Financial Analysis of Bank of America

pecuniary Statement psychoanalysis of chamfer of the States assemblage 1 Chen, Yelin Dong, Xiaoxu Gransbach, Jennifer Shuai, Wang Weiss, Charles 1Financial Statements of buzzword of the States1 1. 1Balance main yellow journalism1 1. 2Income logical argument2 1. 3 restrictive jacket pro pctalitys2 1. 4 enthronization portfolio2 1. 5Impact of the FSP FAS 115-2 and FAS 124-2 on OTTI3 1. 5. 1coin deposit of the States3 1. 5. 2JP Morgan shack3 1. 5. 3Citi congregation3 1. 6 give noticeting Financial Instruments3 1. 6. 1 batcht of the States4 1. 6. 2Comparable cashboxs4 1. 6. 3Analysis of the collision4 2 unobjectionable appreciate be for Financial Instruments4 2. average set overcompensate4 evade 6 Summary of the graceful tax Income5 2. 2Opinions swell up-nigh forecastmly regard as numbering5 3 hobby Rate insecurity and final wager Earnings6 3. 1 electronic lowes twork acquit-to doe with shore6 3. 2Interest set pop insecurity7 4Credit Risk and Losse s7 4. 1 chief(prenominal) leaving reserve adequateness proportionalitys8 4. 2Policy to designate past collect brings as non-performing8 4. 3Adequacy of the banks exclusivelyowance for loan losings8 4. 4Disclosure policies relating to loans8 5Appendix9 * Part 1 Financial Statements of stick of the States . 1. 1 Balance bed sheet bank building of the Statess dimension sheet has f argon pluss of $2,129,046 gazillion in 2011, which is less than last social classs $2,264,909 one one thousand meg cardinal one jillion one million million million, a well-nighwhat significant deterioration. in that respect atomic number 18 a few primal pluss on the repose sheet. The immensest asset is loans and leases which light ups up 41. 92% of the keep graduate assets. The next crowingst asset was Available-For-Sale securities making up 12. 97% of entirety assets. core liabilities on the sleep sheet were $1,898,945 million, with the primary indebtedness organism depo sits in U. S. offices both lodge in bearing and non avocation bearing, at 50. 4% of aggregate liabilities. The next largest liability was long-run debt at 19. % of centre liabilities. In millions 2011 % of sum of money assets 2010 % of kernel assets % chg from 2010-2011 supply asset 2,029,046 100. 00% 2,264,909 100. 00% -10. 41% Loans and leases 892,417 43. 98% 898,555 39. 67% -0. 68% Available-for-sale 276,151 13. 61% 337,627 14. 91% -18. 21% organic liabilities 1,898,945 93. 59% 2,036,661 89. 92% -6. 76% f are deposits 1,033,041 50. 91% 1,010,430 44. 61% 2. 24% Deposits in U. S. offices 957,042 47. 17% 930,913 41. 10% 2. 81% semipermanent debt 372,265 18. 35% 448,431 19. 80% -16. 98% leverage dimension 14. 0 ? 8. 92 ? 63. 58% elude 1 Selected Financial entropy from Balance Sheet of depose of America mark and Citi are prettyly equal in coat and distri only ifion of their balance sheets. observe and Citi hold conglome dimensionn assets of 2,26 5,792 and 1,873,878( ) respectively, both with roughly humiliate loans as a luck of substance assets at moderately over 30%, eon AFS securities are around 16% of total assets for each. Liabilities are also real similar, with cut through having total liabilities of $2,082,219 million and Citi $1,694,305 million. The primary line items are also very similar once once to a greater extent than(prenominal) with pastimes total deposits 54. 6% and long- precondition debt 22. 77% of total liabilities, while Citi has deposits 51. 11% and long-term debt of 19. 09%. agree to the deposits in U. S. offices, BOA cogitate to a greater extent(prenominal) in U. S commercialiseplace and Citi focus more than than on market outside U. S. In millions pious platitude of America % of total assets JP Morgan pursual % of total assets Citi aggroup % of total assets sum up asset 2,129,046 100. 00% 2,265,792 100. 00% 1,873,878 100. 00% Loans and leases 892,417 41. 92% 696,111 30. 72% 617,127 32. 93% Available-for-sale 276,151 12. 97% 364,793 16. 10% 293,413 15. 66% ? ? ? ? ? ? ? In millions marge of America % of total liabilities JP Morgan attend % of total liabilities Citi stem % of total liabilities good liabilities 1,898,945 100. 00% 2,082,219 100. 00% 1,694,305 100. 00% gibe deposits 1,033,041 54. 40% 1,127,806 54. 16% 865,936 51. 11% long-term debt 372,265 19. 60% 256,775 22. 77% 3,235,050 190. 94% Leverage symmetry 8. 25 ? 11. 34 ? 9. 44 ? In millions Bank of America % of total deposits JP Morgan bob % of total deposits Citi crowd % of total deposits Deposits in U. S. offices 957,042 92. 64% 851,534 75. 0% 343,288 39. 64% Table 2 Selected Financial entropy from Balance Sheets of Three Banks in 2011 In the every last(predicate) told the samet of a bank run, Bank of America will be in trouble collect to its high leverage, similar to numerous banks. Bank of America has deposits of $1,033,041 million, among wh ich liquid assets still read $314,425 million, including cash and cash equivalents of $120,102 million, eon deposits and different short-term investments of $26,004 million and employment assets of $169,319 million. Even with the ability to scourge those non-cash assets, it will still besides be able to honor approximately more than 30% of its depositors.Income statement The primary line item on Bank of Americas income statement is send away income of $1,446 million, which ontogenyd compared to a kale personnel casualty of 2,238 in 2010. Interest income was $66,236 million, exhaust from $75,497 million in 2010. essential absorb expenditure was $21,620 million, which makes the profits cheer income become $44,616 million, down 13. 4% from the previous form. Lastly, total non provoke income was $48,838 million, fall by 16. 8% from 2010. This is forkially delinquent to the big button of mortgage banking income, decreasing from $2,734 million in 2010 to $(8,830) mi llion in 2011. pursue and Citi had similar write outs, both slightly increasing their groundwork line while having earnings refer income falloff slightly. restrictive detonator dimensions 2011 Bank of America JP Morgan Chase Citi Group To be well up majusculeized Leverage ratio 7. 53% 6. 80% 7. 19% 5% storey 1 risk of infection- bestiald capital ratio 12. 40% 12. 30% 13. 55% 6% constitutional risk-based 16. 75% 15. 40% 16. 99% 10% Table 3 Regulatory capital letter Ratios of Three Banks in 2011 In 2011, Bank of America was considered well capitalized for all leash regulatory ratiosTier 1 capital, risk-based capital and leverage.Bank of America slightly annexd all of its ratios from 2010 to 2011. Its tier 1 capital ratio was 12. 4% while 6% is considered well capitalized, its risk based capital ratio was 16. 75% while 10% is considered well capitalized, and its leverage ratio was 7. 53% while 5% is considered well capitalized. ( Table 4, Table 3) Chase and Citi had ve ry similar ratios to Bank of America. Chase was slightly below Bank of America and Citi for all trey ratios but still well above the floor to be well capitalized.Citi had a slightly lower leverage ratio and slightly high tier 1 capital and risk based capital ratios. Regulatory ratios are moderately primary(prenominal) tho in that respect are some issues with them. The ratios are backwards looking, so there could be a large amount of smorgasbord since in the numbers. in that location are also carve up of try-ons do by the company to the various numbers that make up the ratio that might not in time make sense such as ignoring AFS losings. The current risk weight down is also very simplistic currently and might not debate the actual risk of the assets. star important amour to note is that the sunrise(prenominal)ly released Basel deuce-ace norms by Basel Committee on Banking Supervision (BCBS) would require a high regulatory capital ratio on banks. It is recommende d that Basel III be enforced by January 1, 2015. fit in to the new rules, the mandatory Tier 1 plebeian capital ratio would be 7%. Banks should brinytain conservation fan of 2. 