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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 2004

 

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number:

1-6523

 


 

Exact name of registrant as specified in its charter:

Bank of America Corporation

 


 

State of incorporation:

Delaware

 

IRS Employer Identification Number:

56-0906609

 

Address of principal executive offices:

Bank of America Corporate Center

100 N. Tryon Street

Charlotte, North Carolina 28255

 

Registrant’s telephone number, including area code:

(704) 386-8486

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  x    No  ¨

 

On October 31, 2004, there were 4,039,176,560 shares of Bank of America Corporation Common Stock outstanding.

 



Table of Contents

Bank of America Corporation

 

September 30, 2004 Form 10-Q

 

INDEX

 

     Page

Part I. Financial Information

    
     Item 1.    Financial Statements:     
               Consolidated Statement of Income for the Three Months and Nine Months Ended September 30, 2004 and 2003    2
               Consolidated Balance Sheet at September 30, 2004 and December 31, 2003    3
               Consolidated Statement of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2004 and 2003    4
               Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2004 and 2003    5
               Notes to Consolidated Financial Statements    6
     Item 2.    Management’s Discussion and Analysis of Results of Operations and Financial Condition    30
     Item 3.    Quantitative and Qualitative Disclosures about Market Risk    82
     Item 4.    Controls and Procedures    82

Part II. Other Information

    
     Item 1.    Legal Proceedings    82
     Item 2.    Unregistered Sales of Equity Securities and the Use of Proceeds    82
     Item 6.    Exhibits    83
     Signature    84
     Index to Exhibits    85

 

1


Table of Contents

Part I. Financial Information

Item 1. Financial Statements

 

Bank of America Corporation and Subsidiaries

Consolidated Statement of Income

 

     Three Months Ended
September 30


   Nine Months Ended
September 30


(Dollars in millions, except per share information)


   2004

    2003

   2004

   2003

Interest income

                            

Interest and fees on loans and leases

   $ 7,508     $ 5,328    $ 20,294    $ 16,088

Interest and dividends on securities

     2,078       600      5,197      2,342

Federal funds sold and securities purchased under agreements to resell

     484       480      1,331      867

Trading account assets

     968       975      2,988      3,024

Other interest income

     480       472      1,288      1,254
    


 

  

  

Total interest income

     11,518       7,855      31,098      23,575
    


 

  

  

Interest expense

                            

Deposits

     1,711       1,278      4,446      3,730

Short-term borrowings

     1,183       447      2,960      1,414

Trading account liabilities

     333       345      965      969

Long-term debt

     626       481      1,680      1,584
    


 

  

  

Total interest expense

     3,853       2,551      10,051      7,697
    


 

  

  

Net interest income

     7,665       5,304      21,047      15,878

Noninterest income

                            

Service charges

     1,899       1,458      5,098      4,182

Investment and brokerage services

     945       594      2,539      1,752

Mortgage banking income (loss)

     (250 )     666      258      1,630

Investment banking income

     438       412      1,389      1,278

Equity investment gains

     220       25      437      —  

Card income

     1,257       794      3,208      2,237

Trading account profits

     184       175      600      382

Other income

     202       322      523      940
    


 

  

  

Total noninterest income

     4,895       4,446      14,052      12,401
    


 

  

  

Total revenue

     12,560       9,750      35,099      28,279

Provision for credit losses

     650       651      2,063      2,256

Gains on sales of securities

     732       233      2,022      802

Noninterest expense

                            

Personnel

     3,540       2,595      9,941      7,749

Occupancy

     622       522      1,731      1,492

Equipment

     309       252      888      789

Marketing

     364       249      1,012      717

Professional fees

     194       214      521      620

Amortization of intangibles

     200       55      455      163

Data processing

     340       275      954      803

Telecommunications

     180       152      514      413

Other general operating

     1,024       763      3,250      2,121

Merger and restructuring charges

     221       —        346      —  
    


 

  

  

Total noninterest expense

     6,994       5,077      19,612      14,867
    


 

  

  

Income before income taxes

     5,648       4,255      15,446      11,958

Income tax expense

     1,884       1,333      5,152      3,874
    


 

  

  

Net income

   $ 3,764     $ 2,922    $ 10,294    $ 8,084
    


 

  

  

Net income available to common shareholders

   $ 3,759     $ 2,921    $ 10,283    $ 8,081
    


 

  

  

Per common share information

                            

Earnings

   $ 0.93     $ 0.98    $ 2.80    $ 2.70
    


 

  

  

Diluted earnings

   $ 0.91     $ 0.96    $ 2.76    $ 2.65
    


 

  

  

Dividends paid

   $ 0.45     $ 0.40    $ 1.25    $ 1.04
    


 

  

  

Average common shares issued and outstanding (in thousands)

     4,052,304       2,980,206      3,666,298      2,988,739
    


 

  

  

Average diluted common shares issued and outstanding (in thousands)

     4,121,375       3,039,282      3,729,120      3,047,046
    


 

  

  

See accompanying notes to Consolidated Financial Statements.

 

2


Table of Contents

Bank of America Corporation and Subsidiaries

Consolidated Balance Sheet

 

(Dollars in millions)


   September 30,
2004


    December 31,
2003


 

Assets

                

Cash and cash equivalents

   $ 29,252     $ 27,084  

Time deposits placed and other short-term investments

     11,021       8,051  

Federal funds sold and securities purchased under agreements to resell (includes $104,466 and $76,446 pledged as collateral)

     104,570       76,492  

Trading account assets (includes $22,828 and $18,722 pledged as collateral)

     102,925       68,547  

Derivative assets

     35,247       36,507  

Securities:

                

Available-for-sale (includes $67,592 and $20,858 pledged as collateral)

     163,438       66,382  

Held-to-maturity, at cost (market value - $420 and $254)

     420       247  
    


 


Total securities

     163,858       66,629  
    


 


Loans and leases

     511,639       371,463  

Allowance for loan and lease losses

     (8,723 )     (6,163 )
    


 


Loans and leases, net of allowance

     502,916       365,300  
    


 


Premises and equipment, net

     7,884       6,036  

Mortgage servicing rights

     2,453       2,762  

Goodwill

     44,709       11,455  

Core deposit intangibles and other intangibles

     3,726       908  

Other assets

     80,435       66,674  
    


 


Total assets

   $ 1,088,996     $ 736,445  
    


 


Liabilities

                

Deposits in domestic offices:

                

Noninterest-bearing

   $ 155,406     $ 118,495  

Interest-bearing

     380,956       262,032  

Deposits in foreign offices:

                

Noninterest-bearing

     5,632       3,035  

Interest-bearing

     49,264       30,551  
    


 


Total deposits

     591,258       414,113  
    


 


Federal funds purchased and securities sold under agreements to repurchase

     142,992       78,046  

Trading account liabilities

     36,825       26,844  

Derivative liabilities

     19,039       24,526  

Commercial paper and other short-term borrowings

     71,434       42,478  

Accrued expenses and other liabilities (includes $446 and $416 of Reserve for unfunded lending commitments)

     28,851       27,115  

Long-term debt

     100,586       75,343  
    


 


Total liabilities

     990,985       688,465  
    


 


Commitments and contingencies (Note 9)

                

Shareholders’ equity

                

Preferred stock, $0.01 par value; authorized - 100,000,000 shares; issued and outstanding - 1,090,189 and 2,539,200 shares

     271       54  

Common stock and additional paid-in capital, $0.01 par value; authorized – 7,500,000,000 and 5,000,000,000 shares; issued and outstanding - 4,049,062,685 and 2,882,287,572 shares

     44,756       29  

Retained earnings

     55,979       50,198  

Accumulated other comprehensive loss

     (2,669 )     (2,148 )

Other

     (326 )     (153 )
    


 


Total shareholders’ equity

     98,011       47,980  
    


 


Total liabilities and shareholders’ equity

   $ 1,088,996     $ 736,445  
    


 


 

See accompanying notes to Consolidated Financial Statements.

 

3


Table of Contents

Bank of America Corporation and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity

 

(Dollars in millions, shares in thousands)


  

Preferred

Stock


   

Common Stock and

Additional Paid-in Capital


   

Retained

Earnings


   

Accumulated

Other

Comprehensive

Income (Loss)(1)


    Other

   

Total

Share-

holders’
Equity


   

Comprehensive

Income


 
     Shares

    Amount

           

Balance, December 31, 2002

   $ 58     3,001,382     $ 496     $ 48,517     $ 1,232     $ 16     $ 50,319          

Net income

                           8,084                       8,084     $ 8,084  

Net unrealized losses on available-for-sale and marketable equity securities

                                   (267 )             (267 )     (267 )

Net unrealized gains on foreign currency translation adjustments

                                   15               15       15  

Net unrealized losses on derivatives

                                   (2,756 )             (2,756 )     (2,756 )

Cash dividends paid:

                                                              

Common

                           (3,113 )                     (3,113 )        

Preferred

                           (3 )                     (3 )        

Common stock issued under employee plans and related tax benefits

           124,870       3,797                       (138 )     3,659          

Common stock repurchased

           (147,630 )     (4,403 )     (1,162 )                     (5,565 )        

Conversion of preferred stock

     (3 )   252       3                               —            

Other

           —         137       (18 )             (47 )     72          
    


 

 


 


 


 


 


 


Balance, September 30, 2003

   $ 55     2,978,874     $ 30     $ 52,305     $ (1,776 )   $ (169 )   $ 50,445     $ 5,076  
    


 

 


 


 


 


 


 


Balance, December 31, 2003

   $ 54     2,882,288     $ 29     $ 50,198     $ (2,148 )   $ (153 )   $ 47,980          

Net income

                           10,294                       10,294     $ 10,294  

Net unrealized losses on available-for-sale and marketable equity securities

                                   (390 )             (390 )     (390 )

Net unrealized losses on foreign currency translation adjustments

                                   (9 )             (9 )     (9 )

Net unrealized losses on derivatives

                                   (122 )             (122 )     (122 )

Cash dividends paid:

                                                              

Common

                           (4,629 )                     (4,629 )        

Preferred

                           (11 )                     (11 )        

Common stock issued under employee plans and related tax benefits

           89,603       3,037                       (172 )     2,865          

Stocks issued in acquisition (2)

     271     1,186,728       46,480                               46,751          

Common stock repurchased

           (113,796 )     (4,837 )     88                       (4,749 )        

Conversion of preferred stock

     (54 )   4,240       53                               (1 )        

Other

                   (6 )     39               (1 )     32          
    


 

 


 


 


 


 


 


Balance, September 30, 2004

   $ 271     4,049,063     $ 44,756     $ 55,979     $ (2,669 )   $ (326 )   $ 98,011     $ 9,773  
    


 

 


 


 


 


 


 



(1) At September 30, 2004 and December 31, 2003, Accumulated Other Comprehensive Income (Loss) included Net Unrealized Losses on Available-for-sale and Marketable Equity Securities of $460 and $70, respectively; Net Unrealized Losses on Foreign Currency Translation Adjustments of $175 and $166, respectively; and Net Unrealized Losses on Derivatives of $1,930 and $1,808, respectively.
(2) Includes adjustment for the fair value of outstanding FleetBoston Financial Corporation (FleetBoston) stock options of $862.

 

See accompanying Notes to Consolidated Financial Statements.

 

4


Table of Contents

Bank of America Corporation and Subsidiaries

Consolidated Statement of Cash Flows

 

    

Nine Months

Ended September 30


 

(Dollars in millions)


   2004

    2003

 

Operating activities

                

Net income

   $ 10,294     $ 8,084  

Reconciliation of net income to net cash provided by (used in) operating activities:

                

Provision for credit losses

     2,063       2,256  

Gains on sales of securities

     (2,022 )     (802 )

Depreciation and premises improvements amortization

     723       660  

Amortization of intangibles

     455       163  

Deferred income tax benefit

     (402 )     (510 )

Net increase in trading and hedging instruments

     (26,892 )     (1,493 )

Net (increase) decrease in other assets

     2,556       (3,467 )

Net increase (decrease) in accrued expenses and other liabilities

     (8,131 )     20,616  

Other operating activities, net

     (1,043 )     (93 )
    


 


Net cash provided by (used in) operating activities

     (22,399 )     25,414  
    


 


Investing activities

                

Net (increase) decrease in time deposits placed and other short-term investments

     193       (68 )

Net increase in federal funds sold and securities purchased under agreements to resell

     (17,090 )     (22,851 )

Proceeds from sales of available-for-sale securities

     74,449       155,973  

Proceeds from maturities of available-for-sale securities

     23,652       25,875  

Purchases of available-for-sale securities

     (165,890 )     (177,994 )

Proceeds from maturities of held-to-maturity securities

     63       768  

Proceeds from sales of loans and leases

     3,192       28,342  

Other changes in loans and leases, net

     (18,938 )     (70,622 )

Originations and purchases of mortgage servicing rights

     (841 )     (1,352 )

Net (purchases) dispositions of premises and equipment

     (970 )     101  

Proceeds from sales of foreclosed properties

     145       144  

Investment in unconsolidated subsidiary

     —         (1,600 )

Cash equivalents acquired net of purchase acquisitions

     5,593       (141 )

Other investing activities, net

     788       966  
    


 


Net cash used in investing activities

     (95,654 )     (62,459 )
    


 


Financing activities

                

Net increase in deposits

     37,111       22,052  

Net increase in federal funds purchased and securities sold under agreements to repurchase

     59,003       14,696  

Net increase in commercial paper and other short-term borrowings

     22,774       4,283  

Proceeds from issuance of long-term debt

     19,080       7,867  

Retirement of long-term debt

     (11,286 )     (9,597 )

Proceeds from issuance of common stock

     2,941       3,524  

Common stock repurchased

     (4,749 )     (5,565 )

Cash dividends paid

     (4,640 )     (3,116 )

Other financing activities, net

     (41 )     (60 )
    


 


Net cash provided by financing activities

     120,193       34,084  
    


 


Effect of exchange rate changes on cash and cash equivalents

     28       130  
    


 


Net increase (decrease) in cash and cash equivalents

     2,168       (2,831 )

Cash and cash equivalents at January 1

     27,084       24,973  
    


 


Cash and cash equivalents at September 30

   $ 29,252     $ 22,142  
    


 


 

Net transfers of Loans and Leases from loans held for sale (included in Other Assets) to the loan portfolio for Asset and Liability Manangement (ALM) purposes amounted to $73 and $9,556 for the nine months ended September 30, 2004 and 2003, respectively.

 

The fair values of noncash assets acquired and liabilities assumed in the merger with FleetBoston were $224,546 and $182,916, respectively.

 

Approximately 1.2 billion shares of common stock, valued at approximately $45,622, were issued in connection with the merger with

FleetBoston.

 

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

Bank of America Corporation and Subsidiaries

Notes to Consolidated Financial Statements

 

Bank of America Corporation and its subsidiaries (the Corporation) through its banking and nonbanking subsidiaries, provide a diverse range of financial services and products throughout the United States and in selected international markets. At September 30, 2004, the Corporation operated its banking activities primarily under three charters: Bank of America, National Association (Bank of America, N.A.), Bank of America, N.A. (USA) and Fleet National Bank.

 

On April 1, 2004, the Corporation acquired all of the outstanding stock of FleetBoston (the Merger). FleetBoston’s results of operations were included in the Corporation’s results beginning on April 1, 2004. The Merger was accounted for as a purchase. For informational and comparative purposes, certain tables have been expanded to include a column entitled FleetBoston, April 1, 2004. This represents balances acquired from FleetBoston as of April 1, 2004, including purchase accounting adjustments.

 

Note 1 – Summary of Significant Accounting Principles

 

Principles of Consolidation and Basis of Presentation

 

The Consolidated Financial Statements include the accounts of the Corporation and its majority-owned subsidiaries, and those variable interest entities (VIEs) where the Corporation is the primary beneficiary. All significant intercompany accounts and transactions have been eliminated.

 

The information contained in the Consolidated Financial Statements is unaudited. In the opinion of management, normal recurring adjustments necessary for a fair statement of the interim period results have been made. Certain prior period amounts were reclassified to conform to current period presentation and certain conforming accounting adjustments were made in conjunction with the Merger.

 

During the second quarter of 2004, the Corporation’s Board of Directors (the Board) approved a 2-for-1 stock split in the form of a common stock dividend effective August 27, 2004 to common shareholders of record on August 6, 2004. All prior period common share and related per common share information has been restated to reflect the 2-for-1 stock split.

 

Business Combinations

 

Statement of Financial Accounting Standards (SFAS) No. 141 “Business Combinations” (SFAS 141) requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method. The purchase method of accounting requires that the cost of an acquired entity be allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The difference between the fair values and the purchase price is recorded to Goodwill. Also under SFAS 141, identified intangible assets acquired in a purchase business combination must be separately valued and recognized on the balance sheet if they meet certain requirements.

 

Recently Issued Accounting Pronouncements

 

In March 2004, the Emerging Issues Task Force (EITF) finalized and issued EITF 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (EITF 03-1). EITF 03-1 provides recognition and measurement guidance regarding when impairments of equity and debt securities are considered other-than-temporary requiring a charge to earnings, and also requires additional annual disclosures for investments in unrealized loss positions. The additional annual disclosure requirements were previously issued by the EITF in November 2003 and were effective for the Corporation for the year ended December 31, 2003. In September 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) EITF 03-1-1, which delays the recognition and measurement provisions of EITF 03-1 pending the issuance of further implementation guidance. We are currently evaluating the effect of the recognition and measurement provisions of EITF 03-1. While our analysis is pending the FASB’s revisions to EITF 03-1, we currently believe the adoption of EITF 03-1 will not result in a material impact on the Corporation’s results of operations or financial condition.

 

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Table of Contents

In the third quarter of 2004, the Corporation adopted FSP No. FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (FSP No. 106-2), which superseded FSP No. FAS 106-1. FSP No. 106-2 provides authoritative guidance on accounting for the federal subsidy and other provisions of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The effects of these provisions will be recognized prospectively from July 1, 2004. A remeasurement on that date resulted in a reduction of $53 million in the Corporation’s accumulated postretirement benefit obligation. In addition, the Corporation’s net periodic benefit cost for other postretirement benefits has decreased by $8 million for the third quarter and for the nine months ended September 30, 2004 as a result of the remeasurement.

 

On December 12, 2003, the American Institute of Certified Public Accountants issued Statement of Position No. 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” (SOP 03-3). SOP 03-3 requires acquired loans with poor credit quality to be recorded at fair value and prohibits carrying over or creation of valuation allowances in the initial accounting for the loans. SOP 03-3 also limits the yield that may be accreted to income. SOP 03-3 applies to the purchase of an individual loan, a pool of loans, a group of loans, and loans acquired in a business combination. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 31, 2004. SOP 03-3 is not expected to have a material impact on the Corporation’s results of operations or financial condition.

 

On March 31, 2004, the FASB issued an Exposure Draft, “Share-Based Payment - an Amendment of Statements No. 123 and 95,” (SFAS 123R) which would eliminate the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and generally would require that such transactions be accounted for using a fair value-based method. The FASB is presently redeliberating the Exposure Draft and a final statement is expected to be issued in the fourth quarter of 2004. SFAS 123R would be effective for the Corporation beginning July 1, 2005. The Corporation adopted the fair value-based method of accounting for stock-based employee compensation prospectively as of January 1, 2003, and as a result, adoption of SFAS 123R is not expected to have a material impact on the Corporation’s results of operations or financial condition.

 

7


Table of Contents

Stock-based Compensation

 

As permitted by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123” (SFAS 148), the Corporation has elected to follow the prospective method of accounting for stock options. Under the prospective method, only the impact of newly-issued employee stock options are recognized. In accordance with SFAS 148, the Corporation provides disclosures as if it had adopted the fair value-based method of measuring all outstanding employee stock options during the three and nine months ended September 30, 2004 and 2003 as indicated in the following table. The following table presents the effect on Net Income and Earnings per Common Share had the fair value-based method been applied to all outstanding and unvested awards for the three and nine months ended September 30, 2004 and 2003.

 

    

Three Months Ended

September 30


   

Nine Months Ended

September 30


 

(Dollars in millions, except per share data)


   2004

    2003

    2004

    2003

 

Net income (as reported)

   $ 3,764     $ 2,922     $ 10,294     $ 8,084  

Stock-based employee compensation expense recognized during period, net of related tax effects

     40       20       118       58  

Stock-based employee compensation expense determined under fair value-based method, net of related tax effects (1)

     (52 )     (61 )     (161 )     (201 )
    


 


 


 


Pro forma net income

   $ 3,752     $ 2,881     $ 10,251     $ 7,941  
    


 


 


 


As reported

                                

Earnings per common share

   $ 0.93     $ 0.98     $ 2.80     $ 2.70  

Diluted earnings per common share

     0.91       0.96       2.76       2.65  

Pro forma

                                

Earnings per common share

     0.93       0.97       2.79       2.66  

Diluted earnings per common share

     0.91       0.95       2.75       2.61  

(1) Includes all awards granted, modified or settled for which the fair value was required to be measured under SFAS 123, except restricted stock. Restricted stock expense, included in Net Income, for the three months ended September 30, 2004 and 2003 was $90 and $56, respectively, and for the nine months ended September 30, 2004 and 2003 was $258 and $225, respectively.

 

Mortgage Servicing Rights

 

Pursuant to agreements between the Corporation and its counterparties, $2.2 billion of Excess Spread Certificates (the Certificates) were converted into Mortgage Servicing Rights (MSRs) on June 1, 2004. Prior to the conversion of the Certificates into MSRs, the Certificates were accounted for on a mark to market basis (i.e. fair value) and changes in the value were recognized as Trading Account Profits. On the date of the conversion, the Corporation recorded these MSRs at the Certificates’ fair market value, and that value became their new cost basis. Subsequent to the conversion, the Corporation accounts for the MSRs at the lower of cost or market with impairment recognized as a reduction of Mortgage Banking Income. Except for Note 6 of the Consolidated Financial Statements, what are now referred to as MSRs include the Certificates for periods prior to the conversion. For additional information on the Certificates, see Note 1 of the Consolidated Financial Statements of the Corporation’s 2003 Annual Report.

 

During the third quarter, the Corporation concluded its discussions with the Securities and Exchange Commission Staff (the Staff) regarding the prior accounting for the Certificates. Following discussions with the Staff, the conclusion was reached that the Certificates lacked sufficient separation from the MSRs to be accounted for as described above (i.e. fair value). Accordingly, the Corporation should have continued to account for the Certificates as MSRs (i.e. lower of cost or market). The effect on our previously filed consolidated financial statements of following lower of cost or market accounting for the Certificates compared to fair value accounting (i.e. the prior accounting) is not material. Consequently, no revisions will be made to previously filed consolidated financial statements.

 

When applying SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133) hedge accounting for derivative financial instruments that have been designated to hedge MSRs, these derivatives have a daily documented hedge period. Loans underlying the MSRs being hedged are stratified into pools that possess similar

 

8


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interest rate and prepayment risk exposures. The Corporation has designated the hedged risk as the change in the overall fair value of these stratified pools within a hedge period. The Corporation performs both prospective and retrospective hedge effectiveness evaluations, using regression analyses. A prospective test is performed to determine whether the hedge is expected to be highly effective at the inception of the hedge. A retrospective test is performed at the end of the hedge period to determine whether the hedge was actually effective during the hedge period.

 

Other derivatives are used as economic hedges of the MSRs, but are not designated as hedges under SFAS 133. These derivatives are marked to market and recognized through Mortgage Banking Income. Securities are also used as economic hedges of MSRs, but do not qualify as hedges under SFAS 133 and, therefore, are accounted for as Available-for-sale (AFS) Securities with realized gains recorded in Gains on Sales of Securities and unrealized gains or losses recorded in Accumulated Other Comprehensive Income (OCI).

 

For additional information on recently issued accounting pronouncements and other significant accounting principles, see Note 1 of the Consolidated Financial Statements of the Corporation’s 2003 Annual Report.

 

Note 2 – Merger and Restructuring Activity

 

Pursuant to the Agreement and Plan of Merger, dated October 27, 2003, by and between the Corporation and FleetBoston (the Merger Agreement), the Corporation acquired 100 percent of the outstanding stock of FleetBoston on April 1, 2004 in order to expand the Corporation’s presence in the Northeast. FleetBoston’s results of operations were included in the Corporation’s results beginning April 1, 2004.

 

As provided by the Merger Agreement, approximately 1.069 billion shares of FleetBoston common stock were exchanged for approximately 1.187 billion shares of the Corporation’s common stock, as adjusted for the stock split. At the date of the Merger, this represented approximately 29 percent of the Corporation’s outstanding common stock. FleetBoston shareholders also received cash of $4 million instead of any fractional shares of the Corporation’s common stock that would have otherwise been issued on April 1, 2004. Holders of FleetBoston preferred stock received 1.1 million shares of the Corporation’s preferred stock. The Corporation’s preferred stock that was exchanged was valued using the book value of FleetBoston preferred stock. The depositary shares underlying the FleetBoston preferred stock, each representing a one-fifth interest in the FleetBoston preferred stock prior to the Merger, now represent a one-fifth interest in a share of the Corporation’s preferred stock. FleetBoston shares totaling 15.7 million that were previously held by the Corporation were cancelled.

 

9


Table of Contents

The Merger is being accounted for in accordance with SFAS 141. Accordingly, the purchase price was preliminarily allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the Merger date as summarized below. In the third quarter, the allocation of assets acquired and liabilities assumed was updated principally for certain “change in control” and severance liabilities. The final allocation of the purchase price will be determined after completion of a final analysis of the fair values of FleetBoston’s tangible and identifiable intangible assets and liabilities, and final decisions regarding integration activities.

 

(Dollars in millions)


           

Purchase price

               

FleetBoston common stock exchanged (in thousands)

     1,068,635         

Exchange ratio (as adjusted for the stock split)

     1.1106         
    

        

Total shares of the Corporation’s common stock exchanged (in thousands)

     1,186,826         

Purchase price per share of the Corporation’s common stock(1)

   $ 38.44         
    

        

Total value of the Corporation’s common stock exchanged

          $ 45,622  

FleetBoston preferred stock converted to the Corporation’s preferred stock

            271  

Fair value of outstanding stock options, direct acquisition costs and the effect of FleetBoston shares already owned by the Corporation

            1,360  
           


Total purchase price

          $ 47,253  
           


Allocation of the purchase price

               

FleetBoston stockholders’ equity

          $ 19,329  

FleetBoston goodwill and other intangible assets

            (4,709 )

Estimated adjustments to reflect assets acquired and liabilities assumed at fair value:

               

Securities

            (82 )

Loans and leases

            (699 )

Premises and equipment

            (727 )

Identified intangibles

            3,243  

Other assets and deferred income tax

            203  

Deposits

            (313 )

Other liabilities

            (290 )

Exit and termination liabilities

            (708 )

Long-term debt

            (1,182 )
           


Estimated fair value of net assets acquired

            14,065  
           


Estimated goodwill resulting from the Merger

          $ 33,188  
           



(1) The value of the shares of common stock exchanged with FleetBoston shareholders was based upon the average of the closing prices of the Corporation’s common stock for the period commencing two trading days before, and ending two trading days after, October 27, 2003, the date of the Merger Agreement, as adjusted for the stock split.

 

10


Table of Contents

Unaudited Pro Forma Condensed Combined Financial Information

 

The following unaudited pro forma condensed combined financial information presents the results of operations of the Corporation had the Merger taken place at January 1, 2003. For more information on the unaudited pro forma condensed combined financial information, refer to the Form 8-K/A filed by the Corporation with the Securities and Exchange Commission on October 14, 2004.

 

    

Three Months Ended

September 30

2003


   Nine Months Ended
September 30


(Dollars in millions except per common share information)


      2004

   2003

Net interest income

   $ 6,916    $ 22,834    $ 20,890

Noninterest income

     5,902      15,570      16,319

Provision for credit losses

     916      2,063      3,086

Gains on sales of securities

     268      2,071      906

Merger and restructuring charges

     —        346      —  

Other noninterest expense

     6,852      21,379      20,128

Income before income taxes

     5,318      16,687      14,901

Net income

     3,567      11,054      9,860
    

  

  

Per common share information

                    

Earnings

   $ 0.86    $ 2.72    $ 2.37

Diluted earnings

     0.85      2.67      2.34
    

  

  

Average common shares issued and outstanding (in thousands)

     4,144,231      4,061,487      4,152,040
    

  

  

Average diluted common shares issued and outstanding (in thousands)

     4,208,371      4,130,927      4,213,903
    

  

  

 

Merger and Restructuring Charges

 

Merger and Restructuring Charges are recorded in the Consolidated Statement of Income, and include incremental costs to integrate Bank of America and FleetBoston’s operations. These charges represent costs associated with these one-time activities and do not represent on-going costs of the fully integrated combined organization. Systems Integrations and Related Charges, and Other, as shown in the table below, are expensed as incurred.

 

In addition, Merger and Restructuring Charges include costs related to an infrastructure initiative undertaken in the third quarter to simplify the Corporation’s business model. Management is engaged in a thorough review of major business units and supporting functions to ensure the Corporation is operating in a cost efficient manner. As a result of this review, and additional opportunities the Corporation has identified to operate more efficiently through the Merger, the Corporation announced that it will reduce its workforce by approximately 2.5 percent, or 4,500 positions resulting in severance costs of $150 million. Included in Merger and Restructuring Charges are $65 million incurred for this initiative. An additional $28 million of severance liabilities was recorded related to this initiative for legacy FleetBoston associates resulting in an increase in Goodwill. See analysis of exit costs and restructuring reserves on page 12. The Corporation expects to incur additional severance costs related to this initiative of approximately $60 million over the next two quarters.

 

    

Three Months

Ended


  

Nine Months

Ended


(Dollars in millions)


   September 30, 2004

Severance and employee-related charges:

             

FleetBoston Merger

   $ 33    $ 97

Infrastructure initiative

     65      65

System integrations and related charges

     86      115

Other

     37      69
    

  

Total merger and restructuring charges

   $ 221    $ 346
    

  

 

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Table of Contents

Exit Costs and Restructuring Reserves

 

On April 1, 2004, $680 million of liabilities for FleetBoston’s exit and termination costs were recorded as purchase accounting adjustments resulting in an increase in Goodwill. Included in the $680 million were $507 million for severance, relocation and other employee-related costs, $168 million for contract terminations, and $5 million for other charges. As previously mentioned, during the third quarter 2004, $28 million of additional liabilities was recorded related to severance costs for legacy FleetBoston associates. During the three and nine months ended September 30, 2004, cash payments of $87 million and $149 million, respectively, have been charged against this liability including $86 million and $145 million, respectively, of severance, relocation and other employee-related costs, and $1 million and $4 million, respectively, of contract terminations.

 

Restructuring charges through September 30, 2004 include the establishment of a reserve for legacy Bank of America associate severance and other employee-related charges of $64 million during the second quarter of 2004. During the third quarter, an additional $98 million of liabilities were added to this reserve. Of the $98 million of additional reserves recorded in the third quarter, $65 million were related to the infrastructure initiative. For the three and nine months ended September 30, 2004, cash payments of $19 million and $29 million, respectively, have been charged against this reserve.

 

Payments under these reserves are expected to be substantially completed by the end of 2005.

 

Exit Costs and Restructuring Reserves

 

(Dollars in millions)


  

Exit Costs

Reserves(1)


   

Restructuring

Reserves(2)


 

Balance, April 1, 2004

   $ —       $ —    

FleetBoston exit costs

     680       —    

Restructuring charges

     —         64  

Infrastructure initiative

     —         —    

Cash payments

     (62 )     (10 )
    


 


Balance, June 30, 2004

   $ 618     $ 54  
    


 


FleetBoston exit costs

     28       —    

Restructuring charges

     —         33  

Infrastructure initiative

     —         65  

Cash payments

     (87 )     (19 )
    


 


Balance, September 30, 2004

   $ 559     $ 133  
    


 



(1) Exit costs reserves were established in purchase accounting resulting in an increase in Goodwill.
(2) Restructuring reserves were established by a charge to income.

