10-Q 1 d10q.htm BANK OF AMERICA FORM 10-Q Bank of America Form 10-Q
Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

þ

 

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

 

For the Quarterly Period Ended March 31, 2003

 

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

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     þ             No    ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

 

Yes     þ             No    ¨

 

On April 30, 2003, there were 1,498,039,156 shares of Bank of America Corporation Common Stock outstanding.

 



Table of Contents

 

Bank of America Corporation

 

March 31, 2003 Form 10-Q


 

INDEX

 

              

Page


Part I

  

Item 1.

  

Financial Statements:

    

Financial Information

       

Consolidated Statement of Income for the Three
Months Ended March 31, 2003 and 2002

  

3

         

Consolidated Balance Sheet at March 31, 2003 and
December 31, 2002

  

4

         

Consolidated Statement of Changes in Shareholders’
Equity for the Three Months Ended March 31, 2003 and 2002

  

5

         

Consolidated Statement of Cash Flows for the Three
Months Ended March 31, 2003 and 2002

  

6

         

Notes to Consolidated Financial Statements

  

7

    

Item 2.

  

Management’s Discussion and Analysis of Results of
Operations and Financial Condition

  

19

    

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

  

51

    

Item 4.

  

Controls and Procedures

  

51

                

Part II

              

Other Information

  

Item 1.

  

Legal Proceedings

  

51

    

Item 2.

  

Changes in Securities and Use of Proceeds

  

51

    

Item 6.

  

Exhibits and Reports on Form 8-K

  

51

    

Signature

  

53

    

Certification of the Chief Executive Officer

  

54

    

Certification of the Chief Financial Officer

  

55

    

Index to Exhibits

  

56

 

2


Table of Contents

 

Part I. Financial Information

Item 1. Financial Statements


Bank of America Corporation and Subsidiaries

Consolidated Statement of Income


    

Three Months Ended March 31


(Dollars in millions, except per share information)


  

2003


    

2002


Interest income

               

Interest and fees on loans and leases

  

$

5,348

 

  

$

5,445

Interest and dividends on securities

  

 

778

 

  

 

946

Federal funds sold and securities purchased under agreements to resell

  

 

194

 

  

 

215

Trading account assets

  

 

1,042

 

  

 

878

Other interest income

  

 

363

 

  

 

387

    


  

Total interest income

  

 

7,725

 

  

 

7,871

    


  

Interest expense

               

Deposits

  

 

1,183

 

  

 

1,344

Short-term borrowings

  

 

453

 

  

 

477

Trading account liabilities

  

 

308

 

  

 

285

Long-term debt

  

 

572

 

  

 

612

    


  

Total interest expense

  

 

2,516

 

  

 

2,718

    


  

Net interest income

  

 

5,209

 

  

 

5,153

Noninterest income

               

Consumer service charges

  

 

777

 

  

 

691

Corporate service charges

  

 

577

 

  

 

567

    


  

Total service charges

  

 

1,354

 

  

 

1,258

    


  

Consumer investment and brokerage services

  

 

378

 

  

 

381

Corporate investment and brokerage services

  

 

165

 

  

 

170

    


  

Total investment and brokerage services

  

 

543

 

  

 

551

    


  

Mortgage banking income

  

 

405

 

  

 

195

Investment banking income

  

 

378

 

  

 

341

Equity investment gains (losses)

  

 

(68

)

  

 

26

Card income

  

 

681

 

  

 

577

Trading account profits

  

 

114

 

  

 

345

Other income

  

 

278

 

  

 

147

    


  

Total noninterest income

  

 

3,685

 

  

 

3,440

    


  

Total revenue

  

 

8,894

 

  

 

8,593

Provision for credit losses

  

 

833

 

  

 

840

Gains on sales of securities

  

 

273

 

  

 

44

Noninterest expense

               

Personnel

  

 

2,459

 

  

 

2,446

Occupancy

  

 

472

 

  

 

432

Equipment

  

 

284

 

  

 

262

Marketing

  

 

230

 

  

 

170

Professional fees

  

 

125

 

  

 

91

Amortization of intangibles

  

 

54

 

  

 

55

Data processing

  

 

266

 

  

 

205

Telecommunications

  

 

124

 

  

 

119

Other general operating

  

 

703

 

  

 

714

    


  

Total noninterest expense

  

 

4,717

 

  

 

4,494

    


  

Income before income taxes

  

 

3,617

 

  

 

3,303

Income tax expense

  

 

1,193

 

  

 

1,124

    


  

Net income

  

$

2,424

 

  

$

2,179

    


  

Net income available to common shareholders

  

$

2,423

 

  

$

2,178

    


  

Per common share information

               

Earnings

  

$

1.62

 

  

$

1.41

    


  

Diluted earnings

  

$

1.59

 

  

$

1.38

    


  

Dividends declared

  

$

0.64

 

  

$

0.60

    


  

Average common shares issued and outstanding (in thousands)

  

 

1,499,405

 

  

 

1,543,471

    


  

 

See accompanying notes to consolidated financial statements.

 

 

3


Table of Contents

Bank of America Corporation and Subsidiaries

Consolidated Balance Sheet


(Dollars in millions)


  

March 31 2003


    

December 31 2002


 

Assets

                 

Cash and cash equivalents

  

$

25,069

 

  

$

24,973

 

Time deposits placed and other short-term investments

  

 

5,523

 

  

 

6,813

 

Federal funds sold and securities purchased under agreements to resell (includes $49,740 and $44,779 pledged as collateral)

  

 

49,809

 

  

 

44,878

 

Trading account assets (includes $32,597 and $35,515 pledged as collateral)

  

 

65,733

 

  

 

63,996

 

Derivative assets

  

 

35,409

 

  

 

34,310

 

Securities:

                 

Available-for-sale (includes $31,171 and $32,919 pledged as collateral)

  

 

75,511

 

  

 

68,122

 

Held-to-maturity, at cost (market value—$928 and $1,001)

  

 

927

 

  

 

1,026

 

    


  


Total securities

  

 

76,438

 

  

 

69,148

 

    


  


Loans and leases

  

 

343,412

 

  

 

342,755

 

Allowance for credit losses

  

 

(6,853

)

  

 

(6,851

)

    


  


Loans and leases, net of allowance for credit losses

  

 

336,559

 

  

 

335,904

 

    


  


Premises and equipment, net

  

 

6,643

 

  

 

6,717

 

Mortgage banking assets

  

 

1,995

 

  

 

2,110

 

Goodwill

  

 

11,396

 

  

 

11,389

 

Core deposit intangibles and other intangibles

  

 

1,065

 

  

 

1,095

 

Other assets

  

 

64,126

 

  

 

59,125

 

    


  


Total assets

  

$

679,765

 

  

$

660,458

 

    


  


Liabilities

                 

Deposits in domestic offices:

                 

Noninterest-bearing

  

$

121,127

 

  

$

122,686

 

Interest-bearing

  

 

242,287

 

  

 

232,320

 

Deposits in foreign offices:

                 

Noninterest-bearing

  

 

2,331

 

  

 

1,673

 

Interest-bearing

  

 

29,431

 

  

 

29,779

 

    


  


Total deposits

  

 

395,176

 

  

 

386,458

 

    


  


Federal funds purchased and securities sold under agreements to repurchase

  

 

72,976

 

  

 

65,079

 

Trading account liabilities

  

 

23,578

 

  

 

25,574

 

Derivative liabilities

  

 

22,876

 

  

 

23,566

 

Commercial paper and other short-term borrowings

  

 

29,729

 

  

 

25,234

 

Accrued expenses and other liabilities

  

 

15,905

 

  

 

17,052

 

Long-term debt

  

 

63,442

 

  

 

61,145

 

Trust preferred securities

  

 

6,031

 

  

 

6,031

 

    


  


Total liabilities

  

 

629,713

 

  

 

610,139

 

    


  


Commitments and contingencies (Note 5)

                 

Shareholders' equity

                 

Preferred stock, $0.01 par value; authorized—100,000,000 shares; issued and outstanding—1,336,200 and 1,356,749 shares

  

 

57

 

  

 

58

 

Common stock, $0.01 par value; authorized—5,000,000,000 shares; issued and outstanding—1,497,530,740 and 1,500,691,103 shares

  

 

127

 

  

 

496

 

Retained earnings

  

 

49,978

 

  

 

48,517

 

Accumulated other comprehensive income

  

 

74

 

  

 

1,232

 

Other

  

 

(184

)

  

 

16

 

    


  


Total shareholders' equity

  

 

50,052

 

  

 

50,319

 

    


  


Total liabilities and shareholders' equity

  

$

679,765

 

  

$

660,458

 

    


  


 

See accompanying notes to consolidated financial statements.

 

4


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


    

Retained Earnings


      

Accumulated Other Comprehensive Income (Loss) (1)


    

Other


    

Total Share-holders' Equity


      

Comprehensive Income


 
     

Shares


    

Amount


                    

Balance, December 31, 2001

  

$

65

 

  

1,559,297

 

  

$

5,076

 

  

$

42,980

 

    

$

437

 

  

$

(38

)

  

$

48,520

 

          

Net income

                           

 

2,179

 

                      

 

2,179

 

    

$

2,179

 

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

                                      

 

(3

)

           

 

(3

)

    

 

(3

)

Net unrealized gains on foreign currency translation adjustments

                                      

 

2

 

           

 

2

 

    

 

2

 

Net unrealized losses on derivatives

                                      

 

(508

)

           

 

(508

)

    

 

(508

)

Cash dividends declared:

                                                                         

Common

                           

 

(925

)

                      

 

(925

)

          

Preferred

                           

 

(1

)

                      

 

(1

)

          

Common stock issued under employee plans

           

16,323

 

  

 

808

 

                      

 

9

 

  

 

817

 

          

Common stock repurchased

           

(31,207

)

  

 

(1,955

)

                               

 

(1,955

)

          

Conversion of preferred stock

  

 

(3

)

  

105

 

  

 

3

 

                                                

Other

           

3

 

  

 

17

 

  

 

12

 

             

 

14

 

  

 

43

 

          
    


  

  


  


    


  


  


    


Balance, March 31, 2002

  

$

62

 

  

1,544,521

 

  

$

3,949

 

  

$

44,245

 

    

$

(72

)

  

$

(15

)

  

$

48,169

 

    

$

1,670

 

    


  

  


  


    


  


  


    


Balance, December 31, 2002

  

$

58

 

  

1,500,691

 

  

$

496

 

  

$

48,517

 

    

$

1,232

 

  

$

16

 

  

$

50,319

 

          

Net income

                           

 

2,424

 

                      

 

2,424

 

    

$

2,424

 

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

                                      

 

(9

)

           

 

(9

)

    

 

(9

)

Net unrealized gains on foreign currency translation adjustments

                                      

 

33

 

           

 

33

 

    

 

33

 

Net unrealized losses on derivatives

                                      

 

(1,182

)

           

 

(1,182

)

    

 

(1,182

)

Cash dividends declared:

                                                                         

Common

                           

 

(961

)

                      

 

(961

)

          

Preferred

                           

 

(1

)

                      

 

(1

)

          

Common stock issued under employee plans

           

15,206

 

  

 

818

 

                      

 

(173

)

  

 

645

 

          

Common stock repurchased

           

(18,400

)

  

 

(1,260

)

                               

 

(1,260

)

          

Conversion of preferred stock

  

 

(1

)

  

34

 

  

 

1

 

                               

 

—  

 

          

Other

           

—  

 

  

 

72

 

  

 

(1

)

             

 

(27

)

  

 

44

 

          
    


  

  


  


    


  


  


    


Balance, March 31, 2003

  

$

57

 

  

1,497,531

 

  

$

127

 

  

$

49,978

 

    

$

74

 

  

$

(184

)

  

$

50,052

 

    

$

1,266

 

    


  

  


  


    


  


  


    



(1)   At March 31, 2003 and December 31, 2002, Accumulated Other Comprehensive Income (Loss) consisted of net unrealized gains on available-for-sale and marketable equity securities of $485 and $494, respectively; foreign currency translation adjustments of $(135) and $(168), respectively; and net unrealized gains (losses) on derivatives of $(187) and $995, respectively.

