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2006 Annual Report

 

Balance Sheet Analysis

Table 4 Selected Balance Sheet Data
December 31
Average Balance
(Dollars in millions) 2006 2005 2006 2005
Assets
Federal funds sold and securities purchased under
agreements to resell
$
135,478
$
149,785
$
175,334
$
169,132
Trading account assets 153,052 131,707 145,321 133,502
Debt securities 192,846 221,603 225,219 219,843
Loans and leases, net of allowance for loan and lease losses 697,474 565,746 643,259 528,793
All other assets 280,887 222,962 277,548 218,622
Total assets
$
1,459,737
$
1,291,803
$
1,466,681
$
1,269,892
Liabilities
Deposits
$
693,497
$
634,670
$
672,995
$
632,432
Federal funds purchased and securities sold under
agreements to repurchase
217,527 240,655 286,903 230,751
Trading account liabilities 67,670 50,890 64,689 57,689
Commercial paper and other short-term borrowings 141,300 116,269 124,229 95,657
Long-term debt 146,000 100,848 130,124 97,709
All other liabilities 58,471 46,938 57,278 55,793
Total liabilities 1,324,465 1,190,270 1,336,218 1,170,031
Shareholders' equity 135,272 101,533 130,463 99,861
Total liabilities and shareholders' equity
$
1,459,737
$
1,291,803
$
1,466,681
$
1,269,892

At December 31, 2006, Total Assets were $1.5 trillion, an increase of $167.9 billion, or 13 percent, from December 31, 2005. Average Total Assets in 2006 increased $196.8 billion, or 15 percent, from 2005. Growth in period end and average Total Assets was primarily attributable to the MBNA merger, which had $83.3 billion of Total Assets on January 1, 2006. The increase in Loans and Leases was also attributable to organic growth. In addition, market-based earning assets increased $42.2 billion and $46.9 billion on a period end and average basis due to continued growth and build out in the Capital Markets and Advisory Services business within Global Corporate and Investment Banking.

At December 31, 2006, Total Liabilities were $1.3 trillion, an increase of $134.2 billion, or 11 percent, from December 31, 2005. Average Total Liabilities in 2006 increased $166.2 billion, or 14 percent, from 2005. Growth in period end and average Total Liabilities was primarily attributable to increases in Deposits and Long-term Debt, due to the assumption of liabilities in connection with the MBNA merger and the net issuances of Long-term Debt. Funding requirements related to the support of growth in assets, including the financing needs of our trading business, resulted in increases in certain other funding categories.

Period end and average Shareholders' Equity increased primarily from the issuance of stock related to the MBNA merger.

Federal Funds Sold and Securities Purchased under Agreements to Resell

The Federal Funds Sold and Securities Purchased under Agreements to Resell average balance increased $6.2 billion, or four percent, in 2006 compared to the prior year. The increase was from activities in the trading businesses, primarily in interest rate and equity products, as a result of expanded activities related to a variety of client needs.

Trading Account Assets

Trading Account Assets consist primarily of fixed income securities (including government and corporate debt), equity and convertible instruments. The average balance increased $11.8 billion to $145.3 billion in 2006, which was due to growth in client-driven market-making activities in interest rate, credit and equity products. For additional information, see Market Risk Management.

Debt Securities

Available-for-sale (AFS) Debt Securities include fixed income securities such as mortgage-backed securities, foreign debt, asset-backed securities, municipal debt, U.S. Government agencies and corporate debt. We use the AFS portfolio primarily to manage interest rate risk and liquidity risk and to take advantage of market conditions that create more economically attractive returns on these investments. The average balance in the securities portfolio increased $5.4 billion from 2005 primarily due to the increase in the AFS portfolio in the first half of the year partially offset by the sale of mortgage-backed securities of $43.7 billion in the third quarter of 2006. For additional information, see Market Risk Management.

Loans and Leases, Net of Allowance for Loan and Lease Losses

Average Loans and Leases, net of Allowance for Loan and Lease Losses, was $643.3 billion in 2006, an increase of 22 percent from 2005. The consumer loan and lease portfolio increased $83.9 billion primarily due to higher retained mortgage production and the MBNA merger. The commercial loan and lease portfolio increased $31.3 billion due to organic growth and the MBNA merger, including the business card portfolio. For a more detailed discussion of the loan portfolio and the allowance for credit losses, see Credit Risk Management and Note 6 and Note 7 of the Consolidated Financial Statements.

Deposits

Average Deposits increased $40.6 billion to $673.0 billion in 2006 compared to 2005 due to a $24.2 billion increase in average foreign interest-bearing deposits and a $14.0 billion increase in average domestic interest-bearing deposits primarily due to the assumption of liabilities in connection with the MBNA merger. We categorize our deposits as core or market-based deposits. Core deposits are generally customer-based and represent a stable, low-cost funding source that usually react more slowly to interest rate changes than market-based deposits. Core deposits include savings, NOW and money market accounts, consumer CDs and IRAs, and noninterest-bearing deposits. Core deposits exclude negotiable CDs, public funds, other domestic time deposits and foreign interest-bearing deposits. Average core deposits increased $11.0 billion to $574.6 billion in 2006, a two percent increase from the prior year. The increase was distributed between consumer CDs and noninterest-bearing deposits partially offset by decreases in NOW and money market deposits, and savings. The increase in consumer CDs was impacted by the shift of deposit balances from NOW and money market deposits and savings to consumer CDs as a result of the favorable rates offered on consumer CDs. Average market-based deposit funding increased $29.6 billion to $98.4 billion in 2006 compared to 2005 due to increases of $24.2 billion in foreign interest-bearing deposits and $5.3 billion in negotiable CDs, public funds and other time deposits related to funding of growth in core and market-based assets.

