Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2007

or

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

EXCHANGE ACT OF 1934

Commission file number:

1-6523

Exact name of registrant as specified in its charter:

Bank of America Corporation

State of incorporation:

Delaware

IRS Employer Identification Number:

56-0906609

Address of principal executive offices:

Bank of America Corporate Center

100 N. Tryon Street

Charlotte, North Carolina 28255

Registrant’s telephone number, including area code:

(704) 386-5681

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ü   No    

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

 

Large accelerated filer  ü   Accelerated filer      

Non-accelerated filer    

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).  Yes     No  ü

On April 30, 2007, there were 4,437,771,404 shares of Bank of America Corporation Common Stock outstanding.

 



Table of Contents

Bank of America Corporation

March 31, 2007 Form 10-Q

              Page

INDEX

         

Part I.

 

Item 1.

  

Financial Statements:

    

Financial
Information

    

Consolidated Statement of Income for the Three Months Ended March 31, 2007 and 2006

     3
    

Consolidated Balance Sheet at March 31, 2007 and December 31, 2006

     4
    

Consolidated Statement of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2007 and 2006

     5
    

Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2007 and 2006

     6
    

Notes to Consolidated Financial Statements

     7
 

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      31
    

Table of Contents

     31
    

Discussion and Analysis

     32
 

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

     91
 

Item 4.

  

Controls and Procedures

     92
                 

Part II.

Other Information

 

Item 1.

  

Legal Proceedings

     92
 

Item 1A.

  

Risk Factors

     92
 

Item 2.

   Unregistered Sales of Equity Securities
and the Use of Proceeds
     92
 

Item 5.

  

Other Information

     92
 

Item 6.

  

Exhibits

     93
 

Signature

     94
 

Index to Exhibits

     95

 

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Table of Contents

Bank of America Corporation and Subsidiaries

Consolidated Statement of Income

     Three Months Ended March 31
(Dollars in millions, except per share information)    2007    2006

Interest income

     

Interest and fees on loans and leases

   $         12,884    $ 11,127

Interest on debt securities

     2,380      3,014

Federal funds sold and securities purchased under agreements to resell

     1,979      1,709

Trading account assets

     2,273      1,548

Other interest income

     1,044      727

Total interest income

     20,560      18,125

Interest expense

     

Deposits

     4,034      3,007

Short-term borrowings

     5,318      4,309

Trading account liabilities

     892      517

Long-term debt

     2,048      1,516

Total interest expense

     12,292      9,349

Net interest income

     8,268      8,776

Noninterest income

     

Card income

     3,333      3,434

Service charges

     2,072      1,901

Investment and brokerage services

     1,149      1,103

Investment banking income

     638      501

Equity investment gains

     1,014      718

Trading account profits

     872      1,060

Mortgage banking income

     213      137

Other income

     534      47

Total noninterest income

     9,825      8,901

Total revenue

     18,093      17,677

Provision for credit losses

     1,235      1,270

Gains on sales of debt securities

     62      14

Noninterest expense

     

Personnel

     5,025      4,813

Occupancy

     713      701

Equipment

     350      344

Marketing

     555      575

Professional fees

     229      218

Amortization of intangibles

     389      440

Data processing

     437      410

Telecommunications

     251      220

Other general operating

     1,037      1,105

Merger and restructuring charges

     111      98

Total noninterest expense

     9,097      8,924

Income before income taxes

     7,823      7,497

Income tax expense

     2,568      2,511

Net income

   $ 5,255    $ 4,986

Net income available to common shareholders

   $ 5,209    $ 4,981

Per common share information

     

Earnings

   $ 1.18    $ 1.08

Diluted earnings

   $ 1.16    $ 1.07

Dividends paid

   $ 0.56    $ 0.50

Average common shares issued and outstanding (in thousands)

     4,432,664      4,609,481

Average diluted common shares issued and outstanding (in thousands)

     4,497,028      4,666,405

See accompanying Notes to Consolidated Financial Statements.

 

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Bank of America Corporation and Subsidiaries

Consolidated Balance Sheet

(Dollars in millions)    March 31
2007
    December 31
2006
 

Assets

    

Cash and cash equivalents

   $ 31,549     $ 36,429  

Time deposits placed and other short-term investments

     12,037       13,952  

Federal funds sold and securities purchased under agreements to resell (includes $1,490 measured at fair value at March 31, 2007 and $138,639 and $135,409 pledged as collateral)

     138,646       135,478  

Trading account assets (includes $70,501 and $92,274 pledged as collateral)

     174,218       153,052  

Derivative assets

     25,279       23,439  

Debt securities:

    

Available-for-sale (includes $127,143 and $83,785 pledged as collateral)

     180,961       192,806  

Held-to-maturity, at cost (market value—$925 and $40)

     925       40  

Total debt securities

     181,886       192,846  

Loans and leases (includes $3,859 measured at fair value at March 31, 2007 and $42,306 and $14,290 pledged as collateral)

     723,633       706,490  

Allowance for loan and lease losses

     (8,732 )     (9,016 )

Loans and leases, net of allowance

     714,901       697,474  

Premises and equipment, net

     9,271       9,255  

Mortgage servicing rights (includes $2,963 and $2,869 measured at fair value)

     3,141       3,045  

Goodwill

     65,696       65,662  

Intangible assets

     9,217       9,422  

Other assets (includes $27,565 measured at fair value at March 31, 2007)

     136,316       119,683  

Total assets

   $ 1,502,157     $ 1,459,737  

Liabilities

    

Deposits in domestic offices:

    

Noninterest-bearing

   $ 174,082     $ 180,231  

Interest-bearing (includes $554 measured at fair value at March 31, 2007)

     425,197       418,100  

Deposits in foreign offices:

    

Noninterest-bearing

     3,346       4,577  

Interest-bearing

     90,176       90,589  

Total deposits

     692,801       693,497  

Federal funds purchased and securities sold under agreements to repurchase

     234,413       217,527  

Trading account liabilities

     77,289       67,670  

Derivative liabilities

     17,946       16,339  

Commercial paper and other short-term borrowings

     156,844       141,300  

Accrued expenses and other liabilities (includes $377 measured at fair value at March 31, 2007 and $374 and $397 of reserve for unfunded lending commitments)

     35,446       42,132  

Long-term debt

     152,562       146,000  

Total liabilities

     1,367,301       1,324,465  

Commitments and contingencies (Notes 8 and 10)

    

Shareholders’ equity

    

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

     2,851       2,851  

Common stock and additional paid-in capital, $0.01 par value; authorized—7,500,000,000 shares; issued and outstanding—4,439,069,837 and 4,458,151,391 shares

     60,536       61,574  

Retained earnings

     79,996       79,024  

Accumulated other comprehensive income (loss)

     (7,660 )     (7,711 )

Other

     (867 )     (466 )

Total shareholders’ equity

     134,856       135,272  

Total liabilities and shareholders’ equity

   $ 1,502,157     $ 1,459,737  

See accompanying Notes to Consolidated Financial Statements.

 

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Bank of America Corporation and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity

(Dollars in millions, shares in thousands)   Preferred  
Stock  
  Common Stock and
Additional Paid-in
Capital
    Retained
Earnings
   

Accumulated
Other
Comprehensive
Income

(Loss) (1)

    Other     Total
Shareholders’
Equity
    Comprehensive
Income
 
    Shares     Amount            

Balance, December 31, 2005

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

Net income

          4,986           4,986     $ 4,986  

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

            (2,019 )       (2,019 )     (2,019 )

Net changes in unrealized gains on foreign currency translation adjustments

            42         42       42  

Net changes in derivatives

            552         552       552  

Cash dividends paid:

               

Common

          (2,329 )         (2,329 )  

Preferred

          (5 )         (5 )  

Common stock issued under employee plans and related tax benefits

    38,935       1,704           (346 )     1,358    

Stock issued in acquisition (2)

    631,145       29,377             29,377    

Common stock repurchased

    (88,450 )     (4,069 )           (4,069 )  

Balance, March 31, 2006

  $ 271   4,581,318     $ 68,705     $ 70,204     $ (8,981 )   $ (773 )   $ 129,426     $ 3,561  

Balance, December 31, 2006

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

Cumulative adjustment for accounting changes (3):

               

Leveraged leases

          (1,381 )         (1,381 )  

Fair value option and measurement

          (208 )         (208 )  

Income tax uncertainties

          (146 )         (146 )  

Net income

          5,255           5,255     $ 5,255  

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

            (108 )       (108 )     (108 )

Net changes in unrealized losses on foreign currency translation adjustments

            (12 )       (12 )     (12 )

Net changes in derivatives

            140         140       140  

Amortization of costs included in net periodic benefit costs

            31         31       31  

Cash dividends paid:

               

Common

          (2,502 )         (2,502 )  

Preferred

          (46 )         (46 )  

Common stock issued under employee plans and related tax benefits

    28,919       1,468           (401 )     1,067    

Common stock repurchased

    (48,000 )     (2,506 )           (2,506 )  

Balance, March 31, 2007

  $ 2,851   4,439,070     $ 60,536     $ 79,996     $ (7,660 )   $ (867 )   $ 134,856     $ 5,306  

 

(1)

At March 31, 2007 and December 31, 2006, accumulated other comprehensive income (loss) (OCI) includes net gains (losses) on derivatives of $(3,557) million and $(3,697) million; net unrealized gains (losses) on available-for-sale (AFS) debt and marketable equity securities of $(2,841) million and $(2,733) million; unamortized net periodic benefit costs of $(1,397) million and $(1,428) million, and net unrealized gains (losses) on foreign currency translation adjustments of $135 million and $147 million. Amounts shown are net of tax. For additional information on accumulated OCI, see Note 11 of the Consolidated Financial Statements.

(2)

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

(3)

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

See accompanying Notes to Consolidated Financial Statements.

 

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Bank of America Corporation and Subsidiaries

Consolidated Statement of Cash Flows

     Three Months Ended March 31  
(Dollars in millions)    2007      2006  

Operating activities

     

Net income

   $ 5,255      $   4,986  

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

     

Provision for credit losses

     1,235        1,270  

Gains on sales of debt securities

     (62 )      (14 )

Depreciation and premises improvements amortization

     275        278  

Amortization of intangibles

     389        440  

Deferred income tax expense

     244        326  

Net (increase) decrease in trading and derivative instruments

     (8,356 )      18,388  

Net increase in other assets

     (12,126 )      (15,790 )

Net increase (decrease) in accrued expenses and other liabilities

     (6,740 )      487  

Other operating activities, net

     255        (1,873 )

Net cash provided by (used in) operating activities

     (19,631 )      8,498  

Investing activities

     

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

     1,927        2,671  

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

     (3,348 )      12,704  

Proceeds from sales of available-for-sale debt securities

     4,173        7,032  

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

     5,157        5,357  

Purchases of available-for-sale debt securities

     (2,934 )      (26,548 )

Proceeds from maturities of held-to-maturity debt securities

     24        —    

Proceeds from sales of loans and leases

     17,527        6,819  

Other changes in loans and leases, net

     (44,304 )      (16,442 )

Net (purchases) dispositions of premises and equipment

     (358 )      140  

Proceeds from sales of foreclosed properties

     38        32  

(Acquisition) divestiture of business activities, net

     (460 )      (3,519 )

Other investing activities, net

     (2,040 )      (380 )

Net cash used in investing activities

     (24,598 )      (12,134 )

Financing activities

     

Net increase in deposits

     4,471        19,021  

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

     16,985        (4,521 )

Net increase (decrease) in commercial paper and other short-term borrowings

     15,617        (18,828 )

Proceeds from issuance of long-term debt

     16,927        10,197  

Retirement of long-term debt

     (10,050 )      (1,330 )

Proceeds from issuance of common stock

     323        948  

Common stock repurchased

     (2,506 )      (4,069 )

Cash dividends paid

     (2,548 )      (2,334 )

Excess tax benefits of share-based payments

     148        75  

Other financing activities, net

     (10 )      50  

Net cash provided by (used in) financing activities

     39,357        (791 )

Effect of exchange rate changes on cash and cash equivalents

     (8 )      3  

Net decrease in cash and cash equivalents

     (4,880 )      (4,424 )

Cash and cash equivalents at January 1

     36,429        36,999  

Cash and cash equivalents at March 31

   $ 31,549      $ 32,575  

During the three months ended March 31, 2007, the Corporation sold its operations in Chile and Uruguay for 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 the three months ended March 31, 2007, there were $3.7 billion of AFS debt securities that were transferred to trading account assets following the adoption of SFAS 159.

