The following supplements the disclosure in Note 13 – Commitments and Contingencies to the Consolidated Financial Statements filed as Exhibit 99.2 to the Corporation’s Current Report on Form 8-K filed on May 23, 2007.

Adelphia Communications Corporation

On June 11, 2007, the U.S. Bankruptcy Court for the Southern District of New York (the Bankruptcy Court) entered an order on the pending motions to dismiss the complaint filed by the Creditors’ Committee, dismissing some of the claims asserted by the Creditors’ Committee against Bank of America, N.A., Banc of America Securities (BAS) and Fleet Securities, Inc. (FSI) (in some cases with leave to amend and replead) and allowing other claims to proceed. Bank of America, N.A., BAS and FSI intend to challenge the adverse rulings in the U.S. District Court for the Southern District of New York. The Bankruptcy Court indicated that it will rule on the motions to dismiss the complaint filed by the Equity Committee at a later date.

Data Treasury

The Corporation and Bank of America, N.A. have been named as defendants in an action filed by Data Treasury Corporation in the U.S. District Court for the Eastern District of Texas. Plaintiff alleges that defendants have “provided, sold, installed, utilized, and assisted others to use and utilize image-based banking and archival solutions” in a manner that infringes United States Patent Nos. 5,910,988 and 6,032,137. Plaintiff seeks unspecified damages and injunctive relief against the alleged infringement. No trial is currently scheduled.

The Corporation and Bank of America, N.A. have been named as defendants in an action filed by Data Treasury Corporation in the U.S. District Court for the Eastern District of Texas. Plaintiff alleges that the Corporation and Bank of America, N.A., among other defendants, are “making, using, selling, offering for sale, and/or importing into the United States, directly, contributory, and/or by inducement, without authority, products and services that fall within the scope of the claims of” United States Patent Nos. 5,265,007; 5,583,759; 5,717,868; and 5,930,778. Plaintiff seeks unspecified damages and injunctive relief against the alleged infringement. Trial is currently scheduled for October 2008.

In re Initial Public Offering Securities Litigation

On May 18, 2007, in In re Initial Public Offering Securities Litigation, the U.S. Court of Appeals for the Second Circuit (the Second Circuit) denied the plaintiffs’ motion seeking reconsideration by the full court of the decision reversing the district court’s class certification order. On June 25, 2007, the District Court approved an agreement between the plaintiffs and 298 of the issuer defendants terminating their proposed settlement, which the district court had conditionally approved on February 15, 2005.

On June 18, 2007, the U.S. Supreme Court (the Supreme Court) reversed the Second Circuit’s decision reinstating related lawsuits, captioned Credit Suisse v. Billing, in which the plaintiffs allege that certain underwriters, including Robertson Stephens, Inc., violated the federal antitrust laws. The Supreme Court held that the alleged conduct could not be challenged under the antitrust laws.

Parmalat Finanziaria S.p.A.

On May 22, 2007, in Dr. Enrico Bondi, Extraordinary Commissioner of Parmalat Finanziaria, S.p.A., et al. v. Bank of America Corporation, et al., the U.S. District Court for the Southern District of New York granted plaintiff’s motion to amend to add a claim of breach of fiduciary duty. On July 6, 2007, the preliminary hearings on the administrative charges filed against the Corporation in the Court of Milan ended, and the Court ruled that the trial on such charges will be held in January 2008. The charges against the Corporation allege that it failed to maintain an organizational model sufficient to prevent the alleged criminal activities of its former employees, which are the subject of the current trial in Milan.

 

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NOTE 11 – Shareholders’ Equity and Earnings Per Common Share

 

Common Stock

The following table presents share repurchase activity for the three and six months ended June 30, 2007 and 2006, including total common shares repurchased under announced programs, weighted average per share price and the remaining buyback authority under announced programs.

 

(Dollars in millions, except per share information;
shares in thousands)
           Common Shares        
Repurchased (1)
  

Weighted Average

Per Share Price

   Remaining Buyback Authority (2)
         Amounts    Shares

April 1 – 30, 2007

   3,750    $50.90    $16,175    211,338

May 1 – 31, 2007

   6,050    51.19    15,865    205,288

June 1 – 30, 2007

   3,650    50.44    15,681    201,638

Three months ended June 30, 2007

   13,450    50.91      

Six months ended June 30, 2007

   61,450    51.94          
(Dollars in millions, except per share information;
shares in thousands)
   Common Shares
Repurchased (3)
   Weighted Average
Per Share Price
   Remaining Buyback Authority (2)
         Amounts    Shares

April 1 – 30, 2006

   24,100    $46.30    $16,731    241,638

May 1 – 31, 2006

   39,450    49.33    14,785    202,188

June 1 – 30, 2006

   19,500    48.08    11,169    182,688

Three months ended June 30, 2006

   83,050    48.16      

Six months ended June 30, 2006

   171,500    47.06          

 

 

(1)

Reduced shareholders’ equity by $3.2 billion and increased diluted earnings per common share by approximately $0.01 for the six months ended June 30, 2007. These repurchases were partially offset by the issuance of approximately 40.2 million shares of common stock under employee plans, which increased shareholders’ equity by $1.7 billion, net of $249 million of deferred compensation related to restricted stock awards, and decreased diluted earnings per common share by approximately $0.01 for the six months ended June 30, 2007.

 

 

(2)

On January 24, 2007, the Board of Directors (the Board) authorized a stock repurchase program of up to 200 million shares of the Corporation’s common stock at an aggregate cost not to exceed $14.0 billion and is limited to a period of 12 to 18 months. On April 26, 2006, the Board authorized a stock repurchase program of up to 200 million shares of the Corporation’s common stock at an aggregate cost not to exceed $12.0 billion and to be completed within a period of 12 to 18 months. On March 22, 2005, the Board authorized a stock repurchase program of up to 200 million shares of the Corporation’s common stock at an aggregate cost not to exceed $12.0 billion and to be completed within a period of 18 months. This repurchase plan was completed during the second quarter of 2006.

 

 

(3)

Reduced shareholders’ equity by $8.1 billion and increased diluted earnings per common share by approximately $0.03 for the six months ended June 30, 2006. These repurchases were partially offset by the issuance of approximately 68.6 million shares of common stock under employee plans, which increased shareholders’ equity by $2.6 billion, net of $245 million of deferred compensation related to restricted stock awards, and decreased diluted earnings per common share by approximately $0.01 for the six months ended June 30, 2006.

The Corporation may repurchase shares, from time to time, in the open market or in private transactions through the Corporation’s approved repurchase program. The Corporation expects to continue to repurchase a number of shares of common stock comparable to any shares issued under the Corporation’s employee stock plans.

In July 2007, the Board increased the regular quarterly cash dividend on common stock 14 percent from $0.56 to $0.64 per share, payable on September 28, 2007 to common shareholders of record on September 7, 2007.

In April 2007, the Board declared a regular quarterly cash dividend on common stock of $0.56 per share, payable on June 22, 2007 to common shareholders of record on June 1, 2007.

 

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Accumulated OCI

The following table presents the changes in accumulated OCI for the six months ended June 30, 2007 and 2006, net of tax:

 

(Dollars in millions)

   Securities (1, 2)      Derivatives (3)      Employee
Benefit Plans
    

Foreign

Currency

     Total

Balance, December 31, 2006

   $(2,733)      $(3,697)      $(1,428)      $147      $(7,711)

Net change in fair value recorded in accumulated OCI

   (2,561)      197           90      (2,274)

Net realized (gains) losses reclassified into earnings (4)

   (262)      219      58      13      28

Balance, June 30, 2007

   $(5,556)      $(3,281)      $(1,370)      $250      $(9,957)

Balance, December 31, 2005

   $(2,978)      $(4,338)      $(118)      $(122)      $(7,556)

Net change in fair value recorded in accumulated OCI

   (4,153)      771           90      (3,292)

Net realized (gains) losses reclassified into earnings (4)

   (220)      95                (125)

Balance, June 30, 2006

   $(7,351)      $(3,472)      $(118)      $(32)      $(10,973)

 

 

(1)

For the six months ended June 30, 2007 and 2006, the Corporation reclassified net realized gains into earnings on the sales of AFS debt securities of $41 million and $3 million net of tax, and gains on the sales of AFS marketable equity securities of $221 million and $217 million net of tax.

 

 

(2)

Accumulated OCI includes fair value gains of $4 million and $162 million net of tax on certain retained interests in the Corporation’s securitization transactions that were included in other assets at June 30, 2007 and 2006.

 

 

(3)

The amount included in accumulated OCI for terminated derivative contracts were losses of $3.3 billion and $3.2 billion, net of tax, at June 30, 2007 and 2006.

 

 

(4)

Included in this line item are amounts related to derivatives used in cash flow hedge relationships. These amounts are reclassified into earnings in the same period or periods during which the hedged forecasted transactions affect earnings. This line item also includes gains (losses) on AFS debt and marketable equity securities. These amounts are reclassified into earnings upon sale of the related security.

 

Earnings per Common Share

The calculation of earnings per common share and diluted earnings per common share for the three and six months ended June 30, 2007 and 2006 is presented below:

 

(Dollars in millions, except per share information; shares in
thousands)
             Three Months Ended June 30                      Six Months Ended June 30        
     2007      2006      2007      2006

Earnings per common share

                   

Net income

     $5,761      $5,475      $11,016      $10,461

Preferred stock dividends

     (40)      (4)      (86)      (9)

Net income available to common shareholders

     $5,721      $5,471      $10,930      $10,452

Average common shares issued and outstanding

             4,419,246              4,534,627              4,426,046              4,572,013

Earnings per common share

     $1.29      $1.21      $2.47      $2.29

Diluted earnings per common share

                   

Net income available to common shareholders

     $5,721      $5,471      $10,930      $10,452

Average common shares issued and outstanding

     4,419,246      4,534,627      4,426,046      4,572,013

Dilutive potential common shares (1, 2)

     57,553      66,542      61,178      64,946

Total diluted average common shares issued and outstanding

     4,476,799      4,601,169      4,487,224      4,636,959

Diluted earnings per common share

     $1.28      $1.19      $2.44      $2.25

 

 

(1)

For the three and six months ended June 30, 2007, average options to purchase 34 million and 24 million shares were outstanding but not included in the computation of earnings per common share because they were antidilutive. For the three and six months ended June 30, 2006, average options to purchase 31 million and 52 million shares were outstanding but not included in the computation of earnings per common share because they were antidilutive.

 

 

(2)

Includes incremental shares from restricted stock units, restricted stock shares and stock options.