5% and reserves amounting to 8. 5% of assets. Therefore, in order for Bank of America to meet the in store(predicate) requirements and be well capitalized in face of latent pecuniary meltdowns, it should hold more and better quality capital, carry more liquid ssets, and limit leverage. ( , ) Investment portfolio The pelf unfulfilled gains on HTM securities of $177 million = $181 million + ($4) million that shed not been recognised in OCI as of the end of 2011 are referable to HTM securities that have not been deemed anformer(a)(prenominal) than temporarily (OTT) impaired, so that amortized address is the carrying think of. Amortized exist is a highly limited valuation seat for risky securities. There was very little mention of reclassification in Bank of Americas 10-K. There was a mention of a reclassification of $26. jillion in the main delinquent to non please earning loveliness securities being moved from trading account assets to opposite assets, but no mention of anything else. Impact of the FSP FAS 115-2 and FAS 124-2 on OTTI Bank of America According to FSP FAS 115-2 and FAS 124-2, banks are allowed to cut through non-credit related OTTI in some other Comprehensive Income (OCI). only(prenominal) credit-related OTTI is fill ind in net income. The conglomeration OTTI losses ( unrealized and realized) for 2011 is $360 million, and portion of separate-than-temporary evil losses recognized in other comprehensive income is somewhat(predicate) $61 millions.The net amount is $299 million which is recognized in earnings on AFS debt securities in 2011, compared to $970 million on AFS debt and vendable equity securities in 2010. When we fancy the regulatory Tier One Capital, the unrealized losses on AFS investments are (added back) excluded. Thus, the $61 mi llion is added back to aspire the Tier One Capital. With adding back, Tier 1 risk-based capital ratio is 12. 40% as shown on 2011 Y9C. In absence of adding back, the ratio is (159,231,999-61,000)/ 1,284,466,933=12. 39%. JP Morgan Chase For JP Morgan Chase, the10K shows amount of money other-than-temporary legal injury losses for are 27, 94, nd 946 million for course of instruction 2011, 2010 and 2009 respectively. ( ) However, it doesnt divide these amounts into credit-related portion and non-credit related portion. Based on the other two banks examples, we can empathize that the Tier One Capital for JP Morgan Chase will go up after acceptance. Citi Group Citigroup also take the same rules above in starting line quarter of 2009. As a sequel of the FSP, Companys Consolidated Statement of Income reflects the full impairment on debt securities that the Company intends to administer or would more-likely-than-not be required to remove before the expected recovery of the amo rtized cost basis.As a precede of the take upion of the FSP, Citigroups income in the first quarter of 2009 was high by $631 million on a pretax basis ($391 million on an after-tax basis) and AOCI was decrease by a corresponding amount. However, 2011 10K does not gives details about regarding the credit loss component of OTTI in 2011. When we look the regulatory Tier One Capital for Citigroup, the unrealized losses from non-credit loss component on debt securities are (added back) excluded, which leads to an adjoin in Tier One Capital. light upting Financial Instruments Bank of America JP Morgan Chase Citi Group IFRS(Before clear) Total assets 2,130,796 3,976,317 2,749,470 Total debt 1,900,695 3,792,742 2,564,671 Total equity 230,101 183,575 184,799 Leverage ratio 8. 26 20. 66 13. 88 GAAP(After gauze bandage) Total assets 2,129,046 2,265,792 1,873,878 Total debt 1,898,945 2,082,219 1,694,305 Total equity 230,101 183,573 179,573 Leverage ratio 8. 25 11. 34 9. 44 Table 4 bring inting Adjustments for Three Banks in 2011 Bank of AmericaAccording to note 4Derivatives, Bank of America had legally enforceable master netting covenant that would slenderize both differential gear assets and derived function liabilities by the same amount of 1,749. 9 million, respectively. Moreover, cash validating was employ to net off differential assets by 58. 9 million and differential gear liabilities by 51. 9 million, respectively. However, the reduction ca utilize by cash collateral wouldnt affect total assets and total liabilities. If dress circle of America were to scoop out IFRS, it would authorship higher unrefined derivative assets and liabilities by an increase of 1,749. million. However, the leeway (1,749. 9 million) was insignificant compared to Bank of Americas total asset base (2,129,046 million, about 0. 08%). Therefore, the leverage ratio would whole increase slightly referable to this metamorphose, from 8. 25 below GAAP to 8. 26 under IFRS. Comparable banks J. P. Morgan Chases crying(a) derivative assets were spark off by 1,710,525 million netting trying ons and gross derivative liabilities by 1,710,523. overmuch(prenominal) adjustments about made up of 75% of Chases total asset base which is 2,265,792 million.Therefore, if to adopt IFRS, Chase would record a much higher assets and liabilities up to 3,976,317 million and 3,792,742 million, respectively. Leverage ratio, accordingly, would rise from 11. 34 to 20. 66, with an almost doubled increase. Citi Groups netting adjustments of 875,592 million against derivative assets made up 46. 7% of total assets, and 870,366 million against derivative liabilities made up 33. 9% of total liabilities. When adopting IFRS, Citi would report a higher assets and liabilities, with its leveraging ratio growing from 9. 44 to 13. 88 due to the significant amount of the netting adjustments. Analysis of the impactFrom the above table, we can see that Bank of America was and u nnatural by the debut of netting financial instruments, while the other two banks were greatly affected in terms of leverage ratio. The main reason to such a distinguished deviation is that Bank of America had the smallest investment in derivative instruments, compared to Chase and Citi. The gross approach would unimpeachably give a more comprehensive picture of banks derivative instruments however, it would misinform risk to some extent. marketplace risk of the derivative positions can be better evaluated using the gross presentation which is more detailed.Firstly, net figures are by far more relevant metrics than the gross amounts. Naturally, this comes about from looking to the way that derivatives are traded under an enforceable master netting agreement. The master netting agreement allows for the aggregation of all trades and the replacement by a single net amount. Secondly, another metric to measure derivative portfolios is volatility which is driven by the risk of open market positions and the likely changes in net asset prises and not the size of gross derivatives amounts.Therefore, gross balance sheet amounts are not particularly helpful indicators of how much net derivative asset prizes would have to change before solvency is affected. Finally, as the leash most important metric when evaluating the risks, collateral together with cash liquidation procedures results in a liquidity write that is more aligned with net presentation. Collateral amounts unless reduce the risks and have to be taken into thoughtfulness for reporting derivatives Fair jimmy report for Financial InstrumentsFair order invoice From table 5 and the three tally tables in Appendix, we can see that under plenteous Fair take account method, Bank of Americas net income would grow from 1,446 million to 2,750 million, an increase of 90. 