================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [CHECK MARK] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2000 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: (888) 279-3457 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 [CHECK MARK] No On July 31, 2000, there were 1,642,701,344 shares of Bank of America Corporation Common Stock outstanding. ================================================================================ Bank of America Corporation June 30, 2000 Form 10-Q - --------------------------------------------------------------------------------
INDEX Page ---- Part I Item 1. Financial Statements: Financial Consolidated Statement of Income for the Three 2 Information Months and Six Months Ended June 30, 2000 and 1999 Consolidated Balance Sheet at June 30, 2000 3 and December 31, 1999 Consolidated Statement of Changes in Share- 4 holders' Equity for the Six Months Ended June 30, 2000 and 1999 Consolidated Statement of Cash Flows for the 5 Six Months Ended June 30, 2000 and 1999 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Results 19 of Operations and Financial Condition Item 3. Quantitative and Qualitative Disclosures about 58 Market Risk - ------------------------------------------------------------------------------------------------------------------- Part II Other Information Item 1. Legal Proceedings 58 Item 2. Changes in Securities and Use of Proceeds 59 Item 4. Submission of Matters to a Vote of Security Holders 59 Item 6. Exhibits and Reports on Form 8-K 60 Signature 62 Index to Exhibits 63
1 Part I. Financial Information Item 1. Financial Statements - -------------------------------------------------------------------------------- Bank of America Corporation and Subsidiaries Consolidated Statement of Income - --------------------------------------------------------------------------------
Three Months Six Months Ended June 30 Ended June 30 ----------------- ------------------- (Dollars in millions, except per share information) 2000 1999 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------------- Interest income Interest and fees on loans and leases $ 7,923 $ 6,853 $ 15,317 $ 13,623 Interest and dividends on securities 1,271 1,143 2,602 2,318 Federal funds sold and securities purchased under agreements to resell 595 387 1,170 768 Trading account assets 694 525 1,230 1,070 Other interest income 254 298 504 628 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest income 10,737 9,206 20,823 18,407 - ---------------------------------------------------------------------------------------------------------------------------------- Interest expense Deposits 2,720 2,168 5,215 4,480 Short-term borrowings 1,990 1,396 3,792 2,751 Trading account liabilities 189 150 370 279 Long-term debt 1,207 880 2,291 1,685 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest expense 6,106 4,594 11,668 9,195 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income 4,631 4,612 9,155 9,212 Provision for credit losses 470 510 890 1,020 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for credit losses 4,161 4,102 8,265 8,192 Gains on sales of securities 6 52 12 182 Noninterest income Consumer service charges 646 634 1,264 1,237 Corporate service charges 479 439 968 892 - ---------------------------------------------------------------------------------------------------------------------------------- Total service charges 1,125 1,073 2,232 2,129 - ---------------------------------------------------------------------------------------------------------------------------------- Consumer investment and brokerage services 387 334 751 645 Corporate investment and brokerage services 105 133 226 248 - ---------------------------------------------------------------------------------------------------------------------------------- Total investment and brokerage services 492 467 977 893 - ---------------------------------------------------------------------------------------------------------------------------------- Mortgage servicing income 136 125 264 257 Investment banking income 373 421 770 654 Equity investment gains 134 134 697 289 Card income 556 497 1,040 891 Trading account profits 471 395 1,195 895 Other income 213 410 371 737 - ---------------------------------------------------------------------------------------------------------------------------------- Total noninterest income 3,500 3,522 7,546 6,745 - ---------------------------------------------------------------------------------------------------------------------------------- Merger-related charges - 200 - 200 Other noninterest expense Personnel 2,311 2,261 4,845 4,594 Occupancy 411 395 829 791 Equipment 296 339 597 697 Marketing 132 147 251 294 Professional fees 93 166 198 292 Amortization of intangibles 218 225 435 447 Data processing 169 214 328 404 Telecommunications 133 140 264 276 Other general operating 505 446 1,020 866 General administrative and other 145 124 269 249 - ---------------------------------------------------------------------------------------------------------------------------------- Total other noninterest expense 4,413 4,457 9,036 8,910 - ---------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 3,254 3,019 6,787 6,009 Income tax expense 1,191 1,104 2,484 2,180 - ---------------------------------------------------------------------------------------------------------------------------------- Net income $ 2,063 $1,915 $ 4,303 $3,829 - ---------------------------------------------------------------------------------------------------------------------------------- Net income available to common shareholders $ 2,061 $1,914 $ 4,300 $3,826 - ---------------------------------------------------------------------------------------------------------------------------------- Per share information Earnings per common share $ 1.25 $ 1.10 $ 2.59 $ 2.20 - ---------------------------------------------------------------------------------------------------------------------------------- Diluted earnings per common share $ 1.23 $ 1.07 $ 2.56 $ 2.15 - ---------------------------------------------------------------------------------------------------------------------------------- Dividends per common share $ .50 $ .45 $ 1.00 $ .90 - ---------------------------------------------------------------------------------------------------------------------------------- Average common shares issued and outstanding (in thousands) 1,653,495 1,743,503 1,661,403 1,740,549 ==================================================================================================================================
See accompanying notes to consolidated financial statements. 2 ================================================================================ Bank of America Corporation and Subsidiaries Consolidated Balance Sheet - --------------------------------------------------------------------------------
June 30 December 31 (Dollars in millions) 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 27,493 $ 26,989 Time deposits placed and other short-term investments 4,394 4,838 Federal funds sold and securities purchased under agreements to resell 42,460 37,928 Trading account assets 50,162 38,460 Securities: Available-for-sale 79,518 81,647 Held-for-investment, at cost (market value - $1,312 and $1,270) 1,439 1,422 - ------------------------------------------------------------------------------------------------------------------------------- Total securities 80,957 83,069 - ------------------------------------------------------------------------------------------------------------------------------- Loans and leases 400,817 370,662 Allowance for credit losses (6,815) (6,828) - ------------------------------------------------------------------------------------------------------------------------------- Loans and leases, net of allowance for credit losses 394,002 363,834 - ------------------------------------------------------------------------------------------------------------------------------- Premises and equipment, net 6,514 6,713 Customers' acceptance liability 2,477 1,869 Derivative-dealer assets 16,149 16,055 Interest receivable 4,083 3,777 Mortgage servicing rights 4,065 4,093 Goodwill 11,961 12,262 Core deposits and other intangibles 1,617 1,730 Other assets 33,204 30,957 - ------------------------------------------------------------------------------------------------------------------------------- Total assets $679,538 $632,574 - ------------------------------------------------------------------------------------------------------------------------------- Liabilities Deposits in domestic offices: Noninterest-bearing $ 94,014 $ 93,476 Interest-bearing 207,977 207,048 Deposits in foreign offices: Noninterest-bearing 1,631 1,993 Interest-bearing 53,042 44,756 - ------------------------------------------------------------------------------------------------------------------------------- Total deposits 356,664 347,273 - ------------------------------------------------------------------------------------------------------------------------------- Federal funds purchased and securities sold under agreements to repurchase 89,508 74,561 Trading account liabilities 23,056 20,958 Derivative-dealer liabilities 17,609 16,200 Commercial paper 10,225 7,331 Other short-term borrowings 39,801 40,340 Acceptances outstanding 2,477 1,869 Accrued expenses and other liabilities 20,137 19,169 Long-term debt 69,245 55,486 Trust preferred securities 4,955 4,955 - ------------------------------------------------------------------------------------------------------------------------------- Total liabilities 633,677 588,142 - ------------------------------------------------------------------------------------------------------------------------------- Commitments and contingencies (Note Six) Shareholders' equity Preferred stock, $0.01 par value; authorized - 100,000,000 shares; issued and outstanding - 1,742,349 and 1,797,702 shares 75 77 Common stock, $0.01 par value; authorized - 5,000,000,000 shares; issued and outstanding - 1,645,701,425 and 1,677,273,267 shares 10,188 11,671 Retained earnings 38,330 35,681 Accumulated other comprehensive loss (2,537) (2,658) Other (195) (339) - ------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 45,861 44,432 - ------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $679,538 $632,574 - -------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 3 - -------------------------------------------------------------------------------- Bank of America Corporation and Subsidiaries Consolidated Statement of Changes in Shareholders' Equity - -------------------------------------------------------------------------------- Accumulated Common Stock Other Preferred ------------------------ Retained Comprehensive (Dollars in millions, shares in thousands) Stock Shares Amount Earnings Income (Loss) (1,2) - ------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1998 $83 1,724,484 $14,837 $30,998 $ 152 Net income 3,829 Other comprehensive loss, net of tax (1,747) Comprehensive income Cash dividends: Common (1,568) Preferred (3) Common stock issued under employee plans 23,307 1,097 Common stock repurchased (25,000) (1,722) Conversion of preferred stock (3) 136 3 Other 4 218 - ------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1999 $80 1,722,931 $14,433 $33,256 $ (1,595) ============================================================================================================================== Balance, December 31, 1999 $77 1,677,273 $11,671 $35,681 $ (2,658) Net income 4,303 Other comprehensive income, net of tax 121 Comprehensive income Cash dividends: Common (1,655) Preferred (3) Common stock issued under employee plans 2,185 34 Common stock repurchased (33,850) (1,623) Conversion of preferred stock (2) 92 2 Other 1 104 4 - ------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 2000 $75 1,645,701 $10,188 $38,330 $(2,537) ==============================================================================================================================
Total Share- holders' Comprehensive Other Equity Income ------------------------------------------ Balance, December 31, 1998 $(132) $45,938 Net income 3,829 $3,829 Other comprehensive loss, net of tax (1,747) (1,747) ------- Comprehensive income $2,082 Cash dividends: ======= Common (1,568) Preferred (3) Common stock issued under employee plans (420) 677 Common stock repurchased (1,722) Conversion of preferred stock Other 9 227 - ---------------------------------------------------------------------------------- Balance, June 30, 1999 $(543) $45,631 ================================================================================== Balance, December 31, 1999 $(339) $44,432 Net income 4,303 $4,303 Other comprehensive income, net of tax 121 121 ------- Comprehensive income $4,424 ======= Cash dividends: Common (1,655) Preferred (3) Common stock issued under employee plans 106 140 Common stock repurchased (1,623) Conversion of preferred stock Other 38 146 - ---------------------------------------------------------------------------------- Balance, June 30, 2000 $(195) $45,861 ==================================================================================
(1) Changes in Accumulated Other Comprehensive Income (Loss) include after-tax net unrealized gains (losses) on available-for-sale and marketable equity securities of $119 and $(1,710) and after-tax net unrealized gains (losses) on foreign currency translation adjustments of $2 and $(37) for the six months ended June 30, 2000 and 1999, respectively. (2) Accumulated Other Comprehensive Income (Loss) consists of the after-tax valuation allowance for available-for-sale and marketable equity securities of $(2,351) and $(1,407) and foreign currency translation adjustments of $(186) and $(188) at June 30, 2000 and 1999, respectively. See accompanying notes to consolidated financial statements. 4 - -------------------------------------------------------------------------------- Bank of America Corporation and Subsidiaries Consolidated Statement of Cash Flows - --------------------------------------------------------------------------------
Six Months Ended June 30 ------------------------------------- (Dollars in millions) 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------------- Operating Activities Net Income $4,303 $3,829 Reconciliation of net income to net cash used in operating activities: Provision for credit losses 890 1,020 Gains on sales of securities (12) (182) Merger-related charges, net - 200 Depreciation and premises improvements amortization 472 533 Amortization of intangibles 435 447 Deferred income tax (benefit) expense 1,067 (542) Net (increase) decrease in trading instruments (8,289) 5,662 Net (increase) decrease in interest receivable (306) 256 Net (increase) decrease in other assets (3,388) 293 Net increase (decrease) in interest payable 100 (155) Net decrease in accrued expenses and other liabilities (124) (11,652) Other operating activities, net 172 (69) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used in operating activities (4,680) (360) - ----------------------------------------------------------------------------------------------------------------------------------- Investing activities Net decrease in time deposits placed and other short-term investments 444 1,400 Net increase in federal funds sold and securities purchased under agreements to resell (4,532) (8,761) Proceeds from sales of available-for-sale securities 13,729 24,321 Proceeds from maturities of available-for-sale securities 2,781 5,163 Purchases of available-for-sale securities (13,925) (28,070) Proceeds from maturities of held-for-investment securities 128 498 Proceeds from sales and securitizations of loans and leases 12,523 19,892 Purchases and net originations of loans and leases (42,973) (24,615) Purchases and originations of mortgage servicing rights (242) (1,428) Net purchases of premises and equipment (273) (256) Proceeds from sales of foreclosed properties 145 169 Acquisitions and divestitures of business activities, net of cash (24) (1,483) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (32,219) (13,170) - ----------------------------------------------------------------------------------------------------------------------------------- Financing activities Net increase (decrease) in deposits 9,391 (18,215) Net increase in federal funds purchased and securities sold under agreements to repurchase 14,947 10,774 Net increase in commercial paper and other short-term borrowings 2,355 10,158 Proceeds from issuance of long-term debt 19,681 12,420 Retirement of long-term debt (6,728) (3,110) Proceeds from issuance of common stock 140 677 Common stock repurchased (1,623) (1,722) Cash dividends paid (1,658) (1,571) Other financing activities, net 939 50 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 37,444 9,461 - ----------------------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents (41) (11) - ----------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 504 (4,080) Cash and cash equivalents at December 31 26,989 28,277 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at June 30 $27,493 $24,197 ===================================================================================================================================
Loans transferred to foreclosed properties amounted to $188 and $198 for the six months ended June 30, 2000 and 1999, respectively. Loans securitized and retained in the available-for-sale securities portfolio amounted to $224 and $367 for the six months ended June 30, 2000 and 1999, respectively. There were no acquisitions for the six months ended June 30, 2000. The fair value of noncash assets acquired and liabilities assumed in acquisitions for the six months ended June 30, 1999 were $1,557 and $74, net of cash acquired. See accompanying notes to consolidated financial statements. 5 Bank of America Corporation and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Bank of America Corporation (the Corporation) is a Delaware corporation, a bank holding company and a financial holding company. Through its banking and nonbanking subsidiaries, the Corporation provides a diverse range of financial services and products throughout the U.S. and in selected international markets. Note One - Accounting Policies 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. Accounting policies followed in the presentation of interim financial results are presented on pages 58 to 63 of the Corporation's Annual Report on Form 10-K for the year ended December 31, 1999. In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). This standard requires all derivative instruments to be recognized as either assets or liabilities and measured at their fair values. In addition, SFAS 133 provides special hedge accounting for fair value, cash flow and foreign currency hedges, provided certain criteria are met. Pursuant to Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of Effective Date of Financial Accounting Standards Board Statement No. 133", the Corporation is required to adopt the standard on or before January 1, 2001. On June 15, 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - An Amendment of SFAS 133." This standard addresses certain implementation issues of SFAS 133. Upon adoption, all hedging relationships must be designated and documented pursuant to the provisions of SFAS 133, as amended. The Corporation is in the process of evaluating the impact of this statement and associated amendment on its risk management strategies and processes, information systems and financial statements. In 1999, the Federal Financial Institutions Examination Council issued The Uniform Classification and Account Management Policy (the Policy) which updated and expanded the classification of delinquent retail credits. The Policy provides guidance for banks on the treatment of delinquent open-end and close-end loans. The Corporation is required to implement the Policy by December 31, 2000 and expects to be in full compliance with the Policy by that date. The Corporation does not expect the adoption of this Policy to have a material impact on its results of operations and financial condition. 6 Note Two - Acquisition and Merger-Related Activities At June 30, 2000, 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). On March 31, 1999, NationsBank of Delaware, N.A. merged with and into Bank of America, N.A. (USA), a national association headquartered in Phoenix, Arizona (formerly known as Bank of America National Association), which operates the Corporation's credit card business. On April 1, 1999, the mortgage business of BankAmerica transferred to NationsBanc Mortgage Corporation. On December 1, 1999, NationsBanc Mortgage Corporation merged with and into BA Mortgage, LLC, a Delaware limited liability company and a Bank of America, N.A. subsidiary. On April 8, 1999, the Corporation merged Bank of America Texas, N.A. into NationsBank, N.A. On July 5, 1999, NationsBank, N.A. changed its name to Bank of America, N.A. On July 23, 1999, Bank of America, N.A. merged into Bank of America National Trust and Savings Association (Bank of America NT&SA), and the surviving entity of that merger changed its name to Bank of America, N.A. On December 1, 1999, Bank of America, FSB, a federal savings bank formerly headquartered in Portland, Oregon, was converted into a national bank and merged into Bank of America, N.A. On September 30, 1998, BankAmerica Corporation (BankAmerica) merged (the Merger) with and into the Corporation, formerly NationsBank Corporation (NationsBank). In connection with the Merger, the Corporation recorded pre-tax merger-related charges of $525 million ($358 million after-tax) in 1999 and $1,325 million ($960 million after-tax) in 1998. Of the $525 million in 1999, $200 million ($145 million after-tax) and $325 million ($213 million after-tax) were recorded in the second and fourth quarters, respectively. Of the $1,325 million in 1998, $725 million ($519 million after-tax) and $600 million ($441 million after-tax) were recorded in the third and fourth quarters, respectively. The total pre-tax charge for 1999 consisted of approximately $219 million primarily of severance, change in control and other employee-related costs, $187 million of conversion and related costs including occupancy, equipment and customer communication expenses, $128 million of exit and related costs and a $9 million reduction of other merger costs. The total pre-tax charge for 1998 consisted of approximately $740 million primarily of severance, change in control and other employee-related costs, $150 million of conversion and related costs including occupancy and equipment expenses (primarily lease exit costs and the elimination of duplicate facilities and other capitalized assets) and customer communication expenses, $300 million of exit and related costs and $135 million of other merger costs (including legal, investment banking and filing fees). Total severance, change in control and other employee-related costs include amounts related to job eliminations of former associates of BankAmerica and NationsBank impacted by the Merger. Through June 30, 2000, approximately 13,800 employees had entered the severance process. Employee-related costs of the Merger were principally in overlapping functions, operations and businesses of the Corporation. The BankAmerica merger-related reserve balance was $300 million at January 1, 2000. Cash payments applied to the reserve in 2000 were approximately $169 million and noncash reductions were $29 million. The remaining merger-related reserve balance was $102 million at June 30, 2000. On June 15, 2000, the Corporation entered into an agreement, effective January 2, 2001, to acquire the remaining 50 percent of Marsico Capital Management LLP (Marsico) for a total investment of $1.1 billion. The Corporation acquired the first 50 percent in 1999. Marsico is a Denver-based investment management firm with more than $15 billion in assets under management, specializing in large capitalization growth stocks. For additional information on the Corporation's merger-related activities, refer to Note Two of the Corporation's 1999 Annual Report on Form 10-K. 7 Note Three - 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-dealer positions. These transactions include positions to meet customer demand as well as for the Corporation's own trading account. Trading positions are taken in a diverse range of financial instruments and markets. The profitability of these trading positions is largely dependent on the volume and type of transactions, the level of risk assumed and the volatility of price and rate movements. Trading account profits, as reported in the Corporation's Consolidated Statement of Income, includes neither the net interest recognized on interest-earning and interest-bearing trading positions nor the related funding charge or benefit. Trading account profits and trading-related net interest income ("trading-related revenue") are presented in the table below 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 Six Months Ended June 30 June 30 ---------------------------------------- (Dollars in millions) 2000 1999 2000 1999 - ------------------------------------------------------------------------------- Trading account profits - as reported $ 471 $ 395 $1,195 $ 895 Net interest income 263 148 483 315 - ------------------------------------------------------------------------------- Total trading-related revenue $ 734 $ 543 $1,678 $1,210 - ------------------------------------------------------------------------------- Trading-related revenue by product Foreign exchange contracts $ 132 $ 154 $ 290 $ 312 Interest rate contracts 169 126 476 340 Fixed income 71 105 244 296 Equities 335 135 624 222 Commodities and other 27 23 44 40 - ------------------------------------------------------------------------------- Total trading-related revenue $ 734 $ 543 $1,678 $1,210 =============================================================================== 8 Trading Account Assets and Liabilities The fair value of the components of trading account assets and liabilities at June 30, 2000 and December 31,1999 were:
Fair Value ------------------------------ June 30 December 31 (Dollars in millions) 2000 1999 ---------------------------------------------------------------------------------------------------------------- Trading account assets U.S. Treasury securities $5,361 $ 6,793 Securities of other U.S. Government agencies and corporations 5,315 3,554 Certificates of deposit, bankers' acceptances and commercial paper 3,335 3,039 Corporate debt 3,021 2,993 Foreign sovereign debt 14,697 9,532 Mortgage-backed securities 7,132 6,748 Equity securities 4,255 2,856 Other 7,046 2,945 ---------------------------------------------------------------------------------------------------------------- Total $50,162 $38,460 ---------------------------------------------------------------------------------------------------------------- Trading account liabilities U.S. Treasury securities $9,403 $8,414 Corporate debt 1,926 - Foreign sovereign debt 3,601 3,490 Equity securities 7,702 7,840 Other 424 1,214 ---------------------------------------------------------------------------------------------------------------- Total $23,056 $20,958 ================================================================================================================
See Note Six for additional information on derivative-dealer positions, including credit risk. Note Four - Loans and Leases Loans and leases at June 30, 2000 and December 31, 1999 were:
