SEC Company Response from BANK OF AMERICA (BAC) — May 25, 2012
BANK OF AMERICA CORP /DE/ (BAC, BAC-PB, BAC-PE, BAC-PK, BAC-PL, BAC-PM, BAC-PN, BAC-PO, BAC-PP, BAC-PQ, BAC-PS, BML-PG, BML-PL) (CIK 0000070858)
Date: May 25, 2012 · CIK: 0000070858 · Accession: 0000070858-12-000239
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 001-06523
Referenced dates: May 3, 2012
Letter
United States Securities and Exchange Commission Division of Corporation Finance Form 10-K for Fiscal Year Ended December 31, 2011 Filed February 23, 2012 Form 8-K Filed April 19, 2012 File No. 001-06523
Dear Ms. Hayes:
We have received and reviewed your letter dated May 3, 2012. The following are our responses to each of your comments and requests. For ease of reference, we have repeated the Staff's comments. Our responses are intended to address the comments and questions raised by the Staff. We would be pleased to continue to work with the Staff in resolving any matter requiring further attention.
Form 10-K for Fiscal Year Ended December 31, 2011
Item 1A. Risk Factors
Mortgage and Housing Market-Related Risk, page 5
1.
Please include a risk factor discussing the higher risk characteristics of your loan portfolio. For example, we note the discussion on pages 86 and 87 that 20 percent of your loan portfolio consists of HELOCs, home equity loans and reverse mortgages and it appears that 45% of your home equity portfolio excluding the Countrywide PCI loan portfolio is in a second-lien or more junior-lien position.
Response: We believe that the higher risk characteristics of our loan portfolio are included in Item 1A, Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2011 (2011 Form 10-K). Our risk factors disclosed the most significant risks that could affect our businesses, operations and financial condition. In regards to the higher risk characteristics of our loan portfolio, the risk factors disclosure in our 2011 Form 10-K explained the various characteristics of and risks associated with our loan portfolio, including concentration of credit risk with respect to our consumer real estate portfolio, global and U.S. economic conditions, market disruptions, continued stress in the U.S. housing market such as declines in home prices, elevated levels of distressed and delinquent mortgages, continued high unemployment rates and other macroeconomic conditions. We also indicated that as one of the nation's largest lenders, the credit quality of our consumer portfolio has a significant impact on our earnings. In regards to your example, while the home equity portfolio comprised 20% of consumer loans it was 13%
Ms. Suzanne Hayes
Assistant Director
United States Securities and Exchange Commission
May 25, 2012
Page 2 of 25
of the total loan portfolio. The specific risks associated with the home equity portfolio, along with our other loan portfolios, are presented elsewhere in Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) of our 2011 Form 10-K on a more detailed basis, including the Credit Risk Management section of the MD&A.
We have considered and believe our risk factor disclosure in our 2011 Form 10-K discusses the most significant factors, including the higher risk characteristics of the loan portfolio, that could adversely affect our businesses, operations and results of operations. We do not believe that the risks within any specific loan class are among the most significant risks that could affect our businesses, operations and results of operations, and thus, do not believe additional discussion in Item 1A Risk Factors is required.
We temporarily suspended our foreclosure sales nationally in 2010 to conduct an assessment…,
page 7
2.
Please identify the judicial states where you have a material concentration of residential real estate loans and indicate whether you have a concentration of non-performing loans. Additionally, indicate whether the process of obtaining a court order has resulted in a significant backlog of foreclosure inventory.
Response: We do not have a material concentration of residential real estate loans in any judicial states. In the Consumer Portfolio Credit Risk Management section of the MD&A in our 2011 Form 10-K, we provide disclosure regarding certain state concentrations for the residential real estate portfolios. Specifically Tables 25 and 27, which excludes the Countrywide PCI portfolio, lists our largest residential mortgage and home equity state concentrations. Of the states listed in these tables, Florida, New York and New Jersey are judicial states, none of which we believe have a material concentration of residential real estate loans.
