Bank of America 2007 Annual Report Download - page 57

estimated average life, seniority level and vintage of underlying assets. We
assigned a zero value to the CDO positions for which an event of default
had been triggered. The value of cash held by the trustee for all CDO struc-
tures was also incorporated into the resulting net asset value.
At December 31, 2007, we held $5.1 billion of purchased insurance
on our CDO exposure of which 66 percent was provided by monolines in
the form of CDS, total-return-swaps (TRS) or financial guarantees. The
majority of this purchased insurance relates to the high grade super senior
exposure. In the case of default we will first look to the underlying secu-
rities and then to recovery on purchased insurance. We valued these con-
tracts by referencing the fair value of the CDO and subsequently adjusted
these fair values downward by $200 million due to counterparty credit risk.
For more information on our credit exposure to monolines, see Industry
Concentrations beginning on page 79.
Treasury Services
Treasury Services provides integrated working capital management and
treasury solutions to clients worldwide through our network of proprietary
offices and special clearing arrangements. Our clients include multina-
tionals, middle-market companies, correspondent banks, commercial real
estate firms and governments. Our products and services include treasury
management, trade finance, foreign exchange, short-term credit facilities
and short-term investing options. Net interest income is derived from
interest-bearing and noninterest-bearing deposits, sweep investments, and
other liability management products. Deposit products provide a relatively
stable source of funding and liquidity. We earn net interest spread rev-
enues from investing this liquidity in earning assets through client-facing
lending activity and our ALM activities. The revenue is attributed to the
deposit products using our funds transfer pricing process which takes into
account the interest rates and maturity characteristics of the deposits.
Noninterest income is generated from payment and receipt products,
merchant services, wholesale card products, and trade services and is
comprised largely of service charges which are net of market-based earn-
ings credit rates applied against noninterest-bearing deposits. During
2007, Merchant Services was transferred to Treasury Services. Previously,
these results were reported in Card Services in GCSBB. Prior period
amounts have been reclassified.
Net income decreased $237 million, or 10 percent, in 2007 compared to
2006 driven by the increase in noninterest expense combined with a
decrease in revenue. Net interest income decreased $64 million, or two
percent, due to the negative impact of a change in the mix between
interest-bearing and noninterest-bearing deposits as clients maintained
lower noninterest-bearing compensating balances by shifting to interest-
bearing and/or higher yielding investment alternatives, and spread com-
pression resulting from the rate environment and competitive pricing.
Partially offsetting this decrease was an increase in average deposits of
$7.3 billion due to organic growth as well as the LaSalle merger. Non-
interest income was relatively flat at $3.3 billion as the increase in service
charges was more than offset by the decrease in all other income. Service
charges increased $102 million due to organic growth, including the
impact of deposit product shifts mentioned above, providing a partial off-
set to lower net interest income. All other income decreased $131 million
due to the sale of a business related to our merchant services activities in
the prior year. Noninterest expense increased $295 million, or eight per-
cent, mainly due to Treasury Services’ allocation of the Visa-related liti-
gation costs and the addition of LaSalle.
ALM/Other
ALM/Other includes an allocation of a portion of the Corporation’s net
interest income from ALM activities as well as our Commercial Insurance
business.
Net income decreased $90 million, or 46 percent, in 2007 compared
to 2006 mainly due to a decrease in net interest income of $167 million,
resulting from a lower contribution from the Corporation’s ALM activities,
and increased noninterest expense partially offset by an increase in all
other income. All other income increased $122 million due to the sale of
our Commercial Insurance business in the fourth quarter of 2007. Non-
interest expense increased $98 million due to severance costs associated
with the GCIB strategic review implemented in 2007 as well as increased
occupancy costs.
Bank of America 2007 55