June 30, 2000 December 31, 1999 -------------------- ---------------------- (Dollars in millions) Amount Percent Amount Percent ------------------------------------------------------------------------------------------------ Commercial - domestic $150,622 37.6% $143,450 38.7% Commercial - foreign 30,582 7.6 27,978 7.5 Commercial real estate - domestic 26,054 6.5 24,026 6.5 Commercial real estate - foreign 229 .1 325 .1 ------------------------------------------------------------------------------------------------ Total commercial 207,487 51.8 195,779 52.8 ------------------------------------------------------------------------------------------------ Residential mortgage 94,090 23.5 81,860 22.1 Home equity lines 20,154 5.0 17,273 4.7 Direct/Indirect consumer 41,824 10.4 42,161 11.4 Consumer finance 24,748 6.2 22,326 6.0 Bankcard 10,310 2.6 9,019 2.4 Foreign consumer 2,204 .5 2,244 .6 ------------------------------------------------------------------------------------------------ Total consumer 193,330 48.2 174,883 47.2 ------------------------------------------------------------------------------------------------ Total loans and leases $400,817 100.0% $370,662 100.0% ================================================================================================
9 The table below summarizes the changes in the allowance for credit losses for the three months and six months ended June 30, 2000 and 1999:
Three Months Six Months Ended June 30 Ended June 30 ----------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 - ---------------------------------------------------------------------------------------------------- Balance, beginning of period $ 6,827 $ 7,123 $ 6,828 $ 7,122 - ---------------------------------------------------------------------------------------------------- Loans and leases charged off (620) (672) (1,190) (1,338) Recoveries of loans and leases previously charged off 150 152 300 299 - ---------------------------------------------------------------------------------------------------- Net charge-offs (470) (520) (890) (1,039) - ---------------------------------------------------------------------------------------------------- Provision for credit losses 470 510 890 1,020 Other, net (12) (17) (13) (7) - ---------------------------------------------------------------------------------------------------- Balance, June 30 $ 6,815 $ 7,096 $ 6,815 $ 7,096 ====================================================================================================
The following table presents the recorded investment in specific loans that were considered individually impaired at June 30, 2000 and December 31, 1999: June 30 December 31 (Dollars in millions) 2000 1999 ------------------------------------------------------------------- Commercial - domestic $1,496 $1,133 Commercial - foreign 585 503 Commercial real estate - domestic 391 449 ---------------------------------------------------------------- Total impaired loans $2,472 $2,085 =================================================================== A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the agreement. Due to their homogeneous nature, consumer loans and certain smaller business loans are generally evaluated as a group based on individual loan type. Commercial and commercial real estate loans are generally evaluated individually due to a general lack of uniformity among individual loans within each loan type and business segment. Once a loan has been identified as impaired, management measures impairment in accordance with Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114). Impaired loans are measured based on the present value of payments expected to be received, observable market prices or for loans that are solely dependent on the collateral for repayment, the estimated fair value of the collateral. If the recorded investment in impaired loans exceeds the measure of estimated fair value, a valuation allowance is established as a component of the allowance for credit losses. At June 30, 2000 and December 31, 1999, nonperforming loans including certain loans which were considered impaired totaled $3.7 billion and $3.0 billion, respectively. Foreclosed properties amounted to $195 million and $163 million at June 30, 2000 and December 31, 1999, respectively. 10 Note Five - Short-Term Borrowings and Long-Term Debt During 2000, Bank of America Corporation issued $4.4 billion in senior and subordinated long-term debt, domestically and internationally, with maturities ranging from 2002 to 2015. Of the $4.4 billion issued, $2.4 billion bears interest at floating rates ranging primarily from eight to 41 basis points over three-month London InterBank Offered Rate (LIBOR). The remaining $2.0 billion was converted from fixed rates ranging from 7.35 percent to 8.42 percent to floating rates through interest rate swaps at spreads ranging from nine to 59 basis points over three-month LIBOR. At June 30, 2000, Bank of America Corporation had the authority to issue approximately $15.5 billion of corporate debt and other securities under its existing shelf registration statements. During 2000, Bank of America, N.A. issued $13.7 billion in senior long-term bank notes having maturities ranging from 2001 to 2013. Of the $13.7 billion issued, $5.0 billion bears interest at spreads ranging from zero to 15 basis points above three-month LIBOR, $4.1 billion bears interest at spreads ranging from 287 to 272 basis points below the prime rate, $2.8 billion bears interest at fixed rates ranging from 6.45 percent to 7.40 percent, $1.1 billion bears interest at spreads ranging from 14 to 28 basis points above the Fed Funds rate and $695 million bears interest at spreads ranging from five to 12 basis points above one-month LIBOR. Bank of America, N.A. maintains a domestic program to offer up to a maximum of $35.0 billion, at any one time, of bank notes with fixed or floating rates and maturities ranging from seven days or more from date of issue. Short-term bank notes outstanding under this program totaled $14.7 billion at June 30, 2000 compared to $15.2 billion at December 31, 1999. These short-term bank notes, along with Treasury tax and loan notes and term federal funds purchased, are reflected in other short-term borrowings in the Consolidated Balance Sheet. Long-term debt under current and former programs totaled $18.1 billion at June 30, 2000 compared to $10.1 billion at December 31, 1999. On August 1, 2000, Bank of America, N.A. increased the maximum amount of bank notes that it can offer from $35.0 billion to $50.0 billion. Bank of America Corporation and Bank of America, N.A. maintain a joint Euro medium-term note program to offer up to $15.0 billion of senior, or in the case of Bank of America Corporation, subordinated notes exclusively to non-United States residents. The notes bear interest at fixed or floating rates and may be denominated in U.S. dollars or foreign currencies. Bank of America Corporation uses foreign currency contracts to convert certain foreign-denominated debt into U.S. dollars. Bank of America Corporation's notes outstanding under this program totaled $5.0 billion at June 30, 2000 compared to $4.5 billion at December 31, 1999. Bank of America, N.A.'s notes outstanding under this program totaled $1.2 billion at June 30, 2000. Bank of America, N.A. had no notes outstanding under this program at December 31, 1999. Of the $15.0 billion authorized at June 30, 2000, Bank of America Corporation and Bank of America, N.A. had remaining authority to issue in the aggregate of debt securities under the current program approximately $5.0 billion and $3.8 billion, respectively. At June 30, 2000 and December 31, 1999, $3.2 billion and $3.3 billion, respectively, were outstanding under the former BankAmerica Euro medium-term note program. No additional debt securities will be offered under that program. On August 1, 2000, Bank of America Corporation and Bank of America, N.A. increased the size of their joint Euro medium-term note program to $20.0 billion. 11 Note Six - Commitments and Contingencies Credit Extension Commitments The Corporation enters into commitments to extend credit, standby letters of credit and commercial letters of credit to meet the financing needs of its customers. The commitments shown below have been reduced by amounts collateralized by cash and amounts participated to other financial institutions. The following table summarizes outstanding commitments to extend credit:
June 30 December 31 (Dollars in millions) 2000 1999 ------------------------------------------------------------------------------------- Credit card commitments $68,370 $67,394 Other loan commitments 252,522 246,827 Standby letters of credit and financial guarantees 32,076 32,993 Commercial letters of credit 4,552 3,690
Derivatives Credit Risk Associated with Derivative-Dealer Activities The table on the following page presents the notional or contract amounts at June 30, 2000 and December 31, 1999 and the credit risk amounts (the net replacement cost of contracts in a gain position) of the Corporation's derivative-dealer positions which are primarily executed in the over-the-counter market for trading purposes. This table should be read in conjunction with the "Market Risk Management" section on pages 42 through 46 and Note Eleven of the Corporation's 1999 Annual Report on Form 10-K. The notional or contract amounts indicate the total volume of transactions and significantly exceed the amount of the Corporation's credit or market risk associated with these instruments. 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 and any collateral underlying the contracts proves to be of no value. The credit risk amounts presented in the following table do not consider the value of any collateral but generally take into consideration the effects of legally enforceable master netting agreements. 12
Derivative-Dealer Positions ------------------------------------------------------------------------------------------------ June 30, 2000 December 31, 1999 --------------------------------------------------------- Contract/ Credit Contract/ Credit (Dollars in millions) Notional Risk Notional Risk ------------------------------------------------------------------------------------------------ Interest rate contracts Swaps $3,506,678 $7,639 $2,597,886 $5,691 Futures and forwards 921,152 98 644,795 58 Written options 295,994 - 560,070 - Purchased options 537,425 1,120 638,517 1,747 Foreign exchange contracts Swaps 60,964 578 55,278 1,058 Spot, futures and forwards 757,133 2,761 537,719 3,298 Written options 33,259 - 28,450 - Purchased options 32,349 337 26,820 424 Equity contracts Swaps 17,316 412 11,128 1,042 Futures and forwards 30,320 86 21,421 3 Written options 21,908 - 24,232 - Purchased options 39,873 2,318 28,251 4,625 Other contracts Swaps 5,555 671 1,950 190 Futures and forwards 873 77 1,075 38 Written options 8,741 - 4,636 - Purchased options 7,798 372 3,965 265 Credit derivatives 25,758 112 19,028 70 ------------------------------------------------------------------------------------------------ Total before cross-product netting 16,581 18,509 Cross-product netting 432 2,454 ------------------------------------------------------------------------------------------------ Net replacement cost $16,149 $16,055 ================================================================================================
The table above includes both long and short derivative-dealer positions. The average fair value of derivative-dealer assets for the six months ended June 30, 2000 and for the year ended December 31, 1999 was $19.4 billion and $16.0 billion, respectively. The average fair value of derivative-dealer liabilities for the six months ended June 30, 2000 and for the year ended December 31, 1999 was $19.3 billion and $16.5 billion, respectively. The fair value of derivative-dealer assets at both June 30, 2000 and December 31, 1999 was $16.1 billion. The fair value of derivative-dealer liabilities at June 30, 2000 and December 31, 1999 was $17.6 billion and $16.2 billion, respectively. See Note Three for a discussion of trading-related revenue. During the six months ended June 30, 2000 and 1999, there were no significant credit losses associated with derivative contracts. At June 30, 2000 and December 31, 1999, there were no nonperforming derivative positions that were material to the Corporation. In addition to credit risk management activities, the Corporation uses credit derivatives to generate revenue by taking on exposure to underlying credits. The Corporation also provides credit derivatives to sophisticated customers who wish to hedge existing credit exposures or take on additional credit exposure to generate revenue. The Corporation's credit derivative positions at June 30, 2000 and December 31, 1999 consisted of credit default swaps and total return swaps. 13 Asset and Liability Management (ALM) Activities The table below outlines the status of the Corporation's ALM activity at June 30, 2000 and December 31, 1999. It presents the notional amount and fair value of the Corporation's open and closed ALM contracts. This table should be read in conjunction with the "Market Risk Management" section on pages 42 through 46 and Note Eleven of the Corporation's 1999 Annual Report on Form 10-K.
June 30, 2000 December 31, 1999 --------------------------------------------------- Notional Fair Notional Fair (Dollars in millions) Amount Value Amount Value ---------------------------------------------------------------------------------------- Open interest rate contracts Receive fixed swaps $ 55,177 $ (1,687) $ 63,002 $ (1,747) Pay fixed swaps 18,566 151 25,701 115 ---------------------------------------------------------------------------------------- Net open receive fixed 36,611 (1,536) 37,301 (1,632) Basis swaps 7,815 (5) 7,971 (6) ---------------------------------------------------------------------------------------- Total net swap position 44,426 (1,541) 45,272 (1,638) Option products 42,850 (146) 35,134 5 Futures and forwards 2,119 (35) 931 3 ---------------------------------------------------------------------------------------- Total open interest rate contracts(1) (1,722) (1,630) ---------------------------------------------------------------------------------------- Closed interest rate contracts Swap positions 99 174 Option products 112 82 Futures and forwards (19) (21) ---------------------------------------------------------------------------------------- Total closed interest rate contracts(2) 192 235 ---------------------------------------------------------------------------------------- Net interest rate contract position (1,530) (1,395) ---------------------------------------------------------------------------------------- Open foreign exchange contracts(1) 5,959 (200) 6,231 (30) ---------------------------------------------------------------------------------------- Total ALM contracts $ (1,730) $ (1,425) ========================================================================================
(1) Fair value represents the net unrealized losses on open contracts. (2) Represents the unamortized net realized deferred gains associated with closed contracts. --------------------------------------------------------------------------- When-Issued Securities At June 30, 2000, the Corporation had commitments to purchase and sell when-issued securities of $14.5 billion and $20.5 billion, respectively. At December 31, 1999, the Corporation had commitments to purchase and sell when-issued securities of $12.0 billion and $16.8 billion, respectively. Litigation In the ordinary course of business, the Corporation and its subsidiaries are routinely defendants in or parties to a number of pending and threatened legal actions and proceedings, including actions brought on behalf of various classes of claimants. In certain of these actions and proceedings, substantial money damages are asserted against the Corporation and its subsidiaries and certain of these actions and proceedings are based on alleged violations of consumer protection, securities, environmental, banking and other laws. The Corporation and certain present and former officers and directors have been named as defendants in a number of actions filed in several federal courts that have been consolidated for pretrial purposes before a Missouri federal court. The amended complaint in the consolidated actions alleges, among other things, that the defendants failed to disclose material facts about BankAmerica's losses relating to D.E. Shaw Securities Group, L.P. and related entities until mid-October 1998, in violation of various provisions of federal and state laws. The amended complaint also alleges that the proxy statement-prospectus of August 4, 1998, falsely stated that the Merger would be one of equals and alleges a scheme to have NationsBank gain control over the newly merged entity. The Missouri federal 14 court has certified classes consisting generally of persons who were stockholders of NationsBank or BankAmerica on September 30, 1998, or were entitled to vote on the Merger, or who purchased or acquired securities of the Corporation or its predecessors between August 4, 1998 and October 13, 1998. The amended complaint substantially survived a motion to dismiss, and discovery is underway. Claims against certain director-defendants were dismissed with leave to replead. Similar uncertified class actions (including one limited to California residents raising the claim that the proxy statement-prospectus of August 4, 1998, falsely stated that the Merger would be one of equals) were filed in California state court, alleging violations of the California Corporations Code and other state laws. The action on behalf of California residents was certified, but has since been dismissed and an appeal is pending. Of the remaining actions, one has been stayed, and a motion for class certification is pending in the other. The Missouri federal court has enjoined prosecution of that action as a class action. The plaintiffs who were enjoined have appealed. The Corporation believes the actions lack merit and will defend them vigorously. The amount of any ultimate exposure cannot be determined with certainty at this time. Management believes that the actions and proceedings and the losses, if any, resulting from the final outcome thereof, will not be material in the aggregate to the Corporation's financial position or results of operations. 15 Note Seven - Shareholders' Equity and Earnings Per Common Share On June 23, 1999, the Corporation's Board of Directors (the Board) authorized the repurchase of up to 130 million shares of the Corporation's common stock at an aggregate cost of up to $10.0 billion. Through June 30, 2000, the Corporation had repurchased 112 million shares of its common stock in open market repurchases and under accelerated share repurchase programs at an average per-share price of $57.92 which reduced shareholders' equity by $6.5 billion. The remaining buyback authority for common stock under the current program totaled $3.5 billion or 18 million shares at June 30, 2000. On July 26, 2000, the Board authorized a new stock repurchase program of up to 100 million shares of the Corporation's common stock at an aggregate cost of up to $7.5 billion. Earnings per common share is computed by dividing net income available to common shareholders by the weighted average common shares issued and outstanding. For diluted earnings per common share, net income available to common shareholders can be affected by the conversion of the registrant's convertible preferred stock. Where the effect of this conversion would have been dilutive, net income available to common shareholders is adjusted by the associated preferred dividends. This adjusted net income is divided by the weighted average number of common shares issued and outstanding for each period plus amounts representing the dilutive effect of stock options outstanding and the dilution resulting from the conversion of the registrant's convertible preferred stock, if applicable. The effect of convertible preferred stock is excluded from the computation of diluted earnings per common share in periods in which the effect would be antidilutive. The calculation of earnings per common share and diluted earnings per common share for the three months and six months ended June 30, 2000 and 1999 is presented below:
Three Months Ended Six Months Ended (Shares in thousands; dollars in millions, June 30 June 30 except per share information) ------------------------------------------------------- 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------- Earnings per common share Net income $2,063 $1,915 $4,303 $3,829 Preferred stock dividends (2) (1) (3) (3) ------------------------------------------------------------------------------------------------------------------------- Net income available to common shareholders $2,061 $1,914 $4,300 $3,826 ------------------------------------------------------------------------------------------------------------------------- Average common shares issued and outstanding 1,653,495 1,743,503 1,661,403 1,740,549 ------------------------------------------------------------------------------------------------------------------------- Earnings per common share $1.25 $ 1.10 $2.59 $ 2.20 ========================================================================================================================= Diluted earnings per common share Net income available to common shareholders $2,061 $1,914 $4,300 $3,826 Preferred stock dividends 2 1 3 3 ------------------------------------------------------------------------------------------------------------------------- Net income available to common shareholders and assumed conversions $2,063 $1,915 $4,303 $3,829 ------------------------------------------------------------------------------------------------------------------------- Average common shares issued and outstanding 1,653,495 1,743,503 1,661,403 1,740,549 ------------------------------------------------------------------------------------------------------------------------- Incremental shares from assumed conversions: Convertible preferred stock 2,914 3,098 2,987 3,098 Stock options 19,680 40,244 17,239 39,670 ------------------------------------------------------------------------------------------------------------------------- Dilutive potential common shares 22,594 43,342 20,226 42,768 ------------------------------------------------------------------------------------------------------------------------- Total dilutive average common shares issued and outstanding 1,676,089 1,786,845 1,681,630 1,783,317 ------------------------------------------------------------------------------------------------------------------------- Diluted earnings per common share $ 1.23 $ 1.07 $ 2.56 $ 2.15 =========================================================================================================================
16 Note Eight - Business Segment Information During the first quarter of 2000, the Corporation realigned its business segments to report the results of the Corporation's operations through three business segments: Consumer and Commercial Banking, Asset Management and Global Corporate and Investment Banking. 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 to middle market companies with annual revenue between $10 million and $500 million. Asset Management offers customized asset management and credit, financial advisory, fiduciary and trust services, and banking services. It also provides management of equity, fixed income, cash and alternative investments to individuals, corporations and a wide array of institutional clients and full service and discount brokerage services. Global Corporate and Investment Banking provides a diversified range of financial products such as investment banking, trade finance, treasury management, capital markets, leasing and financial advisory services to domestic and international corporations, financial institutions and government entities. The following table includes total revenue, net income and average total assets for the three months and six months ended June 30, 2000 and 1999 for each business segment. Certain prior period amounts have been reclassified between segments to conform to the current period presentation. For the three months ended June 30 Consumer and Global Corporate and Commercial Banking (2) Asset Management (2) Investment Banking((2) Corporate Other ----------------------------------------------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income (1) $ 3,425 $ 3,506 $ 159 $ 142 $ 1,045 $ 914 $ 80 $ 101 Noninterest income 1,789 1,807 420 394 1,291 1,321 - - - ------------------------------------------------------------------------------------------------------------------------------------ Total revenue 5,214 5,313 579 536 2,336 2,235 80 101 Provision for credit losses 310 397 - 20 144 93 16 - Gains on sales of securities (1) - - - - 10 7 42 Amortization of intangibles 169 178 6 6 43 41 - - Depreciation expense 168 188 13 17 52 58 - - Merger-related charges - - - - - - - 200 Other noninterest expense 2,497 2,632 296 278 1,171 1,051 (2) 8 - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 2,069 1,918 264 215 926 1,002 73 (65) Income tax expense 815 724 101 80 326 355 27 (4) - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 1,254 $ 1,194 $ 163 $ 135 $ 600 $ 647 $ 46 $ (61) ==================================================================================================================================== Average total assets $ 311,356 $ 292,707 $ 23,360 $ 20,163 $ 246,939 $ 218,367 $ 90,933 $ 84,127 ====================================================================================================================================
==================================================================================================================================== For the six months ended June 30 Consumer and Global Corporate and Commercial Banking (2) Asset Management (2) Investment Banking((2) Corporate Other ------------------------------------------------------------------------------------------ (Dollars in millions) 2000 1999 2000 1999 2000 1999 2000 1999 - -------------------------------------------------------------------------------------------------------------------------- Net interest income (1) $ 6,819 $ 6,975 $ 314 $ 277 $ 2,011 $ 1,862 $ 160 $ 194 Noninterest income 3,423 3,382 830 824 3,214 2,539 79 - - ------------------------------------------------------------------------------------------------------------------------------------ Total revenue 10,242 10,357 1,144 1,101 5,225 4,401 239 194 Provision for credit losses 690 749 11 39 173 232 16 - Gains on sales of securities - 3 - - 3 9 9 170 Amortization of intangibles 338 350 12 13 85 84 - - Depreciation expense 340 380 27 34 105 119 - - Merger-related charges - - - - - - - 200 Other noninterest expense 5,056 5,235 580 558 2,439 2,139 54 (2) - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 3,818 3,646 514 457 2,426 1,836 178 166 Income tax expense 1,500 1,377 197 171 870 647 66 81 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 2,318 $ 2,269 $ 317 $ 286 $ 1,556 $ 1,189 $ 112 $ 85 ==================================================================================================================================== Average total assets $306,124 $290,010 $ 22,832 $ 19,776 $241,860 $219,779 $ 90,988 $ 82,945 ====================================================================================================================================
(1) Net interest income is presented on a taxable-equivalent basis. (2) There were no material intersegment revenues among the three business segments. 17 A reconciliation of the segments' net income to consolidated net income follows:
Three Months Ended Six Months Ended June 30 June 30 ---------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 - -------------------------------------------------------------------------------------------------- Segments' net income $2,017 $1,976 $4,191 $3,744 Adjustments, net of taxes: Earnings associated with unassigned capital 52 58 100 123 Gains on sales of securities 4 26 6 107 Merger-related charges - (145) - (145) Other (10) - 6 - - -------------------------------------------------------------------------------------------------- Consolidated net income $2,063 $1,915 $4,303 $3,829 ==================================================================================================