The process of obtaining a court order has contributed to the backlog of foreclosure inventory in these judicial states, as the foreclosure process typically takes longer to complete in judicial states as compared to non-judicial states. For example, the industry standard timelines for our largest judicial states are 15 months in Florida and New Jersey, and, 19 months in New York as compared to the industry timelines for our largest non-judicial states of 5 months in California and 4 months in Texas.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations
Business Segment Operations, page 39
3.
We note from your tabular disclosure on page 54 that the amount of equity allocated to the “All Other” category at December 31, 2011 increased by $33.2 billion to $72.1 billion as compared to $38.9 billion as of December 31, 2010. We also note your disclosure in footnote (2) to this table that this is due to the fact that excess capital is not assigned to the business segments. Please respond to the following:
Ms. Suzanne Hayes
Assistant Director
United States Securities and Exchange Commission
May 25, 2012
Page 3 of 25
a.
In light of the fact that the carrying value of your reporting units is based on the amount of allocated equity assigned to it based on your determination of economic profit for each reporting unit, please tell us in more detail how you determined it was appropriate to just allocate the excess capital to this reporting unit, which happens to have very little goodwill given the nature of its activities.
Response: We use economic capital to drive risk/return investment decisions, to evaluate business performance of our segments and, as one metric we consider, to ensure capital adequacy in relation to the risk profile of the Corporation. Although we use U.S. GAAP for separate legal entity reporting and the reporting of the Corporation's consolidated financial statements and results, for management accounting and reporting purposes, where appropriate, we utilize our funds transfer pricing process and allocated capital. Because the reporting units are not separate legal entities, the Corporation would utilize its fund transfer pricing process and the use of allocated equity. Therefore, allocated equity is used as a proxy for the carrying amount of equity for the reporting units. A business segment's allocated equity includes the economic capital for the segment, 100% of its goodwill and a portion of the intangibles assigned to the business segment.
Our economic capital methodology utilizes a bottoms-up approach where economic capital is allocated to the segments based on an estimate of the risk each segment contributes to the overall risk of the Corporation. Our economic capital measurement process provides a risk-based measurement of the capital required for unexpected credit, market and operational losses over a one-year time horizon. Economic capital is calculated for each business unit based upon its risk positions and contribution to enterprise risk, and is used for capital adequacy, performance measurement and risk management purposes.
After determining the allocation of equity to the businesses, we compare the total average allocated amount for all segments to total U.S. GAAP shareholders' equity for the Corporation. The difference between the sum of average allocated equity for all business segments and total shareholders' equity for the Corporation is attributed to All Other noting that All Other includes a "required capital" component and an "excess capital or residual capital" component which results from this process. The "required capital" principally relates to the strategic investments and certain businesses in All Other.
Throughout 2011, the Corporation took a number of actions aimed at divesting non-core businesses, reducing legacy asset portfolios, improving liquidity and reducing risk-weighted assets in our businesses in order to increase regulatory capital and ensure compliance with future increased regulatory capital requirements. Regulatory capital requirements are expected to significantly increase as a result of upcoming Basel III rules, and the additional capital required for being a systemically important financial institution. Our actions have resulted in a decrease of risk in our businesses and a related decrease of allocated equity for the segments and respectively, for the reporting units, as explained in further detail below. However, our overall book capital does not reflect the same level of decrease as regulatory capital requirements continue to increase at the Corporation. Accordingly, the impact of our actions to reduce overall risk, which has decreased the required equity of the segments, has been offset by the need to build capital. This capital build has been retained as part of the assets of All Other resulting in an increase in the amount of equity attributed to All Other versus returning capital to shareholders in the form of dividends or share repurchases.
Ms. Suzanne Hayes
Assistant Director
United States Securities and Exchange Commission
May 25, 2012
Page 4 of 25
The following table summarizes the Corporation's Average Allocated Equity for 2011 and 2010 for the reporting segments and the All Other category.
