Form 10-Q for the Quarterly Period Ended September 30, 2006
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 September 30, 2006

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 October 31, 2006, there were 4,490,688,140 shares of Bank of America Corporation Common Stock outstanding.

 



Table of Contents

Bank of America Corporation

 

 

September 30, 2006 Form 10-Q

INDEX        
        Page

Part I.

    

Item 1.      Financial Statements:

  
Financial Information     

Consolidated Statement of Income for the Three Months
and Nine Months Ended September 30, 2006 and 2005

   3
    

Consolidated Balance Sheet at September 30, 2006 and
December 31, 2005

   4
    

Consolidated Statement of Changes in Shareholders’
Equity for the Nine Months Ended September 30, 2006 and 2005

   5
    

Consolidated Statement of Cash Flows for the Nine Months
Ended September 30, 2006 and 2005

   6
    

Notes to Consolidated Financial Statements

   7
    

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

  
    

Table of Contents

   34
    

Discussion and Analysis

   35
    

Item 3.      Quantitative and Qualitative Disclosures about Market Risk

   104
      

Item 4.      Controls and Procedures

   105

Part II.

Other Information

       
    

Item 1.      Legal Proceedings

   105
    

Item 1A.  Risk Factors

   105
    

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

   105
    

Item 6.      Exhibits

   106
     Signature    107
     Index to Exhibits    108

 

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Table of Contents

Bank of America Corporation and Subsidiaries

Consolidated Statement of Income

     Three Months Ended September 30        Nine Months Ended September 30
(Dollars in millions, except per share information)    2006        2005        2006        2005

Interest income

                 

Interest and fees on loans and leases

   $ 12,638        $ 8,933        $ 35,569        $ 25,307

Interest and dividends on securities

     3,080          2,793          9,215          8,122

Federal funds sold and securities purchased under agreements to resell

     2,146          1,382          5,755          3,535

Trading account assets

     1,856          1,550          5,031          4,158

Other interest income

     952          547          2,524          1,486

Total interest income

     20,672          15,205          58,094          42,608

Interest expense

                 

Deposits

     3,976          2,471          10,491          7,016

Short-term borrowings

     5,467          3,190          14,618          7,760

Trading account liabilities

     727          707          1,840          1,745

Long-term debt

     1,916          1,102          5,153          3,209

Total interest expense

     12,086          7,470          32,102          19,730

Net interest income

     8,586          7,735          25,992          22,878

Noninterest income

                 

Service charges

     2,147          2,080          6,125          5,777

Investment and brokerage services

     1,085          1,060          3,334          3,122

Mortgage banking income

     189          180          415          590

Investment banking income

     510          522          1,623          1,319

Equity investment gains

     705          713          2,122          1,691

Card income

     3,473          1,520          10,566          4,246

Trading account profits

     731          557          2,706          1,464

Other income

     1,227          (216 )        1,675          1,194

Total noninterest income

     10,067          6,416          28,566          19,403

Total revenue

     18,653          14,151          54,558          42,281

Provision for credit losses

     1,165          1,159          3,440          2,614

Gains (losses) on sales of debt securities

     (469 )        29          (464 )        1,013

Noninterest expense

                 

Personnel

     4,474          3,837          13,767          11,209

Occupancy

     696          638          2,100          1,889

Equipment

     318          300          978          894

Marketing

     587          307          1,713          990

Professional fees

     259          254          710          647

Amortization of intangibles

     441          201          1,322          613

Data processing

     426          361          1,245          1,093

Telecommunications

     237          206          685          608

Other general operating

     1,156          1,061          3,423          3,065

Merger and restructuring charges

     269          120          561          353

Total noninterest expense

     8,863          7,285          26,504          21,361

Income before income taxes

     8,156          5,736          24,150          19,319

Income tax expense

     2,740          1,895          8,273          6,428

Net income

   $ 5,416        $ 3,841        $ 15,877        $ 12,891

Net income available to common shareholders

   $ 5,416        $ 3,836        $ 15,868        $ 12,877

Per common share information

                 

Earnings

   $ 1.20        $ 0.96        $ 3.49        $ 3.21

Diluted earnings

   $ 1.18        $ 0.95        $ 3.44        $ 3.16

Dividends paid

   $ 0.56        $ 0.50        $ 1.56        $ 1.40

Average common shares issued and outstanding (in thousands)

     4,499,704          4,000,573          4,547,693          4,012,924

Average diluted common shares issued and outstanding (in thousands)

     4,570,558          4,054,659          4,614,599          4,072,991

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents
Bank of America Corporation and Subsidiaries
Consolidated Balance Sheet
(Dollars in millions)      September 30
2006
       December 31
2005
 

Assets

         

Cash and cash equivalents

     $ 31,239        $ 36,999  

Time deposits placed and other short-term investments

       13,006          12,800  

Federal funds sold and securities purchased under agreements to resell (includes $134,583 and $148,299 pledged as collateral)

       134,595          149,785  

Trading account assets (includes $57,025 and $68,223 pledged as collateral)

       141,211          131,707  

Derivative assets

       23,121          23,712  

Securities:

         

Available-for-sale (includes $156,062 and $116,659 pledged as collateral)

       195,095          221,556  

Held-to-maturity, at cost (market value—$56 and $47)

       57          47  

Total securities

       195,152          221,603  

Loans and leases

       669,149          573,791  

Allowance for loan and lease losses

       (8,872 )        (8,045 )

Loans and leases, net of allowance

       660,277          565,746  

Premises and equipment, net

       9,205          7,786  

Mortgage servicing rights (includes $2,932 measured at fair value at September 30, 2006)

       3,091          2,806  

Goodwill

       65,818          45,354  

Intangible assets

       9,758          3,194  

Other assets

       162,738          90,311  

Total assets

     $ 1,449,211        $ 1,291,803  

Liabilities

         

Deposits in domestic offices:

         

Noninterest-bearing

     $ 169,540        $ 179,571  

Interest-bearing

       409,718          384,155  

Deposits in foreign offices:

         

Noninterest-bearing

       4,371          7,165  

Interest-bearing

       82,276          63,779  

Total deposits

       665,905          634,670  

Federal funds purchased and securities sold under agreements to repurchase

       258,090          240,655  

Trading account liabilities

       64,936          50,890  

Derivative liabilities

       15,394          15,000  

Commercial paper and other short-term borrowings

       135,056          116,269  

Accrued expenses and other liabilities (includes $388 and $395 of reserve for unfunded lending commitments)

       38,494          31,938  

Long-term debt

       137,739          100,848  

Total liabilities

       1,315,614          1,190,270  

Commitments and contingencies (Notes 8 and 10)

         

Shareholders’ equity

         

Preferred stock, $0.01 par value; authorized—100,000,000 shares; issued and outstanding—40,739 and 1,090,189 shares

       826          271  

Common stock and additional paid-in capital, $0.01 par value; authorized—7,500,000,000 shares; issued and outstanding—4,498,145,315 and 3,999,688,491 shares

       63,929          41,693  

Retained earnings

       76,271          67,552  

Accumulated other comprehensive income (loss)

       (6,867 )        (7,556 )

Other

       (562 )        (427 )

Total shareholders’ equity

       133,597          101,533  

Total liabilities and shareholders’ equity

     $ 1,449,211        $ 1,291,803  

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

Bank of America Corporation and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity

          Common Stock and          

Accumulated
Other
Comprehensive
Income (Loss) (1)

 

         

Total
Shareholders’
Equity

 

       

(Dollars in millions, shares in
thousands)

 

        Additional Paid-in
Capital
   

Retained
Earnings

 

                 
 

Preferred
Stock

 

   

Shares

 

   

Amount

 

       

Other

 

     

Comprehensive
Income

 

 

Balance, December 31, 2004

  $ 271     4,046,546     $ 44,236     $ 58,773     $ (2,764 )   $ (281 )   $ 100,235          

Net income

          12,891           12,891     $ 12,891  

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

            (1,711 )       (1,711 )     (1,711 )

Net unrealized gains on foreign currency translation adjustments

            26         26       26  

Net losses on derivatives

            (2,130 )       (2,130 )     (2,130 )

Cash dividends paid:

               

Common

          (5,658 )         (5,658 )  

Preferred

          (14 )         (14 )  

Common stock issued under employee plans and related tax benefits

    60,704       2,593           (211 )     2,382    

Common stock repurchased

    (94,187 )     (4,281 )           (4,281 )  

Other

                          (12 )     (1 )     1       (12 )     (1 )

Balance, September 30, 2005

  $ 271     4,013,063     $ 42,548     $ 65,980     $ (6,580 )   $ (491 )   $ 101,728     $ 9,075  

Balance, December 31, 2005

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

Net income

          15,877           15,877     $ 15,877  

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

            (106 )       (106 )     (106 )

Net unrealized gains on foreign currency translation adjustments

            177         177       177  

Net gains on derivatives

            618         618       618  

Cash dividends paid:

               

Common

          (7,149 )         (7,149 )  

Preferred

          (9 )         (9 )  

Issuance of preferred stock

    825                 825    

Redemption of preferred stock

    (270 )               (270 )  

Common stock issued under employee plans and related tax benefits

    98,312       3,988           (135 )     3,853    

Stock issued in acquisition (2)

    631,145       29,377             29,377    

Common stock repurchased

          (231,000 )     (11,129 )                             (11,129 )        

Balance, September 30, 2006

  $ 826     4,498,145     $ 63,929     $ 76,271     $ (6,867 )   $ (562 )   $ 133,597     $ 16,566  

 

(1)

At September 30, 2006 and December 31, 2005, Accumulated Other Comprehensive Income (Loss) (OCI) includes Net Gains (Losses) on Derivatives of $(3,720) million and $(4,338) million; Net Unrealized Gains (Losses) on Available-for-sale (AFS) Debt and Marketable Equity Securities of $(3,084) million and $(2,978) million; Net Unrealized Gains (Losses) on Foreign Currency Translation Adjustments of $55 million and $(122) million; and Other of $(118) million and $(118) million. Amounts shown are net of tax. For additional information on Accumulated OCI, see Note 11 of the Consolidated Financial Statements.

 

(2)

Includes the fair value of outstanding MBNA Corporation (MBNA) stock options of $435 million that were exchanged for the Corporation’s options as part of the MBNA merger.

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

Bank of America Corporation and Subsidiaries

Consolidated Statement of Cash Flows

    Nine Months Ended September 30  
(Dollars in millions)   2006        2005  

Operating activities

      

Net income

  $ 15,877        $ 12,891  

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

      

Provision for credit losses

    3,440          2,614  

(Gains) losses on sales of debt securities

    464          (1,013 )

Depreciation and premises improvements amortization

    835          716  

Amortization of intangibles

    1,322          613  

Deferred income tax expense

    1,322          126  

Net (increase) decrease in trading and derivative instruments

    7,830          (10,503 )

Net increase in other assets

    (26,704 )        (3,130 )

Net increase (decrease) in accrued expenses and other liabilities

    648          (6,015 )

Stock-based compensation expense

    862          608  

Other operating activities, net

    (3,054 )        (7,381 )

Net cash provided by (used in) operating activities

    2,842          (10,474 )

Investing activities

      

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

    (295 )        1,125  

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

    13,903          (44,049 )

Proceeds from sales of available-for-sale securities

    17,122          134,419  

Proceeds from maturities of available-for-sale securities

    17,708          31,392  

Purchases of available-for-sale securities

    (38,270 )        (200,407 )

Proceeds from maturities of held-to-maturity securities

             194  

Proceeds from sales of loans and leases

    29,902          13,059  

Other changes in loans and leases, net

    (96,643 )        (48,763 )

Net purchases of premises and equipment

    (398 )        (858 )

Proceeds from sales of foreclosed properties

    86          101  

Investment in China Construction Bank

             (2,500 )

Net cash paid for business acquisitions and divestitures

    (3,615 )         

Other investing activities, net

    (222 )        83  

Net cash used in investing activities

    (60,722 )        (116,204 )

Financing activities

      

Net increase in deposits

    7,249          7,907  

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

    18,109          97,312  

Net increase in commercial paper and other short-term borrowings

    17,454          29,057  

Proceeds from issuance of long-term debt

    37,403          17,813  

Retirement of long-term debt

    (13,507 )        (13,076 )

Issuance of preferred stock

    825           

Redemption of preferred stock

    (270 )         

Proceeds from issuance of common stock

    2,587          1,607  

Common stock repurchased

    (11,129 )        (4,281 )

Cash dividends paid

    (7,158 )        (5,672 )

Excess tax benefits of share-based payments

    342           

Other financing activities, net

    121          (104 )

Net cash provided by financing activities

    52,026          130,563  

Effect of exchange rate changes on cash and cash equivalents

    94          (50 )

Net increase (decrease) in cash and cash equivalents

    (5,760 )        3,835  

Cash and cash equivalents at January 1

    36,999          28,936  

Cash and cash equivalents at September 30

  $ 31,239        $ 32,771  

The fair values of noncash assets acquired and liabilities assumed in the MBNA merger were $83.5 billion and $50.6 billion.