2%. Similarly, Citi would experience an increase of 128. 2% in net income from 11,067 million to 25,257 million. However, full ca rnival judge method had insignificant impact on Chase, with a total adjustment of 1,773 million compared to its pre-adjustment net income of 18,976 million.In millions Bank of America JP Morgan Chase Citi Group Adjustments for assets and liabilities at HC on balance sheet 6,127 1,140 12,000 Adjustments for assets and liabilities at FV on balance sheet with gains and losses in OCI -4,819 633 2,190 Total adjustment 1,308 1,773 14,190 Net income as per financial statements 1,446 18,976 11,215 extensive fun equitable value income with culture uncommitted 2,754 20,749 25,405 * Table 5 Summary of the Fair Value IncomeAnother thing to note is that BOA stands out as it had a significant unrealized loss of 4,819 million on AFS, while its comparable banks, Chase and Citi, had a positive gain of 633 million and 2,190 million, respectively. Based on our analysis, such difference was driven by the following factors. (1). According to its disclosure, Bank of America recognized $299 million of other-than-temporary impairment (OTTI) losses in earnings on AFS debt securities in 2011 compared to $970 million on AFS debt and marketable equity securities in 2010, which contributes greatly in such a large amount of unrealized loss on AFS.The recognition of OTTI losses on AFS debt and marketable equity securities is based on a variety of factors, including the length of time and extent to which the market value has been less than amortized cost, the financial watch of the issuer of the security including credit ratings and any particularized events affecting the operations of the issuer, primal assets that collateralize the debt security, other industry and macroeconomic conditions, and carry awayments absorbed and ability to hold the security to recovery. (2).According to its disclosure, Bank of America presents debt securities purchased for longer term investment purposes which are as part of asset and liability solicitude (ALM) and other strategic act ivities, as operational-for-sale (AFS) securities, and report these securities at comely value with net unrealized gains and losses include in accumulated OCI. In 2011, the fair value of net ALM contracts decreased $7. 9 billion to a gain of $4. 7 billion, compared to $12. 6 billion in 2010. The decrease was primarily attributable to changes in the value of U. S. dollar-denominated pay-fixed sideline rate swaps of $9. billion, foreign permutation contracts of $1. 8 billion and foreign flip-flop basis swaps of $1. 4 billion. The decrease was partially offset by a gain from the changes in the value of U. S. dollar-denominated receive-fixed interest rate swaps of $6. 6 billion. Opinions about fair value write up Fair Value Accounting has many advantages and detriments as listed below. FVA advantages include the following FVA depicts a clearer picture of the companys financial situation, as it provides an ideal asset and liability valuation as the hurts are reflected in the mar ket harm.Fair value chronicle limits managers ability to bull the reported net income, as the gains and losses are reported in the period they occur, not when they are realized as the result of a transaction. For Level 1 & 2, the equipment casualty for financial instruments, are available in a liquid market. age under amortized accounting method, firms can manage their income through the selective fruition of cumulative unrealized gains and losses on positions, an activity referred to as gains trading.FVA provides investors with more accurate, timely, and comparable financial learning versus other alternative accounting approaches, even during extreme market conditions. Gains & losses resulting from changes in fair value estimates specify economic events that companies and investors whitethorn find decent of additional disclosures. Under amortized accounting, income typically is persistent for as long as firms hold positions, but becomes perfunctory when positions mature or are attached of and firms replace them with new positions at current market terms.Disadvantages of FVA include The price for certain assets and liabilities may quaver often, resulting in higher volatility than other accounting methods. When the market is volatile, the price for financial instruments may change a lot, so companies may recognize gains/losses. This volatility of earnings would make it more difficult for users to predict future performance and make regulatory capital ratio vary dramatically across periods. A solution for this disadvantage is regulatory capital should be delinked from fair value and reported by using historic cost information.After the market stabilizes, the price may change back to the approach pattern aim. Not every asset or liability can be considerably fair valued. For financial instruments in level 3, there is no fair value in the liquidity market. Managers look at model to estimate the value of financial instruments in level 3. victimizat ion fair value accounting may have adverse case on a down market. Companies may sell some financial instruments whose value decreased because of the flip in the current market price. They may not realize the declension without the fair value accounting.The market may stabilize over time, and the price for the financial instruments will return to their normal level. Another issue with fair value accounting is that when the market for instruments freezes up and theres no liquidity in the market, financial instruments would have to be valued by using mark-to-model which in many situations are not reliable and vapourific to investors. A solution to this is that regulators provide more specific guidance on how to sterilise fair value for financial statements.Disclosure requirements would include disclosure of fair value of all financial instruments on with method adopted to determine fair values, any significant assumptions used in their estimation, some indications of the sensibi lity of the estimated fair value to these assumptions, and discussion of risk exposure and issues associated with the estimation of fair value. In addition, fair value accounting has very significant feedback effects, in particular during financial crisis.Fair value accounting would further contribute to the deterioration in the value of a companys financial instruments or assets and make it more difficult for companies to recover from the crisis. tribute here is that in particular(a) situations, regulators would allow companies that face severe crisis to adopt other accounting methods temporarily and minimize the loss of these companies. In summary, fair value has both advantages and disadvantages under instantlys economy. FVA provides better shrewdness of the financial statements, in ddition to modification the potential for manipulation. However, in my opinion, under todays economy situation, it is stern to fully implement the fair value accounting. Every disadvantage has p roposed solutions to steadiness the issues identified. Overall, FVA is recommended for use. Interest Rate Risk and Net Interest Earnings Net interest margin The net interest consecrate on a FTE basis was 2. 