The following discusses the most significant decreases in average allocated equity:
•
Card Services - Average allocated equity decreased $11.3 billion in 2011 compared to 2010 primarily due to lower levels of credit risk as a result of a sale of our Canadian operations, a decline in loan balances, an improvement in credit quality and a significant impairment charge taken in 2010.
•
Consumer Real Estate Services - Average allocated equity decreased $9.8 billion in 2011 compared to 2010 due to a reduction in credit risk driven by lower loan balances and the sale of Balboa Insurance, as well as goodwill impairment charges.
•
Global Banking & Markets - Average allocated equity decreased $12.8 billion in 2011 compared to 2010 due to reductions in credit risk driven by improved risk ratings, lower counterparty credit risk and a decline in market risk-related trading exposures.
The increase in All Other is a reflection of the actions taken by the Corporation to reduce the various risks at each reporting segment. This results in lower economic capital needed at each segment. With no reduction in the Corporation's overall capital levels, lower capital needed at the segment level results in an increase in the excess capital retained in All Other. All Other's allocated equity includes the economic capital needed to support the assets held in All Other as well as this excess capital not re-invested in the businesses. Consistent with the requirements of ASC 350-20, all assets and liabilities of the Corporation are allocated to the reporting segments except for those that are not deployed in and do not relate to the operations of the segments and would not be considered in determining the fair value of the segments. As a result, certain assets are retained in All Other (i.e., certain smaller non-core businesses, equity investments, etc), along with the economic capital needed to support those assets as referenced above. All Other also includes the residual results of our Asset Liability Management (ALM) process, including the net residual assets not deployed in the segments. If excess capital were to be allocated to the segments from All Other, a corresponding allocation of residual assets would also need to be allocated, thereby increasing both the carrying value and fair value of the segments by like amounts.
Based on the theory of economic capital, we do not believe that excess capital should be allocated to the segments as our economic capital methodology appropriately allocates the amount of capital needed at each segment level based on the risk contribution of the assets and operations of the
Ms. Suzanne Hayes
Assistant Director
United States Securities and Exchange Commission
May 25, 2012
Page 5 of 25
respective segment. Our economic capital process ensures that capital is sufficient to support the business activities of the segments. If we determined that any of the segments had excess capital over and above the capital necessary to run the business that excess capital would not be held by the segment as it would be economically inefficient to do so. This is further supported by our practice to evaluate the performance of the businesses based on measures that utilize return on average economic capital.
We believe that on an overall basis, using allocated equity that incorporates economic capital to measure the carrying value of the reporting units for purposes of our goodwill impairment tests is appropriate as it represents the capital necessary to run the respective business and does not misstate the carrying value of the reporting units. Additionally, we understand this method is consistent with how certain market participants would allocate capital among the reporting units and segments.
b.
Please clarify and explain in further detail your disclosure on page 39 where you state that diversification of risks across the components is reflected as a reduction to allocated equity for each segment. For example, tell us why it is appropriate to reflect this diversification of risk at the particular reporting unit level when that is the level that is being assessed for goodwill impairment.
Response: We believe our methodology for allocating equity to reporting units is consistent with the hypothetical capital requirements that a market participant would impose if each of the reporting units were standalone entities. As described above, economic capital is our internal estimate of capital required to support a reporting unit, which considers that unit's unique risk profile. A reporting unit's risk profile includes credit, market, interest rate, strategic and operational risk components. Economic capital is calculated for each of these components independently, based upon estimates of worst case possible losses. However, the worst case possible losses in these risk categories are not likely to occur simultaneously. If this happened, it would imply a perfect correlation across risk categories, which is an incorrect assumption. Therefore, we measure the inter-risk diversification effect from the various cases which creates an offset to the capital requirements for the individual risk categories. We believe this is a better approach than lowering the capital requirements within the risk categories.