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

Net transfers from AFS securities to Other Assets related to broker receivables of $35.9 billion for the nine months ended September 30, 2006.

On September 1, 2006, the Corporation completed the sale of its Brazilian operations for approximately $1.9 billion in equity of Banco Itau Holding Financeira S.A.

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

Bank of America Corporation and Subsidiaries

Notes to Consolidated Financial Statements

 

Bank of America Corporation and its subsidiaries (the Corporation) through its banking and nonbanking subsidiaries, provide a diverse range of financial services and products throughout the U.S. and in selected international markets. At September 30, 2006, the Corporation operated its banking activities primarily under three charters: Bank of America, National Association (Bank of America, N.A.), Bank of America, N.A. (USA), and FIA Card Services, N.A. Effective June 10, 2006, MBNA America Bank N.A. was renamed FIA Card Services, N.A.

On January 1, 2006, the Corporation acquired 100 percent of the outstanding stock of MBNA Corporation (MBNA). The MBNA merger was accounted for under the purchase method of accounting. Consequently, MBNA’s results of operations were included in the Corporation’s results beginning as of January 1, 2006.

 

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.

Certain historical financial statements and other selected financial data were restated to comply with the accounting treatment for certain derivative transactions under the Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities, as amended” (SFAS 133). For additional information on this restatement, see Note 1 of the Consolidated Financial Statements filed as Exhibit 99.2 to the Corporation’s Current Report on Form 8-K filed on May 25, 2006.

As part of its credit portfolio management, the Corporation purchases credit protection through credit derivatives. Effective January 1, 2006, the Corporation classifies the impact of these credit derivatives that economically hedge the portfolio in Other Income. Prior to January 1, 2006, the impact was classified in Trading Account Profits.

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

On September 1, 2006, the Corporation completed the sale of its Brazilian operations for approximately $1.9 billion in equity of Banco Itau Holding Financeira S.A., Brazil’s second largest nongovernment-owned banking company. The sale resulted in a $720 million gain (pre-tax) that was recorded in Other Income.

 

Recently Issued or Proposed Accounting Pronouncements

 

On September 29, 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)”, (SFAS 158) which requires the recognition of a plan’s over-funded or under-funded status as an asset or liability with an offsetting adjustment to Accumulated Other Comprehensive Income (Loss) (OCI). SFAS 158 requires the determination of the fair values of a plan’s assets at a company’s year-end and recognition of actuarial gains and losses, prior service costs or credits, and transition assets or obligations as a component of Accumulated OCI. This statement is effective as of December 31, 2006. If the provisions of SFAS 158 had been applied as of December 31, 2005, Shareholders’ Equity would have been reduced by approximately $3 billion before tax and approximately $2 billion after tax. Additionally, the initial adoption of SFAS 158 may impact the Corporation’s regulatory capital. For additional information on the Corporation’s pension and postretirement plans, see Note 16 of the Consolidated Financial Statements filed as Exhibit 99.2 to the Corporation’s Current Report on Form 8-K filed on May 25, 2006.

 

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On September 15, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles (GAAP) and enhances disclosures about fair value measurements. SFAS 157 retains the exchange price notion and clarifies that the exchange price is the price that would be received for an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. SFAS 157 is effective for the Corporation’s financial statements for the year beginning on January 1, 2008, with earlier adoption permitted. Management is currently evaluating the effect of SFAS 157 on the Corporation’s financial condition and results of operations.

On September 13, 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (SAB 108). SAB 108 expresses the SEC Staff’s views regarding the process of quantifying financial statement misstatements. SAB 108 states that in evaluating the materiality of financial statement misstatements a corporation must quantify the impact of correcting misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. SAB 108 is effective for the year ended December 31, 2006. Under certain circumstances, prior year financial statements will not have to be restated and the effects of initially applying SAB 108 on prior years will be recorded as a cumulative effect adjustment to beginning Retained Earnings on January 1, 2006, with disclosure of the items included in the cumulative effect. Management is currently evaluating the effect of SAB 108 on the Corporation’s financial condition and results of operations.

On July 13, 2006, the FASB issued 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. FSP 13-2 is effective as of January 1, 2007 and requires that the cumulative effect of adoption be reflected as an adjustment to the beginning balance of Retained Earnings in the period of adoption with a corresponding offset decreasing the net investment in leveraged leases. Management currently estimates that the adoption of FSP 13-2 will result in an adjustment increasing Goodwill by approximately $400 million for leveraged leases acquired as part of the merger with FleetBoston Financial Corporation (FleetBoston) and a charge of approximately $350 million to Retained Earnings as of January 1, 2007.

On July 13, 2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 clarifies the accounting and reporting for income taxes where interpretation of the tax law may be uncertain. FIN 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of income tax uncertainties with respect to positions taken or expected to be taken in income tax returns. The Corporation will adopt FIN 48 on January 1, 2007. The cumulative effect, if any, of applying FIN 48 will be recorded as an adjustment to the beginning balance of Retained Earnings. Management is currently evaluating the effect of FIN 48 on the Corporation’s financial condition and results of operations.

On March 17, 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 133 and 140” (SFAS 156), which permits, but does not require, an entity to account for one or more classes of servicing rights (i.e., mortgage servicing rights, or MSRs) at fair value, with the changes in fair value recorded in the Consolidated Statement of Income. The Corporation elected to early adopt the standard and to account for consumer MSRs using the fair value measurement method on January 1, 2006. Commercial related MSRs continue to be accounted for using the amortization method (i.e., lower of cost or market). The adoption of this standard did not have a material impact on the Corporation’s financial condition and results of operations. For additional information on MSRs, see Note 7 of the Consolidated Financial Statements.

On February 16, 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Instruments” (SFAS 155), which permits, but does not require, fair value accounting for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurcation in accordance with SFAS 133. The statement also subjects beneficial interests issued by securitization vehicles to the requirements of SFAS 133. The statement is effective as of January 1, 2007. The adoption of SFAS 155 is not expected to have a material impact on the Corporation’s financial condition and results of operations.

Effective January 1, 2006, the Corporation adopted SFAS No. 123 (revised 2004), “Share-based Payment” (SFAS 123R). Previously, the Corporation accounted for stock-based employee compensation under the fair value-based method of accounting. For additional information on stock-based employee compensation, see Note 13 of the Consolidated Financial Statements.

 

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For additional information on recently issued accounting pronouncements and other significant accounting principles, see Note 1 of the Consolidated Financial Statements filed as Exhibit 99.2 to the Corporation’s Current Report on Form 8-K filed on May 25, 2006.

 

NOTE 2—MBNA Merger and Restructuring Activity

 

The Corporation acquired 100 percent of the outstanding stock of MBNA on January 1, 2006 under the terms of the MBNA merger agreement. As a result, 1,260 million shares of MBNA common stock were exchanged for 631 million shares of the Corporation’s common stock. Prior to the MBNA merger, this represented approximately 16 percent of the Corporation’s outstanding common stock. MBNA shareholders also received cash of $5.2 billion. The MBNA merger was a tax-free merger for the Corporation. The acquisition expands the Corporation’s customer base and its opportunity to deepen customer relationships across the full breadth of the Corporation by delivering innovative deposit, lending and investment products and services to MBNA’s customer base. Additionally, the acquisition allows the Corporation to significantly increase its affinity relationships through MBNA’s credit card operations and sell these credit cards through its delivery channels (including the retail branch network). MBNA’s results of operations were included in the Corporation’s results beginning January 1, 2006.

The MBNA merger was accounted for under the purchase method of accounting in accordance with SFAS No. 141, “Business Combinations.” The purchase price has been allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the MBNA merger date as summarized in the following table. This allocation is based on management’s current estimation and could change as the fair value calculations are finalized and more information becomes available.

 

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MBNA Purchase Price Allocation (In millions, except per share amounts)  

Purchase price

       

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

   $ 45.856     

Exchange ratio

     0.5009           

Purchase price per share of the Corporation’s common stock exchanged

   $ 22.969     

Cash portion of the MBNA merger consideration

     4.125           

Implied value of one share of MBNA common stock

     27.094     

MBNA common stock exchanged

     1,260           

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

        $ 34,139  

Fair value of outstanding stock options and direct acquisition costs

              467  

Total purchase price

        $ 34,606  

Allocation of the purchase price

       

MBNA stockholders’ equity

        $ 13,410  

MBNA goodwill and other intangible assets

          (3,564 )

Adjustments to reflect assets acquired and liabilities assumed at fair value:

       

Loans and leases

          (292 )

Premises and equipment

          (563 )

Identified intangibles (2)

          7,857  

Other assets

          (678 )

Deposits

          (97 )

Exit and termination liabilities

          (299 )

Other personnel-related liabilities

          (685 )

Other liabilities and deferred income taxes

          (638 )

Long-term debt

              (409 )

Estimated fair value of net assets acquired

              14,042  

Estimated goodwill resulting from the MBNA merger (3)

            $ 20,564  

 

(1)

The value of the shares of common stock exchanged with MBNA shareholders was based upon the average of the closing prices of the Corporation’s common stock for the period commencing two trading days before, and ending two trading days after, June 30, 2005, the date of the MBNA merger announcement.

 

(2)

Includes purchased credit card relationships of $5,698 million, affinity relationships of $1,641 million, core deposit intangibles of $214 million, and other intangibles of $304 million. The amortization life for core deposit intangibles is 10 years, and purchased credit card relationships and affinity relationships are 15 years. These intangibles are primarily amortized on an accelerated basis.

 

(3)

No Goodwill is expected to be deductible for tax purposes. Substantially all Goodwill was allocated to Global Consumer and Small Business Banking.

As a result of the MBNA merger, the Corporation acquired certain loans for which there was, at the time of the merger, evidence of deterioration of credit quality since origination and for which it was probable that all contractually required payments would not be collected. These loans were accounted for in accordance with American Institute of Certified Public Accountants Statement of Position No. 03-3 “Accounting for Certain Loans or Debt Securities Acquired in a Transfer”, which requires that purchased impaired loans be recorded at fair value as of the merger date. The purchase accounting adjustment to reduce impaired loans to fair value results in an increase in Goodwill. In addition, an adjustment was made to the Allowance for Loan and Lease Losses for those impaired loans resulting in a decrease in Goodwill. The outstanding balance and fair value of such loans was approximately $1.3 billion and $940 million as of the merger date. At September 30, 2006, the outstanding balance of such loans was approximately $129 million.

 

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Unaudited Pro Forma Condensed Combined Financial Information

 

The following unaudited pro forma condensed combined financial information presents the results of operations of the Corporation had the MBNA merger taken place at January 1, 2005.

 

     Pro Forma
    

Three Months

Ended

    

Nine Months

Ended

(Dollars in millions)    September 30, 2005

Net interest income

   $ 8,585      $ 25,363

Noninterest income

     8,364        24,973

Total revenue

     16,949        50,336

Provision for credit losses

     1,439        3,385

Gains on sales of debt securities

     29        1,013

Merger and restructuring charges

     102        1,118

Other noninterest expense

     8,622        25,409

Income before income taxes

     6,815        21,437

Net income

     4,529        14,246

Merger and Restructuring Charges in the above table includes a nonrecurring restructuring charge related to legacy MBNA of $(18) million and $765 million for the three and nine months ended September 30, 2005. Pro forma Earnings per Common Share and Diluted Earnings per Common Share were $0.98 and $0.97 for the three months ended September 30, 2005, and $3.06 and $3.02 for the nine months ended September 30, 2005.