 

See accompanying notes to consolidated financial statements.

 

 

5


Table of Contents

Bank of America Corporation and Subsidiaries

Consolidated Statement of Cash Flows


    

Three Months Ended March 31


 

(Dollars in millions)


  

2003


    

2002


 

Operating activities

                 

Net income

  

$

2,424

 

  

$

2,179

 

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

                 

Provision for credit losses

  

 

833

 

  

 

840

 

Gains on sales of securities

  

 

(273

)

  

 

(44

)

Depreciation and premises improvements amortization

  

 

224

 

  

 

217

 

Amortization of intangibles

  

 

54

 

  

 

55

 

Deferred income tax benefit

  

 

(94

)

  

 

(141

)

Net increase in trading and hedging instruments

  

 

(6,854

)

  

 

(2,095

)

Net (increase) decrease in other assets

  

 

(7,037

)

  

 

9,584

 

Net increase (decrease) in accrued expenses and other liabilities

  

 

(604

)

  

 

266

 

Other operating activities, net

  

 

590

 

  

 

595

 

    


  


Net cash provided by (used in) operating activities

  

 

(10,737

)

  

 

11,456

 

    


  


Investing activities

                 

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

  

 

1,290

 

  

 

(1,124

)

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

  

 

(4,931

)

  

 

(12,663

)

Proceeds from sales of available-for-sale securities

  

 

27,258

 

  

 

27,750

 

Proceeds from maturities of available-for-sale securities

  

 

6,847

 

  

 

7,221

 

Purchases of available-for-sale securities

  

 

(41,285

)

  

 

(24,916

)

Proceeds from maturities of held-to-maturity securities

  

 

99

 

  

 

12

 

Proceeds from sales and securitizations of loans and leases

  

 

9,182

 

  

 

4,448

 

Other changes in loans and leases, net

  

 

(7,110

)

  

 

(4,893

)

Purchases and originations of mortgage banking assets

  

 

(359

)

  

 

(211

)

Net purchases of premises and equipment

  

 

(150

)

  

 

(551

)

Proceeds from sales of foreclosed properties

  

 

12

 

  

 

83

 

Investment in unconsolidated subsidiary

  

 

(1,600

)

  

 

—  

 

Acquisition of business activities, net

  

 

(71

)

  

 

(110

)

Other investing activities, net

  

 

586

 

  

 

(7

)

    


  


Net cash used in investing activities

  

 

(10,232

)

  

 

(4,961

)

    


  


Financing activities

                 

Net increase (decrease) in deposits

  

 

8,718

 

  

 

(6,295

)

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

  

 

7,897

 

  

 

818

 

Net increase (decrease) in commercial paper and other short-term borrowings

  

 

4,495

 

  

 

(225

)

Proceeds from issuance of long-term debt and trust preferred securities

  

 

4,578

 

  

 

3,306

 

Retirement of long-term debt and trust preferred securities

  

 

(3,051

)

  

 

(6,344

)

Proceeds from issuance of common stock

  

 

645

 

  

 

817

 

Common stock repurchased

  

 

(1,260

)

  

 

(1,955

)

Cash dividends paid

  

 

(962

)

  

 

(926

)

Other financing activities, net

  

 

(32

)

  

 

(21

)

    


  


Net cash provided by (used in) financing activities

  

 

21,028

 

  

 

(10,825

)

    


  


Effect of exchange rate changes on cash and cash equivalents

  

 

37

 

  

 

(63

)

    


  


Net increase (decrease) in cash and cash equivalents

  

 

96

 

  

 

(4,393

)

Cash and cash equivalents at January 1

  

 

24,973

 

  

 

26,837

 

    


  


Cash and cash equivalents at March 31

  

$

25,069

 

  

$

22,444

 

    


  


 

Net transfers of loans and leases from loans held for sale (included in other assets) to the loan portfolio amounted to $3,621 and $2,534 for the three months ended March 31, 2003 and 2002, respectively.

 

Loans transferred to foreclosed properties amounted to $60 and $82 for the three months ended March 31, 2003 and 2002, respectively.

 

See accompanying notes to consolidated financial statements.

 

6


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 U.S. and in selected international markets. At March 31, 2003, the Corporation operated its banking activities primarily under two charters: Bank of America, National Association (Bank of America, N.A.) and Bank of America, N.A. (USA).

 

Note 1—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. All significant intercompany accounts and transactions have been eliminated.

 

The information contained in the consolidated financial statements is unaudited. In the opinion of management, all normal recurring adjustments necessary for a fair statement of the interim period results have been made. Certain prior period amounts have been reclassified to conform to current period classifications.

 

Recently Issued Accounting Pronouncements

 

In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation 46 “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (FIN 46). FIN 46 (the interpretation) provides a new framework for identifying variable interest entities (VIEs) and determining when a company should include the assets, liabilities, noncontrolling interests and results of activities of a VIE in its consolidated financial statements. FIN 46 is effective immediately for VIEs created after January 31, 2003 and is effective beginning in the third quarter of 2003 for VIEs created prior to the issuance of the interpretation. Management is currently evaluating the impact of this new interpretation on the financial statements. For additional information on VIEs, see Note 8 of the consolidated financial statements.

 

Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of SFAS 123, Accounting for Stock-Based Compensation,” was adopted by the Corporation on January 1, 2003. SFAS 148 provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. SFAS 148 also amends the disclosure requirements of SFAS 123, to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Under the provisions of SFAS 148, the Corporation transitioned to the fair value-based method of accounting for stock-based employee compensation costs using the prospective method as of January 1, 2003. Under the prospective method, all stock options granted under plans before the adoption date will continue to be accounted for under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (APB 25) unless these stock options are modified or settled subsequent to adoption.

 

7


Table of Contents

 

In accordance with SFAS 148, the Corporation provides disclosures as if the Corporation had adopted the fair value based method of measuring all outstanding employee stock options in 2003 and 2002 as indicated in the following table. The disclosure requirement of SFAS 148 recognizes the impact of all outstanding employee stock options while the prospective method that the Corporation is following recognizes the impact of only newly issued employee stock options. The following table presents the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards at March 31, 2003 and 2002.

 

    

March 31


 

(Dollars in millions, except per share data)


  

2003


    

2002


 

Net income

  

$

2,424

 

  

$

2,179

 

Stock-based employee compensation expense recognized during period (1)

  

 

17

 

  

 

—  

 

Stock-based employee compensation expense determined under fair value based
method
(1,2)

  

 

(76

)

  

 

(82

)

    


  


Pro forma net income

  

$

2,365

 

  

$

2,097

 

    


  


As Reported

                 

Earnings per common share

  

$

1.62

 

  

$

1.41

 

Diluted earnings per common share

  

 

1.59

 

  

 

1.38

 

Pro forma

                 

Earnings per common share

  

 

1.58

 

  

 

1.36

 

Diluted earnings per common share

  

 

1.55

 

  

 

1.33

 

    


  


  (1)   Net of related tax effects.
  (2)   Includes all awards granted, modified or settled which the fair value was required to be measured under FAS 123, except restricted stock. Restricted stock expense, included in net income, for the three months ended March 31, 2003 and 2002 was $87 million and $35 million, respectively.

 

FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,” (FIN 45) was issued in November 2002. FIN 45 requires that a liability be recognized at the inception of certain guarantees for the fair value of the obligation, including the ongoing obligation to stand ready to perform over the term of the guarantee. The accounting provisions of FIN 45 were effective for certain guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on the Corporation’s results of operations or financial condition. For additional information regarding the impact of FIN 45, see Note 5 of the consolidated financial statements.

 

On April 30, 2003, the FASB issued SFAS 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” and is effective for hedging relationships entered into or modified after June 30, 2003. SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”. Management is currently evaluating the impact of this new rule on the financial statements and does not anticipate the adoption of this pronouncement will have a material impact on its results of operations or financial condition.

 

For additional information on recently issued accounting pronouncements and other significant accounting principles, see Note 1 of the consolidated financial statements on pages 76 through 83 of the Corporation’s 2002 Annual Report.

 

Note 2—Trading Activities

 

Trading-Related Revenue

 

Trading account profits represent the net amount earned from the Corporation’s trading positions, which include trading account assets and liabilities as well as derivative positions and mortgage banking certificates. Trading account profits, as reported in the Consolidated Statement of Income, does not include the net interest income recognized on trading positions or the related funding charge or benefit.

 

8


Table of Contents

Trading account profits and trading-related net interest income (“trading-related revenue”) are presented in the following table as they are both considered in evaluating the overall profitability of the Corporation’s trading positions. Trading-related revenue is derived from foreign exchange spot, forward and cross-currency contracts, fixed income and equity securities, and derivative contracts in interest rates, equities, credit and commodities.