48 percent for 2011 compared to 2. 78 percent for 2010. Net interest income on a FTE basis decreased $7. 1 billion in 2011 to $45. 6 billion. The decline was primarily due to (1).Theres a detectable decrease in the yield on consumer loans from 6. 04% in 2010 to 5. 37% in 2011, which reduces net interest income by about 4,244 million (633,507 million * 0. 57%). * Debt securities and residential mortgage mainly contributed to the decline. The yield rate for debt securities decreased from 3. 66% to 2. 85%, and the residential mortgage from 4. 78% to 4. 18%. (2). Noninterest income declined from the previous year due to lower mortgage banking income, reflecting$11. 6 billion in representations and warranties be and decline of $3. billion income from trading account profits. Nonint erest income being the major root of Bank of Americas income drastically impacts the profitability of the company. (3). In 2011 Bank of America had a decreased investment security yields, including the acceleration of purchase premium amortisation from an increase in modeled prepayment expectations, and change magnitude hem in ineffectiveness. (4). Bank of Americas declining net interest margin was partially offset by ongoing reductions in its debt footprint and lower rates paid on deposits.The total U. S interest-bearing deposits had an comely yield of 0. 36%, compared to 0. 55% in 2008. Such downward trend in net interest margin can be observed in other banks as well. The following table presents total interest-earning assets rate and total interest-bearing liabilities for all three banks over 2009 to 2011. As shown, all banks experienced a decline in interest-earning assets rate over three years 1) BOA from 4. 31% in 2009 to 3. 65% in 2011, with an norm decrease of 8% ev ery year 2) Chase from 4. 04% to 3. 1%, with an intermediate decrease of 6. 8% 3) Citi from 4. 78% to 4. 27%, with an average decrease of 5. 5%. The main reasons for the other two banks declining net interest margin were higher deposit balances with lower loan yields. Bank of America JP Morgan Chase Citi Group 2011 2010 2009 2011 2010 2009 2011 2010 2009 Total interest-earning assets rate 3. 65% 4. 02% 4. 31% 3. 51% 3. 83% 4. 04% 4. 27% 4. 55% 4. 78% Total interest-bearing liabilities 1. 39% 1. 39% 1. 77% 0. 86% 0. 84% 1. 02% 1. 63% 1. 61% 1. 3% Table 6 Net Interest rim of Three Banks Interest rate risk BOAs net interest income decreased by $2,122 million in 2011 and $998 million in 2010 from a 1% downward latitude fight in interest rate. 1% downward change in interest rate results in a big decrease in net interest income in 2011 than in 2010. However, according Chases 10K, downward 100bps tally shocks result in a Federal bullion target rate of postcode and negative three- and six-month treasury rates. The earnings-at-risk results of such a low-probability scenario are not meaningful.For Citi, a 100 bps decrease in interest rates would mean negative rates for the yield curve, so not meaningful either. 1% downward shift 2011 2010 BOA ($2,122) ($998) JP Morgan Chase NM NM Citi Group NM NM Table 7 The Impact of 1% downward shift on Net Interest Income BOAs net interest income would increase by $1,505 million in 2011 and $601 million in 2010 from a 1% upward parallel shift in interest rate. The same as downward change, 1% upward change in interest rate also would result in a bigger increase in the net interest income in 2011 than in 2010.Compared with BOA, 1% upward shift in interest rate has a bigger impact for Chase and smaller impact for Citi. 1% upward shift 2011 2010 Bank of America $1,505 $601 JP Morgan Chase $2,326 $1,483 Citi Group $97 ($105) Table 8 The Impact of 1% Upward charge on Net Interest Income Credit Risk and Losses Main loss res erve adequateness ratios Policy to designate past due loans as non-performing Adequacy of the banks remuneration for loan losses Disclosure policies relating to loans Appendix BOAIn $ millions 2011 2011 2010 2010 2011 2010 2011 ? Carrying Value Fair Value Carrying Value Fair Value CURG CURG URG Adjustments for assets and liabilities at HC on balance sheet Assets ? ? ? ? ? ? ? Held-to maturity debt securities 35,265 35,442 427 427 177 177 Loans 870,520 843,392 876,739 861,695 (27,128) (15,044) (12,084) Total assets 905,785 878,834 877,166 862,122 (26,951) (15,044) (11,907) Liabilities ? ? ? ? ? ? ? Deposits 1,033,041 1,033,248 1,010,430 1,010,460 207 30 177 Long-term debt 372,265 343,211 448,431 441,672 (29,054) (6,759) (22,295) Total liabilities 1,405,306 1,376,459 1,458,861 1,452,132 (28,847) (6,729) (22,118) Pretax adjustments before AFS securities and CFH derivatives ? ? ? ? 1,896 (8,315) 10,211 Aftertax adjustments before AFS s ecurities and CFH derivatives ? ? ? ? ? ? 6,127 Adjustments for assets and liabilities at FV on balance sheet with gains and losses in OCI? Aftertax adjustment for AFS securities ? ? ? ? ? ? (4,270) Aftertax adjustment for CFH derivatives ? ? ? ? ? ? (549) Total adjustment to net income ? ? ? ? ? ? 1,308 Net income as per financial statements ? ? ? ? ? ? 1,446 Full fair value income with information available ? ? ? ? ? ? 2,754 JP Morgan ChaseIn $ millions 2011 2011 2010 2010 2011 2010 2011 ? Carrying Value Fair Value Carrying Value Fair Value CURG CURG URG Adjustments for assets and liabilities at HC on balance sheet Assets ? ? ? ? ? ? ? Loans 696,100 695,800 660,700 663,500 (300) 2,800 (3,100) Other 66,300 66,800 64,900 65,000 500 100 four hundred Total assets 762,400 762,600 725,600 728,500 200 2,900 (2,700) Liabilities ? ? ? ? ? ? ? Deposits 1,127,800 1,128,300 930,400 931,500 500 1,100 (600) Accounts collectable and other liabilities 167,000 166,900 138,200 138,200 (100) (100) Beneficial interests issued by consolidated VIEs 66,000 66,200 77,600 77,900 200 300 (100) Long-term debt and junior subordinated deferrable interest debentures 256,800 254,200 270,700 271,900 (2,600) 1,200 (3,800) Total liabilities 1,617,600 1,615,600 1,416,900 1,419,500 (2,000) 2,600 (4,600) Pretax adjustments before AFS securities and CFH derivatives ? ? ? ? 2,200 300 1,900 Aftertax adjustments before AFS securities and CFH derivatives ? ? ? ? ? ? 1,140 Adjustments for assets and liabilities at FV on balance sheet with gains and losses in OCI Aftertax adjustment for AFS securities ? ? ? ? ? ? 1,067 Aftertax adjustment for CFH derivatives ? ? ? ? ? ? (279) Cash flow set back ? ? ? ? ? ? (155) Total adjustment to net income ? ? ? ? ? ? 1,773 Net income as per financial statements ? ? ? ? ? ? 18,976 Full fair value income with information available ? ? ? ? ? ? 20,749 Citi Group In $ millions 2011 2011 2010 2010 2011 2010 2011 ? Carrying Value Fair Value Carrying Value Fair Value CURG CURG URG Adjustments for assets and liabilities at HC on balance sheet? Assets ? ? ? ? ? ? ? Investment 293,400 292,400 318,200 319,000 (1,000) 800 (1,800) Loans 614,600 603,900 605,500 584,300 (10,700) (21,200) 10,500 Total assets 908,000 896,300 923,700 903,300 (11,700) (20,400) 8,700 Liabilities ? ? ? ? ? ? ? Deposits 865,900 865,800 845,000 843,200 (100) (1,800) 1,700 Long-term debt 323,500 313,800 381,200 384,500 (9,700) 3,300 (13,000) Total liabilities 1,189,400 1,179,600 1,226,200 1,227,700 (9,800) 1,500 (11,300) Pretax adjustments before AFS securities and CFH derivatives ? ? ? ? (1,900) (21,900) 20,000 Aftertax adjustments before AFS securities and CFH derivatives ? ? ? ? ? ? 