 

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Table of Contents

Note 3—Trading Account Assets and Liabilities

 

The following table presents the fair values of the components of Trading Account Assets and Liabilities at September 30, 2004 and December 31, 2003.

 

(Dollars in millions)


  

September 30

2004


  

December 31

2003


  

FleetBoston

April 1, 2004


Trading account assets

                    

U.S. government and agency securities

   $ 16,606    $ 16,073    $ 561

Corporate securities, trading loans, and other

     37,792      25,647      353

Equity securities

     19,599      11,445      2

Mortgage trading loans and asset-backed securities

     21,432      8,221      2,199

Foreign sovereign debt

     7,496      7,161      94
    

  

  

Total

   $ 102,925    $ 68,547    $ 3,209
    

  

  

Trading account liabilities

                    

U.S. government and agency securities

   $ 15,054    $ 7,304    $ 64

Equity securities

     8,415      8,863      —  

Corporate securities, trading loans, and other

     8,533      5,379      356

Foreign sovereign debt

     4,617      5,276      —  

Mortgage trading loans and asset-backed securities

     206      22      355
    

  

  

Total

   $ 36,825    $ 26,844    $ 775
    

  

  

 

Note 4—Derivatives

 

Credit risk associated with derivatives is measured as the net replacement cost should the counterparties with contracts in a gain position to the Corporation completely fail to perform under the terms of those contracts assuming no recoveries of underlying collateral. A detailed discussion of derivative trading activities and the ALM process is presented in Note 6 of the Consolidated Financial Statements of the Corporation’s 2003 Annual Report.

 

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Table of Contents

The following table presents the contract/notional and credit risk amounts at September 30, 2004 and December 31, 2003 of the Corporation’s derivative positions held for trading and hedging purposes. These derivative positions are primarily executed in the over-the-counter market. The credit risk amounts presented in the following table do not consider the value of any collateral held but take into consideration the effects of legally enforceable master netting agreements. The Corporation held $21.6 billion of collateral on derivative positions, of which $14.6 billion could be applied against credit risk at September 30, 2004.

 

Derivatives (1)

 

     September 30, 2004

   December 31, 2003

  

FleetBoston

April 1, 2004


(Dollars in millions)


  

Contract/

Notional


  

Credit

Risk


  

Contract/

Notional


  

Credit

Risk


  

Contract/

Notional


  

Credit

Risk


Interest rate contracts

                                         

Swaps

   $ 10,892,801    $ 13,185    $ 8,873,600    $ 14,893    $ 105,366    $ 1,671

Futures and forwards

     1,870,337      955      2,437,907      633      18,383      2

Written options

     1,035,699      —        1,174,014      —        104,118      —  

Purchased options

     1,213,479      3,472      1,132,486      3,471      159,408      91

Foreign exchange contracts

                                         

Swaps

     286,356      5,259      260,210      4,473      9,928      307

Spot, futures and forwards

     995,437      2,033      775,105      4,202      33,941      403

Written options

     161,875      —        138,474      —        2,854      —  

Purchased options

     161,207      349      133,512      669      2,776      58

Equity contracts

                                         

Swaps

     30,268      823      30,850      364      1,026      127

Futures and forwards

     4,395      —        3,234      —        —        —  

Written options

     34,706      —        25,794      —        779      —  

Purchased options

     30,825      5,188      24,119      5,370      811      55

Commodity contracts

                                         

Swaps

     13,873      2,873      15,491      1,554      —        —  

Futures and forwards

     7,073      1      5,726      —        275      —  

Written options

     12,034      —        11,695      —        —        —  

Purchased options

     7,504      657      7,223      294      —        —  

Credit derivatives

     385,207      452      136,788      584      29,763      75
           

         

         

Total derivative assets

          $ 35,247           $ 36,507           $ 2,789
           

         

         


(1) Includes both long and short derivative positions.

 

The average fair value of Derivative Assets for the nine months ended September 30, 2004 and 2003 was $35.4 billion and $34.8 billion, respectively. The average fair value of Derivative Liabilities for the nine months ended September 30, 2004 and 2003 was $22.8 billion and $23.9 billion, respectively. Included in the average fair value of Derivative Assets and Derivative Liabilities for the nine months ended September 30, 2004 was $1.3 billion and $944 million, respectively, from the addition of derivatives acquired from FleetBoston.

 

Fair Value and Cash Flow Hedges

 

The Corporation uses various types of interest rate and foreign currency exchange rate derivative contracts to protect against changes in the fair value of its fixed-rate assets and liabilities due to fluctuations in interest rates and exchange rates. The Corporation also uses various types of interest rate contracts to protect against changes in the cash flows of its variable-rate assets and liabilities, and anticipated transactions. During the next 12 months, net losses on derivative instruments included in Accumulated OCI, of approximately $365 million (pre-tax) are expected to be reclassified into earnings. These net losses reclassified into earnings are expected to decrease revenue or increase expense on the respective hedged items.

 

14


Table of Contents

The following table summarizes certain information related to the Corporation’s hedging activities for the nine months ended September 30, 2004 and 2003.

 

    

Nine Months Ended

September 30


 

(Dollars in millions)


   2004

    2003

 

Fair value hedges

                

Hedge ineffectiveness recognized in earnings (1)

   $ 13     $ —    

Net loss excluded from assessment of effectiveness (2)

     (4 )     (94 )

Cash flow hedges

                

Hedge ineffectiveness recognized in earnings (3)

     94       43  

Net investment hedges

                

Gains (losses) included in foreign currency translation adjustments within accumulated other comprehensive income

     13       (147 )

(1) Included $(7) recorded in Net Interest Income and $20 recorded in Mortgage Banking Income in the Consolidated Statement of Income for the nine months ended September 30, 2004.
(2) Included $(5) and $(94), respectively, recorded in Net Interest Income related to the excluded time value of certain hedges and $1 and $0, respectively, recorded in Mortgage Banking Income in the Consolidated Statement of Income for the nine months ended September 30, 2004 and 2003.
(3) Included $98 and $43, respectively, recorded in Mortgage Banking Income in the Consolidated Statement of Income and ($4) recorded in Net Interest Income from other various cash flow hedges for the nine months ended September 30, 2004 and 2003.

 

Note 5—Outstanding Loans and Leases, and Allowance for Credit Losses

 

Outstanding loans and leases at September 30, 2004 and December 31, 2003 were:

 

(Dollars in millions)


  

September 30

2004


  

December 31

2003


  

FleetBoston

April 1, 2004


Commercial - domestic

   $ 122,211    $ 91,491    $ 31,796

Commercial - foreign

     18,976      10,754      9,160

Commercial real estate (1)

     30,719      19,367      9,982

Commercial lease financing

     19,991      9,692      10,720
    

  

  

Total commercial

     191,897      131,304      61,658
    

  

  

Residential mortgage

     179,673      140,513      34,571

Home equity lines

     46,497      23,859      13,799

Direct/Indirect consumer

     38,378      33,415      6,113

Credit card

     47,554      34,814      6,848

Other consumer (2)

     7,640      7,558      1,272
    

  

  

Total consumer

     319,742      240,159      62,603
    

  

  

Total

   $ 511,639    $ 371,463    $ 124,261
    

  

  


(1) Includes domestic and foreign commercial real estate loans of $30,255 and $464 at September 30, 2004, respectively, and $19,043 and $324 at December 31, 2003, respectively.
(2) Includes consumer finance, foreign consumer and consumer lease financing of $3,564, $3,433 and $643 at September 30, 2004, respectively, and $3,905, $1,969 and $1,684 at December 31, 2003, respectively.

 

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Table of Contents

The following table presents the gross recorded investment in specific loans, without consideration to the specific component of the Allowance for Loan and Lease Losses, that were considered individually impaired in accordance with SFAS No. 114 “Accounting by Creditors for Impairment of a Loan” (SFAS 114) at September 30, 2004 and December 31, 2003. SFAS 114 impairment includes performing troubled debt restructurings, and excludes all commercial leases.

 

(Dollars in millions)


  

September 30

2004


  

December 31

2003


  

FleetBoston

April 1, 2004


Commercial - domestic

   $ 1,003    $ 1,404    $ 349

Commercial - foreign

     475      581      480

Commercial real estate

     137      153      85
    

  

  

Total impaired loans

   $ 1,615    $ 2,138    $ 914
    

  

  

 

At September 30, 2004 and December 31, 2003, nonperforming loans and leases, including impaired loans and nonaccrual consumer loans, totaled $2.5 billion and $2.9 billion, respectively. Nonperforming securities, which are primarily related to international securities held in the AFS portfolio, were obtained through troubled debt restructurings, largely acquired through FleetBoston, and amounted to $157 million at September 30, 2004. Foreclosed properties amounted to $133 million and $148 million at September 30, 2004 and December 31, 2003, respectively, and are included in Other Assets on the Consolidated Balance Sheet. In addition, included in Other Assets was $100 million and $202 million of nonperforming assets that were held for sale at September 30, 2004 and December 31, 2003, respectively.

 

The following table summarizes the changes in the Allowance for Credit Losses for the three and nine months ended September 30, 2004 and 2003:

 

    

Three Months Ended

September 30


   

Nine Months Ended

September 30


 

(Dollars in millions)


   2004

    2003

    2004

    2003

 

Allowance for loan and lease losses, beginning of period

   $ 8,767     $ 6,366     $ 6,163     $ 6,358  
    


 


 


 


FleetBoston balance, April 1, 2004

     —         —         2,763       —    

Loans and leases charged off

     (982 )     (975 )     (2,968 )     (2,892 )

Recoveries of loans and leases previously charged off

     263       199       700       511  
    


 


 


 


Net charge-offs

     (719 )     (776 )     (2,268 )     (2,381 )
    


 


 


 


Provision for loan and lease losses

     690       668       2,118       2,291  

Transfers (1)

     (15 )     —         (53 )     (10 )
    


 


 


 


Allowance for loan and lease losses, September 30

   $ 8,723     $ 6,258     $ 8,723     $ 6,258  
    


 


 


 


Reserve for unfunded lending commitments, beginning of period

   $ 486     $ 475     $ 416     $ 493  

FleetBoston balance, April 1, 2004

     —         —         85       —    

Provision for unfunded lending commitments

     (40 )     (17 )     (55 )     (35 )
    


 


 


 


Reserve for unfunded lending commitments, September 30

   $ 446     $ 458     $ 446     $ 458  
    


 


 


 


Total

   $ 9,169     $ 6,716     $ 9,169     $ 6,716  
    


 


 


 



(1) Includes transfers to loans held for sale.

 

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Table of Contents

Note 6—Mortgage Servicing Rights

 

The Corporation has retained MSRs from the sale or securitization of mortgage loans. The activity in MSRs for the three and nine months ended September 30, 2004 and 2003 is as follows:

 

    

Three Months Ended

September 30


   

Nine Months Ended

September 30


 

(Dollars in millions)


   2004

    2003

    2004

    2003

 

Balance, beginning of period

   $ 3,005     $ 395     $ 479     $ 499  
    


 


 


 


Additions

     179       44       2,806       164  

Amortization

     (136 )     (34 )     (220 )     (116 )

Change in value attributed to SFAS 133 hedged MSRs(1)

     (208 )     —         (193 )     —    

(Impairment) recovery, net

     (387 )     37       (419 )     (105 )
    


 


 


 


Balance, September 30

   $ 2,453     $ 442     $ 2,453     $ 442  
    


 


 


 



(1) Excludes $221 and $213, respectively, of offsetting hedge gains recognized in Mortgage Banking Income for the three and nine months ended September 30, 2004. See page 45 for an analysis of Mortgage Banking Income.

 

Impairment of MSRs totaled $387 million and $419 million for the three and nine months ended September 30, 2004. See page 46 for discussion of economic hedges on MSRs. For the comparable 2003 periods, changes in the value of the Certificates and MSRs were recognized as Trading Account Profits. Impairment charges in the three months ended September 30, 2004 included prepayment adjustments and changes to valuation assumptions related to expectations regarding future prepayment speeds and other assumptions totaling $190 million. Additional impairment reflects decreases in the value of MSRs primarily due to increased probability of prepayments driven by decreases in market interest rates during the third quarter 2004.

 

The estimated fair value of MSRs was $2.5 billion and $479 million at September 30, 2004 and December 31, 2003, respectively. The additions during the nine months ended September 30, 2004 include $2.2 billion of MSRs as a result of the conversion of Certificates discussed in Note 1 of the Consolidated Financial Statements.

 

At September 30, 2004, key economic assumptions and the sensitivities of the valuations of the MSRs to immediate changes in those assumptions were analyzed. The sensitivity analysis included the impact on fair value of modeled prepayment and discount rate changes under favorable and adverse conditions. The discount rate is the rate used to calculate the present value of the expected future servicing cash flows associated with the MSRs. A decrease of 10 percent and 20 percent in modeled prepayments would result in an increase in value of $123 million and $259 million, respectively; and an increase in modeled prepayments of 10 percent and 20 percent would result in a decrease in value of $112 million and $214 million, respectively. A decrease of 100 and 200 basis points (bps) in the discount rate would result in an increase in value of $92 million and $191 million, respectively; and an increase in the discount rate of 100 and 200 bps would result in a decrease in value of $85 million and $165 million, respectively.

 

Note 7—Special Purpose Financing Entities

 

Securitizations

 

The Corporation securitizes assets and may retain a portion or all of the securities, subordinated tranches, interest-only strips and, in some cases, a cash reserve account, all of which are considered retained interests in the securitized assets. Those assets may be serviced by the Corporation or by third parties to whom the servicing has been sold.

 

Variable Interest Entities

 

In December 2003, the FASB issued FIN 46R that addresses VIEs. FIN 46R is an update of FIN 46 and contains different implementation dates based on the types of entities subject to the standard and based on whether a company

 

17


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has adopted FIN 46. The Corporation early adopted FIN 46 in July 2003 and adopted FIN 46R on March 31, 2004. As a result of the adoption of FIN 46R, there was no material impact on the Corporation’s results of operations or financial condition. At September 30, 2004, the consolidated assets and liabilities of one multi-seller asset-backed commercial paper conduit were reflected in AFS Securities, Other Assets, and Commercial Paper and Other Short-term Borrowings in the Global Corporate and Investment Banking business segment. At September 30, 2004, the Corporation held $5.4 billion of assets of this entity while the Corporation’s maximum loss exposure associated with this entity including unfunded lending commitments was approximately $6.9 billion.

 

Additionally, the Corporation had significant involvement with other VIEs that it did not consolidate because it was not deemed to be the primary beneficiary. In such cases, the Corporation does not absorb the majority of the entities’ expected losses nor does it receive a majority of the entities’ expected residual returns, or both. These entities facilitate client transactions, and the Corporation typically functions as administrator for these entities and provides either liquidity and letters of credit or derivatives to the VIE. The Corporation also provides asset management and related services to other special purpose vehicles. The Corporation typically obtains variable interests in these types of entities at the inception of the transaction. Total assets of these entities at September 30, 2004 and December 31, 2003 were approximately $31.9 billion and $36.9 billion, respectively; revenues associated with administration, liquidity, letters of credit and other services were approximately $178 million and $123 million for the nine months ended September 30, 2004 and 2003, respectively. At September 30, 2004 and December 31, 2003, the Corporation’s maximum loss exposure associated with these VIEs was approximately $33.7 billion and $28.7 billion, respectively, which is net of amounts syndicated.

 

Additionally, the Corporation had contractual relationships with other VIEs that engaged in leasing or lending activities and were consolidated by the Corporation prior to FIN 46. The amount of assets of these entities at September 30, 2004 and December 31, 2003 was $2.5 billion and $1.5 billion, respectively, and the Corporation’s maximum loss exposure was $2.2 billion and $1.3 billion, respectively.

 

Management does not believe losses resulting from its involvement with the entities discussed above will be significant. See Notes 1 and 9 of the Corporation’s 2003 Annual Report for additional discussion of special purpose financing entities.

 

Note 8—Goodwill and Other Intangibles

 

The following table presents allocated goodwill at September 30, 2004 and December 31, 2003 for each business segment. The increases from December 31, 2003 were due to the Merger.

 

(Dollars in millions)


  

September 30

2004


  

December 31

2003


Consumer and Small Business Banking

   $ 21,905    $ 6,000

Commercial Banking

     13,269      1,144

Global Corporate and Investment Banking

     4,501      1,953

Wealth and Investment Management

     4,638      2,223

Corporate Other

     396      135
    

  

Total

   $ 44,709    $ 11,455
    

  

 

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The gross carrying value and accumulated amortization related to core deposit intangibles and other intangibles at September 30, 2004 and December 31, 2003 are presented below:

 

     September 30, 2004

   December 31, 2003

(Dollars in millions)


  

Gross Carrying

Value


  

Accumulated

Amortization


  

Gross Carrying

Value


  

Accumulated

Amortization


Core deposit intangibles

   $ 3,669    $ 1,214    $ 1,495    $ 886

Other intangibles

     1,886      615      787      488
    

  

  

  

Total

   $ 5,555    $ 1,829    $ 2,282    $ 1,374
    

  

  

  

 

As a result of the Merger, the Corporation recorded $2.2 billion of core deposit intangibles and $1.1 billion of other intangibles. As of September 30, 2004, the weighted average amortization period for the core deposit intangibles as well as the other intangibles was approximately 10 years.

 

Amortization expense on core deposit intangibles and other intangibles was $200 million and $55 million for the three months ended September 30, 2004 and 2003, respectively, and $455 million and $163 million for the nine months ended September 30, 2004 and 2003, respectively. The Corporation estimates that aggregate amortization expense will be approximately $212 million for the fourth quarter of 2004. In addition, the Corporation estimates that aggregate amortization expense will be $827 million, $764 million, $628 million, $532 million and $412 million for 2005, 2006, 2007, 2008 and 2009, respectively.

 

Note 9—Commitments and Contingencies

 

In the normal course of business, the Corporation enters into a number of off-balance sheet commitments. These commitments expose the Corporation to varying degrees of credit and market risk and are subject to the same credit and market risk limitation reviews as those recorded on the Corporation’s Balance Sheet. For additional information on commitments and contingencies, see Note 13 of the Consolidated Financial Statements of the Corporation’s 2003 Annual Report.

 

Credit Extension Commitments

 

The Corporation enters into commitments to extend credit such as loan commitments, standby letters of credit (SBLCs) and commercial letters of credit to meet the financing needs of its customers. The outstanding unfunded lending commitments shown in the following table have been reduced by amounts participated to other financial institutions of $21.3 billion and $12.5 billion at September 30, 2004 and December 31, 2003, respectively. The carrying amount for these commitments, which represents the liability recorded related to these instruments, at September 30, 2004 and December 31, 2003 was $535 million and $418 million, respectively.

 

(Dollars in millions)


  

September 30

2004


  

December 31

2003


  

FleetBoston

April 1, 2004


Loan commitments(1)

   $ 303,255    $ 211,781    $ 74,903

Standby letters of credit and financial guarantees

     42,542      31,150      12,914

Commercial letters of credit

     5,920      3,260      1,689
    

  

  

Legally binding commitments

     351,717      246,191      89,506

Credit card lines

     184,955      93,771      77,997
    

  

  

Total

   $ 536,672    $ 339,962    $ 167,503
    

  

  


(1) Equity commitments of $2,128 and $1,678 related to obligations to fund existing equity investments were included in loan commitments at September 30, 2004 and December 31, 2003, respectively. Included in loan commitments at September 30, 2004, were $885 of equity commitments related to obligations to fund existing equity investments acquired from FleetBoston.

 

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Other Commitments

 

Interest rate lock commitments associated with mortgages are commitments to extend credit at a specified interest rate and are recorded as derivatives at fair value with changes in fair value recorded in the Consolidated Statement of Income.

 

At September 30, 2004 and December 31, 2003, charge cards (nonrevolving card lines) to individuals and government entities guaranteed by the U.S. government in the amount of $12.2 billion and $13.7 billion, respectively, were not included in credit card line commitments in the previous table. The outstandings related to these charge cards were $249 million and $233 million, respectively.

 

At September 30, 2004, the Corporation had whole mortgage loan purchase commitments of $3.4 billion, of which $2.8 billion settled in October 2004, and $555 million will settle in November 2004. At December 31, 2003, the Corporation had whole mortgage loan purchase commitments of $4.6 billion, all of which were settled in January and February 2004. At September 30, 2004 and December 31, 2003, the Corporation had no forward whole mortgage loan sale commitments.

 

Other Guarantees

 

The Corporation sells products that offer book value protection primarily to plan sponsors of Employee Retirement Income Security Act of 1974 (ERISA)-governed pension plans such as 401(k) plans, 457 plans, etc. At September 30, 2004 and December 31, 2003, the notional amount of these guarantees totaled $25.9 billion and $24.9 billion, respectively, with estimated maturity dates between 2006 and 2034. As of September 30, 2004 and December 31, 2003, the Corporation has not made a payment under these products, and management believes that the probability of payments under these guarantees is remote.

 

The Corporation also sells products that guarantee the return of principal to investors at a preset future date. At September 30, 2004 and December 31, 2003, the notional amount of these guarantees totaled $8.7 billion and $7.4 billion, respectively; however, at September 30, 2004 and December 31, 2003, the Corporation had not made a payment under these products, and management believes that the probability of payments under these guarantees is remote. These guarantees have various maturities ranging from 2006 to 2016.

 

The Corporation has entered into additional guarantee agreements, including lease end obligation agreements, partial credit guarantees on certain leases, sold risk participation swaps and sold put options that require gross settlement. The maximum potential future payment under these agreements was approximately $1.8 billion and $1.3 billion at September 30, 2004 and December 31, 2003, respectively. The estimated maturity dates of these obligations are between 2004 and 2033. At September 30, 2004 and December 31, 2003, the Corporation had made no material payments under these products.

 

The Corporation provides credit and debit card processing services to various merchants, processing credit and debit card transactions on their behalf. In connection with these services, a liability may arise in the event of a billing dispute between the merchant and a cardholder that is ultimately resolved in the cardholder’s favor and the merchant defaults upon its obligation to reimburse the cardholder. A cardholder, through its issuing bank, generally has until the later of up to four months after the date a transaction is processed or the delivery of the product or service to present a chargeback to the Corporation as the merchant processor. If the Corporation is unable to collect this amount from the merchant, it bears the loss for the amount paid to the cardholder. For the nine months ended September 30, 2004 and the full year ended December 31, 2003, the Corporation processed $67.7 billion and $71.8 billion, respectively, of transactions and recorded losses as a result of these chargebacks of $3 million and $6 million, respectively.

 

At September 30, 2004 and December 31, 2003, the Corporation held as collateral approximately $239 million and $182 million, respectively, of merchant escrow deposits which the Corporation has the right to set off against amounts due from the individual merchants. The Corporation also has the right to offset any payments with cash flows otherwise due to the merchant. Accordingly, the Corporation believes that the maximum potential exposure is not representative of the actual potential loss exposure. Management believes the maximum potential exposure for chargebacks would not exceed the total amount of merchant transactions processed through Visa® and

 

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Table of Contents

MasterCard® for the last four months, which represents the claim period for the cardholder, plus any outstanding delayed-delivery transactions. As of September 30, 2004 and December 31, 2003, the maximum potential exposure totaled approximately $32.7 billion and $25.0 billion, respectively.

 

For additional information on recourse obligations related to mortgage loans sold and other guarantees related to securitizations, see Note 13 of the Consolidated Financial Statements of the Corporation’s 2003 Annual Report.

 

Litigation and Regulatory Matters

 

The following disclosure supplements the disclosure in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, the Current Reports on Form 8-K filed since December 31, 2003 and the quarterly reports on Form 10-Q for the quarters ended March 31, 2004 and June 30, 2004.

 

In Re Initial Public Offering Securities Litigation

 

On October 13, 2004, the United States District Court for the Southern District of New York granted in part and denied in part plaintiffs’ motions to certify as class actions six of 309 cases filed. The court granted the plaintiffs’ motions to certify the classes, but narrowed the scope of the proposed classes for both the Section 10(b) and Section 11 claims.

 

Parmalat Finanziaria S.p.A. and its related entities (Parmalat)

 

In July 2004, the Italian Ministry of Production Activities approved a plan of reorganization, as amended, for the restructuring of the Parmalat group companies that are included in the Italian extraordinary administration proceeding.

 

In August 2004, the Extraordinary Commissioner filed objections to certain claims with the Court of Parma, Italy. In that filing on behalf of Parmalat, the Extraordinary Commissioner rejected all the Corporation’s claims on various grounds. On September 18, 2004, the Corporation filed its responses to the filing with the Court of Parma. The Court of Parma has not yet resolved these objections.

 

A preliminary hearing regarding the previously disclosed administrative charge against the Corporation in the Court of Milan, Italy was held on October 5, 2004. At this hearing, a number of persons filed requests to participate in the proceedings as damaged civil parties under Italian law. Additional preliminary hearings have been scheduled.

 

On October 7, 2004, the Extraordinary Commissioner filed an action in the United States District Court for the Western District of North Carolina against the Corporation and various related entities, entitled Dr. Enrico Bondi, Extraordinary Commissioner of Parmalat Finanziaria, S.p.A., et al v. Bank of America Corporation, et al. The complaint alleges federal and state RICO claims and various state law claims, including fraud. The plaintiffs seek $10 billion in damages.

 

WorldCom

 

Judge Cote in the class action case filed in the United States District Court for the Southern District of New York entered an order moving the trial date from January 10, 2005 to February 28, 2005.

 

The Corporation previously disclosed that an institutional investor filed an individual action in an Alabama state court. That investor, the Retirement Systems of Alabama (RSA), alleged liability under Alabama law in connection with certain WorldCom offerings. On September 29, 2004, the Corporation, Banc of America Securities LLC (BAS), J.P. Morgan Chase & Co., J.P. Morgan Securities, Inc., Citigroup, Inc., Salomon Smith Barney, Inc., and Arthur Andersen, LLP, entered into a settlement agreement with RSA pursuant to which RSA agreed to dismiss its claims in exchange for payment by those defendants in the aggregate amount of $111 million. The Corporation and BAS contributed $13 million, which is expected to be reduced by anticipated reimbursements from certain co-defendants to approximately $10 million.

 

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Table of Contents

Pension Plans

 

An amended putative class action complaint, entitled Anita Pothier, et al v. Bank of America Corp., et al, was filed on July 1, 2004 in the United States District Court for the Southern District of Illinois on behalf of all participants in or beneficiaries of any cash balance formula defined benefit plan maintained by the Corporation or its predecessors. The amended complaint named as defendants the Corporation, Bank of America, N.A., the Bank of America Pension Plan (formerly known as the NationsBank Cash Balance Plan) and its predecessor plans, the Bank of America 401(k) Plan and its predecessor plans, members of the Bank of America Corporate Benefits Committee, various current and former directors of the Corporation and certain of its predecessors, and PricewaterhouseCoopers LLP. The named plaintiffs are alleged to be current or former participants in one or more employee benefit pension plans sponsored or participated in by the Corporation or its predecessors.

 

The amended complaint alleges the defendants violated various provisions of ERISA, including that the cash balance formula of the Bank of America Pension Plan and the BankAmerica Pension Plan violated ERISA’s defined benefit pension plan standards. In addition, the amended complaint alleges age discrimination in the design and operation of the identified cash balance plans, improper benefit to the Corporation and its predecessors, and various prohibited transactions and fiduciary breaches. The amended complaint further alleges that certain voluntary transfers by participants of assets from the NationsBank, Barnett Banks, Inc., and Bank of America 401(k) plans to the Bank of America Pension Plan violated ERISA.

 

The amended complaint alleges that the participants in these plans are entitled to greater benefits than they have received and seeks declaratory relief, monetary relief in an unspecified amount, equitable relief, attorneys’ fees and interest.

 

The Internal Revenue Service is conducting an audit of the 1998 and 1999 tax returns of the Bank of America Pension Plan and the Bank of America 401(k) Plan. This audit includes a review of voluntary transfers by participants of 401(k) plan assets to the Bank of America Pension Plan and whether such transfers were in accordance with applicable law.

 

On September 29, 2004, a putative class action complaint, entitled Donna C. Richards vs. FleetBoston Financial Corp. and the FleetBoston Financial Pension Plan, was filed in the United States District Court of the District of Connecticut on behalf of former or current employees of FleetBoston who on December 31, 1996 were not yet 50 years of age with 15 years of vesting service, who participated in the FleetBoston Financial Pension Plan (Fleet Plan) before January 1, 1997, and who have participated in the Fleet Plan at any time since January 1, 1997.

 

The complaint alleges that FleetBoston violated ERISA by amending the Fleet Plan to be a cash balance plan without notifying participants that the amendment significantly reduced their plan benefits, by conditioning the amount of benefits payable under the Fleet Plan upon the form of benefit elected, by reducing the rate of benefit accruals on account of age, and by failing to inform participants of the correct amount of their pensions and related claims. The complaint also alleges that the Fleet Plan violates the “anti-backloading” rule of ERISA.

 

The complaint seeks equitable and remedial relief, including a declaration that the cash balance amendment to the Fleet Plan was ineffective, additional unspecified benefit payments, attorneys’ fees and interest.

 

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Table of Contents

Note 10 - Shareholders’ Equity and Earnings Per Common Share

 

The following table presents the changes in Accumulated OCI for the nine months ended September 30, 2004 and 2003.

 

     Nine Months Ended September 30

 
     2004

    2003

 

(Dollars in millions)


   Pre-tax
Amount


    Income Tax
Expense
(Benefit)


    After-tax
Amount


    Pre-tax
Amount


    Income Tax
Expense
(Benefit)


    After-tax
Amount


 

Balance, January 1

   $ (3,242 )   $ (1,094 )   $ (2,148 )   $ 1,944     $ 712     $ 1,232  

Net unrealized gains (losses) (1)

     1,417       622       795       (3,497 )     (1,217 )     (2,280 )

Less: Net realized gains recorded to net income

     2,346       1,030       1,316       1,117       389       728  
    


 


 


 


 


 


Balance, September 30

   $ (4,171 )   $ (1,502 )   $ (2,669 )   $ (2,670 )   $ (894 )   $ (1,776 )
    


 


 


 


 


 



(1) Net unrealized gains (losses) include the valuation changes of AFS and marketable equity securities, foreign currency translation adjustments, derivatives, and other.

 

The calculation of earnings per common share and diluted earnings per common share for the three and nine months ended September 30, 2004 and 2003 is presented below.

 

(Dollars in millions, except per share information; shares in thousands)


   Three Months Ended
September 30


   

Nine Months Ended

September 30


 
   2004

    2003

    2004

    2003

 

Earnings per common share

                                

Net income

   $ 3,764     $ 2,922     $ 10,294     $ 8,084  

Preferred stock dividends

     (5 )     (1 )     (11 )     (3 )
    


 


 


 


Net income available to common shareholders

   $ 3,759     $ 2,921     $ 10,283     $ 8,081  
    


 


 


 


Average common shares issued and outstanding

     4,052,304       2,980,206       3,666,298       2,988,739  
    


 


 


 


Earnings per common share

   $ 0.93     $ 0.98     $ 2.80     $ 2.70  
    


 


 


 


Diluted earnings per common share

                                

Net income available to common shareholders

   $ 3,759     $ 2,921     $ 10,283     $ 8,081  

Preferred stock dividends

     5       1       11       3  
    


 


 


 


Net income available to common shareholders and assumed conversions

   $ 3,764     $ 2,922     $ 10,294     $ 8,084  
    


 


 


 


Average common shares issued and outstanding

     4,052,304       2,980,206       3,666,298       2,988,739  

Dilutive potential common shares (1,2)

     69,071       59,076       62,822       58,307  
    


 


 


 


Total diluted average common shares issued and outstanding

     4,121,375       3,039,282       3,729,120       3,047,046  
    


 


 


 


Diluted earnings per common share

   $ 0.91     $ 0.96     $ 2.76     $ 2.65  
    


 


 


 



(1) For the three and nine months ended September 30, 2004, average options to purchase 11 million and 10 million shares, respectively, were outstanding but not included in the computation of earnings per common share because they were antidilutive. For the three and nine months ended September 30, 2003, average options to purchase 10 million and 18 million shares, respectively, were outstanding but not included in the computation of earnings per common share because they were antidilutive.
(2) Includes incremental shares from assumed conversions of convertible preferred stock, restricted stock units, restricted stock shares and stock options.