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

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

See accompanying Notes to Consolidated Financial Statements.

 

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Bank of America Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Bank of America Corporation and its subsidiaries (the Corporation), through its banking and nonbanking subsidiaries, provides a diverse range of financial services and products throughout the U.S. and in selected international markets. At March 31, 2007, the Corporation operated its banking activities primarily under two charters: Bank of America, National Association (Bank of America, N.A.) and FIA Card Services, N.A.

 

NOTE 1 – Summary of Significant Accounting Principles

 

Principles of Consolidation and Basis of Presentation

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

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

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

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

 

Recently Adopted Accounting Pronouncements

Effective January 1, 2007, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” (SFAS 157) and SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). SFAS 157 defines fair value, establishes a framework for measuring fair value under accounting principles generally accepted in the United States (GAAP) and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The impact of adopting both SFAS 157 and SFAS 159 reduced the beginning balance of retained earnings as of January 1, 2007 by $208 million, net of tax. Subsequent changes in fair value of these financial assets and liabilities are recognized in earnings when they occur. For additional information on the fair value of certain financial assets and liabilities, see Note 14 of the Consolidated Financial Statements.

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

Effective January 1, 2007, the Corporation adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 clarifies the accounting and reporting for income taxes where interpretation of the tax law may be uncertain. FIN 48 prescribes a

 

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comprehensive model for the financial statement recognition, measurement, presentation and disclosure of income tax uncertainties with respect to positions taken or expected to be taken in income tax returns. The adoption of FIN 48 reduced the beginning balance of retained earnings as of January 1, 2007 by $146 million and increased goodwill by $52 million. For additional information on income taxes, see Note 13 of the Consolidated Financial Statements.

For additional information on recently issued accounting pronouncements and other significant accounting principles, see Note 1 of the Consolidated Financial Statements of the Corporation’s 2006 Annual Report on Form 10-K.

 

NOTE 2 – MBNA Merger and Restructuring Activity

 

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

 

Merger and Restructuring Charges

Merger and restructuring charges are recorded in the Consolidated Statement of Income and include incremental costs to integrate the operations of the Corporation and MBNA. These charges represent costs associated with these one-time activities and do not represent ongoing costs of the fully integrated combined organization. The following table presents severance and employee-related charges, systems integrations and related charges, and other merger-related charges.

 

       Three Months Ended March 31
(Dollars in millions)      2007      2006

Severance and employee-related charges

     $     12      $     20

Systems integrations and related charges

       79        48

Other

       20        30

Total merger and restructuring charges

     $ 111      $ 98

 

Exit Cost and Restructuring Reserves

 

As of December 31, 2006, there were $125 million of exit cost reserves, including $121 million for severance, relocation and other employee-related expenses and $4 million for contract terminations. Cash payments of $26 million during the three months ended March 31, 2007 consisted of $24 million of severance, relocation and other employee-related costs and $2 million of contract terminations. The impact of these items reduced the balance in the liability to $99 million at March 31, 2007.

As of December 31, 2006, there were $67 million of restructuring reserves remaining, including $58 million related to severance and other employee-related expenses and $9 million related to contract terminations. During the three months ended March 31, 2007, $11 million was recorded to the restructuring reserves. During the three months ended March 31, 2007, cash payments of $28 million for severance and other employee-related costs and $5 million of contract terminations have reduced this liability. The net impact of these items resulted in a balance of $45 million at March 31, 2007.

Payments under exit cost and restructuring reserves associated with the MBNA merger are expected to be substantially completed in 2007. The following table presents the changes in exit cost and restructuring reserves for the three months ended March 31, 2007 and 2006.

 

     Three Months Ended March 31
     Exit Cost
Reserves (1)
    Restructuring
Reserves (2)
(Dollars in millions)    2007     2006     2007     2006

Balance, January 1,

   $ 125     $     $ 67     $

MBNA exit costs

           269            

Restructuring charges

                 11       34

Cash payments

     (26 )     (22 )     (33 )    

Balance, March 31

   $ 99     $ 247     $ 45     $ 34

 

(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.

 

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NOTE 3 – Trading Account Assets and Liabilities

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

 

     March 31    December 31
(Dollars in millions)    2007    2006

Trading account assets

     

Corporate securities, trading loans and other

   $ 63,705    $ 53,923

U.S. government and agency securities (1)

     43,629      36,656

Equity securities

     31,362      27,103

Mortgage trading loans and asset-backed securities

     16,111      15,449

Foreign sovereign debt

     19,411      19,921

Total trading account assets

   $ 174,218    $ 153,052

Trading account liabilities

     

U.S. government and agency securities

   $ 32,713    $ 26,760

Equity securities

     26,540      23,908

Foreign sovereign debt

     10,133      9,261

Corporate securities and other

     7,903      7,741

Total trading account liabilities

   $ 77,289    $ 67,670

 

(1)

Includes $23.0 billion and $22.7 billion at March 31, 2007 and December 31, 2006 of government-sponsored enterprise obligations that are not backed by the full faith and credit of the U.S. Government.

 

NOTE 4 – Derivatives

All derivatives are recognized on the Consolidated Balance Sheet at fair value, taking into consideration the effects of legally enforceable master netting agreements that allow the Corporation to settle positive and negative positions and offset cash collateral held with the same counterparty on a net basis. For exchange-traded contracts, fair value is based on quoted market prices. For non-exchange traded contracts, fair value is based on dealer quotes, pricing models or quoted prices for instruments with similar characteristics. The Corporation designates at inception whether the derivative contract is considered hedging or non-hedging for SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133) accounting purposes. Derivatives held for trading purposes are included in derivative assets or derivative liabilities with changes in fair value reflected in trading account profits. Other derivatives that are used as economic hedges, but not designated in a hedging relationship for accounting purposes, are also included in derivative assets or derivative liabilities with changes in fair value recorded in mortgage banking income or other income. A detailed discussion of derivative trading activities and asset and liability management (ALM) activities are presented in Notes 1 and 4 of the Consolidated Financial Statements of the Corporation’s 2006 Annual Report on Form 10-K.

 

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The following table presents the contract/notional amounts and credit risk amounts at March 31, 2007 and December 31, 2006 of all the Corporation’s derivative positions. These derivative positions are primarily executed in the over-the-counter market. Credit risk associated with derivatives is measured as the net replacement cost in the event the counterparties with contracts in a gain position to the Corporation completely fail to perform under the terms of those contracts. The credit risk amounts take into consideration the effects of legally enforceable master netting agreements, and on an aggregate basis have been reduced by the cash collateral applied against derivative assets. At March 31, 2007 and December 31, 2006, the cash collateral applied against derivative assets on the Consolidated Balance Sheet was $8.7 billion and $7.3 billion. In addition, at March 31, 2007 and December 31, 2006, the cash collateral placed against derivative liabilities was $6.0 billion and $6.5 billion.

 

      March 31, 2007    December 31, 2006

(Dollars in millions)

   Contract/
Notional
   Credit
Risk
   Contract/
Notional
   Credit
Risk

Interest rate contracts

           

Swaps

   $ 19,305,549    $ 9,834    $ 18,185,655    $ 9,601

Futures and forwards

     2,690,359      56      2,283,579      103

Written options

     1,264,115           1,043,933     

Purchased options

     1,645,827      1,808      1,308,888      2,212

Foreign exchange contracts

           

Swaps

     492,428      4,292      451,462      4,241

Spot, futures and forwards

     1,378,049      2,296      1,234,009      2,995

Written options

     421,185           464,420     

Purchased options

     494,530      1,079      414,004      1,391

Equity contracts

           

Swaps

     47,308      1,225      32,247      577

Futures and forwards

     22,511      31      19,947      24

Written options

     197,572           102,902     

Purchased options

     233,146      10,759      104,958      7,513

Commodity contracts

           

Swaps

     6,565      948      4,868      1,129

Futures and forwards

     18,481      6      13,513      2

Written options

     12,484           9,947     

Purchased options

     10,663      199      6,796      184

Credit derivatives

     2,025,200      1,482      1,497,869      756

Credit risk before cash collateral

        34,015         30,728

Less: Cash collateral applied

            8,736             7,289

Total derivative assets

          $ 25,279           $ 23,439

The average fair value of derivative assets, less cash collateral, for the three months ended March 31, 2007 and December 31, 2006 was $25.1 billion and $24.3 billion. The average fair value of derivative liabilities for the three months ended March 31, 2007 and December 31, 2006 was $17.7 billion and $17.1 billion.

 

Fair Value and Cash Flow Hedges

The Corporation uses various types of interest rate and foreign exchange derivative contracts to protect against changes in the fair value of its assets and liabilities due to fluctuations in interest rates and exchange rates (fair value hedges). The Corporation also uses these types of contracts to protect against changes in the cash flows of its assets and liabilities, and other forecasted transactions (cash flow hedges). During the next 12 months, net losses on derivative instruments included in accumulated other comprehensive income (OCI) of approximately $1.0 billion ($653 million after-tax) are expected to be reclassified into earnings. These net losses reclassified into earnings are expected to decrease income or increase expense on the respective hedged items.

 

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The following table summarizes certain information related to the Corporation’s derivative hedges accounted for under SFAS 133 for the three months ended March 31, 2007 and 2006.

 

     Three Months Ended March 31  
(Dollars in millions)    2007     2006  

Fair value hedges

    

Hedge ineffectiveness recognized in earnings (1)

   $ 2     $ (19 )
Cash flow hedges     

Hedge ineffectiveness recognized in earnings (1)

           (1 )
Net investment hedges     

Gains (losses) included in foreign currency translation adjustments within accumulated OCI

     (35 )     10  

 

(1)

Hedge ineffectiveness was recognized within net interest income in the Consolidated Statement of Income for the three months ended March 31, 2007 and 2006.

 

NOTE 5 – Securities

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

 

(Dollars in millions)    Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Fair
Value

Available-for-sale debt securities, March 31, 2007

          

U.S. Treasury securities and agency debentures

   $ 692    $    $ (6 )   $ 686

Mortgage-backed securities

     157,148      3      (4,490 )     152,661

Foreign securities

     7,935      2      (44 )     7,893

Corporate/Agency bonds

     4,151           (73 )     4,078

Other taxable securities (1)

     9,814      9      (48 )     9,775

Total taxable securities

     179,740      14      (4,661 )     175,093

Tax-exempt securities

     5,887      12      (31 )     5,868

Total available-for-sale debt securities

   $ 185,627    $ 26    $ (4,692 )   $ 180,961

Available-for-sale marketable equity securities (2)

   $ 2,648    $ 184    $ (73 )   $ 2,759

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

          

U.S. Treasury securities and agency debentures

   $ 697    $    $ (9 )   $ 688

Mortgage-backed securities

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

Foreign securities

     12,126      2      (78 )     12,050

Corporate/Agency bonds

     4,699           (96 )     4,603

Other taxable securities (1)

     12,077      10      (38 )     12,049

Total taxable securities

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

Tax-exempt securities

     6,493      64      (34 )     6,523

Total available-for-sale debt securities

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

Available-for-sale marketable equity securities (2)

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

Held-to-maturity debt securities, March 31, 2007

          

Taxable securities

   $ 909    $    $     $ 909

Tax-exempt securities

     16                 16

Total held-to-maturity debt securities

   $ 925    $    $     $ 925

Held-to-maturity debt securities, December 31, 2006

          

Taxable securities

   $ 1    $    $     $ 1

Tax-exempt securities

     39                 39

Total held-to-maturity debt securities

   $ 40    $    $     $ 40

 

(1)

Includes asset-backed securities.

(2)

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

 

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At March 31, 2007 and December 31, 2006, accumulated net unrealized losses on AFS debt and marketable equity securities included in accumulated OCI were $2.8 billion and $2.9 billion, net of the related income tax benefit of $1.8 billion and $1.7 billion, respectively. Effective January 1, 2007, the Corporation redesignated $909 million of securities at amortized cost from AFS to held-to-maturity.