Federal Funds Purchased and Securities Sold under Agreements to Repurchase

The Federal Funds Purchased and Securities Sold under Agreements to Repurchase average balance increased $56.2 billion to $286.9 billion in 2006 as a result of expanded trading activities within interest rate and equity products related to client activities.

Trading Account Liabilities

Trading Account Liabilities consist primarily of short positions in fixed income securities (including government and corporate debt), equity and convertible instruments. The average balance increased $7.0 billion to $64.7 billion in 2006, which was due to growth in client-driven market-making activities in equity products, partially offset by a reduction in interest rate products. For additional information, see Market Risk Management.

Commercial Paper and Other Short-term Borrowings

Commercial Paper and Other Short-term Borrowings provide a funding source to supplement Deposits in our ALM strategy. The average balance increased $28.6 billion to $124.2 billion in 2006, mainly due to the increase in Federal Home Loan Bank advances to fund core asset growth, primarily in the ALM portfolio.

Long-term Debt

Period end and average Long-term Debt increased $45.2 billion and $32.4 billion. The increase resulted from the funding of core asset growth, the addition of MBNA and the issuance of subordinated debt to support Tier 2 capital. For additional information, see Note 12 of the Consolidated Financial Statements.

Shareholders' Equity

Period end and average Shareholders' Equity increased $33.7 billion and $30.6 billion primarily due to the issuance of stock related to the MBNA merger. This increase along with Net Income and issuances of Preferred Stock, was partially offset by cash dividends, net share repurchases of Common Stock and redemption of Preferred Stock.

Table 5 Five Year Summary of Selected Financial Data
(Dollars in millions, except per share information) 2006 2005 2004 2003 2002
Income statement
Net interest income
$
34,591
$
30,737
$
27,960
$
20,505
$
20,117
Noninterest income 38,432 25,354 21,005 17,329 14,874
Total revenue 73,023 56,091 48,965 37,834 34,991
Provision for credit losses 5,010 4,014 2,769 2,839 3,697
Gains (losses) on sales of debt securities (443) 1,084 1,724 941 630
Noninterest expense 35,597 28,681 27,012 20,155 18,445
Income before income taxes 31,973 24,480 20,908 15,781 13,479
Income tax expense 10,840 8,015 6,961 5,019 3,926
Net income 21,133 16,465 13,947 10,762 9,553
Average common shares issued and outstanding
(in thousands)
4,526,637 4,008,688 3,758,507 2,973,407 3,040,085
Average diluted common shares issued and
outstanding (in thousands)
4,595,896 4,068,140 3,823,943 3,030,356 3,130,935
Performance ratios
Return on average assets 1.44
%
1.30
%
1.34
%
1.44
%
1.46
%
Return on average common shareholders' equity 16.27 16.51 16.47 21.50 19.96
Total ending equity to total ending assets 9.27 7.86 9.03 6.76 7.92
Total average equity to total average assets 8.90 7.86 8.12 6.69 7.33
Dividend payout 45.66 46.61 46.31 39.76 38.79
Per common share data
Earnings
$
4.66
$
4.10
$
3.71
$
3.62
$
3.14
Diluted earnings 4.59 4.04 3.64 3.55 3.05
Dividends paid 2.12 1.90 1.70 1.44 1.22
Book value 29.70 25.32 24.70 16.86 17.04
Average balance sheet
Total loans and leases
$
652,417
$
537,218
$
472,617
$
356,220
$
336,820
Total assets 1,466,681 1,269,892 1,044,631 749,104 653,732
Total deposits 672,995 632,432 551,559 406,233 371,479
Long-term debt 130,124 97,709 92,303 67,077 65,550
Common shareholders' equity 129,773 99,590 84,584 50,035 47,837
Total shareholders' equity 130,463 99,861 84,815 50,091 47,898
Asset Quality
Allowance for credit losses
$
9,413
$
8,440
$
9,028
$
6,579
$
6,851
Nonperforming assets 1,856 1,603 2,455 3,021 5,262
Allowance for loan and lease losses as a percentage
of total loans and leases outstanding
1.28
%
1.40
%
1.65
%
1.66
%
1.85
%
Allowance for loan and lease losses as a percentage
of total nonperforming loans and leases
505 532 390 215 126
Net charge-offs
$
4,539
$
4,562
$
3,113
$
3,106
$
3,697
Net charge-offs as a percentage of average loans
and leases
0.70
%
0.85
%
0.66
%
0.87
%
1.10
%
Nonperforming loans and leases as a percentage
of total loans and leases outstanding
0.25 0.26 0.42 0.77 1.47
Nonperforming assets as a percentage of total
loans, leases, and foreclosed properties
0.26 0.28 0.47 0.81 1.53
Ratio of the allowance for loan and lease losses
at December 31 to net charge-offs
1.99 1.76 2.77 1.98 1.72
Capital ratios (period end)
Risk-based capital:
Tier 1 8.64
%
8.25
%
8.20
%
8.02
%
8.41
%
Total 11.88 11.08 11.73 12.05 12.63
Tier 1 Leverage 6.36 5.91 5.89 5.86 6.44
Market capitalization
$
238,021
$
184,586
$
190,147
$
115,926
$
104,418
Market price per share of common stock
Closing
$
53.39
$
46.15
$
46.99
$
40.22
$
34.79
High closing 54.90 47.08 47.44 41.77 38.45
Low closing 43.09 41.57 38.96 32.82 27.08