 

During the second quarter of 2004, the Corporation’s Board of Directors approved a 2-for-1 stock split in the form of a common stock dividend and increased the quarterly cash dividends 12.5 percent from $0.40 to $0.45 per post-split share. The common stock dividend was effective August 27, 2004 to common shareholders of record on August 6, 2004 and the cash dividend was effective September 24, 2004 to common shareholders of record on September 3, 2004. All prior period common share and related per common share information has been restated to reflect the 2-for-1 stock split.

 

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Table of Contents

Note 11 – Pension and Postretirement Plans

 

The Corporation sponsors noncontributory trusteed qualified pension plans that cover substantially all officers and employees, a number of noncontributory, nonqualified pension plans and postretirement health and life plans. A detailed discussion of these plans is provided in Note 16 of the Consolidated Financial Statements of the Corporation’s 2003 Annual Report.

 

Net periodic benefit cost of the Corporation’s plans for the three months ended September 30, 2004 and 2003, included the following components:

 

     Three Months Ended September 30

 
     Qualified Pension Plan

    Nonqualified Pension Plans

   Postretirement Health and
Life Plans


 

(Dollars in millions)


   2004

    2003

    2004

   2003

   2004

    2003

 

Components of net periodic benefit cost

                                              

Service cost

   $ 53     $ 44     $ 6    $ 7    $ 2     $ 2  

Interest cost

     133       128       11      12      16       17  

Expected return on plan assets

     (194 )     (185 )     —        —        (3 )     (4 )

Amortization of transition obligation

     —         —         —        —        8       8  

Amortization of prior service cost

     14       14       1      —        —         1  

Recognized net actuarial loss

     23       11       4      3      12       22  
    


 


 

  

  


 


Net periodic benefit cost

   $ 29     $ 12     $ 22    $ 22    $ 35     $ 46  
    


 


 

  

  


 


 

Net periodic benefit cost of the Corporation’s plans for the nine months ended September 30, 2004 and 2003, included the following components:

 

     Nine Months Ended September 30

 
     Qualified Pension Plan

    Nonqualified Pension Plans

   Postretirement Health and
Life Plans


 

(Dollars in millions)


   2004

    2003

    2004

   2003

   2004

    2003

 

Components of net periodic benefit cost

                                              

Service cost

   $ 159     $ 142     $ 19    $ 19    $ 7     $ 7  

Interest cost

     399       386       34      33      51       51  

Expected return on plan assets

     (581 )     (551 )     —        —        (10 )     (11 )

Amortization of transition obligation

     —         —         —        —        24       24  

Amortization of prior service cost

     41       42       2      2      —         3  

Recognized net actuarial loss

     69       35       11      8      55       67  
    


 


 

  

  


 


Net periodic benefit cost

   $ 87     $ 54     $ 66    $ 62    $ 127     $ 141  
    


 


 

  

  


 


 

The Corporation previously disclosed that it expected to contribute at least a combined $63 million to its Qualified Pension Plan, Nonqualified Pension Plans and Postretirement Health and Life Plans in 2004. At September 30, 2004, that estimate has not changed. At September 30, 2004, the Corporation had contributed $48 million to these plans.

 

As a result of the Merger, the Corporation assumed the obligations related to the plans of former FleetBoston. These plans are substantially similar to the legacy Bank of America plans discussed above. The following tables include activity beginning on April 1, 2004.

 

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Table of Contents

Net periodic benefit cost of the former FleetBoston plans for the three months ended September 30, 2004 included the following components:

 

     Three Months Ended September 30, 2004

 

(Dollars in millions)


   Qualified Pension Plan

    Nonqualified Pension
Plans


   Postretirement Health
and Life Plans


 

Components of net periodic benefit cost

                       

Service cost

   $ 15     $ 1    $ —    

Interest cost

     31       5      3  

Expected return on plan assets

     (47 )     —        (1 )
    


 

  


Net periodic benefit cost

   $ (1 )   $ 6    $ 2  
    


 

  


 

Net periodic benefit cost of the former FleetBoston plans for the nine months ended September 30, 2004 included the following components:

 

     Nine Months Ended September 30, 2004

 

(Dollars in millions)


   Qualified Pension Plan

    Nonqualified Pension
Plans


   Postretirement Health
and Life Plans


 

Components of net periodic benefit cost

                       

Service cost

   $ 30     $ 1    $  —    

Interest cost

     61       11      6  

Expected return on plan assets

     (94 )     —        (2 )
    


 

  


Net periodic benefit cost

   $ (3 )   $ 12    $ 4  
    


 

  


 

The Corporation previously disclosed that it expects to contribute at least an aggregate of $41 million to the former FleetBoston plans during 2004. At September 30, 2004, this estimate has not changed. At September 30, 2004, the Corporation had contributed $26 million to these plans.

 

Note 12 – Business Segment Information

 

In connection with the Merger, the Corporation realigned its business segment reporting to reflect the new business model of the combined company. Prior period information has been reclassified to conform to the current period presentation. The Corporation reports the results of its operations through four business segments: Consumer and Small Business Banking, Commercial Banking, Global Corporate and Investment Banking, and Wealth and Investment Management. Certain operating segments have been aggregated into a single business segment. The Corporation may periodically reclassify business segment results based on modifications to its management reporting and profitability measurement methodologies and changes in organizational alignment.

 

Consumer and Small Business Banking provides a diversified range of products and services to individuals and small businesses through multiple delivery channels. Commercial Banking primarily provides commercial lending and treasury management services to middle market companies. Global Corporate and Investment Banking provides capital-raising solutions, advisory services, derivatives capabilities, equity and debt sales and trading for our clients as well as traditional bank deposit and loan products, treasury management and payment services to large corporations and institutional clients. Wealth and Investment Management offers investment, fiduciary and comprehensive banking and credit expertise, asset management services to institutional clients, high-net-worth individuals and retail customers, investment, securities and financial planning services to affluent and high-net-worth individuals, and retail clearing services for broker/dealers.

 

Corporate Other consists primarily of Latin America, Equity Investments, Noninterest Income and Expense amounts associated with the ALM process, including Gains on Sales of Securities, and the results of certain consumer finance and commercial lending businesses that are being liquidated. Latin America includes the Corporation’s full-service Latin American operations in Brazil, Argentina, Chile and Uruguay, but excludes Mexico.

 

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Table of Contents

Total Revenue includes Net Interest Income on a fully taxable-equivalent basis and Noninterest Income. The adjustment of Net Interest Income to a fully taxable-equivalent basis results in a corresponding increase in Income Tax Expense. The Net Interest Income of the business segments includes the results of a funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics. Net Interest Income also reflects an allocation of Net Interest Income generated by assets and liabilities used in the Corporation’s ALM process. The business segments’ Provision for Credit Losses is based on the methodology applied at the consolidated level.

 

Certain expenses not directly attributable to a specific business segment are allocated to the segments based on pre-determined means. The most significant of these expenses include data processing and item processing costs. Data processing costs are allocated to the segments based on equipment usage. Additionally, item processing costs are allocated to the segments based on the volume of items processed for each segment.

 

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The following tables present results of operations, selected performance ratios and selected average balance sheet categories for the three and nine months ended September 30, 2004 and 2003 for each business segment.

 

Business Segment Summary

For the three months ended September 30

 

     Total Corporation

   

Consumer and

Small Business Banking (1)


    Commercial Banking (1)

 

(Dollars in millions)


   2004

    2003

    2004

    2003

    2004

    2003

 

Net interest income (fully taxable-equivalent basis)

   $ 7,836     $ 5,477     $ 4,710     $ 3,013     $ 1,243     $ 792  

Noninterest income

     4,895       4,446       2,315       2,548       578       373  
    


 


 


 


 


 


Total revenue

     12,731       9,923       7,025       5,561       1,821       1,165  

Provision for credit losses

     650       651       999       409       (63 )     122  

Gains on sales of securities

     732       233       117       1       —         —    

Amortization of intangibles

     200       55       138       37       25       5  

Other noninterest expense

     6,794       5,022       3,366       2,507       598       425  
    


 


 


 


 


 


Income before income taxes

     5,819       4,428       2,639       2,609       1,261       613  

Income tax expense

     2,055       1,506       957       930       437       213  
    


 


 


 


 


 


Net income

   $ 3,764     $ 2,922     $ 1,682     $ 1,679     $ 824     $ 400  
    


 


 


 


 


 


Net interest yield (fully taxable-equivalent basis)

     3.28 %     3.22 %     5.36 %     4.79 %     3.39 %     3.19 %

Return on average equity

     15.56       23.74       17.35       50.13       14.42       27.26  

Efficiency ratio (fully taxable-equivalent basis)

     54.94       51.16       49.85       45.76       34.23       36.85  

Average:

                                                

Total loans and leases

   $ 503,078     $ 357,288     $ 150,334     $ 92,509     $ 139,983     $ 93,451  

Total assets

     1,110,124       786,155       383,907       264,230       169,547       104,337  

Total deposits

     587,878       414,569       339,565       246,048       58,175       31,505  

Common equity/Allocated equity

     96,120       48,816       38,564       13,286       22,735       5,825  

For the three months ended September 30

                                                
     Global Corporate and
Investment Banking (1)


   

Wealth and

Investment Management (1)


    Corporate Other (2)

 

(Dollars in millions)


   2004

    2003

    2004

    2003

    2004

    2003

 

Net interest income (fully taxable-equivalent basis)

   $ 968     $ 1,053     $ 752     $ 468     $ 163     $ 151  

Noninterest income

     1,096       1,011       821       491       85       23  
    


 


 


 


 


 


Total revenue

     2,064       2,064       1,573       959       248       174  

Provision for credit losses

     (155 )     50       (17 )     (1 )     (114 )     71  

Gains on sales of securities

     1       —         —         —         614       232  

Amortization of intangibles

     13       6       19       5       5       2  

Other noninterest expense

     1,490       1,368       832       563       508       159  
    


 


 


 


 


 


Income before income taxes

     717       640       739       392       463       174  

Income tax expense

     242       205       270       136       149       22  
    


 


 


 


 


 


Net income

   $ 475     $ 435     $ 469     $ 256     $ 314     $ 152  
    


 


 


 


 


 


Net interest yield (fully taxable-equivalent basis)

     1.39 %     1.61 %     3.32 %     3.27 %     n/m       n/m  

Return on average equity

     17.30       21.30       21.27       29.70       n/m       n/m  

Efficiency ratio (fully taxable-equivalent basis)

     72.87       66.57       54.17       59.18       n/m       n/m  

Average:

                                                

Total loans and leases

   $ 35,881     $ 33,805     $ 45,646     $ 37,159     $ 131,234     $ 100,364  

Total assets

     328,373       310,976       97,078       60,027       131,219       46,585  

Total deposits

     74,345       67,367       87,904       55,503       27,889       14,146  

Common equity/Allocated equity

     10,908       8,097       8,779       3,417       15,134       18,191  

 

 

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Table of Contents

Business Segment Summary (continued)

 

For the nine months ended September 30                                     
     Total Corporation

   

Commercial and

Small Business Banking(1)


    Commercial Banking (1)

 

(Dollars in millions)


   2004

    2003

    2004

    2003

    2004

    2003

 

Net interest income (fully taxable-equivalent basis)

   $ 21,557     $ 16,362     $ 12,615     $ 8,835     $ 3,307     $ 2,302  

Noninterest income

     14,052       12,401       6,653       6,752       1,464       1,014  
    


 


 


 


 


 


Total revenue

     35,609       28,763       19,268       15,587       4,771       3,316  

Provision for credit losses

     2,063       2,256       2,097       1,230       (30 )     360  

Gains on sales of securities

     2,022       802       116       12       —         —    

Amortization of intangibles

     455       163       314       110       57       16  

Other noninterest expense

     19,157       14,705       9,425       7,523       1,747       1,299  
    


 


 


 


 


 


Income before income taxes

     15,956       12,441       7,548       6,736       2,997       1,641  

Income tax expense

     5,662       4,357       2,764       2,462       1,069       580  
    


 


 


 


 


 


Net income

   $ 10,294     $ 8,084     $ 4,784     $ 4,274     $ 1,928     $ 1,061  
    


 


 


 


 


 


Net interest yield (fully taxable-equivalent basis)

     3.26 %     3.35 %     5.35 %     4.93 %     3.39 %     3.16 %

Return on average equity

     17.32       21.85       20.97       44.12       15.15       24.12  

Efficiency ratio (fully taxable-equivalent basis)

     55.07       51.69       50.54       48.96       37.83       39.63  

Average:

                                                

Total loans and leases

   $ 458,268     $ 351,119     $ 131,599     $ 91,889     $ 125,245     $ 92,832  

Total assets

     1,023,005       758,605       342,788       254,997       148,195       102,990  

Total deposits

     531,958       401,985       307,285       237,748       50,919       30,588  

Common equity/Allocated equity

     79,293       49,455       30,478       12,952       17,000       5,884  
For the nine months ended September 30  
     Global Corporate and
Investment Banking (1)


   

Wealth and

Investment Management (1)


    Corporate Other (2)

 

(Dollars in millions)


   2004

    2003

    2004

    2003

    2004

    2003

 

Net interest income (fully taxable-equivalent basis)

   $ 3,146     $ 3,289     $ 2,023     $ 1,406     $ 466     $ 530  

Noninterest income

     3,705       3,110       2,151       1,421       79       104  
    


 


 


 


 


 


Total revenue

     6,851       6,399       4,174       2,827       545       634  

Provision for credit losses

     (275 )     387       (16 )     4       287       275  

Gains (losses) on sales of securities

     (11 )     (17 )     —         —         1,917       807  

Amortization of intangibles

     31       18       43       15       10       4  

Other noninterest expense

     4,996       4,039       2,404       1,546       585       298  
    


 


 


 


 


 


Income before income taxes

     2,088       1,938       1,743       1,262       1,580       864  

Income tax expense

     717       656       636       456       476       203  
    


 


 


 


 


 


Net income

   $ 1,371     $ 1,282     $ 1,107     $ 806     $ 1,104     $ 661  
    


 


 


 


 


 


Net interest yield (fully taxable-equivalent basis)

     1.53 %     1.87 %     3.43 %     3.54 %     n/m       n/m  

Return on average equity

     18.78       19.83       20.07       31.74       n/m       n/m  

Efficiency ratio (fully taxable-equivalent basis)

     73.38       63.40       58.64       55.19       n/m       n/m  

Average:

                                                

Total loans and leases

   $ 34,314     $ 38,529     $ 42,740     $ 37,681     $ 124,370     $ 90,188  

Total assets

     327,100       284,587       84,517       56,341       120,405       59,690  

Total deposits

     74,711       67,139       76,522       52,045       22,521       14,465  

Common equity/Allocated equity

     9,750       8,640       7,365       3,397       14,700       18,582  

n/m = not meaningful
(1) There were no material intersegment revenues among the segments.
(2) Equity in Corporate Other represents equity of the Corporation not allocated to the business segments.

 

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The following table presents reconciliations of the four business segments’ Total Revenue and Net Income to consolidated totals. The adjustments presented in the table below include consolidated income and expense amounts not specifically allocated to individual business segments.

 

     Three Months Ended
September 30


    Nine Months Ended
September 30


 

(Dollars in millions)


   2004

    2003

    2004

    2003

 

Segments’ revenue

   $ 12,483     $ 9,749     $ 35,064     $ 28,129  

Adjustments:

                                

Revenue associated with unassigned capital

     63       170       268       546  

ALM activities (1)

     (21 )     118       (62 )     513  

Latin America

     264       6       541       28  

Equity investments

     114       (80 )     101       (200 )

Liquidating businesses

     64       86       224       246  

Fully taxable-equivalent basis adjustment

     (171 )     (173 )     (510 )     (484 )

Other

     (236 )     (126 )     (527 )     (499 )
    


 


 


 


Consolidated revenue

   $ 12,560     $ 9,750     $ 35,099     $ 28,279  
    


 


 


 


Segments’ net income

   $ 3,450     $ 2,770     $ 9,190     $ 7,423  

Adjustments, net of taxes:

                                

Earnings associated with unassigned capital

     42       117       179       369  

ALM activities (1, 2)

     386       238       1,220       880  

Latin America

     151       (7 )     184       (32 )

Equity investments

     47       (69 )     3       (183 )

Liquidating businesses

     29       5       55       (20 )

Other

     (341 )     (132 )     (537 )     (353 )
    


 


 


 


Consolidated net income

   $ 3,764     $ 2,922     $ 10,294     $ 8,084  
    


 


 


 



(1) Includes whole mortgage loan sale gains for the three and nine months ended September 30, 2003.
(2) Includes pre-tax Gains on Sales of Securities of $614 and $232 for the three months ended September 30, 2004 and 2003, respectively, and $1,917 and $807 for the nine months ended September 30, 2004 and 2003, respectively.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

 

This report on Form 10-Q contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from those expressed in, or implied by, our forward-looking statements. Words such as “expects,” “anticipates,” “believes,” “estimates” and other similar expressions or future or conditional verbs such as “will,” “should,” “would” and “could” are intended to identify such forward-looking statements. Readers of the Bank of America Corporation and its subsidiaries (the Corporation) Form 10-Q should not rely solely on the forward-looking statements and should consider all uncertainties and risks throughout this report as well as those discussed in the Corporation’s 2003 Annual Report. The statements are representative only as of the date they are made, and the Corporation undertakes no obligation to update any forward-looking statement.

 

Possible events or factors that could cause results or performance to differ materially from those expressed in our forward-looking statements include the following: changes in general economic conditions and economic conditions in the geographic regions and industries in which the Corporation operates which may affect, among other things, the level of nonperforming assets, charge-offs and provision expense; changes in the interest rate environment which may reduce interest margins and impact funding sources; changes in foreign exchange rates; adverse movements and volatility in debt and equity capital markets; changes in market rates and prices which may adversely impact the value of financial products including securities, loans, deposits, debt and derivative financial instruments and other similar financial instruments; political conditions and related actions by the United States military abroad which may adversely affect the Corporation’s businesses and economic conditions as a whole; liabilities resulting from litigation and regulatory investigations, including costs, expenses, settlements and judgments; changes in domestic or foreign tax laws, rules and regulations as well as Internal Revenue Service (IRS) or other governmental agencies’ interpretations thereof; various monetary and fiscal policies and regulations, including those determined by the Board of Governors of the Federal Reserve System (FRB), the Office of the Comptroller of Currency, the Federal Deposit Insurance Corporation and state regulators; competition with other local, regional and international banks, thrifts, credit unions and other nonbank financial institutions; ability to grow core businesses; ability to develop and introduce new banking-related products, services and enhancements and gain market acceptance of such products; mergers and acquisitions and their integration into the Corporation; decisions to downsize, sell or close units or otherwise change the business mix of the Corporation; and management’s ability to manage these and other risks.

 

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The Corporation, headquartered in Charlotte, North Carolina, operates in 29 states and the District of Columbia and has offices located in 36 foreign countries. The Corporation provides a diversified range of banking and certain nonbanking financial services and products both domestically and internationally through four business segments: Consumer and Small Business Banking, Commercial Banking, Global Corporate and Investment Banking, and Wealth and Investment Management. At September 30, 2004, the Corporation had $1.1 trillion in assets and approximately 176,000 full-time equivalent employees. Notes to the Consolidated Financial Statements referred to in Management’s Discussion and Analysis of Results of Operations and Financial Condition are incorporated by reference into Management’s Discussion and Analysis of Results of Operations and Financial Condition.

 

On April 1, 2004, we completed our merger with FleetBoston Financial Corporation (FleetBoston) (the Merger) after obtaining final shareholder and regulatory approvals. The Merger created a banking institution with leading market shares throughout the Northeast, Southeast, Southwest and West regions of the United States. The Merger is being accounted for under the purchase method of accounting. Accordingly, results for the three months ended September 30, 2004 included three months of combined company results, while the results for the nine months ended September 30, 2004 included six months of combined company results. Results for the three months and nine months ended September 30, 2003 and at December 31, 2003 excluded FleetBoston. For more information on the Merger, see Note 2 of the Consolidated Financial Statements. For informational and comparative purposes, certain tables have been expanded to include a column entitled FleetBoston, April 1, 2004. This represents balances acquired from FleetBoston as of April 1, 2004, including purchase accounting adjustments.

 

During the second quarter of 2004, our Board of Directors (the Board) approved a 2-for-1 stock split in the form of a common stock dividend and increased the quarterly cash dividends 12.5 percent from $0.40 to $0.45 per post-split share. The common stock dividend was effective August 27, 2004 to common shareholders of record on August 6, 2004 and the cash dividend was effective September 24, 2004 to common shareholders of record on September 3, 2004. All prior period common share and related per common share information has been restated to reflect the 2-for-1 stock split.

 

On July 12, 2004, we entered into an agreement to acquire all outstanding shares of National Processing, Inc. for $1.4 billion in cash. The resulting combination of National Processing, Inc. with Bank of America Merchant Services will create the second largest merchant acquirer in the United States. The transaction closed on October 15, 2004.

 

Performance overview for the nine months ended September 30, 2004 compared to the same period in 2003:

 

Net Income totaled $10.3 billion, or $2.76 per diluted common share, 27 percent and four percent increases, respectively, from $8.1 billion, or $2.65 per diluted common share. The return on average common shareholders’ equity was 17 percent compared to 22 percent.

 

Net Income for Consumer and Small Business Banking increased $510 million to $4.8 billion. Driving this increase was the $3.8 billion increase in Net Interest Income and a $971 million increase in Card Income. Offsetting this was the $2.1 billion increase in Noninterest Expense and a $1.4 billion decrease in Mortgage Banking Income, including writedowns of Mortgage Servicing Rights (MSRs) for prepayment adjustments and changes to valuation assumptions of $190 million. See page 45 for discussion of Mortgage Banking Income. Also offsetting the increase was a $867 million increase in Provision for Credit Losses compared to a year ago. Included in the results above was $1.0 billion of Net Income attributed to the addition of FleetBoston.

 

Within Consumer and Small Business Banking, we continue to attract and retain customers. During the nine months ended September 30, 2004, we opened approximately 1.5 million net new checking accounts and 1.9 million net new savings accounts. Our active online banking customers reached 11.8 million, a 78 percent increase. Forty-eight percent of the increase related to the addition of FleetBoston active online banking customers. Forty-eight percent of consumer households that hold checking accounts use online banking. Active bill pay customers increased 72 percent to 4.8 million. Active bill pay users paid $61.0 billion of bills during the nine months ended September 30, 2004 compared to $33.5 billion in the same period a year ago.

 

Debit card purchase volumes grew 22 percent while consumer credit card purchases increased 18 percent. Total managed card revenue, including interest income, increased 60 percent. Average managed consumer credit card receivables grew $17.5 billion, or 57 percent, due to new account growth and $9.8 billion from the addition of the FleetBoston consumer credit card portfolio.

 

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Commercial Banking Net Income increased 82 percent to $1.9 billion for the nine months ended September 30, 2004 as compared to the prior year including the $722 million impact of the addition of FleetBoston. Both average loans and leases, and deposits grew significantly from the prior year, with increases of $32.4 billion, or 35 percent, and $20.3 billion, or 66 percent, respectively. Impacting these increases were the $26.3 billion effect on average loans and the $15.8 billion effect on average deposits related to the addition of FleetBoston. Also driving the improved results was the $390 million decrease in Provision for Credit Losses during the period, driven by lower net charge-offs and the continued improvement in the commercial credit portfolio.

 

Net Income within Global Corporate and Investment Banking increased $89 million, or seven percent, to $1.4 billion compared to a year ago. Contributing to the increase in Net Income was a reduction of $662 million in Provision for Credit Losses and an increase in Trading Account Profits of $235 million. Partially offsetting these increases were the $422 million impact of charges taken for litigation matters, an increase of $183 million of incentive compensation for market-based activities and the $143 million impact of the charges taken for the mutual fund matter. Included in the results above was $292 million of Net Income related to the addition of FleetBoston.

 

Global Corporate and Investment Banking gained market share, as compared to a year ago, in areas such as mergers and acquisitions, high-yield/leveraged debt, mortgage-backed securities, and syndicated loans. Notable improvements in credit quality in the large corporate portfolio and a 59 percent reduction in net charge-offs drove the $662 million, or 171 percent, decrease in Provision for Credit Losses.

 

Within Wealth and Investment Management, Net Income increased $301 million to $1.1 billion. The impact attributable to FleetBoston to Net Income during the period was $191 million. Total assets under management increased $148.3 billion, or 53 percent, to $429.5 billion at September 30, 2004, due to $146.5 billion of FleetBoston assets under management, growth in Marsico Capital Management LLC’s (Marsico) assets under management and market appreciation offset by fund outflows, primarily in money markets products caused by rising interest rates.

 

Financial highlights for the nine months ended September 30, 2004 compared to the same period in 2003:

 

Net Interest Income on a fully taxable-equivalent basis increased $5.2 billion to $21.6 billion. This increase was driven by the impact of the Merger, higher asset and liability management (ALM) portfolio levels (consisting of Securities and whole loan mortgages) and rates, growth in consumer loan levels, primarily credit card and home equity, and higher core deposit funding levels. Partially offsetting these increases were reductions in the large corporate and foreign loan balances, the continued runoff of previously exited consumer businesses, lower mortgage warehouse levels and lower trading-related contributions. The net interest yield on a fully taxable-equivalent basis declined nine basis points (bps) to 3.26 percent due to the negative impact of increases in lower-yielding trading-related assets partially offset by higher levels of higher-yielding consumer loans, primarily credit card.

 

Noninterest Income increased $1.7 billion to $14.1 billion, due primarily to the addition of FleetBoston. Card Income increased $971 million due to increased fees and interchange income, including the $557 million impact of the addition of the FleetBoston card portfolio. Service Charges grew by $916 million caused by account growth, of which approximately $631 million was attributable to the addition of FleetBoston customers. Investment and Brokerage Services increased $787 million due to approximately $698 million related to the addition of the FleetBoston business, growth in Marsico and market appreciation. Equity Investment Gains increased $437 million due to an increase in Principal Investing cash gains related to the legacy Bank of America portfolio of $262 million and the addition of $142 million of cash gains related to the FleetBoston portfolio. Trading Account Profits increased $218 million due to increased customer activity, including the $151 million impact of the addition of FleetBoston. Investment Banking Income increased $111 million on increased market share in a variety of products.

 

Offsetting these increases was a decrease in Mortgage Banking Income of $1.4 billion caused by lower production levels, a decrease in the gains on sales of loans to the secondary market and writedowns of the value of MSRs. Also offsetting the increase in Noninterest Income was the decrease in gains on whole loan mortgage sales to zero in the first nine months of 2004 from $723 million in the first nine months of 2003.

 

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Gains on Sales of Securities were $2.0 billion compared to $802 million, as we continued to reposition the ALM portfolio in response to interest rate fluctuations, and to manage mortgage prepayment risk.

 

The Provision for Credit Losses decreased $193 million to $2.1 billion driven by the continued improvements in credit quality in both the large corporate and commercial loan portfolios. Partially offsetting these decreases were increases in the Provision for Credit Losses in our consumer credit card portfolio. The increases were driven by the addition of the FleetBoston credit card portfolio, the return of securitized loans to the balance sheet, organic growth in the portfolio and overall seasoning of the portfolio.

 

Despite the addition of FleetBoston criticized commercial exposure of $7.1 billion on April 1, 2004, criticized commercial exposure decreased by $625 million from December 31, 2003 driven by overall improvement in the large corporate and commercial loan portfolios including paydowns and payoffs, loans sales, net charge-offs, and returns to performing status. Total commercial net charge-offs decreased $614 million for the nine months ended September 30, 2004 compared to a year ago.

 

Nonperforming assets decreased $185 million to $2.8 billion, or 0.55 percent of loans, leases and foreclosed properties at September 30, 2004 compared to 0.81 percent at December 31, 2003. This decrease was driven by the continued reductions in the nonperforming asset levels of the large corporate and commercial portfolios, partially offset by the addition of $1.2 billion of FleetBoston nonperforming assets on April 1, 2004.

 

Noninterest Expense increased $4.7 billion, driven by higher Personnel Expenses of $2.2 billion and increased Other General Operating Expenses of $1.1 billion. Higher Personnel Expenses resulted from the $1.6 billion impact to salaries, benefits costs and revenue-related incentives of the addition of associates from FleetBoston. The increase in Other General Operating Expenses was related to the $425 million impact of the addition of FleetBoston, $300 million of legal expenses incurred during the second quarter of 2004 related to previously disclosed matters, and the $375 million mutual fund settlement entered into during the period. This settlement amount was offset by a $90 million reserve established in 2003 to produce a net settlement expense of $285 million recorded in the first quarter of 2004. This net settlement expense was divided equally between Global Corporate and Investment Banking and Wealth and Investment Management for business segment reporting purposes. Also impacting Noninterest Expense during the period was the $346 million Merger and Restructuring Charges in connection with the integration of FleetBoston’s operations. For more information on Merger and Restructuring Charges, see Note 2 of the Consolidated Financial Statements.

 

Income Tax Expense was $5.2 billion reflecting an estimated effective tax rate of 33.4 percent compared to $3.9 billion and 32.4 percent, respectively, a year ago. The increase in the effective tax rate was generally due to the impact of the higher FleetBoston effective tax rate and purchase accounting adjustments related to the Merger.

 

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Table 1

Selected Quarterly Financial Data (1)

 

     2004 Quarters

    2003 Quarters

 

(Dollars in millions, except per share information)


   Third

    Second

    First

    Fourth

    Third

 

Income statement

                                        

Net interest income

   $ 7,665     $ 7,581     $ 5,801     $ 5,586     $ 5,304  

Noninterest income

     4,895       5,440       3,717       4,049       4,446  

Total revenue

     12,560       13,021       9,518       9,635       9,750  

Provision for credit losses

     650       789       624       583       651  

Gains on sales of securities

     732       795       495       139       233  

Noninterest expense

     6,994       7,201       5,417       5,288       5,077  

Income before income taxes

     5,648       5,826       3,972       3,903       4,255  

Income tax expense

     1,884       1,977       1,291       1,177       1,333  

Net income

     3,764       3,849       2,681       2,726       2,922  

Average common shares issued and outstanding (in thousands)

     4,052,304       4,062,384       2,880,306       2,926,494       2,980,206  

Average diluted common shares issued and outstanding (in thousands)

     4,121,375       4,131,290       2,933,402       2,978,962       3,039,282  
    


 


 


 


 


Performance ratios

                                        

Return on average assets

     1.35 %     1.40 %     1.27 %     1.39 %     1.48 %

Return on average common shareholders’ equity

     15.56       16.63       22.16       22.42       23.74  

Total equity to total assets (period end)

     9.00       9.24       5.98       6.52       6.84  

Total average equity to total average assets

     8.68       8.42       5.73       6.19       6.22  

Dividend payout

     48.75       42.60       43.21       42.70       40.85  
    


 


 


 


 


Per common share data

                                        

Earnings

   $ 0.93     $ 0.95     $ 0.93     $ 0.93     $ 0.98  

Diluted earnings

     0.91       0.93       0.91       0.92       0.96  

Dividends paid

     0.45       0.40       0.40       0.40       0.40  

Book value

     24.14       23.51       16.85       16.63       16.92  
    


 


 


 


 


Average balance sheet

                                        

Total loans and leases

   $ 503,078     $ 497,158     $ 374,077     $ 371,071     $ 357,288  

Total assets

     1,110,124       1,108,307       849,627       780,536       786,155  

Total deposits

     587,878       582,305       425,075       418,840       414,569  

Long-term debt

     98,361       96,395       78,852       70,596       66,788  

Common shareholders’ equity

     96,120       92,943       48,632       48,238       48,816  

Total shareholders’ equity

     96,392       93,266       48,686       48,293       48,871  
    


 


 


 


 


Capital ratios (period end)

                                        

Risk-based capital:

                                        

Tier 1

     8.08 %     8.20 %     7.73 %     7.85 %     8.25 %

Total

     11.71       11.97       11.46       11.87       12.17  

Leverage

     5.92       5.83       5.43       5.73       5.95  
    


 


 


 


 


Market price per share of common stock

                                        

Closing

   $ 43.33     $ 42.31     $ 40.49     $ 40.22     $ 39.02  

High closing

     44.98       42.72       41.38       41.25       41.77  

Low closing

     41.81       38.96       39.15       36.43       37.44  
    


 


 


 


 



(1) Certain prior period amounts have been reclassified to conform to current period presentation.