 

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NOTE 12 – Pension and Postretirement Plans

The Corporation sponsors noncontributory trusteed qualified pension plans that cover substantially all officers and employees, a number of noncontributory nonqualified pension plans, and postretirement health and life plans. The Bank of America Pension Plan (the Pension Plan) allows participants to select from various earnings measures, which are based on the returns of certain funds or common stock of the Corporation. The participant-selected earnings measures determine the earnings rate on the individual participant account balances in the Pension Plan. A detailed discussion of these plans is presented in Note 16 – Employee Benefit Plans to the Consolidated Financial Statements filed as Exhibit 99.2 to the Corporation’s Current Report on Form 8-K filed on May 23, 2007.

Net periodic benefit cost (income) for the three and six months ended June 30, 2007 and 2006 included the following components:

 

     Three Months Ended June 30
         Qualified Pension Plans          Nonqualified Pension Plans        Postretirement Health and  
Life Plans

(Dollars in millions)

   2007    2006    2007    2006    2007    2006

Components of net periodic benefit cost (income)

                 

Service cost

   $65    $71    $1    $3    $4    $3

Interest cost

   180    170    16    18    19    24

Expected return on plan assets

   (312)    (257)          (1)    (2)

Amortization of transition obligation

               8    8

Amortization of prior service cost (credits)

   12    11    (2)    (2)      

Recognized net actuarial loss (gain)

   43    61    4    5    (25)    13

Recognized loss due to settlements and curtailments

         13         

Net periodic benefit cost (income)

   $(12)    $56    $32    $24    $5    $46

 

     Six Months Ended June 30
         Qualified Pension Plans          Nonqualified Pension Plans        Postretirement Health and  
Life Plans

(Dollars in millions)

   2007    2006    2007    2006    2007    2006

Components of net periodic benefit cost (income)

                 

Service cost

   $151    $153    $4    $6    $7    $7

Interest cost

   360    338    34    40    41    46

Expected return on plan assets

   (628)    (517)          (3)    (4)

Amortization of transition obligation

               16    16

Amortization of prior service cost (credits)

   24    21    (4)    (4)      

Recognized net actuarial loss (gain)

   76    114    9    10    (31)    26

Recognized loss due to settlements and curtailments

         13         

Net periodic benefit cost (income)

   $(17)    $109    $56    $52    $30    $91

The Corporation expects to contribute $147 million and $95 million in 2007 to its Nonqualified Pension Plans and Postretirement Health and Life Plans. For the six months ended June 30, 2007, the Corporation contributed $110 million and $48 million to these plans.

 

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NOTE 13 – Income Taxes

Under FIN 48, income tax benefits are recognized and measured based upon a two-step model: 1) a tax position must be more-likely-than-not to be sustained based solely on its technical merits in order to be recognized, and 2) the benefit is measured as the largest dollar amount of that position that is more-likely-than-not to be sustained upon settlement. The difference between the benefit recognized for a position in accordance with this FIN 48 model and the tax benefit claimed on a tax return is referred to as an unrecognized tax benefit (UTB). As of January 1, 2007, the balance of the Corporation’s UTBs, excluding any related accrual for interest, was $2.7 billion, of which $1.5 billion would, if recognized, affect the Corporation’s effective tax rate. Included in the $2.7 billion UTB balance are some items the recognition of which would not affect the effective tax rate, such as the tax effect of certain temporary differences and the portion of gross state UTBs that would be offset by the tax benefit of the associated federal deduction.

As of June 30, 2007, the Internal Revenue Service (IRS) has completed the examination phase of the audit of the Corporation’s federal income tax returns for the years 2000 through 2002 and issued a Revenue Agent’s Report (RAR) to the Corporation. Included in this RAR were proposed adjustments to disallow certain tax deductions and include additional taxable income relating to certain leveraged leases referred to by the IRS as “SILOs.” The Corporation filed a protest of this proposed adjustment as well as certain other of the RAR adjustments with the Appeals office of the IRS. We believe our tax treatment of the SILO position as true leases for U.S. income tax purposes is supported by the relevant facts and tax authorities. Further, issuance of the RAR did not change management’s estimate of the ultimate resolution of positions included in the UTB balance. However, final determination of the audit or changes in the Corporation’s estimate may result in future income tax expense or benefit. The Corporation’s federal income tax returns for the years 2003 and 2004 remain under examination by the IRS. In addition, the federal income tax returns of FleetBoston Financial Corporation (FleetBoston) are currently under examination for the years 1997 through March 31, 2004. Upon the final determination of each of the above audits, the UTB balance will decrease, since resolved items would be removed from the balance whether their resolution resulted in payment or recognition. Management does not expect these matters to be concluded within the next 12 months. Finally, the audit of the federal income tax returns of MBNA for the tax years 2001 through 2004 was completed during the second quarter of 2007. The completion of the MBNA audit does not significantly impact the Corporation’s effective tax rate or UTB balance. All tax years subsequent to the above years remain open to examination.

As of June 30, 2007, the Corporation’s accrual for interest and penalties that relate to income taxes, net of taxes and net of payments and deposits, including applicable interest on certain leveraged lease positions, was $475 million. This amount represents a decrease from January 1, 2007, primarily as a result of payments to and deposits with the IRS of tax and interest to stop the potential accrual of interest on certain items relating to the examinations. Under FIN 48 the Corporation continues its policy of accruing income-tax-related interest and penalties (if applicable) within income tax expense.

 

NOTE 14 – Fair Value Disclosures

Effective January 1, 2007, the Corporation adopted SFAS 157, which provides a framework for measuring fair value under GAAP. As described more fully below, SFAS 157 also eliminated the deferral of gains and losses at inception of certain derivative contracts whose fair value was not evidenced by market-observable data. SFAS 157 requires that the impact of this change in accounting for derivative contracts be recorded as an adjustment to beginning retained earnings in the period of adoption.

The Corporation also adopted SFAS 159 on January 1, 2007. SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Corporation elected to adopt the fair value option for certain financial instruments on the adoption date. SFAS 159 requires that the difference between the carrying value before election of the fair value option and the fair value of these instruments be recorded as an adjustment to beginning retained earnings in the period of adoption.

 

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The following table summarizes the impact of the change in accounting for derivative contracts described above and the impact of adopting the fair value option for certain financial instruments on January 1, 2007. Amounts shown represent the carrying value of the affected instruments before and after the changes in accounting resulting from the adoption of SFAS 157 and SFAS 159.

 

Transition Impact

(Dollars in millions)

  

Ending Balance
Sheet

December 31, 2006

     Adoption Net
Gain/(Loss)
    

Opening Balance
Sheet

January 1, 2007

Impact of adopting SFAS 157

            

Net derivative assets and liabilities (1)

   $7,100      $22      $7,122

Impact of electing the fair value option under SFAS 159

            

Loans and leases (2)

   3,968      (21)      3,947

Accrued expenses and other liabilities (3)

   (28)      (321)      (349)

Other assets (4)

   8,778      -      8,778

Available-for-sale debt securities (5)

   3,692      -      3,692

Federal funds sold and securities purchased under agreements to resell (6)

   1,401      (1)      1,400

Interest-bearing deposits liability in domestic offices (7)

   (548)      1      (547)

Cumulative-effect adjustment (pre-tax)

        (320)     

Tax impact

          112       

Cumulative-effect adjustment (net of tax), decrease to retained earnings

          $(208)       

 

 

(1)

The transition adjustment reflects the impact of recognizing previously deferred gains and losses as a result of the rescission of certain requirements of Emerging Issues Task Force (EITF) Issue No. 02-3, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities” (EITF 02-3) in accordance with SFAS 157.

 

 

(2)

Includes loans to certain large corporate clients. The ending balance at December 31, 2006 and the transition adjustment is net of a $32 million reduction in the allowance for loan and lease losses.

 

 

(3)

The January 1, 2007 balance after adoption represents the fair value of certain unfunded commercial loan commitments. The December 31, 2006 balance prior to adoption represents the reserve for unfunded lending commitments associated with these commitments.

 

 

(4)

Other assets include loans held-for-sale. No transition adjustment was recorded for the loans held-for-sale because they were already recorded at fair value pursuant to lower of cost or market accounting.

 

 

(5)

Changes in fair value of these AFS debt securities resulting from foreign currency exposure, which is the primary driver of fair value for these securities, had previously been hedged by derivatives that qualified for fair value hedge accounting in accordance with SFAS 133. As a result, there was no transition adjustment. Following the election of the fair value option, these AFS debt securities have been transferred to trading account assets.

 

 

(6)

Includes structured reverse repurchase agreements that were hedged with derivatives in accordance with SFAS 133.

 

 

(7)

Includes long-term fixed rate deposits that were economically hedged with derivatives.

 

Fair Value Option

Corporate Loans and Loan Commitments

The Corporation elected to account for certain large corporate loans and loan commitments which exceeded the Corporation’s single name credit risk concentration guidelines at fair value in accordance with SFAS 159. Lending commitments, both funded and unfunded, are actively managed and monitored, and, as appropriate, credit risk for these lending relationships may be mitigated through the use of credit derivatives, with our credit view and market perspectives determining the size and timing of the hedging activity. These credit derivatives do not meet the requirements for hedge accounting under SFAS 133 and are therefore carried at fair value with changes in fair value recorded in other income. Electing the fair value option allows the Corporation to account for these loans and loan commitments at fair value, which is more consistent with management’s view of the underlying economics and the manner in which they are managed. In addition, accounting for these loans and loan commitments at fair value reduces the accounting asymmetry that would otherwise result from carrying the loans at historical cost and the credit derivatives at fair value.

Fair values for the loans and loan commitments are based on market prices, where available, or discounted cash flows using market-based credit spreads of comparable debt instruments or credit derivatives of the specific borrower or

 

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comparable borrowers. Results of discounted cash flow calculations may be adjusted, as appropriate, to reflect other market conditions or the perceived credit risk of the borrower.

At June 30, 2007, funded loans which the Corporation has elected to fair value had an aggregate fair value of $3.61 billion recorded in loans and leases and an aggregate outstanding principal balance of $3.67 billion. At June 30, 2007, unfunded loan commitments that the Corporation has elected to fair value had an aggregate fair value of $391 million recorded in accrued expenses and other liabilities and an aggregate committed exposure of $21.7 billion. Interest income on these loans is recorded in interest and fees on loans and leases. At June 30, 2007, none of these loans were 90 days or more past due and still accruing interest or had been placed on nonaccrual status. Net losses recorded in other income resulting from changes in fair value of these loans and loan commitments totaled $14 million and $41 million during the three and six months ended June 30, 2007. These losses were significantly attributable to changes in instrument-specific credit risk. Following adoption of SFAS 159, an immaterial amount of direct loan origination fees and costs related to items for which the fair value option was elected were recognized in earnings. Previously, these items would have been capitalized and amortized to earnings over the life of the loans.

