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Contains 20% post-consumer content.
© 2008 Bank of America Corporation
00-04-1363B
3/2008
Insights Innovations Opportunities
+
2007 Annual Report
Associates from across our
corporation, many pictured
throughout this report, are
the source of our insights
and innovations.
We are a company of more than 200,000 associates,
serving a vibrant community of customers and clients
around the world. Our size and scope — unmatched
by any other bank — give us the insights that help
us innovate and create opportunities for all.
Insights Innovations Opportunities
+
About Bank of America Corporation
Bank of America Corporation (NYSE: BAC) is a publicly traded company headquartered in Charlotte, NC, that operates throughout the
United States and in more than 30 foreign countries. The corporation provides a diverse range of banking and nonbanking financial services and
products domestically and internationally through three business segments: Global Consumer & Small Business Banking, Global Corporate &
Investment Banking and Global Wealth & Investment Management. Bank of America is now a member of the Dow Jones Industrial Average.
Financial Highlights
(Dollars in millions, except per share information)
For the year 2007 2006
Revenue* $68,068 $73,804
Net income 14,982 21,133
Earnings per common share 3.35 4.66
Diluted earnings per common share 3.30 4.59
Dividends paid per common share 2.40 2.12
Return on average assets 0.94% 1.44%
Return on average common
shareholders’ equity 11.08% 16.27%
Efficiency ratio* 54.37% 48.23%
Average diluted common shares
issued and outstanding (in millions) 4,480 4,596
At year end 2007 2006
Total assets $1,715,746 $1,459,737
Total loans and leases 876,344 706,490
Total deposits 805,177 693,497
Total shareholders’ equity 146,803 135,272
Book value per common share 32.09 29.70
Market price per share
of common stock 41.26 53.39
Common shares issued and
outstanding (in millions) 4,438 4,458
*Fully taxable-equivalent basis
**All Other includes Equity Investments businesses, Asset and Liability Management process
(including gains on sales of debt securities), funds transfer pricing allocation methodologies,
merger and restructuring charges, the securitization offset to present our Global Consumer & Small
Business Banking business on a managed basis and intersegment eliminations. For additional
details, please refer to the All Other discussion in the Management Discussion and Analysis.
$47,682
70%
Revenue*
(in millions)
$13,417
20%
$7,923
11%
Global
Consumer &
Small Business
Banking
Global
Corporate &
Investment
Banking
Global
Wealth &
Investment
Management
($954)
(1%)
All Other**
$9,430
63%
Net Income
(in millions)
$2,095
14%
$2,919
19%
$538
4%
Global
Consumer &
Small Business
Banking
Global
Corporate &
Investment
Banking
Global
Wealth &
Investment
Management
All Other**
Total Cumulative Shareholder Return***
5-Year Stock Performance
$200
$175
$150
$125
$100
$60
$50
$40
$30
0
2002
2003
2004
2005
2006
2007
2003
2004
2005
2006
2007
Bank of America Corporation
S & P 500 CM BANK INDUSTRY
S & P 500 COMP-LTD
High $41.77 $47.44 $47.08 $54.90 $54.05
Low 32.82 38.96 41.57 43.09 41.10
Close 40.22 46.99 46.15 53.39 41.26
*** The graph compares the yearly change in the Corporation’s cumulative total stockholders’ return on its common stock with (i) Standard & Poor’s 500 Index and (ii) Standard & Poor’s 500 Commercial Banks
Index for the years 2003 through 2007. The graph assumes an initial investment of $100 at the end of 2002 and the reinvestment of all dividends during the years indicated.
2 Bank of America 2007
66249ba_2-3 2
66249ba_2-3 2
3/6/08 2:34:58 AM
3/6/08 2:34:58 AM
Our Lines of Business
Global Consumer & Small Business Banking
Global Consumer & Small Business Banking has
approximately 59 million consumer and small business
relationships. We serve consumers through checking,
savings, credit and debit cards, home equity lending and
mortgages. We serve mass-market small businesses
with capital, credit, deposit and payment services.
BUSINESSES
Deposits
Card Services
Consumer Real Estate
Global Corporate & Investment Banking
Global Corporate & Investment Banking provides
comprehensive financial solutions to clients ranging
from companies with $2.5 million in revenues to large
multinational corporations, governments, financial
sponsors, insti tutional investors and hedge funds.
BUSINESSES
Business Lending
Capital Markets & Advisory Services
Treasury Services
Global Wealth & Investment Management
Global Wealth & Investment Management provides
a wide offering of customized banking and investment
services for individual and institutional clients.
BUSINESSES
U.S. Trust, Bank of America Private Wealth Management
Columbia Management
Premier Banking & Investments™
*Fully taxable-equivalent basis
†ALM=Asset and Liability Management
Revenue*
(in millions)
Net Income
(in millions)
$25,533
$5,227
$17,577
$3,712
$3,679
$893
$371
$120
Deposits
Card
Services
Consumer
Real Estate
ALM†/Other
Deposits
Card
Services
Consumer
Real Estate
ALM†/Other
Revenue*
(in millions)
Net Income
(in millions)
$6,172
$7,139
$2,121
$2,065
Treasury
Services
($197)
ALM†/Other
Business
Lending
Treasury
Services
($286)
ALM†/Other
Business
Lending
$303
Capital
Markets &
Advisory
Services
($3,362)
Capital Markets &
Advisory Services
Revenue*
(in millions)
Net Income
(in millions)
$3,751
$1,275
$2,319
$1,506
$467
$347
$196
$157
Columbia
Management
U.S. Trust,
Bank of
America
Private Wealth
Management
ALM†/Other
Premier
Banking &
Investments
Columbia
Management
U.S. Trust,
Bank of
America
Private Wealth
Management
ALM†/Other
Premier
Banking &
Investments
66249ba_2-3 3
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2/29/08 4:37:43 PM
2/29/08 4:37:43 PM
Bank of America 2007 3
Insights Innovations Opportunities
+
TO OUR
SHAREHOLDERS
2007 was a disappointing year for our company. While our financial performance was very strong in
the first half of the year, results in the second half were severely depressed by rising credit costs and
the impact of the unprecedented turbulence in the financial markets.
Despite the short-term fallout from the so-called credit crunch, I remain confident and optimistic about
our competitive position and our ability to generate attractive financial results in the future. Our long-term
growth strategy is working and has not changed: We are using market insight to drive innovation that
creates opportunity and value for our customers and shareholders.
Our earnings power from our core business activities is strong and growing. We are bringing innovative
new products to market, taking market share and expanding customer relationships across the company.
We plan to invest more in growth initiatives in 2008 than we did in 2007. And we have taken steps to build
up our capital strength and liquidity, enhancing our ability to be opportunistic in the future.
This was the first down year our company has suffered during my time as chief executive officer.
And although I take comfort in the fact that our diversity of income, tremendous scale and efficiency will
help us weather this storm better than most, it has still been a difficult time for our company.
While the credit crunch and housing market recession in the United States have hit the entire industry
hard, we offer no excuses for our performance. We escaped direct losses from subprime lending, which we
had exited years ago. But we did experience large writedowns in the value of structured products backed
by such loans, and our trading results were poor.
As these issues became apparent, we moved decisively to mitigate our losses and reposition our
businesses for growth. In October, we launched a strategic review of our capital markets business, the
results of which I discuss below.
In my career, I have not experienced a business cycle in which size, scale, revenue diversity and the
ability to execute have been more important. Each of these attributes is a strength of our company. Each
will play a role in determining the winners in our industry. And we are leveraging each of these strengths
to our greatest advantage.
I will review some of the ways we are pursuing our vision for Bank of America in this letter, and you can
read in more detail about our work in the articles that follow. First, I’d like to review our financial results
and the market developments that affected our performance so profoundly.
A challenging year. The story of the 2007 subprime mortgage meltdown and credit crunch is well docu-
mented, so I won’t recount it in great detail here. Suffice it to say that over the past several years, a combina-
tion of low interest rates (which helped to create excess liquidity), looser home loan underwriting standards
at many mortgage origination companies, the rapid growth of innovative and complex financial instruments
in the capital markets, and ratings methodologies that often, with hindsight, did not reflect the true risks
embedded in these securities led to rapid price inflation in U.S. housing — a bubble that had to burst.
4 Bank of America 2007
KENNETH D. LEWIS,
CHAIRMAN, CHIEF EXECUTIVE
CHAIRMAN, CHIEF EXECUTIVE
OFFICER AND PRESIDENT
OFFICER AND PRESIDENT
“ In my career, I have not experienced a
business cycle in which size, scale, revenue
diversity and the ability to execute have
been more important. Each of these
attributes is a strength of our company.”
Bank of America 2007 5
Insights Innovations Opportunities
+
“Our core businesses
continue to execute their
growth strategies in
the marketplace with
precision and discipline.”
Many of us had known for some time that these accelerating trends were unsustainable over the long
term. We took several steps in late 2006 and the first half of 2007 to adjust our business to evolving
market trends. But what we didn’t know was how and when the cycle would turn fully, and how the market
adjustments would play out.
Now we know — the failure of several large hedge funds in July caused the credit markets to seize up
completely in August. All market participants were impacted at the same time, and every deal was caught, as
A LEADING
MOBILE BANK,
with more than
600,000
active Mobile
Banking users.
investors struggled to price risk in the market. Late in the year, ratings agencies aggressively
downgraded mortgage-backed securities that had been rated AAA, which contributed to the
large asset writedowns and financial losses across the industry in the fourth quarter.
Two areas that hit banks hardest were collateralized debt obligations, or CDOs, and
structured investment vehicles, or SIVs. Both are financial instruments — asset-backed
borrowings in the simplest view — that banks and investors have used to fund the mortgage
markets. At Bank of America, our exposure in CDOs was significant. Writedowns of the
value of these securities reached $5.6 billion, which was one major cause of our weak
fourth-quarter performance. Our losses in SIVs, by comparison, were relatively small.
The other major cause was the continued rise in credit costs, which drove rapidly expanding
provision expense — money we set aside to cover loan losses — as consumer credit quality has fallen from
historically high levels to more normal levels, affecting most market segments.
These factors were evident in our financial results for the year.
In 2007, Bank of America earned $15.0 billion, down from $21.1 billion in 2006. Earnings per diluted share
fell to $3.30 from $4.59; revenue fell to $68.1 billion from $73.8 billion; and return on common shareholders’
equity fell to 11.08 percent from 16.27 percent. Our efficiency ratio, which had been in our target range (under
50 percent) for the past two years, rose to 54.37 percent. Provision expense rose 67 percent to $8.4 billion from
$5.0 billion, as nonperforming loans and leases and net charge-offs rose to 0.64 percent and 0.84 percent of
total loans and leases, respectively.
The good news is that our core businesses continue to execute their growth strategies in the
marketplace with precision and discipline. In Global Consumer & Small Business Banking, revenue
rose 6 percent for the year, and noninterest income rose 13 percent. We added more than two million
net new retail checking accounts for the second year in a row, opened nearly 14 million new Card Services
accounts, became a leading direct-to-consumer mortgage and home equity originator and extended our
leadership in the online banking and bill-pay business to lead the industry in mobile banking, with more
than 600,000 active new accounts.
In Global Wealth & Investment Management, revenue was up 8 percent for the year, as record brokerage
income and a 26 percent increase in asset management fees produced a 10 percent rise in noninterest income.
In Premier Banking & Investments (PB&I), revenue rose 9 percent on 22 percent growth in investment and
brokerage services and 19 percent growth in fee-based assets.
In Global Corporate & Investment Banking, net revenue from Business Lending rose 10 percent
and average loans and leases rose 14 percent, demonstrating that we are making progress in deepening
relationships with our commercial and corporate clients.
It was our company’s diverse earnings mix that enabled us to remain profitable despite extremely
challenging conditions. And it is our continued profitability, liquidity and balance sheet strength that have
6 Bank of America 2007
Revenue
(in billions, fully taxable-equivalent basis)
$73.8
$68.1
$58.0
’05
’06
’07
Net Income
(in billions)
$21.1
$16.5
$15.0
’05
’06
’07
enabled us to sustain our dividend at a time when others have not. Overall, 2007
was our 30th consecutive year of raising our quarterly dividend, which increased by
14 percent to $0.64 per share. Over that time, our dividend has increased at a compound
annual rate of 13 percent.
To bolster our capital ratios in the first quarter of 2008, we raised almost $13 billion
in two preferred stock offerings, and could have raised twice as much, demonstrating
investors’ confidence in our company. Bank of America will continue to be character-
ized by strong cash flow and attractive returns for shareholders, tremendous liquidity
and a fortress balance sheet. And we are still focused on achieving our long-term
financial goals, including 6 to 9 percent revenue growth, 2 to 4 percentage points
in operating leverage and 10 percent average annual earnings-per-share growth.
Strategies for growth. Our job in 2008 is to manage through the current economic storm and use our
advantages — size, scale, revenue diversity, innovation, integration and execution — to position the bank for
rapid growth when the storm abates. Here are some highlights of plans and progress in our three major
business lines.
Global Consumer & Small Business Banking (GCSBB)
I believe there are three keys to building a winning franchise in retail financial services: convenience,
innovation and service quality.
Convenience is a well-known strength of Bank of America. No company is more ubiquitous — we have
by far the largest network of banking centers and ATMs in the United States, and we are No. 1 in
telephone banking, online banking and bill-pay as well. Our products are also very easy for customers
to use. For example, our online bill-pay product won the Webby People’s Voice Award for the second year
in a row based on voting by the public, and Bank of America was named twice on IndexCreditCards.com’s
list of top 10 consumer-friendly credit cards.
Innovation has become a great strength of our company, in part because of the huge customer base
that we serve. With more than 3,000 customer transactions per second, we know a lot about customers’
needs and preferences. We invest in the analytical work that turns that knowledge into actionable
insight, which, in turn, helps us create new and better products and services that are attractive and
meaningful to our customers.
Examples from recent years have been Keep the Change®, free SafeSend® and $0 Online Equity Trades.
In 2007, we continued to introduce new products with the launch of No Fee Mortgage PLUS (which
eliminates most fees on conforming mortgages), Mobile Banking (which enables customers to bank with
their cell phones), new Risk Free CD products (which include high fixed rates and penalty-free withdrawals)
and the new BankAmericard™ (which offers more rewards points, no points limits and the most flexible
rewards options in the industry).
Service quality and customer satisfaction, of course, are critical. I wrote last year that after several years
of consistent gains in customer satisfaction, we had reached a plateau in many of our businesses, and
that each business was laying new plans to push scores even higher. Overall scores in GCSBB faced some
headwinds from the expansion of our card business — customer satisfaction in the card industry tends
Bank of America 2007 7
Insights Innovations Opportunities
+
“We believe the best
companies have the skills,
knowledge, resources and
will to pursue multiple
paths to growth.”
to be somewhat lower than in retail banking — but scores have shown a positive trend since last March.
Banking center scores finished the year at an all-time high, and overall consumer problem incidence rates
from July through the end of the year were down 13 percent.
In retail financial services, the result of a customer experience marked by convenience, innovation and service
quality is customer loyalty. Loyalty leads to a growing customer base and expanded relationships with existing
customers — just the right recipe for the organic growth that will drive our company forward in 2008 and beyond.
Global Wealth & Investment Management (GWIM)
In many respects, Global Wealth & Investment Management is one of our greatest opportunities for
growth. This business includes Premier Banking & Investments (PB&I), which serves affluent clients
through Premier Banking and Banc of America Investment Services, Inc., our brokerage; U.S. Trust,
Bank of America Private Wealth Management, which serves high-net-worth clients; and Columbia Management,
our asset management team. In each of these groups, associates’ top priority is client relationship
expansion — by working with teammates throughout GWIM and across the company.
A LEADING
PRIVATE BANK,
with more than
$225 billion in
assets under
management.
Premier Banking serves about 850,000 clients — although more than seven million Bank of
America customers or households qualify for this higher level of service. One of the most impor-
tant investments we are making is to grow our distribution and service capabilities so that we can
continue to move qualifying customers from the mass consumer segment into PB&I.
A key measure of success in serving affluent clients is whether they choose to bring us their
investing business. At the end of 2007, about one-third of our Premier Banking clients had
investment accounts with us. That number grew at an annual rate of 14 percent in 2007, while client
balances have grown at a rate of 11 percent and self-directed brokerage assets were up 20 percent.
One of our best opportunities to expand these relationships is retirement. The demographics
are compelling: The first of the 78 million baby boomers turn 62 in 2008, and the over-69
population will increase by 55 percent by 2030. This is where the money is: $15.1 trillion in total assets and
an annual profit pool of about $35 billion. We are building our team to take advantage of this opportunity.
The biggest news in our private banking business in 2007 was the acquisition of U.S. Trust Corporation.
This acquisition creates the nation’s pre-eminent wealth management provider, U.S. Trust, Bank of America
Private Wealth Management. The group manages more than $225 billion in assets through offices in 32
states, and we’ve been expanding the team in selected cities to better serve a growing client base. The
opportunity here is large. While the group currently serves about 130,000 wealthy clients, this number
represents fewer than half of the more than 300,000 wealthy families in the Bank of America footprint.
Columbia Management’s $440 billion in assets under management supported the continued growth of
GWIM’s total assets under management to more than $640 billion, and the group was recognized with
five Lipper Awards for its mutual funds’ performance. Columbia’s investment performance contributed to
our company’s growing brand as a strong player in the wealth management industry and lent momentum
to the market share gains we made across our client segments.
Global Corporate & Investment Banking (GCIB)
Early this year, we announced the results of a strategic review of our investment banking business. This
study was conducted to determine the right mix of capabilities that will enable us to most effectively serve
8 Bank of America 2007
Dividends Paid Per
Common Share
$1.90
$2.12
$2.40
’05
’06
’07
Earnings Per
Common Share
(diluted)
$4.04
$4.59
$3.30
’05
’06
’07
our commercial, corporate and institutional clients, and provide shareholders with the
best returns.
We are aggressively implementing the recommendations of that study.
Here are the highlights:
• We will continue to serve corporate, commercial and financial-sponsor clients
with debt and equity capital-raising services, strategic advice and a full range
of corporate banking services.
• We will focus investment banking and global markets coverage on areas of
strength, leading to reduced activity in some structured products and refocusing
of our international platform on debt, cash management and trading, including
rates and foreign exchange.
• We made a decision to exit the equity prime brokerage business, which provides
investment banking services to hedge funds.
Our goal has always been to be the primary financial and strategic partner to our clients. That continues
to be our goal today. Simply put, this business is important to us because we know it’s important to our clients.
The changes outlined above will enable us to grow the business profitably and will make us a leaner and
tougher competitor where we know we have the advantages necessary to win.
Even before the capital markets meltdown in the second half of the year, our team in GCIB was reorganizing
to better serve clients. One important step was to consolidate accountability within Global Commercial Banking
for all aspects of client relationship management, including client revenue and profitability. At the same time, we
consolidated credit and treasury management product delivery in a new team called Global Product Solutions.
Client satisfaction scores in GCIB have been rising consistently — up a total of 25 percent over the past
three years. We believe the combination of meaningful organizational change with the results of the strategic
review will put this business — which continues to take market share — back on the right track for growth.
Other paths to growth. As I’ve written here before, we believe the best companies have the skills,
knowledge, resources and will to pursue multiple paths to growth. Each of the activities I’ve highlighted
below represents a key part of our overall strategy for growth — by expanding the franchise, investing
in a fast-growing economic sector, claiming a leadership role in a key product category or helping to strengthen
the communities in which we do business.
Acquisitions
Our acquisition of LaSalle, which closed last October, brings our company several immediate advan-
tages. We now hold leading market positions in both Chicago and Detroit, the third and 10th largest
metropolitan statistical areas (MSAs) in the United States, respectively. We can greatly expand on the
range of services available to our new consumer and commercial customers in these markets. Greatly
heightened visibility in these markets also creates opportunities for our wealth management business.
Our acquisition strategy over the past several years has been tightly focused on the markets that,
according to extensive research, have the greatest potential to produce growth for our company in the
coming years. We have methodically built leading positions in the most important wealth and growth
markets, cornerstone products and key distribution areas to drive the company’s future growth.
Bank of America 2007 9
Insights Innovations Opportunities
+
“One of the most important
ways we apply knowledge,
insight and innovation is
through the work we do to
strengthen our communities.”
These include our acquisitions of FleetBoston (2004), MBNA (2006), U.S. Trust (2007), LaSalle (2007)
and, later this year, Countrywide.
Countrywide Financial Corporation
In January, we agreed to acquire Countrywide Financial Corporation, a transaction we anticipate will
close early in the third quarter of this year. This transaction will make Bank of America the nation’s
leading mortgage lender and loan servicer, adding another key asset to what has become a long list of
financial products and services in which we hold a lead market position.
I’ve had a lot of people ask me why we chose to do this now. My answer is that now is the time — the
price is right, and the deep due diligence we performed confirmed our belief that there is great long-term
value embedded in Countrywide’s business. Countrywide has excellent technology, a huge distribution
network and extremely talented associates who will help us build the best mortgage business in the
country. The mortgage sector is weak today, but I’m confident that home ownership in America is a
market we’ll be happy to lead over the long term.
Financing the “green economy”
Earlier this year, our company announced a 10-year, $20 billion initiative to support the growth of
A LEADING
GREEN BANK,
with a $20 billion
initiative to promote
sustainable
development.
environmentally sustainable business activity. Much of this initiative involves efforts to reduce
the environmental impact of our own operations and to build “green partnerships” with
environmental groups, government agencies and our friends in the business community.
What I am most excited about, though, is that the emerging and fast-growing green economy
has the potential to drive future growth for our company. Fifty years from now, it’s likely that
many of our current technologies will be obsolete, replaced by innovations that provide for greater
sustainability. We are working with clients in existing and emerging industries to finance these
new technologies, and the vast majority of our $20 billion goal is dedicated to this activity.
We believe the United States should be at the forefront of this economic change, building the
new industries that will lead the world to a cleaner, greener and more prosperous future. There
is huge economic opportunity embedded in this shift, and Bank of America will benefit greatly from our
decision to lead.
Strong communities, strong markets
One of the most important ways we apply knowledge, insight and innovation to grow the company is
through the work we do to strengthen our communities.
Through our Neighborhood Excellence Initiative™ (NEI), part of the Bank of America Charitable
Foundation’s 10-year, $1.5 billion goal for giving, we are creating a new approach to corporate philanthropy,
including a focus on local priorities, funding flexibility and leadership development. Our associates also
showed their leadership in community support, as the bank matched more than $20 million in 2007 in
volunteer grants and associate gifts. The Foundation in 2007 again donated more than $200 million overall.
We are excited about opportunities in 2008 to extend our philanthropic model into new markets in
Illinois and Michigan, to sustain LaSalle’s generous level of giving, and to expand our community develop-
ment work as we continue ahead of schedule on our 10-year, $750 billion community development goal. We
10 Bank of America 2007
Total Loans and Leases
(at year end, in billions)
$876.3
$573.8
$706.5
view all these activities as the best examples of “doing well by doing good” — raising
our visibility, building our brand, cultivating relationships and strengthening the
neighborhoods on whose prosperity our success depends.
Looking toward the future. A leader who has been central to our success for
38 years retired in 2007 — Gene Taylor, who served most recently as president of GCIB.
Gene has been one of our most valuable contributors, taking on every challenge we
have thrown at him, from assimilating acquisitions to running multiple lines of business.
His unwavering eye on the client and his ability to bring out the best in his teammates
have inspired many of us over the years. We will miss him.
Our new head of GCIB is Brian Moynihan. Brian brings broad experience to the
’05
’06
’07
Total Deposits
(at year end, in billions)
$634.7
$693.5
$805.2
’05
’06
’07
role, including his successful work building our wealth management business over the past three
years. Moving into the leadership role in GWIM is Keith Banks, who previously served as president
and chief investment officer of Columbia Management. Keith brings deep knowledge of the industry and a
direct leadership style that will help us accelerate our growth in this important sector.
We have one change on our board of directors this year: Steven Jones, dean of the Kenan-Flagler School
of Business at the University of North Carolina at Chapel Hill, has decided not to stand for re-election this
year. Steve has provided valuable insights and counsel in his time on the board, and we appreciate his service.
2007 was a tough year for our company. That fact, however, in no way diminishes my commitment to
our business model and strategy or my confidence in our future performance. I continue to believe that by
offering our customers unmatched convenience and expertise, high service quality, innovative products and
services and a variety of financial solutions delivered as a single relationship, we will continue to cultivate
loyal customers, and Bank of America will continue to grow.
In closing, I would like to thank our customers and clients for your ongoing confidence in our ability
to serve your needs; our associates, for your hard work and dedication to creating opportunity; our
shareholders, for continuing to believe in our vision for growth; and our directors, for your wisdom and
guidance through a very challenging year.
I am looking forward to the remainder of 2008 and to our long-term future with confidence and optimism.
As always, I welcome your thoughts and suggestions.
KENNETH D. LEWIS
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT
MARCH 17, 2008
Bank of America 2007 11
[LEF T TO RIGHT]
JOE L. PRICE, CHIEF FINANCIAL OFFICER
AMY WOODS BRINKLEY, CHIEF RISK OFFICER
GREGORY L. CURL, VICE CHAIRMAN OF
CORPORATE DEVELOPMENT
12 Bank of America 2007
Insights Innovations Opportunities
+
Scale matters
Our franchise is unmatched in size and scope. It spans 32 states, the
District of Columbia and more than 30 foreign countries. In the United
States, it includes more than 6,100 banking centers, more than 18,500
ATMs and peerless e-banking services. This powerful distribution network
lets us deploy products and services effi ciently and build our business
organically by bringing customers the advantages of our scale:
greater convenience and an unparalleled range of products.
Bank of America 2007 13
[LEF T TO RIGHT]
BARBARA J. DESOER, GLOBAL TECHNOLOGY &
OPERATIONS EXECUTIVE
LIAM E. MCGEE, PRESIDENT, GLOBAL CONSUMER &
SMALL BUSINESS BANKING
BRUCE L. HAMMONDS, PRESIDENT, BANK OF
AMERICA CARD SERVICES
14 Bank of America 2007
Insights Innovations Opportunities
+
Innovations that work
Serving an unequalled base of customers and clients helps us develop
market insights that drive industry-leading innovations.
Our new No Fee Mortgage PLUS, for example, helped us build our
mortgage lending in a year when the overall mortgage market declined.
And our pioneering ideas go beyond our products. In 2007, we fi nanced
innovations in environmentally sustainable development, in our
communities and in the arts, as well as in our businesses.
Bank of America 2007 15
[LEF T TO RIGHT]
BRIAN T. MOYNIHAN, PRESIDENT, GLOBAL
CORPORATE & INVESTMENT BANKING
KEITH T. BANKS, PRESIDENT, GLOBAL WEALTH &
INVESTMENT MANAGEMENT
J. STEELE ALPHIN, CHIEF ADMINISTRATIVE OFFICER
16 Bank of America 2007
Insights Innovations Opportunities
+
Deeper relationships
We recognize the importance of building trust and increasing
our value over time. Whether working with a consumer, a small
business or a global corporation, Bank of America looks to create
relationships of depth and longevity supported
by our broad product portfolio. By pairing our investment and
commercial bankers, for example, we create deep relationships
with midsize companies by serving their fi nancial needs while
we help them reach their strategic objectives.
Bank of America 2007 17
Insights Innovations Opportunities
+
Insights
Innovations
Opportunities
■ We listened to more than 6,000 customers
who told us they were excited about buying
a home but apprehensive about fi nancing.
■ We used our pricing and distribution power to
pass on lower costs to our customers, redefi n-
ing the mortgage product and sales process.
■ By balancing risk and opportunity, we cemented
our position as a leading direct-to-consumer
mortgage lender in the United States.
■ Customers also told us they wanted to deal
directly with a bank they knew and trusted,
particularly in uncertain economic times.
■ Bank of America services the mortgages
that it sells, offering greater value and a
consistent customer experience.
■ No Fee Mortage PLUS customers stay with us
longer, purchase more products from us and
are more profi table long-term customers.
More
Mortgages
Percent of our deposit
customers who originate
mortgages with us
2007 Q3
14.6%
2007 Q1
10.4%
2006 Q3
9.0%
2006 Q1
7.6%
2005 Q3
7.0%
A MORTGAGE WITHOUT
THE WORRIES
FOR FIRST-TIME HOME BUYERS, THE RIGHT MORTGAGE FROM THE
RIGHT LENDER IS KEY TO GREATER PEACE OF MIND.
Gressle-Tovar know a little some-
D r. Victor Tovar and Dr. Elizabeth
a family nurse practitioner, is also a Ph.D. who
thing about listening. Victor is a
of Kentucky. His wife, Elizabeth,
medical resident at the University
Martinez recommended No Fee Mortgage PLUS,
Bank of America’s innovative mortgage product.
In April, Bank of America became the first
lender to offer customers looking to buy a home
one product with no application fee, no closing fee,
Source: Bank of America
no private mortgage insurance and two worry-free
teaches at the College of Nursing. They both work
guarantees. The Best Value Guarantee states that
long hours, mainly listening — to doctors, instruc-
if the borrower is approved for a mortgage with
tors, students and, most importantly, patients.
Bank of America but chooses to close with another
“The most valuable lesson of my training was
lender, the bank will send the home buyer $250.
learning to understand my patients’ needs,” said
And the Close-On-Time Service Guarantee prom-
Dr. Tovar. “I believe in paying close attention to
ises that the loan will close within 25 days after
what they tell me, asking thoughtful questions
the application is complete or the bank will pay
and working together to find a solution.”
the first month’s principal and interest.
When the Tovars met Mortgage Loan Officer
In addition to offering great value, No Fee
Veronica Martinez in Bank of America’s Houston
Mortgage PLUS is available via phone, online
office, they knew they had found someone who
and through a nationwide network of loan
would offer the same kind of care. “The Tovars
officers and banking centers. “The process was
▲
were leaving Texas, relocating to Kentucky,”
smooth and quick, and we saved so much on
recalled Martinez. “As newlyweds and first-time
closing costs,” said Dr. Gressle-Tovar. And since
home buyers, they were concerned about navi-
Bank of America also services the mortgages it
gating the intricacies of financing and closing,
sells, customers know an associate like Veronica
coordinating their move and beginning new jobs.”
Martinez will be there, ready to listen.
With special attention
from their Bank of
America loan officer,
Dr. Victor Tovar and
Dr. Elizabeth Gressle-Tovar
had an easy time buying
their first home in
Lexington, Kentucky.
Innovation, leadership and advocacy
Thanks in part to No Fee Mortgage PLUS, which generated
more than $13 billion in funded loans in 2007, Bank of America
achieved its goal of becoming a leading direct-to-consumer
mortgage lender. First-mortgage production increased by
22 percent last year, while the overall mortgage market
declined by 15 percent.
The bank’s first-mortgage portfolio is largely untouched by
recent events. We exited the subprime mortgage business in
2001 and have one of the lowest foreclosure rates in the industry.
Even so, Bank of America is an active participant in public-private
partnerships that reach out to distressed homeowners. “Our
objective is to put people in homes and keep them in their homes,”
said Floyd Robinson, president of the Consumer Real Estate &
Insurance Services Group. “Not only is Bank of America a leader
in market share, we also are leading the way in creating solutions
for homeowners in 2008 and beyond.”
Bank of America 2007 1919
Insights Innovations Opportunities
+
Insights
■ Our customers say they like the
ease of accessing Bank of America
anytime, anywhere.
■ Customers using a mobile platform
want the same security they enjoy
using Online Banking at home.
Innovations
Opportunities
■ Bank of America created a pocket-size mobile
bank that translates to any screen.
■ An end-to-end secure connection and the $0 Liability
Online Banking Guarantee protect customers from
promptly reported unauthorized activity.
■ More than 240 million cell phones are in use
in the United States; our mobile services can
reach 75 percent of them.
■ Mobile Banking services work around the globe
for users with an international calling plan.
■ Mobile Banking customers can also send money
to their Online Banking payees and transferees.
■ By anticipating our customers’ needs and
demands, we can grow in a rapidly changing world.
Banking
on the Go
Bank of America active
Mobile Banking users,
2007 (in thousands)
December
617
October
487
August
388
June
172
BANKING AS MOBILE
AS YOU ARE
STAYING IN TOUCH WITH YOUR FINANCES WHEN YOU’RE
ON THE ROAD NEEDN’T BE AN OLYMPIAN TASK.
patriots are thinking sun and surf,
Next August, when many of his com-
in Athens, he now has his sights set on Beijing for
gold. A member of the 2004 U.S.
Brett Heyl plans to be paddling for
Olympic kayak team that competed
as it travels between cell phone and bank. Custom-
ers can also set up the service to send them e-mail
or text message alerts related to their accounts.
Source: Bank of America
Heyl receives an e-mail whenever a direct deposit
is credited to one of his accounts. He also gets
a reminder if a bill is due or his deposit balance
the 2008 Olympic Games. And as one of 12 Bank of
drops below a predetermined amount.
America Hometown Hopefuls™ supported by the
It’s a great service for someone who’s on the go
bank’s sponsorship of the U.S. Olympic Team, he’ll
every day. “I can be training in Charlotte one day,
have the chance to bring his family and friends to
home in New England the next and traveling to
China. “Staying connected is an important part of
a competition across the globe a week later,” said
my training,” said Heyl, 26. “I’m always at my best
Heyl, who’s been a kayaker since he was 9.
when I’m surrounded by my support team.”
“Bank of America’s Online and Mobile Banking
Heyl, whose hometown is Norwich, Vermont,
services go everywhere I do and allow me to check
has found other ways to stay connected when he’s
my finances anytime it’s convenient for me.”
on the road for competitions and training. An avid
That’s precisely why only six months after
user of Bank of America Online and Mobile Bank-
launching the service, Bank of America had more
ing, Heyl uses his laptop and iPhone™ to access
than 600,000 active Mobile Banking users —
accounts, pay bills, transfer money and locate
more than all other U.S. banks combined. Add
ATMs and banking centers across the nation.
them to 24 million Online Banking customers
With Mobile Banking, protecting customer
(almost 40 percent of total U.S. online banking
data is paramount. Bank of America’s end-to-end
users), and it’s easy to see that Bank of America
security ensures that information stays encrypted
is where customers want and need it to be.
▲
Olympic kayaker Brett Heyl
can stay in touch with his
finances even when
he’s training at the U.S.
National Whitewater
Center near Charlotte,
North Carolina.
Taking the bank to the customer
Bank of America was the first bank to offer Mobile Banking service to
its millions of online customers through the widest variety of carriers
and devices — more than 460 types of phones, including the Apple
iPhone™. “We’re taking convenience and control to a new level by
letting customers stay connected with their finances even when they’re
on the go,” said e-Commerce/ATM executive Lance Drummond.
Like Bank of America’s Online Banking — recently voted the best
consumer Internet bank site in the world by Global Finance magazine
for the second year in a row — Mobile Banking is protected by the
award-winning SiteKey® security service and the $0 Liability Online
Banking Guarantee, which covers any unauthorized activity origi-
nating from Online Banking, including bill payment, when reported
within 60 days of the statement date. For more peace of mind, Bank
of America created SafePass™, a security system that sends a one-
time passcode to a cell phone or integrated debit card when custom-
ers need to make large transfers or other sensitive transactions.
Mobile Banking is not available with accounts located in Washington or Idaho.
Bank of America 2007 2121
Insights Innovations Opportunities
+
Insights
Innovations
Opportunities
■ After analyzing the business processes of
■ The solution Bank of America had
major retailers, Bank of America recognized
that new technologies for handling large
cash volumes would address a major source
of problems for managers and executives.
developed for handling its own huge
cash volumes was adapted to serve
the cash needs of major retailers.
■ With innovative technologies to help companies
address their increasingly complex payments,
receivables and cash-handling needs, Bank
of America can capture market share in the
dynamic retail marketplace.
“
A CASH-HANDLING
REVOLUTION
AN INNOVATIVE TECHNOLOGY CAN CHANGE THE WAY
CLIENTS DO BUSINESS.
in 37 states and annual
WW ith nearly 1,300 restaurants
across its franchise every day. While taking
Chick-fil-A Inc. handles
huge volumes of cash
sales of $2.3 billion,
to the store’s deposit account before the cash
even leaves the premises.
Store operator Terry Shelton said, “Managers
have found this device very easy to work with.
And by reducing employees’ involvement in
handling, counting or carrying cash to the local
Our scale and
geographic reach
enable us to work
closely with major
retailers and
other clients on
strategies to make
cash management
more effi cient,
more convenient
and more secure.”
— Cathy Bessant,
president, Global
Product Solutions
in a lot of currency is any retailer’s goal,
bank branch, we lower the likelihood of error
handling it is costly and letting it sit in the
or theft, and we can spend more time providing
cash register is unproductive. That’s why
great customer service.”
Chick-fil-A agreed to be the lead participant
Because the cash is credited directly to the
in Bank of America’s launch of a pioneering
company account, the technology gives Chick-fil-A
cash-handling solution that will simplify
faster access to funds and maximizes working
how cash is managed, free store employees
capital. Additionally, if store managers need to
from time-consuming tasks and put cash
replenish their cash registers, they can withdraw
to work more quickly.
cash from the device, deducting the total from
The centerpiece of the technology is a highly
Chick-fil-A’s balance.
secure waist-high device in the store’s back office.
“This excellent technology promises to solve
A manager inserts as many as 150 bills of mixed
some of our store operators’ cash-handling and
denominations into the machine, which sorts,
safety concerns,” noted Philip Barrett, vice
counts and secures the cash — and even helps
president and controller of Chick-fil-A. “And for
identify counterfeit bills. In a key innovation, the
us at corporate headquarters, it would be great
device connects directly to Bank of America’s
to be able to have this enhanced visibility into
robust electronic network and credits the total
our cash position across the country.”
▲
At the Carolina Place
Mall branch of Chick-fil-A
in Pineville, North Carolina,
Bank of America is helping
store manager Ana Dorado
take cash-handling beyond
the cash register.
Staying ahead of a changing marketplace
With more commercial and corporate clients than any other bank,
Bank of America has unparalleled insights into the operational and
strategic needs of its customers. To address those needs, the
integrated Global Corporate & Investment Banking business brings
together the entire spectrum of the bank’s innovative capabilities.
One example: a service designed for businesses that handle large
volumes of cash, especially multistore companies that must manage
cash at the retail, regional and corporate levels. The technology is
the cornerstone of a new suite of services Bank of America will
offer to streamline and simplify multiple aspects of cash handling,
including forecasting and transportation management.
“Managing cash is enormously important to retailers but histori-
cally is expensive, time-consuming and prone to error and fraud,”
said Cathy Bessant, president of Bank of America Global Product
Solutions. “This cash-handling solution is game-changing technology
that can revolutionize how retailers do business.”
Bank of America 2007 2323
Insights Innovations Opportunities
+
Insights
Innovations
Opportunities
■ We have relationships with 99 percent of the
U.S. Fortune 500, more than 100 fi nancial
sponsors and nearly 130,000 midsize
corporations.
■ This provides us with an ideal vantage point
from which to identify opportunities across
a large and diverse client base.
■ We worked with our clients to execute
a tender offer — a seldom-used structure
in a leveraged buyout.
■ By combining complementary advisory and
capital markets expertise, we have become
a one-stop solution provider for clients.
■ Our creative capital structure and focused
marketing strategy resulted in outstanding
execution, despite an extremely challenging
credit environment.
■ By combining quality management teams
with leading fi nancial sponsors, we position
clients for optimal strategic outcomes.
Steady
Growth
Bank of America share
of investment banking
fees in fi nancial sponsor
health-care deals
2007
2006
2005
15.5%
10.7%
8.6%
TAKING AN ORTHOPEDIC
LEADER PRIVATE
BANK OF AMERICA PLAYED AN INSTRUMENTAL ROLE IN THE LARGEST
MEDICAL PRODUCTS LEVERAGED BUYOUT IN HISTORY.
morphed from a start-up company
BB y early 2006, Biomet Inc. had
than $2 billion in annual revenue. Looking
first year, into an orthopedics
with sales of $17,000 in 1978, its
industry leader, generating more
diligence and agreed in December 2006 to take
Biomet private for approximately $11 billion in the
largest medical products leveraged buyout ever.
Source: Freeman & Co.
Banc of America Securities acted as lead
financial advisor to the consortium and developed
and underwrote an innovative capital structure
toward the future, the board of the Warsaw,
to finance the acquisition. Following the deal’s
Indiana–based manufacturer of musculoskeletal
announcement, the team continued to support
products such as orthopedic implants announced
the financial sponsors as they worked over the
its plans to review strategic alternatives.
next nine months to complete the transaction and
Based on its extensive relationships with pri-
conclude Biomet’s transition to private ownership.
vate equity firms and in-depth knowledge of the
Further demonstrating its ability to customize
medical technology industry, Bank of America
a solution, the Bank of America team worked with
approached leading financial sponsors with
its clients to modify the structure of the transac-
an idea for a leveraged buyout of Biomet.
tion to include a tender offer for Biomet’s stock.
Leveraged buyouts in this sector were not
Bank of America demonstrated excellence at
common at the time. Over the next six months,
every step in the transaction during a time of
Bank of America advised a private equity
unprecedented market volatility, the sponsors
consortium that included The Blackstone Group,
noted. They added that the bank’s health-care
Goldman Sachs Capital Partners, Kohlberg
industry acumen and innovative capital markets
Kravis Roberts & Co. and TPG Capital. The
and leveraged finance capabilities helped the con-
consortium presented the proposal to Biomet
sortium execute this pivotal transaction and posi-
and its financial advisors, conducted due
tion the Biomet team for a long, prosperous future.
▲
Orthopedic surgeons
perform a total knee
replacement using a
Biomet system.
Delivering the universal bank’s capabilities to its clients
By coupling the strength of its M&A business with first-class
expertise in corporate and leveraged finance, Bank of America
delivers the intellectual and financial capital its clients need to
complete transactions in favorable and challenging markets alike.
The combination of these capabilities in a single financial
partner is a compelling value proposition. “Our universal banking
platform — characterized by strong idea generation, market lead-
ership in corporate and leveraged finance and robust distribution
capabilities — gives Bank of America a powerful competitive
advantage that enables us to win with clients time and time
again,” said Brian J. Brille, head of Global Investment Banking.
“Equally important to the success of our corporate clients is our
ability to structure deals that appeal to investors, even in a chal-
lenging market,” noted Thomas G. White, head of Global Markets.
“Our deep relationships with diverse investors, blended with our
market intelligence, create a potent formula for our issuer clients.”
Bank of America 2007 2525
Insights Innovations Opportunities
+
Insights
Innovations
Opportunities
■ Mass affl uent customers (those with
investable assets between $100,000
and $3 million) cite retirement planning
as their No. 1 fi nancial need.
■ Bank of America and its affi liates plan to deliver
tailored retirement solutions across a client’s
full spectrum of fi nancial needs, from savings
to credit to investments and estate planning.
■ 26 million mass affl uent households own
the majority of personal investable assets
in the United States; Bank of America has
relationships with half of them.
■ 62 percent of mass affl uent customers see
■ Bank of America and its affi liates leverage the
■ With our vast client base and breadth of
banks with brokerage capabilities as suitable
retirement providers, a rating on par with
brokerages and mutual fund complexes.
(Source: BAI/Mercatus, 2007)
company’s unparalleled distribution capabilities
to offer unmatched convenience and access to
retirement solutions online, in banking centers
and over the phone.
offerings, we are seizing our opportunity to
become a leading provider in the fast-growing
(but still fragmented) retirement marketplace.
Share of
mass affl uent
customer assets
held by banks
46%
when banks establish a
retirement relationship
with the customer
18%
when banks do not have
a retirement relationship
with the customer
Source: Bank Administration
Institute/Mercatus Retirement
Study, 2007
GETTING READY FOR LIFE
AFTER WORK
FOR BANK OF AMERICA’S CUSTOMERS, PLANNING FOR RETIREMENT
DOESN’T HAVE TO BE A SECOND CAREER.
Premier Banking & Investments
E very client is unique. That is why
Mark Marich, president and owner of Northeast
and how can Bank of America
asks clients, “What are your goals,
help you achieve them?” For
plan designed for our long-term goals. He
also spent time understanding my own goals
for the future, including my plans for the
business after retirement. Then he developed
a personal retirement strategy for me that
will help me meet my family’s needs.”
Orthotics and Prosthetics in Providence, Rhode
Following a complete net worth analysis,
Island, the financial priorities are preparing for
Marich’s advisor leveraged a range of capabilities
life after work and overseeing a retirement plan
and resources at Bank of America and its
for his employees.
affiliates to help Marich implement his retirement
Marich, 56, who lost a leg in a car accident,
plan. These included IRAs for Marich and his
founded his business in 1985. Since then, his
wife and a variety of investment vehicles to help
company has helped fit thousands of patients
diversify his portfolio. In addition, Marich’s client
with prosthetic limbs and orthotic devices.
manager in Premier Banking helped him utilize
“Several financial institutions managed our
his investment in his house to finance home
company’s pension plan over the years, but
renovations through a home equity line of credit.
I never trusted they had our best interests in
Now Marich can devote more time to personal
mind,” he said. “Then a friend referred me to
interests, like skiing. “We have a team at Premier
▲
Bank of America, and my opinion changed.”
Banking & Investments that serves all of our
Today, Marich is served by professionals
banking and investment needs, which really
at Premier Banking and Banc of America
simplifies our lives,” he said. “Most importantly,
Investment Services, Inc. (BAI). “My BAI finan-
we know they’re committed to doing what’s best
cial advisor developed a corporate retirement
for us and my employees.”
Riding high above the
slopes of Sugarbush
Resort in Warren,
Vermont, with wife
Sharie, entrepreneur
Mark Marich hasn’t let
the loss of a leg slow
him down.
Planning for retirement
About 16 million Bank of America customers are at or near
retirement age. With a range of services across banking and
investing, Bank of America is uniquely positioned to help its
clients realize their dreams for retirement.
“Customers are eager for guidance on how best to plan for
retirement, especially given today’s longer life expectancy and
rising health-care costs,” said Jeff Carney, who joined the bank
in 2007 to lead the company’s comprehensive retirement strategy
for all its customers. “So, when they come to us, they find that
Bank of America has a lot to offer.”
In 2007, Bank of America formed a new organization dedicated
to serving the retirement needs of its customers and growing
the company’s market share of retirement assets. One initial
growth initiative is an IRA acceleration campaign to capture
a larger share of a market segment that is growing at
11 percent per year.
See important disclosures on page 176.
Bank of America 2007 2727
Insights Innovations Opportunities
+
Insights
Innovations
Opportunities
■ Nonprofi ts face great challenges in fi nding
■ We have given nonprofi ts more fl exibility
sources of funding for their programs,
services and operational needs.
through unrestricted funding, letting them
direct funds where needs are greatest.
■ We are helping nonprofi ts enhance their
programs to provide better services to
greater numbers of individuals and families.
■ Aging management and the rapid growth
in the number of nonprofi ts threaten this
complex fi eld with a leadership shortage.
■ We have built nonprofi t leadership through
■ We are positioning nonprofi t leaders to
training and workshops that foster best prac-
tices, networking and professional growth.
partner with government and business lead-
ers to address critical community needs.
FINDING COMMON GROUND
IN THE CITY
A NEW YORK NONPROFIT IS HELPING THE HOMELESS
LEAVE THE STREETS.
By 2016,
the nonprofi t
sector will need
640,000
new leaders.
Source: The Bridgespan Group
that combat homelessness, Common
AAmong the many nonprofit groups
Ground has developed more than
2,000 units of housing for the formerly homeless in
Since its inception in 1990, Common
Ground is one of the most innovative.
improve client services and raise more money,
the Neighborhood Builders Award features a
leadership training program that gave Haggerty
access to a network of leading nonprofits, with
a great strategic payoff. “I’ve discovered syner-
gies between organizations addressing a number
New York City, providing on-site services such as
of community issues,” she said, “and I had the
employment counseling, job training and addiction
opportunity to compare how nonprofits resource
therapy to people rebuilding their lives.
themselves and form business priorities.”
Like many nonprofits, though, Common Ground
With its commitment to change the way people
has faced difficulty in finding a source of
think about the homeless, Common Ground was
funding that will give the organization flexibility
an ideal group to host internships for young New
to invest in its growth and development. The Bank
Yorkers selected as Bank of America Student
of America Neighborhood Builders™ Award lets
Leaders™. Last summer, Andrew D’Antonio, a
Common Ground allocate money to its operations
high school senior, gained hands-on experience
as it sees fit. Since receiving the award, Common
at Common Ground as he assisted homeless men
Ground has developed both its communications
and women applying for housing. Andrew says
strategy and leadership succession plan and
the most rewarding moments of his internship
▲
expanded its programs to three additional cities.
came during his daily rounds at 5 a.m., when he
Common Ground’s pioneering approach to
walked the streets of the city helping to identify
homelessness stems from the thoughtful leader-
the chronically homeless. Over time, his percep-
ship of its president and founder, Rosanne
tion of them changed. As he said, “They are just
Haggerty. Besides helping Common Ground
people in a bad situation.”
Common Ground founder
Rosanne Haggerty talks
with intern Andrew
D’Antonio in a newly
renovated Manhattan
building that provides
housing for formerly
homeless adults.
Helping communities, neighborhood by neighborhood
Bank of America has funded more than 10,000 nonprofits
since 2004. These organizations address critical issues in the
communities we serve across the country. But they are increasingly
hampered by a lack of flexible support, a proliferation in the
number of nonprofits and a shortage of leaders.
In 2004, the Bank of America Charitable Foundation set out to
develop an innovative response to these challenges, and the Neigh-
borhood Excellence Initiative™ was born. In partnership with the
local community, the initiative lets nonprofits direct funding where
they wish — to strengthen their infrastructure, foster innovation,
expand their programs and renovate facilities. The program also
nurtures leadership through paid internships and innovative develop-
ment forums. In all, the bank has committed nearly $90 million to
provide support, training and encouragement to our community
leaders of today and tomorrow, helping improve our neighborhoods
in 45 markets across the United States and in London.
Bank of America 2007 2929
Insights Innovations Opportunities
+
A LEADER
IN OUR
MARKETS
SIZE, SCALE, A DIVERSE REVENUE MIX AND THE ABILITY
TO EXECUTE HAVE NEVER BEEN MORE IMPORTANT.
Global Consumer & Small Business Banking
Revenue
(in billions, fully taxable-equivalent basis)
$44.9
$47.7
$28.4
Global Consumer & Small Business
Bank of America is the leading provider
Banking (GCSBB) has about 59 million
of checking and savings accounts and
consumer and mass-market small
credit and debit cards. It is a leading
business relationships across America.
originator of direct-to-consumer mortgages
Eighty-one percent of U.S. residents live
and home equity loans and has a top
in Bank of America’s retail franchise,
merchant card processing service. Since
’05
’06
’07
which covers 32 states and the District
the businesses are tightly integrated,
Net Income
(in billions)
$11.4
$9.4
$7.0
of Columbia. In addition, four out of five
services may be adapted to meet the needs
of the nation’s mass-market small
of consumers and businesses of any size.
businesses — home-based enterprises,
The Small Business Banking organization
sole proprietorships and smaller manufac-
is responsible for all products, distribution
turing and distribution firms — operate
and marketing related to our innovative
in communities served by Bank of America.
capital, credit, deposit and payment
These consumers, entrepreneurs and
services; a leading credit card operation
businesses can access products and
allows ready access to capital and credit;
’05
’06
’07
services through more than 6,100 banking
the Online Banking division is responsible
centers, more than 18,500 ATMs and the
for Online Business Suite, including
nation’s leading online banking, online
Easy Online Payroll™; and thousands of
bill-pay and mobile banking services, as
banking centers provide cash, night drops,
well as through a world-class sales force
merchant tellers and, in many locations,
and call centers.
small business specialists.
30 Bank of America 2007
66249ba_30-31 30
66249ba_30-31 30
3/4/08 12:25:59 AM
3/4/08 12:25:59 AM
Global Corporate & Investment Banking
Global Corporate & Investment Banking
GCIB serves clients around the world,
(GCIB) provides comprehensive financial
providing integrated delivery of our key
solutions to clients ranging from compa-
range of financial products and services
nies with $2.5 million in revenues to large
through client managers and product part-
multinational corporations, governments,
ners who understand each client’s needs.
financial sponsors, institutional inves-
Clients include 99 percent of the U.S.
Revenue
(in billions, fully taxable-equivalent basis)
$19.9
$21.2
$13.4
tors and hedge funds. Services include
Fortune 500, 83 percent of the Fortune
’05
’06
’07
bank deposit and credit products; risk
Global 500 and one in three midsize U.S.
management, cash management and
companies. In 2007, Bank of America was
payment services; equity and debt capital
the sixth-largest underwriter of U.S. debt,
raising; and advisory services based on
equity and equity-related securities. It is
industry expertise and deep knowledge
the No. 1 treasury services provider in
of client strategies and needs. Investors
the United States and a leading provider
benefit from highly rated debt and equity
globally. GCIB businesses also include the
research, leading-edge sales and trading
leading bank-owned asset-based lender
Net Income
(in billions)
$6.0
$6.0
platforms, and risk-management expertise
and the No. 1 provider of financial services
’05
’06
across asset classes.
to commercial real estate businesses.
$0.5
’07
Global Wealth & Investment Management
Global Wealth & Investment Management
as specialty asset management services.
(GWIM) provides comprehensive banking
Columbia Management provides
and investment services to more than three
investment management to institutional
million individual and institutional custom-
clients and individual investors. This
ers. Clients have access to services from
includes mutual funds, liquidity strategies
three primary businesses: U.S. Trust, Bank
and separately managed accounts.
Revenue
(in billions, fully taxable-equivalent basis)
$6.9
$7.4
$7.9
of America Private Wealth Management
Columbia mutual funds provide a variety
’05
’06
’07
(U.S. Trust); Columbia Management; and
of investment disciplines within equities,
Premier Banking & Investments™.
fixed income (taxable and nontaxable)
Premier Banking & Investments
and cash (taxable and nontaxable). As of
delivers tailored banking and investment
December 31, 2007, GWIM entities man-
solutions and personalized, priority service
aged assets of more than $640 billion.
to affluent clients with investable assets of
Clients may also receive products and
more than $100,000. This division includes
services from Alternative Investment
Premier Banking and Banc of America
Solutions (AI Solutions), which gives
Net Income
(in billions)
$2.2
$2.1
$2.0
Investment Services, Inc.® (BAI), a full-
qualified individual investors and institu-
’05
’06
’07
service and online retail brokerage.
tions access to hedge funds, private equity
U.S. Trust provides integrated wealth
funds and tailored investments. Bank of
management solutions to wealthy indi-
America Retirement & GWIM Client
viduals with investable assets of more
Solutions provides personal and institu-
than $3 million. U.S. Trust is one of the
tional retirement solutions for customers
leading private banks in the United
throughout the enterprise, in addition to
States and provides credit, deposit,
philanthropic management and other
investment and trust services, as well
services and products for GWIM clients.
Bank of America 2007 31
66249ba_30-31 31
66249ba_30-31 31
3/4/08 12:26:00 AM
3/4/08 12:26:00 AM
Insights Innovations Opportunities
+
GOING GREENER
LAST YEAR, BANK OF AMERICA STEPPED UP ITS COMMITMENT
TO THE ENVIRONMENT. YOU CAN JOIN US.
America’s environmental efforts —
AA s with many companies, Bank of
as energy and paper. In 2007, we went further.
which began two decades ago —
conservation of resources such
were initially focused on the
card gives cardholders one EarthSmart™ point
for every dollar spent. Customers can redeem
their points to help build community-based renew-
able energy projects across the United States.
Last year, we joined the Chicago Climate
Exchange, the world’s first voluntary carbon
“
Last March, Bank of America announced a
exchange. We’re well on the way to meeting our
10-year, $20 billion environmental initiative
pledge to reduce the greenhouse-gas emissions of
to address climate change and encourage
our energy and utility client portfolio by 7 percent
sustainable business practices through our
from 2004 levels by the end of 2008 and to lower
new products and services, lending and investing
the greenhouse emissions of our own operations
activities and corporate philanthropy, as well
by 9 percent from 2004 levels by the end of 2009.
as by improving our own operations.
During the next 10 years, we will invest
Under the initiative, we have helped San Jose,
$1.4 billion to achieve LEED (Leadership in
California, become the largest solar-powered
Energy and Environmental Design) certification
school district in the United States, which will
for all our new office buildings and banking
save the district $25 million in energy costs and
centers. And we give employees a $3,000 rebate
cut carbon emissions by more than 37,000 tons.
if they buy a hybrid vehicle.
My hope for the
planet is that
the world’s
businesspeople,
consumers,
activists and
politicians will
work together
to fi nd new
ways to create
sustainable
economic growth.
— Kenneth D. Lewis”
We also invested $65 million so that the Redwood
Bank of America associates have also worked
Forest Foundation could purchase and preserve
hard to cut paper use by 40 percent since 2000.
50,000 acres of forest in Northern California.
You can help by having next year’s annual report
We are helping our retail customers contrib-
delivered to you electronically. Sign up at
ute, too. Our new Brighter Planet Visa® credit
www.bankofamerica.com/annualreport/2007.
▲
Bank of America is
helping to support
sustainable growth in
the Usal Redwood Forest,
north of Fort Bragg in
Northern California.
32 Bank of America 2007
BANK OF AMERICA
2007 FINANCIAL REVIEW
66249ba_fin_33 33
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3/3/08 10:33:04 PM
Bank of America 2007 33
Financial Review Contents
Recent Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merger Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 Economic Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performance Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance Sheet Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business Segment Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Global Consumer and Small Business Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Global Corporate and Investment Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Global Wealth and Investment Management
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Off- and On-Balance Sheet Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations and Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Managing Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Strategic Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liquidity Risk and Capital Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer Portfolio Credit Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Portfolio Credit Risk Management
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for Credit Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for Credit Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest Rate Risk Management for Nontrading Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage Banking Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operational Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recent Accounting and Reporting Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Complex Accounting Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 Compared to 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business Segment Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statistical Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
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81
83
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86
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90
93
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93
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Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
Throughout the MD&A, we use certain acronyms and
abbreviations which are defined in the Glossary beginning on page 110.
34 Bank of America 2007
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Bank of America Corporation and Subsidiaries
This report 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
Annual Report 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 this 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 and market liquidity which may reduce interest
margins, impact funding sources and affect the ability to originate and
distribute financial products in the primary and secondary markets;
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 sim-
ilar financial instruments; political conditions and related actions by the
United States abroad which may adversely affect the Corporation’s busi-
nesses and economic conditions as a whole; liabilities resulting from liti-
expenses,
gation
settlements and judgments; changes in domestic or foreign tax laws, rules
and regulations as well as court, Internal Revenue Service or other gov-
ernmental 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; abil-
ity 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 manage-
ment’s ability to manage these and other risks.
investigations,
regulatory
including
costs,
and
The Corporation, headquartered in Charlotte, North Carolina, oper-
ates in 32 states, the District of Columbia and more than 30 foreign coun-
tries. The Corporation provides a diversified range of banking and
nonbanking financial services and products domestically and internation-
ally through three business segments: Global Consumer and Small Busi-
ness Banking (GCSBB), Global Corporate and Investment Banking (GCIB),
and Global Wealth and Investment Management (GWIM).
At December 31, 2007, the Corporation had $1.7 trillion in assets
and approximately 210,000 full-time equivalent employees. Notes to
Consolidated Financial Statements referred to in the MD&A are
incorporated by reference into the MD&A. Certain prior period amounts
have been reclassified to conform to current period presentation.
Recent Events
2007 Market Dislocation
During the second half of 2007, extreme dislocations emerged in the finan-
cial markets, including the leveraged finance, subprime mortgage, and
commercial paper markets. These dislocations were further compounded
by the decoupling of typical correlations in the various markets in which we
do business. Furthermore, in the fourth quarter of 2007, the credit ratings
of certain structured securities (e.g., CDOs) were downgraded which
among other things triggered further widening of credit spreads for these
types of securities. We have been an active participant in the CDO market
and maintain ongoing exposure to these securities and have incurred
losses associated with these exposures. For more information regarding
Capital Markets and Advisory Services (CMAS) results including CDOs,
leveraged finance and related ongoing exposure, see the CMAS discussion
beginning on page 52.
In addition, the market dislocation impacted the credit ratings of
structured investment vehicles (SIVs) in the market place. GWIM manages
certain cash funds which have invested in SIV transactions. We have
entered into capital commitments to support
these funds and have
incurred losses associated with these commitments including losses on
certain securities purchased earlier from these funds at fair value. For
more information on our cash fund support, see the GWIM discussion
beginning on page 56.
In 2008, we continue to have exposure to those items noted above,
and depending upon market conditions, we may experience additional
losses.
Current Business Environment
The financial conditions mentioned above continue to negatively affect the
economy and the financial services sector in 2008. The slowdown of the
economy, significant decline in consumer real estate prices, and the con-
tinued and rapid deterioration in the housing sector have affected our
home equity portfolio and will, in all likelihood, impact other areas of our
consumer portfolio. We expect that certain industry sectors, in particular
those that are dependent on the housing sector, and certain geographic
regions will experience further stress. For more information on the impact
of
the current business environment on credit, see the Credit Risk
Management discussion beginning on page 69.
The subprime mortgage dislocation has also impacted the ratings of
certain monoline insurance providers (monolines) which has affected the
Bank of America 2007
35
pricing of certain municipal securities and the liquidity of the short term
public finance markets. We have direct and indirect exposure to monolines
and as a result are continuing to monitor this exposure as the markets
evolve. For more information related to our monoline exposure, see the
Industry Concentrations discussion on page 79.
The above conditions together with uncertainty in energy costs and
the overall economic slowdown, which may ultimately lead to recessionary
conditions, will affect other markets in which we do business and will
adversely impact our results in 2008. The degree of the impact is depend-
ent upon the duration and severity of the aforementioned conditions in this
rapidly changing business and interest
rate environment. For more
rate sensitivity, see the Interest Rate Risk
information on interest
Management for Nontrading Activities discussion on page 90.
Other Recent Events
In January 2008, we announced changes in our CMAS business within GCIB
which better align the strategy of this business with GCIB’s broader integrated
platform. We will continue to provide corporate, commercial and sponsored
clients with debt and equity capital raising services, strategic advice, and a
full range of corporate banking capabilities. However, we will reduce activities
in certain structured products (e.g., CDOs) and will resize the international
platform to emphasize debt, cash management, and selected trading serv-
ices, including rates and foreign exchange. This realignment will result in the
reduction of 650 front office personnel with additional infrastructure head-
count reduction to follow. We also plan to sell our equity prime brokerage
business. This is in addition to our announcement in October 2007 to elimi-
nate approximately 3,000 positions within various businesses, which includes
reductions in GCIB as part of our GCIB business strategic review to enhance
the operating platform, reductions in the wholesale mortgage-related business
included in GCSBB and reductions in other related infrastructure positions.
In August of 2007, we made a $2.0 billion investment in Countrywide
Financial Corporation (Countrywide), the largest mortgage lender in the
U.S., in the form of Series B non-voting convertible preferred securities
yielding 7.25 percent. In January 2008, we announced a definitive agree-
ment to purchase all outstanding shares of Countrywide for approximately
$4.0 billion in common stock. The acquisition would make us the nation’s
leading mortgage lender and loan servicer. The closing of this transaction
is subject to closing conditions and regulatory approvals and is expected
to close early in the third quarter of 2008.
In January 2008, the Board of Directors (the Board) declared a regu-
lar quarterly cash dividend on common stock of $0.64 per share, payable
on March 28, 2008 to common shareholders of record on March 7, 2008.
In October 2007, the Board declared a regular quarterly cash dividend on
common stock of $0.64 per share which was paid on December 28, 2007
to common shareholders of record on December 7, 2007. In July 2007,
the Board increased the quarterly cash dividend on common stock 14
percent from $0.56 to $0.64 per share.
In January 2008, we issued 240 thousand shares of Bank of America
Corporation Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series
K with a par value of $0.01 per share for $6.0 billion. The fixed rate is
8.00 percent through January 29, 2018 and then adjusts to three-month
LIBOR plus 363 basis points (bps) thereafter. In addition, we issued
6.9 million shares of Bank of America Corporation 7.25% Non-Cumulative
Perpetual Convertible Preferred Stock, Series L with a par value of
$0.01 per share for $6.9 billion. In November and December of 2007, we
issued 41 thousand shares of Bank of America Corporation 7.25%
Non-Cumulative Preferred Stock, Series J with a par value of $0.01 per
share for $1.0 billion. In September 2007, we issued 22 thousand shares
of Bank of America Corporation 6.625% Non-Cumulative Preferred Stock,
Series I with a par value of $0.01 per share for $550 million.
36 Bank of America 2007
In December 2007, we completed the sale of Marsico Capital Man-
agement, LLC (Marsico), a 100 percent owned investment manager, to
Thomas F. Marsico, founder and chief executive officer of Marsico, and
realized a pre-tax gain of approximately $1.5 billion.
Merger Overview
On October 1, 2007, we acquired all the outstanding shares of ABN AMRO
North America Holding Company, parent of LaSalle Bank Corporation
(LaSalle), for $21.0 billion in cash. With this acquisition, we significantly
expanded our presence in metropolitan Chicago, Illinois and Michigan, by
adding LaSalle’s commercial banking clients, retail customers and banking
centers.
On July 1, 2007, we acquired all the outstanding shares of U.S. Trust
Corporation for $3.3 billion in cash. U.S. Trust Corporation 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 our wealth management business and positions it as one of
the largest financial services companies managing private wealth in the U.S.
On January 1, 2006, we acquired 100 percent of the outstanding
for $34.6 billion. The acquisition
stock of MBNA Corporation (MBNA)
expanded our customer base and opportunity to deepen customer
relationships across the full breadth of
the Corporation by delivering
innovative deposit,
lending and investment products and services to
MBNA’s customer base. Additionally, the acquisition allowed us to sig-
nificantly increase our affinity relationships through MBNA’s credit card
operations and sell these credit cards through our delivery channels includ-
ing the retail branch network.
For more information related to these mergers, see Note 2 – Merger
and Restructuring Activity to the Corporation’s Consolidated Financial
Statements.
2007 Economic Overview
In 2007, notwithstanding significant declines in housing, soaring oil prices
and tremendous turmoil in financial markets, real Gross Domestic Product
(GDP) grew 2.2 percent. Growth softened significantly in the fourth quarter.
Consumer spending remained resilient, as increases in employment and
wages offset the negative influences of declining home prices. Fueled by
another year of strong exports and a slowdown in imports, the U.S. trade
deficit fell sharply, lifting U.S. domestic production. However, declines in
residential construction subtracted nearly a full percentage point from GDP
growth, more than offsetting the boost provided by international trade.
Corporate profits declined modestly in the second half of the year from
all-time record highs. Global economies recorded their fourth consecutive
year of rapid expansion, driven by sustained robust growth in China, India
and other emerging market economies. Growth in Europe and Japan mod-
erated in the second half of the year. Higher energy prices pushed up
inflation throughout the year. However, excluding food and energy, core
inflation receded in the second half of the year, in lagged response to the
deceleration of nominal spending growth. A sharp rise in defaults on sub-
prime mortgages and worries about the potential fallout from the faltering
housing and subprime mortgage markets triggered financial market turbu-
lence beginning in the summer. A dramatic repricing of credit risk and
unprecedented capital losses stemming from sharp declines in the value
of structured credit products based on subprime debt deepened the finan-
cial crisis. In response, the FRB eased short-term interest rates, reduced
the discount rate relative to its federal funds rate target and in December
created a new facility for auctioning short-term funds through the discount
window of the Federal Reserve Banks. The fourth quarter ended on a weak
note, as consumer spending moderated, businesses reduced production,
employment slowed and the unemployment rate rose.
Performance Overview
Net income was $15.0 billion, or $3.30 per diluted common share in 2007, decreases of 29 percent and 28 percent from $21.1 billion, or $4.59 per
diluted common share in 2006.
Table 1 Business Segment Total Revenue and Net Income
(Dollars in millions)
Global Consumer and Small Business Banking (2)
Global Corporate and Investment Banking
Global Wealth and Investment Management
All Other (2)
Total FTE basis
FTE adjustment
Total Consolidated
Total Revenue (1)
Net Income
2007
$47,682
13,417
7,923
(954)
68,068
(1,749)
$66,319
2006
$44,926
21,161
7,357
360
73,804
(1,224)
$72,580
2007
$ 9,430
538
2,095
2,919
14,982
–
$14,982
2006
$11,378
6,032
2,223
1,500
21,133
–
$21,133
(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 42.
(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 $1.9 billion, or 17 percent, to $9.4 billion in 2007
compared to 2006. Managed net revenue rose $2.8 billion, or six percent,
to $47.7 billion driven by increases in both noninterest and net interest
income. Noninterest income increased $2.1 billion, or 13 percent, to
$18.9 billion driven by higher card, service charge and mortgage banking
income. Net interest income increased $612 million, or two percent, to
$28.8 billion due to the impacts of organic growth and the LaSalle acquis-
ition on average loans and leases, and deposits. These increases in rev-
enues were more than offset by the increase in provision for credit losses
of $4.4 billion, or 51 percent, to $12.9 billion. This increase reflects port-
folio growth and seasoning, increases from the unusually low loss levels
experienced in 2006 post bankruptcy reform, the impact of housing mar-
ket weakness on the home equity portfolio, and growth and deterioration
in the small business portfolio. Noninterest expense increased $1.7 bil-
lion, or nine percent, mainly due to increases in personnel and technology-
related costs. For more information on GCSBB, see page 46.
Global Corporate and Investment Banking
Net income decreased $5.5 billion, or 91 percent, to $538 million, and
total revenue decreased $7.7 billion, or 37 percent, to $13.4 billion in
2007 compared to 2006. These decreases were driven by $5.6 billion
in losses resulting from our CDO exposure and other trading losses. These
decreases were partially offset by an increase in net interest income,
primarily market-based, of $1.3 billion, or 14 percent. The provision for
credit losses increased $643 million driven by the absence of 2006
releases of reserves, higher net charge-offs and an increase in reserves
during 2007 reflecting the impact of the weak housing market particularly
loan portfolio. Noninterest expense increased
on the homebuilder
$347 million, or three percent, mainly due to an increase in expenses
related to the addition of LaSalle partially offset by a reduction in CMAS
performance-based incentive compensation. For more information on
GCIB, see page 50.
Global Wealth and Investment Management
Net income decreased $128 million, or six percent, to $2.1 billion in 2007
compared to 2006 as an increase in noninterest expense was partially
offset by an increase in total revenue. Total revenue grew $566 million, or
eight percent, to $7.9 billion driven by higher noninterest income of $380
million. Noninterest income increased due to growth in investment and
brokerage services income of $827 million. The increase was due to
higher AUM primarily attributable to the impact of the U.S. Trust Corpo-
ration acquisition, net client
inflows and favorable market conditions
combined with an increase in brokerage activity. This increase was parti-
ally offset by a decrease in all other income of $447 million due to losses
of $382 million associated with the support provided to certain cash
funds. Noninterest expense increased $768 million driven by the addition
of U.S. Trust Corporation, higher revenue-related expenses and marketing
costs.
AUM increased $100.6 billion to $643.5 billion at December 31,
2007 compared to December 31, 2006 reflecting the acquisition of U.S.
Trust Corporation, net inflows and market appreciation which was partially
offset by the sale of Marsico. For more information on GWIM, see page
56.
All Other
Net income increased $1.4 billion to $2.9 billion in 2007 compared to
2006. Excluding the securitization offset, total revenue increased $283
million resulting from an increase in noninterest income of $1.6 billion
partially offset by a decrease in net interest income of $1.3 billion. The
increase in noninterest income was driven by the $1.5 billion gain from
the sale of Marsico and an increase of $873 million in equity investment
income, partially offset by losses of $394 million on securities after they
were purchased from certain cash funds managed within GWIM at fair
value. In addition, net interest income, noninterest income and noninterest
expense decreased due to certain international operations that were sold
in late 2006 and the beginning of 2007. Merger and restructuring charges
decreased $395 million. For more information on All Other, see page 59.
Financial Highlights
Net Interest Income
Net interest income on a FTE basis increased $367 million to $36.2 bil-
lion for 2007 compared to 2006. The increase was driven by the con-
tribution from market-based net interest income related to our CMAS
business, higher levels of consumer and commercial loans, the impact of
the LaSalle acquisition, and a one-time tax benefit from restructuring our
existing non-U.S. based commercial aircraft
leasing business. These
increases were partially offset by spread compression, increased hedge
costs and the impact of divestitures of certain foreign operations in late
2006 and the beginning of 2007. The net interest yield on a FTE basis
decreased 22 bps to 2.60 percent for 2007 compared to 2006, and was
driven by spread compression, and the impact of the funding of the
LaSalle merger, partially offset by an improvement in market-based yield
Bank of America 2007
37
related to our CMAS business. For more information on net interest
income on a FTE basis, see Tables I and II beginning on page 98.
Noninterest Income
Table 2 Noninterest Income
(Dollars in millions)
Card income
Service charges
Investment and brokerage services
Investment banking income
Equity investment income
Trading account profits (losses)
Mortgage banking income
Gains (losses) on sales of debt securities
Other income
Total noninterest income
2007
$14,077
8,908
5,147
2,345
4,064
(5,131)
902
180
1,394
$31,886
2006
$14,290
8,224
4,456
2,317
3,189
3,166
541
(443)
2,249
$37,989
Noninterest income decreased $6.1 billion to $31.9 billion in 2007
compared to 2006.
Š Card income on a held basis decreased $213 million primarily due to
the impact of higher credit losses on excess servicing income resulting
from seasoning in the securitized portfolio and increases from the
unusually low loss levels experienced in 2006 post bankruptcy reform.
This decrease was partially offset by increases in cash advance fees
and debit card interchange income.
Š Service charges grew $684 million resulting from new account growth in
deposit accounts and the beneficial impact of the LaSalle merger.
Š Investment and brokerage services increased $691 million due primarily
to organic growth in AUM, brokerage activity and the U.S. Trust Corpo-
ration acquisition.
Š Equity investment income increased $875 million driven by the $600
million gain on the sale of private equity funds to Conversus Capital and
the increase in income received on strategic investments.
Š Trading account profits (losses) were $(5.1) billion in 2007 compared to
$3.2 billion in 2006. The decrease in trading account profits (losses)
was driven by losses of $4.9 billion, out of a total of $5.6 billion in
losses, associated with CDO exposure and the impact of the market
disruptions on various parts of our CMAS businesses in the second half
of the year. For more information on the impact of these events refer to
the GCIB discussion beginning on page 50.
Š Mortgage banking income increased $361 million due to the favorable
performance of the MSRs partially offset by the impact of widening
credit spreads on income from mortgage production. Mortgage banking
also benefited from the adoption of the fair value option.
Š Gains (losses) on sales of debt securities were $180 million for 2007
compared to $(443) million for 2006. The losses in the prior year were
largely a result of the sale of $43.7 billion of mortgage-backed debt
securities in the third quarter of 2006.
Š Other income decreased $855 million as the $1.5 billion gain from the
sale of Marsico was more than offset by fourth quarter losses of $752
million, out of a total of $5.6 billion in losses associated with our CDO
exposure, losses of $394 million on securities after they were pur-
chased from certain cash funds at fair value, losses of $382 million
associated with the support provided to certain cash funds managed
within GWIM, and the absence of a $720 million gain on the sale of our
Brazilian operations recognized in 2006.
Provision for Credit Losses
The provision for credit losses increased $3.4 billion to $8.4 billion in
2007 compared to 2006 due to higher net charge-offs, reserve additions
and the absence of 2006 commercial reserve releases. Higher net charge-
offs of $1.9 billion were primarily driven by seasoning of the consumer
portfolios, seasoning and deterioration in the small business and home
equity portfolios as well as lower commercial recoveries. Reserves were
increased in the home equity and homebuilder loan portfolios on con-
tinued weakness in the housing market. Reserves were also added for
small business portfolio seasoning and deterioration as well as growth in
the consumer portfolios. These increases were partially offset by reduc-
tions in reserves from the sale of the Argentina portfolio in the first quarter
of 2007. For more information on credit quality, see Provision for Credit
Losses beginning on page 83.
Noninterest Expense
Table 3 Noninterest Expense
(Dollars in millions)
Personnel
Occupancy
Equipment
Marketing
Professional fees
Amortization of intangibles
Data processing
Telecommunications
Other general operating
Merger and restructuring charges
Total noninterest expense
2007
$18,753
3,038
1,391
2,356
1,174
1,676
1,962
1,013
5,237
410
$37,010
2006
$18,211
2,826
1,329
2,336
1,078
1,755
1,732
945
4,580
805
$35,597
Noninterest expense increased $1.4 billion to $37.0 billion in 2007
compared to 2006, primarily due to increases in personnel expense and
other general operating expense partially offset by a decrease in merger
and restructuring charges. Personnel expense increased $542 million due
to the acquisitions of LaSalle and U.S. Trust Corporation partially offset by
a reduction in performance-based incentive compensation within GCIB.
Other general operating expense increased by $657 million and was
impacted by our acquisitions and various other items including litigation-
related costs. Merger and restructuring charges decreased $395 million
mainly due to the declining integration costs associated with the MBNA
acquisition partially offset by costs associated with the integration of U.S.
Trust Corporation and LaSalle.
Income Tax Expense
Income tax expense was $5.9 billion in 2007 compared to $10.8 billion in
2006, resulting in an effective tax rate of 28.4 percent in 2007 and 33.9
percent in 2006. The decrease in the effective tax rate was primarily due
to lower pre-tax income, a one-time tax benefit from restructuring our exist-
ing non-U.S. based commercial aircraft leasing business and an increase
in the relative percentage of our earnings taxed solely outside of the U.S.
In addition, the 2007 effective tax rate excludes the impact of a $175 mil-
lion charge in 2006 resulting from a change in tax legislation. For more
information on income tax expense, see Note 18 – Income Taxes to the
Consolidated Financial Statements.
38 Bank of America 2007
Balance Sheet Analysis
Table 4 Selected Balance Sheet Data
(Dollars in millions)
Assets
Federal funds sold and securities purchased under agreements to resell
Trading account assets
Debt securities
Loans and leases, net of allowance for loan and lease losses
All other assets
Total assets
Liabilities
Deposits
Federal funds purchased and securities sold under agreements to repurchase
Trading account liabilities
Commercial paper and other short-term borrowings
Long-term debt
All other liabilities
Total liabilities
Shareholders’ equity
December 31
Average Balance
2007
2006
2007
2006
$ 129,552
162,064
214,056
864,756
345,318
$1,715,746
$ 805,177
221,435
77,342
191,089
197,508
76,392
1,568,943
146,803
$ 135,478
153,052
192,846
697,474
280,887
$1,459,737
$ 693,497
217,527
67,670
141,300
146,000
58,471
1,324,465
135,272
$ 155,828
187,287
186,466
766,329
306,163
$1,602,073
$ 717,182
253,481
82,721
171,333
169,855
70,839
1,465,411
136,662
$ 175,334
145,321
225,219
643,259
277,548
$1,466,681
$ 672,995
286,903
64,689
124,229
130,124
57,278
1,336,218
130,463
Total liabilities and shareholders’ equity
$1,715,746
$1,459,737
$1,602,073
$1,466,681
At December 31, 2007, total assets were $1.7 trillion, an increase
of $256.0 billion, or 18 percent, from December 31, 2006. Growth in
period end total assets was due to an increase in loans and leases, AFS
debt securities and all other assets. The increase in loans and leases was
attributable to organic growth and the LaSalle merger. The increases in
AFS debt securities and all other assets were driven by the LaSalle merg-
er. The fair value of the assets acquired in the LaSalle merger was approx-
imately $120 billion. All other assets also increased due to higher loans
held-for-sale and the fair market value adjustment associated with our
investment in China Construction Bank (CCB).
Average total assets in 2007 increased $135.4 billion, or nine per-
cent, from 2006 primarily due to the increase in average loans and leases
driven by the same factors as described above. Average trading account
assets also increased during 2007 reflective of growth in the underlying
business in the first half of 2007. These increases were partially offset by
a decrease in AFS debt securities. The acquisition of LaSalle occurred in
the fourth quarter of 2007 minimizing its impact on the average balance
sheet.
At December 31, 2007, total liabilities were $1.6 trillion, an increase
of $244.5 billion, or 18 percent, from December 31, 2006. Average total
liabilities in 2007 increased $129.2 billion, or 10 percent, from 2006. The
increase in period end and average total
liabilities was attributable to
increases in deposits and long-term debt, which were utilized to support
the growth in overall assets. In addition, the increase in period end and
average total liabilities was due to the funding of, and the assumption of
liabilities associated with,
the
liabilities assumed in the LaSalle merger was approximately $100 billion.
the LaSalle merger. The fair value of
Trading Account Assets
Trading account assets consist primarily of
fixed income securities
(including government and corporate debt), equity and convertible instru-
ments. The average balance increased $42.0 billion to $187.3 billion in
2007, due to growth in client-driven market-making activities in interest
rate, credit and equity products but was negatively impacted by the market
disruptions in the second half of 2007. For additional
information, see
Market Risk Management beginning on page 86.
Debt Securities
AFS debt securities include fixed income securities such as mortgage-
backed securities, foreign debt, ABS, municipal debt, U.S. Government
agencies and corporate debt. We use the AFS portfolio primarily to man-
age interest rate risk and liquidity risk and to take advantage of market
conditions that create more economically attractive returns on these
investments. The average balance in the debt securities portfolio
decreased $38.8 billion from 2006 due to the third quarter 2006 sale of
$43.7 billion of mortgage-backed securities as well as maturities and
paydowns. The period end balances were also impacted by the addition of
LaSalle. For additional
information on our AFS debt securities portfolio,
see Market Risk Management – Securities on page 91 and Note 5 – Secu-
rities to the Consolidated Financial Statements.
Loans and Leases, Net of Allowance for Loan
and Lease Losses
Average loans and leases, net of allowance for loan and lease losses, was
$766.3 billion in 2007, an increase of 19 percent from 2006. The aver-
age consumer loan and lease portfolio increased $88.3 billion primarily
due to higher retained mortgage production. The average commercial loan
and lease portfolio increased $35.4 billion primarily due to organic growth.
The average commercial and, to a lesser extent, consumer loans and
leases increased due to the addition of loans acquired as a result of the
LaSalle merger. For a more detailed discussion of the loan portfolio and
the allowance for credit losses, see Credit Risk Management beginning on
page 69, Note 6 – Outstanding Loans and Leases and Note 7 – Allowance
for Credit Losses to the Consolidated Financial Statements.
All Other Assets
Period end all other assets increased $64.4 billion at December 31,
2007, an increase of 23 percent from December 31, 2006, driven primar-
ily by an increase of $15.9 billion in loans held-for-sale and a pre-tax
$13.4 billion fair value adjustment associated with our CCB investment.
Additionally, the increase in all other assets was impacted by the LaSalle
merger.
Bank of America 2007
39
Deposits
Average deposits increased $44.2 billion to $717.2 billion in 2007 com-
pared to 2006 due to a $31.3 billion increase in average domestic
interest-bearing deposits and a $16.6 billion increase in average foreign
interest-bearing deposits. We categorize our deposits as core or market-
based deposits. Core deposits are generally customer-based and repre-
sent a stable, low-cost funding source that usually reacts more slowly to
interest rate changes than market-based deposits. Core deposits include
savings, NOW and money market accounts, consumer CDs and IRAs, and
noninterest-bearing deposits. Core deposits exclude negotiable CDs, pub-
lic funds, other domestic time deposits and foreign interest-bearing depos-
its. Average core deposits increased $19.3 billion to $593.9 billion in
2007, a three percent increase from the prior year. The increase was
attributable to growth in our average consumer CDs and IRAs due to a
shift from noninterest-bearing and lower yielding deposits to our higher
yielding CDs. Average market-based deposit funding increased $24.9 bil-
lion to $123.3 billion in 2007 compared to 2006 due to increases of
$16.6 billion in foreign interest-bearing deposits and $8.4 billion in nego-
tiable CDs, public funds and other time deposits related to funding of
growth in core and market-based assets. The increase in deposits was
also impacted by the assumption of deposits, primarily money market,
consumer CDs, and other domestic time deposits associated with the
LaSalle merger.