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

 

Strategic Investments

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

Additionally, the Corporation owns $2.6 billion in preferred stock of Banco Itaú Holding Financeira S.A. (Banco Itaú), which is recorded in other assets. These shares are accounted for at cost as they are non-transferable until May 2009.

The shares of CCB and Banco Itaú are currently carried at cost but, as required by GAAP, will be accounted for as AFS marketable equity securities and carried at fair value with an offset to accumulated OCI beginning in the fourth quarter of 2007 and second quarter of 2008, respectively. The fair values of the CCB shares and Banco Itaú shares were approximately $10.9 billion and $3.1 billion at March 31, 2007.

For additional information on securities, see Notes 1 and 5 of the Consolidated Financial Statements of the Corporation’s 2006 Annual Report on Form 10-K.

 

NOTE 6 – Outstanding Loans and Leases

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

 

(Dollars in millions)    March 31
2007
   December 31
2006

Consumer

     

Residential mortgage

   $ 254,845    $ 241,181

Credit card—domestic

     54,490      61,195

Credit card—foreign

     11,430      10,999

Home equity (1)

     91,725      87,896

Direct/Indirect consumer (1)

     62,124      55,501

Other consumer (1, 2)

     8,189      8,933

Total consumer

     482,803      465,705

Commercial

     

Commercial—domestic

     160,190      161,982

Commercial real estate (3)

     36,022      36,258

Commercial lease financing

     19,988      21,864

Commercial—foreign

     20,771      20,681

Total commercial loans measured at historical cost

     236,971      240,785

Commercial loans measured at fair value (4)

     3,859      n/a

Total commercial

     240,830      240,785

Total loans and leases

   $ 723,633    $ 706,490

 

(1)

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

(2)

Includes foreign consumer loans of $4.7 billion and $6.2 billion, and consumer finance loans of $3.5 billion and $2.8 billion at March 31, 2007 and December 31, 2006.

(3)

Includes domestic commercial real estate loans of $35.4 billion and $35.7 billion, and foreign commercial real estate loans of $606 million and $578 million at March 31, 2007 and December 31, 2006.

(4)

Certain commercial loans are measured at fair value in accordance with SFAS 159 and include commercial – domestic loans of $2.75 billion, commercial — foreign loans of $932 million and commercial real estate loans of $179 million at March 31, 2007. See Note 14 of the Consolidated Financial Statements for additional discussion of fair value for certain financial instruments.

 

n/a

= not applicable

 

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

 

(Dollars in millions)    March 31
2007
   December 31
2006

Commercial—domestic

   $ 513    $ 586

Commercial real estate

     189      118

Commercial—foreign

     29      13

Total impaired loans

   $ 731    $ 717

At March 31, 2007 and December 31, 2006, nonperforming loans and leases, including impaired and nonaccrual consumer loans, totaled $2.0 billion and $1.8 billion. In addition, included in other assets were consumer and commercial nonperforming loans held-for-sale of $94 million and $80 million at March 31, 2007 and December 31, 2006.

 

NOTE 7 – Allowance for Credit Losses

The following table summarizes the changes in the allowance for credit losses for the three months ended March 31, 2007 and 2006.

 

    

Three Months Ended

          March 31          

 
(Dollars in millions)    2007     2006  

Allowance for loan and lease losses, January 1

   $ 9,016     $ 8,045  

Transition adjustment due to the adoption of SFAS 159

     (32 )     —    

MBNA balance, January 1, 2006

     —         577  

Loans and leases charged off

     (1,743 )     (1,117 )

Recoveries of loans and leases previously charged off

     316       295  

Net charge-offs

     (1,427 )     (822 )

Provision for loan and lease losses

     1,228       1,270  

Other

     (53 )     (3 )

Allowance for loan and lease losses, March 31

     8,732       9,067  

Reserve for unfunded lending commitments, January 1

     397       395  

Transition adjustment due to the adoption of SFAS 159

     (28 )     —    

Provision for unfunded lending commitments

     7       —    

Other

     (2 )     —    

Reserve for unfunded lending commitments, March 31

     374       395  

Total allowance for credit losses

   $ 9,106     $ 9,462  

 

NOTE 8 – Securitizations

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

 

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The Corporation also uses other special purpose financing entities to access the commercial paper market for other lending, leasing and real estate activities.

As of March 31, 2007 and December 31, 2006 the aggregate debt securities outstanding for the Corporation’s credit card securitization trusts were $97.9 billion and $96.8 billion. Key assumptions used in measuring the fair value of certain interests that continue to be held by the Corporation (included in other assets) from credit card securitizations and the sensitivity of the current fair value of residual cash flows to changes in those assumptions are as follows:

 

(Dollars in millions)    March 31
2007
          December 31
2006
 
Carrying amount of residual interests (at fair value) (1)    $ 2,935        $ 2,929  
Balance of unamortized securitized loans      99,507          98,295  
Weighted average life to call or maturity (in years)      0.3          0.3  
Monthly payment rate      11.0-16.7     %      11.2-19.8     %
Impact on fair value of 10% favorable change    $ 56        $ 43  
Impact on fair value of 25% favorable change      162          133  
Impact on fair value of 10% adverse change      (41 )        (38 )
Impact on fair value of 25% adverse change      (92 )        (82 )
Expected credit losses (annual rate)      3.3-6.0     %      3.8-5.8     %
Impact on fair value of 10% favorable change    $ 107        $ 86  
Impact on fair value of 25% favorable change      268          218  
Impact on fair value of 10% adverse change      (107 )        (85 )
Impact on fair value of 25% adverse change      (268 )        (211 )
Residual cash flows discount rate (annual rate)      12.0     %      12.5     %
Impact on fair value of 100 bps favorable change    $ 14        $ 12  
Impact on fair value of 200 bps favorable change      21          17  
Impact on fair value of 100 bps adverse change      (16 )        (14 )
Impact on fair value of 200 bps adverse change      (32 )          (27 )

 

(1)

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

The sensitivities in the preceding table are hypothetical and should be used with caution. As the amounts indicate, changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of an interest that continues to be held by the Corporation is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. Additionally, the Corporation has the ability to hedge interest rate risk associated with retained residual positions. The above sensitivities do not reflect any hedge strategies that may be undertaken to mitigate such risk.

Principal proceeds from collections reinvested in revolving credit card securitizations were $44.7 billion and $39.1 billion for the three months ended March 31, 2007 and 2006. Contractual credit card servicing fee income totaled $509 million and $440 million for the three months ended March 31, 2007 and 2006. Other cash flows received on credit card securitization interests that continued to be held by the Corporation were $1.7 billion and $1.8 billion for the three months ended March 31, 2007 and 2006.

 

Variable Interest Entities

 

At March 31, 2007 and December 31, 2006, the assets and liabilities of the Corporation’s multi-seller asset-backed commercial paper conduits that have been consolidated in accordance with FASB Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” were reflected in AFS and held-to-maturity debt securities, other assets, and commercial paper and other short-term borrowings. As of March 31, 2007 and December 31, 2006, the Corporation held $10.6 billion and $10.5 billion of assets in these entities, and in the unlikely event that all of the assets in the VIEs become worthless, the Corporation’s maximum loss exposure associated with these entities including unfunded lending commitments would be approximately $13.2 billion and $12.9 billion. In addition, the Corporation had net investments in leveraged lease trusts totaling $6.5 billion and $8.6 billion at March 31, 2007 and

 

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December 31, 2006. These amounts, which were reflected in loans and leases, represent the Corporation’s maximum loss exposure to these entities in the unlikely event that the leveraged lease investments become worthless. Debt issued by the leveraged lease trusts is nonrecourse to the Corporation. The Corporation also had contractual relationships with other consolidated VIEs that engage in leasing or lending activities or real estate joint ventures. As of March 31, 2007 and December 31, 2006, the amount of assets of these entities was $3.2 billion and $3.3 billion, and in the unlikely event that all of the assets in the VIEs become worthless, the Corporation’s maximum possible loss exposure would be $1.5 billion and $1.6 billion.

Additionally, the Corporation had significant variable interests in other VIEs that it did not consolidate because it was not deemed to be the primary beneficiary. In such cases, the Corporation does not absorb the majority of the entities’ expected losses nor does it receive a majority of the entities’ expected residual returns. These entities typically support the financing needs of the Corporation’s customers by facilitating their access to the commercial paper markets. The Corporation functions as administrator and provides either liquidity and letters of credit, or derivatives to the VIE. The Corporation also provides asset management and related services to or invests in other special purpose vehicles that engage in lending, investing, or real estate activities. Total assets of these entities at March 31, 2007 and December 31, 2006 were approximately $54.1 billion and $51.9 billion. Revenues associated with administration, liquidity, letters of credit and other services were approximately $33 million and $29 million for the three months ended March 31, 2007 and 2006. At March 31, 2007 and December 31, 2006, in the unlikely event that all of the assets in the VIEs become worthless, the Corporation’s maximum loss exposure associated with these VIEs would be approximately $51.7 billion and $46.0 billion, which is net of amounts syndicated.

Management does not believe losses resulting from the Corporation’s involvement with the entities discussed above will be material. See Notes 1 and 9 of the Consolidated Financial Statements of the Corporation’s 2006 Annual Report on Form 10-K for additional discussion of special purpose financing entities.

 

NOTE 9 – Goodwill and Intangibles

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

 

(Dollars in millions)    March 31
2007
   December 31
2006

Global Consumer and Small Business Banking

   $ 38,813    $ 38,760

Global Corporate and Investment Banking

     21,425      21,420

Global Wealth and Investment Management

     5,243      5,243

All Other

     215      239

Total goodwill

   $ 65,696    $ 65,662

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

 

     March 31, 2007    December 31, 2006
(Dollars in millions)    Gross Carrying
Value
   Accumulated
Amortization
   Gross Carrying
Value
   Accumulated
Amortization

Purchased credit card relationships

   $ 6,791    $ 1,360    $ 6,790    $ 1,159

Core deposit intangibles

     3,847      2,503      3,850      2,396

Affinity relationships

     1,675      259      1,650      205

Other intangibles

     1,686      660      1,525      633

Total intangible assets

   $ 13,999    $ 4,782    $ 13,815    $ 4,393

Amortization of intangibles expense was $389 million and $440 million for the three months ended March 31, 2007 and 2006. The Corporation estimates that aggregate amortization expense is expected to be approximately $370 million, $360 million, and $350 million for the second, third and fourth quarters of 2007. In addition, the Corporation estimates the aggregate amortization expense will be approximately $1.3 billion, $1.2 billion, $1.0 billion, $900 million and $800 million for 2008 through 2012, respectively.

 

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NOTE 10 – Commitments and Contingencies

 

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

 

Credit Extension Commitments

The Corporation enters into commitments to extend credit such as loan commitments, standby letters of credit and commercial letters of credit to meet the financing needs of its customers. For additional information on commitments to extend credit, see Note 13 of the Consolidated Financial Statements of the Corporation’s 2006 Annual Report on Form 10-K. The outstanding unfunded lending commitments shown in the following table have been reduced by amounts participated to other financial institutions of $36.4 billion and $30.5 billion at March 31, 2007 and December 31, 2006. The carrying amount for these commitments, which represents the liability recorded related to these instruments, at March 31, 2007 and December 31, 2006 was $782 million and $444 million. At March 31, 2007, the carrying amount included deferred revenue of $31 million, a reserve for unfunded lending commitments of $374 million and the fair value of certain unfunded commitments of $377 million that are recorded in accrued expenses and other liabilities. See Note 14 of the Consolidated Financial Statements for additional information on the adoption of SFAS 159. At March 31, 2007, the notional amount of total legally binding commitments measured at fair value in accordance with SFAS 159 was $21.5 billion. The table below only reflects the commitments notional value and excludes the fair value adjustments of $377 million. At December 31, 2006, the carrying amount included deferred revenue of $47 million and a reserve for unfunded lending commitments of $397 million.