Note Nine -- Subsequent Events Bank of America Pension Plan The Corporation and the BankAmerica 401(k) retirement plans were combined effective June 30, 2000. With the introduction of the revised Bank of America retirement plans, qualified BankAmerica employees who are currently active had a one-time opportunity to transfer certain assets in their 401(k) plan account to their Bank of America Pension Plan (pension plan) account effective August 4, 2000. The total amount of 401(k) plan assets transferred to the pension plan was $1.3 billion. The pension plan (which is a cash balance type of pension plan) has a balance guarantee feature, applied at the time a benefit payment is made from the plan, that protects the transferred portion of participants' accounts from future market downturns. The Corporation is responsible for funding any shortfall on the guarantee feature. Productivity and Investment Initiatives On July 28, 2000, the Corporation announced process changes and productivity and other investment initiatives. As part of these initiatives and in order to reallocate resources, the Corporation will eliminate 9,000 to 10,000 positions, or six to seven percent of its work force, over the next 12 months. The Corporation plans to take an after-tax charge of $300 million to $350 million in the third quarter, primarily to cover severance costs related to these changes and initiatives. The Corporation expects such changes and initiatives to strengthen revenue growth, support earnings momentum and improve customers' experience with the Corporation. 18 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - -------------------------------------------------------------------------------- This report on Form 10-Q contains certain forward-looking statements that are subject to risks and uncertainties and include information about possible or assumed future results of operations. Many possible events or factors could affect the future financial results and performance of the Corporation. This could cause results or performance to differ materially from those expressed in our forward-looking statements. Words such as "expects", "anticipates", "believes", "estimates", variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, 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 discussed throughout this report, as well as those discussed in the Corporation's 1999 Annual Report on Form 10-K. These statements are representative only on the date hereof, and the Corporation undertakes no obligation to update any forward-looking statements made. The possible events or factors include the following: the Corporation's loan growth is dependent on economic conditions, as well as various discretionary factors, such as decisions to securitize, sell, or purchase certain loans or loan portfolios; syndications or participations of loans; retention of residential mortgage loans; and the management of borrower, industry, product and geographic concentrations and the mix of the loan portfolio. The rate of charge-offs and provision expense can be affected by local, regional and international economic and market conditions, concentrations of borrowers, industries, products and geographic locations, the mix of the loan portfolio and management's judgments regarding the collectibility of loans. Liquidity requirements may change as a result of fluctuations in assets and liabilities and off-balance sheet exposures, which will impact the capital and debt financing needs of the Corporation and the mix of funding sources. Decisions to purchase, hold or sell securities are also dependent on liquidity requirements and market volatility, as well as on- and off-balance sheet positions. Factors that may impact interest rate risk include local, regional and international economic conditions, levels, mix, maturities, yields or rates of assets and liabilities, utilization and effectiveness of interest rate contracts and the wholesale and retail funding sources of the Corporation. The Corporation is also exposed to the potential of losses arising from adverse changes in market rates and prices which can adversely impact the value of financial products, including securities, loans, deposits, debt and derivative financial instruments, such as futures, forwards, swaps, options and other financial instruments with similar characteristics. In addition, the banking industry in general is subject to various monetary and fiscal policies and regulations, which include those determined by the Federal Reserve Board, the Office of the Comptroller of Currency, the Federal Deposit Insurance Corporation, state regulators and the Office of Thrift Supervision, whose policies and regulations could affect the Corporation's results. Other factors that may cause actual results to differ from the forward-looking statements include the following: projected business increases following process changes and productivity and other investment initiatives are lower than expected or do not pay for severance or other related costs as quickly as anticipated; competition with other local, regional and international banks, thrifts, credit unions and other nonbank financial institutions, such as investment banking firms, investment advisory firms, brokerage firms, investment companies and insurance companies, as well as other entities which offer financial services, located both within and outside the United States and through alternative delivery channels such as the World Wide Web; interest rate, market and monetary fluctuations; inflation; market volatility; general economic conditions and economic conditions in the geographic regions and industries in which the Corporation operates; introduction and acceptance of new banking-related products, services and enhancements; fee pricing strategies, mergers and acquisitions and their integration into the Corporation and management's ability to manage these and other risks. 19 Overview The Corporation is a bank holding company and a financial holding company incorporated under the laws of Delaware, and headquartered in Charlotte, North Carolina. The Corporation provides a diversified range of banking and nonbanking financial services and products both domestically and internationally through three major business segments: Consumer and Commercial Banking, Asset Management and Global Corporate and Investment Banking. At June 30, 2000, the Corporation had $680 billion in assets and approximately 151,000 full-time equivalent employees. The remainder of management's discussion and analysis of the Corporation's results of operations and financial condition should be read in conjunction with the consolidated financial statements and related notes presented on pages 2 through 18. Refer to Table One for selected financial data for the three months and six months ended June 30, 2000 and 1999. Key strategic highlights for the six months ended June 30, 2000 were: o The Corporation continued to focus on expanding its technology leadership in order to meet two important objectives: provide better service to customers and connect those customers to the increasing number of e-commerce capabilities as they become available. o New online banking enrollments increased to approximately 125,000 per month, up from 80,000 per month a year earlier, as total online retail customers rose to approximately 2.4 million. Penetration increased to 14 percent of customers holding Bank of America checking accounts. o Use of Bank of America Direct, the Corporation's web-based cash management system, grew more than 250 percent from a year earlier. o An alliance with Checkfree Holdings Corporation was announced aimed at enhancing the Corporation's advantage in online banking and at creating a national platform for accelerating the development of electronic bill payment and presentment convenience for consumers in the United States. o An alliance announced with Ariba intends to combine the Bank of America financial services engine with Ariba's leading business-to-business commerce platform resulting in a purchase-to-payment system for business-to-business commerce activities. o Balances in Money Manager, the Corporation's combination checking and brokerage product, increased 80 percent from a year ago to $16.5 billion. Total Money Manager accounts more than doubled to 121,000. o Mutual fund assets rose by $12 billion, or 14 percent, during the first six months of the year. In addition, the Corporation agreed to acquire the remaining 50 percent of Marsico Capital Management LLC, a highly successful and fast-growing investment management firm which manages more than $15 billion in assets. 20 Key performance highlights for the six months ended June 30, 2000 were: o Net income totaled $4.3 billion, or $2.56 per common share (diluted) for the six months ended June 30, 2000, an increase of $474 million, or $0.41 per common share (diluted) from the same period in 1999. Excluding merger-related charges that occurred in 1999, net income increased $329 million, or $0.33 per common share (diluted) for the six months ended June 30, 2000 from the comparable 1999 period. o Cash basis ratios on an operating basis measure performance excluding goodwill and other intangible assets and their related amortization expense. Cash basis diluted earnings per common share were $2.82 for the six months ended June 30, 2000, an increase of $0.34 per share compared to the same period in 1999. Return on average tangible common shareholders' equity was 29.14 percent for the six months ended June 30, 2000, an increase of 117 basis points from the comparable 1999 period. The cash basis efficiency ratio was 51.04 percent for the six months ended June 30, 2000, an improvement of 167 basis points from the comparable 1999 period, primarily due to a 12 percent increase in noninterest income. o The return on average common shareholders' equity was 18.60 percent for the six months ended June 30, 2000, an increase of 201 basis points compared to the same period in 1999. Excluding merger-related charges, the return on average common shareholders' equity for the six months ended June 30, 2000 increased 138 basis points from the comparable 1999 period. o Total revenue includes net interest income on a taxable-equivalent basis and noninterest income. For the six months ended June 30, 2000, total revenue was $16.9 billion, an increase of $797 million from the comparable 1999 period. o Net interest income remained essentially unchanged at $9.3 billion for the six months ended June 30, 2000 from a year earlier. Loan growth and higher levels of core deposits and equity were offset by the impact of asset securitizations and loan sales during 1999, spread compression and the cost of share repurchases. Average managed loans and leases were $412.2 billion for the six months ended June 30, 2000, a $38.7 billion increase from the respective 1999 period, primarily due to a 19 percent increase in consumer loans and leases. Average core deposits grew to $298.0 billion for the six months ended June 30, 2000, a $7.9 billion increase from the same period in 1999. The net interest yield was 3.26 percent for the six months ended June 30, 2000, a 29 basis point decline from the comparable 1999 period. The decrease was primarily due to spread compression, increased reliance on long-term debt funding, growth in lower spread securities and trading-related assets and the cost of share repurchases. o Noninterest income was $7.5 billion for the six months ended June 30, 2000, an $801 million increase from the comparable 1999 period. Consumer and Commercial Banking experienced a $149 million increase in card income to $1.0 billion due to purchase volume growth across all card products. Income from investment and brokerage services increased $54 million to $761 million in the Asset Management segment as a result of new business and market growth. Global Corporate and Investment Banking had significant increases in equity investment gains and trading account profits. Equity investment gains were $697 million, reflecting an increase of $408 million. Trading account profits increased $300 million to $1.2 billion driven by higher revenues from interest rate contracts, fixed income and equities, partially offset by decreases in foreign exchange contracts and real estate activities. The increase in noninterest income for the Corporation was partially offset by a $366 million decrease in other income to $371 million due to securitization gains and higher gains on loan sales in 1999. o The provision for credit losses for the six months ended June 30, 2000 was $890 million, a $130 million decrease from the same 1999 period. Net charge-offs were $890 million, or 0.47 percent of average loans and leases, for the six months ended June 30, 2000, a decrease of $149 million or 11 basis points from the comparable 1999 period, driven primarily by lower losses on bankcard loans. Nonperforming assets were $3.9 billion, or 0.97 percent of loans, leases and foreclosed properties at June 30, 2000, a $681 million or 11 basis point increase from December 31, 1999. The increase reflects a rise in nonperforming loans in the corporate commercial portfolio which were not concentrated in any single industry or region. Nonperforming loans also increased in real estate 21 secured consumer finance loans, reflecting the growth and seasoning in that portfolio. The allowance for credit losses totaled $6.8 billion at June 30, 2000, essentially unchanged from December 31, 1999. o Noninterest expense was $9.0 billion for the six months ended June 30, 2000, a $126 million increase from the respective 1999 period, reflecting higher revenue-related incentive compensation and spending on projects to improve sales and service, partially offset by cost reductions resulting from recent mergers. The efficiency ratio was 53.63 percent for the six months ended June 30, 2000, a 186 basis point improvement from the same period in 1999. Employee-Related Matters See Note Nine of the consolidated financial statements for information on the Corporation's process changes and productivity and other investment initiatives which will result in the elimination of 9,000 to 10,000 positions over the next 12 months. The Corporation plans to record a third quarter after-tax charge of $300 million to $350 million related to these initiatives. In addition, see Note Nine for information on the Bank of America Pension Plan. 22
Table One Selected Financial Data ------------------------------------------------------------------------------------------------------------------------------ Three Months Ended June 30 Six Months Ended June 30 ------------------------------------------------------------- (Dollars in millions, except per share information) 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------------ Operating Basis (1) ------------------- Income statement Interest income $ 10,737 $ 9,206 $ 20,823 $ 18,407 Interest expense 6,106 4,594 11,668 9,195 Net interest income 4,631 4,612 9,155 9,212 Net interest income (taxable-equivalent basis) 4,709 4,663 9,304 9,308 Provision for credit losses 470 510 890 1,020 Gains on sales of securities 6 52 12 182 Noninterest income 3,500 3,522 7,546 6,745 Other noninterest expense 4,413 4,457 9,036 8,910 Income before income taxes 3,254 3,219 6,787 6,209 Income tax expense 1,191 1,159 2,484 2,235 Net income 2,063 2,060 4,303 3,974 Net income available to common shareholders 2,061 2,059 4,300 3,971 ------------------------------------------------------------------------------------------------------------------------------ Performance ratios Return on average assets 1.23 % 1.34 % 1.31 % 1.31 % Return on average common shareholders' equity 17.63 17.64 18.60 17.22 Efficiency ratio 53.77 54.44 53.63 55.49 ------------------------------------------------------------------------------------------------------------------------------ Per common share data Earnings $1.25 $1.18 $ 2.59 $ 2.28 Diluted earnings 1.23 1.15 2.56 2.23 ------------------------------------------------------------------------------------------------------------------------------ Cash basis financial data (2) Earnings per common share 1.38 1.31 2.85 2.54 Diluted earnings per common share 1.36 1.28 2.82 2.48 Return on average tangible assets 1.39 % 1.53 % 1.47 % 1.49 % Return on average tangible common shareholders' equity 27.51 28.49 29.14 27.97 Efficiency ratio 51.12 51.70 51.04 52.71 ------------------------------------------------------------------------------------------------------------------------------ As Reported ----------- Income statement Merger-related charges $ - $ 200 $ - $ 200 Income before income taxes 3,254 3,019 6,787 6,009 Income tax expense 1,191 1,104 2,484 2,180 Net income 2,063 1,915 4,303 3,829 Net income available to common shareholders 2,061 1,914 4,300 3,826 Average common shares issued and outstanding (in thousands) 1,653,495 1,743,503 1,661,403 1,740,549 ------------------------------------------------------------------------------------------------------------------------------ Performance ratios Return on average assets 1.23 % 1.25 % 1.31 % 1.26 % Return on average common shareholders' equity 17.63 16.40 18.60 16.59 Total equity to total assets (period-end) 6.75 7.43 6.75 7.43 Total average equity to total average assets 7.00 7.62 7.04 7.61 Dividend payout ratio 39.94 41.07 38.49 40.98 ------------------------------------------------------------------------------------------------------------------------------ Per common share data Earnings $ 1.25 $ 1.10 $ 2.59 $ 2.20 Diluted earnings 1.23 1.07 2.56 2.15 Cash dividends paid .50 .45 1.00 .90 Book value 27.82 26.44 27.82 26.44 ------------------------------------------------------------------------------------------------------------------------------ Cash basis financial data (2) Earnings per common share $ 1.38 $ 1.23 $ 2.85 $ 2.45 Diluted earnings per common share 1.36 1.20 2.82 2.40 Return on average tangible assets 1.39 % 1.43 % 1.47 % 1.44 % Return on average tangible common shareholders' equity 27.51 26.68 29.14 27.05 Ending tangible equity to tangible assets 4.85 5.17 4.85 5.17 ------------------------------------------------------------------------------------------------------------------------------ Balance sheet (period-end) Total loans and leases $ 400,817 $ 363,581 $ 400,817 $ 363,581 Total assets 679,538 614,102 679,538 614,102 Total deposits 356,664 339,045 356,664 339,045 Long-term debt 69,245 55,059 69,245 55,059 Trust preferred securities 4,955 4,955 4,955 4,955 Common shareholders' equity 45,786 45,551 45,786 45,551 Total shareholders' equity 45,861 45,631 45,861 45,631 ------------------------------------------------------------------------------------------------------------------------------ Risk-based capital ratios (period-end) Tier 1 capital 7.40 % 7.38 % 7.40 % 7.38 % Total capital 11.03 11.09 11.03 11.09 Leverage ratio 6.11 6.34 6.11 6.34 ------------------------------------------------------------------------------------------------------------------------------ Market price per share of common stock Closing $ 43 $ 73 5/16 $ 43 $ 73 5/16 High 61 76 1/8 61 76 1/8 Low 42 63/64 61 1/2 42 5/16 59 1/2 ==============================================================================================================================
(1) Operating basis excludes merger-related charges. (2) Cash basis calculations exclude goodwill and other intangible assets and their related amortization expense. 23 Business Segment Operations The Corporation provides a diversified range of banking and nonbanking financial services and products through its various subsidiaries. During the first quarter of 2000, the Corporation realigned its business segments to report the results of the Corporation's operations through three business segments: Consumer and Commercial Banking, Asset Management, and Global Corporate and Investment Banking. The business segments summarized in Table Two are primarily managed with a focus on various performance objectives including total revenue, net income, return on average equity and efficiency. These performance objectives are also presented on a cash basis which excludes the impact of goodwill and other intangible assets and their related amortization expense. Total revenue includes net interest income on a taxable-equivalent basis and noninterest income. The net interest yield of the business segments reflects the results of a funds transfer pricing process which derives net interest income by matching assets and liabilities with similar interest rate sensitivity and maturity characteristics. Equity is allocated to each business segment based on an assessment of its inherent risk. See Note Eight of the consolidated financial statements for additional business segment information and reconciliations to consolidated amounts. Additional information on noninterest income can be found in the "Noninterest Income" section beginning on page 37. Certain prior period amounts have been reclassified between segments and their components (presented after Table Two) to conform to the current period presentation. Table Two Business Segment Summary -------------------------------------------------------------------------------------------------------------------------------- For the Three Months Ended June 30 Consumer and Global Corporate and Commercial Banking Asset Management Investment Banking ---------------------------------------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 2000 1999 ----------------------------------------------------------------------------------------------------------------------------- Net interest income $ 3,425 $ 3,506 $ 159 $ 142 $ 1,045 $ 914 Noninterest income 1,789 1,807 420 394 1,291 1,321 ----------------------------------------------------------------------------------------------------------------------------- Total revenue 5,214 5,313 579 536 2,336 2,235 Net income 1,254 1,194 163 135 600 647 Cash basis earnings 1,423 1,371 169 141 643 688 Net interest yield 4.85% 5.32 % 2.81 % 2.96 % 2.07 % 2.03 % Average equity to average assets 7.88 8.21 7.55 8.32 6.26 6.60 Return on average equity 20.6 19.9 37.2 32.2 15.6 18.0 Return on tangible equity 29.0 29.1 42.9 38.0 18.4 21.3 Efficiency ratio 54.4 56.4 54.4 56.2 54.2 51.5 Cash basis efficiency ratio 51.1 53.1 53.4 55.0 52.3 49.6 Average: Total loans and leases $261,091 $238,751 $21,772 $18,571 $108,635 $108,055 Total deposits 256,435 251,821 11,717 12,156 69,752 65,908 Total assets 311,356 292,707 23,360 20,163 246,939 218,367 ================================================================================================================================
-------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------- For the Six Months Ended June 30 Consumer and Global Corporate and Commercial Banking Asset Management Investment Banking ------------------------------------------------------------------------------------------ (Dollars in millions) 2000 1999 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------------------------------- Net interest income $ 6,819 $ 6,975 $ 314 $ 277 $ 2,011 $ 1,862 Noninterest income 3,423 3,382 830 824 3,214 2,539 -------------------------------------------------------------------------------------------------------------------------------- Total revenue 10,242 10,357 1,144 1,101 5,225 4,401 Net income 2,318 2,269 317 286 1,556 1,189 Cash basis earnings 2,656 2,618 329 299 1,641 1,273 Net interest yield 4.92 % 5.34 2.85 % 2.96 % 2.04 % 2.06 % Average equity to average assets 7.94 8.17 7.68 8.54 6.25 6.68 Return on average equity 19.2 19.3 36.4 34.2 20.7 16.3 Return on tangible equity 27.5 28.4 42.0 40.2 24.1 19.4 Efficiency ratio 56.0 57.6 54.1 54.9 50.3 53.2 Cash basis efficiency ratio 52.7 54.2 53.0 53.7 48.7 51.3 Average: Total loans and leases $255,510 $235,076 $21,248 $18,160 $107,340 $110,216 Total deposits 254,749 251,231 11,342 12,249 68,201 65,883 Total assets 306,124 290,010 22,832 19,776 241,860 219,779 ================================================================================================================================
24 Consumer and Commercial Banking Consumer and Commercial Banking provides a wide array of products and services to individuals, small businesses and middle market companies through multiple delivery channels.
Consumer and Commercial Banking ---------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 ---------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------- Net interest income $3,425 $3,506 $6,819 $6,975 Noninterest income 1,789 1,807 3,423 3,382 - -------------------------------------------------------------------------------------------------- Total revenue 5,214 5,313 10,242 10,357 Cash basis earnings 1,423 1,371 2,656 2,618 Cash basis efficiency ratio 51.1 % 53.1 % 52.7 % 54.2 %
o Growth in the loan portfolio had a positive effect on net interest income for the six months ended June 30, 2000. Spread compression and 1999 loan sales and securitizations more than offset this increase resulting in a two percent decrease in net interest income. o Noninterest income increased one percent for the six months ended June 30, 2000 due to higher card income and service charges resulting from an increased focus by management to grow the card business and new marketing programs. o Cash basis earnings increased one percent for the six months ended June 30, 2000 due to decreased provision expense and noninterest expense partially offset by the decrease in total revenue. o Improved credit quality in the credit card portfolio resulted in a decrease in the provision for credit losses. o Merger-related savings resulted in a decrease across most expense categories. The major components of Consumer and Commercial Banking are Banking Regions, Consumer Products and Commercial Banking. 25 Banking Regions Banking Regions serves approximately 30 million consumer households in 21 states and the District of Columbia and overseas through its extensive network of approximately 4,500 banking centers, 14,000 ATMs, telephone and Internet channels on www.bankofamerica.com. Banking Regions provides a wide array of products and services, including deposit products such as checking, money market savings accounts, time deposits and IRAs, and credit products such as home equity, personal auto loans and auto leasing. Banking Regions also includes small business banking providing treasury management, credit services, community investment, debit card, e-commerce and brokerage services to over two million small business relationships across the franchise.
Banking Regions ---------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 ---------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------- Net interest income $2,089 $2,125 $4,150 $4,211 Noninterest income 876 850 1,719 1,620 - ------------------------------------------------------------------------------------------------- Total revenue 2,965 2,975 5,869 5,831 Cash basis earnings 763 743 1,446 1,401 Cash basis efficiency ratio 58.2 % 60.3 % 59.7 % 61.9 %
o Noninterest income increased six percent for the six months ended June 30, 2000 primarily due to increased consumer service charges and debit card income. o Net interest income declined one percent primarily due to spread compression and 1999 loan sales and securitizations. o Cash basis earnings increased three percent for the six months ended June 30, 2000, primarily attributable to a decrease in noninterest expense driven by merger-related savings and lower transition expense. Consumer Products Consumer Products provides specialized services such as the origination and servicing of residential mortgage loans, issuance and servicing of credit cards, direct banking via telephone and Internet, student lending and certain insurance services. Consumer Products also provides consumer home equity and auto loans, retail finance programs to dealerships and lease financing of new and used cars.