 

    

Three Months Ended March 31


(Dollars in millions)


  

2003


  

2002


Trading account profits—as reported

  

$

114

  

$

345

Trading-related net interest income (1)

  

 

608

  

 

433

    

  

Total trading-related revenue

  

$

722

  

$

778

    

  

Trading-related revenue by product

             

Foreign exchange

  

$

135

  

$

129

Interest rate (1)

  

 

153

  

 

257

Credit (2)

  

 

261

  

 

236

Equities

  

 

121

  

 

132

Commodities

  

 

52

  

 

24

    

  

Total trading-related revenue

  

$

722

  

$

778

    

  

 
  (1)   Presented on a taxable-equivalent basis.
  (2)   Credit includes credit fixed income, credit derivatives used for trading and credit risk management and mortgage banking assets.

 

Trading Account Assets and Liabilities

 

The fair values of the components of trading account assets and liabilities at March 31, 2003 and December 31, 2002 were:

 

(Dollars in millions)


  

March 31
2003


 

December 31
2002


Trading account assets

            

U.S. government and agency securities

  

$

21,555

 

$

19,875

Foreign sovereign debt

  

 

8,785

 

 

8,752

Corporate and other debt securities

  

 

14,705

 

 

14,280

Equity securities

  

 

5,861

 

 

5,380

Mortgage-backed securities

  

 

3,301

 

 

5,917

Other

  

 

11,526

 

 

9,792

    

 

Total

  

$

65,733

 

$

63,996

    

 

Trading account liabilities

            

U.S. government and agency securities

  

$

8,051

 

$

8,531

Foreign sovereign debt

  

 

2,918

 

 

3,465

Corporate and other debt securities

  

 

3,812

 

 

3,032

Equity securities

  

 

5,739

 

 

4,825

Other

  

 

3,058

 

 

5,721

    

 

Total

  

$

23,578

 

$

25,574

    

 

 

Note 3—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 and asset and liability management (ALM) activities is presented in Note 5 of the consolidated financial statements on pages 86 through 88 of the Corporation’s 2002 Annual Report.

 

9


Table of Contents

The following table presents the contract/notional and credit risk amounts at March 31, 2003 and December 31, 2002 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 $17.9 billion of collateral on derivative positions, of which only $12.4 billion could be applied against credit risk at March 31, 2003.

 

Derivatives(1)

         

    

March 31, 2003


  

December 31, 2002


(Dollars in millions)


  

Contract/ Notional


  

Credit Risk


  

Contract/ Notional


  

Credit Risk


Interest rate contracts

                           

Swaps

  

$

7,094,523

  

$

19,186

  

$

6,781,629

  

$

18,981

Futures and forwards

  

 

3,038,531

  

 

85

  

 

2,510,259

  

 

283

Written options

  

 

971,685

  

 

—  

  

 

973,113

  

 

—  

Purchased options

  

 

1,021,040

  

 

4,136

  

 

907,999

  

 

3,318

Foreign exchange contracts

                           

Swaps

  

 

179,902

  

 

2,588

  

 

175,680

  

 

2,460

Spot, futures and forwards

  

 

756,752

  

 

2,029

  

 

724,039

  

 

2,535

Written options

  

 

114,748

  

 

—  

  

 

81,263

  

 

—  

Purchased options

  

 

111,376

  

 

382

  

 

80,395

  

 

452

Equity contracts

                           

Swaps

  

 

18,530

  

 

774

  

 

16,830

  

 

679

Futures and forwards

  

 

38,260

  

 

—  

  

 

48,470

  

 

—  

Written options

  

 

17,319

  

 

—  

  

 

19,794

  

 

—  

Purchased options

  

 

24,389

  

 

3,184

  

 

23,756

  

 

2,885

Commodity contracts

                           

Swaps

  

 

28,587

  

 

1,554

  

 

11,776

  

 

1,117

Futures and forwards

  

 

4,261

  

 

—  

  

 

3,478

  

 

—  

Written options

  

 

15,107

  

 

—  

  

 

12,158

  

 

—  

Purchased options

  

 

9,565

  

 

357

  

 

19,115

  

 

347

Credit derivatives

  

 

107,231

  

 

1,134

  

 

92,098

  

 

1,253

    

  

  

  

Total derivative assets

         

$

35,409

         

$

34,310

           

         


(1)    Includes both long and short derivative positions.

                           

 

The average fair value of derivative assets for the three months ended March 31, 2003 and 2002 was $35.2 billion and $21.6 billion, respectively. The average fair value of derivative liabilities for the three months ended March 31, 2003 and 2002 was $23.6 billion and $14.4 billion, respectively.

 

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 these contracts to protect against changes in the cash flows of its variable-rate assets and liabilities and anticipated transactions. For the three months ended March 31, 2003, the Corporation recognized in the Consolidated Statement of Income a net loss of $79 million (included in interest income) related to fair value hedges. This loss represents the expected change in the forward values of forward contracts and is defined as ineffectiveness by SFAS 133. For the three months ended March 31, 2002, there was no significant gain or loss recognized which represented the ineffective portion of fair value hedges. For the three months ended March 31, 2003 and 2002, the Corporation recognized in the Consolidated Statement of Income net gains of $15 million and $9 million (included in mortgage banking income), respectively, which represented the ineffective portion of cash flow hedges. At March 31, 2003 and December 31, 2002, the Corporation has determined that there were no cash flow

 

10


Table of Contents

hedging positions where it was probable that certain forecasted transactions may not occur within the originally designated time period.

 

For cash flow hedges, gains and losses on derivative contracts reclassified from accumulated other comprehensive income to current period earnings are included in the line item in the Consolidated Statement of Income in which the hedged item is recorded and in the same period the hedged item affects earnings. During the next 12 months, gains on derivative instruments included in accumulated other comprehensive income, of approximately $197 million (pre-tax) are expected to be reclassified into earnings. These net gains reclassified into earnings are expected to increase income or reduce expense on the respective hedged items.

 

Hedges of Net Investments in Foreign Operations

 

The Corporation uses forward exchange contracts, currency swaps and non-derivative cash instruments that provide an economic hedge on portions of its net investments in foreign operations against adverse movements in foreign currency exchange rates. For the three months ended March 31, 2003 and 2002, the Corporation experienced net foreign currency pre-tax gains of $92 million and $2 million, respectively, related to its net investments in foreign operations. These gains were recorded as a component of the foreign currency translation adjustment in other comprehensive income. These gains were partially offset by net pre-tax losses of $41 million and $2 million related to derivative and non-derivative instruments designated as hedges of this currency exposure during these same periods.

 

Note 4—Outstanding Loans and Leases

 

Outstanding loans and leases at March 31, 2003 and December 31, 2002 were:

 

(Dollars in millions)


  

March 31, 2003


  

December 31, 2002


Commercial—domestic

  

$

102,467

  

$

105,053

Commercial—foreign

  

 

18,990

  

 

19,912

Commercial real estate—domestic

  

 

19,981

  

 

19,910

Commercial real estate—foreign

  

 

300

  

 

295

    

  

Total commercial

  

 

141,738

  

 

145,170

    

  

Residential mortgage

  

 

112,800

  

 

108,197

Home equity lines

  

 

22,874

  

 

23,236

Direct/Indirect consumer

  

 

31,540

  

 

31,068

Consumer finance

  

 

7,623

  

 

8,384

Credit card

  

 

24,819

  

 

24,729

Foreign consumer

  

 

2,018

  

 

1,971

    

  

Total consumer

  

 

201,674

  

 

197,585

    

  

Total

  

$

343,412

  

$

342,755

    

  

 

 

 

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Table of Contents

The following table summarizes the changes in the allowance for credit losses for the three months ended March 31, 2003 and 2002:

    

Three Months Ended March 31


 

(Dollars in millions)


  

2003


    

2002


 

Balance, January 1

  

$

6,851

 

  

$

6,875

 

    


  


Loans and leases charged off

  

 

(984

)

  

 

(1,069

)

Recoveries of loans and leases previously charged off

  

 

151

 

  

 

229

 

    


  


Net charge-offs

  

 

(833

)

  

 

(840

)

    


  


Provision for credit losses

  

 

833

 

  

 

840

 

Other, net

  

 

2

 

  

 

(6

)

    


  


Balance, March 31

  

$

6,853

 

  

$

6,869

 

    


  


 

The following table presents the recorded investment in specific loans that were considered individually impaired at March 31, 2003 and December 31, 2002 in accordance with Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan,” as described in the Corporation’s 2002 Annual Report on page 80:

 

(Dollars in millions)


  

March 31,

2003


  

December 31,

2002


Commercial—domestic

  

$

2,446

  

$

2,553

Commercial—foreign

  

 

1,253

  

 

1,355

Commercial real estate—domestic

  

 

180

  

 

157

Commercial real estate—foreign

  

 

3

  

 

2

    

  

Total impaired loans

  

$

3,882

  

$

4,067

    

  

 

At March 31, 2003 and December 31, 2002, nonperforming loans, including certain loans that were considered impaired, totaled $4.8 billion and $5.0 billion, respectively. In addition, included in other assets was $188 million and $120 million of nonperforming assets at March 31, 2003 and December 31, 2002, respectively. Foreclosed properties amounted to $227 million and $225 million at March 31, 2003 and December 31, 2002, respectively.

 

Note 5—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 balance sheet.

 

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. For additional information on credit extension commitments see Note 13 of the consolidated financial statements of the Corporation’s 2002 Annual Report. The following table summarizes outstanding unfunded commitments to extend credit at March 31, 2003 and December 31, 2002. These unfunded commitments have been reduced by amounts participated to other financial institutions.

 

(Dollars in millions)


  

March 31

2003


  

December 31

2002


Loan commitments

  

$

212,768

  

$

212,704

Standby letters of credit and financial guarantees

  

 

29,899

  

 

30,837

Commercial letters of credit

  

 

2,953

  

 

3,109

    

  

Legally binding commitments

  

 

245,620

  

 

246,650

Credit card lines

  

 

75,874

  

 

73,779

    

  

Total commitments

  

$

321,494

  

$

320,429

    

  

 

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Table of Contents

 

Other Commitments

 

When-issued securities are commitments to purchase or sell securities during the time period between the announcement of a securities offering and the issuance of those securities. Changes in market price between commitment date and issuance are reflected in trading account profits. At March 31, 2003, the Corporation had commitments to purchase and sell when-issued securities of $232.9 billion and $233.5 billion, respectively. At December 31, 2002, the Corporation had commitments to purchase and sell when-issued securities of $166.1 billion and $164.5 billion, respectively. The increase during the three months ended March 31, 2003 was primarily attributable to higher volumes of mortgage refinancings in the current low interest rate environment.