Fundamental to the theory of economic capital is that capital is allocated to businesses only at the amount necessary to support the business. As described in our response to Comment 3a, excess capital at a business would not be maintained in the business but instead would be distributed to the parent to allow the parent to more efficiently utilize its resources in its overall operations and businesses. For example, if a reporting unit sold certain assets it would generally reinvest those proceeds in new assets. However, the controlling parent would consider the return expected on those assets as compared to the potential return that could
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CORRESP 1 filename1.htm BAC-Comment Letter 5.3.2012 Confidential Treatment of Portions of this Letter Has Been Requested by Bank of America Corporation Pursuant to 17 C.F.R. § 200.83. Asterisks denote such portions. May 25, 2012 Ms. Suzanne Hayes Assistant Director United States Securities and Exchange Commission Division of Corporation Finance 100 F Street, NE Washington, DC 20549 Re: Bank of America Corporation (the Corporation) Form 10-K for Fiscal Year Ended December 31, 2011 Filed February 23, 2012 Form 8-K Filed April 19, 2012 File No. 001-06523 Dear Ms. Hayes: We have received and reviewed your letter dated May 3, 2012. The following are our responses to each of your comments and requests. For ease of reference, we have repeated the Staff's comments. Our responses are intended to address the comments and questions raised by the Staff. We would be pleased to continue to work with the Staff in resolving any matter requiring further attention. Form 10-K for Fiscal Year Ended December 31, 2011 Item 1A. Risk Factors Mortgage and Housing Market-Related Risk, page 5 1. Please include a risk factor discussing the higher risk characteristics of your loan portfolio. For example, we note the discussion on pages 86 and 87 that 20 percent of your loan portfolio consists of HELOCs, home equity loans and reverse mortgages and it appears that 45% of your home equity portfolio excluding the Countrywide PCI loan portfolio is in a second-lien or more junior-lien position. Response: We believe that the higher risk characteristics of our loan portfolio are included in Item 1A, Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2011 (2011 Form 10-K). Our risk factors disclosed the most significant risks that could affect our businesses, operations and financial condition. In regards to the higher risk characteristics of our loan portfolio, the risk factors disclosure in our 2011 Form 10-K explained the various characteristics of and risks associated with our loan portfolio, including concentration of credit risk with respect to our consumer real estate portfolio, global and U.S. economic conditions, market disruptions, continued stress in the U.S. housing market such as declines in home prices, elevated levels of distressed and delinquent mortgages, continued high unemployment rates and other macroeconomic conditions. We also indicated that as one of the nation's largest lenders, the credit quality of our consumer portfolio has a significant impact on our earnings. In regards to your example, while the home equity portfolio comprised 20% of consumer loans it was 13% Ms. Suzanne Hayes Assistant Director United States Securities and Exchange Commission May 25, 2012 Page 2 of 25 of the total loan portfolio. The specific risks associated with the home equity portfolio, along with our other loan portfolios, are presented elsewhere in Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) of our 2011 Form 10-K on a more detailed basis, including the Credit Risk Management section of the MD&A. We have considered and believe our risk factor disclosure in our 2011 Form 10-K discusses the most significant factors, including the higher risk characteristics of the loan portfolio, that could adversely affect our businesses, operations and results of operations. We do not believe that the risks within any specific loan class are among the most significant risks that could affect our businesses, operations and results of operations, and thus, do not believe additional discussion in Item 1A Risk Factors is required. We temporarily suspended our foreclosure sales nationally in 2010 to conduct an assessment…, page 7 2. Please identify the judicial states where you have a material concentration of residential real estate loans and indicate whether you have a concentration of non-performing loans. Additionally, indicate whether the process of obtaining a court order has resulted in a significant backlog of foreclosure inventory. Response: We do not have a material concentration of residential real estate loans in any judicial states. In the Consumer Portfolio Credit Risk Management section of the MD&A in our 2011 Form 10-K, we provide disclosure regarding certain state concentrations for the residential real estate portfolios. Specifically Tables 25 and 27, which excludes the Countrywide PCI portfolio, lists our largest residential mortgage and home equity state concentrations. Of the states listed in these tables, Florida, New York and New Jersey are judicial states, none of which we believe have a material concentration of residential real estate loans. The process of obtaining a court order has contributed to the backlog of foreclosure inventory in these judicial states, as the foreclosure process typically takes longer to complete in judicial states as compared to non-judicial states. For example, the industry standard timelines for our largest judicial states are 15 months in Florida and New Jersey, and, 19 months in New York as compared to the industry timelines for our largest non-judicial states of 5 months in California and 4 months in Texas. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Business Segment Operations, page 39 3. We note from your tabular disclosure on page 54 that the amount of equity allocated to the “All Other” category at December 31, 2011 increased by $33.2 billion to $72.1 billion as compared to $38.9 billion as of December 31, 2010. We also note your disclosure in footnote (2) to this table that this is due to the fact that excess capital is not assigned to the business segments. Please respond to the following: 2 Ms. Suzanne Hayes Assistant Director United States Securities and Exchange Commission May 25, 2012 Page 3 of 25 a. In light of the fact that the carrying value of your reporting units is based on the amount of allocated equity assigned to it based on your determination of economic profit for each reporting unit, please tell us in more detail how you determined it was appropriate to just allocate the excess capital to this reporting unit, which happens to have very little goodwill given the nature of its activities. Response: We use economic capital to drive risk/return investment decisions, to evaluate business performance of our segments and, as one metric we consider, to ensure capital adequacy in relation to the risk profile of the Corporation. Although we use U.S. GAAP for separate legal entity reporting and the reporting of the Corporation's consolidated financial statements and results, for management accounting and reporting purposes, where appropriate, we utilize our funds transfer pricing process and allocated capital. Because the reporting units are not separate legal entities, the Corporation would utilize its fund transfer pricing process and the use of allocated equity. Therefore, allocated equity is used as a proxy for the carrying amount of equity for the reporting units. A business segment's allocated equity includes the economic capital for the segment, 100% of its goodwill and a portion of the intangibles assigned to the business segment. Our economic capital methodology utilizes a bottoms-up approach where economic capital is allocated to the segments based on an estimate of the risk each segment contributes to the overall risk of the Corporation. Our economic capital measurement process provides a risk-based measurement of the capital required for unexpected credit, market and operational losses over a one-year time horizon. Economic capital is calculated for each business unit based upon its risk positions and contribution to enterprise risk, and is used for capital adequacy, performance measurement and risk management purposes. After determining the allocation of equity to the businesses, we compare the total average allocated amount for all segments to total U.S. GAAP shareholders' equity for the Corporation. The difference between the sum of average allocated equity for all business segments and total shareholders' equity for the Corporation is attributed to All Other noting that All Other includes a "required capital" component and an "excess capital or residual capital" component which results from this process. The "required capital" principally relates to the strategic investments and certain businesses in All Other. Throughout 2011, the Corporation took a number of actions aimed at divesting non-core businesses, reducing legacy asset portfolios, improving liquidity and reducing risk-weighted assets in our businesses in order to increase regulatory capital and ensure compliance with future increased regulatory capital requirements. Regulatory capital requirements are expected to significantly increase as a result of upcoming Basel III rules, and the additional capital required for being a systemically important financial institution. Our actions have resulted in a decrease of risk in our businesses and a related decrease of allocated equity for the segments and respectively, for the reporting units, as explained in further detail below. However, our overall book capital does not reflect the same level of decrease as regulatory capital requirements continue to increase at the Corporation. Accordingly, the impact of our actions to reduce overall risk, which has decreased the required equity of the segments, has been offset by the need to build capital. This capital build has been retained as part of the assets of All Other resulting in an increase in the amount of equity attributed to All Other versus returning capital to shareholders in the form of dividends or share repurchases. 