Consumer Products ---------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 ---------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------- Net interest income $ 800 $ 826 $1,560 $1,655 Noninterest income 685 725 1,253 1,349 - ------------------------------------------------------------------------------------------------- Total revenue 1,485 1,551 2,813 3,004 Cash basis earnings 440 388 766 76 Cash basis efficiency ratio 39.9 % 43.4 % 42.2 % 43.8 %
o Higher card income had a positive effect on noninterest income for the six months ended June 30, 2000. Gains on loan sales and securitizations in 1999 more than offset this increase resulting in a seven percent decline in noninterest income. o Net interest income decreased six percent for the six months ended June 30, 2000 primarily due to a shift to lower spread loan products and loan sales and securitizations in 1999. o Cash basis earnings increased one percent for the six months ended June 30, 2000 primarily due to a decrease in provision expense and noninterest expense partially offset by the decrease in total revenue. 26 o Provision expense decreased due to improved credit quality in the credit card portfolio. o The decrease in noninterest expense was primarily driven by expense reduction initiatives. Commercial Banking Commercial Banking provides commercial lending and treasury management services to middle market companies with annual revenue between $10 million and $500 million. These services are available through relationship manager teams as well as through alternative channels such as the telephone via the commercial service center and the Internet by accessing Bank of America Direct.
Commercial Banking ---------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 ---------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------- Net interest income $536 $555 $1,109 $1,109 Noninterest income 228 232 451 413 - ------------------------------------------------------------------------------------------------- Total revenue 764 787 1,560 1,522 Cash basis earnings 220 240 444 457 Cash basis efficiency ratio 45.5 % 45.0 % 45.1 % 45.3 %
o Total revenue for the six months ended June 30, 2000 increased two percent due to a nine percent increase in noninterest income attributable to higher service charges. o Higher noninterest income had a positive effect on cash basis earnings for the six months ended June 30, 2000. Higher provision expense more than offset this increase resulting in a three percent decline in cash basis earnings. Asset Management Asset Management includes the Private Bank, Banc of America Capital Management and Banc of America Investment Services, Inc. The Private Bank offers financial solutions to high-net-worth clients and foundations in the U.S. and internationally by providing customized asset management and credit, financial advisory, fiduciary, trust and banking services. Banc of America Capital Management offers management of equity, fixed income, cash, and alternative investments; manages the assets of individuals, corporations, municipalities, foundations and universities, and public and private institutions; and provides advisory services to the Corporation's affiliated family of mutual funds. Banc of America Investment Services, Inc. provides both full-service and discount brokerage services through investment professionals located throughout the franchise and a brokerage web site that provides customers a wide array of market analyses, investment research and self-help tools, account information and transaction capabilities. On June 15, 2000, the Corporation entered into an agreement, effective January 2, 2001, to acquire the remaining 50 percent of Marsico Capital Management LLP (Marsico) for a total investment of $1.1 billion. The Corporation acquired the first 50 percent in 1999. Marsico is a Denver-based investment management firm specializing in large capitalization growth stocks. Marsico manages more than $15 billion in assets and has experienced compounded annual revenue growth of approximately 460 percent since its inception in 1997. Marsico will benefit the Corporation's marketing of investment capabilities to financial intermediaries and institutional clients. 27
Asset Management ---------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 ---------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------- Net interest income $159 $142 $ 314 $ 277 Noninterest income 420 394 830 824 - ------------------------------------------------------------------------------------------------- Total revenue 579 536 1,144 1,101 Cash basis earnings 169 141 329 299 Cash basis efficiency ratio 53.4 % 55.0 % 53.0 % 53.7 %
o Total revenue increased four percent for the six months ended June 30, 2000. The increase was attributable to increases in both net interest income and noninterest income. o Net interest income increased 13 percent due to strong loan growth in the commercial loan portfolio. o Noninterest income increased one percent primarily due to increased investment and brokerage fees driven by new business and market growth, partially offset by gains in 1999 on the disposition of certain businesses. o Cash basis earnings increased 10 percent for the six months ended June 30, 2000 due to the increase in total revenue, partially offset by increased noninterest expense, led by one-time business divestiture expenditures in 2000. Global Corporate and Investment Banking Global Corporate and Investment Banking provides a broad array of financial products such as investment banking, trade finance, treasury management, capital markets, leasing and financial advisory services to domestic and international corporations, financial institutions and government entities. Clients are supported through offices in 37 countries in four distinct geographic regions: U.S. and Canada; Asia; Europe, Middle East and Africa; and Latin America. Products and services provided include loan origination, merger and acquisition advisory, debt and equity underwriting and trading, cash management, derivatives, foreign exchange, leasing, leveraged finance, project finance, real estate finance, senior bank debt, structured finance and trade services.
Global Corporate and Investment Banking ---------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 ---------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------- Net interest income $1,045 $ 914 $2,011 $1,862 Noninterest income 1,291 1,321 3,214 2,539 - ------------------------------------------------------------------------------------------------- Total revenue 2,336 2,235 5,225 4,401 Cash basis earnings 643 688 1,641 1,273 Cash basis efficiency ratio 52.3 % 49.6 % 48.7 % 51.3 %
o For the six months ended June 30, 2000, total revenue increased 19 percent due to increases in both net interest income and noninterest income. o Net interest income increased eight percent, primarily due to trading activities, interest recoveries and higher demand deposits. o Noninterest income increased 27 percent due to higher equity investment gains, trading account profits, investment banking income and corporate service charges. o For the six months ended June 30, 2000, cash basis earnings increased 29 percent. The increase was primarily due to the higher revenue discussed above and was partially offset by an increase in noninterest expense resulting from higher revenue-related incentive compensation. 28 Global Corporate and Investment Banking offers clients a comprehensive range of global capabilities through five components: Global Credit Products, Global Capital Raising, Global Markets, Global Treasury Services and Principal Investing. Global Credit Products Global Credit Products provides credit and lending services and includes the corporate industry-focused portfolio, real estate, leasing and project finance.
Global Credit Products ---------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 ---------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------- Net interest income $626 $598 $1,212 $1,204 Noninterest income 157 188 288 305 - ------------------------------------------------------------------------------------------------- Total revenue 783 786 1,500 1,509 Cash basis earnings 329 360 615 633 Cash basis efficiency ratio 22.0 % 22.5 % 22.5 % 23.8 %
o Net interest income increased slightly for the six months ended June 30, 2000, but was offset by a six percent decrease in noninterest income due to a decline in investment banking and other income. o Noninterest expense decreased five percent for the six months ended June 30, 2000 due to a decrease in personnel expense. Offsetting this decrease was an increase in the provision for credit losses driven by the charge-off of a single fraud-related credit, resulting in a three percent decline in cash basis earnings. Global Capital Raising Global Capital Raising includes the Corporation's investment banking activities. Through a separate subsidiary, Banc of America Securities LLC (formerly NationsBanc Montgomery Securities LLC), Global Capital Raising underwrites and makes markets in equity securities, high-grade and high-yield corporate debt securities, commercial paper, and mortgage-backed and asset-backed securities. Banc of America Securities LLC also provides correspondent clearing services for other securities broker/dealers, traditional brokerage services to high-net-worth individuals, prime-brokerage services and makes markets in equity derivatives. Debt and equity securities research, loan syndications, mergers and acquisitions advisory services, private placements and equity derivatives are also provided through Banc of America Securities LLC.
Global Capital Raising ---------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 ---------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------- Net interest income $124 $23 $ 251 $ 70 Noninterest income 609 540 1,282 968 - ------------------------------------------------------------------------------------------------- Total revenue 733 563 1,533 1,038 Cash basis earnings 132 99 319 128 Cash basis efficiency ratio 73.3 % 72.8 % 72.6 % 81.3 %
o Total revenue increased 48 percent for the six months ended June 30, 2000 due to increased net interest income and noninterest income. The increases were due to higher trading-related revenue, investment banking income and corporate investment and brokerage fees primarily due to increased activity and contribution from equity products. 29 o Cash basis earnings increased 149 percent for the six months ended June 30, 2000, led by the increase in revenue partially offset by an increase in noninterest expense, which was driven by higher revenue-related incentive compensation. Global Markets Global Markets provides business solutions for a global customer base using interest rate derivatives, foreign exchange products, commodity derivatives and mortgage-related products. In support of these activities, the businesses will take positions in these products and capitalize on market-making activities. The Global Markets business also takes an active role in the trading of fixed income securities in all of the regions in which Global Corporate and Investment Banking transacts business and is a primary dealer in the U.S., as well as in several international locations.
Global Markets ---------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 ---------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------- Net interest income $177 $166 $314 $331 Noninterest income 215 293 673 651 - ------------------------------------------------------------------------------------------------- Total revenue 392 459 987 982 Cash basis earnings 98 145 290 328 Cash basis efficiency ratio 58.9 % 52.4 % 53.5 % 49.8 %
o Noninterest income increased for the six months ended June 30, 2000, partially offset by a decrease in net interest income, resulting in a one percent increase in total revenue. o Noninterest income increased three percent primarily due to strong client demands in interest rate contracts in the first quarter of 2000. o The five percent decrease in net interest income was primarily due to changes in trading-related positions. o For the six months ended June 30, 2000, cash basis earnings decreased 12 percent primarily due to higher noninterest expense resulting from higher revenue-related incentive compensation, partially offset by the increase in total revenue. 30 Global Treasury Services Global Treasury Services provides the technology, strategies and integrated solutions to help financial institutions, government agencies and public and private companies of all sizes manage their operations and cash flows on a local, regional, national and global level.
Global Treasury Services ---------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 ---------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------- Net interest income $152 $148 $296 $298 Noninterest income 193 185 383 367 - ------------------------------------------------------------------------------------------------- Total revenue 345 333 679 665 Cash basis earnings 48 37 126 82 Cash basis efficiency ratio 74.1 % 78.8 % 75.3 % 79.1 %
o Total revenue increased two percent for the six months ended June 30, 2000, led by a four percent increase in noninterest income, primarily driven by an increase in service charges. o Cash basis earnings increased 54 percent for the six months ended June 30, 2000 primarily due to the increase in total revenue and a decrease in provision expense driven by credit upgrades and declining balances in the international portfolio. Principal Investing Principal Investing invests in both direct and indirect equity investments in a wide variety of transactions. Domestic activities include investments from early-stage seed capital to mezzanine financing, late-stage and buyout investments. International investing focuses on established businesses in Asia, Europe and Latin America delivering strategic and financial guidance, broad business experience and access to the Corporation's global resources.
Principal Investing ---------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 ---------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------- Net interest income $ (34) $ (21) $ (62) $ (41) Noninterest income 117 115 588 248 - ------------------------------------------------------------------------------------------------- Total revenue 83 94 526 207 Cash basis earnings 36 47 291 102 Cash basis efficiency ratio 32.5 % 20.5 % 9.9 % 20.0 %
o For the six months ended June 30, 2000, total revenue increased $319 million primarily due to an increase in noninterest income driven primarily by higher equity investment gains in both cash and portfolio appreciation. o For the six months ended June 30, 2000, cash basis earnings increased $189 million primarily due to the increase in revenue led by equity investment gains. 31 Results of Operations Net Interest Income An analysis of the Corporation's net interest income on a taxable-equivalent basis and average balance sheet for the most recent five quarters and for the six months ended June 30, 2000 and 1999 is presented in Tables Three and Four, respectively. As reported, net interest income on a taxable-equivalent basis was $4.7 billion for the three months ended June 30, 2000, an increase of $46 million compared to the same period in 1999. For the six months ended June 30, 2000 and 1999, net interest income on a taxable-equivalent basis remained at $9.3 billion. Management also reviews "core net interest income" which adjusts reported net interest income for the impact of trading-related activities, securitizations, asset sales and divestitures. For purposes of internal analysis, management combines trading-related net interest income with trading account profits, as discussed in the "Noninterest Income" section on page 39, as trading strategies are typically evaluated on total revenue. The determination of core net interest income also requires adjustment for the impact of securitizations (primarily home equity and credit card), asset sales (primarily residential and commercial real estate loans) and divestitures. Net interest income associated with assets that have been securitized is predominantly offset in noninterest income, as the Corporation takes on the role of servicer and records servicing income and gains on securitizations, where appropriate. The table below provides a reconciliation between net interest income on a taxable-equivalent basis presented in Tables Three and Four and core net interest income for the three months and six months ended June 30, 2000 and 1999, respectively.
Three Months Ended Six Months Ended June 30 June 30 ----------------------------- Increase/ ------------------------- (Dollars in millions) 2000 1999 (Decrease) 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income As reported (1) $ 4,709 $ 4,663 0.99 % $ 9,304 $ 9,308 Less: Trading-related net interest income (263) (148) (483) (315) Add: Impact of securitizations, asset sales and divestitures 144 6 318 28 - ------------------------------------------------------------------------------------------------------------------------------------ Core net interest income $ 4,590 $ 4,521 1.53 % $ 9,139 $ 9,021 - ------------------------------------------------------------------------------------------------------------------------------------ Average earning assets As reported $ 582,490 $530,049 9.89 % $ 572,830 $526,884 Less: Trading-related earning assets (119,115) (82,590) (115,745) (81,302) Add: Earning assets securitized, sold and divested 16,977 1,335 18,484 1,302 - ------------------------------------------------------------------------------------------------------------------------------------ Core average earning assets $ 480,352 $448,794 7.03 % $ 475,569 $446,884 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest yield on earning assets (1,2) As reported 3.24 % 3.53 % (29) bp 3.26 % 3.55 % Add: Impact of trading-related activities 0.61 0.52 9 0.61 0.51 Impact of securitizations, asset sales and divestitures - - - 0.01 - - ------------------------------------------------------------------------------------------------------------------------------------ Core net interest yield on earning assets 3.85 % 4.05 % (20) bp 3.88 % 4.06 % ==================================================================================================================================== Increase/ (Dollars in millions) (Decrease) - ------------------------------------------------------------------- Net interest income As reported (1) (0.04) % Less: Trading-related net interest income Add: Impact of securitizations, asset sales and divestitures - ------------------------------------------------------------------- Core net interest income 1.31 % - ------------------------------------------------------------------- Average earning assets As reported 8.72 % Less: Trading-related earning assets Add: Earning assets securitized, sold and divested - ------------------------------------------------------------------- Core average earning assets 6.42 % - ------------------------------------------------------------------- Net yield on earning assets (1,2) As reported (29) bp Add: Impact of trading-related activities 10 Impact of securitizations, asset sales and divestitures 1 - ------------------------------------------------------------------- Core net interest yield on earning assets (18) bp ====================================================================
(1) Net interest income is presented on a taxable-equivalent basis. (2) bp denotes basis points; 100 bp equals 1%. Core net interest income on a taxable-equivalent basis was $4.6 billion and $9.1 billion for the three months and six months ended June 30, 2000, respectively, an increase of $69 million and $118 million over the corresponding periods in 1999. For both periods, managed loan growth, particularly in consumer products, and higher levels of core deposits and equity were partially offset by spread compression, increased reliance on long-term debt funding and the cost of share repurchases. Core average earning assets were $480.4 billion and $475.6 billion for the three months and six months ended June 30, 2000, respectively, an increase of $31.6 billion and $28.7 billion over the same periods in 1999, primarily reflecting managed loan growth of 12 percent and 10 percent, respectively. 32 Managed consumer loans increased 19 percent for both the three months and six months ended June 30, 2000, led by growth in residential first mortgages, home equity lines and consumer finance loans. Loan growth is dependent on economic conditions, as well as various discretionary factors such as decisions to securitize certain loan portfolios and the management of borrower, industry, product and geographic concentrations. The core net interest yield decreased 20 basis points to 3.85 percent and 18 basis points to 3.88 percent for the three months and six months ended June 30, 2000, respectively, mainly due to spread compression, increased reliance on long-term debt funding and the cost of share repurchases. Provision for Credit Losses The provision for credit losses totaled $470 million and $890 million for the three months and six months ended June 30, 2000, respectively, compared to $510 million and $1.0 billion for the comparable 1999 periods. The decrease in the provision for credit losses was primarily due to a reduction in the inherent risk and size of the Corporation's emerging markets portfolio and a change in the composition of the loan portfolio from commercial and consumer foreign to more consumer loans secured by residential real estate. Total net charge-offs were $470 million and $890 million for the three months and six months ended June 30, 2000, respectively, compared to $520 million and $1.0 billion for the comparable 1999 periods. The decrease in net charge-offs was driven primarily by lower losses on bankcard loans. For additional information on the allowance for credit losses, certain credit quality ratios and credit quality information on specific loan categories, see the "Credit Risk Management and Credit Portfolio Review" section beginning on page 44. Gains on Sales of Securities Gains on sales of securities were $6 million and $12 million for the three months and six months ended June 30, 2000, respectively, compared to $52 million and $182 million in the respective periods of 1999. Securities gains were lower in 2000 as a result of continued unfavorable market conditions for certain debt securities. 33 Table Three Quarterly Average Balances and Interest Rates - Taxable-Equivalent Basis Second Quarter 2000 --------------------------------------- Interest Average Income/ Yield/ (Dollars in millions) Balance Expense Rate --------------------------------------------------------------------------------------------------------------- Earning assets Time deposits placed and other short-term investments $ 4,578 $ 79 7.02% Federal funds sold and securities purchased under agreements to resell 43,983 595 5.43 Trading account assets 48,874 702 5.77 Securities: Available-for-sale (1) 84,054 1,270 6.05 Held-for-investment 1,406 27 7.68 --------------------------------------------------------------------------------------------------------------- Total securities 85,460 1,297 6.08 --------------------------------------------------------------------------------------------------------------- Loans and leases (2): Commercial - domestic 148,034 3,023 8.21 Commercial - foreign 29,068 515 7.12 Commercial real estate - domestic 25,497 563 8.88 Commercial real estate - foreign 376 8 9.15 --------------------------------------------------------------------------------------------------------------- Total commercial 202,975 4,109 8.14 --------------------------------------------------------------------------------------------------------------- Residential mortgage 91,825 1,696 7.40 Home equity lines 19,067 422 8.91 Direct/Indirect consumer 41,757 867 8.36 Consumer finance 24,123 545 9.03 Bankcard 9,429 279 11.87 Foreign consumer 2,228 48 8.81 --------------------------------------------------------------------------------------------------------------- Total consumer 188,429 3,857 8.21 --------------------------------------------------------------------------------------------------------------- Total loans and leases 391,404 7,966 8.17 --------------------------------------------------------------------------------------------------------------- Other earning assets 8,191 176 8.53 --------------------------------------------------------------------------------------------------------------- Total earning assets (3) 582,490 10,815 7.45 --------------------------------------------------------------------------------------------------------------- Cash and cash equivalents 25,605 Other assets, less allowance for credit losses 64,493 --------------------------------------------------------------------------------------------------------------- Total assets $672,588 --------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities Domestic interest-bearing deposits: Savings $23,936 78 1.32 NOW and money market deposit accounts 100,186 734 2.94 Consumer CDs and IRAs 77,384 1,034 5.38 Negotiated CDs, public funds and other time deposits 7,361 111 6.09 --------------------------------------------------------------------------------------------------------------- Total domestic interest-bearing deposits 208,867 1,957 3.77 --------------------------------------------------------------------------------------------------------------- Foreign interest-bearing deposits (4): Banks located in foreign countries 15,823 232 5.92 Governments and official institutions 9,885 151 6.12 Time, savings and other 27,697 380 5.51 --------------------------------------------------------------------------------------------------------------- Total foreign interest-bearing deposits 53,405 763 5.74 --------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 262,272 2,720 4.17 --------------------------------------------------------------------------------------------------------------- Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings 135,817 1,990 5.89 Trading account liabilities 20,532 189 3.70 Long-term debt (5) 69,779 1,207 6.92 --------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities (6) 488,400 6,106 5.02 --------------------------------------------------------------------------------------------------------------- Noninterest-bearing sources: Noninterest-bearing deposits 91,154 Other liabilities 45,922 Shareholders' equity 47,112 --------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $672,588 --------------------------------------------------------------------------------------------------------------- Net interest spread 2.43 Impact of noninterest-bearing sources .81 --------------------------------------------------------------------------------------------------------------- Net interest income/yield on earning assets $4,709 3.24% ---------------------------------------------------------------------------------------------------------------