Loans Held-for-Sale

The Corporation also elected to account for certain loans held-for-sale at fair value. Electing to use fair value allows a better offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting under SFAS 133. The Corporation has not elected to fair value other loans held-for-sale primarily because these loans are floating rate loans that are not economically hedged using derivative instruments. Fair values for loans held-for-sale are based on quoted market prices, where available, or are determined by discounting estimated cash flows using interest rates approximating the Corporation’s current origination rates for similar loans and adjusted to reflect the inherent credit risk. At June 30, 2007, residential mortgage loans, commercial mortgage loans, and other loans held-for-sale for which the fair value option was elected had an aggregate fair value of $19.31 billion and an aggregate outstanding principal balance of $19.83 billion and were recorded in other assets. Interest income on these loans is recorded in interest and fees on loans and leases. Net gains (losses) resulting from changes in fair value of these loans, including realized gains (losses) on sale, of $3 million and $59 million were recorded in mortgage banking income, $(237) million and $(244) million were recorded in trading account profits and $(15) million and $(10) million were recorded in other income during the three and six months ended June 30, 2007. These changes in fair value are mostly offset by hedging activities. An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk. The adoption of SFAS 159 resulted in an increase of $22 million and $61 million in mortgage banking income for the three and six months ended June 30, 2007, and in an increase of $36 million and $65 million in noninterest expense for the three and six months ended June 30, 2007. Subsequent to the adoption of SFAS 159, mortgage loan origination costs are recognized in noninterest expense when incurred. Previously, mortgage loan origination costs would have been capitalized as part of the carrying amount of the loans and recognized as a reduction of mortgage banking income upon the sale of such loans.

Debt Securities

The Corporation elected to fair value $3.7 billion of AFS debt securities during the first quarter of 2007. Changes in fair value resulting from foreign currency exposure, which is the primary driver of fair value for these securities, had previously been hedged by derivatives that qualified for fair value hedge accounting in accordance with SFAS 133. Electing the fair value option allows the Corporation to eliminate the burden of complying with the requirements for hedge accounting under SFAS 133 without introducing accounting volatility. Following election of the fair value option, these securities were reclassified to trading account assets. The Corporation did not elect the fair value option for other AFS debt securities because they are not hedged by derivatives that qualified for hedge accounting in accordance with SFAS 133.

Structured Reverse Repurchase Agreements

The Corporation elected to fair value certain structured reverse repurchase agreements which were hedged with derivatives which qualified for fair value hedge accounting in accordance with SFAS 133. Election of the fair value option allows the Corporation to reduce the burden of complying with the requirements of hedge accounting under SFAS 133. At June 30, 2007, these instruments had an aggregate fair value of $1.97 billion and a principal balance of $1.96 billion recorded

 

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in federal funds sold and securities purchased under agreements to resell. Interest earned on these instruments continues to be recorded in interest income. Net gains resulting from changes in fair value of these instruments of $6 million and $8 million were recorded in other income for the three and six months ended June 30, 2007. The Corporation did not elect to fair value other financial instruments within the same balance sheet category because they are not hedged by derivatives accounted for under SFAS 133.

Long-term Deposits

The Corporation elected to fair value certain long-term fixed rate deposits which are economically hedged with derivatives. At June 30, 2007, these instruments had an aggregate fair value of $521 million and principal balance of $553 million recorded in interest-bearing deposits. Interest paid on these instruments continues to be recorded in interest expense. Net gains resulting from changes in fair value of these instruments of $22 million and $21 million were recorded in other income for the three and six months ended June 30, 2007. Election of the fair value option will allow the Corporation to reduce the accounting volatility that would otherwise result from the accounting asymmetry created by accounting for the financial instruments at historical cost and the economic hedges at fair value. The Corporation did not elect to fair value other financial instruments within the same balance sheet category because they are not economically hedged using derivatives.

 

Fair Value Measurement

SFAS 157 defines fair value 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. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1

    

Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain U.S. Treasury securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2

    

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes U.S. Government and agency mortgage-backed debt securities, corporate debt securities, derivative contracts and residential mortgage loans held-for-sale.

Level 3

    

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights (MSRs) and highly structured or long-term derivative contracts.

Prior to the adoption of SFAS 157, EITF 02-3 prohibited the recognition of gains and losses at inception of a derivative contract unless the fair value of the contract was evidenced by a quoted price in an active market, an observable price or other market transaction, or other observable data. SFAS 157 rescinded this requirement, resulting in the recognition of previously deferred gains and losses as an increase to the beginning balance of retained earnings of $22 million (pre-tax).

Valuations of derivative assets and liabilities reflect the value of the instrument including the values associated with counterparty risk. With the issuance of SFAS 157, the accounting industry clarified that these values must also take into account the Corporation’s own credit standing, thus including in the valuation of the derivative instrument the value of

 

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the net credit differential between the counterparties to the derivative contract. Effective January 1, 2007, the Corporation updated its methodology to calculate the impact of both the counterparty and its own credit standing. The net impact for the three and six months ended June 30, 2007 was not material.

Assets and liabilities measured at fair value on a recurring basis, including financial instruments for which the Corporation has elected the fair value option, are summarized below:

 

       June 30, 2007
       Fair Value Measurements Using       

(Dollars in millions)

     Level 1          Level 2          Level 3          Netting
Adjustments (1)
     Assets/Liabilities
at Fair Value

Assets

                        

Federal funds sold and securities purchased under agreements to resell (2)

     $-      $1,970      $-      $-      $1,970

Trading account assets

     53,768      128,347      289      -      182,404

Derivative assets

     6,057      286,783      7,576      (270,606)      29,810

Available-for-sale debt securities (3)

     1,629      170,477      226      -      172,332

Loans and leases (2,4)

     -      -      3,606      -      3,606

Mortgage servicing rights

     -      -      3,269      -      3,269

Other assets (5)

     2,755      21,166      6,670      -      30,591

Total assets

     $64,209      $608,743      $21,636      $(270,606)      $423,982

Liabilities

                        

Interest-bearing deposits in domestic offices (2)

     $-      $521      $-      $-      $521

Trading account liabilities

     48,699      26,371      -      -      75,070

Derivative liabilities

     6,875      279,656      8,877      (270,267)      25,141

Accrued expenses and other liabilities (2)

     -      -      391      -      391

Total liabilities

     $55,574      $306,548      $9,268      $(270,267)      $101,123

 

 

(1)

Amounts represent the impact of legally enforceable master netting agreements that allow the Corporation to settle positive and negative positions and also cash collateral held or placed with the same counterparties.

 

 

(2)

Amounts represent items for which the Corporation has elected the fair value option under SFAS 159.

 

 

(3)

Effective April 1, 2007, U.S. Government and agency mortgage-backed debt securities are classified as Level 2.

 

 

(4)

Loans and leases at June 30, 2007 included $20.1 billion of leases that were not eligible for the fair value option as they were specifically excluded from fair value option election in accordance with SFAS 159.

 

 

(5)

Other assets include equity investments held by Principal Investing, AFS equity investments and certain retained interests in securitization vehicles, including interest-only strips, all of which were carried at fair value prior to the adoption of SFAS 159; and loans held-for-sale of $19.31 billion for which the Corporation has elected the fair value option under SFAS 159. Substantially all of other assets are eligible for fair value accounting at June 30, 2007.

 

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The table below presents a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2007. Level 3 loans and loan commitments are carried at fair value due to adoption of the fair value option, as described on page 25. Other Level 3 instruments presented in the table, including derivatives, trading account assets, AFS debt securities, MSRs, certain equity investments and retained interests in securitizations, were carried at fair value prior to the adoption of SFAS 159.

 

    Total Fair Value Measurements (Three Months Ended June 30, 2007)

Level 3 Instruments Only

(Dollars in millions)

 

Net

  Derivatives (1)  

 

  Trading  

Account
Assets (2)

  Available-
for-Sale Debt
  Securities (2)  
 

Loans

and

  Leases (3)  

 

  Mortgage  

Servicing
Rights (2)

 

Other

  Assets (4)  

 

Accrued

  Expenses and  

Other
Liabilities (3)

Balance, March 31, 2007

  $608   $269   $-   $3,859   $2,963   $5,867   $(377)

Total gains or losses
(realized/unrealized):

             

Included in earnings

  (519)   3   -   -   418   1,211   (14)

Included in other
comprehensive income

  -   -   4   -   -   (12)   -

Purchases, issuances, and
settlements

  (351)   6   (9)   (253)   (112)   (747)   -

Transfers in and/or out of Level 3

  (1,039)   11   231   -   -   351   -

Balance, June 30, 2007

  $(1,301)   $289   $226   $3,606   $3,269   $6,670   $(391)
    Total Fair Value Measurements (Six Months Ended June 30, 2007)

Level 3 Instruments Only

(Dollars in millions)

 

Net

Derivatives (1)

  Trading
Account
Assets (2)
  Available-
for-Sale Debt
Securities (2)
  Loans
and
Leases (3)
  Mortgage
Servicing
Rights (2)
  Other
Assets (4)
  Accrued
Expenses and
Other
Liabilities (3)

Balance, December 31, 2006

  $766   $303   $-   $3,968   $2,869   $6,605   $(28)

Impact of SFAS 157 and SFAS 159
adoption

  22   -   -   (21)   -   -   (321)

Balance, January 1, 2007

  $788   $303   $-   $3,947   $2,869   $6,605   $(349)

Total gains or losses
(realized/unrealized):

             

Included in earnings

  (583)   (27)   -   1   539   1,941   (42)

Included in other
comprehensive income

  -   -   4   -   -   (63)   -

Purchases, issuances, and
settlements

  (459)   2   (9)   (342)   (139)   (2,150)   -

Transfers in and/or out of Level 3

  (1,047)   11   231   -   -   337   -

Balance, June 30, 2007

  $(1,301)   $289   $226   $3,606   $3,269   $6,670   $(391)

 

 

(1)

Net derivatives at June 30, 2007 included derivative assets of $7.58 billion and derivative liabilities of $8.88 billion, all of which were carried at fair value prior to the adoption of SFAS 159.

 

 

(2)

Amounts represented items which were carried at fair value prior to the adoption of SFAS 159.

 

 

(3)

Amounts represented items for which the Corporation had elected the fair value option under SFAS 159 including commercial loan commitments recorded in accrued expenses and other liabilities.