 

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Table of Contents

Table 2

Selected Year-to-Date Financial Data (1)

 

     Nine Months Ended
September 30


 

(Dollars in millions, except per share information)


   2004

    2003

 

Income statement

                

Net interest income

   $ 21,047     $ 15,878  

Noninterest income

     14,052       12,401  

Total revenue

     35,099       28,279  

Provision for credit losses

     2,063       2,256  

Gains on sales of securities

     2,022       802  

Noninterest expense

     19,612       14,867  

Income before income taxes

     15,446       11,958  

Income tax expense

     5,152       3,874  

Net income

     10,294       8,084  

Average common shares issued and outstanding (in thousands)

     3,666,298       2,988,739  

Average diluted common shares issued and outstanding (in thousands)

     3,729,120       3,047,046  
    


 


Performance ratios

                

Return on average assets

     1.34 %     1.42 %

Return on average common shareholders’ equity

     17.32       21.85  

Total equity to total assets (period end)

     9.00       6.84  

Total average equity to total average assets

     7.77       6.53  

Dividend payout

     45.01       38.53  
    


 


Per common share data

                

Earnings

   $ 2.80     $ 2.70  

Diluted earnings

     2.76       2.65  

Dividends paid

     1.25       1.04  

Book value

     24.14       16.92  
    


 


Average balance sheet

                

Total loans and leases

   $ 458,268     $ 351,119  

Total assets

     1,023,005       758,605  

Total deposits

     531,958       401,985  

Long-term debt

     91,229       67,702  

Common shareholders’ equity

     79,293       49,455  

Total shareholders’ equity

     79,510       49,512  
    


 


Capital ratios (period end)

                

Risk-based capital:

                

Tier 1

     8.08 %     8.25 %

Total

     11.71       12.17  

Leverage

     5.92       5.95  
    


 


Market price per share of common stock

                

Closing

   $ 43.33     $ 39.02  

High closing

     44.98       41.77  

Low closing

     38.96       32.82  
    


 



(1) Certain prior period amounts have been reclassified to conform to current period presentation.

 

Supplemental Financial Data

 

In managing our business, we use certain performance measures and ratios not defined in accounting principles generally accepted in the United States (GAAP), including shareholder value added (SVA). We also calculate certain measures, such as Net Interest Income, core net interest income, net interest yield and the efficiency ratio, on a fully taxable-equivalent basis. Other companies may define or calculate supplemental financial data differently. See Tables 3 and 4 for supplemental financial data for the three and nine months ended September 30, 2004 and 2003.

 

35


Table of Contents

Supplemental financial data presented on an operating basis is a basis of presentation not defined by GAAP that excludes Merger and Restructuring Charges. Table 3 includes earnings, earnings per common share (EPS), SVA, return on average assets, return on average equity, efficiency ratio and dividend payout ratio presented on an operating basis. We believe that the exclusion of the Merger and Restructuring Charges, which represent incremental costs to integrate Bank of America and FleetBoston’s operations and include costs related to an infrastructure initiative undertaken in the third quarter to simplify the Corporation’s business model, provides a meaningful period-to-period comparison and is more reflective of normalized operations.

 

SVA is a key measure of performance not defined by GAAP that is used in managing our growth strategy orientation and strengthening our focus on generating long-term growth and shareholder value. SVA is used in measuring the performance of our different business units and is an integral component for allocating resources. Each business segment has a goal for growth in SVA reflecting the individual segment’s business and customer strategy. Investment resources and initiatives are aligned with these SVA growth goals during the planning and forecasting process. Investment, relationship and profitability models have SVA as a key measure to support the implementation of SVA growth goals.

 

SVA is defined as cash basis earnings on an operating basis less a charge for the use of capital. Cash basis earnings on an operating basis is defined as Net Income adjusted to exclude Merger and Restructuring Charges and Amortization of Intangibles. The charge for the use of capital is calculated by multiplying 11 percent (management’s estimate of the shareholders’ minimum required rate of return on capital invested) by average total common shareholders’ equity at the corporate level and by average allocated equity at the business segment level. Equity is allocated to the business segments using a risk-adjusted methodology for each segment’s credit, market and operational risks. The nature of these risks is discussed further beginning on page 55. SVA increased six percent to $4.4 billion for the nine months ended September 30, 2004 compared to the comparable 2003 period, due to the $2.7 billion increase in cash basis earnings partially offset by the $2.5 billion effect of higher levels of equity caused by the FleetBoston merger. For additional discussion of SVA, see Business Segment Operations beginning on page 43.

 

We review Net Interest Income on a fully taxable-equivalent basis, which is a performance measure used by management in operating the business that we believe provides investors with a more accurate picture of the interest margin for comparative purposes. In this presentation, Net Interest Income is adjusted to reflect tax-exempt interest income on an equivalent before-tax basis. For purposes of this calculation, we use the federal statutory tax rate of 35 percent with a corresponding increase in Income Tax Expense. This measure ensures comparability of Net Interest Income arising from both taxable and tax-exempt sources. Net Interest Income on a fully taxable-equivalent basis is also used in the calculation of the efficiency ratio and the net interest yield. The efficiency ratio, which is calculated by dividing Noninterest Expense by Total Revenue, measures how much it costs to produce one dollar of revenue. Net Interest Income on a fully taxable-equivalent basis is also used in our business segment reporting.

 

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Table of Contents

Table 3

Supplemental Financial Data and Reconciliations to GAAP Financial Measures

 

     Three Months Ended
September 30


    Nine Months Ended
September 30


 

(Dollars in millions, except per share information)


   2004

    2003

    2004

    2003

 

Operating basis (1)

                                

Operating earnings

   $ 3,911     $ 2,922     $ 10,524     $ 8,084  

Operating earnings per common share

     0.96       0.98       2.87       2.70  

Diluted operating earnings per common share

     0.95       0.96       2.82       2.65  

Shareholder value added

     1,453       1,624       4,449       4,178  

Return on average assets

     1.40 %     1.48 %     1.37 %     1.42 %

Return on average common shareholders’ equity

     16.17       23.74       17.71       21.85  

Efficiency ratio (fully taxable-equivalent basis)

     53.20       51.16       54.10       51.69  

Dividend payout ratio

     46.91       40.85       44.02       38.53  
    


 


 


 


Net interest income

                                

Fully taxable-equivalent basis data

                                

Net interest income

   $ 7,836     $ 5,477     $ 21,557     $ 16,362  

Total revenue

     12,731       9,923       35,609       28,763  

Net interest yield

     3.28 %     3.22 %     3.26 %     3.35 %

Efficiency ratio

     54.94       51.16       55.07       51.69  
    


 


 


 


Reconciliation of net income to operating earnings

                                

Net income

   $ 3,764     $ 2,922     $ 10,294     $ 8,084  

Merger and restructuring charges

     221       —         346       —    

Related income tax benefit

     (74 )     —         (116 )     —    
    


 


 


 


Operating earnings

   $ 3,911     $ 2,922     $ 10,524     $ 8,084  
    


 


 


 


Reconciliation of EPS to operating EPS

                                

Earnings per common share

   $ 0.93     $ 0.98     $ 2.80     $ 2.70  

Effect of merger and restructuring charges, net of tax benefit

     0.03       —         0.07       —    
    


 


 


 


Operating earnings per common share

   $ 0.96     $ 0.98     $ 2.87     $ 2.70  
    


 


 


 


Reconciliation of diluted EPS to diluted operating EPS

                                

Diluted earnings per common share

   $ 0.91     $ 0.96     $ 2.76     $ 2.65  

Effect of merger and restructuring charges, net of tax benefit

     0.04       —         0.06       —    
    


 


 


 


Diluted operating earnings per common share

   $ 0.95     $ 0.96     $ 2.82     $ 2.65  
    


 


 


 


Reconciliation of net income to shareholder value added

                                

Net income

   $ 3,764     $ 2,922     $ 10,294     $ 8,084  

Amortization of intangibles

     200       55       455       163  

Merger and restructuring charges, net of tax benefit

     147       —         230       —    
    


 


 


 


Cash basis earnings on an operating basis

     4,111       2,977       10,979       8,247  

Capital charge

     (2,658 )     (1,353 )     (6,530 )     (4,069 )
    


 


 


 


Shareholder value added

   $ 1,453     $ 1,624     $ 4,449     $ 4,178  
    


 


 


 


Reconciliation of return on average assets to operating return on average assets

                                

Return on average assets

     1.35 %     1.48 %     1.34 %     1.42 %

Effect of merger and restructuring charges, net of tax benefit

     0.05       —         0.03       —    
    


 


 


 


Operating return on average assets

     1.40 %     1.48 %     1.37 %     1.42 %
    


 


 


 


Reconciliation of return on average common shareholders’ equity to operating return on average common shareholders’ equity

                                

Return on average common shareholders’ equity

     15.56 %     23.74 %     17.32 %     21.85 %

Effect of merger and restructuring charges, net of tax benefit

     0.61       —         0.39       —    
    


 


 


 


Operating return on average common shareholders’ equity

     16.17 %     23.74 %     17.71 %     21.85 %
    


 


 


 


Reconciliation of efficiency ratio to operating efficiency ratio (fully taxable-equivalent basis)

                                

Efficiency ratio

     54.94 %     51.16 %     55.07 %     51.69 %

Effect of merger and restructuring charges, net of tax benefit

     (1.74 )     —         (0.97 )     —    
    


 


 


 


Operating efficiency ratio

     53.20 %     51.16 %     54.10 %     51.69 %
    


 


 


 


Reconciliation of dividend payout ratio to operating dividend payout ratio

                                

Dividend payout ratio

     48.75 %     40.85 %     45.01 %     38.53 %

Effect of merger and restructuring charges, net of tax benefit

     (1.84 )     —         (0.99 )     —    
    


 


 


 


Operating dividend payout ratio

     46.91 %     40.85 %     44.02 %     38.53 %
    


 


 


 



(1) Operating basis excludes Merger and Restructuring Charges. Merger and Restructuring Charges were $221 and $346 for the three and nine months ended September 30, 2004, respectively, on a pre-tax basis.

 

37


Table of Contents

Core net interest income adjusts reported net interest income on a fully taxable-equivalent basis for the impact of Global Corporate and Investment Banking trading-related activities and loans that we originated and sold into revolving credit card and commercial securitizations. Noninterest Income, rather than Net Interest Income and Provision for Credit Losses, is recorded for assets that have been securitized as we are compensated for servicing the securitized assets and record servicing income and gains or losses on securitizations, where appropriate. We evaluate our trading results by combining trading-related net interest income with Trading Account Profits, as discussed in Trading-related Revenue beginning on page 42 and in the Global Corporate and Investment Banking business segment section beginning on page 48, as trading strategies are evaluated based on total revenue.

 

Table 4 below provides a reconciliation of Net Interest Income on a fully taxable-equivalent basis to core net interest income for the three and nine months ended September 30, 2004 and 2003. Certain prior period amounts have been reclassified to conform to the current period presentation.

 

Table 4

Core Net Interest Income

 

     Three Months Ended
September 30


    Nine Months Ended
September 30


 

(Dollars in millions)


   2004

    2003

    2004

    2003

 

Net interest income

                                

As reported (fully taxable-equivalent basis)

   $ 7,836     $ 5,477     $ 21,557     $ 16,362  

Trading-related net interest income

     (448 )     (546 )     (1,621 )     (1,716 )

Impact of revolving securitizations

     304       78       685       265  
    


 


 


 


Core net interest income

   $ 7,692     $ 5,009     $ 20,621     $ 14,911  
    


 


 


 


Average earning assets

                                

As reported

   $ 954,626     $ 677,308     $ 881,377     $ 651,535  

Trading-related earning assets

     (228,689 )     (199,787 )     (226,509 )     (176,098 )

Impact of revolving securitizations

     13,252       3,112       9,867       3,778  
    


 


 


 


Core average earning assets

   $ 739,189     $ 480,633     $ 664,735     $ 479,215  
    


 


 


 


Net interest yield on earning assets

                                

As reported (fully taxable-equivalent basis)

     3.28 %     3.22 %     3.26 %     3.35 %

Impact of trading-related activities

     0.79       0.89       0.80       0.76  

Impact of revolving securitizations

     0.08       0.03       0.07       0.03  
    


 


 


 


Core net interest yield on earning assets

     4.15 %     4.14 %     4.13 %     4.14 %
    


 


 


 


 

Core net interest income increased $5.7 billion for the nine months ended September 30, 2004 from the comparable 2003 period. Approximately half of the increase was due to the Merger. Other activities within the portfolio affecting core net interest income were higher ALM portfolio levels and the impact of rates, higher consumer loan levels, primarily credit card loans and home equity lines, and higher core deposit funding levels partially offset by reductions in the large corporate and foreign loan balances and the continued runoff of previously exited consumer businesses, and lower mortgage warehouse levels.

 

Core average earning assets increased $185.5 billion for the nine months ended September 30, 2004 from the comparable 2003 period primarily due to higher ALM levels and higher levels of consumer loans, primarily credit card loans and home equity lines. The increases in these assets were due to both the merger with FleetBoston, which contributed $112.7 billion to the core average earning assets, and growth through the normal course of business.

 

The core net interest yield decreased one basis point for the nine months ended September 30, 2004 from the comparable 2003 period mainly due to ALM repositioning partially offset by the growth in consumer loans, primarily credit card loans and home equity lines, and the addition of higher yielding FleetBoston earning assets to the portfolio on April 1, 2004.

 

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Table of Contents

Table 5

Quarterly Average Balances and Interest Rates - Fully Taxable-equivalent Basis

 

(Dollars in millions)


  Third Quarter 2004

    Second Quarter 2004

 
  Average
Balance


  Interest
Income/
Expense


  Yield/
Rate


    Average
Balance


  Interest
Income/
Expense


  Yield/
Rate


 

Earning assets

                                   

Time deposits placed and other short-term investments

  $ 14,726   $ 127   3.45 %   $ 14,384   $ 59   1.65 %

Federal funds sold and securities purchased under agreements to resell

    128,339     484   1.50       124,383     413   1.33  

Trading account assets

    98,459     983   3.99       104,391     1,027   3.94  

Securities

    169,515     2,095   4.94       159,797     1,925   4.82  

Loans and leases (1):

                                   

Commercial - domestic

    122,093     1,855   6.04       123,970     1,843   5.98  

Commercial - foreign

    18,251     245   5.34       18,144     237   5.24  

Commercial real estate

    30,792     344   4.44       30,311     317   4.20  

Commercial lease financing

    20,125     233   4.64       20,086     237   4.72  
   

 

 

 

 

 

Total commercial

    191,261     2,677   5.57       192,511     2,634   5.50  
   

 

 

 

 

 

Residential mortgage

    175,046     2,371   5.41       173,158     2,284   5.29  

Home equity lines

    44,309     514   4.62       40,424     450   4.48  

Direct/Indirect consumer

    38,951     538   5.49       39,763     540   5.44  

Credit card

    45,818     1,265   10.98       43,160     1,167   10.88  

Other consumer (2)

    7,693     152   7.91       8,142     169   8.32  
   

 

 

 

 

 

Total consumer

    311,817     4,840   6.19       304,647     4,610   6.07  
   

 

 

 

 

 

Total loans and leases

    503,078     7,517   5.95       497,158     7,244   5.85  
   

 

 

 

 

 

Other earning assets

    40,509     483   4.74       44,877     510   4.57  
   

 

 

 

 

 

Total earning assets (3)

    954,626     11,689   4.88       944,990     11,178   4.75  
   

 

 

 

 

 

Cash and cash equivalents

    29,469                 30,320            

Other assets, less allowance for loan and lease losses

    126,029                 132,997            
   

             

           

Total assets

  $ 1,110,124               $ 1,108,307            
   

             

           

Interest-bearing liabilities

                                   

Domestic interest-bearing deposits:

                                   

Savings

  $ 36,823   $ 35   0.38 %   $ 35,864   $ 31   0.34 %

NOW and money market deposit accounts

    233,602     523   0.89       233,702     488   0.84  

Consumer CDs and IRAs

    101,250     668   2.63       93,017     587   2.54  

Negotiable CDs, public funds and other time deposits

    5,654     69   4.85       4,737     66   5.60  
   

 

 

 

 

 

Total domestic interest-bearing deposits

    377,329     1,295   1.37       367,320     1,172   1.28  
   

 

 

 

 

 

Foreign interest-bearing deposits (4):

                                   

Banks located in foreign countries

    17,864     307   6.83       18,945     287   6.10  

Governments and official institutions

    5,021     22   1.80       5,739     23   1.58  

Time, savings and other

    29,513     87   1.17       29,882     47   0.64  
   

 

 

 

 

 

Total foreign interest-bearing deposits

    52,398     416   3.16       54,566     357   2.63  
   

 

 

 

 

 

Total interest-bearing deposits

    429,727     1,711   1.58       421,886     1,529   1.46  
   

 

 

 

 

 

Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings

    233,223     1,183   2.02       243,079     1,038   1.72  

Trading account liabilities

    37,706     333   3.51       31,620     297   3.78  

Long-term debt

    98,361     626   2.54       96,395     563   2.34  
   

 

 

 

 

 

Total interest-bearing liabilities (3)

    799,017     3,853   1.92       792,980     3,427   1.74  
   

 

 

 

 

 

Noninterest-bearing sources:

                                   

Noninterest-bearing deposits

    158,151                 160,419            

Other liabilities

    56,564                 61,642            

Shareholders’ equity

    96,392                 93,266            
   

             

           

Total liabilities and shareholders’ equity

  $ 1,110,124               $ 1,108,307            
   

             

           

Net interest spread

              2.96                 3.01  

Impact of noninterest-bearing sources

              0.32                 0.28  
         

 

       

 

Net interest income/yield on earning assets

        $ 7,836   3.28 %         $ 7,751   3.29 %
         

 

       

 

(1) Nonperforming loans are included in the respective average loan balances. Income on such nonperforming loans is recognized on a cash basis.
(2) Includes consumer finance of $3,644, $3,828 and $3,999 in the third, second and first quarters of 2004, and $3,938 and $4,046 in the fourth and third quarters of 2003, respectively; foreign consumer of $3,304, $3,256 and $1,989 in the third, second and first quarters of 2004, and $1,939 and $1,950 in the fourth and third quarters of 2003, respectively; and consumer lease financing of $745, $1,058 and $1,491 in the third, second and first quarters of 2004 and $1,860 and $2,482 in the fourth and third quarters of 2003, respectively.
(3) Interest income includes the impact of interest rate risk management contracts, which increased interest income on the underlying assets $531, $659 and $715 in the third, second and first quarters of 2004 and $884 and $925 in the fourth and third quarters of 2003, respectively. These amounts were substantially offset by corresponding decreases in the income earned on the underlying assets. Interest expense includes the impact of interest rate risk management contracts, which increased interest expense on the underlying liabilities $217, $333 and $183 in the third, second and first quarters of 2004 and $90 and $141 in the fourth and third quarters of 2003, respectively. These amounts were substantially offset by corresponding decreases in the interest paid on the underlying liabilities. For further information on interest rate contracts, see “Interest Rate Risk Management” beginning on page 78.
(4) Primarily consists of time deposits in denominations of $100,000 or more.

 

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Table 5

Quarterly Average Balances and Interest Rates—Fully Taxable—Equivalent Basis (continued)

 

(Dollars in millions)


  First Quarter 2004

    Fourth Quarter 2003

    Third Quarter 2003

 
  Average
Balance


  Interest
Income/
Expense


  Yield/
Rate


    Average
Balance


  Interest
Income/
Expense


  Yield/
Rate


    Average
Balance


  Interest
Income/
Expense


  Yield/
Rate


 

Earning assets

                                                     

Time deposits placed and other short-term investments

  $ 12,268   $ 48   1.57 %   $ 11,231   $ 49   1.71 %   $ 10,062   $ 41   1.63 %

Federal funds sold and securities purchased under agreements to resell

    113,761     434   1.53       96,713     506   2.08       90,236     479   2.11  

Trading account assets

    105,033     1,023   3.90       94,630     926   3.91       96,105     991   4.11  

Securities

    99,755     1,223   4.91       59,197     742   5.01       63,423     616   3.89  

Loans and leases (1):

                                                     

Commercial - domestic

    90,946     1,511   6.68       90,309     1,612   7.08       90,671     1,660   7.26  

Commercial - foreign

    10,753     95   3.57       11,594     101   3.45       12,448     111   3.53  

Commercial real estate

    19,815     210   4.26       19,616     211   4.27       19,961     213   4.23  

Commercial lease financing

    9,459     95   4.00       9,971     93   3.71       9,852     99   4.02  
   

 

 

 

 

 

 

 

 

Total commercial

    130,973     1,911   5.87       131,490     2,017   6.09       132,932     2,083   6.22  
   

 

 

 

 

 

 

 

 

Residential mortgage

    141,898     1,960   5.53       142,482     1,931   5.41       130,948     1,656   5.05  

Home equity lines

    24,379     262   4.31       23,206     255   4.36       22,539     255   4.48  

Direct/Indirect consumer

    34,045     464   5.49       33,422     478   5.67       33,278     488   5.82  

Credit card

    35,303     870   9.92       32,734     810   9.83       29,113     742   10.11  

Other consumer (2)

    7,479     120   6.42       7,737     124   6.37       8,478     138   6.48  
   

 

 

 

 

 

 

 

 

Total consumer

    243,104     3,676   6.07       239,581     3,598   5.98       224,356     3,279   5.82  
   

 

 

 

 

 

 

 

 

Total loans and leases

    374,077     5,587   6.00       371,071     5,615   6.02       357,288     5,362   5.97  
   

 

 

 

 

 

 

 

 

Other earning assets

    38,817     426   4.41       42,370     389   3.66       60,194     539   3.56  
   

 

 

 

 

 

 

 

 

Total earning assets (3)

    743,711     8,741   4.72       675,212     8,227   4.85       677,308     8,028   4.72  
   

 

 

 

 

 

 

 

 

Cash and cash equivalents

    23,187                 22,975                 22,662            

Other assets, less allowance for loan and lease losses

    82,729                 82,349                 86,185            
   

             

             

           

Total assets

  $ 849,627               $ 780,536               $ 786,155            
   

             

             

           

Interest-bearing liabilities

                                                     

Domestic interest-bearing deposits:

                                                     

Savings

  $ 26,159   $ 17   0.27 %   $ 25,494   $ 19   0.30 %   $ 25,285   $ 20   0.31 %

NOW and money market deposit accounts

    155,835     321   0.83       155,369     400   1.02       151,424     249   0.65  

Consumer CDs and IRAs

    75,341     567   3.03       73,246     476   2.58       71,216     872   4.85  

Negotiable CDs, public funds and other time deposits

    5,939     74   5.01       6,195     44   2.81       7,770     25   1.27  
   

 

 

 

 

 

 

 

 

Total domestic interest-bearing deposits

    263,274     979   1.50       260,304     939   1.43       255,695     1,166   1.81  
   

 

 

 

 

 

 

 

 

Foreign interest-bearing deposits (4):

                                                     

Banks located in foreign countries

    18,954     171   3.62       13,225     177   5.34       12,273     59   1.90  

Governments and official institutions

    4,701     19   1.63       2,654     11   1.58       2,033     6   1.21  

Time, savings and other

    21,054     37   0.71       20,019     51   1.02       18,792     47   1.00  
   

 

 

 

 

 

 

 

 

Total foreign interest-bearing deposits

    44,709     227   2.04       35,898     239   2.65       33,098     112   1.35  
   

 

 

 

 

 

 

 

 

Total interest-bearing deposits

    307,983     1,206   1.57       296,202     1,178   1.58       288,793     1,278   1.76  
   

 

 

 

 

 

 

 

 

Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings

    203,398     739   1.46       151,999     537   1.40       162,080     447   1.09  

Trading account liabilities

    34,543     335   3.90       38,298     317   3.28       36,903     345   3.71  

Long-term debt

    78,852     491   2.49       70,596     450   2.55       66,788     481   2.88  
   

 

 

 

 

 

 

 

 

Total interest-bearing liabilities (3)

    624,776     2,771   1.78       557,095     2,482   1.77       554,564     2,551   1.83  
   

 

 

 

 

 

 

 

 

Noninterest-bearing sources:

                                                     

Noninterest-bearing deposits

    117,092                 122,638                 125,776            

Other liabilities

    59,073                 52,510                 56,944            

Shareholders’ equity

    48,686                 48,293                 48,871            
   

             

             

           

Total liabilities and shareholders’ equity

  $ 849,627               $ 780,536               $ 786,155            
   

             

             

           

Net interest spread

              2.94                 3.08                 2.89  

Impact of noninterest-bearing sources

              0.28                 0.31                 0.33  
         

 

       

 

       

 

Net interest income/yield on earning assets

        $ 5,970   3.22 %         $ 5,745   3.39 %         $ 5,477   3.22 %
         

 

       

 

       

 

 

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Table 6

 

Year-to-date Average Balances and Interest Rates - Fully Taxable-equivalent Basis

 

     Nine Months Ended September 30

 
     2004

    2003

 

(Dollars in millions)


   Average
Balance


   Interest
Income/
Expense


   Yield/
Rate


    Average
Balance


   Interest
Income/
Expense


   Yield/
Rate


 
Earning assets                                         

Time deposits placed and other short-term investments

   $ 13,796    $ 234    2.27 %   $ 8,323    $ 123    1.98 %

Federal funds sold and securities purchased under agreements to resell

     122,184      1,331    1.45       72,839      867    1.59  

Trading account assets

     102,612      3,033    3.94       98,095      3,066    4.17  

Securities

     143,119      5,243    4.88       74,532      2,390    4.28  

Loans and leases (1):

                                        

Commercial - domestic

     112,371      5,209    6.19       94,517      5,117    7.24  

Commercial - foreign

     15,725      577    4.90       13,434      359    3.57  

Commercial real estate

     26,987      871    4.31       20,186      651    4.31  

Commercial lease financing

     16,570      565    4.55       10,092      302    3.99  
    

  

  

 

  

  

Total commercial

     171,653      7,222    5.62       138,229      6,429    6.22  
    

  

  

 

  

  

Residential mortgage

     163,410      6,615    5.40       121,862      4,941    5.41  

Home equity lines

     36,400      1,226    4.50       22,783      785    4.61  

Direct/Indirect consumer

     37,591      1,542    5.48       32,314      1,486    6.15  

Credit card

     41,443      3,302    10.64       26,685      2,076    10.40  

Other consumer (2)

     7,771      441    7.58       9,246      464    6.70  
    

  

  

 

  

  

Total consumer

     286,615      13,126    6.11       212,890      9,752    6.12  
    

  

  

 

  

  

Total loans and leases

     458,268      20,348    5.93       351,119      16,181    6.16  
    

  

  

 

  

  

Other earning assets

     41,398      1,419    4.57       46,627      1,432    4.10  
    

  

  

 

  

  

Total earning assets (3)

     881,377      31,608    4.79       651,535      24,059    4.93  
    

  

  

 

  

  

Cash and cash equivalents

     27,665                   22,524              

Other assets, less allowance for loans and lease losses

     113,963                   84,546              
    

               

             

Total assets

   $ 1,023,005                 $ 758,605              
    

               

             

Interest-bearing liabilities

                                        

Domestic interest-bearing deposits:

                                        

Savings

   $ 32,963    $ 83    0.33 %   $ 24,216    $ 89    0.49 %

NOW and money market deposit accounts

     207,808      1,332    0.86       146,715      835    0.76  

Consumer CDs and IRAs

     89,911      1,822    2.71       69,235      2,309    4.46  

Negotiable CDs, public funds and other time deposits

     5,444      209    5.12       8,109      86    1.42  
    

  

  

 

  

  

Total domestic interest-bearing deposits

     336,126      3,446    1.37       248,275      3,319    1.79  
    

  

  

 

  

  

Foreign interest-bearing deposits (4):

                                        

Banks located in foreign countries

     18,585      765    5.50       14,207      226    2.12  

Governments and official institutions

     5,153      64    1.67       2,071      20    1.32  

Time, savings and other

     26,826      171    0.85       18,693      165    1.18  
    

  

  

 

  

  

Total foreign interest-bearing deposits

     50,564      1,000    2.64       34,971      411    1.57  
    

  

  

 

  

  

Total interest-bearing deposits

     386,690      4,446    1.54       283,246      3,730    1.76  
    

  

  

 

  

  

Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings

     226,591      2,960    1.74       146,091      1,414    1.29  

Trading account liabilities

     34,634      965    3.72       36,798      969    3.52  

Long-term debt

     91,229      1,680    2.46       67,702      1,584    3.12  
    

  

  

 

  

  

Total interest-bearing liabilities (3)

     739,144      10,051    1.82       533,837      7,697    1.93  
    

  

  

 

  

  

Noninterest-bearing sources:

                                        

Noninterest-bearing deposits

     145,268                   118,739              

Other liabilities

     59,083                   56,517              

Shareholders’ equity

     79,510                   49,512              
    

               

             

Total liabilities and shareholders’ equity

   $ 1,023,005                 $ 758,605              
    

               

             

Net interest spread

                 2.97                   3.00  

Impact of noninterest-bearing sources

                 0.29                   0.35  
           

  

        

  

Net interest income/yield on earning assets

          $ 21,557    3.26 %          $ 16,362    3.35 %
           

  

        

  


(1) Nonperforming loans are included in the respective average loan balances. Income on such nonperforming loans is recognized on a cash basis.
(2) Includes consumer finance, foreign consumer and consumer lease financing of $3,823, $2,851 and $1,097 for the nine months ended September 30, 2004, respectively, and $4,204, $1,990 and $3,052 for the nine months ended September 30, 2003, respectively.
(3) Interest income includes the impact of interest rate risk management contracts, which increased interest income on the underlying assets $1,904 and $2,088 in the nine months ended September 30, 2004 and 2003, respectively. These amounts were substantially offset by corresponding decreases in the income earned on the underlying assets. Interest expense includes the impact of interest rate risk management contracts, which increased interest expense on the underlying liabilities $733 and $215 in the nine months ended September 30, 2004 and 2003, respectively. These amounts were substantially offset by corresponding decreases in the interest paid on the underlying liabilities. For further information on interest rate contracts, see “Interest Rate Risk Management” beginning on page 78.
(4) Primarily consists of time deposits in denominations of $100,000 or more.

 

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Table of Contents

Trading-related Revenue

 

Trading Account Profits represent the net amount earned from our trading positions, which include Trading Account Assets and Liabilities as well as derivative positions and, prior to the conversion of mortgage excess spread certificates (the Certificates) into MSRs, market value adjustments to the Certificates and the MSRs. Trading Account Profits, as reported in the Consolidated Statement of Income, do not include the net interest income recognized on trading positions or the related funding charge or benefit.

 

Trading-related revenue, which includes net interest income from trading-related positions and Trading Account Profits in Noninterest Income is presented in the following table. Not included are commissions from equity transactions which are recorded in Noninterest Income as Investment and Brokerage Service Income, however, we consider these to be an integral component to the overall business trading revenues. Trading-related revenue is derived from foreign exchange spot, forward and cross-currency contracts, fixed income and equity securities, derivative contracts in interest rates, equities, credit and commodities, and MSRs.