 

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. For a discussion of the prior year Merger and Restructuring Charges related to FleetBoston, see Note 2 of the Consolidated Financial Statements filed as Exhibit 99.2 to the Corporation’s Current Report on Form 8-K filed on May 25, 2006.

 

    

Three Months

Ended

    

Nine Months

Ended

(Dollars in millions)    September 30, 2006

Severance and employee-related charges

   $ 40      $ 74

Systems integrations and related charges

     183        363

Other

     46        124

Total merger and restructuring charges

   $ 269      $ 561

 

Exit Costs and Restructuring Reserves

 

On January 1, 2006, liabilities of $468 million for MBNA’s exit and termination costs were recorded as purchase accounting adjustments resulting in an increase in Goodwill. Included in the $468 million were $409 million for severance, relocation and other employee-related expenses and $59 million for contract terminations. During the three and nine months ended September 30, 2006, the Corporation revised certain of its initial estimates due to lower severance costs and updated integration plans including site consolidations that resulted in the reductions of exit cost reserves of $69 million and $169 million respectively. For the three and nine months ended September 30, 2006, $56 million and $156 million of the reductions in reserves were related to severance, relocation and other employee related expenses. The remaining reduction of $13 million related to contract termination estimates, all of which was recorded in the three months ended September 30, 2006. Cash payments of $41 million and $108 million during the three and nine months ended September 30, 2006, included $39 million and $76 million of severance, relocation and other employee-related costs, and $2 million and $32 million of contract terminations. The impact of these items reduced the balance in the liability from $301 million at June 30, 2006 to $191 million at September 30, 2006.

 

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Restructuring reserves were established for legacy Bank of America associate severance, other employee-related expenses, and contract terminations. During the three and nine months ended September 30, 2006, $38 million and $71 million was recorded to the restructuring reserves related to associate severance and other employee-related expenses, and another $21 million and $62 million for contract terminations. During the three and nine months ended September 30, 2006, cash payments of $7 million and $11 million for severance and other employee-related costs have reduced this liability. The net impact of these items increased the balance from $70 million at June 30, 2006 to $122 million at September 30, 2006.

Payments under exit costs and restructuring reserves associated with the MBNA merger are expected to be substantially complete by the end of 2007. The following table presents the changes in Exit Costs and Restructuring Reserves for the three and nine months ended September 30, 2006.

 

(Dollars in millions)    Exit Cost
Reserves (1)
       Restructuring
Reserves (2)
 

Balance, January 1, 2006

   $        $  

MBNA exit costs

     368           

Restructuring charges

              74  

Cash payments

     (67 )        (4 )

Balance, June 30, 2006

     301          70  

MBNA exit costs

     (69 )         

Restructuring charges

              59  

Cash payments

     (41 )        (7 )

Balance, September 30, 2006

   $ 191        $ 122  

 

(1)

Exit costs reserves were established in purchase accounting resulting in an increase in Goodwill.

 

(2)

Restructuring reserves were established by a charge to income.

 

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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 September 30, 2006 and December 31, 2005.

 

(Dollars in millions)    September 30
2006
   December 31
2005

Trading account assets

     

Corporate securities, trading loans and other

   $ 45,470    $ 46,554

U.S. government and agency securities (1)

     34,165      31,091

Equity securities

     27,153      31,029

Mortgage trading loans and asset-backed securities

     14,832      12,290

Foreign sovereign debt

     19,591      10,743

Total

   $ 141,211    $ 131,707

Trading account liabilities

     

U.S. government and agency securities (2)

   $ 23,499    $ 23,179

Equity securities

     21,750      11,371

Foreign sovereign debt

     12,073      8,915

Corporate securities and other

     7,614      7,425

Total

   $ 64,936    $ 50,890

 

(1)

Includes $24.5 billion at September 30, 2006 and $22.1 billion at December 31, 2005 of government-sponsored enterprise obligations that are not backed by the full faith and credit of the U.S. government.

 

(2)

Includes $2.0 billion at September 30, 2006 and $1.4 billion at December 31, 2005 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 133 accounting purposes. Non-hedging derivatives held for trading purposes are included in Derivative Assets or Derivative Liabilities with changes in fair value reflected in Trading Account Profits. Other non-hedging derivatives that are considered 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 in the Consolidated Statement of Income. A detailed discussion of derivative trading activities and Asset and Liability Management (ALM) activities are presented in Note 5 of the Consolidated Financial Statements filed as Exhibit 99.2 to the Corporation’s Current Report on Form 8-K filed on May 25, 2006.

 

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The following table presents the contract/notional amounts and credit risk amounts at September 30, 2006 and December 31, 2005 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 September 30, 2006 and December 31, 2005, the cash collateral applied against Derivative Assets on the Consolidated Balance Sheet was $7.8 billion and $9.3 billion. In addition, at September 30, 2006 and December 31, 2005, the cash collateral placed against Derivative Liabilities was $6.4 billion and $7.6 billion.

 

     September 30, 2006    December 31, 2005
(Dollars in millions)    Contract/
Notional
   Credit
Risk
   Contract/
Notional
   Credit
Risk

Interest rate contracts

           

Swaps

   $ 17,269,574    $ 10,543    $ 14,401,577    $ 11,085

Futures and forwards

     2,577,243      77      2,113,717     

Written options

     1,073,067           900,036     

Purchased options

     1,415,405      2,300      869,471      3,345

Foreign exchange contracts

           

Swaps

     411,788      3,679      333,487      3,735

Spot, futures and forwards

     1,209,779      1,899      944,321      2,481

Written options

     454,473           214,668     

Purchased options

     446,443      1,466      229,049      1,214

Equity contracts

           

Swaps

     35,250      604      28,287      548

Futures and forwards

     16,584      17      6,479      44

Written options

     114,760           69,048     

Purchased options

     99,380      8,247      57,693      6,729

Commodity contracts

           

Swaps

     4,320      1,295      8,809      2,475

Futures and forwards

     7,727           5,533     

Written options

     5,853           7,854     

Purchased options

     3,266      193      3,673      546

Credit derivatives (1)

     1,168,951      565      722,190      766
                   

Credit risk before cash collateral

        30,885         32,968

Less: Cash collateral applied

            7,764             9,256

Total derivative assets (2)

          $ 23,121           $ 23,712

 

(1)

The December 31, 2005 notional amount has been restated to conform with new regulatory guidance, which defined the notional as the contractual loss protection for structured basket transactions.

 

(2)

Includes long and short derivative positions.

The average fair value of Derivative Assets for the three months ended September 30, 2006 and December 31, 2005 was $23.7 billion and $25.2 billion. The average fair value of Derivative Liabilities for the three months ended September 30, 2006 and December 31, 2005 was $15.9 billion and $16.9 billion.

 

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Fair Value and Cash Flow Hedges

 

The Corporation uses various types of interest rate and foreign currency exchange rate 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 OCI of approximately $752 million (pre-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.

The following table summarizes certain information related to the Corporation’s derivative hedges accounted for under SFAS 133 for the three and nine months ended September 30, 2006 and 2005:

 

     Three Months Ended
September 30
    Nine Months Ended
September 30
 
(Dollars in millions)        2006                2005             2006                2005      

Fair value hedges

              

Hedge ineffectiveness recognized in earnings (1)

   $ 6        $ 47     $ 5        $ 92  

Net gain excluded from assessment of effectiveness (2)

                             2  

Cash flow hedges

              

Hedge ineffectiveness recognized in earnings (3)

     7                10          (15 )

Net investment hedges

              

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

     (94 )        (30 )     (296 )        49  

 

(1)

Included $6 million and $4 million recorded in Net Interest Income, $0 and $41 million recorded in Mortgage Banking Income, $0 and $1 million recorded in Equity Investment Gains, and $0 and $1 million recorded in Trading Account Profits in the Consolidated Statement of Income for the three months ended September 30, 2006 and 2005. Included $5 million and $4 million recorded in Net Interest Income, $0 and $92 million recorded in Mortgage Banking Income, $0 and $(5) million recorded in Equity Investment Gains, and $0 and $1 million recorded in Trading Account Profits for the nine months ended September 30, 2006 and 2005.

 

(2)

Amounts were recorded in Mortgage Banking Income and Equity Investment Gains in the Consolidated Statement of Income for the nine months ended September 30, 2005.

 

(3)

Included $7 million and $0 recorded in Net Interest Income in the Consolidated Statement of Income for the three months ended September 30, 2006 and 2005. Included $9 million and $(1) million recorded in Net Interest Income, and $1 million and $(14) million recorded in Mortgage Banking Income for the nine months ended September 30, 2006 and 2005.

 

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NOTE 5—Outstanding Loans and Leases

 

Outstanding loans and leases at September 30, 2006 and December 31, 2005 were:

 

(Dollars in millions)    September 30
2006
     December 31
2005

Consumer

       

Residential mortgage

   $ 218,918      $ 182,596

Credit card—domestic

     60,130        58,548

Credit card—foreign

     9,937       

Home equity lines

     71,577        62,098

Direct/Indirect consumer (1)

     62,985        45,490

Other consumer (2)

     10,468        6,725

Total consumer

     434,015        355,457

Commercial

       

Commercial—domestic

     154,578        140,533

Commercial real estate (3)

     37,121        35,766

Commercial lease financing

     21,289        20,705

Commercial—foreign

     22,146        21,330

Total commercial

     235,134        218,334

Total

   $ 669,149      $ 573,791

 

(1)

Includes home equity loans of $10.6 billion and $8.1 billion at September 30, 2006 and December 31, 2005.

 

(2)

Includes foreign consumer of $7.6 billion and $3.8 billion, and consumer finance of $2.9 billion and $2.8 billion at September 30, 2006 and December 31, 2005.

 

(3)

Includes domestic commercial real estate loans of $36.4 billion and $35.2 billion, and foreign commercial real estate loans of $768 million and $585 million at September 30, 2006 and December 31, 2005.

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 September 30, 2006 and December 31, 2005. SFAS 114 impairment includes performing troubled debt restructurings and excludes all commercial leases.

 

(Dollars in millions)    September 30
2006
     December 31
2005

Commercial—domestic

   $ 554      $ 613

Commercial real estate

     68        49

Commercial—foreign

     36        34

Total impaired loans

   $ 658      $ 696

At September 30, 2006 and December 31, 2005, nonperforming loans and leases, including impaired loans and nonaccrual consumer loans, totaled $1.6 billion and $1.5 billion. In addition, included in Other Assets were nonperforming loans held-for-sale of $99 million and $69 million at September 30, 2006 and December 31, 2005.

 

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NOTE 6—Allowance for Credit Losses

 

The following table summarizes the changes in the allowance for credit losses for the three and nine months ended September 30, 2006 and 2005:

 

     Three Months Ended
September 30
            Nine Months Ended
September 30
 
(Dollars in millions)    2006        2005              2006        2005  

Allowance for loan and lease losses, beginning of period

   $ 9,080        $ 8,319           $ 8,045        $ 8,626  

MBNA balance, January 1, 2006

                          577           

Loans and leases charged off

     (1,637 )        (1,439 )           (4,161 )        (3,819 )

Recoveries of loans and leases previously charged off

     360          294               1,039          905  

Net charge-offs

     (1,277 )        (1,145 )             (3,122 )        (2,914 )

Provision for loan and lease losses

     1,165          1,152             3,440          2,626  

Other

     (96 )                      (68 )        (12 )

Allowance for loan and lease losses, September 30

     8,872          8,326               8,872          8,326  

Reserve for unfunded lending commitments, beginning of period

     395          383             395          402  

Provision for unfunded lending commitments

              7                      (12 )

Other

     (7 )                      (7 )         

Reserve for unfunded lending commitments, September 30

     388          390               388          390  

Total allowance for credit losses

   $ 9,260        $ 8,716             $ 9,260        $ 8,716  

 

NOTE 7—Mortgage Servicing Rights

 

Effective January 1, 2006, the Corporation accounts for consumer MSRs at fair value with changes in fair value recorded in the Consolidated Statement of Income. The Corporation economically hedges these MSRs with certain derivatives such as options and interest rate swaps. Prior to January 1, 2006, MSRs were accounted for on a lower of cost or market basis and hedged with derivatives that qualified for SFAS 133 hedge accounting.

The following table presents activity for consumer-related MSRs for the three and nine months ended September 30, 2006 and 2005.