 

 

(4)

Other assets included equity investments held by Principal Investing and certain retained interests in securitization vehicles, including interest-only strips, all of which were carried at fair value prior to the adoption of SFAS 159.

 

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The table below summarizes gains and losses due to changes in fair value, including both realized and unrealized gains and losses, recorded in earnings for Level 3 assets and liabilities for the three and six months ended June 30, 2007. These amounts include gains and losses generated by loans and loan commitments for which the fair value option was elected and by other instruments, including certain derivative contracts, trading account assets, MSRs, equity investments and retained interests in securitizations, which were carried at fair value prior to the adoption of SFAS 159.

 

     Total Gains and Losses

Level 3 Instruments Only

(Dollars in millions)

  

Net

  Derivatives (1)  

  

Trading

Account

Assets (1)

  

  Loans and  

Leases (2)

  

  Mortgage  

Servicing

Rights (1)

  

Other

  Assets (1)  

  

Accrued

  Expenses and  

Other

Liabilities (2)

Classification of gains and losses
(realized/unrealized) included in
earnings for the three months ended
June 30, 2007:

                 

Card income

   $-    $-    $-    $-    $99    $-

Equity investment income

   -    -    -    -    1,103    -

Trading account profits

   (396)    3    -    -    -    (1)

Mortgage banking income

   (123)    -    -    418    -    -

Other income

   -    -    -    -    9    (13)

Total

   $(519)    $3    $-    $418    $1,211    $(14)

Classification of gains and losses
(realized/unrealized) included in
earnings for the six months ended
June 30, 2007:

                 

Card income

   $-    $-    $-    $-    $280    $-

Equity investment income

   -    -    -    -    1,611    -

Trading account profits

   (465)    (27)    -    -    -    (1)

Mortgage banking income

   (118)    -    -    539    -    -

Other income

   -    -    1    -    50    (41)

Total

   $(583)    $(27)    $1    $539    $1,941    $(42)

 

 

(1)

Amounts represented items which were carried at fair value prior to the adoption of SFAS 159.

 

 

(2)

Amounts represented items for which the Corporation had elected the fair value option under SFAS 159.

 

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The table below summarizes changes in unrealized gains or losses recorded in earnings for the three and six months ended June 30, 2007 for Level 3 assets and liabilities that are still held at June 30, 2007. These amounts include changes in fair value of loans and loan commitments for which the fair value option was elected and changes in fair value for other instruments, including certain derivative contracts, trading account assets, MSRs, equity investments and retained interests in securitizations, which were carried at fair value prior to the adoption of SFAS 159.

 

    Changes in Unrealized Gains or Losses

Level 3 Instruments Only

(Dollars in millions)

 

Net

  Derivatives (1)  

 

  Trading  

Account

Assets (1)

 

  Loans and  

Leases (2)

 

  Mortgage  

Servicing

Rights (1)

 

Other

  Assets (1)  

 

Accrued
  Expenses and  

Other
Liabilities(2)

Changes in unrealized gains or losses
relating to assets still held at reporting
date for the three months ended
June 30, 2007:

           

Card income

  $-   $-   $-   $-   $64   $-

Equity investment income

  -   -   -   -   668   -

Trading account profits

  (487)   3   -   -   -   (1)

Mortgage banking income

  (114)   -   -   343   -   -

Other income

  -   -   (10)   -   (4)   (47)

Total

  $(601)   $3   $(10)   $343   $728   $(48)

Changes in unrealized gains or losses
relating to assets still held at reporting
date for the six months ended
June 30, 2007:

           

Card income

  $-   $-   $-   $-   $92   $-

Equity investment income

  -   -   -   -   787   -

Trading account profits

  (637)   (30)   -   -   -   (1)

Mortgage banking income

  (111)   -   -   403   -   -

Other income

  -   -   (11)   -   (4)   (79)

Total

  $(748)   $(30)   $(11)   $403   $875   $(80)

 

 

(1)

Amounts represented items which were carried at fair value prior to the adoption of SFAS 159.

 

 

(2)

Amounts represented items for which the Corporation had elected the fair value option under SFAS 159.

Certain assets are measured at fair value on a non-recurring basis (e.g., loans held-for-sale carried at the lower of cost or fair value). At June 30, 2007, loans held-for-sale for which the Corporation had not elected the fair value option and which were carried at the lower of cost or fair value, with an aggregate cost of $3.63 billion had been written down to fair value of $3.32 billion. For the three and six months ended June 30, 2007, a charge of $22 million and $26 million was recorded in other income while $0 and $4 million was recorded in mortgage banking income for these loans held-for-sale. At June 30, 2007, lease residuals for which the Corporation had not elected the fair value option, with an aggregate cost of $65 million had been written down to fair value of $52 million. For both the three and six months ended June 30, 2007, other than temporary impairment charges of $13 million relating to lease residuals were recorded in other income to write the current carrying amount down to fair value.

 

NOTE 15 – Mortgage Servicing Rights

The Corporation accounts for residential first mortgage 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 such as options and interest rate swaps.

 

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The following table presents activity for residential first mortgage MSRs for the three and six months ended June 30, 2007 and 2006.

 

             Three Months Ended June 30                    Six Months Ended June 30        

(Dollars in millions)

               2007            2006          2007    2006  

Balance, beginning of period

   $2,963    $2,925    $2,869    $2,658

MBNA balance, January 1, 2006

   -    -    -    9

Additions

   97    133    268    282

Impact of customer payments

   (184)    (167)    (367)    (338)

Other changes in MSR market value

   393    192    499    472

Balance, June 30

   $3,269    $3,083    $3,269    $3,083

For the three and six months ended June 30, 2007, other changes in MSR market value of $393 million and $499 million reflect changes in discount rates and prepayment speed assumptions, mostly due to changes in interest rates. These amounts do not include $25 million and $40 million resulting from the reconciliation of actual cash received versus expected prepayments. The total of these amounts of $418 million and $539 million is included in the line “Mortgage banking income” in the table “Total Fair Value Measurements” in Note 14 – Fair Value Disclosures to the Consolidated Financial Statements.

The key economic assumptions used in valuations of MSRs included modeled prepayment rates and resultant weighted average lives of the MSRs and the option adjusted spread levels. Commercial and residential reverse mortgage MSRs are accounted for using the amortization method (i.e., lower of cost or market). Commercial and residential reverse mortgage MSRs totaled $239 million at June 30, 2007, including $32 million of residential reverse mortgage MSRs obtained as part of a business acquisition, and commercial MSRs totaled $176 million at December 31, 2006 and are not included in the table above. The Corporation did not have any residential reverse mortgage MSRs at December 31, 2006.

 

NOTE 16 – Business Segment Information

The Corporation reports the results of its operations through three business segments: Global Consumer and Small Business Banking (GCSBB), Global Corporate and Investment Banking (GCIB) and Global Wealth and Investment Management (GWIM). The Corporation may periodically reclassify business segment results based on modifications to its management reporting methodologies and changes in organizational alignment.

 

Global Consumer and Small Business Banking

GCSBB provides a diversified range of products and services to individuals and small businesses. The Corporation reports GCSBB’s results, specifically credit card, business card and certain unsecured lending portfolios, on a managed basis. This basis of presentation excludes the Corporation’s securitized mortgage and home equity portfolios for which the Corporation retains servicing. Reporting on a managed basis is consistent with the way that management as well as analysts evaluate the results of GCSBB. Managed basis assumes that loans that have been securitized were not sold and presents earnings on these loans in a manner similar to the way loans that have not been sold (i.e., held loans) are presented. Loan securitization is an alternative funding process that is used by the Corporation to diversify funding sources. Loan securitization removes loans from the Consolidated Balance Sheet through the sale of loans to an off-balance sheet qualified special purpose entity which is excluded from the Corporation’s Consolidated Financial Statements in accordance with GAAP.

The performance of the managed portfolio is important in understanding GCSBB’s results as it demonstrates the results of the entire portfolio serviced by the business. Securitized loans continue to be serviced by the business and are subject to the same underwriting standards and ongoing monitoring as held loans. In addition, retained excess servicing income is exposed to similar credit risk and repricing of interest rates as held loans. GCSBB’s managed income statement line items differ from a held basis as follows:

 

   

Managed net interest income includes GCSBB’s net interest income on held loans and interest income on the securitized loans less the internal funds transfer pricing allocation related to securitized loans.

 

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Managed noninterest income includes GCSBB’s noninterest income on a held basis less the reclassification of certain components of card income (e.g., excess servicing income) to record managed net interest income and provision for credit losses. Noninterest income, both on a held and managed basis, also includes the impact of adjustments to the interest-only strip that are recorded in card income as management continues to manage this impact within GCSBB.

 

   

Provision for credit losses represents the provision for credit losses on held loans combined with realized credit losses associated with the securitized loan portfolio.

 

Global Corporate and Investment Banking

GCIB provides a wide range of financial services to both the Corporation’s issuer and investor clients that range from business banking clients to large international corporate and institutional investor clients using a strategy to deliver value-added financial products and advisory solutions. GCIB also includes the results of Banc of America Specialist.

 

Global Wealth and Investment Management

GWIM offers investment and brokerage services, estate management, financial planning services, fiduciary management, credit and banking expertise, and diversified asset management products to institutional clients, as well as affluent and high-net-worth individuals. GWIM also includes the impact of migrated qualifying affluent customers, including their related deposit balances from GCSBB. After migration, the associated net interest income, service charges and noninterest expense on the deposit balances is recorded in GWIM.

 

All Other

All Other consists of equity investment activities including Principal Investing, Corporate Investments and Strategic Investments, the residual impacts of the allowance for credit losses and the cost allocation processes, merger and restructuring charges, intersegment eliminations, and the results of certain businesses that are expected to be or have been sold or are in the process of being liquidated (e.g., the Corporation’s Brazilian operations, Asia Commercial Banking business and operations in Chile and Uruguay). All Other also includes certain amounts associated with ALM activities, including the residual impact of funds transfer pricing allocation methodologies, amounts associated with the change in the value of derivatives used as economic hedges of interest rate and foreign exchange rate fluctuations that did not qualify for SFAS 133 hedge accounting treatment, certain gains or losses on sales of whole mortgage loans, and gains (losses) on sales of debt securities. In addition, GCSBB is reported on a managed basis which includes a “securitization impact” adjustment which has the effect of assuming that loans that have been securitized were not sold and presenting these loans in a manner similar to the way loans that have not been sold are presented. All Other’s results include a corresponding “securitization offset” which removes the impact of these securitized loans in order to present the consolidated results of the Corporation on a held basis.