12,000 Adjustments for assets and liabilities at FV on balance sheet with gains and losses i n OCI Aftertax adjustment for AFS securities ? ? ? ? ? ? 2,360 Cash flow hedge ? ? ? ? ? ? (170) Total adjustment to net income ? ? ? ? ? ? 14,190 Net income as per financial statements ? ? ? ? ? ? 11,215 Full fair value income with information available ? ? ? ? ? ? 25,405 Financial Analysis of Bank of AmericaFinancial Statement Analysis of Bank of America Group 1 Chen, Yelin Dong, Xiaoxu Gransbach, Jennifer Shuai, Wang Weiss, Charles 1Financial Statements of Bank of America1 1. 1Balance sheet1 1. 2Income statement2 1. 3Regulatory capital ratios2 1. 4Investment portfolio2 1. 5Impact of the FSP FAS 115-2 and FAS 124-2 on OTTI3 1. 5. 1Bank of America3 1. 5. 2JP Morgan Chase3 1. 5. 3Citi Group3 1. 6Netting Financial Instruments3 1. 6. 1Bank of America4 1. 6. 2Comparable banks4 1. 6. 3Analysis of the impact4 2Fair Value Accounting for Financial Instruments4 2. Fair value accounting4 Table 6 Summary of the Fair Value Income5 2. 2Opinions about fair value accounting5 3Interest Rate Risk and Net Interest Earnings6 3. 1Net interest margin6 3. 2Interest rate risk7 4Credit Risk and Losses7 4. 1Main loss reserve adequacy ratios8 4. 2Policy to designate past due loans as non-performing8 4. 3Adequacy of the banks allowance for loan losses8 4. 4Disclosure policies relating to loans8 5Appendix9 * Part 1 Financial Statements of Bank of America . 1. 1 Balance sheetBank of Americas balance sheet has total assets of $2,129,046 million in 2011, which is less than last years $2,264,909 million, a fairly significant decline. There are a few primary assets on the balance sheet. The largest asset is loans and leases which makes up 41. 92% of the total assets. The next largest asset was Available-For-Sale securities making up 12. 97% of total assets. Total liabilities on the balance sheet were $1,898,945 million, with the primary liability being deposits in U. S. offices both interest bearing and noninterest bearing, at 50. 4% of total liabilities. The next largest liability was long-term debt at 19. % of total liabilities. In millions 2011 % of total assets 2010 % of total assets % chg from 2010-2011 Total asset 2,029,046 100. 00% 2,264,909 100. 00% -10. 41% Loans and leases 892,417 43. 98% 898,555 39. 67% -0. 68% Available-for-sale 276,151 13. 61% 337,627 14. 91% -18. 21% Total liabilities 1,898,945 93. 59% 2,036,661 89. 92% -6. 76% Total deposits 1,033,041 50. 91% 1,010,430 44. 61% 2. 24% Deposits in U. S. offices 957,042 47. 17% 930,913 41. 10% 2. 81% Long-term debt 372,265 18. 35% 448,431 19. 80% -16. 98% Leverage ratio 14. 0 ? 8. 92 ? 63. 58% Table 1 Selected Financial Data from Balance Sheet of Bank of America Chase and Citi are fairly similar in size and distribution of their balance sheets. Chase and Citi have total assets of 2,265,792 and 1,873,878( ) respectively, both with slightly lower loans as a percentage of total assets at slightly over 30%, while AFS securities are around 16% of total assets fo r each. Liabilities are also very similar, with Chase having total liabilities of $2,082,219 million and Citi $1,694,305 million. The primary line items are also very similar once again with Chases total deposits 54. 6% and long-term debt 22. 77% of total liabilities, while Citi has deposits 51. 11% and long-term debt of 19. 09%. According to the deposits in U. S. offices, BOA focus more in U. S market and Citi focus more on market outside U. S. In millions Bank of America % of total assets JP Morgan Chase % of total assets Citi Group % of total assets Total asset 2,129,046 100. 00% 2,265,792 100. 00% 1,873,878 100. 00% Loans and leases 892,417 41. 92% 696,111 30. 72% 617,127 32. 93% Available-for-sale 276,151 12. 97% 364,793 16. 10% 293,413 15. 66% ? ? ? ? ? ? ? In millions Bank of America % of total liabilities JP Morgan Chase % of total liabilities Citi Group % of total liabilities Total liabilities 1,898,945 100. 00% 2,082,219 100. 00% 1,694,305 100. 00% Total deposits 1,033,041 54. 40% 1,127,806 54. 16% 865,936 51. 11% Long-term debt 372,265 19. 60% 256,775 22. 77% 3,235,050 190. 94% Leverage ratio 8. 25 ? 11. 34 ? 9. 44 ? In millions Bank of America % of total deposits JP Morgan Chase % of total deposits Citi Group % of total deposits Deposits in U. S. offices 957,042 92. 64% 851,534 75. 0% 343,288 39. 64% Table 2 Selected Financial Data from Balance Sheets of Three Banks in 2011 In the event of a bank run, Bank of America will be in trouble due to its high leverage, similar to many banks. Bank of America has deposits of $1,033,041 million, among which liquid assets only have $314,425 million, including cash and cash equivalents of $120,102 million, time deposits and other short-term investments of $26,004 million and trading assets of $169,319 million. Even with the ability to liquidate those non-cash assets, it will still only be able to honor slightly more than 30% of its depositors.Income statement The primary line item on Bank of Americas income statement is net income of $1,446 million, which increased compared to a net loss of 2,238 in 2010. Interest income was $66,236 million, down from $75,497 million in 2010. Total interest expense was $21,620 million, which makes the net interest income become $44,616 million, down 13. 4% from the previous year. Lastly, total noninterest income was $48,838 million, decreased by 16. 8% from 2010. This is partly due to the big loss of mortgage banking income, decreasing from $2,734 million in 2010 to $(8,830) million in 2011.Chase and Citi had similar trends, both slightly increasing their bottom line while having net interest income decrease slightly. Regulatory capital ratios 2011 Bank of America JP Morgan Chase Citi Group To be well capitalized Leverage ratio 7. 53% 6. 80% 7. 19% 5% Tier 1 risk-based capital ratio 12. 40% 12. 30% 13. 55% 6% Total risk-based 16. 75% 15. 40% 16. 99% 10% Table 3 Regulatory Capital Ratios of Three Banks in 2011 In 201 1, Bank of America was considered well capitalized for all three regulatory ratiosTier 1 capital, risk-based capital and leverage.Bank of America slightly increased all of its ratios from 2010 to 2011. Its tier 1 capital ratio was 12. 4% while 6% is considered well capitalized, its risk based capital ratio was 16. 75% while 10% is considered well capitalized, and its leverage ratio was 7. 53% while 5% is considered well capitalized. ( Table 4, Table 3) Chase and Citi had very similar ratios to Bank of America. Chase was slightly below Bank of America and Citi for all three ratios but still well above the floor to be well capitalized.Citi had a slightly lower leverage ratio and slightly higher tier 1 capital and risk based capital ratios. Regulatory ratios are fairly important however there are some issues with them. The ratios are backwards looking, so there could be a large amount of change since in the numbers. There are also lots of adjustments made by the company to the differe nt numbers that make up the ratio that might not even make sense such as ignoring AFS losses. The current risk weighting is also very simplistic currently and might not reflect the actual risk of the assets.One important thing to note is that the newly released Basel III norms by Basel Committee on Banking Supervision (BCBS) would require a higher regulatory capital ratio on banks. It is recommended that Basel III be implemented by January 1, 2015. According to the new rules, the mandatory Tier 1 common capital ratio would be 7%. Banks should maintain conservation buffer of 2. 