 

At March 31, 2003, the Corporation had forward whole mortgage loan purchase commitments of $26.4 billion of which $21.4 billion were settled in April 2003. The remaining commitments of $5.0 billion settle in May 2003. At December 31, 2002, the Corporation had forward whole mortgage loan purchase commitments of $10.8 billion, all of which were settled in January 2003. At March 31, 2003, the Corporation had $6.2 billion of forward whole mortgage loan sale commitments that settled in April 2003. At December 31, 2002, the Corporation had no forward whole mortgage loan sale commitments. For further discussion on ALM activities, see Interest Rate and Foreign Exchange Derivative Contracts beginning on page 48.

 

Other Guarantees

 

For additional information on the following guarantees, see Note 13 of the consolidated financial statements of the Corporation’s 2002 Annual Report.

 

The Corporation sells products that offer book value protection primarily to plan sponsors of ERISA-governed pension plans such as 401(k) plans, 457 plans, etc. The Corporation also sells products that guarantee the return of principal to investors at a preset future date. At March 31, 2003 and December 31, 2002, the notional amount of these guarantees totaled $26.4 billion and $23.8 billion, respectively. As of March 31, 2003 and December 31, 2002, the Corporation has not made a payment under these products, and management believes that the probability of payments under these guarantees is remote.

 

In the ordinary course of business, the Corporation enters into various agreements that contain indemnifications, such as tax indemnifications, whereupon payment may become due if certain external events occur, such as a change in tax law.

 

The Corporation has provided protection on a subset of one consumer finance securitization in the form of a guarantee with a maximum payment of $220 million that is only paid out if over-collateralization is not sufficient to absorb losses and certain other conditions are met. The Corporation projects no material payments will be due over the life of the contract, which is approximately seven years.

 

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 $1.0 billion and $575 million at March 31, 2003 and December 31, 2002, respectively.

 

Litigation

 

The number of actions in which the Corporation or Banc of America Securities LLC has been named as a defendant arising out of alleged accounting irregularities in the books and records of WorldCom has increased from approximately 18 actions to 40 actions. For a more detailed discussion on Litigation, see Note 13 of the consolidated financial statements of the Corporation’s 2002 Annual Report.

 

Note 6—Shareholders’ Equity and Earnings Per Common Share

 

At March 31, 2003, under the stock repurchase program authorized by the Corporation’s Board of Directors (the Board) on December 11, 2001, the remaining buyback authority for common stock totaled $1.3 billion, or 5 million

 

13


Table of Contents

shares. During the three months ended March 31, 2003, the Corporation repurchased approximately 18 million shares of its common stock in open market repurchases and as a result of put options exercised, at an average per-share price of $68.48, which reduced shareholders’ equity by $1.3 billion and increased earnings per share by approximately $0.01. These repurchases were partially offset by the issuance of 15 million shares of common stock under employee plans, which increased shareholders’ equity by $645 million, net of $173 million of deferred compensation related to restricted stock awards, and decreased earnings per share by approximately $0.01 for the three months ended March 31, 2003. For the three months ended March 31, 2002, the Corporation repurchased approximately 31 million shares of its common stock in open market repurchases and under an accelerated repurchase program at an average per-share price of $62.64, which reduced shareholders’ equity by $2.0 billion. These repurchases were partially offset by the issuance of 16 million shares of common stock under employee plans, which increased shareholders’ equity by $817 million. On January 22, 2003, the Board authorized a stock repurchase program of up to 130 million shares of the Corporation’s common stock at an aggregate cost of $12.5 billion. The Corporation anticipates it will continue to repurchase shares at least equal to shares issued under its various stock option plans.

 

Accumulated other comprehensive income (OCI) includes pre-tax net unrealized losses related to available-for-sale and marketable equity securities, foreign currency translation adjustments, derivatives and other of $1.4 billion and $83 million for the three months ended March 31, 2003 and 2002, respectively. The net change in accumulated OCI also includes reclassification adjustments for gains (losses) to net income during the current period that had been included in accumulated OCI in previous periods. Pre-tax reclassification adjustments for gains included in the Consolidated Statement of Income for the three months ended March 31, 2003 and 2002 were $130 million and $131 million, respectively. The related income tax expense (benefit) was $(379) million and $295 million for the three months ended March 31, 2003 and 2002, respectively.

 

The Corporation sells put options on its common stock to independent third parties. The put option program was designed to partially offset the cost of share repurchases. For additional information on the put option program, see Note 14 of the consolidated financial statements on page 98 of the Corporation’s 2002 Annual Report.

 

The calculation of earnings per common share and diluted earnings per common share for the three months ended March 31, 2003 and 2002 is presented below.

 

    

Three Months Ended

March 31


 

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


  

2003


    

2002


 

Earnings per common share

                 

Net income

  

$

2,424

 

  

$

2,179

 

Preferred stock dividends

  

 

(1

)

  

 

(1

)

    


  


Net income available to common shareholders

  

$

2,423

 

  

$

2,178

 

    


  


Average common shares issued and outstanding

  

 

1,499,405

 

  

 

1,543,471

 

    


  


Earnings per common share

  

$

1.62

 

  

$

1.41

 

    


  


Diluted earnings per common share

                 

Net income available to common shareholders

  

$

2,423

 

  

$

2,178

 

Preferred stock dividends

  

 

1

 

  

 

1

 

    


  


Net income available to common shareholders and assumed conversions

  

$

2,424

 

  

$

2,179

 

    


  


Average common shares issued and outstanding

  

 

1,499,405

 

  

 

1,543,471

 

Dilutive potential common shares(1, 2)

  

 

26,883

 

  

 

38,377

 

    


  


Total diluted average common shares issued and outstanding

  

 

1,526,288

 

  

 

1,581,848

 

    


  


Diluted earnings per common share

  

$

1.59

 

  

$

1.38

 

    


  



(1)   For the three months ended March 31, 2003 and 2002, average options to purchase 37 million and 35 million shares, respectively, were outstanding but not included in the computation of earnings per share because they were antidilutive.
(2)   Includes incremental shares from assumed conversions of convertible preferred stock, restricted stock units and stock options.

 

14


Table of Contents

Note 7—Business Segment Information

 

The Corporation reports the results of its operations through four business segments: Consumer and Commercial Banking, Asset Management, Global Corporate and Investment Banking and Equity Investments. Certain operating segments have been aggregated into a single business segment.

 

Consumer and Commercial Banking provides a diversified range of products and services to individuals and small businesses through multiple delivery channels and commercial lending and treasury management services primarily to middle market companies with annual revenue between $10 million and $500 million. Asset Management offers investment, fiduciary and comprehensive banking and credit expertise; asset management services to institutional clients, high-net-worth individuals and retail customers; and investment, securities and financial planning services to affluent and high-net-worth individuals. Global Corporate and Investment Banking provides capital raising solutions, advisory services, derivatives capabilities, equity and debt sales and trading as well as traditional bank deposit and loan products, cash management and payment services to large corporations and institutional clients. Equity Investments includes Principal Investing, which is comprised of a diversified portfolio of investments in privately held and publicly traded companies at all stages, from start-up to buyout.

 

Corporate Other consists primarily of certain amounts associated with ALM activities and certain consumer finance and commercial lending businesses being liquidated. Beginning in the first quarter of 2003, net interest income from certain additional ALM activities was allocated directly to the business units. Prior periods have been restated to reflect this change in methodology. In addition, compensation expense related to stock-based employee compensation plans is included in Corporate Other.

 

Total revenue includes net interest income on a 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 assets and liabilities used in the Corporation’s ALM activities.

 

15


Table of Contents

The following table presents results of operations and selected average balance sheet categories for the three months ended March 31, 2003 and 2002 for each business segment. Certain prior period amounts have been reclassified among segments to conform to the current period presentation.

 

Business Segment Summary

                    

For the three months ended March 31

                    
    

Total Corporation


    

Consumer and
Commercial Banking (1)


    

Asset Management (1)


 

(Dollars in millions)


  

2003


    

2002


    

2003


    

2002


    

2003


    

2002


 

Net interest income (2)

  

$

5,361

 

  

$

5,247

 

  

$

3,732

 

  

$

3,683

 

  

$

178

 

  

$

186

 

Noninterest income

  

 

3,685

 

  

 

3,440

 

  

 

2,301

 

  

 

1,967

 

  

 

400

 

  

 

412

 

    


  


  


  


  


  


Total revenue

  

 

9,046

 

  

 

8,687

 

  

 

6,033

 

  

 

5,650

 

  

 

578

 

  

 

598

 

Provision for credit losses

  

 

833

 

  

 

840

 

  

 

488

 

  

 

427

 

  

 

(4

)

  

 

26

 

Gains on sales of securities

  

 

273

 

  

 

44

 

  

 

9

 

  

 

25

 

  

 

—  

 

  

 

—  

 

Amortization of intangibles

  

 

54

 

  

 

55

 

  

 

44

 

  

 

44

 

  

 

1

 

  

 

1

 

Other noninterest expense

  

 

4,663

 

  

 

4,439

 

  

 

2,972

 

  

 

2,732

 

  

 

365

 

  

 

358

 

    


  


  


  


  


  


Income before income taxes

  

 

3,769

 

  

 

3,397

 

  

 

2,538

 

  

 

2,472

 

  

 

216

 

  

 

213

 

Income tax expense

  

 

1,345

 

  

 

1,218

 

  

 

947

 

  

 

916

 

  

 

76

 

  

 

76

 

    


  


  


  


  


  


Net income

  

$

2,424

 

  

$

2,179

 

  

$

1,591

 

  

$

1,556

 

  

$

140

 

  

$

137

 

    


  


  


  


  


  


Shareholder value added

  

$

1,140

 

  

$

832

 

  

$

1,099

 

  

$

1,024

 

  

$

66

 

  

$

70

 

Net interest yield (taxable-equivalent basis)

  

 

3.52

%

  

 

3.85

%

  

 

4.70

%

  

 

5.43

%

  

 

3.08

%

  

 

2.96

%

Return on average equity

  

 

19.9

 

  

 

18.6

 

  

 

32.6

 

  

 

32.4

 

  

 

20.3

 

  

 

23.9

 

Efficiency ratio (taxable-equivalent basis)

  

 

52.1

 

  

 

51.7

 

  

 

50.0

 

  

 

49.1

 

  

 

63.3

 

  

 

59.9

 

Average:

                                                     

Total loans and leases

  

$

345,662

 

  

$

327,801

 

  

$

185,779

 

  

$

181,415

 

  

$

22,683

 

  

$

24,794

 

Total assets

  

 

713,299

 

  

 

637,678

 

  

 

344,580

 

  

 

300,053

 

  

 

25,161

 

  

 

26,737

 

Total deposits

  

 

385,760

 

  

 

364,403

 

  

 

295,654

 

  

 

276,655

 

  

 

12,859

 

  

 

11,837

 