 

(Dollars in millions)    March 31
2007
   December 31
2006

Loan commitments (1)

   $ 346,384    $ 338,205

Home equity lines of credit

     102,726      98,200

Standby letters of credit and financial guarantees

     53,235      53,006

Commercial letters of credit

     4,308      4,482

Legally binding commitments

     506,653      493,893

Credit card lines

     869,826      853,592

Total credit extension commitments

   $ 1,376,479    $ 1,347,485

 

(1)

Included at March 31, 2007 and December 31, 2006, were equity commitments of $1.7 billion and $2.8 billion, related to obligations to further fund equity investments.

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

 

Other Commitments

At March 31, 2007 and December 31, 2006, charge cards (nonrevolving card lines) to individuals and government entities, both of which are guaranteed by the U.S. government, in the amount of $9.6 billion were not included in credit card line commitments in the previous table. The outstanding balances related to these charge cards were $212 million and $193 million at March 31, 2007 and December 31, 2006.

At March 31, 2007, the Corporation had whole mortgage loan purchase commitments of $4.4 billion and whole loan sale commitments of $415 million, all of which will settle in the second quarter of 2007. At December 31, 2006, the Corporation had whole mortgage loan purchase commitments of $8.5 billion, all of which settled in the first quarter of 2007.

At March 31, 2007 the Corporation had home equity loan purchase commitments of $1.3 billion, all of which will settle in the second quarter of 2007. At December 31, 2006 the Corporation had home equity loan purchase commitments of $362 million, all of which settled in the first quarter of 2007.

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

 

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In 2005, the Corporation entered into an agreement for the committed purchase of retail automotive loans over a five-year period ending June 30, 2010. In 2006, the Corporation purchased $7.5 billion of such loans. Under the agreement, the Corporation is committed to purchase up to $5.0 billion of such loans for the period July 1, 2006 through June 30, 2007, of which $2.5 billion is still outstanding at March 31, 2007, and up to $10.0 billion in each of the agreement’s following three fiscal years. As of March 31, 2007, the remaining commitment amount was $32.5 billion.

 

Other Guarantees

The Corporation provides credit and debit card processing services to various merchants by processing credit and debit card transactions on their behalf. In connection with these services, a liability may arise in the event of a billing dispute between the merchant and a cardholder that is ultimately resolved in the cardholder’s favor and the merchant defaults upon its obligation to reimburse the cardholder. A cardholder, through its issuing bank, generally has until the later of up to six months after the date a transaction is processed or the delivery of the product or service to present a chargeback to the Corporation as the merchant processor. If the Corporation is unable to collect this amount from the merchant, it bears the loss for the amount paid to the cardholder. For the three months ended March 31, 2007 and 2006, the Corporation processed $82.8 billion and $88.3 billion of transactions and recorded losses as a result of these chargebacks of $4 million each.

At March 31, 2007 and December 31, 2006, the Corporation held as collateral approximately $26 million and $32 million of merchant escrow deposits which the Corporation has the right to offset against amounts due from the individual merchants. The Corporation also has the right to offset any payments with cash flows otherwise due to the merchant. Accordingly, the Corporation believes that the maximum potential exposure is not representative of the actual potential loss exposure. The Corporation believes the maximum potential exposure for chargebacks would not exceed the total amount of merchant transactions processed through Visa and MasterCard for the last six months, which represents the claim period for the cardholder, plus any outstanding delayed-delivery transactions. As of March 31, 2007 and December 31, 2006, the maximum potential exposure totaled approximately $162.3 billion and $176.0 billion.

For additional information on other guarantees, see Note 13 of the Consolidated Financial Statements on the Corporation’s 2006 Annual Report on Form 10-K. For additional information on recourse obligations related to residential mortgage loans sold and other guarantees related to securitizations, see Note 9 of the Consolidated Financial Statements of the Corporation’s 2006 Annual Report on Form 10-K.

 

Litigation and Regulatory Matters

The following supplements the disclosure in Note 13 of the Consolidated Financial Statements of the Corporation’s 2006 Annual Report on Form 10-K.

In re Initial Public Offering Securities Litigation

In In re Initial Public Offering Securities Litigation, on April 6, 2007, the U.S. Court of Appeals for the Second Circuit (Second Circuit) panel that vacated the district court’s class certification order denied the plaintiffs’ motion to reconsider its ruling. The plaintiffs’ petition for rehearing by the full Second Circuit is pending.

Miller

In Paul J. Miller v. Bank of America, N.A., on March 21, 2007, the California Supreme Court granted plaintiff’s petition to review the California Court Appeal’s decision reversing the trial court’s judgment.

Parmalat Finanziaria S.p.A.

In Food Holdings Ltd., et al. v. Bank of America Corp., et al., on February 28, 2007, the U.S. District Court for the Southern District of New York granted in part and denied in part the Corporation’s motion to dismiss by dismissing three of the eight counts of the complaint consisting of the claims for (1) aiding and abetting breach of fiduciary duty,

 

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(2) civil conspiracy, and (3) a request for declaratory judgment regarding the enforcement of the Corporation’s claims in the insolvency proceedings of such entities. In Parmalat Capital Finance Limited v. Bank of America Corp. et al., on February 28, 2007, the court granted the Corporation’s motion to dismiss claims based on allegations of fraud, but allowed the other claims to remain.

Refco

On April 30, 2007, the district court dismissed the claims against BAS relating to Refco’s senior subordinated notes offering in August 2004.

 

NOTE 11 – Shareholders’ Equity and Earnings Per Common Share

 

 

Common Stock

The following table presents share repurchase activity for the three months ended March 31, 2007 and 2006, including total common shares repurchased under announced programs, weighted average per share price and the remaining buyback authority under announced programs.

 

     Common
Shares
Repurchased (1)
  

Weighted
Average

Per Share
Price

         Remaining Buyback Authority (2)
(Dollars in millions, except per share information; shares in thousands)             Amounts    Shares

January 1-31, 2007

   11,800    $ 53.17       $ 18,246    251,288

February 1-28, 2007

   17,750      53.04         17,304    233,538

March 1-31, 2007

   18,450      50.86         16,366    215,088

Three months ended March 31, 2007

   48,000      52.23                 
     Common
Shares
Repurchased (3)
   Weighted
Average
Per Share
Price
        Remaining Buyback Authority (2)
(Dollars in millions, except per share information; shares in thousands)                Amounts    Shares

January 1-31, 2006

   4,500    $ 44.61       $ 9,717    149,688

February 1-28, 2006

   5,000      45.29         9,491    144,688

March 1-31, 2006

   78,950      46.15         5,847    65,738

Three months ended March 31, 2006

   88,450      46.02                 

 

(1)

Reduced shareholders’ equity by $2.5 billion and increased diluted earnings per common share by less than $0.01 for the three months ended March 31, 2007. These repurchases were partially offset by the issuance of approximately 28.9 million shares of common stock under employee plans, which increased shareholders’ equity by $1.1 billion, net of $401 million of deferred compensation related to restricted stock awards, and decreased diluted earnings per common share by $0.01 for the three months ended March 31, 2007.

(2)

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

(3)

Reduced shareholders’ equity by $4.1 billion and increased diluted earnings per common share by $0.01 for the three months ended March 31, 2006. These repurchases were partially offset by the issuance of approximately 38.9 million shares of common stock under employee plans, which increased shareholders’ equity by $1.4 billion, net of $346 million of deferred compensation related to restricted stock awards, and had no effect on diluted earnings per common share for the three months ended March 31, 2006.

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

In January 2007, the Board declared a regular quarterly cash dividend on common stock of $0.56 per share, payable on March 23, 2007 to common shareholders of record on March 2, 2007.

 

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Table of Contents
Accumulated OCI

The following table presents the changes in accumulated OCI for the three months ended March 31, 2007 and 2006, net of tax:

 

(Dollars in millions)    Securities (1, 2)     Derivatives (3)     Employee
Benefit Plans
   

Foreign

Currency

    Total  

Balance, December 31, 2006

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

Net change in fair value recorded in accumulated OCI

     98       31             (25 )     104  

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

     (206 )     109       31       13       (53 )

Balance, March 31, 2007

   $ (2,841 )   $ (3,557 )   $ (1,397 )   $ 135     $ (7,660 )

Balance, December 31, 2005

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

Net change in fair value recorded in accumulated OCI

     (1,893 )     489             42       (1,362 )

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

     (126 )     63                   (63 )

Balance, March 31, 2006

   $ (4,997 )   $ (3,786 )   $ (118 )   $ (80 )   $ (8,981 )

 

(1)

For the three months ended March 31, 2007 and 2006, the Corporation reclassified net realized gains into earnings on the sale of AFS debt securities of $39 million and $9 million net of tax, and gains on the sales of AFS marketable equity securities of $167 million and $117 million net of tax.

(2)

Accumulated OCI includes fair value loss of $29 million and a fair value gain of $170 million net of tax on certain retained interests in the Corporation’s securitization transactions at March 31, 2007 and 2006.

(3)

The amount included in accumulated OCI for terminated derivative contracts were losses of $3.4 billion and $2.5 billion, net of tax, at March 31, 2007 and 2006.

(4)

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

 

Earnings per Common Share

The calculation of earnings per common share and diluted earnings per common share for the three months ended March 31, 2007 and 2006 is presented below:

 

     Three Months Ended March 31  
(Dollars in millions, except per share information; shares in thousands)    2007     2006  

Earnings per common share

    

Net income

   $ 5,255     $ 4,986  

Preferred stock dividends

     (46 )     (5 )

Net income available to common shareholders

   $ 5,209     $ 4,981  

Average common shares issued and outstanding

     4,432,664       4,609,481  

Earnings per common share

   $ 1.18     $ 1.08  

Diluted earnings per common share

    

Net income available to common shareholders

   $ 5,209     $ 4,981  

Average common shares issued and outstanding

     4,432,664       4,609,481  

Dilutive potential common shares (1, 2)

     64,364       56,924  

Total diluted average common shares issued and outstanding

     4,497,028       4,666,405  

Diluted earnings per common share

   $ 1.16     $ 1.07  

 

(1)

For the three months ended March 31, 2007 and 2006, average options to purchase 17 million and 60 million shares were outstanding but not included in the computation of earnings per common share because they were antidilutive.

(2)

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

 

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Table of Contents
NOTE 12 – Pension and Postretirement Plans

The Corporation sponsors noncontributory trusteed qualified pension plans that cover substantially all officers and employees, a number of noncontributory nonqualified pension plans, and postretirement health and life plans. The Bank of America Pension Plan (the Pension Plan) allows participants to select from various earnings measures, which are based on the returns of certain funds or common stock of the Corporation. The participant-selected earnings measures determine the earnings rate on the individual participant account balances in the Pension Plan. A detailed discussion of these plans is presented in Note 16 of the Consolidated Financial Statements of the Corporation’s 2006 Annual Report on Form 10-K.

Net periodic benefit cost (income) for the three months ended March 31, 2007 and 2006 included the following components:

 

     Three Months Ended March 31  
    

Qualified

Pension Plans

    Nonqualified
Pension Plans
    Postretirement
Health and
Life Plans
 
(Dollars in millions)    2007     2006     2007     2006     2007     2006  

Components of net periodic benefit cost (income)

            

Service cost

   $ 86     $ 82     $ 3     $ 3     $ 3     $ 4  

Interest cost

     180       168       18       22       22       22  

Expected return on plan assets

     (316 )     (260 )     —         —         (2 )     (2 )

Amortization of transition obligation

     —         —         —         —         8       8  

Amortization of prior service cost (credits)

     12       10       (2 )     (2 )     —         —    

Recognized net actuarial loss (gain)

     33       53       5       5       (6 )     13  

Net periodic benefit cost (income)

   $ (5 )   $ 53     $ 24     $ 28     $ 25     $ 45  

During 2007, the Corporation expects to contribute $97 million and $95 million to its Nonqualified Pension Plans and Postretirement Health and Life Plans. At March 31, 2007, the Corporation had contributed $57 million and $24 million to these plans.

 

NOTE 13 – Income Taxes

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

As of January 1, 2007, the Corporation’s accrual for interest and penalties that relate to income taxes, net of taxes and payments on deposit to taxing authorities, was $769 million, including applicable interest on leveraged lease positions. Under FIN 48 the Corporation continues its policy of accruing income-tax-related interest and penalties (if applicable) within income tax expense.