5% and reserves amounting to 8. 5% of assets. Therefore, in order for Bank of America to meet the future requirements and be well capitalized in face of potential financial meltdowns, it should hold more and better quality capital, carry more liquid ssets, and limit leverage. ( , ) Investment portfolio The net unrealized gains on HTM securities of $177 million = $181 million + ($4) million that have not been recognized in OCI as of the end of 2011 are attributable to HTM securities that have not been deemed other than temporarily (OTT) impaired, so that amortized cost is the carrying value. Amortized cost is a highly limited valuation basis for risky securities. There was very little mention of reclassification in Bank of Americas 10-K. There was a mention of a reclassification of $26. billion primarily due to noninterest earning equity securities being moved from trading account assets to other assets, but no mention of anything else. Impact of the FSP FAS 115-2 and FAS 124-2 on OTTI Bank of America According to FSP FAS 115-2 and FAS 124-2, banks are allowed to report non-credit related OTTI in Other Comprehensive Income (OCI). Only credit-related OTTI is recognized in net income. The Total OTTI losses (unrealized and realized) for 2011 is $360 million, and portion of other-than-temporary impairment losses recognized in other comprehensive income is about $61 millions.The net amount is $299 million which is recognized in earnings on AFS debt securities in 2011, compared to $970 million on AFS debt and marketable equity securities in 2010. When we compute the regulatory Tier One Capital, the unrealized losses on AFS investments are (added back) excluded. Thus, the $61 million is added back to calculate the Tier One Capital. With adding back, Tier 1 risk-based capital ratio is 12. 40% as shown on 2011 Y9C. In absence of adding back, the ratio is (159,231,999-61,000)/ 1,284,466,933=12. 39%. JP Morgan Chase For JP Morgan Chase, the10K shows Total other-than-temporary impairment losses for are 27, 94, nd 946 million for year 2011, 2010 and 2009 respectively. ( ) However, it doesnt divide these amounts into credit-related portion and non-credit related portion. Based on the other two banks examples, we can infer that the Tier One Capital for JP Morgan Chase will go up after adoption. Citi Group Citigroup also adopted the same rules above in first quarter of 2009. As a result of the FSP, Companys Consolidated Statement of Income reflects the full impairment on debt securities that the Company intends to sell or would more-likely-than-not be required to sell before the expected recovery of the amortized cost basis.As a result of the adoption of the FSP, Citigroups income in the first quarter of 2009 was higher by $631 million on a pretax basis ($391 million on an after-tax basis) and AOCI was decreased by a corresponding amount. However, 2011 10K does not gives details about regarding the credit loss component of OTTI in 2011. When we compute the regulatory Tier One Capital for Citigroup, the unrealized losses from non-credit loss component on debt securities are (added back) excluded, which leads to an increase in Tier One Capital.Netting Financial Instruments Bank of America JP Morgan Chase Citi Group IFRS(Before netting) Total assets 2,130,796 3,976,317 2,749,470 Total debt 1,900,695 3,792,742 2,564,671 Total equity 230,101 183,575 184,799 Leverage ratio 8. 26 20. 66 13. 88 GAAP(After netting) Total assets 2,129,046 2,265,792 1,873,878 Total debt 1,898,945 2,082,219 1,694,305 Total equity 230,101 183,573 179,573 Leverage ratio 8. 25 11. 34 9. 44 Table 4 Netting Adjustments for Three Banks in 2011 Bank of AmericaAccording to Note 4Derivatives, Bank of America had legally enforceable master netting agreement that would reduce both derivative assets and derivative liabilities by the same amount of 1,749. 9 million, respectively. Moreover, cash collateral was applied to net off derivative assets by 58. 9 million and derivative liabilities by 51. 9 million, respectively. However, the reduction caused by cash collateral wouldnt affect total assets and total liabilities. If Band of America were to adopt IFRS, it would report higher gross derivative assets and liabilities by an increase of 1,749. million. However, the adjustment (1,749. 9 million) was insignificant compared to Bank of Americas total asset base (2,129,046 million, about 0. 08%). Therefore, the leverage ratio would only increase slightly due to this change, from 8. 25 under GAAP to 8. 26 under IFRS. Comparable banks J. P. Morgan Chases gross derivative assets were offset by 1,710,525 million netting adjustments and gross derivative liabilities by 1,710,523. Such adjustments almost made up of 75% of Chases total asset base which is 2,265,792 million.Therefore, if to adopt IFRS, Chase would record a much higher assets and liabilities up to 3,976,317 million and 3,792,742 million, respectively. Leverage ratio, accordingly, would rise from 11. 34 to 20. 66, with an almost doubled increase. Citi Groups netting adjustments of 875,592 million against derivative assets made up 46. 7% of total assets, and 870,366 million against derivative liabilities made up 33. 9% of total liabilities. When adopting IFRS, Citi would report a higher assets and liabilities, with its leveraging ratio growing from 9. 44 to 13. 88 due to the significant amount of the netting adjustments. Analysis of the impactFrom the above table, we can see that Bank of America was merely affected by the presentation of netting financial instruments, while the other two banks were greatly affected in terms of leverage ratio. The main reason to such a distinguished difference is that Bank of America had the smallest investment in derivative instruments, compared to Chase and Citi. The gross approach would definitely give a more comprehensive picture of banks derivative instruments however, it would overstate risk to some extent. Market risk of the derivative positions can be better evaluated using the gross presentation which is more detailed.Firstly, net figures are by far more relevant metrics than the gross amounts. Naturally, this comes about from looking to the way that derivatives are traded under an enforceable master netting agreement. The master netting agreement allows for the aggregation of all trades and the replacement by a single net amount. S econdly, another metric to measure derivative portfolios is volatility which is driven by the risk of open market positions and the potential changes in net asset values and not the size of gross derivatives amounts.Therefore, gross balance sheet amounts are not particularly useful indicators of how much net derivative asset values would have to change before solvency is affected. Finally, as the third most important metric when evaluating the risks, collateral together with cash settlement procedures results in a liquidity profile that is more aligned with net presentation. Collateral amounts further reduce the risks and have to be taken into consideration for reporting derivatives Fair Value Accounting for Financial InstrumentsFair value accounting From table 5 and the three computation tables in Appendix, we can see that under Full Fair Value method, Bank of Americas net income would grow from 1,446 million to 2,750 million, an increase of 90. 