Common equity/Allocated equity

  

 

49,343

 

  

 

47,392

 

  

 

19,771

 

  

 

19,486

 

  

 

2,787

 

  

 

2,325

 

    


  


  


  


  


  


 

For the three months ended March 31

 

    

Global Corporate and Investment Banking (1)


    

Equity Investments (1)


    

Corporate Other


 

(Dollars in millions)


  

2003


    

2002


    

2003


    

2002


    

2003


    

2002


 

Net interest income (2)

  

$

1,278

 

  

$

1,164

 

  

$

(37

)

  

$

(42

)

  

$

210

 

  

$

256

 

Noninterest income

  

 

1,065

 

  

 

1,121

 

  

 

(70

)

  

 

14

 

  

 

(11

)

  

 

(74

)

    


  


  


  


  


  


Total revenue

  

$

2,343

 

  

$

2,285

 

  

$

(107

)

  

$

(28

)

  

 

199

 

  

 

182

 

Provision for credit losses

  

 

272

 

  

 

264

 

  

 

1

 

  

 

—  

 

  

 

76

 

  

 

123

 

Gains (losses) on sales of securities

  

 

(14

)

  

 

(24

)

  

 

—  

 

  

 

—  

 

  

 

278

 

  

 

43

 

Amortization of intangibles

  

 

7

 

  

 

8

 

  

 

1

 

  

 

1

 

  

 

1

 

  

 

1

 

Other noninterest expense

  

 

1,316

 

  

 

1,297

 

  

 

25

 

  

 

26

 

  

 

(15

)

  

 

26

 

    


  


  


  


  


  


Income before income taxes

  

 

734

 

  

 

692

 

  

 

(134

)

  

 

(55

)

  

 

415

 

  

 

75

 

Income tax expense

  

 

253

 

  

 

235

 

  

 

(48

)

  

 

(23

)

  

 

117

 

  

 

14

 

    


  


  


  


  


  


Net income

  

$

481

 

  

$

457

 

  

$

(86

)

  

$

(32

)

  

$

298

 

  

$

61

 

    


  


  


  


  


  


Shareholder value added

  

$

203

 

  

$

123

 

  

$

(141

)

  

$

(94

)

  

$

(87

)

  

$

(291

)

Net interest yield (taxable-equivalent basis)

  

 

2.27

%

  

 

2.43

%

  

 

n/m

 

  

 

n/m

 

  

 

n/m

 

  

 

n/m

 

Return on average equity

  

 

18.6

 

  

 

16.0

 

  

 

(16.7

)%

  

 

(6.2

)%

  

 

n/m

 

  

 

n/m

 

Efficiency ratio (taxable-equivalent basis)

  

 

56.5

 

  

 

57.1

 

  

 

n/m

 

  

 

n/m

 

  

 

n/m

 

  

 

n/m

 

Average:

                                                     

Total loans and leases

  

$

56,521

 

  

$

67,018

 

  

$

434

 

  

$

427

 

  

$

80,245

 

  

$

54,147

 

Total assets

  

 

273,458

 

  

 

231,790

 

  

 

6,115

 

  

 

6,253

 

  

 

63,985

 

  

 

72,845

 

Total deposits

  

 

67,315

 

  

 

63,212

 

  

 

—  

 

  

 

—  

 

  

 

9,932

 

  

 

12,699

 

Common equity/Allocated equity (3)

  

 

10,517

 

  

 

11,595

 

  

 

2,078

 

  

 

2,120

 

  

 

14,190

 

  

 

11,866

 

    


  


  


  


  


  



  n/m   = not meaningful
  (1)   There were no material intersegment revenues among the segments.
  (2)   Net interest income is presented on a taxable-equivalent basis.
  (3)   Equity in Corporate Other is primarily unallocated.

 

 

16


Table of Contents

Reconciliations of the four business segments’ revenue and net income to consolidated totals follow:

 

    

Three Months Ended

March 31


 

(Dollars in millions)


  

2003


    

2002


 

Segments' revenue

  

$

8,847

 

  

$

8,505

 

Adjustments:

                 

Revenue associated with unassigned capital

  

 

172

 

  

 

161

 

Asset and liability management activities (1)

  

 

163

 

  

 

(7

)

Liquidating businesses

  

 

106

 

  

 

157

 

Taxable-equivalent basis adjustment

  

 

(152

)

  

 

(94

)

Other

  

 

(242

)

  

 

(129

)

    


  


Consolidated revenue

  

$

8,894

 

  

$

8,593

 

    


  


Segments' net income

  

$

2,126

 

  

$

2,118

 

Adjustments, net of taxes:

                 

Gains on sales of securities

  

 

186

 

  

 

28

 

Earnings associated with unassigned capital

  

 

115

 

  

 

106

 

Asset and liability management activities (1)

  

 

112

 

  

 

(12

)

Liquidating businesses

  

 

2

 

  

 

12

 

Other

  

 

(117

)

  

 

(73

)

    


  


Consolidated net income

  

$

2,424

 

  

$

2,179

 

    


  



(1)    Includes whole mortgage loan sale gains.

                 

 

The adjustments presented in the table above include consolidated income and expense amounts not specifically allocated to individual business segments.

 

Note 8—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 January 2003, the FASB issued FIN 46 (the interpretation), which provides a new framework for identifying VIEs and determining when a company should include the assets, liabilities, noncontrolling interests and results of activities of a VIE in its consolidated financial statements. As a result, the Corporation expects that it will have to consolidate its multi-seller asset-backed conduits beginning in the third quarter of 2003, as required by the interpretation. As of March 31, 2003, the assets of these entities were approximately $24.5 billion. The actual amount that will be consolidated is dependent on actions taken by the Corporation and its customers prior to September 30, 2003. Management is assessing alternatives with regards to these entities including restructuring the entities and/or alternative sources of cost-efficient funding for the Corporation’s customers and expects that the amount of assets consolidated will be less than the $24.5 billion due to these actions and those of its customers. Revenues from administration, liquidity, letters of credit and other services provided to these entities were approximately $50 million and $36 million for the three months ended March 31, 2003 and 2002, respectively. The interpretation requires that for entities to be consolidated that those assets be initially recorded at their carrying amounts at the date the requirements of the interpretation first apply. If determining carrying amounts as required is

 

17


Table of Contents

impractical, then the assets are to be measured at fair value the first date the interpretation applies. Any difference between the net amount added to the Corporation’s Consolidated Balance Sheet and the amount of any previously recognized interest in the newly consolidated entity shall be recognized as the cumulative effect of an accounting change. Management is currently evaluating the impact of this interpretation on the financial statements. At March 31, 2003, the Corporation’s liquidity and letter of credit exposure associated with the multi-seller conduits administered by the Corporation was approximately $21.0 billion. Management does not believe any losses resulting from its administration of these conduits will be material.

 

Additionally, the Corporation has significant involvement with other VIEs that it will not likely consolidate because it is not considered the primary beneficiary. In all 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 functions as administrator for all of these and provides either liquidity and letters of credit or derivatives to the VIE. Total assets of these entities at March 31, 2003 were approximately $11.0 billion; revenues associated with administration, liquidity, letters of credit and other services were approximately $36 million for the three months ended March 31, 2003. At March 31, 2003, the Corporation’s loss exposure associated with these VIEs was approximately $5.1 billion. Management does not believe any losses resulting from its involvement with these entities will be material.

 

See Notes 1 and 8 of the consolidated financial statements of the Corporation’s 2002 Annual Report for a more detailed discussion of special purpose financing entities.

 

18


Table of Contents

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,” 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 Corporation’s 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 2002 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 including the threat of future terrorist activity and related actions by the United States Military abroad which may adversely affect the company’s businesses and economic conditions as a whole; litigation liabilities, including costs, expenses, settlements and judgments; changes in domestic or foreign tax laws, rules and regulations as well as Internal Revenue Service or other governmental agencies’ interpretations thereof; various monetary and fiscal policies and regulations, including those determined by the Federal Reserve Board, 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.

 

19


Table of Contents

The Corporation is headquartered in Charlotte, North Carolina, operates in 21 states and the District of Columbia and has offices located in 30 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 Commercial Banking, Asset Management, Global Corporate and Investment Banking and Equity Investments. 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.

 

Performance overview for the three months ended March 31, 2003 compared to the same period in 2002:

 

Net income totaled $2.4 billion, or $1.59 per diluted common share, compared to $2.2 billion, or $1.38 per diluted common share. The return on average common shareholders’ equity was 19.92 percent compared to 18.64 percent.

 

In the first quarter of 2003, we saw an increase in net income for all three of our major businesses, and we continued to experience strong core business fundamentals in the areas of customer satisfaction and product/market performance that have created momentum for the remainder of 2003.

 

Customer satisfaction continued to increase for the quarter, resulting in better retention and increased opportunities to deepen relationships with our customers. Delighted or highly satisfied customers, those who rate us a 9 or 10 on a 10-point scale, increased six percent.

 

We increased net new consumer checking accounts by approximately 243,000 compared to a net increase of approximately 122,000 in the comparable period driven by improvement in our ability to retain existing accounts and the popularity of MyAccess Checking.

 

Our active online banking customers reached 5.2 million, a 57 percent increase. Active bill pay customers increased more than 100 percent to two million. For the quarter, two million active bill pay users paid over $9.5 billion of bills.

 

First mortgage originations increased $14.7 billion to $32.6 billion, as low mortgage interest rates drove home purchase and refinance volumes, coupled with expanded market coverage from our deployment of LoanSolutions®, which was first rolled out in the second quarter of 2002. Total mortgages funded through LoanSolutions® totaled $9 billion for the quarter.

 

On March 5, 2003, we closed our previously announced agreement to acquire a 24.9 percent stake in Grupo Financiero Santander Serfin (GFSS), the subsidiary of Santander Central Hispano in Mexico, for $1.6 billion.

 

Despite a challenging market, we continued to gain market share in areas such as mortgage-backed securities and convertibles while maintaining a strong share in fixed income and syndicated loan products in Global Corporate and Investment Banking.

 

Financial highlights for the three months ended March 31, 2003 compared to the same period in 2002:

 

Net interest income on a taxable-equivalent basis increased $114 million. This increase was driven by the impact of higher trading-related contributions, consumer loan growth and higher levels of core deposit funding, partially offset by the negative impact of rates and discretionary portfolio repositioning in the declining rate environment and reductions in loan levels in the large corporate and commercial portfolios as well as exited consumer loan businesses. The net interest yield on a taxable-equivalent basis declined 33 basis points, primarily due to the negative impact of rates and discretionary portfolio positioning in the declining rate environment and higher trading-related assets, partially offset by higher levels of core deposit funding and credit card loans.

