Loans, Notes and Mortgages

9 Months Ended

Sep. 30, 2011

Loans, Notes and Mortgages [Abstract]

Note 10. Loans, Notes and Mortgages

Loans, notes, mortgages and related commitments to extend credit include:


	•	Consumer loans, which are substantially secured, including residential mortgages, home equity loans, and other loans to individuals for household, family, or other personal expenditures; and

	•	Commercial loans, including corporate and institutional loans (including corporate and financial sponsor, non-investment grade lending commitments), commercial mortgages, asset-backed loans, small- and middle-market business loans, and other loans to businesses.

The table below presents information on Merrill Lynch’s loans outstanding at September 30, 2011 and December 31, 2010.


Age Analysis of Outstanding Loans
(dollars in millions)
	September 30, 2011
									Total Current				Loans
	30-59 Days		60-89 Days		90 Days or more		Total Past		or Less Than		Nonperforming		Measured at		Total
	Past Due		Past Due		Past Due		Due		30 Days Past Due		Loans⁽¹⁾		Fair Value		Outstanding


Consumer loans
Residential mortgage	$	9	$	4	$	-	$	13	$	433	$	30	$	-	$	476
Home equity		1		1		-		2		118		3		-		123

Total consumer		10		5		-		15		551		33		-		599

Commercial
Commercial — U.S.		-		-		12		12		4,232		110		-		4,354
Commercial real estate		-		-		-		-		496		120		-		616
Commercial — non-U.S.		-		-		1		1		3,192		56		-		3,249

Total commercial loans		-		-		13		13		7,920		286		-		8,219
Commercial loans measured at fair value		-		-		-		-		-		-		892		892

Total commercial		-		-		13		13		7,920		286		892		9,111

Other⁽²⁾		-		-		-		-		10,789		-		1,507		12,296

Total loans	$	10	$	5	$	13	$	28	$	19,260	$	319	$	2,399	$	22,006

Allowance for loan losses																(90	)

Total loans, net															$	21,916


Age Analysis of Outstanding Loans
(dollars in millions)
	December 31, 2010
									Total Current				Loans
	30-59 Days		60-89 Days		90 Days or more		Total Past		or Less Than		Nonperforming		Measured at		Total
	Past Due		Past Due		Past Due		Due		30 Days Past Due		Loans⁽¹⁾		Fair Value		Outstanding


Consumer loans
Residential mortgage	$	15	$	8	$	-	$	23	$	451	$	30	$	-	$	504
Home equity		1				-		1		126		5		-		132

Total consumer		16		8		-		24		577		35		-		636

Commercial
Commercial — U.S.		1		1		19		21		5,591		210		-		5,822
Commercial real estate		-		-		-		-		1,632		212		-		1,844
Commercial — non-U.S.		-		-		-		-		2,824		161		-		2,985

Total commercial loans		1		1		19		21		10,047		583		-		10,651
Commercial loans measured at fair value		-		-		-		-		-		-		318		318

Total commercial		1		1		19		21		10,047		583		318		10,969

Other⁽³⁾		-		-		-		-		11,496		-		2,872		14,368

Total loans	$	17	$	9	$	19	$	45	$	22,120	$	618	$	3,190	$	25,973

Allowance for loan losses																(170	)

Total loans, net															$	25,803


(1)		Excludes loans measured at fair value.
(2)		Includes asset-backed loans and loans held-for-sale of $9.3 billion and $3.0 billion, respectively, as of September 30, 2011.
(3)		Includes asset-backed loans and loans held-for-sale of $9.2 billion and $5.2 billion, respectively, as of December 31, 2010.

Merrill Lynch monitors the credit quality of its loans on an ongoing basis. Merrill Lynch’s commercial loans are evaluated using pass rated or reservable criticized as the primary credit quality indicators. The term reservable criticized refers to those commercial loans that are internally classified or listed by Merrill Lynch as special mention, substandard or doubtful, which are asset categories defined by regulatory authorities. These assets have an elevated risk and may have a high probability of default or total loss. Pass rated refers to all loans not considered reservable criticized. The table below presents credit quality indicators on Merrill Lynch’s commercial loan portfolio, excluding loans accounted for under the fair value option, at September 30, 2011 and December 31, 2010.


(dollars in millions)
	September 30, 2011
	Commercial —		Commercial Real		Commercial —
	U.S.		Estate		non-U.S.


Risk Ratings
Pass rated	$	4,057	$	317	$	3,050
Reservable criticized		297		299		199

Total Commercial Credit	$	4,354	$	616	$	3,249


(dollars in millions)
	December 31, 2010
	Commercial —		Commercial Real		Commercial —
	U.S.		Estate		non-U.S.


Risk Ratings
Pass rated	$	5,192	$	1,582	$	2,581
Reservable criticized		630		262		404

Total Commercial Credit	$	5,822	$	1,844	$	2,985

Activity in the allowance for loan losses, which is primarily associated with commercial loans, is presented below:


(dollars in millions)
	Nine Months Ended			Nine Months Ended
	September 30, 2011			September 30, 2010


Allowance for loan losses, at beginning of period	$	170		$	33
Provision for loan losses		24			227
Charge-offs		(108	)		(73	)
Recoveries		3			-

Net charge-offs		(105	)		(73	)
Other		1			2

Allowance for loan losses, at end of period	$	90		$	189

Consumer loans, substantially all of which are collateralized, consisted of approximately 23,000 individual loans at September 30, 2011. Commercial loans consisted of approximately 6,000 separate loans.