The Internal Revenue Service is currently examining the Corporation’s federal income tax returns for the years 2000 through 2004. It is anticipated that the examination phase related to the years 2000 through 2002 will be completed during 2007, but management does not believe that this event will cause a significant change in the UTB balance. However, final determination will decrease the UTB balance, since resolved items would be removed whether their resolution resulted in payment or recognition. In addition, the federal income tax returns of FleetBoston Financial Corporation are currently under examination for the years 1997 through March 31, 2004. We do not expect the exam and related discussions with the IRS to be completed within the next 12 months. In addition, the federal income tax returns of MBNA for the tax years 2001 through 2004 are under examination. Management expects these examinations to be completed during 2007. As a result, it is probable that a change to the UTB balance relating to the MBNA examinations will occur, but it will not significantly affect the Corporation’s effective tax rate. All tax years subsequent to the above years remain open to examination.

 

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Table of Contents
NOTE 14 – Fair Value Disclosures

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

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

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

Transition Impact

 

(Dollars in millions)  

Ending Balance
Sheet
December 31, 2006

     Adoption
Net Gain/(Loss)
    

Opening Balance
Sheet
January 1, 2007

 

Impact of adopting SFAS 157

       

Net derivative assets and liabilities (1)

  $ 7,100      $ 22      $ 7,122  

Impact of electing the fair value option under SFAS 159

       

Loans and leases (2)

    3,968        (21 )      3,947  

Accrued expenses and other liabilities (3)

    (28 )      (321 )      (349 )

Other assets (4)

    8,778               8,778  

Available-for-sale debt securities (5)

    3,692               3,692  

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

    1,401        (1 )      1,400  

Interest-bearing deposits liability in domestic offices (7)

    (548 )      1        (547 )

Cumulative-effect adjustment (pre-tax)

       (320 )   

Tax impact

             112           

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

earnings

           $ (208 )         

 

(1)

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

(2)

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

(3)

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

(4)

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

(5)

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

(6)

Includes structured reverse repurchase agreements that are economically hedged with derivatives.

(7)

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

 

Fair Value Option

Corporate Loans and Loan Commitments

The Corporation elected to account for certain large corporate loans and loan commitments which exceeded the Corporation’s single name credit risk concentration guidelines at fair value in accordance with SFAS 159. Lending commitments, both funded and unfunded, are actively managed and monitored, and, as appropriate, credit risk for these

 

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Table of Contents

lending relationships may be mitigated through the use of credit derivatives, with our credit view and market perspectives determining the size and timing of the hedging activity. These credit derivatives do not meet the requirements for hedge accounting under SFAS 133 and are therefore carried at fair value with changes in fair value recorded in other income. Electing the fair value option allows the Corporation to account for these loans and loan commitments at fair value, which is more consistent with management’s view of the underlying economics and the manner in which they are managed. In addition, accounting for these loans and loan commitments at fair value reduces the accounting asymmetry that would otherwise result from carrying the loans at historical cost and the credit derivatives at fair value.

Fair values for the loans and loan commitments are based on market prices, where available, or discounted cash flows using market-based credit spreads of comparable debt instruments or credit derivatives of the specific borrower or 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 March 31, 2007, funded loans which the Corporation has elected to fair value had an aggregate fair value of $3.86 billion recorded in loans and leases and an aggregate outstanding principal balance of $3.93 billion. Unfunded loan commitments that the Corporation has elected to fair value had an aggregate fair value of $377 million recorded in accrued expenses and other liabilities and an aggregate committed exposure of $21.5 billion. At March 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 recorded in other income resulting from changes in fair value of these loans and loan commitments totaled $27 million during the three months ended March 31, 2007 of which $14 million related to commitments originated subsequent to January 1, 2007. These losses were significantly attributable to changes in instrument-specific credit risk. Following adoption of SFAS 159, an immaterial amount of direct loan origination fees and costs related to items for which the fair value option was elected were recognized in earnings. Previously, these items would have been capitalized and amortized to earnings over the life of the loans.

Loans Held-for-Sale

The Corporation also elected to account for certain loans held-for-sale at fair value. Electing to fair value allows a better offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting under SFAS 133. The Corporation has not elected to fair value other loans held-for-sale primarily because these loans are floating rate loans that are not economically hedged using derivative instruments. Fair values for loans held-for-sale are based on quoted market prices, where available, or are determined by discounting estimated cash flows using interest rates approximating the Corporation’s current origination rates for similar loans and adjusted to reflect the inherent credit risk. At March 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 $16.43 billion and an aggregate outstanding principal balance of $16.47 billion and were recorded in other assets. Interest income on these loans is recorded in interest and fees on loans and leases. Net gains resulting from changes in fair value of these loans, including realized gains and losses on sale, of $56 million were recorded in mortgage banking income during the three months ended March 31, 2007. An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk. Following adoption of SFAS 159, direct loan origination fees of $13 million and costs of $29 million related to loans held-for-sale for which the fair value option was elected were recognized in earnings. Previously, these items would have been capitalized as part of the carrying amount of the loans and recognized in earnings upon the sale of such loans.

Debt Securities

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

 

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Table of Contents

Structured Reverse Repurchase Agreements and Certain Long-term Deposits

The Corporation elected to fair value certain other financial instruments which are economically hedged with derivatives. At March 31, 2007, these instruments included structured reverse repurchase agreements with an aggregate fair value and principal balance of $1.5 billion recorded in federal funds sold and securities purchased under agreements to resell; and certain long-term fixed rate deposits with an aggregate fair value of $554 million and principal balance of $558 million recorded in interest-bearing deposits. Interest earned on the structured reverse repurchase agreements and interest paid on the long-term deposits continue to be recorded in interest income and interest expense, respectively. Election of the fair value option will allow the Corporation to reduce the accounting volatility that would otherwise result from the accounting asymmetry created by accounting for the financial instruments at historical cost and the economic hedges at fair value. The Corporation did not elect to fair value other financial instruments within the same balance sheet categories because they are not economically hedged.

The overall effect of electing the fair value option on operating results for the three months ended March 31, 2007 was an $11 million decrease in pre-tax profits. This amount includes a net loss of $27 million due to changes in fair value of loans and loan commitments, offset by a net gain of $27 million due to changes in fair value of mortgage loans held-for-sale. It also reflects a net reduction in profits of $16 million resulting from the change in accounting for direct loan origination fees and costs related to mortgage loans held-for-sale. The impact of electing the fair value option for other items was immaterial.

 

Fair Value Measurement

SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1

  

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

Level 2

  

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

Level 3

  

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

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

 

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Table of Contents

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:

 

     March 31, 2007
     Fair Value Measurements Using     
(Dollars in millions)    Level 1    Level 2    Level 3    Netting
Adjustments (1)
    Assets/
Liabilities
at Fair Value

Assets

             

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

   $    $ 1,490    $    $     $ 1,490

Trading account assets

     54,789      119,160      269            174,218

Derivative assets

     3,891      230,341      7,012      (215,965 )     25,279

Available-for-sale debt securities

     164,928      16,033                 180,961

Loans and leases (2)

               3,859            3,859

Mortgage servicing rights

               2,963            2,963

Other assets (3)

     2,897      18,801      5,867            27,565

Total assets

   $ 226,505    $ 385,825    $ 19,970    $ (215,965 )   $ 416,335

Liabilities

             

Interest-bearing deposits in domestic offices (2)

   $    $ 554    $    $     $ 554

Trading account liabilities

     56,413      20,876                 77,289

Derivative liabilities

     4,530      220,001      6,671      (213,256 )     17,946

Accrued expenses and other liabilities (2)

               377            377

Total liabilities

   $ 60,943    $ 241,431    $ 7,048    $ (213,256 )   $ 96,166

 

(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)

Other assets include equity investments held by Principal Investing, AFS equity investments and certain retained interests in securitization vehicles, including interest-only strips, all of which were carried at fair value prior to the adoption of SFAS 159; and loans held-for-sale of $16.4 billion for which the Corporation has elected the fair value option under SFAS 159.

Loans and leases at March 31, 2007 included $20.0 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.

The table below presents a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the period from January 1, 2007 to March 31, 2007. Level 3 loans and loan commitments are carried at fair value due to adoption of the fair value option, as described on page 23. Other Level 3 instruments presented in the table, including derivatives, trading account assets, mortgage servicing rights (MSRs), certain equity investments and retained interests in securitizations, were carried at fair value prior to the adoption of SFAS 159.

 

     Total Fair Value Measurements  

Level 3 Instruments Only

(Dollars in millions)

   Net
Derivatives (1)
   

Trading
Account
Assets (2)

    Loans
and
Leases (3)
    Mortgage
Servicing
Rights (2)
    Other
Assets (4)
    Accrued
Expenses
and Other
Liabilities (3)
 

Balance, December 31, 2006

   $ 711     $ 303     $ 3,968     $ 2,869     $ 6,605     $ (28 )

Impact of SFAS 157 and SFAS 159 adoption

     22             (21 )           —         (321 )

Balance, January 1, 2007

   $ 733     $ 303     $ 3,947     $ 2,869     $ 6,605     $ (349 )

Total gains or losses (realized/unrealized):

            

Included in earnings

     (64 )     (30 )     1       121       730       (28 )

Included in other comprehensive income

                             (51 )      

Purchases, issuances, and settlements

     (320 )     (4 )     (89 )     (27 )     (1,403 )      

Transfers in and/or out of Level 3

     (8 )                       (14 )      

Balance, March 31, 2007

   $ 341     $ 269     $ 3,859     $ 2,963     $ 5,867     $ (377 )

 

(1)

Net derivatives at March 31, 2007 included derivative assets of $7,012 million and derivative liabilities of $6,671 million, all of which were carried at fair value prior to the adoption of SFAS 159.

(2)

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

(3)

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

(4)

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

 

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The table below summarizes gains and losses due to changes in fair value, including both realized and unrealized gains and losses, recorded in earnings for Level 3 assets and liabilities for the period from January 1, 2007 to March 31, 2007. These amounts include gains and losses generated by loans and loan commitments for which the fair value option was elected and by other instruments, including certain derivative contracts, trading account assets, MSRs, equity investments and retained interests in securitizations, which were carried at fair value prior to the adoption of SFAS 159.

    Total Gains and Losses  

Level 3 Instruments Only

(Dollars in millions)

  Net
Derivatives (1)
   

Trading
Account
Assets (1)

    Loans
and
Leases (2)
  Mortgage
Servicing
Rights (1)
  Other
Assets (1)
   Accrued
Expenses
and Other
Liabilities (2)
 

Classification of gains and losses (realized/unrealized) included in earnings for the period:

            

Card income

  $     $     $   $   $ 181    $  

Equity investment gains

                        508       

Trading account profits

    (69 )     (30 )                   

Mortgage banking income

    5                 121           

Other income

                1         41      (28 )

Total

  $ (64 )   $ (30 )   $ 1   $ 121   $ 730    $ (28 )

 

(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.

The table below summarizes changes in unrealized gains or losses recorded in earnings for the period from January 1, 2007 to March 31, 2007 for Level 3 assets and liabilities that are still held at March 31, 2007. These amounts include changes in fair value of loans and loan commitments for which the fair value option was elected and changes in fair value for other instruments, including certain derivative contracts, trading account assets, MSRs, equity investments and retained interests in securitizations, which were carried at fair value prior to the adoption of SFAS 159.

 

     Changes in Unrealized Gains or Losses  

Level 3 Instruments Only

(Dollars in millions)

   Net
Derivatives (1)
    Trading
Account
Assets (1)
    Loans and
Leases (2)
    Mortgage
Servicing
Rights (1)
   Other
Assets (1)
   Accrued
Expenses and
Other
Liabilities (2)
 

Changes in unrealized gains or losses relating to assets still held at reporting date

              

Card income

   $     $     $     $    $ 28    $  

Equity investment gains

                            118       

Trading account profits

     (158 )     (30 )                      

Mortgage banking income

     4                   60            

Other income

                 (1 )               (31 )

Total

   $ (154 )   $ (30 )   $ (1 )   $ 60    $ 146    $ (31 )

 

(1)

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

(2)

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

Certain assets are measured at fair value on a non-recurring basis. As of March 31, 2007, loans held-for-sale for which the Corporation had not elected the fair value option and lease residuals, both of which were carried at the lower of cost or fair value, with an aggregate cost of $9.29 billion had been written down to fair value of $9.24 billion, resulting in a charge of $45 million, of which $41 million was recorded in other income and $4 million was recorded in mortgage banking income.