 

     Three Months Ended
September 30
           

Nine Months Ended

September 30

 
(Dollars in millions)    2006        2005              2006        2005  

Balance, beginning of period

   $ 3,083        $ 2,233           $ 2,673        $ 2,358  

Additions

     188          241             464          627  

Impact of customer payments

     (177 )                    (515 )         

Amortization

              (161 )                    (454 )

Other changes in MSR market value (1)

     (162 )                    310           

Valuation adjustment of MSRs (2)

              310                        92  

Balance, September 30 (3)

   $ 2,932        $ 2,623             $ 2,932        $ 2,623  

 

(1)

Reflects changes in discount rates and prepayment speed assumptions, mostly due to changes in interest rates and the passage of time.

 

(2)

For the three and nine months ended September 30, 2005, includes $325 million and $121 million related to change in value attributed to SFAS 133 hedged MSRs, and $15 million and $29 million of impairments.

 

(3)

Net of impairment allowance of $273 million at September 30, 2005.

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 $159 million and $148 million at September 30, 2006 and December 31, 2005 and are not included in the table above.

 

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NOTE 8—Securitizations

 

The Corporation securitizes assets and may continue to hold a portion or all of the securities, subordinated tranches, interest-only strips and, in some cases, a cash reserve account, all of which are considered interests that continue to be held by a transferor in the securitized assets. Those assets may be serviced by the Corporation or by third parties. The Corporation also uses other special purpose financing entities to access the commercial paper market and for other lending, leasing and real estate activities.

As a result of the MBNA merger, the Corporation acquired interests in credit card, other consumer, and commercial loan securitization vehicles. These acquired interests include interest-only strips, subordinated tranches, cash reserve accounts, and subordinated accrued interest receivable. Changes in the fair value of the interest-only strips are recorded in Card Income. The aggregate debt securities outstanding for the MBNA credit card securitization trusts as of September 30, 2006 and January 1, 2006, were $92.2 billion and $81.6 billion. As of September 30, 2006 and January 1, 2006, the aggregate debt securities outstanding for the Corporation’s credit card securitization trusts, including MBNA, were $93.0 billion and $83.8 billion.

Key economic assumptions used in measuring the fair value of certain interests that continue to be held by the Corporation (included in Other Assets) in credit card securitizations and the sensitivity of the current fair value of residual cash flows to changes in those assumptions are as follows:

 

(Dollars in millions)    September 30
2006
     December 31
2005
 

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

   $ 2,441      $ 203  

Balance of unamortized securitized loans

     94,389        2,237  

Weighted average life to call or maturity (in years)

     0.3        0.5  

Revolving structures—payment rate

     11.2 – 19.5     %      12.1     %

Impact on fair value of 100 bps favorable change

   $ 20      $ 2  

Impact on fair value of 200 bps favorable change

     44        3  

Impact on fair value of 100 bps adverse change

     (17 )      (2 )

Impact on fair value of 200 bps adverse change

     (34 )      (3 )

Expected credit losses (annual rate)

     3.9 – 5.2     %      4.0 – 4.3     %

Impact on fair value of 10% favorable change

   $ 75      $ 3  

Impact on fair value of 25% favorable change

     212        8  

Impact on fair value of 10% adverse change

     (75 )      (3 )

Impact on fair value of 25% adverse change

     (185 )      (8 )

Residual cash flows discount rate (annual rate)

     12.0     %      12.0     %

Impact on fair value of 100 bps favorable change

   $ 7      $  

Impact on fair value of 200 bps favorable change

     9         

Impact on fair value of 100 bps adverse change

     (10 )       

Impact on fair value of 200 bps adverse change

     (19 )       

 

(1)

Residual interests include interest-only strips, one or more subordinated tranches, accrued interest receivable, and in some cases, a cash reserve account.

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. The other consumer and commercial loan securitization vehicles acquired with MBNA were not material to the Corporation.

Principal proceeds from collections reinvested in revolving credit card securitizations were $41.6 billion and $120.8 billion for the three and nine months ended September 30, 2006, and $747 million and $4.0 billion for the three and nine months ended September 30, 2005. Contractual credit card servicing fee income totaled $472 million and $1.4 billion for the three and nine months ended September 30, 2006, and $21 million and $84 million for the three and nine months ended September 30, 2005. Other cash flows received on interests that continued to be held by the Corporation were $1.7 billion and $5.1 billion for the three and nine months ended September 30, 2006, and $43 million and $163 million for the three and nine months ended September 30, 2005, for credit card securitizations.

 

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The Corporation also reviews its loans and leases portfolio on a managed basis. Managed loans and leases are defined as on-balance sheet Loans and Leases as well as those loans in revolving securitizations and other securitizations where servicing is retained that are undertaken for liquidity or other corporate purposes, which include credit card, home equity lines, commercial loans, auto and certain mortgage securitizations. Managed loans and leases exclude originate-to-distribute loans and other loans in securitizations where the Corporation has not retained servicing. New advances on accounts for which previous loan balances were sold to the securitization trusts will be recorded on the Corporation’s Consolidated Balance Sheet after the revolving period of the securitization, which has the effect of increasing Loans and Leases on the Corporation’s Consolidated Balance Sheet and increasing Net Interest Income and charge-offs, with a related reduction in Noninterest Income.

Portfolio balances, delinquency and historical loss amounts of the managed loans and leases portfolio as of September 30, 2006 and December 31, 2005, and for the three and nine months ended September 30, 2006 and 2005 were as follows:

 

     September 30, 2006    December 31, 2005 (1)
(Dollars in millions)    Total Loans
and Leases
    Accruing
Loans and
Leases Past
Due 90 Days
or More
    Nonperforming
Loans and Leases
   Total Loans
and Leases
    Accruing
Loans and
Leases Past
Due 90 Days
or More
    Nonperforming
Loans and Leases

Residential mortgage (2)

   $ 223,846     $ 111     $ 599    $ 188,502     $     $ 570

Credit card—domestic

     138,436       3,321            60,785       1,217      

Credit card—foreign

     26,020       575                       

Home equity lines

     71,915             175      62,553       3       117

Direct/Indirect consumer

     70,910       414       37      49,486       75       37

Other consumer

     10,468       38       86      6,725       15       61

Total consumer

     541,595       4,459       897      368,051       1,310       785

Commercial—domestic

     155,939       227       544      142,437       117       581

Commercial real estate

     37,121       30       68      35,766       4       49

Commercial lease financing

     21,289       29       35      20,705       15       62

Commercial—foreign

     22,146       4       36      21,330       32       34

Total commercial

     236,495       290       683      220,238       168       726

Total managed loans and leases

     778,090       4,749       1,580      588,289       1,478       1,511

Managed loans in securitizations

     (108,941 )     (2,030 )          (14,498 )     (23 )    

Total held loans and leases

   $ 669,149     $ 2,719     $ 1,580    $ 573,791     $ 1,455     $ 1,511

 

(1)

The amounts at December 31, 2005 have been adjusted to include certain mortgage and auto securitizations as these are now included in the Corporation’s definition of managed loans and leases.

 

(2)

Accruing loans and leases past due 90 days or more represent residential mortgage loans related to repurchases pursuant to our servicing agreements with Government National Mortgage Association mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs.

 

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Table of Contents
     Three Months Ended September 30, 2006            Three Months Ended September 30, 2005 (1)  
(Dollars in millions)    Average Loans and
Leases Outstanding
    Loans and
Leases Net
Losses
    Net
Loss
Ratio (2)
            Average Loans and
Leases Outstanding
    Loans and
Leases Net
Losses
    Net
Loss
Ratio (2)
 

Residential mortgage

   $ 227,985     $ 6     0.01     %        $ 171,012     $ 7     0.02     %

Credit card—domestic

     138,545       1,478     4.23            59,762       864     5.74  

Credit card—foreign

     25,593       270     4.17                       

Home equity lines

     70,428       12     0.06            58,046       9     0.06  

Direct/Indirect consumer

     69,688       238     1.36            47,900       60     0.50  

Other consumer

     11,075       85     3.03            6,715       58     3.42  

Total consumer

     543,314       2,089     1.52            343,435       998     1.15  

Commercial—domestic

     155,131       118     0.30            129,744       54     0.17  

Commercial real estate

     37,471       2     0.02            34,663       2     0.02  

Commercial lease financing

     20,875                      20,402       209     4.06  

Commercial—foreign

     24,761       (13 )   (0.21 )          18,444       (26 )   (0.55 )

Total commercial

     238,238       107     0.18            203,253       239     0.47  

Total managed loans and leases

     781,552       2,196     1.11            546,688       1,237     0.90  

Managed loans in securitizations

     (108,075 )     (919 )   3.37            (7,191 )     (92 )   5.08  

Total held loans and leases

   $ 673,477     $ 1,277     0.75     %          $ 539,497     $ 1,145     0.84     %
     Nine Months Ended September 30, 2006            Nine Months Ended September 30, 2005 (1)  
(Dollars in millions)    Average Loans and
Leases Outstanding
    Loans and
Leases Net
Losses
    Net
Loss
Ratio (2)
            Average Loans and
Leases Outstanding
    Loans and
Leases Net
Losses
    Net
Loss
Ratio (2)
 

Residential mortgage

   $ 207,125     $ 30     0.02     %        $ 172,090     $ 22     0.02     %

Credit card—domestic

     138,402       3,778     3.65            58,821       2,658     6.04  

Credit card—foreign

     24,136       690     3.82                       

Home equity lines

     67,565       32     0.06            54,845       24     0.06  

Direct/Indirect consumer

     66,749       557     1.12            44,240       167     0.50  

Other consumer

     10,748       202     2.52            6,995       157     3.00  

Total consumer

     514,725       5,289     1.37            336,991       3,028     1.20  

Commercial—domestic

     151,729       244     0.22            128,059       73     0.08  

Commercial real estate

     36,968       2     0.01            33,727       3     0.01  

Commercial lease financing

     20,762       (40 )   (0.26 )          20,529       243     1.58  

Commercial—foreign

     24,088       (7 )   (0.04 )          17,935       (61 )   (0.45 )

Total commercial

     233,547       199     0.11            200,250       258     0.17  

Total managed loans and leases

     748,272       5,488     0.98            537,241       3,286     0.82  

Managed loans in securitizations

     (106,363 )     (2,366 )   2.97            (8,910 )     (372 )   5.58  

Total held loans and leases

   $ 641,909     $ 3,122     0.65     %          $ 528,331     $ 2,914     0.74     %

 

(1)

The amounts for the three and nine months ended September 30, 2005 have been adjusted to include certain mortgage and auto securitizations as these are now included in the Corporation’s definition of managed loans and leases.

 

(2)

The net loss ratio is calculated by dividing annualized managed loans and leases net losses by average managed loans and leases outstanding for each loan and lease category.

 

Variable Interest Entities

 

At September 30, 2006 and December 31, 2005, 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 Available-for-sale (AFS) Securities, Other Assets, and Commercial Paper and Other Short-term Borrowings in Global Corporate and Investment Banking. As of September 30, 2006 and December 31, 2005, the Corporation held $9 billion and $7 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 $11 billion and $8 billion. The Corporation also had contractual relationships with other consolidated VIEs that engage in leasing or lending activities or real estate joint ventures. As of September 30, 2006 and December 31, 2005, the amount of assets of these entities was $2 billion and $750 million, and in the unlikely event that all of the assets in the VIEs become worthless, the Corporation’s maximum possible loss exposure would be $2 billion and $212 million.

 

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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 other special purpose vehicles that engage in lending, investing, or real estate activities. Total assets of these entities at September 30, 2006 and December 31, 2005 were approximately $38 billion and $33 billion. Revenues associated with administration, liquidity, letters of credit and other services were approximately $37 million and $104 million for the three and nine months ended September 30, 2006, and $30 million and $94 million for the three and nine months ended September 30, 2005. At September 30, 2006 and December 31, 2005, 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 $32 billion and $27 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 filed on Exhibit 99.2 to the Corporation’s 2005 Current Report on Form 8-K filed on May 25, 2006 for additional discussion of securitizations and special purpose financing entities.

 

NOTE 9—Goodwill and Intangibles

 

The following table presents allocated Goodwill at September 30, 2006 and December 31, 2005 for each business segment and All Other.