 

Table 7

Trading-related Revenue(1)

 

     Three Months Ended
September 30


    Nine Months Ended
September 30


 

(Dollars in millions)


   2004

    2003

    2004

    2003

 

Net interest income (fully taxable-equivalent basis)

   $ 448     $ 546     $ 1,621     $ 1,716  

Trading account profits

     184       175       600       382  
    


 


 


 


Total trading-related revenue

   $ 632     $ 721     $ 2,221     $ 2,098  
    


 


 


 


Trading-related revenue by product

                                

Fixed income

   $ 295     $ 319     $ 902     $ 993  

Interest rate (fully taxable-equivalent basis)

     117       283       625       727  

Foreign exchange

     164       136       524       396  

Equities(2)

     89       70       231       298  

Commodities

     21       (10 )     16       (48 )
    


 


 


 


Market-based trading-related revenue

     686       798       2,298       2,366  

Credit portfolio hedges(3)

     (54 )     (77 )     (77 )     (268 )
    


 


 


 


Total trading-related revenue

   $ 632     $ 721     $ 2,221     $ 2,098  
    


 


 


 



(1) Certain prior period amounts have been reclassified to conform to the current period presentation.
(2) Does not include commissions from equity transactions which were $153 and $166 for the three months ended September 30, 2004 and 2003, respectively, and $494 and $481 for the nine months ended September 30, 2004 and 2003, respectively.
(3) Includes credit default swaps used for credit risk management.

 

Trading-related revenue increased $123 million, or six percent, to $2.2 billion for the nine months ended September 30, 2004 as compared to the first nine months of 2003, driven by the 57 percent increase of Trading Account Profits to $600 million. The overall increase in Trading-related revenue was led by a $191 million, or 71 percent, reduction in the cost of credit portfolio hedges for the nine months ended September 30, 2004 as compared to a year ago. The improvement was primarily due to relatively stable spreads during the first part of the current year compared with spread narrowing throughout last year. Also contributing to the improvement was a $128 million, or 32 percent, improvement in foreign exchange from a year ago, which was due to volatility of the dollar and increased customer activity.

 

Partially offsetting these improvements was a $102 million, or 14 percent, decrease in interest rate contracts largely due to reduced corporate customer activity, lower trading-related profits as a result of FRB tightening, the uncertainty surrounding the election and declining volatility in the options market. Fixed income declined $91 million, or nine percent, during the nine months ended September 30, 2004 from the same 2003 period. This decrease was due to the increase in losses related to the valuation adjustment of our MSRs from $122 million in the

 

42


Table of Contents

first nine months of 2003 to $349 million recorded in 2004 prior to the conversion, due to faster prepayment speeds and changes in other assumptions relative to our portfolio partially offset by growth in our asset-backed business and investment grade trading activity. For more information on MSRs, see Notes 1 and 6 of the Consolidated Financial Statements. In addition, equities declined $67 million, or 22 percent driven by net losses on a single retained stock position, partially offset by increased profits in market-making customer activities.

 

Complex Accounting Estimates and Principles

 

Our significant accounting principles are described in Note 1 of the Corporation’s 2003 Annual Report and are essential in understanding Management’s Discussion and Analysis of Results of Operations and Financial Condition. Some of our accounting principles require significant judgment to estimate values of either assets or liabilities. In addition, certain accounting principles require significant judgment in applying the complex accounting principles to complicated transactions to determine the most appropriate treatment. We have established procedures and processes to facilitate making the judgments necessary to estimate the values of our assets and liabilities and to analyze complex transactions to prepare financial statements. For a complete discussion of our more judgmental and complex accounting estimates and principles, see Complex Accounting Estimates and Principles on pages 30 through 32 of the Corporation’s 2003 Annual Report.

 

See Note 1 of the Consolidated Financial Statements for Recently Issued Accounting Pronouncements.

 

Business Segment Operations

 

In connection with the Merger, we realigned our business segment reporting to reflect the new business model of the combined company. As a part of this realignment, the segment formerly reported as Consumer and Commercial Banking was split into two new segments, Consumer and Small Business Banking and Commercial Banking. We have repositioned Asset Management as Wealth and Investment Management and have moved from Consumer and Commercial Banking, the Premier Banking subsegment, which is made up of our affluent retail customers. We announced a new national business designed to serve the needs of ultra high-net-worth individuals and families. This will more closely reflect the breadth of our mission to delight our customers with a diverse offering of wealth management products. Global Corporate and Investment Banking remained relatively unchanged, with the exception of moving the commercial leasing business to Commercial Banking, and Latin America, excluding Mexico, which moved to Corporate Other. Corporate Other consists primarily of Latin America, the former Equity Investments segment, Noninterest Income and Expense amounts associated with the ALM process, including Gains on Sales of Securities, and the results of certain consumer finance and commercial lending businesses that are being liquidated. Prior period information has been reclassified to conform to the current period presentation.

 

In managing our four business segments, we evaluate results using both financial and nonfinancial measures. Financial measures consist primarily of Total Revenue, Net Income and SVA. Nonfinancial measures include, but are not limited to, market share and customer satisfaction. Total Revenue includes Net Interest Income on a fully taxable-equivalent basis and Noninterest Income. The Net Interest Income of the business segments includes the results of a funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics. Net Interest Income also reflects an allocation of Net Interest Income generated by certain assets and liabilities used in our ALM process.

 

See Note 12 of the Consolidated Financial Statements for additional business segment information including the allocation of certain expenses, selected financial information for the business segments and reconciliations to consolidated Total Revenue and Net Income amounts.

 

Consumer and Small Business Banking

 

Our Consumer and Small Business Banking strategy is to attract, retain and deepen customer relationships. A critical component of that strategy includes continuously improving customer satisfaction. We believe this focus will help us achieve our goal of being recognized as the best retail bank in America. We added approximately 1.7 million

 

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Table of Contents

net new checking accounts and 2.0 million net new savings accounts since September 30, 2003, including approximately 537,000 and 624,000 accounts, respectively, during the third quarter of 2004. This growth resulted from continued improvement in sales and service results in the Banking Center Channel, introduction of new products, advancement of our multicultural strategy, and access to the former FleetBoston franchise, where we opened 129,000 net new checking and 118,000 net new savings accounts since April 1, 2004. Access to our services through online banking, which saw a 78 percent increase in active online subscribers since September 30, 2003, of which 48 percent related to the addition of FleetBoston active online banking customers, our network of domestic banking centers, ATMs, telephone channel, and product innovations all contributed to success with our customers.

 

The major subsegments of Consumer and Small Business Banking are Consumer Banking, Consumer Products, and Small Business Banking.

 

Consumer Banking serves 33 million consumer households in 29 states and the District of Columbia through its network of 5,829 banking centers, 16,728 ATMs, telephone channel and Internet channels on www.bankofamerica.com. Consumer Banking provides a wide range of products and services, including deposit products such as checking accounts, money market savings accounts, time deposits and IRAs, debit card products and credit products such as credit card, home equity products, residential mortgage and personal auto loans.

 

Consumer Products provides services including the origination, fulfillment and servicing of residential mortgage loans, including home equity products, issuance and servicing of credit cards, direct banking via the Internet, deposit services, student lending and certain insurance services.

 

Small Business Banking helps small businesses grow through the offering of business products and services which include payroll, merchant services, online banking and bill payment as well as 401(k) programs. In addition, we provide specialized products like treasury management, lockbox, check cards with photo security and succession planning. Small Business Banking provides services to more than 3 million relationships across the franchise.

 

Consumer and Small Business Banking drove our financial results for the nine months ended September 30, 2004 as Total Revenue increased $3.7 billion, or 24 percent. FleetBoston contributed $2.8 billion to the increase in Total Revenue. Net Income rose $510 million, or 12 percent, including the $1.0 billion impact of the addition of FleetBoston. Offsetting this were writedowns of MSRs for prepayment adjustments and changes to valuation assumptions, including $190 million recognized in Mortgage Banking Income and $275 million recognized in Trading Account Profits. See page 45 for discussion of Mortgage Banking Income. The increase in Net Income offset by an increase in capital as a result of the FleetBoston merger drove a $730 million, or 22 percent, decrease in SVA from $3.3 billion in the first nine months of 2003 to $2.6 billion in the first nine months of 2004.

 

Net Interest Income increased $3.8 billion largely due to growth in consumer loan and deposit balances and the net results of ALM activities. The loan and deposit growth was driven by the addition of FleetBoston earning assets to our portfolio and organic growth during the period. Net Interest Income was positively impacted by the $39.7 billion, or 43 percent, increase in average loans for the nine months ended September 30, 2004, compared to the same period in 2003. This increase was driven by a $14.5 billion, or 54 percent, increase in average on-balance sheet consumer credit card outstandings and a $13.6 billion, or 60 percent, increase in home equity lines. Included in these increases were the $4.0 billion and $10.2 billion effect, respectively, from the FleetBoston portfolio. Other impacts to average loan balances for the nine months ended September 30, 2004 related to the addition of FleetBoston were $9.6 billion of residential mortgages and $3.7 billion of other consumer loans.

 

Deposit growth positively impacted Net Interest Income. Higher consumer deposit balances from the addition of FleetBoston customers of $58.4 billion, government tax cuts, higher customer retention and our efforts to add new customers drove the $69.5 billion, or 29 percent, increase in average deposits for the nine months ended September 30, 2004.

 

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The following table presents the significant Noninterest Income categories for Consumer and Small Business Banking.

 

Significant Noninterest Income Components

 

    

Three Months Ended

September 30


   Nine Months Ended
September 30


 

(Dollars in millions)


   2004

    2003

   2004

    2003

 

Service charges

   $ 1,206     $ 915    $ 3,267     $ 2,671  

Mortgage banking income

     (250 )     666      258       1,630  

Card income

     1,257       794      3,208       2,237  

Trading account profits (losses)

     (2 )     36      (357 )     (132 )

 

Increases in both Consumer and Corporate Service Charges led to the $596 million, or 22 percent, increase in service charge income. Consumer Service Charges increased $553 million, or 24 percent, to $2.9 billion due primarily to a $492 million increase in deposit fees associated with growth in new accounts including the $267 million impact of the addition of FleetBoston deposit accounts. Corporate Service Charges increased $42 million, or 13 percent, to $375 million, driven by the $40 million increase in deposit account fees related to the Merger.

 

The following summarizes the components of Mortgage Banking Income and the related hedge activity:

 

     Three Months Ended
September 30


   

Nine Months Ended

September 30


 

(Dollars in millions)


   2004

    2003

    2004

    2003

 

Production income(1)

   $ 70     $ 618     $ 501     $ 1,504  
    


 


 


 


Servicing income:

                                

Servicing fees and ancillary income

     186       82       375       242  

Amortization of MSRs

     (136 )     (34 )     (220 )     (116 )

Net MSR and SFAS 133 derivative hedge adjustments(2)

     13       —         20       —    

Gains on derivatives(3)

     4       —         1       —    

Impairment of MSRs

     (387 )     —         (419 )     —    
    


 


 


 


Total net servicing income

     (320 )     48       (243 )     126  
    


 


 


 


Total mortgage banking income

     (250 )     666       258       1,630  
    


 


 


 


Interest income (4)

     39       —         45       —    

Gains on sales of securities (5)

     117       —         117       —    
    


 


 


 


Total mortgage banking income and related hedge activity

   $ (94 )   $ 666     $ 420     $ 1,630  
    


 


 


 



(1) Includes gains/(losses) related to hedge ineffectiveness of cash flow hedges on our mortgage pipeline/warehouse of $2 and $15 for the three months ended September 30, 2004 and 2003, respectively, and $98 and $43 for the nine months ended September 30, 2004 and 2003, respectively.
(2) Represents derivative hedge gains of $221 and $213, respectively, offset by a decrease in value of the MSRs under Statement of Financial Accounting Standards (SFAS) No. 133 “Accounting for Derivatve Instruments and Hedging Activities” (SFAS 133) hedges of $208 and $193, respectively, for the three and nine months ended September 30, 2004. See Note 6 of the Consolidated Financial Statements.
(3) Gain on derivatives used as economic hedges of the MSRs, but not designated as SFAS 133 hedges.
(4) Interest Income on Securities used as economic hedges of MSRs beginning in the second quarter of 2004.
(5) Gains on Sales of Securities used as economic hedges of MSRs beginning in the second quarter of 2004.

 

Mortgage Banking Income for the three and nine months ended September 30, 2004 decreased by $916 million and $1.4 billion, respectively, compared to the three and nine months ended September 30, 2003. The decreases were due to lower loan production and sales volumes in 2004 compared to 2003 and impairment of the MSRs recorded in 2004.

 

For the nine months ended September 30, 2004 and 2003, loan sales to the secondary market were $55.2 billion and $87.7 billion, respectively. First mortgage loan originations decreased $43.6 billion to $69.2 billion for the nine months ended September 30, 2004 as higher interest rates resulted in lower refinancing levels. First mortgage loan

 

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origination volume was approximately $44.9 billion of retail loans and $24.3 billion of wholesale loans for the nine months ended September 30, 2004, compared to $80.2 billion and $32.6 billion, respectively, for the nine months ended September 30, 2003.

 

Impairment of MSRs totaled $387 million and $419 million for the three and nine months ended September 30, 2004. For the comparable 2003 periods, changes in the value of the Certificates and MSRs were recognized as Trading Account Profits. Impairment charges in the three months ended September 30, 2004 included an adjustment to MSR values due to prepayment adjustments and changes to valuation assumptions related to expectations regarding future prepayment speeds and other assumptions totaling $190 million. Additional impairment reflects decreases in the value of MSRs primarily due to increased probability of prepayments driven by decreases in market interest rates during the third quarter 2004. We hold a specified portfolio of Securities as economic hedges of MSRs. During the quarter ended September 30, 2004, the Corporation realized $117 million of Gains on Sales of Securities and $39 million of Interest Income from Securities used as economic hedges of MSRs. At September 30, 2004, the amount of MSRs covered by such economic hedges was $1.1 billion. The remaining MSR assets are hedged using a SFAS 133 strategy. Due to the inability to hedge the entire MSR portfolio using SFAS 133 hedges, Mortgage Banking Income may experience increased volatility. See Notes 1 and 6 of the Consolidated Financial Statements for additional information.

 

Prior to the conversion of the Certificates into MSRs in the second quarter of 2004, changes in the value of the Certificates and MSRs were recognized as Trading Account Profits. Changes in the value of derivatives used for risk management of the Certificates and MSRs, but not designated as hedges under SFAS 133 were also recorded in Trading Account Profits. As a result of this activity we recognized net trading losses of $349 million for the nine months ended September 30, 2004, and $40 million of gains and $122 million of losses for the three and nine months ended September 30, 2003, respectively. See pages 80 through 81 for discussion of mortgage banking risk management. Impacting Trading Account Profits (Losses) for the nine months ended September 30, 2004 was a $275 million negative impact on the value of MSRs due to faster prepayment speeds and changes in other assumptions relative to our portfolio recorded in the first quarter of 2004. The value of MSRs decreased to $2.5 billion at September 30, 2004 compared to $2.8 billion at December 31, 2003 due to impairment, decreases in value attributed to SFAS 133 hedged MSRs, normal paydowns and amortization, partially offset by newly created MSRs from loan sales. At September 30, 2004, MSRs as a percent of our servicing portfolio for others were 1.2 percent.

 

Strong debit and credit card performance and the addition of the FleetBoston card portfolio resulted in a $971 million, or 43 percent, increase in Card Income overall. Credit card income increased $769 million, or 49 percent, resulting from higher interchange fees of $219 million, which was driven mainly by an 18 percent, or $8.9 billion, increase in consumer credit card purchase volumes. Also impacting credit card income were increases in late fees of $183 million, merchant discount fees of $81 million, overlimit fees of $77 million and cash advance fees of $50 million. The effect of the addition of FleetBoston to these fee categories were $110 million of interchange fees, $51 million of late fees, $35 million of merchant discount fees, $23 million of overlimit fees, and $21 million of cash advance fees, respectively.

 

Card Income included activity from the securitized credit card portfolio of $136 million and $120 million for the nine months ended September 30, 2004 and 2003, respectively. Noninterest Income, rather than Net Interest Income and Provision for Credit Losses, is recorded for assets that have been securitized, as we are compensated for servicing the securitized assets and record servicing income and gains or losses on securitizations, where appropriate. Previously securitized balances will be recorded on our balance sheet after the revolving period of the securitization. This has the effect of increasing loans on our balance sheet and increasing Net Interest Income and Provision for Credit Losses, with a corresponding reduction in Noninterest Income.

 

Average on-balance sheet consumer credit card outstandings for the first nine months of 2004 increased $14.5 billion, or 54 percent, due to over six million new accounts since September 30, 2003 and the $4.0 billion impact of the addition of the on-balance sheet FleetBoston consumer credit card portfolio. Included in the FleetBoston impact was $2.0 billion in previously securitized balances returning to the balance sheet after the revolving period of the securitization, all occurring in the third quarter of 2004. During the first nine months of 2004, $1.3 billion of previously securitized balances related to legacy Bank of America returned to the balance sheet. Previously securitized balances of approximately $1.0 billion are expected to return to the balance sheet in the fourth quarter of 2004 with an estimated $4.5 billion and $1.5 billion to return to the balance sheet in 2005 and 2006, respectively.

 

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Managed credit card outstandings include securitized credit card loans. Average managed consumer credit card outstandings increased $17.5 billion, or 57 percent, to $48.0 billion for the nine months ended September 30, 2004. The drivers of this increase were account growth from direct marketing programs and the branch network, and the $9.8 billion impact of the addition of the FleetBoston consumer credit card portfolio.

 

The increase in debit card income of $202 million, or 30 percent, was due to an $86 million impact of the addition of the FleetBoston portfolio, and a 22 percent increase in purchase volumes, as well as growth in active accounts, partially offset by a lower signature interchange rate.

 

The increase in the Provision for Credit Losses of $867 million, or 70 percent, was driven by increased credit card net charge-offs of $523 million, of which $191 million was attributed to the addition of the FleetBoston credit card portfolio. The return of securitized loans to the balance sheet, organic growth in the portfolio and overall seasoning of the portfolio also contributed to the increase in the Provision for Credit Losses.

 

Noninterest Expense increased $2.1 billion, or 28 percent, due to increases in Processing Costs of $741 million, Personnel Expense of $557 million and Amortization of Intangibles of $204 million. Personnel Expense increased as a result of higher salaries of $384 million and higher benefit costs of $134 million. The impact of the addition of FleetBoston to Noninterest Expense for the nine months ended September 30, 2004 was $848 million.

 

Commercial Banking

 

The major subsegments of Commercial Banking are Middle Market Banking, Commercial Real Estate Banking, Business Capital, Leasing and Dealer Financial Services.

 

Middle Market Banking provides commercial lending, treasury management solutions and investment banking services to middle-market companies.

 

Commercial Real Estate Banking provides project financing and treasury management to private developers, homebuilders and commercial real estate firms across the U.S. as well as lending and investing services to develop low- and moderate-income communities.

 

Business Capital provides financing solutions to clients’ specific needs by leveraging their assets on a secured basis to generate liquidity.

 

Leasing provides leasing solutions to small business, middle market and large corporations in the U.S. and internationally, offering expertise in the municipal, corporate aircraft, healthcare and vendor vertical markets.

 

Dealer Financial Services provides lending and investing services to retail finance and floorplan programs to marine and recreational vehicle dealerships, and auto dealerships.

 

Total Revenue increased $1.5 billion, or 44 percent for the nine months ended September 30, 2004, compared to the first nine months of 2003. The addition of FleetBoston accounted for $1.4 billion of the increase. Net Income rose $867 million, or 82 percent, including the $722 million impact of the FleetBoston merger. The increase in Net Income was more than offset by an increase in capital related to the FleetBoston merger, which, combined, caused an $8 million, or one percent, decrease in SVA from $593 million for the nine months ended September 30, 2003 to $585 million for the nine months ended September 30, 2004.

 

Net Interest Income increased $1.0 billion, largely due to the increase in commercial loan and deposit balances driven by the addition of FleetBoston earning assets and the net results of ALM activities. Net Interest Income was positively impacted by the $32.4 billion, or 35 percent, increase in average outstanding commercial loans for the nine months ended September 30, 2004 compared to a year ago and the $20.3 billion, or 66 percent, increase in average commercial deposits for the nine months ended September 30, 2004 as compared to the same period in 2003. Impacting these increases were the $26.3 billion effect on average loans and the $15.8 billion effect on average deposits related to the addition of FleetBoston.

 

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The following table presents the significant Noninterest Income categories for Commercial Banking.

 

Significant Noninterest Income Components

 

    

Three Months Ended

September 30


  

Nine Months Ended

September 30


(Dollars in millions)


   2004

   2003

   2004

   2003

Service charges

   $ 288    $ 187    $ 713    $ 537

Investment and brokerage services

     22      20      62      59

Investment banking income

     25      30      83      88

 

Service Charges for the nine months ended September 30, 2004 increased $176 million, or 33 percent from the first nine months of 2003. The increase was due to the $79 million increase in bankers’ acceptances and letters of credit fees and a $76 million increase in charges on deposit accounts. The addition of FleetBoston accounted for $116 million in Service Charges for the nine months ended September 30, 2004.

 

Investment and Brokerage Services of $62 million was primarily related to brokerage income, which totaled $42 million for the first nine months of 2004, an increase of $10 million from a year ago. Overall, Investment and Brokerage Services included $14 million related to FleetBoston in the first nine months of 2004. Without this contribution, Investment and Brokerage Services declined $11 million, or 19 percent from a year ago due to lower service fees as a result of current rate environment driving customer balances to deposits versus mutual funds.

 

Investment Banking Income was $83 million for the nine months ended September 30, 2004, and included $2 million related to FleetBoston. Without the FleetBoston income, Investment Banking Income decreased $7 million, or eight percent, from the first nine months of 2003 due to lower debt product, equity advisory, and commercial paper conduit fees.

 

The Provision for Credit Losses declined $390 million, or 108 percent, from a year ago. The decrease was mainly driven by a $241 million, or 65 percent, decrease in net charge-offs for the nine months ended September 30, 2004 compared to a year ago. Additionally, notable improvement in credit quality has been achieved across the subsegments for the nine months ended September 30, 2004, resulting in lower Provision for Credit Losses.

 

Noninterest Expense for the nine months ended September 30, 2004 increased $489 million, or 37 percent, from the corresponding period in the prior year. Driving the increase was a $204 million increase in Data Processing Expense and a $197 million increase in total Personnel Expense. The impact to these expenses due to the addition of FleetBoston was $157 million and $158 million, respectively, for the nine months ended September 30, 2004.

 

Global Corporate and Investment Banking

 

Our Global Corporate and Investment Banking strategy is to align our resources with sectors where we can deliver value-added financial advisory solutions to our issuer and investor clients. Global Corporate and Investment Banking provides a broad range of financial services to domestic and international corporations, financial institutions, and government entities. Clients are supported through offices in 34 countries in four distinct geographic regions: U.S. and Canada; Asia; Europe, Middle East and Africa; and Mexico. Products and services provided include loan originations, mergers and acquisitions advisory, debt and equity underwriting and trading, cash management, derivatives, foreign exchange, leveraged finance, structured finance and trade services.

 

Global Corporate and Investment Banking offers clients a comprehensive range of global capabilities through the following three financial services: Global Investment Banking, Global Credit Products and Global Treasury Services.

 

Global Investment Banking includes investment banking activities and risk management products. Global Investment Banking underwrites and makes markets in equity and equity-linked securities, high-grade and high-yield corporate debt securities, commercial paper, and mortgage-backed and asset-backed securities and provides correspondent clearing services for other securities broker/dealers and prime brokerage services. Global Investment Banking also provides debt and equity securities research, loan syndications, mergers and acquisitions advisory services and private placements.

 

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Table of Contents

Global Investment Banking provides risk management solutions for customers using interest rate, equity, credit and commodity derivatives, foreign exchange, fixed income and mortgage-related products. In support of these activities, the businesses may take positions in these products and capitalize on market-making activities. The Global Investment Banking business is a primary dealer in the U.S. and in several international locations.

 

Global Credit Products provides credit and lending services for our clients through industry-focused portfolios. Global Credit Products is also responsible for actively managing loan and counterparty risk in our large corporate portfolio using available risk mitigation techniques, including credit default swaps.

 

Global Treasury Services provides the technology, strategies and integrated solutions to help financial institutions, government agencies and corporate clients manage their cash flows.

 

Our financial performance in the first nine months of 2004 continued to be strong as Total Revenue was $6.9 billion, reflecting a $452 million, or seven percent, increase from the first nine months of 2003. Market-based revenues, which include trading-related revenue, Investment Banking Income, Corporate Service Charges and Equity Investment Gains drove the increase. Net income increased $89 million, or seven percent, and included the $565 million impact of the charges taken for the mutual fund matter and other litigation matters. Reduced credit costs, resulting from continued improvement in credit quality, more than offset the mutual fund and litigation matters. SVA increased by $10 million, or two percent, from $589 million to $599 million, principally due to improved credit quality, a decline in loan balances and increased net income during the period.

 

Net Interest Income decreased $143 million, or four percent, to $3.1 billion. Driving this was the $4.2 billion, or 11 percent, decrease in average loans and leases for the nine months ended September 30, 2004. Also, trading-related average earning assets grew by $50.4 billion but the narrower margins from these assets as a result of a flattening yield curve negated their contribution to Net Interest Income. Average deposits increased $7.6 billion, or 11 percent, for the nine months ended September 30, 2004, despite the withdrawal of compensating balances by the U.S. Treasury. Noninterest Income increased $595 million, or 19 percent, for the nine months ended September 30, 2004, as increases in Trading Account Profits, Investment Banking Income, and Service Charges drove the improvement.

 

The following table presents the detail of Investment Banking Income within Global Corporate and Investment Banking.

 

Investment Banking Income

 

     Three Months Ended
September 30


   Nine Months Ended
September 30


(Dollars in millions)


   2004

   2003

   2004

   2003

Securities underwriting

   $ 218    $ 238    $ 711    $ 730

Syndications

     129      95      381      301

Advisory services

     66      50      216      153

Other

     7      5      25      26
    

  

  

  

Total

   $ 420    $ 388    $ 1,333    $ 1,210
    

  

  

  

 

Investment Banking Income increased $123 million, or 10 percent, for the nine months ended September 30, 2004 due to market share increases in mergers and acquisitions, high-yield/leveraged debt, mortgage-backed securities, and syndicated loans during the period. The continued strong momentum in mergers and acquisitions and syndicated loans drove the 41 percent and 27 percent increases, respectively, in advisory services and syndication fees.

 

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Table of Contents

Trading-related revenue, which includes Net Interest Income from trading-related positions and Trading Account Profits in Noninterest Income, is presented in the following table. Not included are commissions from equity transactions which are recorded in Noninterest Income as Investment and Brokerage Services Income, however, we consider these to be an integral component to the overall business trading revenues.

 

Trading-related Revenue

 

     Three Months Ended
September 30


    Nine Months Ended
September 30


 

(Dollars in millions)


   2004

    2003

    2004

    2003

 

Net interest income (fully taxable-equivalent basis)

   $ 448     $ 546     $ 1,621     $ 1,716  

Trading account profits

     137       148       795       560  
    


 


 


 


Total trading-related revenue

   $ 585     $ 694     $ 2,416     $ 2,276  
    


 


 


 


Trading-related revenue by product

                                

Fixed income

   $ 299     $ 282     $ 1,262     $ 1,125  

Interest rate (fully taxable-equivalent basis)

     118       298       575       788  

Foreign exchange

     164       136       524       396  

Equities(1)

     40       65       120       283  

Commodities

     18       (10 )     12       (48 )
    


 


 


 


Market-based trading-related revenue

     639       771       2,493       2,544  

Credit portfolio hedges(2)

     (54 )     (77 )     (77 )     (268 )
    


 


 


 


Total trading-related revenue

   $ 585     $ 694     $ 2,416     $ 2,276  
    


 


 


 



(1) Does not include commissions from equity transactions which were $153 and $166 for the three months ended September 30, 2004 and 2003, respectively and $494 and $481 for the nine months ended September 30, 2004 and 2003, respectively.
(2) Includes credit default swaps used for credit risk management.

 

Market-based trading-related revenue decreased by $51 million, or two percent, in the first nine months of 2004 compared to the first nine months of 2003. Fixed income continued to show strong results increasing $137 million, or 12 percent, driven by growth in our asset-backed business and investment grade trading activity. Foreign exchange revenue increased $128 million, or 32 percent, which was due to volatility of the dollar and increased customer activity. Commodities revenue increased $60 million due to the absence of the negative impact of the SARS outbreak, which occurred during 2003. However, the effects of a reduced risk profile, lower customer activity and higher energy prices resulted in only modest income during the period.

 

More than offsetting these increases were declines in interest rate and equities revenues. Interest rate revenues declined by $213 million, or 27 percent, largely due to reduced corporate customer activity and lower trading-related profits as a result of FRB tightening, uncertainty related to the election and declining volatility in the options market. Trading-related equities revenues declined by $163 million, or 58 percent. Including commissions on equity transactions, they declined $150 million, or 20 percent. The overall decline in equity trading-related revenue was driven by net losses on a single retained stock position, partially offset by increased profits in market-making customer activities.

 

Total trading-related revenues also included losses on credit portfolio hedges of $77 million in the nine months ended September 30, 2004, an improvement of $191 million from the first nine months of 2003. The improvement was primarily due to stable spreads in the first half of the year versus spreads narrowing throughout last year. However, in the third quarter of this year, credit spreads narrowed further, resulting in a cost to hedge of $54 million. We took the opportunity to increase our credit portfolio protection by $4.4 billion during the third quarter of 2004 to $19.3 billion at September 30, 2004.

 

The Provision for Credit Losses decreased $662 million, or 171 percent, due to notable improvements in credit quality in the large corporate portfolio as evidenced by the $424 million decrease in nonperforming assets in the first nine months of 2004 despite the addition of $242 million of FleetBoston nonperforming assets on April 1, 2004. Also contributing to the decrease in the Provision for Credit Losses was the reduction in net charge-offs during the first nine months of 2004 of $229 million, or 59 percent, from a year ago.

 

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Noninterest Expense increased $970 million, or 24 percent, for the nine months ended September 30, 2004 compared to the first nine months of 2003. This increase was due to an increase in legal and litigation charges of $422 million, which reflects the legal charges taken in the second quarter of 2004 and the reversal of legal expenses previously recorded in Corporate Other that were reclassified to Global Corporate and Investment Banking, higher incentive compensation for market-based activities of $183 million and the mutual fund settlement of $143 million.

 

Wealth and Investment Management

 

Wealth and Investment Management provides investment services to individual and institutional clients through five subsegments, Columbia Management Group (CMG), The Private Bank, Banc of America Investments (BAI), Premier Banking and Other Services. We announced a new national business designed to serve the needs of ultra high-net-worth individuals and families.

 

CMG is an asset management organization serving the needs of high-net-worth individuals, institutions and retail customers. CMG offers a full range of investment styles across an array of products including equities, fixed income (taxable and nontaxable) and cash products. CMG distributes its products and services to institutions and individuals through The Private Bank and BAI operations as well as through nonproprietary channels including other brokerage firms.

 

The Private Bank provides integrated wealth management solutions to high-net-worth individuals, with investable assets greater than $3 million, as well as mid-market institutions and charitable organizations. Services include investment, trust, banking and lending services. As of September 30, 2004, The Private Bank had loans of $29.4 billion and deposits of $26.6 billion.

 

BAI is a full-service retail brokerage business, which includes Quick & Reilly. BAI provides investment and financial planning services to individuals with 1.3 million accounts through a network of over 2,100 financial advisors throughout the United States.

 

Premier Banking joins with BAI to bring together personalized banking and investment expertise through priority service with client-dedicated teams. The Premier Banking and investments teams provide comprehensive advice, cash management strategies and customized solutions for mass affluent clients. Mass affluent clients have $100,000 in investable assets, or $250,000 in investable assets and primary mortgage. Premier Banking had $83.8 billion in deposit and credit relationship balances at September 30, 2004.