Trading Account Liabilities
Trading account liabilities consist primarily of short positions in fixed
income securities (including government and corporate debt), equity and
convertible instruments. The average balance increased $18.0 billion to
$82.7 billion in 2007, which was due to growth in client-driven market-
making activities in equity products, partially offset by a reduction in usage
targets for a variety of client activities.
Commercial Paper and Other Short-term Borrowings
Commercial paper and other short-term borrowings provide a funding
source to supplement deposits in our ALM strategy. The average balance
increased $47.1 billion to $171.3 billion in 2007, mainly due to increased
commercial paper and Federal Home Loan Bank advances to fund core
asset growth, primarily in the ALM portfolio and the funding of the LaSalle
acquisition.
Long-term Debt
Average long-term debt increased $39.7 billion to $169.9 billion. The
increase resulted from the funding of core asset growth, and the funding
of, and assumption of liabilities associated with, the LaSalle merger. For
information, see Note 12 – Short-term Borrowings and Long-
additional
term Debt to the Consolidated Financial Statements.
Shareholders’ Equity
Period end and average shareholders’ equity increased $11.5 billion and
$6.2 billion due to net income, increased net gains in accumulated OCI,
including an $8.4 billion, net-of-tax, fair value adjustment relating to our
investment in CCB, common stock issued in connection with employee
benefit plans, and preferred stock issued. These increases were partially
offset by dividend payments, share repurchases and the adoption of cer-
tain new accounting standards.
40 Bank of America 2007
Table 5 Five Year Summary of Selected Financial Data
(Dollars in millions, except per share information)
Income statement
Net interest income
Noninterest income
Total revenue, net of interest expense
Provision for credit losses
Noninterest expense, before merger and restructuring charges
Merger and restructuring charges
Income before income taxes
Income tax expense
Net income
Average common shares issued and outstanding (in thousands)
Average diluted common shares issued and outstanding (in thousands)
Performance ratios
Return on average assets
Return on average common shareholders’ equity
Return on average tangible shareholders’ equity (1)
Total ending equity to total ending assets
Total average equity to total average assets
Dividend payout
Per common share data
Earnings
Diluted earnings
Dividends paid
Book value
Market price per share of common stock
Closing
High closing
Low closing
Market capitalization
Average balance sheet
Total loans and leases
Total assets
Total deposits
Long-term debt
Common shareholders’ equity
Total shareholders’ equity
Asset Quality
Allowance for credit losses (2)
Nonperforming assets measured at historical cost
Allowance for loan and lease losses as a percentage of total loans and
leases outstanding measured at historical cost (3)
Allowance for loan and lease losses as a percentage of total nonperforming
loans and leases measured at historical cost
Net charge-offs
Net charge-offs as a percentage of average loans and leases outstanding
measured at historical cost (3)
Nonperforming loans and leases as a percentage of total loans and leases
outstanding measured at historical cost (3)
Nonperforming assets as a percentage of total loans, leases and foreclosed
properties (3)
Ratio of the allowance for loan and lease losses at December 31 to net
charge-offs
Capital ratios (period end)
Risk-based capital:
Tier 1
Total
Tier 1 Leverage
2007
2006
2005
2004
2003
$
34,433
31,886
66,319
8,385
36,600
410
20,924
5,942
14,982
4,423,579
4,480,254
$
34,591
37,989
72,580
5,010
34,792
805
31,973
10,840
21,133
4,526,637
4,595,896
$
30,737
26,438
57,175
4,014
28,269
412
24,480
8,015
16,465
4,008,688
4,068,140
$
27,960
22,729
50,689
2,769
26,394
618
20,908
6,961
13,947
3,758,507
3,823,943
$
20,505
18,270
38,775
2,839
20,155
–
15,781
5,019
10,762
2,973,407
3,030,356
0.94%
1.44%
1.30%
1.34%
1.44%
11.08
22.25
8.56
8.53
72.26
3.35
3.30
2.40
32.09
41.26
54.05
41.10
$
$
16.27
32.80
9.27
8.90
45.66
4.66
4.59
2.12
29.70
53.39
54.90
43.09
$
$
16.51
30.19
7.86
7.86
46.61
4.10
4.04
1.90
25.32
46.15
47.08
41.57
$
$
16.47
28.93
9.03
8.12
46.31
3.71
3.64
1.70
24.70
46.99
47.44
38.96
$
$
21.50
27.84
6.76
6.69
39.76
3.62
3.55
1.44
16.86
40.22
41.77
32.82
$
$
$ 183,107
$ 238,021
$ 184,586
$ 190,147
$ 115,926
$ 776,154
1,602,073
717,182
169,855
133,555
136,662
$
$
12,106
5,948
1.33%
207
6,480
0.84%
0.64
0.68
1.79
6.87%
11.02
5.04
$ 652,417
1,466,681
672,995
130,124
129,773
130,463
$
$
9,413
1,856
1.28%
505
4,539
$ 537,218
1,269,892
632,432
97,709
99,590
99,861
$
$
8,440
1,603
1.40%
532
4,562
$ 472,617
1,044,631
551,559
92,303
84,584
84,815
$
$
9,028
2,455
1.65%
390
3,113
$ 356,220
749,104
406,233
67,077
50,035
50,091
$
$
6,579
3,021
1.66%
215
3,106
0.70%
0.85%
0.66%
0.87%
0.25
0.26
1.99
8.64%
11.88
6.36
0.26
0.28
1.76
8.25%
11.08
5.91
0.42
0.47
2.77
8.20%
11.73
5.89
0.77
0.81
1.98
8.02%
12.05
5.86
(1) Tangible shareholders’ equity is a non-GAAP measure. For additional information on ROTE and a corresponding reconciliation of tangible shareholders’ equity to a GAAP financial measure, see Supplemental Financial Data
beginning on page 42.
Includes the allowance for loan and lease losses, and the reserve for unfunded lending commitments.
(2)
(3) Ratios do not include loans measured at fair value in accordance with SFAS 159 at and for the year ended December 31, 2007. Loans measured at fair value were $4.59 billion at December 31, 2007.
Bank of America 2007
41
Supplemental Financial Data
Table 6 provides a reconciliation of the supplemental financial data men-
tioned below with financial measures defined by GAAP. Other companies
may define or calculate supplemental financial data differently.
Operating Basis Presentation
In managing our business, we may at times look at performance excluding
certain nonrecurring items. For example, as an alternative to net income,
we view results on an operating basis, which represents net income
excluding merger and restructuring charges. The operating basis of pre-
sentation is not defined by GAAP. We believe that the exclusion of merger
and restructuring charges, which represent events outside our normal
operations, provides a meaningful year-to-year comparison and is more
reflective of normalized operations.
Net Interest Income – FTE Basis
In addition, we view net interest income and related ratios and analysis
(i.e., efficiency ratio, net interest yield and operating leverage) on a FTE
basis. Although this is a non-GAAP measure, we believe managing the
business with net interest income on a FTE basis provides a more accu-
rate picture of the interest margin for comparative purposes. To derive the
FTE basis, net interest income is adjusted to reflect tax-exempt income on
an equivalent before-tax basis with a corresponding increase in income tax
expense. For purposes of this calculation, we use the federal statutory tax
rate of 35 percent. This measure ensures comparability of net interest
income arising from taxable and tax-exempt sources.
Performance Measures
As mentioned above, certain performance measures including the effi-
ciency ratio, net interest yield and operating leverage utilize net interest
income (and thus total revenue) on a FTE basis. The efficiency ratio meas-
ures the costs expended to generate a dollar of revenue, and net interest
yield evaluates how many basis points we are earning over the cost of
funds. Operating leverage measures the total percentage revenue growth
minus the total percentage expense growth for the corresponding period.
During our annual integrated planning process, we set operating leverage
and efficiency targets for the Corporation and each line of business. We
believe the use of these non-GAAP measures provides additional clarity in
assessing our results. Targets vary by year and by business, and are
based on a variety of factors including maturity of the business, invest-
ment appetite, competitive environment, market factors, and other items
(e.g.,
risk appetite). The aforementioned performance measures and
ratios, return on average assets and dividend payout ratio, as well as
those measures discussed more fully below, are presented in Table 6.
Return on Average Common Shareholders’ Equity
and Return on Average Tangible Shareholders’
Equity
We also evaluate our business based upon ROE and ROTE measures. ROE
and ROTE utilize non-GAAP allocation methodologies. ROE measures the
earnings contribution of a unit as a percentage of the shareholders’ equity
allocated to that unit. ROTE measures our earnings contribution as a per-
centage of shareholders’ equity reduced by goodwill. These measures are
used to evaluate our use of equity (i.e., capital) at the individual unit level
and are integral components in the analytics for resource allocation. In
addition, profitability, relationship, and investment models all use ROE as
key measures to support our overall growth goal.
42 Bank of America 2007
Table 6 Supplemental Financial Data and Reconciliations to GAAP Financial Measures
(Dollars in millions)
Operating basis
Operating earnings
Return on average assets
Return on average common shareholders’ equity
Return on average tangible shareholders’ equity
Operating efficiency ratio (FTE basis)
Dividend payout ratio
Operating leverage (FTE basis)
FTE basis data
Net interest income
Total revenue, net of interest expense
Net interest yield
Efficiency ratio
Reconciliation of net income to operating earnings
Net income
Merger and restructuring charges
Related income tax benefit
Operating earnings
Reconciliation of average shareholders’ equity to average tangible shareholders’ equity
Average shareholders’ equity
Average goodwill
Average tangible shareholders’ equity
Reconciliation of return on average assets to operating return on average assets
Return on average assets
Effect of merger and restructuring charges, net-of-tax
Operating return on average assets
Reconciliation of return on average common shareholders’ equity to operating return on
average common shareholders’ equity
Return on average common shareholders’ equity
Effect of merger and restructuring charges, net-of-tax
Operating return on average common shareholders’ equity
Reconciliation of return on average tangible shareholders’ equity to operating return on
average tangible shareholders’ equity
Return on average tangible shareholders’ equity
Effect of merger and restructuring charges, net-of-tax
Operating return on average tangible shareholders’ equity
Reconciliation of efficiency ratio to operating efficiency ratio (FTE basis)
Efficiency ratio
Effect of merger and restructuring charges
Operating efficiency ratio
Reconciliation of dividend payout ratio to operating dividend payout ratio
Dividend payout ratio
Effect of merger and restructuring charges, net-of-tax
Operating dividend payout ratio
Reconciliation of operating leverage to operating basis operating leverage (FTE basis)
Operating leverage
Effect of merger and restructuring charges
Operating leverage
2007
2006
2005
2004
2003
$ 15,240
0.95%
11.27
22.64
53.77
71.02
(12.97)
$ 36,182
68,068
2.60%
54.37
$ 14,982
410
(152)
$ 15,240
$136,662
(69,333)
$ 67,329
0.94%
0.01
0.95%
11.08%
0.19
11.27%
22.25%
0.39
22.64%
54.37%
(0.60)
53.77%
72.26%
(1.24)
71.02%
(11.74)%
(1.23)
(12.97)%
$ 21,640
$ 16,740
$ 14,358
$ 10,762
1.48%
1.32%
16.66
33.59
47.14
44.59
4.15
$ 35,815
73,804
2.82%
48.23
$ 21,133
805
(298)
$ 21,640
$130,463
(66,040)
$ 64,423
1.44%
0.04
1.48%
16.27%
0.39
16.66%
32.80%
0.79
33.59%
48.23%
(1.09)
47.14%
45.66%
(1.07)
44.59%
3.12%
1.03
4.15%
16.79
30.70
48.73
45.84
5.74
$ 31,569
58,007
2.84%
49.44
$ 16,465
412
(137)
$ 16,740
$ 99,861
(45,331)
$ 54,530
1.30%
0.02
1.32%
16.51%
0.28
16.79%
30.19%
0.51
30.70%
49.44%
(0.71)
48.73%
46.61%
(0.77)
45.84%
6.67%
(0.93)
5.74%
1.37%
16.96
29.79
51.35
44.98
(0.55)
$ 28,677
51,406
3.17%
52.55
$ 13,947
618
(207)
$ 14,358
$ 84,815
(36,612)
$ 48,203
1.34%
0.03
1.37%
16.47%
0.49
16.96%
28.93%
0.86
29.79%
52.55%
(1.20)
51.35%
46.31%
(1.33)
44.98%
1.44%
21.50
27.84
51.13
39.76
(0.41)
$ 21,149
39,419
3.26%
51.13
$ 10,762
–
–
$ 10,762
$ 50,091
(11,440)
$ 38,651
1.44%
–
1.44%
21.50%
–
21.50%
27.84%
–
27.84%
51.13%
–
51.13%
39.76%
–
39.76%
(3.62)%
3.07
(0.55)%
(0.41)%
–
(0.41)%
Bank of America 2007
43
Table 7 Core Net Interest Income – Managed Basis
(Dollars in millions)
Net interest income (1)
As reported
Impact of market-based net interest income (2)
Core net interest income
Impact of securitizations (3)
Core net interest income – managed basis
Average earning assets
As reported
Impact of market-based earning assets (2)
Core average earning assets
Impact of securitizations
Core average earning assets – managed basis
Net interest yield contribution (1)
As reported
Impact of market-based activities (2)
Core net interest yield on earning assets
Impact of securitizations
Core net interest yield on earning assets – managed basis
$
2007
36,182
(2,716)
33,466
7,841
2006
2005
$
35,815
(1,660)
34,155
7,045
$
31,569
(1,975)
29,594
323
$
41,307
$
41,200
$
29,917
$1,390,192
(412,326)
977,866
103,371
$1,269,144
(370,187)
$1,111,994
(323,361)
898,957
98,152
788,633
9,033
$1,081,237
$ 997,109
$ 797,666
2.60%
0.82
3.42
0.40
3.82%
2.82%
0.98
3.80
0.33
4.13%
2.84%
0.91
3.75
–
3.75%
(1) FTE basis
(2) Represents the impact of market-based amounts included in the CMAS business within GCIB and excludes $70 million of net interest income on loans for which the fair value option has been elected.
(3) Represents the impact of securitizations utilizing actual bond costs. This is different from the business segment view which utilizes funds transfer pricing methodologies.
Core Net Interest Income – Managed Basis
We manage core net interest income – managed basis, which adjusts
reported net interest income on a FTE basis for the impact of market-
based activities and certain securitizations, net of retained securities. As
discussed in the GCIB business segment section beginning on page 50,
we evaluate our market-based results and strategies on a total market-
based revenue approach by combining net interest income and noninterest
income for CMAS. We also adjust for loans that we originated and sub-
sequently sold into certain securitizations. These securitizations include
off-balance sheet loans and leases, primarily credit card securitizations
where servicing is retained by the Corporation, but excludes first mortgage
securitizations. Noninterest income, rather than net interest income and
provision for credit losses, is recorded for assets that have been securi-
tized as we are compensated for servicing the securitized assets and
record servicing income and gains or losses on securitizations, where
appropriate. We believe the use of this non-GAAP presentation provides
additional clarity in managing our results. An analysis of core net interest
income – managed basis, core average earning assets – managed basis
and core net interest yield on earning assets – managed basis, which
adjusts for the impact of these two non-core items from reported net inter-
est income on a FTE basis, is shown in the table above.
Core net interest income on a managed basis increased $107 million
in 2007 compared to 2006. The increase was driven by higher levels of
consumer and commercial
loans, the impact of the LaSalle acquisition,
and a one-time tax benefit from restructuring our existing non-U.S. based
commercial aircraft leasing business. These increases were partially offset
by spread compression, increased hedge costs and the impact of divest-
itures of certain foreign operations in late 2006 and the beginning of
2007.
On a managed basis, core average earning assets increased $84.1
billion in 2007 compared to 2006 due to higher levels of consumer and
commercial managed loans and increased levels from ALM activities parti-
ally offset by a decrease in average balances from the divestitures men-
tioned above.
Core net interest yield on a managed basis decreased 31 bps to
3.82 percent compared to 2006 and was driven by spread compression,
higher costs of deposits, the impact of the funding of the LaSalle merger
and the sale of certain foreign operations.
Business Segment Operations
Segment Description
We report the results of our operations through three business segments:
GCSBB, GCIB and GWIM, with the remaining operations recorded in All
Other. Certain prior period amounts have been reclassified to conform to
current period presentation. For more information on our basis of pre-
sentation, selected financial information for the business segments and
reconciliations to consolidated total revenue, net income and period end
total asset amounts, see Note 22 – Business Segment Information to the
Consolidated Financial Statements.
Basis of Presentation
We prepare and evaluate segment results using certain non-GAAP method-
ologies and performance measures, many of which are discussed in Sup-
plemental Financial Data beginning on page 42. We begin by evaluating
the operating results of the businesses which by definition excludes
merger and restructuring charges. The segment results also reflect certain
revenue and expense methodologies which are utilized to determine net
income. The net interest income of the businesses includes the results of
a funds transfer pricing process that matches assets and liabilities with
similar interest rate sensitivity and maturity characteristics.
The management accounting reporting process derives segment and
revenue,
business results by utilizing allocation methodologies for
expense and capital. The net
the businesses is
dependent upon revenue and cost allocations using an activity-based cost-
ing model, funds transfer pricing, and other methodologies and assump-
tions management believes are appropriate to reflect the results of the
business.
income derived for
44 Bank of America 2007
Our ALM activities maintain an overall interest rate risk management
strategy that incorporates the use of interest rate contracts to manage
fluctuations in earnings that are caused by interest rate volatility. Our goal
is to manage interest rate sensitivity so that movements in interest rates
do not significantly adversely affect net interest income. The results of the
business segments will fluctuate based on the performance of corporate
ALM activities. Some ALM activities are recorded in the businesses (e.g.,
Deposits) such as external product pricing decisions, including deposit
pricing strategies, as well as the effects of our internal funds transfer pric-
ing process. The net effects of other ALM activities are reported in each of
our segments under ALM/Other. In addition, certain residual impacts of
the funds transfer pricing process are retained in All Other.
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 central-
ized or shared functions are allocated based on methodologies which
reflect utilization.
Equity is allocated to business segments and related businesses
using a risk-adjusted methodology incorporating each unit’s credit, market,
interest rate and operational risk components. The Corporation as a whole
benefits from risk diversification across the different businesses. This
benefit is reflected as a reduction to allocated equity for each segment
and is recorded in ALM/Other. The nature of these risks is discussed fur-
ther beginning on page 65. Average equity is allocated to the business
segments and related businesses, and is impacted by the portion of
goodwill
is specifically assigned to the businesses and the
unallocated portion of goodwill that resides in ALM/Other.
that
Bank of America 2007 45
Global Consumer and Small Business Banking
(Dollars in millions)
Net interest income (3)
Noninterest income:
Card income
Service charges
Mortgage banking income
All other income
Total noninterest income
Total revenue, net of interest expense
Provision for credit losses (4)
Noninterest expense
Income (loss) before income taxes
Income tax expense (benefit) (3)
Net income
Net interest yield (3)
Return on average equity (5)
Efficiency ratio (3)
Period end – total assets (6)
(Dollars in millions)
Net interest income (3)
Noninterest income:
Card income
Service charges
Mortgage banking income
All other income
Total noninterest income
Total revenue, net of interest expense
Provision for credit losses (4)
Noninterest expense
Income before income taxes
Income tax expense (3)
Net income
Net interest yield (3)
Return on average equity (5)
Efficiency ratio (3)
Period end – total assets (6)
Total (1)
$ 28,809
Deposits
$ 9,423
10,189
6,008
1,333
1,343
18,873
47,682
12,929
20,060
14,693
5,263
$ 9,430
8.15%
14.94
42.07
$442,987
2,155
6,003
–
(4)
8,154
17,577
256
9,106
8,215
2,988
$ 5,227
2.97%
33.61
51.81
$358,626
Total (1)
$ 28,197
Deposits
$ 9,405
9,374
5,342
877
1,136
16,729
44,926
8,534
18,375
18,017
6,639
1,907
5,338
–
1
7,246
16,651
165
8,783
7,703
2,840
2007
Card
Services (1)
$ 16,562
8,028
–
–
943
8,971
25,533
11,317
8,294
5,922
2,210
$ 3,712
7.87%
8.43
32.49
$257,000
2006
Card
Services (1)
$ 16,357
7,460
–
–
819
8,279
24,636
8,089
7,519
9,028
3,328
Consumer
Real Estate (2)
$ 2,281
6
5
1,333
54
1,398
3,679
1,041
2,033
605
234
371
$
2.04%
9.00
55.24
$133,324
Consumer
Real Estate (2)
$ 1,994
7
4
877
27
915
2,909
63
1,718
1,128
416
ALM/
Other
$ 543
–
–
–
350
350
893
315
627
(49)
(169)
$ 120
n/m
n/m
n/m
n/m
ALM/
Other
$441
–
–
–
289
289
730
217
355
158
55
$ 11,378
$ 4,863
$ 5,700
$
712
$103
8.20%
18.11
40.90
$399,373
2.93%
8.52%
33.42
52.75
$339,717
12.90
30.52
$235,106
2.19%
22.18
59.06
$101,175
n/m
n/m
n/m
n/m
(1) Presented on a managed basis, specifically Card Services.
(2) Effective January 1, 2007, GCSBB combined the former Mortgage and Home Equity businesses into Consumer Real Estate.
(3) FTE basis
(4) Represents provision for credit losses on held loans combined with realized credit losses associated with the securitized loan portfolio.
(5) Average allocated equity for GCSBB was $63.1 billion and $62.8 billion in 2007 and 2006.
(6) Total assets include asset allocations to match liabilities (i.e., deposits).
n/m = not meaningful
46 Bank of America 2007
(Dollars in millions)
Total loans and leases
Total earning assets (1)
Total assets (1)
Total deposits
(1) Total earning assets and total assets include asset allocations to match liabilities (i.e., deposits).
The strategy for GCSBB is to attract, retain and deepen customer
relationships. We achieve this strategy through our ability to offer a wide
range of products and services through a franchise that stretches coast to
coast through 32 states and the District of Columbia. We also provide
credit card products to customers in Canada,
Ireland, Spain and the
United Kingdom. In the U.S., we serve approximately 59 million consumer
and small business relationships utilizing our network of 6,149 banking
centers, 18,753 domestic branded ATMs, and telephone and Internet
channels. Within GCSBB, there are three primary businesses: Deposits,
Card Services, and Consumer Real Estate.
In addition, ALM/Other
includes the results of ALM activities and other consumer-related busi-
nesses (e.g., insurance). GCSBB, specifically Card Services, is presented
on a managed basis. For a reconciliation of managed GCSBB to held
GCSBB, see Note 22 – Business Segment Information to the Consolidated
Financial Statements.
During 2007, Visa Inc. filed a registration statement with the SEC
with respect to a proposed IPO. Subject to market conditions and other
factors, Visa Inc. expects the IPO to occur in the first half of 2008. We
expect to record a gain associated with the IPO. In addition, we expect
that a portion of the proceeds from the IPO will be used by Visa Inc. to
fund liabilities arising from litigation which would allow us to record an
offset to the litigation liabilities that we recorded in the fourth quarter of
2007 as discussed below.
Net income decreased $1.9 billion, or 17 percent, to $9.4 billion
compared to 2006 as increases in noninterest income and net interest
income were more than offset by increases in provision for credit losses
and noninterest expense.
Net interest income increased $612 million, or two percent, to $28.8
billion due to the impacts of organic growth and the LaSalle acquisition on
average loans and leases, and deposits compared to 2006. Noninterest
income increased $2.1 billion, or 13 percent, to $18.9 billion compared to
the same period in 2006, mainly due to increases in card income, service
charges and mortgage banking income.
Provision for credit losses increased $4.4 billion, or 51 percent, to
$12.9 billion compared to 2006. This increase primarily resulted from a
$3.2 billion increase in Card Services and a $978 million increase in
Consumer Real Estate. For further discussion of the increase in provision
for credit losses related to Card Services and Consumer Real Estate, see
their respective discussions.
to
Noninterest expense increased $1.7 billion, or nine percent,
$20.1 billion largely due to increases in personnel-related expenses, Visa-
related litigation costs, equally allocated to Card Services and Treasury
Services on a management accounting basis, and technology related
costs. For additional information on Visa-related litigation, see Note 13 –
Commitments
Financial
Statements.
and Contingencies
the Consolidated
to
Deposits
Deposits provides a comprehensive range of products to consumers and
small businesses. Our products include traditional savings accounts,
money market savings accounts, CDs and IRAs, and noninterest and
December 31
Average Balance
2007
$359,946
383,384
442,987
344,850
2006
$307,661
343,338
399,373
329,195
2007
$327,810
353,591
408,034
328,918
2006
$288,131
344,013
396,559
332,242
interest-bearing checking accounts. Debit card results are also included in
Deposits.
Deposit products provide a relatively stable source of funding and
liquidity. We earn net interest spread revenues from investing this liquidity
in earning assets through client-facing lending activity and our ALM activ-
ities. The revenue is allocated to the deposit products using our funds
transfer pricing process which takes into account the interest rates and
maturity characteristics of the deposits. Deposits also generate fees such
as account service fees, non-sufficient fund fees, overdraft charges and
ATM fees, while debit cards generate merchant interchange fees based on
purchase volume.
Excluding accounts obtained through acquisitions, we added approx-
imately 2.3 million net new retail checking accounts in 2007. These addi-
tions resulted from continued improvement in sales and service results in
the Banking Center Channel and Online, and the success of such products
as Keep the ChangeTM, Risk Free CDs, Balance Rewards and Affinity.
We continue to migrate qualifying affluent customers and their
related deposit balances from GCSBB to GWIM. In 2007, a total of $11.4
billion of deposits were migrated from GCSBB to GWIM compared to $10.7
billion in 2006. After migration, the associated net interest income, serv-
ice charges and noninterest expense are recorded in GWIM.
interest
Net income increased $364 million, or seven percent, to $5.2 billion
compared to 2006 as an increase in noninterest income was partially
offset by an increase in noninterest expense. Net
income
remained relatively flat at $9.4 billion compared to 2006 as the addition
of LaSalle and higher deposit spreads resulting from disciplined pricing
were offset by the impact of lower balances. Average deposits decreased
$3.2 billion, or one percent, largely due to the migration of customer rela-
tionships and related balances to GWIM, partially offset by the acquisition
of LaSalle. The increase in noninterest income was driven by higher serv-
ice charges of $665 million, or 12 percent, primarily as a result of new
demand deposit account growth and the addition of LaSalle. Additionally,
debit card revenue growth of $248 million, or 13 percent, was due to a
higher number of checking accounts, increased usage, the addition of
LaSalle and market penetration (i.e., increase in the number of existing
account holders with debit cards).
Noninterest expense increased $323 million, or four percent, to $9.1
billion compared to 2006, primarily due to the addition of LaSalle, and to
higher account and transaction volumes.
Card Services
Card Services, which excludes the results of debit cards (included in
Deposits), provides a broad offering of products, including U.S. Consumer
and Business Card, Unsecured Lending, and International Card. We offer a
variety of co-branded and affinity credit card products and have become
the leading issuer of credit cards through endorsed marketing in the U.S.
and Europe. During 2007, Merchant Services was transferred to Treasury
Services within GCIB. Previously their results were reported in Card Serv-
ices. Prior period amounts have been reclassified.
Bank of America 2007
47
The Corporation reports its GCSBB results, specifically Card Services,
on a managed basis, which is consistent with the way that management
evaluates the results of GCSBB. Managed basis assumes that securitized
loans 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 QSPE which is excluded from the Corpo-
ration’s Consolidated Financial Statements in accordance with GAAP.
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, excess servicing income is exposed to similar
credit risk and repricing of interest rates as held loans.
Net income decreased $2.0 billion, or 35 percent, to $3.7 billion
compared to 2006 as growth in noninterest income and net interest
income was more than offset by higher provision for credit losses and
noninterest expense. Net interest income increased $205 million, or one
percent, to $16.6 billion as an increase in managed average loans and
leases of $18.5 billion was partially offset by spread compression.
Noninterest income increased $692 million, or eight percent, to $9.0
billion mainly due to higher cash advance fees related to organic loan
growth in domestic credit card and unsecured lending. All other income
increased $124 million primarily due to higher foreign revenues.
Provision for credit losses increased $3.2 billion, or 40 percent, to
$11.3 billion compared to 2006. The increase was primarily driven by
higher managed net losses from portfolio seasoning and increases from
unusually low loss levels experienced in 2006 post bankruptcy reform. The
higher provision was also driven by reserve increases in our small busi-
ness portfolio reflective of growth in the business and portfolio deterio-
ration. In addition, higher provision was due to seasoning of the unsecured
lending portfolio. These increases in provision were partially offset by a
higher level of reserve reduction from the addition of higher loss profile
accounts to the domestic credit card securitization trust.
Noninterest expense increased $775 million, or 10 percent, to $8.3
billion compared to 2006, largely due to increases in personnel-related
expenses, Card Services’ allocation of the Visa-related litigation costs and
information on Visa-related liti-
technology related costs. For additional
gation, see Note 13 – Commitments and Contingencies to the Con-
solidated Financial Statements.
Key Statistics
(Dollars in millions)
Card Services
Average – total loans and leases:
Managed
Held
Period end – total loans and leases:
Managed
Held
Managed net losses (1):
Amount
Percent
Credit Card (2)
Average – total loans and leases:
Managed
Held
Period end – total loans and leases:
Managed
Held
Managed net losses (1):
Amount
Percent
2007
2006
$209,774
106,490
227,822
124,855
$191,314
95,076
203,151
101,286
10,099
4.81%
7,236
3.78%
$171,376
70,242
183,691
80,724
$163,409
72,979
170,489
72,194
8,214
4.79%
6,375
3.90%
(1) Represents net charge-offs on held loans combined with realized credit losses associated with the
(2)
securitized loan portfolio.
Includes U.S. consumer card and foreign credit card. Does not include business card and unsecured
lending.
The table above and the discussion below presents select key
indicators for the Card Services and credit card portfolios.
Managed Card Services net losses increased $2.9 billion to $10.1
billion, or 4.81 percent of average outstandings, compared to $7.2 billion,
or 3.78 percent (3.93 percent excluding the impact of SOP 03-3) in 2006.
This increase was primarily driven by portfolio seasoning and increases
from the unusually low loss levels experienced in 2006 post bankruptcy
reform.
Managed Card Services total average loans and leases increased
$18.5 billion to $209.8 billion compared to the same period in 2006,
driven by growth in the unsecured lending, foreign and domestic card port-
folios.
Managed credit card net losses increased $1.8 billion to $8.2 billion,
or 4.79 percent of average credit card outstandings, compared to $6.4
billion, or 3.90 percent (3.99 percent excluding the impact of SOP 03-3) in
2006. The increase was driven by portfolio seasoning and increases from
the unusually low loss levels experienced in 2006 post bankruptcy reform.
Managed credit card total average loans and leases increased $8.0
billion to $171.4 billion compared to the same period in 2006. The
increase was driven by growth in the foreign and domestic portfolios.
For more information on credit quality, see Consumer Portfolio Credit
Risk Management beginning on page 70.
48 Bank of America 2007
Consumer Real Estate
Consumer Real Estate generates revenue by providing an extensive line of
consumer real estate products and services to customers nationwide.
Consumer Real Estate products are available to our customers through a
retail network of personal bankers located in 6,149 banking centers,
mortgage loan officers in nearly 200 locations and through a sales force
offering our customers direct telephone and online access to our products.
Consumer Real Estate products include fixed and adjustable rate loans for
home purchase and refinancing needs, reverse mortgages, lines of credit
and home equity loans. Mortgage products are either sold into the secon-
dary mortgage market to investors, while retaining the Bank of America
customer relationships, or are held on our balance sheet for ALM pur-
poses. Consumer Real Estate is not impacted by the Corporation’s mort-
gage production retention decisions as Consumer Real Estate is
compensated for the decision on a management accounting basis with a
corresponding offset recorded in All Other.
The Consumer Real Estate business includes the origination, fulfill-
ment, sale and servicing of first mortgage loan products, reverse mortgage
products and home equity products. Servicing activities primarily include
interest and escrow payments from bor-
collecting cash for principal,
rowers, disbursing customer draws for lines of credit and accounting for
and remitting principal and interest payments to investors and escrow
payments to third parties. Servicing income includes ancillary income
derived in connection with these activities such as late fees.
Within GCSBB, the Consumer Real Estate first mortgage and home
equity production were $93.3 billion and $69.2 billion for 2007 compared
to $76.9 billion and $67.9 billion in 2006. During the second quarter of
2007, the Corporation completed the purchase of a reverse mortgage
business which increased the Corporation’s offerings of reverse mort-
gages.
Net income for Consumer Real Estate decreased $341 million to
$371 million compared to 2006 as increases in mortgage banking income
and net interest income were more than offset by higher provision for
credit losses and an increase in noninterest expense. Net interest income
grew $287 million, or 14 percent, to $2.3 billion and was driven by loan
balances in our home equity business partially offset by spread com-
pression. Average loans and leases increased $20.7 billion, or 24 per-
cent. The increase in mortgage banking income of $456 million, or 52
percent, to $1.3 billion was primarily due to the election under SFAS 159
to account for certain mortgage loans held-for-sale at fair value, favorable
performance of the MSRs and increased production income partially offset
by widening of credit spreads during the year.
Subsequent to the adoption of SFAS 159 on January 1, 2007, mort-
gage loan origination fees and costs are recognized in earnings when
incurred. Previously, mortgage loan origination fees and costs would have
been capitalized as part of the carrying amount of the loans and recog-
nized as a reduction of mortgage banking income upon the sale of such
loans. For more information on the adoption of SFAS 159 on mortgage
banking income, see Mortgage Banking Risk Management on page 93.
Noninterest expense increased $315 million, or 18 percent, to $2.0
billion compared to 2006, driven by costs associated with increased
volume and the increase in cost related to the adoption of SFAS 159 as
discussed above.
Provision for credit losses increased $978 million to $1.0 billion
compared to 2006. This increase was driven by higher losses inherent in
the home equity portfolio reflective of portfolio seasoning and the impacts
of the weak housing market, particularly in geographic areas which have
experienced the most significant home price declines driving a reduction in
collateral value.
The Consumer Real Estate servicing portfolio includes loans serviced
for others, and originated and retained residential mortgages. The servic-
ing portfolio at December 31, 2007 was $516.9 billion, $97.4 billion
higher than at December 31, 2006, driven by production. Included in this
amount was $259.5 billion of residential first mortgage loans serviced for
others.
At December 31, 2007, the residential first mortgage MSR balance
from
was $3.1 billion, an increase of $184 million, or six percent,
December 31, 2006. This value represented 118 bps of the related
unpaid principal balance, a seven bps decrease from December 31, 2006.
ALM/Other
ALM/Other is comprised primarily of the allocation of a portion of the
Corporation’s net interest income from ALM activities and the results of
other consumer-related businesses (e.g., insurance).
Net income increased $17 million compared to 2006 as higher con-
tributions from ALM activities were offset by increases in provision for
credit
losses
losses and noninterest expense. Provision for credit
increased $98 million to $315 million compared to 2006. This increase
was driven by higher losses inherent in the small business lending portfo-
lio managed outside of Card Services. For more information on the Corpo-
ration’s entire small business commercial – domestic portfolio, see
Commercial Portfolio Credit Risk Management beginning on page 74.
Bank of America 2007 49
Global Corporate and Investment Banking
(Dollars in millions)
Net interest income (2)
Noninterest income:
Service charges
Investment and brokerage services
Investment banking income
Trading account profits (losses)
All other income
Total noninterest income
Total revenue, net of interest expense
Provision for credit losses
Noninterest expense
Income (loss) before income taxes
Income tax expense (benefit) (2)
Net income (loss)
Net interest yield (2)
Return on average equity (3)
Efficiency ratio (2)
Period end – total assets (4)
(Dollars in millions)
Net interest income (2)
Noninterest income:
Service charges
Investment and brokerage services
Investment banking income
Trading account profits
All other income
Total noninterest income
Total revenue, net of interest expense
Provision for credit losses
Noninterest expense
Income (loss) before income taxes
Income tax expense (benefit) (2)
Net income (loss)
Net interest yield (2)
Return on average equity (3)
Efficiency ratio (2)
Period end – total assets (4)
2007
Capital
Markets and
Advisory
Services (1)
Treasury
Services
$
2,786
$
3,814
134
867
2,537
(5,050)
(971)
(2,483)
303
–
5,642
(5,339)
(1,977)
2,128
42
–
63
1,092
3,325
7,139
5
3,856
3,278
1,213
Business
Lending
$
5,020
507
1
–
(180)
824
1,152
6,172
647
2,158
3,367
1,246
ALM/
Other
$(403)
–
–
–
3
203
206
(197)
–
269
(466)
(180)
$
2,121
$ (3,362)
$
2,065
$(286)
Total
$ 11,217
2,769
910
2,537
(5,164)
1,148
2,200
13,417
652
11,925
840
302
538
$
1.66%
1.19
88.88
$776,107
2.00%
13.12
34.98
$305,548
n/m
(25.41)%
n/m
$413,115
2.79%
26.31
54.02
$180,369
n/m
n/m
n/m
n/m
Total
Business
Lending
2006
Capital
Markets and
Advisory
Services
Treasury
Services
$ 9,877
$ 4,575
$
1,660
$ 3,878
2,648
942
2,476
2,967
2,251
11,284
21,161
9
11,578
9,574
3,542
501
15
–
55
469
1,040
5,615
(2)
2,047
3,570
1,321
121
893
2,476
2,847
478
6,815
8,475
14
5,799
2,662
985
2,026
33
–
52
1,223
3,334
7,212
(3)
3,561
3,654
1,352
ALM/
Other
$(236)
–
1
–
13
81
95
(141)
–
171
(312)
(116)
$ 6,032
$ 2,249
$
1,677
$ 2,302
$(196)
1.62%
14.33
54.71
$685,935
1.98%
14.36
36.45
$248,225
n/m
15.17%
68.42
$385,450
2.86%
28.71
49.36
$167,979
n/m
n/m
n/m
n/m
(1) CMAS revenue of $303 million for 2007 consists of market-based revenue of $233 million and $70 million of net interest income on loans for which the fair value option has been elected.
(2) FTE basis
(3) Average allocated equity for GCIB was $45.3 billion and $42.1 billion for 2007 and 2006.
(4) Total assets include asset allocations to match liabilities (i.e., deposits).
n/m = not meaningful
50 Bank of America 2007
(Dollars in millions)
Total loans and leases
Total trading-related assets
Total market-based earning assets (1)
Total earning assets (2)
Total assets (2)
Total deposits
December 31
Average Balance
2007
$324,198
308,315
359,730
673,552
776,107
246,788
2006
$242,700
309,097
348,717
599,326
685,935
212,028
2007
$274,015
362,193
412,326
676,500
770,360
220,724
2006
$232,623
336,860
370,187
609,100
691,414
194,972
(1) Total market-based earning assets represents earning assets included in CMAS but excludes loans for which the fair value option has been elected.
(2) Total earning assets and total assets include asset allocations to match liabilities (i.e., deposits).
GCIB provides a wide range of financial services to both our 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’s
products and services are delivered from three primary businesses: Busi-
ness Lending, CMAS, and Treasury Services, and are provided to our cli-
ents through a global team of client relationship managers and product
partners. In addition, ALM/Other includes the results of ALM activities and
other GCIB activities (e.g., Commercial Insurance business which was sold
in the fourth quarter of 2007). Our clients are supported through offices in
22 countries that are divided into four distinct geographic regions: U.S.
and Canada; Asia; Europe, Middle East, and Africa; and Latin America. For
more information on our foreign operations, see Foreign Portfolio beginning
on page 81.
Effective January 1, 2007, the Corporation adopted SFAS 159 and
elected to account for loans and loan commitments to certain large corpo-
rate clients at fair value. For more information on the adoption of SFAS
159, see Note 19 – Fair Value Disclosures to the Consolidated Financial
Statements and see page 74 for a discussion of loans and loan commit-
ments measured at fair value in accordance with SFAS 159. The results of
loans and loan commitments to certain large corporate clients for which
the Corporation elected the fair value option (including the associated risk
mitigation tools) are recorded in CMAS.
Net income decreased $5.5 billion, or 91 percent, to $538 million and
total revenue decreased $7.7 billion, or 37 percent, to $13.4 billion in
2007 compared to 2006. These decreases were driven by $5.6 billion of
losses resulting from our CDO exposure and other trading losses. Addition-
ally, we experienced increases in provision for credit losses and noninterest
expense, which were partially offset by an increase in net interest income.
Net interest income increased $1.3 billion, or 14 percent, due to
higher market-based net interest income of $1.1 billion and the FTE
impact of a one-time tax benefit from restructuring our existing non-U.S.
based commercial aircraft leasing business. Additionally, the benefit of
growth in average loans and leases of $41.4 billion, or 18 percent, was
partially offset by spread compression on core lending and deposit-related
activities, and a change in the mix between interest-bearing and
noninterest-bearing deposits as clients maintained lower noninterest-
bearing compensating balances by shifting to interest bearing and/or
higher yielding investment alternatives. The growth in average loans and
average deposits was due to organic growth as well as the LaSalle merger.
Noninterest income decreased $9.1 billion, or 81 percent, in 2007
compared to 2006, driven by declines in trading account profits (losses) of
$8.1 billion and all other income of $1.1 billion. For more information on
these decreases, see the CMAS discussion.
Provision for credit losses was $652 million in 2007 compared to $9
million in 2006. The increase was driven by the absence of 2006 releases
of reserves, higher net charge-offs and an increase in reserves during
2007 reflecting the impact of the weak housing market particularly on the
homebuilder loan portfolio. Net charge-offs increased in the retail automo-
tive and other dealer-related portfolios due to growth, seasoning and
deterioration, as well as from a lower level of commercial recoveries.
Noninterest expense increased $347 million, or three percent, mainly
due to the addition of LaSalle and Visa-related litigation costs, equally
allocated to Treasury Services and Card Services on a management
accounting basis, partially offset by a reduction in performance-based
incentive compensation in CMAS. For additional
information on Visa-
related litigation, see Note 13 – Commitments and Contingencies to the
Consolidated Financial Statements.
Business Lending
Business Lending provides a wide range of lending-related products and
services to our clients through client relationship teams along with various
product partners. Products include commercial and corporate bank loans
and commitment facilities which cover our business banking clients, mid-
dle market commercial clients and our large multinational corporate cli-
ents. Real estate lending products are issued primarily to public and
private developers, homebuilders and commercial real estate firms. Leas-
ing and asset-based lending products offer our clients innovative financing
solutions. Products also include indirect consumer loans which allow us to
offer financing through automotive, marine, motorcycle and recreational
vehicle dealerships across the U.S. Business Lending also contains the
results for the economic hedging of our risk to certain credit counter-
parties utilizing various risk mitigation tools.
Net income decreased $128 million, or six percent, to $2.1 billion in
2007 compared to 2006 as increases in net interest income and non-
interest income were more than offset by increases in provision for credit
losses and noninterest expense. Net interest income increased $445 mil-
lion, or 10 percent, driven by the FTE impact of approximately $350 million
related to a one-time tax benefit from restructuring our existing non-U.S.
based commercial aircraft leasing business, and average loan growth of
14 percent. These increases were partially offset by the impact of spread
compression on the loan portfolio. The increase in average loans and
leases was attributable to growth in commercial loans, the LaSalle merger
and increases in the indirect consumer loan portfolio related to bulk pur-
chases of retail automotive loans. The increase in noninterest income of
$112 million, or 11 percent, was driven by improved economic hedging
results of our exposures to certain large corporate clients and higher tax
credits from community development activities partially offset by derivative
fair value adjustments related to an option to purchase retail automotive
loans.
Provision for credit losses was $647 million in 2007 compared to
negative $2 million in 2006. The increase was driven by the absence of
2006 releases of reserves related to favorable commercial credit market
conditions, higher net charge-offs and an increase in reserves during 2007
reflecting the impact of the weak housing market particularly on the home-
builder loan portfolio. Net charge-offs increased in 2007 as retail automo-
tive and other dealer-related portfolio losses rose due to growth,
Bank of America 2007
51
seasoning and deterioration, and the level of commercial
declined.
recoveries
Noninterest expense increased $111 million, or five percent, primar-
ily due to the LaSalle merger.
Capital Markets and Advisory Services
CMAS provides financial products, advisory services and financing globally
to our institutional investor clients in support of their investing and trading
activities. We also work with our commercial and corporate issuer clients
to provide debt and equity underwriting and distribution capabilities,
merger-related advisory services and risk management solutions using
interest rate, equity, credit, currency and commodity derivatives, foreign
exchange, fixed income and mortgage-related products. The business may
take positions in these products and participate in market-making activ-
ities dealing in government securities, equity and equity-linked securities,
high-grade and high-yield corporate debt securities, commercial paper,
mortgage-backed securities and ABS. Underwriting debt and equity, secu-
rities research and certain market-based activities are executed through
Banc of America Securities, LLC which is a primary dealer in the U.S.
In January 2008, we announced changes in our CMAS business
which better align the strategy of this business with GCIB’s broader
integrated platform. We will continue to provide corporate, commercial and
sponsored clients with debt and equity capital-raising services, strategic
advice, and a full range of corporate banking capabilities. We will reduce
activities in certain structured products (e.g., CDOs) and will resize the
international platform to emphasize debt, cash management, and trading
services, including rates and foreign exchange. The realignment will result
in the reduction of front office personnel with additional
infrastructure
headcount reduction to follow. We also plan to sell our equity prime
brokerage business.
CMAS evaluates its results using market-based revenue that
is
comprised of net interest income and noninterest income. The following
table presents further detail regarding market-based revenue. Sales and
trading revenue is segregated into fixed income from liquid products
(primarily interest rate and commodity derivatives, foreign exchange con-
tracts and public finance), credit products (primarily investment and non-
investment grade corporate debt obligations and credit derivatives),
structured products (primarily CMBS, residential mortgage-backed secu-
rities, structured credit trading and CDOs), and equity income from equity-
linked derivatives and cash equity activity.
(Dollars in millions)
Investment banking income
Advisory fees
Debt underwriting
Equity underwriting
Total investment banking income
Sales and trading revenue
Fixed income:
Liquid products
Credit products
Structured products
Total fixed income
Equity income
Total sales and trading revenue
Total Capital Markets and Advisory Services
market-based revenue (1)
2007
2006
$ 446
1,772
319
2,537
2,111
(537)
(5,176)
(3,602)
1,298
(2,304)
$ 337
1,824
315
2,476
2,158
821
1,449
4,428
1,571
5,999
$ 233
$8,475
(1) CMAS revenue of $303 million for 2007 consists of market-based revenue of $233 million and $70
million of net interest income on loans for which the fair value option has been elected.
A variety of factors influence results including volume of activity, the
degree in which we successfully anticipate market movements, and how
our hedges perform in the various markets. During the second half of
2007, extreme dislocations emerged in the financial markets, including
leveraged finance, subprime mortgage, and the commercial paper mar-
kets, and these dislocations were further compounded by the decoupling
of typical correlations in the various markets in which we participate.
These conditions created less liquidity, a flight to quality, greater volatility,
widening of credit spreads and a lack of price transparency. Furthermore,
in the fourth quarter of 2007, the credit ratings of certain structured secu-
rities (e.g., CDOs) were downgraded which among other things triggered
further widening of credit spreads for this type of security. We have been
an active participant in the CDO market, maintain ongoing exposure to
these securities and incurred losses associated with these exposures.
Many of these conditions continued into 2008 and it is unclear how long
these conditions and the overall economic slowdown may continue and
what impact they will ultimately have on our results.
CMAS recognized a net loss of $3.4 billion in 2007, a decrease of
$5.0 billion, compared to 2006 driven by a decrease in market-based
revenue of $8.2 billion. The decrease was driven by $5.6 billion of losses
resulting from our CDO exposure and other trading losses. Partially off-
setting this decrease was a reduction in noninterest expense due to lower
performance-based incentive compensation.
Investment banking income increased $61 million to $2.5 billion due
to growth in advisory fees. This growth was driven by increased market
activity primarily in the first half of the year partially offset by reduced debt
underwriting fees that were affected by the market disruptions during the
second half of the year which included the utilization of fees to distribute
leveraged loan commitments.
Sales and trading revenue declined $8.3 billion to a loss of $2.3 bil-
lion in 2007. While structured products and credit products reported
losses for 2007, liquid products and equities compared reasonably well
with 2006 given the market conditions.
Š Liquid products revenue decreased $47 million as the negative impact
of spread widening and correlations breaking down (e.g., correlation
between certain municipal market
indices and bond market swap
spreads) were partially offset by the strength in interest rate products
and foreign exchange contracts.
Š Credit products losses were $537 million, a decline in revenue of $1.4
billion compared to 2006. Losses resulted from positions taken in the
market as a result of customer market making activities as the widening
of spreads during the second half of the year had a negative impact on
these positions. In addition, certain indices became extremely volatile
and diverged from other related indices and from single name credit risk
(bonds, loans or derivatives) in our portfolio. This negatively impacted
our hedging of portfolios of single name credits with derivatives based
on these indices. One example of this divergence was the widening of
the spread between the investment grade cash and the credit derivative
markets. In addition, losses also resulted from positions taken in the
market as the widening of spreads during the second half of the year
had a negative impact on these positions.
We also incurred losses of $292 million, net of $471 million of fees,
on leveraged loans, loan commitments and the Corporation’s share of
the leveraged forward calendar. Losses incurred on our
leveraged
exposure were not concentrated in any one type (senior secured, cove-
nant light or subordinated/senior unsecured) and were generally due to
wider new issuance credit spreads. Since the negotiated spreads were
lower than the then current new issuance spread, a fair value loss
52 Bank of America 2007
resulted. In several instances, commitments were either terminated by
the client or interest rate concessions (e.g., an increase in the stated
coupon) were obtained from the borrowers, thereby increasing the value
of the loans, in each case negating the need for any writedown. At
December 31, 2007, the Corporation’s share of the leveraged finance
forward calendar that consisted primarily of senior secured exposure
was $12.2 billion and our funded position held for distribution was $6.1
billion. In addition, we had limited investment grade exposure that was
in line with our normal exposure levels.
Š Structured products losses were $5.2 billion, with a decline in revenue
of $6.6 billion in 2007 compared to the prior year. The decrease was
driven by $5.6 billion of losses resulting from our CDO exposure, $125
million of losses on CMBS funded debt and the forward calendar and
$875 million related to other structured products. See the detailed CDO
exposure discussion to follow. Other structured products, including resi-
dential mortgage-backed securities and structured credit trading, were
negatively impacted by spread widening due to the credit market dis-
ruptions during the second half of the year and by the breakdown of the
expected hedge correlations. For example, the divergence in valuation of
agency-based mortgage products, principally derivatives and forward
sales contracts, used to economically hedge non-agency mortgage
exposure resulted in losses on our residential mortgage-backed secu-
rities trading positions. At the end of the year, we held $13.7 billion of
funded CMBS debt of which $6.9 billion were floating-rate acquisition
related financings to major, well known operating companies. In addi-
tion, we had a forward calendar of just over $2.0 billion of which $1.1
billion were floating-rate acquisition related financings.
Š Equity products revenue decreased $273 million primarily due to lower
client activity in equity capital markets and equity derivatives combined
with reduced trading results.
Collateralized Debt Obligation Exposure at December 31, 2007
CDO vehicles are special purpose entities that hold diversified pools of
fixed income securities. CDO vehicles issue multiple tranches of debt
securities, including commercial paper, mezzanine and equity securities.
We receive fees for structuring CDO vehicles and/or placing debt
securities with third party investors as part of our structured credit prod-
ucts business. Our CDO exposure can be divided into funded and
unfunded super senior liquidity commitment exposure, other super senior
exposure (i.e., cash positions and derivative contracts), warehouse, and
sales and trading positions. For more information on our CDO liquidity
commitments refer to Collateralized Debt Obligations as part of Off- and
On-Balance Sheet Arrangements beginning on page 60. Super senior
exposure represents the most senior class of commercial paper or notes
that are issued by the CDO vehicles. These financial instruments benefit
from the subordination of all other securities, including AAA-rated secu-
rities, issued by the CDO vehicles.
Bank of America 2007
53
The following table presents our super senior CDO exposure at December 31, 2007.
Super Senior Collateralized Debt Obligation Exposure
Subprime Exposure (1)
December 31, 2007
Non-Subprime Exposure (2)
Total CDO Exposure
Net of
Insured
Amount
Net
Write-
downs (3)
Net
Exposure (3)
Net of
Insured
Amount
Net
Write-
downs (3)
Net
Exposure (3)
Gross Insured
Net of
Insured
Amount
Net
Write-
downs (3)
Net
Exposure (3)
Gross
Insured
Gross
Insured
$ 4,610 $(1,800) $ 2,810 $ (640)
(5)
(2,013)
363
4,240
363
4,240
–
–
$2,170
358
2,227
$3,053 $
–
–
– $3,053
–
–
–
–
$(57)
–
–
$2,996
–
–
$ 7,663 $(1,800) $ 5,863 $ (697)
(5)
(2,013)
363
4,240
363
4,240
–
–
$ 5,166
358
2,227
9,213
(1,800)
7,413
(2,658)
4,755
3,053
–
3,053
(57)
2,996
12,266
(1,800) 10,466
(2,715)
7,751
4,010
1,547
1,685
(2,110)
–
(410)
1,900
1,547
1,275
(233)
(752)
(316)
1,667
795
959
1,192
–
–
(734)
–
–
458
–
–
7,242
(2,520)
4,722
(1,301)
3,421
1,192
(734)
458
–
–
–
–
458
–
–
5,202
1,547
1,685
(2,844)
–
(410)
2,358
1,547
1,275
(233)
(752)
(316)
2,125
795
959
458
8,434
(3,254)
5,180
(1,301)
3,879
$16,455 $(4,320) $12,135 $(3,959)
$8,176
$4,245 $(734) $3,511
$(57)
$3,454
$20,700 $(5,054) $15,646 $(4,016)
$11,630
(Dollars in millions)
Super senior liquidity
commitments
High grade
Mezzanine
CDOs-squared
Total super senior
liquidity
commitments (4)
Other super senior
exposure
High grade
Mezzanine
CDOs-squared
Total other super
senior exposure
Total super senior
CDO exposure
Includes highly-rated CLO and CMBS super senior exposure.
(1) Classified as subprime when subprime consumer real estate loans make up at least 35 percent of the ultimate underlying collateral.
(2)
(3) Net of insurance.
(4) For additional information on our super senior liquidity exposure of $12.3 billion, see the CDO discussion beginning on page 62.
At December 31, 2007, super senior exposure, net of writedowns, of
$11.6 billion in the form of cash positions, liquidity commitments, and
derivative contracts consisted of net subprime super senior exposure of
approximately $8.2 billion and net non-subprime super senior exposure of
$3.5 billion. During 2007, we recorded losses of $4.0 billion associated
with our subprime super senior CDO exposure. The losses reduced trading
account profits (losses) by approximately $3.2 billion and other income by
approximately $750 million. In addition, we incurred approximately $1.1
billion in losses related to subprime sales and trading positions, approx-
imately $300 million related to our CDO warehouse, and approximately
$200 million to cover counterparty risk on the insured CDOs. For more
information on our super senior liquidity exposure, see the CDO discussion
beginning on page 62.
Our net subprime super senior liquidity commitments were $4.8 bil-
lion where we have recorded losses of $2.7 billion. The collateral support-
ing the high grade exposure consisted of about 60 percent subprime of
which approximately 65 percent was made up of 2006 and 2007 vintages
while the remaining amount was comprised of higher quality vintages from
2005 and prior. The mezzanine exposure is collateralized with about 40
percent of subprime assets of which approximately 60 percent are of
higher quality vintages from 2005 and prior. The CDOs-squared exposure
is supported by approximately 75 percent of subprime collateral, the
majority of which were later vintages.
Our net other subprime super senior exposure was $3.4 billion where
we have recorded losses of $1.3 billion. Other subprime super senior
exposure consists primarily of our cash and derivative positions including
the unfunded commitments. The collateral underlying the high grade
exposure is similar to our high grade collateral discussed above. The
mezzanine exposure underlying collateral was heavily weighted to sub-
prime with approximately 65 percent coming from later vintages while the
CDOs-squared collateral was made up of approximately 50 percent sub-
prime assets comprised of later vintages.
We also had net non-subprime super senior CDO exposure of $3.5
billion which primarily included highly-rated CLO and CMBS super senior
exposures. The net non-subprime super senior exposure is comprised of
$3.0 billion of super senior liquidity commitment exposure and $458 mil-
lion of high grade other super senior exposure. We recorded losses of $57
million associated with these exposures. These losses were primarily
driven by spread widening rather than impairment of principal.
In addition to the table above, we also had CDO exposure with a
market value of approximately $815 million in our CDO warehouse of
which $314 million was classified as subprime, and CDO exposure of
approximately $1.0 billion related to our sales and trading activities of
which $279 million was classified as subprime. The subprime exposure
related to our CDO warehouse and sales and trading activities is carried at
approximately 30 percent of par value.
As mentioned above, during the fourth quarter, the credit ratings of
certain CDO structures were downgraded which among other things trig-
gered widening of credit spreads for this type of security. CDO-related
markets experienced significant liquidity constraints impacting the avail-
ability and reliability of transparent pricing. We subsequently valued these
CDO structures assuming they would terminate and looked through the
structures to the underlying net asset values supported by the underlying
securities. We were able to obtain security values using external pricing
services for approximately 70 percent of the CDO exposure for which we
used the average of all prices obtained by security. The majority of the
remaining positions where no pricing quotes were available were valued
using matrix pricing by aligning the value to securities that had similar
vintage of underlying assets and ratings, using the lowest rating between
the rating services. The remaining securities were valued using projected
cash flows, similar to the valuation of an interest-only strip, based on
54 Bank of America 2007
estimated average life, seniority level and vintage of underlying assets. We
assigned a zero value to the CDO positions for which an event of default
had been triggered. The value of cash held by the trustee for all CDO struc-
tures was also incorporated into the resulting net asset value.
At December 31, 2007, we held $5.1 billion of purchased insurance
on our CDO exposure of which 66 percent was provided by monolines in
the form of CDS, total-return-swaps (TRS) or financial guarantees. The
majority of this purchased insurance relates to the high grade super senior
exposure. In the case of default we will first look to the underlying secu-
rities and then to recovery on purchased insurance. We valued these con-
tracts by referencing the fair value of the CDO and subsequently adjusted
these fair values downward by $200 million due to counterparty credit risk.
For more information on our credit exposure to monolines, see Industry
Concentrations beginning on page 79.
Treasury Services
Treasury Services provides integrated working capital management and
treasury solutions to clients worldwide through our network of proprietary
offices and special clearing arrangements. Our clients include multina-
tionals, middle-market companies, correspondent banks, commercial real
estate firms and governments. Our products and services include treasury
management, trade finance, foreign exchange, short-term credit facilities
and short-term investing options. Net interest income is derived from
interest-bearing and noninterest-bearing deposits, sweep investments, and
other liability management products. Deposit products provide a relatively
stable source of funding and liquidity. We earn net interest spread rev-
enues from investing this liquidity in earning assets through client-facing
lending activity and our ALM activities. The revenue is attributed to the
deposit products using our funds transfer pricing process which takes into
account the interest rates and maturity characteristics of the deposits.
Noninterest income is generated from payment and receipt products,
merchant services, wholesale card products, and trade services and is
comprised largely of service charges which are net of market-based earn-
ings credit
rates applied against noninterest-bearing deposits. During
2007, Merchant Services was transferred to Treasury Services. Previously,
these results were reported in Card Services in GCSBB. Prior period
amounts have been reclassified.
Net income decreased $237 million, or 10 percent, in 2007 compared to
2006 driven by the increase in noninterest expense combined with a
decrease in revenue. Net interest income decreased $64 million, or two
percent, due to the negative impact of a change in the mix between
interest-bearing and noninterest-bearing deposits as clients maintained
lower noninterest-bearing compensating balances by shifting to interest-
bearing and/or higher yielding investment alternatives, and spread com-
pression resulting from the rate environment and competitive pricing.
Partially offsetting this decrease was an increase in average deposits of
$7.3 billion due to organic growth as well as the LaSalle merger. Non-
interest income was relatively flat at $3.3 billion as the increase in service
charges was more than offset by the decrease in all other income. Service
charges increased $102 million due to organic growth,
including the
impact of deposit product shifts mentioned above, providing a partial off-
set to lower net interest income. All other income decreased $131 million
due to the sale of a business related to our merchant services activities in
the prior year. Noninterest expense increased $295 million, or eight per-
cent, mainly due to Treasury Services’ allocation of the Visa-related liti-
gation costs and the addition of LaSalle.
ALM/Other
ALM/Other includes an allocation of a portion of the Corporation’s net
interest income from ALM activities as well as our Commercial Insurance
business.
Net income decreased $90 million, or 46 percent, in 2007 compared
to 2006 mainly due to a decrease in net interest income of $167 million,
resulting from a lower contribution from the Corporation’s ALM activities,
and increased noninterest expense partially offset by an increase in all
other income. All other income increased $122 million due to the sale of
our Commercial Insurance business in the fourth quarter of 2007. Non-
interest expense increased $98 million due to severance costs associated
with the GCIB strategic review implemented in 2007 as well as increased
occupancy costs.
Bank of America 2007
55
Global Wealth and Investment Management
(Dollars in millions)
Net interest income (2)
Noninterest income:
Investment and brokerage services
All other income
Total noninterest income
Total revenue, net of interest expense
Provision for credit losses
Noninterest expense
Income before income taxes
Income tax expense (2)
Net income
Net interest yield (2)
Return on average equity (3)
Efficiency ratio (2)
Period end – total assets (4)
(Dollars in millions)
Net interest income (2)
Noninterest income:
Investment and brokerage services
All other income
Total noninterest income
Total revenue, net of interest expense
Provision for credit losses
Noninterest expense
Income before income taxes
Income tax expense (2)
Net income
Net interest yield (2)
Return on average equity (3)
Efficiency ratio (2)
Period end – total assets (4)
Total
U.S. Trust (1)
$
3,857
$ 1,036
2007
Columbia
Management
$
15
Premier
Banking and
Investments
$
2,655
4,210
(144)
4,066
7,923
14
4,635
3,274
1,179
$
2,095
$
1,226
57
1,283
2,319
(14)
1,592
741
274
467
3.06%
18.87
58.50
$157,157
2.69%
17.25
68.67
$51,044
Total
U.S. Trust (1)
1,857
(366)
1,491
1,506
–
1,196
310
114
$ 196
n/m
11.29%
79.39
$2,617
2006
Columbia
Management
$ 3,671
$
902
$ (37)
3,383
303
3,686
7,357
(39)
3,867
3,529
1,306
$ 2,223
$
914
80
994
1,896
(52)
1,233
715
265
450
3.50%
22.28
52.57
$125,287
2.94%
30.43
65.04
$33,648
1,532
44
1,576
1,539
–
1,014
525
194
$ 331
n/m
20.42%
65.88
$3,082
ALM/
Other
$151
177
19
196
347
1
147
199
42
950
146
1,096
3,751
27
1,700
2,024
749
$ 1,275
$157
2.70%
72.44
45.31
$113,329
Premier
Banking and
Investments
$ 2,552
778
125
903
3,455
12
1,560
1,883
697
n/m
n/m
n/m
n/m
ALM/
Other
$254
159
54
213
467
1
60
406
150
$ 1,186
$256
2.98%
70.57
45.15
$ 93,992
n/m
n/m
n/m
n/m
(1)
In July 2007, the operations of the acquired U.S. Trust Corporation were combined with the former Private Bank creating U.S. Trust, Bank of America Private Wealth Management. The results of the combined business were
reported for periods beginning on July 1, 2007. Prior to July 1, 2007, the results solely reflect that of the former Private Bank.
(2) FTE basis
(3) Average allocated equity for GWIM was $11.1 billion and $10.0 billion in 2007 and 2006.
(4) Total assets include asset allocations to match liabilities (i.e., deposits).
n/m = not meaningful
56 Bank of America 2007
(Dollars in millions)
Total loans and leases
Total earning assets (1)
Total assets (1)
Total deposits
(1) Total earning assets and total assets include asset allocations to match liabilities (i.e., deposits).
GWIM provides a wide offering of customized banking, investment
and brokerage services tailored to meet the changing wealth management
goals of our individual and institutional customer base. Our clients have
access to a range of services offered through three primary businesses:
U.S. Trust, Bank of America Private Wealth Management (U.S. Trust);
Columbia Management (Columbia); and Premier Banking and Investments
(PB&I). In addition, ALM/Other primarily includes the results of ALM activ-
ities.
In December of 2007, we completed the sale of Marsico and realized
a pre-tax gain on this transaction of approximately $1.5 billion recognized
in All Other. The business results prior to the closing of the Marsico sale
are reflected within the Columbia business.
Net income decreased $128 million, or six percent, to $2.1 billion in
2007, due mainly to losses associated with the support provided to cer-
tain cash funds managed within Columbia and an increase in noninterest
expense.
Net interest income increased $186 million, or five percent, to $3.9
billion driven by the impact of the U.S. Trust Corporation acquisition and
organic growth in average deposit and loan balances. The growth in balan-
ces was partially offset by spread compression and a shift in the deposit
product mix. GWIM deposit growth benefited from the migration of
customer relationships and related balances from GCSBB, organic growth
and the U.S. Trust Corporation acquisition. A more detailed discussion
regarding migrated customer relationships and related balances is pro-
vided in the PB&I discussion.
Noninterest income increased $380 million, or 10 percent, to $4.1
billion driven by an increase in investment and brokerage services of $827
million, or 24 percent. This increase was due to higher AUM primarily
attributable to the impact of the U.S. Trust Corporation acquisition, net
client inflows and favorable market conditions combined with an increase
in brokerage activity. Partially offsetting this increase was a decrease in all
other income due to losses associated with the support provided to cer-
tain cash funds managed within Columbia.
Noninterest expense increased $768 million, or 20 percent, to $4.6
billion driven by the addition of U.S. Trust Corporation, higher revenue-
related expenses and increased marketing costs.
Client Assets
The following table presents client assets which consist of AUM, client
brokerage assets and assets in custody.
Client Assets
(Dollars in millions)
Assets under management
Client brokerage assets (1)
Assets in custody
Less: Client brokerage assets and assets in
custody included in assets under management
Total net client assets
December 31
2007
$643,531
222,661
167,575
(87,071)
$946,696
2006
$542,977
203,799
107,902
(67,509)
$787,169
(1) Client brokerage assets include non-discretionary brokerage and fee-based assets.
December 31
Average Balance
2007
$ 84,600
145,979
157,157
144,865
2006
$ 65,535
117,342
125,287
113,568
2007
$ 73,469
126,244
135,319
124,867
2006
$ 60,910
105,028
112,557
102,389
AUM increased $100.6 billion, or 19 percent, to $643.5 billion as of
December 31, 2007 compared to 2006, driven by the U.S. Trust Corpo-
ration acquisition, which contributed $115.6 billion, as well as net inflows
and market appreciation partially offset by the sale of Marsico, which
resulted in a decrease of $60.9 billion. As of December 31, 2007, client
brokerage assets increased by $18.9 billion, or nine percent, to $222.7
billion compared to the same period in 2006, driven by increased broker-
age activity. Assets in custody increased $59.7 billion, or 55 percent, to
$167.6 billion compared to the same period in 2006, driven mainly by
U.S. Trust Corporation which contributed $45.0 billion.
U.S. Trust, Bank of America Private Wealth
Management
In July 2007, we completed the acquisition of U.S. Trust Corporation for
$3.3 billion in cash combining it with The Private Bank and its ultra-wealthy
extension, Family Wealth Advisors, to form U.S. Trust. The results of the
combined business were reported for periods beginning on July 1, 2007.
Prior to July 1, 2007, the results solely reflect that of the former Private
Bank. U.S. Trust provides comprehensive wealth management solutions to
wealthy and ultra-wealthy clients with investable assets of more than $3
million. In addition, U.S. Trust provides resources and customized sol-
utions to meet clients’ wealth structuring, investment management, trust
and banking services as well as specialty asset management services (oil
and gas, real estate, farm and ranch, timberland, private businesses and
tax advisory). Clients also benefit from access to resources available
through the Corporation including capital markets products,
large and
complex financing solutions, and its extensive banking platform.
Net income increased $17 million, or four percent, compared to
2006, to $467 million due to higher total revenue partially offset by
increases in noninterest expense and provision for credit losses. Net
interest income increased $134 million due to the acquisition of U.S.
Trust Corporation and organic growth in average loans and leases and
average deposits. This increase was partially offset by spread com-
pression and the shift in deposit product mix. Growth in noninterest
income was driven by a $312 million increase in investment and broker-
age services related to acquisitions and organic growth. Noninterest
expense increased $359 million to $1.6 billion driven by acquisitions and
higher personnel-related expenses.
Columbia Management
Columbia is an asset management business serving the needs of both
institutional clients and individual customers. Columbia provides asset
management products and services, including mutual funds and separate
accounts. Columbia mutual fund offerings provide a broad array of invest-
ment strategies and products including equity, fixed income (taxable and
nontaxable) and money market (taxable and nontaxable) funds. Columbia
distributes its products and services directly to institutional clients, and
distributes to individuals through U.S. Trust, PB&I and nonproprietary
channels including other brokerage firms.
Bank of America 2007
57
In December 2007, we completed the sale of Marsico and realized a
pre-tax gain on this transaction of approximately $1.5 billion recognized in
All Other. The business results prior to the closing of the Marsico sale are
reflected within the Columbia business.
Net income decreased $135 million, or 41 percent, to $196 million
driven by a decrease of $410 million in all other income. This decrease
was due primarily to losses associated with the support provided to cer-
tain cash funds. Partially offsetting this decrease was higher investment
and brokerage services income of $325 million driven by the contribution
from the U.S. Trust Corporation acquisition, net client inflows and favor-
able market conditions.
We provided support to certain cash funds managed within Columbia.
The funds for which we provided support typically invest in high quality, short-
term securities with a weighted average maturity of 90 days or less, including
a limited number of securities issued by SIVs. Due to market disruptions, cer-
tain SIV investments were downgraded by the rating agencies and experienced
a decline in fair value. We entered into capital commitments which required
the Corporation to provide up to $565 million in cash to the funds in the event
the net asset value per unit of a fund declines below certain thresholds. The
capital commitments expire no later than the third quarter of 2010. At
December 31, 2007, losses of $382 million had been recognized and $183
million is still outstanding associated with this capital commitment.
Additionally, we purchased SIV investments from the funds at their
fair value of $561 million. Losses of $394 million on these investments
were recorded within All Other due to declines in fair value subsequent to
the purchase of such securities.
We may from time to time, but are under no obligation to, provide
additional support to funds managed within Columbia. Future support, if
any, may take the form of additional capital commitments to the funds or
the purchase of assets from the funds.
We are not the primary beneficiary of the cash funds and do not
consolidate the cash funds managed within Columbia because the sub-
ordinated support provided by the Corporation will not absorb a majority of
the variability created by the assets of the funds. The cash funds had total
AUM of approximately $189 billion at December 31, 2007.
Premier Banking and Investments
PB&I includes Banc of America Investments, our full-service retail broker-
age business and our Premier Banking channel. PB&I brings personalized
banking and investment expertise through priority service with client-
dedicated teams. PB&I provides a high-touch client experience through a
network of approximately 5,600 client facing associates to our affluent
customers with a personal wealth profile that includes investable assets
plus a mortgage that exceeds $500,000 or at least $100,000 of invest-
able assets.
PB&I includes the impact of migrating qualifying affluent customers,
including their related deposit balances, from GCSBB to our PB&I model.
After migration, the associated net interest income, service charges and
noninterest expense is recorded in PB&I. The growth reported in the finan-
cial results of PB&I includes both the impact of migration, as well as the
impact of incremental organic growth from providing a broader array of
financial products and services to PB&I customers. For 2007 and 2006, a
total of $11.4 billion and $10.7 billion of deposits were migrated from
GCSBB to PB&I.
Net income increased $89 million, or eight percent, to $1.3 billion
compared to the same period in 2006 due to an increase in total rev-
enues. Net interest income increased $103 million, or four percent, to
$2.7 billion driven by higher average deposit and loan balances partially
offset by a shift of the product mix in the deposit portfolio and spread
compression. Noninterest income increased $193 million, or 21 percent,
to $1.1 billion driven by higher investment and brokerage services income.
Noninterest expense increased $140 million, or nine percent, to $1.7 bil-
lion primarily due to increases in personnel-related expense driven by the
expansion of client facing associates and higher incentives.
The growth in PB&I revenues was nine percent, of which approx-
imately seven percent was attributable to the impact of migration and two
percent reflected incremental organic growth.
ALM/Other
ALM/Other primarily includes the results of ALM activities.
Net income decreased $99 million, or 39 percent, to $157 million
compared to 2006. The decrease was driven by a $103 million decrease
in net interest income due to a reduction in the contribution from ALM
activities and an increase in noninterest expense of $87 million.
58 Bank of America 2007
All Other
(Dollars in millions)
Net interest income (3)
Noninterest income:
Card income
Equity investment income
Gains (losses) on sales of debt securities
All other income
Total noninterest income
Total revenue, net of interest expense
Provision for credit losses
Merger and restructuring charges (4)
All other noninterest expense
Income before income taxes
Income tax expense (3)
Net income
Reported
Basis (1)
$(7,701)
2,816
3,745
180
6
6,747
(954)
(5,210)
410
(20)
3,866
947
2007
Securitization
Offset (2)
$ 8,027
As Adjusted
$ 326
(3,356)
–
–
288
(3,068)
4,959
4,959
–
–
–
–
–
(540)
3,745
180
294
3,679
4,005
(251)
410
(20)
3,866
947
$2,919
Reported
Basis (1)
$(5,930)
3,795
2,872
(475)
98
6,290
360
(3,494)
805
972
2,077
577
2006
Securitization
Offset (2)
$ 7,593
As Adjusted
$1,663
(4,566)
–
–
335
(4,231)
3,362
3,362
–
–
–
–
–
(771)
2,872
(475)
433
2,059
3,722
(132)
805
972
2,077
577
$1,500
$ 2,919
$
$ 1,500
$
(1) Provision for credit losses represents the 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
(4) For more information on merger and restructuring charges, see Note 2 – Merger and Restructuring Activity to the Consolidated Financial Statements.
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 pre-
sented. All Other’s results include a corresponding “securitization offset”
which removes the impact of these securitized loans in order to present
the consolidated results on a GAAP basis (i.e., held basis). See the
GCSBB section beginning on page 46 for information on the GCSBB
managed results. The following All Other discussion focuses on the results
on an as adjusted basis excluding the securitization offset. For additional
information, see Note 22 – Business Segment Information to the Con-
solidated Financial Statements.
In addition to the securitization offset discussed above, All Other
includes our Equity Investments businesses and Other.
Equity Investments includes Principal
Investing, Corporate Invest-
Investing is comprised of a
ments and Strategic Investments. Principal
diversified portfolio of
investments in privately-held and publicly-traded
companies at all stages of their life cycle from start-up to buyout. These
investments are made either directly in a company or held through a fund
and are accounted for at fair value. In addition, Principal Investing has
unfunded equity commitments related to some of these investments. For
more information on these commitments, see Note 13 – Commitments
and Contingencies to the Consolidated Financial Statements.
Corporate Investments primarily includes investments in publicly-
traded equity securities and funds which are accounted for as AFS market-
able equity securities. Strategic Investments includes investments of
$16.4 billion in CCB, $2.6 billion in Grupo Financiero Santander, S.A.
(Santander), $2.6 billion Banco Itaú and other investments. Beginning in
the fourth quarter of 2007, the shares of CCB are accounted for as AFS
marketable equity securities and carried at fair value with a corresponding
net-of-tax offset to accumulated OCI. Prior to the fourth quarter of 2007,
these shares were accounted for at cost as they are non-transferable until
October 2008. We also hold an option to increase our ownership interest
in CCB to 19.1 percent. Additional shares received upon exercise of this
option are restricted through August 2011. This option expires in February
2011. The strike price of the option is based on the IPO price that steps
up on an annual basis and is currently at 103 percent of the IPO price. The
investment
strike price of the option is capped at 118 percent of the IPO price depend-
is
ing when the option is exercised. Our
accounted for under
the equity method of accounting. The restricted
shares of Banco Itaú are currently carried at cost but, similar to CCB, will
be accounted for as AFS marketable equity securities and carried at fair
value with an offset net-of-tax to accumulated OCI beginning in the second
quarter of 2008. Income associated with Equity Investments is recorded in
equity investment income.
in Santander
Other includes the residual impact 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.
Other also includes certain amounts associated with ALM activities, includ-
ing 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 do not qualify for SFAS 133 hedge accounting treatment, foreign
exchange rate fluctuations related to SFAS 52 revaluation of
foreign
denominated debt issuances, certain gains (losses) on sales of whole
mortgage loans, and gains (losses) on sales of debt securities. Other also
includes adjustments to noninterest income and income tax expense to
remove the FTE impact of items (primarily low-income housing tax credits)
that have been grossed up within noninterest income to a FTE amount in
the business segments.
Net income increased $1.4 billion to $2.9 billion primarily due to an
increase in noninterest income combined with decreases in all other non-
interest expense, merger and restructuring charges and provision for credit
losses partially offset by a decrease in net interest income.
Net interest income decreased $1.3 billion resulting largely from the
absence of net interest income due to the sale of the Latin American
operations and Hong Kong-based retail and commercial banking business
which were included in our 2006 results. Net interest income was also
adversely impacted by the implementation of new accounting guidance
(FSP 13-2) which decreased net interest income by approximately $230
million.
Noninterest income increased $1.6 billion driven by the $1.5 billion
gain from the sale of Marsico. In addition, noninterest income increased
Bank of America 2007
59
due to higher equity investment income and the absence of a loss of $496
million on the sale of mortgage-backed debt securities which occurred in
the prior year. Partially offsetting these items was a $720 million gain on
the sale of our Brazilian operations in 2006 and losses in 2007 of $394
million on securities after they were purchased at fair value from certain
cash funds managed within GWIM. In addition, all noninterest income line
items were impacted by the absence of noninterest income due to the sale
of the Latin American operations and Hong Kong-based retail and commer-
cial banking business which were included in our 2006 results.
The following table presents the components of All Other’s equity
investment income and a reconciliation to the total consolidated equity
investment income for 2007 and 2006.
Components of Equity Investment Income
(Dollars in millions)
Principal Investing
Corporate and Strategic Investments
Total equity investment income included in All Other
Total equity investment income included in the
business segments
Total consolidated equity investment income
2007
$2,217
1,528
3,745
319
$4,064
2006
$1,894
978
2,872
317
$3,189
Equity investment income increased $873 million primarily due to the
$600 million gain on the sale of private equity funds to Conversus Capital
and an increase of $533 million in dividends from CCB, including a special
dividend of $184 million prior to CCB’s 2007 share listing. Partially off-
setting these increases was a $341 million gain in 2006 recorded on the
liquidation of a strategic European investment.
Provision for credit losses decreased $119 million to negative $251
million compared to negative $132 million in 2006, mainly due to reserve
reductions from the sale of our Argentina portfolio during the first quarter
of 2007 and improved performance of the remaining portfolios from cer-
tain consumer finance businesses that we have previously exited.
Merger and restructuring charges decreased $395 million to $410
million compared to $805 million for 2006 due to declining integration
costs associated with the MBNA acquisition offset by costs associated
with the integration of U.S. Trust Corporation and LaSalle. For additional
information on merger and restructuring charges, see Note 2 – Merger and
Restructuring Activity to the Consolidated Financial Statements.
The decrease in all other noninterest expense of $992 million was
largely driven by the absence of operating costs after the sale of the Latin
America operations and Hong Kong-based retail and commercial banking
business which were included in our 2006 results.
Off- and On-Balance Sheet Arrangements
In the ordinary course of business, we support our customers’ financing
needs by facilitating their access to the commercial paper market. In addi-
tion, we utilize certain financing arrangements to meet our balance sheet
management, funding and liquidity needs. For additional
information on
our liquidity risk, see Liquidity Risk and Capital Management beginning on
page 66. These activities utilize SPEs, typically in the form of corporations,
limited liability companies, or trusts, which raise funds by issuing short-
term commercial paper or similar instruments to third party investors.
These SPEs typically hold various types of financial assets whose cash
flows are the primary source of repayment for the liabilities of the SPEs.
Investors have recourse to the assets in the SPE and often benefit from
other credit enhancements, such as overcollateralization in the form of
excess assets in the SPE, liquidity facilities, and other arrangements. As a
result, the SPEs can typically obtain a favorable credit rating from the rat-
ing agencies, resulting in lower financing costs for our customers.
60 Bank of America 2007
Table 8 Special Purpose Entities Liquidity Exposure (1)
(Dollars in millions)
Corporation-sponsored multi-seller conduits
Municipal bond trusts and corporate SPEs
Collateralized debt obligation vehicles (3)
Asset acquisition conduits
Customer-sponsored conduits
Total liquidity exposure
(Dollars in millions)
Corporation-sponsored multi-seller conduits
Municipal bond trusts and corporate SPEs
Collateralized debt obligation vehicles
Asset acquisition conduits
Customer-sponsored conduits
Total liquidity exposure
December 31, 2007
VIEs
QSPEs
Consolidated (2)
Unconsolidated
Unconsolidated
Total
$16,984
7,359
3,240
1,623
–
$29,206
$47,335
3,120
9,026
6,399
1,724
$67,604
$
–
7,251
–
–
–
$ 64,319
17,730
12,266
8,022
1,724
$7,251
$104,061
December 31, 2006
VIEs
QSPEs
Consolidated (2)
Unconsolidated
Unconsolidated
Total
$11,515
272
–
1,083
–
$12,870
$29,836
48
7,658
5,952
4,586
$48,080
$
–
7,593
–
–
–
$ 41,351
7,913
7,658
7,035
4,586
$7,593
$ 68,543
(1) Note 9 – Variable Interest Entities to the Consolidated Financial Statements is related to this table but only reflects those entities in which we hold a significant variable interest.
(2) We consolidate VIEs when we are the primary beneficiary that will absorb the majority of the expected losses or expected residual returns of the VIEs or both.
(3) For additional information on our CDO exposures and related writedowns at December 31, 2007, see the CDO discussion beginning on page 53.
We have liquidity agreements, SBLCs or other arrangements with the
SPEs, as described below, under which we are obligated to provide funding
in the event of a market disruption or other specified event or otherwise
provide credit support to the entities (hereinafter referred to as liquidity
exposure). We manage our credit risk and any market risk on these
arrangements by subjecting them to our normal underwriting and risk
management processes. Our credit ratings and changes thereto will affect
the borrowing cost and liquidity of these SPEs. In addition, significant
changes in counterparty asset valuation and credit standing may also
affect the ability of the SPEs to issue commercial paper. The contractual
or notional amount of these commitments as presented in Table 8, repre-
sents our maximum possible funding obligation and is not, in manage-
ment’s view, representative of expected losses or funding requirements.