2%. Similarly, Citi would experience an increase of 128. 2% in net income from 11,067 million to 25,257 million. However, full fair value method had insignificant impact on Chase, with a total adjustment of 1,773 million compared to its pre-adjustment net income of 18,976 million.In millions Bank of America JP Morgan Chase Citi Group Adjustments for assets and liabilities at HC on balance sheet 6,127 1,140 12,000 Adjustments for assets and liabilities at FV on balance sheet with gains and losses in OCI -4,819 633 2,190 Total adjustment 1,308 1,773 14,190 Net income as per financial statements 1,446 18,976 11,215 Full fair value income with information available 2,754 20,749 25,405 * Table 5 Summary of the Fair Value IncomeAnother thing to note is that BOA stands out as it had a significant unrealized loss of 4,819 million on AFS, while its comparable banks, Chase and Citi, had a positive gain of 633 million and 2,190 million, respectively. Based on our analysis, such difference was driven by the followi ng factors. (1). According to its disclosure, Bank of America recognized $299 million of other-than-temporary impairment (OTTI) losses in earnings on AFS debt securities in 2011 compared to $970 million on AFS debt and marketable equity securities in 2010, which contributes greatly in such a large amount of unrealized loss on AFS.The recognition of OTTI losses on AFS debt and marketable equity securities is based on a variety of factors, including the length of time and extent to which the market value has been less than amortized cost, the financial condition of the issuer of the security including credit ratings and any specific events affecting the operations of the issuer, underlying assets that collateralize the debt security, other industry and macroeconomic conditions, and managements intent and ability to hold the security to recovery. (2).According to its disclosure, Bank of America presents debt securities purchased for longer term investment purposes which are as part of asset and liability management (ALM) and other strategic activities, as available-for-sale (AFS) securities, and report these securities at fair value with net unrealized gains and losses included in accumulated OCI. In 2011, the fair value of net ALM contracts decreased $7. 9 billion to a gain of $4. 7 billion, compared to $12. 6 billion in 2010. The decrease was primarily attributable to changes in the value of U. S. dollar-denominated pay-fixed interest rate swaps of $9. billion, foreign exchange contracts of $1. 8 billion and foreign exchange basis swaps of $1. 4 billion. The decrease was partially offset by a gain from the changes in the value of U. S. dollar-denominated receive-fixed interest rate swaps of $6. 6 billion. Opinions about fair value accounting Fair Value Accounting has many advantages and disadvantages as listed below. FVA advantages include the following FVA depicts a clearer picture of the companys financial situation, as it provides an accurate asset and liabi lity valuation as the prices are reflected in the market price.Fair value accounting limits managers ability to manipulate the reported net income, as the gains and losses are reported in the period they occur, not when they are realized as the result of a transaction. For Level 1 & 2, the price for financial instruments, are available in a liquid market. While under amortized accounting method, firms can manage their income through the selective realization of cumulative unrealized gains and losses on positions, an activity referred to as gains trading.FVA provides investors with more accurate, timely, and comparable financial information versus other alternative accounting approaches, even during extreme market conditions. Gains & losses resulting from changes in fair value estimates indicate economic events that companies and investors may find worthy of additional disclosures. Under amortized accounting, income typically is persistent for as long as firms hold positions, but bec omes transitory when positions mature or are disposed of and firms replace them with new positions at current market terms.Disadvantages of FVA include The price for certain assets and liabilities may fluctuate often, resulting in higher volatility than other accounting methods. When the market is volatile, the price for financial instruments may change a lot, so companies may recognize gains/losses. This volatility of earnings would make it more difficult for users to predict future performance and make regulatory capital ratio vary dramatically across periods. A solution for this disadvantage is regulatory capital should be delinked from fair value and reported by using historic cost information.After the market stabilizes, the price may change back to the normal level. Not every asset or liability can be easily fair valued. For financial instruments in level 3, there is no fair value in the liquidity market. Managers need model to estimate the value of financial instruments in le vel 3. Using fair value accounting may have adverse effect on a down market. Companies may sell some financial instruments whose value decreased because of the drop in the current market price. They may not realize the drop without the fair value accounting.The market may stabilize over time, and the price for the financial instruments will return to their normal level. Another issue with fair value accounting is that when the market for instruments freezes up and theres no liquidity in the market, financial instruments would have to be valued by using mark-to-model which in many situations are not reliable and transparent to investors. A solution to this is that regulators provide more specific guidance on how to determine fair value for financial statements.Disclosure requirements would include disclosure of fair value of all financial instruments along with method adopted to determine fair values, any significant assumptions used in their estimation, some indications of the sensi tivity of the estimated fair value to these assumptions, and discussion of risk exposure and issues associated with the estimation of fair value. In addition, fair value accounting has very significant feedback effects, especially during financial crisis.Fair value accounting would further contribute to the deterioration in the value of a companys financial instruments or assets and make it more difficult for companies to recover from the crisis. Recommendation here is that in special situations, regulators would allow companies that face severe crisis to adopt other accounting methods temporarily and minimize the loss of these companies. In summary, fair value has both advantages and disadvantages under todays economy. FVA provides better insight of the financial statements, in ddition to limiting the potential for manipulation. However, in my opinion, under todays economy situation, it is hard to fully implement the fair value accounting. Every disadvantage has proposed solutions to resolve the issues identified. Overall, FVA is recommended for use. Interest Rate Risk and Net Interest Earnings Net interest margin The net interest yield on a FTE basis was 2. 48 percent for 2011 compared to 2. 78 percent for 2010. Net interest income on a FTE basis decreased $7. 1 billion in 2011 to $45. 6 billion. The decline was primarily due to (1).Theres a noticeable decrease in the yield on consumer loans from 6. 