 

Noninterest income increased $245 million driven by increases in consumer-based fee income and gains recognized in our whole mortgage loan portfolio as we sold some whole mortgage loans to manage prepayment risk due to lower interest rates. Offsetting this increase were declines in trading account profits and equity investment gains primarily driven by the weakened economic environment. Affecting trading account profits was a net

 

20


Table of Contents

reduction in the value of our mortgage banking assets of $114 million as a result of faster prepayment speeds and lower interest rates. Other noninterest income included gains from whole mortgage loan sales of $242 million compared to $46 million. Other noninterest income also included equity in the earnings of our investment in GFSS of $14 million. Gains on sales of securities were $273 million, an increase of $229 million as we continued to reposition the discretionary portfolio to take advantage of interest rate fluctuations and reduce certain exposure to rising rates.

 

The provision for credit losses remained relatively flat. Net charge-offs were $833 million and represented 0.98 percent of average loans and leases, a decrease of six basis points. Increases in credit card and commercial—foreign were partially offset by a decrease in commercial—domestic net charge-offs.

 

Nonperforming assets decreased $229 million to $5.0 billion, or 1.46 percent of loans, leases and foreclosed properties at March 31, 2003 compared to December 31, 2002. This decline was driven by lower nonperforming assets in the large corporate portfolio due to nonperforming loan sales and repayments within Global Corporate and Investment Banking and improved credit quality in the commercial portfolio within Consumer and Commercial Banking.

 

Noninterest expense increased $223 million, primarily due to increases in data processing, marketing, employee benefits and occupancy expenses. Data processing expense reflects increases in online bill payers and card processing due to higher volumes. Marketing expense increased as we continued to expand our advertising campaign. Advertising efforts primarily focused on card and online banking and bill pay. Employee benefits expense increased as we began expensing stock options in the first quarter of 2003 and due to the impacts of a change in the expected long-term rate of return on plan assets to 8.5 percent for 2003 and a change in the discount rate from 7.25 percent in 2002 to 6.75 percent in 2003 for the Bank of America Pension Plan. Occupancy expense increased due to higher utility and property tax expenses.

 

Income tax expense was $1.2 billion resulting in an effective tax rate of 33.0 percent, compared to $1.1 billion and an effective tax rate of 34.0 percent.

 

21


Table of Contents

Table 1

 

Selected Financial Data


    

Three Months Ended

March 31


 

(Dollars in millions, except per share information)


  

2003


    

2002


 

Income statement

                 

Net interest income

  

$

5,209

 

  

$

5,153

 

Noninterest income

  

 

3,685

 

  

 

3,440

 

Total revenue

  

 

8,894

 

  

 

8,593

 

Provision for credit losses

  

 

833

 

  

 

840

 

Gains on sales of securities

  

 

273

 

  

 

44

 

Noninterest expense

  

 

4,717

 

  

 

4,494

 

Income before income taxes

  

 

3,617

 

  

 

3,303

 

Income tax expense

  

 

1,193

 

  

 

1,124

 

Net income

  

 

2,424

 

  

 

2,179

 

Average common shares issued and outstanding (in thousands)

  

 

1,499,405

 

  

 

1,543,471

 

Average diluted common shares issued and outstanding (in thousands)

  

 

1,526,288

 

  

 

1,581,848

 

    


  


Performance ratios

                 

Return on average assets

  

 

1.38

%

  

 

1.39

%

Return on average common shareholders’ equity

  

 

19.92

 

  

 

18.64

 

Total equity to total assets (period end)

  

 

7.36

 

  

 

7.77

 

Total average equity to total average assets

  

 

6.93

 

  

 

7.44

 

Dividend payout ratio

  

 

39.64

 

  

 

42.48

 

    


  


Per common share data

                 

Earnings

  

$

1.62

 

  

$

1.41

 

Diluted earnings

  

 

1.59

 

  

 

1.38

 

Cash dividends declared

  

 

0.64

 

  

 

0.60

 

Book value

  

 

33.38

 

  

 

31.15

 

    


  


Average balance sheet

                 

Total loans and leases

  

$

345,662

 

  

$

327,801

 

Total assets

  

 

713,299

 

  

 

637,678

 

Total deposits

  

 

385,760

 

  

 

364,403

 

Long-term debt

  

 

61,368

 

  

 

61,713

 

Trust preferred securities

  

 

6,031

 

  

 

5,981

 

Common shareholders’ equity

  

 

49,343

 

  

 

47,392

 

Total shareholders’ equity

  

 

49,400

 

  

 

47,456

 

    


  


Risk-based capital ratios (period end)

                 

Tier 1 capital

  

 

8.20

%

  

 

8.48

%

Total capital

  

 

12.29

 

  

 

12.93

 

Leverage ratio

  

 

6.25

 

  

 

6.72

 

    


  


Market price per share of common stock

                 

Closing

  

$

66.84

 

  

$

68.02

 

High

  

 

72.50

 

  

 

69.61

 

Low

  

 

64.26

 

  

 

57.51

 

    


  


 

Supplemental Financial Data

 

In managing our business, we use certain performance measures and ratios, including shareholder value added (SVA), taxable-equivalent net interest income and core net interest income that are not defined in GAAP (generally accepted accounting principles). We also calculate certain measures, such as the net interest yield and the efficiency ratio, on a taxable-equivalent basis. Other companies may define or calculate supplemental financial data differently. See Tables 2 and 3 for supplemental financial data for the three months ended March 31, 2003 and 2002.

 

SVA is a key measure of performance used in managing our growth strategy orientation and strengthening our focus on generating long-term growth and shareholder value. SVA is used in measuring 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 all have SVA as a key measure to support the implementation of SVA growth goals. SVA is defined as cash basis earnings less a charge for the use of capital. Cash basis earnings is net income adjusted to

 

22


Table of Contents

exclude 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, country and operational risk. SVA increased 37 percent to $1.1 billion for the three months ended March 31, 2003 from the comparable 2002 period, due to both the $244 million increase in cash basis earnings and the decrease in capital charge, which was driven by the reduction in management’s estimate of the rate used to calculate the charge for the use of capital from 12% to 11% in the first quarter of 2003. See Table 2 for the calculation of SVA and for additional discussion, see Business Segment Operations beginning on page 24.

 

We review net interest income on a 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. This measure ensures comparability of net interest income arising from both taxable and tax-exempt sources. Net interest income on a 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 taxable-equivalent basis is also used in our business segment reporting.

 

Table 2

 

Supplemental Financial Data


    

Three Months Ended March 31


 

(Dollars in millions)


  

2003


    

2002


 

Taxable-equivalent basis data

                 

Net interest income

  

$

5,361

 

  

$

5,247

 

Total revenue

  

 

9,046

 

  

 

8,687

 

Net interest yield

  

 

3.52

%

  

 

3.85

%

Efficiency ratio

  

 

52.14

 

  

 

51.74

 

    


  


Shareholder value added

                 

Net income

  

$

2,424

 

  

$

2,179

 

Amortization expense

  

 

54

 

  

 

55

 

Capital charge

  

 

(1,338

)

  

 

(1,402

)

    


  


Shareholder value added

  

$

1,140

 

  

$

832

 

    


  


 

Additionally, we review “core net interest income,” which adjusts reported net interest income on a taxable-equivalent basis for the impact of Global Corporate and Investment Banking’s trading-related activities and loans that we originated and sold into revolving credit card and commercial securitizations. Noninterest income, rather than net interest income, is recorded for assets that have been securitized as we take on the role of servicer and record servicing income and gains or losses on securitizations, where appropriate. For purposes of internal analysis, we combine trading-related net interest income with trading account profits, as discussed in the Global Corporate and Investment Banking business segment discussion beginning on page 27, as trading strategies are evaluated based on total revenue.

 

 

23


Table of Contents

Table 3 below provides a reconciliation of net interest income on a taxable-equivalent basis presented in Table 4 to core net interest income for the three months ended March 31, 2003 and 2002:

 

Table 3

Core Net Interest Income


    

Three Months Ended

March 31


 

(Dollars in millions)


  

2003


    

2002


 

Net interest income

                 

As reported on a taxable-equivalent basis

  

$

5,361

 

  

$

5,247

 

Trading-related net interest income

  

 

(608

)

  

 

(433

)

Impact of revolving securitizations

  

 

98

 

  

 

157

 

    


  


Core net interest income

  

$

4,851

 

  

$

4,971

 

    


  


Average earning assets

                 

As reported

  

$

613,092

 

  

$

549,111

 

Trading-related earning assets

  

 

(158,419

)

  

 

(113,080

)

Impact of revolving securitizations

  

 

4,477

 

  

 

8,452

 

    


  


Core average earning assets

  

$

459,150

 

  

$

444,483

 

    


  


Net interest yield on earning assets

                 

As reported

  

 

3.52

%

  

 

3.85

%

Impact of trading-related activities

  

 

0.69

 

  

 

0.61

 

Impact of revolving securitizations

  

 

0.04

 

  

 

0.06

 

    


  


Core net interest yield on earning assets

  

 

4.25

%

  

 

4.52

%

    


  


 

Core net interest income decreased $120 million driven by the negative impact of rates and discretionary portfolio repositioning in the declining rate environment and reduced loan levels in large corporate, commercial and exited consumer loan businesses, partially offset by the impact of consumer loan growth and higher levels of core deposit funding.

 

Core average earning assets increased $14.7 billion primarily due to higher levels of residential mortgage and credit card loans and loans held for sale, partially offset by reductions in securities and loan levels in the large corporate, commercial and exited consumer loan businesses.

 

The core net interest yield decreased 27 basis points mainly due to the negative impact of rates and discretionary portfolio repositioning in the declining rate environment, partially offset by the impact of higher levels of core deposit funding and credit card loans.

 

Complex Accounting Estimates and Principles

 

Our significant accounting principles are described in Note 1 of the consolidated financial statements and are essential to understanding Management’s Discussion and Analysis of Results of Operations and Financial Condition. Some of these 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 individual transactions to determine the most appropriate treatment. We have established procedures and processes to facilitate making the judgments necessary to prepare financial statements. For a complete discussion of the more judgmental and complex accounting estimates and principles of the Corporation, see Complex Accounting Estimates and Principles on pages 29 through 30 of the Corporation’s 2002 Annual Report.

 

See Note 1 for Recently Issued Accounting Pronouncements.

 

 Business Segment Operations

 

We provide our clients both traditional banking and nonbanking financial products and services through four business segments: Consumer and Commercial Banking, Asset Management, Global Corporate and Investment Banking and Equity Investments. Certain subsegments are managed through a single business segment.