First Quarter 2000 ------------------------------------ Interest Average Income/ Yield/ (Dollars in millions) Balance Expense Rate --------------------------------------------------------------------------------------------------------------- Earning assets Time deposits placed and other short-term investments $ 4,504 $ 75 6.65% Federal funds sold and securities purchased under agreements to resell 45,459 575 5.07 Trading account assets 39,733 542 5.47 Securities: Available-for-sale (1) 86,878 1,332 6.15 Held-for-investment 1,333 24 7.19 --------------------------------------------------------------------------------------------------------------- Total securities 88,211 1,356 6.16 --------------------------------------------------------------------------------------------------------------- Loans and leases (2): Commercial - domestic 145,362 2,824 7.81 Commercial - foreign 27,927 486 6.99 Commercial real estate - domestic 24,664 517 8.43 Commercial real estate - foreign 344 8 9.29 --------------------------------------------------------------------------------------------------------------- Total commercial 198,297 3,835 7.78 --------------------------------------------------------------------------------------------------------------- Residential mortgage 85,427 1,566 7.34 Home equity lines 17,573 377 8.62 Direct/Indirect consumer 41,858 887 8.52 Consumer finance 22,798 486 8.53 Bankcard 8,404 234 11.22 Foreign consumer 2,227 50 9.00 --------------------------------------------------------------------------------------------------------------- Total consumer 178,287 3,600 8.10 --------------------------------------------------------------------------------------------------------------- Total loans and leases 376,584 7,435 7.93 --------------------------------------------------------------------------------------------------------------- Other earning assets 8,679 174 8.11 --------------------------------------------------------------------------------------------------------------- Total earning assets (3) 563,170 10,157 7.24 --------------------------------------------------------------------------------------------------------------- Cash and cash equivalents 25,830 Other assets, less allowance for credit losses 62,019 --------------------------------------------------------------------------------------------------------------- Total assets $651,019 --------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities Domestic interest-bearing deposits: Savings $24,237 78 1.29 NOW and money market deposit accounts 98,424 679 2.78 Consumer CDs and IRAs 76,074 983 5.20 Negotiated CDs, public funds and other time deposits 6,966 103 5.93 --------------------------------------------------------------------------------------------------------------- Total domestic interest-bearing deposits 205,701 1,843 3.60 --------------------------------------------------------------------------------------------------------------- Foreign interest-bearing deposits (4): Banks located in foreign countries 14,180 188 5.33 Governments and official institutions 8,745 124 5.72 Time, savings and other 26,382 340 5.17 --------------------------------------------------------------------------------------------------------------- Total foreign interest-bearing deposits 49,307 652 5.31 --------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 255,008 2,495 3.93 --------------------------------------------------------------------------------------------------------------- Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings 131,517 1,802 5.51 Trading account liabilities 23,013 181 3.16 Long-term debt (5) 64,256 1,084 6.75 --------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities (6) 473,794 5,562 4.72 --------------------------------------------------------------------------------------------------------------- Noninterest-bearing sources: Noninterest-bearing deposits 90,366 Other liabilities 40,829 Shareholders' equity 46,030 --------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $651,019 --------------------------------------------------------------------------------------------------------------- Net interest spread 2.52 Impact of noninterest-bearing sources .75 --------------------------------------------------------------------------------------------------------------- Net interest income/yield on earning assets $4,595 3.27% ---------------------------------------------------------------------------------------------------------------
34
Fourth Quarter 1999 Third Quarter 1999 ---------------------------- ---------------------------- Interest Interest Average Income/ Yield/ Average Income/ Yield/ (Dollars in millions) Balance Expense Rate Balance Expense Rate ------------------------------------------------------------------------------------------------------------------------- Earning assets Time deposits placed and other short-term investments $ 4,512 $ 73 6.33% $ 5,018 $ 69 5.50% Federal funds sold and securities purchased under agreements to resell 39,700 458 4.60 33,074 440 5.30 Trading account assets 38,453 544 5.63 37,453 483 5.14 Securities: Available-for-sale (1) 85,009 1,301 6.10 78,779 1,208 6.12 Held-for-investment 1,433 25 7.25 1,482 26 7.02 ------------------------------------------------------------------------------------------------------------------------- Total securities 86,442 1,326 6.12 80,261 1,234 6.13 ------------------------------------------------------------------------------------------------------------------------- Loans and leases (2): Commercial - domestic 140,674 2,707 7.64 136,149 2,488 7.25 Commercial - foreign 27,430 453 6.56 28,348 494 6.93 Commercial real estate - domestic 24,345 506 8.23 25,056 517 8.19 Commercial real estate - foreign 306 6 8.96 295 7 8.80 ------------------------------------------------------------------------------------------------------------------------- Total commercial 192,755 3,672 7.56 189,848 3,506 7.33 ------------------------------------------------------------------------------------------------------------------------- Residential mortgage 79,783 1,450 7.26 80,015 1,431 7.14 Home equity lines 16,882 345 8.12 16,316 321 7.79 Direct/Indirect consumer 42,442 888 8.30 42,740 875 8.13 Consumer finance 21,340 440 8.18 19,923 433 8.62 Bankcard 8,578 245 11.32 8,923 256 11.38 Foreign consumer 2,430 54 8.77 3,635 86 9.36 ------------------------------------------------------------------------------------------------------------------------- Total consumer 171,455 3,422 7.94 171,552 3,402 7.89 ------------------------------------------------------------------------------------------------------------------------- Total loans and leases 364,210 7,094 7.74 361,400 6,908 7.59 ------------------------------------------------------------------------------------------------------------------------- Other earning assets 10,247 193 7.51 11,358 213 7.40 ------------------------------------------------------------------------------------------------------------------------- Total earning assets (3) 543,564 9,688 7.09 528,564 9,347 7.03 ------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents 25,467 25,905 Other assets, less allowance for credit losses 61,712 56,979 ------------------------------------------------------------------------------------------------------------------------- Total assets $630,743 $611,448 ------------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities Domestic interest-bearing deposits: Savings $25,082 80 1.27 $26,037 82 1.25 NOW and money market deposit accounts 97,481 639 2.60 96,402 579 2.38 Consumer CDs and IRAs 74,653 932 4.95 73,429 898 4.85 Negotiated CDs, public funds and other time deposits 6,825 98 5.73 6,609 94 5.66 ------------------------------------------------------------------------------------------------------------------------- Total domestic interest-bearing deposits 204,041 1,749 3.40 202,477 1,653 3.24 ------------------------------------------------------------------------------------------------------------------------- Foreign interest-bearing deposits (4): Banks located in foreign countries 14,305 178 4.93 13,668 160 4.65 Governments and official institutions 7,121 99 5.53 7,185 90 4.99 Time, savings and other 24,993 298 4.72 25,500 295 4.57 ------------------------------------------------------------------------------------------------------------------------- Total foreign interest-bearing deposits 46,419 575 4.91 46,353 545 4.66 ------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 250,460 2,324 3.68 248,830 2,198 3.50 ------------------------------------------------------------------------------------------------------------------------- Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings 120,858 1,638 5.38 114,934 1,437 4.96 Trading account liabilities 19,223 190 3.92 15,677 189 4.78 Long-term debt (5) 59,972 995 6.63 59,283 920 6.21 ------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities (6) 450,513 5,147 4.54 438,724 4,744 4.30 ------------------------------------------------------------------------------------------------------------------------- Noninterest-bearing sources: Noninterest-bearing deposits 91,453 88,168 Other liabilities 41,985 38,117 Shareholders' equity 46,792 46,439 ------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $630,743 $611,448 ------------------------------------------------------------------------------------------------------------------------- Net interest spread 2.55 2.73 Impact of noninterest-bearing sources .77 .73 ------------------------------------------------------------------------------------------------------------------------- Net interest income/yield on earning assets $4,541 3.32% $4,603 3.46% ------------------------------------------------------------------------------------------------------------------------- Second Quarter 1999 ------------------------------------ Interest Average Income/ Yield/ (Dollars in millions) Balance Expense Rate ---------------------------------------------------------------------------------------------------------------- Earning assets Time deposits placed and other short-term investments $ 5,159 $ 65 5.03% Federal funds sold and securities purchased under agreements to resell 29,521 387 5.25 Trading account assets 39,837 528 5.31 Securities: Available-for-sale (1) 76,373 1,139 5.97 Held-for-investment 1,482 28 7.61 ---------------------------------------------------------------------------------------------------------------- Total securities 77,855 1,167 6.00 ---------------------------------------------------------------------------------------------------------------- Loans and leases (2): Commercial - domestic 138,257 2,473 7.17 Commercial - foreign 30,209 456 6.05 Commercial real estate - domestic 25,938 533 8.25 Commercial real estate - foreign 289 6 8.48 ---------------------------------------------------------------------------------------------------------------- Total commercial 194,693 3,468 7.14 ---------------------------------------------------------------------------------------------------------------- Residential mortgage 80,151 1,430 7.14 Home equity lines 15,857 304 7.68 Direct/Indirect consumer 42,240 859 8.15 Consumer finance 17,794 424 9.56 Bankcard 10,365 306 11.83 Foreign consumer 3,653 87 9.55 ---------------------------------------------------------------------------------------------------------------- Total consumer 170,060 3,410 8.03 ---------------------------------------------------------------------------------------------------------------- Total loans and leases 364,753 6,878 7.56 ---------------------------------------------------------------------------------------------------------------- Other earning assets 12,924 232 7.23 ---------------------------------------------------------------------------------------------------------------- Total earning assets (3) 530,049 9,257 7.00 ---------------------------------------------------------------------------------------------------------------- Cash and cash equivalents 25,868 Other assets, less allowance for credit losses 59,447 ---------------------------------------------------------------------------------------------------------------- Total assets $615,364 ---------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities Domestic interest-bearing deposits: Savings $21,799 67 1.24 NOW and money market deposit accounts 100,897 581 2.31 Consumer CDs and IRAs 73,601 847 4.61 Negotiated CDs, public funds and other time deposits 6,238 80 5.14 ---------------------------------------------------------------------------------------------------------------- Total domestic interest-bearing deposits 202,535 1,575 3.12 ---------------------------------------------------------------------------------------------------------------- Foreign interest-bearing deposits (4): Banks located in foreign countries 16,947 196 4.62 Governments and official institutions 8,089 98 4.81 Time, savings and other 26,354 299 4.56 ---------------------------------------------------------------------------------------------------------------- Total foreign interest-bearing deposits 51,390 593 4.62 ---------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 253,925 2,168 3.42 ---------------------------------------------------------------------------------------------------------------- Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings 116,339 1,396 4.82 Trading account liabilities 14,178 150 4.25 Long-term debt (5) 58,302 880 6.03 ---------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities (6) 442,744 4,594 4.16 ---------------------------------------------------------------------------------------------------------------- Noninterest-bearing sources: Noninterest-bearing deposits 88,324 Other liabilities 37,405 Shareholders' equity 46,891 ---------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $615,364 ---------------------------------------------------------------------------------------------------------------- Net interest spread 2.84 Impact of noninterest-bearing sources .69 ---------------------------------------------------------------------------------------------------------------- Net interest income/yield on earning assets $4,663 3.53% ----------------------------------------------------------------------------------------------------------------
(1) The average balance and yield on available-for-sale securities are based on the average of historical amortized cost balances. (2) Nonperforming loans are included in the average loan balances. Income on such nonperforming loans is recognized on a cash basis. (3) Interest income includes taxable-equivalent basis adjustments of $78 and $71 in the second and first quarters of 2000 and $66, $53 and $51 in the fourth, third and second quarters of 1999, respectively. Interest income also includes the impact of risk management interest rate contracts, which (decreased) increased interest income on the underlying assets $(11) and $7 in the second and first quarters of 2000 and $57, $103 and $83 in the fourth, third and second quarters of 1999, respectively. (4) Primarily consists of time deposits in denominations of $100,000 or more. (5) Long-term debt includes trust preferred securities. (6) Interest expense includes the impact of risk management interest rate contracts, which (increased) decreased interest expense on the underlying liabilities $(5) and $(8) in the second and first quarters of 2000 and $(2), $6 and $52 in the fourth, third and second quarters of 1999, respectively. 35 Table Four Six-Month Average Balances and Interest Rates - Taxable-Equivalent Basis ------------------------------------------------------------------------------------------------------------ Six Months Ended June 30 ------------------------------------------- 2000 ------------------------------------------- Interest Average Income/ Yield/ (Dollars in millions) Balance Expense Rate ------------------------------------------------------------------------------------------------------------ Earning assets Time deposits placed and other short-term investments $ 4,541 $154 6.84% Federal funds sold and securities purchased under agreements to resell 44,721 1,170 5.25 Trading account assets 44,303 1,244 5.63 Securities: Available-for-sale (1) 85,466 2,602 6.10 Held-for-investment 1,369 51 7.44 ------------------------------------------------------------------------------------------------------------ Total securities 86,835 2,653 6.12 ------------------------------------------------------------------------------------------------------------ Loans and leases (2): Commercial - domestic 146,698 5,847 8.01 Commercial - foreign 28,498 1,000 7.06 Commercial real estate - domestic 25,080 1,080 8.66 Commercial real estate - foreign 360 16 9.22 ------------------------------------------------------------------------------------------------------------ Total commercial 200,636 7,943 7.96 ------------------------------------------------------------------------------------------------------------ Residential mortgage 88,626 3,262 7.37 Home equity lines 18,320 799 8.77 Direct/Indirect consumer 41,808 1,754 8.44 Consumer finance 23,460 1,031 8.79 Bankcard 8,916 513 11.56 Foreign consumer 2,228 99 8.90 ------------------------------------------------------------------------------------------------------------ Total consumer 183,358 7,458 8.16 ------------------------------------------------------------------------------------------------------------ Total loans and leases 383,994 15,401 8.05 ------------------------------------------------------------------------------------------------------------ Other earning assets 8,436 350 8.31 ------------------------------------------------------------------------------------------------------------ Total earning assets (3) 572,830 20,972 7.35 ------------------------------------------------------------------------------------------------------------ Cash and cash equivalents 25,718 Other assets, less allowance for credit losses 63,256 ------------------------------------------------------------------------------------------------------------ Total assets $661,804 ------------------------------------------------------------------------------------------------------------ Interest-bearing liabilities Domestic interest-bearing deposits: Savings $24,086 156 1.30 NOW and money market deposit accounts 99,306 1,413 2.86 Consumer CDs and IRAs 76,729 2,017 5.29 Negotiated CDs, public funds and other time deposits 7,163 214 6.01 ------------------------------------------------------------------------------------------------------------ Total domestic interest-bearing deposits 207,284 3,800 3.69 ------------------------------------------------------------------------------------------------------------ Foreign interest-bearing deposits (4): Banks located in foreign countries 15,001 420 5.64 Governments and official institutions 9,315 275 5.93 Time, savings and other 27,040 720 5.35 ------------------------------------------------------------------------------------------------------------ Total foreign interest-bearing deposits 51,356 1,415 5.54 ------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 258,640 5,215 4.05 ------------------------------------------------------------------------------------------------------------ Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings 133,666 3,792 5.70 Trading account liabilities 21,773 370 3.42 Long-term debt (5) 67,018 2,291 6.84 ------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities (6) 481,097 11,668 4.87 ------------------------------------------------------------------------------------------------------------ Noninterest-bearing sources: Noninterest-bearing deposits 90,760 Other liabilities 43,376 Shareholders' equity 46,571 ------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $661,804 ------------------------------------------------------------------------------------------------------------ Net interest spread 2.48 Impact of noninterest-bearing sources .78 ------------------------------------------------------------------------------------------------------------ Net interest income/yield on earning assets $9,304 3.26% ------------------------------------------------------------------------------------------------------------
Six Months Ended June 30 ------------------------------------ 1999 ------------------------------------ Interest Average Income/ Yield/ (Dollars in millions) Balance Expense Rate ---------------------------------------------------------------------------------------------------------- Earning assets Time deposits placed and other short-term investments $ 5,780 $ 153 5.33% Federal funds sold and securities purchased under agreements to resell 28,049 768 5.51 Trading account assets 40,480 1,075 5.34 Securities: Available-for-sale (1) 75,156 2,300 6.14 Held-for-investment 1,692 61 7.18 ---------------------------------------------------------------------------------------------------------- Total securities 76,848 2,361 6.16 ---------------------------------------------------------------------------------------------------------- Loans and leases (2): Commercial - domestic 138,264 4,917 7.17 Commercial - foreign 30,885 950 6.20 Commercial real estate - domestic 26,380 1,092 8.35 Commercial real estate - foreign 288 12 8.63 ------------------------------------------------------------------------------------------------------- Total commercial 195,817 6,971 7.18 ---------------------------------------------------------------------------------------------------------- Residential mortgage 77,982 2,786 7.16 Home equity lines 15,698 602 7.74 Direct/Indirect consumer 41,946 1,706 8.19 Consumer finance 16,842 797 9.55 Bankcard 10,824 633 11.80 Foreign consumer 3,651 176 9.72 --------------------------------------------------------------------------------------------------------- Total consumer 166,943 6,700 8.07 --------------------------------------------------------------------------------------------------------- Total loans and leases 362,760 13,671 7.59 --------------------------------------------------------------------------------------------------------- Other earning assets 12,967 475 7.38 --------------------------------------------------------------------------------------------------------- Total earning assets (3) 526,884 18,503 7.07 --------------------------------------------------------------------------------------------------------- Cash and cash equivalents 25,847 Other assets, less allowance for credit losses 59,779 --------------------------------------------------------------------------------------------------------- Total assets $612,510 --------------------------------------------------------------------------------------------------------- Interest-bearing liabilities Domestic interest-bearing deposits: Savings $21,718 138 1.28 NOW and money market deposit accounts 100,385 1,156 2.32 Consumer CDs and IRAs 73,979 1,704 4.64 Negotiated CDs, public funds and other time deposits 6,574 169 5.17 --------------------------------------------------------------------------------------------------------- Total domestic interest-bearing deposits 202,656 3,167 3.15 --------------------------------------------------------------------------------------------------------- Foreign interest-bearing deposits (4): Banks located in foreign countries 18,653 464 5.01 Governments and official institutions 8,628 211 4.92 Time, savings and other 26,665 638 4.83 --------------------------------------------------------------------------------------------------------- Total foreign interest-bearing deposits 53,946 1,313 4.91 --------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 256,602 4,480 3.52 --------------------------------------------------------------------------------------------------------- Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings 114,373 2,751 4.85 Trading account liabilities 13,433 279 4.19 Long-term debt (5) 55,487 1,685 6.07 --------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities (6) 439,895 9,195 4.21 --------------------------------------------------------------------------------------------------------- Noninterest-bearing sources: Noninterest-bearing deposits 87,478 Other liabilities 38,550 Shareholders' equity 46,587 -------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $612,510 -------------------------------------------------------------------------------------------------------- Net interest spread 2.86 Impact of noninterest-bearing sources .69 -------------------------------------------------------------------------------------------------------- Net interest income/yield on earning assets $9,308 3.55% --------------------------------------------------------------------------------------------------------
(1) The average balance and yield on available-for-sale securities are based on the average of historical amortized cost balances. (2) Nonperforming loans are included in the average loan balances. Income on such nonperforming loans is recognized on a cash basis. (3) Interest income includes taxable-equivalent basis adjustments of $149 and $96 for the six months ended June 30, 2000 and 1999, respectively. Interest income also includes the impact of risk management interest rate contracts, which (decreased) increased interest income on the underlying assets $(4) and $146 for the six months ended June 30, 2000 and 1999, respectively. (4) Primarily consists of time deposits in denominations of $100,000 or more. (5) Long-term debt includes trust preferred securities. (6) Interest expense includes the impact of risk management interest rate contracts, which (increased) decreased interest expense on the underlying liabilities $(13) and $112 in the six months ended June 30, 2000 and 1999, respectively. 36 Noninterest Income As presented in Table Five, noninterest income decreased $22 million and increased $801 million to $3.5 billion and $7.5 billion for the three months and six months ended June 30, 2000, respectively, compared to the comparable 1999 periods. The decrease in noninterest income for the three months ended June 30, 2000 primarily reflects declines in other income and investment banking income partially offset by increases in trading account profits and card income. The increase in noninterest income for the six months ended June 30, 2000 primarily reflects increases in equity investment gains, trading account profits, card income and investment banking income.