3 Ms. Suzanne Hayes Assistant Director United States Securities and Exchange Commission May 25, 2012 Page 4 of 25 The following table summarizes the Corporation's Average Allocated Equity for 2011 and 2010 for the reporting segments and the All Other category. The following discusses the most significant decreases in average allocated equity: • Card Services - Average allocated equity decreased $11.3 billion in 2011 compared to 2010 primarily due to lower levels of credit risk as a result of a sale of our Canadian operations, a decline in loan balances, an improvement in credit quality and a significant impairment charge taken in 2010. • Consumer Real Estate Services - Average allocated equity decreased $9.8 billion in 2011 compared to 2010 due to a reduction in credit risk driven by lower loan balances and the sale of Balboa Insurance, as well as goodwill impairment charges. • Global Banking & Markets - Average allocated equity decreased $12.8 billion in 2011 compared to 2010 due to reductions in credit risk driven by improved risk ratings, lower counterparty credit risk and a decline in market risk-related trading exposures. The increase in All Other is a reflection of the actions taken by the Corporation to reduce the various risks at each reporting segment. This results in lower economic capital needed at each segment. With no reduction in the Corporation's overall capital levels, lower capital needed at the segment level results in an increase in the excess capital retained in All Other. All Other's allocated equity includes the economic capital needed to support the assets held in All Other as well as this excess capital not re-invested in the businesses. Consistent with the requirements of ASC 350-20, all assets and liabilities of the Corporation are allocated to the reporting segments except for those that are not deployed in and do not relate to the operations of the segments and would not be considered in determining the fair value of the segments. As a result, certain assets are retained in All Other (i.e., certain smaller non-core businesses, equity investments, etc), along with the economic capital needed to support those assets as referenced above. All Other also includes the residual results of our Asset Liability Management (ALM) process, including the net residual assets not deployed in the segments. If excess capital were to be allocated to the segments from All Other, a corresponding allocation of residual assets would also need to be allocated, thereby increasing both the carrying value and fair value of the segments by like amounts. Based on the theory of economic capital, we do not believe that excess capital should be allocated to the segments as our economic capital methodology appropriately allocates the amount of capital needed at each segment level based on the risk contribution of the assets and operations of the 4 Ms. Suzanne Hayes Assistant Director United States Securities and Exchange Commission May 25, 2012 Page 5 of 25 respective segment. Our economic capital process ensures that capital is sufficient to support the business activities of the segments. If we determined that any of the segments had excess capital over and above the capital necessary to run the business that excess capital would not be held by the segment as it would be economically inefficient to do so. This is further supported by our practice to evaluate the performance of the businesses based on measures that utilize return on average economic capital. We believe that on an overall basis, using allocated equity that incorporates economic capital to measure the carrying value of the reporting units for purposes of our goodwill impairment tests is appropriate as it represents the capital necessary to run the respective business and does not misstate the carrying value of the reporting units. Additionally, we understand this method is consistent with how certain market participants would allocate capital among the reporting units and segments. b. Please clarify and explain in further detail your disclosure on page 39 where you state that diversification of risks across the components is reflected as a reduction to allocated equity for each segment. For example, tell us why it is appropriate to reflect this diversification of risk at the particular reporting unit level when that is the level that is being assessed for goodwill impairment. Response: We believe our methodology for allocating equity to reporting units is consistent with the hypothetical capital requirements that a market participant would impose if each of the reporting units were standalone entities. As described above, economic capital is our internal estimate of capital required to support a reporting unit, which considers that unit's unique risk profile. A reporting unit's risk profile includes credit, market, interest rate, strategic and operational risk components. Economic capital is calculated for each of these components independently, based upon estimates of worst case possible losses. However, the worst case possible losses in these risk categories are not likely to occur simultaneously. If this happened, it would imply a perfect correlation across risk categories, which is an incorrect assumption. Therefore, we measure the inter-risk diversification effect from the various cases which creates an offset to the capital requirements for the individual risk categories. We believe this is a better approach than lowering the capital requirements within the risk categories. Fundamental to the theory of economic capital is that capital is allocated to businesses only at the amount necessary to support the business. As described in our response to Comment 3a, excess capital at a business would not be maintained in the business but instead would be distributed to the parent to allow the parent to more efficiently utilize its resources in its overall operations and businesses. For example, if a reporting unit sold certain assets it would generally reinvest those proceeds in new assets. However, the controlling parent would consider the return expected on those assets as compared to the potential return that could