 

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NOTE 15 – Mortgage Servicing Rights

The Corporation accounts for consumer MSRs at fair value with changes in fair value recorded in the Consolidated Statement of Income in mortgage banking income. The Corporation economically hedges these MSRs with certain derivatives such as options and interest rate swaps.

The following table presents activity for consumer MSRs for the three months ended March 31, 2007 and 2006.

 

     Three Months Ended March 31  
(Dollars in millions)    2007      2006  

Balance, January 1

   $ 2,869      $ 2,658  

MBNA balance, January 1, 2006

     —          9  

Additions

     171        149  

Impact of customer payments

     (183 )      (171 )

Other changes in MSR market value (1)

     106        280  

Balance, March 31

   $ 2,963      $ 2,925  

 

(1)

Reflects changes in discount rates and prepayment speed assumptions, mostly due to changes in interest rates.

Other changes in MSR market value of $106 million reflect changes in discount rates and prepayment speed assumptions, mostly due to changes in interest rates. This amount does not include $15 million resulting from the reconciliation of actual cash received versus expected prepayments. The total of these amounts of $121 million is included in the line “Mortgage banking income” in the table “Total Gains and Losses” in Note 14 of the Consolidated Financial Statements.

The key economic assumptions used in valuations of MSRs included modeled prepayment rates and resultant weighted average lives of the MSRs and the option adjusted spread levels. Commercial MSRs are accounted for using the amortization method (i.e., lower of cost or market). Commercial MSRs were $178 million and $176 million at March 31, 2007 and December 31, 2006 and are not included in the table above.

 

NOTE 16 - Business Segment Information

The Corporation reports the results of its operations through three business segments: Global Consumer and Small Business Banking (GCSBB), Global Corporate and Investment Banking (GCIB), and Global Wealth and Investment Management (GWIM). Effective January 1, 2007, the Corporation changed its basis of presentation for its business segments as discussed below.

 

Global Consumer and Small Business Banking

GCSBB provides a diversified range of products and services to individuals and small businesses. Effective January 1, 2007, the Corporation began reporting its GCSBB results, specifically credit card, business card and certain unsecured lending portfolios, on a managed basis. This basis of presentation excludes the Corporation’s securitized mortgage and home equity portfolios for which the Corporation retains servicing. The change to a managed basis is consistent with the way that management as well as analysts evaluate the results of GCSBB. Managed basis assumes that loans that have been securitized were not sold and presents earnings on these loans in a manner similar to the way loans that have not been sold (i.e., held loans) are presented. Loan securitization is an alternative funding process that is used by the Corporation to diversify funding sources. Loan securitization removes loans from the Consolidated Balance Sheet through the sale of loans to an off-balance sheet qualified special purpose entity which is excluded from the Corporation’s Consolidated Financial Statements in accordance with GAAP.

The performance of the managed portfolio is important in understanding GCSBB’s results as it demonstrates the results of the entire portfolio serviced by the business. Securitized loans continue to be serviced by the business and are subject to the

 

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same underwriting standards and ongoing monitoring as held loans. In addition, retained excess servicing income is exposed to similar credit risk and repricing of interest rates as held loans. GCSBB’s managed income statement line items differ from its held basis reported in the prior period as follows:

 

   

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

 

   

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 managed credit impact. 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.

 

   

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

Prior period amounts have been adjusted to reflect these changes.

 

Global Corporate and Investment Banking

GCIB serves domestic and international issuer and investor clients, providing financial services, specialized industry expertise and local delivery. Prior to January 1, 2007, GCIB also included the results of our Latin America and Hong Kong based retail and commercial banking businesses, parts of which were sold in 2006. Effective January 1, 2007, the results of the Latin American operations in Argentina, Brazil, Chile, and Uruguay, as well as our Hong Kong based retail and commercial banking business, that are expected to be or have been sold have been transferred to All Other as liquidating businesses as the Corporation has made a decision to exit these businesses in these regions. Also, effective January 1, 2007, the results of Banc of America Specialist have been transferred to GCIB from GWIM to more closely align businesses with similar operations and clients. Prior period amounts have been adjusted to reflect these changes.

 

Global Wealth and Investment Management

GWIM offers investment and brokerage services, estate management, financial planning services, fiduciary management, credit and banking expertise, and diversified asset management products to institutional clients, as well as affluent and high-net-worth individuals. GWIM also includes the impact of migrated qualifying affluent customers, including their related deposit balances and associated net interest income from GCSBB. Prior to January 1, 2007, GWIM also included the results of Banc of America Specialist and International Wealth Management (IWM). Effective January 1, 2007, the results of Banc of America Specialist have been transferred to GCIB to more closely align businesses with similar operations and clients and the results of IWM that are expected to be sold or liquidated have been transferred to All Other as a liquidating business. Prior period amounts have been adjusted to reflect these changes.

 

All Other

Prior to January 1, 2007, All Other consisted of equity investment activities including Principal Investing, Corporate Investments and Strategic Investments, the residual impacts of the allowance for credit losses and the cost allocation processes, merger and restructuring charges, intersegment eliminations, and the results of certain consumer finance and commercial lending businesses that were being liquidated. All Other also included amounts associated with the ALM activities, including the residual impact of funds transfer pricing allocation methodologies, amounts associated with the change in the value of derivatives used as economic hedges of interest rate and foreign exchange rate fluctuations that did not qualify for SFAS 133 hedge accounting treatment, certain gains or losses on sales of whole mortgage loans, and gains (losses) on sales of debt securities. Effective January 1, 2007, All Other now also includes the offsetting securitization impact to present GCSBB on a managed basis which assumes that GCSBB’s securitized loans have not been sold. This offsetting adjustment is made to report the consolidated results of the Corporation on a GAAP basis. All Other also includes the addition of the liquidating businesses that were transferred from GCIB and GWIM. Prior period amounts have been adjusted to reflect these changes.

 

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Table of Contents
Basis of Presentation

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

Certain expenses not directly attributable to a specific business segment are allocated to the segments based on pre-determined means. The most significant of these expenses include data processing costs, item processing costs and certain centralized or shared functions. Data processing costs are allocated to the segments based on equipment usage. Item processing costs are allocated to the segments based on the volume of items processed for each segment. The costs of certain centralized or shared functions are allocated based on methodologies which reflect utilization.

The Corporation’s business segments and All Other have also been revised to reflect the impact of certain management accounting methodologies and related allocation refinements that have occurred subsequent to December 31, 2006. These changes did not have an impact on the previously reported consolidated results of the Corporation.

The following table presents total revenue on a FTE basis and net income for the three months ended March 31, 2007 and 2006, and total assets at March 31, 2007 and 2006 for each business segment, as well as All Other.

Business Segments

 

For the Three Months Ended March 31    Total Corporation   

Global Consumer and
Small Business

Banking (1, 2, 3)

    Global Corporate and
Investment Banking (1)
(Dollars in millions)    2007    2006    2007     2006     2007    2006

Net interest income (4)

   $ 8,597    $ 9,040    $ 7,028     $ 7,092     $ 2,412    $ 2,489

Noninterest income

     9,825      8,901      4,394       3,750       2,909      2,779

Total revenue (4)

     18,422      17,941      11,422       10,842       5,321      5,268

Provision for credit losses/Managed credit impact

     1,235      1,270      2,411       1,901       115      25

Gains (losses) on sales of debt securities

     62      14      (1 )     (1 )     2      14

Amortization of intangibles

     389      440      337       378       34      40

Other noninterest expense

     8,708      8,484      4,391       4,234       2,866      2,792

Income before income taxes (4)

     8,152      7,761      4,282       4,328       2,308      2,425

Income tax expense (4)

     2,897      2,775      1,586       1,604       861      901

Net income

   $ 5,255    $ 4,986    $ 2,696     $ 2,724     $ 1,447    $ 1,524

Period-end total assets

   $ 1,502,157    $ 1,375,080    $ 407,654     $ 406,032     $ 713,868    $ 611,208

 

     Global Wealth and
Investment
Management (1, 2)
   All Other (3)  
(Dollars in millions)    2007    2006    2007     2006  

Net interest income (4)

   $ 926    $ 939    $ (1,769 )   $ (1,480 )

Noninterest income

     962      890      1,560       1,482  

Total revenue (4)

     1,888      1,829      (209 )     2  

Provision for credit losses/Reported credit impact

     23           (1,314 )     (656 )

Gains on sales of debt securities

               61       1  

Amortization of intangibles

     16      18      2       4  

Other noninterest expense

     1,001      949      450       509  

Income before income taxes (4)

     848      862      714       146  

Income tax expense (benefit) (4)

     317      320      133       (50 )

Net income

   $ 531    $ 542    $ 581     $ 196  

Period-end total assets

   $ 128,547    $ 112,399    $ 252,088     $ 245,441  

 

(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

 

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The following table presents reconciliations of GCSBB and the associated offsetting securitization impact in All Other from a managed to held basis.

Global Consumer and Small Business Banking – Reconciliation

 

      For the Three Months Ended
March 31, 2007
    For the Three Months Ended
March 31, 2006
 
(Dollars in millions)    Managed
Basis
    Securitizations
Impact (1)
    Held
Basis
    Managed
Basis
    Securitizations
Impact (1)
    Held
Basis
 

Net interest income (2)

   $ 7,028     $ (1,890 )   $ 5,138     $ 7,092     $ (1,946 )   $ 5,146  

Noninterest income

            

Card income

     2,451       839       3,290       2,107       1,402       3,509  

Service charges

     1,377             1,377       1,190             1,190  

Mortgage banking income

     302             302       205             205  

All other income

     264       (77 )     187       248       (110 )     138  

Total noninterest income

     4,394       762       5,156       3,750       1,292       5,042  

Total revenue (2)

     11,422       (1,128 )     10,294       10,842       (654 )     10,188  

Provision for credit losses

     2,411       (1,128 )     1,283       1,901       (654 )     1,247  

Gains (losses) on sales of debt securities

     (1 )           (1 )     (1 )           (1 )

Noninterest expense

     4,728             4,728       4,612             4,612  

Income before income taxes (2)

     4,282             4,282       4,328             4,328  

Income tax expense (2)

     1,586             1,586       1,604             1,604  

Net income

   $ 2,696     $     $ 2,696     $ 2,724     $     $ 2,724  

All Other – Reconciliation

 

      For the Three Months Ended
March 31, 2007
    For the Three Months Ended
March 31, 2006
 
(Dollars in millions)    Reported
Basis
    Securitizations
Impact (1)
    As
Adjusted
    Reported
Basis
    Securitizations
Impact (1)
    As
Adjusted
 

Net interest income (2)

   $ (1,769 )   $ 1,890     $ 121     $ (1,480 )   $ 1,946     $ 466  

Noninterest income

            

Card income

     722       (839 )     (117 )     1,168       (1,402 )     (234 )

Equity investment gains

     896             896       571             571  

All other income

     (58 )     77       19       (257 )     110       (147 )

Total noninterest income

     1,560       (762 )     798       1,482       (1,292 )     190  

Total revenue (2)

     (209 )     1,128       919       2       654       656  

Provision for credit losses

     (1,314 )     1,128       (186 )     (656 )     654       (2 )

Gains on sales of debt securities

     61             61       1             1  

Merger and restructuring charges

     111             111       98             98  

All other noninterest expense

     341             341       415             415  

Income before income taxes (2)

     714             714       146             146  

Income tax expense (benefit) (2)

     133             133       (50 )           (50 )

Net income

   $ 581     $     $ 581     $ 196     $     $ 196  

 

(1)

The securitizations impact on net interest income is based on a funds transfer pricing methodology consistent with the way we allocate funding costs to the Corporation’s businesses.