Table Five Noninterest Income ------------------------------------------------------------------------------------------------------------------------- Three Months Increase/ Six Months Increase/ Ended June 30 (Decrease) Ended June 30 (Decrease) ---------------------------------------------------------------------------- (Dollars in millions) 2000 1999 Amount Percent 2000 1999 Amount Percent ----------------------------------------------------------------------------------------------------------------------------- Consumer service charges $ 646 $ 634 $12 1.9% $1,264 $1,237 $27 2.2% Corporate service charges 479 439 40 9.1 968 892 76 8.5 ----------------------------------------------------------------------------------------------------------------------------- Total service charges 1,125 1,073 52 4.8 2,232 2,129 103 4.8 ----------------------------------------------------------------------------------------------------------------------------- Consumer investment and brokerage services 387 334 53 15.9 751 645 106 16.4 Corporate investment and brokerage services 105 133 (28) (21.1) 226 248 (22) (8.9) ----------------------------------------------------------------------------------------------------------------------------- Total investment and brokerage services 492 467 25 5.4 977 893 84 9.4 ----------------------------------------------------------------------------------------------------------------------------- Mortgage servicing income 136 125 11 8.8 264 257 7 2.7 Investment banking income 373 421 (48) (11.4) 770 654 116 17.7 Equity investment gains 134 134 - - 697 289 408 n/m Card income 556 497 59 11.9 1,040 891 149 16.7 Trading account profits 471 395 76 19.2 1,195 895 300 33.5 Other income 213 410 (197) (48.0) 371 737 (366) (49.7) ------------------------------------------------------------------------------------------------------------------------------- Total $3,500 $3,522 $(22) (.6)% $7,546 $6,745 $ 801 11.9% =============================================================================================================================== n/m = not meaningful
The following section discusses the noninterest income results of the Corporation's three business segments, as well as other income for the total Corporation. For additional business segment information, see "Business Segment Operations" beginning on page 24. Consumer and Commercial Banking o Noninterest income for Consumer and Commercial Banking decreased $18 million and increased $41 million to $1.8 billion and $3.4 billion for the three months and six months ended June 30, 2000, respectively. The increase for the six months ended June 30, 2000 was due to higher card income and service charges. For the three months ended June 30, 2000, the increases in card income and service charges were offset by a decrease in other income. o Card income includes merchant discount, credit card and debit card fees and interchange income. Card income increased $149 million to $1.0 billion for the six months ended June 30, 2000. The increase was primarily due to increased purchase volume in both the credit card and debit card portfolios resulting in higher interchange income, fee income from the credit card portfolio and servicing income from securitized credit card receivables. Growth in income for the core portfolio is being generated through traditional marketing channels, expanding relationships with existing customers and leveraging the franchise network. Card income included revenue from the securitized portfolio of $48 million and $86 million for the three months and six months ended June 30, 2000, respectively. Card income included revenue and gains of $60 million and $97 million from the securitized portfolio for the three months and six months ended June 30, 1999, respectively. o Service charges include deposit account service charges, non-deposit service charges and fees, bankers' acceptances and letters of credit fees and fees on factored accounts receivable. Service 37 charges increased $47 million to $1.7 billion for the six months ended June 30, 2000 due to an increase in both consumer and corporate service charges. Consumer service charges increased $26 million primarily due to overdraft charges and general banking service fees. Corporate service charges increased $21 million primarily attributable to general banking service fees and bankers' acceptances and letters of credit fee income. o Mortgage servicing income increased $7 million to $264 million for the six months ended June 30, 2000, primarily reflecting higher mortgage servicing fees and slower prepayment speeds which was partially offset by lower origination activity. The average managed portfolio of mortgage loans serviced increased $42.1 billion and $46.5 billion to $328.1 billion and $324.7 billion for the three months and six months ended June 30, 2000, respectively. Total production of first mortgage loans originated through the Corporation decreased $7.3 billion and $15.4 billion to $14.4 billion and $27.8 billion for the three months and six months ended June 30, 2000, respectively, reflecting a slowdown in refinancings as a result of a general increase in levels of interest rates. First mortgage loan origination volume for the three months and six months ended June 30, 2000 was composed of approximately $6.1 billion and $11.1 billion, respectively, of retail loans and $8.3 billion and $16.7 billion, respectively, of correspondent and wholesale loans. In conducting its mortgage production activities, the Corporation is exposed to interest rate risk for the periods between the loan commitment date and the loan funding date. To manage this risk, the Corporation enters into various financial instruments including forward delivery and option contracts. The notional amount of such contracts was $5.2 billion at June 30, 2000 with associated net unrealized losses of $27 million. At December 31, 1999, the notional amount of such contracts was $2.7 billion with associated net unrealized gains of $18 million. These contracts have an average expected maturity of less than 90 days. To manage risk associated with changes in prepayment rates and the impact on mortgage servicing rights, the Corporation uses various financial instruments including options and certain swap contracts. At June 30, 2000, deferred net gains from mortgage servicing rights hedging activity were $53 million, comprised of unamortized realized deferred gains of $229 million and unrealized losses of $176 million on closed and open positions, respectively. At December 31, 1999, deferred net losses from mortgage servicing rights hedging activity were $20 million, comprised of unamortized realized deferred gains of $313 million and unrealized losses of $333 million on closed and open positions, respectively. Notional amounts of hedge instruments used for mortgage servicing rights hedging activities were $47.7 billion and $43.4 billion at June 30, 2000 and December 31, 1999, respectively. Asset Management o Noninterest income for Asset Management increased $6 million to $830 million for the six months ended June 30, 2000. The increase was primarily attributable to increased investment and brokerage services offset by gains in 1999 on the disposition of certain businesses. o Investment and brokerage services include personal and institutional asset management fees and consumer brokerage fees. Income from investment and brokerage services increased $54 million to $761 million for the six months ended June 30, 2000. This increase was primarily attributable to higher revenue from consumer investment and brokerage services reflecting new business and market growth. 38 Global Corporate and Investment Banking o Noninterest income for Global Corporate and Investment Banking increased $675 million to $3.2 billion for the six months ended June 30, 2000. The increase was due to increases in equity investment gains, trading account profits, investment banking income and corporate service charges. o Equity investment gains include investments in both principal investing and strategic technology areas. Equity investment gains were $134 million for the three months ended June 30, 2000 and 1999 and increased $408 million to $697 million for the six months ended June 30, 2000. For the three months ended June 30, 2000, equity investment gains included realized cash returns on equity investments of $221 million, partially offset by fair value depreciation of $87 million. For the six months ended June 30, 2000, equity investment gains included realized returns on equity investments of $595 million and net appreciation in fair value of $102 million. o 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-dealer positions. These transactions include positions to meet customer demand as well as for the Corporation's own trading account. Trading positions are taken in a diverse range of financial instruments and markets. The profitability of these trading positions is largely dependent on the volume and type of transactions, the level of risk assumed, and the volatility of price and rate movements. Trading account profits, as reported in the Corporation's Consolidated Statement of Income, includes neither the net interest recognized on interest-earning and interest-bearing trading positions, nor the related funding charge or benefit. Trading account profits, as well as trading-related net interest income ("trading-related revenue") are presented in the table below 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. Trading-related revenue increased $468 million to $1.7 billion for the six months ended June 30, 2000, primarily due to higher revenues from interest rate contracts and equities, partially offset by decreases in foreign exchange contracts and fixed income. Income from interest rate contracts increased $136 million to $476 million for the six months ended June 30, 2000. The increase was primarily attributable to market volatility driven by interest rate uncertainty, coupled with stronger client activity in domestic and international markets. Revenue from equities increased $402 million to $624 million for the six months ended June 30, 2000. The increase reflects continued growth of this business through enhanced client deal activity and volatility in equity markets. Fixed income decreased $52 million to $244 million for the six months ended June 30, 2000, primarily attributable to spread widening and a decline in customer demand.
Three Months Ended Six Months Ended June 30 June 30 ----------------------------------------- (Dollars in millions) 2000 1999 2000 1999 - -------------------------------------------------------------------------------- Trading account profits - as reported $471 $395 $1,195 $895 Net interest income 263 148 483 315 - -------------------------------------------------------------------------------- Total trading-related revenue $734 $543 $1,678 $1,210 - -------------------------------------------------------------------------------- Trading-related revenue by product Foreign exchange contracts $132 $154 $290 $312 Interest rate contracts 169 126 476 340 Fixed income 71 105 244 296 Equities 335 135 624 222 Commodities and other 27 23 44 40 - -------------------------------------------------------------------------------- Total trading-related revenue $734 $543 $1,678 $1,210 - --------------------------------------------------------------------------------
39 o Investment banking income decreased $48 million and increased $116 million to $373 million and $770 million for the three months and six months ended June 30, 2000, respectively. The decrease for the three months ended June 30, 2000, primarily reflects lower other investment banking fees and high yield securities underwriting fees, partially offset by higher equity securities underwriting fees. The increase for the six months ended June 30, 2000 primarily reflects an increase of $109 million in securities underwriting fees, attributable to continued growth in equity underwriting. Syndication fees increased $64 million to $254 million for the six months ended June 30, 2000. The increase reflects the Corporation's continued strong position as lead arranger on syndications. Advisory services fees increased $34 million to $158 million for the six months ended June 30, 2000. The increase was primarily attributable to strong revenue from a higher volume of merger and acquisition deals in the first quarter. Investment banking income by major activity follows:
Three Months Ended Six Months Ended June 30 June 30 ----------------------------------------- (Dollars in millions) 2000 1999 2000 1999 - -------------------------------------------------------------------------------- Investment banking income Securities underwriting $150 $148 $329 $220 Syndications 123 120 254 190 Advisory services 86 82 158 124 Other 14 71 29 120 - -------------------------------------------------------------------------------- Total $373 $421 $770 $654 - --------------------------------------------------------------------------------
o Service charges increased $60 million for the six months ended June 30, 2000. The increase was primarily attributable to higher corporate service charges driven by an increase in general banking fees and deposit account service charges, partially offset by a decline in bankers' acceptances and letters of credit. Other income for the Corporation decreased $366 million to $371 million for the six months ended June 30, 2000 reflecting the absence of securitization gains and lower loan sales gains. 40 Other Noninterest Expense As presented in Table Six, the Corporation's other noninterest expense decreased $44 million and increased $126 million to $4.4 billion and $9.0 billion for the three months and six months ended June 30, 2000, respectively, from the comparable 1999 periods. The decrease for the three months ended was primarily attributable to declines in professional fees and data processing fees, partially offset by an increase in personnel and other general operating expense. The increase for the six months ended was primarily attributable to personnel and other general operating expenses, partially offset by decreases in equipment, professional fees and data processing expenses. Table Six Other Noninterest Expense
- -------------------------------------------------------------------------------------------------------------------- Three Months Increase/ Six Months Increase/ Ended June 30 (Decrease) Ended June 30 (Decrease) ------------------------------------------------------------------------------- (Dollars in millions) 2000 1999 Amount Percent 2000 1999 Amount Percent - -------------------------------------------------------------------------------------------------------------------- Personnel $2,311 $2,261 $ 50 2.2% $4,845 $4,594 $251 5.5% Occupancy 411 395 16 4.1 829 791 38 4.8 Equipment 296 339 (43) (12.7) 597 697 (100) (14.3) Marketing 132 147 (15) (10.2) 251 294 (43) (14.6) Professional fees 93 166 (73) (44.0) 198 292 (94) (32.2) Amortization of intangibles 218 225 (7) (3.1) 435 447 (12) (2.7) Data processing 169 214 (45) (21.0) 328 404 (76) (18.8) Telecommunications 133 140 (7) (5.0) 264 276 (12) (4.3) Other general operating 505 446 59 13.2 1,020 866 154 17.8 General administrative and other 145 124 21 16.9 269 249 20 8.0 - --------------------------------------------------------------------------------------------------------------------- Total $4,413 $4,457 $ (44) (1.0)% $9,036 $8,910 $126 1.4% - ---------------------------------------------------------------------------------------------------------------------
o Personnel expense increased $50 million and $251 million to $2.3 billion and $4.8 billion for the three months and six months ended June 30, 2000, respectively. The increase was primarily attributable to higher employee benefits and higher revenue-related incentive compensation for both periods. o Equipment expense decreased $43 million and $100 million to $296 million and $597 million for the three months and six months ended June 30, 2000, respectively. For both periods, the decreases reflect a decline in repairs and maintenance expense and a reduction in purchases of non-capitalized equipment. o Marketing expense decreased $15 million and $43 million to $132 million and $251 million for the three months and six months ended June 30, 2000, respectively, primarily due to timing differences related to the underlying marketing efforts across the Corporation. o Professional fees declined $73 million and $94 million to $93 million and $198 million for the three months and six months ended June 30, 2000, respectively. For both periods, the declines primarily reflect lower consulting fees. o Data processing expense decreased $45 million and $76 million to $169 million and $328 million for the three months and six months ended June 30, 2000, respectively. For both periods, the decreases primarily reflect declines in software-related expense, item processing and check clearing expense. o Other general operating expense increased $59 million and $154 million to $505 million and $1.0 billion for the three months and six months ended June 30, 2000, respectively. For the three months ended June 30, 2000, the increase primarily reflects an increase in other operating expense and credit card processing expense, partially offset by lower miscellaneous employee expenses. For the six months ended June 30, 2000, the increase primarily reflects litigation costs from the first quarter related to pre-Merger lawsuits. 41 Income Taxes The Corporation's income tax expense for the three months and six months ended June 30, 2000 was $1.2 billion and $2.5 billion, respectively, for an effective tax rate of 36.6 percent. Excluding merger-related charges, income tax expense for the three months and six months ended June 30, 1999 was $1.2 billion and $2.2 billion, respectively, for an effective tax rate of 36.0 percent. Balance Sheet Review and Liquidity Risk Management The Corporation utilizes an integrated approach in managing its balance sheet which includes management of interest rate sensitivity, credit risk, liquidity risk and its capital position. The discussion of average balances below compares the six months ended June 30, 2000 to the same period in 1999. With the exception of average managed loans, the average balances discussed below can be derived from Table Four. Average levels of customer-based funds increased $7.9 billion to $298.0 billion for the six months ended June 30, 2000 primarily due to an increase in noninterest-bearing demand and savings deposits. As a percentage of total sources, average levels of customer-based funds decreased to 45 percent for the six months ended June 30, 2000 from 47 percent. Average levels of market-based funds increased $25.0 billion for the six months ended June 30, 2000 to $206.8 billion. In addition, average levels of long-term debt increased $11.5 billion to $67.0 billion for the six months ended June 30, 2000 mainly the result of borrowings to fund earning asset growth, business development opportunities, build liquidity, repay maturing debt and fund share repurchases. The average securities portfolio for the six months ended June 30, 2000 increased $10.0 billion to $86.8 billion, representing 13 percent of total uses of funds for the six months ended June 30, 2000. See the following "Securities" section for additional information on the securities portfolio. Average loans and leases, the Corporation's primary use of funds, increased $21.2 billion to $384.0 billion for the six months ended June 30, 2000. Adjusting for securitizations, sales and divestitures, average managed loans and leases increased $38.7 billion to $412.2 billion for the six months ended June 30, 2000. This increase was primarily due to strong consumer loan growth of $32.5 billion or 19 percent annualized growth. The majority of consumer loan growth occurred in residential real estate secured loan products including residential mortgages, home equity lines and consumer finance. Average managed residential mortgages increased $21.6 billion to $92.5 billion, reflecting increased originations of adjustable-rate mortgages and the retention of these products on the balance sheet. Average managed consumer finance loans increased $7.6 billion to $32.0 billion. Average managed home equity lines increased $2.6 billion to $18.3 billion, reflecting the impact of new marketing programs and lower prepayments. Average managed commercial loans increased $6.2 billion to $205.0 billion for the six months ended June 30, 2000. Domestic commercial loans reflected growth of $7.8 billion to $151.1 billion, due to strong growth in the Consumer and Commercial Banking and Asset Management business segments. This domestic growth was partially offset by strategic reductions in foreign commercial loans of $2.5 billion. Average other assets and cash and cash equivalents increased $3.4 billion to $89.0 billion for the six months ended June 30, 2000 due largely to increases in the average balances of derivative-dealer assets and mortgage servicing rights. At June 30, 2000, cash and cash equivalents were $27.5 billion, an increase of $504 million from December 31, 1999. During the six months ended June 30, 2000, net cash used in operating activities was $4.7 billion, net cash used in investing activities was $32.2 billion and net cash provided by financing activities was $37.4 billion. For further information on cash flows, see the Consolidated Statement of Cash Flows of the consolidated financial statements. 42 Liquidity is a measure of the Corporation's ability to fulfill its cash requirements and is managed by the Corporation through its asset and liability management process. The Corporation monitors its assets and liabilities and modifies these positions as liquidity requirements change. This process, coupled with the Corporation's ability to raise capital and debt financing, is designed to cover the liquidity needs of the Corporation. The Corporation also takes into consideration the ability of its subsidiary banks to pay dividends to the Corporation. For additional information on the dividend capabilities of subsidiary banks, see Note Twelve of the Corporation's 1999 Annual Report on Form 10-K. Management believes that the Corporation's sources of liquidity are more than adequate to meet its cash requirements. Securities The securities portfolio at June 30, 2000 consisted of available-for-sale securities totaling $79.5 billion compared to $81.7 billion at December 31, 1999. Held-for-investment securities totaled $1.4 billion at June 30, 2000 and December 31, 1999. The valuation allowance for available-for-sale and marketable equity securities is included in shareholders' equity. At June 30, 2000 the valuation allowance consists of unrealized losses of $2.4 billion, net of related income taxes of $1.3 billion, primarily reflecting market valuation adjustments of $3.6 billion pre-tax net unrealized losses on available-for-sale securities and $5 million pre-tax net unrealized gains on marketable equity securities. At December 31, 1999 the valuation allowance reflects unrealized losses of $2.5 billion, net of related income taxes of $1.1 billion, primarily reflecting market valuation adjustments of $3.8 billion pre-tax net unrealized losses on available-for-sale securities and $248 million pre-tax net unrealized gains on marketable equity securities. At June 30, 2000 and December 31, 1999, the market value of the Corporation's held-for-investment securities reflected pre-tax net unrealized losses of $127 million and $152 million, respectively. The estimated average duration of the available-for-sale securities portfolio was 3.95 years at June 30, 2000 compared to 4.05 years at December 31, 1999. Capital Resources and Capital Management Shareholders' equity at June 30, 2000 was $45.9 billion compared to $44.4 billion at December 31, 1999, an increase of $1.5 billion. The increase was primarily due to net earnings (net income less dividends) of $2.6 billion, partially offset by the repurchase of 34 million shares of common stock for approximately $1.6 billion. The remaining increase of $500 million was due to the exercise of employee stock options, the issuance of restricted stock and changes in net unrealized gains on available-for-sale and marketable equity securities. Through June 30, 2000, the Corporation had repurchased 112 million common shares under a 130 million share authorization enacted on June 23, 1999 by the Corporation's Board of Directors (the Board). On July 26, 2000, the Board authorized a new stock repurchase program of up to 100 million shares of the Corporation's common stock at an aggregate cost of up to $7.5 billion. 43 Presented below are the regulatory risk-based capital ratios and capital amounts for the Corporation and Bank of America, N.A. at June 30, 2000 and December 31, 1999. The Corporation and Bank of America, N.A. were considered "well-capitalized" at June 30, 2000.