 

(Dollars in millions)    September 30
2006
     December 31
2005

Global Consumer and Small Business Banking

   $ 38,932      $ 18,491

Global Corporate and Investment Banking

     21,304        21,292

Global Wealth and Investment Management

     5,333        5,333

All Other

     249        238

Total

   $ 65,818      $ 45,354

The gross carrying values and accumulated amortization related to Intangible Assets at September 30, 2006 and December 31, 2005 are presented below:

 

     September 30, 2006           December 31, 2005
(Dollars in millions)    Gross Carrying
Value
     Accumulated
Amortization
           Gross Carrying
Value
     Accumulated
Amortization

Purchased credit card relationships

   $ 6,534      $ 825         $ 660      $ 217

Core deposit intangibles

     3,850        2,267           3,661        1,881

Affinity relationships

     1,656        154                 

Other intangibles

     1,789        825             1,693        722

Total

   $ 13,829      $ 4,071           $ 6,014      $ 2,820

For additional information on the impact of the MBNA merger, see Note 2 of the Consolidated Financial Statements.

Amortization of Intangibles expense was $441 million and $201 million for the three months ended September 30, 2006 and 2005, and $1.3 billion and $613 million for the nine months ended September 30, 2006 and 2005. The Corporation estimates that aggregate amortization expense will be approximately $430 million for the fourth quarter of 2006. In addition, the Corporation estimates the aggregate amortization expense will be approximately $1.5 billion, $1.3 billion, $1.2 billion, $1.0 billion and $900 million for 2007, 2008, 2009, 2010 and 2011, respectively.

 

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Table of Contents

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 filed on Exhibit 99.2 to the Corporation’s Current Report on Form 8-K filed on May 25, 2006. The outstanding unfunded lending commitments shown in the following table have been reduced by amounts participated to other financial institutions of $30.2 billion and $30.4 billion at September 30, 2006 and December 31, 2005. The carrying amount for these commitments, which represents the liability recorded related to these instruments, at September 30, 2006 and December 31, 2005 was $435 million and $458 million. At September 30, 2006, the carrying amount included deferred revenue of $47 million and a reserve for unfunded lending commitments of $388 million. At December 31, 2005, the carrying amount included deferred revenue of $63 million and a reserve for unfunded lending commitments of $395 million.

 

(Dollars in millions)    September 30
2006
     December 31
2005

Loan commitments (1)

   $ 323,956      $ 277,757

Home equity lines of credit

     94,186        78,626

Standby letters of credit and financial guarantees

     49,540        43,095

Commercial letters of credit

     5,345        5,154

Legally binding commitments

     473,027        404,632

Credit card lines (2)

     844,311        192,968

Total

   $ 1,317,338      $ 597,600

 

(1)

Included at September 30, 2006 and December 31, 2005, were equity commitments of $1.6 billion and $1.4 billion, related to obligations to further fund Principal Investing equity investments.

 

(2)

As part of the MBNA merger, on January 1, 2006, the Corporation acquired $588.4 billion of unused credit card lines.

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 September 30, 2006 and December 31, 2005, charge cards (nonrevolving card lines) to individuals and government entities guaranteed by the U.S. government in the amount of $9.6 billion and $9.4 billion were not included in credit card line commitments in the previous table. The outstanding balances related to these charge cards were $255 million and $171 million at September 30, 2006 and December 31, 2005.

At September 30, 2006, the Corporation did not have any whole mortgage loan purchase commitments. At December 31, 2005, the Corporation had whole mortgage loan purchase commitments of $4.0 billion, all of which settled in the first quarter of 2006.

The Corporation has entered into operating leases for certain of its premises and equipment. Commitments under these leases approximate $1.1 billion in 2006, $1.2 billion in 2007, $1.1 billion in 2008, $1.0 billion in 2009, $900 million in 2010 and $6.4 billion for all years thereafter.

In 2005, the Corporation entered into an agreement for the committed purchase of retail automotive loans over a five-year period ending June 30, 2010. For the nine months ending September 30, 2006, the Corporation purchased $5.0 billion of such loans. In 2005, the Corporation purchased $5.0 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 and up to $10.0 billion in each of the agreement’s following three fiscal years. As of September 30, 2006, the remaining commitment amount was $35.0 billion.

 

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Table of Contents

Other Guarantees

 

The Corporation provides credit and debit card processing services to various merchants, 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 four 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 September 30, 2006 and 2005, the Corporation processed $97.0 billion and $91.3 billion of transactions and recorded losses as a result of these chargebacks of $4 million and $3 million. For the nine months ended September 30, 2006 and 2005, the Corporation processed $282.6 billion and $251.3 billion of transactions and recorded losses as a result of these chargebacks of $13 million and $9 million.

At September 30, 2006 and December 31, 2005, the Corporation held as collateral approximately $91 million and $248 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 four months, which represents the claim period for the cardholder, plus any outstanding delayed-delivery transactions. As of September 30, 2006 and December 31, 2005, the maximum potential exposure totaled approximately $118.6 billion and $118.2 billion.

For additional information on other guarantees, see Note 13 of the Consolidated Financial Statements filed on Exhibit 99.2 to the Corporation’s Current Report on Form 8-K filed on May 25, 2006. 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 filed on Exhibit 99.2 to the Corporation’s Current Report on Form 8-K filed on May 25, 2006.

 

Litigation and Regulatory Matters

 

The following supplements the disclosure in the Corporation’s Current Report on Form 8-K filed on May 25, 2006 as well as Quarterly Reports on Form 10-Q for the periods ended March 31, 2006 and June 30, 2006 and the Current Reports on Form 8-K filed since December 31, 2005.

Adelphia

On September 26, 2006, the defendant banks, including Banc of America Securities LLC (BAS), entered into a settlement agreement with the Los Angeles County Employees Retirement Association. On September 29, 2006, the defendant banks, including BAS and Bank of America, N.A., entered into a settlement agreement with The Division of Investment of the New Jersey Department of the Treasury. The settlement amounts are not material.

Mutual Fund Operations Matters

With respect to the case that was originally filed in a state court in Illinois, on October 16, 2006, the U.S. Court of Appeals for the Seventh Circuit dismissed the appeal of the order remanding the case to state court. This case is being resolved as part of the previously disclosed settlement concerning trading in the Columbia mutual funds.

Parmalat Finanziaria S.p.A.

In the Smith and Pappas cases, plaintiffs filed amended complaints, and the Corporation moved to dismiss the complaints.

Pension Plan Matters

In Donna C. Richards v. FleetBoston Financial Pension Plan, et al., on July 26, 2006, the court dismissed plaintiff’s amended claims alleging violation of ERISA’s “anti-backloading” rule and an allegation of breach of fiduciary duty. The court subsequently modified its order certifying a class to include the undismissed portions of plaintiff’s breach of fiduciary duty claim. On October 6, 2006, plaintiff filed a motion for leave to file a second amended complaint adding a new claim alleging that the Fleet Pension Plan violated ERISA in calculating lump-sum distributions.

 

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NOTE 11—Shareholders’ Equity and Earnings Per Common Share

 

The following table presents share repurchase activity for the three and nine months ended September 30, 2006 and 2005, including total common shares repurchased under announced programs, weighted average per share price and the remaining buyback authority under announced programs.

 

(Dollars in millions, except per share information;
shares in thousands)
  Number of Common
Shares Repurchased
under Announced
Programs (1)
    

Weighted
Average

Per
Share
Price (1)

  Remaining Buyback Authority
under Announced Programs (2)
         Amounts      Shares

Three months ended March 31, 2006

  88,450      $ 46.02   $ 5,847      65,738

Three months ended June 30, 2006

  83,050        48.16     11,169      182,688

July 1-31, 2006

  11,500        49.48     10,600      171,188

August 1-31, 2006

  24,000        52.03     9,352      147,188

September 1-30, 2006

  24,000        51.98     8,104      123,188

Three months ended September 30, 2006

  59,500        51.51       

Nine months ended September 30, 2006

  231,000        48.21             
(Dollars in millions, except per share information;
shares in thousands)
  Number of Common
Shares Repurchased
under Announced
Programs (3)
    

Weighted
Average
Per

Share
Price (3)

 

Remaining Buyback Authority

under Announced Programs (2)

         Amounts      Shares

Three months ended March 31, 2005

  43,214      $ 46.05   $ 14,688      237,411

Three months ended June 30, 2005

  40,300        45.38     11,865      197,111

July 1-31, 2005

  750        44.75     11,832      196,361

August 1-31, 2005

  4,900        43.45     11,619      191,461

September 1-30, 2005

  5,023        42.98     11,403      186,438

Three months ended September 30, 2005

  10,673        43.32       

Nine months ended September 30, 2005

  94,187        45.45             

 

(1)

Reduced Shareholders’ Equity by $11.1 billion and increased diluted earnings per common share by $0.06 for the nine months ended September 30, 2006. These repurchases were partially offset by the issuance of approximately 98 million shares of common stock under employee plans, which increased Shareholders’ Equity by $3.9 billion, net of $135 million of deferred compensation related to restricted stock awards, and decreased diluted earnings per common share by $0.03 for the nine months ended September 30, 2006.

 

(2)

On January 28, 2004, the Board of Directors (the Board) authorized a stock repurchase program of up to 180 million shares of the Corporation’s common stock at an aggregate cost not to exceed $9.0 billion. This repurchase plan was completed during the second quarter of 2005. 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. On April 26, 2006, the Board authorized an additional 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.

 

(3)

Reduced Shareholders’ Equity by $4.3 billion and increased diluted earnings per common share by $0.04 for the nine months ended September 30, 2005. These repurchases were partially offset by the issuance of approximately 61 million shares of common stock under employee plans, which increased Shareholders’ Equity by $2.4 billion, net of $211 million of deferred compensation related to restricted stock awards, and decreased diluted earnings per common share by $0.03 for the nine months ended September 30, 2005.

The Corporation will continue to 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.

On October 25, 2006, the Board declared a regular quarterly cash dividend on common stock of $0.56 per share, payable on December 22, 2006 to common shareholders of record on December 1, 2006. In July 2006, the Board increased the quarterly cash dividend on common stock from $0.50 to $0.56 which was paid on September 22, 2006 to common shareholders of record on September 1, 2006.

In September 2006, the Corporation authorized 34,500 shares and issued 33,000 shares, or $825 million, of Bank of America Corporation 6.204% Non-Cumulative Preferred Stock, Series D (Series D Preferred Stock) with a par value of $0.01 per share. Ownership is held in the form of depositary shares, each representing a 1/1,000 interest in a share of Series D Preferred Stock, paying a quarterly cash dividend on the liquidation preference of $25,000 per share of Series D Preferred

 

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Stock at an annual rate of 6.204 percent. On any dividend date on or after September 14, 2011, the Corporation may redeem Series D Preferred Stock, in whole or in part, at its option, at $25,000 per share, plus accrued and unpaid dividends. Series D Preferred Stock shares are not subject to the operation of a sinking fund, have no participation rights and are not convertible. The holders of Series D Preferred Stock have no general voting rights. If any quarterly dividend payable on the Series D Preferred Stock is in arrears for six or more quarterly dividend periods (whether consecutive or not), the holders of the Series D Preferred Stock and any other class or series of preferred stock ranking equally with the Series D Preferred Stock as to payment of dividends and upon which equivalent voting rights have been conferred and are exercisable (voting as a single class) will be entitled to vote for the election of two additional directors. These voting rights terminate when the Corporation has paid in full dividends on the Series D Preferred Stock for at least four quarterly dividend periods following the dividend arrearage.

On July 14, 2006, the Corporation redeemed its 6.75% Perpetual Preferred Stock with a stated value of $250 per share. The 382,450 shares, or $96 million, outstanding of preferred stock were redeemed at the stated value of $250 per share, plus accrued and unpaid dividends.

On July 3, 2006, the Corporation redeemed its Fixed/Adjustable Rate Cumulative Preferred Stock with a stated value of $250 per share. The 700,000 shares, or $175 million, outstanding of preferred stock were redeemed at the stated value of $250 per share, plus accrued and unpaid dividends.

In addition to the preferred stock described above, the Corporation had 35,045 shares authorized and 7,739 shares, or $1 million, outstanding of the Series B Preferred Stock with a stated value of $100 per share paying dividends quarterly at an annual rate of 7.00 percent.

The following table presents the changes in Accumulated OCI for the nine months ended September 30, 2006 and 2005.