 

Other Services include the Investment Services Group, which provides products and services from traditional capital markets products to alternative investments, U.S. Clearing, which provides retail clearing services to broker/dealers and other correspondent firms, and Fleet Specialist, a New York Stock Exchange market-maker.

 

Total Revenue increased $1.3 billion, or 48 percent, for the nine months ended September 30, 2004 compared to the corresponding period in 2003, while Net Income increased 37 percent and was negatively impacted by the $143 million pre-tax mutual fund settlement. Contributing to the increase in revenue was $717 million in Investment and Brokerage Services, driven by the $624 million addition of FleetBoston, and $617 million in Net Interest Income. The increase in Net Interest Income was driven by higher deposits in both Premier Banking and The Private Bank, as well as higher loans in The Private Bank. Assets acquired from FleetBoston contributed $104 million to Net Interest Income.

 

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SVA remained relatively unchanged at $544 million versus $542 million a year ago, as the increase in Net Income was offset by the increase in capital levels as a result of the Merger.

 

Client Assets

 

     September 30

(Dollars in billions)


   2004

   2003

Assets under management

   $ 429.5    $ 281.2

Client brokerage assets

     141.9      90.7

Assets in custody

     104.0      47.3
    

  

Total client assets

   $ 675.4    $ 419.2
    

  

 

Assets under management generate fees based on a percentage of their market value. They consist largely of mutual funds and separate accounts, which are comprised of money market products, equities, and taxable and nontaxable fixed income securities. Compared to a year ago, assets under management increased $148.3 billion, or 53 percent, due to $146.5 billion of FleetBoston assets under management, growth in Marsico’s assets under management and market valuation offset by outflows primarily in money market products. Client brokerage assets, a source of commission revenue, were up $51.2 billion, or 56 percent, versus the prior year due to the addition of $54.3 billion of FleetBoston client brokerage assets. Client brokerage assets consist largely of investments in annuities, money market mutual funds, bonds and equities. Assets in custody increased $56.7 billion, or 120 percent, and represent trust assets administered for customers. The addition of $53.6 billion of assets in custody from FleetBoston drove the increase. Trust assets encompass a broad range of asset types including real estate, private company ownership interest, personal property and investments.

 

Net Interest Income increased 44 percent to $2.0 billion due to growth in deposits in both Premier Banking and The Private Bank, loan growth in The Private Bank, and the addition of FleetBoston earning assets to the portfolio. Net results of ALM activities also drove the increase. Average deposits increased $24.5 billion, or 47 percent, for the nine months ended September 30, 2004 primarily due to moving clients from Consumer Banking to Premier Banking and Premier Banking customers doing more business with us, as well as increased deposit-taking in The Private Bank. Average loans and leases increased $5.1 billion, or 13 percent, for the nine months ended September 30, 2004 due to the inclusion of the FleetBoston loans and increased loan activity.

 

Significant Noninterest Income Components

 

     Three Months Ended
September 30


   Nine Months Ended
September 30


(Dollars in millions)


   2004

   2003

   2004

   2003

Asset management fees (1)

   $ 565    $ 292    $ 1,428    $ 873

Brokerage income

     169      104      467      305
    

  

  

  

Total investment and brokerage services

     734      396      1,895      1,178
    

  

  

  


(1) Includes personal and institutional asset management fees, mutual fund fees and fees earned on assets in custody.

 

Noninterest Income increased $730 million, or 51 percent, for the nine months ended September 30, 2004. The change was due to an increase in Investment and Brokerage Services of $717 million driven by the addition of FleetBoston and higher assets under management balances in Marsico and market appreciation.

 

Noninterest Expense increased $886 million, or 57 percent, due to the $515 million increase in expenses related to the inclusion of FleetBoston, Wealth and Investment Management’s share of the first quarter mutual fund settlement, which amounted to approximately $143 million pre-tax, and an increase in Personnel Expense. The increased Personnel Expense reflects the addition of 496 client managers in Premier Banking, 228 additional financial advisors in BAI and increased incentives in Marsico due to sales and BAI due to sales and increased payouts.

 

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Corporate Other

 

Corporate Other includes our Latin America and Equity Investments businesses, and Other.

 

Latin America includes our full-service Latin American operations in Brazil, Argentina, Chile and Uruguay, but excludes Mexico. These businesses provide a wide array of products including commercial lending, where the focus has been on large corporations and multinational customers, consumer lending and services, deposit-taking, asset management, private banking and customer-centric treasury operations. The consumer business focuses mainly on the affluent and middle market segments. Our largest book of business is in Brazil, while Argentina has our largest branch network, with 87. Our Brazilian, Chilean and Uruguayan operations have 66, 41 and 15 branches, respectively.

 

Equity Investments includes Principal Investing and certain other corporate investments. Principal Investing is comprised of a diversified portfolio of investments in privately-held and publicly-traded companies at all stages, from start-up to buyout.

 

Other includes Noninterest Income and Expense amounts associated with the ALM process, including Gains on Sales of Securities, and the results of certain consumer finance and commercial lending businesses that are being liquidated.

 

Net Income (Loss) in Corporate Other

 

     Three Months Ended
September 30


    Nine Months Ended
September 30


 

(Dollars in millions)


   2004

   2003

    2004

   2003

 

Latin America

   $ 151    $ (7 )   $ 184    $ (32 )

Equity investments

     47      (69 )     3      (183 )

Other

     116      228       917      876  
    

  


 

  


Total

   $ 314    $ 152     $ 1,104    $ 661  
    

  


 

  


 

Latin America

 

The results of Latin America are driven by the addition of the FleetBoston operations in the region. Prior to the Merger, our business in the region had been reduced to very low levels. For the nine months ended September 30, 2004, Total Revenue increased $513 million from $28 million to $541 million. Latin America had Net Income of $184 million for the nine months ended September 30, 2004 compared to a net loss of $32 million for the same period in 2003. The improvements were due to an improvement in credit quality and an increase in activity as a result of the addition of the FleetBoston Latin America business. SVA increased by $129 million, or over 400 percent, from a negative $32 million to $97 million due to higher Net Income.

 

Net Interest Income increased $305 million from $20 million to $325 million for the nine months ended September 30, 2004 compared to the same period in 2003. The increase was driven by the $300 million impact of the addition of the FleetBoston Latin America business.

 

Noninterest Income increased $208 million from $8 million to $216 million in the nine months ended September 30, 2004 compared to a year ago. The increase was driven by increases in Service Charges, Investment and Brokerage Services and Trading Account Profits of $48 million, $52 million and $49 million, respectively. Of these increases, $56 million, $52 million and $42 million, respectively, were due to the impact of the addition of FleetBoston.

 

The Provision for Credit Losses decreased $170 million, or 266 percent, from $64 million in the prior year, due to continued improvement in the credit quality of the portfolio. Driving this decrease was a reduction in net charge-offs of $100 million during the first nine months of 2004.

 

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Noninterest Expense increased $336 million from $13 million to $349 million for the nine months ended September 30, 2004 due to the $331 million impact of the addition of FleetBoston in the Latin America business.

 

Equity Investments

 

For the nine months ended September 30, 2004, Total Revenue increased $301 million, or 151 percent, to $101 million. Equity Investments had net income of $3 million for the nine months ended September 30, 2004 compared to a net loss of $183 million for the same period in 2003. The improvements were primarily due to higher cash gains in Principal Investing driven by increasing liquidity in the private equity markets and the $52 million of Noninterest Income from assets acquired from the FleetBoston Principal Investing portfolio. SVA increased by $144 million, or 41 percent, from a negative $351 million to a negative $207 million, due to the improvement in the results from a net loss to net income for the period.

 

The following table presents the equity investment portfolio in Principal Investing by major industry at September 30, 2004 and December 31, 2003.

 

Equity Investments in the Principal Investing Portfolio

 

(Dollars in millions)


   September 30,
2004


   December 31,
2003


   FleetBoston
April 1, 2004


Consumer discretionary

   $ 2,081    $ 1,435    $ 834

Industrials

     1,201      876      527

Information technology

     1,087      741      391

Telecommunications services

     781      639      271

Health care

     587      385      211

Financials

     577      332      146

Materials

     431      266      188

Real estate

     295      229      113

Consumer staples

     238      245      88

Individual trusts, nonprofits, government

     84      48      162

Energy

     41      29      67

Utilities

     35      35      6
    

  

  

Total

   $ 7,438    $ 5,260    $ 3,004
    

  

  

 

The following table presents the Equity Investment Gains (Losses) in Principal Investing.

 

Equity Investment Gains (Losses) in Principal Investing

 

    

Three Months Ended

September 30


   

Nine Months Ended

September 30


 

(Dollars in millions)


   2004

    2003

    2004

    2003

 

Cash gains

   $ 257     $ 49     $ 585     $ 181  

Impairments

     (59 )     (100 )     (289 )     (284 )

Fair value adjustments

     (27 )     8       (75 )     8  
    


 


 


 


Total

   $ 171     $ (43 )   $ 221     $ (95 )
    


 


 


 


 

Noninterest Income primarily consists of Equity Investment Gains (Losses). While impairments were relatively unchanged, improvements in the private equity markets and the $142 million effect of the addition of the FleetBoston portfolio resulted in a $404 million increase in cash gains for the nine months ended September 30, 2004 as compared to the same period in 2003.

 

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Other

 

Total Revenue decreased $903 million during the nine months ended September 30, 2004 to a negative $97 million. The decrease was the result of a $334 million decrease in Net Interest Income, from $628 million to $294 million, primarily caused by a reduction of capital in Other, as more capital has been deployed to the business segments, and by the continued runoff of previously exited businesses. The revenue decrease was also caused by the $569 million decline in Noninterest Income, from $178 million to a negative $391 million, primarily caused by the absence of whole loan sale gains during the period. Net Income increased $41 million, or five percent, from $876 million to $917 million, as compared to a year ago. Gains on Sales of Securities increased $1.1 billion to $1.9 billion as we continue to reposition the ALM portfolio in response to interest rate fluctuations and to manage mortgage prepayment risk. Provision for Credit Losses in Other increased from $207 million to $393 million from the first nine months of 2003 associated with the previously exited consumer businesses, changes to components of the formula and other factors. The Noninterest Expense decreased $57 million to $147 million for the nine months ended September 30, 2004.

 

Managing Risk

 

Our management governance structure enables us to manage all major aspects of our business through an integrated planning and review process that includes strategic, financial, associate and risk planning. We derive much of our revenue from managing risk from customer transactions for profit. Through our management governance structure, risk and return are evaluated with a goal of producing sustainable revenue, reducing earnings volatility and increasing shareholder value. Our business exposes us to four major risks: liquidity, credit, market and operational. For a more detailed discussion of our risk management activities, see pages 38 through 39 of the Corporation’s 2003 Annual Report.

 

Liquidity Risk Management

 

Liquidity Risk

 

Liquidity is the ongoing ability to accommodate liability maturities and deposit withdrawals, fund asset growth and meet contractual obligations through unconstrained access to funding at reasonable market rates. Liquidity management involves maintaining ample and diverse funding capacity, liquid assets and other sources of cash to accommodate fluctuations in asset and liability levels due to changes in our business operations or unanticipated events. A more detailed discussion on our liquidity risk is included in the Corporation’s 2003 Annual Report on pages 40 through 44.

 

One ratio used to monitor trends is the “loan to domestic deposit” (LTD) ratio. The LTD ratio reflects the percent of loans that could be funded by domestic deposits. A ratio below 100 percent would indicate that market-based funding would not be needed to fund new loans; conversely, a ratio above 100 percent would indicate that market-based funds would be needed to fund new loans. The ratio was 95 percent at September 30, 2004 compared to 98 percent at December 31, 2003. For further discussion see Deposits and Other Funding Sources below.

 

We originate loans both for retention on our balance sheet and for distribution. As part of our “originate to distribute” strategy, commercial loan originations are distributed through syndication structures, and residential mortgages originated by the mortgage group are frequently distributed in the secondary market. In connection with our balance sheet management activities, we may retain mortgage loans originated as well as purchase and sell loans based on our assessment of market conditions.

 

Deposits and Other Funding Sources

 

Deposits are a key source of funding. Tables 5 and 6 provide information on the average amounts of deposits and the rates paid by deposit category. Average deposits increased $130.0 billion to $532.0 billion for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003 due to a $87.9 billion increase in average domestic interest-bearing

 

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deposits, a $26.5 billion increase in average noninterest-bearing deposits and a $15.6 billion increase in average foreign interest-bearing deposits. These increases included the $64.0 billion, $32.4 and $8.5 billion impact of the addition of FleetBoston domestic interest-bearing deposits, noninterest-bearing deposits and foreign interest-bearing deposits, respectively. We categorize our deposits into either core or market-based deposits. Core deposits, which are generally customer-based, are an important stable, low-cost funding source and typically react more slowly to interest rate changes than market-based deposits. Core deposits exclude negotiable CDs, public funds, other domestic time deposits and foreign interest-bearing deposits. Average core deposits for the nine months ended September 30, 2004 increased $117.0 billion to $476.0 billion, a 33 percent increase from a year ago, which included $95.8 billion in average core deposits from the addition of FleetBoston. The increase was in NOW and money market deposits, noninterest-bearing deposits, consumer CDs and IRAs, and savings. Average market-based deposit funding increased $12.9 billion to $56.0 billion for the nine months ended September 30, 2004 compared to the same period in 2003. The increase was due to a $15.6 billion increase in foreign interest-bearing deposits, which was partially offset by a $2.7 billion decrease in negotiable CDs, public funds and other domestic time deposits. These increases also reflected the $9.2 billion impact to average market-based deposit funding from the addition of FleetBoston market-based deposit funding. Deposits, on average, represented 52 percent and 53 percent of total sources of funds for the nine months ended September 30, 2004 and 2003, respectively.

 

Additional sources of funds include short-term borrowings, long-term debt and shareholders’ equity. Average short-term borrowings, a relatively low-cost source of funds, were up $80.5 billion to $226.6 billion for the nine months ended September 30, 2004 compared to the same period in 2003 due to increases in securities sold under agreements to repurchase of $54.0 billion, commercial paper of $16.2 billion, notes payable of $8.5 billion and other short-term borrowings of $4.0 billion that were used to fund asset growth or facilitate trading activities partially offset by a decrease of $2.1 billion in federal funds purchased. The increases in average short-term borrowings included the $4.2 billion, $404 million, $5.8 billion, and $942 million impact of the addition of FleetBoston securities sold under agreements to repurchase, commercial paper, notes payable and other short-term borrowings, respectively. Issuances and repayments of long-term debt were $19.1 billion and $11.3 billion, respectively, for the nine months ended September 30, 2004.

 

Obligations and Commitments

 

We have contractual obligations to make future payments on debt and lease agreements. Additionally, in the normal course of business, we enter into contractual arrangements whereby we commit to future purchases of products or services from unaffiliated parties. These obligations are more fully discussed in Note 9 of the Consolidated Financial Statements and Notes 12 and 13 of the Consolidated Financial Statements of the Corporation’s 2003 Annual Report.

 

Many of our lending relationships contain both funded and unfunded elements. The funded portion is reflected on our balance sheet. The unfunded component of these commitments is not recorded on our balance sheet until a draw is made under the loan facility. These commitments, as well as guarantees, are more fully discussed in Note 9 of the Consolidated Financial Statements.

 

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The following table summarizes the total unfunded, or off-balance sheet, credit extension commitment amounts by expiration date. At September 30, 2004, charge cards (nonrevolving card lines) to individuals and government entities guaranteed by the U.S. government in the amount of $12.2 billion (related outstandings of $249 million) were not included in credit card line commitments in the table below.

 

Table 8

Credit Extension Commitments

 

     September 30, 2004

(Dollars in millions)


  

Expires in
1 year

or less


   Thereafter

   Total

Loan commitments(1)

   $ 88,883    $ 214,372    $ 303,255

Standby letters of credit and financial guarantees

     20,443      22,099      42,542

Commercial letters of credit

     5,357      563      5,920
    

  

  

Legally binding commitments

     114,683      237,034      351,717

Credit card lines

     176,122      8,833      184,955
    

  

  

Total

   $ 290,805    $ 245,867    $ 536,672
    

  

  


(1) Equity commitments of $2,128 related to obligations to fund existing equity investments were included in loan commitments at September 30, 2004. Included in loan commitments at September 30, 2004, were $885 of equity commitments related to obligations to fund existing equity investments acquired from FleetBoston.

 

On- and Off-balance Sheet Financing Entities

 

In addition to traditional lending, we also support our customers’ financing needs by facilitating their access to the commercial paper markets. These markets provide an attractive, lower-cost financing alternative for our customers. Our customers sell assets, such as high-grade trade or other receivables or leases, to a commercial paper financing entity, which in turn issues high-grade short-term commercial paper that is collateralized by the assets sold. The purpose and use of these types of entities are more fully discussed in the Corporation’s 2003 Annual Report beginning on page 42.

 

We receive fees for providing combinations of liquidity, standby letters of credit (SBLCs) or similar loss protection commitments, and derivatives to the commercial paper financing entities. We manage our credit risk on these commitments by subjecting them to our normal underwriting and risk management processes. At September 30, 2004 and December 31, 2003, the Corporation had off-balance sheet liquidity commitments and SBLCs to these entities of $30.1 billion and $23.5 billion, respectively. Substantially all of these liquidity commitments and SBLCs mature within one year. These amounts are included in Table 8. Net revenues earned from fees associated with these off-balance sheet financing entities were approximately $204 million and $57 million for the nine months ended September 30, 2004 and 2003, respectively.

 

In December 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46 (Revised December 2003) “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (FIN 46R) which addresses variable interest entities (VIEs). FIN 46R is an update of FASB Interpretation No. 46 “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (FIN 46) and contains different implementation dates based on the types of entities subject to the standard and based on whether a company has adopted FIN 46. We early adopted FIN 46 in July 2003 and adopted FIN 46R as of March 31, 2004. As a result of the adoption of FIN 46R, there was no material impact on our results of operations or financial condition. At September 30, 2004, the consolidated assets and liabilities of our multi-seller asset-backed commercial paper conduit were reflected in Available-for-sale (AFS) Securities, Other Assets, and Commercial Paper and Other Short-Term Borrowings in the Global Corporate and Investment Banking business segment. At September 30, 2004, we held $5.4 billion of assets of this entity while our maximum loss exposure associated with this entity including unfunded lending commitments was approximately $6.9 billion.

 

In addition, to control our capital position, diversify funding sources and provide customers with commercial paper investments, from time to time we will sell assets to off-balance sheet commercial paper entities. The

 

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commercial paper entities are Qualified Special Purpose Entities that have been isolated beyond our reach or that of our creditors, even in the event of bankruptcy or other receivership. Assets sold to the entities consist of high-grade corporate or municipal bonds, collateralized debt obligations and asset-backed securities. The purpose and use of these types of entities are more fully discussed in the Corporation’s 2003 Annual Report beginning on page 42.

 

We also receive fees for the services we provide to the entities, and we manage any credit or market risk on commitments or derivatives through normal underwriting and risk management processes. Derivative activity related to these entities is included in Note 4 of the Consolidated Financial Statements. We also provide asset management and related services to other special purpose entities. At both September 30, 2004 and December 31, 2003, the Corporation had off-balance sheet liquidity commitments, SBLCs and other financial guarantees to the entities of $5.4 billion. Substantially all of these liquidity commitments, SBLCs and other financial guarantees mature within one year. These amounts are included in Table 8. Net revenues earned from fees associated with these entities were $16 million and $29 million for the nine months ended September 30, 2004 and 2003, respectively.

 

Because we provide liquidity and credit support to these financing entities, our credit ratings and changes thereto will affect the borrowing cost and liquidity of these entities. In addition, significant changes in counterparty asset valuation and credit standing may also affect the liquidity of the commercial paper issuance. Disruption in the commercial paper markets may result in our having to fund under these commitments and SBLCs discussed above. We seek to manage these risks, along with all other credit and liquidity risks, within our policies and practices. See Notes 1 and 7 of the Consolidated Financial Statements for additional discussion of off-balance sheet financing entities.

 

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Capital Management

 

The final component of liquidity risk is capital management, which focuses on the level of Shareholders’ Equity. Shareholders’ Equity was $98.0 billion at September 30, 2004 compared to $48.0 billion at December 31, 2003, an increase of $50.0 billion. This increase was driven by stock issued in the acquisition of FleetBoston of $46.8 billion, Net Income of $10.3 billion and Common Stock Issued Under Employee Plans and Related Tax Benefits of $2.9 billion, offset by common share repurchases of $4.7 billion and dividends paid of $4.6 billion. Table 9 presents the monthly share repurchase activity for the three and nine months ended September 30, 2004 and 2003, including total common shares repurchased under announced programs, weighted average per share price and the remaining buyback authority under announced programs.

 

Table 9

Monthly Common Share Repurchases

 

(Dollars in millions, except per share

information; shares in thousands)


   Number of Common
Shares Repurchased
under Announced
Programs (1)


  

Weighted
Average

Per Share
Price (1)


  

Remaining Buyback Authority

under Announced Programs (2)


         Dollars

   Shares

Three months ended March 31, 2004

   24,306    $ 40.06    $ 12,351    204,178

Three months ended June 30, 2004

   49,060      41.08      7,959    155,118
    
  

  

  

July 1-31, 2004

   5,810      42.39      7,713    149,308

August 1-31, 2004

   14,720      43.12      7,078    134,588

September 1-30, 2004

   19,900      44.23      6,197    114,688
    
                  

Three months ended September 30, 2004

   40,430                   
    
                  

Nine months ended September 30, 2004

   113,796                   
    
                  

(Dollars in millions, except per share

information; shares in thousands)


   Number of Common
Shares Repurchased
under Announced
Programs (3)


   Weighted
Average
Per Share
Price (3)


  

Remaining Buyback Authority

under Announced Programs (4)


         Dollar

   Shares

Three months ended March 31, 2003

   36,800    $ 34.60    $ 13,807    270,370

Three months ended June 30, 2003

   60,600      37.62      10,587    209,770
    
  

  

  

July 1-31, 2003

   32,934      40.63      9,248    176,836

August 1-31, 2003

   8,497      40.41      8,904    168,339

September 1-30, 2003

   8,799      39.06      8,561    159,540
    
                  

Three months ended September 30, 2003

   50,230                   
    
                  

Nine months ended September 30, 2003

   147,630                   
    
                  

(1) Reduced Shareholders’ Equity by $4.7 billion and increased diluted earnings per common share by $0.03 for the nine months ended September 30, 2004. These repurchases were partially offset by the issuance of approximately 90 million shares of common stock under employee plans, which increased Shareholders’ Equity by $2.9 billion, net of $172 of deferred compensation related to restricted stock awards, and decreased diluted earnings per common share by $0.03 for the nine months ended September 30, 2004.
(2) On January 22, 2003, the Board authorized a stock repurchase program of up to 260 million shares of our common stock at an aggregate cost of $12.5 billion. This repurchase plan was completed during the second quarter of 2004. On January 28, 2004, the Board authorized a stock repurchase program of up to 180 million shares of our common stock at an aggregate cost not to exceed $9.0 billion and to be completed within a period of 18 months.
(3) Reduced Shareholders’ Equity by $5.6 billion and increased diluted earnings per common share by $0.06 for the nine months ended September 30, 2003. These repurchases were partially offset by the issuance of approximately 125 million shares of common stock under employee plans, which increased Shareholders’ Equity by $3.7 billion, net of $138 of deferred compensation related to restricted stock awards, and decreased diluted earnings per common share by $0.05 for the nine months ended September 30, 2003.
(4) On December 11, 2001, the Board authorized a stock repurchase program of up to 260 million shares of our common stock at an aggregate cost of up to $10.0 billion. This repurchase plan was completed during the second quarter of 2003. On January 22, 2003, the Board authorized a stock repurchase program of up to 260 million shares of our common stock at an aggregate cost of $12.5 billion. This repurchase plan was completed during the second quarter of 2004.

 

We will continue to repurchase shares, from time to time, in the open market or in private transactions through our previously approved repurchase plans.

 

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During the second quarter of 2004, the Board approved a 2-for-1 stock split in the form of a common stock dividend and increased the quarterly cash dividends 12.5 percent from $0.40 to $0.45 per post-split share. The common stock dividend was effective August 27, 2004 to common shareholders of record on August 6, 2004 and the cash dividend was effective September 24, 2004 to common shareholders of record on September 3, 2004. All prior period common share and related per common share information has been restated to reflect the 2-for-1 stock split.

 

As part of the SVA calculation, equity is allocated to business units based on an assessment of risk. The allocated amount of capital varies according to the risk characteristics of the individual business segments and the products they offer. Capital is allocated separately based on the following types of risk: credit, market and operational. Average common equity allocated to business units was $64.6 billion and $30.9 billion for the nine months ended September 30, 2004 and 2003, respectively. The increase in average allocated common equity is primarily due to the Merger. Average unallocated common equity (not allocated to business units) was $14.7 billion and $18.6 billion for the nine months ended September 30, 2004 and 2003, respectively.

 

As a regulated financial services company, we are governed by certain regulatory capital requirements. Presented in Table 10 are the regulatory capital ratios, actual capital amounts and minimum required capital amounts for the Corporation, Bank of America National Association (Bank of America N.A.) and Bank of America N.A. (USA) at September 30, 2004 and December 31, 2003 and for Fleet National Bank at September 30, 2004. As of September 30, 2004, we were classified as “well-capitalized” for regulatory purposes, the highest classification. For additional information on the regulatory capital ratios along with a description of the components of risk-based capital, capital adequacy requirements and prompt corrective action provisions, see Note 15 of the Consolidated Financial Statements of the Corporation’s 2003 Annual Report.

 

The capital treatment of trust preferred securities (Trust Securities) is currently under review by the FRB due to the issuing trust companies being deconsolidated under FIN 46R. On May 6, 2004 the FRB proposed to allow Trust Securities to continue to qualify as Tier 1 capital with revised quantitative limits that would be effective after a three-year transition period. As a result, we will continue to report Trust Securities in Tier 1 Capital. In addition, the FRB is proposing to revise the qualitative standards for capital instruments included in regulatory capital.

 

On July 28, 2004, the FRB and other regulatory agencies issued the Final Capital Rule for Consolidated Asset-backed Commercial Paper Program Assets (the Final Rule). The Final Rule allows companies to exclude from risk-weighted assets, the assets of asset-backed commercial paper programs required to be consolidated by FIN 46R when calculating Tier 1 and Total Risk-based Capital ratios. The Final Rule was effective September 30, 2004. In accordance with FIN 46R, as originally issued, the consolidated assets and liabilities of our multi-seller asset-backed commercial paper conduit was approximately $5.4 billion at September 30, 2004. See Note 7 of the Consolidated Financial Statements for additional information on FIN 46R.

 

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Table 10

Regulatory Capital

 

     September 30, 2004

   December 31, 2003

     Actual

   Minimum
Required(1)


   Actual

   Minimum
Required(1)


(Dollars in millions)


   Ratio

    Amount

      Ratio

    Amount

  

Risk-based capital

                                       

Tier 1

                                       

Bank of America Corporation

   8.08 %   $ 62,981    $ 31,194    7.85 %   $ 44,050    $ 22,452

Bank of America, N.A.

   8.47       45,759      21,615    8.73       42,030      19,247

Fleet National Bank

   9.72       14,467      5,954    —         —        —  

Bank of America, N.A. (USA)

   9.82       4,122      1,678    8.41       3,079      1,465

Total

                                       

Bank of America Corporation

   11.71       91,326      62,389    11.87       66,651      44,904

Bank of America, N.A.

   10.65       57,576      43,231    11.31       54,408      38,494

Fleet National Bank

   12.92       19,235      11,909    —         —        —  

Bank of America, N.A. (USA)

   13.38       5,614      3,357    12.29       4,502      2,930

Leverage

                                       

Bank of America Corporation

   5.92       62,981      42,530    5.73       44,050      30,741

Bank of America, N.A.

   6.32       45,759      28,954    6.88       42,030      24,425

Fleet National Bank

   8.09       14,467      7,157    —         —        —  

Bank of America, N.A. (USA)

   10.36       4,122      1,592    9.17       3,079      1,344

(1) Dollar amount required to meet guidelines for adequately capitalized institutions.

 

Credit Risk Management

 

Credit risk is the risk of loss arising from a customer or counterparty’s inability to meet its obligations. Credit risk exists in our outstanding loans and leases, derivative assets and unfunded lending commitments that include loan commitments, letters of credit and financial guarantees. We define the credit exposure to a client as the maximum loss potential arising from all these product classifications. For derivative positions, we use the current mark-to-market value with each counterparty to represent credit exposure without giving consideration to future mark-to-market changes. Our commercial and consumer credit extension and review procedures take into account credit exposures that are both funded and unfunded. For additional information on derivatives and credit extension commitments, see Notes 4 and 9 of the Consolidated Financial Statements.

 

Commercial and Consumer Portfolio Credit Risk Management

 

We manage credit risk based on the risk profile of the borrower, repayment source and the nature of underlying collateral given current events and conditions. At a macro level, we classify our loans as commercial or consumer loans. For a detailed discussion of our credit risk management process associated with these portfolios, see page 44 of the Corporation’s 2003 Annual Report.

 

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Table 11

Outstanding Loans and Leases

 

     September 30, 2004

    December 31, 2003

   

FleetBoston

April 1, 2004


 

(Dollars in millions)


   Amount

   Percent

    Amount

   Percent

    Amount

   Percent

 

Commercial - domestic

   $ 122,211    23.9 %   $ 91,491    24.6 %   $ 31,796    25.6 %

Commercial - foreign

     18,976    3.7       10,754    2.9       9,160    7.4  

Commercial real estate (1)

     30,719    6.0       19,367    5.2       9,982    8.0  

Commercial lease financing

     19,991    3.9       9,692    2.6       10,720    8.6  
    

  

 

  

 

  

Total commercial

     191,897    37.5       131,304    35.3       61,658    49.6  
    

  

 

  

 

  

Residential mortgage

     179,673    35.1       140,513    37.8       34,571    27.9  

Home equity lines

     46,497    9.1       23,859    6.4       13,799    11.1  

Direct/Indirect consumer

     38,378    7.5       33,415    9.0       6,113    4.9  

Credit card

     47,554    9.3       34,814    9.4       6,848    5.5  

Other consumer (2)

     7,640    1.5       7,558    2.1       1,272    1.0  
    

  

 

  

 

  

Total consumer

     319,742    62.5       240,159    64.7       62,603    50.4  
    

  

 

  

 

  

Total

   $ 511,639    100.0 %   $ 371,463    100.0 %   $ 124,261    100.0 %
    

  

 

  

 

  


(1) Includes domestic and foreign commercial real estate loans of $30,255 and $464 at September 30, 2004, respectively, and $19,043 and $324 at December 31, 2003, respectively.
(2) Includes consumer finance, foreign consumer and consumer lease financing of $3,564, $3,433 and $643 at September 30, 2004, respectively, and $3,905, $1,969 and $1,684 at December 31, 2003, respectively.

 

Concentrations of Credit Risk

 

Portfolio credit risk is evaluated and managed with a goal that concentrations of credit exposure do not result in undesirable levels of risk. We review, measure, and manage concentrations of credit exposure by industry, product, geography and customer relationship. Risk due to borrower concentrations is more prevalent in the commercial portfolio. We also review, measure, and manage commercial real estate loans by geographic location and property type. Within our international portfolio, we also evaluate borrowings by region and by country. Tables 12, 13 and 14 summarize these concentrations.