June 30, 2000 December 31, 1999 -------------------------------------------- (Dollars in millions) Ratio Amount Ratio Amount - ---------------------------------------------------------------------------- Tier 1 Capital Bank of America Corporation 7.40% $40,257 7.35% $38,651 Bank of America, N.A. 7.83 39,904 7.78 38,616 Total Capital Bank of America Corporation 11.03 60,027 10.88 57,192 Bank of America, N.A. 10.87 55,396 10.91 54,132 Leverage Bank of America Corporation 6.11 40,257 6.26 38,651 Bank of America, N.A. 6.82 39,904 6.74 38,616 - ----------------------------------------------------------------------------
The regulatory capital guidelines measure capital in relation to the credit and market risks of both on- and off-balance sheet items using various risk weights. Under the regulatory capital guidelines, Total Capital consists of three tiers of capital. Tier 1 Capital includes common shareholders' equity and qualifying preferred stock less goodwill and other adjustments. Tier 2 Capital consists of preferred stock not qualifying as Tier 1 Capital, mandatory convertible debt, limited amounts of subordinated debt, other qualifying term debt and the allowance for credit losses up to 1.25 percent of risk-weighted assets. Tier 3 Capital includes subordinated debt that is unsecured, fully paid, has an original maturity of at least two years, is not redeemable before maturity without prior approval by the Federal Reserve Board and includes a lock-in clause precluding payment of either interest or principal if the payment would cause the issuing bank's risk-based capital ratio to fall or remain below the required minimum. The sum of Tier 1 and Tier 2 Capital less investments in unconsolidated banking and finance subsidiaries represents qualifying total capital, at least 50 percent of which must consist of Tier 1 Capital. Risk-based capital ratios are calculated by dividing Tier 1 and Total Capital by risk-weighted assets. In calculating risk-weighed assets, assets and off-balance sheet exposures are assigned to one of four categories of risk-weights, based primarily on relative credit risk. At June 30, 2000, the Corporation had no subordinated debt that qualified as Tier 3 Capital. At June 30, 2000, the regulatory risk-based capital ratios of the Corporation and Bank of America, N.A. exceeded the regulatory minimums of four percent for Tier 1 risk-based capital ratio, eight percent for total risk-based capital ratio and the leverage guidelines of 100 to 200 basis points above the minimum ratio of three percent. Credit Risk Management and Credit Portfolio Review The following section discusses credit risk in the loan portfolio. The Corporation's primary credit exposure is concentrated in its loans and leases portfolio, which totaled $400.8 billion and $370.7 billion at June 30, 2000 and December 31, 1999, respectively. In an effort to minimize the adverse impact of any single event or set of occurrences, the Corporation strives to maintain a diverse credit portfolio. Table Seven presents the distribution of loans and leases, nonperforming assets and net charge-offs by category. Additional information on the Corporation's real estate, industry and foreign exposure can be found in the Concentrations of Credit Risk section beginning on page 50. 44 - -------------------------------------------------------------------------------- Table Seven Distribution of Loans and Leases, Nonperforming Assets and Net Charge-offs
- ----------------------------------------------------------------------------------------------------------- (Dollars in millions) Distribution of Loans and Leases Nonperforming Assets ------------------------------------------------------------------- June 30 December 31 June 30 December 31 2000 1999 2000 1999 ------------------------------------------------------------------- Amount Percent Amount Percent Amount Amount - ----------------------------------------------------------------------------------------------------------- Commercial - domestic $150,622 37.6% $143,450 38.7% $1,535 $1,163 Commercial - foreign 30,582 7.6 27,978 7.5 588 486 Commercial real estate - domestic 26,054 6.5 24,026 6.5 164 191 Commercial real estate - foreign 229 .1 325 .1 2 3 - ---------------------------------------------------------------------------------------------------------- Total commercial 207,487 51.8 195,779 52.8 2,289 1,843 - ---------------------------------------------------------------------------------------------------------- Residential mortgage 94,090 23.5 81,860 22.1 505 529 Home equity lines 20,154 5.0 17,273 4.7 44 46 Direct/Indirect consumer 41,824 10.4 42,161 11.4 20 19 Consumer finance 24,748 6.2 22,326 6.0 826 598 Bankcard 10,310 2.6 9,019 2.4 Foreign consumer 2,204 .5 2,244 .6 7 7 - --------------------------------------------------------------------------------------------------------- Total consumer 193,330 48.2 174,883 47.2 1,402 1,199 - --------------------------------------------------------------------------------------------------------- Total nonperforming loans 3,691 3,042 - --------------------------------------------------------------------------------------------------------- Foreclosed properties 195 163 - --------------------------------------------------------------------------------------------------------- Total $400,817 100.0% $370,662 100.0% $3,886 $3,205 - --------------------------------------------------------------------------------------------------------- Nonperforming assets as a percentage of: Total assets .57% .51% Loans, leases and foreclosed properties .97 .86 Loans past dues 90 days or more and not classified as nonperforming $482 $ 521 - ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------- (Dollars in millions) Net Charge-offs(1) -------------------------------------------------------------------------- Three Months Ended June 30 Six Months Ended June 30 2000 1999 2000 1999 -------------------------------------------------------------------------- Amount Percent Amount Percent Amount Percent Amount Percent - -------------------------------------------------------------------------------------------------------------------------- Commercial - domestic $226 .62% $147 .43% $398 .55% $ 328 .48% Commercial - foreign 24 .33 84 1.12 29 .21 113 .74 Commercial real estate - domestic 6 .09 (6) n/m 12 .09 (8) n/m Commercial real estate - foreign - .16 1 .10 (2) n/m 1 .35 - -------------------------------------------------------------------------------------------------------------------------- Total commercial 256 .51 226 .47 437 .44 434 .45 - -------------------------------------------------------------------------------------------------------------------------- Residential mortgage 4 .02 7 .04 8 .02 12 .03 Home equity lines 3 .05 3 .09 6 .06 7 .09 Direct/Indirect consumer 61 .58 83 .78 152 .68 178 .85 Consumer finance 59 .97 42 .94 116 .99 90 1.08 Bankcard 77 3.30 153 5.94 158 3.56 308 5.78 Other consumer - domestic 10 - - - 12 - - - Foreign consumer - .09 6 .65 1 .11 10 .54 - -------------------------------------------------------------------------------------------------------------------------- Total consumer 214 .46 294 .69 453 .50 605 .73 - -------------------------------------------------------------------------------------------------------------------------- TOTAL $470 .48% $520 .57% $890 .47% $1,039 .58% - -------------------------------------------------------------------------------------------------------------------------- Managed bankcard net charge-offs and ratios(2) $237 4.84% $294 6.13% $494 5.13% $ 587 6.07% - --------------------------------------------------------------------------------------------------------------------------
n/m = not meaningful (1) Percentage amounts are calculated as net charge-offs divided by average oustanding loans and leases for each loan category. (2) Includes both on-balance sheet and securitized loans. 45 Commercial Portfolio Commercial - domestic loans outstanding totaled $150.6 billion and $143.5 billion at June 30, 2000 and December 31, 1999 or 38 percent and 39 percent of total loans and leases, respectively. The Corporation had commercial - domestic loan net charge-offs of $398 million, or 0.55 percent of average commercial - domestic loans for the six months ended June 30, 2000, compared to $328 million, or 0.48 percent of average commercial - domestic loans for the six months ended June 30, 1999. Net charge-offs increased primarily due to a single fraud-related credit. Nonperforming commercial - domestic loans were $1.5 billion, or 1.02 percent of commercial - domestic loans at June 30, 2000, compared to $1.2 billion, or 0.81 percent of commercial - domestic loans at December 31, 1999. Commercial - domestic loans past due 90 days or more and still accruing interest were $168 million at June 30, 2000, compared to $135 million at December 31, 1999, or 0.11 and 0.09 percent of commercial - domestic loans, respectively. Commercial - foreign loans outstanding totaled $30.6 billion and $28.0 billion at June 30, 2000 and December 31, 1999, respectively, or eight percent of total loans and leases for both periods. The Corporation had commercial - foreign loan net charge-offs for the six months ended June 30, 2000 of $29 million, or 0.21 percent of average commercial - foreign loans, compared to $113 million, or 0.74 percent of average commercial - foreign loans for the six months ended June 30, 1999. Nonperforming commercial - foreign loans were $588 million, or 1.92 percent of commercial - foreign loans at June 30, 2000, compared to $486 million, or 1.74 percent at December 31, 1999. Commercial - foreign loans past due 90 days or more and still accruing interest were $65 million at June 30, 2000, compared to $58 million at December 31, 1999, or 0.21 percent of commercial - foreign loans for both periods. For additional information see the Regional Foreign Exposure discussion beginning on page 51. Commercial real estate - domestic loans totaled $26.1 billion and $24.0 billion at June 30, 2000 and December 31, 1999, respectively, or seven percent of total loans and leases for both periods. Net charge-offs remained negligible at $12 million, or 0.09 percent of average commercial real estate - domestic loans for the six months ended June 30, 2000. Nonperforming commercial real estate - domestic loans were $164 million at June 30, 2000, compared to $191 million at December 31, 1999. At June 30, 2000, commercial real estate - domestic loans past due 90 days or more and still accruing interest were $20 million, or 0.08 percent of total commercial real estate - domestic loans, compared to $6 million, or 0.02 percent at December 31, 1999. Table Nine displays commercial real estate loans by geographic region and property type, including the portion of such loans which are nonperforming, and other real estate credit exposures. Table Ten presents aggregate commercial loan and lease exposures by certain significant industries. Consumer Portfolio At June 30, 2000 and December 31, 1999, total consumer loans outstanding totaled $193.3 billion and $174.9 billion, respectively, or 48 percent and 47 percent of total loans and leases, respectively, of which approximately 70 percent were secured by first and second mortgages on residential real estate. Additional information on components of, and changes in the Corporation's consumer loan portfolio can be found in the average earning asset discussion within the "Net Interest Income" section on page 32 and "Balance Sheet Review and Liquidity Risk Management" section on page 42. Residential mortgage loans increased to $94.1 billion at June 30, 2000, compared to $81.9 billion at December 31, 1999. Net charge-offs on residential mortgage loans remained negligible at $8 million, or 0.02 percent of average residential mortgage loans for the six months ended June 30, 2000. Nonperforming residential mortgage loans decreased $24 million to $505 million at June 30, 2000 compared to $529 million at December 31, 1999. Consumer bankcard receivables increased to $10.3 billion at June 30, 2000, compared to $9.0 billion at December 31, 1999. Net charge-offs on bankcard receivables for the six months ended June 30, 2000 decreased $150 million from the same period in 1999 to $158 million, or 3.56 percent of average bankcard receivables. The decrease resulted from portfolio sales in 1999 and continued declines in delinquency levels and bankruptcy filing rates resulting in lower charge-offs. Bankcard loans past due 90 days and still accruing interest were $112 million, or 1.09 percent of bankcard receivables at June 30, 2000, compared to $138 million, or 1.53 percent at December 31, 1999. 46 Consumer finance loans outstanding totaled $24.7 billion and $22.3 billion at June 30, 2000 and December 31, 1999, respectively, or six percent of total loans and leases for both periods. The Corporation had consumer finance net charge-offs of $116 million or 0.99 percent of average consumer finance loans for the six months ended June 30, 2000, compared to $90 million, or 1.08 percent for the six months ended June 30, 1999. Consumer finance nonperforming loans increased to $826 million at June 30, 2000 from $598 million at December 31, 1999 reflecting continued growth and seasoning in this portfolio. Other domestic consumer loans, which include direct and indirect consumer loans and home equity lines of credit increased to $62.0 billion at June 30, 2000, compared to $59.4 billion at December 31, 1999. Excluding bankcard, total consumer loans past due 90 days or more and still accruing interest were $117 million or 0.06 percent of total consumer loans at June 30, 2000, compared to $184 million or 0.11 percent at December 31, 1999. Nonperforming Assets As presented in Table Seven, nonperforming assets increased to $3.9 billion or 0.97 percent of loans, leases and foreclosed properties at June 30, 2000 from $3.2 billion or 0.86 percent at December 31, 1999. Nonperforming loans increased to $3.7 billion at June 30, 2000 from $3.0 billion at December 31, 1999, primarily due to several large commercial - domestic loans not concentrated in any single industry or region and higher consumer finance non-performers resulting from growth and seasoning in that portfolio. The allowance coverage of nonperforming loans was 185 percent at June 30, 2000 compared to 224 percent at December 31, 1999. Foreclosed properties increased to $195 million at June 30, 2000 compared to $163 million at December 31, 1999. In order to respond when deterioration of a credit occurs, internal loan workout units are devoted to providing specialized expertise and full-time management and/or collection of certain nonperforming assets as well as certain performing loans. Management believes concerted collection strategies and a proactive approach to managing overall problem assets have expedited the disposition, collection and renegotiation of nonperforming and other lower-quality assets. As part of this process, management routinely evaluates all reasonable alternatives, including the sale of assets individually or in groups, and selects the optimal strategy. Note Four of the consolidated financial statements provides the reported investment in specific loans considered to be impaired at June 30, 2000 and December 31, 1999. The Corporation's investment in specific loans that were considered to be impaired at June 30, 2000 was $2.5 billion, compared to $2.1 billion at December 31, 1999. Commercial - domestic impaired loans increased $363 million to $1.5 billion at June 30, 2000, compared to December 31, 1999. Commercial - foreign impaired loans increased $82 million to $585 million at June 30, 2000 compared to December 31, 1999. Commercial real estate - domestic impaired loans decreased $58 million to $391 million at June 30, 2000, compared to December 31, 1999. Allowance for Credit Losses The Corporation performs periodic and systematic detailed reviews of its loan and lease portfolios to identify risks inherent in and to assess the overall collectibility of those portfolios. Certain homogeneous loan portfolios are evaluated collectively based on individual loan type while remaining portfolios are reviewed on an individual loan basis. These detailed reviews, combined with historical loss experience and other factors, result in the identification and quantification of specific allowances for credit losses and 47 loss factors which are used in determining the amount of the allowance and related provision for credit losses. The actual amount of incurred credit losses that may be confirmed may vary from the estimate of incurred losses due to changing economic conditions or changes in industry or geographic concentrations. The Corporation has procedures in place to monitor differences between estimated and actual incurred credit losses. These procedures include detailed periodic assessments by senior management of both individual loans and credit portfolios and the models used to estimate incurred credit losses in those portfolios. Portions of the allowance for credit losses are assigned to cover the estimated probable incurred losses in each loan and lease category based on the results of the Corporation's detailed review process as described above. Further assignments are made based on general and specific economic conditions, as well as performance trends within specific portfolio segments and individual concentrations of credit, including geographic and industry concentrations. The assigned portion of the allowance for credit losses continues to be weighted toward the commercial loan portfolio, which reflects a higher level of nonperforming loans and the potential for higher individual losses. The remaining unassigned portion of the allowance for credit losses, determined separately from the procedures outlined above, addresses certain industry and geographic concentrations, including global economic conditions. This procedure helps to minimize the risk related to the margin of imprecision inherent in the estimation of the assigned allowance for credit losses. Due to the subjectivity involved in the determination of the unassigned portion of the allowance for credit losses, the relationship of the unassigned component to the total allowance for credit losses may fluctuate from period to period. Management evaluates the adequacy of the allowance for credit losses based on the combined total of the assigned and unassigned components and believes that the allowance for credit losses reflects management's best estimate of incurred credit losses as of the balance sheet date. The nature of the process by which the Corporation determines the appropriate allowance for credit losses requires the exercise of considerable judgment. After review of all relevant matters affecting loan collectibility, management believes that the allowance for credit losses is appropriate given its analysis of estimated incurred credit losses at June 30, 2000. Table Eight provides the changes in the allowance for credit losses for the three months and six months ended June 30, 2000 and 1999. 48 Table Eight Allowance For Credit Losses
- ------------------------------------------------------------------------------------------------------------------------------ Three Months Six Months Ended June 30 Ended June 30 ----------------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------ Balance, beginning of period $ 6,827 $ 7,123 $ 6,828 $ 7,122 - ------------------------------------------------------------------------------------------------------------------------------ Loans and leases charged off Commercial - domestic (255) (178) (457) (384) Commercial - foreign (35) (88) (47) (118) Commercial real estate - domestic (14) (5) (22) (7) Commerical real estate - foreign - (1) - (1) - ------------------------------------------------------------------------------------------------------------------------------ Total commercial (304) (272) (526) (510) - ------------------------------------------------------------------------------------------------------------------------------ Residential mortgage (7) (8) (14) (15) Home equity lines (5) (7) (10) (13) Direct/Indirect consumer (109) (127) (255) (267) Consumer finance (89) (84) (182) (182) Bankcard (91) (167) (185) (339) Other consumer domestic (14) - (16) - Foreign consumer (1) (7) (2) (12) - ------------------------------------------------------------------------------------------------------------------------------ Total consumer (316) (400) (664) (828) - ------------------------------------------------------------------------------------------------------------------------------ Total loans and leases charged off (620) (672) (1,190) (1,338) - ------------------------------------------------------------------------------------------------------------------------------ Recoveries of loans and leases previously charged off Commercial - domestic 29 31 59 56 Commercial - foreign 11 4 18 5 Commercial real estate - domestic 8 11 10 15 Commercial real estate - foreign - - 2 - - ------------------------------------------------------------------------------------------------------------------------------ Total commercial 48 46 89 76 - ------------------------------------------------------------------------------------------------------------------------------ Residential mortgage 3 1 6 3 Home equity lines 2 4 4 6 Direct/Indirect consumer 48 44 103 89 Consumer finance 30 42 66 92 Bankcard 14 14 27 31 Other consumer domestic 4 - 4 - Foreign consumer 1 1 1 2 - ------------------------------------------------------------------------------------------------------------------------------ Total consumer 102 106 211 223 - ------------------------------------------------------------------------------------------------------------------------------ Total recoveries of loans and leases previously charged off 150 152 300 299 - ------------------------------------------------------------------------------------------------------------------------------ Net charge-offs (470) (520) (890) (1,039) - ------------------------------------------------------------------------------------------------------------------------------ Provision for credit losses 470 510 890 1,020 Other, net (12) (17) (13) (7) - ------------------------------------------------------------------------------------------------------------------------------ Balance, June 30 $ 6,815 $ 7,096 $ 6,815 $ 7,096 - ------------------------------------------------------------------------------------------------------------------------------ Loans and leases outstanding at June 30 $400,817 $363,581 $400,817 $363,581 Allowance for credit losses as a percentage of loans and leases outstanding at June 30 1.70% 1.95% 1.70% 1.95% Average loans and leases outstanding during the period $391,404 $364,753 $383,994 $362,760 Annualized net charge-offs as a percentage of average loans and leases outstanding during the period .48% .57% .47% .58% Allowance for credit losses as a percentage of nonperforming loans at end of period 184.66 252.38 184.66 252.38 - ------------------------------------------------------------------------------------------------------------------------------
49 Concentrations of Credit Risk In an effort to minimize the adverse impact of any single event or set of occurrences, the Corporation strives to maintain a diverse credit portfolio as outlined in Tables Seven, Nine, Ten and Eleven. The Corporation maintains an extremely diverse commercial loan portfolio, representing 52 percent of total loans and leases, with the largest concentration in commercial real estate, which represents seven percent of total loans and leases. The exposure presented in Table Nine represents credit extensions for real estate-related purposes to borrowers or counterparties who are primarily in the real estate development or investment business and for which the ultimate repayment of the credit is dependent on the sale, lease, rental or refinancing of the real estate. The exposure included in the table does not include credit extensions which were made on the general creditworthiness of the borrower for which real estate was obtained as security and for which the ultimate repayment of the credit is not dependent on the sale, lease, rental or refinancing of the real estate. Accordingly, the exposure presented does not include commercial loans secured by owner-occupied real estate, except where the borrower is a real estate developer. Table Nine Commercial Real Estate Loans, Foreclosed Properties and Other Real Estate Credit Exposure
- --------------------------------------------------------------------------------------------------------------------- June 30, 2000 Foreclosed Other ------------------------------ Credit (Dollars in millions) Outstanding Nonperforming Properties (1) Exposure (2) - ----------------------------------------------------------------------------------------------------------------------- By Geographic Region (3) California $6,024 $ 7 $9 $ 728 Southwest 3,900 9 1 502 Northwest 2,806 6 - 110 Midwest 2,727 14 25 290 Florida 2,453 9 2 381 Mid-Atlantic 1,578 6 - 356 Carolinas 1,356 4 2 58 Midsouth 1,176 2 1 167 Northeast 962 107 - 253 Other states 556 - 19 130 Non-US 229 2 - 9 Geographically diversified 2,516 - - - - ----------------------------------------------------------------------------------------------------------------------- Total $26,283 $166 $59 $2,984 - ----------------------------------------------------------------------------------------------------------------------- By Property Type Apartments $5,300 $16 $ - $ 624 Office buildings 4,922 5 3 288 Shopping centers/retail 3,651 12 20 501 Residential 3,132 16 8 256 Industrial/warehouse 2,388 6 4 49 Land and land development 1,320 3 8 171 Hotels/motels 1,152 8 - 155 Miscellaneous commercial 914 88 15 26 Unsecured 876 - - 13 Multiple use 661 - - 39 Non-US 229 2 - 9 Other 1,738 10 1 853 - ----------------------------------------------------------------------------------------------------------------------- Total $26,283 $166 $59 $2,984 - -----------------------------------------------------------------------------------------------------------------------
(1) Foreclosed properties include commercial real estate loans only. (2) Other credit exposure include letters of credit and loans held for sale. (3) Distribution based on geographic location of collateral. 50 Table Ten below presents aggregate commercial loan and lease exposures by certain significant industries at June 30, 2000. Total commercial loans outstanding, excluding commercial real estate loans, comprised 45 percent of total loans and leases at June 30, 2000. No commercial industry concentration is greater than three percent of total loans and leases. Table Ten Significant Industry Loans and Leases (1) - ------------------------------------------------------------------------------- June 30, 2000 Percent of Total (Dollars in millions) Outstanding Loans and Leases - ------------------------------------------------------------------------------- Transportation $11,613 2.9 % Media 10,360 2.6 Equipment and general manufacturing 9,140 2.3 Business services 8,879 2.2 Healthcare 8,204 2.0 Telecommunications 7,743 1.9 Agribusiness 7,592 1.9 Retail 7,513 1.9 Autos 6,815 1.7 Oil and gas 6,087 1.5 - ------------------------------------------------------------------------------- (1) Includes only non-real estate commercial loans and leases. Regional Foreign Exposure Through its credit and market risk management activities, the Corporation has been devoting particular attention to those countries negatively impacted by global economic pressure. These include certain Asian countries as well as countries within Latin America and Eastern Europe that have experienced currency and other economic problems. In connection with its efforts to maintain a diversified portfolio, the Corporation limits its exposure to any one geographic region or country and monitors this exposure on a continuous basis. Table Eleven sets forth selected regional foreign exposure at June 30, 2000. At June 30, 2000, the Corporation's total exposure to these select countries was $31.8 billion, an increase of $4.0 billion from December 31, 1999, primarily due to increased levels of Japanese government securities. Table Eleven is based on the Federal Financial Institutions Examination Council's instructions for periodic reporting of foreign exposures. The table has been expanded to include "Gross Local Country Claims" as defined in the table below and may not be consistent with disclosures by other financial institutions. 51 Table Eleven Regional Foreign Exposure