 

Basis of Presentation

Total revenue, net of interest expense includes net interest income on a fully taxable-equivalent (FTE) basis and noninterest income. The adjustment of net interest income to a FTE basis results in a corresponding increase in income tax expense. The net interest income of the businesses includes the results of a funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics. Net interest income of the business segments also includes an allocation of net interest income generated by the Corporation’s ALM activities.

Certain expenses not directly attributable to a specific business segment are allocated to the segments based on pre-determined means. The most significant of these expenses include data processing costs, 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 which reflect utilization.

 

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The following tables present total revenue, net of interest expense, on a FTE basis and net income for the three and six months ended June 30, 2007 and 2006, and total assets at June 30, 2007 and 2006 for each business segment, as well as All Other.

 

Business Segments                            
Three Months Ended June 30
     Total Corporation (1)          Global Consumer and Small    
Business Banking (2, 3)    
     Global Corporate and    
Investment Banking (2)    

(Dollars in millions)

   2007          2006          2007          2006          2007          2006    

Net interest income (4)

   $8,781      $8,926      $7,150      $6,967      $2,618      $2,441

Noninterest income

   11,177      9,589      4,789      4,410      3,196      2,874

Total revenue, net of interest expense

   19,958      18,515      11,939      11,377      5,814      5,315

Provision for credit losses (5)

   1,810      1,005      3,094      1,807      41      22

Amortization of intangibles

   391      441      340      380      33      40

Other noninterest expense

   8,702      8,276      4,629      4,128      3,102      2,724

Income before income taxes

   9,055      8,793      3,876      5,062      2,638      2,529

Income tax expense (4)

   3,294      3,318      1,417      1,858      968      934

Net income

   $5,761      $5,475      $2,459      $3,204      $1,670      $1,595

Period-end total assets

   $1,534,359      $1,445,193      $402,195      $396,150      $728,498      $646,861
     Global Wealth and
Investment Management (2)
     All Other (2, 3)                      

(Dollars in millions)

   2007      2006      2007              2006                      

Net interest income (4)

   $958      $922      $(1,945)      $(1,404)          

Noninterest income

   1,050      931      2,142      1,374          

Total revenue, net of interest expense

   2,008      1,853      197      (30)          

Provision for credit losses (5)

   (14)      (40)      (1,311)      (784)          

Amortization of intangibles

   16      18      2      3          

Other noninterest expense

   1,028      953      (57)      471          

Income before income taxes

   978      922      1,563      280          

Income tax expense (4)

   359      340      550      186          

Net income

   $619      $582      $1,013      $94          

Period-end total assets

   $129,544      $109,759      $274,122      $292,423          

 

 

(1)

There were no material intersegment revenues among the segments.

 

 

(2)

Total assets include asset allocations to match liabilities (i.e., deposits).

 

 

(3)

GCSBB is presented on a managed basis with a corresponding offset recorded in All Other.

 

 

(4)

FTE basis

 

 

(5)

Provision for credit losses represents: For GCSBB – Provision for credit losses on held loans combined with realized credit losses associated with the securitized loan portfolio and for All Other – Provision for credit losses combined with the GCSBB securitization offset.

 

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Table of Contents
Business Segments                                   
Six Months Ended June 30
     Total Corporation (1)          Global Consumer and    
Small Business Banking (2, 3)    
     Global Corporate and    
Investment Banking (2)    

(Dollars in millions)

   2007          2006          2007          2006          2007          2006    

Net interest income (4)

   $17,378      $17,966      $14,179      $14,059      $5,030      $4,930

Noninterest income

   21,064      18,504      9,183      8,159      6,107      5,669

Total revenue, net of interest expense

   38,442      36,470      23,362      22,218      11,137      10,599

Provision for credit losses (5)

   3,045      2,275      5,505      3,708      156      47

Amortization of intangibles

   780      881      677      758      67      80

Other noninterest expense

   17,410      16,760      9,023      8,361      5,968      5,516

Income before income taxes

   17,207      16,554      8,157      9,391      4,946      4,956

Income tax expense (4)

   6,191      6,093      3,003      3,462      1,829      1,836

Net income

   $11,016      $10,461      $5,154      $5,929      $3,117      $3,120

Period-end total assets

   $1,534,359      $1,445,193      $402,195      $396,150      $728,498      $646,861
     Global Wealth and
Investment Management (2)
     All Other (2, 3)                  

(Dollars in millions)

   2007      2006      2007          2006                  

Net interest income (4)

   $1,884      $1,861      $(3,715)      $(2,884)          

Noninterest income

   2,012      1,821      3,762      2,855          

Total revenue, net of interest expense

   3,896      3,682      47      (29)          

Provision for credit losses (5)

   9      (40)      (2,625)      (1,440)          

Amortization of intangibles

   32      36      4      7          

Other noninterest expense

   2,029      1,902      390      981          

Income before income taxes

   1,826      1,784      2,278      423          

Income tax expense (4)

   675      661      684      134          

Net income

   $1,151      $1,123      $1,594      $289          

Period-end total assets

   $129,544      $109,759      $274,122      $292,423          

 

 

(1)

There were no material intersegment revenues among the segments.

 

 

(2)

Total assets include asset allocations to match liabilities (i.e., deposits).

 

 

(3)

GCSBB is presented on a managed basis with a corresponding offset recorded in All Other.

 

 

(4)

FTE basis

 

 

(5)

Provision for credit losses represents: For GCSBB – Provision for credit losses on held loans combined with realized credit losses associated with the securitized loan portfolio and for All Other – Provision for credit losses combined with the GCSBB securitization offset.

 

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Table of Contents

GCSBB is reported on a managed basis which includes a “securitization impact” adjustment which has the effect of presenting securitized loans in a manner similar to the way loans that have not been sold are presented. All Other’s results include a corresponding “securitization offset” which removes the impact of these securitized loans in order to present the consolidated results of the Corporation on a held basis. The tables below reconcile GCSBB and All Other to a held basis by reclassifying net interest income, all other income and realized credit losses associated with the securitized loans to card income.

 

Global Consumer and Small Business Banking – Reconciliation       
     Three Months Ended June 30, 2007        Three Months Ended June 30, 2006

(Dollars in millions)

   Managed    
Basis (1)    
     Securitization    
Impact (2)    
     Held    
Basis    
        Managed    
Basis (1)    
     Securitization    
Impact (2)    
     Held    
Basis    

Net interest income (3)

   $7,150      $(1,981)      $5,169      $6,967      $(1,846)      $5,121

Noninterest income:

                           

Card income

   2,676      793      3,469      2,528      1,136      3,664

Service charges

   1,488      -      1,488      1,349      -      1,349

Mortgage banking income

   297      -      297      210      -      210

Gains (losses) on sales of debt securities

   -      -      -      -      -      -

All other income

   328      (74)      254      323      (67)      256

Total noninterest income

   4,789      719      5,508      4,410      1,069      5,479

Total revenue, net of interest expense

   11,939      (1,262)      10,677      11,377      (777)      10,600

Provision for credit losses

   3,094      (1,262)      1,832      1,807      (777)      1,030

Noninterest expense

   4,969      -      4,969      4,508      -      4,508

Income before income taxes

   3,876      -      3,876      5,062      -      5,062

Income tax expense (3)

   1,417      -      1,417      1,858      -      1,858

Net income

   $2,459      $-      $2,459        $3,204      $-      $3,204
     Six Months Ended June 30, 2007        Six Months Ended June 30, 2006

(Dollars in millions)

   Managed    
Basis (1)    
     Securitization    
Impact (2)    
     Held    
Basis    
        Managed    
Basis (1)    
     Securitization    
Impact (2)    
     Held    
Basis    

Net interest income (3)

   $14,179      $(3,871)      $10,308      $14,059      $(3,792)      $10,267

Noninterest income:

                           

Card income

   5,127      1,632      6,759      4,635      2,538      7,173

Service charges

   2,865      -      2,865      2,539      -      2,539

Mortgage banking income

   599      -      599      415      -      415

Gains (losses) on sales of debt securities

   (1)      -      (1)      (1)      -      (1)

All other income

   593      (151)      442      571      (177)      394

Total noninterest income

   9,183      1,481      10,664      8,159      2,361      10,520

Total revenue, net of interest expense

   23,362      (2,390)      20,972      22,218      (1,431)      20,787

Provision for credit losses

   5,505      (2,390)      3,115      3,708      (1,431)      2,277

Noninterest expense

   9,700      -      9,700      9,119      -      9,119

Income before income taxes

   8,157      -      8,157      9,391      -      9,391

Income tax expense (3)

   3,003      -      3,003      3,462      -      3,462

Net income

   $5,154      $-      $5,154        $5,929      $-      $5,929

 

 

(1)

Provision for credit losses represents provision for credit losses on held loans combined with realized credit losses associated with the securitized loan portfolio.

 

 

(2)

The securitization impact on net interest income is on a funds transfer pricing methodology consistent with the way funding costs are allocated to the businesses.

 

 

(3)

FTE basis

 

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Table of Contents
All Other – Reconciliation                    
    Three Months Ended June 30, 2007        Three Months Ended June 30, 2006
(Dollars in millions)   Reported    
Basis (1)    
   Securitization    
Offset (2)    
   As    
Adjusted    
        Reported    
Basis (1)    
   Securitization    
Offset (2)    
   As    
Adjusted    

Net interest income (3)

  $(1,945)    $1,981    $36      $(1,404)    $1,846    $442

Noninterest income:

                  

Card income

  676    (793)    (117)      961    (1,136)    (175)

Equity investment income

  1,719    -    1,719      577    -    577

Gains (losses) on sales of debt securities

  2    -    2      (5)    -    (5)

All other income

  (255)    74    (181)      (159)    67    (92)

Total noninterest income

  2,142    (719)    1,423      1,374    (1,069)    305

Total revenue, net of interest expense

  197    1,262    1,459      (30)    777    747

Provision for credit losses

  (1,311)    1,262    (49)      (784)    777    (7)

Merger and restructuring charges

  75    -    75      194    -    194

All other noninterest expense

  (130)    -    (130)      280    -    280

Income before income taxes

  1,563    -    1,563      280    -    280

Income tax expense (3)

  550    -    550      186    -    186

Net income

  $1,013    $-    $1,013        $94    $-    $94
    Six Months Ended June 30, 2007        Six Months Ended June 30, 2006

(Dollars in millions)

  Reported    
Basis (1)    
   Securitization    
Offset (2)    
   As    
Adjusted    
        Reported    
Basis (1)    
   Securitization    
Offset (2)    
   As    
Adjusted    

Net interest income (3)

  $(3,715)    $3,871    $156      $(2,884)    $3,792    $908

Noninterest income:

                  

Card income

  1,397    (1,632)    (235)      2,129    (2,538)    (409)

Equity investment income

  2,615    -    2,615      1,148    -    1,148

Gains (losses) on sales of debt securities

  63    -    63      (4)    -    (4)

All other income

  (313)    151    (162)      (418)    177    (241)

Total noninterest income

  3,762    (1,481)    2,281      2,855    (2,361)    494

Total revenue, net of interest expense

  47    2,390    2,437      (29)    1,431    1,402

Provision for credit losses

  (2,625)    2,390    (235)      (1,440)    1,431    (9)

Merger and restructuring charges

  186    -    186      292    -    292

All other noninterest expense

  208    -    208      696    -    696

Income before income taxes

  2,278    -    2,278      423    -    423

Income tax expense (3)

  684    -    684      134    -    134

Net income

  $1,594    $-    $1,594        $289    $-    $289

 

 

(1)

Provision for credit losses represents provision for credit losses in All Other combined with the GCSBB securitization offset.