 

(Dollars in millions) (1)    Securities (2)        Derivatives (3)        Other        Total  

Balance, December 31, 2004

   $ (197 )      $ (2,279 )      $ (288 )      $ (2,764 )

Net change in fair value recorded in Accumulated OCI

     (911 )        (2,490 )        25          (3,376 )

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

     (800 )        360                   (440 )

Balance, September 30, 2005

   $ (1,908 )      $ (4,409 )      $ (263 )      $ (6,580 )
                 

Balance, December 31, 2005

   $ (2,978 )      $ (4,338 )      $ (240 )      $ (7,556 )

Net change in fair value recorded in Accumulated OCI

     (159 )        557          128          526  

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

     53          61          49          163  

Balance, September 30, 2006

   $ (3,084 )      $ (3,720 )      $ (63 )      $ (6,867 )

 

(1)

Amounts shown are net-of-tax.

 

(2)

During the nine months ended September 30, 2006 and 2005, the Corporation reclassified net realized (gains) losses into earnings on the sales of AFS debt securities of $292 million and $(638) million and gains on the sales of AFS marketable equity securities of $(239) million and $(162) million.

 

(3)

The amount included in Accumulated OCI for terminated derivative contracts were losses of $3.1 billion and $2.0 billion, net-of-tax, at September 30, 2006 and 2005.

 

(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 securities. These amounts are reclassified into earnings upon sale of the related security.

 

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The calculation of earnings per common share and diluted earnings per common share for the three and nine months ended September 30, 2006 and 2005 is presented below:

 

    Three Months Ended
September 30
         Nine Months Ended
September 30
 
(Dollars in millions, except per share information; shares in thousands)   2006    2005           2006     2005  

Earnings per common share

           

Net income

  $ 5,416    $ 3,841        $ 15,877     $ 12,891  

Preferred stock dividends

         (5 )          (9 )     (14 )

Net income available to common shareholders

  $ 5,416    $ 3,836          $ 15,868     $ 12,877  

Average common shares issued and outstanding

    4,499,704      4,000,573            4,547,693       4,012,924  

Earnings per common share

  $ 1.20    $ 0.96          $ 3.49     $ 3.21  

Diluted earnings per common share

           

Net income available to common shareholders

  $ 5,416    $ 3,836          $ 15,868     $ 12,877  

Average common shares issued and outstanding

    4,499,704      4,000,573          4,547,693       4,012,924  

Dilutive potential common shares (1, 2)

    70,854      54,086            66,906       60,067  

Total diluted average common shares issued and outstanding

    4,570,558      4,054,659            4,614,599       4,072,991  

Diluted earnings per common share

  $ 1.18    $ 0.95          $ 3.44     $ 3.16  

 

(1)

For the three and nine months ended September 30, 2006, average options to purchase 286 thousand and 28 million shares were outstanding but not included in the computation of earnings per common share because they were antidilutive. For the three and nine months ended September 30, 2005, average options to purchase 45 million and 38 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.

 

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 provided in Note 16 of the Consolidated Financial Statements filed on Exhibit 99.2 to the Corporation’s Current Report on Form 8-K filed on May 25, 2006.

As a result of the MBNA merger, the Corporation assumed the obligations related to the plans of the former MBNA. The MBNA Pension Plan retirement benefits are based on the number of years of benefit service and a percentage of the participant’s average annual compensation during the five highest paid consecutive years of their last 10 years of employment. The MBNA Supplemental Executive Retirement Plan (SERP) provides certain officers with supplemental retirement benefits in excess of limits imposed on qualified plans by federal tax law. The MBNA Postretirement Health and Life Plan provides certain health care and life insurance benefits for a closed group upon early retirement.

 

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Net periodic benefit cost of the Corporation’s plans including the MBNA plans, for the three and nine months ended September 30, 2006 and 2005 included the following components:

 

    Three Months Ended September 30  
   

Pension

Plans

      

Nonqualified

Pension Plans

      

Postretirement

Health and Life Plans

 
(Dollars in millions)   2006 (1)        2005        2006 (1)        2005        2006 (1)        2005  

Service cost

  $ 77        $ 42        $ 4        $ 1        $ 3        $ 3  

Interest cost

    169          154          19          14          18          21  

Expected return on plan assets

    (259 )        (241 )                          (4 )        (4 )

Amortization of transition obligation

                                        8          8  

Amortization of prior service cost (credits)

    10          11          (2 )        (2 )                  

Recognized net actuarial loss (gains)

    57          60          5          9          (17 )        26  

Net periodic benefit cost

  $ 54        $ 26        $ 26        $ 22        $ 8        $ 54  
    Nine Months Ended September 30  
   

Pension

Plans

      

Nonqualified

Pension Plans

      

Postretirement

Health and Life Plans

 
(Dollars in millions)   2006 (1)        2005        2006 (1)        2005        2006 (1)        2005  

Service cost

  $ 230        $ 196        $ 10        $ 8        $ 10        $ 8  

Interest cost

    507          482          59          45          64          59  

Expected return on plan assets

    (776 )        (737 )                          (8 )        (11 )

Amortization of transition obligation

                                        24          24  

Amortization of prior service cost (credits)

    31          34          (6 )        (5 )                  

Recognized net actuarial loss

    171          135          15          18          9          60  

Recognized loss due to settlements and curtailments

                               9                    

Net periodic benefit cost

  $ 163        $ 110        $ 78        $ 75        $ 99        $ 140  

 

(1)

Includes the results of the former MBNA. The net periodic benefit cost of the former MBNA Pension Plan, SERP, and Postretirement Health and Life Plan were $13 million, $6 million and $4 million, respectively, for the three months ended September 30, 2006. The net periodic benefit cost of the former MBNA Pension Plan, SERP, and Postretirement Health and Life Plan were $38 million, $19 million and $12 million, respectively, for the nine months ended September 30, 2006.

During 2006, the Corporation expects to contribute $97 million and $37 million to the Corporation’s Nonqualified Pension Plans and Postretirement Health and Life Plans, respectively. At September 30, 2006, the Corporation had contributed $62 million and $28 million, respectively, to these plans. During 2006, the Corporation expects to contribute $242 million and $21 million to the former MBNA SERP and Postretirement Health and Life Plan, respectively. At September 30, 2006, the Corporation had contributed $232 million and $18 million, respectively, to these plans. The Corporation is currently evaluating the contribution amounts related to the Corporation’s Qualified Pension Plans and the former MBNA Pension Plan. The Corporation may choose to contribute more than the required minimum amounts due to the increase in funding limits within the Pension Protection Act of 2006, and in conjunction with an annual review of its funding thresholds.

 

NOTE 13—Stock-Based Compensation Plans

Prior to January 1, 2006, the Corporation accounted for its stock-based compensation plans under SFAS 123. On January 1, 2006, the Corporation adopted SFAS 123R under the modified-prospective application. Under the modified-prospective application, SFAS 123R applies to new awards and to awards modified, repurchased, or cancelled after adoption.

The compensation cost recognized in income for the plans described below was $180 million and $205 million for the three months ended September 30, 2006 and 2005. The related income tax benefit recognized in income was $67 million and $76 million for the three months ended September 30, 2006 and 2005. The compensation cost recognized in income for the plans described below was $862 million and $608 million for the nine months ended September 30, 2006 and 2005. The related income tax benefit recognized in income was $319 million and $221 million for the nine months ended September 30, 2006 and 2005.

 

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Prior to the adoption of SFAS 123R, awards granted to retirement-eligible employees were expensed over the stated vesting period. SFAS 123R requires that the Corporation recognize stock compensation cost immediately for any awards granted to retirement-eligible employees, or over the vesting period or the period from the grant date to the date retirement eligibility is achieved, whichever is shorter. During the first quarter of 2006, the Corporation recognized approximately $320 million in equity-based compensation associated with awards granted to retirement-eligible employees.

Prior to the adoption of SFAS 123R, the Corporation presented tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Consolidated Statement of Cash Flows. SFAS 123R requires the cash flows resulting from the tax benefits due to tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. The Corporation recognized $342 million in excess tax benefits that were classified as a financing cash inflow for the nine months ended September 30, 2006.

Prior to January 1, 2006, the Corporation estimated the fair value of stock options granted on the date of grant using the Black-Scholes option-pricing model. On January 1, 2006, the Corporation began using a lattice option-pricing model to estimate the grant date fair value of stock options granted. The table below presents the assumptions used to estimate the fair value of stock options granted on the date of grant using the lattice option-pricing model for the nine months ended September 30, 2006. Lattice option-pricing models incorporate ranges of assumptions for inputs and those ranges are disclosed in the table below. The risk-free rate for periods within the contractual life of the stock option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatilities are based on implied volatilities from traded stock options on the Corporation’s common stock, historical volatility of the Corporation’s common stock, and other factors. The Corporation uses historical data to estimate stock option exercise and employee termination within the model. The expected term of stock options granted is derived from the output of the model and represents the period of time that stock options granted are expected to be outstanding. The table below also includes the assumptions used to estimate the fair value of stock options granted on the date of grant using the Black-Scholes option-pricing model for the nine months ended September 30, 2005. The estimates of fair value from these models are theoretical values for stock options and changes in the assumptions used in the models could result in materially different fair value estimates. The actual value of the stock options will depend on the market value of the Corporation’s common stock when the stock options are exercised.

 

     Nine Months Ended
September 30
 
      2006        2005  

Risk-free interest rate

   4.59 – 4.70     %      3.94     %

Dividend yield

   4.50            4.60      

Expected volatility

   17.00 – 27.00            20.53      

Weighted-average volatility

   20.30            n/a      

Expected lives (years)

   6.5            6      

The Corporation has certain equity compensation plans that were approved by its shareholders. These plans are the Key Employee Stock Plan and the Key Associate Stock Plan. Descriptions of the material features of these plans follow.

 


Key Employee Stock Plan


The Key Employee Stock Plan, as amended and restated, provided for different types of awards. These include stock options, restricted stock shares and restricted stock units. Under the plan, ten-year options to purchase approximately 260 million shares of common stock were granted through December 31, 2002, to certain employees at the closing market price on the respective grant dates. Options granted under the plan generally vest in three or four equal annual installments. At September 30, 2006, approximately 71 million options were outstanding under this plan. No further awards may be granted.

 


Key Associate Stock Plan


On April 24, 2002, the shareholders approved the Key Associate Stock Plan to be effective January 1, 2003. This approval authorized and reserved 200 million shares for grant in addition to the remaining amount under the Key Employee Stock Plan as of December 31, 2002, which was approximately 34 million shares plus any shares covered by awards under the Key Employee Stock Plan that terminate, expire, lapse or are cancelled after December 31, 2002. Upon the FleetBoston

 

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merger, the shareholders authorized an additional 102 million shares and on April 26, 2006, the shareholders authorized an additional 180 million shares for grant under the Key Associate Stock Plan. At September 30, 2006, approximately 140 million options were outstanding under this plan. Approximately 18 million shares of restricted stock and restricted stock units were granted during the nine months ended September 30, 2006. These shares of restricted stock generally vest in three equal annual installments beginning one year from the grant date. The Corporation incurred restricted stock expense of $126 million and $663 million during the three and nine months ended September 30, 2006 compared to $127 million and $369 million during the same periods in 2005.

The following table presents information on equity compensation plans at September 30, 2006:

 

      Number of Shares
to be Issued (1, 3)
     Weighted Average
Exercise Price of
Outstanding
Options (2)
     Number of Shares
Remaining for
Future Issuance
Under Equity
Compensation
Plans

Plans approved by shareholders

   225,975,003      $ 37.48      303,015,719

Plans not approved by shareholders (4)

   8,425,636        30.68     

Total

   234,400,639        37.22      303,015,719

 

(1)

Includes 14,139,279 unvested restricted stock units.

 

(2)

Does not take into account unvested restricted stock units.

 

(3)

In addition to the securities presented in the table above, there were outstanding options to purchase 44,825,144 shares of the Corporation’s common stock and 526,303 unvested restricted stock units granted to employees of predecessor companies assumed in mergers. The weighted average option price of the assumed options was $34.21 at September 30, 2006.

 

(4)

Shareholder approval of these broad-based stock option plans was not required by applicable law or New York Stock Exchange rules.