 

From the perspective of portfolio risk management, customer concentration management is most relevant in Global Corporate and Investment Banking. Within Global Corporate and Investment Banking, concentrations continue to be addressed through the underwriting and ongoing monitoring processes, the established strategy of “originate to distribute” and partly through the purchase of credit protection through credit derivatives. We utilize various risk mitigation tools to economically hedge our risk to certain counterparties. Two widely used tools are credit default swaps and collateralized loan obligations (CLOs) in which a layer of risk is sold to third parties. Earnings volatility increases due to accounting asymmetry as we mark to market the credit default swaps as required by SFAS 133 and CLOs through Trading Account Profits, while the loans are recorded at historical cost less an Allowance for Credit Losses or, if held for sale, the lower of cost or market. The cost of credit portfolio hedges was $54 million and $77 million for the three months ended September 30, 2004 and 2003, respectively, and $77 million and $268 million for the nine months ended September 30, 2004 and 2003, respectively.

 

In the consumer portfolio, the geographic span and diversity of our franchise along with the range of credit products function to mitigate credit risk concentrations. In addition, credit decisions are statistically-based with tolerances set that decrease the percentage of approvals as the risk profile increases.

 

Beginning in 2003, we entered into several transactions whereby we purchased credit protection on a portion of our residential mortgage loan portfolio from unaffiliated parties. These transactions are designed to aid us in our overall risk management strategy. In the second quarter of 2004, we entered into a similar transaction for a portion of our indirect automobile loan portfolio. At September 30, 2004 and December 31, 2003, approximately $92.6 billion and $63.4 billion of residential mortgage and indirect automobile loans were credit enhanced. Our regulatory risk-weighted assets were reduced as a result of these transactions because we had effectively transferred a degree of credit risk on these loans to unaffiliated parties. These transactions had the cumulative effect of reducing our risk-weighted

 

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assets by $27.2 billion and $18.6 billion at September 30, 2004 and December 31, 2003, respectively, and resulted in 28 bp and 26 bp increases in our Tier 1 Risk-based Capital ratio at September 30, 2004 and December 31, 2003, respectively.

 

Table 12 shows commercial utilized credit exposure by industry. As shown in the table, commercial utilized credit exposure is diversified across a range of industries.

 

Table 12

 

Commercial Utilized Credit Exposure by Industry(1)

 

(Dollars in millions)


   September 30
2004


  

December 31

2003


   FleetBoston
April 1, 2004


Real estate (2)

   $ 36,575    $ 22,228    $ 12,957

Retailing

     22,981      15,152      6,539

Diversified financials

     21,923      20,427      3,557

Banks

     20,020      25,088      1,040

Education and government

     17,237      13,919      1,629

Individuals and trusts

     16,749      14,307      2,627

Materials

     13,867      8,860      5,079

Consumer durables and apparel

     12,921      8,313      3,482

Transportation

     12,645      9,355      3,268

Food, beverage and tobacco

     12,129      9,134      2,552

Health care equipment and services

     12,045      7,064      4,939

Leisure and sports, hotels and restaurants

     12,014      10,099      2,940

Capital goods

     11,984      8,244      4,355

Commercial services and supplies

     10,874      7,206      3,866

Energy

     7,975      4,348      2,044

Media

     6,125      4,701      2,616

Insurance

     6,015      3,638      2,822

Utilities

     5,643      5,012      1,948

Religious and social organizations

     5,514      4,272      475

Food and staples retailing

     3,205      1,837      1,456

Technology hardware and equipment

     3,161      1,941      1,463

Telecommunication services

     2,828      2,526      883

Software and services

     2,378      1,655      770

Automobiles and components

     1,723      1,326      746

Pharmaceuticals and biotechnology

     921      466      590

Household and personal products

     381      302      195

Other (3)

     11,360      1,474      3,751
    

  

  

Total

   $ 291,193    $ 212,894    $ 78,589
    

  

  


(1) Includes Loans and Leases, SBLCs and financial guarantees, Derivatives, assets held for sale and commercial letters of credit.
(2) Industries are viewed from a variety of perspectives to best isolate the perceived risks. For purposes of this table, the Real Estate industry is defined based upon the borrowers’ primary business activity using operating cash flow and source of repayment as key factors.
(3) At September 30, 2004, Other includes $3.3 billion of margin loans, $2.3 billion of commercial credit cards and $5.8 billion to various industries, including $3.4 billion from the addition of FleetBoston.

 

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Table 13 presents outstanding commercial real estate loans by geographic region and by property type. The amounts outstanding do not include commercial loans secured by owner-occupied real estate; accordingly, the amounts do not include outstanding loans and leases that were made on the general creditworthiness of the borrower for which real estate was obtained as security and for which the ultimate repayment of the credit is not dependent on the sale, lease, rental or refinancing of the real estate. As depicted in the table, we believe the commercial real estate loan portfolio is well diversified in terms of geographic region and property type.

 

Table 13

 

Outstanding Commercial Real Estate Loans(1, 2)

 

(Dollars in millions)


   September 30,
2004


   December 31,
2003


   FleetBoston
April 1, 2004


By Geographic Region (3)

                    

Northeast

   $ 6,709    $ 683    $ 3,732

California

     6,102      4,705      567

Florida

     3,410      2,663      215

Southeast

     3,305      2,642      387

Southwest

     3,143      2,725      389

Northwest

     2,006      1,976      68

Midwest

     1,978      1,431      347

Midsouth

     1,452      1,139      152

Other states

     489      448      3,234

Geographically diversified

     1,661      631      769

Non-U.S.

     464      324      122
    

  

  

Total

   $ 30,719    $ 19,367    $ 9,982
    

  

  

By Property Type

                    

Residential

   $ 5,551    $ 3,631    $ 314

Office buildings

     5,339      3,431      2,649

Apartments

     5,171      3,411      1,687

Shopping centers/retail

     3,914      2,295      1,474

Industrial/warehouse

     2,334      1,790      351

Land and land development

     2,024      1,494      155

Hotels/motels

     981      548      531

Multiple use

     684      560      269

Resorts

     289      261      —  

Other

     4,432      1,946      2,552
    

  

  

Total

   $ 30,719    $ 19,367    $ 9,982
    

  

  


(1) Certain prior period amounts have been reclassified to conform to current period presentation.
(2) For purposes of this table, Commercial Real Estate product reflects loans dependent on the sale, lease or refinance of real estate as the final source of repayment.
(3) Distribution is based on geographic location of collateral. Geographic regions are in the U.S. unless otherwise noted.

 

Foreign Portfolio

 

The increase in total foreign exposure at September 30, 2004 compared to December 31, 2003 is due to the addition of exposure associated with FleetBoston.

 

Foreign exposure to entities in countries defined as emerging markets increased $4.6 billion from December 31, 2003 to $15.6 billion at September 30, 2004. At September 30, 2004, 60 percent of emerging markets exposure was in Latin America compared to 42 percent at December 31, 2003, while 39 percent of the emerging markets exposure was in Asia Pacific at September 30, 2004 compared to 55 percent at December 31, 2003.

 

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The increase in Latin America was attributable to the addition of the $6.7 billion FleetBoston portfolio, partially offset by reductions in loans and trading activity in Brazil and Chile. Our investment in the Mexican entity Grupo Financiero Santander Serfin (GFSS) accounted for $1.8 billion of the Mexican exposure.

 

The primary components of our exposure in Brazil at September 30, 2004 and December 31, 2003 were $1.3 billion and $331 million, respectively, of cross-border traditional credit exposure (loans, letters of credit, etc.), and $2.0 billion and $193 million, respectively, of local country exposure net of local liabilities. Nonperforming assets in Brazil were $61 million at September 30, 2004 compared to $39 million at December 31, 2003. Nonperforming assets at September 30, 2004 included $48 million of loans, $11 million of securities and $2 million of foreclosed properties. For the nine months ended September 30, 2004 and 2003, net charge-offs for Brazil totaled $4 million and $23 million, respectively.

 

The primary components of our exposure in Argentina at September 30, 2004 and December 31, 2003, were $339 million and $135 million, respectively, of cross-border traditional credit exposure, and $16 million and $24 million, respectively, of local country exposure net of local liabilities. Our exposure to cross-border securities and other investments at September 30, 2004 and December 31, 2003 was $81 million and $123 million, respectively. At September 30, 2004, Argentina nonperforming assets were $421 million compared to $107 million at December 31, 2003. Nonperforming assets at September 30, 2004 included $294 million of loans, $128 million of securities and $1 million of foreclosed properties. For the nine months ended September 30, 2004, net recoveries for Argentina totaled $11 million compared to net charge-offs of $65 million for the comparable period in 2003.

 

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Table 14 sets forth regional foreign exposure to selected countries defined as emerging markets.

 

Table 14

 

Selected Emerging Markets(1)

 

(Dollars in millions)


  

Loans

and Loan
Commitments


   Other
Financing (2)


   Derivative
Assets


   Securities/
Other
Investments (3,4)


  

Total

Cross-
border
Exposure (5)


   Local
Country
Exposure
Net of Local
Liabilities (6)


  

Total

Foreign
Exposure
September 30,
2004


   Increase/
(Decrease)
from
December 31,
2003


   

Fleet-

Boston
April 1,
2004


Region/Country

                                                               

Latin America

                                                               

Argentina

   $ 275    $ 74    $  —      $ 81    $ 430    $ 16    $ 446    $ 135     $ 542

Brazil

     982      287      33      142      1,444      2,014      3,458      2,787       3,838

Chile

     277      125      2      14      418      712      1,130      999       570

Mexico (7)

     786      142      196      1,952      3,076      —        3,076      293       1,186

Other Latin America (8)

     363      164      141      237      905      267      1,172      455       579
    

  

  

  

  

  

  

  


 

Total Latin America

     2,683      792      372      2,426      6,273      3,009      9,282      4,669       6,715
    

  

  

  

  

  

  

  


 

Asia Pacific

                                                               

Hong Kong

     229      41      89      129      488      569      1,057      187       6

India

     601      188      177      286      1,252      519      1,771      206       9

Singapore

     203      30      52      83      368      —        368      (199 )     21

South Korea

     356      578      32      169      1,135      388      1,523      (95 )     158

Taiwan

     319      105      41      11      476      53      529      (12 )     26

Other Asia Pacific (8)

     89      104      61      351      605      197      802      (74 )     50
    

  

  

  

  

  

  

  


 

Total Asia Pacific

     1,797      1,046      452      1,029      4,324      1,726      6,050      13       270
    

  

  

  

  

  

  

  


 

Central and Eastern Europe (8)

     12      13      23      173      221      —        221      (49 )     —  
    

  

  

  

  

  

  

  


 

Total

   $ 4,492    $ 1,851    $ 847    $ 3,628    $ 10,818    $ 4,735    $ 15,553    $ 4,633     $ 6,985
    

  

  

  

  

  

  

  


 


(1) There is no generally accepted definition of emerging markets. The definition that we use includes all countries in Asia Pacific excluding Japan, Australia and New Zealand; all countries in Latin America excluding Cayman Islands and Bermuda; and all countries in Central and Eastern Europe excluding Greece.
(2) Includes acceptances, SBLCs, commercial letters of credit and formal guarantees.
(3) Amounts outstanding for Other Latin America and Other Asia Pacific have been reduced by $192 and $14, respectively, at September 30, 2004 and $173 and $13, respectively, at December 31, 2003. Such amounts represent the fair value of U.S. Treasury securities held as collateral outside the country of exposure.
(4) Cross-border resale agreements are presented based on the domicile of the counterparty because the counterparty has the legal obligation for repayment. For regulatory reporting under Federal Financial Institutions Examination Council (FFIEC) guidelines, cross-border resale agreements are presented based on the domicile of the issuer of the securities that are held as collateral.
(5) Cross-border exposure includes amounts payable to us by borrowers with a country of residence other than the one in which the credit is booked, regardless of the currency in which the claim is denominated, consistent with FFIEC reporting rules.
(6) Local country exposure includes amounts payable to us by borrowers with a country of residence in which the credit is booked, regardless of the currency in which the claim is denominated. Management subtracts local funding or liabilities from local exposures as allowed by the FFIEC. Total amount of local country exposure funded by local liabilities at September 30, 2004 was $14,136 compared to $5,336 at December 31, 2003. Local country exposure funded by local liabilities at September 30, 2004 in Latin America and Asia Pacific was $8,285 and $5,851, respectively, of which $3,652 was in Brazil, $1,555 in Argentina, $1,145 in Chile, $3,073 in Hong Kong and $1,128 in Singapore. There were no other countries with local country exposure funded by local liabilities greater than $1.0 billion.
(7) Includes $1,800 related to GFSS acquired in the first quarter of 2003.
(8) Other Latin America, Other Asia Pacific, and Central and Eastern Europe include countries each with total foreign exposure of less than $500 million.

 

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We have certain risk mitigation instruments associated with certain exposures for Brazil, including insurance contracts, other trade-related transfer risk mitigation and third party funding. Exposures are covered by political risk insurance, which include contracts purchased from the U.S. and foreign governments, multilateral and private insurers. The ability to file a claim under the insurance policies may vary with the country’s current political and economic environment. Table 15 presents the components of our total foreign exposure for Brazil, net of risk mitigation.

 

Table 15

 

Brazil Foreign Exposure Net of Risk Mitigation

 

(Dollars in millions)


   September 30,
2004


Total foreign exposure per Table 14

   $ 3,458

Less: Insurance contracts

     422

Other trade-related transfer risk mitigation

     962

Third party funding

     230
    

Total foreign exposure net of risk mitigation

   $ 1,844
    

 

Asia Pacific emerging markets exposure was largely unchanged. Increases in India and Hong Kong were offset by decreases in Singapore, South Korea and Other Asia Pacific. The increase in India was attributable to higher commercial loans partially offset by a decline in acceptances. The increase in Hong Kong was due to higher foreign exchange exposure to other financial institutions. Higher commercial loans also contributed to the increase in Hong Kong.

 

Credit Quality Performance

 

Overall credit quality continued to improve during the nine months ended September 30, 2004. Net charge-offs and nonperforming assets continued to decline. All major commercial asset quality performance indicators showed positive trends and consumer asset quality remained stable as credit card charge-offs grew in line with card portfolio growth and continued seasoning of the portfolio. As presented in Table 16, commercial criticized exposure decreased $625 million, or 5 percent, to $12.0 billion at September 30, 2004. The net decrease was driven by $13.2 billion of paydowns, payoffs, credit quality improvements, loan sales and charge-offs; partially offset by the addition of $7.1 billion of FleetBoston commercial criticized exposure on April 1, 2004 and $5.5 billion of newly criticized exposure.

 

Table 16

 

Commercial Criticized Exposure (1)

 

    

September 30, 2004


    December 31, 2003

   

FleetBoston

April 1, 2004


 

(Dollars in millions)


   Amount

   Percent(2)

    Amount

   Percent(2)

    Amount

   Percent(2)

 

Commercial - domestic

   $ 7,581    4.08 %   $ 8,044    5.73 %   $ 4,830    9.86 %

Commercial - foreign

     1,727    3.72       2,612    6.97       1,057    10.01  

Commercial real estate

     1,197    3.08       983    3.89       406    4.08  

Commercial lease financing

     1,520    7.60       1,011    10.43       768    5.42  
    

  

 

  

 

  

Total commercial criticized exposure

   $ 12,025    4.13 %   $ 12,650    5.94 %   $ 7,061    8.44 %
    

  

 

  

 

  


(1) Criticized exposure corresponds to the Special Mention, Substandard and Doubtful asset categories defined by regulatory authorities. Exposure amounts include Loans and Leases, SBLCs and financial guarantees, Derivatives, assets held for sale and commercial letters of credit.
(2) Commercial criticized exposure is taken as a percentage of total commercial utilized exposure which includes Loans and Leases, SBLCs and financial guarantees, Derivatives, assets held for sale and commercial letters of credit.

 

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We review the loan and lease portfolio on an ongoing basis to determine if certain credit exposures should be placed on nonperforming status. An asset is placed on nonperforming status when it is determined that principal and interest are not expected to be fully collected in accordance with contractual terms. As presented in Table 17, nonperforming assets at September 30, 2004 decreased $185 million from December 31, 2003 due primarily to the decrease in the nonperforming commercial loans offset by the $1.2 billion effect of FleetBoston nonperforming assets. The commercial nonperforming loans and leases totaled $1.8 billion at September 30, 2004, a decrease of $392 million from December 31, 2003 levels. The decrease in the first nine months of 2004 was in our large corporate portfolio, which was down $455 million, or 45 percent. Decreases in total commercial nonperforming loans and leases were due to charge-offs of $504 million, loan sales of $434 million and increased returns to performing status of $310 million, offset by new nonaccrual loan inflows of $1.0 billion. Reduced levels of paydowns and payoffs, compared to the same periods in 2003, reflect the lower levels of nonperforming loans and leases resulting from the improvement in credit quality experienced in the last few quarters.

 

Nonperforming commercial - domestic loans decreased $397 million and represented 0.81 percent of commercial – domestic loans at September 30, 2004 compared to 1.52 percent at December 31, 2003. Nonperforming commercial - foreign loans decreased $105 million and represented 2.49 percent of commercial - foreign loans at September 30, 2004 compared to 5.37 percent at December 31, 2003. Also, nonperforming commercial real estate loans decreased $6 million and represented 0.44 percent of commercial real estate loans at September 30, 2004 compared to 0.73 percent at December 31, 2003. These decreases were offset by a $116 million increase in nonperforming commercial lease financing, primarily related to commercial aviation. Nonperforming commercial lease financing represented 1.22 percent of commercial lease financing at September 30, 2004 compared to 1.31 percent at December 31, 2003.

 

Consumer nonperforming loans increased $65 million to $703 million, and represented 0.22 percent of consumer loans at September 30, 2004 compared to $638 million, representing 0.27 percent of consumer loans at December 31, 2003. The increase in nonperforming consumer loans was driven by the addition of $127 million of nonperforming consumer loans on April 1, 2004 related to FleetBoston, of which $46 million was in Other Consumer, partially offset by loan sales of $81 million. The improvement in the percentage of nonperforming consumer loans to the total consumer portfolio was driven by growth in residential mortgage, home equity lines and credit card. The amount of previously securitized credit card balances that were returned to our Balance Sheet after the revolving period of securitization was $3.3 billion for the nine months ended September 30, 2004.

 

Nonperforming asset sales for the nine months ended September 30, 2004 were $665 million. These nonperforming asset sales were comprised of $434 million of nonperforming commercial loans, $81 million of nonperforming consumer loans, $50 million of commercial foreclosed properties, $95 million of consumer foreclosed properties and $5 million of nonperforming securities. Nonperforming asset sales for the nine months ended September 30, 2003 were $1.3 billion. These nonperforming asset sales were comprised of $1.1 billion of nonperforming commercial loans, $101 million of nonperforming consumer loans, $48 million of commercial foreclosed properties and $96 million of consumer foreclosed properties.

 

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Table 17

 

Nonperforming Assets

 

(Dollars in millions)


   September 30,
2004


    December 31,
2003


    FleetBoston
April 1, 2004


 

Nonperforming loans and leases

                        

Commercial - domestic

   $ 991     $ 1,388     $ 317  

Commercial - foreign

     473       578       496  

Commercial real estate

     136       142       80  

Commercial lease financing

     243       127       51  
    


 


 


Total commercial

     1,843       2,235       944  
    


 


 


Residential mortgage

     532       531       55  

Home equity lines

     51       43       13  

Direct/Indirect consumer

     26       28       10  

Other consumer

     94       36       49  
    


 


 


Total consumer

     703       638       127  
    


 


 


Total nonperforming loans and leases

     2,546       2,873       1,071  

Nonperforming securities (1)

     157       —         135  

Foreclosed properties

     133       148       14  
    


 


 


Total nonperforming assets(2)

   $ 2,836     $ 3,021     $ 1,220  
    


 


 


Nonperforming assets as a percentage of:

                        

Total assets

     0.26  %     0.41  %     0.61  %

Outstanding loans, leases and foreclosed properties

     0.55       0.81       0.96  

Nonperforming loans and leases as a percentage of outstanding loans and leases

     0.50       0.77       0.84  

(1) Primarily related to international securities held in the AFS portfolio.
(2) Balances do not include $100 and $202 of nonperforming assets, primarily loans held for sale, included in Other Assets at September 30, 2004 and December 31, 2003, respectively.

 

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Table 18 shows the changes in nonperforming assets in the commercial and consumer portfolios, and securities during the most recent five quarters.

 

Table 18

 

Nonperforming Assets Activity

 

(Dollars in millions)


   Third
Quarter
2004


    Second
Quarter
2004


    First
Quarter
2004


    Fourth
Quarter
2003


    Third
Quarter
2003


 

Balance, beginning of period

   $ 3,179     $ 2,485     $ 3,021     $ 3,657     $ 4,430  
    


 


 


 


 


Commercial

                                        

Additions to nonperforming assets:

                                        

FleetBoston balance, April 1, 2004

     —         958       —         —         —    

New nonaccrual loans and foreclosed properties

     207       610       197       574       419  

Advances on loans

     23       37       15       30       11  
    


 


 


 


 


Total commercial additions

     230       1,605       212       604       430  
    


 


 


 


 


Reductions in nonperforming assets:

                                        

Paydowns and payoffs

     (306 )     (500 )     (230 )     (264 )     (241 )

Sales

     (135 )     (288 )     (61 )     (425 )     (504 )

Returns to performing status

     (21 )     (109 )     (180 )     (109 )     (22 )

Charge-offs(1)

     (91 )     (227 )     (186 )     (290 )     (362 )

Transfers to assets held for sale

     —         (41 )     (72 )     (108 )     —    
    


 


 


 


 


Total commercial reductions

     (553 )     (1,165 )     (729 )     (1,196 )     (1,129 )
    


 


 


 


 


Total commercial net additions to (reductions in) nonperforming assets

     (323 )     440       (517 )     (592 )     (699 )
    


 


 


 


 


Consumer

                                        

Additions to nonperforming assets:

                                        

FleetBoston balance, April 1, 2004

     —         127       —         —         —    

New nonaccrual loans and foreclosed properties

     355       367       357       367       393  

Transfers from assets held for sale (2)

     —         —         1       3       2  
    


 


 


 


 


Total consumer additions

     355       494       358       370       395  
    


 


 


 


 


Reductions in nonperforming assets:

                                        

Paydowns and payoffs

     (96 )     (118 )     (49 )     (118 )     (75 )

Sales

     (58 )     (60 )     (58 )     (73 )     (129 )

Returns to performing status

     (194 )     (185 )     (231 )     (195 )     (235 )

Charge-offs(1)

     (28 )     (33 )     (39 )     (28 )     (30 )
    


 


 


 


 


Total consumer reductions

     (376 )     (396 )     (377 )     (414 )     (469 )
    


 


 


 


 


Total consumer net additions to (reductions in) nonperforming assets

     (21 )     98       (19 )     (44 )     (74 )
    


 


 


 


 


Nonperforming securities (3)

                                        

Additions to nonperforming assets:

                                        

FleetBoston balance, April 1, 2004

     —         135       —         —         —    

Other

     32       23       —         —         —    

Reductions in nonperforming assets:

                                        

Paydowns and payoffs

     (26 )     (2 )     —         —         —    

Sales

     (5 )     —         —         —         —    
    


 


 


 


 


Total securities net additions to nonperforming assets

     1       156       —         —         —    
    


 


 


 


 


Total net additions to (reductions in) nonperforming assets

     (343 )     694       (536 )     (636 )     (773 )
    


 


 


 


 


Balance, end of period

   $ 2,836     $ 3,179     $ 2,485     $ 3,021     $ 3,657  
    


 


 


 


 



(1) Certain loan products, including commercial credit card, consumer credit card and consumer non-real estate loans, are not classified as nonperforming; therefore, the charge-offs on these loans are not included above.
(2) Includes assets held for sale that were foreclosed and transferred to foreclosed properties.
(3) Primarily related to international securities held in AFS portfolio.

 

Commercial - domestic loans past due 90 days or more and still accruing interest were $91 million at September 30, 2004, of which, $28 million was related to the addition of the FleetBoston portfolio on April 1, 2004, and $108 million at December 31, 2003. On-balance sheet consumer loans past due 90 days or more and still accruing interest were $938 million at September 30, 2004, of which $116 million was related to the addition of the FleetBoston portfolio on April 1, 2004, which included on-balance sheet credit card loans of $865 million, of which $98 million was related to the FleetBoston portfolio. At December 31, 2003, the comparable amount was $698 million, which included $616 million on-balance sheet credit card loans.

 

Commercial - domestic loan net charge-offs, as presented in Table 19, decreased $138 million to $25 million in the three months ended September 30, 2004 and decreased $389 million to $150 million in the nine months ended September 30, 2004 compared to the same periods in 2003. The reduction in net charge-offs was due to the overall improvement in the quality of the portfolio.

 

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Commercial - foreign loan net charge-offs decreased $62 million to a net recovery of $4 million in the three months ended September 30, 2004 and decreased $63 million to $168 million in the nine months ended September 30, 2004 compared to the same periods in 2003. The decrease was attributable to improvement in economic trends particularly in Brazil and Argentina as well as improvements in the restructured problem accounts.

 

At September 30, 2004 and December 31, 2003, our credit exposure related to Parmalat Finanziaria S.p.A. and its related entities (Parmalat) was zero and $274 million, respectively; the latter number included $30 million of derivatives. Nonperforming loans related to Parmalat were zero and $226 million at September 30, 2004 and December 31, 2003, respectively. At June 30, 2004, we had nonperforming loans of $33 million and derivatives of $1 million related to Parmalat. During the quarter ended September 30, 2004, we received repayments from Parmalat of $39 million, which extinguished the nonperforming loans and remaining derivative exposure. Net charge-offs related to Parmalat for the nine months ended September 30, 2004 were $182 million.

 

Table 19 presents the net charge-offs and net charge-off ratios.

 

Table 19

 

Net Charge-offs and Net Charge-off Ratios(1)

 

     Three Months Ended September 30

    Nine Months Ended September 30

 
     2004

    2003

    2004

    2003

 

(Dollars in millions)


   Amount

    Percent

    Amount

   Percent

    Amount

    Percent

    Amount

   Percent

 

Commercial - domestic

   $ 25     0.08 %   $ 163    0.71 %   $ 150     0.18 %   $ 539    0.76 %

Commercial - foreign

     (4 )   (0.09 )     58    1.84       168     1.43       231    2.29  

Commercial real estate

     1     0.02       13    0.26       (5 )   (0.02 )     32    0.21  

Commercial lease financing

     (3 )   (0.07 )     40    1.62       (1 )   (0.02 )     124    1.64  
    


 

 

  

 


 

 

  

Total commercial

     19     0.04       274    0.82       312     0.24       926    0.90  
    


 

 

  

 


 

 

  

Residential mortgage

     7     0.02       14    0.04       30     0.02       27    0.03  

Home equity lines

     2     0.02       1    0.02       11     0.04       14    0.08  

Direct/Indirect consumer

     56     0.57       39    0.47       153     0.54       133    0.55  

Credit card

     586     5.09       390    5.32       1,614     5.20       1,091    5.47  

Other consumer

     49     2.53       58    2.70       148     2.55       190    2.75  
    


 

 

  

 


 

 

  

Total consumer

     700     0.89       502    0.89       1,956     0.91       1,455    0.91  
    


 

 

  

 


 

 

  

Total net charge-offs

   $ 719     0.57 %   $ 776    0.86 %   $ 2,268     0.66 %   $ 2,381    0.91 %
    


 

 

  

 


 

 

  


(1) Percentage amounts are calculated as annualized net charge-offs divided by average outstanding loans and leases during the period for each loan category.

 

On-balance sheet credit card net charge-offs increased $523 million to $1.6 billion in the nine months ended September 30, 2004 compared to the same period in 2003. The addition of $191 million in charge-offs from the portfolio acquired from FleetBoston also contributed to the increase. In addition to the $6.8 billion of credit card loans acquired from FleetBoston on April 1, 2004, the seasoning of accounts in the portfolio was the other driver of increased charge-offs.

 

At September 30, 2004, included in our held-for-sale portfolio were $1.1 billion of credit card loans acquired in connection with the FleetBoston acquisition. We expect these credit card loans to be sold in the fourth quarter of this year.

 

Included in Other Assets are loans held for sale and leveraged lease partnership interests of $8.2 billion and $194 million, respectively, at September 30, 2004 and $8.4 billion and $332 million, respectively, at December 31, 2003. Included in these balances are nonperforming loans held for sale and leveraged lease partnership interests of $77 million and $23 million, respectively, at September 30, 2004 and $199 million and $3 million, respectively, at December 31, 2003.

 

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Allowance for Credit Losses

 

Allowance for Loan and Lease Losses

 

The Allowance for Loan and Lease Losses is allocated based on three components.

 

The first component of the Allowance for Loan and Lease Losses covers those commercial loans that are either nonperforming or impaired. An allowance is allocated when the discounted cash flows (or collateral value or observable market price) are lower than the carrying value of that loan. For purposes of computing the specific loss component of the allowance, larger impaired loans are evaluated individually and smaller impaired loans are evaluated as a pool using historical loss experience for the respective product type and risk rating of the loans.

 

The second component of the Allowance for Loan and Lease Losses covers performing commercial loans and leases, and consumer loans. The allowance for commercial loans and leases is established by product type after analyzing historical loss experience, by internal risk rating, current economic conditions and performance trends within each portfolio segment. The allowance for consumer loans is based on aggregated portfolio segment evaluations, generally by product type. Loss forecast models are utilized for consumer products that consider a variety of factors including, but not limited to, historical loss experience, estimated defaults or foreclosures based on portfolio trends, delinquencies, economic trends and credit scores.

 

The third component of the Allowance for Loan and Lease Losses is maintained to cover uncertainties that affect our estimate of probable losses. These uncertainties include the imprecision inherent in the forecasting methodologies, as well as domestic and global economic uncertainty, large single name defaults or event risk. We assess these components, and consider other current events and conditions, to determine the overall level of the third component. The relationship of the third component to the total Allowance for Loan and Lease Losses may fluctuate from period to period.

 

We evaluate the adequacy of the Allowance for Loan and Lease Losses based on the combined total of these three components.

 

We monitor differences between estimated and actual incurred loan and lease losses. This monitoring process includes periodic assessments by senior management of loan and lease portfolios and the models used to estimate incurred losses in those portfolios.

 

Additions to the Allowance for Loan and Lease Losses are made by charges to the Provision for Credit Losses. Credit exposures deemed to be uncollectible are charged against the Allowance for Loan and Lease Losses. Recoveries of previously charged off amounts are credited to the Allowance for Loan and Lease Losses.

 

The allowance for total commercial loan and lease losses as presented in Table 21 was $3.6 billion, a $1.1 billion increase from December 31, 2003. This increase was due to the addition on April 1, 2004 of $1.7 billion of FleetBoston allowance for commercial loans and leases to the portfolio partially offset by reduced levels of Allowance for Loan and Lease Losses resulting from improvement in the commercial loan portfolio. Commercial credit quality continues to improve as reflected in the continued declines in both commercial criticized exposure and commercial nonperforming loans and leases. Commercial criticized exposure at September 30, 2004 of $12.0 billion was down $625 million from December 31, 2003 as shown in Table 16, despite the addition of $7.1 billion of FleetBoston criticized commercial exposure as of April 1, 2004. Commercial nonperforming loans and leases totaled $1.8 billion at September 30, 2004, a decrease of $392 million from December 31, 2003. The decrease was driven by net declines of $1.3 billion in the nine months ended September 30, 2004 partially offset by the addition of $944 million on April 1, 2004 of FleetBoston commercial nonperforming loans and leases. Specific reserves on commercial impaired loans decreased $143 million, or 37 percent, in the nine months ended September 30, 2004, reflecting the decrease in our investment in specific loans considered impaired of $523 million to $1.6 billion at September 30, 2004. The net decrease of $523 million included the addition of FleetBoston impaired loans on April 1, 2004 of $914 million offset by net decreases of $1.4 billion in the nine months ended September 30, 2004. The decreased levels of criticized, nonperforming and impaired loans, and the respective reserves were driven by overall improvement in the commercial credit quality, including paydowns and payoffs, loan sales, net charge-offs and returns to performing status.