 

24


Table of Contents

Descriptions of each business segment and subsegment can be found in the Corporation’s 2002 Annual Report on pages 32 through 36.

 

See Note 7 of the consolidated financial statements for additional business segment information, selected financial information for the business segments, reconciliations to consolidated amounts and information on Corporate Other. Certain prior period amounts have been reclassified among segments and their components to conform to the current period presentation.

 

Consumer and Commercial Banking

 

Total revenue increased $383 million, or seven percent, for the three months ended March 31, 2003. Net income increased $35 million, or two percent. SVA increased seven percent driven by the increase in net income and the decrease in the capital charge due to the reduction in the rate used to calculate the charge for the use of capital.

 

Our Consumer and Commercial Banking strategy is to attract, retain and deepen customer relationships. A critical component of that strategy includes continuously improving customer satisfaction. We believe that this focus will help us to achieve our goal of being recognized as the best retail bank in America. Customers reporting that they were delighted with their service increased six percent for the three months ended March 31, 2003. We added 243,000 net new checking accounts for the three months ended March 31, 2003 compared to 122,000 for the comparable 2002 period driven by ongoing improvement in our ability to retain existing accounts and the popularity of MyAccess Checking. Access to our services through online banking, which saw a 57 percent increase in active online subscribers, our network of domestic banking centers, card products, ATMs, telephone and internet channels, and our product innovations such as an expedited mortgage application process through LoanSolutions® were factors contributing to revenue growth and success with our customers.

 

Net interest income increased $49 million, primarily due to a favorable shift in loan mix and overall loan and deposit growth. These increases were partially offset by the compression of deposit interest margins and the results of asset and liability management (ALM) activities.

 

Net interest income was positively impacted by the $4.4 billion, or two percent, increase in average loans and leases for the three months ended March 31, 2003 compared to the same period in 2002 as an increase in consumer loans was partially offset by a decline in commercial loans. Average on-balance sheet credit card outstandings increased 27 percent, primarily due to new account growth and an increase in new advances on previously securitized balances that are recorded on our balance sheet after the revolving period of the securitization. Average managed credit card outstandings, which include securitized credit card loans, increased 10 percent. Average residential mortgage loans increased four percent, primarily driven by the refinancing environment due to lower interest rates. A five percent increase in average home equity lines and a four percent increase in average direct/indirect loans also contributed to consumer loan growth. The decline in average commercial loans of five percent was driven by paydowns, liquidations, lower hold levels, reduced utilization of existing facilities and soft loan demand. Compared to December 31, 2002, average commercial loans increased four percent as we began to see signs of growth in the middle market business at the end of last year continuing into the first quarter of 2003.

 

Deposit growth also positively impacted net interest income. Higher consumer deposit balances due to significant growth in net new checking accounts, increased money market accounts due to an emphasis on total relationship balances and customer preference for stable investments in these uncertain economic times drove the $19.0 billion, or seven percent, increase in average deposits for the three months ended March 31, 2003.

 

Significant Noninterest Income Components


 
    

Three Months Ended

March 31


 

(Dollars in millions)


  

2003


    

2002


 

Service charges

  

$

1,053

 

  

$

957

 

Mortgage banking income

  

 

405

 

  

 

195

 

Card income

  

 

681

 

  

 

577

 

Trading account profits

  

 

(121

)

  

 

(8

)

    


  


 

 

25


Table of Contents

Increases in service charges, mortgage banking income and card income drove the $334 million, or 17 percent, increase in noninterest income. These increases were partially offset by a decrease in trading account profits.

 

Both corporate and consumer service charges drove the $96 million, or 10 percent, increase in service charges. Corporate service charges increased $10 million, or four percent, as customers opted to pay service charges rather than maintain additional deposit balances in the lower rate environment. Increased levels of deposit fees from new account growth and favorable repricing drove the $86 million, or 13 percent, increase in consumer service charges.

 

An increase in net first mortgage loan origination income driven by higher mortgage sales was the main contributor to the $210 million increase in mortgage banking income. An increase in total volume of originated first mortgage loans of $14.7 billion to $32.6 billion for the three months ended March 31, 2003 is primarily attributed to the current elevated refinancing levels and the successful deployment of LoanSolutions®. First mortgage loan origination volume was composed of approximately $21.8 billion of retail loans and $10.8 billion of wholesale loans for the three months ended March 31, 2003, compared to $13.0 billion of retail loans and $4.9 billion of wholesale loans for the three months ended March 31, 2002. An increase in mortgage prepayments resulting from the significant decrease in mortgage interest rates drove the $34.0 billion decline in the average portfolio of first mortgage loans serviced to $259.0 billion for the three months ended March 31, 2003.

 

Increases in both debit and credit card income drove the 18 percent increase in card income. The increase in debit card income of $43 million, or 26 percent, was driven by increases in purchase volumes. Higher interchange fees related to increased credit card purchase volumes as well as higher late and overlimit fees contributed to the $61 million, or 15 percent, increase in credit card income. Card income included activity from the securitized portfolio of $41 million and $46 million for the three months ended March 31, 2003 and 2002, respectively. Noninterest income, rather than net interest income, is recorded for assets that have been securitized as we take on the role of servicer and record servicing income and gains or losses on securitizations, where appropriate. New advances under these previously securitized balances will be recorded on our balance sheet after the revolving period of the securitization, which has the effect of increasing loans on our balance sheet and increasing net interest income and charge-offs, with a corresponding reduction in noninterest income.

 

Trading account profits represents the net mark-to-market adjustments on mortgage banking assets and the related derivative instruments. Impacting trading account profits for the three months ended March 31, 2003 was a net reduction in the value of our mortgage banking assets of $114 million, primarily due to the impact of faster prepayment speeds. This reduction drove the overall decline in trading account profits. Mortgage banking assets decreased to $2.0 billion at March 31, 2003 compared to $2.1 billion at December 31, 2002 due to higher prepayments in the lower interest rate environment, partially offset by the strong volume of new originations.

 

Higher provision in the credit card loan portfolio, partially offset by a decline in commercial banking provision resulted in a $61 million, or 14 percent, increase in the provision for credit losses. The increase in credit card provision was primarily attributable to portfolio seasoning of outstandings from new account growth in prior years, new advances on previously securitized balances, higher bankruptcies and a weaker economic environment. Seasoning refers to the length of time passed since an account was opened. The reduction in the commercial banking provision was driven by the reduction in average commercial loans and leases and improved credit quality during the first quarter of 2003.

 

Noninterest expense increased $240 million, or nine percent, primarily due to increases in personnel expense, marketing and promotional fees and data processing expense. Increases in employee benefits expense and incentive compensation due to higher mortgage production drove the increase in personnel expense. The increase in marketing and promotional fees was primarily due to increased advertising and marketing investments in online banking and bill pay and card products. The increase in data processing expense was primarily attributable to increases in online bill payers and card processing due to higher volumes.

 

Asset Management

 

Despite the drop in market indices by more than 20 percent from a year ago, total revenue declined only $20 million, or three percent, for the three months ended March 31, 2003. Net income increased two percent. SVA declined six percent as an increase in capital levels was partially offset by the increase in net income and the decrease in the capital charge. The increase in capital levels was driven by additional goodwill recorded in 2002

 

26


Table of Contents

representing final contingent consideration in connection with the acquisition of the remaining 50 percent of Marsico Capital Management, LLC. During 2003, Asset Management will continue to grow its distribution capabilities to better serve the financial needs of its clients across the franchise, with a goal of increasing the number of financial advisors by approximately 20 percent.

 

Client Assets


    

March 31


(Dollars in billions)


  

2003


  

2002


Assets under management

  

$

297.0

  

$

314.9

Client brokerage assets

  

 

90.8

  

 

96.6

Assets in custody

  

 

45.1

  

 

46.0

    

  

Total client assets

  

$

432.9

  

$

457.5

    

  

 

Assets under management, which consist largely of mutual funds, equities and bonds, generate fees based on a percentage of their market value. Compared to a year ago, assets under management decreased $17.9 billion, or six percent, as the decline in equity funds due to the weakened economic environment was partially offset by an increase in fixed income funds. Client brokerage assets, a source of commission revenue, decreased $5.8 billion, or six percent, reflecting the current market environment. Client brokerage assets consist largely of investments in bonds, mutual funds, annuities and equities. Assets in custody represent trust assets managed for customers. Trust assets encompass a broad range of asset types including real estate, private company ownership interest, personal property and investments.

 

Net interest income decreased $8 million, or four percent, primarily driven by the results of ALM activities and lower loan balances, partially offset by growth in deposits. Average loans and leases declined $2.1 billion, or nine percent, for the three months ended March 31, 2003. Average deposits increased $1.0 billion, or nine percent, for the three months ended March 31, 2003.

 

Significant Noninterest Income Components


    

Three Months Ended March 31


(Dollars in millions)


  

2003


  

2002


Asset management fees(1)

  

$

277

  

$

271

Brokerage income

  

 

96

  

 

111

    

  

Total investment and brokerage services

  

$

373

  

$

382

    

  


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

 

Noninterest income decreased $12 million, or three percent. This decline was primarily due to a decrease in investment and brokerage services activities, which reflected the current market environment. Declines in personal asset management fees and brokerage income more than offset an increase in mutual fund fees.

 

Provision for credit losses decreased $30 million, primarily driven by higher recoveries in the first quarter of 2003.

 

Noninterest expense increased $7 million, or two percent, as increased expense related to the addition of financial advisors over the past four quarters was partially offset by lower revenue-related incentive compensation.

 

Global Corporate and Investment Banking

 

Total revenue increased $58 million, or three percent, primarily driven by an increase in trading-related revenue and investment banking income for the three months ended March 31, 2003. Net income increased $24 million, or five percent. The increase in net income, lower economic capital primarily due to reductions in loan levels and the decrease in the capital charge drove the 65 percent increase in SVA.

 

27


Table of Contents

Net interest income increased by $114 million, or 10 percent, as the result of higher net interest income from trading-related activities, partially offset by lower commercial loan levels and the results of ALM activities. Average loans and leases declined $10.5 billion, or 16 percent, for the three months ended March 31, 2003.

 

Noninterest income decreased $56 million, or five percent, as a decline in trading account profits was partially offset by an increase in investment banking income. Both service charges and investment and brokerage services remained flat. The decline in trading account profits was primarily due to the level and mix of mortgage-backed traded assets and related off-balance sheet hedge instruments, which was offset by increased levels of related net interest income.

 

Trading-related net interest income as well as trading account profits in noninterest income (“trading-related revenue”) are presented in the following table as they are both considered in evaluating the overall profitability of our trading activities.