From time to time, we may purchase commercial paper issued by these
SPEs in connection with market-making activities or for investment pur-
poses. During the second half of 2007, there were instances in which the
asset-backed commercial paper market became illiquid due to market
perceptions of uncertainty and certain investment activities were affected.
As a result, at December 31, 2007, we held $6.6 billion of commercial
paper on the Corporation’s Consolidated Balance Sheet that was issued in
connection with our liquidity obligations to unconsolidated CDOs summar-
ized in the table above. At December 31, 2006, we held $123 million of
commercial paper issued by the SPEs included in the table above.
The table above presents our liquidity exposure to these consolidated
and unconsolidated SPEs, which include VIEs and QSPEs. VIEs are SPEs
which lack sufficient equity at risk or whose equity investors do not have a
controlling financial interest. QSPEs are SPEs whose activities are strictly
limited to holding and servicing financial assets. Some, but not all, of the
liquidity commitments to VIEs are considered to be significant variable
interests and are disclosed in Note 9 – Variable Interest Entities to the
Consolidated Financial Statements. Those liquidity commitments that are
not significant variable interests are not required to be included in Note 9
– Variable Interest Entities to the Consolidated Financial Statements.
At December 31, 2007 the Corporation’s total liquidity exposure to
SPEs was $104.1 billion, an increase of $35.5 billion from December 31,
2006. The increase was primarily due to increases in corporation-
sponsored multi-seller conduits and municipal bond trusts and corporate
SPEs. The increase of $23.0 billion in corporation-sponsored multi-seller
conduits was primarily due to organic growth in the business. The increase
of $9.8 billion in municipal bond trusts and corporate SPEs was mainly
due to the acquisition of LaSalle.
Corporation-Sponsored Multi-Seller Conduits
We administer three multi-seller conduits which provide a low-cost funding
alternative to our customers by facilitating their access to the commercial
paper market. Our customers sell or otherwise transfer assets to the
conduits, which in turn issue high-grade, short-term commercial paper that
is collateralized by the underlying assets. We receive fees for providing
combinations of liquidity and SBLCs or similar loss protection commit-
ments to the conduits. These commitments represent significant variable
in Note 9 –
interests in the SPEs, which are discussed in more detail
Variable Interest Entities to the Consolidated Financial Statements. Third
parties participate in a small number of the liquidity facilities on a pari
passu basis with the Corporation.
At December 31, 2007, our liquidity commitments to the conduits
were collateralized by various classes of assets. Assets held in the con-
duits incorporate features such as overcollateralization and cash reserves
which are designed to provide credit support at a level that is equivalent to
an investment grade as determined in accordance with internal risk rating
guidelines. During 2007, there were no material write-downs or down-
grades of assets.
We are the primary beneficiary of one conduit which is included in our
Consolidated Financial Statements. At December 31, 2007, our liquidity
commitments to this conduit were collateralized by credit card loans (21
percent), auto loans (14 percent), equipment loans (13 percent), and
student loans (eight percent). None of these assets are subprime resi-
In addition, 29 percent of our commitments were
dential mortgages.
Bank of America 2007
61
collateralized by projected cash flows from long-term contracts (e.g., tele-
vision broadcast contracts, stadium revenues and royalty payments)
which, as mentioned above, incorporate features that provide credit sup-
port at a level equivalent to an investment grade. At December 31, 2007,
the weighted average life of assets in the consolidated conduit was 5.4
years and the weighted average maturity of commercial paper issued by
this conduit was 40 days. Assets of the Corporation are not available to
pay creditors of the consolidated conduit except to the extent the Corpo-
ration may be obligated to perform under the liquidity commitments and
SBLCs. Assets of the consolidated conduit are not available to pay cred-
itors of the Corporation.
We do not consolidate the other two conduits as we do not expect to
absorb a majority of the variability of the conduits. At December 31, 2007,
our liquidity commitments to the unconsolidated conduits were collateral-
ized by student loans (27 percent), credit card loans and trade receivables
(10 percent each), and auto loans (eight percent). Less than one percent
of these assets are subprime residential mortgages. In addition, 29 per-
cent of our commitments were collateralized by the conduits’ short-term
lending arrangements with investment funds, primarily real estate funds,
which as mentioned above, incorporate features that provide credit sup-
port at a level equivalent to an investment grade. Amounts advanced
under these arrangements will be repaid when the investment funds issue
capital calls to their qualified equity investors. At December 31, 2007, the
weighted average life of assets in the unconsolidated conduits was 2.6
years and the weighted average maturity of commercial paper issued by
these conduits was 36 days.
The liquidity commitments and SBLCs provided to unconsolidated
conduits are included in Table 10 in the Obligations and Commitments
section beginning on page 63. We have no other contractual obligations to
the unconsolidated conduits, nor do we intend to provide noncontractual
or other forms of support.
On a combined basis, the unconsolidated conduits issued approx-
imately $27 million of capital notes and equity interests to third parties.
This represents the maximum amount of loss that would be absorbed by
the third party investors. Based on an analysis of projected cash flows, we
have determined that the Corporation will not absorb a majority of the
variability created by the assets of the conduits.
Despite the market disruptions in the second half of 2007, the con-
duits did not experience any material difficulties in issuing commercial
paper. The Corporation did not purchase any commercial paper issued by
the conduits other than incidentally and in its role as commercial paper
dealer.
Municipal Bond Trusts and Corporate SPEs
We have provided a total of $17.7 billion and $7.9 billion in liquidity sup-
port to municipal bond trusts and corporate SPEs at December 31, 2007
and 2006. We administer municipal bond trusts that hold highly-rated,
long-term, fixed-rate municipal bonds, some of which are callable prior to
maturity, for which we provided liquidity support of $13.4 billion and $2.6
billion at December 31, 2007 and 2006. In addition, we administer sev-
eral conduits to which we provided $4.3 billion and $5.3 billion of liquidity
support at December 31, 2007 and 2006.
As it relates to the municipal bond trusts the weighted average
remaining life of the bonds at December 31, 2007 was 20.8 years. Sub-
stantially all of the bonds are rated AAA or AA and some of the bonds
benefit from being wrapped by monolines. There were no material write-
downs or downgrades of assets or issuers during 2007. The trusts obtain
financing by issuing floating-rate trust certificates that reprice on a weekly
basis to third party investors. The floating-rate investors have the right to
tender the certificates at any time upon seven days notice. We serve as
remarketing agent and liquidity provider for the trusts. Should we be
unable to remarket the tendered certificates, we are generally obligated to
purchase them at par. We are not obligated to purchase the certificate if a
bond’s credit rating declines below investment grade or in the event of
certain defaults or bankruptcy of the issuer and/or insurer. The total
notional amount of floating-rate certificates for which we provide liquidity
support was $13.4 billion and $2.6 billion at December 31, 2007 and
2006. Some of these trusts are QSPEs. We consolidate those trusts that
are not QSPEs if we hold the residual
interest or otherwise expect to
absorb a majority of the variability of the trusts. We have $6.1 billion of
liquidity commitments to unconsolidated trusts at December 31, 2007,
which are included in Table 10 in the Obligations and Commitments sec-
tion beginning on page 63.
to third party investors. At December 31, 2007,
Assets of the other corporate conduits consisted primarily of high-
long-term municipal, corporate, and mortgage-backed securities
grade,
which had a weighted average remaining life of approximately 7.5 years at
December 31, 2007. Substantially all of the securities are rated AAA or AA
and some of the bonds benefit from being wrapped by monolines. There
were no material write-downs or downgrades of assets or insurers during
2007. These conduits, which are QSPEs, obtain funding by issuing com-
mercial paper
the
weighted average maturity of the commercial paper was 25 days. We have
entered into derivative contracts which provide interest rate, currency and
a pre-specified amount of credit protection to the entities in exchange for
the commercial paper rate. In addition, we may be obligated to purchase
assets from the vehicles if the assets or insurers are downgraded. If an
asset’s rating declines below a certain investment quality as evidenced by
its credit rating or defaults, we are no longer exposed to the risk of loss.
Due to the market disruptions during the second half of 2007, these
conduits began to experience difficulties in issuing commercial paper as
credit spreads widened. On occasion,
including in the first quarter of
2008, we held some of the issued commercial paper when marketing
attempts were unsuccessful. In the event that we are unable to remarket
the conduits’ commercial paper such that it no longer qualifies as a QSPE,
we would consolidate the conduit which may have an adverse impact on
the fair value of the related derivative contracts. At December 31, 2007
we did not hold any commercial paper issued by the conduits.
We have no other contractual obligations to the unconsolidated bond
trusts and conduits described above, nor do we intend to provide non-
contractual or other forms of support.
Derivative activity related to these entities is included in Note 4 –
Derivatives
For more
to the Consolidated Financial Statements.
information on QSPEs, see Note 9 – Variable Interest Entities to the Con-
solidated Financial Statements. For additional information on our monoline
exposure, see Industry Concentrations beginning on page 79.
Collateralized Debt Obligation Vehicles
CDOs are SPEs that hold diversified pools of fixed income securities. They
issue multiple tranches of debt securities, including commercial paper and
equity securities. We receive fees for structuring the CDOs and/or placing
debt securities with third party investors. We provided total liquidity sup-
port of $12.3 billion and $7.7 billion at December 31, 2007 and 2006
consisting of $10.0 billion and $2.1 billion of written put options and $2.3
billion and $5.5 billion of other forms of liquidity support.
At December 31, 2007 and 2006, we provided liquidity support in
the form of written put options on $10.0 billion and $2.1 billion of
commercial paper issued by CDOs, including $3.2 billion issued by a
consolidated CDO at December 31, 2007. No third parties provide similar
62 Bank of America 2007
that
commitments to these CDOs. The commercial paper is the most senior
class of securities issued by the CDOs and benefits from the sub-
including AAA-rated securities. The
ordination of all other securities,
amount
is principally backed by subprime residential mortgage
exposure (net of insurance and prior to writedowns) totaled $7.4 billion.
This amount included approximately $2.8 billion of high grade ABS, $4.2
billion of CDOs-squared, of which $3.2 billion were consolidated, and
$363 million of mezzanine ABS.
The commercial paper subject to the put options is the most senior
class of securities issued by the CDOs and benefits from the sub-
ordination of all other securities, including AAA-rated securities. We are
obligated under the written put options to provide funding to the CDOs by
purchasing the commercial paper at predetermined contractual yields in
the event of a severe disruption in the short-term funding market as evi-
denced by the inability of the CDOs to issue commercial paper at spreads
below a predetermined rate.
Prior to the second half of 2007, we believed that the likelihood of
our experiencing an economic loss as the result of our obligations under
the written put options was remote. However, due to severe market dis-
ruptions during the second half of 2007, the CDOs holding the put options
began to experience difficulties in issuing commercial paper. Shortly
thereafter, a significant portion of the assets held in these CDOs were
downgraded or threatened with downgrade by the rating agencies. As a
result of these factors, we began to purchase commercial paper that could
not be issued to third parties at less than the contractual yield specified in
our liquidity obligations. See Note 13 – Commitments and Contingencies
to the Consolidated Financial Statements for more information on the writ-
ten put options. These written put options are recorded as derivatives on
the Consolidated Balance Sheet and are carried at fair value with changes
in fair value recorded in trading account profits (losses). Derivative activity
related to these entities is included in Note 4 – Derivatives to the Con-
solidated Financial Statements.
We also administer a CDO conduit that obtains funds by issuing
commercial paper to third party investors. The conduit held $2.3 billion
and $5.5 billion of assets at December 31, 2007 and 2006 consisting of
super senior tranches of debt securities issued by other CDOs, none of
which are principally backed by subprime residential mortgages at
December 31, 2007. We provide liquidity support equal to the amount of
assets in this conduit which obligates us to purchase the commercial
paper at a predetermined contractual yield in the event of a severe dis-
ruption in the short-term funding market as evidenced by the inability of
the conduit to issue commercial paper at spreads below a predetermined
rate. In addition, we are obligated to purchase assets from the conduit or
absorb market losses on the sale of assets in the event of a downgrade or
decline in credit quality of the assets. Our $2.3 billion liquidity commit-
ment to the conduit at December 31, 2007 is included in Table 10 in the
Obligations and Commitments section. We are the sole provider of liquidity
to the CDO vehicle.
During the fourth quarter of 2007, as contractually allowed in our role
as conduit administrator, the Corporation removed certain assets from the
CDO conduit due to a decline in credit quality. The CDO conduit also began
to experience difficulties in issuing commercial paper due to market dis-
ruptions during the second half of 2007, and we began to purchase
commercial paper that could not be issued to third parties at less than the
contractual yield specified in our liquidity obligations.
At December 31, 2007, we held $6.6 billion of commercial paper on
the balance sheet that was issued by unconsolidated CDO vehicles of
which $5.0 billion related to the written put options and $1.6 billion
related to other liquidity support. We also held AFS debt securities in
consolidated CDO vehicles with a fair value of $2.8 billion that were princi-
pally related to certain assets that were removed from the CDO conduit, as
discussed above. We recorded losses of $3.2 billion, net of insurance,
in trading account profits (losses) in 2007 of which $2.7 billion related to
written put options and $519 million related to other liquidity support.
These losses are included in the $4.0 billion of net writedowns on super
senior CDO exposure which is discussed in more detail beginning on
page 53.
Asset Acquisition Conduits
two unconsolidated conduits which acquire assets on
We administer
behalf of our customers. The return on the assets held in the conduits,
which consist principally of liquid exchange-traded securities and some
leveraged loans, is passed through to our customers through a series of
derivative contracts. We consolidate a third conduit which holds sub-
ordinated debt securities for our benefit. These conduits obtain funding
through the issuance of commercial paper and subordinated certificates to
third party investors. Repayment of the commercial paper and certificates
is assured by derivative contracts between the Corporation and the con-
duits, and we are reimbursed through the derivative contracts with our
customers. Our performance under the derivatives is collateralized by the
underlying assets. Derivative activity related to these entities is included in
Note 4 – Derivatives to the Consolidated Financial Statements.
Despite the market disruptions in the second half of 2007, the con-
duits did not experience any material difficulties in issuing commercial
paper. The Corporation did not hold a significant amount of commercial
paper issued by the conduits at any time during 2007. At December 31,
2007, the weighted average life of commercial paper issued by the con-
duits was 34 days.
We have no other contractual obligations to the conduits described
above, nor do we intend to provide noncontractual or other forms of
support.
Customer-Sponsored Conduits
We provide liquidity facilities to conduits that are sponsored by our custom-
ers and which provide them with direct access to the commercial paper
market. We are typically one of several liquidity providers for a customer’s
conduit. We do not provide SBLCs or other forms of credit enhancement to
these conduits. Assets of these conduits consist primarily of auto loans,
student
loans and credit card receivables. The liquidity commitments
benefit from structural protections which vary depending upon the pro-
gram, but given these protections, the exposures are viewed to be of
investment grade quality.
These commitments are included in Table 10 in the Obligations and
Commitments section. As we typically provide less than 20 percent of the
liquidity commitments to these conduits and do not provide other
total
forms of support, we have concluded that we do not hold a significant
variable interest in the conduits and they are not included in our dis-
cussion of VIEs in Note 9 – Variable Interest Entities to the Consolidated
Financial Statements.
Obligations and Commitments
We have contractual obligations to make future payments on debt and
lease agreements. Additionally, in the normal course of business, we enter
into contractual arrangements whereby we commit to future purchases of
products or services from unaffiliated parties. Obligations that are legally
binding agreements whereby we agree to purchase products or services
with a specific minimum quantity defined at a fixed, minimum or variable
price over a specified period of time are defined as purchase obligations.
Bank of America 2007
63
Included in purchase obligations are vendor contracts of $4.9 billion,
commitments to purchase securities of $3.7 billion and commitments to
purchase loans of $27.1 billion. The most significant of our vendor con-
tracts include communication services, processing services and software
contracts. Other long-term liabilities include our contractual funding obliga-
tions related to the Qualified Pension Plans, Nonqualified Pension Plans
and Postretirement Health and Life Plans (the Plans). Obligations to the
Plans are based on the current and projected obligations of the Plans,
performance of the Plans’ assets and any participant contributions, if
applicable. During 2007 and 2006, we contributed $243 million and $2.6
billion to the Plans, and we expect to make at least $206 million of con-
tributions during 2008. The following table does not include UTBs of $3.1
billion associated with FIN 48 and tax-related interest and penalties of
$573 million.
Debt, lease, equity and other obligations are more fully discussed in
Note 12 – Short-term Borrowings and Long-term Debt and Note 13 –
Commitments and Contingencies to the Consolidated Financial State-
ments. The Plans and UTBs are more fully discussed in Note 16 –
Employee Benefit Plans and Note 18 – Income Taxes to the Consolidated
Financial Statements.
Table 9 presents total
long-term debt and other obligations at
December 31, 2007.
Table 9 Long-term Debt and Other Obligations
(Dollars in millions)
Long-term debt and capital leases
Purchase obligations (1)
Operating lease obligations
Other long-term liabilities
Total long-term debt and other obligations
December 31, 2007
Due in 1 year
or less
Due after 1 year
through 3 years
Due after 3 years
through 5 years
$30,435
12,266
2,049
493
$45,243
$50,693
21,994
3,405
694
$76,786
$28,115
624
2,480
432
$31,651
Due
after 5
years
$88,265
842
8,151
480
$97,738
Total
$197,508
35,726
16,085
2,099
$251,418
(1) Obligations that are legally binding agreements whereby we agree to purchase products or services with a specific minimum quantity defined at a fixed, minimum or variable price over a specified period of time are defined as
purchase obligations.
Many of our
lending relationships contain funded and unfunded
elements. The funded portion is reflected on our balance sheet. For lend-
ing relationships carried at historical cost, the unfunded component of
these commitments is not recorded on our balance sheet until a draw is
made under the credit facility; however, a reserve is established for prob-
able losses. For
lending commitments for which we have elected to
account for under SFAS 159, the fair value of the commitment is recorded
in accrued expenses and other liabilities. The Corporation also manages
certain concentrations of commitments (e.g., bridge financing) through its
established “originate to distribute” strategy.
For more information on these commitments and guarantees, includ-
ing equity commitments, see Note 13 – Commitments and Contingencies
to the Consolidated Financial Statements. For more information on the
adoption of SFAS 159, see Note 19 – Fair Value Disclosures to the Con-
solidated Financial Statements.
We enter into commitments to extend credit such as loan commit-
ments, SBLCs and commercial
letters of credit to meet the financing
needs of our customers. The table below summarizes the total unfunded,
or off-balance sheet, credit extension commitment amounts by expiration
date. At December 31, 2007, the unfunded lending commitments related
to charge cards (nonrevolving card lines) to individuals and government
entities guaranteed by the U.S. Government in the amount of $9.9 billion
(related outstandings of $193 million) were not included in credit card line
commitments in the table below.
Other Commitments
We provided support to cash funds managed within GWIM by purchasing
certain assets at fair value and by committing to provide a limited amount
of capital to the funds. For more information, see Note 13 – Commitments
and Contingencies to the Consolidated Financial Statements.
Table 10 Credit Extension Commitments
(Dollars in millions)
Loan commitments
Home equity lines of credit
Standby letters of credit and financial guarantees
Commercial letters of credit
Legally binding commitments (1)
Credit card lines
Total credit extension commitments
December 31, 2007
Expires after 1
year through
3 years
Expires after 3
years through
5 years
$ 92,153
1,828
14,493
50
108,524
17,864
$126,388
$106,904
2,758
7,943
33
117,638
–
$117,638
Expires in 1
year or less
$ 178,931
8,482
31,629
3,753
222,795
876,393
$1,099,188
Expires after
5 years
$ 27,902
107,055
8,731
717
144,405
–
Total
$ 405,890
120,123
62,796
4,553
593,362
894,257
$144,405
$1,487,619
(1)
Includes commitments of $47.3 billion to corporation-sponsored multi-seller conduits, $2.3 billion to CDOs, $6.1 billion to municipal bond trusts and $1.7 billion to customer-sponsored conduits at December 31, 2007.
64 Bank of America 2007
Managing Risk
Overview
Our management governance structure enables us to manage all major
aspects of our business through an integrated planning and review proc-
ess that includes strategic, financial, associate, customer and risk plan-
ning. We derive much of our revenue from managing risk from customer
transactions for profit. In addition to qualitative factors, we utilize quantita-
tive measures to optimize risk and reward trade offs in order to achieve
growth targets and financial objectives while reducing the variability of
earnings and minimizing unexpected losses. Risk metrics that allow us to
measure performance include economic capital targets and corporate risk
limits. By allocating economic capital to a line of business, we effectively
manage that business’s ability to take on risk. Review and approval of
business plans incorporate approval of economic capital allocation, and
economic capital usage is monitored through financial and risk reporting.
Industry, country, trading, asset allocation and other limits supplement the
allocation of economic capital. These limits are based on an analysis of
risk and reward in each line of business and management is responsible
for tracking and reporting performance measurements as well as any
exceptions to guidelines or limits. Our risk management process con-
tinually evaluates risk and appropriate metrics needed to measure it.
intrinsic risks of business will
Our business exposes us to the following major risks: strategic, liquid-
ity, credit, market and operational risk. Strategic risk is the risk that
adverse business decisions, ineffective or inappropriate business plans or
failure to respond to changes in the competitive environment, business
cycles, customer preferences, product obsolescence, execution and/or
other
impact our ability to meet our
objectives. Liquidity risk is the inability to accommodate liability maturities
and deposit withdrawals, fund asset growth and meet contractual obliga-
tions through unconstrained access to funding at reasonable market rates.
Credit risk is the risk of loss arising from a borrower’s or counterparty’s
inability to meet its obligations. Market risk is the risk that values of
assets and liabilities or revenues will be adversely affected by changes in
market conditions, such as interest rate movements. Operational risk is
the risk of loss resulting from inadequate or failed internal processes,
people and systems or external events. The following sections, Strategic
Risk Management on page 66, Liquidity Risk and Capital Management
beginning on page 66, Credit Risk Management beginning on page 69,
Market Risk Management beginning on page 86 and Operational Risk
Management beginning on page 93, address in more detail the specific
procedures, measures and analyses of the major categories of risk that
we manage.
Risk Management Processes and Methods
We have established and continually enhance control processes and use
various methods to align risk-taking and risk management throughout our
organization. These control processes and methods are designed around
“three lines of defense”:
lines of business, enterprise functions and
Corporate Audit.
The lines of business are the first line of defense and are respon-
sible for identifying, quantifying, mitigating and monitoring all risks within
their lines of business, while certain enterprise-wide risks are managed
centrally. For example, except for trading-related business activities, inter-
est rate risk associated with our business activities is managed centrally
as part of our ALM activities. Line of business management makes and
executes the business plan and is closest to the changing nature of risks
and, therefore, we believe is best able to take actions to manage and
mitigate those risks. Our
lines of business prepare periodic self-
assessment reports to identify the status of risk issues, including miti-
gation plans,
if appropriate. These reports roll up to executive
management to ensure appropriate risk management and oversight, and
to identify enterprise-wide issues. Our management processes, structures
and policies aid us in complying with laws and regulations and provide
clear lines for decision-making and accountability. Wherever practical, we
attempt to house decision-making authority as close to the transaction as
possible while retaining supervisory control functions from both in and
outside of the lines of business.
The key elements of the second line of defense are Risk Manage-
ment, Compliance, Finance, Global Technology and Operations, Human
Resources, and Legal functions. These groups are independent of the
lines of businesses and are organized on both a line of business and
enterprise-wide basis. For example, for Risk Management, a senior risk
executive is assigned to each of the lines of business and is responsible
for the oversight of all the risks associated with that line of business.
Enterprise-level risk executives have responsibility to develop and imple-
ment polices and practices to assess and manage enterprise-wide credit,
market and operational risks.
Corporate Audit, the third line of defense, provides an independent
assessment of our management and internal control systems. Corporate
Audit activities are designed to provide reasonable assurance that
resources are adequately protected; significant financial, managerial and
operating information is materially complete, accurate and reliable; and
employees’ actions are in compliance with corporate policies, standards,
procedures, and applicable laws and regulations.
treasury, compliance,
We use various methods to manage risks at the line of business
levels and corporate-wide. Examples of these methods include planning
and forecasting, risk committees and forums, limits, models, and hedging
strategies. Planning and forecasting facilitates analysis of actual versus
planned results and provides an indication of unanticipated risk levels.
Generally, risk committees and forums are composed of lines of business,
legal and finance personnel,
risk management,
among others, who actively monitor performance against plan,
limits,
potential issues, and introduction of new products. Limits, the amount of
exposure that may be taken in a product, relationship, region or industry,
seek to align corporate-wide risk goals with those of each line of business
and are part of our overall risk management process to help reduce the
volatility of market, credit and operational
losses. Models are used to
estimate market value and net interest income sensitivity, and to estimate
expected and unexpected losses for each product and line of business,
where appropriate. Hedging strategies are used to manage the risk of
borrower or counterparty concentration risk and to manage market risk in
the portfolio.
The formal processes used to manage risk represent only one portion
of our overall risk management process. Corporate culture and the actions
of our associates are also critical to effective risk management. Through
our Code of Ethics, we set a high standard for our associates. The Code of
Ethics provides a framework for all of our associates to conduct them-
selves with the highest integrity in the delivery of our products or services
to our customers. We instill a risk-conscious culture through communica-
tions,
roles and
responsibilities. Additionally, we continue to strengthen the linkage
between the associate performance management process and individual
compensation to encourage associates to work toward corporate-wide risk
goals.
training, policies, procedures, and organizational
Bank of America 2007
65
page 93 for a further description of this process. Corporate Audit in turn
monitors, and independently reviews and evaluates, the plans and meas-
urement processes.
One of the key tools we use to manage strategic risk is economic
capital allocation. Through the economic capital allocation process, we
effectively manage each line of business’s ability to take on risk. Review
and approval of business plans incorporate approval of economic capital
allocation, and economic capital usage is monitored through financial and
risk reporting. Economic capital allocation plans for the lines of business
are incorporated into the Corporation’s operating plan that is approved by
the Board on an annual basis.
Liquidity Risk and Capital Management
Liquidity Risk
Liquidity is the ongoing ability to accommodate liability maturities and
deposit withdrawals,
fund asset growth and business operations, and
meet contractual obligations through unconstrained access to funding at
reasonable market rates. Liquidity management involves forecasting fund-
ing requirements and maintaining sufficient capacity to meet the needs
and accommodate fluctuations in asset and liability levels due to changes
in our business operations or unanticipated events. Sources of liquidity
include deposits and other customer-based funding, and wholesale
market-based funding.
We manage liquidity at two levels. The first is the liquidity of the
parent company, which is the holding company that owns the banking and
nonbanking subsidiaries. The second is the liquidity of the banking sub-
sidiaries. The management of liquidity at both levels is essential because
the parent company and banking subsidiaries have different funding needs
and sources, and are subject to certain regulatory guidelines and require-
ments. Through ALCO, the Finance Committee is responsible for establish-
ing our liquidity policy as well as approving operating and contingency
procedures, and monitoring liquidity on an ongoing basis. Corporate
Treasury is responsible for planning and executing our funding activities
and strategy.
In order to ensure adequate liquidity through the full range of poten-
tial operating environments and market conditions, we conduct our liquid-
ity management and business activities in a manner that will preserve and
enhance funding stability, flexibility and diversity. Key components of this
operating strategy include a strong focus on customer-based funding,
maintaining direct relationships with wholesale market funding providers,
and maintaining the ability to liquefy certain assets when, and if, require-
ments warrant.
We develop and maintain contingency funding plans for both the
parent company and bank liquidity positions. These plans evaluate our
liquidity position under various operating circumstances and allow us to
ensure that we would be able to operate through a period of stress when
access to normal sources of funding is constrained. The plans project
funding requirements during a potential period of stress, specify and quan-
liquidity, outline actions and procedures for effectively
tify sources of
and
managing
responsibilities. They are reviewed and approved annually by ALCO.
problem period,
through
define
roles
and
the
Oversight
The Board oversees the risk management of the Corporation through its
committees, management committees and the Chief Executive Officer. The
Board’s Audit Committee monitors (1) the effectiveness of our internal
controls, (2) the integrity of our Consolidated Financial Statements and
(3) compliance with legal and regulatory requirements. In addition, the
Audit Committee oversees the internal audit function and the independent
registered public accountant. The Board’s Asset Quality Committee over-
sees credit risks and related topics that may impact our assets and earn-
ings. The Finance Committee, a management committee, oversees the
development and performance of the policies and strategies for managing
the strategic, credit, market, and operational risks to our earnings and
capital. The Asset Liability Committee (ALCO), a subcommittee of the
Finance Committee, oversees our policies and processes designed to
assure sound market risk and balance sheet management. The Global
Markets Risk Committee (GRC) has been designated by ALCO as the
primary governance authority for Global Markets Risk Management. The
Compliance and Operational Risk Committee, a subcommittee of the
Finance Committee, oversees our policies and processes designed to
assure sound operational and compliance risk management. The Credit
Risk Committee (CRC), a subcommittee of the Finance Committee, over-
sees and approves our adherence to sound credit risk management poli-
cies and practices. Certain CRC approvals are subject to the oversight of
the Board’s Asset Quality Committee. The Executive Management Team
(i.e., Chief Executive Officer and select executives of the management
team) reviews our corporate strategies and objectives, evaluates business
performance, and reviews business plans including economic capital allo-
cations to the Corporation and lines of business. Management continues
to direct corporate-wide efforts to address the Basel Committee on Bank-
ing Supervision’s new risk-based capital standards (Basel II). The Audit
Committee and Finance Committee oversee management’s plans to com-
ply with Basel II. For additional information, see the Basel II discussion on
page 68 and Note 15 – Regulatory Requirements and Restrictions to the
Consolidated Financial Statements.
Strategic Risk Management
Strategic risk is the risk that adverse business decisions, ineffective or
inappropriate business plans, or failure to respond to changes in the
competitive environment, business cycles, customer preferences, product
obsolescence, execution and/or other
intrinsic risks of business will
impact our ability to meet our objectives. We use an integrated planning
process to help manage strategic risk. A key component of the planning
process aligns strategies, goals, tactics and resources throughout the
enterprise. The process begins with the creation of a corporate-wide busi-
ness plan which incorporates an assessment of the strategic risks. This
business plan establishes the corporate strategic direction. The planning
process then cascades through the lines of business, creating business
line plans that are aligned with the Corporation’s strategic direction. At
each level, tactics and metrics are identified to measure success in
achieving goals and assure adherence to the plans. As part of this proc-
ess, the lines of business continuously evaluate the impact of changing
market and business conditions, and the overall
risk in meeting
objectives. See the Operational Risk Management section beginning on
66 Bank of America 2007
Our borrowing costs and ability to raise funds are directly impacted by our credit ratings. The credit ratings of Bank of America Corporation and Bank of
America, N.A. are reflected in the table below.
Table 11 Credit Ratings
Moody’s Investors Service
Standard & Poor’s
Fitch Ratings
Under normal business conditions, primary sources of funding for the
parent company include dividends received from its banking and non-
banking subsidiaries, and proceeds from the issuance of senior and sub-
ordinated debt, as well as commercial paper and equity. Primary uses of
funds for the parent company include repayment of maturing debt and
commercial paper, share repurchases, dividends paid to shareholders,
and subsidiary funding through capital or debt.
The parent company maintains a cushion of excess liquidity that
would be sufficient to fully fund the holding company and nonbank affiliate
operations for an extended period during which funding from normal sour-
ces is disrupted. The primary measure used to assess the parent compa-
ny’s liquidity is the “Time to Required Funding” during such a period of
liquidity disruption. This measure assumes that the parent company is
unable to generate funds from debt or equity issuance, receives no divi-
dend income from subsidiaries, and no longer pays dividends to share-
holders while continuing to meet nondiscretionary uses needed to
maintain bank operations and repayment of contractual principal and
interest payments owed by the parent company and affiliated companies.
Under this scenario, the amount of time the parent company and its non-
bank subsidiaries can operate and meet all obligations before the current
liquid assets are exhausted is considered the “Time to Required Funding.”
ALCO approves the target range set for this metric, in months, and mon-
itors adherence to the target. Maintaining excess parent company cash
ensures that “Time to Required Funding” remains in the target range of 21
to 27 months and is the primary driver of the timing and amount of the
Corporation’s debt
issuances. As of December 31, 2007 “Time to
Required Funding” was 19 months compared to 24 months at
December 31, 2006. The reduction reflects the funding of the LaSalle
acquisition for $21.0 billion in cash which closed on October 1, 2007. We
had anticipated in the fourth quarter of 2007 that the “Time to Required
Funding” would decrease slightly below our target range as a result of the
funding of the LaSalle acquisition. We anticipate returning to our target
range in 2008 due in part to the issuance of preferred stock in the first
quarter of 2008. For additional information on our recent preferred stock
issuances, see the Preferred Stock discussion on page 69.
The primary sources of funding for our banking subsidiaries include
customer deposits and wholesale market–based funding. Primary uses of
funds for the banking subsidiaries include growth in the core asset portfo-
lios, including loan demand, and in the ALM portfolio. We use the ALM
portfolio primarily to manage interest rate risk and liquidity risk.
One ratio that can be used to monitor the stability of funding composi-
tion is the “loan to domestic deposit” ratio. This ratio reflects the percent
of loans and leases that are funded by domestic core deposits, a relatively
stable funding source. A ratio below 100 percent indicates that our loan
portfolio is completely funded by domestic core deposits. The ratio was
127 percent at December 31, 2007 compared to 118 percent at
December 31, 2007
Bank of America Corporation
Bank of America, N.A.
Senior Debt
Subordinated
Debt
Commercial
Paper
Short-term
Borrowings
Long-term
Debt
Aa1
AA
AA
Aa2
AA-
AA-
P-1
A-1+
F1+
P-1
A-1+
F1+
Aaa
AA+
AA
December 31, 2006. The increase was primarily attributable to organic
growth in the loan and lease portfolio, and a decision to retain a larger
share of mortgage production on the Corporation’s balance sheet.
The strength of our balance sheet is a result of rigorous financial and
risk discipline. Our core deposit base, which is a low cost funding source,
is often used to fund the purchase of incremental assets (primarily loans
and securities), the composition of which impacts our loan to deposit
ratio. Mortgage-backed securities and mortgage loans have prepayment
risk which must be managed. Repricing of deposits is a key variable in this
process. The capital generated in excess of capital adequacy targets and
to support business growth, is available for the payment of dividends and
share repurchases.
ALCO determines prudent parameters for wholesale market-based
borrowing and regularly reviews the funding plan for the bank subsidiaries
to ensure compliance with these parameters. The contingency funding
plan for the banking subsidiaries evaluates liquidity over a 12-month
period in a variety of business environment scenarios assuming different
levels of earnings performance and credit ratings as well as public and
investor relations factors. Funding exposure related to our role as liquidity
provider to certain off-balance sheet financing entities is also measured
under a stress scenario. In this analysis, ratings are downgraded such that
the off-balance sheet financing entities are not able to issue commercial
paper and backup facilities that we provide are drawn upon. In addition,
potential draws on credit facilities to issuers with ratings below a certain
level are analyzed to assess potential funding exposure.
We originate loans for retention on our balance sheet and for dis-
tribution. As part of our “originate to distribute” strategy, commercial loan
originations are distributed through syndication structures, and residential
mortgages originated by Consumer Real Estate are frequently distributed
in the secondary market. In connection with our balance sheet manage-
ment activities, we may retain mortgage loans originated as well as pur-
chase and sell loans based on our assessment of market conditions.
Regulatory Capital
At December 31, 2007, the Corporation operated its banking activities
primarily under three charters: Bank of America, N.A., FIA Card Services,
N.A. and LaSalle Bank, N.A. As a regulated financial services company, we
are governed by certain regulatory capital requirements. At December 31,
2007 and 2006, the Corporation, Bank of America, N.A., and FIA Card
Services, N.A., were classified as “well-capitalized” for regulatory pur-
poses, the highest classification. At December 31, 2007, LaSalle Bank,
N.A. was also classified as “well-capitalized” for regulatory purposes.
There have been no conditions or events since December 31, 2007 that
management believes have changed the Corporation’s, Bank of America,
N.A.’s, FIA Card Services, N.A.’s, and LaSalle Bank, N.A.’s capital classi-
fications.
Bank of America 2007
67
Table 12 Reconciliation of Tier 1 and Total Capital
(Dollars in millions)
Tier 1 Capital
Total shareholders’ equity
Goodwill
Nonqualifying intangible assets (1)
Effect of net unrealized (gains) losses on AFS debt and marketable equity securities and net
(gains) losses on derivatives recorded in accumulated OCI, net-of-tax
Unamortized net periodic benefit costs recorded in accumulated OCI, net-of-tax
Trust securities (2)
Other
Total Tier 1 Capital
Long-term debt qualifying as Tier 2 Capital
Allowance for loan and lease losses
Reserve for unfunded lending commitments
Other (3)
Total Capital
(1) Nonqualifying intangible assets of the Corporation are comprised of certain core deposit intangibles, affinity relationships and other intangibles.
(2) Trust securities are net of unamortized discounts.
(3)
Includes 45 percent, or $6.0 billion, of the pre-tax fair value adjustment related to the Corporation’s stock investment in CCB.
December 31
2007
2006
$146,803
(77,530)
(5,239)
$135,272
(65,662)
(3,782)
(2,149)
1,301
16,863
3,323
83,372
31,771
11,588
518
6,471
6,565
1,428
15,942
1,301
91,064
24,546
9,016
397
203
$133,720
$125,226
Certain corporate sponsored trust companies which issue trust pre-
ferred securities (Trust Securities) are deconsolidated under FIN 46R. As a
result, the Trust Securities are not included on our Consolidated Balance
Sheets. On March 1, 2005, the FRB issued Risk-Based Capital Standards:
Trust Preferred Securities and the Definition of Capital (the Final Rule)
which allows Trust Securities to continue to qualify as Tier 1 Capital with
revised quantitative limits that would be effective after a five-year tran-
sition period. As a result, we continue to include Trust Securities in Tier 1
Capital.
The Final Rule limits restricted core capital elements to 15 percent
for internationally active bank holding companies. In addition, the FRB
revised the qualitative standards for capital instruments included in regu-
latory capital. Internationally active bank holding companies are those with
than $250 billion or on-balance sheet
consolidated assets greater
exposure greater than $10 billion. At December 31, 2007, our restricted
core capital elements comprised 20.3 percent of total core capital ele-
ments. We expect to be fully compliant with the revised limits prior to the
implementation date of March 31, 2009.
Table 12 reconciles the Corporation’s total shareholders’ equity to
Tier 1 and Total Capital as defined by the regulations issued by the FRB,
the FDIC, and the OCC at December 31, 2007 and 2006.
At December 31, 2007, the Corporation’s Tier 1 Capital, Total Capi-
tal and Tier 1 Leverage ratios were 6.87 percent, 11.02 percent, and 5.04
percent, respectively. During 2007, the Corporation completed its acquis-
itions of U.S. Trust Corporation for $3.3 billion in cash and LaSalle
for $21.0 billion in cash. As a result of these acquisitions, the Corpo-
ration’s Tier 1 Capital, Total Capital, and Tier 1 Leverage ratios were
reduced by approximately 130 bps, 145 bps and 90 bps, respectively, at
December 31, 2007.
In January 2008, we issued 240 thousand shares of Bank of America
Corporation Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series
K with a par value of $0.01 per share for $6.0 billion. The fixed rate is
8.00 percent through January 29, 2018 and then adjusts to three-month
LIBOR plus 363 bps thereafter. In addition, we issued 6.9 million shares
of Bank of America Corporation 7.25% Non-Cumulative Perpetual Con-
vertible Preferred Stock, Series L with a par value of $0.01 per share for
68 Bank of America 2007
$6.9 billion. Based on December 31, 2007 balances, the Corporation’s
Tier 1 and Total Capital ratios are expected to increase by approximately
105 bps and its Tier 1 Leverage ratio is expected to increase by approx-
imately 75 bps as a result of these issuances. See Note 15 – Regulatory
Requirements and Restrictions to the Consolidated Financial Statements
for more information on the Corporation’s regulatory capital.
Basel II
In June 2004, the Basel II Accord was published with the intent of more
underlying
closely
risks. Similar to economic capital measures, Basel II seeks to address
credit risk, market risk and operational risk.
requirements with
regulatory
aligning
capital
While economic capital is measured to cover unexpected losses, the
Corporation also maintains a certain threshold in terms of regulatory capi-
tal to adhere to legal standards of capital adequacy. These thresholds or
leverage ratios will continue to be utilized for the foreseeable future.
On December 7, 2007, the U.S. regulatory agencies published the
final Basel II rules (Basel II Rules). The Basel II Rules establish require-
ments for the U.S. implementation and provide detailed capital require-
ments for credit and operational
risk under Pillar 1, supervisory
requirements under Pillar 2 and disclosure requirements under Pillar 3. We
are still awaiting final rules for market risk requirements under Basel II.
The Basel II Rules allow U.S. financial institutions to begin parallel
reporting as early as 2008. During the parallel period, the resulting capital
calculations under both the current (Basel I) rules and the Basel II Rules
should be reported to the financial institutions’ regulatory supervisors for
examination and compliance for at least four consecutive quarterly peri-
ods. Once the parallel period and subsequent three-year transition period
are successfully completed, the financial institution will utilize Basel II as
their means of capital adequacy assessment, measurement and reporting
and discontinue use of Basel I. We continue execution efforts to ensure
is to achieve full
preparedness with all Basel II requirements. The goal
compliance by the end of the three-year implementation period in 2011.
Further, internationally Basel II was implemented in several countries dur-
ing the second half of 2007, while others will begin implementation in
2008 and 2009.
Dividends
In 2007, the Corporation paid cash dividends of $10.7 billion on its
common stock. Effective for the third quarter 2007 dividend, the Board
increased the quarterly cash dividend 14 percent from $0.56 to $0.64 per
share. In October 2007, the Board declared a fourth quarter cash dividend
of $0.64 which was paid on December 28, 2007 to common shareholders
of record on December 7, 2007. In January 2008, the Board authorized a
quarterly cash dividend of $0.64 per common share payable on March 28,
2008 to shareholders of record on March 7, 2008.
In 2007, the Corporation paid a total of $182 million in cash divi-
dends on its various series of preferred stock. In January 2008, we also
declared five dividends in regards to preferred stock. The first was a $1.75
regular quarterly cash dividend on the 7 percent Cumulative Redeemable
Preferred Stock, Series B, payable April 25, 2008 to shareholders of
record on April 11, 2008. The second was a regular quarterly cash divi-
dend of $0.38775 per depositary share on the 6.204% Non-Cumulative
Preferred Stock, Series D, payable March 14, 2008 to shareholders of
record on February 29, 2008. The third was a regular quarterly cash divi-
dend of $0.33342 per depositary share on the Floating Rate
Non-Cumulative Preferred Stock, Series E, payable on February 15, 2008
to shareholders of record on January 31, 2008. The fourth was a regular
quarterly cash dividend of $0.41406 per depositary share on the 6.625%
Non-Cumulative Preferred Stock, Series I, payable April 1, 2008 to share-
holders of record on March 15, 2008. The fifth was the initial cash divi-
dend of $0.35750 per depositary share on the 7.25% Non-Cumulative
Preferred Stock, Series J, payable on February 1, 2008 to shareholders of
record on January 15, 2008.
Common Share Repurchases
We expect to continue to repurchase shares, from time to time, in the
open market or in private transactions through our approved repurchase
programs. We repurchased approximately 73.7 million shares of common
stock in 2007 which more than offset the 53.5 million shares issued
under employee stock plans.
In January 2007, 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 to be completed within a period
of 12 to 18 months of which the lesser of approximately $13.5 billion, or
189.4 million shares, remains available for repurchase under the program
at December 31, 2007.
Preferred Stock
In January 2008, we issued 240 thousand shares of Bank of America
Corporation Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series
K with a par value of $0.01 per share for $6.0 billion. The fixed rate is
8.00 percent through January 29, 2018 and then adjusts to three-month
LIBOR plus 363 bps thereafter. In addition, we issued 6.9 million shares
of Bank of America Corporation 7.25% Non-Cumulative Perpetual Con-
vertible Preferred Stock, Series L with a par value of $0.01 per share for
$6.9 billion.
In November and December 2007, the Corporation issued 41 thousand
shares of Bank of America Corporation 7.25% Non-Cumulative Preferred
Stock, Series J, with a par value of $0.01 per share for $1.0 billion.
In September 2007, the Corporation issued 22 thousand shares of
Bank of America Corporation 6.625% Non-Cumulative Preferred Stock,
Series I, with a par value of $0.01 per share for $550 million.
For additional
information on the issuance and redemption of pre-
ferred stock, see Note 14 – Shareholders’ Equity and Earnings per Com-
mon Share to the Consolidated Financial Statements.
Credit Risk Management
Credit risk is the risk of loss arising from the inability of a borrower or
counterparty to meet its obligations. Credit risk can also arise from opera-
tional failures that result in an erroneous advance, commitment or invest-
ment of funds. We define the credit exposure to a borrower or counterparty
as the loss potential arising from all product classifications including loans
trading account assets, assets held-for-sale,
and leases, derivatives,
deposit overdrafts and unfunded lending commitments that include loan
commitments, letters of credit and financial guarantees. Derivative posi-
tions, trading account assets and assets held-for-sale are recorded at fair
value, or the lower of cost or fair value. Loans and unfunded commit-
ments, which the Corporation elected to account for at fair value in
accordance with SFAS 159, are also recorded at fair value. Credit risk for
these categories of assets is not accounted for as part of the allowance
for credit losses but as part of the fair value adjustment recorded in earn-
ings in the period incurred. For derivative positions, our credit risk is
measured as the net replacement cost in the event the counterparties with
contracts in a gain position to us fail to perform under the terms of those
contracts. We use the current mark-to-market value to represent credit
exposure without giving consideration to future mark-to-market changes.
The credit risk amounts take into consideration the effects of legally
enforceable master netting agreements and cash collateral. Our consumer
and commercial credit extension and review procedures take into account
funded and unfunded credit exposures. For additional
information on
derivatives and credit extension commitments, see Note 4 – Derivatives
and Note 13 – Commitments and Contingencies to the Consolidated
Financial Statements.
For credit risk purposes, we evaluate our consumer businesses on
both a held and managed basis. 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. We evaluate credit performance on a managed basis
as the receivables that have been securitized are subject to the same
underwriting standards and ongoing monitoring as held loans. In addition
to the discussion of credit quality statistics of both held and managed
loans included in this section, refer to the Card Services discussion begin-
ning on page 47. For additional information on our managed portfolio and
securitizations, see Note 8 – Securitizations to the Consolidated Financial
Statements.
We manage credit risk based on the risk profile of the borrower or
counterparty, repayment sources, the nature of underlying collateral, and
other support given current events, conditions and expectations. We
classify our portfolios as either consumer or commercial and monitor
credit risk in each as discussed below.
The financial market conditions that existed in the second half of
2007 have continued to affect the economy and the financial services
sector in 2008. It remains unclear what impact the housing downturn,
declines in real estate values and the overall economic slowdown will
ultimately have and how long these conditions will exist. We expect that
certain industry sectors, in particular those that are dependent on the
housing sector, and certain geographic regions, will experience further
stress. Continued deterioration of the housing market, including reces-
sionary conditions, will negatively impact the credit quality of our consumer
portfolio as well as the credit quality of the consumer dependent sectors
of our commercial portfolio and will result in a higher provision for credit
losses in future periods. The degree of the impact will be dependent upon
the duration and severity of the housing downturn. As part of our credit
risk management culture, we continually evaluate our credit standards and
adjust them to be consistent with changes in the environment. For exam-
Bank of America 2007
69
ple, we have adjusted our underwriting criteria, as well as enhanced our
line management and collection strategies across the consumer busi-
nesses. In the commercial businesses, we have increased the frequency
of portfolio monitoring and are aggressively managing exposure when we
begin to see signs of deterioration.
Consumer Portfolio Credit Risk Management
Credit risk management for the consumer portfolio begins with initial under-
writing and continues throughout a borrower’s credit cycle. Statistical
techniques in conjunction with experiential
judgment are used in all
aspects of portfolio management including underwriting, product pricing,
risk appetite, setting credit limits, operating processes and metrics to
quantify and balance risks and returns. In addition, credit decisions are
statistically based with tolerances set to decrease the percentage of
approvals as the risk profile increases. Statistical models are built using
information from external sources such as credit
detailed behavioral
bureaus and/or internal historical experience. These models are a critical
component of our consumer credit risk management process and are used
in the determination of both new and existing credit decisions, portfolio
management strategies including authorizations and line management,
collection practices and strategies, determination of the allowance for
credit losses, and economic capital allocations for credit risk.
For information on our accounting policies regarding delinquencies,
nonperforming status and charge-offs for the consumer portfolio, see Note
1 – Summary of Significant Accounting Principles to the Consolidated
Financial Statements.
Management of Consumer Credit Risk
Concentrations
Consumer credit risk is evaluated and managed with a goal that credit
concentrations do not result in undesirable levels of risk. We review,
measure and manage credit exposure in numerous ways such as by prod-
uct and geography in order to achieve the desired mix. Additionally, to
enhance our overall risk management strategy credit protection is pur-
chased on certain portions of our portfolio.
Our consumer loan portfolio in the states of California, Florida, New
York and Texas represented in aggregate 43 percent and 42 percent of
total managed consumer loans at December 31, 2007 and 2006. Our
consumer loan portfolio in the state of California represented approx-
imately 24 percent and 23 percent of total managed consumer loans at
December 31, 2007 and 2006, primarily driven by the consumer real
estate portfolio. Our consumer loan portfolio in the state of Florida is our
second largest concentration and represented approximately eight percent
of total managed consumer loans at both December 31, 2007 and 2006,
primarily driven by the consumer real estate portfolio. New York and Texas
represented six percent and five percent of total managed consumer loans
at both December 31, 2007 and 2006. No state other than California, and
no single Metropolitan Statistical Area (MSA) within California represented
more than 10 percent of the total managed consumer portfolio. No other
single state represented over five percent of total managed consumer
loans.
We have mitigated a portion of our credit risk in our residential mort-
gage loan portfolio by using synthetic securitizations. These agreements
are cash collateralized and will reimburse us in the event that losses
exceed established loss levels. As of December 31, 2007 and 2006,
approximately $140.0 billion and $130.0 billion of mortgage loans were
protected by these agreements. In addition, we have entered into credit
protection agreements with government-sponsored agencies on approx-
imately $33.0 billion and $5.0 billion as of December 31, 2007 and
2006, providing full protection on conforming residential mortgage loans
that become severely delinquent. Our regulatory risk-weighted assets were
reduced as a result of these transactions because we transferred a por-
tion of our credit risk to unaffiliated parties. At December 31, 2007 and
2006, these transactions had the cumulative effect of reducing our risk-
weighted assets by $49.0 billion and $36.4 billion, and resulted in
increases of 27 bps and 30 bps in our Tier 1 Capital
ratio at
December 31, 2007 and 2006.
70 Bank of America 2007
Table 13 Consumer Loans and Leases
(Dollars in millions)
Held basis
Residential mortgage
Credit card – domestic
Credit card – foreign
Home equity (5)
Direct/Indirect consumer (5, 6)
Other consumer (5, 7)
Total held
Securitization impact
December 31
Year Ended December 31
Outstandings
Nonperforming (1, 2)
Accruing Past
Due 90 Days
or More (3)
Net Charge-
offs/Losses
Net Charge-off/
Loss Ratios (4)
2007
2006
2007
2006
2007
2006
2007
2006
2007
2006
$274,949
65,774
14,950
114,834
76,844
3,850
551,201
108,646
$241,181
61,195
10,999
87,893
59,378
5,059
465,705
110,151
$1,999
n/a
n/a
1,340
8
95
3,442
2
$ 660
n/a
n/a
291
2
77
1,030
2
$ 237
1,855
272
–
745
4
3,113
2,764
$ 118
1,991
184
–
378
7
2,678
2,407
$
57
3,063
378
274
1,373
278
5,423
5,003
$
39
3,094
225
51
610
217
4,236
3,371
0.02% 0.02%
5.29
3.06
0.28
1.95
6.54
4.85
2.46
0.07
1.14
2.97
1.07
4.54
1.69
1.01
3.22
1.45
Total consumer loans and leases – managed
$659,847
$575,856
$3,444
$1,032
$5,877
$5,085
$10,426
$7,607
Managed basis
Residential mortgage
Credit card – domestic
Credit card – foreign
Home equity (5)
Direct/Indirect consumer (5, 6)
Other consumer (5, 7)
$278,733
151,862
31,829
115,009
78,564
3,850
$245,840
142,599
27,890
88,202
66,266
5,059
$1,999
n/a
n/a
1,342
8
95
$ 660
n/a
n/a
293
2
77
$ 237
4,170
714
–
752
4
$ 118
3,828
608
–
524
7
$
57
6,960
1,254
274
1,603
278
$
39
5,395
980
51
925
217
0.02% 0.02%
4.91
4.24
0.28
2.14
6.54
3.89
3.95
0.07
1.49
2.97
Total consumer loans and leases – managed
$659,847
$575,856
$3,444
$1,032
$5,877
$5,085
$10,426
$7,607
1.69
1.45
(1) The definition of nonperforming does not include consumer credit card and consumer non-real estate loans and leases. These loans are charged-off no later than the end of the month in which the account becomes 180 days
past due.
(2) Nonperforming consumer loans and leases as a percentage of outstanding consumer loans and leases were 0.62 percent and 0.22 percent on a held basis, and 0.52 percent and 0.18 percent on a managed basis at
December 31, 2007 and 2006.
(3) Accruing consumer loans and leases past due 90 days or more as a percentage of outstanding consumer loans and leases were 0.57 percent and 0.58 percent on a held basis, and 0.89 percent and 0.88 percent on a
managed basis at December 31, 2007 and 2006.
(4) Net charge-off/loss ratios are calculated as held net charge-offs or managed net losses divided by average outstanding held or managed loans and leases during the year for each loan and lease category.
(5) Home equity loan balances previously included in direct/indirect consumer and other consumer were reclassified to home equity to conform to current year presentation. Additionally, certain foreign consumer balances were
reclassified from other consumer to direct/indirect consumer to conform to current year presentation.
(6) Outstandings include foreign consumer loans of $3.4 billion and $3.9 billion at December 31, 2007 and 2006.
(7) Outstandings include foreign consumer loans of $829 million and $2.3 billion and consumer finance loans of $3.0 billion and $2.8 billion at December 31, 2007 and 2006.
n/a = not applicable
Consumer Credit Portfolio
Table 13 presents our held and managed consumer loans and leases, and
related credit quality information for 2007 and 2006. Overall, consumer
credit quality indicators deteriorated from the favorable levels experienced
in 2006. Weakness in the housing markets resulted in rising credit risk,
most notably in home equity.
Residential Mortgage
The residential mortgage portfolio makes up the largest percentage of our
consumer loan portfolio at 50 percent of held consumer loans and leases
and 42 percent of managed consumer loans and leases at December 31,
2007. Approximately 24 percent of the managed residential portfolio is in
GCSBB and GWIM and represents residential mortgages that are origi-
nated for the home purchase and refinancing needs of our customers. The
remaining portion of the managed portfolio is mostly in All Other, and is
comprised of purchased and originated residential mortgage loans used in
our overall ALM activities.
Residential mortgage loans to borrowers in the state of California
represented 34 percent and 33 percent of total residential mortgage loans
at December 31, 2007 and 2006. The Los Angeles-Long Beach-Santa Ana
MSA within California represented 11 percent of the total residential mort-
gage portfolio at both 2007 and 2006. In addition, residential mortgage
loans to borrowers in the state of Florida represented six percent and
seven percent of the total residential mortgage portfolio at December 31,
2007 and 2006. No single MSA within Florida represented more than 10
percent of the residential mortgage portfolio at December 31, 2007 and
2006. A portion of our credit risk on 68 percent and 56 percent of our
residential mortgage loans in California and Florida was mitigated through
the purchase of credit protection. See Management of Consumer Credit
Risk Concentrations beginning on page 70 for more information.
On a held basis, outstanding loans and leases increased $33.8 bil-
lion at December 31, 2007 compared to 2006 driven by retained mort-
gage production and the acquisition of LaSalle. Nonperforming balances
increased $1.3 billion due to portfolio seasoning reflective of growth in the
business and the impact of the weak housing market. At December 31,
2007 and 2006, loans past due 90 days or more and still accruing inter-
est of $237 million and $118 million were related to repurchases pur-
suant to our servicing agreements with Government National Mortgage
Association (GNMA) mortgage pools where repayments are insured by the
Federal Housing Administration or guaranteed by the Department of Veter-
ans Affairs.
Due to current market conditions, members of the mortgage servicing
industry are evaluating a number of programs for identifying subprime
residential mortgage loan borrowers who are at risk of default and offering
loss mitigation strategies,
including repayment plans and loan mod-
ifications, to such borrowers. Generally these programs require that the
borrower and subprime residential mortgage loan meet certain criteria in
order to qualify for a modification. The SEC’s Office of the Chief Account-
ant (OCA) noted that if certain loan modification requirements are met, the
OCA will not object to continued status of the transferee as a QSPE under
SFAS 140. We do not currently originate or service significant subprime
residential mortgage loans, nor do we hold a significant amount of benefi-
cial
interests in QSPE securitizations of subprime residential mortgage
loans. We do not expect that the implementation of these programs
will have a significant impact on our financial condition and results of
operations.
Bank of America 2007
71
Credit Card – Domestic
The consumer domestic credit card portfolio is managed in Card Services.
Outstandings in the held domestic credit card loan portfolio increased
$4.6 billion in 2007 compared to 2006 due to organic growth in the portfo-
lio partially offset by an increase in securitized levels. The $136 million
decrease in held domestic loans past due 90 days or more and still accru-
ing interest was driven by the addition of higher loss profile accounts to
the securitization trust and an increased level of securitizations partially
offset by portfolio seasoning.
Net charge-offs for the held domestic portfolio decreased $31 million
to $3.1 billion, or 5.29 percent of total average held credit card – domes-
tic loans compared to 4.85 percent (5.00 percent excluding the impact of
SOP 03-3) in 2006. Net charge-offs decreased primarily due to the addi-
tion of higher loss profile accounts to the securitization trust and an
increased level of securitizations as well as the absence of 2006 charge-
offs related to changes made in credit card minimum payment require-
ments. These decreases were partially offset by portfolio seasoning and
increases from the unusually low charge-off levels experienced in 2006
post bankruptcy reform.
Managed domestic credit card outstandings increased $9.3 billion to
$151.9 billion in 2007 compared to 2006 due to an increase in retail and
cash volumes and lower payment rates. Managed net losses increased
$1.6 billion to $7.0 billion, or 4.91 percent of total average managed
domestic loans compared to 3.89 percent (3.96 percent excluding the
impact of SOP 03-3) in 2006. The increases were primarily due to portfolio
seasoning and increases from the unusually low loss levels experienced in
2006 post bankruptcy reform.
See page 73 for a discussion of the impact of SOP 03-3 on managed
losses and net charge-offs.
Credit Card – Foreign
The consumer foreign credit card portfolio is managed in Card Services.
Outstandings in the held foreign credit card loan portfolio increased $4.0
billion to $15.0 billion in 2007 compared to 2006 due to the strengthen-
ing of foreign currencies against the U.S. dollar, organic growth and portfo-
lio acquisitions. Net charge-offs for the held foreign portfolio increased
$153 million to $378 million, or 3.06 percent of total average held credit
card – foreign loans compared to 2.46 percent (3.05 percent excluding the
impact of SOP 03-3) in 2006. The increases in held net charge-offs were
due to seasoning of the European portfolio and strengthening of foreign
currencies against the U.S. dollar.
Managed foreign credit card outstandings increased $3.9 billion to
$31.8 billion in 2007 compared to 2006 due to the same reasons as the
increase in held outstandings stated above. Net losses for the managed
foreign portfolio increased $274 million to $1.3 billion, or 4.24 percent of
total average managed credit card – foreign loans compared to 3.95 per-
in 2006. The
cent (4.17 percent excluding the impact of SOP 03-3)
increases in managed net losses were due to the same reasons as the
increases in held net charge-offs stated above.
See page 73 for a discussion of the impact of SOP 03-3 on managed
losses and net charge-offs.
Home Equity
At December 31, 2007, approximately 74 percent of the managed home
equity portfolio was included in GCSBB, while the remainder of the portfo-
lio was mostly in GWIM. This portfolio consists of both revolving and
non-revolving first and second lien residential mortgage loans and lines of
credit. On a held basis, outstanding home equity loans increased $26.9
billion, or 31 percent, at December 31, 2007 compared to 2006, largely
due to organic home equity production and the LaSalle acquisition.
72 Bank of America 2007
Nonperforming home equity loans increased $1.0 billion and net
charge-offs increased $223 million to $274 million or 0.28 percent of total
average held home equity loans compared to 0.07 percent in 2006. These
increases were driven by deterioration in the housing markets, including
significant declines in home prices in certain geographic areas, as well as
the seasoning of the portfolio reflective of growth. Although it remains
unclear how long the recent and accelerated declines in the consumer
housing markets will continue,
this recent deterioration will negatively
impact our home equity portfolio and will result in a higher provision for
credit losses.
Direct/Indirect Consumer
At December 31, 2007, approximately 50 percent of the managed direct/
indirect portfolio was included in Business Lending (automotive, marine,
motorcycle and recreational vehicle loans); 44 percent was included in
GCSBB (student and other non-real estate secured and unsecured
personal loans) and the remainder was included in GWIM (other non-real
estate secured and unsecured personal loans).
On a held basis, outstanding loans and leases increased $17.5 bil-
lion in 2007 compared to 2006 due to growth in the Card Services
retail automotive portfolio purchases and
unsecured lending product,
reduced securitization activity. Loans past due 90 days or more and still
accruing interest
increased $367 million due to portfolio seasoning
reflective of growth in the businesses and reduced securitization activity.
Net charge-offs increased $763 million to $1.4 billion, or 1.95 percent of
total average held direct/indirect loans compared to 1.14 percent (1.36
percent excluding the impact of SOP 03-3) in 2006. The increases were
primarily driven by growth, seasoning and increases from the unusually low
charge-off levels experienced in 2006 post bankruptcy reform in the Card
Services unsecured lending portfolio, growth, seasoning and deterioration
in the retail automotive and other dealer-related portfolios and the impact
of the Corporation discontinuing sales of receivables into the unsecured
lending trust.
Managed direct/indirect loans outstanding increased $12.3 billion to
$78.6 billion in 2007 compared to 2006, driven by growth in the Card
Services unsecured lending product and retail automotive portfolio pur-
chases. Net losses for the managed loan portfolio increased $678 million
to $1.6 billion, or 2.14 percent of total average managed direct/indirect
loans compared to 1.49 percent (1.69 percent excluding the impact of
SOP 03-3) in 2006. The increases were primarily driven by growth, season-
ing and increases from the unusually low loss levels experienced in 2006
post bankruptcy reform in the Card Services unsecured lending portfolio
and higher losses in the retail automotive and other dealer-related portfo-
lios due to growth, seasoning and deterioration.
See page 73 for a discussion of the impact of SOP 03-3 on managed
losses and net charge-offs.
Other Consumer
At December 31, 2007, approximately 78 percent of the other consumer
portfolio was primarily associated with the portfolios from certain
consumer finance businesses that we have previously exited and was
included in All Other. The remainder consisted of the foreign consumer
loan portfolio which was mostly included in Card Services. Other consumer
outstanding loans and leases decreased $1.2 billion, or 24 percent, at
December 31, 2007 compared to December 31, 2006, driven mainly by
the sale of our Latin American operations. The Corporation classifies
deposit overdraft charge-offs as other consumer. Net charge-offs increased
$61 million, or 357 bps, compared to 2006 driven by overdraft net charge-
offs associated with deposit account growth.
SOP 03-3
SOP 03-3 addresses accounting for differences between contractual cash
flows and cash flows expected to be collected from an investor’s initial
investment in loans acquired in a transfer if those differences are attribut-
able, at least in part, to credit quality. SOP 03-3 requires that impaired
loans be recorded at fair value and prohibits “carrying over” or the creation
of valuation allowances in the initial accounting of loans acquired in a
transfer that are within the scope of this SOP (categories of loans for
which it is probable, at the time of acquisition, that all amounts due
according to the contractual terms of the loan agreement will not be
collected). The prohibition of the valuation allowance carryover applies to
the purchase of an individual loan, a pool of loans, a group of loans, and
loans acquired in a purchase business combination.
In accordance with SOP 03-3, certain acquired loans of LaSalle in
2007 and MBNA in 2006 that were considered impaired were written
down to fair value at the acquisition date. Therefore, reported net charge-
offs and managed net losses were lower since these impaired loans that
would have been charged off during the period were reduced to fair value
as of the acquisition date. SOP 03-3 does not apply to the acquired loans
that have been securitized as they are not held on the Corporation’s Bal-
ance Sheet.
Consumer net charge-offs, managed net
losses, and associated
ratios excluding the impact of SOP 03-3 for 2007 and 2006 are presented
in Table 14. Management believes that excluding the impact of SOP 03-3
provides a more accurate reflection of portfolio credit quality.
Table 14 Consumer Net Charge-offs/Managed Net Losses (Excluding the Impact of SOP 03-3) (1, 2, 3, 4)
(Dollars in millions)
Residential mortgage
Credit card – domestic
Credit card – foreign
Home equity
Direct/Indirect consumer
Other consumer
Total consumer
Held
Managed
Net Charge-offs
Ratio
Net Losses
Ratio
2007
$
59
3,063
378
282
1,375
278
$
2006
39
3,193
278
51
729
217
2007
2006
0.02 % 0.02 % $
5.29
3.06
0.29
1.96
6.54
5.00
3.05
0.07
1.36
2.97
2007
59
6,960
1,254
282
1,605
278
$
2006
39
5,494
1,033
51
1,044
217
2007
2006
0.02 % 0.02 %
4.91
4.24
0.29
2.14
6.54
3.96
4.17
0.07
1.69
2.97
$5,435
$4,507
1.07
1.07
$10,438
$7,878
1.69
1.50
(1) Excluding the impact of SOP 03-3 is a non-GAAP financial measure. The impact of SOP 03-3 on average outstanding held and managed consumer loans and leases in 2007 and 2006 was not material.
(2) Net charge-off/loss ratios are calculated as held net charge-offs or managed net losses divided by average outstanding held or managed loans and leases during the year for each loan and lease category.
(3) Historical ratios have been adjusted for home equity, direct/indirect consumer and other consumer due to the reclassification of home equity loan balances from direct/indirect consumer to home equity, and certain foreign
(4)
consumer loans from other consumer to direct/indirect consumer.
Including the impact of SOP 03-3 would decrease net charge-offs on residential mortgage $2 million, home equity $8 million, direct/indirect consumer $2 million in 2007. Including the impact of SOP 03-3 would decrease net
charge-offs on credit card – domestic $99 million, credit card – foreign $53 million and direct/indirect consumer $119 million in 2006.
Bank of America 2007
73
Table 15 Nonperforming Consumer Assets Activity (1)
(Dollars in millions)
Nonperforming loans and leases
Balance, January 1
Additions to nonperforming loans and leases:
LaSalle balance, October 1, 2007
New nonaccrual loans and leases
Reductions in nonperforming loans and leases:
Paydowns and payoffs
Sales
Returns to performing status (2)
Charge-offs (3)
Transfers to foreclosed properties
Transfers to loans held-for-sale
Total net additions to nonperforming loans and leases
Total nonperforming loans and leases, December 31
Foreclosed properties
Balance, January 1
Additions to foreclosed properties:
LaSalle balance, October 1, 2007
New foreclosed properties
Reductions in foreclosed properties:
Sales
Writedowns
Total net additions to (reductions in) foreclosed properties
Total foreclosed properties, December 31
Nonperforming consumer assets, December 31
Nonperforming consumer loans and leases as a percentage of outstanding consumer loans and leases
Nonperforming consumer assets as a percentage of outstanding consumer loans, leases and foreclosed properties
2007
2006
$1,030
$ 785
232
3,829
(260)
–
(855)
(374)
(152)
(8)
2,412
3,442
59
70
468
(82)
(239)
217
276
–
1,432
(157)
(117)
(698)
(150)
(65)
–
245
1,030
61
–
159
(76)
(85)
(2)
59
$3,718
$1,089
0.62%
0.67
0.22%
0.23
(1) Balances do not include nonperforming loans held-for-sale included in other assets of $95 million and $30 million in 2007 and 2006.
(2) Consumer loans and leases may be restored to performing status when all principal and interest is current and full repayment of the remaining contractual principal and interest is expected, or when the loan otherwise
becomes well-secured and is in the process of collection.
(3) Our policy is not to classify consumer credit card and consumer non-real estate loans and leases as nonperforming; therefore, the charge-offs on these loans have no impact on nonperforming activity.
Nonperforming Consumer Assets Activity
Table 15 presents the additions and reductions to nonperforming assets
in the held consumer portfolio during 2007 and 2006. Net additions to
nonperforming loans and leases in 2007 were $2.4 billion compared to
$245 million in 2006. The increase in 2007 was driven by seasoning of
the home equity and residential mortgage portfolios reflective of growth in
these businesses and the weakening housing market. The nonperforming
consumer loans and leases ratio increased 40 bps compared to 2006
driven by increases in the home equity and residential mortgage portfolios,
especially in geographic regions most impacted by home price declines
and in part due to our Community Reinvestment Act portfolio. These fac-
tors also drove the increase in foreclosed properties of $217 million and
home price declines drove higher writedowns.
for
risk management
Commercial Portfolio Credit Risk Management
Credit
the commercial portfolio begins with an
assessment of the credit risk profile of the borrower or counterparty based
on an analysis of their financial position. As part of the overall credit risk
assessment of a borrower or counterparty, most of our commercial credit
exposure or transactions are assigned a risk rating and are subject to
approval based on defined credit approval standards. Subsequent to loan
origination, risk ratings are monitored on an ongoing basis. If necessary,
risk ratings are adjusted to reflect changes in the financial condition, cash
flow or financial situation of a borrower or counterparty. We use risk rating
aggregations to measure and evaluate concentrations within portfolios.
Risk ratings are a factor in determining the level of assigned economic
capital and the allowance for credit losses. In making credit decisions, we
consider risk rating, collateral, country, industry and single name concen-
tration limits while also balancing the total borrower or counterparty rela-
tionship. Our lines of business and risk management personnel use a
variety of tools to continuously monitor the ability of a borrower or counter-
party to perform under its obligations.
For information on our accounting policies regarding delinquencies,
nonperforming status and charge-offs for the commercial portfolio, see
Note 1 – Summary of Significant Accounting Principles to the Consolidated
Financial Statements.
Management of Commercial Credit Risk
Concentrations
Portfolio credit risk is evaluated and managed with a goal that concen-
trations of credit exposure do not result in undesirable levels of risk. We
review, measure, and manage concentrations of credit exposure by
industry, product, geography and customer relationship. Distribution of
loans and leases by loan size is an additional measure of the portfolio risk
diversification. We also review, measure, and manage commercial real
estate loans by geographic location and property type. In addition, within
our international portfolio, we evaluate borrowings by region and by coun-
try. Tables 19, 21, 24 and 25 summarize our concentrations. Additionally,
we utilize syndication of exposure to third parties, loan sales, hedging and
other risk mitigation techniques to manage the size and risk profile of the
loan portfolio.
74 Bank of America 2007
After the initial application of SFAS 159, any fair value adjustment
upon origination and subsequent changes in the fair value of loans and
unfunded commitments is recorded in other income. By including the
credit risk of the borrower in the fair value adjustments, any credit deterio-
ration or improvement is recorded immediately as part of the fair value
adjustment. As a result, the allowance for loan and lease losses and the
reserve for unfunded lending commitments are no longer used to capture
credit
in these nonperforming or impaired loans and
unfunded commitments. The remaining Commercial Credit Portfolio tables
have been modified to exclude loans and unfunded commitments that are
carried at fair value and to adjust certain ratios for this accounting change.
See Note 19 – Fair Value Disclosures to the Consolidated Financial
Statements for additional information on the adoption of SFAS 159.
losses inherent
At December 31, 2007, outstanding commercial loans measured at
fair value had an aggregate fair value of $4.59 billion recorded in loans
and leases and included commercial – domestic loans of $3.50 billion,
commercial – foreign loans of $790 million and commercial real estate
loans of $304 million. The Corporation recorded net losses of $139 mil-
lion in other income resulting from changes in the fair value of the loan
portfolio during 2007.
In addition, unfunded lending commitments and letters of credit had
an aggregate fair value of $660 million and were recorded in accrued
expenses and other liabilities. The December 31, 2007 aggregate notional
amount of unfunded lending commitments and letters of credit subject to
fair value treatment was $20.9 billion. Net losses resulting from changes
in fair value of commitments and letters of credit of $274 million were
recorded in other income during 2007.
Commercial Credit Portfolio
Commercial credit quality indicators deteriorated from favorable levels
experienced in 2006, in part attributable to the weakness in the housing
and financial markets. The loans and leases net charge-off ratio increased
to 0.40 percent from 0.13 percent a year ago. The increase was princi-
pally attributable to seasoning and deterioration in our small business
portfolio in GCSBB as well as a lower level of commercial recoveries in
GCIB and GWIM. Excluding small business commercial – domestic the
total commercial net charge-off ratio was 0.08 percent compared to a net
recovery ratio of 0.03 percent in 2006, primarily due to a lower level of
recoveries in 2007. The nonperforming loan and commercial utilized criti-
cized exposure ratios were 0.67 percent and 4.17 percent at
December 31, 2007 compared to 0.31 percent and 2.20 percent at
December 31, 2006, mostly related to the addition of LaSalle and
exposure to the homebuilder and mortgage lender sectors.
From the perspective of portfolio risk management, customer concen-
tration management is most relevant in GCIB. Within that segment’s Busi-
ness Lending and CMAS businesses, we facilitate bridge financing (high
grade debt, high yield debt, CMBS and equity) to fund acquisitions, recapi-
talizations and other short-term needs as well as provide syndicated
financing for our clients. These concentrations are managed in part
through our established “originate to distribute” strategy. These client
transactions are sometimes large and leveraged. They can also have a
higher degree of risk as we are providing offers or commitments for vari-
ous components of the clients’ capital structures, including lower rated
unsecured and subordinated debt tranches and/or equity. In many cases,
these offers to finance will not be accepted. If accepted, these conditional
commitments are often retired prior to or shortly following funding via the
placement of securities, syndication or the client’s decision to terminate.
Where we have a binding commitment and there is a market disruption or
other unexpected event, there may be heightened exposure in the portfo-
lios and forward calendar, and a higher potential for writedown or loss
unless the terms of the commitment can be modified and/or an orderly
disposition of the exposure can be made.
The Corporation’s share of the leveraged finance and CMBS forward
calendars were $12.2 billion and $2.0 billion,
respectively, at
December 31, 2007. Funded leveraged finance and CMBS exposure
included in assets held-for-sale totaled $6.1 billion and $13.7 billion at
December 31, 2007. The funded CMBS exposure includes amounts
assumed with the acquisition of LaSalle. The funded CMBS debt consisted
of $6.9 billion of floating-rate acquisition related financings to major, well
known operating companies. In addition, of the CMBS forward calendar,
$1.1 billion were floating-rate acquisition related financings. Writedowns
were taken on both funded and forward calendar commitments to reflect
the current market prices, if available, or the estimated price at which the
exposures could be distributed in the market. In the first quarter of 2008
the leveraged finance markets began to experience disruptions similar to
those experienced in the second half of 2007 and it is unclear what
impact these conditions will have on our results.
Prior to January 1, 2007, the Corporation accounted for all loans in
the held-to-maturity portfolio on a historical cost basis and incurred losses
on this portfolio were charged against the allowance for loan and lease
losses. Effective January 1, 2007, the Corporation elected to account for
certain large corporate loans and loan commitments (including issued but
unfunded letters of credit which are considered utilized for credit risk
management purposes), which exceed the Corporation’s single name
credit risk concentration guidelines at fair value in accordance with SFAS
159.
The Corporation initially adopted the fair value option for $4.0 billion
of outstanding commercial
loans as of January 1, 2007 and recorded
pre-tax net losses of $21 million (net of adjustments related to the allow-
ance for loan and lease losses and direct loan origination fees and costs)
representing the excess of carrying value over fair value of the funded
loans, with the after-tax amount recorded in retained earnings. The Corpo-
ration also initially adopted the fair value option for $21.1 billion of
unfunded commercial commitments, including letters of credit, as of Jan-
uary 1, 2007, and recorded pre-tax net losses of $321 million (net of
associated adjustments related to the reserve for unfunded lending com-
mitments) representing the difference between the carrying value and the
fair value of the unfunded lending commitments, with the after-tax amount
recorded in retained earnings.
Bank of America 2007
75
Table 16 presents our commercial loans and leases and related credit quality information for 2007 and 2006.
Table 16 Commercial Loans and Leases
(Dollars in millions)
Commercial loans and leases
Commercial – domestic (5)
Commercial real estate (6)
Commercial lease financing
Commercial – foreign
Small business commercial – domestic (7)
Total measured at historical cost
Total measured at fair value (8)
Total commercial loans and
leases
December 31
Year Ended December 31
Outstandings
Nonperforming (1)
Accruing Past
Due 90 Days or
More (2)
Net Charge-offs (3)
Net Charge-off
Ratios (4)
2007
2006
2007
2006
2007
2006
2007
2006
2007
2006
$190,541
61,298
22,582
28,376
302,797
17,756
320,553
4,590
$148,255
36,258
21,864
20,681
227,058
13,727
240,785
n/a
$ 869
1,099
33
19
2,020
135
2,155
–
$505
118
42
13
678
79
757
n/a
$119
36
25
16
196
427
623
–
$ 66
78
26
9
179
199
378
n/a
$ 138
47
2
1
188
869
1,057
n/a
$ (25)
3
(28)
(8)
(58)
361
303
n/a
0.09%
0.11
0.01
–
0.08
5.57
0.40
n/a
(0.02)%
0.01
(0.14)
(0.04)
(0.03)
3.00
0.13
n/a
$325,143
$240,785
$2,155
$757
$623
$378
$1,057
$303
0.40
0.13
(1) Nonperforming commercial loans and leases as a percentage of outstanding commercial loans and leases measured at historical cost were 0.67 percent and 0.31 percent at December 31, 2007 and 2006. Including
commercial loans and leases measured at fair value the ratio would have been 0.66 percent at December 31, 2007.
(2) Accruing commercial loans and leases past due 90 days or more as a percentage of outstanding commercial loans and leases measured at historical cost were 0.19 percent and 0.16 percent at December 31, 2007 and
(3)
2006. Including commercial loans and leases measured at fair value the ratio would have remained unchanged at December 31, 2007.
Includes a reduction in net charge-offs on commercial – domestic of $34 million, commercial – real estate of $27 million and commercial lease financing of $2 million as a result of the impact of SOP 03-3 for 2007. Includes a
reduction to small business commercial – domestic of $17 million as a result of the impact of SOP 03-3 for 2006. The impact of SOP 03-3 on average outstanding loans and leases was not material.
(4) Net charge-off ratios are calculated as net charge-offs divided by average outstanding loans and leases measured at historical cost during the year for each loan and lease category.
(5) Excludes small business commercial – domestic loans.
(6) Outstandings include domestic commercial real estate loans of $60.2 billion and $35.7 billion, and foreign commercial real estate loans of $1.1 billion and $578 million at December 31, 2007 and 2006.
(7) Small business commercial – domestic is primarily card related.
(8) Certain commercial loans are measured at fair value in accordance with SFAS 159 and include commercial – domestic loans of $3.5 billion, commercial – foreign loans of $790 million and commercial real estate loans of
$304 million at December 31, 2007.
n/a = not applicable
Table 17 presents commercial credit exposure by type for utilized,
unfunded and total binding committed credit exposure. The increase in
2007 to commercial committed exposure was due to the addition of
LaSalle and organic growth as discussed in the sections on the following
pages. The increase in derivative assets of $11.2 billion was centered in
credit derivatives, interest rate and foreign exchange contracts, and was
driven by growth in the businesses, widening credit spreads and the
strengthening of foreign currencies against the U.S. dollar.
Table 17 Commercial Credit Exposure by Type
(Dollars in millions)
Loans and leases
Standby letters of credit and financial guarantees
Derivative assets (5)
Assets held-for-sale (6)
Commercial letters of credit
Bankers’ acceptances
Securitized assets
Foreclosed properties
Total commercial credit exposure
Commercial Utilized (1, 2)
2007
$325,143
58,747
34,662
26,475
4,413
2,411
790
75
$452,716
2006
$240,785
48,729
23,439
23,904
4,258
1,885
1,292
10
$344,302
December 31
Commercial
Unfunded (3, 4)
2007
$329,396
4,049
–
1,489
140
2
–
–
$335,076
2006
$269,937
4,277
–
1,136
224
1
–
–
$275,575
Total Commercial
Committed
2007
$654,539
62,796
34,662
27,964
4,553
2,413
790
75
$787,792
2006
$510,722
53,006
23,439
25,040
4,482
1,886
1,292
10
$619,877
(1) Exposure includes standby letters of credit, financial guarantees, commercial letters of credit and bankers’ acceptances for which the bank is legally bound to advance funds under prescribed conditions, during a specified
period. Although funds have not been advanced, these exposure types are considered utilized for credit risk management purposes.
(2) Total commercial utilized exposure at December 31, 2007 includes loans and issued letters of credit measured at fair value in accordance with SFAS 159 and is comprised of loans outstanding of $4.59 billion and letters of
credit at notional value of $1.1 billion.
(3) Total commercial unfunded exposure at December 31, 2007 includes loan commitments measured at fair value in accordance with SFAS 159 with a notional value of $19.8 billion.
(4) Excludes unused business card lines which are not legally binding.
(5) Derivative assets are reported on a mark-to-market basis, reflect the effects of legally enforceable master netting agreements, and have been reduced by cash collateral of $12.8 billion and $7.3 billion at December 31, 2007
and 2006. In addition to cash collateral, derivative assets are also collateralized by $8.5 billion and $7.6 billion of primarily other marketable securities at December 31, 2007 and 2006 for which credit risk has not been
reduced.
(6) Total commercial committed exposure consists of $23.9 billion and $11.0 billion of commercial loans held-for-sale exposure (e.g., commercial mortgage and leveraged finance) and $4.1 billion and $14.0 billion of investments
held-for-sale exposure at December 31, 2007 and 2006.
76 Bank of America 2007
Table 18 Commercial Utilized Criticized Exposure (1, 2)
(Dollars in millions)
Commercial – domestic (4)
Commercial real estate
Commercial lease financing
Commercial – foreign
Small business commercial – domestic
Total commercial utilized criticized exposure
December 31, 2007
December 31, 2006
Amount
$ 8,829
6,825
594
509
16,757
796
$17,553
Percent (3)
3.37%
10.35
2.63
0.98
4.16
4.46
4.17
Amount
$4,803
806
504
571
6,684
377
$7,061
Percent (3)
2.39%
1.98
2.31
1.32
2.18
2.72
2.20
(1) Criticized exposure corresponds to the Special Mention, Substandard and Doubtful asset categories defined by regulatory authorities. Balances and ratios have been adjusted to exclude assets held-for-sale at December 31,
2007 and 2006 and exposure measured at fair value in accordance with SFAS 159 at December 31, 2007. Had criticized exposure in the assets held-for-sale and fair value portfolios been included, the ratio of commercial
utilized criticized exposure to total commercial utilized exposure would have been 4.77 percent and 2.23 percent at December 31, 2007 and 2006.