 

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The Allowance for Loan and Lease Losses in the consumer portfolio increased $832 million to $3.4 billion from December 31, 2003 due to the addition of $592 million on April 1, 2004 of FleetBoston allowance for consumer loans, continued growth in consumer loans, primarily credit card, and increased loss rates on the liquidating consumer businesses. The Allowance for Loan and Lease Losses on the credit card portfolio increased $698 million driven by the addition of the FleetBoston on-balance sheet card portfolio in the second quarter, the return of previously securitized credit card balances to the Balance Sheet in the current quarter, and the growth and seasoning in the credit card portfolio.

 

General reserves on loans and leases increased $583 million in the nine months since December 31, 2003; $508 million of the increase is attributable to the addition of FleetBoston general reserves on April 1, 2004 and $75 million of the increase is due to reserves established in the second quarter for continued uncertainty surrounding the extent, depth and pace of the domestic economic recovery and increased uncertainty in the global arena.

 

Reserve for Unfunded Lending Commitments

 

In addition to the Allowance for Loan and Lease Losses, we also estimate probable losses related to unfunded lending commitments, such as letters of credit and financial guarantees, and binding unfunded loan commitments. The Reserve for Unfunded Lending Commitments is included in Accrued Expenses and Other Liabilities on the Consolidated Balance Sheet.

 

We monitor differences between estimated and actual incurred credit losses. This monitoring process includes periodic assessments by senior management of credit portfolios and the models used to estimate incurred losses in those portfolios.

 

The Reserve for Unfunded Lending Commitments increased $30 million from December 31, 2003, due to the addition of $85 million of reserves on April 1, 2004 associated with FleetBoston unfunded lending commitments partially offset by improvements in overall commercial credit quality.

 

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Table 20 presents a roll-forward of the Allowance for Credit Losses.

 

Table 20

 

Allowance for Credit Losses

 

     Three Months Ended
September 30


    Nine Months Ended
September 30


 

(Dollars in millions)


   2004

    2003

    2004

    2003

 

Allowance for loan and lease losses, beginning of period

   $ 8,767     $ 6,366     $ 6,163     $ 6,358  
    


 


 


 


FleetBoston balance, April 1, 2004

     —         —         2,763       —    

Loans and leases charged off

                                

Commercial – domestic

     (107 )     (240 )     (366 )     (698 )

Commercial – foreign

     (31 )     (74 )     (237 )     (266 )

Commercial real estate

     (3 )     (14 )     (9 )     (36 )

Commercial lease financing

     (6 )     (42 )     (19 )     (130 )
    


 


 


 


Total commercial

     (147 )     (370 )     (631 )     (1,130 )
    


 


 


 


Residential mortgage

     (15 )     (21 )     (49 )     (41 )

Home equity lines

     (9 )     (10 )     (29 )     (30 )

Direct/Indirect consumer

     (88 )     (72 )     (253 )     (243 )

Credit card

     (648 )     (426 )     (1,782 )     (1,191 )

Other consumer

     (75 )     (76 )     (224 )     (257 )
    


 


 


 


Total consumer

     (835 )     (605 )     (2,337 )     (1,762 )
    


 


 


 


Total loans and leases charged off

     (982 )     (975 )     (2,968 )     (2,892 )
    


 


 


 


Recoveries of loans and leases previously charged off

                                

Commercial - domestic

     82       77       216       159  

Commercial - foreign

     35       16       69       35  

Commercial real estate

     2       1       14       4  

Commercial lease financing

     9       2       20       6  
    


 


 


 


Total commercial

     128       96       319       204  
    


 


 


 


Residential mortgage

     8       7       19       14  

Home equity lines

     7       8       18       16  

Direct/Indirect consumer

     32       33       100       110  

Credit card

     62       36       168       100  

Other consumer

     26       19       76       67  
    


 


 


 


Total consumer

     135       103       381       307  
    


 


 


 


Total recoveries of loans and leases previously charged off

     263       199       700       511  
    


 


 


 


Net charge-offs

     (719 )     (776 )     (2,268 )     (2,381 )
    


 


 


 


Provision for loan and lease losses

     690       668       2,118       2,291  

Transfers (1)

     (15 )     —         (53 )     (10 )
    


 


 


 


Allowance for loan and lease losses, September 30

   $ 8,723     $ 6,258     $ 8,723     $ 6,258  
    


 


 


 


Reserve for unfunded lending commitments, beginning of period

   $ 486     $ 475     $ 416     $ 493  

FleetBoston balance, April 1, 2004

     —         —         85       —    

Provision for unfunded lending commitments

     (40 )     (17 )     (55 )     (35 )
    


 


 


 


Reserve for unfunded lending commitments, September 30

   $ 446     $ 458     $ 446     $ 458  
    


 


 


 


Total

   $ 9,169     $ 6,716     $ 9,169     $ 6,716  
    


 


 


 


Loans and leases outstanding at September 30

   $ 511,639     $ 373,098     $ 511,639     $ 373,098  

Allowance for loan and lease losses as a percentage of loans and leases outstanding at September 30

     1.70 %     1.68 %     1.70 %     1.68 %

Commercial allowance for loan and lease losses as a percentage of commercial loans and leases outstanding at September 30

     1.87       2.17       1.87       2.17  

Consumer allowance for loan and lease losses as a percentage of consumer loans and leases outstanding at September 30

     1.05       0.94       1.05       0.94  

Average loans and leases outstanding during the period

   $ 503,078     $ 357,288     $ 458,268     $ 351,119  

Annualized net charge-offs as a percentage of average loans and leases outstanding during the period

     0.57 %     0.86 %     0.66 %     0.91 %

Allowance for loan and lease losses as a percentage of nonperforming loans and leases at September 30

     343       183       343       183  

Ratio of the allowance for loan and lease losses at September 30 to annualized net charge-offs

     3.05       2.03       2.88       1.97  

(1) Includes transfers to loans held for sale.

 

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For reporting purposes, we allocate the Allowance for Loan and Lease Losses across products. However, the allowance is available to absorb all credit losses without restriction. Table 21 presents our allocation by product type.

 

Table 21

 

Allocation of the Allowance for Credit Losses by Product Type

 

     September 30, 2004

    December 31, 2003

   

FleetBoston

April 1, 2004


 

(Dollars in millions)


   Amount

   Percent

    Amount

   Percent

    Amount

   Percent

 

Allowance for loan and lease losses

                                       

Commercial - domestic

   $ 1,517    17.4 %   $ 1,257    20.4 %   $ 704    25.5 %

Commercial - foreign

     1,007    11.5       575    9.3       611    22.1  

Commercial real estate

     690    7.9       413    6.7       264    9.6  

Commercial lease financing

     383    4.4       207    3.4       84    3.0  
    

  

 

  

 

  

Total commercial(1)

     3,597    41.2       2,452    39.8       1,663    60.2  
    

  

 

  

 

  

Residential mortgage

     202    2.3       149    2.4       40    1.4  

Home equity lines

     87    1.0       61    1.0       17    0.6  

Direct/Indirect consumer

     391    4.5       340    5.5       43    1.6  

Credit card

     2,300    26.4       1,602    26.0       466    16.9  

Other consumer

     388    4.4       384    6.2       26    0.9  
    

  

 

  

 

  

Total consumer

     3,368    38.6       2,536    41.1       592    21.4  
    

  

 

  

 

  

General

     1,758    20.2       1,175    19.1       508    18.4  
    

  

 

  

 

  

Allowance for loan and lease losses

     8,723    100.0 %     6,163    100.0 %     2,763    100.0 %
    

  

 

  

 

  

Reserve for unfunded lending commitments

     446            416            85       
    

        

        

      

Total

   $ 9,169          $ 6,579          $ 2,848       
    

        

        

      

(1) Includes allowance for loan and lease losses of commercial impaired loans of $248 and $391 at September 30, 2004 and December 31, 2003, respectively.

 

Problem Loan Management

 

Banc of America Strategic Solutions, Inc. (SSI), a majority-owned consolidated subsidiary of Bank of America, N.A., a wholly-owned subsidiary of the Corporation, was established in 2001 to better align the management of domestic commercial loan credit workout operations by providing more effective and efficient management processes afforded by a closely aligned end-to-end function. In the nine months ended September 30, 2004 and 2003, Bank of America, N.A. sold commercial loans with a gross book balance of approximately $724 million and $3.0 billion, respectively, to SSI. For tax purposes, under the Internal Revenue Code, the sales were treated as a taxable exchange. The tax and accounting treatment of these sales had no financial statement impact on us because the sales were transfers among entities under common control, and there was no change in the individual loan resolution strategies. For additional discussion on Problem Loan Management, see page 50 of the Corporation’s 2003 Annual Report.

 

Market Risk Management

 

Market risk is the potential loss due to adverse changes in the market value or yield of a position. This risk is inherent in the financial instruments associated with our operations and/or activities including loans, deposits, securities, short-term borrowings, long-term debt, trading account assets and liabilities, and derivatives. Market-sensitive assets and liabilities are generated through loans and deposits associated with our traditional banking business, our customer and proprietary trading operations, our ALM process, credit risk management, and mortgage banking activities. More detailed information on our market risk management processes is included in the Corporation’s 2003 Annual Report on pages 50 through 55.

 

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Trading Risk Management

 

The histogram of daily revenue or loss below is a graphic depiction of trading volatility and illustrates the success of trading-related revenue for the twelve months ended September 30, 2004. Trading-related revenue encompasses both proprietary trading and customer-related activities. During the twelve months ended September 30, 2004, positive trading-related revenue was recorded for 87 percent of trading days. Furthermore, only six percent of the total trading days had losses greater than $10 million, and the largest loss was $27 million. This can be compared to the twelve months ended September 30, 2003, where positive trading-related revenue was recorded for 88 percent of trading days and only four percent of total trading days had losses greater than $10 million, with the largest loss being $41 million.

 

Histogram of Daily Trading-related Revenue

Twelve Months Ended September 30, 2004

LOGO

 

The above histogram does not include two losses greater than $50 million associated with MSRs as the losses were related to model changes rather than market changes in the portfolio. For additional information on these losses and the related model changes, see Trading-related Revenue beginning on page 42.

 

To evaluate risk in our trading activities, we focus on the actual and potential volatility of individual positions as well as portfolios. At a portfolio and corporate level, we use Value-at-Risk (VAR) modeling and stress testing. VAR is a key statistic used to measure and manage market risk. Trading limits and VAR are used to manage day-to-day risks and are subject to testing where we compare expected performance to actual performance. This testing provides us a view of our models’ predictive accuracy. All limit excesses are communicated to senior management for review.

 

A VAR model estimates a range of hypothetical scenarios within which the next day’s profit or loss is expected. These estimates are impacted by the nature of the positions in the portfolio and the correlation within the portfolio. Within any VAR model, there are significant and numerous assumptions that will differ from company to company. Our VAR model assumes a 99 percent confidence level. Statistically this means that losses will exceed VAR, on average, one out of 100 trading days, or two to three times a year. Actual losses did not exceed VAR in the twelve months ended September 30, 2004 and exceeded VAR twice during the twelve months ended September 30, 2003.

 

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In addition to reviewing our underlying model assumptions with senior management, we seek to mitigate the uncertainties related to these assumptions and estimates through close monitoring and by updating the assumptions and estimates on an ongoing basis. If the results of our analysis indicate higher than expected levels of risk, proactive measures are taken to adjust risk levels.

 

Table 22 presents average, high and low daily VAR for the twelve months ended September 30, 2004 and 2003.

 

Table 22

 

Trading Activities Market Risk

 

     Twelve Months Ended September 30

     2004

   2003

(Dollars in millions)


  

Average

VAR


   

High

VAR (1)


  

Low

VAR (1)


  

Average

VAR


   

High

VAR (1)


  

Low

VAR (1)


               

Foreign exchange

   $ 3.4     $ 6.2    $ 1.4    $ 4.0     $ 7.8    $ 1.5

Interest rate

     26.6       51.5      12.9      28.6       65.2      15.1

Credit (2)

     28.5       52.5      17.6      19.3       24.8      14.9

Real estate/mortgage(3)

     11.3       26.0      4.6      14.2       41.4      2.5

Equities

     22.5       51.5      7.9      18.1       53.8      5.0

Commodities

     6.0       10.2      3.8      10.3       19.3      5.5

Portfolio diversification

     (54.8 )     —        —        (61.2 )     —        —  
    


 

  

  


 

  

Total trading portfolio

   $ 43.5     $ 78.5    $ 22.4    $ 33.3     $ 91.0    $ 11.2
    


 

  

  


 

  


(1) The high and low for the total portfolio may not equal the sum of the individual components as the highs or lows of the individual portfolios may have occurred on different trading days.
(2) Credit includes credit fixed income and credit default swaps used for credit risk management.
(3) Real estate/mortgage, which is included in the fixed income category in Table 7 includes capital market real estate and the Certificates. Effective June 1, 2004, Real estate/mortgage no longer includes the Certificates. For additional information on the Certificates see Note 1 of the Consolidated Financial Statements.

 

During the fourth quarter of 2002, we completed an enhancement of our methodology used in the VAR risk aggregation calculation. This approach utilizes historical market conditions over the last three years to derive estimates of trading risk and provides the ability to aggregate trading risk across different businesses. Historically, we used a mathematical method to allocate risk across different trading businesses that did not assume the benefit of diversification across markets. This change resulted in a lower VAR calculation starting in the fourth quarter 2002.

 

Approximately $4.0 million of the increase in average VAR for the twelve months ended September 30, 2004 was attributable to the addition of FleetBoston in the second quarter of 2004. The remaining increase in average VAR for the twelve months ended September 30, 2004 was primarily due to increases in the average risk taken in credit and equities. The increase in equities was mainly due to the increased economic risk from customer-facilitated transactions that were held in inventory during portions of 2003 and 2004. The increase in credit was mainly due to an increase in risk in portfolio management hedges used for credit risk management.

 

Stress Testing

 

Because the very nature of a VAR model suggests results can exceed our estimates, we “stress test” our portfolio. Stress testing estimates the value change in our trading portfolio due to abnormal market movements. Various stress scenarios are run regularly against the trading portfolio to verify that, even under extreme market moves, we will preserve our capital; to determine the effects of significant historical events; and to determine the effects of specific, extreme hypothetical, but plausible events. The results of the stress scenarios are calculated daily and reported to senior management as part of the regular reporting process. The results of certain specific, extreme hypothetical scenarios are presented to the Asset and Liability Committee.

 

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Interest Rate Risk Management

 

Interest rate risk represents the most significant market risk exposure to our non-trading financial instruments. Our overall goal is to manage interest rate sensitivity so that movements in interest rates do not adversely affect Net Interest Income. Interest rate risk is measured as the potential volatility in our Net Interest Income caused by changes in market interest rates. Client facing activities, primarily lending and deposit-taking, create interest rate sensitive positions on our balance sheet. Interest rate risk from these activities as well as the impact of ever-changing market conditions, is mitigated using the ALM process.

 

At September 30, 2004, we remained well positioned for future rising interest rates and curve flattening to the extent implied by the forward market curve. Table 23 provides our estimated Net Interest Income at risk over the subsequent year from September 30, 2004, December 31, 2003 and September 30, 2003, resulting from a 100 bp gradual (over 12 months) parallel increase or decrease in interest rates from the forward market curve calculated as of September 30, 2004, December 31, 2003 and September 30, 2003, respectively.

 

Table 23

Estimated Net Interest Income at Risk

 

     -100 bp

    +100bp

 

September 30, 2004

   0.9 %   (1.6 )%

December 31, 2003

   1.2     (1.1 )

September 30, 2003

   (0.6 )   (0.2 )

 

As part of the ALM process, we use securities, residential mortgages, and interest rate and foreign exchange derivatives in managing interest rate sensitivity.

 

Securities

 

The securities portfolio is integral to our ALM process. The decision to purchase or sell securities is based upon the current assessment of economic and financial conditions, including the interest rate environment, liquidity and regulatory requirements, and the relative mix of our cash and derivative positions. During the nine months ended September 30, 2004 and 2003, we purchased securities of $193.3 billion and $178.0 billion, respectively, sold $72.4 billion and $155.9 billion, respectively and received paydowns of $23.0 billion and $25.3 billion, respectively. Not included in the purchases above were $65.9 billion of forward purchase contracts of both mortgage-backed securities and mortgage loans at September 30, 2004 settling from October 2004 to January 2005 with an average yield of 5.50 percent, and $49.3 billion of forward purchase contracts of both mortgage-backed securities and mortgage loans at September 30, 2003 that settled from November 2003 to February 2004 with an average yield of 5.96 percent. There were also $36.1 billion of forward sale contracts of mortgage-backed securities at September 30, 2004 settling from October 2004 to November 2004 with an average yield of 5.51 percent. These forward purchase and sale contracts were accounted for as derivatives and designated as cash flow hedges with their net-of-tax unrealized gains and losses included in Accumulated OCI. For additional information on derivatives designated as cash flow hedges see Note 4 of the Consolidated Financial Statements. The forward purchase and sale contracts at September 30, 2004 were also included in Table 24. During the year, we continuously monitored the interest rate risk position of the portfolio and repositioned the securities portfolio in order to manage prepayment risk and to take advantage of interest rate fluctuations. Through sales in the securities portfolio, we realized $2.0 billion and $802 million in Gains on Sales of Securities during the nine months ended September 30, 2004 and 2003, respectively.

 

Residential Mortgage Portfolio

 

During the nine months ended September 30, 2004 and 2003, we purchased $57.7 billion and $89.1 billion, respectively, of residential mortgages for our ALM portfolio and interest rate risk management. Not included in the purchases above were $3.4 billion of forward purchase commitments of mortgage loans at September 30, 2004 settling in November 2004. These commitments, included in Table 24, were accounted for as derivatives at September 30, 2004 under the provisions of SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (SFAS 149) and their net-of-tax unrealized gains and losses were included in

 

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Accumulated OCI. The pre-tax unrealized gain on these forward purchase commitments at September 30, 2004 was $11 million. During the nine months ended September 30, 2004 there were no sales of whole mortgage loans. During the nine months ended September 30, 2003, we sold $24.2 billion of whole mortgage loans and recognized $723 million in gains on the sales included in Other Noninterest Income. Additionally, during the nine months ended September 30, 2004 and 2003, we received paydowns of $31.7 billion and $54.2 billion, respectively.

 

Interest Rate and Foreign Exchange Derivative Contracts

 

Interest rate and foreign exchange derivative contracts are utilized in our ALM process and serve as an efficient, low-cost tool to mitigate our risk. We use derivatives to hedge or offset the changes in cash flows or market values of our balance sheet. See Note 4 of the Consolidated Financial Statements for additional information on our hedging activities.

 

Our interest rate contracts are generally nonleveraged generic interest rate and basis swaps, options, futures and forwards. In addition, we use foreign currency contracts to mitigate the foreign exchange risk associated with foreign currency-denominated assets and liabilities, as well as our equity investments in foreign subsidiaries. Table 24 reflects the notional amounts, fair value, weighted average receive fixed and pay fixed rates, expected maturity and estimated duration of our ALM derivatives at September 30, 2004 and December 31, 2003.

 

Table 24

Asset and Liability Management Interest Rate and Foreign Exchange Contracts

 

September 30, 2004

 

(Dollars in millions, average

estimated duration in years)


  

Fair
Value


    Expected Maturity

   

Average
Estimated
Duration


     Total

    2004

    2005

    2006

    2007

    2008

    Thereafter

   

Cash flow hedges

                                                                    

Receive fixed interest rate swaps (1)

   $ (650 )                                                           3.96

Notional amount

           $ 115,999     $ —       $ 2,500     $ 8,280     $ 21,098     $ 44,223     $ 39,898      

Weighted average fixed rate

             3.61 %     —   %     2.09 %     3.61 %     2.94 %     3.47 %     4.21 %    

Pay fixed interest rate swaps (1)

     (2,795 )                                                           4.29

Notional amount

           $ 169,311     $ 10     $ 5,053     $ 1,060     $ 81,411     $ 16,138     $ 65,639      

Weighted average fixed rate

             4.22 %     5.10 %     2.79 %     5.03 %     3.67 %     3.91 %     5.08 %    

Basis swaps

     (4 )                                                            

Notional amount

           $ 6,700     $ —       $ 500     $ 4,400     $ —       $ —       $ 1,800      

Option products (2)

     1,312                                                              

Notional amount (3)

             229,247       51,267       95,000       50,000       5,500       14,800       12,680      

Futures and forward rate contracts (4)

     945                                                              

Notional amount (3)

             13,176       43,176       (21,000 )     (9,000 )     —         —         —        
    


                                                           

Total net cash flow positions

   $ (1,192 )                                                            
    


                                                           

Fair value hedges

                                                                    

Receive fixed interest rate swaps (1)

   $ 812                                                             5.27

Notional amount

           $ 44,152     $ —       $ 2,580     $ 4,363     $ 2,500     $ 2,638     $ 32,071      

Weighted average fixed rate

             5.01 %     —   %     4.78 %     5.23 %     4.53 %     3.46 %     5.16 %    

Pay fixed interest rate swaps (1)

     (2 )                                                           5.39

Notional amount

           $ 16     $ —       $ —       $ —       $ —       $ —       $ 16      

Weighted average fixed rate

             5.96 %     —   %     —   %     —   %     —   %     —   %     5.96 %    

Foreign exchange contracts

     1,296                                                              

Notional amount

           $ 12,787     $ 155     $ 177     $ 1,996     $ 1,290     $ (260 )   $ 9,429      
    


                                                           

Total net fair value positions

   $ 2,106                                                              
    


                                                           

Closed interest rate contracts (5,6)

     260                                                              
    


                                                           

Total ALM contracts

   $ 1,174                                                              
    


                                                           

 

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Table 24

Asset and Liability Management Interest Rate and Foreign Exchange Contracts (continued)

 

December 31, 2003

 

(Dollars in millions, average

estimated duration in years)


  

Fair
Value


    Expected Maturity

   

Average
Estimated

Duration


     Total

    2004

    2005

    2006

    2007

    2008

    Thereafter

   

Cash flow hedges

                                                                    

Receive fixed interest rate swaps (1)

   $ (2,184 )                                                           5.22

Notional amount

           $ 122,547     $ —       $ 2,000     $ —       $ 33,848     $ 33,561     $ 53,138      

Weighted average fixed rate

             3.46 %     —   %     2.10 %     —   %     3.08 %     2.97 %     4.06 %    

Pay fixed interest rate swaps (1)

     (2,101 )                                                           5.51

Notional amount

           $ 134,654     $ —       $ 3,641     $ 14,501     $ 39,142     $ 13,501     $ 63,869      

Weighted average fixed rate

             4.00 %     —   %     2.09 %     2.92 %     3.33 %     3.77 %     4.81 %    

Basis swaps

     38                                                              

Notional amount

           $ 16,356     $ 9,000     $ 500     $ 4,400     $ 45     $ 590     $ 1,821      

Option products (2)

     1,582                                                              

Notional amount (3)

             84,965       1,267       50,000       3,000       —         30,000       698      

Futures and forward rate contracts (4)

     1,911                                                              

Notional amount (3)

             106,760       86,760       20,000       —         —         —         —        
    


                                                           

Total net cash flow positions

   $ (754 )                                                            
    


                                                           

Fair value hedges

                                                                    

Receive fixed interest rate swaps (1)

   $ 980                                                             6.12

Notional amount

           $ 34,225     $ —       $ 2,580     $ 4,363     $ 2,500     $ 2,638     $ 22,144      

Weighted average fixed rate

             4.96 %     —   %     4.78 %     5.22 %     4.53 %     3.46 %     5.16 %    

Pay fixed interest rate swaps (1)

     (2 )                                                           3.70

Notional amount

           $ 924     $ 81     $ 47     $ 80     $ 112     $ 149     $ 455      

Weighted average fixed rate

             6.00 %     6.04 %     4.84 %     4.54 %     7.61 %     4.77 %     6.38 %    

Foreign exchange contracts

     1,129                                                              

Notional amount

           $ 7,364     $ 100     $ 488     $ 468     $ (379 )   $ 1,560     $ 5,127      

Futures and forward rate contracts (4)

     (3 )                                                            

Notional amount (3)

             (604 )     (604 )     —         —         —         —         —        
    


                                                           

Total net fair value positions

   $ 2,104                                                              
    


                                                           

Closed interest rate contracts (5,6)

     839                                                              
    


                                                           

Total ALM contracts

   $ 2,189                                                              
    


                                                           

(1) At September 30, 2004, $44.3 billion of the receive fixed interest rate swap notional and $113.0 billion of the pay fixed interest swap notional represented forward starting swaps that will not be effective until their respective contractual start dates. At December 31, 2003, $14.2 billion of the receive fixed interest rate swap notional and $114.5 billion of the pay fixed interest rate swap notional represented forward starting swaps that will not be effective until their respective contractual start dates.
(2) Option products include caps, floors and exchange-traded options on index futures contracts. These strategies may include option collars or spread strategies, which involve the buying and selling of options on the same underlying security or interest rate index.
(3) Reflects the net of long and short positions.
(4) Futures and forward rate contracts include Eurodollar futures, U.S. Treasury futures, and forward purchase and sale contracts. Included are $69.2 billion of forward purchase contracts, and $36.1 billion of forward sale contracts of mortgage-backed securities and mortgage loans, at September 30, 2004, as discussed on pages 78 and 79. At December 31, 2003 the forward purchase and sale contracts of mortgage- backed securities and mortgage loans amounted to $69.8 billion and $8.0 billion, respectively.
(5) Represents the unamortized net realized deferred gains associated with closed contracts. As a result, no notional amount is reflected for expected maturity.
(6) The $260 million and $839 million deferred gains as of September 30, 2004 and December 31, 2003, respectively, on closed interest rate contracts primarily consisted of gains on closed ALM swaps and forward contracts. Of the $260 million unamortized net realized deferred gains, a $254 million loss was included in Accumulated OCI, a $538 million gain was included as a basis adjustment of long-term debt, and a $24 million loss was primarily included as a basis adjustment of mortgage loans and available-for-sale securities at September 30, 2004. As of December 31, 2003, a $238 million gain was included in Accumulated OCI, a $631 million gain was primarily included as a basis adjustment of long-term debt, and a $30 million loss was included as a basis adjustment of mortgage loans.

 

Consistent with our strategy of managing interest rate sensitivity to mitigate changes in value of other financial instruments, the notional amount of our interest rate swap position changed to a net pay fixed position of $9.2 billion at September 30, 2004 compared to a net received fixed position of $21.2 billion at December 31, 2003. The net option position increased $144.3 billion to $229.2 billion at September 30, 2004 compared to December 31, 2003 to offset interest rate risk in other portfolios. The changes in our swap and option positions were part of our interest sensitivity management resulting in a repositioning of our hedges of variable rate assets and liabilities.

 

Mortgage Banking Risk Management

 

We manage changes in the value of MSRs by entering into derivative financial instruments and by purchasing and selling Securities. We designate certain derivatives such as purchased options and interest rate swaps as fair value hedges of specified MSRs under SFAS 133. At September 30, 2004, the amount of MSRs identified as being hedged by derivatives in accordance with SFAS 133 was approximately $1.2 billion. From time to time we hold additional derivatives and certain Securities as economic hedges of MSRs, which are not designated as SFAS 133 accounting hedges. At September 30, 2004, the amount of MSRs covered by such economic hedges was $1.1 billion. See Notes 1 and 6 of the Consolidated Financial Statements for additional information.

 

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The notional amount of the derivative contracts designated as SFAS 133 hedges of MSRs at September 30, 2004 was $13.8 billion. The related pre-tax unrealized loss was $11 million. The changes in the fair values of the derivative contracts are substantially offset by changes in the fair values of the MSRs that are hedged by these derivative contracts. There were no notional amounts of derivative contracts used as economic hedges of MSRs not designated as SFAS 133 accounting hedges at September 30, 2004. The carrying value of AFS Securities held as economic hedges of MSRs was $4.8 billion at September 30, 2004. The related net-of-tax unrealized gain on these AFS Securities, which is recorded in Accumulated OCI, was $6 million at September 30, 2004. See Note 1 of the Consolidated Financial Statements for additional discussion of these financial instruments in the Mortgage Servicing Rights section.

 

Operational Risk Management

 

Operational risk is the potential for loss resulting from events involving people, processes, technology, external events, execution, legal, compliance and regulatory matters, and reputation. Successful operational risk management is particularly important to a diversified financial services company like ours because of the very nature, volume and complexity of our various businesses.

 

In keeping with our management governance structure, the lines of business are responsible for all the risks within the business including operational risks. Such risks are managed through corporate-wide or line of business specific policies and procedures, controls, and monitoring tools. Examples of these include personnel management practices, data reconciliation processes, fraud management units, transaction processing monitoring and analysis, business recovery planning, and new product introduction processes.

 

Operational risks fall into two major classifications, corporate-wide and business specific risks affecting all business lines. “Best industry practices”, controls and monitoring tools are used at the corporate level to monitor and manage operational risk. For business specific risks, operational and compliance risk management work with the business segments to drive consistency in policies, processes, assessments and use of “best industry practices”.

 

Operational and compliance risk management, working in conjunction with senior business segment executives, have developed key tools to help manage, monitor and quantify operational risk. One such tool the businesses and executive management utilize is a corporate-wide quarterly self-assessment process, which helps to identify and evaluate the status of risk issues, including mitigation plans, if appropriate. The goal of this process, which originates at the line of business level, is to continuously assess changing market and business conditions. The self-assessment process also assists in identifying emerging operational risk issues and determining how they should be managed, at the line of business or corporate level. In addition to the self-assessment process, key operational risk indicators have been developed and are used to help identify trends and issues on both a corporate and a line of business level. For additional information on operational risk, see page 55 of the Corporation’s 2003 Annual Report.

 

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

See Management’s Discussion and Analysis of Results of Operations and Financial Condition - Market Risk Management beginning on page 75 and the sections referenced therein for Quantitative and Qualitative Disclosures about Market Risk.

 

Item 4. CONTROLS AND PROCEDURES

 

Evaluation of disclosure controls and procedures

 

As of the end of the period covered by this report and pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the Exchange Act), the Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness and design of the Corporation’s disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based upon that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded, as of the end of the period covered by this report, that the Corporation’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting information required to be disclosed by the Corporation, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

Changes in internal controls

 

In addition and as of the end of the period covered by this report, there have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter to which this report relates that have materially affected or are reasonably likely to materially affect, the internal control over financial reporting.

 

Part II. Other Information

 

Item 1. Legal Proceedings      See Note 9 of the Consolidated Financial Statements for litigation disclosure that supplements the disclosure in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, the Current Reports on Form 8-K filed since December 31, 2003 and the quarterly reports on Form 10-Q for the quarters ended March 31, 2004 and June 30, 2004.
Item 2. Unregistered Sales of Equity Securities and the Use of Proceeds     

At September 30, 2004, all put options had matured and there were no remaining put options outstanding.

 

See Table 9 for information on the monthly share repurchase activity for the three and nine months ended September 30, 2004 and 2003, including total common shares repurchased under announced programs, weighted average per share price and the remaining buyback authority under announced programs.

 

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Item 6. Exhibits      Exhibit 11      Earnings Per Share Computation - included in Note 10 of the Consolidated Financial Statements
       Exhibit 12     

Ratio of Earnings to Fixed Charges

Ratio of Earnings to Fixed Charges and Preferred Dividends

       Exhibit 31(a)      Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
       Exhibit 31(b)      Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
       Exhibit 32(a)      Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
       Exhibit 32(b)      Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    Bank of America Corporation
    Registrant
Date: November 9, 2004  

/s/ Neil A. Cotty


    Neil A. Cotty
    Chief Accounting Officer
    (Duly Authorized Officer)

 

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Bank of America Corporation

 

Form 10-Q

 

Index to Exhibits

 

Exhibit

 

Description


    11   Earnings Per Share Computation - included in Note 10 of the Consolidated Financial Statements
    12  

Ratio of Earnings to Fixed Charges

Ratio of Earnings to Fixed Charges and Preferred Dividends

31(a)   Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31(b)   Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32(a)   Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32(b)   Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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