Bank of America 2009 Annual Report Download - page 64

Regulatory Capital
At December 31, 2009, the Corporation operated its banking activities
primarily under two charters: Bank of America, N.A. and FIA Card Serv-
ices, N.A. With the acquisition of Merrill Lynch on January 1, 2009, we
acquired Merrill Lynch Bank USA and Merrill Lynch Bank & Trust Co., FSB.
Effective July 1, 2009, Merrill Lynch Bank USA merged into Bank of Amer-
ica, N.A, with Bank of America, N.A. as the surviving entity. Effective
November 2, 2009, Merrill Lynch Bank & Trust Co., FSB merged into
Bank of America, N.A., with Bank of America, N.A. as the surviving entity.
Further, with the acquisition of Countrywide on July 1, 2008, we acquired
Countrywide Bank, FSB, and effective April 27, 2009, Countrywide Bank,
FSB converted to a national bank with the name Countrywide Bank, N.A.
and immediately thereafter merged with and into Bank of America, N.A.,
with Bank of America, N.A. as the surviving entity.
Certain corporate sponsored trust companies which issue trust pre-
ferred securities (Trust Securities) are not consolidated under applicable
accounting guidance. In accordance with Federal Reserve guidance, Trust
Securities qualify as Tier 1 capital with revised quantitative limits that will
be effective on March 31, 2011. Such limits restrict certain types of capi-
tal to 15 percent of total core capital elements for internationally active
bank holding companies. In addition, the Federal Reserve revised the
qualitative standards for capital instruments included in regulatory capi-
tal. Internationally active bank holding companies are those with con-
solidated assets greater than $250 billion or on-balance sheet exposure
greater than $10 billion. At December 31, 2009, our restricted core capi-
tal elements comprised 11.8 percent of total core capital elements.
Table 13 provides a reconciliation of the Corporation’s total shareholders’
equity at December 31, 2009 and 2008 to Tier 1 common capital, Tier 1 capi-
tal and total capital as defined by the regulations issued by the joint agencies.
See Note 16 – Regulatory Requirements and Restrictions to the Consolidated
Financial Statements for more information on our regulatory capital.
Table 13 Reconciliation of Tier 1 Common Capital, Tier 1 Capital and Total Capital
December 31
(Dollars in millions) 2009 2008
Total common shareholders’ equity $194,236 $139,351
Goodwill (86,314) (81,934)
Nonqualifying intangible assets
(1)
(8,299) (4,195)
Net unrealized losses on AFS debt and marketable equity securities and net losses on derivatives
recorded in accumulated OCI, net-of-tax 1,034 5,479
Unamortized net periodic benefit costs recorded in accumulated OCI, net-of-tax 4,092 4,642
Exclusion of fair value adjustment related to the Merrill Lynch structured notes
(2)
3,010 –
Common Equivalent Securities 19,290 –
Disallowed deferred tax asset (7,080) –
Other 425 (4)
Total Tier 1 common capital 120,394 63,339
Preferred stock 17,964 37,701
Trust preferred securities 21,448 18,105
Noncontrolling interest 582 1,669
Total Tier 1 capital 160,388 120,814
Long-term debt qualifying as Tier 2 capital 43,284 31,312
Allowance for loan and lease losses 37,200 23,071
Reserve for unfunded lending commitments 1,487 421
Other
(3)
(16,282) (3,957)
Total capital $226,077 $171,661
(1) Nonqualifying intangible assets include core deposit intangibles, affinity relationships, customer relationships and other intangibles.
(2) Represents loss on Merrill Lynch structured notes, net-of-tax, that is excluded from Tier 1 common capital, Tier 1 capital and total capital for regulatory purposes.
(3) Balance includes a reduction of $18.7 billion and $6.7 billion related to allowance for loan and lease losses exceeding 1.25 percent of risk-weighted assets in 2009 and 2008. Balance also includes 45 percent of the
pre-tax unrealized fair value adjustments on AFS marketable equity securities.
At December 31, 2009, the Corporation’s Tier 1 common capital, Tier
1 capital, total capital and Tier 1 leverage ratios were 7.81 percent,
10.40 percent, 14.66 percent and 6.91 percent, respectively.
The Corporation calculates Tier 1 common capital as Tier 1 capital
including CES less preferred stock, qualifying trust preferred securities,
hybrid securities and qualifying noncontrolling interest. CES is included in
Tier 1 common capital based upon applicable regulatory guidance and our
expectation that the underlying Common Equivalent Stock would convert
into common stock following shareholder approval of additional
authorized shares. Shareholders approved the increase in the number of
authorized shares of common stock at the special meeting of share-
holders held on February 23, 2010 and the Common Equivalent Stock
converted to common stock on February 24, 2010. Tier 1 common capital
increased to $120.4 billion at December 31, 2009 compared to $63.3
billion at December 31, 2008. The Tier 1 common capital ratio increased
301 bps to 7.81 percent. This increase was driven primarily by the sec-
ond quarter at-the-market common stock issuance and the preferred to
common stock exchanges which together represented a benefit of 185
bps and the issuance of CES which together provided a benefit of 138
bps to the Tier 1 common capital ratio. In addition, Tier 1 common capital
benefited from the common stock that was issued in connection with the
Merrill Lynch acquisition partially offset by an increase in risk-weighted
assets due to the acquisition.
Enterprise-wide Stress Testing
As a part of our core risk management practices, the Corporation con-
ducts enterprise-wide stress tests on a periodic basis to better under-
stand earnings, capital and liquidity sensitivities to certain economic
scenarios, including economic conditions that are more severe than
anticipated. These enterprise-wide stress tests provide an understanding
of the potential impacts to our risk profile, capital and liquidity.
Scenario(s) are selected by a group comprised of senior line of business,
risk and finance executives. Impacts to each line of business from each
scenario are then analyzed and determined, primarily leveraging the
models and processes utilized in everyday management routines. Impacts
are assessed along with potential mitigating actions that may be taken in
each scenario. Analysis from such stress scenarios is compiled for and
reviewed through our ROC, ALMRC, and the Enterprise Risk Committee of
the Board and serves to inform and be incorporated, along with other core
business processes, into decision making by management and the
Board. The Corporation continues to invest in and improve stress testing
capabilities as a core business process.
62 Bank of America 2009