 

 

(2)

The securitization offset on net interest income is on a funds transfer pricing methodology consistent with the way funding costs are allocated to the businesses.

 

 

(3)

FTE basis

 

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The following table presents reconciliations of the three business segments’ (GCSBB, GCIB and GWIM) total revenue, net of interest expense, on a FTE basis and net income to the Consolidated Statement of Income. The adjustments presented in the table below include consolidated income and expense amounts not specifically allocated to individual business segments.

 

     Three Months Ended June 30         Six Months Ended June 30

(Dollars in millions)

   2007                2006                      2007                2006            

Segments’ total revenue, net of interest expense (1)

   $19,761    $18,545       $38,395    $36,499

Adjustments:

              

ALM activities

   (136)    (93)       (40)    (252)

Equity investment income

   1,719    577       2,615    1,148

Liquidating businesses

   132    521       454    1,067

FTE basis adjustment

   (395)    (296)       (724)    (560)

Managed securitization impact to total revenue, net of interest expense

   (1,262)    (777)       (2,390)    (1,431)

Other

   (256)    (258)         (592)    (561)

Consolidated revenue, net of interest expense

   $19,563    $18,219         $37,718    $35,910

Segments’ net income

   $4,748    $5,381       $9,422    $10,172

Adjustments, net of taxes:

              

ALM activities

   (141)    (109)       (145)    (254)

Equity investment income

   1,083    364       1,647    723

Liquidating businesses

   86   

159

      349    322

Merger and restructuring charges

   47    123       117    184

Other

   (62)    (443)         (374)    (686)

Consolidated net income

   $5,761    $5,475         $11,016    $10,461

 

 

(1)

FTE basis

 

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Table of Contents

Bank of America Corporation and Subsidiaries

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Table of Contents

 

Page

Recent Events

   41

Performance Overview

   42

Financial Highlights

   43

Supplemental Financial Data

   49

Business Segment Operations

   56

Global Consumer and Small Business Banking

   57

Global Corporate and Investment Banking

   65

Global Wealth and Investment Management

   71

All Other

   77

Off-Balance Sheet Financing Entities

   79

Obligations and Commitments

   80

Managing Risk

   81

Strategic Risk Management

   81

Liquidity Risk and Capital Management

   82

Credit Risk Management

   85

Consumer Portfolio Credit Risk Management

   85

Commercial Portfolio Credit Risk Management

   92

Foreign Portfolio

   101

Provision for Credit Losses

   103

Allowance for Credit Losses

   103

Market Risk Management

   107

Trading Risk Management

   108

Interest Rate Risk Management for Nontrading Activities

   109

Mortgage Banking Risk Management

   114

Operational Risk Management

   114

Recent Accounting and Reporting Developments

   115

Complex Accounting Estimates

   115

Glossary

   116

 

39


Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report on Form 10-Q contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from those expressed in, or implied by, our forward-looking statements. Words such as “expects,” “anticipates,” “believes,” “estimates” and other similar expressions or future or conditional verbs such as “will,” “should,” “would” and “could” are intended to identify such forward-looking statements. Readers of the Form 10-Q of Bank of America Corporation and its subsidiaries (the Corporation) should not rely solely on the forward-looking statements and should consider all uncertainties and risks throughout this report as well as those discussed under Item 1A. “Risk Factors” of the Corporation’s 2006 Annual Report on Form 10-K. The statements are representative only as of the date they are made, and the Corporation undertakes no obligation to update any forward-looking statement.

Possible events or factors that could cause results or performance to differ materially from those expressed in our forward-looking statements include the following: changes in general economic conditions and economic conditions in the geographic regions and industries in which the Corporation operates which may affect, among other things, the level of nonperforming assets, charge-offs and provision expense; changes in the interest rate environment which may reduce interest margins and impact funding sources; changes in foreign exchange rates; adverse movements and volatility in debt and equity capital markets; changes in market rates and prices which may adversely impact the value of financial products including securities, loans, deposits, debt and derivative financial instruments, and other similar financial instruments; political conditions and related actions by the United States abroad which may adversely affect the Corporation’s businesses and economic conditions as a whole; liabilities resulting from litigation and regulatory investigations, including costs, expenses, settlements and judgments; changes in domestic or foreign tax laws, rules and regulations as well as court, Internal Revenue Service or other governmental agencies’ interpretations thereof; various monetary and fiscal policies and regulations, including those determined by the Board of Governors of the Federal Reserve System, the Office of the Comptroller of Currency, the Federal Deposit Insurance Corporation, state regulators and the Financial Services Authority; changes in accounting standards, rules and interpretations; competition with other local, regional and international banks, thrifts, credit unions and other nonbank financial institutions; ability to grow core businesses; ability to develop and introduce new banking-related products, services and enhancements, and gain market acceptance of such products; mergers and acquisitions and their integration into the Corporation; decisions to downsize, sell or close units or otherwise change the business mix of the Corporation; and management’s ability to manage these and other risks.

The Corporation, headquartered in Charlotte, North Carolina, operates in 30 states, the District of Columbia and 45 foreign countries. The Corporation provides a diversified range of banking and nonbanking financial services and products domestically and internationally through three business segments: Global Consumer and Small Business Banking (GCSBB), Global Corporate and Investment Banking (GCIB), and Global Wealth and Investment Management (GWIM).

At June 30, 2007, the Corporation had $1.5 trillion in assets and approximately 196 thousand full-time equivalent employees. Notes to Consolidated Financial Statements referred to in Management’s Discussion and Analysis of Financial Condition and Results of Operations are incorporated by reference into Management’s Discussion and Analysis of Financial Condition and Results of Operations. Throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations, we use certain acronyms and abbreviations which are defined in the Glossary beginning on page 116. Certain prior period amounts have been reclassified to conform to current period presentation.

 

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Table of Contents
Recent Events

Certain credit markets experienced difficult conditions and volatility during the first six months of 2007. These markets continued to experience pressure into the third quarter including the well publicized sub-prime mortgage market as well as related financings. Further, in late July and early August, market uncertainty increased dramatically and further expanded to other markets (e.g., leveraged finance, collateralized debt obligations and other structured products). These conditions resulted in less liquidity, greater volatility, widening of credit spreads and a lack of price transparency. The Corporation’s GCIB segment operates in these markets, either directly or indirectly, through exposures in securities, loans, derivatives and other commitments. While it is difficult to predict how long these conditions will exist and which markets, products or other businesses of the Corporation will ultimately be affected, these factors could adversely impact the Corporation’s results of operations.

In July 2007, the Corporation sold certain private equity funds, including the associated unfunded equity investment commitments of $638 million, with a total market value of $1.9 billion to Conversus Capital, L.P. (Conversus Capital) resulting in the recognition of a $600 million fair value adjustment for the three and six months ended June 30, 2007. Conversus Capital is a permanent capital vehicle designed to offer its investors both institutional and retail, long-term capital appreciation through a seasoned portfolio of private equity investments. For more information on Conversus Capital see page 79.

In July 2007, the Corporation completed the acquisition of U.S. Trust Corporation (U.S. Trust) for $3.3 billion in cash. U.S. Trust is one of the largest and most respected U.S. firms which focuses exclusively on managing wealth for high net-worth and ultra high net-worth individuals and families. The acquisition significantly increases the size and capabilities of the Corporation’s wealth business and positions it as one of the largest financial services companies managing private wealth in the U.S.

In July 2007, the Board of Directors (the Board) increased the regular quarterly cash dividend on common stock 14 percent from $0.56 to $0.64 per share. The dividend will be payable on September 28, 2007 to common shareholders of record on September 7, 2007.

In June 2007, the Corporation announced the sale of Marsico Capital Management LLC (Marsico), a 100 percent owned investment manager, to Thomas F. Marsico, founder and chief executive officer of Marsico. The Corporation expects to realize a gain on this transaction of approximately $1.4 billion (pre-tax). Closing is expected to occur in the fourth quarter of 2007 and is subject to client consents and mutual fund shareholder approval.

In April 2007, the Corporation announced an agreement to purchase ABN AMRO North America Holding Company, parent company of LaSalle Bank Corporation (LaSalle), from ABN AMRO Bank N.V. (collectively, ABN AMRO) for $21 billion in cash. The transaction has been approved by both companies’ boards of directors. A copy of the agreement was filed as an exhibit to the Corporation’s Current Report on Form 8-K filed on April 26, 2007. On July 13, 2007, the Dutch Supreme Court reversed the Enterprise Chamber Court’s temporary injunction prohibiting the sale of LaSalle in the absence of a vote by ABN AMRO’s shareholders approving the transaction. The Supreme Court held that no such vote was required and that the lower court’s injunction improperly affected the rights of the Corporation as a third party to the dispute between ABN AMRO and its shareholders. The closing of the transaction is subject to obtaining all necessary regulatory approvals and is expected to close in the fourth quarter of 2007.

In April 2007, the Corporation announced an agreement to purchase 24.9 percent of SLM Corporation (Sallie Mae), the U.S. leader in originating and servicing student loans, for $2.2 billion. The Corporation is part of a consortium led by J.C. Flowers & Co. and private-equity firm Friedman Fleischer & Lowe, LLC which under the terms of the agreement will invest $4.4 billion and own 50.2 percent of Sallie Mae, and JP Morgan Chase & Co, which under the terms of the agreement will invest $2.2 billion and own the remaining 24.9 percent of Sallie Mae. The agreement also includes a five year forward purchase commitment for the Corporation to purchase $100 billion of loans from Sallie Mae. The closing of the transaction is subject to certain terms and conditions, will require approval by Sallie Mae’s stockholders and will be subject to obtaining all necessary regulatory approvals. The transaction is expected to close in the fourth quarter of 2007.