The following table presents the status of all option plans at September 30, 2006, and changes during the nine months ended September 30, 2006:

 

     September 30, 2006
Employee stock options    Shares        Weighted
Average
Exercise
Price

Outstanding at January 1, 2006

   298,132,802        $ 35.13

Options assumed through acquisition

   31,506,268          32.70

Granted

   31,461,390          44.40

Exercised

   (92,397,064 )        32.65

Forfeited

   (3,616,892 )        41.38

Outstanding at September 30, 2006

   265,086,504          36.71

Options exercisable at September 30, 2006

   197,007,102          34.14

Options vested and expected to vest (1)

   263,883,117          36.68

 

(1)

Includes vested shares and nonvested shares after a forfeiture rate is applied.

The weighted average remaining contractual term and aggregate intrinsic value of options outstanding was 5.7 years and $4.5 billion, options exercisable was 4.8 years and $3.8 billion, and options vested and expected to vest was 5.0 years and $4.5 billion at September 30, 2006.

The weighted average grant-date fair value of options granted during the nine months ended September 30, 2006 and 2005 was $6.90 and $6.48. The total intrinsic value of options exercised during the three and nine months ended September 30, 2006 was $558 million and $1.6 billion.

 

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Table of Contents

The following table presents the status of the nonvested shares at September 30, 2006, and changes during the nine months ended September 30, 2006:

 

     September 30, 2006
Restricted stock/unit awards    Shares        Weighted
Average
Grant Date
Fair Value

Outstanding at January 1, 2006

   27,278,106        $ 42.79

Share obligations assumed through acquisition

   754,740          30.40

Granted

   18,102,340          44.42

Vested

   (11,677,381 )        41.34

Cancelled

   (1,856,675 )        44.52

Outstanding at September 30, 2006

   32,601,130          43.83

At September 30, 2006, there was $961 million of total unrecognized compensation cost related to share-based compensation arrangements for all awards that is expected to be recognized over a weighted average period of .95 years. The total fair value of restricted stock vested during the three and nine months ended September 30, 2006 was $32 million and $525 million.

 

NOTE 14—Business Segment Information

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

Global Consumer and Small Business Banking provides a diversified range of products and services to individuals and small businesses through its primary businesses: Deposits, Card Services, Mortgage and Home Equity. Global Corporate and Investment Banking serves domestic and international issuer and investor clients, providing financial services, specialized industry expertise and local delivery through its primary businesses: Business Lending, Capital Markets and Advisory Services, and Treasury Services. These businesses provide traditional bank deposit and loan products to large corporations and institutional clients, capital-raising solutions, advisory services, derivatives capabilities, equity and debt sales and trading for clients, as well as treasury management and payment services. Global Wealth and Investment Management offers investment 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 through its primary businesses: The Private Bank, Columbia Management and Premier Banking and Investments.

All Other consists of equity investment activities including Principal Investing, Corporate and Strategic Investments, the residual impact of the allowance for credit losses and the cost allocation processes, Merger and Restructuring Charges, intersegment eliminations, and the results of certain consumer finance and commercial lending businesses that are being liquidated. All Other also includes certain amounts associated with ALM activities, including the residual impact of funds transfer pricing allocation methodologies, amounts associated with the change in the value of derivatives used as economic hedges of interest rate and foreign exchange rate fluctuations that do 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.

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.

 

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The following tables present Total Revenue on a FTE basis and Net Income for the three and nine months ended September 30, 2006 and 2005, and Total Assets at September 30, 2006 and 2005 for each business segment, as well as All Other.

Business Segments

 

For the Three Months Ended September 30                                                
     Total Corporation       

Global Consumer and

Small Business Banking (1, 2)

      

Global Corporate and

Investment Banking (1)

(Dollars in millions)      2006          2005          2006          2005          2006        2005

Net interest income (FTE basis)

   $ 8,894        $ 7,933        $ 5,243        $ 4,238        $ 2,643      $ 2,749

Noninterest income

     10,067          6,416          5,200          3,028          3,372        2,540

Total revenue (FTE basis)

     18,961          14,349          10,443          7,266          6,015        5,289

Provision for credit losses

     1,165          1,159          1,144          1,107          22        12

Gains (losses) on sales of debt securities

     (469 )        29                   (1 )        14        17

Amortization of intangibles

     441          201          379          137          41        43

Other noninterest expense

     8,422          7,084          4,351          3,118          2,924        2,811

Income before income taxes

     8,464          5,934          4,569          2,903          3,042        2,440

Income tax expense

     3,048          2,093          1,680          1,061          1,120        889

Net income

   $ 5,416        $ 3,841        $ 2,889        $ 1,842        $ 1,922      $ 1,551

Period-end total assets

   $ 1,449,211        $ 1,252,267        $ 394,920        $ 326,926        $ 675,893      $ 602,008
     Global Wealth and
Investment Management (1, 2)
       All Other                
(Dollars in millions)      2006          2005          2006          2005            

Net interest income (FTE basis)

   $ 943        $ 937        $ 65        $ 9            

Noninterest income

     925          882          570          (34 )          

Total revenue (FTE basis)

     1,868          1,819          635          (25 )          

Provision for credit losses

     (1 )        (1 )                 41            

Gains (losses) on sales of debt securities

                       (483 )        13            

Amortization of intangibles

     19          20          2          1            

Other noninterest expense

     973          904          174          251            

Income before income taxes

     877          896          (24 )        (305 )          

Income tax expense (benefit)

     324          328          (76 )        (185 )          

Net income

   $ 553        $ 568        $ 52        $ (120 )          

Period-end total assets

   $ 125,247        $ 125,684        $ 253,151        $ 197,649            

 

(1)

There were no material intersegment revenues among the segments.

 

(2)

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

 

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Business Segments

 

                                                     
For the Nine Months Ended September 30                                     
     Total Corporation      Global Consumer and
Small Business Banking (1, 2)
     Global Corporate and
Investment Banking (1)
 
(Dollars in millions)    2006      2005      2006      2005      2006      2005  

Net interest income (FTE basis)

   $ 26,860      $ 23,467      $ 15,788      $ 12,555      $ 8,069      $ 8,394  

Noninterest income

     28,566        19,403        15,274        8,473        9,224        7,257  

Total revenue (FTE basis)

     55,426        42,870        31,062        21,028        17,293        15,651  

Provision for credit losses

     3,440        2,614        3,420        2,973        102        (388 )

Gains (losses) on sales of debt securities

     (464 )      1,013        (1 )      (2 )      34        168  

Amortization of intangibles

     1,322        613        1,137        419        124        131  

Other noninterest expense

     25,182        20,748        12,820        9,420        8,829        8,035  

Income before income taxes

     25,018        19,908        13,684        8,214        8,272        8,041  

Income tax expense

     9,141        7,017        5,040        2,956        3,051        2,933  

Net income

   $ 15,877      $ 12,891      $ 8,644      $ 5,258      $ 5,221      $ 5,108  

Period-end total assets

   $ 1,449,211      $ 1,252,267      $ 394,920      $ 326,926      $ 675,893      $ 602,008  
    

Global Wealth and

Investment Management (1, 2)

     All Other                
(Dollars in millions)    2006      2005      2006      2005                

Net interest income (FTE basis)

   $ 2,910      $ 2,814      $ 93      $ (296 )        

Noninterest income

     2,881        2,607        1,187        1,066          

Total revenue (FTE basis)

     5,791        5,421        1,280        770          

Provision for credit losses

     (42 )      (8 )      (40 )      37          

Gains (losses) on sales of debt securities

                   (497 )      847          

Amortization of intangibles

     57        59        4        4          

Other noninterest expense

     2,918        2,704        615        589          

Income before income taxes

     2,858        2,666        204        987          

Income tax expense (benefit)

     1,057        959        (7 )      169          

Net income

   $ 1,801      $ 1,707      $ 211      $ 818          

Period-end total assets

   $ 125,247      $ 125,684      $ 253,151      $ 197,649          

 

(1)

There were no material intersegment revenues among the segments.

 

(2)

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

 

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The following table presents reconciliations of the three business segments’ Total Revenue on a FTE basis and Net Income to the Consolidated Statement of Income totals. The adjustments presented in the table below include consolidated income and expense amounts not specifically allocated to individual business segments.

 

    

Three Months Ended

September 30

    Nine Months Ended
September 30
 
(Dollars in millions)    2006        2005     2006        2005  

Segments’ total revenue (FTE basis)

   $ 18,326        $ 14,374     $ 54,146        $ 42,100  

Adjustments:

              

ALM activities (1)

     (258 )        (690 )     (498 )        (297 )

Equity investment gains

     687          640       1,835          1,471  

Liquidating businesses

     43          48       219          151  

FTE basis adjustment

     (308 )        (198 )     (868 )        (589 )

Other

     163          (23 )     (276 )        (555 )

Consolidated revenue

   $ 18,653        $ 14,151     $ 54,558        $ 42,281  

Segments’ net income

   $ 5,364        $ 3,961     $ 15,666        $ 12,073  

Adjustments, net of taxes:

              

ALM activities (1, 2)

     (524 )        (471 )     (779 )        243  

Equity investment gains

     433          410       1,156          941  

Liquidating businesses

     21          27       115          70  

Merger and restructuring charges

     169          80       353          235  

Other

     (47 )        (166 )     (634 )        (671 )

Consolidated net income

   $ 5,416        $ 3,841     $ 15,877        $ 12,891  

 

(1)

Includes the impact of derivative instruments which were designated as economic hedges and did not qualify for SFAS 133 hedge accounting treatment.

 

(2)

Includes pre-tax Gains (Losses) on Sales of Debt Securities of $(484) million and $11 million for the three months ended September 30, 2006 and 2005, and $(498) million and $844 million for the nine months ended September 30, 2006 and 2005.

 

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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

   35

MBNA Merger Overview

   36

Performance Overview

   36

Financial Highlights

   38

Supplemental Financial Data

   43

Business Segment Operations

   50

Global Consumer and Small Business Banking

   52

Global Corporate and Investment Banking

   61

Global Wealth and Investment Management

   67

All Other

   71

Off-Balance Sheet Financing Entities

   73

Obligations and Commitments

   74

Managing Risk

   74

Strategic Risk Management

   74

Liquidity Risk and Capital Management

   75

Credit Risk Management

   77

Consumer Portfolio Credit Risk Management

   78

Commercial Portfolio Credit Risk Management

   82

Provision for Credit Losses

   93

Allowance for Credit Losses

   93

Market Risk Management

   96

Trading Risk Management

   97

Interest Rate Risk Management

   98

Mortgage Banking Risk Management

   103

Operational Risk Management

   103

Recent Accounting and Reporting Developments

   104

Complex Accounting Estimates

   104

 

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

This report on Form 10-Q contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from those expressed in, or implied by, our forward-looking statements. Words such as “expects,” “anticipates,” “believes,” “estimates” and other similar expressions or future or conditional verbs such as “will,” “should,” “would” and “could” are intended to identify such forward-looking statements. Readers of the Form 10-Q of Bank of America Corporation and its subsidiaries (the Corporation) should not rely solely on the forward-looking statements and should consider all uncertainties and risks throughout this report as well as those discussed under Item 1A. “Risk Factors” of the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005. 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 (FRB), the Office of the Comptroller of Currency, the Federal Deposit Insurance Corporation and state regulators; 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 44 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, Global Corporate and Investment Banking, and Global Wealth and Investment Management.

At September 30, 2006, the Corporation had $1.4 trillion in assets and approximately 200,000 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. Certain prior period amounts have been reclassified to conform to current period presentation.

 

Recent Events

In November 2006, the Corporation issued 74,000 shares of Bank of America Corporation Floating Rate Non-Cumulative Preferred Stock, Series E with a par value of $0.01 per share for $1.9 billion. In addition, an option to purchase up to an additional 11,100 shares of Series E Preferred Stock, at a purchase price of $25,000 per share, has been granted to the underwriters. In September 2006, the Corporation issued 33,000 shares of Bank of America Corporation 6.204% Non-Cumulative, Preferred Stock, Series D with a par value of $0.01 per share for $825 million. In July 2006, the Corporation redeemed its 700,000 shares, or $175 million, of Fixed/Adjustable Rate Cumulative Preferred Stock and redeemed its 382,450 shares, or $96 million, of 6.75% Perpetual Preferred Stock. Both classes were redeemed at their stated value of $250 per share, plus accrued and unpaid dividends.

