Bank of America 2010 Annual Report Download - page 193

warranties for first-lien residential mortgage loans sold directly to the GSEs in
2010 and 2009, and for other loans sold directly to the GSEs and not covered
by these agreements. The Corporation believes its predictive repurchase
models, utilizing its historical repurchase experience with the GSEs while
considering current developments, including the recent agreements, projec-
tions of future defaults, as well as certain assumptions regarding economic
conditions, home prices and other matters, allows it to reasonably estimate
the liability for representations and warranties on loans sold to the GSEs.
However, future provisions for representations and warranties liability to the
GSEs may be affected if actual experience is different from the Corporation’s
historical experience with the GSEs or the Corporation’s projections of future
defaults and assumptions regarding economic conditions, home prices and
other matters that are incorporated in the provision calculation. Although
experience with non-GSE claims remains limited, the Corporation expects
additional activity in this area going forward and the volume of repurchase
claims from monolines, whole-loan investors and investors in private-label
securitizations could increase in the future. It is reasonably possible that
future losses may occur and the Corporation’s estimate is that the upper
range of possible loss related to non-GSE sales could be $7 billion to
$10 billion over existing accruals. This estimate does not represent a prob-
able loss, is based on currently available information, significant judgment,
and a number of assumptions that are subject to change. A significant portion
of this estimate relates to loans originated through legacy Countrywide, and
the repurchase liability is generally limited to the original seller of the loan.
Future provisions and possible loss or range of loss may be impacted if actual
results are different from the Corporation’s assumptions regarding economic
conditions, home prices and other matters and may vary by counterparty. The
resolution of the repurchase claims process with the non-GSE counterparties
will likely be a protracted process, and the Corporation will vigorously contest
any request for repurchase if it concludes that a valid basis for repurchase
claim does not exist.
NOTE 10 Goodwill and Intangible Assets
Goodwill
The table below presents goodwill balances by business segment at Decem-
ber 31, 2010 and 2009. As discussed in more detail in Note 26 — Business
Segment Information, on January 1, 2010, the Corporation realigned the
former Global Banking and Global Markets business segments. There was no
impact on the reporting units used in goodwill impairment testing. The
reporting units utilized for goodwill impairment tests are the business seg-
ments or one level below the business segments as outlined in the following
table. Substantially all of the decline in goodwill in 2010 is the result of
$12.4 billion of goodwill impairment charges, as described below. No goodwill
impairment was recognized in 2009. The decline in GWIM was attributable to
the sale of Columbia Management’s long-term asset management business.
(Dollars in millions) 2010 2009
December 31
Deposits $17,875 $17,875
Global Card Services
11,889 22,292
Home Loans & Insurance
2,796 4,797
Global Commercial Banking
20,656 20,656
Global Banking & Markets
10,682 10,252
Global Wealth & Investment Management
9,928 10,411
All Other
35 31
Total goodwill $73,861 $86,314
Global Card Services Impairment
On July 21, 2010, the Financial Reform Act was signed into law. Under the
Financial Reform Act and its amendment to the Electronic Fund Transfer Act, the
Federal Reserve must adopt rules within nine months of enactment of the
Financial Reform Act regarding the interchange fees that may be charged with
respect to electronic debit transactions. Those rules will take effect one year
after enactment of the Financial Reform Act. The Financial Reform Act and the
applicable rules are expected to materially reduce the future revenues gener-
ated by the debit card business of the Corporation. The Corporation’s consumer
and small business card products, including the debit card business, are part of
an integrated platform within Global Card Services. During the three months
ended September 30, 2010, the Corporation’s estimate of revenue loss due to
the Financial Reform Act was approximately $2.0 billion annually based on
current volumes. Accordingly, the Corporation performed an impairment test for
Global Card Services during the three months ended September 30, 2010.
In step one of the impairment test, the fair value of Global Card Services was
estimated under the income approach where the significant assumptions in-
cluded the discount rate, terminal value, expected loss rates and expected new
account growth. The Corporation also updated its estimated cash flows to reflect
the current strategic plan forecast and other portfolio assumptions. Based on
the results of step one of the impairment test, the Corporation determined that
the carrying amount of Global Card Services, including goodwill, exceeded the
fair value. The carrying amount, fair value and goodwill for the Global Card
Services reporting unit were $39.2 billion, $25.9 billion and $22.3 billion,
respectively. Accordingly, the Corporation per formed step two of the goodwill
impairment test for this reporting unit. In step two, the Corporation compared the
implied fair value of the reporting unit’s goodwill with the carrying amount of that
goodwill. Under step two of the impairment test, significant assumptions in
measuring the fair value of the assets and liabilities including discount rates,
loss rates and interest rates were updated to reflect the current economic
conditions. Based on the results of this goodwill impairment test for Global Card
Services, the carrying value of the goodwill assigned to the reporting unit
exceeded the implied fair value by $10.4 billion. Accordingly, the Corporation
recorded a non-cash, non-tax deductible goodwill impairment charge of $10.4 bil-
lion to reduce the carrying value of goodwill in Global Card Services from
$22.3 billion to $11.9 billion. The goodwill impairment test included limited
mitigation actions in Global Card Services to recapture lost revenue. Although the
Corporation has identified other potential mitigation actions, the impact of these
actions going forward did not reduce the goodwill impairment charge because
these actions are in the early stages of development and, additionally, certain of
them may impact segments other than Global Card Ser vices (e.g., Deposits).
DuetothecontinuedstressonGlobal Card Services as a result of the
Financial Reform Act, the Corporation concluded that an additional impairment
test should be performed for this reporting unit during the three months ended
December 31, 2010. In step one of the goodwill impairment test, the fair value
of Global Card Services was estimated under the income approach. The
significant assumptions under the income approach included the discount rate,
terminal value, expected loss rates and expected new account growth. The
carrying amount, fair value and goodwill for the Global Card Services reporting
unit were $27.5 billion, $27.6 billion and $11.9 billion, respectively. The
estimated fair value as a percent of the carrying amount at December 31,
2010 was 100 percent. Although the fair value exceeded the carrying amount in
step one of the Global Card Services goodwill impairment test, to further
substantiate the value of goodwill, the Corporation also performed the step
two test for this reporting unit. Under step two of the goodwill impairment test
for this reporting unit, significant assumptions in measuring the fair value of the
assets and liabilities of the reporting unit including discount rates, loss rates
and interest rates were updated to reflect the current economic conditions. The
results of step two of the goodwill impairment test indicated that the remaining
balance of goodwill of $11.9 billion was not impaired as of December 31, 2010.
Bank of America 2010 191