In April 2007, the Board declared a regular quarterly cash dividend on common stock of $0.56 per share, payable on June 22, 2007 to common shareholders of record on June 1, 2007.

 

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Performance Overview

Net income totaled $5.8 billion, or $1.28 per diluted common share, for the three months ended June 30, 2007, increases of five percent and eight percent from $5.5 billion, or $1.19 per diluted common share, for the three months ended June 30, 2006. Net income totaled $11.0 billion, or $2.44 per diluted common share, for the six months ended June 30, 2007, increases of five percent and eight percent from $10.5 billion, or $2.25 per diluted common share, for the six months ended June 30, 2006.

Table 1

Business Segment Total Revenue and Net Income


     Three Months Ended June 30    Six Months Ended June 30
     Total Revenue (1)    Net Income    Total Revenue (1)    Net Income

(Dollars in millions)

   2007        2006        2007        2006        2007        2006        2007        2006    

Global Consumer and Small Business Banking (2)

   $11,939    $11,377    $2,459    $3,204    $23,362    $22,218    $5,154    $5,929

Global Corporate and Investment Banking

   5,814    5,315    1,670    1,595    11,137    10,599    3,117    3,120

Global Wealth and Investment Management

   2,008    1,853    619    582    3,896    3,682    1,151    1,123

All Other (2)

   197    (30)    1,013    94    47    (29)    1,594    289

Total FTE basis

   19,958    18,515    5,761    5,475    38,442    36,470    11,016    10,461

FTE adjustment

   (395)    (296)    -    -    (724)    (560)    -    -

Total Consolidated

   $19,563    $18,219    $5,761    $5,475    $37,718    $35,910    $11,016    $10,461

 

 

(1)

Total revenue is net of interest expense, and is on a FTE basis for the business segments and All Other. For more information on a FTE basis, see Supplemental Financial Data beginning on page 49.

 

 

(2)

GCSBB is presented on a managed basis with a corresponding offset recorded in All Other.

 

Global Consumer and Small Business Banking

Net income decreased $745 million, or 23 percent, to $2.5 billion for the three months ended June 30, 2007 compared to the same period in 2006. Total revenue increased $562 million, or five percent, to $11.9 billion due to higher card income, service charges and mortgage banking income. This increase was more than offset by the increase in provision for credit losses of $1.3 billion, that was driven by portfolio seasoning reflective of growth in the businesses and increases in losses from the unusually low levels experienced in 2006 post bankruptcy reform. Also, noninterest expense increased $461 million mainly due to increases in technology, overhead and personnel including the ongoing impact of adopting SFAS 159.

Net income decreased $775 million, or 13 percent, to $5.2 billion for the six months ended June 30, 2007 compared to the same period in 2006. The increase in total revenue of $1.1 billion, or five percent, to $23.4 billion was more than offset by the increases in provision for credit losses of $1.8 billion and noninterest expense of $581 million. These period over period changes were largely driven by the same factors as described in the three-month discussion above. For more information on GCSBB, see page 57.

 

Global Corporate and Investment Banking

Net income increased $75 million, or five percent, to $1.7 billion for the three months ended June 30, 2007 compared to the same period in 2006. Total revenue increased $499 million, or nine percent, to $5.8 billion driven by increases in net interest income (primarily market-based) of $177 million and investment banking income of $177 million. Investment banking income increased due to increased market activity and deal flow. These increases were partially offset by increases in noninterest expense of $371 million mainly due to higher personnel expense, increases in other general operating expenses driven by transaction volume and an increase in litigation reserves. Additionally the provision for credit losses increased $19 million primarily resulting from a lower level of commercial recoveries.

Net income remained unchanged at $3.1 billion for the six months ended June 30, 2007 compared to the same period in 2006. The increase in total revenue of $538 million, or five percent, was offset by increases in noninterest expense of $439 million and provision for credit losses of $109 million. These period over period changes were primarily driven by the same factors as described in the three-month discussion above. In addition, trading account profits decreased $116 million

 

42


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compared to record results for the same period in the prior year. Also in the six-month comparison, provision for credit losses was impacted by the absence of 2006 releases of reserves related to favorable commercial credit market conditions. For more information on GCIB, see page 65.

 

Global Wealth and Investment Management

Net income increased $37 million, or six percent, for the three months ended June 30, 2007 compared to the same period in 2006. Total revenue grew $155 million, or eight percent, largely resulting from higher noninterest income of $119 million, driven by the effect of a 13 percent increase in AUM balances. These increases were partially offset by increased noninterest expense of $73 million driven by the continued investment in client facing associates and a higher level of revenue-generating operating costs. In addition, provision for credit losses increased $26 million mainly due to the absence of a 2006 credit loss recovery.

Net income increased $28 million, or two percent, for the six months ended June 30, 2007 compared to the same period in 2006. Total revenue increased $214 million, or six percent, provision for credit losses increased $49 million to $9 million, and noninterest expense increased $123 million. These period over period changes were largely driven by the same factors as described in the three-month discussion above.

Total AUM were $566.2 billion at June 30, 2007, an increase of $23.3 billion since December 31, 2006 and $66.1 billion since June 30, 2006. For more information on GWIM, see page 71.

 

All Other

Net income increased $919 million to $1.0 billion for the three months ended June 30, 2007 compared to the same period in 2006. Excluding the securitization offset, total revenue increased $712 million largely resulting from higher equity investment income of $1.1 billion driven by the $600 million increase in value related to the July sale of private equity funds to Conversus Capital as well as higher dividends from strategic investments. In addition, net interest income and noninterest expense decreased $406 million and $410 million primarily due to the sale of the Latin American operations and Hong Kong based retail and commercial banking business which were included in the Corporation’s 2006 results. The increase in net income was also driven by decreases in merger and restructuring charges of $119 million, and provision for credit losses of $42 million.

Net income increased $1.3 billion to $1.6 billion for the six months ended June 30, 2007 compared to the same period in 2006. Excluding the securitization offset, total revenue increased $1.0 billion. These period over period changes were largely driven by the same factors as described in the three-month discussion above. For more information on All Other, see page 77.

 

Financial Highlights

 

Net Interest Income

Net interest income on a FTE basis decreased $145 million to $8.8 billion and $588 million to $17.4 billion for the three and six months ended June 30, 2007 compared to the same periods in 2006. The primary drivers of the decreases were the impact of the divestitures of certain foreign operations in 2006 and the first quarter of 2007, increased hedge costs, higher cost of deposits, spread compression, reduced benefits from purchase accounting adjustments and the negative impact of the adoption of FSP 13-2. These decreases were partially offset by a higher contribution from market-based activity, higher levels of consumer and commercial domestic loans and increased ALM portfolio levels. The net interest yield on a FTE basis decreased 26 basis points (bps) to 2.59 percent and 31 bps to 2.60 percent for the three and six months ended June 30, 2007 compared to the same periods in 2006.

For more information on net interest income on a FTE basis, see Tables 8 and 9 on pages 53 to 55.

 

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Noninterest Income

Table 2

Noninterest Income

 


             Three Months Ended June 30                      Six Months Ended June 30         

(Dollars in millions)

       2007              2006              2007          2006    

Card income

   $3,558      $3,664      $6,891      $7,098

Service charges

   2,200      2,077      4,272      3,978

Investment and brokerage services

   1,193      1,146      2,342      2,249

Investment banking income

   774      612      1,412      1,113

Equity investment income

   1,829      699      2,843      1,417

Trading account profits

   890      915      1,762      1,975

Mortgage banking income

   148      89      361      226

Gains (losses) on sales of debt securities

   2      (9)      64      5

Other income

   583      396      1,117      443

Total noninterest income

   $11,177      $9,589      $21,064      $18,504

Noninterest income increased $1.6 billion to $11.2 billion and $2.6 billion to $21.1 billion for the three and six months ended June 30, 2007 compared to the same periods in 2006, due primarily to the following:

 

   

Card income on a held basis decreased $106 million and $207 million for the three and six months ended June 30, 2007 as increases in cash advance fees and interchange income from debit and credit cards were more than offset by a decrease in excess servicing income resulting from an increase in credit losses on securitized loans.

 

   

Service charges grew $123 million and $294 million for the three and six months ended June 30, 2007 resulting from new account growth in deposit products.

 

   

Investment banking income increased $162 million and $299 million for the three and six months ended June 30, 2007 due to continued strength in debt underwriting and growth in advisory fees.

 

   

Equity investment income increased $1.1 billion and $1.4 billion for the three and six months ended June 30, 2007 primarily driven by the $600 million increase in value related to the July sale of private equity funds to Conversus Capital. Equity investment income also benefited from dividends on strategic investments in the second quarter of 2007. For more information on Conversus Capital see page 79.

 

   

Trading account profits decreased $25 million and $213 million for the three and six months ended June 30, 2007 compared to record results in 2006.

 

   

Mortgage banking income increased $59 million and $135 million for the three and six months ended June 30, 2007 due to the net favorable performance of the MSRs and the impact of the adoption of SFAS 159 partially offset by the absence of gains on sale of mortgage loans as the Corporation increased retention of residential mortgages.

 

   

Other income increased $187 million and $674 million for the three and six months ended June 30, 2007 primarily related to gains recognized on certain lease transactions during the quarter and lower losses in credit mitigation. In addition, the increase for the six months ended June 30, 2007 was impacted by the mark-to-market losses realized in 2006 on certain economic hedges that did not qualify for SFAS 133 hedge accounting.

 

Provision for Credit Losses

The provision for credit losses increased $805 million to $1.8 billion and $770 million to $3.0 billion for the three and six months ended June 30, 2007 compared to the same periods in 2006. Higher net charge-offs were predominantly driven by portfolio seasoning reflective of growth in the businesses and increases from the unusually low charge-off levels

 

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experienced in 2006 post bankruptcy reform. Additionally, reserve increases for higher losses inherent in our small business card and home equity portfolios as well as seasoning of the Card Services consumer portfolios contributed to the increase in provision expense. In the six-month comparison, partially offsetting these increases were reductions in reserves from consumer credit card securitization activities and the sale of the Argentina portfolio.

For more information on credit quality, see Credit Risk Management beginning on page 85.