(2)

FTE basis

 

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Table of Contents

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

 

    

Three Months Ended

March 31

 
(Dollars in millions)    2007     2006  

Segments’ total revenue (1)

   $ 18,631     $ 17,939  

Adjustments:

    

ALM activities

     38       (151 )

Equity investment gains

     896       571  

Liquidating businesses

     318       536  

FTE basis adjustment

     (329 )     (264 )

Managed securitizations impact to total revenue

     (1,128 )     (654 )

Other

     (333 )     (300 )

Consolidated revenue

   $ 18,093     $ 17,677  

Segments’ net income

   $ 4,674     $ 4,790  

Adjustments, net of taxes:

    

ALM activities (2)

     (4 )     (145 )

Equity investment gains

     564       360  

Liquidating businesses

     263       163  

Merger and restructuring charges

     (70 )     (61 )

Other

     (172 )     (121 )

Consolidated net income

   $ 5,255     $ 4,986  

 

(1)

FTE basis

(2)

Includes pre-tax gains (losses) on sales of debt securities of $58 million and $(8) million for the three months ended March 31, 2007 and 2006.

 

NOTE 17 – Subsequent Event

In April 2007, the Corporation announced an agreement to purchase ABN AMRO North America Holding Company, parent company of LaSalle Bank Corporation, from ABN AMRO Bank N.V. (collectively, ABN AMRO) for $21 billion in cash. The transaction has been approved by both company’s boards of directors. A copy of the agreement is filed as an exhibit to the Corporation’s Current Report on Form 8-K filed April 26, 2007. On May 3, 2007, a court in the Netherlands ruled that ABN AMRO is enjoined from consummating the transaction until ABN AMRO’s public shareholders vote on the proposed transaction. The Corporation believes it has a valid and binding agreement, and has filed a lawsuit against ABN AMRO in a federal district court located in New York to enforce its legal rights.

 

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Table of Contents

Bank of America Corporation and Subsidiaries

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

Table of Contents

   Page

Recent Events

   32

Performance Overview

   33

Financial Highlights

   34

Supplemental Financial Data

   38

Business Segment Operations

   43

Global Consumer and Small Business Banking

   44

Global Corporate and Investment Banking

   49

Global Wealth and Investment Management

   53

All Other

   56

Off-Balance Sheet Financing Entities

   58

Obligations and Commitments

   58

Managing Risk

   59

Strategic Risk Management

   59

Liquidity Risk and Capital Management

   60

Credit Risk Management

   62

Consumer Portfolio Credit Risk Management

   63

Commercial Portfolio Credit Risk Management

   68

Foreign Portfolio

   75

Provision for Credit Losses

   77

Allowance for Credit Losses

   77

Market Risk Management

   80

Trading Risk Management

   80

Interest Rate Risk Management for Nontrading Activities

   82

Mortgage Banking Risk Management

   87

Operational Risk Management

   87

Recent Accounting and Reporting Developments

   88

Complex Accounting Estimates

   88

Glossary

   89

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

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

At March 31, 2007, the Corporation had $1.5 trillion in assets and approximately 199,000 full-time equivalent employees. Notes to Consolidated Financial Statements referred to in Management’s Discussion and Analysis of Financial Condition and Results of Operations are incorporated by reference into Management’s Discussion and Analysis of Financial Condition and Results of Operations. Throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations, we use certain acronyms and abbreviations which are defined in the Glossary beginning on page 89. Certain prior period amounts have been reclassified to conform to current period presentation.

 

Recent Events

In April 2007, the Corporation announced an agreement to purchase ABN AMRO North America Holding Company, parent company of LaSalle Bank Corporation, from ABN AMRO Bank N.V. (collectively, ABN AMRO) for $21 billion in cash. The transaction has been approved by both company’s boards of directors. A copy of the agreement is filed as an exhibit to the Corporation’s Current Report on Form 8-K filed April 26, 2007. On May 3, 2007, a court in the Netherlands ruled that ABN AMRO is enjoined from consummating the transaction until ABN AMRO’s public shareholders vote on the proposed transaction. The Corporation believes it has a valid and binding agreement, and has filed a lawsuit against ABN AMRO in a federal district court located in New York to enforce its legal rights.

 

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

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

In February and March 2007, the Corporation completed the sale of its operations in Chile and Uruguay for approximately $750 million in equity of Banco Itaú Holding Financeira S.A. (Banco Itaú), Brazil’s second largest nongovernment-owned banking company. In addition, in March 2007, the Corporation completed the sale of its BankBoston Argentina assets to a consortium led by Johannesburg-based Standard Bank Group Ltd in exchange for the assumption of BankBoston Argentina liabilities of approximately $2.0 billion. These sales resulted in a $46 million gain (pre-tax) that was recorded in other income and a decrease of $132 million in provision for credit losses from a reduction of reserves related to the sale of our Argentina portfolio.

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 and is limited to a period of 12 to 18 months.

In January 2007, the Board declared a regular quarterly cash dividend on common stock of $0.56 per share, payable on March 23, 2007 to common shareholders of record on March 2, 2007.

 

Performance Overview

Net income totaled $5.3 billion, or $1.16 per diluted common share, for the three months ended March 31, 2007, increases of five percent and eight percent from $5.0 billion, or $1.07 per diluted common share, for the three months ended March 31, 2006.

Table 1

Business Segment Total Revenue and Net Income

 

      Three Months Ended March 31
     Total Revenue     Net Income
(Dollars in millions)    2007     2006     2007    2006

Global Consumer and Small Business Banking (1)

   $ 11,422     $ 10,842     $ 2,696    $ 2,724

Global Corporate and Investment Banking

     5,321       5,268       1,447      1,524

Global Wealth and Investment Management

     1,888       1,829       531      542

All Other (1)

     (209 )     2       581      196

Total FTE basis (2)

     18,422       17,941       5,255      4,986

FTE adjustment (2)

     (329 )     (264 )         

Total Consolidated

   $ 18,093     $ 17,677     $ 5,255    $ 4,986

 

(1)

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

(2)

Total revenue for the business segments and All Other is on a FTE basis. For more information on a FTE basis, see Supplemental Financial Data beginning on page 38.

 

Global Consumer and Small Business Banking

Net income remained essentially flat at $2.7 billion for the three months ended March 31, 2007 compared to the same period in 2006. Managed total revenue grew $580 million, or five percent, to $11.4 billion, as higher card income, service charges and mortgage banking income were partially offset by spread compression on our Card Services products, which

 

33


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negatively impacted net interest income. The growth in managed total revenue was offset by the higher managed credit impact of $510 million driven by portfolio seasoning and a trend toward more normalized loss levels post bankruptcy reform, and higher noninterest expense. For more information on GCSBB, see page 44.

 

Global Corporate and Investment Banking

Net income decreased $77 million, or five percent, to $1.4 billion for the three months ended March 31, 2007 compared to the same period in 2006. Total revenue remained essentially flat at $5.3 billion as higher noninterest income, primarily due to increases in investment banking income and all other income, was offset by lower net interest income from spread compression in the loan portfolio. The decrease in net income primarily resulted from an increase in the provision for credit losses and higher personnel expenses. For more information on GCIB, see page 49.

 

Global Wealth and Investment Management

Net income remained essentially flat at $531 million for the three months ended March 31, 2007 compared to the same period in 2006. Total revenue increased $59 million, or three percent, as higher noninterest income, primarily due to increases in investment and brokerage services, more than offset the decrease in net interest income as a result of a decline in ALM activities and spread compression. Offsetting the increase in total revenue was higher provision for credit losses as well as increased noninterest expense resulting from higher personnel expenses.

Total AUM were $547.4 billion at March 31, 2007, an increase of $4.5 billion since December 31, 2006 and $53.5 billion since March 31, 2006. For more information on GWIM, see page 53.

 

All Other

Net income increased $385 million to $581 million for the three months ended March 31, 2007 compared to the same period in 2006. Excluding our securitization reclassifications, total revenue increased $263 million as higher noninterest income, primarily due to higher equity investment gains and all other income, was partially offset by a decrease in net interest income. The increase in net income was also driven by a decrease in provision for credit losses. For more information on All Other, see page 56.

 

Financial Highlights

 

Net Interest Income

Net interest income on a FTE basis decreased $443 million to $8.6 billion for the three months ended March 31, 2007 compared to the same period in 2006. The primary drivers of the decrease were the impact of divestitures of certain foreign operations in 2006, reduced benefits from purchase accounting adjustments from 2006, the impact of hedging activities and the higher cost of deposits. Net interest income also decreased as a result of the adoption of FSP 13-2. These decreases were partially offset by higher levels of consumer (primarily unsecured lines of credit and home equity) and commercial loans, higher ALM portfolio balances and a higher contribution from market-based activity. The net interest yield on a FTE basis decreased 37 basis points (bps) to 2.61 percent for the three months ended March 31, 2007 compared to the same period in 2006.

For more information on net interest income on a FTE basis, see Table 7 on page 41.

 

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Noninterest Income

Table 2

Noninterest Income

 

        Three Months Ended March 31
(Dollars in millions)      2007      2006

Card income

     $ 3,333      $ 3,434

Service charges

       2,072        1,901

Investment and brokerage services

       1,149        1,103

Investment banking income

       638        501

Equity investment gains

       1,014        718

Trading account profits

       872        1,060

Mortgage banking income

       213        137

Other income

       534        47

Total noninterest income

     $ 9,825      $ 8,901

Noninterest income increased $924 million to $9.8 billion for the three months ended March 31, 2007 compared to the same period in 2006, due primarily to the following:

 

   

Card income on a held basis decreased $101 million primarily due to lower excess servicing income and lower merchant discount fees partially offset by the favorable change in value of the interest-only strip, increased cash advance fees and higher debit card income.

 

   

Service charges grew $171 million due to increased non-sufficient funds fees and overdraft charges resulting from new account growth and increased usage in deposit products.

 

   

Investment banking income increased $137 million due to continued strength in debt underwriting.

 

   

Equity investment gains increased $296 million driven by increased liquidity in the capital markets.

 

   

Trading account profits decreased $188 million compared to record results in 2006.

 

   

Mortgage banking income increased $76 million due to the net favorable performance of the MSRs and the impact related to the adoption of SFAS 159. For more information on the impact of SFAS 159 on mortgage banking income, see Mortgage Banking Risk Management on page 87.

 

   

Other income increased $487 million primarily related to mark-to-market losses realized in 2006 on certain economic hedges that did not qualify for SFAS 133 hedge accounting, improved credit mitigation results, and the gain on the sales of our Argentina, Chile and Uruguay operations.

 

Provision for Credit Losses

The provision for credit losses decreased $35 million to $1.2 billion for the three months ended March 31, 2007 compared to the same period in 2006. The decrease was primarily driven by reductions in reserves from consumer credit card securitization activities and the sale of the Argentina portfolio. These decreases were partially offset by higher net charge-offs primarily reflecting seasoning and the trend toward more normalized loss levels post bankruptcy reform. For more information on credit quality, see Credit Risk Management beginning on page 62.

 

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Noninterest Expense

Table 3

Noninterest Expense

 

        Three Months Ended March 31
(Dollars in millions)      2007      2006

Personnel

     $ 5,025      $ 4,813

Occupancy

       713        701

Equipment

       350        344

Marketing

       555        575

Professional fees

       229        218

Amortization of intangibles

       389        440

Data processing

       437        410

Telecommunications

       251        220

Other general operating

       1,037        1,105

Merger and restructuring charges

       111        98

Total noninterest expense

     $ 9,097      $ 8,924

Noninterest expense increased $173 million to $9.1 billion for the three months ended March 31, 2007 compared to the same period in 2006. Growth in personnel expense of $212 million was primarily driven by higher revenue-related incentive compensation expense as well as stock-based compensation granted to retirement-eligible employees of $397 million compared to $320 million for the same period in 2006.

 

Income Tax Expense

Income tax expense was $2.6 billion for the three months ended March 31, 2007 compared to $2.5 billion for the three months ended March 31, 2006, resulting in effective tax rates of 32.8 percent and 33.5 percent, respectively. Income tax expense for the three months ended March 31, 2007 reflects a one-time reduction to expense of approximately $50 million resulting from the remeasurement of certain accrued tax liabilities due to the evaluation of new guidance from taxing authorities.