(2) Exposure includes standby letters of credit, financial guarantees, commercial letters of credit and bankers’ acceptances for which the bank is legally bound to advance funds under prescribed conditions, during a specified
period. Although funds have not been advanced, these exposure types are considered utilized for credit risk management purposes.
(3) Ratios are calculated as commercial utilized criticized exposure divided by total commercial utilized exposure for each exposure category.
(4) Excludes small business commercial – domestic exposure.
Table 18 presents commercial utilized criticized exposure by product
type and as a percentage of total commercial utilized exposure. Commer-
cial utilized criticized exposure increased $10.5 billion, or 149 percent,
primarily due to increases in commercial real estate and commercial –
domestic of which LaSalle contributed $5.1 billion as discussed in more
detail
in the product sections below. The table above excludes utilized
criticized exposure related to assets held-for-sale of $2.9 billion and $600
million at December 31, 2007 and 2006 and other utilized criticized
exposure measured at fair value in accordance with SFAS 159 of $1.1 bil-
lion at December 31, 2007. See Note 19 – Fair Value Disclosures to the
Consolidated Financial Statements for a discussion of the fair value portfo-
lio. Criticized assets in the held-for-sale portfolio, are carried at the lower
of cost or market, including bridge exposure of $2.3 billion and $550 mil-
lion at December 31, 2007 and 2006 which funded in the normal course
of our Business Lending and CMAS businesses and are managed in part
through our “originate to distribute” strategy (see Management of
Commercial Credit Risk Concentrations beginning on page 74 for more
information on bridge financing). The level of funded, criticized bridge
exposures in the held-for-sale portfolio increased as a result of adverse
market conditions in the second half of 2007. Had criticized exposure in
the assets held-for-sale and fair value portfolios been included, the ratio of
commercial utilized criticized exposure to total commercial utilized
exposure would have been 4.77 percent and 2.23 percent at
December 31, 2007 and 2006.
Commercial – Domestic
At December 31, 2007, approximately 89 percent of the commercial –
domestic portfolio, excluding small business, was included in Business
Lending (business banking, middle market and large multinational corpo-
rate loans and leases) and CMAS (acquisition and bridge financing). The
remaining 11 percent was mostly in GWIM (business-purpose loans for
wealthy individuals). Outstanding commercial – domestic loans and leases
including loans measured at fair value, increased $45.8 billion to $194.0
billion at December 31, 2007 compared to December 31, 2006 driven
primarily by an increase in loans within GCIB related to the addition of
LaSalle and organic growth. Nonperforming commercial – domestic loans
increased by $364 million to $869 million primarily driven by the addition
of LaSalle. Net charge-offs were up $163 million from 2006 driven primar-
ily by a lower level of recoveries. Criticized utilized commercial – domestic
exposure excluding assets in the held-for-sale and fair value portfolios,
increased $4.0 billion to $8.8 billion primarily driven by the addition of
LaSalle, higher exposure to mortgage lenders and asset-based lending.
Commercial Real Estate
The commercial real estate portfolio is mostly managed in Business Lend-
ing and consists of loans issued primarily to public and private developers,
homebuilders and commercial real estate firms. Outstanding loans and
leases, including loans measured at fair value, increased $25.3 billion to
$61.6 billion at December 31, 2007 compared to 2006. The increase was
related to the acquisition of LaSalle, which increased outstandings by
approximately $18.8 billion, and organic growth. The portfolio remains
diversified across property types and geographic regions with increases in
the Midwest and California largely related to the addition of
Illinois,
LaSalle. Organic growth was strong in the Northeast and in retail, office
and apartment property types. The addition of LaSalle contributed to
growth in residential and broadly across all other property types.
Nonperforming commercial real estate loans increased $981 million
to $1.1 billion and utilized criticized exposure increased $6.0 billion to
$6.8 billion attributable to the continuing impact of the housing slowdown
on the homebuilding sector as well as the addition of LaSalle. Non-
performing loans and utilized criticized exposure in the homebuilding sec-
tor were $792 million and $5.4 billion, respectively, at December 31,
2007 compared to $71 million and $348 million at December 31, 2006.
Net charge-offs were up $44 million from 2006 principally related to the
homebuilder sector of the portfolio. At December 31, 2007, we had
homebuilder-related exposure of $13.6 billion in loans and $21.6 billion in
commercial committed exposure, of which 39 percent was criticized and
six percent was classified as nonperforming. Assets held-for-sale asso-
ciated with commercial real estate increased $8.6 billion to $13.8 billion
at December 31, 2007 compared to 2006, driven by reduced market liq-
uidity resulting in a higher level of warehoused assets pending commercial
mortgage-backed securitizations and the addition of LaSalle. Refer to
Management of Commercial Credit Risk Concentrations on page 74 for a
discussion of our CMBS exposure.
Bank of America 2007
77
Table 19 presents outstanding commercial real estate loans by geographic region and property type diversification.
Table 19 Outstanding Commercial Real Estate Loans (1)
(Dollars in millions)
By Geographic Region (2)
California
Northeast
Midwest
Illinois
Southeast
Southwest
Florida
Midsouth
Northwest
Other
Geographically diversified (3)
Non-U.S.
Total outstanding commercial real estate loans (4)
By Property Type
Residential
Office buildings
Shopping centers/retail
Apartments
Industrial/warehouse
Land and land development
Multiple use
Hotels/motels
Resorts
Other (5)
Total outstanding commercial real estate loans (4)
December 31
2007
2006
$ 9,369
8,951
7,832
6,731
6,472
5,400
4,870
2,843
2,417
3,370
2,282
1,065
$61,602
$11,157
8,837
8,722
7,806
5,662
4,551
1,672
1,535
297
11,363
$61,602
$ 7,781
6,368
1,292
979
5,097
3,787
3,898
2,006
2,053
870
1,549
578
$36,258
$ 8,151
4,823
3,955
4,277
3,247
3,956
1,257
1,185
180
5,227
$36,258
(1) Primarily includes commercial loans and leases secured by non owner-occupied real estate which are dependent on the sale or lease of the real estate as the primary source of repayment.
(2) Distribution is based on geographic location of collateral. Geographic regions are in the U.S. unless otherwise noted.
(3) The geographically diversified category is comprised primarily of unsecured outstandings to real estate investment trusts and national home builders whose portfolios of properties span multiple geographic regions.
(4)
(5) Represents loans to borrowers whose primary business is commercial real estate, but the exposure is not secured by the listed property types.
Includes commercial real estate loans measured at fair value in accordance with SFAS 159 of $304 million at December 31, 2007.
Commercial Lease Financing
The commercial lease financing portfolio is managed in Business Lending.
Outstanding loans and leases increased $718 million in 2007 compared
to 2006 primarily due to the addition of LaSalle which was partially offset
by the adoption of FSP 13-2. Net charge-offs were $2 million compared to
net recoveries of $28 million in 2006.
Commercial – Foreign
The commercial – foreign portfolio is managed primarily in Business Lend-
ing and CMAS. Outstanding loans and leases, including loans measured at
fair value, increased by $8.5 billion to $29.2 billion at December 31,
2007 compared to December 31, 2006 driven by organic growth com-
bined with strengthening of foreign currencies against the U.S. dollar,
partially offset by the sale of our Latin American operations. Criticized uti-
lized exposure, excluding criticized assets in the held-for-sale and fair
value portfolios, decreased $62 million to $509 million, primarily attribut-
able to the sale of our Latin American operations. Net charge-offs were $1
million compared to net recoveries of $8 million in 2006. This increase
was driven primarily by a lower level of recoveries in our large corporate
portfolio. For additional information on the commercial – foreign portfolio,
refer to the Foreign Portfolio discussion beginning on page 81.
Small Business Commercial – Domestic
The small business commercial – domestic portfolio (business card and
small business loans) is managed in GCSBB. Outstanding small business
commercial – domestic loans and leases increased $4.0 billion to $17.8
billion at December 31, 2007 compared to December 31, 2006 driven by
organic growth in the small business card portfolio. Approximately 64
percent of the small business commercial – domestic outstanding loans
and leases at December 31, 2007 was credit card related prod-
ucts. Nonperforming small business commercial – domestic loans
increased $56 million to $135 million, loans past due 90 days or more
and still accruing interest increased $228 million to $427 million and criti-
cized loans increased $419 million or 174 bps, to $796 million, or 4.46
percent, at December 31, 2007 compared to 2006. Small business
commercial – domestic net charge-offs were up $508 million, or 257 bps,
to $869 million, or 5.57 percent. The increases were driven by portfolio
seasoning as well as deterioration particularly in states with the weakest
housing markets. Approximately 70 percent of
the small business
commercial – domestic net charge-offs for 2007 were credit card related
products.
78 Bank of America 2007
Nonperforming Commercial Assets Activity
Table 20 presents the additions and reductions to nonperforming assets in the commercial portfolio during 2007 and 2006. The increase in nonaccrual
loans and leases for 2007 was primarily attributable to homebuilder and mortgage company exposure, and the addition of LaSalle.
Table 20 Nonperforming Commercial Assets Activity (1, 2)
(Dollars in millions)
Nonperforming loans and leases
Balance, January 1
Additions to nonperforming loans and leases:
LaSalle balance, October 1, 2007
New nonaccrual loans and leases
Advances
Reductions in nonperforming loans and leases:
Paydowns and payoffs
Sales
Returns to performing status (3)
Charge-offs (4)
Transfers to foreclosed properties
Transfers to loans held-for-sale
Total net additions to nonperforming loans and leases
Total nonperforming loans and leases, December 31
Foreclosed properties
Balance, January 1
Additions to foreclosed properties:
LaSalle balance, October 1, 2007
New foreclosed properties
Reductions in foreclosed properties:
Sales
Writedowns
Total net additions to (reductions in) foreclosed properties
Total foreclosed properties, December 31
Nonperforming commercial assets, December 31
Nonperforming commercial loans and leases as a percentage of outstanding commercial loans and leases measured at historical cost
Nonperforming commercial assets as a percentage of outstanding commercial loans and leases measured at historical cost and foreclosed properties
2007
2006
$ 757
$ 726
413
2,467
85
(781)
(82)
(239)
(370)
(75)
(20)
1,398
2,155
10
16
75
(22)
(4)
65
75
–
980
32
(403)
(152)
(80)
(331)
(3)
(12)
31
757
31
–
6
(18)
(9)
(21)
10
$2,230
$ 767
0.67%
0.70
0.31%
0.32
(1) Balances do not include nonperforming loans held-for-sale included in other assets of $93 million and $50 million in 2007 and 2006. There were no nonperforming loans measured at fair value in accordance with SFAS 159 in
2007. See Note 19 – Fair Value Disclosures to the Consolidated Financial Statements for a discussion of the changes in the fair value portfolio during 2007.
Includes small business commercial – domestic activity.
(2)
(3) Commercial loans and leases may be restored to performing status when all principal and interest is current and full repayment of the remaining contractual principal and interest is expected, or when the loan otherwise
becomes well-secured and is in the process of collection.
(4) Certain loan and lease products, including business card, are not classified as nonperforming; therefore, the charge-offs on these loans have no impact on nonperforming activity.
Industry Concentrations
Table 21 presents commercial committed and commercial utilized credit
exposure by industry and the total net credit default protection purchased
to cover the funded and the unfunded portion of certain credit exposure.
Our commercial credit exposure is diversified across a broad range of
industries.
Industry limits are used internally to manage industry concentrations
and are based on committed exposure and capital usage that are allo-
cated on an industry-by-industry basis. A risk management framework is in
place to set and approve industry limits, as well as to provide ongoing
monitoring. The CRC oversees industry limits governance.
Total commercial committed credit exposure increased by $167.9
billion, or 27 percent, in 2007 compared to 2006, with $86.6 billion, or
52 percent of the increase, attributable to LaSalle. Total commercial uti-
lized credit exposure increased by $108.4 billion, or 31 percent, in 2007
compared to 2006, with $57.6 billion, or 53 percent, of the increase
attributable to LaSalle. The overall commercial credit utilization rate was
largely unchanged year over year, increasing from 56 percent to 57 per-
cent.
Real estate remains our largest industry concentration, accounting
for 14 percent of total commercial committed exposure at December 31,
2007. Growth of $38.2 billion, or 52 percent, was driven primarily by
LaSalle, which contributed $27.0 billion. Diversified financials grew by
$19.1 billion, or 28 percent, due to a combination of increased activity in
interest rate products, client transactions booked in the bank sponsored
multi-seller conduits, and LaSalle. Government and public education
exposure increased $18.2 billion, or 46 percent, due primarily to financing
commitments to student lenders. Retailing exposure grew by $11.1 billion,
or 25 percent, principally due to LaSalle. Capital goods grew by $15.0 bil-
lion, or 40 percent, attributed equally to organic growth and LaSalle.
Monolines exposure is reported in the insurance industry and man-
aged under
the insurance portfolio industry limits. Direct commercial
committed exposure to monolines, consisted of revolvers of $203 million
and net mark-to-market derivative exposure, of $420 million at
December 31, 2007.
We have indirect exposure to monolines primarily in the form of guar-
antees supporting our loans, investment portfolios, securitizations, credit
enhanced securities as part of our public finance business and other
selected products. Such indirect exposure exists when we purchase credit
protection from monolines to hedge all or a portion of the credit risk on
certain credit exposures including loans and CDOs. We underwrite our
underlying
by
public
evaluating
exposure
finance
the
Bank of America 2007
79
securities. In the case of default we first look to the underlying securities
and then to recovery on the purchased insurance. See page 53 for dis-
cussion on credit protection purchased on our CDO exposure.
We also have indirect exposure as we invest in securities where the
issuers have purchased wraps (i.e., insurance). For example, municipal-
ities and corporations purchase protection in order to enhance their pricing
power which has the effect of reducing their cost of borrowings. If the rat-
ing agencies downgrade the monolines, the credit rating of the bond may
fall and may have an adverse impact on the market value of the security.
We have further exposure related to our public finance business
where we are the lead manager or remarketing agent for transactions that
are wrapped including auction rate securities (ARS), tender option munici-
pal bonds (TOBs), and variable rate demand bonds (VRDBs). We are the
lead manager on municipal and, to a lesser extent, student loan ARS
where a high percentage of the programs are wrapped by either monolines
or other financial guarantors. However, we are only the remarketing agent
on TOBs and VRDBs transactions. Recent concerns about monoline down-
grades or insolvency has caused disruptions in each of these markets as
investor concerns have impacted overall market liquidity and bond prices.
We continue to have liquidity exposure to these markets and instruments,
and as market conditions continue to evolve, these conditions may impact
our results. For information on our liquidity exposure to our public finance
business, see the municipal bond trusts and corporate SPEs discussion
beginning on page 62.
Table 21 Commercial Credit Exposure by Industry (1, 2)
Credit protection is purchased to cover the funded portion as well as
the unfunded portion of certain credit exposure. To lessen the cost of
obtaining our desired credit protection levels, credit exposure may be
added within an industry, borrower or counterparty group by selling pro-
tection. Since December 31, 2006, our net credit default protection pur-
chased has been reduced by $1.1 billion to $7.1 billion as we continue to
reposition the level of purchased protection based on our current view of
the underlying credit risk in the portfolio.
At December 31, 2007 and 2006, we had net notional credit default
protection purchased in our credit derivatives portfolio of $7.1 billion and
$8.3 billion. The net mark-to-market impacts, including the cost of credit
default protection, resulted in net gains of $160 million in 2007 compared
to net losses of $241 million in 2006. The average VAR for these credit
derivative hedges was $22 million and $54 million for the twelve months
ended December 31, 2007 and 2006. The decrease in VAR was driven by
a reduction in the average amount of credit protection outstanding during
the year. There is a diversification effect between the credit derivative
hedges and the market-based trading portfolio such that their combined
average VAR was $55 million and $57 million for the twelve months ended
December 31, 2007 and 2006. Refer to the Trading Risk Management
discussion beginning on page 87 for a description of our VAR calculation
for the market-based trading portfolio.
(Dollars in millions)
Real estate (3)
Diversified financials
Government and public education
Retailing
Capital goods
Healthcare equipment and services
Materials
Consumer services
Banks
Individuals and trusts
Commercial services and supplies
Food, beverage and tobacco
Energy
Media
Utilities
Transportation
Insurance
Religious and social organizations
Consumer durables and apparel
Technology hardware and equipment
Software and services
Pharmaceuticals and biotechnology
Telecommunication services
Automobiles and components
Food and staples retailing
Household and personal products
Semiconductors and semiconductor equipment
Other
Total commercial credit exposure by industry
Net credit default protection purchased on total commitments (4)
December 31
Commercial Utilized
Total Commercial Committed
2007
$ 81,260
37,872
31,743
33,280
25,908
24,337
22,176
23,382
21,261
22,323
21,175
13,919
12,772
7,901
6,438
12,803
7,162
8,208
5,802
4,615
4,739
4,349
3,475
2,648
2,732
889
1,140
8,407
$452,716
2006
$ 49,259
24,813
22,495
27,226
16,830
15,881
15,978
19,191
26,405
18,792
15,224
11,384
9,505
8,784
6,624
11,637
6,759
7,840
4,827
3,326
2,763
2,530
3,565
1,584
2,153
779
802
7,346
$344,302
2007
$111,742
86,118
57,437
55,184
52,356
40,962
38,717
38,650
35,323
32,425
31,858
25,701
23,510
19,343
19,281
18,824
16,014
10,982
10,907
10,239
10,128
8,563
8,235
6,960
5,318
2,776
1,734
8,505
2006
$ 73,544
67,038
39,254
44,064
37,363
31,189
28,789
32,734
36,735
29,167
23,532
21,124
18,460
19,181
17,222
17,375
14,122
10,507
9,124
8,093
6,212
6,289
7,981
5,153
4,222
2,264
1,364
7,775
$787,792
$ (7,146)
$619,877
$ (8,260)
(1) Total commercial utilized and total commercial committed exposure includes loans and letters of credit measured at fair value in accordance with SFAS 159 and are comprised of loans outstanding of $4.59 billion and issued
(2)
(3)
letters of credit at notional value of $1.1 billion at December 31, 2007. In addition, total commercial committed exposure includes unfunded loan commitments at notional value of $19.8 billion at December 31, 2007.
Includes small business commercial – domestic exposure.
Industries are viewed from a variety of perspectives to best isolate the perceived risks. For purposes of this table, the real estate industry is defined based upon the borrowers’ or counterparties’ primary business activity using
operating cash flow and primary source of repayment as key factors.
(4) Represents net notional credit protection purchased.
80 Bank of America 2007
Tables 22 and 23 present the maturity profiles and the credit exposure debt ratings of the net credit default protection portfolio at December 31, 2007
and 2006.
Table 22 Net Credit Default Protection by Maturity Profile
Less than or equal to one year
Greater than one year and less than or equal to five years
Greater than five years
Total net credit default protection
Table 23 Net Credit Default Protection by Credit Exposure Debt Rating (1)
December 31
2007
2006
2%
67
31
7%
46
47
100%
100%
(Dollars in millions)
Ratings
AAA
AA
A
BBB
BB
B
CCC and below
NR (2)
December 31
2007
2006
Net Notional
Percent
Net Notional
Percent
$
(13)
(92)
(2,408)
(3,328)
(1,524)
(180)
(75)
474
0.2%
1.3
33.7
46.6
21.3
2.5
1.0
(6.6)
$
(23)
(237)
(2,598)
(3,968)
(1,341)
(334)
(50)
291
0.3%
2.9
31.5
48.0
16.2
4.0
0.6
(3.5)
Total net credit default protection
$(7,146)
100.0%
$(8,260)
100.0%
(1)
(2)
In order to mitigate the cost of purchasing credit protection, credit exposure can be added by selling credit protection. The distribution of debt rating for net notional credit default protection purchased is shown as a negative
and the net notional credit protection sold is shown as a positive amount.
In addition to unrated names, “NR” includes $550 million and $302 million in net credit default swaps index positions at December 31, 2007 and 2006. While index positions are principally investment grade, credit default
swaps indices include names in and across each of the ratings categories.
Foreign Portfolio
Our foreign credit and trading portfolio is subject to country risk. We define
country risk as the risk of loss from unfavorable economic and political
developments, currency fluctuations, social
instability and changes in
government policies. A risk management framework is in place to meas-
ure, monitor and manage foreign risk and exposures. Management over-
sight of country risk including cross-border risk is provided by the Country
Risk Committee.
Table 24 presents total foreign exposure broken out by region at
December 31, 2007 and 2006. Total foreign exposure includes credit
exposure net of local liabilities, securities, and other investments domi-
ciled in countries other than the United States. Credit card exposure is
reported on a funded basis. Total foreign exposure can be adjusted for
externally guaranteed exposure and certain collateral
types. Exposure
which is assigned external guarantees are reported under the country of
the guarantor. Exposure with tangible collateral is reflected in the country
is held. For securities received, other than cross-
where the collateral
Table 24 Regional Foreign Exposure (1, 2, 3)
(Dollars in millions)
Europe
Asia Pacific
Latin America
Middle East
Africa
Other
Total regional foreign exposure
border resale agreements, exposure is assigned to the domicile of the
issuer of the securities. Resale agreements are generally presented based
on the domicile of the counterparty consistent with FFIEC reporting rules.
Our total
foreign exposure was $138.1 billion at December 31,
2007, an increase of $8.1 billion from December 31, 2006. Europe
accounted for $74.7 billion, or 54 percent, of total foreign exposure. The
European exposure was mostly in Western Europe and was distributed
across a variety of
industries with the largest concentration in the
commercial sector which accounted for approximately 46 percent of the
total exposure in Europe. The decline of $10.6 billion was driven by lower
cross-border other financing exposure, as well as higher local funding
available to net against local exposures in the United Kingdom.
Asia Pacific was our second largest foreign exposure at $42.1 billion,
or 30 percent, of total foreign exposure at December 31, 2007. The
growth of $14.7 billion in Asia Pacific was primarily driven by the fair value
adjustment associated with our CCB investment.
December 31
2007
$ 74,725
42,081
10,944
1,481
470
8,361
$138,062
2006
$ 85,279
27,403
8,998
811
317
7,131
$129,939
In the balances above, local funding or liabilities are subtracted from local exposures as allowed by the FFIEC.
(1)
(2) Exposures have been reduced by $6.3 billion at December 31, 2007 and $4.3 billion at December 31, 2006 related to the cash applied as collateral to derivative assets.
(3) Generally, cross-border resale agreements are presented based on the domicile of the counterparty consistent with FFIEC reporting rules. Cross-border resale agreements where the underlying securities are U.S. Treasury
securities, in which case the domicile is the U.S., are excluded from this presentation.
Bank of America 2007
81
Latin America accounted for $10.9 billion, or eight percent of total
foreign exposure at December 31, 2007, an increase of $1.9 billion, or 22
percent, from December 31, 2006. The increase in exposure in Latin
America was primarily due to higher exposures in Brazil, Mexico, and Chile.
For more information on our Asia Pacific and Latin America exposure, see
the discussion below on foreign exposure to selected countries defined as
emerging markets.
At December 31, 2007, China was the only country where total cross-
border exposure of $17.0 billion, which mostly related to our investment in
CCB, was between 0.75 percent and 1.00 percent of total assets. At
December 31, 2007, we did not operate in any country where the total
total assets. At
cross-border exposure exceeded one percent of our
December 31, 2007 and 2006, the United Kingdom had total cross-border
exposure of $12.7 billion and $17.3 billion representing 0.74 percent and
1.18 percent of total assets.
As presented in Table 25, foreign exposure to borrowers or counter-
parties in emerging markets increased $19.6 billion to $40.4 billion at
December 31, 2007, compared to $20.9 billion at December 31, 2006.
The increase was primarily due to the fair value adjustment associated
with our CCB investment as well as higher exposures across most catego-
ries in all regions. Foreign exposure to borrowers or counterparties in
emerging markets represented 29 percent and 16 percent of total foreign
exposure at December 31, 2007 and 2006.
Table 25 Selected Emerging Markets (1)
At December 31, 2007, 71 percent of
the emerging markets
exposure was in Asia Pacific, compared to 58 percent at December 31,
2006. Asia Pacific emerging markets exposure increased by $16.5 billion.
Growth was driven by higher cross-border exposure mainly in China, India,
South Korea and Singapore. Our exposure in China was primarily related to
the carrying value of our equity investment in CCB which accounted for
$16.4 billion and $3.0 billion at December 31, 2007 and 2006.
At December 31, 2007, 23 percent of
the emerging markets
exposure was in Latin America compared to 36 percent at December 31,
2006. Latin America emerging markets exposure increased by $2.0 billion
driven by higher cross-border exposure in Brazil, Mexico, and Chile, as well
as an increase in our equity investment in Banco Itaú. During the first
quarter of 2007, the Corporation completed the sale of its operations in
Chile and Uruguay for approximately $750 million in equity of Banco Itaú.
The carrying value of our investment in Banco Itaú accounted for $2.6 bil-
lion and $1.9 billion of exposure in Brazil at December 31, 2007 and
2006. The December 31, 2007 equity investment in Banco Itaú repre-
sents seven percent of its outstanding voting and non-voting shares. Our
investment in Banco Itaú is currently carried at cost and will be accounted
for as AFS marketable equity securities and carried at fair value beginning
in the second quarter of 2008.
(Dollars in millions)
Region/Country
Asia Pacific
China (7)
South Korea
India
Singapore
Taiwan
Hong Kong
Other Asia Pacific (8)
Total Asia Pacific
Latin America
Mexico
Brazil
Chile
Other Latin America (8)
Total Latin America
Middle East and Africa (8)
Central and Eastern Europe (8)
Loans and
Leases, and
Loan
Commitments
Other
Financing (2)
Derivative
Assets (3)
Securities/
Other
Investments (4)
Total Cross-
border
Exposure (5)
Local
Country
Exposure
Net of Local
Liabilities (6)
Total
Emerging
Market
Exposure at
December 31,
2007
Increase
(Decrease)
From
December 31,
2006
$ 262
157
1,141
381
345
416
133
2,835
1,181
701
644
186
2,712
838
42
$
70
1,000
470
25
41
100
79
1,785
229
104
55
170
558
711
86
$
79
177
355
192
45
53
35
936
38
42
–
–
80
170
75
$16,629
3,068
1,168
694
169
226
401
22,355
2,990
2,617
14
110
5,731
222
221
$17,040
4,402
3,134
1,292
600
795
648
27,911
4,438
3,464
713
466
9,081
1,941
424
$
–
–
158
–
467
–
39
664
–
223
6
181
410
–
–
$17,040
4,402
3,292
1,292
1,067
795
687
28,575
4,438
3,687
719
647
9,491
1,941
424
$13,426
1,025
1,257
420
325
(69)
96
16,480
507
1,036
393
113
2,049
825
209
Total emerging market exposure
$6,427
$3,140
$1,261
$28,529
$39,357
$1,074
$40,431
$19,563
(1) There is no generally accepted definition of emerging markets. The definition that we use includes all countries in Asia Pacific excluding Japan, Australia and New Zealand; all countries in Latin America excluding Cayman
Islands and Bermuda; all countries in Middle East and Africa; and all countries in Central and Eastern Europe excluding Greece. There was no emerging market exposure included in the portfolio measured at fair value in
accordance with SFAS 159 at December 31, 2007.
Includes acceptances, standby letters of credit, commercial letters of credit and formal guarantees.
(2)
(3) Derivative assets are reported on a mark-to-market basis and have been reduced by the amount of cash collateral applied of $57 million and $9 million at December 31, 2007 and 2006. At December 31, 2007 and 2006
there were $2 million and less than $1 million of other marketable securities collateralizing derivative assets for which credit risk has not been reduced.
(4) Generally, cross-border resale agreements are presented based on the domicile of the counterparty, consistent with FFIEC reporting rules. Cross-border resale agreements where the underlying securities are U.S. Treasury
securities, in which case the domicile is the U.S., are excluded from this presentation.
(5) Cross-border exposure includes amounts payable to the Corporation by borrowers or counterparties with a country of residence other than the one in which the credit is booked, regardless of the currency in which the claim is
denominated, consistent with FFIEC reporting rules.
(6) Local country exposure includes amounts payable to the Corporation by borrowers with a country of residence in which the credit is booked, regardless of the currency in which the claim is denominated. Local funding or
liabilities are subtracted from local exposures as allowed by the FFIEC. Total amount of available local liabilities funding local country exposure at December 31, 2007 was $21.6 billion compared to $20.7 billion at
December 31, 2006. Local liabilities at December 31, 2007 in Asia Pacific and Latin America were $19.7 billion and $1.9 billion, of which $7.9 billion were in Hong Kong, $6.2 billion in Singapore, $2.5 billion in South Korea,
$1.8 billion in Mexico, $1.1 billion in China, $836 million in India, and $508 million in Taiwan. There were no other countries with available local liabilities funding local country exposure greater than $500 million.
(7) Securities/Other Investments include an investment of $16.4 billion in CCB. Beginning in the fourth quarter of 2007, the Corporation’s equity investment in CCB was accounted for at fair value. Previously, the investment in
CCB was accounted for at cost.
(8) No country included in Other Asia Pacific, Other Latin America, Middle East and Africa, and Central and Eastern Europe had total foreign exposure of more than $500 million.
82 Bank of America 2007
The increased exposures in Mexico were attributable to higher cross-
border corporate securities trading exposure and loans and loan commit-
ments. Our 24.9 percent investment in Santander accounted for $2.6
billion and $2.3 billion of exposure in Mexico at December 31, 2007 and
2006.
At both December 31, 2007 and 2006, five percent of the emerging
markets exposure was in Middle East and Africa. Middle East and Africa
emerging markets exposure increased by $825 million driven by higher
cross-border other financing exposure and loans and loan commitments.
Provision for Credit Losses
The provision for credit losses increased $3.4 billion, or 67 percent, to
$8.4 billion in 2007 compared to 2006.
the increase. Additionally,
The consumer portion of the provision for credit losses increased
$1.8 billion to $6.5 billion compared to 2006. Higher net charge-offs from
portfolio seasoning, reflective of growth in the businesses and increases
from the unusually low charge-off levels experienced in 2006 post bank-
ruptcy reform drove a portion of
reserve
increases related to higher losses inherent in our home equity portfolio,
reflecting growth in the business and the impact of the weak housing
market, as well as seasoning of the Card Services consumer portfolios
contributed to the increased provision expense. The increases were parti-
ally offset by reserve reductions from the addition of higher loss profile
accounts to the domestic credit card securitization trust and to a lesser
extent, improved performance of the remaining portfolios from certain
consumer finance businesses that we have previously exited.
The commercial portion of the provision for credit losses increased
$1.6 billion to $1.9 billion compared to 2006. Higher net charge-offs from
seasoning and deterioration in our small business portfolios within GCSBB
as well as a lower level of commercial recoveries in GCIB and GWIM drove
a portion of the increase. Reserve increases for seasoning of growth and
deterioration in the small business portfolio within GCSBB, the absence of
prior year reserve releases in GCIB and portfolio deterioration reflecting
the impact of the weak housing market, particularly on our homebuilder
loan portfolio within GCIB, also drove the year over year increase. Partially
offsetting these increases was a reduction of reserves in All Other reflect-
ing the sale of our Argentina portfolio during the first quarter of 2007.
The provision for credit losses related to unfunded lending commit-
ments was $28 million in 2007 compared to $9 million in 2006.
Allowance for Credit Losses
Allowance for Loan and Lease Losses
The allowance for loan and lease losses excludes loans measured at fair
value in accordance with SFAS 159 as subsequent mark-to-market adjust-
ments related to loans measured at fair value include a credit risk compo-
nent. The allowance for loan and lease losses is allocated based on two
components. We evaluate the adequacy of the allowance for loan and
lease losses based on the combined total of these two components.
The first component of the allowance for loan and lease losses cov-
loans measured at historical cost that are either
ers those commercial
nonperforming or impaired. An allowance is allocated when the discounted
cash flows (or collateral value or observable market price) are lower than
the carrying value of that loan. For purposes of computing the specific loss
impaired loans are evaluated
larger
component of
individually and smaller impaired loans are evaluated as a pool using his-
torical loss experience for the respective product type and risk rating of
the loans.
the allowance,
The second component of the allowance for loan and lease losses
covers performing consumer and commercial loans and leases measured
at historical cost. The allowance for commercial loan and lease losses is
established by product type after analyzing historical loss experience by
internal risk rating, current economic conditions,
industry performance
trends, geographic or obligor concentrations within each portfolio segment,
and any other pertinent information. The commercial historical loss experi-
ence is updated quarterly to incorporate the most recent data reflective of
the current economic environment. As of December 31, 2007, quarterly
updating of historical loss experience did not have a material impact on
the allowance for loan and lease losses. The allowance for consumer and
loan and lease products is based on
certain homogeneous commercial
aggregated portfolio segment evaluations, generally by product type. Loss
forecast models are utilized that consider a variety of factors including, but
not
loss experience, estimated defaults or fore-
closures based on portfolio trends, delinquencies, economic trends and
credit scores. These loss forecast models are updated on a quarterly
basis in order to incorporate information reflective of the current economic
environment. As of December 31, 2007, quarterly updating of the loss
forecast models resulted in increases in the allowance for loan and lease
losses primarily due to growth and seasoning of the consumer portfolios
and higher inherent losses in the home equity and small business portfo-
lios. Included within this second component of the allowance for loan and
lease losses and determined separately from the procedures outlined
above are reserves which are maintained to cover uncertainties that affect
our estimate of probable losses including domestic and global economic
uncertainty and large single name defaults.
limited to, historical
We monitor differences between estimated and actual incurred loan
and lease losses. This monitoring process includes periodic assessments
by senior management of loan and lease portfolios and the models used
to estimate incurred losses in those portfolios.
Additions to the allowance for loan and lease losses are made by
charges to the provision for credit losses. Credit exposures deemed to be
uncollectible are charged against the allowance for loan and lease losses.
Recoveries of previously charged off amounts are credited to the allow-
ance for loan and lease losses.
The allowance for loan and lease losses for the consumer portfolio
as presented in Table 27 was $6.8 billion at December 31, 2007, an
increase of $1.2 billion from December 31, 2006. The increase was
attributable to an increase in reserves during 2007 for higher losses
inherent in our home equity portfolio reflective of the impact of the weak
housing market as well as growth and seasoning of the Card Services
consumer portfolios. These increases were partially offset by reserve
reductions from the addition of higher loss profile accounts to the domes-
tic credit card securitizations trust, net new issuances of securitizations,
the remaining portfolios from certain
and improved performance of
consumer finance businesses that we have previously exited.
The allowance for commercial loan and lease losses was $4.8 billion
at December 31, 2007, a $1.4 billion increase from December 31, 2006.
The LaSalle acquisition increased the allowance for commercial loan and
In addition, the increase in commercial –
lease losses $676 million.
domestic allowance levels was primarily attributable to an increase in
reserves for higher losses inherent in the small business portfolio within
GCSBB. Commercial real estate allowance levels increased mainly due to
the LaSalle acquisition and portfolio deterioration reflecting the impact of
the weak housing market, particularly on our homebuilder loan portfolio
within GCIB. Commercial – foreign allowance levels decreased due to the
sales of our Latin American portfolios and operations.
Bank of America 2007
83
The allowance for loan and lease losses as a percentage of total
loans and leases outstanding was 1.33 percent at December 31, 2007,
compared to 1.28 percent at December 31, 2006. The increase in the
ratio was driven by reserve increases for higher inherent losses in the
small business and home equity portfolios within GCSBB, reflecting growth
of these businesses and deterioration in the portfolios, and seasoning of
the Card Services unsecured lending portfolio as well as discontinuing
sales of new receivables into the unsecured lending trust. These
increases were partially offset by growth in the residential mortgage portfo-
lio, which has a low loss profile, as the Corporation increased retention of
residential mortgage loans for ALM purposes. Also offsetting the increases
were reserve reductions related to the addition of higher loss profile
accounts to the domestic credit card securitization trust and the sales of
our Latin American portfolios and operations.
Reserve for Unfunded Lending Commitments
In addition to the allowance for loan and lease losses, we also estimate
probable losses related to unfunded lending commitments measured at
historical cost, such as letters of credit and financial guarantees, and
binding unfunded loan commitments. Unfunded lending commitments are
subject
to the same assessment as funded loans, except utilization
assumptions are considered. The reserve for unfunded lending commit-
ments is included in accrued expenses and other liabilities on the Con-
solidated Balance Sheet with changes to the reserve generally made
through the provision for credit losses.
The reserve for unfunded lending commitments at December 31,
2007 was $518 million, a $121 million increase from December 31,
2006 primarily driven by the acquisition of LaSalle.
84 Bank of America 2007
Table 26 presents a rollforward of the allowance for credit losses for 2007 and 2006.
Table 26 Allowance for Credit Losses
(Dollars in millions)
Allowance for loan and lease losses, January 1
Adjustment due to the adoption of SFAS 159
LaSalle balance, October 1, 2007
U.S. Trust Corporation balance, July 1, 2007
MBNA balance, January 1, 2006
Loans and leases charged off
Residential mortgage
Credit card – domestic
Credit card – foreign
Home equity
Direct/Indirect consumer
Other consumer
Total consumer charge-offs
Commercial – domestic (1)
Commercial real estate
Commercial lease financing
Commercial – foreign
Total commercial charge-offs
Total loans and leases charged off
Recoveries of loans and leases previously charged off
Residential mortgage
Credit card – domestic
Credit card – foreign
Home equity
Direct/Indirect consumer
Other consumer
Total consumer recoveries
Commercial – domestic (2)
Commercial real estate
Commercial lease financing
Commercial – foreign
Total commercial recoveries
Total recoveries of loans and leases previously charged off
Net charge-offs
Provision for loan and lease losses
Other
Allowance for loan and lease losses, December 31
Reserve for unfunded lending commitments, January 1
Adjustment due to the adoption of SFAS 159
LaSalle balance, October 1, 2007
Provision for unfunded lending commitments
Other
Reserve for unfunded lending commitments, December 31
Allowance for credit losses, December 31
Loans and leases outstanding measured at historical cost at December 31
Allowance for loan and lease losses as a percentage of total loans and leases outstanding measured at historical cost at December 31 (3)
Consumer allowance for loan and lease losses as a percentage of total consumer loans and leases outstanding at December 31
Commercial allowance for loan and lease losses as a percentage of total commercial loans and leases outstanding measured at historical cost
at December 31 (3)
Average loans and leases outstanding measured at historical cost during the year
Net charge-offs as a percentage of average loans and leases outstanding measured at historical cost during the year (3, 4, 5)
Allowance for loan and lease losses as a percentage of total nonperforming loans and leases measured at historical cost at December 31
Ratio of the allowance for loan and lease losses at December 31 to net charge-offs (4, 5)
$
2007
$ 9,016
(32)
725
25
–
(79)
(3,410)
(452)
(286)
(1,885)
(346)
(6,458)
(1,135)
(54)
(55)
(28)
(1,272)
(7,730)
22
347
74
12
512
68
1,035
128
7
53
27
215
1,250
(6,480)
8,357
(23)
11,588
397
(28)
124
28
(3)
518
2006
8,045
–
–
–
577
(74)
(3,546)
(292)
(67)
(857)
(327)
(5,163)
(597)
(7)
(28)
(86)
(718)
(5,881)
35
452
67
16
247
110
927
261
4
56
94
415
1,342
(4,539)
5,001
(68)
9,016
395
–
–
9
(7)
397
$ 12,106
$871,754
1.33%
1.23
$
9,413
$706,490
1.28%
1.19
1.51
$773,142
1.44
$652,417
0.84%
207
1.79
0.70%
505
1.99
(1)
Includes small business commercial – domestic charge offs of $911 million and $409 million in 2007 and 2006.
Includes small business commercial – domestic recoveries of $42 million and $48 million in 2007 and 2006.
(2)
(3) Ratios do not include loans measured at fair value in accordance with SFAS 159 at and for the year ended December 31, 2007. Loans measured at fair value were $4.59 billion at December 31, 2007.
(4)
In 2007, the impact of SOP 03-3 decreased net charge-offs by $75 million. Excluding the impact of SOP 03-3, net charge-offs as a percentage of average loans and leases outstanding measured at historical cost in 2007
would have been 0.85 percent and the ratio of the allowance for loan and lease losses to net charge-offs would have been 1.77 percent at December 31, 2007.
In 2006, the impact of SOP 03-3 decreased net charge-offs by $288 million. Excluding the impact of SOP 03-3, net charge-offs as a percentage of average loans and leases outstanding measured at historical cost in 2006
would have been 0.74 percent, and the ratio of the allowance for loan and lease losses to net charge-offs would have been 1.87 percent at December 31, 2006.
(5)
Bank of America 2007
85
For reporting purposes, we allocate the allowance for credit losses across products. However, the allowance is available to absorb any credit losses
without restriction. Table 27 presents our allocation by product type.
Table 27 Allocation of the Allowance for Credit Losses by Product Type
(Dollars in millions)
Allowance for loan and lease losses
Residential mortgage
Credit card – domestic
Credit card – foreign
Home equity
Direct/Indirect consumer
Other consumer
Total consumer
Commercial – domestic (1)
Commercial real estate
Commercial lease financing
Commercial – foreign
Total commercial (2)
Allowance for loan and lease losses
Reserve for unfunded lending commitments
Allowance for credit losses
December 31
2007
2006
Percent
of Total
1.8%
25.2
3.8
8.3
17.9
1.3
58.3
27.6
9.3
1.9
2.9
41.7
100.0%
Amount
$
207
2,919
441
963
2,077
151
6,758
3,194
1,083
218
335
4,830
11,588
518
$12,106
Percent
of Total
2.8%
35.2
3.7
1.5
15.3
3.2
61.7
24.0
6.5
2.4
5.4
38.3
100.0%
Amount
$ 248
3,176
336
133
1,378
289
5,560
2,162
588
217
489
3,456
9,016
397
$9,413
(1)
(2)
Includes allowance for small business commercial – domestic loans of $1.4 billion and $578 million at December 31, 2007 and 2006.
Includes allowance for loan and lease losses for impaired commercial loans of $123 million and $43 million at December 31, 2007 and 2006.
Market Risk Management
Market risk is the risk that values of assets and liabilities or revenues will
be adversely affected by changes in market conditions such as market
movements. This risk is inherent in the financial instruments associated
with our operations and/or activities including loans, deposits, securities,
short-term borrowings,
trading account assets and
liabilities, and derivatives. Market-sensitive assets and liabilities are gen-
erated through loans and deposits associated with our traditional banking
business, customer and proprietary trading operations, ALM process,
credit risk mitigation activities and mortgage banking activities. In the
event of market volatility, factors such as underlying market movements
and liquidity have an impact on the results of the Corporation.
long-term debt,
Our traditional banking loan and deposit products are nontrading
positions and are reported at amortized cost for assets or the amount
owed for liabilities (historical cost). GAAP requires a historical cost view of
traditional banking assets and liabilities. However, these positions are still
subject to changes in economic value based on varying market conditions,
primarily changes in the levels of interest rates. The risk of adverse
changes in the economic value of our nontrading positions is managed
through our ALM activities. We have elected to fair value certain loan and
deposit products in accordance with SFAS 159. For further information on
fair value of certain financial assets and liabilities, see Note 19 – Fair
Value Disclosures to the Consolidated Financial Statements.
Our trading positions are reported at fair value with changes currently
reflected in income. Trading positions are subject to various risk factors,
which include exposures to interest rates and foreign exchange rates, as
well as mortgage, equity, commodity, issuer and market liquidity risk fac-
tors. We seek to mitigate these risk exposures by using techniques that
instruments in both the cash and
encompass a variety of
derivatives markets. The following discusses the key risk components
along with respective risk mitigation techniques.
financial
Interest Rate Risk
Interest rate risk represents exposures to instruments whose values vary
with the level or volatility of interest rates. These instruments include, but
are not limited to, loans, debt securities, certain trading-related assets
and liabilities, deposits, borrowings and derivative instruments. Hedging
instruments used to mitigate these risks include related derivatives such
as options, futures, forwards and swaps.
Foreign Exchange Risk
Foreign exchange risk represents exposures to changes in the values of
current holdings and future cash flows denominated in other currencies.
The types of instruments exposed to this risk include investments in for-
eign subsidiaries,
foreign currency-denominated loans and securities,
future cash flows in foreign currencies arising from foreign exchange
transactions,
foreign currency-denominated debt and various foreign
exchange derivative instruments whose values fluctuate with changes in
the level or volatility of currency exchange rates or foreign interest rates.
Hedging instruments used to mitigate this risk include foreign exchange
options, currency swaps, futures, forwards and deposits.
Mortgage Risk
Mortgage risk represents exposures to changes in the value of mortgage-
related instruments. The values of these instruments are sensitive to
prepayment rates, mortgage rates, agency debt ratings, default, market
liquidity, other interest rates and interest rate volatility. Our exposure to
these instruments takes several forms. First, we trade and engage in
market-making activities in a variety of mortgage securities including whole
loans, pass-through certificates, commercial mortgages, and collateralized
mortgage obligations including CDOs using mortgages as underlying
collateral. Second, we originate a variety of mortgage-backed securities
which involves the accumulation of mortgage-related loans in anticipation
of eventual securitization. Third, we may hold positions in mortgage secu-
86 Bank of America 2007
financial
Trading Risk Management
Trading-related revenues represent the amount earned from trading posi-
tions, including market-based net interest income, which are taken in a
diverse range of
instruments and markets. Trading account
assets and liabilities and derivative positions are reported at fair value.
For more information on fair value, see Note 19 – Fair Value Disclosures
to the Consolidated Financial Statements and Complex Accounting Esti-
mates beginning on page 93. Trading-related revenues can be volatile and
are largely driven by general market conditions and customer demand.
Trading-related revenues are dependent on the volume and type of trans-
actions, the level of risk assumed, and the volatility of price and rate
movements at any given time within the ever-changing market environ-
ment.
The GRC, chaired by the Global Markets Risk Executive, has been
designated by ALCO as the primary governance authority for Global Mar-
kets Risk Management including trading risk management. The GRC’s
focus is to take a forward-looking view of the primary credit and market
risks impacting CMAS and prioritize those that need a proactive risk miti-
gation strategy.
At the GRC meetings, the committee considers significant daily rev-
enues and losses by business along with an explanation of the primary
driver of the revenue or loss. Thresholds are established for each of our
businesses in order to determine if the revenue or loss is considered to be
significant for that business. If any of the thresholds are exceeded, an
explanation of the variance is made to the GRC. The thresholds are devel-
oped in coordination with the respective risk managers to highlight those
revenues or losses which exceed what is considered to be normal daily
income statement volatility.
rities and residential mortgage loans as part of the ALM portfolio. Fourth,
we create MSRs as part of our mortgage origination activities. See Note
1 – Summary of Significant Accounting Principles and Note 21 – Mortgage
Servicing Rights to the Consolidated Financial Statements for additional
information on MSRs. Hedging instruments used to mitigate this risk
include options, futures, forwards, swaps, swaptions and securities.
Equity Market Risk
Equity market risk represents exposures to securities that represent an
ownership interest in a corporation in the form of domestic and foreign
common stock or other equity-linked instruments. Instruments that would
lead to this exposure include, but are not limited to, the following: com-
mon stock, exchange traded funds, American Depositary Receipts (ADRs),
convertible bonds, listed equity options (puts and calls), over-the-counter
equity options, equity total return swaps, equity index futures and other
equity derivative products. Hedging instruments used to mitigate this risk
include options, futures, swaps, convertible bonds and cash positions.
Commodity Risk
Commodity risk represents exposures to instruments traded in the petro-
leum, natural gas, power, and metals markets. These instruments consist
primarily of futures, forwards, swaps and options. Hedging instruments
used to mitigate this risk include options, futures and swaps in the same
or similar commodity product, as well as cash positions.
Issuer Credit Risk
Issuer credit risk represents exposures to changes in the creditworthiness
of individual
issuers or groups of issuers. Our portfolio is exposed to
issuer credit risk where the value of an asset may be adversely impacted
by changes in the levels of credit spreads, by credit migration, or by
defaults. Hedging instruments used to mitigate this risk include bonds,
CDS and other credit fixed income instruments.
Market Liquidity Risk
Market liquidity risk represents the risk that expected market activity
changes dramatically and in certain cases may even cease to exist. This
exposes us to the risk that we will not be able to transact in an orderly
manner and may impact our
results. This impact could further be
exacerbated if expected hedging or pricing correlations are impacted by
the disproportionate demand or lack of demand for certain instruments.
We utilize various risk mitigating techniques as discussed in more detail in
Trading Risk Management.
Bank of America 2007
87
Histogram of Daily Trading-Related Revenue
Twelve Months Ended December 31, 2007
s
y
a
D
f
o
r
e
b
m
u
N
70
60
50
40
30
20
10
0
< -50
-50 to -40 -40 to -30 -30 to -20 -20 to -10
-10 to 0
0 to 10
10 to 20
20 to 30
30 to 40
40 to 50
> 50
Revenue (dollars in millions)
The histogram of daily revenue or loss above is a graphic depiction of
trading volatility and illustrates the daily level of trading-related revenue for
the twelve months ended December 31, 2007. During the twelve months
ended December 31, 2007, positive trading-related revenue was recorded
for 71 percent of the trading days. During the second half of 2007, CDO-
related markets experienced significant liquidity constraints impacting the
availability and reliability of transparent pricing resulting in the valuation of
CDOs becoming more complex and time consuming. Accordingly, it was
not possible to mark these positions to market on a daily basis. As a
result, we recorded valuation adjustments in trading account profits
(losses) of approximately $4.0 billion on certain discrete dates relating to
our super senior CDO exposure. For further discussion of our super senior
CDO exposure and related losses see page 53. Excluding the discrete
writedowns on our super senior CDO exposure, 21 percent of the total
trading days had losses greater than $10 million, and the largest loss was
$159 million. This can be compared to the twelve months ended
December 31, 2006, where positive trading-related revenue was recorded
for 96 percent of the trading days and there were no losses greater than
$10 million, and the largest loss was $10 million. The increase in the
total trading days with losses greater than $10 million was due to the
period of market disruption during the second half of 2007.
To evaluate risk in our trading activities, we focus on the actual and
potential volatility of individual positions as well as portfolios. VAR is a key
statistic used to measure market risk. In order to manage day-to-day risks,
VAR is subject to trading limits both for our overall trading portfolio and
limit excesses are communicated to
within individual businesses. All
management for review.
A VAR model simulates the value of a portfolio under a range of hypo-
thetical scenarios in order to generate a distribution of potential gains and
losses. The VAR represents the worst loss the portfolio is expected to
experience based on historical trends with a given level of confidence. VAR
depends on the volatility of the positions in the portfolio and on how
strongly their risks are correlated. Within any VAR model, there are sig-
88 Bank of America 2007
nificant and numerous assumptions that will differ from company to com-
pany. In addition, the accuracy of a VAR model depends on the availability
and quality of historical data for each of the positions in the portfolio. A
VAR model may require additional modeling assumptions for new products
which do not have extensive historical price data, or for illiquid positions
for which accurate daily prices are not consistently available. Our VAR
model uses a historical simulation approach based on three years of his-
torical data and assumes a 99 percent confidence level. Statistically, this
means that losses will exceed VAR, on average, one out of 100 trading
days, or two to three times each year.
A VAR model
is an effective tool
in estimating ranges of potential
gains and losses on our trading portfolios. There are however many limi-
tations inherent in a VAR model as it utilizes historical results over a
defined time period to estimate future performance. Historical results may
not always be indicative of future results and changes in market con-
ditions or in the composition of the underlying portfolio could have a mate-
rial
impact on the accuracy of the VAR model. This was of particular
relevance in the last part of 2007 when markets experienced a period of
extreme illiquidity resulting in losses that were far outside of the normal
loss forecasts by VAR models. Due to these limitations, we have histor-
ically used the VAR model as only one of the components in managing our
trading risk and also use other techniques such as stress testing and
desk level limits. Periods of extreme market stress influence the reliability
of these techniques to various degrees. See discussion on stress testing
on the following page.
On a quarterly basis,
the VAR methodology is
the accuracy of
reviewed by backtesting (i.e., comparing actual results against expect-
ations derived from historical data) the VAR results against the daily profit
and loss. Graphic representation of the backtesting results with additional
explanation of backtesting excesses are reported to the GRC. Backtesting
excesses occur when trading losses exceed the VAR. Senior management
reviews and evaluates the results of these tests.
100
50
0
-50
-100
-150
)
s
n
o
i
l
l
i
m
n
i
s
r
a
l
l
o
D
(
-200
12/31/2006
Trading Risk and Return
Daily Trading-Related Revenue and VAR
Daily Trading-
Related
Revenue
VAR
3/31/2007
6/30/2007
9/30/2007
12/31/2007
The graph above shows daily trading-related revenue and VAR exclud-
ing the discrete writedowns on our super senior CDO exposure for the
twelve months ended December 31, 2007. Excluding these writedowns,
losses exceeded daily trading VAR fourteen times in the twelve
actual
months ended December 31, 2007 and losses did not exceed daily trad-
ing VAR in the twelve months ended December 31, 2006. The losses that
exceeded daily trading VAR for the twelve months ended December 31,
2007, occurred during the market disruption which took place during the
second half of 2007. The sudden increase in market volatility during this
period produced a large number of price changes that exceeded the 99th
percentile of the three year history used for our VAR calculations.
Table 28 presents average, high and low daily trading VAR for the
twelve months ended December 31, 2007 and 2006.
The increase in average VAR from 2006 was driven by the increased
market volatility during the second half of 2007. In particular, with the
dislocation in structured and credit products, many credit spreads used in
the calculation of VAR increased by unprecedented amounts. In addition,
many trading assets became extremely illiquid which required changes in
assumptions to properly incorporate them in the VAR model as was the
case with our CDO exposure for which we have updated our model at vari-
ous times during the second half of 2007. In periods of stress, the GRC
members communicate daily to discuss losses, VAR limit excesses and
the impact to regulatory capital. As a result of this process, the lines of
business may selectively reduce risk. Where economically feasible, posi-
tions are sold or macro economic hedges are executed to reduce the
exposure.
Stress Testing
Because the very nature of a VAR model suggests results can exceed our
estimates, we also “stress test” our portfolio. Stress testing estimates
the value change in our trading portfolio that may result from abnormal
market movements. Various types of stress tests are run regularly against
the overall trading portfolio and individual businesses. Historical scenarios
simulate the impact of price changes which occurred during a set of
extended historical market events. The results of these scenarios are
to management. During the twelve months ended
reported daily
December 31, 2007, the largest daily losses among these scenarios
ranged from $9 million to $529 million.
Table 28 Trading Activities Market Risk (1)
(Dollars in millions)
Foreign exchange
Interest rate
Credit
Real estate/mortgage
Equities
Commodities
Portfolio diversification
Total market-based trading portfolio (3)
Twelve Months Ended December 31
2007
VAR
High (2)
$25.3
31.9
69.9
23.5
45.8
10.7
–
$91.5
Average
$ 7.2
13.9
39.5
14.1
24.6
7.2
(53.9)
$ 52.6
Low (2)
$ 3.8
6.6
23.4
5.7
9.6
3.7
–
$32.9
2006
VAR
High (2)
$22.9
50.0
36.7
12.7
39.6
9.9
–
$59.8
Average
$ 8.2
18.5
26.8
8.4
18.8
6.1
(45.5)
$ 41.3
Low (2)
$ 3.1
7.3
18.4
4.7
9.9
3.4
–
$26.0
(1) Excludes our discrete writedowns on super senior CDO exposure. For more information on the CDO writedowns and the impact of the market disruption on the Corporation’s results, see the CDO discussion beginning on page
53.
(2) The high and low for the total portfolio may not equal the sum of the individual components as the highs or lows of the individual portfolios may have occurred on different trading days.
(3) For a discussion of the VAR related to the credit derivatives that economically hedge the loan portfolio, see Industry Concentrations beginning on page 79. The table above does not include credit protection purchased to
manage our counterparty credit risk. During the three months ended December 31, 2007, the average VAR of this protection was $9 million.
Bank of America 2007
89
Hypothetical scenarios evaluate the potential impact of extreme but
plausible events over periods as long as one month. These scenarios are
developed to address perceived vulnerabilities in the market and in our
portfolios, and are periodically updated. They are also reviewed and
updated to reflect changing market conditions, such as were experienced
during the second half of 2007. For example, many trading assets became
extremely illiquid which required changes in assumptions to properly
incorporate them in the stress models. This was the case with our CDO-
related exposure for which we have updated our models at various times
during the second half of 2007. Management reviews and evaluates
results of these scenarios monthly. During the twelve months ended
December 31, 2007, the largest daily losses among these scenarios
ranged from $459 million to $1.5 billion. Worst-case losses, which repre-
sent the most extreme losses in our daily VAR calculation, are reported
daily. Finally, desk-level stress tests are performed daily for individual
businesses. These stress tests evaluate the potential adverse impact of
large moves in the market risk factors to which those businesses are
most sensitive.
Interest Rate Risk Management for Nontrading
Activities
Interest rate risk represents the most significant market risk exposure to
our nontrading exposures. Our overall goal is to manage interest rate risk
so that movements in interest rates do not adversely affect core net inter-
est income – managed basis. Interest rate risk is measured as the poten-
tial volatility in our core net interest income – managed basis caused by
changes in market interest rates. Client facing activities, primarily lending
and deposit-taking, create interest rate sensitive positions on our balance
sheet. Interest rate risk from these activities, as well as the impact of
changing market conditions, is managed through our ALM activities.
Simulations are used to estimate the impact on core net interest
income – managed basis using numerous interest rate scenarios, balance
sheet trends and strategies. These simulations evaluate how the above
mentioned scenarios impact core net interest income – managed basis on
short-term financial instruments, debt securities, loans, deposits, borrow-
these simulations
ings, and derivative instruments.
In addition,
incorporate assumptions about balance sheet dynamics such as loan and
deposit growth and pricing, changes in funding mix, and asset and liability
repricing and maturity characteristics. These simulations do not include
the impact of hedge ineffectiveness.
Management analyzes core net interest income – managed basis
forecasts utilizing different rate scenarios, with the base case utilizing the
forward interest rates. Management frequently updates the core net inter-
est income – managed basis forecast for changing assumptions and differ-
ing outlooks based on economic trends and market conditions. Thus, we
continually monitor our balance sheet position in an effort to maintain an
acceptable level of exposure to interest rate changes.
We prepare forward-looking forecasts of core net interest income –
managed basis. These baseline forecasts take into consideration
expected future business growth, ALM positioning, and the direction of
interest rate movements as implied by forward interest rates. We then
measure and evaluate the impact that alternative interest rate scenarios
have to these static baseline forecasts in order to assess interest rate
sensitivity under varied conditions. The spot and 12-month forward
monthly rates used in our respective baseline forecasts at December 31,
2007 and 2006 are shown in Table 29.
Table 30 reflects the pre-tax dollar impact to forecasted core net
interest
income – managed basis over the next twelve months from
December 31, 2007 and 2006, resulting from a 100 bp gradual parallel
increase, a 100 bp gradual parallel decrease, a 100 bp gradual curve flat-
tening (increase in short-term rates or decrease in long-term rates) and a
100 bp gradual curve steepening (decrease in short-term rates or increase
in long-term rates) from the forward market curve. For further discussion of
core net interest income – managed basis see page 44.
The sensitivity analysis in Table 30 assumes that we take no action
in response to these rate shifts over the indicated years. The estimated
exposure is reported on a managed basis and reflects impacts that may
be realized primarily in net interest income and card income. This sensi-
tivity analysis excludes any impact that could occur in the valuation of
retained interests in the Corporation’s securitizations due to changes in
interest rate levels. For additional information on securitizations, see Note
8 – Securitizations to the Consolidated Financial Statements.
Table 29 Forward Rates
Spot rates
12-month forward rates
Table 30 Estimated Core Net Interest Income – Managed Basis at Risk
(Dollars in millions)
Curve Change
+100 Parallel shift
-100 Parallel shift
Flatteners
Short end
Long end
Steepeners
Short end
Long end
90 Bank of America 2007
December 31
2007
2006
Federal
Funds
4.25%
3.13
Ten-Year
Swap
4.67%
4.79
Federal
Funds
5.25%
4.85
Ten-Year
Swap
5.18%
5.19
Short Rate
Long Rate
+100
-100
+100
–
-100
–
+100
-100
–
-100
–
+100
December 31
2007
$ (952)
865
(1,127)
(386)
1,255
181
2006
$(557)
770
(687)
(192)
971
138
Our core net interest income – managed basis, was liability sensitive
at both December 31, 2007 and 2006. At December 31, 2007, our core
net interest income – managed basis became more liability sensitive as
we positioned ourselves for greater downside risk than was reflected in
the forward curve. We evaluate our balance sheet position on an ongoing
basis. Since December 31, 2007, we have repositioned our balance sheet
to a more modest level given changes in forward rates and we will con-
tinue to evaluate our balance sheet positioning going forward. Over a
12-month horizon, we would benefit from falling rates or a steepening of
the yield curve beyond what is already implied in the forward market curve.
As part of our ALM activities, we use securities, residential mort-
gages, and interest rate and foreign exchange derivatives in managing
interest rate sensitivity.
Securities
The securities portfolio is an integral part of our ALM position. The secu-
rities portfolio is primarily comprised of debt securities and includes
mortgage-backed securities and to a lesser extent corporate, municipal
and other investment grade debt securities. During 2007 and 2006, we
purchased AFS debt securities of $28.0 billion and $40.9 billion, sold
$27.9 billion and $55.1 billion, and had maturities and received paydowns
of $19.2 billion and $22.4 billion. We realized $180 million in gains and
$443 million in losses on sales of debt securities during 2007 and 2006.
Additionally, during 2007, we acquired $32.4 billion of AFS debt securities
as part of the LaSalle and U.S. Trust Corporation acquisitions and con-
tinue to evaluate the appropriate holding levels.
The value of our accumulated OCI loss related to AFS debt securities
improved by a pre-tax amount of $2.0 billion during 2007, driven by a
decrease in interest rates. For those securities that are in an unrealized
loss position we have the intent and ability to hold these securities to
recovery.
Accumulated OCI
includes $6.5 billion in after-tax gains at
December 31, 2007, related to unrealized gains associated with our AFS
securities portfolio, including $1.9 billion of unrealized losses related to
AFS debt securities and $8.4 billion of unrealized gains related to AFS
marketable equity securities. Total market value of the AFS debt securities
was $213.3 billion at December 31, 2007 with a weighted average dura-
tion of 4.3 years and primarily relates to our mortgage-backed securities
portfolio.
Prospective changes to the accumulated OCI amounts for the AFS
securities portfolio will be driven by further interest rate, credit or price
fluctuations (including market value fluctuations associated with our CCB
investment),
the collection of cash flows including prepayment and
maturity activity, and the passage of time. During the fourth quarter of
2007, shares of the Corporation’s strategic investment in CCB are now
accounted for as AFS marketable equity securities and are carried at a fair
value of $16.2 billion. The unrealized gain on this investment of $8.4 bil-
lion net-of-tax is subject to currency and price fluctuation, and is recorded
in accumulated OCI.
In connection with adopting SFAS 159, the Corporation reclassified
approximately $3.7 billion from AFS debt securities to trading account
assets during the first quarter of 2007. There were no net unrealized gains
or losses associated with these securities recorded in accumulated OCI as
these securities were hedged using SFAS 133 hedge accounting. Accord-
ingly, there was no impact on the Corporation’s transition adjustment to
beginning retained earnings upon adoption of SFAS 159 on January 1,
2007.
Residential Mortgage Portfolio
During 2007 and 2006, we purchased $22.5 billion and $42.3 billion of
residential mortgages related to ALM activities, and added $66.3 billion
and $51.9 billion of originated residential mortgages. We sold $34.0 bil-
lion and $11.0 billion of residential mortgages during 2007 and 2006,
which included $23.7 billion and $9.2 billion of originated residential
mortgages, resulting in gains of $271 million and $98 million. Additionally,
we received paydowns of $28.2 billion and $24.7 billion during 2007 and
2006. The ending balance at December 31, 2007 was $274.9 billion
compared to $241.2 billion at December 31, 2006.
Interest Rate and Foreign Exchange Derivative
Contracts
Interest rate and foreign exchange derivative contracts are utilized in our
ALM activities and serve as an efficient tool to mitigate our interest rate
and foreign exchange risk. We use derivatives to hedge the variability in
cash flows or changes in fair value on our balance sheet due to interest
rate and foreign exchange components. For additional information on our
hedging activities, see Note 4 – Derivatives to the Consolidated Financial
Statements.
Our interest rate contracts are generally non-leveraged generic inter-
est rate and foreign exchange basis swaps, options, futures, and for-
wards. In addition, we use foreign exchange contracts, including cross-
currency interest rate swaps and foreign currency forward contracts, to
mitigate the foreign exchange risk associated with foreign currency-
denominated assets and liabilities, as well as certain equity investments
in foreign subsidiaries. Table 31 reflects the notional amounts, fair value,
weighted average receive fixed and pay fixed rates, expected maturity, and
estimated duration of our open ALM derivatives at December 31, 2007
and 2006.
Changes to the composition of our derivatives portfolio over the
course of 2007 reflect actions taken for interest rate and foreign exchange
rate risk management. The decisions to reposition our derivative portfolio
are based upon the current assessment of economic and financial con-
ditions including the interest rate environment, balance sheet composition
and trends, and the relative mix of our cash and derivative positions. Our
interest
rate swap positions (including foreign exchange contracts)
changed to a net receive fixed position of $101.9 billion on December 31,
2007 compared to a net
receive fixed position of $12.3 billion on
December 31, 2006. Changes in the notional levels of our interest rate
swap position were driven by the net termination of $88.9 billion in pay
fixed swaps, the net termination of $9.5 billion in U.S. dollar denominated
receive fixed swaps, and the addition of $10.2 billion in foreign denomi-
nated receive fixed swaps. The notional amount of our foreign exchange
basis swaps increased $22.6 billion to $54.5 billion at December 31,
2007 compared to $31.9 billion at December 31, 2006. The notional
amount of our option position decreased $103.2 billion to $140.1 billion
at December 31, 2007 compared to $243.3 billion at December 31,
2006. The decrease in the notional amount of options was due to the net
terminations and expirations of $85.0 billion in caps and floors and termi-
nations of $18.2 billion of swaptions.
Bank of America 2007
91
Table 31 Asset and Liability Management Interest Rate and Foreign Exchange Contracts
December 31, 2007
(Dollars in millions, average estimated duration in
years)
Receive fixed interest rate swaps (1, 2)
Notional amount
Weighted average fixed rate
Pay fixed interest rate swaps (1)
Notional amount
Weighted average fixed rate
Foreign exchange basis swaps (2, 3, 4)
Notional amount
Option products (5)
Notional amount
Foreign exchange contracts (2, 4, 6)
Notional amount (7)
Futures and forward rate contracts
Notional amount (7)
Net ALM contracts
December 31, 2006
(Dollars in millions, average estimated duration in
years)
Receive fixed interest rate swaps (1, 2)
Notional amount
Weighted average fixed rate
Pay fixed interest rate swaps (1)
Notional amount
Weighted average fixed rate
Foreign exchange basis swaps (2, 3, 4)
Notional amount
Option products (5)
Notional amount
Foreign exchange contracts (2, 4, 6)
Notional amount (7)
Futures and forward rate contracts
Notional amount (7)
Net ALM contracts
Expected Maturity
Total
2008
2009
2010
2011
2012
Thereafter
$ 81,965
$
4,869
$48,908
$ 3,252
$1,630
$2,508
$20,798
4.34%
4.03%
3.91%
4.35%
4.50%
4.88%
5.34%
$ 11,340
$
5.04%
$
–
–%
$
–
–%
$
–
–%
–
–%
$1,000
$10,340
5.45%
5.00%
$ 54,531
$
2,537
$ 4,463
$ 5,839
$4,294
$8,695
$28,703
140,114
130,000
10,000
76
–
–
38
31,054
1,438
2,047
4,171
1,235
3,150
19,013
752
752
–
–
–
–
–
Average Estimated
Duration
3.70
5.37
Expected Maturity
Total
2007
2008
2009
2010
2011
Thereafter
$ 91,502
$
2,795
$ 7,844
$48,900
$3,252
$1,630
$27,081
4.90%
4.80%
4.41%
4.90%
4.35%
4.50%
5.14%
$100,217
$ 15,000
$ 2,500
$44,000
$
4.98%
5.12%
5.11%
4.86%
–
–%
$ 250
$38,467
5.43%
5.06%
$ 31,916
$
174
$ 2,292
$ 3,012
$5,351
$3,962
$17,125
243,280
200,000
43,176
–
70
–
34
20,319
(753)
1,588
1,901
3,850
1,104
12,629
8,480
8,480
–
–
–
–
–
Average Estimated
Duration
4.42
2.93
Fair
Value
$ 992
(429)
6,164
(155)
(499)
(3)
$6,070
Fair
Value
$ (748)
261
1,992
317
(319)
(46)
$1,457
(1) At December 31, 2007, $45.0 billion of the receive fixed interest rate swap notional represented forward starting swaps that will not be effective until their respective contractual start dates. There were no forward starting pay
fixed swap positions at December 31, 2007. At December 31, 2006, $4.2 billion of the receive fixed and $52.5 billion of the pay fixed swap notional represented forward starting swaps that will not be effective until their
respective contractual start dates.
(2) Does not include basis adjustments on fixed rate debt issued by the Corporation and hedged under fair value hedge relationships pursuant to SFAS 133 that substantially offset the fair values of these derivatives.
(3) Foreign exchange basis swaps consist of cross-currency variable interest rate swaps used separately or in conjunction with receive fixed interest rate swaps.
(4) Does not include foreign currency translation adjustments on certain foreign debt issued by the Corporation which substantially offset the fair values of these derivatives.
(5) Option products of $140.1 billion at December 31, 2007 are comprised of $120.1 billion in purchased caps and $20.0 billion in sold floors. At December 31, 2006, option products included $225.1 billion in caps and $18.2
billion in swaptions.
(6) Foreign exchange contracts include foreign-denominated and cross-currency receive fixed interest rate swaps as well as foreign currency forward rate contracts. Total notional was comprised of $31.3 billion in foreign-
denominated and cross-currency receive fixed swaps and $211 million in foreign currency forward rate contracts at December 31, 2007 and $21.0 billion in foreign-denominated and cross-currency receive fixed swaps and
$697 million in foreign currency forward rate contracts at December 31, 2006.
(7) Reflects the net of long and short positions.
The table above includes derivatives utilized in our ALM activities,
including those designated as SFAS 133 accounting hedges and economic
hedges. The fair value of net ALM contracts increased $4.6 billion from a
gain of $1.5 billion at December 31, 2006 to a gain of $6.1 billion at
December 31, 2007. The increase was primarily attributable to gains from
changes in the value of foreign exchange basis swaps of $4.2 billion, and
U.S. dollar denominated receive fixed interest rate swaps of $1.7 billion.
These gains were partially offset by losses from changes in the value of
pay fixed interest rate swaps of $690 million, option products of $472
million, and foreign exchange contracts of $180 million. The increase in
the value of foreign exchange basis swaps was due to the strengthening of
most foreign currencies against the U.S. dollar during the twelve months
ended December 31, 2007. The increase in the value of U.S. dollar
denominated receive fixed interest rate swaps and the decrease in the
value of the pay fixed interest rate swaps were due to decreases in inter-
est rates during 2007. The decrease in the value of the option portfolio
was primarily attributable to decreases in interest rates during 2007, net
terminations and expirations of caps and floors, and terminations of swap-
tions. The decrease in the value of foreign exchange contracts was largely
due to the increase in foreign interest rates during 2007.
The Corporation uses interest rate derivative instruments to hedge
the variability in the cash flows of its assets and liabilities, and other fore-
casted transactions (cash flow hedges). From time to time, the Corpo-
ration also utilizes equity-indexed derivatives accounted for as SFAS 133
cash flow hedges to minimize exposure to price fluctuations on the fore-
casted purchase or sale of certain equity investments. The net losses
on both open and terminated derivative instruments recorded in accumu-
lated OCI, net-of-tax, was $4.4 billion at December 31, 2007. These net
losses are expected to be reclassified into earnings in the same period
when the hedged cash flows affect earnings and will decrease income or
increase expense on the respective hedged cash flows. Assuming no
change in open cash flow derivative hedge positions and no changes to
92 Bank of America 2007
prices or interest rates beyond what is already implied in forward yield
curves at December 31, 2007, the pre-tax net losses are expected to be
reclassified into earnings as follows: $1.3 billion, or 19 percent within the
next year, 68 percent within five years, and 89 percent within 10 years,
with the remaining 11 percent
thereafter. For more information on
derivatives designated as cash flow hedges, see Note 4 – Derivatives to
the Consolidated Financial Statements.
The amounts included in accumulated OCI for terminated derivative
contracts were losses of $3.8 billion and $3.2 billion, net-of-tax, at
December 31, 2007 and 2006. Losses on these terminated derivative
contracts are reclassified into earnings in the same period or periods dur-
ing which the hedged forecasted transaction affects earnings.
Mortgage Banking Risk Management
IRLCs and the related residential first mortgage loans held-for-sale are
subject to interest rate risk between the date of the IRLC and the date the
loans are sold to the secondary market. To hedge interest rate risk, we
utilize forward loan sale commitments and other derivative instruments
including purchased options. These instruments are used as economic
first mortgage loans held-for-sale. At
hedges of
December 31, 2007, the notional amount of derivatives economically
hedging the IRLCs and residential first mortgage loans held-for-sale was
$18.6 billion.
IRLCs and residential
The Corporation adopted SFAS 159 as of January 1, 2007 and
elected to account for certain originated mortgage loans held-for-sale at
fair value. Subsequent to the adoption, 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. At December 31, 2007, residential
mortgage loans held-for-sale in connection with mortgage banking activ-
ities for which the fair value option was elected had an aggregate fair
value of $9.56 billion and an aggregate outstanding principal balance of
$9.82 billion. Net gains resulting from changes in fair value of loans
held-for-sale that we originated, including realized gains and losses on
sale of $333 million, were recorded in mortgage banking income during
2007. The adoption of SFAS 159 resulted in an increase of $256 million
in mortgage banking income during 2007, and in an increase of $212 mil-
lion in noninterest expense during 2007.
We manage changes in the value of MSRs by entering into derivative
financial
instruments. MSRs are a nonfinancial asset created when the
underlying mortgage loan is sold to investors and we retain the right to
service the loan. We use certain derivatives such as options and interest
rate swaps as economic hedges of MSRs. At December 31, 2007, the
amount of MSRs identified as being hedged by derivatives was approx-
imately $3.1 billion. The notional amount of the derivative contracts des-
ignated as economic hedges of MSRs at December 31, 2007 was $69.0
billion. For additional information on MSRs see Note 21 – Mortgage Servic-
ing Rights to the Consolidated Financial Statements.
Operational Risk Management
Operational risk is the risk of loss resulting from inadequate or failed
internal processes, people and systems, including system conversions
and integration, and external events. Successful operational risk manage-
ment is particularly important to diversified financial services companies
because of the nature, volume and complexity of the financial services
business.
We approach operational risk from two perspectives: corporate-wide
and line of business-specific. The Compliance and Operational Risk
Committee provides oversight of significant corporate-wide operational and
compliance issues. Within Global Risk Management, Enterprise Opera-
tional Risk Management develops policies, practices, controls and
monitoring tools for assessing and managing operational risks across the
Corporation. We also mitigate operational risk through a broad-based
approach to process management and process improvement. Improve-
ment efforts are focused on reduction of variation in outputs. We have a
dedicated Quality and Productivity team to manage and certify the process
management and improvement efforts. For selected risks, we use speci-
alized support groups, such as Information Security and Supply Chain
Management, to develop corporate-wide risk management practices, such
as an information security program and a supplier program to ensure that
suppliers adopt appropriate policies and procedures when performing work
on behalf of the Corporation. These specialized groups also assist the
lines of business in the development and implementation of risk manage-
ment practices specific to the needs of the individual businesses. These
groups also work with line of business executives and risk executives to
develop appropriate policies, practices, controls and monitoring tools for
each line of business. Through training and communication efforts, com-
pliance and operational risk awareness is driven across the Corporation.
The lines of business are responsible for all the risks within the
business line, including operational risks. Operational and Compliance
Risk executives, working in conjunction with senior line of business execu-
tives, have developed key tools to help identify, measure, mitigate and
monitor operational risk in each business line. Examples of these include
personnel management practices, data reconciliation processes,
fraud
management units, transaction processing monitoring and analysis, busi-
ness recovery planning and new product introduction processes. In addi-
tion, the lines of business are responsible for monitoring adherence to
corporate practices. Line of business management uses a self-
assessment process, which helps to identify and evaluate the status of
risk and control
issues, including mitigation plans, as appropriate. The
goal of the self-assessment process is to periodically assess changing
market and business conditions, to evaluate key operational risks impact-
ing each line of business, and assess the controls in place to mitigate the
risks. In addition to information gathered from the self-assessment proc-
ess, key operational risk indicators have been developed and are used to
help identify trends and issues on both a corporate and a line of business
level.
Recent Accounting and Reporting
Developments
See Note 1 – Summary of Significant Accounting Principles to the Con-
solidated Financial Statements for a discussion of recently issued account-
ing pronouncements.
Complex Accounting Estimates
Our significant accounting principles, as described in Note 1 – Summary of
Significant Accounting Principles to the Consolidated Financial State-
ments, are essential in understanding the MD&A. Many of our significant
accounting principles require complex judgments to estimate values of
assets and liabilities. We have procedures and processes to facilitate
making these judgments.
The more judgmental estimates are summarized below. We have
identified and described the development of the variables most important
in the estimation process that, with the exception of accrued taxes,
involve mathematical models to derive the estimates. In many cases,
there are numerous alternative judgments that could be used in the proc-
ess of determining the inputs to the model. Where alternatives exist, we
Bank of America 2007
93
have used the factors that we believe represent the most reasonable
value in developing the inputs. Actual performance that differs from our
estimates of the key variables could impact net income. Separate from the
possible future impact to net income from input and model variables, the
value of our lending portfolio and market-sensitive assets and liabilities
may change subsequent to the balance sheet measurement, often sig-
nificantly, due to the nature and magnitude of future credit and market
conditions. Such credit and market conditions may change quickly and in
unforeseen ways and the resulting volatility could have a significant, neg-
ative effect on future operating results. These fluctuations would not be
indicative of deficiencies in our models or inputs.
Allowance for Credit Losses
The allowance for credit losses, which includes the allowance for loan and
lease losses and the reserve for unfunded lending commitments, repre-
sents management’s estimate of probable losses inherent in the Corpo-
ration’s lending activities that are carried at historical cost. Changes to the
allowance for credit losses are reported in the Consolidated Statement of
Income in the provision for credit losses. Our process for determining the
allowance for credit losses is discussed in the Credit Risk Management
section beginning on page 69 and Note 1 – Summary of Significant
Accounting Principles to the Consolidated Financial Statements. Due to
the variability in the drivers of the assumptions made in this process,
estimates of the portfolio’s inherent risks and overall collectibility change
industries, countries and
with changes in the economy,
individual borrowers’ or counterparties’ ability and willingness to repay
their obligations. The degree to which any particular assumption affects
the allowance for credit losses depends on the severity of the change and
its relationship to the other assumptions.
individual
(i)
risk ratings for pools of commercial
Key judgments used in determining the allowance for credit losses
include:
loans and leases,
(ii) market and collateral values and discount rates for individually eval-
uated loans, (iii) product type classifications for consumer and commercial
loans and leases, (iv) loss rates used for consumer and commercial loans
and leases, (v) adjustments made to assess current events and con-
ditions,
(vi) considerations regarding domestic and global economic
uncertainty, and (vii) overall credit conditions.
Our allowance for loan and lease losses is sensitive to the risk rating
assigned to commercial loans and leases. Assuming a downgrade of one
level in the internal risk rating for commercial loans and leases measured
at historical cost and rated under the internal risk rating scale, except
loans and leases already risk-rated Doubtful as defined by regulatory
authorities, the allowance for loans and lease losses would increase by
approximately $1.6 billion at December 31, 2007. The allowance for loan
and lease losses as a percentage of total loans and leases measured at
historical cost at December 31, 2007 was 1.33 percent and this hypo-
thetical increase in the allowance would raise the ratio to approximately
1.50 percent. Our allowance for loans and lease losses is also sensitive
to the loss rates used for the consumer and commercial portfolios. A 10
percent increase in the loss rates used on the consumer and commercial
loan and lease portfolios measured at historical cost would increase the
allowance for loan and lease losses at December 31, 2007 by approx-
imately $820 million, of which $690 million would relate to consumer and
$130 million to commercial.
These sensitivity analyses do not represent management’s expect-
ations of the deterioration in risk ratings or the increases in loss rates but
are provided as hypothetical scenarios to assess the sensitivity of the
allowance for loan and lease losses to changes in key inputs. We believe
the risk ratings and loss severities currently in use are appropriate and
94 Bank of America 2007
that the probability of a downgrade of one level of the internal risk ratings
for commercial loans and leases within a short period of time is remote.
The process of determining the level of the allowance for credit
losses requires a high degree of judgment. It is possible that others, given
the same information, may at any point in time reach different reasonable
conclusions.
Fair Value of Financial Instruments
Effective January 1, 2007, we determined the fair market values of our
financial
instruments based on the fair value hierarchy established in
SFAS 157 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. We carry certain corporate loans and loan commit-
ments, loans held-for-sale, structured reverse repurchase agreements, and
long-term deposits at fair value in accordance with SFAS 159. We also
carry
trading account assets and liabilities, derivative assets and
liabilities, AFS debt and marketable equity securities, MSRs, and certain
other assets at fair value. For more information, see Note 1 – Summary of
Significant Accounting Principles and Note 19 – Fair Value Disclosures to
the Consolidated Financial Statements.
Trading account assets and liabilities are recorded at fair value,
which is primarily based on actively traded markets where prices are
based on either direct market quotes or observed transactions. Liquidity is
a significant factor in the determination of the fair value of trading account
assets or liabilities. Market price quotes may not be readily available for
some positions, or positions within a market sector where trading activity
has slowed significantly or ceased. Situations of illiquidity generally are
triggered by the market’s perception of credit uncertainty regarding a sin-
gle company or a specific market sector. In these instances, fair value is
determined based on limited available market information and other fac-
tors, principally from reviewing the issuer’s financial statements and
ratings made by one or more rating agencies. At
changes in credit
December 31, 2007, $4.0 billion, or two percent, of trading account
assets were classified as level 3 fair value assets. No trading account
liabilities were classified as level 3 liabilities at December 31, 2007.
The fair values of derivative assets and liabilities include adjust-
liquidity, counterparty credit quality and other deal
ments for market
specific factors, where appropriate. To ensure the prudent application of
estimates and management judgment in determining the fair value of
derivative assets and liabilities, various processes and controls have been
adopted, which include: a model validation policy that requires a review
and approval of quantitative models used for deal pricing, financial state-
ment fair value determination and risk quantification; a trading product
valuation policy that requires verification of all traded product valuations;
and a periodic review and substantiation of daily profit and loss reporting
for all traded products. These processes and controls are performed
independently of the business.
The fair values of derivative assets and liabilities traded in the
over-the-counter market are determined using quantitative models that
require the use of multiple market inputs including interest rates, prices
and indices to generate continuous yield or pricing curves and volatility
factors, which are used to value the position. The predominance of market
inputs are actively quoted and can be validated through external sources,
including brokers, market transactions and third-party pricing services.