 

Noninterest Expense

Table 3

Noninterest Expense

 

     Three Months Ended June 30                     Six Months Ended June 30        

(Dollars in millions)

   2007              2006                      2007              2006        

Personnel

   $ 4,737      $ 4,480             $9,762        $9,293

Occupancy

     744        703             1,457        1,404

Equipment

     332        316             682        660

Marketing

     537        551             1,092        1,126

Professional fees

     283        233             512        451

Amortization of intangibles

     391        441             780        881

Data processing

     472        409             909        819

Telecommunications

     244        228             495        448

Other general operating

     1,278        1,162             2,315        2,267

Merger and restructuring charges

     75        194               186        292

Total noninterest expense

   $ 9,093      $ 8,717             $ 18,190      $ 17,641

Noninterest expense increased $376 million to $9.1 billion and $549 million to $18.2 billion for the three and six months ended June 30, 2007 compared to the same periods in 2006 due to the following:

 

   

Personnel expense increased $257 million and $469 million for the three and six months ended June 30, 2007 mainly due to higher revenue-related incentive compensation expense. In addition, results for the six months ended June 30, 2007 were impacted by stock-based compensation granted to retirement-eligible employees of $397 million compared to $320 million for the same period in 2006.

 

   

Other general operating expense increased $116 million and $48 million for the three and six months ended June 30, 2007 mainly attributable to an increase in litigation reserves.

 

   

Merger and restructuring charges decreased $119 million and $106 million for the three and six months ended June 30, 2007 mainly due to declining systems integration work and related charges associated with the MBNA acquisition.

 

Income Tax Expense

Income tax expense was $2.9 billion for the three months ended June 30, 2007 compared to $3.0 billion for the three months ended June 30, 2006, resulting in effective tax rates of 33.5 percent and 35.6 percent. Income tax expense was unchanged at $5.5 billion for the six months ended June 30, 2007 compared to the six months ended June 30, 2006, resulting in effective tax rates of 33.2 percent and 34.6 percent. The decreases in the effective tax rates for both the three and six months ended June 30, 2007 were primarily attributable to the change in tax legislation discussed below. Income tax expense for the six months ended June 30, 2007 also reflects a one-time reduction to expense recorded in the first quarter of 2007 of approximately $50 million resulting from the remeasurement of certain accrued tax liabilities due to the evaluation of new guidance from taxing authorities.

During the second quarter of 2006, the Tax Increase Prevention and Reconciliation Act of 2005 was signed into law. Accounting for the change in law resulted in the discrete recognition of a $175 million charge to income tax expense during the second quarter of 2006.

 

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Assets

At June 30, 2007, total assets were $1.5 trillion, an increase of $74.6 billion, or five percent, from December 31, 2006. Average total assets for both the three and six months ended June 30, 2007 increased approximately $105 billion, or seven percent, compared to the same periods in 2006. Growth in period end and average total assets was due to an increase in loans and leases attributable to organic growth and bulk purchases of loans, growth in trading account assets driven by higher trading activity, and an increase in loans held-for-sale. Partially offsetting this growth was a decrease in AFS debt securities due to the third quarter 2006 sale of $43.7 billion of mortgage-backed securities as well as maturities and paydowns.

 

Liabilities and Shareholders’ Equity

At June 30, 2007, total liabilities were $1.4 trillion, an increase of $74.1 billion, or six percent, from December 31, 2006. Average total liabilities for the three and six months ended June 30, 2007 increased $99.5 billion, or seven percent, and $101.0 billion, or eight percent, compared to the same periods in 2006. Growth in period end and average total liabilities was attributable to increases in most liability line items resulting from funding requirements to support the growth in overall assets.

Period end shareholders’ equity was $135.8 billion at June 30, 2007, an increase of $479 million from December 31, 2006, largely due to net income and common stock issued in connection with employee benefit plans partially offset by dividend payments, share repurchases, increased losses in accumulated OCI and the adoption of certain new accounting standards. The change in accumulated OCI resulted from unrealized losses on AFS debt securities reflecting higher interest rates during the six months ended June 30, 2007.

Average shareholders’ equity for the three and six months ended June 30, 2007 compared to the same periods in 2006, increased $6.2 billion to $133.6 billion, and $4.3 billion to $133.6 billion, primarily due to net income and the issuances of preferred stock partially offset by net share repurchases and the adoption of certain new accounting standards.

 

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Table 4

Selected Quarterly Financial Data

 
      2007 Quarters     2006 Quarters  

(Dollars in millions, per share information in thousands)

   Second     First     Fourth     Third     Second  

Income statement

          

Net interest income

   $8,386     $8,268     $8,599     $8,586     $8,630  

Noninterest income

   11,177     9,887     9,887     9,598     9,589  

Total revenue, net of interest expense

   19,563     18,155     18,486     18,184     18,219  

Provision for credit losses

   1,810     1,235     1,570     1,165     1,005  

Noninterest expense, before merger and restructuring charges

   9,018     8,986     8,849     8,594     8,523  

Merger and restructuring charges

   75     111     244     269     194  

Income before income taxes

   8,660     7,823     7,823     8,156     8,497  

Income tax expense

   2,899     2,568     2,567     2,740     3,022  

Net income

   5,761     5,255     5,256     5,416     5,475  

Average common shares issued and outstanding

   4,419,246     4,432,664     4,464,110     4,499,704     4,534,627  

Average diluted common shares issued and outstanding

   4,476,799     4,497,028     4,536,696     4,570,558     4,601,169  

Performance ratios

          

Return on average assets

   1.48     %   1.40     %   1.39     %   1.43     %   1.51     %

Return on average common shareholders’ equity

   17.55     16.16     15.76     16.64     17.26  

Total ending equity to total ending assets

   8.85     8.98     9.27     9.22     8.85  

Total average equity to total average assets

   8.55     8.78     8.97     8.63     8.75  

Dividend payout

   43.60     48.02     47.49     46.82     41.76  

Per common share data

          

Earnings

   $1.29     $1.18     $1.17     $1.20     $1.21  

Diluted earnings

   1.28     1.16     1.16     1.18     1.19  

Dividends paid

   0.56     0.56     0.56     0.56     0.50  

Book value

   29.95     29.74     29.70     29.52     28.17  

Average balance sheet

          

Total loans and leases

   $740,199     $714,042     $683,598     $673,477     $635,649  

Total assets

   1,561,649     1,521,418     1,495,150     1,497,987     1,456,004  

Total deposits

   697,035     686,704     680,245     676,851     674,796  

Long-term debt

   158,500     148,627     140,756     136,769     125,620  

Common shareholders’ equity

   130,700     130,737     132,004     129,098     127,102  

Total shareholders’ equity

   133,551     133,588     134,047     129,262     127,373  

Asset Quality

          

Allowance for credit losses (1)

   $9,436     $9,106     $9,413     $9,260     $9,475  

Nonperforming assets measured at historical cost

   2,392     2,059     1,856     1,656     1,641  

Allowance for loan and lease losses as a percentage of total loans and leases outstanding measured at historical cost (2)

   1.20     %   1.21     %   1.28     %   1.33     %   1.36     %

Allowance for loan and lease losses as a percentage of total nonperforming loans and leases measured at historical cost

   397     443     505     562     579  

Net charge-offs

   $1,495     $1,427     $1,417     $1,277     $1,023  

Annualized net charge-offs as a percentage of average loans and leases outstanding measured at historical cost (2)

   0.81     %   0.81     %   0.82     %   0.75     %   0.65     %

Nonperforming loans and leases as a percentage of total loans and leases outstanding measured at historical cost (2)

   0.30     0.27     0.25     0.24     0.23  

Nonperforming assets as a percentage of total loans, leases, and foreclosed properties (2)

   0.32     0.29     0.26     0.25     0.25  

Ratio of the allowance for loan and lease losses at period end to annualized net charge-offs

   1.51     1.51     1.60     1.75     2.21  

Capital ratios (period end)

          

Risk-based capital:

          

Tier 1

   8.52     %   8.57     %   8.64     %   8.48     %   8.33     %

Total

   12.11     11.94     11.88     11.46     11.25  

Tier 1 leverage

   6.33     6.25     6.36     6.16     6.13  

Market capitalization

   $216,922     $226,481     $238,021     $240,966     $217,794  

Market price per share of common stock

          

Closing

   $48.89     $51.02     $53.39     $53.57     $48.10  

High closing

   51.82     54.05     54.90     53.57     50.47  

Low closing

   48.80     49.46     51.66     47.98     45.48  

(1) Includes allowance for loan and lease losses, and reserve for unfunded lending commitments.

 

(2) Ratios do not include loans measured at fair value in accordance with SFAS 159 at and for the periods ended June 30, 2007 and March 31, 2007. Loans measured at fair value were $3.61 billion and $3.86 billion at June 30, 2007 and March 31, 2007.

   

    

 

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Table 5

Selected Year-to-Date Financial Data

       Six Months Ended June 30          

(Dollars in millions, per share information in thousands)

     2007              2006          

Income statement

       

Net interest income

     $16,654      $17,406  

Noninterest income

     21,064      18,504  

Total revenue, net of interest expense

     37,718      35,910  

Provision for credit losses

     3,045      2,275  

Noninterest expense, before merger and restructuring charges

     18,004      17,349  

Merger and restructuring charges

     186      292  

Income before income taxes

     16,483      15,994  

Income tax expense

     5,467      5,533  

Net income

     11,016      10,461  

Average common shares issued and outstanding

     4,426,046      4,572,013  

Average diluted common shares issued and outstanding

     4,487,224      4,636,959  

Performance ratios

       

Return on average assets

     1.44     %    1.47     %

Return on average common shareholders’ equity

     16.86      16.34  

Total ending equity to total ending assets

     8.85      8.85  

Total average equity to total average assets

     8.66      9.00  

Dividend payout

     45.71      44.14  

Per common share data

       

Earnings

     $2.47      $2.29  

Diluted earnings

     2.44      2.25  

Dividends paid

     1.12      1.00  

Book value

     29.95      28.17  

Average balance sheet

       

Total loans and leases

     $727,193      $625,863  

Total assets

     1,541,644      1,436,298  

Total deposits

     691,898      667,350  

Long-term debt

     153,591      121,343  

Common shareholders’ equity

     130,718      128,981  

Total shareholders’ equity

     133,569      129,253  

Asset Quality

       

Allowance for credit losses (1)

     $9,436      $9,475  

Nonperforming assets measured at historical cost

     2,392      1,641  

Allowance for loan and lease losses as a percentage of total loans and leases outstanding measured at
historical cost (2)

     1.20     %    1.36     %

Allowance for loan and lease losses as a percentage of total nonperforming loans and leases measured at
historical cost

     397      579  

Net charge-offs

     $2,922 <