 

Trading-related Revenue in

Global Corporate and Investment Banking


    

Three Months Ended

March 31


(Dollars in millions)


  

2003


  

2002


Net interest income(1)

  

$

608

  

$

433

Trading account profits

  

 

303

  

 

359

    

  

Total trading-related revenue

  

$

911

  

$

792

    

  

Revenue by product

             

Foreign exchange

  

$

135

  

$

129

Interest rate(1)

  

 

230

  

 

264

Credit(2)

  

 

379

  

 

249

Equities

  

 

115

  

 

125

Commodities

  

 

52

  

 

25

    

  

Total trading-related revenue

  

$

911

  

$

792

    

  


(1)    Presented on a taxable-equivalent basis.

(2)    Credit includes credit fixed income and credit derivatives used for trading and credit risk
  management.

 

Trading-related revenue increased $119 million, as the $175 million increase in net interest income was partially offset by a $56 million decrease in trading account profits. The overall increase was primarily due to an increase in revenue from credit products of $130 million, which was attributable to the narrowing of credit spreads and strong customer activity, particularly in high grade and high yield bonds, partially offset by losses on credit default swaps used in credit risk management. Also contributing to the overall increase was a $27 million increase in revenue from commodities trading as a result of increased customer sales and trading opportunities relating to geopolitical events during the quarter. Partially offsetting these increases was a decline in interest rate products of $34 million resulting from lower profits on strategic positions.

 

Investment Banking Income in

Global Corporate and Investment Banking


    

Three Months Ended

March 31


(Dollars in millions)


  

2003


  

2002


Securities underwriting

  

$

200

  

$

194

Syndications

  

 

102

  

 

68

Advisory services

  

 

59

  

 

58

Other

  

 

12

  

 

8

    

  

Total

  

$

373

  

$

328

    

  

 

 

 

28


Table of Contents

Investment banking income increased $45 million, or 14 percent, compared to the prior year. We continued to gain market share with our most significant market share gains in mortgage-backed securities and convertible bond offerings. The market for securities underwriting declined for high grade and equity offerings; however, our continued strong market share in fixed income and equity offerings resulted in a three percent increase in securities underwriting fees. We also continued to maintain strong market share in syndicated loan products, which drove an increase in syndication fees of $34 million. Advisory services income remained flat.

 

The adverse economic environment in 2002 continued through the first quarter of 2003, which drove the $8 million, or three percent, increase in provision for credit losses. In addition to credit losses reflected in provision expense, included in other income for the three months ended March 31, 2003 were losses from writedowns of approximately $31 million related to partnership interests in leveraged leases to the airline industry.

 

Noninterest expense increased slightly, primarily due to higher expenses of approximately $40 million associated with our repositioning in South America, partially offset by lower market-based incentive compensation.

 

It is anticipated that the remainder of 2003 will be challenging for the investment banking industry. We will continue to monitor market developments and take actions necessary to adjust resources accordingly to maintain our focus on revenue, net income and SVA.

 

Equity Investments

 

For the three months ended March 31, 2003, both revenue and net income decreased substantially, primarily due to reduced cash gains and negative fair value adjustments. The equity investment portfolio in Principal Investing remained relatively flat at $5.8 billion at March 31, 2003 compared to December 31, 2002.

 

Net interest income consists primarily of the internal funding cost associated with the carrying value of investments.

 

Equity Investment Gains (Losses) in Principal Investing


 
    

Three Months Ended
March 31


 

(Dollars in millions)


  

2003


    

2002


 

Cash gains

  

$

45

 

  

$

150

 

Impairments

  

 

(77

)

  

 

(140

)

Fair value adjustments

  

 

(41

)

  

 

8

 

    


  


Total

  

$

(73

)

  

$

18

 

    


  


 

Noninterest income primarily consists of equity investment gains (losses). Weakness in equity markets for the three months ended March 31, 2003 was the primary driver for the decline in equity investment gains (losses). Impairments and fair value adjustments recorded for the three months ended March 31, 2003 and 2002 were driven by continuing depressed levels of economic activity across many sectors both domestically and internationally.

 

Risk Management

 

Our corporate 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 our revenue from assuming and managing customer risk for profit. Through a robust governance structure, risk and return is evaluated to produce sustainable revenue, to reduce earnings volatility and increase shareholder value. Our business exposes us to four major risks: liquidity, credit, market and operational. For additional detail on risk management activities, see pages 36 through 37 of the Corporation’s 2002 Annual Report.

 

 

29


Table of Contents

Table 4

 

Quarterly Average Balances and Interest Rates—Taxable-Equivalent Basis


    

First Quarter 2003


    

Fourth Quarter 2002


 

(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

  

$

6,987

  

$

43

  

2.49

%

  

$

8,853

  

$

56

  

2.49

%

Federal funds sold and securities purchased under agreements to resell

  

 

57,873

  

 

194

  

1.35

 

  

 

49,169

  

 

208

  

1.68

 

Trading account assets

  

 

99,085

  

 

1,053

  

4.27

 

  

 

84,181

  

 

994

  

4.71

 

Securities

  

 

67,784

  

 

793

  

4.69

 

  

 

83,751

  

 

1,078

  

5.15

 

Loans and leases (1):

                                         

Commercial—domestic

  

 

103,663

  

 

1,836

  

7.18

 

  

 

105,333

  

 

1,777

  

6.70

 

Commercial—foreign

  

 

18,876

  

 

156

  

3.35

 

  

 

20,538

  

 

180

  

3.48

 

Commercial real estate—domestic

  

 

19,955

  

 

215

  

4.37

 

  

 

20,359

  

 

245

  

4.77

 

Commercial real estate—foreign

  

 

301

  

 

3

  

3.88

 

  

 

426

  

 

4

  

3.93

 

    

  

  

  

  

  

Total commercial

  

 

142,795

  

 

2,210

  

6.27

 

  

 

146,656

  

 

2,206

  

5.97

 

    

  

  

  

  

  

Residential mortgage

  

 

113,695

  

 

1,582

  

5.59

 

  

 

108,019

  

 

1,699

  

6.28

 

Home equity lines

  

 

23,054

  

 

267

  

4.70

 

  

 

23,347

  

 

300

  

5.10

 

Direct/Indirect consumer

  

 

31,393

  

 

503

  

6.49

 

  

 

30,643

  

 

523

  

6.76

 

Consumer finance

  

 

8,012

  

 

154

  

7.76

 

  

 

8,943

  

 

174

  

7.75

 

Credit card

  

 

24,684

  

 

644

  

10.57

 

  

 

23,535

  

 

613

  

10.33

 

Foreign consumer

  

 

2,029

  

 

17

  

3.45

 

  

 

1,956

  

 

17

  

3.48

 

    

  

  

  

  

  

Total consumer

  

 

202,867

  

 

3,167

  

6.30

 

  

 

196,443

  

 

3,326

  

6.74

 

    

  

  

  

  

  

Total loans and leases

  

 

345,662

  

 

5,377

  

6.29

 

  

 

343,099

  

 

5,532

  

6.41

 

    

  

  

  

  

  

Other earning assets

  

 

35,701

  

 

417

  

4.71

 

  

 

32,828

  

 

417

  

5.07

 

    

  

  

  

  

  

Total earning assets (2)

  

 

613,092

  

 

7,877

  

5.18

 

  

 

601,881

  

 

8,285

  

5.48

 

    

  

  

  

  

  

Cash and cash equivalents

  

 

21,699

                

 

21,242

             

Other assets, less allowance for credit losses

  

 

78,508

                

 

72,345

             
    

  

  

  

  

  

Total assets

  

$

713,299

                

$

695,468

             
    

  

  

  

  

  

Interest-bearing liabilities

                                         

Domestic interest-bearing deposits:

                                         

Savings

  

$

22,916

  

$

34

  

0.59

%

  

$

22,142

  

$

35

  

0.63

%

NOW and money market deposit accounts

  

 

142,338

  

 

291

  

0.83

 

  

 

137,229

  

 

325

  

0.94

 

Consumer CDs and IRAs

  

 

66,937

  

 

695

  

4.21

 

  

 

66,266

  

 

728

  

4.36

 

Negotiable CDs, public funds and other time deposits

  

 

3,598

  

 

16

  

1.78

 

  

 

3,400

  

 

17

  

1.97

 

    

  

  

  

  

  

Total domestic interest-bearing deposits

  

 

235,789

  

 

1,036

  

1.78

 

  

 

229,037

  

 

1,105

  

1.91

 

    

  

  

  

  

  

Foreign interest-bearing deposits (3):

                                         

Banks located in foreign countries

  

 

14,218

  

 

80

  

2.27

 

  

 

15,286

  

 

104

  

2.70

 

Governments and official institutions

  

 

1,785

  

 

6

  

1.31

 

  

 

1,737

  

 

7

  

1.68

 

Time, savings and other

  

 

18,071

  

 

61

  

1.38

 

  

 

17,929

  

 

76

  

1.68

 

    

  

  

  

  

  

Total foreign interest-bearing deposits

  

 

34,074

  

 

147

  

1.75

 

  

 

34,952

  

 

187

  

2.12

 

    

  

  

  

  

  

Total interest-bearing deposits

  

 

269,863

  

 

1,183

  

1.78

 

  

 

263,989

  

 

1,292

  

1.94

 

    

  

  

  

  

  

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

  

 

123,041

  

 

453

  

1.49

 

  

 

123,434

  

 

558

  

1.79

 

Trading account liabilities

  

 

34,858

  

 

308

  

3.58

 

  

 

30,445

  

 

289

  

3.77

 

Long-term debt and trust preferred securities

  

 

67,399

  

 

572

  

3.40

 

  

 

65,702

  

 

609

  

3.71

 

    

  

  

  

  

  

Total interest-bearing liabilities (2)

  

 

495,161

  

 

2,516

  

2.05

 

  

 

483,570

  

 

2,748

  

2.26

 

    

  

  

  

  

  

Noninterest-bearing sources:

                                         

Noninterest-bearing deposits

  

 

115,897

                

 

117,392

             

Other liabilities

  

 

52,841

                

 

46,432

             

Shareholders’ equity

  

 

49,400

                

 

48,074

             
    

  

  

  

  

  

Total liabilities and shareholders’ equity

  

$

713,299

                

$

695,468

             
    

  

  

  

  

  

Net interest spread

                

3.13

 

                

3.22

 

Impact of noninterest-bearing sources

                

0.39

 

                

0.44

 

    

  

  

  

  

  

Net interest income/yield on earning assets

         

$

5,361

  

3.52

%

         

$

5,537

  

3.66

%