Estimation risk is greater for derivative asset and liability positions that
are either option-based or have longer maturity dates where observable
market inputs are less readily available or are unobservable, in which case
quantitative based extrapolations of rate, price or index scenarios are
used in determining fair values. At December 31, 2007, the level 3 fair
values of derivative assets and liabilities determined by these quantitative
models were $9.0 billion and $10.2 billion. These amounts reflect the full
fair value of the derivatives and do not isolate the discrete value asso-
ciated with the subjective valuation variable. Further, they represent two
percent of both derivative assets and liabilities, before the impact of
legally enforceable master netting agreements. For 2007, there were no
changes to the quantitative models, or uses of such models, that resulted
in a material adjustment to the Consolidated Statement of Income.
Trading account profits (losses), which represent the net amount
earned from our trading positions, can be volatile and are largely driven by
general market conditions and customer demand. Trading account profits
(losses) are dependent on the volume and type of transactions, the level
of risk assumed, and the volatility of price and rate movements at any
given time within the ever-changing market environment. To evaluate risk
in our trading activities, we focus on the actual and potential volatility of
individual positions as well as portfolios. At a portfolio and corporate level,
we use trading limits, stress testing and tools such as VAR modeling,
which estimates a potential daily loss which is not expected to be
exceeded with a specified confidence level, to measure and manage
market risk. At December 31, 2007, the amount of our VAR was $73 mil-
lion based on a 99 percent confidence level. For more information on VAR,
see Trading Risk Management beginning on page 87.
AFS debt and marketable equity securities are recorded at fair value,
which is generally based on quoted market prices or market prices for
similar assets.
Principal Investing
Principal Investing is included within Equity Investments in All Other and is
discussed in more detail beginning on page 59. Principal
Investing is
comprised of a diversified portfolio of investments in privately-held and
publicly-traded companies at all stages of their life cycle, from start-up to
buyout. These investments are made either directly in a company or held
through a fund. Some of these companies may need access to additional
cash to support their long-term business models. Market conditions and
company performance may impact whether funding is available from pri-
vate investors or the capital markets. For more information, see Note 1 –
Summary of Significant Accounting Principles and Note 19 – Fair Value
Disclosures to the Consolidated Financial Statements.
Investments with active market quotes are carried at estimated fair
value; however, the majority of our investments do not have publicly avail-
able price quotations and, therefore, the fair value is unobservable. At
December 31, 2007, we had nonpublic investments of $3.5 billion, or
approximately 86 percent of the total portfolio. Valuation of these invest-
ments requires significant management judgment. We value such invest-
ments initially at transaction price and adjust valuations when evidence is
available to support such adjustments. Such evidence includes trans-
actions in similar instruments, market comparables, completed or pending
third-party transactions in the underlying investment or comparable enti-
ties, subsequent rounds of financing, recapitalizations and other trans-
actions across the capital structure, and changes in financial ratios or
cash flows. Investments are adjusted to estimated fair values at the bal-
ance sheet date with changes being recorded in equity investment income
in the Consolidated Statement of Income.
Accrued Income Taxes
As more fully described in Note 1 – Summary of Significant Accounting
Principles and Note 18 – Income Taxes to the Consolidated Financial
Statements, we account for income taxes in accordance with SFAS 109 as
interpreted by FIN 48. Accrued income taxes, reported as a component of
accrued expenses and other liabilities on our Consolidated Balance Sheet,
represents the net amount of current income taxes we expect to pay to or
receive from various taxing jurisdictions attributable to our operations to
date. We currently file income tax returns in more than 100 jurisdictions
and consider many factors – including statutory, judicial and regulatory
guidance – in estimating the appropriate accrued income taxes for each
jurisdiction.
In applying the principles of SFAS 109, we monitor relevant tax
authorities and change our estimate of accrued income taxes due to
changes in income tax laws and their interpretation by the courts and regu-
latory authorities. These revisions of our estimate of accrued income tax-
es, which also may result from our own income tax planning and from the
resolution of income tax controversies, may be material to our operating
results for any given period.
is reviewed for potential
Goodwill and Intangible Assets
The nature of and accounting for goodwill and intangible assets is dis-
cussed in detail in Note 1 – Summary of Significant Accounting Principles
and Note 10 – Goodwill and Intangible Assets to the Consolidated Finan-
cial Statements. Goodwill
impairment at the
reporting unit level on an annual basis, or in interim periods if events or
circumstances indicate a potential impairment. The reporting units utilized
for this test were those that are one level below the business segments
identified on page 44. The impairment test is performed in two steps. The
first step of the goodwill impairment test compares the fair value of the
reporting unit with its carrying amount, including goodwill. If the fair value
of the reporting unit exceeds its carrying amount, goodwill of the reporting
unit is considered not impaired; however, if the carrying amount of the
reporting unit exceeds its fair value, the second step must be performed.
The second step compares the implied fair value of the reporting unit’s
goodwill, as defined in SFAS 142, with the carrying amount of that good-
will. An impairment loss is recorded to the extent that the carrying amount
of goodwill exceeds its implied fair value.
For intangible assets subject to amortization, impairment exists when
the carrying amount of the intangible asset exceeds its fair value. An
impairment loss will be recognized only if the carrying amount of the
intangible asset is not recoverable and exceeds its fair value. The carrying
amount of the intangible asset is not recoverable if it exceeds the sum of
the undiscounted cash flows expected to result from it. An intangible
asset subject to amortization shall be tested for recoverability whenever
events or changes in circumstances, such as a significant or adverse
change in the business climate that could affect the value of the intangible
asset,
its carrying amount may not be recoverable. An
impairment loss is recorded to the extent the carrying amount of the
intangible asset exceeds its fair value.
indicate that
The fair values of the reporting units were determined using a combi-
nation of valuation techniques consistent with the income approach and
the market approach and the fair values of the intangible assets were
the income
determined using the income approach. For purposes of
approach, discounted cash flows were calculated by taking the net present
value of estimated cash flows using a combination of historical results,
estimated future cash flows and an appropriate price to earnings multiple.
We use our internal forecasts to estimate future cash flows and actual
results may differ from forecasted results. Cash flows were discounted
using a discount rate based on expected equity return rates, which was 11
percent for 2007. Expected rates of equity returns were estimated based
on historical market returns and risk/return rates for similar industries of
Bank of America 2007
95
the reporting unit. For purposes of the market approach, valuations of
reporting units were based on actual comparable market transactions and
market earnings multiples for similar industries of the reporting unit.
Our evaluations for 2007 indicated there was no impairment of
goodwill or intangible assets.
Consolidation and Accounting for Variable Interest
Entities
Under the provisions of FIN 46R, a VIE is consolidated by the entity that
will absorb a majority of the variability created by the assets of the VIE.
The calculation of variability is based on an analysis of projected
probability-weighted cash flows based on the design of the particular VIE.
Scenarios in which expected cash flows are less than or greater than the
expected outcomes create expected losses or expected residual returns.
The entity that will absorb a majority of expected variability (the sum of the
absolute values of the expected losses and expected residual returns)
consolidates the VIE and is referred to as the primary beneficiary.
A variety of qualitative and quantitative assumptions are used to
estimate projected cash flows and the relative probability of each potential
outcome, and to determine which parties will absorb expected losses and
expected residual returns. Critical assumptions, which may include pro-
jected credit losses and interest rates, are independently verified against
market observable data where possible. Where market observable data is
not available, the results of the analysis become more subjective.
As certain events occur, we re-evaluate which parties will absorb
variability and whether we have become or are no longer the primary
beneficiary. Reconsideration events may occur when VIEs acquire addi-
tional assets, issue new variable interests or enter into new or modified
contractual arrangements. A reconsideration event may also occur when
we acquire new or additional interests in a VIE.
In the unlikely event we were required to consolidate our uncon-
solidated VIEs,
their consolidation would increase our assets and
liabilities and could have an adverse impact on our Tier 1 Capital, Total
Capital and Tier 1 Leverage Capital ratios.
For more information, see Note 9 – Variable Interest Entities to the
Consolidated Financial Statements.
2006 Compared to 2005
The following discussion and analysis provides a comparison of our results
of operations for 2006 and 2005. This discussion should be read in con-
junction with the Consolidated Financial Statements and related Notes.
Tables 5 and 6 contain financial data to supplement this discussion.
Overview
Net Income
Net income totaled $21.1 billion, or $4.59 per diluted common share, in
2006 compared to $16.5 billion, or $4.04 per diluted common share, in
2005. The return on average common shareholders’ equity was 16.27
percent in 2006 compared to 16.51 percent in 2005. These earnings
provided sufficient cash flow to allow us to return $21.2 billion and $10.6
billion in 2006 and 2005, in capital to shareholders in the form of divi-
dends and share repurchases, net of employee stock options exercised.
Net Interest Income
Net interest income on a FTE basis increased $4.2 billion to $35.8 billion
in 2006 compared to 2005. The primary drivers of the increase were the
impact of the MBNA merger (volumes and spreads), consumer and com-
loan growth, and increases in the benefits from ALM activities
mercial
96 Bank of America 2007
including higher portfolio balances (primarily residential mortgages) and
the impact of changes in spreads across all product categories. These
increases were partially offset by a lower contribution from market-based
earning assets and the higher cost associated with higher levels of whole-
sale funding. The net interest yield on a FTE basis decreased two bps to
2.82 percent in 2006 due primarily to an increase in lower yielding market-
based earning assets and loan spreads that continued to tighten due to
the flat to inverted yield curve. These decreases were partially offset by
widening of spreads on core deposits.
Noninterest Income
Noninterest income increased $11.6 billion to $38.0 billion in 2006, due
primarily to increases in card income of $8.5 billion, trading account prof-
its (losses) of $1.4 billion, equity investment income of $977 million, serv-
ice charges of $520 million and other income of $1.2 billion partially
offset by a decrease in gains (losses) on sales of debt securities of $1.5
billion. Card income increased primarily due to the addition of MBNA
resulting in higher excess servicing income, cash advance fees, inter-
change income and late fees. Trading account profits (losses) increased
income
due to a favorable market environment. Equity investment
increased primarily due to favorable market conditions driven by liquidity in
the capital markets as well as a gain of $341 million recorded on the
liquidation of a strategic European investment. Service charges grew due
to increased non-sufficient funds fees and overdraft charges, account serv-
ice charges, and ATM fees resulting from new account growth and
increased account usage. Other income increased due to the $720 million
gain on the sale of our Brazilian operations and the $165 million gain on
the sale of our Asia commercial banking business. Gains (losses) on sales
of debt securities were $(443) million and $1.1 billion in 2006 and 2005.
The decrease was primarily due to a loss on the sale of mortgage-backed
securities in 2006 compared to gains recorded in 2005.
Provision for Credit Losses
The provision for credit losses increased $996 million to $5.0 billion in
2006 compared to 2005. Provision expense rose due to increases from
the addition of MBNA, reduced benefits from releases of commercial
reserves and lower commercial recoveries. These increases were partially
offset by lower bankruptcy-related credit costs on the domestic consumer
credit card portfolio.
Noninterest Expense
Noninterest expense increased $6.9 billion in 2006 from 2005, primarily
due to the MBNA merger, increased personnel expense related to higher
performance-based compensation and higher marketing expense related
to consumer banking initiatives. Amortization of intangibles expense was
higher due to increases in purchased credit card relationships, affinity
relationships, core deposit intangibles and other intangibles,
including
trademarks.
Income Tax Expense
Income tax expense was $10.8 billion in 2006 compared to $8.0 billion in
2005, resulting in an effective tax rate of 33.9 percent in 2006 and 32.7
percent in 2005. The increase in the effective tax rate was primarily due to
a $175 million charge to income tax expense arising from the change in
tax legislation, the one-time benefit recorded during 2005 related to the
repatriation of certain foreign earnings and the January 1, 2006 addition of
MBNA.
Business Segment Operations
Global Consumer and Small Business Banking
Net income increased $4.4 billion, or 62 percent, to $11.4 billion in 2006
compared to 2005. Total revenue rose $16.5 billion, or 58 percent, in
2006 compared to 2005, driven by increases in net interest income and
noninterest income. The MBNA merger and organic growth in average
loans and leases contributed to the $10.6 billion, or 60 percent, increase
in net interest income. Increases in card income of $4.9 billion, all other
income of $806 million and service charges of $348 million drove the
$5.9 billion, or 54 percent, increase in noninterest income. Card income
was higher mainly due to increases in interchange income, cash advance
fees and late fees due primarily to the impact of the MBNA merger. All
other income increased primarily as a result of the MBNA merger. Service
charges increased due to new account growth and increased usage. These
increases were partially offset by increases in the provision for credit
losses and noninterest expense. The provision for credit losses increased
$3.8 billion to $8.5 billion in 2006 resulting primarily from an increase in
Card Services mainly due to the MBNA merger. Noninterest expense
increased $5.6 billion, or 44 percent, primarily driven by the addition of
MBNA.
Global Corporate and Investment Banking
Net income increased $78 million, or one percent, to $6.0 billion in 2006
compared to 2005. Total revenue increased $1.3 billion, or seven percent,
in 2006 driven by increases in noninterest income partially offset by a
decrease in net interest income. Net interest income declined $460 mil-
lion, or four percent, primarily due to the impact of ALM activities and
spread compression in the loan portfolio. Noninterest income increased
$1.8 billion, or 18 percent, driven by the increase in trading account prof-
its (losses) of $1.2 billion and investment banking income of $585 million
mainly due to the continued strength in debt underwriting, sales and trad-
ing, and a favorable market environment. These increases were partially
offset by an increase in noninterest expense which increased by $1.1 bil-
lion, or 11 percent, mainly due to higher personnel expense, including
performance-based incentive compensation primarily in CMAS and other
general operating costs.
Global Wealth and Investment Management
Net income increased $211 million, or 10 percent, to $2.2 billion in 2006
compared to 2005. Total revenue increased $483 million, or seven per-
cent, in 2006. Net interest income increased $117 million, or three per-
cent, due to an increase in deposit spreads and higher average loans and
leases, largely offset by a decline in ALM activities and loan spread com-
pression. GWIM also benefited from the migration of deposits from
GCSBB. For 2006 and 2005 a total of $10.7 billion and $16.9 billion of
net deposits were migrated from GCSBB to GWIM. Noninterest income
increased $366 million, or 11 percent, mainly due to increases in invest-
ment and brokerage services driven by higher
levels of AUM. These
changes were offset by higher noninterest expense which increased $126
million, or three percent, primarily due to increases in personnel-related
expense driven by the addition of sales associates and revenue-related
expenses.
All Other
Net income increased $23 million, or two percent, to $1.5 billion in 2006
compared to 2005. Excluding the securitization offset, total revenue rose
$441 million to $3.7 billion, primarily driven by increases in net interest
income of $1.1 billion, equity investment income of $839 million and all
other income of $861 million partially offset by lower gains (losses) on
sales of debt securities. The increase in net interest income was mainly
due to the negative impact to 2005 results retained in All Other relating to
funds transfer pricing that was not allocated to the businesses. The
increase in equity investment income was due to favorable market con-
ditions driving liquidity in the Principal Investing portfolio combined with a
gain recorded on the liquidation of a strategic European investment. The
increase in all other income was primarily related to the gain on the sale
of our Brazilian operations of $720 million. Gains (losses) on sales of debt
securities decreased $1.4 billion to $(475) million resulting from a loss on
the sale of mortgage-backed securities compared with gains recorded on
the sales of mortgage-backed securities in 2005. Merger and restructuring
charges increased $393 million due to the MBNA merger whereas the
2005 charges primarily related to the FleetBoston Financial Corporation
merger.
Bank of America 2007
97
Statistical Tables
Table I Year-to-date Average Balances and Interest Rates – FTE Basis
(Dollars in millions)
Earning assets
Time deposits placed and other short-term investments
Federal funds sold and securities purchased under agreements to
resell
Trading account assets
Debt securities (2)
Loans and leases (3):
Residential mortgage
Credit card – domestic
Credit card – foreign
Home equity (4)
Direct/Indirect consumer (5)
Other consumer (6)
Total consumer
Commercial – domestic
Commercial real estate (7)
Commercial lease financing
Commercial – foreign
Total commercial
Total loans and leases
Other earning assets
Total earning assets (8)
Cash and cash equivalents
Other assets, less allowance for loan and lease losses
Total assets
Interest-bearing liabilities
Domestic interest-bearing deposits:
Savings
NOW and money market deposit accounts
Consumer CDs and IRAs
Negotiable CDs, public funds and other time deposits
Total domestic interest-bearing deposits
Foreign interest-bearing deposits:
Banks located in foreign countries
Governments and official institutions
Time, savings and other
Total foreign interest-bearing deposits
Total interest-bearing deposits
Federal funds purchased, securities sold under agreements to
repurchase and other short-term borrowings
Trading account liabilities
Long-term debt
Total interest-bearing liabilities (8)
Noninterest-bearing sources:
Noninterest-bearing deposits
Other liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Net interest spread
Impact of noninterest-bearing sources
Net interest income/yield on earning assets
2007
2006 (1)
2005
Average
Balance
Interest
Income/
Expense
Yield/
Rate
Average
Balance
Interest
Income/
Expense
Yield/
Rate
Average
Balance
Interest
Income/
Expense
Yield/
Rate
$
13,152 $
627
4.77% $
15,611 $
646
4.14%
$
14,286 $
472
3.30%
155,828
187,287
186,466
7,722
9,747
10,020
4.96
5.20
5.37
175,334
145,321
225,219
7,823
7,552
11,845
4.46
5.20
5.26
169,132
133,502
219,843
5,012
5,883
11,047
2.96
4.41
5.03
15,112
5.71
7,225 12.48
1,502 12.15
7.48
7,385
8.54
6,002
9.14
389
7.40
37,615
7.15
12,884
7.32
3,145
5.93
1,212
5.93
1,452
6.98
18,693
7.25
56,308
6.49
4,629
6.41
89,053
264,650
57,883
12,359
98,765
70,260
4,259
508,176
180,102
42,950
20,435
24,491
267,978
776,154
71,305
1,390,192
33,091
178,790
$1,602,073
207,879
63,838
9,141
78,318
53,371
7,317
419,864
151,231
36,939
20,862
23,521
232,553
652,417
55,242
1,269,144
34,052
163,485
$1,466,681
11,608
5.58
8,638 13.53
1,147 12.55
7.37
5,773
7.84
4,185
788 10.78
7.65
7.21
7.42
4.77
7.12
7.01
7.43
6.33
6.29
32,139
10,897
2,740
995
1,674
16,306
48,445
3,498
79,809
9,424
5.42
6,253 11.58
–
6.16
5.53
9.72
6.65
6.46
5.97
4.85
6.99
6.26
6.50
5.53
5.35
–
3,931
2,072
665
22,345
8,266
2,046
992
1,292
12,596
34,941
2,103
59,458
173,773
53,997
–
63,852
37,472
6,854
335,948
128,034
34,304
20,441
18,491
201,270
537,218
38,013
1,111,994
33,199
124,699
$1,269,892
34,608 $
$
36,602 $
$
32,316 $
220,207
167,801
20,557
440,881
42,788
16,523
43,443
102,754
543,635
188
4,361
7,817
974
13,340
2,174
812
1,767
4,753
18,093
424,814
82,721
169,855
1,221,025
21,975
3,444
9,359
52,871
173,547
70,839
136,662
$1,602,073
0.58% $
1.98
4.66
4.74
3.03
5.08
4.91
4.07
4.63
3.33
5.17
4.16
5.51
4.33
218,077
144,738
12,195
409,618
34,985
12,674
38,544
86,203
495,821
411,132
64,689
130,124
1,101,766
177,174
57,278
130,463
$1,466,681
269
3,923
6,022
483
10,697
1,982
586
1,215
3,783
14,480
19,840
2,640
7,034
43,994
0.78%
1.80
4.16
3.97
2.61
5.67
4.63
3.15
4.39
2.92
4.83
4.08
5.41
3.99
227,722
124,385
6,865
395,574
22,945
7,418
31,603
61,966
457,540
326,408
57,689
97,709
939,346
174,892
55,793
99,861
$1,269,892
211
2,839
4,091
250
7,391
1,202
238
661
2,101
9,492
11,615
2,364
4,418
27,889
0.58%
1.25
3.29
3.65
1.87
5.24
3.21
2.09
3.39
2.08
3.56
4.10
4.52
2.97
2.08%
0.52
2.60%
$36,182
2.30%
0.52
2.82%
$35,815
2.38%
0.46
2.84%
$31,569
(1)
Interest income (FTE basis) in 2006 does not include the cumulative tax charge resulting from a change in tax legislation relating to extraterritorial tax income and foreign sales corporation regimes. The FTE impact to net
interest income and net interest yield on earning assets of this retroactive tax adjustment was a reduction of $270 million and 2 bps, respectively, in 2006. Management has excluded this one-time impact to provide a more
comparative basis of presentation for net interest income and net interest yield on earning assets on a FTE basis. The impact on any given future period is not expected to be material.
(2) Yields on AFS debt securities are calculated based on fair value rather than historical cost balances. The use of fair value does not have a material impact on net interest yield.
(3) Nonperforming loans are included in the respective average loan balances. Income on these nonperforming loans is recognized on a cash basis.
(4)
(5)
(6)
(7)
(8)
Includes home equity loans of $16.7 billion, $9.7 billion and $7.6 billion in 2007, 2006 and 2005, respectively.
Includes foreign consumer loans of $3.8 billion, $3.4 billion, and $53 million in 2007, 2006 and 2005, respectively.
Includes consumer finance loans of $3.2 billion, $2.9 billion, $3.1 billion in 2007, 2006 and 2005, respectively; and other foreign consumer loans of $1.1 billion, $4.4 billion and $3.5 billion in 2007, 2006 and 2005,
respectively.
Includes domestic commercial real estate loans of $42.1 billion, $36.2 billion and $33.8 billion in 2007, 2006 and 2005, respectively.
Interest income includes the impact of interest rate risk management contracts, which increased (decreased) interest income on the underlying assets $(542) million, $(372) million and $704 million in 2007, 2006 and 2005,
respectively. Interest expense includes the impact of interest rate risk management contracts, which increased interest expense on the underlying liabilities $813 million, $106 million and $1.3 billion in 2007, 2006 and
2005, respectively. For further information on interest rate contracts, see Interest Rate Risk Management for Nontrading Activities beginning on page 90.
98 Bank of America 2007
Table II Analysis of Changes in Net Interest Income – FTE Basis
(Dollars in millions)
Increase (decrease) in interest income
Time deposits placed and other short-term investments
Federal funds sold and securities purchased under agreements to resell
Trading account assets
Debt securities
Loans and leases:
Residential mortgage
Credit card – domestic
Credit card – foreign
Home equity
Direct/Indirect consumer
Other consumer
Total consumer
Commercial – domestic
Commercial real estate
Commercial lease financing
Commercial – foreign
Total commercial
Total loans and leases
Other earning assets
Total interest income
Increase (decrease) in interest expense
Domestic interest-bearing deposits:
Savings
NOW and money market deposit accounts
Consumer CDs and IRAs
Negotiable CDs, public funds and other time deposits
Total domestic interest-bearing deposits
Foreign interest-bearing deposits:
Banks located in foreign countries
Governments and official institutions
Time, savings and other
Total foreign interest-bearing deposits
Total interest-bearing deposits
Federal funds purchased, securities sold under agreements to repurchase and other short-term
borrowings
Trading account liabilities
Long-term debt
Total interest expense
Net increase in net interest income (2)
From 2006 to 2007
From 2005 to 2006
Due to Change in (1)
Volume
Rate
Net
Change
Due to Change in (1)
Volume
Rate
Net
Change
$ (102) $
(873)
2,187
(2,037)
83
772
8
212
3,159
(806)
404
1,506
1,323
(329)
2,088
447
(20)
70
345
(607)
(49)
106
494
(70)
(101)
(42)
237
(292)
1,016
115
$
(19) $
(101)
2,195
(1,825)
3,504
(1,413)
355
1,612
1,817
(399)
5,476
1,987
405
217
(222)
2,387
7,863
1,131
$ 9,244
$
43
178
526
282
$ 131
2,633
1,143
516
1,843
1,139
1,147
893
879
46
1,504
159
20
352
341
1,246
–
949
1,234
77
1,127
535
(17)
30
952
443
$
(17) $ (64) $
41
959
333
397
836
158
(81) $ (10) $
438
1,795
491
(113)
671
195
68
1,197
1,260
38
444
179
153
(252)
47
399
679
735
2,155
1,456
69
170
2,643
192
226
552
970
3,613
2,135
804
2,325
8,877
$ 367
631
169
145
149
179
409
3,021
288
1,464
5,204
(12)
1,152
174
2,811
1,669
798
2,184
2,385
1,147
1,842
2,113
123
9,794
2,631
694
3
382
3,710
13,504
1,395
$20,351
$
58
1,084
1,931
233
3,306
780
348
554
1,682
4,988
8,225
276
2,616
16,105
$ 4,246
(1) The changes for each category of interest income and expense are divided between the portion of change attributable to the variance in volume and the portion of change attributable to the variance in rate for that category.
(2)
The unallocated change in rate or volume variance has been allocated between the rate and volume variances.
Interest income (FTE basis) in 2006 does not include the cumulative tax charge resulting from a change in tax legislation relating to extraterritorial tax income and foreign sales corporation regimes. The FTE impact to net
interest income of this retroactive tax adjustment is a reduction of $270 million from 2005 to 2006. Management has excluded this one-time impact to provide a more comparative basis of presentation for net interest
income and net interest yield on earning assets on a FTE basis. The impact on any given future period is not expected to be material.
Bank of America 2007
99
Table III Outstanding Loans and Leases
(Dollars in millions)
Consumer
Residential mortgage
Credit card – domestic
Credit card – foreign
Home equity (1)
Direct/Indirect consumer (1, 2)
Other consumer (1, 3)
Total consumer
Commercial
Commercial – domestic (4)
Commercial real estate (5)
Commercial lease financing
Commercial – foreign
Total commercial loans measured at historical cost
Commercial loans measured at fair value (6)
Total commercial
Total loans and leases
December 31
2007
2006
2005
2004
2003
$274,949
65,774
14,950
114,834
76,844
3,850
$241,181
61,195
10,999
87,893
59,378
5,059
$182,596
58,548
–
70,229
37,407
6,677
$178,079
51,726
–
57,439
33,257
7,382
$140,483
34,814
–
27,507
29,799
7,526
551,201
465,705
355,457
327,883
240,129
208,297
61,298
22,582
28,376
320,553
4,590
161,982
36,258
21,864
20,681
140,533
35,766
20,705
21,330
122,095
32,319
21,115
18,401
91,491
19,367
9,692
10,754
240,785
218,334
193,930
131,304
n/a
n/a
n/a
n/a
325,143
240,785
218,334
193,930
131,304
$876,344
$706,490
$573,791
$521,813
$371,433
(1) Home equity loan balances previously included in direct/indirect consumer and other consumer were reclassified to home equity to conform to current year presentation. Additionally, certain foreign consumer balances were
(2)
(3)
(4)
(5)
reclassified from other consumer to direct/indirect consumer to conform to current year presentation.
Includes foreign consumer loans of $3.4 billion, $3.9 billion, $48 million, $57 million, and $31 million at December 31, 2007, 2006, 2005, 2004, and 2003, respectively.
Includes other foreign consumer loans of $829 million, $2.3 billion, $3.8 billion, $3.5 billion, and $1.9 billion at December 31, 2007, 2006, 2005, 2004, and 2003, respectively; consumer finance loans of $3.0 billion, $2.8
billion, $2.8 billion, $3.4 billion, and $3.9 billion at December 31, 2007, 2006, 2005, 2004, and 2003, respectively; and consumer lease financing of $481 million and $1.7 billion at December 31, 2004 and 2003.
Includes small business commercial—domestic loans, primarily card related, of $17.8 billion, $13.7 billion, $7.2 billion, $5.4 billion, and $2.7 billion at December 31, 2007, 2006, 2005, 2004 and 2003, respectively.
Includes domestic commercial real estate loans of $60.2 billion, $35.7 billion, $35.2 billion, $31.9 billion, and $19.0 billion at December 31, 2007, 2006, 2005, 2004, and 2003, respectively; and foreign commercial real
estate loans of $1.1 billion, $578 million, $585 million, $440 million, and $324 million at December 31, 2007, 2006, 2005, 2004, and 2003, respectively.
(6) Certain commercial loans are measured at fair value in accordance with SFAS 159 and include commercial – domestic loans of $3.5 billion, commercial – foreign loans of $790 million and commercial real estate loans of
$304 million at December 31, 2007. See Note 19 – Fair Value Disclosures to the Consolidated Financial Statements for additional discussion of fair value for certain financial instruments.
n/a = not applicable
100 Bank of America 2007
Table IV Nonperforming Assets
(Dollars in millions)
Consumer
Residential mortgage
Home equity (1)
Direct/Indirect consumer (1)
Other consumer
Total consumer (2)
Commercial
Commercial – domestic (3)
Commercial real estate
Commercial lease financing
Commercial – foreign
Small business commercial – domestic
Total commercial (4)
Total nonperforming loans and leases
Foreclosed properties
Nonperforming securities (5)
Total nonperforming assets (6, 7)
December 31
2007
2006
2005
2004
2003
$1,999
1,340
8
95
$ 660
291
2
77
$ 570
151
3
61
$ 554
94
5
85
$ 531
67
4
36
3,442
1,030
785
738
638
869
1,099
33
19
2,020
135
2,155
5,597
351
–
505
118
42
13
678
79
757
550
49
62
34
695
31
726
1,787
1,511
69
–
92
–
847
87
266
267
1,467
8
1,475
2,213
102
140
1,383
142
127
578
2,230
5
2,235
2,873
148
–
$5,948
$1,856
$1,603
$2,455
$3,021
(1) Nonperforming home equity loan balances previously included in direct/indirect consumer were reclassified to home equity to conform to current year presentation.
(2)
In 2007, $230 million in interest income was estimated to be contractually due on nonperforming consumer loans and leases classified as nonperforming at December 31, 2007 provided that these loans and leases had
been paid according to their terms and conditions. Of this amount, approximately $85 million was received and included in net income for 2007.
(3) Excludes small business commercial – domestic loans.
(4)
In 2007, $229 million in interest income was estimated to be contractually due on nonperforming commercial loans and leases classified as nonperforming at December 31, 2007, including troubled debt restructured loans of
which $33 million were performing at December 31, 2007 and not included in the table above. Approximately $162 million of the estimated $229 million in contractual interest was received and included in net income for
2007.
In 2005, nonperforming international securities held in the AFS portfolio were exchanged for performing securities.
(5)
(6) Balances do not include nonperforming loans held-for-sale included in other assets of $188 million, $80 million, $69 million, $151 million, and $202 million at December 31, 2007, 2006, 2005, 2004, and 2003,
respectively.
(7) Balances do not include loans measured at fair value in accordance with SFAS 159. At December 31, 2007, there were no nonperforming loans measured under fair value in accordance with SFAS 159.
Bank of America 2007 101
Table V Accruing Loans and Leases Past Due 90 Days or More
(Dollars in millions)
Consumer
Residential mortgage (1)
Credit card – domestic
Credit card – foreign
Direct/Indirect consumer
Other consumer
Total consumer
Commercial
Commercial – domestic (2)
Commercial real estate
Commercial lease financing
Commercial – foreign
Small business commercial – domestic
Total commercial
2007
2006
2005
2004
2003
December 31
$ 237
1,855
272
745
4
3,113
119
36
25
16
196
427
623
$ 118
1,991
184
378
7
2,678
66
78
26
9
179
199
378
$
–
1,197
–
75
15
1,287
117
4
15
32
168
–
168
$
–
1,075
–
58
23
1,156
121
1
14
2
138
–
138
$
–
616
–
47
35
698
110
23
n/a
29
162
–
162
Total accruing loans and leases past due 90 days or more (3)
$3,736
$3,056
$1,455
$1,294
$860
(1) Balances at December 31, 2007 and 2006 are related to repurchases pursuant to our servicing agreements with GNMA mortgage pools, where repayments are insured by the Federal Housing Administration or guaranteed by
the Department of Veteran Affairs.
(2) Excludes small business commercial-domestic loans.
(3) Balances do not include loans measured at fair value in accordance with SFAS 159. At December 31, 2007, there were no accruing loans or leases past due 90 days or more measured under fair value in accordance with
SFAS 159.
n/a = not available
102 Bank of America 2007
Table VI Allowance for Credit Losses
(Dollars in millions)
Allowance for loan and lease losses, January 1
Adjustment due to the adoption of SFAS 159
LaSalle balance, October 1, 2007
U.S. Trust Corporation balance, July 1, 2007
MBNA balance, January 1, 2006
FleetBoston balance, April 1, 2004
Loans and leases charged off
Residential mortgage
Credit card – domestic
Credit card – foreign
Home equity
Direct/Indirect consumer
Other consumer
Total consumer charge-offs
Commercial – domestic (1)
Commercial real estate
Commercial lease financing
Commercial – foreign
Total commercial charge-offs
Total loans and leases charged off
Recoveries of loans and leases previously charged off
Residential mortgage
Credit card – domestic
Credit card – foreign
Home equity
Direct/Indirect consumer
Other consumer
Total consumer recoveries
Commercial – domestic (2)
Commercial real estate
Commercial lease financing
Commercial – foreign
Total commercial recoveries
Total recoveries of loans and leases previously charged off
Net charge-offs
Provision for loan and lease losses
Other
Allowance for loan and lease losses, December 31
Reserve for unfunded lending commitments, January 1
Adjustment due to the adoption of SFAS 159
LaSalle balance, October 1, 2007
FleetBoston balance, April 1, 2004
Provision for unfunded lending commitments
Other
Reserve for unfunded lending commitments, December 31
Allowance for credit losses, December 31
Loans and leases outstanding measured at historical cost at December 31
Allowance for loan and lease losses as a percentage of total loans and leases
outstanding measured at historical cost at December 31 (3)
Consumer allowance for loan and lease losses as a percentage of total consumer loans
and leases outstanding at December 31
Commercial allowance for loan and lease losses as a percentage of total commercial
loans and leases outstanding measured at historical cost at December 31 (3)
Average loans and leases outstanding measured at historical cost during the year
Net charge-offs as a percentage of average loans and leases outstanding measured at
historical cost during the year (3, 4, 5)
Allowance for loan and lease losses as a percentage of total nonperforming loans and
leases measured at historical cost at December 31
Ratio of the allowance for loan and lease losses at December 31 to
net charge-offs (4, 5)
2007
$ 9,016
(32)
725
25
–
–
2006
$ 8,045
–
–
–
577
–
2005
$ 8,626
–
–
–
–
–
$
2004
6,163
–
–
–
–
2,763
(62)
(2,536)
–
(38)
(344)
(295)
(3,275)
(504)
(12)
(39)
(262)
(817)
(74)
(3,546)
(292)
(67)
(857)
(327)
(5,163)
(597)
(7)
(28)
(86)
(718)
(58)
(4,018)
–
(46)
(380)
(376)
(4,878)
(535)
(5)
(315)
(61)
(916)
(5,881)
(5,794)
(4,092)
35
452
67
16
247
110
927
261
4
56
94
415
1,342
(4,539)
5,001
(68)
9,016
395
–
–
–
9
(7)
397
31
366
–
15
132
101
645
365
5
84
133
587
1,232
(4,562)
4,021
(40)
8,045
402
–
–
–
(7)
–
395
26
231
–
23
136
102
518
327
15
30
89
461
979
(3,113)
2,868
(55)
8,626
416
–
–
85
(99)
–
402
$
2003
6,358
–
–
–
–
–
(64)
(1,657)
–
(38)
(322)
(343)
(2,424)
(857)
(46)
(132)
(408)
(1,443)
(3,867)
24
143
–
26
141
88
422
224
5
8
102
339
761
(3,106)
2,916
(5)
6,163
493
–
–
–
(77)
–
416
(79)
(3,410)
(452)
(286)
(1,885)
(346)
(6,458)
(1,135)
(54)
(55)
(28)
(1,272)
(7,730)
22
347
74
12
512
68
1,035
128
7
53
27
215
1,250
(6,480)
8,357
(23)
11,588
397
(28)
124
–
28
(3)
518
$ 12,106
$871,754
$ 9,413
$706,490
$ 8,440
$573,791
$
9,028
$521,813
$
6,579
$371,433
1.33 %
1.23
1.28 %
1.40 %
1.65 %
1.66 %
1.19
1.27
1.34
1.25
1.51
$773,142
1.44
$652,417
1.62
$537,218
2.19
$472,617
2.40
$356,220
0.84 %
0.70 %
0.85 %
0.66 %
0.87 %
207
1.79
505
1.99
532
1.76
390
2.77
215
1.98
(1)
Includes small business commercial – domestic charge offs of $911 million and $409 million in 2007 and 2006. Small business commercial – domestic charge offs were not material in 2005, 2004 and 2003.
Includes small business commercial – domestic recoveries of $42 million and $48 million in 2007 and 2006. Small business commercial – domestic recoveries were not material in 2005, 2004 and 2003.
(2)
(3) Ratios do not include loans measured at fair value in accordance with SFAS 159 at and for the year ended December 31, 2007. Loans measured at fair value were $4.59 billion at December 31, 2007.
(4)
In 2007, the impact of SOP 03-3 decreased net charge-offs by $75 million. Excluding the impact of SOP 03-3, net charge-offs as a percentage of average loans and leases outstanding measured at historical cost in 2007
would have been 0.85 percent and the ratio of the allowance for loan and lease losses to net charge-offs would have been 1.77 percent at December 31, 2007.
In 2006, the impact of SOP 03-3 decreased net charge-offs by $288 million. Excluding the impact of SOP 03-3, net charge-offs as a percentage of average loans and leases outstanding measured at historical cost in 2006
would have been 0.74 percent, and the ratio of the allowance for loan and lease losses to net charge-offs would have been 1.87 percent at December 31, 2006.
(5)
Bank of America 2007 103
Table VII Allocation of the Allowance for Credit Losses by Product Type
2007
2006
December 31
2005
Amount
Percent
of total
$
207
2,919
441
963
2,077
151
6,758
3,194
1,083
218
335
4,830
1.8%
25.2
3.8
8.3
17.9
1.3
58.3
27.6
9.3
1.9
2.9
41.7
Amount
$ 248
3,176
336
133
1,378
289
5,560
2,162
588
217
489
3,456
Percent
of total
2.8%
35.2
3.7
1.5
15.3
3.2
61.7
24.0
6.5
2.4
5.4
38.3
Amount
$ 277
3,301
–
136
421
380
4,515
2,100
609
232
589
3,530
2004
2003
Percent
of total
Amount
Percent
of total
Amount
Percent
of total
3.4% $ 240
3,148
–
115
375
500
41.0
–
1.7
5.2
4.8
56.1
26.1
7.6
2.9
7.3
43.9
4,378
2,101
644
442
1,061
4,248
2.8%
36.5
–
1.3
4.3
5.9
50.8
24.3
7.5
5.1
12.3
49.2
$ 185
1,947
–
72
347
456
3,007
1,756
484
235
681
3,156
3.0%
31.6
–
1.2
5.6
7.4
48.8
28.5
7.9
3.8
11.0
51.2
(Dollars in millions)
Allowance for loan and lease
losses
Residential mortgage
Credit card – domestic
Credit card – foreign
Home equity
Direct/Indirect consumer
Other consumer
Total consumer
Commercial – domestic (1)
Commercial real estate
Commercial lease
financing
Commercial – foreign
Total commercial (2)
Allowance for loan
and lease losses
11,588
100.0%
9,016
100.0%
8,045
100.0%
8,626
100.0%
6,163
100.0%
Reserve for unfunded
lending commitments
Allowance for credit
losses
518
$12,106
397
$9,413
395
$8,440
402
$9,028
416
$6,579
(1)
(2)
Includes allowance for small business commercial – domestic loans of $1.4 billion and $578 million at December 31, 2007 and 2006. The allowance for small business commercial – domestic loans was not material in
2005, 2004 and 2003.
Includes allowance for loan and lease losses for impaired commercial loans of $123 million, $43 million, $55 million, $202 million, and $391 million at December 31, 2007, 2006, 2005, 2004, and 2003, respectively.
Table VIII Selected Loan Maturity Data (1, 2)
(Dollars in millions)
Commercial – domestic
Commercial real estate – domestic
Foreign and other (3)
Total selected loans
Percent of total
Sensitivity of selected loans to changes in interest rates for loans due after one year:
Fixed interest rates
Floating or adjustable interest rates
Total
(1) Loan maturities are based on the remaining maturities under contractual terms.
(2)
(3) Loan maturities include direct/indirect consumer, other consumer, commercial real estate and commercial–foreign loans.
Includes loans measured at fair value in accordance with SFAS 159.
December 31, 2007
Due in
One Year
or Less
$ 80,087
24,048
27,615
$131,750
Due After
One Year
Through
Five Years
$ 91,835
31,185
5,773
$128,793
Due After
Five Years
$39,870
5,305
1,085
$46,260
Total
$211,792
60,538
34,473
$306,803
42.9%
42.0%
15.1%
100.0%
$ 11,689
117,104
$128,793
$22,085
24,175
$46,260
104 Bank of America 2007
Table IX Short-term Borrowings
(Dollars in millions)
Federal funds purchased
At December 31
Average during year
Maximum month-end balance during year
Securities sold under agreements to repurchase
At December 31
Average during year
Maximum month-end balance during year
Commercial paper
At December 31
Average during year
Maximum month-end balance during year
Other short-term borrowings
At December 31
Average during year
Maximum month-end balance during year
2007
2006
2005
Amount
Rate
Amount
Rate
Amount
Rate
$ 14,187
7,595
14,187
4.15%
4.84
–
$ 12,232
5,292
12,232
5.35%
5.11
–
207,248
245,886
277,196
55,596
57,712
69,367
135,493
113,621
142,047
4.63
5.21
–
4.85
5.03
–
4.95
5.18
–
205,295
281,611
312,955
41,223
33,942
42,511
100,077
90,287
104,555
4.94
4.66
–
5.34
5.15
–
5.43
5.21
–
$
2,715
3,670
5,964
237,940
227,081
273,544
24,968
26,335
31,380
91,301
69,322
91,301
4.06%
3.09
–
4.26
3.62
–
4.21
3.22
–
4.58
3.51
–
Bank of America 2007 105
Table X Non-exchange Traded Commodity Contracts
(Dollars in millions)
Net fair value of contracts outstanding, January 1, 2007
Effects of legally enforceable master netting agreements
Gross fair value of contracts outstanding, January 1, 2007
Contracts realized or otherwise settled
Fair value of new contracts
Other changes in fair value
Gross fair value of contracts outstanding, December 31, 2007
Effects of legally enforceable master netting agreements
Net fair value of contracts outstanding, December 31, 2007
Table XI Non-exchange Traded Commodity Contract Maturities
(Dollars in millions)
Maturity of less than 1 year
Maturity of 1-3 years
Maturity of 4-5 years
Maturity in excess of 5 years
Gross fair value of contracts outstanding
Effects of legally enforceable master netting agreements
Net fair value of contracts outstanding
Asset
Positions
$ 1,272
2,339
3,611
(3,477)
4,646
(59)
4,721
(3,573)
Liability
Positions
$ 1,130
2,339
3,469
(3,372)
4,736
(34)
4,799
(3,573)
$ 1,148
$ 1,226
December 31, 2007
Asset
Positions
$ 2,948
1,491
274
8
4,721
(3,573)
Liability
Positions
$ 2,964
1,590
224
21
4,799
(3,573)
$ 1,148
$ 1,226
106 Bank of America 2007
Table XII Selected Quarterly Financial Data
(Dollars in millions, except per share information)
Income statement
Net interest income
Noninterest income
Total revenue, net of interest expense
Provision for credit losses
Noninterest expense, before merger and
restructuring charges
Merger and restructuring charges
Income (loss) before income taxes
Income tax expense (benefit)
Net income
Average common shares issued and
outstanding (in thousands)
Average diluted common shares issued
and outstanding (in thousands)
Performance ratios
Return on average assets
Return on average common shareholders’
equity
Total ending equity to total ending assets
Total average equity to total average
assets
Dividend payout
Per common share data
Earnings
Diluted earnings
Dividends paid
Book value
Market price per share of common stock
Closing
High closing
Low closing
Market capitalization
Average balance sheet
Total loans and leases
Total assets
Total deposits
Long-term debt
Common shareholders’ equity
Total shareholders’ equity
Asset Quality
Allowance for credit losses (1)
Nonperforming assets measured at
historical cost
Allowance for loan and lease losses as a
percentage of total loans and leases
outstanding measured at historical
cost (2)
Allowance for loan and lease losses as a
percentage of total nonperforming loans
and leases measured at historical cost
Net charge-offs
Annualized net charge-offs as a percentage
of average loans and leases outstanding
measured at historical cost (2)
Nonperforming loans and leases as a
percentage of total loans and leases
outstanding measured at historical cost (2)
Nonperforming assets as a percentage of
total loans, leases and foreclosed
properties (2)
Ratio of the allowance for loan and lease
losses at period end to annualized net
charge-offs
Capital ratios (period end)
Risk-based capital:
Tier 1
Total
Tier 1 Leverage
$
Fourth
9,164
3,508
12,672
3,310
10,137
140
(915)
(1,183)
268
2007 Quarters
2006 Quarters
Third
Second
First
Fourth
Third
Second
First
$
8,615
7,314
15,929
2,030
8,459
84
5,356
1,658
3,698
$
8,386
11,177
19,563
1,810
9,018
75
8,660
2,899
5,761
$
8,268
9,887
18,155
1,235
8,986
111
7,823
2,568
5,255
$
8,599
9,887
18,486
1,570
8,849
244
7,823
2,567
5,256
$
8,586
9,598
18,184
1,165
8,594
269
8,156
2,740
5,416
$
8,630
9,589
18,219
1,005
8,523
194
8,497
3,022
5,475
$
8,776
8,915
17,691
1,270
8,826
98
7,497
2,511
4,986
4,421,554
4,420,616
4,419,246
4,432,664
4,464,110
4,499,704
4,534,627
4,609,481
4,470,108
4,475,917
4,476,799
4,497,028
4,536,696
4,570,558
4,601,169
4,666,405
0.06 %
0.93 %
1.48 %
1.40 %
1.39 %
1.43 %
1.51 %
1.43 %
0.60
8.56
8.32
n/m
0.05
0.05
0.64
32.09
41.26
52.71
41.10
$
$
11.02
8.77
8.51
77.97
0.83
0.82
0.64
30.45
50.27
51.87
47.00
$
$
17.55
8.85
8.55
43.60
1.29
1.28
0.56
29.95
48.89
51.82
48.80
$
$
16.16
8.98
8.78
48.02
1.18
1.16
0.56
29.74
51.02
54.05
49.46
$
$
15.76
9.27
8.97
47.49
1.17
1.16
0.56
29.70
53.39
54.90
51.66
$
$
16.64
9.22
8.63
46.82
1.20
1.18
0.56
29.52
53.57
53.57
47.98
$
$
17.26
8.85
8.75
41.76
1.21
1.19
0.50
28.17
48.10
50.47
45.48
$
$
15.44
9.41
9.26
46.75
1.08
1.07
0.50
28.19
45.54
47.08
43.09
$
$
$ 183,107
$ 223,041
$ 216,922
$ 226,481
$ 238,021
$ 240,966
$ 217,794
$ 208,633
$ 868,119
1,742,467
781,625
196,444
141,085
144,924
$ 780,516
1,580,565
702,481
175,265
131,606
134,487
$ 740,199
1,561,649
697,035
158,500
130,700
133,551
$ 714,042
1,521,418
686,704
148,627
130,737
133,588
$ 683,598
1,495,150
680,245
140,756
132,004
134,047
$ 673,477
1,497,987
676,851
136,769
129,098
129,262
$ 635,649
1,456,004
674,796
125,620
127,102
127,373
$ 615,968
1,416,373
659,821
117,018
130,881
131,153
$
12,106
$
9,927
$
9,436
$
9,106
$
9,413
$
9,260
$
9,475
$
9,462
5,948
3,372
2,392
2,059
1,856
1,656
1,641
1,680
1.33 %
1.21 %
1.20 %
1.21 %
1.28 %
1.33 %
1.36 %
1.46 %
207
1,985
$
$
300
1,573
$
397
1,495
$
443
1,427
$
505
1,417
$
562
1,277
$
579
1,023
$
572
822
0.91 %
0.80 %
0.81 %
0.81 %
0.82 %
0.75 %
0.65 %
0.54 %
0.64
0.68
1.47
0.40
0.43
1.53
0.30
0.32
1.51
0.27
0.29
1.51
0.25
0.26
1.60
0.24
0.25
1.75
0.23
0.25
2.21
0.26
0.27
2.72
6.87 %
11.02
5.04
8.22 %
11.86
6.20
8.52 %
12.11
6.33
8.57 %
11.94
6.25
8.64 %
11.88
6.36
8.48 %
11.46
6.16
8.33 %
11.25
6.13
8.45 %
11.32
6.18
Includes the allowance for loan and lease losses, and the reserve for unfunded lending commitments.
(1)
(2) Ratios do not include loans measured at fair value in accordance with SFAS 159 at and for the year ended December 31, 2007. Loans measured at fair value were $4.59 billion at December 31, 2007.
n/m = not meaningful
Bank of America 2007 107
Table XIII Quarterly Average Balances and Interest Rates – FTE Basis
Fourth Quarter 2007
Third Quarter 2007
(Dollars in millions)
Earning assets
Time deposits placed and other short-term investments
Federal funds sold and securities purchased under agreements to resell
Trading account assets
Debt securities (1)
Loans and leases (2):
Residential mortgage
Credit card – domestic
Credit card – foreign
Home equity (3)
Direct/Indirect consumer (4)
Other consumer (5)
Total consumer
Commercial – domestic
Commercial real estate (6)
Commercial lease financing
Commercial – foreign
Total commercial
Total loans and leases
Other earning assets
Total earning assets (7)
Cash and cash equivalents
Other assets, less allowance for loan and lease losses
Total assets
Interest-bearing liabilities
Domestic interest-bearing deposits:
Savings
NOW and money market deposit accounts
Consumer CDs and IRAs
Negotiable CDs, public funds and other time deposits
Total domestic interest-bearing deposits
Foreign interest-bearing deposits:
Banks located in foreign countries
Governments and official institutions
Time, savings and other
Total foreign interest-bearing deposits
Total interest-bearing deposits
Federal funds purchased, securities sold under agreements to repurchase and
other short-term borrowings
Trading account liabilities
Long-term debt
Total interest-bearing liabilities (7)
Noninterest-bearing sources:
Noninterest-bearing deposits
Other liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Net interest spread
Impact of noninterest-bearing sources
Interest
Income/
Expense
$
122
1,748
2,422
2,795
3,972
1,781
464
2,043
1,658
71
9,989
3,704
1,053
574
426
5,757
15,746
1,296
24,129
$
50
1,334
2,179
420
3,983
557
192
521
1,270
5,253
5,599
825
2,638
14,315
$
Average
Balance
10,459
151,938
190,700
206,873
277,058
60,063
14,329
112,372
75,423
3,918
543,163
213,200
59,702
22,239
29,815
324,956
868,119
74,909
1,502,998
33,714
205,755
$1,742,467
$
31,961
240,914
183,910
34,997
491,782
45,050
16,506
51,919
113,475
605,257
456,530
81,500
196,444
1,339,731
176,368
81,444
144,924
$1,742,467
Net interest income/yield on earning assets
$ 9,814
$
Average
Balance
11,879
139,259
194,661
174,568
274,385
57,491
11,995
98,611
73,245
4,055
519,782
176,554
38,977
20,044
25,159
260,734
780,516
74,912
1,375,795
31,356
173,414
$1,580,565
$
31,510
215,078
165,840
17,392
429,820
43,727
17,206
41,868
102,801
532,621
409,070
86,118
175,265
1,203,074
169,860
73,144
134,487
$1,580,565
Yield/
Rate
4.63%
4.59
5.06
5.40
5.73
11.76
12.86
7.21
8.72
7.24
7.32
6.89
6.99
10.33
5.67
7.03
7.21
6.89
6.39
0.63%
2.20
4.70
4.76
3.21
4.91
4.62
3.98
4.44
3.44
4.87
4.02
5.37
4.25
2.14%
0.47
2.61%
Interest
Income/
Expense
$
148
1,839
2,604
2,380
3,928
1,780
371
1,884
1,600
96
9,659
3,207
733
246
377
4,563
14,222
1,215
22,408
$
50
1,104
1,949
227
3,330
564
218
433
1,215
4,545
5,521
906
2,446
13,418
$ 8,990
Yield/
Rate
4.92%
5.27
5.33
5.45
5.72
12.29
12.25
7.58
8.67
9.47
7.39
7.21
7.47
4.91
5.95
6.95
7.25
6.46
6.48
0.62%
2.04
4.66
5.20
3.07
5.12
5.03
4.09
4.69
3.39
5.36
4.17
5.58
4.43
2.05%
0.56
2.61%
(1) Yields on AFS debt securities are calculated based on fair value rather than historical cost balances. The use of fair value does not have a material impact on net interest yield.
(2) Nonperforming loans are included in the respective average loan balances. Income on these nonperforming loans is recognized on a cash basis.
(3)
(4)
(5)
(6)
(7)
Includes home equity loans of $20.9 billion, $16.7 billion, $15.6 billion and $13.5 billion in the fourth, third, second and first quarters of 2007, and $11.7 billion in the fourth quarter of 2006, respectively.
Includes foreign consumer loans of $3.6 billion, $3.8 billion, $3.9 billion and $3.9 billion in the fourth, third, second and first quarters of 2007, and $3.8 billion in the fourth quarter of 2006, respectively.
Includes consumer finance loans of $3.1 billion, $3.2 billion, $3.4 billion and $3.0 billion in the fourth, third, second and first quarters of 2007, and $2.8 billion in the fourth quarter of 2006, respectively; and other foreign
consumer loans of $845 million, $843 million, $775 million and $1.9 billion in the fourth, third, second and first quarters of 2007, and $4.0 billion in the fourth quarter of 2006, respectively.
Includes domestic commercial real estate loans of $58.5 billion, $38.0 billion, $36.2 billion and $35.5 billion in the fourth, third, second and first quarters of 2007, and $36.1 billion in the fourth quarter of 2006,
respectively.
Interest income includes the impact of interest rate risk management contracts, which decreased interest income on assets $134 million, $170 million, $117 million and $121 million in the fourth, third, second and first
quarters of 2007, and $198 million in the fourth quarter of 2006, respectively. Interest expense includes the impact of interest rate risk management contracts, which increased (decreased) interest expense on liabilities
$201 million, $226 million, $207 million and $179 million in the fourth, third, second and first quarters of 2007, and $(69) million in the fourth quarter of 2006, respectively. For further information on interest rate contracts,
see Interest Rate Risk Management for Nontrading Activities beginning on page 90.
108 Bank of America 2007
Quarterly Average Balances and Interest Rates – FTE Basis (continued)
(Dollars in millions)
Earning assets
Time deposits placed and other short-term investments
Federal funds sold and securities purchased under agreements
Second Quarter 2007
First Quarter 2007
Fourth Quarter 2006
Average
Balance
Interest
Income/
Expense
Yield/
Rate
Average
Balance
Interest
Income/
Expense
Yield/
Rate
Average
Balance
Interest
Income/
Expense
Yield/
Rate
$
15,310
$
188
4.92% $
15,023
$
169
4.57% $
15,760
$ 166
4.19%
to resell
Trading account assets
Debt securities (1)
Loans and leases (2):
Residential mortgage
Credit card – domestic
Credit card – foreign
Home equity (3)
Direct/Indirect consumer (4)
Other consumer (5)
Total consumer
Commercial – domestic
Commercial real estate (6)
Commercial lease financing
Commercial – foreign
Total commercial
Total loans and leases
Other earning assets
Total earning assets (7)
166,258
188,287
177,834
260,099
56,235
11,946
94,267
68,175
4,153
494,875
166,529
36,788
19,784
22,223
245,324
2,156
2,364
2,394
3,708
1,777
350
1,779
1,441
100
9,155
3,039
687
217
319
4,262
740,199
13,417
70,311
1,108
1,358,199
21,627
5.19
5.03
5.39
5.70
12.67
11.76
7.57
8.48
9.71
7.41
7.32
7.49
4.40
5.75
6.97
7.26
6.31
6.38
Cash and cash equivalents
Other assets, less allowance for loan and lease losses
Total assets
Interest-bearing liabilities
Domestic interest-bearing deposits:
Savings
NOW and money market deposit accounts
Consumer CDs and IRAs
Negotiable CDs, public funds and other time deposits
Total domestic interest-bearing deposits
Foreign interest-bearing deposits:
Banks located in foreign countries
Governments and official institutions
Time, savings and other
Total foreign interest-bearing deposits
Total interest-bearing deposits
Federal funds purchased, securities sold under agreements to
repurchase and other short-term borrowings
Trading account liabilities
Long-term debt
33,689
169,761
$1,561,649
$
33,039
212,330
161,703
16,256
423,328
41,940
17,868
40,335
100,143
523,471
419,260
85,550
158,500
$
47
987
1,857
191
3,082
522
224
433
1,179
4,261
5,537
821
2,227
Total interest-bearing liabilities (7)
1,186,781
12,846
Noninterest-bearing sources:
Noninterest-bearing deposits
Other liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Net interest spread
Impact of noninterest-bearing sources
173,564
67,753
133,551
$1,561,649
Net interest income/yield on earning assets
$ 8,781
For Footnotes, see page 108.
4.79
5.41
5.27
5.69
13.26
11.55
7.60
8.25
9.93
7.50
7.27
7.55
3.55
6.48
6.94
7.31
6.28
6.37
166,195
175,249
186,498
246,618
57,720
11,133
89,559
64,038
4,928
473,996
163,620
36,117
19,651
20,658
240,046
1,979
2,357
2,451
3,504
1,887
317
1,679
1,303
122
8,812
2,934
672
175
330
4,111
714,042
12,923
64,939
1,010
1,321,946
20,889
33,623
165,849
$1,521,418
174,167
167,163
193,601
225,985
59,802
10,375
84,905
57,273
6,804
445,144
158,604
36,851
21,159
21,840
238,454
2,068
2,289
2,504
3,202
2,101
305
1,626
1,185
141
8,560
2,907
704
254
337
4,202
683,598
12,762
65,172
1,058
1,299,461
20,847
32,816
162,873
$1,495,150
4.73
5.46
5.17
5.66
13.94
11.66
7.60
8.21
8.32
7.65
7.27
7.58
4.80
6.12
7.00
7.42
6.46
6.39
0.58% $
1.86
4.61
4.70
2.92
4.99
5.02
4.31
4.72
3.27
5.30
3.85
5.62
4.34
32,773
212,249
159,505
13,376
417,903
40,372
14,482
39,534
94,388
512,291
414,104
77,635
148,627
$
41
936
1,832
136
2,945
531
178
380
1,089
4,034
5,318
892
2,048
1,152,657
12,292
174,413
60,760
133,588
$1,521,418
0.50% $
1.79
4.66
4.12
32,965
211,055
154,621
13,052
$
48
966
1,794
140
0.58%
1.81
4.60
4.30
2.86
411,693
2,948
2.84
5.34
4.98
3.90
4.68
3.19
5.20
4.66
5.51
4.31
38,648
14,220
41,328
94,196
505,889
405,748
75,261
140,756
507
168
366
1,041
3,989
5,222
800
1,881
1,127,654
11,892
5.21
4.70
3.50
4.38
3.13
5.11
4.21
5.34
4.19
174,356
59,093
134,047
$1,495,150
2.04%
0.55
2.59%
2.06%
0.55
2.61%
$ 8,597
2.20%
0.55
2.75%
$8,955
Bank of America 2007 109
Glossary
Assets in Custody – Consist largely of custodial and non-discretionary trust
assets administered for customers excluding brokerage assets. Trust
assets encompass a broad range of asset types including real estate,
private company ownership interest, personal property and investments.
Assets Under Management (AUM) – The total market value of assets under
the investment advisory and discretion of Global Wealth and Investment
Management which generate asset management fees based on a percent-
age of the assets’ market value. AUM reflects assets that are generally
managed for institutional, high net-worth and retail clients and are dis-
tributed through various investment products including mutual funds, other
commingled vehicles and separate accounts.
Bridge Loan – A loan or security which is expected to be replaced by
permanent financing (debt or equity securities, loan syndication or asset
sales) prior to the maturity date of the loan. Bridge loans may include an
unfunded commitment, as well as funded amounts, and are generally
expected to be retired in one year or less.
CDOs-Squared – A type of CDO where the underlying collateralizing secu-
rities include tranches of other CDOs.
Client Brokerage Assets – Include client assets which are held in brokerage
accounts. This includes non-discretionary brokerage and fee-based assets
which generate brokerage income and asset management fee revenue.
Committed Credit Exposure – Committed credit exposure includes any
funded portion of a facility plus the unfunded portion of a facility on which
the Corporation is legally bound to advance funds during a specified period
under prescribed conditions.
Core Net Interest Income – Managed Basis – Net interest income on a fully
taxable-equivalent basis excluding the impact of market-based activities
and certain securitizations.
Credit Default Swaps (CDS) – A derivative contract that provides protection
against the deterioration of credit quality and would allow one party to
receive payment in the event of default by a third party under a borrowing
arrangement.
Derivative – A contract or agreement whose value is derived from changes
in an underlying index such as interest rates, foreign exchange rates or
prices of securities. Derivatives utilized by the Corporation include swaps,
financial futures and forward settlement contracts, and option contracts.
Excess Servicing Income – For certain assets that have been securitized,
interest income, fee revenue and recoveries in excess of interest paid to
the investors, gross credit losses and other trust expenses related to the
securitized receivables are all reclassified into excess servicing income,
which is a component of card income. Excess servicing income also
includes the changes in fair value of
the Corporation’s card related
retained interests.
Interest-only (IO) Strip – A residual interest in a securitization trust repre-
senting the right to receive future net cash flows from securitized assets
after payments to third party investors and net credit losses. These arise
when assets are transferred to a special purpose entity as part of an
asset securitization transaction qualifying for sale treatment under GAAP.
Letter of Credit – A document issued by the Corporation on behalf of a
customer to a third party promising to pay that third party upon pre-
sentation of specified documents. A letter of credit effectively substitutes
the Corporation’s credit for that of the Corporation’s customer.
Managed Basis – Managed basis assumes that securitized loans 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. 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.
Managed Net Losses – Represents net charge-offs on held loans combined
with realized credit losses associated with the securitized loan portfolio.
Mortgage Servicing Right (MSR) – The right to service a mortgage loan
when the underlying loan is sold or securitized. Servicing includes collec-
tions for principal,
interest and escrow payments from borrowers and
accounting for and remitting principal and interest payments to investors.
Net Interest Yield – Net interest income divided by average total interest-
earning assets.
Operating Basis – A basis of presentation not defined by GAAP that
excludes merger and restructuring charges.
Qualified Special Purpose Entity (QSPE) – A special purpose entity whose
activities are strictly limited to holding and servicing financial assets and
meet the requirements set forth in SFAS 140. A qualified special purpose
entity is generally not required to be consolidated by any party.
Return on Average Common Shareholders’ Equity (ROE) – Measures the
earnings contribution of a unit as a percentage of the shareholders’ equity
allocated to that unit.
Return on Average Tangible Shareholders’ Equity (ROTE) – Measures the
earnings contribution of a unit as a percentage of the shareholders’ equity
allocated to that unit reduced by allocated goodwill.
Securitize / Securitization – A process by which financial assets are sold to
a special purpose entity, which then issues securities collateralized by
those underlying assets, and the return on the securities issued is based
on the principal and interest cash flow of the underlying assets.
Structured Investment Vehicle (SIV) – An entity that issues short duration
debt and uses the proceeds from the issuance to purchase longer-term
fixed income securities.
(UTB) – The difference between the benefit
Unrecognized Tax Benefit
recognized for a tax position in accordance with FIN 48, which is measured
as the largest dollar amount of that position that is more-likely-than-not to
be sustained upon settlement, and the tax benefit claimed on a tax return.
Value-at-Risk (VAR) – A VAR model estimates a range of hypothetical
loss which is not expected to be
scenarios to calculate a potential
exceeded with a specified confidence level. VAR is a key statistic used to
measure and manage market risk.
Variable Interest Entities (VIE) – A term defined by FIN 46R for an entity
interest. The
whose equity investors do not have a controlling financial
entity may not have sufficient equity at risk to finance its activities without
additional subordinated financial support from third parties. The equity
investors may lack the ability to make significant decisions about the enti-
ty’s activities, or they may not absorb the losses or receive the residual
returns generated by the assets and other contractual arrangements of the
VIE. The entity that will absorb a majority of expected variability (the sum
of the absolute values of the expected losses and expected residual
returns) consolidates the VIE and is referred to as the primary beneficiary.
110 Bank of America 2007
Accounting Pronouncements
Acronyms
SFAS 52
SFAS 109
SFAS 133
SFAS 140
SFAS 142
SFAS 157
SFAS 159
FIN 46R
FIN 48
FSP 13-2
Foreign Currency Translation
Accounting for Income Taxes
Accounting for Derivative Instruments and Hedging Activ-
ities, as amended
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities – a replacement of FASB
Statement No. 125
Goodwill and Other Intangible Assets
Fair Value Measurements
The Fair Value Option for Financial Assets and Financial
Liabilities
Variable
Consolidation
December 2003) – an interpretation of ARB No. 51
Interest Entities
of
(revised
Accounting for Uncertainty in Income Taxes, an inter-
pretation of FASB Statement No. 109
Accounting for a Change or Projected Change in the Timing
of Cash Flows Relating to Income Taxes Generated by a
Leveraged Lease Transaction
SOP 03-3
Accounting for Certain Loans or Debt Securities Acquired in
a Transfer
ABS
AFS
AICPA
ALCO
ALM
CDO
CLO
CMBS
EPS
FASB
FDIC
FFIEC
FIN
FRB
FSP
FTE
GAAP
IPO
IRLC
LIBOR
MD&A
OCC
OCI
SBLCs
SEC
SFAS
SOP
SPE
Asset-backed securities
Available-for-sale
American Institute of Certified Public Accountants
Asset and Liability Committee
Asset and liability management
Collateralized debt obligation
Collateralized loan obligation
Commercial mortgage-backed securities
Earnings per common share
Financial Accounting Standards Board
Federal Deposit and Insurance Corporation
Federal Financial Institutions Examination Council
Financial Accounting Standards Board Interpretation
Board of Governors of the Federal Reserve System
Financial Accounting Standards Board Staff Position
Fully taxable-equivalent
Generally accepted accounting principles in the United
States
Initial public offering
Interest rate lock commitment
London InterBank Offered Rate
Management’s Discussion and Analysis of Financial Con-
dition and Results of Operations
Office of the Comptroller of the Currency
Other comprehensive income
Standby letters of credit
Securities and Exchange Commission
Financial Accounting Standards Board Statement of Finan-
cial Accounting Standards
American Institute of Certified Public Accountants State-
ment of Position
Special purpose entity
Bank of America 2007 111
Report of Management on Internal Control Over Financial
Reporting
Bank of America Corporation and Subsidiaries
The management of Bank of America Corporation is responsible for estab-
lishing and maintaining adequate internal control over financial reporting.
The Corporation’s internal control over financial reporting is a proc-
ess designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in
the United States of America. The Corporation’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the com-
pany; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America,
and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the com-
pany; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may dete-
riorate.
Management assessed the effectiveness of
the Corporation’s
internal control over financial reporting as of December 31, 2007, based
on the framework set forth by the Committee of Sponsoring Organizations
of the Treadway Commission in Internal Control – Integrated Framework.
Based on that assessment, management concluded that, as of
the Corporation’s internal control over financial
December 31, 2007,
reporting is effective based on the criteria established in Internal Control –
Integrated Framework.
The effectiveness of the Corporation’s internal control over financial report-
ing as of December 31, 2007, has been audited by PricewaterhouseCoopers,
LLP, an independent registered public accounting firm.
Kenneth D. Lewis
Chairman, Chief Executive Officer and President
Joe L. Price
Chief Financial Officer
112 Bank of America 2007
Report of Independent Registered Public Accounting Firm
Bank of America Corporation and Subsidiaries
A company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dis-
positions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors
of the company; and (iii) provide reasonable assurance regarding pre-
vention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may dete-
riorate.
Charlotte, North Carolina
February 20, 2008
To the Board of Directors and Shareholders
of Bank of America Corporation:
the 2007 Annual Report
In our opinion, the accompanying Consolidated Balance Sheet and
the related Consolidated Statement of Income, Consolidated Statement of
Changes in Shareholders’ Equity and Consolidated Statement of Cash
Flows present fairly, in all material respects, the financial position of Bank
of America Corporation and its subsidiaries at December 31, 2007 and
2006, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2007 in conformity with
accounting principles generally accepted in the United States of America.
Also in our opinion, the Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31,
2007, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Corporation’s management is respon-
sible for these financial statements, for maintaining effective internal con-
trol over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the Report of Manage-
ment on Internal Control Over Financial Reporting appearing on page 112
of
responsibility is to
express opinions on these financial statements and on the Corporation’s
internal control over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assur-
the financial statements are free of material
ance about whether
misstatement and whether effective internal control over financial report-
ing was maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by manage-
ment, and evaluating the overall financial statement presentation. Our
audit of
internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of
internal control based on the
assessed risk. Our audits also included performing such other procedures
as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
to Shareholders. Our
As discussed in Note 1 – Summary of Significant Accounting Princi-
ples to the Consolidated Financial Statements,
the Corporation has
adopted SFAS No. 157, “Fair Value Measurements” and SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial Liabilities.”
Bank of America 2007 113
Bank of America Corporation and Subsidiaries
Consolidated Statement of Income
(Dollars in millions, except per share information)
Interest income
Interest and fees on loans and leases
Interest on debt securities
Federal funds sold and securities purchased under agreements to resell
Trading account assets
Other interest income
Total interest income
Interest expense
Deposits
Short-term borrowings
Trading account liabilities
Long-term debt
Total interest expense
Net interest income
Noninterest income
Card income
Service charges
Investment and brokerage services
Investment banking income
Equity investment income
Trading account profits (losses)
Mortgage banking income
Gains (losses) on sales of debt securities
Other income
Total noninterest income
Total revenue, net of interest expense
Provision for credit losses
Noninterest expense
Personnel
Occupancy
Equipment
Marketing
Professional fees
Amortization of intangibles
Data processing
Telecommunications
Other general operating
Merger and restructuring charges
Total noninterest expense
Income before income taxes
Income tax expense
Net income
Preferred stock dividends
Net income available to common shareholders
Per common share information
Earnings
Diluted earnings
Dividends paid
Average common shares issued and outstanding (in thousands)
Average diluted common shares issued and outstanding (in thousands)
$
$
$
$
2007
55,681
9,784
7,722
9,417
4,700
87,304
18,093
21,975
3,444
9,359
52,871
34,433
14,077
8,908
5,147
2,345
4,064
(5,131)
902
180
1,394
31,886
66,319
8,385
18,753
3,038
1,391
2,356
1,174
1,676
1,962
1,013
5,237
410
37,010
20,924
5,942
14,982
182
14,800
3.35
3.30
2.40
Year Ended December 31
2006
2005
$
$
$
$
48,274
11,655
7,823
7,232
3,601
78,585
14,480
19,840
2,640
7,034
43,994
34,591
14,290
8,224
4,456
2,317
3,189
3,166
541
(443)
2,249
37,989
72,580
5,010
18,211
2,826
1,329
2,336
1,078
1,755
1,732
945
4,580
805
35,597
31,973
10,840
21,133
22
21,111
4.66
4.59
2.12
$
$
$
$
34,843
10,937
5,012
5,743
2,091
58,626
9,492
11,615
2,364
4,418
27,889
30,737
5,753
7,704
4,184
1,856
2,212
1,763
805
1,084
1,077
26,438
57,175
4,014
15,054
2,588
1,199
1,255
930
809
1,487
827
4,120
412
28,681
24,480
8,015
16,465
18
16,447
4.10
4.04
1.90
4,423,579
4,480,254
4,526,637
4,595,896
4,008,688
4,068,140
114 Bank of America 2007
See accompanying Notes to Consolidated Financial Statements.
Bank of America Corporation and Subsidiaries
Consolidated Balance Sheet
(Dollars in millions)
Assets
Cash and cash equivalents
Time deposits placed and other short-term investments
Federal funds sold and securities purchased under agreements to resell (includes $2,578 measured at fair value at December 31, 2007
and $128,887 and $135,409 pledged as collateral)
Trading account assets (includes $88,745 and $92,274 pledged as collateral)
Derivative assets
Debt securities:
Available-for-sale (includes $107,440 and $83,785 pledged as collateral)
Held-to-maturity, at cost (fair value – $726 and $40)
Total debt securities
Loans and leases (includes $4,590 measured at fair value at December 31, 2007 and $115,285 and $24,632 pledged as collateral)
Allowance for loan and lease losses
Loans and leases, net of allowance
Premises and equipment, net
Mortgage servicing rights (includes $3,053 and $2,869 measured at fair value)
Goodwill
Intangible assets
Other assets (includes $41,088 measured at fair value at December 31, 2007)
Total assets
Liabilities
Deposits in domestic offices:
Noninterest-bearing
Interest-bearing (includes $2,000 measured at fair value at December 31, 2007)
Deposits in foreign offices:
Noninterest-bearing
Interest-bearing
Total deposits
Federal funds purchased and securities sold under agreements to repurchase
Trading account liabilities
Derivative liabilities
Commercial paper and other short-term borrowings
Accrued expenses and other liabilities (includes $660 measured at fair value at December 31, 2007 and $518 and $397 of reserve for
unfunded lending commitments)
Long-term debt
Total liabilities
Commitments and contingencies (Note 9 – Variable Interest Entities and Note 13 – Commitments and Contingencies)
Shareholders’ equity
Preferred stock, $0.01 par value; authorized – 100,000,000 shares; issued and outstanding – 185,067 and 121,739 shares
Common stock and additional paid-in capital, $0.01 par value; authorized – 7,500,000,000 shares; issued and outstanding – 4,437,885,419
and 4,458,151,391 shares
Retained earnings
Accumulated other comprehensive income (loss)
Other
Total shareholders’ equity
Total liabilities and shareholders’ equity
December 31
2007
2006
$
42,531
11,773
$
36,429
13,952
129,552
162,064
34,662
213,330
726
214,056
876,344
(11,588)
864,756
11,240
3,347
77,530
10,296
153,939
135,478
153,052
23,439
192,806
40
192,846
706,490
(9,016)
697,474
9,255
3,045
65,662
9,422
119,683
$1,715,746
$1,459,737
$ 188,466
501,882
$ 180,231
418,100
3,761
111,068
805,177
221,435
77,342
22,423
191,089
53,969
197,508
4,577
90,589
693,497
217,527
67,670
16,339
141,300
42,132
146,000
1,568,943
1,324,465
4,409
60,328
81,393
1,129
(456)
2,851
61,574
79,024
(7,711)
(466)
146,803
135,272
$1,715,746
$1,459,737
See accompanying Notes to Consolidated Financial Statements.
Bank of America 2007 115
Bank of America Corporation and Subsidiaries
Consolidated Statement of Changes in Shareholders’ Equity
(Dollars in millions, shares in thousands)
Balance, December 31, 2004
Net income
Net changes in available-for-sale debt and marketable equity
securities
Net changes in foreign currency translation adjustments
Net changes in derivatives
Cash dividends paid:
Common
Preferred
Common stock issued under employee plans and related tax
benefits
Common stock repurchased
Other
Balance, December 31, 2005
Adjustment to initially apply FASB Statement No. 158 (2)
Net income
Net changes in available-for-sale debt and marketable equity
securities
Net changes in foreign currency translation adjustments
Net changes in derivatives
Cash dividends paid:
Common
Preferred
benefits
Stock issued in acquisition (3)
Common stock repurchased
Other
Balance, December 31, 2006
Cumulative adjustment for accounting changes (4) :
Leveraged leases
Fair value option and measurement
Income tax uncertainties
Net income
Net changes in available-for-sale debt and marketable equity
securities
Net changes in foreign currency translation adjustments
Net changes in derivatives
Employee benefit plan adjustments
Cash dividends paid:
Common
Preferred
Issuance of preferred stock
Redemption of preferred stock
Common stock issued under employee plans and related tax
2,850
(270)
Common Stock and
Additional Paid-in
Capital
Shares
Amount
Retained
Earnings
4,046,546 $ 44,236 $ 58,773
16,465
Preferred
Stock
$ 271
Accumulated
Other
Comprehensive
Income
(Loss) (1)
Other
$(2,764) $(281)
Total
Shareholders’
Equity
$100,235
16,465
(2,781)
32
(2,059)
(7,665)
(18)
79,579
(126,437)
3,222
(5,765)
(145)
(3)
16
(1)
(2,781)
32
(2,059)
(7,665)
(18)
3,077
(5,765)
12
Comprehensive
Income
$16,465
(2,781)
32
(2,059)
16
271
3,999,688
41,693
67,552
(7,556)
(427)
101,533
11,673
(1,308)
245
269
641
21,133
(9,639)
(22)
118,418
631,145
(291,100)
4,863
29,377
(14,359)
(39)
(2)
(1,308)
21,133
245
269
641
(9,639)
(22)
2,850
(270)
4,824
29,377
(14,359)
(2)
21,133
245
269
641
(2)
2,851
4,458,151
61,574
79,024
(7,711)
(466)
135,272
22,286
(1,381)
(208)
(146)
14,982
(10,696)
(182)
9,269
149
(705)
127
53,464
(73,730)
2,544
(3,790)
10
14,982
9,269
149
(705)
127
(1,381)
(208)
(146)
14,982
9,269
149
(705)
127
(10,696)
(182)
1,558
2,554
(3,790)
Issuance of preferred stock
Common stock issued under employee plans and related tax
1,558
benefits
Common stock repurchased
Balance, December 31, 2007
$4,409
4,437,885 $ 60,328 $ 81,393
$ 1,129 $(456)
$146,803
$23,822
(1) Amounts shown are net-of-tax. For additional information on accumulated OCI, see Note 14 – Shareholders’ Equity and Earnings Per Common Share to the Consolidated Financial Statements.
(2)
Includes accumulated adjustment to apply SFAS 158 of $(1,428) million, net-of-tax, and the reversal of the additional minimum liability adjustment of $120 million, net-of-tax.
Includes adjustment for the fair value of outstanding MBNA Corporation (MBNA) stock options of $435 million.
(3)
(4) 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.
116 Bank of America 2007
See accompanying Notes to Consolidated Financial Statements.
Bank of America Corporation and Subsidiaries
Consolidated Statement of Cash Flows
(Dollars in millions)
Operating activities
Net income
Reconciliation of net income to net cash provided by (used in) operating activities:
Provision for credit losses
(Gains) losses on sales of debt securities
Depreciation and premises improvements amortization
Amortization of intangibles
Deferred income tax (benefit) expense
Net increase in trading and derivative instruments
Net increase in other assets
Net increase (decrease) in accrued expenses and other liabilities
Other operating activities, net
Net cash provided by (used in) operating activities
Investing activities
Net (increase) decrease in time deposits placed and other short-term investments
Net (increase) decrease in federal funds sold and securities purchased under agreements to resell
Proceeds from sales of available-for-sale debt securities
Proceeds from paydowns and maturities of available-for-sale debt securities
Purchases of available-for-sale debt securities
Proceeds from maturities of held-to-maturity debt securities
Purchases of held-to-maturity debt securities
Proceeds from sales of loans and leases
Other changes in loans and leases, net
Net purchases of premises and equipment
Proceeds from sales of foreclosed properties
(Acquisition) divestiture of business activities, net
Other investing activities, net
Net cash used in investing activities
Financing activities
Net increase in deposits
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase
Net increase in commercial paper and other short-term borrowings
Proceeds from issuance of long-term debt
Retirement of long-term debt
Proceeds from issuance of preferred stock
Redemption of preferred stock
Proceeds from issuance of common stock
Common stock repurchased
Cash dividends paid
Excess tax benefits of share-based payments
Other financing activities, net
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at January 1
Cash and cash equivalents at December 31
Supplemental cash flow disclosures
Cash paid for interest
Cash paid for income taxes
Year Ended December 31
2007
2006
2005
$ 14,982
$ 21,133
$ 16,465
8,385
(180)
1,168
1,676
(753)
(8,108)
(15,855)
4,190
5,531
11,036
2,191
6,294
28,107
19,233
(28,016)
630
(314)
57,875
(177,665)
(2,143)
104
(19,816)
5,040
(108,480)
45,368
(1,448)
32,840
67,370
(28,942)
1,558
–
1,118
(3,790)
(10,878)
254
(38)
103,412
134
6,102
36,429
5,010
443
1,114
1,755
1,850
(3,870)
(17,070)
4,517
(373)
14,509
(3,053)
13,020
53,446
22,417
(40,905)
7
–
37,812
(145,779)
(748)
93
(2,388)
(2,226)
(68,304)
38,340
(22,454)
23,709
49,464
(17,768)
2,850
(270)
3,117
(14,359)
(9,661)
477
(312)
53,133
92
(570)
36,999
4,014
(1,084)
959
809
1,695
(18,911)
(104)
(8,205)
(7,861)
(12,223)
(439)
(58,425)
134,490
39,519
(204,476)
283
–
14,458
(71,078)
(1,228)
132
(49)
(3,632)
(150,445)
16,100
120,914
37,671
21,958
(15,107)
–
–
2,846
(5,765)
(7,683)
–
(117)
170,817
(86)
8,063
28,936
$ 42,531
$ 36,429
$ 36,999
$ 51,829
9,196
$ 42,355
7,210
$ 26,239
7,049
The fair values of noncash assets acquired and liabilities assumed in the LaSalle Bank Corporation merger were $115.8 billion and $97.1 billion at October 1, 2007.
The fair values of noncash assets acquired and liabilities assumed in the U.S. Trust Corporation merger were $12.9 billion and $9.8 billion at July 1, 2007.
During 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.
During 2007, the Corporation transferred $1.7 billion of trading account assets to AFS debt securities.
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.
See accompanying Notes to Consolidated Financial Statements.
Bank of America 2007 117
Bank of America Corporation and Subsidiaries
Notes to Consolidated Financial Statements
On October 1, 2007, Bank of America Corporation and its subsidiaries
(the Corporation) acquired all the outstanding shares of ABN AMRO North
America Holding Company, parent of LaSalle Bank Corporation (LaSalle),
for $21.0 billion in cash. On July 1, 2007, the Corporation acquired all the
outstanding shares of U.S. Trust Corporation for $3.3 billion in cash. On
January 1, 2006, the Corporation acquired 100 percent of the outstanding
stock of MBNA Corporation (MBNA). These mergers were accounted for
under the purchase method of accounting. Consequently, LaSalle, U.S.
Trust Corporation and MBNA’s results of operations were included in the
Corporation’s results from their dates of acquisition.
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 December 31, 2007, the
Corporation operated its banking activities primarily under three charters:
Bank of America, National Association (Bank of America, N.A.), FIA Card
Services, N.A. and LaSalle Bank, N.A. Bank of America, N.A. was the sur-
viving entity after the merger with Fleet National Bank on June 13, 2005.
Effective June 10, 2006, MBNA America Bank N.A. was renamed FIA Card
Services, N.A., and on October 20, 2006, Bank of America, N.A. (USA)
merged into FIA Card Services, N.A. These mergers had no impact on the
Consolidated Financial Statements of the Corporation. LaSalle Bank, N.A.
was acquired in connection with the LaSalle acquisition.