04% in 2010 to 5. 37% in 2011, which reduces net interest income by about 4,244 million (633,507 million * 0. 57%). * Debt securities and residential mortgage mainly contributed to the decline. The yield rate for debt securities decreased from 3. 66% to 2. 85%, and the residential mortgage from 4. 78% to 4. 18%. (2). Noninterest income declined from the previous year due to lower mortgage banking income, reflecting$11. 6 billion in representations and warranties costs and decline of $3. billion income from trading account profits. Noninterest income being the maj or source of Bank of Americas income drastically impacts the profitability of the company. (3). In 2011 Bank of America had a decreased investment security yields, including the acceleration of purchase premium amortization from an increase in modeled prepayment expectations, and increased hedge ineffectiveness. (4). Bank of Americas declining net interest margin was partially offset by ongoing reductions in its debt footprint and lower rates paid on deposits.The total U. S interest-bearing deposits had an average yield of 0. 36%, compared to 0. 55% in 2008. Such downward trend in net interest margin can be observed in other banks as well. The following table presents total interest-earning assets rate and total interest-bearing liabilities for all three banks over 2009 to 2011. As shown, all banks experienced a decline in interest-earning assets rate over three years 1) BOA from 4. 31% in 2009 to 3. 65% in 2011, with an average decrease of 8% every year 2) Chase from 4. 04% to 3. 1 %, with an average decrease of 6. 8% 3) Citi from 4. 78% to 4. 27%, with an average decrease of 5. 5%. The main reasons for the other two banks declining net interest margin were higher deposit balances with lower loan yields. Bank of America JP Morgan Chase Citi Group 2011 2010 2009 2011 2010 2009 2011 2010 2009 Total interest-earning assets rate 3. 65% 4. 02% 4. 31% 3. 51% 3. 83% 4. 04% 4. 27% 4. 55% 4. 78% Total interest-bearing liabilities 1. 39% 1. 39% 1. 77% 0. 86% 0. 84% 1. 02% 1. 63% 1. 61% 1. 3% Table 6 Net Interest Margin of Three Banks Interest rate risk BOAs net interest income decreased by $2,122 million in 2011 and $998 million in 2010 from a 1% downward parallel shift in interest rate. 1% downward change in interest rate results in a bigger decrease in net interest income in 2011 than in 2010. However, according Chases 10K, downward 100bps parallel shocks result in a Federal Funds target rate of zero and negative three- and six-month treasury rates. The earnings-at- risk results of such a low-probability scenario are not meaningful.For Citi, a 100 bps decrease in interest rates would imply negative rates for the yield curve, so not meaningful either. 1% downward shift 2011 2010 BOA ($2,122) ($998) JP Morgan Chase NM NM Citi Group NM NM Table 7 The Impact of 1% downward shift on Net Interest Income BOAs net interest income would increase by $1,505 million in 2011 and $601 million in 2010 from a 1% upward parallel shift in interest rate. The same as downward change, 1% upward change in interest rate also would result in a bigger increase in the net interest income in 2011 than in 2010.Compared with BOA, 1% upward shift in interest rate has a bigger impact for Chase and smaller impact for Citi. 1% upward shift 2011 2010 Bank of America $1,505 $601 JP Morgan Chase $2,326 $1,483 Citi Group $97 ($105) Table 8 The Impact of 1% Upward Shift on Net Interest Income Credit Risk and Losses Main loss reserve adequacy ratios Policy to designate past due loans as non-performing Adequacy of the banks allowance for loan losses Disclosure policies relating to loans Appendix BOAIn $ millions 2011 2011 2010 2010 2011 2010 2011 ? Carrying Value Fair Value Carrying Value Fair Value CURG CURG URG Adjustments for assets and liabilities at HC on balance sheet Assets ? ? ? ? ? ? ? Held-to maturity debt securities 35,265 35,442 427 427 177 177 Loans 870,520 843,392 876,739 861,695 (27,128) (15,044) (12,084) Total assets 905,785 878,834 877,166 862,122 (26,951) (15,044) (11,907) Liabilities ? ? ? ? ? ? ? Deposits 1,033,041 1,033,248 1,010,430 1,010,460 207 30 177 Long-term debt 372,265 343,211 448,431 441,672 (29,054) (6,759) (22,295) Total liabilities 1,405,306 1,376,459 1,458,861 1,452,132 (28,847) (6,729) (22,118) Pretax adjustments before AFS securities and CFH derivatives ? ? ? ? 1,896 (8,315) 10,211 Aftertax adjustments before AFS securities and CFH derivatives ? ? ? ? ? ? 6,127 Adj ustments for assets and liabilities at FV on balance sheet with gains and losses in OCI? Aftertax adjustment for AFS securities ? ? ? ? ? ? (4,270) Aftertax adjustment for CFH derivatives ? ? ? ? ? ? (549) Total adjustment to net income ? ? ? ? ? ? 1,308 Net income as per financial statements ? ? ? ? ? ? 1,446 Full fair value income with information available ? ? ? ? ? ? 2,754 JP Morgan ChaseIn $ millions 2011 2011 2010 2010 2011 2010 2011 ? Carrying Value Fair Value Carrying Value Fair Value CURG CURG URG Adjustments for assets and liabilities at HC on balance sheet Assets ? ? ? ? ? ? ? Loans 696,100 695,800 660,700 663,500 (300) 2,800 (3,100) Other 66,300 66,800 64,900 65,000 500 100 400 Total assets 762,400 762,600 725,600 728,500 200 2,900 (2,700) Liabilities ? ? ? ? ? ? ? Deposits 1,127,800 1,128,300 930,400 931,500 500 1,100 (600) Accounts payable and other liabilities 167,000 166,900 138,200 138,200 ( 100) (100) Beneficial interests issued by consolidated VIEs 66,000 66,200 77,600 77,900 200 300 (100) Long-term debt and junior subordinated deferrable interest debentures 256,800 254,200 270,700 271,900 (2,600) 1,200 (3,800) Total liabilities 1,617,600 1,615,600 1,416,900 1,419,500 (2,000) 2,600 (4,600) Pretax adjustments before AFS securities and CFH derivatives ? ? ? ? 2,200 300 1,900 Aftertax adjustments before AFS securities and CFH derivatives ? ? ? ? ? ? 1,140 Adjustments for assets and liabilities at FV on balance sheet with gains and losses in OCI Aftertax adjustment for AFS securities ? ? ? ? ? ? 1,067 Aftertax adjustment for CFH derivatives ? ? ? ? ? ? (279) Cash flow hedge ? ? ? ? ? ? (155) Total adjustment to net income ? ? ? ? ? ? 1,773 Net income as per financial statements ? ? ? ? ? ? 18,976 Full fair value income with information available ? ? ? ? ? ? 20,749 Citi Group In $ millions 2011 2011 2010 2010 2011 2010 2011 ? Carrying Value Fair Value Carrying Value Fair Value CURG CURG URG Adjustments for assets and liabilities at HC on balance sheet? Assets ? ? ? ? ? ? ? Investment 293,400 292,400 318,200 319,000 (1,000) 800 (1,800) Loans 614,600 603,900 605,500 584,300 (10,700) (21,200) 10,500 Total assets 908,000 896,300 923,700 903,300 (11,700) (20,400) 8,700 Liabilities ? ? ? ? ? ? ? Deposits 865,900 865,800 845,000 843,200 (100) (1,800) 1,700 Long-term debt 323,500 313,800 381,200 384,500 (9,700) 3,300 (13,000) Total liabilities 1,189,400 1,179,600 1,226,200 1,227,700 (9,800) 1,500 (11,300) Pretax adjustments before AFS securities and CFH derivatives ? ? ? ? (1,900) (21,900) 20,000 Aftertax adjustments before AFS securities and CFH derivatives ? ? ? ? ? ? 12,000 Adjustments for assets and liabilities at FV on balance sheet with gains and losses in OCI Aftertax adjustment for AFS securities ? ? ? ? ? ? 2,360 Cash flow hedge ? ? ? ? ? ? (170) Total adjustment to net income ? ? ? ? ? ? 14,190 Net income as per financial statements ? ? ? ? ? ? 11,215 Full fair value income with information available ? ? ? ? ? ? 25,405