 

Assets

At March 31, 2007, total assets were $1.5 trillion, an increase of $42.4 billion, or three percent, from December 31, 2006. Average total assets for the three months ended March 31, 2007 increased $105.0 billion, or seven percent, compared to the same period in 2006. Growth in period end and average total assets was due to growth in trading account assets driven by higher trading activity, an increase in loans and leases attributable to organic growth and bulk purchases of primarily residential mortgages and auto loans, and an increase in loans held-for-sale. Offsetting this growth was a decrease in AFS debt securities due to the third quarter 2006 strategic shift in balance sheet composition from mortgage-backed securities to residential mortgage loans.

 

Liabilities and Shareholders’ Equity

At March 31, 2007, total liabilities were $1.4 trillion, an increase of $42.8 billion, or three percent, from December 31, 2006. Average total liabilities for the three months ended March 31, 2007 increased $102.6 billion, or eight percent, compared to the same period in 2006. Growth in period end and average total liabilities was attributable to increases in trading account liabilities, federal funds purchased and securities sold under agreements to repurchase, and commercial paper and other short-term borrowings resulting from funding requirements to support the growth in overall assets. Other increases in average long-term debt and deposits were due to the net issuances of long-term debt and organic growth.

Period end shareholders’ equity was $134.9 billion at March 31, 2007, a decrease of $416 million from December 31, 2006, primarily due to dividend payments, share repurchases and the adoption of certain new accounting standards partially offset by net income and common stock issued in connection with employee benefit plans.

 

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Average shareholders’ equity for the three months ended March 31, 2007, compared to the same period in 2006, increased $2.4 billion to $133.6 billion primarily due to net income and the issuances of preferred stock partially offset by net share repurchases and the adoption of certain new accounting standards.

Table 4

Selected Quarterly Financial Data                                      

      2007 Quarter     2006 Quarters  
(Dollars in millions, per share information in thousands)    First     Fourth     Third     Second     First  

Income statement

          

Net interest income

   $ 8,268     $ 8,599     $ 8,586     $ 8,630     $ 8,776  

Noninterest income

     9,825       9,866       10,067       9,598       8,901  

Total revenue

     18,093       18,465       18,653       18,228       17,677  

Provision for credit losses

     1,235       1,570       1,165       1,005       1,270  

Gains (losses) on sales of debt securities

     62       21       (469 )     (9 )     14  

Noninterest expense

     9,097       9,093       8,863       8,717       8,924  

Income before income taxes

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

Income tax expense

     2,568       2,567       2,740       3,022       2,511  

Net income

     5,255       5,256       5,416       5,475       4,986  

Average common shares issued and outstanding

     4,432,664       4,464,110       4,499,704       4,534,627       4,609,481  

Average diluted common shares issued and outstanding

     4,497,028       4,536,696       4,570,558       4,601,169       4,666,405  

Performance ratios

          

Return on average assets

     1.40   %     1.39   %     1.43   %     1.51   %     1.43   %

Return on average common shareholders’ equity

     16.16       15.76       16.64       17.26       15.44  

Total ending equity to total ending assets

     8.98       9.27       9.22       8.85       9.41  

Total average equity to total average assets

     8.78       8.97       8.63       8.75       9.26  

Dividend payout

     48.02       47.49       46.82       41.76       46.75  

Per common share data

          

Earnings

   $ 1.18     $ 1.17     $ 1.20     $ 1.21     $ 1.08  

Diluted earnings

     1.16       1.16       1.18       1.19       1.07  

Dividends paid

     0.56       0.56       0.56       0.50       0.50  

Book value

     29.74       29.70       29.52       28.17       28.19  

Average balance sheet

          

Total loans and leases

   $ 714,042     $ 683,598     $ 673,477     $ 635,649     $ 615,968  

Total assets

     1,521,418       1,495,150       1,497,987       1,456,004       1,416,373  

Total deposits

     686,704       680,245       676,851       674,796       659,821  

Long-term debt

     148,627       140,756       136,769       125,620       117,018  

Common shareholders’ equity

     130,737       132,004       129,098       127,102       130,881  

Total shareholders’ equity

     133,588       134,047       129,262       127,373       131,153  

Asset Quality

          

Allowance for credit losses

   $ 9,106     $ 9,413     $ 9,260     $ 9,475     $ 9,462  

Nonperforming assets measured at historical cost

     2,059       1,856       1,656       1,641       1,680  

Allowance for loan and lease losses as a percentage of total loans and leases outstanding measured at historical cost (1)

     1.21   %     1.28   %     1.33   %     1.36   %     1.46   %

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

     443       505       562       579       572  

Net charge-offs

   $ 1,427     $ 1,417     $ 1,277     $ 1,023     $ 822  

Annualized net charge-offs as a percentage of average loans and leases outstanding measured at historical cost (1)

     0.81   %     0.82   %     0.75   %     0.65   %     0.54   %

Nonperforming loans and leases as a percentage of total loans and leases outstanding measured at historical cost (1)

     0.27       0.25       0.24       0.23       0.26  

Nonperforming assets as a percentage of total loans, leases, and foreclosed properties (1)

     0.29       0.26       0.25       0.25       0.27  

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

     1.51       1.60       1.75       2.21       2.72  

Capital ratios (period end)

          

Risk-based capital:

          

Tier 1

     8.57   %     8.64   %     8.48   %     8.33   %     8.45   %

Total

     11.94       11.88       11.46       11.25       11.32  

Tier 1 leverage

     6.25       6.36       6.16       6.13       6.18  

Market capitalization

   $ 226,481     $ 238,021     $ 240,966     $ 217,794     $ 208,633  

Market price per share of common stock

          

Closing

   $ 51.02     $ 53.39     $ 53.57     $ 48.10     $ 45.54  

High closing

     54.05       54.90       53.57       50.47       47.08  

Low closing

     49.46       51.66       47.98       45.48       43.09  

 

(1)

Ratios do not include loans measured at fair value in accordance with SFAS 159 at and for the period ended March 31, 2007. Loans measured at fair value were $3.86 billion at March 31, 2007.

 

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Supplemental Financial Data

Table 5 provides a reconciliation of the supplemental financial data mentioned below with financial measures defined by GAAP. Other companies may define or calculate supplemental financial data differently.

 

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 presentation 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 period-to-period 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 accurate picture of the interest margin for comparative purposes. To derive the FTE basis, net interest income is adjusted to reflect tax-exempt income on an equivalent before-tax basis with a corresponding increase in income tax expense. For purposes of this calculation, we use the federal statutory tax rate of 35 percent. This measure ensures comparability of net interest income arising from taxable and tax-exempt sources.

 

Performance Measures

As mentioned above, certain performance measures including the efficiency ratio, net interest yield and operating leverage utilize net interest income (and thus total revenue) on a FTE basis. The efficiency ratio measures the costs expended to generate a dollar of revenue, and net interest yield evaluates how many 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 the results of the Corporation. Targets vary by year and by business, and are based on a variety of factors including maturity of the business, investment appetite, competitive environment, market factors, and other items (e.g., risk appetite). The aforementioned performance measures and ratios, EPS, diluted EPS, return on average assets, and dividend payout ratio, as well as those measures discussed more fully below, are presented in Table 5.

 

Return on Average Common Shareholders’ Equity, Return on Average Tangible Shareholders’ Equity and Shareholder Value Added

We also evaluate our business based upon ROE, ROTE and SVA measures. ROE, ROTE and SVA 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 the earnings contribution of the Corporation as a percentage of shareholders’ equity reduced by goodwill. SVA is defined as cash basis earnings on an operating basis less a charge for the use of capital. 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. We believe using SVA as a performance measure places specific focus on whether incremental investments generate returns in excess of the costs of capital associated with those investments. In addition, profitability, relationship, and investment models all use ROE and SVA as key measures to support our overall growth goal.

 

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Table 5

Supplemental Financial Data and Reconciliations to GAAP Financial Measures

 

      Three Months Ended March 31  
(Dollars in millions, except per share information)    2007      2006  

Operating basis

     

Operating earnings

   $ 5,325      $ 5,047  

Operating earnings per common share

     1.19        1.09  

Diluted operating earnings per common share

     1.17        1.08  

Shareholder value added

     2,168        1,937  

Return on average assets

     1.42     %      1.45     %

Return on average common shareholders’ equity

     16.38        15.63  

Return on average tangible shareholders’ equity

     31.81        31.46  

Operating efficiency ratio (FTE basis)

     48.78        49.19  

Dividend payout ratio

     47.39        46.18  

Operating leverage

     0.86        3.51  

FTE basis data

     

Net interest income

   $ 8,597      $ 9,040  

Total revenue

     18,422        17,941  

Net interest yield

     2.61     %      2.98     %

Efficiency ratio

     49.38        49.74  

Reconciliation of net income to operating earnings

     

Net income

   $ 5,255      $ 4,986  

Merger and restructuring charges

     111        98  

Related income tax benefit

     (41 )      (37 )

Operating earnings

   $ 5,325      $ 5,047  

Reconciliation of average shareholders’ equity to average tangible shareholders’ equity

     

Average shareholders’ equity

   $ 133,588      $ 131,153  

Average goodwill

     (65,703 )      (66,094 )

Average tangible shareholders’ equity

   $ 67,885      $ 65,059  

Reconciliation of EPS to operating EPS

     

Earnings per common share

   $ 1.18      $ 1.08  

Effect of merger and restructuring charges, net of tax benefit

     0.01        0.01  

Operating earnings per common share

   $ 1.19      $ 1.09  

Reconciliation of diluted EPS to diluted operating EPS

     

Diluted earnings per common share

   $ 1.16      $ 1.07  

Effect of merger and restructuring charges, net of tax benefit

     0.01        0.01  

Diluted operating earnings per common share

   $ 1.17      $ 1.08  

Reconciliation of net income to shareholder value added

     

Net income

   $ 5,255      $ 4,986  

Amortization of intangibles

     389        440  

Merger and restructuring charges, net of tax benefit

     70        61  

Cash basis earnings on an operating basis

     5,714        5,487  

Capital charge

     (3,546 )      (3,550 )

Shareholder value added

   $ 2,168      $ 1,937  

Reconciliation of return on average assets to operating return on average assets

     

Return on average assets

     1.40     %      1.43     %

Effect of merger and restructuring charges, net of tax benefit

     0.02        0.02  

Operating return on average assets

     1.42     %      1.45     %

Reconciliation of return on average common shareholders’ equity to operating return on average common shareholders’ equity

     

Return on average common shareholders’ equity

     16.16     %      15.44     %

Effect of merger and restructuring charges, net of tax benefit

     0.22        0.19  

Operating return on average common shareholders’ equity

     16.38     %      15.63     %

Reconciliation of return on average tangible shareholders’ equity to operating return on average tangible shareholders’ equity

     

Return on average tangible shareholders’ equity

     31.39     %      31.08     %

Effect of merger and restructuring charges, net of tax benefit

     0.42        0.38  

Operating return on average tangible shareholders’ equity

     31.81     %      31.46     %

Reconciliation of efficiency ratio to operating efficiency ratio (FTE basis)

     

Efficiency ratio

     49.38     %      49.74     %

Effect of merger and restructuring charges

     (0.60 )      (0.55 )

Operating efficiency ratio

     48.78     %      49.19     %

Reconciliation of dividend payout ratio to operating dividend payout ratio

     

Dividend payout ratio

     48.02     %      46.75     %

Effect of merger and restructuring charges, net of tax benefit

     (0.63 )      (0.57 )

Operating dividend payout ratio

     47.39     %      46.18     %

Reconciliation of operating leverage to operating basis operating leverage

     

Operating leverage

     0.74     %      4.14     %

Effect of merger and restructuring charges

     0.12        (0.63 )

Operating leverage

     0.86     %      3.51     %

 

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Core Net Interest Income – Managed Basis

In managing our business, we review 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 49, we evaluate our market-based results and strategies on a total market-based revenue approach by combining net interest income and noninterest income for the Capital Markets and Advisory Services business. We also adjust for loans that we originated and sold into certain securitizations. These securitizations include off-balance sheet loans and leases, specifically those loans in revolving securitizations and other securitizations where servicing is retained by the Corporation (e.g., credit card and home equity lines). Noninterest income, rather than net interest income and provision for credit losses, is recorded for assets that have been securitized 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 assessing the r