In October 2006, the Board of Directors (the Board) declared a regular quarterly cash dividend on common stock of $0.56 per share, payable on December 22, 2006 to common shareholders of record on December 1, 2006. In July 2006, the Board increased the quarterly cash dividend on common stock 12 percent from $0.50 to $0.56 per share.

 

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Table of Contents

In September 2006, the Corporation completed the sale of its Brazilian operations for approximately $1.9 billion in equity of Banco Itau Holding Financeira S.A. (Banco Itau), Brazil’s second largest nongovernment-owned banking company. The sale resulted in a $720 million gain (pre-tax) that was recorded in Other Income.

In August 2006, the Corporation entered into an agreement to sell Bank of America (Asia) Ltd., including its consumer and commercial banking franchise in Hong Kong, to China Construction Bank (CCB) for $1.25 billion. Closing is subject to regulatory approval.

 

MBNA Merger Overview

The Corporation acquired 100 percent of the outstanding stock of MBNA Corporation (MBNA) on January 1, 2006, for $34.6 billion. In connection therewith 1,260 million shares of MBNA common stock were exchanged for 631 million shares of the Corporation’s common stock. Prior to the MBNA merger, this represented approximately 16 percent of the Corporation’s outstanding common stock. MBNA shareholders also received cash of $5.2 billion. The MBNA merger was a tax-free merger for the Corporation. The acquisition expands the Corporation’s customer base and its opportunity to deepen customer relationships across the full breadth of the Corporation by delivering innovative deposit, lending and investment products and services to MBNA’s customer base. Additionally, the acquisition allows the Corporation to significantly increase its affinity relationships through MBNA’s credit card operations and sell these credit cards through our delivery channels (including the retail branch network). MBNA’s results of operations were included in the Corporation’s results beginning January 1, 2006. The transaction was accounted for under the purchase method of accounting. The purchase price has been allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the MBNA merger date. For more information related to the MBNA merger, see Note 2 of the Corporation’s Consolidated Financial Statements.

 

Performance Overview

Net Income totaled $5.4 billion, or $1.18 per diluted common share, for the three months ended September 30, 2006, increases of 41 percent and 24 percent from $3.8 billion, or $0.95 per diluted common share, for the three months ended September 30, 2005. Net Income totaled $15.9 billion, or $3.44 per diluted common share, for the nine months ended September 30, 2006, increases of 23 percent and nine percent from $12.9 billion, or $3.16 per diluted common share, for the nine months ended September 30, 2005.

 

Table 1

Business Segment Total Revenue and Net Income

    Three Months Ended September 30     Nine Months Ended September 30
    Total Revenue     Net Income     Total Revenue     Net Income
(Dollars in millions)   2006     2005     2006   2005     2006     2005     2006   2005

Global Consumer and Small Business Banking

  $ 10,443     $ 7,266     $ 2,889   $ 1,842     $ 31,062     $ 21,028     $ 8,644   $ 5,258

Global Corporate and Investment Banking

    6,015       5,289       1,922     1,551       17,293       15,651       5,221     5,108

Global Wealth and Investment Management

    1,868       1,819       553     568       5,791       5,421       1,801     1,707

All Other

    635       (25 )     52     (120 )     1,280       770       211     818

Total FTE basis (1)

    18,961       14,349       5,416     3,841       55,426       42,870       15,877     12,891

FTE adjustment (1)

    (308 )     (198 )               (868 )     (589 )        

Total Consolidated

  $ 18,653     $ 14,151     $ 5,416   $ 3,841     $ 54,558     $ 42,281     $ 15,877   $ 12,891

 

(1)

Total revenue for the segments and All Other is on a fully taxable-equivalent (FTE) basis. For more information on a FTE basis, see Supplemental Financial Data beginning on page 43.

 

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Global Consumer and Small Business Banking

 

Net Income increased $1.0 billion, or 57 percent, to $2.9 billion for the three months ended September 30, 2006. Total Revenue increased $3.2 billion, or 44 percent, to $10.4 billion for the three months ended September 30, 2006 compared to the same period in 2005. Driving the increase was the impact of the MBNA merger, which contributed to increases in Card Income and Net Interest Income. Also impacting Net Income was organic growth in Loans and Leases. Partially offsetting these changes was higher Noninterest Expense primarily driven by the acquisition of MBNA.

Net Income increased $3.4 billion, or 64 percent, to $8.6 billion for the nine months ended September 30, 2006. Total Revenue increased $10.0 billion, or 48 percent, to $31.1 billion for the nine months ended September 30, 2006 compared to the same period in 2005. Driving the increase was the impact of the MBNA merger and organic growth which was partially offset by higher Noninterest Expense and Provision for Credit Losses. For more information on Global Consumer and Small Business Banking, see page 52.

 

Global Corporate and Investment Banking

 

 

Net Income increased $371 million, or 24 percent, to $1.9 billion and $113 million, or two percent, to $5.2 billion for the three and nine months ended September 30, 2006 compared to the same periods in the prior year. Total Revenue increased $726 million, or 14 percent, to $6.0 billion and $1.6 billion, or 10 percent, to $17.3 billion for the three and nine months ended September 30, 2006, driven primarily by the $720 million gain (pre-tax) on the sale of our Brazilian operations. Also impacting the increase in Total Revenue was higher Trading Account Profits of $140 million and $1.1 billion for the three and nine months ended September 30, 2006 compared to the same periods in the prior year. Offsetting these increases were spread compression in the loan portfolios and lower Asset Liability Management (ALM) allocation which adversely impacted Net Interest Income. In addition, the nine months ended September 30, 2006 was impacted by increases in Provision for Credit Losses and Noninterest Expense. For more information on Global Corporate and Investment Banking, see page 61.

 

Global Wealth and Investment Management

 

 

Net Income decreased $15 million, or three percent, to $553 million for the three months ended September 30, 2006. The decrease was due to higher Noninterest Expense resulting from higher personnel and incentive based compensation primarily reflecting growth in Global Wealth and Investment Management workforce. Partially offsetting this decrease was an increase in Total Revenue of $49 million, or three percent, due primarily to an increase in Investment and Brokerage Services.

Net Income increased $94 million, or six percent, to $1.8 billion for the nine months ended September 30, 2006. The increase was due to higher Total Revenue of $370 million, or seven percent, as a result of increases in Investment and Brokerage Services and Net Interest Income. Also impacting the increase in Net Income was a credit loss recovery. Partially offsetting these increases was higher Noninterest Expense of $212 million or eight percent due primarily to higher personnel related costs.

Total assets under management increased $34.7 billion to $517.1 billion at September 30, 2006 compared to December 31, 2005. For more information on Global Wealth and Investment Management, see page 67.

 

All Other

 

Net Income increased $172 million to $52 million for the three months ended September 30, 2006. Total Revenue increased $660 million driven primarily by an increase in other income of $557 million. Offsetting this increase were Gains (Losses) on Sales of Debt Securities of $(483) million for the three months ended September 30, 2006 compared to $13 million for the same period in 2005.

Net Income decreased $607 million to $211 million for the nine months ended September 30, 2006. This decrease was primarily a result of lower Gains (Losses) on Sales of Debt Securities which were $(497) million for the nine months ended September 30, 2006 compared to $847 million for the same period in 2005. For more information on All Other, see page 71.

 

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Table of Contents

Financial Highlights

 

 

Net Interest Income

Net Interest Income on a FTE basis increased $961 million to $8.9 billion and $3.4 billion to $26.9 billion for the three and nine months ended September 30, 2006 compared to the same periods in 2005. The primary drivers of the increase were the impact of the MBNA merger, organic loan growth, and increases in ALM activities including increased portfolio balances, wholesale funding activity, and the impact of rates. These increases were partially offset by lower core deposit levels, excluding the impact of MBNA. The net interest yield on a FTE basis decreased 5 basis points (bps) to 2.73 percent for the three months ended September 30, 2006 and was flat at 2.85 percent for the nine months ended September 30, 2006. Loan spreads continued to tighten due to the flat yield curve and heightened competition. Deposits spreads widened slightly as we effectively managed pricing in a rising interest rate environment. The current year results were also positively impacted by wider margins associated with the MBNA credit card portfolios. For more information on Net Interest Income on a FTE basis, see Tables 8 and 9 on pages 47 to 49.

Table 2

Noninterest Income

 

      Three Months Ended
September 30
       Nine Months Ended
September 30
(Dollars in millions)    2006      2005        2006      2005

Service charges

   $ 2,147      $ 2,080        $ 6,125      $ 5,777

Investment and brokerage services

     1,085        1,060          3,334        3,122

Mortgage banking income

     189        180          415        590

Investment banking income

     510        522          1,623        1,319

Equity investment gains

     705        713          2,122        1,691

Card income

     3,473        1,520          10,566        4,246

Trading account profits

     731        557          2,706        1,464

Other income

     1,227        (216 )        1,675        1,194

Total noninterest income

   $ 10,067      $ 6,416        $ 28,566      $ 19,403

Noninterest Income increased $3.7 billion to $10.1 billion and $9.2 billion to $28.6 billion for the three and nine months ended September 30, 2006 compared to the same periods in 2005, due primarily to the following:

 

   

Service Charges grew $67 million and $348 million for the three and nine months ended September 30, 2006 due to increased non-sufficient funds fees and overdraft charges, account service charges, and ATM fees resulting from new account growth.

   

Investment and Brokerage Services increased $25 million and $212 million for the three and nine months ended September 30, 2006 primarily reflecting record levels of assets under management.

   

Mortgage Banking Income was relatively flat and decreased $175 million for the three and nine months ended September 30, 2006. The decrease for the nine months ended September 30, 2006, was driven primarily by weaker production income driven by lower volumes sold and margin compression in addition to a strategic shift to retain a larger portion of mortgage production.

   

Investment Banking Income was relatively flat and increased $304 million for the three and nine months September 30, 2006. The increase for the nine months was due to higher market activity and continued leadership in the leveraged debt underwriting market.

   

Equity Investment Gains was relatively flat and increased $431 million for the three and nine months September 30, 2006. The increase for the nine months was driven by favorable market conditions and increased liquidity in the capital markets.

   

Card Income increased $2.0 billion and $6.3 billion for the three and nine months ended September 30, 2006 primarily due to the addition of MBNA and higher debit card income.

   

Trading Account Profits increased $174 million and $1.2 billion for the three and nine months September 30, 2006 due to increased capital markets activity, and previous investments in personnel and trading infrastructure coming to fruition.

 

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Other Income increased $1.4 billion and $481 million for the three and nine months ended September 30, 2006 primarily related to the $720 million (pre-tax) gain on the sale of our Brazilian operations. Also impacting the third quarter comparison, was the negative impact to 2005 of the change in the value of derivatives of $(418) million used as economic hedges that did not qualify for Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities, as amended” (SFAS 133) hedge accounting treatment.

 

Provision for Credit Losses

 

The Provision for Credit Losses was relatively flat at $1.2 billion and increased $826 million to $3.4 billion for the three and nine months ended September 30, 2006 compared to the same periods in 2005. Provision expense rose due to increases from the addition of MBNA and the absence of prior year releases of commercial credit reserves. These increases were partially offset by reduced credit-related costs on the domestic credit card portfolio.

For more information on credit quality, see Credit Risk Management beginning on page 77.

 

Gains (Losses) on Sales of Debt Securities

 

Gains (Losses) on Sales of Debt Securities for the three and nine months ended September 30, 2006 were $(469) million and $(464) million compared to $29 million and $1.0 billion for the same periods in 2005. These decreases were primarily due to a loss on the sale of mortgage-backed securities during the quarter. The decrease for the nine month period was also impacted by gains recorded on the sales of mortgage-backed securities in 2005. For more information on Gains (Losses) on Sales of Debt Securities, see “Interest Rate Risk Management – Securities” beginning on page 99.

Table 3

Noninterest Expense

 

        Three Months Ended
September 30
     Nine Months Ended
September 30
(Dollars in millions)      2006      2005      2006      2005

Personnel

     $ 4,474      $ 3,837      $ 13,767      $ 11,209

Occupancy

       696        638        2,100        1,889

Equipment

       318        300        978        894

Marketing

       587        307        1,713        990

Professional fees

       259        254        710        647<