- ---------------------------------------------------------------------------------------------------------------------------------- Increase Increase Increase Increase Total Gross Other Total (Decrease) (Decrease) (Decrease) (Decrease) Cross- Local Cross- Exposure from from from from Border Country Border June 30, March 31, December 31, December 31, December 31, (Dollars in millions) Loans Claims(1) Claims(2) 2000 2000 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- Region/Country Asia China $ 85 $ 87 $ 178 $ 350 $ (165) $ (6) $ (99) $ (415) Hong Kong 62 4,544 274 4,880 471 561 (308) (751) India 662 1,463 217 2,342 291 358 (176) (157) Indonesia 390 81 83 554 82 32 (169) (956) Japan 104 974 5,750 6,828 3,440 3,027 1,767 (142) Korea (South) 286 668 989 1,943 (347) (195) 64 (1,861) Malaysia 3 476 47 526 (92) (64) (202) (728) Pakistan 12 196 12 220 (107) (103) (132) (330) Philippines 229 287 234 750 301 247 167 (13) Singapore 101 969 336 1,406 (72) 114 (600) (1,006) Taiwan 229 792 145 1,166 168 205 (1,124) (1,272) Thailand 51 407 87 545 (85) (63) (405) (1,412) Other 4 124 10 138 8 (12) (15) (59) - -------------------------------------------------------------------------------------------------------------------------------- Total 2,218 11,068 8,362 21,648 3,893 4,101 (1,232) (9,102) - -------------------------------------------------------------------------------------------------------------------------------- Central and Eastern Europe Russian Federation 3 - 1 4 (7) (14) (56) (443) Turkey 141 - 87 228 (19) 10 (237) 228 Other 81 40 73 194 (35) (41) (45) (504) - -------------------------------------------------------------------------------------------------------------------------------- Total 225 40 161 426 (61) (45) (338) (719) - -------------------------------------------------------------------------------------------------------------------------------- Latin America Argentina 677 448 139 1,264 296 126 (3) (379) Brazil 1,061 665 726 2,452 (23) (56) (966) (1,178) Chile 788 212 89 1,089 27 90 (562) (591) Colombia 300 51 59 410 (46) (82) (388) (375) Mexico 1,361 166 1,975 3,502 (41) (373) (1,436) (2,610) Venezuela 147 82 224 453 41 40 (104) (170) Other 189 - 341 530 170 183 100 87 - -------------------------------------------------------------------------------------------------------------------------------- Total 4,523 1,624 3,553 9,700 424 (72) (3,359) (5,216) - -------------------------------------------------------------------------------------------------------------------------------- Total $ 6,966 $ 12,732 $ 12,076 $ 31,774 $ 4,256 $ 3,984 $(4,929) $ (15,037) - --------------------------------------------------------------------------------------------------------------------------------
(1) Includes the following claims by the Corporation's foreign offices on local country residents regardless of the currency: loans, accrued interest receivable, acceptances, time deposits placed, trading account assets, other interest-earning investments, other short-term monetary assets, unused commitments, standby letters of credit, commercial letters of credit, formal guarantees, and available-for-sale (at fair value) and held-for-investment (at cost) securities. (2) All instruments in (1) that are cross-border claims excluding loans but including derivative-dealer assets (at fair value) and available-for-sale (at fair value) and held-for-investment (at cost) securities that are collateralized by U.S. Treasury securities as follows: Mexico - $1,142, Venezuela - $171, Philippines - $21 and Latin America Other - $78. Held-for-investment securities (at cost) amounted to $772 with a fair value of $634. International Developments In recent years, a number of countries in Asia, Latin America and Central and Eastern Europe experienced economic difficulties due to a combination of structural problems and negative market reaction that resulted from increased awareness of these problems. While each country's situation is unique, many share common factors such as: (1) government actions which restrain normal functioning of free markets in physical goods, capital and/or currencies; (2) perceived weaknesses of the banking systems; and (3) perceived overvaluation of local currencies and/or pegged exchange rate systems. These factors resulted in capital movement out of these countries or in reduced capital inflows; accordingly, many of these countries experienced liquidity problems in addition to the structural problems. 52 Since 1999, many of the Asian economies have been showing signs of recovery from prior troubles. In the first and second quarters of 2000, they continued to strengthen their recovery despite the higher interest rates in international markets. They have also slowly implemented structural reforms to prevent problems from recurring. However, there can be no assurance that this will continue and setbacks could occur. Since early 1999, several Latin American economies have replaced their pegged exchange rate systems with free-floating currencies. While sustained recovery is not assured, much of Latin America is showing signs of recovery. Where appropriate, the Corporation has adjusted its activities (including its borrower selection) in light of the risks and opportunities discussed above. Throughout 1999, the Corporation continued to reduce its exposure in Asia, Latin America and Central and Eastern Europe, adjusting to the changing economic conditions. During the second quarter of 2000, exposure in Central and Eastern Europe decreased slightly while exposure in Asia and Latin America increased, corresponding with the upturn in economic activity in those regions. The Corporation will continue to monitor and adjust its foreign activities on a country-by-country basis depending on management's judgment of the likely developments in each country and will take action as deemed appropriate. Market Risk Management In the normal course of conducting its business activities, the Corporation is exposed to market risks including price and liquidity risk. Market risk is the potential of loss arising from adverse changes in market rates and prices, such as interest rates (interest rate risk), foreign currency exchange rates (foreign exchange risk), commodity prices (commodity risk) and prices of equity securities (equity risk). Financial products that expose the Corporation to market risk include securities, loans, deposits, debt and derivative financial instruments such as futures, forwards, swaps, options and other financial instruments with similar characteristics. Liquidity risk arises from the possibility that the Corporation may not be able to satisfy current or future financial commitments or that the Corporation may be more reliant on alternative funding sources such as long-term debt. Market risk is managed by the Corporation's Finance Committee, which formulates policy based on desirable levels of market risk. In setting desirable levels of market risk, the Finance Committee considers the impact on both earnings and capital of the current outlook in market rates, potential changes in market rates, world and regional economies, liquidity, business strategies and other factors. 53 Trading Portfolio The table below sets forth the calculated value-at-risk (VAR) amounts for the twelve months ended June 30, 2000 and 1999. The amounts are calculated on a pre-tax basis. The Corporation performs the VAR calculation for each major trading portfolio segment on a daily basis. It then calculates the combined VAR across these portfolio segments using two different sets of assumptions. The first calculation assumes that each portfolio segment experiences adverse price movements at the same time (i.e., the price movements are perfectly correlated). The second calculation assumes that these adverse price movements within the major portfolio segments do not occur at the same time (i.e., they are uncorrelated). Interest rate and foreign exchange risks were generally lower for the twelve months ended June 30, 2000 than for the twelve months ended June 30, 1999 due to the decreased emphasis on proprietary risk-taking and the increased volume of customer flow. Equity risk was generally higher for the twelve months ended June 30, 2000 than for the twelve months ended June 30, 1999 due to growth in the customer equity and equity derivatives businesses. For additional discussion of market risk associated with the trading portfolio, the VAR model and how the Corporation manages its exposure to market risk, see pages 42 and 43 of the Corporation's 1999 Annual Report on Form 10-K. The composition of the trading portfolio and the related fair value are included in Note Three of the consolidated financial statements. Trading Activities Market Risk
- ------------------------------------------------------------------------------------------------------------------------------- Twelve Months Ended June 30, 2000 Twelve Months Ended June 30, 1999 - ------------------------------------------------------------------------------------------------------------------------------- (U.S. dollar equivalents in millions) Average VAR High VAR(1) Low VAR (1) Average VAR High VAR(1) Low VAR(1) - ------------------------------------------------------------------------------------------------------------------------------- Based on perfect positive correlation Interest rate $76.1 $88.3 $66.9 $112.8 $163.8 $74.9 Foreign currency 14.3 23.5 8.5 17.3 45.1 7.9 Commodities 2.3 6.4 0.6 2.3 5.2 0.9 Equity 25.2 40.5 10.6 6.7 13.9 1.0 Based on zero correlation Interest rate 24.7 31.6 18.6 33.9 49.9 21.2 Foreign currency 12.0 21.7 6.9 14.1 37.3 6.1 Commodities 1.9 5.8 0.5 1.8 3.7 0.6 Equity 24.2 39.8 10.0 5.7 12.4 1.0 - -------------------------------------------------------------------------------------------------------------------------------
(1) The high and low for the entire trading account may not equal the sum of the individual components as the highs or lows of the components occurred on different trading days. Asset and Liability Management Activities Non-Trading Portfolio The Corporation's Asset and Liability Management (ALM) process is used to manage interest rate risk through the structuring of balance sheet and off-balance sheet portfolios and identifying and linking such off-balance sheet positions to specific assets and liabilities. Interest rate risk represents the only material market risk exposure to the Corporation's non-trading on-balance sheet financial instruments. Available-for-sale securities had an unrealized loss of $3.6 billion at June 30, 2000, compared to an unrealized loss of $3.8 billion at December 31, 1999. The expected maturities, unrealized gains and losses and weighted average effective yield and rate associated with the Corporation's other significant non-trading on-balance sheet financial instruments at June 30, 2000 were not significantly different from those at December 31, 1999. For a discussion of non-trading on-balance sheet financial instruments, see page 43 and Table Eighteen on page 44 of the "Market Risk Management" section of the Corporation's 1999 Annual Report on Form 10-K. Interest Rate and Foreign Exchange Contracts Risk management interest rate contracts and foreign exchange contracts are utilized in the ALM process. Interest rate contracts, which are generally non-leveraged generic interest rate and basis swaps, options, futures and forwards, allow the Corporation to effectively manage its interest rate risk position. In addition, the Corporation uses foreign currency contracts to manage the foreign exchange risk associated 54 with foreign-denominated assets and liabilities, as well as the Corporation's equity investments in foreign subsidiaries. As reflected in Table Twelve, the notional amount of the Corporation's receive fixed and pay fixed interest rate swaps at June 30, 2000 was $55.2 billion and $18.6 billion, respectively. The receive fixed interest rate swaps are primarily converting variable-rate commercial loans to fixed-rate. The net receive fixed position at June 30, 2000 was $36.6 billion notional compared to $37.3 billion notional at December 31, 1999. The Corporation had $7.8 billion notional and $8.0 billion notional of basis swaps at June 30, 2000 and December 31, 1999, respectively, linked primarily to loans and long-term debt. The Corporation had $42.9 billion notional and $35.1 billion notional of option products at June 30, 2000 and December 31, 1999, respectively. In addition, open foreign exchange contracts at June 30, 2000 had a notional amount of $6.0 billion compared to $6.2 billion at December 31, 1999. Table Twelve also summarizes the expected maturity and the average estimated duration, weighted average receive and pay rates and the net unrealized gains and losses at June 30, 2000 and December 31, 1999 of the Corporation's open ALM interest rate swaps, as well as the expected maturity and net unrealized gains and losses at June 30, 2000 and December 31, 1999 of the Corporation's open ALM basis swaps, options, futures and forward rate and foreign exchange contracts. Unrealized gains and losses are based on the last repricing and will change in the future primarily based on movements in one-, three- and six-month LIBOR rates. The ALM swap portfolio had a net unrealized loss of $1.5 billion and $1.6 billion at June 30, 2000 and December 31, 1999, respectively. The ALM option products had a net unrealized (loss) gain of $(146) million and $5 million at June 30, 2000 and December 31, 1999, respectively. At June 30, 2000 and December 31, 1999, open foreign exchange contracts had a net unrealized loss of $200 million and $30 million, respectively. The amount of unamortized net realized deferred gains associated with closed ALM swaps was $99 million and $174 million at June 30, 2000 and December 31, 1999, respectively. The amount of unamortized net realized deferred gains associated with closed ALM options was $112 million and $82 million at June 30, 2000 and December 31, 1999, respectively. The amount of unamortized net realized deferred losses associated with closed ALM futures and forward contracts was $19 million and $21 million at June 30, 2000 and December 31, 1999, respectively. There were no unamortized net realized deferred gains or losses associated with closed foreign exchange contracts at June 30, 2000 and December 31, 1999. Management believes the fair value of the ALM interest rate and foreign exchange portfolios should be viewed in the context of the overall balance sheet, and the value of any single component of the balance sheet or off-balance sheet positions should not be viewed in isolation. For a discussion of the Corporation's management of risk associated with mortgage production and servicing activities, see the "Noninterest Income" section on page 37. See Note Six of the consolidated financial statements for information on the Corporation's ALM contracts. 55 Table Twelve Asset and Liability Management Interest Rate and Foreign Exchange Contracts
- ------------------------------------------------------------------------------------------------------------------------------------ June 30, 2000 Expected Maturity -------------------------------------------------------------------- Average (Dollars in millions, average Fair After Estimated estimated duration in years) Value Total 2000 2001 2002 2003 2004 2004 Duration - ------------------------------------------------------------------------------------------------------------------------------------ Open interest rate contracts Total receive fixed swaps $(1,687) 3.26 Notional value $55,177 $3,816 $3,889 $5,374 $12,943 $7,068 $22,087 Weighted average receive rate 6.35% 6.48% 6.26% 7.24% 5.60% 6.28% 6.58% Total pay fixed swaps 151 2.42 Notional value $18,566 $2,680 $4,359 $3,114 $2,510 $ 727 $5,176 Weighted average pay rate 6.82% 6.85% 6.43% 7.03% 7.10% 7.43% 6.82% Basis swaps (5) Notional value $7,815 $ 358 $ 588 $1,669 $5,014 $ - $ 186 - -------------------------------------------------- Total swaps (1,541) - -------------------------------------------------- Option products (146) Notional amount 42,850 338 2,637 868 1,950 15,661 21,396 Futures and forward rate contracts (35) Notional amount 2,119 2,119 - - - - - - -------------------------------------------------- Total open interest rate contracts (1,722) Closed interest rate contracts(1) 192 - -------------------------------------------------- Net interest rate contract position (1,530) - -------------------------------------------------- Open foreign exchange contracts (200) Notional amount 5,959 236 1,077 1,420 159 589 2,478 - -------------------------------------------------- Total ALM contracts $(1,730) - ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1999 Expected Maturity -------------------------------------------------------------------- Average (Dollars in millions, average Fair After Estimated estimated duration in years) Value Total 2000 2001 2002 2003 2004 2004 Duration - ------------------------------------------------------------------------------------------------------------------------------------ Open interest rate contracts Total receive fixed swaps $(1,747) 2.75 Notional amount $63,002 $13,539 $11,493 $1,637 $12,894 $7,104 $16,335 Weighted average receive rate 6.15% 5.98% 6.43% 6.88% 5.60% 6.57% 6.28% Total pay fixed swaps 115 2.11 Notional amount $25,701 $6,893 $8,232 $3,175 $2,475 $ 719 $4,207 Weighted average pay rate 6.68% 6.84% 6.57% 6.23% 7.10% 7.46% 6.61% Basis swaps (6) Notional amount $7,971 $ 743 $ 601 $1,669 $4,958 $ - $ - - -------------------------------------------------- Total swaps (1,638) - -------------------------------------------------- Option products 5 Notional amount 35,134 505 2,088 868 1,950 15,661 14,062 Futures and forward rate contracts 3 Notional amount 931 931 - - - - - - -------------------------------------------------- Total open interest rate contracts (1,630) Closed interest rate contracts(1) 235 - -------------------------------------------------- Net interest rate contract position (1,395) - -------------------------------------------------- Open foreign exchange contracts (30) Notional amount 6,231 273 1,499 2,552 112 623 1,172 - -------------------------------------------------- Total ALM contracts $(1,425) - ------------------------------------------------------------------------------------------------------------------------------------
(1) Represents the unamortized net realized deferred gains associated with closed contracts. As a result, no notional amount is reflected for expected maturity. 56 Table Thirteen Selected Quarterly Financial Data
- ------------------------------------------------------------------------------------------------------------------ 2000 Quarters --------------------------------------- (Dollars in millions, except per share information) Second First - ------------------------------------------------------------------------------------------------------------------ Income statement Interest income $ 10,737 $ 10,086 Interest expense 6,106 5,562 Net interest income 4,631 4,524 Net interest income (taxable-equivalent basis) 4,709 4,595 Provision for credit losses 470 420 Gains on sales of securities 6 6 Noninterest income 3,500 4,046 Other noninterest expense 4,413 4,623 Income before income taxes 3,254 3,533 Income tax expense 1,191 1,293 Net income 2,063 2,240 Net income available to common shareholders 2,061 2,239 Average common shares issued and outstanding (in thousands) 1,653,495 1,669,311 - ------------------------------------------------------------------------------------------------------------- Performance ratios Return on average assets 1.23% 1.38% Return on average common shareholders' equity 17.63 19.59 Total equity to total assets (period-end) 6.75 6.90 Total average equity to total average assets 7.00 7.07 Efficiency ratio 53.77 53.49 Dividend payout ratio 39.94 37.16 - ------------------------------------------------------------------------------------------------------------- Per common share data Earnings $ 1.25 $ 1.34 Diluted earnings 1.23 1.33 Cash dividends paid .50 .50 Book value 27.82 27.28 - ------------------------------------------------------------------------------------------------------------- Cash basis financial data (1) Earnings per common share 1.38 1.47 Diluted earnings per common share 1.36 1.46 Return on average tangible assets 1.39% 1.55% Return on average tangible common shareholders' equity 27.51 30.83 Efficiency ratio 51.12 50.98 Ending tangible equity to tangible assets 4.85 4.90 - ------------------------------------------------------------------------------------------------------------- Balance sheet (period-end) Total loans and leases 400,817 382,085 Total assets 679,538 656,113 Total deposits 356,664 351,626 Long-term debt 69,245 62,059 Trust preferred securities 4,955 4,955 Common shareholders' equity 45,786 45,222 Total shareholders' equity 45,861 45,299 - ------------------------------------------------------------------------------------------------------------- Risk-based capital ratios (period-end) Tier 1 capital 7.40% 7.42% Total capital 11.03 11.00 Leverage ratio 6.11 6.17 - ------------------------------------------------------------------------------------------------------------- Market price per share of common stock Closing $43 $52 7/16 High 61 55 3/16 Low 42 63/64 42 5/16 - -------------------------------------------------------------------------------------------------------------
(1) Cash basis calculations exclude goodwill and other intangible assets and their related amortization expense. 57 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------------------- See "Management's Discussion and Analysis of Results of Operations and Financial Condition - Market Risk Management" on page 53 and the sections referenced therein for Quantitative and Qualitative Disclosures about Market Risk. - -------------------------------------------------------------------------------- Part II. Other Information - -------------------------------------------------------------------------------- Item 1. Legal Litigation Proceedings In the ordinary course of business, the Corporation and its subsidiaries are routinely defendants in or parties to a number of pending and threatened legal actions and proceedings, including actions brought on behalf of various classes of claimants. In certain of these actions and proceedings, substantial money damages are asserted against the Corporation and its subsidiaries and certain of these actions and proceedings are based on alleged violations of consumer protection, securities, environmental, banking and other laws. The Corporation and certain present and former officers and directors have been named as defendants in a number of actions filed in several federal courts that have been consolidated for pretrial purposes before a Missouri federal court. The amended complaint in the consolidated actions alleges, among other things, that the defendants failed to disclose material facts about BankAmerica's losses relating to D.E. Shaw Securities Group, L.P. and related entities until mid-October 1998, in violation of various provisions of federal and state laws. The amended complaint also alleges that the proxy statement-prospectus of August 4, 1998, falsely stated that the Merger would be one of equals and alleges a scheme to have NationsBank gain control over the newly merged entity. The Missouri federal court has certified classes consisting generally of persons who were stockholders of NationsBank or BankAmerica on September 30, 1998, or were entitled to vote on the Merger, or who purchased or acquired securities of the Corporation or its predecessors between August 4, 1998 and October 13, 1998. The amended complaint substantially survived a motion to dismiss, and discovery is underway. Claims against certain director-defendants were dismissed with leave to replead. Similar uncertified class actions (including one limited to California residents raising the claim that the proxy statement-prospectus of August 4, 1998, falsely stated that the Merger would be one of equals) were filed in California state court, alleging violations of the California Corporations Code and other state laws. The action on behalf of California residents was certified, but has since been dismissed and an appeal is pending. Of the remaining actions, one has been stayed, and a motion for class certification is pending in the other. The Missouri federal court has enjoined prosecution of that action as a class action. The plaintiffs who were enjoined have appealed. The Corporation believes the actions lack merit and will defend them vigorously. The amount of any ultimate exposure cannot be determined with certainty at this time. Management believes that the actions and proceedings and the losses, if any, resulting from the final outcome thereof, will not be material in the aggregate to the Corporation's financial position or results of operations. 58 Item 2. Changes in As part of its share repurchase program, during the Securities and Use second quarter of 2000, the Corporation sold put Of Proceeds options to purchase an aggregate of one million shares of Common Stock. These put options were sold to an independent third party for an aggregate purchase price of $6.6 million. The put option exercise price is $48.14 per share and expires in April 2001. The put option contracts allow the Corporation to determine the method of settlement (cash or stock). Each of these transactions was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended. As of June 30, 2000, the Corporation had 10,000,000 put options outstanding, with exercise prices ranging from $45.22 per share to $65.30 per share, and expiration dates ranging from July 2000 to April 2001. Item 4. a. The Annual Meeting of Stockholders was held on Submission of April 25, 2000. Matters to a Vote b. The following are the voting results on each of Security Holders matter submitted to the stockholders: 1. To elect 18 directors Against or For Withheld ------------- ---------- Charles W. Coker 1,306,836,134 42,474,094 Alan T. Dickson 1,307,563,388 41,746,840 Frank Dowd, IV 1,300,993,232 48,316,996 Kathleen F. Feldstein 1,307,763,130 41,547,098 Paul Fulton 1,311,569,844 37,740,384 Donald E. Guinn 1,307,729,725 41,580,503 James H. Hance, Jr. 1,307,302,745 42,007,483 C. Ray Holman 1,307,533,084 41,777,144 W. W. Johnson 1,306,818,576 42,491,652 Kenneth D. Lewis 1,307,341,106 41,969,122 Walter E. Massey 1,307,140,279 42,169,949 Hugh L. McColl, Jr. 1,206,328,121 142,982,107 O. Temple Sloan, Jr. 1,291,098,617 58,211,611 Meredith R. Spangler 1,311,797,001 37,513,227 Ronald Townsend 1,307,082,798 42,227,430 Solomon D. Trujillo 1,312,560,600 36,749,628 Jackie M. Ward 1,306,473,551 42,836,677 Virgil R. Williams 1,298,918,344 50,391,884 59 2. To consider and act upon a proposal to ratify the action of the Board of Directors in selecting PricewaterhouseCoopers LLP as independent public accountants to audit the books of the Corporation and its subsidiaries for the current year Against or For Withheld Abstentions ------------- ---------- ----------- 1,333,242,115 9,587,840 6,480,273 3. To consider and act upon a stockholder proposal requesting that the Corporation develop a policy for the cancellation of debt of heavily indebted poor countries Against or Broker For Withheld Abstentions Nonvotes ---------- ----------- ----------- ----------- 28,248,560 996,444,963 80,391,711 244,224,994 4. To consider and act upon a stockholder proposal requesting that the Corporation adopt a compensation committee charter Against or Broker For Withheld Abstentions Nonvotes ---------- ----------- ----------- ----------- 194,871,421 848,379,733 61,809,418 244,249,656 5. To consider and act upon a stockholder proposal requesting that the Corporation adopt a policy relating to contributions to political movements and entities Against or Broker For Withheld Abstentions Nonvotes ---------- ----------- ----------- ----------- 34,840,164 982,743,495 87,471,497 244,255,072 Item 6. Exhibits a) Exhibits and Reports on Form 8-K Exhibit 11 - Earnings Per Share Computation - included in Note 7 of the consolidated financial statements Exhibit 12(a) - Ratio of Earnings to Fixed Charges Exhibit 12(b) - Ratio of Earnings to Fixed Charges and Preferred Dividends Exhibit 27 - Financial Data Schedule b) Reports on Form 8-K The following reports on Form 8-K were filed by the Corporation during the quarter ended June 30, 2000: Current Report on Form 8-K dated April 17, 2000 and filed April 19, 2000, Items 5 and 7. Current Report on Form 8-K dated May 23, 2000 and filed May 31, 2000, Items 5 and 7. 60 Current Report on Form 8-K dated June 02, 2000 and filed June 08, 2000, Items 5 and 7. 61 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Bank of America Corporation --------------------------- Registrant Date: August 14, 2000 /s/ Marc D. Oken --------------- ----------------- MARC D. OKEN Executive Vice President and Principal Financial Executive (Duly Authorized Officer and Chief Accounting Officer) 62 Bank of America Corporation Form 10-Q Index to Exhibits - ------------------------------------------------------------------------------- Exhibit Description - ------- ----------- 11 Earnings Per Share Computation - included in Note 7 of the consolidated financial statements 12(a) Ratio of Earnings to Fixed Charges 12(b) Ratio of Earnings to Fixed Charges and Preferred Dividends 27 Financial Data Schedule 63