Note 1 – Summary of Significant Accounting
Principles
Principles of Consolidation and Basis of Presentation
The Consolidated Financial Statements include the accounts of the Corpo-
ration and its majority-owned subsidiaries, and those variable interest enti-
ties (VIEs) where the Corporation is the primary beneficiary. All significant
intercompany accounts and transactions have been eliminated. Results of
operations of companies purchased are included from the dates of acquis-
ition and for VIEs, from the dates that the Corporation became the primary
beneficiary. Assets held in an agency or fiduciary capacity are not included
in the Consolidated Financial Statements. The Corporation accounts for
investments in companies for which it owns a voting interest of 20 percent
to 50 percent and for which it has the ability to exercise significant influ-
ence over operating and financing decisions using the equity method of
accounting. These investments are included in other assets and the
Corporation’s proportionate share of income or loss is included in equity
investment income.
The preparation of the Consolidated Financial Statements in con-
formity with accounting principles generally accepted in the United States
(GAAP) requires management to make estimates and assumptions that
affect reported amounts and disclosures. Actual results could differ from
those estimates and assumptions.
In 2007, the Corporation changed its basis of presentation for its
business segments. For additional information on the Corporation’s busi-
ness segments see Note 22 – Business Segment Information to the
the Corporation
Consolidated Financial Statements. Also in 2007,
118 Bank of America 2007
changed the current and historical presentation of its Consolidated State-
ment of Income to present gains (losses) on sales of debt securities as a
component of noninterest income.
Certain prior period amounts have been reclassified to conform to
current period presentation.
Recently Issued Accounting Pronouncements
On December 4, 2007, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 141
(revised 2007), “Business Combinations” (SFAS 141R). SFAS 141R modi-
fies the accounting for business combinations and requires, with limited
exceptions, the acquirer in a business combination to recognize 100 per-
cent of the assets acquired, liabilities assumed, and any noncontrolling
interest in the acquiree at the acquisition-date fair value. In addition, SFAS
141R requires the expensing of acquisition-related transaction and
restructuring costs, and certain contingent assets and liabilities acquired,
as well as contingent consideration, to be recognized at fair value. SFAS
141R also modifies the accounting for certain acquired income tax assets
and liabilities. SFAS 141R is effective for new acquisitions consummated
on or after January 1, 2009 and early adoption is not permitted.
for
On December 4, 2007,
the FASB also issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial Statements” (SFAS
160). SFAS 160 requires all entities to report noncontrolling (i.e., minority)
interests in subsidiaries as equity in the Consolidated Financial State-
transactions between an entity and non-
ments and to account
controlling owners as equity transactions if
retains its
controlling financial
interest in the subsidiary. SFAS 160 also requires
expanded disclosure that distinguishes between the interests of the con-
trolling owners and the interests of the noncontrolling owners of a sub-
sidiary. SFAS 160 is effective for the Corporation’s financial statements
for the year beginning on January 1, 2009 and earlier adoption is not
permitted. The adoption of SFAS 160 is not expected to have a material
impact on the Corporation’s financial condition and results of operations.
the parent
On November 5, 2007, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin (SAB) No. 109, “Written Loan Commitments
Recorded at Fair Value Through Earnings” (SAB 109). SAB 109 requires that
the expected net future cash flows related to servicing of a loan be included
in the measurement of all written loan commitments that are accounted for at
fair value through earnings. The adoption of SAB 109 is on a prospective
basis and effective for the Corporation’s loan commitments measured at fair
value through earnings which are issued or modified after January 1, 2008.
The adoption of SAB 109 will not have a material impact on the Corporation’s
financial condition and results of operations.
On June 27, 2007, the 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). Effective
January 1, 2008, EITF 06-11 requires on a prospective basis 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. Prior to January 1, 2008, the Corpo-
ration accounted for this tax benefit as a reduction to income tax expense.
The adoption of EITF 06-11 will not have a material impact on the Corpo-
ration’s financial condition and results of operations.
Effective January 1, 2007, the Corporation adopted 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 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 157 and SFAS 159 reduced the beginning balance of retained earn-
ings as of January 1, 2007 by $208 million, net-of-tax. Subsequent
changes in fair value of these financial assets and liabilities are recog-
nized in earnings when they occur. For additional information on the fair
value of certain financial assets and liabilities, see the Fair Value section
of this note and Note 19 – Fair Value Disclosures to the Consolidated
Financial Statements.
Effective January 1, 2007, the Corporation adopted FASB Staff Posi-
tion (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 Lever-
aged 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 $1.4 billion, 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
(IRS) on certain leveraged leases or management changes its assumption
about the timing of the tax cash flows, the rate of return shall be recalcu-
lated 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 Inter-
pretation No. 48, “Accounting for Uncertainty in Income Taxes, an inter-
pretation 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
recognition, measurement, presentation and dis-
financial statement
closure 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 18 – Income Taxes to the Con-
solidated Financial Statements.
Cash and Cash Equivalents
Cash on hand, cash items in the process of collection, and amounts due
from correspondent banks and the Federal Reserve Bank are included in
cash and cash equivalents.
Securities Purchased Under Agreements to Resell
and Securities Sold under Agreements to Repurchase
Securities purchased under agreements to resell and securities sold under
agreements to repurchase are treated as collateralized financing trans-
actions. These agreements are recorded at the amounts at which the
securities were acquired or sold plus accrued interest, except for certain
structured reverse repurchase agreements for which the Corporation has
elected the fair value option. For more information on structured reverse
repurchase agreements for which the Corporation has elected the fair
value option, see Note 19 – Fair Value Disclosures to the Consolidated
Financial Statements. The Corporation’s policy is to obtain the use of
securities purchased under agreements to resell. The market value of the
underlying securities, including accrued interest, which collateralize the
related receivable on agreements to resell, is monitored. The Corporation
may require counterparties to deposit additional collateral or return collat-
eral pledged, when appropriate.
Collateral
The Corporation accepts collateral that it is permitted by contract or custom
to sell or repledge. At December 31, 2007, the fair value of this collateral
was approximately $210.7 billion of which $156.3 billion was sold or
repledged. At December 31, 2006, the fair value of this collateral was
approximately $186.6 billion of which $113.0 billion was sold or repledged.
The primary source of this collateral is reverse repurchase agreements. The
Corporation also pledges securities and loans as collateral in transactions
that include repurchase agreements, public and trust deposits, Treasury tax
and loan notes, and other short-term borrowings. This collateral can be sold
or repledged by the counterparties to the transactions.
In addition, the Corporation obtains collateral in connection with its
derivative activities. Required collateral levels vary depending on the credit
risk rating and the type of counterparty. Generally, the Corporation accepts
collateral in the form of cash, U.S. Treasury securities and other market-
able securities. Based on provisions contained in legal netting agree-
ments, the Corporation has netted cash collateral against the applicable
derivative mark-to-market exposures. Accordingly, the Corporation offsets
its obligation to return or its right to reclaim cash collateral against the fair
value of the derivatives being collateralized. The Corporation also pledges
collateral on its own derivative positions which can be applied against
derivative liabilities.
Trading Instruments
Financial instruments utilized in trading activities are stated at fair value.
Fair value is generally based on quoted market prices or quoted market
prices for similar assets and liabilities. If these market prices are not
available, fair values are estimated based on dealer quotes, pricing mod-
els, discounted cash flow methodologies, or similar techniques for which
the determination of fair value may require significant management judg-
ment or estimation. Realized and unrealized gains and losses are recog-
nized in trading account profits (losses).
Derivatives and Hedging Activities
The Corporation designates a derivative as held for trading, an economic
hedge not designated as a SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities, as amended” (SFAS 133) hedge, or a
qualifying SFAS 133 hedge when it enters into the derivative contract. The
designation may change based upon management’s reassessment or
changing circumstances. Derivatives utilized by the Corporation include
futures and forward settlement contracts, and option
swaps,
is a contract between two parties to
contracts. A swap agreement
financial
Bank of America 2007 119
exchange cash flows based on specified underlying notional amounts,
assets and/or indices. Financial futures and forward settlement contracts
are agreements to buy or sell a quantity of a financial instrument, index,
currency or commodity at a predetermined future date, and rate or price.
An option contract is an agreement that conveys to the purchaser the
right, but not the obligation, to buy or sell a quantity of a financial instru-
ment (including another derivative financial instrument), index, currency or
commodity at a predetermined rate or price during a period or at a time in
the future. Option agreements can be transacted on organized exchanges
or directly between parties. The Corporation also provides credit
derivatives to customers who wish to increase or decrease credit
exposures. In addition, the Corporation utilizes credit derivatives to man-
age the credit risk associated with the loan portfolio.
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 coun-
terparty 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, discounted cash flow method-
ologies, or similar techniques for which the determination of fair value may
require significant management judgment or estimation.
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, 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 the net credit differential between
the counterparties to the derivative contract. Effective January 1, 2007,
the Corporation updated its methodology to include the impact of both the
counterparty and its own credit standing.
Prior to January 1, 2007,
the Corporation recognized gains and
losses at inception of a derivative contract only if the fair value of the con-
tract was evidenced by a quoted market price in an active market, an
observable price or other market transaction, or other observable data
supporting a valuation model
in accordance with 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). For those gains and losses not evidenced by the
above mentioned market data, the transaction price was used as the fair
value of the derivative contract. Any difference between the transaction
price and the model fair value was considered an unrecognized gain or
loss at inception of the contract. These unrecognized gains and losses
were recorded in income using the straight line method of amortization
over the contractual life of the derivative contract. The adoption of SFAS
157 on January 1, 2007, eliminated the deferral of these gains and
losses resulting in the recognition of previously deferred gains and losses
as an increase to the beginning balance of retained earnings by a pre-tax
amount of $22 million.
Trading Derivatives and Economic Hedges
The Corporation designates at inception whether the derivative contract is
considered hedging or non-hedging for 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 (losses).
Derivatives used as economic hedges but not designated in a hedg-
ing relationship for accounting purposes are also included in derivative
assets or derivative liabilities. Changes in the fair value of derivatives that
serve as economic hedges of mortgage servicing rights (MSRs), interest
rate lock commitments (IRLCs) and first mortgage loans held-for-sale that
are originated by the Corporation are recorded in mortgage banking
income. Changes in the fair value of derivatives that serve as asset and
liability management (ALM) economic hedges, which do not qualify or were
not designated as accounting hedges, are recorded in other income. Credit
derivatives used by the Corporation do not qualify for hedge accounting
under SFAS 133 despite being effective economic hedges with changes in
the fair value of these derivatives included in other income.
Derivatives Used For SFAS 133 Hedge Accounting Purposes
For SFAS 133 hedges, the Corporation formally documents at inception all
relationships between hedging instruments and hedged items, as well as
its risk management objectives and strategies for undertaking various
accounting hedges. Additionally, the Corporation uses dollar offset or
regression analysis at the hedge’s inception and for each reporting period
thereafter to assess whether the derivative used in its hedging transaction
is expected to be and has been highly effective in offsetting changes in
the fair value or cash flows of the hedged item. The Corporation dis-
continues hedge accounting when it is determined that a derivative is not
expected to be or has ceased to be highly effective as a hedge, and then
reflects changes in fair value of the derivative in earnings after termination
of the hedge relationship.
The Corporation uses its derivatives designated as hedging for
accounting purposes as either fair value hedges, cash flow hedges or
hedges of net investments in foreign operations. The Corporation manages
interest rate and foreign currency exchange rate sensitivity predominantly
through the use of derivatives. Fair value hedges are used to protect
against changes in the fair value of the Corporation’s assets and liabilities
that are due to interest rate or foreign exchange volatility. Cash flow
hedges are used to minimize the variability in cash flows of assets or
liabilities, or forecasted transactions caused by interest rate or foreign
exchange fluctuation. For terminated cash flow hedges, the maximum
length of time over which forecasted transactions are hedged is 28 years,
with a substantial portion of the hedged transactions being less than 10
years. For open cash flow hedges, the maximum length of time over which
forecasted transactions are hedged is less than seven years. Changes in
the fair value of derivatives designated as fair value hedges are recorded
in earnings, together and in the same income statement line item with
changes in the fair value of the related hedged item. Changes in the fair
value of derivatives designated as cash flow hedges are recorded in
accumulated other comprehensive income (OCI) and are reclassified into
the line item in the Consolidated Statement of Income in which the hedged
item is recorded in the same period the hedged item affects earnings.
Hedge ineffectiveness and gains and losses on the excluded component
of a derivative in assessing hedge effectiveness are recorded in earnings
in the same income statement line item that is used to record hedge
effectiveness. SFAS 133 retains certain concepts of SFAS No. 52,
“Foreign Currency Translation,” (SFAS 52) for foreign currency exchange
hedging. Consistent with SFAS 52, the Corporation records changes in the
fair value of derivatives used as hedges of the net investment in foreign
operations, to the extent effective, as a component of accumulated OCI.
If a derivative instrument in a fair value hedge is terminated or the
hedge designation removed, the previous adjustments to the carrying
amount of the hedged asset or liability are subsequently accounted for in
the same manner as other components of the carrying amount of that
asset or liability. For interest-earning assets and interest-bearing liabilities,
such adjustments are amortized to earnings over the remaining life of the
respective asset or liability. If a derivative instrument in a cash flow hedge
is terminated or the hedge designation is removed, related amounts in
120 Bank of America 2007
accumulated OCI are reclassified into earnings in the same period or peri-
ods during which the hedged forecasted transaction affects earnings. If it
is probable that a forecasted transaction will not occur, any related
amounts in accumulated OCI are reclassified into earnings in that period.
Interest Rate Lock Commitments
The Corporation enters into IRLCs in connection with its mortgage banking
activities to fund residential mortgage loans at specified times in the
future. IRLCs that relate to the origination of mortgage loans that will be
held for sale are considered derivative instruments under SFAS No. 149,
“Amendment of Statement 133 on Derivative Instruments and Hedging
Activities.” As such, these IRLCs are recorded at fair value with changes in
fair value recorded in mortgage banking income.
Consistent with SEC SAB No. 105, “Application of Accounting Princi-
ples to Loan Commitments,” (SAB 105) the Corporation did not record any
unrealized gain or loss at the inception of the loan commitment, which is
the time the commitment is issued to the borrower. The Corporation
recorded unrealized gains or losses based upon subsequent changes in
the value from the inception of the loan commitment. In estimating the fair
the Corporation assigns a probability to the loan
value of an IRLC,
commitment based on an expectation that it will be exercised and the loan
will be funded. The fair value of the commitments is derived from the fair
value of related mortgage loans which is based on observable market
data. Changes to the fair value of IRLCs are recognized based on interest
rate changes, changes in the probability that the commitment will be
exercised and the passage of time. Changes from the expected future
cash flows related to the customer relationship or loan servicing are
excluded from the valuation of the IRLCs. Effective January 1, 2008, the
Corporation will adopt SAB 109 for its derivative loan commitments issued
or modified after the adoption date which will supersede SAB 105. For
additional
information on the adoption of SAB 109, see the Recently
Issued Accounting Pronouncements section of this note.
Outstanding IRLCs expose the Corporation to the risk that the price
of the loans underlying the commitments might decline from inception of
the rate lock to funding of the loan. To protect against this risk, the Corpo-
ration utilizes forward loan sales commitments and other derivative
instruments, including interest rate swaps and options, to economically
hedge the risk of potential changes in the value of the loans that would
result from the commitments. The changes in the fair value of these
derivatives are recorded in mortgage banking income.
Securities
Debt securities are classified based on management’s intention on the
date of purchase and recorded on the Consolidated Balance Sheet as debt
securities as of the trade date. Debt securities which management has
the intent and ability to hold to maturity are classified as held-to-maturity
and reported at amortized cost. Debt securities that are bought and held
principally for the purpose of resale in the near term are classified as trad-
ing account assets and are stated at fair value with unrealized gains and
losses included in trading account profits (losses). All other debt secu-
rities that management has the intent and ability to hold for the foresee-
able future are classified as available-for-sale (AFS) and carried at fair
value with net unrealized gains and losses included in accumulated OCI on
an after-tax basis. If there is an other-than-temporary deterioration in the
fair value of any individual security classified as AFS, the Corporation will
reclassify the associated net unrealized loss out of accumulated OCI with
a corresponding adjustment to other income. If there is an other-than-
temporary deterioration in the fair value of any individual security classified
as held-to-maturity, the Corporation will write down the security to fair
value with a corresponding adjustment to other income. Interest on debt
securities, including amortization of premiums and accretion of discounts,
is included in interest income. Realized gains and losses from the sales of
debt securities, which are included in gains (losses) on sales of debt
securities, are determined using the specific identification method.
Marketable equity securities are classified based on management’s
intention on the date of purchase and recorded on the Consolidated Bal-
ance Sheet as of the trade date. Marketable equity securities that are
bought and held principally for the purpose of resale in the near term are
classified as trading account assets and are stated at fair value with unreal-
ized gains and losses included in trading account profits (losses). Other
marketable equity securities that management has the intent and ability to
hold for the foreseeable future are accounted for as AFS and classified in
other assets. All AFS marketable equity securities are carried at fair value
with net unrealized gains and losses included in accumulated OCI on a net-
of-tax basis. If there is an other-than-temporary deterioration in the fair
value of any individual AFS marketable equity security, the Corporation will
reclassify the associated net unrealized loss out of accumulated OCI with a
corresponding adjustment to equity investment income. Dividend income on
all AFS marketable equity securities is included in equity investment
income. Realized gains and losses on the sale of all AFS marketable equity
securities, which are recorded in equity investment income, are determined
using the specific identification method.
Equity investments without readily determinable market values are
recorded in other assets, are accounted for using the cost method and are
subject to impairment testing if applicable.
Equity investments held by Principal
Investing, a diversified equity
investor in companies at all stages of their life cycle from startup to buy-
out, are reported at fair value pursuant to the American Institute of Certi-
fied Public Accountants (AICPA)
Investment Company Audit Guide and
recorded in other assets. These investments are made either directly in a
company or held through a fund. Equity investments for which there are
active market quotes are carried at estimated fair value based on market
prices. Nonpublic and other equity investments for which representative
market quotes are not readily available are initially valued at the trans-
action price. Subsequently, the Corporation adjusts valuations when evi-
dence is available to support such adjustments. Such evidence includes
changes in value as a result of initial public offerings (IPO), market com-
parables, market
results, sales
restrictions, or other-than-temporary declines in value. Gains and losses
on these equity investments, both unrealized and realized, are recorded in
equity investment income.
the investees’
financial
liquidity,
Loans and Leases
Loans measured at historical cost are reported at their outstanding princi-
pal balances net of any unearned income, charge-offs, unamortized
deferred fees and costs on originated loans, and premiums or discounts
on purchased loans. Loan origination fees and certain direct origination
costs are deferred and recognized as adjustments to income over the lives
of the related loans. Unearned income, discounts and premiums are amor-
tized to interest income using methods that approximate the interest
method. Subsequent to the adoption of SFAS 159, on January 1, 2007
the Corporation elected the fair value option for certain loans. Fair values
for these loans are based on market prices, where available, or dis-
counted cash flows using market-based credit spreads of comparable debt
instruments or credit derivatives of the specific borrower or comparable
borrowers. Results of discounted cash flow calculations may be adjusted,
as appropriate, to reflect other market conditions or the perceived credit
risk of the borrower.
Bank of America 2007 121
The Corporation purchases loans with and without evidence of credit
quality deterioration since origination. Those loans with evidence of credit
quality deterioration for which it is probable at purchase that the Corpo-
ration will be unable to collect all contractually required payments are
accounted for under AICPA Statement of Position 03-3, “Accounting for
Certain Loans or Debt Securities Acquired in a Transfer” (SOP 03-3). SOP
03-3 addresses accounting for differences between contractual cash flows
and cash flows expected to be collected from an investor’s initial invest-
ment in loans acquired in a transfer if those differences are attributable,
at least in part, to credit quality. SOP 03-3 requires impaired loans be
recorded at fair value and prohibits “carrying over” or the creation of valu-
ation allowances in the initial accounting of loans acquired in a transfer
that are within the scope of this SOP. The prohibition of the valuation
allowance carryover applies to the purchase of an individual loan, a pool of
loans, a group of loans, and loans acquired in a purchase business
combination. Under SOP 03-3, the excess of cash flows expected at pur-
chase over the purchase price is recorded as interest income over the life
of the loan. For those loans not within the scope of SOP 03-3, any differ-
ence between the purchase price and the par value of the loan is reflected
in interest income over the life of the loan.
The Corporation provides equipment
financing to its customers
through a variety of lease arrangements. Direct financing leases are car-
ried at the aggregate of lease payments receivable plus estimated residual
value of the leased property less unearned income. Leveraged leases,
which are a form of financing leases, are carried net of nonrecourse debt.
Unearned income on leveraged and direct financing leases is accreted to
interest income over the lease terms by methods that approximate the
interest method.
Allowance for Credit Losses
The allowance for credit losses, which includes the allowance for loan and
lease losses and the reserve for unfunded lending commitments, repre-
sents management’s estimate of probable losses inherent in the Corpo-
ration’s lending activities that are carried at historical cost. The allowance
for loan and lease losses represents the estimated probable credit losses
in funded consumer and commercial loans and leases measured at histor-
ical cost while the reserve for unfunded lending commitments, including
standby letters of credit (SBLCs) and binding unfunded loan commitments,
represents estimated probable credit losses on these unfunded credit
instruments based on utilization assumptions. The allowance for loan and
lease losses and the reserve for unfunded lending commitments excludes
fair value in
loans and unfunded lending commitments measured at
accordance with SFAS 159 as mark-to-market adjustments related to
these instruments already reflect a credit component. Credit exposures,
excluding derivative assets, trading account assets and loans measured at
fair value, deemed to be uncollectible are charged against these accounts.
Cash recovered on previously charged off amounts are recorded as recov-
eries to these accounts.
The Corporation performs periodic and systematic detailed reviews of
its lending portfolios to identify credit risks and to assess the overall col-
lectibility of those portfolios. The allowance on certain homogeneous loan
portfolios measured at historical cost, which generally consist of
consumer loans (e.g., consumer real estate loans, credit card) and certain
commercial
loans (e.g., business card and small business portfolio) is
based on aggregated portfolio segment evaluations generally by product
type. Loss forecast models are utilized for these segments which consider
a variety of factors including, but not limited to, historical loss experience,
estimated defaults or
foreclosures based on portfolio trends, delin-
quencies, economic conditions and credit scores. These models are
updated on a quarterly basis in order to incorporate information reflective
of the current economic environment. The remaining commercial portfolios
loan basis.
measured at historical cost are reviewed on an individual
Loans subject to individual reviews are analyzed and segregated by risk
according to the Corporation’s internal risk rating scale. These risk classi-
fications, in conjunction with an analysis of historical
loss experience,
current economic conditions, industry performance trends, geographic or
obligor concentrations within each portfolio segment, and any other perti-
nent information (including individual valuations on nonperforming loans in
accordance with SFAS No. 114, “Accounting by Creditors for Impairment of
a Loan,” (SFAS 114)) result in the estimation of the allowance for credit
losses. The historical loss experience is updated quarterly to incorporate
the most recent data reflective of the current economic environment.
impaired commercial
If necessary, a specific allowance for loan and lease losses is estab-
lished for individual
loans measured at historical
cost. A loan is considered impaired when, based on current information
and events, it is probable that the Corporation will be unable to collect all
amounts due, including principal and interest, according to the contractual
terms of the agreement. Once a loan has been identified as individually
impaired, management measures impairment in accordance with SFAS
114. Individually impaired loans are measured based on the present value
of payments expected to be received, observable market prices, or for
loans that are solely dependent on the collateral for repayment, the esti-
mated fair value of the collateral. If the recorded investment in impaired
loans exceeds the present value of payments expected to be received, a
specific allowance is established as a component of the allowance for
loan and lease losses.
The allowance for loan and lease losses includes two components
which are allocated to cover the estimated probable losses in each loan
and lease category based on the results of the Corporation’s detailed
review process described above. The first component covers those com-
mercial loans measured at historical cost that are either nonperforming or
impaired. The second component covers consumer loans and leases, and
loans and leases measured at historical cost.
performing commercial
Included within this second component of the allowance for loan and lease
losses and determined separately from the procedures outlined above are
reserves which are maintained to cover uncertainties that affect the Corpo-
ration’s estimate of probable losses including domestic and global eco-
nomic uncertainty and large single name defaults. Management evaluates
the adequacy of the allowance for loan and lease losses based on the
combined total of these two components.
In addition to the allowance for loan and lease losses, the Corpo-
ration also estimates probable losses related to unfunded lending
commitments, such as letters of credit and financial guarantees, and bind-
ing unfunded loan commitments. The reserve for unfunded lending
commitments excludes commitments measured at fair value in accord-
to
ance with SFAS 159. Unfunded lending commitments are subject
individual reviews and are analyzed and segregated by risk according to
the Corporation’s internal risk rating scale. These risk classifications, in
conjunction with an analysis of historical
loss experience, utilization
assumptions, current economic conditions, performance trends within
specific portfolio segments and any other pertinent information, result in
the estimation of the reserve for unfunded lending commitments.
The allowance for credit losses related to the loan and lease portfolio
is reported separately on the Consolidated Balance Sheet whereas the
allowance for credit losses related to the reserve for unfunded lending
commitments is reported on the Consolidated Balance Sheet in accrued
expenses and other liabilities. Provision for credit losses related to the
loan and lease portfolio and unfunded lending commitments is reported in
the Consolidated Statement of Income in provision for credit losses.
122 Bank of America 2007
Nonperforming Loans and Leases, Charge-offs, and
Delinquencies
In accordance with the Corporation’s policies, non-bankrupt credit card
loans, and open-end unsecured consumer loans are charged off no later
than the end of the month in which the account becomes 180 days past
due. The outstanding balance of real estate secured loans that is in
excess of the property value, less cost to sell, are charged off no later
than the end of the month in which the account becomes 180 days past
due. Personal property secured loans are charged off no later than the end
of the month in which the account becomes 120 days past due. Accounts
in bankruptcy are written down to collateral value either 60 days after
bankruptcy notification (credit card and certain open-end unsecured
accounts) or no later than the end of the month in which the account
becomes 60 days past due. Only real estate secured accounts are gen-
erally placed into nonaccrual status and classified as nonperforming at 90
days past due. These loans may be restored to performing status when all
principal and interest is current and full repayment of the remaining con-
tractual principal and interest is expected, or when the loan otherwise
becomes well-secured and is in the process of collection.
Commercial
time under
loans and leases, excluding business card loans, that
are past due 90 days or more as to principal or interest, or where reason-
able doubt exists as to timely collection,
including loans that are
individually identified as being impaired, are generally classified as non-
performing unless well-secured and in the process of collection. Loans
whose contractual terms have been restructured in a manner which grants
a concession to a borrower experiencing financial difficulties, without
compensation on restructured loans, are classified as nonperforming until
the loan is performing for an adequate period of
the
In situations where the Corporation does not
restructured agreement.
receive adequate compensation, the restructuring is considered a troubled
debt restructuring. Interest accrued but not collected is reversed when a
commercial
loan is classified as nonperforming. Interest collections on
commercial nonperforming loans and leases for which the ultimate
collectibility of principal is uncertain are applied as principal reductions;
otherwise, such collections are credited to income when received. Com-
mercial loans and leases may be restored to performing status when all
principal and interest is current and full repayment of the remaining con-
tractual principal and interest is expected, or when the loan otherwise
becomes well-secured and is in the process of collection. Business card
loans are charged off no later than the end of the month in which the
account becomes 180 days past due or in which 60 days has elapsed
since receipt of notification of bankruptcy filing, whichever comes first, and
are not classified as nonperforming.
The entire balance of a consumer and commercial loan account is
contractually delinquent if the minimum payment is not received by the
specified due date on the customer’s billing statement. Interest and fees
continue to accrue on past due loans until the date the loan goes into
nonaccrual status, if applicable. Delinquency is reported on accruing loans
that are 30 days or more past due.
Loans Held-for-Sale
Loans held-for-sale include residential mortgages, loan syndications, and
to a lesser degree, commercial real estate, consumer finance and other
loans, and are carried at the lower of aggregate cost or market or fair
value. The Corporation elected on January 1, 2007 to account for certain
loans held-for-sale,
including first mortgage loans held-for-sale, at fair
value in accordance with SFAS 159. 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. Mortgage loan origination costs related to
loans held-for-sale for which the Corporation elected the fair value option
are recognized in noninterest expense when incurred. Mortgage loan origi-
nation costs for loans held-for-sale carried at the lower of cost or market
are 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.
Loans held-for-sale are included in other assets.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are recognized using the
straight-line method over the estimated useful
lives of the assets. Esti-
mated lives range up to 40 years for buildings, up to 12 years for furniture
and equipment, and the shorter of lease term or estimated useful life for
leasehold improvements.
Mortgage Servicing Rights
Effective January 1, 2006,
the Corporation adopted SFAS No. 156
“Accounting for Servicing of Financial Assets” (SFAS 156) and began
accounting for consumer-related MSRs at fair value with changes in fair
value recorded in mortgage banking income, while commercial-related and
residential reverse mortgage MSRs continue to be accounted for using the
amortization method (i.e., lower of cost or market) with impairment recog-
nized as a reduction to mortgage banking income. Certain derivatives are
used as economic hedges of the MSRs, but are not designated as hedges
under SFAS 133. These derivatives are marked to market and recognized
through mortgage banking income.
interest
rate and prepayment
Prior to January 1, 2006, the Corporation applied SFAS 133 hedge
accounting for derivative financial instruments that had been designated to
hedge MSRs. The loans underlying the MSRs being hedged were stratified
into pools that possessed similar
risk
exposures. The Corporation had designated the hedged risk as the change
in the overall fair value of these stratified pools within a daily hedge peri-
od. The Corporation performed both prospective and retrospective hedge
effectiveness evaluations, using regression analyses. A prospective test
was performed to determine whether the hedge was expected to be highly
effective at the inception of the hedge. A retrospective test was performed
at the end of the daily hedge period to determine whether the hedge was
actually effective. Debt securities were also used as economic hedges of
MSRs and were accounted for as AFS securities with realized gains or
losses recorded in gains (losses) on sales of debt securities and unreal-
ized gains or losses recorded in accumulated OCI in shareholders’ equity.
information on MSRs, see Note 21 – Mortgage Servicing
For additional
Rights to the Consolidated Financial Statements.
Goodwill and Intangible Assets
Assets and liabilities of companies acquired in purchase transactions are
recorded at fair value at the dates of acquisition. Goodwill is not amortized
impairment on an annual basis, or when
but is reviewed for potential
events or circumstances indicate a potential impairment, at the reporting
unit level. The impairment test is performed in two phases. The first step
of the goodwill impairment test compares the fair value of the reporting
unit with its carrying amount, including goodwill. If the fair value of the
reporting unit exceeds its carrying amount, goodwill of the reporting unit is
considered not impaired; however, if the carrying amount of the reporting
unit exceeds its fair value, an additional step has to be performed. This
additional step compares the implied fair value of the reporting unit’s
goodwill (as defined in SFAS No. 142, “Goodwill and Other Intangible
Bank of America 2007 123
Assets”) with the carrying amount of that goodwill. An impairment loss is
recorded to the extent that the carrying amount of goodwill exceeds its
implied fair value. In 2007, 2006 and 2005, goodwill was tested for
impairment and it was determined that goodwill was not impaired at any of
these dates.
Intangible assets subject to amortization are evaluated for impair-
ment in accordance with SFAS No. 144 “Accounting for the Impairment or
Disposal of Long-Lived Assets.” An impairment loss will be recognized if
the carrying amount of the intangible asset is not recoverable and exceeds
fair value. The carrying amount of the intangible is considered not recover-
able if it exceeds the sum of the undiscounted cash flows expected to
result from the use of the asset. At December 31, 2007, intangible assets
included on the Consolidated Balance Sheet consist of purchased credit
card relationship intangibles, core deposit intangibles, affinity relation-
ships, and other intangibles that are amortized on an accelerated or
straight-line basis over anticipated periods of benefit of up to 15 years.
There were no events or changes in circumstances in 2007, 2006, and
2005 that indicated the carrying amounts of the Corporation’s intangibles
may not be recoverable.
Special Purpose Financing Entities
In the ordinary course of business, the Corporation supports its custom-
ers’ financing needs by facilitating the customers’ access to different fund-
ing sources, assets and risks. In addition, the Corporation utilizes certain
financing arrangements to meet its balance sheet management, funding,
liquidity, and market or credit risk management needs. These financing
entities may be in the form of corporations, partnerships, limited liability
companies or trusts, and are generally not consolidated on the Corpo-
ration’s Consolidated Balance Sheet. The majority of these activities are
basic term or revolving securitization vehicles for mortgages, credit cards
or other types of loans which are generally funded through term-amortizing
debt structures. Other special purpose entities finance their activities by
issuing short-term commercial paper. The securities issued from both
types of vehicles are designed to be paid off from the underlying cash
flows of the vehicles’ assets or the reissuance of commercial paper.
Securitizations
The Corporation securitizes, sells and services interests in residential
mortgage loans and credit card loans, and from time to time, automobile,
other consumer and commercial loans. The accounting for these activities
is governed by SFAS No. 140, “Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities – a replacement of
FASB Statement No. 125” (SFAS 140). The securitization vehicles are
qualified special purpose entities (QSPEs) which, in accordance with SFAS
140, are legally isolated, bankruptcy remote and beyond the control of the
seller. QSPEs are not included in the Corporation’s Consolidated Financial
Statements. When the Corporation securitizes assets,
it may retain
interest-only strips, one or more subordinated tranches, subordinated
interests in accrued interest and fees on the securitized receivables and,
in some cases, cash reserve accounts which are generally considered
interests in the securitized assets. The Corporation may also
residual
retain senior tranches in these securitizations. Gains and losses upon
sale of the assets are based on an allocation of the previous carrying
amount of the assets to the retained interests. Carrying amounts of
assets transferred are allocated in proportion to the relative fair values of
the assets sold and interests retained.
Quoted market prices are used to obtain fair values of senior retained
interests. Generally, quoted market prices for retained residual
interests
are not available; therefore, the Corporation estimates fair values based
124 Bank of America 2007
upon the present value of the associated expected future cash flows. This
may require management to estimate credit losses, prepayment speeds,
forward interest yield curves, discount rates and other factors that impact
the value of retained interests. See Note 8 – Securitizations to the Con-
solidated Financial Statements for further discussion.
Interest-only strips retained in connection with credit card securitiza-
tions are classified in other assets and carried at fair value, with changes
in fair value recorded in card income. Other retained interests are recorded
in other assets and/or AFS debt securities and are carried at fair value or
amounts that approximate fair value with changes recorded in income or
accumulated OCI. If the fair value of such retained interests has declined
below its carrying amount and there has been an adverse change in esti-
mated contractual cash flows of the underlying assets, then such decline
is determined to be other-than-temporary and the retained interest is writ-
ten down to fair value with a corresponding adjustment to other income.
Other Special Purpose Financing Entities
Other special purpose financing entities (SPEs) (e.g., Corporation-
sponsored multi-seller conduits, collateralized debt obligations, asset
acquisition conduits) are generally funded with short-term commercial
paper. These financing entities are usually contractually limited to a nar-
row range of activities that facilitate the transfer of or access to various
types of assets or financial instruments and provide the investors in the
transaction protection from creditors of the Corporation in the event of
bankruptcy or receivership of the Corporation. In certain situations, the
Corporation provides liquidity commitments and/or loss protection agree-
ments.
The Corporation determines whether these entities should be con-
solidated by evaluating the degree to which it maintains control over the
financing entity and will receive the risks and rewards of the assets in the
financing entity. In making this determination, the Corporation considers
whether the entity is a QSPE, which is generally not required to be con-
solidated by the seller or investors in the entity. For non-QSPE structures
or VIEs, the Corporation assesses whether it is the primary beneficiary of
the entity.
In accordance with FASB Interpretation No. 46 (Revised
December 2003), “Consolidation of Variable Interest Entities, an inter-
pretation of ARB No. 51” (FIN 46R), the entity that will absorb a majority of
expected variability (the sum of the absolute values of the expected losses
and expected residual returns) consolidates the VIE and is referred to as
the primary beneficiary. For additional information on other SPEs, see Note
9 – Variable Interest Entities to the Consolidated Financial Statements.
Fair Value
Effective January 1, 2007, the Corporation determines the fair market
values of its financial instruments based on the fair value hierarchy estab-
lished in SFAS 157 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 which are provided on the following
page. The Corporation carries certain corporate loans and loan commit-
ments, loans held-for-sale, structured reverse repurchase agreements, and
long-term deposits at fair value in accordance with SFAS 159. The Corpo-
ration also carries trading account assets and liabilities, derivative assets
and liabilities, AFS debt and marketable equity securities, MSRs, and
certain other assets at fair value.
Level 1
Level 2
Level 3
term of
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. Treas-
ury securities that are highly liquid and are actively traded
in over-the-counter markets.
than Level 1 prices, such as
Observable inputs other
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
the assets or
liabilities. Level 2 assets and liabilities include debt secu-
rities 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, residential mortgage
and loans held-for-sale.
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
instruments whose value is determined
include financial
using pricing models, discounted cash flow methodologies,
or similar techniques, as well as instruments for which the
determination of fair value requires significant manage-
judgment or estimation. This category generally
ment
includes certain private equity
retained
residual
residential MSRs,
asset-backed securities (ABS), highly structured or long-
term derivative contracts and certain collateralized debt
obligations (CDO) where independent pricing information
was not able to be obtained for a significant portion of the
underlying assets.
interests in securitizations,
investments,
For more information on the fair value of the Corporation’s financial
instruments see Note 19 – Fair Value Disclosures to the Consolidated
Financial Statements.
Income Taxes
The Corporation accounts for income taxes in accordance with SFAS
No. 109, “Accounting for Income Taxes” (SFAS 109) as interpreted by FIN
48, resulting in two components of income tax expense: current and
deferred. Current income tax expense approximates taxes to be paid or
refunded for the current period. Deferred income tax expense results from
changes in deferred tax assets and liabilities between periods. These
gross deferred tax assets and liabilities represent decreases or increases
in taxes expected to be paid in the future because of future reversals of
temporary differences in the bases of assets and liabilities as measured
by tax laws and their bases as reported in the financial statements.
Deferred tax assets are also recognized for tax attributes such as net
operating loss carryforwards and tax credit carryforwards. Valuation allow-
ances are then recorded to reduce deferred tax assets to the amounts
management concludes are more-likely-than-not to be realized.
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). The Corporation accrues
income-tax-related interest and penalties (if applicable) within income tax
expense.
For additional information on income taxes, see Note 18 – Income
Taxes to the Consolidated Financial Statements.
Retirement Benefits
The Corporation has established qualified retirement plans covering sub-
stantially all full-time and certain part-time employees. Pension expense
under these plans is charged to current operations and consists of several
components of net pension cost based on various actuarial assumptions
regarding future experience under the plans.
In addition, the Corporation has established unfunded supplemental
benefit plans and supplemental executive retirement plans for selected
officers of the Corporation and its subsidiaries (SERPS) that provide bene-
fits that cannot be paid from a qualified retirement plan due to Internal
Revenue Code restrictions. The SERPS were frozen and the executive offi-
cers do not accrue any additional benefits. These plans are nonqualified
under the Internal Revenue Code and assets used to fund benefit pay-
ments are not segregated from other assets of the Corporation; therefore,
in general, a participant’s or beneficiary’s claim to benefits under these
plans is as a general creditor. In addition, the Corporation has established
several postretirement healthcare and life insurance benefit plans.
The Corporation accounts for its retirement benefit plans in accord-
ance with SFAS No. 87, “Employers’ Accounting for Pensions” (SFAS 87),
SFAS No. 88, “Employers’ Accounting for Settlements and Curtailment of
Defined Benefit Pension Plans and for Termination Benefits,” and SFAS
No. 106, “Employers’ Accounting for Postretirement Benefits Other Than
Pensions,” as applicable.
On December 31, 2006, the Corporation adopted SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and Other Postretire-
ment Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R)” (SFAS 158) which requires the recognition of a plan’s over-funded
or under-funded status as an asset or liability with an offsetting adjust-
ment to accumulated OCI. SFAS 158 requires the determination of the fair
values of a plan’s assets at a company’s year end and recognition of
actuarial gains and losses, prior service costs or credits, and transition
assets or obligations as a component of accumulated OCI. These amounts
were previously netted against the plans’ funded status in the Corpo-
ration’s Consolidated Balance Sheet. These amounts will be subsequently
recognized as components of net periodic benefit costs. Further, actuarial
gains and losses that arise in subsequent periods that are not initially
recognized as a component of net periodic benefit cost will be recognized
as a component of accumulated OCI. Those amounts will subsequently be
recorded as a component of net periodic benefit cost as they are amor-
tized during future periods.
Accumulated Other Comprehensive Income
The Corporation records gains and losses on cash flow hedges, unrealized
gains and losses on AFS debt and marketable equity securities, unrecog-
nized actuarial gains and losses, transition obligation and prior service
costs on pension and postretirement plans, foreign currency translation
adjustments, and related hedges of net investments in foreign operations
in accumulated OCI, net-of-tax. Accumulated OCI also includes fair value
adjustments on certain retained interests in the Corporation’s securitiza-
tion transactions. Gains or losses on derivatives accounted for as cash
Bank of America 2007 125
(SFAS 123R) under
“Share-Based Payment”
Stock-based Compensation
On January 1, 2006, the Corporation adopted SFAS No. 123 (Revised
the modified-
2004),
prospective application. The Corporation had previously adopted the fair
value-based method of accounting for stock-based employee compensa-
tion under SFAS No. 148, “Accounting for Stock-Based Compensation –
Transition and Disclosure – an amendment of FASB Statement No. 123,”
(SFAS 148) prospectively, on January 1, 2003. Had the Corporation
adopted SFAS 148 retrospectively, the impact in 2005 would not have
been material. For additional information on stock-based employee com-
pensation, see Note 17 – Stock-Based Compensation Plans to the Con-
solidated Financial Statements.
Note 2 – Merger and Restructuring Activity
LaSalle Bank Corporation Merger
On October 1, 2007, the Corporation acquired all the outstanding shares
of LaSalle, for $21.0 billion in cash. As part of the acquisition, ABN AMRO
Bank N.V. (the seller) capitalized approximately $6.3 billion as equity of
intercompany debt prior to the date of the acquisition. With this acquis-
ition, the Corporation significantly expanded its presence in metropolitan
Chicago, Illinois and Michigan by adding LaSalle’s commercial banking
clients, retail customers, and banking centers. LaSalle’s results of oper-
ations were included in the Corporation’s results beginning October 1,
2007.
The LaSalle acquisition was accounted for under
the purchase
method of accounting in accordance with SFAS No. 141, “Business
Combinations” (SFAS 141). The preliminary purchase price has been allo-
cated to the assets acquired and the liabilities assumed based on their
fair values at the LaSalle acquisition date as summarized in the following
table.
LaSalle Preliminary Purchase Price Allocation
(Dollars in millions)
Purchase price
Preliminary allocation of the purchase price
LaSalle stockholders’ equity
LaSalle goodwill and intangible assets
Adjustments to reflect assets acquired and liabilities assumed
at fair value:
Loans and leases
Premises and equipment
Identified intangibles (1)
Other assets
Exit and termination liabilities
Other liabilities and deferred income taxes
Fair value of net assets acquired
Preliminary goodwill resulting from the LaSalle merger (2)
$21,015
12,495
(2,728)
(88)
(139)
1,029
(248)
(339)
(72)
9,910
$11,105
(1)
Includes core deposit intangibles of $700 million and other intangibles of $329 million. The amortization
life for core deposit intangibles and other intangibles is 10 years. These intangibles are amortized on an
accelerated basis.
(2) No goodwill is expected to be deductible for tax purposes. The goodwill has been allocated across all of
the Corporation’s business segments.
flow hedges are reclassified to income when the hedged transaction
affects earnings. Gains and losses on AFS debt and marketable equity
securities are reclassified to income as the gains or losses are realized
upon sale of the securities. Other-than-temporary impairment charges are
reclassified to income at the time of the charge. Translation gains or
losses on foreign currency translation adjustments are reclassified to
income upon the substantial sale or liquidation of investments in foreign
operations.
Earnings Per Common Share
Earnings per common share is computed by dividing net income available
to common shareholders by the weighted average common shares issued
and outstanding. For diluted earnings per common share, net income
available to common shareholders is divided by the weighted average
number of common shares issued and outstanding for each period plus
amounts representing the dilutive effect of stock options outstanding,
restricted stock and restricted stock units, if applicable. The effects of
restricted stock, restricted stock units and stock options are excluded
from the computation of diluted earnings per common share in periods in
which the effect would be antidilutive. Dilutive potential common shares
are calculated using the treasury stock method.
Foreign Currency Translation
Assets, liabilities and operations of foreign branches and subsidiaries are
recorded based on the functional currency of each entity. For certain of the
foreign operations, the functional currency is the local currency, in which
case the assets, liabilities and operations are translated, for consolidation
purposes, at period-end rates from the local currency to the reporting cur-
losses are
rency,
reported as a component of accumulated OCI on a net-of-tax basis. When
the foreign entity’s functional currency is determined to be the U.S. dollar,
the resulting remeasurement currency gains or
losses on foreign-
denominated assets or liabilities are included in net income.
the U.S. dollar. The resulting unrealized gains or
Credit Card Arrangements
Endorsing Organization Agreements
The Corporation contracts with other organizations to obtain their endorse-
ment of the Corporation’s loan products. This endorsement may provide
the Corporation exclusive rights to market to the organization’s members
or to customers on behalf of the Corporation. These organizations endorse
the Corporation’s loan products and provide the Corporation with their
mailing lists and marketing activities. These agreements generally have
terms that range from five to seven years. The Corporation typically pays
royalties in exchange for their endorsement. These compensation costs to
the Corporation are recorded as contra-revenue against card income.
Cardholder Reward Agreements
The Corporation offers reward programs that allow its cardholders to earn
points that can be redeemed for a broad range of rewards including cash,
travel and discounted products. The Corporation establishes a rewards
liability based upon the points earned which are expected to be redeemed
and the average cost per point redemption. The points to be redeemed are
estimated based on past redemption behavior, card product type, account
transaction activity and other historical card performance. The liability is
reduced as the points are redeemed. The estimated cost of the rewards
programs is recorded as contra-revenue against card income.
126 Bank of America 2007
The Corporation acquired certain loans for which there was, at the
time of the merger, evidence of deterioration of credit quality since origi-
nation and for which it was probable that all contractually required pay-
ments would not be collected. The outstanding contractual balance of
such loans was approximately $850 million and the recorded fair value
was approximately $650 million as of the merger date. At December 31,
2007, the outstanding contractual balance of such loans was approx-
imately $710 million and the recorded fair value was approximately $590
million.
U.S. Trust Corporation Merger
On July 1, 2007, the Corporation acquired all the outstanding shares of
U.S. Trust Corporation for $3.3 billion in cash. The Corporation allocated
$1.6 billion to goodwill and $1.3 billion to intangible assets as part of the
preliminary purchase price allocation. U.S. Trust Corporation’s results of
operations were included in the Corporation’s results beginning July 1,
2007. The acquisition significantly increased the size and capabilities of
the Corporation’s wealth management business and positions it as one of
the largest financial services companies managing private wealth in the
U.S.
MBNA Merger
On January 1, 2006, the Corporation acquired 100 percent of the out-
In connection therewith,
standing stock of MBNA for $34.6 billion.
1,260 million shares of MBNA common stock were exchanged for
631 million shares of the Corporation’s common stock. Prior to the MBNA
merger, this represented approximately 16 percent of the Corporation’s
outstanding common stock. MBNA shareholders also received cash of
$5.2 billion. The MBNA merger was a tax-free merger for the Corporation.
The acquisition expanded the Corporation’s customer base and its oppor-
tunity to deepen customer relationships across the full breadth of the
Corporation by delivering innovative deposit, lending and investment prod-
ucts and services to MBNA’s customer base. Additionally, the acquisition
allowed the Corporation to significantly increase its affinity relationships
through MBNA’s credit card operations and sell these credit cards through
the Corporation’s delivery channels (including the retail branch network).
MBNA’s results of operations were included in the Corporation’s results
beginning January 1, 2006.
The MBNA merger was accounted for under the purchase method of
accounting in accordance with SFAS 141. The purchase price has been
allocated to the assets acquired and the liabilities assumed based on
their fair values at the MBNA merger date as summarized in the table
below.
MBNA Purchase Price Allocation
(Dollars in millions, except per share amounts)
Purchase price
Purchase price per share of the Corporation’s common stock (1)
Exchange ratio
Purchase price per share of the Corporation’s common stock exchanged
Cash portion of the MBNA merger consideration
Implied value of one share of MBNA common stock
MBNA common stock exchanged
Total value of the Corporation’s common stock and cash exchanged
Fair value of outstanding stock options and direct acquisition costs
Total purchase price
Allocation of the purchase price
MBNA stockholders’ equity
MBNA goodwill and intangible assets
Adjustments to reflect assets acquired and liabilities assumed at fair value:
Loans and leases
Premises and equipment
Identified intangibles (2)
Other assets
Deposits
Exit and termination liabilities
Other personnel-related liabilities
Other liabilities and deferred income taxes
Long-term debt
Fair value of net assets acquired
Goodwill resulting from the MBNA merger (3)
$45.856
0.5009
$22.969
4.125
27.094
1,260
$34,139
467
$34,606
$13,410
(3,564)
(292)
(563)
7,881
(683)
(97)
(269)
(634)
(564)
(409)
14,216
$20,390
(1) The value of the shares of common stock exchanged with MBNA shareholders was based upon the average of the closing prices of the Corporation’s common stock for the period commencing two trading days before, and
(2)
ending two trading days after, June 30, 2005, the date of the MBNA merger announcement.
Includes purchased credit card relationships of $5,698 million, affinity relationships of $1,641 million, core deposit intangibles of $214 million, and other intangibles, including trademarks, of $328 million. The amortization
life for core deposit intangibles is 10 years, purchased credit card relationships and affinity relationships are 15 years, and other intangibles over periods not exceeding 10 years. These intangibles are primarily amortized on
an accelerated basis.
(3) No goodwill is deductible for tax purposes. Substantially all goodwill was allocated to Global Consumer and Small Business Banking.
Bank of America 2007 127
The Corporation acquired certain loans for which there was, at the
time of the merger, evidence of deterioration of credit quality since origi-
nation and for which it was probable that all contractually required pay-
ments would not be collected. The outstanding contractual balance of
such loans was approximately $1.3 billion and the fair value was approx-
imately $940 million as of the merger date. At December 31, 2007 and
2006, there was no outstanding contractual balance of such loans.
Unaudited Pro Forma Condensed Combined Financial Information
for MBNA
The following unaudited pro forma condensed combined financial
information presents the results of operations of the Corporation had the
MBNA merger taken place at January 1, 2005.
Merger and restructuring charges in the preceding table include a
nonrecurring restructuring charge related to legacy MBNA of $767 million
for 2005. Pro forma earnings per common share and diluted earnings per
common share would have been $3.90 and $3.86 for 2005.
Merger and Restructuring Charges
Merger and restructuring charges are recorded in the Consolidated State-
ment of Income and include incremental costs to integrate the operations
of the Corporation, LaSalle, U.S. Trust Corporation, MBNA and FleetBoston
Financial Corporation (FleetBoston). These charges represent costs asso-
ciated 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.
(Dollars in millions)
Net interest income
Noninterest income
Total revenue, net of interest expense
Provision for credit losses
Merger and restructuring charges
Other noninterest expense
Income before income taxes
Net income
Pro Forma
2005
$34,029
33,731
67,760
5,082
1,179
34,411
27,088
18,157
(Dollars in millions)
Severance and employee-related charges
Systems integrations and related charges
Other
Total merger and restructuring
charges
2007 (1)
$106
240
64
2006
$ 85
552
168
$410
$805
2005 (2)
$ 39
218
155
$412
(1)
Included for 2007 are merger-related charges of $233 million, $109 million and $68 million related to
the MBNA, U.S. Trust Corporation and LaSalle mergers, respectively.
(2) Charges for 2005 relate to the FleetBoston merger.
Merger-related Exit Cost and Restructuring Reserves
The following table presents the changes in exit cost and restructuring reserves for 2007 and 2006.
(Dollars in millions)
Balance, January 1
Exit cost and restructuring charges:
MBNA
U.S. Trust Corporation
LaSalle
Cash payments
Balance, December 31
(1) Exit cost reserves were established in purchase accounting resulting in an increase in goodwill.
(2) Restructuring reserves were established by a charge to merger and restructuring charges.
As of December 31, 2006, there were $125 million of exit cost
reserves related to the MBNA merger, including $121 million for sev-
erance, relocation and other employee-related expenses and $4 million for
contract terminations. During 2007, $391 million was added to the exit
cost reserves of which $52 million and $339 million related to the U.S.
Trust Corporation and LaSalle mergers. Included in the $391 million exit
cost charges during 2007 were approximately $193 million in severance,
relocation and other employee-related costs and $198 million in contract
terminations. Cash payments of $139 million during 2007 consisted of
$127 million in severance, relocation and other employee-related costs
and $12 million for contract terminations.
As of December 31, 2006, there were $67 million of restructuring
reserves related to the MBNA acquisition, including $58 million related to
Exit Cost Reserves (1)
Restructuring Reserves (2)
2007
$ 125
–
52
339
(139)
2006
$
–
269
–
–
(144)
2007
$ 67
17
38
47
(61)
$ 377
$ 125
$108
2006
$
–
160
–
–
(93)
$ 67
severance and other employee-related expenses and $9 million related to
terminations. During 2007, $102 million was added to the
contract
restructuring reserves of which $17 million, $38 million and $47 million
related to severance and other employee-related expenses associated with
the MBNA, U.S. Trust Corporation and LaSalle mergers, respectively. Cash
payments of $61 million during 2007 consisted of $56 million in sev-
erance and other employee-related costs and $5 million in contract termi-
nations.
Payments under exit cost and restructuring reserves associated with
the MBNA merger were substantially completed in 2007 while payments
associated with the U.S. Trust Corporation and LaSalle mergers will con-
tinue into 2009.
128 Bank of America 2007
Note 3 – Trading Account Assets and Liabilities
The following table presents the fair values of the components of trading account assets and liabilities at December 31, 2007 and 2006.
(Dollars in millions)
Trading account assets
Corporate securities, trading loans and other
U.S. Government and agency securities (1)
Equity securities
Mortgage trading loans and asset-backed securities
Foreign sovereign debt
Total trading account assets
Trading account liabilities
U.S. Government and agency securities
Equity securities
Foreign sovereign debt
Corporate securities and other
Total trading account liabilities
December 31
2007
2006
$ 55,360
48,240
22,910
18,393
17,161
$162,064
$ 35,375
25,926
9,292
6,749
$ 77,342
$ 53,923
36,656
27,103
15,449
19,921
$153,052
$ 26,760
23,908
9,261
7,741
$ 67,670
(1)
Includes $21.5 billion and $22.7 billion at December 31, 2007 and 2006 of government-sponsored enterprise obligations that are not backed by the full faith and credit of the U.S. Government.
Note 4 – Derivatives
The Corporation designates derivatives as trading derivatives, economic
hedges, or as derivatives used for SFAS 133 accounting purposes. For
additional information on the Corporation’s derivatives and hedging activ-
ities, see Note 1 – Summary of Significant Accounting Principles to the
Consolidated Financial Statements.
Credit Risk Associated with Derivative Activities
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.
In managing derivative credit risk, both the current exposure, which is the
replacement cost of contracts on the measurement date, as well as an
estimate of the potential change in value of contracts over their remaining
lives are considered. The Corporation’s derivative activities are primarily
with financial
institutions and corporations. To minimize credit risk, the
Corporation enters into legally enforceable master netting agreements
which reduce risk by permitting the closeout and netting of transactions
with the same counterparty upon occurrence of certain events. In addition,
the Corporation reduces credit risk by obtaining collateral from counter-
parties. The determination of the need for and the levels of collateral will
vary based on an assessment of the credit risk of the counterparty. Gen-
erally, the Corporation accepts collateral in the form of cash, U.S. Treasury
securities and other marketable securities. The Corporation held $34.2
billion of collateral on derivative positions, of which $21.3 billion could be
applied against credit risk at December 31, 2007.
A portion of the derivative activity involves exchange-traded instru-
ments. Exchange-traded instruments conform to standard terms and are
subject to policies set by the exchange involved, including margin and
security deposit requirements. Management believes the credit risk asso-
ciated with these types of instruments is minimal. The average fair value
of derivative assets, less cash collateral, for 2007 and 2006 was $29.7
billion and $24.2 billion. The average fair value of derivative liabilities,
less cash collateral, for 2007 and 2006 was $20.6 billion and $16.6 bil-
lion.
Bank of America 2007 129
(Dollars in millions)
Interest rate contracts
Swaps
Futures and forwards
Written options
Purchased options
Foreign exchange contracts
Swaps
Spot, futures and forwards
Written options
Purchased options
Equity contracts
Swaps
Futures and forwards
Written options
Purchased options
Commodity contracts
Swaps
Futures and forwards
Written options
Purchased options
Credit derivatives
Credit risk before cash collateral
Less: Cash collateral applied
Total derivative assets
December 31, 2007
December 31, 2006
Contract/
Notional (1)
$22,472,949
2,596,146
1,402,626
1,479,985
505,878
1,600,683
341,148
339,101
56,300
12,174
166,736
195,240
13,627
14,391
14,206
13,093
3,046,381
Contract/
Notional (1)
$18,185,655
2,283,579
1,043,933
1,308,888
451,462
1,234,009
464,420
414,004
32,247
19,947
102,902
104,958
4,868
13,513
9,947
6,796
1,497,869
Credit
Risk
$15,368
10
–
2,508
7,350
4,124
–
1,033
2,026
10
–
6,337
770
12
–
372
7,493
47,413
12,751
$34,662
Credit
Risk
$ 9,601
103
–
2,212
4,241
2,995
–
1,391
577
24
–
7,513
1,129
2
–
184
756
30,728
7,289
$23,439
(1) Represents the total contract/notional amount of the derivatives outstanding and includes both short and long positions.
The table above presents the contract/notional amounts and credit
risk amounts at December 31, 2007 and 2006 of all the Corporation’s
derivative positions. These derivative positions are primarily executed in
the over-the-counter market.
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
the cash collateral applied against
December 31, 2007 and 2006,
derivative assets on the Consolidated Balance Sheet was $12.8 billion
and $7.3 billion. In addition, at December 31, 2007 and 2006, the cash
collateral placed against derivative liabilities was $10.0 billion and $6.5
billion.
ALM Activities
Interest rate contracts and foreign exchange contracts are utilized in the
Corporation’s ALM activities. The Corporation maintains an overall interest
rate risk management strategy that incorporates the use of interest rate
contracts to minimize significant fluctuations in earnings that are caused
by interest rate volatility. The Corporation’s goal is to manage interest rate
sensitivity so that movements in interest
rates do not significantly
adversely affect net interest income. As a result of interest rate fluctua-
tions, hedged fixed-rate assets and liabilities appreciate or depreciate in
market value. Gains or losses on the derivative instruments that are linked
to the hedged fixed-rate assets and liabilities are expected to substantially
offset this unrealized appreciation or depreciation. Interest income and
interest expense on hedged variable-rate assets and liabilities increase or
decrease as a result of interest rate fluctuations. Gains and losses on the
derivative instruments that are linked to these hedged assets and
liabilities are expected to substantially offset this variability in earnings.
Interest rate contracts, which are generally non-leveraged generic
interest rate and basis swaps, options and futures, allow the Corporation
to manage its interest rate risk position. Non-leveraged generic interest
rate swaps involve the exchange of fixed-rate and variable-rate interest
payments based on the contractual underlying notional amount. Basis
swaps involve the exchange of interest payments based on the contractual
underlying notional amounts, where both the pay rate and the receive rate
are floating rates based on different indices. Option products primarily
consist of caps, floors and swaptions. Futures contracts used for the
Corporation’s ALM activities are primarily index futures providing for cash
payments based upon the movements of an underlying rate index.
The Corporation uses foreign currency contracts to manage the for-
eign exchange risk associated with certain foreign currency-denominated
assets and liabilities, as well as the Corporation’s investments in foreign
subsidiaries. Foreign exchange contracts, which include spot and forward
contracts, represent agreements to exchange the currency of one country
for the currency of another country at an agreed-upon price on an agreed-
upon settlement date. Exposure to loss on these contracts will increase or
decrease over their respective lives as currency exchange and interest
rates fluctuate.
Fair Value, Cash Flow and Net Investment 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 con-
tracts 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 OCI of approximately $1.3 billion ($820 million net-of-tax) are
expected to be reclassified into earnings. These net losses reclassified
into earnings are expected to impact net interest income related to the
respective hedged items.
130 Bank of America 2007
The following table summarizes certain information related to the Corporation’s derivative hedges accounted for under SFAS 133 for 2007, 2006 and
2005.
(Dollars in millions)
Fair value hedges
Hedge ineffectiveness recognized in net interest income and mortgage banking income (1)
Net loss excluded from assessment of effectiveness (2)
Cash flow hedges
Hedge ineffectiveness recognized in net interest income
Net gains on transactions which are probable of not occurring recognized in other income
(1) Hedge ineffectiveness was recognized in net interest income in 2007 and 2006 and net interest income and mortgage banking income in 2005.
(2) Net loss excluded from assessment of effectiveness was recorded primarily within mortgage banking income in 2005.
2007
2006
2005
$55
–
4
18
$23
–
18
–
$166
(13)
(31)
–
The Corporation hedges its net investment in consolidated 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 $516 million for 2007 as compared to losses of $475 million in 2006 and gains of $66 million in 2005.
Note 5 – Securities
The amortized cost, gross unrealized gains and losses, and fair value of AFS debt and marketable equity securities at December 31, 2007 and 2006 were:
(Dollars in millions)
Available-for-sale debt securities, December 31, 2007
U.S. Treasury securities and agency debentures
Mortgage-backed securities (1)
Foreign securities
Corporate/Agency bonds
Other taxable securities (2)
Total taxable securities
Tax-exempt securities
Total available-for-sale debt securities
Available-for-sale marketable equity securities (3)
Available-for-sale debt securities, December 31, 2006
U.S. Treasury securities and agency debentures
Mortgage-backed securities (1)
Foreign securities
Corporate/Agency bonds
Other taxable securities (2)
Total taxable securities
Tax-exempt securities
Total available-for-sale debt securities
Available-for-sale marketable equity securities (3)
Amortized
Cost
$
749
166,768
6,568
3,107
24,608
201,800
14,468
$216,268
$
6,562
$
697
161,693
12,126
4,699
12,077
191,292
6,493
$197,785
$ 2,799
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$
$
10
92
290
2
69
463
73
536
$13,530
$
$
$
–
4
2
–
10
16
64
80
408
$
–
(3,144)
(101)
(76)
(84)
(3,405)
(69)
$(3,474)
$ (352)
$
(9)
(4,804)
(78)
(96)
(38)
(5,025)
(34)
$(5,059)
$
(10)
Fair Value
$
759
163,716
6,757
3,033
24,593
198,858
14,472
$213,330
$ 19,740
$
688
156,893
12,050
4,603
12,049
186,283
6,523
$192,806
$
3,197
(1) Substantially all securities were issued by U.S. government-backed or government-sponsored enterprises.
(2)
(3) Represents those AFS marketable equity securities that are recorded in other assets on the Consolidated Balance Sheet. At December 31, 2007, approximately $16.2 billion of the fair value balance, including $13.4 billion of
Includes ABS.
unrealized gain, represents China Construction Bank (CCB) shares. At December 31, 2006 these CCB shares were accounted for at cost and therefore excluded from this table.
At December 31, 2007, the amortized cost and fair value of both
taxable and tax-exempt held-to-maturity debt securities was $726 million.
At December 31, 2006, the amortized cost and fair value of both taxable
and tax-exempt held-to-maturity debt securities was $40 million. Effective
January 1, 2007, the Corporation redesignated $909 million of debt secu-
rities at amortized cost from AFS to held-to-maturity.
At December 31, 2007 and 2006, accumulated net unrealized gains
(losses) on AFS debt and marketable equity securities included in accumu-
lated OCI were $6.6 billion and $(2.9) billion, net of the related income tax
(expense) benefit of $(3.7) billion and $1.7 billion.
Bank of America 2007 131
The following table presents the current fair value and the associated gross unrealized losses only on investments in securities with gross unrealized
losses at December 31, 2007 and 2006. The table also discloses whether these securities have had gross unrealized losses for less than twelve months,
or for twelve months or longer.
(Dollars in millions)
Available-for-sale debt securities as of December 31, 2007
Mortgage-backed securities
Foreign securities
Corporate/Agency bonds
Other taxable securities
Total taxable securities
Tax-exempt securities
Total temporarily-impaired available-for-sale debt securities
Temporarily-impaired available-for-sale marketable equity securities
Total temporarily-impaired available-for-sale securities
Available-for-sale debt securities as of December 31, 2006
U.S. Treasury securities and agency debentures
Mortgage-backed securities
Foreign securities
Corporate/Agency bonds
Other taxable securities
Total taxable securities
Tax-exempt securities
Total temporarily-impaired available-for-sale debt securities
Temporarily-impaired available-for-sale marketable equity securities
Total temporarily-impaired available-for-sale securities
Less than twelve months
Twelve months or longer
Total
Gross
Unrealized
Losses
$(438)
(88)
(2)
(25)
(553)
(66)
(619)
(322)
Fair Value
$140,600
2,129
2,181
712
145,622
505
146,127
57
Gross
Unrealized
Losses
$(2,706)
(13)
(74)
(59)
(2,852)
(3)
(2,855)
(30)
Fair Value
$150,703
2,486
2,308
1,334
156,831
3,068
159,899
2,410
Gross
Unrealized
Losses
$(3,144)
(101)
(76)
(84)
(3,405)
(69)
(3,474)
(352)
$(941)
$146,184
$(2,885)
$162,309
$(3,826)
$
(9)
(128)
(1)
(96)
(29)
(263)
(4)
(267)
(10)
$
–
151,092
6,908
–
287
158,287
1,271
159,558
–
$
–
(4,676)
(77)
–
(9)
(4,762)
(30)
(4,792)
–
$
387
155,776
6,953
4,199
1,540
168,855
2,082
170,937
244
$
(9)
(4,804)
(78)
(96)
(38)
(5,025)
(34)
(5,059)
(10)
$(277)
$159,558
$(4,792)
$171,181
$(5,069)
Fair Value
$10,103
357
127
622
11,209
2,563
13,772
2,353
$16,125
$
387
4,684
45
4,199
1,253
10,568
811
11,379
244
$11,623
Management evaluates securities for other-than-temporary impair-
ment on a quarterly basis, and more frequently when conditions warrant
such evaluation. Factors considered in determining whether an impairment
is other-than-temporary include (1) the length of time and the extent to
which the fair value has been less than cost, (2) the financial condition
and near-term prospects of the issuer, and (3) the intent and ability of the
Corporation to hold the investment for a period of time sufficient to allow
for any anticipated recovery in fair value.
At December 31, 2007, the amortized cost of approximately 7,000
securities in AFS securities exceeded their fair value by $3.8 billion.
Included in the $3.8 billion of gross unrealized losses on AFS securities at
December 31, 2007, was $941 million of gross unrealized losses that
have existed for less than twelve months and $2.9 billion of gross unreal-
ized losses that have existed for a period of twelve months or longer. Of
the gross unrealized losses existing for twelve months or longer, $2.7 bil-
lion, or 94 percent, of the gross unrealized loss is related to approximately
800 mortgage-backed securities. These securities are predominantly guar-
anteed by either the Federal National Mortgage Association (Fannie Mae),
Federal Home Loan Mortgage Corporation (Freddie Mac) or Government
National Mortgage Association (GNMA). The gross unrealized losses on
these mortgage-backed securities are due to overall increases in market
interest rates subsequent to purchase. The Corporation has the ability and
intent to hold these securities for a period of time sufficient to recover all
gross unrealized losses. Accordingly, the Corporation has not recognized
any other-than-temporary impairment for these securities.
The Corporation had investments in securities from Fannie Mae and
Freddie Mac that exceeded 10 percent of consolidated shareholders’
equity as of December 31, 2007 and 2006. Those investments had fair
values of $100.8 billion and $43.2 billion at December 31, 2007, and
$109.9 billion and $42.0 billion at December 31, 2006. In addition, these
investments had total amortized costs of $102.9 billion and $43.9 billion
at December 31, 2007, and $113.5 billion and $43.3 billion at
December 31, 2006. As disclosed in the preceding paragraph, the Corpo-
ration has not recognized any other-than-temporary impairment for these
securities.
The Corporation recognized $398 million of impairment losses on
AFS debt securities during 2007. No such losses were recognized during
2006 or 2005.
Securities are pledged or assigned to secure borrowed funds, govern-
ment and trust deposits and for other purposes. The carrying value of
pledged securities was $107.4 billion and $83.8 billion at December 31,
2007 and 2006.
The expected maturity distribution of the Corporation’s mortgage-
backed securities and the contractual maturity distribution of the Corpo-
ration’s other debt securities, and the yields of its AFS debt securities
portfolio at December 31, 2007 are summarized in the following table.
Actual maturities may differ from the contractual or expected maturities
shown in the following table since borrowers may have the right to prepay
obligations with or without prepayment penalties.
132 Bank of America 2007
(Dollars in millions)
Amount
Yield (1)
Amount
Yield (1)
Amount
Yield (1)
Amount
Yield (1)
Amount
Yield (1)
Due in one year or
less
Due after one year
through five years
Due after five years
through ten years
Due after ten years
Total
December 31, 2007
Fair value of available-for-sale debt securities
U.S. Treasury securities and agency
debentures
Mortgage-backed securities
Foreign securities
Corporate/Agency bonds
Other taxable securities
Total taxable securities
Tax-exempt securities (2)
Total available-for-sale debt securities
Amortized cost of available-for-sale debt
securities
$
93
30
1,658
215
13,044
15,040
352
$15,392
3.82%
7.50
4.57
4.30
4.69
4.67
5.79
4.69
$
541
7,484
4,095
1,032
7,017
20,169
2,891
$23,060
3.97%
5.20
5.52
4.47
5.13
5.17
5.89
5.26
$
119
141,558
54
1,691
2,399
145,821
8,058
$153,879
4.45%
5.08
8.96
4.97
5.76
5.09
6.38
5.16
$
6
14,644
950
95
2,133
17,828
3,171
$20,999
5.82%
6.81
7.57
5.52
5.59
6.70
6.86
6.72
$
759
163,716
6,757
3,033
24,593
198,858
14,472
$213,330
4.04%
5.24
5.67
4.77
5.00
5.21
6.38
5.29
$15,120
$23,205
$156,495
$21,448
$216,268
(1) Yields are calculated based on the amortized cost of the securities.
(2) Yields of tax-exempt securities are calculated on a fully taxable-equivalent (FTE) basis.
The components of realized gains and losses on sales of debt secu-
rities for 2007, 2006 and 2005 were:
(Dollars in millions)
Gross gains
Gross losses
2007
$197
(17)
2006
$ 87
(530)
2005
$1,154
(70)
Net gains (losses) on sales of debt
securities
$180
$(443)
$1,084
The income tax expense (benefit) attributable to realized net gains
(losses) on sales of debt securities was $67 million, $(163) million and
$400 million in 2007, 2006 and 2005, respectively.
Certain Corporate and Strategic Investments
In 2007, the Corporation made a $2.0 billion investment in Countrywide
Financial Corporation (Countrywide), the largest mortgage lender in the
U.S., in the form of Series B non-voting convertible preferred securities
yielding 7.25 percent, which are recorded in other assets. This investment
is accounted for under the cost method of accounting.
The Corporation owns approximately eight percent, or 19.1 billion
common shares, of CCB. These common shares are accounted for at fair
value and recorded as AFS marketable equity securities in other assets.
Prior to the fourth quarter of 2007, these shares were accounted for at
cost as they are nontransferable until October 2008. The cost and fair
value of the CCB investment was approximately $3.0 billion and $16.4
billion at December 31, 2007. Dividend income on this investment is
recorded in equity investment income. The Corporation also holds an
option to increase its ownership interest in CCB to 19.1 percent. Addi-
tional shares received upon exercise of this option are restricted through
August 2011. This option expires in February 2011. The strike price of
the option is based on the IPO price that steps up on an annual basis and
is currently at 103 percent of the IPO price. The strike price of the option
is capped at 118 percent depending when the option is exercised.
Additionally, the Corporation owns approximately 137.0 million and
41.1 million of preferred and common shares, respectively, of Banco Itaú
Holding Financeira S.A. (Banco Itaú) at December 31, 2007 which are
recorded in other assets. These shares are accounted for at cost as they
are non-transferable until May 2009. These shares are currently carried at
cost but will be accounted for as AFS marketable equity securities and
carried at fair value with an offset to accumulated OCI beginning in the
second quarter of 2008. Dividend income on this investment is recorded
in equity investment income. The cost and fair value of this investment
was $2.6 billion and $4.6 billion at December 31, 2007.
The Corporation has a 24.9 percent, or $2.6 billion, investment in
Grupo Financiero Santander, S.A., the subsidiary of Grupo Santander, S.A.
This investment is recorded in other assets and is accounted for under the
equity method of accounting with income being recorded in equity invest-
ment income.
For additional information on securities, see Note 1 – Summary of
Significant Accounting Principles to the Consolidated Financial State-
ments.
Bank of America 2007 133
Note 6 – Outstanding Loans and Leases
Outstanding loans and leases at December 31, 2007 and 2006 were:
(Dollars in millions)
Consumer
Residential mortgage
Credit card – domestic
Credit card – foreign
Home equity (1)
Direct/Indirect consumer (1, 2)
Other consumer (1, 3)
Total consumer
Commercial
Commercial – domestic (4)
Commercial real estate (5)
Commercial lease financing
Commercial – foreign
Total commercial loans measured at historical cost
Commercial loans measured at fair value (6)
Total commercial
Total loans and leases
December 31
2007
2006
$274,949
65,774
14,950
114,834
76,844
3,850
551,201
208,297
61,298
22,582
28,376
320,553
4,590
325,143
$241,181
61,195
10,999
87,893
59,378
5,059
465,705
161,982
36,258
21,864
20,681
240,785
n/a
240,785
$876,344
$706,490
(1) Home equity loan balances previously included in direct/indirect consumer and other consumer were reclassified to home equity to conform to current year presentation. Additionally, certain foreign consumer balances were
(2)
(3)
(4)
reclassified from other consumer to direct/indirect consumer to conform to current year presentation.
Includes foreign consumer loans of $3.4 billion and $3.9 billion at December 31, 2007 and 2006.
Includes other foreign consumer loans of $829 million and $2.3 billion, and consumer finance loans of $3.0 billion and $2.8 billion at December 31, 2007 and 2006.
Includes small business commercial – domestic loans, primarily card-related, of $17.8 billion and $13.7 billion at December 31, 2007 and 2006.
Includes domestic commercial real estate loans of $60.2 billion and $35.7 billion, and foreign commercial real estate loans of $1.1 billion and $578 million at December 31, 2007 and 2006.
(5)
(6) Certain commercial loans are measured at fair value in accordance with SFAS 159 and include commercial – domestic loans of $3.5 billion, commercial – foreign loans of $790 million and commercial real estate loans of
$304 million at December 31, 2007. See Note 19 – 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, with-
out consideration for the specific component of the allowance for
loan and lease losses, that were considered individually impaired in
accordance with SFAS 114 at December 31, 2007 and 2006. SFAS
114 impairment includes performing troubled debt restructurings
and excludes all commercial leases.
(Dollars in millions)
Commercial – domestic (1)
Commercial real estate
Commercial – foreign
Total impaired loans
December 31
2007
$1,018
1,099
19
$2,136
2006
$586
118
13
$717
(1)
Includes small business commercial – domestic loans of $135 million and $79 million at December 31,
2007 and 2006.
The average recorded investment in certain impaired loans for 2007,
2006 and 2005 was approximately $1.2 billion, $722 million and $852
million, respectively. At December 31, 2007 and 2006, the recorded invest-
ment in impaired loans requiring an allowance for loan and lease losses
based on individual analysis per SFAS 114 guidelines was $1.2 billion and
$567 million, and the related allowance for loan and lease losses was
$123 million and $43 million. For 2007, 2006 and 2005, interest income
recognized on impaired loans totaled $130 million, $36 million and $17
million, respectively, all of which was recognized on a cash basis.
At December 31, 2007 and 2006, nonperforming loans and leases,
including impaired and nonaccrual consumer loans, totaled $5.6 billion
and $1.8 billion. In addition, included in other assets were consumer and
commercial nonperforming loans held-for-sale of $188 million and $80
million at December 31, 2007 and 2006.
The Corporation has loan products with varying terms (e.g., interest-only
mortgages, option adjustable rate mortgages, etc.) and loans with high
loan-to-value ratios. Exposure to any of these loan products does not result in
a significant concentration of credit risk. Terms of loan products, collateral
coverage, the borrower’s credit history, and the amount of these loans that are
retained on the Corporation’s balance sheet are included in the Corporation’s
assessment when establishing its allowance for loan and lease losses.
134 Bank of America 2007
Note 7 – Allowance for Credit Losses
The following table summarizes the changes in the allowance for credit losses for 2007, 2006 and 2005.
(Dollars in millions)
Allowance for loan and lease losses, January 1
Adjustment due to the adoption of SFAS 159
LaSalle balance, October 1, 2007
U.S. Trust Corporation balance, July 1, 2007
MBNA balance, January 1, 2006
Loans and leases charged off
Recoveries of loans and leases previously charged off
Net charge-offs
Provision for loan and lease losses
Other
Allowance for loan and lease losses, December 31
Reserve for unfunded lending commitments, January 1
Adjustment due to the adoption of SFAS 159
LaSalle balance, October 1, 2007
Provision for unfunded lending commitments
Other
Reserve for unfunded lending commitments, December 31
Allowance for credit losses, December 31
2007
$ 9,016
(32)
725
25
–
(7,730)
1,250
(6,480)
8,357
(23)
11,588
397
(28)
124
28
(3)
518
2006
$ 8,045
–
–
–
577
(5,881)
1,342
(4,539)
5,001
(68)
9,016
395
–
–
9
(7)
397
2005
$ 8,626
–
–
–
–
(5,794)
1,232
(4,562)
4,021
(40)
8,045
402
–
–
(7)
–
395
$12,106
$ 9,413
$ 8,440
Note 8 – Securitizations
The Corporation securitizes loans which may be serviced by the Corpo-
ration 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 called retained interests. These retained interests are recorded
in other assets and/or AFS debt securities and are carried at fair value or
amounts that approximate fair value with changes recorded in income or
accumulated OCI. Changes in the fair value for credit card-related interest-
only strips are recorded in card income.
Mortgage-related Securitizations
The Corporation securitizes a portion of its residential mortgage loan origi-
nations in conjunction with or shortly after loan closing. In addition, the
Corporation may, from time to time, securitize commercial mortgages and
first residential mortgages that it originates or purchases from other enti-
ties. In 2007 and 2006, the Corporation converted a total of $84.5 billion
(including $13.2 billion originated by other entities) and $70.4 billion
(including $20.4 billion originated by other entities), of commercial mort-
gages and first residential mortgages into mortgage-backed securities
issued through Fannie Mae, Freddie Mac, GNMA, Bank of America, N.A.
and Banc of America Mortgage Securities. At December 31, 2007 and
2006, the Corporation retained $9.2 billion (including $3.3 billion issued
prior to 2007) and $5.5 billion (including $4.2 billion issued prior to 2006)
of securities that were valued using quoted market prices. In addition, the
Corporation retained securities, including residual interests, which totaled
$196 million and $224 million at December 31, 2007 and 2006 and are
classified in trading account assets, with changes in fair value recorded in
earnings.
In 2007, the Corporation reported $633 million in gains on loans
converted into securities and sold, of which gains of $584 million were
from loans originated by the Corporation and $49 million were from loans
originated by other entities. In 2006, the Corporation reported $357 mil-
lion in gains on loans converted into securities and sold, of which gains of
$329 million were from loans originated by the Corporation and $28 mil-
lion were from loans originated by other entities. At December 31, 2007
and 2006, the Corporation had recourse obligations of $150 million and
$412 million with varying terms up to seven years on loans that had been
securitized and sold.
In 2007 and 2006, the Corporation purchased $18.1 billion and
$17.4 billion of mortgage-backed securities from third parties and
resecuritized them. Net gains, which include net interest income earned
during the holding period,
totaled $13 million and $25 million. At
December 31, 2007, the Corporation retained $540 million of the secu-
rities issued in these transactions. At December 31, 2006, the Corpo-
ration did not retain any securities issued in these transactions.
The Corporation has retained MSRs from the sale or securitization of
mortgage loans. Servicing fee and ancillary fee income on all mortgage
loans serviced, including securitizations, was $810 million and $775 mil-
lion in 2007 and 2006. For more information on MSRs, see Note
21 – Mortgage Servicing Rights to the Consolidated Financial Statements.
Due to current market conditions, members of the mortgage servicing
industry are evaluating a number of programs for identifying subprime
residential mortgage loan borrowers who are at risk of default and offering
loss mitigation strategies,
including repayment plans and loan mod-
ifications, to such borrowers. Generally these programs require that the
borrower and subprime residential mortgage loan meet certain criteria in
order to qualify for a modification. The SEC’s Office of the Chief Account-
ant (OCA) noted that if certain loan modification requirements are met, the
OCA will not object to continued status of the transferee as a QSPE under
SFAS 140. The Corporation does not currently originate or service sig-
nificant subprime residential mortgage loans, nor does it hold a significant
interests in QSPE securitizations of subprime resi-
amount of beneficial
dential mortgage loans. The Corporation does not expect
the
implementation of these programs will have a significant impact on its
financial condition and results of operations.
that
Bank of America 2007 135
Credit Card and Other Securitizations
The Corporation maintains interests in credit card, other consumer, and
commercial loan securitization vehicles. These acquired interests include
interest-only strips, subordinated tranches, cash reserve accounts, and
subordinated interests in accrued interest and fees on the securitized
receivables. During 2007 and 2006, the Corporation securitized $19.9
billion and $23.7 billion of credit card receivables resulting in $99 million
and $104 million in gains (net of securitization transaction costs of $14
million and $28 million) which were recorded in card income. As of
December 31, 2007 and 2006, the aggregate debt securities outstanding
for the Corporation’s credit card securitization trusts were $101.3 billion
and $96.8 billion.
The Corporation also securitized $3.3 billion of automobile loans and
recorded losses of $6 million in 2006. The Corporation did not securitize
any automobile loans in 2007. At December 31, 2007 and 2006,
aggregate debt securities outstanding for the Corporation’s automobile
securitization vehicles were $2.6 billion and $5.2 billion, and the Corpo-
ration held residual interests which totaled $100 million and $130 million.
At December 31, 2007 and 2006, the remaining other consumer and
loan securitization vehicles were not material to the Corpo-
commercial
ration.
At December 31, 2007 and 2006, the Corporation held investment
grade securities issued by its securitization vehicles of $2.1 billion ($425
million of which were issued in 2007) and $3.5 billion (none of which were
issued in 2006) in the AFS debt securities portfolio which are valued using
quoted market prices. At December 31, 2007 and 2006, there were no
recognized servicing assets or liabilities associated with any of these
credit card and other securitization transactions.
Key economic assumptions used in measuring the fair value of cer-
tain residual
interests that continue to be held by the Corporation
(included in other assets) in credit card securitizations and the sensitivity
of the current fair value of residual cash flows to changes in those
assumptions are disclosed in the table below.
The sensitivities in the table below 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 $178.6 billion and $163.4 billion in 2007 and 2006.
