Bank of America 2010 Annual Report Download - page 157

Cardholder Reward Agreements
The Corporation offers reward programs that allow its cardholders to earn
points that can be redeemed for a broad range of rewards including cash,
travel and discounted products. The Corporation establishes a rewards lia-
bility based upon the points earned that are expected to be redeemed and the
average cost per point redeemed. The points to be redeemed are estimated
based on past redemption behavior, card product type, account transaction
activity and other historical card performance. The liability is reduced as the
points are redeemed. The estimated cost of the rewards programs is recorded
as contra-revenue in card income.
Insurance Income and Insurance Expense
Property and casualty and credit life and disability premiums are generally
recognized over the term of the policies on a pro-rata basis for all policies
except for certain of the lender-placed auto insurance and the guaranteed
auto protection (GAP) policies. For lender-placed auto insurance, premiums
are recognized when collections become probable due to high cancellation
rates experienced early in the life of the policy. For GAP insurance, revenue
recognition is correlated to the exposure and accelerated over the life of the
contract. Mortgage reinsurance premiums are recognized as earned. Insur-
ance expense includes insurance claims, commissions and premium taxes,
all of which are recorded in other general operating expense.
NOTE 2 Merger and Restructuring Activity
Merrill Lynch
On January 1, 2009, the Corporation acquired Merrill Lynch through its merger
with a subsidiary of the Corporation in exchange for common and preferred
stock with a value of $29.1 billion. Under the terms of the merger agreement,
Merrill Lynch common shareholders received 0.8595 of a share of Bank of
America Corporation common stock in exchange for each share of Merrill
Lynch common stock. In addition, Merrill Lynch non-convertible preferred
shareholders received Bank of America Corporation preferred stock having
substantially identical terms. On October 15, 2010, the outstanding Merrill
Lynch convertible preferred stock automatically converted into Bank of Amer-
ica Corporation common stock in accordance with its terms.
The purchase price was allocated to the acquired assets and liabilities
based on their estimated fair values at the Merrill Lynch acquisition date as
summarized in the table below. Goodwill of $5.2 billion was calculated as the
purchase premium after adjusting for the fair value of net assets acquired. No
goodwill is deductible for federal income tax purposes. The goodwill was
allocated principally to the Global Wealth & Investment Management (GWIM)
and Global Banking & Markets (GBAM) business segments.
Merrill Lynch Purchase Price Allocation
(Dollars in billions, except per share amounts)
Purchase price
Merrill Lynch common shares exchanged (in millions) 1,600
Exchange ratio 0.8595
The Corporation’s common shares issued (in millions) 1,375
Purchase price per share of the Corporation’s common stock
(1)
$14.08
Total value of the Corporation’s common stock and cash exchanged for fractional shares $19.4
Merrill Lynch preferred stock 8.6
Fair value of outstanding employee stock awards 1.1
Total purchase price $29.1
Allocation of the purchase price
Merrill Lynch stockholders’ equity 19.9
Merrill Lynch goodwill and intangible assets (2.6)
Pre-tax adjustments to reflect acquired assets and liabilities at fair value:
Derivatives and securities (2.1)
Loans (6.1)
Intangible assets
(2)
5.4
Other assets/liabilities (0.7)
Long-term debt 16.0
Pre-tax total adjustments 12.5
Deferred income taxes (5.9)
After-tax total adjustments 6.6
Fair value of net assets acquired 23.9
Goodwill resulting from the Merrill Lynch acquisition $5.2
(1)
The value of the shares of common stock exchanged with Merrill Lynch shareholders was based upon the closing price of the Corporation’s common stock at December 31, 2008, the last trading day prior to the date of acquisition.
(2)
Consists of trade name of $1.5 billion and customer relationship and core deposit intangibles of $3.9 billion. The amortization life is 10 years for the customer relationship and core deposit intangibles which are primarily amortized on
a straight-line basis.
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