Merrill Lynch’s outstanding loans include $3.0 billion and $5.2 billion of loans held for sale at September 30, 2011 and December 31, 2010, respectively. Loans held for sale are loans that Merrill Lynch expects to sell prior to maturity. At September 30, 2011, such loans consisted of $0.8 billion of consumer loans, primarily residential mortgages, and $2.2 billion of commercial loans. At December 31, 2010, such loans consisted of $1.7 billion of consumer loans, primarily residential mortgages, and $3.5 billion of commercial loans.

Merrill Lynch generally maintains collateral on secured loans in the form of securities, liens on real estate, perfected security interests in other assets of the borrower, and guarantees. Consumer loans are typically collateralized by liens on real estate and other property. Commercial secured loans primarily include asset-based loans secured by financial assets such as loan receivables and trade receivables where the amount of the loan is based on the level of available collateral (i.e., the borrowing base) and commercial mortgages secured by real property. In addition, for secured commercial loans related to the corporate and institutional lending business, Merrill Lynch typically receives collateral in the form of either a first or second lien on the assets of the borrower or the stock of a subsidiary, which gives Merrill Lynch a priority claim in the case of a bankruptcy filing by the borrower. In many cases, where a security interest in the assets of the borrower is granted, no restrictions are placed on the use of assets by the borrower and asset levels are not typically subject to periodic review; however, the borrowers are typically subject to stringent debt covenants. Where the borrower grants a security interest in the stock of its subsidiary, the subsidiary’s ability to issue additional debt is typically restricted.

In some cases, Merrill Lynch enters into single name and index credit default swaps to mitigate credit exposure related to funded and unfunded commercial loans. The notional value of these swaps totaled $3.7 billion and $2.9 billion at September 30, 2011 and December 31, 2010, respectively.

The following tables provide information regarding Merrill Lynch’s net credit default protection associated with its funded and unfunded commercial loans as of September 30, 2011 and December 31, 2010:


Net Credit Default Protection by Maturity Profile
	September 30,			December 31,
	2011			2010


Less than or equal to one year		14	%		23	%
Greater than one year and less than or equal to five years		84			67
Greater than five years		2			10

Total net credit default protection		100	%		100	%


Net Credit Default Protection by Credit Exposure Debt Rating
(dollars in millions)
	September 30, 2011						December 31, 2010
	Net						Net
Ratings⁽¹⁾	Notional			Percent			Notional			Percent


AA	$	(647	)		17.5	%	$	(450	)		15.5	%
A		(1,727	)		46.7			(1,029	)		35.3
BBB		(716	)		19.4			(655	)		22.5
BB		(232	)		6.3			(359	)		12.3
B		(190	)		5.1			(224	)		7.7
CCC and below		(187	)		5.0			(194	)		6.7

Total net credit default protection	$	(3,699	)		100.0	%	$	(2,911	)		100.0	%


(1)		Merrill Lynch considers ratings of BBB- or higher to meet the definition of investment grade.

Accounting for Acquired Impaired Loans

Upon completion of the acquisition of Merrill Lynch by Bank of America, Merrill Lynch adjusted the carrying value of its loans to fair value. Certain of these loans were subject to the requirements of Acquired Impaired Loan Accounting, which addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans if those differences are attributable, at least in part, to credit quality. Acquired Impaired Loan Accounting requires impaired loans to be recorded at estimated fair value and prohibits “carrying over” or the creation of valuation allowances in the initial accounting for loans acquired in a transfer that are within the scope of Acquired Impaired Loan Accounting.

The estimated fair values for loans within the scope of Acquired Impaired Loan Accounting are determined by discounting cash flows expected to be collected using a discount rate for similar instruments with adjustments that management believes a market participant would consider in determining fair value. Cash flows expected to be collected at acquisition are estimated using internal prepayment, interest rate and credit risk models that incorporate management’s best estimate of certain key assumptions, such as default rates, loss severity and prepayment speeds. All other loans were remeasured at the present value of contractual payments discounted to the prevailing interest rates on the date of acquisition.

Under Acquired Impaired Loan Accounting, the excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loans. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. Changes in the expected cash flows from the date of acquisition will either impact the accretable yield or result in a charge to the provision for credit losses. Subsequent decreases to expected principal cash flows will result in a charge to provision for credit losses and a corresponding increase to allowance for loan losses. Subsequent increases in expected principal cash flows will result in recovery of any previously recorded allowance for loan losses, to the extent applicable, and an increase from expected cash flows to accretable yield for any remaining increase. All changes in expected interest cash flows will result in an increase or decrease of accretable yield.

In connection with Merrill Lynch’s acquisition by Bank of America, loans within the scope of Acquired Impaired Loan Accounting had an unpaid principal balance of $5.6 billion ($2.7 billion consumer and $2.9 billion commercial) and a carrying value of $4.2 billion ($2.3 billion consumer and $1.9 billion commercial) as of January 1, 2009. The loans within the scope of Acquired Impaired Loan Accounting, which were primarily commercial real estate loans, had an unpaid principal balance of $0.7 billion and a carrying value of $0.2 billion as of December 31, 2010, and were not material as of September 30, 2011.

MERRILL LYNCH & CO., INC. 10-Q