Contractual credit card servicing fee income totaled $2.1 billion and $1.9
billion in 2007 and 2006. Other cash flows received on retained interests,
such as cash flow from interest-only strips, were $6.6 billion and $6.7 bil-
lion in 2007 and 2006, for credit card securitizations. Proceeds from col-
lections reinvested in revolving commercial loan securitizations were $2.9
billion and $4.6 billion in 2007 and 2006. Servicing fees and other cash
flows received on retained interests, such as cash flows from interest-only
strips, were $1 million and $9 million in 2007, and $2 million and $15
million in 2006 for commercial loan securitizations.
The Corporation also reviews its loans and leases portfolio on a
managed basis. Managed loans and leases are defined as on-balance
sheet loans and leases as well as those loans in revolving securitizations
and other securitizations where servicing is retained that are undertaken
for corporate management purposes, which include credit card, commer-
cial
loans, automobile and certain mortgage securitizations. Managed
loans and leases exclude originate-to-distribute loans and other loans in
securitizations where the Corporation has not retained servicing. New
advances on accounts for which previous loan balances were sold to the
securitization trusts will be recorded on the Corporation’s Consolidated
Balance Sheet after the revolving period of the securitization, which has
increasing loans and leases on the Corporation’s Con-
the effect of
solidated Balance Sheet and increasing net interest income and charge-
offs, with a related reduction in noninterest income.
(Dollars in millions)
Carrying amount of residual interests (at fair value) (1)
Balance of unamortized securitized loans
Weighted average life to call or maturity (in years)
Monthly payment rate
Impact on fair value of 10% favorable change
Impact on fair value of 25% favorable change
Impact on fair value of 10% adverse change
Impact on fair value of 25% adverse change
Expected credit losses (annual rate)
Impact on fair value of 10% favorable change
Impact on fair value of 25% favorable change
Impact on fair value of 10% adverse change
Impact on fair value of 25% adverse change
Residual cash flows discount rate (annual rate)
Impact on fair value of 100 bps favorable change
Impact on fair value of 200 bps favorable change
Impact on fair value of 100 bps adverse change
Impact on fair value of 200 bps adverse change
2007
$
2,766
102,967
0.3
11.6-16.6%
$
$
$
51
158
(35)
(80)
3.7-5.4%
141
374
(133)
(333)
11.5%
9
13
(12)
(23)
$
$
$
$
2006
2,929
98,295
0.3
11.2-19.8%
43
133
(38)
(82)
3.8-5.8%
86
218
(85)
(211)
12.5%
12
17
(14)
(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.
136 Bank of America 2007
Portfolio balances, delinquency and historical loss amounts of the managed loans and leases portfolio for 2007 and 2006 were as follows:
(Dollars in millions)
Residential mortgage (1)
Credit card – domestic
Credit card – foreign
Home equity
Direct/Indirect consumer
Other consumer
Total consumer
Commercial – domestic (2, 3)
Commercial real estate
Commercial lease financing
Commercial – foreign
Total commercial
Total managed loans and leases
measured at historical cost
Total measured at fair value
Managed loans in securitizations
Total held loans and leases
(Dollars in millions)
Residential mortgage
Credit card – domestic
Credit card – foreign
Home equity
Direct/Indirect consumer
Other consumer
Total consumer
Commercial – domestic (2, 5)
Commercial real estate
Commercial lease financing
Commercial – foreign
Total commercial
Total managed loans and leases
measured at historical cost
Total measured at fair value
Managed loans in securitizations
Total held loans and leases
Total Loans
and Leases
$ 278,733
151,862
31,829
115,009
78,564
3,850
659,847
209,087
61,298
22,582
28,376
321,343
981,190
4,590
(109,436)
$ 876,344
Average
Loans and
Leases
Outstanding
$ 268,879
141,795
29,581
99,023
74,829
4,259
618,366
178,932
42,783
20,435
23,931
266,081
884,447
3,012
(111,305)
$ 776,154
December 31, 2007
December 31, 2006
Accruing
Loans and
Leases Past
Due 90 Days
or More
$
237
4,170
714
–
752
4
5,877
546
36
25
16
623
6,500
–
(2,764)
$ 3,736
Nonperforming
Loans and Leases
$1,999
n/a
n/a
1,342
8
95
3,444
1,004
1,099
33
19
2,155
5,599
–
(2)
Total Loans
and Leases
$ 245,840
142,599
27,890
88,202
66,266
5,059
575,856
163,274
36,258
21,864
20,681
242,077
817,933
n/a
(111,443)
$5,597
$ 706,490
Accruing
Loans and
Leases Past
Due 90 Days
or More
$
118
3,828
608
–
524
7
5,085
265
78
26
9
378
5,463
n/a
(2,407)
$ 3,056
Year Ended December 31, 2007
Year Ended December 31, 2006
$
Net
Losses
57
6,960
1,254
274
1,603
278
10,426
1,007
47
2
1
1,057
11,483
n/a
(5,003)
$ 6,480
Average
Loans and
Leases
Outstanding
$ 213,097
138,592
24,817
78,692
62,002
7,317
524,517
153,796
36,939
20,862
23,521
235,118
759,635
n/a
(107,218)
$ 652,417
Net Loss
Ratio (4)
0.02%
4.91
4.24
0.28
2.14
6.54
1.69
0.56
0.11
0.01
–
0.40
1.30
n/a
4.50
0.84
$
Net
Losses
39
5,395
980
51
925
217
7,607
367
3
(28)
(8)
334
7,941
n/a
(3,402)
$ 4,539
Nonperforming
Loans and Leases
$ 660
n/a
n/a
293
2
77
1,032
598
118
42
13
771
1,803
n/a
(16)
$1,787
Net Loss
Ratio (4)
0.02%
3.89
3.95
0.07
1.49
2.97
1.45
0.24
0.01
(0.14)
(0.04)
0.14
1.05
n/a
3.17
0.70
(1) Accruing loans and leases past due 90 days or more represent residential mortgage loans related to repurchases pursuant to the Corporation’s servicing agreements with GNMA mortgage pools, where repayments are insured
(2)
(3)
by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs.
Includes small business commercial – domestic loans.
Includes small business – commercial domestic accruing loans and leases past due 90 days or more of $427 million and $199 million and nonperforming loans and leases of $135 million and $79 million at December 31,
2007 and 2006.
(4) The net loss ratios are calculated as managed net losses divided by average outstanding managed loans and leases measured at historical cost for each loan and lease category.
(5)
Includes small business – commercial domestic net losses of $869 million, or 5.57 percent, and $361 million, or 3.00 percent, in 2007 and 2006.
n/a = not applicable
Bank of America 2007 137
Note 9 – Variable Interest Entities
The following table presents total assets of those VIEs in which the Corporation holds a significant variable interest and, in the unlikely event that all of the
assets in the VIEs become worthless, the Corporation’s maximum exposure to loss. The Corporation’s maximum exposure to loss incorporates not only
potential losses associated with assets recorded on the Corporation’s balance sheet but also off-balance sheet commitments, such as unfunded liquidity
and lending commitments and other contractual arrangements.
(Dollars in millions)
Variable interest entities, December 31, 2007
Corporation-sponsored multi-seller conduits
Collateralized debt obligation vehicles
Leveraged lease trusts
Other
Total variable interest entities
Variable interest entities, December 31, 2006
Corporation-sponsored multi-seller conduits
Collateralized debt obligation vehicles
Leveraged lease trusts
Other
Total variable interest entities
Consolidated (1)
Unconsolidated
Total Assets
Loss Exposure
Total Assets
Loss Exposure
$11,944
4,464
6,236
13,771
$36,415
$ 9,090
–
8,575
4,717
$22,382
$16,984
4,311
6,236
12,347
$39,878
$11,515
–
8,575
3,019
$23,109
$29,363
8,324
–
8,260
$45,947
$18,983
8,489
–
12,709
$40,181
$47,335
7,410
–
5,953
$60,698
$29,836
7,658
–
9,310
$46,804
(1) The Corporation consolidates VIEs when it is the primary beneficiary that will absorb the majority of the expected losses or expected residual returns of the VIEs or both.
Corporation-Sponsored Multi-seller Conduits
The Corporation administers three multi-seller conduits which provide a
low-cost funding alternative to its customers by facilitating their access to
the commercial paper market. These customers sell or otherwise transfer
assets to the conduits, which in turn issue high-grade, short-term commer-
cial paper that is collateralized by the underlying assets. The Corporation
receives fees for providing combinations of liquidity and SBLCs or similar
loss protection commitments to the conduits.
At December 31, 2007, our liquidity commitments to the conduits
were collateralized by various classes of assets. Assets held in the con-
duits incorporate features such as overcollateralization and cash reserves
which are designed to provide credit support at a level that is equivalent to
investment grade as determined in accordance with internal risk rating
guidelines. During 2007, there were no material write-downs or down-
grades of assets.
The Corporation is the primary beneficiary of one conduit which is
included in the Consolidated Financial Statements. The assets of the
consolidated conduit are recorded in AFS and held-to-maturity debt secu-
rities, and other assets. At December 31, 2007, the Corporation’s liquidity
commitments to the conduit were collateralized by credit card loans (21
percent), auto loans (14 percent), equipment loans (13 percent), and
student loans (eight percent). None of these assets are subprime resi-
dential mortgages. In addition, 29 percent of the Corporation’s liquidity
commitments were collateralized by projected cash flows from long-term
contracts (e.g., television broadcast contracts, stadium revenues and roy-
alty payments) which, as mentioned above, incorporate features that pro-
vide credit support at a level equivalent to investment grade. Assets of the
Corporation are not available to pay creditors of the consolidated conduit,
except to the extent the Corporation may be obligated to perform under
the liquidity commitments and SBLCs. Assets of the consolidated conduit
are not available to pay creditors of the Corporation.
The Corporation does not consolidate the other two conduits which
issued capital notes and equity interests to independent third parties as it
does not expect to absorb a majority of the variability of the conduits. At
December 31, 2007,
the Corporation’s liquidity commitments to the
unconsolidated conduits were collateralized by student loans (27 percent),
credit card loans and trade receivables (10 percent each), and auto loans
(eight percent). Less than one percent of these assets are subprime
In addition, 29 percent of
residential mortgages.
the Corporation’s
commitments were collateralized by the conduits’ short-term lending
arrangements with investment funds, primarily real estate funds, which, as
mentioned above, incorporate features that provide credit support at a
level equivalent to investment grade. Amounts advanced under these
arrangements will be repaid when the investment funds issue capital calls
to their qualified equity investors.
Net revenues earned from fees associated with these commitments
were $184 million and $121 million in 2007 and 2006.
Collateralized Debt Obligation Vehicles
CDO vehicles are SPEs that hold diversified pools of fixed income secu-
rities. They issue multiple tranches of debt securities, including commer-
cial paper, and equity securities. The Corporation receives fees for
structuring the CDOs and/or placing debt securities with third party invest-
liquidity support to CDO vehicles of
ors. The Corporation provided total
$12.3 billion and $7.7 billion notional amount at December 31, 2007 and
2006 consisting of $10.0 billion (including $3.2 billion for a consolidated
CDO) and $2.1 billion of written put options and $2.3 billion and $5.5 bil-
lion of other liquidity support at December 31, 2007 and 2006.
The Corporation is the primary beneficiary of certain CDOs which are
included in the Consolidated Financial Statements at December 31, 2007.
Assets held in the consolidated CDOs are classified in trading account
assets and AFS debt securities, including AFS debt securities with a fair
value of $2.8 billion that were principally related to certain assets that
were removed from the CDO conduit discussed below. The creditors of the
consolidated CDOs have no recourse to the general credit of the Corpo-
ration.
At December 31, 2007 and 2006, the Corporation provided liquidity
support in the form of written put options on $10.0 billion and $2.1 billion
notional amount of commercial paper issued by CDOs including $3.2 bil-
lion issued by a consolidated CDO at December 31, 2007. The commer-
cial paper is the most senior class of securities issued by the CDOs and
benefits from the subordination of all other securities, including AAA-rated
securities, issued by the CDOs. The Corporation is obligated under the
written put options to provide funding to the CDOs by purchasing the
commercial paper at predetermined contractual yields in the event of a
severe disruption in the short-term funding market. These written put
138 Bank of America 2007
options are recorded as derivatives on the Consolidated Balance Sheet
and are carried at fair value with changes in fair value recorded in trading
account profits (losses). See Note 13 – Commitments and Contingencies
to the Consolidated Financial Statements for more information on the writ-
ten put options. Derivative activity related to these entities is included in
Note 4 – Derivatives to the Consolidated Financial Statements.
The Corporation also administers a CDO conduit that obtains funds
by issuing commercial paper to third party investors. The conduit held
$2.3 billion and $5.5 billion of assets at December 31, 2007 and 2006
consisting of super senior tranches of debt securities issued by other
CDOs. These securities benefit from overcollateralization exceeding the
amount that would be required for a AAA-rating. The Corporation provides
liquidity support equal to the amount of assets in this conduit which obli-
gates it to purchase the commercial paper at a predetermined contractual
yield in the event of a severe disruption in the short-term funding market.
At December 31, 2007, the Corporation held $6.6 billion of commer-
cial paper on the balance sheet that was issued by unconsolidated CDO
vehicles, of which $5.0 billion related to these written put options and
$1.6 billion related to other liquidity support. The Corporation recorded
losses of $3.5 billion, net of insurance, in 2007 (of which $3.2 billion was
recorded in trading account profits (losses) and $288 million was recorded
in other income) due to writedowns of assets in consolidated CDOs and
losses recorded in connection with written put options and liquidity
commitments to unconsolidated CDOs. No losses were recorded in 2006.
Net revenues earned from fees associated with these liquidity com-
mitments were $5 million and $3 million in 2007 and 2006.
Leveraged Lease Trusts
The Corporation’s net investment in leveraged lease trusts totaled $6.2
billion and $8.6 billion at December 31, 2007 and 2006. These amounts,
which were recorded 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 lever-
aged lease trusts is nonrecourse to the Corporation. The Corporation has
no liquidity exposure to these leveraged lease trusts.
Other
Other consolidated VIEs at December 31, 2007 and 2006 consisted primarily
of securitization vehicles, including an asset acquisition conduit that holds
securities on the Corporation’s behalf and term securitization vehicles that
did not meet QSPE status, as well as managed investment vehicles that
invest in financial assets, primarily debt securities. The Corporation’s max-
imum exposure to loss of these VIEs included $7.4 billion and $272 million
of liquidity exposure to consolidated trusts that hold municipal bonds and
$1.6 billion and $1.1 billion of liquidity exposure to the consolidated asset
acquisition conduit at December 31, 2007 and 2006. The assets of these
consolidated VIEs were recorded in trading account assets, AFS debt secu-
rities and other assets. Other unconsolidated VIEs at December 31, 2007
and 2006 consisted primarily of securitization vehicles, managed investment
vehicles that invest in financial assets, primarily debt securities, and invest-
ments in affordable housing investment partnerships. Revenues associated
with administration, asset management, liquidity, and other services were
$17 million and $20 million in 2007 and 2006.
Note 10 – Goodwill and Intangible Assets
The following tables present goodwill and intangible assets at December 31, 2007 and 2006.
(Dollars in millions)
Global Consumer and Small Business Banking
Global Corporate and Investment Banking
Global Wealth and Investment Management
All Other
Total goodwill
December 31
2007
$40,340
29,648
6,451
1,091
$77,530
2006
$38,201
21,979
5,243
239
$65,662
The gross carrying values and accumulated amortization related to intangible assets at December 31, 2007 and 2006 are presented below:
(Dollars in millions)
Purchased credit card relationships
Core deposit intangibles
Affinity relationships
Other intangibles
Total intangible assets
December 31
2007
2006
Gross Carrying
Value
Accumulated
Amortization
Gross Carrying
Value
Accumulated
Amortization
$ 7,027
4,594
1,681
3,050
$16,352
$1,970
2,828
406
852
$6,056
$ 6,790
3,850
1,650
1,525
$13,815
$1,159
2,396
205
633
$4,393
The above tables include $11.1 billion and $1.6 billion of goodwill
and $1.0 billion and $1.3 billion of
intangible assets related to the
preliminary purchase price allocations of LaSalle and U.S. Trust Corpo-
ration. For more information on the impact of these acquisitions, see Note
2 – Merger and Restructuring Activity to the Consolidated Financial State-
ments.
Amortization of intangibles expense was $1.7 billion, $1.8 billion and
$809 million in 2007, 2006 and 2005, respectively. The Corporation
estimates aggregate amortization expense will be approximately $1.7 bil-
lion, $1.5 billion, $1.5 billion, $1.2 billion and $1.0 billion for 2008
through 2012, respectively. These estimates exclude the impact of any
planned acquisitions.
Bank of America 2007 139
Note 11 – Deposits
The Corporation had domestic certificates of deposit and other domestic time deposits of $100 thousand or more totaling $94.4 billion and $74.5 billion at
December 31, 2007 and 2006. Foreign certificates of deposit and other foreign time deposits of $100 thousand or more totaled $109.1 billion and $62.1
billion at December 31, 2007 and 2006.
Time deposits of $100 thousand or more
(Dollars in millions)
Domestic certificates of deposit and other time deposits
Foreign certificates of deposit and other time deposits
Three months
or less
$ 45,172
100,515
Over three months
to twelve months
$46,199
5,900
Thereafter
$3,069
2,706
Total
$ 94,440
109,121
At December 31, 2007, the scheduled maturities for total time deposits were as follows:
(Dollars in millions)
Due in 2008
Due in 2009
Due in 2010
Due in 2011
Due in 2012
Thereafter
Total time deposits
Domestic
$205,359
7,656
3,484
1,569
1,776
1,963
$221,807
Foreign
$107,334
786
180
23
1,023
730
$110,076
Total
$312,693
8,442
3,664
1,592
2,799
2,693
$331,883
Note 12 – Short-term Borrowings
and Long-term Debt
Short-term Borrowings
Bank of America Corporation and certain of its subsidiaries issue commer-
cial paper in order to meet short-term funding needs. Commercial paper
outstanding at December 31, 2007 was $55.6 billion compared to $41.2
billion at December 31, 2006.
Bank of America, N.A. maintains a domestic program to offer up to a
maximum of $75.0 billion, at any one time, of bank notes with fixed or
floating rates and maturities of at least seven days from the date of issue.
Short-term bank notes outstanding under this program totaled $12.3 bil-
lion at December 31, 2007 compared to $24.5 billion at December 31,
2006. These short-term bank notes, along with commercial paper, Federal
Home Loan Bank advances, Treasury tax and loan notes, and term federal
funds purchased, are reflected in commercial paper and other short-term
borrowings on the Consolidated Balance Sheet.
140 Bank of America 2007
Long-term Debt
The following table presents the balance of long-term debt at December 31, 2007 and 2006 and the related rates and maturity dates at December 31,
2007:
(Dollars in millions)
Notes issued by Bank of America Corporation
Senior notes:
Fixed, with a weighted average rate of 4.62%, ranging from 0.84% to 8.61%, due 2008 to 2043
Floating, with a weighted average rate of 4.97%, ranging from 0.54% to 9.07%, due 2008 to 2041
Subordinated notes:
Fixed, with a weighted average rate of 5.78%, ranging from 2.40% to 10.20%, due 2008 to 2037
Floating, with a weighted average rate of 5.78%, ranging from 4.58% to 7.52%, due 2016 to 2019
Junior subordinated notes (related to trust preferred securities):
Fixed, with a weighted average rate of 6.64%, ranging from 5.25% to 11.45%, due 2026 to 2055
Floating, with a weighted average rate of 5.71%, ranging from 5.24% to 8.59%, due 2027 to 2056
Total notes issued by Bank of America Corporation
Notes issued by Bank of America, N.A. and other subsidiaries
Senior notes:
Fixed, with a weighted average rate of 4.66%, ranging from 0.93% to 11.30%, due 2008 to 2027
Floating, with a weighted average rate of 5.03%, ranging from 1.00% to 8.00%, due 2008 to 2051
Subordinated notes:
Fixed, with a weighted average rate of 5.99%, ranging from 5.30% to 7.13%, due 2008 to 2036
Floating, with a weighted average rate of 5.25%, ranging from 4.85% to 5.29%, due 2010 to 2027
Total notes issued by Bank of America, N.A. and other subsidiaries
Notes issued by NB Holdings Corporation
Junior subordinated notes (related to trust preferred securities):
Fixed
Floating, 5.54%, due 2027
Total notes issued by NB Holdings Corporation
Notes issued by BAC North America Holding Company and subsidiaries (1)
Senior notes:
Fixed, with a weighted average rate of 5.04%, ranging from 3.00% to 8.00%, due 2008 to 2026
Floating, 3.62%, due 2013
Preferred Securities (related to securities issued by trusts):
Fixed, 6.97%, redeemable on or after 9/15/2010
Floating, with a weighted average rate of 6.56%, ranging from 5.05% to 7.00%, redeemable starting on or after 9/15/2010
Total notes issued by BAC North America Holding Company and subsidiaries
Other debt
Advances from the Federal Home Loan Bank of Atlanta
Floating
Advances from the Federal Home Loan Bank of New York
Fixed, with a weighted average rate of 6.06%, ranging from 4.00% to 8.29%, due 2008 to 2016
Advances from the Federal Home Loan Bank of Seattle
Fixed, with a weighted average rate of 6.34%, ranging from 5.40% to 7.42%, due 2008 to 2031
Floating, with a weighted average rate of 5.20%, ranging from 5.12% to 5.22%, due 2008
Advances from the Federal Home Loan Bank of Boston
Fixed, with a weighted average rate of 5.89%, ranging from 1.00% to 7.72%, due 2008 to 2026
Floating, with a weighted average rate of 4.42%, ranging from 4.36% to 4.45%, due 2008 to 2009
Advances from the Federal Home Loan Bank of Chicago
Fixed, with a weighted average rate of 4.03%, ranging from 2.97% to 8.29%, due 2008 to 2015
Floating, with a weighted average rate of 4.90%, ranging from 4.76% to 5.00%, due 2008 to 2013
Advances from the Federal Home Loan Bank of Indianapolis
Fixed, with a weighted average rate of 4.13%, ranging from 2.95% to 6.61%, due 2008 to 2013
Other
Total other debt
Total long-term debt
(1) Formerly ABN AMRO North America Holding Company which was acquired on October 1, 2007 as part of the LaSalle acquisition.
December 31
2007
2006
$ 47,430
41,791
$ 38,587
26,695
28,630
686
13,866
3,359
135,762
5,648
32,873
6,592
1,907
47,020
–
258
258
583
215
491
1,627
2,916
–
230
122
2,100
133
2,500
1,966
850
3,300
351
11,552
23,896
510
13,665
2,203
105,556
6,450
22,219
4,294
918
33,881
515
258
773
–
–
–
–
–
500
285
125
3,200
146
1,500
–
–
–
34
5,790
$197,508
$146,000
Bank of America 2007 141
The majority of the floating rates are based on three- and six-month
London InterBank Offered Rates (LIBOR). Bank of America Corporation and
Bank of America, N.A. maintain various domestic and international debt
programs to offer both senior and subordinated notes. The notes may be
denominated in U.S. dollars or foreign currencies. At December 31, 2007
and 2006, the amount of foreign currency-denominated debt translated
long-term debt was $58.8 billion and
into U.S. dollars included in total
$37.8 billion. Foreign currency contracts are used to convert certain for-
eign currency-denominated debt into U.S. dollars.
At December 31, 2007 and 2006, Bank of America Corporation was
authorized to issue approximately $64.0 billion and $58.1 billion of addi-
its existing shelf-
tional corporate debt and other securities under
registration statements. At December 31, 2007 and 2006, Bank of
America, N.A. was authorized to issue approximately $62.1 billion and
$30.8 billion of bank notes. At December 31, 2007, Bank of America,
N.A. was authorized to issue approximately $20.6 billion of additional
mortgage notes.
The weighted average effective interest rates for total long-term debt,
total fixed-rate debt and total floating-rate debt (based on the rates in
effect at December 31, 2007) were 5.09 percent, 5.21 percent and 4.93
percent, respectively, at December 31, 2007 and (based on the rates in
effect at December 31, 2006) were 5.32 percent, 5.41 percent and 5.18
percent, respectively, at December 31, 2006. These obligations were
denominated primarily in U.S. dollars.
The following table presents aggregate annual maturities of long-term
debt obligations (based on final maturity dates) at December 31, 2007.
(Dollars in millions)
Bank of America Corporation
Bank of America, N.A. and other subsidiaries
NB Holdings Corporation
BAC North America Holding Company and subsidiaries
Other
Total
2008
$ 7,303
18,802
–
16
4,314
$30,435
2009
$13,487
9,879
–
73
2,783
$26,222
2010
$19,632
2,967
–
91
1,781
$24,471
2011
$ 8,430
147
–
51
1,505
$10,133
2012
Thereafter
Total
$12,188
5,663
–
15
116
$17,982
$74,722
9,562
258
2,670
1,053
$135,762
47,020
258
2,916
11,552
$88,265
$197,508
Trust Preferred and Hybrid Securities
Trust preferred securities (Trust Securities) are issued by the trust compa-
nies (the Trusts) which are not consolidated. These Trust Securities are
mandatorily redeemable preferred security obligations of the Trusts. The
sole assets of the Trusts are Junior Subordinated Deferrable Interest
Notes of the Corporation (the Notes). The Trusts are 100 percent-owned
finance subsidiaries of the Corporation. Obligations associated with the
Notes are included in the Long-term Debt table on the previous page.
Certain of the Trust Securities were issued at a discount and may be
redeemed prior to maturity at the option of the Corporation. The Trusts
have invested the proceeds of such Trust Securities in the Notes. Each
issue of the Notes has an interest rate equal to the corresponding Trust
Securities distribution rate. The Corporation has the right to defer payment
of interest on the Notes at any time, or from time to time for a period not
exceeding five years, provided that no extension period may extend beyond
the stated maturity of the relevant Notes. During any such extension peri-
od, distributions on the Trust Securities will also be deferred and the
Corporation’s ability to pay dividends on its common and preferred stock
will be restricted.
The Trust Securities are subject
to mandatory redemption upon
repayment of the related Notes at their stated maturity dates or their ear-
lier redemption at a redemption price equal to their liquidation amount
plus accrued distributions to the date fixed for redemption and the pre-
mium, if any, paid by the Corporation upon concurrent repayment of the
related Notes.
Periodic
cash payments and payments upon liquidation or
redemption with respect to Trust Securities are guaranteed by the Corpo-
ration to the extent of funds held by the Trusts (the Preferred Securities
Guarantee). The Preferred Securities Guarantee, when taken together with
the Corporation’s other obligations, including its obligations under the
Notes, will constitute a full and unconditional guarantee, on a sub-
ordinated basis, by the Corporation of payments due on the Trust Secu-
rities.
Hybrid Income Term Securities (HITS) totaling $1.6 billion were also
issued by the Trusts to institutional investors. The BAC Capital Trust XIII
Floating Rate Preferred HITS have a distribution rate of three-month LIBOR
plus 40 bps and the BAC Capital Trust XIV Fixed-to-Floating Rate Preferred
HITS have an initial distribution rate of 5.63 percent. Both series of HITS
represent beneficial interests in the assets of the respective capital trust,
which consists of a series of the Corporation’s junior subordinated notes
and a stock purchase contract
the Corpo-
ration’s preferred stock. The Corporation will remarket the junior sub-
ordinated notes underlying each series of HITS on or about the five-year
anniversary of the issuance to obtain sufficient funds for the capital trusts
to buy the Corporation’s preferred stock under the stock purchase con-
tracts.
for a specified series of
In connection with the HITS,
the Corporation entered into two
replacement capital covenants for the benefit of investors in certain series
of the Corporation’s long-term indebtedness (Covered Debt). As of the
date of this report, the Corporation’s 6 5⁄8% Junior Subordinated Notes due
2036 constitutes the Covered Debt under the covenant corresponding to
the Floating Rate Preferred HITS and the Corporation’s 5 5⁄8% Junior Sub-
ordinated Notes due 2035 constitutes the Covered Debt under the cove-
nant corresponding to the Fixed-to-Floating Rate Preferred HITS. These
covenants generally restrict the ability of the Corporation and its sub-
sidiaries to redeem or purchase the HITS and related securities unless the
Corporation has obtained the prior approval of the FRB if required under
the FRB’s capital guidelines, the redemption or purchase price of the HITS
does not exceed the amount received by the Corporation from the sale of
certain qualifying securities, and such replacement securities qualify as
Tier 1 Capital and are not “restricted core capital elements” under the
FRB’s guidelines.
142 Bank of America 2007
The following table is a summary of the outstanding Trust Securities and the Notes at December 31, 2007 as originated by Bank of America Corpo-
ration and the predecessor banks.
(Dollars in millions)
Issuer
Bank of America
Capital Trust I
Capital Trust II
Capital Trust III
Capital Trust IV
Capital Trust V
Capital Trust VI
Capital Trust VII
Capital Trust VIII
Capital Trust X
Capital Trust XI
Capital Trust XII
Capital Trust XIII
Capital Trust XIV
Capital Trust XV
NationsBank
Capital Trust II
Capital Trust III
Capital Trust IV
BankAmerica
Institutional Capital A
Institutional Capital B
Capital II
Capital III
Barnett
Capital III
Fleet
Capital Trust II
Capital Trust V
Capital Trust VIII
Capital Trust IX
BankBoston
Capital Trust III
Capital Trust IV
Progress
Capital Trust I
Capital Trust II
Capital Trust III
Capital Trust IV
MBNA
Capital Trust A
Capital Trust B
Capital Trust D
Capital Trust E
Total
Aggregate
Principal
Amount
of Trust
Securities
Aggregate
Principal
Amount
of the
Notes
Stated Maturity
of the Notes
Per Annum Interest
Rate of the Notes
Interest Payment
Dates
Redemption Period
$
575
900
500
375
518
1,000
1,685
530
900
1,000
863
700
850
500
$
593
928
516
387
534
1,031
1,738
546
928
1,031
890
700
850
500
December 2031
February 2032
August 2032
May 2033
November 2034
March 2035
August 2035
August 2035
March 2055
May 2036
August 2055
March 2043
March 2043
June 2056
7.00% 3/15,6/15,9/15,12/15
2/1,5/1,8/1,11/1
7.00
2/15,5/15,8/15,11/15
7.00
2/1,5/1,8/1,11/1
5.88
2/3,5/3,8/3,11/3
6.00
3/8,9/8
5.63
5.25
2/10,8/10
2/25,5/25,8/25,11/25
6.00
3/29,6/29,9/29,12/29
6.25
5/23,11/23
6.63
2/2,5/2,8/2,11/2
6.88
3/15,6/15,9/15,12/15
3-mo. LIBOR +40 bps
3/15,9/15
5.63
3/1,6/1,9/1,12/1
3-mo. LIBOR +80 bps
On or after 12/15/06
On or after 2/01/07
On or after 8/15/07
On or after 5/01/08
On or after 11/03/09
Any time
Any time
On or after 8/25/10
On or after 3/29/11
Any time
On or after 8/02/11
On or after 3/15/17
On or after 3/15/17
On or after 6/01/37
365
500
500
450
300
450
400
250
250
250
534
175
250
250
9
6
10
5
250
280
300
200
376
515
515
464
309
464
412
258
258
258
550
180
258
258
9
6
10
5
258
289
309
206
December 2026
January 2027
April 2027
7.83
3-mo. LIBOR +55 bps
8.25
6/15,12/15
1/15,4/15,7/15,10/15
4/15,10/15
On or after 12/15/06
On or after 1/15/07
On or after 4/15/07
December 2026
December 2026
December 2026
January 2027
8.07
7.70
8.00
3-mo. LIBOR +57 bps
6/30,12/31
6/30,12/31
6/15,12/15
1/15,4/15,7/15,10/15
On or after 12/31/06
On or after 12/31/06
On or after 12/15/06
On or after 1/15/02
February 2027
3-mo. LIBOR +62.5 bps
2/1,5/1,8/1,11/1
On or after 2/01/07
December 2026
December 2028
March 2032
August 2033
7.92
3-mo. LIBOR +100 bps
7.20
6.00
6/15,12/15
3/18,6/18,9/18,12/18
3/15,6/15,9/15,12/15
2/1,5/1,8/1,11/1
On or after 12/15/06
On or after 12/18/03
On or after 3/08/07
On or after 7/31/08
June 2027
June 2028
3-mo. LIBOR +75 bps
3-mo. LIBOR +60 bps
3/15,6/15,9/15,12/15
3/8,6/8,9/8,12/8
On or after 6/15/07
On or after 6/08/03
June 2027
July 2030
November 2032
January 2033
10.50
11.45
3-mo. LIBOR +335 bps
3-mo. LIBOR +335 bps
6/1,12/1
1/19,7/19
2/15,5/15,8/15,11/15
1/7,4/7,7/7,10/7
On or after 6/01/07
On or after 7/19/10
On or after 11/15/07
On or after 1/07/08
December 2026
February 2027
October 2032
February 2033
8.28
3-mo. LIBOR +80 bps
8.13
8.10
6/1,12/1
2/1,5/1,8/1,11/1
1/1,4/1,7/1,10/1
2/15,5/15,8/15,11/15
On or after 12/01/06
On or after 2/01/07
On or after 10/01/07
On or after 2/15/08
$16,880
$17,339
Issuance Date
December 2001
January 2002
August 2002
April 2003
November 2004
March 2005
August 2005
August 2005
March 2006
May 2006
August 2006
February 2007
February 2007
May 2007
December 1996
February 1997
April 1997
November 1996
November 1996
December 1996
January 1997
January 1997
December 1996
December 1998
March 2002
July 2003
June 1997
June 1998
June 1997
July 2000
November 2002
December 2002
December 1996
January 1997
June 2002
November 2002
Bank of America 2007 143
In addition to the outstanding Trust Securities and Notes included in
the preceding table, non-consolidated wholly-owned subsidiary funding
vehicles of BAC North America Holding Company (BACNAH, formerly ABN
AMRO North America Holding Company) and its direct subsidiary, LaSalle
Bank Corporation (LBC) issued preferred securities (Funding Securities).
These subsidiary funding vehicles have invested the proceeds of their
Funding Securities in separate series of preferred securities of BACNAH or
LBC (BACNAH Preferred Securities). The BACNAH Preferred Securities (and
the corresponding Funding Securities) are non-cumulative and permit
nonpayment of dividends within certain limitations. The issuance dates for
the BACNAH Preferred Securities (and the related Funding Securities)
range from 2000 to 2002. These Funding Securities are subject to man-
datory redemption upon repayment by the Corporation of the correspond-
ing series of BACNAH Preferred Securities at a redemption price equal to
their liquidation amount plus accrued and unpaid distributions for up to
one quarter.
For additional
information on Trust Securities for regulatory capital
purposes, see Note 15 – Regulatory Requirements and Restrictions to the
Consolidated Financial Statements.
Note 13 – Commitments and Contingencies
In the normal course of business, the Corporation enters into a number of
off-balance sheet commitments. These commitments expose the Corpo-
ration 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, SBLCs and commercial letters of credit to meet the financ-
ing needs of its customers. The unfunded legally binding lending commit-
ments shown in the following table are net of amounts distributed (e.g.,
syndicated) to other financial institutions of $39.2 billion and $30.5 billion
at December 31, 2007 and 2006. At December 31, 2007, the carrying
amount of these commitments, excluding fair value adjustments as dis-
cussed below, was $550 million, including deferred revenue of $32 million
and a reserve for unfunded legally binding lending commitments of $518
million. At December 31, 2006, the carrying amount of these commit-
ments was $444 million, including deferred revenue of $47 million and a
reserve for unfunded legally binding lending commitments of $397 million.
The carrying amount of
these commitments is recorded in accrued
expenses and other liabilities.
The table below also includes the notional value of commitments of
$20.9 billion which was measured at fair value in accordance with SFAS
159 at December 31, 2007. However, the table below excludes the fair
value adjustment of $660 million on these commitments that was
recorded in accrued expenses and other liabilities. See Note 19 – Fair
Value Disclosures to the Consolidated Financial Statements for additional
information on the adoption of SFAS 159.
Legally binding commitments to extend credit generally have speci-
fied 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.
(Dollars in millions)
Credit extension commitments, December 31, 2007
Loan commitments
Home equity lines of credit
Standby letters of credit and financial guarantees
Commercial letters of credit
Legally binding commitments (1)
Credit card lines
Total credit extension commitments
Credit extension commitments, December 31, 2006
Loan commitments
Home equity lines of credit
Standby letters of credit and financial guarantees
Commercial letters of credit
Legally binding commitments (1)
Credit card lines
Total credit extension commitments
Expires in 1
year or less
$ 178,931
8,482
31,629
3,753
222,795
876,393
$1,099,188
$ 151,604
1,738
29,213
3,880
186,435
840,215
$1,026,650
Expires after 1
year through
3 years
Expires after 3
years through
5 years
$ 92,153
1,828
14,493
50
108,524
17,864
$126,388
$ 60,637
1,801
10,712
180
73,330
13,377
$ 86,707
$106,904
2,758
7,943
33
117,638
–
$117,638
$ 90,988
2,742
6,744
27
100,501
–
$100,501
Expires after
5 years
$ 27,902
107,055
8,731
717
144,405
–
Total
$ 405,890
120,123
62,796
4,553
593,362
894,257
$144,405
$1,487,619
$ 32,133
91,919
6,337
395
130,784
–
$ 335,362
98,200
53,006
4,482
491,050
853,592
$130,784
$1,344,642
(1)
Includes commitments to VIEs disclosed in Note 9 – Variable Interest Entities to the Consolidated Financial Statements, including $47.3 billion and $29.8 billion to corporation-sponsored multi-seller conduits and $2.3 billion
and $5.5 billion to CDOs at December 31, 2007 and 2006. Also includes commitments to SPEs that are not disclosed in Note 9 – Variable Interest Entities to the Consolidated Financial Statements because the Corporation
does not hold a significant variable interest or because they are QSPEs, including $6.1 billion and $2.3 billion to municipal bond trusts and $1.7 billion and $4.6 billion to customer-sponsored conduits at December 31, 2007
and 2006.
144 Bank of America 2007
The Corporation also facilitates bridge financing (high grade debt,
high yield debt and equity) to fund acquisitions, recapitalizations and other
short-term needs as well as provide syndicated financing for clients. These
concentrations are managed in part through the Corporation’s established
“originate to distribute” strategy. These client transactions are sometimes
large and leveraged. They can also have a higher degree of risk as the
Corporation is providing offers or commitments for various components of
the clients’ capital structures, including lower-rated unsecured and sub-
ordinated debt tranches and/or equity. In many cases, these offers to
finance will not be accepted. If accepted, these conditional commitments
are often retired prior to or shortly following funding via the placement of
securities, syndication or the client’s decision to terminate. Where the
Corporation has a commitment and there is a market disruption or other
unexpected event, there may be heightened exposure in the portfolios,
and higher potential for loss, unless an orderly disposition of the exposure
can be made. These commitments are not necessarily indicative of actual
risk or funding requirements as the commitments may expire unused, the
borrower may not be successful in completing the proposed transaction or
may utilize multiple financing sources,
including other investment and
commercial banks, as well as accessing the general capital markets
instead of drawing on the commitment. In addition, the Corporation may
reduce its portion of the commitment through syndications to investors
and/or lenders prior to funding. Therefore, these commitments are gen-
erally significantly greater than the amounts the Corporation will ultimately
fund. Additionally, the borrower’s ability to draw on the commitment may
be subject to there being no material adverse change in the borrower’s
financial condition, among other
factors. Commitments also generally
contain certain flexible pricing features to adjust for changing market con-
ditions prior to closing. The Corporation’s share of the leveraged finance
forward calendar was $12.2 billion and $20.6 billion at December 31,
2007 and 2006. The Corporation also had unfunded real estate loan
commitments of $2.0 billion and $8.2 billion at December 31, 2007 and
2006.
Other Commitments
their
Principal Investing and Other Equity Investments
At December 31, 2007 and 2006, the Corporation had unfunded equity
investment commitments of approximately $2.6 billion and $2.8 bil-
lion. These commitments related primarily to those included in the Strate-
gic Investments portfolio, as well as equity commitments included in the
Corporation’s Principal Investing business, which is comprised of a diversi-
fied portfolio of investments in privately-held and publicly-traded compa-
nies at all stages of
life cycle from start-up to buyout. These
investments are made either directly in a company or held through a fund
and are accounted for at fair value. Included in the Corporation’s unfunded
equity
investment commitments were also unfunded bridge equity
commitments of $1.2 billion at December 31, 2006. At December 31,
2007, the Corporation did not have any unfunded bridge equity commit-
ments and had funded $1.2 billion of equity bridges that it still intends to
distribute. Bridge equity commitments provide equity bridge financing to
facilitate clients’ investment activities. These conditional commitments
are often retired prior to or shortly following funding via syndication or the
client’s decision to terminate. Where the Corporation has a binding equity
bridge commitment and there is a market disruption or other unexpected
event, there may be heightened exposure in the portfolio and higher poten-
tial for loss, unless an orderly disposition of the exposure can be made.
U.S. Government Guaranteed Charge Cards
At December 31, 2007 and 2006, the unfunded lending commitments
to individuals and
related to charge cards (nonrevolving card lines)
government entities guaranteed by the U.S. Government in the amount of
$9.9 billion and $9.6 billion were not included in credit card line commit-
ments in the previous table. The outstanding balances related to these
charge cards were $193 million at both December 31, 2007 and 2006.
Loan Purchases
At December 31, 2007, the Corporation had net collateralized mortgage
obligation loan purchase commitments related to the Corporation’s ALM
activities of $752 million, all of which will settle in the first quarter of
2008. At December 31, 2006, the Corporation had collateralized mort-
gage obligation loan purchase commitments related to the Corporation’s
ALM activities of $8.5 billion, all of which settled in the first quarter of
2007.
In 2005, the Corporation entered into an agreement for the commit-
ted purchase of retail automotive loans over a five-year period, ending
June 30, 2010. In 2007 and 2006, the Corporation purchased $4.5 billion
and $7.5 billion of loans under this agreement. Under the agreement, the
Corporation is committed to purchase up to $5.0 billion for the fiscal
period July 1, 2007 to June 30, 2008 and $10.0 billion in each of the
agreement’s following two fiscal years. As of December 31, 2007, the
remaining commitment amount was $25.0 billion.
Operating Leases
The Corporation is a party to operating leases for certain of its premises
and equipment. Commitments under these leases approximate $2.0 bil-
lion, $1.8 billion, $1.6 billion, $1.3 billion and $1.2 billion for 2008
through 2012, respectively, and $8.2 billion for all years thereafter.
Other Commitments
In the second half of 2007, the Corporation provided support to certain
cash funds managed within GWIM. The funds for which the Corporation
provided support typically invest in high quality, short-term securities with
a weighted average maturity of 90 days or less, including a limited number
of securities issued by SIVs. Due to market disruptions, certain SIV
investments were downgraded by the rating agencies and experienced a
decline in fair value. The Corporation entered into capital commitments
which required the Corporation to provide up to $565 million in cash to the
funds in the event the net asset value per unit of a fund declines below
certain thresholds. The capital commitments expire no later than the third
quarter of 2010. At December 31, 2007, losses of $382 million had been
recognized and $183 million is still outstanding associated with this capi-
tal commitment.
The Corporation may from time to time, but is under no obligation,
provide additional support to funds managed within GWIM. Future support,
if any, may take the form of additional capital commitments to the funds
or the purchase of assets from the funds.
The Corporation is not the primary beneficiary of the cash funds and
does not consolidate the cash funds managed within the GWIM business
segment because the subordinated support provided by the Corporation
will not absorb a majority of the variability created by the assets of the
funds. The cash funds had total assets under management of approx-
imately $189 billion at December 31, 2007.
Bank of America 2007 145
Other Guarantees
Employee Retirement Protection
The Corporation sells products that offer book value protection primarily to
plan sponsors of Employee Retirement
Income Security Act of 1974
(ERISA) governed pension plans, such as 401(k) plans and 457 plans. The
book value protection is provided on portfolios of intermediate/short-term
investment grade fixed income securities and is intended to cover any
shortfall in the event that plan participants withdraw funds when market
value is below book value. The Corporation retains the option to exit the
contract at any time. If the Corporation exercises its option, the purchaser
can require the Corporation to purchase zero-coupon bonds with the pro-
ceeds of the liquidated assets to assure the return of principal. To man-
age its exposure, the Corporation imposes significant restrictions and
constraints on the timing of the withdrawals, the manner in which the port-
folio is liquidated and the funds are accessed, and the investment
parameters of the underlying portfolio. These constraints, combined with
structural protections, are designed to provide adequate buffers and guard
against payments even under extreme stress scenarios. These guarantees
are booked as derivatives and marked to market in the trading portfolio. At
December 31, 2007 and 2006, the notional amount of these guarantees
totaled $35.2 billion and $33.2 billion with estimated maturity dates
between 2008 and 2037. As of December 31, 2007 and 2006, the
Corporation has not made a payment under these products, and has
assessed the probability of payments under these guarantees as remote.
Written Put Options
At December 31, 2007 and 2006, the Corporation provided liquidity sup-
port in the form of written put options on $10.0 billion and $2.1 billion of
commercial paper issued by CDOs, including $3.2 billion issued by a
consolidated CDO at December 31, 2007. The commercial paper is the
most senior class of securities issued by the CDOs and benefits from the
subordination of all other securities, including AAA-rated securities, issued
by the CDOs. The Corporation is obligated under the written put options to
provide funding to the CDOs by purchasing the commercial paper at pre-
determined contractual yields in the event of a severe disruption in the
short-term funding market. These agreements have various maturities
in the CDOs
ranging from two to five years. The underlying collateral
includes mortgage-backed securities, ABS, and CDO securities issued by
other vehicles. These written put options are recorded as derivatives on
the Consolidated Balance Sheet and are carried at fair value with changes
in fair value recorded in trading account profits (losses). Derivative activity
related to these entities is included in Note 4 – Derivatives to the Con-
solidated Financial Statements. At December 31, 2007, the Corporation
held $5.0 billion of commercial paper on the balance sheet that was
issued by the unconsolidated CDOs and all of the commercial paper
issued by the consolidated CDO. The Corporation recorded losses of $2.7
billion, net of insurance, in trading account profits (losses) in 2007 asso-
ciated with these activities.
difficulty in determining how such laws would apply to parties in contracts,
the absence of exposure limits contained in standard contract language
and the timing of the early termination clause. Historically, any payments
made under these guarantees have been de minimis. The Corporation has
assessed the probability of making such payments in the future as
remote.
Merchant Services
The Corporation provides credit and debit card processing services to vari-
ous 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 ulti-
mately 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 pres-
ent 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. In 2007 and 2006, the
Corporation processed $361.9 billion and $377.8 billion of transactions
and recorded losses as a result of these chargebacks of $13 million and
$20 million.
At December 31, 2007 and 2006, the Corporation held as collateral
approximately $19 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 repre-
sentative 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
December 31, 2007 and 2006, the maximum potential exposure totaled
approximately $151.2 billion and $176.0 billion.
Brokerage Business
Within the Corporation’s brokerage business, the Corporation has con-
tracted with a third party to provide clearing services that include under-
writing margin loans to its clients. This contract stipulates that
the
Corporation will indemnify the third party for any margin loan losses that
occur in their issuing margin to its clients. The maximum potential future
payment under this indemnification was $1.0 billion and $938 million at
December 31, 2007 and 2006. Historically, any payments made under
this indemnification have been immaterial. As these margin loans are
highly collateralized by the securities held by the brokerage clients, the
Corporation has assessed the probability of making such payments in the
future as remote. This indemnification would end with the termination of
the clearing contract.
Indemnifications
In the ordinary course of business, the Corporation enters into various
agreements that contain indemnifications, such as tax indemnifications,
whereupon payment may become due if certain external events occur,
such as a change in tax law. These agreements typically contain an early
termination clause that permits the Corporation to exit the agreement
upon these events. The maximum potential
future payment under
indemnification agreements is difficult to assess for several reasons,
including the inability to predict future changes in tax and other laws, the
Other Guarantees
The Corporation also sells products that guarantee the return of principal
to investors at a preset future date. These guarantees cover a broad range
of underlying asset classes and are designed to cover
the shortfall
between the market value of the underlying portfolio and the principal
amount on the preset future date. To manage its exposure, the Corpo-
ration requires that these guarantees be backed by structural and invest-
ment constraints and certain pre-defined triggers that would require the
underlying assets or portfolio to be liquidated and invested in zero-coupon
146 Bank of America 2007
bonds that mature at the preset future date. The Corporation is required to
fund any shortfall at the preset future date between the proceeds of the
liquidated assets and the purchase price of the zero-coupon bonds. These
guarantees are booked as derivatives and marked to market in the trading
portfolio. At December 31, 2007 and 2006, the notional amount of these
guarantees totaled $1.5 billion and $4.0 billion. These guarantees have
various maturities ranging from two to five years. At December 31, 2007
and 2006, the Corporation had not made a payment under these products
and has assessed the probability of payments under these guarantees as
remote.
The Corporation has entered into additional guarantee agreements,
including lease end obligation agreements, partial credit guarantees on
certain leases, real estate joint venture guarantees, sold risk participation
swaps and sold put options that require gross settlement. The maximum
potential future payment under these agreements was approximately $4.8
billion and $2.0 billion at December 31, 2007 and 2006. The estimated
maturity dates of these obligations are between 2008 and 2033. The
Corporation has made no material payments under these guarantees.
For additional
information on recourse obligations related to resi-
dential mortgage loans sold and other guarantees related to securitiza-
tions, see Note 8 – Securitizations to the Consolidated Financial
Statements.
Litigation and Regulatory Matters
In the ordinary course of business, the Corporation and its subsidiaries
are routinely defendants in or parties to many pending and threatened
legal actions and proceedings, including actions brought on behalf of vari-
ous classes of claimants. Certain of these actions and proceedings are
based on alleged violations of consumer protection, securities, environ-
mental, banking, employment and other laws. In certain of these actions
and proceedings, claims for substantial monetary damages are asserted
against the Corporation and its subsidiaries.
In the ordinary course of business, the Corporation and its sub-
sidiaries are also subject to regulatory examinations, information gathering
requests, inquiries and investigations. Certain subsidiaries of the Corpo-
ration are registered broker/dealers or investment advisors and are sub-
ject to regulation by the Securities and Exchange Commission (SEC), the
Financial Industry Regulatory Authority, the New York Stock Exchange and
state securities regulators.
In connection with formal and informal
inquiries by those agencies, such subsidiaries receive numerous requests,
subpoenas and orders for documents, testimony and information in con-
nection with various aspects of their regulated activities.
In view of the inherent difficulty of predicting the outcome of such liti-
gation and regulatory matters, particularly where the claimants seek very
large or indeterminate damages or where the matters present novel legal
theories or involve a large number of parties, the Corporation cannot state
with confidence what the eventual outcome of the pending matters will be,
what the timing of the ultimate resolution of these matters will be, or what
the eventual loss, fines or penalties related to each pending matter may
be.
In accordance with SFAS No. 5, “Accounting for Contingencies”, the
Corporation establishes reserves for litigation and regulatory matters when
those matters present loss contingencies that are both probable and
estimable. When loss contingencies are not both probable and estimable,
the Corporation does not establish reserves. In some of the matters
described below, including but not limited to a substantial portion of the
Parmalat Finanziaria S.p.A. matters, loss contingencies are not both prob-
able and estimable in the view of management, and, accordingly, reserves
have not been established for those matters. Based on current knowledge,
management does not believe that loss contingencies, if any, arising from
pending litigation and regulatory matters, including the litigation and regu-
latory matters described below, will have a material adverse effect on the
consolidated financial position or liquidity of the Corporation, but may be
material to the Corporation’s operating results for any particular reporting
period.
Adelphia Communications Corporation (ACC)
Adelphia Recovery Trust is the plaintiff in a lawsuit pending in the U.S.
District Court for the Southern District of New York. The lawsuit names
over 700 defendants, including Bank of America, N.A. (BANA), Banc of
America Securities, LLC (BAS), Fleet National Bank, Fleet Securities, Inc.
and other affiliated entities, and asserts over 50 claims under federal
statutes and state common law. The principal claims include fraudulent
transfer, aiding and abetting fraud, aiding and abetting breach of fiduciary
duty, and equitable disallowance and subordination. These claims relate
to loans and other services provided to various affiliates of ACC and enti-
ties owned by members of the founding family of ACC. The plaintiffs seek
unspecified damages in an amount not less than $5 billion.
Data Treasury Litigation
The Corporation and BANA have been named as defendants in two cases
filed by Data Treasury Corporation (Data Treasury) in the U.S. District Court
for the Eastern District of Texas. In one case, Data Treasury alleges that
defendants “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. In the
other case, Data Treasury alleges that the Corporation and BANA, among
other defendants, are “making, using, selling, offering for sale, and/or
importing into the United States, directly, contributory, and/or by induce-
ment, 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. Data Treasury seeks unspecified damages
and injunctive relief in both cases.
Inc.
In re Initial Public Offering Securities Litigation
Beginning in 2001, Robertson Stephens,
(an investment banking
subsidiary of FleetBoston that ceased operations during 2002), BAS, other
underwriters, and various issuers and others, were named as defendants
in certain of the 309 putative class action lawsuits that have been con-
solidated in the U.S. District Court for the Southern District of New York as
In re Initial Public Offering Securities Litigation. Plaintiffs contend that the
defendants failed to make certain required disclosures and manipulated
prices of securities sold in initial public offerings through, among other
things, alleged agreements with institutional
investors receiving alloca-
tions to purchase additional shares in the aftermarket and seek
unspecified damages. On December 5, 2006, the U.S. Court of Appeals
for the Second Circuit reversed the District Court’s order certifying the
proposed classes. On September 27, 2007, plaintiffs filed a motion to
certify modified classes, which defendants have opposed. On June 25,
2007, the District Court approved an agreement between plaintiffs and
298 of the issuer defendants terminating their proposed settlement.
IPO Underwriting Fee Litigation
BAS, Robertson Stephens, Inc., and other underwriters are defendants in
putative class action lawsuits captioned In re Public Offering Fee Antitrust
Litigation and In re Issuer Plaintiff Initial Public Offering Fee Antitrust Liti-
gation, filed in the U.S. District Court for the Southern District of New York
in November 1998 and October 2000, respectively, alleging that under-
writers conspired to fix the underwriters’ discount at 7% of the offering
Bank of America 2007 147
price in certain initial public offerings (IPOs). The complaints, which have
been filed by both purchasers and certain issuers in IPOs, seek treble
damages and injunctive relief. On February 24, 2004, the District Court
granted defendants’ motion to dismiss as to the purchasers’ damages
claims. On April 18, 2006, the District Court denied class certification with
respect to the issuers’ damages claims. On September 11, 2007, the
U.S. Court of Appeals for the Second Circuit reversed the order denying
class certification as to the issuers’ damages claims and remanded the
case to the District Court for further class certification proceedings.
Interchange Antitrust Litigation and Visa-Related Litigation
The Corporation and certain of its subsidiaries are defendants in putative
class actions filed on behalf of retail merchants that accept Visa and Mas-
terCard payment cards. Additional defendants include Visa, MasterCard,
and other financial institutions. Plaintiffs’ First Consolidated and Amended
Class Action Complaint alleges that the defendants conspired to fix the
level of interchange and merchant discount fees and that certain other
practices, including various Visa and MasterCard rules, violate federal and
California antitrust laws. Plaintiffs also filed a supplemental complaint
against certain defendants, including the Corporation and certain of its
subsidiaries, alleging federal antitrust claims and a fraudulent conveyance
claim arising out of MasterCard’s 2006 initial public offering. The putative
class plaintiffs seek unspecified treble damages and injunctive relief. The
actions are coordinated for pre-trial proceedings in the U.S. District Court
for the Eastern District of New York with individual actions brought only
against Visa and MasterCard under the caption In Re Payment Card Inter-
change Fee and Merchant Discount Anti-Trust Litigation (Interchange). On
January 8, 2008, the District Court dismissed all claims for pre-2004
damages. A motion to dismiss the supplemental complaint is pending.
The Corporation and certain of its subsidiaries have entered into
agreements that provide for sharing liabilities in connection with antitrust
including Discover
litigation against Visa (the Visa-Related Litigation),
Financial Services. v. Visa U.S.A., et al., pending in the U.S. District Court
for the Southern District of New York, which alleges that Visa and others
unlawfully inhibited competition in the payment card industry, and Inter-
change. The agreements also provide for sharing liabilities in connection
with American Express Travel Related Services Company v. Visa USA, et
al., which was settled by Visa in November 2007. Under these agree-
ments, the Corporation’s obligations to Visa are capped at the Corpo-
ration’s membership interest of 12.1% in Visa USA. In November 2007,
Visa Inc. filed a registration statement with the SEC with respect to a
proposed initial public offering (Visa IPO). Subject to market conditions
and other factors, Visa Inc. states that it expects the Visa IPO to occur in
the first quarter of 2008. The Corporation expects that a portion of the
proceeds from the Visa IPO will be used by Visa Inc. to fund liabilities aris-
ing from the Visa-Related Litigation.
Miller
On August 13, 1998, a predecessor of BANA was named as a defendant
in a class action filed in Superior Court of California, County of San
Francisco, entitled Paul J. Miller v. Bank of America, N.A., challenging its
practice of debiting accounts that
received, by direct deposit, gov-
ernmental benefits to repay fees incurred in those accounts. The action
alleges, among other claims, fraud, negligent misrepresentation and other
violations of California law. On October 16, 2001, a class was certified
consisting of more than one million California residents who have, had or
will have, at any time after August 13, 1994, a deposit account with BANA
into which payments of public benefits are or have been directly deposited
by the government.
On March 4, 2005, the trial court entered a judgment that purported
to award the class restitution in the amount of $284 million, plus attor-
fees, and provided that class members whose accounts were
neys’
assessed an insufficient funds fee in violation of law suffered substantial
emotional or economic harm and, therefore, are entitled to an additional
$1,000 statutory penalty. The judgment also purported to enjoin BANA,
among other things, from engaging in the account balancing practices at
issue. On November 22, 2005, the California Court of Appeal stayed the
judgment, including the injunction, pending appeal.
On November 20, 2006, the California Court of Appeal reversed the
judgment in its entirety, holding that BANA’s practice did not constitute a
violation of California law. On March 21, 2007, the California Supreme
Court granted plaintiff’s petition to review the Court of Appeal’s decision.
Municipal Derivatives Matters
The Antitrust Division of the U.S. Department of Justice (DOJ), the SEC,
and the IRS are investigating possible anticompetitive bidding practices in
the municipal derivatives industry involving various parties,
including
BANA, from the early 1990s to date. The activities at issue in these
industry-wide government investigations concern the bidding process for
municipal derivatives that are offered to states, municipalities and other
issuers of tax-exempt bonds. The Corporation has cooperated, and con-
tinues to cooperate, with the DOJ, the SEC and the IRS. On February 4,
2008, BANA received a Wells notice advising that the SEC staff is consid-
ering recommending that the SEC bring a civil injunctive action and/or an
administrative proceeding “in connection with the bidding of various finan-
cial
instruments associated with municipal securities.” BANA intends to
respond to the notice. An SEC action or proceeding could seek a perma-
nent injunction, disgorgement plus prejudgment interest, civil penalties
and other remedial relief.
On January 11, 2007, the Corporation entered into a Corporate Condi-
tional Leniency Letter (the Letter) with DOJ. Under the Letter and subject
to the Corporation’s continuing cooperation, DOJ will not bring any criminal
antitrust prosecution against the Corporation in connection with the mat-
ters that the Corporation reported to DOJ. Civil actions may be filed. Sub-
ject to satisfying DOJ and the court presiding over any civil litigation of the
Corporation’s cooperation, the Corporation is eligible for (i) a limit on
liability to single, rather than treble, damages in certain types of related
civil antitrust actions, and (ii) relief from joint and several antitrust liability
with other civil defendants.
Parmalat Finanziaria S.p.A.
On December 24, 2003, Parmalat Finanziaria S.p.A. was admitted into
insolvency proceedings in Italy, known as “extraordinary administration.”
The Corporation, through certain of its subsidiaries, including BANA, pro-
vided financial services and extended credit to Parmalat and its related
entities. On June 21, 2004, Extraordinary Commissioner Dr. Enrico Bondi
filed with the Italian Ministry of Production Activities a plan of reorganiza-
tion for the restructuring of the companies of the Parmalat group that are
included in the Italian extraordinary administration proceeding.
In July 2004, the Italian Ministry of Production Activities approved the
Extraordinary Commissioner’s restructuring plan, as amended,
for the
Parmalat group companies that are included in the Italian extraordinary
administration proceeding. This plan was approved by the voting creditors
and the Court of Parma, Italy in October of 2005.
Litigation and investigations relating to Parmalat are pending in both
Italy and the United States, and the Corporation is responding to inquiries
concerning Parmalat from regulatory and law enforcement authorities in
Italy and the United States.
148 Bank of America 2007
Proceedings in Italy
On May 26, 2004, The Public Prosecutor’s Office for the Court of Milan,
Italy filed criminal charges against Luca Sala, Luis Moncada, and Antonio
Luzi, three former employees of the Corporation, alleging the crime of
market manipulation in connection with a press release issued by Parma-
lat. The Public Prosecutor’s Office also filed a related charge against the
Corporation asserting administrative liability based on an alleged failure to
maintain an organizational model sufficient to prevent the alleged criminal
activities of its former employees. The trial on such charges will begin in
March 2008.
The main trial of the market manipulation charges against Messrs.
Italy on Sep-
Luzi, Moncada, and Sala began in the Court of Milan,
tember 28, 2005. Hearing dates in this trial are currently set through May
of 2008. The Corporation is participating in this trial as a party that has
been damaged by the alleged actions of defendants other than its former
employees, including former Parmalat officials. Additionally, pursuant to a
December 19, 2005 court ruling, other third parties are participating in the
trial who claim damages against BANA as a result of the alleged criminal
violations by the Corporation’s former employees and other defendants.
Separately, The Public Prosecutor’s Office for the Court of Parma,
Italy is conducting an investigation into the collapse of Parmalat. The
Corporation has cooperated, and continues to cooperate, with the Public
Prosecutor’s Office with respect to this investigation. The Public Prose-
cutor’s Office has given notice of its intention to file charges, including a
charge of the crime of fraudulent bankruptcy under Italian criminal law, in
connection with this investigation against the same three former employ-
ees of the Corporation who are named in the Milan criminal proceedings,
Messrs. Luzi, Moncada and Sala.
Proceedings in the United States
On March 5, 2004, a First Amended Complaint was filed in a securities
action pending in the U.S. District Court for the Southern District of New
York entitled Southern Alaska Carpenters Pension Fund et al. v. Bonlat
Financing Corporation et al. The action is brought on behalf of a putative
class of purchasers of Parmalat securities, alleges violations of
the
federal securities laws against the Corporation and certain affiliates, and
seeks unspecified damages. Following orders on motions to dismiss, the
remaining claims concern two transactions entered into between the
Corporation and Parmalat. The plaintiffs filed a motion for class certifi-
cation on September 21, 2006, which remains pending. On July 24, 2007,
the District Court granted the Corporation’s motion to dismiss the claims
of foreign purchaser plaintiffs for lack of subject matter jurisdiction.
On October 7, 2004, Enrico Bondi filed an action in the U.S. District
Court for the Western District of North Carolina on behalf of Parmalat and
its shareholders and creditors against the Corporation and various related
entities, entitled Dr. Enrico Bondi, Extraordinary Commissioner of Parmalat
Finanziaria, S.p.A., et al. v. Bank of America Corporation, et al. (the Bondi
Action). The complaint alleged federal and state RICO claims and various
state law claims, including fraud. The complaint seeks damages in excess
of $10 billion. The Bondi Action was transferred to the U.S. District Court
for the Southern District of New York for coordinated pre-trial purposes
with putative class actions and other related cases against non-Bank of
America defendants under the caption In re Parmalat Securities Litigation.
Following orders on motions to dismiss, the remaining claims are federal
and state RICO claims, a breach of fiduciary duty claim, and other state
law claims with respect to three transactions entered into between the
Corporation and Parmalat. The Corporation filed an answer and counter-
claims (the Counterclaims) seeking damages. The District Court granted in
part a motion to dismiss certain of the Counterclaims, leaving intact the
counterclaims for fraud, negligent misrepresentation and civil conspiracy
against Parmalat S.p.A., Parmalat Finanziaria S.p.A. and Parmalat Nether-
lands, B.V., as well as a claim for securities fraud against Parmalat S.p.A.
and Parmalat Finanziaria S.p.A.
Certain purchasers of Parmalat-related private placement offerings
have filed complaints against the Corporation and various related entities
in the following actions: Principal Global Investors, LLC, et al. v. Bank of
America Corporation, et al. in the U.S. District Court for the Southern Dis-
trict of Iowa; Monumental Life Insurance Company, et al. v. Bank of Amer-
ica Corporation, et al. in the U.S. District Court for the Northern District of
Iowa; Prudential
Insurance Company of America and Hartford Life
Insurance Company v. Bank of America Corporation, et al. in the U.S. Dis-
Illinois; Allstate Life Insurance
trict Court for the Northern District of
Company v. Bank of America Corporation, et al. in the U.S. District Court
for the Northern District of Illinois; Hartford Life Insurance v. Bank of Amer-
ica Corporation, et al. in the U.S. District Court for the Southern District of
New York; and John Hancock Life Insurance Company, et al. v. Bank of
America Corporation et al. in the U.S. District Court for the District of
Massachusetts. The actions variously allege violations of federal and state
securities law and state common law, and seek rescission and
unspecified damages based upon the Corporation’s and related entities’
alleged roles in certain private placement offerings issued by Parmalat-
related companies. All cases have been transferred to the U.S. District
Court for the Southern District of New York for coordinated pre-trial pur-
poses with the In re Parmalat Securities Litigation matter. The plaintiffs
seek rescission and unspecified damages resulting from alleged pur-
chases of approximately $305 million in private placement instruments.
Pension Plan Matters
The Corporation is a defendant in a putative class action entitled William
L. Pender, et al. v. Bank of America Corporation, et al. (formerly captioned
Anita Pothier, et al. v. Bank of America Corporation, et al.), which is pend-
ing in the U.S. District Court for the Western District of North Carolina. The
action is brought on behalf of participants in or beneficiaries of The Bank
of America Pension Plan (formerly known as the NationsBank Cash Bal-
ance Plan) and The Bank of America 401(k) Plan (formerly known as the
NationsBank 401(k) Plan). The Corporation, BANA, The Bank of America
Pension Plan, The Bank of America 401(k) Plan, the Bank of America
Corporation Corporate Benefits Committee and various members thereof,
and PricewaterhouseCoopers LLP are defendants. The complaint alleges
violations of ERISA, including that the design of The Bank of America Pen-
sion Plan violated ERISA’s defined benefit pension plan standards and
that such plan’s definition of normal retirement age is invalid. In addition,
the complaint alleges age discrimination by The Bank of America Pension
Plan, unlawful
lump sum benefit calculation, violation of ERISA’s “anti-
backloading” rule, that certain voluntary transfers of assets by participants
in The Bank of America 401(k) Plan to The Bank of America Pension Plan
violated ERISA, and other related claims. The complaint alleges that plan
participants are entitled to greater benefits and seeks declaratory relief,
monetary relief in an unspecified amount, equitable relief, including an
order reforming The Bank of America Pension Plan, attorneys’ fees and
interest. On December 1, 2005, the plaintiffs moved to certify classes
consisting of, among others, (i) all persons who accrued or who are cur-
rently accruing benefits under The Bank of America Pension Plan and
(ii) all persons who elected to have amounts representing their account
balances under The Bank of America 401(k) Plan transferred to The Bank
of America Pension Plan. That motion, and a motion to dismiss the com-
plaint, are pending.
Bank of America 2007 149
The IRS is conducting an audit of the 1998 and 1999 tax returns of
The Bank of America Pension Plan and The Bank of America 401(k) Plan.
This audit includes a review of voluntary transfers by participants of 401(k)
Plan assets to The Bank of America Pension Plan and whether such trans-
fers were in accordance with applicable law. The Corporation has received
Technical Advice Memoranda from the National Office of the IRS that
(i) concluded that the voluntary transfers violated the anti-cutback rule of
Section 411(d)(6) of the Internal Revenue Code and (ii) denied the Corpo-
ration’s request that the conclusion reached be applied prospectively only.
The Corporation continues to participate in administrative proceedings with
the IRS regarding issues raised in the audit.
On September 29, 2004, a class action, now entitled Donna C.
Richards v. FleetBoston Financial Corp., the FleetBoston Financial Pension
Plan and Bank of America Corporation, was filed in the U.S. District Court
for the District of Connecticut on behalf of certain former and current Fleet
employees. Plaintiffs allege that FleetBoston or its predecessor violated
ERISA by amending the Fleet Financial Group, Inc. Pension Plan (a prede-
cessor to the FleetBoston Financial Pension Plan) to add a cash balance
benefit formula without notifying participants that the amendment reduced
their plan benefits, by reducing the rate of benefit accruals on account of
age, and by failing to inform participants of the correct amount of their
pensions and related claims. In September 2007, the Corporation and the
other named defendants agreed in principle with class counsel to settle all
claims brought on behalf of the class. The agreement is subject to the
execution of a definitive settlement agreement and court approval.
Note 14 – Shareholders’ Equity and Earnings
Per Common Share
Common Stock
The Corporation repurchased approximately 73.7 million shares of common
stock in 2007 which more than offset the 53.5 million shares issued under
employee stock plans. The Corporation may repurchase shares, from time
to time, in the open market or in private transactions through the Corpo-
ration’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.
Effective for the third quarter dividend, the Board increased the quar-
terly cash dividend on common stock 14 percent from $0.56 to $0.64 per
share. In October 2007, the Board declared a fourth quarter cash divi-
dend, which was paid on December 28, 2007 to common shareholders of
record on December 7, 2007.
Preferred Stock
In January 2008, the Corporation issued 240 thousand shares of Bank of
America Corporation Fixed-to-Floating Rate Non-Cumulative Preferred
Stock, Series K (Series K Preferred Stock) with a par value of $0.01 per
share for $6.0 billion. The fixed rate is 8.00 percent through January 29,
2018 and then adjusts to three-month LIBOR plus 363 bps thereafter.
Ownership is held in the form of depositary shares, each representing a
1/25th interest in a share of Series K Preferred Stock, paying a semi-
annual cash dividend through January 29, 2018 then adjusts to a quarterly
cash dividend, on the liquidation preference of $25,000 per share of Ser-
ies K Preferred Stock.
Also in January 2008, the Corporation issued 6.9 million shares of
Bank of America Corporation 7.25% Non-Cumulative Perpetual Convertible
Preferred Stock, Series L (Series L Preferred Stock) with a par value of
$0.01 per share for $6.9 billion, paying a quarterly cash dividend on the
liquidation preference of $1,000 per share of Series L Preferred Stock at
an annual rate of 7.25 percent. Each share of the Series L Preferred Stock
may be converted at any time, at the option of the holder, into 20 shares
of the Corporation’s common stock plus cash in lieu of fractional shares.
On or after January 30, 2013, the Corporation may cause some or all of
the Series L Preferred Stock, at its option, at any time or from time to
time, to be converted into shares of common stock at the then-applicable
conversion rate if, for 20 trading days during any period of 30 consecutive
trading days, the closing price of common stock exceeds 130 percent of
the then-applicable conversion price of the Series L Preferred Stock. If the
Corporation exercises its right to cause the automatic conversion of Series
L Preferred Stock on January 30, 2013, it will still pay any accrued divi-
dends payable on January 30, 2013 to the applicable holders of record.
In November and December 2007,
the Corporation issued
41 thousand shares of Bank of America Corporation 7.25% Non-
Cumulative Preferred Stock, Series J (Series J Preferred Stock) with a par
value of $0.01 per share for $1.0 billion. Ownership is held in the form of
depositary shares, each representing a 1/1,000th interest in a share of
Series J Preferred Stock, paying a quarterly cash dividend on the liqui-
dation preference of $25,000 per share of Series J Preferred Stock at an
annual rate of 7.25 percent. On any dividend date on or after November 1,
2012, the Corporation may redeem Series J Preferred Stock, in whole or in
part, at its option, at $25,000 per share, plus accrued and unpaid divi-
dends.
In September 2007, the Corporation issued 22 thousand shares of
Bank of America Corporation 6.625% Non-Cumulative Preferred Stock,
Series I (Series I Preferred Stock) with a par value of $0.01 per share for
$550 million. Ownership is held in the form of depositary shares, each
representing a 1/1,000th interest in a share of Series I Preferred Stock,
paying a quarterly cash dividend on the liquidation preference of $25,000
per share of Series I Preferred Stock at an annual rate of 6.625 percent.
On any dividend date on or after October 1, 2017, the Corporation may
redeem Series I Preferred Stock, in whole or in part, at its option, at
$25,000 per share, plus accrued and unpaid dividends.
In November 2006, the Corporation issued 81 thousand shares, or
$2.0 billion, of Bank of America Corporation Floating Rate Non-Cumulative
Preferred Stock, Series E (Series E Preferred Stock) with a par value of
$0.01 per share. Ownership is held in the form of depositary shares, each
representing a 1/1,000th interest in a share of Series E Preferred Stock,
paying a quarterly cash dividend on the liquidation preference of $25,000
per share of Series E Preferred Stock at an annual rate equal to the
greater of (a) three-month LIBOR plus 0.35 percent and (b) 4.00 percent,
in arrears. On any dividend date on or after
payable quarterly
November 15, 2011, the Corporation may redeem Series E Preferred
Stock, in whole or in part, at its option, at $25,000 per share, plus
accrued and unpaid dividends.
In September 2006, the Corporation issued 33 thousand shares, or
$825 million, of Bank of America Corporation 6.204% Non-Cumulative
Preferred Stock, Series D (Series D Preferred Stock) with a par value of
$0.01 per share. Ownership is held in the form of depositary shares, each
representing a 1/1,000th interest in a share of Series D Preferred Stock,
paying a quarterly cash dividend on the liquidation preference of $25,000
per share of Series D Preferred Stock at an annual rate of 6.204 percent.
On any dividend date on or after September 14, 2011, the Corporation
may redeem Series D Preferred Stock, in whole or in part, at its option, at
$25,000 per share, plus accrued and unpaid dividends.
The shares of the series of preferred stock discussed above are not
subject to the operations of a sinking fund and have no participation
rights. With the exception of the Series L Preferred Stock, the shares of
the series of preferred stock discussed above are not convertible. The
150 Bank of America 2007
holders of these series have no general voting rights. If any quarterly divi-
dend payable on these series is in arrears for six or more quarterly divi-
dend periods (whether consecutive or not), the holders of these series and
any other class or series of preferred stock ranking equally as to payment
of dividends and upon which equivalent voting rights have been conferred
and are exercisable (voting as a single class) will be entitled to vote for
the election of two additional directors. These voting rights terminate when
the Corporation has paid in full dividends on these series for at least four
quarterly dividend periods following the dividend arrearage.
On July 14, 2006, the Corporation redeemed its 6.75% Perpetual
Preferred Stock with a stated value of $250 per share. The 382 thousand
shares, or $96 million, outstanding of preferred stock were redeemed at
the stated value of $250 per share, plus accrued and unpaid dividends.
On July 3, 2006, the Corporation redeemed its Fixed/Adjustable Rate
Cumulative Preferred Stock with a stated value of $250 per share. The
700 thousand shares, or $175 million, outstanding of preferred stock
were redeemed at the stated value of $250 per share, plus accrued and
unpaid dividends.
In addition to the preferred stock described above, the Corporation
had eight thousand shares, or $1 million, outstanding of the 7% Cumu-
lative Redeemable Preferred Stock with a stated value of $100 per share
paying dividends quarterly at an annual rate of 7.00 percent.
All preferred stock outstanding has preference over the Corporation’s
common stock with respect to the payment of dividends and distribution of
the Corporation’s assets in the event of a liquidation or dissolution.
Except in certain circumstances, the holders of preferred stock have no
voting rights.
Accumulated OCI
The following table presents the changes in accumulated OCI for 2007, 2006 and 2005, net-of-tax.
(Dollars in millions)
Balance, December 31, 2006
Net change in fair value recorded in accumulated OCI (4)
Net realized (gains) losses reclassified into earnings (5)
Balance, December 31, 2007
Balance, December 31, 2005
Net change in fair value recorded in accumulated OCI (6)
Net realized (gains) losses reclassified into earnings (5)
Balance, December 31, 2006
Balance, December 31, 2004
Net change in fair value recorded in accumulated OCI
Net realized (gains) losses reclassified into earnings (5)
Balance, December 31, 2005
Securities (1, 2)
Derivatives (3)
Employee
Benefit Plans
Foreign
Currency
$(2,733)
9,416
(147)
$ 6,536
$(2,978)
465
(220)
$(2,733)
$ (197)
(1,907)
(874)
$(2,978)
$(3,697)
(1,252)
547
$(4,402)
$(4,338)
534
107
$(3,697)
$(2,279)
(2,225)
166
$(4,338)
$(1,428)
4
123
$ (1,301)
$ (118)
(1,310)
–
$(1,428)
$ (134)
16
–
$ (118)
$ 147
142
7
$ 296
$(122)
219
50
$ 147
$(154)
32
–
$(122)
Total
$ (7,711)
8,310
530
$ 1,129
$(7,556)
(92)
(63)
$(7,711)
$(2,764)
(4,084)
(708)
$(7,556)
(1)
In 2007, 2006 and 2005, the Corporation reclassified net realized (gains) losses into earnings on the sales and impairments of AFS debt securities of $137 million, $279 million and $(683) million, net-of-tax, respectively,
and (gains) losses on the sales of AFS marketable equity securities of $(284) million, $(499) million, and $(191) million, net-of-tax, respectively.
(2) Accumulated OCI includes fair value losses of $15 million and gains of $135 million, net-of-tax, on certain retained interests in the Corporation’s securitization transactions that were included in other assets at December 31,
2007 and 2006.
(3) The amounts included in accumulated OCI for terminated derivative contracts were losses of $3.8 billion, $3.2 billion and $2.5 billion, net-of-tax, at December 31, 2007, 2006 and 2005, respectively.
(4) Securities include the fair value adjustment of $8.4 billion, net-of-tax, related to the Corporation’s investment in CCB.
(5)
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 and impairments. These amounts are reclassified into earnings upon sale of the related security.
(6) Employee benefit plans include the accumulated adjustment to initially apply SFAS 158 of $(1.3) billion.
Earnings per Common Share
The calculation of earnings per common share and diluted earnings per common share for 2007, 2006 and 2005 is presented below. See Note 1 – Sum-
mary of Significant Accounting Principles to the Consolidated Financial Statements for a discussion on the calculation of earnings per common share.
(Dollars in millions, except per share information; shares in thousands)
2007
2006
2005
Earnings per common share
Net income
Preferred stock dividends
Net income available to common shareholders
Average common shares issued and outstanding
Earnings per common share
Diluted earnings per common share
Net income available to common shareholders
Average common shares issued and outstanding
Dilutive potential common shares (1, 2)
Total diluted average common shares issued and outstanding
Diluted earnings per common share
$
$
14,982
(182)
14,800
4,423,579
$
$
3.35
14,800
4,423,579
56,675
4,480,254
$
$
$
$
21,133
(22)
21,111
4,526,637
4.66
21,111
4,526,637
69,259
4,595,896
$
$
$
$
16,465
(18)
16,447
4,008,688
4.10
16,447
4,008,688
59,452
4,068,140
$
3.30
$
4.59
$
4.04
(1) For 2007, 2006 and 2005, average options to purchase 28 million, 355 thousand and 39 million shares, respectively, were outstanding but not included in the computation of earnings per common share because they were
antidilutive.
Includes incremental shares from restricted stock units, restricted stock shares and stock options.
(2)
Bank of America 2007 151
Note 15 – Regulatory Requirements and
Restrictions
The Board of Governors of the Federal Reserve System (FRB) requires the
Corporation’s banking subsidiaries to maintain reserve balances based on
a percentage of certain deposits. Average daily reserve balances required
by the FRB were $5.7 billion and $5.6 billion for 2007 and 2006. Currency
and coin residing in branches and cash vaults (vault cash) are used to
partially satisfy the reserve requirement. The average daily reserve balan-
ces, in excess of vault cash, held with the FRB amounted to $49 million
and $27 million for 2007 and 2006.
The primary source of funds for cash distributions by the Corporation
to its shareholders are dividends received from its banking subsidiaries
Bank of America, N.A., FIA Card Services, N.A., and LaSalle Bank, N.A. In
2007, Bank of America Corporation received $15.4 billion in dividends
from its banking subsidiaries. In 2008, Bank of America, N.A., FIA Card
Services, N.A., and LaSalle Bank, N.A. can declare and pay dividends to
Bank of America Corporation of $4.6 billion, $1.6 billion, and $155 million
plus an additional amount equal to their net profits for 2008, as defined
by statute, up to the date of any such dividend declaration. The other
subsidiary national banks can initiate aggregate dividend payments in
2008 of $338 million plus an additional amount equal to their net profits
for 2008, as defined by statute, up to the date of any such dividend decla-
ration. The amount of dividends that each subsidiary bank may declare in
a calendar year without approval by the Office of the Comptroller of the
Currency (OCC) is the subsidiary bank’s net profits for that year combined
with its net retained profits, as defined, for the preceding two years.
The FRB, the OCC and the Federal Deposit Insurance Corporation
(collectively, the Agencies) have issued regulatory capital guidelines for
U.S. banking organizations. Failure to meet the capital requirements can
initiate certain mandatory and discretionary actions by regulators that
could have a material effect on the Corporation’s financial statements. At
December 31, 2007, the Corporation, Bank of America, N.A., FIA Card
Services, N.A., and LaSalle Bank, N.A. were classified as “well-capitalized”
under this regulatory framework. At December 31, 2006, the Corporation,
Bank of America N.A., and FIA Card Services, N.A. were also classified as
“well-capitalized.” There have been no conditions or events since
December 31, 2007 that management believes have changed the Corpo-
ration’s, Bank of America, N.A.’s, FIA Card Services, N.A.’s, and LaSalle
Bank, N.A.’s capital classifications.
The regulatory capital guidelines measure capital
in relation to the
credit and market risks of both off- and on-balance sheet items using vari-
ous risk weights. Under the regulatory capital guidelines, Total Capital
consists of three tiers of capital. Tier 1 Capital includes common share-
holders’ equity, Trust Securities, minority interests and qualifying preferred
stock, less goodwill and other adjustments. Tier 2 Capital consists of
preferred stock not qualifying as Tier 1 Capital, mandatory convertible
debt, limited amounts of subordinated debt, other qualifying term debt, the
allowance for credit losses up to 1.25 percent of risk-weighted assets and
other adjustments. Tier 3 Capital
is
unsecured, fully paid, has an original maturity of at least two years, is not
redeemable before maturity without prior approval by the FRB and includes
a lock-in clause precluding payment of either interest or principal
if the
payment would cause the issuing bank’s risk-based capital ratio to fall or
remain below the required minimum. Tier 3 Capital can only be used to
satisfy the Corporation’s market risk capital requirement and may not be
used to support its credit risk requirement. At December 31, 2007 and
includes subordinated debt
that
2006, the Corporation had no subordinated debt that qualified as Tier 3
Capital.
Certain corporate sponsored trust companies which issue Trust
Securities are not consolidated under FIN 46R. As a result, the Trust
Securities are not included on the Corporation’s Consolidated Balance
Sheet. On March 1, 2005, the FRB issued Risk-Based Capital Standards:
Trust Preferred Securities and the Definition of Capital (the Final Rule)
which allows Trust Securities to continue to qualify as Tier 1 Capital with
revised quantitative limits that would be effective after a five-year tran-
sition period. As a result, Trust Securities are included in Tier 1 Capital.
