Bank of America 2006 Annual Report Download - page 50

Managed Basis
Managed Card Services Net Interest Income increased $10.9 billion to
$16.4 billion in 2006 compared to 2005. This increase was driven by the
addition of MBNA and organic growth which contributed to an increase in
total average managed outstandings.
Managed Card Services Noninterest Income increased $4.9 billion to
$8.5 billion in 2006 compared to 2005, largely resulting from the MBNA
merger and organic growth including increases in interchange income,
cash advance fees and late fees.
Managed Card Services net losses increased $3.0 billion to $7.2 bil-
lion or 3.78 percent of average Managed Card Services outstandings in
2006 compared to $4.2 billion, or 6.86 percent in 2005, primarily driven
by the addition of the MBNA portfolio and portfolio seasoning, partially
offset by lower bankruptcy-related losses. The 308 bps decrease in the
net loss ratio for Managed Card Services was driven by lower net losses
resulting from bankruptcy reform and the beneficial impact of the higher
credit quality of the MBNA portfolio compared to the legacy Bank of Amer-
ica portfolio. We expect managed net losses to trend towards more
normalized levels in 2007.
Managed Card Services total average outstandings increased $130.4
billion to $191.5 billion in 2006 compared to 2005. This increase was
driven by the addition of MBNA and organic growth.
Held Basis
Net Income increased $4.6 billion to $5.6 billion in 2006 compared to
2005 due to revenue growth, partially offset by increases in Noninterest
Expense and Provision for Credit Losses.
Held Total Revenue increased $12.9 billion to $21.5 billion in 2006
compared to 2005 primarily due to the addition of MBNA and organic
growth. The MBNA merger increased excess servicing income, cash
advance fees, late fees, interchange income and all other income. Excess
servicing income benefited from lower net losses on the securitized loan
portfolio resulting from bankruptcy reform.
Held Provision for Credit Losses increased $728 million to $4.7 bil-
lion. This increase was primarily driven by the addition of the MBNA portfo-
lio and seasoning of the business card portfolio, partially offset by reduced
credit-related costs on the domestic consumer credit card portfolio. On the
domestic consumer credit card portfolio lower bankruptcy charge-offs
resulting from bankruptcy reform and the absence of the $210 million
provision recorded in 2005 to establish reserves for changes in credit card
minimum payment requirements were partially offset by portfolio
seasoning.
Card Services held net charge-offs were $3.9 billion, $112 million
higher than 2005, driven by the addition of the MBNA portfolio partially
offset by lower bankruptcy-related credit card net charge-offs. Credit card
held net charge-offs were $3.3 billion, or 4.55 percent of total average
held credit card loans, compared to $3.7 billion, or 6.76 percent, for
2005. This decrease was primarily driven by lower bankruptcy-related
charge-offs as 2005 included accelerated charge-offs resulting from bank-
ruptcy reform. The decrease was partially offset by the addition of the
MBNA portfolio, new advances on accounts for which previous loan balan-
ces were sold to the securitization trusts and portfolio seasoning.
Held total Noninterest Expense increased $4.9 billion to $7.8 billion
compared to the same period in 2005 primarily driven by the MBNA
merger which increased most expense items including Personnel, Market-
ing, and Amortization of Intangibles.
In connection with MasterCard’s initial public offering on May 24,
2006, the Corporation’s previous investment in MasterCard was
exchanged for new restricted shares. The Corporation recognized a net
pre-tax gain of approximately $36 million in all other income relating to the
shares that were required to be redeemed by MasterCard for cash and no
gain was recorded associated with the unredeemed shares. For shares
acquired as part of the MBNA merger, a purchase accounting adjustment
of $71 million was recorded as a reduction of Goodwill to record the fair
value of both the redeemed and unredeemed MasterCard shares. At
December 31, 2006, the Corporation had approximately 3.5 million
restricted shares of MasterCard that are accounted for at cost.
Mortgage
Mortgage generates revenue by providing an extensive line of mortgage
products and services to customers nationwide. Mortgage products are
available to our customers through a retail network of personal bankers
located in 5,747 banking centers, sales account executives in nearly 200
locations and through a sales force offering our customers direct tele-
phone and online access to our products. Additionally, we serve our cus-
tomers through a partnership with more than 6,500 mortgage brokers in
all 50 states. The mortgage product offerings for home purchase and
refinancing needs include fixed and adjustable rate loans. To manage this
portfolio, these products are either sold into the secondary mortgage
market to investors, while retaining the Bank of America customer
relationships, or are held on our balance sheet for ALM purposes.
The mortgage business includes the origination, fulfillment, sale and
servicing of first mortgage loan products. Servicing activities primarily
include collecting cash for principal, interest and escrow payments from
borrowers, and accounting for and remitting principal and interest pay-
ments to investors and escrow payments to third parties. Servicing income
includes ancillary income derived in connection with these activities such
as late fees.
Mortgage production within Global Consumer and Small Business
Banking was $76.7 billion in 2006 compared to $74.7 billion in 2005.
Net Income for Mortgage declined $116 million, or 29 percent, due
to a decrease in Total Revenue of $265 million to $1.4 billion, partially
offset by an $87 million decrease in Noninterest Expense. The decline in
Total Revenue was due to a decrease of $146 million in Net Interest
Income and a decrease of $142 million in Mortgage Banking Income. The
reduction in Net Interest Income was primarily driven by the impact of
spread compression. The decline in Mortgage Banking Income was primar-
ily due to margin compression which negatively impacted the pricing of
loans. This was partially offset by the favorable performance of the Mort-
gage Servicing Rights (MSRs) net of the derivatives used to economically
hedge changes in the fair values of the MSRs. Mortgage was not impacted
by the Corporation’s decision to retain a larger share of mortgage pro-
duction on the Corporation’s Balance Sheet, as Mortgage was compen-
sated for the decision on a management accounting basis with a
corresponding offset in All Other.
The Mortgage servicing portfolio includes loans serviced for others
and originated and retained residential mortgages. The servicing portfolio
at December 31, 2006 was $333.0 billion, $36.2 billion higher than
December 31, 2005, primarily driven by production and lower prepayment
rates. Included in this amount was $229.9 billion of loans serviced for
others.
48 Bank of America 2006