The FRB’s Final Rule limits restricted core capital elements to 15
percent for internationally active bank holding companies. Internationally
active bank holding companies are those with consolidated assets greater
than $250 billion or on-balance sheet exposure greater than $10 billion. In
addition, the FRB revised the qualitative standards for capital instruments
included in regulatory capital. At December 31, 2007, the Corporation’s
restricted core capital elements comprised 20.3 percent of total core capi-
tal elements. The Corporation expects to be fully compliant with the
revised limits prior to the implementation date of March 31, 2009.
To meet minimum, adequately-capitalized regulatory requirements, an
institution must maintain a Tier 1 Capital ratio of four percent and a Total
Capital ratio of eight percent. A well-capitalized institution must generally
maintain capital ratios 200 bps higher than the minimum guidelines. The
risk-based capital rules have been further supplemented by a leverage
ratio, defined as Tier 1 Capital divided by adjusted quarterly average total
assets, after certain adjustments. “Well-capitalized” bank holding compa-
nies must have a minimum Tier 1 Leverage ratio of three percent and are
not subject to a FRB directive to maintain higher capital levels. National
banks must maintain a Tier 1 Leverage ratio of at least five percent to be
classified as “well-capitalized.”
Net unrealized gains (losses) on AFS debt securities, net unrealized
gains on AFS marketable equity securities, net unrealized gains (losses)
on derivatives, and employee benefit plan adjustments in shareholders’
equity at December 31, 2007 and 2006, are excluded from the calcu-
lations of Tier 1 Capital and Leverage ratios. The Total Capital ratio
excludes all of the above with the exception of up to 45 percent of net
unrealized pre-tax gains on AFS marketable equity securities.
Regulatory Capital Developments
In June 2004, Basel II was published with the intent of more closely align-
ing regulatory capital requirements with underlying risks. Similar to eco-
nomic capital measures, Basel II seeks to address credit risk, market risk,
and operational risk. On December 7, 2007, U.S. regulatory agencies pub-
lished the final Basel II rules (Basel II Rules) providing detailed capital
requirements for credit and operational risk under Pillar 1, supervisory
requirements under Pillar 2 and disclosure requirements under Pillar 3.
The Corporation is still awaiting final rules for market risk requirements
under Basel II.
The Basel II Rules’ effective date is April 1, 2008, which allows U.S.
financial
institutions to begin parallel reporting as early as 2008. The
Corporation continues execution efforts to ensure preparedness with all
Basel II requirements. The goal is to achieve full compliance by the end of
the three-year
internationally
implementation period in 2011. Further,
Basel II was implemented in several countries during the second half of
2007, while others will begin implementation in 2008 and 2009.
152 Bank of America 2007
Regulatory Capital
(Dollars in millions)
Risk-based capital
Tier 1
Bank of America Corporation
Bank of America, N.A.
FIA Card Services, N.A.
LaSalle Bank, N.A. (2)
Total
Bank of America Corporation
Bank of America, N.A.
FIA Card Services, N.A.
LaSalle Bank, N.A. (2)
Tier 1 Leverage
Bank of America Corporation
Bank of America, N.A.
FIA Card Services, N.A.
LaSalle Bank, N.A. (2)
2007
Actual
Ratio
Amount
6.87%
8.23
14.29
9.91
11.02
11.01
16.82
11.02
5.04
5.94
16.37
9.21
$ 83,372
75,395
21,625
6,838
133,720
100,891
25,453
7,605
83,372
75,395
21,625
6,838
December 31
2006
Minimum
Required (1)
Actual
Minimum
Ratio
Amount
Required (1)
$48,516
36,661
6,053
2,759
97,032
73,322
12,105
5,518
49,595
38,092
3,963
2,226
8.64%
8.89
14.08
–
11.88
11.19
17.02
–
6.36
6.63
16.88
–
$ 91,064
76,174
19,562
–
125,226
95,867
23,648
–
91,064
76,174
19,562
–
$42,181
34,264
5,558
–
84,363
68,529
11,117
–
42,935
34,487
3,478
–
(1) Dollar amount required to meet guidelines for adequately capitalized institutions.
(2) LaSalle Bank, N.A. is presented for periods subsequent to October 1, 2007.
Note 16 – Employee Benefit Plans
Pension and Postretirement Plans
The Corporation sponsors noncontributory trusteed qualified pension plans
that cover substantially all officers and employees. The plans provide
defined benefits based on an employee’s compensation and years of serv-
ice. The Bank of America Pension Plan (the Pension Plan) provides partic-
ipants with compensation credits, generally based on years of service. For
account balances based on compensation credits prior to January 1,
2008, the Pension Plan allows participants to select from various earnings
measures, which are based on the returns of certain funds or common
the Corporation. The participant-selected earnings measures
stock of
determine the earnings rate on the individual participant account balances
in the Pension Plan. Participants may elect to modify earnings measure
allocations on a periodic basis subject to the provisions of the Pension
Plan. For account balances based on compensation credits subsequent to
December 31, 2007, the account balance earnings rate is based on a
benchmark rate. For eligible employees in the Pension Plan on or after
January 1, 2008, the benefits become vested upon completion of three
years of service. It is the policy of the Corporation to fund not less than
the minimum funding amount required by ERISA.
The Pension Plan has a balance guarantee feature for account balan-
ces with participant-selected earnings, applied at the time a benefit pay-
ment is made from the plan that protects participant balances transferred
and certain compensation credits from future market downturns. The
Corporation is responsible for funding any shortfall on the guarantee fea-
ture.
As a result of recent mergers, the Corporation assumed the obliga-
tions related to the pension plans of former FleetBoston, MBNA, U.S. Trust
Corporation and LaSalle. These plans together with the Pension Plan, are
referred to as the Qualified Pension Plans. The Bank of America Pension
Plan for Legacy Fleet (the FleetBoston Pension Plan) and the Bank of
America Pension Plan for Legacy U.S. Trust Corporation (the U.S. Trust
Pension Plan) are substantially similar to the Pension Plan discussed
above; however, these plans do not allow participants to select various
earnings measures; rather the earnings rate is based on a benchmark
include participants with benefits
rate;
in addition, both plans
determined under formulas based on average or career compensation and
years of service rather than by reference to a pension account. The Bank
of America Pension Plan for Legacy MBNA (the MBNA Pension Plan) and
The Bank of America Pension Plan for Legacy LaSalle (the LaSalle Pension
Plan) provide retirement benefits based on the number of years of benefit
service and a percentage of the participant’s average annual compensa-
tion during the five highest paid consecutive years of their last ten years of
employment.
The Corporation sponsors a number of noncontributory, nonqualified
pension plans (the Nonqualified Pension Plans). As a result of mergers,
the Corporation assumed the obligations related to the noncontributory,
former FleetBoston, MBNA, U.S. Trust
nonqualified pension plans of
Corporation, and LaSalle. These plans, which are unfunded, provide
defined pension benefits to certain employees.
In addition to retirement pension benefits, full-time, salaried employ-
ees and certain part-time employees may become eligible to continue par-
ticipation as retirees in health care and/or life insurance plans sponsored
by the Corporation. Based on the other provisions of the individual plans,
certain retirees may also have the cost of these benefits partially paid by
the Corporation. The obligations assumed as a result of the mergers are
substantially similar to the Corporation’s Postretirement Health and Life
Plans.
The tables within this Note include the information related to the
MBNA plans described above beginning January 1, 2006, the U.S. Trust
Corporation plans beginning July 1, 2007 and the LaSalle plans beginning
October 1, 2007.
On December 31, 2006, the Corporation adopted SFAS 158 which
requires the recognition of a plan’s over-funded or under-funded status as
an asset or liability with an offsetting adjustment to accumulated OCI.
SFAS 158 requires the determination of the fair values of a plan’s assets
at a company’s year end and recognition of actuarial gains and losses,
prior service costs or credits, and transition assets or obligations as a
component of accumulated OCI. These amounts were previously netted
against the plans’ funded status in the Corporation’s Consolidated Bal-
ance Sheet pursuant to the provisions of SFAS 87. These amounts will be
subsequently recognized as components of net periodic benefit costs.
Further, actuarial gains and losses that arise in subsequent periods that
Bank of America 2007 153
are not initially recognized as a component of net periodic benefit cost will
be recognized as a component of accumulated OCI. Those amounts will
subsequently be recognized as a component of net periodic benefit cost
as they are amortized during future periods.
The incremental effects of adopting the provisions of SFAS 158 on
the Corporation’s Consolidated Balance Sheet at December 31, 2006 are
presented in the table below. The adoption of SFAS 158 had no effect on
the Corporation’s Consolidated Statement of Income for 2006, or for any
year presented.
The table on page 155 summarizes the changes in the fair value of
plan assets, changes in the projected benefit obligation (PBO), the funded
status of both the accumulated benefit obligation (ABO) and the PBO, and
the weighted average assumptions used to determine benefit obligations
for the pension plans and postretirement plans at December 31, 2007 and
2006. Amounts recognized at December 31, 2007 and 2006 are reflected
in other assets, and accrued expenses and other liabilities on the Con-
solidated Balance Sheet. The discount rate assumption is based on a cash
flow matching technique and is subject to change each year. This technique
utilizes a yield curve based upon Aa-rated corporate bonds with cash flows
that match estimated benefit payments to produce the discount
rate
assumption. For the Qualified Pension Plans, the Nonqualified Pension
Plans and the Postretirement Health and Life Plans, the discount rate at
December 31, 2007, was 6.00 percent. For both the Qualified Pension
Plans and the Postretirement Health and Life Plans, the expected long-term
return on plan assets is 8.00 percent for 2008. The expected return on
plan assets is determined using the calculated market-related value for the
Qualified Pension Plans and the fair value for the Postretirement Health and
Life Plans. The asset valuation method for the Qualified Pension Plans
recognizes 60 percent of the market gains or losses in the first year, with
the remaining 40 percent spread equally over the next four years.
(Dollars in millions)
Other assets (1)
Total assets
Accrued expenses and other liabilities (2)
Total liabilities
Accumulated OCI (3)
Total shareholders’ equity
Total liabilities and shareholders’ equity
December 31, 2006
Balance Sheet
Before Application
of SFAS 158
$ 121,649
1,461,703
42,790
1,325,123
(6,403)
136,580
1,461,703
SFAS 158
Adoption
Adjustments
$(1,966)
(1,966)
(658)
(658)
(1,308)
(1,308)
(1,966)
December 31, 2006
Balance Sheet
After Application of
SFAS 158
$ 119,683
1,459,737
42,132
1,324,465
(7,711)
135,272
1,459,737
(1) Amounts represent adjustments to plans in an asset position of $(2.0) billion.
(2) Adjustments to plans in a liability position of $301 million, the reversal of the additional minimum liability adjustment of $(190) million and an adjustment to deferred tax liabilities of $(769) million.
(3)
Includes employee benefit plan adjustments of $(1.4) billion, net-of-tax, and the reversal of the additional minimum liability adjustment of $120 million, net-of-tax.
154 Bank of America 2007
(Dollars in millions)
Change in fair value of plan assets
Fair value, January 1
MBNA balance, January 1, 2006
U.S. Trust Corporation balance, July 1, 2007
LaSalle balance, October 1, 2007
Actual return on plan assets
Company contributions (2)
Plan participant contributions
Benefits paid
Federal subsidy on benefits paid
Fair value, December 31
Change in projected benefit obligation
Projected benefit obligation, January 1
MBNA balance, January 1, 2006
U.S. Trust Corporation balance, July 1, 2007
LaSalle balance, October 1, 2007
Service cost
Interest cost
Plan participant contributions
Plan amendments
Actuarial (gains) losses
Benefits paid
Federal subsidy on benefits paid
Projected benefit obligation, December 31
Amount recognized, December 31
Funded status, December 31
Accumulated benefit obligation
Overfunded (unfunded) status of ABO
Provision for future salaries
Projected benefit obligation
Weighted average assumptions, December 31
Discount rate
Expected return on plan assets
Rate of compensation increase
Qualified Pension Plans (1)
Nonqualified Pension
Plans (1)
Postretirement Health
and Life Plans (1)
2007
2006
2007
2006
2007
2006
$16,793
–
437
1,400
1,043
–
–
(953)
n/a
$18,720
$12,680
–
363
1,133
316
761
–
3
(103)
(953)
n/a
$14,200
$ 4,520
$13,540
5,180
660
14,200
$13,097
555
–
–
1,829
2,200
–
(888)
n/a
$16,793
$11,690
695
–
–
306
676
–
33
168
(888)
n/a
$12,680
$ 4,113
$12,151
4,642
529
12,680
$
–
–
–
–
–
159
–
(157)
n/a
$
1
–
–
–
–
321
–
(322)
n/a
$
90
–
–
85
7
84
109
(225)
15
$
126
–
–
–
15
52
98
(213)
12
$
2
$
–
$ 165
$
90
$ 1,345
–
6
108
9
71
–
(1)
(74)
(157)
n/a
$ 1,307
$(1,305)
$ 1,284
(1,282)
23
1,307
$ 1,108
486
–
–
13
78
–
–
(18)
(322)
n/a
$ 1,345
$(1,345)
$ 1,345
(1,345)
–
1,345
$ 1,549
–
9
120
16
84
109
–
(101)
(225)
15
$ 1,576
$(1,411)
n/a
n/a
n/a
$ 1,576
$ 1,420
278
–
–
13
86
98
–
(145)
(213)
12
$ 1,549
$(1,459)
n/a
n/a
n/a
$ 1,549
6.00%
8.00
4.00
5.75%
8.00
4.00
6.00%
n/a
4.00
5.75%
n/a
4.00
6.00%
8.00
n/a
5.75%
8.00
n/a
(1) The measurement date for the Qualified Pension Plans, Nonqualified Pension Plans, and Postretirement Health and Life Plans was December 31 of each year reported.
(2) The Corporation’s best estimate of its contributions to be made to the Qualified Pension Plans, Nonqualified Pension Plans, and Postretirement Health and Life Plans in 2008 is $0, $105 and $101 million.
n/a = not applicable
Amounts recognized in the Consolidated Financial Statements at December 31, 2007 and 2006 were as follows:
(Dollars in millions)
Other assets
Accrued expenses and other liabilities
Net amount recognized at December 31
Qualified
Pension Plans
Nonqualified
Pension Plans
Postretirement
Health and Life Plans
2007
$4,520
–
$4,520
2006
$4,113
–
$4,113
2007
$
–
(1,305)
$(1,305)
2006
$
–
(1,345)
$(1,345)
2007
$
–
(1,411)
$(1,411)
2006
$
–
(1,459)
$(1,459)
Bank of America 2007 155
Net periodic benefit cost (income) for 2007, 2006 and 2005 included the following components:
(Dollars in millions)
2007
2006
2005
2007
2006
2005
2007
2006
2005
Qualified Pension Plans
Nonqualified Pension Plans
Postretirement Health
and Life Plans
Components of net periodic benefit cost (income)
Service cost
Interest cost
Expected return on plan assets
Amortization of transition obligation
Amortization of prior service cost (credits)
Recognized net actuarial (gain) loss
Recognized loss (gain) due to settlements and curtailments
Net periodic benefit cost (income)
Weighted average assumptions used to determine net cost for
years ended December 31
Discount rate (1)
Expected return on plan assets
Rate of compensation increase
$ 316
761
(1,312)
–
47
156
–
$
(32)
$
306
676
(1,034)
–
41
229
–
$
218
$ 261
643
(983)
–
44
182
–
$ 147
$
9
71
–
–
(7)
17
14
$ 104
$ 13
78
–
–
(8)
20
–
$ 103
$ 11
61
–
–
(8)
24
9
$ 97
$ 16
84
(8)
32
–
(60)
(2)
$ 62
$ 13
86
(10)
31
–
12
–
$ 132
$ 11
78
(14)
31
–
80
–
$ 186
5.75%
8.00
4.00
5.50%
8.00
4.00
5.75%
8.50
4.00
5.75%
n/a
4.00
5.50%
n/a
4.00
5.75%
n/a
4.00
5.75%
8.00
n/a
5.50%
8.00
n/a
5.75%
8.50
n/a
(1)
In connection with the U.S. Trust Corporation and LaSalle mergers, those plans were remeasured on July 1, 2007 and October 1, 2007, using a discount rate of 6.15 percent and 6.50 percent.
n/a = not applicable
Net periodic postretirement health and life expense was determined
using the “projected unit credit” actuarial method. Gains and losses for all
benefits except postretirement health care are recognized in accordance
with the standard amortization provisions of the applicable accounting
standards. For the Postretirement Health Care Plans, 50 percent of the
unrecognized gain or loss at the beginning of the fiscal year (or at sub-
sequent remeasurement) is recognized on a level basis during the year.
Assumed health care cost trend rates affect the postretirement bene-
fit obligation and benefit cost reported for the Postretirement Health Care
Plans. The assumed health care cost trend rate used to measure the
expected cost of benefits covered by the Postretirement Health Care Plans
was 9.0 percent for 2008, reducing in steps to 5.0 percent in 2013 and
later years. A one-percentage-point increase in assumed health care cost
trend rates would have increased the service and interest costs and the
benefit obligation by $5 million and $64 million in 2007, and $3 million
and $51 million in both 2006 and 2005. A one-percentage-point decrease
in assumed health care cost trend rates would have lowered the service
and interest costs and the benefit obligation by $4 million and $54 million
in 2007, $3 million and $44 million in 2006, and $3 million and $43 mil-
lion in 2005.
Pre-tax amounts included in accumulated OCI at December 31, 2007 and 2006 were as follows:
(Dollars in millions)
Net actuarial (gain) loss
Transition obligation
Prior service cost (credits)
Amounts recognized in accumulated OCI
Qualified
Pension Plans
Nonqualified
Pension Plans
2007
$1,776
–
157
$1,933
2006
$1,765
–
201
$1,966
2007
$119
–
(38)
$ 81
2006
$224
–
(44)
$180
Postretirement
Health and
Life Plans
2007
$(106)
157
–
$ 51
2006
$ (68)
189
–
$121
Total
2007
$1,789
157
119
$2,065
2006
$1,921
189
157
$2,267
156 Bank of America 2007
Pre-tax amounts recognized in OCI for 2007 included the following components:
(Dollars in millions)
Other changes in plan assets and benefit obligations recognized in OCI
Settlements and curtailments
Current year actuarial (gain) loss
Amortization of actuarial gain (loss)
Current year prior service (credit) cost
Amortization of prior service credit (cost)
Amortization of transition asset (obligation)
Total recognized in OCI
into net periodic benefit cost
The estimated net actuarial (gain) loss and prior service cost (credit)
for the Qualified Pension Plans that will be amortized from accumulated
OCI
(income) during 2008 are pre-tax
amounts of $64 million and $47 million. The estimated net actuarial (gain)
loss and prior service cost (credit) for the Nonqualified Pension Plans that
will be amortized from accumulated OCI
into net periodic benefit cost
(income) during 2008 are pre-tax amounts of $11 million and $(8) million.
The estimated net actuarial (gain) loss and transition obligation for the
Postretirement Health and Life Plans that will be amortized from accumu-
lated OCI into net periodic benefit cost (income) during 2008 are pre-tax
amounts of $(32) million and $31 million.
Plan Assets
The Qualified Pension Plans have been established as retirement vehicles
for participants, and trusts have been established to secure benefits
promised under the Qualified Pension Plans. The Corporation’s policy is to
invest the trust assets in a prudent manner for the exclusive purpose of
providing benefits to participants and defraying reasonable expenses of
administration. The Corporation’s investment strategy is designed to pro-
vide a total return that, over the long-term, increases the ratio of assets to
liabilities. The strategy attempts to maximize the investment return on
assets at a level of risk deemed appropriate by the Corporation while
complying with ERISA and any applicable regulations and laws. The
investment strategy utilizes asset allocation as a principal determinant for
establishing the risk/reward profile of the assets. Asset allocation ranges
are established, periodically reviewed, and adjusted as funding levels and
liability characteristics change. Active and passive investment managers
are employed to help enhance the risk/return profile of the assets. An
additional aspect of the investment strategy used to minimize risk (part of
the asset allocation plan)
includes matching the equity exposure of
participant-selected earnings measures. For example, the common stock
Asset Category
Equity securities
Debt securities
Real estate
Total
Qualified
Pension
Plans
Nonqualified
Pension
Plans
Postretirement
Health and
Life Plans
$
–
167
(156)
3
(47)
–
$ (33)
$(14)
(74)
(17)
(1)
7
–
$(99)
$
2
(100)
60
–
–
(32)
$ (70)
Total
$ (12)
(7)
(113)
2
(40)
(32)
$(202)
of the Corporation held in the trust is maintained as an offset to the
exposure related to participants who selected to receive an earnings
measure based on the return performance of common stock of the Corpo-
ration. No plan assets are expected to be returned to the Corporation
during 2008.
The Expected Return on Asset Assumption (EROA assumption) was
developed through analysis of historical market returns, historical asset
class volatility and correlations, current market conditions, anticipated
future asset allocations, the funds’ past experience, and expectations on
potential future market returns. The EROA assumption represents a long-
term average view of the performance of the Qualified Pension Plans and
Postretirement Health and Life Plan assets, a return that may or may not
be achieved during any one calendar year. In a simplistic analysis of the
EROA assumption, the building blocks used to arrive at the long-term
return assumption would include an implied return from equity securities
of 8.75 percent, debt securities of 5.75 percent, and real estate of 7.00
percent for all pension plans and postretirement health and life plans.
The Qualified Pension Plans’ and Postretirement Health and Life
Plans’ asset allocations at December 31, 2007 and 2006 and target allo-
cations for 2008 by asset category are presented in the table below.
Equity securities for the Qualified Pension Plans include common
stock of the Corporation in the amounts of $667 million (3.56 percent of
total plan assets) and $882 million (5.25 percent of total plan assets) at
December 31, 2007 and 2006.
The Bank of America, MBNA, U.S. Trust Corporation, and LaSalle
Postretirement Health and Life Plans had no investment in the common
stock of the Corporation at December 31, 2007 or 2006. The FleetBoston
Postretirement Health and Life Plans included common stock of the Corpo-
ration in the amount of $0.3 million (0.20 percent of total plan assets)
and $0.4 million (0.46 percent of total plan assets) at December 31,
2007 and 2006.
Qualified Pension Plans
Postretirement Health and Life Plans
2008
Target
Allocation
60 – 80%
20 – 40
0 – 5
Percentage of
Plan Assets at
December 31
2007
2006
70%
27
3
68%
30
2
2008
Target
Allocation
50 – 75%
25 – 45
0 – 5
Percentage of
Plan Assets at
December 31
2007
2006
67%
30
3
61%
36
3
100%
100%
100%
100%
Bank of America 2007 157
Projected Benefit Payments
Benefit payments projected to be made from the Qualified Pension Plans, the Nonqualified Pension Plans and the Postretirement Health and Life Plans are
as follows:
(Dollars in millions)
2008
2009
2010
2011
2012
2013 – 2017
Qualified Pension
Plans (1)
Nonqualified Pension
Plans (2)
Postretirement Health and Life Plans
Net Payments (3)
Medicare Subsidy
$1,057
1,068
1,059
1,110
1,105
5,324
$105
104
103
105
103
479
$150
150
152
153
152
735
$(15)
(15)
(16)
(16)
(17)
(82)
(1) Benefit payments expected to be made from the plans’ assets.
(2) Benefit payments expected to be made from the Corporation’s assets.
(3) Benefit payments (net of retiree contributions) expected to be made from a combination of the plans’ and the Corporation’s assets.
Defined Contribution Plans
The Corporation maintains qualified defined contribution retirement plans
and nonqualified defined contribution retirement plans.
The Corporation contributed approximately $420 million, $328 mil-
lion and $274 million for 2007, 2006 and 2005, in cash, respectively. At
December 31, 2007 and 2006, an aggregate of 93 million shares and
99 million shares of the Corporation’s common stock were held by the
401(k) Plans. Payments to the 401(k) plans for dividends on common
stock were $228 million, $216 million and $207 million during 2007,
2006 and 2005, respectively.
In addition, certain non-U.S. employees within the Corporation are
covered under defined contribution pension plans that are separately
administered in accordance with local laws.
Note 17 – Stock-Based Compensation Plans
On January 1, 2006, the Corporation adopted SFAS 123R under the
modified-prospective application.
The compensation cost recognized in income for the plans described
below was $1.2 billion, $1.0 billion and $805 million in 2007, 2006 and
2005, respectively. The related income tax benefit recognized in income
was $438 million, $382 million and $294 million for 2007, 2006 and
2005, respectively.
Prior to the adoption of SFAS 123R, awards granted to retirement-
eligible employees were expensed over the stated vesting period. SFAS
123R requires that the Corporation recognize stock compensation cost
immediately for any awards granted to retirement-eligible employees, or
over the vesting period or the period from the grant date to the date
retirement eligibility is achieved, whichever is shorter.
Prior to the adoption of SFAS 123R, the Corporation presented tax
benefits of deductions resulting from the exercise of stock options as
operating cash flows in the Consolidated Statement of Cash Flows. SFAS
123R requires the cash flows resulting from the tax benefits due to tax
deductions in excess of the compensation cost recognized for those
options (excess tax benefits) to be classified as financing cash flows. The
Corporation classified $254 million and $477 million in excess tax bene-
fits as a financing cash inflow for 2007 and 2006.
Prior to January 1, 2006, the Corporation estimated the fair value of
stock options granted on the date of grant using the Black-Scholes option-
pricing model. On January 1, 2006, the Corporation began using a lattice
option-pricing model to estimate the grant date fair value of stock options
granted. The following table presents the assumptions used to estimate
the fair value of stock options granted on the date of grant using the lat-
tice option-pricing model for 2007 and 2006. Lattice option-pricing models
incorporate ranges of assumptions for
inputs and those ranges are
disclosed in the table below. The risk-free rate for periods within the con-
tractual life of the stock option is based on the U.S. Treasury yield curve in
effect at the time of grant. Expected volatilities are based on implied vola-
tilities from traded stock options on the Corporation’s common stock,
historical volatility of the Corporation’s common stock, and other factors.
The Corporation uses historical data to estimate stock option exercise and
employee termination within the model. The expected term of stock
options granted is derived from the output of the model and represents
the period of time that stock options granted are expected to be out-
standing. The table below also includes the assumptions used to estimate
the fair value of stock options granted on the date of grant using the
Black-Scholes option-pricing model for 2005. The estimates of fair value
from these models are theoretical values for stock options and changes in
the assumptions used in the models could result in materially different fair
value estimates. The actual value of the stock options will depend on the
market value of the Corporation’s common stock when the stock options
are exercised.
Risk-free interest rate
Dividend yield
Expected volatility
Weighted average volatility
Expected lives (years)
n/a = not applicable
2007
2006
2005
4.72 – 5.16%
4.59 – 4.70%
4.40
16.00 – 27.00
19.70
6.5
4.50
17.00 – 27.00
20.30
6.5
3.94%
4.60
20.53
n/a
6
The Corporation has equity compensation plans that were approved
by its shareholders. These plans are the Key Employee Stock Plan and the
Key Associate Stock Plan. Descriptions of the material features of these
plans follow.
158 Bank of America 2007
Key Employee Stock Plan
The Key Employee Stock Plan, as amended and restated, provided for dif-
ferent types of awards. These include stock options, restricted stock
shares and restricted stock units. Under the Plan, ten-year options to
purchase approximately 260 million shares of common stock were granted
through December 31, 2002, to certain employees at the closing market
price on the respective grant dates. Options granted under the Plan gen-
erally vest in three or four equal annual
installments. At December 31,
2007, approximately 57 million options were outstanding under this Plan.
No further awards may be granted.
At December 31, 2007, the aggregate intrinsic value of options out-
standing, exercisable, and vested and expected to vest was $1.1 billion.
The weighted average remaining contractual term of options outstanding
was 5.6 years, of options exercisable was 4.6 years, and of options
vested and expected to vest was 5.6 years at December 31, 2007.
The weighted average grant-date fair value of options granted in
2007, 2006 and 2005 was $8.44, $6.90 and $6.48, respectively. The
total intrinsic value of options exercised in 2007 was $717 million.
The following table presents the status of the restricted stock/unit
awards at December 31, 2007, and changes during 2007:
Restricted stock/unit awards
Outstanding at January 1, 2007
Granted
Vested
Cancelled
Outstanding at December 31, 2007
December 31, 2007
Shares
31,589,342
18,213,053
(15,499,957)
(2,480,714)
31,821,724
Weighted
Average Grant
Date Fair Value
$43.85
53.82
44.53
49.26
48.80
At December 31, 2007, there was $696 million of total unrecognized
compensation cost related to share-based compensation arrangements for
all awards that is expected to be recognized over a weighted average
period of 0.93 years. The total fair value of restricted stock vested in
2007 was $810 million.
Key Associate Stock Plan
On April 24, 2002, the shareholders approved the Key Associate Stock
Plan to be effective January 1, 2003. This approval authorized and
reserved 200 million shares for grant in addition to the remaining amount
under the Key Employee Stock Plan as of December 31, 2002, which was
approximately 34 million shares plus any shares covered by awards under
the Key Employee Stock Plan that terminate, expire, lapse or are cancelled
after December 31, 2002. Upon the FleetBoston merger, the shareholders
authorized an additional 102 million shares and on April 26, 2006, the
shareholders authorized an additional 180 million shares for grant under
the Key Associate Stock Plan. At December 31, 2007, approximately
151 million options were outstanding under
this plan. Approximately
18 million shares of restricted stock and restricted stock units were
granted in 2007. These shares of restricted stock generally vest in three
equal annual installments beginning one year from the grant date.
The following table presents the status of all option plans at
December 31, 2007, and changes during 2007:
Employee stock options
December 31, 2007
Outstanding at January 1, 2007
Granted
Exercised
Forfeited
Outstanding at December 31,
2007 (1)
Options exercisable at December 31,
2007
Options vested and expected to vest (2)
Shares
245,073,170
34,253,805
(45,434,338)
(5,232,588)
228,660,049
168,956,467
227,941,654
Weighted
Average Exercise
Price
$36.89
53.83
35.56
46.09
39.49
35.86
39.45
(1)
(2)
Includes 57 million options under the Key Employee Stock Plan, 151 million options under the Key
Associate Stock Plan and 20 million options to employees of predecessor companies assumed in
mergers.
Includes vested shares and nonvested shares after a forfeiture rate is applied.
Bank of America 2007 159
Note 18 – Income Taxes
The components of income tax expense for 2007, 2006 and 2005 were as follows:
(Dollars in millions)
Current income tax expense
Federal
State
Foreign
Total current expense
Deferred income tax expense (benefit)
Federal
State
Foreign
Total deferred expense (benefit)
Total income tax expense (1)
2007
2006
2005
$5,210
681
804
6,695
(710)
(18)
(25)
(753)
$5,942
$ 7,398
796
796
8,990
1,807
45
(2)
1,850
$10,840
$5,229
676
415
6,320
1,577
85
33
1,695
$8,015
(1) Does not reflect the deferred tax effects of unrealized gains and losses on AFS debt and marketable equity securities, foreign currency translation adjustments, derivatives, and employee benefit plan adjustments that are
included in accumulated OCI. As a result of these tax effects, accumulated OCI decreased $5.0 billion in 2007 and increased $378 million and $2.9 billion in 2006 and 2005, respectively. Also, does not reflect tax benefits
associated with the Corporation’s employee stock plans which increased common stock and additional paid-in capital $251 million, $674 million and $416 million in 2007, 2006 and 2005, respectively. Goodwill was reduced
$47 million, $195 million and $22 million in 2007, 2006 and 2005, respectively, reflecting certain tax benefits attributable to exercises of employee stock options issued by MBNA and FleetBoston which had vested prior to
the merger dates.
Income tax expense for 2007, 2006 and 2005 varied from the
amount computed by applying the statutory income tax rate to income
before income taxes. A reconciliation between the expected federal
income tax expense using the federal statutory tax rate of 35 percent to
the Corporation’s actual
income tax expense and resulting effective tax
rate for 2007, 2006 and 2005 are presented in the following table.
As a result of the Tax Increase Prevention and Reconciliation Act of
2005 (TIPRA) and the American Jobs Creation Act of 2004 (the AJCA), the
Corporation’s non-U.S. based commercial aircraft leasing business no
longer qualified for a reduced U.S. tax rate. Accounting for the change in
law resulted in the discrete recognition of a $175 million charge to income
tax expense during 2006. However, the AJCA modified the anti-deferral
provisions associated with the active leasing of aircraft operated predom-
inantly outside the U.S. The restructuring of the Corporation’s non-U.S.
based commercial aircraft leasing business in compliance with the provi-
sions of the AJCA resulted in a one-time income tax benefit of $221 mil-
lion in 2007.
(Dollars in millions)
Expected federal income tax expense
Increase (decrease) in taxes resulting from:
Tax-exempt income, including dividends
Low income housing credits/other credits
Foreign tax differential
State tax expense, net of federal benefit
Non-U.S. leasing – TIPRA/AJCA
Other
Total income tax expense
The Corporation adopted the provisions of FIN 48 on January 1,
2007. FIN 48 clarifies the accounting and reporting for income taxes
where interpretation of the tax law may be uncertain. As a result of the
adoption of FIN 48, the Corporation recognized a $198 million increase in
the UTB balance, reducing retained earnings by $146 million and increas-
ing goodwill by $52 million. The beginning UTB balance of $2.7 billion
reconciles to the December 31, 2007 balance in the following table.
2007
Percent
35.0%
(3.3)
(2.8)
(2.3)
2.1
(1.1)
0.8
28.4%
Amount
$7,323
(683)
(590)
(485)
431
(221)
167
$5,942
2006
Amount
$11,191
(630)
(537)
(291)
547
175
385
$10,840
Percent
35.0%
(2.0)
(1.7)
(0.9)
1.7
0.5
1.3
33.9%
Amount
$8,568
(605)
(423)
(99)
495
–
79
$8,015
Reconciliation of the Change in Unrecognized Tax Benefits
(Dollars in millions)
Balance, January 1, 2007
Increases related to positions taken during prior years
Increases related to positions taken during the current year
Positions acquired or assumed in business combinations
Decreases related to positions taken during prior years
Settlements
Expiration of statute of limitations
Balance, December 31, 2007
2005
Percent
35.0%
(2.5)
(1.7)
(0.4)
2.0
–
0.3
32.7%
$2,667
67
456
328
(227)
(108)
(88)
$3,095
160 Bank of America 2007
As of December 31, 2007 and January 1, 2007, the balance of the
Corporation’s UTBs which would, if recognized, affect the Corporation’s
effective tax rate was $1.8 billion and $1.5 billion. Included in the 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,
the portion of gross state UTBs that would be offset by the tax benefit of
the associated federal deduction and UTBs related to acquired entities
that will
if recognized. Once SFAS 141R is effective,
beginning January 1, 2009, any change in the UTBs related to acquired
entities that occurs beyond the measurement period will not impact good-
will but will
the
December 31, 2007 UTB balance that, if recognized after the adoption of
SFAS 141R, would impact the effective tax rate was $577 million.
instead be recognized in earnings. The portion of
impact goodwill
During 2007, the IRS completed the examination phase of the audit
of the Corporation’s federal income tax returns for the years 2000 through
2002 and issued Revenue Agent’s Reports (RAR) to the Corporation.
Included in these RARs were proposed adjustments to disallow certain
foreign tax credits and to recharacterize certain leveraged leases referred
to by the IRS as “SILOs.” The Corporation filed protests of these proposed
adjustments as well as certain other of the RAR adjustments with the
Appeals office of the IRS. The Corporation believes the crediting of the
Corporation’s foreign taxes against U.S. income taxes was appropriate.
Further, the Corporation believes the tax treatment of the SILO position as
true leases for U.S. income tax purposes is supported by the relevant
facts and tax authorities. 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 are currently under examina-
tion for the years 1997 through March 31, 2004. Upon the final determi-
nation of each of the above audits, the UTB balance will decrease, since
resolved items would be removed from the balance whether their reso-
lution resulted in payment or recognition. The Corporation does not expect
these matters to be concluded within the next twelve months.
The federal income tax returns of LaSalle are currently under examina-
tion for the years 2003 through 2005. The Corporation anticipates that it
is reasonably possible that the final determination of these audits will
occur during 2008 and does not anticipate that such resolution would
result in a material change to the Corporation’s financial position.
Finally, the audit of the federal income tax returns of MBNA for the
tax years 2001 through 2004 was completed during 2007.
All tax years subsequent to the above years remain open to examina-
tion.
The Corporation files income tax returns in more than 100 state and
foreign jurisdictions each year and is under continuous examination by
various state and foreign taxing authorities. While many of these examina-
tions are resolved every year, the Corporation does not anticipate that
resolutions occurring within the next twelve months would result in a mate-
rial change to the Corporation’s financial position.
During 2007, the Corporation recognized $161 million, net of taxes,
of interest and penalties within income tax expense. As of December 31,
2007 and January 1, 2007, the Corporation’s accrual for interest and
penalties that related to income taxes, net of taxes and remittances,
including applicable interest on certain leveraged lease positions, was
$573 million and $769 million. The decrease during 2007 primarily
resulted from remittances to the IRS to stop the potential accrual of inter-
est on certain items relating to the above examinations.
Significant components of the Corporation’s net deferred tax liability
at December 31, 2007 and 2006 are presented in the following table.
(Dollars in millions)
Deferred tax liabilities
Equipment lease financing
Available-for-sale securities
Intangibles
Fee income
Mortgage servicing rights
State income taxes
Foreign currency
Other
Gross deferred tax liabilities
Deferred tax assets
Allowance for credit losses
Security valuations
Employee compensation and retirement benefits
Accrued expenses
Available-for-sale securities
Foreign tax credit carryforward
Other
Gross deferred tax assets
Valuation allowance (1)
Total deferred tax assets, net of valuation
allowance
Net deferred tax liabilities (2)
December 31
2007
2006
$ 6,875
3,836
2,015
1,445
859
347
47
1,620
17,044
4,056
3,673
1,541
1,307
–
–
73
$ 6,895
–
1,198
1,065
787
353
659
1,232
12,189
3,054
2,703
1,273
1,283
1,632
117
198
10,650
(148)
10,260
(122)
10,502
$ 6,542
10,138
$ 2,051
(1) At December 31, 2007 and 2006, $37 million and $43 million of the valuation allowance related to gross
deferred tax assets was attributable to the U.S. Trust Corporation, MBNA and FleetBoston mergers.
Future recognition, if occurring prior to the adoption of SFAS 141R, of the tax attributes associated with
these gross deferred tax assets would result in tax benefits being allocated to reduce goodwill.
(2) The Corporation’s net deferred tax liabilities were adjusted during 2007 and 2006 to include $226 million
and $565 million of net deferred tax liabilities related to business combinations.
The valuation allowance at December 31, 2007 and 2006 is attribut-
able to deferred tax assets generated in certain state and foreign juris-
dictions for which management believes it is more likely than not that
realization of these assets will not occur. The change in the valuation
allowance primarily resulted from current year losses in foreign juris-
dictions offset by the remeasurement of certain state temporary differ-
ences against which valuation allowances had been recorded.
At December 31, 2007 and 2006, federal
income taxes had not
been provided on $5.8 billion and $4.4 billion of undistributed earnings of
foreign subsidiaries, earned prior to 1987 and after 1997 that have been
reinvested for an indefinite period of time. If the earnings were distributed,
an additional $925 million and $573 million of tax expense, net of credits
for foreign taxes paid on such earnings and for the related foreign with-
holding taxes, would have resulted as of December 31, 2007 and 2006.
Bank of America 2007 161
Note 19 – Fair Value Disclosures
Effective January 1, 2007, the Corporation adopted SFAS 157, which pro-
vides a framework for measuring fair value under GAAP. 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 begin-
ning 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.
The following table summarizes the impact of the change in account-
ing 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)
Impact of adopting SFAS 157
Net derivative assets and liabilities (1)
Impact of electing the fair value option under SFAS 159
Loans and leases (2)
Accrued expenses and other liabilities (3)
Other assets (4)
Available-for-sale debt securities (5)
Federal funds sold and securities purchased under agreements to resell (6)
Interest-bearing deposit liabilities in domestic offices (7)
Cumulative-effect adjustment, pre-tax
Tax impact
Cumulative-effect adjustment, net-of-tax, decrease to retained earnings
Ending Balance
Sheet
December 31, 2006
Adoption Net
Gain/(Loss)
Opening Balance
Sheet
January 1, 2007
$7,100
$ 22
$7,122
3,968
(28)
8,778
3,692
1,401
(548)
(21)
(321)
–
–
(1)
1
(320)
112
$(208)
3,947
(349)
8,778
3,692
1,400
(547)
(1) The transition adjustment reflects the impact of recognizing previously deferred gains and losses as a result of the rescission of certain requirements of EITF 02-3 in accordance with SFAS 157.
(2)
(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
Includes loans to certain large corporate clients. The ending balance at December 31, 2006 and the transition adjustment were net of a $32 million reduction in the allowance for loan and lease losses.
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.
Includes structured reverse repurchase agreements that were hedged with derivatives in accordance with SFAS 133.
Includes long-term fixed rate deposits that were economically hedged with derivatives.
(6)
(7)
Fair Value Option Elections
Corporate Loans and Loan Commitments
The Corporation elected to account for certain large corporate loans and
loan commitments which exceeded the 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 relation-
ships may be mitigated through the use of credit derivatives, with the
Corporation’s 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 car-
ried at fair value with changes in fair value recorded in other income. Elect-
ing the fair value option allows the Corporation to account for these loans
and loan commitments at fair value, which is more consistent with man-
agement’s view of the underlying economics and the manner in which they
are managed. In addition, accounting for these loans and loan commit-
ments at fair value reduces the accounting asymmetry that would other-
wise 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 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 December 31, 2007, funded loans which the Corporation has
elected to fair value had an aggregate fair value of $4.59 billion recorded
in loans and leases and an aggregate outstanding principal balance of
$4.82 billion. At December 31, 2007, unfunded loan commitments that
the Corporation has elected to fair value had an aggregate fair value of
$660 million recorded in accrued expenses and other liabilities and an
aggregate committed exposure of $20.9 billion. Interest income on these
loans is recorded in interest and fees on loans and leases. At
December 31, 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 resulting from changes in fair value of these loans and loan
commitments of $413 million were recorded in other income during 2007.
These losses were significantly attributable to changes in instrument-
specific credit risk. Following adoption of SFAS 159, approximately $5 mil-
lion of direct loan origination fees and costs related to items for which the
fair value option was elected were recognized in earnings during 2007.
Previously, these items would have been capitalized and amortized to
earnings over the life of the loans.
162 Bank of America 2007
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 econom-
ically 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 float-
ing rate loans that are not economically hedged using derivative instru-
ments. 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 origi-
nation rates for similar loans and adjusted to reflect the inherent credit
risk. At December 31, 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 $15.77 billion and an
aggregate outstanding principal balance of $16.72 billion and were
recorded in other assets. Interest income on these loans is recorded in
other interest income. Net gains (losses) resulting from changes in fair
value of these loans, including realized gains (losses) on sale, of $333
million were recorded in mortgage banking income, $(348) million were
recorded in trading account profits (losses), and $(58) million were
recorded in other income during 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 $256 million in mortgage banking
income, and in an increase of $212 million in noninterest expense for
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
Effective January 1, 2007, the Corporation elected to fair value $3.7 bil-
lion of AFS debt securities through earnings. Changes in fair value result-
ing from foreign currency exposure, which was 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 bur-
den 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 secu-
rities because they were 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 December 31,
2007, these instruments had an aggregate fair value of $2.58 billion and
a principal balance of $2.54 billion recorded 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 result-
ing from changes in fair value of these instruments of $23 million were
recorded in other income for 2007. The Corporation did not elect to fair
value other financial instruments within the same balance sheet category
because they were not economically hedged using derivatives.
Long-term Deposits
The Corporation elected to fair value certain long-term fixed rate deposits
which are economically hedged with derivatives. At December 31, 2007,
these instruments had an aggregate fair value of $2.00 billion and princi-
pal balance of $1.99 billion recorded in interest-bearing deposits. Interest
paid on these instruments continues to be recorded in interest expense.
Net losses resulting from changes in fair value of these instruments of
$26 million were recorded in other income for 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
instruments at historical cost and the
economic hedges at fair value. The Corporation did not elect to fair value
other
instruments within the same balance sheet category
because they were not economically hedged using derivatives.
the financial
financial
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 trans-
action between market participants on the measurement date. For addi-
tional information on how the Corporation measures fair value, see Note 1
– Summary of Significant Accounting Principles to the Consolidated Finan-
cial Statements.
Bank of America 2007 163
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:
(Dollars in millions)
Assets
Federal funds sold and securities purchased under agreements to resell (2)
Trading account assets
Derivative assets
Available-for-sale debt securities
Loans and leases (2, 3)
Mortgage servicing rights
Other assets (4)
Total assets
Liabilities
Interest-bearing deposits in domestic offices (2)
Trading account liabilities
Derivative liabilities
Accrued expenses and other liabilities (2)
Total liabilities
Fair Value Measurements Using
December 31, 2007
Level 1
Level 2
Level 3
Netting
Adjustments (1)
Assets/Liabilities
at Fair Value
$
–
42,986
516
2,089
–
–
19,796
$65,387
$
–
57,331
534
–
$57,865
$ 2,578
115,051
442,471
205,734
–
–
15,971
$781,805
$ 2,000
20,011
426,223
–
$448,234
$
–
4,027
8,972
5,507
4,590
3,053
5,321
$31,470
$
–
–
10,175
660
$10,835
$
–
–
(417,297)
–
–
–
–
$(417,297)
$
–
–
(414,509)
–
$(414,509)
$
2,578
162,064
34,662
213,330
4,590
3,053
41,088
$461,365
$
2,000
77,342
22,423
660
$102,425
(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) Loans and leases at December 31, 2007 included $22.6 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.
(4) 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 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 December 31, 2007.
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) during 2007. Level 3 loans and loan commitments are
carried at fair value due to adoption of the fair value option, as described
on page 162. Other Level 3 instruments presented in the table, including
net 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. During 2007 certain finan-
cial instruments, including certain ABS issued by CDOs and portfolios of
loans held-for-sale, were transferred from Level 2 to Level 3 due to the
lack of current observable market activity. These instruments were valued
using pricing models and discounted cash flow methodologies incorporat-
ing assumptions that, in management’s judgment, reflect the assumptions
a marketplace participant would use at December 31, 2007.
Level 3 Instruments Only
Total Fair Value Measurements
(Dollars in millions)
Balance, December 31, 2006
Impact of SFAS 157 and SFAS 159
adoption
Balance, January 1, 2007
Total gains or losses (realized/
unrealized):
Included in earnings
Included in other comprehensive
income
Purchases, issuances, and settlements
Transfers in to/out of Level 3
Balance, December 31, 2007
Net
Derivatives (1)
766
$
22
788
$
Trading
Account
Assets (2)
303
$
–
303
$
Available-for-
Sale Debt
Securities (2, 3)
$1,133
–
$1,133
Loans
and
Leases (4)
$3,968
(21)
$3,947
Mortgage
Servicing
Rights (2)
$2,869
–
$2,869
Other
Assets (5)
$ 6,605
–
$ 6,605
(341)
(2,959)
(398)
(140)
231
2,059
–
(333)
(1,317)
$(1,203)
–
708
5,975
$ 4,027
(206)
4,588
390
$5,507
–
783
–
$4,590
–
(47)
–
$3,053
(79)
(5,897)
2,633
$ 5,321
Accrued
Expenses
and Other
Liabilities (4)
$ (28)
(321)
$(349)
(279)
–
(32)
–
$(660)
(1) Net derivatives at December 31, 2007 included derivative assets of $8.97 billion and derivative liabilities of $10.18 billion. Amounts at January 1, 2007 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) Certain securities valued using internally developed pricing inputs had been classified as Level 2 measurements at January 1, 2007. The Corporation subsequently determined that these securities are more appropriately
classified as Level 3 measurements which has been reflected as such in the beginning balance. This change in classification did not impact the recorded fair value of the securities.
(4) 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.
(5) 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, and certain portfolios of loans held-for-sale, principally reverse mortgages, for which the Corporation had elected the fair value option under SFAS 159.
164 Bank of America 2007
Level 3 Valuation Techniques
Financial
instruments are considered Level 3 when their values are
determined using pricing models, discounted cash flow methodologies or
similar techniques and at least one significant model assumption or input
is unobservable. Level 3 financial instruments also include those for which
the determination of fair value requires significant management judgment
or estimation. For more information on Level 3 financial instruments, see
Note 1 – Summary of Significant Accounting Policies to the Consolidated
Financial Statements. A brief description of the valuation techniques used
for Level 3 assets and liabilities is provided below.
Derivatives
The fair values of Level 3 derivative instruments are estimated using propri-
etary
valuation models that utilize both market observable and
unobservable parameters. Level 3 derivative instruments have primary risk
characteristics that relate to unobservable pricing parameters such as
private name credit spreads, credit correlations, long dated equity or inter-
est rate volatility skews and forward spreads.
Trading Account Assets and Available-for-Sale Debt Securities
Level 3 trading account assets and available-for-sale debt securities
include CDO positions and other ABS. At December 31, 2007, the majority
of these instruments were valued using a net asset value approach, which
considers the value of the underlying securities. Underlying assets are
valued using external pricing services, where available, or matrix pricing
based on the vintages and ratings, where applicable, of the assets. In
some situations when other market information was not available, secu-
rities are valued using projected cash flows, similar to the valuation of an
interest-only strip, based on estimated average life, seniority level and
vintage of underlying assets.
Loans and Leases
Certain large corporate loans including loan commitments, which the
fair value and for which
Corporation has elected to account
observable market prices are not available, are considered Level 3. This is
normally the result of illiquidity due to the customer, the size of the loan or
the particular loan terms. In these cases, fair value is estimated using
discounted cash flow models with market-based credit spreads of com-
parable debt instruments or credit derivatives of the specific borrower or
comparable borrowers.
for at
Mortgage Servicing Rights
The fair value of MSRs is determined using models which depend on esti-
mates of prepayment rates and resultant weighted average lives of the
MSRs and the option adjusted spread levels (OAS). For more information
on Level 3 MSRs, see Note 21 – Mortgage Servicing Rights to the Con-
solidated Financial Statements.
Other Assets
Level 3 other assets consist primarily of non-public equity investments,
interests in securitiza-
certain held-for-sale loans and retained residual
tions. Non-public equity investments are initially valued at transaction price
and subsequently, adjusted when evidence is available to support such
adjustments. Such evidence includes changes in value as a result of IPOs,
financial results,
market comparables, market liquidity, the investees’
sales restrictions, or other changes in value. Mortgages are valued based
on instruments or portfolios with similar loan terms, collateral type and
credit quality. Retained residual interests in securitizations are based on
certain observable inputs such as interest rates and credit spreads, as
well as unobservable inputs such as estimated net charge-off and pay-
ment rates.
The table below summarizes gains and losses due to changes in fair value, including both realized and unrealized gains and losses, recorded in earn-
ings for Level 3 assets and liabilities during 2007. These amounts include gains and losses generated by loans, loans held-for-sale and loan commitments
for which the fair value option was elected and by other instruments, including certain derivative contracts, trading account assets, AFS debt securities,
MSRs, equity investments and retained interests in securitizations, which were carried at fair value prior to the adoption of SFAS 159.
Level 3 Instruments Only
(Dollars in millions)
Classification of gains and losses (realized/
unrealized) included in earnings for 2007:
Card income
Equity investment income (4)
Trading account losses
Mortgage banking income (loss)
Other income
Total
Net
Derivatives (1)
Trading
Account
Assets (1)
Available-for-
Sale Debt
Securities (1, 5)
Loans
and
Leases (2)
Mortgage
Servicing
Rights (1)
Other
Assets (3)
Accrued
Expenses
and Other
Liabilities (2)
Total Gains and Losses
$
–
–
(515)
174
–
$(341)
$
–
–
(2,959)
–
–
$(2,959)
$
–
–
–
–
(398)
$(398)
$
–
–
(1)
–
(139)
$(140)
$
–
–
–
231
–
$231
$ 103
1,971
(61)
(29)
75
$2,059
$
–
–
(5)
–
(274)
$(279)
Total
$
103
1,971
(3,541)
376
(736)
$(1,827)
(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.
(3) Amounts represented items which were carried at fair value prior to the adoption of SFAS 159 and certain portfolios of loans held-for-sale for which the Corporation had elected the fair value option under SFAS 159.
(4) During 2007, more than 90 percent of equity investment income’s Level 3 net gains were received in cash.
(5) Amount represents writedowns on certain securities that were deemed to be other-than-temporarily impaired during 2007.
Bank of America 2007 165
The table below summarizes changes in unrealized gains or losses recorded in earnings during 2007 for Level 3 assets and liabilities that are still held
at December 31, 2007. These amounts include changes in fair value of loans, loans held-for-sale 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, AFS debt securities, MSRs, equity
investments and retained interests in securitizations, which were carried at fair value prior to the adoption of SFAS 159.
Level 3 Instruments Only
(Dollars in millions)
Changes in unrealized gains or losses
relating to assets still held at reporting
date for 2007:
Card income
Equity investment income
Trading account losses
Mortgage banking income (loss)
Other income
Total
Changes in Unrealized Gains or Losses
Net
Derivatives (1)
Trading
Account
Assets (1)
Available-
for-Sale
Debt
Securities (1)
Loans
and
Leases (2)
Mortgage
Servicing
Rights (1)
Other
Assets (3)
Accrued
Expenses
and Other
Liabilities (3)
$
–
–
(196)
139
–
$ (57)
$
–
–
(2,857)
–
–
$(2,857)
$
–
–
–
–
(398)
$(398)
$
–
–
–
–
(167)
$(167)
$ –
–
–
(43)
–
$(43)
$(136)
(65)
(58)
(22)
–
$(281)
$
–
–
(1)
–
(395)
$(396)
Total
$ (136)
(65)
(3,112)
74
(960)
$(4,199)
(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.
(3) Amounts represented items which were carried at fair value prior to the adoption of SFAS 159 and certain portfolios of loans held-for-sale for which the Corporation had elected the fair value option under SFAS 159.
Certain assets and liabilities are measured at
fair value on a
non-recurring basis (e.g., loans held-for-sale, unfunded loan commitments
held-for-sale, and commercial and residential reverse mortgage MSRs all
of which are carried at the lower of cost or market). At December 31,
2007, loans held-for-sale for which the Corporation had not elected the fair
value option which had an aggregate cost of $14.70 billion had been writ-
ten down to fair value of $14.50 billion (of which $1.20 billion and $13.30
billion were measured using Level 2 and Level 3 inputs within the fair
value hierarchy). In addition, unfunded loan commitments held-for-sale and
the Corporation’s share of the forward calendar were written down by
$142 million and were recorded in accrued expenses and other liabilities
at December 31, 2007, all of which were measured using Level 3 inputs
within the fair value hierarchy. During 2007, losses of $172 million were
recorded in other income (primarily leveraged loans and loan commitments
held-for-sale), losses of $2 million were recorded in mortgage banking
income (primarily consumer mortgage loans held-for-sale), and losses of
$145 million were recorded in trading account profits (losses) (primarily
commercial mortgage loans and loan commitments held-for-sale).
166 Bank of America 2007
Note 20 – Fair Value of Financial Instruments (SFAS 107 Disclosure)
SFAS No. 107, “Disclosures About Fair Value of Financial Instruments”
(SFAS 107), requires the disclosure of the estimated fair value of financial
instruments including those financial
instruments for which the Corpo-
ration did not elect the fair value option. The fair values of such instru-
ments have been derived, in part, by management’s assumptions, the
estimated amount and timing of future cash flows and estimated discount
rates. Different assumptions could significantly affect these estimated fair
values. Accordingly, the net realizable values could be materially different
from the estimates presented below. In addition, the estimates are only
indicative of the value of individual financial instruments and should not be
considered an indication of the fair value of the Corporation.
The provisions of SFAS 107 do not require the disclosure of the fair
value of
instruments,
including goodwill and intangible assets such as purchased credit card,
affinity and trust relationships.
lease financing arrangements and nonfinancial
The following disclosures represent financial instruments in which the
ending balance at December 31, 2007 are not carried at fair value in its
entirety on the Corporation’s Consolidated Balance Sheet.
Short-term Financial Instruments
The carrying value of short-term financial instruments, including cash and
cash equivalents, time deposits placed, federal funds sold and purchased,
resale and certain repurchase agreements, commercial paper and other
short-term investments and borrowings, approximates the fair value of
these instruments. These financial
instruments generally expose the
Corporation to limited credit risk and have no stated maturities or have
short-term maturities and carry interest rates that approximate market. In
accordance with SFAS 159, the Corporation elected to fair value certain
structured reverse repurchase agreements. See Note 19 – Fair Value Dis-
closures to the Consolidated Financial Statements for additional
information on these structured reverse repurchase agreements.
Loans
Fair values were estimated for certain groups of similar loans based upon
type of loan and maturity. The fair value of these loans was 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. Where quoted market prices were available,
primarily for certain residential mortgage loans and commercial
loans,
such market prices were utilized as estimates for fair values. In accord-
ance with SFAS 159, the Corporation elected to fair value certain large
corporate loans which exceeded the Corporation’s single name credit risk
concentration guidelines. See Note 19 – Fair Value Disclosures to the
Consolidated Financial Statements for additional information on loans for
which the Corporation adopted the fair value option.
Substantially all of the foreign loans reprice within relatively short
timeframes. Accordingly, for foreign loans, the net carrying values were
assumed to approximate their fair values.
Deposits
The fair value for certain deposits with stated maturities was calculated by
discounting contractual cash flows using current market rates for instru-
ments with similar maturities. The carrying value of foreign time deposits
approximates fair value. For deposits with no stated maturities, the carry-
ing amount was considered to approximate fair value and does not take
into account the significant value of the cost advantage and stability of the
Corporation’s long-term relationships with depositors. In accordance with
SFAS 159, the Corporation elected to fair value certain long-term fixed rate
deposits which are economically hedged with derivatives. See Note 19 –
Fair Value Disclosures to the Consolidated Financial Statements for addi-
tional information on these long-term fixed rate deposits.
Long-term Debt
The Corporation uses quoted market prices for its long-term debt when
available. When quoted market prices are not available, fair value is esti-
mated based on current market interest rates for debt with similar matur-
ities.
The book and fair values of certain financial
December 31, 2007 and 2006 are presented in the table below.
instruments at
(Dollars in millions)
Financial assets
Loans (1)
Financial liabilities
Deposits
Long-term debt
(1) Presented net of allowance for loan losses.
December 31
2007
Book
Value
Fair Value
2006
Book
Value
Fair Value
$842,392
$847,405
$675,544
$679,738
805,177
197,508
806,511
195,835
693,497
146,000
693,041
148,120
Bank of America 2007 167
Note 21 – 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.
The following table presents activity for residential first mortgage
MSRs for 2007 and 2006.
(Dollars in millions)
Balance, January 1
MBNA balance, January 1, 2006
Additions
Sales of MSRs
Impact of customer payments
Other changes in MSR market value
Balance, December 31
2007
$2,869
–
792
–
(766)
158
$3,053
2006
$2,658
9
572
(71)
(713)
414
$2,869
In 2007, other changes in MSR market value of $158 million reflect
the change in discount rates and prepayment speed assumptions, mostly
due to changes in interest rates. The amount does not include $73 million
resulting from the actual cash received exceeding expected prepayments.
The total amount of $231 million is included in the line “mortgage banking
income (loss)” in the table “Total Gains and Losses” in Note 19 – Fair
Value Disclosures to the Consolidated Financial Statements.
The key economic assumptions used in valuations of MSRs include
modeled prepayment rates and resultant weighted average lives of the
MSRs and the OAS 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
$294 million at December 31, 2007, and commercial MSRs totaled $176
million at December 31, 2006 and are not included in the preceding table.
As of December 31, 2007, the fair value of residential first mortgage
MSRs was $3.1 billion, and the modeled weighted average lives of MSRs
related to fixed and adjustable rate loans (including hybrid adjustable rate
mortgages) were 4.80 years and 2.75 years. The table below presents the
sensitivity of the weighted average lives and fair value of MSRs to changes
in modeled assumptions.
December 31, 2007
Change in Weighted Average Lives
Fixed
Adjustable
0.33 years
0.72
(0.29)
(0.55)
n/a
n/a
n/a
n/a
0.25 years
0.56
(0.21)
(0.39)
n/a
n/a
n/a
n/a
Change
in Fair
Value
$ 169
362
(149)
(280)
$ 128
267
(118)
(226)
(Dollars in millions)
Prepayment rates
Impact of 10% decrease
Impact of 20% decrease
Impact of 10% increase
Impact of 20% increase
OAS level
Impact of 100 bps decrease
Impact of 200 bps decrease
Impact of 100 bps increase
Impact of 200 bps increase
n/a = not applicable
168 Bank of America 2007
Note 22 – Business Segment Information
The Corporation reports the results of its operations through three busi-
ness segments: Global Consumer and Small Business Banking (GCSBB),
Global Corporate and Investment Banking (GCIB) and Global Wealth and
(GWIM). The Corporation may periodically
Investment Management
reclassify business segment
results based on modifications to its
reporting methodologies and changes in organizational
management
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, specifi-
cally credit card, business card and certain unsecured lending portfolios,
on a managed basis. This basis of presentation excludes the Corpo-
ration’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 evaluates the results of GCSBB. Managed
basis assumes that securitized loans 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 sour-
ces. Loan securitization removes loans from the Consolidated Balance
Sheet through the sale of loans to an off-balance sheet QSPE which is
excluded from the Corporation’s Consolidated Financial Statements in
accordance with GAAP.
The performance of the managed portfolio is important in under-
standing GCSBB’s results as it demonstrates the results of the entire
portfolio serviced by the business. Securitized loans continue to be serv-
iced by the business and are subject to the same underwriting standards
and ongoing monitoring as held loans. In addition, retained excess servic-
ing 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:
Š Managed net interest income includes GCSBB’s net interest income on
income on the securitized loans less the
held loans and interest
internal funds transfer pricing allocation related to securitized loans.
Š 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.
Š 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
investor clients using a
large international corporate and institutional
strategy to deliver value-added financial products and advisory solutions.
Global Wealth and Investment Management
GWIM offers investment and brokerage services, estate management,
fiduciary management, credit and banking
financial planning services,
expertise, and diversified asset management products to institutional cli-
ents, 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 asso-
ciated net interest income, service charges and noninterest expense on
the deposit balances are recorded in GWIM.
All Other
All Other consists of equity investment activities including Principal Inves-
ting, Corporate Investments and Strategic Investments,
the residual
impact of the allowance for credit losses and the cost allocation proc-
esses, 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, foreign exchange rate fluctuations related to SFAS
issuances, certain gains
52 revaluation of
(losses) on sales of whole mortgage loans, and gains (losses) on sales of
debt securities. All Other also includes adjustments to noninterest income
and income tax expense to remove the FTE impact of items (primarily low-
income housing tax credits) that have been grossed up within noninterest
income to a FTE amount in the business segments. 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 GAAP basis (i.e., held basis).
foreign-denominated debt
Basis of Presentation
Total revenue, net of interest expense, includes net interest income on a
FTE basis and noninterest income. The adjustment of net interest income
to a FTE basis results in a corresponding increase in income tax expense.
The 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 predetermined 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 central-
ized or shared functions are allocated based on methodologies which
reflect utilization.
Bank of America 2007 169
The following tables present total revenue, net of interest expense, on a FTE basis and net income for 2007, 2006 and 2005, and total assets at
December 31, 2007 and 2006 for each business segment, as well as All Other.
Business Segments
At and for the Year Ended December 31
(Dollars in millions)
Net interest income (4)
Noninterest income
Total revenue, net of interest expense
Provision for credit losses (5)
Amortization of intangibles
Other noninterest expense
Income before income taxes
Income tax expense (4)
Net income
Period-end total assets
(Dollars in millions)
Net interest income (4)
Noninterest income
Total revenue, net of interest expense
Provision for credit losses
Amortization of intangibles
Other noninterest expense
Income before income taxes
Income tax expense (4)
Net income
Period-end total assets
(Dollars in millions)
Net interest income (4)
Noninterest income
Total revenue, net of interest expense
Provision for credit losses (5)
Amortization of intangibles
Other noninterest expense
Income before income taxes
Income tax expense (4)
Net income
Period-end total assets
Total Corporation (1)
Global Consumer and
Small Business Banking (2, 3)
2005
$17,571
10,848
28,419
4,706
480
12,277
10,956
3,934
$ 7,022
2005
$3,554
3,320
6,874
(5)
74
3,667
3,138
1,126
$2,012
$
2007
36,182
31,886
68,068
8,385
1,676
35,334
22,673
7,691
$
2006
35,815
37,989
73,804
5,010
1,755
33,842
33,197
12,064
2005
$31,569
26,438
58,007
4,014
809
27,872
25,312
8,847
2007
$ 28,809
18,873
47,682
12,929
1,336
18,724
14,693
5,263
2006
$ 28,197
16,729
44,926
8,534
1,452
16,923
18,017
6,639
$
14,982
$1,715,746
$
21,133
$16,465
$1,459,737
$ 9,430
$442,987
$ 11,378
$399,373
Global Corporate
and Investment Banking (2)
Global Wealth and
Investment Management (2)
2007
$ 3,857
4,066
2006
$ 3,671
3,686
7,923
14
150
4,485
3,274
1,179
7,357
(39)
72
3,795
3,529
1,306
$ 2,095
$157,157
$ 2,223
$125,287
2007
$ 11,217
2,200
13,417
652
178
11,747
840
302
538
$
$776,107
2007
$ (7,701)
6,747
(954)
(5,210)
12
378
3,866
947
$ 2,919
$339,495
2006
$ 9,877
11,284
21,161
9
218
11,360
9,574
3,542
$ 6,032
$685,935
All Other (2, 3)
2006
$ (5,930)
6,290
360
(3,494)
13
1,764
2,077
577
$ 1,500
$249,142
2005
$10,337
9,530
19,867
44
239
10,217
9,367
3,413
$ 5,954
2005
$ 107
2,740
2,847
(731)
16
1,711
1,851
374
$1,477
(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.
170 Bank of America 2007
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
(Dollars in millions)
Net interest income (3)
Noninterest income:
Card income
Service charges
Mortgage banking income
All other income
Total noninterest income
Total revenue, net of interest expense
Provision for credit losses
Noninterest expense
Income before income taxes
Income tax expense (3)
Net income
Managed
Basis (1)
$28,809
10,189
6,008
1,333
1,343
18,873
47,682
12,929
20,060
14,693
5,263
2007
Securitization
Impact (2)
2006
2005
Held
Basis
Managed
Basis (1)
Securitization
Impact (2)
Held
Basis
Managed
Basis (1)
Securitization
Impact (2)
Held
Basis
$(8,027)
$20,782
$28,197
$(7,593)
$20,604
$17,571
$(503)
$17,068
3,356
–
–
(288)
3,068
(4,959)
(4,959)
–
–
–
–
13,545
6,008
1,333
1,055
21,941
42,723
7,970
20,060
14,693
5,263
9,374
5,342
877
1,136
16,729
44,926
8,534
18,375
18,017
6,639
$ 9,430
$11,378
$
4,566
–
–
(335)
4,231
(3,362)
(3,362)
–
–
–
–
13,940
5,342
877
801
20,960
41,564
5,172
18,375
18,017
6,639
4,512
4,994
1,012
330
10,848
28,419
4,706
12,757
10,956
3,934
$11,378
$ 7,022
$
69
–
–
–
69
(434)
(434)
–
–
–
–
4,581
4,994
1,012
330
10,917
27,985
4,272
12,757
10,956
3,934
$ 7,022
(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
$ 9,430
$
All Other – Reconciliation
(Dollars in millions)
Net interest income (3)
Noninterest income:
Card income
Equity investment income
Gains (losses) on sales of debt securities
All other income
Total noninterest income
Total revenue, net of interest expense
Provision for credit losses
Merger and restructuring charges
All other noninterest expense
Income before income taxes
Income tax expense (3)
Net income
Reported
Basis (1)
$(7,701)
2,816
3,745
180
6
6,747
(954)
(5,210)
410
(20)
3,866
947
2007
2006
2005
Securitization
Offset (2)
As
Adjusted
Reported
Basis (1)
Securitization
Offset (2)
As
Adjusted
Reported
Basis (1)
Securitization
Offset (2)
As
Adjusted
$ 8,027
$ 326
$(5,930)
$ 7,593
$1,663
$ 107
$503
$ 610
(3,356)
–
–
288
(3,068)
4,959
4,959
–
–
–
–
–
(540)
3,745
180
294
3,679
4,005
(251)
410
(20)
3,866
947
3,795
2,872
(475)
98
6,290
360
(3,494)
805
972
2,077
577
(4,566)
–
–
335
(4,231)
3,362
3,362
–
–
–
–
–
(771)
2,872
(475)
433
2,059
3,722
(132)
805
972
2,077
577
166
2,033
969
(428)
2,740
2,847
(731)
412
1,315
1,851
374
(69)
–
–
–
(69)
434
434
–
–
–
–
–
97
2,033
969
(428)
2,671
3,281
(297)
412
1,315
1,851
374
$1,477
$ 2,919
$
$2,919
$ 1,500
$
$1,500
$1,477
$
(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
Bank of America 2007 171
The following tables present 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, and total assets to the Consolidated Balance Sheet. The adjustments presented in the
table below include consolidated income and expense amounts not specifically allocated to individual business segments.
Year Ended December 31
2007
$69,022
66
3,745
628
(1,749)
(4,959)
(434)
$66,319
$12,063
(241)
2,359
416
258
127
2006
2005
$73,444
$55,160
(936)
2,872
2,670
(1,224)
(3,362)
(884)
319
2,033
1,937
(832)
(434)
(1,008)
$72,580
$19,633
$57,175
$14,988
(816)
1,809
1,138
507
(1,138)
52
1,281
856
275
(987)
$14,982
$21,133
$16,465
December 31
2007
2006
$1,376,251
$1,210,595
452,626
31,306
5,340
(72,611)
(102,967)
25,801
384,459
15,639
10,224
(79,926)
(101,865)
20,611
$1,715,746
$1,459,737
(Dollars in millions)
Segments’ total revenue, net of interest expense (1)
Adjustments:
ALM activities (2)
Equity investment income
Liquidating businesses
FTE basis adjustment
Managed securitization impact to total revenue, net of interest expense
Other
Consolidated revenue, net of interest expense
Segments’ net income
Adjustments, net of taxes:
ALM activities (2, 3)
Equity investment income
Liquidating businesses
Merger and restructuring charges
Other
Consolidated net income
(1) FTE basis
(2)
Includes revenue associated with derivative instruments which did not qualify for SFAS 133 hedge accounting treatment of $(675) million in 2005.
Includes net income associated with derivative instruments which did not qualify for SFAS 133 hedge accounting treatment of $(421) million in 2005.
(3)
(Dollars in millions)
Segments’ total assets
Adjustments:
ALM activities, including securities portfolio
Equity investments
Liquidating businesses
Elimination of segment excess asset allocations to match liabilities
Elimination of managed securitized loans (1)
Other
Consolidated total assets
(1) Represents GCSBB’s securitized loans.
172 Bank of America 2007
Note 23 – Parent Company Information
The following tables present the Parent Company Only financial information:
Condensed Statement of Income
(Dollars in millions)
Income
Dividends from subsidiaries:
Bank holding companies and related subsidiaries
Nonbank companies and related subsidiaries
Interest from subsidiaries
Other income
Total income
Expense
Interest on borrowed funds
Noninterest expense
Total expense
Income before income taxes and equity in undistributed earnings of subsidiaries
Income tax benefit
Income before equity in undistributed earnings of subsidiaries
Equity in undistributed earnings (losses) of subsidiaries:
Bank holding companies and related subsidiaries
Nonbank companies and related subsidiaries
Total equity in undistributed earnings (losses) of subsidiaries
Net income
Net income available to common shareholders
Condensed Balance Sheet
(Dollars in millions)
Assets
Cash held at bank subsidiaries
Debt securities
Receivables from subsidiaries:
Bank holding companies and related subsidiaries
Nonbank companies and related subsidiaries
Investments in subsidiaries:
Bank holding companies and related subsidiaries
Nonbank companies and related subsidiaries
Other assets
Total assets
Liabilities and shareholders’ equity
Commercial paper and other short-term borrowings
Accrued expenses and other liabilities
Payables to subsidiaries:
Bank holding companies and related subsidiaries
Nonbank companies and related subsidiaries
Long-term debt
Shareholders’ equity
Total liabilities and shareholders’ equity
Year Ended December 31
2007
2006
2005
$20,615
181
4,939
3,319
29,054
7,834
3,127
10,961
18,093
1,136
19,229
(4,497)
250
(4,247)
$14,982
$14,800
$15,950
111
3,944
2,346
22,351
5,799
3,019
8,818
13,533
1,002
14,535
5,613
985
6,598
$10,400
63
2,581
1,719
14,763
3,843
2,636
6,479
8,284
791
9,075
6,518
872
7,390
$21,133
$21,111
$16,465
$16,447
December 31
2007
2006
$ 51,953
3,198
$ 54,989
2,932
30,032
33,637
181,248
6,935
30,919
17,063
20,661
162,291
6,488
19,118
$337,922
$283,542
$ 40,667
13,226
$ 31,852
9,929
1,464
–
135,762
146,803
857
76
105,556
135,272
$337,922
$283,542
Bank of America 2007 173
Condensed Statement of Cash Flows
(Dollars in millions)
Operating activities
Net income
Reconciliation of net income to net cash provided by operating activities:
Equity in undistributed (earnings) losses of subsidiaries
Other operating activities, net
Net cash provided by operating activities
Investing activities
Net (purchases) sales of securities
Net payments to subsidiaries
Other investing activities, net
Net cash used in investing activities
Financing activities
Net increase (decrease) in commercial paper and other short-term borrowings
Proceeds from issuance of long-term debt
Retirement of long-term debt
Proceeds from issuance of preferred stock
Redemption of preferred stock
Proceeds from issuance of common stock
Common stock repurchased
Cash dividends paid
Other financing activities, net
Net cash provided by financing activities
Net increase (decrease) in cash held at bank subsidiaries
Cash held at bank subsidiaries at January 1
Cash held at bank subsidiaries at December 31
Year Ended December 31
2007
2006
2005
$ 14,982
$ 21,133
$ 16,465
4,247
(276)
18,953
(839)
(44,457)
(824)
(46,120)
8,873
38,730
(12,056)
1,558
–
1,118
(3,790)
(10,878)
576
24,131
(3,036)
54,989
(6,598)
2,159
16,694
(705)
(13,673)
(1,300)
(15,678)
12,519
28,412
(15,506)
2,850
(270)
3,117
(14,359)
(9,661)
(2,799)
4,303
5,319
49,670
(7,390)
(1,035)
8,040
403
(3,145)
(3,001)
(5,743)
(292)
20,477
(11,053)
–
–
2,846
(5,765)
(7,683)
1,705
235
2,532
47,138
$ 51,953
$ 54,989
$ 49,670
Note 24 – Performance by Geographical Area
Since the Corporation’s operations are highly integrated, certain asset, liability, income and expense amounts must be allocated to arrive at total assets,
total revenue, net of interest expense, income before income taxes and net income by geographic area. The Corporation identifies its geographic perform-
ance based upon the business unit structure used to manage the capital or expense deployed in the region as applicable. This requires certain judgments
related to the allocation of revenue so that revenue can be appropriately matched with the related expense or capital deployed in the region.
(Dollars in millions)
Domestic (3)
Asia
Europe, Middle East and Africa
Latin America and the Caribbean
Total Foreign
Total Consolidated
At December 31
Year Ended December 31
Total Assets (1)
$1,529,899
1,312,912
46,359
32,886
129,303
100,928
10,185
13,011
185,847
146,825
Total
Revenue, Net
of Interest
Expense (2)
$59,731
64,381
52,944
Income
Before
Income Taxes
$18,039
28,041
21,880
1,613
1,117
909
4,097
4,835
1,783
878
2,247
1,539
6,588
8,199
4,231
1,146
637
521
894
1,843
920
845
1,452
1,159
2,885
3,932
2,600
Net Income
$13,137
18,605
14,778
721
420
344
592
1,193
603
532
915
740
1,845
2,528
1,687
$1,715,746
1,459,737
$66,319
72,580
57,175
$20,924
31,973
24,480
$14,982
21,133
16,465
Year
2007
2006
2005
2007
2006
2005
2007
2006
2005
2007
2006
2005
2007
2006
2005
2007
2006
2005
(1) Total assets include long-lived assets, which are primarily located in the U.S.
(2) There were no material intercompany revenues between geographic regions for any of the periods presented.
(3)
Includes the Corporation’s Canadian operations, which had total assets of $10.9 billion and $6.8 billion at December 31, 2007 and 2006; total revenue, net of interest expense of $770 million, $636 million and $118
million; income before income taxes of $292 million, $269 million and $73 million; and net income of $195 million, $182 million and $61 million for the years ended December 31, 2007, 2006 and 2005, respectively.
174 Bank of America 2007
Executive Offi cers and Directors
Bank of America Corporation and Subsidiaries
Executive Offi cers
Kenneth D. Lewis
Chairman, Chief Executive Offi cer
and President
Keith T. Banks
President, Global Wealth &
Investment Management
Amy Woods Brinkley
Chief Risk Offi cer
Barbara J. Desoer
Global Technology & Operations
Executive
Liam E. McGee
President, Global Consumer &
Small Business Banking
Brian T. Moynihan
President, Global Corporate &
Investment Banking
Joe L. Price
Chief Financial Offi cer
Board of Directors
William Barnet, III
Chairman, President
and Chief Executive Offi cer
The Barnet Company
Spartanburg, SC
Frank P. Bramble, Sr.
Former Executive Offi cer
MBNA Corporation
Wilmington, DE
John T. Collins
Chief Executive Offi cer
The Collins Group Inc.
Boston, MA
Gary L. Countryman
Chairman Emeritus
Liberty Mutual Group
Boston, MA
Tommy R. Franks
Retired General
United States Army
Roosevelt, OK
Charles K. Gifford
Former Chairman
Bank of America Corporation
Charlotte, NC
W. Steven Jones
Dean
Kenan-Flagler Business School
University of North Carolina
at Chapel Hill
Chapel Hill, NC
Kenneth D. Lewis
Chairman, Chief Executive
Offi cer and President
Bank of America Corporation
Charlotte, NC
Monica C. Lozano
Publisher and
Chief Executive Offi cer
La Opinión
Los Angeles, CA
Walter E. Massey
President Emeritus
Morehouse College
Atlanta, GA
Thomas J. May
Chairman, President and
Chief Executive Offi cer
NSTAR
Boston, MA
Patricia E. Mitchell
President and Chief
Executive Offi cer
The Paley Center for Media
New York, NY
Thomas M. Ryan
Chairman, President and
Chief Executive Offi cer
CVS Caremark Corporation
Woonsocket, RI
O. Temple Sloan, Jr.
Chairman
General Parts International Inc.
Raleigh, NC
Meredith R. Spangler
Trustee and Board Member
C.D. Spangler Construction Company
Charlotte, NC
Robert L. Tillman
Former Chairman and CEO Emeritus
Lowe’s Companies Inc.
Mooresville, NC
Jackie M. Ward
Retired Chairman and CEO
Computer Generation Inc.
Atlanta, GA
Bank of America 2007 175
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Corporate Information
Bank of America Corporation and Subsidiaries
Headquarters
The principal executive offi ces of Bank of America Corporation
(the Corporation) are located in the Bank of America Corporate
Center, Charlotte, NC 28255.
Customers
For assistance with Bank of America products and services,
call 1.800.900.9000, or visit the Bank of America Web site at
www.bankofamerica.com.
Shareholders
The Corporation’s common stock is listed on the New York Stock
Exchange (NYSE) under the symbol BAC. The Corporation’s
common stock is also listed on the London Stock Exchange,
and certain shares are listed on the Tokyo Stock Exchange.
The stock is typically listed as BankAm in newspapers. As of
February 20, 2008, there were 263,761 registered shareholders
of the Corporation’s common stock.
The Corporation’s annual meeting of shareholders will be held
at 10 a.m. local time on April 23, 2008, in the Belk Theater of the
North Carolina Blumenthal Performing Arts Center, 130 North
Tryon Street, Charlotte, NC.
For general shareholder information, call Jane Smith, share-
holder relations manager, at 1.800.521.3984. For inquiries
concerning dividend checks, dividend reinvestment plan, elec-
tronic deposit of dividends, tax information, transferring
ownership, address changes or lost or stolen stock certifi -
cates, contact Bank of America Shareholder Services at Com-
putershare Trust Company, N.A., via our Internet access at
www.computershare.com/bac; call 1.800.642.9855; or write to
P.O. Box 43078, Providence, RI 02940-3078.
Analysts, portfolio managers and other investors seeking
additional information about Bank of America stock should
contact our Investor Relations group at 1.704.386.5681. Visit
the Investor Relations area of the Bank of America Web site,
http://investor.bankofamerica.com, for stock and dividend infor-
mation, fi nancial news releases, links to Bank of America SEC
fi lings, electronic versions of our annual reports and other items
of interest to the Corporation’s shareholders.
Annual Report on Form 10-K
The Corporation’s 2007 Annual Report on Form 10-K is available
at http://investor.bankofamerica.com. The Corporation also will
provide a copy of the 2007 Annual Report on Form 10-K (without
exhibits) upon written request addressed to:
News Media
News media seeking information should visit the Newsroom
area of the Bank of America Web site for news releases,
speeches and other items relating to the Corporation, including
a complete list of the Corporation’s media relations specialists
grouped by business specialty or geography. To do so, go to
www.bankofamerica.com/newsroom.
NYSE and SEC Certifi cations
The Corporation fi led with the New York Stock Exchange (NYSE)
on May 1, 2007, the Annual CEO Certifi cation as required by the
NYSE corporate governance listing standards. The Corporation
has also fi led, as exhibits to its 2007 Annual Report on Form
10-K, the CEO and CFO certifi cations as required by Section 302
and Section 906 of the Sarbanes-Oxley Act.
Disclosures
Global Wealth & Investment Management is a division of Bank of America
Corporation. Banc of America Investment Services, Inc.®, U.S. Trust,
Bank of America Private Wealth Management and Columbia Management
are all affi liates within Global Wealth & Investment Management.
Premier Banking & InvestmentsTM is offered through Bank of America Premier
Banking® and Banc of America Investment Services, Inc.
Banking products are provided by Bank of America, N.A., Member FDIC.
Investment products:
Are Not FDIC Insured May Lose Value Are Not Bank Guaranteed
Banc of America Investment Services, Inc. is a registered broker-dealer, member
FINRA and SIPC, and a nonbank subsidiary of Bank of America, N.A.
U.S. Trust, Bank of America Private Wealth Management operates through
Bank of America, N.A., a wholly owned subsidiary of Bank of America
Corporation.
Columbia Management Group, LLC (“Columbia Management”) is the
investment management division of Bank of America Corporation.
Columbia Management entities furnish investment management
services and products for institutional and individual investors.
The customer opinions expressed in this report refl ect personal
experiences. Other customer experiences may vary.
Bank of America Corporation
Shareholder Relations Department
NC1-002-29-01
101 South Tryon Street
Charlotte, NC 28255
176 Bank of America 2007
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Contains more than 10% post-consumer content.
© 2008 Bank of America Corporation
00-04-1363B
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